INTERIM CONDENSED CONSOLIDATED FINANCIAL REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP FOR THE 6-MONTH PERIOD ENDED 30 JUNE 2014

Transcription

1 INTERIM CONDENSED CONSOLIDATED FINANCIAL REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP FOR THE 6-MONTH PERIOD ENDED 30 JUNE 2014 Warsaw, August 2014

2 Contents: I. Interim condensed consolidated financial statements... 5 Interim consolidated income statement... 5 Interim consolidated statement of comprehensive income... 6 Interim consolidated statement of financial position... 7 Interim consolidated statement of changes in equity... 8 Interim consolidated statement of cash flows Additional notes to interim condensed consolidated financial statements Corporate information Bank Ochrony Środowiska S.A. and the Bank Ochrony Środowiska S.A. Capital Group Seasonality or cyclicality of operations during the year Information on the accounting policies adopted in the preparation of the consolidated financial statements Adjustment of the prior period error Areas of significant accounting estimates and professional judgment Financial risk management Net interest income Net fee and commission income Net trading income Result on investment securities Other operating income Other operating expenses Net impairment losses General administrative expenses Income tax charge Earnings per share Deposits placed in other banks, loans and advances to other banks Securities held for trading Derivative financial and hedge instruments Loans and advances to customers Investment securities Amounts due to customers Liabilities relating to banking securities issued Provisions Share capital Share base payment Contingent assets and contingent liabilities Additional information to the statement of cash flows

3 29. Fair value of financial assets and liabilities Classification of financial instruments measured at fair value according to the fair value measurement method Segment reporting Related-party transactions Nature and amounts of items affecting assets, liabilities, equity, net financial result or cash flows, which are unusual due to their nature, amount or impact Nature and amount of changes in estimates reported in prior interim periods of the current financial year or changes in estimates reported in prior financial years, if they have a significant impact on the current interim period Dividends paid (in total and per share), per ordinary and other shares Significant events after the first half of 2014 which were not reflected in these financial statements The effect of changes in the structure of entity during the first half of 2014, including business combinations, acquisition or disposal of subsidiaries and long-term investments, restructuring and discontinued operations II. Interim condensed financial statements of the Bank Interim income statement of the Bank Interim statement of comprehensive income of the Bank Interim statement of financial position of the Bank Interim statement of changes in equity of the Bank Interim statement of cash flows of the Bank Additional notes to the interim condensed financial statements of the Bank Corporate information Bank Ochrony Środowiska S.A Authorization of financial statements Information on the accounting policies adopted in the preparation of the financial statements Comparative data Capital management Net interest income Net fee and commission income Dividend income Result on investment securities Other operating income Other operating expenses Net impairment losses Earnings per share Loans and advances to customers Provisions Share based payment Contingent assets and contingent liabilities

4 18. Related-party transactions Seasonality or cyclicality of operations during the interim period Nature and amounts of items affecting assets, liabilities, equity, net financial result or cash flows, which are unusual due to their nature, amount or cyclical fluctuations Nature and amount of changes in estimates reported in prior interim periods of the current financial year or changes in estimates reported in prior financial years, if they have a significant impact on the current interim period Dividends paid (in total and per share), per ordinary and other shares Significant events after the first half of 2014 which were not reflected in these financial statements The effect of changes in the structure of entity during the first half of 2014, including business combinations, acquisition or disposal of subsidiaries and long-term investments, restructuring and discontinued operations

5 I. Interim condensed consolidated financial statements Interim consolidated income statement Continued operations Note 2. quarter period from to 6 month period 2. quarter period from to 6 months period Interest and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net fee and commission income Dividend income Net trading income Result on investment securities Result on hedge accounting Foreign exchange result Other operating income Other operating expenses Net impairment losses General administrative expenses Operating profit Profit before tax Income tax charge current tax deferred tax Net profit Attributable to: - equity holders of the parent non-controlling interests Earnings per share attributable to equity holder of the parent during the period (in PLN) basic diluted There were no discontinued operations during 6 30 June 2014 and in the year 31 December Notes on the pages 12 to 70 are an integral part of these interim condensed consolidated financial statements. 5

6 Interim consolidated statement of comprehensive income 2. quarter period from to 6 month period 2. quarter period from to 6 month period Net profit Items that may be reclassified subsequently to profit or loss Gain/loss on valuation of available for sale financial assets Valuation of cash flow hedges Deferred tax Items that will not be reclassified subsequently to profit or loss Total comprehensive income Attributable to: - equity holders of the parent non-controlling interests Notes on the pages 12 to 70 are an integral part of these interim condensed consolidated financial statements. 6

7 Interim consolidated statement of financial position ASSETS Note Cash and deposits placed in the Central Bank Receivables from other banks Securities held-for-trading Derivative financial instruments Derivative hedging instruments Loans and advances to customers Investment securities available for sale held to maturity Investment in associates Intangible assets Property, plant and equipment Income tax assets current deferred Other assets Total assets LIABILITIES Amounts due to the Central Bank Amounts due to other banks Derivative financial instruments Derivative hedging instruments Amounts due to customers Debt securities issued Subordinated debt Provisions Income tax liabilities current deferred Other liabilities Total liabilities EQUITY Attributable to equity holders of the parent: Core capital Share capital Own shares Share premium Revaluation reserve Retained earnings Total equity Total equity and liabilities Notes on the pages 12 to 70 are an integral part of these interim condensed consolidated financial statements. 7

8 for the 6 30 June Interim consolidated statement of changes in equity Attributable to equity holders of the parent: Core capital (Note 25) Retained earnings Share capital Own shares Share premium Revaluation reserve Other supplementary capital Other reserve capital General risk fund Retained earnings Total equity As at Net result Other comprehensive income Total comprehensive income Own shares purchase Cost of share issue Management options Foreign exchange differences Profit distribution, of which: Transfer of net profit to other capital As at () As at Net result Other comprehensive income Total comprehensive income Own shares purchase Cost of share issue Management options Execution of payments of variable compensation in shares Loss from previous periods Profit distribution, of which: Transfer of net profit to other capital As at

9 Attributable to equity holders of the parent: Core capital Retained earnings Share Capital Own Shares Share Premium Revaluation reserve Other supplementary capital Other reserve capital General risk fund Retained earnings Total equity As at Net Result Other comprehensive income Total comprehensive income Own shares purchase Cost of share issue Management options Foreign exchange differences Profit distribution, of which: Transfer of net profit to other capital As at () Non-controlling interests in the 6 30 June 2014 and in year 2013 did not occur. Notes on the pages 12 to 70 are an integral part of these interim condensed consolidated financial statements. 9

10 Interim consolidated statement of cash flows Indirect method CASH FLOW FROM OPERATING ACTIVITIES Note 6 Profit before tax Adjusted for: Amortization and depreciation Interest on investing activities Interest on financing activities Profit from investing activities Unrealized exchange differences on financing activities Change in securities held-for-trading Change in assets and liabilities due to valuation of derivative financial instruments and derivative hedging instruments Change in receivables from other banks Change in loans and advances to customers Change in investment securities Change in other assets Change in amounts due to banks and the Central Bank Change in amounts due to customers Change in provisions Change in other liabilities Income tax paid Net cash flow from operating activities CASH FLOW FROM INVESTING ACTIVITIES Inflows Sale of property, plant and equipment 66 - Interest received Outflows Purchase of held to maturity investments Purchase of intangible assets Purchase of property, plant and equipment Net cash flow from investing activities

11 Indirect method CASH FLOW FROM FINANCING ACTIVITIES Note 6 Inflows Inflows from bonds issued by the Group Outflows Own shares purchase Group bonds redemption Interest paid on bonds issued by the Group, of which: subordinated debt Other outflows Net cash flow from financing activities TOTAL NET CASH FLOW BALANCE SHEET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD, of which: Cash and cash equivalents with limited availability of use Notes on the pages 12 to 70 are an integral part of these consolidated financial statements. 11

12 Additional notes to interim condensed consolidated financial statements 1. Corporate information Bank Ochrony Środowiska S.A. and the Bank Ochrony Środowiska S.A. Capital Group 1.1. Bank Ochrony Środowiska S.A. The parent company of the BOŚ S.A. Capital Group is Bank Ochrony Środowiska S.A. (hereinafter the Bank, BOŚ S.A. or the parent company ). The Bank, with its registered office in Warsaw, Żelazna 32 street, was incorporated based on the decision No. 42 of the President of the National Bank of Poland ( NBP ) dated 15 September 1990 and the Notarial Deed of 28 September 1990 on the establishment of the Bank. On 4 June 2001, the Bank is entered into the National Court Register of the District Court in Warsaw, 12th Commercial Department, with the reference number KRS and the statistical number REGON According to the Polish Classification of Activities (PKD), the Bank s activities fall within the category PKD 6419Z. The Bank has an unlimited period of operation. According to BOŚ S.A. Statutes, the key mission of the Bank is to support activities relating to the development of industry and services for the environmental protection, and to develop the market for products and services related to environmental protection as well as promoting and creating ecominded behavior and initiatives related to environmental protection. According to the Bank s Statutes, the Bank's area of activity is accumulating cash funds, lending, clearing, providing other banking services as well as financial advisory and consulting services. The main scope of the Bank s operations includes: - accepting deposits payable on demand or on maturity and maintaining bank accounts for these deposits; - maintaining other bank accounts; - granting loans; - issuing and confirming bank guarantees and opening and approving letters of credit; - issuing bank securities; - clearing cash transactions; - issuing e-money instruments; - granting cash loans; - processing checks and bills of exchange; - issuing payment cards and conducting transactions with the use of those cards; - purchasing and selling cash receivables; - custody services in respect of goods and securities and providing safe deposit facilities; - buying and selling monetary instruments; - issuing and confirming warranties; - performing commissioned tasks related to issuing securities; - intermediation in transferring cash and making international settlements; - depositary bank services. The scope of the Bank s operations also includes: - acquiring shares, rights vested in those shares or equity interests in legal entities and participation units in investment funds; - incurring liabilities related to the issuance of securities; - trading in securities; - performance of forward financial transactions; - exchange of amounts due from debtors for their assets, on terms and conditions agreed with the debtors; - purchasing and selling real estate; - financial advisory services, especially pro-ecological services; - factoring services; 12

13 - reception and transmission of orders to buy or sell financial instruments with the exception that a subject of the transaction may only be securities issued by the Treasury, or the Polish National Bank, or other financial instruments or bonds not admitted to organized trading referred to in the article No. 39 point 1 of the Act dated 27 October 1994 on Toll Motorways and the National Road Fund; execution of such orders on the account of the principal; - provision of investment firm agent services; - insurance intermediation services; - receivables collection services on commission of banks and entities with which the Bank concluded joint financing agreements or agreements for action under operation programs. Starting from 24 January 1997, in accordance with the decision of the Management Board of the Warsaw Stock Exchange (WSE), the Bank s shares were admitted to trading on the Warsaw Stock Exchange and classified as belonging to the financial/banking sector category. These interim condensed consolidated financial statements of Bank Ochrony Środowiska S.A. Capital Group were authorized 18 August 2014 by the Management Board of the parent company for publication to be made on 21 August List of the Bank Ochrony Środowiska S.A. shareholders The structure of shareholders holding directly or through a subsidiary more than 5% of votes at the General Shareholders Meeting of the Bank: as at 30 June 2014 No. Entity Number of votes held (shares) % of voting rights (shareholding) Narodowy Fundusz Ochrony Środowiska i Gospodarki Wodnej ING Otwarty Fundusz Emerytalny oraz ING Dobrowolny Fundusz Emerytalny as at 31 December 2013 Entity Number of votes held (shares) % of voting rights (shareholding) Narodowy Fundusz Ochrony Środowiska i Gospodarki Wodnej One share entitles to one vote on the General Meeting of Shareholders. 13

14 1.3. List of the BOŚ S.A. Capital Group consolidated entities. As at 30 June 2014, the Capital Group of BOŚ S.A. consists of Bank Ochrony Środowiska S.A., the parent, its direct subsidiaries: Dom Maklerski BOŚ S.A., BOŚ Eko Profit S.A., BOS Finance AB, BOŚ Invest Management sp. z o.o., BOŚ Ekosystem sp. z o.o., BOŚ Nieruchomości sp. z o.o., BOŚ Nieruchomości sp. z o.o. spółka komandytowo akcyjna and an indirect subsidiary: (subsidiary of BOŚ Eko Profit S.A.), MS Wind sp. z o.o. The type of operations conducted by the the BOŚ S.A. subsidiaries: Dom Maklerski BOŚ S.A. BOŚ Eko Profit S.A. BOS Finance AB BOŚ Invest Management sp. z o.o. BOŚ Ekosystem sp. z o.o. BOŚ Nieruchomości sp. z o.o. BOŚ Nieruchomości sp. z o.o. S.K.A. MS Wind sp. z o.o. - operations on a capital market - capital investments in pro-ecological projects and financial and advisory services supplementary to the Bank s offer - financial services issue of Eurobonds - financial services, including financing of the Bank Ochrony Środowiska S.A. Capital Group and relating to its rental and advertisement needs - offering comprehensive solutions for households in respect to renewable energy sources and financial intermediation services, in particular related to financing of pro-ecological projects - real estate trade and management services, acting as a general partner of BOŚ Nieruchomości Sp. z o.o. spółka komandytowo akcyjna - real estate trade and management services - wind farm project. 14

15 The list of the BOŚ S.A. Capital Group entities consolidated using acquisition method: No. Subordinated entities Registered office % shareholding as at % of voting rights as at Direct subsidiaries 1. Dom Maklerski BOŚ S.A. Warsaw 100% 100% 2. BOŚ Eko Profit S.A. Warsaw 100% 100% 3. BOS Finance AB Stockholm 100% 100% 4. BOŚ Invest Management sp. z o.o. 5. BOŚ Nieruchomości sp. z o.o. Warsaw 100% 100% Warsaw 100% 100% 6. BOŚ Nieruchomości sp. z o.o. S.K.A. Warsaw 100% 100% 7. BOŚ Ekosystem sp. z o.o. Warsaw 100% 100% Indirect subsidiaries (subsidiary of BOŚ Eko Profit S.A.) MS Wind sp. z o.o. Warsaw 100% 100% As at 31 December 2013 the Group s interest in the share capital and in the voting rights at the General Meetings of Shareholders of above mentioned entities equaled: - 100% in Dom Maklerski BOŚ S.A., - 100% in BOŚ Eko Profit S.A., - 100% in BOS Finance AB, - 100% in BOŚ Invest Management sp. z o.o., - 100% in BOŚ Nieruchomości sp. z o.o., - 100% in BOŚ Nieruchomości sp. z o.o. S.K.A., - 100% in MS Wind sp. z o.o. 15

16 1.4. Composition of the Management Board and the Supervisory Board of BOŚ S.A. (a) Composition of the Bank s Management Board The composition of the Management Board of the Bank as at 30 June 2014 was as follows: Mariusz Klimczak Stanisław Kolasiński Dariusz Daniluk Adam Zbigniew Grzebieluch Paweł Kazimierz Lemańczyk - President, - Vice-President; First Deputy of the President, - Vice-President, - Vice-President, - Vice-President. On 30 April 2014 due to the fact that the mandates of the BOŚ S.A. Management Board Members have expired, pursuant to Article of the Code of Commercial Companies the Supervisory Board appointed the Management Board for the new term of office. The Supervisory Board appointed Mr. Dariusz Daniluk and Mr. Paweł Lemańczyk in place of Mr. Przemyłsaw Figarski and Mr. Krzysztof Teliga, as Members of the Management Board; except for those changes, the composition of the Management remained unchanged. As of the date of the approval of these interim condensed consolidated financial statements, the composition of the Management Board remained unchanged. The composition of the Management Board of the Bank as at 31 December 2013 was as follows: Mariusz Klimczak - President, Stanisław Kolasiński - Vice-President; First Deputy of the President, Przemysław Lech Figarski - Vice-President, Adam Zbigniew Grzebieluch - Vice-President, Krzysztof Wojciech Telega - Vice-President. (b) Composition of the Bank s Supervisory Board The composition of the Supervisory Board of the Bank as at 30 June 2014 was as follows: Marcin Likierski Piotr Bogdan Kaczyński Adam Grzegorz Wasiak Jacek Czesław Ciepluch Józef Kozioł Andrzej Kazimierz Kraszewski Mariusz Roman Karpiński Ryszard Ochwat Adam Aleksander Wojtaś - President, - Vice-president, - Secretary, - Member - Member - Member - Member - Member - Member On 13 March 2014, the Extraordinary General Shareholders Meeting of BOŚ S.A.: passed a resolution on dismissing Mr. Krzysztof Rogala from the Supervisory Board, passed a resolution on appointing Mr. Piotr Bogdan Kaczyński as a Member of the Supervisory Board. On 30 April 2014, the Ordinary General Shareholders Meeting of BOŚ S.A.: adopted resolutions on dismissing from the Supervisory Board: Mr. Jacek Maciej Bajorek, the Vice-President, Mr. Michał Juliusz Machlejda, the Board Member, adopted resolutions on appointing members of the Management Board: Mr. Jacek Czesław Ciepluch, 16

17 Mr. Mariusz Roman Karpiński. On the same day, during the Supervisory Board meeting, i.e. 30 April 2014, the Supervisory Board elected Mr. Piotr Kaczyński to a position of Vice President of the Supervisory Board. As of the date of the approval of these interim condensed consolidated financial statements, there were no changes in the composition of the Supervisory Board. The composition of the Supervisory Board of the Bank as at 31 December 2013 was as follows: Marcin Likierski Jacek Maciej Bajorek Adam Grzegorz Wasiak Józef Kozioł Andrzej Kazimierz Kraszewski Michał Juliusz Machlejd Ryszard Ochwat Krzysztof Władysław Rogala Adam Aleksander Wojtaś - President, - Vice-President, - Secretary, - Member, - Member, - Member, - Member, - Member, - Member. 2. Seasonality or cyclicality of operations during the year The Group s operations are free of seasonal or cyclical fluctuations. 3. `Information on the accounting policies adopted in the preparation of the consolidated financial statements 3.1. Basis for the preparation of financial statemets The interim condensed consolidated financial statements of the Bank Ochrony Środowiska S.A. Capital Group (hereinafter BOŚ S.A. Capital Group, the Group, the Capital Group ) include: interim consolidated income statement for the period of 6 months 30 June 2014, comparative data for the period of 6 months 30 June 2013 as well as data for the period of 3 months 30 June 2014 together with comparative data for the period of 3 months 30 June 2013 which were not subject to audit, or review by a certified auditor. interim consolidated statement of comprehensive income for the period of 6 months 30 June 2014, comparative data for the period of 6 months 30 June 2013 as well as data for the period of 3 months 30 June 2014 together with comparative data for the period of 3 months 30 June 2013 which were not subject to audit, or review by a certified auditor. interim consolidated statement of financial position as at 30 June 2014 and comparative data as at 31 December interim consolidated statement of changes in equity for the period of 6 months 30 June 2014, comparative data for the period of 12 months 31 December 2013 and for the period of 6 months 30 June interim consolidated statement of cash flows for the period of 6 months 30 June 2014 and comparative data for the period of 6 months 30 June additional explanatory notes. These interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( EU ) effective as at 30 June 2014 and have been prepared using the same accounting policies for each 17

18 period. Due to the change made in 2013 in the method of income recognition of commissions and fees related to insurance products and the change in presentation of income from released provisions for employee benefits, the above changes in presentation of comparative data have been presented in point 3.2. Dom Maklerski BOŚ S.A., BOŚ Eko Profit S.A., BOS Finance AB, BOŚ Invest Management sp. z o.o., BOŚ Nieruchomości sp. z o.o., BOŚ Nieruchomości sp. z o.o. S.K.A. and BOŚ Ekosystem Sp. z o.o. prepare financial statements in accordance with IFRS as adopted by the EU. These interim condensed consolidated financial statements of the Capital Group have been prepared under the historical cost convention, except for the valuation of the available for sale financial assets and securities held for trading, and all derivative contracts re-measured to fair value. The accounting policies applied by the Group have been described in detail in the Annual Consolidated Financial Statements of the BOŚ S.A. Capital Group for the year 31 December 2013 in the notes Standards, interpretations and changes, which were applied for the first time in the year 2014, did not have a significant impact on these financial statements of the Capital Group. The interim condensed consolidated financial statements have been prepared in Polish zloty (PLN) and all values have been presented s, unless stated otherwise. These interim condensed consolidated financial statements for the period of 6 months 30 June 2014 have been prepared in accordance with IFRS, including IAS 34 Interim Financial Statements. These interim condensed consolidated financial statements do not contain all the disclosures required in the annual financial statements. At the date of the authorization of these interim condensed consolidated financial statements, in light of the current process of IFRS endorsement in the European Union and the nature of the Group s activities, there is no difference between IFRSs that came into force and IFRSs endorsed by the European Union with regard to the accounting policies applied by the Group. The attached interim condensed consolidated financial statements have been prepared using the same accounting policies as those applied in the annual consolidated financial statements of the Group for the year 31 December 2013, with the exception of the adoption of the new and am standards listed below and interpretations obligatory for the annual periods commencing on or after 1 January 2014: IRFS 10 Consolidated Financial Statements, adopted by the UE on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), IFRS 11 Joint Arrangements, adopted by the UE on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), IFRS 12 Disclosure of Interests in Other Entities, adopted by the UE on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), IAS 27 (revised in 2011) Separate Financial Statements, adopted by the UE on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), IAS 28 (revised in 2011) Investments in Associates and Joint Ventures, adopted by the UE on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities Transition Guidance, adopted by the UE on 4 April 2013 (effective for annual periods beginning on or after 1 January 2014), Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Consolidated and Separate Financial Statements Investment Entities, adopted by the UE on 20 November 2013 (effective for annual periods beginning on or after 1 January 2014), 18

19 Amendments to IAS 32 Financial Instruments: Presentation Offsetting Financial Assets and Financial Liabilities, adopted by the UE on 13 December 2012 (effective for annual periods beginning on or after 1 January 2014), Amendments to IAS 36 Impairment of Assets Recoverable Amount Disclosures for Non- Financial Assets, adopted by the UE on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014), Amendments to IAS 39 Financial Instruments: Recognition and Measurement Novation of Derivatives and Continuation of Hedge Accounting, adopted by the UE on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014). The adoption of these amendments did not have any effect on the financial position or performance of the Group or data presented in these interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared based on the assumption that the Bank and the Group s entities will continue as going concerns in the foreseeable future, i.e. in at least 12 months from the reporting date. As at the date of the authorization of these interim condensed financial statements, the Management Board is not aware of any facts or circumstances that would indicate a threat to the continued activity of the Bank and the Group s entities within 12 months from the end of the reporting period due to an int or compulsory withdrawal from or limitation in its current activities Comparative data As at 30 June 2014, the Group made the following presentational changes as compared to the previously published financial statements as at 30 June 2013: a) change in the year 2013 of the Groups method of income recognition of commissions and fees related to insurance products, b) change in presentation of income from released provisions for employee benefits presented as other general administrative expenses instead of other operating costs. In the Group s opinion the current presentation better reflects the substance and economical meaning of the described items. 19

20 6 months Income statement item Description Published data Effect of presentation adjustment Data presented in these financial statements Interest and similar income Change in presentation of insurance commission income Net interest income Fee and commission income Net fee and commission income Other operating income Insurance commission income adjustment Change in presentation of income from released provisions of employee benefits General administrative expenses Change in presentation of income from released provisions of employee benefits Operating profit Profit before tax Income tax charges: deferred tax Change in deferred tax expense Net profit months Other comprehensive income item Description Published data Effect of presentation adjustment Data presented in these financial statements Net profit Total comprehensive income Adjustment of income from commissions settled over time

21 6 months Earnings per share item Published data Effect of presentation adjustment Data presented in these financial statements Net profit Basic earnings per share (expressed in PLN) Adjustment of the prior period error During the 6-30 June 2014, no prior periods error adjustments occurred. 5. Significant accounting estimates and judgments Preparation of the financial statements in accordance with the IFRSs adopted by the EU requires applying some estimates material from the accounting perspective. It also requires the Management Board to exercise professional judgment in the process of applying the adopted accounting policies. The areas involving higher degree of professional judgment or complexity, or areas where assumptions and estimates significant to the consolidated financial statements relating to impairment of loans, impairment of equity instruments available for sale, debt securities held to maturity, fair value of financial instruments, provisions for liabilities and claims, provisions for employee benefits, deferred tax asset did not change and are presented in the Annual Financial Statements of BOŚ S.A. Capital Group for the period of 12 months 31 December 2013 and apply in the preparation of this report. 21

22 6. Financial risk management 6.1. Credit risk Credit risk management Credit risk management in the Bank and in the BOŚ S.A. Capital Group is aimed at ensuring an acceptable level of risk and the realization of financial results determined in the Bank s and its subsidiaries financial plans, while complying with the Bank s internal regulations which are in line with external regulations. The Bank s credit risk management system consists of: principles of processing evaluation of the credit risk of a single transaction, establishing of collateral and making credit decisions, principles of monitoring the level of risk, limits setting and stress-testing, rating and scoring models used in client risk assessment, differentiated depending on client segment, principles of establishing risk categories for financial institutions, principles of establishing risk categories for countries, principles of portfolio credit risk measurement, reporting system for the Bank s managerial staff, IT tools, supporting the realization of the above mentioned tasks. The Bank carries out credit risk management in individual terms, i.e. at the level of a single credit transaction and in portfolio terms, i.e. at the level of a group of transactions with common characteristics. The Bank performs credit exposures reviews identifying impaired credit exposures, measuring the impairment and calculating the impairment allowance for these exposures on a monthly basis. To meet this objective, the Bank divides its credit portfolio into individually and group assessed portfolios, taking into account the size of a single exposure and its risk characteristics. Those portfolios are reviewed for impairment indicators. The Bank recognizes as impaired those credit exposures for which there is an evidence of impairment due to one or more events that occurred after the initial recognition of the exposure in the books of the Bank and the loss event has an impact on the expected cash flows from this exposure that can be reliably estimated. As impairment triggers the Bank considers in particular: delay in the repayment of capital or interest over 90 days, excluding credit exposures granted to banks for which a delay over 14 days is an impairment trigger, a deterioration of economic and financial situation of the debtor, resulting in the classification of the rating class 14 and worse, signing of a restructuring agreement or granting a relief in repayment of debts, occurrence of other events, indicating default resulting in inability of a timely repayment of debt. Measurement of impairment is performed by using two methods: individual method, group method. The Bank applies an individual method of impairment measuring in respect to credit exposures that are individually significant and meet the defined criteria, related to the amount of the exposure or 22

23 events, which in the opinion of the Bank, were recognized as an indicator of an individual impairment and: restructured credit exposures, which as of the day of valuation are not individually significant, however were valuated with the use of the individual method in the previous period, restructured exposures, without regard for individual significance of these exposures, in the case where for a particular contract, a renegotiation has occurred more than twice or the Bank has concluded a restructurisation agreement, that susp credit repayment for a certain time, in which the borrower has committed to sell the real estate, insignificant credit exposures, with untypical credit risk characteristics. The impairment evaluation model is based on the calculation of the present value of expected future cash flows related to the particular credit exposure. The Bank performs an impairment measurement of the credit exposures, with a use of the individual method, based on following scenario analysis: vindication, regular repayment, restructuring and potential restructuring, weighted with probability of realization of a certain scenario. Group impairment method applies to individually insignificant credit exposures and credit exposures that were not subject to evaluation with the use of individual method. For the purpose of the group impairment measurement, the exposures are grouped accordingly to similar credit risk characteristics. The parameters which determine classification of credit receivables to specific risk groups reflect the debtors ability to repay the entire exposures in accordance with a contract. The amount of impairment for a particular group depends mainly on: average risk of not repaying the debt by a client classified to a particular group (probability of default PD), estimated recovery in case of lack of credit repayment (recovery rate - RR), probability of returning of the exposition to regular servicing, in case of cessation of servicing the credit, determined for a given homogeneous group (cure rate CR), probability of lasting out the period of quarantine for a risk group, to which an exposure belongs (QR ratio). In the group assessment, the Bank divides exposures into seven portfolios: - Retail customers mortgages granted in PLN, - Retail customers mortgages granted in foreign currency, - Retail customers cash loans, - Retail customers mortgage loans, - Other retail customers, - Corporate clients, including financial institutions and customers from ecological funds segment, - Customers from public finance segment. The review of methodology used to determine the PD and RR ratios, is carried out in accordance with introduced principles of cyclical review of applied adequacy parameters. Impairment allowance is recognised for all credit exposures of the Bank, excluding exposures granted in the last month. The methodology and assumptions used by the Bank to estimate the impairment allowance are regularly reviewed in order to reduce any differences between estimated and actual impairment losses. 23

24 Receivables from other banks The table below presents gross amounts of receivables from other banks, divided into groups based on the Moody s, Fitch and Standard & Poor's (S&P) ratings. Unaudited Moody s A A A Aa Baa Baa Baa Ca 85 - Caa2-165 Fitch A A- 5 6 BBB BBB S&P A No rating *\ Total gross Impairment allowance on receivables from other banks Total net *\ for receivables from other banks that were not externally rated, the Bank assigned its own internal ratings. The table below presents the internal ratings which reflect the Moody s ratings. Internal rating Respective Moody s rating Respective Moody s rating B A1, A2, A3, Baa A1, A2, A3, Baa1 876 C Baa2, Baa Baa2, Baa D Ba1, Ba2 - Ba1, Ba D/E Ba3, B Ba3, B1 - F B B Total

25 Loans and advances to customers and other banks Loans and advances without impairment indicator, of which: Loans and advances which are not past due Loans and advances which are past due Loans and advances without impairment loss due to estimated cash flows Loans and advances impaired Total gross loans and advances to customers and other banks Impairment allowances on loans and advances to customers and other banks Other receivables Total loans and advances to customers and other banks (net), of which: customers banks Corporate and public finance entities and other customers Mortgage loans Other retail loans Banks Total Gross value of loans not impaired Loans and advances without impairment loss due to estimated cash flows individually assessed Loans and advances impaired individually assessed Allowance for loans not impaired (IBNR) Allowance for loans impaired, of which: individually assessed Total net value Other receivables (net) Total loans and advances granted to customers and other banks (net)

26 Corporate and public finance entities and other customers Mortgage loans Other retail loans Banks Total Gross value of loans not impaired Loans and advances without impairment loss due to estimated cash flows individually assessed Loans and advances impaired individually assessed Allowance for loans not impaired (IBNR) Allowance for loans impaired, of which: individually assessed Total net value Other receivables (net) 17 Total loans and advances granted to customers and other banks (net)

27 Analysis of the Group s loans and advances portfolio, by rating/ scoring and class of customers Rating Loans to corporate entities (1-3) (4-5) (6-7) (8-9) (10-11) (12-13) (14-16) no rating Total loans to corporate entities Loans to retail entities private individuals rated clients non-rated clients microenterprises with a scoring *\ Total loans to retail entities Loans to public finance entities (1-3) - - (4-5) (6-7) (8-9) (10-11) (12-13) (14-16) no rating Total loans to public finance entities Loans to other customers, of which: banks Total loans and advances to customers and other banks, gross Impairment allowance for loans and advances to customers and other banks Other receivables (net) Total loans and advances to customers and other banks (net), of which: customers banks *\ Microenterprises Scoring Unaudited (1) (2) (3) (4) (5) (6) Total

28 Debt securities The table below presents ratings by Moody s for debt securities: Moody s State Treasury NBP Banks Auxiliary financial institutions Public finance Corporate Total A no rating Total State Treasury NBP Banks Auxiliary Financial institutions Public finance Corporate Total Moody s A no rating Total The risk classes for issuers of municipal bonds handled by the Bank Ochrony Środowiska S.A. are assigned in accordance with the methodology adopted by the Bank for assessing the creditworthiness of local government units. Internal rating Unaudited Public finance Total

29 6.2. Techniques of the measurement of the market risk (in the trading and banking books) and limits The financial risk in the Group is concentrated mainly in BOŚ S.A. and in DM BOŚ S.A. and includes: (i) liquidity risk; (ii) interest rate risk (in the banking and trading book); (iii) currency risk (in the banking and trading book). The liquidity risk and interest rate risk occurs mostly in the Bank, while the currency risk occurs in the Bank (in the trading book; it is transferred from the banking book to the trading book) and in DM BOŚ S.A (in the trading and non-trading book). DM BOŚ S.A. is also exposed to commodity and stock price risk (in the trading book). Transactions in the banking book are the basic activities of the Bank i.e. they are the result of commercial activities, including obtaining funding and effective liquidity management. According to the definition adopted by BOŚ S.A., trading book contains transactions that were performed on the Bank s own account with the aim of trading, i.e. of gaining financial profits in shortterm periods due to real or expected differences between bid and offer prices in the market as well as other deviations of prices or price parities, including especially: interest rates, exchange rates and stock exchange indices. Sale of transactions from the trading book is not performed in order to provide the Bank s liquidity. Banking book includes positions, which are not included in the trading book, in particular: 1) granted loans, guarantees, advances, deposits and deposits received, 2) transactions, hedging the liquidity and interest rate risk of operations included in the banking book, 3) purchase of securities with purpose other than trading. According to the Group s strategy, activities in the trading book supplements activities in the banking book. The aim of transactions in the trading book is to ensure the Banks clients receive the highest service quality. In order to achieve this goal, the Bank maintains open positions, within the applicable risk limits. As part of activities determinig the Group's appetite for financial risk, in BOŚ S.A., there are policies for liquidity risk, interest rate risk in the banking book and market risk management. The policies set, among others, maximum levels of financial risk, according to the risk appetite adopted by the Bank's Supervisory Board. The level and financial risk profile is regularly monitored and reported to: the Bank s Supervisory Board, the DM BOŚ S.A. Supervisory Board, the Bank s Management Board, the DM BOŚ S.A. Management Board, the Assets and Liabilities Committee (ALCO) and the Liquidity and Market Risk Committee Liquidity risk Liquidity risk is defined as the Group s losing its ability to settle its liabilities within contractual deadlines, to obtain funds to cover unpredicted withdrawal of deposits and the ability to generate a positive cash flow balance. Due to the nature of the liquidity risk, the process of monitoring and managing the risk actively is concentrated in the Bank. The purpose of liquidity management is to ensure Bank s liquidity and maintain the balanced structure of assets and liabilities to provide a safe liquidity profile in particular time periods, divided into PLN and key foreign currencies, and most of all, for the total liquidity position. The liquidity in the Bank is considered in the following time horizon: current liquidity up to one week, short-term liquidity up to one month; medium-term liquidity from 1 month to 12 months; long-term liquidity over 12 months. In order to measure current and short-term liquidity, the Bank has introduced the following measures and tools: (i) liquid assets - they are a safeguard for expected and unexpected outflows in a horizon 29