Financial position of the Group

PKO Bank Polski Group's results were translated into the size of the key financial performance indicators:

Annual Report
2021

Key financial indicators

		31.12.2021	31.12.2020	Change
Net ROE	(net profit/(loss)/average equity)	12.1%	-6.0%	+18.1 p.p.
Net ROTE	(net profit/(loss)/average equity less intangible assets)	13.2%	-6.5%	+19.7 p.p.
Net ROA	(net profit/(loss)/average assets)	1.2%	-0.7%	+1.9 p.p.
C/I	(cost to income ratio)	40.6%	40.9%	-0.3 p.p.
Interest margin	(net interest income/average interest-bearing assets)	2.70%	3.03%	-0.33 p.p.
Share of impaired exposures		3.98%	4.43%	-0.45 p.p.
Cost of credit risk		0.55%	0.78%	-0.23 p.p.
Total capital ratio	(own funds/total capital requirement*12.5)	18.23%	18.18%	+0.05 p.p.
Common equity Tier 1 (CET1)		17.03%	16.99%	+0.04 p.p.

Consolidated income statement

The consolidated net profit of the PKO Bank Polski S.A. Group earned in 2021 amounted to PLN 4,874 million and was PLN 7,431 million higher than in 2020.

¹⁾ Other net income reflects dividend income, net income on financial operations, net foreign exchange gains/(losses) and other net operating income and expense.
²⁾ This item comprises tax on certain financial institutions, share in profits/ (losses) of associates and joint ventures, and profit/(loss) attributable to non-controlling shareholders.

The profit on business activities of the PKO Bank Polski Group for 2021 amounted to PLN 15,202 million and was PLN 577 million (i.e. 3.9%) higher y/y, mainly as a result of an increase in net fee and commission income and other income, accompanied by a decrease in interest income.

Income statement of the PKO Bank Polski S.A. Group (in PLN million)

	2021	2020	Change (PLN million)	Change (%)
Net interest income	9,882	10,346	-464	-4.5%
Net fee and commission income	4,431	3,920	511	13.0%
Net other income	889	359	530	1.5x
Dividend income	12	15	-3	-18.3%
Result on financial transactions	382	236	146	61.8%
Net foreign exchange gains/(losses)	436	182	254	1.4x
Net other operating income and expenses	59	-74	133	1.8x
Result on business activities	15,202	14,625	577	3.9%
Operating expenses	-6,174	-5,983	-191	3.2%
Tax on certain financial institutions	-1,079	-1,055	-24	2.3%
Net operating result	7,949	7,587	362	4.8%
Net write-downs and impairment	-1,466	-9,299	7,833	-84.2%
Share in profits and losses of associates and joint ventures	31	16	15	91.3%
Profit before tax	6,513	-1,696	8,209	4.8x
Income tax expense	-1,640	-865	-775	89.6%
Net profit (including non-controlling shareholders)	4,873	-2,561	7,434	2.9x
Profit (loss) attributable to non-controlling shareholders	-1	-4	3	-84.3%
Net profit	4,874	-2,557	7,431	2.9x

Major items in the consolidated income statement:

Net interest income for 2021 amounted to PLN 9,882 million, i.e. PLN 464 million less than in the previous year. The lower result y/y was mainly due to a decrease in income from financing granted to Customers as a consequence of changes resulting from the MPC on reducing interest rates in the first half of 2020. This effect was partly reduced due to an increase in interest rates in the last quarter of 2021. The low level of market rates influenced the decrease in the interest expense on amounts due to Customers. In 2021 there was also a decrease in interest income from hedging accounting. In turn, the increase in income on securities had a positive effect on the interest income as a result of the increase in volume.

Interest income amounted to PLN 10,568 million and was 10.4% lower than in 2020. This was mainly due to:

a decrease in income from financing granted to Customers of PLN 980 million y/y – related mainly to the drop in the average interest rate on financing granted to Customers of 0.4 p.p., resulting from a decrease in the market interest rates, accompanied by a change in the structure of financing (an increase in the share of PLN housing and consumer loans, with a decrease in the share of business and foreign currency housing loans);
higher income on securities (PLN +141 million y/y), mainly as a result of an increase in the average volume of PLN 28 billion, despite a lower than average interest rate on securities resulting from a decrease in the market interest rates;
lower income from hedging accounting (PLN -389 million y/y), related mainly to a considerable drop in the average CIRS transaction volume (PLN -17 billion y/y).

In 2021, interest income went down by PLN 452 due to the European Union Court of Justice’s judgment on the consumer’s right to a reduction in the cost of loans repaid before contractual maturity (of which PLN 369 million is related to returned costs paid automatically to Customers before the balance sheet date, and PLN 83 million is related to the provision for future reimbursement of costs to Customers). In 2020, interest income was reduced only by the reimbursed amounts paid automatically to Customers, by PLN 232 million (no provision was set up).

Interest expense amounted to PLN 686 million and was PLN 769 million lower than in 2020. The lower interest expense was mainly the effect of a drop in the costs of the deposit base of PLN 660 million y/y, which in particular was the effect of lower average PLN interest rates after the decisions of the MPC and the resulting decrease in the cost of deposits.

The interest margin decreased by 0.33 p.p. y/y and amounted to 2.70% as at the end of 2021.

The decrease in the margin resulted from lower returns on assets in effect of changes in the structure of interest-bearing assets (the share of the lowest interest rates increased mainly at the expense of the share of the highest interest rates on receivables due from Customers). Moreover, the drop in the rate of return on assets was affected by a drop in net interest income as a result of lower market interest rates in Poland, which largely translated into a drop in interest rates on assets rather than on liabilities.

In 2021 the average interest rate on PKO Bank Polski S.A.’s loans was 3.7%, and the average interest rate on total deposits was 0.1%. In 2020, it was 4.0% and 0.3%, respectively.

In 2021 net fee and commission income amounted to PLN 4,431 million, and was PLN 511 million higher than in the previous year. The increase in net commission income was due to, among other things:

higher net income on loans, insurance and operating leases (PLN +120 million y/y), mainly in effect of an increase in commission on business loans and leases, and an increase in the sale of insurance linked to loans, and motor insurance;
higher net income from maintaining bank accounts and other (PLN +111 million y/y), among other things, connected with an increase in commission for maintaining bank accounts of Corporate customers and higher net income on transfers and foreign transactions;
higher net income on margins in Forex transactions (PLN +106 million y/y) in effect of an increase in the number of transactions;
higher net income from investment funds and brokerage activities (PLN +88 million y/y), mainly due to an increase in commission for fund management, higher commissions on securities exchange trading on the stock market, and on the sale of Treasury bonds;
higher net income on cards (PLN +86 million y/y) due to the higher number of cards and higher number of non-cash transactions.

Net other income earned in 2021 amounted to PLN 889 million and was PLN 530 million higher than in 2020, among other things, as an effect of:

higher net foreign exchange gains (PLN +254 million y/y), mainly as a result of closing the currency position resulting from the EGSM decision on offering settlements to Customers;
higher net income on financial operations (PLN +146 million y/y), among other things, as a result of higher income on derivatives (including related to CO2 emission allowances) and higher net income on the sale of securities,
net other operating income and expense higher by PLN 133 million y/y, among other things as a result of:
- costs of provisions for returns to Customers on early repayment of consumer and mortgage loans lower by PLN 79 million;
- setting up a provision in 2020 for potential proceedings before the President of the Office for Competition and Consumer Protection of PLN 41 million;
- an increase in income from other operations of the PKO Leasing S.A. Group of PLN 75 million (among other things, the sale of post-lease cars, remarketing, settlement of damages and insurance premiums);
- recognizing a loss in 2021 on the sale of CO2 emission allowances of PLN 60 million which was fully offset with a positive valuation of Customers’ derivatives related to the CO2 emission allowances.

In 2021 operating expenses amounted to PLN 6,174 million and were 3.2% higher y/y. Their level was mainly determined by:

an increase of PLN 226 million, i.e. 7.6% of the costs of employee benefits, mainly as a result of payments of employee awards in respect of the Bank’s results in 2021, higher bonuses and an increase in the number of employees in subsidiaries,
an increase of PLN 79 million, i.e. of 6.3% of tangible costs, mainly as a result of:
- higher IT costs of PLN 35 million, i.e. 9.8% – mainly higher costs related to cloud services and overhauls, servicing and maintenance of the IT infrastructure;

and at the same time lower:

- costs of promotion and advertising of PLN 5 million, i.e. 3.4%;
an increase of PLN 18 million, i.e. of 1.9% of depreciation and amortization expenses, as a result of an increase in amortization of intangible assets related to the computerization of the Bank;
a drop of PLN 186 million, i.e. of 27.9% of the costs of contributions to the Bank Guarantee Fund (BGF) – these costs amounted to PLN 482 million, of which PLN 253 million accounted for a contribution to the mandatory bank restructuring fund (in 2020 BFG costs were at a level of PLN 668 million, of which PLN 318 million accounted for a contribution to the mandatory restructuring fund).

* including net regulatory charges

The effectiveness of operations of the PKO Bank Polski S.A. Group measured with the C/l ratio on an annual basis was 40.6% and improved by 0.3 p.p. y/y in consequence of the faster increase in the net income on business activities (3.9% y/y) than the increase in operating expenses (3.2% y/y).

In 2021, net write-downs and impairment amounted to PLN -1,466 and were PLN 7,833 million more favourable compared with the same period of the prior year, which was due to the following items created in 2020:

allowances on COVID-19 of PLN 1,224 million;
cost of legal risk related to mortgage loans in convertible currencies of PLN 6,552 million.

In 2021 no costs of legal risk were incurred.

Net write-downs on non-financial assets amounted to PLN -46 million and were PLN 370 million more favourable than in the prior year, mainly due to write-downs on non-financial assets recognized in 2020, i.e. write-down on goodwill of Nordea Bank Polska S.A. (corporate CGU) of PLN -116 million, write-down on the value of shares of Bank Pocztowy S.A. of PLN -93 million, allowance on goodwill of PKO Leasing Pro S.A. of PLN -31 million, impairment of activated costs of acquisition of OFE Customers PLN -49 million and impairment of real estates of PLN -62 million.

* includes the cost of legal risk related to mortgage loans in convertible currencies of PLN 6,552 million.

The share of impaired loans amounted to 3.98% as at the end of 2021 (a 0.45 p.p. decrease compared with 2020).

At the end of 2021, the cost of risk amounted to 0.55% and was 0.23 p.p. lower than obtained in the same period of the prior year.

The Bank continues its conservative credit risk management policy of the Bank’s Group and strict monitoring of the receivables portfolio.

Consolidated statement of financial position

As at the end of 2021 the PKO Bank’s Group total assets amounted to over PLN 418 billion and increased by approx. PLN 41 billion as of the beginning of the year. Thus, the PKO Bank’s Group reinforced its leading position in the Polish banking sector.

On the assets side, the Bank’s Group noted, among other things, an increase in financing granted to Customers and securities portfolio, and on the side of sources of finance the increase was determined mainly by the increase in the deposit base.

Major items of the Statement of Financial Position

As at the end of 2021, financing granted to Customers by the Bank’s Group was PLN 247.6 billion which represents an increase of PLN 11.8 billion y/y.

The volume of retail and private banking loans increased by PLN 4.9 billion, including real estate loans by PLN 3.2 billion and consumer loans by PLN 1.7 billion.

In 2021 there was also an increase in corporate loans (PLN +5.4 billion) and loans for companies and enterprises (PLN +1.6 billion).

Retail and private banking loans were the main items in the structure of financing by type, with share of 58.2% of the portfolio as at the end of 2020.

* including lease receivables and non-Treasury bonds (excluding held for trading)

* including repo transactions
** including issues of securities, subordinated liabilities, loans and advances received

The PKO Bank Polski S.A. Group finances its operations from domestic and foreign sources which come from deposits (also on the interbank market), equity and financing from the wholesale market. The financing from the wholesale market includes liabilities in respect of issues of securities, subordinated liabilities and loans and advances received from monetary and non-monetary institutions. The main source of financing the Bank’ Group’s operations are Customer deposits, which represent 82% of all sources of finance.

The Group’s optimum financing structure enables the PKO Bank Polski S.A. Group to fully meet its investment objectives, including capital investments. The Bank’s Group mainly uses own funds from equity and securities’ issues to finance capital investments.

Customer deposits constitute the basic source of financing the Bank’s Group’s assets. As at the end of 2021 amounts due to Customers reached PLN 322.3 billion, which is an increase of PLN 39.9 billion since the beginning of the year. The increase in the deposit base was partly due to an increase in all categories of amounts due to Customers: retail and private banking deposits (PLN +17.7 billion), corporate deposits (PLN +17.3 billion) and deposits from companies and enterprises (PLN +4.9 billion).

* including liabilities in respect of insurance products

In the ageing structure of Customer deposits, the main items are current deposits whose share went up by 2.2 p.p. compared with the end of 2020 and amounted to 83.8%.

* including liabilities in respect of insurance products

As at the end of 2021 long-term sources of financing amounted to PLN 29.0 billion, which means a drop of PLN 8.0 billion since the beginning of the year, which was due:

maturity of the the Bank’s EMTN bonds with a nominal value of EUR 500 million and CHF 400 million;
maturity of the mortgage-covered bonds of Bank Hipoteczny S.A. in PLN totalling PLN 1.3 billion, and in EUR totalling EUR 0.6 billion;
lower level of securitization bonds issued by PKO Leasing S.A. at PLN 0.3 billion;
a drop in the level of own bonds of PKO Bank Hipoteczny S.A. of PLN 0.6 billion with an increase in own bonds of PKO Leasing S.A. of PLN 0.5 billion;
higher value of PKO Finance AB bonds of PLN 0.2 billion due to the foreign currency rate effect;
repayment of loan instalments received from international financial institutions in accordance with the payment schedule,
higher exchange rates of the USD (PLN +0.30) and CHF (PLN +0.18), accompanied by a drop in the exchange rate of the EUR (PLN -0.02).

Group in 2021 Summary of the year

Group in 2021 Financial position of the Bank