39. Management of financial risks

METRO Treasury manages the financial risks of the group. These primarily concern

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

• For more information about the risk management system, see chapter 2 economic report – 2.2 asset, financial and earnings position – financial and asset position – financial management in the combined management report.

Price risks

For METRO, price risks result from the impact of changes in market interest rates and/or foreign currency exchange rates on the value of financial instruments.

Interest rate risks can arise for METRO from changes in interest rate levels. If necessary, interest rate derivatives are used to cap these risks.

The remaining interest rate risk is assessed using a sensitivity analysis. The sensitivity analysis is based on floating-rate financial instruments in consideration of their corresponding hedging transactions.

As of the closing date, METRO’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 (reported under cash and cash equivalents) with an aggregate debit balance after consideration of hedging transactions of €286 million (30/9/2022: €766 million).

Given this total balance, an interest rate rise of 10 basis points would result in a €0 million (2021/22: €1 million) higher interest result per year. An interest rate decrease of 10 basis points would have the opposite effect of €0 million (2021/22: €−1 million).

METRO faces currency risks in its international procurement of merchandise and because of costs, financing, dividends and lease agreements 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 specifications of the group guideline, 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. METRO AG handles the group-wide coordination of the hedging measures of the group companies and uses external derivative financial instruments as needed. Moreover, currency risks for METRO result from the recognition of foreign currency lease liabilities and foreign currency lease receivables, which affect the amount of the other financial result due to the exchange rate at closing date. Where possible, the risk is reduced through the use of balance sheet hedging measures (‘natural hedge’).

The presentation of the currency risk resulting from the exceptions is also based on a sensitivity analysis.

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 and states the effect of a depreciation of the euro.

A depreciation 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 depreciation 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 below.

As of the closing date, the remaining currency risk of METRO from the important currency pairs was as follows:

The foreign currency holdings above include intra-group balances. Foreign currency valuations from such holdings, insofar as no hedging is undertaken, lead to results in the other financial result as well as to compensating effects outside of profit or loss from the translation of the local financial statements of the counterparty into the group currency, which are recognised in other comprehensive income. This configuration mainly comes into play for cash and cash equivalents from Russia, which were made available to the group as liquidity.

Interest rate and currency risks are substantially reduced and limited by the internal treasury guidelines, if hedging with derivative financial instruments is possible. The group-wide regulations specify that all hedging operations must adhere to predefined limits and must not lead to increased risk exposure under any circumstances. METRO 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 derivative financial instruments.

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

The nominal volume of forward currency contracts/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.

All fair values represent the theoretical value of these instruments upon dissolution of the transaction as of 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.

Currency derivatives are used primarily for the Polish zloty, the Romanian leu, the US dollar, the Swedish krona, the Swiss franc, the British pound sterling and the Czech koruna. The average hedging rates for METRO for the 2 particularly important currency pairs resulting from hedges that are in a hedging relationship are as follows: 1.10 USD/EUR and 7.72 CNY/EUR. The maturity of derivatives used for hedging purposes in the amount of €3 million (30/9/2022: €11 million) is less than 1 year.

The effective portion of the change of the derivatives designated as cash flow hedges recognised in other comprehensive income can be found in the following table:

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 the group companies to ensure that they are provided with the necessary financing to fund their operating and investing activities as cost-effectively and sufficiently high as possible. Cash pooling is used for the need-based allocation of financial resources and the optimisation of interest expenses. METRO determines the financing need of the group on the basis of short- and medium-term liquidity planning.

Financing instruments include money and capital market products (time deposits, call money, commercial papers and listed bonds sold as part of ongoing capital market programmes) as well as bilateral and syndicated loans. METRO has a sufficient liquidity reserve so that liquidity risks are not likely, even if an unexpected event has a negative financial impact on the company’s liquidity situation. The credit facilities held as a liquidity reserve are subject to specific credit conditions. In case that, contrary to expectations, the agreed credit terms cannot be met in the future and no temporary adjustment of the credit terms can be negotiated with the bank consortium, METRO has sufficient refinancing alternatives available with a similar liquidity effect. For more information about the instruments used for financing purposes, see the explanatory notes to the respective balance sheet items.

Credit risks

Credit risks arise from the total or partial default by a counterparty, for example through bankruptcy, or in connection with financial investments and derivative financial instruments with positive market values. METRO’s maximum credit risk as of the closing date is reflected by the carrying amount of financial assets totalling €1,988 million (30/9/2022: €2,202 million).

As part of the risk management of financial investments totalling €520 million (30/9/2022: €770 million) and derivative financial instruments with positive market values totalling €6 million (30/9/2022: €15 million), minimum creditworthiness requirements and individual maximum exposure limits for the engagement have been defined for all business partners of METRO. Cheques and money in circulation are not considered in the determination of credit 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; compliance is constantly monitored by the treasury systems. Cash on hand considered in cash and cash equivalents totalling €22 million (30/9/2022: €13 million) is not exposed to any credit risk.

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.