Annual report 2019

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Credit Risk

Credit risk is the risk of the Bank incurring a loss on account of a failure to meet its obligations by the deadline specified in the agreement as a result of deterioration or loss of creditworthiness by the customer.

The Bank’s credit risk management system has been defined in the Credit Policy of BNP Paribas Bank Polska S.A. adopted by the Management Board. Detailed financing principles and criteria applicable to the product offering of each business line, types of available loans, objectives, financing terms and limits have been defined in the credit policies of each business line. It is the Bank’s intention, in accordance with the criteria established in the credit policy, to cooperate with customers enjoying good reputation and a good economic and financial condition.

Credit policies

Additionally, the aforementioned credit policies specify detailed principles applicable to risk identification, measurement and acceptance, collateral securing repayment of the loan as well as customer monitoring during the term of the loan agreement.

The organisation of the credit risk management process aligned with the business line structure in the Bank. A central role in the credit risk management system is performed by the Risk Division, which is an organisationally separate unit managed by a Member of the Management Board acting in the capacity of the Chief Risk Officer. Credit risk management activities are supported by the Risk Management Committee as well as the Retail Banking/Personal Finance Risk Committees.

The credit risk of the customers is assessed using rating and scoring classification systems in addition to the risk classification standards defined in IFRS.

Credit decisions are made in accordance with the decision-making model approved by the Management Board of the Bank and aligned with the standards imposed by the BNP Paribas Group. The decision-making model takes into account the structure of the business lines, determines the number of decision levels, the scope of their competence as well as the principles, criteria and conditions to be satisfied in the credit decision-making process. The value thresholds for the decision-making competence depend on such criteria as the customer segment, risk profile and the borrowing period. At each competence level, credit decisions are taken by two employees (four-eye principle), namely a representative of the business line and a representative of the organisational unit responsible for customer and transaction risk assessment performed independently of the business line. For customers whose credit risk assessment is performed in accordance with simplified risk assessment principles or models, including scoring models approved by the Risk Management Committee or the Retail Banking/Personal Finance Risk Committees, credit decisions may be taken by one representative of the business line.

The Bank follows the following credit risk management principles:

  • each credit transaction requires comprehensive credit risk assessment expressed in internal rating or scoring,
  • thorough and diligent financial analysis serves as the basis for regarding the customer’s financial information and collateral-related data as reliable; prudential analyses performed by the Bank always take into account a necessary margin of safety,
  • as a rule, financing is provided to the customers based on their ability to generate cash flows that ensure repayment the liabilities to the Bank,
  • the credit risk assessment is additionally verified by credit risk assessment personnel, independent of the business personnel,
  • the pricing terms of a credit transaction cover the risk involved in such a transaction,
  • credit risk is diversified in such dimensions as geographical regions, industries, products and customers,
  • credit decisions may only be taken by authorised employees,
  • the customer and the transactions made with the customer are monitored transparently from the perspective of the customer, in a manner that strengthens the relationship between the Bank and the customer.

Credit risk management in the Bank’s subsidiaries

The principles of the Bank’s supervision over the credit risk generated by the activity of subsidiaries is specified in the Credit Policy of BNP Paribas Bank Polska S.A.

The Bank recommends, reviews and accepts policies, principles and methodologies applied by its subsidiaries in terms of credit risk management.

In the Bank and its subsidiaries, parallel credit risk management methods are applied, including:

  • a rating system for Corporate Banking customers and Small and Medium Enterprises Banking;
  • risk classification system according to IFRS standards;
  • assessment of the creditworthiness of the Bank’s and subsidiaries joint clients;
  • a model for making credit decisions;
  • the Bank’s internal limits system for concentration risk, including limits on the subsidiaries’ portfolios of receivables.

Restructuring and debt collection

In 2019, the Bank recovered a total of PLN 1,143.8 million of receivables, of which:

PLN 112.9 million

as a result of NPL
portfolio sale

PLN 738.8 million

as a result of portfolio restructuring

PLN 292.1 million

as a result of debt collection activities:

  • corporate entities (PLN 43.3 million),
  • micro-enterprises (PLN 82.0 million),
  • SME (PLN 30.8 million),
  • Personal Finance (PLN 103.0 million),
  • mortgages (PLN 33.0 million)

Concentration risk and country risk

Additionally distinguished within the Bank’s credit risk

is an inherent risk taken by the Bank within the framework of its statutory activity and is subject to a specific management process and rules.

The Management Board assesses the adopted concentration risk management policy in terms of the way it is applied, in particular as regards its effectiveness and adequacy of rules implementation in the context of current and planned activities and taking into account the risk management strategy. In the event of significant changes in the Bank’s operating environment or risk management strategy, the review of the adequacy of the concentration risk management process is carried out immediately after the occurrence of such circumstances. Proper assessment of the concentration risk incurred by the Bank significantly depends on correct and complete identification of key risk factors that affect the concentration risk level. In justified cases, the Bank identifies the concentration risk in the process of planning a new business, including the introduction and development of new products, services and presence on the markets, and significant changes to the existing products, services and changes on the markets.

Diversification of the credit portfolio is one of the most important tools for credit risk management. Excessive credit concentration is undesirable for the Bank, as it increases risk. Potential losses related to a significant threat – thus, the degree of concentration should be monitored, controlled and reported to the Bank’s management. The basic tools of concentration risk mitigation are mechanisms of identification and measurement of concentration risk and limits of exposures in particular segments of the Bank’s portfolio and in subsidiaries. These tools enable diversification of the credit portfolio and reduction of negative effects related to unfavourable changes in particular areas of the economy.

The Bank considers a situation in which the share of a given concentration area (dimension) in the Bank’s total assets is equal to or exceeds 10% or 5% of the Bank’s planned net financial result for a given financial year. In such a situation, a given area (dimension) of concentration is subject to analysis, reporting and management within the concentration risk management process.

One of the potential sources of credit risk is a high concentration of the Bank’s credit exposures in particular entities or groups of entities related by capital and organisation. In order to limit it, Regulation (EU) No. 575/2013 defines the maximum exposure limit for the Bank. Pursuant to Article 395 of Regulation (EU) No. 575/2013: An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to a client or group of connected clients the value of which exceeds 25% of its eligible capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall not exceed 25% of the institution’s eligible capital or EUR 150 million, whichever the higher, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all connected clients that are not institutions does not exceed 25% of the institution’s eligible capital.

The Bank monitors concentration limits in accordance with Article 387 of the EU Regulation No. 575/2013. As at the end of 2019, the limits specified in Article 395 of the EU Regulation No. 575/2013 were not exceeded. As at the end of 2019, the Bank’s exposure to financing customers / groups of customers with capital or organisational links does not exceed the exposure concentration limit. The total of exposures equal to or exceeding 10% of the Bank’s own funds represented 17%.

The concentration risk tolerance is defined in the Bank through a system of internal limits, which take into account both the directions and dynamics of business development assumed by the Bank, the acceptable level of credit risk and liquidity, as well as external macroeconomic and sectoral conditions and prospects. Internal limits for credit concentration risk are set for, i.a.:

  • selected economic sectors/ industries,
  • exposures denominated in foreign currency,
  • customer segment (the Bank’s internal segmentation),
  • loans secured by a given type of collateral,
  • geographical regions,
  • the average probability of default,
  • exposures with a specific rating (the Bank’s internal rating scale),
  • exposure with a specific debt-to-income ratio,
  • exposures with a specific loan-to-value.

Actions reducing the Bank’s exposure to concentration risk may include systemic actions and case-by-case actions related to a single / specific decision or transaction. Systemic actions limiting the concentration risk include:

  • limiting the scope of lending to specific types of customers by modifying the credit policy,
  • reducing the concentration risk limits,
  • diversification of asset types at the level of the Bank’s statement of financial position,
  • changing the business strategy in such a way that it prevents excessive concentration,
  • diversification in the types of collateral received.

Case-by-case actions (related to a single / specific decision or transaction) limiting the concentration risk include:

  • limiting new transactions with a given customer or group of connected customers,
  • sale of selected assets / loan portfolios,
  • securitisation of assets,
  • establishment of new collateral (e.g. credit derivatives, guarantees, subparticipation, insurance contracts) for existing or new credit exposures.

The Bank’s industry concentration analysis covers all the Bank’s credit exposures to institutional customers. The Bank defines industries based on the Polish Classification of Activities (PKD 2007 code). The structure of the Bank’s exposure to industries analysed at the end of 2019, similarly as at the end of 2018, is characterised by concentration towards such industries as: Agriculture, Forestry, Hunting and Fishing; Production of Groceries, Beverages and Tobacco Products. In 2018, they accounted for 32% of the Bank’s exposure towards institutional clients, while in 2019 they constituted 34% of the Bank’s exposure.

In 2019, the largest share of non-performing loans was observed in the following industries: (22.1%) Hotels and Restaurants, Entertainment and Recreation activities; (18.3%) Civil and Water Engineering Objects and Specialised construction, and (12.9%) Publishing and printing; Media production.

In 2018, the largest share of non-performing loans was observed in the following industries (excluding issued bonds): (20.3%) Hotels and Restaurants, Entertainment and Recreation activities; (15.9%) Publishing and printing; Media production and (13.2%) Civil and Water Engineering Objects and Specialised construction.

comprises all risks related to conclusion of financial agreements with foreign parties, where it is possible that economic, social or political events will have an adverse effect on creditworthiness of the Bank’s obligors in that country or where intervention of a foreign government could prevent the obligor (which could also be the government itself) from discharging its liabilities.

In 2019, the Bank continued its conservative policy concerning country risk. Country limits have been reviewed periodically and the limit level modified to match precisely the anticipated business needs and risk appetite of the Bank.

As at the end of December 2019, transactions related to foreign credit activity of the Bank represented 46% of the Bank’s exposure toward countries, treasury transactions (including deposits and derivatives) represented 19%, while the remaining part, i.e. 35%, was related to international trade transactions (letters of credit and guarantees). France accounted for 31% of the exposure, the Netherlands for 12%, Luxembourg for 10%, Belgium for 9%, Switzerland for 7%, Austria and the UK for 6% each. The remaining exposures were concentrated in Belarus, Czech Republic and Turkey.

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