This document is a free translation of the Polish original. Terminology current

in Anglo-Saxon countries has been used where practicable for the purposes

of this translation in order to aid understanding. The binding Polish original

should be referred to in matters of interpretation.

Independent Auditor's Report

To the General Shareholders’ Meeting and Supervisory Boardof Bank Polska Kasa Opieki S.A.

Report on the Audit of the Annual Separate Financial Statements

 

Opinion

We have audited the accompanying annual separate financial statements of Bank Polska Kasa Opieki S.A. (the “Bank”), which comprise:

—   the separate statement of financial position as at 31 December 2021;

and, for the period from 1 January to 31 December 2021:

—   the separate statement of profit or loss;

—   the separate statement of comprehensive income;

—   the separate statement of changes in equity;

—   the separate statement of cash flows;

and

—   notes comprising a summary of significant accounting policies and other explanatory information;

(the “separate financial statements”).

In our opinion, the accompanying separate financial statements of the Bank:

—   give a true and fair view of the unconsolidated financial position of the Bank as at 31 December 2021 and of its unconsolidated financial performance and its unconsolidated cash flows for the financial year then ended in accordance with International Financial Reporting Standards, as adopted by the European Union (“IFRS EU”) and the adopted accounting policy;

—   comply, in all material respects, with regard to form and content, with applicable laws and the provisions of the Bank's articles of association;

—   have been prepared, in all material respects, on the basis of properly maintained accounting records in accordance with chapter 2 of the accounting act dated 29 September 1994 (the “Accounting Act”).

Our audit opinion on the separate financial statements is consistent with our report to the Audit Committee dated 2 March 2022.

Basis for Opinion

We conducted our audit in accordance with:

—   International Standards on Auditing as adopted by the National Council of Statutory Auditors as National Standards on Auditing (the “NSA”); and

—   the act on statutory auditors, audit firms and public oversight dated 11 May 2017 (the “Act on statutory auditors”); and

—   regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (the “EU Regulation”); and

—   other applicable laws.

Our responsibilities under those regulations are further described in the Auditor’s Responsibility for the audit of the separate financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and Ethics

We are independent of the Bank in accordance with International Ethics Standards Board for Accountants International Code of Ethics for Professional Accountants (including International Independence Standards) (“IESBA Code”) as adopted by the resolution of the National Council of Statutory Auditors, together with the ethical requirements that are relevant to our audit of the separate financial statements in Poland and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. During our audit the key statutory auditor and the audit firm remained independent of the Bank in accordance with requirements of the Act on statutory auditors and the EU Regulation.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. They are the most significant assessed risks of material misstatements, including those due to fraud. Key audit matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon we have summarised our response to those risks. We do not provide a separate opinion on these matters. We have determined the following key audit matters:

Allowances for expected credit losses for loans and advances to customers and provisions for undrawn credit facilities and guarantees issued
The book value of loans and advances to customers (excluding measured at fair value through profit or loss) as at 31 December 2021: PLN 143.265 million (as at 31 December 2020: PLN 128.540 million); allowances for expected credit losses as at 31 December 2021: PLN 7.408 million (as at 31 December 2020: PLN 6.984 million); provisions for undrawn credit facilities and guarantees issued as at 31 December 2021: PLN 441 million (as at 31 December 2020: PLN 468 million); net allowances for expected credit losses in 2021: -664 million (in 2020: PLN -1.549 million). Reference to consolidated financial statements: note 10 “Net allowances for expected credit losses”, note 22 “Loans and advances to customers”, note 36 “Provisions” and note 45.2 “Credit risk”.
Key audit matter		Our response
Loans and advances to customers ("loans and advances", "exposures") measured at amortized cost or in fair value through other comprehensive income are presented including impairment allowances based on the expected credit loss model, within		Audit procedures conducted with the support of our internal financial risk management and IT specialists included i.a.:

a horizon of 12 months or the entire life of the exposure. In the process of estimating allowances, identification of impairment triggers and a significant increase in credit risk is crucial. The impairment triggers and significant increase in credit risk are identified mainly on the basis of payment delinquencies, economic and financial standing of the debtor and current probability of default level as compared to the date of initial recognition of a given exposure. Allowances for expected credit losses are estimated individually and collectively for homogenous loan portfolios using statistical methods on the basis of risk parameters. Significant assumptions for the portfolio method are risk parameters such as probability of default (PD), loss given default (LGD), exposure at default (EAD) or criteria/ allocation thresholds to risk categories (stages), which are determined for homogenous groups of loan exposures based on historical data taking into account adjustments for expectations about future economic conditions. The measurement of the allowance for expected credit losses requires the Bank’s Management Board to use significant judgments and make significant assumptions, including considering the implications of the COVID-19 pandemic, which is continued for another year, particularly with respect to projections of future economic conditions, identification of impairment triggers, significant increase in credit risk and the application of data to calculate the parameters of statistical model. Moreover, for loans that are assessed on an individual basis, significant judgments and assumptions relate to recovery scenarios and collateral valuation. A relatively small change in these assumptions and other relevant model parameters could have a significant impact on the Bank's allowances expected credit loss estimate. We considered this area to be a key audit matter because estimating the allowances for expected credit losses involves significant inherent risks of error and fraud and significant uncertainty of estimate and, considering the size of the loan portfolio, has a material impact on the consolidated financial statements.

·          critical assessment of the accounting policy for the recognition of impairment losses on loans and advances in terms of compliance with the requirements of applicable financial reporting standards; ·          critical assessment of the design and implementation of relevant internal controls (including general IT system controls) applied in the process of estimating allowances for expected credit losses (including monitoring of collateral values) as well as testing the effectiveness of these controls; ·          analysis of the appropriateness of the Bank's identification of impairment triggers and significant increase in credit risk for the purpose of classification into stages, taking into account qualitative and quantitative criteria; ·          critical analysis of the methodology for estimating risk parameters and the allowances for expected credit losses on both individual and portfolio basis in terms of compliance with the requirements of the relevant accounting standards and market practice; ·          critical assessment of significant assumptions and input data used in the expected credit losses models for individual key credit risk parameters used on the portfolio basis, such as in particular transfer logic between stages, probability of default (PD), exposure at default (EAD) or loss given default (LGD), or the impact of forecasts of future economic conditions on risk parameters; ·          independent recalculation of selected risk parameters and allowances for expected credit losses for a selected sample of exposures; ·          for significant loans and advances to customers assessed individually for a selected sample – assessment of the appropriateness of identification of significant increase in credit risk and impairment triggers and for impaired assets – critical assessment of relevant assumptions adopted by the Bank in the calculation of the allowances, including the amount and period of recovery and independent recalculation of impairment allowances;

		·          an assessment of the completeness and appropriateness of disclosures in the financial statements regarding significant judgments and estimates of expected credit losses, also including a sensitivity analysis of the level of expected credit losses relative to key assumptions used in the model.
Conduct risk, including litigations related to denominated and indexed loans to CHF
The book value of loans granted in CHF to individuals as at 31 December 2021: PLN 1.883 million (as at 31 December 2020: PLN 2.191 million). Due to the risk related to the legal claims with borrowers who have been granted in the past mortgage loans denominated or indexed to CHF, the book value of loan portfolio was reduced by allowances for expected credit losses in the amount of PLN 393 million and a provision was recognized for loans repaid by customers that amounted to PLN 113 million as at 31 December 2021 and (PLN 330 million and PLN 80 million as at 31 December 2020, accordingly). Reference to consolidated financial statements: note 45.2 “Credit risk”, note 36 “Provisions” and note 45.3 „Legal risk related to foreign currency mortgage loans in CHF”.
Key audit matter		Our response
In connection with its operations in regulated markets, the Bank is exposed to the risk of changes in law rulings and events that may result in lower than contractual cash flows from financial contracts with customers or in an obligation or liability arising from past events, the settlement of which will require outflow of resources embodying economic benefits ("risk amount"). As at 31 December 2021, in particular it refers to the impact of decision of the Court of Justice of the European Union ("CJEU") of 3 October 2019 (Case C- 260/18) (Note 45.3). As a result of the above mentioned decision, the number of court claims against the Bank filed by the borrowers who were granted mortgage loans denominated or indexed to CHF ("CHF loans") in the past years significantly increased. The Bank assessed that this growth may continue for some time in the future, which in the evolving a single court ruling in this respect may result in lower expected cash flows from CHF loans than those resulting from the contractual agreements. In order to determine an estimate of new expected cash flows from the CHF loan portfolio, the Bank made scenario analysis regarding future possible events, taking into account both litigation and customer settlements and		Our audit procedures included among others: ·          assessment of the the methodology for estimate by the Bank of the financial effects of CJEU decision and legal claims, as well as accounting policy in this area; ·          assessment of the design, implementation and testing the operating effectiveness of internal controls with respect to identification, monitoring and estimate of risk resulting from disputes with clients; ·          assessment of the appropriateness and reliability of the relevant input data used for the estimation of provisions for risks arising from the CJEU decision by reconciling them to the Bank's relevant IT systems; ·          analysis of the external legal opinion which include assessment of the impact of the CJEU decision of 3 October 2019 on the Bank in the light of other judgments of common courts made in Poland in similar cases after the CJEU decision date, taking into account the characteristics of the practices and loan agreements templates used by the Bank for CHF loans;

making significant assumptions regarding the number of lawsuits, the probability of losing and the probability of possible verdicts of the courts, as well as the estimated size of possible settlements with customers. A relatively small change in significant assumptions may have a significant impact on the level of the Bank's losses. For the above reasons, our assessment of the Bank's reliable estimate of the amount at risk and the disclosures in respect thereof required our significant involvement during our audit of the separate financial statements and was considered a key audit matter by us.

·          reasonableness assessment of significant assumptions provisions adopted by the Bank in the estimation of risk provisions resulting from the CJEU decision, such as probability of adopted scenarios, the number of expected lawsuits from customers, the probability of losing, the probability of possible settlements by the courts based on the trends observed to date in the Bank and in the market. This procedure also included i.a.: —      analysis of complaints and claims submitted by clients in relation to the CJEU decision and their impact on the Bank; —      analysis of confirmations of legal claims received from external legal counsels representing the Bank and their assessment of the financial impact resulting from these cases; —      assessment of the estimated financial consequences for the Bank in case of application of a settlement scenario with customers; —      sensitivity analysis of estimation of the provisions for risks resulting from the CJEU decision to changes in significant assumptions and an assessment of whether the level of those assumptions indicates bias of the Bank's Management Board; ·          assessment of the completeness and adequacy of the disclosures required by the relevant financial reporting standards regarding the estimation of risk provisions resulting from the CJEU decision.

Responsibility of the Management Board and Supervisory Board of the Bank for the Separate Financial Statements

The Management Board of the Bank is responsible for the preparation, on the basis of properly maintained accounting records, of separate financial statements that give a true and fair view in accordance with International Financial Reporting Standards, as adopted by the European Union, the adopted accounting policy, the applicable laws and the provisions of the Bank's articles of association and for such internal control as the Management Board of the Bank determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the separate financial statements, the Management Board of the Bank is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of

accounting unless the Management Board of the Bank either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

According to the Accounting Act, the Management Board and members of the Supervisory Board of the Bank are required to ensure that the separate financial statements are in compliance with the requirements set forth in the Accounting Act. Members of the Supervisory Board of the Bank are responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibility for the Audit of the Separate Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with NSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate financial statements.

The scope of audit does not include assurance on the future viability of the Bank or on the efficiency or effectiveness with which the Management Board of the Bank has conducted or will conduct the affairs of the Bank.

As part of an audit in accordance with NSAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

—   identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

—   obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control;

—   evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management Board of the Bank;

—   conclude on the appropriateness of the Management Board of the Bank’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report on the audit of the separate financial statements to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report on the audit of the separate financial statements. However, future events or conditions may cause the Bank to cease to continue as a going concern;

—   evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Audit Committee of the Bank regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We provide the Audit Committee of the Bank with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the Audit Committee of the Bank, we determine those matters that were of most significance in the audit of the separate financial statements of the current reporting period and are therefore the key audit matters. We describe these matters in our auditors’ report on the audit of the separate financial statements unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other Information

The other information comprise:

—   the letter of the President of the Management Board;

—   the letter of the Chairwoman of Supervisory Board;

—   the selected separate financial data;

—   the report on the activities of Group for the year 2021 (prepared jointly with the Report on the activities of Bank), including the statement on application of Corporate Governance Standards, the statement on non-financial data and representations of the Bank’s Management Board which are separate parts of the Report on activities (the “Report on activities”);

—   the statement of the Supervisory Board of Bank Pekao S.A. regarding the Audit Committee;

—   the assessment of the Report on the activities of the Group for 2021 and financial statements of the Bank and the Group for 2021;

(together the “Other information”).

Responsibility of the Management Board and Supervisory Board

The Management Board of the Bank is responsible for the Other information in accordance with applicable laws.

The Management Board and members of the Supervisory Board of the Bank are required to ensure that the Report on activities, including separate parts of the Report on activities, is in compliance with the requirements set forth in the Accounting Act.

Auditor’s Responsibility

Our opinion on the separate financial statements does not cover the Other information.

In connection with our audit of the separate financial statements, our responsibility was to read the Other information and, in doing so, consider whether the Other information is materially inconsistent with the separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Other information, we are required to report that fact.

In accordance with the Act on statutory auditors our responsibility was to report if the Report on activities was prepared in accordance with applicable laws and the information given in the Report on activities is consistent with the separate financial statements.

Moreover, in accordance with the requirements of the Act on statutory auditors our responsibility was to report whether the Bank included in the statement on corporate governance information required by the applicable laws and regulations, and in relation to specific information indicated in these laws or regulations, to determine whether it complies with the applicable laws and whether it is consistent with the separate financial statements and to inform whether the Bank prepared a statement on non-financial information.

Opinion on the Report on Activities

Based on the work undertaken in the course of our audit of the separate financial statements, in our opinion, the accompanying Report on activities, in all material respects:

—   has been prepared in accordance with applicable laws, and

—   is consistent with the separate financial statements.

Opinion on the Statement on Corporate Governance

In our opinion, the corporate governance statement, which is a separate part of the Report on activities, includes the information required by paragraph 70 subparagraph 6 point 5 of the Decree of the Ministry of Finance dated 29 March 2018 on current and periodic information provided by issuers of securities and the conditions for recognition as equivalent of information required by the laws of a non-member state (the “decree”).

Furthermore, in our opinion, the information identified in paragraph 70 subparagraph 6 point 5 letter c-f, h and letter i of the decree, included in the corporate governance statement, in all material respects:

—   has been prepared in accordance with applicable laws; and

—   is consistent with the separate financial statements.

Information about the Statement on Non-financial Information

In accordance with the requirements of the Act on statutory auditors, we report that the Bank has prepared a statement on non-financial information referred to in art. 49b paragraph 1 of the Accounting Act as a separate part of the Report on activities.

We have not performed any assurance procedures in relation to the statement on non-financial information and, accordingly, we do not express any assurance conclusion thereon.

Statement on Other Information

Furthermore, based on our knowledge about the Bank and its environment obtained in the audit of the separate financial statements, we have not identified material misstatements in the Report on activities and the Other information.

Report on Other Legal and Regulatory Requirements

 

Information on Compliance with Prudential Regulations

The Management Board of the Bank is responsible for the Bank’s compliance with the applicable prudential regulations defined in separate laws, in particular for the appropriate determination of the capital ratios.

Our responsibility was to inform in our auditor’s report whether the Bank complies with the applicable prudential regulations defined in separate laws, in particular whether the Bank appropriately determined the capital ratios presented in note 45.8 “Capital management”.

The audit objective was not to express an opinion on the Bank’s compliance with the applicable prudential regulations and therefore we do not express such an opinion.

Based on our audit of the separate financial statements of the Bank, we inform that we have not identified any instances of non-compliance, in the period from 1 January to 31 December 2021, of the Bank with the applicable prudential regulations, defined in separate laws, in particular with respect to the determination of the capital ratios as at 31 December 2021, that could have a material impact on the separate financial statements.

Statement on Services Other than Audit of the Financial Statements

To the best of our knowledge and belief, we did not provide prohibited non-audit services referred to in Art. 5 paragraph 1 second subparagraph of the EU Regulation and Art. 136 of the act on statutory auditors.

Services other than audit of the financial statements, which were provided to the Bank in the audited period are listed in in point 10 of the Report on activities.

Appointment of the Audit Firm

We have been appointed for the first time to audit the annual separate financial statements of the Bank by resolution of the General Shareholders’ Meeting dated 21 June 2018 and reappointed in the following years, including the resolution dated 11 June 2021, to audit the annual separate financial statements for the year ended 31 December 2021. Our period of total uninterrupted engagement is 4 years, covering the periods ended 31 December 2018 to 31 December 2021.

On behalf of audit firm
KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k.
Registration No. 3546
Signed on the Polish original
Marcin Podsiadły
Key Statutory Auditor
Registration No. 12774
Proxy
Warsaw, 2 March 2022