56. Managing credit concentration risk in the Group

The Group defines credit concentration risk as the risk arising from a considerable exposure to single customers or groups of related customers whose repayment capacity depends on a common risk factor. The Group analyses the concentration risk, among other things, towards:

• the largest entities (customers);
• the largest groups of related customers;
• industry sectors;
• geographical regions;
• currencies;
• exposures secured with a mortgage.

The objective of concentration risk management is to ensure a safe structure of the loan portfolio by mitigating threats arising from excessive concentrations relating to exposures characterized by a potential to generate significant losses at the Bank.

The Group measures and assesses concentration risk by examining the actual aggregate exposure to a customer or to a group of related customers and the actual aggregate exposure to individual groups of loan portfolios.

The Group’s actual exposure complies with the definition of exposure in the CRR, which comprises all assets or off-balance sheet items, including exposures in the banking and trading book and indirect exposures arising from the security applied.

Concentration risk is identified by recognizing the factors due to which the risk may arise or the level of the Group’s exposure may change, including potential risk factors resulting, for example, from planned activities of the Group. In the process of identifying concentration risk, the Group:

• identifies and updates the structure of the group of related customers;
• aggregates the exposures towards a customer or a group of related customers;
• applies exemptions from regulatory limits on large exposures and takes into account recognised credit risk mitigation techniques, to the extent consistent with the CRR.

The Bank’s tolerance to concentration risk is determined by:

• external regulatory limits arising from Art. 395 of the CRR and from Article 79a of the Banking Law;
• internal limits of the Group;
  • strategic limits of concentration risk tolerance;
  • limits that define the appetite for concentration risk.

The Group uses the following to measure concentration risk:

• the exposure concentration ratio of the Group towards a customer or a group of related customers in relation to the Group’s Tier 1 capital;
• Gini coefficient;
• graphs of portfolio concentration (Lorenz curve).

To measure concentration risk and evaluate the effect of internal and external factors on the concentration risk, the Bank performs stress tests with respect to concentration risk for large exposures.

The Group monitors concentration risk:

• on an individual level, by verifying the exposure concentration ratio for a customer or a group of related customers, each time before applying for a decision on granting financing or increasing the amount of the exposure, and before taking other actions resulting in increasing the Bank’s exposure on other accounts;
• on a systemic level, by:
  • daily control over the Bank’s compliance with the external concentration limit and identifying large exposures;
  • monthly control over the Bank’s compliance with the limit arising from Article 79a of the Banking Law;
  • monthly or quarterly control over compliance with the Group’s internal limits with respect to concentration risk;
  • monitoring early warning ratios with respect to concentration;

The Group forecasts changes in the level of concentration risk as part of its analyses and reviews of internal limits and the concentration risk management policy, and in the process of concentration risk stress testing.

The Group performs stress tests to examine, for example, the effect of macroeconomic factors on individual concentrations, the impact of decisions of other financial market participants, decisions on customer mergers, dependency on other risks, for example, currency risk, which may contribute to the materialization of concentration risk, and the effect of other factors from the internal and external environment on the concentration risk.

Concentration risk is tested as part of comprehensive stress tests which enable evaluating the forecast effect of correlated credit, interest rate, currency, operating and liquidity risks and concentration risk on the expected credit losses of the Group.

Reports on currency risk are prepared on a daily, monthly and quarterly basis.

Concentration risk reporting comprises periodic (monthly or quarterly) reporting to the Bank’s relevant bodies on the scale of exposure to concentration risk, which may lead to a significant change in the Bank’s risk profile, including in particular:

• utilization of limits defining risk appetite and exceeding those limits;
• early warning ratios;
• stress-test results;
• on portfolio concentration risk and concentration of the Group’s largest exposures and compliance with concentration standards arising from the Banking Law.
• in quarterly periods – of the supervisory authorities to the extent specified in the consolidated Large exposures reports.

The purpose of management actions is to shape and optimize the concentration risk management process and concentration risk level at the Group (preventing excessive concentrations).

Management actions comprise in particular:

• publishing the Bank’s internal regulations on the process of concentration risk management, defining the tolerance level for concentration risk, determining limits and threshold amounts;
• issuing recommendations, guidelines for conduct, explanations and interpretations of internal regulations;
• taking decisions concerning an acceptable level of concentration risk, including in particular decisions determining the threshold values of limits reflecting concentration risk appetite;
• developing and improving concentration risk control tools which make it possible to maintain the concentration risk level within the limits acceptable to the Bank;
• developing and improving concentration risk assessment methods taking into account the changeability of the macroeconomic situation, including crises on foreign and domestic
• markets and changeability of the regulatory environment;
• developing and improving IT tools to support concentration risk management.

The risk of concentration of exposures to individual customers and groups of related customers is monitored in accordance with the CRR, which is translated into the Bank’s Group. The Group does not assume an exposure to a customer or a group of related customers the value of which exceeds 25% of the value of its consolidated Tier 1 capital.

As at 31 December 2023 and 31 December 2022, concentration limits were not exceeded. As at 31 December 2023, the largest exposure to a single entity accounted amounted to 41.28%¹ of the consolidated Tier 1 capital (42.78% 1 of the consolidated Tier 1 capital as at 31 December 2022).

The Group’s exposure to the 20 largest non-banking customers²:

The largest concentration of the Group’s exposure to a group of related borrowers amounted to 4.68% of the Group’s loan portfolio (4.77% as at 31 December 2022).

As at 31 December 2023 and 31 December 2022, the largest concentration of the Group’s exposures was, respectively: 44.94%1 of the consolidated Tier 1 capital and 46.09%¹ of the consolidated Tier 1 capital.

The Group’s exposure² to 5 largest groups of related customers³

The structure of the Group’s exposure by industry sector is dominated by entities operating in the “Financial and insurance activity” and “Industrial processing” sections. The Group’s exposure to these sectors represents approximately 38% of the entire industry portfolio (37% as at 31 December 2022).

The Group’s loan portfolio is diversified in terms of geographical concentration.

The structure of the loan portfolio by geographical regions is identified by the Group depending on a customer type – it differs for the Retail Market Area (ORD) and for the Corporate and Investment Banking Area (OKI).

In 2023, as in 2022, the largest concentration of the ORD loan portfolio was in the Warsaw region, which accounts for 16.4% of the ORD portfolio (as at 31 December 2022: 16.6%)

In 2023, as in 2022, the largest concentration of the ORD loan portfolio was in the central macroregion which accounts for 45.2% of the ORD portfolio (as at 31 December 2022: 42.7%)

As at 31 December 2023, the share of exposures in convertible currencies other than PLN in the entire Group’s portfolio amounted to 14.8% (as at 31 December 2022: 17.0%). Loans in the EUR are dominating in the structure of foreign currency loans. Their share in the Group’s foreign currency loan portfolio as at the end of 2023 was 79.6% (as at 31 December 2022: 69.9%). A consistent decrease in CHF loans has been observed, mainly as a result of the activities related to concluding settlement agreements with customers holding housing loans in this currency. The share of loans in CHF in the Group’s portfolio as at the end of 2023 amounted to 1.7% (as at 31 December 2022: 3.5%)

The Group analyses the structure of its housing loan portfolio by LTV levels. As at the end of 2023 and 2022, the highest concentration was in the range of LTV 0%–40%.