A significant external factor influencing the decrease in the level of interest income and interest expense in 2021 as compared to 2020 was the policy of the National Bank of Poland regarding the formation of basic interest rates. In order to counteract the negative economic effects of the coronavirus pandemic, the Monetary Policy Council by its decisions of 17 March, 8 April and 28 May 2020 reduced the NBP interest rates (for the reference rate from 1.5% to 0.1%).
The changes caused a decrease in market interest rates, which directly translated into lower profitability of credit products and negatively affected the interest results, especially those realized in the third and fourth quarter of 2020 and in the first three quarters of 2021.
As a result of changes in the macroeconomic situation, the Monetary Policy Council started a monetary policy tightening cycle in the fourth quarter of 2021. The MPC (by decisions of 6 October, 3 November and 8 December) raised the interest rates by a total of 165 bps (to the level of 1.75% for the reference rate). The higher interest rates had a positive effect on the profitability of credit products in the fourth quarter of last year, but due to the timing of their introduction, these changes were not able to fully neutralize the year-on-year decrease in interest income.
The total interest income on loans and advances to customers measured at amortised cost and at fair value through profit or loss in 2021 amounted to PLN 2,421,373 thousand and was lower by PLN 236,734 thousand (i.e. by 8.9%) than the revenue realised in 2020.
The positive effect of interest rate changes will be visible also in the first quarter of 2022 (taking into account subsequent increases made in January and February 2022), and probably in subsequent quarters of 2022, given the statements of the Governor of the NBP indicating a continuation of the monetary policy tightening cycle. An estimate of the sensitivity of the Group’s interest result to interest rate changes is presented in section 9.2. related to interest rate risk.
The negative effect of a decrease in rates was to some extent neutralized by an increase in the value of the loan portfolio. In the case of interest income on the retail loan portfolio, this was already evident from Q1 2021, and in the case of interest income on the corporate and SME loan portfolio from Q3 2021.
The level of interest income was positively influenced by the optimization of financing costs completed in Q2 and Q3 2020. Adjustment of the price of deposits to the changed market environment allowed to partially (decrease of the cost of deposits was twice lower than the decrease of the profitability of loans) neutralize the decrease of interest income from credit products. In Q1, Q2 and Q3 2021, the cost of deposits remained close to zero (mainly due to the high share of current deposits in the total funds acquired from customers, exceeding 90%). The increase in the cost of funding began in the fourth quarter of 2021 due to an increase in market interest rates.
Among the factors that positively affected the level of interest income in 2021, one should also mention the increase in the scale of operations and, consequently, the increase in the average value of the securities portfolio (interest income on debt instruments measured at amortised cost and at fair value increased in the analysed period by a total of PLN 54,422 thousand, i.e. by 7.4%).
The increase in interest income in 2021 compared to 2020 was affected by the fact that the Group applies fair value hedge accounting and (to a much lesser extent) cash flow hedge accounting. The change in fair value measurement of hedging transactions is recognized in the result on hedge accounting. Interest on IRS transactions and hedged items is recognized in net interest income. Net interest income on hedging relationships (the sum of interest income and interest expense on derivatives under fair value and cash flow hedge accounting) amounted to 148,182 thousand compared to 77,121 thousand in 2020 (an increase by PLN 71,061 thousand, i.e. by 92.1%).