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. The Bank’s Group stands out on the Polish market due to its high financial results, which ensure its stable and safe development.

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 financial 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) and the Czech Republic (Czech Branch) as well as through its subsidiaries in Ukraine. In 2020, PKO Bank Polski S.A. opened a branch in the Slovak Republic (Slovak Branch).

11 million

of the Bank’s Customers

5.2 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 (18.3%), in loans (17.6%) 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 through digital service channels and it is being transformed into a technological institution with a banking licence. Customers use iPKO and IKO as means of modern banking outside the traditional financial area. PKO Bank Polski S.A. was committed to the development of a modern approach to e-administration services based on state-of-the-art technologies. In 2018, PKO Bank Polski S.A. started on its path towards cloud computing with the help of a newly established company – Operator Chmury Krajowej sp. z o.o. Within the next three years the Bank’s IT systems 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. already support the Bank’s employees and Customers.

As at the end of 2020 the branch network of PKO Bank Polski S.A. was the largest such network in Poland and covered 1 004 outlets (i.e. Branches, offices and centres) and 492 agencies. The Customers of PKO Bank Polski S.A. have at their disposal a highly developed network of ATMs (which as at the end of 2020 comprised three thousand ATMs).

The PKO Bank Polski S.A. Group is one of the largest and best assessed employers in Poland. As at the end of 2020, the PKO Bank Polski S.A. Group employed 25.9 thousand FTEs.

The PKO Bank Polski S.A. Group between 2016 and 2020

	2020	2019	2018	2017	2016
Statement of financial position (in PLN million)
Total assets	376,966	347,897	324,255	296,912	285,573
Total equity	39,911	41,578	39,101	36,256	32,569
Financing granted to Customers	235,781	244,083	230,438	214,361	208,987
Customer deposits	282,356	256,170	238,723	217,306	200,404
Net profit/loss	-2,557	4,031	3,741	3,104	2,874
Financial ratios
Net ROA	-0.7%	1.2%	1.2%	1.1%	1.1%
Net ROE	-6.0%	10.0%	10.0%	9.0%	9.1%
Net ROTE	-6.5%	10.9%	11.0%	10.0%	10.2%
C/I1)	41.0%	41.3%	44.2%	46.0%	47.4%
Interest margin	3.0%	3.4%	3.4%	3.3%	3.2%
Share of impaired exposures	4.4%	4.3%	4.9%	5.5%	5.9%
Cost of credit risk	0.78%	0.46%	0.59%	0.71%	0.75%
Total capital ratio	18.18%	19.88%	18.88%	17.37%	15.81%
Number of Customers of PKO Bank Polski S.A. (in thousands), including:	11,006	10,933	10,653	10,330	10,080
Individuals (in thousands)	10,463	10,427	10,179	9,877	9,648
Companies and enterprises (in thousands)	526	491	459	438	418
Corporate Customers (in thousands)	16	16	15	15	15
Operational data
Number of branches of PKO Bank Polski S.A.	1,004	1,115	1,155	1,194	1,238
Number of employees (in FTEs)	25,859	27,708	27,856	28,443	29,163
Number of current accounts with the Bank (in thousands)	8,257	8,012	7,697	7,362	7,034
Information on shares
Stock exchange capitalization (in PLN million)	35,900	43,075	49,338	55,388	35,175
Number of shares (in million)	1,250	1,250	1,250	1,250	1,250
Share price (in PLN)	28.72	34.46	39.47	44.31	28.14
Dividend per share (in PLN) (paid in the current year from profit for the preceding years)	0.00	1.33	0.55	0.00	0.00
1) Data for the years 2016-2018 does not take into account presentation changes made in 2020 which could have 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 formed the second foreign branch – the corporate branch in Prague (the Czech Republic) and in Bratislava (the Slovak Republic). The Slovak branch started operating in 2021.

1.3 Main events and financial results achieved in 2020

The PKO Bank Polski S.A. Group’s functioning during the pandemic

In March 2020, the World Health Organization announced the outbreak of the COVID-19 pandemic. A state of epidemic threat was introduced in Poland, and then a state of epidemic. The effect of the pandemic was the freezing of the economy. State institutions implemented amendments to laws in order to restrict the spread of the virus and state aid packages for enterprises and individuals. The Monetary Policy Council (MPC) lowered interest rates and the mandatory reserve, capital requirements for banks were also reduced. The Polish Financial Supervision Authority (PFSA) recommended that banks not pay out dividend. After the slowdown of the pandemic in vacation time and the resumption of business activities, in the fourth quarter of 2020 the number of infected people increased and restrictions were once again introduced in many industries.

The PKO Bank Polski S.A. Group engaged in battling the pandemic from the very start. Many actions were taken to ensure the uninterrupted functioning and safety of the Customers and employees. The Group also supported local and countrywide actions. The digital transformation strategy pursued by PKO Bank Polski S.A. facilitated operations in the conditions of the coronavirus pandemic.

The Bank’s Group:

• supported hospitals and the medical personnel throughout Poland – in total, it transferred over PLN 23 million for fighting the pandemic. This comprised, among other things, donations to hospitals, purchasing tests for the presence of the virus and on virus protection measures, as well as provision of vehicles for medical facilities, sanitary and military services; employees participated in development and implentation countrywide vaccination reservation system;

• actively engaged in saving enterprises and the jobs they create; offered moratoria on loan and lease repayments; and introduced fast and simplified decision-making paths;

• supported Customers by making available to them state aid programmes under the so-called Anti-crisis Shields using instruments of Polski Fundusz Rozwoju S.A. (Polish Development Fund) (PFR) and guarantee programmes and State co-financing through Bank Gospodarstwa Krajowego (BGK);

– PKO Bank Polski S.A. engaged in work on the distribution system for the subsidies from PFR for micro-, small- and medium-sized enterprises via electronic banking; the Bank also organized issues of PFR bonds which enabled financing the programme. PKO Bank Polski S.A. is the sole bank which services liquidity and preferential loans under the PFR Financial Shield for large enterprises;

– PKO Bank Polski S.A. had the largest share in the distribution of subsidies from the PFR Financial Shield1.0 for micro-, small- and medium-sized enterprises. Subsidies totalling PLN 10.5 billion were transferred via the Bank. The subsidies were received by approx. 67 thousand enterprises which employ over 0.5 million staff;

• Introduced organizational solutions and tools which enable performing work remotely, facilitate communication with Customers and ensure their smooth service;

• Accelerated digitization and developed remote channels which allows the Customers easier access to the services offered.

During the lockdown, the bank maintained full accessibility of service for customers via the Contact Center and the largest network of own ATMs, which allowed for ensuring comfort in banking.

The Bank’s Group conducted operations related to the improvement of cost-effectiveness and protection of the quality of the credit portfolio. The liquidity ratios of PKO Bank Polski S.A., both on a separate and consolidated basis, remained at safe levels, with a strong capital base.

PKO Bank Polski S.A. as the European leader of digital banking

PKO Bank Polski S.A. won the Finnoscore 2020 ranking and became the European leader of digital banking. It was rated highly in the following categories: online banking, social media, mobile application, omnichannel communication and innovation strategy. The leading position in the ranking is due among other things to the Bank’s strategy which is based on digital transformation.

300 criteria in 12 selected segments were examined. 200 banks from 26 European and North American countries were analysed.

PKO Bank Polski S.A. accedes to the European Payments Initiative

PKO Bank Polski S.A., as the only bank from Poland, acceded to the European Payments Initiative (EPI). EPI is an alliance of leading European banks aimed at building the European payments system with its own cards for consumers and companies, a digital wallet, immediate payments and transfers over the phone. EPI will support European public institutions by creating a European payments solution.

Development of services and tools, including those supporting operations during the pandemic

The Group developed remote services offered:

• The number of active IKO applications provided to Customers by the Bank reached a record high of 5.2 million on the Polish banking market.

• The Bank jointly with PKO Leasing S.A. and Prime Car Management S.A. launched the Automarket.pl platform which ensures the safe purchase of new and second-hand cars with a documented mileage.

• A personal account may be opened in the IKO mobile application using a selfie, and a company account with simultaneous registration of the business with the Central Registration and Information on Business (CEIDG). The application also allows checking the balance of an account with another bank and the use of services of a voice assistant.

• The Bank prepared a sales model for elderly Customers and for persons who had never used electronic channels for banking services. The model included educating the Customer in using the intuitive application, and adapted sales processes in branches so as to enable Customers to sign contracts with the assistance of an advisor for cash loans, a current account overdraft or a credit card directly in IKO, without the need to print the documents.

• KREDOBANK S.A., basing on PKO Bank Polski S.A.’s experience, as the first bank on the Ukrainian market, implemented a video advisor solution. The “Online Video Consultant” service is based on the infrastructure of Operator Chmury Krajowej sp. z o.o.

• The Bank introduced the option to remotely activate the travel voucher, and to open an investment account totally online using the e-Podpis (e-signature) service mSzafir (iPKO).

• The Bank launched its first cloud applications. Within the project for building its Future Service Points, it virtualized working stations in retail branches. The Project is being performed in cooperation with Operator Chmury Krajowej sp. z o.o.

New term of office of the Bank’s Management and Supervisory Boards

In May 2020 the Bank’s Supervisory Board appointed the former members of the Management Board for another joint term of office, which included appointing Mr Zbigniew Jagiełło to the position of President of the Management Board.

In August 2020 the Bank’s Ordinary General Shareholders’ Meeting appointed ten members of the Bank’s Supervisory Board for a new joint term of office, which included appointing seven of its former members. The former Secretary of the Supervisory Board – Mr Zbigniew Hajłasz – was appointed Chairman of the Supervisory Board.

Record year for the Bank’s Brokerage Office

The year 2020 was a record year for the Brokerage Office of PKO Bank Polski (the Bank’s Brokerage Office). Turnover on the secondary market of shares reached PLN 72.6 billion, which accounted for 11.2% of the market turnover, and placed the Brokerage Office in the leading position in the ranking of brokerage offices.

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

As at the end of 2020, PKO Towarzystwo Funduszy Inwestycyjnych S.A., after completing the three stages of creating the Employee Capital Plans (PPK), remained the leader in terms of managed assets. As at the end of 2020, the total number of contracts for asset management was 18,970, including 1,384 contracts with enterprises employing 250 and more staff. On the PPK accounts managed by the Company there were assets worth PLN 962 million, which comprised 41.1% of all assets serviced by investment fund management companies and 34.1% of all PPK market assets.

Financial results

Recognition of the costs of legal risk of mortgage loans in convertible currencies, the COVID-19 pandemic and reductions in interest rates by the MPC had a significant effect on the results achieved by the PKO Bank Polski S.A. Group in 2020.

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

	2020	2019	Change (y/y)
Net profit/loss	-2,557	4,031	-163.4%
Net interest income	10,346	10,290	+0.5%
Net fee and commission income	3,904	3,731	+4.6%
Result on business activities	14,604	14,579	+0.2%
Operating expenses	-5,983	-6,021	-0.6%
Tax on certain financial institutions	-1,055	-1,022	+3.2%
Net allowances and impairment	-9,277	-1,748	+430.9%
Total assets	376,966	347,897	+8.4%
Total equity	39,911	41,578	-4.0%
Net ROE	-6.0%	10.0%	-16.0 p.p.
Net ROTE	-6.5%	10.9%	-17.4 p.p.
Net ROA	-0.7%	1.2%	-1.9 p.p.
C/I (cost to income ratio)	41.0%	41.3%	-0.3 p.p.
Interest margin	3.03%	3.41%	-0.38 p.p.
Share of impaired exposures	4.4%	4.3%	+0.1 p.p.
Cost of credit risk	0.78%	0.46%	+0.32 p.p.
Total capital ratio	18.18%	19.88%	-1.70 p.p.
Common equity Tier 1 (CET1)	16.99%	18.61%	-1.62 p.p.

In 2020 the PKO Bank Polski S.A. Group incurred net loss of PLN -2 557 million, which is a drop in its results of PLN 6 588 million y/y. The negative change in the net result was caused by a combination of the following factors:

1) material deterioration in net write-downs and impairment of PLN 7 530 million as a result of:

• an increase in the legal risk of mortgage loans in convertible currencies of PLN 6 101 million, which was reflected in the decision of the Extraordinary General Shareholders’ Meeting held on 23 April 2021 relating to concluding settlement agreements with Customers;

• deterioration in net write-downs for expected credit losses of PLN 1 147 million, mainly resulting from COVID-19-related write-downs;

• deterioration of net impairment of non-financial assets of PLN 282 million.

2) improvement in the result on business activities which amounted to PLN 14 604 million (0.2% y/y), mainly due to:

• an increase in net fee and commission income of 4.6% y/y caused by an increase in net income on margins on foreign exchange transactions and by an increase in net loans, insurance and operating lease income;

• Increase in volumes (deposits, debt securities) and increase in revenues from hedge accounting, what partly compensated negative impact of fall in interest rates on net interest income.

3) a drop in operating expenses of 0.6% y/y, mainly costs of employee benefits;

In 2020 the scale of the Bank's Group's operations increased significantly:

• total assets reached the level of almost PLN 377 billion (+PLN 29 billion y/y);

• amounts due to Customers increased to PLN 282 billion (+PLN 26 billion y/y).

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.

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.

The Bank’s (consolidated) financial goals defined 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.

Pursuit of the Strategy

The financial goals set out in the Strategy for 2022 remain under strong pressure from the pandemic and changes in the economic and regulatory environment, among other things, a drop in interest rates, limited demand for loans, increase in the legal risk of foreign currency mortgage loans. Despite functioning in a more difficult economic environment, in 2020 PKO Bank Polski S.A. maintained strict cost discipline and operating effectiveness, and had a strong equity position.

The Bank’s efficiency in reacting to the challenges related to the COVID-19 pandemic reflects the speed and scope of implementations made in 2020 in three areas of priority.

1. Accelerating digital sales.

• Remote Advisor – implementing remote support in the sales of banking products thanks to the reverse virtualization processes and assisted sales.

• A “selfie” account – implementing a fully remote checking account process in the IKO mobile application using remote verification using a “selfie”.

• New stage of iPKO – a single transaction service irrespective of the hardware used by the Customer (responsive – adapted to different monitor sizes).

• A new cash loan process in IKO – implementing a standard cash lending process in IKO, available to all of the Bank’s Customers and implementing a new remote cash loan sales process to Customers without a relationship with the Bank.

• A new PKO Zero Account for mobile (Konto za Zero dla mobilnych) – an offer of an account aimed at acquiring Customers aged 25-45 who use the Bank’s services remotely.

• A new company account for start-ups and small and medium enterprises – the possibility of opening an account online (iPKO, IKO), for those who are planning to start business operations, opening and simultaneous registration of the company in CEIDG with one application.

• Investment account with iPKO – possibility of opening an account remotely thanks to a qualified electronic signature.

• Aggregation of accounts within the open banking system (implemented with respect to seven banks: BNP Paribas, Millennium, Pekao, mBank, Santander, Alior and T-Mobile Usługi Bankowe).

• Making available Autenti services/implementing “mSzafir” – to enable the remote signing of documents.

• Cards with a multicurrency function for entrepreneurs – possibility to make foreign currency payments directly from a foreign currency account.

• Developing the iPKO business function, including “Superwniosek zdalny” – possibility of submitting remote applications for over 25 different orders (among other things, cash management, ordering cards, opening auxiliary accounts, access to the Internet currency exchange desk).

• Lending solutions related to the coronavirus pandemic – credit holidays for Customers and an option to apply remotely for aid packages (under the State Financial Shield).

2. Increase in revenues.

• Launching the New Insurance Speed project (Nowa Prędkość Ubezpieczeń) – expanding the insurance offer and sales model.

• Enabling the conclusion of life insurance contracts with respect to loans and mortgage loans online using the Autenti platform.

• Sales of motor insurance policies in iPKO and IKO – an offer of motor insurance in the Internet service and mobile application of the Bank.

• PKO Inwestomat for Private Banking Customers – enables integrating Customer services in branches and through the remote channel.

• New functions of e-Kantor (e-currency exchange desk) – purchasing currencies in the Internet currency exchange desk using the BLIK code and the possibility of exchanging currencies in Bank accounts to PLN directly from accounts with other banks (using PSD2).

• Marketplace for the automotive platform Automarket – implementing the first Internet platform for purchasing cars in Poland.

3. Operating effectiveness.

• Using Artificial Intelligence (AI) in banking processes and tools:

– development of the voice assistant in IKO;

– improving the efficiency servicing and sales processes – among other things – implementing the information both on the helpline, which helps Customers during the coronavirus pandemic, and tools facilitating sales of cash loans;

– supporting the soft debt collection process;

• Implementing touchscreens in consecutive branches; making available new functions and educating Customers to use digital channels.

• The Road2Cloud Project:

– Strategic partnership of Operator Chmury Krajowej sp. z o.o. with Microsoft – expanding the Bank’s offer by cloud solutions, among other things with respect to the network infrastructure services, databases, analytics, AI and the Internet of Things (IoT);

– Transferring the first seven banking applications to the cloud,

– Virtualization and assurance of a flexible work environment in the branches,

– Automation of test environments for initiatives in which the Bank engages;

– Implementing the Microsoft Teams application that enables remote communication for thousands of employees.

In the coming years, PKO Bank Polski S.A. will follow its path of digital transformation. It will focus in particular on the following areas and activities:

• 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.

The Bank will also continue searching for sources of recovering revenues. In particular, it will implement new innovative services and products while continuing to ensure cost discipline and operating effectiveness (C/I), a stable and safe capital base (TCR, CET1) and an optimal level of the cost of risk. The pandemic and changes in the market environment will result in a review of the financial goals defined for 2022.

1.5 The PKO Bank Polski S.A. Group Market Position

In 2020, the Bank’s Group:

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

• maintained its position on the savings market, both for individuals and institutional entities;

• maintained its position as leader on the market of investment funds for individuals.

Table 2. Market shares

	31.12.2020	31.12.2019	31.12.2018	31.12.2017	31.12.2016	Change 2020/2019
Loans for:	17.6%	17.9%	17.6%	17.7%	17.8%	-0.3 p.p.
private individuals, of which:	22.4%	22.8%	22.9%	23.0%	22.8%	-0.4 p.p.
housing	24.9%	25.8%	26.1%	26.1%	25.7%	-0.9 p.p.
PLN	26.3%	27.6%	28.3%	28.6%	28.6%	-1.3 p.p.
foreign currency	20.8%	21.0%	21.0%	21.2%	21.4%	-0.2 p.p.
consumer and other, of which:	16.5%	16.3%	15.8%	15.9%	15.8%	0.2 p.p.
in current account	32.7%	32.4%	32.1%	32.0%	32.6%	0.3 p.p.
institutional entities	12.6%	13.1%	12.7%	12.8%	12.9%	-0.5 p.p.
Non-Treasury debt securities (indebtedness)	30.2%	30.7%	32.4%	29.3%	29.2%	-0.5 p.p.
Mortgage loans (sales)	19.7%	25.7%	28.9%	29.6%	31.9%	-6 p.p.
Total savings1)	18.3%	18.3%	18.4%	17.3%	16.1%	0 p.p.
savings of individuals2)	24.3%	22.6%	22.0%	21.1%	20.7%	1.7 p.p.
Deposits:	17.3%	17.9%	18.1%	17.9%	17.3%	-0.6 p.p.
private individuals	21.9%	20.8%	20.2%	20.4%	20.7%	1.1 p.p.
institutional entities	11.5%	13.8%	15.2%	14.5%	12.4%	-2.3 p.p.
TFI assets - funds of individuals	19.2%	19.6%	21.6%	17.1%	14.2%	-0.4 p.p.
Brokerage activities - transactions on secondary market3)	11.2%	7.5%	7.7%	14.7%	9.4%	3.7 p.p.
Source: NBP, WSE, ZBP, Analizy Online 1) Total savings comprise total deposits, TFI assets and retail savings bonds. 2) Savings of individuals comprise deposits of individuals, funds of individuals and Treasury savings bonds. 3) In 2017, taking into account the effect of intermediation in the sales of Pekao S.A. shares. After eliminating this effect, the share of brokerage activities in turnover on the secondary market would amount to 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 2021

2.1 Macroeconomic environment

Macroeconomic factors which shaped the national economy in 2020:

Recession caused by the outbreak of the pandemic and the fast rebound

In 2020 economic processes were determined by the pandemic and the scope of pandemic restrictions. The crisis the pandemic caused led to a decrease in GDP of -2.7% during the year for the first time since the transformation. The highest drop in GDP took place in Q2 (8.4% y/y, accompanied by a two-digit drop in consumption and investments), in Q3 a rapid increase in activity took place (GDP: -1.5% y/y and +7.9% q/q) achieved thanks to the discontinuation of restrictions. The lack of material restrictions allowed the “unfreezing” of consumer demand (individual consumption increased by 0.4% y/y) and reinstated the functioning of international added value chains which translated into the regrowth of exports. The pandemic did not stop the expansion of Polish exporters. Exports grew throughout the second half of 2020, and Poland’s share in the European trade grew systematically. The clear increase in coronavirus infections in Q4 and the reintroduction of anti-epidemic restrictions once again led to limiting business activities, but to a lesser degree than in spring. GDP dropped by 0.7% q/q sa and 2.8% y/y. At the end of the year a clear rift was visible between the very good condition of the industrial sector and the distinctly worse condition of services. The crisis caused by the pandemic which encompassed nearly the whole economy in spring, covered selected branches at the end of the year, mainly the travel, accommodation, catering and culture sectors.

Labour market protected by shields

The labour market’s reaction to the recession caused by the pandemic was measurably limited by the Anti-Crisis Shield introduced by the government in cooperation with the National Bank of Poland (NBP) and the Financial Shield provided by PFR. The shields offered the possibility of asking employees to be on standby, shortening working hours (with additional payment towards salary), and conditioned the scale of non-reimbursable aid on maintaining stable employment. In effect, despite the significant drop in business activity the unemployment rate increased only slightly and it stabilized at 6.2% (5.2% as at the end of 2019), after a higher than the seasonal benchmark increase in the number of unemployed in spring (of 120 thousand in Q2). Average employment in the enterprise sector dropped to a minimum in June when it was 3.3% lower y/y. Employment data accounted for, among other things, the option used by employers to temporarily reduce the number of working hours. In effect the scale of decrease in the number of persons employed (and in consequence the increase in unemployment) was much lower. In further months the drop in employment was smaller, in December the number of FTEs was 1.0% lower than in the corresponding period of the previous year. The strategy of maintaining the employment level despite the drop in demand adopted by companies had a negative impact on the rate of growth of remuneration – the average salary in the industry sector grew by 5.4% y/y in Q4 – approx. 1.5 p.p. slower than before the outbreak of the pandemic.

Slow drop in inflation

Despite the unprecedented scale of economic slowdown, throughout the year CPI inflation exceeded the NBP target inflation rate and only dropped to 2.4% y/y in December compared with 3.4% y/y at the end of 2019 and 4.7% in the peak period in February 2020. Base inflation, after eliminating food and energy prices, increased almost throughout the year and amounted to 4.3% y/y in November. In December it fell to 3.7% y/y compared with 3.1% y/y at the end of 2019. The increase in base inflation reflected the increase in administered prices and higher prices of services connected, among other things, with transferring costs of anti-epidemic actions to consumers. The form of inflation processes (persistently high base inflation despite the disinflationary environment, low fuel prices and dropping food prices) is what makes Poland different from the Euro Area, where they were also fighting deflation.

Public finances in a good shape before the outbreak of the pandemic

Polish public finance entered the crisis in good condition compared to other EU countries, and Poland responded with one of the largest direct fiscal packages in Europe, the implementation of which forced amendments to the Budget Act (in place of a balanced budget, a deficit of PLN 109.3 billion was planned). The anti-crisis actions and the cyclic decrease in income increased the fiscal deficit (ESA) in 2020 to 6.9% of GDP from 0.7% in 2019. In this context, the State budget results (for the year) and local government budget results came as a positive surprise. Estimated data shows that the budget deficit was PLN 85 billion, and the excess amount in local government budgets was PLN 5.6 billion and was PLN 7.3 billion higher than in 2019 (to the cost of capital expenditure made by local governments which dropped by 5% y/y). In 2020 public debt (ESA) was 57.5% of GDP.

Anti-crisis actions of the Central Bank

During the pandemic, in coordination with fiscal actions, the Monetary Policy Council (MPC) significantly reduced interest rates. The NBP also implemented additional tools supporting the economy. The reference rate was reduced three times, by 140 bp. in total, to a new historical minimum of 0.1%. Among the remaining tools, the introduction of the option to repurchase Treasury bonds and securities guaranteed by the State Treasury on the secondary market had the largest impact on the economy. Under the QE programme, by the end of 2020, the NBP repurchased bonds (issued by the State Treasury, PFR and BGK) with a value of PLN 107 billion (including PLN 3.2 billion in Q4). As of June, in the communiques following the meetings of the MPC, the opinion prevailed that the lack of strong reaction of the foreign exchange rate to the crisis caused by the pandemic and quantitative easement restricts economic revival. The currency interventions conducted in the second half of December (for the first time since 2010) which led to the weakening of the PLN confirm the fact that the NBP prefers a weaker zloty. According to NBP estimations the anti-crisis actions conducted by the NBP limited the scale of the drop in GDP in 2020, and in 2021 the scale of their positive impact on the economy will grow to 1.1 p.p.

2.2 Situation on the financial market

Interest rate market

In 2020 returns on Polish Treasury bonds dropped significantly – 2-year by 99 b.p. to 0.05%, and 10-year by 88 b.p. to 1.24%. The factors that led to the decrease in returns were the anti-crisis actions of the Central Bank described above. The global increase in liquidity of the financial systems as a result of quantitative easement by key central banks throughout the world also had an impact on the drops in returns on bonds. The construction of the so-called bank tax contributed to the high demand for Treasury bonds on the part of domestic banks.

Currency Market

In 2020 the zloty weakened against the euro. The deterioration in the exchange rate of the Polish currency was the result of the global economic crisis which caused the flow of capital from emerging markets to safe havens. The reductions in the NBP interest rates did not contribute to the value of the PLN either. After accounting for inflation which exceeded 3% the rates remained deeply negative in real terms. This discouraged foreign investors from maintaining short-term financial assets denominated in the Polish currency in their portfolios, thus reducing demand for them. At the end of the year the zloty showed a tendency to appreciate due to the global improvement of investor sentiments accompanying the better perspectives of the global and Polish economy. In effect, in December the NBP decided to intervene to weaken the zloty for the first time since 2010.

Stock Market

The main index on the Warsaw Stock Exchange – WIG – ended the year with a 1% drop. The deep drop from the first quarter was fully compensated in the further part of the year. After a period of panic selling which led to a 36% drop in the index on 12 March compared with the beginning of the year, investors saw that the condition of the economy and of the companies traded on the Warsaw Stock Exchange (WSE) should gradually improve thanks to the decisive anti-crisis actions of the government and the Central Banks. Stock exchanges were supported in particular by the monetary policy. Extremely low interest rates, negative if inflation was to be accounted for, discouraged investors from keeping funds in bank accounts and bonds, causing savings to move to riskier assets, including stocks. The results of particular industries were not affected to the same degree by the pandemic. The financial sector was affected rather more, which is reflected in the prices of the banks’ shares.

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.)

The information does not take into account the loss of PKO Bank Polski S.A. which arose as a result of the decision of the Extraordinary General Shareholders’ Meeting held on 23 April 2021 to conclude settlement agreements with Customers.

In 2020 the impact of the pandemic on the banking sector was reflected by the significant drop in net profit (-48% y/y) and the return on equity (ROE decreased to 3.2% from 6.7% in 2019).

Net interest income dropped y/y – mainly in consequence of the MPC’s reductions in interest rates. Tightening of credit policies by banks and deteriorating consumer sentiments also had a negative impact on net interest income, causing a drop in demand for loans. The drop in the result of the banking sector was further deepened by the provisions for the legal risk of foreign currency housing loans and growing costs of risk. Despite the fact that the quality of the loan portfolio has not deteriorated suddenly since the beginning of the year (an increase in the share of stage 3 loans in the total loan portfolio of 0.2 p.p.), banks increased write-downs taking into consideration the less favourable macroeconomic forecasts and smaller possibilities of accurately forecasting losses. Against the background of deteriorating results in the banking sector the net commission income was a positive feature. It increased thanks to the larger number of transactions performed by customers (mainly in the area of brokerage activities and Forex transactions) and in connection with the changes in the fee and commission tariffs (mainly in the corporate segment).

The capital position of banks was good. The total capital ratio was 21%. The revoking of the obligation to use the systemic risk buffer (3%) had a positive impact on capital adequacy.

The change in net commission income and the result on other business activities – estimation of PKO Bank Polski S.A. The PFSA does not adjust retroactively the manner of presenting results by banks. In 2020 two banks in the banking sector reclassified some of their income statement items. To ensure comparability, data for 2019 was adjusted.

In December 2020 one of the commercial banks was subjected to compulsory resolution, which should have a positive effect on the stability of the banking sector.

Loan and deposit market

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