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

The only binding version is the original Polish version.

SELECTED FINANCIAL DATA RELATING TO THE FINANCIAL STATEMENTS

	in PLN ‘000		in EUR ‘000
SELECTED FINANCIAL DATA	period from 01.01.2021 to 31.12.2021	period from 01.01.2020 to 31.12.2020	period from 01.01.2021 to 31.12.2021	period from 01.01.2020 to 31.12.2020

Net interest income	304,092	330,390	66,432	73,843
Net fee and commission income	(5,697)	(5,264)	(1,245)	(1,177)
Operating profit	141,727	126,846	30,962	28,351
Profit before tax	141,727	126,846	30,962	28,351
Net profit	94,867	81,530	20,725	18,222
Net comprehensive income	20,515	93,182	4,482	20,827
Net cash from/used in operating activities	2,395,242	(821,731)	523,264	(183,660)
Net cash from/used in investing activities	(633,586)	20,447	(138,413)	4,570
Net cash from/used in financing activities	(1,710,806)	801,277	(373,742)	179,088
Total net cash flows	50,850	(7)	11,109	(2)

	in PLN ‘000		in EUR ‘000
SELECTED FINANCIAL DATA	as at 31.12.2021	as at 31.12.2020	as at 31.12.2021	as at 31.12.2020

Total assets	25,620,445	27,310,492	5,570,389	5,918,023
Total equity	2,113,720	2,093,205	459,564	453,585
Share capital	1,611,300	1,611,300	350,328	349,159
Number of shares (in thousands)	1,611,300	1,611,300	1,611,300	1,611,300
Book value per share (in PLN/EUR)	1.31	1.30	0.29	0.28
Diluted number of shares (in thousands)	1,611,300	1,611,300	1,611,300	1,611,300
Diluted book value per share (in PLN/EUR)	1.31	1.30	0.29	0.28
Total capital ratio (TCR)	20.9%	18.7%	20.9%	18.7%
Common equity Tier 1 (CET1)	1,978,394	1,933,805	430,142	419,044
Own funds	1,978,394	1,933,805	430,142	419,044

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

items of the income statement, statement of comprehensive income and statement of cash flows items – the average of the NBP exchange rates prevailing as at the last day of each month of the period	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020
	4.5775	4.4742
items of the statement of financial position – the average NBP exchange rate as at the last day of the period	31.12.2021	31.12.2020
	4.5994	4.6148

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

The only binding version is the original Polish version.

Financial statements

of PKO Bank Hipoteczny SA

for the year ended

31 December 2021

INCOME STATEMENT

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

INCOME STATEMENT

INCOME STATEMENT	Note	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Interest income and income similar to interest income, including:	5	517,473	705,570
Interest income recognized under the effective interest rate method		512,592	701,336
Income similar to interest income on instruments measured at fair value through profit or loss		4,881	4,234
Interest expenses and expenses similar to interest expenses	5	(213,381)	(375,180)
Net interest income		304,092	330,390
Fee and commission income	6	7,671	8,699
Fee and commission expense	6	(13,368)	(13,963)
Net fee and commission income		(5,697)	(5,264)
Net gain/(loss) on financial instruments measured at fair value through profit or loss	7	35	86
Net foreign exchange gains / (losses)	8	563	5,893
Net income / (expense) on modification	9	1,520	(2,581)
Net allowances for expected credit losses	10	(3,249)	(35,665)
Other operating income	11	449	602
Other operating expenses	11	(250)	(650)
Net other operating income and expenses		199	(48)
Administrative expenses	12	(47,064)	(50,957)
Regulatory charges	13	(24,833)	(25,551)
Tax on certain financial institutions	14	(83,839)	(89,457)
Operating profit		141,727	126,846
Profit before tax		141,727	126,846
Corporate income tax	15	(46,860)	(45,316)

Net profit		94,867	81,530

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME	Note	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Net profit		94,867	81,530
Other comprehensive income		(74,352)	11,652
Items which may be reclassified to profit or loss		(74,352)	11,652
Cash flow hedges (gross)		(81,737)	8,351
Deferred tax		15,530	(1,586)
Cash flow hedges (net)	18	(66,207)	6,765
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		(10,056)	6,035
Deferred tax		1,911	(1,148)
Remeasurement of financial assets measured at fair value through other comprehensive income (net)		(8,145)	4,887

Total net comprehensive income		20,515	93,182

STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION	Note	31.12.2021	31.12.2020
ASSETS
Cash and balances with the Central Bank	16	50,362	21
Amounts due from banks	17	532	23
measured at amortized cost		532	23
Derivative hedging instruments	18	841,541	1,154,692
Securities	19	1,870,697	1,241,821
measured at fair value through other comprehensive income		1,870,697	1,241,821
Loans and advances to customers	20, 21	22,848,599	24,902,659
measured at amortized cost		22,848,599	24,902,659
Intangible assets	22	166	1,050
Property, plant and equipment	22	3,772	3,747
Other assets	23	4,776	6,479
TOTAL ASSETS		25,620,445	27,310,492

LIABILITIES AND EQUITY
Liabilities
Amounts due to banks	24	6,544,511	3,575,133
measured at amortized cost		6,544,511	3,575,133
Derivative hedging instruments	18	1,983	541
Amounts due to customers	25	6,617	6,641
measured at amortized cost		6,617	6,641
Liabilities in respect of mortgage covered bonds issued	26	13,146,377	17,205,554
measured at amortized cost		13,146,377	17,205,554
Liabilities in respect of bonds issued	27	3,728,162	4,337,081
measured at amortized cost		3,728,162	4,337,081
Other liabilities	28	45,225	38,428
Current income tax liabilities	15	4,839	4,055
Deferred income tax provision		28,813	49,634
Provisions	29	198	220
TOTAL LIABILITIES		23,506,725	25,217,287

Equity
Share capital	30	1,611,300	1,611,300
Supplementary capital		332,263	250,733
Accumulated other comprehensive income		75,290	149,642
Net profit for the period		94,867	81,530
TOTAL EQUITY		2,113,720	2,093,205

TOTAL LIABILITIES AND EQUITY		25,620,445	27,310,492

Total capital ratio (TCR)	51	20.9%	18.7%
Book value (in PLN ‘000)		2,113,720	2,093,205
Number of shares (in thousands)	30	1,611,300	1,611,300
Book value per share (in PLN)		1.31	1.30
Diluted number of shares (in thousands)		1,611,300	1,611,300
Diluted book value per share (in PLN)		1.31	1.30

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2021	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	including:		Retained earnings	Net profit for the period	Total equity
FOR THE YEAR ENDED 31 DECEMBER 2021	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Cash flow hedges	Financial assets measured at fair value through other comprehensive income	Retained earnings	Net profit for the period	Total equity

1 January 2021		1,611,300	250,733	149,642	141,186	8,456	-	81,530	2,093,205
Transfer from retained earnings		-	-	-	-	-	81,530	(81,530)	-
Transfer from profit to equity		-	81,530	-	-	-	(81,530)	-	-
Total comprehensive income, including:		-	-	(74,352)	(66,207)	(8,145)	-	94,867	20,515
Net profit		-	-	-	-	-	-	94,867	94,867
Other comprehensive income		-	-	(74,352)	(66,207)	(8,145)	-	-	(74,352)

31 December 2021	30	1,611,300	332,263	75,290	74,979	311	-	94,867	2,113,720

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

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

STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS	Note	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Cash flows from operating activities
Profit before tax		141,727	126,846
Income tax paid		(49,457)	(49,155)
Total adjustments:		2,302,972	(899,422)
Amortization and depreciation		2,235	2,730
Interest recognized in cash flows from investing activities and cash flows from financing activities		154,361	239,286
Change in the balance of:
derivative financial instruments (asset)		313,151	(981,417)
gross loans and advances to customers		2,050,850	883,102
securities measured at fair value through other comprehensive income		(842)	5,345
other assets and right-of-use assets		381	4,816
amounts due to banks		(202,903)	(2,088,936)
derivative financial instruments (liability)		1,442	(45,543)
amounts due to customers		(24)	1,756
liabilities in respect of mortgage covered bonds issued		38,423	995,579
liabilities in respect of bonds issued		16,367	36,466
allowances for expected credit losses and provisions		3,188	35,235
other liabilities, excluding liabilities in respect of unregistered issues of own shares		8,079	3,805
Other adjustments (including changes in the measurement of derivative instruments recognized in other comprehensive income)		(81,736)	8,354
Net cash from/used in operating activities		2,395,242	(821,731)

Cash flows from investing activities
Inflows from investing activities		4,166,019	370,392
Redemption securities measured at fair value through other comprehensive income		4,166,019	370,392
Outflows on investing activities		(4,799,605)	(349,945)
Acquisition of securities measured at fair value through other comprehensive income		(4,799,551)	(349,865)
Acquisition of intangible assets and property, plant and equipment		(54)	(80)
Net cash from/used in investing activities		(633,586)	20,447

Cash flows from financing activities
Redemption of mortgage covered bonds issued		(4,097,600)	(30,000)
Proceeds from issue of bonds		6,052,214	6,198,089
Redemption of bonds issued		(6,677,500)	(5,957,500)
Inflows related to overdraft facilities		14,051,970	14,983,256
Outflows related to overdraft facilities		(10,939,689)	(14,180,447)
Inflows related to term loans		60,000	150,000
Outflows related to term loans		-	(100,000)
Repayment of interest on mortgage covered bonds issued, bonds and loans obtained		(158,919)	(260,784)
Payments of lease liabilities (IFRS 16)		(1,282)	(1,337)
Net cash from/used in financing activities		(1,710,806)	801,277

Total net cash flows		50,850	(7)
Cash and cash equivalents at the beginning of the period		44	51
Cash and cash equivalents at the end of the period	34	50,894	44

NOTES TO THE FINANCIAL STATEMENTS – TABLE OF CONTENTS

1. General Information

2. Basis of presentation of the financial statements

3. Description of major accounting policies

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

NOTES TO THE INCOME STATEMENT

5. Interest income and expenses

6. Fee and commission income and expense

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

8. Net foreign exchange gains / (losses)

9. Net income / (expense) on modification

10. Net allowances for expected credit losses

11. Other operating income and expenses

12. Administrative expenses

13. Regulatory charges

14. Tax on certain financial institutions

15. Corporate income tax

NOTES TO THE STATEMENT OF FINANCIAL POSITION

16. Cash and balances with the Central Bank

17. Amounts due from banks

18. Derivative hedging instruments

19. Securities

20. Loans and advances to customers

21. Expected credit losses

22. Intangible assets and property, plant and equipment

23. Other assets

24. Amounts due to banks

25. Amounts due to customers

26. Liabilities in respect of mortgage covered bonds issued

27. Liabilities in respect of bonds issued

28. Other liabilities

29. Provisions

30. Equity and shareholding structure of the Bank

OTHER NOTES

31. Contingent liabilities granted and received

32. Legal claims

33. Information about leases

34. Notes to the statement of cash flows

35. Related party transactions

36. Fair value of financial assets and liabilities

37. Operating segments

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

38. Risk management at PKO Bank Hipoteczny SA

39. Credit risk management

40. Concentration risk management

41. Residual risk management

42. Liquidity risk management

43. Interest rate risk management

44. Derivative instruments risk management

45. Foreign exchangerisk management

46. Model risk management

47. Operational risk management

48. Business risk management

49. Compliance risk management

50. Reputation risk management

51. Capital adequacy and the management of capital risk

EVENTS AFTER THE END OF THE REPORTING PERIOD

52. Events after the end of the reporting period

NOTES TO THE FINANCIAL STATEMENTS

PKO Bank Hipoteczny Spółka Akcyjna (“PKO Bank Hipoteczny SA”, “Bank”) with its registered office in Warsaw ul. Puławska 15, 02-515 Warsaw is entered in the Register of Businesses of the National Court Register (KRS) maintained by the District Court in Warsaw, 13th Business Department of the National Court Register with the reference number KRS 0000528469. The Bank was entered in the Register of Businesses on 24 October 2014. The Bank was assigned the statistical number REGON 222181030. Its share capital as at 31 December 2021 was PLN 1,611,300,000 and it was fully paid up.

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

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

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

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

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

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

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

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

No.	Name and surname	Position	Date of appointment	Date of ceasing to perform the role
1	Mieczysław Król	Chairman of the Supervisory Board	13.08.2021	-
2	Jan Emeryk Rościszewski	Chairman of the Supervisory Board	13.04.2021	12.08.2021
3	Jakub Papierski	Chairman of the Supervisory Board	06.10.2014	13.04.2021
4	Paweł Metrycki	Member of the Supervisory Board (from 30.03.2019 to 07.10.2019) / Deputy Chairman of the Supervisory Board (from 07.10.2019)	30.03.2019	-
5	Justyna Borkiewicz	Member of the Supervisory Board	28.10.2016	07.07.2021
6	Lucyna Kopińska	Member of the Supervisory Board	01.09.2019	-
7	Piotr Kwiecień	Member of the Supervisory Board (independent)	18.10.2017	-
8	Jadwiga Lesisz	Member of the Supervisory Board (independent)	01.09.2019	-
9	Dariusz Odzioba	Member of the Supervisory Board	01.09.2019	30.08.2021
10	Ilona Wołyniec	Member of the Supervisory Board	30.03.2019	-

The following changes in the composition of the Supervisory Board took place in the period covered by the financial statements:

■ On 6 April 2021, Mr Jakub Papierski submitted his resignation as a member of the Bank’s Supervisory Board effective as of the date of the Ordinary General Shareholders’ Meeting approving the financial statements for the financial year ended 31 December 2020;

■ On 13 April 2021, the Ordinary Shareholders Meeting of the Bank appointed Mr Jan Emeryk Rościszewski to the Supervisory Board for a joint four-year term of office;

■ On 7 July 2021, Ms Justyna Borkiewicz submitted her resignation as a member of the Supervisory Board;

■ On 12 August 2021, Mr Jan Emeryk Rościszewski submitted his resignation as a member of the Supervisory Board;

■ On 13 August 2021, the Extraordinary Shareholders Meeting of the Bank appointed Mr Mieczysław Król to the Supervisory Board for a joint four-year term of office;

■ On 30 August 2021, Mr Dariusz Odzioba submitted his resignation as a member of the Supervisory Board.

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

No.	Name and surname	Position	Date of appointment	Date of ceasing to perform the role
1	Daniel Goska	Vice-President of the Management Board (from 01.10.2020 to 30.09.2021) / Vice-President of the Management Board directing the work of the Management Board (from 01.10.2021 to 25.01.2022) / President of the Management Board (from 26.01.2022)	01.10.2020	-
2	Paulina Strugała	President of the Management Board	16.04.2018	30.09.2021
3	Piotr Kochanek	Vice-President of the Management Board	01.01.2019	-
4	Katarzyna Surdy	Vice-President of the Management Board	01.10.2021	-

The following changes in the composition of the Management Board took place in the period covered by the financial statements:

■ On 20 August 2021, Ms Paulina Strugała submitted her resignation as a member of the Bank’s Management Board effective as of the end of 30 September 2021;

■ On 27 August 2021, the Bank’s Supervisory Board appointed Mr Daniel Goska, a Vice-President of the Bank’s Management Board until that date, the President of the Bank’s Management Board as part of the current joint four-year term of office of the Bank’s Management Board, subject to the consent of the Polish Financial Supervision Authority and as at the date of such consent, but not earlier than 1 October 2021. Should the Polish Financial Supervision Authority not issue the said consent by 1 October 2021, the Supervisory Board entrusted Mr Daniel Goska with the task of directing the work of the Management Board in the period from 1 October 2021 until the date of the Polish Financial Supervision Authority issuing the consent. On 26 January 2022, the Polish Financial Supervision Authority issued its consent to the appointment of Mr Daniel Goska as President of the Management Board of PKO Bank Hipoteczny SA;

■ On 27 August 2021, the Bank’s Supervisory Board appointed Ms Katarzyna Surdy a Vice-President of the Bank’s Management Board for the current joint four-year term of office of the Bank’s Management Board as of 1 October 2021.

2. Basis of presentation of the financial statements

The financial statements of PKO Bank Hipoteczny Spółka Akcyjna cover the year ended 31 December 2021 and include comparative data for the year ended 31 December 2020. The financial data is presented in thousands of Polish zlotys (PLN), rounded to a thousand, unless otherwise indicated.

2.1 Statement of compliance

These financial statements have been prepared in accordance with International Financial reporting Standards (IFRS) endorsed by the European Union as at 31 December 2021, and to the extent not governed by the said standards, in accordance with the requirements of the Accounting Act of 29 September 1994 and implementing regulations issued on the basis of the said Act, and the requirements applicable to issuers of securities admitted or seeking admission to trading on a market for official stock exchange listing.

2.2 Going concern

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

2.3 Basis of presentation of the financial statements

In the financial statements, the concept of fair value was applied to financial assets and financial liabilities measured at fair value through profit or loss or through other comprehensive income, including derivative instruments, and to securities measured at fair value through other comprehensive income. Other assets and liabilities are measured in accordance with the accounting policies described in these financial statements.

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

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

Assumptions regarding the future and the data available are used to assess the carrying amounts of assets and liabilities which cannot be unequivocally determined using other sources. In making estimates, the Bank takes into consideration the reasons and sources of the uncertainties that are anticipated at the end of the reporting period. Actual results may differ from the estimates.

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

2.4 Environmeltal issues

The Bank does not identify the material impact of environmental issues on the financial statements. Due to the nature of the economic activity, the Bank's direct impact on the natural environment is limited to the consumption of natural resources. The Bank implements its indirect impact on the environment by shaping its product offer so as to motivate clients to invest in energy-efficient real estate and by issuing green mortgage covered bonds. These issues are described in the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2021.

2.5 Representations of the Management Board

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

2.6 Approval of the financial statements

These financial statements, having been reviewed with an opinion issued by the Audit and Finance Committee of the Supervisory Board on 16 February 2022 and evaluated by the Supervisory Board on 17 February 2022, were approved by the Bank’s Management Board for publication on 17 February 2022.

3. Description of major accounting policies

The most important accounting policies, estimates and judgements applied when preparing these financial statements have been presented in the Notes to the financial statements. The accounting policies were applied consistently in all the reporting periods presented.

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

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

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

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

3.1 Foreign currencies

3.1.1. Functional currency and currency of presentation

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

3.1.2. Transactions and balances in foreign currencies

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

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

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

■ non- monetary items carried at fair value in foreign currencies – are translated using the exchange rates that existed when the fair values were determined.

Gains and losses resulting from the settlement of these transactions and the measurement of monetary assets and liabilities expressed in foreign currencies are recognized in the income statement.

3.2 Recognition of transactions in the books of account

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

3.3 Derecognition of financial instruments

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

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

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

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

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

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

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

The Bank derecognizes a financial liability (or a part thereof) if and when it is no longer binding, i.e. when a contractual liability has been settled, annulled, or has expired.

3.4 Classification and measurement of financial instruments

3.4.1. Financial instruments classification policies

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

■ measured at amortized cost;

■ measured at fair value through other comprehensive income;

■ measured at fair value through profit or loss.

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

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

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

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

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

Business model

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

■ manner of assessing and reporting financial asset portfolio results;

■ manner of managing those assets’ risk and policies for remunerating asset managers.

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

Assessment of the characteristics resulting from contractual cash flows

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

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

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

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

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

SPPI tests are conducted for each financial asset in the model “held to collect” or “held to collect and sell” as at the date of initial recognition (including for material modifications after re-recognizing the financial asset) and in the case of a change in contractual terms which has an impact on the change of the characteristics of contractual cash flows.

Category of measurement of financial assets at amortized cost

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

■ a financial asset is “held to collect”;

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

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

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

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

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

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

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

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

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

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

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

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

1) held for trading – financial assets which:

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

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

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

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

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

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

3.4.2. Change in the classification of financial assets

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

The following are not considered changes in the business model:

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

■ provisional disappearance of a specific financial assets market;

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

3.4.3. Change in estimated contractual cash flows – Modifications

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

If the contractual cash flows relating to a financial asset are subject to renegotiation or any other modification, and the renegotiation or modification does not lead to derecognition of the given financial asset (“Non-substantial Modification”) the gross carrying amount of the financial asset is recalculated and respective gains or losses on modification are recognized in the income statement. Adjustments to the carrying amounts of financial assets due to modifications are accounted for in net interest income/cost using the effective interest rate. The gross carrying amount of a financial asset is calculated as the present value of renegotiated or modified contractual cash flows discounted at the original effective interest rate of the financial asset (or effective interest rate adjusted for credit risk in the event of purchased or originated credit-impaired financial assets) or, where applicable as set out in IFRS 9, at the updated effective interest rate. All the costs and fees incurred adjust the carrying amount of the modified financial asset and are amortized over the period to maturity of the modified financial asset

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

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

The following Qualitative Criteria have been adopted:

■ change in debtor, with the exception of a change following from the debtor’s death;

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

■ currency conversion.

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

The adopted Quantitative Criteria are as follows:

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

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

If the quantitative criterion exceeds 10%, the modification is considered substantial, and if the quantitative criterion is equal to or lower than 10%, the modification is considered non-substantial.

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

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

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

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

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

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

■ measured at fair value through other comprehensive income;

■ measured at amortized cost.

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

4.1 New standards and amendments to the published standards and interpretations which became binding as of 1 January 2021

4.1.1. Amendments relating to the IBOR reform

At stage 1, amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments and IFRS 7 Financial Instruments: Disclosures published in 2019 have modified some detailed requirements concerning hedge accounting, mainly in such a way so as to prevent the expected interest rates reform (IBOR reform) from effectively ending hedge accounting. The key exemptions resulting from the amendment concern:

■ the “highly probable” requirement for cash flows;

■ the risk components;

■ prospective assessments;

■ retrospective effectiveness testing (for IAS 39);

■ reclassifications of the cash flow hedge reserve.

In 2020, the International Accounting Standards Board published stage II amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments relate to, among other things, the accounting treatment of cash flow changes, hedge accounting and disclosures associated with the IBOR reform.

Interbank offered interest rates (IBORs) such as WIBOR, EURIBOR and LIBOR are commonly applied as a reference rate to determine interest rates on a wide range of financial products and transactions.

Within the European Union, a new standard was determined for developing, disclosing and applying reference indices. The BMR Regulation, i.e. Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 constitutes the legal basis for the new standard. The BMR Regulation aims to structure the rules by which benchmarks are provided, to reduce the risk of benchmark manipulation and to eliminate potential conflicts of interest between financial market participants.

This is to be achieved by, among other things:

■ determining rules by which transparent, reliable and integral benchmarks should be provided and applied;

■ identifying extended controls over determining benchmarks;

■ determining benchmarks based, in principle, on actual transactions conducted on a given market.

Given the scope of its operations, the Bank is exposed to the risk associated with aligning the interest rate indices applied with the BMR Regulation, especially with regard to the WIBOR benchmark on which a large part of the Bank’s financial assets and financial liabilities is based.

The WIBOR reform was executed in 2020 and consisted in changing the benchmark’s calculation methodology. On 16 December 2020, the Polish Financial Supervision Authority (the PFSA) issued a decision granting GPW Benchmark S.A. permission to operate as the administrator of interest rate benchmarks, including WIBOR as a critical benchmark. The provision of WIBOR was aligned with the requirements of the BMR Regulation. In accordance with Article 20(2) of the BMR Regulation, the Bank developed the “Plan setting out the actions to be taken in the event that a benchmark materially changes or ceases to be provided” whose provisions have been reflected in template contracts used in relations with customers. Moreover, the Bank monitors the risk relating to contracts concluded before the BMR Regulation has entered into force.

The table below presents the Bank’s exposure to benchmarks as at 31 December 2021. Due to the fact the Bank is not exposed to benchmarks other than WIBOR, the Bank’s exposure to the IBOR reform risk is limited.

	Currency translated to PLN
31.12.2021	WIBOR PLN	Not based on a benchmark	Total
Financial assets
Cash and balances with the Central Bank	-	50,362	50,362
Amounts due from banks	-	532	532
Securities	1,060,935	809,762	1,870,697
Loans and advances to customers	22,574,022	274,577	22,848,599
Other financial assets	-	26	26
Total financial assets	23,634,957	1,135,259	24,770,216

Financial liabilities
Amounts due to banks	6,334,664	209,847	6,544,511
Amounts due to customers	-	6,617	6,617
Liabilities in respect of mortgage covered bonds issued	3,033,152	10,113,225	13,146,377
Liabilities in respect of bonds issued	1,105,499	2,622,663	3,728,162
Other financial liabilities	-	14,925	14,925
Total financial liabilities	10,473,315	12,967,277	23,440,592
Contingent liabilities granted (financing), net	54,697	2,273	56,970

NOMINAL AMOUNT of derivative instruments	Currency translated to PLN
31.12.2021	WIBOR PLN	Not based on a benchmark	Total
Derivative hedging instruments
- Purchase (floating leg buy)	-	10,080,833	10,080,833
- Sale (floating leg sell)	9,347,118	13,932	9,361,050

4.1.2. Other changes

Amendments to:

■ IFRS 4 Insurance Contracts postponing the adoption of IFRS 9 Financial Instruments,

■ and IFRS 16 Leases relating to the simplification of changes resulting from lease agreements due to COVID-19

did not have a material impact on these financial statements.

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

Amendments to:

■ IFRS 3 Business Combination with respect to modification of the Conceptual Framework;

■ IAS 16 Property, plant and equipment with respect to proceeds from selling items produced while preparing the asset for use;

■ IAS 37 Provisions, Contingent Liabilities and Contingent Assets with respect to the clarification on the costs that an entity considers when analysing whether a contract is onerous,

and Annual Improvements 2018-2020 containing clarifications and refinements to recognition and measurement guidelines in: IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the illustrative examples to IFRS 16 Leases will not have a material effect on the Bank’s financial statements.

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

Amendments to:

■ IAS 1 Presentation of Financial Statements, with respect to the classification of liabilities as current and non-current, and the obligation to disclose significant information relating to the accounting policies which were defined in the standard;

■ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, with respect to the definition of estimates;

■ IAS 12 Income Taxes with respect to an obligation to recognize deferred tax on transaction, i.e. on leases and the introduction of IFRS 17 Insurance Contracts will not have a material effect on the Bank’s financial statements.

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

The Bank did not make any changes in the recognition or presentation in the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021.

NOTES TO THE INCOME STATEMENT

5. Interest income and expenses

Accounting policies

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

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

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

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

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

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

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

Financial information

INTEREST INCOME AND SIMILAR INCOME	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Interest income recognized under the effective interest rate method, including:	512,592	701,336
on financial instruments measured at amortized cost, including:	507,193	685,183
loans and advances to customers	507,096	685,131
amounts due from banks and on mandatory reserve	97	52
on instruments measured at fair value through other comprehensive income, including:	5,399	16,153
debt securities	5,399	16,153
Income similar to interest income on instruments measured at fair value through profit or loss, including:	4,881	4,234
hedging IRS transactions (net)	4,881	4,234

Total	517,473	705,570
including: interest income on impaired financial instruments	794	882

INTEREST EXPENSES AND SIMILAR EXPENSES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Interest expense on financial instruments measured at amortized cost, including:	(168,083)	(259,364)
loans received and overdraft facility used	(38,715)	(65,561)
liabilities in respect of the purchase of receivables	(794)	(6,187)
mortgage covered bonds issued	(107,158)	(140,043)
bonds issued	(21,367)	(47,463)
lease liabilities	(49)	(110)
Expenses similar to interest expense on instruments measured at fair value through profit or loss, including:	(45,298)	(115,816)
hedging CIRS transactions (net)	(45,298)	(115,816)

Total	(213,381)	(375,180)

6. Fee and commission income and expense

Accounting policies

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

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

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

Financial information

FEE AND COMMISSION INCOME	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020
Commission for full or partial prepayment of loans	5,381	4,699
Fees for property inspection	1,056	1,668
Fees for property valuation	428	1,014
Other	806	1,318

Total	7,671	8,699

FEE AND COMMISSION EXPENSE	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020
Preparation by property valuers of appraisal reports on Property Value for Mortgage Lending Purposes (MLV)	(770)	(1,187)
Expenses related to bond issue programmes	(4,889)	(3,676)
Expenses related to credit lines	(4,631)	(4,264)
Expenses related to mortgage covered bond issue programmes	(840)	(1,313)
Loan insurance costs	(1,971)	(3,264)
Commissions for other operating services	(243)	(229)
Costs of debt collection and intermediation in selling collateral	(24)	(30)

Total	(13,368)	(13,963)

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

Accounting policies and classification

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

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

Financial information

NET GAIN/(LOSS) ON FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Gain/(loss) on derivatives, including:	35	86
Gain/(loss) on IRS derivative instruments in the speculative period (before designation to hedge accounting and in respect of the final settlement)	239	-
Gain/(loss) on FX derivative instruments related to hedge ineffectiveness	(204)	86

Total	35	86

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

8. Net foreign exchange gains / (losses)

Accounting policies and classification

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

Financial information

NET FOREIGN EXCHANGE GAINS / (LOSSES)	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Result on revaluation	256	792
Gain/(loss) on derivative instruments (CIRS, FX-Forward) in the speculative period (before designation to hedge accounting and in respect of the final settlement)	289	(3)
Gain/(loss) on derivative instruments (CIRS, FX-Forward) related to hedge ineffectiveness	18	5,104

Total	563	5,893

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

9. Net income / (expense) on modification

Accounting policies

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

Financial information

NET INCOME/(EXPENSE) ON MODIFICATION	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Financial instruments measured at fair value through other comprehensive income (debt instruments)	-	-
Financial instruments measured at amortized cost	1,520	(2,581)

Total	1,520	(2,581)

CARRYING AMOUNT AND NET INCOME/(EXPENSE) ON MODIFICATION RECOGNIZED IN RESPECT OF FINANCIAL ASSETS IN THE CASE OF WHICH CONTRACTUAL CASH FLOWS WERE MODIFIED DURING THE REPORTING PERIOD, WHILE THE CORRESPONDING ALLOWANCE FOR EXPECTED CREDIT LOSSES WAS MEASURED AT THE AMOUNT OF LIFETIME EXPECTED CREDIT LOSSES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Carrying amount at amortized cost before modification (stage 2)	32,562	117,155
Gain/(loss) recognized on modification (Stage 2) in the period	128	(193)

Carrying amount at amortized cost before modification (stage 3)	1,938	4,570
Gain/(loss) recognized on modification (Stage 3) in the period	8	(3)

The gross amount of financial assets for which the loss has been calculated over their whole life and which have been modified since initial recognition, for which the allowance for expected credit losses changed during the reporting period by an amount equal to a 12-month expected credit loss, was PLN 18,210 thousand as at 31 December 2021 and PLN 3,851 thousand as at 31 December 2020.

10. Net allowances for expected credit losses

Accounting policies

Accounting policies for recognizing net allowances for expected credit losses are described for specific items in Notes 21 and 39.2, as appropriate. Net allowances for expected credit losses comprise allowances for loans and advances to customers and recognized and released provisions for loan commitments granted relating to residential loans which have not been drawn in full.

Financial information

NET ALLOWANCES FOR EXPECTED CREDIT LOSSES	Note	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Net allowances for loans and advances to customers	21	(3,271)	(35,754)
Net provisions for loan commitments related to residential loans not drawn in full	29	22	89

Total		(3,249)	(35,665)

11. Other operating income and expenses

Accounting policies

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

Financial information

OTHER OPERATING INCOME	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Sundry income	308	569
Other	141	33

Total	449	602

OTHER OPERATING EXPENSES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Sundry costs	(235)	(505)
Other	(15)	(145)

Total	(250)	(650)

12. Administrative expenses

Accounting policies

Employee benefits

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

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

Employee benefits also include a variable remuneration plan for the top management, which is recognized in part as a liability in respect of payments based on the net book value of phantom shares settled in cash. The plan is accounted for based on IAS 19 Employee Benefits and is described in Section 6.6 of the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2021.

Overheads

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

Amortization and depreciation

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

Financial information

ADMINISTRATIVE EXPENSES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Employee benefits	(15,605)	(15,436)
Overheads	(29,224)	(32,791)
Amortization and depreciation, including:	(2,235)	(2,730)
property, plant and equipment	(106)	(155)
right-of-use assets, including:	(1,226)	(1,230)
real estate	(996)	(1,008)
cars	(230)	(222)
intangible assets	(903)	(1,345)

Total	(47,064)	(50,957)

EMPLOYEE BENEFITS	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Wages and salaries, including:	(13,412)	(13,417)
provisions for disability and retirement benefits	-	(15)
costs of contributions to the Employee Pension Plan	(332)	(330)
Salary surcharges	(1,899)	(1,735)
Other employee benefits	(294)	(284)

Total	(15,605)	(15,436)

OVERHEADS	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Services relating to supporting operations under the Outsourcing Agreement 1)	(3,828)	(4,220)
Servicing of loans granted and receivables purchased under the Outsourcing Agreement 1)	(19,778)	(23,049)
External services under other contracts	(2,290)	(2,328)
IT costs	(1,563)	(1,629)
Life- and non-life insurance costs	(483)	(397)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(708)	(703)
Other	(574)	(465)

Total	(29,224)	(32,791)

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

13. Regulatory charges

Selected accounting policies

Contribution and payments to the BGF

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

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

Payments to the PFSA

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

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

Financial information

REGULATORY CHARGES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Contribution and payments to the Bank Guarantee Fund (BGF), including:	(21,053)	(22,507)
resolution fund	(21,053)	(22,507)
Payments to the Polish Financial Supervision Authority (PFSA)	(3,327)	(2,132)
Payments to the Borrowers Support Fund (potential)	(22)	(243)
Other taxes and charges	(431)	(669)

Total	(24,833)	(25,551)

14. Tax on certain financial institutions

For banks, when calculating tax on certain financial institutions, the tax base is calculated as the excess of total assets over PLN 4 billion as per the trial balance as at the end of each month. Banks are entitled to reduce the tax base by deducting, among other things, own funds and the value of Treasury securities held. The tax rate is 0.0366% per month and the tax is paid monthly by the 25th day of the month following the month to which the tax relates. The tax paid is not deductible for the purposes of corporate income tax. Tax on certain financial institutions amounted to PLN 83,839 thousand for 2021 and PLN 89,457 thousand for 2020.

15. Corporate income tax

Accounting policies

Recognition

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

Current income tax expense

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

Deferred tax

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

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

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

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

Financial information

INCOME TAX EXPENSE	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Current income tax expense	(50,240)	(41,838)
Deferred income tax due to temporary differences	3,380	(3,478)
Income tax reported in the income statement	(46,860)	(45,316)
Income tax reported in other comprehensive income due to temporary differences	17,441	(2,734)

Total	(29,419)	(48,050)

RECONCILIATION OF THE EFFECTIVE TAX RATE	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Profit / (loss) before income tax	141,727	126,846
Corporate income tax calculated at the statutory tax rate in force in Poland (19%)	(26,928)	(24,101)
Effect of permanent differences between profit before income tax and taxable income, including:	(19,932)	(21,215)
tax on certain financial institutions	(15,929)	(16,997)
fees to the BGF	(4,000)	(4,276)
PFRON (State Disabled Persons Fund) costs	(14)	(14)
impact of tax costs under Article 15cb of the CIT Act (internal financing)	48	-
impact of other permanent differences	(37)	72
Income tax reported in the income statement	(46,860)	(45,316)

Effective tax rate	33.06%	35.73%

NET DEFERRED TAX ASSETS/PROVISION	31.12.2020	Income statement	Other comprehensive income	31.12.2021

Deferred tax provision
Interest accrued on loans and advances to customers	7,653	1,534	-	9,187
Interest accrued and discount on securities	475	262	-	737
Adjustment of the valuation under the straight-line and effective interest rate methods	24,916	(3,556)		21,360
Deferred costs	694	(208)	-	486
Difference between carrying amount and tax value of property, plant and equipment and intangible assets	4	1	-	5
Valuation of securities	1,985	-	(1,667)	318
Valuation of derivatives	43,231	(620)	(15,166)	27,445
Gross deferred income tax provision	78,958	(2,587)	(16,833)	59,538

Deferred income tax assets
Interest accrued and discount on liabilities	10,229	(402)	-	9,827
Allowances for credit losses	13,638	123	-	13,761
Expenses to be paid	1,759	33	-	1,792
Valuation of securities	-	-	244	244
Valuation of derivatives	3,584	1,037	364	4,985
Difference between depreciation of the right-of-use asset and the cost of lease financing (IFRS 16)	19	2	-	21
Tax relief recognized under Art. 15cb	95	-	-	95
Gross deferred income tax assets	29,324	793	608	30,725

Net deferred income tax assets / (provision)(presented in the statement of financial position)	(49,634)	3,380	17,441	(28,813)

Tax Group

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

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

Due to PKO Bank Hipoteczny SA’s participation in the PKO Bank Polski SA Tax Group, the current income tax liability as at 31 December 2021 is the liability to the PGK parent company, i.e. to PKO Bank Polski SA.

Moreover, based on a contract of 3 November 2021, PKO Bank Polski SA as the parent company, jointly with its two subsidiaries: PKO Bank Hipoteczny SA and PKO Leasing SA, extended the functioning of the PGK for the next three tax years, i.e. until 31 December 2024. The contract was registered by the Head of the First Masovian Tax Office in Warsaw.

NOTES TO THE STATEMENT OF FINANCIAL POSITION

16. Cash and balances with the Central Bank

Accounting policies

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

Financial information

CASH AND BALANCES WITH THE CENTRAL BANK	31.12.2021	31.12.2020

Current account with the Central Bank	50,362	21

Total	50,362	21

Mandatory reserve

In the period from 31 December 2021 to 30 January 2022 and from 31 December 2020 to 31 January 2021, the Bank maintained the mandatory reserve of PLN 50,534 thousand and PLN 15,381 thousand, respectively. As at 31 December 2021, the interest on the mandatory reserve account was 1.75%, and as at 31 December 2020 it was 0.1%.

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

17. Amounts due from banks

Accounting policies

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

Financial information

AMOUNTS DUE FROM BANKS	31.12.2021	31.12.2020

Measured at amortized cost
current accounts	532	23

Total	532	23

Information on exposures to credit risk relating to amounts due from banks is provided in Note 39 “Credit risk management”.

In the periods ended on 31 December 2021 and 31 December 2020, there were no transfers of amounts due from banks between the stages.

18. Derivative hedging instruments

Accounting policies, estimates and assessments

The use of hedge accounting	As at the effective date of IFRS 9, the Bank decided to further apply the provisions of IAS 39 and did not apply IFRS 9 in respect of hedge accounting. In its operations, the Bank uses derivative instruments: CIRS, IRS, FX-Forward for hedging purposes only, in accordance with the risk management strategy described in more detail in Notes 43-45. Such transactions are only concluded with PKO Bank Polski SA and, since they are inter-company transactions, they are excluded from the hedging obligation. All derivatives shall be designated for hedge accounting. The Bank applies hedge accounting when all the following terms and conditions are met: ■ upon setting up the hedge, the hedging relationship, the purpose of risk management by the entity and the hedging strategy were officially established and documented. Such documentation shall contain an identification of the hedging instrument, the hedged item or transaction, the nature of the hedged risk, and the method used by the entity to assess the hedging instrument’s effectiveness in compensating the risk of changes in the fair value of the hedged risk or the cash flows relating to the hedged risk; ■ the hedge is expected to be highly effective in compensating the changes in the fair value or cash flows resulting from the hedged risk, in accordance with the originally documented risk management strategy relating to this specific hedging relationship; ■ in the case of cash flow hedges, the planned hedged transaction must be highly probable and must be exposed to a risk of variability of cash flows which may, as a result, have an impact on the income statement; ■ the hedge effectiveness can be assessed reliably, i.e. the fair value or cash flows relating to the hedged item and resulting from the hedged risk and the fair value of the hedging instrument can be assessed reliably; ■ the hedge is regularly assessed and its high effectiveness is confirmed in all the reporting periods for which the hedge had been designated.
Discontinuation of hedge accounting	The Bank discontinues the application of hedge accounting when: ■ a hedging instrument expires, is sold, terminated or executed (replacing a hedging instrument with another hedging instrument or extending the validity of a hedging instrument is not treated as its expiry or termination, if such replacement or extension is a part of a documented hedging strategy adopted by the entity). In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ the hedge no longer meets the criteria of hedge accounting. In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and are credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ it is no longer expected that the planned transaction will be executed – in such cases, all accumulated gains or losses relating to the hedging instrument, which were recognized directly in other comprehensive income over the period in which the hedge was effective, are recognized in profit or loss; ■ the hedging relationship has been invalidated.
Fair value hedges	The Bank does not apply fair value hedging.
Cash flow hedges	Cash flow hedges are hedges against cash flow volatility, which may be attributed to a specific type of risk associated with a recognized asset or liability (such as future payments of interest on variable-interest debt (or a part thereof)) or a highly probable planned transaction, and which could affect the income statement. Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective part of the hedge. The ineffective portion of the hedge is recognized in the income statement in the item “Net income from financial instruments measured at fair value” or “Foreign exchange gains (losses)”. Moreover, the amounts recognized directly in other comprehensive income are transferred to the income statement as “Net interest income” or “Net foreign exchange gains (losses)”, respectively, in the period or periods in which the impact of the hedged transaction is recognized in the income statement. The effectiveness tests comprise the valuation of hedging transactions, net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in the case of CIRS and FX-Forward transactions). Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.
Potential sources of ineffectiveness	The main sources of hedge ineffectiveness may include: ■ applying the CVA/DVA adjustment to the hedging instrument only; ■ the existence of minute differences in the structure and the basic parameters of hedging transactions and hedged items. The monthly tests show continuous high effectiveness of the hedging strategies applied.
Estimates and judgements	The fair value of derivative instruments is determined using valuation models based on discounted future cash flows from a given financial instrument. The model variables and assumptions used for valuation purposes comprise, subject to availability, data from observable markets (e.g. deposit rates on the interbank market, foreign exchange rates, IRS transaction quotations). The fair value of derivatives includes the Bank’s own credit risk, DVA (debit value adjustment) as well as counterparty credit risk, CVA (credit value adjustment). The process of calculation of CVA and DVA adjustments includes the selection of a method for determining the spread of the counterparty’s or the Bank’s credit risk (e.g. a market price method based on the continuous price quotations of debt instruments issued by the counterparty, a method of spread implied from Credit Default Swap contracts), an estimation of the probability of default by the counterparty or the Bank and the recovery rate.

Types of hedging strategies used by the Bank

Strategy 1	Hedge of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency due to changes in the exchange rate, using CIRS and FX-Forward hedging instruments
Description of the hedging relationship	Elimination of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency (EUR) due to changes in the exchange rate, using CIRS hedging instruments and a series of FX-Forward transactions in the foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged risk	Forex and interest rate risks.
Hedging instruments	■ CIRS transactions in which the Bank pays a coupon based on a variable PLN rate and receives a coupon based on a fixed rate for the convertible currency (EUR). If PKO Bank Hipoteczny SA is declared bankrupt by the court, the CIRS transactions will automatically be extended by 12 months on the terms and conditions set out on the transaction date; ■ an optional series of FX-Forward transactions in the convertible foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged item	■ part of the portfolio of the home loans included in the cover pool of PLN covered bonds at floating rates. The interest rates on the loans are indexed by the 3M WIBOR rate. The mortgage loan margin is excluded from the hedge; ■ fixed-rate covered bonds issued in a convertible currency.
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2022 – August 2024.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF THE HEDGING INSTRUMENT SINCE DESIGNATION
			Assets	Liabilities
31.12.2021
CIRS EUR/PLN	EUR fixed leg	2,175,849	841,412	-	18	837,834
	PLN floating leg	9,287,118
FX forward	purchase of EUR	2,529	129	320	-
	sale of EUR	338
31.12.2020
CIRS EUR/PLN	EUR fixed leg	2,775,514	1,139,378	-	5,054	1,135,861
	PLN floating leg	11,863,682
FX forward	purchase of EUR	2,799	111	541	50
	sale of EUR	937

The average fixed interest rate weighted with the nominal value for CIRS transactions amounted to 0.571% as at 31 December 2021, and 0.504% as at 31 December 2020.

HEDGED ITEMS	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF HEDGED ITEMS SINCE DESIGNATION
31.12.2021
floating rate PLN loans	9,287,118	Loans and advances to customers	(852,571)
fixed-rate covered bonds issued in a convertible currency	10,090,642	Liabilities in respect of mortgage covered bonds issued	(852,571)
31.12.2020
floating rate PLN loans	11,863,682	Loans and advances to customers	(1,150,592)
fixed-rate covered bonds issued in a convertible currency	12,817,035	Liabilities in respect of mortgage covered bonds issued	(1,150,592)

Strategy 2	Hedges against fluctuations in cash flows from variable interest rate loans in PLN, resulting from the risk of changes in interest rates, using IRS transactions
Description of the hedging relationship	Elimination of the risk of cash flow fluctuations generated by the variable interest rate PLN loan portfolio resulting from the risk of changes in interest rates in the period covered by the hedge using IRS transactions.
Hedged risk	Interest rate risk.
Hedging instruments	IRS (Interest Rate Swap) transactions where the Bank pays coupons based on the floating 3M WIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded.
Hedged item	A part of the portfolio of residential loans in PLN indexed to the WIBOR 3M variable rate. The mortgage loan margin is excluded from the hedge.
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2022 – August 2028.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF THE HEDGING INSTRUMENT SINCE DESIGNATION
DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		Assets	Liabilities
31.12.2021
IRS PLN	PLN	60,000	-	1,663	(204)	(1,689)
31.12.2020
IRS PLN	PLN	325,000	15,203	-	86	15,416

The average fixed interest rate weighted with the nominal value for IRS transactions amounted to 3.49% as at 31 December 2021, and 2.84% as at 31 December 2020.

HEDGED ITEMS	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF THE HEDGED ITEMS SINCE DESIGNATION
31.12.2021
floating rate PLN loans	60,000	Loans and advances to customers	1,674
31.12.2020
floating rate PLN loans	325,000	Loans and advances to customers	(15,644)

Financial information

CARRYING AMOUNT / FAIR VALUE OF DERIVATIVES USED AS CASH FLOW HEDGES	31.12.2021		31.12.2020
	Assets	Liabilities	Assets	Liabilities

IRS	-	1,663	15,203	-
CIRS	841,412	-	1,139,378	-
FX forward	129	320	111	541

Total	841,541	1,983	1,154,692	541

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

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY AS AT 31 DECEMBER 2021	up to 1 month	from 1 to 3 months	from 3 months to 1 year	from 1 to 5 years	after more than 5 years	Total

IRS
PLN fixed - float	-	-	-	-	60,000	60,000
CIRS
float PLN sale	-	-	2,811,746	6,475,372	-	9,287,118
fixed EUR purchase (original currency)	-	-	651,999	1,523,850	-	2,175,849
FX forward
PLN sale	-	-	7,681	4,693	-	12,374
EUR purchase (original currency)	-	-	1,580	949	-	2,529
PLN purchase	531	-	316	752	-	1,599
EUR sale (original currency)	115	-	66	157	-	338

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

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

CHANGE IN OTHER COMPREHENSIVE INCOME ON CASH FLOW HEDGES AND THE INEFFECTIVE PORTION OF CASH FLOW HEDGES	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Accumulated other comprehensive income on cash flow hedges at the beginning of the period, gross	174,304	165,953
Gains / (Losses) recognized in other comprehensive income during the period	(91,833)	886,452
Amounts transferred from other comprehensive income to the income statement during the period	10,096	(878,101)
- interest income	(4,881)	(4,234)
- interest expense	45,298	115,816
- net foreign exchange gains/(losses)	(30,321)	(989,683)
Accumulated other comprehensive income on cash flow hedges as at the end of the period, gross	92,567	174,304
Tax effect	(17,588)	(33,118)
Accumulated other comprehensive income on cash flow hedges at the end of the period, net	74,979	141,186

Ineffective portion of cash flow hedges recognized in the income statement	(186)	5,190

Impact on other comprehensive income during the period, gross	(81,737)	8,351
Deferred tax on cash flow hedges	15,530	(1,586)
Impact on other comprehensive income during the period, net	(66,207)	6,765

Calculation of estimates

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

ESTIMATED CHANGE IN VALUE WITH PARALLEL SHIFT OF YIELD CURVES:	31.12.2021		31.12.2020
	scenario +50 b.p.	scenario -50 b.p.	scenario +50 b.p.	scenario -50 b.p.
IRS	(1,475)	1,475	(2,744)	2,744
CIRS	(71,088)	71,088	(133,010)	133,010
FX forward	(3)	3	3	(3)

19. Securities

Accounting policies

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

Financial information

SECURITIES	31.12.2021	31.12.2020

Measured at fair value through other comprehensive income, including:	1,870,697	1,241,821
issued by the State Treasury, PLN Treasury bonds	1,060,935	1,241,821
NBP bills	809,762	-

Total	1,870,697	1,241,821

SECURITIES BY MATURITY	31.12.2021	31.12.2020

issued by the State Treasury, PLN Treasury bonds
up to 1 month	-	173,211
from 1 to 3 months	-	-
from 3 months to 1 year	143,302	-
from 1 to 5 years	917,633	689,771
after more than 5 years	-	378,839

NBP bills
up to 1 month	809,762	-

Total	1,870,697	1,241,821

SECURITIES BY NOMINAL VALUE AND AVERAGE YIELD	31.12.2021	31.12.2020

issued by the State Treasury, PLN Treasury bonds	1,065,000	1,238,000
Average yield	0.75%	0.27%

NBP bills	810,000	-
Average yield	1.77%	-

Information on credit risk exposure in connection with securities is provided in Note 39 “Credit risk management”.

In the periods ended on 31 December 2021 and 31 December 2020, there were no transfers of securities between the stages.

Securities put up as collateral

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

As at 31 December 2021, the contribution to the bank resolution fund, which is contributed as an obligation to pay to the Bank Guarantee Fund (“BGF”), amounted to PLN 20,393 thousand, and the Bank held Treasury bonds with a carrying value of PLN 23,029 thousand to cover the contribution. As at 31 December 2020, these amounted to PLN 14,581 thousand and PLN 17,114 thousand, respectively.

Such funds are treated as assets pledged as collateral for own liabilities, they cannot be pledged or encumbered in any way, are excluded from judicial or administrative enforcement proceedings and do not form part of the estate in bankruptcy.

Security for mortgage covered bonds

The amount of additional collateral entered in the covered bonds cover pool maintained in the form of Treasury securities in PLN was PLN 130,000 thousand as at 31 December 2021 and PLN 250,000 thousand as at 31 December 2020. The disclosure of assets in the covered bonds cover pool is described in Note 26.

20. Loans and advances to customers

Accounting policies

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

Financial information

LOANS AND ADVANCES TO CUSTOMERS	31.12.2021	31.12.2020

Measured at amortized cost
Residential loans, gross, including:	22,929,844	24,980,694
loans granted	11,587,340	12,261,768
receivables acquired	11,342,504	12,718,926

Allowances for expected credit losses	(81,245)	(78,035)

Loans and advances to customers, net	22,848,599	24,902,659

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

In 2021 the Bank purchased, based on the Framework Agreement for the Sale of Receivables signed with PKO Bank Polski SA on 17 November 2015, mortgage covered residential loan portfolios in the amount of PLN 157,984 thousand, and in 2020 – in the amount of PLN 342,417 thousand. The purchase price was determined on an arm’s length basis, based on a valuation made by an independent expert. The receivables purchased were recognized on the transfer dates set out in the Receivables Sale Agreements, on which the Bank acquired the rights to the cash flows from the individual portfolios and assumed all related liability for costs and economic risks in the constituent receivables. The purchase of the receivable portfolios was financed with a liability the nature of which is described in Note 24 “Amounts due to banks”. The Bank ultimately refinances the purchased receivables portfolios primarily through the issue of mortgage covered bonds.

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

Information about exposure to credit risk for loans and advances to customers measured at amortized cost is described in Note 21 “Expected credit losses”. Information about the quality of the loan portfolio is presented in Note 39.4 “Forecasting and monitoring of credit risk”.

21. Expected credit losses

Estimates and judgments

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

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

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

■ Financial instruments measured at fair value through other comprehensive income: the carrying amount of an asset carried at fair value is additionally decreased by the amount of the allowances; measurement changes are however each time divided into the component related to impairment – recognized in the income statement – and the component related to other fair value measurement changes – recognized in other comprehensive income.

The information about the methodology for the assessment of expected credit losses and calculation of the impairment of credit exposures is provided in Note 39.2 “Impairment loss on credit exposures”.

Financial information

Financial assets and allowances for expected credit losses

FINANCIAL ASSETS AND ALLOWANCES FOR EXPECTED CREDIT LOSSES AS AT 31 DECEMBER 2021	Assets with no significant increase in credit risk since initial recognition, gross (Stage 1)	Allowances for expected credit losses (Stage 1)	Assets with a significant increase in credit risk since initial recognition, but not credit-impaired, gross (Stage 2)	Allowances for expected credit losses (Stage 2)	Purchased or originated credit-impaired assets, gross (Stage 3 and POCI)	Allowances for expected credit losses (Stage 3 and POCI)	Total gross amount	Total allowances for expected credit losses

Measured at fair value through other comprehensive income
securities	1,870,697	-	-	-	-	-	1,870,697	-
issued by the State Treasury, PLN Treasury bonds	1,060,935	-	-	-	-	-	1,060,935	-
NBP bills	809,762	-	-	-	-	-	809,762	-
Total	1,870,697	-	-	-	-	-	1,870,697	-

Measured at amortized cost
amounts due from banks	532	-	-	-	-	-	532	-
loans and advances to customers	21,068,222	(8,925)	1,804,202	(48,803)	57,420	(23,517)	22,929,844	(81,245)
residential loans	21,068,222	(8,925)	1,804,202	(48,803)	57,420	(23,517)	22,929,844	(81,245)
loans granted	10,396,455	(5,130)	1,166,328	(32,452)	24,557	(9,427)	11,587,340	(47,009)
receivables acquired	10,671,767	(3,795)	637,874	(16,351)	32,863	(14,090)	11,342,504	(34,236)
other financial assets	26	-	-	-	-	-	26	-
Total	21,068,780	(8,925)	1,804,202	(48,803)	57,420	(23,517)	22,930,402	(81,245)

As at 31 December 2021, the Bank had purchased or originated credit-impaired assets (POCI) of PLN 156 thousand, gross.

The impact of the COVID-19 pandemic on the amount of allowances for expected credit losses is described in Note 39.4.4. “Loans and advances to customers”.

LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2021	Nominal amount of loan commitments with no significant increase in credit risk since initial recognition (Stage 1)	Provisions for loan commitments (Stage 1)	Nominal amount of loan commitments with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)	Provisions for loan commitments (Stage 2)	Nominal amount of credit-impaired loan commitments (Stage 3)	Provisions for loan commitments (Stage 3)	Total nominal amount	Total provisions for loan commitments

Loan commitments	56,907	(22)	92	(7)	-	-	56,999	(29)

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

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

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

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

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

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

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

CHANGES IN GROSS CARRYING AMOUNT OF FINANCIAL INSTRUMENTS IN 2021	Gross carrying amount as at 01.01.2021	Increase due to granting and purchase of loans	Changes due to disbursement of tranches and interest capitalization	Decrease due to repayment / redemption	Changes due to non-substantial modification, net	Decrease due to derecognition	Changes on loans for which the loss recognition horizon was lengthened from 12 months to lifetime	Changes on loans for which the loss recognition horizon was shortened from lifetime to 12 months	Gross carrying amount decrease in connection with a partial write-down	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 and POCI (S3 and POCI)	Other changes, incl. valuation	Gross carrying amount as at 31.12.2021

Measured at fair value through other comprehensive income
securities (S1)	1,241,821	4,799,551	-	(4,166,019)	-	-	-	-	-				(4,656)	1,870,697
Total	1,241,821	4,799,551	-	(4,166,019)	-	-	-	-	-				(4,656)	1,870,697

Measured at amortized cost
amounts due from banks (S1)	23	532	-	(23)	-	-	-	-	-				-	532
loans and advances to customers	24,980,694	533,942	109,505	(2,528,812)	1,506	(71,510)	(9,958)	(85,649)	126				-	22,929,844
residential loans	24,980,694	533,942	109,505	(2,528,812)	1,506	(71,510)	(9,958)	(85,649)	126				-	22,929,844
Stage 1 (S1)	23,079,938	528,406	106,502	(2,447,581)	1,387	(65,939)	(9,958)	-	(1)	2,059,351	(2,176,492)	(7,391)	-	21,068,222
Stage 2 (S2)	1,874,060	5,371	2,992	(74,805)	108	(5,446)	-	(85,349)	4	(2,059,351)	2,190,873	(44,255)	-	1,804,202
Stage 3 and POCI (S3 and POCI)	26,696	165	11	(6,426)	11	(125)	-	(300)	123	-	(14,381)	51,646	-	57,420
other financial assets (S1)	31	26	-	(31)	-	-	-	-	-				-	26
Total	24,980,748	534,500	109,505	(2,528,866)	1,506	(71,510)	(9,958)	(85,649)	126				-	22,930,402

CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON FINANCIAL ASSETS IN 2021	As at 01.01.2021	Increase due to granting and purchase of loans	Changes due to changes in credit risk (net), including total repayment	Changes due to non-substantial modification, net	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Decrease in connection with a partial write-down	Transfers to Stage 1 (S1)	Transfers to Stage 2 (S2)	Transfers to Stage 3 and POCI (S3 and POCI)	Other changes	As at 31.12.2021

Measured at fair value through other comprehensive income
securities (S1)	-	-	-	-	-	-	-	-				-	-
Total	-	-	-	-	-	-	-	-				-	-

Measured at amortized cost
amounts due from banks (S1)	-	-	-	-	-			-				-	-
loans and advances to customers	78,035	323	(4,227)	780	(178)	40,173	(33,600)	(61)				-	81,245
residential loans	78,035	323	(4,227)	780	(178)	40,173	(33,600)	(61)				-	81,245
Stage 1 (S1)	9,651	169	204	193	(24)	40,173	-	(1)	2,613	(41,663)	(2,390)	-	8,925
Stage 2 (S2)	55,822	154	(591)	489	(139)	-	(33,519)	(11)	(2,613)	43,214	(14,003)	-	48,803
Stage 3 and POCI (S3 and POCI)	12,562	-	(3,840)	98	(15)	-	(81)	(49)	-	(1,551)	16,393	-	23,517
other financial assets (S1)	-	-	-	-	-	-	-	-				-	-
Total	78,035	323	(4,227)	780	(178)	40,173	(33,600)	(61)				-	81,245

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

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

Measured at amortized cost
amounts due from banks (S1)	31	23	-	(31)	-	-	-	-	-				-	23
loans and advances to customers	25,863,796	1,107,314	378,486	(2,255,842)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,694
residential loans	25,863,796	1,107,314	378,486	(2,255,842)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,694
Stage 1 (S1)	25,504,795	1,104,892	374,196	(2,236,022)	(2,338)	(75,768)	(8,826)	-	(5)	846,397	(2,423,864)	(3,519)	-	23,079,938
Stage 2 (S2)	341,078	2,422	4,277	(19,428)	(226)	(2,422)	-	(21,155)	-	(846,397)	2,430,966	(15,055)	-	1,874,060
Stage 3 (S3)	17,923	-	13	(392)	(4)	-	-	(1,877)	(439)	-	(7,102)	18,574	-	26,696
other financial assets (S1)	217	31	-	(217)	-	-	-	-	-				-	31
Total	25,864,044	1,107,368	378,486	(2,256,090)	(2,568)	(78,190)	(8,826)	(23,032)	(444)				-	24,980,748

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

Measured at fair value through other comprehensive income
securities (S1)	-	-	-	-	-	-	-	-				-	-
Total	-	-	-	-	-	-	-	-				-	-

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

Calculation of estimates

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

ESTIMATED CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DUE TO A DETERIORATION OR IMPROVEMENT IN RISK PARAMETERS, INCLUDING1	31.12.2021		31.12.2020
	scenario +10%	scenario -10%	scenario +10%	scenario -10%

changes in probability of default	5,095	(5,782)	10,125	(12,807)
changes in rates of recovery	(17,789)	17,790	(17,034)	17,045

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

The table below presents estimated sensitivity of allowances for expected credit losses to macroeconomic conditions, calculated as the change in allowances for expected credit losses on non-impaired exposures as a result of the materialization of various macroeconomic scenarios as at 31 December 2021 and 31 December 2020.

ESTIMATED CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON NON-IMPAIRED EXPOSURES AS A RESULT OF THE MATERIALIZATION OF VARIOUS MACROECONOMIC SCENARIOS (IN PLN MILLION)	31.12.2021		31.12.2020
	optimistic	pessimistic	optimistic	pessimistic
	(8)	6	(17)	14

22. Intangible assets and property, plant and equipment

Accounting policies and estimates

Intangible assets

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

Recognition of intangible assets:

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

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

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

Property, plant and equipment

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

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

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

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

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

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

Expenditure

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

Amortization and depreciation

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

Impairment of non-financial non-current assets

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

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

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

Estimates and judgments

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

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

■ technological or market obsolescence;

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

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

■ other circumstances affecting the useful life of such assets.

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

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

Amortization and depreciation periods

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

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

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

Financial information

Intangible assets

FOR THE PERIOD FROM 1 JANUARY 2021 TO 31 DECEMBER 2021	Intangible assets under construction	Software	Total

Gross carrying amount at the beginning of the period	-	8,646	8,646
Purchases	-	19	19
Gross carrying amount at the end of the period	-	8,665	8,665

Accumulated amortization at the beginning of the period	-	(7,596)	(7,596)
Amortization	-	(903)	(903)
Accumulated amortization at the end of the period	-	(8,499)	(8,499)

Net carrying amount at the beginning of the period	-	1,050	1,050
Net carrying amount at the end of the period	-	166	166

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

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

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

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

Property, plant and equipment

FOR THE PERIOD FROM 1 JANUARY 2021 TO 31 DECEMBER 2021	Leasehold improvements	Plant and machinery	Right-of-use assets, including:		Other	Total
FOR THE PERIOD FROM 1 JANUARY 2021 TO 31 DECEMBER 2021	Leasehold improvements	Plant and machinery	real estate	cars	Other	Total

Gross carrying amount at the beginning of the period	34	1,040	4,992	826	403	7,295
Purchases	-	35	-	-	-	35
Lease contracts concluded	-	-	-	111	-	111
Modification/ indexation of lease contracts	-	-	1,220	10	-	1,230
Termination of lease contracts	-	-	-	(148)	-	(148)
Gross carrying amount at the end of the period	34	1,075	6,212	799	403	8,523

Accumulated depreciation at the beginning of the period	(18)	(841)	(1,880)	(410)	(399)	(3,548)
Depreciation	(3)	(100)	(996)	(230)	(3)	(1,332)
Termination of lease contracts	-	-	-	129	-	129
Accumulated depreciation at the end of the period	(21)	(941)	(2,876)	(511)	(402)	(4,751)

Net carrying amount at the beginning of the period	16	199	3,112	416	4	3,747
Net carrying amount at the end of the period	13	134	3,336	288	1	3,772

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

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

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

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

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

Legal limitations relating to the Bank’s title

In the years 2021 and 2020, there were no intangible assets or property, plant and equipment items to which the Bank’s legal title would be limited or pledged as collateral for the Bank’s liabilities.

23. Other assets

Accounting policies

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

Financial information

OTHER ASSETS	31.12.2021	31.12.2020

Prepayments and deferred costs, including:	4,748	6,446
deferred costs relating to overdraft facilities	1,461	2,176
deferred costs relating to bond issue programmes 1)	311	588
deferred costs relating to mortgage covered bonds issue programmes 1)	786	1,042
other prepayments and deferred costs	2,190	2,640
Settlements relating to appraisal reports on Property Value for Mortgage Lending Purposes (MLV) *	7	25
Settlements with the State Budget	2	2
Other *	19	6

Total	4,776	6,479
including financial assets – marked with * above	26	31

* Financial liabilities are marked with this symbol.

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

24. Amounts due to banks

Accounting policies

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

Financial information

AMOUNTS DUE TO BANKS	31.12.2021	31.12.2020

Measured at amortized cost
overdraft within the limit available	-	14,275
liability related to overdraft facilities	6,334,664	3,222,246
liability related to term loans	209,847	149,864
liability in respect of the purchase of receivables	-	188,748

Total	6,544,511	3,575,133

Liabilities in respect of loans

LENDER	Effective date of agreement	Maturity date	Amount of loan granted as at 31 December 2021	Amount of loan drawn as at 31 December 2021	Liability as at 31 December 2021

PKO Bank Polski SA	29.10.2015	29.10.2025	2,000,000	2,000,000	865,651
PKO Bank Polski SA	02.02.2017	03.02.2026	2,000,000	2,000,000	2,000,013
PKO Bank Polski SA	10.07.2019	01.07.2025	5,000,000	5,000,000	3,469,000
PKO Bank Polski SA 1)	10.09.2020	22.03.2026	210,000	210,000	209,847
Other bank 1	10.06.2019	14.06.2022	150,000	150,000	-

Total			9,360,000	9,360,000	6,544,511

1) The period during which the tranches may be used expired on 10 September 2021. Therefore, the amount of the loan granted and made available as at 31 December 2021 was presented in the amount of the tranches used, and the maturity date was shown for the last tranche drawn.

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

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

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

Liability in respect of the purchase of receivables

The line “Liability in respect of the purchase of receivables” represents the liability arising from the transactions of purchase of residential mortgage loan portfolios from PKO Bank Polski SA, as described in Note 20 “Loans and advances to customers”. The repayment date of the liability resulting from the purchase of receivables is agreed by the parties each time in the Receivables Sale Agreement. For receivables acquired in 2021 and 2020, the parties agreed that the payment would be due no later than 18 months from the date of transfer. If the liability is not settled within 1 month from the date of transfer, the price is increased by interest. The Bank ultimately refinances the purchased receivables portfolios primarily through the issue of mortgage covered bonds. As at 31 December 2021, the Bank had no liabilities in respect of the purchase of receivables.

25. Amounts due to customers

Accounting policies

Due to the fact that the repayment schedule cannot be determined, amounts due to customers are measured at amortized cost. Amounts due to customers comprise solely funds on non-interest bearing technical account dedicated to loan servicing. The Bank does not accept deposits.

Financial information

AMOUNTS DUE TO CUSTOMERS	31.12.2021	31.12.2020

Measured at amortized cost
amounts due to retail customers – funds on non-interest bearing technical account dedicated to loan servicing	6,617	6,641

Total	6,617	6,641

26. Liabilities in respect of mortgage covered bonds issued

Accounting policies

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

Financial information

LIABILITIES IN RESPECT OF MORTGAGE COVERED BONDS ISSUED	31.12.2021	31.12.2020

Measured at amortized cost
mortgage-covered bonds, including issued under:	13,146,377	17,205,554
International Mortgage Covered Bonds Issue Programme	10,052,583	12,847,883
National Mortgage Covered Bonds Issue Programme	3,093,794	4,357,671

Total	13,146,377	17,205,554

REPAYMENT PERIOD OF MORTGAGE COVERED BONDS ISSUED	31.12.2021	31.12.2020

up to 1 month	-	-
from 1 to 3 months	-	-
from 3 months to 1 year	3,610,079	4,035,687
from 1 to 5 years	9,475,656	13,109,240
after more than 5 years	60,642	60,627

Total	13,146,377	17,205,554

In 2021, the Bank did not issue any mortgage covered bonds and redeemed mortgage covered bonds with a value of PLN 1,265,000 thousand and EUR 600,000 thousand. In 2020, the Bank did not issue any mortgage covered bonds and redeemed mortgage covered bonds with a value of PLN 30,000 thousand.

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

As at 31 December 2021, the PLN- and EUR-denominated mortgage covered bonds issued by the Bank were rated by Moody’s Investors Service at Aa1, i.e. the highest level achievable by Polish securities. The limit for the ratings is the Polish country ceiling for debt instruments (i.e. the highest level achievable in Poland), which currently is at the level of Aa1.

The total nominal value of the issued mortgage covered bonds as at 31 December 2021 amounted to PLN 13,112,093 thousand and PLN 17,179,529 as at 31 December 2020.

Mortgage covered bonds issued and outstanding as at 31 December 2021

ISIN	Currency	Nominal amount	Interest rate as at 31.12.2021	Rate + margin / fixed rate	Issue date	Redemption date	Market

XS1508351357	EUR	500,000	0.13%	fixed rate	24.10.2016	24.06.2022	LuxSE, WSE parallel market
XS1559882821	EUR	25,000	0.82%	fixed rate	02.02.2017	02.02.2024	LuxSE
XS1588411188	EUR	500,000	0.63%	fixed rate	30.03.2017	24.01.2023	LuxSE, WSE parallel market
PLPKOHP00041	PLN	500,000	2.31%	WIBOR + 0.69 p.p.	28.04.2017	18.05.2022	Bondspot, WSE parallel market
XS1690669574	EUR	500,000	0.75%	fixed rate	27.09.2017	27.08.2024	LuxSE, WSE parallel market
PLPKOHP00066	PLN	500,000	3.00%	WIBOR + 0.60 p.p.	27.10.2017	27.06.2023	Bondspot, WSE parallel market
XS1709552696	EUR	54,000	0.47%	fixed rate	02.11.2017	03.11.2022	LuxSE
XS1795407979	EUR	500,000	0.75%	fixed rate	22.03.2018	24.01.2024	LuxSE, WSE parallel market
PLPKOHP00074	PLN	700,000	1.19%	WIBOR + 0.49 p.p.	27.04.2018	25.04.2024	Bondspot, WSE parallel market
PLPKOHP00082	PLN	100,000	1.03%	WIBOR + 0.32 p.p.	18.05.2018	29.04.2022	Bondspot, WSE parallel market
PLPKOHP00090	PLN	500,000	1.32%	WIBOR + 0.62 p.p.	27.07.2018	25.07.2025	Bondspot, WSE parallel market
PLPKOHP00108	PLN	60,000	3.49%	fixed rate	24.08.2018	24.08.2028	Bondspot, WSE parallel market
PLPKOHP00116	PLN	230,000	1.36%	WIBOR + 0.66 p.p.	26.10.2018	28.04.2025	Bondspot, WSE parallel market
XS1508351357 (series 2)	EUR	100,000	0.13%	fixed rate	08.03.2019	24.06.2022	LuxSE, WSE parallel market
PLPKOHP00132	PLN	250,000	3.08%	WIBOR + 0.60 p.p.	10.06.2019	30.09.2024	Bondspot, WSE parallel market
PLPKOHP00199	PLN	250,000	2.50%	WIBOR + 0.51 p.p.	02.12.2019	02.12.2024	Bondspot, WSE parallel market

Security for mortgage covered bonds

The mortgage covered bonds are secured with loans secured with the highest priority mortgage entered in the Land and Mortgage Register. Additionally, the mortgage covered bonds may also be issued based on the Bank’s own funds:

■ invested in securities issued or guaranteed by the National Bank of Poland, the European Central Bank, the governments and central banks of the Member States of the European Union, the Organization for Economic Cooperation and Development, excluding countries that are restructuring or have restructured their foreign debt in the past 5 years;

■ deposited with the National Bank of Poland;

■ held in cash.

The nominal value of loans entered in the Bank’s cover pool and representing collateral for the mortgage covered bonds issued as at 31 December 2021 amounted to PLN 21,778,536 million, whereas the nominal value of additional collateral in the form of PLN-denominated securities issued by the State Treasury amounted to PLN 130,000 thousand. As at 31 December 2020, these amounted to PLN 23,106,628 thousand and PLN 250,000 thousand, respectively. The Bank’s mortgage covered bonds cover pool also included CIRS and FX-Forward transactions hedging the currency and interest rate risk of mortgage covered bonds denominated in EUR and IRS transactions hedging the interest rate risk of fixed rate mortgage covered bonds denominated in PLN.

In 2021 and in the previous years the Bank’s mortgage covered bonds cover pool did not include asset-backed securities (ABS), which do not meet the requirements specified in paragraph 1 of Article 80 of the Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (recast).

27. Liabilities in respect of bonds issued

Accounting policies

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

Financial information

LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2021	31.12.2020

Measured at amortized cost
bonds, including bonds issued under:	3,728,162	4,337,081
Bond Issue Programme	3,728,162	3,771,812
Public Bond Issue Programme	-	214,969
an individual agreement	-	350,300

Total	3,728,162	4,337,081

REPAYMENT PERIOD OF LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2021	31.12.2020

up to 1 month	826,763	849,222
from 1 to 3 months	803,097	1,450,883
from 3 months to 1 year	2,098,302	1,812,931
from 1 to 5 years	-	224,045

Total	3,728,162	4,337,081

Bond Issue Programme

In 2021, as part of the Bond Issue Programme, the Bank issued bonds with a total nominal value of PLN 6,066,500 thousand (i.e. 12,133 bonds with PLN 500,000 nominal value each) and redeemed bonds with a total nominal value of PLN 6,112,500 thousand (i.e. 12,225 bonds with PLN 500,000 nominal value each). In 2020, the Bank issued bonds with a total nominal value of PLN 5,822,500 thousand (i.e. 11,645 bonds with PLN 500,000 nominal value each) and redeemed bonds with a total nominal value of PLN 5,446,000 thousand (i.e. 1,020 bonds with PLN 100,000 nominal value each and 10,688 bonds with PLN 500,000 nominal value each).

The above-mentioned issues of bonds are regulated by the Bond Issue Programme Agreement concluded with PKO Bank Polski SA. In accordance with the Agreement, the maximum nominal value of bonds issued and not yet redeemed is PLN 6,000,000 thousand. At the same time, under the Underwriting Agreement, PKO Bank Polski SA as the Underwriter shall be obliged to take up the issuer’s bonds up to the amount of PLN 2,000,000 thousand.

As at 31 December 2021, the Bank’s liability in respect of bonds issued as part of the Bond Issue Programme had a nominal value of PLN 3,730,500 thousand, and as at 31 December 2020 its nominal value was PLN 3,776,500 thousand. As at 31 December 2021 and as at 31 December 2020, PKO Bank Polski SA did not hold any bonds under the Underwriting Agreement.

Public Bond Issue Programme

In 2021, the Bank did not issue any bonds under the Public Bond Issue Programme but redeemed bonds with a total nominal value of PLN 215,000 thousand (i.e. 2,150,000 bonds with PLN 100 nominal value each).

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

As at 31 December 2021, the Bank had no liabilities in respect of bonds issued as part of the Public Bond Issue Programme.

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

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

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

On 24 February 2021, the Bank redeemed unsecured bonds with a nominal value of PLN 350,000 thousand (i.e. 350 bonds with a nominal value of PLN 1,000,000 each), and therefore, as at 31 December 2021, the Bank’s liability in respect of the aforesaid bonds totalled PLN 0 (as at 31 December 2020 it was PLN 350,000 thousand).

Bonds issued and outstanding as at 31 December 2021

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

Bond Issue Programme	OW220317-215	500,000	448	224,000	PLN	WIBOR + 0.28 p.p.	17.12.2020	17.03.2022
	OW220509-217	500,000	435	217,500	PLN	WIBOR + 0.25 p.p.	03.02.2021	09.05.2022
	OW221003-220	500,000	189	94,500	PLN	WIBOR + 0.35 p.p.	29.03.2021	03.10.2022
	OW220124-222	500,000	854	427,000	PLN	zero-coupon	21.05.2021	24.01.2022
	OW220124-223	500,000	800	400,000	PLN	zero-coupon	22.06.2021	24.01.2022
	OW220224-224	500,000	600	300,000	PLN	zero-coupon	26.07.2021	24.02.2022
	OW221123-225	500,000	835	417,500	PLN	WIBOR + 0.33 p.p.	26.07.2021	23.11.2022
	OW220404-226	500,000	977	488,500	PLN	zero-coupon	06.09.2021	04.04.2022
	OW220523-227	500,000	701	350,500	PLN	zero-coupon	18.10.2021	23.05.2022
	OW220422-228	500,000	762	381,000	PLN	zero-coupon	18.10.2021	22.04.2022
	OW220317-229	500,000	560	280,000	PLN	zero-coupon	29.11.2021	17.03.2022
	OW220523-230	500,000	300	150,000	PLN	WIBOR 3M+ 0.20 p.p.	29.11.2021	23.05.2022

28. Other liabilities

Accounting policies

Liabilities

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

Expenses to be paid

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

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

Lease liabilities

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

Financial information

OTHER LIABILITIES	31.12.2021	31.12.2020

Expenses to be paid *	9,525	9,331
Liabilities in respect of the contribution to the Bank Guarantee Fund (BGF), including:	20,393	14,581
maintained in the form of payments commitments to the resolution fund	20,393	14,581
Deferred commissions and costs relating to loans granted, in the part corresponding to unpaid principal and adjustments of deferred commission income on loans granted	2,402	588
Other liabilities, including:	9,191	10,303
sundry creditors*	1,686	2,218
settlements with the state budget, including:	7,505	8,085
liabilities in respect of tax on certain financial institutions	6,812	7,380
Lease liabilities *	3,714	3,625

Total	45,225	38,428
including liabilities marked with * above	14,925	15,174

* Financial liabilities are marked with this symbol.

As at 31 December 2021 and 31 December 2020, the Bank had no overdue contractual liabilities.

29. Provisions

Accounting policies

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

Financial information and estimates

PROVISIONS FOR THE PERIOD FROM 1 JANUARY 2021 TO 31 DECEMBER 2021	Provision for disability and retirement benefits	Provisions for loan commitments	Total

As at 1 January 2021, including:	169	51	220
Short-term provision	-	51	51
Long-term provision	169	-	169
Set-up/reassessment of provisions	-	42	42
Release/utilization	-	(64)	(64)

As at 31 December 2021, including:	169	29	198
Short-term provision	-	29	29
Long-term provision	169	-	169

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

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

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

30. Equity and shareholding structure of the Bank

Accounting policies

Equity

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

Components of the Bank’s equity:

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

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

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

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

Financial information

EQUITY	31.12.2021	31.12.2020

Share capital	1,611,300	1,611,300
Supplementary capital	332,263	250,733
Accumulated other comprehensive income, including:	75,290	149,642
cash flow hedges	74,979	141,186
measurement of financial assets measured at fair value through other comprehensive income	311	8,456
Net profit for the period	94,867	81,530

Total equity	2,113,720	2,093,205

Shareholding structure

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

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

PKO Bank Polski SA was the Bank’s sole shareholder as at 31 December 2021 and 31 December 2020.

The Bank’s share capital amounts to PLN 1,611,300,000 and comprises 1,611,300,000 (one billion six hundred and eleven million three hundred thousand) ordinary registered shares with a nominal value of PLN 1 (one zloty) each. The PKO Bank Hipoteczny SA shares are non-preference shares and have been paid up in full.

The Bank did not pay dividend in 2021 and in 2020.

OTHER NOTES

31. Contingent liabilities granted and received

31.1 Contractual commitments

As at 31 December 2021 and 31 December 2020 the Bank had no contractual commitments relating to the purchase of intangible assets and property, plant and equipment.

31.2 Loan commitments

Accounting policies

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

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

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

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

Financial information

LOAN COMMITMENTS (CONTINGENT)	31.12.2021	31.12.2020

Relating to residential loans not drawn in full (nominal value)	56,999	115,456

provision for residential loans not drawn in full	(29)	(51)

Total, net	56,970	115,405
including irrevocable loan commitments	-	-

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

CONTINGENT LOAN COMMITMENTS GRANTED AT NOMINAL VALUE - ESTIMATED PAYMENTS DEADLINES	31.12.2021	31.12.2020

up to 1 month	15,960	31,173
from 1 to 3 months, inclusive	16,054	36,908
from 3 months to 1 year, inclusive	22,821	43,256
from 1 year to 5 years, inclusive	2,164	4,119

Total	56,999	115,456

31.3 Guarantee commitments granted

PKO Bank Hipoteczny SA does not grant guarantee commitments.

31.4 Contingent liabilities received

Financial information

CONTINGENT COMMITMENTS RECEIVED AT THE NOMINAL VALUE	31.12.2021	31.12.2020

Contingent commitments received
financial	2,815,477	3,577,757
guarantees	2,000,000	2,000,000

Total	4,815,477	5,577,757

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

Right to sell or pledge collateral established for the Bank

As at 31 December 2021 and 31 December 2020 no collateral was established for the Bank, which the Bank would be entitled to sell or re-pledge, in the event of fulfilling all obligations by the owner of the collateral.

32. Legal claims

As at 31 December 2021 and 31 December 2020 there were no legal claims.

33. Information about leases

Accounting policies

Leases – Lessee

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

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

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

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

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

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

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

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

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

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

■ fixed lease payments less any lease incentives due;

■ variable lease payments that depend on market indices;

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

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

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

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

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

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

Right-of-use assets are initially measured at cost, which comprises:

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

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

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

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

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

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

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

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

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

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

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

In the reporting period, the discount rates calculated by the Bank ranged from 0.6% to 2.5% (depending on the length of the lease period). All lease agreements concluded by the Bank are in PLN.

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

Leases – Lessor

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

Financial information

LEASE AMOUNTS RECOGNIZED IN THE INCOME STATEMENT - LESSEE	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

Amortization of the right-of-use assets	(1,226)	(1,230)
real estate	(996)	(1,008)
cars	(230)	(222)
Interest expense	(49)	(110)
Costs related to short-term lease contracts	-	-
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(708)	(703)

Total	(1,983)	(2,043)

RIGHT-OF-USE ASSETS	31.12.2021	31.12.2020

Real estate	3,336	3,112
Cars	288	416

Total	3,624	3,528

OTHER LIABILITIES	31.12.2021	31.12.2020

Lease liabilities, due	3,714	3,625
up to 1 month	106	106
from 1 to 3 months	212	211
from 3 months to 1 year	919	923
from 1 to 5 years	2,477	2,383
after more than 5 years	-	2

Total	3,714	3,625

34. Notes to the statement of cash flows

Cash and cash equivalents

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

Financial information

Cash and cash equivalents	31.12.2021	31.12.2020

Cash and balances with the Central Bank	50,362	21
Amounts due from banks - current accounts	532	23

Total	50,894	44

As at 31 December 2021 and 31 December 2020 there were no cash and cash equivalents with restricted availability for use.

INTEREST INCOME – RECEIVED	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

From operating activities
Interest received on loans and advances to customers	514,636	705,556
Interest received on CIRS transactions	63,922	60,705
Interest received on IRS transactions	9,221	9,221
Interest received on deposits	-	16
Other interest received	97	37
From investing activities
Interest received on securities measured at fair value through other comprehensive income	4,557	22,379

Total	592,433	797,914

INTEREST EXPENSE – PAID	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

From operating activities
Interest paid on CIRS transactions	102,306	199,952
Interest paid on IRS transactions	2,190	5,296
Interest paid for extending overdraft limits	69	65
Interest paid on liabilities in respect of purchase of receivables	1,126	39,073
Other interest paid	0	-
From financing activities
Interest paid on loans	38,466	68,461
Interest paid on mortgage covered bonds issued	98,360	132,767
Discount and interest paid on bonds issued	22,092	59,556

Total	264,609	505,170

RECONCILIATION OF ITEMS PRESENTED IN THE STATEMENT OF FINANCIAL POSITION WITH THE STATEMENT OF CASH FLOWS			In the statement of cash flows, recognized in
	Note	31.12.2020	financing activities		operating activities			31.12.2021
	Note	31.12.2020	Incurred	Repaid	Monetary changes	Non-monetary changes, including:2)	foreign exchange gains/(losses)	31.12.2021

Amounts due to banks	24	3,575,133	14,111,970	(10,939,689)	(202,750)	(153)	-	6,544,511
overdraft within the limit available 1)		14,275	-	-	(14,275)	-	-	-
liability related to overdraft facilities		3,222,246	14,051,970	(10,939,689)	-	137	-	6,334,664
liability related to term loans		149,864	60,000	-	(60)	43	-	209,847
liability in respect of the purchase of receivables 1)		188,748	-	-	(188,415)	(333)	-	-
Liabilities in respect of mortgage covered bonds issued	26	17,205,554	-	(4,097,600)	-	38,423	30,135	13,146,377
Liabilities in respect of bonds issued	27	4,337,081	6,052,214	(6,677,500)	-	16,367	-	3,728,162

Total		25,117,768	20,164,184	(21,714,789)	(202,750)	54,637	30,135	23,419,050

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

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

35. Related party transactions

35.1 Related party transactions - capital links

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

Financial information

As at 31 December 2021

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

PKO Bank Polski SA	842,080	841,541

Total	842,080	841,541

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

PKO Bank Polski SA	6,544,672	-	63,577	7,844	1,983
PKO BP Finat Sp. z o.o.	-	-	-	18	-
PKO Leasing SA	-	-	-	147	-
Prime Car Management SA	-	-	-	153	-
PKO Towarzystwo Ubezpieczeń SA	-	-	97,246	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	61,757	-	-
PKO VC -fizan	-	-	20,973	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	15,995	-	-

Total	6,544,672	-	259,548	8,162	1,983

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	4,665,477

Total	-	4,665,477

For the period from 1 January 2021 to 31 December 2021

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

PKO Bank Polski SA	5,032	4,881	121,777	96,104	35	30,709
PKO BP Finat Sp. z o.o.	-	-	187	-	-	-
PKO Leasing SA	-	-	293	5	-	-
Prime Car Management SA	-	-	46	1	-	-
PKO Towarzystwo Ubezpieczeń SA	-	-	2,515	2,515	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	350	350	-	-
PKO VC -fizan	-	-	71	71	-	-
NEPTUN - fizan	-	-	59	59	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	103	103	-	-

Total	5,032	4,881	125,401	99,208	35	30,709

As at 31 December 2020

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

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

Total	1,154,740	1,154,692

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

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

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

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	5,577,757

Total	-	5,577,757

For the period from 1 January 2020 to 31 December 2020

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

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

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

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

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

■ On 29 October 2015, the Bank concluded an overdraft facility agreement with PKO Bank Polski SA with a limit of PLN 900,000 thousand for a period of 3 years. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 29 October 2025;

■ On 2 February 2017, the Bank concluded an overdraft facility agreement with PKO Bank Polski SA with a limit of PLN 1,500,000 thousand for a period of 3 years. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 03 February 2026;

■ On 10 July 2019, the Bank concluded an overdraft facility agreement with PKO Bank Polski SA with a limit of PLN 1,000,000 thousand for a period of 3 years. As a result of annexing the agreement, the amount of overdraft was increased to PLN 5,000,000 and may be used to repay liabilities in respect of the loan portfolios purchased and servicing of redemption of mortgage covered bonds, and the lending period was extended until 1 July 2025.

As at 31 December 2021, all the aforementioned facilities were drawn in the full amount.

Furthermore, on 10 September 2020, the Bank concluded a non-revolving working capital facility agreement with PKO Bank Polski SA in PLN with a limit of PLN 300,000 thousand for a period of 6 years. The loan may be drawn in tranches repayable within 5 years. The tranches bear interest at a fixed rate, which is determined for each drawing separately. The Bank used PLN 210 million of that loan. The remaining amount has not been used.

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

■ the Bond Issue Programme:

□ On 30 September 2015, the Bank entered into a PKO Bank Hipoteczny Bond Issuance Programme Agreement (the “Programme”) with PKO Bank Polski SA for a Programme amount of up to PLN 2,000,000 thousand over a period of 4 years, as well as an Underwriting Agreement under which the Underwriter assumes the obligation to take up the Issuer’s Bonds for its own account up to the amount of PLN 2 000 000 thousand. Based on an annex signed on 30 September 2019, the parties extended both agreements for a subsequent 4-year period. By annexing the agreement, the Programme amount was PLN 6,000,000 thousand as at 31 December 2021.

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

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

■ the Public Bond Issue Programme:

□ On 12 October 2020, after the Polish Financial Supervision Authority approved the Basic Prospectus on 8 October 2020, PKO Bank Hipoteczny SA signed with PKO Bank Polski SA (also acting through its branch, the Brokerage Office in Warsaw) the Programme Agreement relating to the Public Bond Issue Programme set up on 11 April 2019. Based on the said agreement, PKO Bank Polski SA acts as the Arranger and Calculation Agent, and the Brokerage Office acts as the Offering Agent, Technical Agent and Issue Underwriter. On 20 December 2021, the last bonds issued under that Programme were redeemed.

■ the International Mortgage Covered Bonds Issue Programme:

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

On 17 November 2015, the Framework Agreement for the Sale of Receivables was concluded with PKO Bank Polski SA. Based on the agreement, in 2021 the Bank continued to purchase portfolios of receivables under mortgage backed residential loans. Further details are available in Notes 20 and 24.

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

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

35.2 Transactions with the State Treasury and its related entities

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

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

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

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

35.3 Related-party transactions – personal links

As at 31 December 2021, 6 entities were related to the Bank through key management personnel of PKO Bank Hipoteczny SA or close relatives of key management personnel, whereas at 31 December 2020 there were 9 such entities. In the above-mentioned periods, the Bank had an active agreement with and made payments for the purchases of goods to only one of these entities.

35.4 Benefits for PKO Bank Hipoteczny SA key management personnel

The principles for determining a policy of variable remuneration components for the Bank’s managers are described in the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2021 (section 6.6).

Financial information

COST OF REMUNERATION OF THE BANK’S MANAGEMENT BOARD AND SUPERVISORY BOARD	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020

The Bank’s Management Board1)
Short-term employee benefits2)	1,902	2,072
Post-employment benefits	272	80
Long-term benefits3)	165	145
Share-based payments settled in cash 4)	413	363
Severance benefits	174	138
Total	2,926	2,798

The Bank’s Supervisory Board (independent Supervisory Board members)
Short-term employee benefits2)	136	135
Total	136	135

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

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

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

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

PROVISION FOR VARIABLE REMUNERATION COMPONENTS	31.12.2021	31.12.2020
PROVISION FOR VARIABLE REMUNERATION COMPONENTS	(for the years 2018-2021)	(for the years 2017-2020)

The Bank’s Management Board1)	2,612	2,367
other members of the management (MRT)2	3,597	3,108

Total provisions	6,209	5,475

REMUNERATION PAID DURING THE YEAR	01.01.2021 - 31.12.2021	01.01.2020 - 31.12.2020
REMUNERATION PAID DURING THE YEAR	(for the years 2017-2020)	(for the years 2016-2019)

granted in cash
The Bank’s Management Board1)	437	376
other members of the management (MRT)2	756	887
granted in the form of financial instruments
The Bank’s Management Board1)	517	640
other members of the management (MRT)2	563	278

Total paid	2,273	2,181

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

2) MRT – Material Risk Takers;

Loans and advances granted by the Bank to its management

In the period from 1 January to 31 December 2021 and from 1 January to 31 December 2020, no loans or advances were granted to the Bank’s management. As at 31 December 2021, the carrying amount of loans or advances granted to the Bank’s management was PLN 627 thousand, and as at 31 December 2020 it was PLN 1,166 thousand. The interest rate and repayment terms are consistent with the arm’s length principle.

36. Fair value of financial assets and liabilities

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

Accounting policies

Classification of financial assets and liabilities	Individual financial assets and liabilities measured at fair value are classified by the Bank to the following categories: ■ Level 1: Prices quoted on active markets; ■ Level 2: Measurement techniques based on observable market data; ■ Level 3: Other measurement techniques. Depending on the category to which financial assets and liabilities are classified, different fair value measurement methods are applied.
Level 1 Prices quoted on active markets	Financial assets and liabilities whose fair value is measured directly on the basis of prices quoted on active markets for identical assets or liabilities (unadjusted). The Bank classifies to this category financial instruments for which there is an active market and whose fair value is determined based on the market purchase price. Securities are measured in accordance with Bondspot fixing.
Level 2 Measurement techniques based on observable market data	Financial assets and liabilities whose fair value is determined using measurement models, when all significant input data is observable on the market either directly (as prices) or indirectly (based on prices). In this category the Bank classifies financial instruments for which there is no active market, i.e. CIRS, IRS and FX forward derivatives.
Level 3 Other measurement techniques	Financial assets and liabilities whose fair values are measured using measurement models, if inputs are not based on observable market data (unobservable inputs). The Bank did not have any instruments classified to this category.
Transfers	Transfers of instruments between Level 1 and Level 2 are based on the availability of quotations from an active market as at the end of a reporting period. Instruments are transferred from Level 2 to Level 3 if an observable factor is replaced in the measurement with an unobservable one or if a new unobservable risk factor having a significant effect on the measurement of an instrument is applied. Instruments are transferred from Level 3 to Level 2 if an unobservable factor is replaced in the measurement with an observable one or if the effect of an unobservable factor on the measurement is no longer significant. There were no transfers between the fair value hierarchy levels in 2021 and 2020.

Measurement techniques and observable input data

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

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

Financial information

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31 DECEMBER 2021	Note	Carrying amount	Level 1	Level 2	Level 3
	Note	Carrying amount	Prices quoted on active markets	Measurement techniques based on observable market data	Other measurement techniques

Derivative hedging instruments	18	841,541	-	841,541	-
CIRS		841,412	-	841,412	-
FX forward		129	-	129	-
IRS		-	-	-	-
Securities	19	1,870,697	1,060,935	809,762	-
measured at fair value through other comprehensive income		1,870,697	1,060,935	809,762	-
Total financial assets measured at fair value		2,712,238	1,060,935	1,651,303	-
					-
Derivative hedging instruments	18	1,983	-	1,983	-
CIRS		-	-	-	-
FX forward		320	-	320	-
IRS		1,663	-	1,663	-
Total financial liabilities measured at fair value		1,983	-	1,983	-

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

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

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

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

Accounting policies

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

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

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

■ cash and balances with the Central Bank;

■ amounts due from banks;

■ amounts due to banks;

■ amounts due to customers;

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

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

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

Financial information

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 DECEMBER 2021	fair value hierarchy level	measurement method	31.12.2021
	fair value hierarchy level	measurement method	carrying amount	fair value

Cash and balances with the Central Bank	N/A	amount of consideration due	50,362	50,362
Amounts due from banks	2	discounted cashflows	532	532
Loans and advances to customers, including:			22,848,599	22,406,196
residential loans	3	discounted cashflows	22,848,599	22,406,196
Other financial assets	3	amount of consideration due taking into account impairment	26	26
Amounts due to banks	2	discounted cashflows	6,544,511	6,544,511
Amounts due to customers	2	discounted cashflows	6,617	6,617
Liabilities in respect of mortgage covered bonds issued	1	quotation on the regulated market	13,146,377	13,283,746
Liabilities in respect of bonds issued, including issued under:			3,728,162	3,728,162
Bond Issue Programme and an individual agreement	2	discounted cashflows	3,728,162	3,728,162
Other financial liabilities	3	amount of consideration due	14,925	14,925

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 DECEMBER 2020	fair value hierarchy level	measurement method	31.12.2020
	fair value hierarchy level	measurement method	carrying amount	fair value

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

37. Operating segments

In 2021 and 2020 the Bank did not analyse its operations by segments due to the specific nature of its operations. The whole loan portfolio of the Bank is uniform and consists of residential loans granted to retail customers for the financing of real estate located in Poland. All operations of the Bank represent one segment. The main operational decision-maker is the Bank’s Management Board. The Bank’s gross profit/(loss) is analysed at the level of all operations of the Bank. Therefore, the financial data presented in the statement of financial position and the income statement is representative for the Bank as a whole, which consists of a single operating segment.

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

38. Risk management at PKO Bank Hipoteczny SA

Risk management at PKO Bank Hipoteczny SA is aimed at ensuring the financial stability of the Bank, safeguarding the value and security of the mortgage covered bonds issued and guaranteeing the safety of funds resulting from the issue of bonds and the other sources of financing the Bank’s operations. The risk management system is also intended to ensure appropriate and as comprehensive as possible information on the risk when making decisions, and to effectively embed risk management in the Bank’s organizational culture. The assumed level of risk plays an important role in the planning process.

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

Type of risk	Section
credit risk	39
concentration risk	40
residual risk	41
liquidity risk	42
interest rate risk	43
foreign exchange risk	44
derivative instruments risk	45
model risk	46
operational risk	47
business risk	48
compliance risk	49
reputation risk	50
capital adequacy risk	51

38.1 Key risk management policies

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

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

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

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

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

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

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

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

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Risk management system

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

38.2 Components of the risk management system

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

risk identification

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

Risk measurement and assessment

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

risk control

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

risk forecasting and monitoring

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

risk reporting

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

management actions

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

38.3 Risk management in the Bank

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

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

Risk management takes place at three independent, complementary levels:

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

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

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

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

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

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

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

Risk Bureau

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

■ identification of risk factors and sources of risk;

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

■ measuring and assessing capital adequacy;

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

The Risk Bureau may also recommend improvements to the risk management system and present opportunities to implement corrective actions with regard to infringements of the risk controls, including in particular the applicable risk tolerance limits.

Loan Bureau

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

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

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

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

Security and Legal Services Bureau

The Security and Legal Services Bureau is responsible for shaping the reputation risk management system.

Compliance Team

The Compliance Team is responsible, in particular, for shaping the compliance risk management system, including identification, assessment, control and monitoring of that risk, and for the related reporting.

Validation and Risk Control Team

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

Risk management is supported by the following committees:

Supervisory Board Audit and Finance Committee (“AFC”)

The Committee supports the Supervisory Board in particular by:

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

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

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

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

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

Supervisory Board Risk Committee (“RC”)

The Committee supports the Supervisory Board in particular by:

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

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

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

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

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

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

Assets & Liabilities Management Committee (“ALCO”)

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

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

■ managing the Bank’s capital adequacy;

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

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

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

Credit Committee (“CC”)

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

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

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

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

Strategy and Business Initiatives Committee (“SBIC”)

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

■ supporting the reputation and compliance risk management function;

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

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

Operational and Data Quality Risk Committee (“ODQRC”)

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

■ supporting the operational risk function;

■ overseeing the functioning of the operational risk management, including tasks relating to ensuring business continuity of the Bank and the security of the information and infocommunication environment;

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

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

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

38.4 Identification of material risks

Materiality of different risks

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

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

■ material risks – subject to active management;

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

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

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

Risk types considered to be material:

■ credit risk;

■ liquidity risk, including financing risk;

■ interest rate risk;

■ operational risk;

■ model risk.

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

■ concentration risk;

■ foreign exchange risk;

■ residual risk;

■ business risk, including risk of macroeconomic changes;

■ compliance risk;

■ reputational risk;

■ capital adequacy risk, including risk of excessive leverage.

■ derivative instruments risk.

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

In the Risk Management Strategy the Bank has defined a number of strategic limits defining the appetite for different risks. The limits are regularly monitored. In 2021, none of the strategic limits was exceeded.

39. Credit risk management

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

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

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

39.1 Credit risk measurement and assessment

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

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

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

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

When purchasing receivables in respect of residential loans from PKO Bank Polski SA, the Bank also performs an assessment of the credit risks of the contracts to be purchased, in accordance with the Bank’s methodology for assessing purchased receivables. The assessment covers, in particular: the customer’s creditworthiness at the time PKO Bank Polski SA granted the loan to be transferred, the current behavioural scoring and the current timeliness of repayments, eliminating from the transfer receivables which do not satisfy the methodology criteria.

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

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

■ probability of default – “PD”;

■ loss given default – “LGD”;

■ expected credit loss – “ECL”;

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

■ coverage ratio – “CR”;

■ risk costs – “RC”;

■ vintage analyses;

■ stress testing;

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

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

The loan portfolio structure taking into account the PD parameters is presented in the table in Note 39.4.4. “Loans and advances to customers”.

39.2 Impairment loss on credit exposures

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

In accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms (the “CRR”), the Bank defines default of a borrower if the Bank considers that the borrower is unlikely to pay its credit obligations without recourse by the Bank, or the borrower is past due more than 90 days on any material credit obligation; indications of default are the same as the indications of impairment. On 1 January 2021, the Bank implemented EBA/GL/2016/07 Guidelines on the application of the definition of default set out in Article 178 of the CRR. The main principles for identification of default introduced by the Bank in connection with the Guidelines are as follows:

■ consistent identification of default at the level of borrower in the PKO Bank Polski Group;

■ a borrower’s past due default occurs when amounts overdue in respect of principal, interest or fees within the PKO Bank Polski Group have exceeded the materiality threshold for 90 days;

■ determining an absolute materiality threshold for all exposures at the level of PLN 400 and introducing a relative threshold for amounts overdue of 1% expressed as a ratio of credit obligations to total balance sheet exposures in the Group;

■ the contagion by default of private exposures belonging to owners of business entities which have been identified as being in a default where owners have unlimited liability.

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

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

■ off-balance-sheet financial and guarantee exposures.

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

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

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

The result of such comparison, referred to as α statistical value, is applied to a threshold value above which an increase in credit risk is considered material. A threshold value is determined based on historical relations between α statistical value and the occurrence of default. In this process, the probability of the following events is reduced to a minimum:

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

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

According to data as at 31 December 2021, a 2 times or bigger increase in PD in relation to the value at the moment of recognition in the books is an indication of a significant deterioration in credit quality, while as at 31 December 2020, it was 2.5 times or bigger. With respect to credit exposures for which the current risk of insolvency does not exceed the level reflected in the price of the financing granted, the results of a comparison of PD curves as at the date of initial recognition and as at the reporting date do not entail the recognition of a significant credit risk increase.

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

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

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

■ a significant increase in LTV;

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

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

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

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

Indications of impairment of credit exposures comprise in particular:

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

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

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

■ consumer bankruptcy being declared in respect of any of the co-borrowers or the filing of a bankruptcy petition by all the borrowers;

■ death of all the borrowers;

■ a material deterioration in the borrower’s financial and economic position in respect of credit obligations to other PKO BP Group entities;

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

Due to the specialized nature of its business, i.e. having one type of credit product on offer, the Bank calculates its expected credit loss on the basis of one homogeneous portfolio, without applying additional segmentation. The Bank applies the portfolio method to calculate the expected credit loss.

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

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

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

In calculating the value of the ultimate expected loss, the Bank also considers estimates of the future macroeconomic conditions. In the case of the portfolio analysis, the impact of macroeconomic scenarios is taken into account in the level of specific risk parameters. The methodology of calculation of the risk parameters includes back-testing of the dependence of the value of the parameters on macroeconomic conditions. Three macroeconomic scenarios developed on the basis of the Group’s forecasts are used for the purpose of calculating expected loss (as in the identification of an indication of a material increase in credit risk) – a baseline scenario with 75% probability and two alternative scenarios: with 5% probability (an optimistic scenario) and 20% probability (a pessimistic scenario). The forecast ratios include: GDP growth rates, unemployment rate, and real estate price index. The ultimate expected loss is the average of expected losses in each scenario, weighted by the probability of the scenarios. The baseline scenario is based on base macroeconomic forecasts. The forecasts are prepared on the basis of quantitative models and adjusted for one-off events.

Stress scenarios refer to so-called internal shocks, where the external variables (interest rates abroad) do not change relative to the baseline scenario. Stress scenarios are developed on the basis of statistical and econometric analyses, i.e. they do not reflect the events to be described, but the projected path Two scenarios are identified: an optimistic scenario and a pessimistic scenario. The share of scenarios for the GDP path that falls between the optimistic and the pessimistic scenario is referred to as the baseline scenario probability. Based on this assumption, GDP dynamics is projected assuming a time-varying potential growth rate of the Polish economy calculated using quarterly data provided by the Central Statistical Office. After determining the extreme paths of GDP dynamics, the values of other macroeconomic variables used in the scenarios (unemployment rate, house price index) are estimated.

The unemployment rate is calculated on the basis of a quantified relationship with the difference between the GDP dynamics and the potential economic growth rate. The result is adjusted for important structural changes occurring in the Polish economy which are not covered by the quantitative model, in particular:

■ the ageing of the Polish population (and the emergence of unsatisfied demand for labour, which will limit the scale of the increase in the unemployment rate in a situation of a slowdown in economic growth)

■ the Polish labour market reaching a state close to full employment (due to supply constraints, the space for further decline in the unemployment rate is getting smaller)

■ migrant inflows (only partially included in official statistics).

The level of the property price index is determined on the basis of changes in GDP, taking into account supply and demand conditions on the market, based on data and trends presented by the NBP in its publication “Information on housing prices and the situation on the residential and commercial property market in Poland” and the Group’s own analyses.

The tables below present forecasts of the main macroeconomic indices adopted as at 31 December 2021 and 31 December 2020, and the respective probabilities of occurrence assumed.

Scenario as at 31.12.2021	baseline			optimistic			pessimistic
probability	75%			5%			20%
	2022	2023	2024	2022	2023	2024	2022	2023	2024
GDP growth y/y	5.2	3.7	3.0	10.9	6.6	3.0	(0.5)	0.9	3.0
Unemployment rate	3.0	2.6	2.5	2.0	1.7	2.5	4.0	3.5	2.5
Real estate price index	109.4	106.6	102.5	116.3	112.8	102.5	102.4	100.8	102.5

Scenario as at 31.12.2020	baseline			optimistic			pessimistic
probability	75%			5%			20%
	2021	2022	2023	2021	2022	2023	2021	2022	2023
GDP growth y/y	5.4	4.7	3.0	9.9	7.0	3.0	0.8	2.4	3.0
Unemployment rate	5.9	4.5	3.7	5.2	3.4	3.7	8.0	5.6	3.7
Real estate price index	99.5	102.9	102.5	103.3	103.4	102.5	96.1	99.5	102.5

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

■ the financial instrument has a low risk of default;

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

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

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

Both the process of assessing a material increase in credit risk and the process of calculating the expected loss are carried out on a monthly basis at the individual exposure level, with macroeconomic forecast data updated on a quarterly basis. A dedicated computing environment is used which enables the results to be distributed to the Group’s internal units.

In 2021, the Bank made the following modifications to the impairment measurement model:

■ aligning the definition of default to EBA Guidelines (EBA/GL/2016/07) effective from 1 January 2021;

■ introducing an additional indication of impairment (death of the borrowers) and indication of a significant increase in credit risk associated with past due amounts exceeding 90 days which do not meet the materiality criteria in order to comply with the requirements of the amended Recommendation R.

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

39.3 Credit risk control

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

39.4 Credit risk forecasting and monitoring

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

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

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

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

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

39.4.1 Maximum exposure to credit risk

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

MAXIMUM EXPOSURE TO CREDIT RISK	31.12.2021	31.12.2020

Derivative hedging instruments	841,541	1,154,692

Balance sheet exposure - total	841,541	1,154,692

39.4.2 Amounts due from banks

AMOUNTS DUE FROM BANKS	31.12.2021	31.12.2020

Amounts not overdue, not impaired (counterparty rating A2)	532	23

Total, gross	532	23
Allowances for expected credit losses	-	-

Total, net	532	23

39.4.3 Securities

SECURITIES	31.12.2021	31.12.2020

Issued by the State Treasury, PLN Treasury bonds (rating A)	1,060,935	1,241,821
NBP bills	809,762	-

Total, gross	1,870,697	1,241,821
Allowances for expected credit losses	-	-

Total, net	1,870,697	1,241,821

39.4.4 Loans and advances to customers

The loan portfolio is characterized by a low level of impaired exposures. At 31 December 2021, 299 impaired loans were identified, and their share in the total loan portfolio amount was 0.25%, whereas as at 31 December 2020, 130 impaired loans were identified, and their share in the total loan portfolio amount was 0.11%. The increase in the share of impaired loans is partly due to the fact that a new definition of default, consistent with Guidelines EBA/GL/2016/07, has been applied since 1 January 2021.

The structure of overdue loans is presented below:

LOANS OVERDUE AND IMPAIRED OR IMPAIRED AS AT 31.12.2021	up to 30 days	from 30 to 90 days	more than 90 days	TOTAL

Stage 1	19,312	-	-	19,312
Stage 2	52,601	14,518	1,863	68,982
Stage 3 and POCI	5,090	2,904	16,536	24,530

Total, gross	77,003	17,422	18,399	112,824

LOANS OVERDUE AND IMPAIRED OR IMPAIRED AS AT 31.12.2020	up to 30 days	from 30 to 90 days	more than 90 days	TOTAL

Stage 1	37,572	-	-	37,572
Stage 2	66,196	11,089	-	77,285
Stage 3	430	3,570	12,553	16,553

Total, gross	104,198	14,659	12,553	131,410

Due to the COVID-19 pandemic, in 2020 the Bank allowed the customers to suspend up to 6 principal or principal-and-interest instalments on the terms and conditions adopted by the banking sector in cooperation with the Polish Bank Association. Taking advantage of the aforementioned moratorium (known as the non-statutory moratorium) did not automatically change the classification of exposures to exposures under restructuring, unless they had been classified as such previously. Throughout the period of the moratorium and afterwards, the Bank assessed the probability of default by debtors covered by the moratorium in accordance with the standard procedures, taking into account in particular the repayment delays occurring after the suspension period. The moratorium was offered until 30 September 2020, therefore, up until 31 March 2021, the Bank continued suspending instalments for its customers who took advantage of this option when it was offered.

Moreover, on 24 June 2020 the Bank gave customers the possibility to suspend the performance of a loan agreement based on the Act on subsidization of interest on bank loans granted to provide liquidity to entrepreneurs affected by COVID-19 and a simplified arrangement approval procedure due to COVID-19 of 19 June 2020 (the “Shield 4.0”). The total number of loan agreements covered by statutory moratoria in 2021 was 18. As at 31 December 2021 there were no loans subject to statutory moratoria, and there were 9 such loans totalling PLN 2,219 thousand as at 31 December 2020.

The Bank has not identified a material deterioration in the quality of the loan portfolio as a result of COVID-19 pandemic. The Bank is actively monitoring the collectability of loans which were subject to statutory or non-statutory moratoria after the moratorium has expired, and there are no suspended loans in the Bank’s portfolio as at 31 December 2021. In 2021, the Bank did not recognize any additional allowances for expected credit losses due to the impact of the COVID-19 pandemic. The COVID-19 pandemic does not affect the going concern principle.

Loan portfolio and financial liabilities granted by PD range

The PD parameter presented in the following tables defines the probability of default over a 12-month horizon.

LOANS AND ADVANCES TO CUSTOMERS	31.12.2021
PD RANGE	Stage 1	Stage 2	Stage 3 and POCI	Total, gross

<0.01%	13,166	143		13,309
0.01% - 0.02%	996,494	128		996,622
0.02% - 0.05%	5,605,454	2,664		5,608,118
0.05% - 0.1%	5,001,909	3,365		5,005,274
0.1% - 0.3%	7,051,692	347,571	104	7,399,367
0.3% - 1.0%	2,180,635	928,849		3,109,484
1.0% - 10%	218,872	391,720		610,592
10% - 99.99%	-	129,762		129,762
100%	-	-	57,316	57,316

Total gross amount	21,068,222	1,804,202	57,420	22,929,844

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

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

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

LOAN COMMITMENTS	31.12.2021
PD RANGE	Stage 1	Stage 2	Stage 3 and POCI	Total

<0.01%	762	-	-	762
0.01% - 0.02%	5,998	-	-	5,998
0.02% - 0.05%	17,708	-	-	17,708
0.05% - 0.1%	9,732	-	-	9,732
0.1% - 0.3%	16,917	-	-	16,917
0.3% - 1.0%	5,790	-	-	5,790
1.0% - 10%	0	92	-	92
10% - 99.99%	-	-	-	-
100%	-	-	-	-

Total nominal amount	56,907	92	-	56,999

LOAN COMMITMENTS	31.12.2020
PD RANGE	Stage 1	Stage 2	Stage 3	Total

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

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

39.4.5 Forbearance practices

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

Forbearance changes in repayment terms may consist of:

■ dividing the overdue debt into instalments;

■ changing the repayment formula (annuity instalments, decreasing instalments);

■ extending the loan period;

■ changing the interest rate;

■ changing the margin;

■ reducing the amounts due.

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

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

The inclusion of such exposures in the portfolio of serviced exposures (discontinuation of recognition of the forbearance agreement as an impairment trigger) takes place at least 12 months after the introduction of forbearance, provided that all payments in arrears and at least six scheduled payments have been made by the customer and, in the Bank’s opinion, the current situation of the customer does not pose a threat to their compliance with the terms of the restructuring agreement.

Exposures cease to satisfy the criteria of forborne exposure when the following conditions are met jointly:

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

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

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

Forborne exposures are monitored on a current basis. Due to the impairment trigger or a significant increase in credit risk identified in connection therewith, throughout the whole period of their recognition, allowances are recognized for these exposures in the amount of expected losses over the life horizon of the exposure.

EXPOSURES SUBJECT TO FORBEARANCE IN THE LOAN PORTFOLIO	31.12.2021	31.12.2020

Gross loans and advances to customers, including:	22,929,844	24,980,694
subject to forbearance	8,964	6,201
Allowances for expected credit losses, including:	(81,245)	(78,035)
on loans and advances subject to forbearance	(1,915)	(1,174)

Net loans and advances to customers, including:	22,848,599	24,902,659
subject to forbearance	7,049	5,027

39.5 Credit risk reporting

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

39.6 Credit risk management actions

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

■ strategic and internal (portfolio) risk tolerance limits;

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

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

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

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

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

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

40. Concentration risk management

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

■ exposures to individual customers or groups of related customers;

■ exposures subject to common or correlated risk factors;

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

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

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

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

GROSS LOANS AND ADVANCES TO CUSTOMERS – CONCENTRATION RATIO	31.12.2021	31.12.2020

10 largest exposures	0.05%	0.05%
20 largest exposures	0.10%	0.09%
50 largest exposures	0.22%	0.21%
100 largest exposures	0.42%	0.40%

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

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

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

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

■ limits of concentration of internal receivables;

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

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

In the period ended 31 December 2021 and in any of the previous reporting periods, the Bank did not exceed any of the concentration limits.

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

41. Residual risk management

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

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

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

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

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

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

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

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

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

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

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

GROSS LOANS AND ADVANCES TO CUSTOMERS BY LTV BASED ON MARKET VALUATION - SHARE	31.12.2021	31.12.2020

below 50%	64%	47%
51% – 60%	22%	24%
61% - 70%	11%	18%
71% - 80%	3%	9%
81% - 90%	0%	2%
Total	100%	100%
Average LTV based on market valuation	44%	50%

GROSS LOANS AND ADVANCES TO CUSTOMERS BY LTV BASED ON MARKET VALUATION - AMOUNT	31.12.2021	31.12.2020

below 50%	14,642,602	11,767,792
51% – 60%	4,990,063	5,960,726
61% - 70%	2,646,614	4,521,396
71% - 80%	640,347	2,341,902
81% - 90%	10,218	388,878
Total, gross	22,929,844	24,980,694

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

GROSS LOANS AND ADVANCES TO CUSTOMERS - BY GEOGRAPHICAL REGION	31.12.2021	31.12.2020

Warsaw region	21.9%	22.0%
Wrocław region	11.9%	11.9%
Gdańsk region	11.4%	11.4%
Poznań region	10.4%	10.4%
Katowice region	9.8%	9.7%
Kraków region	8.2%	8.1%
Szczecin region	7.3%	7.3%
Łódź region	7.3%	7.3%
Lublin region	6.3%	6.3%
Białystok region	5.5%	5.6%

Total	100.0%	100.0%

A change in comparative data as at 31 December 2020 is due to an update to the poviat to region mapping vocabularies which took place during the reporting period. The data as at 31 December 2020 were recalculated and presented according to the vocabulary applied for the current data.

42. Liquidity risk management

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

Lack of liquidity may arise, in particular, from an inappropriate structure of assets and liabilities, including off-balance sheet, mismatch of cash flows, counterparty default, customers’ sudden realization of contingent commitments, the inability to roll over bonds or other market events.

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

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

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

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

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

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

42.1 Liquidity risk measurement and assessment

The Bank applies the following liquidity risk measures:

■ contractual, adjusted and stress-test liquidity gap;

■ liquidity surplus and survival horizon with no external support;

■ regulatory liquidity measures:

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

□ NSFR – net stable funding ratio

■ the concentration of funding sources;

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

■ liquidity stress tests.

The actualized liquidity gaps as at 31 December 2021 and as at 31 December 2020 are presented below.

LIQUIDITY GAP AS AT 31.12.2021	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months

Adjusted periodic gap	1,335,371	1,511,967	151,151	(2,797,460)	(254,439)	(3,633,745)	(12,406,027)	16,093,182
Adjusted cumulative periodic gap	1,335,371	2,847,338	2,998,489	201,029	(53,410)	(3,687,155)	(16,093,182)	-

As at 31 December 2021, in the ranges of up to 6 months, the cumulative adjusted liquidity gap was positive, which means the surplus of maturing assets increased by estimated inflows from the available overdraft limit over mature liabilities in the short and medium term.

LIQUIDITY GAP AS AT 31.12.2020	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months

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

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

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

SENSITIVITY MEASURE	31.12.2021	31.12.2020

Excess liquidity in the horizon of up to 1 month	2,291,169	3,829,808

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

SENSITIVITY MEASURE	31.12.2021	31.12.2020

Liquidity coverage ratio up to 1 month (LCR)	187.8%	1,762.8%
LCR regulatory limit	100.0%	100.0%

On 28 June 2021, Regulation (EU) 2019/876 of 20 May 2019 of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and (EU) (the “CRR”) with regard to the net stable funding ratio (NSFR) came into force. The Regulation introduced a regulatory limit for NSFR at 100%. At the same time, in accordance with Article 94(2) of the Act on Macroprudential Supervision, the provisions of PFSA Resolution no. 386/2008 ceased to apply (including regulatory liquidity measures M3 and M4) on the date of introduction of the 100% NSFR requirement.

The net stable funding ratio (NSFR) applicable from 28 June 2021 is presented in the table below:

SENSITIVITY MEASURE	31.12.2021	31.12.2020

Net stable funding ratio (NSFR)	100.9%
NSFR regulatory limit	100.0%

On 21 December 2021, the Bank received the PFSA's position on the interpretation of the provisions of the CRR according to which mortgage bonds issued under applicable national legislation do not meet the conditions set out in Article 428f(2)(c), i.e. they cannot be treated as interdependent for the purpose of calculating the NSFR. Consequently, starting from 31 December 2021, the Bank ceased to apply interdependence in the construction of the NSFR measure and adjusted its balance sheet structure to meet the regulatory requirements taking into account the PFSA's position. As at 31 December 2021, the NSFR ratio was 100.9% and was above the regulatory minima.

42.2 Liquidity risk control

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

42.3 Liquidity risk forecasting and monitoring

The liquidity risk exposure of PKO Bank Hipoteczny SA as at 31 December 2021 and 31 December 2020 was within the strategic and internal limits set. During 2021 and 2020 the Bank did not exceed any of the liquidity standards nor any strategic or internal limits.

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

42.4 Liquidity gap in the presentation of contractual cash flows

Liquidity gap in the presentation of contractual cash flows is a mismatch between the inflows and outflows classified in a given range. In the calculation of liquidity gap relating to cash flows, the Bank takes into account all instruments concluded as at the balance sheet date. An increase in the amount of loans granted or rolling over of financing for a consecutive period is not taken into account. However, in accordance with the Bank’s internal methodology, it is assumed that funds available under credit lines will be used, given the nature of these instruments (stand-by line used to finance current operations).

31.12.2021	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months	Total

Inflows	50,894	963,932	282,139	427,181	1,006,578	1,723,071	5,920,100	22,953,330	33,327,225
securities	-	810,953	-	3,060	159,138	37,031	977,650	-	1,987,832
loans and advances to customers	-	152,979	282,139	424,121	847,440	1,686,040	4,942,450	22,953,330	31,288,499
other	50,894								50,894

Outflows	-	936,684	870,497	5,029,481	916,730	3,099,973	13,565,896	64,187	24,483,448
amounts due to banks	-	-	34,367	34,256	69,740	138,412	6,788,991	-	7,065,766
liabilities in respect of mortgage covered bonds issued	-	36,432	10,992	3,388,751	315,315	2,959,397	6,776,905	64,187	13,551,979
unsecured bonds issued	-	827,141	809,084	1,594,114	521,214	-	-	-	3,751,553
disbursement of loan commitments	-	15,960	16,054	12,360	10,461	2,164	-	-	56,999
other	-	57,151	-	-	-	-	-	-	57,151

Inflows due to initialled and available revolving current account loans	1,284,477	-	-	1,381,000	-	-	-	-	2,665,477
Outflows due to repayment of current account loans used	-	-	-	-	-	-	2,665,477	-	2,665,477

Inflows from derivative hedging instruments	-	32,681	943	2,763,073	269,490	2,353,079	4,756,009	4,185	10,179,460
Outflows on derivative hedging instruments	-	15,680	33,542	2,671,441	353,566	2,318,965	4,438,169	4,400	9,835,763

Periodic gap	1,335,371	44,249	(620,957)	(3,129,668)	5,772	(1,342,788)	(9,993,433)	22,888,928	9,187,474

Cumulative gap	1,335,371	1,379,620	758,663	(2,371,005)	(2,365,233)	(3,708,021)	(13,701,454)	9,187,474

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

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

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

Inflows due to initialled and available revolving current account loans	3,378,483	49,274	-		-		-		-		-		-		3,577,757
Outflows due to repayment of current account loans used	-	-	-		-		-		1,427,757		2,000,000		150,000		3,577,757

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

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

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

42.5 Concentration of funding sources

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

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

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

■ funding supplied by the parent;

■ issue of own bonds.

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

STRUCTURE OF THE BANK'S FINANCING	31.12.2021	31.12.2020

Mortgage covered bonds issued	51.3%	63.0%
Funds from the parent entity	25.5%	12.5%
Bonds issued	14.6%	15.9%
Equity	8.3%	7.7%
Other	0.3%	0.9%

Total	100.0%	100.0%

The share of funding raised from the parent entity amounted to 25.5% as at 31 December 2021 and 12.5% as at 31 December 2020. This share increased compared with the level at 31 December 2020 due to redemption of mortgage covered bond issued maturing in 2021 using funds obtained from the parent company.

Seeking to reduce the concentration risk of funding sources, the Bank has implemented a system of internal limits, both short- and long-term, taking into account the dates of mortgage covered bond issues carried out by the Bank. In the period ended 31 December 2021 and 31 December 2020 none of these limits were exceeded.

42.6 Liquidity stress tests

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

■ shock changes in market parameters on financial markets;

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

■ downrating of the Bank’s counterparties and of the Bank;

■ deterioration in the creditworthiness of borrowers;

■ increase in the instability of funding sources;

■ reduced repayments and increased disbursements of mortgage loans granted;

■ inability to roll over short-term bond issues or obtain new ones;

■ inability to roll over covered bond issues or obtain new ones.

Stress test results are used in particular in:

■ monitoring the Bank’s exposure to liquidity risk under stressed conditions;

■ the process of setting internal limits for liquidity risk measures;

■ controlling liquidity maintenance, for each day of the 30-day time band;

■ the process of planning the Bank’s statement of financial position;

■ the process of determining conditions triggering the implementation of liquidity emergency plans of the Bank.

Test results are presented at the meetings of the Management Board and the Supervisory Board of the Bank.

The stress tests conducted on the basis of the Bank’s financial data as at 31 December 2021 and as at 31 December 2020 did not indicate any risk to the Bank’s business due to the occurrence of hypothetical stressed market conditions. Owing to the well-balanced funding structure, long maturities of most of its liabilities and a sufficient level of liquid assets, the Bank has a high ability to survive a liquidity crisis.

42.7 Liquidity risk reporting

The Bank prepares liquidity risk reports on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to liquidity risk and information about the utilization of the liquidity risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

42.8 Liquidity risk management actions

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

■ procedures for liquidity risk management, including in particular emergency plans;

■ internal limits limiting liquidity risk;

■ deposit and derivative transactions, including structural currency transactions and transactions for sale or purchase of securities;

■ unconditional liquidity support instruments obtained from PKO Bank Polski SA;

■ transactions ensuring long-term funding of the lending activity.

The Bank pays particular attention to matching the timing of cash flows upon the maturity of material liabilities (redemption of mortgage covered bonds).

43. Interest rate risk management

The operations of PKO Bank Hipoteczny SA are exposed to interest rate risk, which is defined as the risk of loss on balance sheet items and off-balance sheet positions, sensitive to movements in the interest rates, as a result of changes in the market interest rates.

The aim of interest rate risk management is to limit any potential losses incurred due to changes in the market interest rates to an acceptable level by the proper shaping of the structure of the balance sheet items and off-balance sheet positions, among other things, in terms of the matching of the repricing periods.

43.1 Interest rate risk measurement and assessment

In the process of interest rate risk management, the Bank uses the net interest income sensitivity (NIIS) measure, economic capital sensitivity measure, stress tests and repricing gap reports.

The net interest income sensitivity (NIIS) measure is a measure determining the change in net interest income arising from a sudden change in the interest rates while the economic value of capital sensitivity measure is a measure illustrating the impact of such a change on the fair value of an item in the banking portfolio. The measures are calculated assuming a parallel shift in the yield curves of 100 b.p. up and down (whichever scenario is more unfavourable), and take into account the diversification of repricing dates for individual interest items in each subsequent time band.

SENSITIVITY MEASURE	31.12.2021	31.12.2020

Net interest income sensitivity (NIIS)	(13,502)	(14,943)
Economic value of capital sensitivity	(7,515)	(2,881)

Stress tests are used to estimate potential losses resulting from the maintained structure of the balance sheet and off-balance sheet positions in the event of the occurrence of the hypothetical scenarios within which parallel shifts in interest rate curves by ±50 bps, ±100 bps and ±200 bps are arbitrarily assumed. Scenarios for changes in interest rate curves and reversed stress test scenarios are also adopted, assuming a drop in the Bank’s financial result to PLN 0 and a loss of the Bank’s economic value of 1% of its equity.

The repricing gap presents the difference between the value of the assets and liabilities exposed to interest rate risk, which are repriced within the given time band, where positions which are not repriced (fixed-interest items) are recognized at their maturity dates.

The repricing gap report presented below includes assets, liabilities and financial liabilities granted which are sensitive to changes in interest rates. They do not include contingent liabilities which are insensitive to interest rate risk, the Bank’s own funds, amounts due from banks in the form of current account balances.

31.12.2021	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	8,447,790	13,811,908	2,168,512	2,942	5,456	262,014	-	24,648,260
balances with the Central Bank	50,362	-	-	-	-	-	-
securities	1,572,000	-	303,000	-	-	-	-	1,875,000
loans and advances to customers	6,825,428	13,811,908	1,865,512	2,942	5,456	262,014	-	22,773,260

Liabilities	(6,786,023)	(5,089,000)	(3,979,640)	(248,368)	(2,299,700)	(4,924,385)	(60,000)	(23,387,116)
amounts due to banks	(4,334,523)	(2,000,000)	-	-	-	(210,000)	-	(6,544,523)
liabilities in respect of mortgage covered bonds issued	(1,530,000)	(1,500,000)	(2,759,640)	(248,368)	(2,299,700)	(4,714,385)	(60,000)	(13,112,093)
unsecured bonds issued	(921,500)	(1,589,000)	(1,220,000)	-	-	-	-	(3,730,500)

Derivative hedging instruments – assets	531	-	2,757,706	248,684	2,300,341	4,713,570	60,000	10,080,832
Derivative hedging instruments – liabilities	(4,232,660)	(5,114,987)	(7,681)	(305)	(1,294)	(4,122)	-	(9,361,049)

Periodic gap	(2,570,362)	3,607,921	938,897	2,953	4,803	47,077	-	2,031,289

Cumulative gap	(2,570,362)	1,037,559	1,976,456	1,979,409	1,984,212	2,031,289	2,031,289

31.12.2020	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	8,463,404	15,282,116	2,127,482	2,811	6,285	183,319	-	26,065,417
securities	935,000	-	303,000	-	-	-	-	1,238,000
loans and advances to customers	7,528,404	15,282,116	1,824,482	2,811	6,285	183,319	-	24,827,417

Liabilities	(6,380,158)	(3,751,000)	(1,651,000)	(3,033,880)	(3,018,079)	(7,187,570)	(60,000)	(25,081,687)
amounts due to banks	(3,410,658)	-	-	-	-	(150,000)	-	(3,560,658)
liabilities in respect of mortgage covered bonds issued	(2,030,000)	(2,000,000)	-	(3,033,880)	(3,018,079)	(7,037,570)	(60,000)	(17,179,529)
unsecured bonds issued	(939,500)	(1,751,000)	(1,651,000)	-	-	-	-	(4,341,500)

Derivative hedging instruments – assets	519	-	1,960	3,033,888	3,016,986	7,037,393	60,000	13,150,746
Derivative hedging instruments – liabilities	(4,232,662)	(7,956,551)	(1,924)	(1,538)	(8,518)	(5,419)	-	(12,206,612)

Periodic gap	(2,148,897)	3,574,565	476,518	1,281	(3,326)	27,723	-	1,927,864

Cumulative gap	(2,148,897)	1,425,668	1,902,186	1,903,467	1,900,141	1,927,864	1,927,864

43.2 Interest rate risk control

The control of interest rate risk involves determining risk limits appropriate to the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for interest rate risk, which are subject to monitoring, and in the event that they are exceeded management actions are taken.

43.3 Interest rate risk forecasting and monitoring

The interest rate risk exposure of PKO Bank Hipoteczny SA as at 31 December 2021 and 31 December 2020 was within the strategic and internal limits set. Owing to effective mitigating activities, interest rate risk was relatively low and caused by the mismatch between the repricing dates of the interest rates on the Bank’s assets and liabilities in the shortest repricing bands, i.e. up to 6 months.

43.4 Interest rate risk reporting

The Bank prepares reports concerning liquidity risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to interest rate risk and information about the utilization of the interest rate risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

43.5 Interest rate risk management actions

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

■ procedures concerning the management of interest rate risk;

■ internal limits on interest rate risk, among other things for basis point value sensitivity and net interest income sensitivity;

■ specification of the permitted types of interest-rate based transactions;

■ concluding acceptable transactions based on interest rate;

■ the proper selection of transaction parameters making it possible to apply natural hedges between assets and liabilities.

The Bank manages interest rate risk by matching the repricing structure of the assets and funding sources (natural hedging) and, on an as needed basis, enters into hedging transactions (derivative contracts). The Bank uses IRS and CIRS derivative transactions to hedge against interest rate risk associated with issues of fixed interest mortgage covered bonds in PLN and EUR aimed at financing variable interest rate loans.

44. Derivative instruments risk management

The Bank concludes derivative transactions solely in order to hedge risks related to its operations, in particular interest rate risk and foreign exchange risk. The Bank manages the derivative instruments risk as part of managing other types of risks, including credit risk, interest rate risk, foreign exchange risk and liquidity risk.

The purpose of managing the derivative instruments risk is to limit losses relating to derivative transactions, mainly resulting from the potential ineffectiveness of hedging strategies by taking appropriate, i.e. consistent with the management of other risks, positions in such instruments and by implementing appropriate procedures and controls specific for derivative instruments.

45. Foreign exchange risk management

The operations of PKO Bank Hipoteczny SA are exposed to foreign exchange risk, which is defined as the risk of loss due to changes in the foreign exchange rates generated by the maintenance of open positions in various currencies.

The aim of foreign exchange risk management is to limit any potential losses incurred due to changes in the exchange rates to an acceptable level by the proper shaping of the currency structure of the balance sheet items and loan commitments, and the use of derivative instruments.

In the process of foreign exchange risk management, the Bank in particular uses individual and aggregate FX positions and stress tests. Stress tests are used to estimate the potential loss on the positions taken in foreign currencies in the event of an extraordinary situation on the FX market. The Bank uses hypothetical scenarios – which assume a hypothetical appreciation or depreciation of foreign exchange rates (20 per cent and 50 per cent).

The Bank’s FX positions are presented in the following table:

FOREIGN CURRENCY POSITION IN PLN ‘000	31.12.2021	31.12.2020

EUR	(30)	(18)
USD	3	3

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 the loss in the case of rapid changes on the FX market which are not described in terms of standard statistical measures. The Bank’s combined FX VaR for all currencies is presented in the following table:

SENSITIVITY MEASURE	31.12.2021	31.12.2020

10-day FX VaR at 99% confidence level in PLN ‘000	0.9	0.7

The foreign exchange risk exposure of PKO Bank Hipoteczny SA as at 31 December 2021 and 31 December 2020 was within the strategic and internal limits set.

The Bank closes all open FX positions on an ongoing basis, and the control and reporting procedures implemented by the Bank significantly limit the impact of changes in exchange rates on the Bank’s financial performance, hence the foreign exchange risk as at 31 December 2021 and 31 December 2020 was low. The biggest FX positions of the Bank are associated with liabilities in respect of mortgage covered bonds issued in EUR and they are closed on an ongoing basis using CIRS and FX Forward derivative transactions.

The Bank prepares reports concerning foreign exchange risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to foreign exchange risk and information about the utilization of the foreign exchange risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

The basic foreign exchange rate risk management tools used by PKO Bank Hipoteczny SA comprise:

■ procedures concerning the management of foreign exchange risk;

■ limits and thresholds on foreign exchange risk, among others on foreign exchange positions;

■ specification of the permitted types of foreign exchange transactions.

46. Model risk management

Model risk is the risk of losses resulting from wrong business decisions made on the basis of the models used.

The aim of the management of model risk is to mitigate the risk of losses resulting from a wrong business decision made on the basis of the models used by way of a properly defined and implemented model management process.

All models of significance for the Bank are subject to a process of regular and impartial validation by the Bank’s validation function – the Risk Validation and Control Team.

The model risk management process in PKO Bank Hipoteczny SA is consistent with the solutions in place in the PKO Bank Polski Group.

46.1 Model risk measurement and assessment

Identification of model risk consists in particular of:

■ collecting information about the models in use and those to be implemented;

■ periodical determination of significance of the models.

Assessment of model risk is aimed at determining the scale of threats connected with the existence of model risk. The assessment is carried out at the level of a single model as well as on an aggregate basis for the whole Bank.

46.2 Model risk control

The aim of the model risk control is to maintain the aggregate assessment of model risk at a level acceptable to the Bank. The control of model risk consists of defining mechanisms for diagnosing the model risk level and the risk mitigation tools.

The tools used for diagnosing model risk include in particular a strategic limit of model risk tolerance and model risk thresholds.

46.3 Model risk forecasting and monitoring

The aim of model risk monitoring is to diagnose the areas requiring management action. The following in particular are monitored as part of the model risk monitoring process:

■ updating the model risk level;

■ evaluating the utilization of the strategic limit of model risk tolerance and the values of the model risk thresholds;

■ verifying the status of implementation and evaluation of the effectiveness of the model risk mitigating actions.

46.4 Model risk reporting

The results of monitoring are presented in quarterly reports for the Management Board and annual reports for the Supervisory Board Risk Committee and the Supervisory Board containing a comprehensive assessment of model risk, including in particular:

■ information about the utilization of the strategic limit of model risk;

■ information about the level of model risk;

■ the model risk map;

■ the status of implementation of the recommendations issued after model reviews or validation;

■ suggested management actions to mitigate the model risk.

46.5 Model risk management actions

The aim of management actions is to develop the model risk management process and shape the risk level, in particular by setting acceptable risk levels and making decisions about the use of risk management supporting tools.

47. Operational risk management

Operational risk is defined as the risk of the occurrence of a loss due to non-compliance or failure of internal processes, people and systems or external events. Operational risk includes legal risk, but it does not include reputation risk and business risk. Operational risk is classified as a material risk.

The aim of operational risk management is to enhance the security of the Bank’s operating activities by enhancing effective mechanisms of identification, assessment and measurement, limitation, monitoring of and reporting on operational risk tailored to the profile and scale of operations.

The process of operational risk management is executed at the level of the Bank as a whole and at the level of each systemic operational risk management area. Systemic operational risk management involves the development of solutions which enable the Bank to exercise control over the level of operational risk so that it can accomplish its goals. Ongoing operational risk management is conducted by every employee of the Bank, within their responsibilities and tasks.

For the purpose of managing operational risk, the Bank gathers internal and external data about operational incidents, business environment factors, the results of operational risk self-assessment, data on key risk indicators in respect of operational risk (KRI) and data related to the quality of internal control.

Taking into account the scale of outsourcing and its potential impact on the operational risk profile, the Bank has prepared a risk management process related to the outsourcing of services, including sales and after sales servicing and IT services. The management of this risk, carried out by different organizational units of the Bank, includes numerous components, such as the introduction of procedures for outsourcing services for the Bank, analysing and assessing the risk associated with the outsourcing of services by the Bank, assessing the reliability and financial position of the service providers, developing contingency plans for the Bank and its service providers (in particular in the IT field), implementing adequate safeguards of the Bank’s interests in outsourcing agreements, requirements for an appropriate insurance coverage by insourcers, monitoring the proper execution of contracts and the insourcers’ position, including their periodic verification, recording incidents and losses related to the provision of services by insourcers.

47.1 Operational credit risk measurement and assessment

Operational risk is measured in order to determine the scale of threats associated with the existence of operational risk using set risk measures. Operational risk measurement covers:

■ determining the strategic operational risk tolerance limits;

■ calculating key risk indicators (KRI);

■ calculating the own funds requirement for operational risk under the BIA approach (BIA requirement);

■ stress testing;

■ calculating internal capital.

The operational risk self-assessment includes the identification and assessment of operational risk in relation to the Bank’s processes. The operational risk self-assessment is conducted once a year for the key processes or once in two years for other processes and before the introduction of new or significantly changed products, processes or applications used by the Bank, with the use of:

■ data collected on operational incidents;

■ results of inspections, proceedings and functional internal control;

■ KRIs.

47.2 Operational risk control

The aim of operational risk control is to strive to maintain the Bank’s operational risk at an acceptable level.

The control of operational risk involves determining the risk limits appropriate for the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for operational risk and KRI limits, including threshold and critical values.

The strategic operational risk tolerance limits are set by the Management Board and approved by the Supervisory Board.

47.3 Operational risk forecasting and monitoring

The aim of operational risk monitoring is to control operational risk and diagnose the areas requiring management action.

In particular, the Bank regularly monitors:

■ the utilization of strategic tolerance limits and operational risk loss limits;

■ the effectiveness and timeliness of actions undertaken to reduce or transfer the operational risk;

■ the values of the KRIs;

■ the results of operational risk self-assessment;

■ the results of stress test;

■ operational incidents and their consequences.

47.4 Operational risk reporting

Operational risk information is reported for:

■ the Bank’s internal purposes, in particular: the Management Board and the Supervisory Board;

■ supervisory and regulatory bodies;

■ the shareholders and the financial market.

Operational risk information is reported for the Bank’s internal purposes on a quarterly basis. Quarterly reports contain, in particular, information about:

■ the results of the measurement and monitoring of operational risk;

■ the operational risk profile of the Bank resulting from the process of identifying and assessing the threats to products, processes and applications of the Bank;

■ the level of operational risk and the tools applied in operational risk management;

■ the actions taken to limit operational risk and the evaluation of the effectiveness of the actions taken to reduce the operational risk level;

■ recommendations, decision and suggestions of the Management Board.

The quarterly reports also include information on operational risks identified in relation to the activities outsourced by the Bank to external entities, including, in particular, PKO Bank Polski SA.

47.5 Operational risk management actions

Management actions are taken when the self-assessed operational risk, KRI or adjusted operational risk reaches an elevated or high level at the Bank.

If the risk level is elevated or high, the Bank uses the following approach:

■ risk reduction – mitigating the impact of the risk factors or the consequences of its materialization;

■ risk transfer – the transfer of responsibility for covering potential losses to a third-party;

■ risk avoidance – discontinuance of activities that generate risk or eliminate the possibility of occurrence of a risk factor.

The operational risk management process is subject to internal control including:

■ a review of the strategy and the process of operational risk management;

■ internal audit.

47.6 Operational losses incurred

In 2021, nineteen (19) operational risk incidents were identified at the Bank, which generated a financial loss in the total net amount of PLN 12 thousand. In 2020 there were 33 such incidents and the total net financial loss amounted to PLN 13 thousand.

In order to mitigate the losses arising from operational risk, the Bank applies ad hoc and systemic management measures. Ad hoc measures include a direct response to the identified risks, eliminating reversible irregularities and recovering losses.

48. Business risk management

Business risk is a risk of failing to achieve the assumed financial targets, including a risk of losses, resulting from adverse changes in the business environment, wrong decisions made, incorrect implementation of decisions made or failing to take proper action in response to changes occurring in the business environment. It also takes into account a risk of macroeconomic changes (a risk of deterioration in the Bank’s financial position due to the adverse effect of changing macroeconomic conditions).

Identification of business risk consists of recognizing and defining actual as well as potential factors which result from the current or contemplated business operations of the Bank and may adversely affect the Bank’s financial position, the occurrence or the volume of the Bank’s income and expenses.

Business risk is measured in order to determine the scale of threats connected with the existence of business risk using specified risk measures.

Control of business risk is intended to mitigate the adverse effect of internal and external factors on the financial position of the Bank. The purpose of business risk control is to define the acceptable level of business risk adequate to the Bank’s scale of operations and its impact on the functioning and the financial situation of the Bank in the form of strategic tolerance limits.

The aim of business risk monitoring is to determine whether its level after applying risk controls reflects the admissible level and to diagnose the need to take management actions and the areas in which they have to be taken.

Particular attention is paid to monitoring the strategic business risk tolerance limit.

Business risk is reported via reports addressed to the ALCO, the Management Board and the Supervisory Board.

Management actions consist in particular of:

■ verifying and updating the quarterly financial forecasts and the financial plan taking into account measures aimed at mitigating the level of business risk in line with the set limits;

■ monitoring the level of the strategic business risk tolerance limit.

49. Compliance risk management

Compliance risk is defined at PKO Bank Hipoteczny SA as the risk of legal sanctions, incurring financial losses or the loss of reputation as a result of failure on the part of the Bank, the Bank’s employees or entities acting on its behalf to comply with the provisions of the law, internal regulations and the market standards adopted by the Bank.

The aim of compliance risk management is to:

■ maintain the Bank’s reputation as an institution acting in accordance with the law and the adopted market standards, reliable, fair and honest, among customers, employees, business partners and other market participants;

■ prevent the occurrence on the Bank’s side of financial losses or legal sanctions and cases of loss of reputation, which may be a result of a breach of the law, internal regulations or the market standards adopted by the Bank.

The identification and evaluation of compliance risk is carried out on the basis of the methodology implemented in the PKO Bank Polski SA Group for the identification and evaluation of compliance risk.

The identification of compliance risk includes the identification of potential cases of non-compliance that may occur in the processes and products and their classification to compliance risk categories.

The compliance risk assessment is carried out through:

■ estimation of the potential severity of the consequences of non-compliance in the form of:

□ financial losses, particularly in the form of administrative penalties or damages;

□ loss of reputation;

□ other legal sanctions;

■ estimation of the probability of materialization of compliance risk.

Based on the compliance risk assessment for the individual compliance risk categories, the overall level of compliance risk for a given process and the related product is determined.

As part of compliance risk control, the Bank protects itself against or mitigates the risk by implementing compliance risk controls and ensuring that they are observed.

The following is covered by compliance risk monitoring:

■ the results of compliance risk identification and assessment;

■ in the event of non-compliance – its reasons and consequences;

■ the actions taken by the Bank as part of:

□ compliance risk management;

□ implementing the recommendations issued by internal auditors and external inspectors;

□ bringing the Bank to compliance with new legislation and standards of conduct;

□ fulfilling the recommendations regarding compliance;

■ effectiveness of the controls connected with the mitigation of compliance risk;

■ stress test results.

Information on compliance risk is reported on a quarterly basis. The recipients of the reports are: The Management Board, the Supervisory Board and the Supervisory Board Audit and Finance Committees. The reports contain, in particular, information about:

■ the results of compliance risk identification and assessment;

■ the observed cases of non-compliance in the Bank and in the financial sector;

■ the most significant changes in the regulatory environment of the Bank, as well as circumstances resulting from the activities of external supervisory and regulatory authorities;

■ the results of external inspections carried out within the Bank;

■ the most important actions undertaken as part of compliance risk management and the implementation of recommendations arising from external inspections.

The Compliance Team is responsible for the management of compliance risk. The activities of the Compliance Team are based on an annual plan approved by the Bank’s Supervisory Board. The report on the pursuit of the plan, and supplementary and summary information to the quarterly reports are presented to the Management Board, the Supervisory Board, and the Audit and Finance Committee on an annual basis.

49.1 Management of conflicts of interest

The Bank has the “Policies for managing conflicts of interests in PKO Bank Hipoteczny S.A.”, adopted by the Management Board and approved by the Supervisory Board, which specify:

■ the objective of conflicts of interest management;

■ sources of situations when conflicts of interest may arise;

■ the process for identification, reporting and monitoring conflicts of interest;

■ counteracting conflicts of interest and their effects;

■ tasks of the Compliance Team relating to conflicts of interest management.

The objective of managing conflicts of interest at the Bank is to ensure that all customers, the Bank related parties, suppliers and bidders are treated professionally, fairly and honestly.

The Bank manages conflicts of interest by preventing situations that may give rise to conflicts of interest, taking steps to identify, disclose and control conflicts of interest and to eliminate or limit their negative impact on the Bank's functioning and its relations with clients and other entities.

Given the scope and the specific nature of its operations as a mortgage bank, the Bank identifies potential situations of conflicts of interest which may arise in the relationship between:

■ the Bank or its related entity and the Bank’s customer;

■ a related entity and the Bank;

■ the Bank or its related entity and a supplier or bidder or their related parties;

■ the Bank and its parent company.

A conflict of interest between the Bank or its related party and the Bank’s customer arises, in particular, when the Bank or its related party may derive a benefit as a result of the customer incurring a cost or not gaining a benefit or has an interest in a specific result of customer service that is divergent from the customer’s interest.

A conflict of interest between the Bank’s related party and the Bank may arise in particular in situations leading to a contradiction between the interests of the Bank and the interests its related party associated with a breach of impartiality or objectivity and the obligation to act in the best interests of the Bank in the course of performing duties related to employment with the Bank or carrying out activities for the Bank.

A conflict of interest between the Bank or its related party and a bidder or supplier or their related parties may arise in particular where the bidder or supplier concerned is favoured because of personal family, business or social connections.

Conflicts of interest between the Bank and the parent company may arise, in particular, when the parent company takes advantage of the subordination relationship or the flow of information (e.g. by exerting pressure to conduct business on non-market terms, access to proprietary, confidential or otherwise sensitive information).

The “Policies for managing conflicts of interests” describe in detail the procedure for identifying, reporting and monitoring conflicts of interest. In order to facilitate the identification of conflicts of interest, as well as the conflict management rules, the Bank has introduced Conflict of Interest Maps defining the typical types of conflicts of interest identified in the Bank).

The Bank limits the possibility of conflicts of interest arising and counteracts the negative consequences of their occurrence, in particular by:

■ excluding from credit decision-making an employee or a member of the Management Board, if this person has a personal or professional relationship with the customer;

■ promoting, applying and enforcing observance by the employees of the Code of Ethics which sets out ethical standards of carrying business activities by the Bank and of the Bank’s employees conduct in relations with the Bank and its customers;

■ establishing information barriers in accordance with internal regulations on the security of protected information and the flow of confidential information;

■ enforcing that Bank employees and persons acting on behalf of the Bank comply with restrictions on accepting benefits or gifts in business relationships;

■ limiting the possibility for a Bank employee or other person to represent the Bank’s interests in relations with close persons and entities related with the Bank;

■ introducing additional authorization of decisions which result in the Bank incurring liabilities in respect of the products offered to members of the Bank’s Management Board, Supervisory Board and managers, as well as people close to them;

■ accepting declarations and notifications of conflicts of interests from bidders and suppliers;

■ obtaining assurances and relevant documents, as appropriate, from the persons and entities to which the Bank entrusted activities covered by regulations on outsourcing, confirming the implementation and enforcement of internal governance requirements, including conflict of interest rules and good practices, to ensure prudent and stable operations, including operational and reputational risk management.

The Compliance Team maintains a register of conflicts of interest and reports the conflicts of interest identified in periodical reports on managing the compliance risk addressed to the management Board of the Bank, the Audit and Finance Committee of the Supervisory Board and the Supervisory Board of the Bank.

50. Reputation risk management

Reputation risk is understood as the current or potential risk of deterioration of reputation among customers, counterparties, investors, supervisory and regulatory authorities and the general public as a result of business decisions made by the Bank, operational incidents, instances of non-compliance or other events, including security incidents.

The objective of reputation risk management is to protect the Bank’s reputation by counteracting reputation losses and limiting the negative impact of image-related events on the Bank’s reputation.

Identification of the reputation risks covers the developments observed in the Bank’s internal processes and its external environment, including in particular:

■ image-related events;

■ factors related to the business environment, i.e. quantitative and qualitative information, including in particular data describing the Bank and its external environment, which suggest the existence of reputation risk.

Information collected about image-related events includes each identified piece of information about the Bank, which adversely affects its reputation, such as:

■ information spread by the mass media;

■ information disclosed by the Bank in accordance with its internal regulations concerning the Bank’s information policies regarding contacts with investors and customers;

■ evaluations of auditing firms, analytical institutions and external supervisory and regulatory authorities;

■ public protests and demonstrations.

An assessment of reputation risk involves evaluating the impact of image-related events on the Bank’s reputation, in particular by determining the severity of losses of reputation caused by such events. The assessment of reputation loss involves the impact, credibility and the opinion-forming potential of the disclosure of an image-related event to the public.

Controlling reputation risk involves determining the reputation risk controls in the form of an internal tolerance limit for reputation risk and a single reputation loss limit.

Monitoring reputation risk consists of regular assessments of the utilization of the limits in relation to the adopted threshold values.

Information about reputation risk is reported in the form of:

■ semi-annual management reports addressed to the Management Board of the Bank;

■ information on current events which have a material impact on the Bank’s reputation and immediate reporting of such events, should they occur, to the Management Board member responsible in accordance with the division of competences within the Management Board;

■ information provided in the annual report on the execution of the risk management macroprocess at the Bank, addressed to the Management Board and the Supervisory Board.

Based on the specific level of reputation risk management actions are taken which may cover:

■ an analysis of the reasons for the given risk occurring;

■ assessment of the effects of such a level of risk occurring;

■ preparation of proposed management actions aimed at reducing the level of reputation risk or justification of the lack of the need to take such action, e.g. in the event of incidental extraordinary events occurring.

51. Capital adequacy and the management of capital risk

Capital adequacy is a process aimed at ensuring that, for a given level of risk tolerance, the level of risk assumed by the Bank associated with the development of its business activities may be covered with capital held within a given time horizon. The process of managing capital adequacy comprises, in particular, compliance with prevailing regulatory standards and the level of risk tolerance determined at the Bank, the process of capital planning, including the policies in respect of capital sourcing.

Capital adequacy risk is the risk of failing to arrange an adequate level and structure of own funds or the inability to ensure an adequate level of equity given the business risk borne by the Bank, necessary to cover unexpected losses and satisfy regulatory requirements, making it possible for the Bank to continue independent operations. Capital adequacy risk includes the risk of excessive leverage, i.e. the risk resulting from vulnerability to threats due to financial leverage or conditional financial leverage, which may necessitate taking involuntary action modifying business plans, including the forced sale of assets which could lead to losses or to the need to adjust the valuation of other assets.

Managing the Bank’s capital adequacy covers:

■ Pillar I: minimum capital requirements specified in the legislation;

■ Pillar II: internal capital, determined by means of the Bank’s own models for the risks considered material.

The aim of capital adequacy management is to maintain, on a continuous basis, own funds at a level that is adequate to the scale and risk profile of the Bank’s activities, with due regard to regulatory requirements.

The following legal acts constituted the legal basis of the capital adequacy assessment process as at 31 December 2021:

■ Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (the “CRR”), as amended;

■ Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic;

■ the Act of 29 August 1997 “Banking Law”;

■ the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (“Macroprudential Act”);

■ the Regulation of the Minister of Finance, Funds and Regional Policy of 27 July 2021 on the detailed manner of estimating internal capital and reviewing estimation strategies and procedures by banks, and on continued maintenance of the internal capital.

The capital adequacy process is described in Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (“CRD”). The CRD has been implemented in the Polish law by way of updating the Banking Law.

The process of managing the Bank’s capital adequacy comprises:

■ defining and achieving the capital adequacy targets desired by the Bank;

■ identifying and monitoring material risks;

■ assessing internal capital to cover the individual risk types and assessing total internal capital;

■ establishing internal limits with respect to capital adequacy;

■ forecasting, monitoring, and reporting the level and structure of own capital and capital adequacy;

■ capital contingency activities.

Capital adequacy risk is classified as a risk subject to monitoring. In 2021 and since the beginning of the Bank’s operations, capital adequacy remained at a safe level above the supervisory limits.

At 31 December 2021, the total capital ratio of the Bank amounted to 20.9% (as at 31 December 2020: 18.7%). If the temporary solutions resulting from the implementation of IFRS 9 and relating to the COVID-19 pandemic had not been taken into account, the total capital ratio of the Bank would have amounted to 20.5% (as at 31 December 2020: 18.5%). All capital ratios as at 31 December 2021 and throughout the year 2021 remained at safe levels, much above the internal limits adopted by the Bank and the external capital requirements.

51.1 Own funds for the purpose of capital adequacy

The Bank’s own funds for capital adequacy purposes have been calculated in accordance with the Banking Law and the CRR with implementing legislation.

The Bank’s own funds consist entirely of common equity Tier 1 capital (CET 1). In determining its own funds, the Bank makes use of the transitional provisions following from the implementation of IFRS 9 and related to the COVID-19 pandemic.

BANK’S OWN FUNDS	31.12.2021	31.12.2020

Share capital	1,611,300	1,611,300
Supplementary capital	332,263	250,733
Net profit for the period	94,867	81,530
Accumulated other comprehensive income – cash flow hedges	74,979	141,186
Accumulated other comprehensive income – financial assets measured at fair value through other comprehensive income	311	8,456
Equity	2,113,720	2,093,205

Equity adjustments	(135,326)	(159,400)
Net profit for the period	(94,867)	(81,530)
Net profit for the first half of 2020 included by permission from the PFSA		35,475
Accumulated other comprehensive income – cash flow hedges	(74,979)	(141,186)
Intangible assets	-	(742)
Adjustment to assets measured at fair value (AVA)	(2,577)	(2,131)
Adjustment relating to the transitional period, including:	37,097	30,714
- due to IFRS 9 implementation	12,611	17,656
- due to COVID-19 pandemic	24,486	13,058

Own funds	1,978,394	1,933,805

As at 31 December 2021, the Bank’s own funds, Tier 1 common equity capital and Tier 1 capital would have amounted to PLN 1,941,297 thousand without taking into account the transitional solution, and as at 31 December 2020 they would have amounted to PLN 1,903,091 thousand.

51.2 Capital buffers

On 19 March 2020, the Minister of Finance signed a regulation on revoking the systemic risk buffer which amounted to 3%, decreasing the regulatory requirement relating to the core Tier 1 capital ratio (CET1) and the total capital ratio (TCR) to 10.5%.

Since the beginning of 2020, the banks have been required to maintain capital ratios at the following levels:

■ Total capital ratio (TCR) = 8% + an add-on + the combined buffer requirement;

■ Tier 1 capital ratio (T1) = 6% + 75%*add-on + the combined buffer requirement;

■ Core Tier 1 capital ratio (CET1) = 4.5% + 56%*add-on + the combined buffer requirement,

where the add-on means the requirement specified in Article 138 (1) (2a) of the Banking Law and the combined buffer requirement is the sum total of the mandatory buffers, i.e.:

■ the systemic risk buffer of 2.5%;

■ the counter-cyclical buffer of 0% for loan exposures on the territory of Poland;

■ the buffer of other systemically important institution set by the PFSA on a case by case basis;

■ the systemic risk buffer of 0%.

PKO Bank Hipoteczny SA has not been recognized as another systemically important institution by the PFSA and therefore it is not required to satisfy the applicable additional capital requirements.

The Bank is also not required to satisfy the requirements specified in Article 138 (1) 2a of the Banking Law (add-on).

51.3 Financial leverage

The risk of excessive leverage is defined as the risk resulting from vulnerability to risks because of financial leverage or conditional financial leverage, which may necessitate taking involuntary actions to modify business plans, including the forced sale of assets which could result in losses or result in the need to adjust the valuation of other assets.

Financial leverage is defined as the relative size of a Bank’s assets, off-balance sheet obligations and contingent obligations to pay or to deliver, or to provide collateral, including obligations from received funding, commitments made, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of a Bank, compared to the Bank’s own funds.

The Bank calculates financial leverage in accordance with the CRR.

The financial leverage ratio is monitored on a monthly basis, whereas the Bank recognizes a ratio in excess of 5% to be safe and not requiring further action.

LEVERAGE	31.12.2021	31.12.2020

Leverage ratio (LR)	8.0%	7.4%

As at 31 December 2021 and as at 31 December 2020, the Bank’s financial leverage ratio was above the 3% level resulting from Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019, which shall apply from 28 June 2021.

As at 31 December 2021, the leverage ratio without taking into account the transitional solutions following from the implementation of IFRS 9 and relating to the COVID-19 pandemic would have amounted to 7.8%, and as at 31 December 2020 it would have amounted to 7.3%.

51.4 Requirements regarding own funds (Pillar I)

In accordance with the CRR, the Bank calculates requirements in respect of own funds for the following risk types:

■ credit risk – according to the standardized approach;

■ credit valuation adjustment (CVA) risk – according to the standardized approach;

■ settlement and delivery risk – according to the standardized approach;

■ operational risk – using the Basic Indicator Approach (BIA);

■ market risk (foreign exchange risk only) – according to basic methods.

At 31 December 2021 and as at 31 December 2020, the own fund requirements in respect of the risk of credit valuation adjustment, settlement and delivery, and market risk were nil, therefore, the total requirement in respect of own funds comprised the requirements in respect of credit and operational risk.

OWN FUNDS REQUIREMENTS	31.12.2021	31.12.2020

Credit risk	714,533	790,074
Operational risk	44,320	35,171
Total own funds requirement	758,853	825,245
Common equity Tier 1 capital ratio (CET1)	20.9%	18.7%
Tier 1 capital ratio (T1);	20.9%	18.7%

Total capital ratio (TCR)	20.9%	18.7%

EVENTS AFTER THE END OF THE REPORTING PERIOD

52. Events after the end of the reporting period

None.

Signatures of all Management Board Members

17.02.2022

Daniel Goska

President of the Management Board

Signed on Polish original

......................................................

(signature)

17.02.2022

Piotr Kochanek

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

17.02.2022

Katarzyna Surdy

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

Signature of the person responsible for the Bank’s accounts

17.02.2022

Tomasz Rynkowski

Director, the Bank's Chief Accountant

Signed on Polish original

......................................................

(signature)

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