PKO Bank Hipoteczny SA (the “Bank”) specializes in granting residential mortgage loans to individual customers and purchasing receivables in respect of such loans. The Bank acquires loans for its portfolio based on strategic cooperation with PKO Bank Polski SA.

PKO Bank Hipoteczny SA is leader of the Polish mortgage bank market in terms of total assets and the balance of residential mortgage loans. The Bank is Poland’s largest issuer of mortgage-covered bonds on Polish and international markets. It was the only Bank in Poland to carry out benchmark issues of EUR-denominated mortgage-covered bonds, five issues in total as at 31 December 2020. The outstanding mortgage-covered bonds issued by the Bank account for approx. 65% of the total value of outstanding mortgage-covered bonds issued by Polish mortgage banks.

The Bank both grants new residential mortgage loans and purchases such loans from PKO Bank Polski SA. In 2020, the Bank’s total assets exceeded PLN 27 billion, of which PLN 24.9 billion were a high quality portfolio of residential mortgage loans.

COVID-19 pandemic

In connection with the COVID-19 pandemic the Bank took action to increase the customers’ and employees’ safety, and ensure prudent management of the Bank:

• in March 2020 the decision was taken to instruct most employees to work remotely, and then in September 2020 to introduce a rotational shift work system;

• at the end of the first quarter of 2020 the Bank implemented specific solutions for borrowers of mortgage loans and allowed suspending repayment of three subsequent loan instalments in 2020; In consecutive months the Bank extended the possibility of suspending the repayment of loan instalments from three to six;

• despite the fact that the Bank does not have full knowledge of the impact of the pandemic on the macroeconomic conditions and their impact on other banking sector entities, it accounted for an allowance for the forecast deterioration of the loan portfolio due to COVID-19 in its financial statements for 2020.

The COVID-19 pandemic has a negative impact, among other things, on business activity in Poland and on the functioning of financial markets. However, the Bank’s liquidity and equity position remains good and exceeds the regulatory requirements.

The developments related to the COVID-19 pandemic and its further impact on the Bank’s operations are uncertain and difficult to estimate, therefore, the Bank is monitoring the situation and will appropriately adapt the actions taken.

Strategy of PKO Bank Hipoteczny SA for the years 2020-2022

In the first quarter of 2020 the Company’s Management Board adopted, and the Supervisory Board approved the updated Strategy of PKO Bank Hipoteczny SA for the years 2020 – 2022.

The Strategy covers the determination of:

• the Bank’s mission and its strategic goals;

• the Bank’s market position;

• the Bank’s operating model;

• the Bank’s strategic operating directions;

• the Bank’s financial position in the years 2020 - 2022.

The Bank developed an updated operating strategy for the years 2020 – 2022 due to:

a) updating the PKO Bank Polski Group strategy which redefines the role of PKO Bank Hipoteczny within the Group;

b) the new strategy horizon developed by PKO Bank Polski (for 2020 – 2022), therefore, the strategy horizon of PKO Bank Hipoteczny SA was extended to 2022;

c) changes in the regulatory environment, mainly the new regulatory requirement as to minimum own funds and eligible liabilities (MREL) which have a significant impact on the planned financing structure of the Group.

The Bank’s strategic goals under the new strategy comprise:

The current state of epidemiological threat may have an impact on Poland’s macroeconomic position and on the position of PKO Bank Hipoteczny SA, among other things by limiting revenue inflows, an increase in allowances set up and difficulties in access to funding. Therefore, the strategy will be reviewed annually and potentially updated, and annual financial plans will be adapted appropriately.

Mortgage covered bonds issued

In 2020 the Bank did not issue any mortgage covered bonds. As at the end of 2020, the Bank was the leader of the Polish mortgage bank market in terms of total assets and the balance of residential mortgage loans. The outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA amounted to PLN 17.2 billion as at 31 December 2020.

2. External operating conditions

Macroeconomic environment

Residential real estate market

Housing loan market

Mortgage-covered bond market

Regulatory and legal environment

2.1. Macroeconomic environment

The Bank only operates in Poland.

Macroeconomic factors affecting the Polish economy in 2020:

Gross Domestic Product

The GDP growth rate affects both the residential real estate market and the mortgage loan market. A sufficiently high GDP growth rate translates into new jobs and higher wages, and, consequently, into consumer purchasing power and creditworthiness.

In 2020 economic processes were determined by the pandemic and the scale of respective restrictions. After a heavy drop in GDP of 8.4 % in the second quarter of 2020 y/y (with a two-digit drop in consumption and investments), in the third quarter business activity increased dynamically (GDP: -1.5% y/y and +7.9% q/q) thanks to cancelling the restrictions. The lack of material restrictions enabled the “unfreezing” of consumer demand (individual consumption increased by 0.4% y/y) and restored the operations of international added value chains, which translated into re-growth of exports (+2% y/y in total for goods and services). The pandemic did not stop the expansion of Polish exporters which was continued throughout the second half of 2020, and Poland’s share in European trade grew systematically.

The significant increase in infections in the fourth quarter and the re-introduced anti-epidemic restrictions once again led to limiting business activities but to a lesser extent than in the spring. Monthly GUS (Polish Statistics) data for the period suggest that the scale of the drop in GDP once again increased (according to PKO BP estimates by -2.4% y/y). At the end of the year a clear dissonance was noted between the very good condition of the industrial sector and the visibly worse condition of services. The crisis caused by the epidemic which engulfed almost the entire economy in spring, at the end of the year covered several branches, mainly the travel, hospitality, catering and culture sectors. The whole year ended with the first GDP drop since the transformation, estimated at 2.8%.

Unemployment, and wages and salaries

The labour market reaction to the recession caused by the pandemic was mitigated by the Anti-crisis Shield and the PFR Financial Shield. The unemployment rate registered in the period from June to November remained at the level of 6.1%, after the higher than usual spring season increase (by 120 thousand in the second quarter). According to the estimates of the Ministry of Development, Labour and Technology (MRPiT) in December the registered unemployment rate was 6.2%, which according to PKO BP’s estimates is a drop compared with November without seasonal adjustments. Despite the slowing of business activity the labour market remained “hibernated”.

A minimum average number of employees in the industry sector was noted in June when employment was 3.3% lower y/y. Employment data accounted for, among other things, the employers’ option to temporarily reduce the number of hours worked which helped reduce the scale of the drop in the number of people employed (and in consequence also the increase in unemployment). In consecutive months the drop in the number of people employed was smaller, in November the number of full-time equivalents was 1.2% lower than in the corresponding period of the previous year. The strategy adopted by companies of “hoarding work” (maintaining the same level of employment despite the drop in demand) had a negative impact on the rate of growth of wages and salaries – in November the average wage in the industry sector increased by 4.9% y/y – approx. 2 percentage points slower than before the outbreak of the pandemic.

Inflation

Price changes affect consumer purchasing power and the level of interest rates. The high inflation level which is not compensated by an increase in wages and salaries has a negative impact on bank customers’ creditworthiness (lower real disposable income), which in turn translates into the value of residential loans granted.

Despite the unprecedented scale of the economic slowdown for most of the year CPI exceeded the National Bank of Poland’s inflation target and only dropped to 2.3% in December compared with 3.4% y/y as at the end of 2019 and 4.7% in the peak period in February 2020. Base inflation, after eliminating food and energy prices, continued to rise throughout the year and amounted to 4.3% y/y in November compared with 3.1% y/y as at the end of 2019. The increase in base inflation reflected the administered price increases and higher prices of services, related – among other things – to transferring the costs of anti-epidemic protection to consumers. The form of inflationary processes (persistently high base inflation, despite the disinflationary environment, low fuel prices and dropping food prices) differentiates Poland from the Euro Area, which at the same time was trying to fight off deflation.

Interest rates

After the unprecedented quantitative easing in the March – May 2020 period, the Monetary Policy Council (RPP) is stabilizing its parameters and sees the positive impact of its actions on economic activities. During the pandemic, in coordination with fiscal actions, interest rates were also reduced significantly and additional tools to support the economy were introduced. The reference rate was reduced by a total of 140 bp to a new historical minimum at a level of 0.1%. From among the other tools the largest impact on the economy was the introduction of the possibility to purchase Treasury bonds or securities guaranteed by the State Treasury on the secondary market. Under the QE Programme, by the end of November the NBP had purchased bonds (of the State Treasury, Polish Development Fund and Bank Gospodarstwa Krajowego) of a value of PLN 107 billion (including PLN 3.2 billion in the fourth quarter of 2020).

The reduction in interest rates may contribute to reducing the costs of servicing debt with respect to already drawn PLN residential loans.

Since June 2020 assessments appeared in the communications following RPP meetings stating that the lack of a strong reaction of the foreign exchange rates to the crisis and quantitative easement caused by the pandemic is a factor that curbs economic revival. The fact that the NBP prefers that the zloty be weaker is confirmed by the currency interventions conducted in the second half of December to weaken the Polish currency (for the first time since 2010).

2.2. Residential real estate market

In 2020 the residential real estate market, similarly to the whole economy, was under the strong influence of events related to the Coronavirus pandemic. The socio-economic turbulences being a consequence of the pandemic had an impact on the lower activity of market participants and a drop in the number of transactions concluded, however, they did not stop the residential real estate price increase trend, which has prevailed for many years, but only slowed it down a little. Crisis occurrences on the residential real estate market were limited by the record low interest rates and relatively stable conditions on the labour market.

Primary Residential Market

According to the data provided by RedNet Property Group Sp. z o.o. (RedNet) in the third quarter of 2020, the average price of a square metre of residential property sold on the primary market, on the six most liquid local markets,[1] was 10% higher than in the corresponding period of the previous year. The average real estate prices offered by developers in the third quarter of 202 increased by 10% y/y. JLL’s [2] report for the fourth quarter of 2020 informs that the increase in transaction prices of new apartments on the six most liquid markets compared with the corresponding quarter of 2019 was from 3% in Poznań to 12% in Kraków.

The data published by the NBP indicates that although an upward trend was maintained on the primary market, the pace of increase weakened somewhat compared with the prior year. In Warsaw, annualized price increases slowed to 6% in the second quarter of 2020, however, in the third quarter of 2020 the pace of growth had already returned to the level before the pandemic (11% y/y). In the six large cities segment the annualized pace of growth of apartment prices on the primary market before the pandemic was approx. 10%, only to drop to 7% and 8% y/y in the second and third quarters respectively. A somewhat larger drop in the increase trend was noted in the ten largest cities segment. In the two quarters preceding the outbreak of the pandemic (fourth quarter of 2019 and first quarter of 2020) the pace of growth of prices in this segment was 10% y/y, and in the next two quarters it dropped to 7% and 5% in the second and third quarters of 2020 respectively.

RedNet data on the activity on the developer market on the six most liquid local markets show a significant scale of decreases in sales of apartments during the first wave of the pandemic in the second quarter of 2020. The number of apartments sold during this period (7.7 thousand) was 46% lower than in the first quarter of 2020, i.e. before the outbreak of the pandemic and 45% lower than in the corresponding quarter of the previous year. The developer sector was relieved to see the return of sales to a relatively high level after the first wave of the pandemic abated and the government cancelled most restrictions. In the third quarter of 2020 13.5 thousand apartments were sold on the six most liquid local markets which was a 75% increase compared to the second quarter of 2020 which was a result that was only 11% lower than the one before the pandemic (in the first quarter of 2020).

According to the data included in the JLL report, in the fourth quarter of 2020 a sales volume of 14 thousand apartments was achieved, which meant a 5% increase compared to the previous quarter. The last quarter of 2020 confirmed the argument about the high level of resilience of the primary residential real estate market to the crises resulting from the Coronavirus epidemic. In 2020, a total of 53 thousand apartments were sold, 19% less than in 2019. Although the annualized drop in sales was significant, taking into consideration the proportional drop in supply in the developers’ new offer it should be stated that the primary residential market remained more or less balanced. As at the end of 2020 the volume of the developers’ offer remained at a similar level to the annualized sales volume.

In 2020 the increase in costs of real estate construction slowed down which additionally lowered pressure on the primary real estate market price increases. According to SEKOCENBUD’s costing rates for Q4 2019, the cost of construction (excluding the price of land) of selected single and multi-family residential buildings grew by 3.4% to 4.8% per annum compared with 5.8% to 8.5% per annum in Q4 2019 and 6.1 to 9% per annum in Q4 2018). The reduced cost pressure which may be accompanied by a somewhat lower demand potential resulting from the weakening of the economy as a result of the pandemic may reduce the pressure on an increase in residential real estate prices on the primary market in 2021.

Secondary market

NBP data on residential real estate prices on the secondary market shows that in 2020 a high pace of growth in prices was noted. In Warsaw itself after 11% annualized price increases in Q1 and Q2 2020, in Q3 2020 the pace of growth dropped to 5% per annum. This fast pace of annualized growth was maintained to Q3 2020 in the six largest cities segment (12-13%) and 10 medium-sized cities segment (11-15%).

Transaction prices registered in the bank’s internal database relating to transactions concluded on the secondary residential real estate market show that the pace of growth of real estate prices dropped in 2020 compared with 2019. The average annualized pace of growth in prices calculated according to a linear trend in Warsaw dropped from 12% in 2019 to 7% in 2020. In corresponding periods a drop in the pace of increase in prices was noted: in the six largest cities from 6% to 3%, in the ten medium-sized cities from 12% to 6%, in the remaining urban county segments from 13% to 8%, and in the rural county segment from 9% to 8%. Taking into account the large scale of crisis occurrences observed in the economy in 2020 resulting from the Coronavirus pandemic, the maintained increase trend in residential real estate prices was surprising and confirmed the strong foundation for the trend prevailing since 2014.

Supply and demand on the residential real estate market

In the years preceding the outbreak of the pandemic (2014–2019) we observed a systematic growth in the activity of the residential development segment. The number of building permits issued increased from year to year, as well as the number of apartments under construction and those commissioned for use. The restrictions consisting of temporary freezing of socio-economic activities in 2020 had an impact on the limited activity of the residential developer sector, however, a significant drop in this activity was noted only during the first 2-3 months after the outbreak of the pandemic.

GUS data shows that the number of residential building permits dropped significantly in April and May 2020 (by -27% and -28% y/y respectively). From June to November 2020 the number of building permits issued was similar to that noted in 2019 and the excellent result in December 2020 (+72% y/y) caused, despite the perturbations related to the pandemic, a 2.8% increase in the number of building permits for apartments issued in 2020 compared with 2019. However, it should be mentioned that regulatory issues following from the stricter technical requirements relating to the energy effectiveness of buildings coming into force as of 1 January 2021 had an impact on the increase in the number of building permits issued at the end of 2020 (in particular in December 2020).

With respect to the volume of apartments under construction a drop in volume caused by the pandemic related to three months (from March to May 2020), during which the drops were between -21% and -38% y/y. Between June and December 2020 the volumes of apartments under construction were similar to the levels noted in the record year of 2019. In effect, the total result in 2020 was 5.7% lower than in the record 2019.

With respect to the number of apartments commissioned for use, a significant drop, in annualized terms, was noted only in April 2020 (-19%). In the remaining months the volume of apartments commissioned for use was similar or higher than in 2019. In total, despite the difficulties related to the pandemic, in 2020 7% more apartments were commissioned for use than in 2019.

The volumes describing the activity of the residential developer sector are material as the data (in particular the number of building permits issued and residential real estate under construction) are considered to be the most sensitive ratios of the condition in the residential real estate market (anticipative with respect to price changes).

Based on NBP data, in Q3 2020, the average availability of apartments in the large cities (a measure defining the number of square meters of housing available for an average one-month salary in the enterprise sector based on the average transaction price of an apartment on the given market) was 0.76 sq. m. This is a small drop compared with 2019 when the ratio was 0.8 sq. m on average. The drop follows from the fact that the pandemic-related crisis phenomena led to a reduction in the pace of growth of salaries to a slightly larger extent than on reducing the pace of growth of real estate prices.

The large drop in sales of new apartments by developers in the second quarter of 2020 was temporary and did not cause a permanent weakening of demand on the primary market, as proven by the ratio of returns. According to RedNet data before the pandemic the ratio was at a low level of 2.3% (data for Q1 2020), and then in Q2 2020 it increased to 8.8%, to drop once again to 3.2% in Q3 2020. To compare, as a result of the 2008 crisis the returns ratio increased to approx. 17%, and then up until 2011 it was at a level exceeding 10%. The stable position of developers in the residential real estate market is also confirmed by the share of finished apartments in the current offer on the primary market, which is low at 11% (to compare, at the beginning of the current growth trend – i.e. at the end of 2013 – the share was at 39%).

The average pace of selling out the developers’ offers at the sales level noted in Q3 2020 was 12 months. This means that developers have no problems with sales of the apartments built, in particular in consideration of the fact that the dominant portion of their offer comprises real estate to be completed from 12 to 24 months (therefore, a period longer than their sales period).

Finalizing the construction and sale of a record number of apartments to be commissioned between 2021 and 2022 is exposed to some risk. The potential reduction in demand as a result of the crisis caused by the pandemic could destabilize the demand-supply relationship on the residential real estate market and start a period of price corrections.

Residential property purchases are financed with household savings and mortgage loans. According to NBP data, the estimated share of cash purchases of apartments on the six most liquid local primary markets was 64% in Q3 2020. In the last three years, it ranged from 62% to 75%. Based on GUS data, household deposits have been steadily increasing, and at the end of Q3 2020, they were 10% higher than in the previous year.

2.3. Residential loan market

Based on NBP data, banks’ receivables from residential loans in Poland were PLN 479.2 billion as at 31 December 2020, up 7.5% y/y. Loans denominated in Polish zloty were PLN 358.4 billion as at 31 December 2020 (74.8% of the Bank’s total receivables from residential loans in Poland), up 10.1% y/y.

The total balance of residential loans in relation to gross domestic product expressed at market prices stood at 20.5% at the end of Q3 2020. That is significantly lower than the average for the European Union, which, according to 2019 data, was 47.4%. This indicates a great potential for further growth of the residential loan market in Poland.

2.4. Mortgage covered bond market

As at 31 December 2020 four mortgage banks were operating in Poland:

• PKO Bank Hipoteczny SA;

• mBank Hipoteczny SA;

• Pekao Bank Hipoteczny SA;

• ING Bank Hipoteczny SA.

The Polish mortgage covered bond market is relatively small and moderately liquid. At the end of December 2020, the total value of outstanding mortgage covered bonds issued by Polish mortgage banks amounted to approx. PLN 26.3 billion, i.e. PLN 0.3 billion more than at 31 December 2019. As at 31 December 2020, outstanding covered bonds issued by Polish banks corresponded to 5.5% of the amount of housing loans granted by banks. For comparison, in 2019 this ratio was 15.7% in Germany and 29.1% in the Czech Republic.

PKO Bank Hipoteczny SA is the largest issuer of mortgage covered bonds in Poland. As at 31 December 2020, the value of outstanding covered bonds issued by PKO Bank Hipoteczny SA amounted to PLN 17.2 billion, which accounted for approx. 65% of the total value of outstanding mortgage covered bonds issued by Polish mortgage banks.

2.5. Regulatory and legal environment

In 2020, the following legal and regulatory solutions significantly affecting the operations of PKO Bank Hipoteczny SA came into force:

BORROWER SUPPORT	The Act of 4 July 2019 on amending the Act supporting borrowers in financial distress who had drawn residential loans and several other acts – the act expands the possibility of being granted support from the Borrower Support Fund.
DEMATERIALIZATION OF SHARES	The Act on amending the Commercial Companies Code and certain other acts of 30 August 2019 – the Act introduces obligatory share dematerialization and the obligation to choose a third party entity maintaining the shareholders register; the third party will also be allowed to settle the company’s financial liabilities to the shareholders in respect of the rights to shares.
COVID-19	The Act on subsidization of interest on bank loans granted to entities affected by COVID-19 and simplified arrangement approval proceedings due to COVID-19 – the act obligates the banks to suspend the execution of loan agreements over the period of three months with respect to those who lost their jobs or main source of income during the Covid-19 pandemic and who filed an appropriate application.
CONSUMER BANKRUPTCY	The Act of 30 August 2019 on amending the act – the Bankruptcy law and several other acts – the act introduces several facilitations in the process of declaring consumer bankruptcy, including three methods for relieving the consumer of debt, allowing the debtor to conclude out-of-court arrangements with their creditors, introducing quick sales of the whole property of the bankrupt individual.

3. Financial performance and capital adequacy

Basic financial ratios of PKO Bank Hipoteczny SA

Statement of financial position of PKO Bank Hipoteczny SA

Income statement of PKO Bank Hipoteczny SA

Requirements relating to own funds (Pillar I)

Internal capital (Pillar II)

Disclosures (Pillar III)

3.1. Basic financial ratios of PKO Bank Hipoteczny SA

	31.12.2020	31.12.2019
Total assets (in PLN millions)	27,310.5	27,253.3
ROA [3]	0.3%	0.4%
ROE [4]	4.0%	5.0%
Total capital ratio (TCR)	18.7%	16.6%
Leverage ratio (LR)	7.4%	6.7%
Cost to income ratio (C/I)[5]	23.3%	24.6%

3.2. Statement of financial position of PKO Bank Hipoteczny SA

in PLN millions	31.12.2020	31.12.2019
Cash and balances with the Central Bank	0.0	0.0
Amounts due from banks	0.0	0.0
Derivative hedging instruments	1,154.7	173.3
Securities	1,241.8	1,240.2
Loans and advances to customers	24,902.7	25,821.1
Other assets [6]	11.3	18.7
TOTAL ASSETS	27,310.5	27,253.3

in PLN millions	31.12.2020	31.12.2019
Amounts due to banks	3,575.1	4,811.3
Derivative hedging instruments	0.5	46.1
Liabilities in respect of mortgage covered bonds issued	17,205.6	16,240.0
Liabilities in respect of bonds issued	4,337.1	4,060.0
Other liabilities and provisions [7]	99.0	95.9
Equity	2,093.2	2,000.0
TOTAL LIABILITIES AND EQUITY	27,310.5	27,253.3

As at 31 December 2020 the balance sheet total of PKO Bank Hipoteczny SA was PLN 27,310.5 million. Residential mortgage loans were the key component of the Bank’s assets. Their carrying amount, taking into account allowances for expected credit losses recognized as at 31 December 2020, amounted to PLN 24,902.7 million, of which new loans amounted to PLN 12,215.8 million, whereas loans purchased from PKO Bank Polski SA amounted to PLN 12,686.9 million.

As far as liabilities are concerned, the share of mortgage covered bonds rose to 63% thereof as at the end of December 2020. In 2020 PKO Bank Hipoteczny SA did not issue any mortgage covered bonds.

The carrying value of mortgage covered bonds was PLN 17,205.6 million at the end of 2020, which is a 6% increase compared with the end of 2019, due to the impact of the EUR/PLN exchange rate on the measurement of mortgage covered bonds denominated in EUR.

As at 31 December 2020, financial liabilities to PKO Bank Polski SA constituted a significant item of the Bank’s equity and liabilities. They consisted of liabilities in the form of revolving credit lines, limited overdraft facilities, liabilities in respect of the purchase of receivables, liabilities in respect of mortgage covered bonds and unsecured bonds acquired by PKO Bank Polski SA and other liabilities to PKO Bank Polski SA. Their total balance was PLN 3,451.8 million. Short-term bonds issued by the Bank and bonds maturing after more than one year were also a significant source of funding the Bank’s operations. As at 31 December 2020, their total balance amounted to PLN 4,337.1 million, up 7% compared with the end of 2019.

3.3. Income statement of PKO Bank Hipoteczny SA

in PLN millions	01.01.2020 – 31.12.2020	01.01.2019– 31.12.2019	Change y/y (in PLN million)
Net interest income	330.4	316.7	13.7
Net fee and commission income	(5.3)	(5.9)	0.6
Net gain/(loss) on financial instruments measured at fair value through profit or loss	0.1	0.1	0.0
Net foreign exchange gains/(losses)	5.9	(1.8)	7.7
Net income/(expense) on modification	(2.6)	0.4	(3.0)
Net allowances for expected credit losses	(35.7)	(14.7)	(21.0)
Net other operating income and expenses	0.0	(0.4)	0.4
Administrative expenses	(51.0)	(51.4)	0.4
Regulatory charges	(25.5)	(24.8)	(0.7)
Tax on certain financial institutions	(89.5)	(83.1)	(6.4)
Operating profit	126.8	135.1	(8.3)
Profit before tax	126.8	135.1	(8.3)
Corporate income tax	(45.3)	(45.9)	0.6
Net profit	81.5	89.2	(7.7)

In 2020, PKO Bank Hipoteczny SA generated a net profit of PLN 81.5 million, down PLN 7.7 million compared with 2019.

In the analysed period, the Bank earned interest income of PLN 705.6 million. It comprised mainly interest income on residential mortgage loans of PLN 685.1 million and income on debt securities. In the same period, the Bank incurred interest expense of PLN 375.2 million. Interest expense resulted mainly from mortgage covered bonds issued and costs of hedging transactions. The related interest expense was PLN 255.9 million. The Bank also incurred, among other things, interest expense of PLN 65.6 million on loans and overdraft limits used, interest expense of PLN 6.2 million on the liability for the deferred payment for receivables purchased from PKO Bank Polski SA, and interest expense of PLN 47.5 million on bonds issued.

The Bank’s turnover in 2020 (understood as the total value of interest income and fee and commission income) amounted to PLN 714.3 million. The realized turnover was generated entirely by the Bank’s operations in Poland.

In 2020, the Bank incurred negative fee and commission result of PLN 5.3 million. This item comprised, among other things, costs of expert valuations of the mortgage lending value of real estate (MLV), as prepared by real estate appraisers, in the amount of PLN 1.2 million, costs of the bond issue programme of PLN 3.7 million, costs of insuring loans of PLN 3.3 million, and costs of credit lines of PLN 4.3 million. The Bank also recognized fee and commission income from customers for, among other things, real estate valuations performed by the Bank and for real estate inspections, as well as commission for early, full or partial loan repayments. The total fee and commission income was PLN 8.7 million.

In 2020 the Bank incurred administrative expenses of PLN 51.0 million. Non-personnel expenses of PLN 33.3 million, including costs related to services rendered by PKO Bank Polski SA of PLN 27.3 million under an outsourcing agreement, were a significant component of administrative expenses. Costs of employee benefits, whose amount during the reporting period was PLN 15.0 million, were also a significant component of administrative expenses.

In 2020, the Bank also incurred regulatory expenses totalling PLN 25.5 million. The main item of such expenses was the contribution to the mandatory resolution fund of the Bank Guarantee Fund of PLN 22.5 million (PLN 0.4 million more than in 2019). The high level of regulatory charges had a significant negative impact on the Bank’s profitability ratios.

Tax on certain financial institutions, which amounted to PLN 89.5 million in the reporting period, was a significant cost of the Bank’s activities.

The Bank’s costs resulting from allowances for expected credit losses amounted to PLN 35.7 million in 2020.

In connection with the continuing COVID-19 pandemic and its negative impact on the financial standing of the Bank’s customers, the Bank expects that the quality of the loan portfolio in consecutive years will deteriorate. Despite not having full knowledge about the impact of the pandemic on the economy, the Bank accounted for an additional allowance for the impact of COVID-19 on the forecast deterioration in the value of the credit portfolio. The COVID-19 pandemic does not affect the going concern assumption.

The Bank’s financing structure

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

	31.12.2020	31.12.2019
Equity	7.7%	7.3%
Funds from the parent entity	12.5%	16.7%
Mortgage covered bonds issued	63.0%	59.6%
Bonds issued	15.9%	14.9%
Other	0.9%	1.5%
Total	100.0%	100.0%

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

3.4. Requirements relating to own funds (Pillar I)

General Information

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) – using basic methods.

At 31 December 2020, the own funds requirements concerning the credit valuation adjustment, settlement and delivery, and market risk were nil, therefore the total own funds requirement comprised the requirements for credit and operational risks.

Own funds requirements	31.12.2020	31.12.2019
Credit risk (in PLN millions)	790.1	854.5
Operational risk (in PLN millions)	35.2	22.7
Total own funds requirement (in PLN millions)	825.3	877.2
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%

The tables below show the exposure amounts, risk weighted assets (RWA) and the own funds requirements broken down by particular exposure classes:

31.12.2020	Gross exposure	Exposure value [8]	Risk-weighted assets (RWA)	Own funds requirement
Retail exposures [9]	2,817.3	2,755.8	2,066.9	165.3
Exposures secured by mortgages on immovable property	22,252.1	22,217.8	7,776.2	622.1
Exposures to central governments or central banks	1,241.8	1,241.8	0.0	0.0
Exposures to institutions	1,686.1	1,686.1	0.0	0.0
Exposures in default	26.7	20.8	22.3	1.8
Other exposures	10.5	10.5	10.5	0.8
Total	28,034.6	27,932.8	9,875.9	790.1

31.12.2019	Gross exposure	Exposure value12	Risk-weighted assets (RWA)	Own funds requirement
Retail exposures13	4,034.3	3,823.8	2,867.9	229.4
Exposures secured by mortgages on immovable property	22,294.2	22,237.4	7,783.1	622.6
Exposures to central governments or central banks	1,240.2	1,240.2	0.0	0.0
Exposures to institutions	771.2	771.2	0.0	0.0
Exposures in default	17.9	13.6	14.8	1.2
Other exposures	16.1	16.1	16.1	1.3
Total	28,373.9	28,102.3	10,681.9	854.5

In 2020 the drop in retail exposures compared to 2019 results from a lower number of new loans being acquired in 2020 (both in the agency and pooling model), and the resulting lower number of loans without a final entry to the land and mortgage register on behalf of the Bank to which the Bank could apply a preferential risk weight.

Credit risk adjustments

For the purpose of specific credit risk adjustments, the Bank uses impairment loss, which was recognized in the Bank’s Tier 1 capital in accordance with the CRR and implementing legislation.

The approach applied by the Bank to identifying exposures at risk of impairment and methods for estimating allowances for expected credit losses and provisions for financial liabilities granted are described in Note 38.3 “Impairment loss on credit exposures ” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020.

Use of credit risk mitigation techniques

The Bank uses mortgage collateral for the classification of exposures to classes of exposures secured by mortgages on immovable property and the use of preferential risk weights. Detailed information about the main types of collateral adopted by the Bank and the method of determining the mortgage lending value is presented in Note 40 “Residual risk management” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020.

3.5. Internal capital (Pillar II)

Internal capital is the estimated amount of capital required to cover all identified material risks in the Bank’s activities, as well as the effect of changes in the business environment, taking into account the expected level of risk.

PKO Bank Hipoteczny SA regularly monitors the materiality of different risks involved in the Bank’s operations.

The Bank separately assesses its internal capital for the following risks considered as material:

• credit risk;

• liquidity risk;

• operational risk;

• interest rate risk;

• model risk.

The internal capital to cover particular risks is determined in accordance with the methods set out in the Bank’s internal regulations. The total internal capital is the sum of internal capital amounts necessary to cover all the risks material for the Bank. The Bank has adopted a prudent approach to risk aggregation and does not take advantage of the diversification effect.

Structure of internal capital	31.12.2020	31.12.2019
For credit risk	89.0%	93.8%
For operational risk	4.0%	2.5%
For liquidity risk	2.3%	1.7%
For interest rate risk	4.5%	1.8%
For model risk	0.2%	0.2%
Total	100.0%	100.0%

As at 31 December 2020, the relationship between the Bank’s own funds and internal capital remained above the statutory and internal limits.

In order to estimate the amount of capital necessary to operate safely in recessionary conditions, the Bank conducts regular stress tests.

3.6. Disclosures (Pillar III)

Considering the scale and specific nature of its operations, in the financial statements and in the Directors’ Report the Bank discloses in particular the following information:

• risk management objectives and strategies;

• own funds for capital adequacy purposes;

• capital buffers;

• leverage ratio;

• capital requirements;

• credit risk adjustments;

• credit risk mitigation techniques used;

• remuneration policy for those categories of personnel whose professional activities have a material impact on the Bank’s risk profile;

• requirements referred to in Article 111a of the Banking Act and Recommendation H;

• operational risk in accordance with Recommendation M;

• liquidity risk management system and the liquidity position, in accordance with Recommendation P;

• impact of implementing International Financial Reporting Standard 9 (IFRS 9) on capital adequacy.

Being part of the PKO Bank Polski Group, the Bank also supplies information to the parent for consolidation purposes.

Details of the scope of information disclosed, the method of its verification and publication are presented in PKO Bank Hipoteczny SA Capital Adequacy Information Policies and other information to be published, which is available on the Bank’s website (www.pkobh.pl).

4. Business of PKO Bank Hipoteczny SA

Sales of residential mortgage loans under the agency model

Acquisition of receivables under residential mortgage loans

Structure of the residential mortgage loan portfolio

Mortgage covered bonds

Financial market operations

Bond issues – Bond Issue Programme Agreement concluded with PKO Bank Polski SA

Bonds – public programme

Bond issues – other

Ratings of the Bank and its mortgage covered bonds

4.1. Sales of residential mortgage loans under the agency model

PKO Bank Hipoteczny SA has been granting residential mortgage loans in Polish zlotys since 1 April 2015. New residential loans are sold under the agency model, through Poland’s largest network of branches, agents and intermediaries, organized by PKO Bank Polski SA. The Bank accepts apartments and single-family homes as collateral.

In 2020, implementing the updated strategy for the years 2020 – 2022, the Bank limited sales of residential mortgage loans. This decision had no impact on the Group’s total sales of residential mortgage loans. Therefore, in 2020, the Bank granted PLN 704.9 million worth of mortgage loans, which is a drop of 81.2% compared with 2019.

In accordance with Recommendation S of the PFSA, the Bank only grants loans for which the loan-to-value ratio does not exceed 80%. Where a low down payment insurance policy was used, the Bank approved loans for which this ratio was not higher than 90%. At the beginning of the second quarter of 2020 the Bank restricted granting loans to those for which the loan-to-value ratio exceeds 80%.

Moreover, in compliance with the Polish Act on Mortgage Covered Bonds and Mortgage Banks, the Bank only grants loans where the loan amount in relation to the mortgage lending value of the real estate does not exceed 100%.

The following table shows the main criteria applied by PKO Bank Hipoteczny SA in the process of granting loans secured by mortgages.

Criteria	Agency model
Loan amount/market value of the real estate	Max 80%[10]
Loan amount/mortgage lending value of the property	Max 100%
Legal title to the real estate	Ownership or perpetual usufruct
Loan collateral	Mortgage recorded as the first in Section IV of the Land and Mortgage Register
Currency	PLN
Purpose	Residential

In 2020, in connection with the epidemic situation in Poland the Bank introduced specific solutions for borrowers of mortgage loans. As at the end of the first quarter of 2020 the Bank allowed the borrowers to suspend repayment of up to three consecutive loan instalments, and in the following quarters it modified the principles governing repayments and extended the possibility of suspending repayments from three to six loan instalments.

Therefore, the Bank adopted the respective “The banks’ position on the standardization of principles for offering support tools to customers of the banking sector” developed under the aegis of the Polish Bank Association, a non-legislative moratorium within the meaning of the EBA Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis.

Furthermore, in accordance with the Act of 19 June 2020 on the subsidization of interest on bank loans granted to entities affected by COVID-19 and simplified arrangement approval proceedings due to COVID-19 (“Shield 4.0”), the Bank also implemented the possibility of suspending the exercising of a loan contract for borrowers who had lost their jobs or another main source of income after 13 March 2020.

4.2. Purchase of residential mortgage loan receivables

The purchase of mortgage residential loan receivables based on a framework agreement signed in 2015 with PKO Bank Polski SA, is an important element of the business of PKO Bank Hipoteczny SA.

In 2020, PKO Bank Hipoteczny SA purchased a portfolio of residential mortgage loan receivables totalling PLN 342.4 million from PKO Bank Polski SA. The following table shows the main criteria applied by PKO Bank Hipoteczny SA in the process of purchasing the mortgage loans.

Criteria	Pooling model
Loan amount/mortgage lending value of the property	Max 100%
Legal title to the real estate	Ownership or perpetual usufruct
Loan collateral	Mortgage recorded as the first in Section IV of the Land and Mortgage Register
Currency	PLN
Days past due or impairment indicators	None
Purpose	Residential

4.3. Structure of the residential mortgage loan portfolio

Portfolio structure by LtV

The structure of the gross portfolio of loans granted to customers in the statement of financial position of PKO Bank Hipoteczny SA according to the LtV ratio based on market valuation [11] and the LtV ratio based on the BHWN is presented in the following tables.

Gross loans granted to customers at LtV based on market valuation	31.12.2020	31.12.2019
below 50%	47.1%	34.1%
51% - 60%	23.8%	20.5%
61% - 70%	18.1%	21.8%
71% - 80%	9.4%	16.2%
80% - 90%	1.6%	7.4%
above 90%	0.0%	0.0%
Total, gross	100%	100%
Average LtV based on market valuation	50.0%	56.2%

Gross loans granted to customers at LtV based on mortgage lending value	31.12.2020	31.12.2019
below 50%	16.5%	14.5%
51% - 60%	10.5%	9.5%
61% - 70%	14.4%	13.0%
71% - 80%	21.2%	19.1%
80% - 90%	25.4%	25.0%
above 90%	12.0%	18.9%
Total, gross	100%	100%
Average LtV based on MLV	70.0%	72.4%

In 2020 the average LtV based on the market valuation of the loan portfolio dropped by 6.2 p.p. (in 2019 it dropped by 2.5 p.p.), which is the effect of further growth in the market values of the real estate constituting the collateral for the loans granted by the Bank, with simultaneous depreciation of the portfolio. With respect to LtV based on MLV the drop is much smaller and results exclusively from the depreciation of the portfolio. The MLV determined as at the moment of granting the loans did not have to be updated.

Interest on loans

In its offer the Bank has loans bearing an interest rate based on WIBOR 6M and a historical portfolio based on WIBOR 3M.

In its lending activities the Bank uses base reference interest rates WIBOR 3M and WIBOR 6M, which in 2020 amounted to 0.66% and 0.70% respectively.

4.4. Mortgage covered bonds

The key objective of PKO Bank Hipoteczny SA is issuing mortgage covered bonds which are the main source of the long-term financing for loans secured with real estate.

Domestic issues of mortgage covered bonds

From the beginning of its operations, PKO Bank Hipoteczny SA has issued thirteen series of Polish mortgage covered bonds, including two issues of Green Covered bonds.

The total value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA for the domestic market (at the nominal value) as at the end of 2020 was PLN 4,355.0 million

All series of domestic mortgage covered bonds issued are traded on the Warsaw Stock Exchange parallel market and on the BondSpot regulated market. They are also accepted in repo transactions by the National Bank of Poland.

In 2020 PKO Bank Hipoteczny SA did not issue any domestic mortgage covered bonds.

On 11 December 2020, PKO Bank Hipoteczny SA redeemed series 1 mortgage covered bonds with a total nominal value of PLN 30 million.

PLN-denominated issues of mortgage covered bonds of PKO Bank Hipoteczny SA carried out up to 31 December 2020:

Series	Mortgage covered bond number (ISIN)	Issue date	Redemption date	Series value (in PLN million)	Interest rate	Currency	Rating of the issue	Listing
2	PLPKOHP00025	27.04.2016	28.04.2021	500	WIBOR3M+0.65%	PLN	Aa3	BondSpot, WSE parallel market
3	PLPKOHP00033	17.06.2016	18.06.2021	500	WIBOR3M+0.59%	PLN	Aa3	BondSpot, WSE parallel market
4	PLPKOHP00041	28.04.2017	18.05.2022	500	WIBOR3M+0.69%	PLN	Aa3	BondSpot, WSE parallel market
5	PLPKOHP00058	22.06.2017	10.09.2021	265	2.69%	PLN	Aa3	BondSpot, WSE parallel market
6	PLPKOHP00066	27.10.2017	27.06.2023	500	WIBOR3M+0.60%	PLN	Aa3	BondSpot, WSE parallel market
7	PLPKOHP00074	27.04.2018	25.04.2024	700	WIBOR3M+0.49%	PLN	Aa3	BondSpot, WSE parallel market
8	PLPKOHP00082	18.05.2018	29.04.2022	100	WIBOR3M+0.32%	PLN	Aa3	BondSpot, WSE parallel market
9	PLPKOHP00090	27.07.2018	25.07.2025	500	WIBOR3M+0.62%	PLN	Aa3	BondSpot, WSE parallel market
10	PLPKOHP00108	24.08.2018	24.08.2028	60	3.4875%	PLN	Aa3	BondSpot, WSE parallel market
11	PLPKOHP00116	26.10.2018	28.04.2025	230	WIBOR3M+0.66%	PLN	Aa3	BondSpot, WSE parallel market
12	PLPKOHP00132	10.06.2019	30.09.2024	250	WIBOR3M+0.60%	PLN	Aa3	BondSpot, WSE parallel market
13	PLPKOHP00199	02.12.2019	02.12.2024	250	WIBOR3M+0.51%	PLN	Aa3	BondSpot, WSE parallel market

International issues of mortgage covered bonds

From the beginning of its operations, PKO Bank Hipoteczny SA has issued seven series of international mortgage covered bonds, including five benchmark issues and two private placement issues.

The total value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA for the international markets (at the nominal value) as at the end of 2020 was EUR 2,779.0 million.

All series of international mortgage covered bonds issued are traded on the Luxembourg Stock Exchange and, except for series 2 and 5, on the parallel market of the Warsaw Stock Exchange. They are also accepted in repo transactions by the European Central Bank.

In 2020 PKO Bank Hipoteczny SA did not issue any international mortgage covered bonds.

EUR-denominated issues of mortgage covered bonds of PKO Bank Hipoteczny SA carried out up to 31 December 2020:

Series	Mortgage covered bond number (ISIN)	Issue date	Redemption date	Series value (in EUR million)	Coupon	Price	Currency	Rating of the issue	Listing
1	XS1508351357	24.10.2016	24.06.2022	500	0.125%	99.702%	EUR	Aa3	LuxSE, WSE parallel market
1 2nd tranche	XS1508351357	08.03.2019	24.06.2022	100	0.125%	99.489%	EUR	Aa3	LuxSE, WSE parallel market
2	XS1559882821	02.02.2017	02.02.2024	25	0.82%	100.00%	EUR	Aa3	LuxSE
3	XS1588411188	30.03.2017	24.01.2023	500	0.625%	99.972%	EUR	Aa3	LuxSE, WSE parallel market
4	XS1690669574	27.09.2017	27.08.2024	500	0.75%	99.906%	EUR	Aa3	LuxSE, WSE parallel market
5	XS1709552696	02.11.2017	03.11.2022	54	0.467%	100.00%	EUR	Aa3	LuxSE
6	XS1795407979	22.03.2018	24.01.2024	500	0.75%	99.892%	EUR	Aa3	LuxSE, WSE parallel market
7	XS1935261013	28.01.2019	23.11.2021	500	0.250%	99.933%	EUR	Aa3	LuxSE, WSE parallel market
7 2nd tranche	XS1935261013	01.03.2019	23.11.2021	100	0.250%	100.145%	EUR	Aa3	LuxSE, WSE parallel market

The funds raised from the issues of mortgage covered bonds have been used by PKO Bank Hipoteczny SA to grant residential loans and to purchase mortgage loan receivables from PKO Bank Polski SA.

The Covered Bond Label

On 6 February 2018, PKO Bank Hipoteczny, as the first issuer of mortgage covered bonds from Poland, joined The Covered Bond Label. The Covered Bond Label is a quality certificate, whose purpose is to build awareness of the safety and high quality of assets such as mortgage covered bonds among investors.

The Bank’s details on the website of The Covered Bond Label are available at:

https://coveredbondlabel.com/issuer/161/

Green Covered Bonds

In 2020 PKO Bank Hipoteczny SA was continuously prepared to issue Green Covered Bonds. The published Green Covered Bond Framework (GCBF) remained in force.

The proceeds from Green Covered Bonds are used exclusively to provide full or partial financing or refinancing of new and/or existing projects which have been classified as green. Such bonds should satisfy the criteria set by the International Capital Market Association (ICMA), which are known as Green Bond Principles (GBP). The GBP are a set of guidelines concerning transparency, disclosure and reporting, which promote the consistency of the green bond market.

For more detailed information concerning Green Covered Bonds issued by the Bank, please visit:

https://www.pkobh.pl/relacje-inwestorskie/zielone-listy-zastawne/

4.5. Financial market operations

PKO Bank Hipoteczny SA executes treasury transactions on the wholesale financial market. The purpose of the transactions is to manage liquidity (over short-, mid- and long-term time horizons) and the Bank’s foreign-currency position. Additionally, the Act on Mortgage Covered Bonds and Mortgage Banks imposes an obligation on PKO Bank Hipoteczny SA to mitigate the risk caused by fluctuations in exchange rates.

For the purpose of financing the granting of residential loans and the purchase of receivables for housing loans granted by PKO Bank Polski SA, PKO Bank Hipoteczny SA issues mortgage covered bonds, unsecured bonds, and takes out credit lines and assumes liabilities for purchased receivables. However, in accordance with the Act on Mortgage Covered Bonds and Mortgage Banks, the level of liabilities arising from the taking out of loans and advances (including liabilities in respect of purchased receivables) and issuing bonds cannot exceed in aggregate six times the Bank’s own funds.

In the Management Board’s opinion, as at 31 December 2020, there were no indicators of a risk of late payment of the liabilities incurred by the Bank. In 2020, the Bank did not exceed any of the liquidity limits. Details of the levels of the Bank’s liquidity limits are provided in Note 41 “Liquidity risk management” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020.

As far as the issue of EUR-denominated mortgage covered bonds is concerned, for the purpose of hedging interest-rate risk and foreign exchange risk, PKO Bank Hipoteczny SA entered into Cross-Currency Interest Rate Swap (CIRS) transactions, under which the Bank pays a coupon in PLN based on a variable interest rate, and receives a coupon based on a fixed interest rate for EUR. If PKO Bank Hipoteczny SA is declared bankrupt by a court, the CIRS transactions will automatically be extended by 12 months on the terms set on the transaction date and indicated in the Final Terms of issue of mortgage covered bonds. Additionally, the Bank has executed a series of FX-Forward contracts, which hedge currency exposures with maturities on the payment dates of the coupons for the EUR-denominated mortgage covered bonds.

As far as the issue of fixed-interest rate mortgage covered bonds in PLN is concerned, PKO Bank Hipoteczny SA entered into IRS transactions to hedge interest rate risk in 2017 and 2018. Under the IRS transactions, the Bank pays a coupon based on a floating PLN rate, and receives a coupon based on a fixed PLN rate.

4.6. Bond issues – Bond Issue Programme Agreement concluded with PKO Bank Polski SA

On 30 September 2015, PKO Bank Hipoteczny SA concluded an agreement for an Own Bonds Issue Programme with PKO Bank Polski SA, based on which zero coupon bonds, floating coupon bonds and fixed coupon bonds with maximum tenors up to 36 months.

In 2020, the Bank issued bonds with a total nominal value of PLN 5,822.5 million under the Programme. The balance of issued bonds was PLN 3,776.5 million as at 31 December 2020. The Bank intends to continue seeking financing under this Programme.

4.7. Bonds – public programme

On 12 October 2020, in connection with the Polish Financial Supervision Authority approving the Base Bond Issue Prospectus on 8 October 2020, PKO Bank Hipoteczny SA signed a Programme Agreement, relating to the Public Bond Issue Programme established on 11 April 2019, with PKO Bank Polski SA also acting through its branch, the Brokerage Office in Warsaw.

In 2020, under the Public Bond Issue Programme, PKO Bank Hipoteczny SA issued bonds with a total nominal value of PLN 50.0 million. The balance of issued and outstanding bonds was PLN 215.0 million as at 31 December 2020. All the series were admitted and introduced to trading on the WSE regulated market (the parallel market). The Bank intends to continue seeking financing under this Programme.

Outstanding PLN bond issues of PKO Bank Hipoteczny SA conducted under the Programme up to 31 December 2020:

Series	Bond number (ISIN)	Issue date	Redemption date	Series value (in PLN million)	Coupon	Currency	Rating of the issue	Listing
1	PLPKOHP00140	11.07.2019	12.07.2021	50	WIBOR3M+0.60%	PLN	None	WSE parallel market
3	PLPKOHP00165	28.08.2019	30.08.2021	45	WIBOR3M+0.60%	PLN	None	WSE parallel market
4	PLPKOHP00173	17.10.2019	18.10.2021	40	WIBOR3M+0.60%	PLN	None	WSE parallel market
5	PLPKOHP00181	18.12.2019	20.12.2021	30	WIBOR3M+0.60%	PLN	None	WSE parallel market
6	PLPKOHP00207	27.11.2020	02.06.2021	50	0.60%	PLN	None	WSE parallel market

4.8. Bonds – other

On 20 February 2020, PKO Bank Hipoteczny SA signed an agreement with a European financial institution for an issue of unsecured bonds based on a floating interest rate with a total nominal value of PLN 350.0 million and redemption date on 24 February 2021, and redeemed unsecured bonds with a nominal value of PLN 350.0 million.

4.9. Ratings of the Bank and its mortgage covered bonds

As at the date of this Report, PKO Bank Hipoteczny SA had the following ratings assigned by Moody’s:

	Rating	Outlook	Date of initial rating/rating confirmation date
Long-term issuer rating	Baa1	Stable	19.12.2017
Short-term issuer rating	P-2	n/a	19.12.2017
Long-term counterparty risk rating	A3	n/a	18.06.2018
Long-term counterparty risk rating	P-2	n/a	18.06.2018
Long-term counterparty risk assessment (CR)	A3(cr)	n/a	19.12.2017
Short-term counterparty risk assessment (CR)	P-2(cr)	n/a	19.12.2017

As at the date of this Report, the mortgage covered bonds of PKO Bank Hipoteczny SA had the following ratings assigned by Moody’s:

	Rating	Date of initial rating	Rating confirmation date
Mortgage covered bonds denominated in PLN	Aa1	07.12.2020	09.12.2020
Mortgage covered bonds denominated in EUR	Aa1	07.12.2020	09.12.2020

The rating assigned to the mortgage covered bonds of PKO Bank Hipoteczny SA is the highest rating achievable for Polish securities. The limit for the ratings is the Polish country ceiling [12] for debt instruments, which currently is at the level of Aa1.

5. Internal operating conditions

Lending process and cooperation with PKO Bank Polski SA

Internal control system

Risk management

Valuation of residential mortgage loan collaterals

Cover pool for mortgage covered bonds

Cover Pool Monitor

Statutory limits

5.1. Lending process and cooperation with PKO Bank Polski SA

PKO Bank Hipoteczny SA purchases residential mortgage loans for its portfolio as part of its strategic cooperation with PKO Bank Polski SA. The banks work together under two models:

• agency model;

• pooling model.

The cooperation with PKO Bank Polski SA is governed in detail by an outsourcing agreement concluded on 16 January 2015. The agreement governs the scope of the cooperation and describes in detail the method of performing the outsourced functions, first and foremost in the area of offering and administering residential loans and performing support functions for PKO Bank Hipoteczny SA. Additionally, the agreement imposes obligations on PKO Bank Polski SA to properly perform the functions entrusted to it, as well as broad reporting and controlling obligations towards PKO Bank Hipoteczny SA.

On 17 November 2015, the Receivables Sale Framework Agreement was signed with PKO Bank Polski SA. On the basis thereof, the Bank has been acquiring portfolios of receivables in respect of residential mortgage loans since December 2015.

As part of the regulatory approval process before the PFSA for establishing a mortgage bank, PKO Bank Polski SA undertook to ensure that, if necessary and if PKO Bank Hipoteczny SA’s capital or liquidity ratios fall below the level required by law or by other regulations of relevant domestic banking supervision authorities that are applicable to PKO Bank Hipoteczny SA, it will immediately provide PKO Bank Hipoteczny SA with appropriate financial support.

5.2. Internal control system

The internal control system in PKO Bank Hipoteczny SA is one of the elements of managing the Bank. The objective of the internal control system is to support the Bank’s decision-making processes to ensure:

• effectiveness of the Bank’s operations;

• reliability and accuracy of financial reporting, administrative and accounting procedures, and reliable internal and external reporting;

• compliance with the risk management policy;

• compliance of the Bank’s operations with the generally applicable laws, internal regulations and market standards adopted by the Bank, taking into account regulatory recommendations.

The Bank’s internal control system includes:

• the control function designed to ensure compliance with controls relating, in particular, to risk management; this function covers all of the Bank’s and the Head Office’s business units which are responsible for carrying out the tasks assigned to this function;

• the compliance function, which, together with the Head Office’s business units, is responsible for identifying, assessing, controlling and monitoring the risk of the Bank’s non-compliance with the generally applicable laws and with the Bank’s internal regulations and market standards adopted by the Bank, taking into account regulatory recommendations, and for the submission of the relevant reports;

• the independent internal audit function to evaluate and assess, independently and objectively, the adequacy and effectiveness of the risk management system, the internal control system, and corporate governance, except for the aspects relating to the internal audit function itself.

The internal control system is arranged at the Bank on three independent levels:

• the first level consists of organizational structures that perform risk-generating operational tasks and operate under internal regulations;

• the second level is composed of specialized organizational structures operating under applicable policies, methodologies and procedures. The purpose of such structures is to ensure that actions at the first level are properly designed and ensure effective functioning with respect to risk mitigation, support risk management and measurement, and to ensure the effectiveness of operations. This level comprises the activities of the compliance function, as well as identification, measurement or estimation, control, monitoring and reporting of risks material to the Bank, and identified threats and irregularities;

• the third level is internal audit, which carries out independent audits of elements of the Bank’s management system, including the risk management system and the internal control system. The internal audit operates separately from, and can support the activities carried out by, the first and second level. The support involves consultation without affecting the decisions made.

The Bank’s Management Board ensures the continuity of operation of the internal control system and proper cooperation of all business units within the internal control system in place. The Management Board also identifies corrective actions to be taken to remedy any irregularities identified by the internal control system, including specific corrective and disciplinary measures. The Bank’s Management Board approves criteria for distinguishing the relevant processes taking into account the management strategy, the business model and the impact on the Bank’s financial performance and capital adequacy, as well as risk tolerance. The Bank’s Management Board also approves the list of significant processes and their connection with the internal control system’s objectives.

Supervision over the internal control system is exercised by the Supervisory Board with the support of the Audit and Finance Committee of the Bank’s Supervisory Board. The Supervisory Board approves, in particular, the principles of operation of the internal control system and assesses the adequacy and effectiveness of the system. The Audit and Finance Committee supports the Supervisory Board by monitoring and reviewing the adequacy and effectiveness of the internal control system based on the reports obtained from compliance, internal audit and the control function matrix coordinator, as well as by reviewing draft resolutions of the Management Board in terms of the internal control system, the approval of which falls within the competence of the Supervisory Board.

In 2020, the reporting within the internal control system and the remedial actions taken indicated that the internal control system in PKO Bank Hipoteczny SA was effective and commensurate with the business model and the scale of the Bank’s operations.

5.3. Risk management

The risk management process is a key process in PKO Bank Hipoteczny SA. Its purpose is to ensure control of the risk level in a changing macroeconomic and legal environment, control of the risk level, and to ensure it is maintained within the risk tolerance established by the Bank and the system of limits that is in place. The assumed level of risk constitutes an important component of the planning and decision-making process.

Risk management in the Bank is based in particular on the following principles:

• the Bank manages identified types of risk associated with its operations;

• the process of risk management is adequate to the scale of the Bank’s operations and to the materiality, scale and complexity of a given risk;

• the risk management process supports the execution of the Bank management strategy, while maintaining compliance with the risk management strategy, in particular in the area of the risk tolerance level;

• the process of risk management is continuously adjusted to new factors and sources of risk;

• methods of risk management and risk measurement systems are adjusted to the scale and complexity of the Bank’s operations and to the nature and size of the risk to which the Bank is exposed;

• methods of risk management are periodically reviewed and validated;

• risk management is integrated with planning and controlling processes;

• the risk level is regularly monitored and compared against the system of limits that apply in the Bank, while the Bank’s management receives regular information on the level of risk;

• the risk management process is cohesive with the risk management principles in the PKO Bank Polski SA Group.

PKO Bank Hipoteczny SA identifies and manages the following types of risk:

Material risks

• Credit risk

• Liquidity risk including financing risk

• Interest rate risk

• Model risk

• Operational risk

Monitored risks

• Concentration risk

• Residual risk

• Currency risk

• Business risk, including macroeconomic risk

• Compliance risk

• Reputation risk

• Capital adequacy risk, including excessive leverage risk

The materiality of individual types of risk is defined at the level of the Bank. While determining the criteria of considering a certain risk to be material, the impact of such risk on the Bank’s activities is taken into account, and three levels of risk are distinguished:

• material risks, which are subject to active management;

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

• other risks which have not been defined or do not arise in the Bank (immaterial and unmonitored).

For monitored risks, PKO Bank Hipoteczny SA performs periodic monitoring of whether they should be designated as material. The Bank has defined materiality criteria, which when exceeded, a risk will be recognized as material.

In its Risk Management Strategy, the Bank has defined a number of strategic limits which define the tolerance for different risks. The Bank monitors these limits on an ongoing basis. In 2020, as well as during the whole period of the Bank’s activities, none of them was exceeded.

A detailed description of the Bank’s risk management objectives and methods is provided in the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020, in the chapter “Objectives and principles of Risk Management”. It also includes important information on the level of financial risk in the Bank’s operations, together with the methods of hedging significant types of planned transactions for which hedge accounting is applied.

5.4. Measurement of residential mortgage loan collaterals

PKO Bank Hipoteczny SA’s policy concerning loan collaterals and their measurement is based on the provisions of the following legal acts:

• the Mortgage Covered Bonds and Mortgage Banks Act;

• the Act on Land and Mortgage Registers and Mortgage;

• the Banking Law.

Additionally, the question of loan collaterals is addressed by:

• the recommendations of the PFSA, including Recommendations F, S and J;

• the Bank’s internal regulations.

The Bank has in place and applies the Rules for Setting the Mortgage Lending Value of Real Estate, approved (as amended) by the Polish Financial Supervision Authority on 30 October 2017. The Rules take into account the provisions of Recommendation F concerning the basic criteria applied by the Polish Financial Supervision Authority in approving rules for setting the mortgage lending value of real estate issued by mortgage banks.

The mortgage lending value of real estate is the value determined by the mortgage bank which, in the Bank’s opinion, reflects the level of risk associated with the real estate as the loan collateral. The mortgage lending value of real estate is used to determine the maximum amount of a loan that can be secured by a mortgage on a given property, and to make a decision on whether a receivable secured by a particular property can be purchased by the Bank. The mortgage lending value of real estate is determined in a prudent manner, taking into consideration long-term parameters.

PKO Bank Hipoteczny SA determines the 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 opinion takes into account analyses and forecasts concerning specific parameters for a given property, which influence the evaluation of credit risk, as well as factors of a general nature, e.g. population growth, the unemployment rate and urban development planning.

The process of setting the MLV is carried out in the Bank by a dedicated team.

In the agency model, the process of setting the mortgage lending value of real estate comprises three stages:

Preparation of the MLV expert opinion	Property appraiser with appropriate experience and the ability to estimate banking risk in connection with securing residential mortgage loans or a dedicated organizational unit of the Bank – the Collateral Valuation Team at the Loan Office, based on the report from the inspection of the real estate prepared by a property appraiser
Verification of the MLV opinion	PKO Bank Polski SA under the Outsourcing Agreement, or a dedicated organizational unit of the Bank: the Collateral Valuation Team at the Loan Office
Review of the MLV of real estate expert opinion and determining the mortgage lending value of the real estate	A dedicated organizational unit of the Bank: the Collateral Valuation Team at the Loan Office

In the case of the purchase of a receivable, the process of setting the mortgage lending value of real estate comprises four stages:

Confirmation of the property’s legal status	PKO Bank Polski SA, under the outsourcing agreement
Preparation of an inspection protocol of the property, together with market research	Appraiser with appropriate experience and the ability to estimate banking risk in the area of securing residential mortgage loans
Preparation of the MLV expert opinion	A dedicated organizational unit of the Bank: the Collateral Valuation Team at the Loan Office
Review of the MLV of real estate expert opinion and determining the mortgage lending value of the real estate	A dedicated organizational unit of the Bank: the Collateral Valuation Team at the Loan Office

The processes of preparing an MLV expert opinion and setting the mortgage lending value of a property described above are executed by two independent individuals.

5.5. Cover pool for mortgage covered bonds

PKO Bank Hipoteczny SA maintains a cover pool for its mortgage covered bonds. The Bank includes in the cover pool residential mortgage loan receivables, and rights and funds that constitute the basis for issuing mortgage covered bonds, as well as additional funds that constitute the excess to cover interest on mortgage covered bonds in circulation which is due in the following six months. The mortgage covered bonds are secured by loans secured by the first mortgage. Certain bank funds can also constitute the basis for issuing mortgage covered bonds:

• invested in securities issued or guaranteed by the National Bank of Poland, the European Central Bank, governments and central banks of members of the European Union and/or the Organisation for Economic Cooperation and Development, excluding countries that are restructuring or have restructured their foreign debt in the past five years;

• deposited with the National Bank of Poland;

• held in cash.

The nominal value of loans included in the cover pool and constituting collateral for issues of mortgage covered bonds as at 31 December 2020 stood at PLN 23,107.0 million. The nominal value of the over-collateralization in the form of securities issued by the State Treasury, denominated in PLN, stood at PLN 250 million. As at 31 December 2019, these figures were PLN 21,662.0 million and PLN 250 million respectively. The cover pool also takes into account CIRS transactions hedging foreign exchange risk and the interest rate risk on EUR-denominated mortgage covered bonds, FX-Forward transactions hedging the foreign exchange risk of issued EUR-denominated mortgage covered bonds and an IRS transactions hedging the interest rate risk of PLN-denominated mortgage covered bonds issued on a fixed-rate basis.

In 2020 and in previous years, the cover pool did not include asset-backed securities that do not meet the requirements described in Article 80 paragraph 1 of 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).

The method of managing the cover pool is laid out by:

• the Polish Mortgage Covered Bonds and Mortgage Banks Act of 29 August 1997 (Journal of Laws of 2003, No 99, item 919, as amended;

• Resolution No. 633/2015 of the PFSA of 1 December 2015 on defining the form of a cover pool;

• Recommendation K of the PFSA of 9 February 2016 concerning the principles for maintaining the cover pool by mortgage banks;

The Cover Pool Monitor and the Deputy Cover Pool Monitor provide continuous supervision of the management of the cover pool.

The following table presents basic data on the Cover Pool as at 31 December 2020 and 31 December 2019:

	31.12.2020	31.12.2019
Total cover pool, including (in PLN million):	23,356.6	21,912.0
loans secured by mortgages (in PLN million)	23,106.6	21,662.0
other assets [13] (in PLN million)	250.0	250.0
Liquidity buffer [14] (in PLN million)	74.4	119.4
Nominal value of hedging transactions [15] (in PLN million)	13,146.1	12,156.2
Number of loans	123,096	115,978
Average loan value (PLN thousand)	187.7	186.8
Average weighted time since loan issuance (seasoning) (months)	54.8	48.1
Average weighted maturity (months)	254.9	258.4
Average LtV (loan amount to market value)	49.2%	53.6%
Average weighted loan to mortgage lending value of real estate	69.7%	71.0%
Over-collateralization [16]	41.4%	34.7%

5.6. Cover Pool Monitor

The purpose of the cover pool monitor is to ensure protection of the material interests of the holders of mortgage covered bonds. The Act on Mortgage Covered Bonds and Mortgage Banks guarantees protecting the independence of the monitor and his deputy. Monitors are appointed by the Polish Financial Supervision Authority, upon the request of the Bank’s Supervisory Board, for a period of six years.

On 6 March 2015 the Polish Financial Supervision Authority appointed the following cover pool monitor and deputy cover pool monitor for PKO Bank Hipoteczny SA:

	Position	Appointment date	Date of dismissal / resignation
Tadeusz Swat	Cover Pool Monitor	06.03.2015	-
Grzegorz Kędzia	Deputy Monitor	06.03.2015	-

5.7. Statutory limits

Acting under the Act on Mortgage Covered Bonds and Mortgage Banks, PKO Bank Hipoteczny SA is obliged to monitor and comply with designated limits related to the operations of a mortgage bank.

The statutory limits and the level to which they have been met as of 31 December 202 and 31 December 2019 were as follows:

Limit	Legal basis	Limit level	Actual level
Limit	Legal basis	Limit level	31.12.2020	31.12.2019
Total value of receivables on loans secured by mortgages, and mortgage loan receivables purchased from other banks, in which the value exceeds 60% of the mortgage lending value, in proportion to the total value of receivables secured by mortgages	Article 13(1)	≤30.0%	17.0%	18.7%
Value of funds received from the issue of mortgage bonds designated for refinancing loans secured by mortgages or receivables on such loans acquired from other banks, in proportion to 80% of the mortgage lending value of particular residential properties that constitute the collateral	Article14	≤100.0%	71.4%	65.5%
Total value of acquired shares in other entities, in proportion to the Bank’s own funds	Article 15(1)(5)	≤10.0%	0.0%	0.0%
Total value of loans and advances taken out and bonds issued, in proportion to the Bank’s own funds	Article 15(2)	≤600.0%[17]	408.7%	485.2%
Total amount of loans and advances taken out and bonds issued, in proportion to the amount designated for refinancing of activities described in Article 12 of the Act, i.e. issue of loans secured and unsecured by mortgages, receivables purchased from other banks on loans granted by them and secured or unsecured by mortgages	Article 15(3)	≤100.0%	31.7%	34.2%
Total nominal value of mortgage covered bonds outstanding, in proportion to the Bank’s own funds and general risk provision	Article17	≤4000.0%	888.6%	890.1%
Total nominal value of receivables secured by mortgages and value of rights and additional funds of the Bank constituting the basis for the issue of mortgage covered bonds, in proportion to the total nominal value of outstanding mortgage covered bonds (taking into account hedging instruments)	Article 18(1)	≥110.0%	141.4%	134.7%
Total nominal value of receivables secured by mortgages constituting the basis for the issue of mortgage covered bonds, in proportion to the total nominal value of mortgage covered bonds outstanding	Article 18(1)	≥85.0%	134.4%	133.5%
Interest expense on mortgage covered bonds outstanding (cumulative from the beginning of the financial year and on any given day), in proportion to interest income on receivables secured by mortgages and rights and additional funds constituting the basis for the issue of mortgage covered bonds (cumulative from the beginning of the financial year and on any given day), taking into account hedging instruments	Article 18(2)	≤100.0%	26.7%	33.8%
Bank funds constituting the excess described in Article 18(3a) over the nominal value of interest on mortgage bonds outstanding due in the following six months	Article 18(3)(a)	≥100.0%	142.0%	149.2%
Value of receivables secured by mortgages established during the course of construction investments, in proportion to the total value of receivables secured by mortgages that constitute the basis for the issue of mortgage covered bonds	first sentence of Article 23(1)	≤10.0%	8.4%	8.5%
Value of receivables secured by mortgages established on land designated for construction in accordance with development plans, in proportion to the value of receivables secured by mortgages established during the course of construction projects that constitute the basis for the issue of mortgage covered bonds	second sentence of Article 23(1)	≤10.0%	0.0%	0.0%

PKO Bank Hipoteczny SA did not breach any of these limits during the entire period covered by this Report.

As at the end of 2020, just as at the end of 2019, the Bank obtained positive results of the liquidity tests and coverage balance tests conducted.

6. Organization and Governing Bodies of PKO Bank Hipoteczny SA

Qualified management team

Organizational structure of PKO Bank Hipoteczny SA

Powers of the governing bodies and committees of PKO Bank Hipoteczny SA

The Management Board of PKO Bank Hipoteczny SA

The Supervisory Board of PKO Bank Hipoteczny SA

Remuneration and human resources management policy

Benefits for key management personnel of PKO Bank Hipoteczny SA

6.1. Qualified management team

The Bank implements tools and procedures to guarantee that managers employed in the Bank have the highest qualifications in the Bank’s key business areas. The Bank constantly improves the qualifications of its employees, and makes efforts to ensure the stability and continuity of the management. These factors have a significant impact on the implementation of the Bank’s strategy and business objectives and, consequently, on its operations and results of operations.

6.2. Organizational structure of PKO Bank Hipoteczny SA

PKO Bank Hipoteczny SA is managed on the basis of the organizational structure presented in the chart below and within the framework of the duties of the Bank’s Governing Bodies, described in the following section of this chapter.

6.3. Powers of the governing bodies and committees of PKO Bank Hipoteczny SA

The powers of the General Shareholders’ Meeting of the Bank include in particular:

• appointing and dismissing members of the Supervisory Board and determining the principles for remunerating them and covering the costs related to the performance of a Supervisory Board member by the Bank;

• adopting resolutions on the settlement of claims for damages caused at the establishment of the Bank, or by the exercise of management or supervision;

• establishing the procedure for redemption of shares and the level of compensation for the redeemed shares and the expression of consent to the purchase of the Bank’s shares for the purpose of their redemption;

• creation and dissolution of special funds created from net profit;

• adopting resolutions on the issue of bonds convertible into shares or other instruments entitling the holder to acquire or take up shares in the Bank;

• adopting resolutions on the liquidation, disposal or lease of the enterprise of the Bank or its organized part and establishing limited property rights over them;

• assessing whether the Bank’s remuneration policy is conducive to its development and operating safety.

The powers of the Bank’s Supervisory Board include in particular:

• approving the Bank’s annual financial plan and long-term development plans (in particular the Bank’s strategy);

• approving the compliance policies of the Bank;

• approving the Bank’s management strategy, the risk management strategy, including the general level of risk at the Bank, the policy for estimating internal capital and capital management and reviewing the internal capital assessment strategies and procedures and capital management procedures;

• approving the assumptions underlying the introduction of a new product to the Bank’s offer;

• approving the audit charter, the internal audit function’s strategy, the annual and long-term internal audit plans and the principles for cooperation with the internal audit function at PKO Bank Polski SA and the statutory auditor;

• approving the remuneration policy concerning persons whose professional activities significantly affect the Bank’s risk profile;

• approving the Management Board regulations;

• approving the Regulations for Setting the Mortgage Lending Value of Property, which take effect after the approval by the PFSA;

• affirming the Code of Ethics and the Rules for the Management of Conflicts of Interest;

• approving the operating principles of internal controls, the criteria for assessing the adequacy and effectiveness of the internal control system and the principles for classifying irregularities discovered by the internal controls;

• approving the operating regulations of the compliance and internal audit functions;

• approving the framework organizational structure of the Bank, adjusted to the scale and profile of the risk taken on by the Bank;

• approving and reviewing cooperation agreements concluded with PKO Bank Polski SA;

• adopting the Supervisory Board Rules;

• appointing and dismissing individual members of the Management Board, including specifying the detailed principles and procedures of conducting qualification procedures for Management Board Members;

• representing the Bank in agreements with members of the Management Board;

• approving the policy and procedure for selecting an audit firm responsible for auditing the Bank’s financial statements and the policy for providing permitted non-audit services by the audit firm performing the audit, its related entities and members of its network;

• selecting an audit firm to conduct an audit or review of the Bank’s financial statements;

• assessing the Directors’ Report on the Bank’s activities and the financial statements for the previous financial year in terms of their consistency with the books of accounts and documents and the proposals of the Management Board concerning the distribution of profit or the off-setting of losses and presenting, to the General Shareholders’ Meeting, a written annual report on the results of these assessments;

• applying to the PFSA for consent to appoint two members of the Management Board, including the Chairman of the Management Board and the Member of the Bank’s Management Board responsible for managing risks material to the Bank’s operations, and to entrust the function of the Member of the Management Board responsible for supervising the management of risks material to the Bank’s operations to an appointed member of the Management Board;

• applying to the PFSA for consent to the appointment of a Bank cover pool monitor and deputy cover pool monitor;

• granting prior approval for the Bank to using the rights or incurring liabilities in instances indicated in the Bank’s Articles of Association, and concluding agreements that exceed the normal scope of the Bank’s operations, concluding transactions between the Bank and its shareholders or their related parties or members of the Bank’s governing bodies in instances indicated in the Bank’s Articles of Association;

• granting consent to changing the Bank’s registered office or location (address);

• assessing the functioning of the remuneration policy in the Bank and presenting a report on this area to the General Shareholders’ Meeting;

• assessing the application by the Bank of the Principles of Corporate Governance for Supervised Institutions.

In 2020, the following Supervisory Board committees operated:

Audit and Finance Committee	• monitoring and expressing periodic opinions on the adequacy and effectiveness of the internal control system, the adequacy and effectiveness of the risk management system and internal audit, the effectiveness of the Bank’s compliance risk management and the adequacy of the compliance unit, the application of the Corporate Governance Principles for Supervised Institutions, the adequacy and effectiveness of the whistleblowing policy and the ethical procedures and standards in force at the Bank; • developing the policy of selecting an audit firm, submitting to the Supervisory Board a recommendation of an audit firm to conduct an audit of the Bank’s financial statements; • monitoring the financial reporting process, including reviewing the interim and annual financial statements of the Bank and expressing an opinion on them; • monitoring financial audit proceedings and the independence of the statutory auditor and the entity authorized to audit the financial statements; • giving opinions on Management Board information relating to the operation of the internal control system, the method for ensuring independence of the internal audit unit and the compliance unit, and the funds necessary to perform tasks and improve the qualifications and skills of the units’ staff; • giving opinions on Management Board resolutions relating to the internal control system, the approval of which is the responsibility of the Supervisory Board.
Risk Committee	• giving opinions on the Bank’s overall current and future risk appetite, strategic risk directions and tasks in the context of the Bank’s strategy and the conditions resulting from the macroeconomic situation and the regulatory environment, and, in particular, on the risk management strategy developed by the Management Board and the Bank’s acceptable overall risk level; • monitoring compliance of the Bank’s policy in the area of taking on risk with the strategy and financial plan; • analysing periodic risk-related reports, including the utilization of strategic risk tolerance limits, and developing appropriate guidelines on the basis thereof, as well as reviewing periodically the implementation of the risk management strategy; • giving opinions on capital adequacy, creditworthiness evaluation principles, the risk measurement model, the impairment measurement model; • giving opinions on the principles of the information policy in the area of capital adequacy, managing capital adequacy, liquidity risk, operational and model risk and impairment measurement; • giving opinions on the draft Rules on setting the mortgage lending value of real estate.
Remuneration and Nomination Committee	• evaluating and conducting periodic reviews of nominations for key managerial positions in the Bank; • submitting proposals relating to appropriate forms of contracts with members of the Bank’s Management Board to the Supervisory Board; • preparing opinions on the Code of Ethics and the Principles for Management of Conflicts of Interest; • preparing opinions on requests concerning the consent for a member of the Management Board to engage in competitive activities or to participate in a competing company as a shareholder of a civil law company, a sole proprietorship or as a member of a governing body of a commercial company, or to participate in another competing legal person as a member of a governing body; • evaluating and performing periodic reviews, subject to the approval of the Supervisory Board, of the general principles of the policy for remunerating individuals whose actions have a material impact on the Bank’s risk profile; • evaluating and monitoring the variable remuneration components of individuals whose activities have a significant impact on the Bank’s risk profile, second-level risk management, the compliance unit manager and the internal audit unit manager; • reviewing detailed rules and procedures for recruiting members of the Bank’s Management Board and assessing the suitability of members of the Bank’s Management Board; • preparing and carrying out, with potential support from external independent entities, the programme for raising the qualifications of members of the Supervisory Board.
Commercial Committee	• reviewing cooperation agreements concluded between PKO Bank Polski SA and the Bank; • providing opinions and approving product regulations, including the criteria for qualifying products for the Bank; • providing opinions on introducing new products to the Bank’s offer and the directions of change in the Bank’s product offer; • monitoring and supervising the outsourcing of internal processes.

The competencies of the Bank’s Management Board include, in particular:

• defining PKO Bank Hipoteczny SA’s strategy, taking into account the operational risk and the strategy for managing the Bank;

• determining the risk management strategy, including the determination of the Bank’s general risk level;

• setting the annual financial plan, including the conditions for its execution;

• adopting the Organizational Regulations of the Bank and the rules for segregation of duties;

• establishing and closing down standing Committees of the Bank and defining their powers;

• adopting the Management Board Rules;

• adopting the Regulations for setting the mortgage lending value of real estate;

• adopting the regulations for the use of special funds created from net profit;

• determining the operating principles of the internal control system, the criteria for determining the adequacy and effectiveness of the system and the principles for classifying irregularities discovered by the internal control system;

• establishing, restructuring and closing down branches and other organizational units of the Bank in Poland and abroad;

• approving the operating regulations of the internal audit unit and the compliance unit;

• approving the policy for estimating internal capital and equity management;

• taking decisions on issues of mortgage covered bonds.

The Bank’s Management Board established the following standing committees:

The Asset and Liability Committee	• supporting the management functions for liquidity, interest rate, business risks – including macroeconomic, currency, capital risk – including leverage risk – and the related risk of models and their measurement; • 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, risk model validation results, stress testing assumptions and launching capital and liquidity emergency measures; • issuing recommendations to 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.
The Credit Committee	• 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, impairment losses on assets, acquisition of loan portfolios and the property market; • making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, the results of the validation of the risk models, the methodologies and models of calculation of impairment losses on credit assets, cut-offs used in the assessment of credit risk, loan receivables purchased by the Bank and individual loan transactions; • issuing recommendations to 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.
The Data Quality Committee	• determining the strategic directions of operations in the area of managing the quality of data and data architecture in 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 Head Office organizational units; • making decisions on the development directions of DMS, evaluating operating effectiveness, prioritizing DMS tasks and departures from data quality criteria and rules and data quality solution standards.
The Strategy and Business Initiatives Committee	• supporting the operational, reputation and compliance risk management functions as well as the risk of the models measuring such risks; • examining materials on the risks mentioned above, directions of the Bank’s development, the Bank’s strategy and IT strategy, initiatives related to the implementation of the Bank’s strategy and IT strategy together with the operational risk analysis, product offer, product profitability, lending process; • making decisions concerning the Bank’s operations, particularly regarding the management of these risks and the models of their measurement, as well as the risk measures and limits; • issuing recommendations to 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.
Green Covered Bonds Committee	• supervising the issue of Green Covered Bonds, including determining the directions of change with respect to the Green Bonds and assessing and selecting assets qualifying for funding with the Green Covered Bonds; • making decisions relating to the Bank’s operation among other things, in the scope of assessing and selecting qualified loans according to the methodology adopted by the Bank and adopting the rules for issuing the Green Covered Bonds by the Bank pursuant to appropriate guidelines; • issuing recommendations to 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.

6.4. The Management Board of PKO Bank Hipoteczny SA

In the period from 1 January to 31 December 2020, the composition of the Management Board of PKO Bank Hipoteczny SA was as follows:

	Position	Position holding period
Paulina Strugała	President of the Management Board	16.04.2018 – until now
Agnieszka Krawczyk	Vice-President of the Management Board	01.01.2018 – 30.09.2020
Piotr Kochanek	Vice-President of the Management Board	01.01.2019 – until now
Daniel Goska	Vice-President of the Management Board	01.10.2020 – until now

On 18 March 2020 the General Shareholders’ Meeting granted a vote of approval to the President of the Management Board, Ms Paulina Strugała, the Vice President of the Management Board, Ms Agnieszka Krawczyk, and the Vice President of the Management Board Mr Piotr Kochanek.

Due to the resignation of Ms Agnieszka Krawczyk as Vice-President of the 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 Management Board as of 1 October 2020.

The Bank’s Supervisory Board has established the following internal division of key competences within the Bank’s Management Board:

Paulina Strugała	President of the Management Board responsible for supervising compliance and reputation risk, the internal audit function, human resources management, communication and legal services
Other functions performed:	Chairperson of the Strategy and Business Initiatives Committee Chairperson of the Asset and Liability Committee
Daniel Goska	Vice President of the Management Board responsible for supervising the development, creation and functioning of the product offer for individuals and business entities, as well as for coordinating activities in respect of sales of mortgage products in all distribution channels, supervising the acquisition of loan receivables, creating principles for and supervising the process of handling the loans granted and acquired, operation and effectiveness of IT resources, creating the principles for outsourcing and exercising the outsourcing process, as well as supervising financial planning and financial control issues, accounting and financial reporting, issuing securities and obtaining the respective funds
Other functions performed:	Chairperson of the Green Covered Bonds Committee Deputy Chairperson of the Strategy and Business Initiatives Committee Member of the Credit Committee Member of the Asset and Liability Committee
Piotr Kochanek	Vice President of the Management Board responsible for supervising the management of all risks relating to the Bank’s operations except compliance risk and reputation risk, supervising restructuring and debt collection, supervising the lending decisions in respect of the credit risk and supervising the verification and assessment of real estate constituting collateral for loans granted or acquired
Other functions performed:	Chairperson of the Credit Committee Chairperson of the Data Quality Committee Deputy Chairperson of the Asset and Liability Committee Deputy Chairperson of the Green Mortgage Bonds Committee Member of the Strategy and Business Initiatives Committee

Other management functions of the Management Board members

	Position	Position holding period
Paulina Strugała	Member of the Supervisory Board of PKO BP Finat Sp. o.o.	Throughout the reporting period
Agnieszka Krawczyk	Director of the Mortgage Banking Products Department at PKO Bank Polski SA, on a part-time (0.2 FTE) basis	01.01.2020–30.09.2020
Piotr Kochanek	During the reporting period Piotr Kochanek did not hold any other positions as a member of the Management Board or the Supervisory Board, or directorial positions	Throughout the reporting period
Daniel Goska	During the reporting period Daniel Goska did not hold any other positions as a member of the Management Board or the Supervisory Board, or directorial positions	Throughout the reporting period

Recruitment policy concerning the selection of Management Board members and evaluation of Management Board members

The process of selecting and evaluating candidates as members of the Management Board in PKO Bank Hipoteczny SA is carried out by the Remuneration and Nominations Committee of the Bank’s Supervisory Board. The Committee takes into consideration the guidelines of the European Banking Authority dated 21 March 2018 regarding evaluating the qualifications of members of a management body and persons performing key functions (the EBA guidelines) and the Regulation of the Minister of Development and Finance of 10 March 2017 on information and documents concerning the founders and the management board of the bank to be submitted to the PFSA. During the candidate selection process, the Committee takes into account PKO Bank Hipoteczny SA’s profile, scope and scale of operations. During the evaluation of a candidate, the Committee also verifies whether the candidate’s experience and knowledge will strengthen the abilities of other members of the Bank’s Management Board, and complement them, so as to ensure the coverage of all areas managed in the Bank. The examination of this criterion has as its purpose ensuring variety in the selection of members of the managing body, its purposes, tasks and scope of operation.

Before their appointment, all members of the Management Board of PKO Bank Hipoteczny SA were subjected to an evaluation of their suitability, in accordance with the EBA guidelines.

Members of the Management Board are subject to continuous evaluation by the Supervisory Board’s Remuneration and Nomination Committee, beginning from the moment of recruitment and continuing through their entire term of office. In addition, in accordance with Article 395 § 2(3) of the Commercial Companies Code, each year the Ordinary General Shareholders’ Meeting grants each individual member of the Management Board a vote of approval. The granting of this vote of approval constitutes an evaluation of the Management Board members, which is independent of the approval of the Bank’s Directors’ Report by the General Shareholders’ Meeting.

The process described above for appointments to perform functions on the Management Board and the positive evaluation of members of the Bank’s Management Board constitutes confirmation of their proper performance of their duties, based on adequate knowledge, abilities and experience, in accordance with the requirements of Article 22aa of the Banking Law.

6.5. The Supervisory Board of PKO Bank Hipoteczny SA

In 2020, the composition of the Supervisory Board of PKO Bank Hipoteczny SA was as follows:

	Function on the Supervisory Board	Appointment date	Date of dismissal / resignation	qualifications in finance	Independent member [18]	Audit and Finance Committee	Risk Committee	Remuneration and Nomination Committee	Commercial Committee
Jakub Papierski	Chairperson	06.10.2014		√				Ch	Ch
Justyna Borkiewicz	Board Member	28.10.2016		√			M
Piotr Kwiecień	Board Member	18.10.2017		√	√	Ch			M
Paweł Metrycki	Deputy Chairperson	07.10.2019		√		D	Ch		M
Ilona Wołyniec	Board Member	30.03.2019		√			D	D	D
Lucyna Kopińska	Board Member	01.09.2019		√					M
Jadwiga Lesisz	Board Member	01.09.2019		√	√	M
Dariusz Odzioba	Board Member	01.09.2019		√

Ch – Chairperson of the Committee; D – Deputy Chairperson of the Committee; M – Member of the Committee

The composition of the Committees is presented as at 31 December 2020.

Pursuant to Article 395 § 2 (3) of the Commercial Companies Code each year the Ordinary General Shareholders’ Meeting grants a vote of approval to each individual member of the Supervisory Board. Granting this vote of approval constitutes an evaluation of the Supervisory Board members, independent of the approval of the Supervisory Board’s report on the Bank’s operations by the General Shareholders’ Meeting. On 18 March 2020, by resolution of the ordinary General Shareholders’ Meeting, all members of the Bank’s Supervisory Board received a vote of approval for the period ended 31 December 2019.

This constitutes a confirmation that members of the Supervisory Board duly performed their duties, based on adequate knowledge, abilities and experience, in accordance with the requirements of Article 22aa of the Banking Law.

Information on the Audit and Finance Committee

In 2020, the composition of the Audit and Finance Committee of PKO Bank Hipoteczny SA was as follows:

	Information on the Audit and Finance Committee	Appointment date	Dismissal / resignation date	Independent member [19]	accounting and/or auditing knowledge and skills	mortgage banking knowledge and skills
Piotr Kwiecień	Chairperson of the Committee	07.10.2019		√
Paweł Metrycki	Deputy Chairperson of the Committee	07.10.2019			√	√
Jadwiga Lesisz	Member of the Committee	07.10.2019		√

The Audit and Finance Committee met seven times in 2020.

6.6. Remuneration and human resources management policy

Employment

As at 31 December 2020, 53 people were employed in PKO Bank Hipoteczny SA. This means a decrease of 27 employees compared with the end of 2019.

Remuneration policy

The Remuneration Policy of PKO Bank Hipoteczny SA, approved by the Supervisory Board, comprises the key internal remuneration regulations. It determines:

• the role of the Bank’s particular structures and authorities in the implementation and application of the Policy and identification of the Material Risk Taker (MRT) positions;

• functioning of the fixed and variable remuneration of the members of the Bank’s Management Board, Material Risk Takers (MRT) and employees other than the members of the Bank’s Management Board and MRT;

• non-remuneration benefits available to the employees.

In addition, the Remuneration Policy of PKO Bank Hipoteczny SA, introduced by Order of the President of the Management Board, functions within the Bank. In accordance with the Order, Bank employees are entitled to the following remuneration components:

• basic salary;

• bonuses and awards for special achievements in professional work;

• additional remuneration for working overtime and at night.

Basic salaries and additional benefits granted to employees are determined on the basis of an analysis of market remuneration in the banking sector. The remuneration policy of PKO Bank Hipoteczny SA is consistent with the principles of appropriate and effective risk management.

There is no employee share programme in place at the Bank.

Basic salaries

The Bank assigns basic salaries in accordance with an internal system of salary levels. The levels are assigned based on an independent and objective scoring method. The positions are evaluated on an ongoing basis, in particular in the case of significant organizational changes at the Bank. The Bank engages specialist external entities to verify the adequacy of basic salaries by performing regular benchmark tests.

Variable remuneration

The Bank regulates the process of granting variable remuneration in the Bank Hipoteczny SA Remuneration Policy, the Principles for employing and remunerating members of the Bank’s Management Board and the Principles for granting bonuses to Bank employees whose actions have a material impact on Bank Hipoteczny SA’s risk profile – Material Risk Takers - and the Principles of granting bonuses to the Bank’s employees.

The targets assigned are aimed at ensuring that the risk associated with the Bank’s operations is taken into account. All targets result from target grids approved by the Bank’s Management Board, which are cascaded to the employees of the individual structures. MRT (Material Risk Takers) are additionally responsible for special projects aimed at executing the Bank’s strategy.

MRTs, who have significant influence on the safety level and stable development of the Bank, are subject to additional remuneration restrictions. Variable remuneration components are granted to MRTs, including the Management Board members, for a particular appraisal year (calendar year) following the settlement of bonus targets in non-deferred and deferred form. In order to ensure that the results are sustainable, deferred variable remuneration components can be reduced if the Bank’s financial results have deteriorated, the Bank incurred a loss or other variables deteriorated.

Moreover, half of the value of each component is payable in the form of a financial instrument linked to the carrying amount of the Bank’s net assets. Bonus parametrization takes into account the Bank’s situation and the market benchmarks of the financial sector. The Supervisory Board had rights to set bonus parameters for the Management Board (bonus indices, bonus adjustment indices, targets whose execution is rewarded with a bonus). The President of the Bank’s Management Board had the same rights with respect to the MRTs and other employees.

In addition to the bonus system, an employee awards system functions in the Bank, as part of which an award fund is created, designated for individual discretionary awards for employees who achieve distinctive results in their professional work or for achievements as a result of which important outcomes are achieved for the Bank.

Employee benefits

Extra medical care	The Bank provides its employees with extra medical care (in addition to occupational medical care provided in accordance with the Labour Code). Different medical packages are assigned to specific job categories.
group insurance	The possibility of joining group insurance, which is paid for by the employees through the Bank.
MyBenefit cafeteria system	Under this system, every employee of the Bank can manage the funds assigned to him/her from the Company Social Fund as he/she chooses.
Employee Pension Scheme (PPE)	Possibility of joining the Employee pension scheme where the base premium is fully funded by the employer.

The principles for remunerating the Management Board members

On 29 June 2020 and on 18 December 2020 the Policy for employing and remunerating members of the Management Board of the Bank was adopted by Resolution of the Supervisory Board No. 37/2020 and 58/2020 respectively. Based thereon, members of the Bank’s Management Board are entitled to:

• fixed remuneration, whose level is set by the Bank’s Supervisory Board in a resolution, separately for each of the members of the Management Board;

• variable remuneration – additional remuneration granted and payable after the appraisal period, in particular in the form of bonuses, rewards for special achievements at work, severance pay (other than fixed remuneration and benefits granted based on the applicable laws).

The information on remuneration components and other benefits payable to Management Board members in the reporting period is presented in the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020 (Note 35.4).

Variable remuneration components for members of the Management Board and Material Risk Takers (MRT).

In accordance with the requirements of CRD IV, i.e. Commission Delegated Regulation (EU) 604/2014 (as amended) supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile, as well as in connection with the Regulation of the Minister of Development and Finance of 6 March 2017 on the risk management system, the internal control system, the remuneration policy and detailed method of estimating internal capital in banks, the following policies and procedures laying down the principles of determining variable remuneration components are in force in the Bank:

• The Policy for employing and remunerating members of the Management Board of the Bank, adopted by Resolution of the Supervisory Board;

• Principles of the remuneration policy concerning persons whose professional activities significantly affect the Bank’s risk profile (MRT);

• The list of positions where professional activities have a significant impact on the institution’s risk profile and identification of key functions in the Bank (the list of MRTs).

The policy on variable remuneration components for Management Board members and MRTs as at 31 December 2020 was applicable to 43 Management Board members, 4 former Management Board members and 14 MRT positions.

Variable remuneration components are awarded for the purpose of the achievement of objectives assigned as part of the Management by Objectives (MbO) system. The variable salary components for a given appraisal period (calendar year) are granted after the bonus targets are accounted for. The maximum amount of variable remuneration cannot exceed 50% of the fixed remuneration for a given assessment period.

Variable salary components are awarded and paid in the following forms:

• non-deferred;

• deferred.

In connection with the circumstances related to the announcement of the state of COVID–19 epidemic, in particular the extraordinary administrative restrictions relating to business operations and the potential economic consequences of this state and their expected impact on the banking sector, taking into consideration the statement of the European Banking Authority dated 31 March 2020 and of the PFSA dated 17 April 2020 on the expectations with respect to banks’ actions in response to the outbreak of the pandemic, including those relating to paying out variable remuneration components, the decision was taken to temporarily change:

• the proportion of deferred and non-deferred variable remuneration to variable remuneration for 2019 increasing the deferred portion and at the same time decreasing the non-deferred portion of the variable remuneration;

• the proportion between the cash component and the financial instrument component of the variable remuneration with respect to variable remuneration for 2019 increasing the financial instrument portion with the simultaneous decreasing of the cash portion of the remuneration.

Both non-deferred and deferred remuneration is granted in cash and in the form of financial instruments (i.e. phantom shares) converted into cash after the retention period, and in the case of deferred remuneration – after the period of deferral).

Each of the accrued components of variable remuneration may be reduced as a consequence of:

• material violations of duties following from the assigned tasks;

• inadequate performance of the assigned professional duties;

• material non-compliance with the legal regulations or customer service standards;

• material violation of the principles of community life in relation to other employees and co-workers.

For members of the Management Board, variable remuneration may only be assigned and paid provided that the Directors’ Report and the financial statements for the previous financial year have been approved and the Management Board member has been granted a discharge in respect of his/her duties. Variable remuneration may be reduced by the Supervisory Board up to total deprivation of the right to such remuneration in the event that up to the date of payment (in particular within the last three years) a member of the Management Board was responsible for:

• material violation of duties following from the assigned tasks;

• inadequate performance of the assigned professional duties;

• material non-compliance with the legal regulations or customer service standards;

• material violation of the principles of community life in relation to other employees and co-workers.

A member of the Management Board is entitled to severance pay as a result of the termination of his/her contract for services if he/she ceases to perform the functions of a Management Board member, in an amount equal to three times the permanent portion of remuneration on condition that the function of Management Board member was performed for at least twelve months before the termination of the contract; the period of performing a function on the Management Board includes a period of constant performance of the function directly before the date of concluding the management contract. A member of the Management Board is entitled to compensation in respect of the ban to engage in competitive activities over a period of six months after termination of the management contract, in the amount of 100% of the fixed portion of remuneration for providing managerial services, following from the contract for services, as at the date of its termination. A member of the Management Board is entitled to contributions to the Employee Pension Fund over a period of performing the duties of member of the Management Board, which are included in the fixed and variable components of remuneration and which are not included in the fixed and variable remuneration; the amount of the contributions is the same as for the Bank’s employees.

In 2020, none of the employees at PKO Bank Hipoteczny SA received total remuneration of at least EUR 1 million.

The policy on variable remuneration components for members of the Management Board and material risk takers is reviewed annually by the Internal Audit Office, the Remuneration and Nomination Committee of the Bank’s Supervisory Board and by the Supervisory Board of PKO Bank Hipoteczny SA.

In the reporting period, five meetings of the Remuneration and Nomination Committee of the Supervisory Board of PKO Bank Hipoteczny SA were held.

Contracts concluded by and between the Bank and management members

Within the meaning of the provisions of § 2 (1) (30)(a) of the Regulation of the Minister of Finance of 29 March 2018 on current and periodical information to be reported by issuers of securities and the conditions for treating information required by the laws of a state other than a member state as equivalent, the persons managing the Bank are the Management Board members.

In 2020 each of the members of the Bank’s Management Board performed their functions based on the contracts for providing management services concluded with the Bank, which determined – among other things – the terms and conditions relating to remuneration and the ban on performing competitive activities.

6.7. Benefits for key management personnel of PKO Bank Hipoteczny SA

Benefits for members of the Supervisory Board

In accordance with the Principles of remuneration for the Bank’s Supervisory Board adopted by the General Shareholders’ Meeting on 18 October 2017, updated on 5 July 2018, the members of the Supervisory Board of PKO Bank Hipoteczny SA do not receive remuneration for the functions performed. Independent members of the Supervisory Board are an exception; they receive monthly remuneration equal to the average monthly remuneration in the enterprise sector, without payments out of profit in the fourth quarter of 2016, announced by the President of Polish Statistics. The remuneration is increased by 10% when an independent member of the Supervisory Board participates in at least one standing committee of the Supervisory Board.

Benefits for members of the Supervisory Board (PLN ‘000)	01.01.2020 – 31.12.2020	01.01.2019– 31.12.2019
Artur Kluczny	0	44
Piotr Kwiecień	58	49
Jadwiga Lesisz	58	15
Total	116	118

Benefits for members of the Management Board received, receivable and potentially receivable

BENEFITS FOR MEMBERS OF THE MANAGEMENT BOARD (PLN ‘000)	01.01.2020 – 31.12.2020
	Short-term employee benefit			Other long-term benefits - variable cash remuneration [20]			Share-based payments settled in cash
	Remuneration 01.01.2020-31.12.2020 [21]	Other received 01.01.2020-31.12.2020	Received 01.01.2020-31.12.2020		Potentially receivable as at 31.12.2020	Received 01.01.2020-31.12.2020		Potentially receivable as at 31.12.2020
Paulina Strugała	612.0		57.4		93.2	83.4		227.8
Piotr Kochanek	480.0		32.9		49.4	-		152.9
Agnieszka Krawczyk	359.0		49.5		81.9	91.3		306.7
Daniel Goska [22]	105.0				-			-

Members of the Management Board who have not performed their functions in 2020	-		236.3		152.4	465.6		171.4

Total benefits for members of the Management Board	1,556.0		376.1		376.9	640.3		858.8

BENEFITS FOR MEMBERS OF THE MANAGEMENT BOARD (PLN ‘000)	01.01.2019 - 31.12.2019
	Short-term employee benefit			Other long-term benefits - variable cash remuneration [23]			Share-based payments settled in cash
	Remuneration 01.01.2019-31.12.2019 [24]	Other received 01.01.2019-31.12.2019	Received 01.01.2019-31.12.2019		Potentially receivable as at 31.12.2019	Received 01.01.2019-31.12.2019		Potentially receivable as at 31.12.2019
Paulina Strugała	613.0	65.0	-		43.0	-		108.0
Piotr Kochanek [25]	472.0	-	-		-	-		-
Agnieszka Krawczyk	478.0	71.0	-		47.0	-		119.0
Jakub Niesłuchowski	86.0	75.0	73.0		137.0	228.0		207.0

Members of the Management Board who have not performed their functions in 2019	-	70.0	161.0		246.0	507.0		306.0

Total benefits for members of the Management Board	1,649.0	281.0	234.0		473.0	735.0		740.0

Benefits after the term of the contract for services

In the period from 1 January to 31 December 2019, no post-employment benefits were paid to the Bank’s Management Board.

In the period from 1 January to 31 December 2020 a post-employment benefit was paid to Ms Agnieszka Krawczyk of PLN 80 thousand.

Benefits in respect of the termination of the contract for services

In the period from 1 January to 31 December 2020 a benefit of PLN 58 thousand was paid out in respect of the termination of the contract for services granted to Mr Marek Szcześniak in 2018.

7. Corporate governance and information for investors

Representation on compliance with the rules for corporate governance

Audit firm

Other information

7.1. Representation on compliance with the rules for corporate governance

The Bank has adopted the Principles of Corporate Governance for Supervised Institutions, as issued by the Polish Financial Supervision Authority, on the basis of the following decisions by the Bank’s bodies:

• the Resolution of the Bank’s Management Board of 15 December 2014 – in relation to the powers and duties of the Management Board, i.e. conducting the Bank’s affairs and its representation, in accordance with the generally applicable laws and the Bank’s Articles of Association;

• the Resolution of the Supervisory Board of 18 December 2014 – in relation to the powers and duties of the Supervisory Board, i.e. supervising the conduct of the Bank’s affairs, in accordance with the generally applicable laws and the Bank’s Articles of Association;

• the Resolution of the General Shareholders’ Meeting of 22 December 2015 – in relation to the powers reserved for the General Meeting.

Pursuant to and to the extent arising from, the aforementioned decisions, the Bank opted out of the following provisions of the Principles of Corporate Governance for Supervised Institutions:

• the provisions referring to the principles of cooperation and rights of multiple shareholders (§ 8(4), § 9(1) and (6), § 10(3), § 11(3) and § 31(3)), which are not applied because the Bank only has a single shareholder;

• chapter 9, concerning the management of assets at the customer’s risk, because the Bank does not conduct operations in this area;

• the principle described in § 22(1), concerning the independence of Supervisory Board members, manifesting itself primarily in the lack of direct and indirect ties to the supervised institution, members of the management and supervisory bodies, significant shareholders and related parties; in addition, two members meeting the independence requirements set out in the Act of 11 May 2017 on statutory auditors, audit firms and public supervision were appointed as members of the Bank’s Supervisory Board. (Journal of Laws, item 1089 as amended).

In accordance with the requirement arising from § 27 of the Principles of Corporate Governance for Supervised Institutions, on 22 May 2020, the Supervisory Board evaluated the application of the said Principles in the Bank in 2019. The Supervisory Board positively evaluated the application of the Principles in the Bank confirming that the Principles adopted by the Bank and its authorities were applied adequately to the scale, nature of operations and the specific character of the Bank.

The text of the Principles is available on the website of the Polish Financial Supervision Authority:

https://www.knf.gov.pl/knf/pl/komponenty/img/knf_140904_Zasady_ladu_korporacyjnego_22072014_38575.pdf

Diversity policy

Diversity management at the Bank concerns all employees, the Bank’s authorities and key managers. Diversity activities affect many aspects of the Bank’s operations and are aimed at respecting other persons, equal treatment of the employees and making use of their potential. Diversity means that people are important regardless of their gender, age, health, sexual orientation, religion, marital status or country of origin. Therefore, the following solutions were implemented in the form of regulations, processes and HR policies:

• The Code of Ethics and the Rules and regulations of the Bank’s operations concerning, among other things, preventing discrimination due to gender, age, disability, race, religion, nationality, political views, trade union membership, ethnicity, religion or sexual orientation, as well as due to employment for a specified or unspecified period or full- or part-time.

• When conducting recruitment projects, the Bank observes the principles of equal treatment during the hiring process and at work. The processes of selecting candidates are based on the principles of objectivity, and their individual stages follow the established patterns and principles.

• Employee appraisal is performed every year based on a competence model, which covers general, leadership and job-specific competencies. As part of the periodic performance appraisal system, every employee determines his or her individual development plan during the interview with his/her superior.

• The Code of Ethics specifies the values, principles, standards of proceeding and ethical conduct in relationships with Customers and in the Bank’s business operations, and in the Bank’s relations with the environment.

• When performing work we prevent mobbing, harassment and discrimination, and other forms of unequal and inappropriate treatment.

Diversity policy concerning the management and supervisory staff as at 31 December 2020

Diversity management also concerns the PKO Bank Hipoteczny SA Supervisory Board and Management Board members and the key managers. The management and supervisory staff includes persons of different gender, age and experience.

Gender	Women	Men
Supervisory Board	4	4
Management Board	1	2
Key managers	7	5

Age	30 - 40 years	41 – 50 years	51 – 60 years	over 60 years
Supervisory Board	-	5	3	-
Management Board	2	1	-	-
Key managers	4	8	-	-

Period of employment with PKO Bank Hipoteczny SA	Up to 1 year	1 – 5 years	over 5 years
Supervisory Board	0	7	1
Management Board	0	2	1
Key managers	1	3	7 [26]

Main characteristics of the internal control system in relation to the process of preparing the financial statements

To ensure the reliability and accuracy of the financial reporting process, the Bank introduced a number of control mechanisms to the reporting system and the internal regulation of this process. Such mechanisms involve, among other things, continued verification and reconciliation of reporting data with the books of account, subsidiary ledgers and other documents which provide the basis for the preparation of the financial statements.

The process of preparing the financial statements is verified regularly, in particular with regard to arithmetical correctness, technical analysis and reliability of information. In accordance with the internal regulations, the financial statements are approved by the Management Board of PKO Bank Hipoteczny SA and an opinion on them is issued by the Audit and Finance Committee of the Supervisory Board of PKO Bank Hipoteczny SA. The annual and interim financial statements for the first half of the year are additionally assessed by the Supervisory Board of PKO Bank Hipoteczny SA.

The Director of the Finance and Accounting Office is responsible for ensuring compliance with controls in the area of financial reporting, while the internal audit function reviews and independently evaluates the adequacy and effectiveness of controls over the financial reporting processes and evaluates risk management in these processes, in accordance with the approved internal audit plans. No issues which would cast doubt on the reliability of the financial reporting have been observed so far as part of the internal audit operations.

List of direct or indirect holders of significant blocks of shares with an indication of the number of shares held and the number of votes attached to these shares

As at 31 December 2020 the share capital of PKO Bank Hipoteczny SA amounted to PLN 1,611.3 million and comprised 1,611,300,000 shares with PLN 1 nominal value. The shares are paid up in full. The amount of share capital did not change compared to the end of 2019. The PKO Bank Hipoteczny SA shares are non-preference shares. The holders of PKO Bank Hipoteczny SA shares do not have any control rights due to holding such shares. 100% of the shares of PKO Bank Hipoteczny SA are held by Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna.

Structure of the share capital of PKO Bank Hipoteczny SA:

Series	Type of shares	Number of shares	Nominal value per share	Number of votes at GSM	Amount paid in for the shares
A	Ordinary registered shares	300,000,000	PLN 1	300,000,000	PLN 300,000,000.00
B	Ordinary registered shares	200,000,000	PLN 1	200,000,000	PLN 200,000,000.00
C	Ordinary registered shares	200,000,000	PLN 1	200,000,000	PLN 200,000,000.00
D	Ordinary registered shares	100,000,000	PLN 1	100,000,000	PLN 100,000,000.00
E	Ordinary registered shares	150,000,000	PLN 1	150,000,000	PLN 150,000,000.00
F	Ordinary registered shares	150,000,000	PLN 1	150,000,000	PLN 150,000,000.00
G	Ordinary registered shares	100,000,000	PLN 1	100,000,000	PLN 100,000,000.00
H	Ordinary registered shares	95,000,000	PLN 1	95,000,000	PLN 95,000,000.00
I	Ordinary registered shares	100,000,000	PLN 1	100,000,000	PLN 100,000,000.00
J	Ordinary registered shares	131,500,000	PLN 1	131,500,000	PLN 131,500,000.00
K	Ordinary registered shares	84,800,000	PLN 1	84,800,000	PLN 84,800,000.00
	TOTAL	1,611,300,000		1,611,300,000	PLN 1,611,300,000.00

Shareholder	31.12.2020		31.12.2019
Shareholder	Number of shares	Share in number of votes at GSM	Number of shares	Share in number of votes at GSM
Powszechna Kasa Oszczędności Bank Polski SA	1,611,300,000	100%	1,611,300,000	100%

Description of the rules for appointing and dismissing managers

Members of the Management Board are appointed and dismissed by resolution of the Supervisory Board. When appointing Management Board members, the Supervisory Board determines their number. The appointment of two members of the Management Board, including the President and the member responsible for risk, requires the consent of the Polish Financial Supervision Authority. The terms of office of members of the Management Board expire on the date on which the General Shareholders’ Meeting approves the financial statements for the last full financial year during which a member served, at the latest. Additionally, the term of office of a Management Board member also expires as a result of his/her death, resignation or dismissal from the Management Board, as of the date of the event causing the expiration, unless the resolution on dismissal provides a different date of expiration. Management Board members may be dismissed before the end of their term of office at any time.

The Supervisory Board notifies the Polish Financial Supervision Authority of the composition of the Management Board and of any changes in the composition thereof immediately after its appointment or after any changes in the composition thereof. The Supervisory Board also notifies the Polish Financial Supervision Authority of the members of the Management Board who, as a result of the segregation of duties, is in charge of the risk management and the internal audit unit. The Supervisory Board notifies the Polish Financial Supervision Authority of its intention to dismiss, and the reasons for dismissal of, a member of the Management Board who, as a result of the segregation of duties, is in charge of risk management and the internal audit unit, immediately after the relevant item has been placed on the agenda of the Supervisory Board meeting.

Additional information on the powers of management are provided in chapter 6. Organization and Governing Bodies of PKO Bank Hipoteczny SA.

Description of authorizations to decide on share issues or redemptions

The powers of the General Shareholders’ Meeting include adopting resolutions on establishing the share redemption procedures and the level of compensation for redeemed shares, approving the acquisition of the Bank’s treasury shares for redemption, and approving the issue of bonds convertible into shares or other instruments giving the right to purchase or take up shares in the Bank.

Indication of any limitations on the transfer of ownership rights to the issuer’s securities

There are no limitations on the transfer of ownership rights to the issuer’s securities.

Principles for amending the Bank’s Articles of Association

Amendments to the Bank’s Articles of Association require a resolution of the General Shareholders’ Meeting and must be entered in the Register of Businesses of the National Court Register. To the extent defined by Article 34(2) of the Banking Law, an amendment to the Articles of Association requires the consent of the Polish Financial Supervision Authority.

Composition and changes during the last financial year, and a description of the operations of the management, supervisory and administrative bodies of the issuer, and of their committees

Information concerning the description of the management, supervisory and administrative bodies of the issuer, their committees and their composition and changes during the last financial year is presented in Section 6. Organization and Governing Bodies of PKO Bank Hipoteczny SA.

The General Shareholders’ Meeting and relations with shareholders

The method of operation of the General Shareholders’ Meeting and its key powers as well as a description of the shareholder rights and the method of their execution follow directly from the applicable laws and the Bank’s Articles of Association. In consideration of the fact that all shares in the Bank’s share capital are held by a single shareholder, i.e. PKO Bank Polski SA, the resolutions of the General Shareholders’ Meeting are adopted without formally convening a General Shareholders’ Meeting, in accordance with the principles arising from Article 405 of the Polish Commercial Companies Code.

7.2. Audit firm

In accordance with the policy for selecting an audit firm to perform an audit of the Bank’s financial statements, the Supervisory Board conducts an open tender procedure to commission an audit of the financial statements. The Audit and Finance Committee of the Bank’s Supervisory Board makes a recommendation concerning the audit firm selection to the Supervisory Board. Unless it concerns renewing an existing audit contract, the recommendation contains at least two suggestions with justifications and indicates the preferred firm. The Bank’s Supervisory Board selects an audit firm based on the recommendation of the Audit and Finance Committee of the Bank’s Supervisory Board. The offers made by audit firms are assessed based on transparent and non-discriminatory selection criteria.

In accordance with the policy for providing permitted non-audit services to the Bank by the audit firm conducting the audit, its related entities and members of its network, the provision of non-audit services by the audit firm conducting the audit, its related entities and members of its network to the Bank requires the consent of the Audit and Finance Committee of the Bank’s Supervisory Board and of the Audit Committee of the Supervisory Board of PKO Bank Polski SA.

In accordance with the provisions of the Policy and Procedures for selecting an audit firm to conduct an audit of the Bank’s financial statements, on 27 February 2019 the Supervisory Board of PKO Bank Hipoteczny SA, based on § 18 (1)(4) of the Bank’s Articles of Association and the recommendation of the Audit and Finance Committee of the Bank’s Supervisory Board, appointed PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. as the audit firm to conduct the audit and review of the Bank’s financial statements for the years 2020–2021.

PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. with its registered office in Warsaw, ul. Polna 11, is entered on the list of audit firms maintained by the Polish Agency for Audit Oversight with the number 144.

On 26 April 2019 a contract for conducting an audit and review of the Bank’s financial statements for the years 2020 – 2021 was concluded by and between PKO Bank Hipoteczny SA and PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k.

In 2019, the audit firm KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp. k. with its registered office in Warsaw, ul. Inflancka 4A (“KPMG”), entered on the list of entities authorized to audit financial statements maintained by the Polish Chamber of Statutory Auditors, with the number 3546, conducted the audit and review of the Bank’s financial statements based on an audit contract concluded on 19 June 2017. Moreover, in 2019 KPMG provided the Bank with permitted services other than audit, which related to the issue of attestation letters for which the Bank obtained the prior consent of the Audit and Finance Committee of the Bank’s Supervisory Board.

The following table presents the services provided by audit firms and the fees for such services:

Net fee of the audit firm (in PLN ‘000)	2020 (PwC)	2019 (KPMG)
Audit of the financial statements	140.4	132.5
Review of the financial statements, audit and review of group packages	87.4	105.3
Other assurance services – attestation letters	-	250.0

7.3. Other information

Changes in the holding of shares and rights to shares in PKO Bank Hipoteczny SA by individuals in management and supervisory roles

In 2020 there were no changes in the holdings of shares and rights to shares of PKO Bank Hipoteczny SA by individuals in management and supervisory roles. 100% of the shares are held by PKO Bank Polski S.A.

Evaluation of PKO Bank Hipoteczny SA’s financial credibility

On 27 March 2015, the Bank requested the rating agency Moody’s Investors Service (“Moody’s”) to assign ratings to the Bank and to the mortgage covered bonds issued by PKO Bank Hipoteczny SA.

On 7 September 2015, Moody’s assigned Baa1/P-2 long- and short-term issuer ratings to PKO Bank Hipoteczny SA, with a stable outlook. On 19 December 2017, Moody’s announced that the ratings had been maintained.

On 8 September 2015, Moody’s assigned a long-term (P) rating (a provisional rating) of Aa3 to PKO Bank Hipoteczny SA’s PLN-denominated mortgage covered bonds. This rating was confirmed by the agency on 11 December 2015, i.e. immediately after PKO Bank Hipoteczny SA conducted its first issue of mortgage covered bonds. The rating was maintained for all issues of PLN-denominated mortgage covered bonds of PKO Bank Hipoteczny SA.

On 29 September 2016, Moody’s assigned a long-term (P) rating (a provisional rating) of Aa3 to PKO Bank Hipoteczny SA’s EUR-denominated mortgage covered bonds. This rating was confirmed by the agency on 24 October 2016, i.e. immediately after PKO Bank Hipoteczny SA conducted its first issue of EUR- denominated covered bonds. The rating was maintained for all issues of EUR-denominated mortgage covered bonds of PKO Bank Hipoteczny SA.

The rating assigned to the mortgage covered bonds of PKO Bank Hipoteczny SA is the highest rating achievable for Polish securities. The limit for the ratings is Poland’s country ceiling for debt instruments, which currently is at a level of Aa3.

On 18 June 2018, Moody’s Investors Service assigned new counterparty risk ratings (CRR) to the Bank. The long-term counterparty risk rating was set at A3, and the short-term counterparty risk rating – at P-2. The new ratings were assigned in connection with updating the bank rating methodology by the agency in June 2018. At the same time, new ratings were assigned to 32 other banks in Central and Eastern Europe. Counterparty risk ratings reflect the entity’s ability to settle an unsecured portion of the counterparty’s financial liabilities not related to debt (CRR liabilities) and the expected financial losses in the case of failing to settle such liabilities.

On 9 December 2020 Moody’s increased the long-term rating for the mortgage covered bonds issued by PKO Bank Hipoteczny from Aa3 to Aa1. The change relates both to mortgage covered bonds denominated in PLN and in EUR.

The change in the ratings was related to Moody’s increasing the country ceiling for Polish bonds to Aa1 on 7 December 2020. The rating assigned to the mortgage covered bonds of PKO Bank Hipoteczny SA is the highest rating achievable for Polish securities.

Significant and material agreements with the central bank or supervisory bodies

In 2020 PKO Bank Hipoteczny SA did not conclude any significant or material agreements with the Central Bank or with supervisory bodies.

Financial and guarantee commitments granted

In 2020 PKO Bank Hipoteczny SA did not issue any guarantees.

Financial liabilities with respect to loans granted and not disbursed as at 31 December 2020 stood at PLN 115.5 million, down by PLN 367.2 million compared to 31 December 2019.

Off-balance-sheet liabilities granted to related parties

In 2020, PKO Bank Hipoteczny SA did not grant any off-balance sheet liabilities to related parties.

Loans taken out and loan and guarantee agreements unrelated to the Bank’s operations

In 2020, Bank Hipoteczny SA did not take out any loans or enter into any loan or guarantee agreements unrelated to the Bank’s operations.

Underwriting agreements

On 12 October 2020, PKO Bank Hipoteczny SA signed a programme agreement with PKO Bank Polski SA (also acting through its Branch – the Brokerage House of PKO Bank Polski in Warsaw) in which it engaged the Brokerage House of PKO Bank Polski SA to act as its underwriter.

Identification of proceedings pending before courts, arbitration bodies or public-administration authorities

As at 31 December 2020, no proceedings were pending before courts, arbitration bodies or public administration bodies concerning liabilities or receivables whose value constituted at least 10% of PKO Bank Hipoteczny SA’s equity.

Factors which will influence future financial performance over the horizon of at least one quarter

Among the significant factors and threats which may affect the Bank’s results over the consecutive quarter, the following should be mentioned:

• expected slowing of the global economy due to the Covid-19 pandemic;

• the conditions of the residential market in Poland;

• the conditions on the residential mortgage loans market in Poland;

• the possibility and timing of further transfers of portions of the portfolio of mortgage loans previously granted by PKO Bank Polski SA to the Bank;

• the situation on the domestic and foreign mortgage covered bonds markets;

• investor demand for mortgage covered bonds issued by the Bank;

• PKO Bank Polski SA policy concerning managing the financing structure and liquidity management;

• potential further decrease in interest rates in Poland.

Information on loan guarantees or other guarantees issued by the Bank or its subsidiary – in aggregate to a single entity or its subsidiary, if the total amount of the existing guarantees is equivalent to at least 10% of the issuer’s equity

In 2020 PKO Bank Hipoteczny SA did not warrant any loan or advance and did not grant any guarantees to a single entity or a subsidiary of such an entity with a total value equivalent to at least 10% of the Bank’s equity.

Information on agreements for loans and advances concluded and terminated during a financial year

On 8 May 2020, PKO Bank Hipoteczny SA concluded an annexe to a medium-term current account overdraft facility agreement with an external financial institution of up to PLN 150 million extending the repayment deadline until 13 June 2021.

On 18 March 2020, PKO Bank Hipoteczny SA and PKO Bank Polski SA concluded annex no. 2 to the agreement dated 10 July 2019 on the revolving current account overdraft facility increasing the limit from PLN 2,500 million to PLN 4,000 million. The increase in the available funds was earmarked for refinancing own bonds which mature in the first half of 2020.

On 10 September 2020, PKO Bank Hipoteczny SA concluded a non-revolving PLN working capital loan agreement for PLN 300 million for a period of 6 years with PKO Bank Polski SA. The loan may be paid out in tranches each of which will be repayable within five years. The tranches bear interest based on a fixed rate determined separately for each tranche.

Moreover, as at 31 December 2020 the Bank, had a liability arising from purchased receivables of PLN 188.7 million resulting from the purchase of residential mortgage loan receivable portfolios from PKO Bank Polski SA, as described in Note 24 to the financial statements. 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 the purchased receivables, 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 of the date of transfer, interest will be charged on the price.

Information on transaction(s) with related parties concluded by the issuer or its subsidiary, if material and not concluded on an arm’s length basis

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

In 2020 PKO Bank Hipoteczny SA did not conclude any significant non-arm’s length transactions with related parties.

Information on changes in the key principles of managing the Bank’s enterprise

In 2020 there were no changes in the key principles of managing the Bank’s enterprise in PKO Bank Hipoteczny SA.

Financial support agreements

PKO Bank Hipoteczny SA did not conclude financial support agreements with other entities subject to consolidated supervision operating within the same holding, or with closely related parties.

Deposits and guarantees and sureties issued

PKO Bank Hipoteczny SA does not accept any deposits or issue any guarantees or sureties.

Information on the value of security established on the accounts or assets of borrowers

In 2020 PKO Bank Hipoteczny SA did not set up any security on the borrowers’ accounts.

The value of collateral in respect of residential mortgage loans secured with real estate as at 31 December 2020 was PLN 59.7 billion.

Subsequent events

As of 1 January 2021, the Bank uses a new default definition compliant with the EBA/GL/2016/07 Guidelines dated 18 January 2017 concerning the application of the definition of default specified in Article 178 of Regulation (EU) No 575/2013 using materiality thresholds compliant with the Regulation of the Minister of Finance, Investments and Development dated 3 October 2019 on the materiality level of an overdue loan liability. The Bank assessed the impact of the application of the new definition of default, which indicates that as at 31 December 2020 the portfolio of impaired loans would have increased by PLN 15.4 million, and the impact of the respective allowances on the results and the total capital ratio would be immaterial.

8. Statement of the Management Board of PKO Bank Hipoteczny SA

The Management Board of PKO Bank Hipoteczny SA declares that, to the best of their knowledge:

• the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020 have been prepared in accordance with the applicable accounting policies and give a true, fair and clear view of the financial position of PKO Bank Hipoteczny SA and of the results of its operations;

• the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2020 gives a true view of the development and achievements as well as of the position of PKO Bank Hipoteczny SA, including a description of the key risks and threats.

The Management Board of PKO Bank Hipoteczny SA declares that the audit firm which conducted the audit of the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2020 was selected in compliance with the applicable laws and that both the entity and the statutory auditor who conducted the audit fulfilled all the criteria for providing an unbiased and independent audit opinion on the financial statements, in compliance with the applicable laws and professional standards.

Signatures of all members of the Bank’s Management Board

11 February 2021	Paulina Strugała	President of the Management Board	Signed on Polish original ...................................................... (signature)
11 February 2021	Piotr Kochanek	Vice-President of the Management Board	Signed on Polish original ...................................................... (signature)
11 February 2021	Daniel Goska	Vice-President of the Management Board	Signed on Polish original ...................................................... (signature)

[1] Warsaw, Kraków, Poznań, Wrocław, Tricity, Łódź

[2] Residential market in Poland Q4 2020

[3] Annualized ratio expressed as the quotient of the net profit (loss) for the given period and the average balance of assets at the beginning and end of the reporting period and of the interim monthly periods.

[4] Annualized ratio calculated by dividing the net profit (loss) for the year by the average level of total equity at the beginning and end of the reporting period and of the interim monthly periods.

[5] Annualized ratio excluding tax on certain financial institutions.

[6] Covers the following items of the statement of financial position: intangible assets, property, plant and equipment and other assets.

[7] Covers the following items of the statement of financial position: amounts due to customers, other liabilities, liabilities in respect of current income tax, deferred tax provisions and provisions.

[8] The value of balance-sheet exposures and the balance-sheet equivalent of contingent liabilities and transactions, taking into account specific credit risk adjustments and the CCF (Credit Conversion Factor).

[9] These result from that part of the exposure which is not fully and completely secured, i.e. which exceeds an MLV of 80% or is in a transitional period, i.e. until collateral has been put up.

[10] Until the end of the first quarter of 2020 the Bank allowed granting loans where the loan-to-value ratio did not exceed 90%, if a low down payment insurance policy was used.

[11] The current LtV level, based on the value of the real estate at the moment the loan is granted, updated using statistical methods on the basis of a real estate market analysis.

[12] Maximum country rating for Poland.

[13]Article 18(3) of the Act on Mortgage Covered Bonds and Mortgage Banks.

[14] Article 18(3)(a) of the Act on Mortgage Covered Bonds and Mortgage Banks.

[15] The nominal value of the hedging transaction corresponds to the issue price of the mortgage covered bond.

[16] It includes the net value of hedging transactions but excludes NPL.

[17] On 1 April 2020 the limit level following from Article 15 (2) (in accordance with which after five years of commencing operations by a mortgage bank the liabilities following from loans and advances drawn and bonds issued cannot exceed six times the amount of own funds of the bank in total) changed. Until 31 March 2020 the limit level was 1,000.0%.

[18] As defined in the Act of 11 May 2017 on registered auditors, audit firms and public oversight.

[19] As defined in the Act of 11 May 2017 on registered auditors, audit firms and public oversight.

[20] The benefits comprise base salaries, additional payments for medical care and the Company Social Fund.

[21] Deferred component of variable remuneration (in cash).

[22] The values presented relate to the period of performing the function of member of the Management Board, i.e. values resulting from previous performance of functions of MRT (“Material Risk Taker”) of a person who has not been member of the Management Board have not been included.

[23] The benefits cover: base salary, additional benefits with respect to medicare and the Company Social Fund.

[24] The deferred component of variable remuneration (in cash form).

[25] The values presented relate to the period of performing the function of member of the Management Board, i.e. values resulting from previous performance of functions of MRT (“Material Risk Taker”) of a person who has not been member of the Management Board have not been included.

[26] Cooperation with the Director of the Compliance, Security and Legal Services Office was resumed on 1 August 2020, the total years in service exceed five years.