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Consolidated financial statements of the PKO Bank Polski S.A. Group for the year ended 31 December 2020

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

SELECTED FINANCIAL DATA DERIVED FROM THE CONSOLIDATED FINANCIAL STATEMENTS

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	2020	2019	2020	2019
Net interest income/(expense)	10 346	10 290	2 312	2 392
Net fee and commission income	3 904	3 731	873	867
Profit / (loss) before tax	(1 696)	5 819	(379)	1 353
Net Profit / (loss) (including non-controlling shareholders)	(2 561)	4 032	(572)	937
Net Profit / (loss) attributable to equity holders of the parent company	(2 557)	4 031	(571)	937
Earnings per share for the period - basic (in PLN/EUR)	(2,05)	3,22	(0,46)	0,75
Earnings per share for the period - diluted (in PLN/EUR)	(2,05)	3,22	(0,46)	0,75
Total net comprehensive income	(1 667)	4 251	(373)	988
Net cash from operating activities	(8 980)	(11 845)	(2 007)	(2 753)

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	31.12.2020	31.12.2019	31.12.2020	31.12.2019
Total assets	376 966	347 897	81 686	81 695
Total equity	39 911	41 578	8 648	9 764
Capital and reserves attributable to equity holders of the parent company	39 924	41 587	8 651	9 742
Share capital	1 250	1 250	271	294
Number of shares (in million)	1 250	1 250	1 250	1 250
Book value per share (in PLN/EUR)	31,93	33,26	6,92	7,81
Diluted number of shares (in million)	1 250	1 250	1 250	1 250
Diluted book value per share (in PLN/EUR)	31,93	33,26	6,92	7,81
Total capital adequacy ratio	18,18%	18,42%	18,18%	18,42%
Tier 1	38 816	36 717	8 411	8 622
Tier 2	2 700	2 700	585	634

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

TABLE OF CONTENTS

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

General information about the Group

1. Activities of the Group

2. Changes to companies comprising the Group

3. Infor Information on members of the Supervisory and Management

4. Approval of the consolidated financial statements

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

6. Basis of preparation of the financial statements

7. Statement of compliance

8. Going concern

9. Management Representation

10. New standards and interpretations and their amendments

11. Description of significant accounting policies

11.1. Functional currency, presentation currency and foreign currencies

11.2. Basis of consolidation

11.3. Accounting for transactions

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

11.5. The principles for classification of financial instruments

11.6. Financial assets measured at amortized cost

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

11.8. Financial assets measured at fair value throught profit or loss

11.9. Equity instruments

11.10. Reclassification of financial assets

11.11. Modifications – Changes in contractual cash flows

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

11.13. Measurement of financial liabilities

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. Segment reporting

14. Interest income and expense

15. Fee and commission income and expenses

16. Dividend income

17. Gains/(losses) on financial transactions

18. Foreign exchange gains/ (losses)

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

20. Other operating income and expenses

21. Net expected credit losses

22. Net impairment allowances on non-financial assets

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

24. Administrative expenses

25. Tax on certain financial institutions

26. Income tax expense

27. Cash and balances with the Central Bank

28. Amounts due from banks

29. Hedge accounting

30. Other derivative instruments

31. Securities

31.1. Securities – classification of financial assets by stage

31.2. securities - changes in the gross carrying amount during the period

31.3. securities - changes in allowances for expected credit losses in the period

32. Repo and reverse repo transactions

33. Loans and advances to customers

33.1. Loans and advances to customers – classification of financial assets by stage

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

33.3. Loans and advances to customers – Changes in allowances for expected credit losses

34. Receivables and liabilities related to insurance activities

35. Intangible assets, property, plant and equipment, and property, plant and equipment leased out under operating lease

35.1. Property, plant and equipment sent in operating leases

35.2. Property, plant and equipment

35.3. Intangible assets

36. Assets held for sale

37. Investments in associates and joint ventures

38. Other assets

39. Amounts due to the Central Bank and banks

40. Amounts due to customers

41. Financing received

41.1. Loans and advances received

41.2. Debt securities in issue

41.3. Subordinated liabilities

42. Other liabilities

43. Provisions

44. Equity and shareholding structure of the Bank

45. Dividend and profit appropriation

46. Leases

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

48. Legal claims

49. Notes to the consolidated cash flow statement

50. Transactions with the State Treasury and related parties

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

52. Fair value hierarchy

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

54. Offsetting financial assets and financial liabilities

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

56. Financial assets and liabilities by currency

57. Contractual cash flows from the group’s financial liabilities, including derivative financial instruments

58. Current and non-current assets and liabilities

59. Risk management within the Group

60. Specific activities in the area of risk management undertaken by the Group in 2020

61. Credit risk management

62. Credit risk – financial information

63. Managing credit concentration risk in the Group

64. Collateral

65. Forbearance practices

66. Counterparty credit risk exposure

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

68. Interest rate risk management

69. Currency risk management

70. Liquidity risk management

71. Capital adequacy

72. Leverage ration

73. Information on securitization of the lease portfolio and package sale of receivables

74. Fiduciary activities

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

76. Subsequent events

CONSOLIDATED INCOME STATEMENT

INCOME STATEMENT	Note	2020	2019 restated
Net interest income/(expense)	14	10 346	10 290
Interest income		11 801	12 637
of which calculated under the effective interest rate method		10 415	11 327
Interest expenses		(1 455)	(2 347)
Net fee and commission income	15	3 904	3 731
Fee and commission income		4 953	4 814
Fee and commission expense		(1 049)	(1 083)
Other net income		197	522
Dividend income	16	15	14
Gains/(losses) on financial transactions	17	(102)	175
of which due to impact of macroeconomic variables on the loan portfolio		(48)	-
Foreign exchange gains/ (losses)	18	182	104
Gains/(losses) on derecognition of financial instruments	19	181	145
of which measured at amortized cost		(22)	(13)
Net other operating income and expense	20	(79)	84
Result on business activities		14 447	14 543
Net expected credit losses	21	(2 174)	(1 148)
of which due to impact of macroeconomic variables on the loan portfolio		(1 175)	-
Net impairment allowances on non-financial assets	22	(395)	(113)
Cost of the legal risk of mortgage loans in convertible currencies	23	(6 552)	(451)
Administrative expenses	24	(5 983)	(6 021)
of which net regulatory charges		(778)	(537)
Tax on certain financial institutions	25	(1 055)	(1 022)
Share in profits and losses of associates and joint ventures	37	16	31
Profit / (loss) before tax		(1 696)	5 819
Income tax expense	26	(865)	(1 787)
Net Profit / (loss) (including non-controlling shareholders)		(2 561)	4 032
Profit (loss) attributable to non-controlling shareholders		(4)	1
Net Profit / (loss) attributable to equity holders of the parent company		(2 557)	4 031

Earnings per share
– basic earnings per share for the period (PLN)		(2,05)	3,22
– diluted earnings per share for the period (PLN)		(2,05)	3,22
Weighted average number of ordinary shares during the period (in million)		1 250	1 250

* In the years 2020 and 2019, there were no dilutive instruments. Therefore, the amount of diluted earnings per share is the same as the amount of basic earnings per share.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREMENSIVE INCOME	Note	2020	2019
Net Profit / (loss) (including non-controlling shareholders)		(2 561)	4 032
Other comprehensive income		894	219
Items which may be reclassified to profit or loss		899	224
Cash flow hedges (net)		123	210
Cash flow hedges (gross)	29	174	259
Deferred income tax	26,29	(51)	(49)
Fair value of financial assets measured at fair value through other comprehensive incomen (net)		836	(36)
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		1 233	115
Gains /losses transferred to the profit or loss (on disposal)		(203)	(158)
Deferred income tax	26	(194)	7
Foreign exchange differences on translation of foreign branches		(68)	50
Share in other comprehensive income of associates and joint ventures		8	-
Items which cannot be reclassified to profit or loss		(5)	(5)
Actuarial gains and losses (net)		(5)	(5)
Actuarial gains and losses (gross)		(6)	(7)
Deferred income tax	26	1	2
Total net comprehensive income, of which attributable to:		(1 667)	4 251
equity holders of the parent		(1 663)	4 250
Non-controlling interest		(4)	1

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Note	31.12.2020	31.12.2019 restated	01.01.2019 restated *
ASSETS		376 966	347 897	325 100
Cash and balances with Central Bank	27	7 474	14 677	22 925
Amounts due from banks	28	2 557	4 092	7 661
Hedging derivatives	29	958	645	658
Other derivative instruments	30	5 501	2 795	1 907
Securities	31	123 682	80 573	64 114
Reverse repo transactions	32	-	1 081	51
Loans and advances to customers	33	222 603	230 206	214 861
Liabilities in respect of insurance activities	34	798	858	672
Property, plant and equipment under operating lease	35.1	1 168	1 300	554
Property, plant and equipment	35.2	3 161	3 142	3 225
Non-current assets held for sale	36	126	12	16
Intangible assets	35.3	3 281	3 178	3 195
Investments in associates and joint ventures	37	291	377	344
Current income tax receivable		19	5	4
Deferred income tax assets	26	2 543	2 243	2 135
Other assets	38	2 804	2 713	2 778

		31.12.2020	31.12.2019 restated	01.01.2019 restated*
LIABILITIES AND EQUITY		376 966	347 897	325 100
Liabilities		337 055	306 319	286 110
Amounts due to the Central Bank	39	-	-	7
Amounts due to banks	39	2 626	2 135	1 751
Hedging derivatives	29	378	589	471
Other derivative instruments	30	6 104	2 924	2 655
Amounts due to customers	40	282 356	256 170	238 723
Liabilities in respect of insurance activities	34	1 740	1 777	1 397
Loans and advances received	41	2 267	2 779	4 343
Debt securities in issue	41	32 098	31 148	28 627
Subordinated liabilities	41	2 716	2 730	2 731
Other liabilities	42	4 703	4 692	4 436
Current income tax liabilities		193	324	371
Deferred income tax provision	26	372	370	52
Provisions	43	1 502	681	546
		'	'
EQUITY		39 911	41 578	38 990
Share capital		1 250	1 250	1 250
Other capital		35 089	34 205	34 505
Retained earnings		6 142	2 101	(496)
Net profit or loss for the year		(2 557)	4 031	3 741
Capital and reserves attributable to equity holders of the parent company		39 924	41 587	39 000
Non-controlling interests		(13)	(9)	(10)

* taking into account the implementation of IFRS 16

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD ENDED 31 December 2020	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Capital and reserves attributable to equity holders of the parent company	Total non-controlling interests	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 429	1 070	3 237	469	34 205	2 101	4 031	41 587	(9)	41 578
Transfer from retained earnings	-	-	-	-	-	-	4 031	(4 031)	-	-	-
Comprehensive income	-	-	-	-	894	894	-	(2 557)	(1 663)	(4)	(1 667)
Covering of prior year loss1	-	-	-	(111)	-	(111)	111	-	-	-	-
Transfer from retained earnings to equity	-	90	-	11	-	101	(101)	-	-	-	-
As at the end of the period	1 250	29 519	1 070	3 137	1 363	35 089	6 142	(2 557)	39 924	(13)	39 911

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

FOR THE PERIOD ENDED 31 December 2019	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Capital and reserves attributable to equity holders of the parent company	Total non-controlling interests	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 354	1 070	3 831	250	34 505	(385)	3 741	39 111	(10)	39 101
Changes in the accounting policies	-	-	-	-	-	-	(111)	-	(111)	-	(111)
As at the beginning of the period, after policy changes	1 250	29 354	1 070	3 831	250	34 505	(496)	3 741	39 000	(10)	38 990
Transfer from retained earnings	-	-	-	-	-	-	3 741	(3 741)	-	-	-
Dividend	-	-	-	-	-	-	(1 663)	-	(1 663)	-	(1 663)
Comprehensive income	-	-	-	-	219	219	-	4 031	4 250	1	4 251
Covering of prior year loss1	-	-	-	(606)	-	(606)	606	-	-	-	-
Transfer from retained earnings to equity	-	75	-	12	-	87	(87)	-	-	-	-
As at the end of the period	1 250	29 429	1 070	3 237	469	34 205	2 101	4 031	41 587	(9)	41 578

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

FOR THE YEAR ENDED 31 December 2020	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2020	Share in other comprehensive income of associates and joint ventures	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Foreign exchange differences on translation of foreign branches	Total
As at the beginning of the period	(12)	457	232	(16)	(192)	469
Comprehensive income	8	836	123	(5)	(68)	894
As at the end of the period	(4)	1 293	355	(21)	(260)	1 363

FOR THE YEAR ENDED 31 December 2019	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2019	Share in other comprehensive income of associates and joint ventures	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Foreign exchange differences on translation of foreign branches	Total
As at the beginning of the period	(12)	493	22	(11)	(242)	250
Comprehensive income	-	(36)	210	(5)	50	219
As at the end of the period	(12)	457	232	(16)	(192)	469

CONSOLIDATED STATEMENT OF CASH FLOWS

	Note	2020	2019
Cash flows from operating activities
Profit / (loss) before tax		(1 696)	5 819
Income tax paid		(1 552)	(1 592)
Total adjustments:		36 244	(900)
Amortization and depreciation, including depreciation of property, plant and equipment under operating leases		1 172	1 049
(Gains)/losses on investing activities	49	(4)	(11)
Interest and dividends	49	(1 278)	(863)
Change in:
amounts due from banks	49	(258)	(30)
hedging derivatives		(524)	131
other derivative instruments		474	(619)
securities	49	(1 652)	(2 028)
loans and advances to customers	49	6 018	(13 284)
reverse repo transactions		1 081	(1 030)
receivebles in respect of insurance activities		60	(186)
non-current assets held for sale	49	(116)	3
other assets	49	(236)	129
accumulated allowances for expected credit losses	49	2 040	(956)
accumulated allowances on non-financial assets and other provisions	49	831	179
amounts due to banks	49	491	(917)
amounts due to customers	49	26 186	17 447
liabilities in respect of insurance activities		(37)	380
loan and advances received	49	403	1 115
liabilities in respect of debt securities in issue	49	1 374	(143)
subordinated liabilities	49	(14)	(1)
other liabilities	49	244	387
Other adjustments	49	(11)	148
Net cash from/used in operating activities		32 996	5 127

	Note	2020	2019
Cash flows from investing activities
Inflows from investing activities		65 807	218 185
Proceeds from sale of and interest on securities measured at fair value through other comprehensive income		63 742	209 689
Proceeds from sale of and interest on securities measured at amortized cost		1 871	8 061
Proceeds from sale of intangible assets, property, plant and equipment and assets held for sale		162	385
Other inflows from investing activities (dividends)	49	32	50
Outflows from investing activities		(105 609)	(232 357)
Purchase of shares in subsidiaries, net of cash acquired		-	(275)
Purchase of securities measured at fair value through other comprehensive income		(69 486)	(218 318)
Purchase of securities measured at amortized cost		(34 741)	(12 433)
Acquisition of intangible assets and property, plant and equipment, including under operating leases		(1 382)	(1 331)
Net cash from/used in investing activities		(39 802)	(14 172)

	Note	2020	2019
Cash flows from financing activities
Proceeds from debt securities in issue	49	6 838	13 079
Redemption of debt securities	49	(7 262)	(10 665)
Taking up loans and advances	49	-	665
Repayment of loans and advances	49	(915)	(3 353)
Dividend paid to shareholders	49	-	(1 663)
Payment of lease liabilities	49	(233)	(221)
Repayment of interest on long-term liabilities	49	(602)	(642)
Net cash from financing activities		(2 174)	(2 800)
Total net cash flows		(8 980)	(11 845)
of which foreign exchange differences on cash and cash equivalents		115	17
Cash equivalents at the beginning of the period		18 681	30 526
Cash equivalents at the end of the period	49	9 701	18 681

General information about the Group

Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna (“PKO Bank Polski S.A.” or “the Bank”) was established by virtue of a decree signed on 7 February 1919 by the Head of State Józef Piłsudski, Prime Minister Ignacy Paderewski and Hubert Linde, first president of Pocztowa Kasa Oszczędnościowa. In 1950, the Bank began operating as Powszechna Kasa Oszczędności Bank Państwowy (state-owned bank). Pursuant to the Decree of the Council of Ministers dated 18 January 2000, Powszechna Kasa Oszczędności (a state-owned bank) was transformed into a state owned joint-stock company, Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna.

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

Country of registration	Polska
Registered office	Warsaw
Address of the registered office of the entity	ul. Puławska 15, 02-515 Warsaw

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

The Powszechna Kasa Oszczędnościowa Bank Polski Spółka Akcyjna Group (“the PKO Bank Polski S.A. Group”, “the Bank’s Group”, “the Group”) conducts its operations within the territory of the Republic of Poland and through subsidiaries in Ukraine, Sweden and Ireland; it also has branches in the Federal Republic of Germany (“the German Branch”), the Czech Republic (“the Czech Branch”) and in the Slovak Republic (“the Slovak Branch”).

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

Through its subsidiaries, the Group offers mortgage loans, provides specialized financial services related to leases, factoring, debt collection, investment funds, pension funds and insurance, as well as provides services related to car fleet management, transfer agent, technological solutions, IT outsourcing and business support, real estate management and also conducts banking operations and provides debt collection and financing services in Ukraine.

In 2020, the Bank did not change the name of the reporting entity or other identification data.

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

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

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

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

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

* share in equity of the direct parent

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

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

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

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

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

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

The Group holds the following associates and joint ventures.

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

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

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

2. Changes to companies comprising the Group

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

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

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

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

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

3. Infor Information on members of the Supervisory and Management

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

• Zbigniew Hajłasz – Chair of the Supervisory Board

• Marcin Izdebski – Vice-Chair of the Supervisory Board

• Grażyna Ciurzyńska – Deputy Chair of the Supervisory Board

• Mariusz Andrzejewski – Member of the Supervisory Board

• Grzegorz Chłopek – Member of the Supervisory Board

• Wojciech Jasiński – Member of the Supervisory Board

• Andrzej Kisielewicz – Member of the Supervisory Board

• Rafał Kos – Member of the Supervisory Board

• Krzysztof Michalski – Member of the Supervisory Board

• Piotr Sadownik – Member of the Supervisory Board

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

• Zbigniew Jagiełło – President of the Management Board

• Rafał Antczak – Vice-President of the Management Board

• Rafał Kozłowski – Vice-President of the Management Board

• Maks Kraczkowski – Vice-President of the Management Board

• Mieczysław Król – Vice-President of the Management Board

• Adam Marciniak – Vice-President of the Management Board

• Piotr Mazur – Vice-President of the Management Board

• Jakub Papierski – Vice-President of the Management Board

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

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

4. Approval of the consolidated financial statements

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

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

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

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

• Impact on estimates and assumptions

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

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

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

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

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

A detailed description of the moratoria offered to the Bank’s Customers and the public it captures the note is included in the Note “Specific activities in the area of risk management undertaken by the Group in 2020”, and in the “PKO Bank Polski S.A. Group Directors’ Report for 2020”.

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

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

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

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

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

Given the fact that the COVID-19 pandemic has an adverse effect on the economic environment, the Group conducted an impairment test of goodwill on Nordea Bank Polska S.A. and in connection with taking over control of PKO Leasing Pro S.A. The results of the test are described in detail in the Note „Intangible assets, property, plant and equipment under operating leases”.

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

• Capital adequacy

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

Accounting policies adopted to prepare the consolidated financial statements

6. Basis of preparation of the financial statements

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

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

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

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

7. Statement of compliance

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

8. Going concern

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

9. Management Representation

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

10. New standards and interpretations and their amendments

• Standards and interpretations and their amendments effective from 1 January 2020

Standards and interpretations*	Description of changes and impact
Amendments to References to the Conceptual Framework in IFRS (1.01.2020/29.11.2019)	The purpose of the amendments is to replace references to the previous conceptual framework in a number of standards and interpretations with references to the amended Conceptual Framework. Implementation of the Conceptual Framework had no effect on the consolidated financial statements.
Amendments to IAS 1 and IAS 8: Definition of the term ‘material’ (1.01.2020/29.11.2019)	The amendments standardize and clarify the definition of ‘material’ and contain guidelines to increase the consistency of application of this concept in the IFRS. The Group makes assessments of the materiality of disclosures in accordance with the requirements of IAS 1 on an ongoing basis, and based on these assessments, makes appropriate changes in the presentation of data in the consolidated financial statements.
Amendments to IFRS 9, IAS 39 and IFRS 7 – IBOR reform (1.01.2020/ 15.01.2020)	The amendments introduce certain temporary, narrow departures from the requirements of prospective verification of the effectiveness of hedging relations set out in IAS 39 and IFRS 9. The amendments allow prospective testing of hedging relationships without taking into account the effects of the future implementation of the IBOR reform. The Group took amendments into account in the prospective testing of hedging relationships. As part of the established hedging relationships, the Capital Group identifies the following interest rate reference ratios: WIBOR, EURIBOR, LIBOR CHF, LIBOR USD. As at the reporting date, these benchmarks are quoted daily and are available for use and the resulting cash flows are normally exchanged with counterparties. In the case of WIBOR and EURIBOR, the Group currently does not identify any uncertainty regarding the timing or amounts of cash flows resulting from the IBOR reform. For LIBOR CHF and LIBOR USD, the established hedging relationships exceed the announced discontinuation dates for both ratios, i.e. December 31, 2021 for CHF LIBOR and June 20, 2023 for USD LIBOR. The Capital Group expects that these ratios will be replaced by new benchmarks: LIBOR CHF by SARON and LIBOR USD by SOFR. List of hedging relationships and the nominal amounts of their designated hedging instruments that may be affected by the IBOR reform: • Cash flow hedging: CIRS CHF / PLN (CHF 25 million based on CHF LIBOR) - Hedging the volatility of cash flows of floating-rate loans in CHF, resulting from the risk of changes in interest rates and currency risk, and hedging of the volatility of cash flows of term deposits negotiated in PLN / bank products of regular PLN savings resulting from the risk of changes in interest rates, using CIRS transaction • Fair value hedge: IRS USD (USD 81 million based on USD LIBOR) - Hedge of fair value volatility of a fixed-rate convertible currency, measured at fair value through other comprehensive income, resulting from the risk of changes in interest rates, using IRS transactions.
Amendments to IFRS 3 Business combinations (1.01.2020/21.04.2020)	The amendments narrow down and clarify the definition of a venture. They also allow for a simplified assessment of whether a set of assets and activities is a group of assets and not a venture. A prospective approach will apply to these amendments. The Group will apply these amendments, if relevant.
amendments to IFRS 16 “Leases” (1.06.2020/9.10.2020)	The amendments allow lessees not to account for rent concessions as lease modifications if they are a direct consequence of COVID-19 and meet certain conditions. The Group does not expect these amendments to have a material effect on the consolidated financial statements.

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

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

Standards and interpretations*

Description of changes and impact

Amendments to IFRS 9, IFRS 7, IAS 39 and IFRS 16, IFRS 4 – IBOR reform – Phase 2 (1.01.2021/14.01. 2021)

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

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

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

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

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

amendments to IFRS 4 “Insurance Contracts”

(1.01.2021/16.12.2020)

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

The amendments do not apply to the Group.

* The expected effective date in EU / date of endorsement by EU is provided in parentheses

• NEW STANDARDS AND INTERPRETATIONS AND AMENDMENTS THERETO THAT HAVE BEEN PUBLISHED AND ENDORSED BY THE EUROPEAN UNION

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

* The expected effective date in EU / date of endorsement by EU is provided in parentheses

11. Description of significant accounting policies

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

11.1. Functional currency, presentation currency and foreign currencies

The functional currency of the parent and other entities included in these financial statements, except for the German Branch, the Czech Branch, the Slovak Branch and entities conducting their activities outside of the Republic of Poland, is the Polish zloty. The functional currency of the entities operating in Ukraine is the Ukrainian hryvnia, the functional currency of the German Branch, the Slovak Branch and the entities operating in Sweden and Ireland is the euro, and the functional currency of the Czech Branch is the Czech koruna.

• Transactions and balances in foreign currencies

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

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

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

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

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

UAH/PLN	2020	2019
Foreign exchange rates as at the end of the period	0.1326	0.1602
Arithmetic mean of exchange rates as at the last day of each month in the period	0.1439	0.1502
The highest exchange rate during the period	0.1597	0.1655
The lowest exchange rate during the period	0.1311	0.1345

EUR/PLN	2020	2019
Foreign exchange rates as at the end of the period	4.6148	4.2585
Arithmetic mean of exchange rates as at the last day of each month in the period	4.4741	4.3018
The highest exchange rate during the period	4.6188	4.3844
The lowest exchange rate during the period	4.3010	4.2520

CZK/PLN	2020	2019
Foreign exchange rates as at the end of the period	0.1753	0.1676
Arithmetic mean of exchange rates as at the last day of each month in the period	0.1687	0.1676
The highest exchange rate during the period	0.1753	0.1695
The lowest exchange rate during the period	0.1649	0.1661

11.2. Basis of consolidation

• consolidation

All subsidiaries of the PKO Bank Polski S.A. Group are consolidated using the acquisition method.

The process of consolidation of financial statements of subsidiaries under the acquisition method involves adding up the individual items of the income statements and statements of financial position of the parent company and the subsidiaries in the full amounts, and making appropriate consolidation adjustments and eliminations. The carrying amount of the Bank’s investments in subsidiaries and the equity of these entities at the date of their acquisition are eliminated on consolidation.

The following items are eliminated in full on consolidation:

• intercompany receivables and payables and other settlements between consolidated entities of a similar nature;

• revenues and costs resulting from intercompany transactions between consolidated entities;

• profits or losses resulting from intercompany transactions between consolidated entities contained in the value of the consolidated entities’’ assets, except for impairment losses;

• dividends accrued or paid by subsidiaries to the parent company and other consolidated entities;

• inter-company cash flows in the statement of cash flows.

The consolidated statement of cash flows has been prepared on the basis of the consolidated statement of financial position, consolidated income statement and additional notes and explanations.

Financial statements of subsidiaries are prepared for the same reporting periods as the financial statements of the parent company. Consolidation adjustments are made in order to eliminate any differences in the accounting policies applied by the Bank and its subsidiaries.

• Acquisition of subsidiaries

The acquisition of subsidiaries by the Group is accounted for under the acquisition method.

In respect of mergers of the Group companies, i.e. the so-called transactions under common control, the predecessor accounting method is applied, i.e. the acquired subsidiary is recognized at the carrying amount of its assets and liabilities recognized in the Group’s consolidated financial statements in respect of the given subsidiary, including the goodwill arising from the acquisition of that subsidiary.

• Associates and joint ventures

The Group’s share in the results of associates and joint ventures from the acquisition date is recorded in the income statement and its share in changes in the balance of other comprehensive income from the acquisition date is recorded in other comprehensive income. The carrying amount of investments is adjusted by the total movements in the individual equity items from the acquisition date. When the Group’s share in the losses of these entities becomes equal or higher than the Group’s interest in such entities, including unsecured receivables (if any), the Group discontinues recognizing further losses, unless it has assumed the obligation or made payments on behalf of the particular entity.

At each balance sheet date, the Group makes an assessment of whether there is any objective evidence of impairment in investments in associates and joint ventures. If any such evidence exists, the Group estimates the recoverable amount, i.e. the value in use of the investment or the fair value of the investment less costs to sell, whichever of these values is higher. If the carrying amount of an asset exceeds its recoverable amount, the Group recognizes an impairment allowance in the income statement.

11.3. Accounting for transactions

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

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

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

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

• retains the contractual rights to receive cash flows from the financial asset, but assumes a contractual obligation to pay cash flows to an entity outside the Group.

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

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

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

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

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

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

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

11.5. The principles for classification of financial instruments

The Group classifies financial assets into the following categories:

• measured at amortized cost;

• measured at fair value through other comprehensive income;,

• measured at fair value through profit or loss.

The Group classifies financial liabilities into the following categories:

• measured at amortized cost;

• measured at fair value through profit or loss.

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

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

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

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

• business model

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

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

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

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

• Assessment of contractual cash flow characteristics

Ocena charakterystyk wynikających z umowy przepływów pieniężnych polega na ustaleniu, poprzez przeprowadzenie testu umownych przepływów pieniężnych (test SPPI, z ang. Solely Payments of Principal and Interest test), czy wynikające z umowy przepływy pieniężne z tego składnika aktywów są jedynie spłatą kwoty głównej i odsetek od kwoty głównej pozostałej do spłaty. Odsetki obejmują zapłatę za wartość pieniądza w czasie, za ryzyko kredytowe związane z kwotą główną pozostałą do spłaty w określonym czasie i za inne podstawowe ryzyka i koszty związane z udzieleniem finansowania, a także marżę zysku.

Charakterystyka wynikająca z umownych przepływów pieniężnych pozostaje bez wpływu na klasyfikację składnika aktywów finansowych, jeśli:

• mogłaby mieć tylko niewielki wpływ na wynikające z umowy przepływy pieniężne z tytułu tego składnika (cecha de minimis),

• nie jest prawdziwa, tj. jeżeli wpływa na wynikające z umowy przepływy pieniężne z tytułu instrumentu tylko w przypadku wystąpienia zdarzenia niezwykle rzadkiego, wyjątkowo nietypowego i bardzo mało prawdopodobnego (cecha non genuine).

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

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

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

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

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

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

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

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

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

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

11.6. Financial assets measured at amortized cost

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

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

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

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

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

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

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

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

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

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

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

11.8. Financial assets measured at fair value throught profit or loss

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

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

In the Group’s financial consolidated statements, financial assets measured at fair profit or loss are presented as follows:

• held for trading - financial assets which:

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

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

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

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

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

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

11.9. Equity instruments

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

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

11.10. Reclassification of financial assets

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

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

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

• temporary discontinuation of a specific market for financial assets;

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

No financial liabilities are reclassified.

11.11. Modifications – Changes in contractual cash flows

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

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

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

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

The following qualitative criteria have been adopted:

• Currency translation;

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

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

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

• The quantitative criterion consists of a 10% test analysing the change in the contractual terms of a financial asset resulting in a difference between the amount of future cash flows arising from the changed financial asset discounted using the original effective interest rate and the amount of the future cash flows that would arise from the original financial asset discounted using the same interest rate.

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

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

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

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

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

11.13. Measurement of financial liabilities

Liabilities in respect of a short position in securities and some of the liabilities in respect of insurance products are measured at fair value through profit or loss.

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

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

In order to better reflect its operations, the Group made the following changes:

• “Reclassification of a premium on debt securities” (1)

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

• RECLASSIFICATION OF CHARGES COLLECTED FROM CUSTOMERS COMPENSATING NEGATIVE INTEREST ON FINANCIAL LIABILITIE (2)

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

• “Reclassification of transactional margin” (3)

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

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

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

• “Reclassification of allowances for card complaints” (5)

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

• “Reclassification of the net income/(expense) on insurance activities, net income/(expense) on operating leases, short-term rental and net income/(expenses) on the provision of fleet management services” (6)

In accordance with the Group’s previously applied accounting policy, income and expenses not directly related to banking activities were presented in other operating income or expenses, as appropriate. The Group reviewed its policy and the market practice. The Group believes that income and costs indirectly related to the entity’s operations should be presented, as a rule, in operating income and expenses. Both insurance activities and operating leases are classified as core operating activities of the Group and are an element of its strategy.

Consequently, the Group reclassified net income on insurance activities, which had previously been presented in “Other operating income”, to “Fee and commission income”, as a separate line “offering insurance products”. Net income on insurance activities comprises premium income, costs of insurance activities, claims and change in technical reserves, and the impact of the reinsurer’s share in the aforementioned items.

Moreover, the Group reclassified net income on operating leases, short-term rental and net income on the provision of fleet management services, which had previously been presented jointly in “Other operating income and “Other operating expenses”, as appropriate, to “Fee and commission income”, as a separate line of “operating leases and fleet management” Such income comprises mainly fees for using leased assets, income on short-term rentals and net income or expense on fleet management services (including service, tyre replacement, provision of replacement vehicles). Income on operating leases and on fleet management was included in fee and commission income, together with the cost of depreciation of property, plant and equipment under operating leases, which had previously been presented in “Operating expenses”.

• Inclusion of net regulatory charges in administrative expenses (7)

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

INCOME STATEMENT - items reclassified or changed	01.01-31.12.2019 before restatement	(1)	(2)	(3)	(4)	(5)	(6)	(7)	01.01-31.12.2019 restated
Interest income	12 760	(134)	12	-	(1)		-	-	12 637
Interest expenses	(2 481)	134		-	-		-	-	(2 347)
Net interest income/(expense)	10 279	-	12	-	(1)		-	-	10 290
Fee and commission income	4 130	-	(12)	370	-		326	-	4 814
Fee and commission expense	(1 083)	-		-	-			-	(1 083)
Net fee and commission income	3 047	-	(12)	370	-		326	-	3 731
Foreign exchange gains/ (losses)	473	-		(370)	1		-	-	104
Net expected credit losses	(1 147)	-		-	-	(1)	-	-	(1 148)
Net impairment allowances on non-financial assets	(114)	-		-	-	1	-	-	(113)
Net other operating income and expense	537	-		-	-		(453)	-	84
Operating expenses	(5 611)	-		-	-		127	(537)	(6 021)
Net regulatory charges	(537)	-		-	-		-	537	-
Net Profit / (loss) attributable to the Parent Company	4 031	-		-	-	-	-	-	4 031

• “Property, plant and equipment under operating leases” (1)

In order to separate own property, plant and equipment from property, plant and equipment made available to the Group’s customers under operating leases, the Group decided to present such assets in a separate line “Property, plant and equipment under operating leases”.

• “Receivables in respect of insurance activities” and “Liabilities in respect of insurance activities” (2)

Previously, the Group presented the reinsurer’s share in technical reserves and reinsurance receivables in “Other assets”, and accrued reinsurance commission and reinsurance liabilities in “Other liabilities”. Currently, they are presented, respectively, in “Receivables in respect of insurance activities” and “Liabilities in respect of insurance activities”, in order to better reflect the insurance activities conducted by the Group.

• “Reverse repo transactions” and “Repo transactions” (3)

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

• “Reclassification of potential refunds of costs to customers on expected early repayment of open consumer and mortgage loans” (4)

The Group decided to recognize the impact of potential refunds of costs to customers on expected early repayment of open consumer and mortgage loans as a decrease in the gross carrying amount of loans. This approach is similar to the one applied by the Group to recognize the impact of the legal risk of mortgage loans.

• “Loans and advances received” (5)

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

• Reclassification of holiday pay provisions from other liabilities to provisions (6)

The Group reclassified holiday pay provisions from “Other liabilities” to “Provisions”, because the Group believes that they meet the definition of provisions are similar in nature to other provisions and are based on estimates, similarly to other employee provisions presented in provisions, i.e. : provisions for pensions and other post-employment defined benefit obligations.

In addition, the Group reclassified PLN 131 million of the tax in respect of foreign exchange gains and losses in the territory of Sweden (see Note “Income tax expense”) recognized as at 31 December 2019 as “Current income tax liability”. The Group revised its judgment and reclassified the said amount to “Deferred income tax provision”. (7)

ASSETS - items reclassified or changed	31.12.2019 before restatement	(1)	(2)	(3)	(4)	31.12.2019 restated
Reverse repo transactions	-	-	-	1 081	-	1 081
Loans and advances to customers	231 434	-	-	(1 081)	(147)	230 206
Receivebles in respect of insurance activities	-	-	858	-	-	858
Property, plant and equipment under operating leases		1 300	-	-	-	1 300
Property, plant and equipment	4 442	(1 300)	-	-	-	3 142
Other assets	3 571	-	(858)	-	-	2 713
TOTAL ASSETS	348 044	-	-	-	(147)	347 897

ASSETS - items reclassified or changed	31.12.2018*	Implementing IFRS 16	(1)	(2)	(3)	01.01.2019 restated

Reverse repo transactions	-	-	-	-	51	51
Loans and advances to customers	214 912	-	-	-	(51)	214 861
Receivables from insurance activity	-	-	-	672	-	672
Property, plant and equipment under operating leases		-	554	-	-	554
Property, plant and equipment	2 931	848	(554)	-	-	3 225
Non current assets held for sale	15	1	-	-	-	16
Other assets	3 454	(4)	-	(672)	-	2 778

TOTAL ASSETS	324 255	845	-	-	-	325 100

*Data published as comparable data in the consolidated financial statements of the PKO Bank Polski S.A. Group for the year 2019.

LIABILITIES - items reclassified or changed	31.12.2019 before restatement	(2)	(4)	(5)	(6)	(7)	31.12.2019 restated
Amounts due to banks	2 885	-	-	(750)	-	-	2 135
Amounts due to customers	258 199	-	-	(2 029)	-	-	256 170
Liabilities in respect of insurance activities	1 640	137	-	-	-	-	1 777
Loans and advances received	-	-	-	2 779	-	-	2 779
Other liabilities	5 075	(137)	(147)	-	(99)	-	4 692
Current income tax liabilities	455	-	-	-	-	(131)	324
Deferred income tax provision	239	-	-	-	-	131	370
TOTAL LIABILITIES	306 466	-	(147)	-	-	-	306 319

LIABILITIES - items reclassified or changed	31.12.2018*	Implementing IFRS 16	(2)	(5)	(6)	01.01.2019 restated

Liabilities to banks	2 001	-	-	(250)	-	1 751
Liabilities to customers	242 816	-	-	(4 093)	-	238 723
Liabilities from insurance activity	1 292	-	105	-	-	1 397
Received credits and loans	-	-	-	4 343	-	4 343
Other liabilities	3 685	956	(105)	-	(100)	4 436
Reserves	446	-	-	-	100	546

TOTAL LIABILITIES	285 154	-	-	-	-	286 110

*Data published as comparable data in the consolidated financial statements of the PKO Bank Polski S.A. Group for the year 2019.

CONSOLIDATED STATEMENT OF CASH FLOWS - items reclassified or changed	01.01- 31.12.2019 before restatement	(2)	(3)	(4)	(5)	01.01-31.12.2019 restated
Change in:
loans and advances to customers	(14 461)	-	1 030	147	-	(13 284)
reverse repo transactions	-	-	(1 030)	-	-	(1 030)
liabilities in respect of insurance activities	-	(186)	-	-	-	(186)
other assets	(57)	186	-	-	-	129
amounts due to banks	220	-	-	-	(1 137)	(917)
amounts due to customers	17 425	-	-	-	22	17 447
liabilities in respect of insurance activities	348	32	-	-	-	380
loan and advances received	-	-	-	-	1 115	1 115
other liabilities	566	(32)	-	(147)	-	387

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. Segment reporting

The PKO Bank Polski S.A. Group conducts business activities within segments offering specific products and services addressed to specific groups of customers. The manner in which the business segments are divided ensures consistency with the sales management model and offers customers a comprehensive product mix comprising both traditional banking products and more complex investment products, as well as services provided by the Group entities.

The segment note presented below is included in the internal reporting system, i.e. information presented to the Management Board of PKO Bank Polski S.A., used to assess the achieved results and allocate resources.

The segment report presented below reflects the internal organizational structure of the PKO Bank Polski S.A. Group.

The Group activities cover three main segments:

Retail segment	The retail segment offers a full range of services to individuals as part of retail, private and mortgage banking. It also comprises transactions concluded with legal persons, i.e. firms and enterprises. The products and services offered to the customers in this segment comprise: current and savings accounts, term deposits, private banking services, combined investment and insurance products, credit and debit cards, electronic banking services. With regard to financing, this segment offers consumer loans, mortgage loans, including those offered by PKO Bank Hipoteczny S.A., as well as Corporate loans for firms and enterprises, developers, cooperatives and property managers, and leases and factoring offered by the PKO Leasing S.A. Group. In addition, the results of the retail segment comprise the results of the following companies: PKO TFI S.A., PKO BP BANKOWY PTE S.A., PKO Życie Towarzystwo Ubezpieczeń S.A., PKO Towarzystwo Ubezpieczeń S.A., PKO BP Finat sp. z o.o. and ZenCard sp. z o.o. (a company acquired by PKO BP Finat sp. z o.o. on 31 July 2020).
Corporate and investment segment	The corporate and investment segment includes transactions concluded with large corporate clients and financial institutions. This segment offers the following products and services: maintaining current accounts and term deposits, safekeeping of securities, currency products and derivatives, corporate loans, leasing and factoring offered by the PKO Leasing S.A. Group. In this segment, PKO Bank Polski S.A. also concludes, on its own or as part of syndicates with other banks, agreements for the financing of large projects in the form of loans and issues of non-treasury securities. Moreover, the segment comprises own operations, i.e. investing activities, brokerage activities, interbank transactions, transactions in derivatives and debt securities. The results of the corporate and investment segments also comprise the results of the companies operating in Ukraine, mainly KREDOBANK S.A., and companies conducting IT services, real estate development and real estate management activities as well as funds investing money collected from investment fund participants.
Transfer centre and other	The transfer & other activities centre comprises the result on internal settlements related to funds transfer pricing, the result on long-term sources of financing and the result on positions classified for hedge accounting, as well as the results not allocated to any other segment. Internal funds transfer is based on arm’s length transfer pricing. Long-term external financing includes issuing securities, including covered bonds, subordinated liabilities and loans received from financial institutions. The results of PKO Finance AB are presented as part of this segment.

DESCRIPTION OF THE RULES APPLIED BY BUSINESS SEGMENTS

The segmentation note was prepared on the basis of the internal reporting system, i.e. information provided to the Management Board of PKO Bank Polski S.A., which is used to assess the achieved results and allocate resources.

The principles of identifying revenues and costs as well as assets and liabilities applied in the segmentation report are consistent with the accounting principles described in this report. The presented assets and liabilities of the segment are operating assets and liabilities used by the segment in its operating activities. The values of assets and liabilities as well as revenues and costs for individual segments are based on internal management information. The segment results, assets and liabilities also include items that can be assigned based on rational assumptions. On this basis, the segments recognize the impact of significant one-off events, such as negative goodwill arising from the acquisition of the company, goodwill impairment losses, impairment losses on associates, and the cost of legal risk of the portfolio of mortgage loans in convertible currencies.

Share of profits and losses of associates and joint ventures, profits and losses of non-controlling shareholders, income tax charge for the presentation of the result and deferred tax assets, current income tax receivables, current income tax liabilities and provisions due to deferred income tax in the presentation of the statement of financial position were recognized at the Group level (unallocated assets and liabilities).

The Capital Group settles transactions between segments as if they were related to unrelated entities, using internal settlement rates based on market rates for a given currency and maturity / maturity date, taking into account liquidity margins. Transactions between the segments are carried out on normal commercial terms.

In 2020, the Capital Group introduced the following changes to the method of determining the management result of operating segments:

• introducing the allocation of benefits from capital reinvestment from the Transfer Center to the Retail Segment and the Corporate and Investment Segment,

• transfer of the result on the investment portfolio of debt securities from the Corporate and Investment Segments to the Transfer Center and other.

The data for 2019 has been brought to comparability in this respect.

In connection with the changes to the accounting principles introduced from 1 January 2020, which are described in detail in Chapter 12, analogous changes were made to the comparative data for 2019 in the scope of:

• reclassification of negative costs from the net fee and commission income to the net interest income,

• reclassification of the transaction margin from the FX result to the net fee and commission income,

• reclassification of the result on insurance activity, the result on operating lease, short-term rental and the result on the provision of fleet management services from other net operating income and costs to the result on commissions and fees,

• inclusion of the result of regulatory burdens in operating costs.

FINANCIAL INFORMATION

The tables below present data on revenues, costs, profits / losses as well as assets and liabilities of the individual reporting segments of the Capital Group for the periods ended 31 December 2020 and 31 December 2019.

Income statement by segments	Continuing operations
Income statement by segments	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
2020	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
Net interest income/(expense)	7 798	2 041	507	10 346
Net fee and commission income	3 044	874	(14)	3 904
Other net income	(201)	235	163	197
Dividend income	-	15	-	15
Gains/(losses) on financial transactions	(104)	(2)	4	(102)
Foreign exchange gains/ (losses)	11	109	62	182
Gains/(losses) on derecognition of financial instruments	(7)	105	83	181
Net other operating income and expense	(127)	34	14	(79)
Income/(expenses) relating to internal customers	26	(26)	-	-
Result on business activities	10 641	3 151	656	14 448
Net expected credit losses	(971)	(1 203)	-	(2 174)
Net impairment allowances on non-financial assets	(85)	(238)	(72)	(395)
Cost of the legal risk of mortgage loans in convertible currencies	(6 552)	-	-	(6 552)
Administrative expenses, of which:	(4 893)	(1 053)	(37)	(5 983)
depreciation and amortization	(830)	(149)	-	(979)
net regulatory charges	(567)	(175)	(36)	(778)
Tax on certain financial institutions	(742)	(313)	-	(1 055)
Share in profits and losses of associates and joint ventures	-	-	-	16
Segment profit/(loss)	(2 602)	343	547	(1 696)
Income tax (tak burden)	-	-	-	(865)
Net profit (loss) (including non-controlling interest)				(2 561)
Profits and losses of non-controlling shareholders	-	-	-	(4)
Net profit / (loss) attributable to equity holders of the parent company	(2 602)	343	547	(2 557)

Assets and liabilities by segments	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
31.12.2020	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
Assets	180 552	118 624	74 929	374 113
Investments in associates and joint ventures	-	291	-	291
Unallocated assets	-	-	-	2 562
Total assets	180 552	118 915	74 929	376 966
Liabilities	245 577	54 982	35 930	336 489
Unallocated liabilities	-	-	-	565
Total liabilities	245 577	54 982	35 930	337 055

Income statement by segments	Continuing operations
Income statement by segments	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
2019	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
Net interest income/(expense)	8 640	1 575	75	10 290
Net fee and commission income	2 986	800	(21)	3 731
Other net income	182	243	97	522
Dividend income	-	14	-	14
Gains/(losses) on financial transactions	75	149	(49)	175
Foreign exchange gains/ (losses)	11	28	65	104
Gains/(losses) on derecognition of financial instruments	(9)	84	70	145
Net other operating income and expense	79	(6)	11	84
Income/(expenses) relating to internal customers	26	(26)	-	-
Result on business activities	11 774	2 618	151	14 543
Net expected credit losses	(851)	(297)	-	(1 148)
Impairment of non-financial assets	(53)	(17)	(43)	(113)
Cost of the legal risk of mortgage loans in convertible currencies	(451)	-	-	(451)
Administrative expenses, of which:	(5 073)	(1 028)	80	(6 021)
depreciation and amortization	(807)	(115)	-	(922)
net regulatory charges	(504)	(114)	81	(537)
Tax on certain financial institutions	(703)	(316)	(3)	(1 022)
Share in profits and losses of associates and joint ventures	-	-	-	31
Segment profit/(loss)	4 643	960	185	5 819
Profit (loss) attributable to non-controlling shareholders	-	-	-	(1 787)
Profit (loss) attributable to non-controlling shareholders	-	-	-	1
Net profit / (loss) attributable to equity holders of the parent company	4 463	960	185	4 031

Assets and liabilities by segments	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
31.12.2019	Retail segment	Corporate and investment segment	Transfer centre and other	Total activity of the Group
Assets	183 815	129 540	31 917	345 272
Investments in associates and joint ventures	-	377	-	377
Unallocated assets	-	-	-	2 248
Total assets	183 815	129 917	31 917	347 897
Liabilities	208 660	59 002	37 963	305 625
Unallocated liabilities	-	-	-	694
Total liabilities	208 660	59 002	37 963	306 319

14. Interest income and expense

Accounting policies

Interest income and expenses comprise interest, including premiums and discounts in respect of financial instruments measured at amortized cost and instruments measured at fair value. Interest income includes interest income on hedging derivatives. Interest income and expenses also include fees and commissions received and paid, which are deferred using the effective interest rate and which are taken into account in the measurement of the financial instrument, including the costs of employee bonuses to the extent that relate directly to selling credit products.

Interest income and expense is recognized on an accruals basis using the effective interest rate which discounts the estimated future cash flows throughout the life of the financial asset or financial liability to the carrying amount in respect of assets and to amortized cost in respect of financial liabilities, with the following exception:

• purchased or originated assets impaired due to credit risk (POCI). Interest income on POCI assets is calculated on the net carrying amount using the effective interest rate adjusted by credit risk recognized over the life cycle of the asset;

• financial assets which were not POCI assets, impaired due to credit risk, which then became credit impaired financial assets. Interest income on POCI assets is calculated on the net carrying amount using the original effective interest rate from the moment of recognizing premises for impairment of the asset.

The calculation of the effective interest rate covers all commissions, transaction costs paid and received by the parties to the contract, and all other premiums and discounts constituting an integral part of the effective interest rate.

Interest income also includes the effect of the settlement of the fair value measurement of financial assets acquired as part of a merger of subsidiaries and the impact of the ruling of the Court of Justice of the European Union on the consumer's right to lower the cost of the loan in the event of repayment of the loan before the date specified in the loan agreement (note "Litigation") by reducing interest income, as the estimated difference between the value of the unsettled commission according to the effective interest rate as at the date of the expected early repayment of the loan and the and the settlement of the commission according to which the Bank reimburses the commission. The estimate is based on historical prepayment dates and probabilities.

• Interest and expenses resulting from sales of insurance products linked to loans and advances

Due to the fact that the Group offers insurance products along with loans, advances and lease products and there is no possibility of purchasing an insurance product from the Group that is identical with regard to the legal form, conditions and economic content without purchasing a loan, an advance or a lease product, the payments received by the Group for the insurance products sold are treated as an integral part of the remuneration for the financial instruments offered.

Remuneration received and receivable by the Group for offering insurance products for the products directly associated with the financial instruments is settled using the effective interest rate method and recognized in interest income and in the part corresponding to the performance of the agency service, if the insurer is a Group company, it is accounted for using the straight line method during the term of the insurance product and is recognized as commission income.

Remuneration is divided into the commission portion and the interest portion based on the proportion of the fair value of the financial instrument and the fair value of the intermediation service to the sum of these two values, in accordance with the relative fair value model comprising a range of different parameters, including the average effective interest rate on the financial instrument, the average contractual and economic (actual) lending or lease period, the average insurance premium amount, the term of the insurance policy, the independent insurance agent’s commission.

Measurement of the fair value of a financial instrument is based on the income-based approach, involving the conversion of future cash flows to their present value using a discount rate consisting of a risk-free rate determined in relation to the average yield on 5-year and 10-year bonds in the past year, the risk premium determined in relation to the annual costs of credit risk and exceeding the credit risk premium, which reflects all other factors that the market participants would take into account in the fair value measurement under the current circumstances.

On the other hand, measurement of the fair value of the insurance intermediation service is based on the market approach, which consists in referring to prices and other information on identical or similar comparable market transactions.

Costs directly attributable to selling insurance products are accounted for in the same manner as the revenue, i.e. as a component of the amortized cost of a financial instrument or on a one-off basis.

The Group makes periodical estimations of the remuneration amount that will be recoverable in the future due to the early termination of the insurance contract based on historical data on premiums collected and refunds made. The provision for future refunds is allocated to the financial instrument and insurance service in accordance with the relative fair value model.

The Group reviews the correctness of the adopted parameters used in the relative fair value model and the ratio of provisions for refunds whenever the Bank becomes aware of the changes in this respect, at least once a year.

financial information

INTEREST INCOME	2020	2019
Loans to and other receivables from banks	34	97
Hedging derivatives	773	324
Debt securities	1 794	1 595
measured at amortized cost	537	305
measured at fair value through other comprehensive income	1 234	1 253
measured at fair value through profit or loss	23	37
Loans and advances to customers (excluding finance lease receivables)	8 520	9 877
measured at amortized cost	7 930	8 928
measured at fair value through other comprehensive income	-	-
measured at fair value through profit or loss	590	949
Finance lease receivables	660	732
Amounts due to customers	20	12
Total	11 801	12 637
of which: interest income on impaired financial instruments	208	268

Interest income calculated under the effective interest rate method on financial instruments measured at:	10 415	11 327
amortized cost	9 181	10 074
at fair value through other comprehensive income (FVOCI)	1 234	1 253
Income similar to interest income on instruments measured at fair value through profit or loss	1 386	1 310
Total	11 801	12 637

INTEREST INCOME BY SEGMENT	2020
INTEREST INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans to and other receivables from banks	-	18	16	34
Hedging derivatives	-	-	773	773
Debt securities	14	735	1 045	1 794
Loans and advances to customers (excluding finance lease receivables)	6 921	1 599	-	8 520
Finance lease receivables	489	171	-	660
Amounts due to customers	-	20	-	20

Total	7 424	2 543	1 834	11 801

INTEREST INCOME BY SEGMENT	2019
INTEREST INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans to and other receivables from banks	-	58	39	97
Hedging derivatives	-	-	324	324
Debt securities	18	1 094	483	1 595
Loans and advances to customers (excluding finance lease receivables)	8 034	1 843	-	9 877
Finance lease receivables	545	187	-	732
Amounts due to customers	-	12	-	12

Total	8 597	3 194	846	12 637

INTEREST EXPENSE ON	2020	2019
Amounts due to banks	(15)	(11)
Interbank deposits	(9)	(20)
Loans and advances received	(31)	(44)
Leases	(20)	(26)
Amounts due to customers	(865)	(1 640)
Debt securities in issue	(439)	(516)
Subordinated liabilities	(76)	(90)

Total	(1 455)	(2 347)

	31.12.2020	31.12.2019
Interest on funds in the obligatory reserve account	0.1%	0.5%

The Group may use during the day the funds on the required reserve accounts for current cash settlements on the basis of an instruction submitted to the National Bank of Poland, however, it must ensure that the average monthly balance on this account is maintained in the appropriate amount as specified in the mandatory reserve declaration.

Average interest rates on loans and advances to customers in the reporting period	31.12.2020	31.12.2019
Non-profit enterprises:	2.23%	3.48%
including without overdraft facilities	2.34%	3.65%
including revolving and overdraft	1.99%	3.19%
Household:	3.61%	5.45%
including for housing purposes	2.21%	3.74%
including for consumption purposes	6.97%	9.40%
including for other purposes	3.76%	5.30%
including revolving and overdraft	6.09%	7.84%

15. Fee and commission income and expenses

Accounting policies

The Group recognizes fee and commission income that is not accounted for using the effective interest rate in such a manner so as to reflect the transfer of the goods or services promised to a customer in an amount reflecting the consideration to which – in accordance with the Group’s expectations – it will be entitled in return for the goods or services in accordance with the five stage model for recognizing revenue.

Fee and commission income includes one-off amounts charged by the Group for services not related directly to the creation of financial assets, as well as amounts charged by the Group’s services performed, which are recognized on a straight-line basis. Fee and commission income also includes fees and commissions recognized on a straight-line basis, received on loans and advances granted with an unspecified schedule of future cash flows for which the effective interest rate cannot be determined.

Upon concluding a contract, the Bank assesses whether it will be capable of fulfilling the commitment to perform over time or at a point in time.

The accounting policies for recognizing commission income on sales of insurance products linked to loans and advances are described in the Note “Interest income and expenses”.

The following items are also included in commission income:

• net income on insurance activities - in the line “offering insurance products” which comprises premium income, costs of insurance activities, claims and change in technical reserves, and the impact of the reinsurer’s share in the aforementioned items.

• net income on operating leases, short-term rental and net income on the provision of fleet management services – in the line “operating leases and fleet management”. Such income comprises mainly fees for using leased assets, income on short-term rentals and net income or expense on fleet management services (including service, tyre replacement, provision of replacement vehicles). Income on operating leases was included together with the cost of the separation of property, plant and equipment under operating leases;

• the foreign exchange margin included in the exchange rates offered to the Bank’s customers when providing foreign currency purchase/sale services is presented in the line “margin on foreign exchange transactions”.

financial information

FEE AND COMMISSION INCOME	2020	2019
Loans, insurance, operating leases and fleet management	1 237	1 192
lending	726	711
offering insurance products	411	386
operating leases and fleet management	100	95
Investment funds, pension funds and brokerage activities	720	740
servicing investment funds and OFE (including management fees)	412	545
servicing and selling investment and insurance products	34	43
brokerage activities	274	152
Cards	1 325	1 340
Margins on foreign exchange transactions	476	370
Bank accounts and other	1 195	1 172
servicing bank accounts	900	838
cash operations	71	75
servicing foreign mass transactions	73	99
customer orders	53	48
fiduciary services	6	6
other	92	106

Total, of which:	4 953	4 814
income from of financial instruments not measured at fair value through profit or loss	4 203	3 890

FEE AND COMMISSION EXPENSE	2020	2019
Loans and insurance	(132)	(164)
commission paid to external entities for product sales	(33)	(46)
cost of construction investment supervision and property valuation	(36)	(46)
fees to Biuro Informacji Kredytowej	(16)	(18)
loan handling	(47)	(54)
Investment funds, pension funds and brokerage activities	(49)	(34)
Cards	(744)	(775)
Bank accounts and other	(124)	(110)
clearing services	(35)	(29)
commissions for operating services provided by banks	(7)	(11)
sending short text messages (SMS)	(41)	(33)
selling banking products	(7)	(11)
servicing foreign mass transactions	(13)	(10)
other	(21)	(16)

Total	(1 049)	(1 083)

NET INCOME ON OPERATING LEASES AND FLEET MANAGEMENT	2020	2019
Income on operating leases and fleet management	367	269
Cost net income on operating leases and fleet management	(74)	(47)
Depreciation of property, plant and equipment under operating leases	(193)	(127)
Net income on operating leases and fleet management	100	95

FEE AND COMMISSION INCOME BY SEGMENT	2020
FEE AND COMMISSION INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans, insurance, operating leases and fleet management	953	284	-	1 237
Lending	478	248	-	726
offering insurance products	396	15	-	411
operating leases and fleet management	79	21	-	100
Investment funds, pension funds and brokerage activities	508	212	-	720
servicing investment funds and OFE (including management fees)	381	31	-	412
servicing and selling investment and insurance products	34	-	-	34
brokerage activities	93	181	-	274
Cards	1 278	47	-	1 325
Margins on foreign exchange transactions	319	157	-	476
Bank accounts and other	943	252	-	1 195
servicing bank accounts	764	136	-	900
cash operations	43	28	-	71
servicing foreign mass transactions	40	33	-	73
customer orders	29	24	-	53
fiduciary services	-	6	-	6
Other	67	25	-	92

Total	4 001	952	-	4 953

FEE AND COMMISSION INCOME BY SEGMENT	2019
FEE AND COMMISSION INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans, insurance, operating leases and fleet management	926	266	-	1 192
lending	479	232	-	711
offering insurance products	373	13	-	386
operating leases and fleet management	40	55	-	95
Investment funds, pension funds and brokerage activities	582	158	-	740
servicing investment funds and OFE (including management fees)	492	53	-	545
servicing and selling investment and insurance products	43	-	-	43
brokerage activities	47	105	-	152
Cards	1 286	54	-	1 340
Margins on foreign exchange transactions	212	158	-	370
Bank accounts and other	961	211	-	1 172
servicing bank accounts	742	96	-	838
cash operations	45	30	-	75
servicing foreign mass transactions	64	35	-	99
customer orders	27	21	-	48
fiduciary services	-	6	-	6
other	83	23	-	106

Total	3 967	847	-	4 814

16. Dividend income

Accounting policies

Dividend income is recognized on the date when the shareholders’ rights to its receipt is determined, if the Group is entitled to dividend, if it is likely that it will obtain economic benefits related to dividend and the amount of the dividend may be reliably determined.

financial information

DIVIDEND INCOME	2020	2019
from financial assets held for trading	-	1
from financial instruments not held for trading, measured at fair value through profit or loss	15	13

Total	15	14

17. Gains/(losses) on financial transactions

Accounting policies

The net gain/(loss) on financial transactions includes gains and losses arising from disposal of financial instruments designated as financial assets / liabilities measured at fair value through profit or loss and the effect of their measurement at fair value. This item also includes the ineffective portion of cash flow hedges in the case of hedging strategies in which IRS contracts are the hedging instrument, as well as gains and losses on the hedging instrument and hedged item relating to the hedged risk (fair value hedges).

financial information

GAINS/(LOSSES) ON FINANCIAL TRANSACTIONS	2020	2019
Financial instruments held for trading, of which:	43	93
Derivative instruments	29	96
Financial instruments not held for trading, measured at fair value through profit or loss, of which:	(148)	80
Loans and advances to customers	(157)	(58)
Hedge accounting	3	2
Total	(102)	175
including the impact of macroeconomic variables on the loan portfolio	48	-

18. Foreign exchange gains/ (losses)

Accounting policies

Foreign exchange gains (losses) comprise foreign exchange gains and losses, both realized and unrealized, resulting from valuation of assets and liabilities denominated in foreign currencies and from the fair value valuation of foreign currency derivatives (FX forward, FX swap, CIRS and currency options). In the case of the hedging strategies in which CIRS contracts are the hedging instrument, this item also includes the ineffective portion of cash flow hedges.

Impairment charges for loans, advances and other foreign currency-denominated receivables, which are recorded in PLN, are revalued when the measurement of the underlying foreign currency-denominated assets changes. The effect of such remeasurement due to foreign exchange differences is recognized in foreign exchange.

	2020	2019
Foreign exchange gains/(losses)	182	104

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

Accounting policies

Derecognition of financial instruments measured at fair value through other comprehensive income or at amortized cost typically relates to a sale or a significant modification of such assets (see the Note “Modifications – Changes in contractual cash flows”).

GAINS/(LOSSES) ON DERECOGNITION OF FINANCIAL INSTRUMENTS	2020	2019
Measured at fair value through OCI	203	158
Measured at amortized cost	(22)	(13)

Total	181	145

20. Other operating income and expenses

Accounting policies

Other operating income and expenses comprise income and costs not directly related to banking activities. Other operating income mainly includes gains on the sale of investments in residential real estate, sale/scrapping of property, plant and equipment, intangible assets and assets held for sale, damages, fines and penalties received, and income from lease/rental of properties. Other operating expenses mainly include provisions for refunds to customers on early repayment of consumer and mortgage loans, losses on sale /scrapping of property, plant and equipment, intangible assets and foreclosed collateral, and donations made.

In the Group companies, other operating income and expenses also include, respectively, revenue from the sale of finished goods, goods for resale and materials, and the cost of their manufacture.

Other operating income and expenses also include provisions recognized and released for legal claims, excluding legal claims relating to mortgage loans in foreign currencies and other provisions.

financial information

OTHER OPERATING INCOME	2020	2019
Net sales of finished goods and services	85	106
Gains on sale or scrapping of property, plant and equipment, intangible assets and assets held for sale	49	45
Damages, compensation and penalties received	25	23
Ancillary income	11	12
Recovery of receivables expired, forgiven or written off	4	6
Release of provision for potential return of fees and commission to customers	-	58
Provision for future payments	4	1
Release of provision recognized for legal claims excluding legal claims relating to mortgage loans in convertible currencies	5	7
Gain from a bargain purchase*	-	102
Other	67	45

Total	250	405

* relates to the purchase of Prime Car Management S.A. and its subsidiaries by the Group on 27 May 2019

OTHER OPERATING EXPENSE	2020	2019
Costs of products and services sold	(13)	(22)
Losses on sale or scrapping of property, plant and equipment, intangible assets and assets held for sale	(45)	(34)
Damages, compensation and penalties paid	-	-
Donations made	(27)	(23)
Sundry expenses	(15)	(14)
Provision recognized for potential refunds of fees and commission to customers	(106)	(127)
Provision for future payments	(1)	(1)
Provision recognized for legal claims excluding legal claims relating to mortgage loans in convertible currencies	(59)	(8)
Other	(63)	(92)

Total	(329)	(321)

Under “Provision recognized for legal claims excluding legal claims relating to mortgage loans in convertible currencies”, the Group recognized the cost of PLN 41 million of the penalty imposed on the Bank by UOKiK for the Bank using clauses governing the method of determining the foreign currency buy and sell rates in template agreements with customers (further discussed in the Note “Legal claims”).

21. Net expected credit losses

Accounting policies

The allowance for expected credit losses is recognized in the financial statements in the following manner:

• Financial assets measured at amortized cost: the allowance reduces the gross carrying amount of the financial asset; changes in the allowances amount are recognized in the income statement;

• Off-balance sheet liabilities of a financial nature and financial guarantees: the allowance is presented as a provision under liabilities; changes in the provisions amount are recognized in the income statement;

• Financial instruments measured at fair value through other comprehensive income: the carrying amount of assets recognized at fair value is not additionally decreased by the allowances; however, each change in the measurement is divided into the impairment component, which is recognized in the income statement, and the component relating to other changes in the fair value measurement, which is recognized in other comprehensive income;

• Financial assets measured at fair value through profit and loss: no allowances for expected credit losses are recognized.

Estimates and judgments

With regard to impairment, the Group applies the concept of expected losses.

The impairment model is applicable to financial assets that are not measured at fair value through profit or loss, comprising:

• debt financial instruments comprising credit exposures and securities;

• lease receivables;

• other financial assets;

• off-balance sheet financial and guarantee liabilities.

Expected credit losses are not recognized for equity instruments.

Impairment allowances for exposure reflect 12-month or lifetime expected credit losses on such exposures for a given financial asset.

The time horizon of an expected loss depends on whether a significant increase in credit risk occurred since the moment of initial recognition. Based on this criterion, financial assets are allocated to 3 stages:

Stage 1 – exposures in which the credit risk is not significantly higher than upon initial recognition and no evidence of impairment is found;

Stage 2 – exposures in which the credit risk is significantly higher than upon initial recognition, but no evidence of impairment is found;

Stage 3 –assets in respect of which evidence of impairment is recognized, including assets granted or purchased with evidence of impairment recognized (upon being granted or purchased).

• Material increase in credit risk

A material increase in credit risk is verified according to the likeliness of default and its changes with respect to the date of originating the loan.

The Group uses a model based on a marginal PD calculation, i.e. the probability of default in a given month, to assess a material increase in credit risk for mortgage exposures and other retail exposures. This probability depends on the time that has passed from originating the exposure. This enables reflecting the differences in credit quality that are typical of exposures to individuals over the lifetime of the exposure. The marginal PD curves were determined on the basis of historic data at the level of homogeneous portfolios, which are separated according to the type of product, the year of their origination, the loan currency and the credit quality at the time of origination. The marginal PD is attributed to individual exposures by scaling the curve at the level of the portfolio to the individual assessment of the exposure / Customer using application models (using data from loan applications) and behavioral models. The Group identifies the premise of a material increase in risk for a given exposure by comparing individual PD curves over the exposure horizon as at the date of initial recognition and as at the reporting date. Only the parts of the original and current PD curves which correspond to the period from the reporting date to the date of maturity of the exposure are compared as at each reporting date. The comparison is based on the average probability of default over the life of the loan in the period under review adjusted for current and forecast macroeconomic indicators.

The result of this comparison, referred to as α statistics, is referred to the threshold value above which an increase in credit risk is considered material. The threshold value is determined on the basis of the historical relationship between the values of the α statistics and the default arising. In this process the following probabilities are minimized:

• classification into a set of credit exposures with a significant increase in the level of credit risk (based on the α statistic), for which no event of default took place during the audited period (type I error)

• non-classification into the set of credit exposures with a significant increase in the level of credit risk (based on the statistics) for which an event of default occurred during the audited period (type II error).

According to data that is applicable at the end of 2020, an increase in the PD parameter of at least 2.6 compared to the value at the time of its recognition in the Group’s accounting records in respect of mortgage exposures and an increase of at least 2.5 in respect of other retail exposures constitutes a premise of a significant deterioration in credit quality (unchanged compared to end of 2019).

With respect to credit exposures for which the current risk of default does not exceed the level provided for in the price of the loan, the results of the comparison of the probability of default curves as at the date of initial recognition and as at the reporting date do not signify a material increase in credit risk.

The Group uses a model based on Markov chains to assess material increases in credit risk for institutional customers. Historical data is used to build matrices of probabilities of Customers migrating between individual classes of risk that are determined on the basis of the Group’s rating and scoring models. These migrations are determined within homogeneous portfolios, classified using, among other things, customer and customer segment assessment methodologies.

An individual highest acceptable value of the probability of default is set for each class of risk and portfolio on the date of the initial recognition of the credit exposure, which, if exceeded, is identified as a material increase in credit risk. This value is set on the basis of the average probability of default for classes of risk worse than that at initial recognition of the exposure, weighted by the probability of transition to those classes of risk in the given time horizon.

In accordance with the data as at the end of 2020 and 2019, the minimum deterioration in the class of risk which constitutes a premise of a material improvement of the credit presented compared to the current class of risk were as follows:

Risk category	PD range	Minimum range of the risk category deterioration indicating a significant increase in credit risk1
A-B	0.0 – 0.90%	3 categories
C	0.90 – 1.78%	3 categories
D	1.78 – 3.55%	2 categories
E	3.55-7.07%	1 categories
F	7.07-14.07%	1 categories
G	14.07-99.99%	not applicable2

1 average values (the scopes are determined separately for homogeneous groups of Customers)

2 deterioration in the class of risk is a direct premise of impairment

The Group uses all available qualitative and quantitative information to identify the remaining premises of a material increase in credit risk, including:

• restructuring measures introducing forbearance for a debtor in financial difficulties;

• extending the period for the repayment of a significant amount of principal or interest by more than 30 days;

• identified early warning signals as part of the monitoring process, suggesting a material increase in credit risk;

• a significant increase in the LTV ratio;

• an analyst’s assessment according to an individual approach;

• quarantine for Stage 2 exposures, which have not shown premises for impairment in the previous 3 months.

• filing for consumer bankruptcy by any of the joint borrowers;

• transferring the credit exposure to be managed by the Group’s restructuring and debt collection units.

• Impaired loans and definition of default

The premise for the impairment of a credit exposure is, in particular:

• extending the period for the repayment of a significant amount of principal or interest by more than 90 days;

• a deterioration in the debtor’s economic and financial position during the lending period, expressed by the classification into a rating class or class of risk suggesting a material risk of default (Rating H);

• the conclusion of a restructuring agreement or the application of relief in debt repayment, which is forced by economic or legal reasons arising from the customer’s financial difficulties (until the claim is recognized as remedied);

• filing a motion for the debtor’s bankruptcy, placing the debtor into liquidation or the opening of enforcement proceedings with respect to the debtor.

• declaration of consumer bankruptcy by any of the joint borrowers to the list of premises of impairment.

In accordance with the 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 (“CRR”), the Group defines a state of default if it assesses that the debtor is unable to repay the loan liability without resorting to exercising the collateral or if the exposure is overdue more than 90 days. The premises of default are identical to the premises for impairment of the exposure.

• Calculation of the expected credit loss

The model for the calculation of the expected credit loss is based on applying detailed segmentation to the credit portfolio, taking into account the following characteristics at product and customer level:

• type of credit product;

• currency of the product;

• year of granting;

• assessment of risk of the customer’s default;

• the customer’s business segment;

• method of assessing the customer risk.

The Group calculates expected credit losses on an individual and on a portfolio basis.

The individual basis is used in respect of individually significant exposures. The expected credit loss from the exposure is determined as the difference between its gross carrying amount (in the case of an off-balance sheet credit exposure – the value of its balance sheet equivalent) and the present value of the expected future cash flows, established by taking into account the possible scenarios regarding the performance of the contract and the management of credit exposure, weighted by the probability of their realization.

The portfolio method is applied to exposures that are not individually significant and in the event of a failure to identify premises of impairment.

In the portfolio method, the expected loss is calculated as the product of the credit risk parameters: the probability of default (PD), the loss given default (LGD) and the value of the exposure at default (EAD); each of these parameters assumes the form of a vector representing the number of months covering the horizon of estimation of the credit loss.

The Group sets this horizon for retail exposures without a repayment schedule on the basis of behavioral data from historical observations. The loss expected both in the entire duration of the exposure and in a period of 12 months is the sum of expected losses in the individual periods discounted using the effective interest rate. The Group adjusts the parameter specifying the level of exposure at the time of default by the future repayments arising from the schedule and potential overpayments and underpayments to specify the value of the asset at the time of default in a given period.

The calculation of expected credit losses encompasses estimates of future macroeconomic conditions. In terms of portfolio analysis, the impact of macroeconomic scenarios is taken into account in the amount of the individual risk parameters. The methodology for calculating the risk parameters includes the study of the dependencies of these parameters on the macroeconomic conditions based on historical data. Three macroeconomic scenarios based on the Bank’s own forecasts are used for calculating the expected loss – a baseline forecast with a probability of 75% and two alternative scenarios, with a probability of 5%(optimistic) and 20% (pessimistic). The scope of the forecast indicators includes the GDP growth index, the rate of unemployment, the WIBOR 3M rate, the LIBOR CHF 3M rate, the CHF/PLN exchange rate, the property price index and the NBP reference rate. The final expected loss is the weighted average probability of scenarios from expected losses corresponding to individual scenarios. The Group ensures the compliance of the macroeconomic scenarios used for the calculation of the risk parameters with macroeconomic scenarios used for the credit risk budgeting processes. The baseline scenario uses the base macroeconomic forecasts. The forecasts are prepared on the basis of the quantitative models, taking into account adjustments for the presence of one-off events.

The extreme scenarios apply to cases of so-called internal shock, as a result of which the so-called external variables (foreign interest rates) do not change with respect to the baseline scenario. The extreme scenarios are developed on the basis of a statistical and econometric analysis, i.e. they do not reflect the events described, but the forecast path. Two scenarios are identified, optimistic and pessimistic. The share of the scenarios for the GDP path that falls between the optimistic and the pessimistic scenario is referred to as the probability of the baseline scenario. Such an assumption is used to forecast GDP growth, using a potential rate of growth of the Polish economy that varies over time, calculated with the use of quarterly data provided by the Central Statistical Office. The values of other macroeconomic variables used in the scenarios (rate of unemployment, property price index) are estimated after the extreme paths of GDP growth are defined.

The rate of unemployment is calculated on the basis of the quantified dependence on the difference between GDP growth and the potential rate of economic growth. The result is adjusted for significant structural changes taking place in the Polish economy, which are not encompassed by the quantitative model, in particular:

• the ageing of the Polish population (and the appearance of unsatisfied demand for labour, which will limit the scale of increase in the rate of unemployment in a situation in an economic downturn);

• the Polish labour market is nearing full employment (restrictions of supply mean that there is increasingly less space for a further decline in the rate of unemployment);

• the inflow of immigrants (only partly included in the official statistics).

The level of the property price index is set on the basis of changes in GDP, taking into account the conditions of supply and demand on the market based on the data and trends presented by the NBP in the publication “Information on housing prices and the situation on the residential and commercial property market in Poland” and the Group’s own analyses. The forecasts of WIBOR and LIBOR deposit rates are mainly prepared on the basis of assumptions regarding central bank interest rates. The CHF/PLN exchange rate is a cross rate of the EUR/PLN and EUR/CHF exchange rates. Its forecasts are a combination of the forecasts for these two rates. The EUR/PLN and EUR/CHF forecasts are prepared on the basis of a macroeconomic analysis (current and historical) based on econometric methods, as well as on a technical analysis of the financial markets.

Both the process of assessing a material increase in credit risk and the process of calculating the expected loss are conducted monthly at the level of individual exposures. They use a dedicated computing environment that allows for the distribution of the results to the Group’s internal units.

The Group has separated the portfolio of financial assets with low credit risk by classifying financial instruments for which the average long-term default rate does not exceed the probability of default specified by the rating agency for the worst class investment rating. This portfolio includes, in particular, exposures to banks, governments, local government entities and housing cooperatives and communities.

financial information

ALLOWANCES FOR EXPECTED CREDIT LOSSES	note	2020	2019
Amounts due from banks	28	1	-
Debt securities	31	(37)	(3)
- measured at fair value through other comprehensive income		(17)	(9)
- measured at amortized cost		(20)	6
Loans and advances to customers	33	(1 780)	(1 104)
- measured at fair value through other comprehensive income		-	1
- measured at amortized cost		(1 780)	(1 105)
Other financial assets	38	-	1
Provisions for financial liabilities and guarantees granted	43	(358)	(42)

Total		(2 174)	(1 148)
including the impact of macroeconomic variables on the loan portfolio		(1 175)	-

calculation of estimates

The impact of an increase/decrease in estimated cash flows for the Group’s loans and advances portfolio assessed for impairment on the basis of an individual analysis of future cash flows arising both from repayments and foreclosure of collaterals, i.e. the exposures for which an individual method is applied and the impact of an increase/decrease in the portfolio parameters for the Group’s loans and advances portfolio assessed on a portfolio basis is presented in the table below:

ESTIMATED CHANGE IN EXPECTED CREDIT LOSSES ON LOANS AND ADVANCES RESULTING FROM MATERIALIZATION OF A SCENARIO OF THE RISK PARAMETERS DETERIORATION OR IMPROVEMENT, OF WHICH:1	31.12.2020		31.12.2019
	+10% scenario	-10% scenario	+10% scenario	-10% scenario
changes in the present value of estimated future cash flows for the Group’s portfolio of individually impaired loans and advances assessed on an individual basis	(198)	260	(235)	308
changes in the probability of default	187	(207)	157	(164)
change in recovery rates	(492)	493	(424)	426

1 in plus – increase in allowances, in minus – decrease in allowances

The table below presents the estimated sensitivity of the level of allowances for expected credit losses to macroeconomic conditions, calculated as the change in the level of allowances for expected credit losses related to not-impaired exposures resulting from realisation of particular macroeconomic scenarios as at December 31, 2020 and December 31, 2019. Before the start of the COVID-19 pandemic, the Bank applied a model assuming that the dependence of the allowance level changes on the interest rate changes was the strongest statistically – thus the 2019 optimistic scenario had a negative impact on the allowance level.

	31.12.2020		31.12.2019
	optimistic	pessimistic	optimistic	pessimistic
estimated change in the level of write-offs for expected credit losses for exposures without impairment as a result of individual macroeconomic scenarios (in PLN million)	(619)	488	69	(89)

The tables below present the adopted forecasts of the main macroeconomic indicators together with the assumed probabilities of their implementation.

scenario as at 31.12.2020	baseline	optimistic	pessimistic
probability	75%	5%	20%
	average for 4Q2020-3Q2022	average for 4Q2020-3Q2022	average for 4Q2020-3Q2022
GDP growth y/y	1,9	5,7	(1,9)
Unemployment rate	5,2	4,5	6,5
WIBOR 3M	0,4	2,1	(0,2)
Property price index	100,6	102,9	97,3
CHF/PLN	4	3,8	4,4

scenario as at 31.12.2019	baseline	optimistic	pessimistic
probability	80%	10%	10%
	average for 4Q2019-3Q2021	average for 4Q2019-3Q2021	average for 4Q2019-3Q2021
GDP growth y/y	3,9	5,7	2,1
Unemployment rate	3,3	2,5	4,5
WIBOR 3M	1,7	2,7	0,9
Property price index	112,1	120,7	91,5
CHF/PLN	4.0	4.2	3.7

22. Net impairment allowances on non-financial assets

Net impairment allowances on non-financial assets	NOTE	2020	2019
Property, plant and equipment under operating lease	35.1	4	-
Property, plant and equipment	35.2	(58)	(15)
Non-current assets held for sale	36	(4)	-
Intangible assets	35.3	(153)	(51)
Investments in associates and joint ventures	37	(93)	(5)
Other financial assets, including inventories	38	(91)	(42)

Total		(395)	(113)

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

	2020	2019
IMPACT OF THE LEGAL RISK OF MORTGAGE LOANS IN CONVERTIBLE CURRENCIES	(6 552)	(451)
- potential future settlements and court disputes	(6 139)	(310)
- pending proceedings	(414)	(141)

IMPACT OF LEGAL RISK RELATING TO MORTGAGE LOANS IN CONVERTIBLE CURRENCIES	Gross carrying amount of mortgage loans in convertible currencies before taking into account the cost of legal risk related to convertible currency mortgage loans	Cost of legal risk related to mortgage loans in convertible currencies	Gross carrying amount of mortgage loans in convertible currencies taking into account the cost of legal risk related to mortgage loans in convertible currencies
31 December 2020
Loans and advances to customers – adjustment decreasing the carrying amount of loans, due to:	21 983	6 617	15 366
- potential future settlements and court disputes	21 203	6 122	15 081
- pending proceedings	780	495	285
Reserves		426
- potential future settlements and court disputes		351
- pending proceedings		75
TOTAL	21 983	7 043	15 366

IMPACT OF LEGAL RISK RELATING TO MORTGAGE LOANS IN CONVERTIBLE CURRENCIES	Gross carrying amount of mortgage loans in convertible currencies before taking into account the cost of legal risk related to convertible currency mortgage loans	Cost of legal risk related to mortgage loans in convertible currencies	Gross carrying amount of mortgage loans in convertible currencies taking into account the cost of legal risk related to mortgage loans in convertible currencies
31 December 2019
Loans and advances to customers – adjustment decreasing the carrying amount of loans, due to:	21 832	422	21 410
- potential future court disputes	21 595	281	21 314
- pending proceedings	237	141	96
Reserves		29
- potential future court disputes		29
- pending proceedings		0
TOTAL	21 832	451	21 410

As at 31 December 2020, the Group recognized in the financial statements the impact of the legal risk associated with the portfolio of mortgage loans in convertible currencies granted to households

With regard to the pending proceedings, as at 31 December 2020, the Capital Group decreased the gross carrying amount of mortgage loans by PLN 495 million (as at 31 December 2019 - PLN 141 million). For active contracts, the Group, reflecting the changed, estimated contractual cash flows, adjusted the gross carrying amount of mortgage loans in accordance with IFRS 9 by the expected impact of potential settlements and court disputes, reducing their value by PLN 6 122 million (as at 31 December 2019 - PLN 281 million).

For loan contracts for which a liability of the Group resulting in a future cash outflow arose, the Group created a provision for potential settlements and court disputes in the amount of PLN 351 million (as at 31 December 2019 - PLN 29 million) and for pending proceedings in the amount of PLN 75 million PLN.

Additional information on the portfolio of mortgage loans in convertible currencies was presented by the Group in the notes "Legal claims" and "Risk management of foreign currency mortgage loans for individuals"

calculation of estimates

The Group has identified a risk that the planned cash flows from the portfolio of foreign currency denominated and indexed mortgage loans may not be fully recoverable and / or that a liability will arise resulting in a future cash outflow. The Group reduces the gross carrying amount of mortgage loans denominated and indexed in foreign currencies and / or creates provisions for legal risk in accordance with the requirements of IFRS 9 Financial Instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The cost of legal risk was estimated taking into account a number of assumptions that materially affect the amount disclosed in the financial statements of the Group.

The costs of legal risk of mortgage loans in convertible currencies were estimated using a statistical method that takes into account the impact of customer characteristics, as the sum of the products:

• the probability of certain court settlements and the amount of loss for various dispute resolution scenarios, taking into account the current and expected number of court cases in the horizon in which the Bank is exposed to such risk, and

• the likelihood of the client accepting the settlement and the amount of the settlement loss.

The Group also estimates the probability of negative decisions regarding the reported and potential claims. These probabilities differ for indexed and foreign currency-denominated mortgage loans, respectively. In assessing these probabilities, the Group uses the support of external law firms. In the opinion of the Group, the level of the estimated costs of legal risk is also influenced by such factors as: the duration of court proceedings (also estimated on the basis of relatively short statistics that do not meet the conditions for applying quantitative methods) and the growing costs necessary to start litigation and trial support.

The Group carried out an analysis of the model's sensitivity to changes in key parameters:

SENSITIVITY ANALYSIS OF THE MODEL TO CHANGE OF KEY PARAMETERS	Increase in legal risk costs related to mortgage loans in convertible currencies
1 p.p increase in the numer of lawsuits	65
1 p.p. decrease the likelihood of the Bank winning in court	14
1 % increase weighted average loss	13
1 p.p. decrease the numer of settlements	27

24. Administrative expenses

Accounting policies

Employee benefits	Employee benefits comprise wages and salaries and social insurance (including provisions for retirement and disability benefits, which are discussed in detail in the Note “Provisions”), as well as costs of the employee pension scheme constituting a defined contribution scheme and the programme of variable remuneration components for persons occupying managerial positions, a portion of which is recorded as a liability in respect of share-based payments settled in cash, in accordance with IFRS 2 Share-based payments (the programme of variable remuneration components is discussed in detail in the “Remuneration of the PKO Bank Polski S.A. key management”). Moreover, as part of wages and salaries, the Group creates a provision for future liabilities in respect of compensation and severance bonuses paid out to employees with whom the employment relationship is terminated for reasons not related to the employees, and accruals related to costs attributable to the current period, which will be incurred in the next period, including bonuses and holiday pay, taking account of all unused holiday.
Overheads	Overheads include the costs of maintaining fixed assets, IT and telecommunications services costs, costs of administration, promotion and advertising, property protection and training. Lease payments under short-term and low-value leases are recognized in the income statement as an expense on a straight-line basis over the lease term.
contributions and payments to the BGF:	According to IFRIC 21 “Levies”, fees paid by the Group to the Bank Guarantee Fund are recognized in profit or loss upon the occurrence of the obligating event. The Group makes contributions to the banks’ guarantee fund (quarterly) and the banks’ compulsory resolution fund (annually). Contributions to the guarantee fund and the compulsory resolution fund are not tax-deductible.
Fees to PFSA	In accordance with IFRIC 21 “Levies”, fees paid to the Polish Financial Supervision Authority are recognized in profit or loss upon the occurrence of the obligating event. Both fees (to cover the cost of banking supervision and to cover the costs of supervision over the capital market) are paid once a year. Fees paid to the Polish Financial Supervision Authority are tax deductible.
Flat-rate income tax	The Act of 23 October 2018 on amendments to, among other things, Acts on income taxes, introduced a possibility of an alternative to taxation with WHT, namely a 3% tax on certain interest paid to non-residents. Therefore, on 29 March 2019, the Bank filed a notification on the election of the 3% taxation option with the tax office in respect of: • interest on loans which is paid by the Bank to PKO Finance AB with its registered office in Sweden (the election of the taxation, compliant with the act, relates to the years 2014- 2022) and • interest on Eurobonds issued by the Bank before 1 January 2019.
Other taxes and fees	Property tax, payments made to the State Fund for Rehabilitation of Disabled Persons, municipal and administration fees.

financial information

ADMINISTRATIVE EXPENSES	2020	2019

Employee benefits	(2 973)	(3 215)
Overheads, of which:	(1 253)	(1 347)
rent	(96)	(78)
IT	(349)	(321)
Depreciation and amortization	(979)	(922)
property, plant and equipment, of which:	(541)	(531)
right-of-use assets	(229)	(206)
IT	(100)	(124)
investment properties	(1)	(2)
intangible assets, of which:	(438)	(391)
IT	(409)	(358)
Net regulatory charges	(778)	(537)

Total	(5 983)	(6 021)

EMPLOYEE BENEFITS	2020	2019
Wages and salaries, including:	(2 494)	(2 693)
costs of contributions to the employee pension plan	(66)	(66)
restructuring costs	(16)	(32)
Social insurance, of which:	(409)	(432)
contributions for disability and retirement benefits	(355)	(363)
Other employee benefits	(70)	(90)

Total	(2 973)	(3 215)

NET REGULATORY CHARGES	2020	2019
Contribution and payments to the Bank Guarantee Fund (BGF), including:	(668)	(509)
to the Resolution Fund	(318)	(348)
to the Banks’ Guarantee Fund	(350)	(161)
Fees to PFSA	(36)	(41)
Flat-rate income tax, of which:	(7)	81
withheld tax (20%)	-	138
flat-rate income tax (3%)	(7)	(57)
Other taxes and fees	(67)	(68)

Total	(778)	(537)

Due to the fact that the Bank collected 20% withholding tax on interest paid to PKO Finance AB for 2017–2018, on 12 February 2019, it filed a request to determine overpayment of tax together with corrected tax returns. The request was accepted without issuing a decision on this matter. The Bank was informed by the Tax Office that its application had been approved and requested for the instruction on the overpayment settlement approach.

The correction of the 20% withholding tax by PLN 138 million in plus and recognizing the 3% tax on interest assessed for 2014-2018 (PLN 50 million) are one-off events. The 3% tax option in respect of tax interest on loans paid to PKO Finance AB results from Article 21 of the Act of 23 October 2018 on amendments to the Act on personal income tax, the Act on corporate income tax, the Act on tax code and other acts (Journal of Laws of 2018, item 2193 with further amendments). The Group paid the tax in the mandatory statutory period, i.e. from 31 January 2019 to 31 July 2019.

25. Tax on certain financial institutions

As of 1 February 2016, the Act of 15 January 2016 on tax on certain financial institutions came into force, which covered, among other things, banks and insurance companies. The tax is charged on the surplus of a Bank’s total assets above PLN 4 billion, based on the trial balance as at the end of each month. The tax base of insurance companies within one Group is determined jointly as the surplus of total assets over PLN 2 billion. Banks are entitled to reduce the tax base by deducting such items as e.g. own funds or the value of Treasury securities. Additionally, banks reduce the tax base by the value of assets acquired from the NBP, constituting collateral of a refinancing loan granted by the NBP. Insurance companies are entitled to reduce their tax base by the value of assets accumulated under the contracts for Employee Capital Plans that they service, as referred to in the Act on Employee Capital Plans of 4 October 2018.

The tax rate for all taxpayers is 0.0366% per month, and the tax is paid monthly by the 25th of the month following the month to which it relates. The tax paid is not tax-deductible for corporate income tax purposes.

TAX ON CERTAIN FINANCIAL INSTITUTIONS	2020	2019

PKO Bank Polski S.A.	(958)	(931)
PKO Życie Towarzystwo Ubezpieczeń SA	(5)	(5)
PKO Bank Hipoteczny SA	(89)	(83)
PKO Towarzystwo Ubezpieczeń SA	(3)	(3)

Total	(1 055)	(1 022)

26. Income tax expense

Accounting policies

Corporate income tax is recognized as current tax and deferred tax. The current income tax is recognized in the income statement. Deferred income tax, depending on the source of temporary differences, is recorded in the income statement or in other comprehensive income.

• Current income tax

Current income tax is calculated on the basis of gross accounting profit adjusted by non-taxable income, taxable income that does not constitute accounting income, non-tax deductible expenses and tax-deductible costs which are not accounting costs, in accordance with the tax regulations. These items mainly include income and expenses relating to accrued interest receivable and payable, allowances for expected credit losses and provisions for off-balance financial liabilities granted.

Group Companies are Corporate Income Tax payers. The value of the Companies’ current tax liability is transferred to offices of the tax administration authorities with jurisdiction over the Companies’ location.

Corporate income tax liabilities of individual Group companies for 2020 will be paid in accordance with the schedules stipulated by the relevant tax regulations.

Pursuant to the principles governing the statute of limitations for tax liabilities, the correctness of income tax settlements may be audited within five years of the end of the year in which the deadline for the submission of the respective tax returns passed.

• Deferred income tax

Deferred tax is recognized in the amount of the difference between the tax value of the assets and liabilities and their carrying amounts for the purpose of financial reporting. The Group records deferred tax provisions and assets, which are recognized in the statement of financial position. Changes in the balance of deferred tax provisions and assets are recognized in mandatory charges to profit, with the exception of the effects of the measurement of financial assets measured at fair value through other comprehensive income, hedging instruments which are recognized in other comprehensive income, where changes in the balance of deferred tax provisions and assets are recognized in other comprehensive income. In determining deferred income tax, the deferred tax assets and provisions as at the beginning and as at the end of the reporting period are taken into account.

The carrying amounts of deferred tax assets are verified at each balance sheet date and decreased adequately if it is no longer likely that taxable income sufficient to realize a deferred tax asset in part or in full will be earned.

Deferred tax assets and provisions are valued using the tax rates which are expected to be in force in the period in which the asset will crystallize or the provision will be utilized, based on the tax rates (and tax regulations) binding as at the balance sheet date or tax rates and tax regulations that as at the balance sheet date are believed to be binding in the future.

For deferred income tax calculation the Group uses the 19% tax rate for entities operating in the territory of Poland, the 18% tax rate for entities operating in Ukraine and the 21.4% tax rate for entities operating in Sweden.

Deferred tax assets are offset by the Group against deferred tax provisions only when it has an enforceable legal title to offset current income tax receivables against current income tax liabilities and deferred income tax is related to the same taxpayer and the same tax authority.

financial information

• income tax expense

	2020	2019
Income tax expense recognized in the income statement	(865)	(1 787)
Current income tax expense	(1 407)	(1 544)
Deferred income tax on temporary differences	542	(243)
Income tax reported in other comprehensive income in respect of temporary differences	(244)	(40)

Total	(1 109)	(1 827)

• reconciliation of the effective tax rate

RECONCILIATION OF THE EFFECTIVE TAX RATE	2020	2019
Profit or loss before tax	(1 696)	5 819
Tax calculated using the enacted rate in force in Poland (19%)	322	(1 106)
Effect of different tax rates of foreign entities	1	1
Effect of permanent timing differences, of which:	(1 193)	(687)
non-deductible impairment allowance on investments in subordinated entities	(17)	-
non-deductible allowances for expected credit losses on credit exposures and securities	(51)	(31)
contributions and payments to the Bank Guarantee Fund	(127)	(97)
tax on certain financial institutions	(200)	(194)
impairment allowance in respect of the identified impairment of goodwill of Nordea Bank Polska S.A.	(28)	-
cost of the legal risk of mortgage loans in convertible currencies other	(769)	(85)
interest on foreign exchange gains in Sweden	-	(274)
3% flat-rate income tax on interest for non-residents	-	(11)
other permanent differences	(1)	5
Effect of other timing differences, including new technologies tax relief and donations	8	5

Income tax expense recognized in the income statement	(865)	(1 787)

Effective tax rate	(51.04)%	30.71%

• Deferred tax assets, net

DEFERRED TAX PROVISION AND ASSET 2020	As at the beginning of the period	INCOME STATEMENT	OTHER COMPREHENSIVE INCOME	As at the end of the period
Interest accrued on receivables (loans)	220	37	-	257
Capitalized interest on performing housing loans	24	(24)	-	-
Interest on securities	115	34	-	149
Valuation of securities	113	(5)	194	302
Valuation of derivative financial instruments	55	(17)	52	90
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	218	(40)	-	178
Taxable income on the release of IBNR allowance, previously tax deductible, on implementation of IFRS 9	65	(13)	-	52
Prepayments	200	(97)	-	103
Tax on foreign exchange gains in Sweden	274	5	-	279
Other taxable temporary differences	13	19	-	32
Deferred income tax provision, gross	1 297	(101)	246	1 442

Interest accrued on liabilities	86	(41)	-	45
Valuation of derivative financial instruments	9	(4)	1	6
Valuation of securities	1	-	-	1
Provision for employee benefits	86	(1)	1	86
Allowances for expected credit losses	998	285	-	1 283
Fair value measurement of loans	118	13	-	131
Adjustment of straight-line valuation method and effective interest rate	900	(60)	-	840
Other deductible temporary differences	50	3	-	53
Impact of the legal risk of mortgage loans in convertible currencies other	-	476		476
Provision for costs to be incurred	39	15	-	54
Tax loss brought forward	14	(9)	-	5
Foreign exchange differences	-	40	-	40
Difference between carrying amount and tax value of property, plant and equipment and intangible assets, including leased assets	869	(276)	-	593
Deferred tax asset, gross	3 170	441	2	3 613

Total effect of temporary differences	1 873	542	(244)	2 171
Deferred income tax provision (presented in the statement of financial position)	370	(244)	246	372
Deferred income tax asset (presented in the statement of financial position)	2 243	298	2	2 543

DEFERRED TAX PROVISION AND ASSET 2019	As at the beginning of the period	INCOME STATEMENT	OTHER COMPREHENSIVE INCOME	EFFECT OF ACQUISITION AND TAKING UP CONTROL OVER SUBSIDIARIES	As at the end of the period
Interest accrued on receivables (loans)	244	(24)	-	-	220
Capitalized interest on performing housing loans	40	(16)	-	-	24
Interest on securities	80	35	-	-	115
Valuation of securities	100	14	(1)	-	113
Valuation of derivative financial instruments	23	(7)	39	-	55
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	306	(88)	-	-	218
Taxable income on the release of IBNR allowance, previously tax deductible, on implementation of IFRS 9	78	(13)	-	-	65
Prepayments	165	35	-	-	200
Tax on foreign exchange gains in Sweden	-	274	-	-	274
Other taxable temporary differences	5	8	-	-	13
Deferred income tax provision, gross	1 041	218	38	-	1 297

Interest accrued on liabilities	99	(13)	-	-	86
Valuation of derivative financial instruments	142	(123)	(10)	-	9
Valuation of securities	12	(17)	6	-	1
Provision for employee benefits	84	-	2	-	86
Allowances for expected credit losses	1 126	(128)	-	-	998
Fair value measurement of loans	17	101	-	-	118
Adjustment of straight-line valuation method and effective interest rate	800	100	-	-	900
Provision for costs to be incurred	12	38	-	-	50
Tax loss brought forward	36	3	-	-	39
Foreign exchange differences	14	-	-	-	14
Difference between carrying amount and tax value of property, plant and equipment and intangible assets, including leased assets	782	14	-	73	869
Deferred tax asset, gross	3 124	(25)	(2)	73	3 170

Total effect of temporary differences	2 083	(243)	(40)	73	1 873
Deferred income tax provision (presented in the statement of financial position)	52	280	38	-	370
Deferred income tax asset (presented in the statement of financial position)	2 135	37	(2)	73	2 243

• Tax Group

Based on the contract dated 5 November 2018 PKO Bank Polski S.A., jointly with its two subsidiaries: PKO Bank Hipoteczny S.A. and PKO Leasing S.A., created the Podatkowa Grupa Kapitałowa Powszechnej Kasy Oszczędności Banku Polskiego Spółki Akcyjnej Tax Group (“PGK PKO Banku Polskiego S.A.”). The respective contract was registered by the Head of the Second Masovian Tax Office in Warsaw.

A tax group is an institution of the tax law stipulated in the provisions of the Corporate Income Tax Act. Its creation means that the income of the Tax Group companies will be consolidated for corporate income tax purposes and that solutions will be available facilitating the application of other, in particular operational, regulations of the Corporate Income Tax Act, dedicated specifically to Tax Groups.

PKO Bank Polski S.A. is the parent of PGK PKO Banku Polskiego S.A.. PGK PKO Banku Polskiego S.A. was established for three tax years. The first tax year began on 1 January 2019.

• Tax policy

The Management Board declares that, in the area of taxation, it acts in a responsible manner, understood as fulfilling its social responsibility for the timely payment of taxes at amounts commensurate with the scope and effects of the activities conducted. When fulfilling its tax obligations, the Bank takes into account the current provisions of the national tax law, the European standards and international agreements (the Bank complies with the tax laws in all countries where it conducts its business activities).

The tax law is applied taking into account interpretations of the tax offices and guidelines of the tax authorities. In order to responsibly fulfil its tax obligations, the Bank has a number of internal procedures in place, and dedicated organizational units (including the Tax Department) responsible for meeting tax obligations.

The Tax Department operates within the Finance and Accounting Area, and its main purposes (in accordance with the Bank’s internal regulations) are to ensure that the Bank’s tax obligations as a taxpayer are fulfilled in a timely and fair manner and to ensure the balanced tax position of the Bank and its Group. In accordance with Article 22a(6)(4)(b) of the Polish Banking Law, within the Management Board, oversight of the Finance and Accounting Area was assigned to the Vice-President of the Management Board, Rafał Kozłowski in the Banks Organizational By-laws. In accordance with the Bank’s Articles of Association, Members of the Management Board exercise oversight over the operating areas assigned to them and decide on affairs falling within the scope of ordinary management of the operating areas that are supervised by them. Moreover, the Bank has a management system which comprises a set of principles and mechanisms related to the decision-making processes taking place in the Bank, as well as to an assessment of the activities conducted by the Bank. As part of this management system, there is a risk management system, in particular, functioning within the Bank. The Management Board of the Bank designs, implements and ensures the functioning of the management system. The operating principles of the management system, including the risk management system and internal controls system, are set out in the Bank’s internal regulations.

The Management Board declares that the Bank’s approach to taxes is transparent. The Bank maintains continuous relations with the national tax authorities based on transparency and mutual trust, within the framework of the applicable tax law. Any contacts with the Tax authorities are undertaken by the Bank in a professional, courteous and timely manner. Irrespective of the above, the Bank makes every effort to regularly present clear and transparent (public and internal) communication on its approach to specific aspects of tax settlements, within the deadlines and the scope required by the commonly applicable law.

In connection with the business activities conducted and in accordance with the applicable provisions of the tax law, the Management Board declares that the Bank is obliged to pay not only corporate income tax, but other taxes as well, such as, among others, the tax on goods and services (VAT), real estate tax, tax on certain financial institutions. As a taxpayer, the Bank is also collecting and remitting personal income tax on amounts paid to employees, customers and suppliers. With regard to income received by foreign customers and suppliers, the Bank is collecting and remitting withholding tax to national tax authorities.

The Management Board declares that the Bank is consistently avoiding any activities which would require using aggressive tax planning structures or avoiding taxes (including the use of tax havens) and is avoiding any solutions which are clearly in contravention with the legislator’s intentions or the spirit of the law (the principle of tax honesty).

The undertakings listed above also apply to tax settlements made in each country in which the Bank conducts its business activities.

Corporate income tax paid on the income earned by the PKO Bank Polski S.A. Group in 2020 by country of operations:

	Corporate income tax 2020
The Group	1 408
Poland	1 388
Sweden	1
Ukraine	18

Tax systems of countries in which the Bank and entities in the PKO Bank Polski S.A. Group have their registered offices or branches are often subject to amendments to laws, among other things as a result of operations aimed at tightening the tax system, both at national and international level.

In addition, understanding the regulations of the tax law, due to their ambiguity, may in practice lead to inconsistent interpretations by the tax authorities, differing from the interpretation by the taxpayer, and respective disputes may only be resolved by national or European courts. Therefore, interpretations of the tax law by the tax authorities differing from the practices implemented by the Bank or entities of the PKO Bank Polski S.A. Group cannot be eliminated and may have a significant unfavourable impact on their operations and financial condition, despite the various actions aimed at mitigating this risk, which are regularly undertaken and allowed by law.

Due to the doubts relating to taxation of foreign exchange differences on loans granted to the Bank and issue commitments in the territory of Sweden, PKO Finance AB, whose reporting currency is the EUR, applied to the Swedish Council for Tax Rulings (Skatterättsnämnden) for an individual ruling. PKO Finance AB lends funds to the Bank obtained from bonds issued and at the same time recognizes receivables from the loans and liabilities relating to the issue.

Changes in foreign exchange rates have a symmetrical impact on the valuation of such receivables and liabilities, because foreign exchange differences on the valuation of loans granted are matched with the opposite foreign exchange differences on the valuation of liabilities in respect of the bonds issued.

According to the ruling obtained on 14 March 2019, a company for which EUR is the reporting currency should tax the EUR/SEK exchange differences on the loans granted as at the maturity date, and at the same time it is not possible to recognize at the maturity date a tax cost related to foreign exchange differences on the Company’s liabilities in respect of the bond issue. If the Council’s ruling is upheld by the Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen), it would mean that a different approach is applied in Sweden to companies reporting in EUR compared with companies reporting in SEK (which can also include foreign exchange differences on liabilities in their tax settlements), and this would increase the economic risk and hamper effective hedging of the currency risk. In the opinion of the Group, such an approach would be contrary to Art. 63 of the Treaty on the Functioning of the European Union (TFEU) related to the need to ensure free flow of capital in the EU or Art. 49 and 54 of TFEU related to the freedom of business activities. On 3 April 2019, the company appealed to the Swedish Supreme Administrative Court against the Council’s ruling and on 1 July submitted extended arguments to dismiss the case. In its opinion of 23 August 2019, the Swedish Tax Office (Skatteverket) took a negative stance on the company’s appeal. The Company sustained its position in the response to the opinion submitted to the Swedish Supreme Administrative Court on 25 September 2019. In addition, on 10 October 2019, the Company submitted complementary documents to its appeal, in which it emphasized, among other things, the importance of the resolution for companies operating in the territory of Sweden and reporting in euro.

On 5 May 2020, the Swedish Supreme Administrative Court dismissed, for formal reasons, an appeal by PKO Finance AB, resulting in the interpretation of 14 March 2019 becoming expired. On 13 May 2020, PKO Finance AB received two decisions of the Swedish tax office which confirmed the correctness of the Company’s tax settlements for 2015 and 2016. In these decisions, PKO Finance AB adopted a symmetrical settlement of foreign exchange differences on loans granted and due, and on liabilities in respect of eurobond issues. The decisions are favourable for the Group, but inconsistent with the line of interpretations previously issued by the tax office.

In accordance with IFRIC 23 “Uncertainty over Income Tax Treatments” entering into force, the Group made a judgment regarding the uncertain treatment of taxable income earned in the territory of Sweden in respect of foreign exchange differences on loans and liabilities relating to the bond issue. The Group reflected the effect of uncertainty by using the “most probable amount” method.

As at 31 December 2020, the deferred income tax provision amounted to PLN 279 million (PLN 274 million as at 31 December 2019). The Group is analysing the impact of the decisions of the Swedish tax office on the taxation of foreign exchange differences of PKO Finance AB, which may lead to changing the related judgment in the next reporting periods.

27. Cash and balances with the Central Bank

Accounting policies

The item “Cash and balances with the central bank” presents cash recognized at nominal value, and funds in the current account and deposits with the Central Bank measured at amortized cost, and in there is no schedule for future cash flows, at amounts due, including interest on those funds (if any).

financial information

CASH AND BALANCES WITH THE CENTRAL BANK	31.12.2020	31.12.2019
Current account with the Central Bank	4 068	10 777
Cash in hand	3 406	3 900
Total	7 474	14 677

28. Amounts due from banks

Accounting policies

Principles of classification and measurement are described in the Note “Description of significant accounting policies”. In the case of receivables for which no future cash flow schedule can be determined, and therefore the effective interest rate cannot be determined, the receivable is measured at the amount due.

financial information

AMOUNTS DUE FROM BANKS	31.12.2020	31.12.2019
Measured at amortized cost	2 557	4 093
Deposits with banks	1 311	2 995
Current accounts	887	997
Loans and advances granted	358	99
Cash in transit	1	2
Gross amount	2 557	4 093
Allowances for expected credit losses	-	(1)
Net amount	2 557	4 092

As at 31 December 2020 and 31 December 2019, all amounts due from banks were classified as Stage 1

AMOUNTS DUE FROM BANKS -CHANGES IN GROSS CARRYING AMOUNT DURING THE PERIOD	2020	2019
Measured: at amortized cost
As at the beginning of the period	4 093	7 662
Financial instruments granted or acquired	3 211	2 372
Utilization of limits or disbursement of tranches	2	40
Repayments	(4 911)	(6 177)
Derecognition, including sale	-	(8)
Other changes	162	204
As at the end of the period	2 557	4 093

AMOUNTS DUE FROM BANKS - CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	2020	2019
As at the beginning of the period	(1)	(1)
Increase due to recognition and purchase	(1)	-
Changes in credit risk (net)	2	-
As at the end of the period	-	(1)

AMOUNTS DUE FROM BANKS BY MATURITY	31.12.2020	31.12.2019
up to 1 month	2 554	3 988
1 to 3 months	-	78
3 months to 1 year	1	-
1 to 5 years	2	26

Total	2 557	4 092

29. Hedge accounting

risk management strategy

The Group applies hedge accounting to hedge its interest rate risk and foreign exchange risk. The hedging transactions are concluded to mitigate the risk of incurring losses as a result of unfavourable changes in foreign currency exchange rates and interest rates. Cash flows related to the transactions performed and the fair value of assets held are hedged.

The interest rate risk covers in particular:

• the risk related to the repricing (change in interest rates) frequency and dates mismatch of the assets and liabilities, and of off-balance sheet items (repricing date mismatch risk);

• the risk following from the change in the angle of inclination and shape of the yield curve (yield curve risk);

• the risk resulting from an imperfect match between the reference rates used in respect of banking products and the changes in the market rates, or from imperfect transmission systems of changes in market interest rates on those products (base risk);

• risks resulting from options, including embedded options, e.g. restrictions on interests on loans (option risk).

The Group’s foreign exchange risk arises as a result of transactions performed under:

• core business activities;

• trading activities;

• contracts concluded by the Group which generate foreign exchange risk.

Foreign exchange risk arising from the Group’s activities is managed, where required, by specialized units as part of their own operations based on the data received on open currency positions.

A system of threshold values and limits attributed to particular interest and foreign exchange risks is in force at the Group, aimed at determining the maximum allowable risk level which ensures that the strategic tolerance limits are not exceeded.

Accounting policies

The Group decided to further apply the provisions of IAS 39 and did not apply IFRS 9 in respect of hedge accounting.

• Cash flow hedges

Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognized in the income statement in the item “Gains/(losses) on financial transactions” or “Foreign exchange gains (losses)”.

Amounts transferred directly to other comprehensive income are transferred to the income statement in the same period or periods in which the hedged planned transaction affects the income statement. Interest and foreign exchange gains/losses are presented in the income statement, in “Net interest income” and “Net foreign exchange gains (losses)”, respectively.

The effectiveness tests comprise the measurement of hedging transactions net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in the case of CIRS transactions).

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

• Fair value hedges

Changes in the fair value of a derivative hedging instrument designated as fair value hedge are recognized in “Gains/(losses) on financial transactions”, net of the interest component. The interest component is presented in the same line item as interest income on the hedged item, i.e. in “Net interest income”.

A change in the fair value adjustment to the hedged item is recognized in “Gains/(losses) on financial transactions”.

The part of the fair value adjustment which is not hedged is recognized:

• for a hedged item which is a financial asset or a financial liability classified as measured at fair value through profit or loss - as income or costs, as appropriate, in gains/(losses) on financial transactions;

• for a hedged item which is a financial asset measured at fair value through other comprehensive income - in other comprehensive income, where the change in the fair value of financial instruments measured at fair value through other comprehensive is presented.

The effectiveness tests comprise the measurement of hedging transactions net of accrued interest.

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

types of hedging strategies applied by the Group

As at 31 December 2020, the Group had had active relationships as part of:

• 6 strategies for hedging cash flow volatility

• 4 strategies for hedging fair value volatility.

In 2020 the Group introduced new hedging strategies:

• “Hedging fair value volatility of fixed-interest-rate securities in PLN, measured at fair value through other comprehensive income, resulting from the interest rate risk, using IRS transactions”;

• “Hedging cash flow volatility of floating interest rate convertible currency loans arising from interest rate and foreign exchange risk, as well as hedging cash flow volatility of financial liabilities in convertible currencies arising from foreign exchange risk, using CIRS transactions.”

In 2020, the Group closed two relationships under the hedging strategy “Hedging cash flow volatility of floating interest rate convertible currency loans arising from interest rate and foreign exchange risk, as well as hedging cash flow volatility of fixed interest financial liabilities in convertible currencies arising from foreign exchange risk, using CIRS transactions”, due to having no such hedged items. The total effect of discontinuing to apply hedge accounting as part of these relationships on other comprehensive income amounted to PLN 33 million, and net interest income increased by the same amount.

In 2020, the Group closed, as a result of invalidation, a relationship under the hedging strategy “Hedging the fluctuations in the fair value of fixed-interest-rate securities in PLN, measured at fair value through other comprehensive income, resulting from the interest rate risk, using IRS transactions”; the effect of discontinuation of hedge accounting as part of the said relationship on the profit or loss amounted to PLN (-7.7) million.

In 2020, the Group closed, as a result of failing to pass the prospective test of sufficient nominal amount, a relationship under the hedging strategy “Hedging cash flow volatility of floating interest loans in EUR, resulting from the risk of fluctuations in interest rates, using IRS transactions”. The effect of the discontinuation of hedge accounting as part of the said relationship on the profit or loss amounted to PLN 0.6 million.

In 2020, the Group terminated, as a result of the derecognition of the hedged item, the hedging relationships under the hedging strategies:

• Hedging the volatility of cash flows of floating rate CHF loans, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of term deposits negotiated in PLN, resulting from the risk of changes in interest rates, using CIRS transactions;

• Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of a financial liability in a convertible currency with a fixed interest rate, resulting from currency risk, using CIRS transactions;

• Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging of the volatility of cash flows of a financial liability in a convertible currency with a fixed interest rate, resulting from currency risk, using transactions: CIRS;

• Hedging the volatility of cash flows of convertible currency loans with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of financial liabilities in a convertible currency, resulting from the currency risk, with the use of CIRS transactions.

The total impact of the discontinuation of hedge accounting under the above-mentioned the relationship to other comprehensive income amounted to minus PLN 213 million, with the simultaneous increase in the net interest income and foreign exchange gains/ (losses) by this amount.

No changes were made to other hedging strategies in 2020.

In 2019, the Group introduced two new hedging strategies for fair value hedges.

The tables below summarize the types of strategies applied by the Group.

Type of hedging strategy	Cash flow hedges (Strategy no: 1,2,3,4,5,6,7,9,13)
Hedged risk	foreign exchange risk and interest rate risk	interest rate risk
Hedging instrument	transactions CIRS float – float transactions CIRS fixed – float	IRS fixed – float transactions
Hedged item	• the portfolio of floating interest loans in foreign currencies and • the portfolio of current negotiated term deposits, including their future renewals. In designating the hedged item, the Bank used the IAS39 AG 99C in the version adopted by the European Union, or • fixed interest rate financial liability denominated in foreign currency or • the portfolio of floating interest rate regular savings products in PLN, or • financial liabilities in foreign currencies	the portfolio of loans in PLN or foreign currencies indexed to a floating interest rate
Sources of hedge ineffectiveness	• margin on the hedging instrument • differences in discount on the hedged item and the hedging instrument • CVA/DVA adjustment of the hedging instrument	• change in market parameters between the moment of determining the terms and conditions relating to the hedged item and the moment of concluding the hedge • differences in discount on the hedged item and the hedging instrument • CVA/DVA adjustment of the hedging instrument
	The period in which cash flows are expected to occur and affect the financial results: January 2021 – October 2026	The period in which cash flows are expected to occur and affect the financial results: January 2021 – May 2030

Type of hedging strategy	Fair value hedges (Strategy no: 8,10,11,12)
Hedged risk	interest rate risk
Hedging instrument	IRS fixed – float transactions
Hedged item	a component of the interest rate risk relating to a fixed interest rate loan or security in a foreign currency or in PLN, which corresponds to the market IRS rate
Sources of hedge ineffectiveness	• change in market parameters between the moment of determining the terms and conditions relating to the hedged item and the moment of concluding the hedge • CVA/DVA adjustment of the hedging instrument • difference between the present value of the floating leg of IRS and the present value of the nominal value of a security

HEDGED ITEM 31.12.2020	CARRYING AMOUNT OF THE HEDGED ITEM	ITEM IN THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM	STRATEGY NO.
Zabezpieczenie zmienności przepływów pieniężnych
Loans in CHF	525	Loans and advances to customers	280	1
Negotiated deposits in PLN	1 939	Amounts due to customers	280	1
Loans in CHF	400	Loans and advances to customers	(2)	3
Loans in PLN	2 963	Loans and advances to customers	(287)	9
Financial liability in EUR	699	Debt securities in issue	(287)	9
Loans in PLN	66 008	Loans and advances to customers	(399)	2
Loans in EUR	75	Loans and advances to customers	15	6
Negotiated deposits in PLN	328	Amounts due to customers	15	6
Loans in EUR	1 228	Loans and advances to customers	(9)	3; 4
Fair value hedges
Security in EUR	30	Securities measured at amortized cost	1	10
Security in EUR	102	Securities measured at fair value through other comprehensive income	1	11
Security in USD	158	Securities measured at fair value through other comprehensive income	5	11
Loans in EUR	174	Loans and advances to customers	1	8
Security in PLN	535	Securities measured at fair value through other comprehensive income	17	12
Total			(377)

HEDGED ITEM 31.12.2019	CARRYING AMOUNT OF THE HEDGED ITEM	ITEM IN THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM	STRATEGY NO.
HEDGED ITEM 31.12.2019	CARRYING AMOUNT OF THE HEDGED ITEM	ITEM IN THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM	STRATEGY NO.
Cash flow hedges
Loans in CHF	1 025	Loans and advances to customers	391	1
Negotiated deposits in PLN	3 653	Amounts due to customers	391	1
Loans in CHF	3 385	Loans and advances to customers	96	5
Financial liability in USD	875	Debt securities in issue
Financial liability in EUR	2 301	Debt securities in issue
Loans in CHF	225	Loans and advances to customers	7	7
Regular savings products in PLN	872	Amounts due to customers	7	7
Loans in CHF	400	Loans and advances to customers	(2)	3
Loans in PLN	2 964	Loans and advances to customers	(67)	9
Financial liability in EUR	699	Debt securities in issue	(67)	9
Loans in PLN	40 783	Loans and advances to customers	(58)	2
Loans in EUR	100	Loans and advances to customers	(10)	6
Negotiated deposits in PLN	437	Amounts due to customers	(10)	6
Loans in EUR	1 224	Loans and advances to customers	(7)	3;4
Fair value hedges
Security in EUR	30	Securities measured at amortized cost	-	10
Security in EUR	44	Securities measured at fair value through other comprehensive income	-	11
Security in USD	134	Securities measured at fair value through other comprehensive income	(1)	11
Loans in EUR	183	Loans and advances to customers	1	8
Total			350

Hedging derivative 2020-12-31		Nominal amount of hedging derivatives	Nominal-weighted average margin / Nominal-weighted average fixed interest rate	Carrying amount (fair value of hedging instruments)		Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item	Change in the fair value of hedging instruments since designation	Strategy no.
Hedging derivative 2020-12-31		Nominal amount of hedging derivatives		Assets	Liabilities			Strategy no.
Cash flow hedges
CIRS CHF/PLN	float CHF	525	-0,0108%	-	293	(1)	(277)	1; 7
CIRS CHF/PLN	float PLN	1 939	0,0000%	-	293	(1)	(277)	1; 7
IRS PLN	fixed PLN	66 008	1,7924%	598	8	3	406	2
IRS CHF	fixed CHF	400	-0,4425%	6	-	-	1	3
IRS EUR	fixed EUR	1 228	-0,1479%	22	6	-	8	3; 4
CIRS EUR/PLN	float EUR	75	0,0000%	-	17	(1)	(14)	6
CIRS EUR/PLN	float PLN	328	-0,0500%	-	17	(1)	(14)	6
CIRS PLN/EUR	float PLN	2 963	0,0000%	332	21	3	290	9
CIRS PLN/EUR	fixed EUR	699	0,6177%	332	21	3	290	9
Fair value hedges
IRS EUR	float EUR	306	-0,2837%	-	13	13	(8)	8; 10; 11
IRS USD	float USD	158	-0,3465%	-	2	17	(1)	11
IRS PLN	float PLN	535	1,3735%	-	20	17	(17)	12
Total				958	378	51	389

Hedging derivative 31.12.2019		Nominal amount of hedging derivatives	Nominal-weighted average margin / Nominal-weighted average fixed interest rate	Carrying amount (fair value of hedging instruments)		Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item	Change in the fair value of hedging instruments since designation	Strategy no.
				Assets	Liabilities
Cash flow hedges
CIRS CHF/PLN	float CHF	1 250	0,0024%	14	378	1	(379)	1;7
	float PLN	4 524	0,0000%
IRS PLN	PLN	40 783	2,2972%	239	8	2	63	2
IRS CHF	CHF	400	-0,4425%	8	-	-	2	3
IRS EUR	EUR	1 224	-0,1699%	15	2	-	6	3;4
CIRS CHF/USD	float CHF	818	0,0000%	189	-	(2)	124	5
	fixed USD	875	2,4315%
CIRS CHF/EUR	float CHF	2 567	0,0000%	86	186	(16)	(220)	5
	fixed EUR	2 301	0,2958%
CIRS EUR/PLN	float EUR	100	0,0000%	11	-	-	11	6
	float PLN	437	-0,0277%
CIRS PLN/EUR	float PLN	2 964	0,0000%	79	8	(7)	67	9
	fixed EUR	699	0,6177%
Fair value hedges
IRS EUR	EUR	257	-0,1874%	1	6	4	(1)	8;10;11
IRS USD	USD	134	1,5702%	3	1	(2)	1	11
Total				645	589	(20)	(326)

financial information

CARRYING AMOUNT OF HEDGING INSTRUMENTS	31.12.2020		31.12.2019
CARRYING AMOUNT OF HEDGING INSTRUMENTS	Assets	Liabilities	Assets	Liabilities
Cash flow hedges	958	324	641	582
- interest rate risk IRS	626	14	262	10
- foreign exchange risk and interest rate risk - CIRS	332	310	379	572
Fair value hedges	-	54	4	7
- interest rate risk IRS	-	54	4	7

Total	958	378	645	589

Cash flow hedges

CHANGE IN OTHER COMPREHENSIVE INCOME RELATING TO CASH FLOW HEDGES AND AN INEFFECTIVE PORTION OF CASH FLOW HEDGES	2020	2019
Accumulated other comprehensive income at the beginning of the period, net	232	22
Impact on other comprehensive income during the period, gross	174	259
Gains/losses recognized in other comprehensive income during the period	911	187
Amounts transferred from other comprehensive income to the income statement, of which:	(737)	72
- interest income	(780)	(324)
- net foreign exchange gains/(losses)	43	396
Tax effect	(51)	(49)
Accumulated other comprehensive income at the end of the period, net	355	232

Ineffective portion of cash flow hedges recognized in the income statements, including in:	4	(20)
Foreign exchange gains/ (losses)	1	(22)
Gain/(loss) on financial instruments measured at fair value	3	2

Fair value hedges

HEDGES OF INTEREST RATE RISK	31.12.2020	31.12.2019
Fair value measurement of the hedging derivative instrument - IRS	(54)	(3)
IRS fixed - float	(54)	(3)
Fair value adjustment of the hedged instrument attributable to the hedged risk	46	2
Securities	5	1
Loans and advances to customers	4	4
FVOCI securities - fair value adjustment recognized in OCI	37	(3)

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY (in original currencies)	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
31.12.2020
Hedge type: Cash flow hedges
Risk hedged: interest rate risk
IRS PLN fixed - float	2 150	1 520	12 728	49 315	295	66 008
IRS EUR fixed - float	-	-	500	723	4	1 227
IRS CHF fixed - float	-	-	400	-	-	400
Risk hedged: foreign exchange and interest rate risks
CIRS float CHF/float PLN
float CHF	-	-	500	25	-	525
float PLN	-	-	1 842	97	-	1 939
CIRS float EUR/float PLN
float EUR	-	75	-	-	-	75
float PLN	-	328	-	-	-	328
CIRS float PLN/fixed EUR
float PLN	-	-	434	2 530	-	2 964
fixed EUR	-	-	100	599	-	699
Hedge type: Fair value hedges
Risk hedged: interest rate risk
IRS USD fixed - float	-	-	-	158	-	158
IRS EUR fixed - float	-	-	82	188	36	306
IRS PLN fixed - float	-	-	-	-	535	535

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY (in original currencies)	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
31.12.2019
Hedge type: Cash flow hedges
Risk hedged: interest rate risk
IRS PLN fixed - float	500	4 700	25 492	10 031	60	40 783
IRS EUR fixed - float	-	-	700	524	-	1 224
IRS CHF fixed - float	-	-	-	400	-	400
Risk hedged: foreign exchange and interest rate risks
CIRS float CHF/float PLN
float CHF	-	50	425	750	25	1 250
float PLN	-	169	1 456	2 811	88	4 524
CIRS fixed USD/float CHF
fixed USD	-	-	-	875	-	875
float CHF	-	-	-	817	-	817
CIRS float EUR/float PLN
float EUR	25	-	-	75	-	100
float PLN	108	-	-	329	-	437
CIRS float PLN/fixed EUR
float PLN	-	-	-	2 964	-	2 964
fixed EUR	-	-	-	699	-	699
CIRS fixed EUR/float CHF
fixed EUR	-	-	-	2 301	-	2 301
float CHF	-	-	-	2 567	-	2 567
Hedge type: Fair value hedges
Risk hedged: interest rate risk
IRS USD fixed - float	-	-	-	134	-	134
IRS EUR fixed - float	-	-	-	209	48	257

Calculation of estimates

ESTIMATED CHANGE IN VALUATION OF DERIVATIVE HEDGING INSTRUMENTS FOLLOWING A PARALLEL SHIFT IN YIELD CURVES:	31.12.2020		31.12.2019
	scenario +50bp	scenario -50bp	scenario +50bp	scenario -50bp
IRS	(531)	537	(190)	191
CIRS	(119)	121	(167)	170

Total	(650)	658	(357)	361

30. Other derivative instruments

Accounting policies

In its operations, the Group uses derivative financial instruments for risk management purposes related to its operations. The Group most often uses the following derivative instruments: IRS, CIRS, FX Swap, options, commodity swap, FRA, Forward and Futures. Derivative financial instruments are stated at fair value from the transaction date. Every derivative with positive fair value is shown under “Other derivative financial instruments” as an asset, and if the fair value is negative – as a liability.

The Group recognizes changes to the fair value measurement of derivative instruments which are not classified as hedging instruments and the gain/(loss) on the settlement of those instruments in the net gain/(loss) on financial instruments or net foreign exchange gains/(losses), depending on the type of derivative.

Estimates and judgments

The fair value of derivative instruments other than options is designated using the measurement methods that base on discounted cash flows which may be obtained from a given financial instrument. The measurement techniques for financial instruments other than options are based on yield curves constructed on the basis of available market data (deposit rates on the interbank market, quotations of IRS transactions). Options are valued using option pricing models. The variables and assumptions used in a valuation include, where available, data derived from observable markets.

The fair value of derivative instruments accounts for DVA (debit value adjustment), and CVA (credit value adjustment). The process of calculating CVA and DVA adjustments covers the selection of the methods for designating the counterparty’s or the Group’s credit risk spread (e.g. the market based measurement based on liquid quotations of prices of debt instruments issued by the counterparty, the implied spread from Credit Default Swap contracts), estimating the probability of the counterparty’s or the Group’s default and the recovery rate, as well as the calculation of CVA and DVA adjustments.

financial information

OTHER DERIVATIVE INSTRUMENTS - BY TYPE	31.12.2020		31.12.2019
OTHER DERIVATIVE INSTRUMENTS - BY TYPE	Assets	Liabilities	Assets	Liabilities
IRS	3 178	3 405	1 523	1 624
CIRS	652	978	151	145
FX Swap	358	314	217	186
Opcje	260	383	312	336
Commodity swap	411	408	287	283
FRA	4	3	1	1
Forward	312	293	304	348
Futures	-	-	-	1
Commodity Forward	326	320	-	-

Total	5 501	6 104	2 795	2 924

	31.12.2020	31.12.2019
CVA and DVA adjustments	(16)	(9)

NOMINAL AMOUNTS OF UNDERLYING INSTRUMENTS (BUY AND SELL TOGETHER) other derivative instruments

31.12.2020

up to 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

over 5 years

Total

IRS

13 198

14 716

77 592

232 784

38 398

376 688

Purchase

6 599

7 358

38 796

116 392

19 199

188 344

Sale

6 599

7 358

38 796

116 392

19 199

188 344

CIRS

13 662

37 161

7 546

58 369

Purchase

6 831

18 577

3 772

29 180

Sale

6 831

18 584

3 774

29 189

FX Swap

27 650

12 919

9 428

5 373

55 370

Purchase of currencies

13 893

6 457

4 674

2 697

27 721

Sale of currencies

13 757

6 462

4 754

2 676

27 649

Options

5 154

9 685

25 008

10 345

50 193

Purchase

2 589

4 838

12 435

5 170

25 032

Sale

2 565

4 847

12 573

5 175

25 161

FRA

17 829

819

18 648

Purchase

8 678

581

9 259

Sale

9 151

238

9 389

Forward

6 513

14 387

18 566

7 954

47 467

Purchase of currencies

3 271

7 168

9 281

3 985

23 728

Sale of currencies

3 242

7 219

9 285

3 969

23 739

Other (including on stock exchange indices

701

1 299

3 661

1 133

434

7 228

Purchase

351

650

1 832

567

233

3 633

Sale

350

649

1 829

566

201

3 595

Total

53 216

53 006

165 746

295 569

46 426

613 963

NOMINAL AMOUNTS OF UNDERLYING INSTRUMENTS (BUY AND SELL TOGETHER) other derivative instruments
31.12.2019	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
IRS	7 204	40 152	187 598	206 124	39 435	480 513
Purchase	3 602	20 076	93 799	103 062	19 718	240 257
Sale	3 602	20 076	93 799	103 062	19 717	240 256
CIRS	1 386	406	4 248	70 580	7 554	84 174
Purchase	694	191	2 019	38 160	3 772	44 836
Sale	692	215	2 229	32 420	3 782	39 338
FX Swap	21 328	8 336	13 663	5 211	-	48 538
Purchase of currencies	10 659	4 161	6 846	2 639	-	24 305
Sale of currencies	10 669	4 175	6 817	2 572	-	24 233
Options	6 263	12 743	37 545	11 845	1	68 397
Purchase	3 108	6 432	18 576	5 849	-	33 965
Sale	3 155	6 311	18 969	5 996	1	34 432
FRA	-	-	22 211	1 000	-	23 211
Purchase	-	-	12 397	500	-	12 897
Sale	-	-	9 814	500	-	10 314
Forward	7 601	13 160	24 650	12 634	-	58 045
Purchase of currencies	3 795	6 588	12 316	6 305	-	29 004
Sale of currencies	3 806	6 572	12 334	6 329	-	29 041
Other (including on stock exchange indices	824	1 348	1 924	614	-	4 710
Purchase	518	683	962	307	-	2 470
Sale	306	665	962	307	-	2 240

Total	44 606	76 145	291 839	308 008	46 990	767 588

Calculation of estimates

The Group made simulations aimed at determining the possible impact of the changes in the yield curve on the valuation of transactions.

ESTIMATED CHANGE IN VALUATION OF OTHER DERIVATIVE INSTRUMENTS FOLLOWING A PARALLEL SHIFT IN YIELD CURVES:	31.12.2020		31.12.2019
	scenario +50bp	scenario -50bp	scenario +50bp	scenario -50bp
IRS	(523)	528	(182)	183
CIRS	(159)	161	(219)	222
other instruments	(4)	4	(2)	2

Total	(686)	693	(403)	407

31. Securities

Accounting policies

Securities are classified and valued in accordance with the principles of selecting the business model and assessing the characteristics of contractual cash flows referred to in the Note „Description of significant accounting policies”.

The item “Securities” also includes an adjustment relating to fair value hedge accounting for securities representing hedged items (note “Hedge Accounting”).

Financial information

SECURITIES	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2020
Debt securities	1 151	978	73 511	46 522	122 162
Treasury bonds (in PLN)	684	430	52 930	29 647	83 691
Treasury bonds (in foreign currencies)	4	367	2 872	39	3 282
Treasury bills	349	-	500	-	849
corporate bonds (in PLN) secured with the State Treasury guarantees	-	-	8 702	9 887	18 589
municipal bonds (in PLN)	15	-	4 649	5 060	9 724
corporate bonds (in foreign currencies)	-	-	-	-	-
corporate bonds (in PLN)	99	181	3 835	1 518	5 633
corporate bonds (in foreign currencies)	-	-	23	371	394
Equity securities	27	1 488	-	-	1 515
shares in other entities – not listed	-	451	-	-	451
shares in other entities – listed	25	135	-	-	160
participation units in investment funds, investment certificates, rights to shares, pre-emptive rights	2	902	-	-	904

Total (excluding adjustment relating to fair value hedge accounting)	1 178	2 466	73 511	46 522	123 677
Adjustment relating to fair value hedge accounting	-	-	-	5	5

Total	1 178	2 466	73 511	46 527	123 682

SECURITIES	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2019
Debt securities	1 095	493	63 807	13 454	78 849
NBP money market bills	-	-	1 000	-	1 000
Treasury bonds (in PLN)	982	301	51 541	7 406	60 230
Treasury bonds (in foreign currencies)	2	-	2 520	60	2 582
municipal bonds (in PLN)	15	-	5 232	4 563	9 810
corporate bonds (in PLN)	95	192	3 514	1 083	4 884
corporate bonds (in foreign currencies)	1	-	-	342	343
Equity securities	17	1 706	-	-	1 723
shares in other entities – not listed	-	436	-	-	436
shares in other entities – listed	15	150	-	-	165
participation units in investment funds, investment certificates, rights to shares, pre-emptive rights	2	1 120	-	-	1 122

Total (excluding adjustment relating to fair value hedge accounting)	1 112	2 199	63 807	13 454	80 572
Adjustment relating to fair value hedge accounting	-	-	-	1	1

Total	1 112	2 199	63 807	13 455	80 573

The item “T-bonds in PLN and in foreign currencies” comprises Polish T-bonds.

As at 31 December 2020 and 31 December 2019, the item “Treasury bonds in foreign currencies” also includes bonds issued by the State Treasury of Ukraine of PLN 820 and PLN 492 million, respectively.

31.1. Securities – classification of financial assets by stage

SECURITIES (excluding adjustments relating to fair value hedge accounting) 31.12.2020	stage 1	stage 2	stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	73 000	68	457	73 525	438
Treasury bonds (in PLN)	52 930	-	-	52 930	-
Treasury bonds (in foreign currencies)	2 872	-	-	2 872	-
Treasury bills	500	-	-	500	-
corporate bonds (in PLN) secured with the State Treasury guarantees	8 702	-	-	8 702	-
municipal bonds (in PLN)	4 582	67	-	4 649	-
corporate bonds (in PLN)	3 391	1	457	3 849	438
corporate bonds (in foreign currencies)	23	-	-	23	-
Allowances for expected credit losses	-	-	(14)	(14)	(14)
corporate bonds (in PLN)	-	-	(14)	(14)	(14)
Net amount	73 000	68	443	73 511	424
Treasury bonds (in PLN)	52 930	-	-	52 930	-
Treasury bonds (in foreign currencies)	2 872	-	-	2 872	-
Treasury bills	500	-	-	500	-
corporate bonds (in PLN) secured with the State Treasury guarantees	8 702	-	-	8 702	-
municipal bonds (in PLN)	4 582	67	-	4 649	-
corporate bonds (in PLN)	3 391	1	443	3 835	424
corporate bonds (in foreign currencies)	23	-	-	23	-
Wycena: wg zamortyzowanego kosztu
Gross amount	46 330	228	-	46 558	-
Treasury bonds (in PLN)	29 647	-	-	29 647	-
Treasury bonds (in foreign currencies)	39	-	-	39	-
corporate bonds (in PLN) secured with the State Treasury guarantees	9 889	-	-	9 889	-
municipal bonds (in PLN)	5 052	24	-	5 076	-
corporate bonds (in PLN)	1 331	204	-	1 535	-
corporate bonds (in foreign currencies)	372	-	-	372	-
Allowances for expected credit losses	(20)	(16)	-	(36)	-
corporate bonds (in PLN) secured with the State Treasury guarantees	(2)	-	-	(2)	-
municipal bonds (in PLN)	(16)	-	-	(16)	-
corporate bonds (in PLN)	(1)	(16)	-	(17)	-
corporate bonds (in foreign currencies)	(1)	-	-	(1)	-
Net amount	46 310	212	-	46 522	-
Treasury bonds (in PLN)	29 647	-	-	29 647	-
Treasury bonds (in foreign currencies)	39	-	-	39	-
corporate bonds (in PLN) secured with the State Treasury guarantees	9 887	-	-	9 887	-
municipal bonds (in PLN)	5 036	24	-	5 060	-
corporate bonds (in PLN)	1 330	188	-	1 518	-
corporate bonds (in foreign currencies)	371	-	-	371	-
Total securities
Gross amount	119 330	296	457	120 083	438
Allowances for expected credit losses	(20)	(16)	(14)	(50)	(14)
Net amount	119 310	280	443	120 033	424

SECURITIES (excluding adjustments relating to fair value hedge accounting) 31.12.2019	stage 1	stage 2	stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	63 290	59	463	63 812	463
NBP money market bills	1 000	-	-	1 000	-
Treasury bonds (in PLN)	51 541	-	-	51 541	-
Treasury bonds (in foreign currencies)	2 520	-	-	2 520	-
municipal bonds (in PLN)	5 232	-	-	5 232	-
corporate bonds (in PLN)	2 997	59	463	3 519	463
Allowances for expected credit losses	-	-	(5)	(5)	(5)
corporate bonds (in PLN)	-	-	(5)	(5)	(5)
Net amount	63 290	59	458	63 807	458
NBP money market bills	1 000	-	-	1 000	-
Treasury bonds (in PLN)	51 541	-	-	51 541	-
Treasury bonds (in foreign currencies)	2 520	-	-	2 520	-
municipal bonds (in PLN)	5 232	-	-	5 232	-
corporate bonds (in PLN)	2 997	59	458	3 514	458
Measured at: amortized cost
Gross amount	13 450	20	4	13 474	-
Treasury bonds (in PLN)	7 406	-	-	7 406	-
Treasury bonds (in foreign currencies)	61	-	-	61	-
municipal bonds (in PLN)	4 574	-	-	4 574	-
corporate bonds (in PLN)	1 063	20	4	1 087	-
corporate bonds (in foreign currencies)	346	-	-	346	-
Allowances for expected credit losses	(16)	-	(4)	(20)	-
Treasury bonds (in foreign currencies)	(1)	-	-	(1)	-
municipal bonds (in PLN)	(11)	-	-	(11)	-
corporate bonds (in PLN)	-	-	(4)	(4)	-
corporate bonds (in foreign currencies)	(4)	-	-	(4)	-
Net amount	13 434	20	-	13 454	-
Treasury bonds (in PLN)	7 406	-	-	7 406	-
Treasury bonds (in foreign currencies)	60	-	-	60	-
municipal bonds (in PLN)	4 563	-	-	4 563	-
corporate bonds (in PLN)	1 063	20	-	1 083	-
corporate bonds (in foreign currencies)	342	-	-	342	-
Total securities
Gross amount	76 740	79	467	77 286	463
Allowances for expected credit losses	(16)	-	(9)	(25)	(5)
Net amount	63 290	59	463	63 812	463

31.2. securities - changes in the gross carrying amount during the period

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Carrying amount as at the beginning of the period, gross	63 290	59	463	63 812	463
Transfer from stage 2 and 3 to stage 1	8	(8)	-	-	-
Transfer from stage 1 and 3 to stage 2	(14)	14	-	-	-
Transfer from stage 1 and 2 to stage 3	(19)	-	19	-	-
Granting or purchase of financial instruments	68 610	4	-	68 614	-
Utilization of limits or disbursement of tranches	953	-	1	954	1
Repayments	(61 602)	(1)	(23)	(61 626)	(23)
Insignificant modifications	2	-	-	2	-
Derecognition, including sale	(2 134)	-	-	(2 134)	-
Write-offs	-	-	(2)	(2)	(2)
Other changes	3 906	-	(1)	3 905	(1)
Carrying amount as at the end of the period, gross	73 000	68	457	73 525	438

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Carrying amount as at the beginning of the period, gross	13 450	20	4	13 474	-
Transfer from stage 2 and 3 to stage 1	12	(12)	-	-	-
Transfer from stage 1 and 3 to stage 2	(105)	105	-	-	-
Granting or purchase of financial instruments	33 844	-	-	33 844	-
Utilization of limits or disbursement of tranches	130	1	-	131	-
Repayments	(1 859)	(6)	-	(1 865)	-
Derecognition, including sale	(25)	-	-	(25)	-
Write-offs	-	-	(3)	(3)	-
Other changes	883	120	(1)	1 002	-
Carrying amount as at the end of the period, gross	46 330	228	-	46 558	-

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Carrying amount as at the beginning of the period, gross	51 709	388	471	52 568	471
Transfer from stage 2 and 3 to stage 1	295	(295)	-	-	-
Transfer from stage 1 and 3 to stage 2	(10)	10	-	-	-
Transfer from stage 1 and 2 to stage 3	-	(26)	26	-	26
Granting or purchase of financial instruments	217 981	22	-	218 003	-
Utilization of limits or disbursement of tranches	315	-	-	315	-
Repayments	(209 656)	(22)	(11)	(209 689)	(11)
Derecognition, including sale	(196)	(17)	-	(213)	-
Write-offs	-	-	3	3	3
Other changes	2 852	(1)	(26)	2 825	(26)
Carrying amount as at the end of the period, gross	63 290	59	463	63 812	463

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Carrying amount as at the beginning of the period, gross	8 437	59	3	8 499	-
Transfer from stage 2 and 3 to stage 1	48	(48)	-	-	-
Transfer from stage 1 and 3 to stage 2	(18)	18	-	-	-
Granting or purchase of financial instruments	12 400	8	-	12 408	-
Utilization of limits or disbursement of tranches	25	-	-	25	-
Repayments	(8 053)	(8)	-	(8 061)	-
Insignificant modifications	1	-	-	1	-
Derecognition, including sale	(116)	(8)	-	(124)	-
Other changes	726	(1)	1	726	-
Carrying amount as at the end of the period, gross	13 450	20	4	13 474	-

31.3. securities - changes in allowances for expected credit losses in the period

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
As at the beginning of the period	-	-	(5)	(5)	(5)
Increase due to recognition and purchase	(19)	-	-	(19)	-
Changes in credit risk (net)	8	-	(8)	-	(8)
Decrease due to derecognition	2	-	-	2	-
Write-offs	-	-	2	2	2
Other adjustments	9	-	(3)	6	(3)
As at the end of the period	-	-	(14)	(14)	(14)

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
As at the beginning of the period	(16)	-	(4)	(20)	-
Transfer from stage 1 and 3 to stage 2	4	(4)	-	-	-
Increase due to recognition and purchase	(6)	-	-	(6)	-
Changes in credit risk (net)	1	(16)	-	(15)	-
Write-offs	-	-	3	3	-
Other adjustments	(3)	4	1	2	-
As at the end of the period	(20)	(16)	-	(36)	-

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
As at the beginning of the period	-	-	(10)	(10)	(10)
Increase due to recognition and purchase	(12)	-	-	(12)	-
Changes in credit risk (net)	9	(15)	6	-	6
Decrease due to derecognition	3	-	-	3	-
Write-offs	-	-	(3)	(3)	(3)
Other adjustments	-	15	2	17	2
As at the end of the period	-	-	(5)	(5)	(5)

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
As at the beginning of the period	(15)	(8)	(3)	(26)	-
Transfer from stage 2 and 3 to stage 1	(8)	8	-	-	-
Increase due to recognition and purchase	(4)	-	-	(4)	-
Changes in credit risk (net)	10	-	-	10	-
Other adjustments	1	-	(1)	-	-
As at the end of the period	(16)	-	(4)	(20)	-

• Other information

	31.12.2020	31.12.2019
allowance not reducing fair value of securities measured at fair value through other comprehensive income	30	21

SECURITIES BY MATURITY (excluding adjustments relating to fair value hedge accounting)	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2020
without a set date – equity securities	27	1 488	-	-	1 515
up to 1 month	1	2	214	6	223
1 to 3 months	351	-	569	51	971
3 months to 1 year	543	46	9 561	854	11 004
1 to 5 years	180	701	43 642	33 572	78 095
over 5 years	76	229	19 525	12 039	31 869

Total	1 178	2 466	73 511	46 522	123 677

SECURITIES BY MATURITY (excluding adjustments relating to fair value hedge accounting)	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2019
without a set date – equity securities	17	1 706	-	-	1 723
up to 1 month	115	-	1 247	-	1 362
1 to 3 months	3	-	105	10	118
3 months to 1 year	331	47	2 215	403	2 996
1 to 5 years	150	228	44 804	8 693	53 875
over 5 years	496	218	15 436	4 348	20 498

Total	1 112	2 199	63 807	13 454	80 572

32. Repo and reverse repo transactions

Accounting policies

Reverse repo transactions are measured at amortized cost. The difference between the sale price and repurchase (sales) price constitutes interest income and is settled over the period of the agreement using the effective interest rate.

Reverse repo transactions are security sale transactions with a granted promise of repurchase with a defined contractual term and specified price. The securities that are a component of the reverse repo transactions are not eliminated from the statement of financial position and are measured in accordance with the principles specified for each category of securities. The difference between the sales price and the repurchase price is the interest expense and is deferred over the term of the contract using the effective interest rate.

Financial information

Reverse repo transactions	31.12.2020	31.12.2019
Gross amount	-	1 081
Odpisy na oczekiwane straty kredytowe	-	-
Net amount	-	1 081

As at 31 December 2020 and 31 December 2019, all reverse repo transactions were in Stage 1.

CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	2020	2019
Reverse repo transactions
Carrying amount as at the beginning of the period, gross	1 081	51
Granting or purchase of financial instruments	-	1 085
Repayments	(1 081)	(51)
Other changes	-	(4)
Carrying amount as at the end of the period, gross	-	1 081

33. Loans and advances to customers

Accounting policies

Loans and advances to customers include amounts due from loans and advances granted and finance lease receivables.

Loans and advances to customers are classified in the individual measurement categories in accordance with the principles for selecting the business model and evaluating the characteristics of contractual cash flows referred to in the Note „Description of significant accounting policies”.

Finance lease agreements are recognized as receivables in the amount equal to the current contractual value of the lease payments plus the potential not guaranteed residual value attributed to the lessor, determined as at the date of inception of the lease. Lease payments on finance leases are divided between interest income and a reduction in the balance of receivables in a manner enabling the achievement of a fixed interest rate on the remaining receivables.

The item “Loans and advances to customers” also includes an adjustment relating to fair value hedge accounting for loans and advances to customers which represent hedged items (note “Hedge accounting”).

Additionally, the Group recognizes the impact of:

• the legal risk related to potential litigation for the portfolio of mortgage loans in convertible currencies and existing legal claims related to loan exposures recognized as at the balance sheet date in the statement of financial position;

• potential reimbursements of costs to customers in connection with expected early repayment of active consumer and mortgage loans;

when adjusting the gross carrying amount of housing and consumer loans measured at amortized cost.

Financial information

LOANS AND ADVANCES TO CUSTOMERS 31.12.2020	not held for trading, measured at fair value through profit or loss	measured at amortized cost	Total
retail and private banking	5 895	133 391	139 286
housing loans	7	110 352	110 359
consumer loans	5 888	22 932	28 820
finance lease receivables	-	107	107
SME	46	29 883	29 929
housing loans	-	5 674	5 674
corporate loans	46	12 478	12 524
factoring receivables	-	144	144
finance lease receivables	-	11 587	11 587
corporate entities	68	53 316	53 384
housing loans	-	292	292
corporate loans	68	46 483	46 551
factoring receivables	-	1 484	1 484
finance lease receivables	-	5 057	5 057
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)	6 009	216 590	222 599
Adjustment relating to fair value hedge accounting	4	-	4
Total	6 013	216 590	222 603

LOANS AND ADVANCES TO CUSTOMERS 31.12.2019	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost
retail and private banking	8 138	134 051	142 189
housing loans	15	112 397	112 412
consumer loans	8 123	21 539	29 662
finance lease receivables	-	115	115
SME	54	30 700	30 754
housing loans	-	5 769	5 769
corporate loans	54	13 314	13 368
factoring receivables	-	192	192
finance lease receivables	-	11 425	11 425
corporate entities	94	57 165	57 259
housing loans	-	282	282
corporate loans	94	50 980	51 074
factoring receivables	-	1 119	1 119
finance lease receivables	-	4 784	4 784
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)	8 286	221 916	230 202
Adjustment relating to fair value hedge accounting	4	-	4
Total	8 290	221 916	230 206

33.1. Loans and advances to customers – classification of financial assets by stage

LOANS AND ADVANCES TO CUSTOMERS (excluding adjustments relating to fair value hedge accounting) 31.12.2020	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: amortized cost
Gross amount	182 300	33 249	9 865	225 414	270
housing loans	102 746	13 702	1 953	118 401	85
corporate loans	44 346	13 689	5 450	63 485	57
consumer loans	20 240	2 855	1 447	24 542	53
factoring receivables	1 532	94	23	1 649	-
finance lease receivables	13 436	2 909	992	17 337	75
Allowances for expected credit losses	(602)	(2 061)	(6 161)	(8 824)	(39)
housing loans	(58)	(621)	(1 404)	(2 083)	(27)
corporate loans	(289)	(931)	(3 304)	(4 524)	(6)
consumer loans	(209)	(426)	(975)	(1 610)	(4)
factoring receivables	(2)	-	(19)	(21)	-
finance lease receivables	(44)	(83)	(459)	(586)	(2)
Net amount	181 698	31 188	3 704	216 590	231
housing loans	102 688	13 081	549	116 318	58
corporate loans	44 057	12 758	2 146	58 961	51
consumer loans	20 031	2 429	472	22 932	49
factoring receivables	1 530	94	4	1 628	-
finance lease receivables	13 392	2 826	533	16 751	73
Loans and advances to customers, total
Gross amount	182 300	33 249	9 865	225 414	270
Allowances for expected credit losses	(602)	(2 061)	(6 161)	(8 824)	(39)
Net amount	181 698	31 188	3 704	216 590	231

LOANS AND ADVANCES TO CUSTOMERS (excluding adjustments relating to fair value hedge accounting) 31.12.2019	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	-	-	1	1	1
consumer loans	-	-	1	1	1
Allowances for expected credit losses	-	-	(1)	(1)	(1)
consumer loans	-	-	(1)	(1)	(1)
Net amount	-	-	-	-	-
consumer loans	-	-	-	-	-
Measured at: amortized cost
Gross amount	204 589	14 823	9 725	229 137	386
housing loans	112 498	5 806	2 110	120 414	92
corporate loans	57 503	4 837	5 506	67 846	166
consumer loans	19 801	1 722	1 236	22 759	48
factoring receivables	1 198	81	51	1 330	-
finance lease receivables	13 589	2 377	822	16 788	80
Allowances for expected credit losses	(619)	(1 142)	(5 460)	(7 221)	(66)
housing loans	(55)	(527)	(1 384)	(1 966)	(32)
corporate loans	(363)	(314)	(2 875)	(3 552)	2
consumer loans	(164)	(231)	(825)	(1 220)	(34)
factoring receivables	(2)	-	(17)	(19)	-
finance lease receivables	(35)	(70)	(359)	(464)	(2)
Net amount	203 970	13 681	4 265	221 916	320
housing loans	112 443	5 279	726	118 448	60
corporate loans	57 140	4 523	2 631	64 294	168
consumer loans	19 637	1 491	411	21 539	14
factoring receivables	1 196	81	34	1 311	-
finance lease receivables	13 554	2 307	463	16 324	78
Loans and advances to customers, total
Gross amount	204 589	14 823	9 726	229 138	387
Allowances for expected credit losses	(619)	(1 142)	(5 461)	(7 222)	(67)
Net amount	203 970	13 681	4 265	221 916	320

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

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Consumer loans
Carrying amount as at the beginning of the period, gross	-	-	1	1	1
Repayments	-	-	(1)	(1)	(1)
Carrying amount as at the end of the period, gross	-	-	-	-	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Housing loans
Carrying amount as at the beginning of the period, gross	112 498	5 806	2 110	120 414	92
Transfer from stage 2 and 3 to stage 1	1 896	(1 893)	(3)	-	-
Transfer from stage 1 and 3 to stage 2	(11 358)	11 490	(132)	-	-
Transfer from stage 1 and 2 to stage 3	(83)	(198)	281	-	-
Granting or purchase of financial instruments	2 366	83	39	2 488	4
Utilization of limits or disbursement of tranches	9 584	128	65	9 777	1
Repayments	(11 613)	(619)	(126)	(12 358)	(12)
Insignificant modifications	77	(1)	(2)	74	-
Derecognition, including sale	(402)	(27)	(7)	(436)	(7)
Write-offs	(11)	1	(22)	(32)	-
Other changes*	(208)	(1 068)	(250)	(1 526)	7
Carrying amount as at the end of the period, gross	102 746	13 702	1 953	118 401	85

* ncludes changes in gross carrrying amounts recognized in note „Cost of legal risk of mortgage loans in convertible currencies”

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Corporate loans
Carrying amount as at the beginning of the period, gross	57 503	4 837	5 506	67 846	166
Transfer from stage 2 and 3 to stage 1	554	(532)	(22)	-	-
Transfer from stage 1 and 3 to stage 2	(6 337)	6 623	(286)	-	-
Transfer from stage 1 and 2 to stage 3	(379)	564	(185)	-	-
Granting or purchase of financial instruments	9 934	1 974	370	12 278	18
Utilization of limits or disbursement of tranches	9 838	1 115	201	11 154	27
Repayments	(25 919)	(1 521)	(708)	(28 148)	(157)
Insignificant modifications	52	(31)	(16)	5	-
Derecognition, including sale	(359)	(84)	(39)	(482)	(29)
Write-offs	(139)	2	(76)	(213)	2
Change in the business model	-	(1)	(6)	(7)	-
Other changes	(402)	743	711	1 052	29
Carrying amount as at the end of the period, gross	44 346	13 689	5 450	63 485	57

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Consumer loans
Carrying amount as at the beginning of the period, gross	19 801	1 722	1 236	22 759	48
Transfer from stage 2 and 3 to stage 1	507	(495)	(12)	-	-
Transfer from stage 1 and 3 to stage 2	(1 794)	1 830	(36)	-	-
Transfer from stage 1 and 2 to stage 3	(361)	(227)	588	-	-
Granting or purchase of financial instruments	8 193	321	77	8 591	16
Utilization of limits or disbursement of tranches	983	138	99	1 220	3
Repayments	(7 418)	(286)	(125)	(7 829)	(15)
Insignificant modifications	(9)	(5)	(2)	(16)	-
Derecognition, including sale	(118)	(5)	(48)	(171)	(39)
Write-offs	(204)	-	(84)	(288)	(19)
Change in the business model	(6)	(6)	(54)	(66)	-
Other changes	666	(132)	(192)	342	59
Carrying amount as at the end of the period, gross	20 240	2 855	1 447	24 542	53

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Finance lease receivables
Carrying amount as at the beginning of the period, gross	13 589	2 377	822	16 788	80
Transfer from stage 2 and 3 to stage 1	24	(23)	(1)	-	-
Transfer from stage 1 and 3 to stage 2	(187)	191	(4)	-	-
Transfer from stage 1 and 2 to stage 3	(12)	(9)	21	-	-
Granting or purchase of financial instruments	5 438	371	56	5 865	4
Utilization of limits or disbursement of tranches	54	-	-	54	-
Repayments	(2 951)	(343)	(131)	(3 425)	(9)
Derecognition, including sale	(1 039)	(244)	(87)	(1 370)	-
Write-offs	-	(1)	(37)	(38)	-
Other changes	(1 480)	590	353	(537)	-
Carrying amount as at the end of the period, gross	13 436	2 909	992	17 337	75

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Factoring receivables
Carrying amount as at the beginning of the period, gross	1 198	81	51	1 330	-
Transfer from stage 2 and 3 to stage 1	17	(15)	(2)	-	-
Transfer from stage 1 and 3 to stage 2	(6)	9	(3)	-	-
Transfer from stage 1 and 2 to stage 3	7	-	(7)	-	-
Granting or purchase of financial instruments	974	60	4	1 038	-
Utilization of limits or disbursement of tranches	(173)	18	(4)	(159)	-
Repayments	(483)	(60)	(16)	(559)	-
Other changes	(2)	1	-	(1)	-
Carrying amount as at the end of the period, gross	1 532	94	23	1 649	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Consumer loans
Carrying amount as at the beginning of the period, gross	-	-	-	-	-
Granting or purchase of financial instruments	-	-	1	1	1
Carrying amount as at the end of the period, gross	-	-	1	1	1

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Housing loans
Carrying amount as at the beginning of the period, gross	106 561	5 960	2 260	114 781	103
Transfer from stage 2 and 3 to stage 1	2 434	(2 427)	(7)	-	-
Transfer from stage 1 and 3 to stage 2	(2 858)	2 955	(97)	-	-
Transfer from stage 1 and 2 to stage 3	(89)	(254)	343	-	3
Granting or purchase of financial instruments	7 034	24	3	7 061	1
Utilization of limits or disbursement of tranches	10 226	210	114	10 550	2
Repayments	(11 898)	(1 492)	(208)	(13 598)	(8)
Insignificant modifications	78	(1)	(3)	74	-
Derecognition, including sale	(290)	(19)	(122)	(431)	(9)
Write-offs	-	(12)	(189)	(201)	-
Other changes	1 300	862	16	2 178	-
Carrying amount as at the end of the period, gross	112 498	5 806	2 110	120 414	92

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Corporate loans
Carrying amount as at the beginning of the period, gross	51 965	5 304	6 556	63 825	423
Transfer from stage 2 and 3 to stage 1	1 061	(1 046)	(15)	-	-
Transfer from stage 1 and 3 to stage 2	(1 538)	1 648	(110)	-	-
Transfer from stage 1 and 2 to stage 3	(224)	(341)	565	-	-
Granting or purchase of financial instruments	11 566	371	535	12 472	150
Utilization of limits or disbursement of tranches	10 968	778	296	12 042	-
Repayments	(15 857)	(1 826)	(1 226)	(18 909)	(403)
Insignificant modifications	10	2	(1)	11	1
Derecognition, including sale	(580)	(49)	(388)	(1 017)	(5)
Write-offs	-	(7)	(714)	(721)	-
Other changes	132	3	8	143	-
Carrying amount as at the end of the period, gross	57 503	4 837	5 506	67 846	166

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Consumer loans
Carrying amount as at the beginning of the period, gross	23 664	1 786	1 831	27 281	54
Transfer from stage 2 and 3 to stage 1	233	(225)	(8)	-	-
Transfer from stage 1 and 3 to stage 2	(886)	910	(24)	-	-
Transfer from stage 1 and 2 to stage 3	(288)	(169)	457	-	-
Granting or purchase of financial instruments	11 931	456	104	12 491	3
Utilization of limits or disbursement of tranches	1 572	97	122	1 791	3
Repayments	(9 093)	(384)	(172)	(9 649)	(7)
Insignificant modifications	(6)	(2)	(7)	(15)	-
Derecognition, including sale	(161)	(66)	(126)	(353)	(11)
Write-offs	-	(10)	(383)	(393)	-
Change in the business model	(7 296)	(835)	(822)	(8 953)	-
Other changes	131	164	264	559	6
Carrying amount as at the end of the period, gross	19 801	1 722	1 236	22 759	48

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Finance lease receivables
Carrying amount as at the beginning of the period, gross	11 477	2 719	790	14 986	94
Transfer from stage 2 and 3 to stage 1	746	(726)	(20)	-	-
Transfer from stage 1 and 3 to stage 2	(793)	833	(40)	-	-
Transfer from stage 1 and 2 to stage 3	9	(312)	303	-	-
Granting or purchase of financial instruments	6 599	745	109	7 453	3
Repayments	(2 749)	(630)	(140)	(3 519)	(16)
Derecognition, including sale	(980)	(251)	(40)	(1 271)	-
Write-offs	-	-	(126)	(126)	-
Other changes	(720)	(1)	(14)	(735)	(1)
Carrying amount as at the end of the period, gross	13 589	2 377	822	16 788	80

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Factoring receivables
Carrying amount as at the beginning of the period, gross	673	399	13	1 085	-
Transfer from stage 2 and 3 to stage 1	(37)	37	-	-	-
Transfer from stage 1 and 3 to stage 2	(10)	10	-	-	-
Transfer from stage 1 and 2 to stage 3	(39)	(1)	40	-	-
Granting or purchase of financial instruments	402	-	-	402	-
Utilization of limits or disbursement of tranches	261	(332)	(1)	(72)	-
Repayments	(52)	(32)	-	(84)	-
Other changes	-	-	(1)	(1)	-
Carrying amount as at the end of the period, gross	1 198	81	51	1 330	-

33.3. Loans and advances to customers – Changes in allowances for expected credit losses

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Consumer loans
As at the beginning of the period	-	-	(1)	(1)	(1)
Other adjustments	-	-	1	1	1
As at the end of the period	-	-	-	-	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020		Stage 2
Measured at: amortized cost
Housing loans
As at the beginning of the period	(55)	(527)	(1 384)	(1 966)	(32)
Transfer from stage 2 and 3 to stage 1	(5)	5	-	-	-
Transfer from stage 1 and 3 to stage 2	323	(347)	24	-	-
Transfer from stage 1 and 2 to stage 3	27	86	(113)	-	-
Increase due to recognition and purchase	(8)	-	-	(8)	-
Changes in credit risk (net)	65	(73)	43	35	8
Decrease due to derecognition	8	2	6	16	5
Changes due to modification without derecognition (net)	(3)	(14)	(15)	(32)	-
Write-offs	-	(1)	33	32	-
Other adjustments	(410)	248	2	(160)	(8)
As at the end of the period	(58)	(621)	(1 404)	(2 083)	(27)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Corporate loans
As at the beginning of the period	(363)	(314)	(2 875)	(3 552)	2
Transfer from stage 2 and 3 to stage 1	(10)	10	-	-	-
Transfer from stage 1 and 3 to stage 2	397	(418)	21	-	-
Transfer from stage 1 and 2 to stage 3	119	126	(245)	-	-
Increase due to recognition and purchase	(85)	(39)	(86)	(210)	-
Changes in credit risk (net)	252	(538)	(493)	(779)	6
Decrease due to derecognition	7	5	18	30	7
Changes due to modification without derecognition (net)	(4)	(9)	(37)	(50)	-
Changing the method of performing estimates (net effect)	(1)	1	(2)	(2)	-
Write-offs	-	(2)	216	214	(2)
Other adjustments	(601)	247	179	(175)	(19)
As at the end of the period	(289)	(931)	(3 304)	(4 524)	(6)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Consumer loans
As at the beginning of the period	(164)	(231)	(825)	(1 220)	(34)
Transfer from stage 2 and 3 to stage 1	(8)	8	-	-	-
Transfer from stage 1 and 3 to stage 2	253	(259)	6	-	-
Transfer from stage 1 and 2 to stage 3	181	153	(334)	-	-
Increase due to recognition and purchase	(67)	(7)	(31)	(105)	(8)
Changes in credit risk (net)	63	(302)	(304)	(543)	10
Decrease due to derecognition	4	1	24	29	20
Changes due to modification without derecognition (net)	1	(3)	(11)	(13)	-
Changing the method of performing estimates (net effect)	3	-	(4)	(1)	2
Write-offs	-	-	288	288	19
Other adjustments	(475)	214	216	(45)	(13)
As at the end of the period	(209)	(426)	(975)	(1 610)	(4)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Finance lease receivables
As at the beginning of the period	(35)	(70)	(359)	(464)	(2)
Transfer from stage 1 and 2 to stage 3	-	1	(1)	-	-
Increase due to recognition and purchase	(27)	(25)	(75)	(127)	-
Changes in credit risk (net)	6	(9)	(102)	(105)	-
Decrease due to derecognition	13	20	52	85	-
Write-offs	-	-	35	35	-
Other adjustments	(1)	-	(9)	(10)	-
As at the end of the period	(44)	(83)	(459)	(586)	(2)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Factoring receivables
As at the beginning of the period	(1)	-	(17)	(18)	-
Transfer from stage 2 and 3 to stage 1	(2)	-	2	-	-
Transfer from stage 1 and 2 to stage 3	4	-	(4)	-	-
Increase due to recognition and purchase	(1)	-	(1)	(2)	-
Changes in credit risk (net)	(2)	-	-	(2)	-
Decrease due to derecognition	1	-	2	3	-
Other adjustments	(1)	-	(1)	(2)	-
As at the end of the period	(2)	-	(19)	(21)	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Consumer loans
As at the beginning of the period
Changes due to modification without derecognition (net)	-	-	(1)	(1)	(1)
As at the end of the period	-	-	(1)	(1)	(1)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Housing loans
As at the beginning of the period	(54)	(538)	(1 420)	(2 012)	(41)
Transfer from stage 2 and 3 to stage 1	(5)	5	-	-	-
Transfer from stage 1 and 3 to stage 2	205	(213)	8	-	-
Transfer from stage 1 and 2 to stage 3	32	92	(124)	-	-
Increase due to recognition and purchase	(4)	-	(1)	(5)	-
Changes in credit risk (net)	(189)	126	(39)	(102)	15
Decrease due to derecognition	2	-	2	4	-
Changes due to modification without derecognition (net)	-	(1)	-	(1)	-
Write-offs	-	12	189	201	(2)
Other adjustments	(42)	(10)	1	(51)	(4)
As at the end of the period	(55)	(527)	(1 384)	(1 966)	(32)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Corporate loans
As at the beginning of the period	(317)	(319)	(3 342)	(3 978)	(56)
Transfer from stage 2 and 3 to stage 1	(13)	13	-	-	-
Transfer from stage 1 and 3 to stage 2	101	(107)	6	-	-
Transfer from stage 1 and 2 to stage 3	63	59	(122)	-	-
Increase due to recognition and purchase	(110)	(17)	(76)	(203)	(1)
Changes in credit risk (net)	(59)	58	(178)	(179)	59
Decrease due to derecognition	22	2	30	54	5
Changes due to modification without derecognition (net)	(3)	(4)	(17)	(24)	(1)
Changing the method of performing estimates (net effect)	-	-	(3)	(3)	-
Write-offs	-	7	714	721	-
Other adjustments	(47)	(6)	113	60	(4)
As at the end of the period	(363)	(314)	(2 875)	(3 552)	2

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Consumer loans
As at the beginning of the period	(160)	(311)	(1 240)	(1 711)	(30)
Transfer from stage 2 and 3 to stage 1	(2)	2	-	-	-
Transfer from stage 1 and 3 to stage 2	104	(107)	3	-	-
Transfer from stage 1 and 2 to stage 3	139	89	(228)	-	-
Increase due to recognition and purchase	(72)	(6)	(29)	(107)	-
Changes in credit risk (net)	(205)	(90)	(201)	(496)	23
Decrease due to derecognition	6	23	10	39	1
Changes due to modification without derecognition (net)	-	(1)	4	3	-
Changing the method of performing estimates (net effect)	2	(1)	1	2	-
Write-offs	-	10	383	393	-
Change in the business model	45	106	599	750	-
Other adjustments	(21)	55	(127)	(93)	(28)
As at the end of the period	(164)	(231)	(825)	(1 220)	(34)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Finance lease receivables
As at the beginning of the period	(34)	(80)	(375)	(489)	(4)
Transfer from stage 2 and 3 to stage 1	(20)	16	4	-	-
Transfer from stage 1 and 3 to stage 2	4	(12)	8	-	-
Transfer from stage 1 and 2 to stage 3	-	24	(24)	-	-
Increase due to recognition and purchase	(25)	(35)	(67)	(127)	-
Changes in credit risk (net)	5	16	(83)	(62)	-
Decrease due to derecognition	20	29	59	108	2
Changing the method of performing estimates (net effect)	-	-	1	1	-
Write-offs	-	-	126	126	-
Other adjustments	15	(28)	(8)	(21)	-
As at the end of the period	(35)	(70)	(359)	(464)	(2)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Factoring receivables
As at the beginning of the period	(1)	(1)	(12)	(14)	-
Transfer from stage 1 and 2 to stage 3	2	4	(6)	-	-
Increase due to recognition and purchase	(1)	-	-	(1)	-
Changes in credit risk (net)	(3)	(3)	-	(6)	-
Other adjustments	1	-	1	2	-
As at the end of the period	(2)	-	(17)	(19)	-

• Other information

LOANS AND ADVANCES TO CUSTOMERS BY MATURITY (excluding adjustments relating to fair value hedge accounting)	not held for trading, mandatorily measured at fair value through profit or loss	measured at amortized cost	Total
31.12.2020
up to 1 month	1 032	9 076	10 108
1 to 3 months	675	8 355	9 030
3 months to 1 year	2 572	28 883	31 455
from 1 to 5 years	1 624	75 695	77 319
over 5 years	107	94 581	94 688

Total	6 010	216 590	222 600

LOANS AND ADVANCES TO CUSTOMERS BY MATURITY (excluding adjustments relating to fair value hedge accounting)	not held for trading, mandatorily measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost
31.12.2019
up to 1 month	1 954	9 012	10 966
1 to 3 months	678	7 538	8 216
3 months to 1 year	2 829	30 693	33 522
from 1 to 5 years	2 467	71 423	73 890
over 5 years	358	103 250	103 608

Total	8 286	221 916	230 202

• Reclassification of loans from measured at amortized cost to measured at fair value through profit or loss

In the third quarter of 2019, the Group reclassified a part of the portfolio of consumer loans with the net carrying amount of PLN 8 204 million from measured at amortized cost to measured at fair value through profit or loss. Reclassification related to the following products: cash loans, credit cards and revolving loans, which contained a multiple in the interest rate formula in the contractual provisions. The impact of the reclassification on the net result as at the reclassification date was nil.

Reclassification was justified by the fact that these contracts did not meet the IFRS 9 classification criteria for categories other than measured at fair value through profit or loss as the contracts for these products provided for a multiple in the interest rate formula.

34. Receivables and liabilities related to insurance activities

accounting policies

Receivables from insurance activities are receivables on account of reinsurance and share of reinsurers in technical reserves so far presented as “Other assets”.

Reinsurance receivables include receivables from reinsurers and reinsurance brokers resulting from concluded outward reinsurance contracts. Reinsurance receivables are valued at the amount due, less impairment losses.

The reinsurer's share in the technical provisions is determined on the basis of the gross provisions and the conditions specified in the reinsurance contracts. Thus, as in the case of technical provisions, the majority of the reinsurer's share in the provisions is determined on the basis of individual methods. In the case of the reinsurer's share appointed at the level of aggregated data, the granularity of calculations is applied, which enables proper consideration of the parameters of the reinsurance contract, e.g. defining the reinsurance contract at the level of the claim year or policy year. The reinsurer's share in the technical provisions is determined adequately and carefully.

Liabilities in respect of insurance activities comprise technical reserves to cover current and future claims and costs which may arise from the insurance contracts concluded, i.e. unearned premium and unexpired risk reserves, outstanding claims and benefits reserve, reserve for bonuses and discounts for the insured, life insurance reserve, and other, starting from 2020 – deferred reinsurance commission and reinsurance related liabilities which so far were presented as “Other liabilities”.

Technical provisions are created to cover current and future claims and costs that may result from concluded insurance contracts. Provisions include both events that have occurred in the past but have not yet been settled, as well as events that will occur in the future. In most cases, provisions are created on an individual basis at the level of individual policies or claims, with the exception of, inter alia, IBNR reserve, which is determined at the level of homogeneous risk groups. All provisions are calculated using classical actuarial methods. The provisions take into account not only the expected claims and benefits payments and costs, but also any other cash flows resulting from concluded insurance contracts, e.g. bonuses and rebates. Provisions are created adequately and carefully in such a way as to include a certain risk margin.

Reinsurance commissions in the part falling for future reporting periods are settled in time according to the rules governing the creation of the provision for premiums with the reinsurer's share. Reinsurance liabilities include current liabilities towards reinsurers resulting from settlements made on the basis of outward reinsurance contracts. Reinsurance liabilities are recognized at their nominal value and measured at the amount required as at the balance sheet date

Financial information

Receivables in respect of insurance activities	31.12.2020	31.12.2019
Reinsurers’ share in technical reserves	752	799
Receivables in respect of reinsurance	46	59
Total	798	858

As at 31 December 2020 and 31 December 2019, all receivables related to insurance activities were in Stage 1.

RECEIVABLES IN RESPECT OF INSURANCE ACTIVITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	2020	2019
Carrying amount as at the beginning of the period, gross	858	672
Granting or purchase of financial instruments	-	186
Repayments	(60)	-
Carrying amount as at the end of the period, gross	798	858

LIABILITIES IN RESPECT OF INSURANCE ACTIVITIES	31.12.2020	31.12.2019
Technical reserves	1 051	1 025
Deferred reinsurance commission	641	688
Liabilities in respect of reinsurance	48	64
Total	1 740	1 777

35. Intangible assets, property, plant and equipment, and property, plant and equipment leased out under operating lease

Accounting policies

Software – Acquired computer software licences are recognized in the amount of costs incurred on the purchase and preparation of the software for use, taking into consideration accumulated amortization and impairment allowances.

Goodwill – Goodwill arising on acquisition of subsidiaries is recognized under “Intangible assets” and goodwill arising on acquisition of associates and joint ventures is recognized under “Investments in associates and joint ventures”. The test for impairment of goodwill is conducted at least at the end of each year.

Customer relations and value in force – As a result of a settlement of the transaction, two components of intangible assets that are recognized separately from goodwill, i.e. customer relations and value in force, representing the present value of future profits from concluded insurance contracts, were identified. These components of intangible assets are amortized using the reducing balance method based on the rate of consumption of economic benefits arising from their use.

Other intangible assets – Other intangible assets acquired by the Group are recognized at the cost of purchase or manufacture, less accumulated amortization and impairment allowances.

Development costs – The costs of completed development projects are classified as intangible assets in connection with the expected economic benefits to be obtained and meeting specific terms and conditions, i.e. if there is a possibility and intention to complete and use the internally generated intangible asset, there are appropriate technical and financial resources to complete the development and to use the asset and it is possible to reliably measure the expenditure incurred during its development which can be directly attributed to generating the intangible asset.

Property, plant and equipment – are measured at the cost of purchase or manufacture, less accumulated depreciation and impairment allowances.

Investment properties – are measured according to the accounting policies applied to property, plant and equipment.

Capital expenditure – The carrying amount of property, plant and equipment items is increased by additional capital expenditure incurred during their use.

Right-of-use assets are presented in the same items in which the underlying assets would be presented, if owned by the Group.

• Depreciation and amortization

Depreciation of property, plant and equipment and amortization of intangible assets and investment properties begins on the first day of the month following the month in which the asset has been commissioned, with the exception of right-of-use assets, for which depreciation begins in the same month in which they were commissioned, and ends no later than at the time when:

• the amount of depreciation or amortization charges becomes equal to the initial cost of the asset, or

• the lease period ends; or

• the asset is designated for scrapping; or

• the asset is sold; or

• the asset is found to be missing; or

• it is found – as a result of verification – that the expected residual value of the asset exceeds its (net) carrying amount, taking into account the expected residual value of the asset upon scrapping, i.e. the net amount that the Group expects to obtain at the end of the useful life of the asset, net of its expected costs to sell..

Depreciation write-offs are made using the straight-line method, consisting in a systematic, even distribution of the initial value of a fixed asset, the right to use and an intangible asset over the specified depreciation period, regardless of the possibility of their unauthorized periods.

For non-financial non-current assets it is assumed that the residual value is nil, unless there is a third party obligation to buy back the asset, or if there is an active market which will continue to exist at the end of the asset’s period of use and when it is possible to determine the value of the asset on this market.

Costs relating to the acquisition or construction of buildings are allocated to significant parts of the building (components), when such components have different useful lives or when each of the components generates benefits for the Group in a different manner. Each component of the building is depreciated separately. Intangible assets with indefinite useful lives, which are subject to an annual impairment test, are not amortized.

• Impairment allowances on non-financial non-current assets and right-of-use assets

Impairment allowances in respect of cash generating units first and foremost reduce the goodwill relating to those cash generating units (groups of units), and then they reduce proportionally the carrying amount of other assets in the unit (group of units).

An impairment allowance in respect of goodwill cannot be reversed. The impairment allowance may be reversed if there was a change in the estimates used to determine the recoverable amount. An impairment allowance may be reversed only to the level at which the carrying amount of an asset does not exceed the carrying amount – less depreciation/amortization – which would be determined had the impairment allowance not been recorded.

If there are indications of impairment of common assets, i.e. assets which do not generate cash flows independently from other assets or groups of assets, and the recoverable amount of a single asset included in common assets cannot be determined, the Group determines the recoverable amount at the level of the cash-generating unit to which the asset belongs.

Estimates and judgments

• Useful lives of property, plant and equipment, including assets leased out under operating lease and intangible assets and investment properties

In estimating useful lives of particular types of property, plant and equipment, including assets leased out under operating lease, intangible assets and investment properties, the following factors are taken into account:

• expected physical wear and tear, estimated based on the average useful lives recorded to date, reflecting the normal physical wear and tear rate, intensity of use etc.,

• technical or market obsolescence;

• legal and other limitations on the use of the asset;

• expected use of the asset;

• other factors affecting useful lives of such assets.

When the useful life of a given asset results from the contract term, the useful life of such an asset corresponds to the period defined in the contract. If the estimated useful life is shorter than the period defined in the contract, the estimated useful life is applied. The adopted depreciation/amortization method and useful lives are reviewed at least on an annual basis.

Depreciation /amortization periods applied by PKO Bank Polski S.A. Group

Fixed assets	Use periods
Buildings, premises, cooperative rights to premises (including investment real estate)	from 25 to 60 years
Improvements in foreign fixed assets (buildings, premises)	from 1 to 11 years (or the lease term, if shorter)
Machines, technical devices, tools and instruments	from 2 to 15 years
Set of computers	from 2 to 10 years
Means of transport	from 3 to 5 years
Intangible assets	Use periods
Software	from 1 to 20 years
Other intangible assets	from 2 to 20 years

• Impairment allowances

At each balance sheet date, the Group makes an assessment of whether there is objective evidence of impairment of any non-financial non-current assets, right-of-use assets (or cash-generating units). If any such evidence is identified, and annually in the case of intangible assets which are not amortized and goodwill, the Group estimates the recoverable amount being the higher of the fair value less costs to sell or the value in use of a non-current asset (or a cash-generating unit), and if the carrying amount of an asset exceeds its recoverable amount, the Group recognizes an impairment allowance in the income statement. The estimation for the above-mentioned values requires making assumptions, among other things about future expected cash flows that the Group may receive from the continued use or disposal of the non-current asset (or a cash-generating unit). The adoption of different assumptions with reference to the valuation of future cash flows could affect the carrying amount of certain non-current assets.

Financial information

35.1. Property, plant and equipment sent in operating leases

PROPERTY, PLANT AND EQUIPMENT SENT IN OPERATING LEASES	Land and buildings	Machinery and equipment, including IT equipment	Other, including means of transport	Total
2020
Gross carrying amount at the beginning of the period	19	8	1 652	1 679
Purchase	-	-	462	462
Liquidation and sale	-	(7)	(577)	(584)
Other	(6)	1	8	3
Gross carrying amount at the end of the period	13	2	1 545	1 560

Accumulated depreciation at the beginning of the period	(2)	(6)	(364)	(372)
Depreciation charge for the period	-	-	(192)	(192)
Liquidation and sale	-	6	169	175
Other	-	(1)	(1)	(2)
Accumulated depreciation at the end of the period	(2)	(1)	(388)	(391)

Impairment allowances at the beginning of the period	(2)	-	(5)	(7)
Recognized during the period	(1)	-	-	(1)
Reversed during the period	-	-	5	5
Other	2	-	-	2
Impairment allowances at the end of the period	(1)	-	-	(1)

Net carrying amount at the beginning of the period	15	2	1 283	1 300
Net carrying amount at the end of the period	10	1	1 157	1 168

PROPERTY, PLANT AND EQUIPMENT SENT IN OPERATING LEASES	Land and buildings	Machinery and equipment, including IT equipment	Other, including means of transport	Total
2019
Gross carrying amount at the beginning of the period	27	9	657	693
Taking control of a subsidiary	-	-	1 019	1 019
Other	(8)	(1)	(24)	(33)
Gross carrying amount at the end of the period	19	8	1 652	1 679

Accumulated depreciation at the beginning of the period	(2)	(5)	(126)	(133)
Depreciation charge for the period	-	(2)	(125)	(127)
Taking control of a subsidiary	-	-	(258)	(258)
Other	-	-	146	146
Accumulated depreciation at the end of the period	(2)	(7)	(363)	(372)

Impairment allowances at the beginning of the period	(2)	-	(4)	(6)
Other	-	-	(1)	(1)
Impairment allowances at the end of the period	(2)	-	(5)	(7)

Net carrying amount at the beginning of the period	23	4	527	554
Net carrying amount at the end of the period	15	2	1 283	1 300

35.2. Property, plant and equipment

PROPERTY, PLANT AND EQUIPMENT	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total	of which of right-of-use assets
2020
Carrying amount as at the beginning of the period, gross	3 561	1 1657	221	803	6 241	1 094
Purchase	377	21	281	79	758	373
Transfers from capital expenditure	60	118	(208)	31	1	-
Liquidation and sale	(51)	(59)	-	(48)	(158)	(10)
Other	(140)	(22)	(5)	(31)	(197)	3
Carrying amount as at the end of the period, gross	3 807	1 715	289	834	6 645	1 460

Accumulated depreciation as at the beginning of the period	(1 300)	(1 259)	(1)	(488)	(3 048)	(208)
Depreciation charge for the period	(336)	(140)	-	(65)	(541)	(229)
Liquidation and sale	46	58	-	47	151	6
Other	37	9	1	8	55	-
Accumulated depreciation as at the end of the period	(1 553)	(1 332)	-	(498)	(3 383)	(431)

Impairment allowances as at the beginning of the period	(46)	(1)	(4)	(1)	(52)	(1)
Recognized during the period	(62)	(1)	-	-	(63)	(4)
Reversed during the period	5	-	-	-	5	-
Other	6	1	1	1	9	-
Impairment allowances as at the end of the period	(97)	(1)	(3)	-	(101)	(5)

Carrying amount as at the beginning of the period, net	2 215	397	216	314	3 141	885
Carrying amount as at the end of the period, net	2 157	382	286	336	3 161	1 024

PROPERTY, PLANT AND EQUIPMENT	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total	of which of right-of-use assets
2019
Carrying amount as at the beginning of the period, gross	3 413	1 635	165	796	6 009	959
Purchase	136	42	273	479	930	127
Transfers from capital expenditure	58	117	(214)	39	-	-
Liquidation and sale	(55)	(144)	-	(514)	(713)	(9)
Taking control of a subsidiary	22	2	-	10	34	18
Other	(13)	4	(3)	(7)	(19)	(1)
Carrying amount as at the end of the period, gross	3 561	1 656	221	803	6 241	1 094

Accumulated depreciation as at the beginning of the period	(1 048)	(1 222)	-	(471)	(2 741)	-
Depreciation charge for the period	(296)	(170)	(1)	(64)	(531)	(206)
Liquidation and sale	34	142	-	197	373	-
Taking control of the subsidiary	(4)	(2)	-	(3)	(9)	(1)
Loss of control of the subsidiary	(2)	-	-	-	(2)	-
Other	16	(6)	-	(147)	(138)	-
Accumulated depreciation as at the end of the period	(1 300)	(1 258)	(1)	(488)	(3 047)	(207)

Impairment allowances as at the beginning of the period	(36)	(1)	(3)	(3)	(43)	-
Recognized during the period	(14)	-	-	(1)	(15)	(1)
Other	4	-	(1)	3	6	-
Impairment allowances as at the end of the period	(46)	(1)	(4)	(1)	(52)	(1)

Carrying amount as at the beginning of the period, net	2 329	412	162	322	3 225	959
Carrying amount as at the end of the period, net	2 215	397	216	314	3 142	886

PROPERTY, PLANT AND EQUIPMENT related to right of use	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total
2020
Carrying amount as at the beginning of the period, gross	1 067	1	-	26	1 094
Purchase	372	-	-	-	372
Liquidation and sale	(10)	(1)	-	-	(11)
Other	5	-	-	-	5
Carrying amount as at the end of the period, gross	1 434	-	-	26	1 460

Accumulated depreciation as at the beginning of the period	(207)	-	-	-	(207)
Depreciation charge for the period	(229)	-	-	-	(229)
Liquidation and sale	6	-	-	-	6
Other	(1)	-	-	-	(1)
Accumulated depreciation as at the end of the period	(431)	-	-	-	(431)

Impairment allowances as at the beginning of the period	(1)	-	-	-	(1)
Recognized during the period	(4)	-	-	-	(4)
Impairment allowances as at the end of the period	(5)		-	-	(5)

Carrying amount as at the beginning of the period, net	859	1	-	26	886
Carrying amount as at the end of the period, net	998	-	-	26	1 025

PROPERTY, PLANT AND EQUIPMENT related to right of use	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total
2019
Carrying amount as at the beginning of the period, gross	926			33	959
Purchase	126	1			127
Liquidation and sale	(8)			(1)	(9)
Taking control of the subsidiary	18				18
Other	5			(6)	(1)
Carrying amount as at the end of the period, gross	1 067	1	-	26	1 094

Accumulated depreciation as at the beginning of the period
Depreciation charge for the period	(206)			-	(206)
Loss of control over subsidiary	(1)				(1)
Accumulated depreciation as at the end of the period	(207)				(207)

Impairment allowances as at the beginning of the period
Recognized during the period	(1)				(1)
Impairment allowances as at the end of the period	(1)				(1)

Carrying amount as at the beginning of the period, net	926	-	-	33	959
Carrying amount as at the end of the period, net	859	1	-	26	886

35.3. Intangible assets

INTANGIBLE ASSETS	Software	Goodwill	Future profit on concluded insurance contracts	Customer relationships		Other, including capital expenditure	of which: software		Total
2020
Carrying amount as at the beginning of the period, gross	5 552	1 438	141	157	479		346	7 767
Purchase	44	-	-	-	580		580	624
Transfers from capital expenditure	537	-	-	-	(537)		(537)	-
Other	4	(1)	-	1	47		44	51
Carrying amount as at the end of the period, gross	6 137	1 437	141	158	569		433	8 442

Accumulated amortization as at the beginning of the period	(4 039)	-	(100)	(91)	(85)		-	(4 315)
Amortization charge for the period	(409)	-	(10)	(13)	(6)		-	(438)
Other	8	-	-	(1)	-		-	7
Accumulated amortization as at the end of the period	(4 440)	-	(110)	(105)	(91)		-	(4 746)

Impairment allowances as at the beginning of the period	(19)	(238)	-	-	(17)		(10)	(274)
Recognized during the period	-	(147)	-	-	(6)		-	(153)
Other	1	1	-	-	10		10	12
Impairment allowances as at the end of the period	(18)	(384)	-	-		(13)	-		(415)

Carrying amount as at the beginning of the period, net	1 494	1 200	41	66		377	336		3 178
Carrying amount as at the end of the period, net	1 679	1 053	31	53		465	433		3 281

INTANGIBLE ASSETS	Software	Goodwill	Future profit on concluded insurance contracts	Customer relationships	Other, including capital expenditure	of which: software	Total
2019
Carrying amount as at the beginning of the period, gross	5 206	1 438	141	150	410	283	7 345
Purchase	31	-	-	-	370	370	401
Transfers from capital expenditure	305	-	-	-	(305)	(305)	-
Liquidation and sale	(6)	-	-	-	(1)	(1)	(7)
Other	16	-	-	7	5	-1	28
Carrying amount as at the end of the period, gross	5 552	1 438	141	157	479	346	7 767

Accumulated amortization as at the beginning of the period	(3 686)	-	(90)	(77)	(76)	-	(3 929)
Amortization charge for the period	(358)	-	(10)	(14)	(9)	-	(391)
Liquidation and sale	5	-	-	-	-	-	5
Accumulated amortization as at the end of the period	(4 039)	-	(100)	(91)	(85)	-	(4 315)

Impairment allowances as at the beginning of the period	(18)	(187)	-	-	(16)	(10)	(221)
Recognized during the period	(1)	(51)	-	-	(1)	(1)	(53)
Reversed during the period	-	-	-	-	2	-	2
Other	-	-	-	-	(2)	1-	(2)
Impairment allowances as at the end of the period	(19)	(238)	-	-	(17)	(10)	(274)

Carrying amount as at the beginning of the period, net	1 502	1 251	51	73	318	273	3 195
Carrying amount as at the end of the period, net	1 494	1 200	41	66	377	336	3 178

With regard to the Bank, a significant item of intangible assets relates to expenditures on the Integrated Information System (IIS). The total capital expenditure incurred for the IIS system in the years 2004–2020 amounted to PLN 1 525 million.

The net carrying amount of the Integrated Information System (IIS) amounted to PLN 616 million as at 31 December 2020 (PLN 590 million as at 31 December 2019). The expected useful life of the IIS system is 24 years. As at 31 December 2020, the remaining useful life is 10 years.

• Goodwill

Net goodwill	31.12.2020	31.12.2019
Nordea Bank Polska S.A.	747	863
PKO Życie Towarzystwo Ubezpieczeń S.A.	91	91
PKO Leasing Pro S.A.	-	31
Raiffeisen – Leasing Polska S.A. and its subsidiaries (PKO Leasing S.A.)	57	57
PKO Towarzystwo Funduszy Inwestycyjnych S.A.	150	150
Assets taken over from CFP sp. z o.o.	8	8
Total	1 053	1 200

Goodwill	Impairment test – method
Nordea Bank Polska S.A.	The impairment test is carried out by comparing the carrying amount of the cash-generating units ("CGU") with their recoverable amount. Two CGUs have been distinguished to which the goodwill arising from the acquisition of Nordea Bank Polska SA has been assigned - retail and corporate, overlapping with the operating segments. The residual value of the CGU was calculated by extrapolating the cash flow projections beyond the forecast period using the growth rate assumed at 2.7%. The cash flow forecasts in the impairment test cover a period of 10 years and were based on the assumptions contained in the Bank's financial plans for 2021, taking into account the impact of COVID-19 and interest rate cuts on the current and forecast macroeconomic situation and the impact of the decision taken by the EGMS in regarding settlements concerning foreign currency housing loans. To discount future cash flows, the Group used a discount rate of 8.13%, taking into account the risk-free rate and the risk premium. The goodwill of Nordea Bank Polska S.A in the amount of PLN 747 million relates to the retail segment. As at December 31, 2020, the test shows a surplus of value in use over the carrying amount of the retail CGU. The sensitivity analysis from the discount rate point of view shows that this surplus would decrease to zero if it increased to 10.11%. On 30 June 2020, as a result of the impairment test for the goodwill arising from the acquisition of Nordea Bank Polska SA, the Group made a write-off for the corporate CGU in the amount of PLN 117 million. The main factors influencing the write-off were the outbreak of the COVID-19 pandemic and its effects (increased costs of credit risk and expected lower economic activity) and the reduction of interest rates combined with a high level of regulatory burdens (tax on certain financial institutions and costs of fees payable to BFG) which resulted in a significant decrease in the expected profitability of banking activities.
PKO Towarzystwo Funduszy Inwestycyjnych S.A.,	The impairment test was carried out on the basis of the two-year financial forecast prepared by the Company based on the discounted dividend method, taking into account the residual value. No impairment of goodwill was recognized.
PKO Życie Towarzystwo Ubezpieczeń S.A.	The impairment test carried out was developed on the basis of the present value of expected future cash flows for the Bank, taking into account the residual value. Future cash flows were estimated on the basis of the 10-year financial forecast prepared by the Company. No impairment of goodwill was recognized.
PKO Leasing Pro S.A.	The goodwill arising on the acquisition of the Company was allocated to the whole of PKO Leasing S.A. as the immediate parent company, which acquired the assets of PKO Leasing Pro S.A. in the merger. The impairment test was prepared on the basis of the present value of the expected future cash flows generated by the Company, estimated on the basis of the financial forecast prepared by the Company for five years with the simultaneous fading out of activities thereafter. The valuation model took into account the effect of NBP interest rate decreases introduced by the Monetary Policy Council (MPC) (140 bp in total) and the effect of the pandemic on the financial projections, including in particular the expected increase in the cost of credit risk. The recoverable amount of the cash-generating unit to which this goodwill was related, i.e. customers from the acquired company PKO Leasing Pro S.A., was estimated lower than the carrying amount. As a result of the test, the Group recorded an allowance in the amount of PLN 31 million.
Raiffeisen-Leasing Polska S.A. and its subsidiaries (PKO Leasing S.A.)	The goodwill that arose on the acquisition of these companies was allocated to the portion of the assets of the PKO Leasing S.A. Group that was separately recorded in the accounts as assets of the Raiffeisen-Leasing Polska S.A. Group that was acquired. The impairment test was carried out using the discounted dividend method on the basis of the eight-year financial forecast prepared by the company, taking into account the residual value. No impairment of goodwill was recognized.

In the impairment tests described above, a discount rate of 7.555% (except for Nordea Bank Polska SA) was used to discount future cash flows, taking into account the risk-free rate equal to the yield of 10-year treasury bonds as at the date of valuation and a premium for market risk and risk ratio determined for projects of PKO Bank Polski S.A..

The measurement methods and forecast periods were adapted to the specificity of the assets or companies measured.

Calculation of estimates

The impact of change in the useful lives of assets being subject to depreciation and classified as land and buildings is presented in the table below:

CHANGE IN THE USEFUL LIVES OF ASSETS SUBJECT TO DEPRECIATION AND CLASSIFIED AS LAND AND BUILDINGS	31.12.2020		31.12.2019
	scenario +10 years	scenario -10 years	scenario +10 years	scenario -10 years
Depreciation costs	(33)	206	(36)	245

36. Assets held for sale

Accounting policies

Only assets available for immediate sale in the current condition are classified as non-current assets, when such sale is highly probable, i.e. the entity has determined to sell the asset, started to seek actively for a buyer and finish the sale process. In addition, such assets are offered for sale at a price which is reasonable with respect to their current fair value and it is expected that the sale will be recognized as completed within one year from the date of classification of the asset into this category.

These assets are recognized at the lower of their carrying amount and fair value less costs to sell. Impairment allowances on non-current assets held for sale are recognized in the income statement for the period in which the allowances were made. Amortization is not charged on assets classified to this category.

When the respective classification criteria to this category are no longer met, the Group reclassifies assets from non-current assets held for sale to appropriate other asset categories. Assets withdrawn from assets held for sale are measured at the lower of: 1) the carrying amount from before the moment of their classification to non-current assets held for sale, less amortization/depreciation that would have been recorded had the asset (or disposal group) not been classified as held for sale; 2) the recoverable amount as at the date of the decision to discontinue the sale.

NON-CURRENT ASSETS HELD FOR SALE	31.12.2020	31.12.2019
Land and buildings	128	13
Other	1	-
Total, gross	129	13
Impairment allowances	(3)	(1)

Total	126	12

Non-current assets held for sale – CHANGES IN ALLOWANCES	31.12.2020	31.12.2019
As at the beginning of the period	(1)	-
Recognized during the period	(4)	-
Other	2	(1)
As at the end of the period	(3)	(1)

37. Investments in associates and joint ventures

• Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.

The Bank has the shares entitling to 34% votes at the General Meeting of Shareholders. The second shareholder is EVO International Payments Acquisition GmbH in Germany. According to the agreement signed by the partners, regulating the principles of cooperation, decisions regarding the significant activities of the company require consent of both partners. Both Shareholders have the right to appoint their representatives in the Supervisory Board: in the case of the Supervisory Board of 5 members, PKO Bank Polski S.A. has the right to appoint 2 members (in the case of 7 members of PKO - 3 members). The Bank has two representatives on the Supervisory Board consisting of 7 people and indicates the independent member. Decisions reserved to the competence of the Supervisory Board regarding significant activities require the consent of at least one representative of PKO Bank Polski S.A. and one representative of the other shareholder.

• Bank Pocztowy SA

PKO Bank Polski S.A. is a significant investor – it holds 25% plus 10 votes at the Company’s shareholders’ meeting. Poczta Polska SA is the other shareholder. Through its representatives on the Supervisory Board and the Company’s Shareholders’ Meeting, the Bank participates in the policymaking process, including decisions on dividends and other ways of profit distribution.

• „Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.

PKO Bank Polski S.A. holds 33.33% votes at the Company’s Shareholders’ Meeting. The Bank has two representatives on the Company’s Supervisory Board which consists of 4 people. Other shareholders have 1 representative each on the Supervisory Board. Through its representatives on the Supervisory Board and the Company’s Shareholders’ Meeting, the Bank participates in the policymaking process, including decisions on dividends and other ways of profit distribution.

• Operator Chmury Krajowej sp. z o.o.

The Bank has shares in the Company which carry 34% of votes at the Shareholders’ Meeting, with Polski Fundusz Rozwoju SA being the other shareholder.

In accordance with the Company’s Articles of Association:

a) each of the shareholders is personally entitled to appoint and dismiss members of the Management Board and the Supervisory Board, with the Bank and PFR having the right to appoint an equal number of members of each of the said bodies;

b) additionally, the Bank has the exclusive right to appoint the President of the Management Board and PFR has the exclusive right to appoint the Chair of the Supervisory Board;

all key decisions relating to the Company’s operations must be taken by a unanimous resolution of the Supervisory Board or by a unanimous resolution of the Shareholders’ Meeting.

• SAFER SP. Z O.O.

PKO VC - fizan (a subsidiary of PKO Bank Polski S.A.) holds the company's shares entitling to 35.06% of votes at the Shareholders' Meeting, and the other majority shareholder of the company is Michał Pilch 59.740%

Pursuant to the Articles of Association, decisions regarding the significant activities of the Company (i.e. activities that have a significant impact on the amount of returns generated by the Company, where returns are understood as e.g. dividends, increasing or decreasing the share capital of the Company, passing or returning additional payments, the value of the Company's shares in the balance sheet of the shareholder) were reserved to the competence of the General Meeting of Shareholders and require the consent of both shareholders.

Financial information

ASSOCIATES	31.12.2020	31.12.2019
Bank Pocztowy S.A.	-	88
Acquisition price	184	184
Change in the share of net assets	85	78
Impairment allowances	(269)	(174)
“Poznański Fundusz Poręczeń Kredytowych” sp. z o.o.	-	-
Acquisition price	2	2
Change in the share of net assets	4	4
Impairment allowances	(6)	(6)
Total	-	88

JOINT VENTURES	31.12.2020	31.12.2019
“Centrum Obsługi Biznesu” Sp. z o.o.	-	-
Acquisition price	18	17
Change in the share of net assets	(18)	(14)
Impairment allowances	-	(3)
Grupa Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	271	250
Value of shares as at the date of obtaining joint control	197	197
Change in the share of net assets	74	53
Operator Chmury Krajowej sp. z o.o.	20	39
Value of shares as at the date of obtaining joint control	43	43
Change in the share of net assets	(23)	(4)
Total	291	289

CHANGE IN INVESTMENTS IN ASSOCIATES	2020	2019
Investments in associates as at the beginning of the period	88	88
Share in profits/ (losses)	-	5
Net impairment allowance	(95)	(5)
Share in the change in other equity components	7	-
Investments in associates as at the end of the period	0	88

CHANGE IN INVESTMENTS IN JOINT VENTURES	2020	2019
Investments in joint ventures as at the beginning of the period	289	256
Reclassification of shares from subsidiaries to joint ventures	-	43
Share in profits/ (losses)	16	26
Net impairment allowance	3	-
Dividend	(17)	(36)
Other	1	-
Investments in joint ventures as at the end of the period	292	289

IMPAIRMENT ALLOWANCES – RECONCILIATION OF MOVEMENTS	2020	2019
As at the beginning of the period	183	178
Recognized during the period	95	5
Reversed during the period	(3)	-
As at the end of the period	275	183

The Group tested the shares held in Bank Pocztowy S.A. for impairment. The valuation was performed using the discounted dividend method. The valuation model took account of the reduction in NBP interest rates introduced by the Monetary Policy Council in March and April of this year (by a total of 100 bp) and the impact of the COVID-19 pandemic on financial projections, especially including the expected increase in the cost of credit risk.

Bank Pocztowy S.A. operates on the basis of the agency model in cooperation with the Polish Post (Poczta Polska, its majority shareholder) and on the basis of its own network in the retail and corporate segment. The agency model with the Polish Post is permanently profitable, whereas the own network of Bank Pocztowy S.A. is not profitable. The NBP interest rate decreases and the increase in the cost of risk due to COVID-19 will make it even less profitable.

Despite the profitable agency model with the Polish Post, the result of the impairment test of the Bank Pocztowy S.A. shares held by the Group resulted in the recognition of a further allowance for the Group’s capital exposure in Bank Pocztowy S.A. in the amount of PLN 95 million.

As at 31 December 2020, and as at 31 December 2019, the parent company did not have any share in contingent liabilities of associates acquired together with another investor.

Selected information on associates and joint ventures

A summary of the financial data separately for each joint venture and each associate of the Group is presented below. The amounts presented are derived from the financial statements of the individual entities prepared in accordance with IFRS or the Polish Accounting Standards (PAS). In the case of companies which have subsidiaries, the presented data is derived from the consolidated financial statements of these companies. The data for 2019 is derived from audited financial statements.

Centrum Elektronicznych Usług Płatniczych eService sp. z o.o. (in accordance with IFRS)	31.12.2020	31.12.2019
Current assets	339	296
Non-current assets	189	197
Current liabilities	174	208
Long-term liabilities	35	22
	01.01-31.12.2020	01.01-31.12.2019
Revenue	530	553
Profit/(loss) for the period	104	107
Other comprehensive income	4	2
Total comprehensive income	108	109
Dividend received from an entity classified as a joint venture	17	36
“Centrum Obsługi Biznesu” Sp. z o.o. (in accordance with PAS)	31.12.2020	31.12.2019
Current assets	6	8
Non-current assets	75	77
Current liabilities	29	38
Long-term liabilities	54	39
	01.01-31.12.2020	01.01-31.12.2019
Revenue	9	25
Profit/(loss) for the period	(10)	1

Bank Pocztowy S.A. (in accordance with IFRS, data as published by the company)	31.12.2020	31.12.2019
Total assets	9 170	8 008
Total liabilities	8 537	7 395
	01.01-31.12.2020	01.01-31.12.2019
Revenue	355	432
Profit/(loss) for the period	(9)	19
Other comprehensive income	29	(7)
Total comprehensive income	20	12

“Poznański Fundusz Poręczeń Kredytowych” sp. z o.o. (in accordance with PAS)	31.12.2020	31.12.2019
Current assets	34	31
Non-current assets	-	-
Current liabilities	5	4
Long-term liabilities	11	8
	01.01-31.12.2020	01.01-31.12.2019
Revenue	2	2
Profit/(loss) for the period	-	-

Operator Chmury Krajowej sp. z o.o. (in accordance with PAS)	31.12.2020	31.12.2019
Current assets	63	92
Non-current assets	65	32
Current liabilities	54	18
Long-term liabilities	17	10
	01.01-31.12.2020	01.01-31.12.2019
Revenue	50	11
Profit/(loss) for the period	(39)	(24)

BSafer sp. z o.o. (in PLN thousand)	31.12.2020
Current assets	344
Non-current assets	74
Current liabilities	38
Long-term liabilities	387
	01.01-31.12.2020
Revenue	439
Profit/(loss) for the period	(467)

38. Other assets

Accounting policies

Financial assets recognized in this item are stated at amounts due, comprising also potential interest on such assets, taking into consideration provisions for expected credit losses. Non-financial assets are measured in accordance with the valuation principles applicable to specific categories of assets recognized in this item.

Financial information

OTHER ASSETS	31.12.2020	31.12.2019
Other financial assets	1 937	1 766
Settlements in respect of card transactions	1 222	1 301
Settlement of financial instruments	164	73
Receivables in respect of cash settlements	159	193
Receivables and settlements in respect of trading in securities	9	3
Sale of foreign currencies	7	-
Trade receivables	210	146
Other	166	50
Other non-financial assets	866	947
Inventories	130	141
Assets for sale	141	140
Prepayments and deferred costs	131	186
VAT receivable	358	270
Receivables from the State Budget in respect of lump-sum income tax	-	115
Other	107	95

Total	2 804	2 713

OTHER FINANCIAL ASSETS	Faza 1	Faza 3	Razem
31.12.2020
Gross amount	1 937	137	2 075
Allowances for expected credit losses	-	(137)	(138)
Net amount	1 937		1 937

OTHER FINANCIAL ASSETS	Faza 1	Faza 3	Razem
31.12.2019
Gross amount	1 766	84	1 850
Allowances for expected credit losses	-	(84)	(84)
Net amount	1 766	-	1 766

OTHER FINANCIAL ASSETS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 3	Total
2020
Carrying amount as at the beginning of the period, gross	1 766	84	1 850
Granting or purchase of financial instruments	1 821	2	1 823
Repayments	(1 648)	(2)	(1 650)
Other changes	(2)	54	52
Carrying amount as at the end of the period, gross	1 937	138	2 075

OTHER FINANCIAL ASSETS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 3	Total
2019
Carrying amount as at the beginning of the period, gross	2 153	89	2 242
Granting or purchase of financial instruments	2 435	-	2 435
Repayments	(2 825)	-	(2 825)
Derecognition, including sale	-	(5)	(5)
Write-offs	-	(3)	(3)
Other changes	3	3	6
Carrying amount as at the end of the period, gross	1 766	84	1 850

OTHER FINANCIAL ASSETS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 3	Total
2020
As at the beginning of the period	-	(84)	(84)
Other adjustments	-	(54)	(54)
As at the end of the period	-	(138)	(138)

OTHER FINANCIAL ASSETS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 3	Total
2019
As at the beginning of the period	-	(89)	(89)
Decrease due to derecognition	-	2	2
Write-offs	-	3	3
As at the end of the period	-	(84)	(84)

OTHER ASSETS – INVENTORIES	31.12.2020	31.12.2019
Finished goods	121	135
Materials	19	16
Impairment allowances on inventories	(10)	(10)

Total	130	141

Other non-financial assets – CHANGES IN ALLOWANCES	2020	2019
As at the beginning of the period	(200)	(175)
Increase in the period	(93)	(42)
Derecognition of assets and settlements	11
Reversed during the period	2
Other	(12)	17
As at the end of the period	(292)	(200)

• Management of foreclosed collateral– item “assets for sale”

Foreclosed collaterals as a result of restructuring or debt collection activities are either designated for sale or used by the Group for internal purposes. Details of the foreclosed assets are analysed in order to determine whether they can be used by the Group for internal purposes. All of the assets foreclosed as a result of the restructuring and debt collection activities in the years ended 31 December 2020 and 31 December 2019, respectively, were designated for sale. Activities undertaken by the Group are aimed at selling assets as soon as possible. The primary procedure for the sale of assets is an open tender. In justified cases, the sale follows a different procedure depending on the specifics of the sold property.

39. Amounts due to the Central Bank and banks

Accounting policies

The principles of classification and measurement are discussed in Note ”Description of significant accounting policies”.

Financial information

AMOUNTS DUE TO BANKS	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	-	317
Liabilities in respect of short position in securities	-	317
Measured at amortized cost	2 626	1 818
Bank deposits	1 383	786
Current accounts	1 178	915
Other monetary market deposits	65	117

Total	2 626	2 135

AMOUNTS DUE TO BANKS BY MATURITY	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	-	317
up to 1 month	-	317
Measured at amortized cost:	2 626	1 818
up to 1 month	2 626	1 730
1 to 3 months	-	88

Total	2 626	2 135

40. Amounts due to customers

accounting policies

The principles of classification and measurement are described in the note "Description of major accounting principles".

Liabilities from insurance products include liabilities from unit-linked products, safe capital product, structured products and insurance deposits.

Financial information

AMOUNTS DUE TO CUSTOMERS	Amounts due to households	Amounts due to corporate entities	Amounts due to public entities	Total
31.12.2020
Measured at fair value through profit or loss	1 216	-	-	1 216
Liabilities in respect of insurance products	1 216	-	-	1 216
Measured at amortized cost	223 691	43 705	13 744	281 140
Cash on current accounts and overnight deposits of which	174 525	42 224	13 706	230 455
-savings accounts and other interest-bearing assets	53 631	16 059	7 322	77 012
Term deposits	48 354	798	18	49 170
Other liabilities	494	683	20	1 197
Liabilities in respect of insurance products	318	-	-	318

Total	224 907	43 705	13 744	282 356

The Group decided to separate the line of liabilities in respect of insurance products measured at fair value and there to present technical provisions for life insurance where the investment risk is borne by the insured. The measurement of these provisions is based on the value of the corresponding assets measured at fair value. The comparative data has been adjusted accordingly.

AMOUNTS DUE TO CUSTOMERS	Amounts due to households	Amounts due to corporate entities	Amounts due to public entities	Total
31.12.2019
Measured at fair value through profit or loss	1 353	46	-	1 399
Liabilities in respect of short position in securities	-	46	-	46
Liabilities in respect of insurance products	1 353	-	-	1 353
Measured at amortized cost	193 769	49 648	11 354	254 771
Cash on current accounts and overnight deposits of which	127 520	40 381	10 997	178 898
-savings accounts and other interest-bearing assets	45 177	16 799	-	61 976
Term deposits	65 535	8 435	331	74 301
Other liabilities	393	832	26	1 251
Liabilities in respect of insurance products	321	-	-	321

Total	195 122	49 694	11 354	256 170

AMOUNTS DUE TO CUSTOMERS BY MATURITY	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	1 216	1 399
up to 1 month	-	45
3 months to 1 year	-	1
1 to 5 years	2	2
over 5 years	1 214	1 351

Measured at amortized cost:	281 140	254 771
up to 1 month	240 938	197 229
1 to 3 months	11 146	16 865
3 months to 1 year	17 941	29 290
from 1 to 5 years	3 420	5 510
over 5 years	7 695	5 877

Total	282 356	256 170

AMOUNTS DUE TO CUSTOMERS BY SEGMENT	31.12.2020	31.12.2019
retail and private banking	197 003	174 091
Corporate entities	41 095	49 918
SME	42 712	30 476
other liabilities (including liabilities in respect of insurance products)	1 546	1 685

Total	282 356	256 170

AVERAGE INTEREST RATES AN AMOUNTS DUE TO CUSTOMERS	31.12.2020	31.12.2019
Non-financial institutions:	0.00%	0.87%
of which term deposits:	0.38%	1.10%
of which deposits in the current account and one day deposits:	0.00%	0.84%
Households:	0.07%	0.53%
of which term deposits:	0.22%	0.95%
of which deposits in the current account and one day deposits:	0.02%	0.29%

41. Financing received

FINANCING RECEIVED	31.12.2020	31.12.2019
Loans and advances received from:	2 267	2 779
banks	875	750
international financial institutions	1 379	2 029
other financial institutions	13	-
Debt securities in issue:	32 098	31 148
mortgage covered bonds issued by PKO Bank Hipoteczny S.A.	17 201	16 198
bonds issued by PKO Bank Hipoteczny S.A.	4 036	3 947
bonds issued by PKO Bank Polski S.A.	4 020	4 769
bonds issued by PKO Finance AB	3 294	4 057
bonds issued by the PKO Leasing S.A. Group	3 496	2 132
bonds issued by KREDOBANK S.A.	51	45
Subordinated liabilities	2 716	2 730

Total	37 081	36 657

41.1. Loans and advances received

LOANS AND ADVANCES RECEIVED BY MATURITY	31.12.2020	31.12.2019
up to 1 month	116	-
1 to 3 months	98	-
3 months to 1 year	438	512
1 to 5 years	1 615	2 267
over 5 years	-	-

TOTAL	2 267	2 779

Loans and advances received from banks

Date of receipt	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

10.06.2019	150	PLN	13.06.2021	150	150
27.12.2018	100	PLN	28.12.2020	-	100
04.12.2019	500	PLN	04.12.2023	406	500
08.05.2020	600	UAH	25.04.2025	80	-
12.06.2020	50	UAH	06.06.2025	7	-
11.09.2020	450	UAH	05.09.2025	60	-
09.10.2020	600	UAH	03.10.2025	79	-
11.12.2020	600	UAH	05.12.2025	79	-
31.12.20201	14	PLN	31.12.2020	14	-

Total				875	750

1current loan from the National Bank of Poland – overdraft on the NOSTRO account.

Loans and advances received from International Financial Organizations

Date of receipt of a loan or advance by the Group	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

28.12.2006	5	EUR	30.04.2022	-	21
28.12.2006	97	PLN	30.04.2020	-	97
28.12.2006	7	CHF	30.04.2020	-	28
23.12.2010	75	EUR	23.12.2020	-	64
25.09.2013	75	EUR	25.09.2023	208	256
11.06.2015	132	PLN	31.07.2021	20	46
11.06.2015	42	PLN	30.09.2020	-	6
11.06.2015	10	EUR	30.09.2020	-	6
11.06.2015	10	EUR	31.03.2021	2	11
11.06.2015	20	EUR	30.04.2021	9	26
25.09.2015	15	EUR	30.11.2020	-	16
25.09.2015	25	EUR	30.09.2021	22	47
25.09.2015	43	PLN	30.11.2020	-	11
16.03.2016	175	PLN	01.12.2020	-	34
18.03.2016	66	EUR	15.03.2021	43	120
28.10.2016	20	EUR	31.12.2021	19	34
28.10.2016	20	EUR	31.01.2022	23	39
28.09.2017	50	EUR	30.11.2022	115	159
28.11.2018	50	EUR	30.11.2022	173	213
13.04.2018	40	EUR	31.01.2022	98	130
23.10.2018	646	PLN	23.10.2023	647	649
10.10.2019	100	UAH	08.10.2021	-	16

Total				1 379	2 029

Loans and Loans received from other financial institution

Received date	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

10.10.2019	100	UAH	08.10.2021	13	-

41.2. Debt securities in issue

LIABILITIES IN RESPECT OF DEBT SECURITIES IN ISSUE – REPAYMENT	31.12.2020	31.12.2019
Measured at amortized cost:
up to 1 month	819	796
1 to 3 months	1 917	802
3 months to 1 year	10 431	2 366
from 1 to 5 years	18 870	24 410
over 5 years	61	2 774

Total	32 098	31 148

Bonds issued by PKO Bank Polski S.A.

In 2020, the Capital Group made an early partial redemption of the issued bonds (maturity on 25 July 2021) for the amount of EUR 250 million. The outstanding nominal value of this issue as at 31 December 2020 is EUR 500 million.

Issue date	Type of interest rate	Interest rate	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

25.07.2017	fixed	0.75	500	EUR	25.07.2021	2 314	3 200
02.11.2017	fixed	0.30	400	CHF	02.11.2021	1 706	1 569

Total						4 020	4 769

Bonds issued by PKO Bank Hipoteczny S.A.

Issue date	Type of interest rate	Interest (index + margin)	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

21.12.2018	zero-coupon	-	350	PLN	21.02.2020	-	351
05.02.2019	zero-coupon	-	102	PLN	05.02.2020	-	102
10.07.2019	variable	6MWIBOR + 0.30	162	PLN	10.01.2020	-	163
11.07.2019	variable	3MWIBOR + 0.60	43	PLN	12.07.2021	43	46
23.07.2019	zero-coupon	-	634	PLN	23.01.2020	-	633
23.08.2019	zero-coupon	-	200	PLN	21.02.2020	-	200
28.08.2019	variable	3MWIBOR + 0.60	43	PLN	30.08.2021	43	44
02.10.2019	zero-coupon	-	900	PLN	01.04.2020	-	895
17.10.2019	variable	3MWIBOR + 0.60	40	PLN	18.10.2021	40	40
06.11.2019	zero-coupon	-	727	PLN	08.05.2020	-	722
06.12.2019	zero-coupon	-	738	PLN	08.06.2020	-	731
18.12.2019	variable	3MWIBOR + 0.60	28	PLN	20.12.2021	28	20
05.02.2020	zero-coupon	-	25	PLN	03.02.2021	24	-
24.02.2020	variable	-	350	PLN	24.02.2021	350	-
23.07.2020	zero-coupon	-	820	PLN	20.01.2021	819	-
24.08.2020	zero-coupon	-	555	PLN	08.03.2021	554	-
11.09.2020	zero-coupon	-	350	PLN	29.03.2021	350	-
08.10.2020	zero-coupon	-	330	PLN	22.06.2021	329	-
28.10.2020	zero-coupon	-	296	PLN	20.04.2021	296	-
27.11.2020	fixed	0.60	50	PLN	02.06.2021	50	-
07.12.2020	zero-coupon	-	887	PLN	21.05.2021	886	-
17.12.2020	variable	3MWIBOR + 0.28	224	PLN	17.03.2022	224	-

Total						4 036	3 947

Bonds issued by PKO Finance AB

In 2020, the Capital Group carried out a transaction of early partial redemption, from third parties, of bonds issued by PKO Finance AB (maturity date on 26 September 2022) for the amount of USD 195 million. The redeemed bonds remain in the possession of PKO Bank Polski S.A., with the Capital Group reserved the right to resell them or submit them for redemption in the future. The bonds are still listed on the regulated market operated by the Luxembourg Stock Exchange. The outstanding face value of this issue as at 31 December 2020 is $ 805 million.

Issue date	Type of interest rate	Interest rate	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

25.07.2012	fixed	4.00	50	EUR	25.07.2022	234	215
26.09.2012	fixed	4.63	805	USD	26.09.2022	3 060	3 842

Total						3 294	4 057

Bonds issued by Capital Group PKO Leasing SA

Issue date	Type of interest rate	Interest (index + margin)	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

01.12.20141	variable	WIBOR 3M + margin	146	PLN	02.10.2025	-	147
30.08.2019	variable	WIBOR 6M + margin	150	PLN	28.02.2020	-	149
26.09.20191	variable	WIBOR 3M + margin	2 475	PLN	28.12.2029	2 475	1 836
28.08.2020	variable	WIBOR 6M + margin	324	PLN	26.02.2021	323	-
02.12.2020	variable	WIBOR 6M + margin	395	PLN	01.06.2021	394	-
23.12.2020	variable	WIBOR 3M + margin	305	PLN	23.03.2021	304	-

Total						3 496	2 132

1Bonds issued as part of securitization of leasing receivables, taken over by the PKO Leasing S.A. Capital Group as part of the acquisition of Raiffeisen-Leasing Polska S.A. and issued as part of the securitization of lease receivables carried out in September 2019. The bonds are secured with lease receivables subject to securitization (see the note "Information on securitization of the leasing portfolio and bundling of receivables").

Bonds issued by KREDOBANK S.A.

Issue date	Type of interest rate	Interest (index + margin)	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

01.12.2017	fixed	15,12	132	UAH	26.11.2022	18	3
13.07.2018	variable	UIRD16M + 2,25	250	UAH	28.12.2022	33	42

Total						51	45

1Ukrainian Index of Retail Deposit Rates

Mortgage-covered bonds issued by PKO Bank Hipoteczny S.A.

Issue date	Type of interest rate	Interest (index + margin)	Nominal value	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

11.12.2015	variable	3MWIBOR + 0.75	18	PLN	11.12.2020	-	18
27.04.2016	variable	3MWIBOR + 0.65	500	PLN	28.04.2021	501	487
17.06.2016	variable	3MWIBOR + 0.59	500	PLN	18.06.2021	500	500
24.10.2016	fixed	0.125	500	EUR	24.06.2022	2 306	2 126
02.02.2017	fixed	0.820	25	EUR	02.02.2024	116	107
30.03.2017	fixed	0.625	500	EUR	24.01.2023	2 319	2 139
28.04.2017	variable	3MWIBOR + 0.69	500	PLN	18.05.2022	500	500
22.06.2017	fixed	2.69	265	PLN	10.09.2021	267	266
27.09.2017	fixed	0.75	500	EUR	27.08.2024	2 309	2 130
27.10.2017	variable	3MWIBOR + 0.60	500	PLN	27.06.2023	500	499
02.11.2017	fixed	0.47	54	EUR	03.11.2022	249	230
22.03.2018	fixed	0.75	500	EUR	24.01.2024	2 320	2 139
27.04.2018	variable	3MWIBOR + 0.49	698	PLN	25.04.2024	698	698
18.05.2018	variable	3MWIBOR + 0.32	100	PLN	29.04.2022	100	100
27.07.2018	variable	3MWIBOR + 0.62	500	PLN	25.07.2025	500	499
24.08.2018	fixed	3.4875	60	PLN	24.08.2028	61	61
26.10.2018	variable	3MWIBOR + 0.66	230	PLN	28.04.2025	230	231
28.01.2019	fixed	0.25	500	EUR	23.11.2021	2 306	2 126
01.03.2019	fixed	0.25	100	EUR	23.11.2021	461	426
08.03.2019	fixed	0.125	100	EUR	24.06.2022	461	424
10.06.2019	variable	3MWIBOR + 0.60	245	PLN	30.09.2024	247	244
02.12.2019	variable	3MWIBOR + 0.51	250	PLN	02.12.2024	250	248

Total						17 201	16 198

41.3. Subordinated liabilities

Type of liability	Interest rate	Nominal value	Currency	Period	Carrying amount
Type of liability	Interest rate	Nominal value	Currency	Period	31.12.2020	31.12.2019
Subordinated bonds	3.34	1 700	PLN	28.08.2017 - 28.08.2027	1 710	1 719
Subordinated bonds	3.29	1 000	PLN	05.03.2018 - 06.03.2028	1 006	1 011

Razem					2 716	2 730

The subordinated bonds were designated for increasing the Group’s supplementary funds upon approval of the Polish Financial Supervision Authority.

42. Other liabilities

Accounting policies

Liabilities included in this item are measured at amounts due which cover potential interest on the liabilities, and the accrual for future payments in reliably estimated, justified amounts necessary to meet the present obligation as at the end of the reporting period. Non-financial liabilities are measured in accordance with the measurement policies binding for particular types of liabilities recognized in this item.

Financial information

OTHER LIABILITIES	31.12.2020	31.12.2019
Other financial liabilities	3 011	3 217
Costs to be paid	559	567
Interbank settlements	276	461
Liabilities arising from investing activities and internal operations	379	251
Amounts due to suppliers	132	204
Liabilities and settlements in respect of trading in securities	247	586
Settlement of financial instruments	38	22
Liabilities in respect of foreign exchange activities	245	201
Liabilities in respect of payment cards	31	20
Lease liabilities	1 090	894
Other	14	11
Other non-financial liabilities	1 692	1 475
Deferred income	663	454
Liability in respect of tax on certain financial institutions	87	86
Liabilities in respect of a contribution to the Bank Guarantee Fund maintained in the form of payment obligations	590	394
to the Resolution Fund	308	217
to the Banks’ Guarantee Fund	282	177
Liabilities under the public law	83	158
Other	269	383

Total	4 703	4 692

The item “Liabilities in respect of contributions to the Bank Guarantee Fund” includes an obligation to pay contributions to the BGF (see the Note “Assets pledged to secure liabilities and financial assets transferred).

As at 31 December 2020 and as at 31 December 2019, the Group did not have any liabilities in respect of which it did not meet its contractual obligations.

43. Provisions

Accounting policies, and estimates and judgments

• provisions for legal claims, excluding legal claims relating to mortgage loans in convertible currencies

The provisions for legal claims include disputes with business partners, customers and external institutions (e.g. UOKiK), and are created based on an evaluation of the probability of a court case being lost by the Group (legal claims have been discussed in detail in the Note “Legal claims”).

Provisions for legal claims are created in the amount of the expected outflow of economic benefits.

• provisions for pensions and other defined post-employment benefits

The provision for retirement and disability benefits resulting from the Labour Code is created individually for each employee on the basis of an actuarial valuation. The provision for employee benefits is determined on the basis of the Group’s internal regulations.

Valuation of the provision for employee benefits is performed using actuarial techniques and assumptions. The calculation of the provision includes all retirement and pension benefits expected to be paid in the future. The provision was created on the basis of a list of persons with all the necessary employee information, in particular the length of their service, age and gender. The provisions calculated are equal to discounted future payments, taking into account staff turnover.

• provisions for holiday pay

The provisions for holiday pay is established at the amount of expected inflows of cash, excluding discounting, based on the number of days of holiday remaining to be utilized by the Bank’s employees and average monthly salary.

• Provisions for financial liabilities and guarantees granted

The provision for financial liabilities and guarantees is established at the amount of the expected credit losses (for details please see the Note “Net expected credit losses”).

In the portfolio analysis, when determining provisions, portfolio parameters estimated using statistical methods are used, based on historical observations of exposures with the same characteristics, the parameters which define a marginal probability of evidence of impairment, the average utilization of an off-balance sheet liability and the level of anticipated loss in the event of impairment in subsequent months in the period from the reporting date to the horizon of the calculation of the anticipated loss.

With regard to exposures which are material on an individual basis, and are subject to assessment, the provision is determined on a case by case basis – as the difference between the expected amount of the balance sheet exposure which will arise as a result of an off-balance sheet liability at the date of overdue amounts arising treated as evidence of impairment, and the present value of the expected future cash flows obtained from the exposure.

• Provisions for potential legal claims against the bank relating to mortgage loans in convertible currencies

The provisions are described in the Note “Cost of the legal risk of mortgage loans in convertible currencies”.

Provisions for the reimbursement of costs to customers on the early repayment of consumer loans

The amount of the provision for the reimbursement of costs to customers on the early repayment of consumer loans is affected by the percentage of prepaid consumer loans, the expected amount of consumer claims referring to the reimbursement of loan costs prepaid before the balance sheet data and the average amount of the refund.

• other provisions

Other provisions mainly include provisions for potential claims on the sale of receivables, described in detail in the note “Information on securitization of the lease portfolio and portfolio sale of receivables”.

Provisions for future payments are measured at reliably estimated, justified amounts necessary to meet the present obligation as at the end of the reporting period. All provisions are recognized in the profit and loss account, excluding actuarial gains and losses recognized in other comprehensive income.

If the effect of the time value of money is material, the amount of the provision is determined by discounting the estimated future cash flows to their present value, using the discount rate before tax which reflects the current market assessments of the time value of money and the potential risk related to a given obligation.

Financial information

FOR THE YEAR ENDED 31.12.2020	Provisions for financial liabilities and guarantees granted	Provisions for legal claims, excluding legal claims relating to repaid mortgage loans in convertible currencies	Provisions for legal claims against the bank relating to repaid mortgage loans in convertible currencies	Provisions for reimbursement of costs to customers on early repayment of consumer and mortgage loans	Provisions for pensions and other defined post-employment benefits	Restructuring	Provision for holiday pay	Other provisions, including provisions for employee disputed claims	FOR THE YEAR ENDED 31.12.2020
As at the beginning of the period	269	52	29	104	57	41	99	30	681
Increases, including increases of existing provisions	358	59	398	106	14	16	29	119	1 099
Utilized amounts	-	(4)	-	(187)	(1)	(5)	(9)	(4)	(210)
Unused provisions reversed during the period	-	(5)	-	-	(7)	(13)	(22)	(2)	(49)
Other changes and reclassifications	2	-	(1)	1	-	-	(1)	(20)	(19)
As at the end of the period	629	102	426	24	63	39	96	123	1 502
Short-term provisions	538	6	-	23	7	39	95	3	711
Long-term provisions	91	96	426	1	56	-	1	120	791

FOR THE YEAR ENDE 31.12.2019	Provisions for financial liabilities and guarantees granted	Provisions for legal claims, excluding legal claims relating to mortgage loans in convertible currencies	Provisions for legal claims against the bank relating to repaid mortgage loans in convertible currencies	Provisions for reimbursement of costs to customers on early repayment of consumer and mortgage loans	Provisions for pensions and other defined post-employment benefits	Restructuring	Provision for holiday pay	Other provisions, including provisions for employee disputed claims	Total
As at the beginning of the period	227	54	-	-	50	24	100	91	546
Taking control of a subsidiary	-	-	-	-	-	-	-	2	2
Increases, including increases of existing provisions	289	8	29	127	4	33	25	4	519
Utilized amounts	-	(3)	-	(23)	(1)	(15)	(8)	(4)	(54)
Unused provisions reversed during the period	(247)	(7)	-	-	(2)	(1)	(21)	(63)	(341)
Other changes and reclassifications	-	-	-	-	6	-	3	-	9

As at the end of the period	269	52	29	104	57	41	99	30	681
Short-term provisions	226	2	29	104	7	41	99	6	514
Long-term provisions	43	50	-	-	50	-	-	24	167

Calculation of estimates

The Group updated its estimates of provisions for pensions and other liabilities from defined post-employment benefit plans as at 31 December 2020 using an external independent actuary’s calculations. The provisions calculated are equal to discounted future payments, taking into account staff turnover.

COMPONENTS AFFECTING THE PROVISION AMOUNT	31.12.2020	31.12.2019
financial discount rate adopted	1.20%	2.00%
weighted average ratio of employee mobility	9.19%	9.36%
average remaining period of service in years	7.68	7.80
10-year average assumed annual increase in the basis calculation of retirement benefits	2.53%	2.26%

The impact of the increase/decrease in the financial discount rate and of the planned increases of 1 p.p. in the provision base on the decrease/increase in the value of the provision for retirement and other defined post-employment benefit plans as at 31 December 2020 and as at 31 December 2019 is presented in the tables below:

ESTIMATED CHANGE IN PROVISION for pensions and other liabilities in respect of defined post-employment benefits	31.12.2020		31.12.2019
	scenario +1pp	scenario –1pp	scenario +1pp	scenario –1pp

Discount rate	(5)	6	(4)	5
Planned increases in base amounts	6	(5)	6	(4)

The Group performed a sensitivity analysis of the provision for reimbursement for customers on early repayments of consumer and mortgage loans before the balance sheet date as at 31 December 2020 and 31 December 2019 due to changes in the number of claims and average value of a refund.

ESTIMATED CHANGE IN PROVISION	Change in the number of claims		Change in the average amount of reimbursement
ESTIMATED CHANGE IN PROVISION	–10%	10%	–10%	10%
31.12.2020
Provision for refunds of costs to customers on early repayment of consumer and mortgage loans	(2)	2	(2)	2

ESTIMATED CHANGE IN PROVISION	Change in the number of claims		Change in the average amount of reimbursement
ESTIMATED CHANGE IN PROVISION	-10%	10%	-10%	10%
31.12.2019
Provision for refunds of costs to customers on early repayment of consumer and mortgage loans	(10)	10	(10)	10

44. Equity and shareholding structure of the Bank

Accounting policies

Equity constitutes capital and reserves created in accordance with the legal regulations.

The classification to particular components discussed below results from the Polish Commercial Companies Code, the Banking Law and the requirements of IAS 1.7, IAS 1.78.e, IAS 1.54.q–r and IAS 1.79.b.

Equity components of the subsidiaries other than share capital, in proportion to the parent’s interest in the subsidiary, are added to respective equity components of the parent. The Group’s equity includes only those parts of the equity of the subsidiaries which arose after the acquisition of shares by the parent. In accordance with the legislation in force in Poland, only the equity of the parent company and the equity of specific subsidiaries, determined on the basis of separate financial statements, are distributable.

Equity components:

• Share capital comprises solely the share capital of the parent company and is stated at nominal value in accordance with the Articles of Association and entry to the Register of Entrepreneurs.

• Supplementary capital is created according to the Articles of Association of Companies in the Group, from the appropriation of profits and from share premium less issue costs and it is to cover the potential losses which might result from the Group’s activities.

• The general banking risk fund in PKO Bank Polski S.A. is created from profit after tax in accordance with the Banking Law, and it is to cover unidentified risks of the Bank’s operations.

• Other reserves are created from the appropriation of net profit. Other reserves are only meant to cover any potential balance-sheet losses.

• Non-controlling interests represent the part of capital in a subsidiary, which cannot be directly or indirectly assigned to the parent company.

• Accumulated other comprehensive income includes the effects of the measurement of financial assets at fair value through other comprehensive income, allowances for expected credit losses on these assets, the effective portion of cash flow hedges in hedge accounting, as well as actuarial gains and losses. Deferred tax on those items is recognized in other comprehensive income. Moreover, the item includes the share of the parent in the total other comprehensive income of associates and joint ventures and foreign exchange differences on translation to Polish currency of the net result of the foreign operation at an exchange rate constituting the arithmetic mean of the average foreign exchange rates as at the day ending each of the months in the financial year, as published by the National Bank of Poland.

Financial information

Shareholding structure of the Bank

According to the information available as at 31 December 2020 the Bank’s shareholding structure is as follows:

NAME OF SHAREHOLDER	number of shares	% of shares	Nominal value of 1 share	Interest in the share capital (%)
As at 31 December 2020
State Treasury	367 918 980	29,43	1 zł	29,43
Nationale Nederlanden Open Pension Fund1	107 198 023	8,58	1 zł	8,58
Aviva Open Pension Fund1	93 610 319	7,49	1 zł	7,49
Other shareholders2	681 272 678	54,50	1 zł	54,50
Total	1 250 000 000	100,00	---	100,00
As at 31 December 2019
State Treasury	367 918 980	29,43	1 zł	29,43
Nationale Nederlanden Open Pension Fund1	94 500 000	7,56	1 zł	7,56
Aviva Open Pension Fund1	88 010 319	7,04	1 zł	7,04
Other shareholders2	699 570 701	55,97	1 zł	55,97
Total	1 250 000 000	100,00	---	100,00

1 Calculation of shareholdings as at the end of the year published by PTE in annual information about the structure of fund assets and quotation from the securities exchange official list (Ceduła Giełdowa).

2 Including Bank Gospodarstwa Krajowego which, as at 31.12.2020, held 24 487 297 shares, constituting a 1.96% share of the votes at the General Shareholders’ Meeting.

All the shares of PKO Bank Polski S.A. carry the same rights and obligations. No shares are preferred shares (one share entitles to one vote), in particular with regard to voting rights or dividend. The Articles of Association of PKO Bank Polski S.A. restrict the voting rights of shareholders holding more than 10% of the total number of votes at the General Shareholders’ Meeting and forbid those shareholders to execute more than 10% of the total number of votes at the General Shareholders’ Meeting. The above restriction does not apply to:

• those shareholders who on the date of passing the resolution of the General Shareholders’ Meeting introducing the limitation of the voting rights had rights from the shares representing more than 10% of the total number of votes at the Bank (i.e. the State Treasury and BGK),

• shareholders who have the rights from A-series registered shares (the State Treasury), and

• shareholders acting jointly with the shareholders referred to in point (2) based on an agreement concerning the joint execution of voting rights from shares. Moreover, the restriction on the voting rights shall expire when the share of the State Treasury in the Bank’s share capital drops below 5%.

In accordance with § 6 (2) of the PKO Bank Polski S.A.’s Articles of Association, the conversion of A-series registered shares into bearer shares and the transfer of these shares requires the approval of the Council of Ministers in the form of a resolution. Conversion into bearer shares or transfer of A-series registered shares, after getting the above-mentioned approval, results in the expiry of the above-mentioned restrictions in respect of shares subject to conversion into bearer shares or transfer, to the extent to which this approval was given.

Pursuant to Art. 13 (1) (26) of the Act dated 16 December 2016 on the rules for managing the State property, the shares of PKO Bank Polski S.A. owned by the State Treasury may not be sold (excluding statutory exceptions).

The Bank’s shares are listed on the Warsaw Stock Exchange.

Structure of PKO Bank Polski S.A.’s share capital:

Series	Type of shares	Number of shares	Nominal value of 1 share	Nominal value of the series
Series A	ordinary registered shares	312 500 000	PLN 1	312 500 000
Series A	ordinary bearer shares	197 500 000	PLN 1	197 500 000
Series B	ordinary bearer shares	105 000 000	PLN 1	105 000 000
Series C	ordinary bearer shares	385 000 000	PLN 1	385 000 000
Series D	ordinary bearer shares	250 000 000	PLN 1	250 000 000
Total	- - -	1 250 000 000	- - -	1 250 000 000

In 2020 and in 2019, there were no changes in the amount of the share capital of PKO Bank Polski S.A.. Shares of PKO Bank Polski S.A. issued are not preference shares and are fully paid up.

45. Dividend and profit appropriation

On 26 August 2020, the Annual General Meeting of the Bank passed a resolution to retain the entire net profit earned by the Bank in previous years:

• with regard to the profit for 2019 – to allocate to the reserve capital the amount of PLN 2 155 113 and to leave as undistributed the amount of PLN 3 832 348 976,

• leaving still undistributed profit from previous years in the amount of PLN 1 667 651 024..

The resolution was in line with the recommendation of the Polish Financial Supervision Authority submitted to the Bank on 26 March 2020.

On 16 December 2020, the Polish Financial Supervision Authority (KNF) adopted a stance on the banks’ dividend policy in 2021, which resulted in:

• significant uncertainty as to the further development of events related to the COVID-19 pandemic,

• the temporary nature of solutions used by banks to improve the capital situation during the pandemic,

• continuing cautious supervisory positions in the European Union with regard to dividend restrictions and other forms of reducing capital resources,

• revision of the guidelines of the European Banking Authority, extending the moratoria

The Polish Financial Supervision Authority considered it necessary to suspend the payment of dividends by commercial banks in the first half of 2021 and not to take other actions, in particular those outside the scope of current business and operating activities, which could result in a reduction of the capital base without prior consultation with the supervisory authority. This applies to possible dividend payments from retained earnings and the buyout of treasury shares.

The Commission expects that the possible implementation of such operations will always be preceded by a prior consultation with the supervisory authority and subject to their positive outcome.

The position of the Polish Financial Supervision Authority on the dividend policy of commercial banks in the second half of 2021 will be presented separately after analyzing the financial situation of the banking sector in the first half of the year. PKO Bank Polski S.A. On 14 January 2021, he received an individual recommendation of the Polish Financial Supervision Authority, in which the Polish Financial Supervision Authority recommended the Bank:

• suspension of dividend payments in the first half of 2021 (including retained earnings from previous years),

• failure to undertake in the first half of 2021, without prior consultation with the supervisory authority, other activities outside the scope of current business and operating activities that may result in a reduction in the capital base, including buyouts of treasury shares.

The Management Board of the Bank and the Supervisory Board of the Bank adopted resolutions that, within the limits of their competences, they will supervise the implementation of the above recommendation of the PFSA.

Pursuant to Art. 395.2.2 of the Commercial Companies Code, the decision on the distribution of profit remains within the competence of the Bank's Ordinary General Meeting.

46. Leases

Accounting policies

• LEASES – LESSOR

The Group acts as a lessor in lease agreements relating to vehicles, buildings, including office space, and machinery and equipment. The Group conducts lease activities through the entities from the PKO Leasing S.A. Group and KREDOBANK S.A.

The Group as a lessor classifies leases as operating or finance leases.

A lease agreement is classified as an operating lease if substantially all risks and benefits from owning the underlying assets are not transferred. In such an instance the Group records lease payments as income on a straight-line basis.

A lease agreement is classified as a finance lease if substantially all risks and benefits from owning the underlying assets are transferred. The Group classifies agreements as finance leases where at least one or all of the following conditions have been met:

• the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;

• the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised;

• the lease term is for the major part of the economic life of the underlying asset even if title is not transferred;

• at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset (in a sublease it is the value of the right-of-use asset arising from the master lease agreement); and

• the underlying asset is of such a specialized nature that only the lessee can use it without major modifications.

At the inception of a lease, the Group as a lessor in a finance lease presents receivables in an amount equal to the net investment in the lease, i.e. gross investment in the lease discounted with the interest rate implicit in the lease.

Gross investment in the lease is the sum of:

• lease payments receivable by a lessor under a finance lease; and

• any unguaranteed residual value accruing to the lessor.

The interest rate implicit in the lease applied by the Group is the rate of interest that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the Group.

• LEASE – LESSEE

From the point of view of the lessee, IFRS 16 eliminates the classification of leases into operating and finance leases and introduces one recognition and measurement model.

Lease agreements or agreements containing a lease according to the Group’s classification include agreements under which the Group:

• obtains the right of use of the identified asset and the supplier’s ability to substitute an alternative asset is not significant; and

• has the right to obtain substantially all economic benefits from the right of use throughout the period of use; and

• has the right to direct the use of the identified asset over the period of use, when:

• the Group has the right to direct how and for what purpose the asset is used throughout the period of use; or

• the relevant decisions about how and for what purpose the asset is used are predetermined.

The Group applies exceptions and does not recognize right-of-use assets and liabilities with respect to:

• short-term leases, which include agreements without an option to buy an asset, concluded for a period not exceeding 12 months from the commencement of the agreement, in particular agreements concluded for an indefinite period with a short (up to 12 months) notice period, without significant penalties, which include in particular leasehold improvements incurred and relocation costs;

• low-value leases (an asset’s value is lower than PLN 20 000, determined based on the value of a new asset, regardless of the age of the leased asset), excluding agreements for rental of space.

The Group initially measures lease liabilities at the present value of the lease payments outstanding as at that date.

The amount of the lease liability is affected by:

• fixed payments less any lease incentives payable;

• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

• any residual guarantees expected from the lessee;

• the exercise price of a purchase option if the probability that the Group would exercise that option is higher than 50%;

• payments of penalties for terminating the lease, if the lease agreement contains an option for the Group to terminate the lease as a lessee.

The Group does not classify variable fees that depend on external factors as lease payments.

After initial recognition the Group’s lease liabilities are measured at amortized cost.

The Group records revaluation of lease liabilities as an adjustment to the right-of-use asset. If as a result of remeasurement the carrying amount of the right-of-use asset is reduced to zero and the lease liability is further reduced, the Group recognizes the remaining amount of the remeasurement as a profit or loss.

The Group initially measures the right-of-use assets at cost, which comprises:

• 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 Group.

The Group subsequently measures the right-of-use asset at cost less accumulated depreciation (depreciation calculated under the straight-line method) and accumulated impairment losses, adjusted for any remeasurement of the lease liability.

To discount future lease payments, the Group applies discount rates that:

• are calculated based on yield curves reflecting the cost of financing in a given currency,

• cover the tenor of the longest lease contract subject to measurement and reflecting – for a given currency – a fixed market interest rate and the Group’s cost of financing (the tenors of the lease agreements are within the range from 1 to 99 years);

• have been read from the curve for maturity corresponding to one-half of the maturity of the lease agreement.

The Group performs quarterly updates of the incremental borrowing rate for lease agreements.

The Group applies the same discount rates for the portfolio of car leases and property leases, including rights to perpetual usufruct of land, taking into account the impact of the lease security on the discount rate applied.

The Group recognizes the lease payments relating to short-term and low-value leases as cost using the straight-line method, over the term of the lease. The differences between the amounts paid and those arising from the straight-line recognition of the costs are recorded as prepayments or accruals.

Financial information:

• LESSEE

LESSEE – LEASE AMOUNTS RECOGNIZED IN THE INCOME STATEMENT	2020	2019
Costs related to short-term lease contracts	(5)	(12)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(72)	(66)

Total	(77)	(78)

• LESSOR – OPERATING LEASE

TOTAL FUTURE LEASE PAYMENTS UNDER IRREVOCABLE OPERATING LEASES – LESSOR	31.12.2020	31.12.2019
For a period:
up to 1 year	259	247
from 1 to 2 years	161	141
from 2 to 3 years	76	62
from 3 to 4 years	15	17
from 4 to 5 years	3	2
over 5 years	2	2

Total	516	471

The average agreement period for operating lease agreements where the Group is a lessor is usually 36 months. The lessee bears service and insurance costs.

Assets leased out under operating lease agreements are presented in the Note “Intangible assets and property, plant and equipment as well as property, plant and equipment leased out under operating lease agreements.”

• LESSOR – FINANCE LEASE

GROSS INVESTMENT IN THE LEASE AND MINIMUM LEASE PAYMENTS RECEIVABLE	Gross investment in the lease	of which:		Unrealized income	Net investment in the lease
	Gross investment in the lease	Non-discounted lease payments	Non-discounted not guaranteed residual values attributable to the lessor	Unrealized income	Net investment in the lease
31.12.2020
Lease receivables, gross	X	X	X	X	X
up to 1 year	7 264	7 113	151	(511)	6 753
from 1 to 2 years	4 893	4 781	112	(306)	4 587
from 2 to 3 years	3 285	3 233	52	(158)	3 127
from 3 to 4 years	1 791	1 763	27	(69)	1 721
from 4 to 5 years	795	789	7	(24)	772
over 5 years	390	388	2	(13)	377
Total, gross	18 418	18 067	351	(1 081)	17 337
Allowances for expected losses	(586)	(586)	-	-	(586)

Total carrying amount, net	17 832	17 481	351	(1 081)	16 751

GROSS INVESTMENT IN THE LEASE AND MINIMUM LEASE PAYMENTS RECEIVABLE	Gross investment in the lease	of which:		Unrealized income	Net investment in the lease
	Gross investment in the lease	Non-discounted lease payments	Non-discounted not guaranteed residual values attributable to the lessor	Unrealized income	Net investment in the lease
31.12.2019
Lease receivables, gross
up to 1 year	7 165	6 999	166	(627)	6 538
from 1 to 2 years	4 862	4 687	175	(378)	4 484
from 2 to 3 years	3 209	3 094	115	(196)	3 013
from 3 to 4 years	1 725	1 693	32	(88)	1 637
from 4 to 5 years	795	783	12	(32)	763
over 5 years	374	373	1	(21)	353
Total, gross	18 130	17 629	501	(1 342)	16 788
Allowances for expected losses	(464)	(464)	-	-	(464)

Total carrying amount, net	17 666	17 165	501	(1 342)	16 324

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

Accounting policies

Upon initial recognition financial guarantee agreements are stated at fair value. In subsequent periods, as at the balance sheet date, financial guarantees are measured at the higher of:

• allowances for expected credit losses; or

• the amount of commission recognized initially, less accumulated amortization in accordance with IFRS 15.

Financial information

• Securities programmes covered with underwriting agreements (maximum Group’s commitment to take up securities)

As at 31 December 2020 no agreements covered with underwriting have been concluded.

Issuer of underwritten securities As at 31.12.2019	Type of underwritten securities	Maximum commitment to take up securities	Contract expiry date
Company C	Corporate bonds	36	31.12.2022

All contracts relate to the Agreement for Organization, Conducting and Servicing of the Bond Issuance Programme. All securities of the Group under the underwriting programme have unlimited transferability, are not listed on the stock exchange and are not traded on a regulated OTC market.

• Contractual commitments

VALUE OF CONTRACTUAL COMMITMENTS CONCERNING	31.12.2020	31.12.2019
intangible assets	27	28
property, plant and equipment	76	29
Total	103	57

• Financial and guarantee commitments granted

FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2020	STAGE 1		STAGE 2		STAGE 3		Total	Provisions per IFRS 9	Net amount
FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2020	Nominal value	Provision	Nominal value	Provision	Nominal value	Provision	Total	Provisions per IFRS 9	Net amount
Credit lines and limits	52 047	(83)	6 811	(228)	119	(29)	58 977	(340)	58 637
housing	4 280	(9)	148	(5)	3	(1)	4 431	(15)	4 416
corporate	36 923	(58)	5 031	(186)	106	(25)	42 060	(269)	41 791
consumer	8 897	(16)	1 415	(37)	10	(3)	10 322	(56)	10 266
factoring	1 798	-	217	-	-	-	2 015	-	2 015
finance lease	149	-	-	-	-	-	149	-	149
Other	3 001	(29)	-	-	-	-	3 001	(29)	2 972
Total financial commitments granted, including:	55 048	(112)	6 811	(228)	119	(29)	61 978	(369)	61 609
irrevocable commitments granted	21 966	(46)	2 883	(94)	42	(10)	24 891	(150)	24 741
POCI	-	-	-	-	20	-	20	-	20

guarantees in domestic and foreign trading	6 304	(4)	1 635	(88)	336	(162)	8 275	(254)	8 021
to financial entities	960	-	-	-	-	-	960	-	960
to non-financial entities	5 296	(4)	1 635	(88)	336	(162)	7 267	(254)	7 013
to public entities	48	-	-	-	-	-	48	-	48
domestic municipal bonds (state budget entities)	166	-	-	-	-	-	166	-	166
letters of credit	1 422	(1)	77	(4)	13	(1)	1 512	(6)	1 506
to financial entities	196	-	-	-	-	-	196	-	196
to non-financial entities	1 226	(1)	77	(4)	13	(1)	1 316	(6)	1 310
payment guarantees to financial entities	40	-	-	-	-	-	40	-	40
Total guarantees and pledges granted, including:	7 932	(5)	1 712	(92)	349	(163)	9 993	(260)	9 733
irrevocable commitments granted	4 320	(4)	1 635	(88)	336	(162)	6 291	(254)	6 037
performance guarantee	1 681	(1)	998	(54)	182	(135)	2 861	(190)	2 671
POCI	-	-	-	-	1	-	1	-	1
Total financial and guarantee commitments granted	62 980	(117)	8 523	(320)	468	(192)	71 971	(629)	71 342

FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2019	STAGE 1		STAGE 2		STAGE 3		Total	Provisions per IFRS 9	Net amount
FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2019	Nominal value	Provision	Nominal value	Provision	Nominal value	Provision	Total	Provisions per IFRS 9	Net amount
Credit lines and limits	48 365	(91)	2 812	(77)	183	(28)	51 360	(196)	51 164
housing	5 244	(16)	309	(12)	7	(2)	5 560	(30)	5 530
corporate	32 873	(61)	1 155	(35)	168	(23)	34 196	(119)	34 077
consumer	8 410	(14)	1 348	(30)	8	(3)	9 766	(47)	9 719
factoring	1 551	-	-	-	-	-	1 551	-	1 551
finance lease	287	-	-	-	-	-	287	-	287
Other	4 005	(13)	3	-	-	-	4 008	(13)	3 995
Total financial commitments granted, including:	52 370	(104)	2 815	(77)	183	(28)	55 368	(209)	55 159
irrevocable commitments granted	20 684	(29)	1 974	(47)	98	(11)	22 756	(87)	22 669
POCI	-	-	-	-	67	-	67	-	67

guarantees in domestic and foreign trading	9 345	(6)	501	(11)	291	(40)	10 137	(57)	10 080
to financial entities	595	-	-	-	-	-	595	-	595
to non-financial entities	8 591	(6)	501	(11)	291	(40)	9 383	(57)	9 326
to public entities	159	-	-	-	-	-	159	-	159
domestic corporate bonds	36	-	-	-	-	-	36	-	36
to non-financial entities	36	-	-	-	-	-	36	-	36
domestic municipal bonds (state budget entities)	101	-	-	-	-	-	101	-	101
letters of credit	1 188	(1)	-	-	13	(2)	1 201	(3)	1 198
to non-financial entities	1 188	(1)	-	-	13	(2)	1 201	(3)	1 198
payment guarantees to financial entities	35	-	-	-	-	-	35	-	35
Total guarantees and pledges granted, including:	10 705	(7)	501	(11)	304	(42)	11 510	(60)	11 450
irrevocable commitments granted	7 355	(5)	501	(11)	291	(40)	8 147	(56)	8 091
performance guarantee	2 021	(1)	390	(1)	149	(12)	2 560	(14)	2 546

Total financial and guarantee commitments granted	63 075	(111)	3 316	(88)	487	(70)	66 878	(269)	66 609

• nominal value of commitments granted by maturity

COMMITMENTS GRANTED BY MATURITY AS AT 31.12.2020	up to 1 month (inclusive)	from 1 to 3 months (inclusive)	from 3 months to 1 year (inclusive)	from 1 to 5 years (inclusive)	over 5 years	Total

financial commitments granted	10 935	5 413	19 154	18 197	8 279	61 978
guarantees and pledges granted,	499	1 144	3 829	2 422	2 099	9 993

Total	11 434	6 557	22 983	20 619	10 378	71 971

COMMITMENTS GRANTED BY MATURITY AS AT 31.12.2019	up to 1 month (inclusive)	from 1 to 3 months (inclusive)	from 3 months to 1 year (inclusive)	from 1 to 5 years (inclusive)	over 5 years	Total

financial commitments granted	15 936	3 567	15 086	12 000	8 779	55 368
guarantees and pledges granted,	161	1 653	5 185	3 176	1 335	11 510

Total	16 097	5 220	20 271	15 176	10 114	66 878

• Off-balance sheet liabilities received

OFF-BALANCE SHEET LIABILITIES RECEIVED BY NOMINAL VALUE	31.12.2020	31.12.2019
Financial	147	119
Guarantees	4 312	2 478

Total	4 459	2 597

• Right to sell or pledge a collateral established for the Group

As at 31 December 2020, and as at 31 December 2019 there were no collaterals established for the benefit of the Bank’s Group, which the Group was entitled to sell or pledge, if all obligations of the collateral holder were performed.

48. Legal claims

As at 31 December 2020, the total value of the subject matter of litigation in court proceedings (trials) pending in which the companies belonging to the PKO Bank Polski Group S.A. were defendants amounted to PLN 2 064 million (as at 31 December 2019: PLN 1 194 million), and the total value of the subject matter of litigation in court proceedings (trials) pending in which the companies belonging to the PKO Bank Polski Group S.A. were claimants as at 31 December 2020 was PLN 2 607 million (as at 31 December 2019: PLN 2 527 million).

• litigation against the Bank relating to mortgage loans in convertible currencies

As at 31 December 2020, 5 372 legal proceedings were pending against the Bank (as at 31 December 2019: 1 645) relating to mortgage loans granted in previous years in foreign currency with a total value in dispute of PLN 1 404 million (as at 31 December 2019: PLN 392 million), including one group proceeding with 72 loan agreements. The Bank’s customers’ claims concerned mainly demands to determine the invalidity of all or part of the agreements or to receive reimbursement of allegedly undue benefits in connection with the abusive nature of the foreign currency clauses. None of the clauses used by the Bank in the agreements was entered in the register of prohibited contractual provisions. The number of lawsuits filed by customers against the Bank is significantly influenced by the intensive advertising campaign of law firms, which encourages borrowers to commission to them – for a fee – the conducting of cases against banks.

On 3 October 2019, the Court of Justice of the European Union (hereinafter: CJEU) issued a ruling in case C 260/18 initiated by preliminary questions formulated by the Circuit Court in Warsaw. The Bank was not a party to the proceedings before the CJEU.

The Group monitors on an ongoing basis the state of court rulings on loans indexed or denominated in foreign currencies in terms of shaping and possible changes to the rulings.

As at 31 December 2020, 75 final rulings have been issued by the courts in cases against the Bank (including 33 rulings after 3 October 2019). 48 of these rulings (including in 10 rulings issued after 3 October 2019) are favourable for the Bank. The Bank files cassation complaints to the Supreme Court against final rulings unfavourable to the Bank.

On 29 January 2021, in connection with the discrepancies in the interpretation of legal provisions in the jurisprudence of the Supreme Court and common courts and in order to ensure the uniformity of jurisprudence, the First President of the Supreme Court submitted a request for the full panel of the Civil Chamber of the Supreme Court to resolve the following legal issues concerning the subject of loans denominated and indexed in foreign currencies (legal basis: Article 83 § 1 of the Act of 8 December 2017 on the Supreme Court):

1. If a provision of an indexed or denominated loan agreement relating to the method of determining the foreign currency exchange rate is found to constitute an illicit contractual provision and is not binding on the consumer – is it then possible to assume that another method of determining the foreign currency exchange rate resulting from law or custom takes its place?

If the above question is answered in the negative:

2. In the event that it is impossible to establish a foreign currency exchange rate binding on the parties in a loan agreement indexed to such a currency, can the remainder of the agreement still be binding for the parties?

3. If it is not possible to establish a binding rate for a foreign currency in a loan agreement denominated in a foreign currency, can the remainder of the agreement still be binding for the parties?

Notwithstanding the content of the answers to questions 1 to 3:

4. In the event of the invalidity or ineffectiveness of a loan agreement, in the performance of which the bank disbursed to the borrower all or part of the amount of the loan and the borrower made repayments of the loan, do separate claims for wrongful performance arise for each of the parties, or does only a single claim arise, equal to the difference in performance, for the party whose total performance was higher?

5. Where a loan agreement is invalid or ineffective as a result of the unlawful nature of certain of its terms, does the limitation period for the bank’s claim for repayment of the sums paid under the loan begin to run from the time at which those sums were paid?

6. If, in the case of the invalidity or ineffectiveness of a loan agreement, either party has a claim for repayment of a performance made in the performance of that agreement, can that party also claim a fee for the use of its funds by the other party?

A session of the full composition of the Civil Chamber for the examination of the above-mentioned the application was scheduled for 25 March 2021. Currently, the scheduled date of the meeting is 11 May 2021.

On 29 April 2021, a ruling by the CJEU (C-19/20) on 5 questions referred for a preliminary ruling by the District Court in Gdańsk is scheduled. The judgment of the CJEU may be of significant importance for all disputes regarding loans indexed or denominated to CHF, because the questions of the District Court concern, inter alia, the nature of the judgment declaring the invalidity of the contract and the related issue of limitation and the scope of informing the consumer by the court about claims due to banks in the event of invalidity , including a claim for a return of capital and a claim for payment of remuneration for the use of capital.

The directions of the Supreme Court's ruling may affect the revision of the assumptions adopted for the model of calculating the legal risk costs of the portfolio of mortgage loans granted in a foreign currency, and thus the level of the estimated impact of this risk. Due to the inability to predict the shape of the resolution of individual issues by the Supreme Court, in the opinion of the Management Board, at the time of preparing these financial statements, it is not possible to reliably estimate the value of the impact of the Supreme Court's position on the level of legal risk costs of the portfolio of mortgage loans denominated and indexed in foreign currencies as at 31 December 2020.

• Actions taken by the capital group due to proposal of the chairman of the financial supervision authority and the expected session of the supreme court related to loans granted in convertible currencies

In December 2020, the Chairman of the Polish Financial Supervision Authority (hereinafter "the Chairman of the Polish Financial Supervision Authority") presented a proposal aimed at a systemic solution to the problem of housing loans in Swiss francs. This solution assumes that banks will voluntarily offer their clients the option of concluding settlements under which the clients would settle accounts with the bank as if their loans were from the beginning PLN loans bearing interest at the WIBOR reference rate increased by the margin used historically for such loans. On 9 February 2021, the National Bank of Poland issued a communiqué on the possible involvement in the operation of currency conversion of housing foreign currency loans. The Management Board of the National Bank of Poland welcomes the initiatives of banks aimed at limiting the legal risk of foreign currency housing loans through agreements with borrowers. In this context, the NBP Management Board is considering a possible involvement in the process of converting foreign currency housing loans into PLN, on the terms and at market rates.

The Group analyzed the benefits and risks related to possible options for proceeding with foreign currency housing loans. In the opinion of the Capital Group, reaching a compromise and reaching a settlement is both more beneficial for its clients than engaging in long-term court proceedings with uncertain resolution.

The Group conducted a survey among its clients which showed that about 70 percent of them are interested in concluding a settlement with the Bank. Currently, the Group is conducting a pilot of settlements, under which it participates in mediation at the arbitration court at the PFSA and concludes settlements before common courts.

On 23 April 2021, the Extraordinary General Meeting of Shareholders accepted the possibility of offering settlements to Customers. Therefore, estimating the costs of legal risk of mortgage loans denominated in foreign currencies, the Capital Group recognized the impact of forecasted settlements.

• Court proceedings against the Bank concerning reimbursement of the commission in the event of early repayment of loans

As at 31 December 2020, 203 court proceedings were pending against the Bank with a total disputed amount of PLN 907 thousand, concerning the reimbursement of the commission in the event of early repayment of all or part of a loan liability by the customer (as at 31 December 2019: 102 court proceedings with a total litigation value of PLN 640 thousand).

The provision for such proceedings as at 31 December 2020 amounted to PLN 694 thousand (PLN 355 thousand as at 31 December 2019).

On 11 September 2019, the Court of Justice of the European Union (“CJEU”) issued its ruling in Case C-383/18 initiated by a request for a preliminary ruling from the District Court for Lublin-East in Lublin with its seat in Świdnik. The Bank was not a party to the proceedings before the CJEU.

The Group has made an estimate of possible early repayments that may occur in the future and relate to the consumer and mortgage loan portfolio, recognizing their impact as a reduction in the gross carrying amount of consumer and housing loans of PLN 149 million as at 31 December 2020. Moreover, the Group estimated the likely costs of satisfying customer complaints relating to reimbursement of commission in connection with early repayments in the past. They were recognized in the balance of provisions as at 31 December 2020 in the amount of PLN 24 million and as at 31 December 2019 in the amount of PLN 104 million (note “Provisions”).

Proceedings before the President of the Office of Competition and Consumer Protection (UOKiK)

Three proceedings have been brought before the President of UOKiK ex officio and are currently in progress:

• Proceedings initiated ex officio on 28 June 2017 on the acknowledgement that the provisions of the template agreement are inadmissible. The violation alleged against the Bank relates to using contractual provisions concerning the method of determining the rates of foreign currency purchase and sale in the template agreements for mortgage loans indexed/denominated to foreign currencies and annexes thereto, which, in the opinion of the President of UOKiK, may be considered prohibited under Article 385 § 1 of the Civil Code. In the decision of 16 October 2020, the President of UOKiK declared the provisions of the template agreement “Annex to the housing loan/mortgage loan agreement” in the section “Appendix to the annex ‘Rules for determining foreign exchange spreads at PKO BP S.A.’” as inadmissible provisions and prohibited their use. In addition, the President of UOKiK ordered that all consumers being parties to the assessed annexes be informed about the decision to declare them inadmissible and about the consequences resulting therefrom, not later than within 3 months from the date on which the decision became legally binding and ordered that a declaration be submitted, with the contents as indicated in the decision, not later than 1 month from the date the decision became legally binding, which is to be kept on the website for 4 months. Furthermore, the President of UOKiK imposed on the Bank a fine of PLN 41 million, payable to the Financial Education Fund. On 13 November 2020, the Bank filed an appeal against the UOKiK decision with the Court of Competition and Consumer Protection. As at 31 December 2020, the Bank recorded a provision against this litigation of PLN 41 million.

• Proceedings initiated on 26 July 2017 ex officio concerning using practices which violate the collective interests of customers. The violation with which the Bank has been charged consists of collecting higher instalments on loans and advances denominated in foreign currencies to customers than those following from the advice about interest rate risk provided to customers before they had concluded the contracts, and transferring possible currency risk to the customers. The Bank presented its position on the claims in its letter dated 23 September 2017. In a letter dated 14 March 2019, the UOKiK President asked the Bank 16 detailed questions in order to establish the circumstances that are necessary to resolve the case. The Bank gave the answers in a letter dated 10 May 2019. As at 31 December 2020, the President of UOKiK did not take any further steps in this matter. As at 31 December 2020, the Group had not set up a provision for the proceedings.

• Proceedings initiated ex officio on 12 March 2019 on the acknowledgement that the provisions of the template agreement are inadmissible. The proceedings are related to modification clauses which specify the circumstances in which the Bank is entitled to amend the terms and conditions of the agreement, including the amount of fees and commission. In the opinion of the President of UOKiK the modification clauses applied by the Bank give the Bank unilateral unlimited and arbitrary possibilities to modify the performance of the agreement. Consequently, the President of UOKiK is of the opinion that the clauses applied by the Bank shape the rights and obligations of the consumers in a way that is contrary to good practice and are in gross violation of their interests, which justifies the conclusion that they are abusive. In its letter of 31 May 2019, the Bank presented its position on the charges made by the President of UOKiK. In a letter dated 30 December 2020 the President of UOKiK extended the term of concluding the proceedings until 31 March 2021. As at 31 December 2020, the Group had not set up a provision for these proceedings.

Proceedings related to restrictive practices on the market of payments with payment cards in Poland

The Bank is a party to proceedings initiated by the President of the Office of Competition and Consumer Protection (UOKiK) on the basis of a decision dated 23 April 2001 upon the request of the Polish Trade and Distribution Organization – Employers Association (Polska Organizacja Handlu i Dystrybucji – Związek Pracodawców) against operators of the Visa and Europay payment systems and banks issuing Visa and Europay/ Eurocard/ Mastercard banking cards.

The claims under these proceedings relate to the use of practices limiting competition on the market of banking card payments in Poland, consisting of applying pre-agreed “interchange” fees for transactions made using the Visa and Europay/Eurocard/Mastercard cards as well as limiting access to this market for external entities. On 29 December 2006, UOKiK decided that the practices, consisting of joint determination of the “interchange” fee, did limit market competition and ordered that any such practices should be discontinued, and imposed a fine on, among others, the Bank, in the amount of PLN 16.6 million. The Bank appealed against the decision of the President of UOKiK to the Court for Competition and Consumer Protection (Sąd Ochrony Konkurencji i Konsumentów – SOKiK). By the ruling dated 21 November 2013 SOKiK reduced the fine imposed on the Bank to PLN 10.4 million. The parties to the proceedings appealed against the ruling. The Court of Appeal in Warsaw in its ruling dated 6 October 2015 reinstated the initial amount of the imposed fines set in the decision of the UOKiK, i.e. the fine of PLN 16.6 million (the fine imposed on PKO Bank Polski S.A.) and the fine of PLN 4.8 million (the fine imposed on Nordea Bank Polska S.A.. PKO Bank Polski S.A. is a legal successor of Nordea Bank Polska S.A. through a merger in accordance with Article 492 § 1(1) of the Commercial Companies Code). The fine was paid by the Bank in October 2015. As a result of the cassation complaint made by the Bank, in its ruling dated 25 October 2017, the Supreme Court revoked the appealed ruling of the Court of Appeal in Warsaw and submitted the case for re-examination. The fine paid by the Bank was reimbursed to the Bank on 21 March 2018. On 23 November 2020, the Court of Appeal in Warsaw issued a ruling in which it revoked the ruling of the District Court in Warsaw dated 21 November 2013 and submitted it for re-examination. As at 31 December 2020 the Bank recorded a provision for this litigation of PLN 21 million.

• Claims for damages in respect of the interchange fee

The Bank was served six summons to participate, as an outside intervener on the defendant’s side in cases relating to the interchange fees. Other banks are respondents on the defendant’s side. The claims vis-à-vis the sued banks amount to a total of PLN 783 million and are pursued as damages for differences in interchange fees resulting from applying practices that limit competition. Since these proceedings are not pending against the Bank, their value was not included in the total value of the cases against the Bank.

If the courts find the claims justified, the defendants may claim recourse in separate court proceedings from other banks, including, among others, from PKO Bank Polski S.A.. As at 31 December 2020, the Bank entered five proceedings as an outside intervener.

• Other unfair competition proceedings

In 2020, PKO Bank Hipoteczny S.A. submitted documents and information to the President of UOKiK as part of two investigations concerning the rules of deferring the repayment of mortgage loans under the so-called “commercial” and “statutory loan vacations” during the pandemic period and PKO Życie Towarzystwo Ubezpieczeń S.A. conducted correspondence concerning the statement of UOKiK’s President without initiating proceedings on the method of fulfilling the insurance benefits in connection with permanent and total disability, inability to work or limited capabilities of unaided existence. Other entities of the Bank’s Group did not conduct any arrangements with UOKiK in the aforementioned period.

• Re-privatization claims relating to properties held by the Group

As at the date of the consolidated financial statements, there are:

• three proceedings involving reprivatization claims. One of the proceedings has been suspended. In the second proceeding which ended with a final court ruling favourable to the Bank, the opposing party lodged a cassation complaint, and the Supreme Court accepted it for consideration. In the third proceeding the subject matter of which is to confirm the invalidity of the decision refusing to grant temporary ownership of the Bank’s property to the applicant, a cassation complaint has been lodged with the Voivodeship Administrative Court against the final decision discontinuing the proceedings as groundless. The claim was rejected by the Voivodeship Administrative Court but the opponent appealed against this decision.

• seven proceedings, including one suspended in respect of real properties of other members of the Bank’s Group, related to declaring the invalidity of administrative decisions or the reimbursement of the property.

The Management Board of PKO Bank Polski S.A. believes that the probability of serious claims against the Group as a result of the aforesaid proceedings is low.

49. Notes to the consolidated cash flow statement

• Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, cash on nostro accounts in the National Bank of Poland, as well as current amounts due from banks, as well as other cash equivalents with maturities up to 3 months from the date of acquisition.

CASH AND CASH EQUIVALENTS	2020	2019
	7 474	14 677
Cash, current account with the Central Bank	2 083	3 768
Deposits with the Central Bank	144	236
Current amounts due from banks	115	224
Restricted cash and cash equivalents of which	29	12

Total	9 701	18 681

• Restricted cash and cash equivalents

Cash and cash equivalents of PLN 144 million (as at 31 December 2019: PLN 236 million), including:

• PLN 29 million (as at 31 December 2019: PLN 12 million) pledged as collateral for securities’ transactions conducted by Biuro Maklerskie PKO BP are deposited in the National Depository for Securities (KDPW_CCP), as part of the Guarantee Fund for the Settlement of Stock Exchange Transactions. Each direct participant who holds the status of settlement-making participant is obliged to make payments to the settlement fund which guarantees proper settlement of the stock exchange transactions covered by that fund. The amount of the payments depends on the value of transactions made by each participant and is updated by KDPW_CCP on a daily basis.

• PLN 10 million (as at 31 December 2019: PLN 4 million) paid in by participants in IKE, IKZE, PPE and PSO, which had not been converted by the transfer agent into investment fund participation units by 31 December 2020 and 31 December 2019, respectively.

• PLN 105 million (as at 31 December 2019: PLN 220 million) pledged as collateral for securitization transactions.

• Cash flows from interest and dividends, both received and paid

INTEREST INCOME ON:	2020	2019
loans to and other receivables from banks	73	105
hedging derivatives	528	418
debt securities	1 884	1 506
loans and advances to customers	7 486	9 538

Total	9 971	11 567

The above amounts of interest received do not include the amounts of commission recognized using the effective interest rate as interest income.

INTEREST EXPENSES – PAID:	2020	2019
amounts due to banks	(19)	(58)
amounts due to customers	(1 003)	(1 709)
loans and advances received	(32)	(44)
leases	(20)	(26)
debt securities:	(38)	(91)
debt securities in issue	(480)	(521)
subordinated liabilities	(90)	(90)

Total	(1 682)	(2 539)

DIVIDEND INCOME – RECEIVED	2020	2019
from associates and joint ventures	17	36
from financial assets held for trading	-	1
financial instruments not held for trading, measured at fair value through profit or loss	15	13

Total	32	50

• Cash flows from operating activities – other adjustments

OTHER ADJUSTMENTS	2020	2019
Changes resulting from acquisition of business entities	-	(30)
Cash flow hedges	174	210
Actuarial gains and losses	(6)	(7)
Foreign exchange differences on translation of foreign branches	(68)	50
Remeasurement of shares in subordinated entities and other changes	11	(123)
Scrapping of property, plant and equipment and intangible assets	(122)	48

Total	(11)	148

• Explanation of differences between the consolidated statement of financial position and changes in these items presented under operating activities in the consolidated cash flow statement

(GAINS)/LOSSES ON INVESTING ACTIVITIES	2020	2019
Gains on sale and scrapping of property, plant and equipment, intangible assets and assets held for sale	(49)	(45)
Losses on sale and scrapping of property, plant and equipment, intangible assets and assets held for sale	45	34

Total	(4)	(11)

INTEREST AND DIVIDENDS	2020	2019
Shown in investing activities	(1 880)	(1 505)
dividends received from associates and joint ventures	(17)	(36)
dividends received from securities held for trading	-	(1)
dividends received from securities not held for trading, measured at fair value through profit or loss	(15)	(13)
interest received on securities measured at fair value through other comprehensive income	(1 367)	(1 200)
interest received on securities measured at amortized cost	(481)	(255)
Shown in financing activities:	602	642
interest paid on debt securities in issue	480	521
interest paid on subordinated liabilities	90	90
interest paid on loans and advances received	32	31

Total	(1 278)	(863)

CHANGES IN AMOUNTS DUE FROM BANKS	2020	2019
Change in the balance sheet	1 535	3 569
Changes in allowances for expected credit losses	1	-
Exclusion of the change in cash and cash equivalents	(1 794)	(3 599)

Total	(258)	(30)

CHANGE IN SECURITIES	2020	2019
Change in the balance sheet	(43 109)	(16 459)
Changes in allowances for expected credit losses	(25)	11
Fair value of financial assets measured at fair value through other comprehensive income (net)	1 020	(36)
Recognition of acquisition / disposal of securities measured at fair value through other comprehensive income in investing activities	7 136	9 829
Recognition of acquisition / disposal of securities measured at amortized cost in investing activities	33 326	4 627
Total	(1 652)	(2 028)

CHANGE IN LOANS AND ADVANCES TO CUSTOMERS	2020	2019
Change in the balance sheet	7 603	(15 345)
Changes resulting from the acquisition of business entities	-	1 077
Changes in allowances for expected credit losses	(1 602)	982
Exclusion of the change in cash and cash equivalents	17	2

Total	6 018	(13 284)

CHANGE IN NON-CURRENT ASSETS HELD FOR SALE	2020	2019
Change in the balance sheet	(114)	3
Changes due to implementation of IFRS 16	-	1
Changes in allowances on non-current assets held for sale	(2)	(1)

Total	(116)	3

CHANGE IN OTHER ASSETS	2020	2019
Change in the balance sheet	(90)	69
Changes resulting from the acquisition of business entities	-	76
Changes due to implementation of IFRS 16	-	(4)
Changes in allowances for other assets and inventories	(146)	(12)

Total	(236)	129

CHANGE IN AMOUNTS DUE TO BANKS AND THE CENTRAL BANK	2020	2019
Change in the balance sheet	491	384
Changes resulting from the acquisition of business entities	-	(1 301)

Total	491	(917)

CHANGE IN AMOUNTS DUE TO CUSTOMERS	2020	2019
Change in the balance sheet	26 186	17 447

Total	26 186	17 447

CHANGE IN LIABILITIES IN RESPECT OF LOANS AND ADVANCES RECEIVED	2020	2019
Change in the balance sheet	(512)	(1 564)
Recognition of drawing/repayment of long-term loans and advances under financing activities, including interest	915	2 679

Total	403	1 115

CHANGE IN LIABILITIES IN RESPECT OF DEBT SECURITIES IN ISSUE	2020	2019
Change in the balance sheet	950	2 521
Changes resulting from the acquisition of business entities	-	(250)
Recognition of drawing/repayment of liabilities in respect of debt securities in issue under financing activities	424	(2 414)

Total	1 374	(143)

CHANGE IN SUBORDINATED LIABILITIES	2020	2019
Change in the balance sheet	(14)	(1)

Total	(14)	(1)

CHANGE IN ACCUMULATED ALLOWANCES FOR EXPECTED CREDIT LOSSES AND IMPAIRMENT ALLOWANCES ON NON-FINANCIAL AND OTHER ASSETS	2020	2019
Change in accumulated allowances and provisions for expected credit losses	2 040	(955)
for amounts due from banks	(1)	-
for loans and advances to customers	1 602	(982)
for securities	25	(11)
for other financial assets	54	(4)
provisions for financial liabilities and guarantees granted	360	42
Change in accumulated impairment allowances on non-financial assets and other provisions	831	187
for non-current assets held for sale	2	1
for property, plant and equipment	43	10
for intangible assets	141	53
for investments in subordinated entities	92	5
for other non-financial assets	92	25
other provisions	461	93

Total	2 871	(768)

CHANGE IN OTHER LIABILITIES	2020	2019
Change in the balance sheet	11	1 212
Changes due to implementation of IFRS 16	-	(956)
Changes resulting from the acquisition of business entities	-	(90)
Recognition of lease payments in financing activities	233	221

Total	244	387

• Reconciliation of items presented in the consolidated statement of financial position with financing activities in the consolidated cash flow statement

2020	As at the beginning of the period	Recognized in financing activities in the cash flow statement		Recognized in operating activities in the cash flow statement	As at the end of the period
2020	As at the beginning of the period	Incurred	Repaid		As at the end of the period
Loans and advances received	2 779	-	(915)	403	2 267
from banks	750	-	(194)	319	875
from customers	2 029	-	(721)	84	1 392
Debt securities in issue	31 148	6 838	(7 262)	1 374	32 098
Subordinated liabilities – subordinated bonds	2 730	-	-	(14)	2 716
Payment of lease liabilities	894	-	(233)	429	1 090
	x	x	x	x	x
Total	37 551	6 838	(8 410)	2 192	38 171

2019	As at the beginning of the period	Recognized in financing activities in the cash flow statement		Recognized in operating activities in the cash flow statement	As at the end of the period
2019	As at the beginning of the period	Incurred	Repaid		As at the end of the period
Loans and advances received	4 343	665	(3 353)	1 124	2 779
from banks	250	650	(1 294)	1 144	750
from customers	4 093	15	(2 059)	(20)	2 029
Debt securities in issue	28 627	13 079	(10 665)	107	31 148
Subordinated liabilities – subordinated bonds	2 731	-	-	(1)	2 730
Payment of lease liabilities	956	-	(221)	159	894
Total	36 657	13 744	(14 239)	1 389	37 551

50. Transactions with the State Treasury and related parties

• Transactions with the State Treasury

The State Treasury holds a 29.43% interest in the Bank’s share capital.

Pursuant to the Act of 30 November 1995 on the state support in repayment of certain housing loans, reimbursement of guarantee bonuses paid, and amendments to certain Acts, PKO Bank Polski S.A. receives payments from the State budget as repurchase of interest receivable on housing loans.

TRANSACTIONS WITH THE STATE TREASURY	2020	2019
Income recognized on an accruals basis	78	93
Income recognized on a cash basis	64	75
Income from temporary redemption by the State Treasury of interest on housing loans in the “old portfolio”	14	18

As of 1 January 2018 based on the provisions of the Act of 30 November 1995 on state support in the repayment of certain housing loans, granting guarantee bonuses and reimbursement of guarantee bonuses paid, the borrowers acquired the right to be forgiven the remaining debt by the State Treasury, which will result in the gradual (until 2026) full settlement of the housing loan indebtedness from the so-called “old” portfolio. The Bank conducts settlements in respect of repurchase of interest on housing loans by the State Budget and on this account the Bank received commission in 2020 and 2019 amounting to under PLN 1 million.

As of 1 January 1996, the Bank became the general distributor of value marks. The Bank receives commissions in this respect from the State Treasury – in 2020 and in 2019, the Bank received commission on this account of under PLN 1 million.

Biuro Maklerskie PKO BP plays the role of an agent for the issue of retail Treasury bonds under the agreement signed with the Ministry of Finance on 11 February 2003. Under this agreement, Biuro Maklerskie PKO BP receives a fee for providing the services of an agent for the issue of bonds – in 2020 in the amount of PLN 128 million, and in 2019 in the amount of PLN 83 million.

• Significant transactions with the State Treasury’s related entities

The Group’s exposure and the value of the Group’s liabilities to 10 entities related to the State Treasury with the highest total exposure are presented below.

SIGNIFICANT TRANSACTIONS WITH THE STATE TREASURY’S RELATED ENTITIES	BALANCE SHEET EXPOSURE, INCLUDING EXPOSURE TO LOANS AND DEBT INSTRUMENTS		OFF-BALANCE SHEET EXPOSURE		LIABILITIES IN RESPECT OF DEPOSITS
	31.12.2020	31.12.2019	31.12.2020	31.12.2019	31.12.2020	31.12.2019
counterparty 1	-	-	-	2 453	793	-
counterparty 2	16 845	3 443	30	350	737	61
counterparty 3	465	240	2 036	3 520	98	3 686
counterparty 4	1 617	614	714	2 291	48	175
counterparty 5	623	599	1 693	1 683	63	350
counterparty 6	129	2 021	2 046	667	41	122
counterparty 7	999	467	1 156	1 080	11	50
counterparty 8	644	485	950	2 132	46	231
counterparty 9	46	1 726	1 191	1 193	114	94
counterparty 10	313	167	706	802	-	6

	2020	2019
Interest and commission income	206	200
Interest and commission expense	(16)	(29)

As at 31 December 2020 and as at 31 December 2019, respectively, no allowances for expected credit losses were recognized for the above-mentioned receivables using the individualized method.

In the opinion of the Group, all transactions with entities related to the State Treasury are concluded on an arm’s- length basis.

• Related-party transactions – capital links

Transactions of the Bank as the parent company with associates and joint ventures are presented in the table below. All transactions with joint ventures and associates presented below were arm’s length transactions. Repayment terms are within a range of from one month to seventeen years.

31.12.2020 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	54	6	168	54
„Centrum Obsługi Biznesu" sp. z o.o.	17	17	4	-
Bank Pocztowy SA	-	-	-	1
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	-	-	22	-
Operator Chmury Krajowej sp. z o.o.	-	-	18	767
Total joint ventures and associates	71	23	212	822

For the period ended 31.12.2020 Company name	Total income	of which interest and commission expense	Total expenses	of which interest and commission expense
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	543	517	92	91
Total joint ventures and associates	543	517	92	91

31.12.2019 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	80	26	43	32
„Centrum Obsługi Biznesu" sp. z o.o.	19	19	6	-
Bank Pocztowy SA	-	-	-	1
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	-	-	1	-
Operator Chmury Krajowej sp. z o.o.	-	-	59	769
Total joint ventures and associates	99	45	109	802

For the period ended 31.12.2019 Company name	Total income	of which interest and commission expense	Total expenses	of which interest and commission expense
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	508	468	125	125
„Centrum Obsługi Biznesu" sp. z o.o.	1	1	-	-
Operator Chmury Krajowej sp. z o.o.	-	-	9	-
Total joint ventures and associates	509	469	134	125

As at 31 December 2020, seven entities were related to the Group through the key management personnel of PKO Bank Polski S.A. or close family members of the key management personnel. As at 31 December 2019, it was six entities. In 2020 and in 2019, no transactions were concluded with those entities.

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

Accounting policies

Short-term employee benefits include, apart from the base salary, also the part of the variable remuneration component paid in cash which is not deferred.

The deferred part of the variable remuneration component paid in cash was recognized as other long-term benefits.

Non-deferred and deferred remuneration components granted in the form of financial instruments i.e. phantom shares (for which conversion into cash is carried out after an additional period of retention) are recognized as share-based payments settled in cash in accordance with the principles described below.

• Variable remuneration components of key management personnel in the Group

Variable remuneration components are granted in the form of: non-deferred remuneration (in the first year after the calendar year constituting an appraisal period), and deferred remuneration (for the next three years after the first year of the appraisal period), whereas both the non-deferred and deferred remuneration is awarded in equal parts in cash and in the form of financial instruments, i.e. phantom shares (for which conversion into cash is carried out after an additional period of retention).

The component of remuneration in the form of the financial instrument is converted into phantom shares after granting a particular component – taking into consideration the median of the daily average prices of the Bank’s shares (Volume Weighted Average Price) on the Warsaw Stock Exchange, published in the Thomson Reuters or Bloomberg information systems – from the fourth quarter of the appraisal period. Next, after a period of retention and deferral period, the shares are converted into cash – taking into consideration the median of the daily average prices of the Bank’s shares (Volume Weighted Average Price) on the Warsaw Stock Exchange from the third quarter of the calendar year preceding the payment (the Management Board) and the third quarter of the calendar year in which the payment is made (other persons in management positions), published in the Thomson Reuters or Bloomberg information systems.

The deferred remuneration may be reduced in the event of deterioration in the financial performance of the Bank or a Group Company, respectively, a loss incurred by the Bank / Company or deterioration of other variables related to the performance in the period of appraisal of key management personnel and results of the organizational units/cells supervised or managed by these people, which were revealed after the appraisal period.

In 2020, variable remuneration components were also granted in selected PKO Bank Polski S.A. Group companies. Regulations on variable remuneration components for members of the Management Board applied in: PKO Bank Hipoteczny S.A., PKO BP BANKOWY PTE S.A., PKO TFI S.A., PKO Leasing S.A., PKO Towarzystwo Ubezpieczeń S.A., PKO Życie Towarzystwo Ubezpieczeń S.A., Kredobank S.A. and PKO Faktoring S.A. Simultaneously, employees in certain managerial positions at PKO Bank Hipoteczny S.A., PKO Towarzystwo Ubezpieczeń S.A., PKO Życie Towarzystwo Ubezpieczeń S.A. and PKO Leasing S.A. having a significant impact on the company’s risk profile, and certain employees at PKO TFI S.A., whose jobs include activities that materially affect the risk profile of the company or the fund management company, were also covered by variable remuneration policies - a more detailed description in chapter 10.2 “Variable remuneration components of the Bank's Management Board members and key managers with a high impact on the Bank's risk profile" of the Management Board's report on the activities of the PKO Bank Polski S.A. Group for 2020 drawn up together with the Management Board's report on the activities of PKO Bank Polski S.A.

Financial information

COST OF REMUNERATION OF THE BANK’S MANAGEMENT AND SUPERVISORY BOARDS (in PLN thousand)	2020	20191
Management Board of the Bank
Short-term employee benefits	9 162	9 547
Long-term employee benefits	1 484	1 134
Share-based payments settled in cash	3 711	2 835
Benefits to the Bank’s Management Board members who ceased to perform their functions in prior years	-	172
Total	14 357	13 688

Supervisory Board of the Bank
Short-term employee benefits	1 388	1 340
Total	1 388	1 340

COSTS OF REMUNERATION OF THE SUBSIDIARIES’ MANAGEMENT AND SUPERVISORY BOARDS (in PLN thousand)	2020	20191
Management Boards of the Companies
Short-term employee benefits	24 108	27 097
Long-term employee benefits	3 867	2 577
Share-based payments settled in cash	2 903	3 121
Benefits to members of the Companies’ Management Boards who ceased to perform their functions in prior years	538	108
Total	31 416	32 903

Supervisory Boards of the Companies
Short-term employee benefits	1 089	1 542
Total	1 089	1 542

1 The data for the comparable period takes into account a shift in the proportion between variable remuneration in cash and in financial instruments towards increasing the financial instruments portion, and a shift in the proportion of deferred and non-deferred variable remuneration towards increasing the deferred variable remuneration portion.

LOANS AND ADVANCES GRANTED BY THE BANK TO THE MANAGEMENT AND SUPERVISORY BOARDS (in PLN thousand)	31.12.2020	31.12.2019

Supervisory Board of the Bank	902	376
Management Board of the Bank	769	1 340
Total	1 671	1 716

The interest rates and repayment terms do not differ from the arm’s-length conditions and repayment terms for similar banking products.

The Bank provides the key management personnel, members of the Supervisory Board and their families with standard financial services which comprise, among other things, operating bank accounts, accepting deposits, granting loans and providing other financial services. All these transactions are concluded on an arm’s-length basis.

• Variable remuneration components

PROVISION FOR VARIABLE REMUNERATION COMPONENTS	31.12.2020	31.12.2019
PROVISION FOR VARIABLE REMUNERATION COMPONENTS	(for 2015-2020)	(for 2014-2019)
Management Board (including members who ceased to perform their functions)	18	18
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	63	39
Group entities	28	22
Total provision	109	79
Remuneration paid during the year	31.12.2020	31.12.2019
Remuneration paid during the year	(for 2015-2020)	(for 2014-2019)
- granted in cash	28	21
Management Board (including members who ceased to perform their functions)	3	6
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	11	9
Group entities	14	6
- granted in the form of financial instruments	8	18
Management Board (including members who ceased to perform their functions)	4	4
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	-	10
Group entities	4	4
Total remuneration paid	36	39

52. Fair value hierarchy

Accounting policies, and estimates, and judgments

Depending on the classification of financial assets and liabilities to a specific level of the hierarchy, different methods of fair value measurement are used.

• Level 1: Prices quoted on active markets

Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) on active markets for identical assets and liabilities. In this category the Group classifies financial instruments for which there is an active market and for which the fair value is determined with reference to the market value, which is a bid price:

• debt securities valued using fixing from the Bondspot platform, or Bloomberg or Reuters information services;

• debt and equity securities which are traded on regulated markets, including in the Biuro Maklerskie PKO BP portfolio;

• derivative instruments, which are traded on a regulated market.

• Level 2: Valuation techniques based on observable market data

Financial assets and liabilities whose fair value is determined using valuation models where all significant entry data is observable on the market directly (as prices) or indirectly (based on prices). In this category, the Group classifies financial instruments for which there is no active market:

Financial assets and liabilities measured at fair value	Valuation method (technique)	Observable inputs
Derivative financial instruments – CIRS, IRS, FRA	The discounted future cash flows model based on the yield curves.	Yield curves are built based on market rates, market data of the money market, market transactions of FRA, IRS, basis swap.
Derivative financial instruments – currency option, interest rate options, equity exotic options, fx forward, fx swap transactions	Valuation models specific for particular types of currency options. The model of discounted future cash flows based on yield curves for FX forward and FX swap transactions. The prices of exotic equity options embedded in structured products are obtained from the market (market prices).	Yield curves built based on money market rates, market rate of swap points, volatility levels for specific currency pairs, NBP fixing exchange rates. For the valuation of exotic equity options embedded in structured products, market prices of these options are obtained.
NBP money market bills	Yield curve method	Yield curves are built based on money market data and OIS (overnight index swap) transactions market.
Municipal bonds in EUR	Accepted valuation model.	Market rates, market data from the money market, IRS transactions market, CDS transactions market, volatility of interest rate options market.
Municipal bonds in PLN	Yield curve and risk margin model.	Yield curves are built based on market rates, money market data, IRS transactions market.
Corporate bonds	Yield curve and risk margin model.	Yield curves are built based on market rates, money market data, IRS transactions market.
Commodity swap transactions	Commodity price curve model.	Commodity price and yield curves are built based on money market rates, market rates of SWAP points.
Liabilities in respect of insurance products measured at fair value	A provision for life insurance in which the deposit risk is borne by the policyholder, in insurance with the insurance capital fund, is set up for each active policy individually, at the end of the reporting period. The provision is equal to the individual balance of the fund as at the date at which the provisions are created, and is equal to the number of units accumulated under the individual fund balance multiplied by the price as at the date of valuation.	Number of fund units, unit price

• Level 3: Other valuation techniques

Financial assets and liabilities whose fair value is determined using valuation models for which input data is not based on observable market data (unobservable input data). In this category, the Group classified financial instruments, which are measured using internal valuation models.

The fair value of equity and debt securities classified as financial assets is determined by the organizational units of the Head Office responsible for them, including the Treasury Products Department and the Brokerage House. In their internal regulations, these units specify the detailed measurement methods, including determining the data sources used for measurement purposes and the method of performing the calculation.

The Credit Risk Department develops the assumptions of the fair value model for financial assets arising from loans and advances granted or other financing agreements being the substitute of loans. The Assets and Liabilities Management Committee approves the fair value model for loan exposures.

Financial assets and liabilities measured at fair value	Valuation method (technique)	unobservable input
Financial instruments not held for trading, mandatorily measured at fair value through profit or loss
Loans and advances to customers	Discounted cash flow method.	Effective margin on loans.
C-series preference shares of Visa Inc.	Estimation of the fair value based on the current market value of the listed ordinary shares of Visa Inc., including a discount which takes into account the limited liquidity of C-series shares and the terms and conditions of conversion of C-series shares into ordinary shares.	Discount taking into account the limited liquidity of C-series shares and the terms of converting the C-series shares into ordinary shares.
Corporate bonds	Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data.	Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors).
Shares in Biuro Informacji Kredytowej S.A.	Estimation of the fair value based on the present value of the forecast results of the company	Forecast results of the company. Discount rate.
Shares in Polski Standard Płatności sp. z o.o.	Estimation of the fair value based on the present value of the forecast results of the company.	Forecast results of the company. Discount rate.
Shares in Society For Worldwide Interbank Financial Telecommunication	Market value of the shares estimated by the company.	Market value estimated by the company. Discount rate.
Shares in Krajowa Izba Rozliczeniowa S.A.	Estimation of the fair value based on the present value of the forecast results of the company.	Forecast results of the company. Discount rate.
Shares in Wałbrzyska Specjalna Strefa Ekonomiczna “Invest-Park” sp z o.o.	Fair value determined by an appraiser using the net adjusted assets method.	Value of the company’s net assets.
Shares in Wielkopolska Gildia Rolno-Ogrodnicza S.A.	Fair value determined by an appraiser using the net adjusted assets method.	Value of the company’s net assets.
Financial Instruments measured at fair value through other comprehensive income
Corporate bonds	Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data.	Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors).

Financial information

ASSETS MEASURED AT FAIR VALUE 31.12.2020	Carrying amount	Level 1	Level 2	Level 3
ASSETS MEASURED AT FAIR VALUE 31.12.2020	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques
Hedging derivatives	958	-	958	-
Other derivative instruments	5 501	-	5 501	-
Securities	77 155	68 647	7 174	1 334
held for trading	1 178	824	354	-
debt securities	1 151	797	354	-
shares in other entities – listed	25	25	-	-
shares in other entities – not listed	2	2	-	-
not held for trading, measured at fair value through profit or loss	2 466	1 832	26	608
debt securities	978	799	21	158
shares in other entities – listed	135	135	-	-
shares in other entities – not listed	451	-	1	450
participation units in investment funds, investment certificates, rights to shares, pre emptive rights	902	898	4	-
measured at fair value through other comprehensive income – corporate bonds	73 511	65 991	6 794	726
Loans and advances to customers	6 009	-	-	6 009
not held for trading, measured at fair value through profit or loss	6 009	-	-	6 009
housing loans	7	-	-	7
corporate loans	114	-	-	114
consumer loans	5 888	-	-	5 888
Total financial assets measured at fair value	89 623	68 647	13 633	7 343

LIABILITIES MEASURED AT FAIR VALUE	Carrying amount	Level 1	Level 2	Level 3
31.12.2020	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques

Hedging derivatives	378	-	378	-
Other derivative instruments	6 104	-	6 104	-
Liabilities in respect of insurance products	1 216	-	1 216	-
Total financial liabilities measured at fair value	7 698	-	7 698	-

ASSETS MEASURED AT FAIR VALUE 31.12.2019	Carrying amount	Level 1	Level 2	Level 3
ASSETS MEASURED AT FAIR VALUE 31.12.2019	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques
Hedging derivatives	645	-	645	-
Other derivative instruments	2 795	1	2 794	-
Securities	67 118	57 089	7 206	2 823
held for trading	1 112	1 112	-	-
debt securities	1 095	1 095	-	-
shares in other entities - listed	15	15	-	-
participation units in investment funds, investment certificates, rights to shares, pre emptive rights	2	2	-	-
not held for trading, measured at fair value through profit or loss	2 199	1 439	144	616
debt securities	493	301	12	180
shares in other entities - listed	150	150	-	-
shares in other entities - not listed	436	-	-	436
participation units in investment funds, investment certificates, rights to shares, pre emptive rights	1 120	988	132	-
measured at fair value through other comprehensive income – corporate bonds	63 807	54 538	7 062	2 207
Loans and advances to customers	8 286	-	-	8 286
not held for trading, measured at fair value through profit or loss	8 286	-	-	8 286
housing loans	15	-	-	15
corporate loans	148	-	-	148
consumer loans	8 123	-	-	8 123
Total financial assets measured at fair value	78 844	57 090	10 645	11 109

LIABILITIES MEASURED AT FAIR VALUE	Carrying amount	Level 1	Level 2	Level 3
31.12.2019	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques

Hedging derivatives	589	-	589	-
Other derivative instruments	2 924	-	2 924	-
Liabilities in respect of a short position in securities	363	363	-	-
Liabilities in respect of insurance products	1 353	-	1 353	-
Total financial liabilities measured at fair value	5 229	363	4 866	-

In 2020, corporate bonds amounting to PLN 154 million were transferred from level 1 to level 3, and those amounting to PLN 1 063 million from level 3 to level 2, as a result of a change in the manner of calculating the risk margin. In 2019 corporate bonds amounting to PLN 1 469 million were transferred from level 2 to level 3 as a result of a change in the manner of calculating the risk margin.

IMPACT OF ESTIMATES ON FAIR VALUE MEASUREMENT OF LEVEL 3 FINANCIAL INSTRUMENTS	31.12.2020		31.12.2019
	Fair value under		Fair value under
	positive scenario	negative scenario	positive scenario	negative scenario
Shares in Visa Inc.1	255	244	225	199
Other equity investments2	203	183	226	204
Corporate bonds3	879	876	2 392	2 382
Loans and advances to customers4	6 009	6 009	8 526	8 054

1 Scenario assuming a discount rate in respect of the future conditions of converting C-series shares to ordinary shares at a level of 0%/100% respectively

2 Scenario assuming a change in the company’s value of +/-5%

3 Scenario assuming a change in the credit spread of +/-10%

4 Scenario assuming a change in the discount rate of +/- 0.5 p.p.

The reconciliation of changes to fair value of the financial instruments at Level 3 is presented in the table below.

RECONCILIATION OF CHANGES DURING THE REPORTING PERIOD TO FAIR VALUE AT LEVEL 3	2020	2019
Opening balance at the beginning of the period	11 109	3 025
Increase in exposure to equity instruments	4	-
Increase in exposure to corporate and municipal bonds	38	-
Decrease in exposure to corporate bond	(596)	(710)
Increase in exposure to loans and advances to customers	802	779
Decrease in exposure to loans and advances to customers	(2 770)	(1 748)
Transfers from level 2 and 2 to level 3	154	1 469
Transfers from level 3 to level 2	(1 063)	-
Reclassification from measured at amortized cost to measured at fair value through profit or loss	73	8 204
Net gain/(loss) on financial instruments measured at fair value through profit or loss	(171)	108
Change in the valuation recognized in OCI	2	(20)
Foreign exchange differences	2	2
Other	(240)	-
As at the end of the period	7 344	11 109

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

The Group holds financial instruments which are not presented at fair value in the statement of financial position.

For many financial instruments, the market values are unattainable hence the fair values presented are estimated with the use of an array of measurement techniques.

All model calculations include certain simplifying assumptions and therefore are sensitive to those assumptions. For certain categories of financial instruments, it has been assumed that their carrying amount equals approximately their fair values, which is due to lack of expected material differences between their carrying amount and fair value resulting from the features of these categories (such as short-term nature, high correlation with market parameters, a unique nature of the instrument).

Item	Major methods and assumptions used when estimating fair values of financial instruments not measured at fair value
Amounts due from and to banks	• interbank placements and deposits – the model based on expected cash flows discounted using the current interbank market rates; • interbank deposits and placements with maturities of up to 7 days or with variable interest, loans or advances granted and received on the interbank market with variable interest (with interest rate changes occurring every 3 months or less) – fair value equals the carrying amount.
Securities	• treasury bonds – market quotations; • PLN corporate bonds secured with State Treasury guarantees - discounted cash flow method, calculated using yield curves, prices available in Bloomberg (BVAL - Bloomberg Valuation Service) and Refinitiv Eikon; • corporate and municipal bonds – discounted cash flow method, calculated using profitability curves and credit margins.
Loans and advances to customers	• not impaired: the model based on estimating the present value of future cash flows by discounting cash flows using current interest rates; the model takes into account the credit risk margin and adjusted maturities derived from the loan agreements. The current level of margins was determined for transactions concluded in the last quarter ending on the balance sheet date involving instruments with a similar credit risk profile. The current margin for loans in PLN adjusted for the cost of foreign currency acquisition in basis-swap transactions was applied to loans in foreign currencies. • finance lease receivables – the model of expected cash flows discounted using the internal rate of return for lease transactions of the same type concluded by the Group during the period directly preceding the end of the reporting period; • impaired: fair values are equal to carrying amounts; • loans and advances to customers: a part of the housing loan portfolio (the “old” housing loan portfolio), loans with no specific repayment schedule, loans due as at the moment of valuation – fair values are equal to carrying amounts;
Amounts due to customers	• deposits and other amounts due to customers other than banks, with fixed maturities; the model of expected cash flows discounted using current interest rates appropriate for the individual deposit products. The fair value is calculated for each deposit and liability, and then the fair values for the entire deposit portfolio are grouped by product type and by customer segment. • amounts due to customers: liabilities with no specific repayment schedule, other specific products for which no active market exists - fair values are equal to carrying amounts.
Debt securities in issue	The Bank: the model of expected cash flows discounted using the current interbank market rates and market quotations.
	PKO Bank Hipoteczny S.A.: • mortgage covered bonds – listed on the Luxembourg Stock Exchange (in EUR) and on the Warsaw Stock Exchange (in PLN); • bonds under the Public Bond Issue Programme – listed on the Catalyst market; • bonds of the Bond Issue Programme – the model of expected cash flows discounted using the current interbank market rates and market quotations.
	PKO Finance AB: quotations on the Luxembourg Stock Exchange.
	PKO Leasing S.A.: the model of expected cash flows discounted using the current market quotations
Subordinated liabilities	The model of expected cash flows discounted based on yield curves
Cash and balances with the Central Bank and amounts due to the Central Bank	Fair values are equal to carrying amounts.
Other financial assets and financial liabilities	Fair values are equal to carrying amounts.

	level of fair value hierarchy	31.12.2020		31.12.2019
	level of fair value hierarchy	carrying amount	fair value	carrying amount	fair value
Cash and balances with Central Bank	nd	7 474	7 474	14 677	14 677
Amounts due from banks	2	2 557	2 557	4 092	4 092
Securities (excluding adjustments relating to fair value hedge accounting)	1, 2, 3	46 522	47 729	13 454	13 518
treasury bonds (in PLN)	1	29 647	30 682	7 406	7 470
treasury bonds (in foreign currencies)	1	39	39	60	60
corporate bonds (in PLN) secured with State Treasury guarantees	1	9 887	10 015	-	-
municipal bonds (in PLN)	2	5 060	5 056	4 563	4 563
corporate bonds (in PLN)	1, 2, 3	1 518	1 539	1 083	1 083
corporate bonds (in foreign currencies)	2	371	398	342	342
Reverse repo transactions	2	-	-	1 081	1 081
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)	3	216 590	216 993	221 916	220 927
housing loans	3	116 318	115 054	118 448	116 405
corporate loans	3	58 961	60 134	64 294	65 074
consumer loans	3	22 932	23 386	21 539	21 809
factoring receivables	3	1 628	1 628	1 311	1 311
finance lease receivables	3	16 751	16 791	16 324	16 328
Receivables in respect of insurance activities	3	798	798	858	858
Other financial assets	3	1 937	1 937	1 766	1 766

Amounts due to banks	2	2 626	2 626	1 818	1 818
Repo transactions	3	281 140	281 167	254 771	254 718
Amounts due to customers	3	223 691	223 689	193 769	193 716
amounts due to households	3	43 705	43 734	49 648	49 648
amounts due to business entities	3	13 744	13 744	11 354	11 354
Liabilities in respect of insurance activities	3	1 740	1 740	1 777	1 777
Loans and advances received	3	2 267	2 267	2 779	2 779
Debt securities in issue	1, 2, 3	32 098	32 584	31 148	31 595
Subordinated liabilities	2	2 716	2 768	2 730	2 730
Other financial liabilities	3	3 011	3 011	3 217	3 217

54. Offsetting financial assets and financial liabilities

The Group enters into offsetting arrangements, i.e. International Swaps and Derivatives Association Master Agreements (ISDA) and Global Master Repurchase Agreements (GMRA), which make it possible to offset financial assets and liabilities (final deduction and settlement of the transaction so-called close out netting) in the event of an infringement with respect to one of the parties of the agreement. These agreements are of particular importance to mitigate the risk posed by derivative instruments, because they enable offsetting both matured liabilities (mitigating the settlement risk) and non-matured liabilities of the parties (mitigating the pre-settlement risk). However, these agreements do not meet the requirements set out in IAS 32, because the right to offset is conditional on the occurrence of a specific future event (instances of infringement).

Exposures arising from derivatives are further secured by margin deposits provided by counterparties as part of executing CSA (Credit Support Annex).

OFFSETTING ASSETS	Total financial assets	Derivatives	Repo transactions
31.12.2020
Recognized financial assets, gross	6 464	6 464	-
Financial liabilities subject to offsetting, gross	(5)	(5)	-
Financial assets recognized in the statement of financial position, net	6 459	6 459	-
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	1 093	1 093	-
(i) recognized financial instruments which do not meet the offsetting criteria	516	516	-
(ii) financial collateral (including cash)	577	577	-
Net amount	5 366	5 366	-

OFFSETTING LIABILITIES	Total financial liabilities	Derivatives	Repo transactions
31.12.2020
Recognized financial liabilities, gross	6 487	6 487	-
Financial assets subject to offsetting, gross	(5)	(5)	-
Financial liabilities recognized in the statement of financial position, net	6 482	6 482	-
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	993	993	-
(i) recognized financial instruments which do not meet the offsetting criteria	516	516	-
(ii) financial collateral (including cash)	477	477	-
Net amount	5 489	5 489	-

OFFSETTING ASSETS	Total financial assets	Derivatives	Repo transactions
31.12.2019
Recognized financial assets, gross	4 521	3 440	1 081
Financial assets recognized in the statement of financial position, net	4 521	3 440	1 081
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	2 486	2 486	-
(i) recognized financial instruments which do not meet the offsetting criteria	1 744	1 744	-
(ii) financial collateral (including cash)	742	742	-
Net amount	2 035	954	1 081

OFFSETTING LIABILITIES	Total financial liabilities	Derivatives	Repo transactions
31.12.2019
Recognized financial liabilities, gross	3 513	3 513	-
Financial liabilities recognized in the statement of financial position, net	3 513	3 513	-
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	2 540	2 540	-
(i) recognized financial instruments which do not meet the offsetting criteria	1 744	1 744	-
(ii) financial collateral (including cash)	796	796	-
Net amount	973	973	-

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

• Collateral for mortgage covered bonds of PKO Bank Hipoteczny S.A.

The mortgage covered bonds are secured by loans secured by the highest priority mortgage. Additionally, the basis for the issue of mortgage covered bonds can also be PKO Bank Hipoteczny S.A.’s own funds:

• invested in securities issued or guaranteed by the National Bank of Poland, the European Central Bank, governments and central banks of members of the European Union and/or the Organization for Economic Cooperation and Development, excluding countries that are restructuring or have restructured their foreign debt in the past 5 years;

• invested in the National Bank of Poland;

• held in cash.

The CIRS and FX-Forward transactions which hedge the foreign exchange and interest-rate risk of the issued EUR mortgage covered bonds, and the IRS transactions hedging interest rate risk of the issued PLN fixed-interest-rate mortgage covered bonds were also recognized in the register of collaterals for mortgage covered bonds.

In 2020 and in the previous years the mortgage covered bonds cover pool did not include asset-backed securities (ABS), that do not meet the requirements described in paragraph 1 of Article 80 of the Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (recast).

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – ASSETS PLEDGED AS COLLATERAL FOR MORTGAGE COVERED BONDS	31.12.2020	31.12.2019
nominal value of the pledge	23 107	21 662
the nominal value of the overcollateralization in the form of securities issued by the State Treasury, denominated in PLN	250	250

• receivables covered by securitization of lease receivables

For detailed information see the note “Information on securitization of the lease portfolio and package sale of receivables”.

• Liabilities due to the negative valuation of derivative instruments

Cash in bank deposits includes assets securing own liabilities, including settlements due to negative valuation of derivative instruments.

ASSETS SECURING LIABILITIES – LIABILITIES DUE TO NEGATIVE VALUATION OF DERIVATIVE INSTRUMENTS	31.12.2020	31.12.2019
Cash on bank deposits as security for own liabilities	-	796

• PRELIMINARY SETTLEMENT DEPOSIT OF THE NATIONAL DEPOSITORY FOR SECURITIES KDPW

As at 31 December 2020, Biuro Maklerskie PKO BP held no bonds with the National Depository for Securities.

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – PRELIMINARY SETTLEMENT DEPOSIT OF THE NATIONAL DEPOSITORY FOR SECURITIES (KDPW)	31.12.2020	31.12.2019
Value of the deposit	-	10
Nominal value of the collateral	-	12
Type of collateral	-	Treasury bonds
Carrying amount of the collateral	-	12

• Fund for the Protection of Guaranteed Funds

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – FUND FOR THE PROTECTION OF GUARANTEED FUNDS	31.12.2020	31.12.2019
Value of the fund	1 100	1 082
Nominal value of the collateral	1 100	1 200
Type of collateral	Treasury bonds	Treasury bonds
Maturity of the collateral	25.04.2024	25.01.2024
Carrying amount of the collateral	1 201	1 206

The assets that constitute security for the fund are Treasury bonds which mature in the period that ensures securing the carrying amount over the period specified in the Act of 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution. The Fund is increased or decreased on 1 July of each year, in proportion to the amount representing the basis for the calculation of the mandatory reserve deposits. These assets are treated as assets pledged as collateral for own liabilities.

• Funds securing liabilities in respect of contributions to the Bank Guarantee Fund (BGF)

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES Funds securing liabilities in respect of contributions to the Bank Guarantee Fund (BGF)	31.12.2020	31.12.2019
Value of the contribution made in the form of payables	590	394
Nominal value of the assets in which funds corresponding to payables were invested	728	499
Type of collateral	Treasury bonds	Treasury bonds
Maturity of the collateral	25.01.2024	25.01.2024
Carrying amount of the collateral	744	501

Starting from 2017, the value of contributions in the form of payment obligations represents 30% of the contributions to the Bank Guarantee Fund (“the BGF”) for the Deposit Guarantee Fund or the Bank Resolution Fund. Assets securing payment commitments include Treasury bonds pledged for BGF in the amount which ensures maintaining the ratio of the value of property rights securing payment commitments to the amount of payment commitments of no less than 110%. For purposes of establishing the minimum ratio of assets to the amount of payment commitment, the value of property rights securing payment commitments is determined at the amount specified based on the last fixing rate of the day in the electronic market for Treasury securities organized by the minister responsible for the budgetary matters, plus interest due as at the valuation date, unless interest has already been included in the fixing rate.

Such funds are treated as assets pledged as collateral for own liabilities, they cannot be pledged or encumbered in any way, are excluded from judicial or administrative enforcement proceedings and do not form part of the estate in bankruptcy. The amount of funds securing payment obligations relating to contributions to the BGF will be increased on payment dates of contributions to the Deposit Guarantee Fund (quarterly) and the Bank Resolution Fund (in the third quarter of a given year) representing not more than 30% of the contribution established by the BGF.

The amount of these funds may decrease if the Bank is called by the BGF to transfer the amount corresponding to the value of payment commitments in cash.

• Legal limitations relating to the Group’s title

In the years ended 31 December 2020 and 31 December 2019, respectively, there were no intangible assets or property, plant and equipment items to which the Group’s legal title would be limited and pledged as collateral for the Bank’s liabilities.

56. Financial assets and liabilities by currency

Financial assets BY CURRENCY	Currency translated to PLN
31.12.2020	PLN	CHF	EUR	USD	UAH	Inne	Total
Cash and balances with Central Bank	6 515	39	550	136	51	183	7 474
Amounts due from banks	657	5	1 217	224	215	239	2 557
Hedging derivatives	931	6	21	-	-	-	958
Other derivative instruments	4 971	118	326	80	-	6	5 501
Securities	119 589	-	2 240	1 535	318	-	123 682
- held for trading	1 173	-	5	-	-	-	1 178
- not held for trading, mandatorily measured at fair value through profit or loss	1 688	-	506	272	-	-	2 466
- measured at fair value through OCI	70 616	-	1 419	1 158	318	-	73 511
- measured at amortized cost	46 112	-	310	105	-	-	46 527
Loans and advances to customers	185 329	15 049	18 905	1 543	1 440	337	222 603
- not held for trading, mandatorily measured at fair value through profit or loss	6 009	-	4	-	-	-	6 013
- measured at amortized cost	179 320	15 049	18 901	1 543	1 440	337	216 590
Receivables in respect of insurance activities	798	-	-	-	-	-	798
Other financial assets	1 817	16	81	10	-	13	1 937
Total assets	320 607	15 233	23 340	3 528	2 024	778	365 510

Financial liabilities and off-balance sheet liabilities BY CURRENCY	Currency translated to PLN
31.12.2020	PLN	CHF	EUR	USD	UAH	Inne	Total
Amounts due to banks	1 280	6	1 259	62	1	18	2 626
- measured at amortized cost	1 280	6	1 259	62	1	18	2 626
Hedging derivatives	340	-	18	20	-	-	378
Other derivative instruments	5 525	-	495	78	-	6	6 104
Repo transactions	-	-	-	-	-	-	-
Amounts due to customers	252 241	742	16 699	8 841	1 369	2 464	282 356
- measured at fair value through profit or loss	1 216	-	-	-	-	-	1 216
- measured at amortized cost	251 025	742	16 699	8 841	1 369	2 464	281 140
Liabilities in respect of insurance activities	1 740	-	-	-	-	-	1 740
Loans and advances received	967	-	956	26	318	-	2 267
Debt securities in issue	11 875	1 706	15 406	3 060	51	-	32 098
Subordinated liabilities	2 716	-	-	-	-	-	2 716
Other financial liabilities	2 184	3	625	121	32	46	3 011
Provisions for financial liabilities and guarantees granted	530	2	84	7	3	3	629
Total liabilities	279 398	2 459	35 542	12 215	1 774	2 537	333 925
Financial liabilities and guarantees granted	60 567	135	6 547	3 785	362	575	71 971

Financial assets BY CURRENCY	Currency translated to PLN
31.12.2019	PLN	CHF	EUR	USD	UAH	Inne	Total
Cash and balances with Central Bank	13 652	43	641	101	47	193	14 677
Amounts due from banks	755	53	1 797	994	191	302	4 092
Hedging derivatives	618	8	16	3	-	-	645
Other derivative instruments	2 499	-	231	64	-	1	2 795
Securities	77 255	-	2 081	1 189	48	-	80 573
- held for trading	1 109	-	3	-	-	-	1 112
- not held for trading, mandatorily measured at fair value through profit or loss	1 807	-	148	244	-	-	2 199
- measured at fair value through OCI	61 287	-	1 584	888	48	-	63 807
- measured at amortized cost	13 052	-	346	57	-	-	13 455
Repo transactions	1 081	-	-	-	-	-	1 081
Loans and advances to customers	187 654	21 229	17 522	1 821	1 501	479	230 206
- not held for trading, mandatorily measured at fair value through profit or loss	8 286	-	4	-	-	-	8 290
- measured at amortized cost	179 368	21 229	17 518	1 821	1 501	479	221 916
Receivables in respect of insurance activities	858	-	-	-	-	-	858
Other financial assets	1 624	-	78	20	8	36	1 766
Total assets	285 996	21 333	22 366	4 192	1 795	1 011	336 693

Financial liabilities and off-balance sheet liabilities BY CURRENCY	Currency translated to PLN
31.12.2019	PLN	CHF	EUR	USD	UAH	Inne	Total
Amounts due to banks	731	9	583	259	11	542	2 135
- measured at fair value through profit or loss	317	-	-	-	-	-	317
- measured at amortized cost	414	9	583	259	11	542	1 818
Hedging derivatives	581	-	7	1	-	-	589
Other derivative instruments	2 590	-	240	94	-	-	2 924
Amounts due to customers	226 500	509	17 527	7 896	1 460	2 278	256 170
- measured at fair value through profit or loss	1 398	-	-	-	-	-	1 398
- measured at amortized cost	225 102	509	17 527	7 896	1 460	2 278	254 772
Liabilities in respect of insurance activities	1 777	-	-	-	-	-	1 777
Loans and advances received	1 593	28	1 142	-	16	-	2 779
Debt securities in issue	10 430	1 569	15 262	3 842	45	-	31 148
Subordinated liabilities	2 730	-	-	-	-	-	2 730
Other financial liabilities	2 615	1	415	77	65	44	3 217
Provisions for financial liabilities and guarantees granted	217	2	34	13	2	1	269
Total liabilities	249 764	2 118	35 210	12 182	1 599	2 865	303 738
Financial liabilities and guarantees granted	56 564	136	5 466	4 083	270	359	66 878

57. Contractual cash flows from the group’s financial liabilities, including derivative financial instruments

Contractual cash flows from the financial liabilities, excluding derivative financial instruments

The amounts disclosed comprise non-discounted future cash flows, both in respect of the principal and interest (if applicable), in accordance with the contract, for the entire period to the date of the liability’s maturity. Where the party to whom the Group has a liability is able to select the settlement deadline, it has been assumed that the earliest date on which the Group is obliged to settle the liability shall be taken into account. Where the Group is obliged to settle the liabilities in instalments, each instalment is allocated to the earliest period in which the Group might be obligated to settle. In the case of liabilities where instalment amounts are not fixed, the terms binding as at the reporting date have been adopted.

CONTRACTUAL CASH FLOWS FROM THE GROUP’S FINANCIAL LIABILITIES, EXCLUDING DERIVATIVE FINANCIAL INSTRUMENTS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount	Carrying amount
31.12.2020
Amounts due to banks	2 626	-	-	-	-	2 626	2 626
Amounts due to customers	240 958	11 175	17 998	3 435	9 124	282 690	282 356
Loans and advances received	48	29	575	2 067	3	2 722	2 267
Liabilities in respect of insurance activities	-	-	541	1199	-	1 740	1 740
Debt securities in issue	856	1 978	11 363	19 345	66	33 608	32 098
Subordinated liabilities	-	24	24	235	2 878	3 161	2 716
Lease liabilities	24	40	192	477	405	1 138	1 090
Other financial liabilities	1 843	-	-	78	-	1 921	1 921
Total	246 355	13 246	30 693	26 836	12 476	329 606	326 814
Off-balance sheet liabilities
financing granted	10 935	5 413	19 154	18 197	8 279	61 978	-
guarantees granted	499	1 144	3 829	2 422	2 099	9 993	-

CONTRACTUAL CASH FLOWS FROM THE GROUP’S FINANCIAL LIABILITIES, EXCLUDING DERIVATIVE FINANCIAL INSTRUMENTS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount	Carrying amount
31.12.2019
Amounts due to banks	2 124	16	271	-	-	2 411	2 135
Amounts due to customers	197 828	17 260	29 592	4 267	10 521	259 468	256 170
Loans and advances received	3	-	520	2 297	-	2 820	2 779
Liabilities in respect of insurance activities	-	-	525	1 252	-	1 777	1 777
Debt securities in issue	914	797	2 769	27 267	811	32 558	31 148
Subordinated liabilities	-	45	45	473	2 913	3 476	2 730
Lease liabilities	19	37	155	495	411	1 117	894
Other financial liabilities	2 323	-	-	-	-	2 323	2 323
Total	203 211	18 155	33 877	36 051	14 656	305 950	299 956
Off-balance sheet liabilities
financing granted	15 936	3 567	15 086	12 000	8 779	55 368		-
guarantees granted	161	1 653	5 185	3 176	1 335	11 510		-

• Contractual cash flows from liabilities in respect of derivative financial instruments for which the valuation as at the balance sheet date was negative (a liability) and which are settled on a gross basis

The amounts disclosed comprise non-discounted future cash flows, both in respect of principal and interest (if applicable).

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A GROSS BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2020	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
outflows (principal and interest)	(7 752)	(9 706)	(8 042)	(8 309)	-	(33 809)
inflows (principal and interest)	8 940	9 897	8 267	10 673	-	37 777

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A GROSS BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2019	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
outflows (principal and interest)	(8 643)	(3 819)	(6 265)	(5 696)	(370)	(24 793)
inflows (principal and interest)	8 915	3 848	7 379	5 686	838	26 666

In the case of IRS and NDF transactions, non-discounted future net cash flows in respect of interest and principal have been presented and in the case of the remaining derivative instruments settled on a net basis, the amount of the valuation as at 31 December 2020 and as at 31 December 2019, respectively, was adopted as the cash flow amount.

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A NET BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2020	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
IRS	(201)	(76)	64	(666)	-	(879)
other derivatives: options, FRA, NDF	(365)	(1 297)	(1 002)	(227)	-	(2 891)

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A NET BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2019	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
IRS	(115)	(200)	(89)	3	61	(340)
other derivatives: options, FRA, NDF	(610)	(963)	(2 062)	(2 495)	(1)	(6 131)

58. Current and non-current assets and liabilities

FINANCIAL ASSETS	Current	Non-current	Total carrying amount
31.12.2020
Cash and balances with Central Bank	7 474	-	7 474
Amounts due from banks	2 555	2	2 557
Hedging derivatives	423	535	958
Other derivative instruments	1 824	3 677	5 501
Securities	13 718	109 964	123 682
- held for trading	922	256	1 178
- not held for trading, mandatorily measured at fair value through profit or loss	1 536	930	2 466
- measured at fair value through OCI	10 344	63 167	73 511
- measured at amortized cost	916	45 611	46 527
Loans and advances to customers	50 596	172 007	222 603
- not held for trading, mandatorily measured at fair value through profit or loss	4 282	1 731	6 013
- measured at amortized cost	46 314	170 276	216 590
Receivables in respect of insurance activities	306	492	798
Other financial assets	1 927	10	1 937

Total financial assets	78 823	286 687	365 510

FINANCIAL ASSETS	Current	Non-current	Total carrying amount
31.12.2019
Cash and balances with Central Bank	14 677	-	14 677
Amounts due from banks	4 066	26	4 092
Hedging derivatives	160	485	645
Other derivative instruments	1 190	1 605	2 795
Securities	6 200	74 373	80 573
- held for trading	466	646	1 112
- not held for trading, mandatorily measured at fair value through profit or loss	1 753	446	2 199
- measured at fair value through OCI	3 567	60 240	63 807
- measured at amortized cost	414	13 041	13 455
Repo transactions	1 081	-	1 081
Loans and advances to customers	52 708	177 498	230 206
- not held for trading, mandatorily measured at fair value through profit or loss	5 465	2 825	8 290
- measured at amortized cost	47 243	174 673	221 916
Receivables in respect of insurance activities	339	519	858
Other financial assets	1 766	-	1 766

Total financial assets	82 187	254 507	336 694

FINANCIAL LIABILITIES	Current	Non-current	Total carrying amount
31.12.2020
Amounts due to banks	2 626	-	2 626
- measured at fair value through profit or loss	2 626	-	2 626
- measured at amortized cost	308	70	378
Hedging derivatives	2 412	3 692	6 104
Other derivative instruments	270 025	12 331	282 356
Amounts due to customers	-	1 216	1 216
- measured at fair value through profit or loss	270 025	11 115	281 140
Liabilities in respect of insurance activities	541	1 199	1 740
Loans and advances received	652	1 615	2 267
Debt securities in issue	13 167	18 931	32 098
Subordinated liabilities	-	2 716	2 716
Other financial liabilities	2 098	913	3 011
Provisions for financial liabilities and guarantees granted	538	91	629

Total financial liabilities	292 367	41 558	333 925

FINANCIAL LIABILITIES	Current	Non-current	Total carrying amount
31.12.2019
Amounts due to banks	2 135	-	2 135
- measured at fair value through profit or loss	317	-	317
- measured at amortized cost	1 818	-	1 818
Hedging derivatives	238	351	589
Other derivative instruments	1 272	1 652	2 924
Amounts due to customers	243 430	12 740	256 170
- measured at fair value through profit or loss	46	1 353	1 399
- measured at amortized cost	243 384	11 387	254 771
Liabilities in respect of insurance activities	525	1 252	1 777
Loans and advances received	512	2 267	2 779
Debt securities in issue	3 964	27 184	31 148
Subordinated liabilities	-	2 730	2 730
Other financial liabilities	2 543	674	3 217
Provisions for financial liabilities and guarantees granted	226	43	269

Total financial liabilities	254 845	48 893	303 738

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

59. Risk management within the Group

Risk management is one of the most important internal processes in both the Bank and other entities of the Group.

It is aimed at ensuring (in the changing environment) the profitability of business activities while ensuring an appropriate level of control and keeping the risk level within the risk tolerances and limits system adopted by the Bank and the Group, in a changing macroeconomic environment. The level of risk is an important part of the planning processes.

The Group identifies risks in its operations and analyses the impact of each type of risk on its business. All the risks are managed; some of them have a material effect on the profitability and capital needed to cover them. The following risks are considered material for the Group: credit risk, risk of foreign currency mortgage loans for households, currency risk, interest rate risk, liquidity risk (including financing risk), operating risk, business risk, risk of macroeconomic changes and model risk. The materiality of all the identified risks is assessed by the Group on a regular basis, at least annually.

A detailed description of the management policies for material risks is presented in the “Report on capital adequacy and other information subject to publication by the PKO Bank Polski S.A. Group”.

Risk management objective

The objective of risk management is to strive to maintain the level of risk within the accepted tolerances in order to:

• protect shareholder value;

• protect customer deposits;

• support the Group in conducting efficient operations.

The risk management objectives are achieved, in particular, by providing appropriate information on the risks, so that decisions are made in full awareness of the particular risks involved.

Main principles of risk management

The Group’s risk management is based, in particular, on the following principles:

• the risk management covers all the risks identified;

• the risk management process is appropriate from the perspective of the scale of operations and materiality, scale and complexity of a given risk, and adjusted on an on-going basis to take account of the new risks and their sources;

• risk management methods (especially models and their assumptions) and risk management measurement or assessment systems are tailored to the scale and complexity of individual risks, the current and planned operations of the Group and its operating environment, and are periodically verified and validated;

• the area of risk management remains organizationally independent of business activities;

• risk management is integrated into the planning and controlling systems;

• the level of risk is monitored and controlled on an on-going basis;

• the risk management process supports the implementation of the Bank’s strategy in compliance with the Risk Management Strategy, in particular with respect to the level of risk tolerance.

Risk management process

The process of risk management in the Group consists of the following stages:

• Risk identification:

Risk identification consists of recognizing the existing and potential sources of risk and estimating the significance of its potential impact on the Bank’s and the Group’s operations. As part of risk identification, the risks considered to be material in the Bank’s or the Group’s operations are identified.

• Risk measurement and assessment:

Risk measurement and assessment are aimed at determining the scale of threats connected with the risks arising. Risk measurement covers determining the risk assessment measures adequate to the type and significance of the risk, and data availability. Quantitative and qualitative risk measurement results are the basis for the risk assessment aimed at identifying the scale or scope of risk.

As part of risk measurement, the Bank’s Group carries out:

• specific stress tests which are conducted separately for individual risk types and are used to assess sensitivity of a given risk to unfavourable market conditions,

• comprehensive stress tests conducted jointly for the concentration risk and risks regarded as material, used to determine sensitivity of the capital adequacy measures and Bank’s results to the occurrence of a negative scenario of changes in the environment and the functioning of the Bank Group’s.

The stress-tests are conducted by the Bank’s Group based on assumptions which ensure a sound assessment of the risk, in particular taking into account the Recommendations of the Polish Financial Supervision Authority.

• Risk control:

Risk control involves the determination of risk control mechanisms adjusted to the scale and complexity of the Bank Group’s activities, especially in the form of strategic tolerance limits for the individual types of risk. Strategic risk tolerance limits are subject to regular monitoring, and if they are exceeded, the Group members take management actions.

• Risk forecasting and monitoring:

Risk forecasting involves foreseeing future risk levels, taking into account the assumed business development projections, and internal and external events. Risk level forecasts of the Bank and the Bank’s Group are assessed (so-called “reverse stress tests”) in order to verify their accuracy.

Risk monitoring involves observing deviations from the forecasts or the adopted benchmarks (e.g. limits, thresholds, plans, prior period measurements, recommendations and instructions issued by external supervisory and regulatory authority). Risk monitoring and forecasting frequency is adequate to the materiality and variability of specific risks.

• Risk reporting:

Risk reporting consists in informing about the results of the risk identification, measurement, assessment and forecasting, causes of changes in the risks, actions taken and recommended. The scope, frequency and form of the reporting are adjusted to the managerial level of the recipients. If potential liquidity problems arise, the Supervisory Board is immediately informed about significant changes in the risk level, and in particular, about threats and remedial actions taken, and of their impact on the Bank’s liquidity level.

• Management actions:

Management actions consist of determining the desired risk level favourable for building the structure of assets and liabilities. Management may result, in particular, in:

• acceptance of the risk – determining the acceptable risk level, taking into account business needs and developing management actions in the case the level is exceeded,

• reduction of the risk – mitigation of the impact of the risk factors or effects of its materialization (e.g. By reducing or diversifying the risk exposure, determining limits, utilizing collaterals),

• transfer of the risk – transferring responsibility for covering potential losses (e.g. by transferring the risk to another entity with the use of legal instruments, such as insurance contracts, security services agreements for a building, accepting guarantees),

• risk avoidance - resignation from the risk-generating activity or elimination of the probability of materialization of the risk factor, including in particular determination o zero tolerance to risk.

Organization of risk management within the group

The Bank supervises the functioning of individual entities in the PKO Bank Polski S.A. Group. As part of its supervisory role, the Bank monitors their risk management systems and supports their development. In addition, the Bank takes into account the level of risk in particular Group companies for purposes of risk monitoring and reporting system at Group level. Risk management in the Bank takes place in all of the organizational units of the Bank.

The organization of risk management in PKO Bank Polski S.A. is presented in the diagram below:

The Supervisory Board supervises and evaluates the risk management process, in particular, on the basis of regular reports on the risk, taking into account the adequacy and effectiveness of the risk management system and information about the implementation of the risk management strategy, also at the level of limits which limit the risk and conclusion from stress tests, and if necessary, orders the verification of the process.

The Supervisory Board is supported by the following committees: the Supervisory Board Nominations and Remuneration Committee, the Supervisory Board Risk Committee and the Supervisory Board Audit Committee.

In respect of risk management, the Management Board of PKO Bank Polski S.A. is responsible for strategic risk management, including supervising and monitoring actions taken by the Bank in respect of risk management. The Management Board makes major decisions affecting the risk profile of the Bank and adopts internal regulations concerning risk management. It ensures operation of the risk management system, monitors and assesses its functioning, and transfers the respective information to the Supervisory Board. In its risk management activities, the Management Board is supported by the following committees:

• the Risk Committee;

• the Asset and Liability Committee (ALCO);

• The Bank’s Credit Committee;

• the Operational Risk Committee.

The risk management process is carried out in three independent but complementary lines of defence:

THE FIRST LINE OF DEFENCE – is formed of organizational structures responsible for product management, selling products and servicing customers, and of other structures which perform operational tasks that generate risk, which function based on internal regulations. This function is performed by all of the Bank’s and the Group’s entities. The Bank’s entities implement appropriate risk controls, including in particular limits, designed by them and located at the second-line of defence. They also ensure that they are met by means of appropriate controls.

At the same time, the Bank Group’s companies are obliged to have comparable and consistent systems for risk assessment and control, taking into account the specificity of each entity and its market.

THE SECOND LINE OF DEFENCE – covers compliance units and involves the identification, measurement, evaluation and/or control, monitoring and reporting of significant types of risks, and of the threats and irregularities identified; the tasks are performed by dedicated organizational structures acting on the basis of the applicable internal regulations of the Bank; the objective of these structures is to ensure that the tasks performed as part of the first line of defence are properly governed in the internal regulations of the Bank and that they effectively limit the risk, support risk measurement, assessment and analysis and contribute to operational effectiveness. The function is performed, in particular by Risk Management, the Compliance Department and relevant committees. The second line of defence supports actions taken to eliminate unfavourable deviations from the financial plan, with respect to the amounts impacting the quantitative strategic risk tolerance limits specified in the financial plan. These tasks are performed in particular in the entities of the Bank responsible for controlling.

THE THIRD LINE OF DEFENCE – consists of the internal audit function which performs independent audits of individual components of the Bank’s management system, including the risk management system, and the internal control system; the internal audit operates independently of the first and second lines of defence and may support their actions by way of consultation, but without the possibility to impact the decisions taken. The function is performed in accordance with the Bank’s internal regulations concerning the operation of the internal control system.

The independence of the lines consists of ensuring organizational separation at the following levels:

• the function of the second line of defence with regard to creating system solutions is independent of the function of the first line of defence;

• the function of the third line of defence is independent of the functions of the first and second lines of defence.

Risk management within the Group

The Bank, as the parent entity in the Group, defines the key risk management rules applied in the Bank’s Group, supervises implementation of the risk management principles in entities in the Group, resulting from the risk management strategy, taking into account the adequacy of such rules to the operations of entities in the Bank’s Group, and also exercises control of the risk in the Bank’s Group in respect of material risk types. Entities in the Bank’s Group create and update internal regulations concerning the management of specific risks, upon consultation with the Bank and taking into account recommendations issued by the Bank and the risk management strategy.

The risk management function in the Group entities is carried out, in particular, by:

• participation of units in the Bank’s Risk Management Area or of the relevant committees of the Bank in consulting large transactions in the Group entities;

• assessments and reviews of the internal regulations concerning risk management in individual Group entities by the Bank’s units in the Risk Management Area and Compliance Department;

• reporting of the Group risks to the relevant committees of the Bank or to the Management Board;

• monitoring the strategic limits of risk tolerance for the Group.

60. Specific activities in the area of risk management undertaken by the Group in 2020

• Impact of COVID -19

The outbreak of the COVID-19 pandemic has a significant impact on the economic situation of many enterprises and individuals, leading to a lack of financial liquidity and difficulties with the timely settlement of their financial liabilities. The Group immediately took several measures aimed at supporting the Bank’s customers in their struggle against the economic implications of the COVID-19 pandemic, and therefore to minimize the deterioration in the quality of the loan portfolio.

In 2020, the Group offered special solutions which supported its customers in maintaining financial liquidity, e.g. by periodically reducing their financial burden and facilitating the extension and conclusion of agreements. The scope of assistance varied and was adapted to the pandemic situation, restrictions in conducting business activities and took into account regulatory guidelines. The activities of PKO Bank Polski S.A. and its subsidiaries based in Poland are consistent with the guidelines of the European Banking Authority (EBA).

• The Bank, PKO Bank Hipoteczny S.A., PKO Leasing S.A. and Prime Car Management S.A. allowed borrowers and lessees to suspend or extend, on request, payments of instalments (either principal, principal-interest or interest – depending on the form of financing) for a maximum period of 6 months.

• As part of financing firms, enterprises and corporate entities, the Bank introduced simplified rules for extending selected revolving products, internal customer limits and restructuring agreements.

• KREDOBANK S.A. applied loan relief programmes in the form of suspending total instalments or principal instalments, on the customer’s request, for a maximum of up to 3 months. Moreover, KREDOBANK S.A. implemented quick decision paths for renewal of loan facilities;

• The Group introduced the possibility of temporarily suspending the repayment of credit card liabilities of retail customers and Business-type credit cards of firms and enterprises (the Bank). Companies in the Prime Car Management S.A. Group allowed for earlier returns of vehicles on preferential terms, under lease and subscription agreements. PKO Faktoring S.A. offered simplified rules in respect of factoring payments.

At the end of 2020, in connection with the second wave of pandemic and related restrictions, the Bank started preparations to resume assistance tools, in particular in relation to the support of borrowers who are most affected by COVID-19.

In 2020, the Group’s customers could apply statutory moratoria, including in particular:

• customers of the Bank and PKO Bank Hipoteczny S.A. who lost their jobs or another main source of income after 13 March 2020, could suspend the performance of their mortgage loan and consumer loan agreements for a maximum of 3 months. During the period in which an agreement is suspended, banks did not assess any interest or other fees related with the performance of the agreement, except insurance contributions;

• the Bank’s customers who had preferential student loans which was in the repayment period, could suspend the repayment of the loan with interest for a maximum period of 6 months. It was not related to any additional fees, and the period of the loan repayment was not extended. Interest due in the period of suspended repayment were entirely covered from the Student Credit Fund.

The Group’s customers could also use aid tools introduced as part of anti-crisis shields, offered by Bank Gospodarstwa Krajowego (BGK) and Polski Fundusz Rozwoju S.A. (PFR):

• The Bank’s customers (micro, small- and medium-sized enterprises) could use a guarantee to secure repayment of loans or an advance under the portfolio de minimis guarantee line from BGK. From March 2020, the guarantee line was offered in a higher amount and on more favorable terms. Moreover, in December 2020, the Bank concluded an annex to the agreement with BGK which will allow its customers, in the first half of 2021, to also use this security for currency loans. The total value of the guarantee in 2020 amounted to PLN 4.2 billion.

• The Bank’s customers could use BGK’s Liquidity Guarantees Fund created to help medium-sized and large enterprises affected by the pandemic. The Bank initiated the development of more favorable terms for guarantees (a possibility to cover currency loans with the guarantee was introduced and the minimum amount of a single guarantee was cancelled). The Bank entered into an arrangement on the terms of cooperation in respect of providing loan repayment guarantees made available under syndicated financing. In December 2020, it signed an annex to the agreement, to extend the possibility of using the guarantee instruments by 30 June 2021. The total value of guarantees granted to the Bank’s customers in 2020 amounted to PLN 2.1 billion (out of PLN 18 billion available for granting).

• By the end of July 2020, the customers could apply in the Bank’s transaction services for financial grants under the PFR 1.0. Financial Shield dedicated to micro-, small- and medium-sized enterprises. Funds totaling PLN 10.5 billion were received by 67 thousand enterprises who employed 0.5 million people. The Bank had the largest share in the distribution of this form of aid.

• From June 2020, entrepreneurs could file directly with PFR applications for liquidity loans with preferential interest rates and preferential loans under the PFR Financial Shield dedicated to large firms. The total value of both financial instruments amounted to PLN 17.5 billion. The Bank is the only bank which handles such loans as part of the shield. The Bank’s role is, among other things, to maintain accounts designated for the payment of funds allocated under the programme, registering and monitoring the loans and collateral, as well as the operational handling thereof.

• Entrepreneurs could file applications with the Bank for subsidies to the interest charged on working capital loans. The support is designated for enterprises which lost their financial liquidity or are under the threat of losing liquidity due to the economic situation resulting from the COVID-19 pandemic. A single entrepreneur can use the subsidy only for a single working capital loan – a new or an existing one. BGK covers part of interest assessed on the loan for a maximum of 12 months. Entrepreneurs could apply for the support by the end of 2020 or until the exhaustion of the pool of PLN 565 million for all banks cooperating with BGK. In February 2021, the Bank signed an annex to the agreement with BGK to extend the subsidy programme until 30 June 2021;

• PKO Faktoring S.A., as one of the first factors in Poland, concluded a portfolio guarantee line agreement with BGK. According to the agreement, from 2020 the Company is offering its customers the possibility to secure up to 80% of the factoring limit granted under non-recourse or reverse factoring arrangements. The maximum amount of the guarantee which can be granted by PKO Faktoring S.A. under the guarantee line amounts to PLN 200 million. By 31 December 2020, the total value of guarantees granted to the Company’s customers amounted to PLN 135 million. The possibility of concluding agreements with BGK guarantee is offered until 30 June 2021;

• From October 2020, the existing PKO Leasing S.A. and the Bank’s customers (small- and medium-sized enterprises) can use liquidity sell-and-lease-back arrangements with COSME-Covid guarantee granted by the European Investment Fund. The offer is addressed to owners of cars or delivery vans up to 3.5 tonnes (worth up to PLN 150 thousand) who have had an active lease agreement or a company account with the Bank for a minimum of 6 months. Through the lease transactions customers can recover funds spent on the purchase of the vehicle, and at the same time use it. The lease provider finances up to 80% of the value of the vehicle according to the valuation. The offer is valid until 30 June 2021 or until the total amount of the guarantee (PLN 500 million) is exhausted;

• In November 2020, PKO Leasing S.A. Signed an understanding on cooperation with ARP Leasing sp. z o.o. owned by Agencja Rozwoju Przemysłu S.A. The understanding concerns the rules for ARP Leasing sp. z o.o. refinancing lease agreements for enterprises in the transport and coach sectors affected by the COVID-19 pandemic’s consequences. Small and medium-sized enterprises can use up 12 month of a grace period in repayment of their liabilities under lease agreements. The understanding has been concluded for an unspecified period, and the first applications were processed in November 2020;

• The Bank’s customers can submit applications for subsidies from the PFR 2.0 Financial Shield via iPKO and iPKO biznes on-line services. The PFR 2.0 Financial Shield is addressed to micro-, small- and medium-sized enterprises from 45 sectors which had to limit their business activities in connection with the COVID-19 pandemic situation. The financial support will amount to up to PLN 13 billion.

The Bank’s Group monitors identified threats in respect of operational risk, which result from the state of COVID-19 pandemic and take measures to ensure the safety of the Bank’s customers and employees, as well as the continuity and functioning of its business processes.

• CREDITS AND LOANS SECURELY INDEXED OR DENOMINATED FOR FOREIGN CURRENCY

In December 2020, the Chairman of the Polish Financial Supervision Authority presented a proposal aimed at a systemic solution to the problem of housing loans in Swiss francs, which would involve an amicable conversion of loans in Swiss francs into loans in PLN (details in the note "Legal claims").

The Capital Group has launched a pilot process of concluding settlements with clients who are managed by the Restructuring and Debt Collection Center and a pilot for clients who do not have arrears in repayment but are in a court dispute with the Capital Group. At the same time, work is underway at the Capital Group to prepare the mass-scale settlement process.

• A NEW DEFINITION OF NON-PERFORMANCE (HEREBY "NDD")

On January 1, 2021, the Capital Group implemented the EBA guidelines (EBA / GL / 2016/07) on the application of the definition of default specified in art. 178 of Regulation (EU) No 575/2013.

The most important changes include:

• introduction of consistent identification of default at the level of the debtor in the Group: for this purpose, the Group has implemented daily exchange of analytical data between PKO Bank Polski S.A., PKO Bank Hipoteczny S.A., PKO Leasing S.A., PKO Faktoring S.A. and Prime Car Management S.A .;

• change in the rules for calculating the overdue credit obligation: default by the debtor due to overdue payment takes place after exceeding the materiality threshold of the amounts overdue in respect of principal, interest or fees in the Capital Group for a period of 90 days (so far, the overdue date was based on the date of the oldest unpaid principal and interest installment separately for each Group company);

• determining the absolute materiality threshold for all exposures at PLN 400 and introducing a relative materiality threshold of 1%, expressed as the ratio of overdue credit obligations to the total amount of all balance sheet exposures in the Group;

• introducing default contagion of private exposures belonging to the owners of economic entities corresponding with their entire assets, which entities have an identified default

The impact of the implementation of the EBA guidelines on the costs of credit risk at the consolidated level of the Group is approximately PLN 76 million (the amount will be included in the results for 2021) and results in a reduction in capital ratios by no more than 10 bps.

61. Credit risk management

• Definition

Credit risk is defined as the risk of losses being incurred as a result of a customer’s default on its liabilities towards the Group or the risk of a decrease in the economic value of amounts due to the Group as a result of a deterioration in the customer’s ability to repay its liabilities.

• Risk management objective

The objective of credit risk management is to minimize losses on the loan portfolio as well as to minimize the risk of occurrence of loans at risk of impairment, while maintaining the expected level of profitability and value of the loan portfolio.

The Bank and the Group subsidiaries are guided mainly by the following credit risk management principles:

• a loan transaction is subject to comprehensive credit risk assessment, which is reflected in an internal rating or credit scoring;

• credit risk relating to loan transactions is measured at the stage of examining a loan application and on a regular basis, as part of the monitoring process, taking into consideration changes in the external conditions and in the financial standing of the borrowers;

• credit risk assessment of exposures is separated from the sales function by ensuring an appropriate organizational structure, independence in developing and validating tools supporting an assessment of credit risk and independence of decisions approving deviations from the suggestions resulting from the use of these tools;

• the terms and conditions of a loan transactions offered to a customer depend on the assessment of credit risk level generated by the transaction;

• credit decisions may be taken solely by the persons authorized to do so;

• credit risk is diversified, in particular, in terms of geographical areas, industries, products and customers;

• an expected credit risk level is mitigated by collateral received by the Bank, margins from customers and impairment allowances (provisions) for expected credit losses.

The above-mentioned principles are implemented by the Group through the use of advanced credit risk management methods, both at the level of individual credit exposures and of the entire loan portfolio of the Group. These methods are verified and developed to ensure compliance with the requirements of the internal rating-based method (IRB), i.e. an advanced credit risk measurement method which may be used to calculate the capital requirements for credit risk, subject to approval by the Polish Financial Supervision Authority.

The Group entities which have significant credit risk levels (the KREDOBANK S.A. Group, the PKO Leasing S.A. Group, PKO Bank Hipoteczny S.A. and Finansowa Kompania “Prywatne Inwestycje” sp. z o.o.) manage their credit risk individually, but the methods used for credit risk assessment and measurement are adjusted to the methods used by PKO Bank Polski S.A., taking into account the specific nature of the activities of these companies.

Any changes to the solutions used by the Group’s subsidiaries must be agreed each time with the Bank’s units responsible for risk management.

The PKO Leasing S.A. Group, the KREDOBANK S.A. Group, and Finansowa Kompania “Prywatne Inwestycje” sp. z o.o. as well as PKO Bank Hipoteczny S.A. measure their credit risk regularly and the results of such measurements are submitted to the Bank.

Within the structures of PKO Bank Hipoteczny S.A., the KREDOBANK S.A. Group and the PKO Leasing S.A. Group, there are organizational units in the risk management areas which are responsible, in particular, for:

• developing methodologies for credit risk assessment and recognition of provisions and allowances;

• control over and monitoring of credit risk in the lending process;

• quality and efficiency of the restructuring and debt collection processes;

In these companies, the credit decision limits depend primarily on: the amount of exposure to a given customer, the amount of an individual credit transaction and the duration of the lending period.

The process of credit decision-making in PKO Bank Hipoteczny S.A., the KREDOBANK S.A. Group and the PKO Leasing S.A. Group is supported by credit committees which are involved in the process for credit transactions which generate an increased level of credit risk.

• Measurement and assessment of credit risk: Credit risk measurement and assessment methods

In order to assess the level of credit risk and profitability of its loan portfolios, the Group uses different credit risk measurement and valuation methods, including:

• probability of default (PD);

• loss given default (LGD);

• credit conversion factor (CCF);

• expected credit loss (ECL);

• credit value at risk (CVaR);

• the share and structure of impaired credit exposures;

• coverage ratio of impaired loans;

• cost of credit risk;

• stress tests.

The Group systematically expands the scope of credit risk measures used, taking into account the requirements of the IRB method, and extends the use of risk measures to cover the entire loan portfolio of the Group.

The portfolio credit risk measurement methods allow, among other things, to reflect the credit risk in the price of products, determine the best conditions of financing availability and determine the level of impairment allowances.

The Group performs analyses and stress tests relating to the impact of potential changes in the macroeconomic environment on the quality of the Group’s loan portfolio, and the results of such analyses and stress tests are presented in reports to the Bank’s governing bodies. Such information enables the identification and implementation of the measures mitigating the negative effects of the impact of unfavourable market conditions on the Group’s profit or loss.

The credit risk assessment process at the Bank’s Group takes into account the requirements of the Polish Financial Supervision Authority as laid down in the PFSA Recommendations.

The description of the anticipated credit losses is disclosed in the Note “Net expected credit losses”.

• Measurement and assessment of credit risk: Rating and scoring methods

An assessment of the risk of individual loan transactions is performed by the Group using the scoring and rating methods which are supported by dedicated IT applications. The risk assessment method is defined in the Group’s internal regulations whose main aim is to ensure a uniform and objective evaluation of credit risk during the lending process.

The Group evaluates the credit risk of retail customers in two dimensions: qualitative and quantitative assessment of their borrowing capacity. A quantitative borrowing capacity assessment consists of examining a customer’s financial position, and the qualitative assessment involves scoring and assessing a customer’s credit history obtained from the Group’s internal records and external databases.

In the case of corporate customers in the small- and medium-sized enterprises segment who meet certain criteria, the Group assesses credit risk using the scoring method. Such assessment refers to low-value, non-complex loan transactions and it is performed in two dimensions: a customer’s borrowing capacity and his creditworthiness. An assessment of the borrowing capacity consists of examining a customer’s economic and financial position, and the assessment of creditworthiness involves scoring and evaluating the customer’s credit history obtained from the Group’s internal records and external databases.

In other cases, the rating method is used for institutional customers.

An assessment of the credit risk associated with financing institutional customers is performed by the Bank in two dimensions: the customer and the transaction. The measures involved include an evaluation of the customer’s creditworthiness, i.e. the rating, and an assessment of the transaction risk, i.e. the customer’s ability to repay the amounts due in the amounts and on the dates specified.

Rating models for institutional customers are developed using the Group’s internal data, thus ensuring that they are tailored to the risk profiles of the Group’s customers. Models are based on a statistical dependence analysis between the default and a customer’s risk scoring. The scoring includes an evaluation of financial ratios, qualitative factors and behavioral factors. A customer’s risk assessment depends on the size of the assessed enterprise. In addition, the Group applies a model for the assessment of credited entrepreneurs in the formula of specialized lending, which allows an adequate credit risk assessment of large projects involving real estate financing (e.g. office space, retail space, industrial space) and infrastructure projects (e.g. telecommunication, industrial or public utility infrastructure).

Rating models are implemented within the IT tool which supports the assessment of the Group’s credit risk associated with the financing of institutional customers.

In order to examine the correct operation of the methods applied by the Group, credit risk assessment methodologies relating to individual loan exposures are subject to periodical reviews.

The credit risk assessment process in the Group takes into account the requirements of the Polish Financial Supervision Authority as defined in Recommendation S concerning good practices for the management of mortgage-secured loan exposures and Recommendation T concerning good practices for the management of retail credit exposures.

Information on rating and scoring assessments is widely used in the Group to manage credit risk, in the system of credit decision authorizations, to determine the amounts triggering the credit risk assessment services and in the credit risk measurement and reporting system.

• Measurement and assessment of credit risk: Credit risk forecasting and monitoring

Credit risk forecasting and monitoring involves preparing risk level forecasts and monitoring deviations from the forecasts or the adopted benchmarks (e.g. limits, thresholds, plans, prior period measurements, recommendations and instructions issued by external supervisory and regulatory authorities), and performing (specific and comprehensive) stress tests. Risk level forecasts are subject to backtesting.

Credit risk is monitored at the level of individual credit transactions and at portfolio level.

Credit risk monitoring at the individual loan transaction level is governed, in particular, by the Group’s internal regulations concerning:

• assessment of the credit risk related to customer financing;

• methods of assessing customers;

• identification of groups of related entities;

• evaluation of collateral and inspection of investments;

• recognition of allowances for expected credit losses;

• Early Warning System;

• operating procedures.

In order to accelerate the response to the warning signals noted reflecting an increased credit risk level, the Group uses and develops an IT application, the Early Warning System (EWS).

Credit risk monitoring at the portfolio level consists of:

• supervising the level of the portfolio credit risk on the basis of the adopted tools used for measuring credit risk, taking into consideration the identified sources of credit risk and analysing the effects and actions taken as part of system management;

• recommending preventive measures in the event of identifying an increased level of credit risk.

• Credit risk reporting

Credit risk reporting includes periodical reporting of the loan portfolio risk exposure.

The Group prepares monthly and quarterly credit risk reports. Credit risk reporting includes periodical reporting of the loan portfolio risk exposure. In addition to information for the Bank, the reports also include information on the level of credit risk in the Group entities where a material level of credit risk was identified (e.g. the KREDOBANK S.A. Group, the PKO Leasing S.A. Group, PKO Bank Hipoteczny S.A.).

• Management actions relating to credit risk

The purpose of management actions is to shape and optimize the credit risk management system and credit risk level at the Group.

The credit risk management actions include particularly:

• issuing internal regulations governing the credit risk management system at the Group;

• issuing recommendations, guidelines for conduct, explanations and interpretation of the Group’s internal regulations;

• taking decisions regarding the acceptable level of credit risk, including in particular lending decisions;

• developing and improving credit risk control tools and mechanisms which make it possible to maintain the credit risk level within the limits acceptable to the Group;

• developing and monitoring the operation of credit risk management controls;

• developing and improving credit risk assessment methods and models;

• developing and improving IT tools used in credit risk management;

• planning actions and issuing recommendations.

The main credit risk management tools used by the Group include:

• minimum transaction requirements (risk parameters) determined for a given type of transaction (e.g. minimum LTV value, maximum loan amount, required collateral);

• the principles of defining credit availability, including cut-offs – the minimum number of points awarded in the process of creditworthiness assessment with the use of a scoring system (for retail customers and SMEs) or the customer’s rating class (for corporate clients), which a customer must obtain to receive a loan;

• Concentration limits – limits under the CRR and Banking Law or external limits that define the appetite for concentration risk;

• industry-related limits – limits which reduce the risk level related to financing institutional customers conducting business activities in industries characterized by high levels of credit risk;

• the limits defining the appetite for credit risk resulting from, among other things, Recommendations S and T;

• credit limits defining the Group’s maximum exposure to a customer or a country in respect of wholesale market transactions, settlement limits and limits for exposure duration;

• authorization limits – limits defining the maximum level of credit decision-making powers with regard to the Group’s customers; the limits depend primarily on the amount of the Bank’s exposure to a given customer (or a group of related customers) and the lending period; authorization limits depend on the level (in the Bank’s organizational structure) at which credit decisions are made;

• minimum credit margins – credit risk margins relating to a given credit transaction concluded by the Group with a given corporate customer, where the interest rate offered to the customer should not be lower than the reference rate plus an appropriate credit risk margin.

• Use of credit risk mitigation techniques – collateral

The collateral management policy plays a significant role in establishing minimum transaction terms. The Bank’s and the Group companies’ collateral management policy is intended to properly protect them against credit risk to which the Group is exposed, including above all by establishing that is collateral as liquid as possible. Collateral may be considered liquid if it can be sold without a significant decrease in its price and at a time which does not expose the Bank to a change in the collateral value due to price fluctuations typical of a given asset.

The Group strives to diversify collateral in terms of its forms and assets used as collateral.

The Group evaluates collateral from the perspective of the actual possibility of using it to satisfy its claims.

In addition, when assessing collateral, the Bank takes into account the following factors:

• the economic, financial and economic, or social and financial position of entities which provide personal guarantees;

• the condition and market value of the assets accepted as collateral and their vulnerability to depreciation in the period of maintaining the collateral (the impact of the technological wear and tear of a collateralized asset on its value);

• potential economic benefits to the Group resulting from a specific method of securing receivables, including, in particular, the possibility of reducing allowances for expected credit losses;

• the method of establishing collateral, including the typical duration and complexity of formalities, as well as the necessary costs (the costs of maintaining collateral and the enforcement against the collateral), using the Group’s internal regulations concerning the assessment of collateral;

• the complexity, time-consuming nature and economic and legal conditions for the effective realization of collateral, in the context of enforcement restrictions and the applicable principles for the distribution of the sums obtained from individual enforcement or in the course of bankruptcy proceedings, the ranking of claims;

• The type of collateral depends on the level of risk of a given customer or transaction.

When granting loans intended to finance housing and commercial funding properties, a mortgage is an obligatory type of collateral.

Until effective protection is established (depending on the type and amount of a loan), the Group may accept temporary collateral in a different form.

With regard to consumer loans, usually personal guarantees (a civil law surety/guarantee, a bill of exchange) are used or collateral is established on the customer’s bank account, car or securities.

The collateral for loans intended for the financing of small- and medium-sized enterprises as well as corporate customers is established, among other things: on receivables from business operations, bank accounts, movables, real estate or securities. The collateral management policy is set out in the internal regulations of the Group’s subsidiaries.

When concluding lease agreements, the PKO Leasing S.A. Group, as the owner of the leased assets, treats the leased assets as collateral.

62. Credit risk – financial information

• Impact of Covid 19 on the quality of loan portfolio

Exposures covered by statutory non-statutory moratoria are presented in the tables below:

a) Carrying amount, gross active and expired exposures

Loans and advances covered by statutory and non-statutory moratoria by residual period of the moratoria	31.12.2020
	Number of debtors	Carrying amount, gross
			Of which: statutory moratoria	Of which: expired	Residual period of moratoria
			Of which: statutory moratoria	Of which: expired	<= 3 months	> 3 months <= 6 months	> 6 months <= 9 months	> 9 months <= 12 months	> 1 year
Loans and advances in respect of which moratoria were offered	209 024	33 360
Loans and advances covered by moratoria in line with the EBA guidelines	206 220	32 745	38	29 723	2 897	62	4	14	45
retail and private banking		19 648	38	17 669	1 969	3	-	7	-
housing		15 339	26	13 805	1 534	-	-	-	-
finance lease receivables		3	-	3	-	-	-	-	-
consumer		4 306	12	3 861	435	3	-	7	-
SME		6 692	-	6 388	208	53	2	6	35
corporate		1 658	-	1 607	29	4	-	3	15
housing		1 546	-	1 470	76	-	-	-	-
finance lease receivables		3 488	-	3 311	103	49	2	3	20
corporate entities		6 405	-	5 666	720	6	2	1	10
corporate		3 474	-	2 914	552	4	-	1	3
finance lease receivables		1 529	-	1 351	167	2	2	-	7
housing		1 402	-	1 401	1	-	-	-	-

b) gross carrying amount of active exposures

Loans and advances covered by moratoria in line with the EBA guidelines (statutory and non-statutory)	31.12.2020
	Carrying amount, gross
		Performing			Non-performing
			including: exposures covered by restructuring	of which: Stage 2		including: exposures covered by restructuring	of which: there is little probability that the liability will be repaid, but the liability is not overdue or is overdue < = 90 days
Loans and advances covered by moratoria in line with the EBA guidelines	3 022	2 758	26	1 504	264	2	248
retail and private banking	1 979	1 918	26	1 217	62	2	50
housing	1 534	1 504	23	1 048	30	2	28
consumer	445	414	3	169	31	-	22
SME	303	224	-	79	80	-	78
corporate	50	46	-	29	4	-	3
housing	76	76	-	10	-	-	-
finance lease receivables	177	101	-	40	76	-	75
corporate entities	740	617	-	208	123	-	120
corporate	561	558	-	201	3	-	-
finance lease receivables	178	58	-	7	120	-	120
housing	1	1	-	-	-	-	-

c) accumulated impairment of active exposures

Loans and advances covered by moratoria in line with the EBA guidelines (statutory and non-statutory)	Accumulated impairment, accumulated loss of fair value due to credit risk
		Performing			Non-performing
			including: exposures covered by restructuring	of which: Stage 2		including: exposures covered by restructuring	of which: there is little probability that the liability will be repaid, but the liability is not overdue or is overdue < = 90 days
Loans and advances covered by moratoria in line with the EBA guidelines	(144)	(75)	(3)	(68)	(69)	(1)	(59)
retail and private banking	(87)	(65)	(3)	(59)	(22)	(1)	(16)
housing	(45)	(37)	(2)	(35)	(8)	(1)	(8)
consumer	(42)	(28)	(1)	(25)	(14)	(0)	(8)
SME	(23)	(4)	-	(3)	(19)	-	(19)
corporate	(2)	(2)	-	(2)	(0)	-	(0)
housing	(1)	(1)	-	-	-	-	-
finance lease receivables	(20)	(1)	-	(1)	(19)	-	(19)
corporate entities	(34)	(6)	-	(6)	(28)	-	(24)
corporate	(9)	(6)	-	(6)	(3)	-	-
finance lease receivables	(25)	-	-	-	(25)	-	(24)

d) gross carrying amount and maximum recognizable amount of guarantees for newly granted loans covered by guarantees

Newly granted loans and advances under new public guarantee programmes introduced in relation to the COVID-19 crisis	31.12.2020
	Carrying amount, gross		Maximum recognizable amount of guarantees
		Including: exposures covered by restructuring	Public guarantee received in relation to the COVID-19 crisis
Newly granted loans and advances covered by public guarantee programmes	3 699	22	133
SME	2 761	11	133
corporate	2 478	11	-
factoring receivable	283	-	133
corporate entities	938	11	-
corporate	938	11	-

The Group assessed the impact of macroeconomic variables in the aftermath of the COVID-19 on the deterioration in the quality of its loan portfolio and other financial assets as PLN 1 233 million, of which PLN 1 175 million was related to the impact on the result of allowances for expected credit losses, and PLN 48 million in respect of the result on financial operations.

When the recognizing impact of the COVID–19 pandemic on the loan portfolio, the Group took into account three scenarios in respect of the main develops of the macroeconomic parameters. An assessment of the pandemic’s impact is performed based on the correlation between an expected loss and a change in the macroeconomic parameters under each of the three scenarios developed based on the Group’s internal forecasts. The range of the forecast ratios comprises, among other things, the GDP rate indicators and unemployment rate, because these parameters have the major impact on the level of recognized changes in the valuation of the Group’s assets. In order to adequately account for the high quarterly variability of macroeconomic ratios in the risk parameter models (in particular in the probability of default (PD) model), the average values of the said indices over a 2-year period were adopted. The additional write-down due to COVID-19 is the result of the significant deterioration in the macroeconomic forecasts in all three scenarios considered, and from the determination of a significant increase in the credit risk for exposures subject to moratoria with the highest PD values.

The COVID-19 write-off results from a significant deterioration of macroeconomic forecasts in all three adopted scenarios and would amount to PLN 570 million.

The applied approach to the impact of macroeconomic forecasts on risk parameters describes the situation in all sectors of the economy at the same time and may not take into account the problems of individual industries caused by the pandemic, therefore the Capital Group conducted additional analyzes of the loan portfolio. These analyzes carried out by risk experts mainly included an assessment of the impact of specific macroeconomic conditions not included in the portfolio approach and allowed for the identification of customers and industries particularly affected by the current economic situation. Exposures with the highest PD values, which were granted moratoria or belong to identified industries, were marked with the indication of a "significant increase in credit risk" and were subject to an increased write-off. Additional write-offs created in this way amounted to PLN 653 million.

• Exposure to credit risk

MAXIMUM EXPOSURE TO CREDIT RISK – FINANCIAL INSTRUMENTS NOT SUBJECT TO IMPAIRMENT REQUIREMENTS	31.12.2020	31.12.2019
Hedging derivatives	958	645
Other derivative instruments	5 501	2 795
Securities:	3 644	3 311
held for trading	1 178	1 112
not held for trading, measured at fair value through profit or loss	2 466	2 199
Loans and advances to customers not held for trading, measured at fair value through profit or loss	6 009	8 286
housing loans	7	15
corporate loans	114	148
consumer loans	5 888	8 123

Total	16 112	15 037

• Modifications

FINANCIAL ASSETS SUBJECT TO MODIFICATION	2020		2019
Financial assets subject to modification during the period:	Stage 2	Stage 3	Stage 2	Stage 3
valuation amount at amortized cost before modification	2 020	753	432	372
gain (loss) on modification	(3)	-	4	(14)
Financial assets subject to modification since initial recognition:	31.12.2020		31.12.2019
gross carrying amount of financial assets subject to modification for which the loss was calculated over the lifetime and which are classified as Stage 1 after modification	104		229

• Receivables written off during the period, subject to recovery procedures

The table below presents the outstanding amounts of financial assets to be repaid, which were written down during the reporting period and which are still subject to debt recovery activities.

RECEIVABLES WRITTEN OFF	2020		2019
RECEIVABLES WRITTEN OFF	Partly written off	Entirely written off	Partly written off	Entirely written off
Debt securities	-	3	-	-
Loans and advances to customers	29	217	44	815
housing loans	3	10	14	103
corporate loans	5	49	8	427
consumer loans	21	122	22	159
finance lease receivables	-	36	-	126
Other financial assets	1	1	-	1
Total	30	221	44	816

The Group adopted the following criteria for writing off receivables:

• the receivable has fully matured and is in particular the consequence of a loan, advance, contractual overdraft, guarantee or warranty of loan, advance or bond repayment;

• in accordance with IAS and IFRS the allowance for expected credit losses:

• covers 100% of the gross carrying amount of the asset; or

• exceeds 90% of the gross carrying amount of the asset and: actions have been or are still being taken in respect of the receivable which did not lead to its recovery, and the assessment of the probability of recovering the receivable (which, in particular, accounts for the decisions of the bailiff or the receiver) transferability of collateral, level of satisfaction, record in the land and mortgage register indicate that the entire receivable will not be recovered, or that the repayments of the receivable did not cover interest accrued on a current basis over the past 12 calendar months.

• Past due financial assets subject to impairment or impaired

PAST DUE FINANCIAL ASSETS SUBJECT TO IMPAIRMENT OR IMPAIRED	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
31.12.2020	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
Stage 1	2 200	-	-	2 200
Loans and advances to customers:	2 200	-	-	2 200
housing loans	187	-	-	187
corporate loans	279	-	-	279
consumer loans	172	-	-	172
factoring receivables	200	-	-	200
finance lease receivables	1 362	-	-	1 362
Stage 2	1 790	610	3	2 310
Loans and advances to customers:	1 790	610	3	2 310
housing loans	622	116	-	738
corporate loans	127	70	-	197
consumer loans	162	75	-	237
factoring receivables	-	93	-	-
finance lease receivables	879	256	3	1 138
Stage 3	231	280	1 288	1 795
Loans and advances to customers:	231	280	1 288	1 795
housing loans	43	38	196	277
corporate loans	102	96	798	996
consumer loans	31	33	189	253
factoring receivables	-	-	4	-
finance lease receivables	55	113	101	269

TOTAL	4 221	890	1 291	6 305

PAST DUE FINANCIAL ASSETS SUBJECT TO IMPAIRMENT OR IMPAIRED	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
31.12.2019	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
Stage 1	2 755	-	-	2 755
Loans and advances to customers:	2 755	-	-	2 755
housing loans	380	-	-	380
corporate loans	541	-	-	541
consumer loans	233	-	-	233
factoring receivables	132	-	-	132
finance lease receivables	1 469	-	-	1 469
Stage 2	1 822	803	22	2 647
Loans and advances to customers:	1 822	803	22	2 647
housing loans	718	174	-	892
corporate loans	138	72	-	210
consumer loans	150	74	-	224
factoring receivables	4	60	17	81
finance lease receivables	812	423	5	1 240
Stage 3	255	263	1 767	2 285
Loans and advances to customers:	255	263	1 767	2 285
housing loans	78	78	300	456
corporate loans	78	42	1 061	1 181
consumer loans	27	29	219	275
factoring receivables	33	-	-	33
finance lease receivables	39	114	187	340

TOTAL	4 832	1 066	1 789	7 687

The Group takes into account the minimum levels of matured amounts of PLN 500 for credit exposures to individuals and PLN 3 000 for other credit exposures to specify whether a loan is overdue.

Loans and advances to customers were secured by the following collateral established for the Group: mortgages, registered pledges, transfer of ownership, restrictions on a deposit account, insurance of the credit exposure, as well as guarantees and sureties.

• Quality of the portfolio covered by the rating model for loans and advances granted to customers

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
HOUSING LOANS	102746	13 702	1 953	118 401	85
0,00 - 0,02%	7 506	16	-	7 522	-
0,02 - 0,07%	34 690	89	1	34 780	1
0,07 - 0,11%	14 790	68	2	14 860	2
0,11 - 0,18%	17 305	113	1	17 419	1
0,18 - 0,45%	17 619	4 936	5	22 560	5
0,45 - 1,78%	5 746	4 558	7	10 311	7
1,78 - 99,99%	755	3 881	10	4 646	11
100%	-	-	1 927	1 927	57
no internal rating	4 334	41	1	4 375	1

CORPORATE LOANS, FACTORING RECEIVABLES , FINANCE LEASE RECEIVABLES	59 314	16 692	6 465	82 604	132
0.00 - 0.45%	8 366	98	-	8 464	-
0.45 - 0.90%	4 480	99	-	4 579	-
0.90 - 1.78%	11 713	317	-	12 030	-
1.78 - 3.55%	22 467	3 516	20	26 003	20
3.55 - 7.07%	8 081	7 948	-	16 029	-
7.07 - 14.07%	3 789	2 795	-	6 584	-
14.07 - 99.99%	386	1 846	-	2 232	-
100%	-	-	6 445	6 445	112
no internal rating	32	73	-	106	-

	20 240	2 855	1 447	24 542	53
0,00 - 0,45%	6 284	118	-	6 402	-
0,45 - 0,90%	4 678	155	-	4 833	-
0,90 - 1,78%	4 035	221	-	4 256	-
1,78 - 3,55%	2 857	297	-	3 154	-
3,55 - 7,07%	1 131	668	-	1 799	-
7,07 - 14,07%	418	500	-	918	-
14,07 - 99,99%	136	826	-	962	-
100%	-	-	1 447	1 447	53
no internal rating	701	70	-	771	-

Total	182 300	33 249	9 865	225 415	270

1 This item refers mainly to the Housing Association and Cooperatives portfolio.

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
HOUSING LOANS	112 528	5 806	2 021	120 355	89
0,00 - 0,02%	6 580	12	-	6 592	-
0,02 - 0,07%	32 268	79	1	32 348	1
0,07 - 0,11%	14 728	49	2	14 779	2
0,11 - 0,18%	18 044	107	-	18 151	-
0,18 - 0,45%	24 825	337	4	25 166	4
0,45 - 1,78%	10 964	982	8	11 954	8
1,78 - 99,99%	1 186	4 172	15	5 373	15
100%	-	-	2 080	2 080	59
no internal rating	3 903	68	-	3 971	-

CORPORATE LOANS, FACTORING RECEIVABLES , FINANCE LEASE RECEIVABLES	72 290	7 295	6 379	85 964	246
0,00 - 0,45%	8 117	13	7	8 137	4
0,45 - 0,90%	8 302	80	-	8 382	-
0,90 - 1,78%	12 745	1 311	12	14 068	12
1,78 - 3,55%	20 104	1 353	2	21 459	2
3,55 - 7,07%	16 680	1 256	-	17 936	-
7,07 - 14,07%	5 484	1 967	5	7 456	5
14,07 - 99,99%	480	1 099	6 242	7 821	112
100%	-	-	111	111	111
no internal rating	378	216	-	594	-

CONSUMER LOANS	19 918	1 722	1 236	22 759	48
0,00 - 0,45%	4 591	24	-	4 615	-
0,45 - 0,90%	5 492	73	-	5 565	-
0,90 - 1,78%	4 393	162	-	4 555	-
1,78 - 3,55%	2 798	256	-	3 054	-
3,55 - 7,07%	1 320	283	-	1 603	-
7,07 - 14,07%	529	307	-	836	-
14,07 - 99,99%	121	574	-	695	-
100%	-	-	1 236	1 236	48
no internal rating	557	43	-	600	-

Total	204 589	14 823	9 725	229 137	386

• 1 This item refers mainly to Housing Association and Cooperatives exposures.

• Quality of the portfolio covered by the rating model for off-balance sheet liabilities

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
OFF-BALANCE SHEET LIABILITIES
0,00 - 0,45%	16 586	119	-	16 703	-
0,45 - 0,90%	6 349	151	-	6 500	-
0,90 - 1,78%	10 745	564	-	11 308	-
1,78 - 3,55%	5 961	626	-	6 787	-
3,55 - 7,07%	6 088	3 967	-	10 055	-
7,07 - 14,07%	2 966	1 219	-	4 185	-
14,07 - 99,99%	113	150	-	263	-
100%	-	-	446	446	20
no internal rating	6 804	1 310	-	8 113	-

Total	55 609	8 305	446	64 360	20

1 This item refers mainly to the State Treasury exposures and credit lines for derivative transactions.

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
OFF-BALANCE SHEET LIABILITIES
0,00 - 0,45%	11 674	42	-	11 716	-
0,45 - 0,90%	14 966	43	-	15 009	-
0,90 - 1,78%	7 580	167	-	7 747	-
1,78 - 3,55%	6 789	435	-	7 224	-
3,55 - 7,07%	6 871	650	-	7 521	-
7,07 - 14,07%	3 924	579	-	4 503	-
14,07 - 99,99%	131	107	-	238	-
100%	-	-	487	420	67
no internal rating	11 140	1 293	-	12 433	-

Total	63 075	3 316	487	66 878	67

1 This item refers mainly to the State Treasury exposures and credit lines for derivative transactions.

• Quality of the portfolio covered by the rating model for amounts due from banks

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
AMOUNTS DUE FROM BANKS	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
EXTERNAL RATINGS	2 558	-	-	2 558	-
AAA	3	-	-	3	-
AA	549	-	-	549	-
A	1 720	-	-	1 720	-
BBB	41	-	-	41	-
BB	23	-	-	23	-
B	214	-	-	214	-
CCC	7	-	-	7	-

TOTAL	2 557	-	-	2 557	-

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
AMOUNTS DUE FROM BANKS	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
EXTERNAL RATINGS	4 077	-	-	4 077	-
AAA	462	-	-	462	-
AA	1 107	-	-	1 107	-
A	1 540	-	-	1 540	-
BBB	793	-	-	793	-
BB	1	-	-	1	-
B	174	-	-	174	-
				-
INTERNAL RATINGS	16	-	-	16	-
0,97%	6	-	-	6	-
3,13%	10	-	-	10	-

TOTAL	4 093	-	-	4 093	-

• Quality of the portfolio covered by the rating model for debt securities

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
DEBT SECURITIES	Stage 1	Stage 2	Stage 3	TOTAL	including POCI
EXTERNAL RATINGS	91 293	-	-	91 293	-
AAA	2 513	-	-	2 513	-
AA	5	-	-	5	-
A	86 887	-	-	86 887	-
BBB	1 642	-	-	1 642	-
BB	246	-	-	246	-
B	-	-	-	-	-
CCC	-	-	-	-	-

INTERNAL RATINGS	25 021	296	457	25 654	438
0.00 - 0.5%	8 645	-	-	8 645	-
0.45 - 0.90%	686	89	-	775	-
0.90 - 1.78%	15 220	2	-	15 222	-
1.78 - 3.55%	148	118	-	266	-
3 55 - 7.07%	186	3	-	189	-
7 07 - 14.07%	16	84	-	100	-
14.07 - 99.99%	-	-	-	-	-
100.00%	-	-	457	457	438
no internal rating	3 136	-	-	3 136	-

Total	119 330	296	457	120 083	438

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
DEBT SECURITIES	Stage 1	Stage 2	Stage 3	Total	including POCI
EXTERNAL RATINGS	63 548	-	-	63 548	-
AAA	1 064	-	-	1 064	-
A	60 195	-	-	60 195	-
BBB	2 207	-	-	2 207	-
BB	82	-	-	82	-

INTERNAL RATINGS	9 878	79	467	9 957	463
0.00 - 0.45%	8 133	-	-	8 133	-
0.45 - 0.90%	764	77	-	841	-
0.90 - 1.78%	162	2	-	164	-
1.78 - 3.55%	542	-	-	542	-
3 55 - 7.07%	31	-	-	31	-
7 07 - 14.07%	246	-	-	246	-
14.07 - 99.99%	-	-	463	-	463
no internal rating	3 314	-	4	3 318	-

Total	76 740	79	467	77 286	463

63. Managing credit concentration risk in the Group

The Group defines credit concentration risk as the risk arising from a considerable exposure to groups of related customers whose repayment capacity depends on a common risk factor. The risk Group analyses the concentration risk, among other things, towards:

• the largest entities (customers);

• the largest groups of related customers;

• industry sectors;

• geographical regions;

• currencies;

• exposures secured with a mortgage.

• Risk management objective

The objective of concentration risk management is to ensure a safe structure of the loan portfolio by mitigating threats arising from excessive concentrations relating to exposures characterized by the potential to generate significant losses for the Group.

• Measurement and assessment of concentration risk

The Group measures and assesses concentration risk by examining the actual aggregate exposure to a customer or to a group of related customers and the actual aggregate exposure to individual groups of loan portfolios.

The Group’s actual exposure is defined in the CRR, which means all assets or off-balance sheet items, including exposures in the banking and trading book and indirect exposures arising from the security applied.

Concentration risk is identified by recognizing the factors due to which the risk may arise or the level of the Group’s exposure may change, including potential risk factors resulting, for example, from the planned activities of the Group. In the process of identifying concentration risk, the Group:

• identifies and updates the structure of the group of related customers;

• aggregates the exposures towards a customer or a group of related customers;

• applies exemptions from regulatory limits for large exposures, in accordance with the CRR. The Group’s tolerance to concentration risk is determined by:

• external regulatory limits arising from Art. 395 of the CRR and from Article 79a of the Banking Law;

• internal limits of the Group:

• strategic limits of concentration risk tolerance;

• limits that define the appetite for concentration risk.

The Group uses the following to measure concentration risk:

• the ratio of the Group’s exposure to concentration risk with respect to individual customers or groups of related customers to the Group’s eligible capital;

• Gini coefficient;

• graphs of portfolio concentration (Lorenz curve).

To measure concentration risk and evaluate the effect of internal and external factors on the concentration risk, the Bank performs stress tests with respect to concentration risk for large exposures.

• Monitoring and forecasting concentration risk

The Group monitors concentration risk:

• on an individual level, by verifying the exposure concentration ratio for a customer or a group of related customers, each time before applying for a decision on granting financing or increasing the amount of the exposure, and before taking other actions resulting in increasing the Bank’s exposure on other accounts;

• on a systemic level, by:

• daily control over compliance with the external concentration limit and identifying large exposures;

• monthly control over the limit arising from Art. 79a of the Banking Law;

• monthly or quarterly control over compliance with the Group’s internal limits with respect to concentration risk;

• monitoring early warning ratios with respect to concentration;

The Group forecasts changes in the level of concentration risk as part of its analyses and reviews of internal limits and the concentration risk management policy, and in the process of stress testing concentration risk.

The Group performs stress tests to examine, for example, the effect of macroeconomic factors on individual concentrations, the impact of decisions of other financial market participants, decisions on customer mergers, dependency on other risks, for example, currency risk, which may contribute to the materialization of concentration risk, and the effect of other factors from the internal and external environment on the concentration risk.

Concentration risk is tested as part of comprehensive stress tests which enable evaluating the forecast effect of correlated credit, interest rate, currency, operating and liquidity risks and concentration risk on the expected credit losses of the Group.

• Concentration risk reporting

Reports on currency risk are prepared on a daily, monthly and quarterly basis.

Concentration risk reporting comprises periodic (monthly or quarterly) reporting to the Bank’s relevant bodies on the scale of exposure to concentration risk, which may lead to a significant change in the Bank’s risk profile, including in particular:

• utilization of limits defining risk appetite and exceeding those limits;

• early warning ratios;

• stress-test results;

• on portfolio concentration risk and concentration of the Group’s largest exposures and compliance with concentration standards arising from the Banking Law.

• Management actions relating to concentration risk

The purpose of management actions is to shape and optimize the concentration risk management process and concentration risk level at the Group (preventing excessive concentrations).

Management actions comprise in particular:

• publishing the Bank’s internal regulations on the process of concentration risk management, defining the tolerance level for concentration risk, determining limits and threshold amounts;

• issuing recommendations, guidelines for conduct, explanations and interpretations of internal regulations;

• taking decisions concerning an acceptable level of concentration risk, including in particular decisions determining the threshold values of limits reflecting concentration risk appetite;

• developing and improving concentration risk control tools which make it possible to maintain the concentration risk level within the limits acceptable to the Bank;

• developing and improving concentration risk assessment methods taking into account the changeability of the macroeconomic situation, including crises on foreign and domestic markets and the changeability of the regulatory environment;

• developing and improving IT tools to support concentration risk management.

• Concentration by the largest entities (customers)

The Banking Law sets the limits of the maximum exposure of the Bank which are translated to the Bank’s Group. The risk of concentration of exposures to individual customers and groups of related customers is monitored in accordance with the CRR, according to which the Bank’s Group does not assume an exposure to a customer or a group of related customers the value of which exceeds 25% of the value of its eligible consolidated capital.

The Group’s exposure to the 20 largest non-banking customers2:

31.12.2020				31.12.2019
No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees and interest receivables as well as off-balance sheet and capital exposures*	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio - (relation of exposure to the value of the consolidated eligible capital)	No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees and interest receivables as well as off-balance sheet and capital exposures*	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio - (relation of exposure to the value of the consolidated eligible capital)	Concentration ratio (restated)
1.2	16 877	4,97%	40,65%	1.	3 792	1,18%	9,62%	8,96%
2.	2 831	0,83%	6,82%	2.	3 753	1,16%	9,52%	8,87%
3.	2 453	0,72%	5,91%	3.	2 899	0,90%	7,35%	6,85%
4.	2 367	0,70%	5,70%	4.	2 717	0,84%	6,89%	6,42%
5.	2 273	0,67%	5,48%	5.	2 679	0,83%	6,80%	6,33%
6.	2 268	0,67%	5,46%	6.	2 583	0,80%	6,55%	6,10%
7.	2 121	0,62%	5,11%	7.	2 453	0,76%	6,22%	5,79%
8.	2 047	0,60%	4,93%	8.	2 270	0,70%	5,76%	5,36%
9.	1 593	0,47%	3,84%	9.	1 792	0,56%	4,55%	4,23%
10.	1 310	0,39%	3,15%	10.	1 547	0,48%	3,92%	3,65%
11.	1 204	0,35%	2,90%	11.	1 279	0,40%	3,24%	3,02%
12.	1 172	0,35%	2,82%	12.	1 098	0,34%	2,79%	2,59%
13.	1 007	0,30%	2,43%	13.	961	0,30%	2,44%	2,27%
14.	923	0,27%	2,22%	14.	961	0,30%	2,44%	2,27%
15.	839	0,25%	2,02%	15.	817	0,25%	2,07%	1,93%
16.	815	0,24%	1,96%	16.2	798	0,25%	2,02%	1,89%
17.	797	0,23%	1,92%	17.	743	0,23%	1,88%	1,76%
18.	757	0,22%	1,82%	18.	689	0,21%	1,75%	1,63%
19.	757	0,22%	1,82%	19.	670	0,21%	1,70%	1,58%
20.	722	0,21%	1,74%	20.	664	0,21%	1,68%	1,57%
Total	45 133	13,29%	108,71%	Total	35 165	10,90%	89,21%	83,07%

1 zaangażowanie pozabilansowe uwzględnia zobowiązanie wynikające z transakcji pochodnych w kwocie równej ich ekwiwalentowi bilansowemu

2 zaangażowanie wyłączone lub częściowo wyłączone spod limitu koncentracji zaangażowań zgodnie z CRR

• Koncentracja wobec największych grup powiązanych klientów

Zaangażowanie Grupy Kapitałowej wobec 5 największych grup kapitałowych3

31.12.2020				31.12.2019
No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees and interest receivables as well as off-balance sheet and capital exposures*	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio - (relation of exposure to the value of the consolidated eligible capital)	No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees and interest receivables as well as off-balance sheet and capital exposures*	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio - (relation of exposure to the value of the consolidated eligible capital)	Concentration ratio (restated)
1.2	17 761	5,23%	42,78%	1.	4 593	1,42%	11,65%	10,85%
2.	3 623	1,07%	8,73%	2.	3 839	1,19%	9,74%	9,07%
3.	2 666	0,79%	6,42%	3.	3 591	1,11%	9,11%	8,48%
4.	2 629	0,77%	6,33%	4.	3 183	0,99%	8,08%	7,52%
5.	2 453	0,72%	5,91%	5.	2 912	0,90%	7,39%	6,88%
Total	29 132	8,58%	70,17%	Total	18 118	5,61%	45,96%	42,80%

1 exposure partly excluded from the exposure concentration limit under the CRR

2 off-balance sheet exposure includes the liability arising from derivative transactions in an amount equal to their balance sheet equivalent

3 the list does not include exposure to the State Treasury (relevant for groups in which the State Treasury has control)

• Concentration by industry

The structure of the Group’s exposure by industry sector is dominated by entities operating in the “Financial and insurance activity” and “Industrial processing” sections. The Group’s exposure to these sectors represents approximately 35.0% of the entire industry portfolio.

SECTION	SECTION NAME	31.12.2020		31.12.2019
SECTION	SECTION NAME	EXPOSURE	No. OF ENTITIES	EXPOSURE	No. OF ENTITIES
K	Financial and insurance activities	19,67%	1,96%	17,10%	1,98%
C	Industrial processing	15,29%	10,68%	15,32%	11,34%
L	Real estate administration	11,31%	12,81%	10,53%	13,85%
G	Wholesale and retail trade, repair of motor vehicles	12,09%	21,47%	11,57%	22,59%
O	Public administration and national defence, obligatory social security	12,77%	2,22%	12,45%	0,25%
Other exposures		28,87%	50,86%	33,03%	49,99%
Total		100,00%	100,00%	100,00%	100,00%

• Concentration by geographical regions

The Group’s loan portfolio is diversified in terms of geographical concentration.

The Group classifies the structure of the loan portfolio by geographical regions depending on the customer area - it is different for the Retail Market Area (ORD) and for the Corporate and Investment Banking Area (CaIBA).

In 2020, the largest concentration of the ORD loan portfolio was in the Warsaw region – this region accounts for approx. 17.23% of the ORD portfolio (17.92% as at 31 December 2019).

CONCENTRATION OF CREDIT RISK BY GEOGRAPHICAL REGION FOR RETAIL CUSTOMERS	31.12.2020	31.12.2019

Warsaw region	17,23%	17,92%
Katowice region	10,58%	10,91%
Poznań region	10,49%	10,30%
Kraków region	8,45%	8,67%
Łódź region	8,46%	8,11%
Wrocław region	10,79%	10,57%
Gdańsk region	10,47%	10,18%
Lublin region	6,84%	6,90%
Białystok region	6,21%	6,29%
Szczecin region	8,21%	8,06%
Head Office	0,68%	0,55%
other	0,44%	0,23%
foreign countries	1,15%	1,31%
Total	100,00%	100,00%

In 2020, the highest concentration of the OKI loan portfolio was in the central macro-region – 40.5% of the OKI portfolio (at the end of 2019: 45,35%).

CONCENTRATION OF CREDIT RISK BY GEOGRAPHICAL REGION FOR INSTITUTIONAL CUSTOMERS	31.12.2020	31.12.2019

Head Office	6,74%	2,98%
central macroregion	40,50%	45,35%
northern macroregion	8,30%	8,77%
western macroregion	13,21%	11,05%
southern macroregion	10,78%	10,24%
south-eastern macroregion	8,97%	8,85%
north-eastern macroregion	4,24%	4,88%
south-western macroregion	6,27%	6,75%
other	0,01%	0,00%
foreign countries	0,99%	1,13%
Total	100,00%	100,00%

• Concentration of credit risk by currency

As at 31 December 2020, the share of exposures in convertible currencies other than PLN in the entire Group’s portfolio amounted to 18.21% and it remained at a similar level to 2019.

CONCENTRATION OF CREDIT RISK BY CURRENCY	31.12.2020	31.12.2019
PLN	81,79%	81,78%
Foreign currencies, of which:	18,21%	18,22%
CHF	7,85%	8,46%
EUR	8,66%	8,16%
USD	0,99%	0,80%
UAH	0,58%	0,62%
GBP	0,02%	0,03%
Total	100,00%	100,00%

• Other types of concentration

The Capital Group analyzes the structure of the housing loan portfolio in relation to LTV levels. At the end of 2020, the highest concentration is in the LTV 41% - 60% range (at the end of 2019 - in the range of 61% -80%).

GROUP’S HOUSING LOAN PORTFOLIO STRUCTURE BY LTV	31.12.2020	31.12.2019
0% - 40%	27,06%	23,28%
41%-60%	38,91%	31,75%
61% - 80%	28,88%	35,88%
81% - 90%	3,43%	6,61%
91% - 100%	0,76%	1,11%
More than 100%	0,97%	1,37%
Total	100,00%	100,00%

	31.12.2020	31.12.2019
average LTV for the portfolio of loans in CHF	55,96%	58,68%
average LTV for the entire portfolio	52,84%	55,32%

64. Collateral

In the period ended 31 December 2020, the Bank did not make any changes to its collateral policies.

The Group takes into account the collateral held for credit exposures when estimating the expected credit loss. With respect to individually significant exposures that meet the conditions for impairment, future collateral recoveries are estimated individually and taken into account in determining the expected loss, with a weight corresponding to the assessment of the probability of implementation of the debt recovery scenario. The value of collateral recoveries estimated under the recovery scenario for impaired exposures at the balance sheet date was PLN xxx million (as at 31 December 2019 PLN 2 418 million).

The Group does not have any exposures for which, due to the value of the collateral, it has not recognized an allowance for expected credit loss.

65. Forbearance practices

Forbearance is defined by the group as actions aimed at amending contractual terms agreed with a debtor or an issuer forced by the debtor’s or issuer’s difficult financial situation (restructuring activities introducing concessions that otherwise would not have been granted). The aim of forbearance activities is to restore a debtor’s or an issuer’s ability to settle their liabilities towards the Group and to maximize the efficiency of non-performing loans management, i.e. obtaining the highest possible recoveries while minimizing the costs incurred.

Forbearance changes in repayment terms may consist in:

• dividing the debt due into instalments;

• changing the repayment scheme (annuity payments, degressive payments);

• extending the loan period;

• changing the interest rate;

• changing the margin;

• reducing the debt.

As a result of signing a forbearance agreement and repaying the amounts due under it on a timely basis, a non-performing loan becomes a performing loan.

The provision of facilities within the framework of forbearance, as a premise of impairment, results in the recognition of the premise of impairment and the classification of the credit exposure into the portfolio of exposures at risk of impairment.

The inclusion of such exposures in the portfolio of performing exposures (discontinuing recognition of the forbearance agreement as an impairment trigger) takes place at least 12 months after the introduction of forbearance, provided that all payments in arrears and at least six scheduled payments have been made by the customer and, in the Group’s opinion, the current situation of the customer does not pose a threat to their compliance with the terms of the restructuring agreement.

Exposures cease to meet the criteria of a forborne exposure when all of the following conditions are met:

• at least 24 months have passed from the date of including the exposure into the portfolio of performing exposures (conditional period);

• as at the end of the conditional period referred to above, the customer has no debt towards the Group overdue for more than 30 days;

• at least 12 instalments have been repaid on a timely basis and in the amounts agreed.

Forborne exposures are monitored on an on-going basis. Throughout the whole period of their recognition allowances are recognized for these exposures in the amount of expected losses over the life horizon of the exposure.

31.12.2020	Instruments with modified terms and conditions	Refinancing	Total, gross	Impairment allowances	Total, net
Performing exposures
Not held for trading, measured at fair value through profit or loss:	17	-	17	-	17
consumer loans	17	-	17	-	17
Measured at amortized cost:	951	-	951	(65)	886
housing loans	375	-	375	(29)	346
corporate loans	509	-	509	(28)	481
consumer loans	62	-	62	(8)	54
finance lease receivables	5	-	5	-	5
Total performing exposures	968	-	968	(65)	903
Non-performing exposures
Not held for trading, measured at fair value through profit or loss:	207	-	207	-	207
consumer loans	47	-	47	-	47
corporate bonds	160	-	160	-	160
Measured at fair value through OCI:	457	-	457	(14)	443
corporate bonds	457	-	457	(14)	443
Measured at amortized cost:	2 216	34	2 250	(1 012)	1 238
housing loans	437	-	437	(239)	198
corporate loans	1 575	32	1 607	(726)	881
consumer loans	129	2	131	(33)	98
finance lease receivables	75	-	75	(14)	61
Total non-performing exposures	2 880	34	2 914	(1 026)	1 888

TOTAL EXPOSURES SUBJECT TO FOBEARANCE	3 848	34	3 882	(1 091)	2 791

31.12.2019	Instruments with modified terms and conditions	Refinancing	Total, gross	Impairment allowances	Total, net
Performing exposures
Not held for trading, measured at fair value through profit or loss:	19	-	19	-	19
consumer loans	19	-	19	-	19
Measured at amortized cost:	1 129	1	1 130	(70)	1 060
housing loans	466	-	466	(27)	439
corporate loans	600	1	601	(39)	562
consumer loans	55	-	55	(4)	51
finance lease receivables	8	-	8	-	8
Total performing exposures	1 148	1	1 149	(70)	1 079
Non-performing exposures
Not held for trading, measured at fair value through profit or loss:	216	-	216	-	216
consumer loans	37	-	37	-	37
corporate bonds	179	-	179	-	179
Measured at fair value through OCI:	463	-	463	(5)	458
corporate bonds	463	-	463	(5)	458
Measured at amortized cost:	2 068	45	2 113	(822)	1 291
housing loans	485	-	485	(226)	259
corporate loans	1 399	42	1 441	(548)	893
consumer loans	114	3	117	(36)	81
finance lease receivables	70	-	70	(12)	58
Total non-performing exposures	2 747	45	2 792	(827)	1 965

TOTAL EXPOSURES SUBJECT TO FOBEARANCE	3 895	46	3 941	(897)	3 044

LOANS AND ADVANCES TO CUSTOMERS SUBJECT TO FORBEARANCE	2020	2019
Recognized interest income on forborne loans granted to customers	89	139

66. Counterparty credit risk exposure

CONCENTRATION OF CREDIT RISK – INTERBANK MARKET AND NON-WHOLESALE MARKET – EXPOSURE AS AT 31.12.2020*
Counterparty	Country	Rating	Interbank market – wholesale			Non-wholesale market		Total
Counterparty	Country	Rating	Deposit (nominal value)	Derivatives (market value, excluding collateral if positive)	Securities (nominal value)
Counterparty 1	Poland	A	-	13	3 513	-	-	3 526
Counterparty 2	Luxembourg	AAA	-	-	2 344	-	-	2 344
Counterparty 3	Belgium	A	167	5	-	-	-	172
Counterparty 4	Poland	A	-	(1)	2	150	-	152
Counterparty 5	United Kingdom	AA	-	135	-	-	-	135
Counterparty 6	Germany	BBB	-	130	-	-	-	130
Counterparty 7	France	A	-	(85)	-	125	-	125
Counterparty 8	Finland	AA	-	(142)	-	1	110	111
Counterparty 9	Ireland	AA	105	-	-	-	-	105
Counterparty 10	Germany	BBB	8	78	-	-	-	86
Counterparty 11	France	A	-	(3)	-	72	-	72
Counterparty 12	United States of America	AA	56	-	-	-	-	56
Counterparty 13	Poland	BBB	-	48	1	-	-
Counterparty 14	Norway	AA	-	37	-	-	-	37
Counterparty 15	Luxembourg	A	-	-	-	2	18	20
Counterparty 16	Ireland	A	-	17	-	-	-	17
Counterparty 17	United States of America	AA	-	(17)	-	1	12	13
Counterparty 18	France	A	-	11	-	-	-	11
Counterparty 19	Poland	none	-	8	-	-	-	8
Counterparty 20	Austria	A	8	-	-	-	-	8

CONCENTRATION OF CREDIT RISK – INTERBANK MARKET AND NON-WHOLESALE MARKET – EXPOSURE AS AT 31.12.2019*
Counterparty	Country	Rating	Interbank market - wholesale			Non-wholesale market		Total
Counterparty	Country	Rating	Deposit (nominal value)	Derivatives (market value, excluding collateral if positive)	Securities (nominal value)
Counterparty 2	Supranational institution	AAA	-	3	1 017	-	-	1 020
Counterparty 72	Austria	BBB	681	-	-	-	-	681
Counterparty 59	Switzerland	AAA	456	(11)	-	-	-	456
Counterparty 73	United Kingdom	A	341	-	-	-	-	341
Counterparty 74	United States of America	AA	266	-	-	-	-	266
Counterparty 68	Austria	A	199	(5)	-	-	-	199
Counterparty 4	Poland	A	-	1	1	150	-	152
Counterparty 8	Finland	AA	-	(88)	-	20	123	144
Counterparty 9	Ireland	AA	110	-	-	-	-	110
Counterparty 17	United States of America	AA	-	88	-	5	5	98
Counterparty 75	Denmark	A	74	(2)	-	-	-	74
Counterparty 5	United Kingdom	AA	-	70	-	-	-	70
Counterparty 6	Germany	BBB	-	67	-	-	-	67
Counterparty 13	Poland	BBB	-	39	-	-	-	39
Counterparty 21	United Kingdom	A	-	36	-	-	-	36
Counterparty 50	United Kingdom	A	-	32	-	-	-	32
Counterparty 57	Germany	AA	-	27	-	-	-	27
Counterparty 54	Germany	BBB	-	25	-	-	-	25
Counterparty 15	Luxembourg	AA	-	-	-	-	20	20
Counterparty 11	France	A	-	20	-	-	-	20

1 Excluding exposure to the State Treasury and the National Bank of Poland.

The Group has access to two clearing houses through which it settles interest rate derivative transactions specified in the EMIR Regulation with selected domestic and foreign counterparties. In order to limit the credit risk in respect of derivative transactions and securities transactions, the Group concludes with its counterparties framework agreements (under the ZBP, ISDA and ICMA standards). The framework agreements allow to offset mutual amounts payable (reduction of the settlement risk) and non-payable (reduction of pre-settlement risk), resulting from transactions, and also utilize the close-out netting mechanism upon termination of the framework agreement as a result of default or an event justifying termination with regard to one or both parties to the agreement.

Moreover, the Group concludes with its counterparties collateral agreements (CSA – Credit Support Annex under the ISDA standard, or a Collateral Agreement under the ZBP standard), under which each party undertakes, upon meeting the premises stipulated therein, to establish an appropriate collateral together with the right to offset. Exemptions include derivative transactions concluded between members of the Group: PKO Bank Polski S.A. and PKO Bank Hipoteczny S.A., which were exempted from the obligation to replacing collaterals under the EMIR Regulation.

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

The Group analyses its portfolio of foreign currency mortgage loans to individuals in a specific manner. The Group monitors the quality of the portfolio on an on-going basis and reviews the risk of deterioration in the quality of the portfolio. Currently, the quality of the portfolio is at an acceptable level. The Group takes into consideration the risk of foreign currency mortgage loans for individuals in the capital adequacy and equity management.

HOUSING LOANS AND ADVANCES TO INDIVIDUALS (RETAIL AND PRIVATE BANKING) BY CURRENCY	31.12.2020			31.12.2019
	gross	impairment allowance	net	gross	impairment allowance	net
in local currency	94 088	(1 207)	92 881	89 924	(1 055)	88 869
PLN	93 828	(1 188)	92 640	89 715	(1 034)	88 681
UAH	260	(19)	241	209	(21)	188
in foreign currency	18 198	(719)	17 479	24 294	(751)	23 543
CHF	15 366	(647)	14 719	21 410	(692)	20 718
EUR	2 787	(68)	2 719	2 825	(53)	2 772
USD	36	(4)	32	50	(6)	44
OTHER	9	-	9	9	-	9

TOTAL	112 286	(1 926)	110 360	114 218	(1 806)	112 412

FOREIGN CURRENCY HOUSING LOANS AND ADVANCES TO INDIVIDUALS BY THE GRANTING DATE		INDEXED	DENOMINATED	Total
31.12.2020
up to 2002	Gross amount	-	59	59
	Allowances for credit losses	-	(1)	(1)
	Net amount	-	58	58
	Number of loans granted	-	5 444	5 444

from 2003 to 2006	Gross amount	-	3 616	3 616
	Allowances for credit losses	-	(106)	(106)
	Net amount	-	3 510	3 510
	Number of loans granted	-	42 445	42 445

from 2007 to 2009	Gross amount	-	8 464	8 464
	Allowances for credit losses	-	(491)	(491)
	Net amount	-	7 973	7 973
	Number of loans granted	-	51 166	51 166

from 2010 to 2012	Gross amount	3 137	2 904	6 041
	Allowances for credit losses	(48)	(72)	(120)
	Net amount	3 089	2 832	5 921
	Number of loans granted	10 648	11 903	22 551

from 2013 to 2016	Gross amount	5	12	17
	Allowances for credit losses	-	(1)	(1)
	Net amount	5	11	16
	Number of loans granted	18	43	61

Total	Gross amount	3 142	15 055	18 197
	Allowances for credit losses	(48)	(671)	(719)
	Net amount	3 094	14 384	17 478
	Number of loans granted	10 666	111 001	121 667

FOREIGN CURRENCY HOUSING LOANS AND ADVANCES TO INDIVIDUALS BY THE GRANTING DATE		INDEXED	DENOMINATED	Total
31.12.2019
up to 2002	Gross amount	-	98	98
	Allowances for credit losses	-	(2)	(2)
	Net amount	-	96	96
	Number of loans granted	-	6 704	6 704

from 2003 to 2006	Gross amount	-	4 974	4 974
	Allowances for credit losses	-	(107)	(107)
	Net amount	-	4 867	4 867
	Number of loans granted	-	47 821	47 821

from 2007 to 2009	Gross amount	-	12 756	12 756
	Allowances for credit losses	-	(544)	(544)
	Net amount	-	12 212	12 212
	Number of loans granted	-	54 056	54 056

from 2010 to 2012	Gross amount	3 362	3 085	6 447
	Allowances for credit losses	(39)	(57)	(96)
	Net amount	3 323	3 028	6 351
	Number of loans granted	11 115	12 709	23 824

from 2013 to 2016	Gross amount	5	14	19
	Allowances for credit losses	-	(2)	(2)
	Net amount	5	12	17
	Number of loans granted	18	47	65

Total	Gross amount	3 367	20 927	24 294
	Allowances for credit losses	(39)	(712)	(751)
	Net amount	3 328	20 215	23 543
	Number of loans granted	11 133	121 337	132 470

68. Interest rate risk management

Interest rate risk management

• Definition

Interest rate risk is a risk of losses being incurred on the Group’s balance sheet and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in market interest rates.

• Risk management objective

To reduce the potential losses resulting from market interest rate fluctuations to an acceptable level by properly shaping the structure of balance sheet and off-balance sheet items.

• Risk identification and measurement

The Group uses the following measures of interest rate risk: interest income sensitivity, economic value sensitivity, value at risk (VaR), stress tests and repricing gaps.

• Control

Control over interest rate risk consists of determining interest rate risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to interest rate risk.

• Risk forecasting and monitoring

The following measures are monitored by the Group on a regular basis:

• the levels of interest rate risk measures;

• utilization of the strategic limit of tolerance to interest rate risk;

• utilization of internal limits and thresholds of interest rate risk.

• Reporting

Reports on interest rate risk are prepared on a daily, weekly, monthly and quarterly basis.

• Management actions

The main tools for interest rate risk management used by the Group are: interest rate risk management procedures, interest rate risk limits and thresholds.

The Group established limits and thresholds for interest rate risk comprising, among other things, the following: interest income sensitivity, sensitivity of the economic value and losses.

Financial information

The PKO Bank Polski S.A. Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2020 and 31 December 2019. The Group was mainly exposed to PLN interest rate risk. The interest rate risk generated by the Group companies did not materially affect the interest rate risk of the entire Group and therefore did not change its risk profile significantly.

The Group categorizes its portfolios from the perspective of interest rate risk management:

• the banking book – comprises balance sheet and off-balance sheet items not included in the trading book, in particular items resulting from the Group’s core activities, transactions concluded for investment and liquidity purposes and their hedging transactions;

• the trading book – comprises transactions concluded on financial instruments as part of activities conducted on own account and on behalf of the customers.

Banking book

In order to monitor interest rate risk, the Bank applies interest rate risk measures that reflect the identified four main types of interest rate risk:

• the risk of revaluation date mismatch;

• the yield curve risk;

• the basis risk; and

• the customer option risk.

• Sensitivity of interest income

The sensitivity of interest income to sudden shifts in the yield curve is determined by the potential financial effect of such a shift reflected in a changed amount of interest income in a given time horizon. The change results from the mismatch between the revaluation dates of assets, liabilities and off-balance sheet liabilities granted and received (in particular derivative instruments) sensitive to interest rate fluctuations.

The sensitivity of interest income in the banking book of the Group to the abrupt shift in the yield curve of 100 bp down in a one-year horizon in all currencies is shown in the table below:

NAME OF THE MEASURE	31.12.2020	31.12.2019
Sensitivity of interest income (PLN million)	(527)	(907)

• Sensitivity of economic value

Sensitivity of economic value reflects the fair value changes of items in the portfolio arising from the parallel shift of the yield curves by 100 bp up or down (the most unfavourable of the scenarios mentioned).

The table below presents the economic value sensitivity measure (BPV) of the banking book of the Group in all currencies as at 31 December 2020 and 31 December 2019:

NAME OF THE MEASURE	31.12.2020	31.12.2019
Sensitivity of economic value (PLN million)	(443)	(266)

Trading book

In order to monitor the interest rate risk in the trading book, the Bank applies the value-at-risk (VaR) measure.

• Value at risk

The IR VaR measure is a potential amount of loss that may be incurred in normal market conditions in a specific time (i.e. horizon) and with an assumed level of probability related to changes in the interest rate curves.

The IR VaR in the Bank’s trading book is shown in the table below:

NAME OF THE MEASURE	31.12.2020	31.12.2019
IR VaR for a 10-day time horizon at the confidence level of 99% (PLN million):
Average value	11	5
Maximum value	20	10
Value at the end of the period	13	6

69. Currency risk management

Currency risk management

• Definition

Currency risk is the risk of incurring losses due to unfavourable exchange rate fluctuations. The risk is generated by maintaining open currency positions in various foreign currencies.

• Risk management objective

To reduce the potential losses resulting from exchange rate fluctuations to an acceptable level by properly shaping the currency structure of balance sheet and off-balance sheet items.

• Risk identification and measurement

The Group uses the following measures of the currency risk: value-at-risk (VaR) and stress tests.

• Control

Control over currency risk consists of determining currency risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to currency risk.

• Risk forecasting and monitoring

The following measures are monitored by the Group on a regular basis:

• the level of currency risk measures;

• utilization of the strategic limit of tolerance to currency risk;

• utilization of internal limits and thresholds of currency risk.

• Reporting

Reports on currency risk are prepared on a daily, weekly, monthly and quarterly basis.

• Management actions

The main tools for currency risk management used by the Group are:

• currency risk management procedures;

• currency risk limits and thresholds;

• defining allowable types of foreign currency transactions and the exchange rates used in such transactions.

The Group has set limits and thresholds for currency risk for, among other things: currency positions, Value at Risk calculated for a 10-day time horizon and loss on the currency market.

Financial information

• Sensitivity measures

The FX VaR measure is a potential value of loss that may occur in normal market conditions at a specific time (i.e. horizon) and with an assumed level of probability related to changes in foreign exchange rates.

Stress tests are used to estimate loss in an event of abrupt changes on the currency market which are not described using statistical measures by default.

The Bank’s FX VaR, in aggregate for all currencies, is presented in the table below:

NAME OF THE SENSITIVITY MEASURE	31.12.2020	31.12.2019
VaR for a 10-day time horizon at a confidence level of 99% (in PLN million)1	615	9

1 Taking into account the nature of the operation of the other Group companies which generate material currency risk and the specific characteristics of the market in which they operate, the Group does not determine the consolidated VaR sensitivity measure. Such companies use their own risk measures to manage their interest rate risk. KREDOBANK S.A. applies the 10-day VaR which amounted to approx. PLN 0.1 million as at 31 December 2020, and to PLN 0.1 million as at 31 December 2019.

• Foreign currency position

The Group’s foreign currency positions are presented in the table below:

FOREIGN CURRENCY POSITION	31.12.2020	31.12.2019
EUR	(326)	(152)
CHF	(14 361)	(238)
Other (Global, Net)	(50)	7

Currency positions (in addition to the volatility of foreign exchange rates) are a key factor determining the level of currency risk to which the Group is exposed. The foreign currency positions are determined by all foreign currency transactions concluded, both in the statement of financial position and off-balance sheet transactions. The significant currency position in CHF results from the recognition of the impact of legal risk related to the portfolio of mortgage loans in convertible currencies (see the note "Legal risk cost of mortgage loans in convertible currencies" and the note "Litigation"). The currency position was limited in the first half of 2021.

70. Liquidity risk management

• Definition

Liquidity risk is the risk of inability to settle liabilities as they become due because of the absence of liquid assets. The lack of liquidity may be due to the inappropriate structure of assets and liabilities, including off-balance sheet, a mismatch of cash flows, customers failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market events.

The Group also manages the financing risk which takes into account the risk of losing the existing sources of financing and the inability to renew the required means of financing or the loss of access to new sources of financing.

• Risk management objective

To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately establishing the structure of balance sheet and off-balance sheet assets and liabilities.

• Risk identification and measurement

The Group uses the following measures of the liquidity risk:

• contractual and adjusted liquidity gap;

• liquidity surplus;

• liquidity reserve;

• the ratio of stable funds to illiquid assets;

• liquidity coverage ratio (LCR);

• domestic supervisory liquidity measures (M3-M4);

• measures of stability of the deposit and loan portfolios;

• liquidity stress tests.

• Control

Control over the liquidity risk consists in determining liquidity risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to liquidity risk.

• Risk forecasting and monitoring

The following measures are monitored by the Group on a regular basis:

• utilization of the strategic limit of tolerance to liquidity risk;

• utilization of regulatory liquidity standards;

• utilization of internal limits and thresholds of liquidity risk;

• concentration of the sources of financing;

• early warning indicators - monitored for the early detection of unfavourable occurrences which may have a negative impact on the Group’s or the financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).

The Group also makes regular liquidity forecasts which take into account the current developments in the Group’s operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the forecasts of the Group’s assets and liabilities and in selected stress test scenarios.

• Reporting

Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth long-term liquidity analysis is performed. The reports contain information on liquidity risk exposure and on the risk limits utilization. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.

• Management actions / Risk management tools

The main tools for liquidity risk management used by the Group are:

• procedures for liquidity risk management, in particular contingency plans;

• limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;

• national and European supervisory liquidity standards;

• deposit, investment and securities transactions and well as derivatives, including structural currency transactions and transactions for the sale or purchase of securities;

• transactions ensuring long-term financing of the lending activities.

The Group’s policy concerning liquidity is based on keeping an appropriate level of liquidity surplus and supervisory and internal measures of liquidity risk and financing through an increase in the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.

Financial information

• Liquidity gap

The adjusted liquidity gap comprises a set of particular balance sheet and off-balance sheet categories in respect of their adjusted maturities. The liquidity gaps presented below represent the sum of adjusted liquidity gaps of the Bank (adjustments relate to, among other things, the Bank’s core deposits from non-financial entities and their maturities, overdrafts and credit cards and their maturities, and liquid securities and their maturities), PKO Bank Hipoteczny, PKO Leasing S.A., KREDOBANK S.A. and PKO Życie Towarzystwo Ubezpieczeń S.A., and the contractual liquidity gaps of the other Group companies.

	on demand	0 – 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	over 60 months
31.12.2020
Adjusted periodic gap	6 920	70 393	(5 774)	(4 210)	(3 114)	3 468	18 210	(85 893)
Adjusted cumulative periodic gap	6 920	77 313	71 539	67 329	64 215	67 683	85 893	-
31.12.2019
Adjusted periodic gap	11 355	30 783	(8 092)	(7 285)	(3 317)	5 024	18 205	(46 673)
Adjusted cumulative periodic gap	11 355	42 138	34 046	26 761	23 444	28 468	46 673	-

1 brought to comparability with the data as at 31 December 2019.

In all time horizons, the adjusted cumulative liquidity gap of the Group, determined as the sum of the adjusted liquidity gaps of the Bank, PKO Bank Hipoteczny S.A., PKO Leasing S.A., KREDOBANK and PKO Życie Towarzystwo Ubezpieczeń S.A. and the contractual liquidity gaps of the other Group companies with respect to items of the statement of financial position, was positive both as at 31 December 2020 and 31 December 2019. This means a surplus of the assets receivable over the liabilities payable.

• Supervisory liquidity measures

The following supervisory liquidity measures are regularly set and monitored at the Bank and the Group:

• Liquidity Coverage Ratio (LCR) – defining the relation of high-quality liquid assets to net outflows in the 30-day horizon in stress conditions (supervisory measure specified in the CRR Regulation);

• Net Stable Funding Ratio (NSFR) – a measure defining the relationship of items providing stable funding to items requiring stable funding;

The following supervisory liquidity measures are regularly set and monitored at the Bank:

• M3 – non-liquid assets to own funds (national supervisory ratio);

• M4 – non-liquid assets and assets with limited liquidity to own funds and stable external funds (national supervisory ratio).

SUPERVISORY LIQUIDITY MEASURES	31.12.2020	31.12.2019
M3 - coverage ratio of non-liquid assets to own funds	12,59	14,92
M4 - coverage ratio of non-liquid assets and liquidity-restricted assets with own funds and stable external funds	1,43	1,25
NSFR - net stable funding ratio	134,7%	123,1%
LCR - liquidity coverage ratio	226,7%	146,3%

In the period ended 31 December 2020 and 31 December 2019, liquidity measures remained above their respective supervisory limits. The LCR and NSFR ratios in the table refer to the Group, while the M3-M4 indicators refer to the Bank.

• Core deposit base

As at 31 December 2020, the core deposit base constituted approx. 94.3% of all deposits placed with the Bank (excluding the interbank market), which represents an increase of approx. 0.5 p.p. compared with the end of 2019.

• Structure of the sources of financing

STRUCTURE OF THE SOURCES OF FINANCING	31.12.2020	31.12.2019
Total deposits (excluding interbank market)	77,97%	76,44%
Interbank market deposits	0,66%	0,40%
Equity	11,07%	11,59%
Market financing	10,30%	11,57%

Total	100,00%	100,00%

71. Capital adequacy

• Capital adequacy

Capital adequacy is the state in which the level of risk incurred by the Bank’s Group in connection with its business development can be covered by its capital whose level and structure are adequate to the applicable supervisory requirements, specific risk tolerance level and adopted time horizon. The process of managing capital adequacy comprises, in particular, compliance with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level determined within the Bank and the Bank’s Group and the capital planning process, including the policy concerning the sources of acquisition of capital.

The objective of capital adequacy management is to maintain own funds at a level which is adequate to the scale and profile of the risk relating to the Group’s activities at all times.

The process of managing the Group’s capital adequacy comprises:

• specifying and pursuing the Group’s capital targets;

• identifying and monitoring significant types of risk;

• measuring or estimating internal capital to cover individual risk types and total internal capital;

• determining threshold values for capital adequacy measures,

• forecasting, monitoring and reporting the level and structure of own funds;

• managing the structure of the balance sheet to optimize the quality of the Bank’s own funds;

• emergency measures with regard to capital;

• stress-tests;

• forecasting requirements for own funds;

• assessing the profitability of individual business areas and customer segments.

Capital adequacy measures include:

• total capital ratio (TCR);

• the ratio of own funds to internal capital;

• Tier 1 core capital ratio (CET1);

• Tier 1 capital ratio (T1);

• leverage ratio.

The objective of monitoring the level of capital adequacy measures is to determine the degree of compliance with supervisory standards and to identify cases which require emergency measures to be implemented or the preparation of a capital protection plan.

Major regulations applicable in the capital adequacy assessment process include:

• the Polish Banking Law;

• the CRR Regulation;

• the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (as amended), (the Act on macroprudential supervision);

• the Regulation of the Minister of Development and Finance of 6 March 2017 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating the internal capital in banks.

Minimum level of capital ratios maintained by the Group in accordance with Art. 92 of the CRR Regulation
• total capital ratio (TCR);	8,0%
• Tier 1 capital ratio (T1);	6,0%
• Tier 1 core capital ratio (CET1);	4,5%

Obligation to maintain a combined buffer above the minimum amounts specified in Article 92 of the CRR, representing the sum of the applicable buffers	31.12.2020	31.12.2019
Total:	3.51%	6.51%
• conservation buffer	2.5%	2.5%
• countercyclical buffer	0.01%	0.01%
• systemic risk buffer	0%1	3%2
• due to identifying the Bank as another systemically important institution (“O-SII”)	1%3	1%3

1 On 19 March 2020, in connection with the COVID-19, the Regulation of the Minister of Finance cancelling the systemic risk buffer came into effect.

2 The buffer is calculated for the exposure within the territory of the Republic of Poland. Due to the fact that the Group also conducts foreign activities, the systemic risk buffer specific to the Group was 2.88% as at the end of December 2019.

3 of total exposure to the risks calculated in accordance with the CRR.

Discretionary capital requirement (“domiar kapitałowy”) (an additional capital requirement in order to hedge the risk resulting from mortgage-secured loans and advances to households)	31.12.2020	31.12.2019
• for the total capital ratio:	0.24 p.p.	0.36 p.p.
• for the Tier 1 capital ratio:	0.18 p.p.	0.27 p.p.
• for the Tier 1 core capital ratio:	0.14 p.p.	0.20 p.p.

Irrespective of the above buffers, to meet the requirements for distributing 100% of the profit, the Polish Financial Supervision Authority determined an add-on in respect of the Bank’s sensitivity to an adverse macroeconomic scenario, of 0.10 p.p.

On 26 October 2020, the Group received a letter from the Bank Guarantee Fund (“the Fund”) on the results of the update and feasibility assessment of the mandatory restructuring plans, which presented the target requirement, developed based on the current methodology, for the minimum level of own funds and eligible liabilities (MREL) and interim goals (the so-called destination path) on a consolidated and stand-alone basis. The destination path developed by the Fund to reach the required MREL level is based on data as at 31 December 2021, and assumes a straight-line increase in the requirement over the projection period. On the consolidated basis, the MREL goals in relation to total own funds and liabilities (TLOF) an in relation to total risk exposure (TRE) are as follows:

in %	31.12.2021	31.12.2022	31.12.2023
MREL (TLOF)	10,06	11,35	12,65
MREL (TRE)	15,99	18,06	20,12

According to the Fund’s text of communication, the Bank is obliged to meet the MREL requirement from 1 January 2024.

The impact of IFRS 9 on own funds and capital adequacy measures is governed by Regulation 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State. According to this regulation, banks are allowed to apply transitional provisions in respect of own funds and increase the common equity capital Tier 1 connected with the implementation of a new impairment model over the subsequent 5 years from 1 January 2018, whereas the adjustment ratio decreases gradually.

Moreover, on 27 June 2020, Regulation 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulation (UE) No. 575/2013 and (UE) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic came into effect. This provision allows to mitigate the impact on the write-offs recorded as of 1 January 2020 on Tier 1 capital.

Such a solution can be applied up to 2024, inclusive, whereas the adjustment ratio allocated to this value decreases gradually. The Bank decided that in the light of Art. 473a (7a) of the CRR implemented by the aforesaid Regulation, it would apply an option according to which the adjustment mitigating the impact of the introduction of IFRS 9 on own funds would receive a risk weight equal to 100 % and the resulting value would be added to the total exposure. In respect of the data for December 2019, an adjusting coefficient was used to adjust the specific risk which reduces the exposure value calculated in accordance with Art. 473a (7b) of the CRR.

The impact of implementing the new definition of default would result in a reduction in capital ratios of no more than 10 bps.

• Own funds for capital adequacy purposes

In 2020 and 2019, the Group’s capital adequacy level remained at a safe level, well above the supervisory limits. The minimum capital requirements were complied with throughout the period.

• Requirements relating to own funds (Pillar I)

The Group calculates own funds requirements for the following types of risk:

credit risk	under the standard approach, using the following formulas with regard to: balance sheet exposures – the product of a carrying amount (accounting for adjustments for specific credit risk), the risk weight of the exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral), off-balance sheet liabilities granted – the product of the amount of a liability (accounting for adjustments for specific credit risk), the risk weight of the product, the risk weight of off-balance sheet exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral); off-balance sheet transactions (derivative instruments) – the product of the risk weight of an off-balance sheet transaction calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (the value of the equivalent in the statement of financial position is calculated in accordance with the mark-to-market method).
operational risk	• in accordance with the AMA approach – with respect to the Bank’s activities, taking into account the branch in Germany and excluding the branch in the Czech Republic; • in accordance with the BIA approach – with respect to the activities of the branch in the Czech Republic and entities of the Group subject to the prudential consolidation.
market risk	• currency risk – calculated under the core approach; • commodity risk – calculated under the simplified approach; • equity instruments risk – calculated under the simplified approach; • specific risk of debt instruments – calculated under the core approach; • general risk of debt instruments – calculated under the duration-based approach; • other types of risk, other than delta risk (non-delta risk) calculated under the scenario approach in the case of options for which the Bank uses its own valuation models and under the delta plus approach for other options.
Other risks	• settlement risk and delivery risk – calculated under the approach specified in Title V, “Own funds requirements for settlement risk” of the CRR Regulation; • counterparty credit risk – calculated under the approach set out in Chapter 6, “Counterparty credit risk” of Title II, “Capital requirements for credit risk” of the CRR Regulation; • credit valuation adjustment risk – calculated under the approach specified in Title VI, “Own funds requirements for credit valuation adjustment risk” of the CRR Regulation; • exceeding the large exposures limit – calculated under the approach set out in paragraphs 395-401 of the CRR Regulation; • for exposures to a central counterparty, a requirement for transactions and contributions made to the default fund of a qualifying central counterparty is calculated.

	31.12.2020	31.12.2019 restated	31.12.2019 published
Equity	39 911	41 578	41 578
capital: share capital, supplementary capital, other reserves, and general risk reserve	34 976	34 986	34 986
retained earnings	6 142	2 101	2 101
net profit or loss for the year	(2 557)	4 031	4 031
other comprehensive income and non-controlling interests	1 350	460	460

Exclusions from equity:	76	4 015	4 015
deconsolidation - adjustments due to prudential consolidation	(279)	(267)	(267)
net profit or loss for the year	-	4 050	4 050
cash flow hedges	355	232	232

Other fund reductions:	2 671	2 909	2 914
goodwill	961	1 109	1 109
other intangible assets	1 264	1 711	1 711
securitization items	67	-	-
additional asset adjustments (AVA, DVA)	379	89	94

Temporary reversal of IFRS 9 impact	1 652	926	1 030
Net profit or loss for the year	-	4 050	1 038

Tier 1 capital	38 816	39 630	36 717
Tier 2 capital (subordinated debt)	2 700	2 700	2 700

Equity	41 516	42 330	39 417

Requirements for own funds	18 273	17 034	17 120
Credit risk	14 985	15 749	15 835
Operational risk 1	1 629	843	843
Market risk	1 631	419	419
Credit valuation adjustment risk	28	23	23

Total capital ratio	18,18%	19,88%	18,42%
Tier 1 capital ratio	16,99%	18,61%	17,16%

1 In 2020, there was an increase in the own funds requirement for operational risk by PLN 786 million, mainly due to the growing costs of legal risk related to the portfolio of mortgage loans in convertible currencies. Due to the quarterly shift of data included in the AMA method, the cost level from 3Q2020 is included in the requirement at the end of 2020. Starting from 2021, provisions reducing the gross carrying amount of loans (i.e. credit risk related losses) will be included in the AMA method by the Group at a constant value from 3Q2020.

2 The increase in the requirement for market risk is mainly due to the requirement for currency risk in the amount of PLN 1,167 million, resulting from the double write-offs for legal risk related to foreign currency loans. The currency position was limited in the first half of 2021.

Pursuant to Art. 26 (2) of CRR, an institution may include interim or year-end profits in CET1 after the Bank has taken a formal decision confirming the final profit or loss of the institution for the year, or before it has taken the formal decision, only with the competent authority’s prior permission. In May 2020, the European Banking Authority (EBA) published, in a single rulebook Q&A, its position regarding the inclusion of annual and interim profits in the capital adequacy data (Q&A 2018_3822 and Q&A 2018_4085). According to this position, once the Bank has formally met the criteria for including its profit for a given period in the Tier 1 capital, this profit should be included retrospectively (as at the date of the profit, and not the date of meeting the criteria), and own funds should be adjusted accordingly as at the date related to the profit. Therefore, the column for the “restated” data presents own funds, capital adequacy requirements and capital ratios taking into account the distribution of profit for 2019 performed by the General Shareholders Meeting of the Bank.

According to the CRR Regulations for capital adequacy purposes, prudential consolidation is used, which, unlike consolidation in accordance with IFRS, includes only subsidiaries that meet the definition of an institution, financial institution or any ancillary services enterprise. In addition, pursuant to Article 19 Paragraph 1 of the CRR, prudential consolidation may exclude entities whose total value of assets and off-balance sheet items are less than EUR 10 million.

Other subsidiaries, not consolidated under the full method for the purposes of prudential consolidation are measured using the equity method.

For the purposes of prudential consolidation, the Group consists of following entities:

• PKO Bank Polski S.A.;

• Grupa Kapitałowa PKO Leasing S.A.;

• PKO BP BANKOWY PTE S.A.;

• PKO Towarzystwo Funduszy Inwestycyjnych S.A.;

• Grupa Kapitałowa KREDOBANK S.A.;

• PKO Finance AB;

• PKO BP Finat sp. z o.o.;

• PKO Bank Hipoteczny S.A.;

• Grupa Kapitałowa Bankowe Towarzystwo Kapitałowe S.A.

Non-financial and insurance entities are excluded from the prudential consolidation.

consolidated income statement in accordance with the CRR (prudential consolidation)

INCOME STATEMENT IN ACCORDANCE WITH THE CRR	2020	2019
Net interest income/(expense)	10 312	10 251
Interest income	11 780	12 746
Interest expense	(1 468)	(2 495)
Net fee and commission income	3 752	3 160
Fee and commission income	4 804	4 245
Fee and commission expense	(1 052)	(1 085)
Other net income	158	1 066
Dividend income	15	14
Gains/(losses) on financial transactions	(112)	180
Foreign exchange gains/ (losses)	196	473
Gains/(losses) on derecognition of financial instruments	165	143
Net other operating income and expense	(106)	256
Result on business activities	14 222	14 477
Net expected credit losses	(2 178)	(1 148)
Net impairment allowances on non-financial assets	(395)	(111)
Cost of the legal risk of mortgage loans in convertible currencies	(6 552)	(451)
Operating expenses	(5 871)	(6 028)
Tax on certain financial institutions	(1 047)	(1 014)
Share in profits and losses of subsidiaries, associates and joint ventures	122	82
Profit / (loss) before tax	(1 699)	5 807
Income tax expense	(851)	(1 757)

Net profit / (loss) (including non-controlling shareholders)	(2 550)	4 050
Profit (loss) attributable to non-controlling shareholders	-	-
Net profit / (loss) attributable to equity holders of the parent company	(2 550)	4 050

• INTERNAL CAPITAL (PILLAR II)

In 2020, the Group calculated internal capital in accordance with the commonly binding legal regulations:

• the CRR Regulation;

• the Polish Banking Law;

• The Act on macro-prudential supervision;

and the internal regulations of the Bank and the Group.

Internal capital constitutes an estimated amount of capital necessary to cover all material types of risk arising from the Group’s operations. The purpose of estimating the internal capital is to determine own funds at a level ensuring operational safety, taking into account changes in the profile and scale of the activities conducted and adverse stress conditions, and enabling more effective management of the Bank aimed at improving the profitability of operations and profitability of the capital invested.

The internal capital for covering significant risk types is determined using the methods specified in the internal regulations.

The relation of the Group’s own funds to its internal capital remained at a level exceeding both the threshold set by the law and the Group’s internal limit.

• DISCLOSURES (PILLAR III)

The Group publishes annual information in particular concerning risk management and capital adequacy in accordance with: the CRR Regulation and the executive acts to the CRR, guidelines of the European Banking Authority, including guidelines concerning disclosure requirements pursuant to section eight of the CRR Regulation (“EBA guidelines”), the Act on Macro-prudential supervision, the Polish Banking Law Act, the Recommendation H, M and P issued by the Polish Financial Supervision Authority as part of the Report, “Capital adequacy and other information to be published by the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Group”.

Details of the scope of information disclosed, the method of its verification and publication are presented in PKO Bank Polski S.A. Capital Adequacy Information Policies and other information to be published, which are available on the Bank’s website (www.pkobp.pl).

72. Leverage ration

The Group calculates the leverage ratio as one of its capital adequacy measures.

The objective of excessive leverage risk management is to ensure an appropriate relationship between the amount of the Tier 1 capital and the total of balance sheet assets and off-balance sheet liabilities granted by the Group.

For the purpose of measuring the risk of excessive financial leverage, a leverage ratio is calculated by the Group as a measure of Tier 1 capital divided by the measure of total exposure and is expressed as a percentage rate. The leverage ratio as at 31 December 2020 and 31 December 2019 was above internal and external limits, as well as above the minimum levels as recommended by the PFSA.

To maintain the leverage ratio at an acceptable level, the Group set up a strategic tolerance limit and a threshold for the ratio and they are regularly monitored and verified periodically.

	Leverage ratio exposures specified in CRR
	31.12.2020	31.12.2019	31.12.2019
Total capital and exposure measure		restated	published
Tier 1 capital	38 816	39 631	36 717
Total exposure measure for leverage ratio calculation	394 468	363 733	364 618
Leverage ratio
Leverage ratio	9,84%	10,90%	10,07%

73. Information on securitization of the lease portfolio and package sale of receivables

In connection with the acquisition of Raiffeisen-Leasing Polska S.A. and its subsidiaries, on 1 December 2016, the Group consolidated a special purpose vehicle ROOF Poland Leasing 2014 DAC with its registered office in Ireland. The SPV is buying securitized receivables resulting from lease agreements sold by Raiffeisen-Leasing Polska S.A. (currently: PKO Leasing S.A.) under the securitization plan which was initiated in December 2014. The receivables acquired by the SPV were financed by an issue of securities. The objective of and benefit from selling these receivables to the SPV was to obtain and diversify sources of long-term financing.

Redemption of debt securities in the period from 1 January to 31 December 2020 at their nominal value totalled PLN 146 million, including PLN 85 million redeemed on 2 January 2020, and PLN 61 million redeemed on 2 April 2020.

The redemption of debt securities in the period from 1 January to 31 December 2020 according to their nominal value totalled PLN 491 million, including PLN 153 million redeemed on 2 January 2019, PLN 134 million redeemed on 2 April 2019, PLN 110 million redeemed on 2 July 2019 and PLN 94 million redeemed on 2 October 2019.

On 2 July 2020, the securitization programme with the participation of special purpose vehicle, ROOF Poland Leasing 2014 DAC, was completed, and PKO Leasing S.A. exercised its option to buy the remaining lease receivables left in the programme (the clean-up-call option). The reason for launching the process of completion of the transaction in question was repayment of the last bonds issued by the SPV, ROOF Poland Leasing 2014 DAC, which took place on 2 April 2020. As of that day, PKO Leasing S.A. was the only creditor of the company in relation to the subordinated loan. The proceeds from the resale of the lease receivables were used – after paying fees to entities which handled the transaction – to repay the subordinated loan granted by PKO Leasing S.A. to the SPV. Subsequently, procedures are pending to initiate the liquidation procedure in respect of ROOF.

In September 2019, PKO Leasing S.A. carried out securitization of lease receivables with a value of PLN 2 500 million. On 26 September 2019, the Company sold lease receivables to the special-purpose vehicle Polish Lease Prime 1 Designated Activity Company (Polish Lease Prime 1 DAC) with its registered office in Dublin (Ireland). The receivables purchased by the SPV were financed mainly with an issue of securities (bonds) conducted on 26 September 2019 with the redemption date falling on 28 December 2029 and with funds obtained as part of the PKO Leasing S.A. Group. Bonds with a nominal value of PLN 1 835 million were taken up by entities from outside the PKO Bank Polski S.A. Group. The objective of and benefit from selling these receivables to the SPV was to obtain and diversify sources of long-term financing.

As at 31 December 2020, the value of receivables constituting the object of the securitization transaction for lease receivables amounted to PLN 2 457 million, and as at 31 December 2019 it was PLN 2 723 million.

Carrying amounts of the financial assets and financial liabilities covered by securitization are presented in the table below

SECURITIZATION	Transaction amount	Amount of risk remaining at the Group	Transaction amount	Amount of risk remaining at the Group
	31.12.2020		31.12.2019
carrying amount of assets	2 457	2 457	2 723	2 723
carrying amount of liabilities	2 475	2 475	1 983	1 983
Net balance	(18)	(18)	740	740

Moreover, in 2020 the Group performed sales of impaired loan portfolios (balance sheet and off-balance sheet receivables) of more than 26.8 thousand individual receivables from retail and business customers amounting to approximately PLN 716 million (PLN 1 790 million in 2019). The total carrying amount of the provisions for potential claims on the sale of impaired loan portfolios as at 31 December 2020 amounted to PLN 1.9 million (as at 31 December 2019 it was PLN 2 million). As a result of the sale of the receivables all risks and rewards were transferred, hence the Group derecognized these assets.

The Group did not receive any securities as a result of these transactions.

OTHER NOTES

74. Fiduciary activities

The parent is a direct participant in the Central Securities Depository of Poland (Krajowy Depozyt Papierow Wartosciowych) and the Securities Register (at the National Bank of Poland). The parent maintains securities accounts and handles transactions on the domestic and foreign markets, provides fiduciary services and performs a depository role for pension and investment funds. Assets held by the parent as part of providing fiduciary services have not been disclosed in these financial statements since they do not meet the definition of the parent’s assets.

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

On 13 December 2018, pursuant to § 15 clause 1 point 2 of the Bank’s Articles of Association, the Bank’s Supervisory Board selected PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. (hereinafter PwC) as the audit firm to audit and review the financial statements of the Bank and of the Group for the years 2020-2021. PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnoscią Audyt sp. k. with its registered office in Warsaw, ul. Polna 11 is entered in the list of audit companies maintained by the National Board of Registered Auditors with the number 144. On 24 January 2019, the Bank concluded an agreement with PWC for the audit and review of the financial statements of the Bank and of the Bank and the Bank’s Group for the years 2020-2021.

Based on the Supervisory Board’s declaration, the Management Board states that the appointment of the PwC audit firm to audit the Group’s consolidated financial statements for the year ended 31 December 2020 and the Bank’s financial statements for the year ended 31 December 2020 (Audit) was made in accordance with the provisions of the law and the internal rules of the Bank accepted by the Supervisory Board on the appointment of the audit firm, which were in force as at the date on which the choice was made. Simultaneously, based on the Supervisory Board’s declaration, the Management Board states that::

• the audit firm, PwC, and the members of the team conducting the Audit satisfied the conditions for preparing an impartial and independent Audit report, in accordance with the generally applicable provisions of the law, standards of practising the profession and principles of professional ethics;

• the generally binding provisions of the law related to the rotation of audit firms and the key registered auditor auditing the Group’s consolidated financial statements and the Bank’s financial statements and the related mandatory periods of grace are observed at the Bank;

• the Bank has a policy on and a procedure for the selection of audit firms for auditing the Bank’s and the Group’s financial statements, as well as a policy on the provision of admissible non-audit services by the audit firm conducting the audit, affiliates of that audit firm and a member of the network of audit firms, to the Bank and companies from the Bank’s Group, including services that are conditionally released from the prohibition of provision of services by the audit firm.

The audit and review of the Bank’s and Group’s financial statements for 2019 were carried out by KPMG Audyt Spółka z ograniczoną odpowiedzialnością spółka komandytowa.

TOTAL AMOUNT OF NET REMUNERATION DUE TO THE AUDIT FIRM AUDITING THE FINANCIAL STATEMENTS IN RESPECT OF: (in PLN thousand)	2020	2019
audit of financial statements of the Bank and the Capital Group	1 804	1 537
assurance services, including reviews of the financial statements	530	961
Total	2 334	2 498

76. Subsequent events

On 23 April 2021, the Extraordinary General Meeting of PKO Bank Polski S.A. decided to enter into settlement agreements with consumers who have entered into mortgage loan agreements with the Bank indexed to foreign currencies or denominated in foreign currencies (hereinafter: settlement agreements with consumers). According to the adopted resolution:

• PKO Bank Polski S.A. creates a special fund in the amount of PLN 6.7 billion for the purpose of covering specific balance sheet losses that will arise as a result of recognizing the financial effects of the settlement agreements with consumers;

• the amount of PLN 6.7 billion shall be allocated from the Bank’s supplementary capital, in the part created from retained earnings available for distribution and transferred to the aforementioned special fund;

• the General Meeting shall oblige the Bank’s Management Board to present for approval to the Bank’s Supervisory Board the terms and conditions on which the settlement agreements shall be concluded, including the terms and conditions of releasing from debt;

• The Bank’s Management Board may enter into settlement agreements with consumers (including the terms and conditions of releasing from debt) after the Bank’s Supervisory Board has issued a positive opinion on the terms and conditions under which the agreements will be concluded, including in respect of releasing from debt. The content of individual settlement agreements should be within the terms and conditions approved by the Bank’s Supervisory Board.

Signatures of all Members of the Bank’s Management Board

28.04.2021	Zbigniew Jagiełło	President of the Management Board
28.04.2021	Rafał Antczak	Vice-President of the Management Board
28.04.2021	Rafał Kozłowski	Vice-President of the Management Board
28.04.2021	Maks Kraczkowski	Vice-President of the Management Board
28.04.2021	Mieczysław Król	Vice-President of the Management Board
28.04.2021	Adam Marciniak	Vice-President of the Management Board
28.04.2021	Piotr Mazur	Vice-President of the Management Board
28.04.2021	Jakub Papierski	Vice-President of the Management Board
28.04.2021	Jan Emeryk Rościszewski	Vice-President of the Management Board

Signature of the person responsible

for maintaining the books of account

Danuta Szymańska

Director of the Accounting Division

Biblioteka czcionek:

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