Dear Shareholders,
I am pleased to present you with the Annual Report of Bank Pekao S.A. for 2020.
The past year was in many was a time of great test and extraordinary actions that society, economy, and public sector took in the face of the global scale of the COVID-19 pandemic. Together we implemented and supported solutions that, on the one hand, allowed us significantly minimizing the spread of pandemic itself, and on the other hand, allowed us actively combat negative economic consequences. The banking sector, both in Poland and globally, had a very important role to play in those difficult circumstances. Contrary to the global financial crisis at the turn of the previous decade, and thanks to strong capital and liquidity position, financial institutions globally this time could join forces to counteract negative effects of the pandemic, supporting their clients, employees and a wider society. Situation was no different in Poland, where the banking sector, from the first weeks of the spread of the pandemic, launched measures aimed at ensuring safety of customers and employees, as well as helping clients in accessing financing. For Bank Pekao, as the second largest banking institution in Poland, responsibility is one of the key pillars of our more than 90-years of history. Therefore, we actively and rapidly engaged in measures to counteract the effects of the pandemic owing to a strong balance sheet position and scale. We were able to support both our clients and employees, without compromising our strategic activities, in particular operational and digital transformation, that in many way we have stepped up in the face of the demanding environment. The Bank’s response to the pandemic situation was founded on three pillars that provided a clear direction throughout 2020. We define those three pillars as cautious growth, digitization and efficiency, as well as resilience and responsibility. Those were the factors that more than anything else determined actions taken in order to ensure safety of our employees, support of our customers, as well as business development and focus on financial delivery.
The shock to the economy associated with the need to halt many sectors of the economy in 2020 in the face of the pandemic, took an unpreceded scale in the post-war era. However, once again, the Polish economy proved its strong foundations, diversification and a natural ability to absorb economic shocks compared to many European countries. The decline of the Polish GDP by 2.8% in 2020 turned out to be significantly narrower compared with expectations of most economists even from the beginning of the pandemic and ultimately the annual GDP read was one of the best results among large economies globally. Public economic policy also played a significant and positive role in the absorption of the economic shock through numerous and coordinated actions totaling over PLN 300 billion, the scale of which would not be possible without the strong fiscal position of the Polish economy at the outset of the pandemic. Poland not only coped better in this difficult year, but also its medium-term prospects of above-average growth compare favorably with the rest of Europe thanks to its high competitiveness and changes to global supply chains that the pandemic has shaken. I am convinced that with the return of the economy on the path of sustainable growth, also the Polish banking sector will be able to return to the growth trajectory it enjoyed in the last decade, which also positively distinguished Polish banks a from vast majority of its European counterparts.
As the Polish economy has once again demonstrated its strength, Bank Pekao has demonstrated a high potential to adapt to challenging economic environment. That was well reflected in our approach of prudent growth. While maintaining high growth rate of the Bank's scale (+15% y/y), we were focused on growing in segments most resilient to economic cycles, such as retail mortgage products, as well as loans with a substantial use of public guarantees in financing corporates (nearly two-thirds of our total sales in the SME segment in 2020). At the same time, we were prudent in originating loans in those segments most vulnerable to volatile economic conditions, such as retail cash loans. We have once again shown that we are a trustworthy financial institution during periods of uncertainty as we managed to increase by 10% total volume of retail savings, despite steps to reduce cost of the Bank’s financing. For the third year in a row, new client acquisition exceeded level set in our strategic ambitions. That would not be possible without innovations, such as introduction of the PeoPay Kids mobile application for the youngest customers and their parents.
Our consistent development over the years would not be possible without the growth of our clients, which is precisely why in those difficult times we wanted to supported them, among others through offer of credit moratoria, if which we granted nearly PLN 13 billion in 2020. We also engaged into active distribution of liquidity support programs of the Polish Development Fund, in which we reached a 13% market share. We took care of the safety of both customers and employees thanks to the wide use of remote work, highest standards of sanitary protocol across our premises and expanding digital products and services.
The radical change in the underlying conditions for the economy in the face of the pandemic was not without short and medium term consequences on the ability to generate financial results by the banking sector. That is why, I would also like to emphasize our actions centered on efficiency and digitization, which once again proved that Bank Pekao is able to respond in a rapid and radical manner to changes in its operating conditions. In order to offset impact of those conditions for a top line growth, we took a series of strategic and operational cost measures, that allowed us reducing the overall cost base by nearly 3.5% y/y, while accelerating the evolution of our business model to ever more digital. Those actions were best exemplified by a further optimization of our branch network by 10% over the year, as well as deployment of our award-winning digital platform PeoPay. It was largely due to evolution of PeoPay that we exceeded strategic target of 2 million active mobile customers, and that every second cash loan originated, was sold in remote channel in 2020. I am convinced that the pandemic will have a lasting impact on the use of digital services in banking. Therefore our new strategy, that we plan to present in the first half of 2021, will undoubtedly raise the bar for our aspirations in this area. Anticipating and exceeding market trends, we constantly seek for a potential to accelerate growth in the most promising areas of banking, while leveraging opportunities of strategic partnerships, especially in the area of accelerating technological or product rollout. Therefore, I am very pleased with the strategic cooperation that we have launched with the leading operator of the payment system, Tpay, in order to facilitate a comprehensive product offer for our clients in the e-commerce channel. The Bank's equity investment in Tpay itself will strengthen monetization of the potential, that we see in this long-term partnership. As a bank, we want to place ourselves among the winners in the new digital area, which, on the one hand, will benefit customers through a greater standardization of services and products, and on the other, creates the need for even more intensity to diversify and evolve the bank's business model. Creating an ecosystem of services and partnerships as well as a further investment in our platform will help us achieving this goal.
At the beginning I mentioned resilience and responsibility, which in the face of the pandemic gained even more importance. It helped demonstrating balance sheet strength of Bank Pekao, which has been consistently built over the years. Our responsible approach is undoubtedly expressed in a conservative credit risk management, which over the course of the economic cycle allowed us to realize the lowest risk costs among large commercial banks in Poland. Last year, we prudently established additional COVID-19 provisions, of the largest scale in the Polish banking sector, which put us in a strong position should difficult economic conditions persist for longer, even if we all hope for a speedy return to economic growth. Thinking about resilience of our portfolio, we benefited again from responsible actions taken in the past. Contrary to many banks in the sector, our minimal exposure and defensive structure of the retail portfolio in CHF has materially limited scale of provisions created, that many banks had to establish as a consequence of the CJEU ruling. However, despite this, we took decision to increase level of legal risk provisioning in 2020 in order to provide ourselves with further strategic flexibility regardless of how the path to resolve this legal conundrum will look like. Writing about a responsible approach, I could not ignore the Bank's responsibility for the environment, in which we operate. Therefore, in recent months, we have continued drive focused on the sustainable development under ESG principles (Environment, Social Responsibility and Corporate Governance). The total scale of our involvement in sustainable finance exceeded PLN 8 billion in 2020, and in addition, we played a leading role in the issuance of ESG-linked bonds, of which the coupon rate was linked to the implementation of environmental goals. We lead by example by introducing ESG innovation in the key sectors of the economy from the perspective of Poland's energy transformation. Our actions are noticed by global opinion leaders. We have improved or maintained score in all key ESG ratings. For the second year in a row, we were part of a prestigious list established by Bloomberg of 500 global companies that care after the gender equality in the workplace. We also established a dedicated team and an institutional framework at the Bank, in order to roll out ESG framework into commercial and operational activities of the Bank. Certainly, ESG factors will be high on the agenda of our new strategy.
In this unique year, we also set an example of responsibility for the stability of the banking sector, taking a decision to participate in the resolution process of Idea Bank under the tool of the Bank Guarantee Fund Legal Act. As a result, we acquired an Enterprise of Idea Bank, protecting its depositors, the banking sector, and as a result also Pekao, against the negative consequences of a potential bankruptcy of Idea Bank. The structure of the transaction allowed us to fully secure the interests of Pekao, as well as clients and depositors of both banks. The transaction demonstrated high competences, organizational skills and strong commitment of Pekao ‘s employees in the execution of demanding projects in difficult times.
The transaction that I just mentioned, was just one of many examples of strategic and operational actions undertaken this year, which clearly show that only with a full commitment, engagement and energy of our employees are we able to drive strategic agenda of our Bank. That is why, together with the entire Management Board, we unanimously consider investment in people that shape Bank Pekao, as one of the pillars of the further ambitious development of our institution.
The pandemic and its economic consequences have prevented many companies from realizing their financial potential and reaching short-term strategic ambitions. While the Bank's results were better compared to the banking sector in Poland, we also needed to revise our financial ambitions nearing final phase of the implementation of our strategy "The Power of the Polish Bison". Despite a very strong capital position, for the first time in more than a decade, we could not share the financial results of our work with shareholders in the form of dividend. At the same time, using the effects of the digital transformation, we were ready to quickly adapt to operate during pandemic. This success convinced us to continue and double-down on our transformational efforts over the course of the year, and I would like to point out already that a digital transformation will continue to play outsized role in our next strategic plan.
We are entering 2021 with optimism. We believe that global and national efforts to deal with pandemic will achieve the desired outcome, allowing all of us for a return to normality. However, we also acknowledge that in many aspects of economic life, normalization does not mean a return to the reality we all remember even from the beginning of 2020. Also in the banking sector, we cannot count on a return to the operating conditions that supported profitability before the pandemic stroke, for example of the interest rate environment. Therefore, we will soon present the new strategic plan of the Bank. We want this to be an ambitious yet realistic plan, showing the effects of hard work put in recent years and strongly anchored on the needs of our customers in a digital age. At the same time, we want it to be once again a strategy to reward our shareholders by rebuilding profitability based on scale and by offering an attractive dividend policy. At this point, I would like to thank all our clients, our employees and all shareholders. I would also like to thank the Supervisory Board for the trust, cooperation and support that the Board has shown to the Management Board of the Bank.
Yours sincerely,
Leszek Skiba
President of the Management Board of Bank Pekao S.A.