47.10 Fair value of financial assets and liabilities
Financial instruments that are measured at fair value in the consolidated statement of financial position of the Group
The measurement of fair value of derivatives and instruments, for which market values are available from an active market, shall be based on market quotations for the instrument concerned (mark-to-market).
The measurement of fair value of Over-the-counter (‘OTC’) derivatives and instruments with limited liquidity (i.e. for which no market quotations are available), is made on the basis of other instruments quotations on active markets by replication thereof using a number of valuation techniques, including the estimation of present value of future cash flows (mark-to-model).
As of 31 December 2021 and 31 December 2020, the Group classified the financial assets and liabilities measured at fair value into the following hierarchy of three categories based on the following hierarchy:
- Level 1: mark-to-market, applies to securities quoted on active markets,
- Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to illiquid government, municipal, corporate and central bank debt securities, linear and non-linear derivative instruments of interest rate markets (including forward transactions on debt securities), equity, commodity and foreign currency exchange markets, except for those cases that meet the criteria of Level 3,
- Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, applicable to loans and advances, corporate and municipal debt securities and for linear and non-linear derivative instruments of interest rate, equity, commodity and foreign currency exchange markets for which unobservable parameters (e.g. credit risk factors) are recognized as significant.
The measurement at fair value is performed directly by an organizational unit within Risk Management Division, independent of front-office units. The methodology of fair value measurement, including the changes of its parameterization, is subject to approval of Assets and Liabilities Committee (ALCO). The adequacy of measurement methods is subject to on-going
analysis and periodical reviews in the framework of model risk management. The same Risk Management Division unit performs the assessment of adequacy and significance of risk factors and assignment of valuation models to appropriate method class, according to established hierarchy of classification.
Assets and liabilities measured at fair value in breakdown by fair value hierarchy levels
| 31.12.2021 | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL |
| Assets: | 8,538,322 | 17,905,364 | 5,859,840 | 32,303,526 |
| Financial assets held for trading | 225,288 | 229,541 | 94,433 | 549,262 |
| Derivative financial instruments, including: | 7,922,679 | 5,860 | 7,928,539 | |
| Banks | 1,559,398 | 5,860 | 1,565,258 | |
| Customers | 6,363,281 | 6,363,281 | ||
| Hedging instruments, including: | 78,216 | 78,216 | ||
| Banks | 63,402 | 63,402 | ||
| Customers | 14,814 | 14,814 | ||
| Securities measured at fair value through other comprehensive income | 8,313,034 | 9,674,928 | 5,181,843 | 23,169,805 |
| Securities measured at fair value through profit or loss | – | 171,496 | 171,496 | |
| Loans and advances to customers measured at fair value through other comprehensive income | – | 245,829 | 245,829 | |
| Loans and advances to customers measured at fair value through profit or loss | – | 160,379 | 160,379 | |
| Liabilities: | 639,733 | 10,191,075 | 10,830,808 | |
| Financial liabilities held for trading | 639,733 | – | 639,733 | |
| Derivative financial instruments, including: | 7,969,343 | 7,969,343 | ||
| Banks | 1,251,678 | 1,251,678 | ||
| Customers | 6,717,665 | 6,717,665 | ||
| Hedging instruments, including: | 2,221,732 | 2,221,732 | ||
| Banks | 836,833 | 836,833 | ||
| Customers | 1,384,899 | 1,384,899 |
Assets and liabilities measured at fair value in breakdown by fair value hierarchy levels
| 31.12.2020 | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL |
| Assets: | 14,342,453 | 25,099,498 | 12,358,784 | 51,800,735 |
| Financial assets held for trading | 938,452 | 335,725 | 43,532 | 1,317,709 |
| Derivative financial instruments, including: | 4,810,519 | 1,712 | 4,812,231 | |
|
Banks |
1,223,864 | 1,712 | 1,225,576 | |
|
Customers |
3,586,655 | 3,586,655 | ||
| Hedging instruments, including: | 779,063 | 779,063 | ||
|
Banks |
26,070 | 26,070 | ||
|
Customers |
752,993 | 752,993 | ||
| Securities measured at fair value through other comprehensive income | 13,404,001 | 19,174,191 | 10,490,998 | 43,069,190 |
| Securities measured at fair value through profit or loss | – | 160,486 | 160,486 | |
| Loans and advances to customers measured at fair value through other comprehensive income | – | 1,475,055 | 1,475,055 | |
| Loans and advances to customers measured at fair value through profit or loss | – | 187,001 | 187,001 | |
| Liabilities: | 742,804 | 5,690,375 | 6,433,179 | |
| Financial liabilities held for trading | 742,804 | – | 742,804 | |
| Derivative financial instruments, including: | 4,617,416 | 4,617,416 | ||
|
Banks |
1,220,458 | 1,220,458 | ||
|
Customers |
3,396,958 | 3,396,958 | ||
| Hedging instruments, including: | 1,072,959 | 1,072,959 | ||
|
Banks |
995,230 | 995,230 | ||
|
Customers |
77,729 | 77,729 |
Change in fair value of financial assets measured at fair value according to Level 3 by the Group
| 2021 | FINANCIAL ASSETS HELD FOR TRADING | DERIVATE FINANCIAL INTRUMENTS (ASSETS) | LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME | LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS | SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS | SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME | DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES) |
| Opening balance | 43,532 | 1,712 | 1,475,055 | 187,001 | 160,486 | 10,490,998 | – |
| Increases, including: | 5,940,649 | 11,973 | 96,431 | 764 | 11,010 | 4,046,238 | 4,390 |
| Increase due to acquisition of part of Idea Bank S.A. activity | – | 4,453 | – | – | – | 85,309 | 4,390 |
| Reclassification from other levels | 32,977 | – | – | – | – | 788,236 | – |
| Transactions made in 2021 | – | – | 52,830 | 764 | – | – | – |
| Acquisition/Granting | 5,904,973 | – | – | – | – | 3,050,445 | – |
| Settlement/Redemption | – | – | – | – | – | – | – |
| Gains on financial instruments | 2,699 | 7,520 | 43,601 | – | 11,010 | 122,248 | – |
| recognized in the income statement | 2,649 | 7,520 | 43,601 | – | 11,010 | 119,579 | – |
| recognized in revaluation reserves | 50 | – | – | – | – | 2,669 | – |
| Decreases, including: | -5,889,748 | -7,825 | -1,325,657 | -27,386 | – | -9,355,393 | 4,390 |
| Reclassification to other leve | -209 | – | – | – | – | -298,662 | 3,696 |
| Settlement/Redemption | -21,729 | -7,825 | -1,099,062 | -23,634 | – | -4,357,890 | 694 |
| Sale/Repayment | -5,856,240 | – | -203,000 | – | – | -4,654,666 | – |
| Losses on financial instruments | -11,570 | – | -23,595 | -3,752 | – | -44,175 | – |
| recognized in the income statement | – | – | – | -3,752 | – | -125 | – |
| recognized in revaluation reserves | -11,570 | – | -23,595 | – | – | -44,050 | – |
| Closing balance | 94,433 | 5,860 | 245,829 | 160,379 | 171,496 | 5,181,843 | – |
| Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: |
-11,304 |
2,102 |
-5,376 |
-3,782 |
– |
-233,588 |
– |
| Income statement: | -11,304 | 2,102 | 4 | -3,782 | – | 10,990 | – |
| net interest income | 486 | – | 1,494 | 273 | – | 14,456 | – |
| net allowances for expected credit losses | – | – | -1,490 | – | – | -3,466 | – |
| result on financial assets and liabilities held for trading | -11,790 | 2,102 | – | -4,055 | – | – | – |
| Other comprehensive income | – | – | -5,380 | – | – | -244,578 | – |
Change in fair value of financial assets measured at fair value according to Level 3 by the Group
| 2021 | FINANCIAL ASSETS HELD FOR TRADING | DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) | LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME | LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS | SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS | SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME | DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES) |
| Opening balance | 43,532 | 1,712 | 1,475,055 | 187,001 | 160,486 | 10,490,998 | – |
| Increases, including: | 5,940,649 | 11,973 | 96,431 | 764 | 11,010 | 4,046,238 | 4,390 |
| Increase due to acquisition of part of Idea Bank S.A. activity | – | 4,453 | – | – | 85,309 | 4,390 | |
| Reclassification from other levels | 32,977 | – | – | – | 788,236 | – | |
| Transactions made in 2021 | – | – | 52,830 | 764 | – | – | – |
| Acquisition/Granting | 5,904,973 | – | – | – | 3,050,445 | – | |
| Settlement/Redemption | – | – | – | – | – | – | |
| Gains on financial instruments | 2,699 | 7,520 | 43,601 | 11,010 | 122,248 | – | |
| recognized in the income statement | 2,649 | 7,520 | 43,601 | 11,010 | 119,579 | – | |
| recognized in revaluation reserves | 50 | – | – | – | 2,669 | – | |
| Decreases, including: | -5,889,748 | -7,825 | -1,325,657 | -27,386 | – | -9,355,393 | 4,390 |
| Reclassification to other level | -209 | – | – | – | -298,662 | 3,696 | |
| Settlement/Redemption | -21,729 | -7,825 | -1,099,062 | -23,634 | – | -4,357,890 | 694 |
| Sale/Repayment | -5,856,240 | – | -203,000 | – | -4,654,666 | – | |
| Losses on financial instruments | -11,570 | – | -23,595 | -3,752 | – | -44,175 | – |
| recognized in the income statement | – | – | – | -3,752 | – | -125 | – |
| recognized in revaluation reserves | -11,570 | – | -23,595 | – | – | -44,050 | – |
| Closing balance | 94,433 | 5,860 | 245,829 | 160,379 | 171,496 | 5,181,843 | – |
| Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: |
-11,304 |
2,102 |
-5,376 |
-3,782 |
– |
-233,588 |
– |
| Income statement: | -11,304 | 2,102 | 4 | -3,782 | – | 10,990 | – |
| net interest income | 486 | – | 1,494 | 273 | – | 14,456 | – |
| net allowances for expected credit losses | – | – | -1,490 | – | – | -3,466 | – |
| result on financial assets and liabilities held for trading | -11,790 | 2,102 | – | -4,055 | – | – | – |
| Other comprehensive income | – | – | -5,380 | – | -244,578 | – |
Transfers of instruments between fair value hierarchy levels are based on changes in availability of active market quotations at the end of the reporting periods.
In the period from 1 January to 31 December 2021 the following transfers of financial instruments between the levels of the fair value hierarchy were made:
- from Level 3 to Level 2: corporate bonds which were valued based on information on the prices of comparable financial instruments, corporate and municipal bonds with immaterial impact of the estimated credit parameters on the valuation and capital market derivative instruments for which impact of the unobservable factor (correlation) on the valuation was immaterial.
- from Level 2 to Level 3: municipal and corporate bonds, for which impact of estimated credit parameters was material, government bonds with material impact of estimated spread to benchmark bond and capital market derivative instruments with material impact of the estimated factor (correlation) on the valuation.
Sensitivity analysis
The impact of estimated parameters on measurement of financial instruments for which the Group applies fair value valuation according to Level 3 as at 31 December 2021 and as at 31 December 2020 is as follows:
| FINANCIAL ASSET/LIABILITY | FAIR VALUE AS AT 31.12.2021 | VALUATION TECHNIQUE | UNOBSERVABLE FACTOR | ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE ) | IMPACT ON FAIR VALUE AS AT 31.12.2021 | |
| POSITIVE SCENARIO | NEGATIVE SCENARIO | |||||
|
Corporate and municipal debt securities |
4,872,851 | Discounted cash flow | Credit spread | 0.55%-1.45% | 241,334 | -258,585 |
|
Government bonds |
27,481 | Discounted cash flow | Spread to benchmarking bond | 0.07%-0.69% | 1,467 | -1,467 |
| Derivatives | 5,860 | Black Scholes Model | Variability | 3.2-4.8 | 1,177 | -972 |
| Loans and advances measured at fair value through profit or loss | 160,379 | Discounted cash flow | Credit spread | 0.73%-1.66% | 2,332 | -2,279 |
| Loans and advances measured at fair value through other comprehensive income | 245,829 | Discounted cash flow | Credit spread | 4.15%-5.07% | 2,219 | -2,188 |
| FINANCIAL ASSET | FAIR VALUE AS AT 31.12.2021 | PARAMETR | SCENARIO | IMPACT ON FAIR VALUE AS AT 31.12.2021 | |
| POSITIVE SCENARIO | POSITIVE SCENARIO | ||||
| Equity instruments mandatorily measured at fair value through profit or loss | 171,496 | Conversion discount | +10% / -10% | 9,504 | -19,050 |
| Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income | 323,277 | Discount rate | +1% / -1% | 56,123 | -41,436 |
The impact of estimated parameters on measurement of financial instruments for which the Group applies fair value valuation according to Level 3 as at 31 December 2021 and as at 31 December 2020 is as follows:
| FINANCIAL ASSET/LIABILITY | FAIR VALUE AS AT 31.12.2021 | VALUATION TECHNIQUE | UNOBSERVABLE FACTOR | ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE) | IMPACT ON FAIR VALUE AS AT 31.12.2021 | |
| POSITIVE SCENARIO | POSITIVE SCENARIO | |||||
| Corporate and municipal debt securities | 10,228,287 | Discounted cash flow | Credit spread | 0.21%-1.03% | 130,290 | -140,244 |
| Government bonds | 28,116 | Discounted cash flow | Spread to benchmarking bond | 0.04%-0.71% | 1,878 | -1,878 |
| Derivatives | 1,712 | Black Scholes Model | Correlation | 0-1 | 17 | -1,099 |
| Loans and advances measured at fair value through profit or loss | 187,001 | Discounted cash flow | Credit spread | 0.30%-1.19% | 3,735 | -3,641 |
| Loans and advances measured at fair value through other comprehensive income | 1,475,055 | Discounted cash flow | Credit spread | 2.30%-3.20% | 18,068 | -17,799 |
| FINANCIAL ASSET | FAIR VALUE AS AT 31.12.2020 | PARAMETR | SCENARIO | IMPACT ON FAIR VALUE AS AT 31.12.2021 | |
| POSITIVE SCENARIO | POSITIVE SCENARIO | ||||
| Equity instruments mandatorily measured at fair value through profit or loss | 160,486 | Conversion discount | +10% / -10% | 8,911 | -17,831 |
| Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income | 239,617 | Discount rate | +1% / -1% | 47,508 | -33,966 |
Financial instruments that are not measured at fair value in the consolidated statement of financial position of the Group
The Group also holds financial instruments which are not presented at fair value in the financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
As of 31 December 2021 and 31 December 2020, the Group classified the financial assets and liabilities not measured at fair value in the consolidated statement of financial position into the following three categories based on the valuation leve:
- Level 1: mark-to-market, applies to government securities quoted on the liquid market and cash,
- Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to interbank deposits, own issues, illiquid government, municipal, corporate and central bank debt securities,
- Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, is applicable to corporate and municipal debt securities and loans and deposits for which the applied credit risk factor (an unobservable parameter) is recognized significant.
In case of certain groups of financial assets, recognized at the amount to be received with impairment considered, the fair value was assumed to be equal to carrying amount. The above applies in particular to cash and other financial assets and liabilities.
In the case of loans for which no quoted market values are available, the fair values presented are generally estimated using valuation techniques taking into consideration the assumption, that at the moment when the loan is granted its fair value is equal to its carrying amount. Fair value of non-impaired loans is equal to the sum of future expected cash flows, discounted at the balance sheet date, less expected credit loss. The discount rate is defined as the appropriate market risk-free rate plus the liquidity risk margin and current sales margin for the given loan products group. The margin is computed on loans granted broken down by loan product groups and maturity.
For the purpose of the fair value of foreign currency loans estimation, the margin on PLN loans adjusted by the cross-currency basis swap quotes and FX-Swap is used. The fair value of impaired loans is defined as equal to the sum of expected recoveries, discounted with the use of effective interest rate, since the average expected recovery values take the element of credit risk fully into consideration. In case of loans without repayment schedule (loans in current account, overdrafts and credit cards), the fair value was assumed as equal to the carrying amount.
Since no quoted market prices are available for deposits, their fair values have been generally estimated using valuation techniques with the assumption that the fair value of a deposit at the moment of its receipt is equal to its carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows, discounted at the relevant balance sheet date. The cash flow discount rate is defined as the relevant market risk-free rate, increased by the sales margin. The margin is computed on deposits acquired during last three months broken down by deposit product groups and maturity. In case of short term deposits (current deposits, overnights, saving accounts), the fair value was assumed as equal to the carrying amount.
The fair value of deposits and loans, apart from mortgage loans denominated in PLN and CHF for which prepayment model is used, is calculated based on contractual cash flows.
The mark-to-model valuation of own issue debt instruments is based on the method of discounting the future cash flows. Variable cash flows are estimated based upon rates adopted for specific markets (depending upon issue specifications). Both the fixed and implied cash flows are discounted using interbank money market rates.
Assets and liabilities not measured at fair value in the financial statement in breakdown by fair value hierarchy levels
| 31.12.2021 | CARRYING AMOUNT | FAIR VALUE | OF WHICH: | ||
| LEVEL 1 | LEVEL 2 | LEVEL 3 | |||
|
Assets |
|||||
| Cash and due from Central Bank | 4,696,620 | 4,696,695 | 3,699,683 | 997,012 | – |
| Loans and advance to banks | 3,328,087 | 3,334,784 | 1,476,248 | 1,858,536 | |
| Loans and advances to customers measured at amortised cost | 158,822,548 | 157,567,855 | 969,694 | 156,598,161 | |
| Debt securities measured at amortised cost | 44,276,101 | 41,828,431 | 22,436,197 | 2,700,086 | 16,692,148 |
| Other assets | 1,086,984 | 1,086,984 | – | 1,086,984 | |
|
Total Assets |
212,210,340 | 208,514,749 | 26,135,880 | 6,143,040 | 176,235,829 |
|
Liabilities |
|||||
| Amounts due to Central Bank | – | – | – | – | |
| Amounts due to other banks | 8,575,469 | 8,591,675 | 3,110,410 | 5,481,265 | |
| Amounts due to customers | 195,161,943 | 194,824,190 | – | 194,824,190 | |
| Debt securities issued | 5,355,355 | 5,350,726 | 5,350,726 | – | |
| Subordinated liabilities | 2,761,474 | 2,747,964 | 2,747,964 | – | |
| Other liabilities | 3,105,291 | 3,105,291 | – | 3,105,291 | |
|
Total Liabilities |
214,959,532 | 214,619,846 | 11,209,100 | 203,410,746 | |
| 31.12.2020 | CARRYING AMOUNT | FAIR VALUE |
OF WHICH: |
||
| LEVEL 1 | LEVEL 2 | LEVEL 3 | |||
|
Assets |
|||||
| Cash and due from Central Bank | 4,456,279 | 4,456,235 | 4,306,094 | 150,141 | – |
| Loans and advance to banks | 2,578,339 | 2,577,485 | 1,170,713 | 1,406,772 | |
| Loans and advances to customers measured at amortised cost | 140,825,741 | 140,012,831 | 280,627 | 139,732,204 | |
| Debt securities measured at amortised cost | 27,261,551 | 28,310,323 | 19,803,027 | 4,410,186 | 4,097,110 |
| Other assets | 1,059,292 | 1,059,292 | – | 1,059,292 | |
| Total Assets | 176,181,202 | 176,416,166 | 24,109,121 | 6,011,667 | 146,295,378 |
|
Liabilities |
|||||
| Amounts due to Central Bank | – | – | – | – | |
| Amounts due to other banks | 9,950,663 | 9,844,466 | 2,475,559 | 7,368,907 | |
| Amounts due to customers | 178,303,984 | 177,489,039 | – | 177,489,039 | |
| Debt securities issued | 6,146,708 | 6,130,664 | 6,130,664 | – | |
| Subordinated liabilities | 2,757,876 | 2,761,026 | 2,761,026 | – | |
| Other liabilities | 2,718,650 | 2,718,650 | – | 2,718,650 | |
| Total Liabilities | 199,877,881 | 198,943,845 | 11,367,249 | 187,576,596 | |