38.1 Accounting policy and material estimates
An assessment is performed at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired.
If there is objective evidence of impairment arising from loss events that occurred after the initial recognition of financial assets and causing a decrease in expected future cash flows then appropriate impairment losses are recognized against costs of the current period.
Objective evidence of impairment includes information about the following loss events:
- significant financial difficulty of the issuer or obligor;
- a breach of contract, such as a default or delinquency in interest or principal payments;
- the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider (forbearance);
- it becoming probable that the borrower will enter liquidation, bankruptcy or other financial reorganization;
- the disappearance of an active market for that financial asset because of the issuer’s financial difficulties;
- observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
- adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or
- adverse changes in the economic condition in a specific industry, region, etc. contributing to the deterioration of the debtors’ capacity for repayment;
- adverse changes in the technology, market, economic, legal or other environment in which the issuer of an equity instrument operates indicating that costs of investment in that equity instrument may not be recovered.
In the case of assets which are not measured at fair value through profit or loss, the PZU Group recognizes the expected credit loss – ECL. This applies to:
- loan receivables from clients;
- loans;
- debt securities;
- buy-sell-back transactions;
- lease receivables;
- term deposits with credit institutions;
- lending commitments and issued financial guarantees.
For debt assets measured at amortized cost and at fair value through other comprehensive income, impairment is measured as:
- Lifetime ECL – expected credit losses that result from all possible default events over the expected life of a financial instrument;
- 12-month ECL – the portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
The PZU Group measures allowances for expected credit losses at an amount equal to lifetime ECL, except for the following instruments, for which 12-month ECL is recognized instead:
- financial instruments for which credit risk has not increased significantly since initial recognition;
- debt securities that have low credit risk at the reporting date. Low credit risk debt securities are those securities that have been assigned an external investment-grade rating and
- exposures to banks and the NBP.
The charge is calculated in three categories:
- basket 1 – portfolio with low credit risk – 12-month ECL is recognized;
- basket 2 – portfolio in which a significant increase of credit risk occurs – lifetime ECL is recognized;
- basket 3 – impaired portfolio – lifetime ECL is recognized.
The method of calculation of the allowance for expected credit losses also impacts the method of recognizing interest income – for baskets 1 and 2 interest income is determined on the basis of gross exposures, and in basket 3 on the net exposure basis.
The PZU Group recognizes the cumulative changes in lifetime ECL since initial recognition as a loss allowance for ECL from purchased or granted credit-impaired financial assets (POCI).
Changes in the value of allowances for expected credit losses is recognized in the consolidated profit and loss account in the “Movement in allowances for expected credit losses and impairment losses on financial instruments” item.
The ECL classification and estimation effected by the PZU Group in terms of loan receivables from clients is in compliance with the requirements of:
- IFRS 9 Financial Instruments and IAS 37 Provisions, contingent liabilities and contingent assets;
- Recommendation R of the Polish Financial Supervision Authority on the principles of credit exposure classification, estimation and recognition of expected credit losses and credit risk management, issued in April 2021;
- Article 178 of the CRR, guidelines EBA/GL/2016/07 on the application of the definition of default and the Regulation of the Minister of Finance, Investments and Development of 3 October 2019 on the materiality level of overdue credit obligations and EU Regulation No. 2021/451, Annex V – in accordance with which the definition of default is used at the level of:
- distinct credit instruments – in the case of retail exposures (except in the case of arrears material for the whole relationship);
- debtor – for commercial exposures.
Provisions for legal risk pertaining to FX mortgage loans in Swiss francs
In connection with the CJEU ruling of 3 October 2019, the PZU Group identifies legal risk pertaining to FX mortgage loans in Swiss francs.
For exposures outstanding as at 31 December 2021, the PZU Group considers that the legal risk impacts the expected cash flows from the credit exposure and that the level of the expected credit loss, as defined in IFRS 9.
Accordingly, the credit risk of the Swiss franc mortgage portfolio is evaluated in compliance with the legal risk associated with this portfolio. The PZU Group recognizes that with regard to the CHF mortgage loan portfolio there was a significant increase in credit risk from the date of initial recognition and classifies these loans into Basket 2. Because of the currently unfavorable case- law resulting in a significant probability of losses in litigation, whenever a customer files a statement of claim, the loans covered by such claims are classified into Basket 3. Consequently, the PZU Group recognizes the amount of the provision pertaining to credit exposures outstanding as at 31 December 2021 (comprising existing and possible future statements of claim) in the impairment losses for loan receivables from clients and, accordingly, in the “movement in allowances for expected credit losses and impairment losses”.
Additional information on estimation of the provisions associated with the legal risk pertaining to FX mortgage loans in Swill francs is presented in section 47.3.
Principles governing the treatment of the expected economic situation
Determination of impairment losses in compliance with IFRS 9 requires the formulation of forecasts of the evolution of the key credit risk parameters. For the calculation of allowances, the PZU Group takes into account various scenarios for the assessment of the portfolio quality, reflecting the current and expected changes in the economic situation and the uncertainty factors.
The PZU Group calculates its expected credit losses in accordance with various scenarios for the future macroeconomic situation. Assuming a 100% probability of the baseline scenario, the value of expected credit losses for loans granted to customers would be lower than the one currently assumed by PLN 160 million.
| Estimated movement in the impairment of loan receivables from customers due to a change in PD or LGD affecting the portfolio by +/– 10% | 31 December 2021 | 31 December 2020 | ||
| -10% | +10% | -10% | +10% | |
| Basket 1 | 279 | -300 | 276 | -280 |
| Basket 2 | 418 | -386 | 406 | -396 |
Moratoria implemented in 2020 due to COVID-19
In 2021, the PZU Group continued to apply the following loan repayment programs implemented in 2020:
- moratoria prepared by the PZU Group in accordance with EBA Guidelines – on 29 May 2020 the KNF Office notified the EBA of the banks’ position prepared under the patronage of the Polish Bank Association on the EBA Guidelines, which was introduced by the PZU Group for loan agreements concluded before 13 March 2020 on the following rules:
- for individual clients, micro and small businesses, the PZU Group introduced the possibility of deferring principal or principal and interest installments for a period specified by the client, up to 6 months (regardless of the number of applications submitted by the given client). The application of the moratorium is dependent on the timely service of the loan by the individual client and their creditworthiness taking into account COVID-19 (in the case of businesses);
- for medium-sized enterprises (with the turnover up to EUR 50 million) the PZU Group introduced the possibility of deferring the principal or principal and interest installments in accordance with the client’s request for a term they specify, up to: 6 months (principal installments) and 3 months (principal and interest installments), under the condition the client had creditworthiness at the end of 2019 and, for big corporations (with the turnover over EUR 50 million) the PZU Group introduced the possibility of deferring principal installments in accordance with the client’s request, for a period they specify, up to 6 months under the condition the client had creditworthiness at the end of 2019.
The program ended on 31 March 2021.
- suspension of performance of the agreement pursuant to the provisions of the Act of 2 March 2020 on Special Solutions Associated with Preventing, Counteracting and Combating COVID-19, Other Infectious Diseases and Crises Caused by Them, i.e.:
- consumer clients who lost their job or other main source of income after 13 March 2020;
- during the term of the suspension of performance of the agreement (no more than 3 months) the client is not obligated to make any payments under the agreement, including loan installments, except for the fees for insurance associated with such agreements and no interest is accrued.
As at 31 December 2021, the program was still in effect.
All of the above moratoria were evaluated by the PZU Group with an eye to satisfying the modification criteria within the meaning of IFRS 9. Having regard for their nature, they constituted immaterial modifications. As at 31 December 2021, the balance of active statutory moratoria was PLN 76 million.
In 2021, the PZU Group banks continued to apply a number of portfolio guarantee agreements with Bank Gospodarstwa Krajowego, thereby reducing the consequences of COVID-19. Moreover, on 14 December 2021, Pekao signed a portfolio guarantee agreement with the European Investment Fund under the Pan-European Guarantee Fund established by 22 EU Member States in order to counteract the effects of the COVID-19 pandemic.
In the PZU Group insurance segment, in the credit risk area, the impact of the COVID-19 pandemic was low; just like in 2020, no indications of impairment were identified in the portfolio, hence no exposure was classified to basket 3 (instruments for which impairment has been recognized)
38.1.1. Calculation of PD and LGD parameters
PZU Group uses the PD and LGD parameters to estimate allowances for expected credit losses.
For issuers and exposures that are externally rated, PDs is assigned on the basis of the average market default rate for the rating classes concerned. First, the internal rating of an entity/issue is determined in accordance with the internal rating methodology. The tables published by external rating agencies are used to estimate average PD.
The Moody’s RiskCalc model is used for issuers of corporate bonds and corporate loans, for which no external rating is available. The EDF parameter (expected default frequency) is used to estimate PD. When estimating lifetime PD for exposures with maturity above 5 years (in the RiskCalc model, the forward EDF curve refers to a 5-year period), it is assumed that in subsequent years PD is constant and corresponds to the value determined by the model for the 5th year.
For loan receivables from clients PD is estimated based on internal models depending on the segment group, individual credit quality of the customer, and the exposure lifecycle phase.
For issuers of corporate bonds and corporate loans, 12-month LGD is determined based on the Moody’s RiskCalc model (LGD module). When estimating lifetime LGD for exposures with a maturity above 5 years, it is assumed that in subsequent years LGD is constant and corresponds to the value determined by the module for the 5th year.
If a credit rating agency has allocated a separate recovery rate to the instrument concerned then this parameter is used. For a given RR (recovery rate) parameter, the formula: LGD = 1-RR is applied.
Where the RiskCalc model cannot be used to estimate LGD levels and where the instrument does not have an LGD awarded by an external rating agency, then the average RR should be used, based on market data (properly differentiating the corporate and sovereign debt classes) supplied by external rating agencies using the following formula: LGD = 1-RR. When lifetime LGD must be estimated, the value of this parameter is assumed to be constant. The degree of subordination of debt is taken into account when selecting data for LGD.
38.1.2. Change in credit risk since initial recognition
At each reporting date, the PZU Group shall assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the PZU Group should use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, the Group compares the PD for the financial instrument as at the reporting date with the PD as at the date of initial recognition and consider reasonable and supportable information, that is available without undue cost or effort.
If a financial instrument is determined to have low credit risk (i.e. has an external investment-grade rating) both at initial recognition and as at the reporting date, it is assumed that the credit risk associated with this instrument has not increased significantly. This pertains in particular to treasury bonds:
The PZU Group assesses whether the credit risk of financial instruments has increased significantly by comparing the PD parameter for the rest of its lifetime on the reporting date with the PD parameter for the rest of its lifetime estimated at the time of initial recognition.
The PZU Group regularly monitors the effectiveness of the criteria used to identify a significant increase in credit risk, in order to confirm that:
- the criteria allow for identification of a significant increase in credit risk before the impairment of the exposure occurs;
- the average time between identifying a significant increase in credit risk and impairment is reasonable;
- exposures are in principle not transferred directly from basket 1 (12-month ECL) to basket 3 (impairment);
- there is no unreasonable volatility of allowances for expected credit losses resulting from transfers between 12-month ECL and lifetime ECL.
In the case of loan receivables from clients, the identification of a significant credit risk growth is based on an analysis of qualitative (such as the occurrence of a 30-day past due period, customer’s classification in the watch list, forbearance) and quantitative premises.
38.1.3. Identified impaired financial assets (basket 3)
The PZU Group classifies financial assets to basket 3 when the premises for impairment losses such as, among others, delay in payment of more than 90 days, are satisfied with simultaneous satisfaction of the unpaid amount materiality threshold, exposure being included in the restructuring process or occurrence of another qualitative premise of impairment losses.
38.1.4. Financial assets impaired due to credit risk (POCI)
Acquired or granted financial assets impaired due to credit risk (POCI) is assets with impairment losses determined at the time of the initial recognition. The POCI classification does not change over the life of the instrument until derecognition.
POCI assets arise from:
- acquisition of a contract satisfying the definition of POCI (e.g. on combination with another entity or purchase of a portfolio);
- conclusion of a POCI contract on the initial granting (e.g. granting of a loan to a client in a poor financial condition);
- modification of a contract (e.g. in the course of restructuring) resulting in excluding an asset from the statement of financial position and recognizing a new asset satisfying the definition of POCI.
As at the initial recognition, POCI assets are recognized at the fair value, without recognizing allowances for expected credit losses.
38.1.5. Receivables from policyholders
In accordance with the provisions of IFRS 9 item 5.5.15, a simplified model, in which an aggregate assessment of the impairment is carried out and the impairment losses are estimated at the expected credit loss amount over the entire lifetime, is applied for receivables from policyholders which do not contain a significant financing component.
Receivables are grouped by similar credit risk characteristics. For receivables before maturity, the value of the receivable that is likely to become due is determined based on a historical analysis of the percentage of the ratio of receivables that are not paid before maturity. The amount of write-off for expected credit losses is determined on the basis of the uncollectibility ratio for matured receivables with the shortest past due period.
For matured receivables, an age structure is prepared, depending on the past due period. For this group, the value of the allowance for expected credit losses is calculated in separate ranges of past due periods, based on the uncollectibility ratios determined through historical analysis.