17. Interest income and expense

Interest income and expenses comprise interest, including premiums and discounts in respect of financial instruments measured at amortized cost and instruments measured at fair value through other comprehensive income, as well as income similar in nature to interest on instruments measured at fair value through profit or loss, including interest income and expense on derivative hedging instruments. Interest income and expenses also include fees and commissions received and paid, which are deferred using the effective interest rate and which are taken into account in the measurement of the financial instrument, including costs of remuneration of agents and intermediaries for the sale of the financial instrument, costs of employee bonuses to the extent that relate directly to selling credit products.

The Group consistently applies the method of presenting the total net interest income/(expense) on hedging instruments for all hedging strategies in the line “derivative hedging instruments” under “Net interest income” – the positive total amount for a period is presented in “Interest income” and the negative total amount is presented in “Interest expenses”.

Interest income and expense are recognised using the effective interest rate method, except for:

• POCI financial assets. Interest income on these assets is calculated on the net carrying amount using the effective interest rate, adjusted for the credit risk recognised for the entire life of the asset, with the calculation of interest income being made based on the net carrying amount calculated using the previous month’s net-to-gross ratio;
• non-POCI financial assets that subsequently became POCI assets. Interest income on these assets is calculated on the net carrying amount using the original effective interest rate from the moment of recognizing premises for impairment of the asset, with the calculation of interest income for stage 3 being made based on the net carrying amount calculated using the previous month’s net-to-gross ratio;

Interest income also includes:

• the effect of the fair value measurement of financial assets acquired as part of business combinations between subsidiaries
• the impact of the European Union Court of Justice’s ruling on consumer rights to reduce the cost of loans repaid before maturity by deducting interest income, as the estimated difference between the outstanding commission at the effective interest rate at the date of the expected early repayment of the loan and the commission that would have been accounted for on a straight-line basis, according to which the Bank reimburses the commission. The estimates are based on historical early repayment periods and their probability;
• effect of statutory credit holidays, introduced by the Act on crowdfunding for business ventures and assistance to borrowers, recognised in the second half of 2022 in correspondence with the gross carrying amount of mortgage loans granted in PLN (Note „Loans and advances to customers”).
• the impact of the amendment of the Act of 23 March 2017 on mortgage credit and supervision of mortgage credit intermediaries and agents (Journal of Laws of 2020, items 1027 and 2320 and of 2022, items 872 and 1488), concerning the reimbursement of the additional mortgage cost associated with waiting for the mortgage to be registered in the mortgage register, borne by the customer until the mortgage is registered in the mortgage register by deducting interest income, as the value of the estimated return of the margin for customers calculated until the date of registration of the mortgage in the mortgage register.

During the course of a working day, the Group may use funds from the mandatory reserve accounts for ongoing payments, on the basis of an instruction submitted to the National Bank of Poland (NBP). However, the Bank must ensure that the average monthly balance on this account complies with the requirements set in the mandatory reserve declaration.