Market risk means the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, credit spread, value of liabilities and financial instruments

Market risk types in the PZU Group include:

  • equity risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of equities;
  •  unquoted equity risk – the possibility of incurring loss as a result of changes in the valuation of unquoted shares;
  • property risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of real estate;
  •  commodity risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of commodities;
  • inflation risk – the possibility of incurring loss associated with the level of information, especially inflation of prices of goodsand services as well as expectations as to the future inflation level, which affect the valuation of assets and liabilities;
  • liquidity risk – the risk of being unable to realize investments and other assets without affecting their market prices in order to settle financial obligations when they fall due;
  • interest rate risk – the possibility of incurring a loss as a result of changes in the value of financial instruments or other assets and a change in the present value of projected cash flows from liabilities, caused by changes in the term structure of marke trates or in the volatility of risk- free market interest rates;
  • basis risk – the possibility of incurring a loss as a result of changes in the value of financial instruments or assets and a change in the present value of projected cash flows from liabilities, caused by changes in the term structure of spreads between market interest rates and risk-free rates or in the volatility of such spreads, excluding credit spreads;
  • foreign exchange risk – the possibility of incurring loss as a result of changes in the value of assets, liabilities and financial instruments, caused by changes in the level or in the volatility of currency exchange rates;
  • credit spread risk – the possibility of incurring loss as a result of changes in the value of assets, liabilities and financial instruments, caused by changes in the level or in the volatility of credit spreads over the term structure of the interest rates on debt securities issued by the State Treasury;
  • concentration risk – the possibility of incurring loss 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.

Concentration risk and credit spread risk are regarded as an integral part of market risk when measuring risk for the purposes ofrisk profile, risk tolerance, and market risk ratio reporting. The risk  management process has, however, a different set of traits from the process of managing the other sub-categories of market risk and has been described in section 8.5.1.1 along with the
process for managing counterparty insolvency risk.

The market risk in the PZU Group originates from three major sources:

  • operations associated with asset and liability matching (ALM portfolio);
  • operations associated with active allocation, i.e. designating the optimum medium-term asset structure (AA portfolios);
  • banking operations in Pekao Alior Bank – generating material exposure to interest rate risk.

A number of documents approved by supervisory boards, management boards and dedicated committees govern investment activity in PZU Group companies.

Risk units take part in the risk identification process, measure, monitor and report on the risks. Market risk is measured using the Value at Risk (VaR) economic capital calculation model or standard formula in accordance with the rules defined by Solvency II Directive. In order to effectively manage market risk, risk limits are adopted in a form of a capital amount allocated to each market risk and limits for individual market risks.

In Pekao, the market risk management system forms the structural, organizational and methodological framework, which aims to maintain the balance sheet and off-balance sheet structure in line with the accepted strategic objectives. The market risk management process and the governing procedures include the separation into the banking and trading books.

In managing its trading book’s market risk, Pekao strives to optimize the financial performance and ensure the highest possible quality of service of the bank’s clients in respect to market-making, while remaining within the limits approved by the management board and the supervisory board.

When managing interest rate risk in its banking book, Pekao endeavors to secure the economic value of equity and to achieve its intended net interest income target within the accepted limits.

In Alior Bank, the exposure to market risk is restricted by the system of periodically updated limits introduced by the resolution of the supervisory board or the Capital, Asset and Liability Management Committee, covering all risk measures the level of which is monitored and reported by Alior Bank’s organizational units that are independent of the business division. In Alior Bank, there are three types of limits that differ in respect to their functioning – basic, supplementary and stress-test limits. Market risk management focuses on limiting potential adverse changes in economic value of equity.

Exposure to market risk

XLS

Carrying amount Note 31 December 2022 31 December 2021
Assets at Group’s risk Assets at client’s risk Total Assets at Group’s risk Assets at client’s risk Total
including
banks’ assets		 including
banks’ assets
Financial assets and cash exposed to interest rate risk 389 627 344 610 931 390 558 360 904 316 355 1 032 361 936
Fixed-income debt securities 37 107 587 75 050 860 108 447 95 855 60 477 965 96 820
Variable-income debt securities 37 24 580 22 076 44 24 624 24 825 22 798 43 24 868
Loan receivables from clients 35 212 693 212 693 – 212 693 215 008 215 008 – 215 008
Term deposits with credit institutions 37 3 047 2 562 21 3 068 1 364 1 031 20 1 384
Loans 37 4 269 – – 4 269 3 586 – – 3 586
Cash 40 15 954 15 231 6 15 960 9 443 8 684 4 9 447
Buy-sell-back transactions 37 7 071 2 572 – 7 071 4 117 1 651 – 4 117
Derivatives 36 14 426 14 426 – 14 426 6 706 6 706 – 6 706
Financial assets exposed to other price risk 5 041 2 172 4 084 9 125 3 896 2 339 5 241 9 137
Equity instruments 37 3 290 692 4 064 7 354 2 306 770 5 209 7 515
Derivatives 36 1 751 1 480 20 1 771 1 590 1 569 32 1 622
Total 394 668 346 782 5 015 399 683 364 800 318 694 6 273 371 073

The following table presents financial assets of banks and at client’s risk, by the item in which they are classified in the consolidated financial statements:

XLS

Financial assets of banks and financial assets at client’s risk Note 31 December 2022 31 December 2021
Pekao and Alior Bank Financial assets at client’s risk Pekao and Alior Bank Financial assets at client’s risk
Loan receivables from clients 35 212 693 – 215 008 –
Financial derivatives 15 906 20 8 275 32
Investment financial assets 102 952 4 989 86 727 6 237
Measured at amortized cost 74 402 21 53 432 20
Debt securities 69 268 – 50 750 –
Government securities 48 111 – 43 770 –
Domestic 42 654 – 43 770 –
Fixed rate 38 661 – 38 644 –
Floating rate 3 993 – 5 126 –
Foreign 5 457 – – –
Fixed rate 5 457 – – –
Other 21 157 – 6 980 –
Fixed rate 15 843 – 2 224 –
Floating rate 5 314 – 4 756 –
Buy-sell-back transactions 2 572 – 1 651 –
Term deposits with credit institutions 2 562 21 1 031 20
Measured at fair value through other comprehensive income 27 359 – 32 425 –
Equity instruments 443 – 513 –
Debt securities 26 916 – 31 912 –
Government securities 18 133 – 22 171 –
Domestic 18 075 – 22 171 –
Fixed rate 9 601 – 14 868 –
Floating rate 8 474 – 7 303 –
Foreign 58 – – –
Fixed rate 58 – – –
Other 8 783 – 9 740 –
Fixed rate 4 735 – 4 445 –
Floating rate 4 048 – 5 295 –
Measured at fair value through profit or loss 1 191 4 968 870 6 217
Equity instruments 239 311 249 377
Participation units and investment certificates 10 3 753 8 4 832
Debt securities 942 904 613 1 008
Government securities 743 860 403 965
Domestic 743 851 403 959
Fixed rate 650 846 291 956
Floating rate 93 5 112 3
Foreign – 9 – 6
Fixed rate – 9 – 6
Other 199 44 210 43
Fixed rate 45 5 4 3
Floating rate 154 39 206 40
Cash 15 231 6 8 684 4
Total financial assets of banks and financial assets at client’s risk 346 782 5 015 318 694 6 273

In its investing activities, the PZU Group uses derivatives as a tool to mitigate risk (with or without hedge accounting) and to facilitate efficient management of the investment portfolio.

The PZU Group’s exposure to derivatives is presented in section 36.

Exposure to debt securities issued by governments other than the Polish government

XLS

Carrying amount of debt securities issued by governments other than the Polish government 31 grudnia 2022 31 grudnia 2021
Germany 2 557 1
France 1 864 14
United States 1 226 13
Lithuania 717 845
Romania 209 227
Latvia 180 155
Indonesia 176 132
Spain 142 17
Hungary 128 134
Italy 114 118
Bulgaria 78 87
Mexico 78 88
Ukraine 78 163
Columbia 76 76
Croatia 75 154
Brazil 66 70
Panama 66 76
Peru 64 74
Other 625 1) 754 2)
Total 8 519 3 198
1) The line item “Other” includes bonds issued by 54 countries with respect to which the balance sheet exposure does not exceed the equivalent of PLN 50 million.
2) The line item “Other” includes bonds issued by 53 countries.

Exposure to debt securities issued by corporations and local government units

XLS

Carrying amount of debt securities issued by corporations, local government units and National Bank of Poland 31 grudnia 2022 31 grudnia 2021
K. Financial and insurance activities, of which: 22 256 8 375
Foreign banks 5 864 4 777
National Bank of Poland 14 594 1 870
Companies from the WIG-Banks Index 562 553
O. Public administration and defense, compulsory social security, of which: 5 313 5 354
Domestic local governments 5 309 5 345
D. Electricity, gas, steam, hot water and air conditioning production and supply, of which: 1 914 2 329
Companies from the WIG-Energy Index 1 308 1 614
C. Manufacturing, of which: 1 676 1 818
Production and processing of crude oil refining products (including WIG-Fuels) 707 766
H. Transportation and storage 679 801
N. Administrative and support service activities 620 1 006
E. Water supply; sewerage, waste management and remediation activities 584 413
F. Construction 373 305
J. Information and communication 365 377
I. R. Accommodation and food service activities (including: WIG – hotels and restaurants), and arts, entertainment and recreation activities 298 335
B. Mining and quarrying 192 185
M. Professional, scientific and technical activity 187 196
L. Real estate activities 185 285
G. Wholesale and retail trade services; repair services of motor vehicles and motorcycles 24 47
Total 34 666 21 826
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