Credit risk is inherent in the core financial operations of the Group, the scope of which includes both lending and providing funding with the use of capital market products. Consequently, credit risk is identified as the risk with the highest potential to affect the present and future profits and equity of BNP Paribas. Proof of the key nature of credit risk is its 79% share in the total economic capital estimated by the Group for purposes of covering major risks involved in the Bank’s operations, in addition to its 89% share in the total value of regulatory capital.
Credit risk management is primarily aimed at implementation of the Group’s strategy through a harmonious increase in the loan portfolio, accompanied by maintenance of the credit risk appetite at an acceptable level.
Credit risk management principles adopted by the Group include:
- each credit transaction requires comprehensive credit risk assessment expressed in internal rating or scoring;
- in-depth and careful financial analysis serves as the basis for regarding the customer’s financial information and collateral-related data as reliable; prudential analyses performed by the Group always take into account a safety margin;
- as a rule, financing is provided based on the customer’s ability to generate cash flows that ensure payment of liabilities to the Group;
- credit risk assessment is additionally verified by credit risk assessment personnel, independent of the business;
- pricing terms of a credit transaction have to take account of the risk involved in such a transaction;
- credit risk is diversified with regard to geographical regions, industries, products and customers;
- credit decisions may only be taken by competent employees;
- the Group enters credit transactions only with known customers and long-term relationships are the basis for cooperation with customers;
- the customer and the transactions made with the customer are monitored transparently from the perspective of the customer, in a manner strengthening the relationship between the Bank and the customer.
Concentration risk is the Bank’s risk inherent to its statutory operations, which is appropriately defined and managed.
The Management Board assesses the concentration risk policy in terms of its application. In particular, it analyses the efficiency and adequacy of the principles applied in the context of the current and planned operations and risk management strategy. The adequacy of the concentration risk management is reviewed if any material changes are observed in the Group’s environment or if the risk management strategy is modified. The appropriate assessment of the concentration risk of the Group is highly dependent on correct identification of all key concentration risks. In justified cases, the Group identifies concentration risk when planning its new activities involving the development and launch of new products, services, expansion to new markets, considerable alterations of products and services or market changes.
Credit portfolio diversification is one of the key credit risk management tools. The Group avoids excessive credit concentration, as it increases the risk. Possible losses pose a considerable threat, and therefore the concentration level should be monitored, controlled and reported to the Group’s management. Key concentration risk mitigation tools include risk identification and measurement mechanisms and exposure limits in individual Bank portfolio segments and in subsidiaries. These tools enable internal differentiation of the loan portfolio and mitigation of negative effects of adverse changes in the economy.
A significant concentration area (aspect) is the one whose share in the Group’s balance sheet total is equal or higher than 10% or 5% of the net profit planned for a given year. In such cases, a given concentration area (aspect) is subject to analyses, reporting and management under the concentration risk management process.
High concentration of the Group’s credit exposures to each entity or group of entities with equity or organizational relationships is one of the potential sources of credit risk. For purposes of its reduction, the Regulation No. 575/2013 specifies the Group’s maximum exposure limit. Under Article 395 of the Regulation No. 575/2013: the institution does not assume any exposure to the client or related clients, the value of which, taking into account the effect of limiting credit risk in accordance with Articles 399-403, exceeds 25% of the value of its Tier 1 capital. If a client is an institution or if a group of related clients include at least one institution, the value does not exceed 25% of its Tier 1 capital or of the amount of EUR 150 million, depending on which one of these two amounts is higher, provided that the sum of the exposure to all related non-institutional customers, after taking into account the effect of credit risk mitigation under Articles 399-403, does not exceed 25% of the value of the institution’s Tier 1 capital.
The Group’s concentration limits are monitored in accordance with Article 387 of the Regulation No. 575/2013. The limits, defined in Article 395 of the Regulation No. 575/2013, had not been exceeded as at the end of 2021. As at the end of 2021, the Group’s exposure to customers/groups of customers with equity or organizational relationships had not exceeded the concentration limit. The Group’s largest exposure represented 20.14% of Tier 1 capital.
Concentration risk tolerance in the Group is determined by a system of internal limits, including both assumed development directions and speed of the Group’s business, an acceptable level of credit risk and liquidity, as well as external conditions, macroeconomic and sectoral perspective. Among others, internal limits for credit concentration risk are determined for:
- selected sectors / industries;
- exposures denominated in foreign currencies;
- customer segments (intra-bank customer segmentation);
- loans secured with a given type of collateral;
- geographical regions;
- average probability of default;
- exposures with a specified rating (the Group’s internal rating scale);
- exposures with a specified debt-to-income ratio;
- exposures with a specified loan-to-value ratio.
Activities that limit Group’s exposure to concentration risk may include systemic measures and one-off / specific decision and transactions. Systemic measures that limit concentration risk include:
- reduction of the scope of crediting of determined customer types through credit policy adjustment;
- reduction of limits charged with concentration risk;
- diversification of asset types on the level of the Group’s statement of financial position;
- change of business strategy to ensure prevention of excessive concentration;
- diversification of accepted collateral types.
Systemic measures that limit concentration risk include:
- reduction of further transactions with a given customer or a group of related customers;
- sale of selected assets/loan portfolios;
- securitization of assets;
- establishing of new collateral types (e.g. credit derivatives, guarantees, sub-participation, and insurance contracts) for existing or new credit exposures.
A concentration analysis by industry, conducted by the Group, focuses on all credit exposures of the Group to institutional customers. The Group defines industries based on Polish statistical classification of economic activities (NACE/PKD 2007). The Group’s exposure to industries analysed at the end of 2021 (presented based on the classification of industries in NACE/PKD), similarly as at the end of December 2020, is concentrated in the following industries: Agriculture, Forestry, Hunting and Fishing, manufacturing. As at the end of December 2021, the share of manufacturing increased by 3 p.p. to the level of 24% as compared to the end of 2020, while the share of agriculture, forestry and fishing decreased by 4 p.p. as compared to the end of 2020 to the level of 22% of industrial exposure.
The table below presents a comparison of the share of impaired loans in industries (gross balance sheet value) as at 31 December 2021 and 2020.
||Share of impaired loans
|AGRICULTURE, FORESTRY AND FISHING
|MINING AND QUARRYING
|ELECTRICITY, GAS, STEAM AND AIR CONDITIONING SUPPLY
|WATER SUPPLY; SEWERAGE, WASTE MANAGEMENT AND REMEDIATION ACTIVITIES
|WHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES AND MOTORCYCLES
|TRANSPORTATION AND STORAGE
|ACCOMMODATION AND FOOD SERVICE ACTIVITIES
|INFORMATION AND COMMUNICATION ACTIVITIES
|FINANCIAL AND INSURANCE ACTIVITIES
|REAL ESTATE ACTIVITIES
|PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES
|ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES
|PUBLIC ADMINISTRATION AND DEFENCE, COMPULSORY SOCIAL SECURITY
|HUMAN HEALTH AND SOCIAL WORK ACTIVITIES
|ARTS, ENTERTAINMENT AND RECREATION ACTIVITIES
*Financial data have been rounded and presented in PLN ‘000, and therefore, in some cases, the totals may not correspond exactly to the total sum.
The Group manages the risk of collateral concentration. For this purpose, the Group introduced limits for the involvement of particular types of collateral, ensuring their appropriate diversification. As at the end of 2021, as well as at the end of 2020, the limits were not exceeded.
In the case of an individually assessed exposures as at 31 December 2021, the Group expects to recover, due to established collateral, the amount of PLN 325,251 thousand, which is 29% of the total exposure assessed individually with an impairment recognised as at 31 December 2020 (PLN 446,091 thousand and 30% as at 31 December 2020).