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7.5.1. Credit risk and concentration risk

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Credit risk is the risk of a loss or adverse change in the financial situation resulting from fluctuations in the trustworthiness and creditworthiness of issuers of securities, counterparties and all debtors, materializing through a counterparty’s default on a liability or an increase in credit spread. This definition also includes credit risk in financial insurance.

Credit risk types in the PZU Group include:

  • credit risk in banking activity – is the credit risk arising from activity conducted in the banking sector, associated mainly with the possibility that a debtor or borrower defaults on its obligations;
  • credit risk in financial insurance – credit risk resulting from activity in the financial insurance sector, related mainly to the possibility that a PZU Group customer defaults on its obligations to a third party, or a debtor/borrower defaults on its obligations to a PZU Group customer; this threat may result from failure to complete an undertaking or adverse influence of the business environment;
  • credit spread risk – the possibility of incurring a loss due to a change in the value of assets, liabilities and financial instruments resulting from a change in the level of credit spreads as compared to the term structure of interest rates of debt securities issued by the State Treasury or fluctuations of their volatility;
  • counterparty default risk – the possibility of incurring a loss as a result of unexpected default of counterparties and debtors or deterioration of their credit rating;
  • concentration risk is the risk stemming either from lack of diversification in the asset portfolio or from large exposure to default risk by a single issuer of securities or a group of related issuers.

Exposure to credit risk in the PZU Group arises directly from banking, investment activities, activity in the financial insurance and guarantee segment and reinsurance and bancassurance operations. The PZU Group distinguishes the following kinds of credit risk exposure:

  • risk of a customer’s default against PZU Group under contracted loans (in banking activity);
  • risk of bankruptcy of an issuer of financial instruments in which PZU Group invests or which it trades, e.g. corporate bonds;
  • counterparty default risk, e.g. reinsurance or OTC derivatives and bancassurance activity;
  • risk of default of a PZU Group’s customer against a third party, e.g. insurance of cash receivables, insurance guarantees.

7.5.1.1. Concentration risk arising out of lending activity

This section presents information related to lending activity of PZU Group’s banks.

To prevent adverse events that could result from excessive concentration, both Pekao and Alior Bank mitigate the concentration risk by setting limits and applying concentration standards arising from both external and internal regulations. They include the following:

  • rules of identifying the areas where concentration risk arises in credit activity;
  • taking concentration into account when estimating internal capital;
  • process of setting and updating limit levels;
  • process of managing the limits and adopting the rules of conduct if the permitted limit level is exceeded;
  • concentration risk monitoring process, including reporting;
  • oversight over the concentration risk management process.

The process of setting and updating concentration limits takes the following into account:

  • information on the level of credit risk of limited portfolio segments and their impact on realization of assumptions related to risk appetite in terms of credit portfolio quality and capital position;
  • sensitivity of limited portfolio segments to changes in the macroeconomic environment assessed in regular stress tests;
  • reliable economic and market information concerning each exposure concentration area, especially macroeconomic and industry ratios, information about economic trends, including the projection of the levels of interest rates, exchange rates, political risk analysis, ratings of governments and financial institutions;
  • reliable information about economic situation of companies, industries, branches, economic sectors, general economic information including news about economic and political situation of countries, as well as other information needed to evaluate concentration risk;
  • interactions between different kinds of risk, i.e. credit, market, liquidity and operational risk. 

Risk analysis is performed, in individual and portfolio approach. Measures are undertaken to:

  • minimize credit risk for an individual loan with the assumed level of return;
  • reduce overall credit risk arising from a specific credit portfolio.

In order to minimize the risk level of a single exposure, the following is assessed every time when a loan or other credit product is granted:

  • reliability and creditworthiness, including detailed analysis of the source of repayment;
  • collateral, which entails review of the formal, legal and economic status, including loan to value adequacy.

In order to enhance control over the risk of individual exposures, clients are monitored regularly and appropriate measures are taken if increased risk is identified.

In order to minimize credit risk arising from a particular portfolio:

  • concentration limits are set and tracked;
  • early warning signals are monitored;
  • credit portfolio is monitored regularly, especially material credit risk parameters;
  • regular stress tests are carried out.

7.5.1.2. Credit risk in banking activity

Risk assessment in credit process

The provision of credit products is accomplished in accordance with loan granting methodologies appropriate for a given client segment and type of product. The internal rating process in both banks constitutes a significant part of assessing credit risk of both the client and the transaction. It is an important step in the credit decision-making process for new loans and for changes of lending terms, and in monitoring loan portfolio quality. Each bank has developed its own models used in the client creditworthiness assessment process, which must be completed before a credit decision is made. The models are based on external information and on internal data. Credit products are granted in the banks in accordance with the operating procedures, whose purpose is to set out the proper steps that must be taken in the credit process, identify the units responsible for those activities and the tools to be applied.

Credit decisions are made in accordance with the existing credit decision system (with decision-making powers at specific levels matching the risk level of a particular client and transaction).

In order to conduct regular assessment of accepted credit risk and to mitigate potential losses on credit exposures, the client’s standing is monitored during the lending period by identifying early warning signals and by conducting regular individual reviews of credit exposures.

To minimize credit risk, security interests are established in line with the level of exposure to credit risk, considering recovery rate from a specific type of collateral. The establishment of a security interest does not waive the requirement to examine the client’s creditworthiness.

Collateral is taken to secure repayment of the loan amount with due interest and costs if the borrower fails to settle its due debt within the dates stipulated in a loan agreement and restructuring activities are not successful. Accepted forms of collateral include: guarantees, sureties, account freezes, registered pledges, transfers of title, assignments of receivables, assignment of credit insurance, promissory notes, mortgages, powers of attorney to bank accounts and security deposits (as special forms of collateral). The assets constituting collateral are reviewed in the credit process in terms of their legal capacity to establish effective security interest and also the recoverable amount in a possible enforcement procedure.

The financial effect of the established collateral for the portfolio of exposures measured individually with recognized impairment as at 31 December 2021 is PLN 2,291 million (as at 31 December 2020: PLN 2,658 million). This is an amount by which the level of the required impairment losses for this portfolio would be higher if no discounted cash flows obtained from collateral were taken into account in their estimation.

As at 31 December 2021, the PZU Group did not register any adverse impact of the COVID-19 pandemic on the quality of its loan portfolio, while taking into account elevated risks for certain industries when accepting new exposures and assigning internal ratings.

Scoring and credit rating

The rating scale differs by bank, customer segment and transaction type. The following tables present the quality of credit portfolios for exposures covered by internal rating models. Because of the different rating models employed by Pekao and Alior Bank, the data are presented for each of the banks separately.

Pekao

In 2021, Pekao launched the process of aligning its rating scale for internal rating models with the rating scale model applicable to external ratings – the so-called Masterscale, in accordance with the following table:

Description Class
Investment classes
High quality AA, AA-
Robust repayment capacity A+, A, A-
Adequate repayment capacity BBB+, BBB, BBB-
Speculative classes
Repayment likely, some degree of permanent uncertainty BB+, BB, BB-
High risk of default B+, B, B-
Very high risk CCC
Default likely CC, C

At the end of 2021, the rating models within the corporate/enterprise customer segment were mapped onto the Masterscale.

Retail customer portfolio (unimpaired) covered by the rating model – gross carrying amount 31 December 2021 31 December 2020
Basket 1 Basket 2 Basket 3 and POCI Total Basket 1 Basket 2 Basket 3 and POCI Total
Microentreprises 3 813 964 - 4 777 n/a n/a n/a n/a
   Class 1 (0% <= PD < 0.06%) 19 4 - 23 n/a n/a n/a n/a.
   Class 2 (0.06% <= PD < 0.14%) 230 22 - 252 n/a n/a n/a n/a
   Class 3 (0.14% <= PD < 0.35%) 555 52 - 607 n/a n/a n/a n/a
   Class 4 (0.35% <= PD < 0.88%) 634 69 - 703 n/a n/a n/a n/a
   Class 5 (0.88% <= PD < 2.10%) 715 94 - 809 n/a n/a n/a n/a
   Class 6 (2.10% <= PD < 4.00%) 560 85 - 645 n/a n/a n/a n/a
   Class 7 (4.00% <= PD < 7.00%) 653 131 - 784 n/a n/a n/a n/a
   Class 8 (7.00% <= PD < 12.00%) 312 91 - 403 n/a n/a n/a n/a
   Class 9 (12.00% <= PD < 22.00%) 135 114 - 249 n/a n/a n/a n/a
   Class 10 (22.00% <= PD < 100%) - 302 - 302 n/a n/a n/a n/a
Mortgage-backed residential loans 55 288 8 515 - 63 803 53 574 7 715 - 61 289
   Class 1 (0.00% <= PD < 0.06%) 9 482 359 - 9 841 10 325 378 - 10 703
   Class 2 (0.06% <= PD < 0.19%) 4 810 268 - 5 078 5 054 296 - 5 350
   Class 3 (0.19% <= PD < 0.35%) 26 605 3 234 - 29 839 25 829 3 438 - 29 267
   Class 4 (0.35% <= PD < 0.73%) 13 547 2 635 - 16 182 11 274 1 761 - 13 035
   Class 5 (0.73% <= PD < 3.50%) 622 960 - 1 582 787 1 013 - 1 800
   Class 6 (3.50% <= PD < 14.00%) 154 474 - 628 188 420 - 608
   Class 7 (14.00% <= PD < 100.00%) 68 585 - 653 117 409 - 526
Cash (consumer) loans 9 409 1 429 - 10 838 9 021 2 054 - 11 075
   Class 1 (0.00% <= PD < 0.09%) 913 86 - 999 832 136 - 968
   Class 2 (0.09% <= PD < 0.18%) 1 644 64 - 1 708 1 630 141 - 1 771
   Class 3 (0.18% <= PD < 0.39%) 2 942 73 - 3 015 2 779 151 - 2 930
   Class 4 (0.39% <= PD < 0.90%) 2 313 62 - 2 375 2 252 232 - 2 484
   Class 5 (0.90% <= PD < 2.60%) 1 294 240 - 1 534 1 107 464 - 1 571
   Class 6 (2.60% <= PD < 9.00%) 250 414 - 664 318 396 - 714
   Class 7 (9.00% <= PD < 30.00%) 53 291 - 344 85 292 - 377
   Class 8 (30.00% <= PD < 100.00%) - 199 - 199 18 242 - 260
Renewable limits 139 77 - 216 123 74 - 197
   Class 1 (0.00% <= PD < 0.02%) 6 3 - 9 6 3 - 9
   Class 2 (0.02% <= PD < 0.11%) 34 12 - 46 29 11 - 40
   Class 3 (0.11% <= PD < 0.35%) 42 21 - 63 41 20 - 61
   Class 4 (0.35% <= PD < 0.89%) 40 15 - 55 32 16 - 48
   Class 5 (0.89% <= PD < 2.00%) 8 13 - 21 10 9 - 19
   Class 6 (2.00% <= PD < 4.80%) 6 8 - 14 5 6 - 11
   Class 7 (4.80% <= PD < 100.00%) 3 5 - 8 - 9 - 9
Total retail customer segment 68 649 10 985 - 79 634 62 718 9 843 - 72 561

Corporate segment portfolio (unimpaired) covered by the rating model – gross carrying amount 31 December 2021
Basket 1 Basket 2 Basket 3 and POCI Total
Large enterprises (Masterscale) 21 976 1 629 - 23 605
   AA (0% <= PD <= 0.01000%) 59 - - 59
   AA- (0.01000% < PD <= 0.01700%) - - - -
   A+ (0.01700% < PD <= 0.02890%) - - - -
   A (0.02890% < PD <= 0.04913%) 3 - - 3
   A- (0.04193% < PD <= 0.08352%) 6 - - 6
   BBB+ (0.08352% < PD <= 0.14199%) 1 560 1 - 1 561
   BBB (0.14199% < PD <= 0.24138%) 306 5 - 311
   BBB- (0.24138% < PD <= 0.41034%) 1 039 56 - 1 095
   BB+ (0.41034% < PD <= 0.69758%) 2 576 22 - 2 598
   BB (0.69758% < PD <= 1.18588%) 4 124 69 - 4 193
   BB- (1.18588% < PD <= 2.01599%) 3 675 83 - 3 758
   B+ (2.01599% < PD <= 3.42719%) 4 036 79 - 4 115
   B (3.42719% < PD <= 5.82622%) 1 655 26 - 1 681
   B- (5.82622% < PD <= 9.90458%) 2 411 787 - 3 198
   CCC (9.90458% < PD <= 16.83778%) 480 494 - 974
   CC (16.83778% < PD <= 28.62423%) 38 3 - 41
   C (28.62423% < PD <= 100%) 8 4 - 12
Small and medium-sized enterprises (Masterscale) 15 368 2 175 - 17 543
   AA (0% <= PD <= 0.01000%) - - - -
   AA- (0.01000% < PD <= 0.01700%) - - - -
   A+ (0.01700% < PD <= 0.02890%) - - - -
   A (0.02890% < PD <= 0.04913%) 25 1 - 26
   A- (0.04193% < PD <= 0.08352%) 69 2 - 71
   BBB+ (0.08352% < PD <= 0.14199%) 339 2 - 341
   BBB (0.14199% < PD <= 0.24138%) 1 469 5 - 1 474
   BBB- (0.24138% < PD <= 0.41034%) 1 336 17 - 1 353
   BB+ (0.41034% < PD <= 0.69758%) 2 448 79 - 2 527
   BB (0.69758% < PD <= 1.18588%) 2 170 90 - 2 260
   BB- (1.18588% < PD <= 2.01599%) 1 865 203 - 2 068
   B+ (2.01599% < PD <= 3.42719%) 2 149 152 - 2 301
   B (3.42719% < PD <= 5.82622%) 1 447 342 - 1 789
   B- (5.82622% < PD <= 9.90458%) 1 776 522 - 2 298
   CCC (9.90458% < PD <= 16.83778%) 223 652 - 875
   CC (16.83778% < PD <= 28.62423%) 52 59 - 111
   C (28.62423% < PD <= 100%) - 49 - 49
Enterprises covered by the rating model of Pekao Bank Hipoteczny SA 330 178 - 508
   Class 1 112 5 - 117
   Class 2 201 18 - 219
   Class 3 16 73 - 89
   Class 4 1 8 - 9
   Class 5 - 48 - 48
   Class 6 - 16 - 16
   Class 7 - 10 - 10
Total corporate segment 37 674 3 982 - 41 656

Corporate segment portfolio (unimpaired) covered by the rating model – gross carrying amount 31 December 2020
Basket 1 Basket 2 Basket 3 and POCI Total
Corporate clients 22 777 3 856 - 26 633
   Class 1 (0.00% <= PD < 0.14%) 122 - - 122
   Class 2 (0.14% <= PD < 0.25%) 1 010 4 - 1 014
   Class 3 (0.25% <= PD < 0.42%) 2 518 5 - 2 523
   Class 4 (0.42% <= PD < 0.77%) 5 847 64 - 5 911
   Class 5 (0.77% <= PD < 1.42%) 5 556 735 - 6 291
   Class 6 (1.42% <= PD < 2.85%) 2 468 578 - 3 046
   Class 7 (2.85% <= PD < 6.00%) 3 970 802 - 4 772
   Class 8 (6.00% <= PD < 12.00%) 1 264 1 517 - 2 781
   Class 9 (12.00% <= PD < 100.00%) 22 151 - 173
Small and medium-sized enterprises (SMEs) 2 382 344 - 2 726
   Class 1 (0.00% <= PD < 0.06%) 16 - - 16
   Class 2 (0.06% <= PD < 0.14%) 192 2 - 194
   Class 3 (0.14% <= PD < 0.35%) 623 37 - 660
   Class 4 (0.35% <= PD < 0.88%) 645 59 - 704
   Class 5 (0.88% <= PD < 2.10%) 484 80 - 564
   Class 6 (2.10% <= PD < 4.00%) 241 56 - 297
   Class 7 (4.00% <= PD < 7.00%) 93 45 - 138
   Class 8 (7.00% <= PD < 12.00%) 59 26 - 85
   Class 9 (12.00% <= PD < 22.00%) 15 16 - 31
   Class 10 (22.00% <= PD < 100.00%) 14 23 - 37
Corporate segment covered by the rating model of Pekao Bank Hipoteczny SA 409 235 - 644
   Class 1 4 4 - 8
   Class 2 12 9 - 21
   Class 3 110 22 - 132
   Class 4 283 188 - 471
   Class 5 - 12 - 12
Total corporate segment 25 568 4 435 - 30 003

Local government units (unimpaired) covered by the rating model – gross carrying amount 31 December 2021
Basket 1 Basket 2 Basket 3 and POCI Total
AA (0% <= PD <= 0.01000%) - - - -
AA- (0.01000% < PD <= 0.01700%) - - - -
A+ (0.01700% < PD <= 0.02890%) - - - -
A (0.02890% < PD <= 0.04913%) 1 - - 1
A- (0.04193% < PD <= 0.08352%) 139 - - 139
BBB+ (0.08352% < PD <= 0.14199%) 25 - - 25
BBB (0.14199% < PD <= 0.24138%) 218 - - 218
BBB- (0.24138% < PD <= 0.41034%) 117 - - 117
BB+ (0.41034% < PD <= 0.69758%) 533 - - 533
BB (0.69758% < PD <= 1.18588%) 26 - - 26
BB- (1.18588% < PD <= 2.01599%) 138 - - 138
B+ (2.01599% < PD <= 3.42719%) - - - -
B (3.42719% < PD <= 5.82622%) - - - -
B- (5.82622% < PD <= 9.90458%) - - - -
CCC (9.90458% < PD <= 16.83778%) - - - -
CC (16.83778% < PD <= 28.62423%) - - - -
C (28.62423% < PD <= 100%) - - - -
Total local government units 1 197 - - 1 197

Local government units (unimpaired) covered by the rating model – gross carrying amount 31 December 2020
Basket 1 Basket 2 Basket 3 and POCI Total
Class 1 (0.00% <= PD < 0.04%) 6 - - 6
Class 2 (0.04% <= PD < 0.06%) 223 - - 223
Class 3 (0.06% <= PD < 0.13%) 84 - - 84
Class 4 (0.13% <= PD < 0.27%) 377 - - 377
Class 5 (0.27% <= PD < 0.50%) 319 - - 319
Class 6 (0.50% <= PD < 0.80%) 466 - - 466
Class 7 (0.80% <= PD < 1.60%) 130 - - 130
Class 8 (1.60% <= PD < 100.00%) - - - -
Total local government units 1 605 - - 1 605

Portfolio of specialized lending exposures within the meaning of the CRR – unimpaired – by supervisory classes – gross carrying
amount
31 December 2021 31 December 2020
Basket 1 Basket 2 Basket 3 and POCI Total Basket 1 Basket 2 Basket 3 and POCI Total
High 497 8 - 505 449 - - 449
Good 3 111 2 100 - 5 211 2 475 1 911 - 4 386
Satisfactory 98 562 - 660 105 842 - 947
Poor - 3 - 3 - - - -
Total 3 706 2 673 - 6 379 3 029 2 753 - 5 782

Portfolio 31 December 2021
Gross carrying amount Impairment allowance Net carrying amount
Exposures without recognized impairment 157 095 -1 669 155 426
Portfolio covered by the rating model for the retail customer segment 79 634 -571 79 063
Microentreprises 4 777 -45 4 732
Retail clients 74 857 -526 74 331
Mortgage-backed residential loans 63 803 -205 63 598
Cash (consumer) loans 10 838 -316 10 522
Renewable limits 216 -5 211
Portfolio covered by the rating model for the corporate segment 41 656 -337 41 319
Large enterprises (Masterscale) 23 605 -154 23 451
Small and medium-sized enterprises (Masterscale) 17 543 -181 17 362
Corporate segment covered by the rating model of Pekao Bank Hipoteczny SA 508 -2 506
Portfolio covered by the rating model for the local government unit segment (Masterscale) 1 197 -2 1 195
Specialized lending exposures 6 379 -147 6 232
Exposures not covered by the internal rating model 28 229 -612 27 617
Exposures with recognized impairment 9 091 -6 073 3 018
Total receivables from clients on account of impaired loans 1) 166 186 -7 742 158 444

1 Loan receivables from clients are measured at amortized cost or at fair value through other comprehensive income.

Alior Bank

Portfolio 31 December 2020
Gross carrying amount Impairment allowance Net carrying amount
Exposures without recognized impairment 140 153 -1 529 138 624
Portfolio covered by the rating model for the individual client segment 72 561 -635 71 926
Mortgage-backed residential loans 61 289 -253 61 036
Cash (consumer) loans 11 075 -378 10 697
Renewable limits 197 -4 193
Portfolio covered by the rating model for the corporate segment 30 003 -279 29 724
Corporate clients 26 633 -213 26 420
Small and medium-sized enterprises (SME) 2 726 -62 2 664
Corporate segment covered by the rating model of Pekao Bank Hipoteczny SA 644 -4 640
Portfolio covered by the rating model for the local government unit segment 1 605 - 1 605
Specialized lending exposures 5 782 -114 5 668
Exposures not covered by the rating model 30 202 -501 29 701
Exposures with recognized impairment 8 516 -5 595 2 921
Total receivables from clients on account of impaired loans 1) 148 669 -7 124 141 545

1) Loan receivables from clients are measured at amortized cost or at fair value through other comprehensive income.


Loan receivables from clients – outstanding 31 December 2021 31 December 2020
Basket 1 Basket 2 Basket 3 and POCI Total Basket 1 Basket 2 Basket 3 and POCI Total
Retail segment 32 676 1 179 - 33 855 29 535 1 559 - 31 094
   PD < 0.18% 10 869 150 - 11 019 3 364 22 - 3 386
   0.18% <= PD < 0.28% 1 860 20 - 1 880 3 451 25 - 3 476
   0.28% <= PD < 0.44% 2 373 43 - 2 416 3 049 24 - 3 073
   0.44% <= PD < 0.85% 2 902 22 - 2 924 5 080 62 - 5 142
   0.85% <= PD < 1.33% 3 088 36 - 3 124 2 927 71 - 2 998
   1.33% <= PD < 2.06% 3 354 53 - 3 407 3 197 151 - 3 348
   2.06% <= PD < 3.94% 2 849 78 - 2 927 4 993 391 - 5 384
   3.94% <= PD < 9.10% 3 993 344 - 4 337 2 114 277 - 2 391
   PD => 9.1% 1 345 433 - 1 778 1 272 536 - 1 808
   No scoring 43 - - 43 88 - - 88
Business segment 13 709 4 452 - 18 161 13 936 3 802 - 17 738
   PD < 0.28% 77 1 - 78 8 1 - 9
   0.28% <= PD < 0.44% 376 - - 376 40 1 - 41
   0.44% <= PD < 0.85% 308 69 - 377 225 65 - 290
   0.85% <= PD < 1.33% 1 849 218 - 2 067 2 239 100 - 2 339
   1.33% <= PD < 2.06% 1 811 217 - 2 028 2 411 184 - 2 595
   2.06% <= PD < 3.94% 4 576 315 - 4 891 2 399 377 - 2 776
   3.94% <= PD < 9.1% 3 452 1 320 - 4 772 4 362 1 230 - 5 592
   PD => 9.1% 1 098 2 312 - 3 410 2 026 1 844 - 3 870
   No scoring 162 - - 162 226 - - 226
Total non past due receivables from customers, without impairment 46 385 5 631 - 52 016 43 471 5 361 - 48 832

Past due loan receivables from clients 31 December 2021 31 December 2020
Basket 1 and Basket 2 2 552 2 948
   Retail segment 1 438 1 438
   Business segment 1 114 1 510
Basket 3 1 883 2 409
   Retail segment 645 754
   Business segment 1 238 1 655
POCI 400 520
   Retail segment 125 174
   Business segment 275 346
Total past due assets 4 835 5 877

7.5.1.3. Restructured exposures

A restructured exposure is an exposure whose terms of repayment have been changed during the life of the liability in respect of a debtor experiencing or is likely to experience financial difficulties. The change of contractual terms includes a variety of restructuring activities, such as:

  • extending the lending period (in the form of an annex to the agreement) or signing a restructuring agreement (in the case of debt that is fully overdue), which results in reduction of the principal and interest installment;
  • change of terms and conditions of the agreement allowing for lower interest or principal repayments;
  • agreement subject to refinancing.

A restructured exposure that is classified as non-performing (either due to restructuring measures taken or prior to the taking of any restructuring measures) or that has been reclassified from performing to non-performing, including as a result of a restructured exposure being overdue by more than 30 days during the contingency period, is considered a non-performing restructured exposure (technically: forborne exposure).

In the case of granting a loan moratorium period or other measures to ease the effects of the COVID-19 pandemic, the PZU Group applies an approach consistent with the regulatory guidance in this respect and does not classify such items automatically as forborne.

Loan receivables from clients 31 December 2021 31 December 2020
Basket 1 Basket 2 Basket 3 POCI Total Basket 1 Basket 2 Basket 3 POCI Total
Individual
analysis
Group analysis Individual
analysis
Group analysis
Measured at amortized cost











   Gross forborne exposures 1 033 987 2 708 1 125 1 859 7 712 1 153 1 385 1 965 1 031 2 054 7 588
   Impairment loss -6 -110 -1 205 -628 -1 486 -3 435 -12 -155 -927 -524 -1 509 -3 127
   Net forborne exposures 1 027 877 1 503 497 373 4 277 1 141 1 230 1 038 507 545 4 461
Measured at fair value through profit or loss X X X X X 1 X X X X X 1
Total 1 027 877 1 503 497 374 4 278 1 141 1 230 1 038 507 545 4 462

Movement in net carrying amount of forborne exposures 1 January –
31 December 2021
1 January –
31 December 2020
Opening balance 4 462 3 215
Value of exposures recognized in the period 1 704 3 090
Value of exposures excluded in the period -1 172 -702
Movements in impairment losses -28 -761
Other changes -688 -380
Total net receivables 4 278 4 462

7.5.1.4. Credit risk arising out of investing activity

The management principles for credit risk arising from investing activity in the PZU Group are governed by a number of documents approved by supervisory boards, management boards and dedicated committees.

Credit risk exposures to respective counterparties and issuers are subject to restrictions based on exposure limits. The limits are established by dedicated committees, based on the analyses of risks associated with a given exposure and taking into account the financial standing of entities or groups of related entities and the impact of such exposures on the occurrence of concentration risk. Qualitative restrictions on exposures established by individual committees in accordance with their powers form an additional factor mitigating the credit risk and concentration risk identified in investment activities.

The limits refer to exposure limits to a single entity or a group of affiliated entities (this applies to both credit limits and concentration limits). The use of credit risk and concentration risk limits is subject to monitoring and reporting. If the limit is exceeded, appropriate actions, as defined in internal regulations, are taken.

Credit risk assessment of an entity is based on internal credit ratings (the approach to rating differs by type of entity). Ratings are based on quantitative and qualitative analyses and form one of the key elements of the process of setting exposure limits. The credit quality of counterparties and issuers is regularly monitored. One of the basic elements of monitoring is a regular update of internal ratings.

Risk units identify, measure and monitor exposure to credit risk and concentration risk related to investment activity, in particular they give opinions on requests to set exposure limits referred to individual committees.

Information on the credit quality of assets related to investing activity is presented in section 38.

Exposure to credit risk

The following tables present the exposure of credit risk assets to credit risk broken down by ratings granted by external rating agencies. Credit risk exposures arising from conditional transactions are presented as an exposure to the issuer of the underlying securities.

The tables do not include loan receivables from clients and receivables due under insurance contracts. This was because these asset portfolios are very dispersed and therefore contains a significant percentage of receivables from unrated entities and individuals.

Credit risk assets as at 31 December 2021 Basket 1 Basket 2 Basket 3 POCI Total
Debt securities measured at amortized cost – carrying amount 73 828 346 - 9 74 183
– gross carrying amount 73 897 354 35 39 74 325
– from AAA to A 60 350 - - - 60 350
– from BBB to B 1 242 35 - - 1 277
– no rating 12 305 319 35 39 12 698
– write-off for expected credit losses -69 -8 -35 -30 -142
Debt securities measured at fair value through other comprehensive income – carrying amount 44 788 251 - - 45 039
– from AAA to A 35 806 - - - 35 806
– from BBB to B 5 117 127 - - 5 244
– no rating 3 865 124 - - 3 989
– write-off for expected credit losses 1) -54 -26 - - -80
Debt securities measured at fair value through profit or loss – carrying amount X X X X 2 466
– from AAA to A X X X X 1 142
– from BBB to B X X X X 171
– no rating X X X X 145
– assets at the client’s risk X X X X 1 008
Term deposits with credit institutions and buy-sell-back transactions – carrying amount 5 501 - - - 5 501
– gross carrying amount 5 502 - - - 5 502
– from AAA to A 796 - - - 796
– from BBB to B 519 - - - 519
– no rating 4 167 - - - 4 167
– assets at the client’s risk 20 - - - 20
– write-off for expected credit losses -1 - - - -1
Loans – carrying amount 3 517 69 - - 3 586
– gross carrying amount 3 522 75 - - 3 597
– from BBB to B 150 - - - 150
– no rating 3 372 75 - - 3 447
– write-off for expected credit losses -5 -6 - - -11
Derivatives X X X X 8 328
– from AAA to A X X X X 6 632
– from BBB to B X X X X 882
– no rating X X X X 782
– assets at the client’s risk X X X X 32
Reinsurers’ share in claims provisions X X X X 1 399
– from AAA to A X X X X 1 192
– from BBB to B X X X X 8
– no rating X X X X 199
Reinsurance receivables X X X X 63
– from AAA to A X X X X 35
– no rating X X X X 28
Total 127 634 666 - 9 140 565

1) The write-off is recognized in revaluation reserve and it does not lower the carrying amount of assets.


Credit risk assets as at 31 December 2020 Basket 1 Basket 2 Basket 3 POCI Total
Debt securities measured at amortized cost – carrying amount 57 800 71 - - 57 871
– gross carrying amount 57 850 73 34 - 57 957
– from AAA to A 49 199 - - - 49 199
– from BBB to B 609 35 - - 644
– no rating 8 042 38 34 - 8 114
– write-off for expected credit losses -50 -2 -34 - -86
Debt securities measured at fair value through other comprehensive income – carrying amount 63 387 256 - - 63 643
– from AAA to A 47 181 - - - 47 181
– from BBB to B 5 495 55 - - 5 550
– no rating 10 711 201 - - 10 912
– write-off for expected credit losses 1) -68 -13 - -81
Debt securities measured at fair value through profit or loss – carrying amount X X X X 3 566
– from AAA to A X X X X 1 999
– from BBB to B X X X X 161
– no rating X X X X 220
– assets at the client’s risk X X X X 1 186
Term deposits with credit institutions and buy-sell-back transactions – carrying amount 5 609 - - - 5 609
– gross carrying amount 5 610 - - - 5 610
– from AAA to A 1 156 - - - 1 156
– from BBB to B 328 - - - 328
– no rating 4 093 - - - 4 093
– assets at the client’s risk 33 - - - 33
– write-off for expected credit losses -1 - - - -1
Loans – carrying amount 3 311 73 - - 3 384
– gross carrying amount 3 318 79 - - 3 397
– from BBB to B 40 - - - 40
– no rating 3 278 79 - - 3 357
– write-off for expected credit losses -7 -6 - - -13
Derivatives X X X X 6 339
– from AAA to A X X X X 4 718
– from BBB to B X X X X 485
– no rating X X X X 1 108
– assets at the client’s risk X X X X 28
Reinsurers’ share in claims provisions X X X X 1 176
– from AAA to A X X X X 1 022
– from BBB to B X X X X 1
– no rating X X X X 153
Reinsurance receivables X X X X 55
– from AAA to A X X X X 35
– no rating X X X X 20
Total 130 107 400 - - 141 643

1 The allowance is recognized in the revaluation reserve and does not lower the carrying amount of assets.

7.5.1.5. Reinsurer’s credit risk in insurance activity

PZU Group enters into proportional and non-proportional reinsurance contracts aiming to reduce liabilities arising from its core business. Reinsurance is exposed to credit risk associated with the risk that a reinsurer default on its obligations.

Assessment of reinsurers’ creditworthiness is conducted based on market data, information obtained from external sources and also based on an internal model. The model divides reinsurers into several classes, depending on the estimated risk level. A reinsurer will not be accepted if its risk is higher than a pre-defined cut-off point. The acceptance is not automatic and the analysis is supplemented by assessments by reinsurance brokers. In the credit risk monitoring process, this assessment is updated on a quarterly basis.

The following tables present the credit risk of the reinsurers that cooperated with PZU Group companies.

Reinsurer Reinsurers’ share in technical provisions (net) as at 31 December 2021 Best A.M.’s rating as at 31 December 2021 1)
Reinsurer 1 268 A+
Reinsurer 2 215 unrated
Reinsurer 3 168 A+
Reinsurer 4 129 A++
Reinsurer 5 126 AA-
Reinsurer 6 117 A+
Reinsurer 7 89 AA-
Reinsurer 8 76 A+
Reinsurer 9 58 A+
Reinsurer 10 50 A+
Others, including: 2) 1 244
With investment-grade rating 1 110
With sub-investment grade rating or unrated 134
Total 2 540

1) Standard&Poor’s ratings were used where A.M. Best’s rating was not available.
2) “Others” includes reinsurers’ shares in technical provisions if their carrying amounts are lower than those presented above.


Reinsurer Reinsurers’ share in technical provisions (net) as at 31 December 2020 Best A.M.’s rating as at 31 December 2020 1)
Reinsurer 1 218 A+
Reinsurer 2 170 unrated
Reinsurer 3 135 A+
Reinsurer 4 104 A++
Reinsurer 5 98 A+
Reinsurer 6 66 A+
Reinsurer 7 55 A+
Reinsurer 8 47 A+
Reinsurer 9 45 AA-
Reinsurer 10 44 AA-
Others, including: 2) 1 119
With investment-grade rating 979
With sub-investment grade rating or unrated 140
Total 2 101

1) Standard&Poor’s ratings were used where A.M. Best’s rating was not available.
2) “Others” includes reinsurers’ shares in technical provisions if their carrying amounts are lower than those presented above.

Counterparty risk related to reinsurance is mitigated by the fact that the PZU Group cooperates with numerous reinsurers with reliable credit ratings.

7.5.1.6. Risk concentration in credit risk

The following table presents the concentration of PZU Group’s balance-sheet and off-balance-sheet exposures using the sections of the Polish Classification of Business Activity (PKD):

  • exposure to financial investments such as equity instruments, debt securities, loans granted buy-sell-back transactions, bank accounts and term deposits;
  • amounts of extended insurance guarantees;
  • liability limits for insurance of receivables;
  • value of loans (gross carrying amount and off-balance sheet exposure).

Industry segment 31 December 2021 31 December 2020
O. Public administration and defense, compulsory social security 16,08% 14,54%
K. Financial and insurance activities 11,94% 12,83%
C. Manufacturing 16,27% 16,09%
G. Wholesale and retail trade services; repair services of motor vehicles and motorcycles 13,51% 12,70%
L. Real estate activities 8,12% 8,78%
F. Construction 5,65% 5,89%
H. Transportation and storage 5,51% 5,47%
D. Electricity, gas, steam, hot water and air conditioning supply 4,63% 4,79%
J. Information and communication 2,74% 2,59%
M. Professional, scientific and technical activity 5,24% 6,79%
B. Mining and quarrying 1,08% 1,19%
Other sectors 9,23% 8,34%
Total 100,00% 100,00%