Concentration 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.
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 2020, the limits specified in Article 395 of the EU Regulation No. 575/2013 were not exceeded. As at the end of 2020, the Bank’s exposure to financing ustomers / 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 15%.
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),
- exposures with a specific debt-to-income ratio,
- exposures with a specific loan-to-value ratio.
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 2020, similarly as at the end of 2019, is characterised by concentration towards such industries as: Agriculture, Forestry, Hunting and Fishing (in accordance with the section defined in the PKD). As at the end of 2020, they accounted for 26% of the Bank’s exposure towards institutional Clients, while in at the analogical period-end of the previous year they constituted 28% of the Bank’s exposure.
As at the end of 2020, the largest share of non-performing loans was observed in the following industries: Entertainment and Recreation activities (21%), Accommodation and food service activities (20.5%).