Separate Financial Statements

of Bank Pekao S.A. for the year ended on 31 December 2020

Warsaw, February 2021

This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation.

II.Separate statement of comprehensive income

III.Separate statement of financial position

IV.Separate statement of changes in equity

V.Separate cash flow statement

VI.Notes to the separate financial statements

1. General information

2. Business combinations

3. Statement of compliance

4. Significant accounting policies

5. Risk management

6. Custody activity

7. Brokerage activity

8. Interest income and expense

9. Fee and commission income and expense

10. Dividend income

11. Result on financial assets and liabilities measured at fai value through profit or loss

12. Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss

13. Net allowances for expected credit losses

14. Other operating income and expenses

15. Administrative expenses

16. Depreciation and amortization

17. Total gains (losses) from subsidiaries and associates

18. Income Tax

19. Earnings per share

20. Dividend

21. Cash and balances with Central Bank

22. Loans and advances to banks

23. Financial assets and liabilities held for trading

24. Derivative financial instruments (held for trading)

25. Loans and advances to customers

26. Hedge accounting

27. Investment (placement) securities

28. Assets and liabilities held for sale

29. Investments in subsidiaries

30. Investments in associates

31. Intangible assets

32. Property, plant and equipment

33. Investment property

34. Other assets

35. Assets pledged as security for liabilities

36. Amounts due to other banks

37. Amounts due to customers

38. Debt securities issued

39. Subordinated liabilities

40. Provisions

41. Other liabilities

42. Defined benefit plans

43. Share-based payments

44. Leasing

45. Contingent commitments

46. Share capital

47. Other capital and reserves, retained earnings and profit for the period

48. Additional information to the cash flow statement

49. Related party transactions

50. Repo and reverse repo transactions

51. Company Social Benefits Fund (‘ZFŚS’)

52. Subsequent events

I. Separate income statement

	NOTE	2020	2019 RESTATED
Interest income	8	5 576 227	6 420 302
Interest income calculated using the effective interest method		5 334 553	6 157 882
Financial assets measured at amortised cost		4 703 919	5 513 813
Financial assets measured at fair value through other comprehensive income		630 634	644 069
Other interest income related to financial assets measured at fair value through profit or loss		241 674	262 420
Interest expense	8	(547 786)	(1 110 680)
Net interest income		5 028 441	5 309 622
Fee and commission income	9	2 519 607	2 453 654
Fee and commission expense	9	(463 789)	(373 381)
Net fee and commission income		2 055 818	2 080 273
Dividend income	10	236 680	291 427
Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result	11	158 185	128 400
Result on fair value hedge accounting	26	(847)	(1 666)
Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss	12	60 543	70 953
Net allowances for expected credit losses	13	(1 549 497)	(624 107)
Operating income	14	67 516	98 069
Operating expenses	14	(130 546)	(90 075)
Administrative expenses	15	(3 733 887)	(3 786 262)
Personnel expenses		(1 804 236)	(1 823 257)
Other administrative expenses		(1 929 651)	(1 963 005)
Depreciation and amortization	16	(496 033)	(460 868)
Gains (losses) on subsidiaries and associates	17	847	-
PROFIT BEFORE INCOME TAX		1 697 220	3 015 766
Income tax expense	18	(570 796)	(768 299)
NET PROFIT		1 126 424	2 247 467
Earnings per share (in PLN per share)	19
basic for the period		4.29	8.56
diluted for the period		4.29	8.56

II. Separate statement of comprehensive income

	NOTE	2020	2019
Net profit		1 126 424	2 247 467
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:		696 234	130 089
Profit or loss on fair value measurement		742 428	192 127
Profit or loss reclassification to income statement after derecognition		(46 194)	(62 038)
Change in fair value of cash flow hedges	26	466 716	75 223
Tax on items that are or may be reclassified subsequently to profit or loss	18	(220 960)	(39 009)
Items that will never be reclassified to profit or loss:
Effects of the revaluation or sale of investments in equity instruments designated at fair value through other comprehensive		88 080	(7 462)
Remeasurements of the defined benefit liabilities		(10 370)	(2 665)
Tax on items that will never be reclassified to profit or loss	18	(14 765)	1 924
Other comprehensive income (net of tax)		1 004 935	158 100
Total comprehensive income		2 131 359	2 405 567

III. Separate statement of financial position

	NotE	31.12.2020	31.12.2019
ASSETS
Cash and due from Central Bank	21	4 456 272	5 138 758
Loans and advances to banks	23	2 917 839	2 243 908
Financial assets held for trading	23	1 613 337	1 279 495
Derivative financial instruments (held for trading)	24	4 842 279	2 085 989
Loans and advances to customers	25	128 726 959	131 675 384
1. Measured at amortised cost		126 951 240	129 886 963
2. Measured at fair value through profit or loss		187 001	242 639
3. Measured at fair value through other comprehensive income		1 588 718	1 545 782
Hedging instruments	26	779 063	377 208
Investments (placement) securities	27	72 657 423	45 873 297
1. Measured at fair value through profit or loss		160 486	125 454
2. Designated at fair value through profit or loss		-	-
3. Measured at fair value through other comprehensive income (debt securities)		44 606 162	30 964 680
4. Designated at fair value through other comprehensive income (equity instruments)		331 690	225 332
5. Measured at amortised cost		27 559 085	14 557 831
Assets held for sale	23	35 738	17 175
Investments in subsidiaries	29	1 542 792	1 626 449
Investments in associates	30	-	-
Intangible assets	31	1 139 355	739 777
Property, plant and equipment	32	1 834 635	1 842 378
Investment properties	33	-	-
Income tax assets	18	939 978	777 116
1. Current tax assets		-	-
2. Deferred tax assets		939 978	777 116
Other assets	34	895 326	973 058
TOTAL ASSETS		222 380 996	194 649 992
EQUITY AND LIABILITIES
Liabilities
Amounts due to Central Bank	21	-	4 550
Amounts due to other banks	36	5 225 544	3 043 969
Financial liabilities held for trading	23	742 804	184 799
Derivative financial instruments (held for trading)	24	4 636 116	2 040 368
Amounts due to customers	37	178 827 283	158 544 670
Hedging instruments	26	1 072 959	614 765
Debt securities issued	38	523 305	1 604 344
Subordinated liabilities	39	2 757 876	2 764 493
Income tax liabilities		309 449	168 318
1. Current tax liabilities		309 449	168 318
2. Deferred tax liabilities		-	-
Provisions	40	1 052 781	773 057
Other liabilities	41	2 585 508	2 379 871
TOTAL LIABILITIES		197 733 625	172 123 204
Equity
Share capital	46	262 470	262 470
Other capital and reserves	47	21 573 419	20 016 851
Retained earnings and net profit for the period	47	2 811 482	2 247 467
TOTAL EQUITY		24 647 371	22 526 788
TOTAL LIABILITIES AND EQUITY		222 380 996	194 649 992

IV. Separate statement of changes in equity

For the period from 1 January 2020 to 31 December 2020

	SHARE CAPITAL	OTHER CAPITAL AND RESERVES						RETAINED EARNINGS AND NET PROFIT for the period	TOTAL EQUITY
	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
Note	46	47						47
Equity as at 1.01.2020	262 470	20 016 851	9 137 221	1 982 459	8 300 933	363 111	233 127	2 247 467	22 526 788
Comprehensive income	-	1 004 935	-	-	-	1 004 935	-	1 126 424	2 131 359
Remeasurements of the defined benefit liabilities (net of tax)	-	(8 400)	-	-	-	(8 400)	-	-	(8 400)
Revaluation of debt financial instruments measured at fair value through other comprehensive income (net of tax)	-	563 950	-	-	-	563 950	-	-	563 950
Revaluation or sale of investments in equity instruments designated at t fair value through other comprehensive income (net of tax)	-	71 345	-	-	-	71 345	-	-	71 345
Revaluation of hedging financial instruments (net of tax)	-	378 040	-	-	-	378 040	-	-	378 040
Net profit for the period	-	0	-	-	-	-	-	1 126 424	1 126 424
Appropriation of retained earnings	-	562 409	-	-	562 409	-	-	(562 409)	-
Dividend paid	-	0	-	-	0	-	-	-	-
Profit appropriation	-	562 409	-	-	562 409	-	-	(562 409)	-
Other	-	(10 776)	-	-	(10 776)	-	-	-	(10 776)
Acquisition of the organised part of the enterprise of the Pekao Investment Banking S.A	-	(10 776)	-	-	(10 776)	-	-	-	(10 776)
Equity as at 31.12.2020	262 470	21 573 419	9 137 221	1 982 459	8 852 566	1 368 046	233 127	2 811 482	24 647 371

For the period from 1 January 2019 to 31 December 2019

	SHARE CAPITAL	OTHER CAPITAL AND RESERVES						RETAINED EARNINGS AND NET PROFIT for the period	TOTAL EQUITY
	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
Note	46	47						47

Equity as at 1.01.2019	262 470	20 185 676	9 137 221	1 982 459	8 627 858	205 011	233 127	1 373 852	21 821 998
Comprehensive income	-	158 100	-	-	-	158 100	-	2 247 467	2 405 567
Remeasurements of the defined benefit liabilities (net of tax)	-	(2 159)	-	-	-	(2 159)	-	-	(2 159)
Revaluation of debt financial instruments and loans measured at fair value through other comprehensive income (net of tax)	-	105 372	-	-	-	105 372	-	-	105 372
Revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income (net of tax)	-	(6 044)	-	-	-	(6 044)	-	-	(6 044)
Revaluation of hedging financial instruments (net of tax)	-	60 931	-	-	-	60 931	-	-	60 931
Net profit for the period	-	-	-	-	-	-	-	2 247 467	2 247 467
Appropriation of retained earnings	-	578 298	-	-	578 298	-	-	(2 310 600)	(1 732 302)
Dividend paid	-	-	-	-	-	-	-	(1 732 302)	(1 732 302)
Profit appropriation	-	578 298	-	-	578 298	-	-	(578 298)	-
Other	-	(905 223)	-	-	(905 223)	-	-	936 748	31 525
Coverage of negative impact of IFRS 9 implementation	-	(936 748)	-	-	(936 748)	-	-	936 748	-
Transfer of a part of CDM assets and liabilities to the Bank	-	31 525	-	-	31 525	-	-	-	31 525
Equity as at 31.12.2019	262 470	20 016 851	9 137 221	1 982 459	8 300 933	363 111	233 127	2 247 467	22 526 788

V. Separate cash flow statement

	NOTE	2020	2019 Restated
Cash flow from operating activities – indirect method
Profit before income tax		1 697 220	3 015 766
Adjustments for:		26 701 695	(2 075 843)
Depreciation and amortization	16	496 033	460 868
(Gains) losses on investing activities		(50 319)	(86 372)
Net interest income	8	(5 028 441)	(5 309 622)
Dividend income	10	(236 680)	(291 427)
Interest received		5 477 538	6 376 534
Interest paid		(710 942)	(1 138 084)
Income tax paid		(703 356)	(615 472)
Change in loans and advances to banks		81 796	83 160
Change in financial assets held for trading		(340 951)	(389 961)
Change in derivative financial instruments (assets)		(2 756 290)	(630 013)
Change in loans and advances to customers		2 879 327	(9 359 628)
Change in investment (placement) securities		(26 647)	176 172
Change in other assets		488 407	(534 753)
Change in amounts due to banks		2 373 171	85 991
Change in financial liabilities held for trading		558 005	82 370
Change in derivative financial instruments (liabilities)		2 595 748	120 974
Change in amounts due to customers		20 539 974	8 625 640
Change in debt securities issued		1 525	17 071
Change in subordinated liabilities		-	2 008
Payments for short-term leases and leases of low-value assets		(2 185)	(8 092)
Change in provisions		279 724	118 097
Change in other liabilities		786 258	138 696
Net cash flows from operating activities		28 398 915	939 923)
Cash flow from investing activities
Investing activity inflows		351 008 315	136 298 026
Sale of investment securities		350 771 655	135 988 504
Sale of intangible assets and property, plant and equipment	31, 32	-	18 095
Dividend received	10	236 660	291 427
Investing activity outflows		(377 953 640)	(143 980 921)
Acquisition of investment securities		(377 165 906)	(143 520 085)
Acquisition of intangible assets and property, plant and equipment	31, 32	(787 734)	(460 836)
Net cash flows from investing activities		(26 945 325)	(7 682 895)

	NOTE	2020	2019 Restated
Cash flows from financing activities
Financing activity inflows		479 940	2 376 280
Due to loans and advances received from banks	48	-	245 881
Issue of debt securities	48	479 940	1 380 399
Issue of subordinated liabilities	48	-	750 000
Financing activity outflows		(1 857 363)	(3 645 896)
Repayment of loans and advances received from banks	48	(183 301)	(215 429)
Redemption of debt securities	48	(1 560 496)	(1 507 034)
Dividends and other payments to shareholders		-	(1 732 302)
Payments for the principal portion of the lease liabilities		(113 566)	(191 131)
Net cash flows from financing activities		(1 377 423)	(1 269 616)
Total net cash flows		76 167	(8 012 588)
including: effect of exchange rate fluctuations on cash and cash equivalents held		172 095	(10 906)
Net change in cash and cash equivalents		76 167	(8 012 588)
Cash and cash equivalents at the beginning of the period	48	7 220 182	15 232 770
Cash and cash equivalents at the end of the period	48	7 296 349	7 220 182

VI. Notes to the separate 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 Bank 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 Bank also prepares Consolidated Financial Statements of Bank Pekao S.A. Group.

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. Business combinations

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 Bank recognized the acquired assets and assumed liabilities at their current book value. As a result of this transaction, the Bank did not recognize any goodwill or profit on a bargain purchase. The difference in the amount of PLN 10 776 thousand between the value of the acquired assets and assumed liabilities and the payment made was recognized in the Bank's equity.

3. Statement of compliance

The annual separate financial statements (‘financial statements’) of Bank Pekao S.A. 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 separate financial statements were approved for publication by the Bank’s Management Board on 24 February 2021.

4. Significant accounting policies

4.1 Basis of preparation of Separate 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 Bank 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 Bank entities.

Separate Financial Statements of the Bank 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 separate 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 Bank’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 4.10 and Note 4.11). In the Bank’s opinion, amendments to Standards and interpretations will not have a material impact on the separate financial statements of the Bank.

Comparability of financial data

In the separate financial statements for the year ended on 31 December 2020, the Bank 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.

SEPARATE INCOME STATEMENT	DATE FOR 31.12.2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 31.12.2019 AFTER RESTATEMENT
Net other operating income and expenses	7 994	(7 994)	-
Other operating income	-	98 069	98 069
Other operating expenses	-	(90 075)	(90 075)

In the separate financial statements for the year ended on 31 December 31 2020 the Bank changed presentation of selected items of the separate 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 ‘Other investment inflows’ was presented in line ‘Changes in investment (placement) securities’.

The impact of changes on the comparative data of the statement of cash flows is presented in the table below:

CASH FLOW STATEMENT	DATE FOR 2019 BEFORE RESTATEMENT	RESTATEMENT	DATE FOR 2019 AFTER RESTATEMENT
Profit before income tax	-	3 015 766	3 015 766
Net profit for the period	2 247 467	(2 247 467)	-
Income tax	768 299	(768 299)	-
Change in other assets	(534 751)	(2)	(534 753)
Change in investment (placement) securities	(836 350)	1 012 522	176 172
Other investing inflows	1 012 520	(1 012 520)	-

4.2 Accounting estimates

Preparation of financial statements in accordance with IFRS requires the Bank 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 Bank 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 Bank included in its estimates the impact of the COVID-19 epidemic on individual items of the Bank'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 Bank 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 Bank 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 Bank 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 Bank asses impaired allowances for expected losses with regard to the financial instrument as an amount equal 12-month expected credit losses. Otherwise, the Bank 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 Bank, 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 Bank’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 Bank measures the impairment allowance (impairment credit loss) as part of individual assessment. The individual assessment is carrying out by the Bank’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 Bank 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 Bank 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 Bank reviews its non-current assets for indications of impairment. The Bank performs an impairment test of goodwill on a yearly basis or more often if impairment triggers occur.

Where such indications exist, the Bank 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 Bank 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 Bank 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 31.

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 Bank 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 5.7.

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 42.

Provisions for legal risk regarding foreign currency mortgage loans in CHF

As at 31 December 2020 the Bank 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 Bank 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 5.2.

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

As at 31 December 2020 the Bank 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 Bank estimated the possible prepayments of these exposures in the future.

The estimates required the Bank 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 40.

4.3 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.

4.4 Income statement

Interest income and expense

The Bank 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 Bank. 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 Bank’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 Bank 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 Bank’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 Bank 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 Bank for the purpose of managing the Bank’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.

4.5 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 Bank’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 Bank 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 Bank’s managing financial assets in order to generate cash flows.

The Bank 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 of the Bank’s business activities regarding these models and also reflects to information analysis of those activities provided to the Bank’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 Bank'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 Bank 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 Bank'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 Bank’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 Bank'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 Bank’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 Bank 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 Bank 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 Bank’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 Bank 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 Bank 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 Bank 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 Bank 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 purchaseof 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 recognitionof 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 Bank may irrevocably choose to present changes in their fair value in other comprehensive income. The Bank 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 Bank's right to receive payment is established.

Financial assets at fair value through profit or loss

In this category, the Bank 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 Bank.

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 Bank 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 Bank 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 5.2 ‘Credit risk’.

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

The Bank 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 Bank 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 Bank analyzes whether the modification has improved or restored the Bank's ability to collect interest and principal. As part of this process, the Bank 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 Bank 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 Bank measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

At each reporting date, the Bank 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 Bank measures the expected credit losses in the amount equal to the expected credit losses over the life of such instruments.

The Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 5.2.

Derivative financial instruments and hedge accounting

The Bank 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 Bank designates some of its derivative instruments as hedging items in applying hedge accounting. The Bank 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 Bank 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 Bank 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 Bank 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 Bank ceases to apply hedge accounting when the hedging instrument expires or is sold, or if the Bank 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 Bank 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 Bank, 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 Bank 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 Bank derecognizes a credit or a loan receivable, or its part, when it is sold. Additionally, the Bank 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 583 203 thousand (as at 31 December 2019 - PLN 581 666 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 Bank 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 Bank 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 Bank 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 Bank estimates the legal risk provisions for foreign currency mortgage loans in CHF in accordance with the methodology described in Note 5.2.

4.6 Valuation of other items in the Bank’s 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 Bank which do not have a physical form which are identifiable and represent future economic benefits for the Bank 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.

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 Bank 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 Bank, 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

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%

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

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

Bank as a lessee

The Bank, 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 Bank 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 Bank, 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 Bank’s incremental borrowing rate.

After the lease commencement date, the Bank 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 Bank 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.

Bank as a lessor

At commencement date of a lease, the Bank, as a lessor, classifies each lease contract as an operating lease or a finance lease. The Bank 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 Bank 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 Bank, 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 Bank.

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

The Bank 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 Bank.

Operating lease

During the lease term, the Bank, 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 Bank for property, plant and equipment.

Provisions

The provisions are recognized when the Bank 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 Bank on the basis of the best available estimates of direct outlays resulting from restructuring activities, which are not connected with the Bank’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 Bank 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 Bank 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 Bank uses the income method. Government grants related to assets are presented in the statement of financial position of the Bank as a reduction in the carrying value of the asset.

Equity of the Bank

Equity is comprised of the capital and funds created by the companies of the Bank 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 Bank’s interest.

The equity of the Bank 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 Bank 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.

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.

4.7 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 Bank 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 Bank’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.

4.8 Other

Contingent liabilities and commitments

The Bank 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 Bank (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.

4.9 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 Bank 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.

4.10 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/ INTERPRETATION	Description	IMPACT ASSESSMENT
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 Bank 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 Bank is currently analyzing the impact of those changes on the financial statements.

STANDARD/

INTERPRETATION

Description

IMPACT ASSESSMENT

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

4.11 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 statement’’	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 Bank 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 Bank 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 Bank claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application.

5. Risk management

The risk management policy of the Bank 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 Bank 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 Bank’s operations are described in the further part of the Note.

5.1 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 Bank’s policy with respect to risk taking with the Bank’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 Bank’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 Bank 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.

5.2 Credit risk

Credit risk is one of the basic risks associated with activities of the Bank. The percentage share of credits and loans in the Bank’s statement of financial position makes the maintenance of this risk at safe level essential to the Bank’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.

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.

4) Bank’s exposures to Pekao Group entities, subject to appropriate prudential requirements.

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
				individual assessment	group assessment					individual assessment	group assessment
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
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%

For specialized lending, the Bank 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	2 475 145	1 911 825				4 386 970	686 820	8 882			695 702	78.0%
Satisfactory	104 804	842 280				947 084	17 460	3			17 463	14.8%
Low	-	-				-	-	-			-	0.0%
Total	3 028 450	2 754 105				5 782 555	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
	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	% PORT-FOLIO
	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	% PORT-FOLIO
EXPOSURES NOT COVERED BY THE RATING MODEL
Not past due	13 948 942	3 486 651				17 435 593	31 214 361	750 173			31 964 534	99.8%
Past due, of which:	36 407	55 059				91 466	22 909	1 414			24 323	0.2%
up to 1 month	36 375	37 440				73 815	22 909	977			23 886	0.2%
between 1 month and 2 months	-	10 692				10 692	-	35			35	0.0%
between 2 and 3 months	32	6 927				6 959	-	402			402	0.0%
Total	13 985 349	3 541 710				17 527 059	31 237 270	751 587			31 988 857	100.0%

	31.12.2019
	GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES						NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES
	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	% PORT-FOLIO
	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	% PORT-FOLIO
EXPOSURES NOT COVERED BY THE RATING MODEL
Not past due	21 915 112	410 776				22 325 888	22 797 500	158 974			22 956 474	99.2%
Past due, of which:	52 592	43 548				96 140	44 371	246 588			290 959	0.8%
up to 1 month	52 592	28 819				81 411	44 371	1 809			46 180	0.3%
between 1 month and 2 months	-	13 582				13 582	-	491			491	0.0%
between 2 and 3 months	-	1 147				1 147	-	244 288			244 288	0.5%
Total	21 967 704	454 324				22 422 028	22 841 871	405 562			23 247 433	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			1 734 081	566 937	1 021	2 302 039			299 090	5 740	304 830	30.9%
Past due, of which:			3 115 011	2 518 269	5 544	5 638 824			180 147	2 725	182 872	69.1%
up to 1 month			20 344	217 608	165	238 117			96	740	836	2.8%
between 1 month and 3 months			61 275	206 094	109	267 478			79	198	277	3.2%
between 3 months and 1 year			144 222	390 908	77	535 207			1 142	622	1 764	6.4%
between 1 year and 5 years			474 816	958 885	957	1 434 658			177 115	557	177 672	19.1%
above 5 years			2 414 354	744 774	4 236	3 163 364			1 715	608	2 323	37.6%
Total			4 849 092	3 085 206	6 565	7 940 863			479 237	8 465	487 702	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			1 347 338	291 298	5 530	1 644 166			296 433	7 496	303 929	23.7%
Past due, of which:			3 488 870	2 503 709	4 519	5 997 098			264 860	3 531	268 391	76.3%
up to 1 month			42 311	218 805	251	261 367			268	661	929	3.2%
between 1 month and 3 months			21 585	229 278	125	250 988			21	656	677	3.1%
between 3 months and 1 year			95 247	412 750	288	508 285			119 558	779	120 337	7.7%
between 1 year and 5 years			742 582	833 330	797	1 576 709			143 313	1 155	144 468	20.9%
above 5 years			2 587 145	809 546	3 058	3 399 749			1 700	280	1 980	41.4%
Total			4 836 208	2 795 007	10 049	7 641 264			561 293	11 027	572 320	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	127 555 093	(1 531 193)	126 023 900
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
Specialized lending exposures	5 782 555	(83 970)	5 698 585
Exposures not covered by the rating model	17 527 059	(463 466)	17 063 593
Impaired exposures	7 940 863	(5 424 804)	2 516 059
Total loans and advances to customers subject to impairment (*)	135 495 956	(6 955 997)	128 539 959

(*) 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	130 068 599	(1 019 496)	129 049 103
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
Specialized lending exposures	5 790 547	(46 102)	5 744 445
Exposures not covered by the rating model	22 422 028	(202 787)	22 219 241
Impaired exposures	7 641 264	(5 257 622)	2 383 642
Total loans and advances to customers subject to impairment (*)	137 709 863	(6 277 118)	131 432 745

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

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	68 456 970	(268 371)
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	31 988 857	(151 320)
Impaired exposures	487 702	(191 960)
Total off- balance sheet exposures to customers	68 944 672	(460 331)

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	55 417 678	(134 755)
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	(64 217)
Corporates	26 889 016	(62 282)
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	23 247 433	(63 206)
Impaired exposures	572 320	(186 387)
Total off- balance sheet exposures to customers	55 989 998	(321 142)

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	51.2%
BBB+ to BBB-	727 883	-	-	-	-	727 883	24.9%
BB+ to BB-	14 035	-	-	-	-	14 035	0.5%
B+ do B-	150	-	-	-	-	150	0.0%
No rating	677 806	-	-	4	-	677 810	23.2%
Total gross carrying amount	2 921 080	168	-	86	-	2 921 334	100.0%
Impairment allowance	(3 491)	-	-	(4)	-	(3 495)
Total net carrying amount	2 917 589	168	-	82	-	2 917 839

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	1.0%
A+ to A-	899 921	288	-	95	-	900 304	40.1%
BBB+ to BBB-	748 786	-	-	-	-	748 786	33.3%
BB+ to BB-	8 384	-	-	-	-	8 384	0.4%
B+ do B-	65	-	-	-	-	65	0.0%
No rating	566 848	3	-	1	-	566 852	25.2%
Total gross carrying amount	2 246 417	291	-	96	-	2 246 804	100.0%
Impairment allowance	(2 895)	-	-	(1)	-	(2 896)
Total net carrying amount	2 243 522	291	-	95	-	2 243 908

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	4.5%
A+ to A-	20 798 125	-	-	-	-	20 798 125	75.3%
BBB+ do BBB-	41 891	-	-	-	-	41 891	0.2%
No rating	5 469 231	38 434	32 971	-		5 540 636	20.0%
Gross carrying amount	27 563 172	38 434	32 971	-	-	27 634 577	100.0%
Impairment allowance	(41 944)	(582)	(32 971)	-	5	(75 492)
Carrying amount	27 521 228	37 852	-	-	5	27 559 085
DEBT SECURITIES Measured at fair value through other comprehensive income
AAA	4 752 614	-	-	-	-	4 752 614	10.7%
A+ to A-	25 415 015	-	-	-	-	25 415 015	57.0%
BBB+ do BBB-	2 188 464	-	-	-	-	2 188 464	4.9%
BB+ do BB-	36 542					36 542	0.1%
No rating	12 069 142	144 385	-	-	-	12 213 527	27.3%
Carrying amount	44 461 777	144 385	-	-	-	44 606 162	100.0%
Impairment allowance (*)	(72 240)	(3 102)	-	-	-	(75 342)
DEBT SECURITIES HELD FOR TRADING
AAA						707	0.0%
A+ to A-						1 113 330	69.2%
BBB+ to BBB-						39 599	2.5%
No rating						454 308	28.3%
Carrying amount						1 607 944	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-	8 955 963	-	-	-	-	8 955 963	61.2%
BBB+ do BBB-	234 218	-	-	-	-	234 218	1.6%
No rating	5 078 450	331 816	32 370	-	-	5 442 636	37.2%
Gross carrying amount	14 268 631	331 816	32 370	-	-	14 632 817	100.0%
Impairment allowance	(25 661)	(16 955)	(32 370)	-	-	(74 986)
Carrying amount	14 242 970	314 861	-	-	-	14 557 831
DEBT SECURITIES Measured at fair value through other comprehensive income
AAA	3 632 368	-	-	-	-	3 632 368	11.7%
A+ to A-	18 898 077	-	-	-	-	18 898 077	61.0%
BBB+ do BBB-	2 044 168	-	-	-	-	2 044 168	6.6%
BB+ do BB-	83 026	-	-	-	-	83 026	0.3%
No rating	6 294 181	12 860	-	-	-	6 307 041	20.4%
Carrying amount	30 951 820	12 860	-	-	-	30 964 680	100.0%
Impairment allowance (*)	(32 425)	(671)	-	-	-	(33 096)
DEBT SECURITIES HELD FOR TRADING
A+ to A-						1 142 873	89.3%
BBB+ to BBB-						111 474	8.7%
No rating						25 148	2.0%
Carrying amount						1 279 495	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		72.6%
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-	231 943	-	188 340	474	-	-	420 757		7.5%
BB+ to BB-	4 157	-	-	-	-	-	4 157		0.1%
B+ to B-	-	-	-	-	-	-	-		-
No rating	95 170	191 808	663 926	-	-	-	950 904		16.9%
Total	1 253 923	2 736 090	852 266	26 070	752 993	-	5 621 342		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		56.5%
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-	193 502	-	97 825	21 641	-	-	312 968		12.7%
BB+ to BB-	2 348	-	-	-	-	-	2 348		0.1%
B+ to B-	-	-	-	-	-	-	-		-
No rating	113 009	110 426	323 111	25 398	-	-	571 944		23.2%
Total	786 706	878 347	420 936	91 677	285 531	-	2 463 197		100.0%

The description of the model for impairment allowance

The Bank 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 Bank compares the cash flows that it should receive pursuant to the agreement with the borrower and the flows estimated by the Bank 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 Bank determines the expected losses in the period in which it is exposed to credit risk (i.e. 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 Bank. In the estimation, the Bank:

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 Bank 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 Bank 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 Bank 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%	na	na	58
-5.0%	(68)	264	na
-1.0%	(14)	53	na
1.0%	16	(53)	na
5.0%	71	(263)	na

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 Bank 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 Bank will identify a significant increase in credit risk from the initial recognition are classified in Stage 2. The Bank 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 Bank 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 Bank 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 Bank 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 Bank, 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 Bank 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 (e.g. 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 Bank has identified occurrences of the default event are classified in Stage 3.

In the second half of 2019 the Bank 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 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 /G /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 Bank 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 Bank 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, Bank 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 Bank’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 Bank 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 Bank has observed only moderate increase in the default rate limited to certain client segments, (share of NPL remained on the stable level in range: 5.0%-5.4% throughout the year).

Banks expectations of macroeconomic situation

Starting point in the calculation of expected credit losses is the Bank’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 Bank 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 Bank’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 Bank 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 Bank 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 Bank is equal PLN 1 549 million. The Bank 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
	STAGE 1 (12M ECL)	STAGE 2 (lifetime Ecl - NOT CREDIT-IMPAIRED)	individual assessment	group assessment	TOTAL
GROSS CARRYING AMOUNT
GROSS CARRYING AMOUNT AS AT 1.01.2020	4 348 373	291	-	96	4 348 760
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	1 850 547	-	-	-	1 850 547
Financial assets derecognised, other than write-offs (repayments)	(3 188 349)	(96)	-	(27)	(3 188 472)
Financial assets written off (**)	-	-	-	(2)	(2)
Other, in this changes resulting from exchange rates	60 723	(35)	-	10	60 698
GROSS CARRYING AMOUNT AS AT 31.12.2020	3 071 277	168	-	86	3 071 531
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	3 069	-	-	1	3 070
Transfer to Stage 1	-	-	-	-	-
Transfer to Stage 2	-	-	-	-	-
Transfer to Stage 3	(2)	-	-	2	-
New / purchased / granted financial assets	1 294	-	-	-	1 294
Financial assets derecognised, other than write-offs (repayments)	(713)	(54)	-	(23)	(790)
Financial assets written off (**)	-	-	-	(2)	(2)
Changes in level of credit risk (excluding the transfers between the Stages)	(50)	-	-	4	(46)
Other, in this changes resulting from exchange rates	(94)	54	-	22	(18)
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	3 504	-	-	4	3 508

(*) 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	12 299 883	614	8 987	108	12 309 592
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	2 044 641	-	-	-	2 044 641
Financial assets derecognised, other than write-offs (repayments)	(9 993 899)	(236)	-	(46)	(9 994 181)
Other, in this changes resulting from exchange rates	(2 271)	(43)	(8 987)	9	(11 292)
GROSS CARRYING AMOUNT AS AT 31.12.2019	4 348 373	291	-	96	4 348 760
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	2 356	-	8 987	-	11 343
Transfer to Stage 1	-	-	-	-	-
Transfer to Stage 2	-	-	-	-	-
Transfer to Stage 3	-	-	-	-	-
New / purchased / granted financial assets	1 840	-	-	-	1 840
Financial assets derecognised, other than write-offs (repayments)	(881)	(85)	-	(20)	(986)
Changes in level of credit risk (excluding the transfers between the Stages)	(121)	-	-	10	(111)
Other, in this changes resulting from exchange rates	(125)	85	(8 987)	11	(9 016)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	3 069	-	-	1	3 070

(*) 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	109 352 812	19 170 005	4 836 208	2 795 007	10 049	136 164 081	937 162	608 620	1 545 782
Transfer to Stage 1	3 490 248	(3 457 333)	(220)	(32 695)	-	-	-	-	-
Transfer to Stage 2	(12 162 367)	12 338 589	(13 748)	(162 474)	-	-	(183 753)	183 753	-
Transfer to Stage 3	(1 113 306)	(598 618)	744 205	967 719	-	-	-	-	-
New / purchased / granted financial assets	28 136 800	-	-	-	1 001	28 137 801	100 000	-	100 000
Financial assets derecognised, other than write-offs (repayments)	(27 434 056)	(2 921 962)	(299 563)	(354 277)	(5 550)	(31 015 408)	(127 701)	(51 141)	(178 842)
Financial assets written off (*)	-	-	(642 807)	(216 263)	(867)	(859 937)	-	-	-
Modifications not resulting in derecognition	(6 892)	(1 312)	18	(3 061)	-	(11 247)	-	-	-
Other, in this changes resulting from exchange rates	929 050	244 717	224 999	91 250	1 932	1 491 948	57 420	64 358	121 778
GROSS CARRYING AMOUNT AS AT 31.12.2020	101 192 289	24 774 086	4 849 092	3 085 206	6 565	133 907 238	783 128	805 590	1 588 718
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	315 839	703 006	3 332 521	1 923 480	2 272	6 277 118	4 954	17 402	22 356
Transfer to Stage 1	144 213	(133 700)	(184)	(10 329)	-	-	-	-	-
Transfer to Stage 2	(60 349)	115 369	(2 802)	(52 218)	-	-	(960)	960	-
Transfer to Stage 3	(110 167)	(110 031)	42 882	177 316	-	-	-	-	-
New / purchased / granted financial assets	124 001	-	-	-	793	124 794	331	-	331
Financial assets derecognised, other than write-offs (repayments)	(41 839)	(26 771)	(42 637)	(31 964)	(465)	(143 676)	(1 102)	-	(1 102)
Financial assets written off (*)	-	-	(625 079)	(216 263)	(867)	(842 209)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(12 216)	581 691	568 136	246 411	(1 415)	1 382 607	1 894	2 788	4 682
Other, in this changes resulting from exchange rates	26 437	15 710	176 671	(64 622)	3 168	157 364	343	1 658	2 001
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	385 919	1 145 274	3 449 508	1 971 811	3 486	6 955 998	5 460	22 808	28 268

(*) Including the value of contractual interest subject to partial write-off in the amount of PLN 199 301 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 329 655 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 (as at 31 December 2019 – PLN 3 249 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	99 001 708	20 019 456	4 816 470	2 540 327	54 922	126 432 883	1 696 888	-	1 696 888
Transfer to Stage 1	4 524 073	(4 504 629)	(2 028)	(17 416)	-	-	-	-	-
Transfer to Stage 2	(6 888 696)	7 003 804	(90)	(115 018)	-	-	(623 665)	623 665	-
Transfer to Stage 3	(725 383)	(706 620)	512 052	919 951	-	-	-	-	-
New / purchased / granted financial assets	37 697 546	-	-	-	5 145	37 702 691	571 101	-	571 101
Financial assets derecognised, other than write-offs (repayments)	(24 059 040)	(2 771 006)	(356 264)	(325 966)	(49 677)	(27 561 953)	(706 447)	(15 977)	(722 424)
Financial assets written off (*)	-	-	(311 111)	(270 429)	(126)	(581 666)	-	-	-
Modifications not resulting in derecognition	(2 223)	-	-	-	-	(2 223)	-	-	-
Other, in this changes resulting from exchange rates	(195 173)	129 000	177 179	63 558	(215)	174 349	(715)	932	217
GROSS CARRYING AMOUNT AS AT 31.12.2019	109 352 812	19 170 005	4 836 208	2 795 007	10 049	136 164 081	937 162	608 620	1 545 782
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	375 911	656 689	3 196 748	1 801 503	52 435	6 083 286	16 723	-	16 723
Transfer to Stage 1	131 217	(123 407)	(566)	(7 244)	-	-	-	-	-
Transfer to Stage 2	(36 721)	84 771	(608)	(47 442)	-	-	(7 955)	7 955	-
Transfer to Stage 3	(120 047)	(188 508)	36 889	271 666	-	-	-	-	-
New / purchased / granted financial assets	144 647	-	-	-	2 783	147 430	2 307	-	2 307
Financial assets derecognised, other than write-offs (repayments)	(65 324)	(33 564)	(43 350)	(53 096)	(5 551)	(200 885)	(3 484)	-	(3 484)
Financial assets written off (*)	-	-	(311 111)	(270 429)	(126)	(581 666)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(130 710)	296 320	241 300	201 291	(9 775)	598 426	(2 404)	9 431	7 027
Other, in this changes resulting from exchange rates	16 866	10 705	213 219	27 231	(37 494)	230 527	(233)	16	(217)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	315 839	703 006	3 332 521	1 923 480	2 272	6 277 118	4 954	17 402	22 356

(*) Including the value of contractual interest subject to partial write-off in the amount of PLN 291 269 thousand.

(***) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 27 712 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	47 951 914	4 143 731	4 627 824	537 988	5 235	57 266 692	937 162	608 620	1 545 782
Transfer to Stage 1	1 596 124	(1 591 503)	(204)	(4 417)	-	-	-	-	-
Transfer to Stage 2	(8 047 705)	8 063 327	(12 892)	(2 730)	-	-	(183 753)	183 753	-
Transfer to Stage 3	(627 395)	(144 290)	730 787	40 898	-	-	-	-	-
New / purchased / granted financial assets	16 777 995	-	-	-	20	16 778 015	100 000	-	100 000
Financial assets derecognised, other than write-offs (repayments)	(19 492 180)	(1 082 368)	(297 598)	(47 324)	(4 425)	(20 923 895)	(127 701)	(51 141)	(178 842)
Financial assets written off	-	-	(635 288)	(53 941)	(3)	(689 232)	-	-	-
Modifications not resulting in derecognition	(2 135)	(44)	-	1	-	(2 178)	-	-	-
Other, in this changes resulting from exchange rates	926 693	22 777	218 250	21 550	2 220	1 191 490	57 420	64 358	121 778
GROSS CARRYING AMOUNT AS AT 31.12.2020	39 083 311	9 411 630	4 630 879	492 025	3 047	53 620 892	783 128	805 590	1 588 718
IMPAIRMENT ALLOWANCE(*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	206 646	99 126	3 157 920	497 134	(369)	3 960 457	4 954	17 402	22 356
Transfer to Stage 1	40 729	(37 606)	(181)	(2 942)	-	-	-	-	-
Transfer to Stage 2	(54 325)	59 125	(2 764)	(2 036)	-	-	(960)	960	-
Transfer to Stage 3	(28 205)	(9 722)	41 037	(3 110)	-	-	-	-	-
New / purchased / granted financial assets	77 639	-	-	-	200	77 839	331	-	331
Financial assets derecognised, other than write-offs (repayments)	(34 787)	(8 022)	(42 411)	(9 290)	(377)	(94 887)	(1 102)	-	(1 102)
Financial assets written off	-	-	(617 560)	(53 941)	(3)	(671 504)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	23 023	137 225	557 879	27 971	(540)	745 558	1 894	2 788	4 682
Other, in this changes resulting from exchange rates	18 950	2 779	172 232	2 185	2 657	198 803	343	1 658	2 001
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	249 670	242 905	3 266 152	455 971	1 568	4 216 266	5 460	22 808	28 268

(*) 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	43 630 908	3 961 789	4 604 095	538 135	3 735	52 738 662	1 696 888	-	1 696 888
Transfer to Stage 1	1 624 007	(1 619 837)	(2 028)	(2 142)	-	-	-	-	-
Transfer to Stage 2	(2 945 965)	2 948 704	(90)	(2 649)	-	-	(623 665)	623 665	-
Transfer to Stage 3	(409 017)	(247 737)	508 571	148 183	-	-	-	-	-
New / purchased / granted financial assets	22 586 033	-	-	-	4 752	22 590 785	571 101	-	571 101
Financial assets derecognised, other than write-offs (repayments)	(16 381 254)	(924 054)	(347 662)	(52 263)	( 2719)	(17 707 952)	(706 447)	(15 977)	(722 424)
Financial assets written off	-	-	(304 100)	(81 659)	(28)	(385 787)	-	-	-
Modifications not resulting in derecognition	(609)	-	-	-	-	(609)	-	-	-
Other, in this changes resulting from exchange rates	(152 189)	24 866	169 038	(9 617)	(505)	31 593	(715)	932	217
GROSS CARRYING AMOUNT AS AT 31.12.2019	47 951 914	4 143 731	4 627 824	537 988	5 235	57 266 692	937 162	608 620	1 545 782
IMPAIRMENT ALLOWANCE(*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	243 240	96 295	3 024 931	469 848	3 066	3 837 380	16 723	-	16 723
Transfer to Stage 1	33 634	(31 777)	(566)	(1 291)	-	-	-	-	-
Transfer to Stage 2	(28 733)	31 663	(608)	(2 322)	-	-	(7 955)	7 955	-
Transfer to Stage 3	(31 088)	(34 085)	35 675	29 498	-	-	-	-	-
New / purchased / granted financial assets	79 821	-	-	-	2 217	82 038	2 307	-	2 307
Financial assets derecognised, other than write-offs (repayments)	(48 962)	(37 223)	(43 229)	(21 100)	299	(150 215)	(3 484)	-	(3 484)
Financial assets written off	-	-	(304 100)	(81 659)	(28)	(385 787)	-	-	-
Changes in level of credit risk (excluding the transfers between the Stages)	(48 138)	74 189	233 384	67 739	(443)	326 731	(2 404)	9 431	7 027
Other, in this changes resulting from exchange rates	6 872	64	212 433	36 421	(5 480)	250 310	(233)	16	(217)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	206 646	99 126	3 157 920	497 134	(369)	3 960 457	4 954	17 402	22 356

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	47 284 003	12 690 965	59 623	738 917	150	60 773 658
Transfer to Stage 1	1 721 139	(1 704 556)	-	(16 583)	-	-
Transfer to Stage 2	(2 877 549)	2 999 787	(855)	(121 383)	-	-
Transfer to Stage 3	(194 119)	(248 174)	12 696	429 597	-	-
New / purchased / granted financial assets	8 054 247	-	-	-	548	8 054 795
Financial assets derecognised, other than write-offs (repayments)	(3 828 280)	(1 189 003)	(1 741)	(76 833)	(167)	(5 096 024)
Financial assets written off	-	-	(5 989)	(11 518)	-	(17 507)
Modifications not resulting in derecognition	(2 681)	(548)	18	(1 023)	-	(4 234)
Other, in this changes resulting from exchange rates	48 343	207 109	3 794	17 434	(404)	276 276
GROSS CARRYING AMOUNT AS AT 31.12.2020	50 205 103	12 755 580	67 546	958 608	127	63 986 964
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	20 553	276 139	37 952	286 939	(15)	621 568
Transfer to Stage 1	37 669	(36 210)	-	(1 459)	-	-
Transfer to Stage 2	(478)	29 332	(38)	(28 816)	-	-
Transfer to Stage 3	(8 499)	(26 153)	1 468	33 184	-	-
New / purchased / granted financial assets	4 485	-	-	-	280	4 765
Financial assets derecognised, other than write-offs (repayments)	(511)	(5 793)	(226)	(8 663)	(10)	(15 203)
Financial assets written off	-	-	(5 989)	(11 518)	-	(17 507)
Changes in level of credit risk (excluding the transfers between the Stages)	(34 815)	50 207	8 772	72 844	(158)	96 850
Other, in this changes resulting from exchange rates	1 712	6 107	2 395	4 993	(110)	15 097
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	20 116	293 629	44 334	347 504	(13)	705 570

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	41 026 819	14 046 350	55 231	661 942	921	55 791 263
Transfer to Stage 1	2 766 635	(2 758 978)	-	(7 657)	-	-
Transfer to Stage 2	(2 731 405)	2 821 646	-	(90 241)	-	-
Transfer to Stage 3	(55 723)	(199 257)	3 448	251 532	-	-
New / purchased / granted financial assets	9 351 642	-	-	-	-	9 351 642
Financial assets derecognised, other than write-offs (repayments)	(3 080 410)	(1 295 323)	(3 289)	(73 204)	(804)	(4 453 030)
Financial assets written off	-	-	-	(20 276)	-	(20 276)
Modifications not resulting in derecognition	(1 117)	-	-	-	-	(1 117)
Other, in this changes resulting from exchange rates	7 562	76 527	4 233	16 821	33	105 176
GROSS CARRYING AMOUNT AS AT 31.12.2019	47 284 003	12 690 965	59 623	738 917	150	60 773 658
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	14 821	246 842	25 152	294 335	772	581 922
Transfer to Stage 1	60 700	(59 298)	-	(1 402)	-	-
Transfer to Stage 2	(412)	31 025	-	(30 613)	-	-
Transfer to Stage 3	(7 997)	(31 377)	1 200	38 174	-	-
New / purchased / granted financial assets	5 565	-	-	-	-	5 565
Financial assets derecognised, other than write-offs (repayments)	(284)	20 928	(120)	(11 293)	(38)	9 193
Financial assets written off	-	-	-	(20 276)	-	(20 276)
Changes in level of credit risk (excluding the transfers between the Stages)	(52 686)	64 210	8 766	1 839	(425)	21 704
Other, in this changes resulting from exchange rates	846	3 809	2 954	16 175	(324)	23 460
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	20 553	276 139	37 952	286 939	(15)	621 568

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	11 419 405	2 239 287	36 722	1 518 099	4 661	15 218 174
Transfer to Stage 1	169 974	(158 262)	(17)	(11 695)	-	-
Transfer to Stage 2	(1 178 443)	1 216 803	-	(38 360)	-	-
Transfer to Stage 3	(291 792)	(206 154)	723	497 223	-	-
New / purchased / granted financial assets	3 196 989	-	-	-	434	3 197 423
Financial assets derecognised, other than write-offs (repayments)	(3 393 436)	(637 382)	(226)	(230 122)	(958)	(4 262 124)
Financial assets written off	-	-	(1 436)	(150 803)	(864)	(153 103)
Modifications not resulting in derecognition	(2 076)	(720)	-	(2 039)	-	(4 835)
Other, in this changes resulting from exchange rates	(51 977)	14 831	2 862	52 262	114	18 092
GROSS CARRYING AMOUNT AS AT 31.12.2020	9 868 644	2 468 403	38 628	1 634 565	3 387	14 013 627
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	85 375	323 562	24 612	1 139 407	2 655	1 575 611
Transfer to Stage 1	65 748	(59 817)	(4)	(5 927)	-	-
Transfer to Stage 2	(4 847)	26 212	-	(21 365)	-	-
Transfer to Stage 3	(73 463)	(74 156)	377	147 242	-	-
New / purchased / granted financial assets	41 555	-	-	-	312	41 867
Financial assets derecognised, other than write-offs (repayments)	(6 398)	(12 955)	-	(14 011)	(78)	(33 442)
Financial assets written off	-	-	(1 436)	(150 803)	(864)	(153 103)
Changes in level of credit risk (excluding the transfers between the Stages )	(212)	392 575	1 486	140 725	(717)	533 857
Other, in this changes resulting from exchange rates	5 467	6 822	1 951	(66 930)	623	(52 067)
IMPAIRMENT ALLOWANCE AS AT 31.12.2020	113 225	602 243	26 986	1 168 338	1 931	1 912 723

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	11 136 693	1 969 625	40 924	1 340 248	50 267	14 537 757
Transfer to Stage 1	121 622	(114 005)	-	(7 617)	-	-
Transfer to Stage 2	(1 143 515)	1 165 643	-	(22 128)	-	-
Transfer to Stage 3	(260 643)	(259 626)	33	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)	(1 129)	(200 498)	(46 154)	(4 637 143)
Financial assets written off	-	-	(6 902)	(168 493)	(99)	(175 494)
Modifications not resulting in derecognition	(497)	-	-	-	-	(497)
Other, in this changes resulting from exchange rates	(104 409)	14 116	3 796	56 351	254	(29 892)
GROSS CARRYING AMOUNT AS AT 31.12.2019	11 419 405	2 239 287	36 722	1 518 099	4 661	15 218 174
IMPAIRMENT ALLOWANCE
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	113 267	313 013	30 447	1 037 320	48 596	1 542 643
Transfer to Stage 1	36 744	(32 193)	-	(4 551)	-	-
Transfer to Stage 2	(6 756)	21 263	-	(14 507)	-	-
Transfer to Stage 3	(80 961)	(123 046)	13	203 994	-	-
New / purchased / granted financial assets	58 436	-	-	-	566	59 002
Financial assets derecognised, other than write-offs (repayments)	(15 922)	(17 240)	-	(20 701)	(5 812)	(59 675)
Financial assets written off	-	-	(6 902)	(168 493)	(99)	(175 494)
Changes in level of credit risk (excluding the transfers between the Stages )	(28 500)	155 061	(851)	131 711	(8 907)	248 514
Other, in this changes resulting from exchange rates	9 067	6 704	1 905	(25 366)	(31 689)	(39 379)
IMPAIRMENT ALLOWANCE AS AT 31.12.2019	85 375	323 562	24 612	1 139 407	2 655	1 575 611

	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	14 268 631	331 816	32 370	-	14 632 817	30 951 820	12 860	30 964 680
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	20 398 512	-	-	-	20 398 512	356 783 532	-	356 783 532
Financial assets derecognised, other than write-offs (repayments)	(7 679 491)	(33 191)	-	-	(7 712 682)	(344 082 025)	(1 376)	(344 083 401)
Modifications not resulting in derecognition	-	-	-	-	-	-	-	-
Other, in this changes resulting from exchange rates	315 355	(26)	601	-	315 930	941 036	315	941 351
GROSS CARRYING AMOUNT AS AT 31.12.2020	27 563 173	38 433	32 971	-	27 634 577	44 461 777	144 385	44 606 162
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2020	25 661	16 955	32 370	-	74 986	32 425	671	33 096
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	15 529	-	-	-	15 529	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)	(5 783)	111	-	(5)	(5 677)	17 181	-	17 181
Other, in this changes resulting from exchange rates	429	-	601	-	1 030	(1)	-	(1)
GROSS CARRYING AMOUNT AS AT 31.12.2020	41 944	582	32 971	(5)	75 492	72 240	3 102	75 342

(*) 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	11 158 109	-	31 547		11 189 656	26 904 574	-	26 904 574
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	8 234 245	-	-		8 234 245	135 290 310	-	135 290 310
Financial assets derecognised, other than write-offs (repayments)	(4 964 041)	-	-	-	(4 964 041)	(131 970 590)	-	(131 970 590)
Other, in this changes resulting from exchange rates	172 134	-	823	-	172 957	740 386	-	740 386
GROSS CARRYING AMOUNT AS AT 31.12.2019	14 268 631	331 816	32 370		14 632 817	30 951 820	12 860	30 964 680
IMPAIRMENT ALLOWANCE (*)
IMPAIRMENT ALLOWANCE AS AT 1.01.2019	27 742	-	31 547		59 289	28 207	-	28 207
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)	6 053	7 506	-	-	13 559	1 030	283	1 313
Other, in this changes resulting from exchange rates	(66)	1	823	-	758	2	-	2
GROSS CARRYING AMOUNT AS AT 31.12.2019	25 661	16 955	32 370	-	74 986	32 425	671	33 096

(*) 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

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

All the above-mentioned moratoria were assessed by the Bank in terms of meeting the modification criteria as defined in IFRS 9 in accordance with the principles defined in the Bank's accounting policies. Given the nature of the above-mentioned moratoria, they were insignificant modifications in line with the policies adopted by the Bank. Therefore, in relation to the loans covered by the above-mentioned moratoria, the Bank 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 12 697 million (59 185 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.

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

Guarantees for the above-mentioned parameters can be granted until 31 December 2020. The guarantee may be granted for new credits and renewals. As at 31 December 2020, the gross carrying amount of the loan portfolio covered by the above-mentioned guarantees amounted to PLN 3 252 million (4 530 units).

Bank’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	2 101 782
Loans and advances from banks and from customers	131 644 798	133 919 292
Financial assets held for trading	1 613 337	1 279 495
Derivative financial instruments (held for trading)	4 842 279	2 085 989
Hedging instruments	779 063	377 208
Investment securities	72 657 423	45 873 297
Other assets (*)	856 331	3 307 570
Balance sheet exposure (**)	212 543 416	188 944 633
Obligations to grant loans	44 980 725	37 338 574
Other contingent liabilities	31 463 281	22 042 849
Off-balance sheet exposure	76 444 006	59 381 423
Total	288 987 422	248 326 056

(*) Includes the following items of the statement of financial position: ‘Investments in subsidiaries’, ‘Investments in associates’ and 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

Bank 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 Bank 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 665 564 thousand as at 31 December 2020 (PLN 872 980 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 Bank 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%	13 658 642	6 236 212	25 610	355 700	50	20 276 214
50% < LtV <= 70%	18 156 080	3 733 130	19 007	354 809	-	22 263 026
70% < LtV <= 90%	6 892 166	1 081 684	3 363	74 045	-	8 051 258
90% < LtV <= 100%	1 825 918	207 727	3 332	19 222	-	2 056 199
100% < LtV	201 785	27 316	6 122	2 350	-	237 573
Total	40 734 591	11 286 069	57 434	806 126	50	52 884 270

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%	9 796 025	5 426 020	12 180	259 660	-	15 493 885
50% < LtV <= 70%	17 068 730	4 017 582	21 810	271 399	-	21 379 521
70% < LtV <= 90%	10 799 352	1 780 327	5 655	115 232	-	12 700 566
90% < LtV <= 100%	142 346	33 663	397	3 740	-	180 146
100% < LtV	76 365	18 720	13 591	3 684	-	112 360
Total	37 882 818	11 276 312	53 633	653 715	-	49 866 478

Credit risk concentration

According to valid regulations the total exposure of the Bank to single borrower or a group of borrowers related by capital or management may not exceed 25% of the Bank’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 Bank as at 31 December 2020	% SHARE OF PORTFOLIO
Client 1	0.9%
Client 2	0.9%
Client 3	0.7%
Client 4	0.7%
Client 5	0.7%
Client 6	0.6%
Client 7	0.6%
Client 8	0.5%
Client 9	0.4%
Client 10	0.4%
Total	6.4%

EXPOSURE TO 10 LARGERST CLIENTS OF THE BankP as at 31 December 2019	% SHARE OF PORTFOLIO
Client 1	1.1%
Client 2	1.1%
Client 3	0.8%
Client 4	0.7%
Client 5	0.6%
Client 6	0.6%
Client 7	0.6%
Client 8	0.6%
Client 9	0.4%
Client 10	0.4%
Total	6.9%

b) Concentration by capital groups

EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE Bank as at 31 December 2020	% SHARE OF PORTFOLIO
Group 1	1.2%
Group 2	1.0%
Group 3	0.9%
Group 4	0.8%
Group 5	0.8%
Total	4.7%

EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE Bank as at 31 December 2019	% SHARE OF PORTFOLIO
Group 1	1.3%
Group 2	1.1%
Group 3	0.9%
Group 4	0.9%
Group 5	0.8%
Total	5.0%

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	0.6%	0.7%
Mining and quarrying	0.9%	1.2%
Manufacturing	18.6%	19.1%
Electricity, gas, steam and air conditioning supply	5.8%	7.5%
Water supply	2.3%	2.4%
Construction	4.5%	4.3%
Wholesale and retail trade	12.3%	14.6%
Transport and storage	4.4%	5.1%
Accommodation and food service activities	2.6%	2.6%
Information and communication	2.2%	2.0%
Financial and insurance activities	20.8%	16.0%
Real estate activities	9.8%	11.5%
Professional, scientific and technical activities	7.1%	3.2%
Administrative and support service activities	1.2%	1.4%
Public administration and defence, compulsory social security	5.1%	6.2%
Education	0.2%	0.2%
Human health services and social work activities	0.6%	0.7%
Arts, entertainment and recreation	0.9%	1.1%
Others	0.1%	0.2%
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	3 087 270	16 662
Net modification gain or loss	(3 785)	(373)
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	438 407	12 286

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 Bank 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 Bank.

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 Bank 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 Bank 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 Bank 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 Bank’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	1 066 433	392 180	2 391 141	635 583	1 201	4 486 538
Loss allowance	(2 207)	(34 871)	(1 797 164)	(325 652)	(219)	(2 160 113)
Forborne exposures net	1 064 226	357 309	593 977	309 931	982	2 326 425
Loans and advances measured at fair value through other comprehensive income, including:	783 128	805 590	-	-	-	1 588 718
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:	109 036 973	18 466 999	1 503 687	871 527	7 777	129 886 963
Forborne exposures gross	347 639	112 208	2 261 037	485 121	577	3 206 582
Loss allowance	(2 938)	(11 647)	(1 389 932)	(264 347)	(258)	(1 669 122)
Forborne exposures net	344 701	100 561	871 105	220 774	319	1 537 460
Loans and advances measured at fair value through other comprehensive income, including:	937 162	608 620	-	-	-	1 545 782
Forborne exposures	-	-	-	-	-	-
Loss allowance (*)	-	-	-	-	-	-
Loans and advances measured at fair value through profit or loss, including:						242 639
Forborne exposures						998

(*) 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.

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:	1 066 433	392 180	2 391 141	635 583		1 201	4 486 538
not past due	1 063 459	300 210	853 092	241 024		823	2 458 608
up to 1 month	2 974	71 528	15 343	96 740		154	186 739
between 1 month and 3 months	-	20 235	17 710	72 203		86	110 234
between 3 months and 1 year	-	207	52 758	86 607		12	139 584
between 1 year and 5 years	-	-	298 698	107 344		89	406 131
above 5 years	-	-	1 153 540	31 665		37	1 185 242
Impairment allowances, of which:	(2 207)	(34 871)	(1 797 164)	(325 652)		(219)	(2 160 113)
not past due	(2 138)	(19 305)	(492 436)	(82 782)		(180)	(596 841)
up to 1 month	(69)	(11 065)	(9 063)	(40 476)		114	(60 559)
between 1 month and 3 months	-	(4 469)	(5 260)	(34 131)		(58)	(43 918)
between 3 months and 1 year	-	(32)	(40 774)	(51 818)		(8)	(92 632)
between 1 year and 5 years	-	-	(210 651)	(85 227)		(50)	(295 928)
above 5 years	-	-	(1 038 980)	(31 218)		(37)	(1 070 235)

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:	347 639	112 208	2 261 037	485 121		577	3 206 582
not past due	347 404	76 919	645 538	165 042		289	1 235 192
up to 1 month	235	27 931	17 246	81 371		13	126 796
between 1 month and 3 months	-	7 358	17 456	50 415		48	75 277
between 3 months and 1 year	-	-	64 456	56 824		125	121 405
between 1 year and 5 years	-	-	266 867	105 206		39	372 112
above 5 years	-	-	1 249 474	26 263		63	1 275 800
Impairment allowances, of which:	(2 938)	(11 647)	(1 389 932)	(264 347)		(258)	(1 669 122)
not past due	(2 922)	(5 725)	(177 133)	(59 176)		(119)	(245 075)
up to 1 month	(16)	(4 044)	(7 745)	(33 496)		77	(45 224)
between 1 month and 3 months	-	(1 878)	(8 210)	(26 054)		8	(36 134)
between 3 months and 1 year	-	-	(25 678)	(37 245)		(122)	(63 045)
between 1 year and 5 years	-	-	(172 198)	(82 750)		(39)	(254 987)
above 5 years	-	-	(998 968)	(25 626)		(63)	(1 024 657)
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	1 538 458	1 890 607
Amount of exposures recognized in the period	1 606 852	142 285
Amount of exposures derecognized in the period	(376 017)	(282 404)
Changes in impairment allowances	(410 824)	8 580
Other changes	(30 976)	(220 610)
Carrying amount at the end	2 327 493	1 538 458
Interest income	122 448	83 599

Forborne exposures by type of forbearance activity

	31.12.2020	31.12.2019
Modification of terms and conditions	2 327 493	1 538 458
Carrying amount	2 327 493	1 538 458

Forborne exposures by product type

	31.12.2020	31.12.2019
Mortgage loans	1 636 640	1 065 076
Current accounts	46 863	55 722
Operating loans	60 119	89 084
Investment loans	213 822	230 342
Cash loans	350 761	76 279
Other loans and advances	19 288	21 955
Carrying amount	2 327 493	1 538 458

Forborne exposures by industrial sectors

	31.12.2020	31.12.2019
Corporates:	589 948	1 195 674
Real estate activities	236 548	775 249
Manufacturing	59 328	78 079
Wholesale and retail trade	49 984	101 848
Accommodation and food service activities	85 468	49 460
Construction	54 071	99 478
Professional, scientific and technical activities	60 459	51 248
Transportation and storage	10 898	3 538
Agriculture, forestry and fishing	18 106	18 402
Other sectors	15 086	18 372
Individuals	1 737 545	342 784
Carrying amount	2 327 493	1 538 458

Forborne exposures by geographical structure

	31.12.2020	31.12.2019
Poland	2 326 456	1 537 432
Other countries	1 037	1 026
Carrying amount	2 327 493	1 538 458

Issues related to the legal risk related to FX 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 31 2020, the Bank had a portfolio of foreign currency mortgage loans in CHF with a total gross carrying amount of PLN 2 660 million (i.e. CHF 623.8 million) compared to PLN 2 753 million (i.e. CHF 702.1 million) as at 31 December 31 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	2 438 951	34 705	183 547	-	2 659 805
denominated in CHF	2 602	2 433 395	34 705	182 953	-	2 653 655
indexed to CHF	-	5 556	-	594	-	6 150
Impairment allowances, of which: (*)	(1)	(353 883)	(23 976)	(91 229)	-	(469 089)
denominated in CHF	(1)	(353 845)	(23 976)	(91 033)	-	(468 855)
indexed to CHF	-	(38)	-	(196)	-	(234)
Carrying amount, of which:	2 601	2 085 068	10 729	92 318	-	2 190 716
denominated in CHF	2 601	2 079 550	10 729	91 920	-	2 184 800
indexed to CHF	-	5 518	-	398	-	5 916

(*) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 329 655 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:	3 372	2 555 642	30 843	163 352	-	2 753 209
denominated in CHF	3 372	2 546 227	30 843	162 541	-	2 742 983
indexed to CHF	-	9 415	-	811	-	10 226
Impairment allowances, of which:	(3)	(55 939)	(20 053)	(79 988)	-	(155 983)
denominated in CHF	(3)	(55 882)	(20 053)	(79 680)	-	(155 618)
indexed to CHF	-	(57)	-	(308)	-	(365)
Carrying amount, of which:	3 369	2 499 703	10 790	83 364	-	2 597 226
denominated in CHF	3 369	2 490 345	10 790	82 861	-	2 587 365
indexed to CHF	-	9 358	-	503	-	9 861

(*) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 27 712 thousand.

Moreover, the portfolio of granted and repaid foreign currency loans in CHF amounted to CHF 1 287 million as at 31 December 1 2020, compared to CHF 1 198 million as at 31 December 2019.

As of 31 December 2020 the average LTV for CHF loans to individuals granted by the Bank amounted to 37.1%(39.1% as at 31 December 2019), with an average LTV for the whole portfolio of mortgage loans of 55.5% (57.7% 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 Bank'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 31 2020, 515 individual court cases were pending against the Bank regarding FX mortgage loans in CHF, which were granted in previous years, with the total value of the claim in the amount of PLN 126 million (as at 31 December 2019, the number of cases was 158, and the corresponding value of the dispute is PLN 43.7 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 Bank'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 Bank received 33 unfavorable court judgments in cases brought by borrowers, including 3 final judgments declaring the invalidity of the loan agreement and 10 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 3 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 Bank 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 Bank 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 410 million as at 31 December 2020 (PLN 46.7 million as at 31 December 2019).

The above amount includes the provision for individual pending litigation to which the Bank 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 Bank 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 Bank 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 Bank estimated the provision in this respect in the total amount of PLN 69 million (PLN 14.2 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 Bank 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 95%), 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 Bank 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 Bank 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 Bank 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):

PARAMETER	SCENARIO	IMPACT ON THE PROVISION LEVEL
Number of lawsuits	+20%	29 859
Number of lawsuits	-20%	(29 859)
Probability of failure	+10 p.p.	21 333
	- 10 p.p.	(21 333)
Probability of a contract invalidity scenario	+10 p.p.	6 432
Probability of a contract invalidity scenario	- 10 p.p.	(6 432)

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 Bank 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 Bank 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 Bank 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 Bank allocated the total amount of the provision in the amount of PLN 410 million as follows:

1. PLN 329.7 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 27.7 million as at 31 December 2019),

2. PLN 80.3 million for current and future legal disputes regarding repaid exposures, recognized as provisions in correspondence with ‘Other operating expenses’ (PLN 19.0 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:	329 655	27 712
Individual provisions	58 859	11 164
Portfolio provisions	270 796	16 548
Provisions for litigation and claims, in this:	80 325	18 990
Individual provisions	10 127	3 020
Portfolio provisions	70 198	15 970
Total	409 980	46 702

INCOME STATEMENT	2020	2019
Net allowances for expected credit losses	(301 943)	(27 712)
Other operating expenses	(61 335)	(18 990)
Total	(363 278)	(46 702)

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 Bank 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 Bank 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	5 449 810	(4 439 645)	(326 395)	683 769
TOTAL	5 449 810	(4 439 645)	(326 395)	683 769

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	5 641 933	(4 450 897)	(813 049)	377 988
TOTAL	5 641 933	(4 450 897)	(813 049)	377 988

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	2 412 367	(1 850 010)	(310 724)	251 633
TOTAL	2 412 367	(1 850 010)	(310 724)	251 633

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	2 589 498	(1 882 641)	(613 100)	93 757
TOTAL	2 589 498	(1 882 641)	(613 100)	93 757

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	4 670 747	Derivative financial instruments (held for trading)	4 842 279	171 532	24
Derivatives	779 063	Hedging instruments	779 063	-	26
financial LIABILITIES
Derivatives	4 568 974	Derivative financial instruments (held for trading)	4 636 116	67 142	24
Derivatives	1 072 959	Hedging instruments	1 072 959	-	26

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	2 035 159	Derivative financial instruments (held for trading)	2 085 989	50 830	24
Derivatives	377 208	Hedging instruments	377 208	-	26
financial LIABILITIES
Derivatives	1 974 733	Derivative financial instruments (held for trading)	2 040 368	65 635	24
Derivatives	614 765	Hedging instruments	614 765	-	26

5.3 Market risk

The Bank 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 Bank resulting from market changes. The main factors of market risk are as follows:

 interest rates,

 foreign exchange rates,

 stock prices,

 commodity prices.

The Bank 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 Bank 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 Bank’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 Bank 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	844	2 071	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	1 100	874	1 447	2 581

Interest rate risk of the banking book

In managing the interest rate risk of the banking book the Bank aims at hedging the economic value of capital and achieving the planned interest result within the accepted limits. The financial position of the Bank 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	(6.13)	(6.94)
EVE	(7.04)	(2.94)

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 Bank’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 (*)	242	122

(*) 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	24 216 874	18 927 452	26 661 391	32 081 060	(130 247)
USD	9 270 686	9 623 831	11 066 970	10 678 559	35 266
CHF	2 670 755	649 867	2 730 324	4 755 311	(4 099)
SEK	140 628	68 185	67 506	139 623	326
CAD	17 125	55 492	43 007	4 380	260
CZK	56 995	17 554	650 361	689 607	195
DKK	82 206	16 849	57 989	123 156	190
GBP	392 429	1 106 959	2 126 362	1 411 961	(129)
NOK	516 555	66 514	207 543	657 470	114
CNY	25 253	16 707	356 180	364 812	(86)
Other currencies	44 312	95 914	380 329	327 595	1 132
TOTAL	37 433 818	30 645 324	44 347 962	51 233 534	(97 078)

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	23 018 008	19 107 106	14 770 726	18 597 989	83 639
USD	5 108 516	8 431 987	12 363 822	9 006 351	34 000
CHF	2 715 419	614 002	2 968 114	5 069 893	(362)
GBP	445 661	969 948	748 318	224 240	(209)
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	157 176	184 642	378 101	349 701	934
TOTAL	31 962 032	29 593 524	31 611 241	33 861 534	118 215

5.4 Liquidity risk

The objective of liquidity risk management is to:

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

 prevent the occurrance of crisis situations, and

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

The Bank 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 Bank'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 Bank 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 Bank’s liquidity monitoring process. Within the scope of these analyses the Bank’s liquidity is assessed under the conditions of crisis which is caused by financial markets or is caused by internal factors, specific to the Bank.

Managing the liquidity, the Bank 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 Bank 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 Bank as well as three levels of liquidity risk states depending on the level of early-warning indicators, the Bank’s, the Bank’s and market situation. It also defines the sources for covering the expected outflows from the Bank. This document sets the procedures for monitoring the liquidity states, emergency action procedures, task forces dedicated for restoring the Bank’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 () (*)	3 754 186	49 391	249 949	483 646	664 706	5 201 878
Amounts due to customers (***)	164 620 173	5 847 338	7 433 844	303 779	160 512	178 365 646
Lease liabilities	14 954	17 785	77 258	149 850	394 738	654 585
Debt securities issued	175 085	193 350	155 724	-	-	524 159
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	168 564 398	6 107 864	7 975 122	1 431 076	4 671 195	188 749 655
OFF-BALANCE SHEET COMMITMENTS (*)
Off-balance sheet commitments Financial liabilities granted	45 095 123	-	-	-	-	45 095 123
Off-balance sheet commitments Guarantees liabilities granted	26 963 296	-	-	-	-	26 963 296
Total	72 058 419	-	-	-	-	72 058 419

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 () (*)	1 661 130	48 552	171 899	613 258	603 447	3 098 286
Amounts due to customers (***)	123 471 043	12 590 259	20 906 526	546 046	940 818	158 454 692
Lease liabilities	13 510	15 892	69 629	207 820	370 330	677 181
Debt securities issued	95 843	519 113	946 599	55 890	-	1 617 445
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	125 315 641	13 173 816	22 188 807	1 787 077	5 092 672	167 558 013
OFF-BALANCE SHEET COMMITMENTS (*)
Off-balance sheet commitments Financial liabilities granted	37 235 632	-	-	-	-	37 235 632
Off-balance sheet commitments Guarantees liabilities granted	21 792 826	-	-	-	-	21 792 826
Total	59 028 458	-	-	-	-	59 028 458

(*) 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 Bank is possible based on contracts entered into by the Bank. However, outflows expected by the Bank 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 Bank on continuous basis. The Bank estimates also more probable flows that are reflected in Tables ‘Adjusted liquidity gap’.

(**) Including Central Bank.

(***) Without leasing liabilities.

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	2.34	1.46

(*) 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 separate 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	66 669 376	5 103 139	25 313 566	66 859 460	58 435 455	222 380 996
Balance sheet liabilities	17 672 273	8 803 973	24 148 925	32 262 001	139 493 824	222 380 996
Off-balance sheet assets/liabilities (net)	(9 876 652)	22 925	2 970 600	2 282 755	3 910 122	(690 250)
Periodic gap	39 120 451	(3 677 909)	4 135 241	36 880 214	(77 148 247)	(690 250)
Cumulated gap	-	35 442 542	39 577 783	76 457 997	(690 250)	-

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	37 289 235	5 749 275	27 614 844	62 970 209	61 026 429	194 649 992
Balance sheet liabilities	10 571 118	8 483 214	20 603 246	15 503 903	139 488 511	194 649 992
Off-balance sheet assets/liabilities (net)	(6 432 613)	(1 061 775)	1 149 837	2 998 797	3 038 425	(307 329)
Periodic gap	20 285 504	(3 795 714)	8 161 435	50 465 103	(75 423 657)	(307 329)
Cumulated gap	-	16 489 790	24 651 225	75 116 328	(307 329)	-

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 Bank 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 Bank 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	109 865	361 910	2 660 573	1 247 169	4 455 750
31.12.2019	48 242	92 083	204 441	980 160	593 030	1 917 956

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	38 071 279	11 920 843	14 911 803	11 339 567	978 285	77 221 777
Outflows	38 157 524	11 983 706	14 957 181	11 651 246	1 187 983	77 937 640
31.12.2019
Inflows	20 678 287	7 002 569	14 517 278	11 933 202	1 501 027	55 632 363
Outflows	20 715 278	6 980 073	14 520 523	12 023 733	1 707 454	55 947 061

5.5 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 Bank. 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 Bank'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 Bank'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 Bank 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.

5.6 Capital management

The capital management process applied by the Bank 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 Bank funds.

The Bank 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 Bank’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 Bank 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. 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 Bank 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 Bank. 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 Bank 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, Bank 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%.

Bank does not have any Capital requirement of Pillar 2.

Combined buffer requirement, as at 31 December 2020 consists of:

 Capital conservation buffer in amount of 2.5%,

 Countercyclical capital buffer in amount of 0.0% (countercyclical capital buffer was calculated as of 31.12.2019 at the level 0.0029%),

 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 19 March 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, Bank is required to maintain:

 Total capital ratio (TCR) in amount of 11.25%,

 Capital ratio Tier 1 (T1) in amount of 9.25%,

 Common Equity Tier (CET 1) in amount of 7.75%.

As at 31 December 2020 total capital ratio of the Bank amounted at 20.8% (as at 31 December 2019 – 18.7%).

	31.12.2020	31.12.2019
CAPITAL REQUIREMENTS
Credit risk	9 219 587	9 257 816
Market risk	99 495	87 707
Counterparty risk including CVA	173 728	119 741
Operational risk	597 848	443 575
Total capital requirement	10 090 658	9 908 839
OWN FUNDS
Common Equity Tier 1 capital	23 447 481	20 448 802
Capital Tier 1	2 750 000	2 750 000
Own funds for total capital ratio	26 197 481	23 198 802
OWN FUNDS REQUIREMENTS
Common Equity Tier 1 capital ratio (%)	18.6%	16.5%
Total capital ratio (%)	20.8%	18.7%

Total capital ratio at the end of 2020 compared with the end of 2019 increased by 2.1 p.p.

Total capital requirement increased by 1.8%, mainly due to higher operational risk capital requirement resulting mainly from increase of provisions on loans denominated in foreign currencies.

As of 31 December 2020 Common Equity Tier 1 capital was higher by 14.7% as compared to 31 December 2019. Increase in own funds for total capital ratio calculation by 12.9% resulted from retention Bank’s entire net profit for year 2019 to Tier 1 capital after the General Meeting of Shareholders in accordance with the recommendation of the 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 approval of the KNF.

For the purpose of capital requirement calculation the Bank 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 Bank 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 Bank’s own funds consist of Common Equity Tier 1 capital. Additional Tier 1 capital and Tier 2 capital.

	31.12.2020	31.12.2019
OWN FUNDS
Capital	24 647 371	22 526 788
Component of the capital not included into own funds, in which:	(974 994)	(2 064 215)
Current year net profit	(1 126 424)	(2 247 467)
Current year net profit included in own funds after KNF approval	151 430	183 252
Regulatory adjustments, in which:	(224 896)	(13 771)
Intangible assets	(642 656)	(676 946)
Cash flow hedges	(480 718)	(102 678)
Adjustments mitigating impact of IFRS introduction in transitional period	959 039	805 540
Additional value adjustments due to prudent calculation	(60 561)	(39 687)
Common Equity Tier 1 capital	23 447 481	20 448 802
Tier 2 capital	2 750 000	2 750 000
Own funds for total capital ratio	26 197 481	23 198 802

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 151 430 thousand PLN from the prudently consolidated net profit of the Bank 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, accordingto 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,

 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.

Internal capital adequacy assessment

To assess the internal capital adequacy of the Bank, the Bank applies methods designed internally.

The Bank 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 Bank develops and applies adequate risk assessment and measurement methods. The Bank 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 Bank’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 Bank 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 Bank. 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 Bank.

5.7 Fair value of financial assets and liabilities

Financial instruments that are measured at fair value in the separate statement of financial position of the Bank

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 Bank 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:	14 211 836	26 853 336	13 043 564	54 108 736
Financial assets held for trading	938 452	629 783	45 102	1 613 337
Derivative financial instruments, including:	-	4 840 567	1 712	4 842 279
Banks	-	1 252 211	1 712	1 253 923
Customers	-	3 588 356	-	3 588 356
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	13 273 384	20 603 923	11 060 545	44 937 852
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	-	-	187 001	187 001
Loans and advances to customers measured at fair value through profit or loss	-	-	1 588 718	1 588 718
Liabilities:	742 804	5 709 075	-	6 451 879
Financial liabilities held for trading	742 804	-	-	742 804
Derivative financial instruments, including:	-	4 636 116	-	4 636 116
Banks	-	1 230 815	-	1 230 815
Customers	-	3 405 301	-	3 405 301
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:	15 467 463	12 376 755	9 002 361	36 846 579
Financial assets held for trading	1 123 003	148 321	8 171	1 279 495
Derivative financial instruments, including:	-	2 082 947	3 042	2 085 989
Banks	-	783 664	3 042	786 706
Customers	-	1 299 283	-	1 299 283
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	14 344 460	9 768 279	7 077 273	31 190 012
Securities measured at fair value through profit or loss	-	-	125 454	125 454
Loans and advances to customers measured at fair value through other comprehensive income	-	-	1 545 782	1 545 782
Loans and advances to customers measured at fair value through profit or loss	-	-	242 639	242 639
Liabilities:	184 799	2 655 133	-	2 839 932
Financial liabilities held for trading	184 799	-	-	184 799
Derivative financial instruments, including:	-	2 040 368	-	2 040 368
Banks	-	713 693	-	713 693
Customers	-	1 326 675	-	1 326 675
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 Bank

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	8 171	3 042	1 545 782	242 639	125 454	7 077 273
Increases, including:	5 617 622	-	146 092	652	36 159	17 667 218
Reclassification	28 947	-	-	-	-	42 937
Transactions made in 2020	-	-	-	-	-	-
Acquisition/Granting	5 584 669	-	99 437	604	-	17 345 323
Settlement/Redemption	-	-	-	-	-	-
Gains on financial instruments	4 006	-	46 653	48	36 159	278 958
recognized in the income statement	4 006	-	32 560	48	36 159	258 424
recognized in revaluation reserves	-	-	14 093	-	-	20 534
Decreases, including:	(5 580 691)	(1 330)	(103 154)	( 56 290)	(1 127)	(13 683 946)
Reclassification	(136)	-	-	-	-	(194 800)
Settlement/Redemption	(1 953 741)	-	(52 324)	(56 290)	-	(513 030)
Sale/Repayment	(3 626 800)	-	(50 830)	-	-	(12 944 895)
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	45 102	1 712	1 588 718	187 001	160 486	11 060 545
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in:	2 315	(1 330)	10 712	(82)	-	117 510
Income statement:	2 315	(1 330)	(3 304)	(82)	-	34 704
net interest income	14	-	1 708	557	-	55 590
net allowances for expected credit losses	-	-	(5 012)	-	-	(20 886)
result on financial assets and liabilities held for trading	2 301	(1 330)		(639)	-	-
Other comprehensive income	-	-	14 016	-	-	82 806

Change in fair value of financial assets measured at fair value according to Level 3 by the Bank

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	99 001	1 230	1 696 888	302 630	65 408	7 111 833
Increases, including:	-	1 486	-	-	-	544 884
Reclassification	-	1 486	-	-	-	544 884
Transactions made in 2019	628 919	-	166 522	-	-	1 212 241
Acquisition/Granting	-	363	-	-	-	-
Gains on financial instruments	1 115	1 183	51 853	-	60 046	228 295
recognized in the income statement	1 115	1 183	34 347	-	60 046	181 369
recognized in revaluation reserves	-	-	17 506	-	-	46 926
Decreases, including:	(720 864)	(1 220)	(369 481)	(59 991)	-	(2 019 980)
Reclassification	-	-	-	-	-	(83 209)
Settlement/Redemption	(131 455)	-	(55 795)	(58 649)	-	(366 767)
Sale/Repayment	(589 388)	-	(313 686)	-	-	(1 552 779)
Losses on financial instruments	(21)	(1 220)	-	(1 342)	-	(17 225)
recognized in the income statement	(21)	(1 220)	-	(1 342)	-	(1 399)
recognized in revaluation reserves	-	-	-		-	(15 826)
Closing balance	8 171	3 042	1 545 782	242 639	125 454	7 077 273
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in:	20	1 183	9 071	(3 393)	-	66 197
Income statement:	20	1 183	(6 920)	(3 393)	-	32 071
net interest income	13	-	968	138	-	35 952
net allowances for expected credit losses	-	-	(7 888)		-	(3 881)
result on financial assets and liabilities held for trading	7	1 183	-	(3 531)	-	-
Other comprehensive income	-	-	15 991	-	-	34 126

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	10 799 404	Discounted cash flow	Credit spread	0.20%-1.02%	131 754	(142 002)
Government bonds	28 116	Discounted cash flow	Spread to benchmarking 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	1 588 718	Discounted cash flow	Credit spread	2.34%-3.24%	19 426	(19 141)

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	6 890 342	Discounted cash flow	Credit spread	0.37% - 0.95%	68 220	(83 460)
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	1 545 782	Discounted cash flow	Credit spread	2.59%-3.30%	15 522	(15 304)

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 separate statement of financial position of the Bank

The Bank 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 Bank classified the financial assets and liabilities not measured at fair value in the separate 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	4 456 272	4 456 230	4 306 089	150 141	-
Loans and advance to banks	2 917 839	2 914 802	-	1 455 460	1 459 342
Loans and advances to customers measured at amortised cost	126 951 240	126 140 716	-	280 627	125 860 089
Debt securities measured at amortised cost	27 559 085	28 610 710	19 803 027	4 410 186	4 397 497
Other Assets	895 326	895 326	-	-	895 326
Total Assets	162 779 762	163 017 784	24 109 116	6 296 414	132 612 254
Liabilities
Amounts due to Central Bank	-	-	-	-	-
Amounts due to other banks	5 225 544	5 240 842	-	2 475 559	2 765 283
Amounts due to customers	178 827 283	177 998 857	-	-	177 998 857
Debt securities issued	523 305	523 940	-	523 940	-
Subordinated liabilities	2 757 876	2 761 026	-	2 761 026	-
Other liabilities	2 585 508	2 585 508	-	-	2 585 508
Total Liabilities	189 919 516	189 110 173	-	5 760 525	183 349 648

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	5 138 758	5 138 145	3 036 363	2 101 782	-
Loans and advance to banks	2 243 908	2 246 223	-	1 038 859	1 207 364
Loans and advances to customers measured at amortised cost	129 886 963	131 260 959	-	502 344	130 758 615
Debt securities measured at amortised cost	14 557 831	14 885 744	9 102 253	1 068 286	4 715 205
Other Assets	973 058	973 058	-	-	973 058
Total Assets	152 800 518	154 504 129	12 138 616	4 711 271	137 654 242
Liabilities
Amounts due to Central Bank	4 550	4 602	-	-	4 602
Amounts due to other banks	3 043 969	3 083 744	-	678 799	2 404 945
Amounts due to customers	158 543 950	158 779 955	-	379 787	158 400 168
Debt securities issued	1 604 344	1 602 985	-	1 602 985	-
Subordinated liabilities	2 764 493	2 766 289	-	2 766 289	-
Other liabilities	2 379 871	2 379 871	-	-	2 379 871
Total Liabilities	168 336 627	168 612 844	-	5 427 860	163 184 984

6. 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).

7. Brokerage activity

Bank 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.

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	3 316 548 278	2 599 565 898	27 209 243
Equity securities and rights to such financial assets	3 313 122 211	3 313 122 211	2 570 184 410	25 103 445
Debt instruments and rights to such financial assets	3 426 067	3 426 067	29 381 488	2 105 798
Stored in a form of document	4 505 665 042	4 505 665 042	690 909 626	5 668 875
Equity securities and rights to such financial assets	4 505 665 042	4 505 665 042	690 909 626	5 668 875
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	1 929 647	919 969
Other customers’ cash	12 215	13 372
Total	1 941 862	933 341

Settlements due to unsettled transactions

	31.12.2020	31.12.2019
Liabilities from executed transactions	11 648	3 091

Settlements with the 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 margin deposits	59 642	30 378
Other receivables	7 034	-
Total receivables	66 676	30 378
Liabilities from margin deposit	-	740
Other liabilities	1 150	-
Total Liabilities	1 150	740

8. 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	4 703 919	630 634	-	5 334 553
Loans and advances	4 278 889	36 444	-	4 315 333
Interbank placements	12 694	-	-	12 694
Reverse repo transactions	10 498	-	-	10 498
Investment securities	401 838	594 190	-	996 028
Other interest income related to financial assets measured at fair value through profit or loss	-	-	241 674	241 674
Loans and other receivables from customers	-	-	2 127	2 127
Hedging derivatives	-	-	230 423	230 423
Financial assets held for trading	-	-	9 124	9 124
Total	4 703 919	630 634	241 674	5 576 227

	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	5 513 813	644 069	-	6 157 882
Loans and advances	5 083 796	40 127	-	5 123 923
Interbank placements	46 086	-	-	46 086
Reverse repo transactions	39 129	-	-	39 129
Investment securities	344 802	603 942	-	948 744
Other interest income related to financial assets measured at fair value through profit or loss	-	-	262 420	262 420
Loans and other receivables from customers	-	-	6 316	6 316
Hedging derivatives	-	-	235 250	235 250
Financial assets held for trading	-	-	20 854	20 854
Total	5 513 813	644 069	262 420	6 420 302

Interest expense

	2020	2019
Deposits from customers	(431 218)	(924 788)
Interbank deposits	(8 535)	(20 768)
Repo transactions	(6 994)	(40 310)
Loans and advances received	(2 620)	(2 305)
Leasing	(11 718)	(16 568)
Debt securities	(86 701)	(105 941)
Total	(547 786)	(1 110 680)

The amounts shown above contain interest expense relating to the financial liabilities measured at amortised cost.

9. Fee and commission income and expense

Fee and commission income

	2020	2019
Accounts maintenance, payment orders and cash transactions	606 150	635 820
Payment cards	584 131	610 518
Loans and advances	348 648	391 547
Margin on foreign exchange transactions with clients	527 917	491 758
Service and sell investment and insurance products	151 955	143 762
Securities operations	93 823	19 671
Custody activity	64 810	58 530
Guarantees, letters of credit and similar transactions	68 498	63 918
Other	73 675	38 130
Total	2 519 607	2 453 654

Fee and commission expense

	2020	2019
Payment cards	(323 852)	(264 275)
Money orders and transfers	(21 580)	(23 343)
Securities and derivatives operations	(43 810)	(26 131)
Acquisition services	(42 417)	(32 945)
Custody activity	(19 970)	(15 996)
Accounts maintenance	(4 621)	(4 792)
Other	(7 539)	(5 899)
Total	(463 789)	(373 381)

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.

10. Dividend income

	2020	2019
Subsidiaries	210 407	269 154
Issuers of securities measured at fair value through profit or loss	787	1 023
Issuers of equity instruments designated at fair value through other comprehensive income	25 486	21 250
Total	236 680	291 427

11. 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	36 159	59 263
Foreign currency exchange result	(29 220)	(35 079)
Gains (losses) on derivatives	106 743	87 185
Gains (losses) on securities held for trading	44 678	20 516
Total	158 185	128 400

12. 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	18 702	19 154
Financial assets measured at fair value through other comprehensive income	48 221	62 318
Financial liabilities not measured at fair value through profit or loss	1	-
Total	66 924	81 472

Realized losses

	2020	2019
Financial assets measured at amortised cost	(4 196)	(9 793)
Financial assets measured at fair value through other comprehensive income	(2 027)	(281)
Financial liabilities not measured at fair value through profit or loss	(158)	(445)
Total	(6 381)	(10 519)

Net realized profit

60 543

70 953

13. Net allowances for expected credit losses

	2020	2019
Loans and other financial assets measured at amortized cost () (*)	(1 062 240)	(518 002)
Debt securities measured at amortized cost	524	(14 939)
Loans measured at fair value through other comprehensive income	(3 911)	(5 850)
Debt securities measured at fair value through other comprehensive income	(42 247)	(4 887)
Off-balance sheet commitments	(139 680)	(52 717)
Legal risk regarding foreign currency mortgage loans	(301 943)	(27 712)
Total	(1 549 497)	(624 107)

(*) Item includes impairment losses on loans and advances to banks.

(**) 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.

14. Other operating income and expenses

Other operating income

	2020	2019
Gains on disposal of property, plant and equipment	710	19 707
Premises rental income, terminals and IT equipment	30 814	21 470
Compensation, recoveries, penalty fees and fines received	14 261	19 832
Miscellaneous income	10 017	19 449
Recovery of debt collection costs	8 876	15 800
Other	2 838	1 811
Total	67 516	98 069

Other operating expenses

	2020	2019
Provision for liabilities disputable and other provisions(*)	(28 757)		(48 604)
Provision for legal risk regarding foreign currency mortgage loans	(61 335)		(18 990)
Loss on disposal of property, plant and equipment and intangible assets	(10 225)		(2 734)
Card transactions monitoring costs	(7 971)		(6 814)
Sundry expenses	(3 823)		(5 144)
Costs of litigation and claims	(3 390)		(2 809)
Impairment allowance on fixed assets, litigations and other assets	(3 634)		(312)
Compensation, penalty fees and fines	(612)		(415)
Other	(10 799)		(4 253)
Total	(130 546)		(90 075)

(*) the item also includes the provision for commission reimbursements on previously repaid consumer loans

15. Administrative expenses

Personnel expenses

	2020	2019
Wages and salaries	(1 530 716)	(1 532 141)
Insurance and other charges related to employees	(260 347)	(277 926)
Share-based payments expenses	(13 173)	(13 190)
Total	(1 804 236)	(1 823 257)

Other administrative expenses

	2020	2019
General expenses	(842 795)	(867 150)
Taxes and charges	(29 881)	(28 101)
Bank Guarantee Fund fee	(378 503)	(452 141)
Financial supervision authority fee (KNF)	(17 882)	(24 210)
Tax on certain financial institutions	(660 590)	(591 403)
Total	(1 929 651)	(1 963 005)

Total administrative expenses

(3 733 887)

(3 786 262)

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 208 030 thousand (PLN 369 854 thousand in 2019).

16. Depreciation and amortization

	2020	2019
Property, plant and equipment	(286 376)	(277 525)
Investment property	-	(219)
Intangible assets	(209 657)	(183 124)
Total	(496 033)	(460 868)

17. Total gains (losses) from subsidiaries and associates

	2020	2019
Impairment allowances for equity investments	847	-
Total gains (losses) from subsidiaries and associates	847	-

18. Income Tax

The below additional information notes present the Bank gross profit’s.

Reconciliation between tax calculated by applying the current tax rate to accounting profit and the actual tax charge presented in the separate income statement.

	2020	2019
Profit before income tax	1 697 220	3 015 766
Tax charge according to applicable tax rate	322 472	572 996
Permanent differences:	248 324	195 303
Non taxable income	(46 282)	(59 735)
Non tax deductible costs including:	293 226	256 188
Bank Guarantee fund fee	71 916	85 907
Banking tax	125 512	112 367
Other non tax deductible costs	95 798	57 914
Impact of other tax rates applied in accordance with art.19.1.2 of CIT Act	-	-
Impact of utilized tax losses	48	82
Other	1 332	(1 232)
Effective income tax charge on gross profit	570 796	768 299

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	(966 855)	(741 983)
Current tax charge in the income statement	(967 155)	(741 228)
Adjustments related to the current tax from previous years	987	(305)
Other taxes (e.g. withholding tax)	(687)	(450)
Deferred tax	396 059	(26 316)
Occurrence and reversal of temporary differences	396 059	(26 316)
Tax charge in the separate income statement	(570 796)	(768 299)
Equity
Deferred tax	(235 725)	(37 085)
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	(132 284)	(24 717)
Tax on items that are or may be reclassified subsequently to profit or loss	(220 960)	(39 009)
Tax charge on items that will never be reclassified to profit or loss	(14 765)	1 924
fair value revaluation through other comprehensive income –equity securities	(16 735)	1 418
remeasurements the defined benefit liabilities	1 970	506
Total charge	(806 521)	(805 384)

			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	-	-		-	-	-	-	-	-	-	-
Accrued income – loans	119 529	119 529		-	(17 091)	-	-	-	102 438	102 438	-
Change in revaluation of financial assets	343 782	241 106		102 676	(62 590)	237 696	-	-	518 888	178 516	340 372
Accelerated depreciation	105 428	105 428		-	20 497	-	(2 310)	-	123 615	123 615	-
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	2 330	2 330		-	(2 330)	-	-	-	-	-	-
Gross deferred tax liability	735 178	632 502		102 676	(45 319)	237 696	(2 310)	-	925 245	584 873	340 372
DEFFERED TAX ASSET
Accrued expenses - securities	86 686	86 686		-	180 080	-	-	-	266 766	266 766	-
Accrued expenses - deposits and loans	36 431	36 431		-	(26 292)	-	-	-	10 139	10139	-
Downward revaluation of financial assets	312 705	312 705		-	23 353	-	-	-	336 058	336 058	-
Income received to be amortized over time from loans and current accounts	322 533	322 533		-	(13 106)	-	-	-	309 427	309 427	-
Loan provisions charges	604 050	604 050		-	152 592	-	-	-	756 642	756 642	-
Personnel related provisions	117 080	99 619		17 461	(212)	1 971	213	-	119 052	99 620	19 432
Accruals	21 973	21 973		-	91	-	5	-	22 069	22 069	-
Previous year losses	-	-		-	-	-	-	-	-	-	-
Other	10 836	10 836		-	34 235	-	-	-	45 071	45 071	-
Gross deferred tax assets	1 512 294	1 494 833		17 461	350 741	1 971	218	-	1 865 224	1 845 792	19 432
Deferred tax charge	X	X		X	396 060	(235 725)	2 528	-	X	X	X
Net deferred tax assets	777 116	862 331		(85 215)	X	X	X	X	939 979	1 260 919	(320 940)
Net deferred tax liability	-	-		-	X	X	X	X	-	-	-

			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	EQUITY	THE INCOME STATEMENT	EQUITY	TOTAL DEFERRED TAX	IN THE INCOME STATEMENT	IN EQUITY
DEFFERED TAX LIABILITY
Accrued income – securities	-	-		-	-	-	-	-	-	-	-
Accrued income – loans	131 927	131 927		-	(12 398)	-	-	-	119 529	119 529	-
Change in revaluation of financial assets	239 503	174 259		65 244	66 646	37 631	201	(199)	343 782	241 106	102 676
Accelerated depreciation	114 951	114 951		-	(9 523)	-	-	-	105 428	105 428	-
Investment relief	3 833	3 833		-	591	-	-	-	4 424	4 424	-
Paid intermediation costs	132 387	132 387		-	27 298	-	-	-	159 685	159 685	-
Other	2 466	2 466		-	(420)	-	284	-	2 330	2 330	-
Gross deferred tax liability	625 067	559 823		65 244	72 194	37 631	485	(199)	735 178	632 502	102 676
DEFFERED TAX ASSET
Accrued expenses - securities	5 873	5 873		-	80 813	-	-	-	86 686	86 686	-
Accrued expenses - deposits and loans	35 836	35 836		-	595	-	-	-	36 431	36 431	-
Downward revaluation of financial assets	397 681	397 681		-	(84 976)	-	-	-	312 705	312 705	-
Income received to be amortized over time from loans and current accounts	286 669	286 669		-	35 864	-	-	-	322 533	322 533	-
Loan provisions charges	594 811	594 811		-	9 384	-	(145)	-	604 050	604 050	-
Personnel related provisions	114 301	97 346		16 955	2 273	546	-	(40)	117 080	99 619	17 461
Accruals	20 495	20 495		-	1 478	-	-	-	21 973	21 973	-
Previous year losses	-	-		-	-	-	-	-	-	-	-
Other	10 389	10 389		-	447	-	-	-	10 836	10 836	-
Gross deferred tax assets	1 466 055	1 449 100		16 955	45 878	546	(145)	(40)	1 512 294	1 494 833	17 461
Deferred tax charge	X	X		X	(26 316)	(37 085)	(630)	159	X	X	X
Net deferred tax assets	840 988	889 277		(48 289)	X	X	X	X	777 116	862 331	(85 215)
Net deferred tax liability	-	-		-	X	X	X	X	-	-	-

In the opinion of the Bank the deferred tax asset in the amount of PLN 939 979 thousand reported as at 31 December 2020 is sustainable in total amount. The analysis was performed based on the past results of the company 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 no temporary differences related to investmentsin 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 reversein foreseeable future.

As at 31 December 2020 and 31 December 2019, there were no temporary differences, unused tax losses and unused tax relieves which were not included in the deferred tax assets.

19. 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	1 126 424	2 247 467
Weighted average number of ordinary shares in the period	262 470 034	262 470 034
Earnings per share (in PLN per share)	4.29	8.56

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 Bank.

	2020	2019
Net profit	1 126 424	2 247 467
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)	4.29	8.56

20. 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

21. Cash and balances with Central Bank

CASH AND DUE FROM CENTRAL BANK	31.12.2020	31.12.2019
Cash	4 306 088	3 036 976
Current account at Central Bank	150 197	2 101 956
Other	-	-
Gross carrying amount	4 456 285	5 138 932
Impairment allowances	(13)	(174)
Net carrying amount	4 456 272	5 138 758

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	2 079 581	-
EUR	1 106 970	-
USD	556 922	-
GBP	185 317	-
CHF	100 412	-
NOK	258 502	-
Other currencies	168 568	-
Total	4 456 272	-

31.12.2019	Assets	LIABILITIES
PLN	3 759 446	4 550
EUR	806 786	-
USD	242 253	-
GBP	101 235	-
CHF	78 726	-
NOK	53 804	-
Other currencies	96 508	-
Total	5 138 758	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%).

22. Loans and advances to banks

Loans and advances to banks by product type

	31.12.2020	31.12.2019
Current accounts	561 002	618 837
Interbank placements	179 332	200 843
Loans and advances	86 007	172 583
Cash collaterals	1 176 927	733 090
Reverse repo transactions	719 015	219 153
Cash in transit	199 051	302 298
Total gross amount	2 921 334	2 246 804
Impairment allowances	(3 495)	(2 896)
Total net amount	2 917 839	2 243 908

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	2 840 435	2 080 342
between 1 and 3 months	614	3 037
between 3 months and 1 year	278	83 041
between 1 and 5 years	79 618	78 005
over 5 years	16	81
past due	373	2 298
Total gross amount	2 921 334	2 246 804
Impairment allowances	(3 495)	(2 896)
Total net amount	2 917 839	2 243 908

Loans and advances to banks by currency

	31.12.2020	31.12.2019
PLN	1 127 778	787 958
EUR	1 363 657	980 977
GBP	5 103	164 928
USD	257 719	80 993
HUF	1 217	53 159
CZK	2 756	50 945
Other currencies	159 609	124 948
Total	2 917 839	2 243 908

23. 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	1 607 944	1 279 495
Equity securities	5 393	-
Total financial assets	1 613 337	1 279 495
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	1 131 734
T- bills	100	-
T- bonds	975 925	1 131 734
Debt securities issued by banks	172 165	13 974
Debt securities issued by business entities	459 754	133 787
Total financial assets	1 607 944	1 279 495
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	-
Total	5 393	-

Debt securities held for trading by maturity

	31.12.2020	31.12.2019
Financial assets
Debt securities, including:
up to 1 month	17 524	21
between 1 and 3 months	11 050	100 922
between 3 months and 1 year	504 590	27 093
between 1 and 5 years	651 791	1 121 806
over 5 years	422 989	29 653
unspecified term	-	-
Total financial assets	1 607 944	1 279 495
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	1 448 931	1 264 654
EUR	148 543	12 735
USD	10 470	2 106
Total financial assets	1 607 944	1 279 495
Financial liabilities
PLN	742 804	184 799
Total financial liabilities	742 804	184 799

24. Derivative financial instruments (held for trading)

Derivative financial instruments at the Bank

In its operations the Bank uses different financial derivatives that are offered to the clients and are used for managing risks involved in the Bank’s business. The majority of derivatives at the Bak 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 Bank 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 processof 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 Bank 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 Bank 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 Bank uses the same method as for credit risk assessment. In order to control its credit risk levels the Bank 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 Bank’s credit or price risk level.

Fair value of trading derivatives

31.12.2020	assets	liabilities
Interest rate transactions
Interest Rate Swaps (IRS)	4 071 770	4 027 296
Forward Rate Agreements (FRA)	605	586
Options	6 580	2 171
Other	831	847
Foreign currency and gold transactions
Cross-Currency Interest Rate Swaps (CIRS)	119 417	70 622
Currency Forward Agreements	257 942	272 972
Currency Swaps (FX-Swap)	193 335	83 919
Options for currency and gold	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	4 842 279	4 636 116

31.12.2019	assets	liabilities
Interest rate transactions
Interest Rate Swaps (IRS)	1 644 621	1 604 186
Forward Rate Agreements (FRA)	284	3
Options	8 463	2 003
Other	39	61
Foreign currency and gold transactions
Cross-Currency Interest Rate Swaps (CIRS)	81 369	53 546
Currency Forward Agreements	153 950	157 608
Currency Swaps (FX-Swap)	80 285	109 509
Options for currency and for gold	73 950	72 799
Transactions based on equity securities and stock indexes
Options	3 084	3 076
Other	-	-
Transactions based on commodities and precious metals
Options	25 646	23 523
Other	14 298	14 054
Total	2 085 989	2 040 368

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	6 453 283	42 292 408	127 220 509	37 376 497	219 572 527
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 transactions						-
Cross-Currency Interest Rate Swaps (CIRS) - currency bought	-	1 154 252	107 754	6 282 193	126 650	7 670 849
Cross-Currency Interest Rate Swaps (CIRS) - currency sold	-	1 120 300	100 000	6 302 003	124 435	7 646 738
Currency Forward Agreements - currency bought	20 057 578	4 787 788	7 798 255	3 227 169	26 674	35 897 464
Currency Forward Agreements - currency sold	20 064 674	4 827 371	7 798 762	3 255 715	27 372	35 973 894
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	75 101 516	27 692 221	71 640 390	152 923 145	38 093 040	365 450 312

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	91 708 769	30 547 721	197 014 096
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 transactions
Cross-Currency Interest Rate Swaps (CIRS) - currency bought	-	1 013 584	1 242 697	6 215 984	166 666	8 638 931
Cross-Currency Interest Rate Swaps (CIRS) - currency sold	-	1 016 622	1 227 952	6 191 523	166 383	8 602 480
Currency Forward Agreements - currency bought	5 107 200	2 854 577	6 417 509	4 360 671	-	18 739 957
Currency Forward Agreements - currency sold	5 114 742	2 850 759	6 427 955	4 378 171	-	18 771 627
Currency Swaps (FX-Swap) – currency bought	13 821 068	1 703 894	3 999 958	598 423	-	20 123 343
Currency Swaps (FX-Swap) – currency sold	13 836 643	1 711 052	4 028 472	591 352	-	20 167 519
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	-	-	-	-	-	-
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	44 263 038	26 518 221	96 700 150	122 589 304	31 175 485	321 246 198

25. 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	73 636 275	867 948	15 902	74 520 125
Current accounts	9 409 954	-	-	9 409 954
Operating loans	10 912 352	443 778	19 285	11 375 415
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
Factoring	2 103 256	-	-	2 103 256
Other loans and advances	982 335	-	131 475	1 113 810
Reverse repo transactions	280 620	-	-	280 620
Cash in transit	149 325	-	-	149 325
Gross carrying amount	133 907 238	1 588 718	187 001	135 682 957
Impairment allowances () (*)	(6 955 998)	-	-	(6 955 998)
Carrying amount	126 951 240	1 588 718	187 001	128 726 959

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 28 268 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 329 655 thousand.

	31.12.2019
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
Mortgage loans	68 557 662	972 945	21 600	69 552 207
Current accounts	12 224 536	-	-	12 224 536
Operating loans	15 075 523	404 374	22 518	15 502 415
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
Factoring	2 582 870	-	-	2 582 870
Other loans and advances	837 126	-	141 295	978 421
Reverse repo transactions	502 300	-	-	502 300
Cash in transit	34 390	-	-	34 390
Gross carrying amount	136 164 081	1 545 782	242 639	137 952 502
Impairment allowances (*)	(6 277 118)	-	-	(6 277 118)
Carrying amount	129 886 963	1 545 782	242 639	131 675 384

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 22 356 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 27 712 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	53 620 892	(4 216 266)	49 404 626	1 588 718	32 234	51 025 578
Individuals	78 000 591	(2 618 293)	75 382 298	-	131 474	75 513 772
Budget entities	2 285 755	(121 439)	2 164 316	-	23 293	2 187 609
Loans and advances to customers	133 907 238	(6 955 998)	126 951 240	1 588 718	187 001	128 726 959

(**) Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 329 655 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	57 266 692	(3 960 457)	53 306 235	1 545 782	44 128	54 896 145
Individuals	75 991 832	(2 197 179)	73 794 653	-	141 296	73 935 949
Budget entities	2 905 557	(119 482)	2 786 075	-	57 215	2 843 290
Loans and advances to customers	136 164 081	(6 277 118)	129 886 963	1 545 782	242 639	131 675 384

(*) The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount ofPLN 22 356 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 27 712 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	13 794 544	-	2 155	13 796 699
between 1 and 3 months	3 257 693	-	6 254	3 263 947
between 3 months and 1 year	12 815 005	51 305	21 812	12 888 122
between 1 and 5 years	44 952 702	340 029	119 240	45 411 971
over 5 years	54 918 634	1 197 384	33 778	56 149 796
past due	4 168 660	-	3 762	4 172 422
Gross carrying amount	133 907 238	1 588 718	187 001	135 682 957
Impairment allowances () (*)	(6 955 998)	-	-	(6 955 998)
Carrying amount	126 951 240	1 588 718	187 001	128 726 959

(*) The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 28 268 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 329 655 thousand.

	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	16 067 547	-	2 395	16 069 942
between 1 and 3 months	4 324 282	-	14 669	4 338 951
between 3 months and 1 year	13 524 297	51 859	50 043	13 626 199
between 1 and 5 years	42 093 945	350 768	130 095	42 574 808
over 5 years	55 634 329	1 143 155	43 567	56 821 051
past due	4 519 681	-	1 870	4 521 551
Gross carrying amount	136 164 081	1 545 782	242 639	137 952 502
Impairment allowances (*)	(6 277 118)	-	-	(6 277 118)
Carrying amount	129 886 963	1 545 782	242 639	131 675 384

(*) The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 22 356 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 27 712 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	104 923 972	150 819	187 001	105 261 792
CHF	2 521 858	-	-	2 521 858
EUR	17 439 173	1 437 899	-	18 877 072
USD	1 530 157	-	-	1 530 157
Other currencies	536 080	-	-	536 080
Total	126 951 240	1 588 718	187 001	128 726 959

	31.12.2019
	AMORTISED COST	FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME	FAIR VALUE THROUGH PROFIT OR LOSS	TOTAL
PLN	108 998 763	50 124	242 639	109 291 526
CHF	2 600 631	-	-	2 600 631
EUR	16 497 283	1 495 658	-	17 992 941
USD	1 313 033	-	-	1 313 033
Other currencies	477 253	-	-	477 253
Total	129 886 963	1 545 782	242 639	131 675 384

26. Hedge accounting

The Bank 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 Bank applies and will apply hedge accounting in the future.

As of 31 December 2020 the Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 bank 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 Bank 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 Bank 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 Bank to market risk managemant, including interest rate risk, is presented in Note 6.3. Details regarding exposure of the Bank to interest rate risk is disclosed in Note 5.3.

The use of derivative instruments to hedge the exposure to changes in interest rates generates counterparty credit risk of derivative transactions. The Bank 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 Bank 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 Bank, 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 Bank 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 Bank 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 Bank 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 swap (FX-Swap) to hedge the exposure to interest rate risk related to the volatility of market reference rates (EURIBOR, LIBOR USD), and the exposure to the currency risk, generated by both, portfolios of variable-rate of loans denominated in EUR and portfolios of term and negotiable deposits 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 Bank 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 Bank to market risk management, including interest rate risk and currency risk, is presented in Note 5.3. Details regarding the Bank’s interest rate risk and currency risk exposure are disclosed in Note 5.3.

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 Bank manages this risk in a way similar to fair value hedge.

The Bank 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 Bank, 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 Bank 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 Bank’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

27. Investment (placement) securities

	31.12.2020	31.12.2019
Debt securities measured at amortised cost	27 559 085	14 557 831
Debt securities measured at fair value through other comprehensive income	44 606 162	30 964 680
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	125 454
Total	72 657 423	45 873 297

Debt securities measured at amortised cost

	31.12.2020	31.12.2019
Debt securities issued by central governments	19 759 086	8 880 617
T-bills	808 649	-
T-bonds	18 950 437	8 880 617
Debt securities issued by central banks	74 678	64 262
Debt securities issued by banks	2 229 516	-
Debt securities issued by business entities	2 334 813	2 416 388
Debt securities issued by local governments	3 160 992	3 196 564
Total	27 559 085	14 557 831
including impairment of assets	(75 492)	(74 986)

Debt securities measured at fair value through other comprehensive income

	31.12.2020	31.12.2019
Debt securities issued by central governments	21 247 521	18 525 465
T-bills	1 737 500	-
T-bonds	19 260 041	18 275 855
Other	249 980	249 610
Debt securities issued by central banks	1 000 000	3 000 508
Debt securities issued by banks	9 238 452	3 768 345
Debt securities issued by business entities	10 491 102	2 732 829
Debt securities issued by local governments	2 629 087	2 937 533
Total	44 606 162	30 964 680
including impairment of assets (*)	(75 342)	(33 096)

(*) 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 Bank 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 Bank did not sell any investments in equity instruments designated for measurement at fair value through other comprehensive income.

Equity instruments mandatorily measured at fair value through profit or loss

	31.12.2020	31.12.2019
Shares	160 486	125 454
Total	160 486	125 454

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	3 836 873	66 038
between 3 months and 1 year	11 205 324	3 725 987
between 1 and 5 years	35 157 849	25 751 347
over 5 years	19 732 591	12 259 318
Total	72 165 247	45 522 511

Investment debt securities by currency

	31.12.2020	31.12.2019
PLN	63 316 781	39 458 491
EUR	2 270 092	2 831 292
USD	6 578 374	3 232 728
Total	72 165 247	45 522 511

28. 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

 investments.

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

.Assets held for sale

	31.12.2020	31.12.2019
Assets held for sale
Property, plant and equipment	14 619	17 175
Investment in associated	21 119	-
Total assets	35 738	17 175

The changes in the balance of assets held for sale

ASSETS HELD FOR SALE	2020	2019
Opening balance	17 175	11 550
Increases including:	21 119	50 127
transfer from property, plant and equipment	-	39 314
transfer from investment properties	-	10 813
Transfer of shares of Dom Inwestycyjny Xelion Sp. z o.o.	21 119	-
other	-	-
Decreases including:	(2 556)	(44 502)
transfer to property, plant and equipment	-	(290)
disposal	-	(43 560)
other	(2 556)	(652)
Closing balance	35 738	17 175

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

29. Investments in subsidiaries

Condensed information about subsidiaries as at 31 December 2020 (*)

name of entity	location	activities	assets	liabilities	revenues	net profit /loss	% of shares	carrying AMOUNT of shares
Pekao Investment Banking S.A.	Warsaw	Brokerage services	248 901	3 369	21 653	172	100.00	274 334
Pekao Faktoring Sp. z o.o.	Lublin	Factoring	4 773 706	4 696 535	102 431	25 822	100.00	50 268
Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation)	Warsaw	Business consulting	52 967	62	211	53	100.00	.51 380
Pekao Financial Services Sp. z o.o.	Warsaw	Transferable agent	48 632	14 855	65 030	3 452	66.50	4 500
Pekao Leasing Sp. z o.o.	Warsaw	Lease services	8 615 417	8 130 972	255 981	31 498	100.00	278 798
Centrum Kart S.A.	Warsaw	Additional financial services	130 434	94 155	41	4 225	100.00	17 592
Pekao Bank Hipoteczny S.A.	Warsaw	Banking services	2 776 442	2 508 605	70 371	(12 385)	100.00	233 823
Pekao Property S.A. (in liquidation)	Warsaw	Real estate development services	25 993	237	78	(338)	100.00	25 756
Pekao Direct Sp. z o.o.( ex. Centrum Bankowości Bezpośredniej Sp. z o.o.)	Cracow	Call-center services	28 422	12 038	26 872	2 281	100.00	547
Pekao Investment Management S.A. (**)	Warsaw	Holding	319 740	41 788	283 303	103 823	100.00	605 794
Dom Inwestycyjny Xelion Sp. z o.o.	Warsaw	Financial intermediation	120 015	82 647	44 731	903	100.00	-
Total								1 542 792

Condensed information about subsidiaries as at 31 December 2019 (*)

name of entity	location	activities	assets	liabilities	revenues	net profit /loss	% of shares	carrying AMOUNT of shares
Pekao Investment Banking S.A.	Warsaw	Brokerage services	259 700	25 089	23 680	(19 044)	100.00	274 334
Pekao Faktoring Sp. z o.o.	Lublin	Factoring	3 646 244	3 575 650	87 288	19 245	100.00	50 268
Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation)	Warsaw	Business consulting	52 929	77	549	384	100.00	51 380
Pekao Powszechne Towarzystwo Emerytalne S.A. (in liquidation)	Warsaw	Pension funds management	63 486	354	728	743	100.00	61 834
Pekao Financial Services Sp. z o.o.	Warsaw	Transferable agent	51 274	16 235	53 796	4 687	66.50	4 500
Pekao Leasing Sp. z o.o.	Warsaw	Lease services	7 603 344	7 069 708	261 067	83 529	100.00	278 798
Centrum Kart S.A.	Warsaw	Additional financial services	45 017	12 905	164	589	100.00	17 592
Pekao Bank Hipoteczny S.A.	Warsaw	Banking services	2 546 926	2 265 881	81 186	(37 702)	100.00	233 823
Pekao Property S.A. (in liquidation)	Warsaw	Real estate development services	26 249	155	220	(102)	100.00	26 460
Pekao Direct Sp. z o.o.( ex. Centrum Bankowości Bezpośredniej Sp. z o.o.)	Cracow	Call-center services	26 455	12 045	27 261	2 219	100.00	547
Pekao Investment Management S.A. (**)	Warsaw	Holding	311 932	30 044	327 321	126 019	100.00	605 794
Dom Inwestycyjny Xelion Sp. z o.o.	Warsaw	Financial intermediation	71 908	35 443	41 251	549	100.00	21 119
Total								1 626 449

(*) Data available at the date of financial statements.

(**) Consolidated data together a company of Pekao TFI SA.

Changes in investment into subsidiaries

	2020	2019
Opening balance	1 626 449	1 682 756
Increases, including:	-	25
Transfer of a part assets and liabilities CDM S.A to CBB Sp. z o.o.	-	25
Decreases, including	(83 657)	(56 332)
przejęcie przez Bank spółki CDM S.A.	-	(56 332)
transfer of shares in Dom Inwestycyjny Xelion Sp. z o.o. to ‘Assets held for sale’	(21 119)	-
liquidation of Pekao Powszechne Towarzystwo Emerytalne S.A. (in liquidation)	(61 834)	-
changes of impairment allowances	(704)	-
Closing balance	1 542 792	1 626 449

The structure of investments in subsidiaries

	31.12.2020	31.12.2019
Investment in subsidiaries, including:
banks	233 823	233 823
other financial institutions	1 231 833	1 314 786
non-financial institutions	77 136	77 840
Total	1 542 792	1 626 449

30. Investments in associates

Information about associates as at 31 December 2020

NAME OF ENTITY	LOCATION	ACTIVITIES	ASSETS	LIABILITIES	REVENUES	NET PROFIT/LOSS	% OF SHARES	carrying amount OF SHARES
CPF Management	Tortola, British Virgin Islands	Advisory services– currently does not provide its services	-	-	-	-	-	-
Total								-

Information about associates as at 31 December 2019 (*)

NAME OF ENTITY	LOCATION	ACTIVITIES	ASSETS	LIABILITIES	REVENUES	NET PROFIT/LOSS	% OF SHARES	carrying amount OF SHARES
CPF Management	Tortola, British Virgin Islands	Advisory services– currently does not provide its services	n/a	n/a	n/a	n/a	40.00	-
Total								-

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

As at 31 December 2020 and 31 December 2019, the Bank did not have the investment in entities under common control.

31. Intangible assets

	31.12.2020	31.12.2019
Intangible assets, including:	1 086 720	687 142
research and development expenditures	1 276	-
licenses and patents	738 613	445 205
other	4 121	5 240
assets under construction	342 710	236 697
Goodwill	52 635	52 635
Total	1 139 355	739 777

The item ‘Goodwill’ contains:

 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,

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
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
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	72 455	2 743 555	36 284	236 697	52 635	3 141 626
Increases including:	1 276	504 489	1 080	554 396	-	1 061 241
acquisitions	-	-	-	553 965	-	553 965
transfer from investments outlays	-	447 352	1 031	-	-	448 383
the work carried out on their own	-	41 282	-	-	-	41 282
other	1 276	15 855	49	431	-	17 611
Decreases, including:	-	(17 684)	(482)	(448 383)	-	(466 549)
liquidation	-	(17 684)	(482)	-	-	(18 166)
sale	-	-	-	-	-	-
transfer from investments outlays	-	-	-	(448 383)	-	(448 383)
other	-	-	-	-	-	-
Closing balance	73 731	3 230 360	36 882	342 710	52 635	3 736 318
ACCUMULATED Amortization
Opening balance	72 455	2 298 350	31 044	-	-	2 401 849
Amortization	-	207 458	2 199	-	-	209 657
Liquidation	-	(17 684)	(482)	-	-	(18 166)
Sale	-	-	-	-	-	-
Other	-	3 623	-	-	-	3 623
Closing balance	72 455	2 491 747	32 761	-	-	2 596 963
impairment
Opening balance	-	-	-	-	-	-
Closing balance	-	-	-	-	-	-
net value
Opening balance	-	445 205	5 240	236 697	52 635	739 777
Closing balance	1 276	738 613	4 121	342 710	52 635	1 139 355

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	72 455	2 543 875	34 556	146 326	52 635	2 849 847
Increases including:	-	214 173	1 803	282 260	-	498 236
acquisitions	-	-	-	253 681	-	253 681
transfer from investments outlays	-	-	919	478	-	1 397
the work carried out on their own	-	23 925	20	-	-	23 945
other	-	188 100	864	-	-	188 964
Decreases, including:	-	2 148	-	28 101	-	30 249
liquidation	-	(14 493)	(75)	(191 889)	-	(206 457)
sale	-	(13 574)	(75)	-	-	(13 649)
transfer from investments outlays	-	(919)	-	(2 925)	-	(3 844)
other	-	-	-	(188 964)	-	(188 964)
Closing balance	72 455	2 743 555	36 284	236 697	52 635	3 141 626
ACCUMULATED Amortization
Opening balance	72 452	2 115 108	29 122	-	-	2 216 682
Amortization	3	181 144	1 977	-	-	183 124
Liquidation	-	(13 574)	(75)	-	-	(13 649)
Sale	-	-	-	-	-	-
Business combination	-	15 672	20	-	-	15 692
Closing balance	72 455	2 298 350	31 044	-	-	2 401 849
impairment
Opening balance	-	-	-	-	-	-
Closing balance	-	-	-	-	-	-
net value
Opening balance	3	428 767	5 434	146 326	52 635	633 165
Closing balance	-	445 205	5 240	236 697	52 635	739 777

In the period from 1 January to 31 December 2020 the Bank acquired intangible assets in the amount of PLN 552 904 thousand (in 2019 – PLN 253 681 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 115 409 thousand, whereas as at 31 December 2019 – PLN 174 945thousand.

32. Property, plant and equipment

	31.12.2020	31.12.2019
Non-current assets, including:	1 707 692	1 667 277
land and buildings	1 221 945	1 282 742
machinery and equipment	360 786	267 508
transport vehicles	17 322	26 130
other	107 639	90 897
Non-current assets under construction and prepayments	126 943	175 101
Total	1 834 635	1 842 378

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	2 763 579	1 385 011	80 499	458 233	175 101	4 862 423
Increases, including:	96 979	202 108	24 831	38 112	230 956	592 986
acquisitions	2 813	-	-	-	230 956	233 769
other	36 901	20 000	23 202	-	-	80 103
business combination	-	-	-	-	-	-
transfer from non-current assets under construction	57 265	182 108	1 629	38 112	-	279 114
Decreases, including:	(15 425)	(127 852)	(22 241)	(14 003)	(279 114)	(458 635)
liquidation and sale	(13 335)	(102 796)	(465)	(10 329)	-	(126 925)
transfer to non-current assets held for sale	-	-	-	-	-	-
other	(2 090)	(25 056)	(21 776)	(3 674)	-	(52 596)
transfer from non-current assets under construction	-	-	-	-	(279 114)	(279 114)
Closing balance	2 845 133	1 459 267	83 089	482 342	126 943	4 996 774
Accumulated Depreciation
Opening balance	1 474 974	1 114 982	54 369	367 251	-	3 011 576
Increases, including:	149 822	107 782	33 501	21 021	-	312 126
depreciation	149 822	107 782	11 549	17 223	-	286 376
other	-	-	21 952	3 798	-	25 750
business combination	-	-	-	-	-	-
Decreases, including:	(8 023)	(126 015)	(22 103)	(13 654)	-	(169 795)
liquidation and sale	(8 023)	(99 784)	(323)	(10 034)	-	(118 164)
transfer to non-current assets held for sale	-	-	-	-	-	-
other	-	(26 231)	(21 780)	(3 620)	-	(51 631)
Closing balance	1 616 773	1 096 749	65 767	374 618	-	3 153 907
impairment
Opening balance	5 863	2 521	-	85	-	8 469
Increases	1 164	-	-	-	-	1 164
Decreases	(612)	(789)	-	-	-	(1 401)
Closing balance	6 415	1 732	-	85	-	8 232
net value
Opening balance	1 282 742	267 508	26 130	90 897	175 101	1 842 378
Closing balance	1 221 945	360 786	17 322	107 639	126 943	1 834 635

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	2 261 495	1 276 648	74 073	455 340	141 667	4 209 223
Impact of IFRS 16 Application	496 852	75 415	-	-	-	572 267
Opening balance with impact of IFRS 16	2 758 347	1 352 063	74 073	455 340	141 667	4 781 490
Increases, including:	115 598	117 420	7 906	41 765	205 044	487 733
acquisitions	-	-	-	-	204 823	204 823
other	13 992	3 451	7 165	71	-	24 679
business combination	63 077	17 252	741	5 335	221	86 626
transfer from non-current assets under construction	38 529	96 717	-	36 359	-	171 605
Decreases, including:	(110 366)	(84 472)	(1 480)	(38 872)	(171 610)	(406 800)
liquidation and sale	(44 015)	(65 465)	(1 480)	(38 774)	-	(149 734)
transfer to non-current assets held for sale	(66 351)	(18 940)	-	(98)	-	(85 389)
other	-	(67)	-	-	(5)	(72)
transfer from non-current assets under construction	-	-	-	-	(171 605)	(171 605)
Closing balance	2 763 579	1 385 011	80 499	458 233	175 101	4 862 423
Accumulated Depreciation
Opening balance	1 332 755	1 060 834	40 489	383 930	-	2 818 008
Increases, including:	205 846	136 774	15 052	19 981	-	377 653
depreciation	157 946	87 471	14 708	14 756	-	274 881
other	47	35 887	-	66	-	36 000
business combination	47 853	13 416	344	5 159	-	66 772
Decreases, including:	(63 627)	(82 626)	(1 172)	(36 660)	-	(184 085)
liquidation and sale	(34 994)	(64 862)	(1 172)	(36 567)	-	(137 595)
transfer to non-current assets held for sale	(28 518)	(17 464)	-	(93)	-	(46 075)
other	(115)	(300)	-	-	-	(415)
Closing balance	1 474 974	1 114 982	54 369	367 251	-	3 011 576
impairment
Opening balance	4 328	2 598	-	86	-	7 012
Increases	2 662	-	-	-	-	2 662
Decreases	(1 127)	(77)	-	(1)	-	(1 205)
Closing balance	5 863	2 521	-	85	-	8 469
net value
Opening balance	924 412	213 216	33 584	71 324	141 667	1 384 203
Closing balance	1 282 742	267 508	26 130	90 897	175 101	1 842 378

In the period from 1 January to 31 December 2020 the Bank acquired property, plant and equipment in the amount of PLN 233 769 thousand (in 2019 - PLN 204 823 thousand), while the value of property, plant and equipment sold amounted to PLN 925 thousand (in 2019 - PLN 8 542 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 1 813 thousand (in 2019 - PLN 2 671 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).

33. Investment property

The Bank 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	-	-
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	-	(7 850)
Decreases, including:	-	-
sale of real estate	-	(7 802)
transfer to non-current assets held for sale	-	(48)
transfer to property plant and equipment	-	-
other	-	-
Closing balance	-	-
IMPAIRMENT
Opening balance	-	-
Increases, including:	-	-
impairment charges	-	(19)
Decreases, including:	-	-
sale of real estate	-	-
transfer to non-current assets held for sale	-	-
transfer to property plant and equipment	-	-
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	2 216
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	-	-

34. Other assets

	31.12.2020	31.12.2019
Prepaid expenses	38 995	31 589
Accrued income	216 471	173 110
Interbank and interbranch settlements	4 002	16 465
Other debtors	114 965	85 834
Card settlements	520 893	666 060
Total	895 326	973 058

Prepaid expenses represent expenditures, which will be amortized against income statement in the forthcoming reporting periods.

35. 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	304 186	290 000	265 370
Lombard and technical loan	bonds	5 852 305	5 628 888	-
Other loans	bonds	361 456	349 400	302 880
Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW)	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	237 583	230 000	206 998
Lombard and technical loan	bonds	5 758 095	5 548 332	-
Other loans	bonds	373 537	360 100	314 430
Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW)	cash deposits	30 378	30 378	-
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 BankPekao S.A. and its clients,

 in case of freeze to the benefit of KDPW – with the status of the clearing member for brokerage transactions.

36. Amounts due to other banks

Amounts due to other banks by product type

	31.12.2020	31.12.2019
Current accounts	1 239 659	725 260
Interbank deposits and other liabilities	2 070 855	691 719
Loans and advances received	1 292 792	1 381 474
Repo transactions	589 928	218 449
Cash in transit	32 175	26 466
Lease liabilities	135	601
Total	5 225 544	3 043 969

Amounts due to other banks are measured at amortised cost.

Amounts due to other banks by currency

	31.12.2020	31.12.2019
PLN	4 119 485	1 541 687
CHF	153 146	192 684
EUR	927 109	1 258 007
USD	18 085	20 908
Other currencies	7 719	30 683
Total	5 225 544	3 043 969

37. Amounts due to customers

Amounts due to customers by entity and product type

	31.12.2020	31.12.2019
Amounts due to corporate, including:	59 918 474	54 719 433
current accounts	56 639 155	42 366 012
term deposits and other liabilities	3 279 319	12 353 421
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:	105 776 434	91 874 677
current accounts	88 796 952	56 987 681
term deposits and other liabilities	16 979 482	34 886 996
Repo transactions	152 563	379 792
Cash in transit	299 842	240 407
Lease liabilities	398 310	414 512
Total	178 827 283	158 544 670

Amounts due to customers are measured at amortised cost.

Amounts due to customers by currency

	31.12.2020	31.12.2019
PLN	150 281 053	131 101 655
CHF	496 394	420 985
EUR	17 299 290	17 349 999
USD	9 319 532	8 265 919
Other currencies	1 431 014	1 406 112
Total	178 827 283	158 544 670

38. Debt securities issued

Debt securities issued by type

	31.12.2020	31.12.2019
Certificates of deposit	523 305	1 604 344
Total	523 305	1 604 344

Amounts debt securities issued are measured at amortised cost.

The Bank redeems its own debt securities issued on a timely basis.

Debt securities issued by currency

	31.12.2020	31.12.2019
PLN	516 596	1 579 558
USD	6 709	24 786
Total	523 305	1 604 344

39. 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

40. 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	99 335	18 954	285 987	324 288	44 493	773 057
Provision charges/revaluation	99 130	144 430	22 969	299 645	13 173	579 347
Provision utilization	(17 744)	(82 306)	(29 584)	-	(10 965)	(140 599)
Provision releases	(9 039)	-	-	(159 965)	-	(169 004)
Foreign currency exchange differences	(164)	-	-	4 263	-	4 099
Other changes	(4 718)	-	10 599	-	-	5 881
Closing balance	166 800	81 078	289 971	468 231	46 701	1 052 781
Short term	32 644	81 078	24 302	65 578	-	203 602
Long term	134 156	-	265 669	402 653	46 701	849 179

(*) Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 80 325 thousand and a provision for early repayments 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	53 988	-	284 634	271 609	44 729	654 960
Provision charges/revaluation	72 346	85 000	23 063	223 079	13 190	416 678
Provision utilization	(22 433)	(66 046)	(25 310)	-	(14 204)	(127 993)
Provision releases	(4 752)	-	-	(170 363)	-	(175 115)
Foreign currency exchange differences	-	-	-	(37)	-	(37)
Other changes	186	-	3 600	-	778	4 564
Closing balance	99 335	18 954	285 987	324 288	44 493	773 057
Short term	28 970	18 954	142	44 509	-	92 575
Long term	70 365	-	285 845	279 779	44 493	680 482

(*) Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 18 990 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 4.6 and 5.2 of these separate financial statements.

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 Bank 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 Bank performed an analysis of data on early repayment of loans and complaints. As a result of the above, the Bank 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 ( as at 31 December 2019f PLN 26.3 million).

The estimates required the Bank to adopt expert assumptions and are associated with uncertainty. The Bank 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 Bank 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 Bank 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 Bank estimated possible future prepayments of these exposures. In accordance with the above, the Bank 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 realizowanych 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.

41. Other liabilities

	31.12.2020	31.12.2019
Deferred income	184 317	155 357
Provisions for holiday leave	58 515	56 413
Provisions for other employee-related liabilities	166 424	210 108
Provisions for administrative costs	134 086	129 652
Other costs to be paid (*)	68 321	74 185
Other creditors	931 298	648 542
Interbank and interbranch settlements	708 338	744 616
Card settlements	334 209	360 998
Total	2 585 508	2 379 871

(*) 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).

42. Defined benefit plans

Based on internal regulations in respect to remuneration, the employees of the Bank 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 Bank 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 Bank’s employees would increase the defined benefit plans obligations,

 longevity risk – the increase in life expectancy of the Bank’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 Bank,

 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 Bank.

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	285 987	284 634
Current service cost	17 237	15 586
Interest expense	5 732	7 477
Remeasurements of the defined benefit obligations:	10 371	2 848
actuarial gains and losses arising from changes in demographic assumptions	(2 685)	25 009
actuarial gains and losses arising from changes in financial assumptions	6 693	26 347
actuarial gains and losses arising from experience adjustments	6 363	(48 508)
Contributions paid by the employer	(29 584)	(25 310)
Business combination	228	752
Closing balance	289 971	285 987

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

43. 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.

		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.

	31.12.2020	31.12.2019
Up to 1 year	4 241	2 702
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	6 682	9 942

LEASES UNDER IFRS 16	31.12.2020	31.12.2019
Interest expense on lease liabilities	(11 718)	(16 568)
Expenses relating to short-term leases presented in ‘Other administrative expenses’	(1 801)	(8 092)
Expenses relating to leases of low-value assets, excluding short-termleases of low-value assets presented in ‘Other administrative expenses’	(384)	(91)

	31.12.2020	31.12.2019
Financial commitments granted to:
banks	966 326	669 821
customers entities	43 406 882	35 908 132
budget entities	721 915	657 679
Total	45 095 123	37 235 632

	31.12.2020	31.12.2019
Issued to banks:	2 147 420	2 368 639
guarantees	1 609 041	2 168 540
sureties	494 500	153 750
confirmed export letters of credit	43 879	46 349
Issued customers entities	23 455 223	18 741 322
guarantees	13 590 925	12 108 330
securities’ underwriting guarantees	3 013 647	2 982 379
sureties	6 850 651	3 650 613
Issued to budget entities:	1 360 653	682 865
guarantees	35 551	29 070
securities’ underwriting guarantees	1 325 102	653 795
Total	26 963 296	21 792 826

	31.12.2020	31.12.2019
Financial received from:	563 455	233 370
banks	563 455	233 370
customers entities	-	-
budget entities	-	-
Guarantees received from:	19 815 138	17 581 742
banks	8 596 465	4 820 053
clients entities	10 112 082	11 746 732
budget entities	1 106 591	1 014 957
Total	20 378 593	17 815 112

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

2020	ISSUED AND FULLY PAID-UP SHARES	TOTAL
Opening balance	262 470 034	262 470 034
Closing balance	262 470 034	262 470 034

	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	8 852 566	8 300 933
Revaluation reserves, in this:	1 368 046	363 111
remeasurements of the defined benefit liabilities (net of tax)	(82 841)	(74 441)
revaluation of debt financial instruments and loans measured at fair value through other comprehensive income (net of tax)	766 212	202 262
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:	233 127	233 127
supplementary capital	189 308	189 308
bonds convertible into shares - equity component	28 819	28 819
fund for brokerage activities	15 000	15 000
Other capital and reserves	21 573 419	20 016 851
Retained earnings	1 685 058	-
Net profit for the period	1 126 424	2 247 467
Retained earnings and net profit for the period	2 811 482	2 247 467
Total	24 384 901	22 264 318

	31.12.2020	31.12.2019
Cash and amounts due from Central Bank	4 456 272	5 138 758
Loans and receivables from banks with maturity up to 3 months	2 840 077	2 081 424
Cash and Cash equivalents presented in the cash flow statement	7 296 349	7 220 182

	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	1 604 344	(1 080 556)	436	(919)	523 305
Subordinated liabilities	2 764 493	-	-	(6 617)	2 757 876
Loans and advances received	1 381 474	(183 301)	94 914	(295)	1 292 792
Lease liabilities	415 113	(113 566)	-	96 898	398 445
Total	6 165 424	(1 377 423)	95 350	89 067	4 972 418

	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	1 732 596	-	1 732 596	(126 635)	-	(1 617)	1 604 344
Subordinated liabilities	2 012 485	-	2 012 485	750 000	-	2 008	2 764 493
Loans and advances received	1 354 225	-	1 354 225	30 452	305	(3 508)	1 381 474
Lease liabilities	38 014	536 460	574 474	(191 131)	-	31 770	415 113
Total	5 137 320	536 460	5 673 780	462 686	305	28 653	6 165 424

Name of entity	Receivables from Loans, advances 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	1 414	87 519	-		2 044
Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities	1	-	9 517	9 544	308 929	322		2
Bank Pekao S.A. Group entities
Subsidiaries
Pekao Investment Banking S.A.	-	-	-	-	236 093	-		-
Pekao Leasing Sp. z o.o.	257 457	1 487 996	1 711	121	24 020	8 399		-
Pekao Faktoring Sp. z o.o.	1 389 285	771 459	-	181	1 470	-		1 049
Pekao Fundusz Kapitałowy Sp. z o.o. (in liguidation)	14	-	-	-	52 947	-		-
Centrum Kart S.A.	-	-	-	10	29 288	-		7 892
Pekao Financial Services Sp. z o. o.	-	-	-	7	11 708	-		-
Pekao Bank Hipoteczny S.A.	342 300	332 985	28 403	-	180	10 527		27
Pekao Property S.A. (in liguidation)	55	-	-	6 231	25 819	-		-
Pekao Direct Sp. z o.o.	-	-	-	46	15 304	-		7 187
FPB – Media Sp. z o. o. (in bankruptcy)	8 971	-	-	-	-	-		-
Dom Inwestycyjny Xelion Sp. z o.o.	-	-	-	5	80 422	-		-
Pekao Investment Management S.A.	-	-	-	-	956	-		-
Pekao TFI S.A. (PIM S.A. subsidiary)	-	-	-	15 731	160 612	-		-
Total of Bank Pekao S.A. Group entieties	1 998 082	2 592 440	30 114	22 332	638 819	18 926		16 155
Key management personnel of the Bank Pekao S.A.	1 640	-	-	-	2 943	-		-
Total	1 999 724	2 592 440	40 542	33 290	1 038 210	19 248		18 201

Name of entity	interest income	interes expense	fee and commission income	fee and commissio expense	income from derivatives and other	expenses from derivatives and other
PZU S.A. – the Bank ‘s parent entity	(1 644)	(279)	21 690	(231)	321	(2 596)
Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities	184	(445)	14 055	(208)	2 611	(6 692)
Bank Pekao S.A. Group entities
Subsidiaries
Pekao Investment Banking S.A.	-	(471)	163	(59)	80	(191)
Pekao Leasing Sp. z o.o.	22 066	(1 875)	16 102	(22)	3 644	(6 336)
Pekao Faktoring Sp. z o.o.	31 797	(29)	5 058	-	432	-
Pekao Powszechne Towarzystwo Emerytalne S.A. (in liguidation)(*)	-	(153)	6	-	21	-
Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation)	-	(210)	6	-	9	-
Centrum Kart S.A.	-	(41)	1 245	-	10 714	(60 122)
Pekao Financial Services Sp. z o.o.	-	(15)	91	-	75	-
Pekao Bank Hipoteczny S.A.	5 132	(81)	1 297	-	118	(7 869)
Pekao Direct Sp. z o.o.	(184)	-	26	(24 947)	1 908	(47 046)
Pekao Property S.A. (in liquidation)	-	(78)	6	-	43	-
Dom Inwestycyjny Xelion Sp. z o.o.	-	(193)	133	-	84	-
Pekao Investment Management S.A.	-	(345)	18	-	-	-
Pekao TFI S.A. (PIM S.A. subsidiary)	-	(739)	86 671	-	-	-
Total of Bank Pekao S.A. Group entities	58 811	(4 230)	110 822	(25 028)	17 128	(121 564)
Key management personnel of the Bank Pekao S.A.	4	(16)	1	-	-	-
Total	57 355	(4 970)	146 568	(25 467)	20 060	(130 852)

Name of entity	GRANTED		RECEIVED
Name of entity	FINANCIAL	guarantees	FINANCIAL	guarantees
PZU S.A. – the Bank ‘s parent entity	2 710	108 637	-	-
Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities	1 085	103 730	-	-
Bank Pekao S.A. Group entities				-
Subsidiaries				-
Pekao Investment Banking S.A.	104	-		-
Pekao Leasing Sp. z o.o.	4 391 287	9 432 068	-	-
Pekao Faktoring Sp. z o.o.	2 626 646	3 408 376	-	-
Centrum Kart S.A.	39	3 000	-	-
Pekao Financial Services Sp. z o. o.	65	1 295	-	-
Pekao Bank Hipoteczny S.A.	414 823	500 272	-	-
Pekao Direct Sp. z o.o.	60	-	-	-
Dom Inwestycyjny Xelion Sp. z o.o.	4	-	-	-
Pekao TFI S.A. (PIM S.A. subsidiary)	107	-	-	-
Total of Bank Pekao S.A. Group entities	7 433 135	13 345 011	-	-
Key management personnel of the Bank Pekao S.A.	255	-	-	-
Total	7 437 185	13 557 378	-	-

	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

	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

	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

	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

	31.12.2020	31.12.2019
Loans granted to employees	25 735	26 159
Cash at ZFŚS account	546	779
ZFŚS assets	26 281	26 938
ZFŚS value	26 281	26 938
	2020	2019
Deductions made to ZFŚS during fiscal period	27 886	23 842

I. Separate income statement

II. Separate statement of comprehensive income

III. Separate statement of financial position

IV. Separate statement of changes in equity

V. Separate cash flow statement

VI. Notes to the separate financial statements

1. General information

2. Business combinations

3. Statement of compliance

4. Significant accounting policies

5. Risk management

6. Custody activity

7. Brokerage activity

8. Interest income and expense

9. Fee and commission income and expense

10. Dividend income

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

12. Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss

13. Net allowances for expected credit losses

14. Other operating income and expenses

15. Administrative expenses

16. Depreciation and amortization

17. Total gains (losses) from subsidiaries and associates

18. Income Tax

19. Earnings per share

20. Dividend

21. Cash and balances with Central Bank

22. Loans and advances to banks

23. Financial assets and liabilities held for trading

24. Derivative financial instruments (held for trading)

25. Loans and advances to customers

26. Hedge accounting

27. Investment (placement) securities

28. Assets and liabilities held for sale

29. Investments in subsidiaries

30. Investments in associates

31. Intangible assets

32. Property, plant and equipment

33. Investment property

34. Other assets

35. Assets pledged as security for liabilities

36. Amounts due to other banks

37. Amounts due to customers

38. Debt securities issued

39. Subordinated liabilities

40. Provisions

41. Other liabilities

42. Defined benefit plans

43. Share-based payments

44. Leasing

45. Contingent commitments

46. Share capital

47. Other capital and reserves, retained earnings and profit for the period

48. Additional information to the cash flow statement

49. Related party transactions

50. Repo and reverse repo transactions

51. Company Social Benefits Fund (‘ZFŚS’)

52. Subsequent events

11. Result on financial assets and liabilities measured at fair

value through profit or loss and foreign exchange result

ITEM NAME	(UNAUDITED
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

	31.12.2020
CAPITAL RATIOS
Common Equity Tier 1 capital ratio (%)	18.59%
Common Equity Tier 1 capital ratio (%), using the new definition of default	18.57%
Total capital ratio (%)	20.77%
Total capital ratio (%), using the new definition of default	20.74%

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
24.02.2021	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