Selected financial data for the period from 1 January 2021 to 31 December 2021

INCOME STATEMENT IN PLN M	01.01.2021– 31.12.2021	01.01.2020– 31.12.2020	Change y/y (in PLN millions)
Net interest income	304.1	330.4	(26.3)
Net fee and commission income	(5.7)	(5.3)	(0.4)
Net gain/(loss) on financial instruments measured at fair value through profit or loss	0.0	0.1	(0.1)
Net foreign exchange gains/(losses)	0.5	5.9	(5.4)
Net income/(expense) on modification	1.5	(2.6)	4.1
Net allowances for expected credit losses	(3.2)	(35.7)	32.5
Net other operating income and expenses	0.2	0.0	0.2
Administrative expenses	(47.1)	(51.0)	3.9
Regulatory charges	(24.8)	(25.5)	0.7
Tax on certain financial institutions	(83.8)	(89.5)	5.7
Operating profit	141.7	126.8	14.9
Profit before tax	141.7	126.8	14.9
Corporate income tax	(46.8)	(45.3)	(1.5)
Net profit	94.9	81.5	13.4

STATEMENT OF FINANCIAL POSITION	31.12.2021	31.12.2020
Cash and balances with the Central Bank	50.4	0.0
Amounts due from banks	0.5	0.0
Derivative hedging instruments	841.5	1,154.7
Securities	1,870.7	1,241.8
Loans and advances to customers	22,848.6	24,902.7
Other assets [1]	8.7	11.3
TOTAL ASSETS	25,620.4	27,310.5
Amounts due to banks	6,544.5	3,575.1
Derivative hedging instruments	2.0	0.5
Liabilities in respect of mortgage covered bonds issued	13,146.4	17,205.6
Liabilities in respect of bonds issued	3,728.1	4,337.1
Other liabilities and provisions [2]	85.7	99.0
Equity	2,113.7	2,093.2
TOTAL LIABILITIES AND EQUITY	25,620.4	27,310.5

Table of Contents

2. External operating conditions

2.1. Macroeconomic environment

2.2. Residential real estate market

2.3. Residential loan market

2.4. Mortgage covered bonds market

2.5. Regulatory and legal environment

3. Financial performance and capital adequacy

3.1. Key financial indicators of PKO Bank Hipoteczny SA

3.2. Statement of financial position of PKO Bank Hipoteczny SA

3.3. Income statement of PKO Bank Hipoteczny SA

3.4. Requirements regarding own funds (Pillar I)

3.5. Internal capital (Pillar II)

3.6. Disclosures (Pillar III)

4. Business of PKO Bank Hipoteczny SA

4.1. Sales of residential mortgage loans under the agency model

4.2. Acquisition of residential mortgage loan receivables

4.3. Structure of the residential mortgage loans portfolio

4.4. Mortgage covered bonds

4.5. Financial market operations

4.6. Bonds - Bond Issue Programme Agreement concluded with PKO Bank Polski SA

4.7. Bonds –Public Programme

4.8. Bonds – Other

5. Internal operating conditions

5.1. Lending process and cooperation with PKO Bank Polski SA

5.2. Internal control system

5.3. Risk management

5.4. Measurement of residential mortgage loan collaterals

5.5. Cover pool for mortgage covered bonds

5.6. Cover Pool Monitor

5.7. Statutory limits

6. Organization and Governing Bodies of PKO Bank Hipoteczny SA

6.1. Qualified staff

6.2. Organizational structure of PKO Bank Hipoteczny SA

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

6.4. The Management Board of PKO Bank Hipoteczny SA

6.5. The Supervisory Board of PKO Bank Hipoteczny SA

6.6. Remuneration and human resources management policy

6.7. Benefits for members of the Supervisory Board

7. Corporate Governance and Investor Information

7.1. Representation on compliance with the rules for corporate governance

7.2. Audit Firm

7.3. Other Information

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

1. Introduction

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

PKO Bank Hipoteczny SA is the leader of the Polish mortgage bank market in terms of total assets and the balance of mortgage home loans. The Bank is Poland’s largest regular issuer of mortgage-covered bonds on Polish and international markets. It was the only bank in Poland to carry out benchmark issues of euro-denominated mortgage covered bonds, in the total number of five to 31 December 2021. The outstanding mortgage covered bonds issued by the Bank account for approx. 57% of the total value of outstanding mortgage covered bonds issued by Polish mortgage banks.

The Bank both grants new residential loans and purchases such loans from PKO Bank Polski SA. In 2021, the Bank’s total assets exceeded PLN 25.6 billion, of which PLN 22.8 billion were a high quality portfolio of residential loans.

Evaluation of PKO Bank Hipoteczny SA’s financial credibility – ratings

The financial credibility of PKO Bank Hipoteczny SA and the mortgage covered bonds issued by the Bank is assessed by the Moody’s Investors Service Ltd international rating agency.

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

	Rating	Outlook	Data of initial rating/rating confirmation date
Long-term issuer rating	A3	Stable	13.07.2021
Short-term issuer rating	P-2	n/a	13.07.2021
Opinion on long-term counterparty risk	A2(cr)	n/a	13.07.2021
Opinion on short-term counterparty risk	P-1(cr)	n/a	13.07.2021
Long-term counterparty risk rating	A2	n/a	13.07.2021
Short-term counterparty risk rating	P-1	n/a	13.07.2021

On 13 July 2021 Moody’s Investors Service (“Moody’s”) informed of changes in PKO Bank Hipoteczny SA’s ratings. The long-term issuer rating was increased from Baa1 to A3, the long-term counterparty risk rating was increased from A3 to A2, the short-term counterparty risk rating was increased from P-2 to P-1, the opinion on the long-term counterparty risk was increased from A3(cr) to A2(cr), the opinion on the short-term counterparty risk was increased from P-2(cr) to P-1(cr). The short-term issuer rating remains unchanged at P-2. The rating outlook remains unchanged and is Stable.

Moody’s informed that the ratings changed in consequence of a change in methodology, “Banks Methodology”, on 9 July 2021. The ratings given reflect Moody’s reassessment of the Bank’s mutual relations with its Parent – PKO Bank Polski SA – and determining that the risk of the parent reducing the priority of the Bank carrying out its obligations in view of the Parent’s or Group’s financial difficulties is low.

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

	Rating	Rating confirmation date
Mortgage covered bonds denominated in PLN	Aa1	09.12.2020
Mortgage covered bonds denominated in EUR	Aa1	09.12.2020

The rating assigned to the mortgage covered bonds of PKO Bank Hipoteczny SA is the highest rating achievable by Polish securities. The limit for the ratings is the Polish country ceiling [3] for debt instruments, which currently is at the level of Aa1.

The Covid-19 pandemic

In connection with the COVID-19 pandemic, in 2021 the Bank continued the actions taken in 2020, aimed at increasing the safety of customers and employees, and ensuring prudent management of the Bank. Among other things:

• The Bank exercised the rotation work model.

• The Bank continued the possibility of suspending exercising loan contracts under “Shield 4.0” (statutory moratoria) by customers with residential mortgage loans who lost their jobs or another main source of income.

The pandemic Bank monitors the pandemic situation and accordingly adapts the actions taken.

PKO Bank Hipoteczny SA’s strategy for the years 2020 - 2022

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

The Strategy covers determining:

• the Bank’s mission and its strategic goals;

• the Bank’s market position;

• the Bank’s operating model;

• the Bank’s strategic operating directions;

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

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

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

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

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

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

The current epidemiological position has a much lesser impact on Poland’s macroeconomic position and on the position of PKO Bank Hipoteczny SA than in 2020, when among other things revenue inflows were limited, the allowances set up were increased and there were difficulties in access to funding. In 2021 the economy rebounded strongly, public finances improved and the labour market grew stronger. The Bank’s annual financial plans are appropriately adapted to the prevailing conditions, in consideration of updating the macroeconomic assumptions which reflect the development of the epidemiological situation.

Selected projects

Green mortgages: obtaining funding by way of issuing green covered bonds

The Bank continues to be prepared to issue Green Covered Bonds. It has a financing offer on preferential terms for those customers who submit an energy certificate which meet the Bank’s “green” energy criteria and regularly analyses and updates its offer. At the end of 2021 the Bank also began work aimed at adapting the methodology for selecting green assets to the EU Taxonomy and at obtaining a new Second Party Opinion for the Green Bond Framework under the project conducted in the PKO Bank Polski SA Group.

In February 2021 the Bank accessed the Energy Efficient Mortgage Label initiative. This initiative is aimed at creating a standard for green mortgage bonds and supporting the EU Green Deal. It is planned that this standard will be reported as of the end of the first quarter of 2022.

Implementing a modification to the credit product which makes it more efficient for customers

In 2021, enhancement work focused primarily on developing remote processes.

The implemented modifications covered in particular the iPKO internet banking system, through which the loan applications, documents and selected customer instructions may be submitted. An active loan application form in pdf format, an option to send documentation to the customer in electronic form as well as remote presentation of offers to potential customers were made available. All implementation work was conducted in cooperation with PKO Bank Polski SA which is the entity that offers the Bank’s products.

Fixed-interest-rate loans

At the end of the first half of 2021 the Bank included in its offer the option of changing the interest on residential mortgage loans from variable to fixed over 5 years for the whole loan portfolio, thus adapting it to the regulations of the amended Recommendation S of the Polish Financial Supervision Authority (PFSA). Next, the Bank started work on implementing a process of informing customers of the offer, including notifying them of the available formulas for accruing interest on loans before the end of the fixed interest rate period.

Analyses / publications on mortgage banking and the real estate market

In cooperation with the Economic Analyses Department of PKO BP – on the website https://www.pkobp.pl/centrum-analiz/ – in the real estate market section, the Bank prepares and publishes materials and analyses are published on the most current issues related to the real estate market.

Active participation in legislative work to adapt Polish law to the Covered Bonds Directive

In 2021 intense work was in progress on the draft amendments to the Act on Mortgage Covered Bonds and Mortgage Banks, implementing the decisions of Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bond public supervision and amending Directives 2009/65/EC and 2014/59/EU (the Covered Bond Directive) to the Polish legislation. Within one year, four draft acts were published. The Bank, in cooperation with the PBA and other mortgage banks, actively participates in providing opinions on the draft acts and provides its comments.

Mortgage covered bond issues

The Bank did not issue any mortgage covered bonds in 2021. As at the end of December 2021, the Bank was the leader of the Polish mortgage banking market in terms of the balance of outstanding mortgage covered bonds and the balance of residential mortgage loans. The value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA was PLN 13.1 billion as at 31 December 2021.

2. External operating conditions

Macroeconomic environment

Residential real estate market

Residential loan market

Mortgage covered bonds market

Regulatory and legal environment

2.1. Macroeconomic environment

The Bank only operates in Poland.

Macroeconomic factors which shaped the national economy in 2021:

Strong recovery of the economy after the pandemic

Chart: Growth rate and decomposition of GDP (%, y/y) and its components (p.p.)

In 2021 the impact of the consecutive waves of the pandemic on economic activity was much lower than in 2020. The on-going innoculation programme gradually limited the scale of anti-epidemic restrictions imposed in 2021, and the economy made up for the pandemic losses already in the second quarter of the year. After a 2.5% drop in 2020, according to initial data the GDP increase was 5.7% in 2021. The year-to-year rate of growth was positive as from the second quarter, when it reached a record 11.2% y/y. The GDP growth was driven by a sudden rebound in demand, mainly consumer demand, after the pandemic restrictions were lifted. Investments in the second half of the year grew at a rate of nearly 10% y/y. Despite disturbances in global value-added chains due to insufficient supply of key components, which lasted almost throughout the year, export grew at a double-digit rate. The strong growth of imports reflected, among other things, a change in the model of inventories management from just-in-time to just-in-case, and their strong growth. As a result, at the end of the year the surplus on the trade current account changed to a deficit. At the end of the year economic activity was increasingly impacted by inflationary processes – both companies and households had to face ever-increasing costs of operations and maintenance, which resulted from a sudden increase in the costs of energy in Europe.

Clear reconstruction of the labour market

Chart: Unemployment and employment (end of period, %)

The situation on the labour market improved systematically in 2021. The unemployment rate registered in December was 5.4% compared with 6.3% at the end of 2020. After accounting for seasonal differences it was only 0.2 p.p. higher than before the pandemic (in the worst period, the unemployment rate’s reaction to the pandemic was 1.1 p.p.). According to the Study of the Population’s Economic Activity (BAEL) dropped in the third quarter of 2021 to a level close to record 3.0%, and the occupational activity ratio increased to a record 58.2%. The increase in occupational activity enables satisfying the demand for work, despite the unfavourable demographic trends. The situation on the domestic labour market is tense due to the limited supply of employees. The number of unoccupied work places recovered to the level from before the pandemic and during the year the proportion of companies indicating recruitment problems grew, which in turn led to an increase in pressure on wages and salaries, also in reaction to increased inflation. Average wages and salaries in the enterprise sector were at a level exceeding the trend from before the pandemic, and – what is significant from the perspective of basic consumption – their increase was higher than inflation. The rate of growth of wages and salaries in the second quarter was pushed up by the low statistical base effect to approx. 10% y/y and remained close to this level until the end of the year, which suggests that despite such a large increase in inflation the wage-price spiral effect did not occur in 2021.

Increased inflation

The CPI was within an admissible range of deviations from the NBP target (2.5% +/- 1%) only in the first quarter of 2021; in further months it grew distinctly to a level unrecorded for more than 20 years: 8.6% y/y in December. During the year inflation was boosted by increasing fuel prices (the effect of a global increase of demand for oil and the low statistical base), energy (a strong increase in demand connected with disruptions in the functioning of the gas market and an increase in CO2 emission rights) and food. Exogenic factors which boosted inflation globally in 2021 were responsible for approx. 80% of the increase in the price ratio. However, the pressure on price increases was extensive and covered both goods and services. In December base inflation increased to 5.3% y/y and was highest in twenty years. In January 2022 inflation will probably continue to increase, however, as of February 2022 the Anti-Inflation Shield announced by the government will reduce it by approx. 3 p.p.

Improvement in the state of public finance

The solid increase in nominal GDP and its fiscally efficient structure contributed to the results of the State budget in 2021. After November 2021 the budget still had a surplus of PLN 50.4 billion compared with the deficit planned for the whole year of PLN 40.5 billion. Cumulative income increased by 18% y/y, of which tax income grew by 17.4% (including mainly CIT: 25.1% y/y), and non-tax income (such as share in profit of the NBP and income from the CO2 emission allowance auctions) by 23.6%. As at the end of the year the budget is expected to show an approx. PLN 25 billion deficit, additionally approx. PLN 50 billion of anti-COVID fund expenses, not included in the budget. The fiscal position improved significantly during the year, and the deficit according to ESA (the European System of National and Regional Accounts – covering the broadly-understood public sector) dropped, according to estimations, to 2.5% of GDP from 7.1% of GDP in 2020. Public debt compared to GDP is expected to decrease to 56.5% from 57.4% of GDP.

Chart: Public finance sector deficit and debt	Chart: Central budget performance (in PLN billion, given quarter)

Beginning of normalization of the monetary policy

In the first half of 2021 the NBP received monetary support for the economy – it stabilized interest rates at a record low, engaged in QE (quantitative easing) programme actions and preferred to fundamentally understate the zloty. In reaction to the sudden acceleration in price increases and to prevent anchoring inflation expectations, in October the Monetary Policy Council (MPC) increased interest rates for the first time since 2012. This movement started a whole cycle of increases, which in 2021 increased the NBP reference rate by 1.65 p.p. to 1.75%. Another increase was made in January 2022, when the MPC set base NBP interest rates at the following levels: Lombard rate: 2.75%, bills of exchange discount rate: 2.35%, bills of exchange rediscount rate: 2.30%, reference rate: 2.25% and deposit rate: 1.75%. According to the MPC’s declarations, further increases in interest rates should be expected, and the target reference rate will be in the 3.0–4.0% range.

NBP reference rates (end of period):

Interest rate	Q1-Q3 2021 [%]	Q4 2021 [%]
reference	0.10	1.75
bills of exchange rediscount	0.11	1.80
bills of exchange discount	0.12	1.85
Lombard	0.50	2.25
deposit	0.00	1.25

2.2. Residential real estate market

After the slowing of real estate price growth rates observed in the second half of 2020, in 2021 the pace of growth of apartment prices gradually returned to the level from before the pandemic. Due to the strong demand, the trading volume on the residential real estate market was high, in particular in the first half of 2021.

In 2022 a weakening in demand on the residential real estate market should be expected as a result of further increases in interest rates, which will translate into an increase in the costs of servicing residential mortgage loans, and will probably lead to banks tightening their lending policies and declining consumer sentiments. In consequence, a lower rate of increase in prices of residential real estate and lower sales volumes are to be expected.

Primary market

According to RedNet Property Group Sp. z o.o. (RedNet), the rate of increase in residential real estate prices sold on the six most liquid local markets [4] in subsequent quarters of 2021 clearly increased, from 6% p.a. in the first quarter, through 8% p.a. in the second quarter, to 11% p.a. in the third quarter. The increase in average prices of real estate offered by developers was also at 11% p.a. at the end of the third quarter of 2021. In the first and second quarters of 2021 it was 7% and 9% respectively.

Data published by the NBP shows that in Warsaw price increase rates fluctuated during the first three quarters of 2021 from 8% to 13% p.a. (the lowest 8% dynamics was noted in the third quarter and the highest in the second quarter). In the segment of seven large cities [5] the pace of price increases grew systematically from 7% in the first quarter to 11% in the third quarter. An even more dynamic increase was observed in the segment of 10 medium cities:[6] 7%, 13% and 15% p.a. respectively, in the three subsequent quarters of 2021.

It follows from data on transaction prices registered in the PKO Bank Polski SA Group database that in the fourth quarter of 2021, the high pace of growth of residential real estate on the primary market was maintained.

Data on activity on the developer market on the six most liquid local markets, published by RedNet, indicate a rapid growth of the sales volume in the first half of 2021. The first quarter of 2021 with 18.8 thousand of sold apartments was only second to the record first quarter of 2017, and the first half of 2021 with a 36.6 thousand of apartments was the record half year to date. Sales only dropped slightly in the third quarter of 2021 (13.9 thousand apartments), partly due to supply factors (a smaller number of apartments offered by developers), as demand for apartments was still strong in the period. A slight drop in demand for residential real estate should be expected only in the data for the first quarter of 2022, when increased inflation induced the MPC to initiate a further cycle of interest rate increases, and growing prices additionally led to a drop in consumer sentiments.

In 2021 the construction costs of residential real estate, which additionally reinforced the pressure on real estate price increases on the primary market. According to SEKOCENBUD’s cost quotation rates for the third quarter of 2021 construction costs (net of land) of selected one- and multi-family residential premises increased by 6.6%-12.7% y/y. According to SEKOCENBUD’s forecast quotation rates during the year construction costs (net of land) will increase, in particular with respect to one-family houses (by approx.17%), which results from high demand for these premises and a relatively higher share of labour costs. A slightly slower increase is expected with respect to the already high costs of multi-family buildings.

Secondary market

NBP data on residential real estate prices on the secondary market shows that in most segments high price increase rates were noted in 2021. Only in Warsaw, in the second and third quarter of 2021 the rate of price growths did not exceed 5% y/y. A much higher rate of growth was noted in the segment of six large and 10 medium cities, where in the third quarter of 2021 residential real estate prices on an average were 10% higher than in the previous year.

Transaction prices registered in the Bank’s internal database, relating to transactions concluded on the secondary residential real estate market indicate a clear acceleration of the growth trend in real estate prices in 2021 compared with 2020. The annual average rate of price growths in Warsaw calculated based on a straight-line trend increased from 8% in 2020 to 11% in 2021, in the segment of six large cities from 3% to 10%, and in the segment of 10 medium cities from 7% to 15%.

The secondary market transaction volumes, after the 2020 decreases, during the following 11 months of 2021 returned to levels similar to those observed in the corresponding months of 2019 – the year preceding the pandemic.

Supply and demand on the residential real estate market

In the years preceding the outbreak of the pandemic (2014–2019) systematic increases in the activity of the residential real estate construction sector was noted, as expressed by the number of permits issued for the construction of apartment buildings, the number of apartments whose construction started and the number of apartments commissioned for use. In 2021 activity of the residential buildings construction sector continued to grow.

The number of residential building permits issued in 2021 was 24% higher than in 2020 and 27% higher than two years earlier. The number of apartments whose construction was begun increased by 24% compared with 2020 and by 17% compared with 2019.

In 2021, 3% more apartments were commissioned for use than in 2020 and 13% more than in 2019.

It should be stressed that the increased activity of investors in the residential buildings construction sector was uneven in particular market segments. In Warsaw, although the volume of commenced constructions of residential buildings increased in the 11 months of 2021 compared with the corresponding period of 2020, it was 19% lower than in the 11 months of 2019. On the other hand in the six large cities segment commenced constructions of residential real estate increased by no more than 3% compared with 2019. This is the consequence of the fact that on the most attractive markets investors encounter supply limitations related in particular to the availability of investment land.

The volumes describing the activity of the residential real estate construction are material to the extent that the data (in particular the number of residential construction permits and commenced residential building constructions) are considered to be one of the most sensitive indicators of market conditions on the residential real estate market (which precede changes in prices).

According to NBP data, in the third quarter of 2021 the average availability of apartments in large cities (a measure determining the number of square metres of available for purchase apartments for the average monthly salary in the enterprise sector on a given market at an average transaction price of an apartment on the given market) was at 0.78 sq. m and was slightly higher than in the fourth quarter of 2020 (0.76 m2).

In the first three quarters of 2021 the number of apartments sold was higher than the number of apartments introduced to developers’ offers. In consequence, the number of apartments in the developers’ offers dropped and at the end of the third quarter of 2021, on the six most liquid local markets it was 15% lower than as at the end of 2020. The volume of apartments on offer is approximately at the level of 9-months’ developers’ sales. This means that currently developers as a rule have no problems with the sale of constructed apartments, in particular in view of the fact that apartments are being offered at an early stage of the construction process. The share of finished apartments on offer was only 9%.

Purchases of residential real estate are financed with households’ savings and with funds from mortgage loans. According to NBP data, the estimated share of cash purchases of apartments on the six most liquid primary local markets is at 60–70%, although in the third quarter of 2021 – due to an increased amount of residential loans disbursed compared with the number of apartments sold – the estimated share of cash purchases temporarily decreased to 50%. According to Polish Statistics (GUS) data the value of household deposits is systematically growing, and at the end of the third quarter of 2021 it was 7% higher than in the previous year.

2.3. Residential loan market

Based on NBP data, the banks’ receivables in respect of residential loans in Poland were PLN 514.4 billion as at 31 December 2021, up 7.4% y/y. As at 31 December 2021, the balance of loans in PLN was PLN 403.2 billion (78.4% of the total amounts due to banks in respect of residential loans in Poland) and increased by 12.5% y/y.

The total balance of residential loans in relation to the Gross Domestic Product expressed at market prices stood at 20.2% at the end of the third quarter of 2021. This amount was significantly below the average for EU Member States, which according to data as at the end of the third quarter of 2021 is 41.5%. This shows the large development potential of the residential loan market in Poland.

2.4. Mortgage covered bonds market

As at 31 December 2021, five mortgage banks were operating in Poland:

• PKO Bank Hipoteczny SA;

• mBank Hipoteczny SA;

• Pekao Bank Hipoteczny SA;

• ING Bank Hipoteczny SA;

• Millennium Bank Hipoteczny SA.

The Polish mortgage covered bond market is relatively small and moderately liquid. At the end of December 2021, the total value of outstanding mortgage covered bonds issued by Polish mortgage banks amounted to PLN 23.0 billion, i.e. PLN 3.3 billion less than at 31 December 2020. As at 31 December 2021, outstanding mortgage covered bonds issued by Polish banks corresponded to 4.5% of the amount of residential loans granted by banks. For comparative purposes, in 2020 in Germany the ratio was at 15.1%, and in the Czech Republic at 35.5%.

PKO Bank Hipoteczny SA is the largest issuer of mortgage covered bonds in Poland. The value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA was PLN 13.1 billion as at 31 December 2021, which constituted approx. 57% of the total value of outstanding mortgage covered bonds issued by Polish mortgage banks.

2.5. Regulatory and legal environment

In 2021, the following legal and regulatory solutions significantly affecting the operations of PKO Bank Hipoteczny SA came into force:

COUNTERACTING MONEY LAUNDERING	The Act of 30 March 2021 on amending the act on counteracting money laundering and terrorism financing and certain other acts – the act introduces, among other things, changes to definitions of a Politically Exposed Person (PEP), beneficial owner, responsible institution and reporting to the General Inspector of Financial Information (GIFI) and data retention.
RECOMMENDATION S	Recommendation S relating to good mortgage-secured loan exposures management issued by the Polish Financial Supervision Authority became binding on 30 June 2021 – the recommendation is a set of best practices relating to limiting the risk of mortgage-secured loans and introduces new requirements in loan offers, products and credit risk.
ENFORCEMENT PROCEEDINGS	The Act of 28 May 2021 on amending the act – Code of Civil Procedure and several other acts – the amendments introduce regulations concerning the possibility of enforcement sale of real estate by way of an electronic auction.

In 2021 legislative work was also in progress on amending the act which is most important for the operations of PKO Bank Hipoteczny SA, i.e. on the draft Act on amending the Act on Mortgage Covered Bonds and Mortgage Banks and Certain Other Acts, which is to implement the Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bond public supervision and amending Directives 2009/65/EC and 2014/59/EU. In response to particular draft acts made available, the Bank, via the PBA and jointly with other mortgage banks operating on the market, submitted its comments to the draft act.

In addition, in 2021 work was in progress at the Bank on implementing the requirements following from the recommendations issued by the Polish Financial Supervision Authority:

• Recommendation Z – relating to corporate governance in banks; and

• Recommendation R – relating to the principles of classifying loan exposures, estimating and recognizing expected credit losses and managing credit risk. Both recommendations came into force at the beginning of 2022.

3. Financial performance and capital adequacy

Key financial indicators of PKO Bank Hipoteczny SA

Statement of financial position of PKO Bank Hipoteczny SA

Income statement of PKO Bank Hipoteczny SA

Requirements regarding own funds (Pillar I)

Internal capital (Pillar II)

Disclosures (Pillar III)

3.1. Key financial indicators of PKO Bank Hipoteczny SA

	31.12.2021	31.12.2020
Total assets (in PLN million)	25,620.4	27,310.5
ROA [7]	0.4%	0.3%
ROE [8]	4.5%	4.0%
Total capital ratio (TCR)	20.9%	18.7%
Leverage ratio (LR)	8.0%	7.4%
Cost to income ratio (C/I)[9]	23.9%	23.3%

3.2. Statement of financial position of PKO Bank Hipoteczny SA

in PLN million	31.12.2021	31.12.2020
Cash and balances with the Central Bank	50.4	0.0
Amounts due from banks	0.5	0.0
Derivative hedging instruments	841.5	1,154.7
Securities	1,870.7	1,241.8
Loans and advances to customers	22,848.6	24,902.7
Other assets [10]	8.7	11.3
TOTAL ASSETS	25,620.4	27,310.5

in PLN million	31.12.2021	31.12.2020
Amounts due to banks	6,544.5	3,575.1
Derivative hedging instruments	2.0	0.5
Liabilities in respect of mortgage covered bonds issued	13,146.4	17,205.6
Liabilities in respect of bonds issued	3,728.1	4,337.1
Other liabilities and provisions [11]	85.7	99.0
Equity	2,113.7	2,093.2
TOTAL LIABILITIES AND EQUITY	25,620.4	27,310.5

As at 31 December 2021 total assets of PKO Bank Hipoteczny SA amounted to PLN 25,620.4 million. Residential mortgage loans were the key component of the Bank’s assets. Their carrying amount, taking into account allowances for expected credit losses recognized as at 31 December 2021, amounted to PLN 22,848.6 million, of which new loans amounted to PLN 11,540.3 million, whereas loans purchased from PKO Bank Polski SA amounted to PLN 11,308.3 million.

As far as liabilities are concerned, the share of mortgage covered bonds dropped to 51% of the balance sheet total as at the end of December 2021.

As at the end of December 2021, the carrying amount of mortgage covered bonds was PLN 13,146.4 million, 23.6% down compared with the end of 2020 due to redemption of mortgage covered bonds maturing in 2021 and the impact of the EUR/PLN exchange rate on the measurement of mortgage covered bonds denominated in EUR.

As at 31 December 2021, financial liabilities to PKO Bank Polski SA constituted a significant item of the Bank’s liabilities and equity. They consisted of liabilities in the form of loans, limited overdraft facilities, liabilities in respect of the mortgage covered bonds and unsecured bonds acquired by PKO Bank Polski SA and other liabilities to PKO Bank Polski SA. Their total balance was PLN 6,616.1 million. Unsecured bonds issued by the bank also constituted a significant source of funding the Bank’s operations. As at 31 December 2021, they amounted to PLN 3,728.1 million, down 14% compared to the end of 2020.

3.3. Income statement of PKO Bank Hipoteczny SA

in PLN million	01.01.2021– 31.12.2021	01.01.2020– 31.12.2020	Change y/y (in PLN millions)
Net interest income	304.1	330.4	(26.3)
Net fee and commission income	(5.7)	(5.3)	(0.4)
Net income/loss on financial instruments measured at fair value through the income statement	0.0	0.1	(0.1)
Net foreign exchange gains/(losses)	0.5	5.9	(5.4)
Net income/(expense) on modification	1.5	(2.6)	4.1
Net allowances for expected credit losses	(3.2)	(35.7)	32.5
Net other operating income and expenses	0.2	0.0	0.2
Administrative expenses	(47.1)	(51.0)	3.9
Regulatory charges	(24.8)	(25.5)	0.7
Tax on certain financial institutions	(83.8)	(89.5)	5.7
Operating profit/loss	141.7	126.8	14.9
Profit before tax	141.7	126.8	14.9
Corporate income tax	(46.8)	(45.3)	(1.5)
Net profit	94.9	81.5	13.4

In 2021, PKO Bank Hipoteczny SA generated a net profit of PLN 94.9 million, up PLN 13.4 million compared with 2020.

In the analysed period, the Bank earned interest income of PLN 517.5 million. It comprised mainly interest income on residential loans of PLN 507.1 million and income on debt securities. In the same period, the Bank incurred interest expense of PLN 213.4 million. Interest expense resulted mainly from mortgage covered bonds issued and costs of hedging transactions. The related interest expense was PLN 152.5 million. The Bank also incurred, among other things, interest expense of PLN 38.7 million on loans and overdraft limits used, and PLN 21.4 million on bonds issued.

The Bank’s turnover in 2021 (understood as the total value of interest income and fee and commission income) amounted to PLN 525.1 million. The realized turnover was generated entirely from the Bank’s operations in Poland.

In 2021, the Bank incurred net fee and commission expense of PLN 5.7 million. This item comprised, among other things, costs of expert valuations of the mortgage lending value of real estate (MLV) prepared by real estate appraisers of PLN 0.8 million, costs of the bond issue programme of PLN 4.9 million, and costs of credit lines of PLN 4.6 million. The Bank also recognized fee and commission income from customers including, among other things, fees for real estate valuations performed by the Bank and for real estate inspections, as well as commission for early, full or partial loan repayments. The total fee and commission income amounted to PLN 7.7 million.

In 2021, the Bank incurred administrative expenses of PLN 47.1 million. Non-personnel costs of PLN 29.2 million, including costs related to services rendered by PKO Bank Polski SA under an outsourcing agreement of PLN 23.6 million, were a significant component of administrative expenses. Costs of employee benefits, whose amount during the reporting period was PLN 15.6 million, were also a significant component of administrative expenses.

In 2021, the Bank also incurred regulatory expenses totalling PLN 24.8 million. The main item of such expenses was the contribution to the mandatory resolution fund of the Bank Guarantee Fund of PLN 21.1 million, which is a PLN 1.5 million drop compared with 2020. The high level of regulatory charges had a negative impact on the Bank’s profitability ratios.

Tax on certain financial institutions, which amounted to PLN 83.8 million in the reporting period, was a significant cost of the Bank’s activities.

The Bank’s costs resulting from allowances for expected credit losses amounted to PLN 3.2 million in 2021. These costs were significantly lower than in 2020 due to the amortization of the loan portfolio, macroeconomic forecasts which improved in 2021 and the very good quality of the loan portfolio despite the Covid-19 pandemic.

The Bank’s funding structure

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

	31.12.2021	31.12.2020
Equity	8.3%	7.7%
Funds from the parent entity	25.5%	12.5%
Mortgage covered bonds issued	51.3%	63.0%
Bonds issued	14.6%	15.9%
Other	0.3%	0.9%
Total	100.0%	100.0%

As at 31 December 2021 and as at 31 December 2020 the Bank had no liabilities in respect of which it would be in contractual default.

3.4. Requirements regarding own funds (Pillar I)

General Information

In accordance with the CRR, the Bank calculates requirements in respect of own funds for the following risk types:

• credit risk – according to the standardized approach;

• credit valuation adjustment (CVA) risk – according to the standardized approach;

• settlement and delivery risk – according to the standardized approach;

• operational risk– according to the basic indicator approach (BIA);

• market risk (foreign exchange risk only) – using basic methods.

At 31 December 2021, the own funds requirements concerning the credit valuation adjustment, settlement and delivery, and market risk were nil, therefore the total own funds requirement comprised the requirements for credit and operational risks.

Own funds requirements	31.12.2021	31.12.2020
Credit risk (in PLN millions)	714.6	790.1
Operational risk (in PLN millions)	44.3	35.2
Total own funds requirement (in PLN millions)	758.9	825.3
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%

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

31.12.2021	Gross exposure	Exposure value [12]	Risk-weighted assets (RWA)	Own funds requirement
Retail exposures [13]	2,208.9	2,171.7	1,628.8	130.3
Exposures secured by mortgages on immovable property	20,720.6	20,688.4	7,240.9	579.3
Exposures to central governments or central banks	1,921.1	1,921.1	0.0	0.0
Exposures to institutions	2,030.5	2,030.5	0.0	0.0
Exposures in default	57.3	48.3	53.2	4.3
Other exposures	8.7	8.7	8.7	0.7
Total	26,947.1	26,868.7	8,931.6	714.6

31.12.2020	Gross exposure	Exposure value [14]	Risk-weighted assets (RWA)	Own funds requirement
Retail exposures [15]	2,817.3	2,755.8	2,066.9	165.3
Exposures secured by mortgages on immovable property	22,252.1	22,217.8	7,776.2	622.1
Exposures to central governments or central banks	1,241.8	1,241.8	0.0	0.0
Exposures to institutions	1,686.1	1,686.1	0.0	0.0
Exposures in default	26.7	20.8	22.3	1.8
Other exposures	10.5	10.5	10.5	0.8
Total	28,034.6	27,932.8	9,875.9	790.1

The drop in retail exposures in 2021 compared with 2020 results from limiting the acquisition of new loans in 2021 (both in the agency and in the pooling model), which caused a drop in the number of loans without a legally binding entry to the Land and Mortgage Register on behalf of the Bank, and the Bank cannot use the preferential risk weight with respect to these loans. The significant drop in the value of exposures secured with real estate mortgages in 2021 is another effect of the limited loan acquisition with the simultaneous increase in the rate of amortization (repayment) of the existing portfolio.

Credit risk adjustments

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

The approach applied by the Bank to identifying exposures at risk of impairment and methods for estimating allowances for expected credit losses and provisions for financial liabilities granted are described in Note 39.2 “Impairment of credit exposures” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021.

Use of credit risk mitigation techniques

The Bank uses mortgage collateral for the classification of exposures to classes of exposures secured by mortgages on immovable property and the use of preferential risk weights. Detailed information about the main types of collateral adopted by the Bank and the method of determining the mortgage lending value is presented in Note 41 “Residual risk management” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021.

3.5. Internal capital (Pillar II)

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

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

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

• credit risk;

• liquidity risk;

• operational risk;

• interest rate risk;

• model risk.

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

Structure of internal capital	31.12.2021	31.12.2020
For credit risk	87.1%	89.0%
For operational risk	5.4%	4.0%
For liquidity risk	2.5%	2.3%
For interest rate risk	4.8%	4.5%
For model risk	0.2%	0.2%
Total	100.0%	100.0%

As at 31 June 2021, the relationship between the Bank’s own funds and internal capital remained above the statutory and internal limits.

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

3.6. Disclosures (Pillar III)

Considering the scale and specific nature of its operations, in the financial statements and in the Directors’ Report the Bank discloses in particular the following information:[16]

• risk management objectives and strategies;

• own funds for capital adequacy purposes;

• capital buffers;

• financial leverage;

• capital requirements;

• credit risk adjustments;

• credit risk mitigation techniques used;

• the Bank’s remuneration policies, in accordance with Recommendation Z;

• the key decisions in the Conflicts of Interest Management Rules, in accordance with Recommendation Z;

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

• operational risk in accordance with Recommendation M;

• credit risk and information on the impairment of financial assets in accordance with Recommendation R and IFRS 9;

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

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

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

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

4. Business of PKO Bank Hipoteczny SA

Sales of residential mortgage loans under the agency model

Acquisition of residential mortgage loan receivables

Structure of the residential mortgage loan portfolio

Mortgage covered bonds

Financial market operations

Bonds - Bond Issue Programme Agreement concluded with PKO Bank Polski SA

Bonds –Public Programme

Bonds – other

4.1. Sales of residential mortgage loans under the agency model

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

As of 2020, implementing the updated strategy for the years 2020 – 2022, the Bank is limiting sales of residential mortgage loans. This decision had no impact on the Group’s total sales of mortgage loans. Therefore, in 2021, the Bank granted PLN 364 million worth of mortgage loans, which is a drop of 48% compared with 2020.

In accordance with Recommendation S of the Polish Financial Supervision Authority, the Bank only grants loans for which the loan-to-value ratio does not exceed 80%. Where a low down payment insurance policy was used, the Bank approved loans for which this ratio was not higher than 90%. Moreover, in compliance with the Polish Act on Mortgage Covered Bonds and Mortgage Banks, the Bank only grants loans whose value in relation to the mortgage lending value of the real estate does not exceed 100%.

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

Criteria	Agency model
Loan amount/market value of the real estate	Max 80%[17]
Loan amount/mortgage lending value of the property	Max 100%
Legal title to the real estate	Ownership or perpetual usufruct
Loan collateral	Mortgage recorded as the first in Section IV of the Land and Mortgage Register
Currency	PLN
Purpose	Residential

As of the end of the first half of 2021, the Bank implemented an option allowing changing interest rates from variable to periodically fixed over five years of the loan (annexing the loan contract) for the whole loan portfolio. Therefore, the Bank’s offer includes newly issued loans bearing a variable interest rate and a rate based on a fixed five-year base rate, and allows changing the manner of charging interest on the loans from variable to fixed during a period of five years.

In accordance with the Act of 19 June 2020 on subsidization of interest on bank loans granted to entities affected by COVID-19 and simplified arrangement approval proceedings due to COVID-19 (“Shield 4.0”), the Bank continues to offer the possibility of suspending exercising loan contracts for borrowers who lost their jobs or another main source of income after 13 March 2020 (under the so-called statutory moratoria).

4.2. Acquisition of residential mortgage loan receivables

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

In 2021, PKO Bank Hipoteczny SA acquired a portfolio of residential mortgage loan receivables totalling PLN 158.0 million from PKO Bank Polski SA.

The following table shows the main criteria applied by PKO Bank Hipoteczny SA in the process of acquiring the residential mortgage loans.

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

4.3. Structure of the residential mortgage loans portfolio

Portfolio structure by LtV

The structure of the gross portfolio of loans granted to customers in the statement of financial position of PKO Bank Hipoteczny SA according to the LtV ratio based on market valuation [18] and the LtV ratio based on the MLV is presented in the following tables.

Gross loans granted to customers at LtV based on market valuation	31.12.2021	31.12.2020
below 50%	63.9%	47.1%
51% - 60%	21.8%	23.8%
61% - 70%	11.5%	18.1%
71% - 80%	2.8%	9.4%
80% - 90%	0.0%	1.6%
over 90%	0.0%	0.0%
Total, gross	100%	100%
Average LtV based on market valuation	44.0%	50.0%

Gross loans granted to customers at LtV based on mortgage lending value	31.12.2021	31.12.2020
below 50%	18.9%	16.5%
51% - 60%	11.7%	10.5%
61% - 70%	16.0%	14.4%
71% - 80%	23.1%	21.2%
80% - 90%	25.0%	25.4%
over 90%	5.3%	12.0%
Total, gross	100%	100%
Average LtV based on MLV	67.3%	70.0%

In 2021, the average LtV based on the market valuation of the loan portfolio dropped by 6.0 p.p. (in 2020, it dropped by 6.2 p.p.), which is the effect of further growth in the market values of the real estate constituting the collateral for the loans granted by the Bank, with simultaneous depreciation of the portfolio. With respect to LtV based on MLV the drop is much smaller and results exclusively from the depreciation of the portfolio. The MLV determined as at the moment of granting the loans did not require updating.

Interest on loans

In its offer the Bank has loans bearing an interest rate based on WIBOR 6M and a historical loan portfolio based on WIBOR 3M, whose share, albeit small, grew systematically throughout 2021.

In its lending activities the Bank uses base reference interest rates WIBOR 3M and WIBOR 6M, which in 2021 amounted, on an average, to 0.54% and 0.63% respectively.

4.4. Mortgage covered bonds

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

Domestic issues of mortgage covered bonds

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

The total value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA for the domestic market (at the nominal value) as at the end of December 2021 was PLN 3,090.0 million.

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

During 2021 PKO Bank Hipoteczny SA did not carry out any domestic issues of mortgage covered bonds.

In 2021, PKO Bank Hipoteczny SA redeemed three series of mortgage covered bonds with a total nominal value of PLN 1,265 million.

PLN-denominated mortgage covered bonds of PKO Bank Hipoteczny SA issued and outstanding until 31 December 2021:

Series	Mortgage covered bond number (ISIN)	Issue date	Redemption date	Series value (PLN million)	Interest rate	Currency	Rating of the issue	Listing
4	PLPKOHP00041	28.04.2017	18.05.2022	500	WIBOR3M +0.69%	PLN	Aa1	Bondspot, WSE parallel regulated market
6	PLPKOHP00066	27.10.2017	27.06.2023	500	WIBOR3M +0.60%	PLN	Aa1	Bondspot, WSE parallel regulated market
7	PLPKOHP00074	27.04.2018	25.04.2024	700	WIBOR3M +0.49%	PLN	Aa1	Bondspot, WSE parallel regulated market
8	PLPKOHP00082	18.05.2018	29.04.2022	100	WIBOR3M +0.32%	PLN	Aa1	Bondspot, WSE parallel regulated market
9	PLPKOHP00090	27.07.2018	25.07.2025	500	WIBOR3M +0.62%	PLN	Aa1	Bondspot, WSE parallel regulated market
10	PLPKOHP00108	24.08.2018	24.08.2028	60	3.4875%	PLN	Aa1	Bondspot, WSE parallel regulated market
11	PLPKOHP00116	26.10.2018	28.04.2025	230	WIBOR3M +0.66%	PLN’000	Aa1	Bondspot, WSE parallel regulated market
12	PLPKOHP00132	10.06.2019	30.09.2024	250	WIBOR3M +0.60%	PLN	Aa1	Bondspot, WSE parallel regulated market
13	PLPKOHP00199	02.12.2019	02.12.2024	250	WIBOR3M +0.51%	PLN	Aa1	Bondspot, WSE parallel regulated market

International issues of mortgage covered bonds

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

The total value of outstanding mortgage covered bonds issued by PKO Bank Hipoteczny SA for the international markets (at the nominal value) as at the end of 2021 was EUR 2,179.0 million.

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

In 2021 PKO Bank Hipoteczny SA did not issue international mortgage covered bonds.

In 2021, PKO Bank Hipoteczny SA redeemed three series of EUR-denominated mortgage covered bonds with a total nominal value of EUR 600 million.

EUR-denominated mortgage covered bonds of PKO Bank Hipoteczny SA issued and outstanding until 31 December 2021:

Series	Mortgage covered bond number (ISIN)	Issue date	Redemption date	Series value (EUR million)	Coupon	Price	Currency	Rating of the issue	Listing
1	XS1508351357	24.10.2016	24.06.2022	500	0.125%	99.702%	EUR	Aa1	LuxSE, WSE parallel regulated market
1 2nd tranche	XS1508351357	08.03.2019	24.06.2022	100	0.125%	99.489%	EUR	Aa1	LuxSE, WSE parallel regulated market
2	XS1559882821	02.02.2017	02.02.2024	25	0.82%	100.00%	EUR	Aa1	LuxSE
3	XS1588411188	30.03.2017	24.01.2023	500	0.625%	99.972%	EUR	Aa1	LuxSE, WSE parallel regulated market
4	XS1690669574	27.09.2017	27.08.2024	500	0.75%	99.906%	EUR	Aa1	LuxSE, WSE parallel regulated market
5	XS1709552696	02.11.2017	03.11.2022	54	0.467%	100.00%	EUR	Aa1	LuxSE
6	XS1795407979	22.03.2018	24.01.2024	500	0.75%	99.892%	EUR	Aa1	LuxSE, WSE parallel regulated market

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

The Covered Bond Label

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

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

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

Energy efficient mortgage Label

The Energy Efficient Mortgage Label was created by the European Mortgage Federation – European Bond Council (EMF-ECBC) as a clear and transparent sign of quality for consumers, lenders and investors for the purpose of identifying energy-efficient mortgage loans for residential real estate construction.

PKO Bank Hipoteczny was the first bank from Poland to join the Energy Efficient Mortgage Label initiative in 2021. The initiative’s goal is to support the EU Green Deal and climate neutrality by 2050, and to adapt the product portfolio to regulatory changes such as the new EU taxonomy.

The Bank’s data on the Energy Efficient Mortgage Label website may be found at:

https://www.energy-efficient-mortgage-label.org/issuers/directory

Green Covered Bonds

In 2021, PKO Bank Hipoteczny SA continued to be prepared to issue green covered bonds. The Green Covered Bond Framework (GCBF) published by the Bank in June 2019 remained valid in 2021.

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

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

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

4.5. Financial market operations

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

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

In the Management Board’s opinion, as at 31 December 2021, there were no indicators of a risk of late payment of the liabilities incurred by the Bank. In 2021, the Bank complied with all internal and regulatory liquidity limits. Details of the levels of the Bank’s liquidity limits are provided in Note 42 “Liquidity risk management” to the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021.

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

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

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

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

In 2021, the Bank issued bonds with a total nominal value of PLN 6,066.5 million under the Programme. At the same time, the Bank redeemed bonds with a total nominal value of PLN 6,112.5 million. The balance of bonds issued under the Programme was PLN 3,730.5 million as at 31 December 2021. The Bank intends to continue to seek funding under this Programme.

4.7. Bonds –Public Programme

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

In 2021, PKO Bank Hipoteczny SA did not issue bonds under the Public Bond Issue Programme. In this period the Bank redeemed all the bonds issued under the Programme for a total of PLN 215.0 million.

4.8. Bonds – Other

In 2021, PKO Bank Hipoteczny SA did not issue any unsecured bonds on the basis of an individual agreement.

On 24 February 2021, PKO Bank Hipoteczny SA redeemed bonds issued on the basis of a bond issue agreement concluded with a European financial institution. The nominal value of the redeemed bonds was PLN 350.0 million.

5. Internal operating conditions

Lending process and cooperation with PKO Bank Polski SA

Internal control system

Risk management

Measurement of residential mortgage loan collaterals

Cover pool for mortgage covered bonds

Cover Pool Monitor

Statutory limits

5.1. Lending process and cooperation with PKO Bank Polski SA

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

• agency model;

• pooling model.

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

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

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

5.2. Internal control system

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

• effectiveness of the Bank’s operations;

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

• compliance with the risk management policy;

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

The Bank’s internal control system includes:

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

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

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

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

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

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

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

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

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

The results of monitoring and testing the control mechanisms functioning within the internal control system and the enhancements made in this respect indicated that in 2021 the internal control system in PKO Bank Hipoteczny SA was effective and commensurate with the business model and the scale of the Bank’s operations.

5.3. Risk management

The risk management process is a key process in PKO Bank Hipoteczny SA. Its purpose is to ensure the Bank’s financial stability, protect the value and ensure safety of funds from the issued mortgage covered bonds and other sources of funding the Bank’s operations by striving to maintain the risk tolerance established by the Bank. Another aim of the risk management system is to ensure proper and possibly the fullest information about the risk relating to taking decisions, and to effectively place risk management within the Bank’s organizational culture. The assumed level of risk constitutes an important component of the planning and decision-making process.

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

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

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

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

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

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

• methods of risk management are periodically reviewed and validated;

• risk management is integrated with planning and controlling processes;

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

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

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

Material risks

• Credit risk

• Liquidity risk including funding risk

• Interest rate risk

• Model risk

• Operational risk

Monitored risks

• Concentration risk

• Residual risk

• Foreign exchange risk

• Derivatives risk

• Business risk, including macroeconomic risk

• Compliance risk

• Reputation risk

• Capital adequacy risk, including excessive leverage risk

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

• material risks – which are subject to active management;

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

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

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

In its Risk Management Strategy, the Bank has defined a number of strategic limits which define the tolerance for different risks. The Bank monitors these limits on an ongoing basis. In 2021, as well as during the whole period of the Bank’s activities, none of them was exceeded.

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

5.4. Measurement of residential mortgage loan collaterals

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

• the Act on Mortgage Bonds and Mortgage Banks;

• the Act on Land and Mortgage Registers and Mortgage;

• the Banking Law.

Additionally, the question of loan collaterals is addressed by:

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

• the Bank’s internal regulations.

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

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

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

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

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

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

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

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

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

5.5. Cover pool for mortgage covered bonds

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

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

• deposited with the National Bank of Poland;

• held in cash.

The nominal value of loans entered in the Bank’s cover pool representing collateral for the covered bonds issued totalled PLN 21,778.5 thousand at 31 December 2021. The nominal value of the over-collateralization in the form of securities issued by the State Treasury, denominated in PLN, stood at PLN 130 million. As at 31 December 2020 it amounted to PLN 23,106.6 million and PLN 250 million respectively. The cover pool also takes into account CIRS transactions hedging foreign exchange risk and the interest rate risk on EUR-denominated mortgage covered bonds, FX-Forward transactions hedging the foreign exchange risk of issued EUR-denominated mortgage covered bonds and an IRS transactions hedging the interest rate risk of PLN-denominated mortgage covered bonds issued on a fixed-rate basis.

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

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

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

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

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

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

The following table presents basic data on the Cover Pool as at 31 December 2021 and 31 December 2020:

	31.12.2021	31.12.2020
Total cover pool, including (in PLN million):	21,908.5	23,356.6
loans secured by mortgages (in PLN million)	21,778.5	23,106.6
other assets [19] (in PLN million)	130.0	250.0
Liquidity buffer [20] (in PLN million)	136.0	74.4
Nominal value of hedging transactions [21] (in PLN million)	10,079.2	13,146.1
Number of loans	120,246	123,096
Average loan value (in PLN thousand)	181.1	187.7
Average weighted time since loan issuance (seasoning) (months)	64.8	54.8
Average maturity (months)	248.4	254.9
Average LtV (loan amount to market value)	43.3%	49.2%
Average weighted loan to mortgage lending value of real estate	67.1%	69.7%
Over-collateralization [22]	72.2%	41.4%

5.6. Cover Pool Monitor

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

Due to the lapse of the six-year period referred to above, on 5 March 2021 the PFSA appointed the Cover Pool Monitor and the Deputy Cover Pool Monitor for PKO Bank Hipoteczny SA, and the same persons are again responsible for the same functions:

	Position	Appointment date	Date of dismissal / resignation
Tadeusz Swat	Cover Pool Monitor	05.03.2021	-
Grzegorz Kędzia	Deputy Monitor	05.03.2021	-

5.7. Statutory limits

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

The statutory limits and the level to which they have been met as at 31 December 2021 and 31 December 2020 were as follows:

Limit	Legal basis	Limit level	Actual level
Limit	Legal basis	Limit level	31.12.2021	31.12.2020
Total value of receivables on loans secured by mortgages, and mortgage loan receivables purchased from other banks, in which the value exceeds 60% of the mortgage lending value, in proportion to the total value of receivables secured by mortgages	Article 13(1)	≤30.0%	15.0%	17.0%
Value of funds received from the issue of mortgage bonds designated for refinancing loans secured by mortgages or receivables on such loans acquired from other banks, in proportion to 80% of the mortgage lending value of particular residential properties that constitute the collateral	Article 14	≤100.0%	58.9%	71.4%
Total value of acquired shares in other entities, in proportion to the Bank’s own funds	Article 15(1)(5)	≤10.0%	0.0%	0.0%
Total value of loans and advances taken out and bonds issued, in proportion to the Bank’s own funds	Article 15(2)	≤600.0%[23]	519.9%	408.7%
Total amount of loans and advances taken out and bonds issued, in proportion to the amount designated for refinancing of activities described in Article 12 of the Act, i.e. issue of loans secured and unsecured by mortgages, receivables purchased from other banks on loans granted by them and secured or unsecured by mortgage	Article 15(3)	≤100.0%	45.0%	31.7%
Total nominal value of mortgage covered bonds outstanding, in proportion to the Bank’s own funds and general risk provision	Article 17	≤4000.0%	663.5%	888.6%
Total nominal value of receivables secured by mortgages and value of rights and additional funds of the Bank constituting the basis for the issue of mortgage covered bonds, in proportion to the total nominal value of outstanding mortgage covered bonds (taking into account hedging instruments)	Article 18(1)	≥110.0%	172.3%	141.4%
Total nominal value of receivables secured by mortgages constituting the basis for the issue of mortgage covered bonds, in proportion to the total nominal value of outstanding mortgage covered bonds	Article 18(1)	≥85.0%	165.8%	134.4%
Interest expense on mortgage covered bonds outstanding (cumulative from the beginning of the financial year and on any given day), in proportion to interest income on receivables secured by mortgages and rights and additional funds constituting the basis for the issue of mortgage covered bonds (cumulative from the beginning of the financial year and on any given day), taking into account hedging instruments	Article 18(2)	≤100.0%	21.8%	26.7%
Bank funds constituting the excess described in Article 18(3a) over the nominal value of interest on mortgage bonds outstanding due in the following six months	Article 18(3a)	≥100.0%	207.0%	142.0%
Value of receivables secured by mortgages established during the course of construction investments, in proportion to the total value of receivables secured by mortgages that constitute the basis for the issue of mortgage covered bonds	first sentence of Article 23(1)	≤10.0%	3.3%	8.4%
Value of receivables secured by mortgages established on land designated for construction in accordance with development plans, in proportion to the value of receivables secured by mortgages established during the course of construction projects that constitute the basis for the issue of mortgage covered bonds	second sentence of Article 23(2)	≤10.0%	0.0%	0.0%

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

As at the end of 2021 and as at the end of 2020, the Bank obtained positive results of the liquidity tests and coverage balance tests conducted.

6. Organization and Governing Bodies of PKO Bank Hipoteczny SA

Qualified staff

Organizational structure of PKO Bank Hipoteczny SA

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

The Management Board of PKO Bank Hipoteczny SA

The Supervisory Board of PKO Bank Hipoteczny SA

Remuneration and human resources management policy

Benefits for PKO Bank Hipoteczny SA’s key management personnel

6.1. Qualified staff

The Bank implements tools and procedures to guarantee that the Bank’s staff has the highest qualifications in its key areas of operation. The Bank systematically raises the qualifications of its staff and tries to ensure employment stability. These factors have a significant impact on the pursuit of the Bank’s strategy and its business objectives, and therefore on its operations and performance.

6.2. Organizational structure of PKO Bank Hipoteczny SA

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

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

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

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

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

• creating and dissolving special funds created from net profit;

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

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

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

• granting consent for the Bank taking up, acquiring within the scope allowed by the Act, as well as for selling or encumbering shares in companies by the Bank, redeeming shares in companies held by the Bank, as well as making additional payments to such companies by the Bank, making contributions, investing and disinvesting in companies and granting consent for the purchase and sale of bonds or other securities convertible into shares;

• assessing whether the remuneration policy used by the Bank contributes to the development and safety of the Bank’s operations;

• granting consent to manage intangible fixed assets, property, plant and equipment, including making contributions to a company or cooperative if the market value of the assets exceeds 5% of total assets determined on the basis of the latest financial statements, and offering these assets for use to another entity, for a period longer than 180 days in a calendar year, based on a legal transaction, if the market value of the subject matter of the legal transaction exceeds 5% of total assets;

• granting consent to purchasing property, plant and equipment with a value exceeding PLN 100,000,000 or 5% of total assets determined on the basis of the latest approved financial statements.

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

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

• approving the compliance policies of the Bank;

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

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

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

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

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

• approving the Management Board regulations;

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

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

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

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

• adopting the Supervisory Board Rules;

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

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

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

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

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

• assessing the adequacy and effectiveness of the internal control system operating in the Bank, including the control function, the compliance unit and the internal audit units, as well as assessing the adequacy and effectiveness of the risk management system;

• assessing the effectiveness of managing the compliance risk by the Bank;

• assessing the adequacy and effectiveness of the whistleblowing procedure with respect to violations of the law and of the procedures and ethical standards in force at the Bank;

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

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

• granting consent to appointing and removing the person managing the compliance and internal audit unit;

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

• assessing the functioning of the Bank’s remuneration policy and submitting relevant reports to the General Shareholders’ Meeting;

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

In the first half of 2021, the Supervisory Board committees which operated in the Bank had, in particular, the following competences:

Audit and Finance Committee	• monitoring and expressing periodic opinions on the adequacy and effectiveness of the internal control system, the adequacy and effectiveness of the risk management system and internal audit, the effectiveness of the Bank’s compliance risk management and the adequacy of the compliance unit, the application of the Corporate Governance Principles for Supervised Institutions, the adequacy and effectiveness of the whistleblowing policy and the ethical procedures and standards in force at the Bank; • developing the policy of selecting an audit firm, submitting to the Supervisory Board a recommendation of an audit firm to conduct an audit of the Bank’s financial statements; • monitoring the financial reporting process, including reviewing the interim and annual financial statements of the Bank and expressing an opinion on them; • monitoring financial audit proceedings and the independence of the statutory auditor and the entity authorized to audit the financial statements; • giving opinions on Management Board information relating to the operation of the internal control system, the approval of which is the responsibility of the Supervisory Board.
Risk Committee	• giving opinions on the Bank’s overall current and future risk appetite, strategic risk directions and tasks in the context of the Bank’s strategy and the conditions resulting from the macroeconomic situation and the regulatory environment, and in particular, on the risk management strategy developed by the Management Board and the Bank’s acceptable overall risk level; • reviewing the prices of liabilities and assets offered to customers to check whether they are fully compliant with the Bank’s business model and its risk management strategy, and if they do not appropriately reflect the types of risk pursuant to this model and strategy, presenting the directions of adjusting actions to the Bank’s Management Board; • monitoring compliance of the Bank’s policy in the area of taking on risk with the strategy and financial plan; • analysing periodic risk reports, including the utilization of strategic risk tolerance limits and developing relevant guidelines on their basis, as well as periodically reviewing the pursuance of the risk management strategy; • giving opinions on capital adequacy, creditworthiness evaluation principles, the risk measurement model, the impairment measurement model; • reviewing the principles of the disclosure policy regarding capital adequacy, liquidity risk management, interest rate risk and foreign exchange risk, operational risk, model risk, including the impairment risk. • giving opinions on the draft Rules on setting the Mortgage Lending Value of real estate.
Remuneration and Nomination Committee	• giving opinions on, and conducting periodic reviews of, nominations for key managerial positions in the Bank; • submitting proposals relating to appropriate forms of contracts with members of the Bank’s Management Board to the Supervisory Board; • preparing opinions on the Code of Ethics and the Principles for Management of Conflicts of Interest; • preparing opinions on requests concerning the consent for a member of the Management Board to engage in competitive activities or to participate in a competing company as a partner in a civil law company, a sole proprietorship or as a member of a governing body of a commercial company, or to participate in another competing legal person as a member of its governing body; • evaluating and performing periodic reviews, subject to the approval of the Supervisory Board, of the general principles of the policy for remunerating individuals whose actions have a material impact on the Bank’s risk profile; • evaluating and monitoring the variable remuneration components of individuals whose activities have a significant impact on the Bank’s risk profile, second-level risk management, the compliance unit manager and the internal audit unit manager; • reviewing detailed rules and procedures for recruiting members of the Bank’s Management Board and assessing the suitability of members of the Bank’s Management Board; • preparing and carrying out, with potential support from external independent entities, the programme for raising the qualifications of members of the Supervisory Board.
Commercial Committee	• reviewing the results of the functioning of cooperation agreements concluded between PKO Bank Polski SA and the Bank; • providing opinions on material changes to the criteria for qualifying products for the Bank; • providing opinions on introducing new products to the Bank’s offer and the directions of change in the Bank’s product offer; • monitoring and supervising the outsourcing of internal processes.

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

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

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

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

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

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

• adopting the Management Board Rules;

• adopting the Regulations for setting the Mortgage Lending Value of real estate;

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

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

• approving the operating regulations of the internal audit unit and the audit charter, determining the cooperation rules of the internal audit committee with the corresponding unit of PKO Bank Polski SA and the independent registered auditor, giving opinions on the operating strategy of the internal audit unit and annual and multi-year plans of internal audits;

• approving the operating rules of the compliance unit, determining the cooperation principles of the internal audit committee with the corresponding unit of PKO Bank Polski SA and giving opinions on the annual operating plan of the compliance unit;

• establishing internal capital estimation and equity The Bank’s Management Board established the following standing committees: management policies;

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

• taking decisions on issues of mortgage covered bonds

As at 31 December 2921, the Bank’s Management Board established standing committees with the following functions:

The Asset and Liability Committee	• supporting the management functions for liquidity, interest rate, business risks – including macroeconomic, currency, capital risk – including leverage risk – and the related risk of models and their measurement; • managing of the Bank’s capital adequacy; • reviewing documents concerning the structure of assets and liabilities, meeting financial goals, capital adequacy, equity, internal capital, stress testing, the risks mentioned above and the risk tolerance limits for those risks; • making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, risk management, the result of validation of the risk models, stress-test assumptions, hedging strategies under hedge accounting and recommendations for the Management Board with regard to launching emergency measures relating to capital and emergency procedures relating to liquidity; • issuing 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	• supporting the functions that manage credit, concentration and residual risks, as well as the risk of the models measuring such risks; • reviewing documents concerning the risks mentioned above, the profile and quality structure of the loan portfolio, impairment losses on assets, acquisition of loan portfolios, and the property market; • making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, risk management, the results of the validation of the risk models, the methodologies and models of calculation of impairment losses on credit assets, cut-offs used in the assessment of credit risk, loan receivables purchased by the Bank and individual loan transactions; • issuing recommendations 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.
The Operational Risk and Data Quality Committee	• effective management of operational risk, improving the safety of the Bank’s operating activities; • managing outsourcing risk; • determining the directions of operational risk management development; • supervising the functioning of operational risk management, including tasks relating to ensuring business continuity and the information and telecom security environment; • setting tasks in the event of failures putting the Bank’s image at risk, which could lead to operating losses; • determining the directions of operations in the area of managing the quality of data and data architecture in the Bank, in the context of the Data Management System (DMS); • supervising the Data Management System, including assessing its effectiveness and actions of the Bank’s particular organizational entities; • issuing 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.
The Strategy and Business Initiatives Committee	• supporting the reputation and compliance risk management functions as well as the risk of the models measuring such risks; • examining materials on the risks mentioned above, directions of the Bank’s development, the Bank’s strategy and IT strategy, initiatives related to the implementation of the Bank’s strategy and IT strategy together with the operational risk analysis, product offer, product profitability, lending process; • making decisions concerning the Bank’s operations, particularly regarding the management of these risks and the models of their measurement, as well as the risk measures and limits; • issuing recommendations 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.
Greeen Covered Bonds Committee	• supervising the issue of Green Covered Bonds, including determining the directions of change with respect to the Green Bonds and assessing and selecting assets qualifying for funding with the Green Covered Bonds; • examining materials relating to the guidelines and principles set by the International Capital Markets Association (ICMA) for the Green Covered Bonds market, domestic regulations on the binding energy efficiency standards, reporting on the allocation of funds earned on emissions and the impact on the funding environment gained by issuing the Green Covered Bonds, in accordance with the rules for issuing the Green Covered Bonds in force at the Bank, investor information with respect to the Green Covered Bonds; • making decisions relating to the Bank’s operation, among other things, in the scope of assessing and selecting qualified loans according to the methodology adopted by the Bank and adopting the rules for issuing the Green Covered Bonds by the Bank pursuant to appropriate guidelines; • issuing recommendations 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.

6.4. The Management Board of PKO Bank Hipoteczny SA

In the period from 1 January to 31 December 2021, the composition of the Management Board of PKO Bank Hipoteczny SA was as follows:

	Position	Position holding period
Paulina Strugała	President of the Management Board	16.04.2018 – 30.09.2021
Daniel Goska	Vice-President of the Management Board Vice-President of the Management Board managing the Management Board’s operations President of the Management Board	01. 10.2020 – 30.09.2021 01.10.2021– 25.01.2022 26.01.2022 – until now
Piotr Kochanek	Vice-President of the Management Board	01.01.2019 – until now
Katarzyna Surdy	Vice-President of the Management Board	01.10.2021 – until now

On 13 April 2021, the Ordinary General Shareholders’ Meeting granted the discharge of duties to the President of the Management Board Ms Paulina Strugała for the period from 1 January 2020 to 31 December 2020, to the Vice-President of the Management Board Mr Piotr Kochanek for the period from 1 January 2020 to 31 December 2020, to the Vice-President of the Management Board Ms Agnieszka Krawczyk for the period from 1 January 2020 to 30 September 2020 and to the Vice-President Mr Daniel Goska from 1 October 2020 to 31 December 2020.

On 20 August 2021, Ms Paulina Strugała, President of the Management Board of PKO Bank Hipoteczny S.A., resigned from the position with effect as of 30 September 2021.

On 27 August 2021 the Supervisory Board of PKO Bank Hipoteczny SA appointed Mr Daniel Goska President of the Management Board (on condition that the PFSA gives its consent) and Ms Katarzyna Surdy Vice-President of the Bank’s Management Board for the current joint four-year term of office as of 1 October 2021.

On 26 January 2022, the Polish Financial Supervision Authority gave its unanimous consent to appointing Mr Daniel Goska President of the Management Board of PKO Bank Hipoteczny SA.

The Bank’s Supervisory Board determined the following internal assignment of particular key competences of the Management Board of PKO Bank Hipoteczny SA as at 31 December 2021:

Daniel Goska

Vice-President of the Management Board managing the Management Board’s operations and responsible for supervising the internal audit function, managing compliance risk , HR and supervising financial planning and financial controlling

Other functions performed:

Chairperson of the Strategy and Business Initiatives Committee

Chairperson of the Asset and Liability Committee

Piotr Kochanek

Vice-President of the Management Board responsible for supervision over all of the Bank’s risks, with the exception of compliance and reputational risk, and supervision over the process of assessing creditability and determining the mortgage lending value of real estate, the restructuring and debt collection process and settling and confirming treasury transaction, as well as accounting and financial reporting issues

Other functions performed:

Chairperson of the Credit Committee

Chairperson of the Operational Risk and Data Quality Committee

Deputy Chairperson of the Asset and Liability Committee

Member of the Strategy and Business Initiatives Committee

Katarzyna Surdy

Vice-President of the Management Board responsible for supervision over reputational risk management, legal services, outsourcing, supervision over the creation and development of the product offer, coordination of product sales and acquiring loan receivables as well as the process of their further handling, functioning and effectiveness of IT resources, as well as issuing securities and raising funds

Other functions performed:

Chairperson of the Green Covered Bonds Committee

Deputy Chairperson of the Operational Risk and Data Quality Committee

Deputy Chairperson of the Strategy and Business Initiatives Committee

Member of the Asset and Liability Committee

Member of the Credit Committee

Other management functions of the Management Board members

	Position	Position holding period
Paulina Strugała	Member of the Supervisory Board of PKO BP Finat Sp. o.o.	01.01.2021– 30.09.2021
Piotr Kochanek	Did not perform any additional functions as member of the Management Board or of the Supervisory Board and did not hold any other directorial positions	Throughout the reporting period
Daniel Goska	Did not perform any additional functions as member of the Management Board or of the Supervisory Board and did not hold any other directorial positions	Throughout the reporting period
Katarzyna Surdy	Did not perform any additional functions as member of the Management Board or of the Supervisory Board and did not hold any other directorial positions	Throughout the reporting period

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

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

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

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

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

6.5. The Supervisory Board of PKO Bank Hipoteczny SA

In 2021 the composition of the Supervisory Board of PKO Bank Hipoteczny SA was as follows:

	Function on the Supervisory Board	Appointment date	Date of dismissal / resignation	qualifications in finance	Independent member [24]	Audit and Finance Committee	Risk Committee	Remuneration and Nomination Committee	Commercial Committee
Jakub Papierski	Chairman	06.10.2014	13.04.2021	√				C	C
Jan Emeryk Rościszewski	Member of the Supervisory Board Chairman	13.04.2021 30.04.2021	29.04.2021 12.08.2021	√				C	M
Mieczysław Król	Member of the Supervisory Board Chairman	13.08.2021 27.08.2021	26.08.2021	√				C	M
Justyna Borkiewicz	Member of the Supervisory Board	28.10.2016	07.07.2021	√			M
Piotr Kwiecień	Member of the Supervisory Board	18.10.2017		√	√	C	M		M
Paweł Metrycki	Deputy Chair	07.10.2019		√		D	C		D
Ilona Wołyniec	Member of the Supervisory Board	30.03.2019		√			D	D	C
Lucyna Kopińska	Member of the Supervisory Board	01.09.2019		√					M
Jadwiga Leszisz	Member of the Supervisory Board	01.09.2019		√	√	M
Dariusz Odzioba	Member of the Supervisory Board	01.09.2019	30.08.2021	√

C – Chairperson of the Committee, D – Deputy Chairperson of the Committee, M – Member of the Committee

The composition of the Committees is presented as at 31 December 2021.

Pursuant to Article 395 § 2 item 3 of the Commercial Companies Code once a year the Ordinary General Shareholders’ Meeting grants a vote of approval to each individual member of the Supervisory Board. Granting this vote of approval constitutes an evaluation of the Supervisory Board members, independent of the approval of the Supervisory Board’s report on the Bank’s operations by the General Shareholders’ Meeting. On 13 April 2021 all members of the Bank’s Supervisory Board received a vote of approval for the period ended 31 December 2020, by way of resolutions of the General Shareholders’ Meeting.

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

Information on the Audit and Finance Committee

In 2021, the composition of the Audit and Finance Committee of PKO Bank Hipoteczny SA was as follows:

	Position on the Audit and Finance Committee	Appointment date	Dismissal / resignation date	Independent member [25]	accounting and/or auditing knowledge and skills	knowledge and skills in banking
Piotr Kwiecień	Member of the Committee Chairperson of the Committee	18.10.2017 07.10.2019		√	√	√
Paweł Metrycki	Deputy Chairperson of the Committee	07.10.2019			√	√
Jadwiga Lesisz	Member of the Committee	07.10.2019		√	√

In 2021, five meetings of the Audit and Finance Committee took place.

6.6. Remuneration and human resources management policy

Number of employees

On 31 December 2021 PKO Bank Hipoteczny SA employed 54 people. This is an increase of one employee compared with the end of 2020.

Remuneration Policy

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

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

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

• non-remuneration benefits available to the employees.

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

• basic salary;

• bonuses and awards for special achievements in professional work;

• additional remuneration for working overtime and at night.

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

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

Basic Salary

The Bank assigns basic salaries in accordance with an internal system of salary levels. The levels are assigned based on an independent and objective scoring method.

Variable Remuneration

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

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

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

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

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

Employee benefits

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

Principles for remunerating Members of the Bank’s Management Board

On 17 December 2021 the Policy for employing and remunerating members of the Management Board of the Bank was adopted by Resolution of the Supervisory Board No. 54/2021. Based thereon, members of the Bank’s Management Board are entitled to:

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

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

The information on remuneration components and other benefits payable to Management Board members in the reporting period is presented in the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021 (Note 35.4).

Variable remuneration components for Members of the Management Board and Material Risk Takers

In accordance with the requirements of CRD IV, i.e. Commission Delegated Regulation (EU) 2021/923 (as amended) supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile, referred to in Article 92 (3) of the Directive, as well as in connection with the Regulation of the Minister of Finance, Funds and Regional Policy of 8 June 2021 on the risk management system, the internal control system, and the remuneration policy in banks, the following regulations laying down the principles of determining variable remuneration components are in force in the Bank:

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

• The principles of remunerating persons whose professional activities significantly affect the Bank’s risk profile (MRTs);

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

The policy on variable remuneration components for Management Board members and MRTs as at 31 December 2021 was applicable to 3 Management Board members, 5 former Management Board members and 13 MRT positions.

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

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

• non-deferred;

• deferred.

In 2021 variable remuneration components were paid out based on resolutions passed in previous periods. In connection with the continued state of the COVID-19 epidemic in Poland, in particular the temporary extraordinary administrative restrictions relating to business operations and the potential economic consequences of this state and their expected impact on the financial sector, taking into consideration the statement of the European Banking Authority dated 15 December 2020 and of the PFSA dated 17 April 2020 on the expectations with respect to banks’ actions relating to paying out variable remuneration components, the decision was taken to temporarily limit the amount of funds for the variable portion of remuneration of members of the Management Board and key managers for 2020.

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

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

• material violations of duties following from the employment contract;

• inadequate performance of the assigned professional duties;

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

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

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

• material violations of duties following from the assigned tasks;

• inadequate performance of the assigned professional duties;

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

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

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

In 2021, none of the employees at PKO Bank Hipoteczny SA received total remuneration of at least EUR 1 million.

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

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

Contracts concluded by and between the Bank and management members

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

In 2021 each of the members of the Bank’s Management Board performed their functions based on the contracts for providing management services concluded with the Bank, which determined – among other things – the terms and conditions relating to remuneration and the ban on performing competitive activities.

6.7. Benefits for members of the Supervisory Board

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

Benefits for independent members of the Supervisory Board (PLN ‘000)	01.01.2021 – 31.12.2021	01.01.2020– 31.12.2020

Piotr Kwiecień	58	58
Jadwiga Lesisz	58	58
Total	116	116

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

BENEFITS FOR MEMBERS OF THE MANAGEMENT BOARD (in PLN’000)	01.01.2021 - 31.12.2021
	Short-term employee benefits		Other long-term employee benefits – variable cash remuneration [26]		Share-based payments settled in cash
	Remuneration 01.01.2021-31.12.2021 [27]	Other received 01.01.2021- 31.12.2021	Received 01.01.2021-31.12.2021	Potentially receivable as at 31.12.2021	Received 01.01.2021-31.12.2021	Potentially receivable as at 31.12.2021
Paulina Strugała	459.0		104.8	123.0	135.5	160.0
Piotr Kochanek	480.0		73.3	81.0	92.4	109.0
Katarzyna Surdy	105.0		-	-	-	-
Daniel Goska	420.0		12.4	10.5	-	10.5

Members of the Management Board who have not performed their functions in 2021	-		246.8	156.0	314.1	190.0

Total benefits for members of the Management Board	1,464.0		437.4	370.5	517.3	469.5

BENEFITS FOR MEMBERS OF THE MANAGEMENT BOARD (in PLN’000)	01.01.2020 - 31.12.2020
	Short-term employee benefits		Other long-term employee benefits – variable cash remuneration26		Share-based payments settled in cash
	Remuneration 01.01.2020-31.12.202027	Other received 01.01.2020- 31.12.2020	Received 01.01.2020-31.12.2020	Potentially receivable as at 31.12.2020	Received 01.01.2020-31.12.2020	Potentially receivable as at 31.12.2020
Paulina Strugała	612.0		57.4	93.2	83.4	227.8
Piotr Kochanek	480.0		32.9	49.4	-	152.9
Agnieszka Krawczyk	359.0		49.5	81.9	91.3	306.7
Daniel Goska	105.0			-		-

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

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

Benefits after the term of the contract for services

In 2021 Ms Agnieszka Krawczyk was paid a post-employment benefit of PLN 119 thousand.

In 2021 Ms Paulina Strugała was paid a post-employment benefit of PLN 153 thousand.

Benefits in respect of the termination of the contract for services

In the period from 1 January to 31 December 2021 Ms Paulina Strugała was awarded a benefit in respect of the termination of her contract for services of PLN 153 thousand.

7. Corporate Governance and Investor Information

Representation on compliance with the rules for corporate governance

Audit firm

Other information

7.1. Representation on compliance with the rules for corporate governance

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

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

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

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

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

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

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

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

In accordance with the requirement arising from § 27 of the Principles of Corporate Governance for Supervised Institutions, on 30 May 2021, the Supervisory Board evaluated the application of the said Principles in the Bank in 2020. The Supervisory Board positively evaluated the application of the Principles in the Bank confirming that the Principles adopted by the Bank and its authorities were applied adequately to the scale, nature of operations and the specific character of the Bank.

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

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

Diversity Policy

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

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

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

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

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

Diversity policy concerning the management and supervisory staff as at 31 December 2021

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

Gender	Female	Male
Supervisory Board	3	3
Management Board	1	2
Key managers	7	5

Age	30 – 40 years	41 – 50 years	51 – 60 years	Over 60 years
Supervisory Board	-	3	2	1
Management Board	1	2	-	-
Key managers	4	7	1	-

Period of employment with PKO Bank Hipoteczny SA	up to 1 year	1 – 5 years	Over 5 years
Supervisory Board	1	5	0
Management Board	0	1	2
Key managers	1	5	6

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

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

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

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

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

As at 31 December 2021 the share capital of PKO Bank Hipoteczny SA amounted to PLN 1,611.3 million and comprised 1,611,300,000 shares with PLN 1 nominal value. The shares are paid up in full. The amount of share capital did not change compared to the end of 2020. The PKO Bank Hipoteczny SA shares are non-preference shares. The holders of PKO Bank Hipoteczny SA shares do not have any control rights due to holding such shares. 100% of the shares of PKO Bank Hipoteczny SA are held by Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna.

Structure of the share capital of PKO Bank Hipoteczny SA:

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

Shareholder	31.12.2021		31.12.2020
Shareholder	Number of shares	Share of votes at GSM	Number of shares	Share of votes at GSM
Powszechna Kasa Oszczędności Bank Polski SA	1,611,300,000	100%	1,611,300,000	100%

Description of the rules for appointing and dismissing managers

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

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

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

Description of authorizations to decide on share issues or redemptions

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

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

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

Principles for amending the Bank’s Articles of Association

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

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

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

The General Shareholders’ Meeting and relations with shareholders

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

7.2. Audit Firm

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

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

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

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

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

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

Net fee of the audit firm (PLN’000).	2021	2020
Audit of the financial statements	140.4	140.4
Review of the financial statements, audit and review of group packages	87.4	87.4

Moreover, in accordance with the provisions of the Policy and Procedures for selecting an audit firm to conduct an audit of the Bank’s financial statements, on 29 October 2021 the Supervisory Board of PKO Bank Hipoteczny SA, based on § 18 (1)(4) of the Bank’s Articles of Association and the recommendation of the Audit and Finance Committee of the Bank’s Supervisory Board, appointed PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. as the audit firm to conduct the audit and review of the Bank’s financial statements for the years 2022–2023.

7.3. Other Information

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

In 2021 there were no changes in the holding of shares and rights to shares in PKO Bank Hipoteczny SA by individuals in management and supervisory roles. 100% of the shares are held by PKO Bank Polski S.A.

Significant and material agreements with the central bank or supervisory bodies

In 2021 PKO Bank Hipoteczny SA did not conclude any significant or material agreements with the Central Bank or with supervisory bodies.

Financial and guarantee commitments granted

In 2021 PKO Bank Hipoteczny SA did not issue any guarantees.

Financial liabilities with respect to loans granted and not disbursed as at 31 December 2021 stood at PLN 57 million, down by PLN 58.5 million compared to 31 December 2020.

Off-balance-sheet liabilities granted to related parties

In 2021, PKO Bank Hipoteczny SA did not grant any off-balance sheet liabilities to related parties.

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

In 2021, Bank Hipoteczny SA did not take out any loans or enter into any loan or guarantee agreements unrelated to the Bank’s operations.

Underwriting agreements

In 2021 PKO Bank Hipoteczny SA did not conclude any underwriting agreements.

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

As at 31 December 2021, no material proceedings were pending before courts, arbitration bodies or public administration bodies concerning liabilities or receivables of PKO Bank Hipoteczny SA.

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

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

In the global economy:

• developments in the pandemic, including infections with the extremely contagious Omicron variant observed at the beginning of 2022; the effectiveness and advancement of the vaccinations programme and the contagiousness and virulence of the consecutive mutations of the Coronavirus;

• reaction of the global economy to the ever more widespread process of tightening the monetary policy, including the likely relatively quick and multiple increases in interest rates in the USA;

• possible easing of supply limitations (limitations in availability of production components, high prices of energy resources), which currently lead to increased cost pressure and limit the rate and scale of economic revival;

• possible increase in stagflation concerns and maintained higher inflation both on a global and on national scale;

• the political and economic situation in Ukraine, significant risk of increased tension in relations with Russia, not only between Ukraine and Russia, but also between UE/USA and Russia.

In the Polish economy:

• the scale and direction of changes in the NBP interest rates and in the level of the mandatory reserve;

• efficiency and timescale of the government inflation-limiting programmes, and the impact of the price increase – highest since twenty years – on real consumer expenses and their propensity to use up their savings;

• the reaction of the household sector to the increased NBP interest rates, including the loan demand profile and the ability to service the liabilities already incurred;

• a weakening of households’ demand for loans, including residential mortgage loans, and maintained increase in demand for corporate finance, accompanied by the still increased volume of deposits;

• the trends in the situation on the residential real estate market and demand for residential loans, including likely weak speculative / investment demand for apartments in connection with the increase in the NBP interest rates;

• the Polish Deal entering into force, including changes in taxation which increase the disposable income of most households;

• the growing BGF costs which have a direct impact on a decrease in the results of the banking sector.

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

In 2021, PKO Bank Hipoteczny SA did not grant any loan guarantees or other guarantees to a single entity or a subsidiary of such an entity with a total value equivalent to at least 10% of the Bank’s equity.

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

On 9 June 2021, PKO Bank Hipoteczny SA concluded an annexe to a medium-term current account overdraft facility agreement of up to PLN 150 million with an external financial institution, extending the repayment deadline until 14 June 2022.

On 18 October 2021, PKO Bank Hipoteczny SA and PKO Bank Polski SA concluded annexe no. 10 to the agreement dated 29 July 2015 on a revolving current account overdraft facility extending the term of the facility to 29 October 2025.

On 25 February 2021 PKO Bank Hipoteczny SA concluded annexe no. 10 to the agreement dated 2 February 2017 on a revolving current account overdraft facility with PKO Bank Polski SA, changing the rules of accruing interest on the facility. On 2 September 2021 as a result of signing annexe no. 11 to the agreement, the lending period was extended to 3 February 2026.

On 23 June 2021, PKO Bank Hipoteczny SA and PKO Bank Polski SA concluded annexe no. 4 to the agreement dated 10 July 2019 on the revolving current account overdraft facility extending the term of the facility to 1 July 2025. The amount of the limit is PLN 4,000 million. On 15 December 2021, as a result of signing annexe no. 5 to the agreement, the amount of the limit was increased to PLN 5,000 million.

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

PKO Bank Polski SA and PKO Bank Polski SA entities are the Bank’s related parties in terms of equity.

In 2021, PKO Bank Hipoteczny SA did not conclude any material non-arm’s length transactions with related parties.

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

In 2021, there were no changes in the key principles of managing the Bank’s enterprise in PKO Bank Hipoteczny SA.

Financial support agreements

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

Deposits, and guarantees and sureties issued

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

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

In 2021, PKO Bank Hipoteczny SA did not set up any security on the borrowers’ accounts.

As at 31 December 2021, the value of collateral in respect of residential mortgage loans secured with real estate was PLN 63.3 billion.

Subsequent events

There were no subsequent events.

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

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

• the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021 have been prepared in accordance with the applicable accounting policies and give a true, fair and clear view of the financial position of PKO Bank Hipoteczny SA and of the results of its operations;

• the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2021 gives a true view of the development and achievements as well as of the position of PKO Bank Hipoteczny SA, including a description of the key risks and threats.

The Management Board of PKO Bank Hipoteczny SA declares that the audit firm which conducted the audit of the financial statements of PKO Bank Hipoteczny SA for the year ended 31 December 2021 was selected in compliance with the applicable laws, and that both the entity and the statutory auditor who conducted the audit fulfilled all the criteria for providing an unbiased and independent audit opinion on the financial statements, in compliance with the applicable laws and professional standards.

This Directors’ Report on the activities of PKO Bank Hipoteczny SA for the year ended 31 December 2021 comprises 59 sequentially numbered pages.

Signatures of all the Members of the Bank’s Management Board

17.02.2022	Daniel Goska	President of the Management Board	signed with a qualified electronic signature ...................................................... (signature)
17.02.2022	Piotr Kochanek	Vice-President of the Management Board	signed with a qualified electronic signature ...................................................... (signature)
17.02.2022	Katarzyna Surdy	Vice-President of the Management Board	signed with a qualified electronic signature ...................................................... (signature)

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

[2] Covering the following items of the statement of financial position: amounts due to customers; other liabilities, current income tax liability, deferred tax provision and provisions.

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

[5] Warsaw, Kraków, Poznań, Wrocław, Gdańsk, Gdynia, Łódź

[6] Bydgoszcz, Białystok, Katowice, Kielce, Lublin, Olsztyn, Opole, Rzeszów, Szczecin, Zielona Góra

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

[8] Annualized ratio calculated by dividing net profit/(loss) for the given period by the average balance of total equity as at the beginning and end of the reporting period, and interim monthly periods.

[9] Annualized ratio without accounting for the tax on other financial institutions.

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

[11] Covering the following items of the statement of financial position: amounts due to customers; other liabilities, current income tax liability, deferred tax provision and provisions.

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

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

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

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

[16]In accordance with the information policy of PKO Bank Hipoteczny SA with respect to capital adequacy and other information subject to publication, the disclosure requirements comply with Recommendations R and Z in force as of 1 January 2022.

[17] In the event that the required own contribution is insured, the Bank allows granting a loan where the ratio does not exceed 90%.

[18] Current level of LtV calculated based on the value of the real estate as at the moment of granting the loan, updated using statistical methods based on an analysis of the real estate market.

[19] Article 18(3) of the Act on mortgage covered bonds and mortgage banks

[20] Article 18(3a) of the Act on mortgage covered bonds and mortgage banks.

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

[22] Accounts for the net value of hedging transactions and does not account for non-performing loans (NPL).

[23] As of 1 April 2020, there was a change to the limit level following from Article 15(2) in accordance with which after the first five years of operation of a mortgage bank the total amount of liabilities resulting from loans and borrowings drawn and bonds issued cannot exceed six times the amount of the mortgage bank’s own funds. Until 31 March 2020 the limit was 1,000.0%.

[24] In accordance with the Act of 11 May 2017 on statutory auditors, audit firms and public oversight.

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

[26] Deferred portion of the variable remuneration (in cash).

[27] The benefits include basic salaries, additions with respect of health care benefits and the Company Social Fund.