MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP IN THE FIRST HALF OF 2013

Transcription

1 MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP IN THE FIRST HALF OF 2013 WARSAW, AUGUST 2013

2 TABLE OF CONTENTS: I. SUMMARY OF PERFORMANCE OF BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP IN THE FIRST HALF OF II. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE GROUP IN THE FIRST HALF OF MACROECONOMIC SITUATION EVENTS WITH SIGNIFICANT IMPACT ON THE FINANCIAL POSITION OF THE GROUP... 6 III. FINANCIAL PERFORMANCE AND ACTIVITIES OF THE GROUP INCOME STATEMENT GROUP BALANCE SHEET Group s assets Changes in the structure of assets Loans and advances granted to customers Quality of loan portfolio Total equity and liabilities of the Group Changes in the structure of total equity and liabilities Sources of financing Group s operations Information about loans and advances drawn, loan agreements and sureties or guarantees Information about loans and advances drawn, loan and surety or guarantee agreements not relating to the Bank s operating activities Advances, sureties and guarantees granted to subsidiaries Utilization of proceeds from issue of securities CONTINGENT ASSETS AND LIABILITIES DIFFERENCE BETWEEN FINANCIAL FORECASTS AND ACTUAL PERFORMANCE FACTORS MATERIAL TO THE GROUP S DEVELOPMENT GROUP DEVELOPMENT STRATEGY Development directions KEY SCOPE OF OPERATIONS OF THE CAPITAL GROUP Banking activity BOŚ S.A share in the banking sector MAIN PRODUCTS, SERVICES AND BUSINESS AREAS OF THE GROUP 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 Brokerage activity Money and capital market Cooperation with foreign financial institutions Investment banking IV. RISK MANAGEMENT AND CONTROL IN THE CAPITAL GROUP FINANCIAL RISK MANAGEMENT Liquidity risk Interest rate risk Interest rate risk in the banking book Interest rate risk in the trading book Currency risk Commodity and stock price risk OPERATING AND COMPLIANCE RISK CREDIT RISK: DESCRIPTION OF THE BANK S LOAN POLICY INTERNAL CONTROL SYSTEM FINANCIAL RESOURCES MANAGEMENT Objectives and organization of financial resources management Assessment of the Bank s ability to repay liabilities incurred V. SUPPLEMENTARY INFORMATION ABOUT THE BANK ORGANISATION OF THE CAPITAL GROUP Capital Group structure Dependence on partners INFORMATION ON THE BANK'S AGREEMENTS Significant agreements Agreements with the Central Bank, regulatory bodies and the Polish Banks Association (ZBP) UNUSUAL FACTORS AND EVENTS

3 4. COURT PROCEEDINGS RELATED PARTY TRANSACTIONS CHANGES IN THE KEY MANAGEMENT PRINCIPLES SEASONALITY OR CYCLICALITY DIVIDEND MAJOR INVESTMENT PROJECTS SHAREHOLDERS AND THEIR RIGHTS Shareholders Information on contracts relating to future changes in the shareholding structure Holders of special control rights under securities Restrictions in transferring ownership rights to securities and executing voting rights BANK S GOVERNING BODIES General Shareholders Meeting of the Bank Supervisory Board of the Bank The Management Board of the Bank Principles of appointment and dismissal of members of the Bank s governing bodies and their authority Shares of BOŚ S.A. held by members of executive and supervisory bodies Contracts relating to compensation to members of executive bodies EMPLOYEES Training Executive share option scheme Incentive Pay Scheme for executives of BOŚ S.A POST-BALANCE SHEET EVENTS PROMOTIONAL ACTIVITIES CORPORATE SOCIAL RESPONSIBILITY

4 I. SUMMARY OF PERFORMANCE OF BANK OCHRONY ŚRODOWISKA S.A. CAPITAL GROUP IN THE FIRST HALF OF 2013 In the first half of 2013, BOŚ S.A. Capital Group generated gross profit of PLN 51.1 million which is equal year-on-year growth of 89.4%. The net profit was PLN 39.5 million and increased by 66.6%. In the first half of 2013, net interest income of BOŚ S.A. Capital Group was by 5.0% lower than in the previous year. The drop in the net interest income resulted from a reduced interest profitability of the loan portfolio arising from a reduction in market interest rates. Net Fee and commission income generated an increase by 1.8%, dividend income by 8.8%, net trading income by 118.5% and result on investment securities by 9.4%. Result on impairment allowance remained at favorable level. Importantly, cost discipline has been maintained in the Capital Group. General and administrative expenses dropped by 0.2% year on year, with 10.2% increase in the scale of operations measured by a growth in assets in comparison to 30 June Non-personnel expenses in the Group decreased by 9.4%, while employee benefit costs remained flat, with the headcount decrease by 3.3% y-o-y. In Q2 2013, BOŚ S.A. Group recorded a net profit of PLN 22.7 million, constitute 34.6% growth compared to Q and 99.0% growth year on year. The value of loans and advances granted increased by 3.0% compared to the end of In the first half of 2013, loans granted to corporate clients increased by 9.1% and those granted to retail clients increased by 4.0%. BOŚ S.A. concerns 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 30 June 2013, the balance of pro-ecological loan portfolio amounted to 20.4% of the total loan balance, while as at June 2012 it amounted to 18.4%. These loans have been used mainly for atmospheric protection investments, mainly including energy efficiency and renewable energy sources, as well as water management and protection, including mainly sewage systems and sewage treatment plants. In the first half of 2013, liabilities towards clients increased by PLN 1,004.0 million, ie by 8.5% compared to the balance as at 31 December The largest increase by PLN million, ie by 14.4% was noted in the retail clients segment. Deposits from the public finance segment increased by PLN million, ie by 47.2%, while deposits from corporate clients increased by PLN million, ie by 3.1%. The Group s balance sheet total increased by 4.5% and amounted to PLN 17,626.3 million as at 30 June All financial indicators of the Group remained on the safe level. At the end of the first half of 2013, its capital adequacy ratio was 14.11% compared to 15.24% at the end of The change in the value is related to increased sale of loans. As at 30 June 2013, Tier 1 ratio amounted to 10.84% compared to 11.57% at the end of

5 II. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE GROUP IN THE FIRST HALF OF MACROECONOMIC SITUATION In Q2 2013, first symptoms of slight recovery in Polish economy occurred, after the GDP growth of 0.5% y-o-y recorded in Q being the lowest since Partial economic ratios increased in Q2: industrial production grew by 1.2% y-o-y compared to a 2.0% y-o-y drop in Q1, while retail sales increased by 1.5% y-o-y compared to 0% in Q1. A slight improvement in the global economic standing (in particular, in the U.S. and Eurozone) supported the domestic growth and the actual growth (adjusted by inflation) of household income accompanied with stabilization of the domestic labor market (limited employment decrease in the industrial sector during the year). Restricted level of infrastructural investments that followed the boom seen in 2009 mid-2012 had its continuous negative effects. Further, enterprises cautiously approached new investments due to uncertainty regarding the observed demand improvement. In Q2, inflation measured by CPI continued to decrease from 1.0% in March to 0.2% in June, which has been the lowest level recorded after the systemic transformation. This was the second subsequent quarter with CPI below 1.5%, ie the minimum value in the inflation volatility range included in the target set by the National Bank of Poland. The reduced inflation resulted mostly from a slowdown in the growth of prices of food and energy carriers, and to a lower extent, prices classified as contributing to basic inflation (ie depending mostly from demand). In Q2 2013, Monetary Policy Council continued the loosening of its policy commenced in 2012 through reduction of interest rates by the total of 50 base points. As a result, the reference rate of the National Bank of Poland at the end of Q2 reached 2.75%. The decrease in the National Bank s interest rates was accompanied with reduction of loan rates on WIBOR interbank market. 3M WIBOR rate dropped from 2.73% at the end of Q2 compared to 3.39% at the end of Q1. 7,0 6,3 6,1 6,0 5,2 5,0 4,0 3,0 2,0 1,0 0, ,0 1,0 0,0-1,0 1 Q 08 Quarterly GDP dynamics 1Q Q 2013 (% y/y) 2 Q 08 3 Q 08 3,2 4 Q 08 0,4 1,01,7 1 Q Q 09 3 Q 09 3,7 4,2 4,7 4,44,14,1 4,6 3,6 3,2 2,7 4 Q 09 1 Q 10 2 Q 10 3 Q 10 4 Q 10 1 Q 11 2 Q 11 3 Q 11 4 Q 11 1 Q 12 2,3 1,3 0,70,5 Unemployment rate recorded in the period w okresie January June 2013 number on unemployed uneployment rate (%) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Inflation in the period January June 2013 on a m/m and y/y basis (%) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 2 Q 12 3 Q 12 4 Q 12 1 Q ,0 5,0 4,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0 5

6 In Q2 volatility on the global finance market increased. The process of limiting the purchases of financial instruments as signaled by Federal Reserve (Fed) was the main reason. The perspective of Fed resigning from ultra-loose monetary policy earlier than expected, and thus implying limited liquidity on the global financial market, accompanied with growing market expectations regarding an increase in U.S. interest rates resulted in a strong profitability growth of treasury bonds of key developed economies in Q2 (mostly the U.S.) and sales of financial instruments on emerging markets (including Poland). In Q2 the PLN exchange rate deteriorated following changes in the global market standing: PLN lost 3.5% to EUR, 1.8% to USD and 2.2% to CHF. At the end of June, PLN/EUR rate was 4.33, while PLN/USD rate was 3.32 and PLN/CHF rate was Following the changes in the bond market in developed countries, profitability of domestic treasury bonds with five and ten year maturity increased in Q2. At the same time, reduction in interest rates of the National Bank of Poland resulted in a reduced profitability of securities with maturity up to two years. In Q2, profitability of ten-year bonds increased by nearly 0.3 p.p., while that of two-year ones decreased by 0.15 p.p. 5,50 5,00 4,50 4,00 3,50 3,00 2,50 Dec-10 4,9000 4,5000 4,1000 3,7000 3,3000 2,9000 2,5000 Dec-10 WIBOR in the period December June 2013 Mar-11 Jun-11 WIBOR 1M WIBOR 3M WIBOR 6M Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Exchange rates in in the period December June 2013 Mar-11 Jun-11 Dec-12 EUR/PLN USD/PLN CHF/PLN Aug-11 Nov-11 Feb-12 Apr-12 Jul-12 Oct-12 Dec-12 Mar-13 Mar-13 Jun-13 Jun EVENTS WITH SIGNIFICANT IMPACT ON THE FINANCIAL POSITION OF THE GROUP Rating maintained by Fitch On 30 April 2013, Finch Ratings confirmed the long-term IDR rating of the Bank at BBB level, shortterm 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. At the same time, the agency confirmed rating of Eurobonds issued by BOS Finance AB at BBB level. Information regarding the Fitch Ratings maintaining its rating has been presented in the current report no. 20/2013. JESSICA initiative In the first half of 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 the following agreements regarding urban projects using JESSICA funds: Świętochłowice Municipality The project includes revitalization of the city bathing beach and construction of a multi-functional facility at OSIR Skałka" in Świętochłowice. The investment cost exceeds PLN 15 million, out of which nearly PLN 10.8 million come from JESSICA initiative. Browar Mariacki sp. z o.o. The project includes revitalizing of a former Śląski Hotel in Katowice to be developed into a hotel facility with a restaurant and mini-brewery. The investment cost exceeds PLN 16.8 million, out of which nearly PLN 6.3 million come from JESSICA initiative, with the remaining amount covered by supplementary funding provided by BOŚ S.A. and own funds of the investor. ZBMiTBS Sp. z o.o. in Gliwice The project includes revitalization of a group of buildings at Pszczyńska 44 in Gliwice in the form 6

7 of office space and premises to be used for service-providing purposes. The investment cost exceeds PLN 5 million, out of which nearly PLN 1.7 million come from JESSICA initiative and the rest covered by investor s own funds. Świnoujście Municipality The project with value exceeding PLN 4 million involves construction of a market place in Świnoujście. The JESSICA loan amounts to PLN 2.4 million. Zdrojowa Invest Sp. z o.o. Projekt 7 Spółka Komandytowo Akcyjna. The project amounting to PLN 200 million involves revitalization of the seaside district in Świnoujście through construction of a modern hotel and apartment facility named Baltic Park Molo. JESSICA initiative provides PLN 25 million, the remaining amount being supplementary funding provided by BOŚ S.A. and investor s own funds. DOM INWEST T. and E. JAPTOK Sp. J. The project involves construction of a hotel facility with spa and supporting services. The investment cost exceeds PLN 43 million, out of which nearly PLN 12 million come from JESSICA initiative, with the remaining amount covered by supplementary funding provided by BOŚ S.A. and own funds of the investor. Significant agreements The Bank s Management Board informed that: On 27 June 2013 a working capital loan agreement 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 with a client for the amount of EUR 35.7 million (the equivalent of PLN million at the average exchange rate of the National Bank of Poland of 1 July 2013) for the period of 36 months and a working capital loan agreement for PLN 8.5 million for the period of 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). Long-term bonds issue On 14 February 2013, J series bonds were issued by BOŚ S.A. in the amount of PLN 100 million. The issue of J series bonds was co-organized with Bank Gospodarstwa Krajowego. Information about the issue was included in current report no. 7/2013. On 22 February 2013, K series bonds were issued by BOŚ S.A. in the amount of PLN 50 million. The issue of K series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 8/2013. Short-term treasury bonds issue On 14 January 2013, KT.1.13 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 40 million. The issue of KT.1.13 series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 2/2013. On 17 January 2013, KT.1.14 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 50 million. The issue of KT.1.14 series bonds was co-organized with Bank Gospodarstwa Krajowego. Information about the issue was included in current report no. 4/2013. On 22 January 2013, KT.1.15 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 50 million. The issue of KT.1.15 series bonds was co-organized with Bank Gospodarstwa Krajowego. Information about the issue was included in current report no. 5/2013. On 6 March 2013, KT.1.16 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 30 million. The issue of KT.1.16 series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 11/2013. On 28 March 2013, KT.1.17 series bonds were issued by BOŚ S.A. in the amount of PLN 15 million. The issue of KT.1.17 series bonds was co-organized with Bank Gospodarstwa Krajowego. Information about the issue was included in current report no. 15/2013. On 30 April 2013, KT.1.18 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 40 million. The issue of KT.1.18 series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 19/2013. On 8 May 2013, KT.1.19 series bonds were issued by BOŚ S.A. in the amount of PLN 50 million. The issue of KT.1.19 series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 21/

8 On 22 May 2013, KT.1.20 series bonds were issued by BOŚ S.A. in the amount of PLN 50 million. The issue of KT.1.20 series bonds was co-organized with BRE Bank S.A. Information about the issue was included in current report no. 24/2013. On 20 June 2013, KT.1.21 series short-term bonds were issued by BOŚ S.A. in the amount of PLN 41 million. The issue of KT.1.21 series bonds was co-organized with Bank Gospodarstwa Krajowego. Information about the issue was included in current report no. 31/2013. Proceeds from the issues were used to fund increased loan sale and improve the balance sheet structure of the Bank. Redemption of bonds The Bank redeemed the following securities before their maturity date: H series bonds of PLN 185 million redeemed on 27 February 2013 (information about the redemption was included in current report 9/2013) and F series bonds of PLN million redeemed on 4 April 2013 (current report 16/2013). Appointing a certified auditor On 22 may 2013, Supervisory Board of BOŚ S.A. appointed a certified auditor to carry out review of mid-year financial statements of Bank Ochrony Środowiska S.A. and mid-year consolidated financial statements of BOŚ S.A. Capital Group and to audit annual financial statements of Bank Ochrony Środowiska S.A. and consolidated financial statements of BOŚ S.A. Capital Group prepared for 2013 and 2014 reporting periods. Deloitte Polska Spółka z ograniczoną odpowiedzialnością Sp.k. with the registered office in Warsaw is the entity authorized to review and audit the financial statements of the Bank (report no. 25/2013 published on 23 May 2013). III. FINANCIAL PERFORMANCE AND ACTIVITIES OF THE GROUP 1. INCOME STATEMENT In the first half of 2013, BOŚ S.A. Capital Group generated gross profit of PLN 51.1 million generating year-on-year growth of 89.4%. The net profit of the Group was PLN 39.5 million and increased by 66.6% in comparison to respective prior period. Item 1 st half of st half of 2012 Change PLN 000 % Continued operations Interest and similar income Interest and similar expense 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 x Foreign exchange result Other operating income Other operating expenses Net impairment losses General administrative expenses Operating profit Profit before tax Income tax charges Net profit In the first half of 2013, net interest income of BOŚ S.A. Capital Group was 5.0% lower than in the previous year whereas the decrease in banking sector was 8.9% (according to own calculations based on KNF (Polish Financial Supervision Authority) data The banking sector including foreign branches ). Interest and similar income decreased by 7.5%. The drop resulted from a reduced interest profitability of the loan portfolio arising from a reduction in market interest rates. The biggest decrease in interest income occurred for interest on loans and advances and amounted to PLN 43.7 million (by 12.8%). Interest and similar expense decreased by 8.6%. A decrease in costs of deposits and bank accounts of PLN 16.9 million (by 8.5%) contributed the most to the change in the item and resulted from interest rate reduction. 8

9 Item 1st half of st half of 2012 Change PLN 000 % Interest and similar income: Loans and advances, of which: Banks Customers Financial instruments Hedging transactions Total Interest and similar expense: Accepted deposits, deposits and bank accounts, of which from: Banks Customers Loans and advances, of which from: Banks Customers Funds assigned to loans and advances Financial instruments debt securities issued Total Interest expense of loans and advances decreased by PLN 10.7 million (59.9%) due to a drop in the volume of loans and advances received by the Bank. A decrease in interest expense arising from funds assigned to loans amounted to PLN 2.4 million and resulted from lower costs incurred in relation to loan assigned funds used to finance JESSICA initiatives. Interest expense arising from financial instruments debt securities issued by the Bank - increased by 5.4% with a volume growth of million, ie by 4.8% compared to 30 June Fee and commission income Item Fees for maintaining customer accounts and other domestic and international settlement transactions 1st half of st half of 2012 Change PLN 000 % Fees for securities operations Fees and commissions on loans and guarantees Fees for portfolio management and other management related fee Other fees Total Fee and commission expense Brokerage fees Charges for payments with the use of payment cards Current account fees Other fees Commissions paid to other banks for cash transactions Total Fee and commissions income of the Group increased by 1.8%, ie by PLN 0.9 million. Total Group s income on fees and commissions increased by 1.3%, mainly due to increase in income on fees for maintaining customer accounts and other domestic and international settlement transactions by PLN 3.3 million, while income on fees for securities operations was lower due to reduced activity of individual clients of Dom Maklerski BOŚ S.A. with the Warsaw Stock Exchange facing a slowdown. Fee and commission was lower by 0.4%. The main decrease by 6.1% (PLN 0.4 million) was noted in brokerage fees, mainly due to smaller number of transactions performed by clients of Dom Maklerski BOŚ S.A. Dividend income for the first half of 2013 included mainly the dividend paid by Kemipol Sp. z.o.o. of PLN thousand and by WODKAN Przedsiębiorstwo Wodociągów i Kanalizacji S.A. of PLN 242 thousand. In the corresponding period of 2012, the Bank received PLN thousand of dividend paid by Kemipol Sp. z o.o. In the first half of 2013 the net trading income was PLN 32.4 million. It saw year on year growth of 118.5%, mainly due to the increase in performance on the Bank s net trading income of PLN

10 million arising from IRS transactions with clients of the Bank and increase of the net trading income of Dom Maklerski BOŚ S.A. by PLN 4.7 million, caused mainly by higher result on forex transactions and other derivatives. The result on investment securities amounted to PLN 14.9 million as a result of the Bank taking the opportunity provided by favorable changes in State Treasury bond prices and selling the bonds from the available for sale portfolio. The Foreign exchange result decreased by 21.0% mainly due to a reduced amount of originated loans in foreign currencies. The suspended sales of foreign currency loans resulted from implementation of a recommendation by Polish Financial Supervision Authority, which resulted in increased requirements regarding such loans and conservative interest margin policy adopted by the Bank. In the first half of 2013 result on impairment improved compared to the previous year and amounted to PLN (13.4) million compared to PLN (24.5) million as at 30 June As at 30 June 2013 General and administrative expenses of the Group dropped by 0.2% year on year, with 10.2% increase in the scale of operations measured by a growth in assets compared to the corresponding period of Non-personnel expenses in the Group decreased by 9.4% ie PLN 5.7 million, mainly as a result of marketing expense reduction. Also an increase of depreciation cost by 37.1%, ie by PLN 6.2 million, was noticed due to implementation of The Central Banking System and other projects connected with its implementation in the second half of Item 1st half of st half of 2012 Change PLN 000 % Employee benefits Administrative expenses, of which: non-personnel expenses taxes and charges contributions and payments to the Banking Guarantee Fund (BGF) contributions and payments to the PFSA other Depreciation/ amortization, of which: depreciation of property, plant and equipment amortization of intangible assets Total Employee benefit expenses have not changed compared to the first half of At the same time, employment in BOŚ S.A. Capital Group entities decreased by 3.3% y-o-y. Item Change Number of employees % Employment in BOŚ S.A Employment in Subsidiaries Total employment, BOŚ S.A. Capital Group Efficiency and safety of Group s operations The following table includes key profitability and efficiency ratios of the Group and their calculation methodology. Item First half of Change % in p.p. Return on equity (ROE) Return on assets (ROA) Interest margin on total assets Costs / Income ratio (C/I) ) relation of annualized net profit for four quarters to average shareholders' equity at the beginning and end of the period 2) relation of annualized net profit for four quarters to average balance of assets at the beginning and at the end of the period 3) relation of annualized net interest income to average assets at the beginning and at the end of the period 4) relation of general administrative expenses and other operating expenses to net interest income, net fee and commission income, dividend income, net trading income, result on investment securities, hedge accounting result, foreign exchange result and other operating income. 10

11 In the first half of 2013, ROE amounted to 5.4% compared to 2.9% in Cost/income ratio amounted to 74.8% as at 30 June A decrease of ratio by 5.2 p.p. was caused both by an increase in income and reduction in expenses. Item Change % in p.p. Capital adequacy ratio Tier 1 ratio Loans / deposits ratio* * Loans and advances to customers / Amounts due to customers The capital adequacy ratio decreased by 1.1 p.p. compared to the end of 2012 due to an increase in the volume of loans. Loans/ deposits ratio decreased by 4.8 p.p. compared to the end of 2012 and amounted to 89.4% as at 30 June GROUP BALANCE SHEET As at 30 June 2013, the Group s balance sheet total amounted to PLN 17,626.3 million and was 4.5% higher than at the end of Group s assets Changes in the structure of assets Item Change (%) Change (%) PLN = =100 Cash and deposits with the Central Bank Deposits with other banks, loans and advances to other banks Securities held-for-trading Derivative financial instruments Derivative hedge instruments Loans and advances to customers Investment securities available for sale held to maturity Investments in associates Intangible assets Property, plant and equipment Income tax assets Other assets TOTAL ASSETS As at 30 June 2013, loans and advances to clients accounted for the largest asset (65.0%). In the first half of 2013, its contribution to assets decreased by 0.9 p.p., while the share of investment securities increased by 5.0 p.p. At the end of the first half of 2013, their share in assets accounted for 28.0% Loans and advances granted to customers The carrying amount of loans and advances originated to Group s clients at the end of the first half of 2012 was PLN million and was by 3.0% higher than at the end of Item Change (%) Change (%) PLN = =100 Loans granted to retail clients Loans granted to corporate clients Loans granted to public finance Loans granted to other clients Total loans Other receivables LOANS AND ADVANCES GRANTED TO CUSTOMERS

12 In the first half of 2013, loans granted to corporate clients increased by 9.1% and those granted to retail clients increased by 4.0%. Retail segment loans have still the biggest share (41.7%) in the total balance of loans. Mortgage loan remains the key product in this segment. Loans and advances granted to clients by segment Loans for retail clients 41.7% Loans to corporate clients 32.9 % Loans to public finance 25.4% The carrying amount of loans and advances originated to retail clients at the end of the first half of 2013 was PLN 3,923.5 million compared to PLN 3,791.4 million at the end of The share of mortgage loans denominated in foreign currencies in the portfolio of mortgage loans granted to individuals was 63.0% at the end of the first half of 2013 compared to 64.1% at the end of Quality of loan portfolio Item PLN 000 % PLN 000 % Loans and advances which are neither past due nor impaired Loans and advances which are past due but not impaired as at the balance sheet date Loans and advances which are impaired including loans and advances without impairment loss due to estimated cash flows Total gross loans and advances to customers and other banks Impairment allowances on loans and advances to customers and other banks Other receivables, net Total net loans and advances to customers and other banks, of which: clients banks In the first half of 2013, impairment loss level increased by 1.1% ie by PLN 3.3 million compared to the end of The share of impairment loss in total gross loans and advances as at 30 June 2013 was 2.6% and did not change compared to the end of The share of impaired loans and advances in the total portfolio was 7.7% compared to 7.8% at the end of Total equity and liabilities of the Group Changes in the structure of total equity and liabilities In the first half of 2013 the structure of equity and liabilities changed. The share of liabilities to clients increased by 0.5 p.p. from 72.2% at the end of 2012 to 72.7% as at 30 June The share of liabilities arising from issue of bank securities decreased by 0.9 p.p. In the first half of 2013 the Bank had nine issues of short-term bonds, series from KT.1.13 to KT.1.21 with the total value of PLN 366 million. In the first half of 2013 the Bank issued also J series bonds of 12

13 PLN 100 million and K series bonds of PLN 50 million. The Bank redeemed F series bonds with nominal value of PLN million and H series bonds of PLN 185 million prior to their maturity date. Item Change (%) Change (%) PLN = =100 Amounts due to the Central Bank Amounts due to other banks Derivative financial instruments Derivative hedge instruments x Amounts due to customers Liabilities under banking securities issued Subordinated debt Provisions Income tax liabilities Other liabilities Equity TOTAL EQUITY AND LIABILITIES The share of the Group s equity in the balance sheet total at the end of the first half of 2013 was 8.3% and decreased by 0.3 p.p. in comparison to 31 December BOŚ S.A. Group was fully solvent in terms of repaying due liabilities, funding of the loan campaign and other investment expenses Sources of financing Group s operations Item Change (%) Change (%) PLN = =100 Corporate clients Retail clients Public finance Ecological funds Other clients Loans and advances from international financial institutions Funds made available by ecological funds for lending purposes TOTAL LIABILITIES DUE TO CUSTOMERS As at 30 June 2013 Group s liabilities to clients amounted to PLN 12,820.4 million meaning that the Group s liabilities to clients increased by PLN 1.004,0 million, ie by 8.5% compared to 31 December The biggest increase was observed in deposits from retail clients segment by PLN million, ie by 14.4%. Public finance deposits increased by PLN million, ie by 47.2%, while corporate segment deposits increased by PLN million, ie by 3.1%. Following the increase in retail deposits, their share in total liabilities to clients at the end of the first half of 2013 increased to 41.2% from 39.1% at the end of The share of corporate deposits in the total deposit balance was 34.5% as at 30 June 2013 compared to 36.3% at the end of Liabilities towards clients - segment structure Funds made available by ecological funds for lending purposes; 3,3% Corporate clients; 34,5% Loans and advances from international financial institutions; 9,7% Other clients; 0,6% Ecological funds; 2,5% Public finance; 8,2% Retail clients; 41,2% 13

14 Information about loans and advances drawn, loan agreements and sureties or guarantees Information regarding loans and advances drawn in the first half of 2013 (significant agreements) is presented in point II.2 Events with significant effect on the financial position of the Group. Contracted loans: Creditor Loan amount, 000 Amount available, 000 Currency Agreement conclusion date Principal repayment date Kreditanstalt für Wiederaufbau, Frankfurt EUR Council of Europe Development Bank, Paris EUR European Investment Bank, Luxembourg EUR Kreditanstalt für Wiederaufbau, Frankfurt EUR I tranche II tranche European Investment Bank, Luksemburg EUR* Council of Europe Development Bank, Paris EUR* European Investment Bank, Luxembourg EUR I and II tranche Kreditanstalt fur Wiederaufbau, Frankfurt EUR Council of Europe Development Bank, Paris EUR I tranche II tranche Nordic Investment Bank EUR I and II tranche European Investment Bank, Luxembourg EUR I tranche II tranche Council of Europe Development Bank, Paris EUR I tranche TOTAL EUR * Utilization in PLN or EUR In the first half of 2013, no loan agreements were terminated. Loans and advances drawn by the Bank supplement the key funding sources that include liabilities to clients, issues of bonds and equity Information about loans and advances drawn, loan and surety or guarantee agreements not relating to the Bank s operating activities In the first half of 2013, the Bank did not conclude any loan agreement with international financial institutions or foreign banks Advances, sureties and guarantees granted to subsidiaries In the period from 1 January to 30 June 2013 the Bank did not grant any advances, sureties or guarantees to its related parties. Guarantees granted by the Bank to its subsidiaries as at 30 June 2013: Dom Maklerski BOŚ S.A. PLN 10.0 million BOS Finance AB - PLN million Utilization of proceeds from issue of securities BOŚ S.A. used funds arising from the issue of bonds and increase of capital resulting from the issue of P series shares registered on 15 June 2012 to fund the increased sale of loans and improve its balance sheet structure. 3. CONTINGENT ASSETS AND LIABILITIES As at 30 June 2013 Group s contingent liabilities amounted to PLN 2,585.8 million, including financial liabilities of the Group in the amount of PLN 2,198.3 million. As at 30 June 2013, sureties and loan repayment guarantees amounted to PLN 65.0 million. The balance of valid guarantees and sureties of the Group was PLN million. 14

15 Change (%) Change (%) = =100 Contingent liabilities: ,5 19,6 Related to financing, of which: Open credit facilities, of which: revocable irrevocable Open import letters of credit commitments to grant loans (committed loan facilities), of which : irrevocable other Guarantees, of which: loan repayment sureties and guarantees performance bonds other Issue underwriting Securities to receive X Contingent assets: \ Related to financing, of which: open credit lines other X Guarantees Other Total contingent assets and contingent liabilities % -2.1% In the first half of 2013 the Bank granted 130 guarantees and sureties in the total amount of PLN million. Most guarantees granted in the first half of 2013 regard tender liabilities and performance bonds. As at 30 June 2013, the guarantees were requested by: in 20.1% non-financial entities in 1.0% government and municipality institutions in 78.9% financial entities. 4. DIFFERENCE BETWEEN FINANCIAL FORECASTS AND ACTUAL PERFORMANCE BOŚ S.A. did not publish any forecasts of its financial performance. 5. FACTORS MATERIAL TO THE GROUP S DEVELOPMENT Factors that may have effects on the Group 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; Standing of the public finance sector that may result in resigning from or postponing proecological investments the Bank specializes in funding of. Also, non-public finance sector investors may resign from such investments due to the general market condition and changes in legal regulations regarding the related operations; Maintaining the cost rationalizing policy, both with regard to personnel and non-personnel expenses; Development of cooperation with environmental funds to further develop environment-friendly activities of the Bank; Decisions of the Monetary Policy Council regarding interest rates; Possible changes in regulations regarding banking operations; Situation of Warsaw Stock Exchange and its effect on the performance of Dom Maklerski BOŚ S.A., a subsidiary. 15

16 6. GROUP DEVELOPMENT STRATEGY 6.1. Development directions On 22 May 2013, Supervisory Board of the Bank issued a decision regarding approval of the Bank s Strategy for the years The update of the existing Strategy was necessitated by changes in the market environment, including among others changes arising from T Recommendation and CRD IV Directive, amendment to BFG Act, changes in economic conditions, such as interest rate decrease, appreciation of PLN or continued medium-paced growth of the banking sector. The above conditions resulted in a decision to verify the projected Bank's ratios for the years Further, the time horizon of the approved document has been extended by another year, ie to Implementation of the Strategy should be reflected among others in improved return on equity and on assets. Further, it should allow material improvement in the Bank s efficiency, thus reducing the C/I ratio. Improved ROE, ROA and efficiency should be achieved by an increase in commission income, centralized support processes, improvement of cost and investment efficiency as well as efficiency of debt collection, credit and operating risk assessment processes. By 2016, BOŚ S.A. will enhance its market position of Eco-bank specializing in the funding of ecological initiatives and preferred by pro-ecologically oriented people. BOŚ S.A. will aim at increasing its value as an important part of the ecology-funding system in Poland, fulfilling needs of its clients by its unique, pro-ecological product offer, involvement in projects supporting sustainable development and enabling additional, unique competencies based on its values. In the years to come, key objectives of BOŚ S.A. will include maintaining its position on the ecoproject funding market. According to its Strategy, the Bank is planning an increase in the share of loans granted for environmental protection purposes and supporting sustainable development to approximate 30% of the total loan portfolio. It will focus on the funding of initiatives regarding energy efficiency, renewable energy sources, waste collection and management, water and sewage management and structural funding. Its strategy regarding corporate and public finance sector assumes partnering with Polish businesses and being a leader in funding of environmental protection projects in Poland. Achieving a significant share in funding of EU projects is another priority. Bank s strategy in the corporate and public finance sector includes growing its share in the corporate client sector (mainly SME) and in the group of clients implementing environmental projects. Its objective is to become the preferred bank for clients looking for funding of pro-ecological investments. The retail sector strategy assumes BOŚ S.A. to be the preferred bank and animator of the new market funding solutions that offer ecology-based economic benefits. The pro-ecological offer will leverage growth in sales of high-margin products. Additionally, BOŚ S.A. and its Dom Maklerski (Brokerage House) want to become significant players on the market of saving, investment and insurance products. The above objectives will be achieved among others through implementation of a variety of initiatives supporting the Strategy, to include building of an outstanding product offer adjusted to opportunities provided by the nascent prosumer market in Poland in the form of combining ecology with financial benefits and implementation of an Internet platform to allow depositing and growing savings, implementing a model branch under a new formula or tools allowing quality management of client service and relations. Policy adopted by BOŚ S.A. with regard to capital investments allows its involvement in entities whose profile would allow extending the scope of services and products offered to its clients. The Bank focuses on investments in its subsidiaries, thus enhancing their capital base and its position on the financial market. The Group maintains its investment policy regarding disposal of shares in companies acquired as inkind contribution from National Fund for Environmental Protection and Water Management in exchange for O series shares issued by BOŚ S.A. 16

17 7. KEY SCOPE OF OPERATIONS OF THE CAPITAL GROUP 7.1. Banking activity The main objective of the Bank is to effectively manage shareholders capital and the funds entrusted by clients whilst ensuring profitability of business and safety of the entrusted funds. BOŚ S.A. strives at being seen as a Bank for active people, which cares for the Clients and the environment. The BOŚ corporate value canon embraces stability, integrity, environmental protection, social responsibility, Client and activity. The mission of BOŚ S.A.: Reliable bank concerned for you and our environment. In accordance with the articles of association, the main mission of the Bank is to support activities serving the development of environmental protection, development of the market of services and products related to ecology and the promotion and creation of pro-ecological attitudes and initiatives for the protection of the natural environment BOŚ S.A Capital Group share in the banking sector In the period from July to June 30 of this year. BOŚ S.A. increased its share in balance sheet total by 0.04 p.p and by 0.05 p.p. in liabilities total; its share loans and advances remained at the same level.the share held by the BOŚ S.A. in the commercial banking sector at the end of the first half of 2013 (based on data provided by PFSA with regard to banks with foreign branches): 1.26% for the balance sheet total compared to 1.25% at the end of 2012 and 1.22% at the end of the first half of 2012; 1.29% for total liabilities compared to 1.28% at the end of 2012 and 1.24% at the end of the first half of 2012; 1.19% for loans and advances; the share did not change compared to the end of 2012 and the end of the first half of BOŚ S.A. Group performs brokerage operations through Dom Maklerski BOŚ S.A., a subsidiary (DM BOŚ S.A.). The average share of DM BOŚ S.A. in the core aspects of trading performance of Warsaw Stock Exchange in the first half of 2013: 2.43 % on the stock market compared to 2.06% at the end of 2012 and 2.06% in the first half of 2012; 18.85% on the forward market compared to 14.78% at the end of 2012 and 13.47% in the first half of 2012; 20.90% on the option market compared to 21.82% at the end of 2012 and 20.30% in the first half of MAIN PRODUCTS, SERVICES AND BUSINESS AREAS OF THE GROUP 8.1. Banking products The Bank s offer includes products (deposits, loans and settlement) offered to all groups of clients, as well as products addressed directly to selected groups of clients. The Bank operated the following business areas or segments: corporate, public finance and retail segment. Within the corporate and public finance segments, the Bank additionally distinguishes the following types of main client segments: corporate clients, public finance clients and ecological clients. The retail segment of the Bank consists of individuals and micro-enterprises segment, housing communities and NGO segment. The terms and conditions of cooperation with individual groups of clients are tailored by the Bank to the changing market conditions and the needs of addressees of the Bank s offer with a simultaneous focus on the target in the form of continuous improvement of client service level. 17

18 8.2. Number of serviced clients, accounts, payment cards and branches At the end of the first half of 2013, the Bank operated through 17 Main Branches and 77 Operating Branches. Corporate clients were served in 11 Corporate Centers. In order to improve the reach of its offer, the Bank cooperated with financial agents offering mortgage loans and advances and cash advances. Further, through cooperation with partner advisors, it offers mortgage products, cash loans, current and saving accounts, overdraft facilities and credit cards. As at 30 June 2013 Dom Maklerski BOŚ S.A. operated through 15 branches. Its services are also available on the Internet platform ( Item Change % Change (%) in = =100 BANK OCHRONY ŚRODOWISKA S.A. Number of clients Number of retail clients Number of corporate and public sector clients Number of savings and current accounts* Debit and credit cards of individual clients Debit and credit cards of institutional clients Number of outlets DOM MAKLERSKI BOŚ S.A. Number of investment accounts including number of Internet accounts Number of outlets * Including saving accounts 8.3. Pro-ecological offer and cooperation with ecological funds The Bank s pro-ecological offer comprises own products as well as loans and advances offered in cooperation with donors. The offer is varied and adjusted to the needs of all types of entities. BOŚ S.A. products are targeted at all corporate, public finance and retail clients. These loans are used to fund pro-ecologic initiatives and to promote environment-friendly solutions. BOŚ S.A. actively develops its activities in the field of renewable energy sources. Pro-ecological loans As at 30 June 2013, the balance of pro-ecological loan portfolio amounted to according to equity value PLN 2,393 million, accounting for 20.4% of the total loan balance. The share of pro-ecological loans in the Bank s portfolio has grown regularly (18.1% as at 31 December 2011; 18.4% as at 30 June 2012; 19.4% as at 31 December 2012). In the period from 1 January to 30 June 2013 the newly concluded loan agreements amounted to PLN million. Vast majority of pro-ecological loans was granted to corporate clients (86.2% of the balance). Growth in the value of loans granted achieved 262.9% year on year, with the highest increase related to corporate segment loans (336.6%). Pro-ecological loans were used mainly for the following investments: - atmospheric protection: PLN million (91.9% of the value of concluded loan agreements), to include mainly energy efficiency initiatives and construction of renewable energy sources; - water management and protection: PLN 46.5 million (6.7% of the value of concluded loan agreements), to include mainly sewage systems and treatment plants. Improving competitive advantage in the most promising market segments and building Bank s position in new business areas: - corporate and public finance in relation to energy efficiency, renewable energy sources and waste management; - retail in relation to renewable energy sources and energy efficiency, mainly energy-saving housing. 18

19 In June 2013, the Bank introduced on the market the concept of "Samospłacający się dom," ( SELFpaying house ). The main idea is to create a program of housing development outside metropolitan areas on the basis of a mortgage for the ecological house that is self-repaying thanks to the revenues obtained from the energy produced in the photovoltaic system. The program prepared by the Bank in collaboration with representatives of Polish companies producing materials and equipment for home furnishings and home appliances and also with house projects supplier met with positive response and great interest from the media and has gained great popularity among potential customers. Operational start-up of the program is dependent on the adoption of the Law on Renewable Energy Sources and the support system specified there. The Bank builds its competitive advantage on a broad offer of pro-ecological products adjusted to investors needs and on professional employees with ecological background, consulting clients with possible pro-ecological solutions and the related benefits, thus providing grounds for further development of pro-ecological business operations in the form of investment funding. Liabilities to ecological funds Item Change (%) Change (%) in = =100 - current/settlement accounts term deposits ECOLOGICAL FUNDS In the first half of 2013, the balance of ecological fund deposits decreased by 42.4% with the current account balance reduced by PLN 36.3 million and term deposits reduced by PLN million Corporate client segment The sector of small- and medium-sized enterprises (SMEs) has remained for BOŚ S.A. one of the most important market segments. The Bank, whilst structuring a comprehensive offer of settlement, deposit and credit products, ensured an appropriate base which can be used to build an individual product offer tailored to the individual client needs. As regards its settlement product offer, the Bank offers standard current accounts which fulfill settlement functions and serve to accumulate cash and to conduct domestic and foreign settlement operations. Bank accounts may be maintained in such basic currencies as PLN, USD, EUR, GBP, CHF, SEK, HUF, RUB and CZK. In the first half of 2013: the following special offers were launched: Rachunek z Mocą, Kredyt z Mocą and Kompensator za 1 zł. The offer includes incentives for clients for the use of pro-ecological AC power compensation; the bank account offer has been extended with opportunity to open current and auxiliary accounts maintained in CZK; Konto Wyjątkowe Biznes offer was extended with free-of-charge ATM service under Moduł Rozliczeniowy ; the escrow account offer has been extended with accounts kept in accordance with Article 59 of the Banking Law of 29 August The offer changes allow clients the use of new form to collateralize business transactions available at BOŚ S.A. Sales of loans funding current operations and investment was continued, including pro-ecologic activities and each time tailoring loan terms to client s needs. BOŚ S.A. offers also multi-purpose and guarantee facilities, included in one contract and one collateral, which enjoy substantial interest of clients. Clients may use a variety of loan products, including overdraft facility, working capital loans and bank guarantees. With regard to loan products in the first half of 2013: Kredyt EkoMontaŜ offer was extended with opportunities to have photo-cells co-financed and to obtain project subsidies from Agency for Restructuring and Modernization of Agriculture (ARMA); 19

20 Kredyt z Dobrą Energią offer was extended with opportunities to have photo-cell power plants funded and improved product parameters, to include an increase in the maximum loan amount to 90% of the investment value, the grace period for interest up to 18 months and a possibility to extend the grace period for the principal and interest by 6 months following investment completion; the offer of products available under the multi-purpose facility was extended with documentary credit and promise of guarantee; the list of currencies available was extended with EUR and USD; pro-ecological product offer was extended with opportunity to use a simplified procedure for loans granted under Kredyt z Mocą promotion and EkoOszczędny intended for the purchase of environment protection devices for amounts up to PLN 500 thousand. Loans granted to corporate clients As at 30 June 2013, the value of loans granted to corporate clients amounted to PLN 3,773.4 and increased by 9.1% compared to the end of Liabilities to corporate clients Item Change (%) Change (%) = =100 - current/settlement accounts term deposits CORPORATE CLIENTS In the first half of 2013, the balance of corporate client deposits increased by 3.1% with the current account balance reduced by PLN million and term deposits growing by PLN million Public finance segment In 2013, the Bank continued cooperation with local municipalities in Poland. It provided some of them with comprehensive budget support allowing efficient cash management. The services have been provided pursuant to the Public Procurement Law, using banking products and services, as well as other instruments made available by the Bank. Public finance segment clients are offered with all standard deposit and loan products included in the Bank s offer. Products intended to finance pro-ecological projects (preference and commercial loans) hold a special place in the offer, as well as facilities offered under credit line made by foreign banks to fund environmental protection and infrastructural investments and the European Offer being a bundle of products targeted at entrepreneurs, local self-governments and municipal companies. Comprehensive support of issue of municipal bonds is an important for of cooperation offered to these clients. It includes preparing the issue, maintaining the record of bonds and servicing the issuerelated payments. Loans granted to public finance segment clients As at 30 June 2013, the value of loans granted to public finance segment clients amounted to PLN 2,913.8 compared to PLN 3,077.6 at the end of Liabilities to the public finance segment Item Change (%) Change (%) = =100 - current/settlement accounts term deposits PUBLIC FINANCE In the first half of 2013 the Group recorded 47.2% increase in deposits made by public finance sector clients compared to the end of The increase occurred in the balance of term deposits, whereas the current account balance dropped. 20