43. Fair value of financial assets and liabilities
Based on the methods used to determine fair value, the Group classifies particular assets and liabilities into the following categories:
Level 1
Assets and liabilities measured on the basis of market quotations available on active markets for identical instruments.
Level 2
Assets and liabilities measured using valuation techniques based on directly or indirectly observed market quotations or other information based on market quotations.
Level 3
Assets and liabilities measured using valuation techniques where input data is not based on observable market data.
The Group periodically (at least quarterly) assigns individual assets and liabilities to particular levels of the fair value hierarchy. The basis for classification to particular levels of the valuation hierarchy is the input data used for the valuation, i.e. market quotes or other information. The lowest level of input data used for the valuation, having a significant impact on determining the fair value, determines the classification of an asset or liability to a particular hierarchy level.
If the input data is changed to data classified to another level, e.g. as a result of changes in the valuation methodology or changes in market data sources, the Group transfers the asset or liability to the appropriate level of measurement in the reporting period in which the change occurred.
In 2021, the Group did not make any changes in the method of fair value measurement that would result in the transfer of financial assets and liabilities between levels.
On 31 December 2021, particular instruments were included in the following valuation levels:
- the first level: Treasury bonds and bonds issued by European Investment Bank (fair value is determined directly by reference to published active market quotations), shares listed on stock exchanges;
- the second level: interest rate options in EUR, USD and GBP, FX options, base interest rate and FX swaps maturing within 10 years, FRA maturing within 1 year, FX Forward, NDF and FX swaps maturing within 1 year, commodity swaps maturing within 1 year, interest rate swaps maturing within 10 years, structured instruments (whose fair value determined using measurement techniques which are based on available, verifiable market data);
- the third level: interest rate options in PLN, FX options maturing over 1 year, FX Forward, NDF and FX swaps maturing over 1 year, base interest rate and FX swaps maturing over 10 years, commodity swaps maturing over 1 year, interest rate swaps with residual maturity exceeding 10 years, structured instruments (whose fair value determined using measurement techniques (models) which are not based on available, verifiable market data), derivatives for which significant Fair Value Correction or Credit Value Adjustment was created and corporate bonds other than CATALYST-listed ones, shares which are not listed on the WSE and other stock exchanges, subsidized loans (fair value determined using measurement techniques (models) which are not based on available, verifiable market data, i.e. in cases other than those described in 1 and 2).
The table below presents classification of assets and liabilities re-measured to fair value in the consolidated financial statements into three categories:
| 31.12.2021 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Assets measured at fair value: | 9,170,446 | 1,412,875 | 2,093,752 | 12,677,073 |
| Derivative financial instruments | – | 1,347,410 | 554,509 | 1,901,919 |
| Hedging instruments | – | 65,465 | – | 65,465 |
| Securities measured at fair value through other comprehensive income | 9,143,353 | – | – | 9,143,353 |
| Securities measured at fair value through profit or loss | 27,093 | – | 320,216 | 347,309 |
| Loans and advances to customers measured at fair value through profit or loss | – | – | 1,219,027 | 1,219,027 |
| Liabilities measured at fair value: | – | 2,440,495 | 520,144 | 2,960,639 |
| Derivative financial instruments | – | 1,458,287 | 459,745 | 1,918,032 |
| Hedging instruments | – | 982,208 | 60,399 | 1,042,607 |
| 31.12.2020 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Assets measured at fair value: | 10,228,604 | 1,681,443 | 2,293,671 | 14,203,718 |
| Derivative financial instruments | – | 1,244,523 | 287,094 | 1,531,617 |
| Hedging instruments | – | 436,920 | 94,873 | 531,793 |
| Securities measured at fair value through other comprehensive income | 10,228,560 | – | – | 10,228,560 |
| Securities measured at fair value through profit or loss | 44 | – | 371,856 | 371,900 |
| Loans and advances to customers measured at fair value through profit or loss | – | – | 1 539,848 | 1,539,848 |
| Liabilities measured at fair value: | – | 1,233,070 | 348,105 | 1,581,175 |
| Derivative financial instruments | – | 1,173,043 | 348,105 | 1,521,148 |
| Hedging instruments | – | 60,027 | – | 60,027 |
In the case of some derivatives there was a change of valuation level from 3 to 2 due to reduction of time to maturity. Four of the transactions migrated from valuation level 2 to level 3 due to the increased CVA/DVA adjustment. There was also a transfer of Visa shares and Mastercard shares from level 1 to level 2 (due to the application of a liquidity discount) and a transfer of PFR bonds from level 1 to level 2 (the price comes from the market, but a reduction in liquidity was observed).
The fair value of level 2 and 3 financial instruments is determined using the measurement techniques (e.g. models).
The input data used for purposes of valuation of level 2 and 3 instruments include foreign exchange rates, yield curves, reference rates, changes in foreign exchange rates, reference rates, stock market indices and stock prices, swap points, basis spreads, stock market index values and futures prices.
In the case of derivative financial instruments classified to level 3, the unobservable parameters are correlations between stock exchange indices, correlations between exchange rates and stock exchange indices and implied volatilities of shares listed on the WSE and the WIG20 index.
As regards level 3 municipal bonds, the credit risk margin is a non-observable parameter which is replaceable with the market margin for instruments within similar characteristics. The effect of changes in the credit margin on changes in the fair value is considered immaterial.
The table below presents the changes in the measurement of level 3 assets and liabilities as well as amounts charged to profit or loss and statement of comprehensive income.
| 31.12.2021 | Derivative financial instruments – assets | Hedging instruments – assets | Financial assets measured at fair value | Derivative financial instruments – liabilities | Hedging instruments – liabilities |
|---|---|---|---|---|---|
| Opening balance | 287,094 | 94,873 | 1,911,704 | (348,105) | – |
| Total gains/losses recognised in: | 267,414 | (94,873) | 18,719 | (111,640) | (60,399) |
| statement of profit or loss | 267,414 | (94,873) | 18,719 | (111,640) | (60,339) |
| Statement of comprehensive income | – | – | – | – | – |
| Purchase | – | – | 3,431 | – | – |
| Sale | – | – | (786) | – | – |
| Settlement/expiry | – | – | (393,825) | – | – |
| Closing balance | 554,509 | – | 1,539,243 | (459,745) | (60,399) |
| Unrealized gains/losses recognised in profit or loss related to assets and liabilities at the end of the period | |||||
| 267,414 | (94,873) | 18,719 | (111,640) | (60,339) | |
| 31.12.2020 | Derivative financial instruments – assets | Hedging instruments – assets | Financial assets measured at fair value | Investment property | Derivative financial instruments – liabilities | Hedging instruments – liabilities |
|---|---|---|---|---|---|---|
| Opening balance | 300,814 | 90,992 | 2 215,823 | 56,577 | (306,055) | (1,626) |
| Total gains/losses recognised in: | (13,720) | 3,881 | 60,332 | – | (42,050) | 1,626 |
| statement of profit or loss | (13,720) | 3,881 | 60,332 | – | (42,050) | 1,626 |
| Purchase | – | – | 35,306 | – | – | – |
| Sale | – | – | (4,368) | (56,577) | – | – |
| Settlement/expiry | – | – | (400,385) | – | – | – |
| Transfer | – | – | 4,996 | – | – | – |
| Closing balance | 287,094 | 94,873 | 1,911,704 | – | (348,105) | – |
| Unrealized gains/losses recognised in profit or loss related to assets and liabilities at the end of the period | ||||||
| (13,720) | 3,881 | (60,332) | – | (42,050) | 1,626 | |
The Group measures the fair value by discounting all contractual cash flows related to transactions, with the use of yield curves characteristic of each transaction group. Where no repayment schedule is agreed for a product, it is assumed that the fair value is equal to the carrying amount of the transaction, or, in case of revolving products, the curves derived from the liquidity profile of these products and the expected behavioural duration of these exposures are used.
The yield curve used for fair value measurement of liabilities (such as customer and interbank deposits) and receivables (such as loans to customers and interbank deposits) of the Group comprises:
- the credit risk free yield curve;
- the cost of obtaining financing above the credit risk free yield curve;
- the market margin that reflects credit risk for receivables.
The yield curve for fair value measurement of loans is constructed through classification of loans into sub-portfolios depending on the product type and currency as well as customer segmentation. A margin is determined for each sub-portfolio taking into account credit risk. The margin may be determined in two ways: by reference to margins used for each type of loan granted over the past six months or with the use of credit risk parameters of a given customer determined in the process of calculating the impairment of financial instruments.
When using the first approach for foreign currency mortgage loans, the margin for the entire portfolio of a specific type of mortgage loans serves as the basis for determination of a margin reflecting credit risk as no new transactions are concluded. In the case of insufficient amount of loans, which makes it impossible to reliably determine the amount of margin, the average market margin for products of a given type is used.
The following table presents the book and fair values of those financial assets and liabilities which have not been presented in the Group’s statement of financial position at fair value, along with the measurement classification level. The current credit risk margin and the current liquidity margin, the values of which are not quoted on an active market, are the non-observable parameters for all the categories.
| 31.12.2021 | Book value | Fair value | Level |
| Financial assets | |||
| Cash and balances at Central Bank | 4,631,477 | 4,631,477 | 3 |
| Amounts due from other banks | 2,615,150 | 2,442,241 | 3 |
| Loans and advances to customers measured at amortised cost | 85,080,454 | 83,996,937 | 3 |
| Securities measured at amortised cost | 23,268,041 | 21,612,237 | 1,3 |
| Other financial assets | 369,108 | 369,108 | 3 |
| Financial liabilities | |||
| Amounts due to other banks | 8,012,244 | 7,966,133 | 3 |
| Amounts due to customers | 101,092,941 | 100,330,112 | 3 |
| Subordinated liabilities | 4,334,572 | 4,591,245 | 3 |
| Lease liabilities | 860,004 | 860,004 | 3 |
| Other financial liabilities | 714,379 | 714,379 | 3 |
| Debt securities issued | 14,841,541 | 14,841,541 | 3 |
| 31.12.2020 | Book value | Fair value | Level |
|---|---|---|---|
| Financial assets | |||
| Cash and balances at Central Bank | 3,421,877 | 3,421,877 | 3 |
| Amounts due from other banks | 774,722 | 744,238 | 3 |
| Loans and advances to customers measured at amortised cost | 74,097,269 | 72,806,516 | 3 |
| Securities measured at amortised cost | 23,361,022 | 25,276,195 | 1,3 |
| Other financial assets | 496,078 | 496,078 | 3 |
| Financial liabilities | |||
| Amounts due to the Central Bank | 84,675 | 84,675 | 3 |
| Amounts due to other banks | 6,824,894 | 6,821,688 | 3 |
| Amounts due to customers | 90,051,004 | 90,063,849 | 3 |
| Subordinated liabilities | 4,306,539 | 4,847,359 | 3 |
| Lease liabilities | 968,749 | 968,749 | 3 |
| Other financial liabilities | 432,881 | 432,881 | 3 |
| Debt securities issued | 1,318,380 | 1,318,380 | 3 |
a) Amounts due from banks and amounts due to banks
Amounts due from banks and amounts due to banks include interbank deposits and interbank settlements. The fair value of fixed and floating rate deposits/placements is based on discounted cash flows determined by reference to money market interest rates for items with similar credit risk and residual maturity.
b) Loans and advances to customers
The estimated fair value of loans and advances is the discounted value of future cash flows to be received, using the current market rates adjusted by financing cost and by actual or estimated credit risk margins.
c) Securities measured at amortised cost
The fair value of securities measured at amortised cost was determined by reference to the published quoted prices in an active market for quoted securities (first level of measurement). However, for unquoted securities, fair value was determined using valuation techniques not based on available market data (third level of measurement).
d) Investments in subsidiaries and associates
The fair value of investments in subsidiaries and associates amounts to their balance sheet value.
e)Liabilities due to subordinated loan
Liabilities include subordinated loans. The fair value of the floating rate loan is based on discounted cash flows determined by reference to money market interest rates for items with similar credit risk and residual maturity.
f) Liabilities due to customers
The fair value of fixed and floating rate deposits is based on discounted cash flows determined by reference to money market interest rates adjusted by the actual cost of securing funds over the past three months. For demand deposits, it is assumed that the fair value is equal to their carrying amount.
g) Lease liabilities
The fair value of lease liabilities was determined as equal to their balance sheet value.
h) Debt securities issued
The fair value of the securities issue was estimated using a model that discounts the future cash flows of the investment based on market interest rate curves adjusted for issuer credit risk.
Compensation of financial assets and liabilities
| 31.12.2021 | Gross value presented in financial assets/liabilities | Net value presented in financial assets/liabilities | Offsetting value under concluded contracts | Cash collateral value | Net value |
| Financial assets | |||||
| Trading and hedging derivatives | 1,967,384 | 1,967,384 | (1,283,175) | (46,407) | 637,801 |
| Total | 1,967,384 | 1,967,384 | (1,283,175) | (46,407) | 637,801 |
| Financial liabilities | |||||
| Trading and hedging derivatives | 3,046,005 | 3,046,005 | (1,283,175) | (1,552,559) | 210,271 |
| Total | 3,046,005 | 3,046,005 | (1,283,175) | (1,552,559) | 210,271 |
| 31.12.2020 | Gross value presented in financial assets/liabilities | Net value presented in financial assets/liabilities | Offsetting value under concluded contracts | Cash collateral value | Net value |
|---|---|---|---|---|---|
| Financial assets | |||||
| Trading and hedging derivatives | 2,063,410 | 2,063,410 | (1,244,829) | (342,436) | 476,146 |
| Total | 2,063,410 | 2,063,410 | (1,244,829) | (342,436) | 476,146 |
| Financial liabilities | |||||
| Trading and hedging derivatives | 1,581,175 | 1,581,175 | (1,244,829) | (260,442) | 75,905 |
| Total | 1,581,175 | 1,581,175 | (1,244,829) | (260,442) | 75,905 |
The possibility to compensate receivables and liabilities which are not due as well as settlement in the net amount in case of early settlement of the contract, result from the provisions of framework agreements / ISDA concluded with the customers.