15. Profit and loss
15.1. Net interest income
Interest income on financial assets classified as available for sale, loans and advances and financial assets held to maturity are recognized in the profit and loss at amortized cost using the effective interest rate.
The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, an estimate of cash flows is made considering all contractual terms of the financial instrument but future credit losses are not considered. The calculation includes all fees and commissions paid or received (external) between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.
Interest income comprises interest and commission (received or due) recognized in the calculation of the effective interest rate due to: loans with repayment schedule, intrabanking deposits and securities held to maturity available for sale, held for trading and the ones which meet the definition of loans and cash loans, and are classified to cash loans and receivables.
In case impairment is recognized for a financial asset or group of similar financial assets, interest income is accrued based on the current amount of receivable (this is the value reduced by revaluation charge) with the use of the interest rate according to which future cash flows were discounted for impairment valuation.
Interest income on debt securities classified to trading portfolio or designated at fair value through profit and loss are recognized under the caption Interest income.
Interest revenue/ costs on interest rate derivatives and Interest revenue/ costs on current accrual of the swap/forward points on FX-derivatives classified as held for trading are recognized under Interest result on derivatives.
Interest revenue/ costs on derivatives designated as hedging instruments in the hedge accounting are recognized under Net interest income.
15.2. Net commission income
Commission income arises from providing financial services by the Group and comprises fees for extending a loan, the Group’s pledge to extend a loan, cards issue, cash management services, brokerage services, insurance products-related services and asset management services. Commission income comprises also margins on FX derivatives transactions concluded with corporate clients.
Fees and commissions (both income and expenses) directly attributed to rise of financial assets with repayment schedule are recognised in the income statement as effective interest rate component and are part of the interest income.
The Group recognizes the following effective interest rate-adjusting commissions:
- commissions for application review and credit commitment letter issue;
- commissions for limit/overdraft granted;
- commissions for loan or limit/overdraft extension;
- commissions for receivables/bills of exchange purchased, for bill of exchange discount;
- commission for restructured loan processing;
- commission for amending the credit agreement as to the amount, currency or schedule of repayments;
- costs of credit and cash loan agency commissions.
Other commissions that are interwoven with occurrence of assets without defined schedules are cleared on a straight line basis throughout the contract.
The Group recognizes the following commissions as the ones cleared on a straight line basis:
- the commissions described as the commissions adjusting the effective interest rate for the loans for whose commissions no cash flows can be estimated (first of all, current account overdrafts, working capital loans and revolving loans);
- commissions for issuing, confirming or prolonging the time and increasing the amount of the guarantee or letter of credit;
- commissions for multi-facility agreements;
- commissions for the loan or limit/ overdraft granted to start another lending year.
Fees on pledge to extend a loan, which is likely to be taken, are deferred and as at the date of financial assets rise are settled as the component of effective interest rate or using straight-line method based on above mentioned criterion.
Other fees and commissions relating to the financial services offered by the Group – like cash management services, brokerage services and asset management services – are recognised in the income statement at the time of service provision.
Commission income that was accrued and is due but was not paid on time are derecognised from the Group’s financial result upon the lapse of 90 days.
15.2.1. Net commission income from bancassurance services
Fees and commission related to insurance products are recognised in the income statement according to their economic content and classified as:
- commissions being part and parcel of a fee under a financial instrument wherewith the insurance product is linked,
- fee for agency service, and
- fee for additional services after the insurance product sale.
Prior to implementation of the insurance product, in order to recognise it properly in the income statement, the Group analyses features of the insurance product and also the link between the insurance product and banking product. In this analysis, the Group takes account of the prevalence of the economic content over the legal form. The factors analysed by the Group include:
- manner in which an insurance product is offered, option of purchasing a banking product without the insurance product as well as option of purchasing only the insurance product at the Group,
- pricing conditions of the two products sold together and separately,
- profitability of the insurance and banking products sold together and separately,
- sales target of combined products versus sales target of the same banking products sold without insurance,
- option of concluding an insurance agreement outside the Group,
- number of resignations and the value of refunded insurance premiums,
- settlement cycle with a client, and
- scope of activities performed by the Group for the insurer and their duration.
Insurance products offered with loans are treated by the Group as linked to lending products, mainly because of lack of the possibility to purchase at the Group an insurance product without a loan or a cash loan.
For the absolute majority of insurance products linked with lending products functioning at the Group, the income on insurance products is earned based on monthly settlements with both the insurer and the client. Since the client may resign at any time from the insurance coverage for the following month, the Group treats such insurances as renewed each month and settled for each month separately. Therefore, the income on insurance products settled monthly is recognised in the income statement also on a monthly basis. The Group recognises the income on such insurances in the commission income on insurance products.
The Group analogically presents the costs directly related to these insurance products.
Such an approach ensures compliance with the matching principle. At the same time, the Group monitors the level of costs under insurance products linked to the lending products in terms of legitimacy of division into interest income and commission income. At present such a division would not materially impact the Group’s income statement. The Group applies an analogical approach to real property insurance with mortgage loans. Taking account of the materiality principle, the Group presents full income on this insurance in the net commission income.
Most insurance products linked with the Group’s deposit products (current accounts and savings accounts) use the monthly-settlement structure. Therefore, the income on insurance products settled monthly is recognised in the income statement also on a monthly basis. The Group recognises the income on such insurances in the commission income on insurance products.
Commissions under insurance products not linked to banking products are recognised in the income statement:
- on a straight-line basis during the insurance policy term – if the Group, apart from other sales operations, also provides additional services during the insurance term,
- on a one-off basis – if the Group does not provide any additional services during the insurance policy term.
Should there be a risk of refund of the fee under the insurance product, the Group decreases its income by the amounts of estimated provisions. The provisions for refunds are established based on the historical data on actual refunds made in the past and based on projections as to the amount of refunds in the future.
15.3. Net income on financial instruments measured at fair value through profit and loss and FX result
Net income on financial instruments measured at fair value through profit and loss and FX result includes gains and losses arising from disposal and change of fair value of assets and liabilities held for trading and designated at initial recognition at fair value through profit and loss account.
Result on financial instruments through profit and loss and FX result also includes adjustments of fair value due to risk for unexecuted FX-options transactions.
Result from accrued interest and settlement of discount or premium on debt securities held for trading or designated at fair value through profit and loss is recognized as interest income.
15.4. Net income on investments
The net income on investments comprises profits or losses resulting from sale of financial assets classified as available for sale and earnings from dividends. Dividend income is recognized in the profit and loss account when the shareholders’ right to receive payment is established.
15.5. Net income on hedge accounting
This item includes the measurement of hedged and hedging transactions in fair value hedging accounting and the result on measurement of hedging instruments in the ineffective part of hedge relationship of cash flows hedge accounting.
15.6. Net income on other basic activities
Net income on other basic activities comprise of expense and income not attributed directly to Group’s banking and brokerage activity. These include in particular: the result due to holding an investment property, sale of assets (non-current assets and intangible assets), revenues from sales of other services, revenues due to recovered bad debts, received and paid damages, penalties and fines.
15.7. Net profit (loss) attributable to non-controlling interests
Net profit (loss) attributable to non-controlling interests comprises of that part of the profit and loss, net result for the period and net assets of subordinated entity that can be attributed to shares not held by parent company (directly or indirectly through subordinated entities).