64. Interest rate risk management

• DEFINITION

Interest rate risk is a risk of losses being incurred on the Group’s balance sheet and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in market interest rates.

• RISK MANAGEMENT OBJECTIVE

To reduce the potential losses resulting from market interest rate fluctuations to an acceptable level by properly shaping the structure of balance sheet and off-balance sheet items.

• RISK IDENTIFICATION AND MEASUREMENT

The Group uses the following measures of interest rate risk: interest income sensitivity, economic value sensitivity, value at risk (VaR), stress tests and repricing gaps.

• CONTROL

Control over interest rate risk consists of determining interest rate risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to interest rate risk.

• RISK FORECASTING AND MONITORING

The following measures are monitored by the Group on a regular basis:

• the levels of interest rate risk measures;
• utilization of the strategic limit of tolerance to interest rate risk;
• utilization of internal limits and thresholds of interest rate risk.

REPORTING

Reports on interest rate risk are prepared on a daily, weekly, monthly and quarterly basis. The reports contain information on interest rate risk exposure and on the risk limits utilization. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.

• MANAGEMENT ACTIONS

The main tools for interest rate risk management used by the Group are:

• interest rate risk management procedures;
• currency risk limits and thresholds;
• transactions that reduce interest income sensitivity or economic value sensitivity.

The Group established limits and thresholds for interest rate risk comprising, among other things, the following: interest income sensitivity, sensitivity of the economic value and losses.

The PKO Bank Polski S.A. Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2022 and 31 December 2021. The Group was mainly exposed to PLN interest rate risk. Interest rate risk generated by the Group companies did not materially affect interest rate risk of the entire Group and therefore did not change its risk profile significantly.

The Group categorizes its portfolios from the perspective of interest rate risk management:

• the banking book – comprises balance sheet and off-balance sheet items not included in the trading book, in particular items resulting from the Group’s core activities, transactions concluded for investment and liquidity purposes and their hedging transactions;
• the trading book – comprises transactions concluded on financial instruments as part of activities conducted on own account and on behalf of the customers.

The Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2022 and 31 December 2021. Due to the principle of keeping interest rate risk in the trading book at a limited level, this risk is primarily generated by positions in the banking book.

In order to mitigate the interest rate risk of the banking book, the Group uses limits and thresholds, as well as risk mitigation transactions based on information on the level of risk (using a measure of interest income sensitivity, a measure of economic value sensitivity, shock analyses and repricing gap) and planned business development. In order to hedge the level of future cash flows and the volatility of fair value arising from interest rate risk, hedging strategies approved by the Bank’s Management Board are applied using IRS/CIRS transactions as part of hedge accounting, which are described in Chapter 13.

In order to monitor interest rate risk the Group in applies interest rate risk measures that reflect the identified five main types of interest rate risk:

• the risk of revaluation date mismatch;
• the yield curve risk;
• the basis risk;
• the customer option risk; and
• credit spread risk in the banking book (CSRBB).

• Sensitivity of interest income

The sensitivity of interest income to sudden shifts in the yield curve is determined by a potential financial effect of such a shift reflected in a changed amount of interest income in a given time horizon. The change results from the mismatch between revaluation dates of assets, liabilities and off-balance sheet liabilities granted and received (in particular derivative instruments) sensitive to interest rate fluctuations.

Sensitivity of interest income in the banking book of the Group to the abrupt shift in the yield curve of 100 bp down in a one-year horizon in all currencies is shown in the table below:

• Sensitivity of economic value

Sensitivity of economic value reflects the fair value changes of items in the portfolio arising from the parallel shift of the yield curves by 100 bp up or down (the most unfavourable of the scenarios mentioned).

The table below presents the economic value sensitivity measure (stress-test) of the banking book of the Group in all currencies as at 31 December 2022 and 31 December 2021:

In order to monitor the interest rate risk in the trading book the Group applies the value-at-risk (VaR) measure.

• Value at risk

The IR VaR measure is a potential amount of loss that may be incurred in normal market conditions in a specific time (i.e. horizon) and with an assumed level of probability related to changes in interest rate curves.

The IR VaR in the Bank’s trading book is shown in the table below: