This document is a translation of a document originally issued in Polish.

The only binding version is the original Polish version. ządu

SELECTED FINANCIAL DATA RELATING TO THE FINANCIAL STATEMENTS

	in PLN ‘000		in EUR ‘000
SELECTED FINANCIAL DATA	period from 01.01.2020 to 30.12.2020	period from 01.01.2019 to 31.12.2019	period from 01.01.2020 to 30.12.2020	period from 01.01.2019 to 31.12.2019

Net interest income	330,390	316,665	73,843	73,612
Net fee and commission income	(5,264)	(5,888)	(1,177)	(1,369)
Operating profit	126,846	135,123	28,351	31,411
Profit before tax	126,846	135,123	28,351	31,411
Net profit	81,530	89,170	18,222	20,729
Net comprehensive income	93,182	163,271	20,827	37,954
Net cash from/used in operating activities	(821,731)	(4,326,317)	(183,660)	(1,005,700)
Net cash from/used in investing activities	20,447	(377,256)	4,570	(87,697)
Net cash from/used in financing activities	801,277	4,703,596	179,088	1,093,402
Total net cash flows	(7)	23	(2)	5

SELECTED FINANCIAL DATA	in PLN ‘000		in EUR ‘000
SELECTED FINANCIAL DATA	as at 31.12.2020	as at 31.12.2019	as at 31.12.2020	as at 31.12.2019

Total assets	27,310,492	27,253,301	5,918,023	6,399,742
Total equity	2,093,205	2,000,023	453,585	469,654
Share capital	1,611,300	1,611,300	349,159	378,373
Number of shares (in thousands)	1,611,300	1,611,300	1,611,300	1,611,300
Book value per share (in PLN/EUR)	1.30	1.24	0.28	0.29
Diluted number of shares (in thousands)	1,611,300	1,611,300	1,611,300	1,611,300
Diluted book value per share (in PLN/EUR)	1.30	1.24	0.28	0.29
Total capital ratio (TCR)	18.7%	16.6%	18.7%	16.6%
Common equity Tier 1 (CET 1)	1,933,805	1,820,780	419,044	427,564
Own funds	1,933,805	1,820,780	419,044	427,564

Selected financial statement items have been translated to EUR at the following foreign exchange rates

items of the income statement, statement of comprehensive income and statement of cash flows – the average of the NBP exchange rates as at the last day of each month of the period	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019
	4.4742	4.3018
items of the statement of financial position – the average NBP exchange rate as at the last day of the period	31.12.2020	31.12.2019
	4.6148	4.2585

This document is a translation of a document originally issued in Polish.

The only binding version is the original Polish version. ządu

Financial statements of

PKO Bank Hipoteczny SA

for the year ended

31 December 2020

INCOME STATEMENT

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

INCOME STATEMENT

INCOME STATEMENT	Note	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Interest income and income similar to interest income, including:	5	705,570	862,413
Interest income recognized under the effective interest rate method		701,336	860,820
Income similar to interest income on instruments measured at fair value through profit or loss		4,234	1,593
Interest expenses and expenses similar to interest expenses	5	(375,180)	(545,748)
Net interest income		330,390	316,665
Fee and commission income	6	8,699	15,495
Fee and commission expense	6	(13,963)	(21,383)
Net fee and commission income		(5,264)	(5,888)
Net gain/(loss) on financial instruments measured at fair value through profit or loss	7	86	65
Net foreign exchange gains/(losses)	8	5,893	(1,803)
Net income (expense) on modification	9	(2,581)	455
Net allowances for expected credit losses	10	(35,665)	(14,708)
Other operating income	11	602	499
Other operating expenses	11	(650)	(930)
Net other operating income and expenses		(48)	(431)
Administrative expenses	12	(50,957)	(51,385)
Regulatory charges	13	(25,551)	(24,745)
Tax on certain financial institutions	14	(89,457)	(83,102)
Operating profit		126,846	135,123
Profit before tax		126,846	135,123
Corporate income tax	15	(45,316)	(45,953)

Net profit		81,530	89,170

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME	Note	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Net profit		81,530	89,170
Other comprehensive income		11,652	74,101
Items which may be reclassified to profit or loss		11,652	74,101
Cash flow hedges (gross)		8,351	92,542
Deferred tax		(1,586)	(17,583)
Cash flow hedges (net)	18	6,765	74,959
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		6,035	(1,059)
Deferred tax		(1,148)	201
Remeasurement of financial assets measured at fair value through other comprehensive income (net)		4,887	(858)

Total net comprehensive income		93,182	163,271

STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION	Note	31.12.2020	31.12.2019
ASSETS
Cash and balances with the Central Bank	16	21	20
Amounts due from banks	17	23	31
measured at amortized cost		23	31
Derivative hedging instruments	18	1,154,692	173,275
Securities	19	1,241,821	1,240,161
measured at fair value through other comprehensive income		1,241,821	1,240,161
Loans and advances to customers	20, 21	24,902,659	25,821,070
measured at amortized cost		24,902,659	25,821,070
Intangible assets	22	1,050	2,395
Property, plant and equipment	22	3,747	5,271
Other assets	23	6,479	11,078
TOTAL ASSETS		27,310,492	27,253,301

LIABILITIES AND EQUITY
Liabilities
Amounts due to banks	24	3,575,133	4,811,259
measured at amortized cost		3,575,133	4,811,259
Derivative hedging instruments	18	541	46,084
Amounts due to customers	25	6,641	4,885
measured at amortized cost		6,641	4,885
Liabilities in respect of mortgage covered bonds issued	26	17,205,554	16,239,975
measured at amortized cost		17,205,554	16,239,975
Liabilities in respect of bonds issued	27	4,337,081	4,060,026
measured at amortized cost		4,337,081	4,060,026
Other liabilities	28	38,428	35,960
Current income tax liabilities	15	4,055	11,373
Deferred income tax provision		49,634	43,422
Provisions	29	220	294
TOTAL LIABILITIES		25,217,287	25,253,278

Equity
Share capital	30	1,611,300	1,611,300
Supplementary capital		250,733	161,563
Accumulated other comprehensive income		149,642	137,990
Net profit for the period		81,530	89,170
TOTAL EQUITY		2,093,205	2,000,023

TOTAL LIABILITIES AND EQUITY		27,310,492	27,253,301

Total capital ratio (TCR)	49	18.7%	16.6%
Book value (in PLN ‘000)		2,093,205	2,000,023
Number of shares (in thousands)	30	1,611,300	1,611,300
Book value per share (in PLN)		1.30	1.24
Diluted number of shares (in thousands)		1,611,300	1,611,300
Diluted book value per share (in PLN)		1.30	1.24

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2020	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Including:		Retained earnings	Net profit for the period	Total equity
FOR THE YEAR ENDED 31 DECEMBER 2020	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Cash flow hedges	Financial assets measured at fair value through other comprehensive income	Retained earnings	Net profit for the period	Total equity

01 January 2020		1,611,300	161,563	137,990	134,421	3,569	-	89,170	2,000,023
Transfer from retained earnings		-	-	-	-	-	89,170	(89,170)	-
Transfer from profit to equity		-	89,170	-	-	-	(89,170)	-	-
Total comprehensive income, including:		-	-	11,652	6,765	4,887	-	81,530	93,182
Net profit		-	-	-	-	-	-	81,530	81,530
Other comprehensive income		-	-	11,652	6,765	4,887	-	-	11,652
				-
31 December 2020	30	1,611,300	250,733	149,642	141,186	8,456	-	81,530	2,093,205

FOR THE YEAR ENDED 31 DECEMBER 2019	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Including:		Retained earnings	Net profit for the period	Total equity
FOR THE YEAR ENDED 31 DECEMBER 2019	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Cash flow hedges	Financial assets measured at fair value through other comprehensive income	Retained earnings	Net profit for the period	Total equity

31 December 2018		1,295,000	54,932	63,889	59,462	4,427	(11,787)	85,849	1,487,883
Issue of I series shares		100,000	-	-	-	-	-	-	100,000
Issue of J series shares		131,500	17,741	-	-	-	-	-	149,241
Issue of K series shares		84,800	14,828	-	-	-	-	-	99,628
Transfer from retained earnings		-	-	-	-	-	85,849	(85,849)	-
Transfer from profit to equity		-	74,062	-	-	-	(74,062)	-	-
Total comprehensive income, including:		-	-	74,101	74,959	(858)	-	89,170	163,271
Net profit		-	-	-	-	-	-	89,170	89,170
Other comprehensive income		-	-	74,101	74,959	(858)	-	-	74,101

31 December 2019	30	1,611,300	161,563	137,990	134,421	3,569	-	89,170	2,000,023

STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS	Note	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Cash flows from operating activities
Profit before tax		126,846	135,123
Total adjustments:		(948,577)	(4,461,440)
Amortization and depreciation		2,730	3,249
Interest recognized in cash flows from investing activities and cash flows from financing activities		239,286	249,306
Change in the balance of:
derivative financial instruments (asset)		(981,417)	(4,986)
gross loans and advances to customers		883,102	(4,765,054)
securities measured at fair value through other comprehensive income		5,345	(4,712)
other assets and right-of-use assets		4,816	4,935
amounts due to banks		(2,088,936)	(21,880)
derivative financial instruments (liability)		(45,543)	30,830
amounts due to customers		1,756	526
liabilities in respect of mortgage covered bonds issued		995,579	(106,181)
liabilities in respect of bonds issued		36,466	72,690
allowances for expected credit losses and provisions		35,235	14,479
other liabilities, excluding liabilities in respect of unregistered issues of own shares		3,805	9,822
Other adjustments (including changes in the measurement of derivative instruments recognized in other comprehensive income)		8,354	92,538
Income tax paid		(49,155)	(37,002)
Net cash from/used in operating activities		(821,731)	(4,326,317)

Cash flows from investing activities
Inflows from investing activities		370,392	641,620
Redemption of securities measured at fair value through other comprehensive income		370,392	641,620
Outflows on investing activities		(349,945)	(1,018,876)
Acquisition of securities measured at fair value through other comprehensive income		(349,865)	(1,018,758)
Acquisition of intangible assets and property, plant and equipment		(80)	(118)
Net cash from/used in investing activities		20,447	(377,256)

Cash flows from financing activities
Proceeds from issue of own shares and payments towards issue of own shares		-	248,869
Proceeds from issue of mortgage covered bonds		-	3,504,656
Redemption of mortgage covered bonds issued		(30,000)	-
Proceeds from issue of bonds		6,198,089	7,624,688
Redemption of bonds issued		(5,957,500)	(6,948,500)
Inflows related to overdraft facilities		14,983,256	11,096,009
Outflows related to overdraft facilities		(14,180,447)	(10,555,156)
Inflows related to term loans		150,000	-
Outflows related to term loans		(100,000)	-
Repayment of interest on mortgage covered bonds issued, bonds and loans obtained		(260,784)	(265,711)
Payments of lease liabilities (IFRS 16)		(1,337)	(1,259)
Net cash from/used in financing activities		801,277	4,703,596

Total net cash flows		(7)	23
Cash and cash equivalents at the beginning of the period		51	28
Cash and cash equivalents at the end of the period	34	44	51

NOTES TO THE FINANCIAL STATEMENTS – TABLE OF CONTENTS

1. General Information

2. Basis of preparation of the financial statements

3. Description of major accounting policies

4. Changes in accounting policies and explanation of differences between previously published reports

NOTES TO THE INCOME STATEMENT

5. Interest income and expense

6. Fee and commission income and expense

7. Net gain/(loss) on financial instruments measured at fair value through profit or loss

8. Net foreign exchange gains/(losses)

9. Net income/(expense) on modification

10. Net allowances for expected credit losses

11. Other operating income and expenses

12. Administrative expenses

13. Regulatory charges

14. Tax on certain financial institutions

15. Corporate income tax

NOTES TO THE STATEMENT OF FINANCIAL POSITION

16. Cash and balances with the Central Bank

17. Amounts due from banks

18. Derivative hedging instruments

19. Securities

20. Loans and advances to customers

21. Expected credit losses

22. Intangible assets and property, plant and equipment

23. Other assets

24. Amounts due to banks

25. Amounts due to customers

26. Liabilities in respect of mortgage covered bonds issued

27. Liabilities in respect of bonds issued

28. Other liabilities

29. Provisions

30. Equity and shareholding structure of the Bank

OTHER NOTES

31. Contingent liabilities granted and received

32. Legal claims

33. Information about leases

34. Notes to the statement of cash flows

35. Related party transactions

36. Fair value of financial assets and liabilities

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

37. Risk management at PKO Bank Hipoteczny SA

38. Credit risk management

39. Concentration risk management

40. Residual risk management

41. Liquidity risk management

42. Interest rate risk management

43. Currency risk management

44. Model risk management

45. Operational risk management

46. Business risk management

47. Compliance risk management

48. Reputation risk management

49. Capital adequacy and the management of capital risk

EVENTS AFTER THE END OF THE REPORTING PERIOD

50. Events after the end of the reporting period

NOTES TO THE FINANCIAL STATEMENTS

PKO Bank Hipoteczny Spółka Akcyjna (“PKO Bank Hipoteczny SA”, “Bank”) with its registered office in Warsaw, ul. Puławska 15, 02-515 Warsaw, is registered in the Register of Businesses maintained by the District Court for the capital city of Warsaw in Warsaw, 13th Business Department of the National Court Register, with the reference number KRS 0000528469. The Bank was entered in the Register of Businesses of the National Court Register on 24 October 2014. Until 24 September 2020, when the change in the registered office was registered in the National Court Register, the Bank’s registered office was located in Gdynia at ul. Jerzego Waszyngtona 17, 81-342 Gdynia. The Bank was assigned the statistical number REGON 222181030. Its share capital as at 31 December 2020 was PLN 1,611,300,000 and it was fully paid up.

PKO Bank Hipoteczny is a specialized bank that operates on the basis of the Polish Covered Bonds and Mortgage Banks Act dated 29 August 1997, the Banking Law of 29 August 1997, the Commercial Companies Code and other generally applicable provisions of the law, the principles of good banking practice and the Bank’s Articles of Association.

The Bank specializes in granting residential mortgage loans for individuals. The Bank also acquires receivables in respect of such loans from PKO Bank Polski SA. The Bank acquires loans for its portfolio based on strategic cooperation with PKO Bank Polski SA.

The Bank’s principal objective, in terms of financing, is to issue mortgage covered bonds, which are to serve as the primary source of long-term financing for residential mortgage loans.

Indication as to whether the Bank is a parent or significant investor and whether it prepares consolidated financial statements

PKO Bank Hipoteczny SA is not a parent or a significant investor in associates and jointly controlled entities. Therefore, PKO Bank Hipoteczny SA does not prepare consolidated financial statements.

The Parent of PKO Bank Hipoteczny SA is PKO Bank Polski SA, in which the State Treasury holds 29.43% of the share capital. PKO Bank Polski SA prepares consolidated financial statements of the PKO Bank Polski Group.

Information on the composition of the Bank’s Supervisory Board and Management Board

The following table presents the composition of the Supervisory Board of PKO Bank Hipoteczny SA during the period covered by the financial statements:

No.	Name and surname	Position	Date of appointment to the Supervisory Board	Date of dismissal/ resignation/ end of term
1	Jakub Papierski	Chairman of the Supervisory Board	06.10.2014	-
2	Paweł Metrycki	Member of the Supervisory Board (from 30.03.2019 to 07.10.2019) / Deputy Chairman of the Supervisory Board (from 07.10.2019)	30.03.2019	-
3	Justyna Borkiewicz	Member of the Supervisory Board	28.10.2016	-
4	Lucyna Kopińska	Member of the Supervisory Board	01.09.2019	-
5	Piotr Kwiecień	Member of the Supervisory Board (independent)	18.10.2017	-
6	Jadwiga Lesisz	Member of the Supervisory Board (independent)	01.09.2019	-
7	Dariusz Odzioba	Member of the Supervisory Board	01.09.2019	-
8	Ilona Wołyniec	Member of the Supervisory Board	30.03.2019	-

The following table presents the composition of the Management Board of PKO Bank Hipoteczny SA during the period covered by the financial statements:

No.	Name and surname	Position	Date of appointment to the Management Board	Date of dismissal/ resignation
1	Paulina Strugała	President of the Management Board	16.04.2018	-
2	Daniel Goska	Vice-President of the Management Board	01.10.2020	-
3	Piotr Kochanek	Vice-President of the Management Board	01.01.2019	-
4	Agnieszka Krawczyk	Vice-President of the Management Board	01.01.2018	30.09.2020

In connection with the resignation of Ms Agnieszka Krawczyk as Vice-President of the Bank’s Management Board as of 30 September 2020, on 28 September 2020 the Supervisory Board of PKO Bank Hipoteczny SA appointed Mr Daniel Goska to the position of Vice-President of the Bank’s Management Board with effect from 1 October 2020.

2. Basis of preparation of the financial statements

The financial statements of PKO Bank Hipoteczny Spółka Akcyjna cover the year ended 31 December 2020 and contain comparative data for the year ended 31 December 2019. The financial data is presented in thousands of Polish zlotys (PLN), rounded to a thousand, unless otherwise indicated.

2.1 Statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) endorsed by the European Union as at 31 December 2020, and to the extent not governed by the said standards, in accordance with the requirements of the Accounting Act of 29 September 1994 and implementing regulations issued on the basis of the said Act, and the requirements applicable to issuers of securities admitted or seeking admission to trading on a market for official stock exchange listing.

2.2 Going concern

The financial statements have been prepared on the assumption that the Bank will continue its business activities in the foreseeable future (i.e. in the period of at least 12 months after the end of the reporting period). As at the date of signing these financial statements, the Management Board has not identified any facts or circumstances which would indicate any threats to the Bank’s ability to continue as a going concern for at least 12 months after the end of the reporting period as a result of intended or forced discontinuing or significantly curtailing the Bank’s existing operations.

2.3 Basis of preparation of the financial statements

In the financial statements, the concept of fair value was applied to financial assets and financial liabilities measured at fair value through profit or loss or through other comprehensive income, including derivative instruments and securities measured at fair value through other comprehensive income. Other components of financial assets and financial liabilities (including loans and advances) are reported at amortized cost, using the effective interest rate method, less allowances for expected credit losses in the case of financial assets.

The Bank recognized all items of costs and income in accordance with the accruals basis, the matching principle, the principles of recognition and measurement of assets and liabilities, and the recognition of impairment allowances. Accounting policies applicable to individual items are presented in the notes to the statement of financial position and to the income statement.

When preparing the financial statements, the Bank makes certain estimates and adopts assumptions which directly affect the financial statements. The estimates and assumptions that are used by the Bank in determining the value of its assets and liabilities, as well as revenues and costs, are made based on historical data and other factors which are available and are considered to be proper under the circumstances.

Assumptions regarding the future and the data available are used for estimating carrying amounts of assets and liabilities which cannot be unequivocally determined using other sources. In making estimates, the Bank 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 the estimates.

Estimates and assumptions made by the Bank are reviewed on an on-going basis. Adjustments to estimates are recognized in the periods in which the estimates were adjusted, provided that these adjustments only affect a given period. If the adjustments affect both the period in which the adjustment was made and future periods, they are recognized in the period in which the adjustments were made and in the future periods.

2.4 Representations of the Management Board

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

2.5 Approval of the financial statements

These financial statements, having been reviewed with an opinion issued by the Audit and Finance Committee of the Supervisory Board on 11 February 2021 and evaluated by the Supervisory Board on 11 February 2021, were approved by the Bank’s Management Board for publication on 11 February 2021.

3. Description of major accounting policies

The most important accounting policies, estimates and judgements applied when preparing these financial statements are presented in the individual Notes to the financial statements. These policies have been applied consistently in all the years presented.

The list of accounting policies and important estimates and judgments for specific items of the income statement and statement of financial position have been presented below.

INCOME STATEMENT	Note	Accounting policies 1)	Major estimates and judgements 1)
Interest income and expense	5	T	T
Fee and commission income and expense	6	T
Net gain/(loss) on financial instruments measured at fair value through profit or loss	7	T	T
Net foreign exchange gains/(losses)	8	T	T
Gain or loss on derecognition of financial assets and financial liabilities not measured at fair value through profit or loss		T
Net income (expense) on modification	9	T
Net allowances for expected credit losses	10	T	T
Net other operating income and expenses	11	T
Administrative expenses	12	T
Regulatory charges	13	T
Corporate income tax	15	T

STATEMENT OF FINANCIAL POSITION	Note	Accounting policies 1)	Major estimates and judgements 1)
Cash and balances with the Central Bank	16	T
Amounts due from banks	17	T
Derivative hedging instruments	18	T	T
Securities	19	T
Loans and advances to customers	20	T	T
Intangible assets	22	T	T
Property, plant and equipment, including right-of-use assets	22	T	T
Other assets	23	T
Amounts due to banks	24	T
Amounts due to customers	25	T
Liabilities in respect of mortgage covered bonds issued	26	T
Liabilities in respect of bonds issued	27	T
Other liabilities	28	T
Provisions	29	T	T
Equity	30	T

1) Letter “Y” means the presence of a given accounting policy or major estimates and judgments

3.1 Foreign currencies

3.1.1. Functional currency and currency of presentation

These financial statements are presented in Polish zlotys (PLN), which are the Bank’s functional currency and currency of presentation.

3.1.2. Transactions and balances in foreign currencies

Transactions expressed in foreign currencies are translated into the functional currency at the exchange rate applicable on the transaction date. At the end of each reporting period, the Bank translates:

■ monetary items in foreign currencies – at the closing exchange rate, i.e. the average exchange rate announced by the National Bank of Poland applicable at the end of the reporting period;

■ non-monetary items carried at historical cost in foreign currencies – at the exchange rate as at the date of the transaction;

■ non-monetary items carried at fair value in foreign currencies are translated using the exchange rates applicable as at the day at which the fair values are determined.

Gains and losses resulting from the settlement of these transactions and the measurement of monetary assets and liabilities expressed in foreign currencies are recognized in the income statement as net foreign exchange gains/(losses).

3.2 Recognition of transactions in the books of account

Financial assets and financial liabilities, including forward contracts which result in an obligation or a right to buy or sell a fixed quantity of specific financial instruments at a fixed price at a future date, are recognized in the books of account as at the date of the contract, irrespective of the contractual settlement date.

3.3 Derecognition of financial instruments

A financial asset is derecognized when contractual rights to cash flows from the financial assets expire or when the Bank transfers the financial assets to another entity. Such transfer takes place when the Bank:

■ transfers contractual rights to cash flows from the financial asset, or

■ retains contractual rights to cash flows from the financial asset, but assumes a contractual obligation to transfer these cash flows to a third party.

When transferring a financial asset, the Bank makes an assessment of the extent to which it retains the risks and rewards of the ownership of the financial asset. In such a case:

■ if the Bank transfers substantially all risks and rewards of ownership of a financial asset, the Bank removes the financial asset from the statement of financial position;

■ if the Bank retains substantially all risks and rewards of ownership of a financial asset, the Bank continues to present the financial asset in the statement of financial position;

■ If the Bank neither transfers nor retains substantially all risks and rewards of ownership of a financial asset, the Bank determines whether or not it has retained control over the financial asset. If control has been retained, the financial asset is recognized in the Bank’s statement of financial position up to the amount resulting from permanent involvement. Otherwise, the financial asset is derecognized.

The Bank derecognizes a financial liability (or a part thereof) when the contractual liability has been settled, annulled, or has expired.

3.4 Classification and measurement of financial instruments

3.4.1. Financial instruments classification policies

The Bank classifies its financial assets to one of the following categories:

■ measured at amortized cost;

■ measured at fair value through other comprehensive income;

■ measured at fair value through profit or loss.

Classification as at the date of acquisition or origin of an asset depends on the business model adopted by the Bank to manage a given group of assets and the characteristics of the contractual cash flows from a single asset or group of assets. The Bank identifies the following business models:

■ “held to collect” – a model according to which financial assets acquired or originated are held to benefit from contractual cash flows – a model typical of lending operations;

■ “held to collect or sell” – a model according to which financial assets acquired or originated are held to benefit from contractual cash flows, but may also be sold – a model typical of liquidity management;

■ residual – other than the “held to collect” and “held to collect or sell” model.

Financial instruments are classified upon their recognition or significant modification. Changes in the classification of financial assets may result from changes in the business model. Changes in the model are caused by changes occurring inside or outside the Bank or by the commencement or discontinuation of a given type of operation; therefore, such changes very rarely occur.

Business model

A business model is selected at initial recognition of financial assets. It is selected at the level of particular groups of assets, in the context of the area of operations in connection with which the financial assets originated or were acquired, and the selection is based, among other things, on:

■ the manner of assessing and reporting financial asset portfolio results;

■ the manner of managing the risk associated with such assets and the policies for remunerating portfolio managers.

In the “held to collect” business model, the sale of assets is incidental and may only take place in the event of increased credit risk, changes in laws or regulations – to maintain the assumed regulatory capital level, on the terms and conditions described in the management strategies of such portfolios or on the condition that the sale is close to maturity, in the event of a significant risk increase above the level assumed for the given portfolio, material internal restructuring or the acquisition of another business, execution of a contingency or recovery plan or other unforeseeable factors which are beyond the Bank’s control.

Assessment of the characteristics resulting from contractual cash flows

Characteristics resulting from contractual cash flows are assessed by determining, on the basis of an SPPI test, whether the contractual cash flows resulting from the asset constitute exclusively repayment of the principal and interest on the outstanding principal amount. Interest comprises payment for the time value of money and the credit risk associated with the outstanding principal over a specified period, and for other basic risks and costs relating to granting or acquiring the financial asset, as well as a profit margin.

The characteristics resulting from contractual cash flows have no impact on the classification of financial assets if:

■ they would only have an insignificant impact on the contractual cash flows from the asset (de minimis feature);

■ they would impact the contractual cash flows from the instrument only if an extremely rare, atypical and unlikely event occurred (non-genuine feature).

To determine this, the potential impact of characteristics resulting from contractual cash flows in each reporting period and throughout the life cycle of the financial instrument is taken into account.

SPPI tests are conducted for each financial asset in the “held to collect” or “held to collect and sell” model as at the date of initial recognition (and, for material modifications, after re-recognizing the financial asset) and in the event of a change in the terms and conditions of the contract affecting the characteristics of contractual cash flows.

Category of measurement of financial assets at amortized cost

A financial asset (this relates to debt financial assets) is measured at amortized cost if the following conditions are jointly met:

■ a financial asset is “held to collect”;

■ the contractual terms relating to the financial asset cause cash flows to arise in certain periods, which are only the result of repayment of the principal and the interest on the outstanding principal (passed SPPI test).

The initial value of an asset measured at amortized cost is adjusted by all commissions and fees which have an impact on its effective return and constitute an integral part of the effective interest rate on the asset (commissions and fees arising as a result of the Bank conducting activities which lead to the origin of the asset). Commissions and fees which affect the effective return on assets and arise after the date of origin of the financial asset lead to changes in future cash flow schedules generated by the assets.

The present value of this category of assets is determined using the effective interest rate used to determine (accrue) interest income generated by the asset in the given period, on a current basis, adjusted for allowances for expected credit losses.

Category of measurement of financial assets at fair value through other comprehensive income

A financial asset (this relates to debt financial assets) is measured at fair value through other comprehensive income if the following conditions are jointly met:

■ the financial asset is held in accordance with the business model aimed at both receiving contractual cash flows and selling the asset; and

■ the contractual terms relating to the financial asset result in cash flows, which comprise solely payments of principal and interest on the outstanding principal.

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

The effects of changes in the fair value of such financial assets until derecognition or reclassification are recognized in other comprehensive income, with the exception of interest income, net allowances for expected credit losses and foreign exchange gains and losses, which are recognized in the income statement. If a financial asset has been derecognized, accumulated gains and losses previously reported in other comprehensive income are reclassified from other comprehensive income to the income statement.

Category of measurement of financial assets at fair value through profit or loss

If financial assets do not meet the above-mentioned qualification criteria to be measured at amortized cost or at fair value through other comprehensive income, they are classified to financial assets measured at fair value through profit or loss.

In addition, upon initial recognition, a financial asset may be irrevocably designated as measured at fair value through profit or loss (the option of measurement at fair value through profit or loss), provided that this will eliminate or significantly reduce inconsistency in the measurement or recognition (accounting mismatch). This option is available for debt instruments both under the “held to collect” and “held to collect and sell” model.

Pursuant to IFRS 9, financial assets measured at fair value through profit or loss are presented as follows:

1) held for trading – financial assets which:

■ have been purchased mainly to sell or redeem in the short term; or

■ upon initial recognition 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);

2) financial assets not held for trading, obligatorily measured at fair value through profit or loss – financial assets which have not met the criterion of cash flow characteristics (the SPPI test) (irrespective of the business model);

3) financial assets designated for measurement at fair value through profit or loss at initial recognition (the option of measurement at fair value through profit or loss).

Gains or losses on a financial asset measured at fair value through profit or loss are recognized in the income statement.

3.4.2. Change in the classification of financial assets

Financial assets may be reclassified only in the event of a change in the business model relating to an asset or a group of assets resulting from the commencement or discontinuation of a material part of operations. Such changes are incidental. Changes in the classification are recognized prospectively, i.e. without changing the effects of fair value measurement, allowances or accrued interest, which have been recognized to-date.

The following are not considered changes in the business model:

■ changes in the intentions relating to specific financial assets (even in the event of significant changes in market conditions);

■ temporary disappearance of a specific financial assets market;

■ transfer of financial assets between areas of operations using different business models.

3.4.3. Change in estimated contractual cash flows – Modifications

A modification is a change in contractual flows of a financial asset based on an annex to the respective contract or changes in the terms and conditions of the contract resulting from legal regulations. A modification may be material or immaterial. Changes in contractual flows resulting from meeting the contractual terms and conditions are not considered to be modifications.

If the contractual cash flows relating to a financial asset are subject to renegotiation or any other modification, and the renegotiation or modification does not lead to derecognition of the given financial asset (“Immaterial Modification”) the gross carrying amount of the financial asset is recalculated and respective gains or losses on modification are recognized in the income statement. Adjustments to the carrying amounts of financial assets due to modifications are accounted for in net interest income/cost using the effective interest rate. The gross carrying amount of a financial asset is calculated as the present value of renegotiated or modified contractual cash flows discounted at the original effective interest rate of the financial asset (or effective interest rate adjusted for credit risk in the event of purchased or originated credit-impaired financial assets) or, if applicable (e.g. for gains or losses on hedging), at the updated effective interest rate. All the costs and fees incurred adjust the carrying amount of the modified financial asset and are amortized over the period to maturity of the modified financial asset.

In some situations, renegotiation or modification of contractual cash flows relating to a financial asset may lead to the derecognition of an existing financial asset. If the modification of a financial asset leads to its derecognition and then to the recognition of a modified financial asset, the modified financial asset is considered to be a new financial asset (“Material Modification”). The new asset is recognized at fair value and a new effective interest rate to be applied to the new asset is calculated. If the characteristics of a modified new financial asset (after the execution of an annex) reflect the arm’s length basis, the carrying amount of the financial asset is equal to its fair value.

The assessment of whether a given modification of financial assets is material or immaterial depends on whether certain qualitative and quantitative criteria have been met.

The following Qualitative Criteria have been adopted:

■ change of debtor, except in the case of the debtor’s death;

■ introducing a contractual feature to the contract which leads to failing the cash flow characteristics test or removal of such a feature;

■ currency conversion;

■ an increase in a debtor’s exposure, which includes an increase in the capital and off-balance sheet commitments granted of more than 10% in relation to the amount of capital and off-balance sheet commitments prior to the increase for each individual exposure.

If at least one of these criteria is present, a material modification occurs.

The adopted Quantitative Criterion constitutes a 10% test consisting of analysing the changes in the contractual terms of a financial asset resulting in a difference arising between the amount of the future cash flows from the changed financial asset discounted using the original effective interest rate and the amount of corresponding future cash flows from the original financial asset discounted using the same interest rate.

If the quantitative criterion exceeds 10%, the modification is considered material, and if the quantitative criterion is equal to or lower than 10%, the modification is considered immaterial.

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

Purchased or originated credit-impaired assets (“POCI”) are debt financial assets measured at amortized cost and measured at fair value through other comprehensive income, i.e. loans and debt securities which were impaired at the moment of their purchase or origin. Those assets are initially recognized in net amounts (net of impairment allowances) which reflect their fair value. Interest income on POCI assets is calculated on the net carrying amount using the effective interest rate adjusted for credit risk recognized over the life of the asset. Credit risk-adjusted effective interest rate is calculated based on the future cash flows adjusted for the effect of credit risk recognized over the life of the asset. The change in estimates of future recoveries in further reporting periods is recognized as an impairment loss or revaluation gain in the income statement.

3.4.5. Recognition of gains/(losses) on derecognition of financial instruments not measured at fair value through profit or loss and income/expense on modification

Gains and losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss (including gains and losses on disposal or material modification) are recognized in “Gains/(losses) on derecognition of financial assets and liabilities not measures at fair value through profit or loss”.

The result on immaterial modification of financial assets is recognized in “Net income/(expense) on modification”.

Both these income statement items are presented separately for the following financial instruments:

■ measured at fair value through other comprehensive income;

■ measured at amortized cost.

4. Changes in accounting policies and explanation of differences between previously published reports

4.1 New standards and amendments to the published standards and interpretations which became binding as of 1 January 2020

4.1.1. Amendments to IFRS 9, IAS 39 and IFRS 7 relating to IBOR reform

Amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments and IFRS 7 Financial Instruments: Disclosures published in 2019 modify some detailed requirements concerning hedge accounting, mainly in order to prevent the expected interest rates reform (IBOR reform) from effectively ending hedge accounting. The key exemptions resulting from the amendments concern:

■ the requirement that the flows are “highly probable”;

■ the risk components;

■ prospective assessments;

■ retrospective effectiveness testing (concerns IAS 39);

■ reclassification of the provision for cash flow hedges.

In view of the above, the Bank did not take the impact of uncertainty as to the IBOR rates after 31 December 2021 into account in the prospective tests of the effectiveness of hedges.

The IBOR reform may affect all hedging relationships applied by the Bank. Their nature and the nominal amounts of the instruments designated as hedges as at 31 December 2020 are described in Note 18 “Hedging derivatives”.

4.1.2. Other amendments

The implementation of new standards and interpretations and amendments thereto, which became binding on 1 January 2020, concerning:

■ definition of the term “material” in IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;

■ definition of a business in IFRS 3 Business Combinations;

■ and modifications to the IFRS Conceptual Framework;

did not have a material impact on these financial statements.

4.2 New standards and interpretations, and amendments thereto, which have been published and have been endorsed by the European Union, but are not yet binding and have not been applied by the Bank

The Bank does not identify any new standards or amendments to standards or interpretations, which have been published and endorsed by the European Union, but are not binding for annual periods beginning on 1 January 2020 and have not been applied in the financial statements, but which will have a material impact on the financial statements.

4.3 New standards and interpretations, and amendments thereto, which have been published but have not been endorsed by the European Union

In response to the expected interest rates reform (IBOR reform), the International Accounting Standards Board published the second part of the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments concern, inter alia, accounting for changes in cash flows, hedge accounting and disclosures related to the IBOR reform. As the Bank has significant financial assets and financial liabilities based on variable IBOR rates, the analysis of the standard's impact on the financial statements has not yet been completed.

Amendments to: IAS 1 Presentation of Financial Statements, with respect to the classification of liabilities as current and non-current and the implementation of IFRS 17 Insurance Contracts will not have a material effect on the Bank’s financial statements.

4.4 Explanation of differences between previously published financial statements and these financial statements

The Bank did not make any changes in the recognition or presentation in the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020.

NOTES TO THE INCOME STATEMENT

5. Interest income and expense

Accounting policies

Interest income and expense include interest, including premium and discount on financial instruments measured at amortized cost, and instruments measured at fair value. Interest income and expense also include fees and commissions received and paid, accounted for using the effective interest rate method, included in the measurement of a financial instrument.

Interest income and expense are recognized on an accruals basis and using the effective interest rate method to discount the estimated future cash flows throughout the expected life of the financial asset or liability to the gross carrying amount of the asset or the amortized cost of the financial liability, with the exception of:

■ purchased or originated credit-impaired financial assets (POCI assets). Interest income on such assets is calculated on the net carrying amount using the effective interest rate adjusted for credit risk recognized over the life of the asset;

■ financial assets other than POCI, which subsequently became credit-impaired. Interest income on such assets is calculated based on their net carrying amount using the original effective interest rate as at the date of recognition of the impairment indication.

All commissions paid and received by the parties to the contract are taken into account in the effective interest rate calculation.

Income and expense on the sale of insurance products linked to loans and advances

The Bank does not offer any insurance products linked to loans and advances.

Financial information

INTEREST INCOME AND INCOME SIMILAR TO INTEREST INCOME	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Interest income recognized using the effective interest rate method, including:	701,336	860,820
on financial instruments measured at amortized cost, including:	685,183	839,704
loans and advances to customers	685,131	839,611
amounts due from banks and on mandatory reserve	52	93
instruments measured at fair value through other comprehensive income, including:	16,153	21,116
debt securities	16,153	21,116
Income similar to interest income on instruments measured at fair value through profit or loss, including:	4,234	1,593
hedging IRS transactions (net)	4,234	1,593

Total	705,570	862,413
including: interest income on impaired financial instruments	882	576

INTEREST EXPENSES AND SIMILAR EXPENSES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Interest expense on financial instruments measured at amortized cost, including:	(259,364)	(331,445)
loans received and overdraft facility used	(65,561)	(44,507)
liabilities in respect of the purchase of receivables	(6,187)	(43,473)
mortgage covered bonds issued	(140,043)	(161,784)
bonds issued	(47,463)	(81,523)
lease liabilities	(110)	(158)
Expenses similar to interest expense on instruments measured at fair value through profit or loss, including:	(115,816)	(214,303)
hedging CIRS transactions (net)	(115,816)	(214,303)

Total	(375,180)	(545,748)

6. Fee and commission income and expense

Accounting policies

Fee and commission income is recognized when the service has been provided.

Fee and commission income includes one-off fees collected by the Bank for performing tasks not directly related to the origination of loans, advances and other receivables.

Commission expense includes fees and commissions accrued on a straight-line basis, paid in connection with the financing obtained by the Bank where the timing of the future cash flows is unspecified, for which the effective interest rate cannot be determined, and relating to issue programmes, as well as the costs incurred by the Bank in connection with the preparation by property valuers of appraisal reports on Property Value for Mortgage Lending Purposes (MLV) for the purposes of loans granted.

Financial information

FEE AND COMMISSION INCOME	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019
Fees for property valuation	1,014	5,659
Fees for property inspection	1,668	2,573
Commission for full or partial prepayment of loans	4,699	5,503
Other	1,318	1,760

Total	8,699	15,495

FEE AND COMMISSION EXPENSES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019
Preparation by property valuers of appraisal reports on Property Value for Mortgage Lending Purposes (MLV)	(1,187)	(8,463)
Expenses related to bond issue programmes	(3,676)	(4,151)
Expenses related to credit lines	(4,264)	(3,339)
Expenses related to mortgage covered bond issue programmes	(1,313)	(1,219)
Loan insurance costs	(3,264)	(3,971)
Commissions for other operating services	(229)	(213)
Costs of debt collection and intermediation in selling collateral	(30)	(27)

Total	(13,963)	(21,383)

7. Net gain/(loss) on financial instruments measured at fair value through profit or loss

Accounting policies and classification

Net result on financial instruments measured at fair value through profit or loss includes gains and losses arising on disposal of financial instruments classified as financial assets/liabilities measured at fair value through profit or loss (both those held for trading and designated as measured at fair value through profit or loss at initial recognition), and the effect of their remeasurement to the fair value.

The item also includes an ineffective part of cash flow hedges for hedging strategies where Interest Rate Swap (IRS) contracts are hedging instruments.

Financial information

NET GAIN/(LOSS) ON FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Gain/(loss) on derivatives	86	65
Gain/(loss) on IRS derivative instruments related to hedge ineffectiveness	86	65

Total	86	65

The Bank concludes and maintains IRS derivative instruments solely for hedging purposes.

8. Net foreign exchange gains/(losses)

Accounting policies and classification

Net foreign exchange gains/(losses) include foreign exchange gains and losses, both realized and unrealized, on measurement of foreign currency assets and liabilities at average exchange rates announced by the National Bank of Poland applicable as at the end of the reporting period, and on the fair value measurement of derivative instruments, i.e. Cross Currency Interest Rate Swaps (CIRS) and Foreign Exchange Forwards (FX-Forward), including the ineffective part of cash flow hedges for hedging strategies where CIRS and FX Forward contracts are hedging instruments.

Financial information

NET FOREIGN EXCHANGE GAINS/(LOSSES)	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Result on revaluation	792	34
Gain/(loss) on derivative instruments (CIRS, FX-Forward) before designation to hedge accounting	(3)	(388)
Gain/(loss) on derivative instruments (CIRS, FX-Forward) related to hedge ineffectiveness	5,104	(1,449)

Total	5,893	(1,803)

The Bank concludes and maintains CIRS and FX Forward derivative instruments solely for hedging purposes.

9. Net income/(expense) on modification

Accounting policies

The principles for the recognition of net income/(expense) on modification are described in Note 3.4 “Classification and measurement of financial instruments”.

Financial information

NET INCOME/(EXPENSE) ON MODIFICATION	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Instruments measured at fair value through other comprehensive income (debt instruments)	-	-
Financial instruments measured at amortized cost	(2,581)	455

Total	(2,581)	455

FINANCIAL ASSETS SUBJECT TO MODIFICATION	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Carrying amount at amortized cost before modification (Stage 2)	117,155	4,909
Gain/(loss) recognized on modification (Stage 2) in the period	(193)	7

Carrying amount at amortized cost before modification (Stage 3)	4,570	1,939
Gain/(loss) recognized on modification (Stage 3) in the period	(3)	(3)

The gross amount of financial assets for which the loss has been calculated over their whole life and which have been modified since initial recognition, for which the allowance for expected credit losses changed during the reporting period by an amount equal to a 12-month expected credit loss, was PLN 3,851 thousand as at 31 December 2020 and PLN 2,567 thousand as at 31 December 2019.

10. Net allowances for expected credit losses

Accounting policies

Accounting policies for recognizing net allowances for expected credit losses are described for specific items in Notes 21 and 38.3, as appropriate. Net allowances for expected credit losses comprise allowances for loans and advances to customers and recognized and released provisions for loan commitments granted relating to residential loans which have not been drawn in full.

Financial information

NET ALLOWANCES FOR EXPECTED CREDIT LOSSES	Note	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Net allowances for loans and advances to customers	21	(35,754)	(14,712)
Net provisions for financial commitments related to residential loans not drawn in full	29	89	4

Total		(35,665)	(14,708)

The impact of the COVID-19 pandemic on the amount of allowances for expected credit losses is described in Note 38.4.4.

11. Other operating income and expenses

Accounting policies

Other operating income and expenses include income and expenses not directly associated with banking activities.

Financial information

OTHER OPERATING INCOME	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Sundry income	569	485
Other	33	14

Total	602	499

OTHER OPERATING EXPENSES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Sundry costs	(505)	(396)
Other	(145)	(534)

Total	(650)	(930)

12. Administrative expenses

Accounting policies

Employee benefits

Employee benefits include costs of salaries and wages and social insurance (including provisions for pension and disability benefits, described in detail in Note 29 “Provisions”).

The Bank also recognizes accruals in respect of costs of wages and salaries which are attributable to the current period, but will be incurred in the following period, including bonuses and unused holiday, taking into account all outstanding days of holiday.

Employee benefits also include a variable remuneration plan for the top management, which is recognized in part as a liability in respect of payments based on the net book value of phantom shares settled in cash. The plan is accounted for based on IAS 19 Employee Benefits and is described in Section 6.6 of the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2020.

Overheads

These include, among others: the costs of services relating to supporting tasks and the costs of servicing loans under the Outsourcing Agreement (described in Note 35.1 “Related-party transactions – capital links”), costs of external services resulting from other agreements and IT costs.

Amortization and depreciation

Depreciation and amortization policies are described in detail in Note 22 “Intangible assets and property, plant and equipment”.

Financial information

ADMINISTRATIVE EXPENSES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Employee benefits	(14,977)	(17,471)
Overheads	(33,250)	(30,665)
Amortization and depreciation, including:	(2,730)	(3,249)
property, plant and equipment	(155)	(221)
right-of-use assets, including:	(1,230)	(1,206)
real estate	(1,008)	(1,018)
cars	(222)	(188)
intangible assets	(1,345)	(1,822)

Total	(50,957)	(51,385)

EMPLOYEE BENEFITS	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Wages and salaries, including:	(12,958)	(14,951)
provision for disability and retirement benefits	(15)	(30)
costs of contributions to the Employee Pension Plan	(330)	(22)
Salary surcharges	(1,735)	(1,961)
Other employee benefits	(284)	(559)

Total	(14,977)	(17,471)

OVERHEADS	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Services relating to supporting operations provided under the Outsourcing Agreement 1)	(4,220)	(3,861)
Servicing of loans granted and receivables purchased under the Outsourcing Agreement 1)	(23,049)	(19,957)
External services under other contracts	(2,136)	(2,558)
IT costs	(1,821)	(1,802)
Non-life insurance costs	(397)	(375)
Costs related to short-term lease contracts	-	(88)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(703)	(753)
Other	(924)	(1,271)

Total	(33,250)	(30,665)

1) The Outsourcing Agreement is described in Note 35.1 “Related-party transactions – capital links”.

13. Regulatory charges

Selected accounting policies

Contribution and payments to BGF

In accordance with IFRIC 21 – Levies, the payments incurred by the Bank to the Bank Guarantee Fund (BGF) are recognized in the income statement upon the occurrence of the obligating event.

The Bank pays a contribution to the bank resolution fund once a year. The contribution is not a tax-deductible expense.

Payments to PFSA

The payments made by the Bank to the Polish Financial Supervision Authority pursuant to IFRIC 21 – Levies are recognized in the income statement upon the occurrence of the obligating event.

Both payments (the payment towards the costs of banking supervision and the payment made by the issuer of securities other than shares) are made once a year. The payments to the Polish Financial Supervision Authority are tax-deductible expenses.

Financial information

REGULATORY CHARGES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Contribution and payments to the Bank Guarantee Fund (BGF), including:	(22,507)	(22,058)
resolution fund	(22,507)	(22,058)
Payments to the Polish Financial Supervision Authority (PFSA)	(2,132)	(2,239)
Payments to the Borrowers Support Fund (potential)	(243)	-
Other taxes and charges	(669)	(448)

Total	(25,551)	(24,745)

14. Tax on certain financial institutions

On 1 February 2016, the Act on tax on certain financial institutions of 15 January 2016 entered into force. For banks, the tax base is calculated as the excess of total assets over PLN 4 billion as per the trial balance as at the end of each month. Banks are entitled to reduce the tax base by deducting, among other things, own funds and the value of Treasury securities held. The tax rate is 0.0366% per month and the tax is paid monthly by the 25th day of the month following the month to which the tax relates. The tax paid is not deductible for the purposes of corporate income tax. Tax on certain financial institutions amounted to PLN 89,457 thousand for 2020 and PLN 83,102 thousand for 2019.

15. Corporate income tax

Accounting policies

Recognition

Income tax expense comprises current and deferred tax. Current income tax expense is recognized in the income statement. Deferred tax is recognized in the income statement or other comprehensive income, depending on the source of the timing differences.

Current income tax expense

Current income tax is calculated based on profit before tax determined in accordance with the accounting regulations, adjusted by income which is not taxable under the tax regulations, taxable income not recognized as income for accounting purposes, non-deductible costs and tax-deductible costs not recognized as costs for accounting purposes, in accordance with the relevant provisions of the tax law. These include, among other things, interest income and expense accrued to be received or paid, allowances for credit losses, provisions for liabilities, the cost of tax on certain financial institutions or payments to the BGF.

Deferred tax

Deferred income tax is recognized using the balance sheet method as the difference between the tax bases of assets and liabilities and their carrying amounts. A change in deferred tax provisions and assets is charged to the profit or loss, with the exception of the effects of revaluation of financial assets measured at fair value through other comprehensive income and the valuation of the hedging instruments recognized in other comprehensive income, where the changes in the balance of the deferred tax provision and asset are also recognized in other comprehensive income. When determining the deferred income tax, the amounts of the deferred tax provision and asset as at the beginning and end of the reporting period are taken into account.

The carrying amount of a deferred tax asset is reviewed as at each reporting date and is decreased to the extent it has become less probable that a taxable profit will be generated in an amount sufficient for the deferred tax asset to be partially or fully realized.

Deferred income tax assets and provisions are measured using the tax rates, which are expected to apply in the period in which the asset is realized or the provision released, determined on the basis of tax rates (and tax regulations) enacted or substantively enacted as at the end of the reporting period, or the rates which are certain to apply in the future.

The Bank offsets the deferred tax asset against the deferred tax provision solely when it has a legally enforceable title to offset the current income tax receivables and liabilities, and if the deferred income tax asset and provision relate to income taxes imposed by the same tax authority on the same taxpayer.

Financial information

INCOME TAX EXPENSE	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Current income tax expense	(41,838)	(45,216)
Deferred income tax due to temporary differences	(3,478)	(737)
Income tax reported in the income statement	(45,316)	(45,953)
Income tax reported in other comprehensive income due to temporary differences	(2,734)	(17,382)

Total	(48,050)	(63,335)

RECONCILIATION OF THE EFFECTIVE TAX RATE	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Profit / (loss) before income tax	126,846	135,123
Corporate income tax calculated at the statutory tax rate in force in Poland (19%)	(24,101)	(25,673)
Effect of permanent differences between profit before income tax and taxable income, including:	(21,215)	(20,035)
tax on certain financial institutions	(16,997)	(15,789)
fees to BGF	(4,276)	(4,191)
PFRON (State Disabled Persons Fund) costs	(14)	(19)
impact of other permanent differences	72	(36)
Effect of other differences between profit before income tax and taxable income, including adjustments to previous periods	-	(245)
Income tax reported in the income statement	(45,316)	(45,953)

Effective tax rate	35.73%	34.01%

NET DEFERRED TAX ASSETS/PROVISION	31.12.2019	Income statement	Other comprehensive income	31.12.2020

Deferred tax provision
Interest accrued on loans and advances to customers	9,082	(1,429)	-	7,653
Interest accrued and discount on securities	1,563	(1,088)	-	475
Adjustment of loan portfolio valuation under the straight-line and effective interest rate methods	25,194	(1,206)	-	23,988
Adjustment of own issues valuation under the straight-line and effective interest rate methods	3,017	(2,089)	-	928
Deferred costs	819	(125)	-	694
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	6	(2)	-	4
Valuation of securities	890	-	1,095	1,985
Valuation of derivatives	40,876	612	1,743	43,231
Gross deferred income tax provision	81,447	(5,327)	2,838	78,958

Deferred income tax assets
Interest accrued on amounts due to banks	6,878	(6,869)	-	9
Interest accrued and discount on liabilities in respect of securities issued	13,396	(3,176)	-	10,220
Allowances for credit losses	7,482	6,156	-	13,638
Expenses to be paid	1,885	(126)	-	1,759
Valuation of securities	53	-	(53)	-
Valuation of derivatives	8,311	(4,884)	157	3,584
Difference between depreciation of the right-of-use asset and the cost of lease financing (IFRS 16)	20	(1)	-	19
Tax relief recognized under Art. 15cb	-	95	-	95
Gross deferred income tax assets	38,025	(8,805)	104	29,324

Net deferred income tax assets / (provision) (presented in the statement of financial position)	(43,422)	(3,478)	(2,734)	(49,634)

Tax Group

Based on the contract dated 5 November 2018, PKO Bank Polski SA, as the parent company, jointly with its two subsidiaries: PKO Bank Hipoteczny SA and PKO Leasing SA, created the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Tax Group (“PKO Bank Polski SA Tax Group” or “PGK”). The contract was registered by the Head of the Second Masovian Tax Office in Warsaw. The PKO Bank Polski SA Tax Group was established for three tax years. The first tax year began on 1 January 2019.

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.

Due to the fact that PKO Bank Hipoteczny SA joined the PKO Bank Polski SA Tax Group as of 1 January 2019, the current income tax liability as at 31 December 2020 is the liability to the PGK parent company, i.e. PKO Bank Polski SA.

NOTES TO THE STATEMENT OF FINANCIAL POSITION

16. Cash and balances with the Central Bank

Accounting policies

“Cash and balances with the Central Bank” comprise amounts in the current account and deposits with the Central Bank, measured at amounts due which include any interest on these amounts.

Financial information

CASH AND BALANCES WITH THE CENTRAL BANK	31.12.2020	31.12.2019

Current account with the Central Bank	21	20

Total	21	20

Mandatory reserve

In the period from 31 December 2020 to 31 January 2021 and from 31 December 2019 to 30 January 2020, the Bank maintained the mandatory reserve of PLN 15,381 thousand and PLN 10,226 thousand, respectively. As at 31 December 2020, the interest on the mandatory reserve account was 0.1%, and as at 31 December 2019 it was 0.5%.

During the day, the Bank may use the funds deposited in the mandatory reserve account for current cash settlements on the basis of an instruction submitted to the National Bank of Poland, but the Bank must ensure that the monthly average balance is maintained on the account at an appropriate level consistent with the declared mandatory reserve.

17. Amounts due from banks

Accounting policies

Amounts due from banks are financial assets measured at amortized cost using the effective interest rate method, net of allowances for expected credit losses. If the timing of future cash flows and, consequently, the effective interest rate, cannot be determined for a receivable, it is measured at the amount due.

Financial information

AMOUNTS DUE FROM BANKS	31.12.2020	31.12.2019

Measured at amortized cost
current accounts	23	31

Total	23	31

Information on exposures to credit risk relating to amounts due from banks is provided in Note 38 “Credit risk management”.

All amounts due from banks were classified to Stage 1 as at 31 December 2020 and 31 December 2019. In the periods ended on these dates, there were no transfers of amounts due from banks between the stages.

18. Derivative hedging instruments

Accounting policies, estimates and assessments

The use of hedge accounting	The Bank decided to continue the application of the provisions of IAS 39. It did not apply IFRS 9 in respect of hedge accounting. In its operations, the Bank uses derivative instruments: CIRS, IRS, FX-Forward for hedging purposes only, in accordance with the risk management strategy described in more detail in Notes 42 and 43. Such transactions are only concluded with PKO Bank Polski SA and, since they are inter-company transactions, they are excluded from the hedging obligation. All derivatives shall be designated for hedge accounting. The Bank applies hedge accounting when all the following terms and conditions are met: ■ upon setting up the hedge, the hedging relationship, the purpose of risk management by the entity and the hedging strategy were officially established and documented. Such documentation shall contain an identification of the hedging instrument, the hedged item or transaction, the nature of the hedged risk, and the method used by the entity to assess the hedging instrument’s effectiveness in compensating the risk of changes in the fair value of the hedged risk or the cash flows relating to the hedged risk; ■ the hedge is expected to be highly effective in compensating the changes in the fair value or cash flows resulting from the hedged risk, in accordance with the originally documented risk management strategy relating to this specific hedging relationship; ■ in the case of cash flow hedges, the planned hedged transaction must be highly probable and must be exposed to a risk of variability of cash flows which may, as a result, have an impact on the income statement; ■ the hedge effectiveness can be assessed reliably, i.e. the fair value or cash flows relating to the hedged item and resulting from the hedged risk and the fair value of the hedging instrument can be assessed reliably; ■ the hedge is regularly assessed and its high effectiveness is confirmed in all the reporting periods for which the hedge had been designated.
Discontinuation of hedge accounting	The Bank discontinues the application of hedge accounting when: ■ a hedging instrument expires, is sold, terminated or executed (replacing a hedging instrument with another hedging instrument or extending the validity of a hedging instrument is not treated as its expiry or termination, if such replacement or extension is a part of a documented hedging strategy adopted by the entity). In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ the hedge no longer meets the criteria of hedge accounting. In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and are credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ the planned transaction is no longer expected to be executed – in such cases, all accumulated gains or losses relating to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective, are recognized in profit or loss; ■ the hedging relationship has been invalidated.
Fair value hedges	The Bank does not apply fair value hedging.
Cash flow hedges	Cash flow hedges are hedges against cash flow volatility, which may be attributed to a specific type of risk associated with a recognized asset or liability (such as future payments of interest on variable-interest debt (or a part thereof)) or a highly probable planned transaction, and which could affect the income statement. 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 part of the hedge. The ineffective portion of the hedge is recognized in the income statement in the item “Net income from financial instruments measured at fair value” or “Foreign exchange gains (losses)”. Moreover, the amounts recognized directly in other comprehensive income are transferred to the income statement as “Net interest income” or “Net foreign exchange gains (losses)”, respectively, in the period or periods in which the impact of the hedged transaction is recognized in the income statement. The effectiveness tests comprise the valuation 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 and FX-Forward transactions). Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.
Potential sources of ineffectiveness	The main sources of hedge ineffectiveness may include: ■ applying the CVA/DVA adjustment to the hedging instrument only; ■ the existence of minute differences in the structure and the basic parameters of hedging transactions and hedged items. The monthly tests show continuous high effectiveness of the hedging strategies applied.
Estimates and judgments	The fair value of derivative instruments is determined using valuation models based on discounted future cash flows from a given financial instrument. The model variables and assumptions used for valuation purposes comprise, subject to availability, data from observable markets (e.g. deposit rates on the interbank market, foreign exchange rates, IRS transaction quotations). The fair value of derivatives includes the Bank’s own credit risk, DVA (debit value adjustment) as well as counterparty credit risk, CVA (credit value adjustment). The process of calculation of CVA and DVA adjustments includes the selection of a method for determining the spread of the counterparty’s or the Bank’s credit risk (e.g. a market price method based on the continuous price quotations of debt instruments issued by the counterparty, a method of spread implied from Credit Default Swap contracts), an estimation of the probability of default by the counterparty or the Bank and the recovery rate.

Types of hedging strategies used by the Bank

Strategy 1	Hedge of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency due to changes in the exchange rate, using CIRS and FX-Forward hedging instruments
Description of the hedging relationship	Elimination of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency (EUR) due to changes in the exchange rate, using CIRS hedging instruments and a series of FX-Forward transactions in the foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged risk	Forex and interest rate risks.
Hedging instruments	■ CIRS transactions in which the Bank pays a coupon based on a variable PLN rate and receives a coupon based on a fixed rate for the convertible currency (EUR). If PKO Bank Hipoteczny SA is declared bankrupt by the court, the CIRS transactions will automatically be extended by 12 months on the terms and conditions set out on the transaction date; ■ an optional series of FX-Forward transactions in the convertible foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged item	■ a part of the portfolio of residential loans included in the cover pool of PLN mortgage covered bonds at floating rates. The interest rates on the loans are indexed by the 3M WIBOR rate. The mortgage loan margin is excluded from the hedge; ■ fixed-rate mortgage covered bonds issued in a convertible currency.
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2021 – August 2024.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF HEDGING INSTRUMENT SINCE DESIGNATION
			Assets	Liabilities
31.12.2020
CIRS EUR/PLN	EUR fixed leg	2,775,514	1,139,378	-	5,054	1,135,861
	PLN floating leg	11,863,682
FX forward	purchase of EUR	2,799	111	541	50
	sale of EUR	937
31.12.2019
CIRS EUR/PLN	EUR fixed leg	2,775,514	163,676	45,237	(1,423)	114,888
	PLN floating leg	11,863,682
FX forward	purchase of EUR	2,852	382	847	(26)
	sale of EUR	1,654

The average fixed rate weighted with the nominal value for CIRS transactions amounted to 0.504% as at 31 December 2020, and 0.502% as at 31 December 2019.

HEDGED ITEMS	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF HEDGED ITEMS SINCE DESIGNATION
31.12.2020
floating rate PLN loans	11,863,682	Loans and advances to customers	(1,150,592)
fixed-rate mortgage covered bonds issued in a convertible currency	12,817,035	Liabilities in respect of mortgage covered bonds issued	(1,150,592)
31.12.2019
floating rate PLN loans	11,863,682	Loans and advances to customers	(125,679)
fixed-rate mortgage-covered bonds issued in a convertible currency	11,824,628	Liabilities in respect of mortgage covered bonds issued	(125,679)

Strategy 2	Hedges against fluctuations in cash flows from variable interest rate loans in PLN, resulting from the risk of changes in interest rates, using IRS transactions
Description of the hedging relationship	Elimination of the risk of cash flow fluctuations generated by the variable interest rate PLN loan portfolio resulting from the risk of changes in interest rates in the period covered by the hedge using IRS transactions.
Hedged risk	Interest rate risk.
Hedging instruments	IRS (Interest Rate Swap) transactions where the Bank pays coupons based on the floating 3M WIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded.
Hedged item	A part of the portfolio of residential loans in PLN indexed to the WIBOR 3M variable rate. The mortgage loan margin is excluded from the hedge;
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2021 – August 2028.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF HEDGING INSTRUMENT SINCE DESIGNATION
DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		Assets	Liabilities
31.12.2020
IRS PLN	PLN	325,000	15,203	-	86	15,416
31.12.2019
IRS PLN	PLN	325,000	9,217	-	65	9,430

The average fixed interest rate weighted with the nominal value for IRS transactions was 2.84% both as at 31 December 2020 and as at 31 December 2019.

	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF HEDGED ITEMS SINCE DESIGNATION
31.12.2020
floating rate PLN loans	325,000	Loans and advances to customers	(15,644)
31.12.2019
floating rate PLN loans	325,000	Loans and advances to customers	(9,371)

Financial information

CARRYING AMOUNT/FAIR VALUE OF DERIVATIVES USED AS CASH FLOW HEDGES	31.12.2020		31.12.2019
	Assets	Liabilities	Assets	Liabilities

IRS	15,203	-	9,217	-
CIRS	1,139,378	-	163,676	45,237
FX forward	111	541	382	847

Total	1,154,692	541	173,275	46,084

The Bank concludes and maintains derivative instruments exclusively for hedging purposes.

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY AS AT 31 December 2020	up to 1 month	from 1 to 3 months	from 3 months to 1 year	from 1 to 5 years	after more than 5 years	Total

IRS
PLN fixed-float	-	-	265,000	-	60,000	325,000
CIRS
float PLN sale	-	-	2,576,564	9,287,118	-	11,863,682
fixed EUR purchase (original currency)	-	-	599,665	2,175,849	-	2,775,514
FX forward
PLN sale	-	-	1,232	12,374	-	13,606
EUR purchase (original currency)	-	-	270	2,529	-	2,799
PLN purchase	519	-	2,269	1,600	-	4,388
EUR sale (original currency)	115	-	483	339	-	937

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY AS AT 31 DECEMBER 2019	up to 1 month	from 1 to 3 months	from 3 months to 1 year	from 1 to 5 years	after more than 5 years	Total

IRS
PLN fixed-float	-	-	-	265,000	60,000	325,000
CIRS
float PLN sale	-	-	-	11,863,682	-	11,863,682
fixed EUR purchase (original currency)	-	-	-	2,775,514	-	2,775,514
FX forward
PLN sale	-	-	238	13,606	-	13,844
EUR purchase (original currency)	-	-	53	2,799	-	2,852
PLN purchase	507	-	2,747	4,388	-	7,642
EUR sale (original currency)	115	-	602	937	-	1,654

CHANGE IN OTHER COMPREHENSIVE INCOME ON CASH FLOW HEDGES AND INEFFECTIVE PORTION OF CASH FLOW HEDGES	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Accumulated other comprehensive income on cash flow hedges at the beginning of the period, gross	165,953	73,411
Gains / (Losses) recognized in other comprehensive income during the period	886,452	(233,934)
Amounts transferred from other comprehensive income to the income statement during the period	(878,101)	326,476
- interest income	(4,234)	(1,593)
- interest expenses	115,816	214,303
- net foreign exchange gains/(losses)	(989,683)	113,766
Accumulated other comprehensive income on cash flow hedges at the end of the period, gross	174,304	165,953
Tax effect	(33,118)	(31,532)
Accumulated other comprehensive income on cash flow hedges at the end of the period, net	141,186	134,421

Ineffective portion of cash flow hedges recognized in the income statement	5,190	(1,384)

Impact on other comprehensive income during the period, gross	8,351	92,542
Deferred tax on cash flow hedges	(1,586)	(17,583)
Impact on other comprehensive income during the period, net	6,765	74,959

Calculation of estimates

The Bank conducted a simulation to assess the potential impact of changes in the yield curves on the transaction value.

ESTIMATED CHANGE IN VALUE WITH PARALLEL SHIFT OF YIELD CURVES:	31.12.2020		31.12.2019
	scenario +50 b.p.	scenario -50 b.p.	scenario +50 b.p.	scenario -50 b.p.
IRS	(2,744)	2,744	(4,024)	4,024
CIRS	(133,010)	133,010	(183,184)	183,184
FX forward	3	(3)	6	(6)

19. Securities

Accounting policies

The debt securities’ classification and measurement policies are described in Note 3.4 “Classification and measurement of financial instruments”.

Financial information

SECURITIES	31.12.2020	31.12.2019

Measured at fair value through other comprehensive income, including:	1,241,821	1,240,161
issued by the State Treasury, PLN Treasury bonds	1,241,821	1,240,161

Total	1,241,821	1,240,161

SECURITIES BY MATURITY	31.12.2020	31.12.2019

Issued by the State Treasury, PLN Treasury bonds
up to 1 month	173,211	159,745
from 1 to 5 years	689,771	704,465
after more than 5 years	378,839	375,951

Total	1,241,821	1,240,161

SECURITIES BY NOMINAL VALUE AND AVERAGE YIELD	31.12.2020	31.12.2019

Issued by the State Treasury, PLN Treasury bonds	1,238,000	1,236,480
Average yield	0.27%	1.79%

Information on credit risk exposure in connection with securities is provided in Note 38 “Credit risk management”.

The whole balance of securities as at 31 December 2020 and 31 December 2019 was classified in Stage 1. In the periods ended on these dates, there were no transfers of securities between the stages.

Securities put up as collateral

Collateral for liabilities in respect of the payment of contributions to the Bank Guarantee Fund

As at 31 December 2020, the contribution to the bank resolution fund, which is contributed as an obligation to pay to the Bank Guarantee Fund (“BGF”), amounted to PLN 14,581 thousand, and the Bank held Treasury bonds with a carrying value of PLN 17,114 thousand to cover the contribution. As at 31 December 2019, these amounts were PLN 7,984 thousand and PLN 9,059 thousand respectively.

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.

Security for mortgage covered bonds

The amount of additional collateral entered in the covered bonds cover pool maintained in the form of Treasury securities in PLN was PLN 250,000 thousand as at 31 December 2020 and 31 December 2019. The disclosure of assets in the covered bonds cover pool is described in Note 26.

20. Loans and advances to customers

Accounting policies

The classification and measurement policies in respect of loans and advances to customers are described in Note 3.4 “Classification and measurement of financial instruments”.

Financial information

LOANS AND ADVANCES TO CUSTOMERS	31.12.2020	31.12.2019

Measured at amortized cost
Residential loans, gross, including:	24,980,694	25,863,796
loans granted	12,261,768	12,090,010
receivables acquired	12,718,926	13,773,786

Allowances for expected credit losses	(78,035)	(42,726)

Loans and advances to customers, net	24,902,659	25,821,070

The division into loans granted and receivables acquired presented in the table above solely relates to the source of obtaining credit. The Bank manages its whole loan portfolio in a uniform manner.

In 2020 the Bank purchased, based on the Framework Agreement for the Sale of Receivables signed with PKO Bank Polski SA on 17 November 2015, mortgage covered residential loan portfolios in the amount of PLN 342,417 thousand, and in 2019 – in the amount of PLN 2,745,544 thousand. The purchase price was determined on an arm’s length basis, based on a valuation made by an independent expert. The receivables purchased were recognized on the transfer dates set out in the Receivables Sale Agreements, on which the Bank acquired the rights to the cash flows from the individual portfolios and assumed all related liability for costs and economic risks in the constituent receivables. The purchase of the receivables portfolios was financed with a liability the nature of which is described in Note 24 “Amounts due to banks”. The Bank ultimately refinances the purchased receivables portfolios primarily through the issue of mortgage covered bonds.

Loans granted and receivables purchased which have been entered in the Bank’s cover pool represent collateral for mortgage covered bonds issued by the Bank, as described in Note 26 “Liabilities in respect of mortgage covered bonds issued”.

Information about exposure to credit risk for loans and advances to customers measured at amortized cost is described in Note 21 “Expected credit losses”.

Information about the quality of the loan portfolio is presented in Note 38.4 “Forecasting and monitoring of credit risk”.

21. Expected credit losses

Estimates and judgments

The allowance for expected credit losses is recognized in the financial statements as follows:

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

■ Off-balance sheet liabilities of a credit nature and financial guarantees: the allowance is presented as a provision in liabilities; changes in allowances are recognized in the income statement;

■ Financial instruments measured at fair value through other comprehensive income: the carrying amount of an asset carried at fair value is not additionally decreased by the amount of the allowances; measurement changes are however each time divided into the impairment component – recognized in the income statement – and the component related to other fair value measurement changes – recognized in other comprehensive income.

The information about the methodology for the assessment of expected credit losses and calculation of the impairment of credit exposures is provided in Note 38.3 “Impairment loss on credit exposures”.

Financial information

Allowances for expected credit losses

FINANCIAL ASSETS AND ALLOWANCES FOR EXPECTED CREDIT LOSSES AS AT 31 DECEMBER 2020	Assets with no significant increase in credit risk since initial recognition, gross (Stage 1)	Allowances for expected credit losses (Stage 1)	Assets with a significant increase in credit risk since initial recognition, but not credit-impaired, gross (Stage 2)	Allowances for expected credit losses (Stage 2)	Credit-impaired assets, gross (Stage 3)	Allowances for expected credit losses (Stage 3)	Total gross amount	Total allowances for expected credit losses

Measured at fair value through other comprehensive income
securities	1,241,821	-	-	-	-	-	1,241,821	-
issued by the State Treasury, PLN Treasury bonds	1,241,821	-	-	-	-	-	1,241,821	-
Total	1,241,821	-	-	-	-	-	1,241,821	-

Measured at amortized cost
amounts due from banks	23	-	-	-	-	-	23	-
loans and advances to customers	23,079,938	(9,651)	1,874,060	(55,822)	26,696	(12,562)	24,980,694	(78,035)
residential loans	23,079,938	(9,651)	1,874,060	(55,822)	26,696	(12,562)	24,980,694	(78,035)
loans granted	11,082,641	(5,200)	1,168,965	(35,723)	10,162	(4,694)	12,261,768	(45,617)
receivables acquired	11,997,297	(4,451)	705,095	(20,099)	16,534	(7,868)	12,718,926	(32,418)
other financial assets	31	-	-	-	-	-	31	-
Total	23,079,992	(9,651)	1,874,060	(55,822)	26,696	(12,562)	24,980,748	(78,035)

The impact of the COVID-19 pandemic on the amount of allowances for expected credit losses is described in Note 38.4.4. “Loans and advances to customers”

LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2020	Nominal amount of loan commitments with no significant increase in credit risk since initial recognition (Stage 1)	Provisions for loan commitments (Stage 1)	Nominal amount of loan commitments with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)	Provisions for loan commitments (Stage 2)	Nominal amount of credit-impaired loan commitments (Stage 3)	Provisions for loan commitments (Stage 3)	Total nominal amount	Total provisions for loan commitments

Loan commitments	114,179	(36)	1,277	(15)	-	-	115,456	(51)

FINANCIAL ASSETS AND ALLOWANCES FOR EXPECTED CREDIT LOSSES AS AT 31 DECEMBER 2019	Assets with no significant increase in credit risk since initial recognition, gross (Stage 1)	Allowances for expected credit losses (Stage 1)	Assets with a significant increase in credit risk since initial recognition, but not credit-impaired, gross (Stage 2)	Allowances for expected credit losses (Stage 2)	Credit-impaired assets, gross (Stage 3)	Allowances for expected credit losses (Stage 3)	Total gross amount	Total allowances for expected credit losses

Measured at fair value through other comprehensive income
securities	1,240,161	-	-	-	-	-	1,240,161	-
issued by the State Treasury, PLN Treasury bonds	1,240,161	-	-	-	-	-	1,240,161	-
Total	1,240,161	-	-	-	-	-	1,240,161	-

Measured at amortized cost
amounts due from banks	31	-	-	-	-	-	31	-
loans and advances to customers	25,504,795	(9,333)	341,078	(25,895)	17,923	(7,498)	25,863,796	(42,726)
residential loans	25,504,795	(9,333)	341,078	(25,895)	17,923	(7,498)	25,863,796	(42,726)
loans granted	11,881,240	(5,283)	202,712	(16,334)	6,058	(2,951)	12,090,010	(24,568)
receivables acquired	13,623,555	(4,050)	138,366	(9,561)	11,865	(4,547)	13,773,786	(18,158)
other financial assets	217	-	-	-	-	-	217	-
Total	25,505,043	(9,333)	341,078	(25,895)	17,923	(7,498)	25,864,044	(42,726)

LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2019	Nominal amount of loan commitments with no significant increase in credit risk since initial recognition (Stage 1)	Provisions for loan commitments (Stage 1)	Nominal amount of loan commitments with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)	Provisions for loan commitments (Stage 2)	Nominal amount of credit-impaired loan commitments (Stage 3)	Provisions for loan commitments (Stage 3)	Total nominal amount	Total provisions for loan commitments

Loan commitments	482,236	(111)	450	(29)	-	-	482,686	(140)

Changes in the gross carrying amount of financial instruments and changes in allowances for expected credit losses

CHANGES IN GROSS CARRYING AMOUNT OF FINANCIAL INSTRUMENTS IN 2020	Gross carrying amount as at 01.01.2020	Increase due to granting and purchase of loans	Changes due to disbursement of tranches and interest capitalization	Decrease due to repayment / redemption	Changes due to immaterial modification (net)	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Gross carrying amount decrease in connection with a partial write-down	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 (S3)	Other changes	Gross carrying amount as at 31.12.2020

Measured at fair value through OCI
securities (S1)	1,240,161	349,865	-	(370,392)	-	-	-	-	-				22,187	1,241,821
Total	1,240,161	349,865	-	(370,392)	-	-	-	-	-				22,187	1,241,821

Measured at amortized cost
amounts due from banks (S1)	31	22	-	(31)	-	-	-	-	-				-	22
loans and advances to customers	25,863,796	1,107,314	378,486	(2,255,842)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,694
residential loans	25,863,796	1,107,314	378,486	(2,255,842)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,694
Stage 1 (S1)	25,504,795	1,104,892	374,196	(2,236,022)	(2,338)	(75,768)	(8,826)	-	(5)	846,397	(2,423,864)	(3,519)	-	23,079,938
Stage 2 (S2)	341,078	2,422	4,277	(19,428)	(226)	(2,422)	-	(21,155)	-	(846,397)	2,430,966	(15,055)	-	1,874,060
Stage 3 (S3)	17,923	-	13	(392)	(4)	-	-	(1,877)	(439)	-	(7,102)	18,574	-	26,696
other financial assets (S1)	217	31	-	(217)	-	-	-	-	-				-	31
Total	25,864,044	1,107,367	378,486	(2,256,090)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,747

CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON FINANCIAL ASSETS IN 2020	As at 01.01.2020	Increase due to granting and purchase of loans	Changes due to changes in credit risk (net), including total repayment	Changes due to immaterial modification (net)	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Decrease due to partial write-off	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 (S3)	Other changes	As at 31.12.2020

Measured at fair value through OCI
securities (S1)	-	-	-	-	-	-	-	-				-	-
Total	-	-	-	-	-	-	-	-				-	-

Measured at amortized cost
amounts due from banks (S1)	-	-	-	-	-			-				-	-
loans and advances to customers	42,726	546	(3,164)	1,925	(268)	70,657	(33,943)	(444)				-	78,035
residential loans	42,726	546	(3,164)	1,925	(268)	70,657	(33,943)	(444)				-	78,035
Stage 1 (S1)	9,333	305	5,278	2,846	(27)	70,657	-	(5)	2,760	(80,268)	(1,228)	-	9,651
Stage 2 (S2)	25,895	241	(9,150)	(338)	(241)	-	(33,199)	-	(2,760)	80,784	(5,410)	-	55,822
Stage 3 (S3)	7,498	-	708	(583)	-	-	(744)	(439)	-	(516)	6,638	-	12,562
other financial assets (S1)	-	-	-	-	-	-	-	-				-	-
Total	42,726	546	(3,164)	1,925	(268)	70,657	(33,943)	(444)				-	78,035

Błąd! Nieprawidłowe łącze.

CHANGES IN GROSS CARRYING AMOUNT OF FINANCIAL INSTRUMENTS IN 2019	Gross carrying amount as at 01.01.2019	Increase due to granting and purchase of loans	Changes due to disbursement of tranches and interest capitalization	Decrease due to repayment / redemption	Changes due to immaterial modification (net)	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Gross carrying amount decrease in connection with a partial write-down	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 (S3)	Other changes	Gross carrying amount as at 31.12.2019

Measured at fair value through OCI
securities (Stage 1, hereinafter: S1)	842,965	1,018,758	-	(641,620)	-	-			-				20,058	1,240,161
Total	842,965	1,018,758	-	(641,620)	-	-			-				20,058	1,240,161

Measured at amortized cost
amounts due from banks (S1)	22	31	-	(22)	-	-								31
loans and advances to customers	21,098,742	5,977,214	766,964	(1,904,946)	454	(56,299)	(3,359)	(14,715)	(259)				-	25,863,796
residential loans	21,098,742	5,977,214	766,964	(1,904,946)	454	(56,299)	(3,359)	(14,715)	(259)				-	25,863,796
Stage 1 (S1)	20,823,722	5,976,036	763,439	(1,891,233)	450	(55,121)	(3,359)	-	(4)	690,867	(799,417)	(585)	-	25,504,795
Stage 2 (S2)	266,928	1,178	3,519	(13,403)	7	(1,178)	-	(13,824)	(13)	(690,867)	802,616	(13,885)	-	341,078
Stage 3 (S3)	8,092	-	6	(310)	(3)	-	-	(891)	(242)	-	(3,199)	14,470	-	17,923
other financial assets (S1)	449	217	-	(449)	-	-	-	-	-				-	217
Total	21,099,213	5,977,462	766,964	(1,905,417)	454	(56,299)	(3,359)	(14,715)	(259)				-	25,864,044

CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON FINANCIAL ASSETS IN 2019	As at 01.01.2019	Increase due to granting and purchase of loans	Changes due to changes in credit risk (net), including total repayment	Changes due to immaterial modification (net)	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Decrease due to partial write-off	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 (S3)	Other changes	As at 31.12.2019

Measured at fair value through OCI
securities (S1)	-	-	-	-	-	-	-	-				-	-
Total	-	-	-	-	-	-	-	-				-	-

Measured at amortized cost
amounts due from banks (S1)	-	-	-	-	-			-				-	-
loans and advances to customers	28,273	1,542	(808)	182	(68)	41,987	(28,123)	(259)				-	42,726
residential loans	28,273	1,542	(808)	182	(68)	41,987	(28,123)	(259)				-	42,726
Stage 1 (S1)	7,108	1,490	1,342	140	(16)	41,987	-	(4)	1,806	(44,336)	(184)	-	9,333
Stage 2 (S2)	17,979	52	(2,315)	33	(52)	-	(27,760)	(13)	(1,806)	44,515	(4,738)	-	25,895
Stage 3 (S3)	3,186	-	165	9	-	-	(363)	(242)	-	(179)	4,922	-	7,498
other financial assets (S1)	-	-	-	-	-	-	-	-				-	-
Total	28,273	1,542	(808)	182	(68)	41,987	(28,123)	(259)				-	42,726

Calculation of estimates

The Bank performed a simulation of a change in the allowances for expected credit losses resulting from a deterioration or improvement in risk parameters.

ESTIMATED CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DUE TO A DETERIORATION OR IMPROVEMENT IN RISK PARAMETERS, INCLUDING:1	31.12.2020		31.12.2019
	scenario +10%	scenario -10%	scenario +10%	scenario -10%

changes in probability of default	10,125	(12,807)	3,173	(3,540)
changes in rates of recovery	(17,034)	17,045	(9,206)	9,214

1 in plus – an increase in allowances; in minus – a decrease in allowances

Purchased or originated credit-impaired financial assets - POCI

As at 31 December 2020 and 31 December 2019, the Bank had no purchased or originated credit-impaired financial assets (POCI).

22. Intangible assets and property, plant and equipment

Accounting policies and estimates

Intangible assets

Intangible assets comprise identifiable non-monetary assets, which do not have a physical form.

Recognition of intangible assets:

■ software – computer software licences acquired are recognized at the amount of the costs incurred on their purchase and preparation for use, taking into account amortization and impairment;

■ other intangible assets acquired by the Bank are recognized at the purchase price or cost of manufacture less amortization and total impairment allowances;

■ the costs of completed development projects are recognized in intangible assets when economic benefits are obtained and specific conditions are satisfied, i.e. if there is a possibility and intention to complete and use the asset, appropriate technical and financial means are available to complete the work and use the asset and the amount of expenditure incurred during development work, which can be allocated to the development of intangible assets, can be assessed reliably.

Property, plant and equipment

Property, plant and equipment are recognized at the end of a reporting period at the purchase price or cost of manufacture less depreciation and impairment.

Right-of-use assets, which are measured at cost, are also recognized in this category. The cost of a right-of-use asset includes:

■ the amount of the initial measurement of the lease liability;

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

■ any initial direct costs incurred by the lessee in connection with concluding the lease agreement;

■ an estimate of the costs to be incurred by the lessee under the contract in connection with the obligation to dismantle and remove the underlying asset or restore the underlying asset.

Expenditure

The carrying amount of property, plant and equipment and intangible assets is increased by additional expenditure incurred over the period of their use.

Amortization and depreciation

Depreciation and amortization is charged on all property, plant and equipment, including right-of-use assets, and intangible assets whose value decreases due to their use or lapse of time under the straight-line method over the estimated useful life of a given asset. The amortization/depreciation method and useful life are verified at least once a year.

Impairment of non-financial non-current assets

At the end of each reporting period the Bank assesses whether there are any indications of impairment of any non-financial non-current assets (or cash-generating units). When such indications are recognized and each year in the case of intangible assets which are not amortized, the Bank estimates the recoverable amount, which is the higher of the following two amounts: the fair value less costs to sell and the value in use of the non-current asset (or the cash-generating unit), and if the carrying amount of the asset exceeds its recoverable amount, the Bank recognized an impairment allowance in the income statement. In order to estimate these amounts it is necessary to adopt assumptions concerning, among other things, the projected future cash flows that the Bank may obtain from further use or sale of a given non-current asset (or a cash-generating unit). Adopting different assumptions concerning the valuation of future cash flows could affect the carrying amount of non-current assets.

If there are any indications of impairment of common assets, i.e. assets that do not generate cash inflows independently from other assets or groups of assets, and the recoverable amount of a single common asset cannot be established, the Bank determines the recoverable amount of the cash-generating unit to which a given asset belongs.

This allowance is reversed if the estimations used to determine the recoverable amount have changed.

Estimates and judgements

The following factors are taken into account in estimating the useful lives of different types of property, plant and equipment and intangible assets:

■ expected wear and tear estimated based on the average periods of use recorded to date, reflecting the rate of wear and tear, intensity of use, etc.;

■ technological or market obsolescence;

■ legal and other restrictions of the asset’s use;

■ expected utilization of an asset estimated based on the expected production capacity or volume;

■ other circumstances affecting the useful life of such assets.

If the period of using an asset results from contractual provisions, its useful life corresponds to the period resulting from the contract.

It is assumed that the residual value of property, plant and equipment and intangible assets is zero, unless a third party has made a commitment to purchase them or there is (and will continue to exist as at the end of their useful life) an active market for such assets and their value on that market can be estimated.

Amortization and depreciation periods

Amortization and depreciation periods for the basic groups of intangible assets and property, plant and equipment applied by PKO Bank Hipoteczny SA:

PROPERTY, PLANT AND EQUIPMENT	PERIODS
Leasehold improvements (buildings, offices, apartments)	not exceeding the lease term 1)
Plant and machinery	from 2 to 5 years
Computer sets	3 years
Right-of-use assets	lease term 1)

INTANGIBLE ASSETS	PERIODS
Software	from 2 to 5 years
1) In the case of agreements for unspecified period, the estimated useful life of the leased asset

Financial information

Intangible assets

FOR THE PERIOD FROM 1 JANUARY 2020 TO 31 DECEMBER 2020	Intangible assets under construction	Software	Total

Gross carrying amount at the beginning of the year	274	8,372	8,646
Transfers	(274)	274	-
Gross carrying amount at the end of the year	-	8,646	8,646

Accumulated amortization at the beginning of the year	-	(6,251)	(6,251)
Amortization	-	(1,345)	(1,345)
Accumulated amortization at the end of the year	-	(7,596)	(7,596)

Net carrying amount at the beginning of the year	274	2,121	2,395
Net carrying amount at the end of the year	-	1,050	1,050

FOR THE PERIOD FROM 1 JANUARY 2019 TO 31 DECEMBER 2019	Intangible assets under construction	Software	Total

Gross carrying amount at the beginning of the year	229	8,580	8,809
Purchase	45	7	52
Scrapping	-	(215)	(215)
Gross carrying amount at the end of the year	274	8,372	8,646

Accumulated amortization at the beginning of the year	-	(4,644)	(4,644)
Amortization	-	(1,822)	(1,822)
Scrapping	-	215	215
Accumulated amortization at the end of the year	-	(6,251)	(6,251)

Net carrying amount at the beginning of the year	229	3,936	4,165
Net carrying amount at the end of the year	274	2,121	2,395

Property, plant and equipment

FOR THE PERIOD FROM 1 JANUARY 2020 TO 31 DECEMBER 2020	Leasehold improvements	Plant and machinery	Right-of-use assets, including:		Other	Total
FOR THE PERIOD FROM 1 JANUARY 2020 TO 31 DECEMBER 2020	Leasehold improvements	Plant and machinery	real estate	cars	Other	Total

Gross carrying amount at the beginning of the year	34	960	5,433	750	403	7,580
Purchase	-	80	-	-	-	80
Lease contracts concluded	-	-	-	77	-	77
Modification/ indexation of lease contracts	-	-	(441)	(1)	-	(442)
Gross carrying amount at the end of the year	34	1,040	4,992	826	403	7,295

Accumulated depreciation at the beginning of the year	(14)	(720)	(1,018)	(188)	(369)	(2,309)
Depreciation	(4)	(121)	(1,008)	(222)	(30)	(1,385)
Modification of lease contracts	-	-	146	-	-	146
Accumulated depreciation at the end of the year	(18)	(841)	(1,880)	(410)	(399)	(3,548)

Net carrying amount at the beginning of the year	20	240	4,415	562	34	5,271
Net carrying amount at the end of the year	16	199	3,112	416	4	3,747

FOR THE PERIOD FROM 1 JANUARY 2019 TO 31 DECEMBER 2019	Leasehold improvements	Plant and machinery	Right-of-use assets, including:		Other	Total
FOR THE PERIOD FROM 1 JANUARY 2019 TO 31 DECEMBER 2019	Leasehold improvements	Plant and machinery	real estate	cars	Other	Total

Gross carrying amount at the end of the previous year	34	894			403	1,331
Changes due to IFRS 16 implementation	-	-	5,361	66	-	5,427
Gross carrying amount at the beginning of the year	34	894	5,361	66	403	6,758
Purchase	-	66	-	-	-	66
Lease contracts concluded	-	-	-	684	-	684
Modification/ indexation of lease contracts	-	-	72	-	-	72
Gross carrying amount at the end of the year	34	960	5,433	750	403	7,580

Accumulated depreciation at the beginning of the year	(11)	(582)			(289)	(882)
Depreciation	(3)	(138)	(1,018)	(188)	(80)	(1,427)
Accumulated depreciation at the end of the year	(14)	(720)	(1,018)	(188)	(369)	(2,309)

Net carrying amount at the beginning of the year	23	312	5,361	66	114	5,876
Net carrying amount at the end of the year	20	240	4,415	562	34	5,271

The item “Other” comprises mainly the Bank’s office furniture.

Legal limitations relating to the Bank’s title

In the years 2020 and 2019, there were no intangible assets or property, plant and equipment items to which the Bank’s legal title would be limited or pledged as collateral for the Bank’s liabilities.

23. Other assets

Accounting policies

Financial assets recognized in this item are measured at amounts due, including interest on such assets (if any) and taking into account allowances for expected credit losses. Non-financial assets are measured in accordance with the principles applicable to the specific categories of assets recognized in this item.

Financial information

OTHER ASSETS	31.12.2020	31.12.2019

Prepayments and deferred costs, including:	6,446	7,656
deferred costs relating to overdraft facilities	2,176	1,753
deferred costs relating to bond issue programmes 1)	588	891
deferred costs relating to mortgage covered bonds issue programmes 1)	1,042	1,667
other prepayments and deferred costs	2,640	3,345
Deferred commissions and costs relating to loans granted in the part corresponding to unpaid principal and adjustment of deferred commission income on loans granted	-	3,194
Settlements relating to appraisal reports on Property Value for Mortgage Lending Purposes (MLV) *	25	208
Settlements with the state budget	2	11
Other *	6	9

Total	6,479	11,078
including financial assets - marked with * above	31	217

* Financial liabilities are marked with this symbol.

1) Costs associated with issue programmes relate to the issue programmes as a whole and cannot be allocated to the individual issues executed as part of the programmes.

24. Amounts due to banks

Accounting policies

Amounts due to banks are measured at amortized cost using the effective interest rate method. If a schedule of future cash flows cannot be determined for a financial liability (and, therefore, the effective interest rate cannot be determined), the liability is measured at the amount due.

Financial information

AMOUNTS DUE TO BANKS	31.12.2020	31.12.2019

Measured at amortized cost
overdraft within limit available	14,275	10,081
liability related to overdraft facilities	3,222,246	2,422,408
liability related to term loans	149,864	100,007
liability in respect of the purchase of receivables	188,748	2,278,763

Total	3,575,133	4,811,259

Liabilities in respect of loans

LENDER	Effective date of agreement	Maturity date	Amount of loan granted as at 31 December 2020	Amount of loan drawn as at 31 December 2020	Liability as at 31 December 2020

PKO Bank Polski SA	29.10.2015	29.10.2022	2,000,000	2,000,000	621,517
PKO Bank Polski SA	02.02.2017	03.02.2023	2,000,000	2,000,000	-
PKO Bank Polski SA	10.07.2019	01.07.2022	2,500,000	2,500,000	2,450,726
PKO Bank Polski SA	10.09.2020	10.09.2026	300,000	300,000	149,864
Other bank 1	10.06.2019	13.06.2021	150,000	150,000	150,003

Total			6,950,000	6,950,000	3,372,110

LENDER	Effective date of agreement	Maturity date	Amount of loan granted as at 31 December 2019	Amount of loan drawn as at 31 December 2019	Liability as at 31 December 2019

PKO Bank Polski SA	29.10.2015	29.10.2022	2,000,000	2,000,000	1,579,996
PKO Bank Polski SA	02.02.2017	03.02.2023	1,500,000	1,500,000	692,404
PKO Bank Polski SA	10.07.2019	08.07.2022	1,000,000	1,000,000	-
Other bank 1	10.06.2019	12.06.2020	150,000	150,000	150,008
Other bank 2	27.12.2018	28.12.2020	100,000	100,000	100,007

Total			4,750,000	4,750,000	2,522,415

Liability in respect of the purchase of receivables

The line “Liability in respect of the purchase of receivables” represents the liability arising from the transactions of purchase of residential mortgage loan portfolios from PKO Bank Polski SA, as described in Note 20 “Loans and advances to customers”. The repayment date of the liability resulting from the purchase of receivables is agreed by the parties each time in the Receivables Sale Agreement. For receivables acquired in 2020 and 2019, the parties agreed that the payment would be due no later than 18 months from the date of transfer. If the liability is not settled within 1 month from the date of transfer, the price is increased by interest. The Bank ultimately refinances the purchased receivables portfolios primarily through the issue of mortgage covered bonds. The liability resulting from the purchase of receivables as at 31 December 2020 concerns portfolios purchased in the 3rd quarter of 2020, whereas as at 31 December 2019 the liability concerned portfolios purchased in 2019.

25. Amounts due to customers

Accounting policies

Due to the fact that the repayment schedule cannot be determined, amounts due to customers are measured at amounts due. Amounts due comprise loan overpayments only. The Bank does not accept deposits.

Financial information

AMOUNTS DUE TO CUSTOMERS	31.12.2020	31.12.2019

Measured at amortized cost
amounts due to retail customers- overpaid loans	6,641	4,885

Total	6,641	4,885

26. Liabilities in respect of mortgage covered bonds issued

Accounting policies

Liabilities in respect of mortgage covered bonds issued are measured at amortized cost using the effective interest rate method.

Financial information

LIABILITIES IN RESPECT OF MORTGAGE COVERED BONDS ISSUED	31.12.2020	31.12.2019

Measured at amortized cost
mortgage covered bonds, including issued under:	17,205,554	16,239,975
International Mortgage Covered Bonds Issue Programme	12,847,883	11,847,023
National Mortgage Covered Bonds Issue Programme	4,357,671	4,392,952

Total	17,205,554	16,239,975

REPAYMENT PERIOD OF MORTGAGE COVERED BONDS ISSUED	31.12.2020	31.12.2019

from 3 months to 1 year	4,035,687	30,020
from 1 to 5 years	13,109,240	15,417,600
after more than 5 years	60,627	792,355

Total	17,205,554	16,239,975

In 2020, the Bank did not issue any mortgage covered bonds and redeemed mortgage covered bonds with a value of PLN 30,000 thousand. In 2019, the Bank carried out two issues of green mortgage covered bonds denominated in PLN with a total value of PLN 500,000 thousand and three issues of mortgage covered bonds denominated in EUR with a total value of EUR 700,000 thousand. It did not redeem any mortgage covered bonds.

Domestic issues of mortgage covered bonds are listed on the parallel market of the Warsaw Stock Exchange and on BondSpot, and issues of foreign mortgage covered bonds are listed on the Luxembourg Stock Exchange and the Warsaw Stock Exchange (the WSE parallel market).

As at 31 December 2020, the PLN- and EUR-denominated mortgage covered bonds issued by the Bank were rated by Moody’s Investors Service at Aa1, i.e. the highest level achievable by Polish securities. The limit for the ratings is the Polish country ceiling for debt instruments (i.e. the highest level achievable in Poland) , which currently is at the level of Aa1. As at 31 December 2019, mortgage covered bonds issued by PKO Bank Hipoteczny SA were rated Aa3, which was the Polish country ceiling for debt instruments as at that date.

The total nominal value of the issued mortgage covered bonds as at 31 December 2020 amounted to PLN 17,179,529 thousand, and as at 31 December 2019 – PLN 16,219,372 thousand. The value growth was mainly due to the changes in the EUR/PLN exchange rate.

Mortgage covered bonds issued and outstanding as at 31 December 2020

ISIN	Currency	Nominal amount	Interest as at 31.12.2020	Rate + margin / fixed rate	Issue date	Redemption date	Market

PLPKOHP00025	PLN.	500,000	0.87%	WIBOR3M + 0.65 p.p.	27.04.2016	28.04.2021	BondSpot, WSE parallel market
PLPKOHP00033	PLN	500,000	0.80%	WIBOR3M + 0.59 p.p.	17.06.2016	18.06.2021	BondSpot, WSE parallel market
XS1508351357	EUR	500,000	0.13%	fixed rate	24.10.2016	24.06.2022	LuxSE, WSE parallel market
XS1559882821	EUR	25,000	0.82%	fixed rate	02.02.2017	02.02.2024	LuxSE
XS1588411188	EUR	500,000	0.63%	fixed rate	30.03.2017	24.01.2023	LuxSE, WSE parallel market
PLPKOHP00041	PLN	500,000	0.91%	WIBOR3M + 0.69 p.p.	28.04.2017	18..05.2022	BondSpot, WSE parallel market
PLPKOHP00058	PLN	265,000	2.69%	fixed rate	22.06.2017	10.09.2021	BondSpot, WSE parallel market
XS1690669574	EUR	500,000	0.75%	fixed rate	27.09.2017	27.08.2024	LuxSE, WSE parallel market
PLPKOHP00066	PLN	500,000	0.81%	WIBOR3M + 0.60 p.p.	27.10.2017	27.06.2023	BondSpot, WSE parallel market
XS1709552696	EUR	54,000	0.47%	fixed rate	02.11.2017	03.11.2022	LuxSE
XS1795407979	EUR	500,000	0.75%	fixed rate	22.03.2018	24.01.2024	LuxSE, WSE parallel market
PLPKOHP00074	PLN	700,000	0.71%	WIBOR3M + 0.49 p.p.	27.04.2018	25.04.2024	BondSpot, WSE parallel market
PLPKOHP00082	PLN	100,000	0.54%	WIBOR3M + 0.32 p.p.	18.05.2018	29.04.2022	BondSpot, WSE parallel market
PLPKOHP00090	PLN	500,000	0.84%	WIBOR3M + 0.62 p.p.	27.07.2018	25.07.2025	BondSpot, WSE parallel market
PLPKOHP00108	PLN	60,000	3.49%	fixed rate	24.08.2018	24.08.2028	BondSpot, WSE parallel market
PLPKOHP00116	PLN	230,000	0.88%	WIBOR3M + 0.66 p.p.	26.10.2018	28.04.2025	BondSpot, WSE parallel market
XS1935261013	EUR	500,000	0.25%	fixed rate	28.01.2019	23.11.2021	LuxSE, WSE parallel market
XS1935261013 (series 2)	EUR	100,000	0.25%	fixed rate	01.03.2019	23.11.2021	LuxSE, WSE parallel market
XS1508351357 (series 2)	EUR	100,000	0.13%	fixed rate	08.03.2019	24.06.2022	LuxSE, WSE parallel market
PLPKOHP00132	PLN	250,000	0.81%	WIBOR3M + 0.60 p.p.	10.06.2019	30.09.2024	BondSpot, WSE parallel market
PLPKOHP00199	PLN	250,000	0.73%	WIBOR3M + 0.51 p.p.	02.12.2019	02.12.2024	BondSpot, WSE parallel market

Security for mortgage covered bonds

The mortgage covered bonds are secured with loans secured with the highest priority mortgage. Additionally, the mortgage covered bonds may also be issued based on the Bank’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 or the Organization for Economic Cooperation and Development, excluding countries that are restructuring or have restructured their foreign debt in the past 5 years;

■ deposited with the National Bank of Poland;

■ held in cash.

The nominal value of loans entered in the Bank’s cover pool representing collateral for the mortgage covered bonds issued totalled PLN 23,106,628 thousand as at 31 December 2020, whereas the nominal value of additional collateral in the form of PLN-denominated securities issued by the State Treasury amounted to PLN 250 000 thousand. As at 31 December 2019, these amounts were PLN 21,662,027 thousand and PLN 250,000 thousand respectively. The Bank’s mortgage covered bonds cover pool also included CIRS and FX-Forward transactions hedging the currency and interest rate risk of mortgage covered bonds denominated in EUR and IRS transactions hedging the interest rate risk of fixed rate mortgage covered bonds issued in PLN.

In 2020 and in the previous years the Bank’s mortgage covered bonds cover pool did not include asset-backed securities (ABS), which do not meet the requirements specified 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).

27. Liabilities in respect of bonds issued

Accounting policies

Liabilities in respect of bonds issued are measured at amortized cost using the effective interest rate method.

Financial information

LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2020	31.12.2019

Measured at amortized cost
bonds, including bonds issued under:	4,337,081	4,060,026
Bond Issue Programme	3,771,812	3,380,932
Public Bond Issue Programme	214,969	328,148
an individual agreement	350,300	350,946

Total	4,337,081	4,060,026

REPAYMENT PERIOD OF LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2020	31.12.2019

up to 1 month	849,222	796,324
from 1 to 3 months	1,450,883	652,153
from 3 months to 1 year	1,812,931	2,446,519
from 1 to 5 years	224,045	165,030

Total	4,337,081	4,060,026

Bond Issue Programme

In 2020, as part of the Bond Issue Programme, the Bank issued bonds with a total nominal value of PLN 5,822,500 thousand (i.e. 11,645 bonds with PLN 500,000 nominal value each) and redeemed bonds with a total nominal value of PLN 5,446,000 thousand (i.e. 1,020 bonds with PLN 100,000 nominal value each and 10,688 bonds with PLN 500,000 nominal value each). In 2019, the Bank issued 47,317 bonds with a total nominal value of PLN 7,370,100 thousand (i.e. 40,721 bonds with PLN 100,000 nominal value each and 6,596 bonds with PLN 500,000 nominal value each) and redeemed 69,485 bonds with PLN 100,000 nominal value each, i.e. with a total nominal value of PLN 6,948,500 thousand.

The above-mentioned issues of bonds are regulated by the Bond Issue Programme Agreement concluded with PKO Bank Polski SA. In accordance with the Agreement, the maximum nominal value of bonds issued and not yet redeemed is PLN 4,000,000 thousand. At the same time, under the Underwriting Agreement, PKO Bank Polski SA as the Underwriter shall be obliged to take up the issuer’s bonds up to the amount of PLN 2,000,000 thousand.

As at 31 December 2020, the Bank’s liability in respect of bonds issued as part of the Bond Issue Programme had a nominal value of PLN 3,776,500 thousand, and as at 31 December 2019 its nominal value was PLN 3,400,000 thousand. As at 31 December 2020 and as at 31 December 2019 PKO Bank Polski SA did not hold any bonds under the underwriting agreement.

Public Bond Issue Programme

In 2020, as part of the Public Bond Issue Programme the Bank issued one series of bonds addressed mainly to retail investors with a total value of PLN 50,000 thousand (i.e. 500,000 bonds of PLN 100 nominal value each) and a redemption period of 6 months and redeemed bonds with a total nominal value of PLN 161,500 thousand (i.e. 1,615 bonds with PLN 100,000 nominal value each).

In 2019, under the Programme the Bank issued:

■ one series of bonds with a value of PLN 161,500 thousand and a redemption period of 6 months, which was taken up by the PKO Bank Polski SA Brokerage Office acting as the underwriter, and subsequently resold to institutional investors;

■ four series of bonds mainly addressed to retail investors with a total value of PLN 165,000 thousand and a redemption period of 2 years;

while the Bank did not redeem any bonds under this programme.

As at 31 December 2020, the Bank’s liability in respect of bonds issued as part of the Public Bond Issue Programme amounted to PLN 215,000 thousand (the nominal value), of which bonds issued under the underwriting agreement with the PKO Bank Polski Brokerage Office amounted to PLN 0. As at 31 December 2019, these amounts were PLN 326,500 thousand and PLN 161,500 thousand respectively.

The bonds issued under the Public Bond Issue Programme are admitted to trading on the parallel market of the Warsaw Stock Exchange.

Other issues of unsecured bonds (based on an individual agreement)

In February 2020, PKO Bank Hipoteczny SA signed an agreement with a European financial institution for an issue of unsecured bonds based on a variable interest rate with a total nominal value of PLN 350,000 thousand (i.e. 350 bonds with a nominal value of PLN 1,000,000 each) and redemption date on 24 February 2021 and redeemed unsecured bonds with a total nominal value of PLN 350,000 thousand (i.e. 350 bonds with a nominal value of PLN 1,000,000 each).

The company’s liability as at 31 December 2020 in respect of the bonds referred to above in nominal terms amounted to PLN 350,000 thousand.

Bonds issued and outstanding as at 31 December 2020

Bonds issued under:	BONDS (code / ISIN)	Nominal value of 1 bond (in PLN)	Number of bonds	Nominal value (in PLN ‘000)	Currency	Interest rate	Issue date	Redemption date

Bond Issue Programme	OW030221-205	500,000	204	102,000	PLN	zero-coupon	05.02.2020	03.02.2021
	OW200121-209	500,000	1,699	849,500	PLN	zero-coupon	23.07.2020	20.01.2021
	OW210308-210	500,000	1,300	650,000	PLN	zero-coupon	24.08.2020	08.03.2021
	OW290321-211	500,000	700	350,000	PLN	zero-coupon	11.09.2020	29.03.2021
	OW220621-212	500,000	710	355,000	PLN	zero-coupon	08.10.2020	22.06.2021
	OW200421-213	500,000	592	296,000	PLN	zero-coupon	28.10.2020	20.04.2021
	OW210521-214	500,000	1,900	950,000	PLN	zero-coupon	07.12.2020	21.05.2021
	OW220317-215	500,000	448	224,000	PLN	WIBOR3M + 0.28 p.p.	17.12.2020	17.03.2022
Public Bond Issue Programme	PLPKOHP00140	100	500,000	50,000	PLN	WIBOR3M + 0.60 p.p.	11.07.2019	12.07.2021
	PLPKOHP00165	100	450,000	45,000	PLN	WIBOR3M + 0.60 p.p.	28.08.2019	30.08.2021
	PLPKOHP00173	100	400,000	40,000	PLN	WIBOR3M + 0.60 p.p.	17.10.2019	18.10.2021
	PLPKOHP00181	100	300,000	30,000	PLN	WIBOR3M + 0.60 p.p.	18.12.2019	20.12.2021
	PLPKOHP00207	100	500,000	50,000	PLN	0,60 % p.a.	27.11.2020	02.06.2021
An individual agreement	PLPKOHP00124	1,000,000	350	350,000	PLN	floating	24.02.2020	24.02.2021

28. Other liabilities

Accounting policies

Liabilities

The liabilities recognized in this item are measured at the amounts due including interest, if any. Non-financial liabilities are measured in accordance with the principles of measurement applicable to the specific categories of liabilities recognized in this item.

Expenses to be paid

The Bank recognizes accruals in respect of future payments in justified, reliably estimated amounts that are necessary to fulfil the present obligation as at the end of the reporting period.

The Bank also recognizes accruals in respect of costs which are attributable to the current period, but will be incurred in the next period, including bonuses and unused holiday, taking into account all outstanding days of holiday.

Lease liabilities

The accounting policies are presented in Note 33 Information about leases.

Financial information

OTHER LIABILITIES	31.12.2020	31.12.2019

Expenses to be paid *	9,331	9,767
Liabilities in respect of contribution to the Bank Guarantee Fund, including:	14,581	7,984
maintained in the form of payment commitments to the resolution fund	14,581	7,984
Deferred commissions and costs relating to loans granted in the part corresponding to unpaid principal and adjustment of deferred commission income on loans granted	588	-
Other liabilities, including:	10,303	13,158
sundry creditors *	2,218	5,295
settlements with the state budget, including:	8,085	7,863
liabilities in respect of tax on certain financial institutions	7,380	7,404
Lease liabilities	3,625	5,051

Total	38,428	35,960
including financial lLiabilities - marked with * above	15,174	20,113

* Financial liabilities are marked with this symbol.

As at 31 December 2020 and 31 December 2019, the Bank had no overdue contractual liabilities.

29. Provisions

Accounting policies

The principles for recording provisions	Provisions are liabilities whose amount or date of payment are uncertain. Provisions are created when the Bank has a current (legal or constructive) obligation resulting from past events and fulfilling this obligation is likely to cause an outflow of economic benefits whose amount can be estimated reliably. If the effect of the time value of money is material, the amount of the provision is determined by discounting the forecast future cash flows to their present value, using the gross discount rate reflecting the current market assessments of the time value of money and the potential risk related to a given obligation. All provisions are charged to the income statement
Provisions for legal claims	The Bank recognizes provisions for disputes with counterparties, customers and third parties after being informed by a legal counsel about the high probability of losing a court case or administrative proceedings. Such provisions are recognized in the amount of the expected outflow of economic benefits
Provisions for disability and retirement benefits	In accordance with the Labour Code, the employees of PKO Bank Hipoteczny SA are entitled to disability or retirement benefits upon their retirement or obtaining a qualification for disability pension. The Bank periodically calculates provisions for employee benefits. Provisions for disability and retirement benefits resulting from the Labour Code are recognized for every employee individually based on periodical valuations. The calculation takes into account all retirement and disability benefits which may be payable in the future. The provision is recognized based on a list of employees containing all the necessary details, in particular the length of service, age and gender.
Provisions for loan commitments	Provisions for loan commitments relating to residential loans which have not been drawn in full are recorded in the amount of expected credit losses. The provision is determined using portfolio parameters estimated with the use of statistical methods, based on historical observations of exposures with the same characteristics, defining the marginal probability of occurrence of impairment indications and the level of expected loss in the event of the occurrence of an impairment indication in the consecutive months of the period from the reporting date to the expected loss horizon.

Financial information and estimates

PROVISIONS FOR THE PERIOD FROM 1 JANUARY 2020 TO 31 DECEMBER 2020	Provision for disability and retirement benefits	Provision for loan commitments	Total

As at 1 January 2020, including:	154	140	294
Short-term provision	-	140	140
Long-term provision	154	-	154
Set-up/reassessment of provisions	15	67	82
Release/utilization	-	(156)	(156)

As at 31 December 2020, including:	169	51	220
Short-term provision	-	51	51
Long-term provision	169	-	169

PROVISIONS FOR THE PERIOD FROM 1 JANUARY 2019 TO 31 DECEMBER 2019	Provision for disability and retirement benefits	Provision for loan commitments	Total

As at 1 January 2019, including:	124	144	268
Short-term provision	-	144	144
Long-term provision	124	-	124
Set-up/reassessment of provisions	30	207	237
Release/utilization	-	(211)	(211)
As at 31 December 2019, including:	154	140	294
Short-term provision	-	140	140
Long-term provision	154	-	154

30. Equity and shareholding structure of the Bank

Accounting policies

Equity

Equity comprises the capital and funds created by the Bank in accordance with the applicable laws and the Articles of Association.

Components of the Bank’s equity:

■ the share capital is recognized in the nominal amount presented in the Articles of Association and entered in the business register;

■ the supplementary capital is created from profit and share premiums less share issue costs and it is earmarked for offsetting the losses that may occur in connection with the Bank’s operations;

■ the accumulated other comprehensive income comprises the amounts resulting from the valuation of financial assets measured at fair value through other comprehensive income and the effective portion of cash flow hedges and the related deferred tax amounts;

■ the reserves are created from net profit. The reserves are created solely for the purpose of offsetting potential losses.

Financial information

EQUITY	31.12.2020	31.12.2019

Share capital	1,611,300	1,611,300
Supplementary capital	250,733	161,563
Accumulated other comprehensive income, including:	149,642	137,990
cash flow hedges	141,186	134,421
measurement of financial assets measured at fair value through other comprehensive income	8,456	3,569
Net profit for the period	81,530	89,170

Total equity	2,093,205	2,000,023

Shareholding structure

Series	Type of shares	Number of shares	Nominal value of 1 share (in PLN)	Series value at nominal value (in PLN)	Date of passing the resolution by GSM	Issue date	Date of registration in the National Court Register

A	ordinary registered	300,000,000	1	300,000,000	06.10.2014	06.10.2014	24.10.2014
B	ordinary registered	200,000,000	1	200,000,000	14.03.2016	07.04.2016	22.04.2016
C	ordinary registered	200,000,000	1	200,000,000	01.07.2016	15.07.2016	28.07.2016
D	ordinary registered	100,000,000	1	100,000,000	28.10.2016	18.11.2016	01.12.2016
E	ordinary registered	150,000,000	1	150,000,000	21.03.2017	04.04.2017	12.04.2017
F	ordinary registered	150,000,000	1	150,000,000	28.06.2017	04.07.2017	11.09.2017
G	ordinary registered	100,000,000	1	100,000,000	18.10.2017	20.10.2017	16.11.2017
H	ordinary registered	95,000,000	1	95,000,000	13.08.2018	17.08.2018	08.10.2018
I	ordinary registered	100,000,000	1	100,000,000	19.12.2018	21.12.2018	21.02.2019
J	ordinary registered	131,500,000	1	131,500,000	07.03.2019	19.03.2019	16.05.2019
K	ordinary registered	84,800,000	1	84,800,000	27.06.2019	01.07.2019	20.08.2019
Total		1,611,300,000		1,611,300,000

PKO Bank Polski SA was the Bank’s sole shareholder as at 31 December 2020 and 31 December 2019.

The Bank’s share capital amounted to PLN 1,611,300,000 and comprised 1,611,300,000 ordinary registered shares with a nominal value of PLN 1 (one) each. The PKO Bank Hipoteczny SA shares are non-preference shares and have been paid up in full.

The Bank did not pay dividend in 2020 and in 2019. The Bank’s Management Board will propose to the Annual General Shareholders’ Meeting that the profit for the year ended 31 December 2020 is transferred to the supplementary capital.

OTHER NOTES

31. Contingent liabilities granted and received

31.1 Contractual commitments

As at 31 December 2020 and 31 December 2019 the Bank had no contractual commitments relating to the purchase of intangible assets and property, plant and equipment.

31.2 Loan commitments

Accounting policies

As part of its operations, the Bank concludes transactions that are not initially recognized in the statement of financial position as assets or liabilities, but give rise to contingent liabilities. A contingent liability is:

■ a potential obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Bank;

■ a current obligation that arises from past events, but is not recognized in the statement of financial position, because an outflow of cash or other assets for the purpose of fulfilling the obligation is not likely, or the amount of the liability cannot be reliably estimated.

Loan commitments relate to residential loans which have not been drawn in full.

Financial information

LOAN COMMITMENTS (CONTINGENT)	31.12.2020	31.12.2019

Relating to residential loans not drawn in full (nominal amount)	115,456	482,686

provisions for residential loans not drawn in full	(51)	(140)

Total, net	115,405	482,546
including irrevocable loan commitments	-	-

Information on provisions for loan commitments is provided in Note 29 “Provisions”.

CONTINGENT LOAN COMMITMENTS GRANTED AT NOMINAL VALUE - ESTIMATED PAYMENTS DEADLINES	31.12.2020	31.12.2019

up to 1 month	31,173	149,633
from 1 to 3 months (inclusive)	36,908	121,617
from 3 months to 1 year (inclusive)	43,256	182,961
from 1 to 5 years (inclusive)	4,119	28,475

Total	115,456	482,686

31.3 Guarantee commitments granted

PKO Bank Hipoteczny SA does not grant guarantee commitments.

31.4 contingent liabilities received

Financial information

CONTINGENT COMMITMENTS RECEIVED AT THE NOMINAL VALUE	31.12.2020	31.12.2019

Contingent commitments received
financial	3,577,757	2,230,566
guarantees	2,000,000	2,000,000

Total	5,577,757	4,230,566

Contingent liabilities received of a financial nature represent initiated and available loans, while guarantee commitments received represent the available guarantees to underwrite bond issues.

Right to sell or pledge collateral established for the Bank

As at 31 December 2020 and 31 December 2019 no collateral was established for the Bank, which the Bank would be entitled to sell or re-pledge, in the event of fulfilling all obligations by the owner of the collateral.

32. Legal claims

As at 31 December 2020 and 31 December 2019 there were no legal claims.

33. Information about leases

Accounting policies

Leases – Lessee

The Bank classifies agreements as leases or agreements containing a lease component, if:

■ the Bank obtains the right to use the identified asset and the supplier’s right to substitute an alternative asset is not significant; and

■ the Bank has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use; and

■ the Bank has the right to direct the use of the identified asset throughout the period of use, if:

□ the Bank 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 Bank applies exemptions and it does not recognize right-of-use assets and lease liabilities relating to:

■ short-term leases, which include agreements without an option to purchase the asset, concluded for a period of up to 12 months from the lease inception, in particular agreements concluded for an unspecified term with a short notice period (up to 12 months), without significant penalties, which include in particular as expenditure incurred on leasehold improvements and relocation costs;

■ leases of low-value assets (where the asset’s value, determined based on the value of a new asset irrespective of the age of the leased asset is less than PLN 20,000).

Lease liabilities are initially measured by the Bank at the present value of the lease payments for the right to use the underlying asset throughout the lease term:

■ fixed lease payments less any lease incentives due;

■ variable lease payments that depend on market indices;

■ amounts expected to be paid in respect of the guaranteed residual value of a leased asset;

■ the exercise price of a purchase option if it may be reasonably assumed to be exercised;

■ payments of penalties for terminating the lease, if the lessee is able to exercise an option to terminate the lease.

Lease payments do not include variable payments depending on external factors.

After initial recognition, the Bank measures lease liabilities at amortized cost.

Remeasurement of lease liabilities is recognized as an adjustment of right-of-use assets. If the carrying amount of a right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, the Bank shall recognize any remaining amount of the remeasurement in profit or loss.

Right-of-use assets are initially measured 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 lessee in connection with concluding the lease agreement;

■ an estimate of the costs to be incurred by the lessee under the contract in connection with the obligation to dismantle and remove the underlying asset or restore the underlying asset.

After initial recognition, the Bank reduces the value of the right-of-use assets by depreciation (on a straight-line basis) and impairment and adjusts the lease liabilities for remeasurement.

The Bank discounts the future lease payments using discount rates which:

■ have been calculated based on yield curves reflecting the cost of financing in a given currency;

■ cover the term of the longest lease agreement measured and reflect, for a given currency, the fixed market interest rate and the Bank’s cost of financing;

■ are based on the yield curve for the maturity corresponding to half of the maturity of the lease agreement (due to the fact that fixed lease payments are assumed).

The Bank updates the marginal lending rates for lease agreements if such a need is identified in quarterly periods.

The Bank applies the same discount rates to the portfolios of car and real estate leases, taking into account the effect of security of lease agreements on the discount rate applied.

In the reporting period, the discount rates calculated by the Bank ranged from 0.6% to 4.1% (depending on the length of the lease period). All lease agreements concluded by the Bank are in PLN.

Lease payments relating to short-term leases (below 12 months) and low-value leases (up to PLN 20,000) are charged by the Bank to the income statement on a straight-line basis during the lease term. The differences between the amounts paid and the costs recognized on a straight-line basis are recognized as prepayments or accruals.

Leases – Lessor

The Bank does not conclude agreements in which it acts as the lessor.

Financial information

LEASE AMOUNTS RECOGNIZED IN THE INCOME STATEMENT - LESSEE	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

Amortization of the right-of-use assets	(1,230)	(1,206)
real estate	(1,008)	(1,018)
cars	(222)	(188)
Interest expenses	(110)	(158)
Costs related to short-term lease contracts	-	(88)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(703)	(753)

Total	(2,043)	(2,205)

RIGHT-OF-USE ASSETS	31.12.2020	31.12.2019

Real estate	3,112	4,415
Cars	416	562

Total	3,528	4,977

OTHER LIABILITIES	31.12.2020	31.12.2019

Lease liabilities, due:	3,625	5,051
up to 1 month	106	111
from 1 to 3 months	211	221
from 3 months to 1 year	923	981
from 1 to 5 years	2,383	3,411
after more than 5 years	2	327

Total	3,625	5,051

34. Notes to the statement of cash flows

Cash and cash equivalents

Cash and cash equivalents comprise: Cash, amounts at the Central Bank, current amounts due from banks, as well as cash equivalents with maturities up to 3 months from the date of acquisition.

Financial information

Cash and cash equivalents	31.12.2020	31.12.2019

Cash and balances with the Central Bank	21	20
Amounts due from banks - current accounts	23	31

Total	44	51

As at 31 December 2020 and 31 December 2019 there were no cash and cash equivalents with restricted availability for use.

INTEREST INCOME - RECEIVED	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

From operating activities
Interest received on loans and advances to customers	705,556	840,573
Interest received on CIRS transactions	60,705	55,602
Interest received on IRS transactions	9,221	9,221
Interest received on deposits	16	49
Other interest received	37	44
From investing activities
Interest received on securities measured at fair value through other comprehensive income	22,379	17,931

Total	797,914	923,420

INTEREST EXPENSES - PAID	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019

From operating activities
Interest paid on CIRS transactions	199,952	267,046
Interest paid on IRS transactions	5,296	7,640
Interest paid for extending overdraft limits	65	167
Interest paid on liabilities in respect of purchase of receivables	39,073	38,871
Other interest paid	-	40
From financing activities
Interest paid on overdrafts	66,878	41,827
Interest paid on term loans	1,583	2,470
Interest paid on mortgage covered bonds issued	132,767	148,265
Discount and interest paid on bonds issued	59,556	72,679

Total	505,170	579,005

RECONCILIATION OF ITEMS PRESENTED IN THE STATEMENT OF FINANCIAL POSITION WITH THE STATEMENT OF CASH FLOWS			In the statement of cash flows, presented in:
	Note	31.12.2019	financing activities		operating activities			2020-12-31
	Note	31.12.2019	Incurred	Repaid	Monetary changes	Non-monetary changes, including:2)	foreign exchange gains/(losses)	2020-12-31

Amounts due to banks	24	4,811,259	15,133,256	(14,280,447)	(2,053,085)	(35,850)	-	3,575,133
overdraft within the limit available 1)		10,081	-	-	4,194	-	-	14,275
liability related to overdraft facilities		2,422,408	14,983,256	(14,180,447)	-	(2,971)	-	3,222,246
liability related to term loans		100,007	150,000	(100,000)	(150)	7	-	149,864
liability in respect of the purchase of receivables 1)		2,278,763	-	-	(2,057,129)	(32,886)	-	188,748
Liabilities in respect of mortgage covered bonds issued	26	16,239,975	-	(30,000)	-	995,579	990,158	17,205,554
Liabilities in respect of bonds issued	27	4,060,026	6,198,089	(5,957,500)	-	36,466	-	4,337,081

Total		25,111,260	21,331,345	(20,267,947)	(2,053,085)	996,195	990,158	25,117,768

1) Presented in the statement of cash flows from operating activities.

2) Non-cash changes comprise mainly accrued interest, discount settlements and foreign exchange gains/(losses).

35. Related party transactions

35.1 Related-party transactions – capital links

PKO Bank Polski SA and PKO Bank Polski SA Group entities are the Bank’s related parties.

Financial information

As at 31 December 2020

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

PKO Bank Polski SA	1,154,740	1,154,692

Total	1,154,740	1,154,692

ENTITY	LIABILITIES
ENTITY	Loans and overdraft	Acquisition of receivables	Mortgage covered bonds and bonds	Other liabilities	including derivatives

PKO Bank Polski SA	3,236,523	188,748	19,338	7,212	541
PKO BP Finat sp. z o.o.	-	-	-	17	-
PKO Leasing SA	-	-	-	359	-
Prime Car Management SA	-	-	-	72	-
PKO Towarzystwo Ubezpieczeń SA	-	-	97,458	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	116,885
PKO VC -fizan	-	-	20,969	-	-
NEPTUN - fizan	-	-	29,995	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	24,934	-	-

Total	3,236,523	188,748	309,579	7,660	541

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	5,577,757

Total	-	5,577,757

For the period from 1 January 2020 to 31 December 2020

ENTITY	Total revenues	including interest and commissions	Total costs	including interest and commissions	Net income/(expense) from financial instruments measured at fair value	Net foreign exchange gains/(losses)

PKO Bank Polski SA	4,661	4,249	225,999	196,677	86	994,878
PKO BP Finat sp. z o.o.	-	-	192	-	-	-
PKO Leasing SA	-	-	327	11	-	-
Prime Car Management SA	-	-	9	0	-	-
PKO Towarzystwo Ubezpieczeń SA	-	-	4,637	4,637	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	976	976	-	-
PKO VC -fizan	-	-	430	430	-	-
NEPTUN - fizan	-	-	88	88	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	32	32	-	-

Total	4,661	4,249	232,690	202,851	86	994,878

As at 31 December 2019

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

PKO Bank Polski SA	173,515	173,275

Total	173,515	173,275

ENTITY	LIABILITIES
ENTITY	Loans and overdraft	Acquisition of receivables	Mortgage covered bonds and bonds	Other liabilities	including derivatives

PKO Bank Polski SA	2,282,481	2,278,763	62,416	57,897	46,084
PKO BP Finat sp. z o.o.	-	-	-	19	-
PKO Leasing SA	-	-	-	577	-
PKO Towarzystwo Ubezpieczeń SA	-	-	-	31	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	64,423
PKO VC -fizan	-	-	33,698	-	-

Total	2,282,481	2,278,763	160,537	58,524	46,084

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	4,230,566

Total	-	4,230,566

For the period from 1 January 2019 to 31 December 2019

ENTITY	Total revenues	including interest and commissions	Total costs	including interest and commissions	Net income/(expense) from financial instruments measured at fair value	Net foreign exchange gains/(losses)

PKO Bank Polski SA	1,924	1,642	342,575	317,626	65	(115,511)
PKO BP Finat sp. z o.o.	-	-	197	-	-	-
PKO Leasing SA	-	-	225	14	-	-
PKO Towarzystwo Ubezpieczeń SA	-	-	3,417	3,417	-	-
Qualia Sp. z o.o.	-	-	25	25	-	-
PKO VC -fizan	-	-	713	713	-	-

Total	1,924	1,642	347,152	321,796	65	(115,511)

The Bank holds current accounts and made deposits with PKO Bank Polski SA during the reporting period. In addition, the Bank cooperates strategically with PKO Bank Polski SA. Housing loan sales as well as after-sales servicing, excluding risk management, internal audit and control, are carried out within the framework of the Outsourcing Agreement with PKO Bank Polski SA dated 16 January 2015. Assistance is also provided with respect to support activities under this agreement.

The Bank also obtains financing from PKO Bank Polski SA in the form of overdrafts bearing interest at a variable rate, i.e. a base rate increased by a margin:

■ On 29 October 2015, the Bank concluded with PKO Bank Polski SA an overdraft facility agreement with a limit of PLN 900,000 thousand for a period of 3 years. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 29 October 2022;

■ On 2 February 2017, the Bank concluded with PKO Bank Polski SA an overdraft facility agreement with a limit of PLN 1,500,000 thousand for a period of 3 years. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 3 February 2023;

■ On 10 July 2019, the Bank concluded with PKO Bank Polski SA an overdraft facility agreement with a limit of PLN 1,000,000 thousand for a period of 3 years. By signing an annex to the agreement, the limit was increased to PLN 2,500,000 thousand as of 1 January 2020. At the same time, the purpose of the facility was extended to include repayment of the liabilities in respect of the loan portfolios purchased and servicing of redemption of mortgage covered bonds. Subsequently, on 18 March 2020, PKO Bank Hipoteczny SA concluded an annex to the agreement with PKO Bank Polski SA increasing the limit to PLN 4,000,000 thousand. The annex specifies that the amount of the facility in excess of PLN 2,500,000 thousand will be used by the borrower for redemption of own bonds maturing in the first half of 2020 in the event of problems with refinancing the individual series of own bonds resulting from the situation on the financial market;

Furthermore, on 10 September 2020, the Bank concluded with PKO Bank Polski SA a non-revolving working capital facility agreement in PLN with a limit of PLN 300,000 thousand for a period of 6 years. The loan may be drawn in tranches repayable within 5 years. The tranches bear interest at a fixed rate, which is determined for each drawing separately.

As at 31 December 2020, all the above-mentioned facilities were drawn in the full amount.

The Bank also has agreements with PKO Bank Polski SA relating to the issues of bonds and mortgage covered bonds as part of:

■ the Bond Issue Programme:

□ On 30 September 2015, the Bank entered into the PKO Bank Hipoteczny Bond Issue Programme Agreement (the “Programme”) with PKO Bank Polski SA for a Programme amount of up to PLN 2,000,000 thousand over a period of 4 years, as well as the Underwriting Agreement under which the Underwriter assumes an obligation to take up the Issuer’s Bonds on its own account up to the amount of PLN 2,000,000 thousand. By signing annexes to the agreement, the Programme amount was increased to PLN 3,500,000 thousand as of 21 May 2018 and to PLN 4,000,000 thousand as of 11 February 2020. On 30 September 2019, the parties extended both agreements for a subsequent 4-year period;

□ On 18 July 2019, the Bank signed the Issue Agent Agreement with the PKO Bank Polski Brokerage Office. At the same time, on 18 December 2019 PKO Bank Hipoteczny signed a Dealership Agreement with PKO Bank Polski SA, on the basis of which PKO Bank Polski SA acts as a dealer with respect to bonds issued under the PKO Bank Hipoteczny SA Own Bonds Issue Programme;

□ On 16 October 2020, an annex to the Bond Issue Programme was signed, extending the maximum maturity of the bonds issued from 12 to 36 months and extending the catalogue of the types of bonds issued from discount bonds to zero coupon bonds, fixed coupon bonds and variable coupon bonds.

■ the Public Bond Issue Programme:

□ On 12 October 2020, after the Polish Financial Supervision Authority approved the Basic Prospectus on 8 October 2020, PKO Bank Hipoteczny SA signed with PKO Bank Polski SA (also acting through its branch, the Brokerage Office in Warsaw) the Programme Agreement relating to the Public Bond Issue Programme set up on 11 April 2019. Based on the said agreement, PKO Bank Polski SA acts as the Arranger and Calculation Agent, and the Brokerage Office acts as the Offering Agent, Technical Agent and Issue Underwriter.

■ the International Mortgage Covered Bonds Issue Programme:

□ On 21 August 2020, upon approval of the Basic Prospectus of PKO Bank Hipoteczny SA relating to the issue of mortgage covered bonds for the European market (including the Polish market) by Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg, PKO Bank Hipoteczny SA signed the Programme Agreement with PKO Bank Polski SA, on the basis of which PKO Bank Polski SA acts as the Arranger and Dealer.

On 17 November 2015, the Framework Agreement for the Sale of Receivables was concluded with PKO Bank Polski SA. Based on the agreement, in 2020 the Bank continued to purchase portfolios of receivables under mortgage backed residential loans. Further details are available in Notes 20 and 24.

Furthermore, as part of the transactions with parties related by equity, PKO BP Finat Sp. z o.o. provides to the Bank accounting services with respect to the Bank’s general administration, as well as personnel and payroll services, PKO Bank Polski SA rents office space, PKO Leasing SA and Prime Car Management SA provide vehicles under lease agreements, and PKO Towarzystwo Ubezpieczeniowe SA insures the Bank’s credit risk.

During the reporting period the Bank did not conclude any transactions with related parties other than on an arm’s length basis.

35.2 Transactions with the State Treasury and its related entities

Since the State Treasury holds 29.43% of the share capital of PKO Bank Polski SA, PKO Bank Hipoteczny SA (which is a part of the PKO Bank Polski SA Group) is a related entity of the State Treasury.

The Bank concludes the following transactions with the State Treasury and its related entities:

■ purchases of Treasury bonds issued by the State Treasury, which are described in Note 19 “Securities”;

■ purchases of goods and services from related entities of the State Treasury as part of the Bank’s operating activities, which are immaterial individually and cumulatively from the financial statements perspective.

35.3 Related-party transactions – personal links

As at 31 December 2020, 9 entities were related to the Bank through key management personnel of PKO Bank Hipoteczny SA or close relatives of key management personnel, whereas at 31 December 2019 there were 10 such entities. In the above-mentioned periods, the Bank had an active agreement with and made payments for the purchases of goods to only one of these entities.

35.4 Benefits for PKO Bank Hipoteczny SA key management personnel

The principles for determining a policy of variable remuneration components for the Bank’s managers are described in the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2020 (section 6.6).

Financial information

COST OF REMUNERATION OF THE BANK’S MANAGEMENT BOARD AND SUPERVISORY BOARD	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019 5)

The Bank’s Management Board 1)
Short-term employee benefits2)	2,072	1,875
Post-employment benefits	80	-
Long-term benefits 3)	145	197
Share-based payments settled in cash4)	363	609
Payments due to termination of service contracts	138	-
Total	2,798	2,681

The Bank’s Supervisory Board (independent Supervisory Board members)
Short-term employee benefits2)	135	138
Total	135	138

1) Including the Management Board members who no longer perform their functions.

2) Short-term employee benefits comprise remuneration, social insurance contributions, employee pension plans, other benefits and the provision for not deferred variable remuneration components, which have been or will be settled within 12 months of the end of a reporting period;

3) Long-term benefits comprise provisions for deferred variable remuneration components granted in cash, which will be payable after 12 months from the end of a reporting period;

4) Share-based payments settled in cash (IAS 19) comprise cost of accruals for deferred variable remuneration components granted in the form of financial instruments, i.e. phantom shares. Phantom shares are converted into cash after the retention period.

5) Data for the comparative period takes into account a change in proportion between variable remuneration in cash and in the form of financial instruments, i.e. an increase in the part payable in the form of financial instruments, in accordance with a resolution of the Bank’s Supervisory Board from June 2020.

PROVISION FOR VARIABLE REMUNERATION COMPONENTS	31.12.2020	31.12.2019
PROVISION FOR VARIABLE REMUNERATION COMPONENTS	(for the years 2017-2020)	(for the years 2016-2019)

The Bank’s Management Board 1)	2,367	2,037
other members of the management (MRT)2	3,108	2,808

Total provisions	5,475	4,845

REMUNERATION PAID DURING THE YEAR	01.01.2020 - 31.12.2020	01.01.2019 - 31.12.2019
REMUNERATION PAID DURING THE YEAR	(for the years 2016-2019)	(for the years 2015-2018)

granted in cash
the Bank’s Management Board 1)	376	515
other members of the management (MRT)2	887	975
granted in the form of financial instruments
the Bank’s Management Board 1)	640	735
other members of the management (MRT)2	278	223

Total paid	2,181	2,448

1) Including Management Board members who no longer perform their functions;

2) MRT – Material Risk Takers;

Loans and advances granted by the Bank to its management

In the period from 1 January to 31 December 2020 and from 1 January to 31 December 2019, no loans or advances were granted to the Bank’s management.

Under the Framework Agreement Concerning the Sale of Receivables entered into with PKO Bank Polski SA on 17 November 2015, the Bank purchased portfolios of residential mortgage loans comprising loans granted to members of the Bank’s management. As at 31 December 2020, their carrying amount was PLN 1,166 thousand, and as at 31 December 2019 it was PLN 621 thousand. The interest rate and repayment terms are consistent with the arm’s length principle.

36. Fair value of financial assets and liabilities

36.1 Categories of fair value measurement of financial assets and financial liabilities measured at fair value in the statement of financial position

Accounting policies

Classification of financial assets and liabilities	Individual financial assets and liabilities measured at fair value are classified by the Bank to the following categories: Level 1: Prices quoted on active markets; Level 2: Measurement techniques based on observable market data; Level 3: Other measurement techniques. Depending on the category to which financial assets and liabilities are classified, different fair value measurement methods are applied.
Level 1 Prices quoted on active markets	Financial assets and liabilities whose fair value is measured directly on the basis of prices quoted on active markets for identical assets or liabilities (unadjusted). The Bank classifies to this category financial instruments for which there is an active market and whose fair value is determined based on the market purchase price. Securities are measured in accordance with Bondspot fixing.
Level 2 Measurement techniques based on observable market data	Financial assets and liabilities whose fair value is determined using measurement models, when all significant input data is observable on the market either directly (as prices) or indirectly (based on prices). In this category the Bank classifies financial instruments for which there is no active market, i.e. CIRS, IRS and FX forward derivatives.
Level 3 Other measurement techniques	Financial assets and liabilities whose fair values are measured using measurement models, if inputs are not based on observable market data (unobservable inputs). The Bank did not have any instruments classified to this category.
Transfers	Transfers of instruments between Level 1 and Level 2 are based on the availability of quotations from an active market as at the end of a reporting period. Instruments are transferred from Level 2 to Level 3 if an observable factor is replaced in the measurement with an unobservable one or if a new unobservable risk factor having a significant effect on the measurement of an instrument is applied. Instruments are transferred from Level 3 to Level 2 if an unobservable factor is replaced in the measurement with an observable one or if the effect of an unobservable factor on the measurement is no longer significant. There were no transfers between the fair value hierarchy levels in 2020 and 2019.

Measurement techniques and observable input data

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE	Measurement methods (techniques)	Observable input data

CIRS	Discounted cash flow model based on profitability curves	Profitability curves are based on market rates and data for the money market, FRA (Forward Rate Agreement) transactions market, IRS (Interest Rate Swap) market, basis swap, CDS (Credit Default Swap) quotations.
IRS	Discounted cash flow model based on yield curves	Profitability curves are based on market rates and data for the money market, FRA (Forward Rate Agreement) transactions market, IRS (Interest Rate Swap).
FX forward	Discounted cash flow model based on profitability curves	Yield curves are based on market rates and data on the money market and the FX-Forward transactions market

Financial information

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31 DECEMBER 2020	Note	Carrying amount	Level 1	Level 2	Level 3
	Note	Carrying amount	Prices quoted on active markets	Measurement techniques based on observable market data	Other measurement techniques

Derivative hedging instruments	18	1,154,692	-	1,154,692	-
CIRS		1,139,378	-	1,139,378	-
FX forward		111	-	111	-
IRS		15,203	-	15,203	-
Securities	19	1,241,821	1,241,821	-	-
measured at fair value through other comprehensive income		1,241,821	1,241,821	-	-
Total financial assets measured at fair value		2,396,513	1,241,821	1,154,692	-

Derivative hedging instruments	18	541	-	541	-
CIRS		-	-	-	-
FX forward		541	-	541	-
IRS		-	-	-	-
Total financial liabilities measured at fair value		541	-	541	-

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31 DECEMBER 2019	Note	Carrying amount	Level 1	Level 2	Level 3
	Note	Carrying amount	Prices quoted on active markets	Measurement techniques based on observable market data	Other measurement techniques

Derivative hedging instruments	18	173,275	-	173,275	-
CIRS		163,676	-	163,676	-
FX forward		382	-	382	-
IRS		9,217	-	9,217	-
Securities	19	1,240,161	1,240,161	-	-
measured at fair value through other comprehensive income		1,240,161	1,240,161	-	-
Total financial assets measured at fair value		1,413,436	1,240,161	173,275	-

Derivative hedging instruments	18	46,084	-	46,084	-
CIRS		45,237	-	45,237	-
FX forward		847	-	847	-
IRS		-	-	-	-
Total financial liabilities measured at fair value		46,084	-	46,084	-

36.2 Financial assets and financial liabilities not presented at fair value in the statement of financial position

Accounting policies

Market values are unavailable for most financial instruments, therefore, the fair values are estimated based on a number of measurement techniques. The fair values of financial instruments are determined using a model based on estimating the present value of future cash flows by discounting the cash flows using the appropriate discount rates. The model calculations include certain simplifications and are sensitive to the assumptions adopted.

The summary of the main methods and assumptions used to estimate the fair values of financial instruments which are not measured at fair value are presented below.

In the case of some groups of financial instruments, due to a lack of expected significant differences between their carrying amount and the fair value, resulting from the characteristics of those groups (e.g. short-term nature, high correlation with market parameters, short periods of rate overstatement, unique nature of an instrument or a short period from the issue date), it was assumed that the carrying amount of the instrument approximates its fair value. This applies to the following groups of financial instruments:

■ cash and balances with the Central Bank;

■ amounts due from banks;

■ amounts due to banks

■ amounts due to customers;

■ bonds issued under the Bond Issue Programme or an individual agreement.

In the case of:

■ mortgage covered bonds issued – the fair value is determined based on the price observed on a regulated market (the Luxembourg Stock Exchange for EUR-denominated mortgage covered bonds and the Warsaw Stock Exchange (WSE) for mortgage covered bonds in PLN);

■ bonds issued under the Public Bond Issue Programme – the fair value is determined based on the price observed on the WSE parallel market.

The model used with respect to loans and advances to customers without recognized impairment was based on the estimated present values of future cash flows, which were discounted using current interest rates taking into account the amount of credit risk margin and real repayment deadlines resulting from loan agreements. The current margin levels were determined for transactions concluded in the last quarter ended with a balance sheet date. In the case of loans with recognized impairment it is assumed that the fair value is equal to the carrying amount.

Financial information

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 December 2020	fair value hierarchy level	measurement method	2020-12-31
	fair value hierarchy level	measurement method	carrying amount	fair value

Cash and balances with the Central Bank	N/A	amount of consideration due	21	21
Amounts due from banks	2	discounted cash flows	23	23
Loans and advances to customers, including:			24,902,659	24,072,854
residential loans	3	discounted cash flows	24,902,659	24,072,854
Other financial assets	3	amount of consideration due taking into account impairment	31	31
Amounts due to banks	2	discounted cash flows	3,575,133	3,575,133
Amounts due to customers	2	discounted cash flows	6,641	6,641
Liabilities in respect of mortgage covered bonds issued	1	quotations on the regulated market	17,205,554	17,478,010
Liabilities in respect of bonds issued under:			4,337,081	4,337,362
Public Bond Issue Programme	1	quotations on the regulated market	214,969	215,250
Bond Issue Programme and an individual agreement	2	discounted cash flows	4,122,112	4,122,112
Other financial liabilities	3	amount of consideration due	15,174	15,174

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 DECEMBER 2019	fair value hierarchy level	measurement method	31.12.2019
	fair value hierarchy level	measurement method	carrying amount	fair value

Cash and balances with the Central Bank	N/A	amount of consideration due	20	20
Amounts due from banks	2	discounted cash flows	31	31
Loans and advances to customers, including:			25,821,070	25,138,514
residential loans	3	discounted cash flows	25,821,070	25,138,514
Other financial assets	3	amount of consideration due taking into account impairment	217	217
Amounts due to banks	2	discounted cash flows	4,811,259	4,811,259
Amounts due to customers	2	discounted cash flows	4,885	4,885
Liabilities in respect of mortgage covered bonds issued	1	quotations on the regulated market	16,239,975	16,463,539
Liabilities in respect of bonds issued under:			4,060,026	4,060,577
Public Bond Issue Programme	1	quotations on the regulated market	328,148	328,699
Bond Issue Programme and an individual agreement	2	discounted cash flows	3,731,878	3,731,878
Other financial liabilities	3	amount of consideration due	20,113	20,113

Operating segments

In 2020 and 2019 the Bank did not analyse its operations by segments due to the specific nature of its operations. The whole loan portfolio of the Bank is uniform and consists of residential loans granted to retail customers for the financing of real estate located in Poland. All operations of the Bank represent one segment. The main operational decision-maker is the Bank’s Management Board. The Bank’s gross profit/(loss) is analysed at the level of all operations of the Bank. Therefore, the financial data presented in the statement of financial position and the income statement is representative for the Bank as a whole, which consists of a single operating segment.

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

37. Risk management at PKO Bank Hipoteczny SA

Risk management at PKO Bank Hipoteczny SA is aimed at ensuring the financial stability of the Bank, safeguarding the value and security of the mortgage covered bonds issued and guaranteeing the safety of funds resulting from the issue of bonds and the other sources of financing of the Bank’s operations. The assumed level of risk plays an important role in the planning process.

The Bank has identified the following types of risks which are managed:

Type of risk	Section
credit risk	38
concentration risk	39
residual risk	40
liquidity risk	41
interest rate risk	42
foreign exchange risk	43
model risk	44
operational risk	45
business risk	46
compliance risk	47
reputation risk	48
capital risk	49

37.1 Key risk management policies

Risk management in PKO Bank Hipoteczny SA is based in particular on the following policies:

■ the risk management process, including the lending process, is defined and regulated by strategies, policies and procedures adopted by the Management Board and approved by the Supervisory Board of PKO Bank Hipoteczny SA;

■ the Bank manages all identified types of banking risks and performs an ICAAP (Internal Capital Adequacy Assessment Process), and ILAAP (Internal Liquidity Adequacy Assessment Process) where:

a) the risk management process is appropriate to the scale of the operations and to the significance, scale and complexity of a given risk and tailored to new risk factors and sources of risk as they emerge;

b) the risk management methods, models, assumptions and systems are tailored to the scale and complexity of the risk, and periodically verified and validated;

■ the organizational structure of risk management ensures the independence of the risk function, including the real estate valuation and the credit decision making processes from business activities;

■ risk management is integrated with the planning and controlling systems and supports the pursuit of the Bank’s strategy in compliance with the risk management strategy, in particular in terms of risk tolerance levels;

■ the risk management process is consistent with the principles of risk management of the PKO Bank Polski SA Group, including the application of group risk models, modified to reflect the nature of activities of PKO Bank Hipoteczny SA and approved by the adequate authorities of PKO Bank Hipoteczny SA.

Risk management system

The risk management system of PKO Bank Hipoteczny SA covers the following components:

37.2 Components of the risk management system

The risk management system of PKO Bank Hipoteczny SA comprises the following components:

risk identification

Risk identification consists of identifying actual and potential sources of risk and assessing the materiality of their potential influence on the financial position of the Bank. As part of the risk identification process, material types of risk for the Bank’s activities are identified. The different risks assessments are reviewed at least once a year for their materiality.

risk measurement or assessment

Risk measurement covers defining risk measures adequate to the type and materiality of the risk, data availability and quantification of risk by means of set measures, and risk assessment covers identifying the scale of risk, taking into account risk management goals. Stress tests are carried out as part of risk measurement, with a view to determining the potential impact of adverse changes in the Bank’s environment and operations on its financial position.

risk control

Risk control consists of determining the tools to be used to diagnose or mitigate the level of risk in specific areas of the Bank’s activity. Risk control comprises determining risk controls appropriate for the scale and complexity of the Bank’s operations, in particular in the form of strategic tolerance limits for individual types of risks subject to monitoring, and in the event that these are exceeded, management actions are taken.

risk forecasting and monitoring

Risk forecasting and monitoring consists of preparing forecasts and monitoring deviations from forecasts or adopted reference points (e.g. limits, thresholds, plans, measures from the previous period, recommendations) and stress testing. Risk monitoring is performed with a frequency appropriate to the materiality and volatility of a specific risk type.

risk reporting

Risk reporting consists of regularly informing the authorities of the Bank about the results of risk measurement, actions taken and recommended. The scope, frequency and the form of reporting are adjusted to the management level of the recipients.

management actions

The management actions taken by the Bank comprise in particular enacting internal regulations, specifying the risk tolerance level, establishing limits and thresholds, issuing recommendations, taking decisions, including about the use of tools supporting risk management. The objective of management actions is to shape the risk management system and risk levels.

37.3 Organization of risk management at the Bank

Risk management is overseen by the Bank’s Supervisory Board, which is informed on a regular basis about the risk profile of PKO Bank Hipoteczny SA and about the most important actions undertaken with respect to risk management.

The Bank’s Management Board is responsible for risk management, including supervising and monitoring the risk management actions taken by the Bank. The Bank’s Management Board takes key decisions affecting the risk profile of the Bank and adopts internal regulations concerning risk management.

Risk management takes place at three independent, complementary levels:

■ the first level consists of the organizational structures performing product management, sales and customer service tasks and other organizational units whose operations generate risk, operating in accordance with internal operations;

■ the second level consists of the operations of the compliance unit as well as the identification, measurement or assessment, control, monitoring and reporting of risk, threats and irregularities – these tasks are performed by specialist organizational units operating in accordance with the Bank’s internal regulations; the purpose of these units is to develop internal regulations defining the risk management principles, methods, tools and procedures and to measure performance;

■ the third level comprises the operations of the internal audit unit, which performs independent audits of the elements of the Bank’s management system, including the risk management system and the internal control system; internal audit is separate from the first and the second level.

The independence of the levels is achieved by preserving organizational independence in the following areas:

■ the function of the second level in creating systemic solutions is independent of the function of the first level;

■ the function of the third level is independent of the functions of the first and the second level.

The following organizational units of PKO Bank Hipoteczny SA are responsible for risk management to the extent of the powers vested in them:

Risk Bureau

The Risk Bureau is responsible in particular for the management of the following risks: credit risk, concentration risk, liquidity risk, interest rate risk, foreign exchange risk, business risk, and the management of capital adequacy, including:

■ identification of risk factors and sources of risk;

■ measuring, assessing, as well as periodic monitoring and reporting risk levels;

■ measuring and assessing capital adequacy;

■ collaboration with the regulatory authorities in the risk area (SREP, inspections, clarifications, questionnaires, etc.).

Loan Bureau

The Loan Bureau is responsible for credit security and credit decisions, the restructuring and debt collection processes, and the lending process optimization and organization, including:

■ analyses of the real estate market, property valuation policies, including the principles for determining the Property Value for Mortgage Lending Purposes (MLV);

■ monitoring the quality, completeness and value of security at the portfolio level (including regular indexation of property value);

■ bad debt management and taking actions to recover such debt.

Compliance Team in the Compliance, Security and Legal Bureau

The Compliance Team, which is a separate internal unit of the Compliance, Security and Legal Bureau, is responsible in particular for developing the compliance risk management system and identifying, controlling and monitoring compliance risk in the Bank, as well as preparing reports and developing a system for managing reputation risk.

Validation and Risk Control Team

The Validation and Risk Control Team is responsible, in particular, for ensuring the effectiveness of the Bank’s operational risk management system, which includes the identification, measurement, monitoring, control and reporting of the risk, designing model risk management standards, and assessing the level of model risk, validating the models, cooperating in this respect with the model validations unit in PKO Bank Polski SA and for designing and monitoring the operation of systemic solutions for forming control functions in respect of processes considered to be significant for the internal control system, including maintaining the Control Function Matrix. The Team’s responsibilities also include coordinating data and data quality management processes as well as supervising the security of IT systems.

Risk management is supported by the following committees:

Supervisory Board Audit and Finance Committee (“AFC”)

The Committee supports the Supervisory Board in particular by:

■ monitoring and periodically expressing its opinions on: the adequacy and effectiveness of internal controls; the adequacy and effectiveness of the risk management system; the degree of effectiveness of compliance risk management in the Bank; the application of corporate governance principles to supervised institutions, the internal audit and compliance principles; the adequacy and effectiveness of whistleblowing procedures (i.e. anonymous reporting of violations of the law and the ethical procedures and standards in place at the Bank);

■ developing a policy for selecting an audit firm, recommending an audit firm that would audit the Bank’s financial statements to the Supervisory Board;

■ monitoring the financial reporting process, including reviewing the interim and annual financial statements of the Bank;

■ monitoring the audit performance and independence of the registered auditor and the audit firm;

■ expressing opinions on the resolutions of the Bank’s Management Board concerning the internal control system, which are subject to Supervisory Board approval.

Supervisory Board Risk Committee (“RC”)

The Committee supports the Supervisory Board in particular by:

■ reviewing the whole current and future readiness of the Bank to take risk, strategic directions and tasks concerning risk in the context of the Bank’s business strategy and the conditions resulting from the macroeconomic situation and the regulatory environment, and in particular the risk management strategy prepared by the Management Board and the Bank’s acceptable general risk level;

■ monitoring the conformity of the Bank’s risk-taking policy with the strategy and the financial plan;

■ analysing periodic risk reports, including utilization of strategic risk tolerance limits and developing relevant guidelines on their basis, as well as periodic reviews of the pursuit of the risk management strategy;

■ issuing opinions about capital adequacy, the rules for evaluating creditworthiness, the risk measurement models, the impairment model;

■ reviewing the disclosure policies regarding capital adequacy, the management of capital adequacy, liquidity risk, operational risk, model risk, and impairment measurement risk.

■ reviewing the draft Rules for Setting the Property Value for Mortgage Lending Purposes.

Assets & Liabilities Management Committee (“ALCO”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the management of liquidity risk, interest rate risk, business risk (including the risk of macroeconomic changes), foreign exchange risk and capital risk (including the risk of excessive leverage) as well as the risk of the measurement models applicable to such risks;

■ managing the Bank’s capital adequacy;

■ reviewing documents concerning capital adequacy, equity, internal capital, stress testing, the risks mentioned above and the risk tolerance limits for those risks;

■ making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, and launching capital and liquidity emergency actions;

■ presenting recommendations for the relevant governing bodies of the Bank, organizational units, members of the Bank’s Management Board, project teams or task forces – within the scope of its competences.

Credit Committee (“CC”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the functions that manage credit, concentration and residual risks, as well as the risk of the models measuring such risks;

■ reviewing documents concerning the risks mentioned above, the profile and quality structure of the loan portfolio, allowances for expected credit losses, acquisition of loan portfolios and the real estate market;

■ making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, the results of the valuation of the risk models, the methodologies and models for calculation of expected credit losses, cut-offs used in the assessment of credit risk, loan receivables purchased by the Bank and individual loan transactions;

Strategy and Business Initiatives Committee (“SBIC”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the functions that manage operational, reputation and compliance risks as well as the risk of the models measuring such risks;

■ reviewing documents concerning the risks mentioned above, the directions of the Bank’s development, the Bank’s strategy and the IT strategy, initiatives connected with the pursuit of the Bank’s strategy and the IT strategy, including analyses of operational risk, reviewing the product range, product profitability and the lending process;

■ making decisions concerning the Bank’s operations, particularly regarding the management of these risks and the models of risk measurement, as well as the risk measures and limits;

Data Quality Committee (“DQC”)

The Committee supports the Bank’s Management Board in particular by:

■ defining the strategic directions of data quality and data architecture management operations at the Bank in the context of the Data Management System (“DMS”);

■ supervising the DMS operations, which includes assessing its effectiveness and the operations of the individual organizational units of the Bank.

The Committees, the Management Board and the Supervisory Board receive regular reports concerning the different types of risk.

37.4 Identification of material risks

Materiality of different risks

The materiality of different risks is established on the basis of the review of all the Bank’s operations.

In determining the materiality criteria for the different risks, the impact of the risk on the Bank’s operations is taken into account and three types of risks are recognized:

■ material risks – subject to active management;

■ risks subject to monitoring– which are monitored for materiality;

■ other risks which have not been identified in the Bank’s operations (immaterial and unmonitored).

The materiality evaluation of the different risks is performed periodically on the basis of quantitative and qualitative data. First and foremost, the evaluation results in defining all the risks existing at the Bank; then the risks are classified to one of the two categories: material risk or risk subject to monitoring. The materiality evaluation is also performed whenever a major change occurs in the scope or profile of the Bank’s operations.

Risk types considered to be material:

■ credit risk;

■ liquidity risk, including financing risk;

■ interest rate risk;

■ operational risk;

■ model risk.

Additionally, the following types of risk are monitored by the Bank:

■ concentration risk;

■ foreign exchange risk;

■ residual risk;

■ business risk, including risk of macroeconomic changes;

■ compliance risk;

■ reputation risk;

■ capital adequacy risk, including risk of excessive leverage.

The Bank has defined and monitors materiality criteria for the risks that are subject to monitoring. The fulfilment of these criteria will result in the recognition of such risk as material to the Bank.

In the Risk Management Strategy the Bank has defined a number of strategic limits defining the appetite for different risks. The limits are regularly monitored. In 2020 and in 2019 none of the strategic limits was exceeded.

38. Credit risk management

Credit risk is defined as the risk of the occurrence of losses due to a counterparty’s default on obligations to the Bank or as the risk of a decrease in the economic value of the Bank’s receivables as a result of a deterioration in a counterparty’s ability to service its obligations. The aim of credit risk management is to minimize losses on the loan portfolio as well as to minimize the risk of occurrence of exposures at risk of impairment, while maintaining the expected level of profitability and value of the loan portfolio.

PKO Bank Hipoteczny SA has policies for credit risk management, which are aimed at the proper risk assessment of loan transactions at the loan application stage and throughout the life of the transaction (monitoring), as well as proper safeguarding of risk by applying appropriate credit risk mitigation techniques.

The policies are executed by the Bank through the use of advanced credit risk management methods, both at the level of individual credit exposures and at the level of the entire loan portfolio of the Bank. These methods are verified and developed to ensure compliance with internal rating based requirements (IRB), i.e. an advanced credit risk measurement approach.

38.1 Credit risk measurement and assessment

PKO Bank Hipoteczny SA measures and assesses credit risk at the level of individual transactions and at the level of the entire portfolio.

The measurement and assessment of the risk of individual loan transactions is performed by PKO Bank Hipoteczny SA with the use of group risk models adapted to the specificity of PKO Bank Hipoteczny’s business and approved by the relevant governing bodies of PKO Bank Hipoteczny SA. The group risk models used by PKO Bank Hipoteczny SA are based on application data, behavioural data and data from the Credit Information Bureau. The review (monitoring) of the models and their validation are performed separately based on the Bank’s portfolio, PKO Bank Polski SA’s portfolio and the combined portfolios of both banks.

The detailed principles and scope of cooperation within the PKO Bank Polski Group regarding the group risk models are laid down in the Outsourcing Agreement with PKO Bank Polski SA described in Note 35.1. “Related-party transactions – capital links”.

In the lending process, as part of the risk assessment of an individual loan transaction, the Bank assesses the customer’s creditworthiness on a qualitative and quantitative basis and evaluates the collateral. The qualitative assessment of creditworthiness means the review of all the available customer information originating from internal and external sources of information, as well as the assessment of certain socio-demographic features describing the customer from the perspective of statistical risk as a debtor. The quantitative assessment consists of investigating the customer’s financial position in order to determine if the customer has sufficient funds for timely repayment of liabilities, including those arising from the requested loan. Creditworthiness is assessed, among other things, based on the documentation supplied by the customer, which is verified for completeness, authenticity and consistency with the facts and the legal status. The assessment of the collateral, particularly the property value for mortgage lending purposes, consists of verifying the criteria determining the acceptability and effectiveness of the collateral as a possible source of recovery of the receivable.

When purchasing receivables in respect of residential loans from PKO Bank Polski SA, the Bank also performs an assessment of the credit risks of the contracts to be purchased, in accordance with the Bank’s methodology for assessing purchased receivables. In particular, the Bank assesses: the customer’s creditworthiness at the time PKO Bank Polski SA granted the loan to be transferred, the current behavioural scoring (based on the group’s scoring model in accordance with the Internal Ratings-Based Approach – IRB) and the current timeliness of repayments, eliminating the receivables which do not satisfy the methodology criteria from the transfer.

In addition, the purchased portfolios are measured by an independent third party to guarantee an unbiased valuation of the portfolios to be acquired. As part of the valuation, the costs of risk anticipated with regard to the given receivables portfolio are also assessed and are reflected in the final price which the Bank pays for the portfolio.

In order to determine the credit risk at the portfolio level, the Bank uses the following risk measurement and assessment methods:

■ probability of default – “PD”;

■ loss given default – “LGD”;

■ expected credit loss – “ECL”;

■ share and structure of non-performing loans – “NPL”;

■ coverage ratio – “CR”;

■ risk cost – “RC”;

■ vintage analyses.

The portfolio credit risk measurement methods allow, among other things, to determine the level of provisions for expected credit losses.

The Bank performs analyses and stress-tests regarding the effect of potential changes in macroeconomic conditions on the quality of the Bank’s loan portfolio. The test results reported to the Bank’s governing bodies allow them to identify and take measures to mitigate the risks related to the business conducted.

The loan portfolio structure taking into account the PD parameters is presented in the table in Note 38.4.4. “Loans and advances to customers”.

38.2 Credit risk control

The control of credit risk consists of defining tools for measuring the level of credit risks and applying risk controls to mitigate the level of credit risk, both in the lending processes and at portfolio level. The key credit risk controls are strategic credit risk tolerance limits. The Bank monitors the level of credit exposure towards its customers or groups of related customers within the meaning of the Banking Law, setting competency limits representing the maximum level of credit decision-making powers.

38.3 Impairment loss on credit exposures

PKO Bank Hipoteczny SA performs monthly reviews of credit exposures in order to identify those that are at risk of impairment or whose credit risk has increased significantly since the initial recognition, to measure the impairment of credit exposures and to set up provisions for expected credit losses.

In the area of impairment measurement, the Bank applies IFRS 9, which is based on the concept of expected losses. The impairment model is applicable to financial assets which are not measured at fair value through profit or loss, and which comprise:

■ debt financial instruments in the form of credit exposures and securities;

■ off-balance-sheet financial and guarantee exposures.

In accordance with IFRS 9, impairment is measured as 12-month expected credit losses or perpetual expected credit losses. The time horizon of an expected loss depends on whether a significant increase in credit risk occurred since the moment of initial recognition. Therefore, financial assets are allocated to 4 stages.

IFRS 9 portfolio	Period of expected credit losses
Stage 1 (assets whose credit risk has not increased materially since initial recognition)	12-month expected credit losses
Stage 2 (assets whose credit risk has increased materially since initial recognition)	lifetime expected credit losses
Stage 3 (impaired assets)
Stage 4 (purchased or originated credit-impaired assets – POCI)

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

With regard to exposures classified in Stage 1, the Bank uses a 12-month horizon of estimation of the expected loss, unless the maturity is shorter than 12 months. With Stage 2 exposures, the expected loss is estimated in the time horizon until maturity. In either case, the expected loss is the sum of the losses expected in the individual periods, discounted by the effective interest rate.

Material credit risk increase is determined taking into account the probability of insolvency and its changes in relation to the level recorded at the initial recognition of the loan. In order to assess a material credit risk increase, the Bank uses a model based on the calculation of marginal PD, i.e. the probability of default in a given month. Such probability depends on the amount of time that has passed since the inception of the exposure. Therefore, it is possible to obtain a projection of changes in credit quality over the life of an exposure, which are characteristic of retail exposures. Marginal PD curves have been determined based on historical data. Marginal PD is assigned to individual exposures by scaling the curve determined at the portfolio level to the individual exposure/customer assessment obtained using application models (which use data from loan applications) and behavioural models. The Bank identifies material credit risk increases for individual exposures based on the comparison of probability of default curves over the lifetime of an exposure on initial recognition and on a given reporting date. For each reporting date, only those parts of the initial and current PD curve are compared which correspond to the period from the reporting date to the maturity of the exposure. The comparison is based on average PD values over the life of the loan in the analysed period adjusted for present and forecast macroeconomic ratios. The result of such comparison, referred to as a statistical value, is applied to a threshold value above which an increase in credit risk is considered material. A threshold value is determined based on historical relations between a statistical value and the occurrence of default. In this process, the probability of the following events is reduced to a minimum:

■ classifying an exposure which was not in default in the period analysed to the set of credit exposures with significantly increased credit risk (based on statistics) (type I error);

■ not classifying an exposure which was in default in the period analysed to the set of credit exposures with significantly increased credit risk (based on statistics) (type II error).

According to data as at the end of 2020, a 2.5 times or bigger increase in PD in relation to the value at the moment of recognition in the books is an indication of a significant deterioration in credit quality. With respect to credit exposures for which the current risk of insolvency does not exceed the level reflected in the price of the financing granted, the results of a comparison of PD curves as at the date of initial recognition and as at the reporting date do not entail the recognition of a significant credit risk increase.

To identify other indications of a significant credit risk increase, the Bank uses full quantitative and qualitative information available, including information on:

■ restructuring actions introducing favourable conditions for debtors in financial hardship (forbearance);

■ delays in repayment of a material amount of principal or interest exceeding 30 days;

■ a significant increase in LTV;

■ quarantine of exposures for which the indication of impairment ceased to exist in the last 3 months in Stage 2;

■ petitioning for consumer bankruptcy by any of the co-borrowers;

■ putting a credit exposure under the management of restructuring and debt collection units of the Bank;

■ suspension of loan repayment based on a non-statutory loan moratorium during the COVID-19 pandemic, combined with an increased risk assessment expressed as PD.

Impairment premises of credit exposures comprise in particular:

■ delays in repayment of a material amount of principal or interest exceeding 90 days;

■ conclusion of a restructuring agreement or applying a relief in debt repayment for economic or legal reasons resulting from the customer’s financial distress (until the debt is considered recoverable);

■ the Bank giving notice and requesting immediate repayment of the loan;

■ petitioning for consumer bankruptcy by at least one of the co-borrowers;

■ so-called contamination of the loans, i.e. situations whereby impairment recognized on a loan exposure implicates the necessity of its recognition in all loan exposures in respect of housing loans of the relevant co-debtors – this premise requires checking both the Bank’s and PKO Bank Polski SA’s exposures;

■ suspension of the execution of the loan agreement based on a statutory loan moratorium in connection with the borrower losing his/her job or another source of income.

In order to determine the value of assets at the time of default, the Bank determines the exposure at default parameter on the basis of future payments according to the repayment schedule and potential over- or underpayments.

In calculating the value of the ultimate expected loss, the Bank also considers the impact of macroeconomic scenarios on the respective parameters (PD, LGD). The methodology of calculation of the risk parameters includes back-testing of the dependence of the value of the parameters on macroeconomic conditions. Three macroeconomic scenarios developed on the basis of the forecasts prepared by the Group are used for the purpose of calculating the expected loss (as in the case of the identification of an indication of a material credit risk increase). The forecast ratios include: GDP growth rates, unemployment rate, WIBOR 3M and real estate price index. The ultimate expected loss is the average of expected losses in each scenario, weighted by the probability of the scenarios. The base scenario is based on base macroeconomic forecasts. The forecasts are prepared on the basis of quantitative models and adjusted for one-off events. The following tables present the forecasts of the main macroeconomic indicators as at 31 December 2020 and 31 December 2019 and the probabilities of their materialization.

Scenario as at 31.12.2020	base	optimistic	pessimistic
probability	75%	5%	20%
	average for the period 4Q2020-3Q2022	average for the period 4Q2020-3Q2022	average for the period 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)
Real estate price index	100.6	102.9	97.3

Scenario as at 31.12.2019	base	optimistic	pessimistic
probability	80%	10%	10%
	average for the period 4Q2019-3Q2021	average for the period 4Q2019-3Q2021	average for the period 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
real estate price index	112.1	120.7	91.5

The Bank applies the low credit risk criterion in accordance with IFRS 9, which allows exposures considered to be at low credit risk to remain in Stage 1, irrespective of the scale of the relative deterioration in credit quality since initial recognition. In accordance with IFRS 9, credit risk of a financial instrument is considered low when:

■ the financial instrument has a low risk of default;

■ the borrower has a strong capacity to meet its contractual cash flow obligations in the short term;

■ adverse changes in economic and business conditions in the longer term may, but do not have to, reduce the ability of the borrower to fulfil its contractual obligations.

The Bank applies the low credit risk criterion to exposures to PKO Bank Polski SA and exposures to the State Treasury and the National Bank of Poland.

In 2020, the Bank made the following modifications to the impairment measurement model:

■ introducing the PD threshold over a 12-month horizon, above which the Bank identifies indications of a material credit risk increase irrespective of the result of comparing the α parameter with the threshold value;

■ changing the macro PD adjustment calculation method in connection with the COVID-19 pandemic and its anticipated significant effect on the economic conditions in Poland and in the world; the new method takes into account GDP and unemployment as the variables with the strongest effect on the anticipated PD (unlike the previous method, which used the interest rate level as the main indicator);

■ introducing the principle of classification of loan exposures whose repayment was suspended during the COVID-19 pandemic based on non-statutory moratoria to Stage 2 (as described in Note 38.4.4.) – such exposures are characterized by an increased PD;

■ introducing the principle of classification to Stage 3 of loan exposures whose repayment was suspended during the COVID-19 pandemic based on statutory moratoria due to a loss of employment or another source of income by the borrower (as described in Note 38.4.4.).

The structure of the loan portfolio and the amount of allowances for expected credit losses of PKO Bank Hipoteczny SA are shown in the tables in Note 21 “Expected credit losses”.

38.4 Credit risk forecasting and monitoring

PKO Bank Hipoteczny SA monitors credit risk at the level of individual transactions and at the level of the entire portfolio.

The monitoring of credit risk at the level of individual loan transactions is governed by the Bank’s policies concerning, among other things, the early monitoring of delays in the payment of dues.

The monitoring of credit risk at the portfolio level consists of:

■ monitoring the level of the portfolio credit risk taking into account the identified sources of credit risk and an analysis of the consequences and measures applied as part of systemic management;

■ recommending remedial actions if an increased level of credit risk is detected.

38.4.1 Maximum exposure to credit risk

The following table presents the maximum exposure to credit risk with respect to financial instruments covered by the provisions of IFRS 7 to which the requirements of IFRS 9 relating to impairment do not apply.

MAXIMUM EXPOSURE TO CREDIT RISK	31.12.2020	31.12.2019

Derivative hedging instruments	1,154,692	173,275

Balance sheet exposure - total	1,154,692	173,275

38.4.2 Amounts due from banks

AMOUNTS DUE FROM BANKS	31.12.2020	31.12.2019

Amounts not overdue, not impaired (counterparty rating A2)	23	31

Total, gross	23	31
Allowances for expected credit losses	-	-

Total, net	23	31

38.4.3 Securities

SECURITIES	31.12.2020	31.12.2019

Issued by the State Treasury, PLN Treasury bonds (rating A)	1,241,821	1,240,161

Total, gross	1,241,821	1,240,161
Allowances for expected credit losses	-	-

Total, net	1,241,821	1,240,161

38.4.4 Loans and advances to customers

The loan portfolio is characterized by a low level of impaired exposures. At 31 December 2020, 130 impaired loans were recognized, and their share in the total loan portfolio was 0.11%, whereas as at 31 December 2019, 88 impaired loans were recognized and their share in the total loan portfolio was 0.07%.

Due to the COVID-19 pandemic and its adverse effect on the financial situation of customers, the Bank expects the quality of its loan portfolio to deteriorate in the following reporting periods. Even though the Bank’s knowledge about the effect of the pandemic on the macroeconomic situation is still incomplete, an additional write-down for a forecast deterioration in the loan portfolio quality due to COVID-19 was recognized in 2020. The COVID-19 pandemic does not affect the going concern principle.

The additional write-down due to COVID-19 is a result of a significant deterioration in the macroeconomic projections in all three scenarios described in Note 38.3 “Impairment of credit exposures” and a modification of the weights assigned to the individual scenarios – the base scenario was adopted with 75% probability, the optimistic scenario with a weight of 5%, and the pessimistic scenario with a weight of 20% (as at 31 December 2019: 80%/10%/10%, respectively). The additional write-down is also a result of reclassification of some of the loans covered by a moratorium to Stage 2 and 3 in accordance with the principles described in Note 38.3.

LOANS AND ADVANCES TO CUSTOMERS	31.12.2020	31.12.2019

Loans not overdue, not impaired	24,839,142	25,728,434
Loans overdue, not impaired	114,856	117,439
Loans impaired	26,696	17,923

Total, gross	24,980,694	25,863,796

Allowances for loans not overdue, not impaired	(53,140)	(27,212)
Allowances for loans overdue, not impaired	(12,333)	(8,016)
Allowances for loans impaired	(12,562)	(7,498)

Total, net	24,902,659	25,821,070

Due to the COVID-19 pandemic, in 2020 the Bank allowed customers to suspend up to 6 principal or principal-and-interest instalments on the terms and conditions adopted by the banking sector in cooperation with the Polish Bank Association. Taking advantage of the above-mentioned moratorium (known as the non-statutory moratorium) does not automatically change the classification of exposures to exposures under restructuring, unless they have been classified as such previously. Throughout the period of the moratorium and afterwards, the Bank will assess the probability of default by debtors covered by the moratorium in accordance with the standard procedures, taking into account in particular the repayment delays occurring after the suspension period. As at 31 December 2020, the Bank identified 1,048 loans covered by a non-statutory moratorium, representing 0.80% of the loan portfolio, including three loans with recognized impairment. The portfolio value as at 31 December 2020 is presented in the following table. In order to illustrate the rate of changes in the portfolio covered by the non-statutory moratoria, the comparative data as at the end of the two previous quarters of 2020 was also presented.

LOANS AND ADVANCES TO CUSTOMERS SUBJECT TO NON-STATUTORY MORATORIA	31.12.2020	30.09.2020	30.06.2020

Loans not impaired, including:	250,063	863,683	1,694,670
loans whose credit risk has increased materially (Stage 2)	132,665	95,295	136,076
Loans impaired	475	2,234	2,368

Total, gross	250,538	865,917	1,697,038

Allowances for not impaired loans, including:	(2,951)	(11,836)	(14,143)
allowances for loans whose credit risk has increased materially (Stage 2)	(2,914)	(10,815)	(12,411)
Allowances for impaired loans	(128)	(575)	(494)

Total, net	247,459	853,506	1,682,401

According to the criteria applied by the Bank in 2020 to assess the changes in the estimated contractual cash flows, i.e. the modifications described in Note 3.4.3, the instalment suspensions presented above were not material modifications. Therefore, they did not result in the derecognition of an existing financial asset and a subsequent recognition of a new modified financial asset.

Since the repayment of loan instalments may be suspended, the Bank does not identify an increase in overdue loans associated with the COVID-19 pandemic. The present structure of overdue loans is presented below:

LOANS AND ADVANCES TO CUSTOMERS, NOT IMPAIRED	31.12.2020	31.12.2019

not overdue	24,839,142	25,728,434
up to 30 days overdue	103,767	107,093
from 31 to 60 days overdue	9,187	8,406
from 61 to 90 days overdue	1,902	1,940

Total, gross	24,953,998	25,845,873

Moreover, on 24 June 2020 the Bank granted to customers the possibility of suspending the execution of a loan agreement based on the Act on subsidization of interest on bank loans granted to entities affected by COVID-19 and a simplified arrangement approval procedure due to COVID-19 of 19 June 2020 (the “Shield 4.0”). The total number of loan agreements covered by statutory moratoria in 2020 was 16. As at 31 December 2020, there were 9 such loans with a total value of PLN 2,219 thousand.

Loan portfolio and financial liabilities granted by PD range

The PD parameter presented in the following tables defines the probability of default over a 12-month horizon. In 2020, part of the loan portfolio shifted towards higher PD ranges and the Stage 2 portfolio increased, reflecting a deterioration in the macroeconomic forecasts due to COVID-19, which directly affected PD, and the reclassification to Stage 2 of a part of the portfolio of loans whose repayment was suspended under the non-statutory moratoria.

LOANS AND ADVANCES TO CUSTOMERS	31.12.2020
PD RANGE	Stage 1	Stage 2	Stage 3	Total, gross

<0.01%	10,867	-	-	10,867
0.01% - 0.02%	1,303,648	836	-	1,304,484
0.02% - 0.05%	6,469,842	5,407	-	6,475,249
0.05% - 0.1%	5,508,591	3,375	-	5,511,966
0.1% - 0.3%	7,591,281	411,563	-	8,002,844
0.3% - 1.0%	2,009,449	931,096	-	2,940,545
1.0% - 10%	186,260	380,439	-	566,699
10% - 99.99%	-	141,344	-	141,344
100%	-	-	26,696	26,696

Total gross amount	23,079,938	1,874,060	26,696	24,980,694

LOANS AND ADVANCES TO CUSTOMERS	31.12.2019
PD RANGE	Stage 1	Stage 2	Stage 3	Total, gross

<0.01%	764,248	609	-	764,857
0.01% - 0.02%	3,329,464	2,525	-	3,331,989
0.02% - 0.05%	7,219,473	3,198	-	7,222,671
0.05% - 0.1%	6,027,817	2,188	-	6,030,005
0.1% - 0.3%	6,447,869	3,233	-	6,451,102
0.3% - 1.0%	1,517,342	85,740	-	1,603,082
1.0% - 10%	187,143	200,619	-	387,762
10% - 99.99%	11,439	42,966	-	54,405
100%	-	-	17,923	17,923

Total gross amount	25,504,795	341,078	17,923	25,863,796

FINANCIAL LIABILITIES GRANTED	31.12.2020
PD RANGE	Stage 1	Stage 2	Stage 3	Total

<0.01%	665	-	-	665
0.01% - 0.02%	8,607	-	-	8,607
0.02% - 0.05%	32,522	-	-	32,522
0.05% - 0.1%	42,772	-	-	42,772
0.1% - 0.3%	24,824	634	-	25,458
0.3% - 1.0%	4,160	435	-	4,595
1.0% - 10%	629	208	-	837
10% - 99.99%	-	-	-	-
100%	-	-	-	-

Total nominal amount	114,179	1,277	-	115,456

FINANCIAL LIABILITIES GRANTED	31.12.2019
PD RANGE	Stage 1	Stage 2	Stage 3	Total

<0.01%	25,661	-	-	25,661
0.01% - 0.02%	70,390	29	-	70,419
0.02% - 0.05%	100,533	-	-	100,533
0.05% - 0.1%	206,437	-	-	206,437
0.1% - 0.3%	59,841	-	-	59,841
0.3% - 1.0%	19,324	49	-	19,373
1.0% - 10%	50	372	-	422
10% - 99.99%	-	-	-	-
100%	-	-	-	-

Total nominal amount	482,236	450	-	482,686

38.4.5 Forbearance practices

The Bank defines forbearance as actions aimed at changing the contractual terms agreed with a debtor, caused by the debtor’s financial distress (restructuring activities introducing concessions that would otherwise not have been granted). The purpose of forbearance activities is to restore a debtor’s ability to fulfil his obligations towards the Bank and to maximize the effectiveness of non-performing loan management, i.e. obtaining the highest recoveries while minimizing their costs.

Forbearance changes in repayment terms may consist in:

■ dividing the debt due into instalments;

■ changing the repayment scheme (annuities, degressive instalments);

■ extending the loan period;

■ changing the interest rate;

■ changing the margin;

■ reducing the amounts due.

As a result of signing and repaying the amounts due under a forbearance agreement on a timely basis, a non-performing loan becomes a performing loan.

The granting of forbearance concessions recognized as impairment triggers results in the recognition of a default event and the classification of the credit exposure to the impaired portfolio.

The inclusion of such exposures in the portfolio of serviced exposures (discontinuation of 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 Bank’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 satisfy the criteria of forborne exposure when the following conditions are jointly met:

■ at least 24 months have lapsed since the forborne exposure was included in the serviced exposures portfolio (probation period);

■ at the end of the probation period mentioned above, the customer does not have any debt to the Bank overdue by more than 30 days;

■ at least 12 instalments have been repaid in the expected amounts.

Forborne exposures are monitored on a current basis. Due to the impairment trigger or a significant increase in credit risk identified in connection therewith, 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.

EXPOSURES SUBJECT TO FORBEARANCE IN THE LOAN PORTFOLIO	31.12.2020	31.12.2019

Gross loans and advances to customers, including:	24,980,694	25,863,796
subject to forbearance	6,201	4,469
Allowances for expected credit losses, of which:	(78,035)	(42,726)
on loans and advances subject to forbearance	(1,174)	(953)

Net loans and advances to customers, including:	24,902,659	25,821,070
subject to forbearance	5,027	3,516

38.5 Credit risk reporting

Monthly and quarterly credit risk reports are prepared in the Bank. Credit risk reporting involves periodical reporting on the structure and scale of risk exposure of the Bank’s loan portfolio. The reports are submitted to the Credit Committee on a monthly basis and to the Bank’s Management Board, the Supervisory Board Risk Committee and the Supervisory Board on a quarterly basis.

38.6 Credit risk management actions

The basic credit risk management tools used by PKO Bank Hipoteczny SA comprise in particular:

■ strategic and internal (portfolio) risk tolerance limits;

■ minimum transaction conditions (i.e. the maximum value of LTV, maximum loan amount, required down payment, required collateral, the amount of a single loan to MLV);

■ the scoring system, including specific cut-off points based on the expected credit loss (the maximum value of the product of PD and LGD for a given customer over a 12-month horizon at which a loan transaction is acceptable);

■ limits of loan exposures of Bank customers – limits defining the Bank’s appetite for credit risk resulting, among other things, from Recommendation S (such as the level of the relationship between the expenses of servicing the liabilities in respect of credit and the financial nature to customer’s income, i.e. Debt-to-Income (DtI) ratio, acceptable to the Supervisory Board);

■ competence limits – defining the maximum level of credit decision-making powers concerning the customers of the Bank; the amount of competence limits depends on the authority level at which the credit decision is made (within the Bank’s organization);

■ minimum loan margins, taking into account the costs of credit risk.

A key role in establishing minimum transaction conditions is played by the collateral policy. It is executed by setting up mortgages on the financed properties, and its main purpose is to limit credit losses resulting from the customers’ inability to repay their liabilities to the Bank. At the same time, the Bank follows the overriding principle that collateral is only accepted as a loan support instrument and may not be used as a substitute for the customer’s ability to pay his/her dues.

39. Concentration risk management

Concentration risk is analysed in the Bank in relation to lending and defined as the Bank’s excessive exposure to:

■ exposures to individual customers or groups of related customers;

■ exposures subject to common or correlated risk factors;

■ exposures characterized by the potential to generate losses large enough to threaten the financial standing of the Bank or the ability to conduct its core operations or to lead to a significant change in the Bank’s risk profile.

As part of the management of concentration risk, the Bank performs regular risk identification, measurement, control, monitoring and reporting.

Given the high degree of dispersion of the Bank’s portfolio in terms of exposure to individual customers, the Bank identifies and assesses the concentration risk by analysing the structure of the portfolio in relation to significant risk factors (characteristics of exposure) from the point of view of credit risk, and on this basis distinguishes groups of exposures excessive concentration to which is undesirable and could generate losses in excess of the Bank’s appetite for credit risk in stress conditions.

The following table presents the loans and advances exposure concentrations measured with the share of the largest exposures in the Bank’s total loan portfolio.

GROSS LOANS AND ADVANCES TO CUSTOMERS - CONCENTRATION RATIO	31.12.2020	31.12.2019

10 largest exposures	0.05%	0.05%
20 largest exposures	0.09%	0.09%
50 largest exposures	0.21%	0.21%
100 largest exposures	0.40%	0.39%

Measurement and control of the concentration risk in PKO Bank Hipoteczny SA are performed by determining the amount of exposure, which generates the risk of concentration, and comparing the amount to the set limits resulting from legal regulations and internal limits.

Internal limits of exposure are determined in respect of the Bank’s own funds and the Bank’s total credit exposure, and reflect the Bank’s credit risk appetite taking into consideration both normal and stress conditions.

The Bank mitigates concentration risk by using the following limits, the use of which is monitored and reported on a monthly basis:

■ exposure limits to a single entity or group of entities related financially or organizationally;

■ limits of concentration of internal receivables;

■ exposure limits to credit exposures for customers generating income from business activity;

■ exposure limits to credit exposures for customers with a DtI ratio of over 50%.

In the period ended 31 December 2020 and in any of the previous reporting periods, the Bank did not exceed any of the concentration limits.

The Bank prepares monthly and quarterly concentration risk reports. The reports are submitted to the Credit Committee on a monthly basis and to the Bank’s Management Board, the Supervisory Board Risk Committee and the Supervisory Board on a quarterly basis.

40. Residual risk management

Residual risk is a risk arising from the effectiveness of the credit risk mitigation techniques used being lower than assumed by the Bank.

The aim of residual risk management is to ensure the effectiveness of the credit risk mitigation techniques and eliminate the risk connected with the use of loan collateral.

In view of the above and considering the specialist nature of its business, the Bank attaches particular importance to the monitoring of the collateral value. Therefore a key role in determining the minimum transaction conditions is played by the credit risk collateral policy. The mortgage policy is aimed at properly securing the credit risk to which the Bank is exposed, including the establishment of mortgage collateral affording the highest possible recovery rates in the event of the need for debt recovery activities.

The Bank’s policy regarding loan collateral and collateral valuation takes into account the provisions of the following statutory acts: the Banking Act, the Mortgage Covered Bonds and Mortgage Banks Act, the Land and Mortgage Registers and Mortgage Act. In addition, the matter of collateral is also addressed by the guidelines and recommendations of the Polish Financial Supervision Authority, including Recommendations F, S, and J, and the internal regulations of the Bank.

The Bank has enacted and follows the Rules for Determining the Property Value for Mortgage Lending Purposes approved by the Polish Financial Supervision Authority, issued on the basis of the Polish Covered Bonds and Mortgage Banks Act of 29 August 1997, taking into account Recommendation F concerning the basic criteria applied by the Polish Financial Supervision Authority in approving the rules of determination of the property value for mortgage lending purposes enacted by mortgage banks.

The Property Value for Mortgage Lending Purposes (MLV) is the value determined by the Bank, which in the Bank’s opinion reflects the level of risk associated with the property serving as collateral for loans, and is used to determine the ceiling of a granted or purchased loan secured by a mortgage on a specific property or to reach a decision by the Bank as to whether the loan secured on the property may be acquired by the Bank.

PKO Bank Hipoteczny SA determines MLV on the basis of expert valuations of the mortgage lending value of property. Such valuations are carried out with due diligence and prudence. They take into account only those property characteristics and expenditures necessary for its construction, which will be of a permanent nature and which any property holder will be able to obtain assuming rational exploitation. The expert valuation, made on a specified date, documents assumptions and parameters underlying the analysis, the process of determining the MLV and the resulting MLV proposal. The expert valuation report takes into account the analyses and forecasts concerning specific parameters for a given property that affect the credit risk assessment, as well as general factors such as: population growth, unemployment rate, and local zoning plans.

The Bank accepts the following as a mandatory legal collateral for granted or acquired loans:

■ the highest priority mortgage on the property registered in the land and mortgage register;

■ the assignment of rights from the insurance policies against fire and other accidental causes for the mortgaged property underwritten on behalf of the Bank.

The following tables present the concentration ratio for the portfolio of loans and advances measured in terms of LtV based on market valuation and the value of such portfolio. The Bank does not have any exposures with LtV above 90%.

GROSS LOANS BY LTV BASED ON MARKET VALUATION - SHARE	31.12.2020	31.12.2019

below 50%	47%	34%
51% - 60%	24%	21%
61% - 70%	18%	22%
71% - 80%	9%	16%
81% - 90%	2%	7%
Total	100%	100%
Average LTV based on market valuation	50%	56%

GROSS LOANS BY LTV BASED ON MARKET VALUATION - AMOUNT	31.12.2020	31.12.2019

below 50%	11,767,792	8,809,271
51% - 60%	5,960,726	5,309,789
61% - 70%	4,521,396	5,630,223
71% - 80%	2,341,902	4,190,137
81% - 90%	388,878	1,924,376
Total, gross	24,980,694	25,863,796

The following table presents the concentration ratio for the portfolio of loans and advances by geographical region in which the real estate put up as collateral for the loan is located.

GROSS LOANS AND ADVANCES TO CUSTOMERS - BY GEOGRAPHICAL REGION	31.12.2020	31.12.2019

Warsaw region	22.1%	21.7%
Wrocław region	12.4%	12.4%
Gdańsk region	11.3%	11.2%
Poznań region	10.9%	10.9%
Katowice region	9.8%	9.9%
Kraków region	8.1%	8.1%
Szczecin region	7.3%	7.3%
Łódź region	6.8%	6.8%
Lublin region	5.9%	6.1%
Białystok region	5.4%	5.6%

Total	100.0%	100.0%

41. Liquidity risk management

Liquidity risk is the risk of the inability to settle the Bank’s obligations when due as a result of a lack of liquid assets. Liquidity risk comprises funding risk, which is a risk of the inability to renew the required funding resources or a loss of access to new sources of funding.

Lack of liquidity may arise from an inappropriate structure of the statement of financial position, mismatch of cash flows, counterparty default, customers’ sudden realization of contingent commitments, the inability to roll over bonds or other market events.

The aim of liquidity risk management is to ensure a sufficient level of funds to settle present and future obligations (including potential obligations) when due, taking into account the nature of activities and requirements which may occur due to changes in market conditions. The Bank maintains a proper liquidity level by appropriate structuring of the statement of financial position and financial liabilities granted.

The Bank manages liquidity risk in order to maintain current, short-term, medium-term and long-term liquidity. The fundamental rule of the liquidity policy of PKO Bank Hipoteczny SA is to maintain an appropriate portfolio of liquid securities and stable sources of financing (in particular from the issue of mortgage covered bonds), and to ensure appropriate liquidity supporting tools. Money market instruments and unsecured bonds issued are also used in liquidity risk management.

The liquidity risk management is built into the risk management process described in Note 37.2.

The Bank’s Supervisory Board oversees the liquidity management policy and reviews reports concerning the Bank’s liquidity, the Bank’s liquidity risk exposure, utilization of internal limits and the consequences of liquidity risk management decisions. The Supervisory Board approves a set of strategic limits which determine liquidity risk tolerance and the rules of stress-testing with regard to liquidity.

The Bank’s Management Board oversees the liquidity risk management process and at least once a year reviews, evaluates and potentially updates internal regulations (including the policies for stress testing), informing the Supervisory Board about the results of the assessment and the implementation of liquidity risk management policies. The Management Board makes decisions about corrective actions, in particular in a situation of increased risk of a loss of the Bank’s liquidity. In the event of potential liquidity problems, the Bank’s Management Board promptly informs the Supervisory Board about the level of the Bank’s liquidity, threats and actions taken.

The Assets and Liabilities Management Committee (ALCO) establishes internal liquidity risk limits, at least once a year verifies the level of existing internal liquidity risk limits, issues recommendations for actions aimed at maintaining an acceptable level of liquidity risk by the Bank, and monitors liquidity risk on the basis of the reports obtained. The ALCO also initiates actions to protect the Bank from liquidity risk, in particular, for the purpose of implementing the banking risk management strategy adopted by the Bank.

The Treasury Bureau is responsible for the operational management of short-term liquidity and the Risk Bureau deals with overseeing this activity and with developing risk management tools and checking the observance of the limits.

41.1 Liquidity risk measurement and assessment

The Bank applies the following liquidity risk measures:

■ contractual, adjusted and stress-test liquidity gap;

■ liquidity surplus and survival horizon;

■ regulatory liquidity measures:

□ M3 – non-liquid assets to own funds;

□ M4 – non-liquid assets and assets with limited liquidity to own funds and stable external funds ratio;

□ Liquidity coverage ratio (LCR) - the coverage ratio of net outflows up to 1 month;

■ the concentration of funding sources;

■ coverage ratio of long-term assets with long-term funding;

■ liquidity stress tests.

The actualized liquidity gaps as at 31 December 2020 and as at 31 December 2019 are presented below.

LIQUIDITY GAP 31.12.2020	on demand	0 - 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	more than 60 months

Adjusted periodic gap	3,378,527	934,217	(148,748)	(2,542,571)	(2,455,179)	(9,135,493)	(7,510,715)	17,479,962
Adjusted cumulative periodic gap	3,378,527	4,312,744	4,163,996	1,621,425	(833,754)	(9,969,247)	(17,479,962)	-

As at 31 December 2020, in the ranges of up to 6 months, the cumulative adjusted liquidity gap was positive, which means a surplus of maturing assets increased by estimated inflows from the available overdraft limit over mature liabilities in the short and medium term.

LIQUIDITY GAP AS AT 31.12.2019	on demand	0 - 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	more than 60 months

Adjusted periodic gap	1,230,618	839,626	41,062	(1,899,479)	(1,775,357)	(5,072,776)	(11,849,070)	18,485,376
Adjusted cumulative periodic gap	1,230,618	2,070,244	2,111,306	211,827	(1,563,530)	(6,636,306)	(18,485,376)	-

The liquidity surplus is determined taking account of outflows of funds under stress conditions.

A liquidity surplus comprises liquid assets (consisting of the main part aimed at providing protection from the most acute crises and the supplementary part providing protection from less acute, but longer lasting crises) adjusted for net stress test flows (outflows less inflows) over a 30-day horizon.

SENSITIVITY MEASURE	31.12.2020	31.12.2019

Excess liquidity in the horizon of up to 1 month	3,829,808	1,605,939

The Bank monitors all liquidity standards specified in the PFSA Resolution 386/2008 dated 17 December 2008. The values of liquidity standards binding as at the end of the reporting periods ended 31 December 2020 and 31 December 2019 and the average, minimum and maximum values during the reporting periods are shown in the following table:

31.12.2020	as at the end of the period	average during the period	minimum for the period	maximum for the period	regulatory minimum

M3	472.97	401.68	308.74	496.70	>1.0
M4	1.08	1.05	1.03	1.08	>1.0

31.12.2019	as at the end of the period	average during the period	minimum for the period	maximum for the period	regulatory minimum

M3	331.27	306.32	145.75	1,807.65	>1.0
M4	1.03	1.03	1.03	1.05	>1.0

The liquidity coverage ratio (LCR) of net outflows of up to 1 month is shown in the following table:

SENSITIVITY MEASURE	31.12.2020	31.12.2019

Liquidity coverage ratio up to 1 month (LCR)	1763%	163%
LCR regulatory limit	100%	100%

41.2 Liquidity risk control

The liquidity risk control consists of determining strategic tolerance limits appropriate for the scale and complexity of the Bank, and internal limits for short-, medium-, and long-term liquidity risk, which are monitored, and if overrun, the Bank initiates management actions.

41.3 Liquidity risk forecasting and monitoring

The liquidity risk exposure of PKO Bank Hipoteczny SA as at 31 December 2020 and 31 December 2019 was within the strategic and internal limits set. In the period ended 31 December 2020 and in the period ended 31 December 2019 the Bank did not exceed any of the liquidity standards nor any strategic or internal limits.

The Bank regularly reviews the business assumptions which may have a material effect on the projections of liquidity risk measures. Forecasts of the basic liquidity risk measures are prepared periodically and on an on-going basis and these are juxtaposed with the internal limits.

41.4 Liquidity gap in the presentation of contractual cash flows

Liquidity gap in the presentation of contractual cash flows is a mismatch between the inflows and outflows classified in a given range. In the calculation of the liquidity gap relating to cash flows, the Bank takes into account all instruments concluded as at the balance sheet date. An increase in the amount of loans granted or rolling over of financing for a consecutive period is not taken into account. It is assumed that the funds available under the existing credit lines will be utilized.

31.12.2020	on demand	0 - 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	more than 60 months	Total

Inflows	44	318,928	270,486	407,983	818,516	1,777,452	5,348,444	23,226,022	32,167,875
securities	-	174,309	-	379	1,382	145,503	559,190	380,581	1,261,344
loans and advances to customers	-	144,619	270,486	407,604	817,134	1,631,949	4,789,254	22,845,441	30,906,487
other	44	-	-	-	-	-	-	-	44

Outflows	-	937,705	1,510,110	2,853,360	3,295,579	7,233,971	9,774,097	66,280	25,671,102
amounts due to banks	-	14,429	14,945	164,946	29,634	3,308,857	159,621	-	3,692,432
liabilities in respect of mortgage covered bonds issued	-	35,773	5,025	1,011,857	3,081,327	3,696,710	9,614,476	66,280	17,511,448
liabilities in respect of bonds issued	-	849,689	1,453,232	1,651,806	166,113	224,285	-	-	4,345,125
disbursement of loan commitments	-	31,173	36,908	24,751	18,505	4,119	-	-	115,456
other	-	6,641	-	-	-	-	-	-	6,641

Inflows/outflows due to initialed and available revolving current account loans	3,378,483	49,274	-	-	-	(1,427,757)	(2,000,000)	-	-

Inflows from derivative hedging instruments	-	32,776	946	7,345	2,804,112	3,076,443	7,130,769	6,278	13,058,669
Outflows on derivative hedging instruments	-	10,562	16,458	96,420	2,772,821	3,106,127	6,754,715	6,821	12,763,924

Periodic gap	3,378,527	(547,289)	(1,255,136)	(2,534,452)	(2,445,772)	(6,913,960)	(6,049,599)	23,159,199	6,791,518

Cumulative gap	3,378,527	2,831,238	1,576,102	(958,350)	(3,404,122)	(10,318,082)	(16,367,681)	6,791,518

31.12.2019	on demand	0 - 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	more than 60 months	Total

Inflows	51	324,459	305,992	466,029	951,151	2,090,996	6,188,933	28,931,264	39,258,875
securities	-	168,267	-	1,280	9,806	190,568	566,007	388,754	1,324,682
loans and advances to customers	-	156,192	305,992	464,749	941,345	1,900,428	5,622,926	28,542,510	37,934,142
other	51	-	-	-	-	-	-	-	51

Outflows	5,167	1,003,723	798,562	2,750,597	2,387,780	4,439,653	15,912,104	810,655	28,108,241
amounts due to banks	5,167	10,370	9,780	162,269	2,186,462	276,384	4,046,808	-	6,697,240
liabilities in respect of mortgage covered bonds issued	-	40,967	12,601	27,360	112,319	3,967,011	11,864,800	810,655	16,835,713
liabilities in respect of bonds issued	-	797,728	654,564	2,464,978	2,028	168,279	-	-	4,087,577
disbursement of loan commitments	-	149,633	121,617	95,990	86,971	27,979	496	-	482,686
other	-	5,025	-	-	-	-	-	-	5,025

Inflows/outflows due to initialed and available revolving current account loans	1,230,566	-	500,000	-	-	-	(1,730,566)	-	-

Inflows from derivative hedging instruments	-	30,274	873	6,883	34,275	2,626,435	9,417,809	8,370	12,124,919
Outflows on derivative hedging instruments	-	26,415	46,277	87,886	181,515	2,963,035	9,858,376	9,166	13,172,670

Periodic gap	1,235,784	1,332,041	1,559,150	3,135,623	3,191,691	6,194,049	19,929,904	29,741,123	66,319,365

Cumulative gap	1,225,450	550,045	512,071	(1,853,500)	(3,437,369)	(6,122,626)	(16,286,364)	11,833,449

41.5 Concentration of funding sources

The Bank recognizes the risk of concentration of funding sources as an element of liquidity risk determined by circumstances under which the funding structure becomes susceptible to the occurrence of individual events or single factors, such as sudden significant withdrawal of funds or insufficient access to new funding.

The Bank’s business model assumes that the risk of concentration of funding sources results from:

■ a high proportion of mortgage covered bonds in the funding structure (mortgage covered bonds are a stable source of funding, however, the balloon nature of their redemption causes further need for a new issue or alternative source of funding to arise at redemption in most cases);

■ funding supplied by the parent;

■ issue of own bonds.

The table below presents the structure of the Bank’s funding sources:

STRUCTURE OF THE BANK'S FINANCING	31.12.2020	31.12.2019

Mortgage covered bonds issued	63.0%	59.6%
Funds from the parent entity	12.5%	16.7%
Bonds issued	15.9%	14.9%
Equity	7.7%	7.3%
Other	0.9%	1.5%

Total	100.0%	100.0%

The share of funding raised from the parent entity amounted to 12.5% as at 31 December 2020 (16.7% as at 31 December 2019). This share decreased in relation to the share observed as at 31 December 2019 following a temporary increase during the year resulting from a lower share of own bonds issued, which were replaced with funding provided by the parent entity due to the temporary problems with rolling over a part of the issues maturing in the first half of 2020 due to the COVID-19 pandemic. The Bank rebuilt the share of bonds issued in the 2nd half of the year. The funding concentration risk is assessed as acceptable.

Seeking to reduce the concentration risk of funding sources, the Bank has implemented a system of internal limits, both short- and long-term, taking into account the dates of mortgage covered bond issues carried out by the Bank. In the period ended 31 December 2020 and 31 December 2019 none of these limits were exceeded.

41.6 Liquidity stress tests

Liquidity stress tests present the impact of stressed market conditions on the level of the Bank’s liquidity. Shock analyses are carried out on the basis of scenarios involving hypothetical changes in the following factors:

■ shock changes in market parameters on financial markets;

■ the impact of extreme changes in market factors, as well as drops in prices on the property market on the anticipated losses on the residential loan portfolio;

■ downrating of the Bank’s counterparties and of the Bank;

■ deterioration in the creditworthiness of borrowers;

■ increase in the instability of funding sources;

■ increased disbursements of mortgage loans granted;

■ inability to roll over short-term bond issues or obtain new ones;

■ inability to roll over mortgage covered bond issues or obtain new ones.

Stress test results are used in particular in:

■ monitoring the Bank’s exposure to liquidity risk under stressed conditions;

■ the process of setting internal limits for liquidity risk measures;

■ controlling liquidity maintenance for each day of the 30-day time band;

■ the process of planning the Bank’s balance sheet;

■ the process of determining conditions triggering the implementation of liquidity emergency plans of the Bank.

Test results are presented at the meetings of the Management Board and the Supervisory Board of the Bank.

The stress tests conducted on the basis of the Bank’s financial data as at 31 December 2020 and as at 31 December 2019 did not indicate any risk to the Bank’s business due to the occurrence of hypothetical stressed market conditions. Owing to the well-balanced funding structure, long maturities of most of its liabilities and a sufficient level of liquid assets, the Bank has a high ability to survive a liquidity crisis.

41.7 Liquidity risk reporting

The Bank prepares liquidity risk reports on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to liquidity risk and information about the utilization of the liquidity risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

41.8 Liquidity risk management actions

The risk management system of PKO Bank Hipoteczny SA comprises the following major components:

■ procedures for liquidity risk management, including in particular emergency plans;

■ internal limits limiting liquidity risk;

■ deposit and derivative transactions, including structural currency transactions and transactions for the sale or purchase of securities;

■ unconditional liquidity support instruments obtained from PKO Bank Polski SA;

■ transactions ensuring long-term funding of the lending activity.

The Bank pays particular attention to matching the timing of cash flows upon the maturity of material liabilities (redemption of mortgage covered bonds).

42. Interest rate risk management

The operations of PKO Bank Hipoteczny SA are exposed to interest rate risk, which is defined as the risk of loss on balance sheet items and off-balance sheet positions sensitive to movements in the interest rates as a result of changes in the market interest rates.

The aim of interest rate risk management is to limit any potential losses incurred due to changes in the market interest rates to an acceptable level by proper shaping of the structure of the balance sheet items and off-balance sheet positions, among other things, in terms of the matching of the repricing periods.

42.1 Interest rate risk measurement and assessment

In the process of interest rate risk management, the Bank uses the net interest income sensitivity (NIIS) measure, the Basis Point Value (BPV) measure, stress tests and repricing gap reports.

The net interest income sensitivity (NIIS) measure is a measure determining the change in net interest income arising from a sudden change in the interest rates while the Basis Point Value (BPV) measure is a measure illustrating the impact of such a change on the economic value of capital. The measures allow diversification of the repricing periods of individual interest items in each subsequent time band.

SENSITIVITY MEASURE	31.12.2020	31.12.2019

Interest income sensitivity with yield curve shift of 100 b.p (IIS) in PLN ‘000	17,008	19,341
Economic value of capital sensitivity (BPV) in PLN’000	(27)	2

Stress tests are used to estimate potential losses resulting from the maintained structure of the balance sheet and off-balance sheet positions in the event of the occurrence of the hypothetical scenarios within which parallel shifts in interest rate curves by ±50 bps, ±100 bps and ±200 bps are arbitrarily assumed. Scenarios for changes in interest rate curves and reversed stress test scenarios are also adopted, assuming a drop in the Bank’s financial result to PLN 0 and a loss of the Bank’s economic value of 1% of its equity.

The repricing gap presents the difference between the current value of the assets and liabilities exposed to interest rate risk, which are repriced within the given time band, where positions which are not marked-to-market (e.g. loans) are recognized in the amounts serving as the basis for interest accrual.

The repricing gap report presented below includes assets, liabilities and financial liabilities granted which are sensitive to changes in interest rates. They do not include contingent liabilities which are insensitive to interest rate risk, the Bank’s own funds, amounts due from banks in the form of current account balances and current account overdrafts.

31.12.2020	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	8,463,404	15,282,116	2,127,482	2,811	6,285	183,319	-	26,065,417
securities	935,000	-	303,000	-	-	-	-	1,238,000
loans and advances to customers	7,528,404	15,282,116	1,824,482	2,811	6,285	183,319	-	24,827,417

Liabilities	(6,380,158)	(3,751,000)	(1,651,000)	(3,033,880)	(3,018,079)	(7,187,570)	(60,000)	(25,081,687)
amounts due to banks	(3,410,658)	-	-	-	-	(150,000)	-	(3,560,658)
liabilities in respect of mortgage covered bonds issued	(2,030,000)	(2,000,000)	-	(3,033,880)	(3,018,079)	(7,037,570)	(60,000)	(17,179,529)
liabilities in respect of bonds issued	(939,500)	(1,751,000)	(1,651,000)	-	-	-	-	(4,341,500)

Active positions on derivative hedging instruments	519	-	1,960	3,033,888	3,016,986	7,037,393	60,000	13,150,746
Passive positions on derivative hedging instruments	(4,232,662)	(7,956,551)	(1,924)	(1,538)	(8,518)	(5,419)	-	(12,206,612)

Periodic gap	(2,148,897)	3,574,565	476,518	1,281	(3,326)	27,723	-	1,927,864

Cumulative gap	(2,148,897)	1,425,668	1,902,186	1,903,467	1,900,141	1,927,864	1,927,864

31.12.2019	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	8,997,175	16,188,124	1,722,523	3,928	6,544	25,274	-	26,943,568
securities	1,093,480	-	143,000	-	-	-	-	1,236,480
loans and advances to customers	7,903,695	16,188,124	1,579,523	3,928	6,544	25,274	-	25,707,088

Liabilities	(5,710,816)	(4,726,662)	(2,464,000)	-	(2,820,100)	(9,279,272)	(60,000)	(25,060,850)
amounts due to banks	(2,795,316)	(1,969,662)	-	-	-	-	-	(4,764,978)
liabilities in respect of mortgage covered bonds issued	(2,030,000)	(2,030,000)	-	-	(2,820,100)	(9,279,272)	(60,000)	(16,219,372)
liabilities in respect of bonds issued	(885,500)	(727,000)	(2,464,000)	-	-	-	-	(4,076,500)

Active positions on derivative hedging instruments	507	-	1,914	1,059	2,822,610	9,278,223	60,000	12,164,313
Passive positions on derivative hedging instruments	(4,232,621)	(7,956,551)	(1,775)	(1,028)	(3,780)	(13,816)	-	(12,209,571)

Periodic gap	(945,755)	3,504,911	(741,338)	3,959	5,274	10,409	-	1,837,460

Cumulative gap	(945,755)	2,559,156	1,817,818	1,821,777	1,827,051	1,837,460	1,837,460

42.2 Interest rate risk control

The control of interest rate risk involves determining risk limits appropriate to the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for interest rate risk, which are subject to monitoring, and in the event that they are exceeded management actions are taken.

42.3 Interest rate risk forecasting and monitoring

The interest rate risk exposure of PKO Bank Hipoteczny SA as at 31 December 2020 and 31 December 2019 was within the strategic and internal limits set. Owing to effective mitigating activities, interest rate risk was relatively low and caused by the mismatch between the repricing dates of the interest rates on the Bank’s assets and liabilities in the shortest repricing bands, i.e. up to 3 months.

42.4 Interest rate risk reporting

The Bank prepares reports concerning liquidity risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to interest rate risk and information about the utilization of the interest rate risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

42.5 Interest rate risk management actions

The basic interest rate risk management tools used by PKO Bank Hipoteczny SA comprise in particular:

■ procedures concerning the management of interest rate risk;

■ internal interest rate risk limits, among other things for price sensitivity and net interest income sensitivity;

■ specification of the permitted types of interest rate based transactions;

■ hedging interest risk with derivatives transactions;

■ proper selection of transaction parameters making it possible to apply natural hedges between assets and liabilities.

The Bank manages interest rate risk by matching the repricing structure of the assets and funding sources (natural hedging) and, on an as needed basis, enters into hedging transactions (derivative contracts). The Bank uses IRS and CIRS derivative transactions to hedge against interest rate risk associated with issues of fixed interest mortgage covered bonds in PLN and EUR aimed at financing variable interest rate loans.

43. Currency risk management

The operations of PKO Bank Hipoteczny SA are exposed to foreign exchange risk, which is defined as the risk of loss due to changes in the foreign exchange rates generated by the maintenance of open positions in various currencies.

The aim of foreign exchange risk management is to limit any potential losses incurred due to changes in the exchange rates to an acceptable level by the proper shaping of the currency structure of the balance sheet items and loan commitments, and the use of derivative instruments.

In the process of foreign exchange risk management the Bank in particular uses individual and aggregate FX positions and stress tests. Stress tests are used to estimate the potential loss on the positions taken in foreign currencies in the event of an extraordinary situation on the FX market. The Bank uses hypothetical scenarios – which assume a hypothetical appreciation or depreciation of foreign exchange rates (20 per cent and 50 per cent).

The Bank’s FX positions are presented in the following table:

FOREIGN CURRENCY POSITION IN PLN ‘000	31.12.2020	31.12.2019

EUR	(18)	86
USD	3	4

The FX VaR measure is the potential amount of a loss that may occur under normal market conditions within a specified time horizon given the assumed probability of changes in foreign exchange rates. Stress tests are used to estimate the loss in the case of rapid changes on the FX market which are not described in terms of standard statistical measures. The Bank’s combined FX VaR for all currencies is presented in the following table:

SENSITIVITY MEASURE	31.12.2020	31.12.2019

10-day FX VaR at 99% confidence level in PLN ‘000	0.7	1.6

The foreign exchange risk exposure of PKO Bank Hipoteczny SA as at 31 December 2020 and 31 December 2019 was within the strategic and internal limits set.

The Bank closes all open FX positions on an ongoing basis, and the control and reporting procedures implemented by the Bank significantly limit the impact of changes in exchange rates on the Bank’s financial performance, hence the foreign exchange risk as at 31 December 2020 and 31 December 2019 was low. The biggest FX positions of the Bank are associated with liabilities in respect of mortgage covered bonds issued in EUR and they are closed on an ongoing basis using CIRS and FX Forward derivative transactions.

The Bank prepares reports concerning foreign exchange risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to foreign exchange risk and information about the utilization of the foreign exchange risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

The basic foreign exchange rate risk management tools used by PKO Bank Hipoteczny SA comprise:

■ procedures concerning the management of foreign exchange risk;

■ limits and thresholds on foreign exchange risk, among others on foreign exchange positions;

■ specification of the permitted types of foreign exchange transactions.

44. Model risk management

Model risk is the risk of losses resulting from wrong business decisions made on the basis of the models used.

The aim of the management of model risk is to mitigate the risk of losses resulting from a wrong business decision made on the basis of the models used by way of a properly defined and implemented model management process.

All models of significance for the Bank are subject to a process of regular and impartial validation by the Bank’s validation function – the Risk Validation and Control Team.

The model risk management process in PKO Bank Hipoteczny SA is consistent with the solutions in place in the PKO Bank Polski Group.

44.1 Model risk measurement and assessment

Identification of model risk consists in particular of:

■ collecting information about the models in use and those to be implemented;

■ periodical determination of the significance of the models.

Assessment of model risk is aimed at determining the scale of threats connected with the existence of model risk. The assessment is carried out at the level of a single model as well as on an aggregate basis for the whole Bank.

44.2 Model risk control

The aim of the model risk control is to maintain the aggregate assessment of model risk at a level acceptable to the Bank. The control of model risk consists of defining mechanisms for diagnosing the model risk level and the risk mitigation tools.

The tools used for diagnosing model risk include in particular a strategic limit of model risk tolerance and model risk thresholds.

44.3 Model risk forecasting and monitoring

The aim of model risk monitoring is to diagnose the areas requiring management action. The following in particular are monitored as part of the model risk monitoring process:

■ updating the model risk level;

■ evaluating the utilization of the strategic limit of model risk tolerance and the values of the model risk thresholds;

■ verifying the status of implementation and evaluation of the effectiveness of the model risk mitigating actions.

44.4 Model risk reporting

The results of monitoring are presented in quarterly reports for the Management Board and annual reports for the Supervisory Board Risk Committee and the Supervisory Board containing a comprehensive assessment of model risk, including in particular:

■ information about the utilization of the strategic limit of model risk tolerance;

■ information about the level of model risk;

■ the model risk map;

■ the status of implementation of the recommendations issued after model reviews or validation;

■ suggested management actions to mitigate the model risk, if any.

44.5 Model risk management actions

The aim of management actions is to develop the model risk management process and shape the risk level, in particular by setting acceptable risk levels and making decisions about the use of risk management supporting tools.

45. Operational risk management

Operational risk is defined as the risk of the occurrence of a loss due to non-compliance or failure of internal processes, people and systems or external events. Operational risk includes legal risk, but it does not include reputation risk and business risk. Operational risk is classified as a material risk.

The aim of operational risk management is to enhance the security of the Bank’s operating activities by enhancing effective mechanisms of identification, assessment and measurement, limitation, monitoring of and reporting on operational risk tailored to the profile and the scale of operations.

The process of operational risk management is executed at the level of the Bank as a whole and at the level of each systemic operational risk management area. Systemic operational risk management involves development of solutions which enable the Bank to exercise control over the level of operational risk so that it can accomplish its goals. Ongoing operational risk management is conducted by every employee of the Bank, within their responsibilities and tasks.

For the purpose of managing operational risk, the Bank gathers internal and external data about operational incidents, business environment factors, the results of operational risk self-assessment, data on key risk indicators in respect of operational risk (KRI) and data related to the quality of internal control.

Taking into account the scale of outsourcing and its potential impact on the operational risk profile, the Bank has prepared a risk management process related to the outsourcing of services, including sales and after sales servicing and IT services. The management of this risk, carried out by different organizational units of the Bank, includes numerous components, such as the introduction of procedures for outsourcing services for the Bank, analysing and assessing the risk associated with the outsourcing of services by the Bank, assessing the reliability and financial position of the service providers, developing contingency plans for the Bank and its service providers (in particular in the IT field), implementing adequate safeguards of the Bank’s interests in outsourcing agreements, requirements for an appropriate insurance coverage by insourcers, monitoring the proper execution of contracts and the insourcers’ position, including their periodic verification, recording incidents and losses related to the provision of services by insourcers.

45.1 Operational credit risk measurement and assessment

Operational risk is measured in order to determine the scale of threats associated with the existence of operational risk using set risk measures. Operational risk measurement covers:

■ determining the strategic operational risk tolerance limits;

■ calculating key risk indicators (KRI);

■ calculating the own funds requirement for operational risk under the BIA approach (BIA requirement);

■ stress testing;

■ calculating internal capital.

The operational risk self-assessment includes the identification and assessment of operational risk in relation to the Bank’s processes. The operational risk self-assessment is conducted once a year for the key processes or once in two years for other processes and before the introduction of new or significantly changed products, processes or applications used by the Bank, with the use of:

■ data collected on operational incidents;

■ results of inspections, proceedings and functional internal control;

■ KRI.

45.2 Operational risk control

The aim of operational risk control is to strive to maintain the Bank’s operational risk at an acceptable level.

The control of operational risk involves determining the risk limits appropriate for the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for operational risk and KRI limits, including threshold and critical values.

The strategic operational risk tolerance limits are set by the Management Board and approved by the Supervisory Board.

45.3 Operational risk forecasting and monitoring

The aim of operational risk monitoring is to control operational risk and diagnose the areas requiring management action.

In particular, the Bank regularly monitors:

■ the utilization of strategic tolerance limits and operational risk loss limits;

■ the effectiveness and timeliness of actions undertaken to reduce or transfer the operational risk;

■ the values of the KRIs;

■ the results of operational risk self-assessment;

■ the results of stress tests;

■ operational incidents and their consequences.

45.4 Operational risk reporting

Operational risk information is reported for:

■ the Bank’s internal purposes, in particular: the Management Board and the Supervisory Board;

■ supervisory and regulatory bodies;

■ the shareholders and the financial market.

Operational risk information is reported for the Bank’s internal purposes on a quarterly basis. Quarterly reports contain, in particular, information about:

■ the results of the measurement and monitoring of operational risk;

■ the operational risk profile of the Bank resulting from the process of identifying and assessing the threats to products, processes and applications of the Bank;

■ the level of operational risk and the tools applied in operational risk management;

■ the actions taken to limit operational risk and the evaluation of the effectiveness of the actions taken to reduce operational risk level;

■ recommendations, decision and suggestions of the Management Board.

The quarterly reports also include information on operational risks identified in relation to the activities outsourced by the Bank to external entities, including, in particular, PKO Bank Polski SA.

45.5 Operational risk management actions

Management actions are taken when the self-assessed operational risk, KRI or adjusted operational risk reaches an elevated or high level at the Bank.

If the risk level is elevated or high, the Bank uses the following approach:

■ risk reduction – mitigating the impact of the risk factors or the consequences of its materialization;

■ risk transfer – the transfer of responsibility for covering potential losses to a third-party;

■ risk avoidance – discontinuing activities that generate risk or elimination of the possibility of the occurrence of a risk factor.

The operational risk management process is subject to internal control including:

■ a review of the operational risk management strategy and process ;

■ internal audit.

45.6 Operational losses incurred

In 2020, 33 operational risk incidents were identified at the Bank, which generated a financial loss in the total net amount of PLN 13 thousand. In 2019 there were 16 such incidents and the total net financial loss amounted to PLN 486 thousand.

In order to mitigate the losses arising from operational risk, the Bank applies ad hoc and systemic management measures. Ad hoc measures include a direct response to the identified risks, eliminating reversible irregularities and recovering losses.

46. Business risk management

Business risk is a risk of failing to achieve the assumed financial targets, including a risk of losses, resulting from adverse changes in the business environment, wrong decisions made, incorrect implementation of decisions made or failing to take proper action in response to changes occurring in the business environment. It also takes into account a risk of macroeconomic changes (a risk of deterioration in the Bank’s financial position due to an adverse effect of changing macroeconomic conditions).

Identification of business risk consists of recognizing and defining actual as well as potential factors which result from the current or contemplated business operations of the Bank and may adversely affect the Bank’s financial position, the occurrence or the volume of the Bank’s income and expenses.

Business risk is measured in order to determine the scale of threats connected with the existence of business risk using specified risk measures.

Control of business risk is intended to mitigate the adverse effect of internal and external factors on the financial position of the Bank. The purpose of business risk control is to define the acceptable level of business risk adequate to the Bank’s scale of operations and its impact on the functioning and the financial situation of the Bank in the form of strategic tolerance limits.

The aim of business risk monitoring is to determine whether its level after applying risk controls reflects the admissible level and to diagnose the need to take management actions and the areas in which they have to be taken.

Particular attention is paid to monitoring the strategic business risk tolerance limit.

Business risk is reported in the form of reports addressed to the ALCO, the Management Board and the Supervisory Board .

Management actions consist in particular of:

■ verifying and updating the quarterly financial forecasts and the financial plan taking into account measures aimed at mitigating the level of business risk in line with the set limits;

■ monitoring the level of the strategic business risk tolerance limit.

47. Compliance risk management

Compliance risk is defined at PKO Bank Hipoteczny SA as the risk of legal sanctions, incurring financial losses or the loss of reputation as a result of failure on the part of the Bank, the Bank’s employees or entities acting on its behalf to comply with the provisions of the law, internal regulations and the market standards adopted by the Bank.

The aim of compliance risk management is to:

■ maintain the Bank’s reputation as an institution acting in accordance with the law and the adopted market standards, reliable, fair and honest, among customers, employees, business partners and other market participants;

■ prevent the occurrence of financial losses or legal sanctions and cases of loss of reputation at the Bank, which may be the result of a breach of the law, internal regulations or the market standards adopted by the Bank.

The identification and evaluation of compliance risk is carried out on the basis of the methodology implemented in the PKO Bank Polski SA Group for the identification and evaluation of compliance risk.

The identification of compliance risk includes the identification of potential cases of non-compliance that may occur in the processes and products and their classification to compliance risk categories.

The compliance risk assessment is carried out through:

■ estimation of the potential severity of the consequences of non-compliance in the form of:

□ financial losses, particularly in the form of administrative penalties or damages;

□ loss of reputation;

□ other legal sanctions;

■ estimation of the probability of materialization of compliance risk.

Based on the compliance risk assessment for the individual compliance risk categories, the overall level of compliance risk for a given process and the related product is determined.

As part of compliance risk control, the Bank protects itself against or mitigates the risk by implementing compliance risk controls and ensuring that they are observed.

The following is covered by compliance risk monitoring:

■ the results of compliance risk identification and assessment;

■ in the event of non-compliance – its reasons and consequences;

■ the actions taken by the Bank as part of:

□ compliance risk management;

□ implementing the recommendations issued by internal auditors and external inspectors;

□ bringing the Bank to compliance with new legislation and standards of conduct;

□ fulfilling the recommendations regarding compliance;

■ effectiveness of the controls aimed at mitigation of compliance risk;

■ stress test results.

Information on compliance risk is reported on a quarterly basis. The reports are addressed to: the Management Board, the Supervisory Board and the Supervisory Board Audit and Finance Committee. The reports contain, in particular, information about:

■ the results of compliance risk identification and assessment;

■ the observed cases of non-compliance at the Bank and in the financial sector;

■ the most significant changes in the regulatory environment and circumstances resulting from the activities of external supervisory and regulatory authorities;

■ the results of external inspections carried out at the Bank;

■ the most important actions taken as part of compliance risk management and the implementation of recommendations arising from external inspections.

The Compliance Team is responsible for the management of compliance risk. The activities of the Compliance Team are based on an annual plan approved by the Bank’s Supervisory Board. The report on the pursuit of the plan, and supplementary and summary information to the quarterly reports are presented to the Management Board, the Supervisory Board, and the Audit and Finance Committee on an annual basis.

48. Reputation risk management

Reputation risk is understood as the current or potential risk of deterioration of reputation among customers, counterparties, investors, supervisory and regulatory authorities and the general public as a result of business decisions made by the Bank, operational incidents, instances of non-compliance or other events, including security incidents.

The objective of reputation risk management is to protect the Bank’s reputation by counteracting reputation losses and limiting the negative impact of image-related events on the Bank’s reputation.

Identification of the reputation risks covers the developments observed in the Bank’s internal processes and its external environment, including in particular:

■ image-related events;

■ factors related to the business environment, i.e. quantitative and qualitative information, including in particular data describing the Bank and its external environment, which suggest the existence of reputation risk.

Information collected about image-related events includes each identified piece of information about the Bank, which adversely affects its reputation, such as:

■ information spread by the mass media;

■ information disclosed by the Bank in accordance with its internal regulations concerning the Bank’s information policies regarding contacts with investors and customers;

■ evaluations of audit firms, analytical institutions and external supervisory and regulatory authorities;

■ public protests and demonstrations.

An assessment of reputation risk involves evaluating the impact of image-related events on the Bank’s reputation, in particular by determining the severity of losses of reputation caused by such events. The assessment of reputation loss involves the impact, credibility and the opinion-forming potential of the disclosure of an image-related event to the public.

Controlling reputation risk involves determining the reputation risk controls in the form of an internal tolerance limit for reputation risk and a single reputation loss limit.

Monitoring reputation risk consists of regular assessments of the utilization of the limits in relation to the adopted threshold values.

Information about reputation risk is reported in the form of:

■ semi-annual management reports addressed to the Management Board of the Bank;

■ information on current events having a material impact on the Bank’s reputation; should they occur, they should immediately be presented to the President of the Management Board;

■ information provided in the annual report on the execution of the risk management macroprocess at the Bank, addressed to the Management Board and the Supervisory Board.

Based on the specific level of reputation risk management actions are taken which may cover:

■ an analysis of the reasons for the given risk level occurring;

■ assessment of the effects of such a level of risk occurring;

■ preparation of proposed management actions aimed at reducing the level of reputation risk or justification of the lack of the need to take such action, e.g. in the event of incidental extraordinary events occurring.

49. Capital adequacy and the management of capital risk

Capital adequacy is a process aimed at ensuring that, for a given level of risk tolerance, the level of risk assumed by the Bank associated with the development of its business activities may be covered with capital held within a given time horizon. The process of managing capital adequacy comprises, in particular, compliance with prevailing regulatory standards and the level of risk tolerance determined at the Bank, the process of capital planning, including the policies in respect of capital sourcing.

Capital risk is the risk of failing to arrange an adequate level and structure of own funds or the inability to ensure an adequate level of equity given the business risk borne by the Bank, necessary to cover unexpected losses and satisfy regulatory requirements, making it possible for the Bank to continue independent operations. Capital risk includes the risk of excessive leverage, i.e. the risk resulting from vulnerability to threats due to financial leverage or conditional financial leverage, which may necessitate taking involuntary action modifying business plans, including the forced sale of assets which could lead to losses or to the need to adjust the valuation of other assets.

Managing the Bank’s capital adequacy covers:

■ Pillar I: minimum capital requirements specified in the legislation;

■ Pillar II: internal capital, determined by means of the Bank’s own models for the risks considered material.

The aim of capital adequacy management is to maintain, on a continuous basis, own funds at a level that is adequate to the scale and risk profile of the Bank’s activities, with due regard to regulatory requirements.

The following legal acts constituted the legal basis of the capital adequacy assessment process as at 31 December 2020:

■ 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 and amending Regulation (EU) No 648/2012 (“CRR Regulation”);

■ Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic;

■ the Act of 29 August 1997 “Banking Law”;

■ The Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (the “Macroprudential Act”);

■ The Regulation of the Minister of Development and Finance of 25 May 2017 in respect of a higher risk weight for exposures secured with mortgages on residential property.

The capital adequacy process is described in Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (“CRD”). The CRD has been implemented in the Polish law by way of updating the Banking Law.

The process of managing the Bank’s capital adequacy comprises:

■ defining and achieving the capital adequacy targets desired by the Bank;

■ identifying and monitoring material risks;

■ assessing internal capital to cover the material risk types and assessing total internal capital;

■ establishing internal limits with respect to capital adequacy;

■ forecasting, monitoring, and reporting the level and structure of own capital and capital adequacy;

■ capital contingency activities.

Capital risk is classified as a risk subject to monitoring. In 2020 and since the beginning of the Bank’s operations, capital adequacy remained at a safe level above the supervisory limits.

At 31 December 2020, the total capital ratio of the Bank amounted to 18.7% (as at 31 December 2019: 16.6%). If the temporary solutions resulting from the implementation of IFRS 9 and relating to the COVID-19 pandemic had not been taken into account, the total capital ratio of the Bank would have amounted to 18.5% (as at 31 December 2019: 16.5%). All capital ratios as at 31 December 2020 and throughout the year 2020 remained at safe levels, much above the internal limits adopted by the Bank and the external capital requirements.

49.1 Own funds for the purpose of capital adequacy

The Bank’s own funds for capital adequacy purposes have been calculated in accordance with the Banking Law and the CRR with implementing legislation.

The Bank’s own funds consist entirely of common equity Tier 1 capital (CET 1). In determining its own funds, the Bank makes use of the transitional provisions following from the implementation of IFRS 9 and relating to COVID-19 pandemic.

BANK’S OWN FUNDS	31.12.2020	31.12.2019

Share capital	1,611,300	1,611,300
Supplementary capital	250,733	161,563
Net profit for the period	81,530	89,170
Accumulated other comprehensive income - cash flow hedges	141,186	134,421
Accumulated other comprehensive income - financial assets measured at fair value through other comprehensive income	8,456	3,569
Equity	2,093,205	2,000,023

Equity adjustments	(159,400)	(179,243)
Net profit for the period	(81,530)	(89,170)
Current profit, included by permission from the PFSA	35,475	30,629
Accumulated other comprehensive income - cash flow hedges	(141,186)	(134,421)
Intangible assets	(742)	(2,395)
Adjustment to assets measured at fair value (AVA)	(2,131)	(1,360)
Adjustments relating to transition period, including:	30,714	17,474
- due to IFRS 9 implementation	17,656	17,474
- due to COVID-19 pandemic	13,058

Own funds	1,933,805	1,820,780

As at 31 December 2020, the Bank’s own funds, the common equity Tier 1 and Tier 1 capital would have amounted to PLN 1,903,091 thousand without taking into account the transitional solutions, whereas as at 31 December 2019 they would have amounted to PLN 1,803,306 thousand.

49.2 Capital buffers

In accordance with the Regulation of the Minister of Development and Finance of 1 September 2017 in respect of the systemic risk buffer (Official Journal 2017, item 1776), since the beginning of 2020 the banks have been required to maintain capital ratios at the following levels:

■ total capital ratio (TCR) = 8% + an add-on + the combined buffer requirement;

■ Tier 1 capital ratio (T1) = 6% + 75%*add-on + the combined buffer requirement;

■ Core Tier 1 capital ratio (CET1) = 4.5% + 56%*add-on + the combined buffer requirement,

where the add-on means the requirement specified in Article 138 (1) (2a) of the Banking Law and the combined buffer requirement is the sum total of the mandatory buffers, i.e.:

■ the systemic risk buffer of 2.5%;

■ the counter-cyclical buffer of 0% for loan exposures on the territory of Poland;

■ the buffer of other systemically important institution set by the PFSA on a case by case basis;

■ the systemic risk buffer of 3%.

On 19 March 2020, the Minister of Finance signed a regulation on revoking the systemic risk buffer which amounted to 3%, decreasing the regulatory requirement relating to the core Tier 1 capital ratio (CET1) and the total capital ratio (TCR) to 10.5%.

PKO Bank Hipoteczny SA has not been recognized as another systemically important institution by the PFSA and therefore it is not required to satisfy the applicable additional capital requirements.

The Bank is also not required to satisfy the requirements specified in Article 138 (1) 2a of the Banking Law (add-on).

49.3 Financial leverage

The risk of excessive leverage is defined as the risk resulting from vulnerability to risks because of financial leverage or conditional financial leverage, which may necessitate taking involuntary actions to modify business plans, including the forced sale of assets which could result in losses or result in the need to adjust the valuation of other assets.

Financial leverage is defined as the relative size of a Bank’s assets, off-balance sheet obligations and contingent obligations to pay or to deliver, or to provide collateral, including obligations from received funding, commitments made, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of a Bank, compared to the Bank’s own funds.

The Bank calculates financial leverage in accordance with the CRR.

The financial leverage ratio is monitored on a monthly basis, whereas the Bank recognizes a ratio in excess of 5% to be safe and not requiring further action.

LEVERAGE	31.12.2020	31.12.2019

Leverage ratio (LR)	7.4%	6.7%

As at 31 December 2020 and as at 31 December 2019, the Bank’s financial leverage ratio was above the 3% level resulting from Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019, which shall apply from 28 June 2021.

As at 31 December 2020, the leverage ratio without taking into account the transitional solutions following from the implementation of IFRS 9 and relating to the COVID-19 pandemic would have amounted to 7.3%, and as at 31 December 2019 it would have amounted to 6.6%.

49.4 Requirements regarding own funds (Pillar I)

In accordance with the CRR, the Bank calculates requirements in respect of own funds for the following risk types:

■ credit risk – according to the standardized approach;

■ credit valuation adjustment (CVA) risk – according to the standardized approach;

■ settlement and delivery risk – according to the standardized approach;

■ operational risk– using the basic indicator approach (BIA);

■ market risk (foreign exchange risk only) – according to basic methods.

As at 31 December 2020 and as at 31 December 2019, the own fund requirements in respect of the risk of credit valuation adjustment, settlement and delivery, and market risk were nil, therefore, the total requirement in respect of own funds comprised the requirements in respect of credit and operational risk.

OWN FUNDS REQUIREMENTS	31.12.2020	31.12.2019

Credit risk	790,074	854,550
Operational risk	35,171	22,695
Total own funds requirement	825,245	877,245
Common Equity Tier 1 capital ratio (CET1)	18.7%	16.6%
Tier 1 capital ratio (T1)	18.7%	16.6%

Total capital ratio (TCR)	18.7%	16.6%

EVENTS AFTER THE END OF THE REPORTING PERIOD

50. Events after the end of the reporting period

From 1 January 2021, the Bank will applies the new definition of default, consistent with the EBA/GL/2016/07 Guidelines on the application of the definition of default dated 18 January 2017, provided in Article 178 of Regulation (EU) 575/2013, using the materiality thresholds specified in the Regulation of the Minister of Finance, Investments and Development of 3 October 2019 on the materiality level of overdue loan exposures. The Bank estimated the impact of applying the new definition of default, which indicates that as at 31 December 2020, the portfolio of impaired loans would increase by PLN 15,398 thousand, while the impact on the expected credit losses and the total capital ratio would be immaterial.

Signatures of all Members of the Bank’s Management Board

11.02.2021

Paulina Strugała

President of the Management Board

Signed on Polish original

......................................................

(signature)

11.02.2021

Daniel Goska

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

11.02.2021

Piotr Kochanek

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

Signature of the person responsible for the Bank's accounts

11.02.2021

Tomasz Rynkowski

Director, the Bank's Chief Accountant

Signed on Polish original

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(signature)