	NOTA	2020	2019 Restated
Interest income	10	5 849 359	6 692 914
Interest income calculated using the effective interest method		5 610 855	6 435 065
Financial assets measured at amortised cost		4 983 095	5 792 886
Financial assets measured at fair value through other comprehensive income		627 760	642 179
Other interest income related to financial assets measured at fair value through profit or loss		238 504	257 849
Interest expense	10	(647 347)	(1 224 868)
Net interest income		5 202 012	5 468 046
Fee and commission income	11	2 905 266	2 912 452
Fee and commission expense	11	(471 616)	(378 788)
Net fee and commission income		2 433 650	2 533 664
Dividend income	12	26 278	22 407
Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result	13	170 539	143 871
Result on fair value hedge accounting	27	(847)	(1 666)
Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss	14	61 132	71 901
Net allowances for expected credit losses	15	(1 578 460)	(696 038)
Operating income	16	68 180	142 444
Operating expenses	16	(148 111)	(98 938)
Administrative expenses	17	(3 970 407)	(4 078 985)
Personnel expenses		(2 039 866)	(2 077 696)
Other administrative expenses		(1 930 541)	(2 001 289)
Depreciation and amortization	18	(538 951)	(504 217)
PROFIT BEFORE INCOME TAX		1 725 015	3 002 489
Income tax expense	19	(622 114)	(835 872)
NET PROFIT		1 102 901	2 166 617
1. Attributable to equity holders of the Bank		1 101 712	2 165 047
2. Attributable to non-controlling interests	47	1 189	1 570
Earnings per share (in PLN per share)	20
basic for the period		4.20	8.25
diluted for the period		4.20	8.25

II. Consolidated statement of comprehensive income

	NOTE	2020	2019
Net profit		1 102 901	2 166 617
Other comprehensive income
Item that are or may be reclassified subsequently to profit or loss:
Change in fair value of financial assets measured at fair value through other comprehensive income:		685 728	129 086
Profit or loss on fair value measurement		732 511	191 771
Profit or loss reclassification to income statement after derecognition		(46 783)	(62 685)
Change in fair value of cash flow hedges	27	466 716	75 223
Tax on items that are or may be reclassified subsequently to profit or loss	19	(218 964)	(38 818)
Items that will never be reclassified to profit or loss:
Effects of the revaluation of investments in equity instruments designated at fair value through other comprehensive		88 080	(7 462)
Remeasurements of the defined benefit liabilities		(10 964)	(2 783)
Tax on items that will never be reclassified to profit or loss	19	(14 652)	1 946
Other comprehensive income (net of tax)		995 944	157 192
Total comprehensive income		2 098 845	2 323 809
1. Attributable to equity holders of the Bank		2 097 665	2 322 247
2. Attributable to non-controlling interests		1 180	1 562

III. Consolidated statement of financial position

	NotE	31.12.2020	31.12.2019 Restated	01.01.2019 Restated
ASSETS
Cash and due from Central Bank	22	4 456 279	5 162 682	13 026 584
Loans and advances to banks	23	2 578 339	1 791 553	2 268 763
Financial assets held for trading	24	1 317 709	1 281 664	762 712
Derivative financial instruments (held for trading)	25	4 812 231	2 079 529	1 451 662
Loans and advances to customers (in this receivables from financial leases)	26	142 487 797	140 913 235	129 296 381
1. Measured at amortised cost		140 825 741	139 289 989	127 482 649
2. Measured at fair value through profit or loss		187 001	242 639	302 630
3. Measured at fair value through other comprehensive income		1 475 055	1 380 607	1 511 102
Hedging instruments	27	779 063	377 208	313 565
Investments (placement) securities	28	70 491 227	45 893 115	38 586 995
1. Measured at fair value through profit or loss		160 486	146 119	65 408
2. Designated at fair value through profit or loss		-	-	-
3. Measured at fair value through other comprehensive income (debt securities)		42 737 500	30 942 999	27 032 827
4. Designated at fair value through other comprehensive income (equity instruments)		331 690	225 332	232 861
5. Measured at amortised cost		27 261 551	14 578 665	11 255 899
Assets held for sale	29	54 123	17 175	11 550
Investments in associates		-	-	-
Intangible assets	30	2 008 097	1 617 531	1 526 746
Property, plant and equipment	31	1 919 447	1 920 252	1 419 942
Investment properties	32	-	-	11 168
Income tax assets		1 253 578	1 095 050	1 132 416
1. Current tax assets		4 831	420	1 345
2. Deferred tax assets	19	1 248 747	1 094 630	1 131 071
Other assets	33	1 059 292	1 173 925	1 281 321
TOTAL ASSETS		233 217 182	203 322 919	191 089 805
EQUITY AND LIABILITIES
Liabilities
Amounts due to Central Bank	22	-	4 550	5 067
Amounts due to other banks	35	9 950 663	6 539 539	5 615 631
Financial liabilities held for trading	24	742 804	184 799	102 429
Derivative financial instruments (held for trading)	25	4 617 416	2 034 113	1 913 046
Amounts due to customers	36	178 303 984	157 989 734	149 491 059
Hedging instruments	27	1 072 959	614 765	905 056
Debt securities issued	37	6 146 708	6 307 837	5 230 814
Subordinated liabilities	38	2 757 876	2 764 493	2 012 485
Liabilities associated with assets held for sale	29	82 643	-	-
Income tax liabilities		339 798	216 920	244 534
1. Current tax liabilities		312 006	187 002	211 826
2. Deferred tax liabilities	19	27 792	29 918	32 708
Provisions	39	988 704	752 597	635 085
Other liabilities	40	2 718 650	2 515 546	2 126 382
TOTAL LIABILITIES		207 722 205	179 924 893	168 281 588
Equity
Share capital	45	262 470	262 470	262 470
Other capital and reserves	46	22 243 269	20 665 430	20 865 916
Retained earnings and net profit for the period	46	2 977 889	2 458 387	1 668 340
Total equity attributable to equity holders of the Bank		25 483 628	23 386 287	22 796 726
Non-controlling interests	47	11 349	11 739	11 491
TOTAL EQUITY		25 494 977	23 398 026	22 808 217
TOTAL LIABILITIES AND EQUITY		233 217 182	203 322 919	191 089 805

IV. Consolidated statement of changes in equity

For the period from 1 January 2020 to 31 December 2020

	Equity attributable to equity holders of the Bank									NON - CONTROLLING INTERESTS	TOTAL EQUITY
	SHARE CAPITAL	OTHER CAPITAL and reserves						RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD	total equity attributable to equity holders of the bank
	SHARE CAPITAL	TOTAL OTHER CAPITAL AND RESERVES	SHARE PREMIUM	GENERAL BANKING RISK FUND	OTHER RESERVE CAPITAL	REVALUATION RESERVES	OTHER	RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD	total equity attributable to equity holders of the bank
Note	45	46						46		47
Equity as at 1.01.2020	262 470	20 665 430	9 137 221	1 982 459	8 787 844	359 668	398 238	2 458 387	23 386 287	11 739	23 398 026
Comprehensive income	-	995 953	-	-	-	995 953	-	1 101 712	2 097 665	1 180	2 098 845
Remeasurements of the defined benefit liabilities (net of tax)	-	(8 872)	-	-	-	(8 872)	-	-	(8 872)	(9)	(8 881)
Revaluation of debt financial instruments and loans measured at fair value through other comprehensive income (net of tax)	-	555 440	-	-	-	555 440	-	-	555 440	-	555 440
Revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income (net of tax)	-	71 345	-	-	-	71 345	-	-	71 345	-	71 345
Revaluation of hedging financial instruments (net of tax)	-	378 040	-	-	-	378 040	-	-	378 040	-	378 040
Net profit for the period	-	-	-	-	-	-	-	1 101 712	1 101 712	1 189	1 102 901
Appropriation of retained earnings	-	581 861	-	-	598 686	-	(16 825)	(581 861)	-	(1 469)	(1 469)
Dividend paid	-	-	-	-	-	-	-	-	-	(1 469)	(1 469)
Profit appropriation to other reserves	-	581 861	-	-	598 686	-	(16 825)	(581 861)	-	-	-
Other	-	25	-	-	25	-	-	(349)	(324)	(101)	(425)
Other	-	25	-	-	25	-	-	(349)	(324)	(101)	(425)
Equity as at 31.12.2020	262 470	22 243 269	9 137 221	1 982 459	9 386 555	1 355 621	381 413	2 977 889	25 483 628	11 349	25 494 977

For the period from 1 January 2019 to 31 December 2019

	Equity attributable to equity holders of the Bank									NON - CONTROLLING INTERESTS	TOTAL EQUITY
	SHARE CAPITAL	OTHER CAPITAL and reserves						RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD	total equity attributable to equity holders of the bank
	SHARE CAPITAL	TOTAL OTHER CAPITAL AND RESERVES	SHARE PREMIUM	GENERAL BANKING RISK FUND	OTHER RESERVE CAPITAL	REVALUATION RESERVES	OTHER	RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD	total equity attributable to equity holders of the bank
Note	45	46						46		47
Equity as at 1.01.2019	262 470	20 865 916	9 137 221	1 982 459	9 137 113	202 663	406 460	1 668 340	22 796 726	11 491	22 808 217
Comprehensive income	-	157 200	-	-	195	157 005	-	2 165 047	2 322 247	1 562	2 323 809
Remeasurements of the defined benefit liabilities (net of tax)	-	(2 247)	-	-	171	(2 418)	-	-	(2 247)	(8)	(2 255)
Revaluation of debt financial instruments and loans measured at fair value through other comprehensive income (net of tax)	-	104 560	-	-	-	104 560	-	-	104 560	-	104 560
Revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income (net of tax)	-	(6 044)	-	-	24	(6 068)	-	-	(6 044)	-	(6 044)
Revaluation of hedging financial instruments (net of tax)	-	60 931	-	-	-	60 931	-	-	60 931	-	60 931
Net profit for the period	-	-	-	-	-	-	-	2 165 047	2 165 047	1 570	2 166 617
Appropriation of retained earnings	-	593 566	-	-	587 318	-	6 248	(2 325 868)	(1 732 302)	(1 214)	(1 733 516)
Dividend paid	-	-	-	-	-	-	-	(1 732 302)	(1 732 302)	(1 214)	(1 733 516)
Profit appropriation to other reserves	-	593 566	-	-	587 318	-	6 248	(593 566)	-	-	-
Other	-	(951 252)	-	-	(936 782)	-	(14 470)	950 868	(384)	(100)	(484)
Coverage of negative impact of IFRS 9 implementation	-	(951 218)	-	-	(936 748)	-	(14 470)	951 218	-	-	-
Other	-	(34)	-	-	(34)	-	-	(350)	(384)	(100)	(484)
Equity as at 31.12.2019	262 470	20 665 430	9 137 221	1 982 459	8 787 844	359 668	398 238	2 458 387	23 386 287	11 739	23 398 026

V. Consolidated cash flow statement

	NOTE	2020	2019 Restated
Cash flow from operating activities – indirect method
Profit before income tax		1 725 015	3 002 489
Adjustments for:		22 965 508	(4 481 301)
Depreciation and amortization	18	538 951	504 217
(Gains) losses on investing activities		(51 145)	(87 553)
Net interest income	10	(5 202 012)	(5 468 046)
Dividend income	12	(26 278)	(22 407)
Interest received		(1 579 526)	6 651 445
Interest paid		(822 552)	(1 222 560)
Income tax paid		(768 095)	(715 814)
Change in loans and advances to banks		(28 927)	50 108
Change in financial assets held for trading		(43 174)	(519 757)
Change in derivative financial instruments (assets)		(2 732 702)	(627 867)
Change in loans and advances to customers		5 687 122	(11 652 604)
Change in investment (placement) securities		(121 152)	93 256
Change in other assets		589 320	(460 199)
Change in amounts due to banks		2 606 471	(184 375)
Change in financial liabilities held for trading		558 005	82 370
Change in derivative financial instruments (liabilities)		2 583 303	121 067
Change in amounts due to customers		20 573 060	8 733 103
Change in debt securities issued		57 414	28 267
Change in subordinated liabilities		-	2 008
Payments for short-term leases and leases of low-value assets		(3 838)	(20 908)
Change in provisions		236 107	117 512
Change in other liabilities		915 156	117 436
Net cash flows from operating activities		24 690 523	(1 478 812)
Cash flow from investing activities
Investing activity inflows		349 678 196	136 828 954
Sale of investment securities		349 633 759	136 750 241
Sale of intangible assets and property, plant and equipment	30, 31	18 159	56 306
Dividend received	12	26 278	22 407
Investing activity outflows		(374 809 443)	(144 596 833)
Acquisition of investment securities		(373 885 399)	(144 045 837)
Acquisition of intangible assets and property, plant and equipment	30, 31	(924 044)	(550 996)
Net cash flows from investing activities		(25 131 247)	(7 767 879)
Cash flows from financing activities
Financing activity inflows		11 325 370	13 120 042
Due to loans and advances received from banks	48	1 660 575	4 299 917
Issue of debt securities	48	9 664 795	8 070 125
Issue of subordinated liabilities	48	-	750 000
Financing activity outflows		(10 830 270)	(12 161 645)
Repayment of loans and advances received from banks	48	(844 747)	(3 200 119)
Redemption of debt securities	48	(9 871 878)	(7 029 763)
Dividends and other payments to shareholders		-	(1 732 302)
Payments for the principal portion of the lease liabilities		(113 645)	(199 461)
Net cash flows from financing activities		495 100	958 397
Total net cash flows		54 376	(8 288 294)
including: effect of exchange rate fluctuations on cash and cash equivalents held		170 817	(6 436)
Net change in cash and cash equivalents		54 376	(8 288 294)
Cash and cash equivalents at the beginning of the period	48	6 950 972	15 239 266
Cash and cash equivalents at the end of the period	48	7 005 348	6 950 972

VI. Notes to the consolidated financial statements

1. General information

Bank Polska Kasa Opieki Spółka Akcyjna (hereafter ‘Bank Pekao S.A.’ or ‘the Bank’), with its headquarters in Poland in Warsaw 00-844, Grzybowska Street 53/57, was incorporated on 29 October 1929 in the Commercial Register of the District Court in Warsaw and has been continuously operating since its incorporation.

Bank Pekao S.A. is registered in the National Court Registry – Enterprise Registry of the Warsaw District Court, XII Commercial Division of the National Court Registry in Warsaw under the reference number KRS 0000014843 no changes in the name or identification data compared to the previous reporting period)

The Bank’s shares are quoted on the Warsaw Stock Exchange (WSE). The Bank’s securities, traded on regulated markets, are classified in the banking sector.

Bank Pekao S.A. is a universal commercial bank, offering a broad range of banking services on domestic financial markets, provided to retail and corporate clients, in compliance with the scope of services, set forth in the Bank’s Articles of Association.

The Bank runs both PLN and forex operations, and it actively participates in both domestic and foreign financial markets. Moreover, acting through its subsidiaries, the Group provides stockbroking, leasing, factoring operations and offering other financial services.

According to IFRS 10 ‘Consolidated financial statements’, the parent entity of Bank Pekao S.A. is Powszechny Zakład Ubezpieczeń S.A. (hereinafter ‘PZU S.A.’) with its registered office in Warsaw at Al. Jana Pawła II 24.

The Consolidated Financial Statements of Bank Pekao S.A. Group for the period from 1 January 2020 to 31 December 2020 contain financial information of the Bank and its subsidiaries (together referred to as the ‘Group’), and the associates accounted for using equity method.

The share ownership structure of the Bank is presented in the Note 6.1 of the Report on the activities of Bank Pekao S.A. Group for the year 2020 - prepared jointly with the Report on the activities of Bank Pekao S.A.

2. Group structure

The Group consists of Bank Pekao S.A. as the parent entity and the following subsidiaries

NAME OF ENTITY		LOCATION	CORE ACTIVITY		Percentage of the Group’s ownership rights in share capital/voting
NAME OF ENTITY		LOCATION	CORE ACTIVITY		31.12.2020	31.12.2019
Pekao Bank Hipoteczny S.A.	Warsaw			Banking	100.00	100.00
Pekao Leasing Sp. z o.o.	Warsaw			Leasing services	100.00	100.00
Pekao Investment Banking S.A.	Warsaw			Brokerage	100.00	100.00
Pekao Faktoring Sp. z o.o.	Lublin			Factoring services	100.00	100.00
Pekao Powszechne Towarzystwo Emerytalne S.A. (in liquidation)	Warsaw			Pension fund management	-	100.00
Centrum Kart S.A.	Warsaw			Financial support	100.00	100.00
Pekao Financial Services Sp. z o.o.	Warsaw			Transferable agent	66.50	66.50
Pekao Direct Sp. z o.o.	Cracow			Call-center services	100.00	100.00
Pekao Property S.A. (in liquidation)	Warsaw			Real estate development	100.00	100.00
FPB - Media Sp. z o.o. (in bankruptcy)	Warsaw			Real estate development	100.00	100.00
Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation)	Warsaw			Business consulting	100.00	100.00
Dom Inwestycyjny Xelion Sp. z o.o.	Warsaw			Financial intermediary	100.00	100.00
Pekao Investment Management S.A.	Warsaw			Asset management	100.00	100.00
Pekao TFI S.A.	Warsaw			Asset management	100.00	100.00

As at 31 December 2020, all subsidiaries of the Bank have been consolidated.

Associates

Bank Pekao S.A. Group has an interest in the following associates

NAME OF ENTITY		LOCATION	CORE ACTIVITY		Percentage of the Group’s ownership rights in share capital/voting
NAME OF ENTITY		LOCATION	CORE ACTIVITY		31.12.2020	31.12.2019
CPF Management	Tortola, British Virgin Islands			Financial brokerage – not operating	-	40.00

As at 31 December 2020, the Group held no shares in entities under joint control.

Acquisition of an organized part of the enterprise of Pekao Investment Banking S.A.

On 29 May 2020 the Bank acquired an organized part of the enterprise of Pekao Investment Banking S.A. related to the provision of brokerage services. Other activities of Pekao Investment Banking S.A. related to oferent investment banking services remained with the Company.

The transaction of acquisition of an organized part of the enterprise of Pekao Investment Banking S.A. has been recognized in accordance with the adopted accounting policy applied to business combinations under common control. The transaction had no impact on the Group.

Liquidation of Pekao Powszechne Towarzystwo Emerytalne S.A. (in liquidation)

In 2020, Pekao Powszechne Towarzystwo Emerytalne S.A. (in liquidation) was liquidated.

Dissolution of CPF Management Inc.

In 2020, CPF Management Inc. was removed from the register of companies and dissolved.

Planned acquisition of shares of Krajowy Integrator Płatności S.A.

On 21 December 2020, the Bank signed a preliminary agreement to acquire a package of 38.33% of shares of Krajowy Integrator Płatności S.A. (hereinafter ‘KIP’), the operator of the Tpay.com system. The acquisition by the Bank of a package of KIP shares will allow for the creation of a strategic partnership on the e-commerce market, while supporting the implementation of the assumed strategic goals of the Bank in the field of digital transformation and digitization. The transaction will provide the Bank's corporate clients with a comprehensive payment acceptance offer, supplemented with products for the e-commerce market. The closing of the transaction is planned at the turn of the first and second quarter of 2021 and is subject to the approval of the Polish Financial Supervision Authority.

Planned sale of shares in the company Dom Inwestycyjny Xelion Sp. z o.o.

In December 2020, the Bank signed a preliminary agreement for the sale of 100% shares in Dom Inwestycyjny Xelion Sp. z o.o. Due to the planned sale of these shares, the Bank presented the assets and liabilities of Dom Inwestycyjny Xelion Sp. z o.o. as held for sale in these financial statements.

3. Business combinations

In 2020 there were no business combinations in the Group.

4. Statement of compliance

The annual consolidated financial statements (‘financial statements’) of Bank Pekao S.A. Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and in respect to matters that are not regulated by the above standards, in accordance with the requirements of the Accounting Act dated 29 September 1994 (Official Journal from 2019, item 351 with further amendments) and respective operating regulations, and in accordance with the requirements for issuers of securities admitted or sought to be admitted to trading on an official stock exchange listing market.

These consolidated financial statements were approved for publication by the Bank’s Management Board on 24 February 2021.

5. Significant accounting policies

5.1. Basis of preparation of Consolidated Financial Statements

General information

The financial statements have been prepared in Polish zloty, and all data in the financial statements are presented in PLN thousand (PLN ‘000), unless indicated otherwise.

The financial statements have been prepared on a going concern basis on the assumption that the Group will continue its business operations substantially unchanged in scope for a period of at least one year from the balance sheet date.

The accounting principles as described below have been consistently applied for all the reporting periods. The principles have been applied consistently by all the Group entities.

Consolidated Financial Statements of the Group for the year ended on 31 December 2020 have been prepared based on the following valuation methods:

 at fair value for derivatives, financial assets and liabilities held for trading, financial assets designated as measured at fair value through profit and loss at initial recognition, equity instruments, financial assets classified to business model whose objective is achieved by both collecting contractual cash flows and selling financial assets that do meet SPPI criteria (Solely Payments of Principal and Interest criteria) and financial assets that do not meet SPPI criteria,

 at amortized cost for financial assets, classified to business model whose objective is to hold financial assets in order to collect contractual cash and meeting SPPI criteria at the same time, for other financial liabilities,

 at historical cost for non-financial assets and liabilities,

 non-current assets (or disposal groups) classified as held for sale are measured at the lower of the carrying amount or the fair value less costs to sell.

The consolidated financial statements include the requirements of all the International Financial Reporting Standards and International Accounting Standards approved by the European Union and related interpretations. Changes in published standards and interpretations, which became effective on or after 1 January 2020, had no material impact on the Group’s financial statements.

The financial statements does take into consideration interpretations and amendments to Standards, pending approval by the European Union or approved by the European Union but came into force or shall come into force after the balance sheet date (Note 5.11 and Note 5.12). In the Group’s opinion, amendments to Standards and interpretations will not have a material impact on the consolidated financial statements of the Group,

Comparability of financial data

In the consolidated financial statements for the year ended on 31 December 2020, the Group changed the presentation of selected items in the profit and loss account. The item ‘Net other operating income and expenses’ has been presented in two separate lines, i.e. as ‘Other operating income’ and ‘Other operating expenses’.

The above-mentioned changes resulted in restatement of comparable data, but without impact on the financial result level.

The impact of changes on the comparative data of the income statement is presented in the table below.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION	DATE FOR 31.12.2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 31.12.2019 AFTER RESTATEMENT
Loans and advances to banks	1 791 436	117	1 791 553
Loans and advances to customers	134 200 413	6 712 822	140 913 235
1. Measured at amortised cost	132 577 167	6 712 822	139 289 989
Receivables from finance leases	6 712 939	(6 712 939)	-

CONSOLIDATED STATEMENT OF FINANCIAL POSITION	DATE FOR 01.01.2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 01.01.2019 AFTER RESTATEMENT
Loans and advances to banks	2 268 422	341	2 268 763
Loans and advances to customers	123 970 055	5 326 326	129 296 381
1. Measured at amortised cost	122 156 323	5 326 326	127 482 649
Receivables from finance leases	5 326 667	(5 326 667)	-

The above-mentioned changes resulted in restatement of comparable data, but without impact on the financial result level.

The impact of changes on the comparative data of the income statement is presented in the table below.

CONSOLIDATED INCOME STATEMENT	DATE FOR 31.12.2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 31.12.2019 AFTER RESTATEMENT
Net other operating income and expenses	43 506	(43 506)	-
Other operating income	-	142 444	142 444
Other operating expenses	-	(98 938)	(98 938)

In the consolidated financial statements for the year ended on 31 December 31 2020 the Group changed presentation of selected items of the consolidated statement of cash flows:

 cash flows from operating activities determined using the indirect method have been presented as ‘Gross profit’ and adjustments (previously ‘Net profit’ and adjustments), therefore the item ‘Income tax’ has been rejected from the item ‘Total adjustments’,

 position ‘Net Profit attributable to non-controlling interests’ was presented in line ‘Change in other assets’,

 position ‘Change in receivables from financial leases’ was presented in line ‘Change in loans and advances to banks’ and ‘Change in loans and advances from customers (in this receivables from financial leases)’, depending on the type of entity,

 position ‘Other investment inflows’ was presented in line ‘Changes in investment (placement) securitie’.

The impact of changes on the comparative data of the cash flow statement is presented in the table below.

CONSOLIDATED CASH FLOW STATEMENT	DATE FOR 2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 2019 AFTER RESTATEMENT
Profit before income tax	-	3 002 489	3 002 489
Net profit for the period	2 165 047	(2 165 047)	-
Income tax	835 872	(835 872)	-
Change in other assets	(458 629)	(1 570)	(460 199)
Change in receivables from finance leases	(1 386 272)	1 386 272	-
Change in loans and advances to banks	49 884	224	50 108
Change in loans and advances to customers (in this receivables from financial leases)	(10 266 108)	(1 386 496)	(11 652 604)
Change in investment (placement) securities	(920 794)	1 014 050	93 256
Other investing inflows	1 014 050	(1 014 050)	-

5.2. Consolidation

Consolidation principles

The consolidated financial statements of Bank Pekao S.A. Group include the financial data of Bank Pekao S.A. and its subsidiaries as at 31 December 2020. The financial statements of the subsidiaries are prepared at the same reporting date as those of the parent entity, using consistent accounting policies within the Group in all important aspects.

All intra-group balances and transactions, including unrealized gains, have been eliminated. Unrealized losses are also eliminated, unless there is an objective evidence of impairment, which should be recognized in the consolidated financial statements.

Investments in subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group has power over an entity, is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. The subsidiaries are consolidated from the date of obtaining control by the Group until the date when the control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date. The Group measures any non-controlling interests in the acquire at fair value or at the present ownership instruments’ proportionate share in the recognized amounts of the acquire's identifiable net assets.

Acquisition-related costs are expenses as incurred (in the income statement under ‘Administrative expenses’).

If the business combination is achieved in stages, the acquirer remeasures its previously held equity interests in the acquiree at fair value at the acquisition date (date of obtaining control) and recognizes the resulting gain or loss in the income statement. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement.

The above policy does not apply to the business combinations under common control.

The changes in a parent entity's ownership interest in a subsidiary that do not result in the parent entity losing control of the subsidiary are accounted for as equity transactions (i.e. transactions with owners of parent entity). The Group recognizes directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attributes it to the owners of the parent entity.

When the Group ceases to have control over the subsidiary, any retained interest in that subsidiary is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognized in the income statement.

Recognition of business combinations under common control at book value

Business combinations under common control are excluded from the scope of IFRS. As a consequence, following the recommendation included in IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, in the absence of any specific guidance within IFRS, Bank Pekao S.A. has adopted the accounting policy consistently applied in all business combinations under common and recognizes those transactions using book value.

The acquirer recognizes the assets and liabilities of the acquired entity at their current book value adjusted exclusively for the purpose of aligning the accounting principles. Neither goodwill, nor badwill is recognized.

Any difference between the book value of the net assets acquired and the fair value of the consideration paid is recognized in the Group’s equity. In applying this book value method, the comparative periods are not restated.

If the transaction results in the acquisition of non-controlling interests, the acquisition of any non-controlling interest is accounted for separately.

There is no guidance in IFRS how to determine the percentage of non-controlling interests acquired from the perspective of a subsidiary. Accordingly Bank Pekao S.A. uses the same principles as the ultimate parent for estimating the value of non-controlling interests acquired.

Investments in associates

An associate is an entity over which the Group has significant influence, and that is neither a subsidiary nor a joint venture. The Group usually holds from 20% to 50% of the voting rights in an associate. The equity method is calculated using the financial statements of the associates. The balance sheet dates of the Group and its associates are the same.

On acquisition of the investment, any difference between the cost of the investment and the Group's share in the net fair value of the investee's identifiable assets and liabilities is accounted for as follows:

 goodwill relating to an associate is included in the carrying amount of the investment,

 any excess of the Group's share in the net fair value of the investee's identifiable assets and liabilities over the cost of the investment is included as income in the determination of the Group's share in the associate's profit or loss in the period in which the investment is acquired.

The Group recognizes the investments in associates applying the equity method. The investment in associates is initially recognized at cost and the carrying amount is increased or decreased to recognize the Group’s statement of financial position share in net assets of the associate after the date of acquisition, net of any impairment allowances.

The Group’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. Distributions received from an associate reduce the carrying amount of the investment.

If the Group’s share in the losses of an associate equals or exceeds the Group’s share in the associate, the Group ceases to recognize further losses, unless it assumed obligations or made a payment on behalf of the associate.

Unrealized profits or losses from transactions between the Group and associates are eliminated pro rata to the Group’s share in the associates.

5.3. Accounting estimates

Preparation of financial statements in accordance with IFRS requires the Group to make certain estimates and to adopt certain assumptions, which affect the amounts of assets and liabilities presented in the financial statements.

Estimates and assumptions are reviewed on an ongoing basis by the Group and rely on historic data and other factors including expectation of the future events which seems justified in given circumstances. In particular, as at 31 December 2020, the Group included in its estimates the impact of the COVID-19 epidemic on individual items of the Group's assets and liabilities. However, taking into account the significant uncertainty as to the further development of the economic situation, the estimates made may change in the future. The uncertainty of the estimates made by the Group as at 31 December 2020 concerns mainly:

 forecasts regarding macroeconomic assumptions, in particular those relating to key economic indicators (the level of the expected economic recovery, GDP, employment, housing prices, possible disruptions in capital markets, etc.),

 possible business disruptions due to decisions made by public institutions, enterprises and consumers to help contain the spread of the virus,

 the effectiveness of the support programs that have been designed to support businesses and consumers.

Significant accounting estimates that are affected by the aforementioned forecasts and the related uncertainties relate primarily to expected credit losses and the determination of the recoverable amount of non-financial assets.

Estimates and underlying assumptions are subject to a regular review. Revisions to accounting estimates are recongised prospectively starting from the period in which the estimates are revised.

Information on the applied estimates and the underlying uncertainty related to significant risk of the material adjustments in the subsequent financial statements are presented below.

Impairment of loans and advances to customers, expected credit losses

At each balance sheet date the Group assesses whether there is any objective evidence (‘trigger’) that credit exposures are impaired taking into consideration actual definition of Default.

The definition of Default consistently considers all financial instruments. For financial instruments that are not impaired, the Group asses if credit risk has increased significantly since initial recognition. If at balance sheet date credit risk concerning the financial instrument has not increase significantly since initial recognition, the Group asses impaired allowances for expected losses with regard to the financial instrument as an amount equal 12-month expected credit losses. Otherwise, the Group asses impaired allowances for expected losses with regard to the financial instrument as an amount equal expected credit losses over the expected life (lifetime horizon) of that financial instrument (lifetime expected credit losses).

The Group, in order to determine the value of expected credit losses, ring fence individually significant financial instruments, in particular all credit exposures of the borrower, for whom total Group’s exposure exceeds the threshold value as at balance sheet date equal 1 million PLN and the -financial restructuring instruments of debtors being the entrepreneurs within the meaning of the Article 43 of the Civil Code.

For all individually significant financial instruments , which are impaired as at balance sheet date, the Group measures the impairment allowance (impairment credit loss) as part of individual assessment. The individual assessment is carrying out by the Group’s employees and consists of individual verification of the default occurrence and projection of future cash flows from foreclosure, less costs incurred for obtaining and selling the collateral or other repayment resources.

The Group compares the estimated future cash flows applied for measurement of individual expected credit losses with the actual cash flows on a regular basis.

For all other financial instruments the Group measures the allowance according to IFRS 9 based on the expected credit losses and taking into account forecasts and expected future economic conditions in the context of credit risk.

More information about the applied assumptions and the underlying uncertainty related to the estimates in respect to expected credit losses, as well as the sensitivity analysis concerning impairment of loans and advances estimates were presented in Note 6.2 ’.

Impairment of non-current assets (including goodwill)

At each balance sheet date the Group reviews its non-current assets for indications of impairment. The Group performs an impairment test of goodwill on a yearly basis or more often if impairment triggers occur.

Where such indications exist, the Group makes a formal estimation of the recoverable value (of a given assets or – in the case of goodwill - all cash-generating units to which the goodwill relates). If the carrying amount of a given asset is in excess of its recoverable value, impairment is defined and a write-down is recorded to adjust the carrying amount to the level of its recoverable value. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value-in-use.

Estimation of the value-in-use of an assets (or cash generating unit) requires assumptions to be made regarding, among other, future cash flows which the Group may obtain from the given asset (or cash generating unit), any changes in amount or timing of occurrence of these cash flows and other factors such as the lack of liquidity. The adoption of different measurement assumptions may affect the carrying amount of some of the Group’s non-current assets.

As at 31 December 2020, the Group assessed whether the current market conditions and the existing uncertainty regarding the macroeconomic situation caused by COVID-19 have an impact on the impairment of non-current assets. As a result of this analysis, no need was found to make impairment allowances of non-current assets, including goodwill. The main assumptions used in the goodwill impairment test are presented in Note 30.

Measurement of derivatives, unquoted debt securities measured at fair value through other comprehensive income and loans and advances to customers measured at fair value through other comprehensive income and measured at fair value through profit or loss

The fair value of non-option derivatives, debt securities measured at fair value through other comprehensive income and loans and advances to customers measured at fair value through other comprehensive income and measured at fair value through profit or loss that do not have a quoted market price on an active market is measured using valuation models based on discounted cash flows. Options are valued using option valuation models. Variables used for valuation purposes include, where possible, the data from observable markets. However, the Group also adopts assumptions concerning counterparty’s credit risks which affect the valuation of instruments. The adoption of other measurement assumptions may affect the valuation of these financial instruments. The assumptions used for fair value measurement are described in detail in Note 6.7.

Provisions for defined benefit plans

The principal actuarial assumptions applied to estimation of provisions for defined benefit plans, as well as the sensitivity analysis were presented in Note 41.

Provisions for legal risk regarding foreign currency mortgage loans in CHF

As at 31 December 2020 the Group assessed the probability of the impact of legal risk regarding foreign currency mortgage loans in CHF on future expected cash flows from loan exposures and the probability of cash outflows.

Given the inconsistent judicial decisions regarding foreign currency mortgage loans in CHF and the short period of historical data regarding lawsuits related to the above-mentioned loans, the estimation of the provision required the Group to adopt expert assumptions and is associated with significant uncertainty.

Details on the main assumptions used to estimate the provisions for legal risk regarding foreign currency mortgage loans in CHF are presented in Note 6.2

Provisions for commission refunds in the event of early repayment of loan

As at 31 December 2020 the Group assessed the legal risk arising from the judgment of the Court of Justice of the European Union (hereinafter the ‘CJEU’) on consumer loans and estimated the possible amount of cash outflow as a refund of commission to the customer in relation to early repayment of consumer loans (for loans prepaid before the judgment of the CJEU, i.e. before 11 September 2019).

In addition, with regard to balance-sheet exposures as at 31 December 2020, the Group estimated the possible prepayments of these exposures in the future.

The estimates required the Group to adopt expert assumptions primarily regarding the scale of complaints and amounts reimbursed for prepaid loans before the CJEU judgment, as well as the expected scale of prepayments and future returns for balance sheet exposures, and are associated with significant uncertainty.

Details on the estimated provision for earlier repayments of consumer loans are presented in Note 39.

5.4. Foreign currencies

 Transactions and balances

Foreign currency transactions are calculated into the functional currency using the spot exchange rate from the date of the transaction. Gains and losses from foreign currency translation differences resulting from settlements of such transactions and from the statement of financial position valuation of monetary assets and liabilities expressed in foreign currencies are recognized in the income statement.

 Foreign currency translation differences arising from non-monetary items, such as equity instruments classified as financial assets measured at fair value through the profit or loss are recognized together with the changes in the fair value of that item in the income statement.

 Foreign currency translation differences arising from non-monetary items such as equity instruments classified as financial assets measured at fair value through other comprehensive income are recognized in the revaluation reserves.

The foreign exchange rate differences from the valuation of foreign entities are accounted for as a separate component of equity.

Goodwill arising on acquisition of the entity operating abroad as well as any adjustments of the balance sheet value of assets and liabilities to fair value arising on the acquisition of the entity are treated as assets and liabilities of a foreign entity i.e. they are expressed in the functional currency of the overseas entity and translated at the closing exchange rate as described above.

5.5. Income statement

Interest income and expense

The Group recognizes in the income statement all interest income and expense related to financial instruments measured at amortized cost using the effective interest rate method, financial assets measured at fair value through other comprehensive income and financial assets and liabilities measured through profit or loss.

The effective interest rate is the discount rate of estimated future cash inflows and payments made during the expected period until the expiry date of the financial instruments, and in justified cases in a shorter time, to the gross carrying amount of such financial asset or to the amortised cost of financial liability. The calculation of the effective interest rate includes all commissions paid and received by parties to the agreement, transaction costs and all other premiums and discounts, comprising an integral part of the effective interest rate.

Interest income includes interest and commission fees received or due from loans, interbank deposits and securities measured at amortised cost recognized in the calculation of effective interest rate of loans and financial assets measured at fair value through other comprehensive income or through profit or loss and hedging derivatives.

Gross carrying amount of the financial asset is the basis for interest income calculation except for credit-impaired financial assets (‘in Stage 3’) and purchased or originated credit-impaired financial assets (POCI assets). At the recognition of impairment of financial assets measured at amortized cost or financial assets measured at fair value through other comprehensive income, the interest income is still recognized in profit or loss but is calculated by applying the effective interest rate to the gross carrying amount less the impairment charges.

Interest expense related to liabilities associated with client accounts and debt securities issued are recognized in the profit or loss using the effective interest rate.

Fee and commission income and expense

Fee and commission income is generated from financial services provided by the Group. Fee and commission income and expense is recognized in the profit or loss using the following methods:

 fees and commissions directly attributable to financial asset or liability origination (both income and expense) are recognized in the income statement using the effective interest rate method and are described above,

 fees and commissions relating to the loans and advances without a defined repayment schedule and without a defined interest rate schedule e.g. overdraft facilities and credit cards are amortized over the life of the product using the straight line method,

 other fees and commissions arising from the Group’s financial services offering (customer account transaction charges, credit card servicing transactions, bonuses from card providers in order to cover the marketing card cost, brokerage activity and canvassing) as well as the trade margins on foreign exchange transactions with the Bank’s clients are recognized in the income statement up-front when the corresponding service is provided.

Income and expense from bancassurance

The Group splits the remuneration for sale of insurance products linked to loans into separate components, i.e. dividing the remuneration into proportion of fair value of financial instrument and fair value of intermediary service to the sum of those values. The fair values of particular components of the remuneration are determined based on market data to a highest degree.

The particular components of the Group’s remuneration for sale of insurance products linked to loans are recognized in the income statement according to the following principles:

 remuneration from financial instrument – as part of effective interest rate calculation, included in interest income,

 remuneration for intermediary service – upfront at the time when the insurance product in sold, included in fee and commission income.

Additionally the Group estimates the part of the remuneration which will be refunded in the future (eg. due to early termination of insurance contract, early repayment of loan). The estimate of the provision for future refunds is based on the analysis of historical data and expectations in respect to refunds trend in the future.

Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result

Result on financial assets measured at fair value through profit or loss includes:

 Foreign exchange result

The foreign exchange gains (losses) are calculated taking into account the positive and negative foreign currency translation differences, whether realized or unrealized from the daily valuation of assets and liabilities denominated in foreign currencies. The revaluation is perform using the average exchange announced by the NBP on the balance sheet date.

The foreign exchange result includes swap points from derivative transactions, entered into by the Group for the purpose of managing the Group’s liquidity in foreign currencies.

Income from foreign exchange positions includes also foreign currency translation differences from valuation of investments in foreign operations arising on disposal thereof. Until the disposal, foreign currency translation differences from valuation of assets in foreign operations are recognized in ‘Other capital and reserves’.

 Result on derivatives, loans and advances to customers and securities measured at fair value through profit or loss.

The income referred to above includes gains and losses realized on a sale or a change in the fair value of financial assets and liabilities measured at fair value through profit or loss.

The accrued interest and unwinding of a discount or a premium on loans and advances to customers and debt securities measured at fair value through profit or loss is presented in the net interest income.

Gains (losses) on financial assets/liabilities designated at fair value through profit or loss

This includes gains and losses arising from changes realized on a sale or a change in the fair value of assets and liabilities, designated at fair value through profit or loss.

The accrued interest and unwinding of a discount or a premium on financial assets/liabilities designated at fair value through profit or loss are recognized in the interest result.

Other operating income/expense

Other operating income includes mainly revenues from received compensations, revenues from operating leases, recovery of debt collection costs and miscellaneous revenues. Other operating expenses include mainly the costs of provision for legal claims, cost of provisions for current and future legal risk related to foreign currency mortgage loans in CHF, impairment allowance on fixed assets, client claims, compensation paid and miscellaneous expenses

5.6. Valuation of financial assets and liabilities, derivative financial instruments

Financial assets

Financial assets are classified into the following categories:

 financial assets measured at amortised cost,

 financial assets measured at fair value through other comprehensive income,

 financial assets measured at fair value through profit or loss.

The above mentioned classification is based on the entity’s business model for managing the financial assets and the characteristics regarding the contractual cash flows (i.e. whether the contractual payments are solely payments of principal and interest on the principal amount outstanding ( i.e.‘criterion SPPI’).

The financial assets could be classified depending on the Group’s business model to the following categories:

 a business model whose objective is to hold financial assets in order to collect contractual cash flows,

 a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets,

 other business model than business model whose objective is to hold financial assets in order to collect contractual cash flows and business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

The business model assessment

The assessment of the business model is made at the initial recognition of the asset (with the exception of the first adoption of IFRS 9 – when implementing the Standard, the Group classified the particular groups of the asset in accordance with the business model applied at the date of the implementation of the IFRS 9 i.e. 1 January 2018, not at the initial recognition of the financial asset.

The business model criteria refers to the way the Group’s managing financial assets in order to generate cash flows.

The Group evaluates the purpose of the business model, to which the particular financial assets are classified on the level of particular portfolios of the assets – performing the analysis on those portfolio level is a reliable reflection business activities regarding these models and also reflects to information analysis of those activities provided to the Group’s management.

The assessment of the business model is based on the analysis of the following information regarding the portfolio of the financial assets:

 applied policies and business aims for the particular portfolio and its practical implementation. In particular, the management's strategy regarding the acquisition of revenues from contractual interest payments, maintaining a specific interest rate profile of the portfolio, managing the liquidity gap and obtaining cash flows as a result of the sale of financial assets is assessed,

 the manner in which the profitability of the portfolio is assessed and reported to the Bank's Management Board,

 types of risk that affect the profitability and effectiveness of a given business model (and financial assets held under this business model) and the manner of managing the identified types of risk,

 the way in which the managers of business operations are remunerated under a given business model - eg whether the remuneration depends on changes in the fair value of financial assets or the value of contractual cash flows obtained,

 frequency, value and moment of sale of financial assets made in prior reporting periods, the reasons for these sales and expectations regarding future sales activity. However, information on sales activity is analyzed taking into account the overall assessment of the Group's implementation of the adopted method of managing financial assets and generating cash flows.

Before making a decision regarding allocating a portfolio of financial assets to a business model which purpose is to obtain contractual cash flows, the Group reviews and evaluates significant and objective quantitative data influencing the allocation of asset portfolios to the relevant business model, in particular:

 the value of sales of financial assets made within the particular portfolios,

 the frequency of sales of financial assets as part of particular portfolios,

 expectation analysis regarding the value of planned sales of financial assets and their frequency of the particular portfolios, this analysis is carried out on the basis of probable scenarios of the Group's business activities in the future.

The portfolios of financial assets from which sales are made that do not result from an increase in credit risk meet the assumptions of the business model, which purpose is to obtain contractual cash flows, provided that these sales:

 are at low volume (even with a relatively high frequency of sales) or

 are made rarely - as a result of one-off events, which the probability to occur again in the future, according to the Group’s professional judgment is rare (even with a relatively high volume) or

 they occur close to the maturity date of the financial assets being sold, and the revenue obtained from such sales is similar to those which could be obtained from remaining contractual cash flows as if the financial asset was held in the Group's portfolio to the original maturity date.

The following sales are excluded from the analysis of sales value:

 the sales resulting from an increase in the credit risk of financial assets, regardless of their frequency and volume,

 the sales resulting from one-off events, which the probability to occur again in the future, according to the Group’s professional judgment is rare,

 the sales made close to maturity.

A held to obtain contractual cash flows or sale business model includes a portfolio of financial assets whose purpose is, in particular, managing current liquidity levels, maintaining the assumed profitability profile and/or adjust the duration of the asset and financial liabilities, and a level of sales are higher than for those financial assets classified in a model which purpose is to obtain contractual cash flows.

The business model comprising financial assets held for sale and other includes assets that do not meet the criteria to be classified into the business model, which purpose is to obtain contractual cash flows the business model which purpose is to obtain contractual cash flows or sales and also acquiring cash flows from interest and capital is not the main business target.

Assessment, whether the contractual payments are solely payments of principal and interest on the principal amount outstanding (SPPI criteria)

For the purposes of assessing cash flow characteristics, ‘principal’ is defined as the fair value of a financial asset at the time of initial recognition. ‘Interest’ is defined as the time value of money and the credit risk related to the unpaid part of principal and also other risks and costs associated with a standard loan agreement / a security (e.g. liquidity risk or administrative costs) and margin.

When assessing whether the contractual cash flows constitute solely payments of principal and interest, the Group analyzes contractual cash flows. This analysis includes an assessment whether the contractual terms include any provisions that the contractual payments could be changed or the amount of the contractual payments could be changed in a way that from an economic point of view they will not only represent repayments of principal and interest on the outstanding principal. When making this assessment, the Group takes into account the occurrence of, among others:

 conditional events that may change the amount or timing of the payment,

 financial leverage (for example, interest terms include a multiplier greater than 1),

 terms regarding the extension of the contract or prepayment option,

 terms that the Group’s cash flow claim is limited to a specified assets (eg non-recourse assets),

 terms that modify the time value of money – e.g. mismatch of the frequency of the revaluation of the reference interest rate to its tenor.

The SPPI test is conducted for each financial asset classified into the business model, which purpose is to obtain contractual cash flows or a business model which purpose is to obtain contractual cash flows or sale, as at the initial recognition date or as at the latest significant annex date changing the terms of contractual cash flows.

The Group performs an SPPI test at the level of homogeneous groups of standard products or at the level of a single contract for non-standard products or at the level of ISIN code for debt securities.

In situation when the time value of money is modified for a particular financial asset, the Group is required to make an additional assessment (i.e. Benchmark Test) to determine whether the contractual cash flows are still solely payments of principal and interest on the principal amount outstanding by determining how different the contractual (undiscounted) cash flows could be from the (undiscounted) cash flows that would arise if the time value of money element was not be modified (the benchmark cash flows). Benchmark Testing is not permitted for situation that some terms modify contractual cash flows, such as the built-in leverage element.

Financial assets measured at amortized cost

Financial assets are measured at amortized cost if at the same time they meet the following two criteria:

 the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and

 the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criteria are met).

Financial assets measured at amortized cost include amounts due from the Central Bank, amounts due from other banks, loans and advances to customers, investment debt securities, receivables reverse-repo and buy-sell-back transactions, meeting the criteria described in the previous paragraph.

Upon initial recognition, these assets are measured at fair value increased by transaction costs that are directly attributable to the acquisition or issue of a financial asset.

After initial recognition, these assets are measured at amortized cost using the effective interest rate. The calculation of the effective interest rate includes all commissions paid and received by the parties, transaction costs and other bonuses and discounts constituting an intergrated part of the effective interest rate.

Interest accrued using the effective interest rate is recognized in net interest income.

Since the impairment recognition, the interest recognized in the income statement is calculated based on the net carrying amount, whereas the interest recognized in the statement of financial position is accrued on the gross carrying amount. The impairment allowances are estimated for the part of accrued interest exposure, which the Group consider as difficult to recover.

Allowances for expected credit losses reduce the gross carrying amount of assets, on the other hand they are recognized in the income statement under ‘Net allowances for expected credit losses’.

Financial assets measured at fair value through other comprehensive income

Financial assets (excluding equity instruments) are measured at fair value through other comprehensive income when they simultaneously meet the following two conditions and have not been designated for measurement at fair value through profit or loss:

 the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and

Financial assets measured at fair value through other comprehensive income include investment debt securities as well as loans and advances to customers that meet the criteria described in the previous paragraph.

Interest accrued using the effective interest rate is recognized in net interest income.

The effects of changes in fair value are recognized in other comprehensive income until the asset is excluded from the statement of financial position, when accumulated profit or loss is recognized in the income statement under ‘Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss’.

An allowance for expected credit losses from financial assets that are measured at fair value through other comprehensive income is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. On the other hand, an expected credit risk allowance is recognized in the income statement under ‘Net allowances for expected credit losses’.

Purchased or originated credit-impaired financial assets (POCI)

The Group distinguishes the category of purchased or originated credit-impaired assets. POCI are assets that are credit-impaired on initial recognition. Financial assets that were classified as POCI at initial recognition should be treated as POCI in all subsequent periods until they are derecognition.

POCI assets may arise through:

 by purchasing a contract that meets the definition of POCI (e.g. as a result of a merger with another entity or purchase of a portfolio of assets),

 by concluding a contract that is POCI at the time of original granting (e.g. granting a loan to a customer in a bad financial condition),

 by modifying the contract (e.g. under restructuring) qualifying this contract to be derecognised, resulting in a recognition of a new contract meeting the definition of POCI. Conditions for qualifying a contract to be derecognised are described below.

At initial recognition, POCI assets are recognized in the balance sheet at their fair value, in particular they do not have recognized impairment allowance.

POCI assets do not constitute a separate accounting category of financial assets. They are classified into accounting categories in accordance with the general principles for classification of financial assets. The categories in which POCI assets may exist are a category of financial assets measured at amortized cost and financial assets measured at fair value through other comprehensive income.

Investments in equity instruments

For investments in equity instruments not held for trading, the Group may irrevocably choose to present changes in their fair value in other comprehensive income. The Group makes a decision in this respect based on an individual analysis of each investment. In sucha a case the amounts presented in other comprehensive income are never subsequently transferred to profit or loss. In case of sale of an equity investment elected to be measured at fair value through other comprehensive income, a result on sale is transferred to the item ‘Other reserve capital’.

Equity investments not designated for measurement at fair value through other comprehensive income at the initial recognition are measured at fair value through profit or loss. Changes in the fair value of such investments, as well as the result on sales, are recognized in the income statement under ‘Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result’.

Dividends from equity instruments, both measured at fair value through profit or loss and designated for valuation through other comprehensive income, are recognized in the income statement when the Group's right to receive payment is established.

Financial assets at fair value through profit or loss

In this category, the Group qualifies derivatives (non-hedging instruments), debt and equity securities, loans and receivables that were acquired or included in this category with the intention of selling in the short term. In addition, this category includes financial assets not held for trading that are compulsorily measured at fair value through profit or loss for which the SPPI test has not been passed.

Moreover, at initial recognition, the Bank may irrevocably designate selected financial assets that meet the amortized cost measurement criteria or at fair value through other comprehensive income for measurement at fair value through profit or loss if it eliminates or significantly reduces the accounting mismatch that would otherwise arise from measuring assets at different methods.

Changes in the fair value of assets, which occur during the period from transaction date to transaction settlement date, shall be recognized similarly as in the case of the asset held.

Credits and loans are recognized on the date of cash disbursement to the debtor.

Derivative instruments are recognized or derecognized on transaction dates.

Reclassification of financial asset

Financial assets are not reclassified in the reporting periods following the initial recognition, except for the reporting period following the change of the business model for managing financial assets by the Group.

The reclassification of financial assets is applied prospectively from the reclassification date - without restatement of previously recognized gains or losses (including impairment gains or losses) or interest.

The following are not changes in business model:

 a change in intention related to particular financial assets (even in circumstances of significant changes in market conditions),

 the temporary disappearance of a particular market for financial assets,

 a transfer of financial assets between parts of the entity with different business models.

Modifications of financial assets

If the terms of the financial asset agreement change, the Group assesses whether the cash flows generated by the modified asset differ significantly from those generated by the asset before modifying the terms of its agreement. If a significant difference is identified, the original financial asset is derecognised, and the modified financial asset is recognized in the books at its fair value. Income or expense arising as at the date of determining the effects of the significant modification is recognized in the profit and loss in the item ‘Profit (loss) on derecognition of financial assets and liabilities not measured at fair value through profit or loss’.

If the cash flows generated by the modified asset measured at amortized cost are not materially different from the original cash flows, the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset, and the result on the immaterial modification is recognized in interest income. Quantitative information about financial assets that were subject to modification that didn’t result in derecognition was presented in Note 6.2’.

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

The Group has adopted the following quality criteria to determine significant modifications:

 currency conversion, unless it results from existing contractual provisions or requirements of applicable legal regulations,

 change (replacement) of the debtor, excluding the addition/departure of the joint debtor or taking over the loan in inheritance,

 consolidation of several exposures into one under an annex or settlement/restructuring agreement,

 change in the type interest rate from fixed to variable or vice versa

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

The Group has adopted the following quantitative criteria to determine significant modifications:

 extension of the loan term by at least one year and at least a doubling of the residual maturity to the original maturity (meeting both conditions jointly) for Stage 1 and Stage 2, or

 increasing the current loan amount/limit by at least 10% for Stage 1 and Stage 2 or increasing the current loan amount/limit for a contract in Stage 3.

If the terms of a financial asset agreement are modified, and the modification does not result in derecognition of the asset from the balance sheet, the determination, whether the credit risk of a given asset significantly increases, is made by comparing:

 lifetime PD on the reporting date, based on modified conditions, with

 lifetime PD estimated on the basis of data valid at the date of initial recognition and initial contractual terms.

In the case of modification of financial assets, the Group analyzes whether the modification has improved or restored the Group's ability to collect interest and principal. As part of this process, the Group assesses the borrower's ability to pay in relation to modified terms of agreement.

Impairment of financial assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events:

1) significant financial difficulty of the issuer or the borrower,

2) a breach of contract, such as a default or past due event,

3) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider,

4) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization,

5) the disappearance of an active market for that financial asset because of financial difficulties, or

6) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

The Group recognises a loss allowance for expected credit losses on a financial asset that is measured at amortised cost or at fair value through other comprehensive income, a financial lease receivable, a contract asset or a loan commitment and a financial guarantee contract.

A loss allowance for financial assets that are measured at fair value through other comprehensive income is recognised in other comprehensive income and is not reducing the carrying amount of the financial asset in the statement of financial position.

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

At each reporting date, the Group measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

For financial instruments in Stage 3, the Group measures the expected credit losses in the amount equal to the expected credit losses over the life of such instruments

The Group recognises in profit or loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with this chapter.

For loan commitments and financial guarantee contracts, the date that the Group becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements.

Since initial recognition of POCI assets, the Group recognises the cumulative changes in lifetime expected credit losses as a loss allowance for purchased or originated credit-impaired financial assets. At each reporting date, the Group recognises in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition.

The Group measures the loss allowance at an amount equal to lifetime expected credit losses for:

1) trade receivables or contract assets that result from transactions that are within the scope of IFRS 15,

2) receivables that result from transactions that are within the scope of IFRS 16 (other than receivables from finance lease).

Expected credit losses are not recognized for impairment of equity instruments.

The methodology for calculating expected credit losses is described in detail in ‘The description of the model for impairment allowance’ in Note 6.2.

Derivative financial instruments and hedge accounting

The Group acquires the derivative financial instruments: currency transactions (spot, forward, currency swap and currency options, CIRS), exchange rate transactions (FRA, IRS, CAP), derivative transactions based on security prices, indices of stocks and commodities. Derivative financial instruments are initially recorded at fair value as at the transaction date and subsequently re-measured at fair value at each balance sheet date. The fair value is established on the basis of market quotations for an instrument traded in an active market, as well as on the basis of valuation techniques, including models using discounted cash flows and options valuation models, depending on which valuation method is appropriate.

Positive valuation of derivative financial instruments is presented in the statement of financial position in the line ‘Derivative financial instruments (held for trading)’ or ‘Hedging instruments’ on an asset side, whereas the negative valuation - ‘Derivative financial instruments (held for trading)’ or ‘Hedging instruments’ on a liabilities side.

In case of contracts that are not financial instruments with a component of an instrument meeting the above conditions the built-in derivative instrument is classified in accordance with assets or liabilities of derivatives financial instruments with respect to the income statement in accordance with derivative financial instruments valuation principles.

The method of recognition of the changes in the fair value of an instrument depends on whether a derivative instrument is classified as held for trading or is designated as a hedging item under hedge accounting.

The changes in fair value of the derivative financial instruments held for trading are recognized in the income statement.

The Group designates some of its derivative instruments as hedging items in applying hedge accounting. The Group decided to take advantage of the choice which gives IFRS 9 and continues to apply the hedge accounting requirements of IAS 39. This decision will apply to all hedging relationships, for which the Bank applies and will apply hedge accounting in the future. The Group implemented fair value hedge accounting as well as cash flow hedge accounting.

Fair value hedge accounting principles

Changes in the measurement to fair value of financial instruments indicated as hedged positions are recognized - in the part ensuing from hedged risk - in the income statement. In the remaining part, changes in the carrying amount are recognized in accordance with the principles applicable for the given class of financial instruments.

Changes in the fair market valuation of derivative financial instruments, indicated as hedging positions in fair value hedge accounting, are recognized in the profit or loss in the same caption, in which the gains/losses from change in the value of hedged positions are recognized i.e. in the item ‘Net income from fair value hedge accounting’

Interest income on derivative instruments hedging interest positions hedged is presented as interest margin.

The Group ceases to apply hedge accounting, when the hedging instrument expires, is sold, dissolved or released (the replacement of one hedging instrument with another or extension of validity of given hedging instrument is not considered an expiration or release, providing such replacement or extension of validity is a part of a documented hedging strategy adopted by given unit), or does not meet the criteria of hedge accounting or the Group ceases the hedging relation.

An adjustment for the hedged risk on hedged interest position is amortized in the income statement at the point of ceasing to apply hedge accounting.

Cash flow hedge accounting principles

Changes in the fair value of the derivative financial instruments indicated as cash flow hedging instruments are recognized:

 directly in the caption ‘Revaluation reserves’ in the part constituting the effective hedge,

 in the income statement in the line ‘Result on financial assets and liabilities held for trading and foreign exchange result’ in the part representing ineffective hedge.

The amounts accumulated in the ‘Revaluation reserves’ are transferred to the income statement in the period, in which the hedge is reflected in the income statement and are presented in the same lines as individual components of the hedged position measurement, i.e. the interest income from hedging derivatives in cash flow hedge accounting is recognized in the interest result, whereas gains/losses from foreign exchange revaluation are presented in the foreign exchange gains (losses).

The Group ceases to apply hedge accounting when the hedging instrument expires or is sold, or if the Group revokes the designation, or when hedge no longer meets the criteria for hedge accounting. In such cases, the accumulated gains or losses related to such hedging item, initially recognized in ‘Revaluation reserves’, if the hedge was effective, are still presented in equity until the planned transaction was closed and recognized in the income statement.

If the planned transaction is no longer probable, the cumulative gains or losses recognized in ‘Revaluation reserves’ are transferred to the income statement for the given period.

Financial liabilities

The Group classifies financial liabilities other than financial guarantee contracts and loan commitments, as measured at amortized cost or at fair value through profit or loss.

Financial liabilities valued at amortized cost include liabilities to banks and customers, loans taken by the Group, issued own debt securities and subordinated liabilities.

De-recognition of financial instruments from the statement of financial position

Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or when the Group transfers the contractual rights to receive the cash flows in a transaction in which substantially all risk and rewards of ownership of the financial asset are transferred.

The Group derecognizes a credit or a loan receivable, or its part, when it is sold. Additionally, the Group writes-off a receivable against the corresponding impairment provision (completely or partially) when the debt redemption process is completed and when no further cash flows from the given receivable are expected. Such cases are documented in compliance with the current tax regulations.

The value of contractual cash flows required under contracts of financial assets, which were written-off in 2020 and are still subject to enforcement proceedings as at 31 December 2020, is PLN 597 760 thousand (as at 31 December 2019 - PLN 610 626 thousand).

Accumulated profits and losses that have been recognized in other comprehensive income from equity instruments designated to be measured at fair value through other comprehensive income are not recognized in the profit and loss account when these financial instruments are removed from the balance sheet.

The Group derecognizes a financial liability, or its part, when the liability expires. The liability expires when the obligation stated in the agreement is settled, redeemed or the period for its collection expires.

Repo and reverse-repo agreements

Repo and reverse-repo transactions, as well as sell-buy back and buy-sell back transactions are classified as sales or purchase transactions of securities with the obligation of repurchase or resale at an agreed date and price.

Sales transactions of securities with the repurchase obligation granted (repo and sell-buy back) are recognized as at transaction date in amounts due to other banks or amounts due to customers from deposits depending upon the counterparty to the transaction. Securities purchased in reverse-repo and buy-sell back transactions are recognized as loans and receivables from banks or as loans and receivables from customers, depending upon the counterparty to the transaction.

The difference between the sale and repurchase price is recognized as interest income or expense, and amortized over the contractual life of the contract using the effective interest rate method.

Recognition of the provision for legal risk regarding foreign currency mortgage loans in CHF

With respect to foreign currency mortgage loans in CHF outstanding at 31 December 2020, the Group recognizes that legal risk has an impact on the expected cash flow from the loan exposure and the amount of the provision is the difference between the expected cash flow from the given exposure and the contractual cash flows.

In connection with the above, the Group adopts the approach that the amount of the provision for unpaid loan exposures as at 31 December 2020 (including existing and possible future claims) is recognized in ‘Impairment allowances for loan exposures’ (in correspondence with ‘Net allowances for expected credit losses’).

In the case of the part of the provision related to repaid foreign currency mortgage loans in CHF (including existing and possible future claims), the amount of the provision is recognized as ‘Provisions’ in correspondence with ‘Other operating expenses’.

The Group estimates the legal risk provisions for foreign currency mortgage loans in CHF in accordance with the methodology described in Note 6.2.

5.7. Valuation of other items in the Group’s consolidated statement of financial position

Intangible assets

Goodwill

Goodwill is defined as a surplus of the purchasing price over the fair value of acquired assets, assumed liabilities and contingent liabilities of the acquired subsidiary, associate or a unit under joint control. Goodwill at initial recognition is carried at purchase price reduced by any accumulated impairment losses. Impairment is determined by estimating the recoverable value of the cash generating unit, to which given goodwill pertains.

If the recoverable value of the cash generating unit is lower than the carrying amount an impairment charge is made. Impairment identified in the course of such tests is not reversed.

Goodwill on acquisition of subsidiaries is presented in intangible assets and goodwill on acquisition of associates is presented under the caption ‘Investments in associates’.

Other intangible assets

Intangible assets are assets controlled by the Group which do not have a physical form which are identifiable and represent future economic benefits for the Group directly attributable to such assets.

These assets include:

 computer software licenses,

 copyrights,

 costs of completed development works.

Intangible assets are initially carried at purchase price. Subsequently intangible assets are stated at cost less accumulated amortization and accumulated impairment losses.

Intangible assets with a definite useful life are amortized over their estimated useful life. Intangible assets with indefinite useful life are not amortized.

All intangible assets are reviewed on a periodical basis to verify if any significant impairment triggers occurred, which would require performing a test for impairment and a potential impairment charge.

As far as intangible assets with indefinite useful life and those still not put into service are concerned, impairment test is performed on a yearly basis and additionally when impairment triggers are identified.

Property, plant and equipment

Property, plant and equipment are defined as controlled non-current assets and assets under construction. Non-current assets include certain tangible assets with an expected useful life longer than one year, which are maintained for the purpose of own use or to be leased to other entities.

Property, plant and equipment are recognized at historical cost less accumulated depreciation and accumulated impairment write downs. Historical cost consists of purchase price or development cost and costs directly related to the purchase of a given asset.

Each component of property, plant and equipment, the purchase price or production cost of which is significant compared to the purchase price or production cost of the entire item is a subject to separate depreciation. The Group separates the initial value of property, plant and equipment into its significant parts.

Subsequent expenditures relating to property plant and equipment are capitalized only when it is probable that such expenditures will result in future economic benefits to the Group, and the cost of such expenses can be reliably measured.

Service and maintenance costs of property, plant and equipment are expensed in the reporting period in which they have been incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.

Depreciation and amortization

Depreciation expense for property, plant and equipment and investment properties and the amortization expense for intangible assets are calculated using straight line method over the expected useful life of an asset. Depreciated value is defined as the purchase price or cost to develop a given asset, less residual value of the asset. Depreciation rates and residual values of assets, determined for balance-sheet purposes, are subject to regular reviews, with results of such reviews recognized in the same period.

The statement of financial position depreciation and amortization rates applied to property, plant and equipment, investment properties and intangible assets are as follows:

a) depreciation rates applied for non-current assets

Buildings and structures and cooperative ownership rights to residential premises and cooperative ownership rights to commercial premises	1.5% – 10.0%
Technical equipment and machines	4.5% – 30.0%
Vehicles	7% – 20.0%

b) amortization rates for intangible assets

Software licenses, copyrights	12.5% – 50.0%
Costs of completed development projects	33.3%
Other intangibles	20% – 33.3%

c) depreciation rates for investment properties

Buildings and structures

1.5% – 10.0%

Land, non-current assets under construction and intangible assets under development are not subject to depreciation and amortization.

Depreciation are charged to the income statement in the item ‘Depreciation and amortization’, wheres the impairment losses are charged to the income statement in the item ‘Other operating expenses’.

Investment properties

Investment properties assets are recognized initially at purchase cost, taking the transaction costs into consideration. Upon initial recognition, investment property assets are measured using the purchasing price model.

Investment property assets are derecognized from the statement of financial position when disposed of, or when such investment property is permanently decommissioned and no future benefits are expected from its sale. Any gains or losses resulting from de-recognition of an investment property are recognized in the income statement in the period when such de-recognition occurred.

Non-current assets held for sale and discontinued operations

Non-current assets held for sale include assets, the carrying amount of which is to be recovered by way of resale and not from their continued use. The only assets classified as held for sale are those available for immediate sale in their present condition, and the sale of which is highly probable, i.e. when the decision has been made to sell a given asset, an active program to identify a buyer has been launched and the divestment plan is completed. Moreover, such assets are offered for sale at a price which approximates its present fair value, and it is expected that the sale will be recognized as completed within one year from the date of such asset is reclassified into this category.

Non-current assets held for sale are recognized at the carrying amount or at fair value reduced by the cost of such assets, whichever is lower. Assets classified in this category are not subject to depreciation.

A discontinued operation is a component of the Group’s business which constitutes a separate line of business or a geographical area of operations, which was sold, made available for sale or to be disposed, or is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as held for sale, the comparative figures in the income statement are represented as if the operation had been discontinued from the beginning of the comparative period.

Leases

At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group is a party to lease contracts, based on which the Group accepts the right to use an identified asset for a period of time in exchange for consideration.

The Group is also a party to lease contracts, based on which the Group transfers the right to use of an identified asset for a period of time in exchange for consideration.

Group as a lessee

The Group, as a lessee, recognizes the lease contract as a component of the right-to-use assets and the corresponding lease liability on the date when the subject of the lease is available for use. Each lease payment is allocated between the liability and accrued interest on the liability. Interest expense is recognized in the income statement over the lease term to obtain a constant periodic interest rate on the remaining balance of the lease liability. The right-of-use asset is depreciated on a straight-line basis over the shorter of two periods: the useful life of the asset or the lease term. The Group recognizes the right-of-use assets in the item of the statement of financial position ‘Property, plant and equipment’ and lease liabilities - in the item of the statement of financial position ‘Amounts due to customers’ or ‘Amounts due to banks’.

The right-of-use assets are measured at cost, comprising:

 the amount of the initial measurement of the lease liability,

 any lease payments made at or before the commencement date, less any lease incentives received,

 any initial direct costs incurred by the lessee, and

 an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located, if the lessee incurs liabilities regarding these costs.

On the date when the lease commences, the Group, as a lessee, measures the lease liability in the present value of lease payments outstanding as at that date. The lease liabilities include the current value of the following lease payments:

 fixed payments less any lease incentives receivable,

 variable lease payments that depend on an index or a rate,

 amounts expected to be payable by the lessee under residual value guarantees,

 the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

 payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

The lease payments are discounted using the interest rate implicit in the lease, if the rate can be readily determined, or the Group’s incremental borrowing rate.

After the lease commencement date, the Group taken into account changes in lease payments (resulting, inter alia, from changes in the index, rate, lease term), by remeasuring the lease liabilities and the right-of-use assets.

The Group does not recognize the right-of-use assets and lease liabilities for short-term lease contracts and lease contracts of low-value assets. Short-term lease payments and payments for leases of low-value assets are recognized as an expense in the income statement on a straight-line basis. Short-term lease contracts are lease contracts that have a lease term of 12 months or less. Low-value assets include mainly lease of space (land) for ATMs.

Group as a lessor

At commencement date of a lease, the Group, as a lessor, classifies each lease contract as an operating lease or a finance lease. The Group classifies a lease as a finance lease whether it transfers substantially all the risks and rewards of ownership of an underlying asset. Conversely, if substantially all the risks and rewards of ownership of the underlying asset are not transferred, the lease is considered to be an operating lease. In the process of determining the classification of a lease contract, the Group takes into account elements such as whether the lease term accounts for the major part of the economic life of the underlying asset.

Finance lease

At the commencement date, the Group, as a lessor, recognizes assets held under a finance lease in its statement of financial position and present them as a receivables from finance lease (presented in item ‘Loans and advances to customers’) at an amount equal to the net investment in the lease, i.e. at present value of lease payments and any unguaranteed residual value assigned to the Group.

At the finance lease commencement date, the lease payments included in the measurement of the net investment in the lease comprise the following payments for the right to use the underlying asset during the lease term that are not received at the commencement date:

 fixed payments, less any lease incentives payable,

 variable lease payments that depend on an index or a rate,

 any residual value guarantees provided to the Group as a lessor,

 the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

 payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

During the lease term, the Group, as a lessor, recognizes interest income, based on a pattern reflecting a constant periodic rate of return on the Group's net investment in the lease. Lease payments paid over the lease term, reduce both the principal and the accrued interest.

The Group applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease. The estimated unguaranteed residual values used in computing the gross investment in the lease are regularly reviewed by the Group.

Operating lease

During the lease term, the Group, as a lessor, recognizes lease payments from operating lease as income on a straight-line basis and presents them in the item ‘Other operating income’. The depreciation of leased assets is recognized in accordance with the principles applied by the Group for property, plant and equipment.

Provisions

The provisions are recognized when the Group has a present obligation (legal or constructive) resulting from the past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

If the effect of the time value of money is material, the amount of a provision is established by discounting forecasted future cash flows to the present value, using the discount rate reflecting current market estimates of the time value of money and the possible risk associated with the obligation.

The provisions include provisions for litigation and claims (in this provision for legal risk regarding foreign currency mortgage loans in CHF and provision for early repayments of consumer loans), provisions relating to long-term employee benefits, in this those measured by an actuary and provisions for restructuring costs. The provision for restructuring costs is recognized when the general recognition criteria for provisions and detailed criteria for recognition of provisions for restructuring cost under IAS 37 ‘Provisions, contingent liabilities and contingent assets’ are met. The amount of employment restructuring provision is calculated by the Group on the basis of the best available estimates of direct outlays resulting from restructuring activities, which are not connected with the Group’s current activities.

The provisions are charged to the income statement, except for actuarial gains and losses from the measurement of the defined benefit plans obligations, which are recognized in other comprehensive income.

Deferred income and accrued expenses (liabilities)

This caption includes primarily commission income settled using the straight line method and other income charged in advance, that will be recognized in the income statement in the future periods.

Accrued expenses include accrued costs resulting from services provided for the Group by counterparties which will be settled in future periods, accrued payroll and other employee benefits (including annual and Christmas bonuses, other bonuses and awards and accrued holiday pay).

Deferred income and accrued expenses are presented in the statement of financial position under the caption ‘Other liabilities’.

Government grants

The Group recognizes government grants when there is reasonable assurance that it will comply with any conditions attached to the grant and the grant will be received. Government grants are recognized in profit or loss in the periods in which the related expenses are recognized which the grants are intended to compensate. For the settlement of the grant, the Group uses the income method. Government grants related to assets are presented in the statement of financial position of the Group as a reduction in the carrying value of the asset.

Equity of the Group

Equity is comprised of the capital and funds created by the companies of the Group in accordance with the binding legal regulations and the appropriate laws and Articles of Association. Equity also includes retained earnings. Subsidiaries’ equity line items, other that share capital, are added to the relevant equity line items of the parent company, in the proportion of the Group’s interest.

The equity of the Group includes only those parts of the subsidiaries’ equity which were created after the date of purchase of shares or stocks by the parent entity.

The Group equity consists of the following:

a) share capital - applies only to the capital of the Bank as the parent entity and is presented at nominal value specified in the Articles of Association and in the entry in the Enterprises Registry,

b) ‘issue premium’ - surplus generated during share issues over the nominal value of such issues, remaining after the issue costs are covered. Moreover, this item also includes a change in the value of minority shares, ensuing from an increase of the share of the Parent entity in Bank’s share capital,

c) the general banking risk fund is established at Bank Pekao S.A. in keeping with the Banking Act dated 29 August 1997 from profit after tax,

d) other reserve capital utilized for the purposes defined in the Statute is created from appropriations of profits,

e) revaluation reserve includes the impact of revaluation of debt financial instruments measured at fair value through other comprehensive income, revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income, revaluation of derivative instruments hedging cash flows, remeasurements of the defined benefit liabilities and the value of deferred tax for items classified as temporary differences, recognized as valuation allowance. In the statement of financial position, the valuation allowance is presented as net value,

f) other capital:

 other supplementary capital, established in keeping with provisions under the Articles of Association of companies from profit appropriations,

 bonds convertible to shares - includes the fair value of financial instruments issued as part of transactions settled in equity instruments,

 brokerage activity fund for stock broking operations, carried out by Bank Pekao S.A.,

 retained earnings from prior periods includes undistributed profit and uncovered losses generated/incurred in prior periods by subsidiaries consolidated full method,

 net profit/loss which constitutes profit/loss presented in the income statement for the relevant period. Net profit is after accounting for income tax.

Non - controlling interests

Non - controlling interests are defined as the equity in a subsidiary not attributable, directly or indirectly, to the Bank.

Bank’s Pekao S.A. phantom shares-settled share-based payment transaction

The cost of transactions settled with employees in phantom shares is measured by reference to the fair value of the liability as of the balance sheet date.

The fair value of the liability is estimated based upon the Bank’s shares price on the (WSE) as of the balance sheet date and expected number of phantom shares to which full rights will be acquired.

The cost of phantom share-based payments is recognized in personnel expenses together with the accompanying increase in the value of liabilities towards employees presented in ‘Provisions’.

The accumulated cost recognized for transactions settled in phantom shares for each balance sheet date until the vesting date reflects the extent of elapse of the vesting period and the number of rights to shares the rights to which – in the opinion of the Bank’s Management Board for that date based on best available estimates of the number of phantom shares – will be eventually vested.

5.8. Income tax

Income tax expense comprises current and deferred tax. The income tax expense is recognized in the income statement excluding the situations when it is recognized directly in equity. The current tax is the tax payable of the Group entities on their taxable income for the period, calculated based on binding tax rates, and any adjustment to tax payable in respect of previous years. The receivables resulting from taxes are disclosed if the Group’s companies has sufficient certainty that they exist and that they will be recovered.

Deferred tax assets and deferred tax liabilities are calculated, using the balance sheet method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax is determined using tax rates based on legislation enacted or substantively enacted at the balance sheet date and expected to apply when the deferred tax asset or the deferred tax liability is realized.

A deferred tax asset is recognized for negative temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

A deferred tax liability is calculated using the balance sheet method based on identification of positive temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

5.9. Other

Contingent liabilities and commitments

The Group enters into transactions which are not recognized in the statement of financial position as assets or liabilities, but which result in contingent liabilities and commitments. Contingent liabilities are characterized as:

 a potential obligation the existence of which will be confirmed upon occurrence or non-occurrence of uncertain future events that are beyond the control of the Group (e.g. litigations),

 a current obligation which arises as a result of past events but is not recognized in the statement of financial position as it is improbable that it will result in an outflow of benefits to settle the obligation or the amount of the obligation cannot be reliably measured (mainly: unused credit lines and guarantees and letters of credit issued).

Financial guarantees

Financial guarantees are measured at the higher of:

 the amount of the loss allowance or

 the amount initially recognised less the cumulative amount of income recognised in accordance with the principles of IFRS 15.

5.10. New standards, interpretations and amendments to published standards that have been approved and published by the European Union and are effective on or after 1 January 2020

STANDARD/ INTERPRETATION	Description	IMPACT ASSESSMENT
IAS 1 (amendment) ‘Presentation of financial statements’ and IAS 8 (amendment) ‘Accounting policies, changes in accounting estimates and errors’	The amendments clarify and align the definition of ‘material’ and provide guidance to help improve consistency in the application of that concept whenever it is used in IFRS Standards.	The standards amendments did not have a material impact on the financial statements in the period of its first application.
IFRS 9 (amendment) ‘Financial instruments’ and IFRS 7 (amendment) ‘Financial instruments: disclosures’	The changes are mandatory and apply to all hedging relationships that are affected by uncertainty arising from the interest rate benchmark reform. The amendments introduce a temporary exemption from the application of specific hedge accounting requirements in such a way that the interest rate benchmark reform does not result in the termination of hedge accounting. The key exemptions resulting from the Changes relate to:  the requirement that flows are 'highly likely',  risk components,  prospective assessment,  retrospective effectiveness test (applies to IAS 39),  reclassification of the provision for cash flow hedges.	The Group decided to apply these changes in the standards earlier, i.e. the principles resulting from these changes were adopted as binding in 2019.
IFRS 3 (amendment) ‘Business combinations’	The amendments narrowed and clarified the definition of a business. They also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business.	The standard’s amendment did not have a material impact on the financial statements in the period of its first application.
MSSF 16 (amendment) ‘Leasing’	The amendments introduce an optional practical expedient that simplifies how a lessee accounts for rent concessions that are a direct consequence of COVID-19. A lessee that applies the practical expedient is not required to assess whether eligible rent concessions are lease modifications, and accounts for them in accordance with other applicable guidance. The resulting accounting will depend on the details of the rent concession. For example, if the concession is in the form of a one-off reduction in rent, it will be accounted for as a variable lease payment and be recognised in profit or loss. The practical expedient will only apply if:  the revised consideration is substantially the same or less than the original consideration,  the reduction in lease payments relates to payments due on or before 30 June 2021, and  no other substantive changes have been made to the terms of the lease	The standard’s amendment did not have a material impact on the financial statements in the period of its first application.

5.11. New standards, interpretations and amendments to published standards that have been published by the International Accounting Standards Board (IASB) and approved by the European Union but are not yet effective

STANDARD / INTERPRETACJA	OPIS	OCENA WPŁYWU
IFRS 4 (amendment) ‘Insurance contracts’	The main amendments include:  deferral of the date of initial application of IFRS 17 by two years to annual reporting periods beginning on or after 1 January 2023,  extension of the temporary exemption from applying IFRS 9 by two years. As a result, the qualifying entities will be required to apply IFRS 9 for annual period beginning on or after 1 January 2023. Date of application: annual periods beginning on or after 1 January 2021.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application
IFRS 9 (amendment) ‘Financial instruments’ and IFRS 7 (amendment) ‘Financial instruments: disclosures’ and IFRS 17 (amendment) ‘Insurance contracts’ and IFRS 16 (amendment) ‘Leasing’	The main amendments include: 1. accounting for modifications to financial assets, financial liabilities and lease liabilities required as a direct consequence of the interest rate benchmark reform and performed on an economically equivalent basis, by updating the effective interest rate. 2. hedge accounting is not discontinued solely because of the interest rate benchmark reform. Hedging relationships (and related documentation) must be amended to reflect modifications to the hedged item, hedging instrument and hedged risk. Amended hedging relationships should meet all qualifying criteria to apply hedge accounting, including effectiveness requirements. 3. in order to allow users to understand the nature and extent of risks arising from the interest rate benchmark reform to which the entity is exposed to and how the entity manages those risks as well as the entity’s progress in transitioning from interest rate benchmarks to alternative benchmark rates, and how the entity is managing this transition, the amendments require that an entity discloses information about:  how the transition from interest rate benchmarks to alternative benchmark rates is managed, the progress made at the reporting date, and the risks arising from the transition;  quantitative information about non-derivative financial assets, non-derivative financial liabilities and derivatives that continue to reference interest rate benchmarks subject to the reform, disaggregated by significant interest rate benchmark;  to the extent that the interest rate benchmark reform has resulted in changes to an entity’s risk management strategy, a description of these changes and how is the entity managing those risks. Date of application: annual periods beginning on or after 1 January 2021.	The Group is currently analyzing the impact of those changes on the financial statements.

STANDARD /

INTERPRETACJA

OPIS

OCENA WPŁYWU

IFRS 4 (amendment) ‘Insurance contracts’

The main amendments include:

 deferral of the date of initial application of IFRS 17 by two years to annual reporting periods beginning on or after 1 January 2023,

 extension of the temporary exemption from applying IFRS 9 by two years. As a result, the qualifying entities will be required to apply IFRS 9 for annual period beginning on or after 1 January 2023.

Date of application: annual periods beginning on or after 1 January 2021.

The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application

IFRS 9 (amendment) ‘Financial instruments’ and IFRS 7 (amendment) ‘Financial instruments: disclosures’ and IFRS 17 (amendment) ‘Insurance contracts’ and IFRS 16 (amendment) ‘Leasing’

The main amendments include:

1. accounting for modifications to financial assets, financial liabilities and lease liabilities required as a direct consequence of the interest rate benchmark reform and performed on an economically equivalent basis, by updating the effective interest rate.

2. hedge accounting is not discontinued solely because of the interest rate benchmark reform. Hedging relationships (and related documentation) must be amended to reflect modifications to the hedged item, hedging instrument and hedged risk. Amended hedging relationships should meet all qualifying criteria to apply hedge accounting, including effectiveness requirements.

3. in order to allow users to understand the nature and extent of risks arising from the interest rate benchmark reform to which the entity is exposed to and how the entity manages those risks as well as the entity’s progress in transitioning from interest rate benchmarks to alternative benchmark rates, and how the entity is managing this transition, the amendments require that an entity discloses information about:

 how the transition from interest rate benchmarks to alternative benchmark rates is managed, the progress made at the reporting date, and the risks arising from the transition;

 quantitative information about non-derivative financial assets, non-derivative financial liabilities and derivatives that continue to reference interest rate benchmarks subject to the reform, disaggregated by significant interest rate benchmark;

 to the extent that the interest rate benchmark reform has resulted in changes to an entity’s risk management strategy, a description of these changes and how is the entity managing those risks.

Date of application: annual periods beginning on or after 1 January 2021.

The Group is currently analyzing the impact of those changes on the financial statements.

5.12. New standards, interpretations and amendments to published standards that have been published by the International Accounting Standards Board (IASB) and not yet approved by the European Union

STANDARD/ INTERPRETATION	Description	IMPACT ASSESSMENT
IFRS 17 ‘Insurance Contracts’	The new standard requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 ‘Insurance Contracts’ and related interpretations while applied. Date of application: annual periods beginning on or after 1 January 2023.	The Group claims that the new standard will not have a material impact on the financial statements in the period of its first application.
IAS 1 (amendment) ‘Presentation of financial statements’	The amendments affect requirements in IAS 1 for the presentation of liabilities. In particular, these amendments clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of the reporting period. Date of application: annual periods beginning on or after 1 January 2023.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
IFRS 3 (amendment) ‘Business combinations’	The amendments to IFRS 3 include:  Update IFRS 3 so that it refers to the 2018 Conceptual Framework instead of the 1989 Framework,  Add to IFRS 3 a requirement that, for transactions and other events within the scope of IAS 37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 (instead of the Conceptual Framework) to identify the liabilities it has assumed in a business combination, and  Add to IFRS 3 an explicit statement that an acquirer does not recognize contingent assets acquired in a business combination. Date of application: annual periods beginning on or after 1 January 2022.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
IAS 16 (amendment) ‘Property, plant and equipment’	The amendments to IAS 16 prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognises the proceeds from selling such items, and the cost of producing those items, in profit or loss. Date of application: annual periods beginning on or after 1 January 2022.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
IAS 37 (amendment) ‘Provisions, contingent liabilities and contingent assets’	The amendments to IAS 37 specify that the ‘cost of fulfilling’ an onerous contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. Date of application: annual periods beginning on or after 1 January 2022.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
IAS 1 (amendment) ‘Presentation of financial statements’	The amendments to IAS 1 include:  an entity is required to disclose its material accounting policy information instead of its significant accounting policies;  clarification that accounting policy information may be material because of its nature, even if the related amounts are immaterial;  clarification that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements; and  clarification that if an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information. Date of application: annual periods beginning on or after 1 January 2023.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
IAS 8 (amendment) ‘Accounting policies, changes in accounting estimates and errors’	The amendments to IAS 8 include:  the definition of a change in accounting estimates is replaced with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty;  clarification that a change in accounting estimate that results from new information or new developments is not the correction of an error. In addition, the effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors;  clarification that a change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. The effect of the change relating to the current period is recognized as income or expense in the current period. The effect, if any, on future periods is recognized as income or expense in those future periods. Date of application: annual periods beginning on or after 1 January 2023.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.
MSSF 16 (amendment) ‘Leasing’	The amendments introduce an optional practical expedient that simplifies how a lessee accounts for rent concessions that are a direct consequence of COVID-19. A lessee that applies the practical expedient is not required to assess whether eligible rent concessions are lease modifications, and accounts for them in accordance with other applicable guidance. The resulting accounting will depend on the details of the rent concession. For example, if the concession is in the form of a one-off reduction in rent, it will be accounted for as a variable lease payment and be recognized in profit or loss. The practical expedient will only apply if:  the revised consideration is substantially the same or less than the original consideration,  the reduction in lease payments relates to payments due on or before 30 June 2021, and  no other substantive changes have been made to the terms of the lease Date of application: periods beginning on or after 1 April 2021.	The Group claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.

6. Risk management

The risk management policy of the Group aims at optimizing the structure of the balance sheet and off-balance sheet items taking into consideration the assumed risks-income relation and overall impact of variuos risks that the Group undertakes in conducting its business activities. Risks are monitored and controlled with reference to profitability and capital coverage and are regularly reported in accordance with rules presented below.

All significant risks incurred in the course of the Group’s operations are described in the further part of the Note.

6.1. Organizational structure of risk management

Supervisory Board

The Supervisory Board provides supervision over the risk management system, assessing its adequacy and effectiveness. Moreover, the Supervisory Board supervises the compliance of the Group’s policy with respect to risk taking with the Group’s strategy and financial plan. Carrying out their tasks, the Supervisory Board is assisted by the Risk Committee.

Management Board

The Management Board is responsible for the development, implementation and functioning of risk management processes by, among others, introduction of relevant, internal regulations, taking into consideration the results of internal audit inspections.

The Management Board is responsible for the effectiveness of the risk management system, internal control system, internal capital computation process and the effectiveness of the review of the process of computing and monitoring of internal capital. Moreover, the Management Board introduces the essential adjustments or improvements to those processes and systems whenever necessary. This need may be a consequence of changes to risk levels of the Group’s operations, business environment factors or irregularities in the functioning of processes or systems.

Periodically, the Management Board submits to the Supervisory Board concise information on the types, scale and significance of risks the Group is exposed to, as well as on methods used in the management of such risks.

The Management Board is responsible for assessing, whether activities such as identification, measurement, monitoring, reporting and control or mitigation are carried out appropriately within the scope of the risk management process. Moreover, the Management Board examines whether the management at all levels is effectively managing the risks within the scope of their competence.

Committees

Performing these risk management tasks, the Management Board is supported by the relevant committees:

 Assets, Liabilities and Risk Management Committee - in market risk management, liquidity and capital adequacy,

 Liquidity and Market Risk Committee, acting as support for the Assets, Liabilities and Risk Management Committee – in liquidity and market risk management,

 Operational Risk Committee – in operational risk management,

 Credit Committee – in making credit decisions within the powers, and in the case of issuing recommendations on the largest transactions presented to the Management Board for decision,

 Safety Committee – in the field of security and business continuity management,

 Model Risk Committee – in model risk management

 Recovery Plan Committee – for supporting the proces of creating, maintaining and updating the Recovery Plan.

6.2. Credit risk

Credit risk is one of the basic risks associated with activities of the Group. The percentage share of credits and loans in the Group’s statement of financial position makes the maintenance of this risk at safe level essential to the Group’s performance. The process of credit risk management is centralized and managed mainly by Risk Management Division units, situated at the Bank Head Office or in local units.

Risk management process covers all credit functions – credit analysis, making credit decisions, monitoring and loan administration, as well as restructuring and collection.

These functions are conducted in compliance with the Bank’s credit policy, adopted by the Bank’s Management Board and the Bank’s Supervisory Board for a given reporting year. The effectiveness and efficiency of credit functions are achieved using diverse credit methods and methodologies, supported by advanced IT tools, integrated into the Bank’s general IT system. The Bank’s procedures facilitate credit risk mitigation, in particular those related to transaction risk evaluation, to establishing collateral, setting authorization limits for granting loans and limiting of exposure to some areas of business activity in line with current client’s segmentation scheme in the Bank.

Credit granting authorizations, restrictions on crediting the specific business activities as well as internal and external prudential standards include not only credits, loans and guarantees, but also derivatives transactions and debt securities.

The Bank’s lending activity is limited by the restrictions of the external regulation as well as internal prudential standards in order to increase safety. These restrictions refer in particular to credit exposure concentration, credit quality ratios and exposure limits for particular foreign countries, foreign banks and domestic financial institutions.

The Bank established the following portfolio limits in the Bank’s credit policy:

 exposure limits for sectors of economy,

 share of significant exposures in the loan portfolio of the Bank,

 customer segment limits and FX limits,

 product limits (mortgage loans to private individuals, exposures to business entities secured by mortgage, inculidng financing commercial real estate),

The internal limits system operating in the Bank also includes a number of detailed limits supporting key limits set out in the credit policy.

Moreover, the Bank limits higher risk credit transactions, marked by excess risk by restricting the decision-making powers in such cases to higher-level decision-making bodies.

The management of the Bank’s credit portfolio quality is further supported by regular reviews and continuous monitoring of timely loan repayments and the financial condition of the borrowers.

Rating models utilized in the credit risk management process

For credit risk management purposes, the Bank uses the internal rating models depending on the client’s segment and/or exposure type.

The rating process is a significant element of credit risk assessment in relation to clients and transactions, and constitutes a preliminary stage of the credit decision-making process of granting a new credit or changing the terms and conditions of an existing credit and of the credit portfolio quality monitoring process.

In the credit risk measurement the following three parameters are used: PD, LGD and EAD. PD is the probability of a client’s failure to meet its obligations and hence the violation of contract terms and conditions by the borrower within one year horizon, such default may be subject-matter or product-related. LGD indicates the estimated value of the loss to be incurred for any credit transaction from the date of occurrence of such default. EAD reflects the estimated value of credit exposure as at such date.

The risk parameters based on the rating models are designed for calculation of the expected losses resulted from credit risk.

The value of expected loss is one of the significant assessment criteria taken into consideration by the decision-making bodies in the course of the crediting process. In particular, this value is compared to the requested margin level.

The level of minimum margins for given products or client segments is determined based upon risk analysis, taking into consideration the value of risk parameters assessed.

The client and transaction rating, as well as other credit risk parameters hold a significant role in the Credit Risk Management Information System. For each rating model, the credit risk reports provide information on the comparison between the realized parameters and the theoretical values for each rating class.

Credit risk reports are generated on a monthly basis, with their scope varying depending upon the recipient of the report (the higher the management level, the more aggregated the information presented). Credit risk reports are being used in the credit risk management process.

For internal purposes, within the Bank the following rating models are used, developed in accordance with provisions of Regulation (EU) no 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms:

1) For the private individuals, the Bank uses the following models applicable for:

 mortgage loans,

 consumer loans,

 renewable limits.

2) For the corporate clients, the Bank uses rating models dividing clients into:

 non-financial enterprises:

o corporate clients,

o small and medium enterprises (SME),

 specialized lending (commercial real estate financing),

 local government units.

3) For the corporate clients, Pekao Bank Hipoteczny S.A. uses the SOP rating model (Point Rating System).

The following exposure types are not covered by internal rating models:

1) retail exposures immaterial in terms of size and perceived risk profile:

 overdrafts,

 exposures related to credit cards,

 exposures related to the Building Society (Kasa Mieszkaniowa) unit,

 other loans.

2) corporate clients:

 exposures to stock exchanges and other financial intermediators,

 exposures to insurance companies,

 project financing,

 purchased receivables,

 exposures to investment funds,

 exposures to leasing companies and financial holding companies,

 other loans immaterial in terms of size and perceived risk profile.

3) exposures to regional governments and local authorities which are not treated as exposures to central governments, for which the number of significant counterparties is limited.

The tables below present the quality of the loan portfolio.

The distribution of rated portfolio for individual client segment (excluding impaired loans)

RATING CLASS	RANGE OF PD	31.12.2020
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
MORTGAGE LOANS
1	0.00% <= PD < 0.06%	9 427 476	1 397 961				10 825 437	270 897	479			271 376	17.5%
2	0.06% <= PD < 0.19%	4 223 460	1 161 191				5 384 651	287 367	537			287 904	9.0%
3	0.19% <= PD < 0.35%	24 407 668	5 112 529				29 520 197	298 535	37 889			336 424	47.2%
4	0.35% <= PD < 0.73%	10 585 602	2 558 630				13 144 232	195 676	38 329			234 005	21.1%
5	0.73% <= PD < 3.50%	543 562	1 313 860				1 857 422	101 870	37 841			139 711	3.2%
6	3.50% <= PD < 14.00%	36 358	600 638				636 996	14 659	60 045			74 704	1.1%
7	14.00% <= PD < 100.00%	2 594	567 408				570 002	246	11 041			11 287	0.9%
Total		49 226 720	12 712 217				61 938 937	1 169 250	186 161			1 355 411	100.0%
CONSUMER LOANS
1	0.00% <= PD < 0.09%	820 562	147 240				967 802	1	-			1	8.7%
2	0.09% <= PD < 0.18%	1 623 714	147 160				1 770 874	158	-			158	16.0%
3	0.18% <= PD < 0.39%	2 774 848	155 910				2 930 758	25	-			25	26.4%
4	0.39% <= PD < 0.90%	2 249 802	234 957				2 484 759	91	-			91	22.4%
5	0.90% <= PD < 2.60%	1 105 232	466 568				1 571 800	20	2			22	14.2%
6	2.60% <= PD < 9.00%	317 618	398 689				716 307	2	5			7	6.5%
7	9.00% <= PD < 30.00%	84 197	294 287				378 484	-	8			8	3.4%
8	30.00% <= PD < 100.00%	18 416	243 084				261 500	-	-			-	2.4%
Total		8 994 389	2 087 895				11 082 284	297	15			312	100.0%
LIMITS
1	0.00% <= PD < 0.02%	1 525	6 888				8 413	45 511	403 620			449 131	46.6%
2	0.02% <= PD < 0.11%	7 841	31 815				39 656	31 717	190 209			221 926	26.7%
3	0.11% <= PD < 0.35%	8 665	52 654				61 319	7 044	57 153			64 197	12.8%
4	0.35% <= PD < 0.89%	9 548	38 977				48 525	11 126	17 824			28 950	7.9%
5	0.89% <= PD < 2.00%	906	18 497				19 403	296	6 415			6 711	2.7%
6	2.00% <= PD < 4.80%	644	10 461				11 105	158	6 472			6 630	1.8%
7	4.80% <= PD < 100.00%	108	8 447				8 555	109	6 213			6 322	1.5%
Total		29 237	167 739				196 976	95 961	687 906			783 867	100.0%
Individual client segment - total		58 250 346	14 967 851				73 218 197	1 265 508	874 082			2 139 590

The distribution of rated portfolio for individual client segment (excluding impaired loans)

RATING CLASS	RANGE OF PD	31.12.2019
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
MORTGAGE LOANS
1	0.00% <= PD < 0.06%	9 233 873	1 485 203				10 719 076	291 995	194			292 189	18.3%
2	0.06% <= PD < 0.19%	4 177 756	1 249 785				5 427 541	318 470	187			318 657	9.5%
3	0.19% <= PD < 0.35%	22 531 902	4 762 961				27 294 863	348 180	24 159			372 339	46.0%
4	0.35% <= PD < 0.73%	9 480 685	2 521 353				12 002 038	199 831	32 424			232 255	20.3%
5	0.73% <= PD < 3.50%	636 636	1 294 035				1 930 671	109 036	32 316			141 352	3.4%
6	3.50% <= PD < 14.00%	45 478	648 205				693 683	13 996	58 877			72 873	1.3%
7	14.00% <= PD < 100.00%	3 749	719 254				723 003	330	10 047			10 377	1.2%
Total		46 110 079	12 680 796				58 790 875	1 281 838	158 204			1 440 042	100.0%
CONSUMER LOANS
1	0.00% <= PD < 0.09%	728 599	147 737				876 336	4	-			4	7.3%
2	0.09% <= PD < 0.18%	1 537 399	198 793				1 736 192	59	-			59	14.6%
3	0.18% <= PD < 0.39%	2 734 533	223 202				2 957 735	41	-			41	24.9%
4	0.39% <= PD < 0.90%	2 619 406	152 819				2 772 225	329	-			329	23.2%
5	0.90% <= PD < 2.60%	1 708 634	165 775				1 874 409	43	-			43	15.7%
6	2.60% <= PD < 9.00%	623 057	332 672				955 729	4	19			23	8.0%
7	9.00% <= PD < 30.00%	156 692	308 864				465 556	1	201			202	3.9%
8	30.00% <= PD < 100.00%	21 284	268 797				290 081	-	6			6	2.4%
Total		10 129 604	1 798 659				11 928 263	481	226			707	100.0%
LIMITS
1	0.00% <= PD < 0.02%	1 111	5 580				6 691	34 123	332 426			366 549	36.0%
2	0.02% <= PD < 0.11%	9 364	40 404				49 768	41 943	271 628			313 571	35.1%
3	0.11% <= PD < 0.35%	11 564	65 151				76 715	8 897	64 278			73 175	14.5%
4	0.35% <= PD < 0.89%	4 580	45 388				49 968	1 898	18 048			19 946	6.8%
5	0.89% <= PD < 2.00%	2 264	26 539				28 803	501	7 740			8 241	3.6%
6	2.00% <= PD < 4.80%	1 125	18 019				19 144	262	6 757			7 019	2.5%
7	4.80% <= PD < 100.00%	211	9 460				9 671	202	5 670			5 872	1.5%
Total		30 219	210 541				240 760	87 826	706 547			794 373	100.0%
Individual client segment - total		56 269 902	14 689 996				70 959 898	1 370 145	864 977			2 235 122

The distribution of rated portfolio for corporate client segment (excluding impaired loans)

RATING CLASS	RANGE OF PD	31.12.2020
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
CORPORATES
1	0.00% <= PD < 0.14%	122 099	140				122 239	471 598	131			471 729	1.0%
2	0.14% <= PD < 0.25%	1 011 543	3 521				1 015 064	2 139 727	17 586			2 157 313	5.4%
3	0.25% <= PD < 0.42%	2 522 666	5 956				2 528 622	6 194 806	40 235			6 235 041	15.0%
4	0.42% <= PD < 0.77%	5 863 163	85 402				5 948 565	6 452 169	520 941			6 973 110	22.1%
5	0.77% <= PD < 1.42%	5 568 552	731 633				6 300 185	6 592 749	356 656			6 949 405	22.7%
6	1.42% <= PD < 2.85%	2 467 610	579 431				3 047 041	2 579 710	568 572			3 148 282	10.6%
7	2.85% <= PD < 6.00%	3 954 244	828 511				4 782 755	3 316 399	405 511			3 721 910	14.6%
8	6.00% <= PD < 12.00%	1 212 857	1 578 229				2 791 086	1 186 916	618 521			1 805 437	7.9%
9	12.00% <= PD < 100.00%	15 135	143 710				158 845	36 308	203 597			239 905	0.7%
Total		22 737 869	3 956 533				26 694 402	28 970 382	2 731 750			31 702 132	100.0%
SMEs
1	0.00% <= PD < 0.06%	16 014	55				16 069	23 521	100			23 621	1.0%
2	0.06% <= PD < 0.14%	192 212	2 495				194 707	246 236	3 682			249 918	10.7%
3	0.14% <= PD < 0.35%	626 147	36 791				662 938	417 039	19 206			436 245	26.4%
4	0.35% <= PD < 0.88%	644 033	62 747				706 780	327 976	35 695			363 671	25.7%
5	0.88% <= PD < 2.10%	481 445	85 207				566 652	162 376	22 431			184 807	18.0%
6	2.10% <= PD < 4.00%	239 868	57 842				297 710	85 155	9 394			94 549	9.4%
7	4.00% <= PD < 7.00%	92 500	45 809				138 309	37 030	19 426			56 456	4.7%
8	7.00% <= PD < 12.00%	59 119	27 267				86 386	9 175	1 636			10 811	2.3%
9	12.00% <= PD < 22.00%	14 454	16 963				31 417	3 023	747			3 770	0.8%
10	22.00% <= PD < 100.00%	13 291	24 301				37 592	2 992	1 354			4 346	1.0%
Total		2 379 083	359 477				2 738 560	1 314 523	113 671			1 428 194	100.0%
Corporate client segment - total		25 116 952	4 316 010				29 432 962	30 284 905	2 845 421			33 130 326

The distribution of rated portfolio for corporate client segment (excluding impaired loans)

RATING CLASS	RANGE OF PD	31.12.2019
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
CORPORATES
1	0.00% <= PD < 0.14%	275 630	671				276 301	859 367	2 001			861 368	2.2%
2	0.14% <= PD < 0.25%	1 880 637	8 227				1 888 864	5 346 078	25 827			5 371 905	13.8%
3	0.25% <= PD < 0.42%	3 963 063	169 016				4 132 079	4 506 882	219 586			4 726 468	16.9%
4	0.42% <= PD < 0.77%	6 078 657	194 449				6 273 106	5 281 087	334 418			5 615 505	22.7%
5	0.77% <= PD < 1.42%	4 799 018	295 243				5 094 261	3 606 115	384 703			3 990 818	17.3%
6	1.42% <= PD < 2.85%	3 169 057	563 146				3 732 203	2 621 428	254 241			2 875 669	12.6%
7	2.85% <= PD < 6.00%	559 941	226 291				786 232	1 543 789	356 684			1 900 473	5.1%
8	6.00% <= PD < 12.00%	1 212 535	1 813 748				3 026 283	986 933	393 162			1 380 095	8.4%
9	12.00% <= PD < 100.00%	121 795	249 586				371 381	7 523	159 192			166 715	1.0%
Total		22 060 333	3 520 377				25 580 710	24 759 202	2 129 814			26 889 016	100.0%
SMEs
1	0.00% <= PD < 0.06%	17 333	2 702				20 035	29 066	310			29 376	1.1%
2	0.06% <= PD < 0.14%	223 137	3 459				226 596	233 168	2 854			236 022	9.9%
3	0.14% <= PD < 0.35%	770 220	55 836				826 056	394 508	17 389			411 897	26.6%
4	0.35% <= PD < 0.88%	813 715	82 688				896 403	247 706	42 686			290 392	25.4%
5	0.88% <= PD < 2.10%	602 666	80 864				683 530	128 830	14 136			142 966	17.7%
6	2.10% <= PD < 4.00%	253 834	44 055				297 889	71 490	5 690			77 180	8.0%
7	4.00% <= PD < 7.00%	100 628	46 823				147 451	20 074	2 813			22 887	3.7%
8	7.00% <= PD < 12.00%	65 851	48 545				114 396	27 723	7 639			35 362	3.2%
9	12.00% <= PD < 22.00%	82 690	30 797				113 487	18 795	1 254			20 049	2.9%
10	22.00% <= PD < 100.00%	16 074	54 124				70 198	775	1 249			2 024	1.5%
Total		2 946 148	449 893				3 396 041	1 172 135	96 020			1 268 155	100.0%
Corporate client segment - total		25 006 481	3 970 270				28 976 751	25 931 337	2 225 834			28 157 171

The distribution of rated portfolio for local government units segment (excluding impaired loans)

RATING CLASS	RANGE OF PD	31.12.2020
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
LOCAL GOVERNMENT UNITS
1	0.00% <= PD < 0.04%	5 529	-				5 529	60 890	-			60 890	3.2%
2	0.04% <= PD < 0.06%	223 197	-				223 197	9 959	-			9 959	11.3%
3	0.06% <= PD < 0.13%	84 722	-				84 722	120 552	-			120 552	10.0%
4	0.13% <= PD < 0.27%	381 489	-				381 489	130 319	-			130 319	24.9%
5	0.27% <= PD < 0.50%	310 006	-				310 006	56 900	-			56 900	17.8%
6	0.50% <= PD < 0.80%	459 694	-				459 694	61 000	-			61 000	25.4%
7	0.80% <= PD < 1.60%	129 683	-				129 683	23 275	-			23 275	7.4%
8	1.60% <= PD < 100.00%	-	-				-	-	-			-	0.0%
Total		1 594 320	-				1 594 320	462 895	-			462 895	100.0%

RATING CLASS	RANGE OF PD	31.12.2019
		GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
		STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
LOCAL GOVERNMENT UNITS
1	0.00% <= PD < 0.04%	19 171	-				19 171	58 069	-			58 069	3.4%
2	0.04% <= PD < 0.06%	242 222	-				242 222	1 017	-			1 017	10.8%
3	0.06% <= PD < 0.13%	137 284	-				137 284	24 028	-			24 028	7.2%
4	0.13% <= PD < 0.27%	513 020	-				513 020	192 381	-			192 381	31.3%
5	0.27% <= PD < 0.50%	326 835	-				326 835	35 200	-			35 200	16.0%
6	0.50% <= PD < 0.80%	572 450	-				572 450	8 000	-			8 000	25.7%
7	0.80% <= PD < 1.60%	101 926	-				101 926	17 525	-			17 525	5.3%
8	1.60% <= PD < 100.00%	6 467	-				6 467	184	-			184	0.3%
Total		1 919 375	-				1 919 375	336 404	-			336 404	100.0%

The distribution of rated portfolio covered by the SOP rating model of Pekao Bank Hipoteczny S.A. for the corporate client segment (excluding impaired loans)

RATING CLASS	31.12.2020
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
CORPORATE SEGMENT COVERED BY SOP RATING MODEL
SOP1	4 351	3 684				8 035	-	-			-	1.2%
SOP2	11 645	9 767				21 412	-	-			-	3.3%
SOP3	110 384	21 436				131 820	-	-			-	20.5%
SOP4	282 789	187 809				470 598	-	-			-	73.2%
SOP5	-	11 648				11 648	-	-			-	1.8%
Total	409 169	234 344				643 513	-	-			-	100.0%

RATING CLASS	31.12.2019
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
CORPORATE SEGMENT COVERED BY SOP RATING MODEL
SOP1	5 944	-				5 944	-	-			-	0.8%
SOP2	22 736	4 542				27 278	-	-			-	3.5%
SOP3	331 144	8 828				339 972	-	-			-	43.0%
SOP4	381 781	14 710				396 491	-	-			-	50.1%
SOP5	6 449	14 164				20 613	-	-			-	2.6%
Total	748 054	42 244				790 298	-	-			-	100.0%

For specialized lending, the Group adopts slotting criteria approach within internal rating method which uses supervisory categories in the process of assigning risk weigh category.

The distribution of the portfolio exposure to specialized lending (excluding impaired loans)

SUPERVISORY CATHEGORY	31.12.2020
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
EXPOSURE TO SPECIALIZED LENDING
High	448 501	-				448 501	22 137	-			22 137	7.2%
Good	2 475 157	1 911 113				4 386 270	686 820	8 882			695 702	78.0%
Satisfactory	104 540	842 280				946 820	17 460	3			17 463	14.8%
Low	-	-				-	-	-			-	0.0%
Total	3 028 198	2 753 393				5 781 591	726 417	8 885			735 302	100.0%

SUPERVISORY CATHEGORY	31.12.2019
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
EXPOSURE TO SPECIALIZED LENDING
High	654 675	-				654 675	51 116	-			51 116	9.8%
Good	4 173 576	-				4 173 576	1 321 969	-			1 321 969	75.9%
Satisfactory	298 261	608 620				906 881	68 463	-			68 463	13.5%
Low	-	55 415				55 415	-	-			-	0.8%
Total	5 126 512	664 035				5 790 547	1 441 548	-			1 441 548	100.0%

Portfolio of exposures not covered by the rating model (excluding impaired loans), broken down by delays in repayment

	31.12.2020
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES						% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
EXPOSURES NOT COVERED BY THE RATING MODEL
Not past due	25 136 203	4 294 870				29 431 073	14 837 215	797 768			15 634 983	98.1%
Past due, of which:	701 345	166 741				868 086	22 909	1 414			24 323	1.9%
up to 1 month	685 830	59 123				744 953	22 909	977			23 886	1.6%
between 1 month and 2 months	10 474	79 297				89 771	-	35			35	0.2%
between 2 and 3 months	5 041	28 321				33 362	-	402			402	0.1%
Total	25 837 548	4 461 611				30 299 159	14 860 124	799 182			15 659 306	100.0%

	31.12.2019
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
EXPOSURES NOT COVERED BY THE RATING MODEL
Not past due	28 888 704	574 281				29 462 985	13 869 014	203 582			14 072 596	97.0%
Past due, of which:	779 215	281 690				1 060 905	44 371	246 588			290 959	3.0%
up to 1 month	779 215	75 632				854 847	44 371	1 809			46 180	2.0%
between 1 month and 2 months	-	95 958				95 958	-	491			491	0.2%
between 2 and 3 months	-	110 100				110 100	-	244 288			244 288	0.8%
Total	29 667 919	855 971				30 523 890	13 913 385	450 170			14 363 555	100.0%

Portfolio of impaired exposures, broken down by delays in repayment

	31.12.2020
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
IMPAIRED EXPOSURES
Not past due			1 924 516	610 169	4 947	2 539 632			299 090	14 134	313 224	31.5%
Past due, of which:			3 311 495	2 682 313	34 625	6 028 433			180 147	2 725	182 872	68.5%
up to 1 month			38 232	223 655	9 635	271 522			96	740	836	3.0%
between 1 month and 3 months			74 415	215 886	109	290 410			79	198	277	3.2%
between 3 months and 1 year			178 664	412 604	7 151	598 419			1 142	622	1 764	6.6%
between 1 year and 5 years			516 238	1 039 721	957	1 556 916			177 115	557	177 672	19.1%
above 5 years			2 503 946	790 447	16 773	3 311 166			1 715	608	2 323	36.6%
Total			5 236 011	3 292 482	39 572	8 568 065			479 237	16 859	496 096	100.0%

	31.12.2019
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES					% PORT-FOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
IMPAIRED EXPOSURES
Not past due			1 503 188	298 129	9 314	1 810 631			296 433	8 134	304 567	24.2%
Past due, of which:			3 747 663	2 587 719	33 492	6 368 874			264 860	3 531	268 391	75.8%
up to 1 month			55 302	220 230	11 929	287 461			268	661	929	3.3%
between 1 month and 3 months			51 513	232 646	5 796	289 955			21	656	677	3.3%
between 3 months and 1 year			128 969	430 116	288	559 373			119 558	779	120 337	7.8%
between 1 year and 5 years			819 136	888 457	797	1 708 390			143 313	1 155	144 468	21.2%
above 5 years			2 692 743	816 270	14 682	3 523 695			1 700	280	1 980	40.2%
Total			5 250 851	2 885 848	42 806	8 179 505			561 293	11 665	572 958	100.0%

Client/transaction rating and credit risk decision-making level

Decision-making level connected with transaction approval is directly dependent upon the client’s rating.

Decision-making entitlement limits are associated with the position held, determined in accordance with the Bank’s organizational structure. The limits are determined taking the following matters into consideration:

 the Bank’s total exposure to a client, including the amount of the requested transaction,

 type of a client,

 commitments of persons and entities associated with the client.

Validation of rating models

The internal validation of models and risk parameter assessments is focused on the quality assessment of risk models and the accuracy and stability of parameter assessments, applied by the Bank. Validation is carried out at the level of each risk model, although the Bank may apply several models for each class of exposures.

Moreover, the internal audit unit is obligated to review the Bank’s rating systems and their functionality at least once a year. In particular, the internal audit unit reviews the scope of operations of credit division and estimations of risk parameters.

Division of loans and advances to customers for covered and not covered by internal rating models

PORTFOLIO	31.12.2020
PORTFOLIO	GROSS CARRYING AMOUNT	impairment Allowance	NET CARRYING AMOUNT
Exposures with no impairment	140 969 742	(1 565 778)	139 403 964
Rated portfolio for individual client segment	73 218 197	(709 889)	72 508 308
Mortgage loans	61 938 937	(321 496)	61 617 441
Consumer loans	11 082 284	(382 770)	10 699 514
Limits	196 976	(5 623)	191 353
Rated portfolio for corporate client segment	29 432 962	(271 956)	29 161 006
Corporates	26 694 402	(222 752)	26 471 650
SMEs	2 738 560	(49 204)	2 689 356
Rated portfolio for local government units segment	1 594 320	(1 912)	1 592 408
Corporate client segment covered by the SOP rating model of Pekao Bank Hipoteczny S.A.	643 513	(3 866)	639 647
Specialized lending exposures	5 781 591	(85 668)	5 695 923
Exposures not covered by the rating model	30 299 159	(492 487)	29 806 672
Impaired exposures	8 568 065	(5 671 233)	2 896 832
Total loans and advances to customers subject to impairment (*)	149 537 807	(7 237 011)	142 300 796

(*) Loans and advances to customers measured at amortised cost and measured at fair value through other comprehensive income.

Division of loans and advances to customers for covered and not covered by internal rating models

PORTFOLIO	31.12.2019
PORTFOLIO	GROSS CARRYING AMOUNT	impairment Allowance	NET CARRYING AMOUNT
Exposures with no impairment	138 960 759	(1 016 007)	137 944 752
Rated portfolio for individual client segment	70 959 898	(593 592)	70 366 306
Mortgage loans	58 790 875	(268 208)	58 522 667
Consumer loans	11 928 263	(317 714)	11 610 549
Limits	240 760	(7 670)	233 090
Rated portfolio for corporate client segment	28 976 751	(174 901)	28 801 850
Corporates	25 580 710	(131 751)	25 448 959
SMEs	3 396 041	(43 150)	3 352 891
Rated portfolio for local government units segment	1 919 375	(2 114)	1 917 261
Corporate client segment covered by the SOP rating model of Pekao Bank Hipoteczny S.A.	790 298	(3 052)	787 246
Specialized lending exposures	5 790 547	(46 102)	5 744 445
Exposures not covered by the rating model	30 523 890	(196 246)	30 327 644
Impaired exposures	8 179 505	(5 453 544)	2 725 961
Total loans and advances to customers subject to impairment (*)	147 140 264	(6 469 551)	140 670 713

(*) Loans and advances to customers measured at amortised cost, measured at fair value through other comprehensive income and receivables from finance leases.

Division of off-balance sheet exposures to customers (loan commitments and financial guarantee contracts) for covered and not covered by internal rating models

PORTFOLIO	31.12.2020
PORTFOLIO	NOMINAL AMOUNT	impairment Allowance
Exposures with no impairment	52 127 419	(184 917)
Rated portfolio for individual client segment	2 139 590	(5 189)
Mortgage loans	1 355 411	(3 050)
Consumer loans	312	(132)
Limits	783 867	(2 007)
Rated portfolio for corporate client segment	33 130 326	(111 257)
Corporates	31 702 132	(107 711)
SMEs	1 428 194	(3 546)
Rated portfolio for local government units segment	462 895	(23)
Specialized lending exposures	735 302	(582)
Exposures not covered by the rating model	15 659 306	(67 866)
Impaired exposures	496 096	(191 960)
Total off- balance sheet exposures to customers	52 623 515	(376 877)

Division of off-balance sheet exposures to customers (loan commitments and financial guarantee contracts) for covered and not covered by internal rating models

PORTFOLIO	31.12.2019
PORTFOLIO	NOMINAL AMOUNT	impairment Allowance
Exposures with no impairment	46 533 800	(101 901)
Rated portfolio for individual client segment	2 235 122	(5 490)
Mortgage loans	1 440 042	(3 236)
Consumer loans	707	(45)
Limits	794 373	(2 209)
Rated portfolio for corporate client segment	28 157 171	(64 207)
Corporates	26 889 016	(62 272)
SMEs	1 268 155	(1 935)
Rated portfolio for local government units segment	336 404	(37)
Specialized lending exposures	1 441 548	(1 805)
Exposures not covered by the rating model	14 363 555	(30 362)
Impaired exposures	572 958	(186 387)
Total off- balance sheet exposures to customers	47 106 758	(288 288)

Classification of loans and advances to banks according to Fitch ratings

31.12.2020	CARRYING AMOUNT						%PORTFOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
LOANS AND ADVANCES TO BANKS MEASURED AT AMORTISED COST
AA+ to AA-	6 304	-	-	-	-	6 304	0.2%
A+ to A-	1 494 902	168	-	82	-	1 495 152	58.0%
BBB+ to BBB-	385 790	-	-	-	-	385 790	15.0%
BB+ to BB-	14 035	-	-	-	-	14 035	0.5%
B+ do B-	150	-	-	-	-	150	0.0%
No rating	678 127	-	-	4	-	678 131	26.3%
Total gross carrying amount	2 579 308	168	-	86	-	2 579 562	100.0%
Impairment allowance	(1 219)	-	-	(4)	-	(1 223)
Total net carrying amount	2 578 089	168	-	82	-	2 578 339

Classification of loans and advances to banks according to Fitch ratings

31.12.2019	CARRYING AMOUNT						%PORTFOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
LOANS AND ADVANCES TO BANKS MEASURED AT AMORTISED COST
AA+ to AA-	22 413	-	-	-	-	22 413	1.3%
A+ to A-	899 921	288	-	95	-	900 304	50.2%
BBB+ to BBB-	291 058	-	-	-	-	291 058	16.2%
BB+ to BB-	8 384	-	-	-	-	8 384	0.5%
B+ do B-	65	-	-	-	-	65	0.0%
No rating	570 513	3	-	1	-	570 517	31.8%
Total gross carrying amount	1 792 354	291	-	96	-	1 792 741	100.0%
Impairment allowance	(1 187)	-	-	(1)	-	(1 188)
Total net carrying amount	1 791 167	291	-	95	-	1 791 553

Classification of exposures to debt securities according to Fitch ratings

31.12.2020	CARRYING AMOUNT						%PORTFOLIO
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
DEBT SECURITIES Measured at amortised cost
AAA	1 253 925	-	-	-	-	1 253 925	4.6%
A+ to A-	20 798 125	-	-	-	-	20 798 125	76.0%
BBB+ do BBB-	41 891	-	-	-	-	41 891	0.2%
No rating	5 169 771	38 434	32 971	-	-	5 241 176	19.2%
Gross carrying amount	27 263 712	38 434	32 971	-	-	27 335 117	100.0%
Impairment allowance	(40 018)	(582)	(32 971)	-	5	(73 566)
Carrying amount	27 223 694	37 852	-	-	5	27 261 551
DEBT SECURITIES Measured at fair value through other comprehensive income
AAA	4 752 614	-	-	-	-	4 752 614	11.1%
A+ to A-	25 545 632	-	-	-	-	25 545 632	59.8%
BBB+ do BBB-	1 892 344	-	-	-	-	1 892 344	4.4%
BB+ do BB-	36 542	-	-	-	-	36 542	0.1%
No rating	10 365 983	144 385	-	-	-	10 510 368	24.6%
Carrying amount	42 593 115	144 385	-	-	-	42 737 500	100.0%
Impairment allowance (*)	(60 041)	(3 102)	-	-	-	(63 143)
DEBT SECURITIES HELD FOR TRADING
AAA						707	0.1%
A+ to A-						1 113 330	84.8%
BBB+ to BBB-						2 733	0.2%
No rating						195 546	14.9%
Carrying amount						1 312 316	100.0%

(*) The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount.

Classification of exposures to debt securities according to Fitch ratings

31.12.2019	CARRYING AMOUNT						%PORTFOLIO
	STAGE 1(12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1(12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
DEBT SECURITIES Measured at amortised cost
A+ to A-	8 976 804	-	-	-	-	8 976 804	61.3%
BBB+ do BBB-	234 218	-	-	-	-	234 218	1.6%
No rating	5 078 450	331 816	32 370	-	-	5 442 636	37.1%
Gross carrying amount	14 289 472	331 816	32 370	-	-	14 653 658	100.0%
Impairment allowance	(25 668)	(16 955)	(32 370)	-	-	(74 993)
Carrying amount	14 263 804	314 861	-	-	-	14 578 665
DEBT SECURITIES Measured at fair value through other comprehensive income
AAA	3 632 368	-	-	-	-	3 632 368	11.7%
A+ to A-	19 012 373	-	-	-	-	19 012 373	61.4%
BBB+ do BBB-	1 908 191	-	-	-	-	1 908 191	6.2%
BB+ do BB-	83 026	-	-	-	-	83 026	0.3%
No rating	6 294 181	12 860	-	-	-	6 307 041	20.4%
Carrying amount	30 930 139	12 860	-	-	-	30 942 999	100.0%
Impairment allowance (*)	(32 000)	(671)	-	-	-	(32 671)
DEBT SECURITIES HELD FOR TRADING
A+ to A-						1 142 872	89.5%
BBB+ to BBB-						111 338	8.7%
No rating						22 501	1.8%
Carrying amount						1 276 711	100.0%

(*) The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount.

Classification of exposures to derivative financial instruments according to Fitch ratings

31.12.2020	DERIVATIVES HELD FOR TRANDING			HEDGING DERIVATIVES				TOTAL	%PORTFOLIO
31.12.2020	BANks	OTHER FINANCIAL INSTITUTIONS	Non-financial entities	BANks	OTHER FINANCIAL INSTITUTIONS	Non-financial entities		TOTAL	%PORTFOLIO
AAA	769 483	2 541 241	-	20 734	752 993	-	4 084 451		73.0%
AA+ to AA-	46 151	3 041	-	514	-	-	49 706		0.9%
A+ to A-	107 019	-	-	4 348	-	-	111 367		2.0%
BBB+ to BBB-	203 595	-	188 340	474	-	-	392 409		7.0%
BB+ to BB-	4 157	-	-	-	-	-	4 157		0.1%
B+ to B-	-	-	-	-	-	-	-		-
No rating	95 171	190 097	663 936	-	-	-	949 204		17.0%
Total	1 225 576	2 734 379	852 276	26 070	752 993	-	5 591 294		100.0%

Classification of exposures to derivative financial instruments according to Fitch ratings

31.12.2019	DERIVATIVES HELD FOR TRANDING			HEDGING DERIVATIVES				TOTAL	%PORTFOLIO
31.12.2019	BANks	OTHER FINANCIAL INSTITUTIONS	Non-financial entities	BANks	OTHER FINANCIAL INSTITUTIONS	Non-financial entities		TOTAL	%PORTFOLIO
AAA	330 847	766 811	-	9 729	284 315	-	1 391 702		56.6%
AA+ to AA-	28 540	-	-	1 725	-	-	30 265		1.2%
A+ to A-	118 460	1 110	-	33 184	1 216	-	153 970		6.3%
BBB+ to BBB-	187 160	-	97 825	21 641	-	-	306 626		12.5%
BB+ to BB-	2 348	-	-	-	-	-	2 348		0.1%
B+ to B-	-	-	-	-	-	-	-		-
No rating	113 009	110 305	323 114	25 398	-	-	571 826		23.3%
Total	780 364	878 226	420 939	91 677	285 531	-	2 456 737		100.0%

The description of the model for impairment allowance

The Group has recognized impairment allowance in accordance with the IRFS 9. IFRS 9 assumes the calculation of impairment losses based on expected credit losses and taking into account forecasts and expected future economic conditions in the context of credit risk exposure assessment.

Expected credit loss model

Expected credit loss model applies to financial assets classified, in accordance with the IFRS 9, as financial assets at amortized cost or at fair value through other comprehensive income, with the exception of equity instruments.

Expected credit loss model in accordance with IFRS 9 is based on the allocation of exposure to one of the three stages, depending on credit quality changes compared to the initial recognition of assets in the accounting records. How to calculate the impairment loss depends on the stage.

STAGE	CLASSIFICATION CRITERION TO THE STAGE	THE METHOD OF CALCULATING THE IMPAIRMENT ALLOWANCE
Stage 1	Exposures for which no significant increase in credit risk has been identified since the initial recognition until the balance sheet date and no impairment was identified	12-month expected credit losses
Stage 2	Exposures for which a significant increase in credit risk has been identified since the initial recognition until the balance sheet date and no impairment was identified	Lifetime expected credit losses
Stage 3	Exposures for which impairment has been identified	Lifetime expected credit losses

In addition, financial assets that were classified as POCI at the time of initial recognition are treated as POCI (i.e. purchased or originated credit-impaired) in all subsequent periods until they are derecognised. This rule applies even if, in the meantime, the asset has been healed. In other words, assets once recognized as POCI remain in this status regardless of future changes in estimates of their cash flows.

In the case of instruments with the POCI status, life-time expected credit losses are recognized throughout the lifetime of these instruments.

Calculation of expected credit losses

For the purpose of calculating the credit loss in accordance with IFRS 9, the Group compares the cash flows that it should receive pursuant to the agreement with the borrower and the flows estimated by the Group that it expects to receive. The difference is discounted by the original effective interest rate.

Expected credit losses are determined in the contractual maturity period with the exception of products meeting the criteria of IFRS 9 para. 5.5.20, for which the Group determines the expected losses in the period in which it is exposed to credit risk (ie in the economic maturity).

Calculation of expected credit losses in a lifetime horizon requires the application of multi-annual risk parameters.

Methodology for calculating group parameters - PD, RR and EAD.

Multi-annual PD parameters are an assessment of the probability of a default event in the next annual intervals in the lifetime. The PD long-term curve for a given exposure depends on the current value of the 12M PD parameter (and the appropriate rating class) determined based on the internal PD models of the Group. In the estimation, the Group:

a) estimates unbiased PD parameters without taking into account additional margins of conservatism (IFRS 9, paragraph 5.5.17 (a)),

b) takes into account current and forecasted macroeconomic conditions (IFRS 9, paragraph 5.5.17 (c)).

The calculation of expected recovery rates (RR) is based on the ‘pool’ model, in which, within homogeneous groups, average monthly recoveries are calculated conditionally against the months since default (MSD). Homogeneous groups of accounts were separated on the basis of the following characteristics:

 the type of borrower,

 product type,

 ranges of the LTV parameter (for mortgages and housing loans) or credit amount (for chosen products).

As part of defined homogeneous groups, average monthly recovery rates are calculated, which consist of repayments and recoveries resulting from both the secured part and the unsecured exposure, weighted by the value of outstanding capital observed at the beginning of a given MSD.

For products for which a repayment schedule is available, the Group sets the exposure value at the moment of default (EAD, Exposure at Default) and principal at the moment of default (PAD, Principal at Default) in the lifetime (ie for future repayments) based on contractual payment schedules and taking into account the following effects:

 the effect of arrears on principal and interest installments related to the expected non-payment of the last installments prior to the occurrence of the default,

 the effect of arrears of payments (principal and interest) on the date of calculation of the provision,

 the effect of settlement of the EIR adjustment over time.

For products for which a repayment schedule is not available, the Group sets the long-term EAD and PAD using the CCF (Credit Conversion Factor) and parameters. The CCF_1Y parameter, which estimates the percentage utilization of the remaining part of the limit in the period of 12 months before the expected moment of the default event, is used to determine the expected value of PAD and EAD parameters in the 12M period from the reference date. The CCF_2Y parameter is used to determine the expected value of PAD and EAD parameters from 12M after the reference date to the maturity date of the account.

For exposures for which it is not possible to determine risk parameters based on internal models, the Group adopts an approach based on using parameters from other portfolios with similar characteristics.

The models and parameters used to calculate impairment allowance are periodically validated.

The table below shows results of the sensitivity analyses of ECL in established changes of PD and RR/LGD parameters, separately for individual and statistical valuated portfolio (portfolio level valuation). For portfolio valuation the growth and decline scenarios for PD and recovery rate (1-LGD) correction are presented, by 1% and 5% vs. values used to expected credit loss calculation at 31 December 2020. For exposures individually valuated sensitivity estimation is presented as impact of decrease by 10% in recovery rate from collaterals in workout scenario.

DELTA PARAMETER	SCENARIO
	STATISTICAL ANALYSIS		INDIVIDUAL ANALYSIS
	PD CHANGE	RECOVERY RATE CHANGE (1-LGD)	DEBT COLLECTION CHANGE
-10.0%	n/a	n/a	58
-5.0%	(68)	264	n/a
-1.0%	(14)	53	n/a
1.0%	16	(53)	n/a
5.0%	71	(263)	n/a

The low credit risk criterion

According to par. 5.5.10 IFRS 9 exposures that are considered as low risk credit exposures at the reporting date may remain in Stage 1, regardless of the scale of the relative credit deterioration from the initial recognition. According to par. B.5.5.22 of IFRS 9, the credit risk of a financial instrument is considered low when:

 the financial instrument has a low risk of default,

 the borrower has a strong capacity to meet its contractual cash flow obligations in the near term,

 adverse changes in the economic and business conditions in the long term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations.

The Group applies a low credit risk criterion for three portfolios: exposures to banks, exposures to local government units and exposures to the State Treasury and the National Bank of Poland.

Financial assets with an identified significant increase in credit risk

Financial assets for which at the balance sheet date the Group will identify a significant increase in credit risk from the initial recognition are classified in Stage 2. The Group recognizes that for a given asset a significant increase in credit risk has been identified if a quantitative or qualitative criterion is met, in particular if contractual payments are more than 30 days past due, where the occurrence of a given criterion is verified at the exposure level.

Quantitative criteria

Taking into account the requirements of the standard, the Group defined three basic characteristics of the quantitative model:

 the measure on the basis of which the allocation is made to stages,

 the significance of the deterioration of the credit quality,

 quantification of the level of significant deterioration.

The measure, on the basis of which the allocation to stages is made, was set by the Group as the ratio of:

 current credit risk assessment defined as lifetime PD in the horizon from the reporting date to the maturity date determined on the basis of the characteristics effective as at the reporting date,

 the original credit risk assessment defined as lifetime PD in the period from the reporting date to the maturity date determined on the basis of the characteristics applicable as at the date of initial recognition.

The assessment of a significant credit risk deterioration is carried out by comparing the observed value of a relative change in the risk assessment with the theoretical value, which is the threshold above which the Group considers that a significant deterioration in credit risk occurred.

The allocation threshold at the single exposure level is determined by a statistical model based, among others, on information on the credit risk assessment as of the date of the initial recognition and the time from the date of the initial recognition of the exposure.

Qualitative criteria

As a result of the monitoring process carried out by the Group, the qualitative criteria for the allocation to Stage 2 are identified, such as:

 a delay in repayment over 30 days (30 DPD),

 occurrence of forbearance status,

 exposure is on the Watchlist.

In addition to the above, for individual monitoring the Group has defined a number of specific quality criteria for various types of portfolios, such as, inter alia, changes in the internal rating, changes in supervisory classes for selected segments (eg specialized financing), warning signals identified in the monitoring system and credit risk management or the results of individual monitoring.

Financial assets with identified impairment

Financial assets for which at the balance sheet date the Group has identified occurrences of the default event are classified in Stage 3.

In the second half of 2019 the Group modified the default definition in terms of identifying quantitative trigger. The new definition of default was used both to estimate the respective risk parameters used to estimate the expected credit loss and to classify the exposure to Stage 3. The quantitative trigger occurs when at the aggregation level the number of days in arrears for the amount overdue above the materiality threshold (PLN 100 for retail exposures and PLN 2 000 for non-retail exposures) exceeds 90 days. Daily data is used for current data and some historical data. The introduced changes are the first stage of implementation in the Group of Guidelines EBA /GL /2016/07 regarding the application of the definition of default, as specified in art. 178 of Regulation (EU) No 575/2013. In the second stage Group will implement changes coming from Guidelines EBA /GL/2016/07 at scope of quality triggers, and in the third stage will adapt new default definition to expected credit loss calculation.

The Group recognizes that for a given asset a default was identified if at least one of the following occurred:

 amount of arrears above the set materiality threshold (PLN 100 for retail exposures and PLN 2 000 for non-retail exposures) for over 90 days,

 exposure during the restructuring process,

 other qualitative impairment trigger.

For SME and corporate segments, default is identified at the customer level, whereas for the retail segment at the customer/product group level. The criterion of days and amounts of delays is also defined at the level of identification. Similarly, if for any of the contracts under the aggregated group there is a default condition, all contracts in this group are treated as default.

The Group applies a six-month quarantine period effective from the moment all defaults cease to exist.

Sensitivity analysis regarding the forecast of the macroeconomic situation

Changes in expected credit losses for exposures without impairment presented in the table below were assessed as a difference between expected credit losses calculated for a specific macroeconomic scenario and expected credit losses calculated taking into account all macroeconomic scenarios weighed with the probability of their implementation (in accordance with IFRS 9).

Macroeconomic scenarios include forecasts of macroeconomic factors influencing the level of expected credit losses and are prepared by the Macroeconomic Research Office on a quarterly basis. The forecasts take into account the following factors: GDP growth, registered unemployment rate and 3-month WIBOR in 3 scenarios: baseline (the most probable), optimistic (assuming positive changes in factors in subsequent years against the baseline scenario) and pessimistic (assuming negative changes in factors in the following years against the baseline scenario).

31.12.2020	BASLINE SCENARIO	OPTIMISTIC SCENARIO	PESSIMISTIC SCENARIO
Changes in expected credit losses for exposures without impairment (Stages 1 and 2) assuming 100% implementation of the scenario	(22 497)	16 398	134 046

31.12.2019	BASLINE SCENARIO	OPTIMISTIC SCENARIO	PESSIMISTIC SCENARIO
Changes in expected credit losses for exposures without impairment (Stages 1 and 2) assuming 100% implementation of the scenario	(5 527)	(10 182)	59 053

Changes in the methodology of calculation and expected credit losses coming from COVID-19

Due to COVID-19 pandemic, Pekao Group identifies the risk of economic disruption associated with a withhold or limited activities in some sectors, distortion in supply chain, unavailability of employees, employment reduction, consumer behavior changes, slowdown of the economy of Poland’s trading partners and others directly or indirectly impacted by activities related to COVID-19 pandemic. In the Group’s assessment these can lead to a significant deterioration of customers financial situation, however this deterioration maybe spread in time. In order to limit these risks the Group has implemented a variety of mitigation measures and invested in supporting their customers, these include:

 Increased monitoring of the portfolio with particular focus on increased risk industries,

 Strengthening of measures used to limit credit risk, in particular legal aspects of secure claims both during financing and monitoring,

 Verification of procedures in the area of financing particular business lines and adjusting them to the ongoing situation,

 Granting loans guaranteed by BGK (Bank Gospodarstwa Krajowego) with guarantees up to 80 % of the total exposure,

 Delay of installment payments upon request for a period of maximum 6 months,

 Delay of application of penalties resulting from contractual clauses,.

Detailed information on aid schemes (their characteristics and scale of use) are presented below (Moratoria implemented in the 2020 due to COVID-19).

Rapid spread of the COVID-19 pandemic ongoing 3 quarters and an unprecedented scale of remedies taken so far by the Polish government and banking sector in the scope of pandemic range limitation and stimulation of the economy, implicate very high uncertainty of future economic perspective and impact on the Bank’s credit portfolio. Due to lack of similar historical experience, the forecasting of future, which is the basis in the calculation of expected credit losses, in this situation is subject to additional degree of uncertainty and require some major expert assumptions. The Bank’s approach in this area and selected credit risk quantitative data are presented below.

In its approach, the Bank aimed to adequately reflect the potential future deterioration in the credit risk quality in the expected credit losses for stage 1 and 2 and appropriate coverage ratio of nonperforming loans (stage 3) because of possible difficulty in the credit debt recovery (collection) in the present situation. In the current phase of downturn caused by the COVID-19 epidemic, increase in impairment allowances in the Bank results mainly from forecasts of changes in the credit portfolio quality, taken into account in the calculation of expected credit losses according to IFRS9 requirements, and not from its actual its evolution. So far the Group has observed only moderate increase in the default rate limited to certain client segments, (share of NPL remained on the stable level in range: 5.1%-5.4% throughout the year).

Banks expectations of macroeconomic situation

Starting point in the calculation of expected credit losses is the Group’s expectations of macroeconomic situation which assume improvement of macroeconomic situation in 2021 after 2020 economic slowdown. GDP growth forecast is 4.5% year over year in 2021. It is assumed that the unemployment rate will stabilize on the level of 6.0%. Simultaneously, due to expiry of aid programs, Bank assumes delayed deterioration of credit portfolio quality caused by economic disturbance in 2020.

Observed deterioration of macroeconomic situation reflects changes in credit risk parameters (PD - probability of default, LGD - loss given default), which are used in the calculation of expected credit losses, based on historical data analysis and taking into account expert judgment which is necessary, because of uniqueness current situation. Based on historical analysis of changes in credit portfolio quality and economic parameters the most comparable period to the present is 1 quarter 2008 -1 quarter 2009 (the culmination of financial crisis when observed decrease of GDP growth was from 6.3% to 0.4%, which is comparable decrease to the one observed in 2020). Relative changes in default rate observed at that time in the Group are translated into changes in PD used in the calculation of expected credit losses, by imposing them on the projection of risk parameters estimated before epidemic outbreak.

Additional expert judgement include specificity of actual situation in 2020 (to a certain extent greater scale of slowdown in 2020 and unheard so far governments and national institutions support which postpones deterioration of credit portfolio quality ). As a result, average deterioration in PD parameter is about 50% in relation to output level projections assumed at the beginning (before pandemic outbreak) for retail portfolio and about 30% for the other portfolios. Regarding LGD parameter, the deterioration in recovery rate was reflected in individual analysis for nonperforming loans and additional assumption for statistical valuated loans. The lock-down in the economy caused by the epidemic would result in recovery delay an average time for a four of months (the duration time of the most important restriction on functioning of the economy), additionally the value of mortgage collaterals etc. will fall in accordance with reestimation on the mortgage market observed during the year.

Approach presented above is applied for all three scenarios used in expected credit loss calculation: baseline, downside (probability of materialization is 20%) and upside scenario (probability of materialization is 10%). Described estimations, with regard to character of current situation, are characterized by a significant level of uncertainty and will be revised in the subsequent periods.

Identification of significant increase in credit risk and stage allocation

The identification process of significant credit risk increase methods did not change. If increase in credit risk is significant then the loan is reclassified to stage 2. The Group use consistently methods taking into consideration current situation, especially in case of credit payment holidays and other actions taken to mitigate the effects of COVID-19 pandemic. The Group’s methodology is consistent with regulatory guidelines in terms of current conditions as a result of COVID-19 (e.g. EBA/GL/2020/02 Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis). Granting payment holidays on credit loans or other measures which mitigate the effects of pandemic do not automatically reclassify exposure to stage 2. But such reclassification take place if other, additional factors show that debtor’s troubles are observed and indicate an increase in credit risk. Additionally, in the scope of binding procedures Bank was made review and reclassification of the most exposed industry (high risk industry) at scope of negative effects of COVID-19 pandemic. Next the Group was made detail analysis of current situation for corporate clients operating in high risk industry and reclassify to stage 2 or 3 the exposures for which significant increase of credit risk was identified. However, for clients using the statutory holidays Group conducted reclassification to stage 3 on the product group level, due to client’s declaration about significant source of profit or job loss.

Estimated impact of COVID-19 on credit risk costs.

Impairment losses in 2020 for the Group is equal PLN 1 578 million. The Group asses that essential amount of this value is COVID-19 impact. Below components of this impact:

1. Increase in costs of risk in stage 1 and stage 2 resulting from deterioration in portfolio credit risk parameters PD and LGD (PLN 482 million),

2. Increase in costs of risk in stage 3 from new default for statutory credit holidays (PLN 53 million),related directly with COVID-19 pandemic.

Below item are tightly connected with outbreak of epidemic but partial materialization also would be observed without epidemic outbreak:

1. increase in costs of risk in stage 2 due to industry review and reclassifications to stage 2 due to similar activities (PLN 128 million),

2. Increase in coverage ratio for nonperforming loans as a result of decrease in future recovery rate (decrease in expected collection of credit debt) (PLN 314 million ),

In above cases it is not possible to conclude if the higher provision level is due only to COVID-19 pandemic or also situation which would exists despite of the epidemic.

The tables below present the changes in impairment allowances and gross carrying amount of financial assets not measured at fair value through profit or loss by class of financial assets:

	LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST (*)
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL m
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL m
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	3 918 225	291	-	96	3 918 612
Transfer to Stage 1	23	(21)	-	(2)	-
Transfer to Stage 2	(34)	45	-	(11)	-
Transfer to Stage 3	(6)	(16)	-	22	-
New / purchased / granted financial assets	1 784 218	-	-	-	1 784 218
Financial assets derecognised, other than write-offs (repayments)	(3 033 953)	(96)	-	(27)	(3 034 076)
Financial assets written off (**)	-	-	-	(2)	(2)
Other, in this changes resulting from exchange rates	61 033	(35)	-	10	61 008
GROSS CARRYING AMOUNT AS AT 31.12.2020	2 729 506	168	-	86	2 729 760
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	1 361	-	-	1	1 362
Transfer to Stage 1	-	-	-	-	-
Transfer to Stage 2	-	-	-	-	-
Transfer to Stage 3	(2)	-	-	2	-
New / purchased / granted financial assets	287	-	-	-	287
Financial assets derecognised, other than write-offs (repayments)	(178)	(54)	-	(22)	(254)
Financial assets written off (**)	-	-	-	(2)	(2)
Changes in level of credit risk (excluding the transfers between the Stages)	(144)	-	-	4	(140)
Other, in this changes resulting from exchange rates	(92)	54	-	21	(17)
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	1 232	-	-	4	1 236

(*) Receivables from the Central Bank include a current account and deposits.

(**) Including the value of contractual interest subject to partial write-off in the amount of PLN 2 thousand.

	LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST (*)
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	12 113 579	614	8 987	108	12 123 288
Transfer to Stage 1	96	(95)	-	(1)	-
Transfer to Stage 2	(68)	74	-	(6)	-
Transfer to Stage 3	(9)	(23)	-	32	-
New / purchased / granted financial assets	1 774 684	-	-	-	1 774 684
Financial assets derecognised, other than write-offs (repayments)	(9 938 611)	(236)	-	(46)	(9 938 893)
Other, in this changes resulting from exchange rates	(31 446)	(43)	(8 987)	9	(40 467)
GROSS CARRYING AMOUNT AS AT 31.12.2019	3 918 225	291	-	96	3 918 612
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	1 834	-	8 987	-	10 821
Transfer to Stage 1	-	-	-	-	-
Transfer to Stage 2	-	-	-	-	-
Transfer to Stage 3	-	-	-	-	-
New / purchased / granted financial assets	3 587	-	-	-	3 587
Financial assets derecognised, other than write-offs (repayments)	(1 440)	(85)	-	(21)	(1 546)
Changes in level of credit risk (excluding the transfers between the Stages)	(1 345)	-	-	10	(1 335)
Other, in this changes resulting from exchange rates	(1 275)	85	(8 987)	12	(10 165)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	1 361	-	-	1	1 362

(*) Receivables from the Central Bank include a current account and deposits.

TOTAL	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST						LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	117 966 139	19 613 896	5 250 851	2 885 848	42 806	145 759 540	771 987	608 620	1 380 607
Transfer to Stage 1	3 791 397	(3 754 500)	(957)	(35 940)	-	-	-	-	-
Transfer to Stage 2	(13 385 880)	13 571 142	(16 750)	(168 512)	-	-	(131 894)	131 894	-
Transfer to Stage 3	(1 235 753)	(657 915)	874 987	1 018 681	-	-	-	-	-
New / purchased / granted financial assets	32 648 254	-	-	-	1 001	32 649 255	100 000	-	100 000
Financial assets derecognised, other than write-offs (repayments)	(27 105 941)	(3 030 513)	(356 344)	(362 176)	(5 550)	(30 860 524)	(75 782)	(51 141)	(126 923)
Financial assets written off (*)	-	-	(654 612)	(219 015)	(867)	(874 494)	-	-	-
Modifications not resulting in derecognition	(6 892)	(1 312)	18	(3 061)	-	(11 247)	-	-	-
Other, in this changes resulting from exchange rates	844 439	238 126	138 818	176 657	2 182	1 400 222	56 459	64 912	121 371
GROSS CARRYING AMOUNT AS AT 31.12.2020	113 515 763	25 978 924	5 236 011	3 292 482	39 572	148 062752	720 770	754 285	1 475 055
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	304 292	712 318	3 464 586	1 976 911	11 444	6 469 551	3 407	17 401	20 808
Transfer to Stage 1	149 897	(139 026)	(315)	(10 556)	-	-	-	-	-
Transfer to Stage 2	(63 837)	119 957	(3 093)	(53 027)	-	-	(503)	503	-
Transfer to Stage 3	(110 353)	(112 280)	44 239	178 394	-	-	-	-	-
New / purchased / granted financial assets	127 737	-	-	-	793	128 530	330	-	330
Financial assets derecognised, other than write-offs (repayments)	(37 256)	(27 914)	(45 828)	(33 623)	(465)	(145 086)	(655)	-	(655)
Financial assets written off (*)	-	-	(636 885)	(219 015)	(867)	(856 767)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(5 267)	604 571	606 162	266 802	1 313	1 473 581	2 462	1 739	4 201
Other, in this changes resulting from exchange rates	25 403	17 536	139 150	(18 645)	3 758	167 202	201	1 686	1 887
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	390 616	1 175 162	3 568 016	2 087 241	15 976	7 237 011	5 242	21 329	26 571

(*) Including the value of contractual interest subject to partial write-off in the amount of PLN 255 319 thousand.

(**) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the Revaluation reserve’ item and does not reduce the carrying amount of the loan.

(***) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 345 131 thousand.

The total value of undiscounted expected credit losses at the time of initial recognition of financial assets purchased or originated credit impaired in the period ended 31 December 2020 amounted to PLN 1 400 thousand.

TOTAL	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST						LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	105 547 825	20 318 347	5 108 261	2 641 107	87 565	133 703 105	1 511 102	-	1 511 102
Transfer to Stage 1	4 694 616	(4 665 648)	(10 507)	(18 461)	-	-	-	-	-
Transfer to Stage 2	(7 344 823)	7 472 766	(9 844)	(118 099)	-	-	(623 665)	623 665	-
Transfer to Stage 3	(798 522)	(861 994)	715 105	945 411	-	-	-	-	-
New / purchased / granted financial assets	41 719 259	-	-	-	5 145	41 724 404	571 101	-	571 101
Financial assets derecognised, other than write-offs (repayments)	(25 533 306)	(2 851 426)	(401 878)	(343 682)	(49 677)	(29 179 969)	(686 334)	(15 977)	(702 311)
Financial assets written off (*)	-	-	(326 514)	(283 986)	(126)	(610 626)	-	-	-
Modifications not resulting in derecognition	(2 223)	-	-	-	-	(2 223)	-	-	-
Other, in this changes resulting from exchange rates	(316 687)	201 851	176 228	63 558	(101)	124 849	(217)	932	715
GROSS CARRYING AMOUNT AS AT 31.12.2019	117 966 139	19 613 896	5 250 851	2 885 848	42 806	145 759 540	771 987	608 620	1 380 607
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	362 418	661 413	3 281 091	1 862 086	53 455	6 220 463	14 590	-	14 590
Transfer to Stage 1	134 755	(126 634)	(841)	(7 280)	-	-	-	-	-
Transfer to Stage 2	(37 064)	86 358	(1 702)	(47 592)	-	-	(7 955)	7 955	-
Transfer to Stage 3	(120 103)	(190 024)	38 461	271 666	-	-	-	-	-
New / purchased / granted financial assets	152 930	6	-	-	2 783	155 719	2 307	-	2 307
Financial assets derecognised, other than write-offs (repayments)	(71 211)	(33 737)	(46 485)	(53 249)	(5 551)	(210 233)	(3 267)	-	(3 267)
Financial assets written off (*)	-	-	(326 514)	(283 986)	(126)	(610 626)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(133 499)	301 307	294 960	213 836	(2 587)	674 017	(2 049)	9 431	7 382
Other, in this changes resulting from exchange rates	16 066	13 629	225 616	21 430	(36 530)	240 211	(219)	15	(204)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	304 292	712 318	3 464 586	1 976 911	11 444	6 469 551	3 407	17 401	20 808

(*) Including the value of contractual interest subject to partial write-off in the amount of PLN 301 658 thousand.

(***) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 36 265 thousand.

CORPORATE	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST						LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	55 206 302	4 529 400	4 902 173	628 826	33 916	65 300 617	771 987	608 620	1 380 607
Transfer to Stage 1	1 823 809	(1 817 146)	(941)	(5 722)	-	-	-	-	-
Transfer to Stage 2	(9 012 687)	9 033 051	(15 894)	(4 470)	-	-	(131 894)	131 894	-
Transfer to Stage 3	(738 433)	(187 111)	850 222	75 322	-	-	-	-	-
New / purchased / granted financial assets	20 777 940	-	-	-	20	20 777 960	100 000	-	100 000
Financial assets derecognised, other than write-offs (repayments)	(19 134 534)	(1 188 698)	(354 168)	(52 517)	(4 425)	(20 734 342)	(75 782)	(51 141)	(126 923)
Financial assets written off	-	-	(642 508)	(53 941)	(3)	(696 452)	-	-	-
Modifications not resulting in derecognition	(2 135)	(44)	-	1	-	(2 178)	-	-	-
Other, in this changes resulting from exchange rates	925 068	16 859	219 011	21 550	2 351	1 184 839	56 459	64 912	121 371
GROSS CARRYING AMOUNT AS AT 31.12.2020	49 845 330	10 386 311	4 957 895	609 049	31 859	65 830 444	720 770	754 285	1 475 055
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	191 429	102 522	3 229 499	551 444	7 925	4 082 819	3 407	17 401	20 808
Transfer to Stage 1	41 844	(38 512)	(312)	(3 020)	-	-	-	-	-
Transfer to Stage 2	(55 447)	60 654	(3 055)	(2 152)	-	-	(503)	503	-
Transfer to Stage 3	(28 310)	(10 532)	41 739	(2 897)	-	-	-	-	-
New / purchased / granted financial assets	80 903	-	-	-	200	81 103	330	-	330
Financial assets derecognised, other than write-offs (repayments)	(30 102)	(9 009)	(45 602)	(10 253)	(377)	(95 343)	(655)	-	(655)
Financial assets written off	-	-	(624 781)	(53 941)	(3)	(678 725)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	34 054	147 543	595 597	42 256	1 874	821 324	2 462	1 739	4 201
Other, in this changes resulting from exchange rates	18 795	3 601	167 766	10 480	3 154	203 796	201	1 686	1 887
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	253 166	256 267	3 360 851	531 917	12 773	4 414 974	5 242	21 329	26 571

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the Revaluation reserve’ item and does not reduce the carrying amount of the loan.

CORPORATE	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST						LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total	STAGE 1 (12M ECL))	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED))	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	48 969 312	4 201 833	4 753 813	638 914	32 435	58 596 307	1 511 102	-	1 511 102
Transfer to Stage 1	1 733 944	(1 725 784)	(4 973)	(3 187)	-	-	-	-	-
Transfer to Stage 2	(3 336 585)	3 346 011	(3 696)	(5 730)	-	-	(623 665)	623 665	-
Transfer to Stage 3	(480 802)	(388 738)	695 898	173 642	-	-	-	-	-
New / purchased / granted financial assets	26 350 085	-	-	-	4 752	26 354 837	571 101	-	571 101
Financial assets derecognised, other than write-offs (repayments)	(17 837 693)	(1 003 920)	(391 773)	(69 979)	(2 719)	(19 306 084)	(686 334)	(15 977)	(702 311)
Financial assets written off	-	-	(313 877)	(95 217)	(28)	(409 122)	-	-	-
Modifications not resulting in derecognition	(609)	-	-	-	-	(609)	-	-	-
Other, in this changes resulting from exchange rates	(191 350)	99 998	166 781	(9 617)	(524)	65 288	(217)	932	715
GROSS CARRYING AMOUNT AS AT 31.12.2019	55 206 302	4 529 400	4 902 173	628 826	33 916	65 300 617	771 987	608 620	1 380 607
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	228 372	98 715	3 070 060	531 455	4 403	3 933 005	14 590	-	14 590
Transfer to Stage 1	34 518	(32 573)	(617)	(1 328)	-	-	-	-	-
Transfer to Stage 2	(29 036)	32 379	(871)	(2 472)	-	-	(7 955)	7 955	-
Transfer to Stage 3	(31 143)	(34 399)	36 044	29 498	-	-	-	-	-
New / purchased / granted financial assets	87 850	6	-	-	2 217	90 073	2 307	-	2 307
Financial assets derecognised, other than write-offs (repayments)	(54 840)	(37 383)	(46 229)	(21 253)	299	(159 406)	(3 267)	-	(3 267)
Financial assets written off	-	-	(313 877)	(95 217)	(28)	(409 122)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(52 796)	75 714	264 393	80 285	6 155	373 751	(2 049)	9 431	7 382
Other, in this changes resulting from exchange rates	8 504	63	220 596	30 476	(5 121)	254 518	(219)	15	(204)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	191 429	102 522	3 229 499	551 444	7 925	4 082 819	3 407	17 401	20 808

MORTGAGE LOANS TO INDIVIDUAL CLIENTS	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	48 106 749	12 715 023	133 400	738 917	1 345	61 695 434
Transfer to Stage 1	1 760 167	(1 742 092)	-	(18 075)	-	-
Transfer to Stage 2	(3 019 550)	3 145 487	(855)	(125 082)	-	-
Transfer to Stage 3	(199 113)	(256 366)	13 868	441 611	-	-
New / purchased / granted financial assets	8 565 756	-	-	-	548	8 566 304
Financial assets derecognised, other than write-offs (repayments)	(3 850 601)	(1 190 321)	(2 361)	(78 931)	(167)	(5 122 381)
Financial assets written off	-	-	(9 713)	(12 726)	-	(22 439)
Modifications not resulting in derecognition	(2 681)	(548)	18	(1 023)	-	(4 234)
Other, in this changes resulting from exchange rates	15 897	206 333	(40 582)	59 594	(396)	240 846
GROSS CARRYING AMOUNT AS AT 31.12.2020	51 376 624	12 877 516	93 775	1 004 285	1 330	65 353 530
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	22 446	278 011	68 340	286 938	127	655 862
Transfer to Stage 1	40 174	(38 573)	-	(1 601)	-	-
Transfer to Stage 2	(1 657)	31 115	(38)	(29 420)	-	-
Transfer to Stage 3	(8 524)	(26 827)	1 479	33 872	-	-
New / purchased / granted financial assets	4 958	-	-	-	280	5 238
Financial assets derecognised, other than write-offs (repayments)	(597)	(5 917)	(226)	(9 094)	(10)	(15 844)
Financial assets written off	-	-	(9 713)	(12 726)	-	(22 439)
Changes in level of credit risk (excluding the transfers between the Stages)	(37 914)	57 502	8 153	75 975	(124)	103 592
Other, in this changes resulting from exchange rates	1 762	6 250	(12 213)	21 325	(100)	17 024
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	20 648	301 561	55 782	365 269	173	743 433

MORTGAGE LOANS TO INDIVIDUAL CLIENTS	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	41 645 805	14 068 652	133 495	661 942	2 138	56 512 032
Transfer to Stage 1	2 801 786	(2 791 016)	(3 113)	(7 657)	-	-
Transfer to Stage 2	(2 770 412)	2 863 968	(3 315)	(90 241)	-	-
Transfer to Stage 3	(55 940)	(206 211)	10 619	251 532	-	-
New / purchased / granted financial assets	9 609 304	-	-	-	-	9 609 304
Financial assets derecognised, other than write-offs (repayments)	(3 098 236)	(1 295 877)	(4 550)	(73 204)	(804)	(4 472 671)
Financial assets written off	-	-	(4 255)	(20 277)	-	(24 532)
Modifications not resulting in derecognition	(1 117)	-	-	-	-	(1 117)
Other, in this changes resulting from exchange rates	(24 441)	75 507	4 519	16 822	11	72 418
GROSS CARRYING AMOUNT AS AT 31.12.2019	48 106 749	12 715 023	133 400	738 917	1 345	61 695 434
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	15 377	248 004	44 865	294 334	863	603 443
Transfer to Stage 1	62 506	(60 934)	(170)	(1 402)	-	-
Transfer to Stage 2	(439)	31 414	(362)	(30 613)	-	-
Transfer to Stage 3	(7 997)	(32 118)	1 941	38 174	-	-
New / purchased / granted financial assets	5 783	-	-	-	-	5 783
Financial assets derecognised, other than write-offs (repayments)	(294)	20 915	(256)	(11 293)	(38)	9 034
Financial assets written off	-	-	(4 255)	(20 277)	-	(24 532)
Changes in level of credit risk (excluding the transfers between the Stages)	(50 944)	64 076	20 323	1 839	(388)	34 906
Other, in this changes resulting from exchange rates	(1 546)	6 654	6 254	16 176	(310)	27 228
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	22 446	278 011	68 340	286 938	127	655 862

Other LOANS and Advance TO INDIVIDUAL CLIENTS	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	11 561 402	2 273 452	103 236	1 518 099	7 543	15 463 732
Transfer to Stage 1	204 409	(192 249)	(17)	(12 143)	-	-
Transfer to Stage 2	(1 294 973)	1 333 933	-	(38 960)	-	-
Transfer to Stage 3	(298 207)	(214 439)	10 898	501 748	-	-
New / purchased / granted financial assets	3 196 989	-	-	-	434	3 197 423
Financial assets derecognised, other than write-offs (repayments)	(3 394 645)	(638 285)	184	(230 730)	( 958)	(4 264 434)
Financial assets written off	-	-	(2 297)	(152 348)	( 864)	(155 509)
Modifications not resulting in derecognition	(2 076)	(720)	-	(2 039)	-	(4 835)
Other, in this changes resulting from exchange rates	(58 495)	15 153	(39 923)	95 511	226	12 472
GROSS CARRYING AMOUNT AS AT 31.12.2020	9 914 404	2 576 845	72 081	1 679 138	6 381	14 248 849
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	86 649	327 607	54 709	1 138 527	3 393	1 610 885
Transfer to Stage 1	67 812	(61 873)	(4)	(5 935)	-	-
Transfer to Stage 2	(6 034)	27 490	-	(21 456)	-	-
Transfer to Stage 3	(73 518)	(74 921)	1 021	147 418	-	-
New / purchased / granted financial assets	41 555	-	-	-	312	41 867
Financial assets derecognised, other than write-offs (repayments)	(6 407)	(12 987)	-	(14 275)	(78)	(33 747)
Financial assets written off	-	-	(2 297)	(152 348)	(864)	(155 509)
Changes in level of credit risk (excluding the transfers between the Stages)	(2 223)	397 843	2 412	143 699	(436)	541 295
Other, in this changes resulting from exchange rates	5 468	7 684	(16 497)	(45 576)	704	(48 217)
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	113 302	610 843	39 344	1 190 054	3 031	1 956 574

Other LOANS and advance TO INDIVIDUAL CLIENTS	LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED))		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	11 289 696	2 006 170	104 731	1 340 248	52 992	14 793 837
Transfer to Stage 1	147 077	(137 039)	(2 421)	(7 617)	-	-
Transfer to Stage 2	(1 170 015)	1 194 976	(2 833)	(22 128)	-	-
Transfer to Stage 3	(261 781)	(267 043)	8 588	520 236	-	-
New / purchased / granted financial assets	5 523 050	-	-	-	393	5 523 443
Financial assets derecognised, other than write-offs (repayments)	(3 852 896)	(536 466)	(1 369)	(200 498)	(46 154)	(4 637 383)
Financial assets written off	-	-	(8 273)	(168 492)	(99)	(176 864)
Modifications not resulting in derecognition	(497)	-	-	-	-	(497)
Other, in this changes resulting from exchange rates	(113 232)	12 854	4 813	56 350	411	(38 804)
GROSS CARRYING AMOUNT AS AT 31.12.2019	11 561 402	2 273 452	103 236	1 518 099	7 543	15 463 732
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	113 432	314 154	48 493	1 037 320	48 622	1 562 021
Transfer to Stage 1	37 592	(32 988)	(53)	(4 551)	-	-
Transfer to Stage 2	(6 770)	21 747	(470)	(14 507)	-	-
Transfer to Stage 3	(80 963)	(123 506)	475	203 994	-	-
New / purchased / granted financial assets	58 436	-	-	-	566	59 002
Financial assets derecognised, other than write-offs (repayments)	(15 922)	(17 240)	-	(20 702)	(5 812)	(59 676)
Financial assets written off	-	-	(8 273)	(168 492)	(99)	(176 864)
Changes in level of credit risk (excluding the transfers between the Stages)	(28 230)	158 656	10 492	131 711	(8 353)	264 276
Other, in this changes resulting from exchange rates	9 074	6 784	4 045	(26 246)	(31 531)	(37 874)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	86 649	327 607	54 709	1 138 527	3 393	1 610 885

	DEBT SECURITIES MEASURED AT AMORTISED COST					DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)))	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI	Total	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI	Total	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	14 289 472	331 816	32 370	-	14 653 658	30 930 139	12 860	30 942 999
Transfer to Stage 1	298 600	(298 600)	-	-	-	11 799	(11 799)	-
Transfer to Stage 2	(38 434)	38 434	-	-	-	(144 385)	144 385	-
Transfer to Stage 3	-	-	-	-	-	-	-	-
New / purchased / granted financial assets	20 791 384	-	-	-	20 791 384	353 110 214	-	353 110 214
Financial assets derecognised, other than write-offs (repayments)	(8 365 499)	(33 191)	-	-	(8 398 690)	(342 236 427)	(1 376)	(342 237 803)
Modifications not resulting in derecognition	-	-	-	-	-
Other, in this changes resulting from exchange rates	288 190	(26)	601	-	288 765	921 775	315	922 090
GROSS CARRYING AMOUNT AS AT 31.12.2020	27 263 713	38 433	32 971	-	27 335 117	42 593 115	144 385	42 737 500
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	25 668	16 955	32 370	-	74 993	32 000	671	32 671
Transfer to Stage 1	15 961	(15 961)	-	-	-	671	(671)	-
Transfer to Stage 2	(171)	171	-	-	-	(3 102)	3 102	-
Transfer to Stage 3	-	-	-	-	-	-	-	-
New / purchased / granted financial assets	15 591	-	-	-	15 591	29 843	-	29 843
Financial assets derecognised, other than write-offs (repayments)	(9 682)	(694)	-	-	(10 376)	(4 777)	-	(4 777)
Changes in level of credit risk (excluding the transfers between the Stages)	(7 763)	111	-	(5)	(7 657)	5 406	-	5 406
Other, in this changes resulting from exchange rates	414	-	601	-	1 015	-	-	-
GROSS CARRYING AMOUNT AS AT 31.12.2020	40 018	582	32 971	(5)	73 566	60 041	3 102	63 143

(*) The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount of the securities

	DEBT SECURITIES MEASURED AT AMORTISED COST					DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)))	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI	Total	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	Total
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI	Total	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	Total
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2019	11 283 691	-	31 547	-	11 315 238	27 032 827	-	27 032 827
Transfer to Stage 1	-	-	-	-	-	-	-	-
Transfer to Stage 2	(331 816)	331 816	-	-	-	(12 860)	12 860	-
Transfer to Stage 3	-	-	-	-	-	-	-	-
New / purchased / granted financial assets	8 775 942	-	-	-	8 775 942	135 254 183	-	135 254 183
Financial assets derecognised, other than write-offs (repayments)	(5 610 765)	-	-	-	(5 610 765)	(132 086 153)	-	(132 086 153)
Other, in this changes resulting from exchange rates	172 420	-	823	-	173 243	742 142	-	742 142
GROSS CARRYING AMOUNT AS AT 31.12.2019	14 289 472	331 816	32 370	-	14 653 658	30 930 139	12 860	30 942 999
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	27 792	-	31 547	-	59 339	28 307	-	28 307
Transfer to Stage 1	-	-	-	-	-	-	-	-
Transfer to Stage 2	(9 448)	9 448	-	-	-	(388)	388	-
Transfer to Stage 3	-	-	-	-	-	-	-	-
New / purchased / granted financial assets	4 470	-	-	-	4 470	10 398	-	10 398
Financial assets derecognised, other than write-offs (repayments)	(3 090)	-	-	-	(3 090)	(6 824)	-	(6 824)
Changes in level of credit risk (excluding the transfers between the Stages)	6 010	7 506	-	-	13 516	507	283	790
Other, in this changes resulting from exchange rates	(66)	1	823	-	758	-	-	-
GROSS CARRYING AMOUNT AS AT 31.12.2019	25 668	16 955	32 370	-	74 993	32 000	671	32 671

Moratoria implemented in the 2020 due to COVID-19

In the 2020, due to COVID-19, the Group introduced the following loan repayment programs:

1) moratoria developed at the initiative of the Group, (non-statutory moratoria)) i.e .:

 for customers who are consumers within the meaning of Art. 221 of the Civil Code, the Group introduced the possibility of suspending the repayment of principal and interest installments for a period of up to 3 months or a prolongation consisting in suspending the payment of up to 3 principal installments with a simultaneous extension of the loan period,

 for enterprises, the Group introduced the possibility of suspending principal or principal and interest installments for a period of 3 to 6 months and simplified extensions of credit limits.

Using the above-mentioned moratoria by clients depended on the timely servicing of loan repayments and the assessment of its financial situation.

2) moratoria developed by the Group in accordance with the EBA Guidelines, (non-statutory moratoria) i.e .:

On 29 May 2020 the Polish Financial Supervision Authority notified the European Banking Authority of the position of banks developed under the patronage of the Polish Bank Association on the EBA/GL/2020/02 Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis, which was introduced by the Group for loan agreements concluded before 13 March 2020 on the following terms:

 for individual clients, micro and small entrepreneurs, the Group introduced the option to defer repayments of principal or principal and interest installments for a period of up to 6 months indicated by the client (regardless of the number of applications submitted by a given client). The condition for using the above-mentioned moratorium is the timely service of the loan by an individual customer and having credit worthiness, taking into account COVID-19 (in the case of entrepreneurs),

 for medium-sized enterprises (with a turnover of up to EUR 50 million), the Group introduced the possibility of deferring the repayments of principal or principal and interest installments, in accordance with the client's request, for the period indicated by the client, amounting to a maximum of 6 months (principal installments) and 3 months (principal and interest installments), provided that the client has credit worthiness at the end of 2019, and for large enterprises (with a turnover of over EUR 50 million), the Group introduced the possibility of deferring the repayment of principal installments in accordance with the client's request, for the period indicated by the client, amounting to a maximum of 6 months, provided the customer has credit worthiness at the end of 2019.

3) suspension of the performance of the contract under the provisions of Act of 2 March 2020 on special solutions related to the prevention, countermeasure and combating of COVID-19, other infectious diseases and emergencies caused by them, (non-statutory moratoria):i.e.:

 are available to customers who, as consumers, lost their job or other main source of income after 13 March 2020,

 during the period of suspension of the performance of the contract, the customer is not obliged to make payments under the contract, including loan installments, except for insurance fees related to these contracts, and no interest is accrued.

Pursuant to the Act, the program is valid until the state of epidemic threat or epidemic state is in force (Article 31f of the Act).

All the above-mentioned moratoria were assessed by the Group in terms of meeting the modification criteria as defined in IFRS 9 in accordance with the principles defined in the Group's accounting policies. Given the nature of the above-mentioned moratoria, they were insignificant modifications in line with the policies adopted by the Group. Therefore, in relation to the loans covered by the above-mentioned moratoria, the Group each time determined the result on insignificant modifications.

As at 31 December 2020, the gross carrying amount of the loan portfolio covered by the above-mentioned moratoria amounted to PLN 14 606 million (69 902 units), and the negative result on insignificant modifications recognised in the 2020 related to these moratoria amounted to PLN 7.4 million and was recognized in the net interest income.

Additionally, the Bank signed the series of portfolio guarantee agreements with Bank Gospodarstwa Krajowego (‘BGK’), limiting the effects of COVID-19. The most important of them are:

1) De minimis guarantees

The annex to the existing agreement was signed on 19 March 2020 and introduced:

 increasing the guarantee to 80% of the loan principal,

 extension of the loan period to 39 months,

 reduction of the commission for the guarantee to PLN 0.

The guarantees are intended for working capital loans in PLN for the micro, small and medium-sized enterprises sector. The maximum amount of the guarantee is PLN 3.5 million. Guarantees for the above the rules may be granted until 31 December 2020. The guarantee may be granted for a new loan, renewal or increase in the loan amount.

2) Agreement under the Liquidity Guarantee Fund (‘LGF’)

The contract was signed on 10 April 2020 and introduced guarantees with the following parameters:

 guarantees for medium and large companies,

 for working capital loans up to PLN 250 million,

 the guarantee covers 80% of the loan principal,

 warranty period up to 27 months,

 commission for the guarantee from 0.25% to 1.15%, depending on the size of the enterprise and the length of the loan.

Guarantees for the above-mentioned parameters can be granted until 31 December 2020. The guarantee may be granted for new credits and renewals.

The term of both lines was extended until 30 June 2021, while in the case of de minimis guarantees, the guarantee amount was increased to EUR 1.5 million and its period to 75 months (working capital loans) and 120 months (investment loans).

As at 31 December 2020, the gross carrying amount of the loan portfolio covered by BGK's portfolio guarantees limiting the effects of COVID-19 was PLN 3 417 million (4 560 customers).

Group’s exposure to credit risk

The maximum credit risk exposure

The table below presents the maximum credit risk exposure for statement of financial position and off-balance sheet positions as at the reporting date.

	31.12.2020	31.12.2019
Due from Central Bank	150 185	2 101 783
Loans and advances from banks and from customers	145 066 136	142 704 788
Financial assets held for trading	1 317 709	1 281 664
Derivative financial instruments (held for trading)	4 812 231	2 079 529
Hedging instruments	779 063	377 208
Investment securities	70 491 227	45 893 115
Other assets (*)	1 007 426	1 129 836
Balance sheet exposure (**)	223 623 977	195 567 923
Obligations to grant loans	41 089 482	36 806 862
Other contingent liabilities	18 203 088	12 865 603
Off-balance sheet exposure	59 292 570	49 672 465
Total	282 916 547	245 240 388

(*) Includes the following items of the statement of financial position part of ‘Other assets’(Accrued income, Interbank and interbranch settlements, Card settlements, Other debtor).

(**) Balance sheet exposure is equal to the carrying amount presented in the statement of financial position.

Credit risk mitigation methods

Group has established specific policies with regard to collateral accepted to secure loans and guarantees. This policy is reflected under internal rules and regulations, which are based on supervision rules, specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

The most frequently used types of collateral for credits and loans, accepted in compliance with the relevant policy of Group are as follows

COLLATERAL	COLLATERAL VALUATION PRINCIPLES
mortgages
commercial	Collateral value is defined as the fair market value endorsed by a real estate expert. Other evidenced sources of valuation are acceptable, e.g. binding purchase offer, value dependent on the stage of tendering procedure, etc.
residential
registered pledge/ assignment:
inventories	The value is defined basing on well evidenced sources e.g. amount derived from pledge agreement, amount disclosed in last financial statements, insurance policy, stock exchange quotations, the value disclosed through foreclosure procedure supported with evidence e.g. prepared by bailiff/receiver.
machines and appliances	The value is defined as expert appraisal or present value determined based on other, sound sources, such as current purchase offer, register of debtor’s non-current assets, value evidenced by bailiff or court receiver, etc.
Vehicles	The value is defined based on available tables (e.g. from insurance companies) proving the car value depending on its producer, age, initial price, or other reliable sources e.g. value stated in the insurance policy.
other	The value is defined upon individually. The valuation should result from reliable sources.
securities and cash	The value is defined upon individually estimated fair market value. Recovery rate shall be assessed prudently reflecting the securities price volatility.
transfer of receivables
from clients with investment rating assigned by independent rating agency or by internal rating system of the Bank	The value is defined upon individually assessed claims’ amount.
from other counterparties	The value is defined upon individually assessed claim’s amount.
Guaranties/sureties (incl. rafts)/accession to debt
from banks and the State Treasury	Up to the guaranteed amount.
from other counterparties enjoying good financial standing, particularly when confirmed by investment rating, assigned by an independent rating agency or by the internal rating system of the Bank	The value is defined upon individually assessed claim’s amount.
from other counterparties	Individually assessed fair market value.

The financial effect of pledged collaterals for exposure portfolio with recognized impairment defined individually amounts to PLN 800 851 thousand as at 31 December 2020 (PLN 1 002 267 thousand as at 31 December 2019). The level of required impairment allowances for the portfolio would increase by this amount, if the discounted cash flows from collateral were not taken into account during estimation.

The Group analyzes the concentration within LtV levels (the ratio of debt to the value of collateral), which is particularly important in the case of mortgage loans to individual clients. The structure of mortgage loans to individual clients according to the LtV level is presented below:

31.12.2020	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
LTV LEVEL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
MORTGAGE LOANS TO INDIVIDUAL CLIENTS – GROSS CARRYING AMOUNT
0% < LtV <= 50%	13 877 539	6 246 800	28 083	367 476	269	20 520 167
50% < LtV <= 70%	18 533 951	3 740 890	24 002	369 241	984	22 669 068
70% < LtV <= 90%	7 550 471	1 093 678	10 684	86 908	-	8 741 741
90% < LtV <= 100%	1 828 031	207 727	5 175	23 607	-	2 064 540
100% < LtV	201 927	27 316	15 158	5 563	-	249 964
Total	41 991 919	11 316 411	83 102	852 795	1 253	54 245 480

31.12.2019	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
LTV LEVEL	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
MORTGAGE LOANS TO INDIVIDUAL CLIENTS – GROSS CARRYING AMOUNT
0% < LtV <= 50%	9 953 978	5 433 129	13 365	271 363	220	15 672 055
50% < LtV <= 70%	17 249 461	4 025 334	27 863	285 902	976	21 589 536
70% < LtV <= 90%	11 275 400	1 787 413	13 358	126 012	-	13 202 183
90% < LtV <= 100%	143 352	34 352	397	8 257	-	186 358
100% < LtV	76 512	18 721	27 987	7 091	-	130 311
Total	38 698 703	11 298 949	82 970	698 625	1 196	50 780 443

Credit risk concentration

According to valid regulations the total exposure of the Group to single borrower or a group of borrowers related by capital or management may not exceed 25% of the Group’s own funds. In 2020 the maximum exposure limits set in the valid regulations were not exceeded.

a) Breakdown by individual entities

EXPOSURE TO 10 LARGERST CLIENTS OF THE GROUP as at 31 December 2020	% SHARE OF PORTFOLIO
Client 1	1.0%
Client 2	1.0%
Client 3	0.9%
Client 4	0.7%
Client 5	0.7%
Client 6	0.7%
Client 7	0.6%
Client 8	0.6%
Client 9	0.5%
Client 10	0.4%
Total	7.1%

EXPOSURE TO 10 LARGERST CLIENTS OF THE GROUP as at 31 December 2019	% SHARE OF PORTFOLIO
Client 1	1.3%
Client 2	1.2%
Client 3	1.0%
Client 4	0.7%
Client 5	0.7%
Client 6	0.6%
Client 7	0.5%
Client 8	0.5%
Client 9	0.5%
Client 10	0.5%
Total	7.5%

b) Concentration by capital groups

EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE GROUP as at 31 December 2020	% SHARE OF PORTFOLIO
Group 1	1.4%
Group 2	1.1%
Group 3	1.0%
Group 4	1.0%
Group 5	0.9%
Total	5.4%

EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE GROUP as at 31 December 2019	% SHARE OF PORTFOLIO
Group 1	1.3%
Group 2	1.1%
Group 3	1.1%
Group 4	1.0%
Group 5	0.9%
Total	5.4%

c) Breakdown by industrial sectors.

In order to mitigate credit risk associated with excessive sector concentration the Bank sets up a system for shaping the sectoral structure of credit exposure. Every year within Credit Policy the Bank defines sector limits for particular sectors of economy. These limits are subject to ongoing monitoring. The system applies to credit exposure in particular types of business activity according to the classification based on the Polish Classification of Economic Activities (Polska Klasyfikacja Działalności – PKD).

Concentration limits are set based on the Bank’s current credit exposure and risk assessment of each sector. Periodic monitoring of the Bank’s exposure allows for ongoing identification of the sectors in which the concentration of sector risk may be too excessive. In such cases, an analysis of the economic situation of the sector is performed including both the current and forecast trends and an assessment of quality of the current exposure to that sector. These measures enable the Bank to formulate the activities to reduce sector concentration risk and ongoing adaptation of the Bank’s Credit Policy to a changing environment.

The table below presents the structure of exposures by sectors

EXPOSURE’S STUCTURE BY SECTORS	31.12.2020	31.12.2019
Agriculture, forestry and fishing	0.8%	0.8%
Mining and quarrying	1.7%	1.8%
Manufacturing	22.5%	22.0%
Electricity, gas, steam and air conditioning supply	6.5%	7.8%
Water supply	2.7%	2.5%
Construction	5.4%	4.9%
Wholesale and retail trade	16.2%	17.5%
Transport and storage	6.4%	6.9%
Accommodation and food service activities	3.0%	2.8%
Information and communication	2.4%	2.1%
Financial and insurance activities	4.3%	3.5%
Real estate activities	10.9%	12.3%
Professional, scientific and technical activities	7.9%	3.6%
Administrative and support service activities	1.5%	1.6%
Public administration and defence, compulsory social security	5.6%	6.6%
Education	0.2%	0.3%
Human health services and social work activities	0.7%	0.8%
Arts, entertainment and recreation	1.0%	1.1%
Others	0.3%	1.1%
Total	100.0%	100.0%

Financial assets subject to modification

The table below presents information about financial assets that were subject to a modification that didn’t result in derecognition and for which, prior to modification, an impairment loss on expected credit losses was calculated as a loan loss over the lifetime of the exposure.

	2020	2019
FINANCIAL ASSETS WHICH WERE SUBJECT TO MODIFICATION IN THE PERIOD
Carrying amount according to the amortised cost before modification	3 381 684	32 458
Net modification gain or loss	(3 796)	(333)
FINANCIAL ASSETS WHICH WERE SUBJECT TO MODIFICATION SINCE INITIAL RECOGNITION
Gross carrying amount of financial assets for which the loss allowance has changed during the reporting period from lifetime expected credit losses to an amount equal to 12-month expected credit losses	457 468	12 450

Forbearance measures

Forborne exposures are debt contracts in respect of which forbearance measures have been extended and in the result of the, so called, rejection test (verification whether an impairment has been identified or a past due date greater than or equal to 30 days in the last 90 days), ), have been finally classified as performing Forborne exposures or non-performing Forborne exposures. Forbearance measures occur in situations in which the borrower is considered to be unable to meet the terms and conditions, including problems with debt service, of the contract due to financial difficulties. Based on these difficulties, the Bank decides to modify the terms and conditions of the contract to allow the borrower sufficient ability to service the debt. Modification of the terms and conditions of the contract may include i.e. the reduction of the interest rate, principal, accrued interest or the rescheduling of the dates of payment of principal or interests.

The Group determines the list of the forbearance measures, including in particular:

 the extension of initial maturity (due) date (in case of additional appendix to the contract) or signing a restructuring contract (in case of full past-due debt), in particular as a result of constant reduction of installments amount,

 the modification of the contract’s terms or conditions which results in lower interests and/or principal payments to eliminate the past-due debt,

 the refinancing by the other loan in the Group.

The classification as forborne exposure shall be discontinued when all the following conditions are met:

 the contract is considered as a performing exposure,

 a minimum 2 year probation period has passed from the date the forborne exposure was considered as performing,

 none of the exposures to the debtor is at least 30 days past-due at the end of the probation period of forborne exposure.

If conditions, referred above, are not fullfiled at the end of the probation period, exposures are classified respectively as performing or non-performing forborne exposures in the probation period untill all these conditions are met. The fullfilment of the conditions is assesed at least on a quarterly basis.

Exposure is classified as forbearance only if the modification of the contractual terms is related to the financial difficulties of the borrower.

The forbearance agreements are monitored for fulfillment of contractual provisions. Dedicated units of the Group manage the agreements with identified forbearance measures and monitor such agreements on an on-going basis.

The decision to apply the forbearance measure is undertaken by the authorized Unit within the credit application process.

The accounting policies in respect to the evaluation and the provisioning of the forborne exposures generally follow the principles in line with the provisions of IFRS 9.

The Group also identifies the assets’ significant credit risk increase for which the forbearance measures have been applied for the purpose of the process of impairment allowance recognition according to IFRS 9.

In the case of granting loan holidays or other mitigating measures for the COVID-19 pandemic, the Group applies an approach consistent with regulatory guidelines in this regard. Granting loan holidays or other mitigation measures against the effects of the COVID-19 pandemic does not automatically identify forborne exposures.

Share of forborne exposures in the Group’s loan portfolio

	31.12.2020
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
Loans and advances measured at amortised cost, including:	113 125 147	24 803 762	1 667 995	1 205 241	23 596	140 825 741
Forborne exposures gross	1 067 782	412 723	2 429 599	661 951	21 672	4 593 727
Loss allowance	(2 222)	(35 246)	(1 803 056)	(335 092)	(3 055)	(2 178 671)
Forborne exposures net	1 065 560	377 477	626 543	326 859	18 617	2 415 056
Loans and advances measured at fair value through other comprehensive income, including:	720 770	754 285	-	-	-	1 475 055
Forborne exposures	-	-	-	-	-	-
Loss allowance (*)	-	-	-	-	-	-
Loans and advances measured at fair value through profit or loss, including:						187 001
Forborne exposures						1 068

	31.12.2019
	STAGE 1(12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)			PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1(12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment		group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
Loans and advances measured at amortised cost, including:	117 661 847	18 901 578	1 786 265	908 937		31 362	139 289 989
Forborne exposures gross	351 083	116 882	2 316 663	514 082		21 491	3 320 201
Loss allowance	(2 953)	(11 698)	(1 400 712)	(271 867)		(757)	(1 687 987)
Forborne exposures net	348 130	105 184	915 951	242 215		20 734	1 632 214
Loans and advances measured at fair value through other comprehensive income, including:	771 987	608 620	-	-		-	1 380 607
Forborne exposures	-	-	-	-		-	-
Loss allowance (*)	-	-	-	-		-	-
Loans and advances measured at fair value through profit or loss, including:							242 639
Forborne exposures							998

The quality analysis of forborne exposures broken down by delays in repayment

	31.12.2020
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)			PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment		group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
FORBORNE EXPOSURES MEASURED AT AMORTISED COST
Gross carrying amount, of which:	1 067 782	412 723	2 429 599	661 951		21 672	4 593 727
not past due	1 064 677	313 524	883 189	252 533		4 749	2 518 672
up to 1 month	3 105	77 511	19 826	100 135		9 625	210 202
between 1 month and 3 months	-	21 481	19 743	73 714		86	115 024
between 3 months and 1 year	-	207	60 052	89 832		7 086	157 177
between 1 year and 5 years	-	-	288 154	109 395		89	397 638
above 5 years	-	-	1 158 635	36 342		37	1 195 014
Impairment allowances, of which:	(2 222)	(35 246)	(1 803 056)	(335 092)		(3 055)	(2 178 671)
not past due	(2 153)	(19 575)	(499 564)	(85 555)		-	(606 847)
up to 1 month	(69)	(11 152)	(10 576)	(41 127)		(1 338)	(64 262)
between 1 month and 3 months	-	(4 487)	(5 427)	(34 430)		(58)	(44 402)
between 3 months and 1 year	-	(32)	(42 627)	(52 484)		(1 572)	(96 715)
between 1 year and 5 years	-	-	(204 655)	(86 544)		(50)	(291 249)
above 5 years	-	-	(1 040 207)	(34 952)		(37)	(1 075 196)
FORBORNE EXPOSURES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS
Carrying amount, of which:							1 068
not past due							142
up to 1 month							-
between 1 month and 3 months							-
between 3 months and 1 year							7
between 1 year and 5 years							919
above 5 years							-

The quality analysis of forborne exposures broken down by delays in repayment

	31.12.2019
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)			PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment		group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
FORBORNE EXPOSURES MEASURED AT AMORTISED COST
Gross carrying amount, of which:	351 083	116 882	2 316 663	514 082		21 491	3 320 201
not past due	350 079	77 417	675 415	176 584		3 633	1 283 128
up to 1 month	1 004	31 565	21 529	82 628		11 912	148 638
between 1 month and 3 months	-	7 852	25 027	53 869		5 719	92 467
between 3 months and 1 year	-	48	66 605	61 493		125	128 271
between 1 year and 5 years	-	-	269 795	108 383		39	378 217
above 5 years	-	-	1 258 292	31 125		63	1 289 480
Impairment allowances, of which:	(2 953)	(11 698)	(1 400 712)	(271 867)		(757)	(1 687 987)
not past due	(2 934)	(5 730)	(183 320)	(61 597)		75	(253 506)
up to 1 month	(19)	(4 088)	(9 378)	(33 675)		257	(46 903)
between 1 month and 3 months	-	(1 880)	(9 304)	(26 514)		(865)	(38 563)
between 3 months and 1 year	-	-	(22 090)	(37 884)		(122)	(60 096)
between 1 year and 5 years	-	-	(174 792)	(84 158)		(39)	(258 989)
above 5 years	-	-	(1 001 828)	(28 039)		(63)	(1 029 930)
FORBORNE EXPOSURES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS
Carrying amount, of which:							998
not past due							28
up to 1 month							-
between 1 month and 3 months							73
between 3 months and 1 year							152
between 1 year and 5 years							745
above 5 years							-

Changes in net carrying amount of forborne exposures

	2020	2019
Carrying amount at the beginning	1 633 212	1 996 700
Amount of exposures recognized in the period	1 627 018	148 281
Amount of exposures derecognized in the period	(397 469)	(308 316)
Changes in impairment allowances	(424 008)	16 599
Other changes	(22 629)	(220 052)
Carrying amount at the end	2 416 124	1 633 212
Interest income	124 299	86 240

Forborne exposures by type of forbearance activity

	31.12.2020	31.12.2019
Modification of terms and conditions	2 416 124	1 633 212
Carrying amount	2 416 124	1 633 212

Forborne exposures by product type

	31.12.2020	31.12.2019
Mortgage loans	1 698 676	1 110 981
Current accounts	46 863	55 722
Operating loans	55 571	84 409
Investment loans	213 822	230 342
Cash loans	350 761	76 279
Financial leasing	31 143	28 432
Other loans and advances	19 288	47 047
Carrying amount	2 416 124	1 633 212

Forborne exposures by industrial sectors

	31.12.2020	31.12.2019
Corporates:	655 649	1 259 141
Real estate activities	248 050	788 418
Manufacturing	59 445	78 282
Wholesale and retail trade	58 792	109 514
Accommodation and food service activities	85 468	49 469
Construction	76 283	120 280
Professional, scientific and technical activities	64 953	56 838
Transportation and storage	26 661	17 274
Agriculture, forestry and fishing	18 106	18 402
Other sectors	17 891	20 664
Individuals	1 760 475	374 071
Carrying amount	2 416 124	1 633 212

Forborne exposures by geographical structure

	31.12.2020	31.12.2019
Poland	2 415 087	1 632 186
Other countries	1 037	1 026
Carrying amount	2 416 124	1 633 212

Issue related to the provision for legal risk regarding foreign currency mortgage loans in CHF

1) Portfolio characteristics

Bank Pekao S.A. has not granted loans in CHF to the public since 2003. Almost the entire current portfolio of loans in CHF for individuals was taken over by Bank Pekao S.A. in the process of partial division of Bank BPH S.A. (loans granted before August 2006).

As at 31 December 2020, the Group had a portfolio of foreign currency mortgage loans in CHF with a total gross carrying amount of PLN 2 899 million (i.e. CHF 679.9 million) compared to PLN 3 003 million (i.e. CHF 765.8 million) as at 31 December 2019.

The tables below present the structure and quality of the CHF loan portfolio for individuals:

	31.12.20120
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
Gross carrying amount, of which:	2 602	2 645 935	52 315	197 467	806	2 899 125
denominated in CHF	2 602	2 640 379	52 315	196 873	806	2 892 975
indexed to CHF	-	5 556	-	594	-	6 150
Impairment allowances, of which: (*)	(1)	(358 050)	(25 436)	(94 040)	(341)	(477 868)
denominated in CHF	(1)	(358 012)	(25 436)	(93 844)	(341)	(477 634)
indexed to CHF	-	(38)	-	(196)	-	(234)
Carrying amount, of which:	2 601	2 287 885	26 879	103 427	465	2 421 257
denominated in CHF	2 601	2 282 367	26 879	103 029	465	2 415 341
indexed to CHF	-	5 518	-	398	-	5 916

(*) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 345 131 thousand.

	31.12.2019
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	STAGE 3 (lifetime ecl - CREDIT-IMPAIRED)		PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI)	TOTAL
Gross carrying amount, of which:	192 721	2 595 740	38 245	175 961	752	3 003 419
denominated in CHF	192 721	2 586 325	38 245	175 150	752	2 993 193
indexed to CHF	-	9 415	-	811	-	10 226
Impairment allowances, of which:	(194)	(57 680)	(21 617)	(82 240)	(303)	(162 034)
denominated in CHF	(194)	(57 623)	(21 617)	(81 932)	(303)	(161 669)
indexed to CHF	-	(57)	-	(308)	-	(365)
Carrying amount, of which:	192 527	2 538 060	16 628	93 721	449	2 841 385
denominated in CHF	192 527	2 528 702	16 628	93 218	449	2 831 524
indexed to CHF	-	9 358	-	503	-	9 861

(*) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 36 265 thousand.

Moreover, the portfolio of granted and repaid foreign currency loans in CHF amounted to CHF 1 413 million as at 31 December 2020, compared to CHF 1 319 million as at 31 December 2019.

As of 31 December 2020 the average LTV for CHF loans to individuals granted by the Group amounted to 38.1% (39.9% as at 31 December 2019), with an average LTV for the whole portfolio of mortgage loans of 55.8% (57.9% as at 31 December 2019).

2) Court proceedings related to foreign currency mortgage loans in CHF

On 3 October 2019, the Court of Justice of the European Union (hereinafter the ‘CJEU’) issued a ruling on a CHF-indexed loan granted by another bank, in which it interpreted the provisions of Council Directive 93/13 / EEC of 5 April 1993 on unfair terms in consumer loans based on the CHF indexed loan agreement. The CJEU indicated the consequences of recognizing the possible abusiveness of conversion clauses by the domestic court, without examining the possible abusiveness of contractual provisions at all. The CJEU did not prejudge that in the event that a domestic court finds possible abusiveness, the court should automatically declare the entire contract invalid. The assessment in this respect remains to be decided by the national court, but the CJEU has not ruled out the possibility of filling the gap resulting from the abusive nature of conversion clauses by means of domestic regulatons.

The ruling of the CJEU constitutes general guidelines for Polish courts. Final decisions made by Polish courts are made on the basis of EU regulations interpreted in accordance with the CJEU judgment, taking into account the provisions of domestic law and the analysis of the individual circumstances of each case. At the same time, it is difficult to talk about a formed line of jurisprudence in cases of mortgage loans in CHF, which is often confirmed by mutually exclusive judgments of common courts, as well as legal inquiries to the CJEU and the Supreme Court to resolve doubts. In particular, attention should be paid to the application submitted on 29 January 2021 by the First President of the Supreme Court to the full composition of the Civil Chamber of the Supreme Court to resolve legal issues related to FX mortgage loans in CHF, relating in particular to the following aspects:

1) whether the abusive provisions relating to the method of determining the currency rate in an indexed or denominated loan agreement can be replaced by provisions of civil or customary law,

2) if it is impossible to establish a binding exchange rate for a foreign currency in a denominated loan agreement, the agreement may bind the parties in the remaining scope,

3) if it is impossible to establish a binding exchange rate for a foreign currency in the loan agreement, the agreement may bind the parties in the remaining scope,

4) whether the balance theory or the theory of two conditions will apply in the event of cancellation of the loan agreement,

5) which is the moment to start the limitation period in the event that the bank makes a claim against the borrower for the repayment of the loan,

6) whether it is possible for banks and borrowers to receive remuneration for using the funds.

In the Group's opinion, the ruling of the Supreme Court expected in March 2021 on the above issues may have a significant impact on the further shaping of the line of judicial decisions in this regard. At the same time, there are discussions in the banking sector in Poland regarding the implementation of possible systemic solutions for FX mortgage loans in CHF, i.e. in accordance with the proposal of the Chairman of the Polish Financial Supervision Authority of 8 December 2020, clients would be able to convert a foreign currency mortgage into a PLN loan, as if the borrower had a loan in PLN from the beginning of the loan, the interest rate of which would be based on 3M WIBOR with a margin adequate to historical levels (depending on time moment the loan was granted).

As at 31 December 2020, 592 individual court cases were pending against the Group regarding FX mortgage loans in CHF, which were granted in previous years, with the total value of the claim in the amount of PLN 159.7 million (as at 31 December 2019, the number of cases was 195, and the corresponding value of the dispute is PLN 59 million). The main cause of the dispute, as indicated by the plaintiffs, concerns the questioning of the provisions of the loan agreement with regard to the Group's application of conversion rates and results in claims regarding the partial or complete invalidity of the loan agreements. As at 31 December 2020, the Group received 36 unfavorable court judgments in cases brought by borrowers, including 3 final judgments declaring the invalidity of the loan agreement and 13 favorable court judgments, including 2 final judgments dismissing the claim to declare the loan agreement invalid and an action for payment in connection with the invalidity of the loan agreement (31 December 2019: 2 unfavorable court judgments - no final judgments stating the invalidity of the loan agreement and 4 favorable non-final judgments dismissing the claim for payment).

3) Provision related to foreign currency mortgage loans in CHF - assumptions and calculation methodology

Taking into account the increase in the number of disputes to which the Group is a party, as well as the increase in the number of claims related to FX mortgage loans in CHF observed in the entire banking sector, along with the increasingly unfavorable tendency in the jurisprudence, the Group has revised the estimation of the provision for the above-mentioned legal risk related to contracts for FX mortgage loans in CHF in the total amount of PLN 436.1 million as at 31 December 2020 (PLN 58.7 million as at 31 December 2019).

The above amount includes the provision for individual pending litigation to which the Group is a party and the portfolio provision for other CHF mortgage loan agreements, which are subject to legal risk related to the nature of these agreements.

For the purposes of estimating the provision, the Group assesses the probability of the impact of the legal risk relating to FX mortgage loans in CHF on future expected cash flows from credit exposures and on the probability of cash outflow.

With regard to existing court cases, the Group assesses the probability of losing a dispute and the probability of a specific court judgment (depending on what the lawsuit concerns). As at 31 December 2020, the Group estimated the provision in this respect in the total amount of PLN 76.1 million (PLN 19.9 million as at 31 December 2019).

With regard to the portfolio provision, as at 31 December 2020, the Bank based its calculations on 3 possible scenarios in order to best account for the various possible solutions related to FX mortgage contracts in CHF, which are currently being analyzed in the banking sector, in the portfolio provision estimation. In the previous periods, the Group used one scenario.

The bank decided to introduce the scenario method due to the significant changes observed in the banking market during 2020, in particular related to significant increases in disputes, the ever-increasing complexity of legal problems and the various sectoral solutions in the area of CHF mortgage loans.

The calculation of the provision performed by the Bank as at 31 December 2020 was based on the following equivalent scenarios:

1) the baseline scenario - the bank assumes that around 6% of foreign currency borrowers (with both active and repaid loans) have filed or will file lawsuits against the Bank within a 3-year horizon regarding the questioning of the loan agreement and estimates the probability of losing court cases, as well as the possible consequences financial in the event of losing a court case, accepting as possible decisions:

• invalidation of the entire agreement for a foreign currency mortgage loan in CHF as a result of recognizing the indexation clause as illegal,

• recognition that the clauses contained in the loan agreement constitute prohibited contractual provisions resulting in the determination of the loan balance in PLN and the interest rate on the loan based on the LIBOR rate, the so-called ‘Defrancation’,

• recognizing the valorization clause as abusive and replacing the Bank's exchange rate table in its content with the average exchange rate of the National Bank of Poland,

• dismissal of the claim.

In the baseline scenario as at 31 December 2020, the Bank took into account its own and the history of lawsuits observed in the market, and used the opinion of an external law firm to determine the probability of losing the disputes and the probabilities of possible solutions. As at 31 December 2020, the Bank estimates that the probability of losing the dispute is 80% (which is an increase by 10 pp compared to the assumptions in this respect as at 31 December 2019).

An additional element of the estimates in the baseline scenario is the probability distribution of a possible dispute resolution, which is associated with a specific loss level. The Bank attributes the largest share in the possible settlement scenarios, amounting to 70% (35% at the end of 2019), to the cancellation of the loan agreement).

2) settlement scenario - legal disputes regarding currency loan agreements in CHF will be possible, but clients will use them to a much lesser extent than in the base scenario, as most of them (around 75-80%) will use the option of settlements with the Bank based on solutions discussed in the banking sector, as proposed by the Chairman of the Polish Financial Supervision Authority. In the settlement scenario, the financial consequences for the Bank are equal to the sum of the differences between the current balance of the FX mortgage loan in CHF and the balance of the hypothetical loan in PLN, based on the WIBOR rate increased by the margin of the loan granted at the same time and for the same period as the loan in CHF and repaid by the borrower in accordance with the repayments made on the CHF loan. With the current market parameters and assuming that all borrowers for whom the conversion of the loan into PLN would be beneficial as proposed by the Chairman of the Polish Financial Supervision Authority would have entered into an appropriate settlement with the Bank, the Bank's loss on this account would be PLN 350-400 million.

3) negative scenario - in the event of a negative resolution of the Civil Chamber of the Supreme Court in the full bench, and in connection with this resolution of unfavorable jurisprudence and common courts regarding FX mortgage loans in CHF, the number of possible claims will be nearly three times higher in the future than assumed in the scenario base, with a simultaneous greater probability both with regard to unfavorable court judgments in principle (increase to the level of 90%), and their decisions in the form of annulment of the entire agreement for a CHF mortgage loan (95% of decisions).

Taking into account the short history of data on the scale of lawsuits (in particular in the field of final judgments), the significant level of complexity of various legal aspects that may occur in relation to these loan agreements, and, as a result, the unshaped direction of possible court decisions, the estimates of the above provision required by the Group of many expert assumptions based on professional judgment.

Subsequent rulings, and above all the expected resolution of the full composition of the Civil Chamber of the Supreme Court and possible sectoral solutions that will appear on the Polish market with regard to FX mortgage loans in CHF, may have an impact on the amount of the provision determined by the Group and cause the need to change individual assumptions made in calculations, in particular in terms of weights of individual scenarios, the probability of unfavorable solutions or the possible number of lawsuits. In connection with the above uncertainty, it is possible that the amount of the provision will change in the future.

The Group performed a sensitivity analysis in relation to the significant assumptions of the provision calculation, where a change in the level of individual parameters would have the following impact on the amount of the provision for the legal risk of FX mortgage loans in CHF.

Impact on the provision level in the event of changes to the assumptions in the base scenario (with other elements of the calculation unchanged):

PARAMETR	Number of lawsuits	Number of lawsuits
Number of lawsuits	+20%	33 657
Number of lawsuits	-20%	(33 657)
Prawdopodobieństwo przegranej	+10 p.p.	26 258
Prawdopodobieństwo przegranej	- 10 p.p.	(26 258)
Prawdopodobieństwo scenariusza unieważnienia umowy	+10 p.p.	9 505
Prawdopodobieństwo scenariusza unieważnienia umowy	- 10 p.p.	(9 505)

4) Provision related to foreign currency mortgage loans in CHF - accounting treatment and presentation

As indicated in the section of the financial statements concerning accounting policies, the Group recognizes that the legal risk affects the expected cash flows from the credit exposure and the amount of the provision is the difference between the expected cash flows from a given exposure and the contractual flows as defined in IFRS 9.

Therefore, with regard to currency exposures of mortgage loans in CHF unpaid as at 31 December 2020, the Group adopts the approach that the amount of the provision for credit exposures outstanding as at 31 December 2020 (including existing and possible future claims) is recognized in ‘Impairment allowances on loan receivables’(in correspondence with the item ‘Net impairment allowance’) up to the amount of credit exposure. Thus, the Group recognizes that with regard to the CHF portfolio, there has been a significant increase in credit risk since the initial recognition date and classifies these loans to Basket 2.

In the case of part of the provision relating to repaid foreign currency mortgage loans in CHF (including existing and possible future lawsuits), or when the amount of the provision exceeds the net carrying amount of the credit exposure, the provision amount is recorded as ‘Provisions’ in correspondence with ‘Other operating expenses’.

Following the above principles, as at 31 December 2020, the Group allocated the total amount of the provision in the amount of PLN 436.1 million as follows:

1. PLN 345.1 million for current and future disputes regarding balance sheet exposures, recognized as an element of impairment losses on credit receivables in correspondence with ‘Net impairment allowance’ (PLN 36.3 million as at 31 December 2019),

2. PLN 91 million for current and future legal disputes regarding repaid exposures, recognized as provisions in correspondence with ‘Other operating expenses’ (PLN 22.4 million as at 31 December 2019).

A summary of the recognition of the provision for legal risk related to FX mortgage loans in CHF in the statement of financial position and profit and loss is presented in the tables below.

STATEMENT OF FINANCIAL POSITION	31.12.2020	31.12.2019
Impairment allowances for loan exposures, in this:	345 131	36 265
Individual provisions	65 420	16 580
Portfolio provisions	279 711	19 685
Provisions for litigation and claims, in this:	90 939	22 441
Individual provisions	10 668	3 280
Portfolio provisions	80 271	19 161
Total	436 070	58 706

INCOME STATEMENT	2020	2019
Net allowances for expected credit losses	(308 866)	(36 265)
Other operating expenses	(68 498)	(22 441)
Total	(377 364)	(58 706)

Offsetting financial assets and financial liabilities

The disclosures in the tables below include financial assets and financial liabilities that are subject to an enforceable master netting agreements or similar agreements, irrespective of whether they are offset in the statement of financial position.

The netting agreements concluded by the Group are:

 ISDA agreements and similar master netting agreements on derivatives,

 GMRA agreements on repo and reverse-repo transactions.

The netting agreements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the one of the counterparty. At the balance, day there were no cases of offsetting financial assets and financial liabilities for these netting agreements.

The Group receives and gives collateral in the form of cash and marketable securities in respect of the derivatives transactions.

Such collateral is subject to standard industry terms. The collateral in the form of cash stems from an ISDA Credit Support Annex (CSA).

Financial assets and financial liabilities subject to enforceable master netting agreements and similar agreements and which may be potentially offset in the statement of financial position.

31.12.2020	carrying amount of FINANCIAL ASSETS presented in the statement of financial position	AMOUNT of potential offsetting		net amount
31.12.2020		financial instruments (including received collateral in the form of securities)	cash collateral received	net amount
financial assets
Derivatives	5 419 752	(4 409 587)	(326 395)	683 770
TOTAL	5 419 752	(4 409 587)	(326 395)	683 770

31.12.2020	carrying amount of FINANCIAL LIABILITIES presented in the statement of financial position	AMOUNT of potential offsetting		net amount
31.12.2020		financial instruments (including pledged collateral in the form of securities)	cash collateral pledged	net amount
financial LIABILITIES
Derivatives	5 623 233	(4 432 197)	(809 209)	381 827
TOTAL	5 623 233	(4 432 197)	(809 209)	381 827

31.12.2019	carrying amount of FINANCIAL ASSETS presented in the statement of financial position	AMOUNT of potential offsetting		net amount
31.12.2019		financial instruments (including received collateral in the form of securities)	cash collateral received	net amount
financial assets
Derivatives	2 405 890	(1 843 533)	(310 017)	252 340
TOTAL	2 405 890	(1 843 533)	(310 017)	252 340

31.12.2019	carrying amount of FINANCIAL LIABILITIES presented in the statement of financial position	AMOUNT of potential offsetting		net amount
31.12.2019		financial instruments (including pledged collateral in the form of securities)	cash collateral pledged	net amount
financial LIABILITIES
Derivatives	2 583 243	(1 876 385)	(613 100)	93 758
TOTAL	2 583 243	(1 876 385)	(613 100)	93 758

The carrying amount of financial assets and financial liabilities disclosed in the above tables have been measured in the statement of financial position on the fair value base.

Reconciliation of the carrying amount of financial assets and financial liabilities subject to enforceable master netting agreements and similar agreements to the amounts presented in the statement of financial position.

31.12.2020	NET carrying amount	item in statement of financial position	carrying amount in statement of financial position	carrying amount of transactions not in scope of offsetting disclosures	note
financial assets
Derivatives	4 640 689	Derivative financial instruments (held for trading)	4 812 231	171 542	24
Derivatives	779 063	Hedging instruments	779 063	-	27
financial LIABILITIES
Derivatives	4 550 274	Derivative financial instruments (held for trading)	4 617 416	67 142	24
Derivatives	1 072 959	Hedging instruments	1 072 959	-	27

31.12.2019	NET carrying amount	item in statement of financial position	carrying amount in statement of financial position	carrying amount of transactions not in scope of offsetting disclosures	note
financial assets
Derivatives	2 028 682	Derivative financial instruments (held for trading)	2 079 529	50 847	24
Derivatives	377 208	Hedging instruments	377 208	-	27
financial LIABILITIES
Derivatives	1 968 478	Derivative financial instruments (held for trading)	2 034 113	65 635	24
Derivatives	614 765	Hedging instruments	614 765	-	27

6.3. Market risk

The Group is exposed in its operations to market risk and other types of risk caused by changing market risk parameters.

Market risk is the risk of deteriorating financial result or capital of the Group resulting from market changes. The main factors of market risk are as follows:

 interest rates,

 foreign exchange rates,

 stock prices,

 commodity prices.

The Group established a market risk management system, providing structural, organizational and methodological frames for the purpose of shaping the structure of balance and off-balance items to assure the achievement of strategic goals.

The main objective of market risk management is to optimize financial results so as to assure the implementation of financial goals of the Group while keeping the exposure to market risk within the risk appetite defined through risk limits approved by the Management Board and the Supervisory Board.

The organization of the market risk management process is based on a three-tier control system, established in compliance with the best international banking practices and recommendations from banking supervision. The process of market risk management and procedures regulating it have been developed taking into consideration the split into trading and banking books.

Market risk of the trading book

The Group’s management of market risk of the trading book aims at optimizing the financial results and assuring the highest possible quality of customer service in reference to the market accessibility (market making) while staying within the limits of risk approved by the Management Board and the Supervisory Board.

The main tool for market risk of the trading book measurement is Value at Risk model (VaR). This value corresponds to the level of a one-day loss, which will be exceeded with the probability not greater than 1%. VaR value is calculated with historical simulation method based on 2 years of historical observations of market risk factors’ dynamics. The set of factors used when calculating VaR consists of all significant market factors that are taken into account for valuation of financial instruments, excluding specific credit risk of an issuer and counterparty. Estimating the impact of changes in market factors on the present value of a given portfolio is performed under the full revaluation (which is a difference between the value of the portfolio after the adjustments in market parameters’ levels by historically observed changes of the parameters and the present value of the portfolio). For such a set of probable changes in the portfolio value (distribution), VaR is defined to be equal to 1% quantile.

The model is subject to continuous, statistical verification by comparing the VaR values to actual and revaluated performance figures. Results of analyses carried out in 2020 and 2019 confirmed the adequacy of the model applied.

The table below presents the market risk exposure of the trading portfolio of the Group measured by Value at Risk as at 31 December 2020 and 31 December 2019.

	31.12.2020	MINIMUM VALUE	AVERAGE VALUE	MAXIMUM VALUE
foreign exchange risk	23	6	67	1 153
interest rate risk	2 578	859	2 028	6 419
Trading portfolio	3 020	837	2 132	6 863

	31.12.2019	MINIMUM VALUE	AVERAGE VALUE	MAXIMUM VALUE
foreign exchange risk	237	6	190	1 161
interest rate risk	1 098	873	1 386	2 055
Trading portfolio	1 098	880	1 450	2 623

Interest rate risk of the banking book

In managing the interest rate risk of the banking book the Group aims at hedging the economic value of capital and achieving the planned interest result within the accepted limits. The financial position of the Group in relation to changing interest rates is monitored through the interest rate gap (repricing gap), duration analysis, sensitivity analysis, stress testing and VaR. The interest rate risk of the banking book measurement is generally carried out on a monthly basis.

The cycle of several significant cuts of the NBP interest rates in response to the developing pandemic COVID-19 had an important impact on the level of the Bank’s exposure to interest rate risk and on the amount of realized interest income in the 2020. In order to hedge current accounts, the Bank continues the implementation of the hedging strategy by concluding IRS transactions and purchasing fixed rate bonds.

The table below presents the sensitivity levels of the contractual interest income (NII) to the interest rate change by 100 b.p. and of economic value of the Bank’s equity (EVE) to the interest rate change by 200 b.p. (standard regulatory shock excluding the risk profile of own funds) for the end of December 2020 and December 2019.

sensitivity in %	31.12.2020	31.12.2019
NII	(6.31)	(6.98)
EVE	(7.10)	(3.04)

Currency risk

Currency risk management is performed simultaneously for the trading and the banking book. The objective of currency risk management is to maintain the currency profile of statement of financial position and off-balance items within the internal limits.

The tables below present the Group’s foreign currency risk profile measured by Value at Risk and currency position.

Value at Risk

VALUE AT RISK	31.12.2020	31.12.2019
Currencies total (*)	287	117

(*) VaR presented in ‘Currencies total’ is VaR for the whole portfolio, and includes correlations among currencies.

Currency exposure

31.12.2020	Balance sheet operations		off-balance sheet operations derivetives		net position
31.12.2020	Assets	Liabilities	LONG PoSITION	SHORT PoSITION	net position
EUR	27 375 809	22 418 332	26 660 237	31 724 567	(106 853)
USD	9 105 146	9 457 571	11 066 970	10 678 562	35 983
CHF	2 959 415	647 418	1 434 038	3 747 830	(1 795)
GBP	393 981	1 108 154	2 126 362	1 411 961	228
CNY	25 253	16 707	356 180	364 812	(86)
NOK	516 555	66 514	207 543	657 470	114
CZK	56 995	17 554	650 361	689 607	195
SEK	140 592	68 148	67 506	139 623	327
CAD	17 125	55 492	43 007	4 380	260
DKK	82 206	16 849	57 989	123 156	190
Other currencies	44 312	95 914	380 329	327 595	1 132
TOTAL	40 717 389	33 968 653	43 050 522	49 869 563	(70 305)

31.12.2019	Balance sheet operations		off-balance sheet operations derivetives		net position
31.12.2019	Assets	Liabilities	LONG PoSITION	SHORT PoSITION	net position
EUR	25 522 777	21 461 513	14 617 411	18 597 989	80 686
USD	5 112 512	8 432 086	12 359 267	9 006 351	33 342
CHF	3 073 660	608 801	1 462 323	3 928 880	(1 698)
GBP	446 240	969 983	748 318	224 240	335
HUF	16 353	113 221	112 481	15 541	72
NOK	303 790	68 356	10 677	245 964	147
CZK	99 210	34 910	198 046	262 370	(24)
SEK	97 899	69 352	60 956	89 485	18
Other currencies	157 179	184 644	378 101	349 701	935
TOTAL	34 829 620	31 942 866	29 947 580	32 720 521	113 813

6.4. Liquidity risk

The objective of liquidity risk management is to:

 ensure and maintain the Group’s solvency with respect to current and future payables taking into account the cost of acquiring liquidity and return on the Group’s equity,

 prevent the occurrance of crisis situations, and

 provide solutions necessary to survive a crisis situation when such circumstances occur.

The Group has centralized liquidity risk management system covering current liquidity management and first level control performed by the responsible functions, the second level control carried out by a dedicated unit responsible for risk management and independent audit.

Managing the Group's liquidity is carried out in intraday, short-term and long-term horizon. Analysing of intraday liquidity concerns flows realized during the day, through a short-term liquidity analysis is understood liquidity measurement system which refers to the time horizon shorter than one year, long-term analysis covers period above one year. Due to the specific tools and techniques used for liquidity risk management, the Group manages current and medium-term liquidity together with short-term liquidity.

The liquidity control is performing as a continuous process of determining and analysing the levels of various indicators and measures related to intraday, short-term and long-term liquidity. Monitoring frequency is matched to the specific liquidity aspect – e.g. daily for short-term liquidity, monthly for long-term liquidity. Liquidity ratios and measures are subject to a formal limiting process. The limits’ utilisation is regularly monitored and presented to the Management of the Bank and subsidiaries. In case of exceeding, escalation process is running as to inform decision-makers and ultimately to restore the liquidity risk exposures to acceptable levels.

Scenario-based stress analyses, conducted on a monthly basis, constitute an integral part of the Group’s liquidity monitoring process. Within the scope of these analyses the Group’s liquidity is assessed under the conditions of crisis which is caused by financial markets or is caused by internal factors, specific to the Group.

Managing the liquidity, the Group pays special attention to the liquidity in foreign currencies through monitoring, limiting and controlling the liquidity individually for each currency, as well as monitoring demand for the current and future currency liquidity and in case of identification of such need the Group hedges using currency swaps. It is also monitored the potential influence on the liquidity of placing required collateral deposits for derivative transaction.

In order to define the principles of contingency liquidity management, Bank prepared ‘Contingency Liquidity Policy’ approved by the Management Board, which defines the contingency procedures in the event of crisis situations. This policy involves daily monitoring of the system and specific early-warning indicators for the Bank and the Group as well as three levels of liquidity risk states depending on the level of early-warning indicators, the Bank’s, the Group’s and market situation. It also defines the sources for covering the expected outflows from the Group. This document sets the procedures for monitoring the liquidity states, emergency action procedures, task forces dedicated for restoring the Group’s liquidity and the Management's responsibilities for taking necessary decisions to restore the required liquidity level.

Due to the COVID-19 pandemic expansion at the end of the first quarter of 2020, which indirectly contributed to the financial market turbulences, the Bank introduced the lowest liquidity contingency state - the state of attention, characterized by an increased frequency of management liquidity monitoring. After 2 months, the state of attention was suspended due to very high and stable liquidity. The liquidity situation of the Bank remains fully stable at the moment and liquidity measures and ratios remain at high and safe level.

Below are presented basic quantitative information concerning the Bank's liquidity at the end of 2020 year in comparison to the end of 2019. They cover the structure of financial liabilities by contractual maturity, supervisory measures of long-term liquidity and Liquidity Coverage Ratio (‘LCR’) adjusted liquidity gap and financial flows from derivative transactions.

Structure of financial liabilities by contractual maturity

31.12.2020	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
BALANCE SHEET LIABILITIES (*)
Amounts due to banks (**)	3 548 877	464 963	1 281 084	3 640 031	972 009	9 906 964
Amounts due to customers	164 064 365	5 850 085	7 450 384	305 334	163 990	177 834 158
Lease liabilities	15 588	18 442	77 759	154 968	395 794	662 551
Debt securities issued	659 405	3 052 040	1 584 486	880 832	-	6 176 763
Subordinated liabilities	-	-	44 138	214 649	3 001 796	3 260 583
Financial liabilities held for trading	-	-	14 209	279 152	449 443	742 804
Total	168 288 235	9 385 530	10 452 060	5 474 966	4 983 032	198 583 823
OFF-BALANCE SHEET COMMITMENTS (*)
Off-balance sheet commitments Financial liabilities granted	41 203 882	-	-	-	-	41 203 882
Off-balance sheet commitments Guarantees liabilities granted	13 618 285	-	-	-	-	13 618 285
Total	54 822 167	-	-	-	-	54 822 167

31.12.2019	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
BALANCE SHEET LIABILITIES (*)
Amounts due to banks (**)	1 415 554	108 652	681 721	3 859 602	603 447	6 668 976
Amounts due to customers	123 172 156	12 311 942	20 923 266	553 333	946 193	157 906 890
Lease liabilities	12 654	15 350	65 324	205 049	370 895	669 272
Debt securities issued	947 507	1 855 445	2 107 611	1 134 305	171 918	6 216 786
Subordinated liabilities	-	-	82 067	321 949	3 121 594	3 525 610
Financial liabilities held for trading	74 115	-	12 087	42 114	56 483	184 799
Total	125 621 986	14 291 389	23 872 076	6 116 352	5 270 530	175 172 333
OFF-BALANCE SHEET COMMITMENTS (*)
Off-balance sheet commitments Financial liabilities granted	36 713 927	-	-	-	-	36 713 927
Off-balance sheet commitments Guarantees liabilities granted	12 638 960	-	-	-	-	12 638 960
Total	49 352 887	-	-	-	-	49 352 887

(*) Exposure amounts from balance liabilities, financing-related off-balance sheet commitments granted and guarantee liabilities granted have been allocated to earliest tenors, for which an outflow of assets from the Group is possible based on contracts entered into by the Group. However, outflows expected by the Group are actually significantly lower than those indicated by the specification presented above. The above is a consequence of considerable diversification of amounts due to customers and stages of life of individual contracts. Risk monitoring and management in relation to the outflow of assets are provided by the Group on continuous basis. The Group estimates also more probable flows that are reflected in Tables ‘Adjusted liquidity gap’.

(**) Including Central Bank.

Regulatory liquidity long-term norms and LCR (*)

Supervisory Liquidty norms		limit	31.12.2020	31.12.2019
M3 () (*)	Own funds to non-liquid assets cover ratio	1	8.45	7.63
M4 (**)	Own funds and stable external funds to non-liquid and limited liquidity assets cover ratio	1	1.38	1.18
LCR	Liquidity coverage ratio	1	2.51	1.52

(*) The values of regulatory liquidity norms have been determined in accordance with the principles set out by Resolution 386/2008 of UKNF of 17 December 2008 and the Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation No. 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions.

(**) Ratio at the unconsolidated level.

Adjusted liquidity gap

The adjusted liquidity gaps presented below include, inter alia, the adjustments concerning the stability of core deposits and their maturities, adjustments of flows from granted off-balance sheet commitments arising from financing, guarantees and from assets without contractual repayment schedules. On top of that, included are also the adjusted flows stemming from the security portfolio and flows resulting from earlier repayment of mortgage loans portfolio. These are the main elements differentiating the adjusted gaps from unadjusted ones. Moreover, the gaps are of static nature, i.e. they do not take into consideration the impact of changes of balance sheet and off-balance sheet items volume (i.e. new deposits).

Adjusted liquidity gap

31.12.2020	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
Balance sheet assets	69 513 131	7 196 796	25 085 033	72 392 852	59 029 370	233 217 182
Balance sheet liabilities	18 307 777	12 023 248	26 212 984	36 038 239	140 634 934	233 217 182
Off-balance sheet assets/liabilities (net)	(9 377 774)	(161 509)	2 726 628	2 231 163	3 874 654	(706 838)
Periodic gap	41 827 580	(4 987 961)	1 598 677	38 585 776	(77 730 910)	(706 838)
Cumulated gap	-	36 839 619	38 438 296	77 024 072	(706 838)	-

31.12.2019	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
Balance sheet assets	39 979 611	7 183 432	27 270 488	67 711 772	61 177 616	203 322 919
Balance sheet liabilities	11 597 534	9 637 749	22 276 041	19 569 624	140 241 971	203 322 919
Off-balance sheet assets/liabilities (net)	(6 184 210)	(1 154 062)	1 039 085	2 976 635	3 008 982	(313 570)
Periodic gap	22 197 867	(3 608 379)	6 033 532	51 118 783	(76 055 373)	(313 570)
Cumulated gap	-	18 589 488	24 623 020	75 741 803	(313 570)	-

Off-balance derivative transactions

The following are the liabilities and financial cash flows associated with off-balance sheet derivative transactions, settled, respectively in net and gross amounts.

Off-balance sheet derivative transactions settled by the Group in net amounts include:

 Interest Rate Swaps (IRS),

 Forward Rate Agreements (FRA),

 Foreign currency options,

 Interest rate options (Cap/Floor),

 Transactions based on equity securities and stock indexes,

 Transactions based on commodities and precious metals.

Off-balance sheet derivative transactions settled by the Group in gross amounts include:

 Cross-Currency Interest Rate Swaps (CIRS),

 Foreign currency forward contracts,

 Foreign currency swaps (FX-Swap),

 Forward contracts based on securities.

Liabilities from off-balance transactions on derivatives recognized in net amounts

	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
31.12.2020	76 233	108 754	361 910	2 660 575	1 247 183	4 454 655
31.12.2019	48 242	92 083	204 441	978 232	593 030	1 916 028

Flows related to off-balance derivative transactions settled in gross amounts

	UP TO 1 MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
31.12.2020
Inflows	38 013 777	10 882 754	14 911 803	9 838 180	978 285	74 624 799
Outflows	38 098 689	10 939 427	14 957 181	10 173 970	1 187 983	75 357 250
31.12.2019
Inflows	20 497 021	6 329 541	14 466 176	10 015 196	1 501 027	52 808 961
Outflows	20 533 834	6 312 447	14 469 199	10 106 968	1 707 454	53 129 902

6.5. Operational risk

Operational risk is defined as the risk of losses resulting from inadequacy or failure of internal processes, people, systems or external events. It includes law risk, whereas strategic risk, business risk and reputation risk are separate risk categories.

Operational risk management is based on internal procedures that are consistent with the law requirements, resolutions, recommendations and guidelines of the supervisor. Operational risk management includes identification, assessment, monitoring, preventing and reporting.

Identification and assessment of operational risk is based on an analysis of internal factors and external factors that may have a significant impact on the achievement of the objectives of the Group. The main tools used in identifying and assessing operational risk are: internal operational events, external operational events, key risk indicators, scenario analysis and self-assessment of operational risk.

Monitoring activities are conducted on three levels of defence: risk management in operational activity of the Bank (all employees), risk management control (Integrated Risk Management Department) and internal audit (Internal Audit Department). Preventing operational risk includes definition of operational risk limits and the obligation to initiate mitigation actions in case they are exceeded, the system of internal control, business continuity plans and insurance coverage.

Operational risk reporting system enables the assessment of the Group's exposure to operational risk and the effective management of this risk, and also plays a fundamental role in the process of informing the Supervisory Board, the Management Board and executives of the Group's exposure to operational risk. It is based in particular on the quarterly reports on operational risk control that include, among others: profile of operational risk, loss limit utilization, analysis of trends in the relevant categories of operational risk, potential losses, information on key indicators of operational risk and operational risk capital requirement.

The Supervisory Board, the Management Board and the Operational Risk Committee are involved in operational risk management. The Integrated Risk Management Department coordinates the process of operational risk management. All employees of the Group and selected specialized units are responsible in their areas for operational risk management, due to diversified character of this risk which requires professional knowledge.

In order to ensure compliance of the operational risk management system with regulatory requirements, at least once a year verification of the operational risk management system is carried out.

6.6. Capital management

The capital management process applied by the Group has been adopted for the following purposes:

 ensuring the safe and secure functioning by maintaining the balance between the capacity to undertake risk (limited by own funds), and the risk levels generated,

 maintenance of capital for covering risk above the minimum stated levels in order to assure further business operations, taking into consideration the possible, future changes in capital requirements and to safeguard the interests of shareholders,

 maintenance of the optimal capital structure in order to maintain the desired quality of risk coverage capital,

 creation of value to shareholders by the best possible utilization of the Group funds.

The Group has put in place a formalized process of capital management and monitoring, established within the scope of Internal Capital Adequacy Assessment Process - ICAAP process. The Finance Division under the Chief Financial Officer is responsible for functioning of the capital management process in the Bank. The ultimate responsibility for capital management is allocated to the Management Board of the Bank, supported by the Assets, Liabilities and Risk Management Committee, which approves the capital management process. The Supervisory Board supervises the capital management system, in particular approves the capital management strategy. The Capital Management Strategy defines the objectives and general rules of the management and monitoring of the Group’s capital adequacy, such as the guidelines concerning risk coverage sources, preferred structure of capital for risk coverage, long-term capital targets, capital limits system and sources of additional capital under contingency situations.

The Group has also implemented the Capital Contingency Policy which establishes rules and obligations in the event of crisis appearance or further development that would significantly reduce capitalization level of the Bank or Group. The policy defines the principles of supervision including split of responsibilities for the purpose of early and consistent management in case of crisis situation development.

The capital adequacy of the Group is controlled by the Assets, Liabilities and Risk Management Committee and Management Board of Bank. Periodic reports on the scale and direction of changes of the capital ratios together with indication of potential threats are prepared for the Supervisory Board, Management Board and for the Assets, Liabilities and Risk Management Committee. The level of basic types of risks is monitored according to the external limits of the banking supervision and the internal limits of the Group. Analyses and evaluations of directions of business activities development are performed assessing the compliance with capital requirements. Forecasting and monitoring of risk weighted assets, own funds and capital ratios constitute an integral part of the planning and budgeting process, including stress tests.

The Group also has a capital allocation process in place, with an aim of guaranteeing the shareholders a safe and effective return on invested capital. On one hand, the process requires capital allocations to products/clients/business lines, which guarantee profits adequate to the risks taken, while on the other hand taking into consideration the cost of capital associated with the business decisions taken. Risk-related efficiency ratios are used in the analyses of income generated compared against the risk taken as well as for the optimization of capital usage for different types of operations.

Regulatory capital requirements

Calculations of the regulatory capital requirements were performed based on Regulation of the European Parliament and of the Council (EU) No 575/2013 of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, together with further amendments, in particular Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, as well as Commission Implementing Regulations or Delegated Regulations (EU) (CRR Regulation).

According to law, Group is required to maintain minimal values of capital ratios resulting from Pillar 1 level (Regulation 575/2013), capital requirement of Pillar 2 resulting from The Banking Act and combined buffer requirement resulting from Act on macro-prudential supervision.

Minimal value of capital ratios on Pillar 1 level are:

 Total capital ratio (TCR) in amount of 8%,

 Tier 1 capital ratio (T1) in amount of 6%,

 Common Equity Tier I capital ratio (CET 1) in amount of 4.5%.

Capital requirement of Pillar II for Pekao Group, results from KNF recommendation regarding holding by the Group own funds to cover the additional capital requirement to secure the risk resulting from mortgage-secured foreign currency loans and credits to households, amounts to 0.008% for TCR, which should consist of at least 75% of Tier 1 (which corresponds to 0.006 pp) and at least 56% of the Common Equity Tier 1 (which corresponds to 0.004 pp).

Combined buffer requirement as at 31 December 2020 consists of:

 Capital conservation buffer in amount of 2.50%,

 Countercyclical capital buffer in amount of 0.00% (countercyclical capital buffer was calculated as of 31.12.2020 at the level 0.0028%),

 Other systemically important institution buffer in amount of 0.75%,

 Systemic risk buffer in amount of 0.00% (according to the Regulation of the Minister of Finance, the systemic risk buffer was abolished on March 19, 2020. The buffer value applicable until that date was 3% of the total risk exposure amount for all exposures located only in the territory of the Republic of Poland).

In total, Group is required to maintain:

 Total capital ratio (TCR) in amount of 11.26%,

 Capital ratio Tier 1 (T1) in amount of 9.26%,

 Common Equity Tier (CET 1) in amount of 7.76%.

As at 31 December 2020 total capital ratio of the Group amounted at 18.7% (as of 31 December 2019 – 17.1%).

	31.12.2020	31.12.2019
CAPITAL REQUIREMENTS
Credit risk	10 207 165	10 107 188
Market risk	99 400	87 596
Counterparty risk including CVA	173 859	119 803
Operational risk	699 703	527 844
Total capital requirement	11 180 127	10 842 431
OWN FUNDS
Common Equity Tier 1 capital	23 331 784	20 387 099
Capital Tier 1	2 750 000	2 750 000
Own funds for total capital ratio	26 081 784	23 137 099
OWN FUNDS REQUIREMENTS
Common Equity Tier 1 capital ratio (%)	16.7%	15.0%
Total capital ratio (%)	18.7%	17.1%

Total capital ratio at the end of 2020 compared with the end of 2019 increased by 1.6 p.p.

Total capital requirement increased by 3.1%, mainly due to higher operational risk capital requirement resulting mainly from increase of provisions on loans denominated in foreign currencies and increase of credit risk capital requirement resulting mainly from increase of loan volumes. As at 31 December 2020 Common Equity Tier 1 Capital was higher by 14.4% as compared to 31 December 2019 due to retention of Bank’s entire net profit for year 2019 to Tier 1 capital after the General Meeting of Shareholders in accordance with the recommendation of KNF regarding the retention of the entire profit and retention of 25% of the Bank's net profit for the first half of 2020 after the KNF approval. Own funds for total capital ratio calculation increased therefore by 12.7% at the end of 2020 compared to the end of 2019.

For the purpose of capital requirement calculation the Group uses:

 Standardised Approach for credit risk capital requirement calculation,

 Financial Collateral Comprehensive Method for credit risk mitigation,

 Mark-to-Market Method for counterparty credit risk capital requirement calculation,

 Standardised Approach for capital requirement calculation of specific risk and duration-based calculation for general risk of debt instruments,

 Standardised Approach for capital requirement calculation of general and specific risk of equity instruments,

 Standardised Approach for capital requirement calculation for pre-funded contributions to the default fund of a qualifying central counterparty,

 Standardised Approach for foreign-exchange risk capital requirement calculation,

 Simplified approach for commodities risk capital requirement calculation,

 Standardised Approach for capital requirements for credit risk valuation adjustment risk,

 Advanced Measurement Approach for operational risk measurement in case of Bank (however, at a level not lower than 50% of the capital requirement calculated using the Standardised Approach and Standardised Approach for Bank’s subsidiaries.

Own funds

The Group defines components of own funds in line with the binding law, particularly with Regulation No 575/2013 and The Banking Act of 29 August 1997 with further amendments.

The Group’s own funds consist of Common Equity Tier 1 capital and Tier 2 capital. Additional Tier 2 capital are not identified in the Group.

	31.12.2020	31.12.2019
OWN FUNDS
Capital	25 494 977	23 398 026
Different scope of consolidation	(10 979)	(10 975)
Component of the capital not included into own funds, in which:	(1 010 477)	(2 073 651)
Current year net profit	(1 101 712)	(2 165 039)
Current year net profit included in own funds after KNF approval	91 235	91 388
Regulatory adjustments, in which:	(1 141 737)	(926 301)
Intangible assets	(1 508 326)	(1 554 367)
Capital from revaluation	(480 718)	(102 678)
Deferred tax assets that rely on future profitability	(7 942)	(10 739)
Adjustments mitigating impact of IFRS 9 introduction in transitional period	924 832	792 732
Additional value adjustments due to prudent calculation	(58 234)	(39 510)
Minority interests	(11 349)	(11 739)
Common Equity Tier 1 capital	23 331 784	20 387 099
Tier 2 capital	2 750 000	2 750 000
Own funds for total capital ratio	26 081 784	23 137 099

Components of capital not included into own funds:

 current year net profit – net profit of current reporting period, verified by statutory auditor responsible for auditing of the Bank’s accounts reduced by all foreseeable charge and dividend, can be included into Common Equity Tier 1 capital only with the permission of KNF. As at 31 of December 2020, the amount of 91 235 thousand PLN from the prudently consolidated net profit of the Group for the first half of 2020 was included in Common Equity Tier 1 capital.

Regulatory adjustments:

 intangible assets (after deduction of related deferred tax liabilities) decrease Common Equity Tier 1 capital, according to Article 36 of CRR Regulation. This amount includes the deduction of software assets classified as intangible assets for accounting purposes, in line with Commission Delegated Regulation (EU) 2020/2176 of 12 November 2020 amending Delegated Regulation (EU) No 241/2014 as regards the deduction of software assets from Common Equity Tier 1 items,

 reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair value, including projected cash flows are excluded from the accumulated other comprehensive income, according to Article 33(a) of CRR Regulation,

 deferred tax assets that rely on future profitability and do not arise from temporary differences, decrease Common Equity Tier 1 capital according to Article 36 of CRR Regulation,

 adjustments in transitional period resulting from introduction of IFRS 9,

 additional value adjustments due to prudent valuation are created for every asset measured at fair value, according to Article 34 of CRR Regulation,

 minority interests are not included in Common Equity Tier 1 capital if the subsidiaries do not meet conditions defined in Article 81 of the CRR Regulation.

Internal capital adequacy assessment

To assess the internal capital adequacy of the Group, the Bank applies methods designed internally.

The Group takes the following risks into consideration:

 credit risk,

 operational risk,

 market risk,

 liquidity risk,

 real estate risk,

 macroeconomic risk,

 business risk (including strategic risk),

 compliance risk,

 reputational risk,

 model risk,

 excessive leverage risk,

 bancassurance risk,

 financial investment risk.

For each risk deemed material, the Group develops and applies adequate risk assessment and measurement methods. The Group applies the following risk assessment methods:

 qualitative assessment – applied in case of risks which are difficult to measure (compliance, reputational and bancassurance risks) with potencial capital coverage in other risks areas,

 assessment by estimation of capital buffer, for risks that are not easily quantifiable however some aggregate assessment of their impact is possible (model risk and macroeconomic risk),

 quantitative assessment – applied for risks which can be measured with the use of economic capital (other risk types apart from liquidity risk and excessive leverage risk) or based on other risk-specific measures (liquidity risk and excessive leverage risk).

Generally, preferred methods of measuring risks and determining the resulting capital requirements are Value at Risk models, based on assumptions derived from the Group’s risk appetite. The models are developed in compliance with the best market practices and regulatory requirements and supplemented with stress tests and/or scenario analyses. In case of risk types for which such methodologies have not been finally developed or implemented, the Group uses regulatory models supplemented with stress tests or simplified measurement methods.

Determination of capital buffer which covers the risk of changes in macroeconomic conditions is made on the basis of an analysis of the impact of the economic slowdown scenario on economic capital over the forecast horizon, with the impact of changes in interest rates on net interest income and changes in the valuation of portfolios classified as measured at fair value through other comprehensive income.

Model risk is estimated using results of model validation and scenario analyses making it possible to evaluate the impact of potential model inconsistencies on its output. Based on the aggregated output, the model risk capital buffer is determined.

The procedure of estimating capital needs starts with the calculation of economic capital, separately for each material quantifiable risk identified by the Group. Next, economic capital figures for individual risks are aggregated. Then, the amount is increased by the capital buffer for model and macroeconomic risks. The sum of economic capital and the capital buffer constitutes the internal capital of the Group.

6.7. Fair value of financial assets and liabilities

Financial instruments that are measured at fair value in the consolidated statement of financial position of the Group

The measurement of fair value of financial instruments, for which market values from active markets are available, is based on market quotations of a given instrument (mark-to-market).

The measurement of fair value of Over-the-counter (‘OTC’) derivatives and instruments with limited liquidity (i.e. for which no market quotations are available), is made on the basis of other instruments quotations on active markets by replication thereof using a number of valuation techniques, including the estimation of present value of future cash flows (mark-to-model).

As of 31 December 2020 and 31 December 2019, the Group classified the financial assets and liabilities measured at fair value into the following hierarchy of three categories based on the following hierarchy:

 Level 1: mark-to-market, applies to securities quoted on active markets,

 Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to illiquid government, municipal, corporate and central bank debt securities, linear and non-linear derivative instruments of interest rate markets (including forward transactions on debt securities), equity, commodity and foreign currency exchange markets, except for those cases that meet the criteria of Level 3,

 Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, applicable to loans and advances, corporate and municipal debt securities and for linear and non-linear derivative instruments of interest rate, equity, commodity and foreign currency exchange markets for which unobservable parameters (e.g. credit risk factors) are recognized as significant.

The measurement at fair value is performed directly by an organizational unit within Risk Management Division, independent of front-office units. The methodology of fair value measurement, including the changes of its parameterization, is subject to approval of Assets and Liabilities Committee (ALCO). The adequacy of measurement methods is subject to on-going analysis and periodical reviews in the framework of model risk management. The same Risk Management Division unit performs the assessment of adequacy and significance of risk factors and assignment of valuation models to appropriate method class, according to established hierarchy of classification.

Assets and liabilities measured at fair value in breakdown by fair value hierarchy levels

31.12.2020	level 1	level 2	level 3	Total
Assets:	14 342 453	25 099 498	12 358 784	51 800 735
Financial assets held for trading	938 452	335 725	43 532	1 317 709
Derivative financial instruments, including:	-	4 810 519	1 712	4 812 231
Banks	-	1 223 864	1 712	1 225 576
Customers	-	3 586 655	-	3 586 655
Hedging instruments, including:	-	779 063	-	779 063
Banks	-	26 070	-	26 070
Customers	-	752 993	-	752 993
Securities measured at fair value through other comprehensive income	13 404 001	19 174 191	10 490 998	43 069 190
Securities measured at fair value through profit or loss	-	-	160 486	160 486
Loans and advances to customers measured at fair value through other comprehensive income	-	-	1 475 055	1 475 055
Loans and advances to customers measured at fair value through profit or loss	-	-	187 001	187 001
Liabilities:	742 804	5 690 375	-	6 433 179
Financial liabilities held for trading	742 804	-	-	742 804
Derivative financial instruments, including:	-	4 617 416	-	4 617 416
Banks	-	1 220 458	-	1 220 458
Customers	-	3 396 958	-	3 396 958
Hedging instruments, including:	-	1 072 959	-	1 072 959
Banks	-	995 230	-	995 230
Customers	-	77 729	-	77 729

31.12.2019	level 1	level 2	level 3	Total
Assets:	15 586 725	12 388 299	8 701 073	36 676 097
Financial assets held for trading	1 127 955	145 674	8 035	1 281 664
Derivative financial instruments, including:	14	2 076 473	3 042	2 079 529
Banks	-	777 322	3 042	780 364
Customers	14	1 299 151	-	1 299 165
Hedging instruments, including:	-	377 208	-	377 208
Banks	-	91 677	-	91 677
Customers	-	285 531	-	285 531
Securities measured at fair value through other comprehensive income	14 458 756	9 768 279	6 941 296	31 168 331
Securities measured at fair value through profit or loss	-	20 665	125 454	146 119
Loans and advances to customers measured at fair value through other comprehensive income	-	-	1 380 607	1 380 607
Loans and advances to customers measured at fair value through profit or loss	-	-	242 639	242 639
Liabilities:	184 799	2 648 878	-	2 833 677
Financial liabilities held for trading	184 799	-	-	184 799
Derivative financial instruments, including:	-	2 034 113	-	2 034 113
Banks	-	707 435	-	707 435
Customers	-	1 326 678	-	1 326 678
Hedging instruments, including:	-	614 765	-	614 765
Banks	-	566 163	-	566 163
Customers	-	48 602	-	48 602

Change in fair value of financial assets measured at fair value according to Level 3 by the Group

2020	financial assets held for trading	derivative FINANCIAL INSTRUMENTS (assets)	Loans and advances to customers measured at fair valuethrough other comprehensive income	Loans and advances to customers measured at fair value through profit or loss	Securities measured at fair value through profit or loss	Securities measured at fair value through other comprehensive income
Opening balance	8 035	3 042	1 380 607	242 639	125 454	6 941 296
Increases, including:	4 081 969	-	144 373	652	36 159	16 168 475
Reclassification	28 947	-	-	-	-	42 937
Transactions made in 2020	-	-	-	-	-	-
Acquisition/Granting	4 050 886	-	99 437	604	-	15 848 668
Settlement/Redemption	-	-	-	-	-	-
Gains on financial instruments	2 136	-	44 936	48	36 159	276 870
recognized in the income statement	2 136	-	29 641	48	36 159	256 336
recognized in revaluation reserves	-	-	15 295	-	-	20 534
Decreases, including:	(4 046 472)	(1 330)	(49 925)	( 56 290)	(1 127)	(12 618 773)
Reclassification	-	-	-	-	-	(58 832)
Settlement/Redemption	(1 953 732)	-	-	(56 290)	-	(513 027)
Sale/Repayment	(2 092 726)	-	(49 925)	-	-	(12 015 693)
Losses on financial instruments	(14)	(1 330)	-	-	(1 127)	(31 221)
recognized in the income statement	(14)	(1 330)	-	-	(1 127)	(76)
recognized in revaluation reserves	-	-	-	-	-	(31 145)
Closing balance	43 532	1 712	1 475 055	187 001	160 486	10 490 998
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in:	2 310	(1 330)	11 538	(82)	-	120 087
Income statement:	2 310	(1 330)	( 3 020)	(82)	-	37 473
net interest income	14	-	1 510	557	-	55 386
net allowances for expected credit losses	-	-	(4 530)	-	-	(17 913)
result on financial assets and liabilities held for trading	2 296	(1 330)	-	(639)	-	-
Other comprehensive income	-	-	14 558	-	-	82 614

Change in fair value of financial assets measured at fair value according to Level 3 by the Group

2019	financial assets held for trading	derivative FINANCIAL INSTRUMENTS (assets)	Loans and advances to customers measured at fair valuethrough other comprehensive income	Loans and advances to customers measured at fair value through profit or loss	Securities measured at fair value through profit or loss	Securities measured at fair value through other comprehensive income
Opening balance	26 110	1 230	1 511 102	302 630	65 408	7 111 833
Opening balance - restated	559 472	3 032	212 096	-	60 046	1 770 090
Increases, including:	-	1 486	-	-	-	544 884
Reclassification	-	-	-	-	-	-
Transactions made in 2019	558 474	-	166 522	-	-	997 151
Acquisition/Granting	-	363	-	-	-	-
Gains on financial instruments	998	1 183	45 574	-	60 046	228 055
recognized in the income statement	998	1 183	29 189	-	60 046	181 129
recognized in revaluation reserves	-	-	16 385	-	-	46 926
Decreases, including:	(577 547)	(1 220)	(342 591)	(59 991)	-	(1 940 627)
Reclassification	-	-	-		-	(83 209)
Settlement/Redemption	(101 455)	-	(50 451)	(58 649)	-	(366 689)
Sale/Repayment	(476 089)	-	(292 140)		-	(1 474 887)
Losses on financial instruments	(3)	(1 220)	-	(1 342)	-	(15 842)
recognized in the income statement	(3)	(1 220)	-	(1 342)	-	(16)
recognized in revaluation reserves	-	-	-	-	-	(15 826)
Closing balance	8 035	3 042	1 380 607	242 639	125 454	6 941 296
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in:	20	1 183	7 510	(3 393)	-	66 673
Income statement:	20	1 183	(7 422)	(3 393)	-	32 556
net interest income	13	-	762	138	-	35 907
net allowances for expected credit losses	-	-	(8 184)		-	(3 351)
result on financial assets and liabilities held for trading	7	1 183	-	(3 531)	-	-
Other comprehensive income	-	-	14 932	-	-	34 117

Transfers of instruments between fair value hierarchy levels are based on changes in availability of active market quotations as at the end of the reporting periods.

Due to COVID-19 pandemic developing at the end of March 2020, which indirectly contributed to the turmoil in financial markets, a significant decrease in liquidity was observed in many market segments, in particular in the corporate and municipal securities segments. As a result, some securities classified to Level 1 or Level 2 were reclassified to lower hierarchy levels

In the period from 1 January to 31 December 2020 the following transfers of financial instruments between the levels of the fair value hierarchy were made:

 from Level 3 to Level 2: corporate bonds which were valued based on information on the prices of comparable financial instruments, corporate and municipal bonds with immaterial impact of the estimated credit parameters on the valuation and capital market derivative instruments for which impact of the unobservable factor (correlation) on the valuation was immaterial,

 from Level 2 to Level 3: municipal and corporate bonds, for which impact of estimated credit parameters was material, government bonds with material impact of estimated spread to benchmark bond and capital market derivative instruments with material impact of the estimated factor (correlation) on the valuation,

 from Level 1 to Level 2: sovereign bonds which was valued based on the prices of comparable financial instruments,

 from Level 2 to Level 1: sovereign bonds that were valued with active market prices.

The impact of estimated parameters on measurement of financial instruments for which the Bank applies fair value valuation according to Level 3 as at 31 December 2020 and as at 31 December 2019 is as follows:

FINANCIAL Asset/LIABILITY	Fair value AS AT 31.12.2020	VALUation Technique	unobservable factor	alternative factor range (weighted average)	IMPACT on FAIR VALUE AS AT 31.12.2020
FINANCIAL Asset/LIABILITY	Fair value AS AT 31.12.2020	VALUation Technique	unobservable factor	alternative factor range (weighted average)	POSITIVE SCENARIO	NEGATIVE SCENARIO
Corporate and municipal debt securities	10 228 287	Discounted cash flow	Credit spread	0.21%-1.03%	130 290	(140 244)
Government bonds	28 116	Discounted cash flow	Spread to benchmark bond	0.04%-0.71%	1 878	(1 878)
Derivatives	1 712	Black Scholes Model	Correlation	0-1	17	(1 099)
Loans and advances measured at fair value through profit or loss	187 001	Discounted cash flow	Credit spread	0.30%-1.19%	3 735	(3 641)
Loans and advances measured at fair value through other comprehensive income	1 475 055	Discounted cash flow	Credit spread	2.30%-3.20%	18 068	(17 799)

FINANCIAL ASSET	FAIR VALUE AS AT 31.12.2020	PARAMETR	SCENARIO	IMPACT ON FAIR VALUE AS AT 31.12.2020
FINANCIAL ASSET	FAIR VALUE AS AT 31.12.2020	PARAMETR	SCENARIO	POSITIVE SCENARIO	NEGATIVE SCENARIO
Equity instruments mandatorily measured at fair value through profit or loss	160 486	Conversion discount	+10% / -10%	8 911	(17 831)
Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income	239 617	Discount rate	+1% / -1%	47 508	(33 966)

FINANCIAL Asset/LIABILITY	Fair value AS AT 31.12.2019	VALUation Technique	unobservable factor	alternative factor range (weighted average)	IMPACT on FAIR VALUE AS AT 31.12.2019
FINANCIAL Asset/LIABILITY	Fair value AS AT 31.12.2019	VALUation Technique	unobservable factor	alternative factor range (weighted average)	POSITIVE SCENARIO	NEGATIVE SCENARIO
Corporate and municipal debt securities	6 754 229	Discounted cash flow	Credit spread	0.37%-0.95%	65 792	(81 032)
Derivatives	3 042	Black Scholes Model	Correlation	0-1	410	(8)
Loans and advances measured at fair value through profit or loss	242 639	Discounted cash flow	Credit spread	1.40%-2.11%	3 260	(3 416)
Loans and advances measured at fair value through other comprehensive income	1 380 607	Discounted cash flow	Credit spread	2.64%-3.36%	13 671	(13 473)

FINANCIAL ASSET	FAIR VALUE AS AT 31.12.2019	PARAMETR	SCENARIO	IMPACT ON FAIR VALUE AS AT 31.12.2019
FINANCIAL ASSET	FAIR VALUE AS AT 31.12.2019	PARAMETR	SCENARIO	POSITIVE SCENARIO	NEGATIVE SCENARIO
Equity instruments mandatorily measured at fair value through profit or loss	125 454	Conversion discount	+10% / -10%	15 682	(15 682)
Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income	176 965	Discount rate	+1% / -1%	19 905	(16 250)

Financial instruments that are not measured at fair value in the consolidated statement of financial position of the Group

The Group also holds financial instruments which are not presented at fair value in the financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As of 31 December 2020 and 31 December 2019, the Group classified the financial assets and liabilities not measured at fair value in the consolidated statement of financial position into the following three categories based on the valuation level:

 Level 1: mark-to-market, applies to government securities quoted on the liquid market and cash,

 Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to interbank deposits, own issues, illiquid government, municipal, corporate and central bank debt securities,

 Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, is applicable to corporate and municipal debt securities and loans and deposits for which the applied credit risk factor (an unobservable parameter) is recognized significant.

In case of certain groups of financial assets, recognized at the amount to be received with impairment considered, the fair value was assumed to be equal to carrying amount. The above applies in particular to cash and other financial assets and liabilities.

In the case of loans for which no quoted market values are available, the fair values presented are generally estimated using valuation techniques taking into consideration the assumption, that at the moment when the loan is granted its fair value is equal to its carrying amount. Fair value of non-impaired loans is equal to the sum of future expected cash flows, discounted at the balance sheet date, less expected credit loss. The discount rate is defined as the appropriate market risk-free rate plus the liquidity risk margin and current sales margin for the given loan products group. The margin is computed on loans granted broken down by loan product groups and maturity.

For the purpose of the fair value of foreign currency loans estimation, the margin on PLN loans adjusted by the cross-currency basis swap quotes and FX-Swap is used. The fair value of impaired loans is defined as equal to the sum of expected recoveries, discounted with the use of effective interest rate, since the average expected recovery values take the element of credit risk fully into consideration. In case of loans without repayment schedule (loans in current account, overdrafts and credit cards), the fair value was assumed as equal to the carrying amount.

Since no quoted market prices are available for deposits, their fair values have been generally estimated using valuation techniques with the assumption that the fair value of a deposit at the moment of its receipt is equal to its carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows, discounted at the relevant balance sheet date. The cash flow discount rate is defined as the relevant market risk-free rate, increased by the sales margin. The margin is computed on deposits acquired during last three months broken down by deposit product groups and maturity. In case of short term deposits (current deposits, overnights, saving accounts), the fair value was assumed as equal to the carrying amount.

The fair value of deposits and loans, apart from mortgage loans denominated in PLN and CHF for which prepayment model is used, is calculated based on contractual cash flows.

The mark-to-model valuation of own issue debt instruments is based on the method of discounting the future cash flows. Variable cash flows are estimated based upon rates adopted for specific markets (depending upon issue specifications). Both the fixed and implied cash flows are discounted using interbank money market rates.

Assets and liabilities not measured at fair value in the financial statement in breakdown by fair value hierarchy levels

31.12.2020	carrying amount	fair value	of which:
31.12.2020	carrying amount	fair value	level 1	level 2	level 3
Assets
Cash and due from Central Bank	4 456 279	4 456 235	4 306 094	150 141	-
Loans and advance to banks	2 578 339	2 577 485	-	1 170 713	1 406 772
Loans and advances to customers measured at amortised cost	140 825 741	140 012 831	-	280 627	139 732 204
Debt securities measured at amortised cost	27 261 551	28 310 323	19 803 027	4 410 186	4 097 110
Other assets	1 059 292	1 059 292	-	-	1 059 292
Total Assets	176 181 202	176 416 166	24 109 121	6 011 667	146 295 378
Liabilities
Amounts due to Central Bank	-	-	-	-	-
Amounts due to other banks	9 950 663	9 844 466	-	2 475 559	7 368 907
Amounts due to customers	178 303 984	177 489 039	-	-	177 489 039
Debt securities issued	6 146 708	6 130 664	-	6 130 664	-
Subordinated liabilities	2 757 876	2 761 026	-	2 761 026	-
Other liabilities	2 718 650	2 718 650	-	-	2 718 650
Total Liabilities	199 877 881	198 943 845	-	11 367 249	187 576 596

31.12.2019	carrying amount	fair value	of which:
31.12.2019	carrying amount	fair value	level 1	level 2	level 3
Assets
Cash and due from Central Bank	5 162 682	5 162 069	3 036 372	2 125 697	-
Loans and advance to banks	1 791 553	1 791 576	-	744 569	1 047 007
Loans and advances to customers measuredat amortised cost	139 289 989	140 653 942	-	502 344	140 151 598
Debt securities measured at amortised cost	14 578 665	14 906 622	9 123 131	1 068 286	4 715 205
Other assets	1 173 925	1 173 925	-	-	1 173 925
Total Assets	161 996 814	163 688 134	12 159 503	4 440 896	147 087 735
Liabilities
Amounts due to Central Bank	4 550	4 602	-	-	4 602
Amounts due to other banks	6 539 539	6 559 562	-	678 799	5 880 763
Amounts due to customers	157 989 734	158 224 937	-	379 787	157 845 150
Debt securities issued	6 307 837	6 314 855	-	6 314 855	-
Subordinated liabilities	2 764 493	2 766 289	-	2 766 289	-
Other liabilities	2 515 546	2 515 546	-	-	2 515 546
Total Liabilities	176 121 699	176 385 791	-	10 139 730	166 246 061

7. Custody activity

Custody activities are performed by virtue of a permit, issued by the Polish Financial Supervision Authority. The Bank’s clients include a number of domestic and foreign financial institutions, banks offering custody and investment services, insurance companies, investment and pension funds, as well as non-financial institutions. The Bank provides custody services, including, inter alia, the settlement of transactions effected on domestic and international markets, custody of clients’ assets, running of securities accounts, valuation of assets and services related to dividend and interest payments. The Bank also performs the activities of investment and pension funds depository and providing services as an issue agent.

As at 31 December 2020 the Bank maintained 8 076 securities accounts and omnibus accounts (in comparison to 7 954 accounts as at 31 December 2019).

8. Brokerage activity

Group provides access to a wide range of the capital market services and products offered by the separated organizational unit of the Bank – Biuro Maklerskie Pekao (BM Pekao), designed to sell capital market products.

In 2020, works on the consolidation of brokerage activities in the Group continued. In the first half of 2020, BM Pekao took over a part of the Pekao Investment Banking S.A. that is responsible for brokerage activities. As a result of the consolidation process, Pekao Investment Banking S.A. brokerage clients became clients of BM Pekao.

Work is currently focused on the operational merger of the consolidated entities. After completion of the process, the implemented project will strengthen the Group's market position by building a strong, integrated center of investment and capital competences.

The task of BM Pekao is to provide the highest quality brokerage services as part of the offer of Bank Pekao S.A. Comprehensive brokerage serviecese on the capital market provides investors, in particular individual clients of Bank Pekao S.A., with the opportunity to invest in financial instruments of various specificities that are listed on the regulated market and in the alternative trading system, organized by the Warsaw Stock Exchange. in Warsaw and BondSpot S.A. (e.g. in shares, treasury and corporate bonds, derivatives - futures and options; ETFs, certificates, warrants), as well as on specific foreign markets in all available customer service channel (using the Internet, mobile devices, telephone and in the form of direct service provided by Customer Advisors in the facility).

At the end of 2020, BM Pekao operated a total of 196.4 thousand. investment accounts servicing 140.9 thousand accounts with active access to services via remote channels. Direct service was carried out within a nationwide network covering the total 368 brokerage services spots .

In 2020, BM Pekao acted as the Offeror for four issues of PZU FIZ Akord Closed-end Investment Funds and one issue of mortgage covered bonds issued by Pekao Bank Hipoteczny S.A.

BM Pekao, as part of cooperation with Pekao Investment Banking S.A., and then after its acquisition, took part in thirteen calls for the sale of shares and provided its services in the compulsory buyout of listed companies shares (North Coast, Ceramika Nowa Gala, MZN Property), purchase of own shares of the company CPD SA and SPO (Second Public Offering) of MLP Group shares.

Moreover, it provides services for Structured Certificates of external issuers and offers Open-End Funds units of selected investment fund companies.

In order to meet the expectations of customers, BM Pekao has introduced a new service to its offer - keeping the Register of Shareholders. It was a response to the recent amendments to the Code of Commercial Companies and certain other acts.

BM Pekao is a member of the Warsaw Stock Exchange (GPW) and a direct participant of the polish national Depository for Securities (KDPW).

BM Pekao is compliant with the principles of the Code of Good Practice for Brokerage Houses guaranteeing comprehensive service in compliance with the highest ethical standards and norms. BM Pekao also actively participates in works on the development of the capital market in Poland.

Dom Inwestycyjny Xelion Sp. z o.o.

The company conducts brokerage activities on the basis of a permit issued by the Polish Financial Supervision Authority from March 2012. At 31 December 2020, the Company provided brokerage services in the areas of:

 acceptance and transfer of orders for purchase or sale of financial instruments,

 keeping cash accounts (used for making settlements in connection with financial instruments purchased or sold through DI Xelion),

 investment advisory,

 preparing of investment analysis, financial analysis and general recommendations on transactions in financial instruments,

 offering financial instruments.

Information about the financial instruments of the clients held on securities accounts or stored in a form of document

	31.12.2020		31.12.2019
	QUANTITY (pcs)	VALUE	QUANTITY (pcs)	VALUE
Clients’ financial instruments
Held on securities accounts	3 316 548 278	31 592 066	3 313 008 312	31 425 948
Equity securities and rights to such financial assets	3 313 122 211	29 130 703	3 283 626 824	29 320 150
Debt instruments and rights to such financial assets	3 426 067	2 461 363	29 381 488	2 105 798
Stored in a form of document	4 505 665 042	20 372 346	695 744 441	5 673 161
Equity securities and rights to such financial assets	4 505 665 042	20 372 346	695 744 441	5 673 161
Debt instruments and rights to such financial assets	-	-	-	-

Customers’ cash on brokerage accounts

	31.12.2020	31.12.2019
Deposited on cash accounts in brokerage house and paid for securities bought in IPO or on the primary market	2 001 050	953 833
Other customers’ cash	12 215	15 346
Total	2 013 265	969 179

Settlements due to unsettled transactions

	31.12.2020	31.12.2019
Liabilities from executed transactions	11 648	4 589

Settlements with National Depository of Securities S.A. (KDPW), KDPW_CCP S.A. and other stock exchange clearing houses

	31.12.2020	31.12.2019
Receivables from clearing fund	-	3 020
Receivables from margin deposits	59 642	32 645
Other receivables	7 034	36
Total receivables	66 676	35 701
Amounts due on margin deposits	-	893
Other liabilities	1 150	81
Total liabilities	1 150	974

Settlement with entities running regulated securities markets and commodity exchanges

	31.12.2020	31.12.2019
Amounts due to Warsaw Stock Exchange S.A.	-	82
Total liabilities	-	82

9. Operating segments

Data reported in the section stem from the application of the management model (‘Model’) in which the main criterion for segmentation is the classification of customers based on their profile and service model.

Reporting and monitoring of results, for managerial purposes, include all components of the income statement up to the gross profit level. Therefore, the income from the segment’s activities as well as operating costs related to those activities (including direct and allocated costs in line with the allocation model applied) and other components of income statement are attached to each segment.

The Group settles transactions between segments on an arm’s length basis by applying current market prices. Fund transfers between retail, private, corporate and investment banking segments, and the assets and liabilities management and other area are based on market prices applicable to the funds’ currency and maturity, including liquidity margins.

Operating segments

The operating segments of the Group are as follows:

 Retail banking – all banking activities related to retail customers (including private banking customers) and micro companies with annual turnover not exceeding PLN 5 million, as well as results of the subsidiaries, and shares in net profit of associates accounted for using the equity method, that are assigned to the retail banking activity,

 SME banking - all banking activities related to the companies with annual turnover from PLN 5 million to PLN 40 million and below 5 million in the case of companies conducting full accounting,

 Corporate and Investment banking – all banking activities related to the medium and large companies and results of the subsidiaries that are assigned to the Corporate and Investment banking activity,

 Assets and Liabilities management and other – supervision and monitoring of fund transfers, interbank market, debt securities and other instruments, other activities centrally managed as well as the results of subsidiaries and share in net profit of associates accounted for using the equity method that are not assigned to other reported segments.

Operating segments reporting for the period from 1 January to 31 December 2020

	RETAIL BANKING	CORPORATE AND INVESTMENT BANKING	SME Banking	ASSETS AND LIABILITIES MANAGEMENT anD OTHER	TOTAL
External interest income	3 014 130	1 769 631	100 514	965 084	5 849 359
External interest expenses	(351 379)	(196 157)	(16 039)	(83 772)	(647 347)
Net external interest income	2 662 751	1 573 474	84 475	881 312	5 202 012
Internal interest income	1 296 337	252 764	82 832	(1 631 933)	-
Internal interest expenses	(1 261 112)	(699 392)	(37 901)	1 998 405	-
Net internal interest income	35 225	(446 628)	44 931	366 472	-
Total net interest income	2 697 976	1 126 846	129 406	1 247 784	5 202 012
Fee and commission income and expense	1 183 859	831 918	260 832	157 041	2 433 650
Other non-interest income	1 748	129 377	18 928	27 118	177 171
Operating income	3 883 583	2 088 141	409 166	1 431 943	7 812 833
Personnel expenses	(934 423)	(291 039)	(98 516)	(715 888)	(2 039 866)
Other administrative expenses	(1 255 905)	(285 623)	(103 088)	755 524	(889 092)
Depreciation and amortisation	(193 105)	(31 950)	(5 322)	(308 574)	(538 951)
Operating costs	(2 383 433)	(608 612)	(206 926)	(268 938)	(3 467 909)
Gross operating profit	1 500 150	1 479 529	202 240	1 163 005	4 344 924
Net allowances for expected credit losses	(723 787)	(890 974)	(33 506)	69 807	(1 578 460)
Net operating profit	776 363	588 555	168 734	1 232 812	2 766 464
Guarantee funds charges	(290 297)	(234 455)	(12 703)	156 596	(380 859)
Tax on certain financial institutions	-	-	-	(660 590)	(660 590)
Profit before tax	486 066	354 100	156 031	728 818	1 725 015
Income tax expense					(622 114)
Net profit for the period					1 102 901
Attributable to equity holders of the Bank					1 101 712
Attributable to non-controling interest					1 189
Allocated assets	79 892 512	89 333 594	3 440 363	43 912 341	216 578 810
Unallocated assets					16 638 372
Total assets					233 217 182
Allocated liabilities	118 507 774	58 990 363	15 361 436	4 997 171	197 856 744
Unallocated liabilities					9 865 461
Total liabilities					207 722 205

Operating segments reporting for the period from 1 January to 31 December 2019

	RETAIL BANKING	CORPORATE AND INVESTMENT BANKING	SME Banking	ASSETS AND LIABILITIES MANAGEMENT anD OTHER	TOTAL
External interest income	3 540 176	2 167 409	135 961	849 368	6 692 914
External interest expenses	(595 673)	(480 441)	(41 283)	(107 471)	(1 224 868)
Net external interest income	2 944 503	1 686 968	94 678	741 897	5 468 046
Internal interest income	1 959 495	828 479	145 389	(2 933 363)	-
Internal interest expenses	(1 764 586)	(1 345 814)	(68 203)	3 178 603	-
Net internal interest income	194 909	(517 335)	77 186	245 240	-
Total net interest income	3 139 412	1 169 633	171 864	987 137	5 468 046
Non-interest income	1 322 317	881 404	268 764	341 198	2 813 683
Operating income	4 461 729	2 051 037	440 628	1 328 335	8 281 729
Personnel expenses	(1 020 270)	(280 366)	(91 021)	(686 039)	(2 077 696)
Other administrative expenses	(1 391 162)	(314 893)	(107 631)	858 526	(955 160)
Depreciation and amortisation	(175 875)	(29 594)	(4 618)	(294 130)	(504 217)
Operating costs	(2 587 307)	(624 853)	(203 270)	(121 643)	(3 537 073)
Gross operating profit	1 874 422	1 426 184	237 358	1 206 692	4 744 656
Net allowance for expected credit losses	(440 366)	(292 205)	(8 721)	45 254	(696 038)
Net operating profit	1 434 056	1 133 979	228 637	1 251 946	4 048 618
Guarantee funds charges	(276 367)	(13 860)	(12 633)	(151 866)	(454 726)
Tax on certain financial institutions	-	-	-	(591 403)	(591 403)
Profit before tax	1 157 689	1 120 119	216 004	508 677	3 002 489
Income tax expense					(835 872)
Net profit for the period					2 166 617
Attributable to equity holders of the Bank					2 165 047
Attributable to non-controling interests					1 570
Allocated assets	77 400 545	72 931 830	3 458 709	38 666 368	192 457 452
Unallocated assets					10 865 467
Total assets					203 322 919
Allocated liabilities	100 435 378	55 384 990	11 668 666	3 089 327	170 578 361
Unallocated liabilities					9 346 531
Total liabilities					179 924 892

Reconciliations of operating income for reportable segments

	2020	2019
Net interest income	5 202 012	5 468 046
Net fee and commission income	2 433 650	2 533 664
Dividend income	26 278	22 407
Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result	170 539	143 871
Result on fair value hedge accounting	(847)	(1 666)
Profit (loss) from derecognition of financial assets and financial liabilities not at fair value through profit or loss	61 132	71 901
Operating income	7 892 764	8 238 223
Other operating income	68 180	142 444
Other operating expenses	(148 111)	(98 938)
Total operating income for reportable segments	7 812 833	8 281 729

10. Interest income and expense

Interest income

	2020
	FINANCIAL ASSETS MEASURED AT AMORTISED COST	FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Interest income calculated using the effective interest method	4 983 095	627 760	-	5 610 855
Loans and advances (in this receivables from financial leases)	4 561 654	33 515	-	4 595 169
Interbank placements	12 702	-	-	12 702
Reverse repo transactions	10 498	-	-	10 498
Investment securities	398 241	594 245	-	992 486
Other interest income related to financial assets measured at fair value through profit or loss	-	-	238 504	238 504
Loans and other receivables from customers	-	-	2 127	2 127
Hedging derivatives	-	-	230 423	230 423
Financial assets held for trading	-	-	5 954	5 954
Total	4 983 095	627 760	238 504	5 849 359

	2019
	FINANCIAL ASSETS MEASURED AT AMORTISED COST	FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Interest income calculated using the effective interest method	5 792 886	642 179	-	6 435 065
Loans and advances (in this receivables from financial leases)	5 361 339	35 611	-	5 396 950
Interbank placements	46 204	-	-	46 204
Reverse repo transactions	39 129	-	-	39 129
Investment securities	346 214	606 568	-	952 782
Other interest income related to financial assets measured at fair value through profit or loss	-	-	257 849	257 849
Loans and other receivables from customers	-	-	6 317	6 317
Hedging derivatives	-	-	235 250	235 250
Financial assets held for trading	-	-	16 282	16 282
Total	5 792 886	642 179	257 849	6 692 914

Interest expense

	2020	2019
Deposits from customers	(429 000)	(917 285)
Interbank deposits	(8 454)	(20 484)
Repo transactions	(6 994)	(40 310)
Loans and advances received	(35 876)	(31 937)
Leasing	(10 461)	(13 388)
Debt securities	(156 562)	(201 464)
Total	(647 347)	(1 224 868)

The amounts shown above contain interest expense relating to the financial liabilities measured at amortised cost.

11. Fee and commission income and expense

Fee and commission income

	2020	2019
Accounts maintenance, payment orders and cash transactions	605 530	634 828
Payment cards	584 116	610 495
Loans and advances	399 888	433 970
Margin on foreign exchange transactions with clients	527 917	491 758
Service and sell investment and insurance products	471 662	521 987
Securities operations	106 849	55 722
Custody activity	57 318	51 157
Guarantees, letters of credit and similar transactions	65 968	62 729
Other	86 018	49 806
Total	2 905 266	2 912 452

Fee and commission expense

	2020	2019
Payment cards	(323 852)	(264 275)
Money orders and transfers	(21 580)	(23 343)
Securities and derivatives operations	(45 369)	(31 290)
Acquisition services	(43 240)	(28 944)
Custody activity	(19 970)	(15 996)
Accounts maintenance	(4 643)	(4 817)
Investment funds management	(963)	(1 029)
Other	(11 999)	(9 094)
Total	(471 616)	(378 788)

Fee and commission income and expense (other than the amounts included in determining the effective interest rate) arising from financial assets and financial liabilities that are not at fair value through profit or loss.

12. Dividend income

	2020	2019
Issuers of securities measured at fair value through profit or loss	792	1 157
Issuers of equity instruments designated at fair value through other comprehensive income	25 486	21 250
Total	26 278	22 407

13. Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result

	2020	2019
Gains (losses) on loans and advances to customers measured mandatorily at fair value through profit or loss	(175)	(3 485)
Gains (losses) on securities measured mandatorily at fair value through profit or loss	36 161	59 746
Foreign currency exchange result	(24 784)	(30 003)
Gains (losses) on derivatives	117 574	97 179
Gains (losses) on securities held for trading	41 763	20 434
Total	170 539	143 871

14. Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss

Realized gains

	2020	2019
Financial assets measured at amortised cost	18 703	19 472
Financial assets measured at fair value through other comprehensive income	48 809	62 979
Financial liabilities not measured at fair value through profit or loss	1	-
Total	67 513	82 451

Realized losses

	2020	2019
Financial assets measured at amortised cost	(4 196)	(9 811)
Financial assets measured at fair value through other comprehensive income	(2 027)	(294)
Financial liabilities not measured at fair value through profit or loss	(158)	(445)
Total	(6 381)	(10 550)

Net realized profit

61 132

71 901

15. Net allowances for expected credit losses

	2020	2019
Loans and other financial assets measured at amortized cost () (*)	(1 148 052)	(583 944)
Debt securities measured at amortized cost	2 442	(14 896)
Loans measured at fair value through other comprehensive income	(3 876)	(6 422)
Debt securities measured at fair value through other comprehensive income	(30 472)	(4 364)
Off-balance sheet commitments	(89 636)	(50 147)
Legal risk regarding foreign currency mortgage loans	(308 866)	(36 265)
Total	(1 578 460)	(696 038)

(*) Item includes impairment losses on loans and advances to banks and receivables from financial leases.

(**) In 2020 the Bank sold loans with a total debt of PLN 229.2 million. The realized gross result on the transaction was PLN 23.1 million. In 2019 the Bank sold loans with a total debt of PLN 663.1 million. The realized gross result on the transaction was PLN 40.9 million.

16. Other operating income and expenses

Other operating income

	2020	2019
Gains on disposal of property, plant and equipment	998	22 166
Premises rental income, terminals and IT equipment	18 740	17 975
Operating leasing net income (*)	(174)	1 713
Compensation, recoveries, penalty fees and fines received	15 780	23 345
Miscellaneous income	13 889	52 122
Recovery of debt collection costs	9 264	16 212
Net revenues from sale of products, goods and services	4 991	4 200
Other	4 692	4 711
Total	68 180	142 444

(*) Operating leasing net income

	2020	2019
Income from operating leases	6 798	4 885
Costs of depreciation of fixed assets provided under operating leases	(6 972)	(3 172)
Total	(174)	1 713

Other operating expenses

	2019	2019
Provision for liabilities disputable and other provisions(*)	(29 515)	(48 901)
Provision for legal risk regarding foreign currency mortgage loans	(68 498)	(22 441)
Loss on disposal of property, plant and equipment and intangible assets	(10 275)	(4 959)
Card transactions monitoring costs	(7 971)	(6 857)
Sundry expenses	(5 974)	(5 167)
Costs of litigation and claims	(3 429)	(2 887)
Impairment allowance on fixed assets, litigations and other assets	(5 858)	(257)
Compensation, penalty fees and fines	(827)	(533)
Other	(15 764)	(6 936)
Total	(148 111)	(98 938)

(*) the item also includes the provision for commission reimbursements on previously repaid consumer loans

17. Administrative expenses

Personnel expenses

	2020	2019
Wages and salaries	(1 730 703)	(1 749 736)
Insurance and other charges related to employees	(295 990)	(314 770)
Share-based payments expenses	(13 173)	(13 190)
Total	(2 039 866)	(2 077 696)

Other administrative expenses

	2020	2019
General expenses	(832 249)	(896 482)
Taxes and charges	(36 258)	(33 430)
Bank Guarantee Fund fee	(380 859)	(454 726)
Financial supervision authority fee (KNF)	(20 585)	(25 248)
Tax on certain financial institutions	(660 590)	(591 403)
Total	(1 930 541)	(2 001 289)

Total administrative expenses

(3 970 407)

(4 078 985)

From 1 January 2017 new rules for making contributions to Bank Guarantee Fund (hereinafter ’BGF’), defined in the Act of 10 June 2016 on Bank Guarantee Fund, deposit guarantee schemes and resolution of banks (hereinafter ‘BGF Act’), have to be applied.

In accordance with BGF Act, the banks are committed to make quarterly contributions to deposit guarantee fund of banks and annual contribution to resolution fund of banks. Such contributions are expenses not deductible for tax purposes. The obligation to make quarterly contribution to deposit guarantee fund of banks arises at the first day of each quarter, whereas the obligation to make annual contribution to resolution fund of banks arises at 1 January of the year concerned.

As a result of application of the Interpretation IFRIC 21 Levies for recognition of the above obligations, the costs of quarterly contribution to deposit guarantee fund of banks in the amount of PLN 170 473 thousand (PLN 82 287 thousand in 2019) and the costs of annual contribution to resolution fund of banks in the amount of PLN 210 386 thousand (PLN 372 439 thousand in 2019).

18. Depreciation and amortization

	2020	2019
Property, plant and equipment	(307 865)	(298 897)
Investment property	-	(219)
Intangible assets	(231 086)	(205 101)
Total	(538 951)	(504 217)

19. Income Tax

The below additional information notes present the Group gross profit’s.

Reconciliation between tax calculated by applying the current tax rate to accounting profit and the actual tax charge presented in the consolidated income statement.

	2020	2019
Profit before income tax	1 725 015	3 002 489
Tax charge according to applicable tax rate	327 753	570 473
Permanent differences:	294 361	265 399
Non taxable income	(8 244)	(9 696)
Non tax deductible costs including:	300 277	262 061
Bank Guarantee fund fee	72 363	86 398
Banking tax	125 512	112 367
Other non tax deductible costs	102 402	63 296
Impact of other tax rates applied in accordance with art.19.1.2 of CIT Act	29	(32)
Impact of utilized tax losses	-	-
Tax relieves not included in the income statement	48	82
Other	2 251	12 984
Effective income tax charge on gross profit	622 114	835 872

The applied tax rate of 19% is the corporate income tax rate binding in Poland.

The basic components of income tax charge presented in the income statement and equity

	2020	2019
income statement
Current tax	(1 011 973)	(839 109)
Current tax charge in the income statement	(1 011 962)	(831 542)
Adjustments related to the current tax from previous years	676	(7 117)
Other taxes (e.g. withholding tax)	(687)	(450)
Deferred tax	389 859	3 237
Occurrence and reversal of temporary differences	389 859	3 237
Tax charge in the consolidated income statement	(622 114)	(835 872)
Equity
Deferred tax	(233 616)	(36 872)
Income and costs disclosed in other comprehensive income:
revaluation of financial instruments - cash flows hedges	(88 676)	(14 292)
fair value revaluation through other comprehensive income	(130 288)	(24 526)
Tax on items that are or may be reclassified subsequently to profit or loss	(218 964)	(38 818)
Tax charge on items that will never be reclassified to profit or loss	(14 652)	1 946
fair value revaluation through other comprehensive income –equity securities	(16 735)	1 418
remeasurements the defined benefit liabilities	2 083	528
Total charge	(855 730)	(872 744)

			Changes in temporary differences in 2020
	OPENING BALANCE				CHANGES RECOGNIZED IN		CHANGES RESULTING FROM CHANGES IN THE SCOPE OF CONSOLIDATION AND OTHER		OPENING BALANCE
	TOTAL DEFERRED TAX	IN THE INCOME STATEMENT		IN EQUITY	THE INCOME STATEMENT	EQUITY	THE INCOME STATEMENT	EQUITY	TOTAL DEFERRED TAX	IN THE INCOME STATEMENT	IN EQUITY
DEFFERED TAX LIABILITY
Accrued income – securities	275	275		-	(110)	-	-	-	165	165	-
Accrued income – loans	128 636	128 636		-	(18 221)	-	-	-	110 415	110 415	-
Change in revaluation of financial assets	350 828	248 775		102 053	(59 936)	235 699	-	-	526 591	188 839	337 752
Accelerated depreciation	106 123	106 123		-	18 014	-	-	-	124 137	124 137	-
Investment relief	4 424	4 424		-	(330)	-	-	-	4 094	4 094	-
Paid intermediation costs	159 685	159 685		-	16 525	-	-	-	176 210	176 210	-
Other	32 330	32 330		-	(32 330)	-	-	-	-	-	-
Gross deferred tax liability	782 301	680 248		102 053	(76 388)	235 699	-	-	941 612	603 860	337 752
DEFFERED TAX ASSET
Accrued expenses - securities	88 665	88 665		-	179 226	-	-	-	267 891	267 891	-
Accrued expenses - deposits and loans	36 568	36 568		-	(26 349)	-	-	-	10 219	10 219	-
Downward revaluation of financial assets	312 595	312 595		-	23 435	-	-	-	336 030	336 030	-
Income received to be amortized over time from loans and current accounts	322 505	322 505		-	(13 632)	-	-	-	308 873	308 873	-
Loan provisions charges	637 546	637 546		-	162 357	-	-	-	799 903	799 903	-
Personnel related provisions	125 269	107 737		17 532	255	2 083	-	-	127 607	107 992	19 615
Accruals	29 570	29 570		-	2 529	-	-	-	32 099	32 099	-
Previous year losses	10 739	10 739		-	(2 797)	-	-	-	7 942	7 942	-
Difference between accounting and tax value of leased assets and other differences from leasing	269 618	269 618		-	(38 843)	-	-	-	230 775	230 775	-
Other	13 938	13 938		-	27 290	-	-	-	41 228	41 228	-
Gross deferred tax assets	1 847 013	1 829 481		17 532	313 471	2 083	-	-	2 162 567	2 142 952	19 615
Deferred tax charge	X	X		X	389 859	(233 616)	-	-	X	X	X
Net deferred tax assets	1 094 630	1 179 151		(84 521)	X	X	X	X	1 248 747	1 566 884	(318 137)
Net deferred tax liability	29 918	29 918		-	X	X	X	X	27 792	27 792	-

			Changes in temporary differences in 2019
	OPENING BALANCE				CHANGES RECOGNIZED IN		CHANGES RESULTING FROM CHANGES IN THE SCOPE OF CONSOLIDATION AND OTHER		OPENING BALANCE
	TOTAL DEFERRED TAX	IN THE INCOME STATEMENT		IN EQUITY	THE INCOME STATEMENT	IN EQUITY	THE INCOME STATEMENT	EQUITY	TOTAL DEFERRED TAX	IN THE INCOME STATEMENT	IN EQUITY
DEFFERED TAX LIABILITY
Accrued income – securities	347	347		-	(72)	-	-	-	275	275	-
Accrued income – loans	140 900	140 900		-	(12 264)	-	-	-	128 636	128 636	-
Change in revaluation of financial assets	245 741	180 836		64 905	67 651	37 441	288	(293)	350 828	248 775	102 053
Accelerated depreciation	116 804	116 804		-	(10 681)	-	-	-	106 123	106 123	-
Investment relief	4 539	4 539		-	(115)	-	-	-	4 424	4 424	-
Paid intermediation costs	132 387	132 387		-	27 298	-	-	-	159 685	159 685	-
Other	35 422	35 422		-	(3 113)	-	21	-	32 330	32 330	-
Gross deferred tax liabilities	676 140	611 235		64 905	68 704	37 441	309	(293)	782 301	680 248	102 053
DEFFERED TAX ASSET
Accrued expenses - securities	7 523	7 523		-	81 142	-	-	-	88 665	88 665	-
Accrued expenses - deposits and loans	35 929	35 929		-	639	-	-	-	36 568	36 568	-
Downward revaluation of financial assets	397 708	397 708		-	(85 113)	-	-	-	312 595	312 595	-
Income received to be amortized over time from loans and current accounts	286 623	286 623		-	35 882	-	-	-	322 505	322 505	-
Loan provisions charges	616 125	616 125		-	21 421	-	-	-	637 546	637 546	-
Personnel related provisions	123 484	106 521		16 963	1 216	569	-	-	125 269	107 737	17 532
Accruals	26 639	26 639		-	2 931	-	-	-	29 570	29 570	-
Previous year losses	23 183	23 183		-	(12 444)	-	-	-	10 739	10 739	-
Difference between accounting and tax value of leased assets and other differences from leasing	243 308	243 308		-	26 310	-	-	-	269 618	269 618	-
Other	13 981	13 981		-	(43)	-	-	-	13 938	13 938	-
Gross deferred tax assets	1 774 503	1 757 540		16 963	71 941	569	-	-	1 847 013	1 829 481	17 532
Deferred tax charge	X	X		X	3 237	(36 872)	(309)	293	X	X	X
Net deferred tax assets	1 131 071	1 179 013		(47 942)	X	X	X	X	1 094 630	1 179 151	(84 521)
Net deferred tax liabilities	32 708	32 708		-	X	X	X	X	29 918	29 918	-

In the opinion of the Group the deferred tax asset in the amount of PLN 1 248 747 thousand reported as at 31 December 2020 is sustainable in total amount. The analysis was performed based on the past results of the Group’s companies and assumed results in the future periods. The analysis assumed the five years’ time horizon.

As at 31 December 2020 and 31 December 2019, there were temporary differences related to investments in subsidiaries and associates, for which deferred tax liability was not created as a result of meeting the conditions of controlling the terms of temporary differences’ reversing and being probable that these differences will not reverse in foreseeable future.

The table below presents the amount of negative temporary differences, unrecognized tax losses, unutilized tax reliefs, in relation to which deferred tax asset was not recognized in the statement of financial position as well as the expiration date of temporary differences.

EXPIRATION YEAR OF TEMPORARY DIFFERENCES	AMOUNT OF DIFFERENCES AS AT 31.12.2020	AMOUNT OF DIFFERENCES AS AT 31.12.2019
2020	-	187
2021	94	12 914
2022	12 914	11 462
2023	11 462	14
2024	28	-
2025	239	-
No time limits	-	1 550
Total	24 737	26 127

20. Earnings per share

Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of the ordinary shares outstanding during the period.

	2020	2019
Net profit	1 101 712	2 165 047
Weighted average number of ordinary shares in the period	262 470 034	262 470 034
Earnings per share (in PLN per share)	4.20	8.25

Diluted earnings per share

Diluted earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of the ordinary shares outstanding during the given period adjusted for all potential dilution of ordinary shares.

As at 31 December 2020 there were no diluting instruments in the form of convertible bonds in the Group.

	2020	2019
Net profit	1 101 712	2 165 047
Weighted average number of ordinary shares in the period	262 470 034	262 470 034
Weighted average number of ordinary shares for the purpose of calculation of diluted earnings per share	262 470 034	262 470 034
Diluted earnings per share (in PLN per share)	4.20	8.25

21. Dividend

The Management Board of Bank Pekao S.A. adopted the position of the Polish Financial Supervision Authority regarding the suspension by Bank Pekao S.A. dividend payments in the first half of 2021.

22. Cash and balances with Central Bank

CASH AND DUE FROM CENTRAL BANK	31.12.2020	31.12.2019
Cash	4 306 094	3 036 985
Current account at Central Bank	150 198	2 101 957
Other	-	23 914
Gross carrying amount	4 456 292	5 162 856
Impairment allowances	(13)	(174)
Net carrying amount	4 456 279	5 162 682

AMOUNTS DUE TO CENTRAL BANK	31.12.2020	31.12.2019
Term deposits	-	4 550
Amounts due to Central Bank	-	4 550

Receivables and liabilities to the Central Bank are measured at amortized cost.

Cash and balances with Central Bank by currency

31.12.2020	Assets	LIABILITIES
PLN	2 079 588	-
EUR	1 106 970	-
USD	556 922	-
GBP	185 317	-
CHF	100 412	-
NOK	258 502	-
Other currencies	168 568	-
Total	4 456 279	-

31.12.2019	Assets	LIABILITIES
PLN	3 783 370	4 550
EUR	806 786	-
USD	242 253	-
GBP	101 235	-
CHF	78 726	-
NOK	53 804	-
Other currencies	96 508	-
Total	5 162 682	4 550

Bank is required to held on current account in the Central Bank the average monthly balance comply with the mandatory reserve declaration.

As at 31 December 2020 the interest rate of funds held on the mandatory reserve account is at 0.1 % (as at 31 December 2019 - 0.5%)

23. Loans and advances to banks

Loans and advances to banks by product type

	31.12.2020	31.12.2019
Current accounts	273 795	325 704
Interbank placements	179 332	200 840
Loans and advances	35 282	11 653
Cash collaterals	1 173 087	733 093
Reverse repo transactions	719 015	219 153
Cash in transit	199 051	302 298
Total gross amount	2 579 562	1 792 741
Impairment allowances	(1 223)	(1 188)
Total net amount	2 578 339	1 791 553

Loans and advances to banks are measured at amortised cost.

Loans and advances to banks by contractual maturity

	31.12.2020	31.12.2019
Loans and advances to banks, including:
up to 1 month	2 549 426	1 787 208
between 1 and 3 months	614	3 033
between 3 months and 1 year	278	-
between 1 and 5 years	28 855	121
over 5 years	16	81
past due	373	2 298
Total gross amount	2 579 562	1 792 741
Impairment allowances	(1 223)	(1 188)
Total net amount	2 578 339	1 791 553

Loans and advances to banks by currency

	31.12.2020	31.12.2019
PLN	938 456	418 397
EUR	1 259 737	894 689
GBP	5 103	168 424
USD	257 301	80 993
HUF	1 217	53 159
CZK	2 756	50 945
Other currencies	113 769	124 946
Total	2 578 339	1 791 553

24. Financial assets and liabilities held for trading

Financial assets and liabilities held for trading by product type

	31.12.2020	31.12.2019
Financial assets
Debt securities	1 312 316	1 276 711
Equity securities	5 393	4 953
Total financial assets	1 317 709	1 281 664
Financial liabilities
Debt securities	742 804	184 799
Total financial liabilities	742 804	184 799

Financial assets and liabilities held for trading are measured at fair value through profit or loss.

Debt securities held for trading

	31.12.2020	31.12.2019
Financial assets
Debt securities issued by central governments	976 025	1 131 733
T- bills	100	-
T- bonds	975 925	1 131 733
Debt securities issued by banks	135 299	13 838
Debt securities issued by business entities	200 992	131 140
Total financial assets	1 312 316	1 276 711
Financial liabilities
Debt securities issued by central governments	742 804	184 799
T- bonds	742 804	184 799
Total financial liabilities	742 804	184 799

Equity securities held for trading

	31.12.2020	31.12.2019
Shares	5 393	2 620
Participation units	-	2 333
Total	5 393	4 953

Debt securities held for trading by maturity

	31.12.2020	31.12.2019
Financial assets
Debt securities, including:
up to 1 month	16 983	-
between 1 and 3 months	6 209	100 122
between 3 months and 1 year	216 653	25 267
between 1 and 5 years	649 482	1 121 671
over 5 years	422 989	29 651
unspecified term	-	-
Total financial assets	1 312 316	1 276 711
Financial liabilities
Debt securities, including:
up to 1 month	-	74 115
between 1 and 3 months	-	-
between 3 months and 1 year	14 209	12 087
between 1 and 5 years	279 152	42 114
over 5 years	449 443	56 483
Total financial liabilities	742 804	184 799

Debt securities held for trading by currency

	31.12.2020	31.12.2019
Financial assets
PLN	1 294 246	1 262 006
EUR	7 600	12 599
USD	10 470	2 106
Total financial assets	1 312 316	1 276 711
Financial liabilities
PLN	742 804	184 799
Total financial liabilities	742 804	184 799

25. Derivative financial instruments (held for trading)

Derivative financial instruments at the Group

In its operations the Group uses different financial derivatives that are offered to the clients and are used for managing risks involved in the Group’s business. The majority of derivatives at the Group include over-the-counter contracts. Regulated stock exchange contracts (mainly futures) represent a small part of those derivatives.

Derivative foreign exchange transactions include the obligation to buy or sell foreign and domestic currency assets. Forward foreign exchange transactions are based on the foreign exchange rates, specified on the transaction date for a predefined future date. These transactions are valued using the discounted cash flow model. Cash flows are discounted according to zero-coupon yield curves, relevant for a given market.

Foreign exchange swaps are a combination of a swap of specific currencies as at spot date and of reverse a transaction as at forward date with foreign exchange rates specified in advance on transaction date. Transactions of such type are settled by an exchange of assets. These transactions are valued using the discounted cash flow model. Cash flows are discounted according to zero-coupon yield curves relevant for a given market.

Foreign exchange options with delivery are defined as contracts, where one of the parties, i.e. the option buyer, purchases from the other party, referred to as the option writer, at a so-called premium price the right without the obligation to buy (call option) or to sell (put option), at a specified point of time in the future or during a specified time range a foreign currency amount specified in the contract at the exchange rate set during the conclusion of the option agreement.

In case of options settled in net amounts, upon acquisition of the rights, the buyer receives an amount of money equal to the product of notional and difference between spot ad strike price.

Barrier option with one barrier is a type of option where exercise of the option depends on the underlying crossing or reaching a given barrier level. A barrier may be reached starting from lower (‘UP’) or from higher (‘DOWN’) level of the underlying instrument. ‘IN’ options start their lives worthless and only become active when a predetermined knock-in barrier price is breached. ‘OUT’ options start their lives active and become null and void when a certain knock-out barrier price is breached.

Foreign exchange options are priced using the Garman-Kohlhagen valuation model (and in case of barrier and Asian options using the so-called expanded Garman-Kohlhagen model). Parameters of the model based on market quotations of plain-vanilla at-the-money options and market spreads for out-of-the-money and in-the-money options (volatility smile) for standard maturities.

Derivatives related to interest rates enable the Group and its customers to transfer, modify or limit interest rate risk.

In the case of Interest Rate Swaps (IRS), counterparties exchange between each other the flows of interest payments, accrued on the nominal amount identified in the contract. These transactions are valued using the discounted cash flow model. Floating (implied) cash flows are estimated on base of respective IRS rates. Floating and fixed cash flows are discounted by relevant zero-coupon yield curves.

Forward Rate Agreements (FRA) involve both parties undertaking to pay interest on a predefined nominal amount for a specified period starting in the future and charged according to the interest rate determined on the day of the agreement The parties settle the transaction on value date using the reference rate as a discount rate in the process of discounting the difference between the FRA rate (forward rate as at transaction date) and the reference rate. These transactions are valued using the discounted cash flow model.

Cross currency IRS involves both parties swapping capital and interest flows in different currencies in a specified period. These transactions are valued using the discounted cash flow model. Valuation of Basis Swap transactions (cross currency IRS with floating coupon) takes into account market quotations of basis spread (Basis swap spread).

In the case of forward transactions on securities, counterparties agree to buy or sell specified securities on a forward date for a payment fixed on the date of transaction. Such transactions are measured based upon the valuation of the security (mark-to-market or mark-to-model) and valuation of the related payment (method of discounting cash flows by money market rate).

Interest rate options (cap/floor) are contracts where one of the parties, the option buyer, purchases from the other party, the option writer, at a so-called premium price, the right without the obligation to borrow (cap) or lend (floor) at specified points of time in the future (independently) amounts specified in the contract at the interest rate set during the conclusion of the option. Contracts are net-settled (without fund location) at agreed time. Transactions of this type are valued using the Normal model (Bachelier model). The model is parameterized based upon market quotations of options as at standard quoted maturities.

Interest rate futures transactions refer to standardized forward contracts purchased on the stock market. Futures contracts are measured based upon quotations available directly from stock exchanges.

Commodity swap contracts are obligations to net settlement equivalent to the execution of a commodity buy or sell transaction at the settlement price according to determination rules set at the trade inception. Commodity instruments are valued with the discounted cash flows method, which includes commodity prices term structure.

Asian commodity options are contracts with the right to buy or sell a certain amount of commodity on a expiry date at the specified price, where settlement price is based on an average level established on the basis of a series of commodity price observations in the period preceding the maturity date of the option. Commodity options are valued with the Black-Scholes model that includes moment matching of commodity price distribution for the arithmetic average.

Derivative financial instruments embedded in other instruments

The Group uses derivatives financial instruments embedded in complex financial instruments, i.e. such as including both a derivative and base agreement, which results in part of the cash flows of the combined instrument changing similarly to cash flows of an independent derivative. Derivatives embedded in other instruments cause part or all cash flows resulting from the base agreement to be modified as per a specific interest rate, price of a security, foreign exchange rate, price index or interest rate index.

The Group has deposits and certificates of deposits on offer which include embedded derivatives. As the nature of such instrument is not strictly associated with the nature of the deposit agreement, the embedded instrument is separated and classified into the portfolio held-for-trading. The valuation of such instrument is recognized in the income statement. Embedded instruments include simple options (plain vanilla) and exotic options for single stocks, commodities, indices and other market indices, including interest rate indices, foreign exchange rates and their related baskets.

All embedded options are immediately closed back-to-back on the interbank market.

Currency options embedded in deposits are valued as other currency options.

Exotic options embedded in deposits as well as their close positions are valued using the Monte-Carlo simulation technique assuming Geometric Brownian Motion model of risk factors. Model parameters are determined first of all on the basis of quoted options and futures contracts and in their absence based on statistical measures of the underlying instrument dynamic.

Risk involved in financial derivatives

Market risk and credit risk are the basic types of risk, associated with derivatives.

At the beginning, financial derivatives usually have a small market value or no market value at all. It is a consequence of the fact that derivatives require no initial net investments, or require a very small net investment compared to other types of contracts, which display a similar reaction to changing market conditions.

Derivatives gain positive or negative value as a result of change in specific interest rates, prices of securities, prices of commodities, currency exchange rates, price index, credit standing or credit index or another market parameter. In case of such changes, the derivatives held become more or less advantageous than instruments with the same residual maturities, available at that moment on the market.

Credit risk related to derivative contracts is a potential cost of concluding a new contract on the original terms and conditions if the other party to the original contract fails to meet its obligations. In order to assess the potential cost of replacement the Group uses the same method as for credit risk assessment. In order to control its credit risk levels the Group performs assessments of other contract parties using the same methods as for credit decisions.

The following tables present nominal amounts of financial derivatives and fair values of such derivatives. Nominal amounts of certain financial instruments are used for comparison with balance sheet instruments but need not necessarily indicate what the future cash flow amounts will be or what the current fair value of such instruments is and therefore do not reflect the Group’s credit or price risk level.

Fair value of trading derivatives

31.12.2020	assets	liabilities
Interest rate transactions
Interest Rate Swaps (IRS)	4 070 059	4 026 201
Forward Rate Agreements (FRA)	605	586
Options	6 580	2 171
Other	831	847
Foreign currency
Cross-Currency Interest Rate Swaps (CIRS)	91 071	61 376
Currency Forward Agreements	257 951	264 613
Currency Swaps (FX-Swap)	193 335	83 919
Options for currency	60 286	51 295
Transactions based on equity securities and stock indexes
Options	1 712	1 712
Other	-	-
Transactions based on commodities and precious metals
Options	56 268	52 659
Other	73 533	72 037
Total	4 812 231	4 617 416

31.12.2019	assets	liabilities
Interest rate transactions
Interest Rate Swaps (IRS)	1 644 485	1 602 258
Forward Rate Agreements (FRA)	284	3
Options	8 463	2 003
Other	39	61
Foreign currency
Cross-Currency Interest Rate Swaps (CIRS)	75 005	49 332
Currency Forward Agreements	153 953	157 608
Currency Swaps (FX-Swap)	80 308	109 396
Options for currency	73 950	72 799
Transactions based on equity securities and stock indexes
Options	3 084	3 076
Other	14	-
Transactions based on commodities and precious metals
Options	25 646	23 523
Other	14 298	14 054
Total	2 079 529	2 034 113

Derivative financial instruments are measured at fair value through profit or loss.

Nominal value of trading derivatives

31.12.2020	Contractual maturity					TOTAL
31.12.2020	UP TO 1MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
Interest rate transactions
Interest Rate Swaps (IRS)	6 229 830	6 384 061	42 292 408	127 208 433	37 318 781	219 433 513
Forward Rate Agreements (FRA)	1 031 000	1 753 000	1 176 000	-	-	3 960 000
Options	50	-	890 564	2 624 532	411 412	3 926 558
Other	521 532	-	-	-	-	521 532
Foreign currency
Cross-Currency Interest Rate Swaps (CIRS) - currency bought	-	409 501	107 754	4 780 362	126 650	5 424 267
Cross-Currency Interest Rate Swaps (CIRS) - currency sold	-	375 983	100 000	4 824 292	124 435	5 424 710
Currency Forward Agreements - currency bought	20 000 076	4 494 449	7 798 255	3 227 614	26 674	35 547 068
Currency Forward Agreements - currency sold	20 005 839	4 527 409	7 798 762	3 256 150	27 372	35 615 532
Currency Swaps (FX-Swap) – currency bought	12 399 025	2 411 504	2 192 868	352 650	-	17 356 047
Currency Swaps (FX-Swap) – currency sold	12 360 053	2 374 534	2 152 112	352 817	-	17 239 516
Options bought	1 055 018	1 066 559	2 603 360	1 481 808	-	6 206 745
Options sold	1 010 973	1 119 281	2 585 226	1 471 468	-	6 186 948
Transactions based on equity securities and stock indexes
Options	8 458	-	49 972	-	-	58 430
Other	-	-	-	-	-	-
Transactions based on commodities and precious metals
Options	96 027	269 477	1 456 207	183 711	-	2 005 422
Other	267 298	354 872	436 902	168 570	-	1 227 642
Total	74 985 179	25 540 630	71 640 390	149 932 407	38 035 324	360 133 930

Nominal value of trading derivatives

31.12.2019	Contractual maturity					TOTAL
31.12.2019	UP TO 1MONTH	BETWEEN 1 AND 3 MONTHS	BETWEEN 3 MONTHS AND 1 YEAR	BETWEEN 1 AND 5 YEARS	OVER 5 YEARS	TOTAL
Interest rate transactions
Interest Rate Swaps (IRS)	2 995 055	12 029 328	59 733 223	91 624 322	30 547 721	196 929 649
Forward Rate Agreements (FRA)	550 000	-	-	-	-	550 000
Options	-	252 278	2 216 992	2 595 213	294 715	5 359 198
Other	78 340	-	-	-	-	78 340
Foreign currency
Cross-Currency Interest Rate Swaps (CIRS) - currency bought	-	340 556	1 191 595	4 297 890	166 666	5 996 707
Cross-Currency Interest Rate Swaps (CIRS) - currency sold	-	348 996	1 176 628	4 274 673	166 383	5 966 680
Currency Forward Agreements - currency bought	5 107 200	2 854 577	6 417 509	4 360 759	-	18 740 045
Currency Forward Agreements - currency sold	5 114 742	2 850 759	6 427 955	4 378 256	-	18 771 712
Currency Swaps (FX-Swap) – currency bought	13 639 802	1 703 894	3 999 958	598 423	-	19 942 077
Currency Swaps (FX-Swap) – currency sold	13 655 199	1 711 052	4 028 472	591 352	-	19 986 075
Options bought	1 241 286	1 109 559	5 131 752	2 596 963	-	10 079 560
Options sold	1 247 505	1 363 199	4 886 284	2 600 452	-	10 097 440
Transactions based on equity securities and stock indexes
Options	-	-	52 245	58 518	-	110 763
Other	-	-	-	1 183	-	1 183
Transactions based on commodities and precious metals
Options	120 372	387 365	1 154 744	670 370	-	2 332 851
Other	150 827	226 004	180 367	22 895	-	580 093
Total	43 900 328	25 177 567	96 597 724	118 671 269	31 175 485	315 522 373

26. Loans and advances to customers

Loans and advances to customers by product type

	31.12.2020
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Mortgage loans	76 198 229	754 285	15 902	76 968 416
Current accounts	8 829 284	-	-	8 829 284
Operating loans	9 839 559	443 778	19 285	10 302 622
Investment loans	21 801 214	276 992	20 339	22 098 545
Cash loans	13 618 453	-	-	13 618 453
Payment cards receivables	1 013 454	-	-	1 013 454
Financial leasing	7 815 053	-	-	7 815 053
Factoring	6 861 923	-	-	6 861 923
Other loans and advances	1 655 638	-	131 475	1 787 113
Reverse repo transactions	280 620	-	-	280 620
Cash in transit	149 325	-	-	149 325
Gross carrying amount	148 062 752	1 475 055	187 001	149 724 808
Impairment allowances () (*)	(7 237 011)	-	-	(7 237 011)
Carrying amount	140 825 741	1 475 055	187 001	142 487 797

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 26 571 thousand is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount of the loan.

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 345 131 thousand.

	31.12.2019
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Mortgage loans	70 892 003	807 770	21 600	71 721 373
Current accounts	11 473 778	-	-	11 473 778
Operating loans	12 008 401	404 374	22 518	12 435 293
Investment loans	20 562 225	168 463	57 226	20 787 914
Cash loans	14 674 372	-	-	14 674 372
Payment cards receivables	1 113 077	-	-	1 113 077
Financial leasing	6 799 185	-	-	6 799 185
Factoring	6 206 770	-	-	6 206 770
Other loans and advances	1 493 039	-	141 295	1 634 334
Reverse repo transactions	502 300	-	-	502 300
Cash in transit	34 390	-	-	34 390
Gross carrying amount	145 759 540	1 380 607	242 639	147 382 786
Impairment allowances (*)	(6 469 551)	-	-	(6 469 551)
Carrying amount	139 289 989	1 380 607	242 639	140 913 235

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 20 808 thousand is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount of the loan.

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 36 265 thousand

Loans and advances to customers by customer type

	31.12.2020
	AMORTISED COST			FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (*)	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
	Gross carrying amount	Impairment allowances (**)	carrying amount	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (*)	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Corporate	65 830 444	(4 414 974)	61 415 470	1 475 055	32 234	62 922 759
Individuals	79 602 379	(2 700 007)	76 902 372	-	131 474	77 033 846
Budget entities	2 629 929	(122 030)	2 507 899	-	23 293	2 531 192
Loans and advances to customers	148 062 752	(7 237 011)	140 825 741	1 475 055	187 001	142 487 797

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 345 131 thousand.

	31.12.2019
	AMORTISED COST			FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (*)	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
	Gross carrying amount	Impairment allowances (**)	carrying amount	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (*)	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Corporate	65 300 617	(4 082 819)	61 217 798	1 380 607	44 128	62 642 533
Individuals	77 159 166	(2 266 747)	74 892 419	-	141 296	75 033 715
Budget entities	3 299 757	(119 985)	3 179 772	-	57 215	3 236 987
Loans and advances to customers	145 759 540	(6 469 551)	139 289 989	1 380 607	242 639	140 913 235

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 36 265 thousand.

Loans and advances to customers by contractual maturity

	31.12.2020
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Loans and advances to customers, including:
up to 1 month	15 013 487	-	2 155	15 015 642
between 1 and 3 months	5 385 693	-	6 254	5 391 947
between 3 months and 1 year	15 519 129	51 305	21 812	15 592 246
between 1 and 5 years	50 659 353	238 332	119 240	51 016 925
over 5 years	56 984 423	1 185 418	33 778	58 203 619
past due	4 500 667	-	3 762	4 504 429
Gross carrying amount	148 062 752	1 475 055	187 001	149 724 808
Impairment allowances () (*)	(7 237 011)	-	-	(7 237 011)
Carrying amount	140 825 741	1 475 055	187 001	142 487 797

(*) The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 26 571 thousand is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount of the loan.

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 345 131 thousand.

Loans and advances to customers by contractual maturity

	31.12.2019
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Loans and advances to customers, including:
up to 1 month	16 683 804	-	2 395	16 686 199
between 1 and 3 months	5 480 206	-	14 669	5 494 875
between 3 months and 1 year	14 184 859	197	50 043	14 235 099
between 1 and 5 years	47 019 611	249 076	130 095	47 398 782
over 5 years	57 410 848	1 131 334	43 567	58 585 749
past due	4 980 212	-	1 870	4 982 082
Gross carrying amount	145 759 540	1 380 607	242 639	147 382 786
Impairment allowances () (*)	(6 469 551)	-	-	(6 469 551)
Carrying amount	139 289 989	1 380 607	242 639	140 913 235

(*) The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 20 808 thousand is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount of the loan.

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 36 265 thousand.

Loans and advances to customers by currency

	31.12.2020
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
PLN	114 511 329	150 819	187 001	114 849 149
CHF	2 857 139	-	-	2 857 139
EUR	21 389 027	1 324 236	-	22 713 263
USD	1 532 043	-	-	1 532 043
Other currencies	536 203	-	-	536 203
Total	140 825 741	1 475 055	187 001	142 487 797

	31.12.2019
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
PLN	115 155 704	50 124	242 639	115 448 467
CHF	2 958 004	-	-	2 958 004
EUR	19 381 306	1 330 483	-	20 711 789
USD	1 317 698	-	-	1 317 698
Other currencies	477 277	-	-	477 277
Total	139 289 989	1 380 607	242 639	140 913 235

Receivables from finance leases

As a lessor, the Group concludes contracts classified as finance leases, the main subject of which are means of transport, machinery and technical equipment. The main lessor in the Group is Pekao Leasing Sp. z o.o.

In 2020, the Group recognized a gain on sale of the right-of-use assets in the amount of PLN 1 251 thousand (in 2019 a gain amounted to PLN 1 501 thousand PLN), presented in ‘Other operating income’.

In 2020, the Group recognized interest income on finance lease receivables in the amount of PLN 208 028 thousand (in 2019 – PLN 210 489 thousand).

The tables below present the maturity analysis of lease receivables, presenting the undiscounted lease payments to be received after the balance sheet date.

fINANCE LEASES UNDER IFRS 16	31.12.2020	31.12.2019
Up to 1 year	2 810 781	2 501 368
Between 1 and 2 years	1 996 667	1 757 167
Between 2 and 3 years	1 417 395	1 338 314
Between 3 and 4 years	852 457	732 167
Between 4 and 5 years	465 047	392 005
Over 5 years	680 863	532 296
Total undiscounted lease payments	8 223 210	7 253 317
Unearned interest income	(408 157)	(454 132)
Net investment in the lease	7 815 053	6 799 185
Impairment allowances	(137 741)	(86 363)
Carrying amount	7 677 312	6 712 822

27. Hedge accounting

The Group decided to take advantage of the choice given by IFRS 9 and continues to apply hedge accounting procedures according to IAS 39. This decision concerns all hedging relationships, for which the Group applies and will apply hedge accounting in the future.

As of 31 December 2020 the Group applies fair value hedge accounting and cash flow hedge accounting:

FVH - fair value hedge accounting:

- Interest rate swaps (IRS) designated to hedge debt securities denominated in PLN, EUR and USD (hereafter: FVH IRS bonds),

CFH - cash flow hedge accounting:

- Interest rate swaps (IRS) designated to hedge floating rate loans and securities denominated in PLN (hereafter: CFH IRS loans/bonds),

- Interest rate swaps (IRS) designated to hedge deposits denominated in PLN and EUR, which economically reflect long-term variable-rate liability (hereafter: CFH IRS deposits),

- cross-currency interest rate swaps (basis swap) designated to hedge floating rate loans denominated in CHF and liabilities denominated in PLN, which economically reflect long-term variable-rate liability (hereafter: CFH CIRS deposits/loans),

- FX-Swaps designated to hedge floating rate loans denominated in EUR and current and term deposits denominated in USD (two hedging relationships, jointly hereafter: CFH FX-Swap deposits/loans).

Impact of the IBOR reform on hedge accounting

In relation to the amendments to IAS 39 and IFRS 9 published on 16 January 2020 (described in the accounting policy - Note 4.9), the Group took advantage of the possibility of early adoption of the above-mentioned amendments to IAS 39 and IFRS 9 concerning the impact of the interest rate benchmark reform on hedge accounting (Interbank Offer Rate - ‘IBOR reform’).

As part of the established hedging relationships, the Group identifies the following interest rate benchmarks: WIBOR, EURIBOR, LIBOR CHF, LIBOR USD. As of the reporting date, these benchmarks rates are quoted and available each day and resulting cash flows are exchanged with its counterparties as usual.

In the case of WIBOR and EURIBOR the Group assessed that, there is currently no uncertainty about the timing or amounts of cash flows arising from the IBOR reform. Both indicators have been reformed and are being developed by Administrators authorized under the European Union Benchmark Regulation (BMR Regulation). The Group not anticipate changing the hedged risk to a different benchmarks.

For LIBOR CHF and LIBOR USD, the established hedging relationships extend beyond the anticipated cessation dates for both benchmarks, i.e. December 31, 2021 for CHF LIBOR and June 20, 2023 for USD LIBOR. The bank expects that these benchmarks will be replaced by new benchmarks: CHF LIBOR by the SARON (Swiss Averaged Rate Overnight) administered by the SIX Swiss Exchange and LIBOR USD by the SOFR (Secured Overnight Financing Rate) administered by the Federal Reserve Bank of New York, but there is uncertainty about the timing and amounts of cash flows for the new rates. Such uncertainty may impact the assessment of: the effectiveness of the relationship and the high probability of the hedged item. For the purposes of these assessments, the Group assumes that the hedged interest rates benchmarks on which the cash flows of the hedged item and / or the hedging instrument are based will not be altered as a result of IBOR reform.

Below is the list of hedging relationships and the nominal amounts of hedging instruments designated thereto, which may be affected by the reform of the LIBOR interest rate benchmarks as at 31 December 2020:

 • CFH CIRS deposits / loans (CHF 613 million transactions based on CHF LIBOR)

 • FVH IRS bonds (USD 173 million transactions based on USD LIBOR)

The Group has developed an action plan in case of significant changes or the discontinuation of the benchmark. One of the activities of the above-mentioned plan is to introduce appropriate clauses in contracts with counterparties. Regarding the hedging instruments, the Bank actively cooperates with counterparties in order to implement rules of conduct in line with the ISDA methodology (ISDA Fallbacks Protocol).

Fair value hedge accounting

The Group applies fair value hedge accounting for fixed coupon debt securities denominated in PLN, EUR and USD, hedged with interest rate swap (IRS) transactions in the same currencies. The Group hedges component of interest rate risk related to the fair value changes of the hedged item resulting exclusively from the volatility of market interest rates (WIBOR, EURIBOR, LIBOR USD). The IRS transactions receive floating-rate flows, and pay fixed-rate flows. In the past, hedged risk component accounted for a significant portion of changes in fair value of the hedged item.

The approach of the Group to market risk managemant, including interest rate risk, is presented in Note 6.3. Details regarding exposure of the Goup to interest rate risk is disclosed in Note 6.3.

The use of derivative instruments to hedge the exposure to changes in interest rates generates counterparty credit risk of derivative transactions. The Group mitigates this risk by requiring the counterparties to post collateral deposits and by settling derivative transactions through Central Counterparty Clearing Houses (CCPs) whch apply a number of mechanisms allowing systemic reduction of the risk of default on obligations under concluded transactions.

The Group applies fair value hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting fair value changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated.

According to the approach of the Group, hedge ratio is determined as ratio of fair value of the hedged item to fair value of the hedging instrument. A hedging relationship is considered effective if all of the following criteria are met:

 high effectiveness of the hedge can be expected on the basis of comparison of critical terms of the hedged item and the hedging instrument,

 in each reporting period, hedge ratio is within 80% - 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal than the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument,

 in each reporting period, simulation of hedge ratio in assumed evoluation of market reference rates scenarios is within 80% - 125% range.

As regards fair value hedge relationships, the main sources of ineffectiveness are:

 impact of the counterparty credit risk and own credit risk of the Group on the fair value of the hedging transactions (IRS), which is not reflected in the fair value of the hedged item,

 differences in maturities of the interest rate swaps and debt securities,

 differences in coupon amounts generated by the hedged item and hedging instruments.

The tables below present interest rate swaps which are used by the Group as instruments hedging interest rate risk in fair value hedge accounting as of 31 December 2020 and 31 December 2019.

Nominal values and interest rates of hedging derivatives - fair value hedge

31.12.2020				CONTRACTUAL MATURITY					TOTAL
31.12.2020				UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
Hedging relationship	Currency			UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
FVH IRS bonds	PLN	Nominal value		-	280 000	-	-	200 000	480 000
	PLN	Average fixed interest rate (%)		-	0.3	-	-	0.3	0.3
	EUR	Nominal value		-	-	346 110	309 192	680 683	1 335 985
	EUR	Average fixed interest rate (%)		-	-	(0.1)	0.8	(0.2)	0.1
	USD	Nominal value		-	-	-	630 509	112 752	743 261
	USD	Average fixed interest rate (%)		-	-	-	2.0	0.2	1.8
Total nominal value			-		280 000	346 110	939 701	993 435	2 559 246

Nominal values and interest rates of hedging derivatives - fair value hedge

31.12.2019				CONTRACTUAL MATURITY					TOTAL
31.12.2019				UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
Hedging relationship	Currency			UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
FVH IRS bonds	PLN	Nominal value		-	-	-	280 000	200 000	480 000
	PLN	Average fixed interest rate (%)		-	-	-	1.8	1.8	1.8
	EUR	Nominal value		-	-	470 564	604 707	628 129	1 703 400
	EUR	Average fixed interest rate (%)		-	-	1.2	0.4	(0.1)	0.4
	USD	Nominal value		-	-	-	637 102	113 931	751 033
	USD	Average fixed interest rate (%)		-	-	-	3.7	2.0	3.5
Total nominal value			-		-	470 564	1 521 809	942 060	2 934 433

Impact of fair value hedge (interest rate risk hedging) on balance sheet and financial result

31.12.2020	FVH IRS bonds – IRS hedging debt securities measured at:		total
31.12.2020	amortised cost	faiR value throught other comprehensive income	total
Hedging instruments
Nominal value	200 000	2 359 246	2 559 246
Carrying amount – assets	-	-	-
Carrying amount – liabilities	26 944	171 136	198 080
Balance sheet item in which hedging instrument is reported	Hedging instruments	Hedging instruments	Hedging instruments
Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency	(11 384)	(34 162)	(45 546)
Amount of hedge ineffectiveness recognized in the income statement ‘Result on fair value hedge accounting’.	(179)	(668)	(847)
Hedged item
Carrying amount – assets	225 471	2 595 811	2 821 282
Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet - assets	25 494	187 793	213 287
Balance sheet item in which hedged item is reported	Hedging instruments	Hedging instruments	Hedging instruments
Change in the value of hedged item used for estimating hedge inefficiency in the reporting period	11 205	33 496	44 701
Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued	-	-	-

Impact of fair value hedge (interest rate risk hedging) on balance sheet and financial result

31.12.2019	FVH IRS bonds – IRS hedging debt securities measured at:		total
31.12.2019	amortised cost	faiR value throught other comprehensive income	total
Hedging instruments
Nominal value	200 000	2 734 433	2 934 433
Carrying amount – assets	-	637	637
Carrying amount – liabilities	15 469	145 897	161 366
Balance sheet item in which hedging instrument is reported	Hedging instruments	Hedging instruments	Hedging instruments
Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency	(5 871)	(37 241)	(43 112)
Amount of hedge ineffectiveness recognized in the income statement ‘Result on fair value hedge accounting’.	(282)	(1 384)	(1 666)
Hedged item
Carrying amount – assets	214 291	2 973 347	3 187 638
Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet - assets	14 288	174 946	189 234
Balance sheet item in which hedged item is reported	Hedging instruments	Hedging instruments	Hedging instruments
Change in the value of hedged item used for estimating hedge inefficiency in the reporting period	5 588	35 858	41 446
Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued	-	-	-

Cash flow hedge accounting

The Group applies:

 cross-currency interest rate swaps (basis swap) to hedge exposure to interest rate risk related to volatility of market reference rates (WIBOR, LIBOR CHF) and exposure to currency risk. Portfolios of variable-rate loans denominated in CHF and deposits in PLN (which economically reflects to long-term variable-rate liability) are hedged items in this hedging relationship. CIRS transactions are decomposed into the part hedging the portfolio of assets and the part hedging the portfolio of liabilities,

 interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR), generated by portfolios of variable-rate loans denominated in PLN,

 currency swaps (FX-Swap) to hedge the exposure to the currency risk, generated by both, portfolios of loans denominated in EUR and portfolios of current and term deposits denominated in USD,

 interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR, EURIBOR), generated by portfolio of deposits denominated in PLN and EUR, which economically reflect a long-term, variable-rate liability.

In perion form 1 January 2019 the Bank established new hedging relationship (FX-Swap), analogous to the existing one in terms of both hedging instruments and underlying position, but covering the currency risk only.

The new relationship is to replace the existing one: while all FX-Swaps designated to hedge accounting after 31 March 2019 have supplied the new hedge, the previous relationship expired in February 2020.

Approach of the Group to hedging interest rate risk through cash flow hedge accounting is the same as the approach applied in the fair value hedge accounting as described above, i.e. only the component of interest rate risk related exclusively to volatility of market reference rates (in the case of cash flows hedge: WIBOR, EURIBOR, LIBOR USD, LIBOR CHF) is hedged.

Approach of the Group to market risk management, including interest rate risk and currency risk, is presented in Note 6.3. Details regarding the Group’s interest rate risk and currency risk exposure are disclosed in Note 6.3.

As in the case of the fair value hedge, using derivative instruments to hedge the exposure to interest rate risk and currency risk generates counterparty credit risk of the derivative transactions, which is not compensated by the hedged item. The Group manages this risk in a way similar to fair value hedge.

The Group applies cash flow hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting cash flow changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated. The assessment is conducted using hypothetical derivative method.

According to the approach of the Group, a hedging relationship is considered effective if all of the following criteria are met:

 correlation coefficient between market reference rate of hedged items and market reference rate of hedging instrument is high,

 forecasted interest flows generated by hedged items are not lower than forecasted interest flows generated by hedging instruments,

 in each reporting period, ratio of the fair value of the hedged item to the fair value of the hedging instrument is within 80% - 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal to the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument,

 in each reporting period, ratio of fair value changes of the hedged item to the hedging instrument due to parallel fall or rise in yield curves by 100 basis point is within 80% - 125% range.

In the case of hedging interest rate and currency risk of portfolios of loans and deposits, the manner of managing these portfolios was adopted allowing for regular inclusion of new transactions in the hedging relationship and exclusion of transactions from the hedging relationship as a result of repayment or classification to non-performing category. As a result, the exposure of these portfolios to interest rate and currency risk is constantly changing. Because of frequent changes to term structure of the portfolio, the Group dynamically assigns the hedged items and allows for matching of hedging instruments to these changes.

As regards cash flow hedge relationships, the main sources of ineffectiveness are:

 impact of counterparty and the Group’s own credit risk on the fair value of the hedging instruments, i.e. interest rate swap (IRS), cross-currency interest rate swap (basis swap), currency swap (FX swap) which is not reflected in the fair value of the hedged item,

 differences in repricing frequency of the hedging instruments and and hedged loans and deposits.

Nominal values of hedging derivatives – cash flow hedge

31.12.2020			CONTRACTUAL MATURITY					TOTAL
31.12.2020			UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
Hedging relationship	Currency		UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
CHF IRS loans	PLN	Nominal value	-	-	-	12 337 000	3 355 000	15 692 000
CHF IRS loans	PLN	Average fixed interest rate (%)	-	-	-	1.9	0.8	1.7
CFH IRS deposits	PLN	Nominal value	-	-	85 000	168 000	266 000	519 000
	PLN	Average fixed interest rate (%)	-	-	0.3	0.3	0.7	0.5
	EUR	Nominal value	-	-	636 289	-	-	636 289
	EUR	Average fixed interest rate (%)	-	-	(0.5)	-	-	(0.5)
CFH CIRS deposits/ loans	CHF/PLN	Nominal value	-	-	546 987	2 298 255	1 861 138	4 706 380
		Average fixed interest rate (%)	-	-	-	-	-	-
		Average fixed interest rate CHF/PLN	-	-	-	-	-	-
CFH FX Swap deposits/loans	EUR/PLN	Nominal value	7 054 492	5 810 711	6 190 792	920 010	-	19 976 005
	EUR/PLN	Average fixed interest rate EUR/PLN	4.5	4.5	4.6	4.6	-	4.5
	USD/PLN	Nominal value	644 600	-	263 008	-	-	907 608
	USD/PLN	Average fixed interest rate EUSD/PLN	3.7	-	3.8	-	-	3.7
	EUR/USD	Nominal value	3 126 850	1 418 089	2 718 445	-	-	7 263 384
	EUR/USD	Average fixed interest rate EUR/USD	1.2	1.2	1.2	-	-	1.2
Total nominal value			10 825 942	7 228 800	10 440 521	15 723 265	5 482 138	49 700 666

Nominal values of hedging derivatives – cash flow hedge

31.12.2019			CONTRACTUAL MATURITY					TOTAL
31.12.2019			UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
Hedging relationship	Currency		UP To 1 MoNth	Between 1 and 3 MoNths	between 3 MoNths To 1 year	Between 1 tO 5 years	over 5 yearS
CHF IRS loans	PLN	Nominal value	600 000	-	1 400 000	7 000 000	3 200 000	12 200 000
CHF IRS loans	PLN	Average fixed interest rate (%)	3.9	-	3.6	2.3	2.0	2.4
CFH IRS deposits	PLN	Nominal value	-	-	47 000	215 000	289 000	551 000
	PLN	Average fixed interest rate (%)	-	-	1.8	1.8	1.9	1.8
	EUR	Nominal value	-	-	28 106	624 296	-	652 402
	EUR	Average fixed interest rate (%)	-	-	(0.4)	(0.4)	-	(0.4)
CFH CIRS deposits/ loans	CHF/PLN	Nominal value	-	-	519 141	1 620 811	2 875 432	5 015 384
		Average fixed interest rate (%)	-	-	-	-	-	-
		Average fixed interest rate CHF/PLN	-	-	-	-	-	-
CFH FX Swap deposits/loans	EUR/PLN	Nominal value	1 581 919	2 452 959	2 635 470	-	-	6 670 348
	EUR/PLN	Average fixed interest rate EUR/PLN	4.3	4.4	4.4	-	-	4.4
	USD/PLN	Nominal value	193 193	-	1 151 106	-	-	1 344 299
	USD/PLN	Average fixed interest rate EUSD/PLN	3.9	-	3.9	-	-	3.9
	EUR/USD	Nominal value	1 660 461	379 194	1 387 541	-	-	3 427 196
	EUR/USD	Average fixed interest rate EUR/USD	1.1	1.1	1.2	-	-	1.1
Total nominal value			4 035 573	2 832 153	7 168 364	9 460 107	6 364 432	29 860 629

Impact of cash of hedge on balance sheet and financial result

HEDGE IN RELATIONSHIP as at 31.12.2020	INTEREST RATE RISK		INTEREST RATE RISK / CURRENCY RISK
	CFH IRS loans	CFH IRS deposits	CFH CIRS deposits/ loans	CFH FX Swap deposits/loans
Hedging instruments
Nominal value	15 692 000	1 155 289	4 706 380	28 146 997
Carrying amount – assets	766 961	6 765	-	5 337
Carrying amount – liabilities	2 085	47 829	561 308	263 657
Balance sheet item in which hedging instrument is reported	Hedging instruments	Hedging instruments	Hedging instruments	Hedging instruments
Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness	475 586	(14 395)	14 303	(1 080)
Gains or losses resulting from hedging, recognized in other comprehensive income	-	-	-	-
Amount of hedge ineffectiveness recognized in the income statement in item ‘Result on financial assets and liabilities measured at fair value through profit or loss’	7 742	-	-	4
Amount transferred from the revaluation reserves due to cash flow hedge accounting to the income statement as a reclassification adjustment	-	-	-	-
Income statement item in which reclassification adjustment is reported	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss
Hedged item
Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period	(466 966)	14 395	(16 776)	1 077
Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period	668 822	(36 727)	(39 329)	713
Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied	-	-	-	-

Impact of cash of hedge on balance sheet and financial result

HEDGE IN RELATIONSHIP as at 31.12.2019	INTEREST RATE RISK		INTEREST RATE RISK / CURRENCY RISK
	CFH IRS loans	CFH IRS deposits	CFH CIRS deposits/ loans	CFH FX Swap deposits/loans
Hedging instruments
Nominal value	12 200 000	1 203 402	5 015 384	11 441 843
Carrying amount – assets	290 699	2 708	-	83 164
Carrying amount – liabilities	8 247	28 699	391 365	25 088
Balance sheet item in which hedging instrument is reported	Hedging instruments	Hedging instruments	Hedging instruments	Hedging instruments
Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness	49 328	(10 521)	32 807	2 226
Gains or losses resulting from hedging, recognized in other comprehensive income	-	-	-	-
Amount of hedge ineffectiveness recognized in the income statement in item ‘Result on financial assets and liabilities measured at fair value through profit or loss’	(1 265)	-	(2)	(6)
Amount transferred from the revaluation reserves due to cash flow hedge accounting to the income statement as a reclassification adjustment	-	-	-	-
Income statement item in which reclassification adjustment is reported	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss	Result on financial assets and liabilities measured at fair value through profit or loss
Hedged item
Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period	(50 455)	10 521	(48 923)	(2 248)
Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period	200 961	(22 346)	(53 646)	1 794
Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied	-	-	-	-

Changes in the revaluation reserve from the valuation of hedging derivatives in cash flow hedge accounting

	2020	2019
Opening balance	126 763	51 540
INTEREST RATE RISK
Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period	453 480	40 216
Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item	-	-
INTEREST RATE RISK/CURRENCY RISK
Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period	13 236	35 007
Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item	-	-
Closing balance	593 479	126 763

28. Investment (placement) securities

	31.12.2020	31.12.2019
Debt securities measured at amortised cost	27 261 551	14 578 665
Debt securities measured at fair value through other comprehensive income	42 737 500	30 942 999
Equity instruments designated for measurement at fair value through other comprehensive income	331 690	225 332
Equity instruments mandatorily measured at fair value through profit or loss	160 486	146 119
Total	70 491 227	45 893 115

Debt securities measured at amortised cost

	31.12.2020	31.12.2019
Debt securities issued by central governments	19 759 086	8 901 451
T-bills	808 649	-
T-bonds	18 950 437	8 901 451
Debt securities issued by central banks	74 678	64 262
Debt securities issued by banks	2 229 516	-
Debt securities issued by business entities	2 037 279	2 416 388
Debt securities issued by local governments	3 160 992	3 196 564
Total	27 261 551	14 578 665
including impairment of assets	(73 566)	(74 993)

Debt securities measured at fair value through other comprehensive income

	31.12.2020	31.12.2019
Debt securities issued by central governments	21 378 138	18 639 761
T-bills	1 737 500	-
T-bonds	19 390 658	18 390 151
Other	249 980	249 610
Debt securities issued by central banks	1 000 000	3 000 508
Debt securities issued by banks	8 942 332	3 632 368
Debt securities issued by business entities	8 787 943	2 732 829
Debt securities issued by local governments	2 629 087	2 937 533
Total	42 737 500	30 942 999
including impairment of assets (*)	(63 143)	(32 671)

(*) The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the ‘Revaluation reserve’ item and does not reduce the carrying amount.

Equity instruments designated for measurement at fair value through other comprehensive income.

The portfolio of equity instruments designated for measurement at fair value through other comprehensive income includes the investments that the Group considers as strategic.

	fair value as at 31.12.2020	Dividends recognized in 2020
Entity X from construction sector	50 701	-
Entity Y from construction sector	2 862	-
Entity Z from construction sector	15 162	-
Entity providing credit information	239 618	24 104
Infrastructure entity of Polish banking sector	18 977	1 382
Intermediary in transactions among financial entities	4 370	-
Total	331 690	25 486

	fair value as at 31.12.2019	Dividends recognized in 2019
Entity X from construction sector	29 371	-
Entity Y from construction sector	859	-
Entity providing credit information	176 965	20 155
Infrastructure entity of Polish banking sector	14 327	1 095
Intermediary in transactions among financial entities	3 810	-
Total	225 332	21 250

In 2020 and 2019 the Group did not sell any investments in equity instruments designated for measurement at fair value through other comprehensive income.

2019

fair value at the derecogniton date

net result

from sale

Stock exchange

Total

Equity instruments mandatorily measured at fair value through profit or loss

	31.12.2020	31.12.2019
Shares	160 486	125 454
Investment certificates	-	20 665
Total	160 486	146 119

Investment debt securities according to contractual maturity

	31.12.2020	31.12.2019
Debt securities, including:
up to 1 month	2 232 610	3 719 821
between 1 and 3 months	3 626 094	66 038
between 3 months and 1 year	9 415 410	3 746 821
between 1 and 5 years	34 992 346	25 630 355
over 5 years	19 732 591	12 358 629
Total	69 999 051	45 521 664

Investment debt securities by currency

	31.12.2020	31.12.2019
PLN	61 619 632	39 593 621
EUR	1 801 045	2 695 315
USD	6 578 374	3 232 728
Total	69 999 051	45 521 664

29. Assets and liabilities held for sale

As at 31 December 2020 non-current assets classified as held for sale are identified non-current assets meeting requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’:

 real estate,

 other property, plant and equipment

 assets and liabilities Dom Inwestycyjny Xelion Sp. z o.o.

After the sale of Dom Inwestycyjny Xelion Sp. z o.o., the Group will continue to provide services for which Dom Inwestycyjny Xelion Sp. z o.o. it generates its income. Therefore, the sale of this Company is not a discontinued operation from the Group's perspective.

Assets and liabilities held for sale

	31.12.2020	31.12.2019
ASSETS HELD FOR SALE
Property, plant and equipment	14 619	17 175
Assets entity Dom Inwestycyjny Xelion Sp. z o.o.	39 504	-
Total	54 123	17 175
ASSETS HELD FOR SALE
Liabilities entity Dom Inwestycyjny Xelion Sp. z o.o.	82 643	-
Total	82 643	-

The changes in the balance of assets and liabilities held for sale

	2020	2019
ASSETS HELD FOR SALE
Opening balance	17 175	11 550
Increases including:	39 504	50 127
assets entity Dom Inwestycyjny Xelion Sp. z o.o.	39 504	-
transfer from property, plant and equipment	-	39 314
transfer from investment properties	-	10 813
other	-	-
Decreases including:	(2 556)	(44 502)
transfer to property, plant and equipment	-	(290)
disposal	-	(43 560)
other	(2 556)	(652)
Closing balance	54 123	17 175
Liabilities associated with assets held for sale
Opening balance	-	-
Increases including:	82 643	-
liabilities entity Dom Inwestycyjny Xelion Sp. z o.o.	82 643	-
Closing balance	82 643	-

The effect of disposal of other assets

	2020	2019
Sales revenues	-	53 709
Net carrying amount of disposed assets (including sale costs)	-	(43 560)
Profit/loss on sale before income tax	-	10 149

The assets and liabilities of Dom Inwestycyjny Xelion Sp. z o.o. included in the assets and liabilities held for sale by the Group.

Dom Inwestycyjny Xelion Sp. z o.o. assets and liabilities items classified by the Group as held for sale is presented below:

	31.12.2020 BEFORE THE ELIMINATION OF CROSS-TRANSACTIONS	ELIMINATION OF CROSS-TRANSACTIONS	31.12.2020 AFTER THE ELIMINATION OF CROSS-TRANSACTIONS
ASSETS HELD FOR SALE
Loans and advances to banks	80 3703	(80 373)	-
Investments (placement) securities: Measured at fair value through other comprehensive income (debt securities)	28 128	-	28 128
Intangible assets	1 534	-	1 534
Property, plant and equipment	4 099	-	4 099
Other assets	5 881	(138)	5 743
TOTAL	120 015	(80 511)	39 504
LIABILITIES HELD FOR SALE
Amounts due to customers	75 630	-	75 630
Provisions	847	-	847
Other liabilities	6 171	(5)	6 166
TOTAL	82 648	(5)	82 643

30. Intangible assets

	31.12.2020	31.12.2019
Intangible assets, including:	1 260 449	869 883
research and development expenditures	10 071	4 715
licenses and patents	760 462	467 147
other	144 155	156 963
assets under construction	345 761	241 058
Goodwill	747 648	747 648
Total	2 008 097	1 617 531

The item ‘Goodwill’ contains:

 goodwill recognized upon acquisition of Pekao Investment Management S.A. and indirectly Pekao TFI S.A. by Bank Pekao S.A. It is determined the smallest identifiable cash-generating units (‘CGU’), to which the goodwill has been allocated in the amount of PLN 692 128 thousand,

 goodwill that was transferred to Bank Pekao S.A. on integration with Bank BPH S.A. It represents the goodwill recognized upon acquisition of Pierwszy Komercyjny Bank S.A. in Lublin (‘PKBL’) by Bank BPH S.A. and relates to those branches of the PKBL which were transferred to Bank Pekao S.A. as a result of integration with Bank BPH S.A. It is determined the smallest identifiable cash-generating units (‘CGU’), to which the goodwill has been allocated in the amount of PLN 51 675 thousand,

 goodwill recognized upon acquisition of Spółdzielcza Kasa Oszczędnościowo – Kredytowa im. Mikołaja Kopernika by Bank Pekao S.A. It is determined the smallest identifiable cash-generating units (‘CGU’), to which the goodwill has been allocated in the amount of PLN 960 thousand,

 goodwill recognized upon acquisition of Pekao Leasing i Finanse S.A. (formerly BPH Leasing S.A.) by Pekao Leasing Holding S.A. (formerly BPH PBK Leasing S.A.). It is determined the smallest identifiable cash-generating units (‘CGU’), to which the goodwill has been allocated in the amount of PLN 2 885 thousand.

In respect to the goodwill, the impairment tests are performed annually, irrespective of whether there is any indication that it may be impaired.

The impairment tests are performed by comparing the carrying amount of the CGU, including the goodwill, with the recoverable amount of the CGU. The recoverable amount is estimated on the basis of value in use of the CGU. The value in use is the present, estimated value of the future cash flows for the period of 5 years, taking into account the residual value of the CGU. The residual value of the CGU is calculated based on an extrapolation of cash flows projections beyond the forecast period using the growth rate presented in the table below. The forecasts of the future cash flows are based on the assumptions included the budget for 2020 and financial plan for 2021-2025. To discount the future cash flows, it is applied the discount rates, which includes the risk-free rate and the risk premium.

The growth rates and discount rates used in the impairment tests for goodwill are as follows.

	31.12.2020		31.12.2019
	GROWTH RATE	DISCOUNT RATE	GROWTH RATE	DISCOUNT RATE
Pekao Investment Management S.A. (including Pekao TFI S.A.)	2.50%	7.27%	2.50%	8.41%
PKBL	2.50%	7.96%	2.50%	8.41%

The impairment tests performed as at 31 December 2020 showed the surplus of the recoverable amount over the carrying amount of the CGU, and therefore no CGU impairments were recognized.

Sensitivity analysis

Estimating the recoverable amount is a complex process and requires the use of subjective assumptions. Relatively small changes in key assumptions may have a significant effect on the measurement of the recoverable amount.

The table below presents the surplus of recoverable amounts over the carrying amounts under the current assumptions and the maximum discount rates at which the carrying amounts and recoverable amounts of each CGU are equalized.

	31.12.2020		31.12.2019
	SURPLUS	MARGINAL VALUE OF THE DISCOUNT RATE	SURPLUS	MARGINAL VALUE OF THE DISCOUNT RATE
Pekao Investment Management S.A. (including Pekao TFI S.A.)	925 041	12.76%	1 034 207	14.64%
PKBL	35 369	8.88%	123 073	13.76%

Changes in ‘Intangibles assets’ in the course of the reporting period

2020	Research and development costs	Licenses and patents	other	assets under construction	goodwill	total
Gross value
Opening balance	77 649	2 836 389	211 347	241 058	747 648	4 114 091
Increases including:	6 176	527 850	1 099	571 182	-	1 106 307
acquisitions	-	8 468	-	562 934	-	571 402
transfer from investments outlays	1 647	462 873	1 030	-	-	465 550
the work carried out on their own	2 966	41 282	-	8 248	-	52 496
other	1 563	15 227	69	-	-	16 859
Decreases, including:	-	(21 858)	(499)	(466 479)	-	(488 836)
liquidation	-	(17 835)	(482)	(20)	-	(18 337)
sale	-	(4 023)	-	(579)	-	(4 602)
transfer from investments outlays	-	-	-	(465 550)	-	(465 550)
other	-	-	(17)	(330)	-	(347)
Closing balance	83 825	3 342 381	211 947	345 761	747 648	4 731 562
ACCUMULATED Amortization
Opening balance	72 934	2 369 242	54 384	-	-	2 496 560
Amortization	820	216 396	13 870	-	-	231 086
Liquidation	-	(17 835)	(482)	-	-	(18 317)
Sale	-	(3 624)	-	-	-	(3 624)
Other	-	17 740	20	-	-	17 760
Closing balance	73 754	2 581 919	67 792	-	-	2 723 465
impairment
Opening balance	-	-	-	-	-	-
Increases	-	-	-	-	-	-
Decreases	-	-	-	-	-	-
Closing balance	-	-	-	-	-	-
net value
Opening balance	4 715	467 147	156 963	241 058	747 648	1 617 531
Closing balance	10 071	760 462	144 155	345 761	747 648	2 008 097

Changes in ‘Intangibles assets’ in the course of the reporting period

2019	Research and development costs	Licenses and patents	other	assets under construction	goodwill	total
Gross value
Opening balance	72 456	2 671 395	209 638	149 013	747 648	3 850 150
Increases including:	5 197	206 194	1 784	294 625	-	507 800
acquisitions	-	5 316	-	263 073	-	268 389
transfer from investments outlays	2 220	190 477	864	-	-	193 561
the work carried out on their own	1 549	2 148	-	31 074	-	34 771
other	1 428	8 253	920	478	-	11 079
Decreases, including:	(4)	(41 200)	(75)	(202 580)	-	(243 859)
liquidation	-	(13 984)	(75)	-	-	(14 059)
sale	-	-	-	-	-	-
transfer from investments outlays	-	-	-	(193 561)	-	(193 561)
other	(4)	(27 216)	-	(9 019)	-	(36 239)
Closing balance	77 649	2 836 389	211 347	241 058	747 648	4 114 091
ACCUMULATED Amortization
Opening balance	72 453	2 210 140	40 811	-	-	2 323 404
Amortization	422	191 031	13 648	-	-	205 101
Liquidation	-	(13 984)	(75)	-	-	(14 059)
Sale	-	-	-	-	-	-
Other	59	(17 945)	-	-	-	(17 886)
Closing balance	72 934	2 369 242	54 384	-	-	2 496 560
impairment
Opening balance	-	-	-	-	-	-
Increases	-	-	-	-	-	-
Decreases	-	-	-	-	-	-
Closing balance	-	-	-	-	-	-
net value
Opening balance	3	461 255	168 827	149 013	747 648	1 526 746
Closing balance	4 715	467 147	156 963	241 058	747 648	1 617 531

In the period from 1 January to 31 December 2020 the Group acquired intangible assets in the amount of PLN 570 342 thousand (in 2019 – PLN 268 389 thousand).

In the period from 1 January to 31 December 2020 and in 2019 there have been no intangible assets whose title is restricted and pledged as security for liabilities.

Contractual commitments

As at 31 December 2020 the contractual commitments for the acquisition of intangible assets amounted to PLN 116 448 thousand, whereas as at 31 December 2019 - PLN 39 911thousand.

31. Property, plant and equipment

	31.12.2020	31.12.2019
Non-current assets, including:	1 791 346	1 743 300
land and buildings	1 224 142	1 288 838
machinery and equipment	384 718	288 008
transport vehicles	73 407	73 528
other	109 079	92 926
Non-current assets under construction and prepayments	128 101	176 952
Total	1 919 447	1 920 252

Changes in ‘Property, plant and equipment’ in the course of the reporting period

2020	lands and buildings	machinery and equipment	means of transportation	other	Non-current assets under construction and prepayments	total
Gross value
Opening balance	2 788 773	1 459 397	134 813	465 674	176 952	5 025 609
Increases, including:	176 264	287 113	49 747	39 599	233 319	786 042
acquisitions	18 236	75 959	24 768	359	233 319	352 641
other	106 185	20 780	23 350	916	-	151 231
transfer from non-current assets under construction	51 843	190 374	1 629	38 324	-	282 170
Decreases, including:	(16 317)	(191 080)	(29 219)	(14 462)	(282 170)	(533 248)
liquidation and sale	(13 335)	(110 750)	(6 951)	(10 788)	-	(141 824)
transfer to non-current assets held for sale	-	-	-	-	-	-
other	(2 982)	(80 330)	(22 268)	(3 674)	-	(109 254)
transfer from non-current assets under construction	-	-	-	-	(282 170)	(282 170)
Closing balance	2 948 720	1 555 430	155 341	490 811	128 101	5 278 403
Accumulated Depreciation
Opening balance	1 493 849	1 168 869	61 285	372 663	-	3 096 666
Increases, including:	232 477	130 944	44 144	23 097	-	430 662
depreciation	161 103	114 953	13 813	17 996	-	307 865
other	71 374	15 991	30 331	5 101	-	122 797
Decreases, including:	(8 164)	(130 833)	(24 258)	(14 113)	-	(177 368)
liquidation and sale	(8 023)	(104 441)	(2 354)	(10 493)	-	(125 311)
transfer to non-current assets held for sale	-	-	-	-	-	-
other	(141)	(26 392)	(21 904)	(3 620)	-	(52 057)
Closing balance	1 718 162	1 168 980	81 171	381 647	-	3 349 960
impairment
Opening balance	6 086	2 520	-	85	-	8 691
Increases	2 957	-	763	-	-	3 720
Decreases	(2 527)	(788)	-	-	-	(3 315)
Closing balance	6 416	1 732	763	85	-	8 996
net value
Opening balance	1 288 838	288 008	73 528	92 926	176 952	1 920 252
Closing balance	1 224 142	384 718	73 407	109 079	128 101	1 919 447

Changes in ‘Property, plant and equipment’ in the course of the reporting period

2019	lands and buildings	machinery and equipment	means of transportation	other	Non-current assets under construction and prepayments	total
Gross value
Opening balance	2 296 470	1 360 208	98 897	468 456	142 168	4 366 199
Impact of IFRS 16 Application	538 439	75 415	-	-	-	613 854
Opening balance with impact of IFRS 16	2 834 909	1 435 623	98 897	468 456	142 168	4 980 053
Increases, including:	72 162	112 091	74 850	37 916	208 766	505 785
acquisitions	981	5 866	66 136	1 079	208 545	282 607
other	32 529	7 413	8 714	324	221	49 201
transfer from non-current assets under construction	38 652	98 812	-	36 513	-	173 977
Decreases, including:	(118 298)	(88 317)	(38 934)	(40 698)	(173 982)	(460 229)
liquidation and sale	(44 588)	(68 199)	(8 353)	(40 237)	-	(161 377)
transfer to non-current assets held for sale	(66 351)	(18 940)	-	(98)	(5)	(85 394)
other	(7 359)	(1 178)	(30 581)	(363)	-	(39 481)
transfer from non-current assets under construction	-	-	-	-	(173 977)	(173 977)
Closing balance	2 788 773	1 459 397	134 813	465 674	176 952	5 025 609
Accumulated Depreciation
Opening balance	1 372 357	1 125 427	45 868	395 413	-	2 939 065
Increases, including:	185 119	127 065	20 208	15 625	-	348 017
depreciation	185 072	78 434	17 035	15 490	-	296 031
other	47	48 631	3 173	135	-	51 986
Decreases, including:	(63 627)	(83 623)	(4 791)	(38 375)	-	(190 416)
liquidation and sale	(34 994)	(64 862)	(4 579)	(37 957)	-	(142 392)
transfer to non-current assets held for sale	(28 518)	(17 464)	-	(93)	-	(46 075)
other	(115)	(1 297)	(212)	(325)	-	(1 949)
Closing balance	1 493 849	1 168 869	61 285	372 663	-	3 096 666
impairment
Opening balance	4 328	2 712	-	152	-	7 192
Increases	2 885	-	-	-	-	2 885
Decreases	(1 127)	(192)	-	(67)	-	(1 386)
Closing balance	6 086	2 520	-	85	-	8 691
net value
Opening balance	919 785	232 069	53 029	72 891	142 168	1 419 942
Closing balance	1 288 838	288 008	73 528	92 926	176 952	1 920 252

In the period from 1 January to 31 December 2020 the Group acquired property, plant and equipment in the amount of PLN 352 641 thousand (in 2019 - PLN 282 607 thousand), while the value of property, plant and equipment sold amounted to PLN 5 254 thousand (in 2019 - PLN 12 149 thousand).

The amount of compensations received from third parties for impairment of loss of property, plant and equipment items recognized in the income statement for 2020 stood at PLN 1 827 thousand (in 2019 - PLN 2 674 thousand).

In the period from 1 January to 31 December 2020 and in 2019 there have been no property, plant and equipment whose title is restricted and pledged as security for liabilities.

Contractual commitments

As at 31 December 2020 the contractual commitments for the acquisition of property, plant and equipment amounted to PLN 45 043 thousand (as at 31 December 2019 – PLN 39 481 thousand).

32. Investment property

The Group values investment property using the historical cost model.

The rights to sell the investment property and the rights to transfer related revenues and profits are not a subject to limitations.

Changes in ‘Investment property’ in the course of the reporting period

	2020	2019
Gross value
Opening balance	-	18 818
Increases, including:	-	-
acquisitions	-	-
transfer from property plant and equipment	-	-
other	-	-
Decreases, including:	-	(18 818)
sale of real estate	-	-
transfer to non-current assets held for sale	-	(18 615)
transfer to property plant and equipment	-	(203)
other	-	-
Closing balance	-	-
accumulated depreciation
Opening balance	-	7 631
Increases, including:	-	219
depreciation for the period	-	219
transfer from property plant and equipment	-	-
other	-	-
Decreases, including:	-	(7 850)
sale of real estate	-	-
transfer to non-current assets held for sale	-	(7 802)
transfer to property plant and equipment	-	(48)
other	-	-
Closing balance	-	-
impairment
Opening balance	-	19
Increases, including:	-	-
impairment charges	-	-
Decreases, including:	-	(19)
sale of real estate	-	-
transfer to non-current assets held for sale	-	-
other	-	(19)
Closing balance	-	-
net value
Opening balance	-	11 168
Closing balance	-	-

The following amounts of revenues and costs associated with investment properties have been recognized in the income statement

	2020	2019
Rental revenues from investment properties	2 041	2 215
Direct operating expenses associated with investment properties (including repair and maintenance costs) which generated rental revenues during the reporting period	(528)	(541)
Direct operating expenses associated with investment properties (including repair and maintenance costs) which did not generate rental revenues during the reporting period	-	-

33. Other assets

	31.12.2020	31.12.2019
Prepaid expenses	51 868	43 963
Accrued income	219 977	174 809
Interbank and interbranch settlements	4 002	16 465
Other debtors	262 552	272 616
Card settlements	520 893	666 072
Total	1 059 292	1 173 925

Prepaid expenses represent expenditures, which will be amortized against income statement in the forthcoming reporting periods.

34. Assets pledged as security for liabilities

type of transaction AS AT 31.12.2020	Security	carrying value of assets pledged as security for liabilities	nominaL value of assets pledged as security for liabilities	value of liabilities subject to Security
Repo transactions	bonds	742 928	699 155	742 491
Coverage of Fund for protection of guaranteed assets to the benefit of the Bank Guarantee Fund	bonds	704 821	660 000	-
Coverage of payment commitments to the guarantee fund for the Bank Guarantee Fund	bonds	145 331	140 000	130 265
Coverage of payment commitments to the resolution fund for the Bank Guarantee Fund	bonds	306 999	292 800	267 598
Lombard and technical loan	bonds	5 852 305	5 628 888	-
Other loans	bonds	361 456	349 400	302 880
Debt securities issued	loans, bonds	1 837 586	1 846 458	1 319 273
Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW)	bonds, cash deposits	43 034	43 034	-
Derivatives	bonds	34 389	33 128	11 252
Uncommitted Collateralized Intraday Technical Overdraft Facility Agreement	bonds	42 345	32 304	-

type of transaction AS AT 31.12..2019	Security	carrying value of assets pledged as security for liabilities	nominaL value of assets pledged as security for liabilities	value of liabilities subject to Security
Repo transactions	bonds	597 540	584 833	598 241
Coverage of Fund for protection of guaranteed assets to the benefit of the Bank Guarantee Fund	bonds	652 929	615 000	-
Coverage of payment commitments to the guarantee fund for the Bank Guarantee Fund	bonds	82 529	81 000	79 123
Coverage of payment commitments to the resolution fund for the Bank Guarantee Fund	bonds	239 577	232 000	208 549
Lombard and technical loan	bonds	5 758 095	5 548 332	-
Other loans	bonds	373 537	360 100	314 430
Debt securities issued	loans, bonds	1 871 923	1 872 149	1 342 437
Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW)	bonds, cash deposits	32 645	32 645	-
Derivatives	bonds	54 461	53 452	32 631

The freeze on securities is a consequence of:

 in case of Repo and Sell-buy-back transactions – binding money market standards for such transactions,

 in case of freeze to the benefit of BFG – binding provisions of the Law on Banking Guaranty Fund BFG,

 in case of lombard and technical loans – policy and standards, applied by the National Bank of Poland NBP,

 in case of other loans, deposits and derivatives – terms and conditions of the agreement, entered between Bank Pekao S.A. and its clients,

 in case of issue of debt securities – binding provisions of the Law on Mortgage Bonds and Mortgage Banks,

 in case of freeze to the benefit of KDPW – with the status of the clearing member for brokerage transactions.

35. Amounts due to other banks

Amounts due to other banks by product type

	31.12.2020	31.12.2019
Current accounts	951 990	408 172
Interbank deposits and other liabilities	2 070 855	691 719
Loans and advances received	6 305 526	5 194 074
Repo transactions	589 928	218 449
Cash in transit	32 175	26 466
Lease liabilities	189	659
Total	9 950 663	6 539 539

Amounts due to other banks are measured at amortised cost.

Amounts due to other banks by currency

	31.12.2020	31.12.2019
PLN	5 810 450	2 988 513
CHF	153 117	187 225
EUR	3 961 307	3 312 304
USD	18 070	20 814
Other currencies	7 719	30 683
Total	9 950 663	6 539 539

36. Amounts due to customers

Amounts due to customers by entity and product type

	31.12.2020	31.12.2019
Amounts due to corporate, including:	59 387 184	54 146 677
current accounts	56 053 193	42 198 847
term deposits and other liabilities	3 333 991	11 947 830
Amounts due to budget entities, including:	12 281 660	10 915 849
current accounts	12 109 189	10 526 619
term deposits and other liabilities	172 471	389 230
Amounts due to individuals, including:	105 776 513	91 900 464
current accounts	88 796 952	57 013 373
term deposits and other liabilities	16 979 561	34 887 091
Repo transactions	152 563	379 792
Cash in transit	299 842	240 406
Lease liabilities	406 222	406 546
Total	178 303 984	157 989 734

Amounts due to customers are measured at amortised cost.

Amounts due to customers by currency

	31.12.2020	31.12.2019
PLN	149 723 872	130 477 778
CHF	496 394	421 014
EUR	17 337 848	17 418 917
USD	9 314 715	8 265 877
Other currencies	1 431 155	1 406 148
Total	178 303 984	157 989 734

37. Debt securities issued

Debt securities issued by type

	31.12.2020	31.12.2019
Liabilities from bonds	4 304 447	3 361 056
Certificates of deposit	523 305	1 604 344
Mortgage bonds	1 318 956	1 342 437
Total	6 146 708	6 307 837

Amounts debt securities issued are measured at amortised cost.

The Group redeems its own debt securities issued on a timely basis.

Debt securities issued by currency

	31.12.2020	31.12.2019
PLN	5 711 638	6 057 073
EUR	428 361	225 978
USD	6 709	24 786
Total	6 146 708	6 307 837

38. Subordinated liabilities

On 30 October 2017, the Bank issued 10 years subordinated bonds with a total nominal value of PLN 1.25 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 21 December 2017 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The bonds were introduced to trading on the ASO Catalyst market.

On 15 October 2018, the Bank issued 10 years subordinated bonds with a total nominal value of PLN 0.55 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 16 November 2018 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The bonds were introduced to trading on the ASO Catalyst market.

On 15 October 2018, the Bank issued 15 years subordinated bonds with a total nominal value of PLN 0.20 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 18 October 2018 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The bonds were introduced to trading on the ASO Catalyst market.

On 4 June 2019, the Bank issued 12 years subordinated bonds with a total nominal value of PLN 0.35 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 8 July 2019 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The bonds were introduced to trading on the ASO Catalyst market.

On 4 December 2019, the Bank issued 12 years subordinated bonds with a total nominal value of PLN 0.40 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 10 December 2019 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The bonds were introduced to trading on the ASO Catalyst market.

Subordinated liabilities by type

TYPE Of transaction	NOMINAL AMOUNT	CURRENCY	INTEREST RATE	ISSUE DATE	MATURITY DATE	SPECIAL TERMS	BALANCE SHEET VALUE AS AT 31.12.2020
Subordinated bonds	1 250 000	PLN	variable, WIBOR 6M + margin	30.10.2017	29.10.2027	Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA	1 253 762
Subordinated bonds	550 000	PLN	variable, WIBOR 6M + margin	15.10.2018	16.10.2028	Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA	552 116
Subordinated bonds	200 000	PLN	variable, WIBOR 6M + margin	15.10.2018	14.10.2033	Call option giving the Bank the right of early redemption within 10 years from the issue date, subject to the approval of the PFSA	200 876
Subordinated bonds	350 000	PLN	variable, WIBOR 6M + margin	04.06.2019	04.06.2031	Call option giving the Bank the right of early redemption within 12 years from the issue date, subject to the approval of the PFSA	350 524
Subordinated bonds	400 000	PLN	variable, WIBOR 6M + margin	04.12.2019	04.06.2031	Call option giving the Bank the right of early redemption within 12 years from the issue date, subject to the approval of the PFSA	400 598
TOTAL	2 750 000						2 757 876

TYPE Of transaction	NOMINAL AMOUNT	CURRENCY	INTEREST RATE	ISSUE DATE	MATURITY DATE	SPECIAL TERMS	BALANCE SHEET VALUE AS AT 31.12.2019
Subordinated bonds	1 250 000	PLN	variable, WIBOR 6M + margin	30.10.2017	29.10.2027	Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA	1 257 025
Subordinated bonds	550 000	PLN	variable, WIBOR 6M + margin	15.10.2018	16.10.2028	Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA	553 926
Subordinated bonds	200 000	PLN	variable, WIBOR 6M + margin	15.10.2018	14.10.2033	Call option giving the Bank the right of early redemption within 10 years from the issue date, subject to the approval of the PFSA	201 534
Subordinated bonds	350 000	PLN	variable, WIBOR 6M + margin	04.06.2019	04.06.2031	Call option giving the Bank the right of early redemption within 12 years from the issue date, subject to the approval of the PFSA	350 937
Subordinated bonds	400 000	PLN	variable, WIBOR 6M + margin	04.12.2019	04.06.2031	Call option giving the Bank the right of early redemption within 12 years from the issue date, subject to the approval of the PFSA	401 071
TOTAL	2 750 000						2 764 493

39. Provisions

Changes in provisions in the reporting period

2020	provisions for litigation and claims (*)	Restructuring provision	Provisons for defined benefit Plans	provisions for undrawn credit facilities and guarantees issued	Other provisions	total
Opening balance	103 933	18 954	290 269	290 902	48 539	752 597
Provision charges/revaluation	107 705	144 430	23 529	240 153	14 005	529 822
Provision utilization	(17 743)	(82 307)	(29 715)	-	(11 714)	(141 479)
Provision releases	(9 744)	-	-	(150 517)	(70)	(160 331)
Foreign currency exchange differences	(164)	-	-	2 877	-	2 713
Other changes	(5 398)	-	10 797	-	(17)	5 382
Closing balance	178 589	81 077	294 880	383 415	50 743	988 704
Short term	32 678	81 077	24 529	52 373	383	191 040
Long term	145 911	-	270 351	331 042	50 360	797 664

(*) Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 90 939 thousand and a provision for earlyrepayments of consumer loans in the amount of PLN 19 661 thousand as at 31 December 2019.

2019	provisions for litigation and claims (*)	Restructuring provision	Provisons for defined benefit Plans	provisions for undrawn credit facilities and guarantees issued	Other provisions	total
Opening balance	54 890	-	289 287	240 698	50 210	635 085
Provision charges/revaluation	76 137	85 000	23 493	209 988	13 364	407 982
Provision utilization	(22 484)	(66 046)	(25 414)	-	(15 842)	(129 786)
Provision releases	(4 795)	-	(24)	(159 841)	-	(164 660)
Foreign currency exchange differences	-	-	-	57	-	57
Other changes	185	-	2 927	-	807	3 919
Closing balance	103 933	18 954	290 269	290 902	48 539	752 597
Short term	32 696	18 954	261	41 155	920	93 986
Long term	71 237	-	290 008	249 747	47 619	658 611

(*) Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 22 441 thousand and a provision for earlyrepayments of consumer loans in the amount of PLN 26 279 thousand as at 31 December 2019.

Provisions for litigation and claims

Provisions for litigation and claims include court, administrative and other legal proceedings. Provisions for litigation and claims were estimated in the amount of expected outflow of resources embodying economic benefits.

Provisions for litigation and claims also include the part of total provision created for legal risk related to foreign currency mortgage loans in CHF, in part relating to exposures already repaid (fully or partially). Details about the above provisions are presented in Note 5.7 and 6.2.

An issue related to the judgment of the Court of Justice of the European Union regarding consumer credit agreements

On 11 September 2019, the Court of Justice of the European Union (hereinafter the ,CJEU,) issued a judgment in Case C-383/18 concerning preliminary questions regarding the consumer's right to reduce the total cost of loan in the event of early repayment of consumer loan.

The Group analyzed the legal risk resulting from the above judgment and in accordance with IAS 37 ‘Provisions, contingent liabilities and contingent assets,’ assessed the probability of cash outflow as a refund of commission in connection with early repayment of loans made by borrowers before the abovementioned judgment of the CJEU.

For the purpose of estimating the aforementioned provision, the Group performed an analysis of data on early repayment of loans and complaints. As a result of the above, the Group has determined a matrix of probability of repayment depending on the amount of commission to be repaid and the period when the earlier repayment was made.

As at 31 December 2020 the provision regarding early repayment of consumer loans made before the judgment of the CJEU (i.e. before 11 September 2019) amounts to PLN 19.7 million (as at 31 December 2019f PLN 26.3 million).

The estimates required the Group to adopt expert assumptions and are associated with uncertainty. The Group monitors the validity of all assumptions adopted in the process of creating the above provision on an ongoing basis.

In relation to the above, the Group conducted a sensitivity analysis in relation to significant provisioning parameters, where a change in the level of these parameters would have the following impact on the amount of the provision:

PARAMETER	SCENARIO	IMPACT ON THE LEVEL OF PROVISION
Change in the number of complaints	+10%	+2.0
Change in the number of complaints	-10%	-2.0
Change in average refund amount	+10%	+2.0
Change in average refund amount	-10%	-2.0

In the case of early repayment of loans made by borrowers after the judgment of the CJEU (i.e. after 11 September 2019), the Group automatically reduces the borrower's total cost of loan and returns the funds to the customer.

In addition, with respect to balance sheet exposures as at 31 December 2020, the Group estimated possible future prepayments of these exposures. In accordance with the above, the Group recognized the amount of PLN 10 million in ‘Other liabilities’ (as at 31 December 2019 - PLN 9.5 million).

Restructuring provision

The Management Board of Bank Pekao S.A. informed that on 20 February 2020, in accordance with the Act of 13 March 2003 on special rules of terminating employment contracts for reasons not attributable to the employees (Journal of Laws, 2018, item 1969), adopted a resolution on the intended collective redundancies and the start of the consultation procedure for collective redundancies.

The intention of the Bank’s Management Board is to terminate employment contracts with up to 1 200 employees and amend terms and conditions of employment with up to 1 350 employees in the period from 13 March 2020 to 31 October 2020, whereby the Bank may take a unilateral decision to extend the process by no more than 5 months.

The Bank estimated all the costs of termination of employment contracts and amendment of terms and conditions of employment the Bank’s employees related to the collective redundancies, as well as of restructuring of branches network for the amount of PLN 144.4 million and the restructuring provision in this amount was created in the Bank's accounting books.

Saldo rezerwy restrukturyzacyjnej na dzień 31 grudnia 2020 roku dotyczy wypłat, które będą realizowane w roku 2021.

Provisions for defined benefits plans

Provisions for defined benefits plans consist of provisions for retirement benefits and death-in-service benefits.The present value of such obligations is measured by an independent actuary using the projected unit credit method.

Other provisions

Other provisions include in particular provisions for other employee benefits.

40. Other liabilities

	31.12.2020	31.12.2019
Deferred income	207 401	177 582
Provisions for holiday leave	65 867	62 768
Provisions for other employee-related liabilities	198 084	243 609
Provisions for administrative costs	96 230	140 913
Other costs to be paid (*)	75 867	77 075
Other creditors	1 032 648	707 971
Interbank and interbranch settlements	708 338	744 616
Card settlements	334 215	361 012
Total	2 718 650	2 515 546

(*) In this as at 31 December 2020 PLN 31 978 thousand of provision for future refunds of the part of the remuneration for sale of insurance products linked to loans (PLN 49 737 thousand as at 31 December 2019).

41. Defined benefit plans

Based on internal regulations in respect to remuneration, the employees of the Group or their families are entitled to defined benefits other than remuneration:

a) retirement benefits,

b) death-in-service benefits.

The present value of such obligations is measured by an independent actuary using the projected unit credit method.

The amount of the retirement benefits and death-in-service benefits is dependent on length of service and amount of remuneration. The expected amount of the benefits is discounted actuarially, taking into account the financial discount rate and the probability of an individual get to the retirement age or die while working respectively. The financial discount rate is determined by reference to market yields at the end of reporting period on government bonds. The probability of an individual get to the retirement age or die while working is determined using the multiple decrement model, taking into consideration the following risks: possibility of dismissal from service, risk of total disability to work and risk of death.

These defined benefit plans expose the Group to actuarial risk, such as:

 interest rate risk – the decrease in market yields on government bonds would increase the defined benefit plans obligations,

 remuneration risk – the increase in remuneration of the Group’s employees would increase the defined benefit plans obligations,

 longevity risk – the increase in life expectancy of the Group’s employees would increase the defined benefit plans obligations.

The principal actuarial assumptions as at 31 December 2020 are as follows:

 the discount rate at the level of 1.2% (2.0 % as at 31 December 2019),

 the future salary growth rate at the level of 2.5% (2.75 % as at 31 December 2019),

 the probable number of leaving employees calculated on the basis of historical data concerning personnel rotation in the Group,

 the mortality adopted in accordance with Life Expectancy Tables for men and women, published the Central Statistical Office, adequately adjusted on the basis of historical data of the Group.

Reconciliation of the present value of defined benefit plans obligations

The following table presents a reconciliation from the opening balances to closing balances for the present value of defined benefit plans obligations.

	2020	2019
Opening balance	290 269	289 287
Current service cost	17 741	15 915
Interest expense	5 788	7 554
Remeasurements of the defined benefit obligations:	10 964	2 174
actuarial gains and losses arising from changes in demographic assumptions	(2 691)	24 227
actuarial gains and losses arising from changes in financial assumptions	7 061	26 722
actuarial gains and losses arising from experience adjustments	6 594	(48 775)
Contributions paid by the employer	(29 715)	(25 414)
Business combination	(167)	753
Closing balance	294 880	290 269

Sensitivity analysis

The following table presents how the impact on the defined benefits obligations would have increased (decreased) as a result of a change in the respective actuarial assumptions by one percent.

31.12.2020	DEFINED BENEFIT PLANS OBLIGATIONS
31.12.2020	1 PERCENT INCREASE	1 PERCENT DECREASE
Discount rate	(25 539)	29 601
Future salary growth rate	28 914	(25 487)

31.12.2019	DEFINED BENEFIT PLANS OBLIGATIONS
31.12.2019	1 PERCENT INCREASE	1 PERCENT DECREASE
Discount rate	(24 367)	28 198
Future salary growth rate	27 622	(24 373)

Maturity of defined benefit plans obligations

The following table presents the maturity profile of the defined benefit plans obligations

	31.12.2020	31.12.2019
The weighted average duration of the defined benefit plans obligations (in years)	9.57	9.3

42. Share-based payments

System of Variable Remuneration for the Management Team

The system of variable remuneration is addressed to Employees defined in the Bank as persons in managerial positions, who have a significant impact on the risk profile of the Bank and who are key employees for the fulfillment of the Bank’s strategy, risk management and long-term increase of the Bank’s income.

The aim of the system is to support the execution of the Bank’s operational strategy, its risk management and to limit conflict of interests.

Under the system the participant who is a member of the Management Board may receive an individual bonus, while a participant who is not a member of the Management Board may receive a bonus based on the bonus pool approach ensuring comprehensive performance measurement at an individual level, organizational unit and results of the entire Bank as well as risk assessment’ verification of the Participant’s compliant behaviour with respect to law provisions and standards adopted by the Bank.

The compensation consists of cash payment and cash-settled share based payment realized in the form of phantom shares as cash equivalent amounting to the value of granted phantom shares.

During the reporting period ending on 31 December 2020 the Bank had the following share-based payments transactions

		SYSTEM 2016 (*)		SYSTEM 2017 (*)	SYSTEM 2018 (*)		SYSTEM 2019 (**)	SYSTEM 2020 (**)
Transaction type				Cash-settled share based payments
Start date of the assessment period		1 January 2016		1 January 2017		1 January 2018	1 January 2019	1 January 2020
Program announcement date		June 2016		April 2017		April 2018	January 2019	January 2020
Program granting date		19 April 2017		21 June 2018		25 July 2019	15 July 2020	Date of the Supervisory Board meeting at which the 2020 assessment will be made and the bonus will be awarded (and in the case of participants who are not members of the Management Board, the date of the Bank's Management Board meeting at which the bonus pool for 2020 will be launched and the 2020 assessment will be presented)
Number of instruments granted (pcs)		127 256		43 578		168 242	145 481	To be determined on the date the program is awarded
Maturity date		31 July 2022		31 July 2023		31 July 2024	31 July 2024	31 July 2025
Vesting date for Management Board Members and Executive Vice President		 40% in the year of program granting (settlement after 2 years retention period)  24% after 2 years from program granting date (settlement after 1 year retention period)  12% after 3 years from program granting date (settlement after 1 year retention period)  24% after 4 years from program granting date (settlement after 1 year retention period)		 40% in the year of program granting (settlement after 2 years retention period)  24% after 2 years from program granting date (settlement after 1 year retention period)  12% after 3 years from program granting date (settlement after 1 year retention period)  24% after 4 years from program granting date (settlement after 1 year retention period)		 40% in the year of program granting (settlement after 1 years retention period)  12% after 2 years from program granting date (settlement after 1 year retention period)  24% after 3 years from program granting date (settlement after 1 year retention period)  24% after 4 years from program granting date (settlement after 1 year retention period)	 60% in the year of program granting (settlement after 1 years retention period)  13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period)  13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period)  13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period)	 60% in the year of program granting (settlement after 1 years retention period)  13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period)  13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period)
Vesting date for remaining participants		 60% in the year of program granting (settlement after 2 years retention period)  20% after 2 years from program granting date (settlement after 1 year retention period)  20% after 3 years from program granting date (settlement after 1 year retention period)		 60% in the year of program granting (settlement after 2 years retention period)  20% after 2 years from program granting date (settlement after 1 year retention period)  20% after 3 years from program granting date (settlement after 1 year retention period)		 60% in the year of program granting (settlement after 2 years retention period)  13.34% after 1 years from program granting date (settlement after 1 year retention period)  13.34% after 2 years from program granting date (settlement after 1 year retention period)  13.32% after 3 years from program granting date (settlement after 1 year retention period)	 60% in the year of program granting (settlement after 2 years retention period)  13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) 1  13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period)  13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period)	 60% in the year of program granting (settlement after 1 years retention period)  13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period)  13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period)
Vesting conditions			Risk assessment, Compliance assessment, Continuous employment, Reaching the aim based on financial results of the Bank for a given period
Program settlement	()The participant will receive a cash payment amounting to the number the possessed phantom shares times the arithmetic mean of the Bank’s share prices at the Warsaw Stock Exchange:  in case of the settlement made at the dates of instalment after the mandatory retention period, for a month preceding the day of General Meeting approving the financial statements for a given year,  in case of settlement made in the voluntary retention period, for 10 working days following the day of release of the financial report in a given quarter, and benefits from acquired phantom shares in the amount equivalent to dividend paid to shareholders in the retention period for shares acquired by the participant. (*) The participant will receive a cash payment amounting to the number the possessed phantom shares times the average closing price of the Bank’s shares at the Warsaw Stock Exchange for 30 calendar days preceding the day of the Supervisory Board meeting, where it evaluates the Bank's financial statements for a given year and benefits from acquired phantom shares in the amount corresponding to the dividend paid to shareholders during the mandatory retention period for shares acquired by the participant.

Since January 2019, the System of Variable Remuneration for the Management Team has been in force, reflecting the provisions of the resolution of the General Meeting of the Bank on adjusting the remuneration of members of the management board to the requirements of the Act on the principles of determining the remuneration of persons managing certain companies.

For the System 2016, 2017, 2018, 2019 the fair value of the program was estimated based upon the Bank’s shares price on the WSE as of the balance sheet date and expected number of phantom shares to which the rights will be acquired.

For the System 2020, as of 31 December 2020 the Bank prepared the program valuation, presuming that the phantom shares were granted on 31 December 2020. This value will be changed at the actual date of granting the program.

The system of variable remuneration realized in the form of phantom shares is a program settled in cash, and therefore its fair value is adjusted on each balance sheet date until the the program settlement, which in case of this program coincides with the vesting date.

The carrying amount of liabilities for cash-settled phantom shares amounted to PLN 46 701 thousand as at 31 December 2020 (as at 31 December 2019 – PLN 44 493 thousand).

The total intrinsic value of liabilities for vested rights to phantom shares amounted to PLN 21 644 thousand as at 31 December 2020 (as at 31 December 2019 – PLN 33 585 thousand).

The remuneration expenses for 2020 relating to the system of variable remuneration in the form of phantom shares amounted to PLN 13 173 thousand (in 2019 - PLN 13 190 thousand).

The table below presents changes in the number of Bank’s phantom shares.

	2019		2019
Opening balance	334 346	276 564
Granted during the year	147 729	168 242
Redeemed during the year	-	-
Exercised during the year	(127 843)	(110 460)
Terminated during the year	-	-
Existing at the period-end	354 232	334 346

The table above does not present the number of shares granted in respect of System 2020. This number will be determined in 2021 after evaluationl of the financial statements for 2020 by the Supervisory Board. The hypothetical number of shares determined on the basis of the base value of the granted bonus to each of the program participants and arithmetic mean of the Bank’s share price on the WSE in December 2020 amounts to 235 623.

System of Variable Remuneration for the Management Team of the subsidiaries Pekao

In order to meet the requirements concerning the rules of establishing the policy of variable remuneration components for individuals holding managerial positions (Regulation of the Minister of Development and Finance on the risk management system and internal control system, remuneration policy and a detailed method of estimating internal capital in banks of 6 March 2017 (Official Journal from 2016, item 1988, 1948, 1997 and 2260 and from 2017, item 85), the Bank’s subsidiaries, Pekao Bank Hipoteczny S.A., Pekao Leasing Sp. z o.o., Pekao Investment Banking S.A, Dom Inwestycyjny Xelion Sp. z o.o., Pekao Faktoring Sp. z o.o,. Pekao Direct Sp. z o.o. and Pekao Towarzystwo Funduszy Inwestycyjnych S.A. use a variable remuneration system for the management.

Within the system participant can receive the bonus depending on the performance and results of work of the participant, of the business unit and the company's results in the area of responsibility of the person, taking into account the results of the whole company, as well as verification of the compliance of Participant’s behaviour with respect to law provisions and standards adopted by the company.

At least 40 % components of variable renumerations is settled and paid in the time-period of 3 to 5 years since the granting date.

The companies measure the future employees benefits at fair value of accepted liabilities, in accordance with IAS 19 ‘Employee benefits’. Results of liabilities meassurement at fair value are presented in income statement as personnel expenses.

The carrying amount of liabilities for cash-settled phantom shares amounted to PLN 5 216 thousand as at 31 December 2020 (as at 31 December 2019 – PLN 6 621 thousand).

The remuneration expenses for 2020 relating to the system of variable remuneration in the form of phantom shares amounted to PLN 2 757 thousand (in 2019 - PLN 3 405 thousand).

43. Leasing

The Group as a Lessor

As a lessor, the Group acts in premises rental contracts classified as operating leases.

In 2020, the Group recognized revenues from the rental of premises, terminals , IT equipment and car leasing in the amount of PLN 26 604 thousand (in 2019 - PLN 20 848 thousand).

The table below presents the maturity analysis of lease payments, presenting the undiscounted lease payments to be received after the balance sheet date.

	31.12.2020	31.12.2019
Up to 1 year	3 440	2 668
Between 1 and 2 years	1 096	917
Between 2 and 3 years	717	709
Between 3 and 4 years	422	613
Between 4 and 5 years	121	486
Over 5 years	85	4 515
Total	5 881	9 908

The Group as Lessee

As a lessee, the Group acts in building and IT infrastructure lease contracts.

Information on lease contracts in which the Group acts as a lessee is presented below in item ‘Right-of-use assets’.

2020	LANDS AND BUILDINGS	MACHINERY AND EQUIPMENT	means of transport	total
Opening balance	436 812	-	28 125	464 937
Depreciation	( 117 297)	-	(11 472)	(128 769)
Additions/Increase to right-of-use assets	64 419	-	1 694	66 113
Lease change	35 962	-	419	36 381
Derecognition of right-of-use assets	(4 805)	-	(2 407)	(7 212)
Closing balance	415 091	-	16 359	431 450

2019	LANDS AND BUILDINGS	MACHINERY AND EQUIPMENT	means of transport	total
Opening balance	538 439	75 415	36 142	649 996
Depreciation	(110 473)	(18 854)	(10 809)	(140 136)
Additions to right-of-use assets	31 509	-	3 091	34 600
Lease change	2 385	-	-	2 385
Derecognition of right-of-use assets	(25 048)	(56 561)	(299)	(81 908)
Closing balance	436 812	-	28 125	464 937

Lease liabilities

	31.12.2020	31.12.2019
Amounts due to other banks	189	659
Amounts due to customers	406 222	406 546
Total	406 411	407 205

Amounts recognized in income statement

2020 – LEASES UNDER IFRS 16	31.12.2020	31.12.2019
Interest expense on lease liabilities	(10 461)	(13 388)
Expenses relating to short-term leases presented in ‘Other administrative expenses’	(2 217)	(20 755)
Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets presented in ‘Other administrative expenses’	(1 621)	(153)

Amounts recognized in cash flow statement

In 2020, total cash outflow for leases amounted to PLN – 121 321 thousand (in 2019 - PLN 241 124 thousand).

44. Contingent commitments

Court cases

As of 31 December 2020 the following court cases for payment are pending with involvement of the Group, that are important in view of the value of the object of litigation:

1) in the group of liabilities (against the Group):

 brought by a legal person – lawsuit for payment by virtue of improper performance of an agreement, value of the object of litigation EUR 17 521 646 (which as of 30 September 2020 at mid NBP rate was equivalent to PLN 79 316 987.11), litigation initiation date – 19 July 2018, on 27 May 2019 the Arbitration Court at the Polish Chamber of Commerce passed a sentence dismissing the suit in its entirety, the sentence is legally valid but the plaintiff lodged a complaint with a court of general jurisdiction and demand the sentence to be repealed, in the present factual and legal circumstances the Bank assesses the funds outflow risk as possible,

 brought by the receiver for a joint stock company in liquidation bankruptcy – lawsuit for payment of compensation for a damage incurred as a result of the Bank’s demanding immediate payment of the amounts due in virtue of payment of the price from the credit receivables transfer agreement and conducting debt enforcement collection of the portion of the price remaining for payment by a court enforcement officer, value of the object of litigation PLN 57 450 130 litigation initiation date – 30 April 2015, in the present factual and legal circumstances the Bank assesses the funds outflow risk as possible,

 brought by a natural person – lawsuit for payment by the Bank of an amount charged by virtue of settlement of financial future or forward transactions, value of the object of litigation PLN 38 916 555.18, litigation initiation date – 2 October 2016, on 6 May 2019 the Regional Court in Warsaw issued a sentence ordering the Bank to pay the amount PLN 3 392 349.18 and as to the remainder the Court dismissed the suit, the sentence is not legally valid, the Bank and the plaintiff appealed against the judgment. In the present factual and legal circumstances regarding the amount awarded by the Circuit Court the Bank assesses the funds outflow risk as probable and in the remaining scope as possible,

 brought by a beneficiary of warranty – lawsuit for payment of a claim by virtue of the warranty issued by the Bank, value of the object of litigation PLN 32 750 000 litigation initiation date – 14 January 2014, in the present factual and legal circumstances the Bank assesses the funds outflow risk as minor,

 brought by a natural person – lawsuit for payment of damages by the Bank resulting from improper conduct of a Group entity – former Pekao S.A. Central Brokerage House, the value of the object of litigation is PLN 30 000 000 - the date of the litigation initiation is 16 May 2019. On 7 February 2020 the Regional Court in Warsaw issued a sentence dismissing the suit in its entirety, the sentence is not legally valid. In the present factual and legal circumstances the Bank assesses the funds outflow risk as minor,

2) in the group of receivables (brought by the Group):

 Bank’s main intervention lawsuit against the parties of the main lawsuit – the object of the intervention is the demand for payment by virtue of the assignment of receivables securing Bank’s liabilities, value of the object of litigation isPLN 321 979 666.87, litigation initiation date – 26 October 2018,

 Bank’s lawsuit for payment against limited debtor by virtue of mortgage collateralizing repayment of the granted credit, value of the object of litigation PLN 132 877 901, litigation initiation date – 21 January 2016,

 Bank’s main intervention lawsuit against the parties of the main lawsuit – the object of the intervention is the demand for payment by virtue of the assignment of receivables securing Bank’s liabilities, value of the object of litigationPLN 119 020 334, litigation initiation date – 26 October 2018,

 Bank’s mutual lawsuit for payment of amounts due by virtue of the transfer of receivables, value of the object of litigation PLN 89 977 886, litigation initiation date – 28 February 2013,

 Bank’s main intervention lawsuit against the parties of the main lawsuit – the object of the intervention is the demand to execute (pay) the liabilities purchased by the Bank from one of the defendants against the other defendant, value of the object of litigation PLN 67 432 617.21 , litigation initiation date – 23 January 2006.

None of the litigations pending in the four quarter of the year 2020 before the court, authority competent for arbitrary proceedings or a body of public administration posed a threat for financial liquidity of the Group.

The Group created provisions for litigations against the Group entities which, according to the legal opinion, are connected with a risk of the funds outflow resulting from the fulfillment of the obligation. The value of the provisions as at 31 December 2020 is PLN 178 589 thousand (PLN 103 933 thousand as at 31 December 2019).

In addition, as at 31 December 2020 the Group assessed the legal risk of foreign currency mortgage loans in CHF and created a provision related to this risk. Details are presented in Note 6.2.

Financial commitments granted

Financial commitments granted by entity

	31.12.2020	31.12.2019
Financial commitments granted to:
banks	551 503	377 742
customers entities	39 930 464	35 678 506
budget entities	721 915	657 679
Total	41 203 882	36 713 927

Guarantees issued

Guarantees issued by entity

	31.12.2020	31.12.2019
Issued to banks:	1 647 148	1 868 388
guarantees	1 603 269	1 822 039
confirmed export letters of credit	43 879	46 349
Issued customers entities	10 610 484	10 087 707
guarantees	7 443 561	7 048 690
securities’ underwriting guarantees	3 013 647	2 982 379
sureties	153 276	56 638
Issued to budget entities:	1 360 653	682 865
guarantees	35 551	29 070
securities’ underwriting guarantees	1 325 102	653 795
Total	13 618 285	12 638 960

Off-balance sheet commitments received

Off-balance sheet commitments received by entity

	31.12.2020	31.12.2019
Financial received from:	563 455	1 297 658
banks	563 455	1 297 658
customers entities	-	-
budget entities	-	-
Guarantees received from:	20 345 840	18 071 470
banks	8 596 465	4 896 962
clients entities	10 642 784	12 159 551
budget entities	1 106 591	1 014 957
Total	20 909 295	19 369 128

Moreover, the Group has the ability to obtain financing from National Bank of Poland secured securities.

45. Share capital

Shareholding structure

CLASS/ISSUE		TYPE OF SHARES	NUMBER OF SHARES		NOMINAL VALUE OF CLASS/ISSUE	EQUITY COVERAGE	REGISTRATION DATE	DIVIDEND RIGHTS (FROM DATE)
A	Common bearer stock		137 650 000		137 650	fully paid-up	21.12.1997	01.01.1998
B	Common bearer stock		7 690 000		7 690	fully paid-up	06.10.1998	01.01.1998
C	Common bearer stock		10 630 632		10 631	fully paid-up	12.12.2000	01.01.2000
D	Common bearer stock		9 777 571		9 777	fully paid-up	12.12.2000	01.01.2000
E	Common bearer stock		373 644		374	fully paid-up	29.08.2003	01.01.2003
F	Common bearer stock		621 411		621	fully paid-up	29.08.2003	19.05.2006 16.05.2007
G	Common bearer stock		603 377		603	fully paid-up	29.08.2003	15.05.2008
H	Common bearer stock		359 840		360	fully paid-up	12.08.2004	01.01.2004
I	Common bearer stock		94 763 559		94 764	fully paid-up	29.11.2007	01.01.2008
Total number of Shares (pcs)				262 470 034
Total share capital in PLN thousand				262 470
Nominal value per share = PLN 1.00

Change in the number of shares (pcs)

2020	ISSUED AND FULLY PAID-UP SHARES	TOTAL
Opening balance	262 470 034	262 470 034
Closing balance	262 470 034	262 470 034

2019	ISSUED AND FULLY PAID-UP SHARES	TOTAL
Opening balance	262 470 034	262 470 034
Closing balance	262 470 034	262 470 034

46. Other capital and reserves, retained earnings and profit for the period

The table below presents the structure of the Group’s equity attributable to equity holders of the Bank

	31.12.2020	31.12.2098
Share premium	9 137 221	9 137 221
General banking risk fund	1 982 459	1 982 459
Other reserve capital	9 386 555	8 787 844
Revaluation reserves, in this:	1 355 621	359 668
remeasurements of the defined benefit liabilities (net of tax)	(83 590)	(74 718)
revaluation of debt financial instruments and loans measured at fair value through other comprehensive income (net of tax)	754 536	199 096
revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income (net of tax)	203 957	132 612
revaluation of hedging financial instruments (net of tax)	480 718	102 678
Other supplementary capital, in this:	381 413	398 238
supplementary capital	337 594	354 419
bonds convertible into shares - equity component	28 819	28 819
fund for brokerage activities	15 000	15 000
Other capital and reserves	22 243 269	20 665 430
Retained earnings	1 876 177	293 340
Net profit for the period	1 101 712	2 165 047
Retained earnings and net profit for the period	2 977 889	2 458 387
Total	25 221 158	23 123 817

The net profit of the Bank for 2019 in the amount of PLN 2 247 467 thousand was distributed in the following way: PLN 562 409 thousand was allocated to reserve capital, and the remaining part of the net profit in the amountof PLN 1 685 058 thousand was left undistributed.

47. Non - controlling interests

The below table presents the information for each of the subsidiaries that have non-controlling interests that are material to the Group

NAME OF THE SUBSIDIARY	cOUNTRY OF INCORPORATION AND PLACE OF BUSINESS	pERCENTAGE SHARE OF NON-CONTROLLING INTERESTS IN SHARE CAPITAL / VOTING RIGHTS		NET PROFIT FOR THE PERIOD ATTRIBUTABLE TO NON-CONTROLLING INTERESTS			ACCUMULATED NON-CONTROLLING INTERESTS
NAME OF THE SUBSIDIARY	cOUNTRY OF INCORPORATION AND PLACE OF BUSINESS	31.12.2020	31.12.2019	2020	2019	31.12.2020		31.12.2019
Pekao Financial Services Sp. z o.o.	Poland	33.50	33.50	1 189	1 570	11 349		11 491
Total				1 189	1 570	11 349		11 491

The summarized financial information of each of the subsidiaries that are material to the Group are presented below

	pekao FINANCIAL SERVICES SP. Z O.O.
	31.12.2020	31.12.2019
Loans and advances to banks	11 708	11 319
Intangible assets	16 454	15 284
Property, plant and equipment	12 904	16 077
Other items of assets	7 566	8 594
TOTAL ASSETS	48 632	51 274
Amounts due to customers	3 483	5 215
Other liabilities	9 419	9 340
Other items of liabilities	1 854	1 679
TOTAL LIABILITIES	14 756	16 234

	pekao FINANCIAL SERVICES SP. Z O.O.
	2020	2019
Revenue	65 030	64 545
Net profit for the period	3 550	4 687
Other comprehensive income	(27)	(23)
Total comprehensive income	3 523	4 664
Dividends paid to non-controlling interests	1 469	1 214
Cash flows from operating activities	15 413	17 250
Cash flows from investing activities	(7 324)	(10 948)
Cash flows from financing activities	(7 700)	(7 097)
Net change in cash and cash equivalents	389	(795)
Cash and cash equivalents at the beginning of the period	11 322	12 117
Cash and cash equivalents at the end of the period	11 711	11 322

48. Additional information to the consolidated cash flow statement

Cash and cash equivalents

	31.12.2020	31.12.2019
Cash and amounts due from Central Bank	4 456 279	5 162 682
Loans and receivables from banks with maturity up to 3 months	2 549 069	1 788 290
Cash and Cash equivalents presented in the cash flow statement	7 005 348	6 950 972

Restricted availability cash and cash equivalents as at 31 December 2020 amounted to PLN 150 198 thousand (PLN 2 101 957 thousand as at 31 December 2019).

Changes in liabilities arising from financing activities

	BALANCE AS AT 1.01.2020	CHANGES FROM FINANCING CASH FLOWS	NON-CASH CHANGES		BALANCE AS AT 31.12.2019
	BALANCE AS AT 1.01.2020	CHANGES FROM FINANCING CASH FLOWS	THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES	OTHER CHANGES	BALANCE AS AT 31.12.2019
Debt securities issued	6 307 837	(207 083)	18 767	27 187	6 146 708
Subordinated liabilities	2 764 493	-	-	(6 617)	2 757 876
Loans and advances received	5 194 074	815 828	295 838	(214)	6 305 526
Lease liabilities	407 205	(113 645)	-	112 851	406 411
Total	14 673 609	495 100	314 605	133 207	15 616 521

	BALANCE AS AT 1.01.2019	Impact of IFRS 16 application	BALANCE AS AT 1 JANUARY 2019 with impact of IFRS 16	CHANGES FROM FINANCING CASH FLOWS	NON-CASH CHANGES		BALANCE AS AT 31.12.2019
	BALANCE AS AT 1.01.2019	Impact of IFRS 16 application	BALANCE AS AT 1 JANUARY 2019 with impact of IFRS 16	CHANGES FROM FINANCING CASH FLOWS	THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES	OTHER CHANGES	BALANCE AS AT 31.12.2019
Debt securities issued	5 230 814	-	5 230 814	1 040 362	(3 487)	40 148	6 307 837
Subordinated liabilities	2 012 485	-	2 012 485	750 000	-	2 008	2 764 493
Loans and advances received	4 060 142	-	4 060 142	1 099 798	33 498	636	5 194 074
Lease liabilities	7 142	578 047	585 189	(199 461)	-	21 477	407 205
Total	11 310 583	578 047	11 888 630	2 690 699	30 011	64 269	14 673 609

49. Related party transactions

The transactions between the Bank and related parties are typical transactions arising from current operating activities conducted by the Bank. Such transactions mainly include loans, deposits, foreign currency transactions and guarantees.

The credit granting process applicable to the Bank’s management and entities related to the Bank

According to the Banking Act, credit transactions with Members of the Bank’s Management Board and Supervisory Board, persons holding managerial positions at the Bank, with the entities related financially or organizationally therewith, shall be effected according to Regulation adopted by the Supervisory Board of the Bank.

The Regulation provides detailed decision-making procedures, applicable to transactions with such persons and entities, also defining the decision-making levels authorized to take decisions. In particular, the transactions with the Members of the Bank’s Management Board or Supervisory Board or with an entity related therewith financially or organizationally, are subject to decisions taken by the Bank’s Management Board and Supervisory Board.

Members of the Bank’s Management Board and entities related therewith financially or organizationally may take advantage of credit products offered by the Bank on standard terms and conditions of the Bank. In particular, the Bank may not offer more advantageous credit interest rates to such persons or entities.

Credit risk assessment is performed using the methodology applied by the Bank, tailored to the client’s segment and type of transaction.

In case of entities related to the Bank, the standard credit procedures are applied, with transaction-related decisions taken exclusively at level of the Bank’s Head Office.

Related party transactions

Related party transactions as at 31 December 2020

Name of entity	RECEIVABLES FROM LOANs and PLACEMENTs	Securities	Receivables from Revaluation of derivatives	Other receivables	LIABILITIES FROM LOANS AND DEPOSITS	LIABILITIES FROM REVALUATION OF DERIVATIVES	other liabilities
PZU S.A. – the Bank‘s parent entity	1	-	911	3 839	87 519	-	2 238
Entities of PZU S.A. Group excluding of Bank Pekao S.A. Group entities	1	-	9 517	12 498	308 929	322	1 109
Key management personnel of the Bank Pekao S.A.	1 640	-	-	-	2 943	-	-
Total	1 642	-	10 428	16 337	399 391	322	3 347

Related party transactions as at 31 December 2019

Name of entity	RECEIVABLES FROM LOANs and PLACEMENTs	Securities	Receivables from Revaluation of derivatives	Other receivables	LIABILITIES FROM LOANS AND DEPOSITS	LIABILITIES FROM REVALUATION OF DERIVATIVES	other liabilities
PZU S.A. – the Bank‘s parent entity	255	-	-	7 751	53 255	637	151
Entities of PZU S.A. Group excluding of Bank Pekao S.A. Group entities	10 113	-	763	9 135	121 845	10 647	1 513
Key management personnel of the Bank Pekao S.A.	38	-	-	-	9 538	-	-
Total	10 406	-	763	16 886	184 638	11 284	1 664

Income and expenses from transactions with related parties for the period from 1 January to 31 December 2020

Name of entity	INterest income	interes expense	Fee and commission income	fee and commission expense	income from DERIVATIVES AND other	expenses from derivatives and other
PZU S.A. – the Bank ‘s parent entity	(1 644)	(417)	38 777	(533)	321	(3 136)
Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities	188	(445)	44 227	(208)	2 657	(15 014)
Key management personnel of the Bank Pekao S.A.	4	(16)	1	-	-	-
Total	(1 452)	(878)	83 005	(741)	2 978	(18 150)

Income and expenses from transactions with related parties for the period from 1 January to 31 December 2019

Name of entity	INterest income	interes expense	Fee and commission income	fee and commission expense	income from DERIVATIVES AND other	expenses from derivatives and other
PZU S.A. – the Bank ‘s parent entity	654	(621)	18 145	(681)	153	(2 026)
Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities	608	(1 579)	48 248	(143)	1 949	(24 479)
Key management personnel of the Bank Pekao S.A.	9	(41)	1	-	-	-
Total	1 271	(2 241)	66 394	(824)	2 102	(26 505)

Off-balance sheet financial liabilities and guarantees as at 31 December 2020

NAME OF ENTITY	GRANTED		RECEIVED
NAME OF ENTITY	FINANCIAL	GUARANTeES	FINANCIAL	GUARANTeE
PZU S.A. – the Bank‘s parent entity	2 710	108 637	-	530 702
Entities of PZU S.A. Group excluding of Bank Pekao S.A. Group entities	1 085	103 730	-	-
Key management personnel of the Bank Pekao S.A.	255	-	-	-
Total	4 050	212 367	-	530 702

Off-balance sheet financial liabilities and guarantees as at 31 December 2019

NAME OF ENTITY	GRANTED		RECEIVED
NAME OF ENTITY	FINANCIAL	GUARANTeES	FINANCIAL	GUARANTeE
PZU S.A. – the Bank‘s parent entity	2 801	15 000	-	489 728
Entities of PZU S.A. Group excluding of Bank Pekao S.A. Group entities	665	10 000	-	-
Key management personnel of the Bank Pekao S.A.	172	-	-	-
Total	3 638	25 000	-	489 728

Transactions with the State Treasury

The Group's transactions with the State Treasury were mostly related to treasury securities and banking services. These transactions are concluded and settled on terms obtainable by customers who are not related parties.

Remuneration expenses of the Bank’s Management Board and Supervisory Board Members

	value of benefits
	2020	2019
Management Board of the Bank
Short-term employee benefits (*)	11 285	12 223
Post-employment benefits	242	139
Long-term benefits (**)	897	1 370
Paid termination benefits	0	3 845
Share-based payments (***)	2 808	5 418
Total	15 232	22 995
Supervisory Board of the Bank
Short-term employee benefits (*)	1 131	1 049
Total	1 131	1 049

(*) Short-term employee benefits include: base salary, bonuses and other benefits due in next 12 months from the date of the balance sheet.

(**) The item ‘Other long-term benefit’ includes: provisions for deferred bonus payments.

(***) The value of share-based payments is a part of Personnel Expenses, recognized according to IFRS 2 during the reporting period in the income statement, representing the settlement of fair value of share options and shares, including phantom shares, granted to the Members of the Bank’s Management Board.

The Bank’s Management Board and Supervisory Board Members did not receive any remuneration from subsidiaries and associates in 2020 and 2019.

Remuneration expenses of Supervisory Boards and Management Boards of subsidiaries

	value of benefits
	2020	2019
Companies’ Management Boards
Short-term employee benefits	12 509	13 551
Post-employment benefits	1 204	1 590
Long-term benefits	1 547	1 180
Paid termination benefits	396	1 726
Total	15 656	18 047
Companies’ Supervisory Boards
Short-term employee benefits	689	732
Total	689	732

50. Repo and reverse repo transactions

The Group increases its funds by sales transactions with the repurchase promise granted (repo and sell-buy back) at the same price increased by interest.

Securities composing the balance sheet portfolio of the Group as well as securities with obligation of resale (reverse repo and buy-sell back transactions) may be a subject to repo and sell-buy back transactions.

Securities composing the balance sheet portfolio of the Group and treated as repo and sell-buy back transactions are not derecognized from the statement of financial position due to the fact that the Group holds all the benefits and the risk deriving from these assets.

	31.12.2020		31.12.2019
	fair value of assets	carrying amount of related liabilities	fair value of assets	Carrying amount of related liabilities
Financial assets held for trading
up to 1 month	455 011	454 765	218 252	218 449
Total financial assets held for trading	455 011	454 765	218 252	218 449
Financial assets measured at fair value through other comprehensive income
up to 1 month	287 917	287 726	379 287	379 792
Total financial assets measured at fair value through other comprehensive income	287 917	287 726	379 287	379 792
Total	742 928	742 491	597 539	598 241

The Group purchases financial instruments with the obligations of repurchase or resale (reverse-repo and buy-sell back) at the same price increased by interest.

Securities treated as reverse-repo and buy-sell back transactions are not disclosed at the statement of financial position due to the fact that the Group do not holds all the advantages of risks and awareness deriving from these assets.

	31.12.2020		31.12.2019
	CARRYING AMOUNT OF ASSETS	FAIR VALUE OF HEDGE ASSETS	CARRYING AMOUNT OF ASSETS	FAIR VALUE OF HEDGE ASSETS
Loans and advances to banks
up to 1 month	718 957	715 774	219 146	217 141
Total loans and advances to bank	718 957	715 774	219 146	217 141
Loans and advances to customers
up to 1 month	280 537	281 930	502 262	495 610
Total loans and advances to customers	280 537	281 930	502 262	495 610
Total	999 494	997 704	721 408	712 751

Financial assets subject to reverse repo and buy-sell back transactions constitute collateral accepted by the Group, which the Group has the right to sell or pledge.

	31.12.2020	31.12.2019
Fair value of assets pledged as collaterals, in this:	997 704	712 751
Short sale	742 804	184 799

51. Company Social Benefits Fund (‘ZFŚS’)

The Social Benefits Fund Act of 4 March 1994 with subsequent amendments introduced the requirement to create a Company’s Social Benefits Fund by all employers employing over 20 employees. The Bank and Group companies employing at least 20 staff have created the ZFŚS Fund and are making periodic charges to the ZFŚS Fund in amounts required by the Act. The basic aim of the ZFŚS Fund is to subsidize social assistance in benefit of the employees, former employees (pensioners and the retired) and entitled members of their families.

The liabilities of the ZFŚS Fund represent the accumulated value of charges made by the Company towards the ZFŚS Fund decreased by the amount of non-returnable expenditures of the ZFŚS Fund.

In the consolidated statement of financial position, the Group netted the ZFŚS Fund assets against the ZFŚS Funds value, due to the fact that the assets of the ZFŚS Fund do not represent the assets of the Group. For this reason the amount pertaining to the ZFŚS Fund in the consolidated statement of financial position as at 31 December 2020 and 31 December 2019 was zero.

The table below presents the assets according to type and book value, the balance of the Fund and costs related to ZFŚS

	31.12.2020	31.12.2019
Loans granted to employees	25 921	26 460
Cash at ZFŚS account	2 450	2 028
ZFŚS assets	28 371	28 488
ZFŚS value	28 371	28 488
		2019
Deductions made to ZFŚS during fiscal period	30 393	25 658

52. Subsequent events

Description of the Transaction

On 30 December 30 2020, the Bank Guarantee Fund (hereinafter ‘BGF’) decided to apply to Idea Bank S.A. the instrument of resolution due to the fulfillment of the following conditions:

1) the bankruptcy of Idea Bank S.A.,

2) there are no premises indicating that possible supervisory actions or actions of Idea Bank S.A. will allow to remove the risk of bankruptcy in due time,

3) initiation of resolution against Idea Bank S.A. was necessary in the public interest understood as the stability of the financial sector.

The resolution instrument applied by the BGF to Idea Bank S.A. consisted in the takeover by the Bank on 3 January 2021 with the effect specified in Art. 176 sec. 1 of the Act of 10 June 2016 on the Bank Guarantee Fund, the deposit guarantee system and forced restructuring (hereinafter the ‘BGF Act’) of Idea Bank SA, covering all its property rights and liabilities as at 31 December 2020 (hereinafter referred to as ‘Transaction’), excluding certain property rights and liabilities indicated in the BGF decision in question, including, inter alia:

1) property rights and liabilities related to actual, legal or tort related to:

a) trading in financial instruments and other activities relating to:

 financial instruments issued by GetBack S.A. and related entities of GetBack S.A.,

 investment certificates, in particular investment certificates issued by Lartiq (formerly Trigon) [Profit XXII NS FIZ, Profit XXIII, NS FIZ, Profit XXIV NS FIZ] represented by Lartiq TFI S.A. (formerly Trigon TFI S.A.), Universe NS FIZ, Universe 2 NS FIZ and other investment funds represented by Altus TFI S.A.,

b) providing insurance coverage, performing insurance intermediary activities or distribution of life insurances, if they are related to an insurance capital fund (also life insurance, where the insurance company's performance is determined based on specific indices or other base values),

c) providing services as an agent of an investment firm,

d) the activities of Idea Bank S.A., which are not covered by the Bank's statute,

and claims arising from these rights and liabilities, including those covered by civil and administrative proceedings, regardless of the date when they were raised.

2) shares in subsidiaries and associates of Idea Bank S.A.,

3) corporate bonds issued by GetBack S.A.,

hereinafter referred to as ‘Acquired Business’.

The takeover of the Acquired Business does not have a significant impact on the financial profile of the Bank, in particular on the capital and liquidity parameters of the Bank and the Group.

Transaction Justification

Idea Bank S.A. was a commercial bank offering banking services provided to individual and institutional clients, such as accepting cash deposits payable on demand or on a specified date and keeping accounts of these deposits, granting loans, granting bank guarantees, issuing securities. Idea Bank S.A. The capital adequacy ratio of Idea Bank S.A. according to the last available financial statements prepared as at 30 September 2020 was at the level of 2.51% (compared to 10.5% required by law) and was significantly below the regulatory requirements.

The initiation of the resolution process made it possible to reduce the effects of the bankruptcy risk of Idea Bank S.A., and the negative consequences for the banking sector related to this eventuality.

Price conditions

The takeover of Idea Bank S.A. was not related to the consideration payment by the Bank. As a result of the transaction, the Bank took over the assets and liabilities of Idea Bank S.A., the total estimated fair value of which was negative.

As indicated in the ‘Description of the Transaction’, the Bank did not acquire all the assets of Idea Bank S.A., in particular, the Bank did not take over shares in subsidiaries and associates.

Considering the above, the Bank received support from the BGF in the form of a subsidy in the amount of PLN 193 million in order to cover the difference between the value of the acquired liabilities and the value of the acquired property rights of Idea Bank S.A. The above funds were received by the Bank on 8 January 2021.

As an inseparable element of the entire Transaction, the Bank also received a guarantee from the BGF to cover losses resulting from the risk related to property rights or the entity's liabilities under the restructuring referred to in Art. 112 paragraph. 3 point 1 of the BGF Act (‘Loss Coverage Guarantee’), which includes a loss coverage guarantee resulting from credit risk related to loan exposures (‘CRM Guarantee’) and a loss coverage guarantee (other than losses resulting from credit risk) related to the Acquired Business (‘Guarantee for Residual Risks’).

The takeover involves the takeover of the loan exposures included in the Acquired Business and could result in an increase in the risk-weighted exposure amount (it is calculated by multiplying the exposure amounts and the risk weight resulting from the provisions of the Regulation of the European Parliament and of the Council (EU) No. 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (‘CRR’)). An increase in such risk weighted exposure amounts could affect the Bank's capital requirements.

Therefore, the CRM Guarantee will be used by the Bank as ‘eligible unfunded credit protection' within the meaning of the CRR. This will allow, in terms of credit risk, to assign a risk weight appropriate to the entity providing protection - BGF, qualified as a public sector entity, to the acquired exposures, in accordance with the Polish Financial Supervision Authority opinion referred to in Art. 116 sec. 4 of CRR. As a consequence of obtaining the opinion referred to in Art. 116 sec. 4 of CRR and after the CRM Guarantee fulfills the remaining conditions for ‘eligible unfunded credit protection’, the exposures covered by the Loss Coverage Guarantee agreement may be treated as exposures to the central government, resulting in a significant reduction of the capital requirement for credit risk on the part of the Bank.

Summary of acquired assets and liabilities

The statement of the assets and liabilities of Idea Bank S.A., according to the book values, i.e. not taking into account the adjustments applied for the needs of the Transaction settlement, is as follows as at 31 December 2020:.

ITEM NAME (*)	(Data not audited)
Cash and due from Central Bank	1 099 662
Loans and advances to banks	200 339
Derivative financial instruments (held for trading)	9 044
Loans and advances to customers (in this receivables from financial leases)	12 048 461
Investments (placement) securities	717 929
Assets held for sale	565
Intangible assets	143 825
Property, plant and equipment	36 496
Other assets	139 221
TOTAL ASSETS	14 395 542
Amounts due to other banks	125 484
Derivative financial instruments (held for trading)	155 203
Amounts due to customers	13 513 680
Provisions	8 389
Other liabilities	342 485
TOTAL LIABILITIES	14 145 241

(*) Data according to the statement of turnover and balances that the Bank received from the BFG on January 3, 2021

The total estimated fair value of the above assets and liabilities determined by the Bank for the purpose of submitting a binding offer to purchase the Acquired Business, was negative and ranged from PLN -110 million to PLN -276 million.

The Bank will settle the Transaction using the principles of International Financial Reporting Standard 3 ‘Business Combinations’ (hereinafter ‘IFRS 3’) based on the financial data relating to the Acquired Business as of 31 December 2020.

The application of IFRS 3 requires, inter alia, carrying out the process of identification and measurement of the acquired assets and assumed liabilities to fair value as at the acquisition date, and recognition and measurement of goodwill or profit on a bargain purchase.

The above process requires collecting and analyzing a very large amount of data and making a number of calculations based on this data in order to determine the fair value of each of the acquired assets and liabilities in a reliable manner.

Taking into account the fact that the Transaction took place on 3 January 2021, the Bank has begun the above process, but was not able to perform the takeover settlement or the provisional settlement of the takeover between the date of taking control and the date of publication of these financial statements.

New definition of default (NDD)

From January 1, 2021, the Bank implemented a new definition of default (NDD) for the purpose of capital adequacy calculation. The new definition is in line with the Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013 (EBA/GL/2016/07) and the Regulation of the Minister of Finance, Investment and Development of October 3, 2019 on the materiality level of overdue credit obligations.

If a new definition of default NDD was implemented as of December 31, 2020, its impact on the capital ratios of the Group would be as follows:

	31.12.2020
CAPITAL RATIOS
Common Equity Tier 1 capital ratio (%)	16.70%
Common Equity Tier 1 capital ratio (%), using the new definition of default	16.64%
Total capital ratio (%)	18.66%
Total capital ratio (%), using the new definition of default	18.60%

24.02.2021	Leszek Skiba	President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Jarosław Fuchs	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Marcin Gadomski	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Krzysztof Kozłowski	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2020	Tomasz Kubiak	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Jerzy Kwieciński	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Błażej Szczecki	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Wojciech Werochowski	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature
24.02.2021	Magdalena Zmitrowicz	Vice President of the Management Board	The original Polish document is signed with a qualified electronic signature
Date	Name/Surname	Position/Function	Signature

Glossary

IFRS – International Financial Reporting Standards – the standards, interpretations and their structure adopted by the International Accounting Standards Board (IASB.)

IAS – International Accounting Standards – previous name of the standards forming part of the current IFRS.

IFRIC – International Financial Reporting Interpretations Committee – the committee operating under the International Accounting Standards Board publishing interpretations of IFRS.

CIRS – Currency Interest Rate Swap – the transaction exchange of principal amounts and interest payments in different currencies between two counterparties.

IRS – Interest Rate Swap – the agreement between two counterparties, under which the counterparties pay each other (at specified intervals during the contract life) interest on contractual principal of the contract, charged at a different interest rate.

FRA – Forward Rate Agreement – the contract under which two counterparties fix the interest rate that will apply in the future for a specified amount expressed in currency of the transaction for a predetermined period.

CAP – the financial agreement, which limits the risk borne by lender on a variable interest rate, exposed to the potential loss as a result of increase in interest rates. Cap option is a series of call options on interest rates, in which the issuer guarantees the buyer the compensation of the additional interest costs, that the buyer must pay if the interest rate on loan increases above the fixed interest rate.

FLOOR –the financial agreement, which limits the risk of incurring losses resulting from decrease in interest rates by the lender providing the loan at a variable interest rate. Floor option is a series of put options on interest rates, in which the issuer guarantees the interest to be paid on the loan if the interest rate on the loan decreases below the fixed interest rate.

PD – Probability Default – the parameter used in Internal Ratings-Based Approach which determines the likelihood that the debtor will be unable to meet its obligation. PD is a financial term describing the likelihood of a default over an one year time horizon.

LGD – Loss Given Default – the percentage of loss over the total exposure when bank’s counterparty goes to default.

EAD – Exposure at Default.

EL – Expected Loss.

Life-time ECL – Lifetime Expected Credit Loss.

CCF – Credit Conversion Factor.

VaR – Value at Risk – the risk measure by which the market value of an asset or portfolio may be reduced for a given assumptions, probability and time horizon.

ICAAP – Internal Capital Adequacy Assessment Process – the process of assessing internal capital adequacy.

FVH – fair value hedge accounting.

LTV – Loan to Value.

CFH – cash flow hedge accounting.