Financial statements of PKO Bank Polski S.A. for the year ended 31 December 2020

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

SELECTED FINANCIAL DATA DERIVED FROM THE FINANCIAL STATEMENTS

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	2020	2019	2020	2019
Net interest income/(expense)	9 184	9 290	2 053	2 157
Net fee and commission income	3 101	2 828	693	574
Profit/(loss) before tax	(2 266)	5 118	(506)	1 190
Net profit/(loss)	(2 944)	3 835	(658)	891
Earnings per share for the period - basic (in PLN/EUR)	(2,36)	3,07	(0,53)	0,71
Earnings per share for the period - diluted (in PLN/EUR)	(2,36)	3,07	(0,53)	0,71
Total net comprehensive income	(1 835)	3 826	(410)	889
Total net cash flows	(8 867)	(12 031)	(1 982)	(2 797)

SELECTED FINANCIAL DATA	PLN million		EUR million
SELECTED FINANCIAL DATA	31.12.2020	31.12.2019	31.12.2020	31.12.2019
Total assets	345 027	316 978	74 765	74 434
Total equity	38 577	40 412	8 359	9 490
Share capital	1 250	1 250	271	294
Number of shares (in million)	1 250	1 250	1 250	1 250
Book value per share (in PLN/EUR)	30,86	32,33	6,69	7,59
Diluted number of shares (in million)	1 250	1 250	1 250	1 250
Diluted book value per share (in PLN/EUR)	30,86	32,33	6,69	7,59
Total capital adequacy ratio	19,78%	22,21%	19,78%	22,21%
Tier 1	37 564	38 606	8 140	9 066
Tier 2	2 700	2 700	585	634

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

TABLE OF CONTENTS

INCOME STATEMENT

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

CASH FLOW STATEMENT

General information about the bank

1. business activities of the bank

2. Changes to companies comprising the Group

3. Information on members of the Supervisory and Management Boards

4. Approval of the financial statements

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

Accounting policies adopted to prepare the financial statements

6. Basis of preparation of the financial statements

7. Statement of compliance

8. Going concern

9. Management Representation

10. New standards and interpretations and their amendments

11. Description of significant accounting policies

11.1. currency, presentation currency and foreign currencies

11.2. Accounting for transactions

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

11.4. The principles for classification of financial instruments

11.5. financial assets measured at amortized cost

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

11.7. Financial assets measured at fair value through profit or loss

11.8. Equity instruments

11.9. Reclassification of financial assets

11.10. Modifications – Changes in contractual cash flows

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

11.12. Measurement of financial liabilities

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

NOTES TO THE FINANCIAL STATEMENTS

13. Interest income and expense

14. Fee and commission income and expenses

15. Dividend income

16. Gains/(losses) on financial transactions

17. foreign exchange gains/(losses)

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

19. Other operating income and expenses

20. Net expected credit losses

21. net Impairment of non-financial assets

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

23. Administrative expenses

24. Tax on certain financial institutions

25. Income tax expense

26. Cash and balances with the Central Bank

27. Amounts due from banks

28. Hedge accounting

30. Securities

30.1. securities – financial assets by stage

30.2. securities - Changes in the gross carrying amount during the period

30.3. securities - Changes in allowances for expected credit losses in the period

31. Repo and reverse repo transactions

32. Loans and advances to customers

32.1 Loans and advances to customers - financial assets by stage

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

32.3 Changes in allowances for expected credit losses in the period

33. Intangible assets, property, plant and equipment

33.1. property, plant and equipment

33.2. intangible assets

34. Assets held for sale

35. Investments in subsidiaries, associates and joint ventures

36. other assets

37. Amounts due to the Central Bank and banks

38. Amounts due to customers

39. Financing received

39.1 Loans and advances received

39.2 debt securities in issue

39.3 subordinated liabilities

40. Other liabilities

41. Provisions

42. Equity and shareholding structure of the Bank

43. Dividend and profit appropriation

44. Leases

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

46. legal claims

47. Notes to the cash flow statement

48. Transactions with the State Treasury and related parties

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

50. Fair value hierarchy

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

52. Offsetting financial assets and financial liabilities

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

54. Financial assets and liabilities by currency

55. Contractual cash flows from the Bank’s financial liabilities, including derivative financial instruments

56. Current and non-current assets and liabilities

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

57. Risk management in the Bank

58. Specific risk management measures undertaken by the Bank in 2020

59. Credit risk management

60. Credit risk – financial information

61. Managing credit concentration risk in the Bank

62. Collateral

63. Forbearance practices

64. Exposure to the counterparty credit risk

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

66. Interest rate risk management

67. Currency risk management

68. Liquidity risk management

69. Capital adequacy

70. Leverage ratio

71. Information on package sale of receivables

OTHER NOTES

72. Fiduciary activities

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

74. Subsequent events

INCOME STATEMENT

RACHUNEK ZYSKÓW I STRAT	Note	2020	2019 converted
Net interest income/(expense)	13	9 184	9 290
Interest income		10 332	11 235
of which calculated under the effective interest rate method		8 934	9 713
Interest expenses		(1 148)	(1 945)
Net fee and commission income	14	3 101	2 828
Fee and commission income		4 099	3 900
Fee and commission expense		(998)	(1 072)
Other net income		433	668
Dividend income	15	332	561
Gains/(losses) on financial transactions	16	(106)	186
of which due to impact of macroeconomic variables on the loan portfolio		(48)	-
Foreign exchange gains/ (losses)	17	133	106
Gains/(losses) on derecognition of financial instruments	18	162	143
of which measured at amortized cost		(24)	(12)
Net other operating income and expense	19	(88)	(328)
Result on business activities		12 718	12 786
Net expected credit losses	20	(1 939)	(1 009)
of which due to impact of macroeconomic variables on the loan portfolio		(1 076)	-
Impairment of non-financial assets	21	(356)	(40)
Cost of the legal risk of mortgage loans in convertible currencies	22	(6 552)	(451)
Administrative expenses	23	(5 180)	(5 237)
of which net regulatory charges		(730)	(492)
Tax on certain financial institutions	24	(957)	(931)
Profit/(loss) before tax		(2 266)	5 118
Income tax expense	25	(678)	(1 283)
Net profit/(loss)		(2 944)	3 835

Earnings per share
– basic earnings per share for the period (PLN)		(2,36)	3,07
– diluted earnings per share for the period (PLN)		(2,36)	3,07
Weighted average number of ordinary shares during the period (in million)*		1 250	1 250

*In 2020 and in 2019 there were no instruments diluting earnings per share. Therefore, the value of diluted aernings per share corresponds with the value of basic earnings per share fot the periods.

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME	Note	2020	2019
Net profit/(loss)		(2 944)	3 835
Other comprehensive income		1 109	(9)
Items which may be reclassified to profit or loss		1 114	(4)
Cash flow hedges (net)		224	113
Cash flow hedges (gross)	28	276	139
Deferred income tax	25,28	(52)	(26)
Fair value of financial assets measured at fair value through other comprehensive income (net)		890	(117)
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		1 283	12
Gains /losses transferred to the profit or loss (on disposal)		(186)	(155)
Deferred income tax	25	(207)	26
Items which cannot be reclassified to profit or loss		(5)	(5)
Actuarial gains and losses (net)		(5)	(5)
Actuarial gains and losses (gross)		(6)	(7)
Deferred income tax	25	1	2

Total net comprehensive income		(1 835)	3 826

STATEMENT OF FINANCIAL POSITION

	Note	31.12.2020	31.12.2019 restated	01.01.2019 restated*
ASSETS		345 027	316 978	301 187
Cash and balances with Central Bank	26	7 397	14 602	22 862
Amounts due from banks	27	5 304	7 953	11 213
Hedging derivatives	28	618	594	592
Other derivative instruments	29	5 416	2 798	1 909
Securities	30	119 973	76 422	60 439
Reverse repo transactions	31	-	1 081	51
Loans and advances to customers	32	193 063	200 867	191 524
Property, plant and equipment	33.1	2 737	2 738	2 860
Non-current assets held for sale	34	124	9	8
Intangible assets	33.2	2 737	2 606	2 595
Investments in subsidiaries	35	3 612	3 650	3 304
Investments in associates and joint ventures	35	257	344	284
Deferred income tax assets	25	1 806	1 290	1 232
Other assets	36	1 983	2 024	2 314

		31.12.2020	31.12.2019 restated	01.01.2019 restated *
LIABILITIES AND EQUITY		345 027	316 978	301 187
Liabilities		306 450	276 566	262 938
Amounts due to the Central Bank	37	-	-	7
Amounts due to banks	37	2 583	1 976	1 591
Hedging derivatives	28	543	668	560
Other derivative instruments	29	6 632	2 927	2 657
Repo transactions	31	47	46	45
Amounts due to customers	38	278 894	252 943	236 329
Loans and advances received	39	4 906	5 026	8 839
Debt securities in issue	39	4 020	4 769	5 367
Subordinated liabilities	39	2 716	2 730	2 731
Other liabilities	40	4 464	4 517	3 989
Current income tax liabilities		178	311	297
- of the Bank		166	282	297
- of the subsidiaries belonging to the Tax Group		12	29	-
Provisions	41	1 467	653	526
		'	'
EQUITY		38 577	40 412	38 249
Share capital		1 250	1 250	1 250
Other capital		34 771	33 771	34 310
Retained earnings		5 500	1 556	(646)
Net profit or loss for the year		(2 944)	3 835	3 335

* taking into account the implementation of IFRS 16

STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD ENDED 31 December 2020	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 168	1 070	3 099	434	33 771	1 556	3 835	40 412
Transfer from retained earnings	-	-	-	-	-	-	3 835	(3 835)	-
Dividend	-	-	-	-	-	-	-	-	-
Comprehensive income	-	-	-	-	1 109	1 109	-	(2 944)	(1 835)
Covering of prior year loss1	-	-	-	(111)	-	(111)	111	-	-
Transfer from retained earnings to other reserves	-	-	-	2	-	2	(2)	-	-
As at the end of the period	1 250	29 168	1 070	2 990	1 543	34 771	5 500	(2 944)	38 577

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

FOR THE PERIOD ENDED 31 December 2019	Share capital	Other capital					Retained earnings	Net profit or loss for the year	Total equity
		Reserves			Accumulated other comprehensive income	Total other capital and reserves
		Supplementary capital	General banking risk fund	Other reserves	Accumulated other comprehensive income	Total other capital and reserves
As at the beginning of the period	1 250	29 168	1 070	3 629	443	34 310	(535)	3 335	38 360
Changes in the accounting policies	-	-	-	-	-	-	(111)	-	(111)
As at the beginning of the period, after policy changes	1 250	29 168	1 070	3 629	443	34 310	(646)	3 335	38 249
Transfer from retained earnings	-	-	-	-	-	-	3 335	(3 335)	-
Dividend	-	-	-	-	-	-	(1 663)	-	(1 663)
Comprehensive income	-	-	-	-	(9)	(9)		3 835	3 826
Covering of prior year loss1	-	-	-	(535)	-	(535)	535	-	-
Transfer from retained earnings to other reserve	-	-	-	5	-	5	(5)	-	-
As at the end of the period	1 250	29 168	1 070	3 099	434	33 771	1 556	3 835	40 412

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

FOR THE YEAR ENDED 31 December 2020	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2020	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Total
As at the beginning of the period	354	95	(15)	434
Total comprehensive income	890	224	(5)	1 109
As at the end of the period	1 244	319	(20)	1 543

FOR THE YEAR ENDED 31 December 2019	Accumulated other comprehensive income
FOR THE YEAR ENDED 31 December 2019	Fair value of financial assets measured at fair value through other comprehensive income	Cash flow hedges	Actuarial gains and losses	Total
As at the beginning of the period	471	(18)	(10)	443
Total comprehensive income	(117)	113	(5)	(9)
As at the end of the period	354	95	(15)	434

CASH FLOW STATEMENT

	Note	2020	2019 converted
Cash flows from operating activities
Profit/(loss) before tax		(2 266)	5 118
Income tax paid		(1 567)	(1 354)
Total adjustments:		34 354	2 455
Depreciation and amortization	23	853	820
(Gains)/losses on investing activities	47	(15)	(14)
Interest and dividends	47	(1 792)	(1 537)
Change in:
amounts due from banks	47	968	(513)
hedging derivatives		(149)	106
other derivative instruments		1 087	(619)
securities	47	(2 364)	(2 191)
loans and advances to customers	47	6 469	(8 273)
receivables in respect of repurchase agreements	47	1 081	(1 030)
non-current assets held for sale	47	(117)	(2)
other assets		(50)	189
accumulated allowances for expected credit losses	47	1 798	(1 041)
accumulated allowances on non-financial assets and other provisions	47	755	98
amounts due to banks	47	607	378
amounts due to customers	47	25 951	16 614
repo transactions		1	1
loan and advances received	47	11	(50)
liabilities in respect of debt securities in issue	47	380	21
subordinated liabilities	47	(14)	(1)
other liabilities	47	163	729
Other adjustments	47	298	124
Net cash from/used in operating activities		32 088	7 573

	Note	2020	2019 converted
Cash flows from investing activities
Inflows from investing activities		63 964	216 142
Proceeds from sale of and interest on securities measured at fair value through other comprehensive income		61 734	207 620
Proceeds from sale of and interest on securities measured at amortized cost		1 865	7 936
Proceeds from sale of intangible assets, property, plant and equipment and assets held for sale		54	61
Other inflows from investing activities (dividends)	47	311	525
Outflows from investing activities		(103 116)	(229 112)
Increase in equity of an associate		(5)	(306)
Purchase of securities measured at fair value through other comprehensive income		(67 169)	(215 678)
Purchase of securities measured at amortized cost		(34 741)	(12 378)
Purchase of intangible assets and property, plant and equipment		(1 201)	(750)
Net cash from/used in investing activities		(39 152)	(12 970)

	Nota	2020	2019 dane przekształcone
Przepływy środków pieniężnych z działalności finansowej
Proceeds from debt securities in issue		-	596
Redemption of debt securities	47	(1 129)	(1 215)
Repayment of loans and advances	47	(131)	(3 763)
Dividend paid to shareholders		-	(1 663)
Payment of lease liabilities	47	(216)	(202)
Repayment of interest on long-term liabilities	47	(327)	(387)
Net cash from financing activities		(1 803)	(6 634)
Total net cash flows		(8 867)	(12 031)
of which foreign exchange differences on cash and cash equivalents		134	(8)
Cash equivalents at the beginning of the period		17 993	30 024
Cash equivalents at the end of the period		9 126	17 993

General information about the bank

1. business activities of the bank

Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna (“PKO Bank Polski S.A.” or “the Bank”) was established by virtue of a decree signed on 7 February 1919 by the Head of State Józef Piłsudski, Prime Minister Ignacy Paderewski and Hubert Linde, post and telegraph minister and simultaneously the first president of Pocztowa Kasa Oszczędnościowa. In 1950, the Bank began operating as Powszechna Kasa Oszczędności bank państwowy (state-owned bank). Pursuant to the Decree of the Council of Ministers dated 18 January 2000, Powszechna Kasa Oszczędności bank państwowy (a state-owned bank) was transformed into a state owned joint-stock company, Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna with its head office in Warsaw, ul. Puławska 15, 02-515 Warsaw, Poland.

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

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

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

As at 31 December 2020, organizational entities comprising the Bank, through which the Bank conducts its operations, include: the Bank’s head office in Warsaw, Biuro Maklerskie PKO Banku Polskiego S.A. (the Brokerage House), 12 specialist organizational entities, 11 regional retail branches, 7 regional corporate branches, 33 corporate centres and 1 062 branches. The Bank also conducts operating activities in the form of a branch in the Federal Republic of Germany (the German Branch), the Czech Republic (the Czech Branch) and Slovakia (the Slovak Branch).

PKO Bank Polski S.A. is the parent entity of the PKO Bank Polski S.A. Group and a significant investor for associates and joint ventures of the Bank. Accordingly, PKO Bank Polski S.A. prepares consolidated financial statements of the Group, which include the financial data of these entities.

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

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

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

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

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

* share in equity of the direct parent

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

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

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

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

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

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

The Bank holds the following associates and joint ventures:

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

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

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

2. Changes to companies comprising the Group

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

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

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

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

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

3. I nformation on members of the Supervisory and Management Boards

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

• Zbigniew Hajłasz - Chair of the Supervisory Board

• Marcin Izdebski – Vice-Chair of the Supervisory Board

• Grażyna Ciurzyńska - Deputy Chair of the Supervisory Board

• Mariusz Andrzejewski - Member of the Supervisory Board

• Grzegorz Chłopek - Member of the Supervisory Board

• Wojciech Jasiński - Member of the Supervisory Board

• Andrzej Kisielewicz - Member of the Supervisory Board

• Rafał Kos - Member of the Supervisory Board

• Krzysztof Michalski - Member of the Supervisory Board

• Piotr Sadownik - Member of the Supervisory Board

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

• Zbigniew Jagiełło - President of the Management Board

• Rafał Antczak – Vice-President of the Management Board

• Rafał Kozłowski – Vice-President of the Management Board

• Maks Kraczkowski – Vice-President of the Management Board

• Mieczysław Król – Vice-President of the Management Board

• Adam Marciniak – Vice-President of the Management Board

• Piotr Mazur – Vice-President of the Management Board

• Jakub Papierski – Vice-President of the Management Board

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

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

4. Approval of the financial statements

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

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

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

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

• Impact on estimates and assumptions

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

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

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

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

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

A detailed description of the moratoria offered to the Bank’s Customers and the public guarantee initiatives is included in the Note “Specific risk management measures adopted by the Bank in 2020”, and in the “PKO Bank Polski S.A. Group Directors’ Report for 2020”.

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

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

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

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

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

Given the fact that the COVID-19 pandemic has an adverse effect on the economic environment, the Bank conducted an impairment test of goodwill on Nordea Bank Polska S.A. The results of the impairment test are described in detail in the Note “Intangible assets and property, plant and equipment”.

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

• Capital adequacy

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

Accounting policies adopted to prepare the financial statements

6. Basis of preparation of the financial statements

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

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

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

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

7. Statement of compliance

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

8. Going concern

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

9. Management Representation

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

10. New standards and interpretations and their amendments

• Standards and interpretations and their amendments effective from 2020

Standards and interpretations*

Description of changes and impact

Amendments to References to the Conceptual Framework in IFRS

(1.01.2020/29.11.2019)

The purpose of the amendments is to replace references to the previous conceptual framework in a number of standards and interpretations with references to the amended Conceptual Framework.

Implementation of the Conceptual Framework had no effect on the financial statements

Amendments to IAS 1 and IAS 8: Definition of the term ‘material’ (1.01.2020/29.11.2019)

The amendments standardize and clarify the definition of ‘material’ and contain guidelines to increase the consistency of application of this concept in the IFRS.

The Bank makes assessments of the materiality of disclosures in accordance with the requirements of IAS 1 on an ongoing basis, and based on these assessments, makes appropriate changes in the presentation of data in the financial statements.

Amendments to IFRS 9, IAS 39 and IFRS 7 – IBOR reform (1.01.2020/ 15.01.2020)

The amendments introduce certain temporary, narrow departures from the requirements of prospective verification of the effectiveness of hedging relations set out in IAS 39 and IFRS 9. The amendments allow prospective testing of hedging relationships without taking into account the effects of the future implementation of the IBOR reform.

The Bank took amendments into account in the prospective testing of hedging relationships.

As part of the established hedging relationships, the Bank identifies the following interest rate reference ratios: WIBOR, EURIBOR, LIBOR CHF, LIBOR USD. As at the reporting date, these benchmarks are quoted daily and are available for use and the resulting cash flows are normally exchanged with counterparties.

In the case of WIBOR and EURIBOR, the Bank does not currently identify uncertainty regarding the timing or amounts of cash flows resulting from the IBOR reform. For LIBOR CHF and LIBOR USD, the established hedging relationships exceed the announced discontinuation dates for both ratios, i.e. December 31, 2021 for CHF LIBOR and June 20, 2023 for USD LIBOR. The bank expects that these ratios will be replaced by new benchmarks: CHF LIBOR by SARON and USD LIBOR by SOFR.

List of hedging relationships and the nominal amounts of their designated hedging instruments that may be affected by the IBOR reform:

• Cash flow hedging:

IRS CHF (CHF 400 million based on LIBOR CHF) - Hedging the volatility of cash flows of loans in convertible currencies other than EUR with variable interest, resulting from the risk of changes in interest rates, using IRS transactions;

CIRS CHF/PLN (CHF 525 million based on CHF LIBOR) - Hedging volatility of cash flows of floating-rate loans in CHF, resulting from the risk of changes in interest rates and currency risk, and hedging of volatility of cash flows of term deposits negotiated in PLN / bank products for regular savings in PLN resulting from the risk of changes in interest rates, using CIRS transactions;

• Fair value hedge:

IRS USD (USD 158 million based on USD LIBOR) - Hedge of fair value volatility of a fixed-rate convertible currency, measured at fair value through other comprehensive income, resulting from the risk of changes in interest rates, using IRS transactions.

Amendments to IFRS 3 Business combinations

(1.01.2020/

21.04.2020)

The amendments narrow down and clarify the definition of a venture. They also allow for a simplified assessment of whether a set of assets and activities is a group of assets and not a venture. A prospective approach will apply to these amendments.

The Bank will apply these amendments, if relevant,

Amendment to IFRS 16 “Leases” (1.06.2020/9.10.2020)

The amendments allow lessees not to account for rent concessions as lease modifications if they are a direct consequence of COVID-19 and meet certain conditions.

The Bank does not expect these amendments to have a material effect.

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

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

Standards and interpretations *

Description of changes and impact

Amendments to IFRS 9, IFRS 7, IAS 39 and IFRS 16, IFRS 4 – IBOR reform – Phase 2 (1.01.2021/ 14.01.2021)

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

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

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

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

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

amendments to IFRS 4 “Insurance Contracts”

(1.01.2021/16.12.2020)

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

The changes do not apply to the Bank.

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

• new standards and interpretations, as well as their amendments, which were published and have not yet been endorsed by the European Union

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

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

11. Description of significant accounting policies

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

11.1. currency, presentation currency and foreign currencies

The financial statements are presented in Polish zlotys (PLN), which are the Bank’s functional and presentation currency. Items of the statement of financial position of the German and Slovak Branches are translated into the presentation currency from the functional currency (EUR) and items of the statement of financial position of the Czech Branch are translated into the presentation currency from the functional currency (CZK) using the average NBP exchange rate at the end of the reporting period. Items in the Branches’ profit and loss are translated into the presentation currency using the average exchange rate from the end of each month of the reporting period. The resulting exchange differences are recognized in other comprehensive income.

• Transactions and balances in foreign currencies

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

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

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

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

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

11.2. Accounting for transactions

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

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

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

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

• retains the contractual rights to receive cash flows from the financial asset, but assumes a contractual obligation to pay cash flows to one or more recipients.

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

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

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

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

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

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

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

11.4. The principles for classification of financial instruments

The Bank classifies financial assets into the following categories:

• measured at amortized cost;

• measured at fair value through other comprehensive income (FVOCI);

• measured at fair value through profit or loss (FVP&L).

The Bank classifies financial liabilities into the following categories:

• measured at amortized cost;

• measured at fair value through profit or loss (FVP&L).

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

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

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

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

• business model

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

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

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

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

• Assessment of contractual cash flow characteristics

The assessment of the contractual cash flow characteristics establishes, based on a test of contractual cash flows, whether contractual cash flows are solely payments of principal and interest (hereinafter “SPPI”). Interest is defined as consideration for the time value of money, credit risk relating to the principal remaining to be repaid within a specified period and other essential risks and costs associated with granting financing, as well as the profit margin.

Contractual cash flow characteristics do not affect the classification of the financial asset if:

• their effect on the contractual cash flows from that asset could not be significant (de minimis characteristic);

• they are not genuine, i.e. they affect the contractual cash flows from the instrument only in the case of occurrence of a very rare, unusual or very unlikely event (non-genuine characteristic).

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

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

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

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

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

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

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

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

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

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

11.5. financial assets measured at amortized cost

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

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

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

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

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

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

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

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

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

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

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

11.7. Financial assets measured at fair value through profit or loss

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

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

In the financial statements, financial assets measured at fair value through profit or loss are presented as follows:

• held for trading - financial assets which:

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

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

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

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

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

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

11.8. Equity instruments

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

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

11.9. Reclassification of financial assets

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

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

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

• temporary discontinuation of a specific market for financial assets;

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

No financial liabilities are reclassified.

11.10. Modifications – Changes in contractual cash flows

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

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

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

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

The following qualitative criteria have been adopted:

• Currency translation;

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

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

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

• The quantitative criterion consists of a 10% test analysing the change in the contractual terms of a financial asset resulting in a difference between the amount of future cash flows arising from the changed financial asset discounted using the original effective interest rate and the amount of the future cash flows that would arise from the original financial asset discounted using the same interest rate. The second quantitative criterion consists of an increased exposure to the debtor, which includes the amount of principal increase and an increase in off-balance sheet liabilities granted which exceed 10% of the equity and off-balance sheet liabilities from before the increase for each individual exposure.

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

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

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

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

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

11.12. Measurement of financial liabilities

Liabilities in respect of a short position in securities are measured at fair value through profit or loss.

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

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

In order to better reflect its operations, the Bank made the following changes in its accounting policies:

• Reclassification of a premium on debt securities (1)

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

• reclassification of fees collected from customers compensating for negative interest rates of financial liabilities (2)

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

• Reclassification of transactional margin (3)

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

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

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

• Reclassification of allowances for card complaints (5)

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

• Inclusion of net regulatory charges in administrative expenses (6)

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

• „Reverse repo transactions” and “Repo transactions” (1)

INCOME STATEMENT– positions subject to reclassification and changes	01.01-31.12.2019 before restatement	(1)	(2)	(3)	(4)	(5)	(6)	01.01-31.12.2019 restated
Net interest income/(expense)	9 279		12	-	(1)	-	-	9 290
Interest income	11 360	(136)	12	-	(1)	-	-	11 235
Interest expenses	(2 081)	136	-	-	-	-	-	(1 945)
Net fee and commission income	2 470	-	(12)	370	-	-	-	2 828
Fee and commission income	3 542	-	(12)	370	-	-	-	3 900
Other net income	1 037	-	-	(370)	1	-	-	668
Foreign exchange gains/ (losses)	475	-	-	(370)	1	-	-	106
Net expected credit losses	(1 008)	-	-	-	-	(1)	-	(1 009)
Impairment of non-financial assets	(41)	-	-	-	-	1	-	(40)
Overheads	(4 745)	-	-	-	-	-	(492)	(5 237)
Net regulatory charges	(492)	-	-	-	-	-	492	-
Net profit/(loss)	3 835	-	-	-	-	-	-	3 835

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

• “Reclassification of potential refunds of costs to customers on expected early repayment of open consumer and mortgage loans” (2)

• “Loans and advances received” (3)

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

• Reclassification of holiday pay provisions from other liabilities to provisions (4)

The Bank reclassified holiday pay provisions from “Other liabilities” to “Provisions”, because the Bank believes that they are of a similar character to other provisions and are also based on estimations like other employee provisions presented in provisions, i.e. pension provisions and other liabilities due to defined post-employment benefits.

ASSETS – positions subject to reclassification and changes	31.12.2019 before restatement	(1)	(2)	31.12.2019 restated
Receivables in respect of repurchase agreements	-	1 081	-	1 081
Loans and advances to customers	202 095	(1 081)	(147)	200 867

TOTAL ASSETS	317 125	-	(147)	316 978

ASSETS – positions subject to reclassification and changes	31.12.2018*	Implementation of MSSF 16	(1)	01.01.2019 restated
Repurchase transactions	-	-	51	51
Loans and advances to customers	191 575	-	(51)	191 524
Property, plant and equipment	2 082	778	-	2 860
Other assets	2 318	(4)	-	2 314
				-
TOTAL ASSETS	300 413	774	-	301 187

*disclosed as comparative data in the financial statements of the Bank for the year 2019

LIABILITIES - positions subject to reclassification and changes	31.12.2019 before restatement	(1)	(2)	(3)	(4)	31.12.2019 restated

Amounts due to customers	258 015	(46)	-	(5 026)	-	252 943
Repurchase transactions	-	46	-	-	-	46
Loans and advances received	-	-	-	5 026	-	5 026
Other liabilities	4 744	-	(147)	-	(80)	4 517
Provisions	573	-	-	-	80	653

TOTAL LIABILITIES	276 713	-	(147)	-	-	276 566

LIABILITIES - positions subject to reclassification and changes	31.12.2018*	Implementation of MSSF 16	(1)	(3)	(4)	01.01.2019 restated

Amounts due to customers	245 213		45)	(8 839)		236 329
Repurchase transactions	-		45	-		45
Loans and advances received	-		-	8 839		8 839
Other liabilities	3 189	885		-	(85)	3 989
Provisions	441		-	-	85	526

TOTAL LIABILITIES	262 053	885	-	-		262 938

*disclosed as comparative data in the financial statements of the Bank for the year 2019

CASH FLOW STATEMENT - positions subject to reclassification and changes	01.01-31.12.2019 before restatement	(1)	(2)	(3)	(4)	(5)	01.01-31.12.2019 restated
Change in:
loans and advances to customers	(9 450)	1 030	147	-	-	-	(8 273)
receivables in respect of repurchase agreements	-	(1 030)	-	-	-	-	(1 030)
accumulated allowances for expected credit losses	(1 042)	-	-	-	-	1	(1 041)
accumulated allowances on non-financial assets and other provisions	103	-	-	-	(4)	(1)	98
amounts due to customers	16 565	(1)	-	50	-	-	16 614
loan and advances received	-	-	-	(50)	-	-	(50)
repo transactions	-	1	-	-	-	-	1
other liabilities	872	-	(147)	-	4	-	729

TOTAL	7 048	-	-	-	-	-	7 048

NOTES TO THE FINANCIAL STATEMENTS

13. Interest income and expense

Accounting policies

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

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

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

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

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

Interest income also includes the effect of the fair value measurement of financial assets acquired as part of business combinations between subsidiaries and the impact of the European Union Court of Justice’s ruling on consumer rights to reduce the cost of loan repaid before contractual maturity (note “Legal claims”) by reducing interest income, as the estimated difference between the value of the commission deferred using the effective interest rate as at the anticipated date of the early repayment of the loan and on a straight-line basis, according to which the Bank is returning commission. The estimates are based on historical early repayment periods and their probability.

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

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

Remuneration received and receivable by the Bank for offering insurance products for the products directly associated with the financial instruments is recognized using the effective interest rate method and recognized in interest income. Remuneration is recognized in commission income upon sale or renewal of an insurance product only in the part relating to the intermediation service provided.

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

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

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

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

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

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

Financial information

INTEREST INCOME ON:	2020	2019
loans to and other receivables from banks	91	132
cash pooling	6	43
hedging derivatives	788	536
debt securities	1 772	1 520
measured at amortized cost	582	296
measured at fair value through other comprehensive income	1 170	1 187
measured at fair value through profit or loss	20	37
loans and advances to customers	7 655	8 992
measured at amortized cost	6 672	7 756
measured at fair value through other comprehensive income	393	287
measured at fair value through profit or loss	590	949
amounts due to customers	20	12
Total	10 332	11 235
of which: interest income on impaired financial instruments	177	239

Interest income calculated under the effective interest rate method on financial instruments measured at::	8 934	9 713
amortized cost	7 371	8 239
fair value through other comprehensive income (FVOCI	1 563	1 474
Income similar to interest income on instruments measured at fair value through profit or loss	1 398	1 522
Total	10 332	11 235

INTEREST INCOME BY SEGMENT	2020
INTEREST INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
loans to and other receivables from banks	-	76	15	91
cash pooling	-	6	-	6
hedging derivatives	-	-	788	788
debt securities	-	741	1 031	1 772
loans and advances to customers	6 173	1 482	-	7 655
amounts due to customers	-	20	-	20

Total	6 173	2 325	1 834	10 332

INTEREST INCOME BY SEGMENT	2019
INTEREST INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
loans to and other receivables from banks	-	93	39	132
cash pooling	-	43	-	43
hedging derivatives	-	-	536	536
debt securities	-	1 058	462	1 520
loans and advances to customers	7 134	1 858	-	8 992
amounts due to customers	-	12	-	12

Total	7 134	3 064	1 037	11 235

INTEREST EXPENSE ON	2020	2019
amounts due to banks	(14)	(12)
interbank deposits	(9)	(15)
loans and advances received	(202)	(211)
leases	(15)	(20)
amounts due to customers	(804)	(1 556)
debt securities in issue	(28)	(41)
subordinated liabilities	(76)	(90)

Total	(1 148)	(1 945)

	31.12.2020	31.12.2019
Interest on cash on required reserve account	0,1%	0,5%

Average interest on loans and advances to customers during the reporting priod	31.12.2020	31.12.2019
Non-financial enterprises:	2,23%	3,48%
excluding current deposits	2,34%	3,65%
including renewable and current deposits	1,99%	3,19%
Households, including:	3,61%	5,45%
housing	2,21%	3,74%
consumer	6,97%	9,40%
other	3,76%	5,30%
renewable and current deposits	6,09%	7,84%

AVERAGE INTEREST ON DEPOSITS FROM CUSTOMERS IN THE REPORTING PERIOD	31.12.2020	31.12.2019
Non-financial enterprises, including:	0,00%	0,87%
fixed-term deposits	0,38%	1,10%
current deposits and O/N deposits	0,00%	0,84%
Households, including:	0,07%	0,53%
fixed-term deposits	0,22%	0,95%
current deposits and O/N deposits	0,02%	0,29%

14. Fee and commission income and expenses

Accounting policies

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

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

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

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

Financial information

FEE AND COMMISSION INCOME	2020	2019
Loans, insurance, operating leases and fleet management	869	895
lending	682	699
offering insurance products	187	196
Investment funds, pension funds and brokerage activities	326	216
servicing investment funds and OFE (including management fees)	37	46
servicing and selling investment and insurance products	10	12
brokerage activities	279	158
Cards	1 299	1 313
Margins on foreign exchange transactions	476	370
Bank accounts and other	1 129	1 106
servicing bank accounts	870	808
cash operations	61	64
servicing foreign mass transactions	73	99
customer orders	53	48
fiduciary services	6	6
other	66	81

Total, of which:	4 099	3 900
income from of financial instruments not measured at fair value through profit or loss	3 964	3 843

FEE AND COMMISSION EXPENSE	2020	2019
Loans and insurance	(129)	(185)
commission paid to external entities for product sales	(34)	(68)
cost of construction investment supervision and property valuation	(34)	(46)
fees to Biuro Informacji Kredytowej	(15)	(18)
loan handling	(46)	(53)
Investment funds, pension funds and brokerage activities	(27)	(18)
Cards	(728)	(757)
Bank accounts and other	(114)	(112)
clearing services	(33)	(29)
commissions for operating services provided by banks	(9)	(10)
sending short text messages (SMS)	(41)	(33)
selling banking products	(7)	(11)
servicing foreign mass transactions	(13)	(10)
other	(11)	(19)

Total	(998)	(1 072)

FEE AND COMMISSION INCOME BY SEGMENT	2020
FEE AND COMMISSION INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans, insurance, operating leases and fleet management	644	225	-	869
lending	457	225	-	682
offering insurance products	187	-	-	187
Investment funds, pension funds and brokerage activities	134	192	-	326
servicing investment funds and OFE (including management fees)	29	8	-	37
servicing and selling investment and insurance products	10	-	-	10
brokerage activities	95	184	-	279
Cards	1 278	21	-	1 299
Margins on foreign exchange transactions	319	157	-	476
Bank accounts and other	932	197	-	1 129
servicing bank accounts	765	105	-	870
cash operations	43	18	-	61
servicing foreign mass transactions	40	33	-	73
customer orders	29	24	-	53
fiduciary services	-	6	-	6
other	55	11	-	66

Total	3 307	792	-	4 099

FEE AND COMMISSION INCOME BY SEGMENT	2019
FEE AND COMMISSION INCOME BY SEGMENT	Retail segment	Corporate and investment segment	Transfer centre and other	Total
Loans, insurance, operating leases and fleet management	669	226	-	895
lending	473	226	-	699
offering insurance products	196	-	-	196
Investment funds, pension funds and brokerage activities	99	117	-	216
servicing investment funds and OFE (including management fees)	39	7	-	46
servicing and selling investment and insurance products	12	-	-	12
brokerage activities	48	110	-	158
Cards	1 286	27	-	1 313
Margins on foreign exchange transactions	212	158	-	370
Bank accounts and other	944	162	-	1 106
servicing bank accounts	743	65	-	808
cash operations	46	18	-	64
servicing foreign mass transactions	64	35	-	99
customer orders	27	21	-	48
fiduciary services	-	6	-	6
other	64	17	-	81

Total	3 210	690	-	3 900

15. Dividend income

Accounting policies

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

Financial information

DIVIDEND INCOME	2020	2019
from subsidiaries	300	511
from associates and joint ventures	17	36
from financial assets held for trading	-	1
from financial instruments not held for trading, measured at fair value through profit or loss	15	13

Total	332	561

16. Gains/(losses) on financial transactions

Accounting policies

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

Financial information

GAINS/(LOSSES) ON FINANCIAL TRANSACTIONS	2020	2019
Financial instruments held for trading, of which:	60	96
Derivatives	47	99
Financial instruments not held for trading, measured at fair value through profit or loss, of which:	(168)	87
Loans and advances to customers	(157)	(58)
Hedge accounting	2	3
Total	(106)	186
including the macroeconomic impact on the loan portfolio	(48)

17. foreign exchange gains/(losses)

Accounting policies

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

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

	2020	2019
Foreign exchange gains/(losses)	133	106

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

Accounting policies

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

GAINS/(LOSSES) ON DERECOGNITION OF FINANCIAL INSTRUMENTS	2020	2019
Measured at fair value through OCI	186	155
Measured at amortized cost	(24)	(12)

Total	162	143

19. Other operating income and expenses

Accounting policies

Other operating income and expenses comprise income and costs not directly related to banking activities. Other operating income mainly includes gains on the sale/scrapping of property, plant and equipment, intangible assets and assets for sale, irrecoverable receivables collected, legal damages, fines and penalties received, and income from lease/rental of properties. Other operating expenses mainly include provisions for refunds to customers on early repayment of consumer and mortgage loans and mortgage loans before the ECJ’s judgment (note “Provisions”), losses on sale /scrapping of property, plant and equipment, intangible assets and assets for sale, and donations made.

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

Financial information

OTHER OPERATING INCOME	2020	2019
Gains on sale or scrapping of property, plant and equipment, intangible assets and assets held for sale	17	17
Damages, compensation and penalties received	-	2
Ancillary income	30	26
Recovery of receivables expired, forgiven or written off	2	4
Release of provision for potential return of fees and commission to customers	-	58
Provision for future payments	-	1
Release of provision recognized for legal claims excluding legal claims relating to mortgage loans in convertible currencies	5	6
Other	84	47

Total	138	161

OTHER OPERATING EXPENSE	2020	2019
Losses on sale or scrapping of property, plant and equipment, intangible assets and assets held for sale	(2)	(3)
Donations made	(20)	(23)
Sundry expenses	(15)	(14)
Provision recognized for potential refunds of fees and commission to customers	(106)	(127)
Provision for future payments	(1)	(1)
Provision recognized for legal claims excluding legal claims relating to mortgage loans in convertible currencies	(55)	(6)
Cost of providing additional financing to a subsidiary	-	(274)
Other	(27)	(41)

Total	(226)	(489)

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

20. Net expected credit losses

Accounting policies

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

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

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

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

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

Estimates and judgments

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

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

• debt financial instruments comprising credit exposures and securities;

• other financial assets;

• off-balance sheet financial and guarantee liabilities.

Expected credit losses are not recognized for equity instruments.

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

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

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

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

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

• Material increase in credit risk

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

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

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

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

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

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

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

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

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

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

Risk category	PD range	Minimum range of the risk category deterioration indicating a significant increase in credit risk1
A-B	0,0 – 0,90%	3 categories
C	0,90 – 1,78%	3 categories
D	1,78 – 3,55%	2 categories
E	3,55-7,07%	1 category
F	7,07-14,07%	1 category
G	14,07-99,99%	not applicable2

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

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

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

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

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

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

• a significant increase in the LTV ratio;

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

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

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

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

• Impaired loans and definition of default

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

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

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

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

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

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

In accordance with the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (“CRR”), the Bank defines a state of default if it assesses that the debtor is unable to repay the loan liability without resorting to exercising the collateral or if the exposure is overdue more than 90 days. The premises of default are identical to the premises for impairment of the exposure.

• Calculation of the expected credit loss

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

• type of credit product;

• currency of the product;

• year of granting;

• assessment of risk of the customer’s default;

• the customer’s business segment;

• method of assessing the customer risk.

The Bank uses the calculates expected credit losses on an individual and on a portfolio basis.

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

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

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

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

The calculation of expected credit losses encompasses estimates of future macroeconomic conditions. In terms of portfolio analysis, the impact of macroeconomic scenarios is taken into account in the amount of the individual risk parameters. The methodology for calculating the risk parameters includes the study of the dependencies of these parameters on the macroeconomic conditions based on historical data. Three macroeconomic scenarios based on the Bank’s own forecasts are used for calculating the expected loss – a baseline forecast with a probability of 80% and two alternative scenarios, each with a probability of 10%. The scope of the forecast indicators includes the GDP growth index, the rate of unemployment, the WIBOR 3M rate, the LIBOR CHF 3M rate, the CHF/PLN exchange rate, the property price index and the NBP reference rate. The final expected loss is the weighted average probability of scenarios from expected losses corresponding to individual scenarios. The Bank ensures the compliance of the macroeconomic scenarios used for the calculation of the risk parameters with macroeconomic scenarios used for the credit risk budgeting processes. The baseline scenario uses the base macroeconomic forecasts. The forecasts are prepared on the basis of the quantitative models, taking into account adjustments for the presence of one-off events.

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

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

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

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

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

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

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

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

Financial information

ALLOWANCES FOR EXPECTED CREDIT LOSSES	Note	2020	2019
Amounts due from banks	27	(3)	-
Debt securities	30	(32)	(7)
- measured at fair value through other comprehensive income		(10)	(11)
- measured at amortized cost		(22)	4
Loans and advances to customers	32	(1 550)	(962)
- measured at fair value through other comprehensive income		(25)	(12)
- measured at amortized cost		(1 525)	(950)
Other financial assets	36	-	1
Provisions for financial liabilities and guarantees granted	41	(354)	(41)

Total		(1 939)	(1 009)
including the macroeconomic impact on the loan portfolio		(1 076)	-

CALCULATION OF ESTIMATES

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

ESTIMATED CHANGE IN EXPECTED CREDIT LOSSES ON LOANS AND ADVANCES RESULTING FROM MATERIALIZATION OF A SCENARIO OF THE RISK PARAMETERS DETERIORATION OR IMPROVEMENT, OF WHICH:1	31.12.2020		31.12.2019
	+10% scenario	-10% scenario	+10% scenario	-10% scenario
changes in the present value of estimated future cash flows for the Banks’s portfolio of individually impaired loans and advances assessed on an individual basis	(198)	260	(235)	308
changes in the probability of default	181	(201)	153	(161)
change in recovery rates	(476)	478	(415)	416

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

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

	31.12.2020		31.12.2019
	optimistic	pessimistic	optimistic	pessimistic
Estimated change in the level of allowances for expected credit losses for not-impaired exposures due to the realisation of particular macroeconomic scenarios (in PLN million)	(619)	488	69	(89)

The tables below present forecasts of the key macroeconomic parameters adopted as at 31 December 2020 and 31 December 20219, together with their assumed realization probabilities.

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

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

21. net Impairment of non-financial assets

NET IMPAIRMENT OF NON-FINANCIAL ASSETS	NOTE	2020	2019
Property, plant and equipment	33.1	(58)	(14)
Non-current assets held for sale	34	(4)	(1)
Intangible assets	33.2	(116)	2
Investments in subsidiaries	35	(42)	-
Investments in associates and joint ventures	35	(88)	-
Other financial assets	36	(48)	(27)

Total		(356)	(40)

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

	2020	2019
Cost of the legal risk of mortgage loans in convertible currencies	(6 552)	(451)
- potential future settlements and court disputes	(6 139)	(310)
- proceedings in progress	(413)	(141)

IMPACT OF THE LEGAL RISK OF MORTGAGE LOANS IN CONVERTIBLE CURRENCIES	Gross carrying amount of mortgage loans in convertible currencies before recognition of mortgage loans in convertible currencies legal risk cost	Mortgage loans in convertible currencies legal risk cost	Gross carrying amount of mortgage loans in convertible currencies after recognition of mortgage loans in convertible currencies legal risk cost
31 DECEMBER 2020		Mortgage loans in convertible currencies legal risk cost
Loans and advances to customers – adjustment reducing the carrying amount of loans due to:	21 983	6 617	15 366
- potential future settlements and court disputes	21 203	6 122	15 081
- proceedings in progress	780	495	285
Provisions		426
- potential future settlements and court disputes		351
- proceedings in progress		75
TOTAL	21 983	7 043	15 366

IMPACT OF THE LEGAL RISK OF MORTGAGE LOANS IN CONVERTIBLE CURRENCIES	Gross carrying amount of mortgage loans in convertible currencies before recognition of mortgage loans in convertible currencies legal risk cost	Mortgage loans in convertible currencies legal risk cost	Gross carrying amount of mortgage loans in convertible currencies after recognition of mortgage loans in convertible currencies legal risk cost
31 DECEMBER 2019		Mortgage loans in convertible currencies legal risk cost
Loans and advances to customers – adjustment reducing the carrying amount of loans due to:	21 832	422	21 410
- potential future court disputes	21 595	281	21 314
- proceedings in progress	237	141	96
Provisions		29
- potential future court disputes		29
- proceedings in progress		0
TOTAL	21 832	451	21 410

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

With regard to the disputes existing as at 31 December 2020, the Bank reduced gross carrying amount of mortgage loans by PLN 495 milion (PLN 141 million as at 31 December 2019). For active agreements, the Bank, reflecting the changed, estimated contractual cash flows, adjusted the gross carrying amount of mortgage loans in accordance with IFRS 9 by the expected impact of potential settlements and disputes, reducing their value by PLN 6 122 million (PLN 281 million as at 31 December 2019).

With regard to credit contracts creating the Bank’s liability resulting in future cash outflow, the Bank set up a provision for potential settlements and disputes in the amount of PLN 351 million (PLN 29 million as at 31 December 2019) and for pending proceedings in the amount of PLN 75 million.

Additional information on the mortgage loans in convertible currencies portfolio has been presented by the Bank in the notes „Legal claims” and „Management of currency risk associated with mortgage loans for individuals”.

calculation of estimates

The Bank identified a risk that the planned cash flows resulting from mortgage loans denominated and indexed in foreign currency might not be fully repaid and/or there may arise a liability resulting in future cash outflow. The Bank reduces the gross carrying amount of mortgage loans denominated and indexed in foreign currency and/or recognizes a provision for legal risk in accordance with IFRS 9 Financial instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The cost of legal risk was estimated taking into account numerous assumptions which have a material impact on the estimates disclosed in the Bank’s financial statements.

The legal risk cost of mortgage loans granted in convertible currencies has been estimated using a statistical method taking into account the impact of Clients’ characteristics, as a sum of products of:

• probabilities of occurence of a certain outcomes of court disputes and loss amount for various scenarios of dispute outcomes, taking into account the current and expected numer of court cases in the time horizon when the Bank is exposed to such a risk, and

• probability of the Client acceptance of settlements and the loss amount resulting from the settlements.

The Bank also estimates the probability of negative outcomes in respect of declared and potential claims. The probabilities differ for denominated and indexed foreign currency mortgage loans, respectively. In assessing these probabilities, the Bank is supported by external law firms. In the Bank’s opinion the level of the estimated costs of legal risk is also influenced by such factors as: the duration of court proceedings (also estimated on the basis of relatively short statistics that do not meet the conditions for applying quantitative methods) and the costs necessary to start litigation and litigation suport costs.

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

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

23. Administrative expenses

Accounting policies

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

Financial information

ADMINISTRATIVE EXPENSES	2020	2019

Employee benefits	(2 526)	(2 788)
Overheads, of which:	(1 071)	(1 137)
rent	(81)	(80)
IT	(295)	(273)
Depreciation and amortization	(853)	(820)
property, plant and equipment, of which:	(470)	(464)
right-of-use assets	(210)	(195)
IT	(82)	(106)
intangible assets, of which:	(383)	(356)
IT	(376)	(348)
Net regulatory charges	(730)	(492)

Total	(5 180)	(5 237)

EMPLOYEE BENEFITS	2020	2019
Wages and salaries, including:	(2 113)	(2 329)
costs of contributions to the employee pension plan	(60)	(61)
restructuring costs	(16)	(32)
Social insurance, of which:	(352)	(380)
contributions for disability and retirement benefits	(305)	(320)
Other employee benefits	(61)	(79)

Total	(2 526)	(2 788)

NET REGULATORY CHARGES	2020	2019
Contribution and payments to the Bank Guarantee Fund (BGF), including:	(646)	(487)
to the Resolution Fund	(296)	(326)
to the Banks’ Guarantee Fund	(350)	(161)
Fees to PFSA	(29)	(37)
Flat-rate income tax, of which:	(7)	81
withheld tax (20%)	-	138
flat-rate income tax (3%)	(7)	(57)
Other taxes and fees	(48)	(49)

Total	(730)	(492)

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

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

24. Tax on certain financial institutions

As of 1 February 2016, the Act of 15 January 2016 on tax on certain financial institutions came into force, which covered, among other things, banks and insurance companies. The tax is charged on the surplus of an entity’s total assets above PLN 4 billion; in the case of banks, the assessment is based on the trial balance as at the end of each month. Banks are entitled to reduce the tax base by deducting such items as e.g. own funds or the value of Treasury securities. Additionally, banks reduce the tax base by the value of assets acquired from the NBP, constituting collateral of a refinancing loan granted by the NBP. The tax rate for all taxpayers is 0.0366% per month, and the tax is paid monthly by the 25th of the month following the month to which it relates. The tax paid is not tax-deductible for corporate income tax purposes.

TAX ON CERTAIN FINANCIAL INSTITUTIONS	2020	2019
Total	(957)	(931)

25. Income tax expense

Accounting policies

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

• Current income tax

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

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

• Deferred income tax

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

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

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

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

Financial information

• income tax expense

	2020	2019
Income tax expense recognized in the income statement	(678)	(1 283)
Current income tax expense	(1 452)	(1 339)
Deferred income tax on temporary differences	774	56
Income tax reported in other comprehensive income in respect of temporary differences	(258)	2

Total	(936)	(1 281)

• reconciliation of the effective tax rate

RECONCILIATION OF THE EFFECTIVE TAX RATE	2020	2019
Profit or loss before tax	(2 266)	5 118
Tax calculated using the enacted rate in force in Poland (19%)	431	(972)
Effect of permanent differences between profit before tax and taxable income with income tax, of which:	(1 115)	(316)
non-deductible impairment allowance on investments in subordinated entities	(24)	-
non-deductible allowances for expected credit losses on credit exposures and securities	(47)	(31)
contributions and payments to the Bank Guarantee Fund	(123)	(92)
tax on certain financial institutions	(182)	(177)
impairment allowance in respect of the identified impairment of goodwill of Nordea Bank Polska S.A.	(22)	-
cost of the legal risk of mortgage loans in convertible currencies other	(769)	(85)
interest on foreign exchange gains in Sweden	4	(52)
Dividend income	63	106
3% flat-rate income tax on interest for non-residents	-	(11)
other permanent differences	(15)	26
Effect of other timing differences, including new technologies tax relief and donations	6	5

Income tax expense recognized in the income statement	(678)	(1 283)

Effective tax rate (in %)	(29,92)%	25,07%

• Deferred tax assets, net

DEFERRED TAX PROVISION AND ASSET 2020	As at the beginning of the period	INCOME STATEMENT	OTHER COMPREHENSIVE INCOME	As at the end of the period
Interest accrued on receivables (loans)	208	35	-	243
Capitalized interest on performing housing loans	24	(24)	-	-
Interest on securities	114	34	-	148
Valuation of securities	106	(12)	192	286
Valuation of derivative financial instruments	12	(18)	52	46
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	197	(32)	-	165
Taxable income on the release of IBNR allowance, previously tax deductible, on implementation of IFRS 9	65	(13)	-	52

Deferred income tax provision, gross	726	(30)	244	940

Interest accrued on liabilities	74	(39)	-	35
Valuation of securities	-	40	-	40
Provision for employee benefits	76	(1)	1	76
Allowances for expected credit losses	902	264	-	1 166
Fair value measurement of loans	138	13	(15)	136
Fees to be settled in time using straight-line valuation method and effective interest rate	760	(11)	-	749
Impact of legal risk of mortgage loans in convertible currencies	-	476		476
Other deductible temporary differences	32	5	-	37
Provision for costs to be incurred	34	(3)	-	31

Deferred tax asset, gross	2 016	744	(14)	2 746

Total effect of temporary differences	1 290	774	(258)	1 806
Deferred income tax asset (presented in the statement of financial position)	1 290	774	(258)	1 806

DEFERRED TAX PROVISION AND ASSET 2019	As at the beginning of the period	INCOME STATEMENT	OTHER COMPREHENSIVE INCOME	As at the end of the period
Interest accrued on receivables (loans)	236	(28)	-	208
Capitalized interest on performing housing loans	39	(15)	-	24
Interest on securities	79	35	-	114
Valuation of securities	99	13	(6)	106
Valuation of derivative financial instruments	-	(10)	22	12
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	288	(91)	-	197
Taxable income on the release of IBNR allowance, previously tax deductible, on implementation of IFRS 9	78	(13)	-	65

Deferred income tax provision, gross	819	(109)	16	726

Interest accrued on liabilities	87	(13)	-	74
Valuation of derivative financial instruments	135	(131)	(4)	-
Provision for employee benefits	77	(3)	2	76
Allowances for expected credit losses	1 019	(117)	-	902
Fair value measurement of loans	17	101	20	138
Fees to be settled in time using straight-line valuation method and effective interest rate	683	77	-	760
Other deductible temporary differences	4	28	-	32
Provision for costs to be incurred	29	5	-	34

Deferred tax asset, gross	2 051	(53)	18	2 016

Total effect of temporary differences	1 232	56	2	1 290
Deferred income tax asset (presented in the statement of financial position)	1 232	56	2	1 290

• Tax Group

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

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

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

• Tax policy

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

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

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

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

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

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

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

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

	Corporate income tax 2020
PKO Bank Polski S.A	1 452
- Poland	1 452

26. Cash and balances with the Central Bank

Accounting policies

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

Financial information

CASH AND BALANCES WITH THE CENTRAL BANK	31.12.2020	31.12.2019
Current account with the Central Bank	4 068	10 777
Cash in hand	3 329	3 825
Total	7 397	14 602

During the course of a working day, the Bank may use funds from the mandatory reserve accounts for ongoing payments, on the basis of an instruction submitted to the National Bank of Poland (NBP). However, the Bank must ensure that the average monthly balance on this account complies with the requirements set in the mandatory reserve declaration.

27. Amounts due from banks

Accounting policies

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

Financial information

AMOUNTS DUE FROM BANKS	31.12.2020	31.12.2019
Measured at amortized cost	5 311	7 957
Deposits with banks	1 287	2 907
Current accounts	414	472
Loans and advances granted	3 421	2 299
Amount due from PKO Bank Hipoteczny S.A. in respect of the sale of mortgage-secured housing loans by the Bank	189	2 279
Gross amount	5 311	7 957
Allowances for expected credit losses	(7)	(4)
Net amount	5 304	7 953

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

AMOUNTS DUE FROM BANKS CHANGES IN GROSS CARRYING AMOUNT DURING THE PERIOD	2020	2019
Measured: at amortized cost
As at the beginning of the period	7 957	11 217
Financial instruments granted or acquired	3 245	2 112
Utilization of limits or disbursement of tranches	2 606	798
Repayments	(8 564)	(6 167)
Other changes	67	(3)
As at the end of the period	5 311	7 957

AMOUNTS DUE FROM BANKS - CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	2020	2019
Measured: at amortized cost
As at the beginning of the period	(4)	(4)
Increase due to recognition and purchase	(1)	-
Changes in credit risk (net)	(2)	-
As at the end of the period	(7)	(4)

AMOUNTS DUE FROM BANKS BY MATURITY	31.12.2020	31.12.2019
up to 1 month	1 897	3 339
1 to 3 months	-	77
3 months to 1 year	1	2 019
1 to 5 years	3 406	2 518

Total	5 304	7 953

28. Hedge accounting

risk management strategy

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

The interest rate risk covers in particular:

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

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

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

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

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

• core business activities;

• trading activities;

• contracts concluded which generate foreign exchange risk.

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

accounting policies

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

• Cash flow hedges

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

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

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

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

• Fair value hedges

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

A change in the fair value adjustment to the hedged item is recognized in “Net income from financial instruments”.

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

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

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

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

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

types of hedging strategies applied by the Group

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

• 5 strategies for hedging cash flow volatility

• 4 strategies for hedging fair value volatility.

In 2020 the Bank introduces new hedging strategies:

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

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

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

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

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

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

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

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

• Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of negotiated deposits in PLN, resulting from the risk of changes in interest rates, using two transactions: CIRS and CIRS-EP;

• Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of bank products of regular savings in PLN, resulting from the risk of changes in interest rates, using two transactions: CIRS and CIRS- EP;

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

The total impact of the discontinuation of hedge accounting under the above-mentioned the relationship to other comprehensive income amounted to minus PLN 117.5 million with a simultaneous increase in the net interest income and foreign exchange gains/ (losses) by this amount.

No changes were made to other hedging strategies in 2020.

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

The tables below summarizes the types of strategies applied by the Bank.

Type of hedging strategy	Cash flow volatility hedges (strategy no.: 1,2,3,4,5,6,7,8,9,14)
Hedged risk	foreign exchange risk and interest rate risk	interest rate risk
Hedging instrument	transactions CIRS float – float transactions CIRS fixed – float	IRS fixed – float transactions
Hedged item	• the portfolio of floating interest loans in foreign currencies and • the portfolio of current negotiated term deposits, including their future renewals. In designating the hedged item, the Bank used the IAS39 WS 99C in the version adopted by the European Union, or • fixed interest rate financial liability denominated in foreign currency or • the portfolio of floating interest rate regular savings products in PLN or financial liabilities in foreign currencies	the portfolio of loans in PLN or foreign currencies indexed to a floating interest rate
Sources of hedge ineffectiveness	• margin on the hedging instrument • differences in discount on the hedged item and the hedging instrument • CVA/DVA adjustment of the hedging instrument	• change in market parameters between the moment of determining the terms and conditions relating to the hedged item and the moment of concluding the hedge • differences in discount on the hedged item and the hedging instrument • CVA/DVA adjustment of the hedging instrument
	The period in which cash flows are expected to occur and affect the financial results: January 2021 – October 2026	The period in which cash flows are expected to occur and affect the financial results: January 2021 – August 2030

Type of hedging strategy	Fair value volatility hedges (strategy no.: 10,11,12,13)
Hedged risk	interest rate risk
Hedging instrument	IRS fixed – float transactions
Hedged item	a component of the interest rate risk relating to a fixed interest rate loan or security in a foreign currency or in PLN, which corresponds to the market IRS rate
Sources of hedge ineffectiveness	• change in market parameters between the moment of determining the terms and conditions relating to the hedged item and the moment of concluding the hedge • CVA/DVA adjustment of the hedging instrument • difference between the present value of the floating leg of IRS and the present value of the nominal value of a security

HEDGED ITEM 31.12.2020	CARRYING AMOUNT OF THE HEDGED ITEM	ITEM IN THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM	STRATEGY NO.
Cash flow hedges
Loans in CHF	525	Loans and advances to customers	280	1; 7
Negotiated deposits in PLN	1 939	Amounts due to customers	280	1; 7
Loans in CHF	400	Loans and advances to customers	(2)	3
Loans in PLN	66 304	Loans and advances to customers	(387)	2
Loans in EUR	599	Loans and advances to customers	139	5; 6
Negotiated deposits in PLN	2 591	Amounts due to customers	139	5; 6
Loans in EUR	704	Loans and advances to customers	(1)	3
Fair value hedges
Security in EUR	30	Securities measured at amortized cost	1	11
Security in EUR	102	Securities measured at fair value through other comprehensive income	1	12
Security in USD	158	Securities measured at fair value through other comprehensive income	5	12
Loans in EUR	174	Loans and advances to customers	1	10
Security in PLN	535	Securities measured at fair value through other comprehensive income	17	13
Total			54

HEDGED ITEM 31.12.2019	CARRYING AMOUNT OF THE HEDGED ITEM	ITEM IN THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM	STRATEGY NO.
Cash flow hedges
Loans in CHF	1 560	Loans and advances to customers	348	1; 7
Negotiated deposits in PLN	5 784	Amounts due to customers	348	1; 7
Loans in CHF	1 643	Loans and advances to customers	(97)	4
Financial liability in USD	875	Debt securities in issue
Financial liability in EUR	748	Debt securities in issue
Loans in CHF	1 431	Loans and advances to customers	220	8; 9
Regular savings products in PLN	5 378	Amounts due to customers	220	8; 9
Loans in CHF	400	Loans and advances to customers	(2)	3
Loans in PLN	40 681	Loans and advances to customers	(51)	2
Loans in EUR	624	Loans and advances to customers	(43)	5; 6
Negatioted deposits in PLN	2 700	Amounts due to customers	(43)	5; 6
Kredyty w EUR	700	Loans and advances to customers	-	3
Fair value hedges
Security in EUR	30	Securities measured at amortized cost	-	11
Security in EUR	44	Securities measured at fair value through other comprehensive income	-	12
Security in USD	134	Securities measured at fair value through other comprehensive income	(1)	12
Loans in EUR	183	Loans and advances to customers	1	10
Total			375

Hedging derivative 2020-12-31		Nominal amount of hedging derivatives	Nominal-weighted average margin / Nominal-weighted average fixed interest rate	Carrying amount (fair value of hedging instruments)		Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item	Change in the fair value of hedging instruments since designation	Strategy no.
Hedging derivative 2020-12-31		Nominal amount of hedging derivatives		Assets	Liabilities			Strategy no.
Cash flow hedges
CIRS CHF/PLN	float CHF	525	-0,0507%	-	293	(1)	(278)	1
CIRS CHF/PLN	float PLN	1 939	0,0000%	-	293	(1)	(278)	1
IRS PLN	fixed PLN	66 304	0,8196%	590	8	2	398	2
IRS CHF	fixed CHF	400	-0,4425%	6	-	-	1	3
IRS EUR	fixed EUR	1 228	-0,1479%	22	6	(1)	18	3; 6
CIRS CHF/EUR	float CHF	-		-	-	6	-	4; 7; 9; 14
CIRS CHF/EUR	fixed EUR	-		-	-	6	-	4; 7; 9; 14
CIRS EUR/PLN	float EUR	75	0,0000%	-	17	(1)	(14)	5
CIRS EUR/PLN	float PLN	328	-0,0500%	-	17	(1)	(14)	5
CIRS-EP EUR/PLN	fixed EUR	524	0,5719%	-	164	(14)	(140)	6
CIRS-EP EUR/PLN	float PLN	2 263	0,0000%	-	164	(14)	(140)	6
Fair value hedges
IRS EUR	float EUR	306	-0,2837%	-	13	13	(3)	10; 11; 12
IRS USD	float USD	158	1,3735%	-	20	17	(5)	12
IRS PLN	float PLN	535	1,2437%	-	21	17	(17)	13
Total				618	542	38	(40)

Hedging derivative 31.12.2019		Nominal amount of hedging derivatives	Nominal-weighted average margin / Nominal-weighted average fixed interest rate	Carrying amount (fair value of hedging instruments)		Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item	Change in the fair value of hedging instruments since designation	Strategy no.
				Assets	Liabilities
Cash flow hedges
CIRS CHF/PLN	float CHF	1 250	0,0109%	14	378	1	(379)	1; 8
	float PLN	4 525	0,0000%
IRS PLN	PLN	40 681	1,7652%	229	8	2	56	2
IRS CHF	CHF	400	-0,4425%	8	-	-	2	3
IRS EUR	EUR	1 224	-0,1699%	15	2	1	12	3; 6
CIRS CHF/USD	float CHF	818	0,0000%	190	-	(2)	124	4
	fixed USD	875	2,4315%
CIRS CHF/EUR	float CHF	2 566	0,0000%	86	187	1	(123)	4; 7; 9
	fixed EUR	2 301	0,0119%
CIRS EUR/PLN	float EUR	100	0,0000%	11	-	-	11	5
	float PLN	437	-0,0277%
CIRS-EP EUR/PLN	fixed EUR	2 077	0,1443%	37	86	3	(54)	6; 7; 9
	float PLN	8 900	0,0000%
Fair value hedges
IRS EUR	EUR	257	-0,1874%	1	6	(4)	(1)	10; 11; 12
IRS USD	USD	134	1,5702%	3	1	2	1	12
Total				594	668	4	(351)

Financial information

CARRYING AMOUNT OF HEDGING INSTRUMENTS	31.12.2020		31.12.2019
CARRYING AMOUNT OF HEDGING INSTRUMENTS	Assets	Liabilities	Assets	Liabilities
Cash flow hedges	618	489	590	661
- interest rate risk IRS	618	14	252	10
- foreign exchange risk and interest rate risk - CIRS	-	475	338	651
Fair value hedges	-	54	4	7
- interest rate risk IRS	-	54	4	7

Total	618	543	594	668

Cash flow hedges

CHANGE IN OTHER COMPREHENSIVE INCOME RELATING TO CASH FLOW HEDGES AND AN INEFFECTIVE PORTION OF CASH FLOW HEDGES	2020	2019
Accumulated other comprehensive income at the beginning of the period, net	95	(18)
Impact on other comprehensive income during the period, gross	276	139
Gains/losses recognized in other comprehensive income during the period	253	395
Amounts transferred from other comprehensive income to the income statement, of which:	23	(256)
- interest income	(797)	(536)
- net foreign exchange gains/(losses)	820	280
Tax effect	(52)	(26)
Accumulated other comprehensive income at the end of the period, net	319	95

Ineffective portion of cash flow hedges recognized in the income statements, including in:	(10)	6
Foreign exchange gains/ (losses)	(11)	3
Gain/(loss) on financial instruments	1	3

Fair value hedges

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

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY (in original currencies)	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
31.12.2020
Hedge type: Cash flow hedges
Risk hedged: interest rate risk
IRS PLN fixed - float	2 150	1 520	12 464	49 427	744	66 305
IRS EUR fixed - float	-	-	500	724	4	1 228
IRS CHF fixed - float	-	-	400	-	-	400
Risk hedged: foreign exchange and interest rate risks
CIRS float CHF/float PLN
float CHF	-	-	500	25	-	525
float PLN	-	-	1 843	97	-	1 940
CIRS float EUR/float PLN
float EUR	-	75	-	-	-	75
float PLN	-	328	-	-	-	328
CIRS float PLN/fixed EUR
float PLN	-	-	-	2 263	-	2 263
fixed EUR	-	-	-	524	-	524
Hedge type: Fair value hedges
Risk hedged: interest rate risk
IRS USD fixed - float	-	-	-	158	-	158
IRS EUR fixed - float	-	-	82	188	36	306
IRS PLN fixed - float					535	535

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY (in original currencies)	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
31.12.2019
Hedge type: Cash flow hedges
Risk hedged: interest rate risk
IRS PLN fixed - float	500	4 700	25 492	9 922	67	40 681
IRS EUR fixed - float	-	-	700	524	-	1 224
IRS CHF fixed - float	-	-	-	400	-	400
Zabezpieczane ryzyko: ryzyka walutowego i ryzyka stopy procentowej
CIRS float CHF/float PLN
float CHF	-	50	425	750	25	1 250
float PLN	-	169	1 456	2 812	88	4 525
CIRS fixed USD/float CHF
fixed USD	-	-	-	875	-	875
float CHF	-	-	-	817	-	817
CIRS float EUR/float PLN
float EUR	25	-	-	75	-	100
float PLN	108	-	-	329	-	437
CIRS float PLN/fixed EUR
float PLN	-	-	-	8 900	-	8 900
fixed EUR	-	-	-	2 077	-	2 077
CIRS fixed EUR/float CHF
fixed EUR	-	-	-	2 301	-	2 301
float CHF	-	-	-	2 567	-	2 567
Hedge type: Fair value hedges
Risk hedged: interest rate risk
IRS USD fixed - float	-	-	-	134	-	134
IRS EUR fixed - float	-	-	-	209	48	257

Calculation of estimates

ESTIMATED CHANGE IN VALUATION OF DERIVATIVE HEDGING INSTRUMENTS FOLLOWING A PARALLEL SHIFT IN YIELD CURVES:	31.12.2020		31.12.2019
	scenario +50bp	scenario -50bp	scenario +50bp	scenario -50bp
IRS	(537)	543	(192)	194
CIRS	(29)	29	(39)	40

Total	(566)	572	(231)	234

29. Other derivative instruments

Accounting policies

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

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

Estimates and judgments

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

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

Financial information

OTHER DERIVATIVE INSTRUMENTS - BY TYPE	31.12.2020		31.12.2019
OTHER DERIVATIVE INSTRUMENTS - BY TYPE	Assets	Liabilities	Assets	Liabilities
IRS	3 192	3 405	1 525	1 624
CIRS	535	1 505	151	148
FX Swap	377	315	217	186
Options	260	383	312	336
Commodity swap	411	409	287	283
FRA	2	2	1	1
Forward	313	293	305	348
Futures	-	-	-	1
Commodity Forward	326	320	-	-

Total	5 416	6 632	2 798	2 927

	31.12.2020	31.12.2019
CVA and CDA adjustments	(15)	(9)

NOMINAL AMOUNTS OF UNDERLYING INSTRUMENTS (BUY AND SELL TOGETHER) other derivative instruments
31.12.2020	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
IRS	13 198	14 716	77 620	233 752	39 712	378 998
Purchase	6 599	7 358	38 810	116 876	19 856	189 499
Sale	6 599	7 358	38 810	116 876	19 856	189 499
CIRS	-	-	17 936	48 460	7 564	73 960
Purchase	-	-	8 799	23 825	3 772	36 396
Sale	-	-	9 137	24 635	3 792	37 564
FX Swap	28 763	12 923	9 428	5 373	-	56 487
Purchase of currencies	14 458	6 459	4 674	2 697	-	28 288
Sale of currencies	14 305	6 464	4 754	2 676	-	28 199
Options	5 154	9 685	25 008	10 345	1	50 193
Purchase	2 589	4 838	12 435	5 170	-	25 032
Sale	2 565	4 847	12 573	5 175	1	25 161
FRA	-	-	17 832	834	-	18 666
Purchase	-	-	8 680	584	-	9 264
Sale	-	-	9 152	250	-	9 402
Forward	6 513	14 387	18 565	7 955	47	47 467
Purchase of currencies	3 271	7 168	9 281	3 985	23	23 728
Sale of currencies	3 242	7 219	9 284	3 970	24	23 739
Other, including Commodity swap and Futures (including stock exchange indices)	701	1 299	3 661	1 133	434	7 228
Purchase	351	650	1 832	567	233	3 633
Sale	350	649	1 829	566	201	3 595

Total	54 329	53 010	170 050	307 852	47 758	632 999

NOMINAL AMOUNTS OF UNDERLYING INSTRUMENTS (BUY AND SELL TOGETHER) other derivative instruments
31.12.2019	up to 1 month	1 to 3 months	3 months to 1 year	1 to 5 years	over 5 years	Total
IRS	7 204	40 152	187 600	207 090	39 576	481 622
Purchase	3 602	20 076	93 800	103 545	19 788	240 811
Sale	3 602	20 076	93 800	103 545	19 788	240 811
CIRS	1 386	447	4 248	64 627	7 554	78 262
Purchase	694	210	2 019	32 207	3 772	38 902
Sale	692	237	2 229	32 420	3 782	39 360
FX Swap	21 409	8 336	13 663	5 211	-	48 619
Purchase of currencies	10 700	4 161	6 846	2 639	-	24 346
Sale of currencies	10 709	4 175	6 817	2 572	-	24 273
Options	6 263	12 743	37 545	11 845	1	68 397
Purchase	3 108	6 432	18 576	5 849	-	33 965
Sale	3 155	6 311	18 969	5 996	1	34 432
FRA	-	-	22 211	1 000	-	23 211
Purchase	-	-	12 397	500	-	12 897
Sale	-	-	9 814	500	-	10 314
Forward	7 601	13 160	24 653	12 650	-	58 064
Purchase of currencies	3 795	6 588	12 319	6 309	-	29 011
Sale of currencies	3 806	6 572	12 334	6 341	-	29 053
Other, including Commodity swap and Futures (including stock exchange indices)	824	1 348	1 924	614	-	4 710
Purchase	518	683	962	307	-	2 470
Sale	306	665	962	307	-	2 240

Total	44 687	76 186	291 844	303 037	47 131	762 885

Calculation of estimates

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

ESTIMATED CHANGE IN VALUATION OF OTHER DERIVATIVE INSTRUMENTS FOLLOWING A PARALLEL SHIFT IN YIELD CURVES:	31.12.2020		31.12.2019
	scenario +50bp	scenario -50bp	scenario +50bp	scenario -50bp
IRS	(530)	536	(184)	185
CIRS	(29)	29	(40)	40
other instruments	(4)	4	(2)	2

Total	(563)	569	(226)	227

30. Securities

Accounting policies

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

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

Financial information

SECURITIES	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2020
Debt securities	1 171	647	70 446	47 217	119 481
NBP money market bills	-	-	-	-	-
Treasury bonds (in PLN)	685	119	50 654	29 617	81 075
Treasury bonds (in foreign currencies)	4	367	2 090	-	2 461
Treasury bills	349	-	500	-	849
corporate bonds (in PLN) secured with the State Treasury guarantees	-	-	8 704	9 887	18 591
municipal bonds (in PLN)	15	-	4 640	5 060	9 715
municipal bonds (in foreign currencies)	-	-	-	-	-
corporate bonds (in PLN)	110	161	3 835	1 517	5 623
corporate bonds (in foreign currencies)	-	-	23	1 136	1 159
covered bonds	8	-	-	-	8
other debt securities	-	-	-	-	-
Equity securities	27	460	-	-	487
shares in other entities – not listed	-	443	-	-	443
shares in other entities – listed	25	17	-	-	42
participation units in investment funds, investment certificates, rights to shares, pre-emptive rights	2	-	-	-	2

Total (excluding adjustment relating to fair value hedge accounting)	1 198	1 107	70 446	47 217	119 968
Adjustment relating to fair value hedge accounting	-	-	-	5	5

Total	1 198	1 107	70 446	47 222	119 973

SECURITIES	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2019
Debt securities	1 158	298	61 130	13 361	75 947
NBP money market bills	-	-	1 000	-	1 000
Treasury bonds (in PLN)	982	118	49 299	7 373	57 772
Treasury bonds (in foreign currencies)	2	-	2 085	-	2 087
municipal bonds (in PLN)	15	-	5 232	4 563	9 810
municipal bonds (in foreign currencies)	-	-	-	-	-
corporate bonds (in PLN)	111	180	3 514	1 083	4 888
corporate bonds (in foreign currencies)	1	-	-	342	343
covered bonds	47	-	-	-	47
Equity securities	17	457	-	-	474
shares in other entities – not listed	-	433	-	-	433
shares in other entities – listed	15	24	-	-	39
participation units in investment funds, investment certificates, rights to shares, pre-emptive rights	2	-	-	-	2

Total (excluding adjustment relating to fair value hedge accounting)	1 175	755	61 130	13 361	76 421
Adjustment relating to fair value hedge accounting	-	-	-	1	1

Total	1 175	755	61 130	13 362	76 22

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

30.1. securities – financial assets by stage

SECURITIES (excluding adjustments relating to fair value hedge accounting) 31.12.2020	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	69 935	68	457	70 460	438
Treasury bonds (in PLN)	50 654	-	-	50 654	-
Treasury bonds (in foreign currencies)	2 090	-	-	2 090	-
Treasury bills	500	-	-	500	-
corporate bonds (in PLN) secured with the State Treasury guarantees	8 704	-	-	8 704	-
municipal bonds (in PLN)	4 573	67	-	4 640	-
corporate bonds (in PLN)	3 391	1	457	3 849	438
corporate bonds (in foreign currencies)	23	-	-	23	-
Allowances for expected credit losses	-	-	(14)	(14)	(14)
corporate bonds (in PLN)	-	-	(14)	(14)	(14)
Net amount	69 935	68	443	70 446	424
Treasury bonds (in PLN)	50 654	-	-	50 654	-
Treasury bonds (in foreign currencies)	2 090	-	-	2 090	-
Treasury bills	500	-	-	500	-
corporate bonds (in PLN) secured with the State Treasury guarantees	8 704	-	-	8 704	-
municipal bonds (in PLN)	4 573	67	-	4 640	-
corporate bonds (in PLN)	3 391	1	443	3 835	424
corporate bonds (in foreign currencies)	23	-	-	23	-
Measured at: amortized cost
Gross amount	47 026	228	-	47 254	-
Treasury bonds (in PLN)	29 617	-	-	29 617	-
corporate bonds (in PLN) secured with the State Treasury guarantees	9 889	-	-	9 889	-
municipal bonds (in PLN)	5 052	24	-	5 076	-
corporate bonds (in PLN)	1 330	204	-	1 534	-
corporate bonds (in foreign currencies)	1 138	-	-	1 138	-
Allowances for expected credit losses	(21)	(16)	-	(37)	-
corporate bonds (in PLN) secured with the State Treasury guarantees	(2)	-	-	(2)	-
municipal bonds (in PLN)	(16)	-	-	(16)	-
corporate bonds (in PLN)	(1)	(16)	-	(17)	-
corporate bonds (in foreign currencies)	(2)	-	-	(2)	-
Net amount	47 005	212	-	47 217	-
Treasury bonds (in PLN)	29 617	-	-	29 617	-
corporate bonds (in PLN) secured with the State Treasury guarantees	9 887	-	-	9 887	-
municipal bonds (in PLN)	5 036	24	-	5 060	-
corporate bonds (in PLN)	1 329	188	-	1 517	-
corporate bonds (in foreign currencies)	1 136	-	-	1 136	-
Total securities
Gross amount	116 961	296	457	117 714	438
Allowances for expected credit losses	(21)	(16)	(14)	(51)	(14)
Net amount	116 940	280	443	117 663	424

SECURITIES (excluding adjustments relating to fair value hedge accounting) 31.12.2019	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	60 613	59	463	61 135	463
NBP money market bills	1 000	-	-	1 000	-
Treasury bonds (in PLN)	49 299	-	-	49 299	-
Treasury bonds (in foreign currencies)	2 085	-	-	2 085	-
municipal bonds (in PLN)	5 173	59	-	5 232	-
corporate bonds (in PLN)	3 056	-	463	3 519	463
Allowances for expected credit losses	-	-	(5)	(5)	(5)
corporate bonds (in PLN)	-	-	(5)	(5)	(5)
Net amount	60 613	59	458	61 130	458
NBP money market bills	1 000	-	-	1 000	-
Treasury bonds (in PLN)	49 299	-	-	49 299	-
Treasury bonds (in foreign currencies)	2 085	-	-	2 085	-
municipal bonds (in PLN)	5 173	59	-	5 232	-
corporate bonds (in PLN)	3 056	-	458	3 514	458
Measured at: amortized cost
Gross amount	13 356	20	-	13 376	-
Treasury bonds (in PLN)	7 373	-	-	7 373	-
municipal bonds (in PLN)	4 554	20	-	4 574	-
corporate bonds (in PLN)	1 087	-	-	1 087	-
corporate bonds (in foreign currencies)	342	-	-	342	-
Allowances for expected credit losses	(15)	-	-	(15)	-
municipal bonds (in PLN)	(11)	-	-	(11)	-
corporate bonds (in PLN)	(4)	-	-	(4)	-
Net amount	13 341	20	-	13 361	-
Treasury bonds (in PLN)	7 373	-	-	7 373	-
municipal bonds (in PLN)	4 543	20	-	4 563	-
corporate bonds (in PLN)	1 083	-	-	1 083	-
corporate bonds (in foreign currencies)	342	-	-	342	-
Total securities
Gross amount	73 969	79	463	74 511	463
Allowances for expected credit losses	(15)	-	(5)	(20)	(5)
Net amount	73 954	79	458	74 491	458

30.2. securities - Changes in the gross carrying amount during the period

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Carrying amount as at the beginning of the period, gross	60 613	59	463	61 135	463
Transfer from stage 2 and 3 to stage 1	8	(8)	-	-	-
Transfer from stage 1 and 3 to stage 2	(14)	14	-	-	-
Transfer from stage 1 and 2 to stage 3	(19)	-	19	-	-
Granting or purchase of financial instruments	66 211	4	-	66 215	-
Utilization of limit or payment of tranches	953	-	1	954	1
Repayments	(61 710)	(1)	(23)	(61 734)	(23)
Immaterial modifications	2	-	-	2	-
Derecognition, including sale	(11)	-	-	(11)	-
Write-offs	-	-	(2)	(2)	(2)
Other changes	3 902	-	(1)	3 901	(1)
Carrying amount as at the end of the period, gross	69 935	68	457	70 460	438

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Carrying amount as at the beginning of the period, gross	13 356	20	-	13 376	-
Transfer from stage 2 and 3 to stage 1	12	(12)	-	-	-
Transfer from stage 1 and 3 to stage 2	(105)	105	-	-	-
Granting or purchase of financial instruments	34 610	-	-	34 610	-
Utilization of limit or payment of tranches	130	1	-	131	-
Repayments	(1 859)	(6)	-	(1 865)	-
Other changes	882	120	-	1 002	-
Carrying amount as at the end of the period, gross	47 026	228	-	47 254	-

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Carrying amount as at the beginning of the period, gross	49 713	388	471	50 572	471
Transfer from stage 2 and 3 to stage 1	295	(295)	-	-	-
Transfer from stage 1 and 3 to stage 2	(10)	10	-	-	-
Transfer from stage 1 and 2 to stage 3	-	(26)	26	-	26
Granting or purchase of financial instruments	215 341	22	-	215 363	-
Utilization of limit or payment of tranches	315	-	-	315	-
Repayments	(207 587)	(22)	(11)	(207 620)	(11)
Derecognition, including sale	(196)	(17)	-	(213)	-
Write-offs	-	-	3	3	3
Other changes	2 742	(1)	(26)	2 715	(26)
Carrying amount as at the end of the period, gross	60 613	59	463	61 135	463

SECURITIES – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD (excluding adjustments relating to fair value hedge accounting)	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Carrying amount as at the beginning of the period, gross	8 276	59	-	8 335	-
Transfer from stage 2 and 3 to stage 1	48	(48)	-	-	-
Transfer from stage 1 and 3 to stage 2	(18)	18	-	-	-
Granting or purchase of financial instruments	12 345	8	-	12 353	-
Utilization of limit or payment of tranches	25	-	-	25	-
Repayments	(7 928)	(8)	-	(7 936)	-
Immaterial modifications	1	-	-	1	-
Derecognition of financial instruments, including sale	(116)	(8)	-	(124)	-
Other changes	723	(1)	-	722	-
Carrying amount as at the end of the period, gross	13 356	20	-	13 376	-

30.3. securities - Changes in allowances for expected credit losses in the period

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

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
As at the beginning of the period	(15)	-	-	(15)	-
Transfer from stage 1 and 3 to stage 2	4	(4)	-	-	-
Increase due to recognition and purchase	(6)	-	-	(6)	-
Changes in credit risk (net)	(1)	(15)	-	(16)	-
Other adjustments	(3)	3	-	-	-
As at the end of the period	(21)	(16)	-	(37)	-

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
As at the beginning of the period	-	-	(10)	(10)	(10)
Changes in credit risk (net)	(2)	(15)	6	(11)	6
Write-offs	-	-	(3)	(3)	(3)
Other adjustments	2	15	2	19	2
As at the end of the period	-	-	(5)	(5)	(5)

SECURITIES – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
As at the beginning of the period	(12)	(8)	-	(20)	-
Transfer from stage 2 and 3 to stage 1	(8)	8	-	-	-
Increase due to recognition and purchase	(3)	-	-	(3)	-
Changes in credit risk (net)	7	-	-	7	-
Other adjustments	1	-	-	1	-
As at the end of the period	(15)	-	-	(15)	-

• Other information

	31.12.2020	31.12.2019
allowance not reducing the fair value of securities measured at fair value through other comprehensive income	19	16

SECURITIES BY MATURITY (excluding adjustments relating to fair value hedge accounting)	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2020
without a set date – equity securities	27	461	-	-	488
up to 1 month	1	2	4	7	14
from 1 to 3 months	351	-	503	12	866
from 3 months to 1 year	556	14	9 156	854	10 580
from 1 to 5 years	187	423	41 984	34 309	76 903
over 5 years	76	207	18 799	12 035	31 117

Total	1 198	1 107	70 446	47 217	119 968

SECURITIES BY MATURITY (excluding adjustments relating to fair value hedge accounting)	held for trading	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2019
without a set date – equity securities	17	457	-	-	474
up to 1 month	114	-	1 002	-	1 116
from 1 to 3 months	3	-	45	9	57
3 months to 1 year	344	-	2 082	379	2 805
from 1 to 5 years	197	117	43 107	8 631	52 052
over 5 years	500	181	14 894	4 342	19 917

Total	1 175	755	61 130	13 361	76 421

31. Repo and reverse repo transactions

Accounting policies

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

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

Financial information

Reverse repo transactions	31.12.2020	31.12.2019
Gross amount	-	1 081
Allowance for expected credit losses	-	-
Net amount	-	1 081

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

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

32. Loans and advances to customers

Accounting policies

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

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

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

Additionally, the Bank recognizes the of:

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

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

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

FINANCIAL INFORMATION

LOANS AND ADVANCES TO CUSTOMERS 31.12.2020	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
retail and private banking	5 895	14 054	93 748	113 697
real estate	7	14 054	71 363	85 424
consumer	5 888	-	22 385	28 273
SME	46	-	16 835	16 881
real estate	-	-	5 673	5 673
corporate	46	-	11 162	11 208
corporate	68	-	62 413	62 481
real estate	-	-	292	292
corporate	68	-	62 121	62 189
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)	6 009	14 054	172 996	193 059
Adjustment relating to fair value hedge accounting	4	-	-	4
Total	6 013	14 054	172 996	193 063

LOANS AND ADVANCES TO CUSTOMERS 31.12.2019	not held for trading, measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
retail and private banking	8 138	9 623	97 765	115 526
real estate	15	9 623	76 890	86 528
consumer	8 123	-	20 875	28 998
SME	54	-	17 791	17 845
real estate	-	-	5 768	5 768
corporate	54	-	12 023	12 077
corporate	94	-	67 398	67 492
real estate	-	-	283	283
corporate	94	-	67 115	67 209
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)	8 286	9 623	182 954	200 863
Adjustment relating to fair value hedge accounting	4	-	-	4
Total	8 290	9 623	182 954	200 867

32.1 Loans and advances to customers - financial assets by stage

LOANS AND ADVANCES TO CUSTOMERS (excluding adjustments relating to fair value hedge accounting) 31.12.2020	Stage 1	Stage 2	Stage 3	Total	including POCI
	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	13 181	863	10	14 054	-
housing loans	13 181	863	10	14 054	-
Allowances for expected credit losses	-	-	-	-	-
housing loans	-	-	-	-	-
Net amount	13 181	863	10	14 054	-
housing loans	13 181	863	10	14 054	-
Measured at: amortized cost
Gross amount	145 125	27 062	8 684	180 871	185
housing loans	66 428	10 951	1 882	79 261	81
corporate loans	58 985	13 271	5 423	77 679	51
consumer loans	19 712	2 840	1 379	23 931	53
Allowances for expected credit losses	(537)	(1 863)	(5 475)	(7 875)	(34)
housing loans	(42)	(522)	(1 369)	(1 933)	(26)
corporate loans	(297)	(920)	(3 179)	(4 396)	(4)
consumer loans	(198)	(421)	(927)	(1 546)	(4)
Net amount	144 588	25 199	3 209	172 996	151
housing loans	66 386	10 429	513	77 328	55
corporate loans	58 688	12 351	2 244	73 283	47
consumer loans	19 514	2 419	452	22 385	49
Loans and advances to customers, total
Gross amount	158 306	27 925	8 694	194 925	185
Allowances for expected credit losses	(537)	(1 863)	(5 475)	(7 875)	(34)
Net amount	157 769	26 062	3 219	187 050	151

LOANS AND ADVANCES TO CUSTOMERS (excluding adjustments relating to fair value hedge accounting) 31.12.2019	Stage 1	Stage 2	Stage 3	Total	including POCI
Measured at: fair value through OCI
Gross amount	9 438	177	8	9 623	-
housing loans	9 438	177	8	9 623	-
Allowances for expected credit losses	-	-	-	-	-
Net amount	9 438	177	8	9 623	-
housing loans	9 438	177	8	9 623	-
Measured at: amortized cost
Gross amount	169 305	11 409	8 683	189 397	288
housing loans	77 480	5 281	2 052	84 813	89
corporate loans	72 691	4 415	5 442	82 548	157
consumer loans	19 134	1 713	1 189	22 036	42
Allowances for expected credit losses	(557)	(1 011)	(4 875)	(6 443)	(55)
housing loans	(41)	(479)	(1 352)	(1 872)	(32)
corporate loans	(369)	(306)	(2 735)	(3 410)	3
consumer loans	(147)	(226)	(788)	(1 161)	(26)
Net amount	168 748	10 398	3 808	182 954	233
housing loans	77 439	4 802	700	82 941	57
corporate loans	72 322	4 109	2 707	79 138	160
consumer loans	18 987	1 487	401	20 875	16
Loans and advances to customers, total
Gross amount	178 743	11 586	8 691	199 020	288
Allowances for expected credit losses	(557)	(1 011)	(4 875)	(6 443)	(55)
Net amount	178 186	10 575	3 816	192 577	233

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

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Housing loans
Carrying amount as at the beginning of the period, gross	9 438	177	8	9 623	-
Transfer from stage 2 and 3 to stage 1	69	(69)	-	-	-
Transfer from stage 1 and 3 to stage 2	(713)	714	(1)	-	-
Transfer from stage 1 and 2 to stage 3	(4)	(3)	7	-	-
Granting or purchase of financial instruments	356	12	-	368	-
Utilization of limit or payment of tranches	3 426	76	-	3 502	-
Repayments	(1 028)	(15)	(1)	(1 044)	-
Immaterial modifications	39	4	-	43	-
Derecognition, including sale	(71)	(6)	-	(77)	-
Other changes	1 669	(27)	(3)	1 639	-
Carrying amount as at the end of the period, gross	13 181	863	10	14 054	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Housing loans
Carrying amount as at the beginning of the period, gross	77 480	5 281	2 052	84 813	91
Transfer from stage 2 and 3 to stage 1	979	(977)	(2)	-	-
Transfer from stage 1 and 3 to stage 2	(8 220)	8 344	(124)	-	-
Transfer from stage 1 and 2 to stage 3	(71)	(179)	250	-	-
Granting or purchase of financial instruments	751	68	35	854	-
Utilization of limit or payment of tranches	5 777	48	65	5 890	1
Repayments	(8 261)	(562)	(120)	(8 943)	(12)
Immaterial modifications	40	(5)	(2)	33	-
Derecognition, including sale	(235)	(18)	(7)	(260)	(7)
Write-offs	(11)	1	(18)	(28)	-
Change in the business model	(6)	(6)	(54)	(66)	-
Other changes1	(1 795)	(1 044)	(193)	(3 032)	8
Carrying amount as at the end of the period, gross	66 428	10 951	1 882	79 261	81

1 Including changes in the gross carrying amount disclosed in the Note „Cost of the legal risk of mortgage loans in convertible currencies”.

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Business loans
Carrying amount as at the beginning of the period, gross	72 691	4 415	5 442	82 548	157
Transfer from stage 2 and 3 to stage 1	553	(531)	(22)	-	-
Transfer from stage 1 and 3 to stage 2	(6 333)	6 619	(286)	-	-
Transfer from stage 1 and 2 to stage 3	(369)	565	(196)	-	-
Granting or purchase of financial instruments	9 115	1 876	354	11 345	18
Utilization of limit or payment of tranches	8 782	1 109	201	10 092	27
Repayments	(25 176)	(1 435)	(685)	(27 296)	(153)
Immaterial modifications	50	(31)	(16)	3	-
Derecognition, including sale	(124)	(22)	(29)	(175)	(29)
Write-offs	(139)	2	(64)	(201)	2
Change in the business model	-	(1)	(6)	(7)	-
Other changes	(65)	705	730	1 370	29
Carrying amount as at the end of the period, gross	58 985	13 271	5 423	77 679	51

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Consumer loans
Carrying amount as at the beginning of the period, gross	19 135	1 713	1 189	22 037	40
Transfer from stage 2 and 3 to stage 1	507	(495)	(12)	-	-
Transfer from stage 1 and 3 to stage 2	(1 779)	1 815	(36)	-	-
Transfer from stage 1 and 2 to stage 3	(317)	(222)	539	-	-
Granting or purchase of financial instruments	7 845	321	77	8 243	16
Utilization of limit or payment of tranches	787	138	98	1 023	3
Repayments	(6 900)	(282)	(101)	(7 283)	(5)
Immaterial modifications	(9)	(5)	(2)	(16)	-
Derecognition, including sale	(6)	(2)	(47)	(55)	(39)
Write-offs	(204)	-	(62)	(266)	(7)
Change in the business model	(6)	(6)	(54)	(66)	-
Other changes	659	(135)	(210)	314	45
Carrying amount as at the end of the period, gross	19 712	2 840	1 379	23 931	53

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Housing loans
Carrying amount as at the beginning of the period, gross	8 330	163	3	8 496	-
Transfer from stage 2 and 3 to stage 1	66	(66)	-	-	-
Transfer from stage 1 and 3 to stage 2	(106)	106	-	-	-
Transfer from stage 1 and 2 to stage 3	(2)	(6)	8	-	-
Granting or purchase of financial instruments	2 990	1	-	2 991	-
Utilization of limit or payment of tranches	2 425	6	-	2 431	-
Repayments	(3 161)	(28)	-	(3 189)	-
Immaterial modifications	15	-	-	15	-
Derecognition, including sale	(2 745)	(1)	-	(2 746)	-
Other changes	1 626	2	(3)	1 625	-
Carrying amount as at the end of the period, gross	9 438	177	8	9 623	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Housing loans
Carrying amount as at the beginning of the period, gross	77 459	5 529	2 223	85 211	103
Transfer from stage 2 and 3 to stage 1	1 676	(1 669)	(7)	-	-
Transfer from stage 1 and 3 to stage 2	(1 950)	2 044	(94)	-	-
Transfer from stage 1 and 2 to stage 3	(83)	(234)	317	-	3
Granting or purchase of financial instruments	720	20	3	743	-
Utilization of limit or payment of tranches	7 015	200	113	7 328	2
Repayments	(7 544)	(641)	(205)	(8 390)	(8)
Immaterial modifications	63	(1)	(3)	59	-
Derecognition, including sale	(210)	(17)	(121)	(348)	(9)
Write-offs	-	(12)	(189)	(201)	-
Other changes	334	62	15	411	-
Carrying amount as at the end of the period, gross	77 480	5 281	2 052	84 813	91

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Business loans
Carrying amount as at the beginning of the period, gross	65 666	5 166	6 567	77 399	412
Transfer from stage 2 and 3 to stage 1	968	(954)	(14)	-	-
Transfer from stage 1 and 3 to stage 2	(1 490)	1 597	(107)	-	-
Transfer from stage 1 and 2 to stage 3	(256)	(302)	558	-	-
Granting or purchase of financial instruments	11 532	239	481	12 252	148
Utilization of limit or payment of tranches	13 386	440	292	14 118	-
Repayments	(16 966)	(1 757)	(1 228)	(19 951)	(399)
Immaterial modifications	10	2	(2)	10	1
Derecognition, including sale	(135)	(9)	(401)	(545)	(5)
Write-offs	-	(7)	(700)	(707)	-
Other changes	(24)	-	(4)	(28)	-
Carrying amount as at the end of the period, gross	72 691	4 415	5 442	82 548	157

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Consumer loans
Carrying amount as at the beginning of the period, gross	23 236	1 781	1 805	26 822	51
Transfer from stage 2 and 3 to stage 1	233	(225)	(8)	-	-
Transfer from stage 1 and 3 to stage 2	(877)	901	(24)	-	-
Transfer from stage 1 and 2 to stage 3	(268)	(167)	435	-	-
Granting or purchase of financial instruments	11 446	456	102	12 004	3
Utilization of limit or payment of tranches	1 551	95	113	1 759	3
Repayments	(8 884)	(382)	(167)	(9 433)	(7)
Immaterial modifications	(6)	(2)	(7)	(15)	-
Derecognition, including sale	(47)	(65)	(122)	(234)	(10)
Write-offs	-	(10)	(369)	(379)	-
Change in the business model	(7 296)	(835)	(822)	(8 953)	-
Other changes	46	166	253	465	-
Carrying amount as at the end of the period, gross	19 134	1 713	1 189	22 036	40

32.3 Changes in allowances for expected credit losses in the period

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: fair value through OCI
Housing loans
As at the beginning of the period	-	-	-	-	-
Transfer from stage 1 and 3 to stage 2	26	(26)	-	-	-
Transfer from stage 1 and 2 to stage 3	1	1	(2)	-	-
Changes in credit risk (net)	6	(26)	(2)	(22)	-
Changes due to modification without derecognition (net)	-	(2)	(1)	(3)	-
Other adjustments	(33)	53	5	25	-
As at the end of the period	-	-	-	-	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020		Stage 2
Measured at: amortized cost
Housing loans
As at the beginning of the period	(41)	(479)	(1 352)	(1 872)	(32)
Transfer from stage 2 and 3 to stage 1	(2)	2	-	-	-
Transfer from stage 1 and 3 to stage 2	217	(240)	23	-	-
Transfer from stage 1 and 2 to stage 3	25	78	(103)	-	-
Increase due to recognition and purchase	(1)	-	-	(1)	-
Changes in credit risk (net)	133	(85)	46	94	8
Decrease due to derecognition	5	-	5	10	5
Changes due to modification without derecognition (net)	-	(12)	(14)	(26)	-
Write-offs	-	(1)	29	28	-
Other adjustments	(378)	215	(3)	(166)	(7)
As at the end of the period	(42)	(522)	(1 369)	(1 933)	(26)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Business loans
As at the beginning of the period	(369)	(306)	(2 735)	(3 410)	3
Transfer from stage 2 and 3 to stage 1	(10)	10	-	-	-
Transfer from stage 1 and 3 to stage 2	397	(418)	21	-	-
Transfer from stage 1 and 2 to stage 3	119	125	(244)	-	-
Increase due to recognition and purchase	(85)	(34)	(70)	(189)	-
Changes in credit risk (net)	253	(534)	(483)	(764)	6
Decrease due to derecognition	3	1	6	10	6
Changes due to modification without derecognition (net)	(4)	(9)	(37)	(50)	-
Changing the method of performing estimates (net effect)	(1)	-	(1)	(2)	-
Write-offs	-	(2)	203	201	(2)
Other adjustments	(600)	247	161	(192)	(17)
As at the end of the period	(297)	(920)	(3 179)	(4 396)	(4)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2020
Measured at: amortized cost
Consumer loans
As at the beginning of the period	(148)	(226)	(788)	(1 162)	(26)
Transfer from stage 2 and 3 to stage 1	(7)	7	-	-	-
Transfer from stage 1 and 3 to stage 2	250	(256)	6	-	-
Transfer from stage 1 and 2 to stage 3	181	132	(313)	-	-
Increase due to recognition and purchase	(59)	(7)	(31)	(97)	(8)
Changes in credit risk (net)	56	(276)	(298)	(518)	12
Decrease due to derecognition	1	-	20	21	19
Changes due to modification without derecognition (net)	1	(7)	(6)	(12)	-
Changing the method of performing estimates (net effect)	3	-	(4)	(1)	2
Write-offs	-	-	266	266	7
Other adjustments	(476)	212	221	(43)	(10)
As at the end of the period	(198)	(421)	(927)	(1 546)	(4)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: fair value through OCI
Housing loans
As at the beginning of the period
Changes of credit risk (net)	12	-	-	12	-
As at the end of the period	(12)	-	-	(12)	-

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
housing loans
As at the beginning of the period	(42)	(502)	(1 396)	(1 940)	(41)
Transfer from stage 2 and 3 to stage 1	(3)	3	-	-	-
Transfer from stage 1 and 3 to stage 2	161	(169)	8	-	-
Transfer from stage 1 and 2 to stage 3	33	87	(120)	-	-
Increase due to recognition and purchase	(1)	-	(1)	(2)	-
Changes in credit risk (net)	(137)	98	(39)	(78)	15
Decrease due to derecognition	2	-	-	2	-
Changes due to modification without derecognition (net)	-	(1)	-	(1)	-
Write-offs	-	12	189	201	(2)
Other adjustments	(54)	(7)	7	(54)	(4)
As at the end of the period	(41)	(479)	(1 352)	(1 872)	(32)

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Business loans
As at the beginning of the period	(332)	(314)	(3 251)	(3 897)	(55)
Transfer from stage 2 and 3 to stage 1	(12)	12	-	-	-
Transfer from stage 1 and 3 to stage 2	101	(106)	5	-	-
Transfer from stage 1 and 2 to stage 3	72	62	(134)	-	-
Increase due to recognition and purchase	(104)	(11)	(64)	(179)	-
Changes in credit risk (net)	(62)	57	(154)	(159)	59
Decrease due to derecognition	19	-	10	29	5
Changes due to modification without derecognition (net)	(3)	(4)	(16)	(23)	(1)
Write-offs	-	7	700	707	-
Other adjustments	(48)	(9)	169	112	(5)
As at the end of the period	(369)	(306)	(2 735)	(3 410)	3

LOANS AND ADVANCES TO CUSTOMERS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DURING THE PERIOD	Stage 1	Stage 2	Stage 3	Total	including POCI
2019
Measured at: amortized cost
Consumer loans
As at the beginning of the period	(147)	(308)	(1 219)	(1 674)	(28)
Transfer from stage 2 and 3 to stage 1	(2)	2	-	-	-
Transfer from stage 1 and 3 to stage 2	109	(112)	3	-	-
Transfer from stage 1 and 2 to stage 3	154	91	(245)	-	-
Increase due to recognition and purchase	(55)	(6)	(29)	(90)	-
Changes in credit risk (net)	(224)	(65)	(196)	(485)	24
Decrease due to derecognition	1	23	6	30	-
Changes due to modification without derecognition (net)	-	(1)	5	4	-
Changing the method of performing estimates (net effect)	2	(1)	1	2	-
Write-offs	-	10	369	379	-
Change in the business model	45	106	599	750	-
Other adjustments	(30)	35	(82)	(77)	(22)
As at the end of the period	(147)	(226)	(788)	(1 161)	(26)

• pozostałe informacje

	31.12.2020	31.12.2019
write-off not lowering the fair value of loans and advances to customers measured at fair value through other comprehensive income	54	29

LOANS AND ADVANCES TO CUSTOMERS BY MATURITY (excluding adjustments relating to fair value hedge accounting)	not held for trading, mandatorily measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2020
up to 1 month	1 032	69	8 154	9 255
from 1 to 3 months	674	80	6 728	7 482
from 3 months to 1 year	2 572	379	22 493	25 444
from 1 to 5 years	1 624	2 224	72 140	75 988
over 5 years	107	11 302	63 481	74 890

Total	6 009	14 054	172 996	193 059

LOANS AND ADVANCES TO CUSTOMERS BY MATURITY (excluding adjustments relating to fair value hedge accounting)	not held for trading, mandatorily measured at fair value through profit or loss	measured at fair value through OCI	measured at amortized cost	Total
31.12.2019
up to 1 month	1 954	26	7 419	9 399
from 1 to 3 months	678	47	5 490	6 215
from 3 months to 1 year	2 829	227	25 969	29 025
from 1 to 5 years	2 467	1 402	69 961	73 830
over 5 years	358	7 921	74 115	82 394

Total	8 286	9 623	182 954	200 863

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

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

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

33. Intangible assets, property, plant and equipment

ACCOUNTING POLICIES

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

Goodwill – The Bank recognizes (since the legal merger with a subsidiary) goodwill related to the acquisition of this entity under intangible assets. Goodwill was recognized in the amount of excess of consideration paid over the value of the identifiable assets acquired and liabilities assumed, measured at fair value as at the acquisition date. Subsequent to the initial recognition goodwill is measured at the amount initially recognized less any cumulative impairment allowances.

Customer relations – As a result of the settlement of purchase transactions, customer relations were identified which are amortized using the reducing balance method based on the rate of economic benefits consumption arising from their use.

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

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

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

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

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

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

• Odpisy amortyzacyjne

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

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

• the lease period ends; or

• the asset is designated for scrapping; or

• the asset is sold; or

• the asset is found to be missing; or

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

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

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

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

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

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

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

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

Estimates and judgments

• Useful lives of property, plant and equipment, intangible assets and investment properties

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

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

• technical or market obsolescence;

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

• expected use of the asset;

• other factors affecting useful lives of such assets.

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

Depreciation /amortization periods applied by the Bank:

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

• Odpisy z tytułu utraty wartości

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

33.1. property, plant and equipment

PROPERTY, PLANT AND EQUIPMENT	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total	of which of right-of-use assets
2020
Carrying amount as at the beginning of the period, gross	3 275	1 458	221	634	5 588	1 008
Purchase	358	1	280	5	644	363
Transfers from capital expenditure	58	117	(206)	31	-	-
Liquidation and sale	(42)	(49)	-	(30)	(121)	(1)
Other	(151)	(1)	(3)	(4)	(159)	-
Carrying amount as at the end of the period, gross	3 498	1 526	292	636	5 952	1 370

Accumulated depreciation as at the beginning of the period	(1 240)	(1 145)	-	(423)	(2 808)	(195)
Depreciation for the period	(298)	(119)	-	(53)	(470)	(210)
Liquidation and sale	39	49	-	30	118	-
Other	37	(1)	-	2	38	-
Accumulated depreciation as at the end of the period	(1 462)	(1 216)	-	(444)	(3 122)	(405)

Impairment allowances as at the beginning of the period	(41)	-	-	(1)	(42)	(1)
Recognized during the period	(62)	(1)	-	-	(63)	(4)
Reversed during the period	5	-	-	-	5	-
Other	6	-	-	1	7	-
Impairment allowances as at the end of the period	(92)	(1)	-	-	(93)	(5)

Carrying amount as at the beginning of the period, net	1 994	313	221	210	2 738	812
Carrying amount as at the end of the period, net	1 944	309	292	192	2 737	960

PROPERTY, PLANT AND EQUIPMENT	Land and buildings	Machinery and equipment, including IT equipment	Assets under construction	Other, including vehicles	Total	of which of right-of-use assets
2019
Carrying amount as at the beginning of the period, gross	3 196	1 480	166	614	5 456	889
Purchase	108	-	269	19	396	127
Transfers from capital expenditure	57	116	(211)	38	-	-
Liquidation and sale	(54)	(139)	-	(30)	(223)	(8)
Other	(32)	1	(3)	(7)	(41)	-
Carrying amount as at the end of the period, gross	3 275	1 458	221	634	5 588	1 008

Accumulated depreciation as at the beginning of the period	(1 022)	(1 135)	-	(405)	(2 562)	-
Depreciation for the period	(266)	(149)	-	(49)	(464)	(195)
Liquidation and sale	34	138	-	29	201	-
Other	14	1	-	2	17	-
Accumulated depreciation as at the end of the period	(1 240)	(1 145)	-	(423)	(2 808)	(195)

Impairment allowances as at the beginning of the period	(32)	-	-	(2)	(34)	-
Recognized during the period	(14)	-	-	-	(14)	(1)
Other	5	-	-	1	6	-
Impairment allowances as at the end of the period	(41)	-	-	(1)	(42)	(1)

Carrying amount as at the beginning of the period, net	2 142	345	166	207	2 860	889
Carrying amount as at the end of the period, net	1 994	313	221	210	2 738	812

PROPERTY, PLANT AND EQUIPMENT related to right-of-use

PROPERTY, PLANT AND EQUIPMENT related to right-of-use	Land and buildings	Other, including vehicles	Total
31.12.2020
Carrying amount as at the beginning of the period, gross	970	38	1 008
Purchase	357	6	363
Liquidation and sale	(1)	-	(1)
Carrying amount as at the end of the period, gross	1 326	44	1 370

Accumulated depreciation as at the beginning of the period	(185)	(10)	(195)
Depreciation charge for the period	(198)	(12)	(210)
Accumulated depreciation as at the end of the period	(383)	(22)	(405)

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

Carrying amount as at the beginning of the period, net	784	28	812
Carrying amount as at the end of the period, net	938	22	960

PROPERTY, PLANT AND EQUIPMENT related to right-of-use	Land and buildings	Other, including vehicles	Total
31.12.2019
Carrying amount as at the beginning of the period, gross	870	19	889
Purchase	108	19	127
Liquidation and sale	(8)	-	(8)
Carrying amount as at the end of the period, gross	970	38	1 008

Accumulated depreciation as at the beginning of the period	-	-	-
Depreciation charge for the period	(185)	(10)	(195)
Accumulated depreciation as at the end of the period	(185)	(10)	(195)

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

Carrying amount as at the beginning of the period, net	870	19	889
Carrying amount as at the end of the period, net	784	28	812

33.2. intangible assets

INTANGIBLE ASSETS	Software	Goodwill	Future profit on concluded insurance contracts	Customer relationships	Other, including capital expenditure	of which: software	Total
31.12.2020
Carrying amount as at the beginning of the period, gross	5 366	871	-	86	384	330	6 707
Purchase	-	-	-	-	557	557	557
Transfers from capital expenditure	525	-	-	-	(525)	(525)	-
Other	16	-	-	-	47	44	63
Carrying amount as at the end of the period, gross	5 907	871	-	86	463	406	7 327
Accumulated amortization as at the beginning of the period	(3 955)	-	-	(74)	(49)	-	(4 078)
Amortization charge for the period	(376)	-	-	(4)	(3)	-	(383)
Other	2	-	-	-	-	-	2
Accumulated amortization as at the end of the period	(4 329)	-	-	(78)	(52)	-	(4 459)

Impairment allowances as at the beginning of the period	(15)	-	-	-	(8)	(8)	(23)
Recognized during the period	-	(116)	-	-	-	-	(116)
Other	-	-	-	-	8	8	8
Impairment allowances as at the end of the period	(15)	(116)	-	-	-	-	(131)
Carrying amount as at the beginning of the period, net	1 396	871	-	12	327	322	2 606
Carrying amount as at the end of the period, net	1 563	755	-	8	411	406	2 737

INTANGIBLE ASSETS	Software	Goodwill	Future profit on concluded insurance contracts	Customer relationships	Other, including capital expenditure	of which: software	Total
31.12.2019
Carrying amount as at the beginning of the period, gross	5 055	871	-	86	330	276	6 342
Purchase	-	-	-	-	354	354	354
Liquidation and sale	296	-	-	-	(296)	(296)	-
Other	15	-	-	-	(4)	(4)	11
Carrying amount as at the end of the period, gross	5 366	871	-	86	384	330	6 707
Accumulated amortization as at the beginning of the period	(3 607)	-	-	(69)	(46)	-	(3 722)
Amortization charge for the period	(348)	-	-	(5)	(3)	-	(356)
Accumulated amortization as at the end of the period	(3 955)	-	-	(74)	(49)	-	(4 078)

Impairment allowances as at the beginning of the period	(15)	-	-	-	(10)	(10)	(25)
Reversed during the period	-	-	-	-	2	2	2
Impairment allowances as at the end of the period	(15)	-	-	-	(8)	(8)	(23)

Carrying amount as at the beginning of the period, net	1 433	871	-	17	274	266	2 595
Carrying amount as at the end of the period, net	1 396	871	-	12	327	322	2 606

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

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

• Goodwill

Net goodwill	31.12.2020	31.12.2019
Nordea Bank Polska S.A.	747	863
Assets taken over from CFP sp. z o.o.	8	8

Goodwill

Impairment test – method

Nordea Bank Polska S.A.

The impairment test is conducted by comparing the carrying amounts of Cash Generating Units (‘CGUs’) with their recoverable amount. Two CGUs were identified to which goodwill on acquisition of Nordea Bank Polska S.A. was allocated – the retail and corporate CGU. The residual value of a CGU has been calculated by extrapolating the cash flow projections beyond the period of the forecast, using the growth rate adopted at a level of 2.7%. Cash flow projections were based on the assumptions included in the financial plans of the Bank for 2020, taking into account the of COVID-19 and the reductions of interests rates on the current and anticipated macroeconomic situation. A discount rate of 8.13%, taking into account the risk-free rate and risk premium was used for the discounting of the future cash flows.

As a result of the test, the Bank recorded an allowance for the corporate CGU in the amount of PLN 117 million. Goodwill of Nordea Bank Polska S.A. of PLN 747 million relates to the retail segment.

The main factors influencing the allowance were the outbreak of the COVID-19 pandemic and its effects (increased cost of credit risk and expected lower economic activity) and interest rate reductions combined with a high level of regulatory burdens (tax on certain financial institutions and cost of fees to the BGF), which resulted in a significant reduction in the expected profitability of the banking business.

Calculation of estimates

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

CHANGE IN THE USEFUL LIVES OF ASSETS SUBJECT TO DEPRECIATION AND CLASSIFIED AS LAND AND BUILDINGS

31.12.2020

31.12.2019

scenario +10 years

scenario -10 years

scenario

+10 years

scenario

-10 years

Depreciation costs

(30)

203

(36)

245

34. Assets held for sale

ACCOUNTING POLICIES

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

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

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

NON-CURRENT ASSETS HELD FOR SALE	31.12.2020	31.12.2019
Land and buildings	126	10
Other	1	-
Total, gross	127	10
Impairment allowances	(3)	(1)

Total	124	9

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

35. Investments in subsidiaries, associates and joint ventures

ACCOUNTING POLICIES

Investments in subsidiaries, associates and joint ventures are measured at cost less impairment allowances. In the case of the sale of investments in subsidiaries, which results in a loss of control, the Bank measures the remaining investment to fair value and accepts this value as a new cost for the purpose of subsequent measurement. The excess of the fair value of the investment over the carrying amount is recognized by the Bank in other operating income.

At each balance sheet date, the Bank makes an assessment of whether there is any objective evidence of impairment of investments in subsidiaries, associates and joint ventures. If any such evidence exists, the Bank estimates the value in use of the investment or the fair value of the investment less costs to sell, depending on which of these values is higher, and in the event that the carrying amount of an asset exceeds its value in use, the Bank recognizes an impairment loss in the income statement. The above estimation of the value in use requires making assumptions, among other things about future cash flows that the Bank may receive from dividends or the cash inflows from a potential disposal of the investment, less costs to sell.

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

The Bank has the shares entitling to 34% votes at the General Meeting of Shareholders, and the second is a shareholder of EVO International Payments Acquisition GmbH in Germany.

According to the agreement signed by the partners, regulating the principles of cooperation, decisions regarding the significant activities of the company require consent of both partners.

Both Shareholders have the right to appoint their representatives in the Supervisory Board: in the case of the Supervisory Board of 5 members, PKO Bank Polski SA has the right to appoint 2 members (in the case of 7 members of PKO - 3 members). The Bank has two representatives on the Supervisory Board consisting of 7 people and indicates the independent member.Decisions reserved to the competence of the Supervisory Board regarding significant activities require the consent of at least one representative of PKO Bank Polski SA and one representative of the other shareholder.

• Bank Pocztowy SA

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

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

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

• Operator Chmury Krajowej sp. z o.o.

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

In accordance with the Company’s Articles of Association:

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

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

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

• BSAFER SP. Z O.O.

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

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

FINANCIAL INFORMATION

31.12.2020	Gross amount	Impairment	Net amount
SUBSIDIARIES
PKO Bank Hipoteczny SA	1 650	-	1 650
KREDOBANK SA	1 072	(793)	279
PKO Leasing SA	496	-	496
PKO Życie Towarzystwo Ubezpieczeń SA	241	-	241
PKO Towarzystwo Funduszy Inwestycyjnych SA	225	-	225
PKO VC – fizan	200	-	200
PKO BP BANKOWY PTE SA	151	(37)	114
NEPTUN – fizan	132	-	132
Merkury - fiz an	120	-	120
PKO Towarzystwo Ubezpieczeń SA	110	-	110
PKO Finance AB	24	-	24
PKO BP Finat sp. z o.o.	21	-	21
JOINT VENTURES
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	197	-	197
Operator Chmury Krajowej sp. z o.o.	60	-	60
ASSOCIATES
Bank Pocztowy SA	184	(184)	-
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	2	(2)	-
Total	4 885	(1 016)	3 869

1 The Bank holds investment certificates of the Fund which allow it to control the Fund in accordance with IFRS.

31.12.2019	Gross amount	Impairment	Net amount
SUBSIDIARIES
PKO Bank Hipoteczny SA	1 650	-	1 650
KREDOBANK SA	1 072	(793)	279
PKO Leasing SA	496	-	496
PKO Życie Towarzystwo Ubezpieczeń SA	241	-	241
PKO Towarzystwo Funduszy Inwestycyjnych SA	225	-	225
PKO VC - fizan	200	-	200
PKO BP BANKOWY PTE SA	151	-	151
NEPTUN - fizan	132	-	132
Merkury - fiz an	120	-	120
PKO Towarzystwo Ubezpieczeń SA	110	-	110
PKO Finance AB	24	-	24
PKO BP Finat sp. z o.o.	21	-	21
Zencard sp. z o.o.	24	(23)	1
JOINT VENTURES
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	197	-	197
Operator Chmury Krajowej sp. z o.o.	60	-	60
ASSOCIATES
Bank Pocztowy SA	184	(97)	87
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	2	(2)	-
Total	4 909	(915)	3 994

1 The Bank holds investment certificates of the Fund which allow it to control the Fund in accordance with IFRS.

IMPAIRMENT ALLOWANCES – RECONCILIATION OF MOVEMENTS	2020	2019
As at the beginning of the period	915	915
Recognized during the period	124	-
Reversed during the period	(23)	-
As at the end of the period	1 016	915

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

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

Despite the profitable agency model with the Polish Post, the result of the impairment test of the Bank Pocztowy S.A. shares held by the Bank resulted in the recognition of a further provision for the Bank’s capital exposure in Bank Pocztowy S.A. in the amount of PLN 87 million.

The Bank carried out an impairment test for the shares in PKO BP Bankowy S.A. as a result of which a write-off of PLN 37 million.

Selected information on associates and joint ventures

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

Centrum Elektronicznych Usług Płatniczych eService sp. z o.o. (in accordance with IFRS)	31.12.2020	31.12.2019
Current assets	339	296
Non-current assets	189	197
Current liabilities	174	208
Long-term liabilities	35	22
	01.01-31.12.2020	01.01-31.12.2019
Revenue	530	553
Profit/(loss) for the period	104	107
Other comprehensive income	4	2
Total comprehensive income	108	109
Dividend received from an entity classified as a joint venture	17	36

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

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

Operator Chmury Krajowej sp. z o.o. (in accordance with PAS)	31.12.2020	31.12.2019
Current assets	63	92
Non-current assets	65	32
Current liabilities	54	16
Long-term liabilities	17	10
	01.01-31.12.2020	01.01-31.12.2019
Revenue	50	11
Profit/(loss) for the period	(39)	(24)

36. other assets

ACCOUNTING POLICIES

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

FINANCIAL INFORMATION

OTHER ASSETS	31.12.2020	31.12.2019
Other financial assets	1 772	1 691
Settlements in respect of card transactions	1 221	1 300
Settlement of financial instruments	155	73
Receivables in respect of cash settlements	159	193
Receivables and settlements in respect of trading in securities	9	3
Dividends receivable and contributions to subsidiaries	21	36
Sale of foreign currencies	8	-
Trade receivables	84	78
Other	115	8
Other non-financial assets	211	333
Inventories	17	14
Receivables from subsidiaries belonging to the Tax Group	12	29
Assets for sale	28	40
Prepayments and deferred costs	71	59
Receivables from the State Budget in respect of lump-sum income tax	-	115
Other	83	76

Total	1 983	2 024

OTHER FINANCIAL ASSETS	Stage 1	Stage 3	Total
31.12.2020
Gross amount	1 772	136	1 908
Allowances for expected credit losses	-	(136)	(136)
Net amount	1 772	-	1 772

OTHER FINANCIAL ASSETS	Stage 1	Stage 3	Total
31.12.2019
Gross amount	1 691	82	1 773
Allowances for expected credit losses	-	(82)	(82)
Net amount	1 691	-	1 691

OTHER FINANCIAL ASSETS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 3	Total
31.12.2020
Carrying amount as at the beginning of the period, gross	1 691	82	1 773
Granting or purchase of financial instruments	1 772	2	1 774
Repayments	(1 691)	(2)	(1 693)
Other changes	-	54	54
Carrying amount as at the end of the period, gross	1 772	136	1 908

OTHER FINANCIAL ASSETS – CHANGES IN THE GROSS CARRYING AMOUNT DURING THE PERIOD	Stage 1	Stage 3	Total
31.12.2019
Carrying amount as at the beginning of the period, gross	2 149	86	2 235
Granting or purchase of financial instruments	1 691	-	1 691
Repayments	(2 149)	-	(2 149)
Derecognition, including sale	-	(5)	(5)
Write-offs	-	(3)	(3)
Other changes	-	4	4
Carrying amount as at the end of the period, gross	1 691	82	1 773

OTHER FINANCIAL ASSETS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 3	Total
31.12.2020
As at the beginning of the period	-	(82)	(82)
Other adjustments	-	(54)	(54)
As at the end of the period	-	(136)	(136)

OTHER FINANCIAL ASSETS – CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES IN THE PERIOD	Stage 1	Stage 3	Total
31.12.2019
As at the beginning of the period	-	(86)	(86)
Increase due to recognition and purchase	-	1	1
Write-offs	-	3	3
As at the end of the period	-	(82)	(82)

Other non-financial assets – CHANGES IN ALLOWANCES	2020	2019
As at the beginning of the period	(127)	(122)
Recognized during the period	(48)	(27)
Derecognition of assets and settlements	11	22
As at the end of the period	(164)	(127)

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

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

37. Amounts due to the Central Bank and banks

ACCOUNTING POLICIES

The principles of classification and measurement are discussed in the Note “Major accounting policies”.

FINANCIAL INFORMATION

As at 31 December 2020 and 31 December 2019 there were no amounts due to the Central Bank from the Bank.

AMOUNTS DUE TO BANKS	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	-	317
Liabilities in respect of short position in securities	-	317
Measured at amortized cost	2 583	1 659
Bank deposits	1 384	786
Current accounts	1 134	756
Other monetary market deposits	65	117

Total	2 583	1 976

AMOUNTS DUE TO BANKS BY MATURITY	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	-	317
up to 1 month	-	317

Measured at amortized cost:	2 583	1 659
up to 1 month	2 582	1 649
from 1 to 3 months	-	10
from 3 months to 1 year	1	-

Total	2 583	1 976

38. Amounts due to customers

ACCOUNTING POLICIES

The principles of classification and measurement are discussed in Note “Major accounting policies”.

FINANCIAL INFORMATION

AMOUNTS DUE TO CUSTOMERS	Amounts due to households	Amounts due to corporate entities	Amounts due to public entities	Total
31.12.2020
Measured at amortized cost	221 988	43 162	13 744	278 894
Cash on current accounts and overnight deposits of which	173 732	41 850	13 706	229 288
savings accounts and other interest-bearing assets	53 569	15 935	7 322	76 826
Term deposits	47 780	629	18	48 427
Other liabilities	476	683	20	1 179

Total	221 988	43 162	13 744	278 894

AMOUNTS DUE TO CUSTOMERS	Amounts due to households	Amounts due to corporate entities	Amounts due to public entities	Total
31.12.2019
Measured at fair value through profit or loss	-	45	-	45
Liabilities in respect of short position in securities	-	45	-	45
Measured at amortized cost	192 391	49 153	11 354	252 898
Cash on current accounts and overnight deposits of which	127 159	39 835	10 997	177 991
savings accounts and other interest-bearing assets	45 134	16 799	-	61 933
Term deposits	64 855	8 486	331	73 672
Other liabilities	377	832	26	1 235

Total	192 391	49 198	11 354	252 943

AMOUNTS DUE TO CUSTOMERS BY MATURITY	31.12.2020	31.12.2019
Measured at fair value through profit or loss:	-	45
up to 1 month	-	45

Measured at amortized cost:	278 894	252 898
up to 1 month	239 471	196 140
from 1 to 3 months	10 913	16 494
from 3 months to 1 year	17 587	28 424
from 1 to 5 years	3 254	4 222
over 5 years	7 669	7 618
Total	278 894	252 943

AMOUNTS DUE TO CUSTOMERS BY SEGMENT	31.12.2020	31.12.2019
retail and private banking	195 985	173 003
corporate	41 171	50 282
SME	41 738	29 658

Total	278 894	252 943

39. Financing received

FINANCING RECEIVED	31.12.2020	31.12.2019
Loans and advances received from:	4 906	5 026
banks	14	-
international financial institutions	855	969
other financial institutions	4 037	4 057
Liabilities in respect of securities in issue, bonds issued by PKO Bank Polski S.A.	4 020	4 769
Subordinated liabilities	2 716	2 730

Total	11 642	12 525

39.1 Loans and advances received

Loans and advances received from banks

Date of receiving a loan *	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

31.12.2020	14	PLN	31.12.2020	14	-

Total				14	-

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

Loans and advances received from International Financial Organizations

Date of receiving a loan or advance	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

23.12.2010	75	EUR	23.12.2020	-	64
25.09.2013	75	EUR	25.09.2023	208	256
23.10.2018	646	PLN	23.10.2023	647	649

Total				855	969

Loans and advances received from other financial institutions

Date of receiving a loan or advance	Nominal amount	Currency	Maturity	Carrying amount at 31.12.2020	Carrying amount at 31.12.2019

25.07.2012	50	EUR	25.07.2022	234	215
26.09.2012	1000	USD	26.09.2022	3 803	3 842

Razem				4 037	4 057

39.2 debt securities in issue

Bonds issued by PKO Bank Polski S.A.

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

25.07.2017	fixed	0,75	500	EUR	25.07.2021	2 314	3 200
02.11.2017	fixed	0,30	400	CHF	02.11.2021	1 706	1 569

Total						4 020	4 769

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

39.3 subordinated liabilities

Type of liability	Nominal value	Interest rate	Currency	Period	Carrying amount
Type of liability	Nominal value	Interest rate	Currency	Period	31.12.2020	31.12.2019
Subordinated bonds	3,34	1 700	PLN	28.08.2017 - 28.08.2027	1 710	1 719
Subordinated bonds	3,29	1 000	PLN	05.03.2018 - 06.03.2028	1 006	1 011

TOTAL					2 716	2 730

The subordinated bonds were designated for increasing the Bank’s supplementary funds (Tier 2) upon the approval of the Polish Financial Supervision Authority.

40. Other liabilities

ACCOUNTING POLICIES

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

FINANCIAL INFORMATION

OTHER LIABILITIES	31.12.2020	31.12.2019
Other financial liabilities	2 983	3 167
Costs to be paid	387	403
Interbank settlements	272	461
Liabilities arising from investing activities and internal operations	379	251
Amounts due to suppliers	49	114
Liabilities and settlements in respect of trading in securities	246	567
Settlement of financial instruments	38	22
liabilities in respect of foreign exchange activities	245	201
Costs of financial support to a subsidiary	284	274
Liabilities in respect of payment cards	30	20
Lease liabilities	1 023	819
Other	30	35
Other non-financial liabilities	1 481	1 350
Deferred income	622	627
Liability in respect of tax on certain financial institutions	79	78
Liabilities in respect of a contribution to the Bank Guarantee Fund maintained in the form of payment obligations	576	386
to the Resolution Fund	294	209
to the Banks’ Guarantee Fund	282	177
Liabilities under the public law	66	141
Other	138	118

Total	4 464	4 517

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

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

41. Provisions

accounting policies and estimates and judgments

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

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

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

• provisions for pensions and other defined post-employment benefits

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

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

• provisions for holiday pay

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

• Provisions for financial liabilities and guarantees granted

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

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

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

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

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

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

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

• other provisions

Other provisions mainly include provisions for potential claims on sale of impaired loans portfolios, details on which have been presented in Note “Sale of impaired loan portfolios”.

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

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

FINANCIAL INFORMATION

FOR THE YEAR ENDED 31.12.2020	Provisions for financial liabilities and guarantees granted	Provisions for legal claims, excluding legal claims relating to repaid mortgage loans in convertible currencies	Provisions for legal claims against the bank relating to repaid mortgage loans in convertible currencies	Provisions for reimbursement of costs to customers on early repayment of consumer and mortgage loans	Provisions for pensions and other defined post-employment benefits	Restructuring	Provisions for holiday pay	Other provisions, including provisions for employee disputed claims	Total
As at the beginning of the period	268	50	29	104	55	41	80	26	653
Increases, including increases of existing provisions	354	55	398	106	13	16	15	117	1 074
Utilized amounts	-	(4)	-	(187)	(1)	(5)	-	(4)	(201)
Unused provisions reversed during the period	-	(5)	-	-	(7)	(13)	(18)	-	(43)
Other changes and reclassifications	4	-	(1)	-	1	(1)	-	(19)	(16)

As at the end of the period	626	96	426	23	61	38	77	120	1 467
Short-term provisions	535	-	-	23	7	38	77	-	680
Long-term provisions	91	96	426	-	54	-	-	120	787

ZA ROK ZAKOŃCZONY 31.12.2019	Provisions for financial liabilities and guarantees granted	Provisions for legal claims, excluding legal claims relating to mortgage loans in convertible currencies	Provisions for legal claims against the bank relating to repaid mortgage loans in convertible currencies	Provisions for reimbursement of costs to customers on early repayment of consumer and mortgage loans	Provisions for pensions and other defined post-employment benefits	Restructuring	Provision for holiday pay	Other provisions, including provisions for employee disputed claims	Total
As at the beginning of the period	227	51	-	-	48	24	85	91	526
Increases, including increases of existing provisions	287	6	29	127	4	33	13	-	499
Utilized amounts	-	(1)	-	(23)	(1)	(15)	-	(4)	(44)
Unused provisions reversed during the period	(246)	(6)	-	-	(2)	(1)	(18)	(61)	(334)
Other changes and reclassifications	-	-	-	-	6	-	-	-	6

As at the end of the period	268	50	29	104	55	41	80	26	653
Short-term provisions	225	-	-	104	7	41	80	4	461
Long-term provisions	43	50	29	-	48	-	-	22	192

Calculation of estimates

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

COMPONENTS AFFECTING THE PROVISION AMOUNT:	31.12.2020	31.12.2019
financial discount rate adopted	1,20%	2,00%
weighted average ratio of employee mobility	9,19%	9,36%
average remaining period of service in years	7,68	7,80
10-year average assumed annual increase in the basis calculation of retirement benefits	2,53%	2,26%

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

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

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

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

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

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

42. Equity and shareholding structure of the Bank

ACCOUNTING POLICIES

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

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

Equity components:

• Share capital is stated at nominal value in accordance with the Articles of Association and entry in the Register of Entrepreneurs.

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

• Supplementary capital is created in accordance with the statutes from annual write-offs from net profit, made until this capital reaches at least one third of the share capital and is intended to cover balance sheet losses that may arise in connection with the Bank's operations. Supplementary capital may also be used for other purposes, in particular for increasing the share capital.

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

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

• Accumulated other comprehensive income includes the effects of the measurement of financial assets at fair value through other comprehensive income, allowances for expected credit losses on these assets, the effective portion of cash flow hedges in hedge accounting, as well as actuarial gains and losses. Deferred tax on those items is recognized in other comprehensive income.

FINANCIAL INFORMATION

Shareholding structure of the Bank

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

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

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

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

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

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

• shareholders who have the rights from A-series registered shares (the State Treasury), and

• shareholders acting jointly with the shareholders referred to in point (2) based on an agreement concerning the joint execution of voting rights from shares. Moreover, the restriction on the voting rights shall expire when the share of the State Treasury in the Bank’s share capital drops below 5%.

In accordance with § 6 (2) of the PKO Bank Polski S.A.’s Articles of Association, the conversion of A-series registered shares into bearer shares and the transfer of these shares requires the approval of the Council of Ministers in the form of a resolution. Conversion into bearer shares or transfer of A-series registered shares, after getting the above-mentioned approval, results in the expiry of the above-mentioned restrictions in respect of shares subject to conversion into bearer shares or transfer, to the extent to which this approval was given.

Pursuant to Art. 13 (1) (26) of the Act dated 16 December 2016 on the rules for managing the State property, the shares of PKO Bank Polski S.A. owned by the State Treasury may not be sold (excluding statutory exceptions).

The Bank’s shares are listed on the Warsaw Stock Exchange.

Structure of PKO Bank Polski S.A.’s share capital:

Series	Type of shares	Number of shares	Nominal value of 1 share	Nominal value of the series
Series A	ordinary registered shares	312 500 000	1 zł	312 500 000
Series A	ordinary bearer shares	197 500 000	1 zł	197 500 000
Series B	ordinary bearer shares	105 000 000	1 zł	105 000 000
Series C	ordinary bearer shares	385 000 000	1 zł	385 000 000
Series D	ordinary bearer shares	250 000 000	1 zł	250 000 000
Total	- - -	1 250 000 000	- - -	1 250 000 000

In 2020 and in 2019, there were no changes in the amount of the share capital of PKO Bank Polski S.A.. Shares of PKO Bank Polski S.A. issued are not preference shares and are fully paid up.

43. D ividend and profit appropriation

On 26 August 2020, the Annual General Meeting of the Bank passed a resolution to retain the entire net profit earned by the Bank in previous years:

• with regard to the profit for 2019 – to allocate to the reserve capital the amount of PLN 2 155 113 and to leave as undistributed the amount of PLN 3 832 348 976,

• leaving still undistributed profit from previous years in the amount of PLN 1 667 651 024..

The resolution was in line with the recommendation of the Polish Financial Supervision Authority submitted to the Bank on 26 March 2020.

On 16 December 2020, the Polish Financial Supervision Authority (KNF) adopted a stance on the banks’ dividend policy in 2021, which resulted in:

• significant uncertainty as to the further development of events related to the COVID-19 pandemic,

• the temporary nature of solutions used by banks to improve the capital situation during the pandemic,

• continuing cautious supervisory positions in the European Union with regard to dividend restrictions and other forms of reducing capital resources,

• revision of the guidelines of the European Banking Authority, extending the moratoria,

The Polish Financial Supervision Authority considered it necessary to suspend the payment of dividends by commercial banks in the first half of 2021 and not to take other actions, in particular those outside the scope of current business and operating activities, which could result in a reduction of the capital base without prior consultation with the supervisory authority. This applies to possible dividend payments from retained earnings and the buyout of treasury shares.

The Commission expects that the possible implementation of such operations will always be preceded by a prior consultation with the supervisory authority and subject to their positive outcome.

The position of the Polish Financial Supervision Authority on the dividend policy of commercial banks in the second half of 2021 will be presented separately after analyzing the financial situation of the banking sector in the first half of the year.

On January 14, 2021, he received an individual recommendation of the Polish Financial Supervision Authority, in which the Polish Financial Supervision Authority recommended the Bank:

• suspension of dividend payments in the first half of 2021 (including retained earnings from previous years),

• failure to undertake in the first half of 2021, without prior consultation with the supervisory authority, other activities outside the scope of current business and operating activities that may result in a reduction in the capital base, including buyouts of treasury shares.

The Management Board of the Bank and the Supervisory Board of the Bank adopted resolutions that, within the limits of their competences, they will supervise the implementation of the above recommendation of the PFSA.

Pursuant to Art. 395.2.2 of the Commercial Companies Code, the decision on the distribution of profit remains within the competence of the Bank's Ordinary General Meeting.

44. Leases

ACCOUNTING POLICIES

Lease agreements or agreements containing a lease according to the Bank’s classification include agreements under which the Bank:

• obtains the right of use of the identified asset and the supplier’s ability to substitute an alternative asset is not significant; and

• has the right to obtain substantially all economic benefits from the right of use throughout the period of use; and

• has the right to direct the use of the identified asset over the period of use, when:

• the Bank has the right to direct how and for what purpose the asset is used throughout the period of use; or

• the relevant decisions about how and for what purpose the asset is used are predetermined.

The Bank applies exceptions and does not recognize right-of-use assets and liabilities with respect to:

• short-term leases, which include agreements without an option to buy an asset, concluded for a period not exceeding 12 months from the commencement of the agreement, in particular agreements concluded for an indefinite period with a short (up to 12 months) notice period, without significant penalties, which include in particular leasehold improvements incurred and relocation costs;

• low-value leases (an asset’s value is lower than PLN 20 000, determined based on the value of a new asset, regardless of the age of the leased asset), excluding agreements for rental of space.

The Bank initially measures lease liabilities at the present value of the lease payments outstanding as at that date.

The amount of the lease liability is affected by:

• fixed payments less any lease incentives payable;

• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

• any residual guarantees expected from the lessee;

• the exercise price of a purchase option if the probability that the Bank would exercise that option is higher than 50%;

• payments of penalties for terminating the lease, if the lease agreement contains an option for the Bank to terminate the lease as a lessee.

The Bank does not classify variable fees that depend on external factors as lease payments.

After initial recognition the Bank’s lease liabilities are measured at amortized cost.

The Bank records the revaluation of lease liabilities as an adjustment to the right-of-use asset. If as a result of remeasurement the carrying amount of the right-of-use asset is reduced to zero and the lease liability is further reduced, the Bank recognizes the remaining amount of the remeasurement as a profit or loss.

The Bank initially measures the right-of-use assets at cost, which comprises:

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

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

• any initial direct costs incurred by the Bank.

The Bank subsequently measures the right-of-use asset at cost less accumulated depreciation (depreciation calculated under the straight-line method) and accumulated impairment losses, and adjusted for any remeasurement of the lease liability.

To discount future lease payments, the Bank applies discount rates that:

• are calculated based on yield curves reflecting the cost of financing in a given currency;

• cover the tenor of the longest lease contract subject to measurement and reflecting – for a given currency – a fixed market interest rate and the Bank’s cost of financing (the tenors of the lease agreements are within the range of from 1 to 99 years);

• have been read from the curve for maturity corresponding to one-half of the maturity of the lease agreement.

The Bank performs quarterly updates of the incremental borrowing rate for lease agreements.

The Bank applies the same discount rates for the portfolio of car leases and property leases, including rights to perpetual usufruct of land, taking into account the of the lease security on the discount rate applied.

The Bank recognizes the lease payments relating to short-term or low-value leases as cost using the straight-line method, over the term of the lease. The differences between the amounts paid and those arising from the straight- line recognition of the costs are recorded as prepayments or accruals.

FINANCIAL INFORMATION:

LESSEE – LEASE AMOUNTS RECOGNIZED IN THE INCOME STATEMENT	2020	2019
Costs related to short-term lease contracts	(5)	(10)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(77)	(70)

Total	(82)	(80)

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

ACCOUNTING POLICIES

Upon initial recognition financial guarantee agreements are stated at fair value. In subsequent periods, as at the balance sheet date, financial guarantees are measured at the higher of:

• allowances for expected credit losses; or

• the amount of commission recognized initially, less accumulated amortization in accordance with IFRS 15.

FINANCIAL INFORMATION

• Securities programmes covered with underwriting agreements (maximum Bank’s commitment to take up securities)

As at 31 December 2020 no agreements covered with underwriting have been concluded.

Issuer of underwritten securities

As at 31.12.2019

Type of underwritten securities

Maximum commitment to take up securities

Contract

expiry

date

Company C

Corporate bonds

31.12.2022

Total

---

All contracts relate to the Agreement for Organization, Conducting and Servicing of the Bond Issue Programme. All securities of the Bank under the underwriting programme have an unlimited transferability, are not listed on the stock exchange and are not traded on a regulated OTC market.

• Contractual commitments

VALUE OF CONTRACTUAL COMMITMENTS CONCERNING:	31.12.2020	31.12.2019
intangible assets	24	24
property, plant and equipment	15	24
Total	39	48

• Financial and guarantee commitments granted

FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2020	STAGE 1		STAGE 2		STAGE 3		Total	Provisions per IFRS 9	Net amount
FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2020	Nominal value	Provision	Nominal value	Provision	Nominal value	Provision	Total	Provisions per IFRS 9	Net amount
Credit lines and limits	58 227	(79)	6 590	(228)	118	(30)	64 935	(337)	64 598
real estate	4 166	(9)	147	(5)	3	(2)	4 316	(16)	4 300
corporate	45 287	(56)	5 029	(186)	105	(25)	50 421	(267)	50 154
consumer	8 774	(14)	1 414	(37)	10	(3)	10 198	(54)	10 144
Other	3 002	(29)	-	-	-	-	3 002	(29)	2 973
Total financial commitments granted, including:	61 229	(108)	6 590	(228)	118	(30)	67 937	(366)	67 571
irrevocable commitments granted	30 121	(46)	2 883	(94)	42	(10)	33 046	(150)	32 896
POCI	-	-	-	-	20	-	20	-	20

guarantees in domestic and foreign trading	8 592	(4)	1 635	(88)	336	(162)	10 563	(254)	10 309
to financial entities	3 297	-	-	-	-	-	3 297	-	3 297
to non-financial entities	5 247	(4)	1 635	(88)	336	(162)	7 218	(254)	6 964
to public entities	48	-	-	-	-	-	48	-	48
domestic corporate bonds	2 000	-	-	-	-	-	2 000	-	2 000
to financial entities	2 000	-	-	-	-	-	2 000	-	2 000
domestic municipal bonds (state budget entities)	166	-	-	-	-	-	166	-	166
letters of credit	1 427	(1)	77	(4)	13	(1)	1 517	(6)	1 511
to financial entities	201	-	-	-	-	-	201	-	201
to non-financial entities	1 226	(1)	77	(4)	13	(1)	1 316	(6)	1 310
payment guarantees to financial entities	83	-	-	-	-	-	83	-	83
Total guarantees and pledges granted, including:	12 268	(5)	1 712	(92)	349	(163)	14 329	(260)	14 069
irrevocable commitments granted	8 668	(4)	1 635	(88)	336	(162)	10 639	(254)	10 385
performance guarantee	1 681	(1)	998	(54)	182	(135)	2 861	(190)	2 671
POCI	-	-	-	-	1	-	1	-	1

Total financial and guarantee commitments granted	73 497	(113)	8 302	(320)	467	(193)	82 266	(626)	81 640

FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2019	STAGE 1		STAGE 2		STAGE 3		Total	Provisions per IFRS 9	Net amount
FINANCIAL AND GUARANTEE COMMITMENTS GRANTED 31.12.2019	Nominal value	Provision	Nominal value	Provision	Nominal value	Provision	Total	Provisions per IFRS 9	Net amount
Credit lines and limits	50 781	(89)	2 811	(77)	183	(28)	53 775	(194)	53 581
real estate	4 762	(16)	308	(12)	7	(2)	5 077	(30)	5 047
corporate	37 677	(60)	1 155	(35)	168	(23)	39 000	(118)	38 882
consumer	8 342	(13)	1 348	(30)	8	(3)	9 698	(46)	9 652
Other	4 005	(13)	3	-	-	-	4 008	(13)	3 995
Total financial commitments granted, including:	54 786	(102)	2 814	(77)	183	(28)	57 783	(207)	57 576
irrevocable commitments granted	25 722	(29)	1 974	(47)	98	(11)	27 794	(87)	27 707
POCI	-	-	-	-	67	-	67	-	67

guarantees in domestic and foreign trading	12 047	(6)	501	(11)	291	(40)	12 839	(57)	12 782
to financial entities	3 337	-	-	-	-	-	3 337	-	3 337
to non-financial entities	8 551	(6)	501	(11)	291	(40)	9 343	(57)	9 286
to public entities	159	-	-	-	-	-	159	-	159
domestic corporate bonds	2 036	(1)	-	-	-	-	2 036	(1)	2 035
to financial entities	2 000	(1)	-	-	-	-	2 000	(1)	1 999
to non-financial entities	36	-	-	-	-	-	36	-	36
domestic municipal bonds (state budget entities)	101	-	-	-	-	-	101	-	101
letters of credit	1 188	(1)	-	-	13	(2)	1 201	(3)	1 198
to non-financial entities	1 188	(1)	-	-	13	(2)	1 201	(3)	1 198
payment guarantees to financial entities	125	-	-	-	-	-	125	-	125
Total guarantees and pledges granted, including:	15 497	(8)	501	(11)	304	(42)	16 302	(61)	16 241
irrevocable commitments granted	12 149	(6)	501	(11)	291	(40)	12 941	(57)	12 884
performance guarantee	2 021	(1)	390	(1)	149	(12)	2 560	(14)	2 546
POCI	-	-	-	-	-	-	-	-	-

Total financial and guarantee commitments granted	70 283	(110)	3 315	(88)	487	(70)	74 085	(268)	73 817

• nominal value of commitments granted by maturity

COMMITMENTS GRANTED BY MATURITY AS AT 31.12.2020	up to 1 month (inclusive)	from 1 to 3 months (inclusive)	from 3 months to 1 year (inclusive)	from 1 to 5 years (inclusive)	over 5 years	Total

Financial commitments granted	10 669	5 835	17 622	25 437	8 374	67 937
Guarantees and pledges granted	496	1 128	4 121	5 632	2 952	14 329

Total	11 165	6 963	21 743	31 069	11 326	82 266

COMMITMENTS GRANTED BY MATURITY AS AT 31.12.2019	up to 1 month (inclusive)	from 1 to 3 months (inclusive)	from 3 months to 1 year (inclusive)	from 1 to 5 years (inclusive)	over 5 years	Total

Financial commitments granted	13 944	5 844	15 141	14 121	8 733	57 783
Guarantees and pledges granted	159	1 651	5 161	7 133	2 198	16 302

Total	14 103	7 495	20 302	21 254	10 931	74 085

• Off-balance sheet liabilities received

OFF-BALANCE SHEET LIABILITIES RECEIVED BY NOMINAL VALUE	31.12.2020	31.12.2019
Financial	147	119
Guarantees	4 025	2 350

Total	4 172	2 469

• Right to sell or pledge collateral established for the Bank

As at 31 December 2020, and as at 31 December 2019 there were no collaterals established for the benefit of the Bank, which the Bank was entitled to sell or pledge, if all obligations of the collateral holder were performed.

46. legal claims

As at 31 December 2020, the total value of the subject matter of litigation in court proceedings (trials) pending in which the Bank is a defendant amounted to PLN 2 028 million (as at 31 December 2019: PLN 1 194 million), and the total value of the subject matter of litigation in court proceedings (trials) pending in which the Bank is the claimant as at 31 December 2020 was PLN 2 230 million (as at 31 December 2019: PLN 2 527 million).

• litigation against the Bank relating to mortgage loans in convertible currencies

As at 31 December 2020, 5 372 legal proceedings were pending against the Bank (as at 31 December 2019: 1 645) relating to mortgage loans granted in previous years in foreign currency with a total value in dispute of PLN 1 404 million (as at 31 December 2019: PLN 392 million), including one group proceeding with 72 loan agreements. The Bank’s customers’ claims concerned mainly demands to determine the invalidity of all or part of the agreements or to receive reimbursement of allegedly undue benefits in connection with the abusive nature of the foreign currency clauses. None of the clauses used by the Bank in the agreements was entered in the register of prohibited contractual provisions. The number of lawsuits filed by customers against the Bank is significantly influenced by the intensive advertising campaign of law firms, which encourages borrowers to commission to them – for a fee – the conducting of cases against banks.

On 3 October 2019, the Court of Justice of the European Union (hereinafter: CJEU) issued a ruling in case C 260/18 initiated by preliminary questions formulated by the Circuit Court in Warsaw. The Bank was not a party to the proceedings before the CJEU.

The Bank monitors the status of court rulings in cases indexed or denominated in foreign currencies on an ongoing basis with respect to the shaping and possible changes in rulings.

As at 31 December 2020, 75 final rulings have been issued by the courts in cases against the Bank (including 33 rulings after 3 October 2019). 48 of these rulings (including in 10 rulings issued after 3 October 2019) are favourable for the Bank. The Bank files cassation complaints to the Supreme Court against final rulings unfavourable to the Bank.

On 29 January 2021, in connection with the discrepancies in the interpretation of legal provisions in the jurisprudence of the Supreme Court and common courts and in order to ensure the uniformity of jurisprudence, the First President of the Supreme Court submitted a request for the full panel of the Civil Chamber of the Supreme Court to resolve the following legal issues concerning the subject of loans denominated and indexed in foreign currencies (legal basis: Article 83 § 1 of the Act of 8 December 2017 on the Supreme Court):

1. If a a provision of an indexed or denominated loan agreement relating to the method of determining the foreign currency exchange rate is found to constitute an illicit contractual provision and is not binding on the consumer – is it then possible to assume that another method of determining the foreign currency exchange rate resulting from law or custom takes its place?

If the above question is answered in the negative:

2. In the event that it is impossible to establish a foreign currency exchange rate binding on the parties in a loan agreement indexed to such a currency, can the remainder of the agreement still be binding for the parties?

3. In the event that it is impossible to establish a foreign currency exchange rate binding on the parties in a loan agreement indexed to such a currency, can the remainder of the agreement still be binding for the parties?

Notwithstanding the content of the answers to questions 1 to 3:

4. In the event of the invalidity or ineffectiveness of a loan agreement, in the performance of which the bank disbursed to the borrower all or part of the amount of the loan and the borrower made repayments of the loan, do separate claims for wrongful performance arise for each of the parties, or does only a single claim arise, equal to the difference in performance, for the party whose total performance was higher?

5. Where a loan agreement is invalid or ineffective as a result of the unlawful nature of certain of its terms, does the limitation period for the bank’s claim for repayment of the sums paid under the loan begin to run from the time at which those sums were paid?

6. If, in the case of the invalidity or ineffectiveness of a loan agreement, either party has a claim for repayment of a performance made in the performance of that agreement, can that party also claim a fee for the use of its funds by the other party?

A session of the full composition of the Civil Chamber for the examination of the above-mentioned the application was scheduled for 25 March 2021. Currently, the scheduled date of the meeting is 11 May 2021.

On 29 April 2021, a ruling by the CJEU (C-19/20) on 5 questions referred for a preliminary ruling by the District Court in Gdańsk is scheduled. The judgment of the CJEU may be of significant importance for all disputes regarding loans indexed or denominated to CHF, because the questions of the District Court concern, inter alia, the nature of the judgment declaring the invalidity of the contract and the related issue of limitation and the scope of informing the consumer by the court about claims due to banks in the event of invalidity. , including a claim for a return of capital and a claim for payment of remuneration for the use of capital.

The directions of the Supreme Court's ruling may affect the revision of the assumptions adopted for the model of calculating the legal risk costs of the portfolio of mortgage loans granted in a foreign currency, and thus the level of the estimated impact of this risk. Due to the inability to predict the shape of the resolution of individual issues by the Supreme Court, in the opinion of the Management Board, at the time of preparing these financial statements, it is not possible to reliably estimate the value of the impact of the Supreme Court's position on the level of legal risk costs of the portfolio of mortgage loans denominated and indexed in foreign currencies as at 31 December 2020.

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

• ACTIONS OF THE BANK TAKEN IN CONNECTION WITH THE PROPOSAL OF THE CHAIRMAN OF THE FINANCIAL SUPERVISION AUTHORITY AND THE EXPECTED MEETING OF THE SUPREME COURT RELATED TO LOANS GRANTED IN CONVERTIBLE CURRENCIES

In December 2020, the Chairman of the Polish Financial Supervision Authority (hereinafter "the Chairman of the Polish Financial Supervision Authority") presented a proposal aimed at a systemic solution to the problem of housing loans in Swiss francs. This solution assumes that banks will voluntarily offer their clients the option of concluding settlements under which the clients would settle accounts with the bank as if their loans were from the beginning PLN loans bearing interest at the WIBOR reference rate increased by the margin used historically for such loans.

On 9 February 2021, the National Bank of Poland issued a communiqué on the possible involvement in the operation of currency conversion of housing foreign currency loans. The Management Board of the National Bank of Poland welcomes the initiatives of banks aimed at limiting the legal risk of foreign currency housing loans through agreements with borrowers. In this context, the NBP Management Board is considering a possible involvement in the process of converting foreign currency housing loans into PLN, on the terms and at market rates.

The Bank analyzed the benefits and risks related to possible options for proceeding with FX housing loans. In the opinion of the Capital Group, reaching a compromise and reaching a settlement is both more beneficial for its clients than engaging in long-term court proceedings with uncertain resolution.

The Group conducted a survey among its clients which showed that about 70 percent. of them are interested in concluding a settlement with the Bank. Currently, the Group is conducting a pilot of settlements, under which it participates in mediation at the arbitration court at the PFSA and concludes settlements before common courts.

On 23 April 2021, the Extraordinary General Meeting of Shareholders accepted the possibility of offering settlements to Customers. Therefore, estimating the costs of legal risk of mortgage loans denominated in foreign currencies, the Bank recognized the impact of forecasted settlements.

• Court proceedings against the Bank concerning reimbursement of the commission in the event of early repayment of loans

As at 31 December 2020, 203 court proceedings were pending against the Bank with a total disputed amount of PLN 907 thousand, concerning the reimbursement of the commission in the event of early repayment of all or part of a loan liability by the customer (as at 31 December 2019: 102 court proceedings with a total litigation value of PLN 640 thousand).

The provision for such proceedings as at 31 December 2020 amounted to PLN 694 thousand (PLN 355 thousand as at 31 December 2019).

On 11 September 2019, the Court of Justice of the European Union (“CJEU”) issued its ruling in Case C-383/18 initiated by a request for a preliminary ruling from the District Court for Lublin-East in Lublin with its seat in Świdnik. The Bank was not a party to the proceedings before the CJEU. A detailed description of an impact, that this ruling may exert on the Bank, has been presented in the consolidated financial statements of the Group for the year 2019.

The Bank has made an estimate of possible early repayments that may occur in the future and relate to the consumer and mortgage loan portfolio, recognizing their impact as a reduction in the gross carrying amount of consumer and housing loans of PLN 147 million as at 31 December 2020. Moreover, the Bank estimated the likely costs of satisfying customer complaints relating to reimbursement of commission in connection with early repayments in the past. They were recognized in the balance of provisions as at 31 December 2020 in the amount of PLN 23 million and as at 31 December 2019 in the amount of PLN 104 million (Note “Provisions”).

• Proceedings before the President of the Office of Competition and Consumer Protection (UOKiK)

Three proceedings have been brought before the President of UOKiK ex officio and are currently in progress:

• Proceedings initiated ex officio on 28 June 2017 on the acknowledgement that the provisions of the template agreement are inadmissible. The violation alleged against the Bank relates to using contractual provisions concerning the method of determining the rates of foreign currency purchase and sale in the template agreements for mortgage loans revalued/indexed/denominated to foreign currencies and annexes thereto, which, in the opinion of the President of UOKiK, may be considered prohibited under Article 385 § 1 of the Civil Code. In the decision of 16 October 2020, the President of UOKiK declared the provisions of the template agreement “Annex to the housing loan/mortgage loan agreement” in the section “Appendix to the annex ‘Rules for determining foreign exchange spreads at PKO BP S.A.’” as inadmissible provisions and prohibited their use. In addition, the President of UOKiK ordered that all consumers being parties to the assessed annexes be informed about the decision to declare them inadmissible and about the consequences resulting therefrom, not later than within 3 months from the date on which the decision became legally binding and ordered that a declaration be submitted, with the contents as indicated in the decision, not later than 1 month from the date the decision became legally binding, which is to be kept on the website for 4 months. Furthermore, the President of UOKiK imposed on the Bank a fine of PLN 41 million, payable to the Financial Education Fund. On 13 November 2020, the Bank filed an appeal against the UOKiK decision with the Court of Competition and Consumer Protection. As at 31 December 2020, the Bank recorded a provision against this litigation of PLN 41 million.

• Proceedings initiated on 26 July 2017 ex officio concerning using practices which violate the collective interests of customers. The violation with which the Bank has been charged consists of collecting higher instalments on loans and advances denominated in foreign currencies to customers than those following from the advice about interest rate risk provided to customers before they had concluded the contracts, and transferring possible currency risk to the customers. The Bank presented its position on the claims in its letter dated 23 September 2017. In a letter dated 14 March 2019, the UOKiK President asked the Bank 16 detailed questions in order to establish the circumstances that are necessary to resolve the case. The Bank gave the answers in a letter dated 10 May 2019. As at 31 December 2020, the President of UOKiK did not take any further steps in this matter. As at 31 December 2020, the Bank did not set up a provision for the proceedings.

• Proceedings initiated ex officio on 12 March 2019 on the acknowledgement that the provisions of the template agreement are inadmissible. The proceedings are related to modification clauses which specify the circumstances in which the Bank is entitled to amend the terms and conditions of the agreement, including the amount of fees and commission. In the opinion of the President of UOKiK the modification clauses applied by the Bank give the Bank unilateral unlimited and arbitrary possibilities to modify the performance of the agreement. Consequently, the President of UOKiK is of the opinion that the clauses applied by the Bank shape the rights and obligations of the consumers in a way that is contrary to good practice and are in gross violation of their interests, which justifies the conclusion that they are abusive. In its letter of 31 May 2019, the Bank presented its position on the charges made by the President of UOKiK. In a letter dated 30 December 2020 the President of UOKiK extended the term of concluding the proceedings until 31 March 2021. As at 31 December 2020, the Bank had not set up a provision for these proceedings.

Proceedings related to restrictive practices on the market of payments with payment cards in Poland

The Bank is a party to proceedings initiated by the President of the Office of Competition and Consumer Protection (UOKiK) on the basis of a decision dated 23 April 2001 upon the request of the Polish Trade and Distribution Organization – Employers Association (Polska Organizacja Handlu i Dystrybucji – Związek Pracodawców) against operators of the Visa and Europay payment systems and banks issuing Visa and Europay/ Eurocard/ Mastercard banking cards.

The claims under these proceedings relate to the use of practices limiting competition on the market of banking card payments in Poland, consisting of applying pre-agreed “interchange” fees for transactions made using the Visa and Europay/Eurocard/Mastercard cards as well as limiting access to this market for external entities. On 29 December 2006, UOKiK decided that the practices, consisting of joint determination of the “interchange” fee, did limit market competition and ordered that any such practices should be discontinued, and imposed a fine on, among others, the Bank, in the amount of PLN 16.6 million. The Bank appealed against the decision of the President of UOKiK to the Court for Competition and Consumer Protection (Sąd Ochrony Konkurencji i Konsumentów – SOKiK). By the ruling dated 21 November 2013, SOKiK reduced the fine imposed on the Bank to PLN 10.4 million. The parties to the proceedings appealed against the ruling. The Court of Appeal in Warsaw in its ruling dated 6 October 2015 reinstated the initial amount of the imposed fines set in the decision of the UOKiK, i.e. the fine of PLN 16.6 million (the fine imposed on PKO Bank Polski S.A.) and the fine of PLN 4.8 million (the fine imposed on Nordea Bank Polska S.A.. PKO Bank Polski S.A. is a legal successor of Nordea Bank Polska S.A. through a merger in accordance with Article 492 § 1(1) of the Commercial Companies Code). The fine was paid by the Bank in October 2015. As a result of the cassation complaint made by the Bank, in its ruling dated 25 October 2017, the Supreme Court revoked the appealed ruling of the Court of Appeal in Warsaw and submitted the case for re-examination. The fine paid by the Bank was reimbursed to the Bank on 21 March 2018. On 23 November 2020, the Court of Appeal in Warsaw issued a ruling in which it revoked the ruling of the District Court in Warsaw dated 21 November 2013 and submitted it for re-examination. As at 31 December 2020 the Bank recorded a provision for this litigation of PLN 21 million.

• interchange Claims for damages in respect of the interchange fee

The Bank was served six summons to participate, as an outside intervener on the defendant’s side in cases relating to the interchange fees. Other banks are respondents on the defendant’s side. The claims vis-à-vis the sued banks amount to a total of PLN 783 million and are pursued as damages for differences in interchange fees resulting from applying practices that limit competition. Since these proceedings are not pending against the Bank, their value was not included in the total value of the cases against the Bank.

If the courts find the claims justified, the defendants may claim recourse in separate court proceedings from other banks, including, among others, from PKO Bank Polski S.A.. As at 31 December 2020, the Bank entered five proceedings as an outside intervener.

• Re-privatization claims relating to properties used by the Bank

As at the date of the consolidated financial statements, there are:

• three proceedings involving reprivatization claims. One of the proceedings has been suspended. In the second proceeding, which ended with a final court ruling favourable to the Bank, the opposing party lodged a cassation complaint, and the Supreme Court accepted it for consideration. In the third proceeding the subject matter of which is to confirm the invalidity of the decision refusing to grant temporary ownership of the Bank’s property to the applicant, a cassation complaint has been lodged with the Voivodeship Administrative Court against the final decision discontinuing the proceedings as groundless. The claim was rejected by the Voivodeship Administrative Court but the opponent appealed against this decision.

The Management Board of PKO Bank Polski S.A. believes that the probability of serious claims against the Bank as a result of the aforesaid proceedings is low.

47. Notes to the cash flow statement

• Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, cash on nostro accounts in the National Bank of Poland, as well as current amounts due from banks, as well as other cash equivalents with maturities of up to 3 months from the date of acquisition.

CASH AND CASH EQUIVALENTS	2020	2019
CASH AND CASH EQUIVALENTS
Cash, current account with the Central Bank	7 397	14 602
Current amounts due from banks	1 700	3 379
Restricted cash and cash equivalents of which	29	12
- loans and advances to customers	29	12

Total	9 126	17 993

• Restricted cash and cash equivalents

Cash of PLN 29 million (as at 31 December 2019: PLN 12 million) pledged as collateral for securities’ transactions conducted by Biuro Maklerskie PKO BP are deposited in the National Depository for Securities (KDPW_CCP), as part of the Guarantee Fund for the Settlement of Stock Exchange Transactions. Each direct participant who holds the status of settlement-making participant is obliged to make payments to the settlement fund which guarantees proper settlement of the stock exchange transactions covered by that fund. The amount of the payments depends on the value of transactions made by each participant and is updated by KDPW_CCP on a daily basis.

• Cash flows from interest and dividends, both received and paid

INTEREST INCOME ON:	2020	2019
loans to and other receivables from banks	138	183
hedging derivatives	670	418
debt securities	1 839	1 450
loans and advances to customers	6 616	7 941

Total	9 263	9 992

The above amounts of interest received do not include the amounts of commission recognized using the effective interest rate as interest income.

INTEREST EXPENSES – PAID:	2020	2019
amounts due to banks	(18)	(31)
amounts due to customers	(930)	(1 603)
loans and advances received	(209)	(257)
leases	(15)	(20)
debt securities	(38)	(91)
securities in issue	(29)	(40)
subordinated liabilities	(90)	(90)

Total	(1 329)	(2 132)

DIVIDEND INCOME RECEIVED	2020	2019
from subsidiaries, associates and joint ventures	295	511
from financial assets held for trading	-	1
financial instruments not held for trading, measured at fair value through profit or loss	15	13

Total	310	525

• Cash flows from operating activities – other adjustments

OTHER ADJUSTMENTS	2020	2019
Cash flow hedges	276	113
Actuarial gains and losses	(6)	(5)
Remeasurement of shares in subordinated entities and other changes	29	-
Scrapping of property, plant and equipment and intangible assets	19	18
Other	(20)	(2)

Total	298	124

• Explanation of differences between the statement of financial position and changes in these items presented under operating activities in the cash flow statement

(GAINS)/LOSSES ON INVESTING ACTIVITIES	2020	2019
Gains on sale and scrapping of property, plant and equipment, intangible assets and assets held for sale	(17)	(17)
Losses on sale and scrapping of property, plant and equipment, intangible assets and assets held for sale	2	3

Total	(15)	(14)

INTEREST AND DIVIDENDS	2020	2019
Shown in investing activities	(2 120)	(1 924)
dividends received from subordinated entities	(295)	(511)
dividends received from securities held for trading	-	(1)
dividends received from securities not held for trading, measured at fair value through profit or loss	(15)	(13)
interest received on securities measured at fair value through other comprehensive income	(1 331)	(1 150)
interest received on securities measured at amortized cost	(479)	(249)
Shown in financing activities:	328	387
interest paid on debt securities in issue	29	40
interest paid on subordinated liabilities	90	90
interest paid on loans and advances received	209	257

Total	(1 792)	(1 537)

CHANGES IN AMOUNTS DUE FROM BANKS	2020	2019
Change in the balance sheet	2 649	3 260
Changes in allowances for expected credit losses	(3)	-
Exclusion of the change in cash and cash equivalents	(1 678)	(3 773)

Total	968	(513)

CHANGE IN SECURITIES	2020	2019
Change in the balance sheet	(43 551)	(15 983)
Changes in allowances for expected credit losses	(31)	10
Fair value of financial assets measured at fair value through other comprehensive income (net)	1 097	(117)
Recognition of acquisition / disposal of securities measured at fair value through other comprehensive income in investing activities	6 766	9 208
Recognition of acquisition / disposal of securities measured at amortized cost in investing activities	33 355	4 691
Total	(2 364)	(2 191)

CHANGE IN LOANS AND ADVANCES TO CUSTOMERS	2020	2019
Change in the balance sheet	7 804	(9 343)
Changes in allowances for expected credit losses	(1 352)	1 068
Exclusion of the change in cash and cash equivalents	17	2

Total	6 469	(8 273)

CHANGE IN NON-CURRENT ASSETS HELD FOR SALE	2020	2019
Change in the balance sheet	(115)	(1)
Changes in allowances on non-current assets held for sale	(2)	(1)

Total	(117)	(2)

ZMIANA STANU INNYCH AKTYWÓW	2020	2019
Change in the balance sheet	41	294
Changes due to implementation of IFRS 16	-	(4)
Changes in allowances for other assets	(91)	(1)
Other	-	(100)

Total	(50)	189

CHANGE IN AMOUNTS DUE TO BANKS AND THE CENTRAL BANK	2020	2019
Change in the balance sheet	607	378

Total	607	378

CHANGE IN AMOUNTS DUE TO CUSTOMERS	31.12.2020	31.12.2019
Change in the balance sheet	25 951	16 614

Total	25 951	16 614

CHANGE IN LIABILITIES IN RESPECT OF LOANS AND ADVANCES RECEIVED	2020	2019
Change in the balance sheet	(120)	(3 813)
Recognition of drawing/repayment of long-term loans and advances under financing activities, including interest	131	3 763

Total	11	(50)

CHANGE IN LIABILITIES IN RESPECT OF DEBT SECURITIES IN ISSUE	2020	2019
Change in the balance sheet	(749)	(598)
Recognition of drawing/repayment of liabilities in respect of debt securities in issue under financing activities	1 129	619

Total	380	21

CHANGE IN SUBORDINATED LIABILITIES	2020	2019
Change in the balance sheet	(14)	(1)

Total	(14)	(1)

CHANGE IN ACCUMULATED ALLOWANCES FOR EXPECTED CREDIT LOSSES AND IMPAIRMENT ALLOWANCES ON NON-FINANCIAL AND OTHER ASSETS	2020	2019
Change in accumulated allowances and provisions for expected credit losses	1 798	(1 041)
for amounts due from banks	3	-
for loans and advances to customers	1 352	(1 068)
for securities	31	(10)
for other financial assets	54	(4)
provisions for financial liabilities and guarantees granted	358	41
Change in accumulated impairment allowances on non-financial assets and other provisions	755	98
for non-current assets held for sale	2	1
for property, plant and equipment	51	7
for intangible assets	108	(2)
for investments in subordinated entities	101	-
for other non-financial assets	37	5
other provisions	456	87

Total	2 553	(943)

CHANGE IN OTHER LIABILITIES	2020	2019
Change in the balance sheet	(53)	1 412
Changes due to implementation of IFRS 16	-	(885)

Recognition of lease payments in financing activities	216	202

Total	163	729

• Reconciliation of items presented in the statement of financial position with financing activities in the cash flow statement

2020	As at the beginning of the period	Recognized in financing activities in the cash flow statement	Recognized in operating activities in the cash flow statement	As at the end of the period
2020	As at the beginning of the period	Repaid		As at the end of the period
Loans and advances received	5 026	(131)	11	4 906
Liabilities in respect of debt securities in issue	4 769	(1 129)	380	4 020
Subordinated liabilities – subordinated bonds	2 730	-	(14)	2 716
Payment of lease liabilities	819	(216)	420	1 023
	x		x	x
Total	13 344	(1 476)x	797	12 665

2019	As at the beginning of the period	Recognized in financing activities in the cash flow statement		Recognized in operating activities in the cash flow statement	As at the end of the period
2019	As at the beginning of the period	Incurred	Repaid
Loans and advances received	8 839	-	(3 763)	(50)	5 026
Liabilities in respect of debt securities in issue	5 367	596	(1 215)	21	4 769
Subordinated liabilities – subordinated bonds	2 731	-	-	(1)	2 730
Payment of lease liabilities	-	-	(202)	1 021	819
	x	x	x	x	x
Total	16 937	596	(5 180)	991	13 344

48. T ransactions with the State Treasury and related parties

• Transactions with the State Treasury

The State Treasury holds a 29.43% interest in the Bank’s share capital.

Pursuant to the Act of 30 November 1995 on the state support in repayment of certain housing loans, reimbursement of guarantee bonuses paid, and amendments to certain Acts, PKO Bank Polski S.A. receives payments from the State budget as repurchase of interest receivable on housing loans.

TRANSACTIONS WITH THE STATE TREASURY	2020	2019
Income recognized on an accruals basis	78	93
Income recognized on a cash basis	64	75
Income from temporary redemption by the State Treasury of interest on housing loans in the ‘old’ portfolio	14	18

As of 1 January 2018 based on the provisions of the Act of 30 November 1995 on state support in the repayment of certain housing loans, granting guarantee bonuses and reimbursement of guarantee bonuses paid, the borrowers acquired the right to be forgiven the remaining debt by the State Treasury, which will result in the gradual (until 2026) full settlement of the housing loan indebtedness from the so-called “old” portfolio. The Bank conducts settlements in respect of repurchase of interest on housing loans by the State Budget and on this account the Bank received commission in 2020 and 2019 amounting to under PLN 1 million.

As of 1 January 1996, the Bank became the general distributor of value marks. The Bank receives commissions in this respect from the State Treasury – in 2020 and in 2019, the Bank received commission on this account of under PLN 1 million.

Biuro Maklerskie PKO BP plays the role of an agent for the issue of retail Treasury bonds under the agreement signed with the Ministry of Finance on 11 February 2003. Under this agreement, Biuro Maklerskie PKO BP receives a fee for providing the services of an agent for the issue of bonds – in 2020 in the amount of PLN 128 million, and in 2019 in the amount of PLN 83 million.

• Significant transactions with the State Treasury’s related entities

The Bank’s exposure and the value of the Bank’s liabilities to 10 entities related to the State Treasury with the highest total exposure are presented below.

SIGNIFICANT TRANSACTIONS WITH THE STATE TREASURY’S RELATED ENTITIES	BALANCE SHEET EXPOSURE, INCLUDING EXPOSURE IN LOANS AND DEBT INSTRUMENTS		OFF-BALANCE SHEET EXPOSURE		LIABILITIES IN RESPECT OF DEPOSITS
	31.12.2020	31.12.2019	31.12.2020	31.12.2019	31.12.2020	31.12.2019
counterparty 1	-	-	-	2 453	793	-
counterparty 2	16 845	3 443	30	350	737	61
counterparty 3	465	240	2 036	3 520	98	3 686
counterparty 4	1 617	614	714	2 291	48	175
counterparty 5	623	599	1 693	1 683	63	350
counterparty 6	129	2 021	2 046	667	41	122
counterparty 7	999	467	1 156	1 080	11	50
counterparty 8	644	485	950	2 132	46	231
counterparty 9	46	1 726	1 191	1 193	114	94
counterparty 10	313	167	706	802	-	6

	2020	2019
Interest and commission income	206	200
Interest and commission expense	(16)	(29)

As at 31 December 2020 and as at 31 December 2019, respectively, no allowances for expected credit losses were recognized for the above-mentioned receivables using the individualized method.

In the opinion of the Bank, all transactions with entities related to the State Treasury are concluded on an arm’s-length basis.

• Related-party transactions – capital links

Transactions between the Bank as the parent and its subsidiaries, associates and joint ventures are presented in the table below. All transactions presented below were arm’s length transactions. Repayment terms are within a range of from one month to seventeen years.

31.12.2020 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
KREDOBANK S.A. and its subsidiary	11	-	19	296
Merkury – fiz an and its subsidiaries	-	-	25	-
NEPTUN – fizan and its subsidiaries	156	156	34	-
PKO Bank Hipoteczny SA	3 439	3 215	1 155	7 078
PKO BP BANKOWY PTE SA	-	-	13	-
PKO BP Finat sp. z o.o.	-	-	9	10
PKO Finance AB	742	-	4 343	-
PKO Leasing S.A. and its subsidiaries	16 753	16 753	16	5 708
PKO Towarzystwo Funduszy Inwestycyjnych S.A.	21	-	164	-
PKO Towarzystwo Ubezpieczeń S.A.	-	-	14	-
PKO Życie Towarzystwo Ubezpieczeń S.A. and its subsidiary	-	-	494	-
Total	21 122	20 124	6 286	13 092
For the period ended 31.12.2020 Company name	Total income	of which interest and commission income	Total expenses	of which interest and commission expense
KREDOBANK S.A. and its subsidiary	1	1	-	-
NEPTUN – fizan and its subsidiaries	2	2	-	-
PKO Bank Hipoteczny SA	234	207	5	4
PKO BP BANKOWY PTE SA	9	1	-	-
PKO BP Finat sp. z o.o.	45	-	6	-
PKO Finance AB	24	24	192	192
PKO Leasing S.A. and its subsidiaries	236	233	-	-
PKO Towarzystwo Funduszy Inwestycyjnych S.A.	236	6	1	1
PKO Towarzystwo Ubezpieczeń S.A.	55	54	-	-
PKO Życie Towarzystwo Ubezpieczeń S.A. and its subsidiary	36	36	10	10
Total	878	564	214	207

31.12.2019 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
KREDOBANK S.A. and its subsidiary	82	-	16	115
Merkury – fiz an and its subsidiaries	-	-	36	-
NEPTUN – fizan and its subsidiaries	148	148	62	-
PKO Bank Hipoteczny SA	4 681	2 282	174	4 231
PKO BP BANKOWY PTE SA	-	-	21	-
PKO BP Finat sp. z o.o.	-	-	38	13
PKO Finance AB	-	-	4 331	-
PKO Leasing S.A. and its subsidiaries	17 172	17 172	9	5 541
PKO Towarzystwo Funduszy Inwestycyjnych S.A.	38	-	245	-
PKO Towarzystwo Ubezpieczeń S.A.	-	-	45	-
PKO Życie Towarzystwo Ubezpieczeń S.A. and its subsidiary	-	-	501	-
ZenCard sp. z o.o.	4	4	1	-
Total	22 125	19 606	5 479	9 900
for the period ended 31.12.2019 Company name	Total income	of which interest and commission expense	Total expenses	of which interest and commission expense
KREDOBANK S.A. and its subsidiary	2	2	-	-
NEPTUN – fizan and its subsidiaries	2	2	-	-
PKO Bank Hipoteczny SA	383	364	2	2
PKO BP BANKOWY PTE SA	14	1	-	-
PKO BP Finat sp. z o.o.	39	-	6	1
PKO Finance AB	-	-	192	192
PKO Leasing S.A. and its subsidiaries	530	369	1	1
PKO Towarzystwo Funduszy Inwestycyjnych SA	253	9	3	3
PKO Towarzystwo Ubezpieczeń SA	73	73	-	-
PKO Życie Towarzystwo Ubezpieczeń S.A. and its subsidiary	70	46	11	11
Operator Chmury Krajowej sp. z o.o.	1	1
Total	1 367	867	215	210

31.12.2020 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	54	6	168	54
„Centrum Obsługi Biznesu" sp. z o.o.	17	17	4	-
Bank Pocztowy SA	-	-	-	1
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	-	-	22	-
Operator Chmury Krajowej sp. z o.o.	-	-	18	767
Total	71	23	212	822
For the period ended 31.12.2020 Company name	Total income	of which interest and commission income	Total expenses	of which interest and commission expense
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	543	517	92	91
Total	543	517	92	91

31.12.2019 Company name	Receivables	of which loans	Liabilities	Off-balance sheet liabilities granted
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	80	26	43	32
„Centrum Obsługi Biznesu" sp. z o.o.	19	19	6	-
Bank Pocztowy SA	-	-	-	1
„Poznański Fundusz Poręczeń Kredytowych" sp. z o.o.	-	-	1	-
Operator Chmury Krajowej sp. z o.o.	-	-	59	769
Total	99	45	109	802
For the period ended 31.12.2019 Company name	Total income	of which interest and commission income	Total expenses	of which interest and commission expense
Centrum Elektronicznych Usług Płatniczych eService sp. z o.o.	508	468	125	125
„Centrum Obsługi Biznesu" sp. z o.o.	1	1	-	-
Operator Chmury Krajowej sp. z o.o.	-	-	9	-
Total	509	469	134	125

• Related-party transactions – personal links

As at 31 December 2020, seven entities were related to the Bank through the key management personnel of PKO Bank Polski S.A. or close family members of the key management personnel. As at 31 December 2019, it was six entities. In 2020 and in 2019, no transactions were conducted between the Bank and those entities.

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

ACCOUNTING POLICIES

Short-term employee benefits include, apart from the base salary, also the part of the variable remuneration component paid in cash which is not deferred.

The deferred part of the variable remuneration component paid in cash was recognized as other long-term benefits.

Non-deferred and deferred remuneration components granted in the form of financial instruments i.e. phantom shares (for which conversion into cash is carried out after an additional period of retention) are recognized as share-based payments settled in cash in accordance with the principles described below.

• Variable remuneration components of key management personnel in the Bank

Variable remuneration components are granted in the form of: non-deferred remuneration (in the first year after the calendar year constituting an appraisal period), and deferred remuneration (for the next three years after the first year of the appraisal period), whereas both the non-deferred and deferred remuneration is awarded in equal parts in cash and in the form of financial instruments, i.e. phantom shares (for which conversion into cash is carried out after an additional period of retention).

The component of remuneration in the form of the financial instrument is converted into phantom shares after granting a particular component – taking into consideration the median of the daily average prices of the Bank’s shares (Volume Weighted Average Price) on the Warsaw Stock Exchange, published in the Thomson Reuters or Bloomberg information systems – from the fourth quarter of the appraisal period. Next, after a period of retention and deferral period, the shares are converted into cash – taking into consideration the median of the daily average prices of the Bank’s shares (Volume Weighted Average Price) on the Warsaw Stock Exchange from the third quarter of the calendar year preceding the payment (the Management Board) and the third quarter of the calendar year in which the payment is made (other persons in management positions), published in the Thomson Reuters or Bloomberg information systems.

The deferred remuneration may be reduced in the event of deterioration in the financial performance of the Bank, a loss incurred by the Bank or deterioration of other variables related to the performance in the period of appraisal of key management personnel and results of the organizational units/cells supervised or managed by these people, which were revealed after the appraisal period.

FINANCIAL INFORMATION

COST OF REMUNERATION OF THE BANK’S MANAGEMENT AND SUPERVISORY BOARDS (in PLN thousand)	2020	2019 1
Management Board of the Bank
Short-term employee benefits	9 162	9 547
Long-term employee benefits	1 484	1 134
Share-based payments settled in cash	3 711	2 835
Benefits to the Bank’s Management Board members who ceased to perform their functions in previous years	-	172
Total	14 357	13 688

Supervisory Board of the Bank
Short-term employee benefits	1 388	1 340
Total	1 388	1 340

1 The data for the comparable period takes into account a shift in the proportion between variable remuneration in cash and in financial instruments towards increasing the financial instruments portion, and a shift in the proportion of deferred and non-deferred variable remuneration towards increasing the deferred variable remuneration portion.

LOANS AND ADVANCES GRANTED BY THE BANK TO THE MANAGEMENT AND SUPERVISORY BOARDS (in PLN thousand)	31.12.2020	31.12.2019

Supervisory Board of the Bank	902	376
Management Board of the Bank	769	1 340
Total	1 671	1 716

The interest rates and repayment terms do not differ from the arm’s-length conditions and repayment terms for similar banking products.

The Bank provides the key management personnel, members of the Supervisory Board and their families with standard financial services which comprise, among other things, operating bank accounts, accepting deposits, granting loans and providing other financial services. All these transactions are concluded on an arm’s-length basis.

• Variable remuneration components

PROVISION FOR VARIABLE REMUNERATION COMPONENTS	31.12.2020	31.12.2019
PROVISION FOR VARIABLE REMUNERATION COMPONENTS	(for 2015-2020)	(for 2014-2019)
Management Board (including members who ceased to perform their functions)	18	18
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	63	39
Total provision	81	57
Remuneration paid during the year	2020	2019
Remuneration paid during the year	(for 2015-2020)	(for 2014-2019)
- granted in cash	13	15
Management Board (including members who ceased to perform their functions)	3	6
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	10	9
- granted in the form of financial instruments	4	14
Management Board (including members who ceased to perform their functions)	4	4
Other Risk Takers (persons holding managerial positions other than members of the Bank’s Management Board)	-	10
Total remuneration paid	17	29

50. Fair value hierarchy

ACCOUNTING POLICIES and estimates and judgments

Depending on the classification of financial assets and liabilities to a specific level of the hierarchy, different methods of fair value measurement are used.

• Level 1: Prices quoted on active markets

Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) on active markets for identical assets and liabilities. In this category, the Bank classifies financial and equity instruments for which there is an active market and for which the fair value is determined with reference to the market value, which is a bid price:

• debt securities valued using fixing from the Bondspot platform, or Bloomberg or Reuters information services;

• debt and equity securities which are traded on regulated markets, including in the Biuro Maklerskie PKO BP portfolio;

• derivative instruments, which are traded on a regulated market.

• Level 2: Valuation techniques based on observable market data

Financial assets and liabilities whose fair value is determined using valuation models where all significant entry data is observable on the market directly (as prices) or indirectly (based on prices). In this category, the Bank classifies financial instruments for which there is no active market:

Financial assets and liabilities measured at fair value	Valuation method (technique)	Observable inputs
Derivative financial instruments - CIRS, IRS, FRA	The discounted future cash flows model based on the yield curves.	Yield curves are built based on market rates, market data of the money market, market transactions of FRA, IRS, basis swap.
Derivative financial instruments – currency option, interest rate options, equity exotic options, fx forward, fx swap transactions	Valuation models specific for particular types of currency options. The model of discounted future cash flows based on yield curves for FX forward and FX swap transactions. The prices of exotic equity options embedded in structured products are obtained from the market (market prices).	Yield curves built based on money market rates, market rate of swap points, volatility levels for specific currency pairs, NBP fixing exchange rates. For the valuation of exotic equity options embedded in structured products, market prices of these options are obtained.
NBP money market bills	Yield curve method	Yield curves are built based on money market data and OIS (overnight index swap) transactions market.
Municipal bonds in EUR	Accepted valuation model.	Market rates, market data from the money market, IRS transactions market, CDS transactions market, volatility of interest rate options market.
Municipal bonds in PLN	Yield curve and risk margin model.	Yield curves are built based on market rates, money market data, IRS transactions market.
Corporate bonds	Yield curve and risk margin model.	Yield curves are built based on market rates, money market data, IRS transactions market.
Commodity swap transactions	Commodity price curve model.	Commodity price and yield curves are built based on money market rates, market rates of SWAP points.

• Level 3: Other valuation techniques

Financial assets and liabilities whose fair value is determined using valuation models for which input data is not based on observable market data (unobservable input data). In this category, the Bank classified financial instruments, which are measured using internal valuation models.

The fair value of equity and debt securities classified as financial assets is determined by the organizational units of the Head Office responsible for them, including the Treasury Products Department and the Brokerage House. In their internal regulations, these units specify the detailed measurement methods, including determining the data sources used for measurement purposes and the method of performing the calculation.

The Credit Risk Department develops the assumptions of the fair value model for financial assets arising from loans and advances granted or other financing agreements being the substitute of loans. The Assets and Liabilities Management Committee approves the fair value model for loan exposures.

Financial assets and liabilities measured at fair value	Valuation method (technique)	unobservable input
Financial instruments not held for trading, mandatorily measured at fair value through profit or loss
Loans and advances to customers	Discounted cash flow method.	Effective margin on loans.
C-series preference shares of Visa Inc.	Estimation of the fair value based on the current market value of the listed ordinary shares of Visa Inc., including a discount which takes into account the limited liquidity of C-series shares and the terms and conditions of conversion of C-series shares into ordinary shares.	Discount taking into account the limited liquidity of C-series shares and the terms of converting the C-series shares into ordinary shares.
Corporate bonds	Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data.	Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors).
Shares in Biuro Informacji Kredytowej S.A.	Estimation of the fair value based on the present value of the forecast results of the company	Forecast results of the company. Discount rate.
Shares in Polski Standard Płatności sp. z o.o.	Estimation of the fair value based on the present value of the forecast results of the company.	Forecast results of the company. Discount rate.
Shares in Society For Worldwide Interbank Financial Telecommunication	Market value of the shares estimated by the company.	Market value estimated by the company. Discount rate.
Shares in Krajowa Izba Rozliczeniowa S.A.	Estimation of the fair value based on the present value of the forecast results of the company.	Forecast results of the company. Discount rate.
Shares in Wałbrzyska Specjalna Strefa Ekonomiczna “Invest-Park” sp z o.o.	Fair value determined by an appraiser using the net adjusted assets method.	Value of the company’s net assets.
Shares in Wielkopolska Gildia Rolno-Ogrodnicza S.A.	Fair value determined by an appraiser using the net adjusted assets method.	Value of the company’s net assets.
Financial Instruments measured at fair value through other comprehensive income
Corporate bonds	Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data.	Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors).

FINANCIAL INFORMATION

ASSETS MEASURED AT FAIR VALUE 31.12.2020	Carrying amount	Level 1	Level 2	Level 3
ASSETS MEASURED AT FAIR VALUE 31.12.2020	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques
Hedging derivatives	618	-	618	-
Other derivative instruments	5 416	-	5 416	-
Securities	72 751	64 285	7 147	1 319
held for trading	1 198	844	354	-
debt securities	1 171	817	354	-
shares in other entities - listed	25	25	-	-
participation units in investment funds, investment certificates, rights to shares, pre emptive rights	2	2	-	-
not held for trading, measured at fair value through profit or loss	1 107	506	1	600
debt securities	647	489	-	158
shares in other entities - listed	17	17	-	-
shares in other entities - not listed	443	-	1	442
measured at fair value through other comprehensive income	70 446	62 935	6 792	719
Loans and advances to customers	20 063	-	-	20 063
not held for trading, measured at fair value through profit or loss	6 009	-	-	6 009
housing loans	7	-	-	7
corporate loans	114	-	-	114
consumer loans	5 888	-	-	5 888
measured at fair value through OCI	14 054	-	-	14 054
housing loans	14 054	-	-	14 054
Total financial assets measured at fair value	98 848	64 285	13 181	21 382

LIABILITIES MEASURED AT FAIR VALUE	Carrying amount	Level 1	Level 2	Level 3
31.12.2020	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques

Hedging derivatives	543	-	543	-
Other derivative instruments	6 632	-	6 632	-
Total financial liabilities measured at fair value	7 175	-	7 175	-

ASSETS MEASURED AT FAIR VALUE 31.12.2019	Carrying amount	Level 1	Level 2	Level 3
ASSETS MEASURED AT FAIR VALUE 31.12.2019	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques
Hedging derivatives	594	-	594	-
Other derivative instruments	2 798	1	2 797	-
Securities	63 060	54 008	6 232	2 820
held for trading	1 175	1 175	-	-
debt securities	1 158	1 158	-	-
shares in other entities - listed	15	15	-	-
participation units in investment funds, investment certificates, rights to shares, pre emptive rights	2	2	-	-
not held for trading, measured at fair value through profit or loss	755	142	-	613
debt securities	298	118	-	180
shares in other entities - listed	24	24	-	-
shares in other entities - not listed	433	-	-	433
measured at fair value through OCI	61 130	52 691	6 232	2 207
Kredyty i pożyczki udzielone klientom	17 909	-	-	17 909
not held for trading, measured at fair value through profit or loss	8 286	-	-	8 286
housing loans	15	-	-	15
corporate loans	148	-	-	148
consumer loans	8 123	-	-	8 123
measured at fair value through OCI	9 623	-	-	9 623
housing loans	9 623	-	-	9 623
Total financial assets measured at fair value	84 361	54 009	9 623	20 729

LIABILITIES MEASURED AT FAIR VALUE	Carrying amount	Level 1	Level 2	Level 3
31.12.2019	Carrying amount	Prices quoted on active markets	Valuation techniques based on observable market data	Other valuation techniques

Hedging derivatives	668	-	668	-
Other derivative instruments	2 927	-	2 927	-
Liabilities in respect of a short position in securities	362	362	-	-
Total financial liabilities measured at fair value	3 957	362	3 595	-

In 2020, corporate bonds amounting to PLN 154 million were transferred from level 1 to level 3, and those amounting to PLN 1 063 million from level 3 to level 2, as a result of a change in the manner of calculating the risk margin. In 2019 corporate bonds amounting to PLN 1 469 million were transferred from level 2 to level 3 as a result of a change in the manner of calculating the risk margin.

IMPACT OF ESTIMATES ON FAIR VALUE MEASUREMENT OF LEVEL 3 FINANCIAL INSTRUMENTS	31.12.2020		31.12.2019
	Fair value under		Fair value under
	positive scenario	negative scenario	positive scenario	negative scenario
Shares in Visa Inc.	255	244	225	199
Other equity investments	200	181	222	202
Corporate bonds	879	876	2 392	2 382
Loans and advances to customers	20 303	19 529	18 428	17 408

1 Scenario assuming a change in the discount rate of +/- 0.5 p.p.

2 Scenario assuming a discount rate in respect of the future conditions of converting C-series shares to ordinary shares at a level of 0%/100% respectively

3 Scenario assuming a change in the credit spread of +/-10%

4 Scenario assuming a change in the company’s value of +/-5%

The reconciliation of changes to fair value of the financial instruments at Level 3 is presented in the table below.

RECONCILIATION OF CHANGES DURING THE REPORTING PERIOD TO FAIR VALUE AT LEVEL 3	2020	2019
Opening balance at the beginning of the period	20 729	11 609
Increase in exposure to corporate bonds	31	-
Decrease in exposure to corporate bonds	(596)	(801)
Increase in exposure to loans and advances to customers	4 713	5 180
Decrease in exposure to loans and advances to customers	(3 891)	(4 915)
Transfers from level 2, 1 to level 3	154	1 469
Transfers from level 3 to level 2	(1 063)	-
Reclassification from measured at amortized cost to measured at fair value through profit or loss	73	8 204
Net gain/(loss) on financial instruments measured at fair value through profit or loss	(172)	108
Change in the valuation recognized in OCI	68	(127)
Other	1 336	2
As at the end of the period	21 382	20 729

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

The Bank holds financial instruments which are not presented at the fair value in the statement of financial position.

For many financial instruments, the market values are unattainable hence the fair values presented are estimated with the use of an array of measurement techniques.

All model calculations include certain simplifying assumptions and therefore are sensitive to those assumptions. For certain categories of financial instruments, it has been assumed that their carrying amount equals approximately their fair values, which is due to lack of expected material differences between their carrying amount and fair value resulting from the features of these categories (such as short-term nature, high correlation with market parameters, a unique nature of the instrument).

POSITION	MAJOR METHODS AND ASSUMPTIONS USED WHEN ESTIMATING FAIR VALUES OF FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
AMOUNTS DUE FROM AND TO BANKS	• interbank placements and deposits – the model based on expected cash flows discounted using the current interbank market rates; • interbank deposits and placements with maturities of up to 7 days or with variable interest, loans or advances granted and received on the interbank market with variable interest (with interest rate changes occurring every 3 months or less) – fair value equals the carrying amount
SECURITIES	• treasury bonds – market quotations • PLN corporate bonds secured with State Treasury guarantees - discounted cash flow method, calculated using yield curves, prices available in Bloomberg (BVAL - Bloomberg Valuation Service) and Refinitiv Eikon news services • corporate and municipal bonds – discounted cash flow method, calculated using yield curves and credit margins
LOANS AND ADVANCES TO CUSTOMERS	• not impaired the model based on estimating the present value of future cash flows by discounting cash flows using current interest rates; the model takes into account the credit risk margin and adjusted maturities derived from the loan agreements. The current level of margins was determined for transactions concluded in the last quarter ending on the balance sheet date involving instruments with a similar credit risk profile. The current margin for loans in PLN adjusted for the cost of foreign currency acquisition in basis-swap transactions was applied to loans in foreign currencies • finance lease receivables – the model of expected cash flows discounted using the internal rate of return for lease transactions of the same type concluded by the Bank during the period directly preceding the end of the reporting period • impaired: fair values are equal to carrying amounts • loans and advances to customers: a part of the housing loan portfolio (the “old” housing loan portfolio), loans with no specific repayment schedule, loans due as at the moment of valuation – fair values are equal to carrying amounts
AMOUNTS DUE TO CUSTOMERS	• deposits and other amounts due to customers other than banks, with fixed maturities; the model of expected cash flows discounted using current interest rates appropriate for the individual deposit products. The fair value is calculated for each deposit and liability, and then the fair values for the entire deposit portfolio are grouped by product type and by customer segment. • amounts due to customers: liabilities with no specific repayment schedule, other specific products for which no active market exists - fair values are equal to carrying amounts
LIABILITIES IN RESPECT OF SECURITIES IN ISSUE	The model of expected cash flows discounted using the current interbank market rates and market quotations
SUBORDINATED LIABILITIES	The model of expected cash flows discounted based on yield curves
CASH AND BALANCES WITH THE CENTRAL BANK AND AMOUNTS DUE TO THE CENTRAL BANK	Fair values are equal to carrying amounts
OTHER FINANCIAL ASSETS AND FINANCIAL LIABILITIES	Fair values are equal to carrying amounts

	level of fair value hierarchy	31.12.2020		31.12.2019
	level of fair value hierarchy	carrying amount	fair value	carrying amount	fair value
Cash and balances with Central Bank	nd	7 397	7 397	14 602	14 602
Amounts due from banks	2	5 304	5 304	7 953	7 953
Securities (excluding adjustments relating to fair value hedge accounting)		47 217	48 420	13 361	13 521
Treasury bonds (in PLN)	1	29 617	30 648	7 373	7 520
corporate bonds (in PLN) secured with State Treasury guarantees	1	9 887	10 015	-	-
municipal bonds (in PLN)	2	5 060	5 056	4 563	4 575
corporate bonds (in PLN)	1, 2, 3	1 517	1 539	1 083	1 087
corporate bonds (in foreign currencies)	2	1 136	1 162	342	339
Repurchase transactions	2	-	-	1 081	1 081
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)		172 996	174 176	182 954	182 610
housing loans	3	77 328	76 895	82 941	81 580
corporate loans	3	73 283	74 455	79 138	79 914
consumer loans	3	22 385	22 826	20 875	21 116
Other financial assets	3	1 772	1 772	1 691	1 691

Amounts due to banks	2	2 583	2 583	1 659	1 659
Amounts due in respect of repurchase agreements		47	47	46	46
Amounts due to customers		278 894	278 892	252 898	252 843
amounts due to households	3	221 988	221 986	192 391	192 336
amounts due to business entities	3	43 162	43 162	49 153	49 153
amounts due to public sector	3	13 744	13 744	11 354	11 354
Loans and advances received	3	4 906	5 153	5 026	5 231
Liabilities in respect of securities in issue	1, 2	4 020	4 035	4 769	4 799
Subordinated liabilities	2	2 716	2 768	2 730	2 730
Other financial liabilities	3	2 983	2 983	3 167	3 167

52. Offsetting financial assets and financial liabilities

The Bank enters into offsetting arrangements, i.e. International Swaps and Derivatives Association Master Agreements (ISDA) and Global Master Repurchase Agreements (GMRA), which make it possible to offset financial assets and liabilities (final deduction and settlement of the transaction, so-called close out netting) in the event of an infringement with respect to one of the parties of the agreement. These agreements are of particular importance to mitigate the risk posed by derivative instruments, because they enable offsetting both matured liabilities (mitigating the settlement risk) and non-matured liabilities of the parties (mitigating the pre-settlement risk). However, these agreements do not meet the requirements set out in IAS 32, because the right to offset is conditional on the occurrence of a specific future event (instances of infringement).

Exposures arising from derivatives are further secured by margin deposits provided by counterparties as part of executing CSA (Credit Support Annex).

OFFSETTING ASSETS	Total financial assets	Derivatives	Repo transactions
31.12.2020
Recognized financial assets, gross	6 039	6 039	-
Financial liabilities subject to offsetting, gross	(5)	(5)	-
Financial assets recognized in the statement of financial position, net	6 034	6 034	-
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	1 093	1 093	-
(i) recognized financial instruments which do not meet the offsetting criteria	516	516	-
(ii) financial collateral (including cash)	577	577	-
Net amount	4 941	4 941	-

OFFSETTING LIABILITIES	Total financial liabilities	Derivatives	Repo transactions
31.12.2020
Recognized financial liabilities, gross	7 227	7 180	47
Gross amounts of financial assets which are offset in accordance with the criteria set out in §42 of IAS 32	(5)	(5)	-
Financial liabilities recognized in the statement of financial position, net	7 222	7 175	47
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	993	993	-
(i) recognized financial instruments which do not meet the offsetting criteria	516	516	-
(ii) financial collateral (including cash)	477	477	-
Net amount	6 229	6 182	47

OFFSETTING ASSETS	Total financial assets	Derivatives	Repo transactions
31.12.2019
Recognized financial assets, gross	4 473	3 392	1 081
Financial assets recognized in the statement of financial position, net	4 473	3 392	1 081
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	2 486	2 486	-
(i) recognized financial instruments which do not meet the offsetting criteria	1 744	1 744	-
(ii) financial collateral (including cash)	742	742	-
Net amount	1 987	906	1 081

OFFSETTING LIABILITIES	Total financial liabilities	Derivatives	Repo transactions
31.12.2019
Recognized financial liabilities, gross	3 641	3 595	46
Financial liabilities recognized in the statement of financial position, net	3 641	3 595	46
Amounts subject to enforceable framework agreement or similar agreement concerning offsetting, including related to:	2 540	2 540	-
(i) recognized financial instruments which do not meet the offsetting criteria	1 744	1 744	-
(ii) financial collateral (including cash)	796	796	-
Net amount	1 101	1 055	46

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

• Collateral for liabilities in respect of repurchase transactions

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – LIABILITIES IN RESPECT OF REPURCHASE TRANSACTIONS	31.12.2020	31.12.2019
Debt securities	43	43
Repo transactions	47	46

Net position	(4)	(3)

• Liabilities from the negative valuation of derivative instruments

Cash deposits with banks include assets held as collateral for own liabilities, including settlements relating to the negative valuation of derivative instruments.

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – LIABILITIES FROM THE NEGATIVE VALUATION OF DERIVATIVE INSTRUMENTS	31.12.2020	31.12.2019
Cash deposits with banks held as collateral for own liabilities	-	796

• Preliminary settlement deposit of the National Depository for Securities (KDPW)

As at 31 December 2020, Biuro Maklerskie PKO BP held no bonds with the National Depository for Securities.

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – PRELIMINARY SETTLEMENT DEPOSIT OF THE NATIONAL DEPOSITORY FOR SECURITIES (KDPW)	31.12.2020	31.12.2019
Value of the deposit	-	10
Nominal value of the collateral	-	12
Type of collateral	-	Treasury bonds
Carrying amount of the collateral	-	12

• Fund for the Protection of Guaranteed Funds

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES – FUND FOR THE PROTECTION OF GUARANTEED FUNDS	31.12.2020	31.12.2019
Value of the fund	1 100	1 082
Nominal value of the collateral	1 100	1 200
Type of collateral	Treasury bonds	Treasury bonds
Maturity of the collateral	25.04.2024	25.01.2024
Carrying amount of the collateral	1 201	1 206

The assets pledged as collateral for the fund are Treasury bonds which mature in the period that ensures securing the carrying amount over the period specified in the Act of 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution. The Fund is increased or decreased on 1 July of each year, in proportion to the amount representing the basis for the calculation of the mandatory reserve deposits. These assets are treated as assets pledged as collateral for own liabilities.

• Funds securing liabilities in respect of contributions to the Bank Guarantee Fund (BGF)

ASSETS PLEDGED AS COLLATERAL FOR LIABILITIES - Funds securing liabilities in respect of contributions to the Bank Guarantee Fund (BGF)	31.12.2020	31.12.2019
Value of the contribution made in the form of payables	576	386
Nominal value of the assets in which funds corresponding to payables were invested	711	490
Type of collateral	Treasury bonds	Treasury bonds
Maturity of the pledge	25.01.2024	25.01.2024
Carrying amount of the collateral	726	492

Starting from 2017, the value of contributions in the form of payment obligations represents 30% of the contributions to the Bank Guarantee Fund (“the BGF”) for the Deposit Guarantee Fund or the Bank Resolution Fund. Assets securing payment commitments include Treasury bonds pledged for BGF in the amount which ensures maintaining the ratio of the value of property rights securing payment commitments to the amount of payment commitments of no less than 110%. For purposes of establishing the minimum ratio of assets to the amount of payment commitment, the value of property rights securing payment commitments is determined at the amount specified based on the last fixing rate of the day in the electronic market for Treasury securities organized by the minister responsible for the budgetary matters, plus interest due as at the valuation date, unless interest has already been included in the fixing rate.

Such funds are treated as assets pledged as collateral for own liabilities, they cannot be pledged or encumbered in any way, are excluded from judicial or administrative enforcement proceedings and do not form part of the estate in bankruptcy. The amount of funds securing payment obligations relating to contributions to the BGF will be increased on payment dates of contributions to the Deposit Guarantee Fund (quarterly) and the Bank Resolution Fund (in the third quarter of a given year) representing not more than 30% of the contribution established by the BGF.

The amount of these funds may decrease if the Bank is called by the BGF to transfer the amount corresponding to the value of payment commitments in cash.

• Legal limitations relating to the Bank’s title

In the years ended 31 December 2020 and 31 December 2019, there were no intangible assets or property, plant and equipment items to which the Bank’s legal title would be limited and pledged as collateral for the Bank’s liabilities.

54. Financial assets and liabilities by currency

Financial assets BY CURRENCY	Currency translated to PLN
31.12.2020	PLN	CHF	EUR	USD	Inne	Razem
Cash and balances with Central Bank	6 505	39	544	126	183	7 397
Amounts due from banks	3 878	4	1 025	165	232	5 304
Hedging derivatives	591	6	21	-	-	618
Other derivative instruments	5 004	-	326	80	6	5 416
Securities	116 091	-	2 105	1 777	-	119 973
- held for trading	1 193	-	5	-	-	1 198
- not held for trading, mandatorily measured at fair value through profit or loss	484	-	371	252	-	1 107
- measured at fair value through OCI	68 333	-	1 419	694	-	70 446
- measured at amortized cost	46 081	-	310	831	-	47 222
Loans and advances to customers	158 548	15 048	17 712	1 420	335	193 063
- not held for trading, mandatorily measured at fair value through profit or loss	6 009	-	4	-	-	6 013
- measured at fair value through other comprehensive income	14 054	-	-	-	-	14 054
- measured at amortized cost	138 485	15 048	17 708	1 420	335	172 996
Other financial assets	1 660	16	73	10	13	1 772
Total assets	292 277	15 113	21 806	3 578	769	333 543

Financial liabilities and off-balance sheet liabilities BY CURRENCY	Currency translated to PLN
31.12.2020	PLN	CHF	EUR	USD	UAH	Inne	Razem
Amounts due to banks	1 295	6	1 248	16	-	18	2 583
Hedging derivatives	505	-	18	20	-	-	543
Other derivative instruments	6 053	-	495	78	-	6	6 632
Repo transactions	47	-	-	-	-	-	47
Amounts due to customers	251 145	741	16 353	8 195	-	2 460	278 894
- measured at amortized cost	251 145	741	16 353	8 195	-	2 460	278 894
Loans and advances received	662	-	441	3 803	-	-	4 906
Liabilities in respect of securities in issue	-	1 706	2 314	-	-	-	4 020
Subordinated liabilities	2 716	-	-	-	-	-	2 716
Other financial liabilities	1 920	3	617	113	-	330	2 983
Provisions for financial liabilities and guarantees granted	531	2	84	6	-	3	626
Total liabilities	264 874	2 458	21 570	12 231	-	2 817	303 950
Financial liabilities and guarantees granted	68 795	135	8 701	4 061	-	574	82 266

Financial assets BY CURRENCY	Currency translated to PLN
31.12.2019	PLN	CHF	EUR	USD	Inne	Razem
Cash and balances with Central Bank	13 644	43	633	90	192	14 602
Amounts due from banks	4 917	53	1 803	874	306	7 953
Hedging derivatives	567	8	16	3	-	594
Other derivative instruments	2 502	-	231	64	1	2 798
Securities	73 769	-	1 886	767	-	76 422
- held for trading	1 172	-	3	-	-	1 175
- not held for trading, mandatorily measured at fair value through profit or loss	532	-	3	220	-	755
- measured at fair value through OCI	59 045	-	1 538	547	-	61 130
- measured at amortized cost	13 020	-	342	-	-	13 362
Repo transactions	1 081	-	-	-	-	1 081
Loans and advances to customers	160 862	21 228	16 571	1 714	492	200 867
- not held for trading, mandatorily measured at fair value through profit or loss	8 286	-	4	-	-	8 290
- measured at fair value through OCI	9 623	-	-	-	-	9 623
- measured at amortized cost	142 953	21 228	16 567	1 714	492	182 954
Other financial assets	1 621	-	30	21	19	1 691
Total assets	258 963	21 332	21 170	3 533	1 010	306 008

Financial liabilities and off-balance sheet liabilities BY CURRENCY	Currency translated to PLN
31.12.2019	PLN	CHF	EUR	USD	Inne	Razem
Amounts due to banks	1 242	9	583	110	32	1 976
- measured at fair value through profit or loss	317	-	-	-	-	317
- measured at amortized cost	925	9	583	110	32	1 659
Hedging derivatives	660	-	7	1	-	668
Other derivative instruments	2 593	-	240	94	-	2 927
Repo transactions	46	-	-	-	-	46
Amounts due to customers	225 439	513	17 310	7 403	2 278	252 943
- measured at fair value through profit or loss	45	-	-	-	-	45
- measured at amortized cost	225 394	513	17 310	7 403	2 278	252 898
Loans and advances received	649	-	535	3 842	-	5 026
Liabilities in respect of securities in issue	-	1 569	3 200	-	-	4 769
Subordinated liabilities	2 730	-	-	-	-	2 730
Other financial liabilities	2 637	1	408	77	44	3 167
Provisions for financial liabilities and guarantees granted	218	2	34	13	1	268
Total liabilities	236 214	2 094	22 317	11 540	2 355	274 520
Financial liabilities and guarantees granted	61 853	167	7 526	4 180	359	74 085

55. Contractual cash flows from the Bank’s financial liabilities, including derivative financial instruments

Contractual cash flows from the financial liabilities, excluding derivative financial instruments

The amounts disclosed comprise non-discounted future cash flows, both in respect of the principal and interest (if applicable), in accordance with the contract, for the entire period to the date of the liability’s maturity. Where the party to whom the Bank has a liability is able to select the settlement deadline, it has been assumed that the earliest date on which the Bank is obliged to settle the liability shall be taken into account. Where the Bank is obliged to settle the liabilities in instalments, each instalment is allocated to the earliest period in which the Bank might be obligated to settle. In the case of liabilities where instalment amounts are not fixed, the terms binding as at the reporting date have been adopted.

CONTRACTUAL CASH FLOWS FROM THE GROUP’S FINANCIAL LIABILITIES, EXCLUDING DERIVATIVE FINANCIAL INSTRUMENTS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount	Carrying amount
31.12.2020
Amounts due to banks	2 582	-	1	-	-	2 583	2 583
Repo transactions	-	-	-	50	-	50	47
Amounts due to customers	239 488	10 940	17 640	3 263	7 871	279 202	278 894
Loans and advances received	-	-	185	5 028	-	5 212	4 906
Liabilities in respect of securities in issue	-	-	4 791	-	-	4 791	4 020
Subordinated liabilities	-	24	24	235	2 878	3 162	2 716
Lease liabilities	20	37	159	451	404	1 071	1 023
Other financial liabilities	1 882	-	-	78	-	1 960	1 960
Total	243 972	11 001	22 800	9 105	11 153	298 031	296 149
Off-balance sheet liabilities:
financing granted	10 669	5 835	17 622	25 437	8 374	67 937
guarantees granted	496	1 128	4 121	5 632	2 952	14 329

CONTRACTUAL CASH FLOWS FROM THE GROUP’S FINANCIAL LIABILITIES, EXCLUDING DERIVATIVE FINANCIAL INSTRUMENTS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount	Carrying amount
31.12.2019
Amounts due to banks	1 966	10	-	-	-	1 976	1 976
Repo transactions	-	-	-	50	-	50	46
Amounts due to customers	196 703	16 802	28 810	4 123	9 143	255 582	252 943
Loans and advances received	3	89	169	5 314	-	5 575	5 026
Liabilities in respect of securities in issue	-	-	29	4 791	-	4 820	4 769
Subordinated liabilities	-	45	45	473	2 913	3 476	2 730
Liabilities in respect of leasing	18	35	145	467	409	1 074	819
Other financial liabilities	2 348	-	-	-	-	2 348	2 348
Total	201 038	16 981	29 198	15 218	12 465	274 901	270 657
Off-balance sheet liabilities:
financing granted	13 944	5 844	15 141	14 121	8 733	57 783	-
guarantees granted	159	1 651	5 161	7 133	2 198	16 302	-

• Contractual cash flows from liabilities in respect of derivative financial instruments for which the valuation as at the balance sheet date was negative (a liability) and which are settled on a gross basis

Kwoty ujawnione obejmują niezdyskontowane przyszłe przepływy zarówno z tytułu nominału, jak i odsetek (jeśli dotyczy).

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A GROSS BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2020	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
- outflows (principal and interest)	(5 755)	(6 126)	(10 441)	(8 249)	(269)	(30 840)
- inflows (principal and interest)	5 675	6 250	13 731	16 128	694	42 478

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A GROSS BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2019	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
- outflows (principal and interest)	(8 673)	(3 825)	(6 282)	(7 450)	(369)	(26 599)
- inflows (principal and interest)	8 941	3 882	7 539	13 136	838	34 336

In the case of IRS and NDF transactions, non-discounted future net cash flows in respect of interest and principal have been presented and in the case of the remaining derivative instruments settled on a net basis, the amount of the valuation as at 31 December 2020 and as at 31 December 2019, respectively, was adopted as the cash flow amount.

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A NET BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2020	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
- IRS	(189)	(264)	(205)	(76)	65	(669)
- other derivatives: options, FRA, NDF	(365)	(1 297)	(1 002)	(227)	-	(2 891)

CONTRACTUAL CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS FOR WHICH THE VALUATION AS AT THE BALANCE SHEET DATE WAS NEGATIVE AND WHICH ARE SETTLED ON A NET BASIS	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
31.12.2019	Up to 1 month inclusive	Over 1 month to 3 months inclusive	Over 3 months to 1 year inclusive	Over 1 year to 5 years inclusive	Over 5 years	Contractual amount
- IRS	(114)	(197)	(91)	2	61	(339)
- other derivatives: options, FRA, NDF	(610)	(962)	(2 061)	(2 495)	-	(6 128)

56. Current and non-current assets and liabilities

FINANCIAL ASSETS	Current	Non-current	Total carrying amount
31.12.2020
Cash and balances with Central Bank	7 397	-	7 397
Amounts due from banks	1 898	3 406	5 304
Hedging derivatives	227	391	618
Other derivative instruments	1 856	3 560	5 416
Securities	11 953	108 020	119 973
- held for trading	935	263	1 198
- not held for trading, mandatorily measured at fair value through profit or loss	477	630	1 107
- measured at fair value through OCI	9 663	60 783	70 446
- measured at amortized cost	878	46 344	47 222
Loans and advances to customers	42 185	150 878	193 063
- not held for trading, mandatorily measured at fair value through profit or loss	4 282	1 731	6 013
- measured at fair value through OCI	528	13 526	14 054
- measured at amortized cost	37 375	135 621	172 996
Other financial assets	1 772	-	1 772

Total financial assets	67 288	266 255	333 543

FINANCIAL ASSETS	Current	Non-current	Total carrying amount
31.12.2019
Cash and balances with Central Bank	14 602	-	14 602
Amounts due from banks	5 435	2 518	7 953
Hedging derivatives	160	434	594
Other derivative instruments	1 192	1 606	2 798
Securities	5 150	71 272	76 422
- held for trading	1 175	-	1 175
- not held for trading, mandatorily measured at fair value through profit or loss	457	298	755
- measured at fair value through OCI	3 129	58 001	61 130
- measured at amortized cost	389	12 973	13 362
Repo transactions	1 081	-	1 081
Loans and advances to customers	47 908	152 959	200 867
- not held for trading, mandatorily measured at fair value through profit or loss	5 465	2 825	8 290
- measured at fair value through OCI	300	9 323	9 623
- measured at amortized cost	42 143	140 811	182 954
Other financial assets	1 691	-	1 691

Total financial assets	77 219	228 789	306 008

FINANCIAL LIABILITIES	Current	Non-current	Total carrying amount
31.12.2020
Amounts due to banks	2 583	-	2 583
- measured at amortized cost	2 583	-	2 583
Hedging derivatives	308	235	543
Other derivative instruments	2 411	4 221	6 632
Repo transactions	-	47	47
Amounts due to customers	267 971	10 923	278 894
- measured at amortized cost	267 971	10 923	278 894
Loans and advances received	14	4 892	4 906
Liabilities in respect of securities in issue	4 020	-	4 020
Subordinated liabilities	-	2 716	2 716
Other financial liabilities	2 098	885	2 983
Provisions for financial liabilities and guarantees granted	535	91	626

Total financial liabilities	279 940	24 010	303 950

FINANCIAL LIABILITIES	Current	Non-current	Total carrying amount
31.12.2019
Amounts due to banks	1 976	-	1 976
- measured at fair value through profit or loss	317	-	317
- measured at amortized cost	1 659	-	1 659
Hedging derivatives	238	430	668
Other derivative instruments	1 275	1 652	2 927
Repo transactions	-	46	46
Amounts due to customers	241 103	11 840	252 943
- measured at fair value through profit or loss	45	-	45
- measured at amortized cost	241 058	11 840	252 898
Loans and advances received	64	4 962	5 026
Liabilities in respect of securities in issue	-	4 769	4 769
Subordinated liabilities	-	2 730	2 730
Other financial liabilities	2 461	706	3 167
Provisions for financial liabilities and guarantees granted	225	43	268

Total financial liabilities	247 342	27 178	274 520

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

57. Risk management in the Bank

Risk management is one of the most important internal processes in the Bank.

It is aimed at ensuring (in the changing environment) the profitability of business activities while ensuring an appropriate level of control and keeping the risk level within the risk tolerances and limits system adopted by the Bank, in a changing macroeconomic environment. The level of risk is an important part of the planning processes.

The Bank identifies risks in its operations and analyses the impact of each type of risk on its business. All the risks are managed; some of them have a material effect on the profitability and capital needed to cover them. The following risks are considered material for the Bank: credit risk, risk of foreign currency mortgage loans for households, currency risk, interest rate risk, liquidity risk (including financing risk), operating risk, business risk, risk of macroeconomic changes and model risk. The Bank assesses the materiality of all the identified risks on a regular basis, at least annually.

A detailed description of the management policies for material risks is presented in the “Report on capital adequacy and other information subject to publication by the PKO Bank Polski S.A. Group”.

risk management objective

The objective of risk management is to strive to maintain the level of risk within the accepted tolerances in order to:

• protect shareholder value;

• protect customer deposits;

• support the Bank in conducting efficient operations.

The risk management objectives are achieved, in particular, by providing appropriate information on the risk, so that decisions are made in full awareness of the particular risks involved.

Main principles of risk management

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

• the risk management covers all the risks identified;

• the risk management process is appropriate from the perspective of the scale of operations and materiality, scale and complexity of a given risk, and adjusted on an on-going basis to take account of the new risks and their sources;

• risk management methods (especially models and their assumptions) and risk measurement or assessment systems are tailored to the scale and complexity of individual risks, the current and planned operations of the Bank and its operating environment, and are periodically verified and validated;

• the area of risk management remains organizationally independent of business activities;

• risk management is integrated into the planning and controlling systems;

• the level of risk is monitored and controlled on an on-going basis;

• the risk management process supports the implementation of the Bank’s strategy in compliance with the Risk Management Strategy, in particular with respect to the level of risk tolerance.

Risk management process

The process of risk management in the Group consists of the following stages:

• Risk identification:

Risk identification consists of recognizing the existing and potential sources of risk and estimating the significance of its potential impact on the Bank’s operations. As part of risk identification, the risks considered to be material in the Bank’s operations are identified.

• Risk measurement and assessment:

Risk measurement and assessment are aimed at determining the scale of threats connected with the risks arising. Risk measurement covers determining the risk assessment measures adequate to the type and significance of the risk, and data availability. Quantitative and qualitative risk measurement results are the basis for the risk assessment aimed at identifying the scale or scope of risk.

As part of risk measurement, the Bank carries out:

• specific stress tests which are conducted separately for individual risk types and are used to assess sensitivity of a given risk to unfavourable market conditions,

• comprehensive stress tests conducted jointly for the concentration risk and risks regarded as material, used to determine sensitivity of the capital adequacy measures and Bank’s results to the occurrence of a negative scenario of changes in the environment and the functioning of the Bank’s.

The stress-tests are conducted by the Bank based on assumptions which ensure a sound assessment of the risk, in particular taking into account the Recommendations of the Polish Financial Supervision Authority.

• Risk control:

Risk control involves the determination of risk control mechanisms adjusted to the scale and complexity of the Bank’s activities, especially in the form of strategic tolerance limits for the individual types of risk. Strategic risk tolerance limits are subject to regular monitoring, and if they are exceeded, the Bank takes management actions.

• Risk forecasting and monitoring:

Risk forecasting involves foreseeing future risk levels, taking into account the assumed business development projections, and internal and external events. Risk level forecasts are assessed by the Bank (so-called “reverse stress tests”) in order to verify their accuracy.

Risk monitoring involves observing deviations from the forecasts or the adopted benchmarks (e.g. limits, thresholds, plans, prior period measurements, recommendations and instructions issued by external supervisory and regulatory authority). Risk monitoring and forecasting frequency is adequate to the materiality and variability of specific risks. Risk monitoring frequency is adequate to the significance and variability of specific risks.

• Risk reporting:

Risk reporting consists in informing about the results of the risk identification, measurement, assessment and forecasting, causes of changes in the risks, actions taken and recommended. The scope, frequency and form of the reporting are adjusted to the managerial level of the recipients. If potential liquidity problems arise, the Supervisory Board is immediately informed about significant changes in the risk level, and in particular, about threats and remedial actions taken, and of their impact on the Bank’s liquidity level.

• Management actions:

Management actions consist of determining the desired risk level favourable for building the structure of assets and liabilities. Management may result, in particular, in:

• acceptance of the risk – determining the acceptable risk level, taking into account business needs and developing management actions in the case the level is exceeded,

• reduction of the risk – mitigation of the impact of the risk factors or effects of its materialization (e.g. By reducing or diversifying the risk exposure, determining limits, utilizing collaterals),

• transfer of the risk – transferring responsibility for covering potential losses (e.g. by transferring the risk to another entity with the use of legal instruments, such as insurance contracts, security services agreements for a building, accepting guarantees),

• risk avoidance - resignation from the risk-generating activity or elimination of the probability of materialization of the risk factor, including in particular determination of zero tolerance to risk.

Organization of risk management at PKO Bank Polski S.A.

Risk management in the Bank takes place in all of the organizational units of the Bank.

The organization of risk management in PKO Bank Polski S.A. is presented in the diagram below:

The Supervisory Board supervises and evaluates the risk management process, in particular, on the basis of regular reports on the risk, taking into account the adequacy and effectiveness of the risk management system and information about the implementation of the risk management strategy, also at the level of limits which limit the risk and conclusion from stress tests, and if necessary, orders the verification of the process.

The Supervisory Board is supported by the following committees: the Supervisory Board Nominations and Remuneration Committee, the Supervisory Board Risk Committee and the Supervisory Board Audit Committee.

In respect of risk management, the Management Board of PKO Bank Polski S.A. is responsible for strategic risk management, including supervising and monitoring actions taken by the Bank in respect of risk management. The Management Board makes major decisions affecting the risk profile of the Bank and adopts internal regulations concerning risk management. It ensures operation of the risk management system, monitors and assesses its functioning, and transfers the respective information to the Supervisory Board. In its risk management activities, the Management Board is supported by the following committees:

• the Risk Committee;

• the Asset and Liability Committee (ALCO);

• The Bank’s Credit Committee;

• the Operational Risk Committee.

The risk management process is carried out in three independent but complementary lines of defence:

THE FIRST LINE OF DEFENCE – is formed of organizational structures responsible for product management, selling products and servicing customers, and of other structures which perform operational tasks that generate risk, which function based on internal regulations. This function is performed by all of the Bank’s and the Group’s entities. The Bank’s entities implement appropriate risk controls, including in particular limits, designed by them and located at the second-line of defence. They also ensure that they are met by means of appropriate controls.

THE SECOND LINE OF DEFENCE – covers compliance units and involves the identification, measurement, evaluation and/or control, monitoring and reporting of significant types of risks, and of the threats and irregularities identified; the tasks are performed by dedicated organizational structures acting on the basis of the applicable internal regulations of the Bank; the objective of these structures is to ensure that the tasks performed as part of the first line of defence are properly governed in the internal regulations of the Bank and that they effectively limit the risk, support risk measurement, assessment and analysis and contribute to operational effectiveness. The function is performed, in particular by Risk Management, the Compliance Department and relevant committees. The second line of defence supports actions taken to eliminate unfavourable deviations from the financial plan, with respect to the amounts impacting the quantitative strategic risk tolerance limits specified in the financial plan. These tasks are performed in particular in the entities of the Bank responsible for controlling.

THE THIRD LINE OF DEFENCE – consists of the internal audit function which performs independent audits of individual components of the Bank’s management system, including the risk management system, and the internal control system; the internal audit operates independently of the first and second lines of defence and may support their actions by way of consultation, but without the possibility to impact the decisions taken. The function is performed in accordance with the Bank’s internal regulations concerning the operation of the internal control system.

The independence of the lines consists of ensuring organizational separation at the following levels:

• the function of the second line of defence with regard to creating system solutions is independent of the function of the first line of defence;

• the function of the third line of defence is independent of the functions of the first and second lines of defence.

58. Specific risk management measures undertaken by the Bank in 2020

• impact of covid-19

The outbreak of the COVID-19 pandemic has a significant impact on the economic situation of many enterprises and individuals, leading to a lack of financial liquidity and difficulties with the timely settlement of their financial liabilities. The Bank immediately took several measures aimed at supporting the Bank’s customers in their struggle against the economic implications of the COVID pandemic, and therefore to minimize the deterioration in the quality of the loan portfolio.

In 2020, the Bank offered special solutions which supported its customers in maintaining financial liquidity, e.g. by periodically reducing their financial burden and facilitating the extension and conclusion of agreements. The scope of assistance varied and was adapted to the pandemic situation, restrictions in conducting business activities and took into account regulatory guidelines. The activities of PKO Bank Polski S.A. are consistent with the guidelines of the European Banking Authority (EBA).

• The Bank, PKO Bank Hipoteczny S.A., PKO Leasing S.A. and Prime Car Management S.A. allowed borrowers and lessees to suspend or extend, on request, payments of instalments (either principal, principal-interest or interest – depending on the form of financing) for a maximum period of 6 months.

• As part of financing firms, enterprises and corporate entities, the Bank introduced simplified rules for extending selected revolving products, internal customer limits and restructuring agreements.

• The Bank introduced the possibility of temporarily suspending the repayment of credit card liabilities of retail customers and Business-type credit cards of firms and enterprises.

The Bank considered the impact of the second wave of pandemic and related restrictions. The Bank started preparations to resume assistance tools, in particular in relation to the support of borrowers who are most affected by COVID-19.

In 2020, the Group’s customers could apply statutory moratoria, including in particular:

• customers of the Bank, who lost their jobs or another main source of income after 13 March 2020, could suspend the performance of their mortgage loan and consumer loan agreements for a maximum of 3 months. During the period in which an agreement is suspended, banks did not assess any interest or other fees related with the performance of the agreement, except insurance contributions;

the Bank’s customers who had preferential student loans which was in the repayment period, could suspend the repayment of the loan with interest for a maximum period of 6 months. It was not related to any additional fees, and the period of the loan repayment was not extended. Interest due in the period of suspended repayment were entirely covered from the Student Credit Fund.

The Bank’s customers could also use aid tools introduced as part of anti-crisis shields, offered by Bank Gospodarstwa Krajowego (BGK) and Polski Fundusz Rozwoju S.A. (PFR):

• The Bank’s customers (micro-, small- and medium-sized enterprises) could use a guarantee to secure repayment of loans or an advance under the portfolio de minimis guarantee line from BGK. From March 2020, the guarantee line was offered in a higher amount and on more favourable terms. Moreover, in December 2020, the Bank concluded an annex to the agreement with BGK which will allow its customers, in the first half of 2021, to also use this security for currency loans. The total value of the guarantee in 2020 amounted to PLN 4.2 billion.

• The Bank’s customers could use BGK’s Liquidity Guarantees Fund created to help medium-sized and large enterprises affected by the pandemic. The Bank initiated the development of more favourable terms for guarantees (a possibility to cover currency loans with the guarantee was introduced and the minimum amount of a single guarantee was cancelled). The Bank entered into an arrangement on the terms of cooperation in respect of providing loan repayment guarantees made available under syndicated financing. In December 2020, it signed an annex to the agreement, to extend the possibility of using the guarantee instruments by 30 June 2021. The total value of guarantees granted to the Bank’s customers in 2020 amounted to PLN 2.1 billion (out of PLN 18 billion available for granting).

• By the end of July 2020, the customers could apply in the Bank’s transaction services for financial grants under the PFR 1.0. Financial Shield dedicated to micro-, small- and medium-sized enterprises. Funds totalling PLN 10.5 billion were received by 67 thousand enterprises who employed 0.5 million people. The Bank had the largest share in the distribution of this form of aid.

• From June 2020, entrepreneurs could file directly with PFR applications for liquidity loans with preferential interest rates and preferential loans under the PFR Financial Shield dedicated to large firms. The total value of both financial instruments amounted to PLN 17.5 billion. The Bank is the only bank which handles such loans as part of the shield. The Bank’s role is, among other things, to maintain accounts designated for the payment of funds allocated under the programme, registering and monitoring the loans and collateral, as well as the operational handling thereof.

• Entrepreneurs could file applications with the Bank for subsidies to the interest charged on working capital loans. The support is designated for enterprises which lost their financial liquidity or are under the threat of losing liquidity due to the economic situation resulting from the COVID-19 pandemic. A single entrepreneur can use the subsidy only for a single working capital loan – a new or an existing one. BGK covers part of interest assessed on the loan for a maximum of 12 months. Entrepreneurs could apply for the support by the end of 2020 or until the exhaustion of the pool of PLN 565 million for all banks cooperating with BGK. In February 2021, the Bank signed an annex to the agreement with BGK to extend the subsidy programme until 30 June 2021;

• From October 2020, the existing Bank’s customers (small- and medium-sized enterprises) can use liquidity sell-and-lease-back arrangements with COSME-Covid guarantee granted by the European Investment Fund. The offer is addressed to owners of cars or delivery vans up to 3.5 tonnes (worth up to PLN 150 thousand) who have had an active lease agreement or a company account with the Bank for a minimum of 6 months. Through the lease transactions customers can recover funds spent on the purchase of the vehicle, and at the same time use it. The lease provider finances up to 80% of the value of the vehicle according to the valuation. The offer is valid until 30 June 2021 or until the total amount of the guarantee (PLN 500 million) is exhausted;

• The Bank’s customers can submit applications for subsidies from the PFR 2.0 Financial Shield via iPKO and iPKO biznes on-line services. The PFR 2.0 Financial Shield is addressed to micro-, small- and medium-sized enterprises from 45 sectors which had to limit their business activities in connection with the COVID-19 pandemic situation. The financial support will amount to up to PLN 13 billion.

The Bank’s Group monitors identified threats in respect of operational risk, which result from the state of COVID-19 pandemic and take measures to ensure the safety of the Bank’s customers and employees, as well as the continuity and functioning of its business processes.

• mortgage loans and advances indexed or denominated in foreign currency

In December 2020, the Chairman of the Polish Financial Supervision Authority presented a proposal aimed at a systemic solution to the problem of housing loans in CHF, involving a conciliatory conversion of loans in CHF into loans in PLN (details in the note "Legal claims").

The Bank has launched a pilot process of concluding settlements with clients who are managed by the Restructuring and Debt Collection Center and a pilotage for clients who repay their debt in timely manner but are in a court dispute with the Bank. Simultaneously, the Bank is in the process of preparing for mass settlements with the Clients.

• A NEW DEFINITION OF NON-PERFORMANCE (HEREBY "NDD")

On January 1, 2021, the Bank implemented the EBA guidelines (EBA / GL / 2016/07) on the application of the definition of default specified in art. 178 of Regulation (EU) No 575/2013.

The most important changes include:

• introduction of consistent identification of default at the level of the debtor in the Group: for this purpose, the Bank has implemented daily exchange of analytical data between PKO Bank Polski S.A., PKO Bank Hipoteczny S.A., PKO Leasing S.A., PKO Faktoring S.A. and Prime Car Management S.A .;

• change in the rules for calculating the overdue credit obligation: default by the debtor due to overdue payment takes place after exceeding the materiality threshold of the amounts overdue in respect of principal, interest or fees in the Group for a period of 90 days (so far, the overdue date was based on the date of the oldest unpaid principal and interest installment separately for each Group company);

• determining the absolute materiality threshold for all exposures at PLN 400 and introducing a relative materiality threshold of 1%, expressed as the ratio of overdue credit obligations to the total amount of all balance sheet exposures in the Group;

• introducing default contagion of private exposures belonging to the owners of economic entities corresponding with their entire assets, which entities have an identified default.

The impact of the implementation of the EBA guidelines on the costs of credit risk at the consolidated level of the Bank is approximately PLN 67 million (the amount will be included in the results for 2021) and results in a reduction in capital ratios by no more than 10 bps.

59. Credit risk management

• Definition

Credit risk is defined as the risk of losses being incurred as a result of a customer’s default on its liabilities towards the Bank or the risk of a decrease in the economic value of amounts due to the Bank as a result of a deterioration in the customer’s ability to repay its liabilities.

• Risk management objective

The objective of credit risk management is to minimize losses on the loan portfolio as well as to minimize the risk of occurrence of loans at risk of impairment, while maintaining the expected level of profitability and value of the loan portfolio.

The Bank follows mainly the following credit risk management principles:

• a loan transaction is subject to comprehensive credit risk assessment, which is reflected in an internal rating or credit scoring;

• credit risk relating to loan transactions is measured at the stage of examining a loan application and on a regular basis, as part of the monitoring process, taking into consideration changes in the external conditions and in the financial standing of the borrowers;

• credit risk assessment of exposures is separated from the sales function by ensuring an appropriate organizational structure, independence in developing and validating tools supporting an assessment of credit risk and independence of decisions approving deviations from the suggestions resulting from the use of these tools;

• the terms and conditions of a loan transactions offered to a customer depend on the assessment of credit risk level generated by the transaction;

• credit decisions may be taken solely by the persons authorized to do so;

• credit risk is diversified, in particular, in terms of geographical areas, industries, products and customers;

• an expected credit risk level is mitigated by collateral received by the Bank, margins from customers and impairment allowances (provisions) for expected credit losses.

The above-mentioned principles are implemented by the Bank through the use of advanced credit risk management methods, both at the level of individual credit exposures and of the entire loan portfolio of the Bank. These methods are verified and developed to ensure compliance with the requirements of the internal rating-based method (IRB), i.e. an advanced credit risk measurement method which may be used to calculate the capital requirements for credit risk, subject to approval by the Polish Financial Supervision Authority.

In these companies, the credit decision limits depend primarily on: the amount of exposure to a given customer, the amount of an individual credit transaction and the duration of the lending period.

• Measurement and assessment of credit risk: Credit risk measurement and assessment methods

In order to assess the level of credit risk and the profitability of its loan portfolios, the Bank uses different credit risk measurement and valuation methods, including:

• probability of default (PD);

• loss given default (LGD);

• credit conversion factor (CCF);

• expected credit loss (ECL);

• credit value at risk (CVaR);

• the share and structure of impaired credit exposures;

• coverage ratio of impaired loans;

• cost of credit risk;

• stress tests.

The Bank systematically expands the scope of credit risk measures used, taking into account the requirements of the IRB method, and extends the use of risk measures to cover the entire loan portfolio of the Bank.

The portfolio credit risk measurement methods allow, among other things, to reflect the credit risk in the price of products, determine the best conditions of financing availability and determine the level of impairment allowances.

The Bank performs analyses and stress-tests relating to the impact of the potential changes in the macroeconomic environment on the quality of the Bank’s loan portfolio, and the results of such analyses and stress tests are presented in reports to the Bank’s governing bodies. Such information enables identification and implementation of the measures mitigating the negative effects of the impact of unfavourable market conditions on the Bank’s profit or loss.

The credit risk assessment process at the Bank takes into account the requirements of the Polish Financial Supervision Authority as laid down in the PFSA Recommendations.

The description of the anticipated credit losses is disclosed in the Note “Allowances for expected credit losses”.

• Measurement and assessment of credit risk: Rating and scoring methods

An assessment of the risk of individual loan transactions is performed by the Bank using the scoring and rating methods which are supported by dedicated IT applications. Risk assessment method is defined in the Bank’s internal regulations whose main aim is to ensure a uniform and objective evaluation of credit risk during the lending process.

The Bank evaluates the credit risk of retail customers in two dimensions: qualitative and quantitative assessment of their borrowing capacity. A quantitative creditworthiness assessment consists of examining a customer’s financial position, and the qualitative risk assessment involves scoring and assessing a customer’s credit history obtained from the Bank’s internal records and external databases.

In the case of corporate customers in the small- and medium-sized enterprises segment who meet certain criteria, the Bank assesses credit risk using the scoring method. Such assessment refers to low-value, non-complex loan transactions and it is performed in two dimensions: a customer’s borrowing capacity and his creditworthiness. An assessment of the borrowing capacity consists of examining a customer’s economic and financial position, and the assessment of creditworthiness involves scoring and evaluating the customer’s credit history obtained from the Bank’s internal records and external databases.

In other cases, the rating method is used for institutional customers.

An assessment of the credit risk associated with financing institutional customers is performed by the Bank in two dimensions: the customer and the transaction. The measures involved include an evaluation of the customer’s creditworthiness, i.e. the rating, and an assessment of the transaction risk, i.e. the customer’s ability to repay the amounts due in the amounts and on the dates specified.

Rating models for institutional customers are developed using the Bank’s internal data, thus ensuring that they are tailored to the risk profiles of the Bank’s customers. Models are based on a statistical dependence analysis between the default and a customer’s risk scoring. The scoring includes an evaluation of financial ratios, qualitative factors and behavioural factors. A customer’s risk assessment depends on the size of the assessed enterprise. In addition, the Bank applies a model for the assessment of credited entrepreneurs in the formula of specialized lending, which allows an adequate credit risk assessment of large projects involving real estate financing (e.g. office space, retail space, industrial space) and infrastructure projects (e.g. telecommunication, industrial or public utility infrastructure).

Rating models are implemented within the IT tool which supports the assessment of the Group’s credit risk associated with the financing of institutional customers.

In order to examine the correct operation of the methods applied by the Bank, credit risk assessment methodologies relating to individual loan exposures are subject to periodical reviews.

The credit risk assessment process in the Bank takes into account the requirements of the Polish Financial Supervision Authority as defined in Recommendation S concerning good practices for the management of mortgage-secured loan exposures and Recommendation T concerning good practices for the management of retail credit exposures.

Information on rating and scoring assessments is widely used in the Bank to manage credit risk, in the system of credit decision authorizations, to determine the amounts triggering the credit risk assessment services and in the credit risk measurement and reporting system.

• Measurement and assessment of credit risk: Credit risk forecasting and monitoring

Credit risk forecasting and monitoring involves preparing risk level forecasts and monitoring deviations from the forecasts or the adopted benchmarks (e.g. limits, thresholds, plans, prior period measurements, recommendations and instructions issued by external supervisory and regulatory authorities), and performing (specific and comprehensive) stress tests. Risk level forecasts are subject to backtesting.

Credit risk is monitored at the level of individual credit transactions and at portfolio level.

Credit risk monitoring at the individual loan transaction level is governed, in particular, by the Bank’s internal regulations concerning:

• assessment of the credit risk related to customer financing;

• methods of assessing customers;

• identification of groups of related entities;

• evaluation of collateral and inspection of investments;

• recognition of allowances for expected credit losses;

• Early Warning System;

• operating procedures.

In order to accelerate the response to the noted warning signals reflecting an increased credit risk level, the Bank uses and develops an IT application, Early Warning System (EWS).

Credit risk monitoring at the portfolio level consists of:

• supervising the level of the portfolio credit risk on the basis of the adopted tools used for measuring credit risk, taking into consideration the identified sources of credit risk and analysing the effects and actions taken as part of system management;

• recommending preventive measures in the event of identifying an increased level of credit risk.

• Credit risk reporting

Credit risk reporting includes periodical reporting of the loan portfolio risk exposure.

Monthly and quarterly credit risk reports are prepared in the Bank. Credit risk reporting includes periodical reporting of the loan portfolio risk exposure.

• Management actions relating to credit risk

The purpose of management actions is to shape and optimize the credit risk management system and credit risk level at the Bank.

The credit risk management actions include particularly:

• issuing internal regulations governing the credit risk management system at the Bank;

• issuing recommendations, guidelines for conduct, explanations and interpretations of internal regulations;

• taking decisions regarding the acceptable level of credit risk, including in particular lending decisions;

• developing and improving credit risk control tools and mechanisms which make it possible to maintain the credit risk level within the limits acceptable to the Bank;

• developing and monitoring the operation of credit risk management controls;

• developing and improving credit risk assessment methods and models;

• developing and improving IT tools used in credit risk management;

• planning actions and issuing recommendations.

In managing the credit risk, the Bank uses in particular the following tools and risk control mechanisms:

• strategic limits of tolerance to credit risk and concentration risk;

• internal limits of tolerance to credit risk and concentration risk:

a) limits determining the level of tolerance to portfolio credit risk and concentration risk;

b) industry limits;

c) competence limits;

• verification of the quality of lending processes;

• branch rating;

• threshold amounts which trigger involvement of risk analysts in the credit risk assessment.

• Use of credit risk mitigation techniques – collateral

The collateral management policy plays a significant role in establishing minimum transaction terms. The Bank’s collateral management policy is intended to properly protect it against credit risk to which the Bank is exposed, including above all by establishing collateral that is as liquid as possible. Collateral may be considered liquid if it can be sold without a significant decrease in its price and at a time which does not expose the Bank to a change in the collateral value due to price fluctuations typical of a given asset.

The Bank strives to diversify collateral in terms of its forms and assets used as collateral.

The Bank evaluates collateral from the perspective of the actual possibility of using it to satisfy its claims.

In addition, when assessing collateral, the Bank takes into account the following factors:

• the economic, financial and economic, or social and financial position of entities which provide personal guarantees;

• the condition and market value of the assets accepted as collateral and their vulnerability to depreciation in the period of maintaining the collateral (the impact of the technological wear and tear of a collateralized asset on its value);

• potential economic benefits to the Bank resulting from a specific method of securing receivables, including, in particular, the possibility of reducing impairment allowances; for expected credit losses?

• the method of establishing collateral, including the typical duration and complexity of formalities, as well as the necessary costs (the costs of maintaining collateral and the enforcement against the collateral), using the Bank’s internal regulations concerning the assessment of collateral;

• the complexity, time-consuming nature and economic and legal conditions for the effective realization of collateral, in the context of enforcement restrictions and the applicable principles for the distribution of the sums obtained from individual enforcement or in the course of bankruptcy proceedings, the ranking of claims;

• The type of collateral depends on the level of risk of a given customer or transaction.

When granting loans intended to finance housing and commercial funding properties, a mortgage is an obligatory type of collateral.

Until effective protection is established (depending on the type and amount of a loan), the Bank may accept temporary collateral in a different form.

With regard to consumer loans, usually personal guarantees (a civil law surety/guarantee, a bill of exchange) are used or collateral is established on the customer’s bank account, car or securities.

The collateral for loans intended for the financing of small- and medium-sized enterprises as well as corporate customers is established, among other things: on receivables from business operations, bank accounts, movables, real estate or securities.

60. Credit risk – financial information

• Impact of Covid 19 on the quality of loan portfolio

Exposures covered by statutory non-statutory moratoria are presented in the tables below:

a) gross carrying amount of active and expired exposures

Loans and advances covered by statutory and non-statutory moratoria by residual period of the moratoria	31.12.2020
	Number of debtors	Carrying amount, gross
			Of which: statutory moratoria	Of which: expired	Residual period of moratoria
			Of which: statutory moratoria	Of which: expired	<= 3 months
Loans and advances in respect of which moratoria were offered	168 699	24 548
Loans and advances covered by moratoria in line with the EBA guidelines	168 699	24 548	35	22 242	2 305
retail and private banking		16 807	35	15 142	1 664
real estate		12 565	23	11 281	1 283
consumer		4 242	12	3 861	381
SME		2 950	-	2 858	92
business		1 404	-	1 388	16
real estate		1 546	-	1 470	76
corporate		4 791	-	4 242	549
business		3 389	-	2 841	548
real estate		1 402	-	1 401	1

b) gross carrying amount of active exposures

Loans and advances covered by moratoria in line with the EBA guidelines (statutory and non-statutory)	31.12.2020
	Carrying amount, gross
		Performing			Non-performing
			including: exposures covered by restructuring	of which: Stage 2		including: exposures covered by restructuring	of which: there is little probability that the liability will be repaid, but the liability is not overdue or is overdue < = 90 days
Loans and advances covered by moratoria in line with the EBA guidelines	2 305	2 258	26	1 286	47	2	45
retail and private banking	1 664	1 617	26	1 071	47	2	45
real estate	1 283	1 257	23	911	26	1	25
consumer	381	360	3	160	21	1	20
SME	92	92	-	21	-	-	-
business	16	16	-	11	-	-	-
real estate	76	76	-	10	-	-	-
corporate	549	549	-	194	-	-	-
business	548	548	-	194	-	-	-
real estate	1	1	-	-	-	-	-

c) accumulated impairment of active exposures

Loans and advances covered by moratoria in line with the EBA guidelines (statutory and non-statutory)	31.12.2020
	Accumulated impairment, accumulated loss of fair value due to credit risk
		Performing			Non-performing
			including: exposures covered by restructuring	of which: Stage 2		including: exposures covered by restructuring	of which: there is little probability that the liability will be repaid, but the liability is not overdue or is overdue < = 90 days
			including: exposures covered by restructuring	of which: Stage 2		including: exposures covered by restructuring
Loans and advances covered by moratoria in line with the EBA guidelines	(80)	(66)	(4)	(60)	(14)	(1)	(14)
retail and private banking	(72)	(58)	(4)	(54)	(14)	(1)	(14)
real estate	(40)	(33)	(2)	(32)	(7)	(1)	(7)
Consumer	(32)	(25)	(2)	(22)	(7)	-	(7)
SME	(2)	(2)	-	(1)	-	-	-
Business	(1)	(1)	-	(1)	-	-	-
real estate	(1)	(1)	-	-	-	-	-
corporate	(6)	(6)	-	(5)	-	-	-
business	(6)	(6)	-	(5)	-	-	-

d) gross carrying amount and maximum recognizable amount of guarantees for newly granted loans covered by guarantees

Newly granted loans and advances under new public guarantee programmes introduced in relation to the COVID-19 crisis	31.12.2020
	Carrying amount, gross		Maximum recognizable amount of guarantees
		Including: exposures covered by restructuring	Public guarantee received in relation to the COVID-19 crisis
Newly granted loans and advances covered by public guarantee programmes	3 416	22	-
SME	2 478	11	-
business	2 478	11	-
corporate	938	11	-
business	938	11	-

The Bank assessed the impact of the macroeconomic variables resulting from COVID-19 pandemic on the deterioration in the quality of the Bank’s loan portfolio and other financial assets in the amount of PLN 1 124 million, of which PLN 1 076 million was related to the impact on the result of allowances for expected credit losses, and PLN 48 million in respect of the result on financial operations.

When recognizing the impact of the COVID–19 pandemic on the loan portfolio, the Bank took into account three scenarios in respect of the main develops of the macroeconomic parameters. An assessment of the pandemic’s impact is performed based on the correlation between an expected loss and a change in the macroeconomic parameters under each of the three scenarios developed based on the Bank’s internal forecasts. The range of the forecast ratios comprises, among other things, the GDP rate indicators and unemployment rate, because these parameters have the major impact on the level of recognized changes in the valuation of the Bank’s assets. In order to adequately account for the high quarterly variability of macroeconomic ratios in the risk parameter models (in particular in the probability of default (PD) model), the average values of the said indices over a 2-year period were adopted. The increase of the PD parameter causes an increased expected loss value of certain loans and results in increased number of migrations to the Stage 2 with regard to some of those loans. The COVID-19 write-off results from a significant deterioration of macroeconomic forecasts in all three adopted scenarios.

The applied approach to the impact of macroeconomic forecasts on risk parameters describes the situation in all sectors of the economy at the same time and may not take into account the problems of individual industries caused by the pandemic, therefore the Bank conducted additional analyzes of the loan portfolio. These analyzes carried out by risk experts mainly included an assessment of the impact of specific macroeconomic conditions not included in the portfolio approach and allowed for the identification of customers and industries particularly affected by the current economic situation. Exposures with the highest PD values, which were granted moratoria or belong to identified industries, were marked with the indication of a "significant increase in credit risk" and were subject to an increased write-off. Additional write-offs created in this way amounted to PLN 423 million.

• Exposure to credit risk

MAXIMUM EXPOSURE TO CREDIT RISK – FINANCIAL INSTRUMENTS NOT SUBJECT TO IMPAIRMENT REQUIREMENTS	31.12.2020	31.12.2019
Hedging derivatives	618	594
Other derivative instruments	5 416	2 798
Securities:	2 305	1 930
held for trading	1 198	1 175
not held for trading, measured at fair value through profit or loss	1 107	755
Loans and advances to customers not held for trading, measured at fair value through profit or loss	6 009	8 286
housing loans	7	15
corporate loans	114	148
consumer loans	5 888	8 123

Total	14 348	13 608

• Modifications

FINANCIAL ASSETS SUBJECT TO MODIFICATION	2020		2019
Financial assets subject to modification during the period:	Faza 2	Faza 3	Faza 2	Faza 3
valuation amount at amortized cost before modification	1 900	743	427	354
gain (loss) on modification	(3)	-	4	(14)
Financial assets subject to modification since initial recognition:	31.12.2020		31.12.2019
gross carrying amount of financial assets subject to modification for which the loss was calculated over the lifetime and which are classified as Stage 1 after modification	99		226

• Receivables written off during the period, subject to recovery procedures

The table below presents the outstanding amounts of financial assets to be repaid, which were written down during the reporting period and which are still subject to debt recovery activities.

RECEIVABLES WRITTEN OFF	2020		2019
RECEIVABLES WRITTEN OFF	Partly written off	Entirely written off	Partly written off	Entirely written off
Loans and advances to customers	29	146	44	666
housing loans	3	7	14	103
corporate loans	5	37	8	418
consumer loans	21	102	22	145
Other financial assets	1	-	-	-
Total	30	146	44	666

The Bank adopted the following criteria for writing off receivables:

• the receivable has fully matured and is in particular the consequence of a loan, advance, contractual overdraft, guarantee or warranty of loan, advance or bond repayment;

• in accordance with IAS and IFRS the allowance for expected credit losses:

 covers 100% of the gross carrying amount of the asset; or

 exceeds 90% of the gross carrying amount of the asset and: actions have been or are still being taken in respect of the receivable which did not lead to its recovery, and the assessment of the probability of recovering the receivable (which, in particular, accounts for the decisions of the bailiff or the receiver) transferability of collateral, level of satisfaction, record in the land and mortgage register indicate that the entire receivable will not be recovered, or that the repayments of the receivable did not cover interest accrued on a current basis over the past 12 calendar months.

• Past due financial assets subject to impairment or impaired

PAST DUE FINANCIAL ASSETS SUBJECT TO IMPAIRMENT OR IMPAIRED	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
31.12.2020	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
Stage 1	484	-	-	484
Loans and advances to customers:	484	-	-	484
housing loans	149	-	-	149
corporate loans	184	-	-	184
consumer loans	151	-	-	151
Stage 2	803	221	-	1 024
Loans and advances to customers:	803	221	-	1 024
housing loans	563	109	-	672
corporate loans	79	43	-	122
consumer loans	161	69	-	230
Stage 3	170	149	1 137	1 456
Loans and advances to customers:	170	149	1 137	1 456
housing loans	42	36	184	262
corporate loans	98	82	778	958
consumer loans	30	31	175	236

TOTAL	1 457	370	1 137	2 964

PAST DUE FINANCIAL ASSETS SUBJECT TO IMPAIRMENT OR IMPAIRED	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
31.12.2019	up to 30 days	over 30 to 90 days	over 90 days	TOTAL
Stage 1	922	-	-	922
Loans and advances to customers:	922	-	-	922
housing loans	303	-	-	303
corporate loans	405	-	-	405
consumer loans	214	-	-	214
Stage 2	927	278	-	1 205
Loans and advances to customers:	927	278	-	1 205
housing loans	691	167	-	858
corporate loans	86	41	-	127
consumer loans	150	70	-	220
Stage 3	168	135	1 536	1 839
Loans and advances to customers:	168	135	1 536	1 839
housing loans	76	76	290	442
corporate loans	65	31	1 035	1 131
consumer loans	27	28	211	266

TOTAL	2 017	413	1 536	3 966

The Bank takes into account the minimum levels of matured amounts of PLN 500 for credit exposures to individuals and PLN 3 000 for other credit exposures to specify whether a loan is overdue.

• Loans and advances to customers were secured by the following collateral established for the Bank: mortgages, registered pledges, transfer of ownership, restrictions on a deposit account, insurance of the credit exposure, as well as warranties and pledges.

• Quality of the portfolio covered by the rating model for loans and advances granted to customers

CREDIT RISK EXPOSURES BY PD PARAMETER PD 31.12.2020	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER PD 31.12.2020	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
HOUSING LOANS	79 609	11 814	1 892	93 315	81
0,00 - 0,02%	5 590	15	-	5 605	-
0,02 - 0,07%	25 147	82	1	25 230	1
0,07 - 0,11%	11 385	65	2	11 452	2
0,11 - 0,18%	13 383	107	1	13 491	1
0,18 - 0,45%	14 268	4 042	5	18 315	5
0,45 - 1,78%	5 046	3 930	7	8 983	7
1,78 - 99,99%	473	3 532	10	4 015	10
100%	-	-	1 866	1 866	55
no internal rating	4 317	41	-	4 358	-

CORPORATE LOANS	58 985	13 271	5 423	77 679	51
0,00 - 0,45%	25 034	98	-	25 132	-
0,45 - 0,90%	4 440	99	-	4 539	-
0,90 - 1,78%	10 263	265	-	10 528	-
1,78 - 3,55%	8 594	1 634	-	10 228	-
3,55 - 7,07%	6 384	7 230	-	13 614	-
7,07 - 14,07%	3 725	2 559	-	6 284	-
14,07 - 99,99%	363	1 312	-	1 675	-
100%	-	-	5 423	5 423	51
no internal rating	182	74	-	256	-

CONSUMER LOANS	19 712	2 840	1 379	23 931	53
0,00 - 0,45%	6 280	118	-	6 398	-
0,45 - 0,90%	4 675	155	-	4 830	-
0,90 - 1,78%	4 025	221	-	4 246	-
1,78 - 3,55%	2 491	296	-	2 787	-
3,55 - 7,07%	986	668	-	1 654	-
7,07 - 14,07%	418	499	-	917	-
14,07 - 99,99%	136	812	-	948	-
100%	-	-	1 379	1 379	53
no internal rating	701	71	-	772	-

Total	158 306	27 925	8 694	194 925	185

1 This item refers mainly to the Housing Association and Cooperatives portfolio.

CREDIT RISK EXPOSURES BY PD 31.12.2019	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD 31.12.2019	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
HOUSING LOANS	86 918	5 458	2 060	94 436	89
0,00 - 0,02%	4 748	9	-	4 757	-
0,02 - 0,07%	22 927	75	-	23 002	1
0,07 - 0,11%	11 017	48	-	11 065	2
0,11 - 0,18%	13 761	106	-	13 867	-
0,18 - 0,45%	20 163	333	-	20 496	4
0,45 - 1,78%	9 579	875	-	10 454	8
1,78 - 99,99%	832	3 947	-	4 779	15
100%	-	-	2 060	2 060	59
no internal rating	3 891	65	-	3 956	-

CORPORATE LOANS	72 691	4 415	5 442	82 548	157
0,00 - 0,45%	23 728	13	-	23 741	-
0,45 - 0,90%	8 395	59	-	8 454	-
0,90 - 1,78%	11 093	227	-	11 320	-
1,78 - 3,55%	8 037	650	-	8 687	-
3,55 - 7,07%	15 373	952	-	16 325	-
7,07 - 14,07%	5 275	1 391	-	6 666	5
14,07 - 99,99%	453	1 097	-	1 550	-
100%	-	-	5 442	5 442	152
no internal rating	337	26	-	363	-

CONSUMER LOANS	19 134	1 713	1 189	22 036	42
0,00 - 0,45%	4 591	24	-	4 615	-
0,45 - 0,90%	5 492	73	-	5 565	-
0,90 - 1,78%	4 393	162	-	4 555	-
1,78 - 3,55%	2 336	256	-	2 592	-
3,55 - 7,07%	1 113	283	-	1 396	-
7,07 - 14,07%	529	307	-	836	-
14,07 - 99,99%	121	565	-	686	-
100%	-	-	1 189	1 189	42
no internal rating	559	43	-	602	-

Total	178 743	11 586	8 691	199 020	288

• Quality of the portfolio covered by the rating model for off-balance sheet liabilities

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
OFF-BALANCE SHEET LIABILITIES
0,00 - 0,45%	22 936	118	-	23 054	-
0,45 - 0,90%	6 292	151	-	6 443	-
0,90 - 1,78%	12 530	563	-	13 093	-
1,78 - 3,55%	5 821	826	-	6 647	-
3,55 - 7,07%	6 084	3 966	-	10 050	-
7,07 - 14,07%	2 966	1 219	-	4 185	-
14,07 - 99,99%	113	150	-	263	-
100%	-	-	467	467	20
no internal rating	16 755	1 309	-	18 064	-

Total	73 497	8 302	467	82 266	20

1 This item refers mainly to the State Treasury exposures and credit lines for derivative transactions.

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
OFF-BALANCE SHEET LIABILITIES
0,00 - 0,45%	19 198	74	-	19 272	-
0,45 - 0,90%	13 409	54	-	13 463	-
0,90 - 1,78%	8 428	211	-	8 639	-
1,78 - 3,55%	5 842	477	-	6 319	-
3,55 - 7,07%	6 066	676	-	6 742	-
7,07 - 14,07%	3 394	593	-	3 987	-
14,07 - 99,99%	116	118	-	234	-
100%	-	-	487	487	67
no internal rating	13 830	1 112	-	14 942	-

Total	70 283	3 315	487	74 085	67

• Quality of the portfolio covered by the rating model for amounts due from banks

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
AMOUNTS DUE FROM BANKS	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
EXTERNAL RATINGS	5 311	-	-	5 311	-
AAA	3	-	-	3	-
AA	387	-	-	387	-
A	1 449	-	-	1 449	-
BBB	3 454	-	-	3 454	-
BB	17	-	-	17	-
B	1	-	-	1	-

TOTAL	5 311	-	-	5 311	-

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
AMOUNTS DUE FROM BANKS	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
EXTERNAL RATINGS	7 875	-	-	7 875	-
AAA	462	-	-	462	-
AA	768	-	-	768	-
A	1 313	-	-	1 313	-
BBB	5 330	-	-	5 330	-
BB	1	-	-	1	-
B	1	-	-	1	-
				-
INTERNAL RATINGS	82	-	-	82	-
0,95%	82	-	-	82	-

TOTAL	7 957	-	-	7 957	-

• Quality of the portfolio covered by the rating model for debt securities

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2020	Carrying amount, gross
DEBT SECURITIES	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
EXTERNAL RATINGS	91 293	-	-	91 293	-
AAA	2 513	-	-	2 513	-
AA	5	-	-	5	-
A	86 887	-	-	86 887	-
BBB	1 642	-	-	1 642	-
BB	246	-	-	246	-

INTERNAL RATINGS	24 902	296	457	25 655	438
0,00-0,45%	8 645	-	-	8 645	-
0,45-0,90%	686	89	-	775	-
0,90-1,78%	15 220	2	-	15 222	-
1,78-3,55%	149	118	-	267	-
3,55-7,07%	186	3	-	189	-
7,07-14,07%	16	84	-	100	-
100,00%	-	-	457	457	438
no internal rating	766	-	-	766	-

TOTAL	116 961	296	457	117 714	438

CREDIT RISK EXPOSURES BY PD PARAMETER 31.12.2019	Carrying amount, gross
DEBT SECURITIES	Stage 1	Stage 2	Stage 3	TOTAL	of which POCI
EXTERNAL RATINGS	63 548	-	-	63 548	-
AAA	1 064	-	-	1 064	-
AA	-	-	-	-	-
A	60 195	-	-	60 195	-
BBB	2 207	-	-	2 207	-
BB	82	-	-	82	-

RATINGI WEWNĘTRZNE	9 878	79	463	10 420	463
0,00-0,45%	8 133	-	-	8 133	-
0,45-0,90%	764	77	-	841	-
0,90-1,78%	162	2	-	164	-
1,78-3,55%	542	-	-	542	-
3,55-7,07%	31	-	-	31	-
7,07-14,07%	246	-	-	246	-
100,00%	-	-	463	463	463
no internal rating	543	-	-	543	-

TOTAL	73 969	79	463	74 511	463

61. Managing credit concentration risk in the Bank

The Bank defines credit concentration risk as the risk arising from a considerable exposure to single customers or groups of related customers whose repayment capacity depends on a common risk factor. The Bank analyses the concentration risk, among other things towards:

• the largest entities (customers);

• the largest groups of related customers;

• industry sectors;

• geographical regions;

• currencies;

• exposures secured with a mortgage.

• Risk management objective

The objective of concentration risk management is to ensure a safe structure of the loan portfolio by mitigating threats arising from excessive concentrations relating to exposures characterized by a potential to generate significant losses for the Bank.

• Measurement and assessment of concentration risk

The Bank measures and assesses concentration risk by examining the actual aggregate exposure to a customer or a group of related customers and the actual aggregate exposure in the individual groups of loan portfolios.

The Bank’s actual exposure complies with the definition of exposure in the CRR, which comprises all assets or off-balance sheet items, including exposures in the banking and trading book and indirect exposures arising from the security applied.

Concentration risk is identified by recognizing the factors due to which the risk may arise or the level of the Bank’s exposure may change, including potential risk factors resulting, for example, from the planned activities of the Bank. In the process of identifying concentration risk, the Bank:

• identifies and updates the structure of the group of related customers;

• aggregates the exposures towards a customer or a group of related customers;

• applies exemptions from regulatory limits for large exposures, in accordance with the CRR. The Bank’s tolerance to concentration risk is determined by:

• external regulatory limits arising from Art. 395 of the CRR and from Article 79a of the Banking Law;

• internal limits of the Bank:

• strategic limits of concentration risk tolerance;

• limits that define the appetite for concentration risk.

The Bank uses in particular the following to measure concentration risk:

• the ratio of the Bank’s exposure to concentration risk with respect to individual customers or groups of related customers to the Bank’s eligible capital;

• the industry or geographic concentration ratio which indicates the share of groups with the highest exposure / number in the Bank’s loan portfolio;

• Gini coefficient;

• graphs of portfolio concentration (Lorenz curve).

To measure concentration risk and evaluate the effect of internal and external factors on the concentration risk, the Bank performs stress tests with respect to concentration risk for large exposures.

• Monitoring and forecasting concentration risk

The Bank monitors concentration risk:

• on an individual level, by verifying the exposure concentration ratio for a customer or a group of related customers, each time before applying for a decision on granting financing or increasing the amount of the exposure, and before taking other actions resulting in increasing the Bank’s exposure on other accounts;

• on a systemic level, by:

• daily control over compliance with the external concentration limit and identifying large exposures;

• monthly control over the limit arising from Art. 79a of the Banking Law;

• monthly or quarterly control over compliance with the Bank’s internal limits with respect to concentration risk;

• monitoring early warning ratios with respect to concentration;

• monthly or quarterly monitoring and assessment of the concentration risk at the portfolio level.

The Bank forecasts changes in the level of concentration risk as part of its analyses and reviews of internal limits and the concentration risk management policy and in the process of stress testing concentration risk.

The Bank performs stress tests to examine, for example, the effect of macroeconomic factors on individual concentrations, the impact of decisions of other financial market participants, decisions on customer mergers, dependency on other risks, for example, currency risk, which may contribute to the materialization of concentration risk and the effect of other factors from the internal and external environment on the concentration risk.

Concentration risk is an element of comprehensive stress tests which enables evaluation of the forecast effect of correlated credit, interest rate, currency, operating and liquidity risks and concentration risk on the expected credit loss of the Bank.

• Concentration risk reporting

Reports on currency risk are prepared on a daily, monthly and quarterly basis.

Concentration risk reporting comprises periodic (monthly or quarterly) reporting to the Bank’s relevant bodies on the scale of exposure to concentration risk, which may lead to a significant change in the Bank’s risk profile, including in particular:

• utilization of limits defining risk appetite and exceeding those limits;

• early warning ratios;

• stress-test results;

• on portfolio concentration risk and concentration of the Bank’s largest exposures and compliance with concentration standards arising from the Banking Law Act.

• Management actions relating to concentration risk

The purpose of management actions is to shape and optimize the concentration risk management process and concentration risk level at the Bank (preventing excessive concentrations).

Management actions comprise in particular:

• publishing the Bank’s internal regulations on the process of concentration risk management, defining the tolerance level for concentration risk, determining limits and threshold amounts;

• issuing recommendations, guidelines for conduct, explanations and interpretations of internal regulations;

• taking decisions concerning an acceptable level of concentration risk, including in particular decisions determining the threshold values of limits reflecting concentration risk appetite;

• developing and improving concentration risk control tools which make it possible to maintain the concentration risk level within the limits acceptable to the Bank;

• developing and improving concentration risk assessment methods taking into account the changeability of the macroeconomic situation, including crises on foreign and domestic markets and the changeability of the regulatory environment;

• developing and improving IT tools to support concentration risk management;

• Concentration by the largest entities (customers)

The Banking Law sets the limits of the maximum exposure of the Bank which are translated to the Bank. The risk of concentration of exposures to individual customers and groups of related customers is monitored in accordance with the CRR, according to which the Bank does not assume an exposure to a customer or a group of related customers the value of which exceeds 25% of the value of its eligible capital.

The Bank’s exposure to the 20 largest non-banking customers2:

31.12.2020				31.12.2019
No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees, and interest receivables as well as off-balance sheet and capital exposures 1	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio –(relation of exposure to the value of the Bank’s eligible capital)		Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees, and interest receivables as well as off-balance sheet and capital exposures 1	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio – (relation of exposure to the value of the Bank’s eligible capital)	Concentration ratio (restated)
12	18 894	5,89%	46,93%	12	19 960	6,65%	51,72%	48,32%
22	16 875	5,26%	41,91%	2	3 792	1,26%	9,83%	9,18%
3	2 831	0,88%	7,03%	3	3 752	1,25%	9,72%	9,08%
42	2 530	0,79%	6,28%	4	2 899	0,97%	7,51%	7,02%
5	2 453	0,76%	6,09%	5	2 717	0,90%	7,04%	6,58%
6	2 366	0,74%	5,88%	6	2 679	0,89%	6,94%	6,49%
7	2 273	0,71%	5,65%	7	2 583	0,86%	6,69%	6,25%
8	2 267	0,71%	5,63%	8	2 453	0,82%	6,36%	5,94%
9	2 120	0,66%	5,27%	9	2 270	0,76%	5,88%	5,50%
10	2 046	0,64%	5,08%	10	1 792	0,60%	4,64%	4,34%
11	1 593	0,50%	3,96%	112	1 612	0,54%	4,18%	3,90%
122	1 527	0,48%	3,79%	122	1 570	0,52%	4,07%	3,80%
13	1 202	0,37%	2,99%	13	1 547	0,52%	4,01%	3,75%
14	1 171	0,37%	2,91%	14	1279	0,43%	3,31%	3,10%
15	1 007	0,31%	2,50%	15	961	0,32%	2,49%	2,33%
16	923	0,29%	2,29%	16	961	0,32%	2,49%	2,33%
17	855	0,27%	2,12%	17	897	0,30%	2,32%	2,17%
18	826	0,26%	2,05%	18	819	0,27%	2,12%	1,98%
19	797	0,25%	1,98%	19	817	0,27%	2,12%	1,98%
202	789	0,25%	1,96%	202	798	0,27%	2,07%	1,93%

Total	65 345	20,39%	162,29%	Total	56 158	18,72%	145,52%	135,95%

1 exposure excluded from the exposure concentration limit under the CRR

2 exposure partly excluded from the exposure concentration limit under the CRR.

• Concentration by the largest groups of related customers

The largest concentration of the Bank’s exposures to a group of borrowers was 7.03% of the Bank’s loan portfolio (as at 31 December 2019 it was 7.74%).

The Bank’s exposure to the 5 largest groups 3:

31.12.2020				31.12.2019
No.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees, and interest receivables as well as off-balance sheet and capital exposures1	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio – (relation of exposure to the value of the Bank’s eligible capital)	Lp.	Credit exposures include loans, advances, purchased debt, bill of exchange discounts, realized guarantees, and interest receivables as well as off-balance sheet and capital exposures1	Share in the loan portfolio, including off-balance sheet and capital exposures	Concentration ratio – (relation of exposure to the value of the Bank’s eligible capital)	Concentration ratio (restated)

12	23 031	7,18%	57,20%	12	23 236	7,74%	60,21%	56,25%
22	17 594	5,49%	43,70%	2	4 559	1,52%	11,81%	11,04%
3	3 623	1,13%	9,00%	3	3 838	1,28%	9,95%	9,29%
4	2 653	0,83%	6,59%	4	3 591	1,20%	9,31%	8,69%
5	2 623	0,82%	6,51%	5	3 183	1,06%	8,25%	7,71%

Razem	49 524	15,45%	123,00%	Razem	38 407	12,80%	99,53%	92,98%

1 off-balance sheet exposure includes the liability arising from derivative transactions in the amount equal to their balance sheet equivalent.

2 exposure partly excluded from exposure concentration limit under the CRR

3 the list does not include exposure to the State Treasury (relevant for groups in which the State Treasury has control)

• Concentration by industry

The structure of the Bank’s exposure by industry sector is dominated by entities operating in the “Financial and insurance activity” and “Public administration and national defence” sections. The Bank’s exposure to these sectors represents approximately 38.3% of the industry portfolio.

CONCENTRATION BY INDUSTRY
SECTION	SECTION NAME	31.12.2020		31.12.2019
SECTION	SECTION NAME	EXPOSURE	No. OF ENTITIES	EXPOSURE	No. OF ENTITIES
K	Financial and insurance activities	23,20	1,56	19,86%	1,59%
C	Industrial processing	14,36	9,69	14,53%	10,62%
L	Real estate administration	12,92	21,85	11,80%	23,24%
G	Wholesale and retail trade, repair of motor vehicles	10,86	21,65	10,33%	23,36%
O	Public administration and national defence, obligatory social security	15,13	4,10	14,54%	0,43%
Other exposures		23,53	41,15	28,94%	40,76%
Total		100,00	100,00	100,00%	100,00%

• Concentration by geographical regions

The Bank’s loan portfolio is diversified in terms of geographical concentration.

The Bank classifies the structure of the loan portfolio by geographical regions depending on the customer area – it is different for the Retail Market Area (ORD) and for the Corporate and Investment Banking Area (OKI).

In 2020, the largest concentration of the ORD loan portfolio was in the Warsaw region and Katowice region – these regions account for around 27.5% of the ORD portfolio (27.8% as at 31 December 2019).

CONCENTRATION OF CREDIT RISK BY GEOGRAPHICAL REGION FOR RETAIL CUSTOMERS	31.12.2020	31.12.2019

Warsaw region	16,61%	16,98%
Katowice region	10,86%	10,82%
Poznań region	10,57%	10,59%
Kraków region	8,63%	8,82%
Łódź region	8,86%	8,77%
Wrocław region	10,66%	10,62%
Gdańsk region	10,47%	10,64%
Lublin region	7,09%	7,01%
Białystok region	6,43%	6,37%
Szczecin region	8,49%	8,45%
Head Office	0,81%	0,67%
other	0,53%	0,26%

Total	100,00%	100,00%

In 2020 and 2019 , the highest concentration of the OKI loan portfolio was in the central macro-region – 41,96% iand 48,06% of the OKI portfolio, respectively.

CONCENTRATION OF CREDIT RISK BY GEOGRAPHICAL REGION FOR INSTITUTIONAL CLIENTS	31.12.2020	31.12.2019
Head Office	8,46	3,75%
central macroregion	41,96	48,06%
northern macroregion	7,81	8,47%
western macroregion	12,06	9,45%
southern macroregion	11,02	10,19%
south-eastern macroregion	7,47	7,31%
north-eastern macroregion	3,84	4,67%
south-western macroregion	6,22	6,79%
other	-	-
foreign countries	1,16	1,31%
Total	100,00	100,00%

• Concentration of credit risk by currency

As at 31 December 2020, the share of exposures in convertible currencies other than PLN in the entire Bank’s portfolio amounted to 19.2% (19.3% as at 31 December 2019).

Exposures in CHF represent the largest part of the Bank’s foreign currency exposure with an approx. 49.7% share in the entire foreign currency portfolio of the Bank as at the end of 2020 (53% as at 31 December 2019). Loans in EUR went up, their share as at the end of 2020 increased to 44.0% of the foreign currency portfolio (from 41.3% as at the end of 2019).

CONCENTRATION OF CREDIT RISK BY CURRENCY	31.12.2020	31.12.2019
PLN	80,83%	80,65%
Foreign currencies, of which:	19,17%	19,35%
CHF	9,53%	10,32%
EUR	8,43%	7,99%
USD	1,05%	0,81%
GBP	0,02%	0,04%
other	0,14%	0,19%
Total	100,00%	100,00%

• Other types of concentration

The Bank analyses the structure of its housing loan portfolio by LTV levels. Both in 2020 and in 2019, the largest concentration was in the LTV range of 41%-60%.

GROUP’S HOUSING LOAN PORTFOLIO STRUCTURE BY LTV	31.12.2020	31.12.2019
0% - 40%	27,1%	24,36%
41%-60%	37,30%	30,46%
61% - 80%	29,36%	35,45%
81% - 90%	3,96%	6,56%
91% - 100%	0,97%	1,40%
over 100%	1,24%	1,77%
Total	100,00%	100,00%

	31.12.2020	31.12.2019
average LTV for the portfolio of loans in CHF	55,96%	58,68%
average LTV for the entire portfolio	53,67%	55,22%

62. Collateral

In the period ended 31 December 2020, the Bank did not make any changes to its collateral policies.

The Bank takes into account the collateral held for credit exposures when estimating the expected credit loss. With respect to individually significant exposures that meet the conditions for impairment, future collateral recoveries are estimated individually and taken into account in determining the expected loss, with a weight corresponding to the assessment of the probability of implementation of the debt recovery scenario. The value of collateral recoveries estimated under the recovery scenario for impaired exposures at the balance sheet date was PLN 1 811 million (na 31 grudnia 2019 roku 2 117 milionów PLN).

The Bank does not have any exposures for which, due to the value of the collateral, it has not recognized an allowance for expected credit loss.

63. Forbearance practices

Forbearance is defined by the Bank as actions aimed at amending the contractual terms agreed with a debtor or an issuer, forced by the debtor’s or issuer’s difficult financial situation (restructuring activities introducing concessions that otherwise would not have been granted). The aim of forbearance activities is to restore a debtor’s or an issuer’s ability to settle their liabilities towards the Bank and to maximize the efficiency of managing non-performing loans, i.e. obtaining the highest possible recoveries while minimizing the costs incurred.

Forbearance changes in repayment terms may consist in:

• dividing the debt due into instalments;

• changing the repayment scheme (annuity payments, degressive payments);

• extending the loan period;

• changing the interest rate;

• changing the margin;

• reducing the debt.

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

The provision of facilities within the framework of forbearance, as a premise of impairment, results in the recognition of the premise of impairment and the classification of the credit exposure into the portfolio of exposures at risk of impairment.

The inclusion of such exposures in the portfolio of performing exposures (discontinuing recognition of the forbearance agreement as an impairment trigger) takes place at least 12 months after the introduction of forbearance, provided that all payments in arrears and at least six scheduled payments have been made by the customer and, in the Bank’s opinion, the current situation of the customer does not pose a threat to their compliance with the terms of the restructuring agreement.

Exposures cease to meet the criteria of a forborne exposure when all of the following conditions are met:

• at least 24 months have passed from the date of including the exposure into the portfolio of performing exposures (conditional period);

• as at the end of the conditional period referred to above, the customer has no debt towards the Bank overdue for more than 30 days;

• at least 12 instalments have been repaid on a timely basis and in the amounts agreed.

Forborne exposures are monitored on an on-going basis. Throughout the whole period of their recognition allowances are recognized for these exposures in the amount of expected losses over the life horizon of the exposure.

31.12.2020	Instruments with modified terms and conditions	Refinancing	Total, gross	Impairment allowances	Total, net
Performing exposures
Not held for trading, measured at fair value through profit or loss:	17	-	17	-	17
consumer loans	17	-	17	-	17
Measured at fair value through OCI:	1	-	1	-	1
housing loans	1	-	1	-	1
Measured at amortized cost:	942	-	942	(65)	877
housing loans	372	-	372	(29)	343
corporate loans	508	-	508	(28)	480
consumer loans	62	-	62	(8)	54
Total performing exposures	959	-	959	(65)	894
Non-performing exposures
Not held for trading, measured at fair value through profit or loss:	207	-	207	-	207
consumer loans	47	-	47	-	47
corporate bonds	160	-	160	-	160
Measured at fair value through OCI:	461	-	461	(14)	447
housing loans	4	-	4	-	4
corporate bonds	457	-	457	(14)	443
Measured at amortized cost:	2 105	32	2 137	(981)	1 156
housing loans	426	-	426	(236)	190
corporate loans	1 556	30	1 586	(716)	870
consumer loans	123	2	125	(29)	96
Total non-performing exposures	2 773	32	2 805	(995)	1 810

TOTAL EXPOSURES SUBJECT TO FOBEARANCE	3 732	32	3 764	(1 060)	2 704

31.12.2019	Instruments with modified terms and conditions	Refinancing	Total, gross	Impairment allowances	Total, net
Performing exposures
Not held for trading, measured at fair value through profit or loss:	19	-	19	-	19
consumer loans	19	-	19	-	19
Measured at fair value through OCI:	1	-	1	-	1
housing loans	1	-	1	-	1
Measured at amortized cost:	1 120	1	1 121	(70)	1 051
housing loans	465	-	465	(27)	438
corporate loans	600	1	601	(39)	562
consumer loans	55	-	55	(4)	51
Total performing exposures	1 140	1	1 141	(70)	1 071
Non-performing exposures
Not held for trading, measured at fair value through profit or loss:	216	-	216	-	216
consumer loans	37	-	37	-	37
corporate bonds	179	-	179	-	179
Measured at fair value through OCI:	466	-	466	(5)	461
housing loans	3	-	3	-	3
corporate bonds	463	-	463	(5)	458
Measured at amortized cost:	1 963	37	2 000	(786)	1 214
housing loans	478	-	478	(224)	254
corporate loans	1 372	35	1 407	(527)	880
consumer loans	113	2	115	(35)	80
Total non-performing exposures	2 645	37	2 682	(791)	1 891

TOTAL EXPOSURES SUBJECT TO FOBEARANCE	3 785	38	3 823	(861)	2 962

LOANS AND ADVANCES TO CUSTOMERS SUBJECT TO FORBEARANCE	2020	2019
Recognized interest income on forborne loans and advances granted to customers	82	134

64. Exposure to the counterparty credit risk

CONCENTRATION OF CREDIT RISK – INTERBANK MARKET AND NON-WHOLESALE MARKET – EXPOSURE AS AT 31.12.2020*
Counterparty	Country	Rating	Interbank market – wholesale			Non-wholesale market		Total
Counterparty	Country	Rating	Deposit (nominal value)	Derivatives (market value, excluding collateral if positive)	Securities (nominal value)	Nominal balance sheet exposure	Nominal off-balance sheet exposure
Counterparty 1	Poland	BBB		1	19	3 222	7 078	10 320
Counterparty 2	Poland	A		13	3 513	-	-	3 526
Counterparty 3	Luxembourg	AAA		-	2 344	-	-	2 344
Counterparty 4	Ukraine	NONE		-	-	-	289	289
Counterparty 5	Poland	A		(1)	2	150	-	152
Counterparty 6	United Kingdom	AA		135	-	-	-	135
Counterparty 7	Germany	BBB		130	-	-	-	130
Counterparty 8	France	A		(85)	-	125	-	125
Counterparty 9	Finland	AA		(142)	-	0	110	111
Counterparty 10	Germany	BBB		78	-	-	-	78
Counterparty 11	France	A		(3)	-	72	-	72
Counterparty 12	Poland	NONE		58	-	-	-	58
Counterparty 13	Poland	BBB		48	1	-	-	49
Counterparty 14	Norway	AA		37	-	-	-	37
Counterparty 15	Luxembourg	A		-	-	2	18	20
Counterparty 16	Ireland	A		17	-	-	-	-
Counterparty 17	United States of America	AA		(17)	-	1	12	13
Counterparty 18	France	A		11	-	-	-	11
Counterparty 19	Poland	NONE		8	-	-	-	8
Counterparty 20	United Kingdom	A		8	-	-	-	8

CONCENTRATION OF CREDIT RISK – INTERBANK MARKET AND NON-WHOLESALE MARKET – EXPOSURE AS AT 31.12.2019*
Counterparty	Country	Rating	Interbank market - wholesale			Non-wholesale market		Total
Counterparty	Country	Rating	Deposit (nominal value)	Derivatives (market value, excluding collateral if positive)	Securities (nominal value)	Nominal balance sheet exposure	Nominal off-balance sheet exposure
Counterparty 1	Poland	BBB	-	52	62	2 272	4 231	6 617
Counterparty 3	Supranational institution	AAA	-	3	1 017	-	-	1 020
Counterparty 69	Austria	BBB	681	-	-	-	-	681
Counterparty 50	Switzerland	AAA	456	(11)	-	-	-	456
Counterparty 70	United Kingdom	A	341	-	-	-	-	341
Counterparty 71	United States of America	AA	266	-	-	-	-	266
Counterparty 52	Austria	A	199	(5)	-	-	-	199
Counterparty 4	Ukraine	NONE	77	-	-	-	114	191
Counterparty 5	Poland	A	-	1	1	150	-	152
Counterparty 9	Finland	AA	-	(88)	-	20	123	144
Counterparty 17	United States of America	AA	-	88	-	5	5	98
Counterparty72	Denmark	A	4	(2)	-	-	-	74
Kontrahent 6	United Kingdom	AA	-	70	-	-	-	70
Kontrahent 7	Germany	BBB	-	67	-	-	-	67
Kontrahent 13	Poland	BBB	-	39	-	-	-	39
Kontrahent 20	United Kingdom	A	-	36	-	-	-	36
Kontrahent 12	Poland	NONE	-	33	-	-	-	33
Kontrahent 46	United Kingdom	A	-	32	-	-	-	32
Kontrahent 66	Germany	AA	-	27	-	-	-	27
Kontrahent 62	Germany	BBB	-	25	-	-	-	25

1 Excluding exposure to the State Treasury and the National Bank of Poland.

The Bank had access to two clearing houses through which it settles clears interest rate derivative transactions specified in the EMIR Regulation with selected domestic and foreign counterparties. In order to limit the credit risk in respect of derivative transactions and securities transactions, the Bank concludes with its counterparties framework agreements (under the ZBP, ISDA and ICMA standards). The framework agreements allow to offset mutual amounts payable (reduction of the settlement risk) and non-payable (reduction of pre-settlement risk), resulting from transactions, and also utilize the close-out netting mechanism upon termination of the framework agreement as a result of default or an event justifying termination with regard to one or both parties to the agreement.

Moreover, the Bank concludes with its counterparties collateral agreements (CSA – Credit Support Annex under the ISDA standard, or a Collateral Agreement under the ZBP standard), under which each party undertakes, upon meeting the premises stipulated therein, to establish an appropriate collateral together with the right to offset. Exemptions include derivative transactions concluded between members of the Group: PKO Bank Polski S.A. and PKO Bank Hipoteczny S.A., which were exempted from the obligation to exchange collaterals under Art. 4 (2) of the EMIR Regulation.

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

The Bank analyses its portfolio of foreign currency mortgage loans to individuals in a specific manner. The Bank monitors the quality of the portfolio on an on-going basis and reviews the risk of deterioration in the quality of the portfolio. Currently, the quality of the portfolio is at an acceptable level. The Bank takes into consideration the risk of foreign currency mortgage loans for individuals in the capital adequacy and equity management.

HOUSING LOANS AND ADVANCES TO INDIVIDUALS (RETAIL AND PRIVATE BANKING) BY CURRENCY	31.12.2020			31.12.2019
	gross	impairment allowance	net	gross	impairment allowance	net
in local currency	69 001	(1 056)	67 945	63 953	(963)	62 990
PLN	69 001	(1 056)	67 945	63 953	(963)	62 990
in foreign currency	18 198	(719)	17 479	24 287	(749)	23 538
CHF	15 366	(647)	14 719	21 410	(692)	20 718
EUR	2 787	(68)	2 719	2 825	(53)	2 772
USD	36	(4)	32	43	(4)	39
OTHER	9	-	9	9	-	9

TOTAL	87 199	(1 775)	85 424	88 240	(1 712)	86 528

FOREIGN CURRENCY HOUSING LOANS AND ADVANCES TO INDIVIDUALS BY THE GRANTING DATE		INDEXED	DENOMINATED	Total
31.12.2020
up to 2002	Gross amount	-	59	59
	Allowances for credit losses	-	(1)	(1)
	Net amount	-	58	58
	Number of loans granted		5 444	5 444

from 2003 to 2006	Gross amount	-	3 617	3 617
	Allowances for credit losses	-	(106)	(106)
	Net amount	-	3 511	3 511
	Number of loans granted		42 445	42 445

from 2007 to 2009	Gross amount	-	8 464	8 464
	Allowances for credit losses	-	(491)	(491)
	Net amount	-	7 973	7 973
	Number of loans granted		51 166	51 166

from 2010 to 2012	Gross amount	3 137	2 904	6 041
	Allowances for credit losses	(48)	(72)	(120)
	Net amount	3 089	2 832	5 921
	Number of loans granted	10 596	11 955	22 551

from 2013 to 2016	Gross amount	5	12	17
	Allowances for credit losses	-	(1)	(1)
	Net amount	5	11	16
	Number of loans granted	18	43	61

Total	Gross amount	3 142	15 056	18 198
	Allowances for credit losses	(48)	(671)	(719)
	Net amount	3 094	14 385	17 479
	Number of loans granted	10 614	111 053	121 667

FOREIGN CURRENCY HOUSING LOANS AND ADVANCES TO INDIVIDUALS BY THE GRANTING DATE		INDEXED	DENOMINATED	Total
31.12.2019
up to 2002	Gross amount	-	98	98
	Allowances for credit losses	-	(2)	(2)
	Net amount	-	96	96
	Number of loans granted		6 704	6 704

from 2003 to 2006	Gross amount	-	4 974	4 974
	Allowances for credit losses	-	(107)	(107)
	Net amount	-	4 867	4 867
	Number of loans granted		47 821	47 821

from 2007 to 2009	Gross amount	-	12 749	12 749
	Allowances for credit losses	-	(542)	(542)
	Net amount	-	12 207	12 207
	Number of loans granted		54 056	54 056

from 2010 to 2012	Gross amount	3 362	3 085	6 447
	Allowances for credit losses	(39)	(57)	(96)
	Net amount	3 323	3 028	6 351
	Number of loans granted	11 115	12 709	23 824

from 2013 to 2016	Gross amount	5	14	19
	Allowances for credit losses	-	(2)	(2)
	Net amount	5	12	17
	Number of loans granted	18	47	65

Total	Gross amount	3 367	20 920	24 287
	Allowances for credit losses	(39)	(710)	(749)
	Net amount	3 328	20 210	23 538
	Number of loans granted	11 133	121 337	132 470

66. Interest rate risk management

Interest rate risk management

• Definition

Interest rate risk is a risk of losses being incurred on the Bank’s balance sheet and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in market interest rates.

• Risk management objective

To reduce the potential losses resulting from market interest rate fluctuations to an acceptable level by properly shaping the structure of balance sheet and off-balance sheet items.

• Risk identification and measurement

The Bank uses the following measures of interest rate risk: interest income sensitivity, economic value sensitivity, value at risk (VaR), stress tests and repricing gaps.

• Control

Control over interest rate risk consists of determining interest rate risk limits and thresholds tailored to the scale and complexity of the Bank’s operations, in particular the strategic limit of tolerance to interest rate risk.

• Risk forecasting and monitoring

The Bank regularly monitors:

• the levels of interest rate risk measures;

• utilization of the strategic limit of tolerance to interest rate risk;

• utilization of internal limits and thresholds of interest rate risk.

• Reporting

Reports on interest rate risk are prepared on a daily, weekly, monthly and quarterly basis.

• Management actions

The main tools for interest rate risk management used by the Bank are: interest rate risk management procedures, interest rate risk limits and thresholds.

The Bank established limits and thresholds for interest rate risk comprising, among other things, the following: interest income sensitivity, sensitivity of the economic value and losses.

FINANCIAL INFORMATION

The Bank’s exposure to interest rate risk remained within the adopted limits as at 31 December 2020 and 31 December 2019. The Bank was mainly exposed to PLN interest rate risk.

The Bank categorizes its portfolios from the perspective of interest rate risk management:

• the banking book – comprises balance sheet and off-balance sheet items not included in the trading book, in particular items resulting from the Bank’s core activities, transactions concluded for investment and liquidity purposes and their hedging transactions;

• the trading book – comprises transactions concluded on financial instruments as part of activities conducted on own account and on behalf of the customers.

Banking book

In order to monitor interest rate risk, the Bank applies interest rate risk measures that reflect the identified four main types of interest rate risk:

• the risk of revaluation date mismatch;

• the yield curve risk;

• the basis risk; and

• the customer option risk.

• Sensitivity of interest income

The sensitivity of interest income to sudden shifts in the yield curve is determined by the potential financial effect of such a shift reflected in a changed amount of interest income in a given time horizon. The change results from the mismatch between the revaluation dates of assets, liabilities and off-balance sheet liabilities granted and received (in particular derivative instruments) sensitive to interest rate fluctuations.

The sensitivity of interest income in the banking book of the Bank to the abrupt shift in the yield curve of 100 bp down in a one-year horizon in all currencies is shown in the table below:

NAME OF THE MEASURE	31.12.2020	31.12.2019
Sensitivity of interest income (PLN million)	(510)	(901)

• Sensitivity of economic value

Sensitivity of economic value reflects the fair value changes of items in the portfolio arising from the parallel shift of the yield curves by 100 bp up or down (the most unfavourable of the scenarios mentioned).

The table below presents the economic value sensitivity measure (BPV) of the banking book of the Bank in all currencies as at 31 December 2020 and 31 December 2019:

NAME OF THE MEASURE	31.12.2020	31.12.2019
Sensitivity of economic value (PLN million)	(454)	(273)

Trading book

In order to monitor the interest rate risk in the trading book, the Bank applies the value-at-risk (VaR) measure.

• Value at risk

The IR VaR measure is a potential amount of loss that may be incurred in normal market conditions in a specific time (i.e. horizon) and with an assumed level of probability related to changes in the interest rate curves.

The IR VaR in the Bank’s trading book is shown in the table below:

NAME OF THE MEASURE	31.12.2020	31.12.2019
IR VaR for a 10-day time horizon at the confidence level of 99% (PLN million):
Average value	11	5
Maximum value	20	10
Value at the end of the period	13	6

67. Currency risk management

Currency risk management

• Definition

Currency risk is the risk of incurring losses due to unfavourable exchange rate fluctuations. The risk is generated by maintaining open currency positions in various foreign currencies.

• Risk management objective

To reduce the potential losses resulting from exchange rate fluctuations to an acceptable level by properly shaping the currency structure of balance sheet and off-balance sheet items.

• Risk identification and measurement

The Bank uses the following measures of the currency risk: value-at-risk (VaR) and stress tests.

• Control

Control over currency risk consists of determining currency risk limits and thresholds tailored to the scale and complexity of the Bank’s operations, in particular the strategic limit of tolerance to currency risk.

• Risk forecasting and monitoring

The Bank regularly monitors:

• the level of currency risk measures;

• utilization of the strategic limit of tolerance to currency risk;

• utilization of internal limits and thresholds of currency risk.

• Reporting

Reports on currency risk are prepared on a daily, weekly, monthly and quarterly basis.

• Management actions

The main tools for currency risk management used by the Bank are:

• currency risk management procedures;

• currency risk limits and thresholds;

• defining allowable types of foreign currency transactions and the exchange rates used in such transactions.

The Bank has set limits and thresholds for currency risk for, among other things: currency positions, Value at Risk calculated for a 10-day time horizon and loss on the currency market.

FINANCIAL INFORMATION

• Sensitivity measures

The FX VaR measure is a potential value of loss that may occur in normal market conditions at a specific time (i.e. horizon) and with an assumed level of probability related to changes in foreign exchange rates.

Stress tests are used to estimate loss in an event of abrupt changes on the currency market which are not described using statistical measures by default.

The Bank’s FX VaR, in aggregate for all currencies, is presented in the table below:

NAME OF THE SENSITIVITY MEASURE	31.12.2020	31.12.2019
VaR for a 10-day time horizon at a confidence level of 99% (in PLN million)	615	9

• Foreign currency position

The Bank’s foreign currency positions are presented in the table below:

FOREIGN CURRENCY POSITION	31.12.2020	31.12.2019
EUR	171	(8)
CHF	(14 361)	(238)
Other (Global, Net)	(53)	(28)

Currency positions (in addition to the volatility of foreign exchange rates) are key factor determining the level of currency risk to which the Bank is exposed. The foreign currency positions are determined by all foreign currency transactions concluded, both in the statement of financial position and off-balance sheet transactions.

The significant currency position in CHF results from the recognition of the impact of legal risk related to the portfolio of mortgage loans in convertible currencies (see the note "Legal risk cost of mortgage loans in convertible currencies" and the note "Legal claims"). The currency position was limited in the first half of 2021.

68. Liquidity risk management

• Definition

Liquidity risk is the risk of inability to settle liabilities as they become due because of the absence of liquid assets. The lack of liquidity may be due to the inappropriate structure of assets and liabilities, including off-balance sheet, a mismatch of cash flows, customers failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market events.

The Bank also manages financing risk which takes into account the risk of losing the existing sources of financing and inability to renew the required means of financing or the loss of access to new sources of financing.

• Risk management objective

To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately establishing the structure of balance sheet and off-balance sheet assets and liabilities.

• Risk identification and measurement

The Bank uses the following measures of the liquidity risk:

• contractual and adjusted liquidity gap;

• liquidity surplus;

• liquidity reserve;

• the ratio of stable funds to illiquid assets;

• liquidity coverage ratio (LCR);

• domestic supervisory liquidity measures (M3-M4);

• measures of stability of the deposit and loan portfolios;

• liquidity stress tests.

• Control

Control over the liquidity risk consists in determining liquidity risk limits and thresholds tailored to the scale and complexity of the Bank’s operations, in particular the strategic limit of tolerance to liquidity risk.

• Risk forecasting and monitoring

The Bank regularly monitors:

• utilization of the strategic limit of tolerance to liquidity risk;

• utilization of regulatory liquidity standards;

• utilization of internal limits and thresholds of liquidity risk;

• concentration of the sources of financing;

• early warning indicators – monitored for the early detection of unfavourable occurrences which may have a negative impact on the Bank’s or the financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).

The Bank also makes regular liquidity risk forecasts which take into account the current developments in the Bank’s operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the forecasts of the Bank’s assets and liabilities and in selected stress test scenarios.

• Reporting

Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth long-term liquidity analysis is performed. The reports contain information on liquidity risk exposure and on the risk limits utilization. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.

• Management actions / Risk management tools

The main tools for liquidity risk management used by the Bank are:

• procedures for liquidity risk management, in particular contingency plans;

• limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;

• national and European supervisory liquidity standards;

• deposit, investment and securities transactions and well as derivatives, including structural currency transactions and transactions for the sale or purchase of securities;

• transactions ensuring long-term financing of the lending activities.

The Bank’s policy concerning liquidity is based on keeping an appropriate level of liquidity surplus and supervisory and internal measures of liquidity risk and financing through an increase in the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.

FINANCIAL INFORMATION

• Liquidity gap

The adjusted liquidity gap comprises a set of particular balance sheet and off-balance sheet categories in respect of their adjusted maturities

	on demand	0 - 1 month	1 - 3 months	3 - 6 months	6 - 12 months	12 - 24 months	24 - 60 months	over 60 months
31.12.2020
Adjusted periodic gap	6 558	68 407	(6 911)	(2 892)	(837)	11 124	30 948	(106 396)
Adjusted cumulative periodic gap	6 558	74 965	68 054	65 162	64 324	75 449	106 396	-
31.12.2019
Adjusted periodic gap	13 368	25 861	(9 437)	(5 561)	(928)	8 177	30 644	(62 124)
Adjusted cumulative periodic gap	13 368	39 229	29 792	24 231	23 303	31 480	62 124	-

1 brought to comparability with the data as at 31 December 2019.

In all time horizons, the adjusted cumulative liquidity gap was positive as at 31 December 2020 and also as at 31 December 2019. This means a surplus of the assets receivable over the liabilities payable.

• Supervisory liquidity measures

The following supervisory liquidity measures are regularly set and monitored at the Bank:

• Liquidity Coverage Ratio (LCR) - defining the relation of high-quality liquid assets to net outflows in the 30-day horizon in stress conditions (supervisory measure specified in the CRR Regulation);

• Net Stable Funding Ratio (NSFR) - a measure defining the relationship of items providing stable funding to items requiring stable funding;

• M3 – non-liquid assets to own funds (national supervisory ratio);

• M4 – non-liquid assets and assets with limited liquidity to own funds and stable external funds (national supervisory ratio).

SUPERVISORY LIQUIDITY MEASURES	31.12.2020	31.12.2019
M3 - coverage ratio of non-liquid assets to own funds	12,59	14,92
M4 - coverage ratio of non-liquid assets and liquidity-restricted assets with own funds and stable external funds	1,42	1,25
NSFR - net stable funding ratio	139,1%	124,9%
LCR - liquidity coverage ratio	204,7%	139,0%

In the period ended 31 December 2020 and 31 December 2019, liquidity measures remained above their respective supervisory limits.

• Core deposit base

As at 31 December 20120, the core deposit base constituted approx. 94,3% of all deposits placed with the Bank (excluding the interbank market), which represents a decrease of approx. 0,5 p.p. compared with the end of 2019.

• Structure of the sources of financing

STRUCTURE OF THE SOURCES OF FINANCING	31.12.2020	31.12.2019
Total deposits (excluding interbank market)	84,17%	83,64%
Interbank market deposits	0,72%	0,42%
Equity	11,63%	12,74%
Market financing	3,48%	3,21%

Total	100,00%	100,00%

69. Capital adequacy

• Capital adequacy

Capital adequacy is the state in which the level of risk incurred by the Bank in connection with its business development can be covered by its capital whose level and structure are adequate to the applicable supervisory requirements, specific risk tolerance level and adopted time horizon. The process of managing capital adequacy comprises, in particular, compliance with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level determined within the Bank and the capital planning process, including the policy concerning the sources of acquisition of capital.

The objective of capital adequacy management is to maintain own funds at a level which is adequate to the scale and profile of the risk relating to the Bank’s activities at all times.

The process of managing the Bank’s capital adequacy comprises:

• specifying and pursuing the Bank’s capital targets;

• identifying and monitoring significant types of risk;

• measuring or estimating internal capital to cover individual risk types and total internal capital;

• determining threshold values for capital adequacy measures,

• forecasting, monitoring and reporting the level and structure of own funds;

• managing the structure of the balance sheet to optimize the quality of the Bank’s own funds;

• emergency measures with regard to capital;

• stress-tests;

• forecasting requirements for own funds;

• assessing the profitability of individual business areas and customer segments.

Capital adequacy measures include:

• total capital ratio (TCR);

• the ratio of own funds to internal capital;

• Tier 1 core capital ratio (CET1);

• Tier 1 capital ratio (T1);

• leverage ratio;

• MREL ratio in relation to total equity and liabilities.

The objective of monitoring the level of capital adequacy measures is to determine the degree of compliance with supervisory requirements and to identify cases which require emergency measures to be implemented or the preparation of a capital protection plan.

Major regulations applicable in the capital adequacy assessment process include:

• the Polish Banking Law;

• the CRR Regulation;

• the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (as amended), (the Act on macroprudential supervision);

• the Regulation of the Minister of Development and Finance of 6 March 2018 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating the internal capital in banks;

• the Act of 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution.

Minimum level of capital ratios maintained by the Bank in accordance with Art. 92 of the CRR Regulation
• total capital ratio (TCR)	8,0%
• Tier 1 capital ratio (T1)	6,0%
• Tier 1 core capital ratio (CET1)	4,5%

Obligation to maintain a combined buffer above the minimum amounts specified in Article 92 of the CRR, representing the sum of the applicable buffers	31.12.2020	31.12.2019
Total:	3,51%	6,51%
• conservation buffer	2,5%	2,5%
• countercyclical buffer	0,01%	0,01%
• systemic risk buffer	0%1	3%2
• due to identifying the Bank as another systemically important institution (“O-SII”)	1%3	1%3

1 On 19 March 2020, in connection with the COVID-19, the Regulation of the Minister of Finance cancelling the systemic risk buffer came into effect.

2 The buffer is calculated for the exposure within the territory of the Republic of Poland. Due to the fact that the Bank also conducts foreign activities, the systemic risk buffer specific to the Bank was 2.91% as at the end of December 2019.

3 of total exposure to the risks calculated in accordance with the CRR.

Discretionary capital requirement (“domiar kapitałowy”) (an additional capital requirement in order to hedge the risk resulting from mortgage-secured loans and advances to households)	31.12.2020	31.12.2019
• for the total capital ratio:	0,27%	0,40%
• for the Tier 1 capital ratio:	0,20%	0,30%
• for the Tier 1 core capital ratio	0,15%	0,23%

Irrespective of the above buffers, to meet the requirements for distributing 100% of the profit, the Polish Financial Supervision Authority determined an add-on in respect of the Bank’s sensitivity to an adverse macroeconomic scenario, of 0.10 p.p.

On 26 October 2020, the Bank received a letter from the Bank Guarantee Fund (“the Fund”) on the results of the update and feasibility assessment of the mandatory restructuring plans, which presented the target requirement, developed based on the current methodology, for the minimum level of own funds and eligible liabilities (MREL) and interim goals (the so-called destination path) on a consolidated and stand-alone basis. The destination path developed by the Fund to reach the required MREL level is based on data as at 31 December 2019, and assumes a straight-line increase in the requirement over the projection period. On the consolidated basis, the MREL goals are as follows:

w %	31.12.2021	31.12.2022	31.12.2023
MREL (TLOF)	10,06	11,35	12,65
MREL (TRE)	15,99	18,06	20,12

According to the Fund’s text of communication, the Bank is obliged to meet the MREL requirement from 1 January 2024.

The impact of IFRS 9 on own funds and capital adequacy measures is governed by Regulation 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State. According to this regulation, banks are allowed to apply transitional provisions in respect of own funds and increase the common equity capital Tier 1 connected with the implementation of a new impairment model over the subsequent 5 years from 1 January 2018, whereas the adjustment ratio decreases gradually.

Moreover, on 27 June 2020, Regulation 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulation (UE) No. 575/2013 and (UE) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic came into effect. This provision allows to mitigate the impact on the write-offs recorded as of 1 January 2020 on Tier 1 capital.

Such a solution can be applied up to 2024, inclusive, whereas the adjustment ratio allocated to this value decreases gradually. The Bank decided that in the light of Art. 473a (7a) of the CRR implemented by the aforesaid Regulation, it would apply an option according to which the adjustment mitigating the impact of the introduction of IFRS 9 on own funds would receive a risk weight equal to 100 % and the resulting value would be added to the total exposure. In respect of the data for December 2019, an adjusting coefficient was used to adjust the specific risk which reduces the exposure value calculated in accordance with Art. 473a (7b) of the CRR.

The impact of implementing the new definition of default would result in a reduction in capital ratios of no more than 10 bps.

• Own funds for capital adequacy purposes

In 2020 and 2019, the Group’s capital adequacy level remained at a safe level, well above the supervisory limits. The minimum capital requirements were complied with throughout the period.

• Requirements relating to own funds (Pillar I)

The Group calculates own funds requirements for the following types of risk:

credit risk	under the standard approach, using the following formulas with regard to: balance sheet exposures – the product of a carrying amount (accounting for adjustments for specific credit risk), the risk weight of the exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral), off-balance sheet liabilities granted – the product of the amount of a liability (accounting for adjustments for specific credit risk), the risk weight of the product, the risk weight of off-balance sheet exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral); off-balance sheet transactions (derivative instruments) – the product of the risk weight of an off-balance sheet transaction calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (the value of the equivalent in the statement of financial position is calculated in accordance with the mark-to-market method).
operational risk	• in accordance with the AMA approach – with respect to the Bank’s activities, taking into account the branch in Germany and excluding the branch in the Czech Republic; • in accordance with the BIA approach – with respect to the activities of the branch in the Czech Republic and entities of the Group subject to the prudential consolidation.
market risk	• currency risk – calculated under the core approach; • commodity risk – calculated under the simplified approach; • equity instruments risk – calculated under the simplified approach; • specific risk of debt instruments – calculated under the core approach; • general risk of debt instruments – calculated under the duration-based approach; • other types of risk, other than delta risk (non-delta risk) calculated under the scenario approach in the case of options for which the Bank uses its own valuation models and under the delta plus approach for other options.
Other risks	• settlement risk and delivery risk – calculated under the approach specified in Title V, “Own funds requirements for settlement risk” of the CRR Regulation; • counterparty credit risk – calculated under the approach set out in Chapter 6, “Counterparty credit risk” of Title II, “Capital requirements for credit risk” of the CRR Regulation; • credit valuation adjustment risk – calculated under the approach specified in Title VI, “Own funds requirements for credit valuation adjustment risk” of the CRR Regulation; • exceeding the large exposures limit – calculated under the approach set out in paragraphs 395-401 of the CRR Regulation; • for exposures to a central counterparty, a requirement for transactions and contributions made to the default fund of a qualifying central counterparty is calculated.

Adequacy – a note to the financial statements	31.12.2020	31.12.2019 restated	31.12.2019 published
Equity	38 577	40 412	40 412
capital: share capital, supplementary capital, other reserves, and general risk reserve	34 478	34 587	34 587
retained earnings	5 500	1 556	1 556
net profit or loss for the year	(2 944)	3 835	3 835
other comprehensive	1 543	434	434

Exclusions from equity:	319	3 930	3 930
prudential consolidation net profit or loss of the year	-	3 835	3 835
unappropriated profit for the prior year	-		-
cash flow hedges	319	95	95

Other fund reductions:	2 254	2 509	2 518
goodwill	755	871	871
other intangible assets	1 138	1 540	1 540
securitization items	-		-
additional asset adjustments (AVA, DVA)	361	98	107

Temporary reversal of IFRS 9 impact	1 560	798	884
Current period profit/loss, included by permission from the PFSA	-	3 835	1 042

Tier 1 capital	37 564	38 606	35 890
Tier 2 capital (subordinated debt)	2 700	2 700	2 700

Equity	40 264	41 306	38 590

Requirements for own funds	16 287	14 875	14 946
Credit risk	13 268	13 829	13 900
Operational risk 1	1 339	582	582
Market risk2	1 652	441	441
Credit valuation adjustment risk	28	23	23
Settlement / delivery risk	-		-

Total capital ratio	19,78	22,21%	20,66
Tier 1 capital ratio	18,45	20,76%	19,21

1 In 2020, there was an increase in the own funds requirement for operational risk by PLN 757, mainly due to the growing costs of legal risk related to the portfolio of mortgage loans in convertible currencies. Due to the quarterly shift of data included in the AMA method, the cost level from 3Q2020 is included in the requirement at the end of 2020. Starting from 2021, provisions reducing the gross carrying amount of loans (i.e. credit risk related losses) will be included in the AMA method by the Bank at a constant value from 3Q2020.

2 The increase in the requirement for market risk is mainly due to the requirement for currency risk in the amount of PLN 1,167 million, resulting from the increased write-offs for legal risk related to foreign currency loans. The currency position was limited in the first half of 2021.

Pursuant to Art. 26 (2) of CRR, an institution may include interim or year-end profits in CET1 after the Bank has taken a formal decision confirming the final profit or loss of the institution for the year, or before it has taken the formal decision, only with the competent authority’s prior permission. In May 2020, the European Banking Authority (EBA) published, in a single rulebook Q&A, its position regarding the inclusion of annual and interim profits in the capital adequacy data (Q&A 2018_3822 and Q&A 2018_4085). According to this position, once the Bank has formally met the criteria for including its profit for a given period in the Tier 1 capital, this profit should be included retrospectively (as at the date of the profit, and not the date of meeting the criteria), and own funds should be adjusted accordingly as at the date related to the profit. Therefore, the column for the “restated” data presents own funds, capital adequacy requirements and capital ratios taking into account the distribution of profit for 2019 performed by the General Shareholders Meeting of the Bank.

The impact of IFRS 9 on own funds and capital adequacy measures is regulated by Regulation 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 with regard to transitional arrangements to mitigate the impact of introducing IFRS 9 on own funds and on treatment as large exposures of some exposures to public sector entities denominated in the domestic currency of any Member State. Pursuant to this regulation, banks may apply transitional provisions regarding own funds and increase Common Equity Tier 1 capital related to the implementation of the new impairment model in the next 5 years from 1 January 2018, with the correction factor decreasing from period to period. On 27 June 2020, Regulation of the European Parliament and of the Council 2020/873 of 24 June 2020, amending Regulations (EU) No 575/2013 and (EU) 2019/876, with regard to certain adjustments in response to the COVID-19 pandemic, entered into force. This provision allows for the mitigation of the impact on Tier 1 capital of the amount of write-offs created from 1 January 2020.

This solution may be applied until 2024 inclusive, with the correction factor assigned to this value decreasing from period to period. The bank made a decision, in the light of Art. 473a paragraph. 7a of CRR introduced by the above Regulation on the exercise of the option whereby a risk weight equal to 100% is assigned to the adjustment to mitigate the impact of introducing IFRS 9 on own funds and the resulting value is added to the total exposure measure. For the data for December 2019, a correction factor was used for specific risk adjustments, by which the exposure value is reduced, calculated in accordance with the provisions of Art. 473a paragraph. 7b of CRR.

• INTERNAL CAPITAL (PILLAR II)

In 2020, PKO Bank Polski S.A. calculated internal capital in accordance with the commonly binding legal regulations:

• the CRR Regulation;

• the Polish Banking Law;

• the Regulation of the Minister of Development and Finance of 6 March 2017 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating the internal capital in banks;

• The Act on macro-prudential supervision;

and the Bank’s internal regulations.

Internal capital constitutes an estimated amount of capital necessary to cover all material types of risk arising from the Bank’s operations. The purpose of estimating the internal capital is to determine own funds at a level ensuring operational safety, taking into account changes in the profile and scale of the activities conducted and adverse stress conditions, and enabling more effective management of the Bank aimed at improving the profitability of operations and profitability of the capital invested.

The internal capital for covering significant risk types is determined using the methods specified in the internal regulations.

The ratio of own funds to internal capital remained at a level exceeding both the statutory limit and the Bank’s internal limit.

• DISCLOSURES (PILLAR III)

The Bank publishes annual information in particular concerning risk management and capital adequacy in accordance with: the CRR Regulation and the executive acts to the CRR, guidelines of the European Banking Authority, including guidelines concerning disclosure requirements pursuant to section eight of the CRR Regulation (“EBA guidelines”), the Act on macro-prudential supervision, the Polish Banking Law Act, the Recommendation H, M and P issued by the Polish Financial Supervision Authority as part of the Report, “Capital adequacy and other information to be published by the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Group”.

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

70. Leverage ratio

The Bank calculates the leverage ratio as one of its capital adequacy measures.

The objective of excessive leverage risk management is to ensure an appropriate relationship between the amount of the Tier 1 capital and the total of balance sheet assets and off-balance sheet liabilities granted by the Bank.

For the purpose of measuring the risk of excessive financial leverage, a leverage ratio is calculated by the Bank as a measure of Tier 1 capital divided by the measure of total exposure and is expressed as a percentage rate. The leverage ratio as at 31 December 2020 and 31 December 2019 was above internal and external limits, as well as above the minimum levels as recommended by the PFSA.

To maintain the leverage ratio at an acceptable level, the Bank set up a strategic tolerance limit and a threshold for the ratio and they are regularly monitored and verified periodically.

	Leverage ratio exposures specified in CRR related to capital requirements
	31.12.2020	restated	published
Total capital and exposure measure
Tier 1 capital	37 564	38 606	35 890
Total exposure measure for leverage ratio calculation	352 760	319 537	320 265
Leverage ratio
Leverage ratio (in %)	10,65	12,08	11,21

71. Information on package sale of receivables

W In 2020, the Bank effected package sales (balance sheet and off-balance sheet receivables) of more than 26,8 thousand individual receivables from retail and business customers amounting to more than PLN 716 million (PLN 1 790 million in 2019). The total carrying amount of the provisions for potential claims on the sale of receivables as at 31 December 2020 amounted to PLN 1.9 million (as at 31 December 2019 it was PLN 2 million). As a result of the sale, all risks and rewards were transferred, hence the Bank derecognized these assets.

The Bank did not receive any securities on account of the aforementioned transactions.

OTHER NOTES

72. Fiduciary activities

The parent is a direct participant in the Central Securities Depository of Poland (Krajowy Depozyt Papierow Wartosciowych) and the Securities Register (at the National Bank of Poland). The parent maintains securities accounts and handles transactions on the domestic and foreign markets, provides fiduciary services and performs depository role for pension and investment funds. Assets held by the parent as part of providing fiduciary services have not been disclosed in these financial statements since they do not meet the definition of the parent’s assets.

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

On 13 December 2018, pursuant to § 15 clause 1 point 2 of the Bank’s Articles of Association, the Bank’s Supervisory Board selected PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. (hereinafter PWC) as the audit firm to audit and review the financial statements of the Bank and of the Group for the years 2020-2021. PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnoscią Audyt sp. k. with its registered office in Warsaw, ul. Polna 11 is entered in the list of audit companies maintained by the National Board of Registered Auditors with the number 144. On 24 January 2019, the Bank concluded an agreement with PWC for the audit and review of the financial statements of the Bank and of the Bank’ Group for the years 2020-2021.

Based on the Supervisory Board’s declaration, the Management Board states that the appointment of the PWC audit firm to audit the Group’s consolidated financial statements for the year ended 31 December 2020 and the Bank’s financial statements for the year ended 31 December 2020 (Audit) was made in accordance with the provisions of the law and the internal rules of the Bank accepted by the Supervisory Board on the appointment of the audit firm, which were in force as at the date on which the choice was made. Simultaneously, based on the Supervisory Board’s declaration, the Management Board states that:

• the audit firm, PWC, and the members of the team conducting the Audit satisfied the conditions for preparing an impartial and independent Audit report, in accordance with the generally applicable provisions of the law, standards of practising the profession and principles of professional ethics;

• the generally binding provisions of the law related to the rotation of audit firms and the key registered auditor auditing the Group’s consolidated financial statements and the Bank’s financial statements and the related mandatory waiting periods are observed at the Bank;

• the Bank has a policy on and a procedure for the selection of audit firms for auditing the Bank’s and the Group’s financial statements, as well as a policy on the provision of admissible non-audit services to the Bank and companies from the Bank’s Group by the audit firm conducting the audit, affiliates of that audit firm and members of the network of audit firms

The audit and review of the Bank’s and Group’s financial statements for 2019 were carried out by KPMG Audyt Spółka z ograniczoną odpowiedzialnością spółka komandytowa.

TOTAL AMOUNT OF NET REMUNERATION DUE TO THE AUDIT FIRM AUDITING THE FINANCIAL STATEMENTS IN RESPECT OF: (in PLN thousand)	2020	2019
audit of financial statements of the Bank and consolidated financial statements of the Group	1 804	1 537
assurance services, including reviews of the financial statements	530	961
Total	2 334	2 498

74. Subsequent events

On 23 April 2021, the Extraordinary General Meeting of PKO Bank Polski S.A. decided to enter into settlement agreements with consumers who have entered into mortgage loan agreements with the Bank indexed to foreign currencies or denominated in foreign currencies (hereinafter: settlement agreements with consumers).

According to the adopted resolution:

• PKO Bank Polski S.A. creates a special fund in the amount of PLN 6.7 billion for the purpose of covering specific balance sheet losses that will arise as a result of recognizing the financial effects of the settlement agreements with consumers;

• the amount of PLN 6.7 billion shall be allocated from the Bank’s supplementary capital, in the part created from retained earnings available for distribution and transferred to the aforementioned special fund;

• the General Meeting shall oblige the Bank’s Management Board to present for approval to the Bank’s Supervisory Board the terms and conditions on which the settlement agreements shall be concluded, including the terms and conditions of releasing from debt;

• The Bank’s Management Board may enter into settlement agreements with consumers (including the terms and conditions of releasing from debt) after the Bank’s Supervisory Board has issued a positive opinion on the terms and conditions under which the agreements will be concluded, including in respect of releasing from debt. The content of individual settlement agreements should be within the terms and conditions approved by the Bank’s Supervisory Board.

Signatures of all Members of the Bank’s Management Board

28.04.2021	Zbigniew Jagiełło	President of the Management Board
28.04.2021	Rafał Antczak	Vice-President of the Management Board
28.04.2021	Rafał Kozłowski	Vice-President of the Management Board
28.04.2021	Maks Kraczkowski	Vice-President of the Management Board
28.04.2021	Mieczysław Król	Vice-President of the Management Board
28.04.2021	Adam Marciniak	Vice-President of the Management Board
28.04.2021	Piotr Mazur	Vice-President of the Management Board
28.04.2021	Jakub Papierski	Vice-President of the Management Board
28.04.2021	Jan Emeryk Rościszewski	Vice-President of the Management Board

Signature of the person responsible

for maintaining the books of account

Danuta Szymańska

Director of the Accounting Division

Biblioteka czcionek:

aąbcćdeęfghijklłmnńoópqrsśtuvwxyzżźAĄBCĆDEĘFGHIJKLŁMNŃOÓPQRSŚTUVWXYZŻŹ