22. Hedge accounting
[Financial notes are presented in PLN thousand]
Significant accounting policies
Derivative hedging financial instruments are initially recorded at fair value as at the transaction date and subsequently re- measured at fair value at each balance sheet date. The fair value is established on the basis of market quotations for an instrument traded in an active market, as well as on the basis of valuation techniques, including models using discounted cash flows and options valuation models, depending on which valuation method is appropriate.
Positive valuation of derivative hedging financial instruments is presented in the statement of financial position in the line ‘Hedging instruments’ on an asset side, whereas the negative valuation – ‘Hedging instruments’ on a liabilities side.
The Group designates some of its derivative instruments as hedging items in applying hedge accounting. The Group decided to take advantage of the choice which gives IFRS 9 and continues to apply the hedge accounting requirements of IAS 39. This decision will apply to all hedging relationships, for which the Bank applies and will apply hedge accounting in the future. The Bank implemented fair value hedge accounting as well as cash flow hedge accounting.
22.1. Fair value hedge accounting
Fair value hedge accounting significant accounting principles
Changes in the measurement to fair value of financial instruments indicated as hedged positions are recognized – in the part ensuing from hedged risk – in the income statement. In the remaining part, changes in the carrying amount are recognized in accordance with the principles applicable for the given class of financial instruments.
Changes in the fair market valuation of derivative financial instruments, indicated as hedging positions in fair value hedge accounting, are recognized in the profit or loss in the same caption, in which the gains/losses from change in the value of hedged positions are recognized i.e. in the item ‘Net income from fair value hedge accounting’.
Interest income on derivative instruments hedging interest positions hedged is presented as interest margin.
The Group ceases to apply hedge accounting, when the hedging instrument expires, is sold, dissolved or released (the replacement of one hedging instrument with another or extension of validity of given hedging instrument is not considered an expiration or release, providing such replacement or extension of validity is a part of a documented hedging strategy adopted by given unit), or does not meet the criteria of hedge accounting or the Group ceases the hedging relation.
An adjustment for the hedged risk on hedged interest position is amortized in the income statement at the point of ceasing to apply hedge accounting.
Characteristics of fair value hedge accounting
The Group applies fair value hedge accounting for fixed coupon debt securities denominated in PLN, EUR and USD, hedged with interest rate swap (IRS) transactions in the same currencies. The Group hedges component of interest rate risk related to the fair value changes of the hedged item resulting exclusively from the volatility of market interest rates (WIBOR, EURIBOR, LIBOR USD). In the past, hedged risk component accounted for a significant portion of changes in fair value of the hedged item.
The approach of the Group to market risk managemant, including interest rate risk, and details regarding exposure of the Group to interest rate risk are disclosed in Note 46.4.
The use of derivative instruments to hedge the exposure to changes in interest rates generates counterparty credit risk of derivative transactions. The Group mitigates this risk by requiring the counterparties to post collateral deposits and by settling derivative transactions through Central Counterparty Clearing Houses (CCPs) whch apply a number of mechanisms allowing systemic reduction of the risk of default on obligations under concluded transactions.
The Group applies fair value hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting fair value changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated.
According to the approach of the Group, hedge ratio is determined as ratio of fair value of the hedged item to fair value of the hedging instrument. A hedging relationship is considered effective if all of the following criteria are met:
- high effectiveness of the hedge can be expected on the basis of comparison of critical terms of the hedged item and the hedging instrument,
- in each reporting period, hedge ratio is within 80% – 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal than the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument,
- in each reporting period, simulation of hedge ratio in assumed evolution of market rates scenarios is within 80% – 125% range.
As regards fair value hedge relationships, the main sources of ineffectiveness are:
- impact of the counterparty credit risk and own credit risk of the Group on the fair value of the hedging transactions (IRS), which is not reflected in the fair value of the hedged item,
- differences in maturities of the interest rate swaps and debt securities,
- differences in coupon amounts generated by the hedged item and hedging instruments.
Financial data for fair value hedge accounting
The tables below present interest rate swaps which are used by the Group as instruments hedging interest rate risk in fair value hedge accounting as of 31 December 2022 and 31 December 2021.
Nominal values and interest rates of hedging derivatives – fair value hedge
| 31.12.2022 | CONTRACTUAL MATURITY | |||||||
| HEDGING RELATIONSHIP | CURRENCY | UP TO 1 MONTH | BETWEEN 1 AND 3 MONTHS | BETWEEN 3 MONTHS TO 1 YEAR | BETWEEN 1 TO 5 YEARS | OVER 5 YEARS | TOTAL | |
| FVH IRS bonds | PLN | Nominal value | – | – | – | 200 000 | – | 200 000 |
| Average fixed interest rate (%) | – | – | – | 7.2 | – | 7.2 | ||
| EUR | Nominal value | 93 798 | – | – | 759 764 | 152 422 | 1 005 984 | |
| Average fixed interest rate (%) | 2.4 | – | – | 1.0 | 1.1 | 1.1 | ||
| USD | Nominal value | – | – | – | – | – | – | |
| Average fixed interest rate (%) | – | – | – | – | – | – | ||
| Total nominal value | 93 798 | – | – | 959 764 | 152 422 | 1 205 984 | ||
| 31.12.2021 | CONTRACTUAL MATURITY | |||||||
| HEDGING RELATIONSHIP | CURRENCY | UP TO 1 MONTH | BETWEEN 1 AND 3 MONTHS | BETWEEN 3 MONTHS TO 1 YEAR | BETWEEN 1 TO 5 YEARS | OVER 5 YEARS | TOTAL | |
| FVH IRS bonds | PLN | Nominal value | – | – | – | 200 000 | – | 200 000 |
| Average fixed interest rate (%) | – | – | – | 2.6 | – | 2.6 | ||
| EUR | Nominal value | – | – | – | 699 109 | 287 463 | 986 572 | |
| Average fixed interest rate (%) | – | – | – | (0.0) | (0.1) | (0.0) | ||
| USD | Nominal value | – | 101 500 | – | 701 405 | – | 802 905 | |
| Average fixed interest rate (%) | – | 3.7 | – | 1.4 | – | 1.7 | ||
| Total nominal value | – | 101 500 | – | 1 600 514 | 287 463 | 1 989 477 | ||
Impact of fair value hedge (interest rate risk hedging) on balance sheet and financial result
| 31.12.2022 |
FVH IRS BONDS – IRS HEDGING DEBT SECURITIES MEASURED AT |
TOTAL | |
| AMORTISED COST | FAIR VALUE THROUGHT OTHER COMPREHENSIVE INCOME | ||
| HEDGING INSTRUMENTS | |||
| Nominal value | 200 000 | 1 005 984 | 1 205 984 |
| Carrying amount – assets | 22 194 | 66 634 | 88 828 |
| Carrying amount – liabilities | – | 5 247 | 5 247 |
| Balance sheet item in which hedging instrument is reported | Hedging instruments | Hedging instruments | Hedging instruments |
| Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency | 15 609 | 167 717 | 183 326 |
| Amount of hedge ineffectiveness recognized in the income statement ‘Result on fair value hedge accounting’ | 602 | 2 795 | 3 397 |
| HEDGED ITEM | |||
| Carrying amount – assets | 178 460 | 966 483 | 1 144 943 |
| Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets | (21 756) | (57 848) | (79 604) |
| Balance sheet item in which hedged item is reported | Hedging instruments | Hedging instruments | Hedging instruments |
| Change in the value of hedged item used for estimating hedge inefficiency in the reporting period | (15 007) | (164 922) | (179 929) |
| Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued | – | – | – |
| 31.12.2021 |
FVH IRS BONDS – IRS HEDGING DEBT SECURITIES MEASURED AT |
TOTAL | |
| AMORTISED COST | FAIR VALUE THROUGHT OTHER COMPREHENSIVE INCOME | ||
| HEDGING INSTRUMENTS | |||
| Nominal value | 200 000 | 1 789 477 | 1 989 477 |
| Carrying amount – assets | 6 334 | – | 6 334 |
| Carrying amount – liabilities | – | 91 244 | 91 244 |
| Balance sheet item in which hedging instrument is reported | Hedging instruments | Hedging instruments | Hedging instruments |
| Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency | 33 148 | 68 401 | 101 549 |
| Amount of hedge ineffectiveness recognized in the income statement ‘Result on fair value hedge accounting’ | 905 | 2 799 | 3 704 |
| HEDGED ITEM | |||
| Carrying amount – assets | 193 467 | 1 932 646 | 2 126 113 |
| Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets | (6 749) | 111 377 | 104 628 |
| Balance sheet item in which hedged item is reported | Hedging instruments | Hedging instruments | Hedging instruments |
| Change in the value of hedged item used for estimating hedge inefficiency in the reporting period | (32 243) | (65 602) | (97 845) |
| Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued | – | – | – |
22.2. Cash flow hedge accounting
Cash flow hedge accounting significant accounting principles
Changes in the fair value of the derivative financial instruments indicated as cash flow hedging instruments are recognized:
- directly in the caption ‘Revaluation reserves’ in the part constituting the effective hedge,
- in the income statement in the line ‘Result on financial assets and liabilities held for trading and foreign exchange result’ in the part representing ineffective hedge.
The amounts accumulated in the ‘Revaluation reserves’ are transferred to the income statement in the period, in which the hedge is reflected in the income statement and are presented in the same lines as individual components of the hedged position measurement, i.e. the interest income from hedging derivatives in cash flow hedge accounting is recognized in the interest result, whereas gains/losses from foreign exchange revaluation are presented in the foreign exchange gains (losses).
The Group ceases to apply hedge accounting when the hedging instrument expires or is sold, or if the Group revokes the designation, or when hedge no longer meets the criteria for hedge accounting. In such cases, the accumulated gains or losses related to such hedging item, initially recognized in ‘Revaluation reserves’, if the hedge was effective, are still presented in equity until the planned transaction was closed and recognized in the income statement.
If the planned transaction is no longer probable, the cumulative gains or losses recognized in ‘Revaluation reserves’ are transferred to the income statement for the given period.
Characteristics of cash flow hedge accounting
The Group applies:
- cross-currency interest rate swaps (basis swap) to hedge exposure to interest rate risk related to volatility of market reference rates (WIBOR, EURIBOR) and exposure to currency risk. Portfolios of variable-rate loans and leasing receivables denominated in EUR and deposits in PLN (which economically constitute a long-term variable-rate liability) are hedged items in this hedging relationship. CIRS transactions (“hedging instruments’) are decomposed into the part hedging the portfolio of assets and the part hedging the portfolio of liabilities,
- interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR), generated by portfolios of variable-rate loans denominated in PLN,
- currency swaps (FX-Swap) to hedge the exposure to the currency risk, generated by both, portfolios of loans denominated in EUR and portfolios of current and term deposits denominated in USD
- interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR, EURIBOR), generated by portfolio of deposits denominated in PLN and EUR, which economically constitute a long-term, variable-rate liability.
In 2022, Group extended the existing relationship (CFH CIRS deposits/loans) with the current and future cash flows resulting from floating interest rate loans and lease receivables in EUR, as well as EUR/PLN basis swap transactions hedging currency and interest rate risk.
In 2022, as a result of the discontinuation of hedge accounting, the Group terminated one hedging relationship: currency- interest swaps (basis swap) hedging a portfolio of loans with a floating interest rate in CHF and a portfolio of deposits in PLN economically constituting a long-term liability with a floating interest rate. Impact of discontinuation of hedge accounting under the above-mentioned relationship on the income statement amounted to PLN 38 470 thousand.
Approach of the Group to hedging interest rate risk through cash flow hedge accounting is the same as the approach applied in the fair value hedge accounting as described above, i.e. only the component of interest rate risk related exclusively to volatility of market reference rates (in the case of cash flows hedge: WIBOR, EURIBOR, LIBOR USD) is hedged.
Approach of the Group to market risk management, including interest rate risk and currency risk, and details regarding the Bank’s interest rate risk and currency risk exposure are disclosed in Nocie 46.4.
As in the case of the fair value hedge, using derivative instruments to hedge the exposure to interest rate risk and currency risk generates counterparty credit risk of the derivative transactions, which is not compensated by the hedged item. The Group manages this risk in a way similar to fair value hedge.
The Group applies cash flow hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting cash flow changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated. The assessment is conducted using hypothetical derivative method.
According to the approach of the Group, a hedging relationship is considered effective if all of the following criteria are met:
- correlation coefficient between market reference rate of hedged items and market reference rate of hedging instrument is high,
- forecasted interest flows generated by hedged items are not lower than forecasted interest flows generated by hedging instruments,
- in each reporting period, ratio of the fair value of the hedged item to the fair value of the hedging instrument is within 80% – 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal to the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument,
- in each reporting period, simulation of hedge ratio in assumed evolution of market rates scenarios is within 80% – 125% range.
In the case of hedging interest rate and currency risk of portfolios of loans and deposits, the manner of managing these portfolios was adopted allowing for regular inclusion of new transactions in the hedging relationship and exclusion of transactions from the hedging relationship as a result of repayment or classification to non-performing category. As a result, the exposure of these portfolios to interest rate and currency risk is constantly changing. Because of frequent changes to term structure of the portfolio, the Group dynamically assigns the hedged items and allows for matching of hedging instruments to these changes.
As regards cash flow hedge relationships, the main sources of ineffectiveness are:
- impact of counterparty and the Group’s own credit risk on the fair value of the hedging instruments, i.e. interest rate swap (IRS), cross-currency interest rate swap (basis swap), currency swap (FX swap) which is not reflected in the fair value of the hedged item,
- differences in repricing frequency of the hedging instruments and and hedged loans and deposits.
Financial data for cash flow hedge accounting
Nominal values and interest rates of hedging derivatives – cash flow hedge
| 31.12.2022 | CONTRACTUAL MATURITY | |||||||
| HEDGING RELATIONSHIP | CURRENCY | UP TO 1 MONTH | BETWEEN 1 AND 3 MONTHS | BETWEEN 3 MONTHS TO 1 YEAR | BETWEEN 1 TO 5 YEARS | OVER 5 YEARS | TOTAL | |
| CHF IRS loans | PLN | Nominal value | – | 200 000 | 3 372 000 | 17 010 000 | 7 958 500 | 28 540 500 |
| Average fixed interest rate (%) | – | 1.1 | 1.3 | 1.7 | 4.7 | 2.5 | ||
| CFH IRS deposits | PLN | Nominal value | – | 5 000 | 25 000 | 116 000 | 198 000 | 344 000 |
| Average fixed interest rate (%) | – | 7.4 | 6.2 | 7.3 | 6.0 | 6.5 | ||
| CFH CIRS deposits/loans | EUR/PLN | Nominal value | 267 935 | 605 953 | 1 549 467 | – | – | 2 423 355 |
| CFH FX Swap deposits/loans | EUR/PLN | Nominal value | 937 340 | 490 445 | 953 903 | – | – | 2 381 688 |
| Average fixed interest rate EUR/PLN | 4.8 | 5.1 | 4.8 | – | – | 4.9 | ||
| USD/PLN | Nominal value | – | – | – | – | – | – | |
| Average fixed interest rate USD/PLN | – | – | – | – | – | – | ||
| EUR/USD | Nominal value | 469 226 | 1 439 604 | 471 947 | – | – | 2 380 777 | |
| Average fixed interest rate EUR/USD | 1.1 | 1.1 | 1.1 | – | – | 1.1 | ||
| Total nominal value | 1 674 501 | 2 741 002 | 6 372 317 | 17 126 000 | 8 156 500 | 36 070 320 | ||
| 31.12.2021 | CONTRACTUAL MATURITY | |||||||
| HEDGING RELATIONSHIP | CURRENCY | UP TO 1 MONTH | BETWEEN 1 AND 3 MONTHS | BETWEEN 3 MONTHS TO 1 YEAR | BETWEEN 1 TO 5 YEARS | OVER 5 YEARS | TOTAL | |
| CHF IRS loans | PLN | Nominal value | – | – | 1 000 000 | 16 703 000 | 6 120 000 | 23 823 000 |
| Average fixed interest rate (%) | – | – | 1.7 | 1.6 | 2.0 | 1.7 | ||
| CFH IRS deposits | PLN | Nominal value | – | – | 90 000 | 113 000 | 231 000 | 434 000 |
| Average fixed interest rate (%) | – | – | 1.4 | 1.2 | 1.4 | 1.3 | ||
| CFH CIRS deposits/loans | CHF/PLN | Nominal value | – | – | 393 795 | 3 080 058 | 785 615 | 4 259 468 |
| EUR/PLN | Nominal value | 266 870 | 285 308 | 666 465 | 2 399 282 | – | 3 617 925 | |
| CFH FX Swap deposits/loans | EUR/PLN | Nominal value | 8 464 322 | 4 725 897 | 5 432 066 | – | – | 18 622 285 |
| Average fixed interest rate EUR/PLN | 4.6 | 4.7 | 4.7 | – | – | 4.7 | ||
| USD/PLN | Nominal value | – | – | 194 290 | – | – | 194 290 | |
| Average fixed interest rate USD/PLN | – | – | 3.7 | – | – | 3.7 | ||
| EUR/USD | Nominal value | 422 974 | 47 813 | 416 973 | – | – | 887 760 | |
| Average fixed interest rate EUR/USD | 1.1 | 1.2 | 1.1 | – | – | 1.1 | ||
| Total nominal value | 9 154 166 | 5 059 018 | 8 193 589 | 22 295 340 | 7 136 615 | 51 838 728 | ||
Impact of cash of hedge on balance sheet and financial result
| HEDGE IN RELATIONSHIP as at 31.12.2022 | INTEREST RATE RISK | INTEREST RATE RISK / CURRENCY RISK | ||
| CFH IRS LOANS | CFH IRS DEPOSITS | CFH CIRS | CFH FX SWAP | |
| HEDGING INSTRUMENTS | ||||
| Nominal value | 28 540 500 | 344 000 | 2 423 355 | 4 762 465 |
| Carrying amount – assets | 104 032 | 39 114 | – | 47 615 |
| Carrying amount – liabilities | 3 089 128 | 12 886 | 68 202 | 950 |
| Balance sheet item in which hedging instrument is reported | Hedging instruments | Hedging instruments | Hedging instruments | Hedging instruments |
| Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness | (1 250 169) | 20 275 | (4 320) | 8 763 |
| Gains or losses resulting from hedging, recognized in other comprehensive income | – | – | – | – |
| Amount of hedge ineffectiveness recognized in the income statement in item ‘Result on financial assets and liabilities measured at fair value through profit or loss’ | 1 133 | – | – | – |
| Amount transferred from the revaluation reserves due to cash flow hedge accounting to the income statement as a reclassification adjustment | – | – | – | – |
| Income statement item in which reclassification adjustment is reported | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss |
| HEDGED ITEM | ||||
| Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period | 1 233 992 | (20 275) | 4 320 | (8 763) |
| Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period | (2 759 755) | 26 419 | (27 187) | (3 455) |
| Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied | – | – | – | – |
Impact of cash of hedge on balance sheet and financial result
| HEDGE IN RELATIONSHIP as at 31.12.2021 | INTEREST RATE RISK | INTEREST RATE RISK / CURRENCY RISK | ||
| CFH IRS LOANS | CFH IRS DEPOSITS | CFH CIRS | CFH FX SWAP | |
| HEDGING INSTRUMENTS | ||||
| Nominal value | 23 823 000 | 434 000 | 7 877 393 | 19 704 335 |
| Carrying amount – assets | – | 8 480 | – | 63 402 |
| Carrying amount – liabilities | 1 403 511 | 5 797 | 690 409 | 30 771 |
| Balance sheet item in which hedging instrument is reported | Hedging instruments | Hedging instruments | Hedging instruments | Hedging instruments |
| Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness | (2 190 677) | 42 884 | 5 302 | (12 931) |
| Gains or losses resulting from hedging, recognized in other comprehensive income | – | – | – | – |
| Amount of hedge ineffectiveness recognized in the income statement in item ‘Result on financial assets and liabilities measured at fair value through profit or loss’ | (13 400) | – | 951 | (1) |
| Amount transferred from the revaluation reserves due to cash flow hedge accounting to the income statement as a reclassification adjustment | – | – | – | – |
| Income statement item in which reclassification adjustment is reported | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss | Result on financial assets and liabilities measured at fair value through profit or loss |
| HEDGED ITEM | ||||
| Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period | 2 196 415 | (42 884) | (11 394) | 12 931 |
| Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period | (1 508 454) | 6 143 | (35 543) | (12 218) |
| Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied | – | – | – | – |
Changes in the revaluation reserve from the valuation of hedging derivatives in cash flow hedge accounting
| 2022 | 2021 | |
|---|---|---|
| Opening balance | (1 550 072) | 593 479 |
| INTEREST RATE RISK | ||
| Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period | (1 231 025) | (2 134 406) |
| Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item | – | – |
| INTEREST RATE RISK/CURRENCY RISK | ||
| Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period | (21 351) | (9 145) |
| Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item | 38 470 | – |
| Closing balance | (2 763 978) | (1 550 072) |