56.3.1. Interest rate risk
Due to floating-rate items the Group is exposed to cash flow changes resulting from interest rate fluctuations. As a result of fixed-rate items the Group is exposed to changes in the fair value of items measured at a fair value. The risk of fair value changes resulting from interest rate changes relates to IRS and CCIRS derivative instruments as well as the loans granted to Elektrociepłownia Stalowa Wola S.A. The Group is also exposed to the risk of lost benefits related to a decrease in interest rates in the case of fixed-rate debt or to an increase in interest rates in the case of fixed-rate assets, although the changes are not disclosed in the financial statements.
The purpose of interest rate risk management is to limit negative effects of market interest rate fluctuations on the Group’s cash flows to an acceptable level and to minimize finance costs. In order to hedge interest rate risk related to floating-rate debt, the Group concluded interest rate swap (IRS) transactions, described in detail in Note 31 of consolidated financial statements. IRS transactions concluded in order to hedge interest rate risk are subject to hedge accounting.
The following tables present the carrying amounts of the Group’s financial instruments exposed to interest rate risk. As the Group has adopted a dynamic financial risk management strategy where the hedged item is represented by cash flows relating to the exposure to the floating WIBOR 6M interest rate, the interest rate risk for a portion of interest cash flows has been reduced by the hedging IRS transactions. Thus, a portion of the carrying amount of debt with floating interest cash flow fluctuations hedged with interest rate swaps has been presented in the table below under fixed-rate items, similarly to the valuation of IRS hedging instruments.
Financial instruments by interest rate type
| Financial instruments | As at 31 December 2022 | As at 31 December 2021 | ||||
| Fixed interest rate | Floating interest rate | Total | Fixed interest rate | Floating interest rate | Total | |
| Financial assets | ||||||
| Deposits | 3 | − | 3 | 26 | 30 | 56 |
| Loans granted | 206 | − | 206 | 99 | − | 99 |
| Cash and cash equivalents | − | 1 619 | 1 619 | − | 766 | 766 |
| Derivative instruments-IRS | 592 | − | 592 | 371 | − | 371 |
| Derivative instruments-CCIRS | 21 | − | 21 | 26 | − | 26 |
| Financial liabilities | ||||||
| Bank overdrafts | 1 | − | 1 | − | − | − |
| Preferential loans and borrowings | − | 8 | 8 | − | 15 | 15 |
| Arm’s length loans and borrowings | 2 961 | 5 040 | 8 001 | 2 634 | 1 886 | 4 520 |
| Bonds issued | 6 821 | 401 | 7 222 | 6 750 | 570 | 7 320 |
| Obligations under finance leases | 1 256 | − | 1 256 | 1 235 | − | 1 235 |
| Derivative instruments-CCIRS | − | − | − | 1 | − | 1 |
Other financial instruments of the Group which are not included in the above table, are not interest-bearing and therefore they are not subject to interest rate risk.
Sensitivity analysis
For the needs of the analysis of sensitivity to changes in market risk factors the Group uses the scenario analysis method. The Group relies on expert scenarios reflecting its judgement concerning the behaviour of individual market risk factors in the future. The scope of the analysis includes only those items which meet the IFRS definition of financial instruments.
As at 31 December 2022, in its sensitivity analysis of derivatives, the Group measures and monitors interest rate risk using the BPV (Basis Point Value) measure, which shows the change in fair value of derivatives due to a parallel shift of the yield curve by 0.01% (one basis point). In the sensitivity analysis for interest rate risk of other financial instruments, the Group applies a parallel shift of the interest rate curve by the potential possible change in reference interest rates over the horizon to the date of the next financial statements, i.e. by the average levels of reference interest rates in a given year.
As at 31 December 2021, the Group used a parallel shift of the interest rate curve by the potential possible change in reference interest rates over the horizon to the date of the next financial statements in its analysis of sensitivity for interest rate risk. The interest rate risk sensitivity analysis has been carried out based on average reference interest rates in the year.
The Group identifies its exposure to the risk of changes in WIBOR, EURIBOR, ESTRON and LIBOR USD interest rate, whereas as at 31 December 2022 and 31 December 2021, its exposure to changes in EURIBOR, ESTRON and LIBOR USD rates was insignificant.
The table below present sensitivity of the gross profit/loss as well as other comprehensive income (gross) of the Group to reasonably potential changes in interest rates within a horizon until the date of the next financial statements, assuming that all other risk factors remain unchanged.
| Financial instruments | 31 December 2022 | Sensitivity analysis for interest rate risk as at 31 December 2022 | 31 December 2021 | Sensitivity analysis for interest rate risk as at 31 December 2021 | ||||
| Carrying amount | Value at risk | Profit/(Loss) /Other comprehensive income1 | Carrying amount | Value at risk | Profit/(Loss) /Other comprehensive income1 | |||
| WIBOR +630 bp | WIBOR -630 bp | WIBOR +64 bp | WIBOR -64 bp | |||||
| Financial assets | ||||||||
| Derivative instruments2 | 849 | 613 | 1 | (1) | 997 | 397 | 82 | (82) |
| Cash and cash equivalents | 1 678 | 1 619 | 95 | (95) | 815 | 766 | 4 | (4) |
| Loans granted | 206 | 181 | (78) | 146 | 99 | 74 | (4) | 5 |
| Financial liabilities | ||||||||
| Arm’s length loans and borrowings | 8 001 | 6 814 | (429) | 429 | 4 520 | 3 638 | (23) | 23 |
| Bonds issued | 7 222 | 2 507 | (158) | 158 | 7 320 | 2 663 | (17) | 17 |
| Preferential loans and borrowings | 8 | 8 | (1) | 1 | 15 | 15 | − | − |
| Derivative instruments2 | 341 | − | − | − | 495 | 1 | − | − |
| Total | (570) | 638 | 42 | (41) | ||||
2 As at 31 December 2022, the sensitivity analysis for derivatives applied the BPV (Basis Point Value) measure, presenting the change in fair value of derivatives due to a parallel shift of the yield curve by 0.01% (one basis point), as mentioned above.
The risk exposure as at 31 December 2022 and as at 31 December 2021 is representative of the Group’s risk exposure during the preceding one-year period.
The Group monitors changes in the market environment related to the planned replacement of WIBOR with WIRON (Warsaw Interest Rate Overnight) based on the parameters of overnight deposit transactions and conducts analyzes to determine the effects of the planned changes for the Group.