46.9. Fair value of financial assets and liabilities
[Financial notes are presented in PLN thousand]
Financial instruments that are measured at fair value in the consolidated statement of financial position of the Group
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 2022 and 31 December 2021, 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
| 31.12.2022 | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL |
|---|---|---|---|---|
| Assets: | 7 465 923 | 21 519 315 | 5 410 349 | 34 395 587 |
| Financial assets held for trading | 722 442 | 110 276 | 96 739 | 929 457 |
| Derivative financial instruments, including: | – | 15 088 624 | 292 | 15 088 916 |
| Banks | – | 2 889 685 | 292 | 2 889 977 |
| Customers | – | 12 198 939 | – | 12 198 939 |
| Hedging instruments, including: | – | 279 589 | – | 279 589 |
| Banks | – | 118 577 | – | 118 577 |
| Customers | – | 161 012 | – | 161 012 |
| Securities measured at fair value through other comprehensive income | 6 743 481 | 6 040 826 | 4 688 512 | 17 472 819 |
| Securities measured at fair value through profit or loss | – | – | 187 189 | 187 189 |
| Loans and advances to customers measured at fair value through other comprehensive income | – | – | 253 697 | 253 697 |
| Loans and advances to customers measured at fair value through profit or loss | – | – | 183 920 | 183 920 |
| Liabilities: | 874 591 | 18 697 902 | – | 19 572 493 |
| Financial liabilities held for trading | 874 591 | – | – | 874 591 |
| Derivative financial instruments, including: | – | 15 521 489 | – | 15 521 489 |
| Banks | – | 3 703 464 | – | 3 703 464 |
| Customers | – | 11 818 025 | – | 11 818 025 |
| Hedging instruments, including: | – | 3 176 413 | – | 3 176 413 |
| Banks | – | 125 949 | – | 125 949 |
| Customers | – | 3 050 464 | – | 3 050 464 |
| 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 |
Change in fair value of financial assets measured at fair value according to Level 3 by the Group
| 2022 | 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 | 94 433 | 5 860 | 245 829 | 160 379 | 171 496 | 5 181 843 | – |
| Increases, including: | 1 110 681 | 849 | 165 052 | 56 009 | – | 1 536 071 | – |
| Reclassification from other levels | 13 962 | 849 | – | – | – | 1 117 713 | – |
| Transactions made in 2022 | – | – | – | 52 772 | – | – | – |
| Acquisition/Granting | 1 093 759 | – | 151 248 | – | – | 233 859 | – |
| Settlement/Redemption | – | – | – | – | – | – | – |
| Gains on financial instruments | 2 960 | – | 13 804 | 3 237 | 15 693 | 184 499 | – |
| recognized in the income statement | 2 960 | – | 13 804 | 3 237 | 15 693 | 181 521 | – |
| recognized in revaluation reserves | – | – | – | – | – | 2 978 | – |
| Decreases, including: | (1 108 375) | (6 417) | (157 184) | (32 468) | – | (2 029 402) | – |
| Reclassification to other level | (64 970) | (1 455) | – | – | – | (940 106) | – |
| Settlement/Redemption | (13 000) | (3 044) | (150 974) | – | – | (471 874) | – |
| Sale/Repayment | (1 030 348) | – | – | – | – | (301 526) | – |
| Losses on financial instruments | (57) | (1 918) | (6 210) | (32 468) | – | (315 896) | – |
| recognized in the income statement | (57) | (1 918) | – | (32 468) | – | (65 036) | – |
| recognized in revaluation reserves | – | – | (6 210) | – | – | (250 860) | – |
| Closing balance | 96 739 | 292 | 253 697 | 183 920 | 187 189 | 4 688 512 | – |
| Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: | (371) | (557) | (7 128) | 3 101 | – | (269 081) | – |
| Income statement: | (371) | (557) | 817 | 3 101 | – | 26 144 | – |
| net interest income | 13 | – | 2 295 | 2 439 | – | 19 142 | – |
| net allowances for expected credit losses | – | – | (1 478) | – | – | 7 002 | – |
| result on financial assets and liabilities held for trading | (384) | (557) | 662 | – | – | – | |
| Other comprehensive income | – | – | (7 945) | – | – | (295 225) | – |
| 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 2022 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 Bank applies fair value valuation according to Level 3 as at 31 December 2022 is as follows:
| FINANCIAL ASSET/LIABILITY | FAIR VALUE AS AT 31.12.2022 | VALUATION TECHNIQUE | UNOBSERVABLE FACTOR | ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE ) | IMPACT ON FAIR VALUE AS AT 31.12.2022 | |
| POSITIVE SCENARIO | NEGATIVE SCENARIO | |||||
| Corporate and municipal debt securities | 4 474 326 | Discounted cash flow | Credit spread | 1.52%-2.62% | 94 198 | (94 198) |
| Derivatives | 292 | Black Scholes Model | Variability | 2.7%-4.1% | 108 | (91) |
| Loans and advances measured at fair value through profit or loss | 183 920 | Discounted cash flow | Credit spread | 1.45%-2.55% | 4 820 | (4 544) |
| Loans and advances measured at fair value through other comprehensive income | 253 452 | Discounted cash flow | Credit spread | 2.84%-3.94% | 3 806 | (3 743) |
| FINANCIAL ASSET/LIABILITY | FAIR VALUE AS AT 31.12.2022 | PARAMETR | SCENARIO | IMPACT ON FAIR VALUE AS AT 31.12.2022 | |
| POSITIVE SCENARIO | NEGATIVE SCENARIO | ||||
| Equity instruments mandatorily measured at fair value through profit or loss | 187 189 | Conversion discount | +10% / -10% | 5 257 | (19 770) |
| Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income | 269 551 | Discount rate | +1% / -1% | 31 916 | (25 585) |
The impact of estimated parameters on measurement of financial instruments for which the Bank applies fair value valuation according to Level 3 as at 31 December 2021 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 | NEGATIVE 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) |
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 2022 and 31 December 2021, 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 level:
- 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
| 31.12.2022 | CARRYING AMOUNT | FAIR VALUE | OF WHICH: | ||
|---|---|---|---|---|---|
| LEVEL 1 | LEVEL 2 | LEVEL 3 | |||
| Assets | |||||
| Cash and due from Central Bank | 13 436 334 | 13 388 622 | 4 316 728 | 9 071 786 | 108 |
| Loans and advance to banks | 4 678 613 | 4 677 978 | – | 1 860 129 | 2 817 849 |
| Loans and advances to customers measured at amortised cost | 158 283 373 | 159 314 361 | – | 1 337 427 | 157 976 934 |
| Debt securities measured at amortised cost | 62 655 238 | 57 691 500 | 25 676 904 | 29 210 619 | 2 803 977 |
| Other assets | 1 951 807 | 1 951 807 | – | – | 1 951 807 |
| Total Assets | 241 005 365 | 237 024 268 | 29 993 632 | 41 479 961 | 165 550 675 |
| Liabilities | |||||
| Amounts due to Central Bank | – | – | – | – | – |
| Amounts due to other banks | 8 594 396 | 8 627 193 | – | 1 417 321 | 7 209 872 |
| Amounts due to customers | 210 747 090 | 210 551 859 | – | – | 210 551 859 |
| Debt securities issued | 10 337 485 | 10 315 091 | – | 10 315 091 | – |
| Subordinated liabilities | 2 789 132 | 2 788 412 | – | 2 788 412 | – |
| Other liabilities | 4 894 444 | 4 894 444 | – | – | 4 894 444 |
| Total Liabilities | 237 362 547 | 237 176 999 | – | 14 520 824 | 222 656 175 |
| 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 |