Market risks in the financial operations primarily comprise interest rate risk, currency risk and share price risk. The Board adopts policies that control these risk, for example, by setting limits that restrict risk levels. No positions are held in the trading book.
Risks attributable to foreign exchange rates arise on the differences between assets and liabilities in different currencies. Interest rate risks arise on the difference between interest-rate terms for assets and liabilities.
Interest rate risk
Interest rate risk is primarily defined as a risk of incurring expenses, meaning the risk that the Group’s net interest income will decrease due to disadvantageous market interest rates.
Interest rate risk normally arises as a result of companies having different maturities or fixed interest terms for their assets and liabilities. Interest rate risk mainly affects companies in the form of gradual changes in net interest income, which can thus affect operating income and both short and long-term capital ratios.
Interest rate risk pertains to changes in interest rates and the structure of the interest rate curve.
The Group endeavours to ensure sound matching between fixed and variable interest rates in its statement of financial position, and can relatively quickly mitigate interest rate rises by changing the terms of new loans. Given the relatively high credit turnover rate and the fact that interest rates can be adjusted within two months according to credit agreements and applicable consumer credit legislation in several markets, overall interest rate risk is deemed limited. Most lending and deposits take place at variable interest rates. Interest swap agreements may also be signed to limit interest rate risk. The operations continually measure interest rate risk on interest-bearing assets and liabilities by applying a variety of models.
In calculating the effect on pre-tax earnings of a one (1) percentage point parallel shift in the yield curve and by applying the discounted future cash flow, interest rate risk on the closing date was +/- SEK 19 million (12).
The banking operations’ financing via deposits from the public has an average fixed interest term of less than three months. In legal terms, the Group’s interest rate risk associated with lending is limited since the majority of the interest rate terms are variable. In reality, however, it is not as easy for market reasons to fully offset a change in interest rates, and this may have an impact on net interest income, depending on the active position. Higher interest expenses can be countered promptly by amending the terms for new lending. In view of the relatively high credit turnover rate, overall interest rate risk is deemed limited. Most borrowers in the Payment Solutions segment are also able to switch between various partial payment options during the credit period.
Exchange rate risk
Exchange rate risk is the risk that the value of assets and liabilities, including derivatives, may vary due to exchange rate fluctuations or other relevant risk factors.
Currency risk arises when the value of assets and liabilities in foreign currency translated to SEK change because exchange rates fluctuate. The main currencies for the operations are: SEK, NOK, DKK and EUR. There are also currency flows in, for example, GBP, CHF and USD.
The banking operations’ exchange rate risk in NOK is of a strategic nature and arose in connection with the investment in yA Bank AS in Norway. This investment is recognised as shares in subsidiaries in the Parent Company and has been translated from NOK to SEK based on the historical rate. In contrast, the translation of this item in NOK to SEK in the Group is based on the closing rate. Resurs Bank AB has SEK as its accounting and presentation currency. yA Bank AS uses NOK for its accounting currency, with all lending and borrowing operations in the company presented in NOK. Remeasurement of assets and liabilities in the bank’s foreign subsidiaries is recognised via other comprehensive income.
When Resurs Bank acquired yA Bank on 26 October 2015, currency exposure of NOK 1,561 million arose in the consolidated situation (the Group’s value of the investment). The reason for this exposure is that the investment at Parent Company level is recognised in SEK, while at the Group and consolidated level parts of the item shares in subsidiaries were re-recognised as goodwill in NOK. Resurs Bank AB has SEK as its accounting and presentation currency. yA Bank AS uses NOK for its accounting currency, with all lending and borrowing operations in the company presented in NOK. Remeasurement of assets and liabilities in the bank’s foreign subsidiaries is recognised via other comprehensive income.
The Group hedged the net investment in yA Bank AS during the year. The hedged item comprises the sum of the subsidiary’s equity at the acquisition date, other contributions after the acquisition and deductions for dividends paid. The Group applies hedge accounting for this net investment. Exchange-rate differences attributable to currency hedges of investments in foreign subsidiaries are recognised in Other comprehensive income. Transactions in foreign branch offices are translated to SEK using the average exchange rate during the period in which the income and expenses have occurred. Exchange-rate gains and losses arising on settlement of these transactions and from translation of foreign currency assets and liabilities using the closing rate are recognised through profit or loss.
The Group’s exposure to currency risks that impact earnings – meaning exchange rate risk, excluding exposures related to investments in foreign operations – is limited. Efforts are made to match assets and liabilities in the respective currencies as far as possible so as to minimise exchange rate risk. The Treasury Department manages the currency exposures arising in the banking operations by using currency hedges to reduce the net value of assets and liabilities (including derivatives) in one single currency. Derivatives in the banking operations are regulated via ISDA and CSA agreements.