62. Interest rate risk management

The PKO Bank Polski S.A. Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2023 and 31 December 2022. The Group was mainly exposed to PLN interest rate risk. Interest rate risk generated by the Group companies did not materially affect interest rate risk of the entire Group and therefore did not change its risk profile significantly.

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

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

Due to the principle of keeping interest rate risk in the trading book at a limited level, this risk is primarily generated by positions in the banking book.

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

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

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

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

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

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

The table below presents the economic value sensitivity measure (stress-test) of the banking book of the Group in all currencies as at 31 December 2023 and 31 December 2022:

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

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

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