Financial statements of PKO Bank Polski S.A. for the year ended 31 December 2020

This document is a translation of a document originally issued in Polish. The only binding version is the original Polish version.

SELECTED FINANCIAL DATA DERIVED FROM THE FINANCIAL STATEMENTS

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	2020	2019	2020	2019
Net interest income/(expense)	9 184	9 290	2 053	2 157
Net fee and commission income	3 101	2 828	693	574
Profit/(loss) before tax	(2 266)	5 118	(506)	1 190
Net profit/(loss)	(2 944)	3 835	(658)	891
Earnings per share for the period - basic (in PLN/EUR)	(2,36)	3,07	(0,53)	0,71
Earnings per share for the period - diluted (in PLN/EUR)	(2,36)	3,07	(0,53)	0,71
Total net comprehensive income	(1 835)	3 826	(410)	889
Total net cash flows	(8 867)	(12 031)	(1 982)	(2 797)

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	31.12.2020	31.12.2019	31.12.2020	31.12.2019
Total assets	345 027	316 978	74 765	74 434
Total equity	38 577	40 412	8 359	9 490
Share capital	1 250	1 250	271	294
Number of shares (in million)	1 250	1 250	1 250	1 250
Book value per share (in PLN/EUR)	30,86	32,33	6,69	7,59
Diluted number of shares (in million)	1 250	1 250	1 250	1 250
Diluted book value per share (in PLN/EUR)	30,86	32,33	6,69	7,59
Total capital adequacy ratio	19,78%	22,21%	19,78%	22,21%
Tier 1	37 564	38 606	8 140	9 066
Tier 2	2 700	2 700	585	634

SELECTED FINANCIAL STATEMENT ITEMS HAVE BEEN TRANSLATED INTO EUR AT THE FOLLOWING RATES	from 01.01.2020 to 31.12.2020	from 01.01.2019 to 31.12.2019
arithmetic mean of NBP exchange rates at the end of a month (income statement, statement of comprehensive income and cash flow statement items)	4,4742	4,3018
	31.12.2020	31.12.2019
NBP mid exchange rates at the date indicated (statement of financial position items)	4,6148	4,2585

TABLE OF CONTENTS

INCOME STATEMENT

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

CASH FLOW STATEMENT

General information about the bank

1. business activities of the bank

2. Changes to companies comprising the Group

3. Information on members of the Supervisory and Management Boards

4. Approval of the financial statements

5. Impact of the COVID-19 pandemic on the Bank’s operations

Accounting policies adopted to prepare the financial statements

6. Basis of preparation of the financial statements

7. Statement of compliance

8. Going concern

9. Management Representation

10. New standards and interpretations and their amendments

11. Description of significant accounting policies

11.1. currency, presentation currency and foreign currencies

11.2. Accounting for transactions

11.3. Derecognition of financial instruments from the statement of financial position

11.4. The principles for classification of financial instruments

11.5. financial assets measured at amortized cost

11.6. Financial assets measured at fair value through other comprehensive income

11.7. Financial assets measured at fair value through profit or loss

11.8. Equity instruments

11.9. Reclassification of financial assets

11.10. Modifications – Changes in contractual cash flows

11.11. Measurement of purchased or originated credit impaired financial assets (POCI)

11.12. Measurement of financial liabilities

12. Changes in the accounting policies applicable from 1 January 2020 and Explanation of the differences between previously published financial statements and these financial statements

NOTES TO THE FINANCIAL STATEMENTS

13. Interest income and expense

14. Fee and commission income and expenses

15. Dividend income

16. Gains/(losses) on financial transactions

17. foreign exchange gains/(losses)

18. Gains/(losses) on derecognition of financial instruments

19. Other operating income and expenses

20. Net expected credit losses

21. net Impairment of non-financial assets

22. Cost of the legal risk of mortgage loans in convertible currencies

23. Administrative expenses

24. Tax on certain financial institutions

25. Income tax expense

26. Cash and balances with the Central Bank

27. Amounts due from banks

28. Hedge accounting

30. Securities

30.1. securities – financial assets by stage

30.2. securities - Changes in the gross carrying amount during the period

30.3. securities - Changes in allowances for expected credit losses in the period

31. Repo and reverse repo transactions

32. Loans and advances to customers

32.1 Loans and advances to customers - financial assets by stage

32.2 Loans and advances to customers – changes in the gross carrying amount

32.3 Changes in allowances for expected credit losses in the period

33. Intangible assets, property, plant and equipment

33.1. property, plant and equipment

33.2. intangible assets

34. Assets held for sale

35. Investments in subsidiaries, associates and joint ventures

36. other assets

37. Amounts due to the Central Bank and banks

38. Amounts due to customers

39. Financing received

39.1 Loans and advances received

39.2 debt securities in issue

39.3 subordinated liabilities

40. Other liabilities

41. Provisions

42. Equity and shareholding structure of the Bank

43. Dividend and profit appropriation

44. Leases

45. Contingent liabilities and off-balance sheet liabilities received and granted

46. legal claims

47. Notes to the cash flow statement

48. Transactions with the State Treasury and related parties

49. Benefits for the PKO Bank Polski S.A. key management

50. Fair value hierarchy

51. Financial assets and financial liabilities not presented at fair value in the statement of financial position

52. Offsetting financial assets and financial liabilities

53. Assets pledged as collateral for liabilities and transferred financial assets

54. Financial assets and liabilities by currency

55. Contractual cash flows from the Bank’s financial liabilities, including derivative financial instruments

56. Current and non-current assets and liabilities

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

57. Risk management in the Bank

58. Specific risk management measures undertaken by the Bank in 2020

59. Credit risk management

60. Credit risk – financial information

61. Managing credit concentration risk in the Bank

62. Collateral

63. Forbearance practices

64. Exposure to the counterparty credit risk

65. Management of currency risk associated with mortgage loans for individuals

66. Interest rate risk management

67. Currency risk management

68. Liquidity risk management

69. Capital adequacy

70. Leverage ratio

71. Information on package sale of receivables

OTHER NOTES

72. Fiduciary activities

73. Information on the entity authorized to audit the financial statements

74. Subsequent events

INCOME STATEMENT

RACHUNEK ZYSKÓW I STRAT	Note	2020	2019 converted
Net interest income/(expense)	13	9 184	9 290
Interest income		10 332	11 235
of which calculated under the effective interest rate method		8 934	9 713
Interest expenses		(1 148)	(1 945)
Net fee and commission income	14	3 101	2 828
Fee and commission income		4 099	3 900
Fee and commission expense		(998)	(1 072)
Other net income		433	668
Dividend income	15	332	561
Gains/(losses) on financial transactions	16	(106)	186
of which due to impact of macroeconomic variables on the loan portfolio		(48)	-
Foreign exchange gains/ (losses)	17	133	106
Gains/(losses) on derecognition of financial instruments	18	162	143
of which measured at amortized cost		(24)	(12)
Net other operating income and expense	19	(88)	(328)
Result on business activities		12 718	12 786
Net expected credit losses	20	(1 939)	(1 009)
of which due to impact of macroeconomic variables on the loan portfolio		(1 076)	-
Impairment of non-financial assets	21	(356)	(40)
Cost of the legal risk of mortgage loans in convertible currencies	22	(6 552)	(451)
Administrative expenses	23	(5 180)	(5 237)
of which net regulatory charges		(730)	(492)
Tax on certain financial institutions	24	(957)	(931)
Profit/(loss) before tax		(2 266)	5 118
Income tax expense	25	(678)	(1 283)
Net profit/(loss)		(2 944)	3 835

Earnings per share
– basic earnings per share for the period (PLN)		(2,36)	3,07
– diluted earnings per share for the period (PLN)		(2,36)	3,07
Weighted average number of ordinary shares during the period (in million)*		1 250	1 250

*In 2020 and in 2019 there were no instruments diluting earnings per share. Therefore, the value of diluted aernings per share corresponds with the value of basic earnings per share fot the periods.

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME	Note	2020	2019
Net profit/(loss)		(2 944)	3 835
Other comprehensive income		1 109	(9)
Items which may be reclassified to profit or loss		1 114	(4)
Cash flow hedges (net)		224	113
Cash flow hedges (gross)	28	276	139
Deferred income tax	25,28	(52)	(26)
Fair value of financial assets measured at fair value through other comprehensive income (net)		890	(117)
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		1 283	12
Gains /losses transferred to the profit or loss (on disposal)		(186)	(155)
Deferred income tax	25	(207)	26
Items which cannot be reclassified to profit or loss		(5)	(5)
Actuarial gains and losses (net)		(5)	(5)
Actuarial gains and losses (gross)		(6)	(7)
Deferred income tax	25	1	2

Total net comprehensive income		(1 835)	3 826

STATEMENT OF FINANCIAL POSITION

	Note	31.12.2020	31.12.2019 restated	01.01.2019 restated*
ASSETS		345 027	316 978	301 187
Cash and balances with Central Bank	26	7 397	14 602	22 862
Amounts due from banks	27	5 304	7 953	11 213
Hedging derivatives	28	618	594	592
Other derivative instruments	29	5 416	2 798	1 909
Securities	30	119 973	76 422	60 439
Reverse repo transactions	31	-	1 081	51
Loans and advances to customers	32	193 063	200 867	191 524
Property, plant and equipment	33.1	2 737	2 738	2 860
Non-current assets held for sale	34	124	9	8
Intangible assets	33.2	2 737	2 606	2 595
Investments in subsidiaries	35	3 612	3 650	3 304
Investments in associates and joint ventures	35	257	344	284
Deferred income tax assets	25	1 806	1 290	1 232
Other assets	36	1 983	2 024	2 314

		31.12.2020	31.12.2019 restated	01.01.2019 restated *
LIABILITIES AND EQUITY		345 027	316 978	301 187
Liabilities		306 450	276 566	262 938
Amounts due to the Central Bank	37	-	-	7
Amounts due to banks	37	2 583	1 976	1 591
Hedging derivatives	28	543	668	560
Other derivative instruments	29	6 632	2 927	2 657
Repo transactions	31	47	46	45
Amounts due to customers	38	278 894	252 943	236 329
Loans and advances received	39	4 906	5 026	8 839
Debt securities in issue	39	4 020	4 769	5 367
Subordinated liabilities	39	2 716	2 730	2 731
Other liabilities	40	4 464	4 517	3 989
Current income tax liabilities		178	311	297
- of the Bank		166	282	297
- of the subsidiaries belonging to the Tax Group		12	29	-
Provisions	41	1 467	653	526
		'	'
EQUITY		38 577	40 412	38 249
Share capital		1 250	1 250	1 250
Other capital		34 771	33 771	34 310
Retained earnings		5 500	1 556	(646)
Net profit or loss for the year		(2 944)	3 835	3 335

* taking into account the implementation of IFRS 16

STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD ENDED 31 December 2020	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 168	1 070	3 099	434	33 771	1 556	3 835	40 412
Transfer from retained earnings	-	-	-	-	-	-	3 835	(3 835)	-
Dividend	-	-	-	-	-	-	-	-	-
Comprehensive income	-	-	-	-	1 109	1 109	-	(2 944)	(1 835)
Covering of prior year loss1	-	-	-	(111)	-	(111)	111	-	-
Transfer from retained earnings to other reserves	-	-	-	2	-	2	(2)	-	-
As at the end of the period	1 250	29 168	1 070	2 990	1 543	34 771	5 500	(2 944)	38 577

1 The item includes i.a. an offset of prior years’ losses of PLN 111 million that arose as a result of the changes in accounting policies resulting from the first-time application of IFRS 16.

FOR THE PERIOD ENDED 31 December 2019	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 168	1 070	3 629	443	34 310	(535)	3 335	38 360
Changes in the accounting policies	-	-	-	-	-	-	(111)	-	(111)
As at the beginning of the period, after policy changes	1 250	29 168	1 070	3 629	443	34 310	(646)	3 335	38 249
Transfer from retained earnings	-	-	-	-	-	-	3 335	(3 335)	-
Dividend	-	-	-	-	-	-	(1 663)	-	(1 663)
Comprehensive income	-	-	-	-	(9)	(9)		3 835	3 826
Covering of prior year loss1	-	-	-	(535)	-	(535)	535	-	-
Transfer from retained earnings to other reserve	-	-	-	5	-	5	(5)	-	-
As at the end of the period	1 250	29 168	1 070	3 099	434	33 771	1 556	3 835	40 412

1 The item includes i.a. an offset of prior years’ losses of PLN 535 million that arose as a result of the changes in accounting policies resulting from the first-time application of IFRS 9.

FOR THE YEAR ENDED 31 December 2020	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2020	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Total
As at the beginning of the period	354	95	(15)	434
Total comprehensive income	890	224	(5)	1 109
As at the end of the period	1 244	319	(20)	1 543

FOR THE YEAR ENDED 31 December 2019	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2019	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Total
As at the beginning of the period	471	(18)	(10)	443
Total comprehensive income	(117)	113	(5)	(9)
As at the end of the period	354	95	(15)	434

CASH FLOW STATEMENT

	Note	2020	2019 converted
Cash flows from operating activities
Profit/(loss) before tax		(2 266)	5 118
Income tax paid		(1 567)	(1 354)
Total adjustments:		34 354	2 455
Depreciation and amortization	23	853	820
(Gains)/losses on investing activities	47	(15)	(14)
Interest and dividends	47	(1 792)	(1 537)
Change in:
amounts due from banks	47	968	(513)
hedging derivatives		(149)	106
other derivative instruments		1 087	(619)
securities	47	(2 364)	(2 191)
loans and advances to customers	47	6 469	(8 273)
receivables in respect of repurchase agreements	47	1 081	(1 030)
non-current assets held for sale	47	(117)	(2)
other assets		(50)	189
accumulated allowances for expected credit losses	47	1 798	(1 041)
accumulated allowances on non-financial assets and other provisions	47	755	98
amounts due to banks	47	607	378
amounts due to customers	47	25 951	16 614
repo transactions		1	1
loan and advances received	47	11	(50)
liabilities in respect of debt securities in issue	47	380	21
subordinated liabilities	47	(14)	(1)
other liabilities	47	163	729
Other adjustments	47	298	124
Net cash from/used in operating activities		32 088	7 573

	Note	2020	2019 converted
Cash flows from investing activities
Inflows from investing activities		63 964	216 142
Proceeds from sale of and interest on securities measured at fair value through other comprehensive income		61 734	207 620
Proceeds from sale of and interest on securities measured at amortized cost		1 865	7 936
Proceeds from sale of intangible assets, property, plant and equipment and assets held for sale		54	61
Other inflows from investing activities (dividends)	47	311	525
Outflows from investing activities		(103 116)	(229 112)
Increase in equity of an associate		(5)	(306)
Purchase of securities measured at fair value through other comprehensive income		(67 169)	(215 678)
Purchase of securities measured at amortized cost		(34 741)	(12 378)
Purchase of intangible assets and property, plant and equipment		(1 201)	(750)
Net cash from/used in investing activities		(39 152)	(12 970)

	Nota	2020	2019 dane przekształcone
Przepływy środków pieniężnych z działalności finansowej
Proceeds from debt securities in issue		-	596
Redemption of debt securities	47	(1 129)	(1 215)
Repayment of loans and advances	47	(131)	(3 763)
Dividend paid to shareholders		-	(1 663)
Payment of lease liabilities	47	(216)	(202)
Repayment of interest on long-term liabilities	47	(327)	(387)
Net cash from financing activities		(1 803)	(6 634)
Total net cash flows		(8 867)	(12 031)
of which foreign exchange differences on cash and cash equivalents		134	(8)
Cash equivalents at the beginning of the period		17 993	30 024
Cash equivalents at the end of the period		9 126	17 993

General information about the bank

1. business activities of the bank

Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna (“PKO Bank Polski S.A.” or “the Bank”) was established by virtue of a decree signed on 7 February 1919 by the Head of State Józef Piłsudski, Prime Minister Ignacy Paderewski and Hubert Linde, post and telegraph minister and simultaneously the first president of Pocztowa Kasa Oszczędnościowa. In 1950, the Bank began operating as Powszechna Kasa Oszczędności bank państwowy (state-owned bank). Pursuant to the Decree of the Council of Ministers dated 18 January 2000, Powszechna Kasa Oszczędności bank państwowy (a state-owned bank) was transformed into a state owned joint-stock company, Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna with its head office in Warsaw, ul. Puławska 15, 02-515 Warsaw, Poland.

On 12 April 2000, Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna was registered and entered into the Commercial Register maintained by the District Court for the City of Warsaw, Commercial Court, 16th Registration Department. At present, the court with jurisdiction over the Bank’s affairs is the District Court in Warsaw, the 13th Business Department of the National Court Register. The Bank was registered under the number KRS 0000026438 and was assigned the statistical number REGON 016298263.

According to the Bulletin of the Warsaw Stock Exchange (Ceduła Giełdowa), the Bank is classified under the macro-sector ‘‘Finance’’, in the ‘‘Banks’’ sector.

PKO Bank Polski S.A. is a universal deposit and credit bank which serves individuals, legal entities and other entities, both Polish and foreign. The Bank may hold and trade cash in foreign currencies, as well as conduct foreign exchange and foreign currency transactions, open and maintain bank accounts in banks abroad, and deposit foreign currency in those accounts.

As at 31 December 2020, organizational entities comprising the Bank, through which the Bank conducts its operations, include: the Bank’s head office in Warsaw, Biuro Maklerskie PKO Banku Polskiego S.A. (the Brokerage House), 12 specialist organizational entities, 11 regional retail branches, 7 regional corporate branches, 33 corporate centres and 1 062 branches. The Bank also conducts operating activities in the form of a branch in the Federal Republic of Germany (the German Branch), the Czech Republic (the Czech Branch) and Slovakia (the Slovak Branch).

PKO Bank Polski S.A. is the parent entity of the PKO Bank Polski S.A. Group and a significant investor for associates and joint ventures of the Bank. Accordingly, PKO Bank Polski S.A. prepares consolidated financial statements of the Group, which include the financial data of these entities.

The PKO Bank Polski S.A. Group consists of the following subsidiaries:

No.	ENTITY NAME	REGISTERED OFFICE	ACTIVITY	% SHARE IN CAPITAL
No.	DIRECT SUBSIDIARIES	REGISTERED OFFICE	ACTIVITY	31.12.2020	31.12.2019
1	PKO Bank Hipoteczny S.A.	Warsaw	banking activities	100	100
2	PKO Towarzystwo Funduszy Inwestycyjnych S.A.	Warsaw	investment fund management	100	100
3	PKO Leasing S.A.	Łódź	leases and loans	100	100
4	PKO BP BANKOWY PTE S.A.	Warsaw	pension fund management	100	100
5	PKO BP Finat sp. z o.o.	Warsaw	services, including transfer agent services and IT specialist outsourcing	100	100
6	PKO Życie Towarzystwo Ubezpieczeń S.A.	Warsaw	life insurance	100	100
7	PKO Towarzystwo Ubezpieczeń S.A.	Warsaw	other personal insurance and property insurance	100	100
8	PKO Finance AB	Stockholm, Sweden	financial services	100	100
9	KREDOBANK S.A.	Lviv, Ukraine	banking activities	100	100
10	Merkury - fiz an1	Warsaw	investing funds collected from fund participants	100	100
11	NEPTUN - fizan1	Warsaw		100	100
12	PKO VC - fizan1	Warsaw		100	100
	ZenCard sp. z o.o.2	Warsaw	IT services and products to support trade and services	-	100

1) PKO Bank Polski S.A. has investment certificates of the Fund; the share in the Fund’s investment certificates of the Fund is presented in the item “Share in equity”.

2) On 31 July 2020 ZenCard sp. z o.o., as the target company, was combined with and PKO Finat sp. z o.o. as the acquiring company.

No.	ENTITY NAME	REGISTERED OFFICE	ACTIVITY	% SHARE IN CAPITAL*
No.	INDIRECT SUBSIDIARIES	REGISTERED OFFICE	ACTIVITY	31.12.2020	31.12.2019
	PKO Leasing S.A. GROUP
1	PKO Agencja Ubezpieczeniowa sp. z o.o.	Warsaw	intermediation in concluding insurance agreements	100	100
	1.1 PKO Leasing Finanse sp. z o.o.	Warsaw	sale of post-lease assets	100	100
2	PKO Leasing Sverige AB	Stockholm, Sweden	leasing	100	100
3	Prime Car Management S.A.	Gdańsk	leasing, fleet management	100	100
	3.1 Futura Leasing S.A.	Gdańsk	leasing and sales of post-lease assets	100	100
	3.2 Masterlease sp. z o.o.	Gdańsk	leasing	100	100
	3.3 MasterRent24 sp. z o.o.	Gdańsk	short-term lease of cars	100	100
4	PKO Faktoring S.A.	Warsaw	actoring	100	100
5	ROOF Poland Leasing 2014 DAC1	Dublin, Ireland	SPV established for securitization of lease receivables	-	-
6	Polish Lease Prime 1 DAC1	Dublin, Ireland	SPV established for securitization of lease receivables	-	-
	PKO Leasing Nieruchomości sp. z o.o.2	Warsaw	leasing	-	100
	PKO Życie Towarzystwo Ubezpieczeń S.A. GROUP
7	Ubezpieczeniowe Usługi Finansowe sp. z o.o.	Warsaw	services	100	100
	KREDOBANK S.A. GROUP
8	Finansowa Kompania „Idea Kapitał” sp. z o.o.	Lviv, Ukraine	services	100	100
	Merkury - fiz an
9	„Zarząd Majątkiem Górczewska” sp. z o.o.	Warsaw	property management	100	100
10	Molina sp. z o.o.	Warsaw	general partner in partnerships limited by shares of a fund	100	100
11	Molina spółka z ograniczoną odpowiedzialnością 1 S.K.A.	Warsaw	buying and selling real estate on own account, property management	100	100
12	Molina spółka z ograniczoną odpowiedzialnością 2 S.K.A.	Warsaw		100	100
13	Molina spółka z ograniczoną odpowiedzialnością 4 S.K.A.	Warsaw		100	100
14	Molina spółka z ograniczoną odpowiedzialnością 5 S.K.A. w likwidacji3	Warszawa		100	100
15	Molina spółka z ograniczoną odpowiedzialnością 6 S.K.A. w likwidacji3	Warszawa		100	100
	Molina spółka z ograniczoną odpowiedzialnością 3 S.K.A. w likwidacji4	Warszawa		-	100
	NEPTUN - fizan
16	Qualia sp. z o.o.	Warszawa	sale services in respect of developer products	100	100
17	Sarnia Dolina sp. z o.o.	Warszawa	development activities	100	100
18	Bankowe Towarzystwo Kapitałowe S.A.	Warszawa	services	100	100
	18.1 „Inter-Risk Ukraina" spółka z dodatkową odpowiedzialnością5	Kijów, Ukraina	debt collection	99,90	99,90
	18.2 Finansowa Kompania „Prywatne Inwestycje” sp. z o.o.6	Kijów, Ukraina	financial services	95,4676	95,4676
19	„CENTRUM HAFFNERA" sp. z o.o.	Sopot	subsidiary management	72,9766	72,9766
	19.1 „Sopot Zdrój" sp. z o.o.	Sopot	property management	100	100

* share in equity of the direct parent

1) In accordance with IFRS 10, PKO Leasing S.A. exercises control over the company, although it does not have a capital share In it.

2) On 28 February 2020, PKO Leasing Nieruchomości sp. z o.o., as the acquire, was combined with and PKO Leasing S.A. as the acquirer.

3) On 1 September 2020, the company was put into liquidation.

4) On 18 June 2020, the company’s liquidation was completed, the company was deleted from the National Court Register.

5) Finansowa Kompania “Prywatne Inwestycje” sp. z o.o. is the second shareholder of the company.

6) Inter-Risk Ukraina” – a company with additional liability – is the second shareholder of the company.

The Bank holds the following associates and joint ventures:

No.	ENTITY NAME	REGISTERED OFFICE	ACTIVITY	% SHARE IN CAPITAL*
No.	ENTITY NAME	REGISTERED OFFICE	ACTIVITY	31.12.2020	31.12.2019
	Joint ventures of PKO Bank Polski S.A.
1	Operator Chmury Krajowej sp. z o.o.	Warsaw	cloud computing services	50	50
2	Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	Warsaw	financial services support activities, including handling transactions concluded using payment instruments	34	34
	1 EVO Payments International s.r.o.	Prague, the Czech Republic	financial services support activities	100	100
	Joint venture NEPTUN - fizan
	2 „Centrum Obsługi Biznesu" sp. z o.o.	Poznań	property management	41,45	41,45
	Joint venture PKO VC - fizan
	3 BSafer sp. z o.o.1	Stalowa Wola	managing marketing consents	35,06	-
	Associates of PKO Bank Polski S.A.
1	Bank Pocztowy S.A.	Bydgoszcz	banking activities	25,0001	25,0001
2	„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	Poznań	guarantees	33,33	33,33

* share in equity of the entity exercising joint control / having a significant impact / the direct parent

1) A joint venture of PKO VC - fizan since 18 March 2020

2. Changes to companies comprising the Group

In 2020, there were no significant changes in the structure of the Group.

There were business combinations of PKO Leasing Nieruchomości sp. z o.o. (as the acquiree) with PKO Leasing S.A. (as the acquirer) and ZenCard sp. z o.o. (as the acquiree) z PKO BP Finat sp. z o.o. (as the acquirer).

The liquidation of Molina spółka z ograniczoną odpowiedzialnością 3 S.K.A. was completed and companies Molina spółka z ograniczoną odpowiedzialnością 5 S.K.A. and Molina spółka z ograniczoną odpowiedzialnością 6 S.K.A. were put into liquidation.

At the beginning of 2020, due to the closure of securitization of PKO Leasing S.A.’s lease receivables conducted in cooperation with a special purpose vehicle (SPV) ROOF Poland Leasing 2014 DAC, operating activities relating to the liquidation of the SPV were commenced by PKO Leasing S.A.

Work was conducted on a reverse acquisition of “CENTRUM HAFFNERA” sp. z o.o. as the acquiree and its subsidiary “Sopot Zdrój” sp. z o.o. as the acquirer. The reverse acquisition occurred on 14 January 2021 with the change being entered in the National Court Register with jurisdiction over the acquirer. After the combination, NEPTUN - fizan holds 62 944 shares in “Sopot Zdrój” sp. z o.o., with a total nominal value of PLN 31 472 thousand, representing 72.98% of the company’s share capital and giving rights to 72.98% of votes at the Shareholders’ Meeting.

3. I nformation on members of the Supervisory and Management Boards

As at 31 December 2020, the Bank’s Supervisory Board consisted of:

• Zbigniew Hajłasz - Chair of the Supervisory Board

• Marcin Izdebski – Vice-Chair of the Supervisory Board

• Grażyna Ciurzyńska - Deputy Chair of the Supervisory Board

• Mariusz Andrzejewski - Member of the Supervisory Board

• Grzegorz Chłopek - Member of the Supervisory Board

• Wojciech Jasiński - Member of the Supervisory Board

• Andrzej Kisielewicz - Member of the Supervisory Board

• Rafał Kos - Member of the Supervisory Board

• Krzysztof Michalski - Member of the Supervisory Board

• Piotr Sadownik - Member of the Supervisory Board

As at 31 December 2020, the Bank’s Management Board consisted of:

• Zbigniew Jagiełło - President of the Management Board

• Rafał Antczak – Vice-President of the Management Board

• Rafał Kozłowski – Vice-President of the Management Board

• Maks Kraczkowski – Vice-President of the Management Board

• Mieczysław Król – Vice-President of the Management Board

• Adam Marciniak – Vice-President of the Management Board

• Piotr Mazur – Vice-President of the Management Board

• Jakub Papierski – Vice-President of the Management Board

• Jan Emeryk Rościszewski – Vice-President of the Management Board.

The Bank’s Ordinary General Shareholders’ Meeting adopted the Policy on the evaluation of the suitability of candidates for members of the Management and Supervisory Boards of Powszechna Kasa Oszczędności Bank Polski S.A. and confirmed the suitability of the appointed body.

4. Approval of the financial statements

These financial statements of the Bank (the financial statements), subject to review by the Audit Committee and adoption by the Supervisory Board of the Bank on 28 April 2021, were approved for publication by the Management Board on 28 April 2021.

5. Impact of the COVID-19 pandemic on the Bank’s operations

The impact of the COVID-19 pandemic on the operations of the Bank and the banking sector and measures adopted by the Bank to ensure the safety of its Customers and employees and business process continuity are described in detail in the PKO Bank Polski S.A. Group Directors’ Report for 2020.

The impact of the COVID-19 pandemic on the Bank’s financial position and measures adopted for the benefit of the Bank’s customers are described below and in selected notes to the financial statements.

• Impact on estimates and assumptions

The COVID-19 pandemic increased the level of uncertainty. Its consequences for the global economy and measures adopted by governments and regulators affect and may affect the Bank’s financial results and position, including, among others, on the expected credit losses or goodwill recognized. All adverse effects which could have been reasonably estimated have been recognized in 2020. The Bank is monitoring the development on an ongoing basis and takes them into account in the current period.

• Moratoria and public guarantees – modifications and the quality of the loan portfolio

In order to mitigate the economic effects of the spread of the COVID-19 pandemic, the Bank introduced a number of corrective measures for retail customers, companies, enterprises, corporate customers and local authority units aimed at mitigating the economic effects of the spread of COVID-19:

• credit moratoria, including those in accordance with the European Banking Authority guidelines;

• granting loans and advances covered by public guarantee initiatives in the context of crisis associated with COVID-19.

A detailed description of the moratoria offered to the Bank’s Customers and the public guarantee initiatives is included in the Note “Specific risk management measures adopted by the Bank in 2020”, and in the “PKO Bank Polski S.A. Group Directors’ Report for 2020”.

Offering borrowers, at their request, the possibility of suspending or postponing the repayment of loan instalments for a maximum of 6 months is the common element of all these measures. Given the fact that these relief measures contributed to the modification of contractual cash flows from contracts with customers, the Bank performed an assessment of individual contracts from the perspective of compliance with quantitative and qualitative criteria in order to determine whether a modification was significant (derecognition) or insignificant. The assessment was conducted in accordance with a policy described in the Note “Description of significant accounting policies”, “Modifications – Changes in contractual cash flows”. The analysis showed that none of the criteria of a significant modification were met. Changes in contractual cash flows as a result of the relief measures offered were insignificant modifications whose impact was recognized by the Bank as a decrease in interest income.

Guarantees received by the Bank as part of public guarantee initiatives under Annex to the de minimis guarantee line portfolio agreement of 22 June 2018 (as amended) and the portfolio guarantee line agreement of the Liquidity Guarantee Fund of 10 April 2020 concluded with Bank Gospodarstwa Krajowego meet the definition of financial guarantees and are presented in the Note “Contingent liabilities and off-balance sheet commitments received and granted”.

The qualitative and quantitative impact of COVID-19 on the quality of the loan portfolio, including the estimated credit losses, is presented in the Note “Credit risk – financial information”. The impact of COVID-19 on the deterioration of the portfolio of loans measured at fair value through profit or loss was recognized in “Net income from financial instruments designated at fair value through profit or loss”, and on the portfolio of loans measured at amortized cost and at fair value through OCI – in “Allowances for expected credit losses”.

• Goodwill and investment in subsidiaries, associates and joint ventures – impairment test

Goodwill and investments in subsidiaries, associates and joint ventures are subject to impairment tests annually and whenever there are indications of a potential impairment during the year.

Given the fact that the COVID-19 pandemic has an adverse effect on the economic environment, the Bank conducted an impairment test of goodwill on Nordea Bank Polska S.A. The results of the impairment test are described in detail in the Note “Intangible assets and property, plant and equipment”.

The COVID-19 pandemic affected also the results of an impairment test of shares in Bank Pocztowy (for further information, see the note “Investments in subsidiaries, associates and joint ventures”.

• Capital adequacy

The impact of COVID-19 on capital adequacy and the activities of the regulatory bodies – Regulation (EU) 2020/873 of the European Parliament and of the Council amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic (CRR Quick Fix) are described in the Note “Capital adequacy” and in the Report “Capital adequacy and other information subject to disclosure of the Group as at 31 December 2020”.

Accounting policies adopted to prepare the financial statements

6. Basis of preparation of the financial statements

The financial statements cover the year ended 31 December 2020 and include comparative data for the year ended 31 December 2019 and additionally the statement of financial position as at 1 January 2019. The financial data is presented in Polish zloty (PLN) in millions, unless otherwise indicated.

These financial statements have been prepared on a fair value basis in respect of financial assets and liabilities measured at fair value through profit or loss, including derivatives and financial assets measured at fair value through other comprehensive income. The remaining financial assets are disclosed in amortized cost less allowances for expected credit losses. However the remaining financial liabilities are disclosed at amortized cost. Non-current assets are measured at acquisition cost less accumulated depreciation and impairment charges. Non-current assets (or groups of such assets) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

While preparing financial statements, the Bank makes certain estimates and assumptions, which have a direct influence on both the financial statements and enclosed supplementary information. The estimates and assumptions that are used by the Bank in determining the value of assets and liabilities as well as revenues and costs, are made based on historical data and other factors which are available and considered appropriate in the given circumstances. Assumptions regarding the future and the available data are used for assessing the carrying amounts of assets and liabilities which cannot be clearly determined using other sources. In making estimates the Bank takes into consideration the reasons and sources of the uncertainties that are anticipated at the end of the reporting period. Actual results may differ from estimates.

Estimates and assumptions made by the Bank are subject to periodic reviews. Changes in estimates are recognized in the period to which they relate.

7. Statement of compliance

The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) as at 31 December 2020, and in the areas not regulated by these standards, in accordance with the requirements of the Accounting Act of 29 September 1994 and the respective secondary legislation issued on its basis, as well as the requirements relating to issuers of securities registered or applying for registration on an official stock market.

8. Going concern

The financial statements have been prepared on the basis of the assumption that the Bank will continue as a going concern for a period of at least 12 months from the publication date, i.e. from 29 April 2021. As at the date of signing these financial statements, the Bank’s Management Board is not aware of any facts or circumstances that would indicate a threat to the Bank’s ability to continue in operation as a going concern for 12 months following the publication date as a result of any intended or compulsory discontinuation or significant limitation of the Bank’s existing operations.

9. Management Representation

The Management Board hereby represents that, to the best of its knowledge, the financial statements and the comparative data have been prepared in accordance with the applicable rules of accounting practice and give a true, fair and clear view of the Bank’s financial position and results of operations.

10. New standards and interpretations and their amendments

• Standards and interpretations and their amendments effective from 2020

Standards and interpretations*

Description of changes and impact

Amendments to References to the Conceptual Framework in IFRS

(1.01.2020/29.11.2019)

The purpose of the amendments is to replace references to the previous conceptual framework in a number of standards and interpretations with references to the amended Conceptual Framework.

Implementation of the Conceptual Framework had no effect on the financial statements

Amendments to IAS 1 and IAS 8: Definition of the term ‘material’ (1.01.2020/29.11.2019)

The amendments standardize and clarify the definition of ‘material’ and contain guidelines to increase the consistency of application of this concept in the IFRS.

The Bank makes assessments of the materiality of disclosures in accordance with the requirements of IAS 1 on an ongoing basis, and based on these assessments, makes appropriate changes in the presentation of data in the financial statements.

Amendments to IFRS 9, IAS 39 and IFRS 7 – IBOR reform (1.01.2020/ 15.01.2020)

The amendments introduce certain temporary, narrow departures from the requirements of prospective verification of the effectiveness of hedging relations set out in IAS 39 and IFRS 9. The amendments allow prospective testing of hedging relationships without taking into account the effects of the future implementation of the IBOR reform.

The Bank took amendments into account in the prospective testing of hedging relationships.

As part of the established hedging relationships, the Bank identifies the following interest rate reference ratios: WIBOR, EURIBOR, LIBOR CHF, LIBOR USD. As at the reporting date, these benchmarks are quoted daily and are available for use and the resulting cash flows are normally exchanged with counterparties.

In the case of WIBOR and EURIBOR, the Bank does not currently identify uncertainty regarding the timing or amounts of cash flows resulting from the IBOR reform. For LIBOR CHF and LIBOR USD, the established hedging relationships exceed the announced discontinuation dates for both ratios, i.e. December 31, 2021 for CHF LIBOR and June 20, 2023 for USD LIBOR. The bank expects that these ratios will be replaced by new benchmarks: CHF LIBOR by SARON and USD LIBOR by SOFR.

List of hedging relationships and the nominal amounts of their designated hedging instruments that may be affected by the IBOR reform:

• Cash flow hedging:

IRS CHF (CHF 400 million based on LIBOR CHF) - Hedging the volatility of cash flows of loans in convertible currencies other than EUR with variable interest, resulting from the risk of changes in interest rates, using IRS transactions;

CIRS CHF/PLN (CHF 525 million based on CHF LIBOR) - Hedging volatility of cash flows of floating-rate loans in CHF, resulting from the risk of changes in interest rates and currency risk, and hedging of volatility of cash flows of term deposits negotiated in PLN / bank products for regular savings in PLN resulting from the risk of changes in interest rates, using CIRS transactions;

• Fair value hedge:

IRS USD (USD 158 million based on USD LIBOR) - Hedge of fair value volatility of a fixed-rate convertible currency, measured at fair value through other comprehensive income, resulting from the risk of changes in interest rates, using IRS transactions.

Amendments to IFRS 3 Business combinations

(1.01.2020/

21.04.2020)

The amendments narrow down and clarify the definition of a venture. They also allow for a simplified assessment of whether a set of assets and activities is a group of assets and not a venture. A prospective approach will apply to these amendments.

The Bank will apply these amendments, if relevant,

Amendment to IFRS 16 “Leases” (1.06.2020/9.10.2020)

The amendments allow lessees not to account for rent concessions as lease modifications if they are a direct consequence of COVID-19 and meet certain conditions.

The Bank does not expect these amendments to have a material effect.

* (the effective date in EU / date of endorsement by EU is provided in parentheses)

• NEW STANDARDS AND INTERPRETATIONS AND AMENDMENTS THERETO THAT HAVE BEEN PUBLISHED AND ENDORSED BY THE EUROPEAN UNION, BUT HAVE NOT COME INTO FORCE YET AND ARE NOT APPLIED BY THE BANK

Standards and interpretations *

Description of changes and impact

Amendments to IFRS 9, IFRS 7, IAS 39 and IFRS 16, IFRS 4 – IBOR reform – Phase 2 (1.01.2021/ 14.01.2021)

Regulations issued under Phase 2 of the IBOR reform relate to the following:

• changes to contractual cash flows – adding to IFRS 9 a practical expedient which will enable accounting for modifications of contractual cash flows arising from the IBOR reform by updating the effective interest rate of the contract to reflect the transition to an alternative benchmark rate (there will be no obligation to derecognize or adjust carrying amounts of financial instruments); practical expedient was introduced for lessee accounting applying IFRS 16;

• hedge accounting: - there will be no need to discontinue applying hedge accounting solely due to the changes required by the reform, provided that the hedge meets other hedge accounting criteria, and

• disclosures - companies will be obliged to disclose information on new risks arising from the reform and on it management of the transition to alternative benchmark rates.

The Bank is in the process of assessing the impact of these amendments on the financial statements.

amendments to IFRS 4 “Insurance Contracts”

(1.01.2021/16.12.2020)

The amendments move the date of termination of the temporary relief from the application of IFRS 9 from 1 January 2021 to 1 January 2023 in order to align it with the effective date of IFRS 17 “Insurance Contracts”. The amendments provides for optional solutions in order to mitigate the impact of different effective dates of IFRS 9 and IFRS 17.

The changes do not apply to the Bank.

*(the effective date in EU / date of endorsement by EU is provided in parentheses)

• new standards and interpretations, as well as their amendments, which were published and have not yet been endorsed by the European Union

Standards and interpretations *	Description of changes and impact
IFRS 17 “Insurance Contracts” ((1.01.2023/no data) and amendments to IFRS 17 (1.01.2023/no data)	IFRS 17 will replace IFRS 4 “Insurance Contracts” which enabled entities to recognize insurance contracts according to the accounting principles in force in the national standards, which, as a result, meant applying many different solutions. IFRS 17 introduces the requirements to recognize all insurance agreements in a consistent manner, including, among others, with regard to the measurement of insurance liabilities, recognition of the profit or loss over time, accounting for reinsurance, separation of an investment component. The application of the standard should follow the full retrospective approach with certain departures. No impact on the Bank’s financial statement.
amendment to IAS 1 – classification of liabilities (1.01.2023/1Q2021)	The amendments relate to the presentation of liabilities in the statement of financial position. In particular, the amendment clarifies that classification of liabilities as current or non-current should be based on the contractual arrangements in place at the reporting date. A prospective approach will apply to these amendments. The Bank does not expect these amendments to have a material effect.
Annual Improvements to IFRS 2018-2020 (1.01.2022/no data)	• The amendment to IFRS 1 relates to situations when a subsidiary adopts IFRS for the first time at a later date than its parent; in such a case, the subsidiary may decide to measure cumulative translation differences for all foreign operations using the amounts reported by its parent in its consolidated financial statements, based on the parent’s date of transition to IFRS. • The amendment to IAS 41 aligns fair value measurement requirements set out in IAS 41 with the assumptions of IFRS 13. Not applicable to the Bank • The amendment clarifies which fees should be included for purposes of the ‘10 per cent’ test in the case of derecognition of financial liabilities. • Amendments to illustrative examples in IFRS 16 relating to identification of lease incentives. The Bank does not expect these amendments to have a material effect.
Amendment to MSSF 3 “Business combinations” (1.01.2022/no data)	Amendments to IFRS 3 have updated references to the Conceptual Framework issued in 2018. In order to ensure that this will not impact assets and liabilities which qualify for the recognition on a business combination, the amendment introduces new exceptions from the recognition and measurement principles of IFRS 3. The Bank does not expect these amendments to have a material effect.
Amendment to IAS 16 “Property, plant and equipment” (1.01.2022/no data)	The amendment specifies that, among other things, proceeds from selling items produced while bringing an asset into the location and condition necessary for it to be capable of operating in the intended manner cannot be deducted from the cost associated with that asset. Instead, such proceeds should be recognized as cost of producing those items, in profit or loss. The Bank does not expect these amendments to have a material effect.
Amendment to IAS 37 “Provisions, contingent liabilities and contingent assets” (1.01.2022/no data)	The amendment clarifies that, when assessing whether or not a contract is onerous, the cost of fulfilling a contract comprises all costs that relate directly to the contract. The Bank does not expect these amendments to have a material effect.
Amendment to IAS 1 and IAS 8 (1.01.2023/no data)	Amendments to IAS 1 contain guidelines on the application of the term “material” in disclosures of the accounting policies. Amendments to IAS 8 explain how companies should distinguish changes in accounting policies from changes in accounting estimates. The Bank does not expect these amendments to have a material effect.

* (the effective date in EU / date of endorsement by EU is provided in parentheses)

11. Description of significant accounting policies

Major accounting policies and estimates and judgments applied in the preparation of these financial statements are presented below and in this note and in individual notes further in the financial statements. In all the years presented, these accounting policies were applied consistently, with the exception of issues described in the Note “Changes in the accounting policies applicable from 1 January 2020 and an explanation of the differences between previously published financial statements and these financial statements”.

11.1. currency, presentation currency and foreign currencies

The financial statements are presented in Polish zlotys (PLN), which are the Bank’s functional and presentation currency. Items of the statement of financial position of the German and Slovak Branches are translated into the presentation currency from the functional currency (EUR) and items of the statement of financial position of the Czech Branch are translated into the presentation currency from the functional currency (CZK) using the average NBP exchange rate at the end of the reporting period. Items in the Branches’ profit and loss are translated into the presentation currency using the average exchange rate from the end of each month of the reporting period. The resulting exchange differences are recognized in other comprehensive income.

• Transactions and balances in foreign currencies

Transactions denominated in foreign currency are translated into the functional currency using exchange rate prevailing at the dates of the transactions. At each balance sheet date, items are translated by the Bank using the following principles:

• cash items denominated in foreign currency are translated using a closing rate i.e. the average rate announced by the National Bank of Poland prevailing as at the end of the reporting period,

• non-cash items measured at historical cost expressed in a foreign currency are translated using the exchange rate as at the date of the transaction,

• non-cash items measured at fair value in a foreign currency are translated using the exchange rates prevailing as at the date of determination of the fair value.

Foreign exchange gains and losses arising from the settlement of such transactions and from the valuation of monetary and non-monetary assets and liabilities expressed in foreign currencies are recognized in the income statement.

11.2. Accounting for transactions

Financial assets and financial liabilities, including forward transactions and standardized transactions, which carry an obligation or a right to purchase or sell in the future an agreed number of specified financial instruments at a fixed price, are entered into the books of account under the date of the conclusion of the contract, irrespective of the settlement date provided in the contract.

11.3. Derecognition of financial instruments from the statement of financial position

Financial assets are derecognized from the statement of financial position when contractual rights to the cash flows from the financial asset expire or when the Bank does not have justified prospects for recovering the given financial asset in full or in part, or when the financial asset is transferred by the Bank to another entity. The financial asset is transferred when the Bank:

• transfers the contractual rights to collect cash flows from that financial asset to another entity, or

• retains the contractual rights to receive cash flows from the financial asset, but assumes a contractual obligation to pay cash flows to one or more recipients.

Upon the transfer of a financial asset, the Bank evaluates the extent to which it retains the risks and benefits associated with holding that financial asset.

If substantially all risks and benefits associated with holding a given financial asset are transferred, the financial asset is eliminated from the statement of financial position.

If the Bank retains substantially all risks and benefits associated with holding a given financial asset, the financial asset continues to be recognized in the statement of financial position.

If substantially all risks and benefits associated with holding a given financial asset are neither transferred nor retained, the Bank determines whether it has maintained control over that financial asset. If the Bank has retained control, it continues to recognize the financial asset in the statement of financial position to the extent of its continuing involvement in the financial asset; if control has not been retained, then the financial asset is derecognized from the statement of financial position.

The Bank derecognizes a financial liability (or a part of a financial liability) from its statement of financial position when the obligation specified in the contract has been met or cancelled, or has expired.

The Bank derecognizes financial assets from its statement of financial position, among other things, when they are forgiven, their limitation period has expired or when they are irrecoverable. When the said assets are derecognized, they are charged to the respective credit loss allowances or losses in respect of legal risk.

In the event that no allowances have been recorded, or if the amount of the allowance is less than the amount of the financial asset, the amount of the impairment allowance is increased by the difference between the value of the asset and the amount of the allowance that has been recognized to date.

11.4. The principles for classification of financial instruments

The Bank classifies financial assets into the following categories:

• measured at amortized cost;

• measured at fair value through other comprehensive income (FVOCI);

• measured at fair value through profit or loss (FVP&L).

The Bank classifies financial liabilities into the following categories:

• measured at amortized cost;

• measured at fair value through profit or loss (FVP&L).

Classification of financial assets as at the date of acquisition or origination depends on the business model adopted by the Bank for the purposes of managing a particular group of assets and on the characteristics of the contractual cash flows resulting from a single asset or group of assets. The Bank identifies the following business models:

• the “held to collect” cash flows model, in which financial assets originated or acquired are held in order to collect gains from contractual cash flows – this model is typical of lending activities;

• the “hold to collect and sell” cash flows model, in which financial assets originated or acquired are held to collect gains from contractual cash flows, but they may also be sold (frequently and in transactions of a high volume) – this model is typical of liquidity management activities;

• the residual model – other than the “held to collect” or the “hold to collect and sell” cash flows model.

• business model

The business model is determined/selected upon initial recognition of financial assets. The determination/selection is performed at the level of individual groups of assets, in the context of the business area in connection with which the financial assets originated or were acquired, and is based, among other things, on the following factors:

• the method for assessing and reporting the financial assets portfolio;

• the method for managing the risk associated with such assets and the principles of remunerating the persons managing such portfolios.

In the “hold to collect” business model, assets are sold occasionally, in the event of an increase in credit risk or a change in the laws or regulations. The purpose of selling the assets is to maintain the assumed level of regulatory capital. Assets are sold in accordance with the principles described in the portfolio management strategy or close to maturity, in the event of a decrease in the credit rating below the level assumed for a given portfolio, significant internal restructuring or acquisition of another business, the performance of a contingency or recovery plan or another unforeseeable factor independent of the Bank.

• Assessment of contractual cash flow characteristics

The assessment of the contractual cash flow characteristics establishes, based on a test of contractual cash flows, whether contractual cash flows are solely payments of principal and interest (hereinafter “SPPI”). Interest is defined as consideration for the time value of money, credit risk relating to the principal remaining to be repaid within a specified period and other essential risks and costs associated with granting financing, as well as the profit margin.

Contractual cash flow characteristics do not affect the classification of the financial asset if:

• their effect on the contractual cash flows from that asset could not be significant (de minimis characteristic);

• they are not genuine, i.e. they affect the contractual cash flows from the instrument only in the case of occurrence of a very rare, unusual or very unlikely event (non-genuine characteristic).

In order to make such a determination, the potential impact of the contractual cash flow characteristics in each reporting period and throughout the whole life of the financial instrument is considered.

The SPPI test is performed for each financial asset in the “hold to collect” or “hold to collect and sell” models upon initial recognition (and for modifications which are significant after subsequent recognition of a financial asset).

The Bank analyses, among others, the following features of financial assets which result in the SPPI test being failed:

• leverage in the design of interest rate, understood as a multiplier higher than 1;

• a creditor’s right to participate in the profit – contractual cash flows are not only the repayment of principal and interest on the outstanding principal;

• limitation of the debtor’s liabilities (resulting in a non-recourse asset);

• early repayment and extension option contingent on a future economic event which does not relate to the agreement, particularly an event not related to a change in the borrower’s credit risk level;

• covenants providing for an increase or decrease in interest rate in line with an increase or decrease in credit risk, which reflects a negative relation between the loan margin and the level of credit risk;

• interest rates unilaterally determined by the Bank (administered interest rates), if they do not approximate variable market rates.

If the qualitative assessment performed as part of the SPPI test is insufficient to determine whether the contractual cash flows are solely payments of principal and interest, a benchmark test (quantitative assessment) is performed to determine the difference between the (non-discounted) contractual cash flows and the (non-discounted) cash flows that would occur should the time value of money remain unchanged (the reference level of cash flows).

11.5. financial assets measured at amortized cost

Financial assets (debt financial assets) are measured at amortized cost, provided that both the following conditions are met:

• the financial asset is held in accordance with the “hold to collect” business model;

• the terms and conditions of an agreement concerning the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding (the SPPI test is passed).

Upon initial recognition, these assets are measured at fair value. The initial value of an asset measured at amortized cost is adjusted by all commissions and fees which affect its effective return and constitute an integral element of the effective interest rate of this asset (commissions and fees arising in connection with activities performed by the Bank, and leading to the arising of the assets).

The carrying amount of this category of assets is determined using the effective interest rate described in the Note “Interest income and expenses”, which is used to determine (calculate) the interest income generated by the asset in a given period, adjusting it for expected credit loss allowances.

Assets for which the schedule of future cash flows necessary for calculating the effective interest rate cannot be determined, are not measured at amortized cost. Such assets are measured at amounts due which also include interest on receivables, taking into consideration allowances for expected credit losses. Commissions and fees connected with the arising of or decisive for the financial qualities of such assets should be settled over the period of life of the asset using the straight-line method, and are included in commission income.

11.6. Financial assets measured at fair value through other comprehensive income

Financial assets (including debt instruments) are measured at fair value through other comprehensive income if both the following conditions are met:

• financial assets are held in the business model whose purpose is to collect contractual cash flows and to sell financial assets; and

Financial assets measured at fair value through other comprehensive income are measured at fair value. The effects of adjustments to the fair value of those financial assets until their derecognition or reclassification are recognized in other comprehensive income, with the exception of interest income, gains or losses in respect of impairment allowances for expected credit losses and foreign exchange gains or losses recognized in the income statement. The gain or loss recognized in other comprehensive income constitutes the difference between the fair value of a financial asset as at the measurement date and the value of the asset at amortized cost.

If a financial asset is no longer recognized, the accumulated profit or loss, which was previously recognized in other comprehensive income, is reclassified from other comprehensive income to financial profit or loss in the form of a reclassification adjustment.

11.7. Financial assets measured at fair value through profit or loss

If financial assets do not satisfy any of the above-mentioned criteria of measurement at amortized cost or at fair value through other comprehensive income, they are classified as financial assets measured at fair value through profit or loss.

Additionally, on initial recognition, a financial asset may be irrevocably classified as measured at fair value through profit or loss (option to measure at fair value through profit or loss) if this eliminates or significantly reduces inconsistency of measurement or recognition which would arise as a result of measuring assets or liabilities, or recognizing the related gains or losses according to different accounting principles (accounting mismatch). This option is available for debt instruments both under the “hold to collect”, and “hold to collect and sell” models.

In the financial statements, financial assets measured at fair value through profit or loss are presented as follows:

• held for trading - financial assets which:

• have been purchased mainly to sell or redeem in the foreseeable future; or

• upon initial recognition they constitute part of a portfolio of specific financial instruments which are managed jointly and for which there is evidence that they currently generate short-term profits; or

• are derivative financial instruments (with the exception of derivatives which are financial guarantee agreements or designated and effective hedges);

• financial assets that are not held for trading and must be measured at fair value through profit or loss - financial assets that have not passed the test of cash flow characteristics (irrespective of the business model); or financial assets classified to the residual model;

• financial assets designated to be measured at fair value through profit or loss at initial recognition (option to measure at fair value through profit or loss.

Gains or losses on assets measured at fair value through profit or loss are recognized in the income statement. Gains or losses on the measurement of the financial asset at fair value comprise the difference between the fair value of the asset and its value at amortized cost determined as at the measurement date.

11.8. Equity instruments

Investments in equity instruments are measured at fair value through profit or loss.

In the case of investments in equity instruments, the Bank did not use the option of measurement at fair value through other comprehensive income.

11.9. Reclassification of financial assets

Financial assets are reclassified only in the event of a change in the business model relating to the asset or a group of assets resulting from the commencement or discontinuation of a significant part of the entity’s operations. Such changes are very infrequent. Reclassification is presented prospectively, i.e. without changing the effects of fair value measurement in earlier periods write-downs or accrued interest that have been recognized to date.

The following are not treated as changes in the business model:

• changes in the intentions regarding specific financial assets (even in the event of significant changes in market conditions);

• temporary discontinuation of a specific market for financial assets;

• a transfer of financial assets between business areas that apply different business models.

No financial liabilities are reclassified.

11.10. Modifications – Changes in contractual cash flows

Modification – understood as a change in the contractual cash flows in respect of a financial asset based on an annex to the contract, may be significant or insignificant. A change in the contractual cash flows resulting from execution of the terms of the contract is not a modification.

If the contractual cash flows associated with a financial asset are renegotiated or otherwise modified based on an annex to the agreement, and such renegotiation or modification does not lead to such a financial asset no longer being recognized (“an insignificant modification”), the gross carrying amount of the financial asset is recalculated and gain or loss arising from such modification is recognized in the financial result. An adjustment of the carrying amount of a financial asset resulting from the modification is recognized in interest income/ expenses over time using the effective interest rate method. The carrying amount of a financial asset is calculated as the present value of renegotiated or modified contractual cash flows, discounted using the original effective interest rate on the financial asset (or, in the case of credit-impaired financial assets purchased or issued, the effective interest rate adjusted for credit risk) or, if applicable (e.g. with respect to gain or loss on a hedged item resulting from hedging), the updated effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortized over the remaining part of the life of the modified financial asset.

In certain circumstances, renegotiation or modification of contractual cash flows associated with a financial asset may lead to derecognition of the financial asset. If an existing financial asset is derecognized due to its modification, and a modified asset is subsequently recognized, the modified asset is treated as a “new” financial asset (“a significant modification”). The new asset is recognized at the fair value and a new effective interest rate applicable to the new asset is calculated. If the characteristics of a modified new financial asset (after signing an annex) comply with the arm’s length conditions, the carrying amount of that financial asset is equal to its fair value.

The assessment whether a given modification of financial assets is a significant or an insignificant modification depends on the satisfaction of certain quantitative and qualitative criteria.

The following qualitative criteria have been adopted:

• Currency translation;

• Change of debtor, other than caused by the debtor’s death;

• Introducing or removing a contractual characteristic that adversely affects the test of cash flow characteristics (SPPI test) or removal of these features.

The occurrence of at least one of these criteria results in a significant modification.

• The quantitative criterion consists of a 10% test analysing the change in the contractual terms of a financial asset resulting in a difference between the amount of future cash flows arising from the changed financial asset discounted using the original effective interest rate and the amount of the future cash flows that would arise from the original financial asset discounted using the same interest rate. The second quantitative criterion consists of an increased exposure to the debtor, which includes the amount of principal increase and an increase in off-balance sheet liabilities granted which exceed 10% of the equity and off-balance sheet liabilities from before the increase for each individual exposure.

In the event of the occurrence of a quantitative criterion (a difference) of more than 10%, the modification is considered significant, whereas a quantitative criterion of 10% or less means that the modification is considered insignificant.

11.11. Measurement of purchased or originated credit impaired financial assets (POCI)

IFRS 9 distinguished a new category of purchased or originated credit-impaired financial assets (POCI).

POCI comprise debt financial assets measured at amortized cost and measured at fair value through other comprehensive income, i.e. loans and debt securities.

Such assets are initially recognized at the net carrying amount (net of write-downs), which corresponds to their fair value. Interest income on POCI assets is calculated based on the net carrying amount using the effective interest rate adjusted for credit risk recognized for the whole life of the asset. The interest rate adjusted for credit risk is calculated taking into account future cash flows adjusted for the effect of credit risk recognized over the whole life of the asset. The change in estimates of future recoveries in further reporting periods is recognized as a gain or loss on expected credit losses.

11.12. Measurement of financial liabilities

Liabilities in respect of a short position in securities are measured at fair value through profit or loss.

Other financial liabilities are measured at amortized cost, using the effective interest rate method. In the case of financial liabilities for which it is not possible to estimate the schedule of future cash flows and the effective interest rate, they are measured at the amount due.

12. Changes in the accounting policies applicable from 1 January 2020 and Explanation of the differences between previously published financial statements and these financial statements

In order to better reflect its operations, the Bank made the following changes in its accounting policies:

• Reclassification of a premium on debt securities (1)

The Bank decided to present costs relating to premium on debt securities under “Interest income” – “debt securities”. Previously, the premium was presented under “Interest expense” – “debt securities”.

• reclassification of fees collected from customers compensating for negative interest rates of financial liabilities (2)

Starting from the financial statements for 2020, the Group presents fees collected from the Bank’s customers to compensate negative interest rates on the Bank’s financial liabilities (customer current accounts) in interest income. Previously, such fees were presented in commission income and interest expense.

• Reclassification of transactional margin (3)

The Bank decided to reclassify the foreign exchange margin included in exchange rates offered to the Bank’s customers when providing foreign currency purchase/sale services, formerly presented in “Net foreign exchange gains / (losses)”, to “Fee and commission income”. The Bank believes that the nature of the foreign exchange margin is similar to other fees and commission collected by the Bank for the services provided.

• Presentation of income and costs relating to foreign currency contracts (4)

The Bank decided to reclassify foreign exchange differences on income and costs accrued on financial assets (e.g. loans, securities, other receivables) and financial liabilities in foreign currencies from “Interest income” to “Net foreign exchange gains / (losses)”. According to the former approach, such income and costs were recognized in the profit or loss in their contractual currencies, and translated to the base currency during the process of annual closure, or at the time interest was accrued or paid by the customers, using the average exchange rate determined by the National Bank of Poland. At the same time, this meant that during a reporting year, such costs and income were accounted for together with foreign exchange differences. At present, such income and costs are recognized in the profit or loss at the average exchange rates determined by the NBP as at the date of their recognition, allowing for foreign exchange differences on individual cost items to be accounted for separately.

• Reclassification of allowances for card complaints (5)

The line “Settlements in respect of card transactions – receivables in respect of card complaints” (under “Other assets”) had previously been included in full in other financial assets. Within of this line, the Bank decided to disclose separately amounts due in respect of card-related complaints which, according to the Bank, should be classified as other non-financial assets. The decision affected the presentation of allowances for card complaints which were previously presented in “Allowances for expected credit losses”, and due to the Bank’s decision, now are presented in “Impairment of non-financial assets”.

• Inclusion of net regulatory charges in administrative expenses (6)

In order to make the presentation of administrative expenses more consistent with the market practice, the Bank combined the line “Administrative expenses” with “Net regulatory charges”.

• „Reverse repo transactions” and “Repo transactions” (1)

INCOME STATEMENT– positions subject to reclassification and changes	01.01-31.12.2019 before restatement	(1)	(2)	(3)	(4)	(5)	(6)	01.01-31.12.2019 restated
Net interest income/(expense)	9 279		12	-	(1)	-	-	9 290
Interest income	11 360	(136)	12	-	(1)	-	-	11 235
Interest expenses	(2 081)	136	-	-	-	-	-	(1 945)
Net fee and commission income	2 470	-	(12)	370	-	-	-	2 828
Fee and commission income	3 542	-	(12)	370	-	-	-	3 900
Other net income	1 037	-	-	(370)	1	-	-	668
Foreign exchange gains/ (losses)	475	-	-	(370)	1	-	-	106
Net expected credit losses	(1 008)	-	-	-	-	(1)	-	(1 009)
Impairment of non-financial assets	(41)	-	-	-	-	1	-	(40)
Overheads	(4 745)	-	-	-	-	-	(492)	(5 237)
Net regulatory charges	(492)	-	-	-	-	-	492	-
Net profit/(loss)	3 835	-	-	-	-	-	-	3 835

The Bank presents as a separate line “Reverse repo and repo transactions” which formerly were presented depending on whether transactions involved interbank market customers or other customers in, respectively: “Amounts due from banks”, “Loans and advances to customers”, Amounts due to banks”, “Amounts due to customers”. As at 31 December 2019, the Bank did not recognize any repo transactions.

• “Reclassification of potential refunds of costs to customers on expected early repayment of open consumer and mortgage loans” (2)

• “Loans and advances received” (3)

Until 2019 (inclusive), loans and advances received by the Bank were presented in “Amounts due to banks” and “Amounts due to customers”. In order to make their presentation consistent with the presentation of interest on loans and advances received and in connection with the fact that the said loans and advances are included in financing activities in the statement of cash flows, the Bank decided to create a separate item in liabilities.

• Reclassification of holiday pay provisions from other liabilities to provisions (4)

The Bank reclassified holiday pay provisions from “Other liabilities” to “Provisions”, because the Bank believes that they are of a similar character to other provisions and are also based on estimations like other employee provisions presented in provisions, i.e. pension provisions and other liabilities due to defined post-employment benefits.

ASSETS – positions subject to reclassification and changes	31.12.2019 before restatement	(1)	(2)	31.12.2019 restated
Receivables in respect of repurchase agreements	-	1 081	-	1 081
Loans and advances to customers	202 095	(1 081)	(147)	200 867

TOTAL ASSETS	317 125	-	(147)	316 978

ASSETS – positions subject to reclassification and changes	31.12.2018*	Implementation of MSSF 16	(1)	01.01.2019 restated
Repurchase transactions	-	-	51	51
Loans and advances to customers	191 575	-	(51)	191 524
Property, plant and equipment	2 082	778	-	2 860
Other assets	2 318	(4)	-	2 314
				-
TOTAL ASSETS	300 413	774	-	301 187

*disclosed as comparative data in the financial statements of the Bank for the year 2019

LIABILITIES - positions subject to reclassification and changes	31.12.2019 before restatement	(1)	(2)	(3)	(4)	31.12.2019 restated

Amounts due to customers	258 015	(46)	-	(5 026)	-	252 943
Repurchase transactions	-	46	-	-	-	46
Loans and advances received	-	-	- �