Selected financial data

 

[PLN thousand]

 

[in EUR thousand]*

 

 

period

period

period

period

 

from 01.01.2021

from 01.01.2020

from 01.01.2021

from 01.01.2020

 

to 31.12.2021

to 31.12.2020

to 31.12.2021

to 31.12.2020

Net interest income

54,614.2

52,088.7

11,957.4

11,719.0

Net income on basic activities

53,728.5

52,081.0

11,763.5

11,717.3

General and administrative expenses, including:

-27,839.1

-24,629.5

-6,095.2

-5,541.2

operating expenses

-22,700.5

-23,645.0

-4,970.1

-5,319.7

regulatory costs

-5,138.6

-984.5

-1,125.1

-221.5

Gross profit (loss)

26,680.5

24,695.6

5,841.5

5,556.1

Net profit (loss)

20,711.2

19,827.6

4,534.6

4,460.8

Profit/loss per ordinary share (PLN)

54.50

52.18

11.93

11.74

 

 

 

 

 

* Figures expressed in EUR have been calculated using the weighted average NBP exchange rate of 2021 for the reporting period and the weighted average NBP exchange rate of 2020 for the comparative figures.

 

 

[PLN thousand]

 

[in EUR thousand]*

 

 

as at

as at

as at

as at

 

31.12.2021

31.12.2020

31.12.2021

31.12.2020

Amounts due from banks

46,828.4

65,823.7

10,181.4

14,263.6

Debt securities

64,636.4

50,186.9

14,053.2

10,875.2

Loans and other receivables from clients

3,882,999.5

3,690,920.7

844,240.5

799,800.8

Total assets

3,999,200.7

3,813,219.1

869,504.9

826,302.1

Liabilities to banks

2,453,682.8

1,969,597.2

533,478.9

426,800.1

Liabilities under issue of bonds

654,660.0

975,131.6

142,336.0

211,305.3

Liabilities under issue of covered bonds

399,876.9

399,480.6

86,941.1

86,565.1

Total liabilities

3,517,213.8

3,351,435.7

764,711.4

726,236.4

Share capital

380,000.0

380,000.0

82,619.5

82,343.8

Total equity

481,986.9

461,783.4

104,793.4

100,065.7

 

 

 

 

 

 * Figures expressed in EUR have been calculated using the average NBP exchange rate of 31 December 2021 for the reporting date and of 31 December 2020 for the comparative figures.

 

The basic ratios

 

 

 

 

as at

as at

31.12.2021

31.12.2020

ROA - return on assets (%)

0.50%

0.52%

ROE - return on equity (%)

4.41%

4.29%

DR - total debt ratio (%)

87.95%

87.89%

TCR - total capital ratio (%)*

30.43%

32.22%

LR - leverage ratio (%)*

11.67%

12.30%

LCR - liquidity coverage ratio (%)

131%

8555%

 

 

 

ROA - return on assets ratio (%) - calculated as the ratio of net profit from 4 consecutive quarters to average assets from 5 consecutive quarters

ROE - return on equity ratio (%) - calculated as the ratio of net profit from 4 consecutive quarters to average shareholders' equity from 5 consecutive quarters

DR - debt ratio (%) - calculated as the ratio of total debt to total assets

TCR - total capital ratio (%) - calculated as required by the provisions of the CRR (for details go to section Risk and Capital Management)

LR - leverage ratio (%) - calculated as required by the provisions of the CRR (for details go to section Risk and Capital Management)

LCR - liquidity coverage ratio (%) - calculated as required by the provisions of the CRR (for details go to section Risk and Capital Management)

* In accordance with supervisory recommendations, the ratios as at 31 December 2020 are recalculated after the profit distribution is approved by the General Shareholders Meeting, and then they are reported to the Supervisor. The above presented ratios as at 31 December 2020 take into account the recalculation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Table of Contents

 

Income statement

Statement of comprehensive income

Statement of financial position

Statement of changes in equity

Cash flow statement

Accounting policy and additional notes

1. Bank details

2. Significant events that occurred in 2021

3. Significant events after the end of the reporting period

4. Statement of compliance with International Financial Reporting Standards

5. Significant accounting principles and key estimates

6. Comparability of financial data

7. Notes to the financial statements

NOTES TO INCOME STATEMENT

7.1. Net interest income

7.2. Net commission income

7.3. General and administrative expenses

7.4. Expected loss provision

7.5. Income tax

7.6. Earnings per ordinary share

NOTES TO STATEMENT OF FINANCIAL POSITION

7.7. Amounts due from banks

7.8. Debt securities

7.9. Loans and other receivables from clients

7.10. Property, plant and equipment

7.11. Intangible assets

7.12. Other assets

7.13. Liabilities to banks

7.15. Liabilities under issue of covered bonds

7.16. Provisions

7.17. Other liabilities

7.18. Lease liabilities

7.19. Share capital

7.20. Accumulated other comprehensive income

7.21. Retained earnings

OTHER NOTES

7.22. Additional information to the cash flow statement

7.23. Fair value

7.25. Off-balance sheet items

7.26. Related party transactions

7.27. Transactions with the management staff and employees

7.28. Headcount

7.29. Segment reporting

7.30. Qualitative information

7.31. Quantitative information

7.32. Capital adequacy disclosures

Income statement

 

 

 

 

 

note

period

period

 

 

from 01.01.2021

from 01.01.2020

 

 

to 31.12.2021

to 31.12.2020

Interest income, including:

7.1.

83,394.1

108,806.1

calculated using the effective interest method

7.1.

83,394.1

108,806.1

Interest costs

7.1.

-28,779.9

-56,717.4

Net interest income

7.1.

54,614.2

52,088.7

Fee and commission income

7.2.

447.3

523.9

Commission expenses

7.2.

-1,149.3

-447.7

Net commission income

7.2.

-702.0

76.2

FX result

 

-31.8

-52.5

Net income on other basic activities

 

-151.9

-31.4

Net income on basic activities

 

53,728.5

52,081.0

General and administrative expenses, including:

7.3.

-27,839.1

-24,629.5

operating expenses

7.3.

-22,700.5

-23,645.0

regulatory costs

7.3.

-5,138.6

-984.5

Expected loss provision

7.4.

854.3

-2,755.9

Tax on certain financial institutions

 

-63.2

0.0

Gross profit (loss)

 

26,680.5

24,695.6

Income tax

7.5.

-5,969.3

-4,868.0

Net profit (loss)

 

20,711.2

19,827.6

 

 

 

 

Number of shares

 

380,000

380,000

Profit(+)/loss(-) per ordinary share - basic (in PLN)

 

54.50

52.18

Profit(+)/loss(-) per ordinary share - diluted (in PLN)

 

54.50

52.18

 

 

 

 

There were discontinued operations at ING Bank Hipoteczny S.A. neither in the period that ended 31 December 2021 nor in the same period last year.

The Income Statement should be read in conjunction with the notes to the financial statements being the integral part thereof.

 

 

Statement of comprehensive income

 

 

 

 

 

Note

period

period

from 01.01.2021

from 01.01.2020

to 31.12.2021

to 31.12.2020

Profit (loss) after tax for the period

 

20,711.2

19,827.6

Other net comprehensive income

 

-507.7

403.8

Items which can be reclassified to income statement

 

-520.5

493.4

Unrealised result on measurement of HTC&S securities

7.20

-520.5

493.4

including deferred tax

 

122.1

-115.7

Items which will not be reclassified to income statement

 

12.7

-89.6

Actuarial gains/losses

7.20

12.7

-89.6

including deferred tax

 

-3.0

21.0

Net comprehensive income for the period

 

20,203.5

20,231.4

 

 

 

 

The statement of comprehensive income should be read in conjunction with the notes to the financial statements being the integral part thereof.



Statement of financial position

 

 

 

 

 

note

as at

as at

31.12.2021

31.12.2020

Amounts due from banks

7.7

46,828.4

65,823.7

Debt securities measured at fair value through other comprehensive income

7.8

49,640.8

50,186.9

Debt securities measured at amortized cost

7.8

14,995.6

0.0

Loans and other receivables from clients

7.9

3,882,999.5

3,690,920.7

Property, plant and equipment

7.10

1,207.1

739.4

Intangible assets

7.11

0.1

824.8

Deferred tax assets

 

1,115.5

942.2

Other assets

7.12

2,413.7

3,781.4

Total assets

 

3,999,200.7

3,813,219.1

 

 

 

 

Liabilities to banks

7.13

2,453,682.8

1,969,597.2

Liabilities under issue of bonds

7.14

654,660.0

975,131.6

Liabilities under issue of covered bonds

7.15

399,876.9

399,480.6

Provisions

7.16

823.6

775.8

Current tax liabilities

 

444.6

98.8

Other liabilities

7.17

7,725.9

6,351.7

Total liabilities

 

3,517,213.8

3,351,435.7

Share capital

7.19

380,000.0

380,000.0

Supplementary capital - share premium

 

62,002.2

62,002.2

Accumulated other comprehensive income

7.20

-554.1

-46.4

Retained earnings

7.21

40,538.8

19,827.6

Total equity

 

481,986.9

461,783.4

Total equity and liabilities

 

3,999,200.7

 

3,813,219.1

 

 

 

 

Carrying amount

 

481,986.9

461,783.4

Number of shares

 

380,000

380,000

Carrying amount per share (in PLN)

 

1,268.39

1,215.22

 

 

 

 

The Statement of Financial Position should be read in conjunction with the notes to the financial statements being the integral part thereof.

 

 

Statement of changes in equity

period from 01.01.2021 to 31.12.2021

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Note

Share capital

Supplementary capital - share premium

Accumulated other comprehensive income

Retained earnings

Total equity

Opening balance of equity

7.19

380,000.0

62,002.2

-46.4

19,827.6

461,783.4

Net result for the current period

7.21

0.0

0.0

0.0

20,711.2

20,711.2

Other net comprehensive income

7.20

0.0

0.0

-507.7

0.0

-507.7

Unrealised result on measurement of securities measured at fair value through other comprehensive income

 

0.0

0.0

-520.5

0.0

-520.5

Actuarial gains/losses

 

0.0

0.0

12.7

0.0

12.7

Closing balance of equity

 

380,000.0

62,002.2

-554.1

40,538.8

481,986.9

  

 

 

 

 

 

 

 

 

 

 

 

 

 

period from 01.01.2020 to 31.12.2020

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Note

Share capital

Supplementary capital - share premium

Accumulated other comprehensive income

Retained earnings

Total equity

Opening balance of equity

7.n/a

210,000.0

62,191.1

-450.1

-188.9

271,552.1

Issue of shares of series C

7.n/a

170,000.0

0.0

0.0

0.0

170,000.0

Coverage of losses from previous years

 

0.0

-188.9

0.0

188.9

0.0

Net result for the current period

7.n/a

0.0

0.0

0.0

19,827.6

19,827.6

Other net comprehensive income

7.20

0.0

0.0

403.7

0.0

403.7

Unrealised result on measurement of HTC&S securities

 

0.0

0.0

493.3

0.0

493.7

Actuarial gains/losses

 

0.0

0.0

-89.6

0.0

-89.6

Closing balance of equity

 

380,000.0

62,002.2

-46.4

19,827.6

461,783.4

  

 

 

 

 

 

 

The Statement of Changes in Equity should be read in conjunction with the notes to the financial statements being the integral part thereof.

 

 

Cash flow statement

 

 

 

 

 

Note

period

period

from 01.01.2021

from 01.01.2020

to 31.12.2021

to 31.12.2020

Profit after tax

 

20,711.2

19,827.6

Adjustments

 

-206,340.6

-616,402.5

Depreciation and amortisation

7.3, 7.10, 7.11

1,179.1

1,368.8

Interest accrued (from the income statement)

7.1

-54,614.2

-52,088.7

Interest paid

 

-47,283.8

-43,999.3

Interest received

 

79,666.0

110,390.8

Income tax (from the income statement)

7.5

-5,969.3

-4,868.0

Income tax paid

 

6,141.8

5,496.6

Change in provisions

7.22

60.5

100.4

Change in loans and other receivables from banks

7.22

2,513.6

1,433.4

Change in debt securities measured at fair value through other comprehensive income

7.22

-113.4

493.4

Change in loans and other receivables from customers

7.22

-190,857.8

-631,395.0

Change in fixed assets due to recognition of lease

 

-496.5

186.1

Change in other assets

7.22

1,042.1

-2,299.8

Change in liabilities to banks

7.22

366.7

-56.3

Change in liabilities under issue of covered bonds

7.22

313.9

531.6

Change in other liabilities

7.22

1,710.8

-1,696.3

Net cash flow from operating activities

 

-185,629.3

-596,574.9

  

  

  

  

Purchase of property, plant and equipment

7.10

0.0

-11.0

Purchase of securities measured at fair value through other comprehensive income

7.8

0.0

-15,914.4

Purchase of securities measured at amortized cost

7.8

-14,995.6

0.0

Disposal of securities measured at amortized cost

7.8

0.0

229,980.4

Interest received on debt securities

 

132.5

339.7

Net cash flow from investing activities

 

-14,863.1

214,394.7

  

  

  

  

Long-term loans received

 

2,792,996.9

3,091,066.6

Long-term loans repaid

 

-2,308,996.9

-3,608,517.9

Interest on long-term loans repaid

 

23,201.3

-6,963.2

Proceeds from the issue of bonds

 

654,000.0

975,000.0

Redemption of bonds

 

-975,000.0

0.0

Payment of interest on issued bonds

 

-1,238.1

0.0

Payment of interest on issued covered bonds

 

-3,129.5

-8,082.9

Lease liabilities repaid

 

-336.6

-314.4

Net cash flow from financing activities

 

181,497.1

442,188.2

  

  

  

  

Net increase/decrease in cash and cash equivalents

 

-18,995.3

60,008.0

Opening balance of cash and cash equivalents

 

65,823.7

5,815.7

Closing balance of cash and cash equivalents

7.7,  7.22

46,828.4

65,823.7

  

  

  

  

The Cash Flow Statement should be read in conjunction with the notes to the financial statements being the integral part thereof.

 

 

Accounting policy and additional notes

 

1.                Bank details

 

1.1.              Key Bank data

ING Bank Hipoteczny Spółka Akcyjna (“Bank”, “Company”) with its registered office in Katowice, ul. Chorzowska 50, entered to the Register of Entrepreneurs of the National Court Register maintained by the District Court Katowice – Wschód in Katowice, 8th Commercial Division of the National Court Register under the number KRS 0000723965 on 20 March 2018. The Bank statistical number is REGON 369582281, and the tax identification number is NIP 205-000-51-99. There have been no changes in the Bank's name or identification data in 2021 compared to the previous reporting period.

 

1.2.              Scope of operations and duration

As at 31 December 2021, ING Bank Hipoteczny S.A. is a joint-stock company holding a permit issued by the Polish Financial Supervision Authority for running business based on the Mortgage/Covered Bonds and Mortgage Banks Act of 29 August 1997, the Banking Law Act of 29 August 1997, Commercial Companies and Partnerships Code and other commonly binding legal regulations, good banking practice principles and the Bank Charter.

The strategic objective of ING Bank Hipoteczny is to acquire and then to increase the share of long-term financing in the Bank’s balance sheet through the issue of covered bonds and to become one of the main issuers of these debt instruments on the Polish market.​

 

1.3.              Share capital

The share capital of ING Bank Hipoteczny S.A. amounts to PLN 380,000,000 and is divided into 380,000 ordinary registered shares of nominal value of PLN 1,000 each.

Structure of the share capital

 

Series

Type of share

Number of shares

Nominal value of one share (PLN)

Series nominal value (PLN)

Date on which a resolution was passed by AGM

Issue date

Date of registration

in the National Court Register (KRS)

A

ordinary

120,000

1,000.00

120,000,000

not applicable*

26.02.2018

20.03.2018

B

ordinary

90,000

1,000.00

90,000,000

03.01.2019

03.01.2019

06.02.2019

C

ordinary

170,000

1,000.00

170,000,000

11.12.2019

11.12.2019

09.01.2020

* Issue of shares of series A stems from the Deed of Incorporation of 26 February 2018.

 

The share capital has been fully covered with pecuniary contributions. Each ordinary share entitles its holder to dividend and one vote during the general meeting.

1.4.              Shareholders of ING Bank Hipoteczny S.A.

ING Bank Hipoteczny S.A. is a subsidiary of ING Bank Śląski S.A., which as at 31 December 2021 held 100% of the share capital of ING Bank Hipoteczny S.A. The Bank is part of the capital group called herein the ING Bank Śląski S.A. Group.

1.5.              ING Bank Hipoteczny S.A. Management Board and Supervisory Board composition

Management Board

In 2021 there were no changes in the composition of the Management Board of ING Bank Hipoteczny S.A.

As at 31 December 2021, the composition of the Management Board of ING Bank Hipoteczny S.A. was as follows:

o        Mr Mirosław Boda, President of the Management Board,

o        Mr Jacek Frejlich, Vice President of the Management Board,

o        Mr Roman Telepko, Vice President of the Management Board.

 

Supervisory Board

In 2021, there were changes in the composition of the Supervisory Board of ING Bank Hipoteczny S.A.

o        On 21 January 2021, Mr Lorenzo Tassan-Bassut tendered his resignation from the position of a member of the Bank Supervisory Board effective end of 31 January 2021.

o        On 14 June 2021, Mr Brunon Bartkiewicz tendered his resignation from the position of Chair of the Supervisory Board of the Bank, effective as of the end of 14 June 2021, while remaining a Member of the Supervisory Board.

o        On 14 June 2021, the Bank's Supervisory Board elected Ms Bożena Graczyk as Chair of the Bank's Supervisory Board, effective from 15 June 2021.

As at 31 December 2021, the Supervisory Board of ING Bank Hipoteczny S.A. worked in the following composition:

o        Ms Bożena Graczyk, Chairwoman,

o        Mr Marcin Giżycki - Deputy Chairman,

o        Mr Jacek Michalski, Secretary (independent member),

o        Mr Brunon Bartkiewicz, Member,

o        Ms Joanna Erdman, Member,

o        Mr Krzysztof Gmur, Member (independent member).

 

1.6.              Auditing firm authorised to audit the financial statements

BDO Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered office in Warsaw is the auditing firm authorised to audit the financial statements of ING Bank Hipoteczny S.A.

 

1.7.              Approval of financial statements

The annual financial statements of ING Bank Hipoteczny S.A. for the period from 1 January 2020 to 31 December 2020 were approved by the General Meeting of ING Bank Hipoteczny S.A. on 24 March 2021.

These financial statements of the ING Bank Hipoteczny S.A. for the period from 1 January 2021 to 31 December 2021 were signed by the Bank Management Board on 16 March 2022.

 

2. Significant events that occurred in 2021

Information on the impact of the COVID-19 epidemic on the operations of ING Bank Hipoteczny S.A.

In 2021, the Bank’s operating, business and financial activities were still influenced by the COVID-19 pandemic. The Polish and global economy are in the period of deep shock and uncertainty, and state institutions and regulators take a number of steps and offer aid programmes to limit the recession.

During the reporting period the Bank’s Management Board analysed the COVID19 pandemic related developments on a current basis. They identified the risks attributable to increased delay in loan repayment and a potential decrease in property prices.  Throughout the whole 2021, the Bank monitored, among other things, the number and volume of loans in respect of which borrowers requested a suspension of loan instalment repayments (the Bank's offer) or a suspension of the execution of the loan agreement (the so-called "statutory credit moratoria"), as well as monitored the impact of the solutions offered to customers on issues related to securing the issue of covered bonds, the cost of risk and the Bank's result.

The Bank also analyses the market situation regarding covered bonds and changes in the regulatory and economic environment on an ongoing basis. Moreover, it is monitored all the time whether the suppliers are able to provide services.

During the pandemic caused by the SARS-CoV-2 coronavirus, the Bank takes measures to maintain operational continuity, including ongoing customer service. Preventive measures were also taken to protect employees’ health by introducing, for instance, remote working. The Bank’s standing is good in terms of its liquidity and capital position. In fact, it significantly exceeds the required regulatory levels. As at 31 December 2021, the Bank’s LCR was 131%. Tier 1 ratio, equal to the Bank’s total capital ratio, was 30.43% as at 31 December 2021. The level of this ratio is currently almost 3 times higher than required by law.

 

Government measures put in place to support the economy

To alleviate the economic impact of the COVID-19 pandemic, the Government and the National Bank of Poland offer tax and cash support to help companies and employees to keep going, and to ensure access to liquidity for the financial sector. The tools used to support the economy include:

o        co-financing of a part of the payroll costs,

o        subsidising business activities, for instance in the form of subsidies and partial payment of interest,

o        launching the system of guarantees and warranties for entrepreneurs,

o        exempting from/postponing payment of contributions and taxes,

o        putting off the deadlines for some reporting obligations,

o        introducing a maximum level of non-interest bearing costs,

o        suspending the running of the time limits in the administrative proceedings,

o        allowing the suspension of loan agreements for three months for these borrowers who have lost their jobs or their main source of income.

The above measures were supported by the Anti-Crisis Shield of the Polish Development Fund (PFR):

The Financial Shield for Micro Enterprises and the Financial Shield for Small and Medium-Sized Enterprises launched in 2Q 2020 (the deadline for subvention applications was 31 July 2020), and the PFR Financial Shield for Large Enterprises launched at the beginning of 3Q 2020.

 

COVID-19 related activities of the Bank

In connection with the ongoing COVID-19 pandemic, in 2021, the Bank continued to carry out activities aimed at assisting the customers  facing financial difficulties. The measures implemented by the Bank are in line with the Polish Bank Association’s “Position of banks on the standardization of principles of offering aid measures to banking sector customers” (i.e. a non-statutory moratorium within the meaning of the European Banking Authority Guidelines “EBA”).

Since 7 April 2020, the Bank has made it possible for the borrowers to suspend repayment of loan instalments (principal part of the instalment or the full loan instalment) for a period of up to 6 months. Since 24 June 2020, the Bank has made it possible for the borrowers to suspend the execution of the loan agreement (under the amended Act on special arrangements for preventing, counteracting and combating COVID–19, other contagious diseases and crisis situations caused by them). As at 31 December 2021, 37 borrowers have availed themselves of the suspension of the execution of the loan agreement (applications under statutory moratorium), of which the suspension period did not end for only 3 debt claims in the amount of PLN 647,600.

 

Purchase of mortgage receivables portfolios, issues of covered bonds

In 2021, another transfer of mortgage receivables was carried out, while due to the external environment in connection with the ongoing COVID-19 pandemic, the Bank did not carry out any further issues of covered bond in 2021.

 

Expected credit loss provisioning

As at 31 December 2021, the Bank has revised its projections concerning macroeconomic indicators, which also include the effect of the COVID-19 impact. The macroeconomic assumptions used to determine the expected credit losses were based on the forecasts agreed upon in the ING Bank Śląski S.A. Group.  In view of the ongoing pandemic and great uncertainty about the future, the Bank is unable to predict the impact of COVID-19 risks and the projections we made may not fully reflect impact of the macroeconomic situation on the expected credit losses level both in the short and long run.Therefore, the Bank revises the macroeconomic assumptions used in determining the ECL provisions on a quarterly basis.

The estimated impact of COVID-19 on macroeconomic parameters is updated on an ongoing basis in subsequent quarters depending on, among others, the scale of the pandemic, its duration, the impact of government support on the economy and external conditions.

The Bank applies the same methodology for the calculation of expected losses.

 

Change in the interest rate formula for a mortgage-backed loan from a variable interest rate to a periodically fixed interest rate.

In 2021, the Bank adjusted its processes to the requirements of the amended Recommendation S of the Polish Financial Supervision Authority (PFSA), implementing, among others, the option to change the loan interest rate formula from a variable rate to a periodically fixed one. In a situation of rising inflation and the MPC's decisions regarding the increase of the reference interest rate, this product offers the Bank's customers the opportunity to mitigate the risk of interest rate increase by convertion to a fixed rate. As at 31 December 2021, 3 borrowers availed themselves of the option to convert the interest rate formula. This concerned debt claims for the amount of PLN 560,500.

Due to the business model of ING Bank Hipoteczny S.A., the Bank does not identify any significant impact directly affecting it in connection with the entry into force as of 1 January 2022 of Recommendation S of the PFSA.

 

Amount of the annual contribution to the BGF compulsory resolution fund in 2021

On 20 April 2021, the Management Board of the Bank was informed by the Bank Guarantee Fund about the amount of the annual contribution to the banks’ compulsory resolution fund in 2021. The total cost to the Bank was PLN 4.7 million, the 2020 contribution adjustment included. The entire amount has been recognised under the costs of the first quarter of 2021.

 

General Meeting of ING Bank Hipoteczny S.A.

On 24 March 2021, the Ordinary General Meeting of ING Bank Hipoteczny S.A. took place. The resolutions that were passed there concerned:

o        Consideration and approval of the financial statements of ING Bank Hipoteczny S.A. for 2020,

o        Consideration and approval of the Management Board Report on Operations of ING Bank Hipoteczny S.A. for 2020  inclusive of Statements of the Management Board on observance of corporate governance principles,

o        Acceptance of reports of the Supervisory Board of ING Bank Hipoteczny S.A. for 2020,

o        Distribution of the profit generated by ING Bank Hipoteczny S.A. in the period from 1 January 2020 to 31 December 2020,

o        Acknowledgement of the fulfilment of duties in 2020 by all Management Board Members and Supervisory Board Members.



Prospectus update - Covered bonds

In December 2021, ING Bank Hipoteczny S.A. updated its prospectus for the issue of covered bonds. The document was approved by Commission de Surveillance du Secteur Financier on 2 December 2021 and, in accordance with Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, constitutes the formal and legal basis for carrying out - for the next 12 months - the issuance of covered bonds.

 

3. Significant events after the end of the reporting period

 

Redemption of own bond series INGBH004 and INGBH006

On 25 January 2022, own bond series INGBH004 of the total nominal value of PLN 150,000,000 issued by the Bank on 25 March 2021 was redeemed. In addition, on 9 March 2022 own bond series INGBH006 of the total nominal value of PLN 425,000,000 issued by the Bank on 9 December 2021 was redeemed.

 

Imposition by the Polish Financial Supervision Authority of a capital charge recommended under Pillar II (P2G)

On 11 February 2022, the Bank received a letter from the Polish Financial Supervision Authority (“PFSA”) on the recommendation to mitigate the risks inherent in the Bank's activities by maintaining by the Bank its own funds allocated for covering the additional capital charge (“P2G”) at 0.98 p.p. in order to absorb potential losses resulting from stress events.According to PFSA’s methodology for determining the capital charge recommended under Pillar II (P2G), the maximum level of P2G capital charge may amount to 4.5 p.p. Details in this respect are described in chapter Risk and Capital Management in item 7.30. Qualitative information - Capital management. The Bank has a high and safe level of capital adequacy, significantly exceeding regulatory requirements including also P2G capital charge.

 

Individual recommendation of the Polish Financial Supervision Authority on meeting the criteria for dividend payout from net profit for 2021

On 25 February 2022, the Bank received a letter from the Polish Financial Supervision Authority (PFSA), in which the PFSA indicated that the Bank meets the requirements to pay dividend of up to 100% of the net profit for 2021. At the same time, the PFSA recommended mitigating the inherent risk of the Bank by not taking, without prior consultation with the supervisory authority, other actions, in particular those outside the scope of current business and operational activities, which could lead to lowering the Bank’s own funds, including possible dividend payout from undivided profit from previous years and buy-back of own shares.

 

Armed conflict in Ukraine

On 24 February 2022, Russia launched a large-scale war against Ukraine. The international community reacted by imposing sanctions against Russia and Belarus.

The Bank continuously monitors the development of events related to the ongoing armed conflict in Ukraine and analyses its impact both on the macroeconomic environment and on the Bank itself. The direct impact of this situation may be reflected in future credit, market and operational risks.

The Bank has a small exposure of mortgage loans granted to individual customers who are citizens of Ukraine, Russia and Belarus. Additionally, absolute majority of these loans were granted to individuals being residents of Poland. The loan portfolio towards the citizens of Ukraine, Russia and Belarus is limited and its share in the loan portfolio does not exceed 1%. It shall be emphasised that this portfolio relates only to mortgage-backed loans, for which the real estate constituting collateral is located in Poland. As at the date of signing this report, the Bank has not identified any significant delays in repayment of mortgage loans by the above mentioned customers. In the opinion of the Bank Management Board, no material impact of the armed conflict in Ukraine on the Bank's liquidity and capital position is identified. As the Bank’s business model is based on the outsourcing of some of its activities, the Bank has also reviewed its suppliers and business continuity plans.

 

In summary, the events in question that occurred after the balance sheet date, i.e. 31 December 2021, are events that indicate a state of affairs occurring after the end of the reporting period and therefore do not require adjustments to the amounts presented in these financial statements. At the date of approval of these financial statements, it is not possible to estimate the financial impact of the above events on subsequent reporting periods.

 

4. Statement of compliance with International Financial Reporting Standards

 

These annual financial statements of ING Bank Hipoteczny S.A. for the period from 1 January 2021 to 31 December 2021 were prepared in compliance with the requirements of the International Financial Reporting Standards (“IFRS”) version approved by the European Union.

The financial statements take into account the requirements of the standards and interpretations approved by the European Union except for the standards and interpretations mentioned in item 4.1 below, which either await approval by the European Union or have been already approved by the European Union but shall take effect after the balance sheet date.

Income statement, Statement of comprehensive income, Statement of changes in equity and Cash flow statement for the period from 01 January 2021 to 31 December 2021 and Statements of financial position as at 31 December 2021 together with comparable data have been prepared using the same accounting principles for each of the periods.

 

4.1.              Changes to accounting standards

In these annual financial statements the following binding standards and new interpretations approved by the European Union for annual periods starting on or after 1 January 2021 were taken into account by the Bank:

 

Change

Influence on the Bank’s statements

Changes to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

Benchmark rate reform - Phase II

Implementation of the amendments involves the possibility to continue recognition and presentation of financial instruments affected by the benchmark rate reform and increased scope of disclosures. Change in benchmark rates has not affected the Bank's financial statements.

The Bank had no exposures based on other reference rates, while customer contracts are based on WIBOR-3M and do not require annexation.

Amendments to IFRS 4 Insurance Contracts

Extension of the temporary exemption from IFRS 9

Application of the amendment has not affected the financial statements of the Bank.

 

The published standards and interpretations which were issued by 31 December 2021 and approved by the European Union but were not previously applied by the Bank:

 

Change

(EU effective date is given in the parentheses)

Influence on the Bank’s statements

Amendment to IFRS 16: COVID-19 rent concessions after 30 June 2021 (financial year beginning 1 April 2021)

Lease modification amendment to extend by 1 year the period of possibile waiver of the assessment of lease modifications when the change in lease payments is a direct consequence of the COVID-19 pandemic. Amendment implementation will have no impact on the financial statements of the Bank.

Changes resulting from the periodical review of IFRS 2018-2020

(financial year beginning on 1 January 2022)

Changes concerning:

IFRS 1 - first-time adopter subsidiary

IFRS 9 - fees in the ‘10 per cent’ test (to determine whether it is possible to exclude financial liabilities from the statement of financial position) - according to the change in the test, all fees paid or received, including those settled by the borrower or lender on behalf of other entities, should be included

Illustrative examples for IFRS 16 - Lease incentives

IAS 41 - Agriculture: taxation in fair value measurements.

The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

IFRS 3

Reference to the conceptual framework

(financial year beginning on 1 January 2022)

Amendment introducing references to conceptual assumptions published in March 2018.

The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

IAS 37

Onerous Contracts — Cost of Fulfilling a Contract

(financial year beginning on 1 January 2022)

The amendment clarifies the notion of the costs of meeting the obligations arising from contracts where the costs exceed the economic benefits arising from them.  The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

IAS 16

Property, Plant and Equipment — Proceeds before Intended Use

(financial year beginning on 1 January 2022)

The change consisting in the exclusion of the possibility of deducting from the cost of production of property, plant and equipment the amounts received from the sale of products produced at the stage of pre-implementation tests. Such sales revenue and corresponding costs should be recognised in the income statement. The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

 

The published standards and interpretations which were issued by 31 December 2021, but were not approved by the European Union as at 31 December 2021 and were not previously applied by the Bank:

 

Change

(expected IASB effective date provided for in the parentheses)

Influence on the Bank’s statements

IAS 1

Presentation of financial statements: classification of financial liabilities as short-term or long-term, taking into account the postponement of the date of application

(financial year beginning on 1 January 2023)

Classification of financial liabilities as long-term will depend on the existence of rights to prolong the liability for a period longer than 12 months and on meeting the conditions for such prolongation as at the balance sheet date. On 19 November 2021, the IASB published draft amendments in this regard. In the Bank’s opinion, the implementation of the amendment will have no impact on the Bank's financial statements.

Amendments to IAS 1 and practical stand to IFRS

Disclosures concerning the Accounting Policy (financial year beginning on 1 January 2023)

Amendment regarding the scope of disclosure of significant accounting principles in the financial statements. In accordance with the implemented amendments, the disclosures will apply only to these accounting policies that have a material effect on the information in the financial statements.

The practical position attached to the amendment provides a detailed illustrative example. The implementation of the amendment will have a significant impact on the scope of disclosure of significant accounting principles in the Bank's financial statements.

Amendment to IAS 8:

definition of accounting estimates (financial year beginning on 1 January 2023)

The amendment clarifies the definition of accounting estimates, i.e.: monetary amounts in the financial statements that are subject to measurement uncertainty. The implementation of the amendment will not have a significant impact on the Bank's financial statements.

 Amendment to IAS 12: 

Deferred tax related to assets and liabilities arising from a single transaction

(financial year beginning on 1 January 2023)

The amendment clarifies the rules for recognizing income tax and the applicable exemption from deferred tax recognition. The amendment specifies that this exemption does not apply to leases and decommissioning obligations, i.e. transactions for which an asset and a liability are recognised at the same time. Amendment implementation will have no impact on the financial statements of the Bank.

Amendments to IFRS 17 Insurance Contracts:  First-time adoption of IFRS 17 and IFRS 9 - comparative information.

(financial year beginning on 1 January 2023)

The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

IFRS 17

Insurance contracts, taking into account the extension of the temporary exemption from the application of IFRS 9.

(financial year beginning on 1 January 2023)

The Bank’s analyses show that the implementation of these changes will have no significant impact on the financial statements of the Bank.

 

As at the date of approving these statements for publication, given the ongoing process of implementing the IFRS standards in the EU as well as the Bank’s operations, with regard to the accounting principles applied by the Bank – there is no difference between the IFRS standards which came into force and the IFRS standards approved by the EU.

 

4.2.              Going concern

These annual financial statements of ING Bank Hipoteczny S.A. were prepared on a going concern basis, as regards at least 12 months from the publication date, that is from 18 March 2022. As at the date of signing these financial statements, the Bank Management Board, identify no facts or circumstances that could pose a threat to the Bank’s operation as a going concern for at least 12 months from the publication date due to intended or forced discontinuation or significant limitation by the Bank of its current operations.

 

 

4.3.              Discontinued operations

Material operations were discontinued neither in 2021 nor in 2020.

 

4.4.              Financial statements scope and currency

The Bank is neither the parent entity nor the major investor for associates, jointly controlled entities or subsidiaries. Thus, ING Bank Hipoteczny S.A. does not prepare consolidated financial statements of the Group covering the financial data of such entities.

The parent entity of ING Bank Hipoteczny S.A. is ING Bank Śląski S.A. The latter prepares consolidated financial statements of the ING Bank Śląski S.A. Group. Whereas ING Bank Śląski S.A. is a part of the capital group that is called herein as the ING Group. ING Groep N.V. is the ultimate parent of the Group.

These annual financial statements of the Bank have been developed in Polish Zloty (“PLN”, “zloty”). Unless otherwise specified, financial data are presented after rounding to one thousand zloty. Therefore, some totals and individual notes can be inconsistent in mathematical terms.

 

4.5.              Reporting period and comparable data

The annual financial statements of the Bank cover the period from 1 January 2021 to 31 December 2021 and include comparative data:

o        for the period from 1 January 2020 to 31 December 2020 for the items in the income statement, statement of comprehensive income, statement of cash flows and statement of changes in equity,

o        as at 31 December 2020 for the items in the statement of financial position.

 

 

5.                Significant accounting principles and key estimates

 

The presented herein below accounting policy of the Bank follows the requirements of IFRS.

The detailed accounting principles and key estimates applied for the needs of preparation of these financial statements are consistent with the principles binding in the financial year ending on 31 December 2020.

In 2021, no material changes were made to the accounting principles applied by the Bank.

At the same time, as a result of the market situation caused by the COVID-19 pandemic, key estimates were changed, which are described in point 5.3 Accounting estimates hereof.

 

5.1.              Basis for preparing the financial statements

The financial statements are presented in Polish zloty, rounded to the nearest thousand, with one decimal place (unless stated otherwise).

In the financial statements, the concept of fair value of financial assets and financial liabilities measured at fair value and financial assets classified as measured at fair value through other comprehensive income was applied, except for those for which fair value cannot be reliably determined. Other items of financial assets are presented at amortized cost less impairment or at cost less impairment.

Property, plant and equipment and intangible assets are recognised at cost less cumulative amortisation and impairment.

All major items of costs and revenue are recognised by the Bank on the following bases: accrual, matching of revenues and expenses, recognition and measurement of assets and liabilities, creation of impairment losses.

 

5.2.              Professional judgement

In the process of applying the accounting principles to the issues indicated below, the professional judgement of the management was of utmost importance, apart from accounting estimates.

 

5.2.1.         Deferred tax asset

The Bank recognises deferred tax assets assuming that it will probably have sufficient taxable income to fully realise the deferred tax asset.

 

5.2.2.         Classification of financial assets

The Bank classifies financial assets based on assessment of a business model under which assets are held and based on assessment whether the contractual terms and conditions entail only payments of principal and interests thereon. Detailed information about the assumptions made in this respect are presented under 5.5.2 below. Classification of financial assets

 

5.3.              Accounting estimates

The development of financial statements in accordance with IFRS requires from the Bank the use of estimates and assumptions that affect directly the amounts reported in the annual financial statements and notes thereto.

Estimations and assumptions applied to the presentation of amounts of assets and liabilities, as well as revenues and costs are made using historical data available and other factors considered to be relevant in given circumstances. The assumptions applied for the future and available data sources are the base for making estimations regarding the carrying amount of assets and liabilities, which cannot be determined explicitly on the basis of other sources. The estimates reflect the reasons for/ sources of uncertainties as at the balance sheet date. The actual results may differ from estimates.

Estimates and assumptions are reviewed on a current basis. Adjustments to estimates are recognized in the period when the estimation was changed provided that the adjustment applies to this period alone. Whereas, should the adjustments affect both the period when the estimation was changed as well as the following periods, they are recognised in the period when the estimation was changed and in the following periods.

Below, there are the most significant accounting estimates made by the Bank.

5.3.1.         Impairment

The Bank assesses whether there is objective evidence of impairment of financial assets (individual items or groups) and non-current assets as at balance sheet date.

5.3.1.1. Impairment of financial assets

The Bank applies the requirements of IFRS 9 as regards impairment in order to recognise and measure loss allowance for expected credit losses attributable to financial assets that are measured:

o        at amortised cost or

o        at fair value through other comprehensive income.

Expected loss in the portfolio of individually non-significant exposures is calculated collectively as a probability weighted average based on a few macroeconomic scenarios of various probability of occurrence. The final level of provisions on exposures in Stage 2 results from the total expected losses calculated each year in future to the remaining maturity, taking into account discounting.

Due to the specifics of its operations, the Bank distinguishes only collective provisions.

In compliance with IFRS 9, a collective provision is made for individually not significant financial assets (provisions for the portfolio at Stage 3 subject to collective evaluation) if there is evidence of impairment for a single financial assets item or for a group of financial assets as a result of a single event or multiple events of default. Provisions for the portfolio at Stage 3 subject to collective evaluation are made for financial assets falling into the risk rating 20, 21, 22 (detailed mapping of risk classes is presented hereinbelow). If after the assessment we find that for a given financial assets item there is no evidence of impairment, the item is included in the group of financial assets with similar credit risk characteristics, which indicate that the debtor is capable to repay the entire debt under to the contractual terms and conditions. For such groups, collective provisions are calculated and, in accordance with IFRS 9, they are defined as provisions for non-impaired assets. Provisions for non-impaired assets are made for financial assets falling into the risk rating 1-19.

Collective provisions are calculated with the collective provisioning method that uses, adjusted to the requirements of IFRS 9 (and IAS 37), models of risk parameters assessment (PD, LGD, EAD/CCF).

Some examples of impairment evidence and triggers for financial assets, methodology of impairment computation and the recording rules applied thereto were described later herein.

 

Customer exposure by risk class

Risk classes can be divided into four basic groups:

         a group of classes corresponding to investment grade (risk classes 1 to 10),

         a group of classes corresponding to speculative ratings (risk classes 11 to 17),

         a group of classes of potentially non-performing exposures (risk classes 18-19),

         a group of classes of non-regular exposures (risk classes 20-22).

The risk class range 1-10 corresponds to Moody's short-term ratings Aaa to Baa3, the risk class range 11-17 corresponds to Moody's short-term ratings Ba1 to Caa3 and the risk class range 18-19 corresponds to Ca to C. For ratings 20-22, the probability of default is 100%.

Macroeconomic forecasts

Credit risk models for IFRS 9 were built based on historical relationships between changes in economic parameters (i.e. GDP, unemployment rate, house price index or interest rates) and their subsequent effect on the realisation of changes in credit risk level (PD/LGD). Every quarter the Bank verifies forecasts of macroeconomic factors used in IFRS models adjusting them to the current situation. At the end of 2021, the adopted forecasts of macroeconomic factors take into account the improvement of the economic situation in Poland in 2021. The Polish economy recovered strongly in the first three quarters of 2021. Real GDP reached pre-crisis levels already in the second quarter of 2021. Although supply disruptions for some commodities and sharp hikes in their prices created problems for many industries, the strong labour market and consumer spending capacity made the economic performance satisfactory, although when interpreting the annual dynamics one should bear in mind the effect of the very low base of 2020. The economic situation in the coming quarters and years will be influenced by, in addition to a less relaxed monetary policy, which has to fight high inflation, the weak Polish zloty and rising inflation expectations, as well as the expected tightening of fiscal policy and a relatively rapid increase in interest rates. In the coming year, this will be compounded with changes brought about by the tax reform and by the unstable situation across the eastern border. Given also the uncertainty caused by the Covid-19 pandemic, which is expected to become endemic over the coming year, the Bank has adopted relatively prudent values for its forecasts of macroeconomic factors.

They are not as optimistic as the 2021 parameter values might suggest, but nevertheless reflect the relatively good situation of the bank's loan portfolio and the expected impact of the exposures previously classified as Stage 3 and now reclassisifed to a better category as a result of the government memorandum.

The adopted forecast values for subsequent years are shown in the tables in the following chapters.

Sensitivity analysis of expected losses to the level of the adopted PD threshold

In order to show the sensitivity of expected losses to the level of the PD threshold adopted, the Bank has estimated the allowance for expected losses in Stages 1 and 2 with the following assumptions:

- all of these financial assets would be below the PD threshold and have an associated 12-month expected loss; and

- all these assets would exceed this PD threshold and have lifetime expected losses attributed to them.

These estimates show as at 31 December 2021, respectively, hypothetical lower expected losses for assets in Stages 1 and 2 by approximately PLN 0.37 million (under the first assumption) or higher by approximately PLN 13.23 million (under the second assumption).

For comparison, estimates made as at 31 December 2020 showed, respectively, hypothetical lower expected losses for assets in Stages 1 and 2 by approximately PLN 0.71 million (under the first assumption) or higher by approximately PLN 13.32 million (under the second assumption).

It should be noted that in 2021 the Bank did not make any significant changes to the classification of mortgage loans, including to Stage 2 (known as SICR - significant increase in credit risk).

Macroeconomic factor projections and weights assigned to each macroeconomic scenario

The following tables present the macroeconomic projections of the main indicators adopted as at 31 December 2021 and 31 December 2020 and the deviation of expected losses in the positive, baseline and negative scenarios from the reported expected losses, weighted by the probability of the scenarios - assuming that the time horizon of the expected loss calculation remains unchanged at 12 months or over the lifetime of the exposures, respectively.

At the end of 2021, the deviations from expected losses for the stressed scenarios (positive and negative) are higher compared to the end of 2020. This is due to a reduction in the level of reported losses as a result of improved portfolio quality and an increase in the severity of certain aspects of these scenarios.

 

2021

 

 

2022

2023

2024

Expected losses unweighted by probability - deviation from reported losses in %

Scenario weight

Reported expected losses

(collective assessment in Stages 1, 2 and 3)

Positive scenario

GDP

6.6%

6.0%

5.5%

-10%

20%

2,905.6

Unemployment according to LFS

1.9%

1.9%

1.8%

Property price index

7.8%

6.3%

6.5%

3M interest rate

3.0%

3.0%

3.0%

Baseline scenario

GDP

5.1%

4.3%

3.5%

-1%

60%

Unemployment according to LFS

2.5%

2.6%

2.8%

Property price index

5.9%

4.7%

4.6%

3M interest rate

2.6%

2.6%

2.5%

Negative scenario

GDP

-0.5%

2.7%

1.7%

+12%

20%

Unemployment according to LFS

4.2%

5.6%

6.9%

Property price index

0.3%

2.5%

2.5%

3M interest rate

2.2%

1.8%

1.7%

 

 

2020

 

 

2021

2022

2023

Expected losses unweighted by probability - deviation from reported losses in %

Scenario weight

Reported expected losses

(collective assessment in Stages 1, 2 and 3)

Positive scenario

GDP

7.7%

4.2%

5.0%

-7%

20%

3,663.3

Unemployment according to LFS

3.8%

2.8%

1.8%

Property price index

8.1%

6.3%

4.3%

3M interest rate

0.6%

1.0%

1.3%

Baseline scenario

GDP

4.2%

3.7%

3.4%

-1%

60%

Unemployment according to LFS

4.7%

3.4%

2.8%

Property price index

2.8%

4.6%

4.6%

3M interest rate

0.1%

0.4%

0.5%

Negative scenario

GDP

-4.8%

5.4%

2.3%

+3%

20%

Unemployment according to LFS

6.8%

6.6%

6.9%

Property price index

-8.1%

5.2%

7.7%

3M interest rate

0.0%

0.2%

0.3%

 

During the development of macroeconomic scenarios and the calculation of the allowance for expected credit losses, the Bank made no management adjustments (including: no management adjustments for the COVID-19 pandemic).

5.3.1.2.    Impairment of other non-current assets

For non-current assets, valuation is based on estimating the recoverable amount of non-current assets being the higher of their value in use and net realisable value at the review date.

The value in use of an item of non-current assets (or a cash-generating unit when the recoverable amount of an assets item forming joint assets cannot be determined) is estimated, among others, through adoption of estimation assumptions for amounts, times of future cash flows which the Bank may generate from a given assets item (or a cash-generating unit) and other factors.

To determine the value in use, the estimated future cash flows are discounted to their present value at pre-tax discount rate, which reflects the current market expectations as regards value of money and the specific risk of a given assets item. When estimating the fair value less costs of sale, the Bank makes use of relevant market data available or valuations made by independent appraisers which are based on estimates by and large.

5.3.2.         Provisions for retirement and pension benefits

The Bank establishes the provisions for retirement and pension benefit in accordance with IAS 19. The provision for retirement and pension benefit pay awarded as part of the benefits under the Labour Code regulations is calculated using the actuarial method by an independent actuary as the present value of the future long-term Bank’s obligations towards their employees considering the headcount and payroll status as at the update date.

The provisions are calculated based on a range of assumptions, relating to both discount rates and projected salary raises as well as to staff rotation, death risk and others. The assumptions are verified at the end of the financial year.

The table below shows model sensitivity to the values adopted for individual assumptions as at 31 December 2021 and 31 December 2020. The value of pension provisions recognised in the Bank's books as at 31 December 2021 and 31 December 2020, respectively, is presented as the base case.

2021

 

 

 

 

 

Provisions for retirement and pension benefits (in PLN thousand)

Lower bracket

Base variant

Upper bracket

Discount Rate (+1% / base variant / - 1%)

721.5

803.6

900.3

Salary raise (-0.5% / base variant/ +0.5%)

756.6

803.6

852.4

 

2020

 

 

 

 

 

Provisions for retirement and pension benefits (in PLN thousand)

Lower bracket

Base variant

Upper bracket

Discount Rate (+1% / base variant / - 1%)

670.7

755.8

856.8

Salary raise (-0.25% / base variant/ +0.25%)

731.5

755.8

781.1

 

5.3.3.         Valuation of incentive schemes

5.3.3.1.    Valuation of variable remuneration programme benefits

As at the balance sheet date, the Bank presents in the books the estimated value of benefits to be rendered under the variable remuneration programme. Benefits will be granted to employees covered with the programme, based on their performance appraisal for a given year. The programme was launched in 2018.

Value of benefits granted in a form of financial instruments entitling to receive cash is estimated based on book value of net assets of ING Bank Hipoteczny S.A. per share, adjusted with factors affecting the said assets, other than the financial result.

The value of the deferred benefit element is adjusted with the reduction factor which accounts for probability of occurrence of an event requiring adjustment of the value of the granted benefit which the employee is not fully eligible to as at the balance sheet date. The catalogue of events has been defined in the programme assumptions.

5.3.4.         Amortisation period and method for intangible assets

The amortisation period and method for intangible assets are verified at the end of each financial year. Changes to the useful life or expected pattern of consumption of the future economic benefits embodied in the intangible asset are recognised by changing the amortisation period or method, accordingly, and are deemed to be changes in the estimates. The Bank applies the capitalisation limit established by the ING Bank Śląski S.A. Group for purchase (PLN 440,000) or in-house production (PLN 10 million) of computer software. Expenditure for acquisition of items of intangible assets below the capitalisation limit are recognised by the Bank directly in expenses when incurred.

 

5.4.       Foreign currency

5.4.1.         Functional currency and presentation currency

The items given in presentations of the Bank are priced in the currency of the basic economic environment in which a given entity operates (“functional currency”).

These financial statements are presented in Polish Zloty, which is the functional currency and the presentation currency of the Bank.

5.4.2.         Transactions in foreign currency

Transactions expressed in foreign currencies are translated at FX rate prevailing at the transaction date. The financial assets and liabilities, being result of the said transactions and denominated in foreign currencies are translated at the FX rate prevailing on a given day. The foreign exchange differences resulting from the settlements of the said transactions and the balance sheet valuation of the financial assets and liabilities denominated in foreign currency are recognized in the income statement under the FX result.

 

5.5.       Financial assets and liabilities

5.5.1. Initial recognition

The Bank recognises financial assets or liabilities item in the statement of financial position when it becomes bound with the stipulations of the instrument-related contract.

Purchase and sale transactions of financial assets measured at amortized cost, measured at fair value through other comprehensive income and at fair value through profit and loss are recognized, in accordance with accounting policies applied to all transactions of a certain type, at the settlement date, the date on which the asset is delivered to an entity or by an entity.

When a financial asset or financial liability is recognized initially, it is measured at its fair value plus, in the case of a financial asset or financial liability not carried at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

The purchased mortgage loans related debt claims are recognised as at the transaction date [1]based on the Debt Transfer Contract in order to issue covered bonds (hereinafter referred to as: “Transfer Contracts”).

5.5.2 Classification of financial assets

Financial assets are classified by the Bank to one of the following categories:

o        measured at amortised cost,

o        measured at fair value through other comprehensive income and

o        measured at fair value through profit or loss.

 

Financial assets measured at amortised cost

A financial asset is measured at amortised cost if both of the following conditions are met and it is not designated to measurement at fair value through profit or loss:

o        the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and

o        the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Debt financial assets measured at fair value through other comprehensive income

A debt financial asset is measured at fair value through other comprehensive income if both of the following conditions are met and it is not designated to measurement at fair value through profit or loss:

o        the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows or to sell the financial assets item,

o        the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Financial assets measured at fair value through profit or loss

All financial assets that do not meet the conditions to be classified as financial assets measured at amortised cost or debt financial assets measured at fair value through other comprehensive income, are classified to financial assets measured at fair value through profit or loss.

Moreover, at initial recognition, the Bank may irrevocably designate a given financial assets item to be measured at fair value through income statement, even though, satisfying the terms and conditions of classification, it can be measured at amortised cost or at fair value through other comprehensive income. It is a prerequisite to confirm that the purpose of such a designation is to eliminate or limit significantly any accounting mismatch that would occur without the said designation.

5.5.3. Business Model Assessment

The Bank assesses goals of the business model per organisational unit of the Bank that manages a given portfolio of financial assets and is its owner.

There are the following business models of holding financial assets; namely assets are held:

o        to receive contractual cash flows,

o        to receive contractual cash flows or to sell,

o        for other reasons (including, but not limited to, in order to maximise profit on sales).

Business models are set at the level that reflects best the Bank’s approach to management of financial assets items in order to achieve business goals and to generate cash flows.

During assessment, the Bank verifies all areas of operation of the business unit of the owner of the ring fenced portfolio of financial assets that may affect decisions about holding the assets in the Bank’s portfolio, including, especially:

o        assumptions of the product offer structure,

o        organisational structure of the unit,

o        assumptions concerning assessment of the yield from the portfolio of assets (for instance, approach to planning, management information assumptions, or key ratios of assessment),

o        approach to remuneration for the key management in relation to the portfolio results and cash flows,

o        risk of the assets portfolio and management approach to that risk,

o        analysis of transactions of sale from the assets portfolio (frequency, volume and reasons for the decisions taken),

o        analysis of projected future sales.

The Bank allows transactions of sale of financial assets held to get contractual cash flows, due to the following reasons:

o        increase in credit risk,

o        closeness to maturity date,

o        occasional sale,

o        sale of insignificant value,

o        in response to regulatory/supervisory requirements,

o        during liquidity crisis (stress situations).

The Bank assumes that:

o        any sale close to the maturity date is the sale of financial assets:

- if the initial maturity date is longer than 1 year - less than 6 months before the maturity date,

- if the initial maturity date is shorter than 1 year - less than 3 months before the maturity date.

o        occasional sale means the sale at the level below 10% of the sales transactions in relation to the average number of items within a given business model, 

o        sale of insignificant value means sale at the level lower than a ratio determined based on the quotient of 10% rate and the average maturity term of the portfolio in relation to one of the following values:

- quotient of the carrying amount of the sold position in relation to the carrying amount of the whole portfolio under a given business model,

- quotient of the realised result in relation to net interest margin of the whole portfolio held under a given business model.

5.5.4.         Cash flows assessment

For the needs of cash flows assessment, the Bank assumes the following definitions:

o        principal – is defined as fair value of the financial assets item at initial recognition in the Bank’s books,

o        interest – is defined as payment that includes:

- fee for the change in time value of money,

- fee for the credit risk of the principal amount due and payable throughout a stipulated period of time,

- fee for other basic credit-related risks and costs (for instance, liquidity risk and overheads) and

- profit margin.

Assessment is to find out whether cash flows are effected solely to repay principal and interest due and payable thereon. The Bank verifies the contractual clauses affecting both the time of cash flows and their amount resulting from specific financial assets.

Most notably, the following terms and conditions are verified:

o        contingencies affecting the amount or timelines of cash flows,

o        leverages,

o        terms and conditions of early payment or prolongation of financing,

o        terms and conditions limiting the right to sue attributable to the cash flows realised,

o        terms and conditions modifying the fee for the change in time value of money.

The terms and conditions modifying the change in time value of money are assessed using qualitative or quantitative analysis.

Should the qualitative appraisal not be enough to confirm the conclusion concerning characteristics of the realised cash flows, the Bank carries out the quantitative one. Quantitative appraisal is carried out by comparing:

o        undiscounted cash flows resulting from the analysed contract with

o        undiscounted cash flows from the reference asset that does not have any terms and conditions modifying the fee for the change in time value of money.

If the analysed cash flows differ significantly from each other, the assessed asset has to be classified for measurement at fair value through the income statement, because cash flows are not effected solely to repay principal and interest due and payable thereon.

5.5.5.         Classification of financial liabilities

The Bank classifies its financial liabilities into categories measured at amortised cost.

Financial liabilities measured at amortized cost are financial liabilities that are contractual obligations to deliver cash or other financial asset to another entity not carried at fair value through profit or loss, being a deposit, loan received or a financial liability recognised as a result of a sale of a financial assets item that cannot be derecognized from the statement of financial position, due to the issue of covered bonds and other securities.

5.5.6.         Derecognition

The Bank derecognizes a financial asset from the Bank’s statement of financial position when, and only when the contractual rights to the cash flows from the financial asset expire or the Bank transfers the financial asset and the transfer meets the conditions for derecognition.

The Bank transfers the financial asset if and only if:

o        it transfers contractual rights to receive cash flows, or

o        it retains the contractual rights to receive cash flows but assumes a contractual obligation to transfer the cash flows. 

When the Bank retains contractual rights to cash flows, but assumes a contractual obligation to transfer those cash flows, the Bank treats such a transaction as a transfer of a financial asset only if all three of the following conditions are met:

o        the Bank is not obliged to pay the amount to eventual recipients until it has received the corresponding amounts that result from the original asset,

o        under the transfer contract, the Bank may not sell or pledge the original asset, other than as security for the obligation to transfer cash flows established in favour of eventual recipients,

o        the Bank is obliged to transfer all cash flows received from the original asset without material delay. 

On transferring the financial asset, the Bank evaluates the extent to which it retains the risks and rewards of ownership of the financial asset. Accordingly, where the Bank:

o        transfers substantially all the risks and rewards of ownership of the financial asset, it derecognises the financial asset from the statement of financial position,

o        retains substantially all the risks and rewards of ownership of the financial asset, it continues to recognise the financial asset in the statement of financial position,

o        neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, then the Bank determines whether it has retained control of the financial asset. If control is retained, the financial asset continues to be recognised in the Bank’s balance sheet; accordingly, if control is not retained, the financial asset is derecognised from the statement of financial position up to the amount resulting from continuing involvement.

The Bank derecognizes a financial liability (or a part thereof) from its statements of financial position when, and only when the obligation specified in the contract is satisfied, cancelled or expires.

The Bank derecognizes a financial asset or a part thereof from the statement of financial position if the rights resulting from that asset expire, the Bank waives those rights, sells the receivables, is redeemed or as a result of a material modification of the terms and conditions of the credit agreement. 

The Bank shall reduce the gross carrying amount of a financial asset if there is no reasonable prospect of recovering the financial asset in whole or in part.

The amounts of receivables written down as loss and recovered thereafter reduce the value of impairment loss in the income statement

5.5.7.         Modification of contractual cash flows

If, after renegotiation of the terms and conditions of a credit facility agreement, cash flows from a given financial assets item are subject to modification, the Bank assesses whether the modification is major and whether it leads to derecognition of that financial assets item from the Bank’s statements of financial position.

The Bank assumes that modification of the terms and conditions of an agreement is major in case of:

o        a change in debtor with the consent of the Bank, or

o        a change in legal form/type of financial instrument, or

o        currency conversion of the credit facility unless it was provided for in the contractual terms and conditions in advance.

If a modification is not major and does not lead to derecognition of the financial assets item from the Bank’s statements of financial position, the Bank recalculates the gross carrying amount of the financial assets item and recognises modification gain or loss through P/L.

5.5.8.         Measurement

After initial recognition, the Bank measures financial assets, at fair value, except for financial assets measured at amortised cost using the effective interest rate.

After initial recognition, all financial liabilities are measured at amortised cost using the effective interest method.

5.5.9.         Impairment

Assessment of impairment is based on measurement of expected credit losses. Such an approach is applied to debt financial assets and credit exposure.

At each reporting date, the Bank will assess loss allowance for expected credit losses of the financial asset in the amount equal to the lifetime expected credit losses if the credit risk on a given financial instrument has increased significantly since initial recognition. If as at the reporting date the credit risk on a given financial instrument has not increased significantly since initial recognition, the Bank assesses loss allowance for expected credit losses of that asset in the amount equal to 12-month expected credit losses.

For accounting and regulatory purposes, the Bank assumes that the past due positions include major financial assets for which there was a delay in repayment of principal or interest. The days past due are calculated starting from the date on which its past due credit obligation is deemed material. The Bank defines the materiality of a credit obligation as exceeding two materiality thresholds jointly: PLN 400 and 1% of the balance sheet exposure amount.

The Bank measures expected credit losses taking into account:

o        unencumbered and probability weighted amount that is determined by assessing numerous possible results;

o        time value of money; and

o        reasonable and supportable information that is available without undue cost or effort as at the reporting date, referring to past events, current conditions and projections concerning future business conditions.

The Bank classifies balance sheet credit exposures as impaired, and impairment loss was incurred when the following two conditions are met:

o        there is evidence of impairment resulting from one event or more events occurring after initial recognition of the balance sheet credit exposure in the accounting books,

o        the event (or events) causing loss impacts (or impact) the expected future cash flows resulting from the balance sheet credit exposure or a group of the balance sheet credit exposures that can be reliably assessed.

Any delay in performance of any major credit obligations of the client towards the Bank, parent entity in excess of 90 days is a default on the client’s part.

The definitions of default, impaired and non-performing exposures have also been clarified by the Bank, by which the Bank has aligned its approach to regulatory requirements in this respect. A debtor or an exposure that is assessed as defaulted is simultaneously considered as impaired and non-performing.

The Bank applies the definition of default at the credit exposure level and additionally applies the principles of contagion: intra-segment - if default is recognised on any customer's exposure in the MTG segment (comprising the Bank's and ING Bank Śląski's portfolios), all other credit exposures of that customer in that segment get a default status (they become “infected”).

 

Approach based on 3 stages

The method of estimation of provisions applied by the Bank depends on the change in the level of credit risk of a given exposure to the risk level determined at the date on which the credit facility was granted. Based on the change in the credit risk level, exposure is classified to one of three stages differing in the method of calculation of the expected credit loss:

o        Stage 1 – covers exposures working without any recognised significant increase in the credit risk since the date on which they were granted. Each loan is in Stage 1 at the time it is granted. A provision is calculated based on a 12month expected loss (or to the remaining maturity if less than 12 months).

o        Stage 2 – covers exposures working with recognised significant increase in the credit risk since the date on which they were granted. The provision is calculated based on lifetime expected credit loss of the exposure, namely from the reporting date to the remaining maturity.

o        Stage 3 – the exposures with identified impairment, namely in default. The provision is calculated based on the assets’ lifelong expected credit loss for PD = 100%.

The Bank classifies the exposures to Stage 1, 2 or 3 using a cascade approach in the following order:

1.          Identification of the impaired exposures and classifying them to Stage 3.

2.          Allocation of exposures to Stage 2 based on the criteria of a significant increase in credit risk.

3.          Allocation of the remaining exposures to Stage 1.

 

Definition of a significant increase in credit risk

A significant increase in credit risk, resulting in the classification to Stage 2, is evidenced by the occurrence of at least one of the following prerequisites, the leading one being the first:

o        a significant increase in the PD over the exposure lifetime determined for the reporting date in relation to the PD ‘lifetime’ as of the date the exposure was granted in the perspective of the period remaining from the reporting date to the maturity date,

o        granting of forbearance to the client,

o        restructuring without identified impairment –  risk ratings 18/19,

o        delay in debt repayment in excess of 30 days,

o        deterioration in the risk profile of the exposure portfolio due to the product type, industry or distribution channel.

 

Rationale for classifying an asset measured at amortised cost to Stage 3

At each balance sheet date, the Bank assesses whether a financial asset or a group of financial assets is impaired. A financial asset item or a group of financial assets is impaired, if, and only if, there is evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset item (a ‘loss event’) and that loss event (or events) has (have) an impact on the expected future cash flows of the financial asset item or a group of financial assets that can be reliably estimated. The Bank recognises expected credit losses based on reasonable and supportable information that is available without undue cost or effort as at the reporting date, referring to past events, current conditions and projections concerning future business conditions.

Impairment triggers require an individual expert assessment of the debtor’s situation and a decision whether classification of default as an impaired exposure is justified. 

Impairment triggers applied to retail credit exposures include the occurrence of one or more of the following situations:

o        there have been a minimum of three failed debt repayment arrangements in row under the current Debt Episode,

o        an individual who has given a surety in the ING Bank Śląski Group for material liabilities of his company is in default or an individual is a debtor of the Bank and his company is in default,

o        if an individual client is in default, it is a default premise for his company, if the company is in default, it is a default premise for the individual,

o        not willing or not able to repay - the Bank assesses whether the debtor is not willing or not able to repay. Liability cannot be repaid when the debtor’s sources of income are insufficient to pay the instalments due,

Examples when clients from the retail segment may not be able to repay their debt:

- loss of job,

- discontinuation of social benefits payments,

- divorce,

- serious illness,

- debtor’ death,

- learning by the Bank about the untimely service of debt of significant value in another bank (pastdue debt over 90 DPD) or about initiation of enforcement/collection actions by another bank.

o        granting a forbearance to a client who is unable to meet his financial obligations under a loan agreement concluded with the Bank due to existing or expected financial difficulties,

o        credit fraud - credit fraud made by the debtor and targeted at the Bank.

In the case of retail credit exposures, a justified suspicion of credit fraud, i.e. a commitment whose credit documentation or established facts indicate that it was granted as a result of a deliberate misrepresentation of the Bank by presenting documents, certificates or statements inconsistent with the facts. In particular, the following events occur:

- the account has been registered by the Bank as a suspected credit fraud,

- after an analysis, a suspected crime has been reported,

- termination of the credit facility and establishing 100% reserve for the debt are recommended,

- the Bank decided to terminate the credit facility and establish 100% reserve for the debt.

o        the occurrence of at least 2 forbearances within 5 years of the application of the first forbearance,

o        the identification of cases of suspected criminal conduct involving a credit exposure.

 

Objective evidence of impairment

The Bank defined objective evidence of impairment the occurrence of which has a direct impact on valuation of future financial cash flows related to the credit receivables.

Objective evidence of impairment may be:

o        a state - i.e., it works as long as the condition that applies to it exists; or

o        an event - it occurs at a specific moment.

Objective impairment evidence of retail credit exposure covers the occurrence of at least one of the following situations:

o        the client has discontinued to repay the principal, pay interest or commissions, with the delay of more than 90 days, provided that the amount of the arrears is higher than both materiality thresholds indicated in item 5.5.9. Impairment

o        the exposure has been recognised as impaired under IFRS9 (due to the unification of the definition, the default is equivalent to impaired exposure),

o        for retail credit exposures - restructuring of non-performing (event),

o        filing a bankruptcy petition by the client (state),

o        the credit exposure becomes due and payable as a consequence of the Bank’s having terminated the loan agreement. For retail credit exposures - termination: the Bank demands early repayment of the loan in full by the debtor, which results in termination of the relationship with the Bank (event),

o        amortization or write-off of retail credit exposures by the Bank:

- amortization of the balance of the principal or/and interest in the total amount exceeding PLN 200, however the debt together with the amortized amount exceed the materiality threshold,

- written-off, and the balance amount increased by the written-off amount plus interest exceed the materiality threshold (event),

o        the Bank sold credit liabilities (or some of them) at a loss>5% of its balance sheet exposure, and a decision to sell was taken due to the deteriorating quality of the exposure (event),

o        the occurrence of overdue amount for more than 30 days on a credit exposure initially classified as Forbearance Non-Performing, but subsequently remedied and of the Forbearance Performing status in the trial period (event),

o        the granting of a further forbearance on a credit exposure initially classified as Forbearance Non-Performing, but subsequently remedied and of the Forbearance Performing status in the trial period (event),

o        interest-free status (no interest accrue) for the credit exposure (status).

Should an objective evidence of impairment be identified on the exposure of a given client, it is assumed that impairment is also recognised on other exposures of that client.

Identification of the objective impairment evidence requires downgrading the client to the worst risk rating. For the credit portfolio of the Bank current monitoring of the timely repayment of the amounts due to the Bank is carried out based on available tools and reports, which makes it possible to identify any threat of future indications or objective evidence of impairment before they crystallize.

The entire lending portfolio of retail clients is tested for exposure impairment.

If after the assessment we find that for a given financial assets item there are no reasons for impairment, the item is included in the group of financial assets with similar credit risk characteristics, which indicate that the debtor is capable to repay the entire debt under to the contractual terms and conditions. Impairment loss for such groups is subject to collective assessment based on measurement of expected credit losses. If there is any evidence of impairment of assets item measured at amortised cost, then the amount of the impairment is the difference between the carrying amount of an asset and the present value of estimated future cash flows, discounted with the initial effective interest rate of a given financial instrument item.

In practice, this means that for Stage 3 portfolio (financial assets that individually are insignificant) - the loss is determined with the collective impairment calculation method using the lifetime expected credit loss of the asset. When estimating future cash flows, available information on the debtor is taken into account, in particular the possibility of repayment of the exposure is assessed, and for backed credit exposures, the expected future cash flows on collateral execution are also used in the estimation, considering the time, costs and impediments of payment recovery under collateral sale, among other factors.

If the existing evidence of impairment of an assets item or financial assets group measured at the amortised cost indicate that there will be no expected future cash flows from the abovementioned financial assets, the impairment loss of assets equals their carrying amount.

 

Measurement of the expected credit losses

To measure expected credit loss in a collective approach, the Bank uses regulatory models of estimating risk parameters of PD, LGD and EAD adjusted to the requirements of IFRS 9, built for the needs of the Advanced Internal Ratings Based Approach (AIRB method). The risk parameter models for the purposes of IFRS 9 maintain the same structure as the regulatory models, while the method of estimating specific parameter values (PD, LGD, EAD) is adapted to the requirements of IFRS 9, and in particular includes reasonable and supportable information that is available without undue cost or effort as at the reporting date, referring to past events, current conditions and projections concerning future business conditions. Parameters of these models were calibrated in line with the PIT (point-in-time) approach and forecasted for 30 years. Parameter EAD takes account of schedules of repayments in accordance with the credit agreements.

Measurement of the expected credit loss (EL) according to IFRS 9 requires forecasting of changes in the risk parameters PD, LGD and EAD (EL = PD x LGD x EAD) in the period from the reporting date to the maturity date, namely within the lifetime of exposure. Forecasting is based on functional dependencies, worked out on historical data, of the changes in risk parameters on the changes in macroeconomic factors. The final level of provisions on exposures in Stage 2 results from the total expected losses calculated each year in future to the remaining maturity, taking into account discounting.

The impairment loss calculated collectively is based on historical loss experience for assets portfolios with similar credit risk characteristics.

The Bank measures the Lifetime Expected Loss (LEL) on an exposure without recognised impairment (Stage 2) as the discounted total of partial losses over the lifetime of exposure, relating to events of default in each 12-month time window remaining to the maturity date of the exposure.

The Bank calculates the expected credit loss as a probability weighted average based on a few macroeconomic scenarios of various probability of occurrence. The expected loss is calculated for each scenario separately and the probability weighted average results from the weights (probabilities) assigned to each scenario (sum of weights = 100%). Such an approach meets the  requirement of the standard that the loss allowance for expected credit losses should be unencumbered and probability-weighted by the amount determined based on a range of possible outcomes.

The projection (valuation) of the expected loss is made at each point in time in the future, depending on the economic conditions expected at a given point. Based on historical data, the Bank has defined the relations between the observed parameters of expected loss (PD, LGD) and macroeconomic factors as functions based on which - with the given projections of macroeconomic factors - the expected values of the parameters of expected loss in a given year in the future are calculated according to the forward looking PiT approach.

For the needs of estimating the expected loss, the Bank determines the level of EAD exposure only for irrevocable credit obligations by applying CCF conversion factors (percentage of the use of the free part of the credit limit in the period from the reporting date to the occurrence of a default) from regulatory EAD models (estimated according to the TTC approach - ‘through the cycle’). EAD decreases over time in line with the repayment schedule of a given exposure.

For exposures with a specified final repayment date the time to maturity is limited to 30 years. 

The LGD parameter, which is a function of the applied credit risk mitigation techniques and which is expressed as a percentage of EAD, is estimated at the product and exposure level based on parameters from regulatory LGD models calibrated for the needs of IFRS 9 (estimated according to the TTC approach - ‘through the cycle’).

The level of the LGD parameter used to calculate the amount of impairment loss using the collective approach for impaired exposures (PD = 100%) depends additionally on how long the credit exposure defaults. 

 

Recognition of a write-down for an expected credit loss on assets measured at amortised cost

The impairment is presented as a decrease in the carrying amount of the assets item through use of an impairment loss and the amount of the loss (the impairment loss formed) is recognised in the income statement for the period.

If in a consecutive period, the amount of loss due to the impairment decreases as a result of an event that took place after the impairment (e.g. improved credit capacity assessment of the debtor), the previous impairment loss is reversed through the income statement by a proper adjustment.

The Bank applies the same criteria to the customer’s exit from the default and reversal of an impairment loss. The trial period and then the recovery process, i.e. transition from the non-performing portfolio to the performing one is carried out at the level of the whole portfolio, unless it concerns a situation recognised at debtor level (e.g. bankruptcy).

If a debtor is in the impaired portfolio and has no exposure with forbearance granted, he is deemed recovered and qualified to the performing portfolio if all the conditions are met in the following order:

o        no evidence of impairment or impairment trigger which is a source of default or which indicates a high probability of default is active,

o        at least 3 months have elapsed since the end date of the evidence of impairment/impairment trigger (trial period) and during that period the client’s conduct (intention to repay) and his situation (ability to repay) has been positively assessed,

o        the client made regular repayments, i.e. no amounts past due >30 days during the trial period,

o        after the end of the trial period, the client was deemed to be able to repay the credit obligations in full without making use of the collateral,

o        there are no overdue amounts exceeding the absolute limit; should there be overdue amounts exceeding the absolute limit, the trial period shall be extended until the amount of the arrears falls below the limit.

A client classified to an impaired portfolio who holds exposure with forbearance granted is deemed to be recovered and classified to the performing portfolio if all the following conditions are met:

o        no evidence of impairment or impairment trigger which is a source of default or which indicates a high probability of default is active,

o        at least 12 months (trial period) have elapsed since the last of the following events:

- granting of the last means under restructuring, namely forbearance,

- the exposure was given a default status,

- end of the grace period specified in the restructuring agreement,

o        during the trial period, the client made substantial/regular repayments:

- having made regular payments in accordance with the agreed restructuring terms and conditions, the client has repaid a substantial amount being earlier overdue payments (if there were any overdue amounts) or amortisation (if there were no overdue amounts),

- the client made regular repayments, in accordance with the new schedule taking into account the terms and conditions of restructuring, i.e. no amounts past due > 30 days during the trial period.

o        at the end of the trial period, the client has no overdue amounts and there are no concerns about the full repayment of the exposure under the terms and conditions of the restructuring agreement.

The Bank established the following additional terms and conditions for impairment reversal / exit from the default status applicable to all clients:

o        if during the trial period evidence or indication of impairment is identified as being the source of default / indicating a high probability of non-payment, the end date of the trial period shall be re-established and the trial period shall start again from the expiry of the evidence / indication of impairment,

o        if during the trial period and after the grace period, a DPD event > 30 has occurred, the end date of the trial period will be reset and the trial period will start again from the date when the DPD has fallen below 31 days,

o        all terms and conditions for impairment reversal / exit from default should also be met with regard to new exposures of the client, especially if that client’s previous credit exposures that were under restructuring have been disposed of or permanently written off,

o        an exception to the principle of no active evidence / indication of impairment being the source of the default is the evidence ‘classification to Stage 3/ provision’ - its existence does not withhold the start of the trial period (because it is an effect and not a cause of default) - classification to Stage 3 and the provision are also upheld during the trial period.

 

Rationale for classification of a financial asset measured at fair value through other comprehensive income to Stage 3

At each balance sheet date, the Bank assesses whether there is any objective evidence of impairment of debt financial assets classified as measured at fair value through other comprehensive income.  Confirmation that such an objective evidence of impairment occurred is a premise for the classification of an asset to Stage 3. 

The evidence indicating that a financial asset or a group of financial assets have been impaired may result from one or more conditions which are presented herein below:

o        significant financial problems of the issuer (e.g. material negative equity, losses incurred in the current year exceeding the equity, termination of credit facility agreement of material value at other bank),

o        a breach of contract, including in particular a default or delinquency in in repayment of liabilities due (e.g. interest or nominal value), interpreted as materialisation of the issuer’s credit risk,

o        awarding the issuer with repayment facilities by their creditors, which would not be awarded in different circumstances,

o        high probability of bankruptcy or other financial restructuring of the issuer,

o        identification of financial assets impairment in the previous period,

o        disappearance of the active market for financial assets that may be due to financial difficulties of the issuer,

o        published analyses and forecasts of rating agencies or other units which confirm a given (high) risk profile of the financial asset, or

o        other tangible data pointing to determinable decrease in estimated future cash flows resulting from financial assets group which appeared upon their initial recognition in the Bank books. The data referred to hereinabove may concern unfavourable changes in the payment situation on the part of issuers from a certain group or unfavourable economic situation of a given country or its part, which translates into the repayment problems sustained by this group of assets.

 

Recognition of a write-down of an expected credit loss on debt financial assets measured at fair value through other comprehensive income

If there is objective evidence that debt financial assets measured at fair value through other comprehensive income are impaired, the part of the measurement corresponding to the amount of the impairment loss is derecognised from other comprehensive income and recognised in the income statement, even if the financial asset is not derecognised from the statement of financial position.

The amount of the cumulative loss that is removed from equity and recognised in the income statement is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in the income statement.

5.5.10.     Gains and losses resulting from subsequent measurement

A gain or loss arising from a change in the fair value of a financial asset or financial liability that is not part of a hedging relationship is recognized, as follows:

o        a gain or loss on a financial asset or financial liability carried at fair value through income statement is recognized in the income statement;

o        a gain or loss on a financial assets item carried at fair value through other comprehensive income is recognized directly in equity through the statement of changes in equity.

 

Settlement of interest using the effective interest method

Interest income is calculated using the effective interest method. The value is calculated by applying the effective interest rate to the gross carrying amount of the financial assets item, except of:

o        purchased or originated credit-impaired financial assets. For these financial assets items, the Bank applies credit-adjusted effective interest rate to amortised cost of the financial assets item since initial recognition;

o        financial assets items other than purchased or originated credit-impaired financial assets, which then became credit-impaired financial assets (Stage 3).

In case of such financial assets items, the Bank applies credit-adjusted effective interest rate to (net) amortised cost of the financial assets item in later reporting periods.

 

Non-interest elements

FX gains and losses arising from a change in financial assets item measured at fair value through other comprehensive income denominated in foreign currency are recognized directly in equity only in case of non-monetary assets, whereas FX differences generated by monetary assets (for instance, debt securities) are recognised in the income statement.

At the moment of derecognition of a debt financial asset from the statements of financial position, cumulated gains and losses recognized previously in equity:

o        are recognised in the income statement as far as debt financial assets are concerned.

If any objective evidence exists that a debt financial assets item measured at fair value through other comprehensive income impaired, the Bank recognises impairment loss as described in an item concerning impairment of financial assets measured at fair value through other comprehensive income.

Fair value of financial assets and liabilities quoted on an active market (including securities) is determined using a bid price for a long position and an offer price for a short position. If there is no alternative market for a given instrument, or in case of securities that are not quoted on an active market, the Bank determines the fair value using valuation techniques, including but not limited to, using recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The fair value of financial assets and liabilities is determined with the use of the prudent valuation approach. This approach aims at determining the fair value with a high, 90%, confidence level, considering uncertain market pricing and closing cost.

Market activity is assessed on the basis of frequency and volume of effected transactions as well as access to information about quoted prices which by and large should be delivered on a continuous basis.

The main market and the most beneficial one at the same time is the market the Bank can access and on which in normal conditions it would enter into sale/purchase transactions for the item of assets or transfer of a liability.

Based on the employed fair value methods, financial assets/liabilities are classified as:

o        Level I: financial assets/liabilities measured directly on the basis of prices quoted in the active market,

o        Level II: financial assets/liabilities measured using the measurement techniques based on assumptions using data from an active market or market observations,

o        Level III: financial assets/liabilities measured using the measurement techniques commonly used by the market players, the assumptions of which are not based on data from an active market.

The Bank verifies on a monthly basis whether any changes occurred to the quality of the input data used in individual measurement techniques and determines the reasons and their impact on the fair value calculation for the financial assets/liabilities item. Each identified case is reviewed individually. Following detailed analyses, the Bank takes a decision whether its identification entails any changes to the approach for fair value measurement or not.

In justified circumstances, the Bank decides to modify the fair value methodologies and their effective date construed as the circumstances change date. Then, they assess the impact of changes on the classification to the individual categories of the fair value measurement hierarchy. Any amendments to the measurement methodology and its rationale are subject to detailed disclosures in a separate note to the financial statements.

 

5.6.              Non-financial assets

5.6.1.         Property, plant and equipment

5.6.1.1.   Own property, plant and equipment

Property, plant and equipment consist of controlled non-current assets and costs to construct such assets. Non-current assets include property, plant and equipment with an expected period of use above one year, maintained to be used to serve the Bank’s needs or to be transferred to other entities, based on the lease contract or for administrative purposes.

Property, plant and equipment are recognised using the model based on the purchase price or manufacturing cost, namely, after initial recognition they are recognized at historical cost less depreciation/amortization and impairment.

The historical cost is made up of the purchase price/ manufacturing cost and the costs directly related to the purchase of assets.

Each component part of the property, plant and equipment item whose purchasing price or manufacturing cost is material in comparison with the purchase price or manufacturing cost of the entire item, is depreciated separately. The Bank allocates the initial value of the property, plant and equipment to its significant parts.

5.6.1.2.   Non-current assets leased

The Bank is a party to lease contracts, under which it receives the right to control the use of an identified assets item in a given period for a fee. The Bank applies the stipulations of IFRS 16 to recognition of all lease contracts, except for intangible assets lease contracts and with exceptions provided for in the standard and described herein below.

Lease and non-lease elements are identified in contracts by the Bank.

Non-lease payments for contracts are recognised in income statement as expenses, using the straight-line method, throughout the period of lease. Lease payments are recognised in accordance with the principles described herein below.

As at the beginning of lease, the Bank recognises right-of-use assets and lease liabilities. Initially, lease liabilities are measured by the Bank at present value of future lease payments. To determine the discounted value of lease payments, the Bank applies lease interest rate, and if such a rate is hardly available, the Bank applies the marginal interest rate. The Bank determines the interest rate for lease as the sum of the interest rate for swaps and internal transfer price, taking into account currencies of the lease contracts and maturity dates of the contracts. After the initial lease date, the carrying amount of the liability:

o        is increased by accrued lease interest that is recognised in the income statement as interest expenses,

o        is decreased by effected lease payments,

o        is revised as a result of re-assessment, change in lease or change in generally fixed lease payments.

As at the initial lease date, the Bank recognises right-of-use assets at cost, the basis of which is the amount of the initial measurement of lease liability. The cost of the right-of-use assets item includes also:

o        lease payments made at or prior to commencement of lease, less the received lease incentives,

o        initial direct costs incurred by the lessee,

o        costs to be incurred by the lessee in order to return the assets item to its initial condition.

The right-of-use is depreciated throughout the lease period and is impaired. During the term of lease, the right-of-use value is reset as a result of re-measurement of the lease liability.

The identification of future lease payments requires the determination of the lease term. Doing it, the Bank takes into account an irrevocable lease period together with the periods for which the lease may be extended and the periods in which the lease may be terminated. At the commencement of the lease contract, the Bank assesses whether it can be reasonably assumed that the Bank will exercise an option to extend the lease, or it will not exercise an option to terminate the lease. To carry out the assessment, the Bank takes into account all major facts and circumstances that give economic incentive to exercise or not to exercise the said options. The Bank reviews the lease term in order to re-assess major events or circumstances that may affect the estimated lease term. Lease is no longer enforceable when both the lessee and the lessor have the right to terminate the lease without a prior permit of the other party, which would result in minor penalty at most. For lease contracts concluded for an indefinite period, in case of which both parties may exercise the option to terminate and in case of which there are potentially high costs of contract termination, the Bank assesses the lease term.

The Bank avails itself of exemption for:

o        short-term leases - a contract may be classified as a short-term one if the contract term is not longer than 12 months, and there is no option to buy the object of the lease contract;

o        leases of low-value objects of lease - assets may be classified as low-value assets if the gross price of acquisition of a new assets item is not higher than EUR 5,000, and the object of lease contract neither is nor will be sub-leased.

Lease payments under the abovementioned contracts are recognised by the Bank in the income statement as expenses throughout the lease term on a systematic basis.

 

Lease term for open-ended contracts

Lease period was determined taking into account contractual options to prolong or shorten lease period if it is probable that such an option would be used. In case of contracts concluded for an indefinite period with an option to terminate them by any of the parties thereto, the Bank assessed whether there would be any significant costs of contract termination. Contracts signed for an indefinite period by the Bank are mostly real estate lease contracts. If there are no significant costs, the lease period was determined as a notice period to which both parties to the contract are entitled. If the costs of contract termination are significant, the Bank assumed a 4-year period as the lease period. The assumed period results from the strategy of physical presence in a given location that ensures flexibility and business efficacy.

The estimates adopted do not have a material impact on the value of the right-of-use assets.

 

5.6.1.3.   Subsequent costs

Under the property, plant and equipment item of the balance sheet the Bank recognizes the costs of replacement of certain elements thereof at the time they are incurred if it is probable that the Bank is likely to earn any asset-related prospective economic benefits and the purchase price or the manufacturing cost may be measured reliably. Other costs are recognised in the income statement at the time they are incurred.

5.6.2.         Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance.

Intangible assets are deemed to include assets which fulfil the following requirements:

o        they can be separated from an economic entity and sold, transferred, licensed or granted for use for a fee to third parties, both separately, and together with their accompanying contracts, assets or liabilities, and

o        they arise from contractual titles or other legal titles, irrespective of whether those are transferable or separable from the business entity or from other rights and obligations.

5.6.2.1.        Computer software

Purchased computer software licences are capitalised in the amount of costs incurred for the purchase and adaptation for use of specific computer software.

Costs of computer software development or maintenance are recognized when incurred.

 

5.6.2.2.        Subsequent costs

Subsequent costs incurred after the initial recognition of an acquired intangible asset are capitalised only if the criteria binding in the Bank are met. In other cases, costs are recognised in the income statement as costs when incurred.

5.6.3.         Depreciation and amortization charges

The depreciation/amortization charge of property, plant and equipment and intangible assets is applied using the straight line method, using defined depreciation/amortization rates throughout the period of their useful lives. The depreciable/amortizable amount is the purchase price or production cost of an asset, less its residual value. The useful life, amortization/depreciation rates and residual values of property, plant and equipment and intangible assets are reviewed annually. Conclusions of the review may lead to a change of depreciation/amortization periods recognized prospectively from the date of application (the effect of this change is in accordance with IAS 8 carried through profit or loss).

Depreciation and amortization charges of property, plant and equipment are recognized in the income statement.

The depreciation/amortization periods are as follows:

o        devices:   3 - 7 years

o        equipment:   5 years

o        costs of software development:   3 years

o        software licenses:  3 years

5.6.4.         Impairment of other non- financial assets

For each balance sheet date, the Bank assesses the existence of objective evidence indicating impairment of property, plant and equipment items. If such evidence exists, the Bank performs an estimation of the recoverable value. If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount.

5.6.5.         Recognition of impairment loss

If there are indications of impairment of common property, i.e. the assets which do not generate cash independently from other assets or groups of assets, and the recoverable amount of the individual asset included among common property cannot be determined, the Bank determines the recoverable amount at the level of the cash-generating unit, to which the given asset belongs. An impairment loss is recognized if the book value of the asset or cash-generating unit exceeds its recoverable amount.

5.6.6.         Reversing impairment loss

An impairment loss of other assets is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount. An impairment loss can be reversed only up to the amount, at which the book value of impaired asset does not exceed its book value, which decreased by depreciation/amortization charge, would be established, if no impairment loss had been recognized.

 

5.7.              Other items of the statement of financial position

5.7.1.         Trade debtors and other receivables

The Bank applied a simplified approach to the assessment of a loss allowance for expected credit losses and recognises the allowance in the amount equal to the receivables lifetime expected credit losses.

Trade receivables are covered by impairment loss when they are past due 60 days. In justified cases, and in particular in the case of receivables due for shortages and damages, claims contested by debtors and other receivables for which the risk of non-recovery is assessed by the Bank as high, impairment losses are made earlier.

If the effect of the time value of money is material, the value of receivable is determined by discounting the projected future cash flows to present value, using a discount rate reflecting the current time value of money. If the discounting method has been applied, the increase in receivables due to time lapse is recognized as financial income.

Budgetary receivables are recognized as part of other financial assets, except for corporate income tax receivables, which are a separate item on the statements of financial position.

5.7.2.         Cash and cash equivalents

Cash and cash equivalents for the purposes of a cash flow statement consists of cash and cash equivalents, however ING Bank Hipoteczny S.A. does not keep cash but only cash equivalents, namely balances on current accounts and term deposit accounts held by other banks.

 

5.8.              Equity

Equity comprises of: share capital, supplementary capital from the sale of shares above their nominal value, retained earnings and cumulated other comprehensive income. The equity is established by the Bank in accordance with the applicable law and the Charter. All balances of capital are recognized at nominal value.

5.8.1.         Share capital

Share capital is presented at nominal value, in accordance with the charter and entry to the Register of Entrepreneurs.

5.8.2.         Supplementary capital - share premium

This capital is formed from the share premium less any direct costs incurred in connection with that issue.

5.8.3.         Retained earnings

Retained earnings are created from profit write-offs and is allocated for purposes specified in the Articles of Association (the Company’s Charter) or other legal regulations. The retained earnings include the net financial result. The financial result after tax represents the result before tax from the income statement for the current year adjusted with the amount owed or due under the corporate income tax.

5.8.4.         Accumulated other net comprehensive income

Accumulated other comprehensive income occurs as a result of:

o        measurement of financial instruments classified to be measured through other comprehensive income,

o        actuarial gains / losses.

Changes in the deferred tax assets and liabilities resulting from recognition of the said measurements are carried through accumulated other comprehensive income. The accumulated other comprehensive income is not distributable.

 

5.9.              Prepayments and deferred income

5.9.1.         Prepayments

Prepayments comprise particular expenses which will be carried through the income statement as being accrued over the future reporting periods. Prepayments include primarily provisions for material costs due to services provided for the Bank by counterparties, as well as subscription, insurance and IT services costs paid in advance to be settled in the future periods. Prepayments are presented in the statement of financial position in the Other assets item.

 

5.10.          Employee benefits

5.10.1.     Benefits under the Act on employee pension programmes