1. Introduction

Characteristics of operations

PKO Bank Polski S.A. Group – history

Main events and financial results achieved in 2021

Development paths

Market position

1.1 Characteristics of operations of the PKO Bank Polski S.A. Group

The Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Group (PKO Bank Polski S.A. Group or the Bank’s Group) is one of the largest groups of financial institutions in Poland and one of the largest financial groups in Central and Eastern Europe. The Parent of the Bank’s Group is Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna (PKO Bank Polski S.A. or the Bank). PKO Bank Polski S.A. is the largest commercial bank in Poland and the leading bank on its home market in terms of the scale of operations, equity, loans, deposits, number of Customers and size of the distribution network.

PKO Bank Polski S.A. is a universal bank that services individuals, legal entities and other Polish and foreign entities.

Apart from strictly banking operations, the PKO Bank Polski S.A. Group also provides services in respect of leases, factoring, investment funds, pension funds and insurance, car fleet management services, transfer agent services, provides technological solutions, outsources IT professionals and supports other entities’ operations, manages properties. The Bank’s Group conducts banking operations and provides financial services outside Poland through its branches in the Federal Republic of Germany (German Branch), the Czech Republic (Czech Branch) and the Slovak Republic (Slovak Branch).as well as through its subsidiaries in Ukraine.

more than 11 million

of the Bank’s Customers

6.1 million

of active IKO applications

……………..

The PKO Bank Polski S.A. Group develops not only in its traditional area of operations, i.e. retail banking. It is also the leader in servicing corporate Customers and companies and enterprises (in particular in respect of financing them), and on the market of financial services for communes (gminy), counties (powiaty), voivodeships and to the budget sector. It is also the major managing underwriter of issues of municipal bonds.

The PKO Bank Polski S.A. Group has the largest share in the Polish banking sector (19.2%), in loans (17.4%) and the market for investment funds for individuals (19.2%). PKO Bank Polski S.A. is the leader in terms of current accounts and payment cards.

The PKO Bank Polski S.A. Group offers modern and comprehensive services via its digital service channels. Customers use iPKO and IKO as means of modern banking, which extends outside the traditional financial area. PKO Bank Polski S.A. was involved in the development of a modern approach to the e-administration services based on cutting edge technologies. Since 2018, PKO Bank Polski S.A., in cooperation with Operator Chmury Krajowej S.A. has consistently followed its “path towards the cloud”. As a result of such actions, over the coming years, the key business IT systems in the Bank are to operate in a computing cloud based on hybrid architecture. The first cloud solutions implemented using global cloud service providers and Operator Chmury Krajowej sp. z o.o. have already supported the Bank’s employees and Customers.

As at the end of 2021 the branch network of PKO Bank Polski S.A. was the largest such network in Poland, and covered 975 own outlets (including branches, offices and centres) and 447 agencies. The Customers of PKO Bank Polski S.A. have at their disposal a highly developed network of ATMs (nearly 3 thousand devices as at the end of 2021).

The PKO Bank Polski S.A. Group is one of the largest and best assessed employers in Poland. As at the end of 2021 the PKO Bank Polski S.A. Group employed over 25.7 thousand FTEs.

The PKO Bank Polski S.A. Group between 2017 and 2021

	2021	2020	2019	2018	2017
Statement of financial position (in PLN million)
Total assets	418,086	376,966	347,897	324,255	296,912
Total equity	37,693	39,911	41,578	39,101	36,256
Own funds	41,224	41,516	42,330	37,850	34,026
Financing granted to Customers	247,572	235,727	244,083	230,438	214,361
Customer deposits	322,296	282,356	256,170	238,723	217,306
Net profit/loss	4,874	-2,557	4,031	3,741	3,104
Financial ratios
Net ROA	1.2%	-0.7%	1.2%	1.2%	1.1%
Net ROE	12.1%	-6.0%	10.0%	10.0%	9.0%
Net ROTE	13.2%	-6.5%	10.9%	11.0%	10.0%
C/I1)	40.6%	40.9%	41.3%	44.2%	46.0%
Interest margin	2.7%	3.0%	3.4%	3.4%	3.3%
Share of impaired exposures	3.98%	4.43%	4.26%	4.87%	5.47%
Cost of credit risk	0.55%	0.78%	0.46%	0.59%	0.71%
Total capital ratio	18.23%	18.18%	19.88%	18.88%	17.37%
Number of Customers of PKO Bank Polski S.A. (in thousands), including:	11,120	11,006	10,933	10,653	10,330
Individuals (in thousands)	10,541	10,463	10,427	10,179	9,877
Companies and enterprises (in thousands)	563	526	491	459	438
Corporate Customers (in thousands)	17	16	16	15	15
Operational data
Number of branches of PKO Bank Polski S.A.	975	1,004	1,115	1,155	1,194
Number of employees (in FTEs)	25,657	25,859	27,708	27,856	28,443
Number of current accounts with the Bank (in thousands)	8,490	8,257	8,012	7,697	7,362
Information on shares
Stock exchange capitalization (in PLN million)	56,163	35,900	43,075	49,338	55,388
Number of shares (in million)	1,250	1,250	1,250	1,250	1,250
Share price (in PLN)	44.93	28.72	34.46	39.47	44.31
Dividend per share (in PLN) (paid in the current year from profit for the preceding years)	0.00	0.00	1.33	0.55	0.00

1) Data for the years 2017-2018 does not take into account presentation changes made in 2020, which had an impact on the amount of the result on business activities and operating expenses.

The definitions of particular items of the statement of financial position and the income statement are described in Section 14: Glossary.

1.2 The PKO Bank Polski S.A. Group - History

The PKO Bank Polski S.A. Group has been offering services to its retail and institutional Customers for more than 100 years.

The main events in the history of the Bank and the Bank’s Group.

1919-1938	1.	Pocztowa Kasa Oszczędności was established on 7 February 1919 by virtue of a decree signed by the Head of the country, Józef Piłsudski, Prime Minister Ignacy Paderewski and Hubert Linde – PKO’s founder and first president.
	2.	Pocztowa Kasa Oszczędności was vested with legal personality as a state institution, operating under the supervision of and with the guarantee of the State.
	3.	The first local branch of Pocztowa Kasa Oszczędności was opened in Poznań.
	4.	Pocztowa Kasa Oszczędności began running School Savings Unions (Szkolne Kasy Oszczędności).
	5.	On the initiative of Pocztowa Kasa Oszczędności, the Ministry of the Treasury decided to set up Bank Polska Kasa Opieki (today Pekao S.A.) as a joint-stock company to facilitate the transfer of foreign currencies to Poland by Poles living abroad.
	6.	Pocztowa Kasa Oszczędności strongly contributed to the development of non-cash transactions – every other larger industrial plant and every large enterprise had a cheque account with Pocztowa Kasa Oszczędności, and the cheque turnover in Poland was one and a half times higher than the cash turnover.
1939-1945		The Second World War was a period in which Pocztowa Kasa Oszczędności’s activity came to a standstill and it suffered huge losses.
1946-1990	1.	Pocztowa Kasa Oszczędności was transformed into Powszechna Kasa Oszczędności.
	2.	The Banking Law Act introduced a privilege for saving deposits held in Powszechna Kasa Oszczędności; they were covered by a State guarantee.
	3.	Powszechna Kasa Oszczędności introduced a modern product: a current account.
	4.	In the years 1975–1987, Powszechna Kasa Oszczędności was merged into the structures of the National Bank of Poland (NBP), yet it retained its identity.
1991-2001	1.	The first Internet information portal of the Bank and the first e-PKO Internet branch were launched.
	2.	PKO Towarzystwo Funduszy Inwestycyjnych S.A. (PKO TFI S.A.) began its operations.
	3.	PKO BP BANKOWY PTE S.A. was formed.
	4.	Bankowy Fundusz Leasingowy S.A. (currently PKO Leasing S.A.) was formed which provides operating and finance leases of non-current assets and property.
	5.	PKO BP, as one of the founders, formed Centrum Elektronicznych Usług Płatniczych eService S.A. (currently CEUP eService sp. z o.o.).
	6.	In 2000, the Bank was transformed into a joint-stock company fully-owned by the State Treasury under the name Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna (PKO Bank Polski S.A.).
2002-2009	1.	The Bank acquired Inteligo Financial Services S.A., a company that provides services covering the maintenance and development of banking systems, also including electronic access to bank accounts (Inteligo account).
	2.	The Bank acquired 66.65% shares in KREDOBANK S.A. The company is registered and operates in Ukraine. At present, the Bank holds 100% of shares in the company’s share capital.
	3.	In 2004, PKO Bank Polski S.A. was floated on the WSE. At the end of the first day of quotations, shares reached a price of PLN 24.50 against the issue price fixed at PLN 20.50.
	4.	PKO BP Faktoring S.A. (currently PKO Faktoring S.A.) began operating.
2010-2015	1.	2013–2015 strategy: “PKO Bank Polski. Every day the best” strengthened the position of the Bank’s Group as a leader in key market segments.
	2.	In 2013, PKO Bank Polski S.A. set a new standard of mobile payments – IKO. The innovative solution on the market of mobile payments was used to create the BLIK payment system in 2015. BLIK became the Polish market standard.
	3.	PKO Bank Polski S.A. signed an agreement for a twenty-year strategic alliance in the electronic payment market with EVO Payments International Acquisition GmbH, and at the same time sold a significant portion of shares in CEUP eService sp. z o.o.
	4.	PKO Bank Hipoteczny S.A. was formed. Its operations include issuing long-term mortgage covered bonds and granting long-term mortgage loans to retail Customers.
	5.	PKO Bank Polski S.A. acquired shares in the Nordea Group companies, including shares in Nordea Bank Polska S.A., and a portfolio of amounts due from corporate Customers. In October 2014, the merger of the banks was carried out.
	6.	PKO Towarzystwo Ubezpieczeń S.A. was formed. The Company provides property insurance services to the retail Customers of PKO Bank Polski S.A.
	7.	PKO Bank Polski S.A. started its expansion into foreign markets and established its first foreign branch abroad (in Frankfurt-am-Main in the Federal Republic of Germany).
2016-2020	1.	PKO Bank Polski S.A. realized two years in advance the financial goals set for 2020 and announced an updated strategy for the years 2020–2022 “PKO Bank of the Future. We support the development of Poland and the Poles”.
	2.	PKO Leasing S.A. – the Bank’s subsidiary – acquired Raiffeisen-Leasing Polska S.A. and Prime Car Management S.A. (with their subsidiaries). This allowed PKO Leasing S.A. to strengthen its position on the lease market, as well as to extend its offer of car fleet management services and rental of cars.
	3.	The Bank’s Group acquired KBC TFI S.A. and the merger with PKO TFI S.A. helped additionally accelerate the rapid development of PKO TFI S.A., and strengthened its leading position in the retail funds segment.
	4.	The Bank’s portfolio of investment projects expanded by Operator Chmury Krajowej sp. z o.o. (cloud computing services), which was joined by another shareholder – Polski Fundusz Rozwoju S.A.
	5.	PKO Bank Polski S.A. established an investment fund managed by PKO TFI S.A. under the business name PKO VC, which pursues an appropriate policy for a venture capital funds and invests in financial technological innovations.
	6.	PKO Bank Polski S.A. continued its development abroad and established a corporate department in Prague (the Czech Republic) and in Bratislava (the Slovak Republic). The branch in Bratislava started its operating activities in March 2021.
	7.	According to the Inteliace Research report, PKO Bank Polski S.A. was the largest bank in the CEE region in terms of assets in 2020.

1.3 Main events and financial results achieved in 2021

Currency mortgage loans – Settlements programme

PKO Bank Polski S.A. was the first bank in Poland to launch, on 4 October 2021, the process of the systemic resolution of the problem of CHF housing loans by offering settlements to its retail Customers who had active loans in CHF, which were intended for satisfying their own housing needs. This solution is based on the proposal of the President of the Polish Financial Supervision Commission (PFSA) and involves converting CHF loans into PLN loans as if it had been a PLN loan from the start subject to interest rate at the WIBOR reference rate increased by the margin historically applied to such loans.

The settlements are offered in the process of mediation proceedings conducted by the Mediation Centre at the Arbitration Tribunal at the PFSA in the course of court proceedings and proceedings resulting from a request to call for an attempt at arbitration.

The settlements are not available to Customers who have already repaid their loans, paid out in full in CHF or who used the Borrowers Support Fund (Fundusz Wsparcia Kredytobiorców).

The amounts to be repaid after conversion may be subject to interest at a variable rate or a fixed rate (for loans maturing within 5 years).

The process – for Customers who have iPKO – is carried out remotely, and the borrowers have to be present in the branch only once – when signing the settlement.

As at the end of 2021, more than 19 thousand applications for mediation were registered. 7,182 mediations were concluded with a positive outcome, including 5,754 cases in which settlements were signed. As at the end of 2021, 1,399 mediations were concluded with a negative outcome. The total number of settlements concluded as at 31 December 2021 amounted to 5,887, of which 5,754 were concluded in mediation proceedings and 133 in court proceedings. Until 22 February 2022, the number of registered applications was 22.7 thousand, 9,343 settlements were concluded including 9,191 in mediation process and 152 in court proceedings.

Changes in the supervisory board and management board of the bank

In 2021, there were changes in the composition of the Supervisory Board of PKO Bank Polski S.A. (the Bank’s Supervisory Board or Supervisory Board), including:

• the following people resigned from membership in the Supervisory Board: Marcin Izdebski and Piotr Sadownik,

• the following people were dismissed from the Supervisory Board: Grażyna Ciurzyńska and Zbigniew Hajłasz,

• the following people were appointed to the Supervisory Board: Dominik Kaczmarski, Tomasz Kuczur, Maciej Łopiński, Bogdan Szafrański and Agnieszka Winnik-Kalemba.

As at 31 December 2021 the Supervisory Board comprised:

• Maciej Łopiński – Chair of the Supervisory Board;

• Wojciech Jasiński – Deputy Chair of the Supervisory Board;

• Dominik Kaczmarski – Secretary of the Supervisory Board;

• Mariusz Andrzejewski – Member of the Supervisory Board;

• Grzegorz Chłopek – Member of the Supervisory Board;

• Andrzej Kisielewicz – Member of the Supervisory Board;

• Rafał Kos – Member of the Supervisory Board;

• Tomasz Kuczur – Member of the Supervisory Board;

• Krzysztof Michalski – Member of the Supervisory Board;

• Bogdan Szafrański – Member of the Supervisory Board;

• Agnieszka Winnik-Kalemba – Member of the Supervisory Board.

In 2021, there were changes in the composition of the Management Board of PKO Bank Polski S.A. (the Bank’s Management Board or the Management Board), including:

• the following people resigned from membership in the Management Board: Zbigniew Jagiełło, Adam Marciniak and Jan Emeryk Rościszewski;

• the following people were dismissed from the Management Board: Rafał Antczak, Rafał Kozłowski and Jakub Papierski;

• the following people were appointed to the Management Board: Iwona Duda, Bartosz Drabikowski, Marcin Eckert, Wojciech Iwanicki and Artur Kurcweil;

• in the period from 8 June 2021 to 2 September 2021, Jan Emeryk Rościszewski led the activities of the Management Board, and from 3 September 2021 to 22 October 2021 was the President of the Management Board.

As at 31 December 2021 the Management Board comprised:

• Iwona Duda – Vice-President of the Management Board, leading the activities of the Management Board; appointed the President of the Management Board subject to the consent of the PFSA as of the date of such consent;

• Bartosz Drabikowski – Vice-President of the Management Board;

• Marcin Eckert – Vice-President of the Management Board;

• Wojciech Iwanicki – Vice-President of the Management Board;

• Maks Kraczkowski – Vice-President of the Management Board;

• Mieczysław Król – Vice-President of the Management Board;

• Artur Kurcweil – Vice-President of the Management Board;

• Piotr Mazur – Vice-President of the Management Board.

On 26 January 2022, the PFSA unanimously agreed to the appointment of Iwona Duda as President of the Management Board of PKO Bank Polski S.A.

Development of remotely offered services

The Group consistently developed remotely offered services:

• The number of active IKO applications provided to the Bank’s Customers reached a record high of 6.12 million on the Polish banking market.

• The IKO mobile application makes is possible to check the balance of an account with another bank and use a new version of voice assistant. The IKO application can also be used by people who have no open account with PKO Bank Polski S.A.

• PKO Bank Polski S.A. was one of the first banks to launch BLIK proximity payment technology. The technology allows transactions to be made using the BLIK system, without providing a BLIK code, without a card, at no cost for currency translation. The new BLIK proximity payment function is available in the IKO application for Android.

• The Bank launched subsequent cloud applications and services. As part of this work, it launched the MLOps Analytical Platform which allows for advanced data analytics and supporting internal processes, as well as pilot implementation of the Infosite, the Bank’s Information Services, i.e. websites available to Customers in the pkobp.pl domain. The Projects are being performed in cooperation with Operator Chmury Krajowej sp. z o.o. – a company co-owned by PKO Bank Polski S.A.

• In April 2021, Google launched the Google Cloud Warsaw region. It is the first computation infrastructure of the global public cloud provider in Central and Eastern Europe. The investment stems from the strategic partnership of Google and Operator Chmury Krajowej sp. z o.o. Each Polish company and institution may use world cutting-edge cloud solutions available in the Google Cloud region located in Poland.

PKO Bank Polski S.A. among the most stable banks in the European union

PKO Bank Polski S.A. participated in the subsequent edition of the European stress tests conducted in 2021 by the European Banking Authority (EBA) with the participation of the PFSA and the European Central Bank and the European Systemic Risk Board. Fifty banks from 15 countries of the European Union and the European Economic Area, accounting for 70% of assets of the EU banking sector, participated in the test. The results of stress tests confirmed that the Bank is highly resilient to theoretical negative macroeconomic scenarios. The Bank was ranked among the most stable banks in the European Union.

Position of the Bank’s brokerage office

In 2021, Brokerage Office of PKO Bank Polski S.A. achieved a turnover on the secondary market of shares of PLN 81.6 billion, corresponding to 12.25% market turnover, which placed the Bank’s Brokerage Office as leader in the ranking of brokerage offices in Poland.

PKO TFI S.A. the leader on the Employee Capital Plans market

As at the end of 2021, PKO Towarzystwo Funduszy Inwestycyjnych S.A., remained the leader on the Employee Capital Plans (PPK) market in terms of managed assets. The total number of management agreements signed at the end of 2021 amounted to 48,912, and the total number of registered participants exceeded 913 thousand. On the PPK accounts managed by the company there were assets worth nearly PLN 2.5 billion, which comprised 38.2% of all assets serviced by investment fund management companies and 32.5% of all PPK market assets.

Support for the community, customers, and employees in the fight against the COVID-19 pandemic

The PKO Bank Polski S.A. Group engaged in battling the pandemic from the very start. In 2021, it took steps to ensure uninterrupted operations and the safety of its Customers and staff. It supported local communities and countrywide actions. It continued the digitization and automation of processes and implementation of advanced digital solutions.

The Bank’s Group supported:

• medical facilities and help organizations – in 2021 it made money and in-kind donations worth PLN 2.9 million;

• anti-COVID-19 vaccinations – the Customers were able, through the iPKO electronic banking service, to log into the Internet Patient Account and register for vaccination; the Bank also supported the vaccination raffle – money prizes could be collected via ATMs and in the Bank’s branches;

• Customers, by making available funds from aid programmes, including those offered by Bank Gospodarstwa Krajowego (BGK) and Polski Fundusz Rozwoju S.A. (PFR); it offered moratoria to the entities from so-called sectors at risk for repayment of loans and made it possible to submit applications for subsidies from the Financial Shield PFR 2.0 in the iPKO and iPKO biznes services.

It developed organizational solutions and tools which enabled remote work, and facilitated communication with Customers and ensured their seamless servicing.

Financial results

The activities which the PKO Bank Polski SA Group conducted in 2021 allowed it to achieve very good financial results and to reinforce its leading position among the largest financial institutions in Poland.

Table 1. Basic financial data of the Bank’s Capital Group (PLN million)

	2021	2020	Change (y/y)
Net profit/loss	4,874	-2,557	+2.9x
Net interest income	9,882	10,346	-4.5%
Net fee and commission income	4,431	3,920	+13.0%
Result on business activities	15,202	14,625	+3.9%
Operating expenses	-6,174	-5,983	+3.2%
Tax on certain financial institutions	-1,079	-1,055	+2.3%
Net write-downs and impairment	-1,466	-9,299	-84.2%
Total assets	418,086	376,966	+10.9%
Total equity	37,693	39,911	-5.6%
Net ROE	12.1%	-6.0%	+18.1 p.p.
Net ROTE	13.2%	-6.5%	+19.7 p.p.
Net ROA	1.2%	-0.7%	+1.9 p.p.
C/I (cost to income ratio)	40.6%	40.9%	-0.3 p.p.
Interest margin	2.70%	3.03%	-0.33 p.p.
Share of impaired loans	3.98%	4.43%	-0.45 p.p.
Cost of credit risk	0.55%	0.78%	-0.23 p.p.
Total capital ratio	18.23%	18.18%	+0.05 p.p.
Common equity Tier 1 (CET 1)	17.03%	16.99%	+0.04 p.p.

In 2021, the PKO Bank Polski S.A. Group generated net profit of PLN 4,874 million, which means an increase in the result of PLN 7,431 million y/y. The change in the net result was due to:

1) significant improvement of net write-downs and impairment of PLN 7,833 million as a result of:

• charging the 2020 result with the costs of legal risk related to mortgage loans in convertible currencies of PLN 6,552 million, which reflected the decision of the Extraordinary General Shareholders’ Meeting (EGSM) of 23 April 2021 related to settlements with Customers;

• an improvement in net expected credit losses of PLN 910 million, mainly as a result of a change in macroeconomic projections given the fact that the credit risk did not materialize.

• an improvement in the net impairment allowances on non-financial assets of PLN 370 million, among other things, as a result of recognizing, in 2020, an impairment allowance on the shares of Bank Pocztowy S.A. (PLN -93 million), goodwill which arose as a result of acquisition of Nordea Bank Polska S.A. (PLN -116 million) and PKO Leasing Pro S.A. (PLN -31 million), value of activated costs of acquisition of OFE Customers (PLN -49 million), and impairment of real estates (PLN -62 million).

2) an improvement in the result on business activities of PLN 577 million which reached PLN 15,202 million, mainly due to:

• increase in net fee and commission income of PLN 511 million resulting from an increase in the result in all core positions, both commissions related to loans, cards, and savings;

• an increase in other profit/loss of PLN 530 million, mainly as a result of exchange positions (in effect of recognizing the net result on closing currency position following the EGSM decision on offering settlements to Customers), other net operating income and costs (among other things, as a result of creating lower provisions for return of commissions on overdue consumer loan repayments and development of other lease activities) and net income/cost on financial operations (mainly as a result of an increase in the net result on derivatives);

• accompanied by a decrease in net interest income/cost of PLN 464 million, determined by a low-interest-rate environment in the first three quarters of 2021, which was partially offset by an increase in interest-bearing assets;

3) an increase in operating expenses of PLN 191 million, mainly an increase in the employee benefit expense accompanied by a decrease in the regulatory costs.

In 2021, there was an apparent increase in the scale of operations of the Bank’s Group:

• total assets exceeded PLN 418 billion (PLN +41 billion y/y);

• amounts due to Customers increased to approx. PLN 322 billion (PLN +40 billion y/y) – as a result of an increase in both retail and private banking deposits, as well as corporate deposits;

• the financing provided to Customers increased to approx. PLN 248 billion (PLN +12 billion y/y), as a result of an increase in the financing granted to both retail and corporate Customers;

• a significant increase in the bank securities portfolio of nearly PLN 12 billion y/y, to PLN 122 billion took place.

1.4 The PKO Bank Polski S.A. Group development paths

Who we are – our mission

PKO Bank Polski S.A.’s Strategy for the years 2020–2022

Pursuit of the Strategy

The paths for the development of PKO Bank Polski S.A. are set out in the Strategy for the years 2020–2022 “PKO Bank of the Future. We support the development of Poland and the Poles” (Strategy), approved by the Supervisory Board on 17 November 2019.

Who we are – our mission

“We support the development of Poland and the Poles”.

For 100 years we have been delivering financial solutions to our Customers; therefore, we understand the needs of Poles and Polish firms.

We are consistently changing, investing in development, and we responsibly implement modern technologies to enable easy finance management at any place or time. We are proud of our history and of our Polish roots.

We wish to continue exerting a positive influence on Poland – its people, firms, culture and the environment. As one of the largest banks in Central and Eastern Europe we responsibly care for the interests of the shareholders, Customers, employees, and local communities.

PKO Bank Polski S.A.’s Strategy for the years 2020– 2022

The Strategy focuses on four pillars which PKO Bank Polski S.A. intends to develop and reinforce.

1. Accessible, mobile and personal. A digital banking model which uses advanced analytics to ensure personalized experience in Customers’ everyday life.

2. Open and innovative. Using open banking possibilities, strategic partnerships and cloud solutions to propose innovative solutions to Customers.

3. Digital and effective. Digitized processes with minimal manual service requirements, paperless. A fast and safe cloud-based Bank.

4. Shaping the competence of the future. A motivated and committed team with competences adapted to the new business challenges, working smoothly, using state-of-the-art technologies.

Medium-term financial goals of the Bank defined in the Strategy for 2022 are as follows:

• net profit over PLN 5 billion;

• target ROE at the level of 12%;

• C/I ratio at the level of approx. 41%;

• cost of risk in the 0.60% – 0.75% bracket;

• capability to pay out dividend.

The Strategy takes into account non-financial factors (ESG) relating to the environment, society and corporate governance.

PKO Bank of the Future:

• is aware of the challenges resulting from climate change;

• gradually eliminates actions that are harmful to the environment;

• supports environmental education;

• is driven by the principle of social responsibility;

• takes into account the impact of its activities on society, Customers, suppliers, employees and shareholders;

• improves its corporate governance;

• ensures transparency of the principles of the Bank’s management.

Pursuit of the Strategy

The financial goals for 2022 defined in the Strategy were, in particular in 2020, under pressure from the COVID-19 pandemic and changes in the economic and regulatory environment, among other things, due to a drop in interest rates and the legal risk related to foreign currency mortgage loans, which had not been taken into account at the time of developing the Strategy.

The 2021 results indicate that the Bank has maintained the assumed profitability, high effectiveness of its operations and risk management, as well as strong capital position.

Table 2. Strategic goals of PKO Bank Polski S.A. for 2022

	2019	2020	2021	2022 target	Accomplishment degree
ROE	10.0%	-6.0% adjusted: 7.1%*	12.1%	12.0%	√
C/I	41.3%	40.9%	40.6%	~41%	√
cost of credit risk	0.46%	0.78%	0.55%	0.60%-0.75%	√
net result	PLN 4.0 billion	PLN -2.6 billion adjusted: PLN 3.2 billion*	PLN 4.9 billion	> PLN 5 billion	realistic
capital	TCR: 19.9%	TCR: 18.2%	TCR: 18.2%	capability to pay out dividend	realistic
capital	TIER 1: 18.6%	TIER 1: 17.0%	TIER 1: 17.0%	capability to pay out dividend	realistic

* return on equity and net result adjusted for the recognized costs of the legal risk and other implications of the EGSM decision on entering into settlements with holders of foreign currency mortgage loans.

The COVID-19 pandemic intensified the Bank’s digital transformation process. There is an accelerated evolution of service models related to the integration of sales channels, so as to ensure Customers have access to the same products in digital channels as in the physical outlets. In the era of the pandemic, PKO Bank Polski S.A. focused on optimizing its internal processes and the resulting limitation of its operating expenses (digitization, automation and robotization). These are still very important factors: maintaining relations with Customers, high quality of service and innovations which the Bank implements to find new, non-interest sources of revenue. Such capabilities are enhanced by advanced data analytics and solutions relying on artificial intelligence and cloud technology.

As a result of changes in the market environment due to the pandemic, PKO Bank Polski S.A. designated, as part of its strategy, priority areas and actions for 2021.

• Customer-centric approach – a segmented approach to the service offer and model, personalized experiences of the Customer and building long-term relationships, further transforming the network into an advisory centre and digital education for the Customers.

• Digitization – ensuring that Customers have an omnichannel access to banking products and services, increasing sales through remote channels, developing functions and innovations in IKO mobile banking, enhancing CRM and advisor tools, intensifying the use of advanced data analytics, the Road2Cloud Project and constructing a modern platform for electronic channels, including its high accessibility, scalability and security.

• Autonomous Bank – accelerating the automation and robotization of processes, increasing the number of processes performed fully digitally, “slim” outlets and an effective service model, simple and convenient offer and communication with the Customers, increasing the use of AI in sales and service processes, and in the organization’s internal processes.

In June 2021, the Management Board and the Supervisory Board adopted indicators to be achieved in the ESG area and included them in the Bank’s Group’s non-financial goals for the following years.

PKO Bank Polski S.A. undertook to reduce greenhouse gas emissions, eliminate exposure to the coal mining sector, increase green financing, take into account the key ESG aspects in its procurement processes, maintain the high participation of women in executive positions, low churn and voluntary terminations, and performance of projects which support the employment of disabled persons.

Information about meeting the key non-financial indicators in 2021 is included in the statement on non-financial information in chapter ‎13.3 Key non-financial performance indicators.

The Bank will continue its work on subsequent ratios and non-financial goals connected with the ESG area, and challenges connected with sustainable development will be included more extensively in its next strategy.

PKO Bank Polski S.A. is the undisputed leader of the Polish banking sector and the most mobile bank in Poland, providing services to more than 6 million users via its IKO mobile application. The Bank builds its long-term relationship with its Customers and remains the bank of first choice for 4.5 million primary Customers (an increase of 9% y/y).

In accordance with the Strategy assumptions, PKO Bank Polski S.A. has been building competitive advantages using its technological potential, which considerably extends beyond the traditional financial area. It cooperates with the fintech market leaders and initiated the establishment of Operator Chmury Krajowej sp. z o.o., with which it builds strategic partnerships with worldwide technology leaders – Google and Microsoft.

1.5 The PKO Bank Polski S.A. Group market position

In 2021 the Bank’s Group:

• maintained a high share in the loan market both in terms of volume and sales of selected products;

• increased its share in the savings market, both for individuals and institutional entities;

• maintained its position as leader on the market of investment funds for individuals and the sale of mortgage loans.

Table 3. Market share

	31.12.2021	31.12.2020	31.12.2019	31.12.2018	31.12.2017	Change 2021/2020
Loans for:	17.4%	17.6%	17.9%	17.6%	17.7%	-0.2 p.p.
1. individuals, of which:	21.9%	22.4%	22.8%	22.9%	23.0%	-0.5 p.p.
- housing	23.7%	24.9%	25.8%	26.1%	26.1%	-1.2 p.p.
PLN	24.7%	26.3%	27.6%	28.3%	28.6%	-1.6 p.p.
foreign currency	20.1%	20.8%	21.0%	21.0%	21.2%	-1.7 p.p.
- consumer and other, of which:	17.1%	16.5%	16.3%	15.8%	15.9%	+0.6 p.p.
in current account	34.1%	32.7%	32.4%	32.1%	32.0%	+1.4 p.p.
2. institutional entities	12.8%	12.6%	13.1%	12.7%	12.8%	+0.2 p.p.
Non-Treasury debt securities (indebtedness)	29.3%	30.2%	30.7%	32.4%	29.3%	-0.9 p.p.
Mortgage loans (sales)	19.8%	19.7%	25.7%	28.9%	29.6%	+0.1 p.p.
Total savings 1), of which:	19.2%	18.3%	18.3%	18.4%	17.3%	+0.9 p.p.
- savings of individuals 2)	25.6%	24.3%	22.6%	22.0%	21.1%	+1.3 p.p.
Deposits:	17.8%	17.3%	17.9%	18.1%	17.9%	+0.5 p.p.
individuals	22.5%	21.9%	20.8%	20.2%	20.4%	+0.6 p.p.
institutional entities	12.3%	11.5%	13.8%	15.2%	14.5%	+0.8 p.p.
TFI assets - funds of individuals 3)	19.9%	19.2%	19.5%	21.5%	17.1%	+0.7 p.p.
Brokerage activities - transactions on secondary market 4)	12.3%	11.2%	7.5%	7.7%	14.7%	+1.1 p.p.

Source: NBP, WSE, ZBP, Analizy Online
1) Total savings comprise total deposits, TFI assets and retail savings bonds.
2) Savings of individuals include deposits of individuals, funds of individuals and saving Treasury bonds.
3) In 2021 the market data changed due to the change in the status of two funds into funds for individuals. The data for the prior period was recalculated.

4) Taking into account the effect of intermediation in the sale of shares in Pekao S.A. in 2017. After elimination of this effect, the share of brokerage activities in the secondary market trading would be 11.2%.

2. External business conditions

Macroeconomic environment

Situation on the financial market

Position of the Polish banking sector

Position of the Polish non-banking sector

Ukrainian market

Regulatory and legal environment

Factors with an impact on the financial results of the Bank’s Group in 2022

2.1 Macroeconomic environment

Macroeconomic factors which shaped the national economy in 2021 are presented below:

Strong economic revival after the pandemic

The pace and decomposition of GDP growth (%, y/y) and its components (p.p.)

In 2021, the impact of subsequent waves of the pandemic on the business activities was considerably weaker than in 2020. Due to the progress of the vaccination programme, the scale of restrictions applied in 2021 was limited, and the economy has already recovered from pandemic losses in the second quarter. After a drop of 2.5% in 2020, the GDP growth in 2021 amounted to 5.7%, according to preliminary data. The year-to-year growth rate was positive starting from the second quarter, when it amounted to a record high of 11.2% y/y. The GDP growth was stimulated by a rapid recovery of demand, mainly from consumers, after lifting the pandemic restrictions. The investment dynamics in the second half of the year amounted to 10% y/y. Despite disruptions in the global value-added chains, which resulted from an insufficient supply of key components, exports grew at a two-digit pace. The strong growth of imports reflected, among other things, a change in the model of managing inventories from just-in-time to just-in-case and their significant increase. As a result, at the end of the year, the current account surpluses visible over the last two years turned into a deficit. At the end of the year, business activities were increasingly affected by inflation processes – both companies and households faced ever growing operating expenses and costs of maintenance which resulted, among other things, from a rapid increase in energy prices in Europe.

Apparent recovery of the labour market

The situation on the labour market in 2021 increased systematically. The recorded unemployment rate in December amounted to 5.4% compared with 6.3% at the end of 2020. Following the elimination of seasonal factors, unemployment was only 0.2 p.p. higher than before the pandemic (in the worst period the reaction of the unemployment rate to the pandemic amounted to 1.1 p.p.). According to BAEL, unemployment dropped in the third quarter of 2021 to a nearly record low of 3.0%, and the labour force participation rate increased to a record high of 58.2%. The increase in the labour force, makes it possible to satisfy the demand for jobs despite unfavourable demographic trends. The situation on the domestic labour market is tense due to the limited supply of potential employees. The number of available jobs recovered to the pre-pandemic level and during the year, the share of companies which reported recruitment problems grew, and this supported pressure on salaries, also in reaction to increased inflation. The average remuneration in the corporate sector was at a level exceeding the pre-pandemic level and –- what is important from the perspective of consumption base –- its growth rate still exceeded inflation. The growth rate of wages and salaries in the second quarter was supported by the effect of the low statistical base increased to around 10% y/y and remained close to this level by the end of the year, which suggests that despite a considerable increase in inflation, the wage-price spiral did not launch in 2021.

Unemployment and employment (end of period, %)

Increased inflation

The CPI inflation remained within the admissible variation range from the NBP target (2.5% +/- 1%) only in the first quarter, and subsequent months brought a considerable increase to a record high (in more the 20 years) of 8.6% y/y in December. During the year, inflation was enhanced by fuel prices (the effect on an increase in global demand for oil and the low statistical base), energy (a strong growth in demand combined with disruptions on the gas market and an increase in the CO2 emission allowances prices, and food. External factors which exacerbated inflation in 2021 worldwide accounted for approx. 80% of the increase in the price index. Pressure on price increases was nevertheless very broad and covered both goods and services. The core inflation increased in December to 5.3% y/y and was the highest in the last 20 years. Inflation in January 2022 increased to 9,2%, however the announced by the Government Anti-inflaiton Shield will reduce it from February 2022 by about 3.3 p.p.

Improvement in the public finances condition

Deficit and debt of the public sector	Results of the central budget (in PLN billion, per quarter)

The robust increase in nominal GDP and its fiscally effective structure supported the results of the State budget in 2021. Even after November, the budget showed a surplus of PLN 50.4 billion against a deficit of PLN 40.5 billion assumed in the Budget Law for the entire year. The accumulated revenues grew by 18% y/y, of which tax income by 17.4% (of which mainly CIT: 25.1% y/y), and non-tax incomes (among others, a distribution from the NBP profit and revenue from an auction of CO2 emission allowances) of 23.6%. As at the end of the year, the budget probably showed approx. PLN 25 billion deficit, and additionally approx. PLN 50 billion accounted for expenses from anti-COVID funds not covered by the budget. The fiscal situation improved considerably during the year, and the deficit according to ESA (covering a broad public sector) dropped to an estimated 2.5% of the GDP from 7.1% GDP in 2020. The public debt probably went down in relation to GDP to 56.5% from 57.4% of GDP.

Start of normalization of the monetary policy

NBP interest rates (end of the period)
Rate:	1-3Q 2021 [%]	4Q 2021 [%]
reference rate	0.10	1.75
bill rediscount rate	0.11	1.80
bill discount rate	0.12	1.85
Lombard rate	0.50	2.25
deposit rate	0.00	1.25

In the first half of 2021, the NBP maintained monetary support for the economy – stabilized interest rates at a record low level, pursued operations under the QE programme, and preferred the fundamental undervaluation of the PLN. In reaction to the rapid acceleration of price increase and in order to prevent the “de-anchoring” of inflation expectations, the Monetary Policy Council (MPC) decided in October on the first interest rate increase since 2012. This move was the first in a cycle of increases as a result of which the NBP increased its reference rate by 1.65 p.p. to 1.75% in 2021.

More increases followed in January and February 2022 – as a result the MPC determined the core NBP interest rates at the following levels: Lombard 3.25%, bill discount 2.85%, bill rediscount 2.80%, reference 2.75% and deposit 2.25%. According to MPC declarations, further interest rate increases should be expected with the target level of the reference rate at 3.5-4.0%.

2.2 Situation on the financial market

Interest rate market

In 2021, the profitability of Polish bonds increased rapidly. Profitability of 2-year bonds reached 3.35%, starting from nearly null as at the beginning of the year, and 10-year bonds reached 3.71%, which is a change of nearly 2.5 p.p. This was the result of a strong increase in PPI and CPI inflation accompanied by concerns about “de-anchoring” inflation expectations from the long-term targets. This situation motivated NBP to introduce significant changes in the monetary policy. The central bank also decided about reference rate increases from 0.10% to 1.75% in total as at the end of 2021, which raised the 3M WIBOR to 2.54%. The increases in returns on bonds were also seen abroad, although on the main markets – USA and Eurozone – they were not as conspicuous as in Poland. Higher volatility of quotations on the Polish debt market resulted mainly from the relatively strong increase in inflation, which amounted to 8.6% at the end of the prior year.

10-years bonds yield (%)

Currency Market

The year 2021 brought weaker PLN against USD and a symbolic change in relation to the EUR. The reinforcement of the USD and constant uncertainty related to the development of the pandemic had a negative impact on the currencies of emerging markets. The US currency benefited from the market increase in interest rates together with the process of limiting the purchase of assets initiated by the Fed. Deeply negative real interest rates which dropped as a result of a strong increase in inflation (an average yearly increase of 5.1%), had a negative impact on the PLN. Only the interest rate increases initiated by the MPC in the fourth quarter reinforced the Polish currency. The PLN exchange rate was also affected by the conflict with the European Union which resulted in the lack of approval of the National Reconstruction Plan, due to which Poland did not receive any financing from the EU Recovery Fund in 2021.

Foreign exchange rates

Stock Market

The year 2021 was beneficial for stock holders, including those investing on the WSE. At that time WIG gained nearly 22%. Following several difficult years, the banks’ securities brought considerable profits – the WIG index for Banks went up by more than 80%. Although the world still wrestled with the COVID-19 pandemic, investors focused on strong economic revival, which translated into the visible recovery of corporate profits. At the end of the year, the stock market felt the burden of global changes in the monetary policy driven by growing inflation pressure. Nevertheless, the financial conditions remained relatively mild, which in combination with solid current and forecast macroeconomic indicators encouraged stock investments.

Global stock market

2.3 Position of the Polish banking sector

Net profit and returns

(Calculations of PKO Bank Polski S.A, based on the last available PFSA data.)

In 2021 the banking sector recorded net profit of PLN 8.8 billion, compared with the loss of PLN -0.3 billion in 2020. The moving return on equity ratio (12M ROE) was 4.1%.

The increase in net profit resulted mainly from the y/y improvement of the net write-downs – in 2020, banks increased allowances due to less favourable macroeconomic forecasts related to the epidemic conditions. The second pillar of improvement in the banks’ results was the net profit on other business activities – the effect of the low reference base in the prior year. Moreover, the positive impact came from the net commission income which grew, among other things, due to changes in the banks’ pricelists, and the increased activity of Customers.

Higher tax burden as the opposite effect. Moreover, the results of the banking sector were affected by provisions related to the legal risk of foreign currency housing loans. At the same time, the net interest income also dropped y/y – primarily due to last year’s decreases in the core NBP interest rates (although a cycle of increases in the NBP rates started in October 2021). Net interest income was also affected by the relatively weak lending activity (in particular in the first half of 2021) in the COVID-19 pandemic conditions. The operating expenses were slightly higher.

The capital position of banks was good. As at the end of September 2021, the total capital adequacy ratio amounted to 20% (most recent data available). Revoking the obligation to use the systemic risk buffer (3%) had a positive impact on capital adequacy.

Change in the net profit of the banking sector (PLN billion)

The “provisions” item contains, among other things, a part of provisions related to the legal risk of foreign currency mortgage loans.

Loan and deposit market

(Based on NBP data and the Analizy Online service site)

At the end of December 2021, the y/y pace of growth in total loans (net of changes in exchange rates) was positive at 4.8% (compared with -0.8% as at the end of 2020). With respect to deposits, the annual rate of growth slowed down to 11.1% compared with 13.9% at the end of 2020, remaining among other things: under the influence of slowing down the growth rate of individual and corporate deposits.

Dynamics of loans and deposits (y/y)

The PLN housing loans growth rate accelerated to 12.5% y/y (compared with 10.1% y/y at the end of 2020) in a clear bull market. The growth rates of consumer loans (net of exchange rate changes) and corporate loans (net of exchange rate changes) were positive and amounted to, respectively: 1.6% y/y (compared with -2.2% y/y as at the end of 2020) and 4.7% y/y (compared with -6.2% y/y as at the end of 2020).

The growth rate of individual deposits slowed down to 6.3% y/y (compared with 8.1% at the end of 2020), while the current deposits growth continued, albeit slower than at the end of 2020, current deposits growth (14.6% y/y vs. 28.6% y/y at the end of 2020) and the term deposits fell slightly more slowly (-20.4% y/y compared with -28.6% y/y at the end of 2020). At the end of 2021, assets of investment funds (IF) of individuals increased by 7.9% y/y, which was influenced, among other things, by the low reference base of the prior year – strong drops on the investment funds market in the first months of the pandemic and the apparent interest of Customers in forms of savings alternative to deposits in the situation of low interest rates in the first half of 2021. The growth rate of cash in circulation slowed down to 10.9% y/y (36.9% y/y at the end of 2020) – which was related to a rapid growth in cash in circulation since March 2020. It was due to: conservative public approach to the access to cash during pandemic and low interest rates on deposits, related to low level of interest rates (in 2020 the reference rate was reduced three times, to the level of 0.1%). As at the end of December 2021, the growth rate of corporate deposits slowed down to 10.9% y/y (compared with 19.3% y/y at the end of 2020), which was, inter alia, due to the use of funds received by companies from Anti-crisis Shields, as well as the effect of high reference base of the prior year.

The liquidity position of the banking sector remained very good – the loan to deposit ratio dropped to 79% compared with 83% at the end of 2020.

Change of loans (y/y)	Change of deposits, FI assets, cash (y/y)

2.4 Position of the Polish non-banking sector

Investment Funds Market

(Based on the data of Analizy Online)

In 2021, assets managed by the Investment Funds Management Companies increased to PLN 301.5 billion (+7.1% y/y), including assets of individuals which increased to PLN 184.1 billion (+7.9% y/y). As at the end of the analysed period, the value of funds accumulated in the PPK Defined Maturity Date Funds was PLN 6.5 billion.

Structure of assets managed by the Investment Fund Management Companies (PLN billion)

As at the end of 2021, the balance of payments and redemptions totalled PLN 10.9 billion (PLN 0.6 billion in 2020). The high level of net inflow of funds to the market was due to the consistently high demand for investment funds among individuals who paid in a net amount of PLN 12.4 billion (PLN 0.3 billion in 2020). The inflow of new funds to the market visibly slowed down in the second half of the year, and in the last quarter the monthly redemptions clearly overweighed the payments.

At the same time, the structure of the balance showed a change in preferences of individuals and a shift towards funds which involved more risk. The largest inflow of funds was recorded by stock funds for which the annual balance of payments and redemptions amounted to PLN 7.2 billion (PLN -0.3 billion in 2020). Debt funds that were most popular with individuals in previous periods, showed a negative balance of payments and redemptions of PLN -8.0 billion in 2021.

Open Pension Funds Market

(Based on PFSA data)

In 2021 assets of Open Pension Funds (OFE) increased by 26.5% (PLN +39.4 billion) to PLN 188 billion. In this period, the number of OFE participants dropped by 1.7% (PLN -255 thousand to 15.2 million).

The OFE market remained under the influence of the recovery on the Warsaw Stock Exchange (in 2021, the WIG index went up by 21.5%) and uncertainty as to the future regulatory aspects of the functioning. Domestic stocks dominated in the OFE asset structure (approx. 81.9% of the net assets as at the end of 2021).

Insurance Market

(Calculations of PKO Bank Polski S.A, based on the last available PFSA data.)

During the three quarters of 2021 insurers earned a net profit of PLN 5.3 billion (+2% y/y), and their technical profit was 18% higher y/y (up to PLN 4.2 billion). The increase in the amount of the revaluation of deposits had a positive impact on the results of insurers, while the increase in the costs of claims and benefits paid (+4% y/y to PLN 29.6 billion) accompanied by an increase in gross written premium of 9% y/y (to PLN 50.9 billion y/y) had a negative impact.

In the life insurance segment, gross written premium went up by 8% y/y (to PLN 16.6 billion), with an increase in claims paid of 7% y/y (to PLN 13.5 billion). The costs of insurance activities in the life insurance segment went up by 7% y/y (PLN 4.0 billion).

The segment of other personal and property insurance noted a y/y increase in gross written premium of 10% (to PLN 34.4 billion), with a considerably slower increase in the cost of claims paid +3% y/y (to PLN 16.1 billion). The costs of insurance activities in the other personal and property insurance segment increased by 5% (to PLN 7.9 billion).

Lease Market

(based on Polish Leasing Association data)

Lease market structure (new sales) in PLN billion

In 2021, the lease industry financed assets of PLN 88.0 billion, compared with PLN 67.4 billion in 2020, which is an increase of 30.7% y/y. The increase was mainly related to the lease of cars and was mainly due to the low reference base related to the epidemic conditions in Poland in 2020, and economic recovery in 2021.

The heavy vehicle lease segment (i.e. covering trucks over 3.5 tonnes, tractors, semitrailers/trailers, buses, ships, airplanes, trains and other) noted the largest growth rate, which is connected with the post-pandemic clear economic recovery in the Eurozone. The value of assets financed in this segment amounted to PLN 21.6 billion (+61.6% y/y), which was approx. 25% of total financing granted by lease companies. Another segment which recorded high growth rates was the lease of light vehicles (passenger cars and trucks up to 3.5 tonnes), which confirmed that the economic growth in Poland is mainly based on consumer spending. The value of assets financed in this segment amounted to PLN 39.2 billion (+22.9% y/y), which was approx. 45% of total financing granted by lease companies. In the plant and machinery segment whose growth is driven by dynamic rebound of industrial production, the value of leased assets amounted to PLN 24.7 billion (+25.9% y/y).

In turn, the real estate segment noted a drop of -9.7% y/y, but its share in the market structure was marginal (1%).

Factoring Market

(Based on the Polish Factors Association data)

The factoring market has more than recovered its pre-pandemic position. In 2021, the turnover of members of the Polish Factors Association increased by approx. 26% y/y and reached a level of PLN 362.4 billion, and the number of business entities using factoring companies amounted to 26 thousand (+42% y/y).

The largest demand on the part of enterprises was for factoring without recourse, whose share in sales of factoring firms was approx. 51%. The share of the second largest market segment, i.e. recourse factoring, was 29%. Manufacturing and distribution companies, mainly from the food, metal and chemical industries, continued to be the entities that used factoring services the most often.

2.5 Ukrainian market

Economic conditions

The year 2021 was not as favourable for the Ukrainian economy as it seemed to promise at first. Following the GDP drop in the first quarter (-2.2% y/y), which was related to another wave of the pandemic (and the respective restrictions), the next two quarters showed an increase in activities (of 5.6% y/y and 2.7% y/y in the second and third quarter, respectively). The frequently published data indicates continued economic expansion in the fourth quarter, but at a level lower than before the pandemic. During the year, the retail trade was recovering from pandemic losses, and in the second half of the year its growth became more stable at a level lower than before the pandemic (6-7% y/y compared with approx. 13% y/y before March 2020). Also the industrial production remained only slightly positive. In total, over the year, the economic growth could exceed 3%, which did not allow for the Ukraine (despite economic revival) to recover the losses of 2020, when its economy shrunk by 4.0%.

The nominal dynamics of wages and salaries returned (for a while) above 20% y/y, but further in the year, it dropped below this level. At the same time, inflation accelerated to above 10%, mainly due to growing prices of food (a two-digit inflation rate in the second half of the year) and fuels. The core inflation increased from 4.5% y/y in December 2020 to 7.9% at the end of 2021. As a result, the actual increase in wages and salaries in the fourth quarter of 2021 (6% y/y in October-November) was lower than a year earlier (9.6% y/y).

The National Bank of Ukraine (NBU) fought inflation by increasing interest rates (five times: in March, April, July, September and December), overall from 6.00% to 9.50%. The tightening of the monetary policy reinforced the UAH exchange rate. The UAH/USD exchange rate was 27.28 at the end of the year, compared with 28.34 at the end of 2020.

The economic revival stimulated tax revenue. The dynamics of PIT revenue increased to nearly 20% y/y, and VAT and CIT exceeded 50% y/y. It allowed a reduction in the budget deficit (to -1.3% of GDP after November, compared with -2.8% of GDP in the same period of 2020), despite increased spending. The ratio of the public debt to GDP went down to 50.1% at the end of November 2021, compared with 60.8% at the end of 2020.

Ukrainian Banking Sector

According to data from the NBU, the number of banks which engaged in operations in Ukraine dropped to 71 in November 2021 (compared with 74 in December 2020).

The value of total assets in the Ukrainian banking system in 2021 increased to UAH 1.98 trillion (as at 30 November) from UAH 1.82 trillion (as at the end of 2020). Equity increased to UAH 244.1 billion from UAH 210.6 billion and as at the end of November 2021 they comprised 12.3% of the balance sheet total, compared with 11.6% as at the end of December 2020. The Ukrainian banking sector remains well capitalized (as at the end of 2021, the capital adequacy ratio of the sector amounted to 18.01%, compared with the minimum requirement of 10% and 22% at the end of 2020), whereas there are concerns that the ratios of 8/13 of banks with systemic relevance were below this level. December brought a clear drop in the capital adequacy ratio from 21.44% as at the end of November 2021.

The year 2021 can be the first year since 2018 in which the volume of loans increased. After November, it was UAH 107.3 billion higher than at the end of 2020 and amounted to UAH 1,086 billion. This was despite the drop in the value of currency loans (among other things due to the reinforcement of the UAH exchange rate). The sources of growth were consumer loans (an increase of UAH 44.1 billion from the end of 2020 to November 2021), loans for private non-financial enterprises (an increase of UAH 43.6 billion over the same period) and loans for the public sector (an increase of UAH 13.7 billion).

At the end of November 2021, the volume of deposits was UAH 100.8 billion higher than at the end of 2020 and amounted to UAH 1,471.4 billion. In this period, deposits of private enterprises went up by UAH 51 billion, and deposits of households increased by UAH 26.7 billion. The volume of currency deposits decreased. The loan to deposit ratio increased to 73.8% as at the end of November 2021, from 71.4% as at the end of 2020.

Profitability ratios returned to levels close to those of 2019: ROA (3.81% after November 2021, compared with 2.44% in 2020) and ROE (32.9% after November 2021, compared with 19.22% in 2020).

2.6 Regulatory and Legal Environment

The following new legal and regulatory solutions, which became binding in 2021, had a significant impact on the financial position and operations of the PKO Bank Polski S.A. Group, including in particular:

Solution

Impact

Risk management

Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012.	Starting to apply new regulatory requirements in respect of the net stable financing ratio (NSFR) and leverage ratio (LR), implementing the new method of calculating the capital requirements for counterparty risk (SA-CCR).
Update of the Polish Financial Supervision Authority’s Recommendation S concerning good practices for the management of mortgage-secured loan exposures.	The requirement to introduce in the bank’s offer mortgage loans with a variable interest rate and fixed interest rate (for a five-year period for loans with a maturity of more than 5 years, or over the entire period for loans maturing within 5 years), development of a method of designating overpayments of loans which have repayment schedules, taking into account changes in the calculation of liquidity risk measures.
Guidelines of the European Banking Authority on loan origination and monitoring (EBA/GL/2020/06) which have superseded the Guidelines on creditworthiness assessment (EBA/GL/2015/11).	Improvement of banking practices in order to ensure solid and prudent credit risk management standards and to ensure the granting of loans in line with consumer protection and the fair treatment of consumers.
Commission Implementing Regulation (EU) 2021/637 of 15 March 2021 laying down implementing technical standards with regard to public disclosures by institutions of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013 of the European Parliament and of the Council and repealing Commission Implementing Regulation (EU) No 1423/2013, Commission Delegated Regulation (EU) 2015/1555, Commission Implementing Regulation (EU) 2016/200 and Commission Delegated Regulation (EU) 2017/2295.	Ensuring uniform reporting process for banks regarding capital adequacy information. Introducing a set of uniform forms, templates and tables, and ensuring the high quality of the information disclosed.
Commission Implementing Regulation (EU) 2021/763 laying down implementing technical standards with regard to the supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities.	Introducing the obligation to regularly submit new reporting forms regarding MREL.
The Act of 8 July 2021 on amendments to the Act on the Bank Guarantee Fund, deposit guarantee scheme and compulsory resolution, and certain other acts.	Changes resulting from the BRR Directive, including the rules for calculating and maintaining MREL requirements, were implemented in the Polish legal system.
Letter from the Bank Guarantee Fund (BGF) of 2 December 2021 (Bank Guarantee Fund) on updating the level of MREL and designating mid-term MREL targets for the Bank.	Change in the regulatory requirements regarding MREL
PFSA decisions on the amount of additional capital requirement to secure the risk related to currency mortgage loans for households.	Reducing the minimum supervision requirements with regard to the value of indices.

Interest rates

In 2021, the Monetary Policy Council raised interest rates three times, in total by 165 b.p. (all increases took place in the fourth quarter of 2021), as a result of which the reference rate went up from 0.10% to 1.75%.

At the same time, the Monetary Policy Council changed the mandatory reserve rate from 0.5% to 2%.

The drop in the valuation of debt instruments, drop in the valuation of IRS instruments, hedging volatility of interest income.

Increase in interest income in 2022.

safety

Amended Act on countervailing money laundering and terrorist financing which implements the provisions of Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the so-called fifth AML Directive which modifies the EU legislation and increases the transparency of financial flows).

Introducing new obligations in respect of the application of financial safety measures and implementing further actions in business relations with Customers connected with high-risk third countries.

Taxes

Regulations applicable as of 1 January 2021, amending income tax Acts introduced, among other things, in respect of taxpayers with annual revenue exceeding EUR 50 million and Tax Groups with an obligation to prepare and publish information on their pursued tax strategy on their websites. According to the communication of the Ministry of Finance, the first information for 2020 should be prepared by the end of 2021.

Still the solutions implemented in 2020 had an impact, in relation to countervailing the effects of the COVID-19 pandemic, mentioned in the PKO Bank Polski S.A. Group Directors’ Report for 2020.

The activities of KREDOBANK S.A. were affected by regulatory and legal changes in Ukraine, including in particular relating to changes in the discount rate, protection of the rights of financial services’ consumers, improving the corporate governance organization in Ukrainian banks, and provisions aimed at countervailing or limiting the consequences of the COVID-19 pandemic.

2.7 Factors with an impact on the financial results of the Bank’s Group in 2022

The following external factors may have a material impact on the operations of the Bank’s Group in 2022:

• development of the pandemic, including the spread of a very contagious variant, Omicron observed at the beginning of the year; effectiveness and progress of the vaccination programme, as well as the infectivity and virulence of subsequent coronavirus mutations;

• reaction of the global economy to the even more universal process of tightening fiscal policy, including probably relatively quick and numerous interest rate increases in the USA;

• possible easing of supply constraints in the second half of the year (shortages of production components, high level of energy commodity prices), which currently exacerbate the cost pressure and limit the pace and scale of economic revival;

• difficulties in the global trade related to maintaining the “zero COVID” policy in China, which particularly affected the main ports in Asia;

• effective functioning of the European gas and CO2 emission allowances market;

• potential concerns about stagflation and maintaining an increased level of inflation worldwide and in Poland;

• the political and economic conditions in Ukraine, significant risk of increased tension in relations with Russia, not only Ukraine-Russia, but also EU/USA – Russia;

and relating to the Polish economy:

• the scale and path of changes in the NBP interest rates and level of mandatory reserve;

• effectiveness as well as scope and timing of the Government’ inflation-reducing programmes, and also impact of the prices increases (which is the fastest in the last 20 years) on the real consumer spending and propensity to use savings;

• reaction of the household sector to the increased level of NBP rates, including the structure of demand for loans and ability to service already existing liabilities;

• weakening of the demand for loans on the part of households, including mortgage loans and maintaining the upward trend of demand for corporate financing, which will be accompanied by a deposit volume which is still above the norm;

• possible further court rulings in respect of currency mortgage loans, which may also impact the level of interest in the settlements programme;

• availability of funds which are to be the basis for the implementation of the National Development Programme;

• developments in the housing properties market and demand for housing loans, including likely weaker speculative/investment demand for housing due to NBP interest rate increases;

• implementation of the “Polski Ład” programme, including tax changes which will affect tax settlements of households and enterprises, and “Mieszkanie bez wkładu własnego” (“Housing loans without initial contribution”) which will increase the availability of mortgage loans for lower-income households;

• lowering the limits for non-interest costs of consumer loans (fees and commissions), and higher capital requirements for lending institutions as part of the planned “anti-usury” regulations;

• growing regulatory costs of the Bank Guarantee Fund, which have a direct impact on lower results in the banking sector.

3. Organization of the PKO Bank Polski S.A. Group

Entities covered by the financial statements

Key changes to the structure of the Bank’s Group in 2021

Related-party transactions

3.1 Entities covered by the financial statements

[GRI 102-45] Pursuant to the International Financial Reporting Standards (IFRS) as at 31 December 2021 the Bank’s Group comprised PKO Bank Polski S.A. as the parent and 38 direct or indirect subsidiaries (at all levels). All the subsidiaries were disclosed in the consolidated financial data pursuant to IFRS 10, “Consolidated financial statements”.

List of direct subsidiaries:

The list presents the share of PKO Bank Polski S.A. in the company’s share capital, and in the case of funds – share of the fund’s investment certificates held. All subsidiaries listed in the Consolidated financial statements of the PKO Bank Polski S.A. Group for the year ended 31 December 2021 (hereinafter: financial statements of the Bank’s Group for 2021) are accounted for using the acquisition accounting method.

A full list of the Bank’s subsidiaries, associates and joint ventures is presented in the 2021 financial statements of the Bank’s Group (Note 1).

3.2 Key changes to the structure of the Bank’s Group in 2021

In 2021 the following changes in the structure of the Bank’s Group took place:

• in January, the reverse merger of “CENTRUM HAFFNERA” sp. z o.o. as the acquiree and its subsidiary “Sopot Zdrój” sp. z o.o. as the acquirer took place;

• in March the process of liquidating ROOF Poland Leasing 2014 DAC started;

• in July, Finansowa Kompania “Prywatne Inwestycje” sp. z o.o. acquired shares in Finansowa Kompania “Idea Kapitał” sp. z o.o. from KREDOBANK S.A. which comprise 100% of its share capital and carry 100% of votes at the General Meeting of the company’s shareholders;

• in August, a new company was entered in the National Register of Legal Entities, Individual Entrepreneurs and Social Organizations of Ukraine, “KREDOLEASING” sp. z o.o. whose sole shareholder is KREDOBANK S.A.; the company’s share capital amounts to UAH 10 million; the company will provide mainly lease services; and had not started operating by the end of 2021.

3.3 Transactions with subordinated entities

In 2021, PKO Bank Polski S.A. provided services to its related (subordinated) entities, including maintaining bank accounts, accepting deposits, granting loans and advances, issue of debt securities, granting of guarantees and spot exchange transactions and offering participation units and certificates of investment funds, lease products, factoring products and insurance products of the Bank Group companies, and services offered by Brokerage Office of PKO Bank Polski S.A.

The Bank provided services to PKO Bank Hipoteczny S.A. within the scope of intermediation in sales of housing loans for individuals, performing tasks as part of post-transaction services in respect of these loans and support tasks under the outsourcing agreement. The Bank offered its infrastructure and IT services and rented office space to selected Bank’s Group companies. Together with Centrum Elektronicznych Usług Płatniczych eService sp. z o.o., the Bank rendered services of payment transaction clearance.

A summary of receivables, liabilities, revenues and costs of the transactions between PKO Bank Polski S.A. and its subordinated entities, including these companies’ indebtedness vis-à-vis the Bank as at 31 December 2021 is presented in the Financial Statements of PKO Bank Polski S.A. for the year ended 31 December 2021 (Note 51).

Information on transaction(s) with related parties concluded by the Issuer or its subsidiary, if they are material and have been concluded on terms other than on an arm’s length basis

Services provided by the Bank to related (subordinated) companies were performed on terms and conditions which do not diverge significantly from the arm’s length conditions.

In 2021, subsidiaries of PKO Bank Polski S.A. did not conclude any material transactions with related parties on conditions other than arm’s length.

4. Financial position of the PKO Bank Polski S.A. Group

Key financial indicators

Consolidated income statement

The consolidated statement of financial position

Any differences in sums, shares or growth rates arise from the rounding of amounts to full PLN millions and rounding of percentage shares in structures to two digital spaces.

4.1 Key financial indicators

The results of the PKO Bank Polski S.A. Group led to obtaining the key financial effectiveness ratios at the levels presented in the table.

Table 4. Financial indicators of the PKO Bank Polski S.A. Group

		31.12.2021	31.12.2020	Change
Net ROE	(net profit/(loss)/average equity)	12.1%	-6.0%	+18.1 p.p.
Net ROTE	(net profit/(loss)/average equity less intangible assets)	13.2%	-6.5%	+19.7 p.p.
Net ROA	(net profit/(loss)/average assets)	1.2%	-0.7%	+1.9 p.p.
C/I	(cost to income ratio)	40.6%	40.9%	-0.3 p.p.
Interest margin	(net interest income/average interest-bearing assets)	2.70%	3.03%	-0.33 p.p.
Share of impaired exposures		3.98%	4.43%	-0.45 p.p.
Cost of credit risk		0.55%	0.78%	-0.23 p.p.
Total capital ratio	(own funds/total capital requirement*12.5)	18.23%	18.18%	+0.05 p.p.
Common equity Tier 1 (CET1)		17.03%	16.99%	+0.04 p.p.

4.2 Consolidated income statement

Net interest income

Net fee and commission income

Other net income

Operating expenses

Net write-downs and impairment

The consolidated net profit of the PKO Bank Polski S.A. Group earned in 2021 amounted to PLN 4,874 million and was PLN 7,431 million higher than in 2020.

Change in net profit of the PKO Bank Polski SA Group (PLN million)

1) Other net income reflects dividend income, net income on financial operations, net foreign exchange gains/(losses) and other net operating income and expense.

2) This item comprises tax on certain financial institutions, share in profits/ (losses) of associates and joint ventures, and profit/(loss) attributable to non-controlling shareholders.

The profit on business activities of the PKO Bank Polski Group for 2021 amounted to PLN 15,202 million and was PLN 577 million (i.e. 3.9%) higher y/y, mainly as a result of an increase in net fee and commission income and other income, accompanied by a decrease in interest income.

Table 5. Income statement of the PKO Bank Polski S.A. Group (in PLN million)

	2021	2020	Change (PLN million)	Change (%)
Net interest income	9,882	10,346	-464	-4.5%
Net fee and commission income	4,431	3,920	511	13.0%
Net other income	889	359	530	1.5x
Dividend income	12	15	-3	-18.3%
Result on financial transactions	382	236	146	61.8%
Net foreign exchange gains/(losses)	436	182	254	1.4x
Net other operating income and expenses	59	-74	133	1.8x
Result on business activities	15,202	14,625	577	3.9%
Operating expenses	-6,174	-5,983	-191	3.2%
Tax on certain financial institutions	-1,079	-1,055	-24	2.3%
Net operating result	7,949	7,587	362	4.8%
Net write-downs and impairment	-1,466	-9,299	7,833	-84.2%
Share in profits and losses of associates and joint ventures	31	16	15	91.3%
Profit before tax	6,513	-1,696	8,209	4.8x
Income tax expense	-1,640	-865	-775	89.6%
Net profit (including non-controlling shareholders)	4,873	-2,561	7,434	2.9x
Profit (loss) attributable to non-controlling shareholders	-1	-4	3	-84.3%
Net profit	4,874	-2,557	7,431	2.9x

Net interest income

Interest income (in PLN million)

Interest expense (in PLN million)

Net interest income for 2021 amounted to PLN 9,882 million, i.e. PLN 464 million less than in the previous year. The lower result y/y was mainly due to a decrease in income from financing granted to Customers as a consequence of changes resulting from the MPC on reducing interest rates in the first half of 2020. This effect was partly reduced due to an increase in interest rates in the last quarter of 2021. The low level of market rates influenced the decrease in the interest expense on amounts due to Customers. In 2021 there was also a decrease in interest income from hedging accounting. In turn, the increase in income on securities had a positive effect on the interest income as a result of the increase in volume.

Interest income amounted to PLN 10,568 million and was 10.4% lower than in 2020. This was mainly due to:

• a decrease in income from financing granted to Customers of PLN 980 million y/y – related mainly to the drop in the average interest rate on financing granted to Customers of 0.4 p.p., resulting from a decrease in the market interest rates, accompanied by a change in the structure of financing (an increase in the share of PLN housing and consumer loans, with a decrease in the share of business and foreign currency housing loans);

• higher income on securities (PLN +141 million y/y), mainly as a result of an increase in the average volume of PLN 28 billion, despite a lower than average interest rate on securities resulting from a decrease in the market interest rates;

• lower income from hedging accounting (PLN -389 million y/y), related mainly to a considerable drop in the average CIRS transaction volume (PLN -17 billion y/y).

In 2021, interest income went down by PLN 452 due to the European Union Court of Justice’s judgment on the consumer’s right to a reduction in the cost of loans repaid before contractual maturity (of which PLN 369 million is related to returned costs paid automatically to Customers before the balance sheet date, and PLN 83 million is related to the provision for future reimbursement of costs to Customers). In 2020, interest income was reduced only by the reimbursed amounts paid automatically to Customers, by PLN 232 million (no provision was set up).

Interest expense amounted to PLN 686 million and was PLN 769 million lower than in 2020. The lower interest expense was mainly the effect of a drop in the costs of the deposit base of PLN 660 million y/y, which in particular was the effect of lower average PLN interest rates after the decisions of the MPC and the resulting decrease in the cost of deposits.

The interest margin decreased by 0.33 p.p. y/y and amounted to 2.70% as at the end of 2021. The decrease in the margin resulted from lower returns on assets in effect of changes in the structure of interest-bearing assets (the share of the lowest interest rates increased mainly at the expense of the share of the highest interest rates on receivables due from Customers). Moreover, the drop in the rate of return on assets was affected by a drop in net interest income as a result of lower market interest rates in Poland, which largely translated into a drop in interest rates on assets rather than on liabilities. In 2021 the average interest rate on PKO Bank Polski S.A.’s loans was 3.7%, and the average interest rate on total deposits was 0.1%. In 2020, it was 4.0% and 0.3%, respectively.		Average interest rate and interest margin (in %)

Net fee and commission income

Net fee and commission income (in PLN million)

In 2021 net fee and commission income amounted to PLN 4,431 million, and was PLN 511 million higher than in the previous year. The increase in net commission income was due to, among other things:

• higher net income on loans, insurance and operating leases (PLN +120 million y/y), mainly in effect of an increase in commission on business loans and leases, and an increase in the sale of insurance linked to loans, and motor insurance;

• higher net income from maintaining bank accounts and other (PLN +111 million y/y), among other things, connected with an increase in commission for maintaining bank accounts of Corporate customers and higher net income on transfers and foreign transactions;

• higher net income on margins in Forex transactions (PLN +106 million y/y) in effect of an increase in the number of transactions;

• higher net income from investment funds and brokerage activities (PLN +88 million y/y), mainly due to an increase in commission for fund management, higher commissions on securities exchange trading on the stock market, and on the sale of Treasury bonds;

• higher net income on cards (PLN +86 million y/y) due to the higher number of cards and higher number of non-cash transactions.

Net other income

Net other income (PLN million)

Net other income earned in 2021 amounted to PLN 889 million and was PLN 530 million higher than in 2020, among other things, as an effect of:

• higher net foreign exchange gains (PLN +254 million y/y), mainly as a result of closing the currency position resulting from the EGSM decision on offering settlements to Customers;

• higher net income on financial operations (PLN +146 million y/y), among other things, as a result of higher income on derivatives (including related to CO2 emission allowances) and higher net income on the sale of securities,

• net other operating income and expense higher by PLN 133 million y/y, among other things as a result of:

– costs of provisions for returns to Customers on early repayment of consumer and mortgage loans lower by PLN 79 million;

– setting up a provision in 2020 for potential proceedings before the President of the Office for Competition and Consumer Protection of PLN 41 million;

– an increase in income from other operations of the PKO Leasing S.A. Group of PLN 75 million (among other things, the sale of post-lease cars, remarketing, settlement of damages and insurance premiums);

– recognizing a loss in 2021 on the sale of CO2 emission allowances of PLN 60 million which was fully offset with a positive valuation of Customers’ derivatives related to the CO2 emission allowances.

Operating expenses

Operating expenses (in PLN million)

C/I ratio components

* including net regulatory charges

In 2021 operating expenses amounted to PLN 6,174 million and were 3.2% higher y/y. Their level was mainly determined by:

• an increase of PLN 226 million, i.e. 7.6% of the costs of employee benefits, mainly as a result of payments of employee awards in respect of the Bank’s results in 2021, higher bonuses and an increase in the number of employees in subsidiaries,

• an increase of PLN 79 million, i.e. of 6.3% of tangible costs, mainly as a result of:

– higher IT costs of PLN 35 million, i.e. 9.8% – mainly higher costs related to cloud services and overhauls, servicing and maintenance of the IT infrastructure;

and at the same time lower:

– costs of promotion and advertising of PLN 5 million, i.e. 3.4%;

• an increase of PLN 18 million, i.e. of 1.9% of depreciation and amortization expenses, as a result of an increase in amortization of intangible assets related to the computerization of the Bank;

• a drop of PLN 186 million, i.e. of 27.9% of the costs of contributions to the Bank Guarantee Fund (BGF) – these costs amounted to PLN 482 million, of which PLN 253 million accounted for a contribution to the mandatory bank restructuring fund (in 2020 BFG costs were at a level of PLN 668 million, of which PLN 318 million accounted for a contribution to the mandatory restructuring fund).

The effectiveness of operations of the PKO Bank Polski S.A. Group measured with the C/l ratio on an annual basis was 40.6% and improved by 0.3 p.p. y/y in consequence of the faster increase in the net income on business activities (3.9% y/y) than the increase in operating expenses (3.2% y/y).

Net write-downs and impairment

Net write-downs and impairment (in PLN million)

* includes the cost of legal risk related to mortgage loans in convertible currencies of PLN 6,552 million.

In 2021, net write-downs and impairment amounted to PLN -1,466 and were PLN 7,833 million more favourable compared with the same period of the prior year, which was due to the following items created in 2020:

– allowances on COVID-19 of PLN 1,224 million;

– cost of legal risk related to mortgage loans in convertible currencies of PLN 6,552 million.

In 2021 no costs of legal risk were incurred.

Net write-downs on non-financial assets amounted to PLN -46 million and were PLN 370 million more favourable than in the prior year, mainly due to write-downs on non-financial assets recognized in 2020, i.e. write-down on goodwill of Nordea Bank Polska S.A. (corporate CGU) of PLN -116 million, write-down on the value of shares of Bank Pocztowy S.A. of PLN -93 million, allowance on goodwill of PKO Leasing Pro S.A. of PLN -31 million, impairment of activated costs of acquisition of OFE Customers PLN -49 million and impairment of real estates of PLN -62 million.

The share of impaired loans amounted to 3.98% as at the end of 2021 (a 0.45 p.p. decrease compared with 2020).

At the end of 2021, the cost of risk amounted to 0.55% and was 0.23 p.p. lower than obtained in the same period of the prior year.

The Bank continues its conservative credit risk management policy of the Bank’s Group and strict monitoring of the receivables portfolio.

Cost of credit risk at the Bank’s Group	Quality of the Bank’s Group's loan portfolio

4.3 Consolidated statement of financial position

Main items of the Statement of financial position

Financing granted to Customers

Sources of financing operations

Amounts due to Customers

External financing

Main items of the Statement of financial position

As at the end of 2021 the PKO Bank’s Group total assets amounted to over PLN 418 billion and increased by approx. PLN 41 billion as of the beginning of the year. Thus, the PKO Bank’s Group reinforced its leading position in the Polish banking sector.

On the assets side, the Bank’s Group noted, among other things, an increase in financing granted to Customers and securities portfolio, and on the side of sources of finance the increase was determined mainly by the increase in the deposit base.

Structure of assets (in PLN billion)

Structure of equity and liabilities (in PLN billion)

Financing granted to customers

As at the end of 2021, financing granted to Customers by the Bank’s Group was PLN 247.6 billion which represents an increase of PLN 11.8 billion y/y.

The volume of retail and private banking loans increased by PLN 4.9 billion, including real estate loans by PLN 3.2 billion and consumer loans by PLN 1.7 billion.

In 2021 there was also an increase in corporate loans (PLN +5.4 billion) and loans for companies and enterprises (PLN +1.6 billion).

Retail and private banking loans were the main items in the structure of financing by type, with share of 58.2% of the portfolio as at the end of 2020.

Net financing granted to customers by type (PLN billion)

* including lease receivables and non-Treasury bonds (excluding held for trading)

Souces of financing operations

Structure of the sources of financing of the Bank’s Group operations

Structure of the financing of the Bank’s Group operations by currency

* including repo transactions

** including issues of securities, subordinated liabilities, loans and advances received

The PKO Bank Polski S.A. Group finances its operations from domestic and foreign sources which come from deposits (also on the interbank market), equity and financing from the wholesale market. The financing from the wholesale market includes liabilities in respect of issues of securities, subordinated liabilities and loans and advances received from monetary and non-monetary institutions. The main source of financing the Bank’ Group’s operations are Customer deposits, which represent 82% of all sources of finance.

The Group’s optimum financing structure enables the PKO Bank Polski S.A. Group to fully meet its investment objectives, including capital investments. The Bank’s Group mainly uses own funds from equity and securities’ issues to finance capital investments.

Amounts due to customers

Customer deposits constitute the basic source of financing the Bank’s Group’s assets. As at the end of 2021 amounts due to Customers reached PLN 322.3 billion, which is an increase of PLN 39.9 billion since the beginning of the year. The increase in the deposit base was partly due to an increase in all categories of amounts due to Customers: retail and private banking deposits (PLN +17.7 billion), corporate deposits (PLN +17.3 billion) and deposits from companies and enterprises (PLN +4.9 billion).

In the ageing structure of Customer deposits, the main items are current deposits whose share went up by 2.2 p.p. compared with the end of 2020 and amounted to 83.8%.

Structure of Customer deposits by type (in PLN billion)	Ageing structure of Customer deposits (in PLN billion)