Cracow, 8 th January 2007 Janina Niedośpiał ul. Słomiana 13/60 30-316 Cracow Chartered auditor 2729/2068 Court-appointed auditor Regional Court For Cracow Śródmieście in Cracow XIth Business Department of the National Court Registry File number: KR XI Ns-Rej. KRS 26364/06/291 OPINION OF AN INDEPENDENT AUDITOR ON THE EXAMINATION OF SPIN-OFF PLAN concerning Bank BPH Spółka Akcyjna in Cracow Further to the decision issued by the Regional Court for Cracow Śródmieście in Cracow, XIth Business Department of the National Court Registry dated 28 th November 2006 on the appointment of Janina Niedośpiał, who is listed in the register of chartered auditors of the District Court in Cracow, to examine the Bank BPH SA spin-off plan of 15 th November 2006 for its regularity and diligence (integrity), I examined the Spin-off plan, which covered the following elements: Part I General provisions 1. type, firm and location of the Companies participating in the spin-off, 2. spin-off method, 1
3. share allocation ratio, 4. principles governing granting of the Spin-off Share Issue to BPH SA s shareholders 5. date, starting from which the Spin-Off Share Issue authorise participation in Pekao SA s profits, 6. rights granted by Pekao SA to BPH SA s shareholders and to persons entitled to special rights in BPH SA 7. special benefits for the members of administrative boards of the Companies participating in BPH SA spin-off and for other people participating in the BPH SA s spin-off, 8. information on the change in Pekao SA s Articles of Association 9. consents and permits of management and supervision organs concerning BPH SA s spin off, 10. miscellaneous Part II Description of assets elements, licenses and benefits allocated to Pekao S.A The following documents were attached to the Spin-off Plan draft resolution of the General Shareholders Meeting of Pekao S.A. on the integration of Pekao S.A. and BPH S.A., performed by way of BPH SA s spin-off, with transfer of part of BPH SA s assets in the form of an organised entity onto Pekao S.A., 2
draft resolution of the General Shareholders Meeting of BPH S.A. on the integration of BPH S.A. and Pekao SA, performed by way of BPH SA s spin-off, with transfer of part of BPH SA s assets in the form of an organised entity onto Pekao S.A., draft amendments to Pekao SA s Articles of Association, definition of BPH SA s assets value as at 1 st October 2006, declaration on Pekao SA s accounting status, developed for the purpose of the spin-off on 1 st October 2006, declaration on BPH SA s accounting status, developed for the purpose of the spin-off on 1 st October 2006. Development of the Spin-off Plan is the responsibility of the Management Board of Pekao S.A. and BPH S.A. My task was to express an opinion on the spin-off plan attached, further to the examination made. My opinion has been developed exclusively for the use of the Regional Court for Cracow Śródmieście in Cracow, XIth Business Department of the National Court Registry and for the Bank s shareholders participating in the spin-off, and as such it cannot be used for any other purpose. I do not assume responsibility towards third parties for the contents of this opinion. I carried out the examination further to the following legal acts: articles 537 and 538 of the law dated 15 th September 2000 Code of Commercial Companies (Official Journal of Laws number 94, section 1037 with later amendments), hereinafter referred to as KSH, 3
standards of chartered auditors profession, issued by the National Council of Chartered Auditors in Poland, International Standards Licensed Services number 3000. I planned and conducted the examination in such a way so as to gain sufficient certainty that the spin-off plan contains no significant distortions and to acquire sufficient base for expressing reliable opinion on the plan. In particular, the examination consisted in the following procedures: Verification whether the spin-off plan agreed by the banks had been developed pursuant to art. 534 1 KSH and if it contains all appendices required to art. 534 2 of KSH, Assessment whether the share valuation methods used for share swap ratio are correct, Verification whether the share valuation was calculated correctly and pursuant to the methods used by the Management Board of both Banks and whether the swap ratio of shares was based on these calculations. Further to the examination, I hereby express the following opinion. Further to the examination, I declare as follows: 1. Share swap ratio, mentioned in art. 534 1 point 2 KSH was defined in a diligent way. In return for the transfer of part of BPH SA s assets onto Pekao S.A., each BPH SA s shareholder will receive 3.3 newly issued Pekao SA s shares for one BPH SA s share. 4
2. The methods used for defining the share swap ratio are sensible. Three valuation methods were used: - valuation in accordance with the Dividend Discount Model, - valuation in accordance with the Market Multipliers Analysis, - valuation in accordance with the P/NAV regression analysis (price to net assets value) and RoNav (return on net assets). 3. Bank BPH SA s Spin-off plan dated 15th November 2006 was agreed upon by Bank Pekao S.A. with seat in Warsaw at 53/57 Grzybowska Street and Bank BPH S.A. with seat in Cracow at Al. Pokoju 1, had been developed in accordance with art. 534 1 of KSH and it contains all appendices enumerated in art. 534 2 of KSH. 4. Particular difficulties related to share valuation: Impact of market speculations on Pekao SA s market price in relation to potential effects of integration with BPH S.A. lack of market transparency for future profits in Pekao S.A. In the light of the above, I hereby declare that the Spin-off Plan for Bank BPH Spółka Akcyjna based in Cracow was developed in a regular a diligent way. 5
Grounds for the opinion 1. Preliminary remarks 1. In its decision of 28 th November 2006, signature KR XI Ns Rej KRS 26364/06/291, the Regional Court for Cracow Śródmieście in Cracow, XIth Business Department of the National Court Registry has appointed Janina Niedośpiał, listed in the register of chartered auditors of the District Court in Cracow, to examine the Bank BPH SA spin-off plan of 15 th November 2006 for its correctnewss and intergrity. 2. With the view to execute this decision, the Management Board of BPH concluded a civil law job agreement with chartered auditor Janina Niedośpiał. II. General provisions 1. Parties to the spin-off Bank Polska Kasa Opieki Spółka Akcyjna based in Warsaw at 53/57 Grzybowska Street (hereinafter referred to as Pekao S.A. ), the taking-over company entered under the number KRS 0000014843 to the Business Register kept by the regional Court for Warsaw, XIIth Business Division of the National Court Register. Representation: Krzysztof Bielecki President of the Management Board, Luigi Lovaglio Vice-President of the Management Board. Bank BPH Spółka Akcyjna based in Cracow at Al. Pokoju 1 (hereinafter referred to as BPH S.A. / - the spin-off company. Representation: 6
Józef Wancer President of the Management Board, Grzegorz Piwowar Board Member. 2. Spin-off method Spin-off will be carried out under art. 529 1 point 4 of KSH by transfer of part of BPH SA s assets onto Pekao S.A. in the form of an organised part of the company in return for Pekao SA s shares, which will be assumed by BPH SA s shareholders Bank BPH SA s shareholders will assume Pekao SA s ordinary bearer shares series I of the nominal value of PLN 1 (say: one zloty) each, issued in relation to the integration of both banks. Bank BPH SA s shareholders will receive 3.3 (say: three and 3/10) Spin-Off Issue Shares, maintaining their hitherto ownership BPH SA s shares. Equity of Bank Pekao S.A. will be increased by 94,763,559 zloty (say: ninety four million seven hundred and sixty three thousand five hundred and fifty nine zlotys) to the amount of 261,571, 816 zloty (say: two hundred and sixty one million five hundred and seventy one thousand eight hundred and sixteen zloty). The spin off of BPH SA s assets has been prepared as at 1 st October 2006. In the course of the spin-off, Pekao S.A. will receive specific assets and liabilities of BPH S.A. in the form of an organised part of the company comprising: 284 BPH SA s branches all new branches established after 1 st October, 2006, 23 corporate centres, 7
8 macroregions, part of BPH SA s head office, part of BPH SA s brokerage office. Assets allocation will be performed according to the rule, under which Pekao S.A. will receive these assets, which are related to the operations of transferred entities. This enables equipping the transferred entities with all elements of fixed assets and equipment, used for their operations. At the same time, all rights and duties, receivables and liabilities, administrative decisions and permits, which are related to the operations of transferred units are allocated to Pekao S.A. Definition of assets allocated to Pekao S.A. was performed further to accounting records kept in line with the regulations binding in BPH S.A. 3. Financial statements BPH SA s financial statements consist of: Balance sheet developed as at 01.10.2006, recording assets and liabilities of: 63,285,468,000 zloty, Profit and loss account developed for the period from 01.01.2006 to 01.10.2006 r, recording net profit of 881,527,000 zloty, Explanatory notes. 8
Pekao SA s financial statements consist of: Balance sheet developed as at 01.10.2006, recording assets and liabilities of: 68,029,726,000 zloty, Profit and loss account developed for the period from 01.01.2006 to 01.10.2006 r, recording net profit of 1,327,000,000 zloty, Explanatory notes. BPH SA s financial statements developed as at 30 th June 2006 were reviewed by KPMG Audyt Sp. z o.o. based in Warsaw at 51 Chłodna Street. Independent chartered auditor s report on the review of abridged mid-year solo financial statements contain a declarations that the review detected no issues which may lead to a conclusion that attached abridged mid-year solo financial statements of Bank BPH SA do not reflect Bank BPH Spółka Akcyjna s financial and propertyrelated situation as at 30 th June 2006, its financial results and cash flows for the period from 1 st January 2006 to 30 th June 2006 in a regular and diligent way in all significant aspects, in line with the requirements of the International Financial Reporting Standards applicable to mid-year financial reporting, which were approved by the European Union. III. Specific provisions. 1/ Share allocation ratio Share allocation ratio was defined as the number of newly issued Pekao SA s shares in return for each BPH s share, according to the following formula: 9
Value of taken-over part of BPH per 1 BPH SA s share Value of Pekao SA s shares Both banks were valued by JP Morgan further to: the pro forma statements for the to be taken-over part of BPH developed as at 30.06.2006, business plan for the takenover part of BPH developed by BPH SA's management board for years 2006-2008 and business plan for the whole Bank BPH SA for the same period, and business plan for Pekao SA for years 2006-2008. Valuations of Pekao S.A. and the to be taken-over part of BPH were executed on the basis of respective valuation methodologies applied for company valuations, including banks. Three valuation methods were used: valuation according to the Dividend Discount Model, valuation according to the Market Multipliers Analysis, valuation according to P/NAV regression analysis (price to net assets value) and RoNav (return on net assets). Valuation according to the Dividend Discount Model This valuation method is used for shareholders, who assume that their investment is long-term and that they will generate revenues mainly from dividends paid out by the valued entity. Therefore, the value of the entity (including bank) will be equal to the value of discounted (current) infinite cash stream of future dividend. In practice, as it is impossible and not sensible to forecast dividend flows ad infinitum, future dividends are projected for e defined period of time (e.g. 3-5 years) and the current 10
value of the final entity s value is calculated, with due account to the assumed longterm growth rate. Key elements that are indispensable to valuation include: financial forecast covering balance sheet, profit and loss account, dividend flows, calculation of final value, definition of long-term growth rate necessary for calculation of final value and definition of discount rate. Valuation according Market Multipliers Analysis This valuation model is used by the share holders, who allow that their investment is a long-term one and their income will come predominantly from the dividend paid out by the entity being a subject of evaluation. Value of the entity (a bank in this case) would will be equal to the discounted (present) infinite cash flow of future dividends. In practice, this method consists in defining the company s value by multiplying specific market multiplier by a relevant economic parameter of the valued entity. The key elements of this method is: to define comparable entities, to define time bracket of the analysis, to define key multipliers and to apply these multipliers to the bank s financial data (i.e. to multiply the multiplier by a relevant economic parameter). The banking industry is relatively well represented on the Warsaw Stock Exchange in Warsaw. For the purpose of Pekao SA and BPH SA valuation, results and stock multipliers of the following banks were analysed: PKO BP, BZ WBK, Bank Handlowy, ING Bank Śląski, BRE Bank S.A., Bank Millennium and Kredyt Bank (i.e. leading Polish banks together with Pekao and BPH ). Then the most important multipliers for the banking industry were selected: P/E - market price to earning per share, 11
P/NAV market price to net assets, RoNAV return on net assets, Valuation according to P/NAV regression analysis Regression analysis consists in defining the relation between two variables (explanatory and dependant variables) and further on in forecasting the value of one variable depending on the value of the second one. In case of bank valuation, this analysis consist in assessing the value of the bank s equity on the basis of relations between future equity profitability, expressed as return on net assets (RoNAV), and premium/discount expressed as the price of shares to net assets value. Key elements of this method pertain to the selection of companies within the sample similar banks as those used for stock market multiplier analysis), definition of the time bracket for analysed RoNAV, definition of RoNAV P/NAV ratios for banks within the sample, analysis of statistical regression between RoNAV and P/NAV and assessment of the bank s value further to regression parameters and RoNAV. Three above-mentioned three valuation methods generated the following results: 1. Pekao SA s value falls between 26.773 31.510 billion zloty (therefore value per share is in the range of 160.5 188.9 zloty) 2. value of taken-over part of BPH SA falls between 14.667 19.059 billion zloty (therefore value per share is in the range of 510.4 663.7 zloty). 12
Further to the above-quoted valuation, share swap ratio for BPH S.A. shares exchanged for newly issued Pekao SA s shares was defined (the brackets were defined in each valuation method as the quotient of the highest value of taken over part of BPH per BPH share and the lowest value of Pekao SA per share, and by reversed action, namely as the quotient of the lowest value of taken over part of BPH per BPH share and the highest value of Pekao SA per share). This exercise was aimed at achieving the broadest possible scope of share swap ratio. The following data was generated in the course of the exercise: Valuation method Share swap ratio Dividend Discount Model 2.7 3.7 Market Multiplier Analysis 2.9 3.6 Regression Analysis Model 3.1 3.8 Average 2.9 3.7 The last phase was to define share swap rate, which was calculated as arithmetical average of average marginal swap rates, computed further to the applied valuation method. This brought about share swap rate of 3.3 in return for transfer of part of BPH SA s assets onto Pekao S.A.. each BPH SA s shareholders will receive 3.3 newly issued Pekao SA s shares for each BPH SA s share they hold. 2/ Division of BPH SA s property and financial results Assets and liabilities were divided further to the pre-defined allocation keys. Individual items from balance sheet and profit and loss account were divided according to the following guidelines, with due account to their types: 13
according to accounting records of spin-off assets elements transferred to Pekao SA or New BPH SA, based on CPK of selected entitles, according to their target operations, i.e. in new BPH SA or Pekao SA, further to binding legal agreements and business decisions, according to the following ratio: number of branches allocated to Pekao S.A. or New BPH SA, divided by the total number of Bank BPH SA s branches, according to the type, number or value of transactions recorded on individual assets items, with the use of balance sheet item proportion, with due account to the scope of operations of the New BPH Sa after spin-off, i.e. excluding assets elements which shall be transferred to Pekao SA in line with business agreements and decisions, with the use of controlling keys, applied in dividing commission costs and revenues, accounting for specific character of transferred 200/280 Branches and their operational scope stemming from binding legal agreements and business decisions, by allocating accounts of the house loans and savings office and leasing to 200 branches of the New BPH SA, as well as all the products which were sold by agents to other branches allocated to Pekao S.A., with the use of the IT model, which identifies planned division between the New BPH SA and the New Pekao SA for each IT services and each element. This division contains both allocation of direct costs and proportion of costs pertaining to outsourcing. Allocation and outsourcing ratios were calculated further to planned use of IT funds, 14
with the use of keys pertaining to full time equivalents, based on the proportion of planned employment in the New BPH SA or Pekao SA after spin-off to employment level as at 1 st October 2006 in BPH SA before spinoff. Division of BPH s assets and liabilities thousand zloty As at 01.10.2006 Assets Mini BPH BPH 280 Cash and operations with Central 1,177,292 518,031 Bank Financial assets for trading 22,620 2,560,998 Amounts due from banks 500,653 12,739,362 including: impairment write-offs 0-589 Amounts due from customers 5,323,977 27,305,542 including: impairment write-offs -246,243-1,073,675 Other financial assets 716,373 10,105,630 Tangibles assets 332,978 587,188 Intangible assets 221,503 61,019 Assets for sales 714 238,656 Other assets 181,980 690,952 including: assets from deferred income tax 92,454 455,659 Total assets 8,478,090 54,807,378 15
As at 01.10.2006 Liabilities Mini BPH BPH 280 Amounts due to Central Bank 94,181 0 Amounts due to banks 1,355,006 6,279,040 Amounts due to customers 4,832,017 33,801,104 Liabilities from issue of own securities 431,528 7,243,968 Provisions 63,153 514,181 Including: provisions for deferred income tax 40,352 437,157 Financial liabilities for trading 22,620 1,131,897 Other liabilities 309,108 862,083 Total equity: 1,370,477 4,975,105 Total liabilities: 8,478,090 54,807,378 The following lists were attached to the Spin-Off Plan: 1. list of transferred Branches, 2. corporate centres, 3. macroregions, 4. debt securities, 5. status of debt securities issued by BPH, 6. derivatives, 7. contracts with contractors, 8. shares and participation units, 9. ownership rights, perpetual usufruct rights, co-operative right to premises, 10. property lease agreements, 11. court proceedings, civil proceedings, settlement and liquidation proceedings, 12. trademarks, 13. intellectual property rights, 16
14. administrative decisions, permits, licenses and benefits, 15. court proceedings covering civil proceedings related to transferred Branches, 16. location of ATMs This opinion together with grounds contains 17 pages initialled by the chartered auditor. Appendices: The Spin-off Plan 17