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Integrated Annual Report
of ING Bank Śląski S.A. 2019

Credit risk

_C2A6785 _C2A6785

Credit risk is understood as:

  • a risk of a financial loss that may be suffered by the Group as a result of default by debtors in whole and at the agreed time on their credit obligations to the Group, or
  • a risk of reduced economic value of credit exposures or groups of credit exposures as a result of impaired ability of debtors to service their debt at the agreed time.

The Group’s Policy relating to the risk of the credit exposure portfolio provides for the fact that the activity generating credit risk may be related also to other risk types as follows: liquidity, market, operational, environmental, social, legal and reputational risks that may reinforce one another.

The Group optimises and mitigates losses relating to risk exposure by:

  • setting internal limits,
  • an adequate structure of credit products,
  • applying collateral,
  • applying functional controls,
  • effective monitoring, restructuring and collection,
  • monitoring of changes to the customers’ credit worthiness and reliability,
  • regular monitoring and validation of models used to identify and measure credit risk
  • performing analyses of trends and the values of key risk indicators.

The Group’s core objective in the process of credit risk management is to support effective accomplishment of business goals by active risk management and efforts supporting organic growth while:

  • maintaining a secure level of solvency and liquidity and an adequate level of provisions,
  • ensuring compliance with the law and supervisory requirements.

The Group manages credit risk in an integrated manner on the basis of:

  • strategic planning,
  • a consistent system of limits, policies and procedures, and
  • tools for risk management, including those to identify, measure and control risks.

The integrated system includes all processes in the Group pursued in connection with credit activity.

Detailed credit risk management objectives are as follows:

  • support to business initiatives,
  • maintenance of credit losses at a pre-determined level,
  • ongoing verification, review of adequacy and development of the applied procedures, models and other elements of the risk management system,
  • adaptation of activities to the changing external conditions,
  • maintenance of an adequate level of capital requirements related to credit risk and provisions,
  • ensuring compliance with the regulator’s requirements.

Credit risk management strategy

The credit risk management strategy supports implementation of business objectives while maintaining the Bank's safe level of solvency and liquidity and an adequate level of provisions. The strategy is determined in order to ensure an optimum development of the credit portfolio while maintaining an adequate quality and profitability of credit operations and capital allocation. The primary goal of defining the credit risk management strategy is to optimise the risk/return on equity ratio, while considering information on the current and prospective macroeconomic environment, the Bank's portfolio and the level of execution of the RAS limits.

The credit risk management strategy provides for a “lookout to the future”, including the need to remain competitive, attractive and to develop the Bank's offer.

Risk Appetite Statement (RAS)

RAS means the Bank's risk appetite which is defined by setting key and specific limits. The determination and monitoring of the risk appetite level (RAS parameters) constitute an integral part of the planning process at the Bank and management of concentration risk by the Bank.

Types of RAS limits for credit risk:

  • limits of portfolio volume,
  • limits for the risk parameters of the portfolio and new sales,
  • concentration limits, including limits for the mortgage-backed credit exposures resulting from Recommendation S of the Polish Financial Supervision Authority.

Apart from RAS limits, the Bank sets limits for credit risk for each area, business lines, products and transaction limits that are approved by the competent credit decision maker. Additionally, internal concentration limits are set for economic sectors, accepted collateral, regions and mortgage-backed credit exposures. The compliance with RAS limits is monitored and reported during the year on a monthly basis.

Non-bank corporate banking portfolio structure – BS and off-BS exposures (%) ING Bank Śląski S.A. Group

Credit risk management process

Credit risk management is a continuous process which includes all activities of the Bank related to its credit business. All units and persons that perform tasks in the credit process closely cooperate in order to:

  • improve the effectiveness of risk management, and
  • maintain risks at a level compliant with the Bank's strategy, risk appetite and financial appetite and the approved RAS level.

The credit risk management process is carried out at the Bank within three lines of defence that are independent organisationally and functionally.

The Bank applies organisational solutions providing for separation of the sales functions of banking products from the risk underwriting functions at all levels of the organisational structure, including the Bank's Management Board. The separation of the monitoring functions and risk control of credit exposures (including concentration risk) from the sales functions of banking products and the risk underwriting functions is maintained below the level of the Bank's Management Board; for retail credit exposures – also at the level of the Management Board.

In case of simplified, automatic credit process paths, the separation of the sales functions of banking products from the risk underwriting functions of credit exposures relies on the independence of the development and validation process of tools supporting the process of risk underwriting from the sales and operational functions. Competences with respect to credit decisions relating to individual credit transactions are separated from decision authority on the development of credit policies and credit risk management principles.

Risk management organisational structure

Within the CRO Division, two credit risk areas were identified that report to Bank Directors:

  • Transactional Credit Risk, including:
    • Central Credit Risk Department,
    • Credit Risk Department in the Regions,
    • Financial Institutions Credit Risk Position.
  • Centre of Expertise – Credit Risk Policy, Models and Systems.

Each area controls and supervises the Bank's business and risk management processes assigned to them.

More information on the organizational structure of Risk Division were presented in the Consolidated Financial Statement of ING Bank Śląski S.A. Group for the year 2019.

Information on lending principles, credit risk management, risk management system were discussed in the Consolidated Financial Statement of ING Bank Śląski S.A. Group for the year 2019.

Lending portfolio quality

Share of receivables at stage 3

In 2019, the quality of our loan portfolio slightly deteriorated compared to 2018. The share of Stage 3 loans in our Bank's Group rose from 2.8% at the end of 2018 to 3.0% at the end of 2019. The value of Stage 3 loans in the Group amounted to PLN 3,530.3 million compared to PLN 2,905.0 million at the end of 2018 (up by 21.5%).

 

Share of impaired loans / loans in stage 3 at ING Bank Śląski S.A. Group against sector average*

* PFSA data-based estimates.

Invariably for many years, the quality of our Bank's loan portfolios is significantly higher than the average in the entire banking sector. The share of Stage 3 receivables in the sector at the end of the year was 5.9%.

Importantly, both our retail and corporate loans are of a higher credit quality than the respective averages for the entire banking sector. As at 2019 yearend, the share of Stage 3 loans in the retail segment in ING Bank Śląski Group accounted for 1.7% against 5.5% for the household sector. Analogous ratios for the corporate segment are 4.1% for the ING Bank Śląski Group and 6.6% for the institutional clients sector, respectively.

* PFSA data-based estimates.

In 2019, the quality of our loan portfolio, apart from the increase in business volumes and prudent lending policy, was also affected by the sale of receivables classified as Stage 3 loans. The total amount of receivables sold (principal, interest, other costs as of the contract date) was PLN 437.2 million, of which PLN 337.0 million concerned receivables representing credit commitment.

 

 Change currency: PLNEURUSD
Quality of portfolio of receivables extended to the ING Bank Śląski S.A. Group clients*
2019 2018 OB 2018 Change 2019 / 2018
PLN million IFRS 9 IFRS 9 IFRS 9 PLN million %
Total exposure 118,312.3 104,226.8 88,313.4 14,085.5 13.5%
Stage 1 and 2 / non-impaired portfolio 114,782.0 101,321.8 85,668.2 13,460.2 13.3%
Stage 3 / impaired portfolio 3,530.3 2,905.0 2,645.2 625.3 21.5%
Impairment loss and provisions 2,588.4 2,348.5 2,593.4 239.9 10.2%
Stage 1 and 2 / non-impaired portfolio provision 572.3 539.0 953.1 33.3 6.2%
Stage 3 / impaired portfolio provision 1,909.0 1,731.0 1,576.8 178.0 10.3%
Provisions for off-balance sheet liabilities 107.1 78.5 63.5 28.6 36.4%
Stage 3 / impaired portfolio share 3.0% 2.8% 3.0% 0.2 p.p.
Stage 3 / impaired portfolio coverage ratio 54.1% 59.6% 59.6% -5.5 p.p.
Exposure – corporate banking 63,300.5 58,863.5 50,763.5 4,437.0 7.5%
Stage 1 and 2 / non-impaired portfolio 60,726.2 56,772.1 48,864.8 3,954.1 7.0%
Stage 3 / impaired portfolio 2,574.3 2,091.4 1,898.7 482.9 23.1%
Impairment loss and provisions 1,447.7 1,324.9 1,213.3 122.8 9.3%
Stage 1 and 2 / non-impaired portfolio provision 104.2 118.8 122.3 -14.6 -12.3%
Stage 3 / impaired portfolio provision 1,251.1 1,142.7 1,035.1 108.4 9.5%
Provisions for off-balance sheet liabilities 92.4 63.4 55.9 29.0 45.7%
Stage 3 / impaired portfolio share 4.1% 3.6% 3.7% 0.5 p.p.
Stage 3 / impaired portfolio coverage ratio 48.6% 54.6% 54.5% -6.0 p.p.
Exposure – retail banking 55,011.8 45,363.3 37,549.9 9,648.5 21.3%
Stage 1 and 2 / non-impaired portfolio 54,055.8 44,549.7 36,803.4 9,506.1 21.3%
Stage 3 / impaired portfolio 956.0 813.6 746.5 142.4 17.5%
Impairment loss and provisions 1,140.7 1,023.6 1,380.1 117.1 11.4%
Stage 1 and 2 / non-impaired portfolio provision 468.1 420.2 830.8 47.9 11.4%
Stage 3 / impaired portfolio provision 657.9 588.3 541.7 69.6 11.8%
Provisions for off-balance sheet liabilities 14.7 15.1 7.6 -0.4 -2.6%
Stage 3 / impaired portfolio share 1.7% 1.8% 2.0% -0.1 p.p.
Stage 3 / impaired portfolio coverage ratio 68.8% 72.3% 72.6% -3.5 p.p.

* Excluding Eurobonds and other receivables.

Quality of portfolio of receivables extended to the ING Bank Śląski S.A. Group clients*
2019 2018 OB 2018 Change 2019 / 2018
EUR million IFRS 9 IFRS 9 IFRS 9 EUR million %
Total exposure 27,782.6 24,238.8 21,173.7 3,543.8 14.6%
Stage 1 and 2 / non-impaired portfolio 26,953.6 23,563.2 20,539.5 3.390.4 14.4%
Stage 3 / impaired portfolio 829.0 675.6 634.2 153.4 22.7%
Impairment loss and provisions 607.8 546.2 621.8 61.7 11.3%
Stage 1 and 2 / non-impaired portfolio provision 134.4 125.3 228.5 9.0 7.2%
Stage 3 / impaired portfolio provision 448.3 402.6 378.0 45.7 11.4%
Provisions for off-balance sheet liabilities 25.1 18.3 15.2 6.9 37.8%
Stage 3 / impaired portfolio share 3.0% 2.8% 3.0% 0.2 p.p.
Stage 3 / impaired portfolio coverage ratio 54.1% 59.6% 59.6% -5.5 p.p.
Exposure – corporate banking 14,864.5 13,689.2 12,170.9 1,175.3 8.6%
Stage 1 and 2 / non-impaired portfolio 14,260.0 13,202.8 11,715.6 1,057.2 8.0%
Stage 3 / impaired portfolio 604.5 486.4 455.2 118.1 24.3%
Impairment loss and provisions 340.0 308.1 290.9 31.8 10.3%
Stage 1 and 2 / non-impaired portfolio provision 24.5 27.6 29.3 -3.2 -11.4%
Stage 3 / impaired portfolio provision 293.8 265.7 248.2 28.0 10.6%
Provisions for off-balance sheet liabilities 21.7 14.7 13.4 7.0 47.2%
Stage 3 / impaired portfolio share 4.1% 3.6% 3.7% 0.5 p.p.
Stage 3 / impaired portfolio coverage ratio 48.6% 54.6% 54.5% -6.0 p.p.
Exposure – retail banking 12,918.1 10,549.6 9,002.8 2,368.5 22.5%
Stage 1 and 2 / non-impaired portfolio 12,693.6 10,360.4 8,823.9 2,333.2 22.5%
Stage 3 / impaired portfolio 224.5 189.2 179.0 35.3 18.6%
Impairment loss and provisions 267.9 238.0 330.9 29.8 12.5%
Stage 1 and 2 / non-impaired portfolio provision 109.9 97.7 199.2 12.2 12.5%
Stage 3 / impaired portfolio provision 154.5 136.8 129.9 17.7 12.9%
Provisions for off-balance sheet liabilities 3.5 3.5 1.8 -0.1 -1.7%
Stage 3 / impaired portfolio share 1.7% 1.8% 2.0% -0.1 p.p.
Stage 3 / impaired portfolio coverage ratio 68.8% 72.3% 72.6% -3.5 p.p.

* Excluding Eurobonds and other receivables.

Quality of portfolio of receivables extended to the ING Bank Śląski S.A. Group clients*
2019 2018 OB 2018 Change 2019 / 2018
USD million IFRS 9 IFRS 9 IFRS 9 USD million %
Total exposure 31,153.7 27,722.1 25,367.9 3,431.6 12.4%
Stage 1 and 2 / non-impaired portfolio 30,224.1 26,949.4 24,608.1 3,274.6 12.2%
Stage 3 / impaired portfolio 929.6 772.7 759.8 156.9 20.3%
Impairment loss and provisions 681.6 624.7 745.0 56.9 9.1%
Stage 1 and 2 / non-impaired portfolio provision 150.7 143.4 273.8 7.3 5.1%
Stage 3 / impaired portfolio provision 502.7 460.4 452.9 42.3 9.2%
Provisions for off-balance sheet liabilities 28.2 20.9 18.2 7.3 35.1%
Stage 3 / impaired portfolio share 3.0% 2.8% 3.0% 0.2 p.p.
Stage 3 / impaired portfolio coverage ratio 54.1% 59.6% 59.6% -5.5 p.p.
Exposure – corporate banking 16,668.1 15,656.4 14,581.8 1,011.7 6.5%
Stage 1 and 2 / non-impaired portfolio 15,990.3 15,100.2 14,036.4 890,.1 5.9%
Stage 3 / impaired portfolio 677.9 556.3 545.4 121.6 21.9%
Impairment loss and provisions 381.2 352.4 348.5 28.8 8.2%
Stage 1 and 2 / non-impaired portfolio provision 27.4 31.6 35.1 -4.2 -13.2%
Stage 3 / impaired portfolio provision 329.4 303.9 297.3 25.5 8.4%
Provisions for off-balance sheet liabilities 24.3 16.9 16.1 7.5 44.3%
Stage 3 / impaired portfolio share 4.1% 3.6% 3.7% 0.5 p.p.
Stage 3 / impaired portfolio coverage ratio 48.6% 54.6% 54.5% -6.0 p.p.
Exposure – retail banking 14,485.6 12,065.7 10,786.2 2,419.9 20.1%
Stage 1 and 2 / non-impaired portfolio 14.233.8 11,849.3 10,571.7 2,384.6 20.1%
Stage 3 / impaired portfolio 251.7 216.4 214.4 35.3 16.3%
Impairment loss and provisions 300.4 272.3 396.4 28.1 10.3%
Stage 1 and 2 / non-impaired portfolio provision 123.3 111.8 238.6 11.5 10.3%
Stage 3 / impaired portfolio provision 173.2 156.5 155.6 16.8 10.7%
Provisions for off-balance sheet liabilities 3.9 4.0 2.2 -0.1 -3.6%
Stage 3 / impaired portfolio share 1.7% 1.8% 2.0% -0.1 p.p.
Stage 3 / impaired portfolio coverage ratio 68.8% 72.3% 72.6% -3.5 p.p.

 

* Excluding Eurobonds and other receivables.

Impaired / stage 3 loans’ provisioning

As at the end of December 2019, the ING Bank Śląski S.A. Group had PLN 1,909.0 million worth of provisions for the lending portfolio in stage 3. The stage 3 portfolio provisioning ratio was 54.1%.

 

Impaired / stage 3 portfolio provisioning ratio

Risk costs

In 2019, there was a slight y/y increase in the risk cost margin ratio (ratio of net loan provisioning to gross loan portfolio), due to the higher level of the ratio in the corporate segment.

For more information on the cost of risk, see Our financial results section.

Types of credit risk collateral

To safeguard the Bank against the credit risk, the Bank accepts various personal and tangible legal collaterals such as: bank guarantee, surety under the civil law, blank promissory note, draft guarantee, assignment of receivables, mortgage, registered pledge, ordinary pledge, repossession for collateral, transfer of a specific amount to the Bank account and freezing of funds in the bank account.

As at 2019 yearend, the Basel II collateral established on borrowers’ accounts or assets totalled PLN 134,165.3 billion (out of which 68.1% were mortgages) for the ING Bank Śląski S.A. Group and PLN 11,970.3 billion (out of which 80.2% are mortgages) for ING Bank Śląski S.A.

Following the amended Banking Law Act of 27 November 2015, the Bank no longer issues banking writs of execution.

Core modifications to the Bank's credit policy in 2019

The modifications to the Bank's credit policy introduced in 2019 were aimed at ensuring a correct and stable functioning of the credit risk management system in the changing legal, economic and business environment and at keeping it enhanced regularly. Additionally, another objective was to ensure compliance of the policy with the approved credit risk appetite. The modifications provided inter alia for the overall economic situation in Poland and the financial condition of each borrower group.

Objectives of the modifications

  • Further improvement of the effectiveness of credit processes while ensuring adequate mechanisms to identify, measure and control credit risk.
  • Increased attractiveness of the Bank's credit offer for its customers assuming the Bank's credit risk remains at an acceptable level.
  • Adaptation of the Bank's internal regulations to changes in the legal environment.
  • Further development of the credit risk reporting and monitoring systems in order to support fast and effective risk identification and measurement.
  • Further reinforcement of active management of sectoral policies by:
    • quarterly reviews of the situation in individual economic sectors, and
    • differentiation of the principles of credit policies on the basis of customer classification to sectoral risk groups (preferred sectors, neutral, watch and non-preferred sectors).
  • A periodic update of assessment parameters of creditworthiness in all retail segments,
  • Completion of tests of granting credit products (other than mortgage) in the channel of banking representatives in the segment of enterprises and individual customers with the launch of the process permanently to the Bank’s offer,
  • Adaptation of the Bank’s regulations to EBA guidelines on the management of non-performing and restructured exposures,
  • Launch of a new credit card – Visa Infinite for customers in the Private Banking and Wealth Management segments,
  • With reference to mortgage loans:
    • modifications to credit risk regulations to mitigate the risk resulting from reduced income when borrowers retire,
    • determination of the borrowers’ maximum age at loan repayment to 75 years,
  • With reference to non-mortgage loans to individual customers:
    • implementation of a new CARE model using artificial intelligence and change to rejection criteria for electronic channels,
    • permanent implementation to the offer (after a summary of completed tests) of the possibility to grant loans without the spouse’s consent,
    • implementation of automatic verification of inflows for applications in electronic channels (MING),
    • implementation of additional documentary requirements in external channels for income from business activity,
    • commencement of new tests of e-cash offers addressed mainly to new customers,
  • With reference to loans to enterprises:
    • commencement of a test for e-application processes in the unsecured offer,
    • tightening of assessment criteria for loan applications submitted by customers acquired through external channels,
    • an update to the assessment principles of Housing Communities in the granting process of investment loans,
    • change to the monitoring principles of customers’ economic and financial situation.

 

  • Optimisation of the calculation and reporting processes of provisions for expected credit losses under exposures from transactions in financial markets with an update of the FM Methodology,
  • Enhancement of the credit process for Investment Fund Companies (pilot program) by implementing an automatic monthly monitoring,
  • Adaptation of the Bank’s regulations to EBA guidelines on the management of non-performing and restructured exposures.
  • Implementation of part automation of decisions taken in remote renewal processes,
  • Adding an electronic process of signing credit documentation to shorten the time to sign agreements and thus simplifying the entire sales process of credit products,
  • Implementation of a possibility to approve ratings in the ING CMS system for corporate customers with annual sales up to EUR 100 million thus incorporating the IT system to the list of systems of the AIRB approach,
  • Incorporation of one more business activity to be covered with the regulation concerning Environmental and Social Risk along with an extension of the coverage of the Exclusion Policy (inter alia: manufacturing, delivery and trade in asbestos fibres),
  • Implementation of modifications to the regulations concerning the credit Fast Track as a result of a new limit dedicated to trade finance products secured with cash,
  • Implementation of modifications to the credit risk regulations as a result of a review of the rules on collateralisation of credit exposures.
  • Ensuring progress in the reconstruction process of SME capital models. Development of a PD model approved by the working group, completion of works on the structure of the EAD model and work on calibration, determination of achieved parameters of the LGD model and work on risk drivers.
  • Cooperation with ING Bank N.V. over the enhancement of group standards for model design that are used to calculate capital requirements with an Advanced Internal Rating-Based approach.
  • We conducted the first monitoring of IFRS 9 models. As a consequence, we adapted, among others criterion for identifying a significant increase in credit risk for SME enterprises by changing the value of the transaction classification threshold to Stage 2. We have also updated the methodology of estimating the total prepayment rate (ESR) used in the process of calculating provisions for all clients, so that ESR better reflects the actual prepayment rate of exposures by clients.
  • Development of a specification for data structure to support the application of analytical tables for risks in the following processes: modelling, monitoring, model re-implementation, ad-hoc analyses, provision of data for other projects. The first evidence for the anticipated functionality of the analytical tables is the application of data from the structures in the development process of a model for personalised (pre-approved) offers for retail customers.
  • Development of a new application PD model for corporate customers handled in the Easy Lending path. The project is to be completed in Q2 2020.
  • Implementation of modifications of a new version of the CARE model, supporting the process of retail customer risk assessment in remote channels.
  • Work on automation of the monitoring process of capital models.
  • Completion of stress tests for credit risk in all stress-test processes, also in compliance with the requirements of the Polish Financial Supervision Authority.

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