7. Interest income and expense

Interest income includes interest and commission fees received or due from loans, interbank deposits and securities measured at amortised cost recognized in the calculation of effective interest rate of loans and financial assets measured at fair value through other comprehensive income or through profit or loss and hedging derivatives.

The effective interest rate is the discount rate of estimated future cash inflows and payments made during the expected period until the expiry date of the financial instruments.

The calculation of the effective interest rate includes all commissions paid and received by parties to the agreement, transaction costs and all other premiums and discounts, comprising an integral part of the effective interest rate.

Gross carrying amount of the financial asset is the basis for interest income calculation except for credit-impaired financial assets (‘in Stage 3’) and purchased or originated credit-impaired financial assets (POCI assets). At the recognition of impairment of financial assets measured at amortized cost or financial assets measured at fair value through other comprehensive income, the interest income is still recognized in profit or loss but is calculated by applying the effective interest rate to the gross carrying amount less the impairment charges.

Interest expense related to liabilities associated with client accounts and debt securities issued are recognized in the profit or loss using the effective interest rate.

Income and expense from bancassurance

The Group splits the remuneration for sale of insurance products linked to loans into separate components, i.e. dividing the remuneration into proportion of fair value of financial instrument and fair value of intermediary service to the sum of those values. The fair values of particular components of the remuneration are determined based on market data to a highest degree.

The particular components of the Group’s remuneration for sale of insurance products linked to loans are recognized in the income statement according to the following principles:

• remuneration from financial instrument – as part of effective interest rate calculation, included in interest income,
• remuneration for intermediary service – upfront at the time when the insurance product in sold, included in fee and commission income.

Additionally the Group estimates the part of the remuneration which will be refunded in the future (eg. due to early termination of insurance contract, early repayment of loan). The estimate of the provision for future refunds is based on the analysis of historical data and expectations in respect to refunds trend in the future.

Modification of expected cash flows related to mortgage loan agreements in PLN

According to par. 5.4.3 of IFRS 9 introduced, by the Act on social financing for business ventures and support to borrowers, rights for customers to suspend their loan repayments constitutes a modification of the expected cash flows and requires the adjustment of the gross carrying amount of the abovementioned loans by designating and recognizing in the Group’s financial result the estimated cost resulting from the above-mentioned permissions as the difference between:

1. the present value of the expected cash flows from the loan portfolio that meets the criteria of the Act (gross carrying amount of this portfolio),
2. the present value of the expected cash flows from the loan portfolio, determined based on the modified cash flows taking into account the terms of the Act (i.e. the possibility of suspending the repayment of loan installments within the specified time frame with the simultaneous extension of the loan period) discounted with the current effective interest rate of the above-mentioned portfolio, taking into account the estimated level of participation of eligible customers who, in the Group’s opinion, will exercise this right.

On the date of entry into force of the provisions in question (July 2022), the Bank estimated and included in the financial results the cost related to the modification of PLN mortgage loan agreements granted to consumers due to the suspension of loan repayments at the gross amount of PLN 2 428 649 thousand, assuming the expert-estimated participation rate (use of the rights under the Act) at the level of 85% and assuming the maximum size (i.e. 8 installments) of using the right by customers. In addition, the Group assumed that a part (50%) of the amounts suspended by customers will be used by them to repay loans.

As at 31 December 2022, the Group updated the above-mentioned estimates for:

• current status as at the balance sheet date of the portfolio covered by the above-mentioned entitlements, e. the volume of loan agreements that meet the criteria for exercising the entitlements in 2023, and
• the expected level of participation rate (use of rights under the Act) for the following months of 2023, i.e. taking into account the existing participation rate (participation level in terms of loan volume 66% as at 31 December 2022) and the observed trend of its growth in 2022, the Group estimated the participation rate for 2023 at the level of 76%.

The Group maintained the originally adopted estimates with respect to:

• use of the maximum repayment suspension period provided for in the Act, i.e. 4 calendar months, by borrowers who decide to submit an application for credit holidays in 2023, and
• allocation of 50% of the suspended payments by borrowers using credit holidays in 2023 for early loan repayment.

Taking into account the above-mentioned updates of individual parameters, the balance of the adjustment related to credit holidays amounts to PLN 1 958 million.

Due to the fact that the above calculation is an estimate of the expected exercise by customers of the rights resulting from the Act, and the actual implementation will take place in the period specified in the Act, i.e. to the end of 2023 under the conditions specified in the Act, the final cost related to the above-mentioned modifications may change and will be charged to the Group’s current financial results.

The table below presents the structure and gross carrying amount of loans as at 31 December 2022 for which repayment was suspended in 2022.

The Group does not identify an increase in credit risk if customers use the suspension of loan repayment. In addition, during the period of suspension of repayments, the amount of delay in repayment (DPD) is maintained at the level from the date of commencement of the suspension.

The table below shows the sensitivity of the estimated level of cost related to the right to suspend repayment of loan installments in 2023 to the estimated participation rate.