ING Bank Śląski | Annual Report 2014

ING BANK ŚLĄSKI

ING BANK ŚLĄSKIAnnual Report 2014

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40. Hedge accounting

40.1. Fair value hedge accounting

In the consolidated financial statements for the year 2014 (similar to year 2013), the Group used fair value hedge accounting for securities.

The hedged risk is the risk of the change of the fair value of the financial asset resulting from the change of the interest rates. The subject of hedging is the fair value of the fixed interest rate debt instrument, namely the position (or its part) on a given security in the available-for sale portfolio, that as of establishing of the hedging relationship has a specific fair value recognised in the revaluation reserve and position (or its part) on a given security in the loans and other receivables portfolio as the result of reclassification from the available-for-sale portfolio.

For the strategy purposes, the part of the fair value change under the hedged risk is separated with the use of valuation models based on the same assumptions as for interest rate derivatives ones. The valuation curves applied in the model are based on market rates corresponding to revaluation tenors of variable interest rate hedging instruments.

Interest Rate Swap changing fixed interest rate into the floating one is the hedging instrument. As a result, changes to the fair value of the hedging instrument show the opposite trend from the changes to the fair value of the hedged item. Therefore, owing to the established hedging relationship, the fair values of the hedging instrument and the hedged item offset one another in the income statement. The mismatch element caused by application of different valuation curves (i.e. interest rate derivatives measured using valuation curves made taking account of the OIS discounting) impacts effectiveness of the hedging strategy, which is visible in the income statement.

Since only one type of risk (interest rate risk) is hedged against, changes to the fair value of the hedged item included in the available-for-sale assets portfolio and caused by other unsecured risks are carried through the revaluation fund.

The net interest income on derivative hedge instruments is presented in the item Interest on available-for-sale financial assets wherein the interest income on the hedged instrument is presented under the described strategy.

The valuation of hedging and hedged transactions is presented in the Group’s income statement under the Net income on hedge accounting item. Bilateral value adjustments of hedging instruments do not impact the presented values due to the fact that only the transactions concluded on the interbank market, additionally hedged with a margin made or received, depending on the exposure, were designated as the hedging instrument.

Fair value of instruments under the fair value hedge accounting for securities
  end of 2014 end of 2013
Nominal value Fair value Nominal value Fair value
Hedged items, of which: 7,051.2 8,019.8 5,139.9 5,657.4
- Debt securities from available-for-sale portfolio, of which: 3,752.2 4,095.9 1,930.0 1,971.6
  - Treasury bonds 3,461.2 3,726.0 1,730.0 1,745.9
  - BGK bonds 291.0 369.9 200.0 225.7
- Debt securities from loans and other receivables portfolio, of which: 3,299.0 3,923.9 3,209.9 3,685.8
  - Treasury bonds 3,299.0 3,923.9 3,209.9 3,685.8
Hedging instruments, of which: 7,036.3 -994.0 5,125.4 -716.7
- Interest Rate Swap – positive valuation 550.0 0.4 200.0 8.2
- Interest Rate Swap – negative valuation 6,486.3 -994.4 4,925.4 -724.9

For the hedging instrument the fair value was given as the balance-sheet valuation.

​40.2. Cash flow hedge accounting

In the consolidated financial statements for the year 2014 (similar to year 2013), the Group applied the rules of accounting of cash flow hedges with regard to a specific portfolio of assets/ liabilities/highly probable planned financial transactions of the Group (e.g. extrapolation of cash flows arising from revolving deposits/overdrafts). Hedging strategies are used to hedge the Group’s exposure against changes in the size of future cash flows arising from interest rate risk. The Group applies the strategy for hedging the mortgage loans indexed to EUR or CHF against changes arising from interest rate risk and foreign currency risk at the same time.

The hedged item is the specified portfolio of assets and/or financial liabilities or the portfolio of planned transactions, which includes financial instruments with variable interest rate (financial products based on the WIBOR / EURIBOR / LIBORCHF market interest rate) that are therefore exposed to the risk of future cash flows arising from the change of the WIBOR/EURIBOR, EURIBOR/LIBORCHF market interest rate and in part of the portfolio denominated in currencies CHF / EUR exposed to foreign exchange risk arising from changes in the exchange rate.

For the strategy purposes, as regards changes to the fair value calculation for the future cash flows of the portfolio being hedged, the Group applies the hypothetical derivative approach (i.e. the method whereunder it is possible to reflect the hedged item and the nature of the risk hedged in the form of a derivative). The measurement principles are the same as for the interest rate derivatives. Bilateral value adjustments of hedging instruments do not impact the presented values due to the fact that only the transactions concluded on the interbank market, additionally hedged with a margin made or received, depending on the exposure, were designated as the hedging instrument.

The instrument hedging asset items in the strategy of hedging the risk of interest rate changes are the Pay-Variable, Receive-Fixed Interest Rate Swaps, while the instrument hedging liabilities items are the Pay-Fixed, Receive-Variable Interest Rate Swaps and the separated parts of the Currency Interest Rate Swap that reflect the Pay-Fixed, Receive-Variable Interest Rate Swaps. The instrument hedging asset items in the strategy of hedging both the risk of interest rate changes and the currency risk are the separated parts of the Currency Interest Rate Swap that reflect the Pay-Variable in CHF/EUR, Receive-Fixed in PLN Currency Swaps.

Considering the fact that the hedging instrument being the object of individual strategies has an impact on the income statement on a continuous basis (i.e. by measurement at the amortized cost), the net interest income on derivative instruments to hedge the portfolio of: 

  • financial assets is presented in the item Interest on loans and other receivables to customers, further split into Interest on loans and advances
  • financial assets is presented in the item Interest on deposits from customers, further split into Interest on deposits.  

In 2014 and 2013, the Group followed the rules of cash flow hedge accounting also with regard to payments arising from the Group’s internal administration agreements denominated in / indexed with foreign currencies against the risk of changes to the future cash flows due to both the interest rate risk and FX risk. The subject of hedging were FX cash flows / cash flows indexed with foreign currencies executed in specific months up to the level defined in line with the methodology of determining the hedged item. The hedging instrument was a series of FX Forward transactions maturing in specific months, on the dates compliant with the adopted risk hedging strategy. Therefore, the income posted on hedge derivative instruments was recognised in the income statement at the moment of specific generic costs execution and recognition under payments hedged by adjustment of its generic cost.

As at 31 Dec 2014, the revaluation reserve included PLN 1,278.3 million (including deferred tax) related to the effective part of hedging relationship in the cash flow hedge accounting (PLN 205.5 million as at 31 Dec 2013). In 2014, the ineffective part of the hedging relationship resulting from the mismatch in compensating changes in fair value of the hedging instrument and hedged item recognised in the income statement totalled PLN 0.3 million compared with PLN -0.4 million in 2013.

Fair value of hedging instruments under cash flow hedge accounting
  end of 2014 end of 2013
Nominal value Fair value Nominal value Fair value
Hedging instruments, of which: 73,326.4 1,945.0 44,159.8 654.2
- Interest Rate Swap – positive valuation 54,218.5 2,981.0 32,603.9 995.0
- Interest Rate Swap – negative valuation 19,107.9 -1,001.4 11,555.9 -388.3
- Cross Currency Swap - positive valuation 0.0 2.4 0.0 48.7
- Cross Currency Swap - negative valuation 0.0 -37.0 0.0 -1.2

The periods in which the Group expects that the cash flows hedged within hedge accounting will appear and have an impact on the P&L are presented below.

 

Future cash flows (PLN million)
end of 2014
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) 525.2 676.9 1,191.3 198.0
Cash outflows (liabilities) -84.2 -137.1 -242.5 -36.2
Net cash flows 441.0 539.8 948.8 161.8

 

end of 2013
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) 589.0 914.1 1,267.3 152.2
Cash outflows (liabilities) -85.7 -191.6 -291.3 -41.0
Net cash flows 503.3 722.5 976.0 111.2

 

Future cash flows (EUR million)
end of 2014
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) 0.1 0.4 6.0 2.2
Cash outflows (liabilities) 0.0 -0.1 -2.6 -1.7
Net cash flows 0.1 0.3 3.4 0.5


end of 2013
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) 1.1 4.8 16.8 3.0
Cash outflows (liabilities) 0.0 0.0 0.0 0.0
Net cash flows 1.1 4.8 16.8 3.0

 

Future cash flows (CHF million)
end of 2014
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) -0.3 -0.5 2.1 0.5
Cash outflows (liabilities) 0.0 0.0 0.0 0.0
Net cash flows -0.3 -0.5 2.1 0.5

 

end of 2013
  up to 1 year over 1 year and
up to 3 years
over 3 years and
up to 8 years
over 8 years
Cash inflows (assets) 0.2 1.7 3.5 0.2
Cash outflows (liabilities) 0.0 0.0 0.0 0.0
Net cash flows 0.2 1.7 3.5 0.2

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