44. Management of financial risks

The treasury of METRO AG manages the financial risks of METRO GROUP. These include, in particular,

  • price risks,
  • liquidity risks,
  • creditworthiness risks and
  • cash flow risks.

For more information about the risk management system, see the combined management report in the economic report – asset, financial and earnings position – financial and asset position – financial management.

Price risks

For METRO GROUP, price risks result from the impact of changes in market interest rates, foreign currency exchange rates, share price fluctuations or changes in commodity prices on the value of financial instruments.

Interest rate risks are caused by changes in interest rate levels. Interest rate derivatives are used to cap these risks.

METRO GROUP’s remaining interest rate risk is assessed in accordance with IFRS 7 using a sensitivity analysis. In the process, the following assumptions are applied in the consideration of changes in interest rates:

  • The total impact determined by the sensitivity analysis relates to the actual balance as of the closing date and reflects the impact for one year.
  • Primary floating-rate financial instruments whose interest payments are not designated as the underlying transaction in a cash flow hedge against changes in interest rates are recognised in the interest result in the sensitivity analysis. The sensitivity for a change of 10 basis points is determined due to the currently low level of interest rates.
  • Primary fixed-interest financial instruments are generally not recognised in the interest result. They are only recognised in other financial result if they are designated as the underlying transaction within a fair value hedge and measured at fair value. In this case, however, the interest-related change in the value of the underlying transaction is offset by the change in the value of the hedging transaction upon full effectiveness of the hedging transaction. The variable interest flows within the group that result from a fair value hedge are recognised in the interest result.
  • Financial instruments designated as the hedging transaction within a cash flow hedge to hedge against variable interest flows will only be recognised in the interest result when the payment flows have actually been initiated. However, the measurement of the hedging transaction at fair value is recognised in reserves retained from earnings outside of profit or loss.
  • Interest rate derivatives that are not part of a qualified hedging transaction under IAS 39 are recognised at fair value in profit or loss in other financial result and, through resulting interest flows, in the interest result.

As of the closing date, METRO GROUP’s remaining interest rate risk is primarily the result of variable interest rate receivables and liabilities to banks as well as other short-term liquid financial assets (shown under cash and cash equivalents) with an aggregate debit balance after consideration of hedging transactions of €2,056 million (30/9/2015: €3,019 million).

Given this total balance, an interest rate rise of 10 basis points would result in €2 million (2014/15: €3 million) higher earnings in the interest result per year. An interest rate decrease of 10 basis points would have the opposite effect of €−2 million (2014/15: €−3 million).

METRO GROUP faces currency risks in its international procurement of merchandise and because of costs and financings that are incurred in a currency other than the relevant local currency or are pegged to the development of another currency. In accordance with the group guideline “Foreign Currency Transactions”, resulting foreign currency positions must be hedged. Exceptions from this hedging requirement exist where hedging is not economically reasonable and in the case of legal and regulatory restrictions in the respective countries. Forex futures/option transactions as well as interest rate swaps and currency swaps are used to limit currency risks.

In the event of an interest rate rise of 10 basis points, the measurement of interest rate swaps with a nominal volume of €0 million (30/9/2015: €206 million), which are part of a cash flow hedge, would result in an increase in equity in the amount of €0 million (2014/15: €0 million). A corresponding drop in interest rates would result in a decrease in equity of €0 million (2014/15: €0 million).

In line with IFRS 7, the presentation of the currency risk resulting from the exceptions is also based on a sensitivity analysis. In the process, the following assumptions are made in the consideration of a devaluation or revaluation of the euro vis-à-vis other currencies:

In terms of its amount and result characteristic, the total effect presented by the sensitivity analysis relates to the amounts of foreign currency held within the consolidated subsidiaries of METRO GROUP and states the effect of a devaluation or revaluation of the euro.

A devaluation of the euro will result in a positive effect if a receivable in the foreign currency exists at a subsidiary which uses the euro as its functional currency and if a liability in euros exists at a subsidiary which does not use the euro as its functional currency. The following table shows the nominal volumes of currency pairs in this category with a positive sign.

A devaluation of the euro will result in a negative effect if a receivable in euros exists at a subsidiary which does not use the euro as its functional currency and if a liability in the foreign currency exists at a subsidiary which uses the euro as its functional currency. Correspondingly, the following table shows the nominal volumes of currency pairs in this category with a negative sign.

By contrast, an appreciation of the euro will have the opposite effect for all currency pairs shown above.

In the sensitivity analysis, the effects of the measurement of non-equity foreign currency positions that are calculated based on the closing date price in line with IAS 21 are recognised in the income statement. In the case of net investments in a foreign operation, the effects of the closing date measurement are recognised in equity (other comprehensive income) outside of profit or loss.

Foreign currency futures/options and interest rate and currency swaps that are not part of a qualified hedge under IAS 39 are recognised through the fair value measurement in the income statement. In fully effective hedging transactions, this effect is offset by the effect from the measurement of the underlying foreign currency transaction.

In the consolidated financial statements, foreign currency future transactions are designated as hedging transactions within a cash flow hedge to hedge merchandise procurement and sales. Changes in the fair value of these hedging instruments are recognised in other comprehensive income until the underlying transaction is recognised through profit or loss.

Effects from the currency translation of financial statements whose functional currency is not the reporting currency of METRO GROUP do not affect cash flows in local currency and are therefore not part of the sensitivity analysis.

As of the closing date, the remaining currency risk of METRO GROUP, which is essentially due to an inability to hedge certain currencies for legal reasons or due to insufficient market depth, was as follows:

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Impact of devaluation/revaluation of euro by 10%

 

 

 

 

 

 

€ million

Currency pair

Volume

30/9/2015

Volume

30/9/2016

Profit or loss for the period

 

+/−

 

+/−

 

CHF / EUR

+27

3

+28

3

 

CNY / EUR

+28

3

+38

4

 

CZK / EUR

+65

7

−7

−1

 

EGP / EUR

+30

3

+31

3

 

GBP / EUR

0

0

−9

−1

 

HKD / EUR

0

0

−13

−1

 

HUF / EUR

−8

−1

0

0

 

JPY / EUR

0

0

−10

−1

 

KZT / EUR

+138

14

+13

1

 

MDL / EUR

+35

4

+38

4

 

PLN / EUR

−2

0

+32

3

 

RON / EUR

+70

7

+35

4

 

RSD / EUR

+30

3

+14

1

 

RUB / EUR

+19

2

+34

3

 

SEK / EUR

+51

5

+29

3

 

TRY / EUR

−6

−1

+8

1

 

UAH / EUR

+33

3

+34

3

 

USD / EUR

+25

3

−16

−2

 

 

 

55

 

27

Equity

 

+/−

 

+/−

 

CNY / EUR

+96

10

+18

2

 

CZK / EUR

0

0

+5

1

 

KZT / EUR

+137

14

+237

24

 

PLN / EUR

+72

7

+75

8

 

RON / EUR

0

0

+7

1

 

RSD / EUR

0

0

+16

2

 

RUB / EUR

0

0

+147

15

 

UAH / EUR

+242

24

+242

24

 

USD / EUR

+288

29

+38

4

 

 

 

84

 

81

 

 

 

139

 

108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency risks existing in addition to these are mainly the result of USD currency holdings in various subsidiaries in which the functional currency is not the US dollar or the euro. At a nominal US dollar volume of €+21 million (30/9/2015: €+140 million), a devaluation of the US dollar by 10 per cent would result in positive effects of €2 million in profit or loss for the period (2014/15: €14 million). Conversely, a revaluation of the US dollar would have negative effects of €2 million (2014/15: €14 million). At a nominal volume of €+21 million (30/9/2015: €+161 million), the currency pair CNY/USD accounts for the largest share of this negative effect (30/9/2015: VND/USD).

Changes in value in the CHF/EUR cross-currency interest rate swap recognised as a cash flow hedge, which were previously recognised in equity outside of profit or loss, are reclassified through profit or loss in line with the expected payment flows from the respective underlying transactions. In the previous year, a devaluation of the euro by 10 per cent would have resulted in an increase in equity of €1 million from a CHF/EUR cross-currency interest rate swap with a nominal volume of €206 million and the respective underlying transaction. A corresponding revaluation of the euro would have reduced equity by €1 million.

Interest rate and currency risks are substantially reduced and limited by the principles laid down in the internal treasury guidelines of METRO GROUP. These include a regulation that is applicable throughout the group whereby all hedging operations must adhere to predefined limits and must not lead to increased risk exposure under any circumstances. METRO GROUP is aware that this severely limits the opportunities to exploit current or expected interest rate and exchange rate movements to optimise results.

In addition, hedging may be carried out only with standard financial derivative instruments whose correct actuarial and accounting mapping and valuation in the treasury system are guaranteed.

As of the closing date, the following derivative financial instruments were being used for risk reduction:

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30/9/2015

30/9/2016

 

 

 

 

 

 

 

 

 

Fair values

 

Fair values

 

 

 

 

 

 

 

€ million

Nominal volume

Financial assets

Financial liabilities

Nominal volume

Financial assets

Financial liabilities

Currency transactions

 

 

 

 

 

 

Currency futures/options

1

34

23

−281

6

14

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(384)

(4)

(5)

(107)

(2)

(4)

thereof not part of hedges

(−383)

(30)

(18)

(−388)

(4)

(10)

Interest rate/currency swaps

206

18

0

0

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(206)

(18)

(0)

(0)

(0)

(0)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

 

207

52

23

−281

6

14

The nominal volume of forex futures/options and interest limitation agreements results from the net position of the buying and selling values in foreign currency underlying the individual transactions translated at the relevant exchange rate on the closing date. The nominal volume of interest rate swaps or interest rate/currency swaps and interest rate hedging agreements on a gross basis.

All fair values represent the theoretical value of these instruments upon dissolution of the transaction on the closing date. Under the premise that instruments are held until the end of their term, these are unrealised gains and losses that, by the end of the term, will be fully set off by gains and losses from the underlying transactions in the case of fully effective hedging transactions.

In order to appropriately show this reconciliation for the period, relationships are created between hedging transactions and underlying transactions and recognised as follows:

  • Within a fair value hedge, both the hedging transaction and the hedged risk of the underlying transaction are recognised at their fair value. The value fluctuations of both transactions are shown in the income statement, where they will be fully set off against each other in the case of full effectiveness.
  • Within a cash flow hedge, the hedging transactions are also principally recognised at their fair value. In the case of full effectiveness of the hedging transaction, the value changes will be recognised in equity until the hedged payment flows or expected transactions impact on earnings. Only then will they be recognised in the income statement.
  • Hedging transactions that, according to IAS 39, are not part of a hedge are recognised at their fair value. Value changes are recognised directly in the income statement. Even if no formal hedging relationship was created, these are hedging transaction that are closely connected to the underlying transaction and whose impact on earnings will be netted by the underlying transaction (natural hedge).

Currency derivatives are used primarily for Chinese renminbi, Japanese yen, Polish złoty, Romanian leu, Russian rouble, Swiss franc, Czech koruna, Hungarian forint and US dollar.

The derivative financial instruments have the following maturities:

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30/9/2015 fair values

30/9/2016 fair values

 

 

 

 

 

 

 

 

Maturities

Maturities

 

 

 

 

 

 

 

€ million

up to 1 year

1 to 5 years

over 5 years

up to 1 year

1 to 5 years

over 5 years

Currency transactions

 

 

 

 

 

 

Currency futures/options

11

0

0

−8

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(−2)

(0)

(0)

(−1)

(0)

(0)

thereof not part of hedges

(12)

(0)

(0)

(−7)

(0)

(0)

Interest rate/currency swaps

18

0

0

0

0

0

thereof within fair value hedges

(0)

(0)

(0)

(0)

(0)

(0)

thereof within cash flow hedges

(18)

(0)

(0)

(0)

(0)

(0)

thereof not part of hedges

(0)

(0)

(0)

(0)

(0)

(0)

 

29

0

0

−8

0

0

Listed below the maturities are the fair values of the financial assets and liabilities that fall due during these periods.

The repricing dates for variable interest rates are less than one year.

Liquidity risks

Liquidity risk describes the risk of being unable to procure or provide funding or being able to only procure or provide funding at a higher cost. Liquidity risks may arise, for example, as a result of temporary capital market disruptions, creditor defaults, insufficient credit facilities or the absence of budgeted incoming payments. METRO AG acts as financial coordinator for METRO GROUP companies to ensure that they are provided with the necessary financing to fund their operating and investing activities at all times and in the most cost-efficient manner possible. The necessary information is provided by means of a group financial plan, which is updated monthly and checked monthly for deviations. This financial plan is complemented by a weekly rolling 14-day liquidity plan.

Instruments used for financing purposes include money and capital market products (time deposits, call money, promissory note loans, commercial papers and listed bonds sold as part of ongoing capital market programmes) as well as bilateral and syndicated loans. METRO GROUP has a sufficient liquidity reserve so that there is no danger of liquidity risks even if an unexpected event has a negative financial impact on the company’s liquidity situation. For more information about the instruments used for financing purposes and credit facilities, see the explanatory notes to the respective balance sheet items.

Further details are provided in no. 30 – cash and cash equivalents as well as in no. 37 – financial liabilities.

Cash pooling allows the surplus liquidity of individual group companies to be used to fund other group companies internally. This reduces the group’s debt financing volume and thus its interest expenses. In addition, METRO AG draws on the financial expertise pooled in the treasury of METRO AG to advise the group companies in all relevant financial matters and provide support. This ranges from the elaboration of investment financing concepts to supporting the responsible financial officers of the individual group companies in their discussions with local banks and financial service providers. This ensures, on the one hand, that the financial resources of METRO GROUP are optimally employed, and, on the other, that all group companies benefit from the strength and credit standing of METRO GROUP in negotiating their financing terms.

Credit risks

Credit risks arise from the total or partial default by a counterparty, for example, through bankruptcy or in connection with monetary investments and derivative financial instruments with positive market values. METRO GROUP’s maximum default exposure as of the closing date is reflected by the carrying amount of financial assets totalling €5,570 million (30/9/2015: €8,194 million).

For more information about the amount of the respective carrying amounts, see no. 41 – carrying amounts and fair values according to measurement categories.

Cash on hand considered in cash and cash equivalents totalling €115 million (30/9/2015: €105 million) is not exposed to any default risk.

In the course of the risk management of monetary investments totalling €2,229 million (30/9/2015: €2,475 million) and derivative financial instruments totalling €6 million (30/9/2015: €52 million), minimum creditworthiness requirements and individual maximum exposure limits for the engagement have been defined for all business partners of METRO GROUP. Cheques and money in circulation are not considered in the determination of creditworthiness risks. This is based on a system of limits laid down in the treasury guidelines, which are based mainly on the ratings of international rating agencies, developments of credit default swaps or internal credit assessments. An individual limit is allocated to every counterparty of METRO GROUP; compliance is constantly monitored by the treasury systems.

The following table shows a breakdown of counterparties by rating class:

Rating classes

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Volume in %

 

 

 

 

 

 

 

 

 

 

 

 

Financial investments

 

 

 

 

 

 

 

 

 

 

 

Grade

Moody’s

Standard & Poor’s

Germany

Western Europe excl. Germany

Eastern Europe

Asia and others

Derivatives with positive market values

Total

Investment grade

Aaa

AAA

0.0

0.0

0.0

0.0

0.0

 

 

Aa1 to Aa3

AA+ to AA-

0.1

0.7

1.6

13.5

0.0

 

 

A1 to A3

A+ to A-

24.2

20.0

2.9

11.5

0.1

 

 

Baa1 to Baa3

BBB+ to BBB-

1.2

9.7

6.7

2.3

0.1

94.6

Non-investment grade

Ba1 to Ba3

BB+ to BB-

0.1

0.7

2.3

0.0

0.0

 

 

B1 to B3

B+ to B-

0.0

0.4

0.0

0.1

0.0

 

 

Caa to C

CCC to C

0.0

0.0

0.0

0.0

0.0

3.6

No rating

 

 

0.0

0.3

1.4

0.1

0.0

1.8

 

 

 

25.6

31.8

14.9

27.5

0.2

100.0

The table shows that, as of the closing date, about 95 per cent of the capital investment volume, including the positive market value of derivatives, had been placed with investment-grade counterparties, in other words, those with good or very good credit ratings. Most of the counterparties that do not yet have an internationally accepted rating are respected financial institutions whose creditworthiness can be considered flawless based on analyses. METRO GROUP also operates in countries where local financial institutions do not have investment-grade ratings due to the rating of their country. For country-specific reasons as well as cost and efficiency considerations, cooperation with these institutions is unavoidable. These institutions account for about 5 per cent of the total volume.

METRO GROUP’s level of exposure to creditworthiness risks is thus very low.

Cash flow risks

A future change in interest rates may cause cash flow from variable interest rate asset and liability items to fluctuate. Stress tests are used to determine the potential impact interest rate changes may have on cash flow and how they can be capped through hedging transactions in accordance with the group’s internal treasury guidelines.