7. Interest income and expense
Significant accounting policies
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 amortised 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.
Financial data
Interest income for 2023
Interest income for 2022
(**) including income from derivative hedging instruments in the amount of minus PLN 418 million.
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 in the period from July 2022 to December 2023 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 2 429 million, 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 Bank assumed that a part (50%) of the amounts suspended by customers will be used by them to repay loans.
The final participation rate (use of the rights arising from the Act) was approximately 70% compared to the estimated level of 72%, and the early loan repayment rate related to the use of the above-mentioned rights was approximately 68% compared to the assumed level of 60%.
As a result of the above, in 2022 the Bank included in its results PLN 1 958 million of the cost related to the total expected modification of PLN mortgage loan agreements granted to consumers due to their suspension of loan repayments, of which during the period of validity of the above-mentioned regulations (2022 and 2023) it was actually realized in the amount of
PLN 1 855 million, and the remaining amount, i.e. PLN 103 million, was recognized in interest income in 2023.
The tables below presents the structure and gross carrying amount of loans as at 31 December 2023 and 31 December 2022 for which repayment was suspended.
The Group does not identify an increase in credit risk if customers use the suspension of loan repayment.