MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF BANK OCHRONY ŚRODOWISKA S.A. IN 2013

Transcription

1 MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF BANK OCHRONY ŚRODOWISKA S.A. IN 2013 WARSAW, MARCH 2014

2 TABLE OF CONTENTS TABLE OF CONTENTS 2 SUMMARY OF THE PERFORMANCE OF BOŚ S.A. CAPITAL GROUP IN I. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE BANK IN MACROECONOMIC SITUATION QUOT OF SHARES IN BOŚ S.A. ON WARSAW STOCK EXCHANGE SIGNIFICANT EVENTS IN FACTORS THAT MAY HAVE EFFECTS ON THE PERFORMANCE OF THE BANKING SECTOR AND THE BANK II. FINANCIAL PERFORMANCE AND ACTIVITIES OF THE BANK INCOME STATEMENT STATEMENT OF FINANCIAL POSITION Bank s assets Changes in the structure of assets Loans and advances due to customers Loans and advances granted in the reporting period Quality of loan portfolio Total equity and liabilities of the Bank Changes in the structure of total equity and liabilities Sources of financing Bank s operations Liabilities to clients Own bonds Information about loans and credit facilities drawn Information about loans and credit facilities drawn. loan and surety or guarantee agreements not relating to the Bank s operating activities Contingent assets and liabilities Loans. sureties and guarantees granted to subsidiaries BANK S DEVELOPMENT STRATEGY KEY SCOPE OF OPERATIONS OF THE BANK Banking activity Share of the BOŚ S.A. in the sector MAIN PRODUCTS, SERVICES AND BUSINESS AREAS Banking products Number of serviced clients. accounts. payment cards and branches Pro-ecological offer and cooperation with ecological funds Corporate client segment Public finance segment Retail client segment JESSICA initiative Cooperation with foreign financial institutions Investment banking III. FINANCIAL RISK MANAGEMENT IN THE BANK CREDIT RISK FINANCIAL RISK Liquidity risk Interest rate risk Interest rate risk in the banking book Interest rate risk in the trading book Currency risk OPERATING AND COMPLIANCE RISK Operating risk Compliance risk IV. ADDITIONAL INFORMATION FINANCIAL RESOURCES MANAGEMENT CHANGES IN THE KEY MANAGEMENT PRINCIPLES UNUSUAL FACTORS AND EVENTS DIFFERENCE BETWEEN FINANCIAL FORECASTS AND ACTUAL PERFORMANCE MAJOR INVESTMENT PROJECTS DEPENDENCE ON PARTNERS RELATED PARTY TRANSACTIONS

3 8. SEASONALITY OR CYCLICALITY INFORMATION ON THE BANK'S AGREEMENTS Significant agreements Agreements with the Central Bank and regulatory bodies Agreements with the entity authorized to audit financial statements COURT PROCEEDINGS ENFORCEMENT TITLES AND COLLATERAL VALUE DIVIDEND UTILIZATION OF PROCEEDS FROM ISSUE OF SECURITIES SHARES OF BOŚ S.A. HELD BY MEMBERS OF EXECUTIVE AND SUPERVISORY BODIES EXECUTIVE SHARE OPTION SCHEME INCENTIVE PAY SCHEME FOR EXECUTIVES OF BOŚ S.A VALUE OF MANAGEMENT REMUNERATION CONTRACTS RELATING TO COMPENSATION TO MEMBERS OF EXECUTIVE BODIES STAFF TRAININGS POST-BALANCE SHEET EVENTS V. STATEMENT OF CORPORATE GOVERNANCE RULES COMPLIANCE CORPORATE GOVERNANCE PRINCIPLES Corporate governance principles applied by BOŚ S.A. and their public availability Information regarding non-compliance with certain corporate governance principles Key characteristics of internal control and risk management systems used in BOŚ S.A. with regard to financial statements preparation SHAREHOLDERS AND THEIR RIGHTS Shareholders Information on contracts relating to future changes in the shareholding structure Shareholder holding directly or indirectly (through subsidiaries) at least 5% of the total number of votes at general meeting of the Bank Holders of special control rights under securities Restrictions in transferring ownership rights to securities and executing voting rights Principles of appointment and dismissal of members of the Bank s governing bodies Amendments to the Bank s Articles of Association Description of the Bank s General Shareholders Meetings, their authorization, shareholders rights and methods of their execution BANK S GOVERNING BODIES General Shareholders Meeting of the Bank The Management Board of the Bank Supervisory Board of the Bank VI. CORPORATE SOCIAL RESPONSIBILITY BANK PORTAL EKO-POLSKA BOŚ FOUNDATION

4 SUMMARY OF THE PERFORMANCE OF BOŚ S.A. CAPITAL GROUP IN 2013 In 2013, BOŚ S.A. generated gross profit of PLN 68.2 million, which was 19.6% higher than in the previous year. The Group s net profit was PLN 62.9 million and saw 14.7% year-on-year increase. The interest gain was 2.7% lower than in the previous year, while the decrease in the banking sector as a whole reached 3.8% (source: own calculation based on data by Polish Financial Supervision Authority, Banking Sector with Foreign Operations ). The drop resulted from a reduced interest profitability of the loan portfolio arising from a reduction in market interest rates. Fees and commissions generated an increase by 12.0%, net trading result by 167.7%, investment securities by 27.0%, foreign exchange result by 4.4% and impairment by 14.9%. Importantly, cost discipline has been maintained in the BOŚ S.A. General and administrative expenses dropped by 2.4% year on year, with 9.3% increase in the scale of operations measured by a growth in assets compared to 31 December Non-personnel expenses in the Bank decreased by 9.0% i.e. PLN 10.2 million, mainly as a result of marketing expense reduction. Employee benefit expenses dropped by 3.4% compared to the end of At the same time, employment in BOŚ S.A. Bank entities decreased. BOŚ S.A. focused on developing its operations on the ecologic project market, increasing the share of loans supporting environmental protection and sustainable development in its portfolio. As at 31 December 2013, the share of these loans in the total portfolio was 23.1% compared to 19.4% at the end of These loans have been used mainly for atmospheric protection investments, in particular energy efficiency and renewable energy sources, as well as water management and protection, including sewage systems and sewage treatment stations. The value of loans granted on ecological purpose in 2013 was approx. three times higher compared to The highest growth of sell was seen in the corporate client loans. In 2013, Bank saw an increase by 8.5% in the value of loans and credit facilities granted to clients, reaching PLN 12.1 billion at the end of Please note that the level of loans and credit facilities granted to corporate clients hit a record. The increase in this segment of Bank's clients amounted to 25.5% while in 2013 the entire banking sector saw a 2.1% increase in loans for enterprises (source: own data of PFSA Banking Sector with Foreign Operations ). The value of loans in retail client segment increase as well. It grew by 4.5% and loans granted to clients from this segment have still the highest in the total loan balance (39.7%). As at 31 December 2013, Bank s liabilities to clients was amounted to PLN 13.2 million, what means increase by 11.8% i.e. by PLN 1.4 billion compared to 31 December Deposits increased in all customer segments: retail clients increased by PLN 0.5 billion, i.e. 11.7%, corporate segment deposits increased by PLN 0.5 billion, i.e. by 11.3% while those of the public finance segment grew by PLN 0.2 billion, i.e. 30.4%. As at 31 December 2013, the Bank s balance sheet total equaled PLN 18.3 billion and was 9.3% higher than at the end of All financial indicators of the BOŚ S.A. remained on the safe level. At the end of 2013, its capital adequacy ratio was 13.39% compared to 14.68% at the end of The change in the value is related to the progress of a loan campaign. As at 31 December 2013, tier 1 ratio amounted to 10.73% compared to 11.71% at the end of Cost/income ratio was 70.4% as at 31 December 2013, and rose 3.7 p.p. compared to the end of 2012 resulted both from a higher income level and reduction in expenses. 4

5 I. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE BANK IN MACROECONOMIC SITUATION In 2013 the GDP growth rate was 1.6% compared to 1.9% y-o-y. In Q2 and Q3 a speed up in economy became visible. After the four-year lowest growth of 0.5% recorded in Q1 2013, the subsequent quarters saw gradual recovery of GDP to exceed 2.7% y-o-y in Q4. The progressing GDP increase resulted from a growth in private consumption and improved investment level (beginning from limited decrease and increasing in Q2). The improvement arose from a growth in construction investments, strongly supported with the effects of a very low reference base in the second half of 2012, when a steep drop in investments was observed as a result of completion of a number of infrastructural projects and limited activity in the housing construction sector. For the entire 2013 the positive balance in the foreign trade contributed to the GDP growth. 6,0 % YoY GDP consumption investments (P) % YoY 5,0 4,0 3,0 2,0 1,0 0,0-1,0-2, At the end of 2013, the registered unemployment rate was 13.4% being equal compared to December The number of the unemployed grew to thousand (by 21 thousand people) at the end of In 2013 the price growth in the economy was very low; the annual average inflation rate was 0.9%, much less than 3.7% seen in 2012 and was the lowest one recorded since Starting from the end of February 2013, the CPI remained below 1.5% i.e. the lower border of the range allowed by the inflation target determined by the National Bank of Poland. The significant inflation decrease in 2013 resulted from a slowdown in the growth of food prices, a decrease in fuel prices (arising from reduced crude oil prices and an improvement in PLN/USD foreign exchange rate) and energy carriers (due to a reduction in gas and power tariffs for individuals), accompanied with a low demand pressure in the economy. 5

6 6,0 % YoY inflation CPI core inflation 4,0 2,0 0,0 In 2013, with the very low inflation and slow economic growth, Monetary Policy Council continued the loosening of its policy commenced in 2012 through reduction of interest rates by the total of 175 base points. The last rate reduction took place in July 2013 with the reference rate of the National Bank of Poland reduced to the historical low level of 2.50%. The decrease in the National Bank s interest rates was accompanied with reduction of loan rates on WIBOR interbank market, with the biggest decrease falling in the first half of During the year, WIBOR 3M rate dropped by 140 base points to 2.71% at the end of December ,0 % 5,0 3,0 National Bank of Poland reference rate WIBOR 3M profitability of 5y bonds 1,0 In 2013, the stabilization of the global financial market progressed. Active monetary policy of central banks in world s key economies and improving data coming from mature markets (continued economic speed-up in the U.S. and labor market improvement, end of the 1.5-year recession in the Eurozone and stabilization of its peripheral economies) contributed to the improved market standing. As a result, the risk of the worst crisis scenarios decreased, which caused a drop in risk premiums on the global financial market and increase in demand for the riskiest financial assets. As a result, the global stock index grew by over 20 per cent during the year, and the spread between profitability of "peripheral" Eurozone economies and the German bonds decreased. At the same time, starting from Q2 2013, a projected change in the U.S. monetary policy substantially contributed to the standing of the global financial market, since in mid-year Fed declared to limit the quantitative easing policy. Increased expectations regarding an early start of this process resulted in a strong growth in profitability of treasury bonds of key mature economies (mostly the U.S.). At the same time, the related perspective of early liquidity restriction on the global finance market resulted in outflow of the portfolio capital from emerging markets in Q2 (following the earlier strong inflow) and decreased prices of financial instruments on these markets. 6

7 Finally, despite Fed commencing the quantitative easing restriction at year-end, the announced high prudency and continued tightening of the monetary policy, being dependent on the incoming macroeconomic data and more positive information regarding mature economies contributed to reduction of market anxiety related to the expected global drop in liquidity. This in turn resulted in further increase in quoted prices of financial assets (stock, treasury bonds of the Eurozone peripherals ) on the developed markets and stabilizing of the emerging markets. In 2013, changes on the domestic foreign exchange and long-term treasury bond market resulted mostly from trends observed on the global finance market. Positive attitudes towards emerging market in early 2013 when foreign capital continued to inflow to the domestic treasury bond market stabilized the PLN exchange rate and reduced profitability of the bonds to the historical minimum at the beginning of Q In mid-year, the projected changes in the U.S. monetary policy and the related significant drop in optimism regarding the emerging markets resulted in a drop in PLN exchange rate and an increase in the treasury bonds profitability. In the second half of the year, stabilized expectations regarding future monetary policy of the U.S. and its effects on the emerging markets caused further increase in PLN exchange rate. At the same time, the prospects of Fed gradually withdrawing from the quantitative easing policy and continued higher profitability of U.S. treasury bonds compared to the beginning of the year resulted in the domestic bond profitability remaining high. During 2013, PLN/EUR exchange rate decreased (by approx. 1%) and PLN/USD rate increased (by approx. 3%), while PLN/CHF rate remained flat. At the end of December 2013, PLN/EUR rate was 1.147, PLN/USD rate was 3.01 and PLN/CHF rate was In 2013, profitability of lmedium- and long-term bonds increased (from over 20 to nearly 50 b.p. depending on their maturity). Short-term bonds was the only segment on the PLN treasury bond market with a reduced profitability (by approx. 10 b.p.) since the market was clearly dominated by the effects of interest rate reduction by the Monetary Policy Council. 2. BOŚ S.A. QUOTATION ON THE WARSAW STOCK EXCHANGE Closing price Volume BOŚ share price Volume in thou In 2013: The price of shares in BOŚ S.A. increased by 56.7% (+ PLN 17.00) from PLN at the end of 2012 to PLN at the end of 2013 The stock quoting ranged from PLN to PLN The average number of Bank s shares traded per day was 7,947 with the largest number (120,868) recorded on 28 August 2013 and the lowest (293) on 20 may

8 180,0 160,0 BOŚ share relative price WIG-Banki Index in relative numbers 140,0 120,0 100,0 80,0 60,0 It is worth to notice that the price of shares in BOŚ S.A was much higher than index WIG-Banki. 3. SIGNIFICANT EVENTS IN 2013 Rating maintained by Fitch On 30 April 2013, Fitch Ratings confirmed the long-term IDR of the Bank at BBB level, short-term rating at F3 level, viability rating at bb level and support rating at level 2. The rating perspective for the entity and long-term national rating remained Stable. Information regarding the Fitch Ratings maintaining its rating has been presented in the current report no. 20/2013. Eko-Polska.pl In April 2013, a new edition of eko-polska.pl website started presenting Internauts and users with measurable benefits of ecology and initiating the process of building long-term relationships. Bossafund In March 2013, Bossafund service prepared by Dom Maklerski BOŚ S.A. was launched allowing clients access to the offer of several investment funds. The service includes access to a modern Internet platform with transaction tools (to place orders regarding investment fund participation units), welldeveloped news section and tools allowing investors building their own investment portfolios. BossaBank In November 2013, an Internet sales platform was launched at which offers deposit and investment products in the Bank and Dom Maklerski BOŚ S.A. Users may avail Online Investment Manager on this platform. The platform is a joint venture of Bank and Dom Maklerski BOŚ S.A. JESSICA initiative In 2013 the Bank, acting under JESSICA initiative (Joint European Support for Sustainable Investment in City Areas), as Fund for the Development of Urban Areas (Fundusz Rozwoju Obszarów Miejskich - FROM) for Zachodniopomorskie Province (except from Szczecin Metropolitan Area), Pomorskie Province (except from Gdańsk, Gdynia, Sopot and Słupsk) and Śląskie Province signed twenty agreements regarding urban projects using JESSICA funds. Factoring In 2013, turnover on factoring reached PLN 1.65 billion and was 40.81% higher than in Development of factoring in BOŚ S.A. is over twice faster than that of the factoring market in Poland, which saw 15.54% increase. BOŚ S.A. closed the year 2013 with 2% market share. 8

9 Bonds issues In 2013 the Bank had fifteen issues of short-term bonds, series from KT.1.13 to KT.1.27 with the total value of PLN million. In the analyzed period, the Bank issued also long-term J series bonds of PLN 100 million, K series bonds of PLN 50 million, L series bonds of PLN 100 million and M1 series bonds of PLN 200 million, as well as N1 series bonds of PLN 200 million, N2 series bonds of PLN 200 million and O1 series bonds of PLN 200 million. It redeemed F series bonds with nominal value of PLN million and H series bonds of PLN 185 million prior to their maturity date. Credit cards and ATM s In cooperation with Trevica S.A. and MasterCard, the Bank carries out a project to implement MasterCard credit cards services by Trevica (authorization center). In July 2013 the Bank concluded an agreement with Euronet regarding the sale of its ATM s. In September 2013, 96 ATM s joined the Euronet system. Bank s clients may use them on previous terms and they have gained access to new services. Organizing non-public issue of municipal bonds In 2013 the Bank concluded 31 agreements regarding organization of municipal bonds issue with the total value of PLN million compared to 12 agreements concluded in 2012 totaling to PLN 77.8 million. Support initiatives In 2013, implementation measures were carried out within nineteen investment projects. Thirteen of them were new; the six had been commenced in the previous year. Projects realized in 2013, resulted from the business or the high-efficiency initiatives, as well as the need to adapt to the requirements of the Bank's legal and / or regulatory supervisory institutions. The key projects included: Implementation of the financial risk management system, a tool used to manage the interest rate and liquidity risk in compliance with relevant recommendations of Polish Financial Supervision Authority (FSA). The new system allows much more precise and detailed measurement of ex-post and ex-ante liquidity risk. In relation to interest rate risk, based on the implemented IT module allowing interest risk management in the bank's ledger, the scope of stress tests has been extended; Developing application that supports the process of impairment loss calculation for portfolios, aimed at compliance with FSA s requirements regarding further separation of loan portfolios and calculation of PD and LGD parameters for these portfolios; Implementing IP Telephony that allowed substantial reduction of annual stationary telephony costs, introducing a single network for the entire Bank and thus simplifying the system operation and improvement of the fax service quality; Investing in an office building for Bank s purposes in order to ensure efficient relocation of Head Office. Legal and regulation related projects included the key compliance initiatives regarding: Regulation of the European Parliament and the Council no. 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories under EMIR project; In Q2 2013, BOŚ S.A. commenced project works regarding Back Office centralization. The changes will relate to operations of organizational units of the Head Office and branches/outlets. The centralization is to reduce costs and improve standardization. Further, the workload not directly related to sales will be reduced in branches. In subsequent years, the initiative will translate into improved efficiency and quality of the Bank s operations. Significant agreements The Bank s Management Board informed that: On 27 June 2013 a working capital loan agreement was concluded with a Client for EUR 25 million for the period of 60 months. The value of the agreement is PLN million at the average rate of the National Bank of Poland of 27 June 2013 (current report no. 36/2013 of 28 June 2013). On 1 July 2013, an investment loan agreement was concluded for EUR 35.7 million (the equivalent of PLN million at the average NBP interest rate of 1 July 2013) for the period of 36 months and 9

10 a working capital loan for PLN 8.5 million for 36 months. As at the origination date, the total value of the loans was PLN million and the total exposure to the Client and its related parties was PLN million (current report no. 38/2013 of 2 July 2013). On 27 September 2013 a working capital loan agreement was concluded with a strategic Client for EUR 10 million for the period of 36 months (current report no. 71/2013 of 27 September 2013). On 19 December 2013, the Bank concluded an investment loan agreement with one of its strategic clients for PLN million for the period until 14 November The loan will be used to fund the construction of a wind farm (current report no. 80/2013 of 20 December 2013). On 19 December 2013, the Bank concluded an investment loan agreement with a strategic client for PLN million for the period until 30 September The loan will be used to fund the construction of two wind farms (current report no. 81/2013 of 20 December 2013). Legal conditions of ecologic business development Absence of legal regulations regarding renewable energy sources is a critical factor influencing the Bank s performance. The legislative process related to the Renewable Energy Source Act and the related Energy Law and Gas Law (the so-called large three-pack ) commenced in December 2011 has not been completed yet. Amendments to the Energy Law (the small three-pack ) passed by the Parliament on 26 July 2013 introduce a definition of micro-installation as a renewable energy source with the total installed capacity up to 40 kw. Introduced reliefs for micro-installations involve exemption from the connection fee and from the obligation to register a power generation business by an owner of micro-installation not classified as an entrepreneur. This provides an opportunity for the prosumer market generating renewable energy for own purposes. Further projects of the Renewable Energy Source Act (latest version 6.2 of 2 February 2014) and a radical change of proposed in previous version supporting Renewable Energy Source Act mechanism i.g green certificates firstly has negatively impacted investment decisions. However, this factor stimulates to acceleration of this decisions and to realize investments, at the moment. This has a material effect on Bank s involvement in such investments. The Bank has monitored the market and legal status on an ongoing basis, adjusting its approach to renewable power projects assessment to the current legal status and market conditions. Awards and recognition of BOŚ S.A. in 2013 BOŚ S.A. was among the four Polish companies mentioned in the EU ranking of 1,000 enterprises that fund and promote innovation. According to Rzeczpospolita Daily, the Bank was among the most expensive Polish brands and its brand value saw a 16% increase during the year. It was classified among ten largest brands in the financial sector. 1 st place for the best Internet image among Banks in a ranking by Gazeta Bankowa; 1 st place in the ranking of six-month currency deposits of GBP 5,000 by Inwestycje.pl; 1st place in the ranking of mortgage loans by Invigo; 1 st place in the ranking of best PLN 1,000 cash loans organized in December 2013 by Bankier.pl; 1st place in the ranking of cash loans in 2013 by Money.pl; 2 nd place in the report Bank brands in media by Press Service Monitoring Mediów; 2 nd place for Kredyt Hipoteczny (mortgage loan) in December 2013 by TotalMoney; Biała EKOlokata in BossaBank considered the best offer among four-month term deposits by TotalMoney; 2 nd place in the ranking of accounts for Internet businesses by Bankier.pl; 2 nd place in the ranking of housing loans without own contribution by Expander and Gazeta Dom; EkoFactoring BOŚ S.A. considered the best product in Business Survey Sudeckie Kryształy 2013; Bank s economists considered the best in the ranking of projections of Gazeta Giełda Parkiet in 2013; 1 st place for Wakacyjny kredyt gotówkowy and Kredyt gotówkowy na Święta in the ranking by Comperia and ebroker.pl; 3rd place for EKOPROGRES 12 in the ranking of deposits by TotalMoney.pl; 3 rd place in the ranking of most dynamic factors by Gazeta Finansowa. Five initiatives of the Bank and BOŚ Foundation of 2013 will be included in the Report of Forum Odpowiedzialnego Biznesu (Responsible Business Forum), namely: - eko-polska.pl combining CSR of the Bank with promotion of pro-ecological attitudes; - umocnij swój biznes combining pro-ecological activities with education and direct business advantages; 10

11 - 2 złote dla Zwierzaka promoting environmental protection; - Szkolne Smaki Szkoły dobrego żywienia, a cycle of conferences devoted to healthy diets; - POMAGAM CAŁY ROK, a regular individual charity plan. 4. FACTORS THAT MAY HAVE EFFECTS ON THE PERFORMANCE OF THE BANKING SECTOR AND THE BANK Factors that may have effects on the Bank s performance in the coming quarters include: Passing the Act on renewable energy sources that will allow introducing a stable, long-term support system both for "large" renewable source projects and small and micro installations implemented by prosumers, BOŚ S.A. being interested in their funding. The impact depends on the final shape of the adopted solutions and their effective date. Passing the Act amending the Public Finance Act and certain other acts. The draft introduces amendments regarding the use of financial assets in certain public sector entities for state budget liquidity purposes and establishing a similar instrument for local self-government entities. The proposed amendment attempts to reduce the public debt and minimize its service costs through extending the obligation to invest free cash in a deposit kept by the Minister of Finance to other public finance sector entities, such as budget entities, cultural institutions, public universities, self-standing public health care entities, as well as provincial environmental protection and water management funds. The above changes may result in an outflow of funds in mid Implementing provisions of CRD IV Directive and CRR Regulation that may impact the cost of obtaining retail deposits. In October 2012, an amendment to payment services was signed resulting in a reduction in interchange fees. Please note, though, frequently published information regarding further reduction of these fees by the lawmakers. Introduction of the governmental Housing for the Youth plan involving support from the State budget and additional financial support including repayment of a portion of a housing loan. The funding is addressed to people applying for loans to purchase an apartment or a family house for own purposes. Amendment to the Bank Guarantee Fund Act aimed at establishing a new stabilization fund. Pursuant to the amendment, banks will be obliged to pay so-called prudency fee to establish the stabilization fund that provide security in the case of liquidity problems caused by a financial crisis. Maintaining the cost rationalizing policy, both with regard to personnel and non-personnel expenses. Developing cooperation with eco-funds for the purpose of further growth in pro-ecological activities of the Bank. Decisions of the Monetary Policy Council regarding interest rates. Possible changes in regulations regarding banking operations. 11

12 II. FINANCIAL PERFORMANCE AND ACTIVITIES OF THE BANK 1. INCOME STATEMENT Continued operations Item Change PLN 000 % Interest income and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net fee and commission income ,0 Dividend income ,8 Net trading income ,7 Result on investment securities ,0 Result on hedge accounting ,1 Foreign exchange result ,4 Other operating income ,8 Other operating expenses ,4 Net impairment gains/ losses ,9 Administrative expenses Result on operating activities Gross profit Income tax expense current tax deferred tax NET PROFIT The interest gain recognized by the Bank in 2013 was 2.7% lower than in the previous year, while the decrease in the banking sector as a whole reached 3.8% (source: own calculation based on data by Polish Financial Supervision Authority, Banking Sector with Foreign Operations ). Interest and similar income decreased by 14.1%. The drop resulted from a reduced interest profitability of the loan portfolio arising from a reduction in market interest rates. The decrease in interest income occurred for interest on loans and credit facilities and amounted to PLN million (by 17.2%). Item Change PLN 000 % Loans and advances due to customers, including: Banks Clients corporate retail public finance segment other Financial instruments, including: available for sale held to maturity held for trading Hedging transactions Total interest income and similar income Interest expense and similar charges decreased by 19.2%. A decrease in costs of deposits and bank accounts of PLN 83.7 million (by 20.3%) contributed the most to the change in the item and resulted from interest rate reduction. 12

13 Item Change PLN 000 % Interest expenses and similar charges arising from: Accepted deposits and bank accounts including: Banks Clients Loans and credit facilities, including: Banks Clients Money from funds assigned to loans Financial instruments issues of own debt securities Total interest and similar expense Costs of loans and credit facilities decreased by PLN 16.7 million (57.4%). A decrease in interest expense arising from funds assigned to loans was PLN 7.1 million and resulted from lower costs incurred in relation to finance JESSICA initiatives. Interest expense arising from financial instruments own issues of debt securities - decreased by 7.4% with a volume growth of million, i.e. by 5.7% compared to 31 December Item Change PLN 000 % Charges for handling customer accounts, other clearing operations in domestic and foreign currency: Fees and commissions from banking activities, including from: Clients Other fees Total fee and commission income Cash card fees Commissions paid to other bank on cash transactions Fees related to current accounts Fees for services provided by Euronet x Other fees Total fee and commission expense Result on fees and commissions increased by 12% compared to Fee and commission income was higher by 7.3% and fees and commission expense was lower by 13.4% regarded drop by 15.2% of payment cards fees and drop of 21.8% from current account fees. Dividend income for 2013 included mainly the dividend paid by Kemipol Sp. z.o.o. of PLN 3.5 million (PLN 3.4 million in 2012), Dom Maklerski BOŚ S.A. of PLN 3.0 mln (in 2012 PLN 15,000 thousand), BOŚ Eko Profit S.A. of PLN 900 thousand and WODKAN Przedsiębiorstwo Wodociągów i Kanalizacji S.A. of PLN 0.2 million (in 2012 PLN 0.2 million). In 2013, the result on trading operations was PLN 22.8 million. It saw year-on-year growth of 167.7%, mainly due to the increase in performance on trading operations by PLN 14.3 million arising from IRS transactions. The result on investment securities amounted to PLN 20.0 million and was lower by 27% then in The result is an effect of the Bank taking the opportunity provided by favorable changes in State Treasury bond prices and selling the bonds from the held for sale portfolio. The performance on foreign exchange positions decreased by 4.4%, mainly due to a increse in the share of credit facilities repaid in the original currency and revaluation of forward and spot instruments with a positive effect of revaluation of provisions. Result on other operating revenue and expenses amounted to PLN 5.4 million in 2013 compared to PLN (7.1) million in This resulted from transferring as a contribution in kind property with right of perpetual usufruct of land in exchange for new shares of the Bank s Subsidiary. This is a step in the implementation of a strategy to conduct the business of marketing and property management as a one isolated entity. Established surplus on initial recognition of the excess value of the shares over the current value of the assets in the amount of PLN 7.3 million was an income for the period and is included in other operating income. Release of provision for a penalty imposed by Office for Competition and Consumer Protection (OCCP) by a decision of the Court on Competition and Consumer Protection on interchange fee rates on Visa and MasterCard transactions has also a positive influence. The Court confirmed the former 13

14 decision of the President of OCCP but reduced the amount of the penalty charged on banks. In 2013 result on impairment deteriorated compared to the previous year and amounted to PLN (52.4) million compared to PLN (60.2) million in previous year. In 2013 the result on impairment of corporate loans (including off-sheet balance liabilities) was PLN (47.3) million and regarded mostly credits granted to construction companies. Item Change PLN 000 % Employee benefits Administrative expenses, including: non-personnel expenses taxes and charges premium and payments to Banking Guarantee Fund and FSA premium and payments to FSA Amortization/depreciation, including fixed assets intangible assets General administrative expenses total General and administrative expenses dropped by 2.4% year on year, with 9.3% increase in the scale of operations measured by a growth in assets compared to 31 December Non-personnel expenses in the Bank decreased by 9.0% i.e. PLN 10.2 million, mainly as a result of marketing expense reduction. Amortization expenses increased by 32.0% i.e. by PLN 9.7 million as a result of implementing the Central Banking System. Employee benefit expenses dropped by 3.4%. At the same time, employment in BOŚ S.A. decreased and as at the end of 2013 it was 1,684 comprising to 1,745 in previous year. Efficiency and safety of Bank s operations The following table includes key profitability and efficiency ratios of the Group and their calculation methodology. Item Change in p.p. % ROE ROA Total interest margin on assets Costs / Income ) Net profit for the four quarters to the average of the opening and closing balance of equity. 2) Net profit for the four quarters to the average of the opening and closing balance of assets. 3) Gain/loss on interests to the average of the opening and closing balance. 4) General administrative expenses to other operating costs, other operating income, profit/loss on interest, profit/loss on fees and commissions, dividends, profit/loss on trading operations, profit/loss on investment securities, profit/loss on hedge accounting and profit/loss on foreign exchange positions ROE amounted to 4.4% in 2013 and did not change compared to Interest margin decreased in relation to 2012 due to the decline in interest rates. Cost / income ratio was 70.4% as at 31 December 2013 and its 3.7 p.p. drop compared to the end of 2012 resulted both from a higher income level and reduction in expenses. 14

15 Item Zmiana w p.p. % Solvency ratio Tier 1 ratio Credits/deposits* *Loans and advances to customers/amounts due to customers All financial indicators of the Group remained on the safe level. At the end of 2013, its capital adequacy ratio was 13.39% compared to 14.68% at the end of The change in the value is related to the progress of a loan campaign. As at 31 December 2013, tier 1 ratio amounted to 10.73% compared to 11.71% at the end of In 2013, BOŚ S.A. saw pre-tax profit PLN 68.2 mln. Compared to the previous year, the result was higher by 19.6%. Income tax expense in 2013 amounted to PLN (5.3) mln compared to PLN (2.2) mln in 2012, which means that the effective tax rate reached 8% compared to 4% in previous year. This level results, among others from the Bank s deductions in respect of new technologies. Bank's net profit amounted to PLN 62.9 mln and was higher by 14.7% compared to the previous year. 2. STATEMENT OF FINANCIAL POSITION As at 31 December 2013, the Bank s balance sheet total equaled PLN 18,331.9 million and was 9.3% higher than at the end of Bank s assets Changes in the structure of assets As at 31 June 2013, loans and credit facilities to clients had the biggest share in total assets (65.8%). During the year, their share in assets decreased by 0.5 p.p., while the share of investment securities increased by 2.0 p.p. At the end of 2013, their share in assets accounted for 25.5%. Item Change (%) PLN =100 Cash and balances with the Central Bank Deposits with other banks, loans and advances to other banks Securities held for trading x Derivative financial instruments Hedging derivatives Loans and advances to customers Investment securities: available for sale held to maturity Investments in subsidiaries and associates Intangible assets Property, plant and equipment Income tax assets current deferred Other assets TOTAL ASSETS

16 Loans and advances due to customers Item Change PLN 000 % Loans and advances granted to retail clients Loans and advances granted to corporate clients Loans and advances granted to public finance sector Loans and advances granted to other clients Total loans and advances Other receivables LOANS AND ADVANCES DUE TO CUSTOMERS The carrying value of loans and credit facilities originated to Bank s clients at the end of 2013 was PLN 12,054.7 million and was 8.5% higher than at the end of Loans and advances due to customers- segmentation Retail clients; 39,7% Corporate clients; 36,0% Public finance; 24,3% In 2013, loans to corporate customers increased by 25.5% and retail customers by 4.5%. Loans granted to public finances declined by 4.7%. Still the highest share in total loans amounting to 39.7% have loans to retail customers. The carrying amount of mortgage loans originated to retail clients at the end of 2013 was PLN 3,854.6 million compared to PLN 3,784.2 million at the end of The share of mortgage loans denominated in foreign currencies in the portfolio of mortgage loans granted to individuals was 40% at the end of 2013 compared to 60% at the end of The average base interest rate on the loans originated by the Bank: total in PLN and foreign currencies: 4.85% in 2013 compared to 5.99% in 2012; PLN: 5.65% in 2013 compared to 7.11% in Loans and advances granted in the reporting period In 2013 loans and credit facilities granted by the Bank totaled PLN 5,201.7 million (without overdraft facilities) being 101.0% higher than in 2012 (at equity value as at the credit origination date). Most loans were granted to corporate and public segment clients. 16

17 Sales of loans and credit facilities in 2013 and 2012 Item Change (PLN 000) Loans and advances granted to corporate clients during the year Loans and advances granted to retail clients during the year Loans and advances granted to public finance sector during the year Loans and advances granted to other clients during the year x LOANS AND ADVANCES DUE TO CUSTOMERS GRANTED DURING THE YEAR Quality of loan portfolio Item PLN 000 % PLN 000 % Unimpaired loans and credits including , Current unimpaired loans and credit facilities , Current unimpaired loans and credits facilities but outsanting , Loans and credit facilities overdue but unimpaired due to the expected cash flows , Impaired loans and credit facilities , Total gross loans and advances granted to customers and other banks , Impairment of loans and advances granted to customers and other banks , Other receivables Total loans and advances granted to customers and other banks including: , clients , banks In 2013, impairment loss level increased by 2.6% (PLN 7.8 million) compared to the end of The share of impairment loss in total loans and credit facilities as at 31 December 2013 was 2.5% and decreased by 0.1 p.p. compared to the end of The share of impaired loans and advances in the total portfolio was 5.5% compared to 6.6% at the end of Total equity and liabilities of the Bank Changes in the structure of total equity and liabilities In 2013 the structure of equity and liabilities changed. The share of liabilities to clients increased by 1.6 p.p. from 70.5% at the end of 2012 to 72.1% as at 31 December The share of liabilities arising from issue of bank securities decreased by 0.5 p.p. The share of the Bank s equity in the balance sheet total at the end of 2013 was 7.9% and decreased by 0.5 p.p. compared to the end of

18 Item Change PLN 000 (%) Amounts due to the Central Bank ,8 Amounts due to other banks ,8 Derivative financial instruments ,1 Hedged derivatives ,6 Amounts due to customers ,8 Debt securities issued ,7 Subordinated debt ,1 Provisions ,5 Other liabilities ,1 Shareholders' equity ,7 TOTAL LIABILITIES ,3 BOŚ S.A. was fully solvent in terms of repaying mature liabilities. funding of the loan campaign and other investment expenses Sources of financing Bank s operations Liabilities to clients Item Change PLN 000 (%) Corporate clients Retail clients Public finance Eco funds Other clients Loans and credit facilities received from international financial institutions Money from funds assigned to loans TOTAL LIABILITIES TO CLIENTS Bank s liabilities to clients as at 31 December 2013 amounted to PLN 13,244 million and increased by PLN 1,395.3 million. i.e percent higher than as at 31 December Deposits rose in each of clients segment: retail clients segment deposits increased by PLN million. i.e. 11.7%, corporate segment deposits increased by PLN million, i.e. by 11.3% and in public finance segment grew by PLN million., i.e. 30.4%. Share of retail clients in total liabilities to clients decreased to 36.5% at the end of 2013 compared to 39.6% at the end of The share of corporate deposits in the total deposit balance was 38.7 % as at the end of 2013 compared to 38.9% at the end of

19 Amounts due to clients - segmentation Corporate clients 38.7% Fund money to be used for loans 2.7% Retail clients 36.5% International financial institution 10.2% Other 0,6% Eco funds 4.3% Public finance 7.0% An average basic interest rate of deposits acquired through the branch of Bank s network stood in 2013 at the level of 2.93% compared to 4.22% in Own bonds Liabilities arising from issue of securities are a material source of funding operations. At the end of 2013 they amounted to PLN 2,733.3 million compared to PLN 2,585.5 million in the previous year (an increase by 5.7%). In 2013 the Bank had fifteen issues of short-term bonds. series from K.T.1.13 to KT.1.27 with the total value of PLN 683 million and seven issues of long-term bonds totaling to PLN million. The Bank pre-maturely redeemed the following securities: H series bonds on 27 February 2013 in the amount of PLN 185 million and F series bonds on 4 April 2013 in the amount of PLN million Information about loans and credit facilities drawn In the Bank did not conclude any loan or credit facility agreement with international financial institutions or foreign banks. In no loan agreements were terminated. Loans and credit facilities drawn by the Bank supplement the key funding sources that include liabilities to clients. issues of bonds and equity. 19

20 Loans contracted in previous years: Creditor Principal amount Amount available Currenc y Agreemen t conclusion date Principal repayment date Kreditanstalt fur Wiederaufbau. Frankfurt EUR Council of Europe Development Bank. Paris EUR European Investment Bank. Luxembourg EUR I tranche Kreditanstalt für Wiederaufbau. Frankfurt EUR II tranche European Investment Bank. Luxembourg EUR Council of Europe Development Bank. Paris EUR I and II tranche 15- European Investment Bank. Luxembourg EUR Kreditanstalt fur Wiederaufbau. Frankfurt EUR Council of Europe Development Bank. Paris EUR Nordic Investment Bank EUR European Investment Bank. Luxembourg EUR Council of Europe Development Bank. Paris EUR TOTAL EUR * Taken in PLN or EUR I tranche II tranche I and II tranche I tranche II tranche III tranche I tranche II tranche Information about loans and credit facilities drawn. loan and surety or guarantee agreements not relating to the Bank s operating activities In 2013 the Bank did not conclude loan. guarantee or surety agreements not related to its operating activities Contingent assets and liabilities Item Change (%) PLN =100 Contingent liabilities Financial. including Including: Credit facilities available. including: revocable irrevocable import credit letters available Loan promises including: irrevocable Other Warranty. including Including: Loan repayment warranties and sureties Performance bonds Guarantees to a subsidiary Other Issue related guarantees Contingent assets Financial. including: Opened credit lines: Other Guarantees CONTINGENT ASSETS AND LIABILITIES TOTAL