STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS	Note	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Cash flows from operating activities
Profit before tax		222,883	(476,770)
Income tax paid / settlement of tax within the Tax Group		47,411	(43,191)
Total adjustments:		2,129,624	4,849,559
Amortization and depreciation		1,662	1,384
Interest recognized in cash flows from investing activities and cash flows from financing activities		753,716	573,075
Change in the balance of:
derivative financial instruments (asset)		452,669	333,489
loans and advances to customers (gross)		1,048,984	3,888,386
securities measured at fair value through other comprehensive income		750	(24,664)
other assets and right-of-use assets		(5,494)	(328)
amounts due to banks		3,726	10,987
derivative financial instruments (liability)		187,522	23,681
amounts due to customers		(1,867)	(1,040)
liabilities in respect of mortgage covered bonds issued		(509,683)	238,909
liabilities in respect of bonds issued		105,128	56,263
allowances for expected credit losses and provisions		7,661	4,973
other liabilities, excluding liabilities in respect of unregistered issues of own shares		8,256	5,437
Other adjustments (including changes in the measurement of derivative instruments recognized in other comprehensive income)		76,594	(260,993)
Net cash from/used in operating activities		2,399,918	4,329,598

Cash flows from investing activities
Inflows from investing activities		256,053	9,924,363
Redemption of securities measured at fair value through other comprehensive income		256,053	9,924,363
Outflows on investing activities		(114,630)	(9,019,678)
Acquisition of securities measured at fair value through other comprehensive income		(109,845)	(9,019,664)
Purchase of intangible assets and property, plant and equipment		(4,785)	(14)
Net cash from/used in investing activities		141,423	904,685

Cash flows from financing activities
Proceeds from issue of mortgage covered bonds		1,750,000	2,358,328
Redemption of mortgage covered bonds issued		(2,859,300)	(3,679,985)
Proceeds from issue of bonds		3,448,728	2,712,478
Redemption of bonds issued		(3,058,500)	(5,001,000)
Inflows related to overdraft facilities		13,876,881	20,641,125
Outflows related to overdraft facilities		(15,202,722)	(23,082,763)
Inflows related to term loans		267,000	1,522,000
Outflows related to term loans		-	-
Dividend paid		-	(87,278)
Repayment of interest on mortgage covered bonds issued, bonds issued and loans obtained		(820,014)	(606,066)
Payments of lease liabilities (IFRS 16)		(1,444)	(1,259)
Net cash from/used in financing activities		(2,599,371)	(5,224,420)

Net change in cash and cash equivalents		(58,030)	9,863
Cash and cash equivalents at the beginning of the period		60,757	50,894
Cash and cash equivalents at the end of the period	40	2,727	60,757

NOTES TO THE FINANCIAL STATEMENTS – CONTENTS

1. Business activities of the Bank

2. Information on the composition of the Bank’s Supervisory Board and Management Board

3. Approval of the financial statements

4. Representations of the Management Board

5. Statement of compliance

6. Going concern

7. Basis for preparation of the financial statements

8. Environmental matters

DESCRIPTION OF MAJOR ACCOUNTING POLICIES

9. Foreign currencies

10. General accounting policies for financial instruments

11. Material changes in accounting policies and explanation of differences between previously published reports

12. New standards and interpretations and their amendments

NOTES TO THE INCOME STATEMENT

13. Interest income and expenses

14. Fee and commission income and expenses

15. Gains/(Losses) on financial transactions

16. Net foreign exchange gains / (losses)

17. Net allowances for expected credit losses

18. Administrative expenses

19. Regulatory charges

20. Tax on certain financial institutions

21. Corporate income tax

NOTES TO THE STATEMENT OF FINANCIAL POSITION

22. Cash and balances with the Central Bank

23. Amounts due from banks

24. Derivative hedging instruments

25. Securities

26. Loans and advances to customers

27. Expected credit losses

28. Intangible assets and property, plant and equipment

29. Other assets

30. Amounts due to banks

31. Amounts due to customers

32. Liabilities in respect of mortgage covered bonds issued

33. Liabilities in respect of bonds issued

34. Other liabilities

35. Provisions

36. Equity and shareholding structure of the Bank

OTHER NOTES TO THE FINANCIAL PART

37. Contingent liabilities granted and received

38. Legal claims

39. Information about leases

40. Notes to the statement of cash flows

41. Related party transactions

42. Fair value of financial assets and financial liabilities

43. Operating segments

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

44. Risk management at PKO Bank Hipoteczny SA

45. Credit risk management

46. Concentration risk management

47. Residual risk management

48. Liquidity risk management

49. Interest rate risk management

50. Derivative instruments risk management

51. Foreign exchange risk management

52. Model risk management

53. Operational risk management

54. Business risk management

55. Compliance risk management

56. Reputation risk management

57. Capital adequacy and the management of capital risk

OTHER NOTES

58. IBOR interest rate benchmark reform

59. Events after the end of the reporting period

GENERAL INFORMATION

1. Business activities of the Bank

PKO Bank Hipoteczny Spółka Akcyjna (“PKO Bank Hipoteczny SA”, “Bank”) with its registered office in Warsaw ul. Puławska 15, 02-515 Warsaw is entered in the Register of Businesses of the National Court Register (KRS) maintained by the District Court in Warsaw, 13th Business Department of the National Court Register with the reference number KRS 0000528469. The Bank was entered to the Register of Businesses on 24 October 2014. The Bank was assigned the statistical number REGON 222181030. Its share capital as at 31 December 2023 was PLN 1,611,300,000 and it was fully paid up.

PKO Bank Hipoteczny is a specialized bank that operates on the basis of the Polish Covered Bonds and Mortgage Banks Act dated 29 August 1997, the Banking Law of 29 August 1997, the Commercial Companies Code and other generally applicable provisions of the law, regulatory recommendation and good corporate governance practices, and the Bank’s Articles of Association.

The Bank specializes in granting residential mortgage loans for individuals. The Bank also acquires receivables in respect of such loans from PKO Bank Polski SA. The Bank acquires loans for its portfolio based on its strategic cooperation with PKO Bank Polski SA.

The Bank’s principal objective, in terms of funding, is to issue mortgage covered bonds, which are to serve as the primary source of long-term funding for residential mortgage loans.

PKO Bank Hipoteczny SA is not a parent or a significant investor in associates and jointly controlled entities. Therefore, PKO Bank Hipoteczny SA does not prepare consolidated financial statements.

The Parent of PKO Bank Hipoteczny SA is PKO Bank Polski SA, in which the State Treasury holds a 29.43% share in the share capital. PKO Bank Polski SA prepares consolidated financial statements for the PKO Bank Polski Group.

2. Information on the composition of the Bank’s Supervisory Board and Management Board

The following table presents the composition of the Supervisory Board of PKO Bank Hipoteczny SA during the period covered by the financial statements:

No.	Name and surname	Position	Date of appointment	Date of ceasing to perform the role
1	Mieczysław Król	Chairman of the Supervisory Board	13.08.2021	-
2	Maciej Brzozowski	Member of the Supervisory Board (from 28.04.2022 to 05.05.2022) / Deputy Chairman of the Supervisory Board (from 05.05.2022)	28.04.2022	-
3	Paweł Metrycki	Deputy Chairman of the Supervisory Board (to 05.05.2022) / Member of the Supervisory Board (from 05.05.2022)	30.03.2019	-
4	Tomasz Baum	Member of the Supervisory Board (independent)	06.12.2022	-
5	Piotr Jaworski	Member of the Supervisory Board	13.02.2023	30.06.2023
6	Lucyna Kopińska	Member of the Supervisory Board	01.09.2019	-
7	Jadwiga Lesisz	Member of the Supervisory Board (independent)	01.09.2019	-
8	Jakub Niesłuchowski	Member of the Supervisory Board	28.04.2022	-
9	Ilona Wołyniec	Member of the Supervisory Board	30.03.2019	30.06.2023

The following changes in the composition of the Supervisory Board took place in the period covered by the financial statements:

■ On 13 February 2023, the Extraordinary Shareholders Meeting of the Bank appointed Mr Piotr Jaworski as a Supervisory Board Member for a joint four-year term of office.

■ On 19 May 2023 the Bank obtained information that members of the Supervisory Board of PKO Bank Hipoteczny SA, Mr. Piotr Jaworski and Ms. Ilona Wołyniec, had decided to resign from running for appointment to the Supervisory Board of PKO Bank Hipoteczny SA for the next term.

■ In connection with the end of the current term of office, on 30 June 2023, the Ordinary General Shareholders Meeting of the Bank appointed:

□ Mr Tomasz Baum;

□ Mr Maciej Brzozowski;

□ Ms Lucyna Kopińska;

□ Mr Mieczysław Król;

□ Ms Jadwiga Lesisz;

□ Mr Paweł Metrycki;

□ Mr Jakub Niesłuchowski

to the Bank’s Supervisory Board for a new joint term of office commencing on 1 July 2023.

The following table presents the composition of the Management Board of PKO Bank Hipoteczny SA during the period covered by the financial statements:

No.		Name and surname		Position		Date of appointment		Date of ceasing to perform the role
1	Katarzyna Kurkowska-Szczechowicz		President of the Management Board (from 27.01.2023) / Vice-President of the Management Board directing the work of the Management Board (from 01.10.2022 to 26.01.2023)		01.10.2022		-
2	Piotr Jaworski		Vice-President of the Management Board		01.07.2023		-
3	Piotr Kochanek		Vice-President of the Management Board		01.01.2019		-
4	Stanisław Skoczylas		Vice-President of the Management Board		06.10.2022		-
5	Katarzyna Surdy		Vice-President of the Management Board		01.10.2021		31.08.2023

The following changes in the composition of the Management Board took place in the period covered by the financial statements:

■ On 27 January 2023, the Polish Financial Supervision Authority issued its unanimous consent to the appointment of Ms Katarzyna Kurkowska-Szczechowicz as President of the Management Board of the Bank.

■ On 19 May 2023, the Bank’s Supervisory Board adopted resolutions on appointing, as of the day following the date of the General Shareholders’ Meeting of the Bank approving the financial statements for the financial year ended 31 December 2022, the following persons for a new joint term of office of the Bank’s Management Board:

□ Ms Katarzyna Kurkowska-Szczechowicz for the position of President of the Bank’s Management Board;

□ Mr Piotr Jaworski for the position of Vice-President of the Bank’s Management Board;

□ Mr Piotr Kochanek for the position of Vice-President of the Bank’s Management Board supervising the management of risks material to the Bank’s operations;

□ Mr Stanisław Skoczylas for the position of Vice-President of the Bank’s Management Board;

□ Mr Katarzyna Surdy for the position of Vice-President of the Bank’s Management Board.

The ordinary General Shareholders Meeting of the Bank approving the financial statements for the financial year ended 31 December 2022 was held on 30 June 2023, therefore a new joint term of office of the Bank’s Management Board began on 1 July 2023.

■ On 28 August 2023, Ms Katarzyna Surdy resigned from membership of the Bank’s Supervisory Board as of the end of 31 August 2023.

3. Approval of the financial statement

These financial statements, having been reviewed with an opinion issued by the Audit and Finance Committee of the Supervisory Board and evaluated by the Supervisory Board on 28 February 2024, were approved by the Bank’s Management Board for publication on 28 February 2024.

4. Representations of the Management Board

The Management Board hereby represents that according to its best knowledge the financial statements and the comparative data have been prepared in accordance with the applicable accounting policies and give a true, fair and clear view of the Bank’s financial position and results of operations.

5. Statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) endorsed by the European Union as at 31 December 2023, and to the extent not governed by the said standards, in accordance with the requirements of the Accounting Act of 29 September 1994 and implementing regulations issued on the basis of the said Act, and the requirements applicable to issuers of securities admitted or seeking admission to trading on a market for official stock exchange listing.

6. Going concern

The financial statements have been prepared on the assumption of the Bank continuing its business activities in the foreseeable future (i.e. in the period of at least 12 months of the date of preparing these financial statements). As at the date of signing these financial statements, the Bank’s Management Board has not identified any facts or circumstances which would indicate any threats to the Bank’s ability to continue as a going concern for at least 12 months of the date of preparing these financial statements as a result of intended or forced discontinuance significantly curtailing the Bank’s existing operations, or environmental issues.

7. Basis for preparation of the financial statements

The financial statements of PKO Bank Hipoteczny Spółka Akcyjna cover the year ended 31 December 2023 and include comparative data for the year ended 31 December 2022. The financial data is presented in thousands of Polish zlotys (PLN), rounded to a thousand, unless otherwise indicated; therefore, discrepancies resulting from the rounding may appear.

These financial statements have been prepared on a fair value basis in respect of assets and liabilities measured at fair value through profit or loss or other comprehensive income, including derivatives and securities measured at fair value through other comprehensive income. Other assets and liabilities are measured in accordance with the accounting policies described in these financial statements.

The Bank recognized all items of costs and income in accordance with the accruals basis, the principles of recognition and measurement of assets and liabilities, and the recognition of impairment allowances. Accounting policies applicable to individual items are presented in the notes to the statement of financial position and to the income statement.

When preparing the financial statements, the Bank makes certain estimates and adopts assumptions which directly affect the financial statements. The estimates and assumptions that are used by the Bank in determining the value of its assets and liabilities, as well as revenues and costs, are made based on historical data and other factors which are available and are considered to be proper in the given circumstances.

Assumptions regarding the future and the data available are used for assessing carrying amounts of assets and liabilities which cannot be unequivocally determined using other sources. In making estimates, the Bank takes into consideration the reasons and sources of the uncertainties that are anticipated at the end of the reporting period. Actual results may differ from the estimates.

Estimates and assumptions made by the Bank are subject to reviews on an on-going basis. Adjustments to estimates are recognized in the periods in which the estimates were adjusted, provided that these adjustments only affect a given period. If the adjustments affect both the period in which the adjustment was made as well as future periods, they are recognized in the period in which the adjustments were made and in future periods.

8. Environmental matters

The Bank has not identified a material impact of environmental matters on the financial statements. Due to the nature of its business activity, the Bank’s direct impact on the natural environment is limited to using natural resources. The Bank’s indirect impact on the environment is realized by designing a product offer in such a way so as to motivate customers to invest in energy-saving properties and by issuing green covered bonds. These issues are discussed in the PKO Bank Hipoteczny SA Directors Report for the year ended 31 December 2023.

There were no material estimates or judgments in the Bank (including those used to calculate the allowances for expected credit losses) related to environmental factors which would have a significant impact on the amounts recognized in these financial statements.

DESCRIPTION OF MAJOR ACCOUNTING POLICIES

The most important accounting policies, estimates and judgements applied when preparing these financial statements have been presented below and in individual Notes to the financial statements.

The accounting policies were applied consistently in all the reporting periods presented.

9. Foreign currencies

9.1 Functional currency and currency of presentation

These financial statements are presented in Polish zlotys which are the Bank’s functional currency and the currency of presentation.

9.2 Transactions and balances in foreign currencies

Transactions expressed in foreign currencies are translated into functional currency based on the exchange rate as at the date of transaction. At the end of each reporting period, the Bank translates:

■ monetary items in foreign currencies – at the closing exchange rate, i.e. the average exchange rate announced by the National Bank of Poland applicable at the end of the reporting period;

■ non-monetary items carried at historical cost in foreign currencies, such as property, plant and equipment – at the mid exchange rate published by the National Bank of Poland as at the date of the transaction;

■ non-monetary items measured at fair value in a foreign currency are translated using the mid exchange rates published by the National Bank of Poland prevailing as at the date of determination of the fair value.

10. General accounting policies for financial instruments

10.1 Recognition of transactions in the books of account

Financial assets and financial liabilities, including forward contracts which result in an obligation or a right to buy or sell a fixed quantity of specific financial instruments at a fixed price at a future date are recognized in the books of account as at the date of the contract being concluded, irrespective of the contractual settlement date.

10.2 Derecognition of financial instruments

Financial assets are derecognized when:

■ The Bank transfers the financial assets to another entity, or

■ they are redeemed, expired or uncollectible (the derecognized assets are charged to respective allowances for expected losses, and if no such allowances had been set up or if their value is less than the value of the financial assets before they are written off, the allowance for expected losses is increased before the assets’ derecognition).

The Bank derecognizes a financial liability (or a part thereof) if and when it is no longer binding, i.e. when a contractual liability has been settled, annulled, or has expired.

10.3 Classification and measurement of financial instruments

10.3.1. Financial instruments classification policies

The Bank classifies its financial assets to one of the following categories:

■ measured at amortized cost;

■ measured at fair value through other comprehensive income;

■ measured at fair value through profit or loss.

Classification as at the date of acquisition or the arising of an asset depends on the business model adopted by the Bank to manage a given group of assets and the contractual characteristics of the cash flows from a single asset or group of assets. The Bank distinguishes the following business models:

■ “held to collect” – a model according to which financial assets which were acquired or arose are held to benefit from contractual cash flows – a model typical for lending operations;

■ “held to collect or sell” – a model according to which financial assets which after their acquisition or arising are held to benefit from contractual cash flows, but which may also be sold – a model typical of liquidity management;

■ residual – other than the model “held to collect”, and “held to collect or sell”.

Financial instruments are classified upon their recognition or significant modification. Changes in the classification of financial assets may result from changes in the business model. Changes in the model are conditioned by changes occurring inside or outside the Bank, or before or after the end of a given type of operation; therefore, such changes do not often occur.

Business model

A business model is selected at initial recognition of financial assets. It is selected at the level of particular groups of assets, in the context of the area of operations in connection with which the financial assets arose or were acquired, and is based, among other things, on:

■ the manner of assessing and reporting financial asset portfolio results;

■ the manner of managing those assets’ risk and policies for remunerating asset managers.

In the “held to collect” business model, the sale of assets is incidental and may only take place in the event of increased credit risk, changes in laws or regulations – to maintain the assumed regulatory capital level, on the terms and conditions described in the management strategies of such portfolios or on the condition that the sale is close to maturity, in the event of a significant risk increase above the level assumed for the given portfolio, material internal restructuring or the acquisition of another business, execution of a contingency or recovery plan or other unforeseeable factors which are beyond the Bank’s control.

Assessment of the characteristics resulting from contractual cash flows

Characteristics resulting from contractual cash flows are assessed by determining, on the basis of a qualitative SPPI test, whether the cash flows resulting from the asset constitute exclusively repayment of the principal and interest on the amount remaining to be repaid. Interest comprises payment for the time value of money and the credit risk associated with the outstanding principal over a specified period, and for other basic risks and costs relating to granting or acquiring the financial asset, as well as a profit margin.

The characteristics resulting from contractual cash flows have no impact on the classification of financial assets if:

■ they would only have an insignificant impact on the contractual cash flows from the asset (de minimis feature);

■ they would impact the contractual cash flows from the instrument only if an extremely rare, atypical and unlikely event occurred (non-genuine feature).

To determine this, the potential impact of characteristics resulting from contractual cash flows in each reporting period and throughout the life cycle of the financial instrument are taken into account.

SPPI tests are conducted for each financial asset in the model “held to collect” or “held to collect and sell” as at the date of initial recognition (including for substantial modifications after re-recognizing the financial asset) and in the case of a change in contractual terms which has an impact on the change of the characteristics of contractual cash flows.

Category of measurement of financial assets at amortized cost

A financial asset (this relates to debt financial assets) is measured at amortized cost if the following conditions are jointly met:

■ a financial asset is “held to collect”;

■ the contractual terms relating to the financial asset cause cash flows to arise in certain periods, which are only the result of repayment of the principal amount and the interest on the principal amount remaining to be repaid (passed SPPI test).

The initial value of an asset measured at amortized cost is adjusted by all commissions and fees which have an impact on its effective return and constitute an integral part of the effective interest rate on the asset (commissions and fees arising as a result of the Bank conducting activities which lead to the origin of the asset). Commissions and fees which affect the effective return on assets and arise after the date of origin of the financial asset lead to changes in future cash flow schedules generated by the assets. Commission for granting and increasing the amount of a mortgage loan in the part which may need to be returned to a customer on early repayment is recognized as an adjustment of the gross carrying amount of that financial instrument and is not recognized using the effective interest rate method until expiry of an expected economic period of the loan. After that time, the adjustment of the gross carrying amount due to a potential refund to a customer is credited to interest income using the straight line method over the remaining life of the financial instruments.

The present value of this category of assets is determined using the effective interest rate used to determine (accrue) interest income generated by the asset in the given period, on a current basis, adjusted for allowances for expected credit losses.

Category of measurement of financial assets at fair value through other comprehensive income

A financial asset (this relates to debt financial assets) is measured at fair value through other comprehensive income if the following conditions are jointly met:

■ the financial asset is held in accordance with the business model aimed at both receiving contractual cash flows and selling the asset; and

The effects of changes in the fair value of such financial assets, until derecognition or reclassification, are recognized in other comprehensive income, with the exception of interest income, net expected credit losses and foreign exchange gains and losses, which are recognized in the income statement. If a financial asset has been derecognized, accumulated gains and losses previously reported in other comprehensive income are reclassified from other comprehensive income to the income statement.

Category of measurement of financial assets at fair value through profit or loss

If financial assets do not meet the aforementioned qualification criteria to be measured at amortized cost or at fair value through other comprehensive income, they are classified to financial assets measured at fair value through profit or loss.

In addition, upon initial recognition, a financial asset may be irrevocably designated as measured at fair value through profit or loss (the option of measurement at fair value through profit or loss), provided that this will eliminate or significantly reduce inconsistency in the measurement or recognition (accounting mismatch). This option is available for debt instruments both under the “held to collect” and “held to collect and sell” models.

Pursuant to IFRS 9, financial assets measured at fair value through profit or loss are presented as follows:

1) held for trading – financial assets which:

■ have been purchased mainly to sell or redeem in the foreseeable future; or

■ upon initial recognition constitute part of a portfolio of specific financial instruments which are managed jointly and for which there is evidence that they currently generate short-term profits; or

■ are derivative financial instruments (with the exception of derivatives which are financial guarantee agreements or designated and effective hedges);

2) financial assets not held for trading, mandatorily measured at fair value through profit or loss – financial assets which have not met the criterion of cash flow characteristics (the SPPI test) (irrespective of a business model);

3) financial assets designated at fair value through profit or loss at initial recognition (the option of measurement at fair value through profit or loss).

Gains or losses on a financial asset measured at fair value through profit or loss are recognized in the income statement.

10.3.2. Change in the classification of financial assets

Financial assets may be reclassified only in the event of a change in the business model relating to an asset or a group of assets resulting from the commencement or discontinuation of a material part of operations. Such changes are incidental. Changes in the classification are recognized prospectively, i.e. without changing the effects of fair value measurement, allowances or accrued interest, which have been recognized to-date.

10.3.3. Change in estimated contractual cash flows – Modifications

A modification is a change in contractual flows of a financial asset based on an annex to the respective contract or changes in the terms and conditions of the contract resulting from legal regulations. A modification may be substantial or non-substantial. Changes in contractual flows resulting from meeting the contractual terms and conditions are not considered to be modifications.

If the contractual cash flows relating to a financial asset are subject to renegotiation or any other modification, and the renegotiation or modification does not lead to derecognition of the given financial asset (“Non-substantial Modification”) the gross carrying amount of the financial asset is recalculated and recognized in the income statement. The gross carrying amount of a financial asset is calculated as the present value of renegotiated or modified contractual cash flows discounted at the original effective interest rate of the financial asset (or effective interest rate adjusted for credit risk in the event of purchased or originated credit-impaired financial assets) or, if applicable under IFRS 9, at the updated effective interest rate. All the costs and fees incurred adjust the carrying amount of the modified financial asset and are amortized over the period to maturity of the modified financial asset.

In some situations, renegotiation or modification of contractual cash flows relating to a financial asset may lead to the derecognition of an existing financial asset. If the modification of a financial asset leads to its derecognition and then to the recognition of a modified financial asset, the modified financial asset is considered to be a new financial asset (“Substantial Modification”). The new asset is recognized at fair value and a new effective interest rate to be applied to the new asset is calculated. If the characteristics of a modified new financial asset (after the execution of an annex) reflect the arm’s length basis, the carrying amount of the financial asset is equal to its fair value.

The assessment of whether modification of financial assets is substantial or non-substantial depends on the qualitative and quantitative criteria being met.

The following Qualitative Criteria have been adopted:

■ change in debtor, with the exception of a change following from the debtor’s death;

■ introducing a contractual feature to the contract which leads to failing the cash flow characteristics test or removal of the feature.

If at least one of these criteria is present, a substantial modification occurs.

The following Quantitative Criteria have been adopted:

■ a 10% test consisting of analysing the changes in the contractual terms of a financial asset resulting in a difference arising between the amount of the future cash flows from the changed financial asset discounted using the original effective interest rate and the amount of corresponding future cash flows from the original financial asset discounted using the same interest rate;

■ an increase in a debtor’s exposure which includes the value of a capital increase and loan commitments exceeding 10% in relation to equity and loan commitments before the increase for each individual exposure;

■ extension of the original lending period in respect of residential loans of more than 4 years.

If the quantitative criterion exceeds 10%, the modification is considered substantial, and if the quantitative criterion is equal to or lower than 10% or the extension of the lending period is not material, the modification is considered non-substantial.

The accounting treatment of gains or losses on derecognition of financial instruments not measured at fair value through profit or loss (including on sale or material modification) and of income/expense on non-substantial modification is presented in Note 10.3.5.

10.3.4. Measurement of purchased or originated credit-impaired financial assets (POCI)

Purchased or originated credit-impaired assets (“POCI”) are debt financial assets measured at amortized cost and measured at fair value through other comprehensive income, i.e. loans and debt securities which were impaired at the moment of their purchase or origin.

Restructuring procedures which result in a substantial modification of impaired contracts are the main source of POCI assets in the Bank.

10.3.5. Recognition of gains/(losses) on derecognition of financial instruments not measured at fair value through profit or loss and income/expense on modification

Gains and losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss (including gains and losses on disposal or substantial modification) are recognized in “Gains/(losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss”.

The result on non-substantial modification of financial assets is recognized in “Interest income”.

Both these income statement items are presented separately for the following financial instruments:

■ measured at fair value through other comprehensive income;

■ measured at amortized cost.

11. Material changes in accounting policies and explanation of differences between previously published reports

None.

12. New standards and interpretations and their amendments

12.1 New standards and interpretations and amendments to the published standards and interpretations which became binding as of 1 January 2023

In connection with the fact that as of 1 January 2023, amendments to IAS 1 Presentation of Financial Statements and IFRS Board Guidelines on accounting policies in practice became effective, an analysis of the policies included in the financial statements has been performed to remove the provisions derived directly from IFRS/IAS and to provide more detailed information specific to the Bank.

Introduction of IFRS 17 Insurance Contracts and amendments to:

■ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, with respect to the definition of estimates;

■ IAS 12 Income Taxes with respect to an obligation to recognize deferred income tax in connection with assets and liabilities arising as part of a single transaction and providing for a temporary relief from the requirement to recognize the deferred tax resulting from the enacted tax law which implements pillar two model rules;

■ IFRS 17 Insurance Contracts

have no material impact on the Bank’s financial statements.

12.2 New standards and interpretations, and amendments thereto, which have been published and have been endorsed by the European Union, but are not yet binding and have not been applied by the Bank

Amendments to:

■ IAS 1 Presentation of Financial Statements, with respect to classification of liabilities as current or non-current;

■ IFRS 16 Leases with respect to lease obligations in sale and leaseback transactions;

■ IAS 7 Statement of Cash Flows and IFRS 7, Financial Instruments: Disclosures with respect to disclosure of information on supplier finance arrangements;

■ IAS 21 The Effects of Changes in Foreign Exchange Rates

will not have a material impact on the Bank’s financial statements.

NOTES TO THE INCOME STATEMENT

13. Interest income and expense

Accounting policies

Interest income and expense include interest, including premium and discount on financial instruments measured at amortized cost, and instruments measured at fair value. Interest income and expense also include fees and commissions received and paid, accounted for using the effective interest rate method, included in the measurement of a financial instrument.

Interest income and expense is recognized using the effective interest rate method, with the exception of:

■ purchased or originated credit-impaired financial assets (POCI assets). Interest income on such assets is calculated on the net carrying amount using the effective interest rate adjusted for credit risk recognized over the life of the asset;

■ financial assets other than POCI, which subsequently became credit-impaired. Interest income on such assets is calculated based on their net carrying amount using the original effective interest rate as at the date of recognition of the impairment indication.

Interest income also includes the result on non-substantial modification of financial assets, including in 2022, in particular, resulting from the statutory loan repayment holidays described in Note 26.

Income and expense on the sale of insurance products linked to loans and advances

The Bank does not offer any insurance products linked to loans and advances.

Financial information

INTEREST INCOME AND INCOME SIMILAR TO INTEREST INCOME	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Interest income recognized under the effective interest rate method, including:	1,641,080	814,458
on financial instruments measured at amortized cost, including:	1,575,532	756,803
loans and advances to customers, including:	1,572,742	753,552
result on non-substantial modification, including recognition of the adjustment relating to a loan repayment holidays	(3,392)	(654,997)
amounts due from banks and on mandatory reserve	2,790	3,251
on instruments measured at fair value through other comprehensive income, including:	65,548	57,655
debt securities	65,548	57,655

Total	1,641,080	814,458
including: interest income on impaired financial instruments	4,107	1,044

INTEREST EXPENSES AND EXPENSES SIMILAR TO INTEREST EXPENSES	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Interest expense on financial instruments measured at amortized cost, including:	(840,734)	(672,427)
loans received and overdraft facility used	(410,059)	(334,495)
mortgage covered bonds issued	(309,767)	(237,289)
bonds issued	(120,742)	(100,556)
lease liabilities	(166)	(87)
Expenses similar to interest expense on instruments measured at fair value through profit or loss, including:	(435,079)	(462,783)
hedging CIRS transactions (net)	(432,680)	(461,326)
hedging IRS transactions (net)	(2,399)	(1,457)

Total	(1,275,813)	(1,135,210)

14. Fee and commission income and expense

Accounting policies

Fee and commission income is recognized when the service has been provided.

Fee and commission income includes one-off fees collected by the Bank for performing tasks not directly related to the origination of loans.

Commission expense includes fees and commissions accrued on a straight-line basis, paid in connection with the funding obtained by the Bank where the timing of the future cash flows is unspecified, for which the effective interest rate cannot be determined, and relating to issue programmes, as well as the costs incurred by the Bank in connection with the preparation by property valuers of appraisal reports on Mortgage Lending Value (MLV) for the purposes of loans granted.

Financial information

FEE AND COMMISSION INCOME	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022
Commission for full or partial prepayment of loans	3,869	7,238
Fees for property inspection	155	287
Fees for property valuation	952	258
Other	1,237	951

Total	6,213	8,734

FEE AND COMMISSION EXPENSE	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022
Preparation by property valuers of appraisal reports on Mortgage Lending Value (MLV)	(2,145)	(693)
Expenses related to bond issue programmes	(2,242)	(1,993)
Expenses related to credit lines	(3,024)	(4,038)
Expenses related to mortgage covered bond issue programmes	(1,342)	(996)
Loan insurance costs	(226)	(943)
Commissions for other operating services	(275)	(290)
Costs of debt collection and intermediation in selling collateral	(70)	(23)

Total	(9,324)	(8,976)

15. Gains/(Losses) on financial transactions

Accounting policies

Gains/(Losses) on financial transactions include gains and losses arising on disposal of financial instruments classified as financial assets/liabilities measured at fair value through profit or loss (both those held for trading and designated as measured at fair value through profit or loss at initial recognition), and the effect of their remeasurement to the fair value.

The item also includes an ineffective part of cash flow hedges for hedging strategies where Interest Rate Swap (IRS) contracts are hedging instruments.

Financial information

GAINS/(LOSSES) ON FINANCIAL TRANSACTIONS	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Gain/(loss) on derivatives, including:	(13)	15
Gain/(loss) on derivative FX instruments related to hedge ineffectiveness	(13)	15

Total	(13)	15

The Bank concludes and maintains IRS derivative instruments solely for hedging purposes.

16. Net foreign exchange gains / (losses)

Accounting policies

Net foreign exchange gains/(losses) include:

■ foreign exchange gains and losses, both realized and unrealized, on measurement of foreign currency assets and liabilities at average exchange rates announced by the National Bank of Poland applicable as at the end of the reporting period;

■ net gains/(losses) on derivative instruments, i.e. Cross Currency Interest Rate Swaps (CIRS) and Foreign Exchange Forwards (FX-Forward) in the speculative period and the ineffective part of cash flow hedges for hedging strategies where CIRS and FX Forward contracts are hedging instruments.

Financial information

NET FOREIGN EXCHANGE GAINS / (LOSSES)	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Result on revaluation	4,169	(495)
Gain/(loss) on derivative instruments (CIRS, FX-Forward) in the speculative period (before designation to hedge accounting and in respect of the final settlement)	(7,773)	853
Gain/(loss) on derivative instruments (CIRS, FX-Forward) related to hedge ineffectiveness	(553)	(20)

Total	(4,157)	338

The Bank concludes and maintains CIRS and FX Forward derivative instruments solely for hedging purposes.

17. Net allowances for expected credit losses

Accounting policies

Accounting policies for recognizing net allowances for expected credit losses are described for specific items in Notes: 27 and 45.2, as appropriate. Net allowances for expected credit losses comprise allowances for loans and advances to customers recognized and released and provisions for loan commitments granted relating to residential loans which have not been drawn in full.

Financial information

NET ALLOWANCES FOR EXPECTED CREDIT LOSSES	Note	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Net allowances for loans and advances to customers	26;27	(7,647)	(5,954)
Net allowances for securities	25;27	75	(111)
Net provisions for loan commitments granted relating to residential loans which have not been drawn in full	35;27	(21)	12

Total		(7,593)	(6,053)

18. Administrative expenses

Accounting policies

Employee benefits

Employee benefits include costs of salaries and wages and social insurance (including provisions for pension and disability benefits, described in detail in Note 35 “Provisions”).

The Bank also recognizes accruals in respect of costs of wages and salaries which are attributable to the current period, but will be incurred in the following period, including bonuses and unused holiday, taking into account all outstanding holiday days.

Employee benefits also include a variable remuneration plan for the top management, which is recognized in part as a liability in respect of payments based on the net book value of phantom shares settled in cash. The plan is accounted for based on IAS 19 Employee Benefits and is described in Section 6.6 of the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2023.

Overheads

These include, among other things: the costs of services relating to supporting tasks and the costs of servicing loans under the Outsourcing Agreement (described in Note 41.1 “Related-party transactions – capital links”), costs of external services resulting from other agreements and IT costs.

Lease payments under short-term and low-value leases are charged to the income statement on a straight line basis over the period of the lease.

Amortization and depreciation

Amortization and depreciation policies are described in detail in Note 28 “Intangible assets and property, plant and equipment”.

Financial information

ADMINISTRATIVE EXPENSES	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Employee benefits	(19,757)	(16,346)
Overheads	(25,957)	(25,611)
Amortization and depreciation, including:	(1,662)	(1,384)
property, plant and equipment	(203)	(69)
right-of-use assets, including:	(1,334)	(1,215)
real estate	(1,134)	(1,008)
cars	(200)	(207)
intangible assets	(125)	(100)

Total	(47,376)	(43,341)

EMPLOYEE BENEFITS	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Wages and salaries, including:	(16,859)	(14,078)
provisions for disability and retirement benefits	(42)	(26)
costs of contributions to the Employee Pension Plan	(390)	(342)
Salary surcharges	(2,434)	(1,936)
Other employee benefits	(464)	(332)

Total	(19,757)	(16,346)

OVERHEADS	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Services relating to supporting operations under the Outsourcing Agreement 1)	(4,615)	(3,924)
Servicing of loans granted and receivables purchased under the Outsourcing Agreement 1)	(14,665)	(15,722)
External services under other contracts	(2,318)	(2,195)
IT costs	(1,800)	(1,700)
Life- and non-life insurance costs	(691)	(621)
Costs related to short-term lease contracts	(0)	(5)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(919)	(714)
Other	(949)	(730)

Total	(25,957)	(25,611)

1) The Outsourcing Agreement is described in Note 41.1 “Transactions with entities related in terms of capital”

19. Regulatory charges

Selected accounting policies

Contribution to BGF	In accordance with IFRIC 21 Levies, the contributions made by the Bank to the Bank Guarantee Fund (BGF) are recognized in the income statement upon the occurrence of the obligating event. The Bank pays a contribution to the bank resolution fund once a year. The contribution is not a tax-deductible expense.
Payments to PFSA	The payments made by the Bank to the Polish Financial Supervision Authority pursuant to IFRIC 21 – Levies are recognized in the income statement upon the occurrence of the obligating event. Both payments (the payment towards the costs of banking supervision and the payment made by the issuer of securities other than shares) are made once a year. The payments to the Polish Financial Supervision Authority are tax-deductible expenses.
Contribution to Borrowers Support Fund	In 2022, a contribution to the Borrowers Support Fund (BSF) resulted from Article 89(1) of the Act of 7 July 2022 on crowdfunding for businesses and aid to borrowers which imposed on lenders an obligation to contribute PLN 1.4 billion in total by 31 December 2022. The contribution to BSF is not a tax-deductible expense.

Financial information

REGULATORY CHARGES	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Contribution to the Bank Guarantee Fund (BGF), including:	(18,520)	(27,553)
resolution fund	(18,520)	(27,553)
Payments to Polish Financial Supervision Authority (PFSA)	(3,128)	(3,246)
Contribution to the Borrowers Support Fund	-	(6,049)
Other taxes and charges	(736)	(479)

Total	(22,384)	(37,327)

20. Tax on certain financial institutions

For banks, when calculating tax on certain financial institutions, the tax base is calculated as the excess of total assets over PLN 4 billion as per the trial balance as at the end of each month. Banks are entitled to reduce the tax base by deducting, among other things, own funds and the value of Treasury securities held. The tax rate is 0.0366% per month and the tax is paid monthly by the 25th day of the month following the month to which the tax relates. The tax paid is not deductible for the purposes of corporate income tax. Tax on certain financial institutions amounted to PLN 57,992 thousand for 2023 and PLN 69,569 thousand for 2022.

21. Corporate income tax

Recognition

Income tax expense comprises current and deferred tax. Current income tax expense is recognized in the income statement. Deferred tax is recognized in the income statement or other comprehensive income, depending on the source of the timing differences.

Tax Group

Based on the contract dated 3 November 2021, PKO Bank Polski SA, as the parent company, jointly with its two subsidiaries: PKO Bank Hipoteczny SA and PKO Leasing SA, extended the functioning of the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Tax Group (“PKO Bank Polski SA Tax Group” or “PGK”) for another 3 tax years, i.e. until 31 December 2024. The contract was registered by the Head of the First Masovian Tax Office in Warsaw.

A tax group is an institution of the tax law stipulated in the provisions of the Corporate Income Tax Act. Its creation means that the income of tax group members will be consolidated for corporate income tax purposes and that solutions will be available facilitating the application of other, in particular operational, regulations of the Corporate Income Tax Act, dedicated specifically to tax groups.

Settlements within PGK

Due to PKO Bank Hipoteczny SA’s participation in the PGK, the current income tax liability is the liability from the PGK parent company, i.e. to PKO Bank Polski SA.

In 2022, the conditions for the PGK to make advance payments on a simplified basis were met, so that each of the subsidiaries forming the PGK remitted to the Parent Company a monthly advance payment of 1/12th of the tax due on the subsidiary’s income as shown in the PGK’s 2020 tax return. Since PKO Bank Hipoteczny SA incurred a tax loss in its final tax return for 2022, the sum of the simplified advances paid to the Parent Company during the year resulted in a corporate income tax receivable.

Due to the fact that PKO Bank Hipoteczny SA expects to incur a tax loss for 2023, it has been agreed that the Bank will not remit monthly tax advances to the parent company of the PGK in 2023.

Financial information

INCOME TAX EXPENSE	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Current income tax1)	17,567	-
Compensation of the tax loss for 2022 from PGK	9,074	-
Adjustment to previous periods	(14)	-
Deferred income tax due to temporary differences	(83,721)	70,952
Income tax reported in the income statement	(57,094)	70,952
Income tax reported in other comprehensive income due to temporary differences	(16,146)	50,747

Total	(73,240)	121,699

1) Resulting from the tax loss incurred in 2023 to be settled with PGK

Non-disclosure of the impact of the current income tax in 2022 is due to the fact that the impact of the tax loss incurred in 2022 was recognized in the deferred tax asset. The tax loss for 2022 was settled with the PGK in the first half of 2023.

RECONCILIATION OF THE EFFECTIVE TAX RATE	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Profit / (loss) before income tax	222,883	(476,770)
Corporate income tax calculated at the statutory tax rate in force in Poland (19%)	(42,348)	90,586
Effect of permanent differences between profit before income tax and taxable income, including:	(14,732)	(19,634)
tax on certain financial institutions	(11,019)	(13,218)
contribution to BGF	(3,519)	(5,235)
contribution to the Borrowers Support Fund	-	(1,149)
PFRON (State Disabled Persons Fund) costs	(14)	(11)
impact of tax costs under Article 15cb of the CIT Act (internal funding)	(95)	48
impact of other permanent differences	(85)	(69)
Effect of other differences between profit before income tax and taxable income, including adjustments to previous periods	(14)	-
Income tax reported in the income statement	(57,094)	70,952

Effective tax rate (excluding adjustments to previous periods)	25.61%	14.88%

NET DEFERRED TAX ASSETS/PROVISION	01.01.2023	Income statement	Other comprehensive income	31.12.2023

Deferred tax provision
Interest accrued on amounts due from banks	68	(14)	-	54
Interest accrued on loans and advances to customers	17,902	(2,614)	-	15,288
Interest accrued and discount on securities	5,534	(142)	-	5,392
Adjustment of the valuation under the straight-line and effective interest rate methods	83,706	(39,475)	-	44,231
Deferred costs	308	(35)	-	273
Difference between the carrying amount and tax value of property, plant and equipment, intangible assets and right-of-use assets (IFRS 16)*	519	592	-	1,111
Valuation of securities	69	-	434	503
Valuation of derivatives	13,480	(4,571)	(5)	8,904
Gross deferred income tax provision	121,586	(46,259)	429	75,756

Deferred income tax assets
Adjustment of the loan portfolio value due to a loan repayment holidays	116,966	(116,966)	-	-
Interest accrued and discount on liabilities	20,953	2,492	-	23,445
Allowances for credit losses	14,892	973	(6)	15,859
Expenses to be paid	1,975	154	-	2,129
Valuation of securities	1,153	-	(1,153)	-
Valuation of derivatives	48,819	(8,020)	(14,558)	26,241
Difference relating to the lease liability (IFRS 16)*	545	556	-	1,101
Tax loss and recognition of tax relief under Art. 15cb	9,169	(9,169)	-	-
Gross deferred income tax assets	214,472	(129,980)	(15,717)	68,775

Net deferred income tax assets / (provision)(presented in the statement of financial position)	92,886	(83,721)	(16,146)	(6,981)

Due to termination of the statutory loan repayment holidays programme introduced in 2022-2023 and described in Note 26, all the temporary differences relating to remeasurement of the portfolio of loans and advances to customers were presented as at 31 December 2023 in the line “Adjustment of the valuation under the straight-line and effective interest rate methods”.

* The amendment to IAS 12 Income Taxes introduced a requirement to recognize the deferred tax on certain transactions which, at initial recognition, give rise to equal taxable and deductible temporary differences, in particular on leases. Starting from 1 January 2023, the Bank applied the amended IAS 12 and, as a result, it recognized the cumulative effect of the initial recognition by increasing the gross deferred tax asset and provision by PLN 516 thousand.

NOTES TO THE STATEMENT OF FINANCIAL POSITION

22. Cash and balances with the Central Bank

Financial information

CASH AND BALANCES WITH THE CENTRAL BANK	31.12.2023	31.12.2022

Current account with the Central Bank (including interest accrued on the mandatory reserve)	306	60,696

Total	306	60,696

Mandatory reserve

In the period from 30 November 2023 to 1 January 2024 and from 30 November 2022 to 1 January 2023, the Bank maintained a mandatory reserve of PLN 56,515 thousand and PLN 58,514 thousand, respectively. As at 31 December 2023, the interest on the mandatory reserve account was 5.75%, and as at 31 December 2022 it was 6.75%.

During the day, the Bank may use the funds deposited in the mandatory reserve account for current cash settlements on the basis of an instruction submitted to the National Bank of Poland, but the Bank must ensure that the monthly average balance is maintained on the account at an appropriate level consistent with the declared mandatory reserve.

23. Amounts due from banks

Financial information

AMOUNTS DUE FROM BANKS	31.12.2023	31.12.2022

Measured at amortized cost
current accounts	2,421	61

Total	2,421	61

Information on exposures to credit risk relating to amounts due from banks is provided in Note 45 “Credit risk management”.

In the periods ended on 31 December 2023 and 31 December 2022, there were no transfers of amounts due from banks between the stages.

24. Derivative hedging instruments

Accounting policies, estimates and assessments

The use of hedge accounting	As at the effective date of IFRS 9, the Bank decided to further apply the provisions of IAS 39 and did not apply IFRS 9 in respect of hedge accounting. In its operations, the Bank uses derivative instruments: CIRS, IRS, FX-Forward for hedging purposes only, in accordance with the risk management strategy described in more detail in Notes 44-46. Such transactions are only concluded with PKO Bank Polski SA and, since they are inter-company transactions, they are excluded from the hedging obligation. All derivatives shall be designated for hedge accounting. The Bank applies hedge accounting when all the following terms and conditions are met: ■ upon setting up the hedge, the hedging relationship, the purpose of risk management by the entity and the hedging strategy were officially established and documented. Such documentation shall contain an identification of the hedging instrument, the hedged item or transaction, the nature of the hedged risk, and the method used by the entity to assess the hedging instrument’s effectiveness in compensating the risk of changes in the fair value of the hedged risk or the cash flows relating to the hedged risk; ■ the hedge is expected to be highly effective in compensating the changes in the fair value or cash flows resulting from the hedged risk, in accordance with the originally documented risk management strategy relating to this specific hedging relationship; ■ in the case of cash flow hedges, the planned hedged transaction must be highly probable and must be exposed to a risk of variability of cash flows which may, as a result, have an impact on the income statement; ■ the hedge effectiveness can be assessed reliably, i.e. the fair value or cash flows relating to the hedged item and resulting from the hedged risk and the fair value of the hedging instrument can be assessed reliably; ■ the hedge is regularly assessed and its high effectiveness is confirmed in all the reporting periods for which the hedge had been designated.
Discontinuation of hedge accounting	The Bank discontinues the application of hedge accounting when: ■ a hedging instrument expires, is sold, terminated or executed (replacing a hedging instrument with another hedging instrument or extending the validity of a hedging instrument is not treated as its expiry or termination, if such replacement or extension is part of a documented hedging strategy adopted by the entity). In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ the hedge no longer meets the criteria of hedge accounting. In such cases, accumulated gains or losses associated with a hedging instrument, which were directly recognized in other comprehensive income over the period in which the hedge was effective, continue to be recognized as a separate item of other comprehensive income and are credited or charged to profit or loss over the period in which the hedged item is recognized in profit or loss; ■ the planned transaction is no longer expected to be executed – in such cases, all accumulated gains or losses relating to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective, are recognized in profit or loss; ■ the hedging relationship has been invalidated.
Fair value hedges	The Bank does not apply fair value hedging.
Cash flow hedges	Cash flow hedges are hedges against cash flow volatility, which may be attributed to a specific type of risk associated with a recognized asset or liability (such as future payments of interest on variable-interest debt (or a part thereof)) or a highly probable planned transaction, and which could affect the income statement. Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective part of the hedge. The ineffective portion of the hedge is recognized in the income statement in the item “Net income from financial instruments measured at fair value” or “Foreign exchange gains (losses)”. Moreover, the amounts recognized directly in other comprehensive income are transferred to the income statement as “Net interest income” or “Net foreign exchange gains (losses)”, respectively, in the period or periods in which the impact of the hedged transaction is recognized in the income statement. The effectiveness tests comprise the valuation of hedging transactions, net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in the case of CIRS and FX-Forward transactions). Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.
Potential sources of ineffectiveness	The main sources of hedge ineffectiveness may include: ■ applying the CVA/DVA adjustment to the hedging instrument only; ■ the existence of minute differences in the structure and the basic parameters of hedging transactions and hedged items. The monthly tests show continuous high effectiveness of the hedging strategies applied. The statutory loan repayment holidays described in Note 26 did not negatively affect the effectiveness of the hedging strategies used.
Estimates and judgements	The fair value of derivative instruments is determined using valuation models based on discounted future cash flows from a given financial instrument. The model variables and assumptions used for valuation purposes comprise, subject to availability, data from observable markets (e.g. deposit rates on the interbank market, foreign exchange rates, IRS transaction quotations). The fair value of derivatives includes the Bank’s own credit risk, DVA (debit value adjustment) as well as counterparty credit risk, CVA (credit value adjustment). The process of calculation of CVA and DVA adjustments includes the selection of a method for determining the spread of the counterparty’s or the Bank’s credit risk (e.g. a market price method based on the continuous price quotations of debt instruments issued by the counterparty, a method of spread implied from Credit Default Swap contracts), an estimation of the probability of default by the counterparty or the Bank and the recovery rate.

Hedging strategies used by the Bank

As at 31 December 2023, the Bank had active relationships as part of two hedging strategies.

Strategy 1	Hedge of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency due to changes in the exchange rate, using CIRS and FX-Forward hedging instruments
Description of the hedging relationship	Elimination of the variability of cash flows generated by mortgage loans in PLN due to changes in the reference interest rates and by mortgage covered bonds denominated in a convertible foreign currency (EUR) due to changes in the exchange rate, using CIRS hedging instruments and a series of FX-Forward transactions in the foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged risk	Forex and interest rate risks.
Hedging instruments	■ CIRS transactions in which the Bank pays a coupon based on a variable PLN rate and receives a coupon based on a fixed rate for the convertible currency (EUR). If PKO Bank Hipoteczny SA is declared bankrupt by the court, the CIRS transactions will automatically be extended by 12 months on the terms and conditions set out on the transaction date; ■ an optional series of FX-Forward transactions in the convertible foreign currency serving as hedges of the FX exposures maturing on the dates of payment of coupons on the mortgage covered bonds in the foreign currency.
Hedged item	■ part of the portfolio of the home loans included in the cover pool of PLN mortgage covered bonds at floating rates. The interest rates on the loans are indexed by the 3M WIBOR rate. The mortgage loan margin is excluded from the hedge; ■ fixed-rate covered bonds issued in a convertible currency.
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2024 – August 2025.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF HEDGING INSTRUMENT SINCE DESIGNATION
			Assets	Liabilities
31.12.2023
CIRS EUR/PLN	EUR fixed leg	1,523,890	55,353	209,290	(543)	(150,880)
	PLN floating leg	6,692,499
FX forward	purchase of EUR	898	30	527	(10)
	sale of EUR	33
31.12.2022
CIRS EUR/PLN	EUR fixed leg	2,023,750	507,982	16,835	(20)	486,944
	PLN floating leg	8,823,403
FX forward	purchase of EUR	1,014	70	46	-
	sale of EUR	222

The average fixed interest rate weighted with the nominal value for CIRS transactions amounted to 1.215% as at 31 December 2023, and 1.071% as at 31 December 2022.

HEDGED ITEMS	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF HEDGED ITEMS SINCE DESIGNATION
31.12.2023
floating rate PLN loans	6,692,499	Loans and advances to customers	150,451
fixed-rate mortgage covered bonds issued in a convertible currency	6,629,635	Liabilities in respect of mortgage covered bonds issued	150,451
31.12.2022
floating rate PLN loans	8,823,403	Loans and advances to customers	(493,546)
fixed-rate mortgage covered bonds issued in a convertible currency	9,494,900	Liabilities in respect of mortgage covered bonds issued	(493,546)

Strategy 2	Hedges against fluctuations in cash flows from variable interest rate loans in PLN, resulting from the risk of changes in interest rates, using IRS transactions
Description of the hedging relationship	Elimination of the risk of cash flow fluctuations generated by the variable interest rate PLN loan portfolio resulting from the risk of changes in interest rates in the period covered by the hedge using IRS transactions.
Hedged risk	Interest rate risk.
Hedging instruments	IRS (Interest Rate Swap) transactions where the Bank pays coupons based on the floating 3M WIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded.
Hedged item	A part of the portfolio of residential loans in PLN indexed to the WIBOR 3M variable rate. The mortgage loan margin is excluded from the hedge;
The period in which cash flows are expected	The period in which cash flows are expected to occur and affect the financial results: January 2024 – August 2028.

DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		CARRYING AMOUNT (FAIR VALUE) OF HEDGING INSTRUMENTS		INEFFECTIVE PORTION OF CASH FLOW HEDGES RECOGNIZED IN THE INCOME STATEMENT	CHANGE IN THE FAIR VALUE OF HEDGING INSTRUMENT SINCE DESIGNATION
DERIVATIVE HEDGING INSTRUMENTS	NOMINAL VALUE OF DERIVATIVE HEDGING INSTRUMENTS		Assets	Liabilities
31.12.2023
IRS PLN	PLN	60,000	-	3,370	(13)	(3,397)
31.12.2022
IRS PLN	PLN	60,000	-	8,783	15	(8,809)

The average fixed interest rate weighted with the nominal value for IRS transactions amounted to 3.49% as at 31 December 2023 and as at 31 December 2022.

HEDGED ITEMS	CARRYING AMOUNT OF HEDGED ITEMS	ITEM OF THE STATEMENT OF FINANCIAL POSITION	CHANGE IN THE FAIR VALUE OF HEDGED ITEMS SINCE DESIGNATION
31.12.2023
floating rate PLN loans	60,000	Loans and advances to customers	3,384
31.12.2022
floating rate PLN loans	60,000	Loans and advances to customers	8,816

Financial information

CARRYING AMOUNT / FAIR VALUE OF DERIVATIVES USED AS CASH FLOW HEDGES	31.12.2023		31.12.2022
	Assets	Liabilities	Assets	Liabilities

IRS	-	3,370	-	8,783
CIRS	55,353	209,290	507,982	16,835
FX forward	30	527	70	46

Total	55,383	213,187	508,052	25,664

The Bank concludes and maintains derivative instruments exclusively for hedging purposes.

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY AS AT 31 DECEMBER 2023	up to 1 month	from 1 to 3 months	from 3 months to 1 year	from 1 to 5 years	after more than 5 years	Total

IRS
PLN fixed - float	-	-	-	-	60,000	60,000
CIRS
float PLN sale	2,101,228	108,500	2,134,741	2,348,030	-	6,692,499
fixed EUR purchase (original currency)	499,460	25,000	499,530	499,900	-	1,523,890
FX forward
PLN sale	2,144	-	1,978	366	-	4,488
EUR purchase (original currency)	440	-	393	65	-	898
PLN purchase	-	-	176	-	-	176
EUR sale (original currency)	-	-	33	-	-	33

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY AS AT 31 DECEMBER 2022	up to 1 month	from 1 to 3 months	from 3 months to 1 year	from 1 to 5 years	after more than 5 years	Total

IRS
PLN fixed - float	-	-	-	-	60,000	60,000
CIRS
float PLN sale	2,130,903	-	-	6,692,500	-	8,823,403
fixed EUR purchase (original currency)	499,860	-	-	1,523,890	-	2,023,750
FX forward
PLN sale	571	-	-	4,488	-	5,059
EUR purchase (original currency)	116	-	-	898	-	1,014
PLN purchase	427	-	487	176	-	1,090
EUR sale (original currency)	91	-	98	33	-	222

CHANGE IN OTHER COMPREHENSIVE INCOME ON CASH FLOW HEDGES AND INEFFECTIVE PORTION OF CASH FLOW HEDGES	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Accumulated other comprehensive income on cash flow hedges at the beginning of the period, gross	(168,427)	92,567
Gains / (Losses) recognized in other comprehensive income during the period	(865,689)	(518,140)
Amounts transferred from other comprehensive income to the income statement during the period	942,281	257,146
- interest income	-	-
- interest expense	435,079	462,783
- net foreign exchange gains/(losses)	507,202	(205,637)
Accumulated other comprehensive income on cash flow hedges as at the end of the period, gross	(91,835)	(168,427)
Tax effect	17,449	32,001
Accumulated other comprehensive income on cash flow hedges at the end of the period, net	(74,386)	(136,426)

Ineffective portion of cash flow hedges recognized in the income statement	(566)	(5)

Impact on other comprehensive income during the period, gross	76,592	(260,994)
Deferred tax on cash flow hedges	(14,552)	49,589
Impact on other comprehensive income during the period, net	62,040	(211,405)

Calculation of estimates

The Bank conducted a simulation to assess the potential impact of changes in the yield curves on the transaction value.

ESTIMATED CHANGE IN VALUE WITH PARALLEL SHIFT OF YIELD CURVES:	31.12.2023		31.12.2022
	scenario +50 b.p.	scenario -50 b.p.	scenario +50 b.p.	scenario -50 b.p.
IRS	(1,052)	1,052	(1,102)	1,102
CIRS	(18,864)	18,864	(55,188)	55,188
FX forward	1	(1)	(1)	1

25. Securities

Accounting policies

The classification and measurement policies in respect of debt securities are described in Note 10.3 “Classification and measurement of financial instruments”.

Financial information

SECURITIES	31.12.2023	31.12.2022

Measured at fair value through other comprehensive income, including:	945,251	1,017,558
issued by the State Treasury, PLN Treasury bonds	945,251	937,645
NBP bills	-	79,913

Allowances for expected credit losses	-	(111)

Securities, net	945,251	1,017,447

SECURITIES BY MATURITY	31.12.2023	31.12.2022

issued by the State Treasury, PLN Treasury bonds
up to 1 month	395,800	-
from 1 to 3 months	-	-
from 3 months to 1 year	-	-
from 1 to 5 years	549,451	937,535

NBP bills
up to 1 month	-	79,912

Total	945,251	1,017,447

SECURITIES BY NOMINAL VALUE AND AVERAGE YIELD	31.12.2023	31.12.2022

issued by the State Treasury, PLN Treasury bonds	922,000	922,000
Average yield	6.54%	7.35%

NBP bills	-	80,000
Average yield	-	6.75%

Information on credit risk exposure in connection with securities is provided in Note 45 “Credit risk management”.

In the periods ended on 31 December 2023 and 31 December 2022, there were no transfers of securities between the stages.

Securities put up as collateral

■ Collateral for liabilities in respect of the payment of contributions to the Bank Guarantee Fund

As at 31 December 2023, the contribution to the bank resolution fund, which is contributed as an obligation to pay to the Bank Guarantee Fund (“BGF”), amounted to PLN 28,659 thousand, and the Bank held Treasury bonds with a carrying value of PLN 34,986 thousand to cover the contribution. As at 31 December 2022, these amounted to PLN 28,659 thousand and PLN 35,028 thousand respectively.

Such funds are treated as assets pledged as collateral for own liabilities, they cannot be pledged or encumbered in any way, are excluded from judicial or administrative enforcement proceedings and do not form part of the estate in bankruptcy.

■ Security for mortgage covered bonds

The amount of additional collateral entered in the Covered Bonds Cover Pool maintained in the form of Treasury securities in PLN was PLN 205,000 thousand as at 31 December 2023 and PLN 285,000 thousand as at 31 December 2022. The disclosure of assets in the Covered Bonds Cover Pool is described in Note 32 “Liabilities in respect of mortgage covered bonds issued”.

26. Loans and advances to customers

Accounting policies

The classification and measurement policies in respect of loans and advances to customers are described in Note 10 “General accounting policies for financial instruments”.

The Bank adjusts the gross carrying amounts of residential loans measured at amortized cost by recognizing the impact of:

 potential refunds of costs to customers relating to anticipated early repayment of active residential loans in the future;

 i.e. the statutory loan repayment holidays recognized in the second half of 2022.

Statutory loan repayment holidays was introduced by the Act of 7 July 2022 on crowdfunding for businesses and aid to borrowers (the “Act”) which contained a package of support measures for mortgage loan customers. In accordance with the provisions of the Act, the statutory loan repayment holidays applied to mortgage loans in Polish zlotys and offered the possibility to suspend the repayment of a loan for 8 months in the years 2022-2023 – for two months each in the third and fourth quarter of 2022 and for one month in each of the four quarters of 2023. The suspension of loan repayment was available to customers if a loan agreement had been concluded before 1 July 2022 and the lending period ended after 31 December 2022; the loan repayment holidays could be used for only one loan. If a customer took advantage of this possibility, the loan instalment repayment schedule was prolonged by the number of months used for the loan repayment holidays.

The Bank believes that the customers’ right to take advantage of the loan repayment suspension constituted a statutory modification of cash flows which occurred on the date of the Act being signed by the President, i.e. on 14 July 2022.

In connection with the above, in the second half of 2022, the Bank adjusted the gross carrying amount of residential loans by reducing interest income. The adjustment was determined as the difference between the present value of estimated cash flows from loan agreements taking into account the suspension of instalment repayment and the present gross carrying amount of the loan portfolio. The calculation of a loss in based on the assumption that approximately 63% of entitled customers having a mortgage loan granted in PLN would decide to avail themselves of the loan repayment holidays (customer participation ratio).

By the end of December 2023, 69.5 thousand of the Bank’s customers filed requests for suspending repayment of one or more instalments of their mortgage loans, which was 61% of the number and 71% of the value of total loans which could be covered by loan repayment holidays. As at 31 December 2023, the total number of applications for suspension was 495 thousand, which represents 54% of the maximum number of instalments to be suspended for all the entitled customers.

In the fourth quarter of 2023, the Bank estimated the actual level of the loss resulting from the loan repayment holidays, taking into account, among other things, empirical data on the customer participation ratio and early repayments made by customers during the period of the statutory loan repayment holidays.

Based on the results of the said analysis, in the fourth quarter of 2023 the Bank reversed a part of the loss on the loan repayment holidays and reduced accordingly the amortization of that loss to date. The cumulative effect recognized in the Bank’s books of account in this respect amounted to PLN 22.3 million (including the reduction of the loss recognized in July 2022 of PLN 27.4 million and the pro rata reduction of the amortization to date of PLN 5 million), which translated to an increase in net interest income and a decrease in the adjustment of the gross carrying amount of the loans.

At present, among the representatives of the political parties represented in the Polish parliament (Sejm), work is under way to agree amendments to the Act on crowdfunding for businesses and aid to borrowers of 7 July 2022 aimed at enabling borrowers to take advantage of the statutory loan repayment holidays also in 2024. Should the amended law enter into force, depending on the solutions adopted, it could materially affect the Bank’s profit or loss for 2024. In accordance with the adopted practice, the Bank believes that the customers’ right to take advantage of the loan repayment holidays in subsequent periods will constitute a statutory modification of cash flows which will occur on the date the amended Act is signed by the President. In connection with the above, the effect of these potential changes has not been recognized in the gross carrying amount of residential loans portfolio and the profit and loss account.

Financial information

LOANS AND ADVANCES TO CUSTOMERS	31.12.2023	31.12.2022

Measured at amortized cost
Residential loans, gross, including:	17,992,474	19,041,457
loans granted	9,848,640	10,074,028
receivables acquired	8,143,834	8,967,429

Allowances for expected credit losses	(93,767)	(86,093)

Loans and advances to customers, net	17,898,707	18,955,364

The division into loans granted and receivables acquired presented in the table above solely relates to the source of obtaining credit. The Bank manages its whole loan portfolio in a uniform manner.

In 2023 the Bank acquired portfolios of receivables of mortgage-secured residential loans amounting to PLN 325,182 thousand under the Framework Receivables Sale Agreement concluded on 17 November 2015 with PKO Bank Polski SA. and in 2022 the Bank did not acquire any receivables portfolios.

Residential loans that have been entered in the Bank’s Cover Pool represent collateral for mortgage covered bonds issued by the Bank, as described in Note 32 “Liabilities in respect of mortgage covered bonds issued”.

Information about exposure to credit risk for loans and advances to customers granted measured at amortized cost is described in Note 27 “Expected credit losses”. Information about the quality of the loan portfolio is presented in Note 45.4 “Forecasting and monitoring of credit risk”.

27. Expected credit losses

Estimates and judgements

The allowance for expected credit losses is recognized in the financial statements as follows:

■ Financial assets measured at amortized cost: the allowance decreases the gross carrying amount of the financial asset; changes in the allowance are recognized in the income statement;

■ Off-balance sheet liabilities granted of a credit nature: the allowance is presented as a provision in liabilities; changes in allowances are recognized in the income statement;

■ Financial instruments measured at fair value through other comprehensive income: the carrying amount of an asset carried at fair value takes into account the amount of the allowances; measurement changes are however each time divided into the component related to impairment – recognized in the income statement – and the component related to other fair value measurement changes – recognized in other comprehensive income.

The information about the methodology for the assessment of expected credit losses and calculation of the impairment of credit exposures is provided in Note 45.2 “Allowances for expected credit losses”.

Financial information

Financial assets and allowances for expected credit losses

FINANCIAL ASSETS AND ALLOWANCES FOR EXPECTED CREDIT LOSSES AS AT 31 DECEMBER 2023	Assets with no significant increase in credit risk since initial recognition (Stage 1)		Assets with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)		Credit-impaired assets (Stage 3)		Total		including POCI
	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances

Measured at fair value through other comprehensive income
securities	945,251	-	-	-	-	-	945,251	-	-	-
issued by the State Treasury, PLN Treasury bonds	945,251	-	-	-	-	-	945,251	-	-	-
NBP bills	-	-	-	-	-	-	-	-	-	-
Total	945,251	-	-	-	-	-	945,251	-	-	-

Measured at amortized cost
amounts due from banks	2,421	-	-	-	-	-	2,421	-	-	-
loans and advances to customers	17,109,703	(10,036)	810,685	(48,245)	72,086	(35,486)	17,992,474	(93,767)	1,281	351
residential loans	17,109,703	(10,036)	810,685	(48,245)	72,086	(35,486)	17,992,474	(93,767)	1,281	351
loans granted	9,273,633	(6,219)	537,691	(32,346)	37,316	(18,243)	9,848,640	(56,808)	590	57
receivables acquired	7,836,070	(3,817)	272,994	(15,899)	34,770	(17,243)	8,143,834	(36,959)	691	294
other financial assets	1,072	-	-	-	-	-	1,072	-	-	-
Total	17,113,196	(10,036)	810,685	(48,245)	72,086	(35,486)	17,995,967	(93,767)	1,281	351

FINANCIAL ASSETS AND ALLOWANCES FOR EXPECTED CREDIT LOSSES AS AT 31 DECEMBER 2022	Assets with no significant increase in credit risk since initial recognition (Stage 1)		Assets with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)		Credit-impaired assets (Stage 3)		Total		including POCI
	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances	Gross amount	Allowances

Measured at fair value through other comprehensive income
securities	1,017,558	(111)	-	-	-	-	1,017,558	(111)	-	-
issued by the State Treasury, PLN Treasury bonds	937,645	(110)	-	-	-	-	937,645	(110)	-	-
NBP bills	79,913	(1)	-	-	-	-	79,913	(1)	-	-
Total	1,017,558	(111)	-	-	-	-	1,017,558	(111)	-	-

Measured at amortized cost
amounts due from banks	61	-	-	-	-	-	61	-	-	-
loans and advances to customers	18,163,173	(12,586)	816,618	(45,096)	61,666	(28,411)	19,041,457	(86,093)	1,313	371
residential loans	18,163,173	(12,586)	816,618	(45,096)	61,666	(28,411)	19,041,457	(86,093)	1,313	371
loans granted	9,511,024	(7,447)	532,259	(28,880)	30,745	(14,579)	10,074,028	(50,906)	602	221
receivables acquired	8,652,149	(5,139)	284,359	(16,216)	30,921	(13,832)	8,967,429	(35,187)	711	150
other financial assets	98	-	-	-	-	-	98	-	-	-
Total	18,163,332	(12,586)	816,618	(45,096)	61,666	(28,411)	19,041,616	(86,093)	1,313	371

Loan commitments and provisions

LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2023	Nominal amount of loan commitments with no significant increase in credit risk since initial recognition (Stage 1)		Loan commitments with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)		Credit-impaired loan commitments (Stage 3)		Total
LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2023	Nominal amount	Provisions	Nominal amount	Provisions	Nominal amount	Provisions	Nominal amount	Provisions

Loan commitments	90,802	(35)	120	(3)	-	-	90,922	(38)

LOAN COMMITMENTS AND PROVISIONS AS AT 31 DECEMBER 2022	Nominal amount of loan commitments with no significant increase in credit risk since initial recognition (Stage 1)		Loan commitments with a significant increase in credit risk since initial recognition, but not credit-impaired (Stage 2)			Credit-impaired loan commitments (Stage 3)			Total
	Nominal amount	Provisions	Nominal amount	Provisions		Nominal amount		Provisions	Nominal amount		Provisions

Loan commitments	37,298	(17)	-		-	-	-		37,298	(17)

Changes in gross carrying amount of financial instruments and changes in allowances for expected credit losses

CHANGES IN GROSS CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS IN 2023	Carrying amount, gross as at 01.01.2023	Increase due to granting and purchase of loans and accrual of interest	Changes due to disbursement of tranches and interest capitalization	Decrease due to repayment / redemption	Changes due to non-substantial modification, net	Decrease due to derecognition	Changes on loans for which the loss recognition horizon was lengthened from 12 months to lifetime	Changes on loans for which the loss recognition horizon was shortened from lifetime to 12 months	Gross carrying amount decrease in connection with a partial write-down	Transfers to S1	Transfers to S2	Transfers to S3	Other changes, incl. valuation	Carrying amount, gross as at 31.12.2023

Measured at fair value through other comprehensive income
securities (S1)	1,017,558	109,845	-	(256,053)	-	-	-	-	-				73,901	945,251
Total	1,017,558	109,845	-	(256,053)	-	-	-	-	-				73,901	945,251

Measured at amortized cost
amounts due from banks (S1)	61	2,421	-	(61)	-	-	-	-	-				-	2,421
loans and advances to customers	19,041,457	1,051,371	49,883	(2,055,445)	(3,396)	(39,324)	(4,652)	(47,517)	97				-	17,992,474
residential loans	19,041,457	1,051,371	49,883	(2,055,445)	(3,396)	(39,324)	(4,652)	(47,517)	97				-	17,992,474
Stage 1 (S1)	18,163,173	1,049,378	48,977	(2,025,607)	(3,424)	(37,468)	(4,652)	-	(67)	1,288,570	(1,359,896)	(9,281)	-	17,109,703
Stage 2 (S2)	816,618	1,646	830	(15,743)	(26)	(1,440)	-	(46,968)	195	(1,288,187)	1,383,858	(40,098)	-	810,685
Stage 3 (S3)	61,666	347	76	(14,095)	54	(416)	-	(549)	(31)	(383)	(23,962)	49,379	-	72,086
of which POCI	1,313	172	4	(222)	-	-	-	-	14	-	-	-	-	1,281
other financial assets (S1)	98	1,072	-	(98)	-	-	-	-	-				-	1,072
Total	19,041,616	1,054,864	49,883	(2,055,604)	(3,396)	(39,324)	(4,652)	(47,517)	97				-	17,995,967

CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON FINANCIAL INSTRUMENTS IN 2023	As at 01.01.2023	Increase due to granting and purchase of loans and accrual of interest	Changes due to changes in credit risk (net), including total repayment	Changes due to non-substantial modification, net	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Decrease in connection with a partial write-down	Transfers to S1	Transfers to S2	Transfers to S3	Other changes	As at 31.12.2023

Measured at fair value through other comprehensive income
securities (S1)	111	-	(75)	-	-	-	-	-				(36)	-
Total	111	-	(75)	-	-	-	-	-				(36)	-

Measured at amortized cost
amounts due from banks (S1)	-	-	-	-	-	-	-	-				-	-
loans and advances to customers	86,093	659	(2,414)	(96)	(258)	57,167	(47,410)	26				-	93,767
residential loans	86,093	659	(2,414)	(96)	(258)	57,167	(47,410)	26				-	93,767
Stage 1 (S1)	12,586	477	(2,198)	68	(21)	57,167	-	(87)	4,916	(59,636)	(3,236)	-	10,036
Stage 2 (S2)	45,096	36	15,916	(51)	(21)	-	(47,089)	195	(4,916)	60,556	(21,477)	-	48,245
Stage 3 (S3)	28,411	146	(16,132)	(113)	(216)	-	(321)	(82)	-	(920)	24,713	-	35,486
of which POCI	(371)	57	8	-	-	-	-	(45)	-	-	-	-	(351)
other financial assets (S1)	-	-	-	-	-	-	-	-				-	-
Total	86,093	659	(2,414)	(96)	(258)	57,167	(47,410)	26				-	93,767

CHANGES IN GROSS CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS IN 2022	Carrying amount, gross as at 01.01.2022	Increase due to granting and purchase of loans	Changes due to disbursement of tranches and interest capitalization	Decrease due to repayment / redemption	Changes due to non-substantial modification, net 1	Decrease due to derecognition	Changes on loans for which the loss recognition horizon was lengthened from 12 months to lifetime	Changes on loans for which the loss recognition horizon was shortened from lifetime to 12 months	Gross carrying amount decrease in connection with a partial write-down	Transfers to S1	Transfers to S2	Transfers to S3	Other changes, incl. valuation	Carrying amount, gross as at 31.12.2022

Measured at fair value through other comprehensive income
securities (S1)	1,870,697	9,019,664	-	(9,924,363)	-	-	-	-	-				51,561	1,017,558
Total	1,870,697	9,019,664	-	(9,924,363)	-	-	-	-	-				51,561	1,017,558

Measured at amortized cost
amounts due from banks (S1)	532	61	-	(532)	-	-	-	-	-				-	61
loans and advances to customers	22,929,844	1,317,687	50,751	(3,749,517)	(654,893)	(748,985)	(11,078)	(92,532)	180				-	19,041,457
residential loans	22,929,844	1,317,687	50,751	(3,749,517)	(654,893)	(748,985)	(11,078)	(92,532)	180				-	19,041,457
Stage 1 (S1)	21,068,222	886,867	47,526	(3,644,843)	(295,558)	(676,745)	(11,078)	-	(6)	2,563,878	(1,766,138)	(8,952)	-	18,163,173
Stage 2 (S2)	1,804,098	429,095	3,195	(94,894)	(358,586)	(69,692)	-	(91,259)	41	(2,563,878)	1,787,560	(29,062)	-	816,618
Stage 3 (S3)	57,368	415	27	(9,780)	(717)	(2,548)	-	(1,273)	145	-	(21,422)	38,014	-	61,666
of which POCI	156	1,310	3	(124)	(32)	-	-	-	-	-	-	-	-	1,313
other financial assets (S1)	26	98	-	(26)	-	-	-	-	-				-	98
Total	22,930,402	1,317,846	50,751	(3,750,075)	(654,893)	(748,985)	(11,078)	(92,532)	180				-	19,041,616

1 Including due to the statutory loan repayment holidays described in Note 26

CHANGES IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON FINANCIAL INSTRUMENTS IN 2022	As at 01.01.2022	Increase due to granting and purchase of loans	Changes due to changes in credit risk (net), including total repayment	Changes due to non-substantial modification, net	Decrease due to derecognition	Changes due to lengthening the loss recognition horizon from 12 months to lifetime	Changes due to shortening the loss recognition horizon from lifetime to 12 months	Decrease in connection with a partial write-down	Transfers to S1	Transfers to S2	Transfers to S3	Other changes	As at 31.12.2022

Measured at fair value through other comprehensive income
securities (S1)	-	1	110	-	-	-	-	-				-	111
Total	-	1	110	-	-	-	-	-				-	111

Measured at amortized cost
amounts due from banks (S1)	-	-	-	-	-	-	-	-				-	-
loans and advances to customers	81,245	1,399	10,310	(3,972)	(2,240)	40,407	(39,950)	(1,106)				-	86,093
residential loans	81,245	1,399	10,310	(3,972)	(2,240)	40,407	(39,950)	(1,106)				-	86,093
Stage 1 (S1)	8,925	297	(1,147)	2,420	(229)	40,407	-	(5)	5,420	(40,707)	(2,795)	-	12,586
Stage 2 (S2)	48,803	1,102	17,141	(4,487)	(1,166)	-	(39,727)	(10)	(5,420)	41,351	(12,491)	-	45,096
Stage 3 (S3)	23,517	-	(5,684)	(1,905)	(845)	-	(223)	(1,091)	-	(644)	15,286	-	28,411
of which POCI	(18)	(134)	(108)	(111)	-	-	-	-	-	-	-	-	(371)
other financial assets (S1)	-	-	-	-	-	-	-	-				-	-
Total	81,245	1,399	10,310	(3,972)	(2,240)	40,407	(39,950)	(1,106)				-	86,093

Calculation of estimates

The Bank performed a simulation of a change in allowances for expected credit losses resulting from a deterioration or improvement in risk parameters.

ESTIMATED CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES DUE TO A DETERIORATION OR IMPROVEMENT IN RISK PARAMETERS, INCLUDING:1	31.12.2023		31.12.2022
	scenario +10%	scenario -10%	scenario +10%	scenario -10%

changes in probability of default	4,021	(5,124)	4,616	(5,645)
changes in rates of recovery	(11,470)	11,492	(12,413)	12,434

1 in plus – an increase in allowances, in minus – a decrease in allowances

The table below presents the sensitivity of allowances for expected credit losses as estimated as at 31 December 2023 and 31 December 2022, calculated as the change in allowances for expected credit losses on non-impaired exposures as a result of the materialization of various macroeconomic scenarios. Projections of these macroeconomic scenarios, including the adopted values of specific macroeconomic parameters, are presented in Note 45.2 “Allowances for expected credit losses”.

ESTIMATED CHANGE IN ALLOWANCES FOR EXPECTED CREDIT LOSSES ON NON-IMPAIRED EXPOSURES AS A RESULT OF THE MATERIALIZATION OF VARIOUS MACROECONOMIC SCENARIOS1	31.12.2023		31.12.2022
	optimistic	pessimistic	optimistic	pessimistic

Stage 1	(2,912)	2,631	(4,714)	2,745
Stage 2	(8,998)	7,763	(13,818)	10,236

Total	(11,910)	10,394	(18,532)	12,981

1 in plus – an increase in allowances, in minus – a decrease in allowances

28. Intangible assets and property, plant and equipment

Accounting policies and estimates

Intangible assets

Intangible assets comprise identifiable non-monetary assets, which do not have a physical form.

Recognition of intangible assets:

■ software – computer software licences acquired are recognized at the amount of the costs incurred on their purchase and preparation for use, taking into account amortization and impairment.

■ other intangible assets acquired by the Bank are recognized at the purchase price or cost of manufacture less amortization and total impairment allowances;

■ the costs of completed development projects are recognized in intangible assets when economic benefits are obtained and specific conditions are satisfied, i.e. if there is a possibility and intention to complete and use the asset, appropriate technical and financial means are available to complete the work and use the asset and the amount of expenditure incurred during development work, which can be allocated to the development of intangible assets, can be assessed reliably.

Property, plant and equipment

Property, plant and equipment are recognized at the end of a reporting period at the purchase price or cost of manufacture less depreciation and impairment.

Right-of-use assets, which are measured at cost, are also recognized in this category. The cost of a right-of-use asset includes:

■ the amount of the initial measurement of the lease liability;

■ any lease payments made at or before the commencement date, less any lease incentives received;

■ any initial direct costs incurred by the lessee in connection with concluding the lease agreement;

■ an estimate of the costs to be incurred by the lessee under the contract in connection with the obligation to dismantle and remove the underlying asset or restore the underlying asset.

Expenditure

The carrying amount of property, plant and equipment and intangible assets is increased by the additional expenditure incurred over the period of their use.

Financial information

Intangible assets

FOR THE PERIOD FROM 1 JANUARY 2023 TO 31 DECEMBER 2023	Software	Other, including expenditure	Total

Gross carrying amount at the beginning of the period	8,665	-	8,665
Purchases	256	20	276
Gross carrying amount at the end of the period	8,921	20	8,941

Accumulated amortization at the beginning of the period	(8,599)	-	(8,599)
Amortization charge	(124)	(1)	(125)
Accumulated amortization at the end of the period	(8,723)	(1)	(8,724)

Net carrying amount at the beginning of the period	66	-	66
Net carrying amount at the end of the period	198	19	217

FOR THE PERIOD FROM 1 JANUARY 2022 TO 31 DECEMBER 2022	Software	Other, including expenditure	Total

Gross carrying amount at the beginning of the period	8,665	-	8,665
Purchases	-	-	-
Gross carrying amount at the end of the period	8,665	-	8,665

Accumulated amortization at the beginning of the period	(8,499)	-	(8,499)
Amortization charge	(100)	-	(100)
Accumulated amortization as at the end of the period	(8,599)	-	(8,599)

Net carrying amount at the beginning of the period	166	-	166
Net carrying amount at the end of the period	66	-	66

Property, plant and equipment

FOR THE PERIOD FROM 1 JANUARY 2023 TO 31 DECEMBER 2023	Property, plant and equipment under construction	Leasehold improvements	Plant and machinery	Right-of-use assets, including:		Other	Total
FOR THE PERIOD FROM 1 JANUARY 2023 TO 31 DECEMBER 2023	Property, plant and equipment under construction	Leasehold improvements	Plant and machinery	real estate	cars	Other	Total

Gross carrying amount at the beginning of the period	-	34	1,007	6,226	904	403	8,574
Purchases	498	3,937	39	-	-	33	4,507
Transfers	(399)	-	209	-	-	190	-
Disposal and sale	-	-	(25)	-	-	-	(25)
Lease contracts concluded	-	-	-	4,572	113	-	4,685
Modification/ indexation of lease contracts	-	-	-	(352)	-	-	(352)
Termination of lease contracts	-	-	-	-	(147)	-	(147)
Gross carrying amount at the end of the period	99	3,971	1,230	10,446	870	626	17,242

Accumulated depreciation as at the beginning of the period	-	(24)	(923)	(3,884)	(532)	(403)	(5,766)
Depreciation charge	-	(102)	(91)	(1,134)	(200)	(10)	(1,537)
Disposal and sale	-	-	25	-	-	-	25
Termination of lease contracts	-	-	-	-	140	-	140
Accumulated depreciation as at the end of the period	-	(126)	(989)	(5,018)	(592)	(413)	(7,138)

Net carrying amount at the beginning of the period	-	10	84	2,342	372	-	2,808
Net carrying amount at the end of the period	99	3,845	241	5,428	278	213	10,104

FOR THE PERIOD FROM 1 JANUARY 2022 TO 31 DECEMBER 2022	Property, plant and equipment under construction	Leasehold improvements	Plant and machinery	Right-of-use assets, including:		Other	Total
FOR THE PERIOD FROM 1 JANUARY 2022 TO 31 DECEMBER 2022	Property, plant and equipment under construction	Leasehold improvements	Plant and machinery	real estate	cars	Other	Total

Gross carrying amount at the beginning of the period	-	34	1,075	6,212	799	403	8,523
Purchases	-	-	14	-	-	-	14
Disposal and sale	-	-	(82)	-	-	-	(82)
Lease contracts concluded	-	-	-	-	197	-	197
Modification/ indexation of lease contracts	-	-	-	14	105	-	119
Termination of lease contracts	-	-	-	-	(197)	-	(197)
Gross carrying amount at the end of the period	-	34	1,007	6,226	904	403	8,574

Accumulated depreciation as at the beginning of the period	-	(21)	(941)	(2,876)	(511)	(402)	(4,751)
Depreciation charge	-	(3)	(64)	(1,008)	(207)	(1)	(1,283)
Disposal and sale	-	-	82	-	-	-	82
Termination of lease contracts	-	-	-	-	186	-	186
Accumulated depreciation as at the end of the period	-	(24)	(923)	(3,884)	(532)	(403)	(5,766)

Net carrying amount at the beginning of the period	-	13	134	3,336	288	1	3,772
Net carrying amount at the end of the period	-	10	84	2,342	372	-	2,808

The item “Other” comprises mainly the Bank’s office furniture.

Legal limitations relating to the Bank’s title

In the years 2023 and 2022, there were no intangible assets or property, plant and equipment items to which the Bank’s legal title would be limited or pledged as collateral for the Bank’s liabilities.

29. Other assets

Accounting policies

Financial assets recognized in this item are measured at amounts due, including interest on such assets (if any) and taking into account allowances for expected credit losses. Non-financial assets are measured in accordance with the principles applicable to the specific categories of assets recognized in this item.

Financial information

OTHER ASSETS	31.12.2023	31.12.2022

Prepayments and deferred costs, including:	4,674	4,487
deferred costs relating to overdraft facilities	920	833
deferred costs relating to bond issue programmes 1)	458	133
deferred costs relating to mortgage covered bonds issue programmes 1)	56	653
other prepayments and deferred costs	3,240	2,868
Deferred commissions and costs relating to loans granted, in the part corresponding to unpaid principal and adjustments of deferred commission income on loans granted	220	213
Settlements relating to appraisal reports on Mortgage Lending Value (MLV) *	1,004	71
Settlements with the State Budget	0	1
Other *	68	27

Total	5,966	4,799
including financial assets – marked with * above	1,072	98

* Financial assets are marked with this symbol.

1) Costs associated with issue programmes relate to the issue programmes as a whole and cannot be allocated to the individual issues executed as part of the programmes.

30. Amounts due to banks

Accounting policies

Amounts due to banks are measured at amortized cost using the effective interest rate method. If a schedule of future cash flows cannot be determined for a financial liability (and, therefore, the effective interest rate cannot be determined), the liability is measured at the amount due.

Financial information

AMOUNTS DUE TO BANKS	31.12.2023	31.12.2022

Measured at amortized cost
overdraft within the limit available	1,653	2,142
liability related to overdraft facilities	2,570,177	3,893,095
liability related to term loans	2,008,914	1,740,623

Total	4,580,744	5,635,860

Liabilities in respect of loans

LENDER	Effective date of agreement	Maturity date	Amount of loan granted as at 31 December 2023	Amount of loan drawn as at 31 December 2023	Liability as at 31 December 2023

PKO Bank Polski SA	29.10.2015	29.10.2025	2,000,000	2,000,000	1,652,544
PKO Bank Polski SA	02.02.2017	03.02.2026	2,000,000	2,000,000	3,133
PKO Bank Polski SA	10.07.2019	01.07.2025	4,178,000	4,178,000	914,500
PKO Bank Polski SA 1)	10.09.2020	22.03.2026	210,000	210,000	210,696
PKO Bank Polski SA 2)	11.02.2022	22.12.2027	1,522,000	1,522,000	1,530,143
PKO Bank Polski SA 3)	03.01.2023	03.01.2030	600,000	600,000	268,075

Total			10,510,000	10,510,000	4,579,091

1) The period during which the tranches may be used expired on 10 September 2021. Therefore, the amount of the loan granted and made available as at 31 December 2023 was presented in the amount of the tranches used, and the maturity date was shown for the last tranche drawn.

2) The period during which the 5-year tranches may be used expired on 11 February 2023, therefore the maturity date of the last tranche drawn was specified as the maturity date, and the used amount of loan was presented as the amount of loan granted.

3) The period during which the 5-year tranches may be used expires on 3 January 2025, therefore the maturity date of the tranche that would be would be made available as the last one was specified as the maturity date.

31. Amounts due to customers

Accounting policies

Amounts due to customers are measured at amortized cost. Amounts due to customers comprise solely funds on non-interest bearing technical account dedicated to loan servicing. The Bank does not accept deposits.

Financial information

AMOUNTS DUE TO CUSTOMERS	31.12.2023	31.12.2022

Measured at amortized cost
amounts due to retail customers – funds on the non-interest bearing technical account dedicated to loan servicing	3,710	5,577

Total	3,710	5,577

32. Liabilities in respect of mortgage covered bonds issued

Accounting policies

Liabilities in respect of mortgage covered bonds issued are measured at amortized cost using the effective interest rate method.

Financial information

LIABILITIES IN RESPECT OF MORTGAGE COVERED BONDS ISSUED	31.12.2023	31.12.2022

Measured at amortized cost
mortgage-covered bonds, including issued under:	10,444,645	12,063,629
International Mortgage Covered Bonds Issue Programme	8,433,219	9,551,280
National Mortgage Covered Bonds Issue Programme	2,011,426	2,512,349

Total	10,444,645	12,063,629

REPAYMENT PERIOD OF MORTGAGE COVERED BONDS ISSUED	31.12.2023	31.12.2022

up to 1 month	2,189,197	2,358,617
from 1 to 3 months	109,510	-
from 3 months to 1 year	3,391,816	500,423
from 1 to 5 years	4,754,122	9,143,934
after more than 5 years	-	60,655

Total	10,444,645	12,063,629

In 2023, under the International Mortgage Covered Bonds Issue Programme for the European market, the Bank conducted:

■ on 2 February 2023, a subscription for series 9 mortgage covered bonds in PLN with a nominal value of PLN 500,000 thousand to be issued on 9 February 2023 and maturing on 9 February 2026. The securities bear a floating interest rate of WIBOR 3M+ 0.85 p.p. margin;

■ on 21 June 2023, a subscription for series 10 mortgage covered bonds in PLN with a nominal value of PLN 500,000 thousand to be issued on 28 June 2023 and maturing on 29 June 2026. The securities bear a floating interest rate of WIBOR 3M+ 0.78 p.p. margin;

■ on 25 October 2023, a subscription for series 11 mortgage covered bonds in PLN with a nominal value of PLN 750,000 thousand to be issued on 2 November 2023 and maturing on 2 November 2026. The securities bear a floating interest rate of WIBOR 3M+ 0.78 p.p. margin

Moreover, in 2023, the Bank redeemed mortgage covered bonds with a value of PLN 500,000 thousand and EUR 500,000 thousand. In 2022, the Bank issued mortgage covered bonds with a nominal value of EUR 500,000 thousand and redeemed mortgage covered bonds with a value of PLN 600,000 thousand and EUR 654,000 thousand.

Domestic issues of mortgage covered bonds are listed on the parallel market of the Warsaw Stock Exchange (WSE PM) and on the regulated market of the BondSpot platform (BondSpot), and issues of foreign mortgage covered bonds are listed on the Luxembourg Stock Exchange (LuxSE) and the parallel market of the Warsaw Stock Exchange.

As at 31 December 2023, the PLN- and EUR-denominated mortgage covered bonds issued by the Bank were rated by Moody’s Investors Service at Aa1, i.e. the highest level achievable by Polish securities. The limit for the ratings is the Polish country ceiling for debt instruments (i.e. the highest level achievable in Poland), which currently is at the level of Aa1.

The total nominal value of the issued mortgage covered bonds in trading as at 31 December 2023 amounted to PLN 10,370,700 thousand and PLN 11,987,048 as at 31 December 2022.

Mortgage covered bonds issued and outstanding as at 31 December 2023

ISIN	Currency	Nominal amount	Interest rate as 31.12.2023	Rate + margin / fixed rate	Issue date	Redemption date	Quotation market

XS1559882821	EUR	25,000	0.82%	fixed rate	02.02.2017	02.02.2024	LuxSE
XS1690669574	EUR	500,000	0.75%	fixed rate	27.09.2017	27.08.2024	LuxSE, WSE parallel market
XS1795407979	EUR	500,000	0.75%	fixed rate	22.03.2018	24.01.2024	LuxSE, WSE parallel market
PLPKOHP00074	PLN	700,000	6.16%	WIBOR + 0.49 p.p.	27.04.2018	25.04.2024	Bondspot, WSE parallel market
PLPKOHP00090	PLN	500,000	6.29%	WIBOR + 0.62 p.p.	27.07.2018	25.07.2025	Bondspot, WSE parallel market
PLPKOHP00108	PLN	60,000	3.488%	fixed rate	24.08.2018	24.08.2028	Bondspot, WSE parallel market
PLPKOHP00116	PLN	230,000	6.33%	WIBOR + 0.66 p.p.	26.10.2018	28.04.2025	Bondspot, WSE parallel market
PLPKOHP00132	PLN	250,000	6.48%	WIBOR + 0.60 p.p.	10.06.2019	30.09.2024	Bondspot, WSE parallel market
PLPKOHP00199	PLN	250,000	6.34%	WIBOR + 0.51 p.p.	02.12.2019	02.12.2024	Bondspot, WSE parallel market
XS2495085784	EUR	500,000	2.125%	fixed rate	04.07.2022	25.06.2025	Bondspot, WSE parallel market
XS2583335943	PLN	500,000	6.49%	WIBOR + 0.85 p.p.	09.02.2023	09.02.2026	Bondspot, WSE parallel market
XS2641919639	PLN	500,000	6.66%	WIBOR + 0.78 p.p.	28.06.2023	29.06.2026	Bondspot, WSE parallel market
XS2711876370	PLN	750,000	6.43%	WIBOR + 0.78 p.p.	02.11.2023	02.11.2026	Bondspot, WSE parallel market

Security for mortgage covered bonds

The mortgage covered bonds are secured with loans secured with the highest priority mortgage entered in the Land and Mortgage Register. Additionally, the mortgage covered bonds may also be issued based on the Bank’s own funds:

■ invested in securities issued or guaranteed by the National Bank of Poland, the European Central Bank, the governments and central banks of the Member States of the European Union, the Organization for Economic Cooperation and Development, excluding countries that are restructuring or have restructured their foreign debt in the past 5 years;

■ deposited with the National Bank of Poland;

■ deposited with domestic banks or a credit institution referred to in Article 18(3)(3) of the Polish Covered Bonds and Mortgage Banks Act of 29 August 1997.

The nominal value of loans entered in the Bank’s Cover Pool and representing collateral for the mortgage covered bonds issued as at 31 December 2023 amounted to PLN 16,768,213 thousand, whereas the nominal value of additional collateral in the form of PLN-denominated securities issued by the State Treasury amounted to PLN 205,000 thousand. As at 31 December 2022, these amounted to PLN 18,560,204 thousand and PLN 285,000 thousand respectively. The Mortgage Covered Bonds Cover Pool also included CIRS transactions hedging the currency and interest rate risk of mortgage covered bonds denominated in EUR and IRS transactions hedging the interest rate risk of fixed rate mortgage covered bonds denominated in PLN.

In 2023 and in the previous years the Mortgage Covered Bonds Cover Pool did not include asset-backed securities (ABS), which do not meet the requirements specified in paragraph 1 of Article 80 of the Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (recast).

33. Liabilities in respect of bonds issued

Accounting policies

Liabilities in respect of bonds issued are measured at amortized cost using the effective interest rate method.

Financial information

LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2023	31.12.2022

Measured at amortized cost
bonds, including bonds issued under the Bond Issue Programme	1,991,260	1,495,904

Total	1,991,260	1,495,904

REPAYMENT PERIOD OF LIABILITIES IN RESPECT OF BONDS ISSUED	31.12.2023	31.12.2022

up to 1 month	-	-
from 1 to 3 months	853,429	267,011
from 3 months to 1 year	1,137,831	1,228,893

Total	1,991,260	1,495,904

Bond Issue Programme

In 2023, as part of the Bond Issue Programme, the Bank issued bonds with a total nominal value of PLN 3,564,000 thousand (i.e. 7,128 bonds with PLN 500,000 nominal value each) and redeemed bonds with a total nominal value of PLN 3,058,500 thousand (i.e. 6,117 bonds with PLN 500,000 nominal value each). In 2022, the Bank issued bonds with a total nominal value of PLN 2,790,000 thousand (i.e. 4,596 bonds with PLN 500,000 nominal value each and 492 bonds with a nominal value of PLN 1,000,000 each) and redeemed bonds with a total nominal value of PLN 5,001,000 thousand (i.e. 9,018 bonds with PLN 500,000 nominal value each and 492 bonds with PLN 1,000,000 nominal value each).

The aforementioned issues of bonds are regulated by the Bond Issue Programme Agreement concluded with PKO Bank Polski SA. concluded on 30 September 2015. In accordance with the said agreement, the maximum nominal value of bonds issued and not yet redeemed is PLN 6,000,000 thousand. At the same time, pursuant to the Underwriting Agreement concluded, PKO Bank Polski SA as the Underwriter shall be obliged to take up the issuer’s bonds up to the amount of PLN 1,000,000 thousand. Based on annexes to the aforesaid agreements signed in September 2023, the agreements were prolonged until 30 September 2026.

As at 31 December 2023, the Bank’s liability in respect of bonds issued as part of the Bond Issue Programme had a nominal value of PLN 2,025,000 thousand, and as at 31 December 2022 its nominal value was PLN 1,519,500 thousand. As at 31 December 2023 and as at 31 December 2022, PKO Bank Polski SA did not hold any bonds under the Underwriting Agreement.

Bonds issued as at 31 December 2023

ISIN	Nominal value of 1 bond (in PLN)	Number of bonds	Nominal value (in PLN ‘000)	Currency	Interest rate	Issue date	Redemption date

PLO219200519	500,000	565	282,500	PLN	zero-coupon	25.07.2023	26.02.2024
PLO219200527	500,000	473	236,500	PLN	zero-coupon	24.08.2023	26.02.2024
PLO219200535	500,000	688	344,000	PLN	zero-coupon	19.09.2023	18.03.2024
PLO219200543	500,000	751	375,500	PLN	zero-coupon	11.10.2023	11.04.2024
PLO219200550	500,000	708	354,000	PLN	zero-coupon	16.11.2023	14.05.2024
PLO219200568	500,000	865	432,500	PLN	zero-coupon	18.12.2023	07.06.2024

34. Other liabilities

Accounting policies

Liabilities

The liabilities recognized in this item are measured at the amounts due including interest, if any. Non-financial liabilities are measured in accordance with the principles of measurement applicable to the specific categories of liabilities recognized in this item.

Expenses to be paid

The Bank recognizes accruals in respect of future payments in justified, reliably estimated amounts that are necessary to fulfil the present obligation as at the end of the reporting period.

The Bank also recognizes accruals in respect of costs which are attributable to the current period, but will be incurred in the next period, including bonuses and unused holiday, taking into account all outstanding days of holiday.

Financial information

OTHER LIABILITIES	31.12.2023	31.12.2022

Expenses to be paid *	10,992	10,650
Liabilities in respect of contribution to the Bank Guarantee Fund (BGF), including:	28,659	28,659
maintained in the form of payments commitments to the resolution fund	28,659	28,659
Other liabilities, including:	10,798	7,283
sundry creditors*	5,584	1,442
settlements with the state budget, including:	5,214	5,841
liabilities in respect of tax on certain financial institutions	4,588	5,236
Lease liabilities *	5,766	2,811

Total	56,215	49,403
including liabilities marked with * above	22,342	14,903

* Financial liabilities are marked with this symbol.

As at 31 December 2023 and 31 December 2022, the Bank had no overdue contractual liabilities.

35. Provisions

Accounting policies

The principles for recording provisions	Provisions are liabilities whose amount or date of payment are uncertain. Provisions are created when the Bank has a current (legal or constructive) obligation resulting from past events and fulfilling this obligation is likely to cause an outflow of economic benefits whose amount can be estimated reliably. If the effect of the time value of money is material, the amount of the provision is determined by discounting the forecast future cash flows to their present value, using the gross discount rate reflecting the current market assessments of the time value of money and the potential risk related to a given obligation. All provisions are charged to the income statement.
Provisions for legal claims	The Bank recognizes provisions for disputes with counterparties, customers and third parties after being informed by a legal counsel about the high probability of losing a court case or administrative proceedings. Such provisions are recognized in the amount of the expected outflow of economic benefits
Provisions for disability and retirement benefits	In accordance with the Labour Code, the employees of PKO Bank Hipoteczny SA are entitled to disability or retirement benefits upon their retirement or obtaining a qualification for disability pension. The Bank periodically calculates provisions for employee benefits. Provisions for disability and retirement benefits resulting from the Labour Code are recognized for every employee individually based on periodical valuations. The calculation takes into account all retirement and disability benefits which may be payable in the future. The provision is recognized based on a list of employees containing all the necessary details, in particular the length of service, age and gender.
Provisions for loan commitments	Provisions for loan commitments relating to residential loans which have not been drawn in full are recorded in the amount of expected credit losses. The provision is determined using portfolio parameters estimated with the use of statistical methods, based on historical observations of exposures with the same characteristics, defining the marginal probability of occurrence of impairment indications and the level of expected loss in the event of the occurrence of an impairment indication in the consecutive months of the period from the reporting date to the expected loss horizon.

Financial information and estimates

PROVISIONS FOR THE PERIOD FROM 1 JANUARY 2023 TO 31 DECEMBER 2023	Provision for disability and retirement benefits	Provisions for loan commitments	Total

As at 1 January 2023, including:	195	17	212
Short-term provision	-	17	17
Long-term provision	195	-	195
Set-up/reassessment of provisions	42	41	83
Release/utilization	-	(20)	(20)

As at 31 December 2023, including:	237	38	275
Short-term provision	-	38	38
Long-term provision	237	-	237

PROVISIONS FOR THE PERIOD FROM 1 JANUARY 2022 TO 31 DECEMBER 2022	Provision for disability and retirement benefits	Provisions for loan commitments	Total

As at 1 January 2022, including:	169	29	198
Short-term provision	-	29	29
Long-term provision	169	-	169
Set-up/reassessment of provisions	26	25	51
Release/utilization	-	(37)	(37)

As at 31 December 2022, including:	195	17	212
Short-term provision	-	17	17
Long-term provision	195	-	195

36. Equity and shareholding structure of the Bank

Accounting policies

Equity

Equity comprises the capital and funds created by the Bank in accordance with the applicable laws and the Articles of Association.

Components of the Bank’s equity:

■ the share capital is recognized in the nominal amount presented in the Articles of Association and entered in the business register;

■ the supplementary capital is created from profit and share premiums less share issue costs;

■ the accumulated other comprehensive income comprises the amounts resulting from the valuation of financial assets measured at fair value through other comprehensive income and the effective portion of cash flow hedges and the related deferred tax amounts;

■ the reserves are created from net profit. The reserves are created solely for the purpose of offsetting potential losses.

Financial information

EQUITY	31.12.2023	31.12.2022

Share capital	1,611,300	1,611,300
Supplementary capital	-	339,852
Accumulated other comprehensive income, including:	(72,218)	(141,052)
cash flow hedges	(74,386)	(136,426)
measurement of financial assets measured at fair value through other comprehensive income	2,168	(4,626)
Retained earnings / (Accumulated losses)	(65,966)	-
Net profit /(loss) for the period	165,789	(405,818)

Total equity	1,638,905	1,404,282

Shareholding structure

Series	Type of shares	Number of shares	Nominal value of 1 share (in PLN)	Series value at nominal value (in PLN)	Date of passing the resolution by the GSM	Issue date	Date of registration in the National Court Register

A	ordinary registered	300,000,000	1	300,000,000	06.10.2014	06.10.2014	24.10.2014
B	ordinary registered	200,000,000	1	200,000,000	14.03.2016	07.04.2016	22.04.2016
C	ordinary registered	200,000,000	1	200,000,000	01.07.2016	15.07.2016	28.07.2016
D	ordinary registered	100,000,000	1	100,000,000	28.10.2016	18.11.2016	01.12.2016
E	ordinary registered	150,000,000	1	150,000,000	21.03.2017	04.04.2017	12.04.2017
F	ordinary registered	150,000,000	1	150,000,000	28.06.2017	04.07.2017	11.09.2017
G	ordinary registered	100,000,000	1	100,000,000	18.10.2017	20.10.2017	16.11.2017
H	ordinary registered	95,000,000	1	95,000,000	13.08.2018	17.08.2018	08.10.2018
I	ordinary registered	100,000,000	1	100,000,000	19.12.2018	21.12.2018	21.02.2019
J	ordinary registered	131,500,000	1	131,500,000	07.03.2019	19.03.2019	16.05.2019
K	ordinary registered	84,800,000	1	84,800,000	27.06.2019	01.07.2019	20.08.2019
Total		1,611,300,000		1,611,300,000

PKO Bank Polski SA was the Bank’s sole shareholder as at 31 December 2023 and 31 December 2022.

The Bank’s share capital amounts to PLN 1,611,300,000 and comprises 1,611,300,000 (one billion six hundred and eleven million three hundred thousand) ordinary registered shares with a nominal value of PLN 1 (one zloty) each. The PKO Bank Hipoteczny SA shares are non-preference shares and have been paid up in full.

On 30 June 2023, the Ordinary Shareholders Meeting of PKO Bank Hipoteczny SA adopted a resolution on the offset of the net loss for the financial year 2022 as follows:

■ PLN 339,852 thousand to be offset against supplementary capital;

■ PLN 65,966 thousand to be offset against future profits.

In 2023, the Bank did not pay dividend, whereas in 2022, the Bank paid dividend totalling PLN 87,278 thousand.

OTHER NOTES TO THE FINANCIAL PART

37. Contingent liabilities granted and received

37.1 Contractual commitments

As at 31 December 2023 and 31 December 2022 the Bank had no contractual commitments relating to the purchase of intangible assets and property, plant and equipment.

37.2 Loan commitments

Accounting policies

As part of its operations, the Bank concludes transactions that are not initially recognized in the statement of financial position as assets or liabilities, but give rise to contingent liabilities. A contingent liability is:

■ a potential obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Bank;

■ a current obligation that arises from past events, but is not recognized in the statement of financial position, because an outflow of cash or other assets for the purpose of fulfilling the obligation is not likely, or the amount of the liability cannot be estimated reliably.

Loan commitments relate to residential loans which have not been drawn in full.

Financial information

LOAN COMMITMENTS (CONTINGENT)	31.12.2023	31.12.2022

Relating to residential loans not drawn in full (nominal value)	90,922	37,298

provision for residential loans not drawn in full	(38)	(17)

Total, net	90,884	37,281
including irrevocable loan commitments	-	-

Information on provisions for loan commitments is provided in Note 35 “Provisions”.

CONTINGENT LOAN COMMITMENTS GRANTED AT NOMINAL VALUE - ESTIMATED PAYMENTS DEADLINES	31.12.2023	31.12.2022

up to 1 month	43,643	11,562
from 1 to 3 months, inclusive	16,933	9,236
from 3 months to 1 year, inclusive	26,597	14,985
from 1 year to 5 years, inclusive	3,749	1,515

Total	90,922	37,298

37.3 Guarantee commitments granted

PKO Bank Hipoteczny SA does not grant guarantee commitments.

37.4 Contingent liabilities received

Financial information

CONTINGENT COMMITMENTS RECEIVED AT THE NOMINAL VALUE	31.12.2023	31.12.2022

Contingent liabilities received
financial	5,943,956	5,735,115
guarantees	1,000,000	2,000,000

Total	6,943,956	7,735,115

Contingent liabilities received of a financial nature represent initiated and available loans, while guarantee commitments received represent the available guarantees to underwrite bonds issued.

Right to sell or pledge collateral established for the Bank

As at 31 December 2023 and 31 December 2022, no collateral was established for the Bank, which the Bank would be entitled to sell or re-pledge, in the event of fulfilling all obligations by the owner of the collateral.

38. Legal claims

As at 31 December 2023 and 31 December 2022 there were no legal claims.

39. Information about leases

Financial information

LEASE AMOUNTS RECOGNIZED IN THE INCOME STATEMENT - LESSEE	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Amortization of the right-of-use assets	(1,334)	(1,215)
real estate	(1,134)	(1,008)
cars	(200)	(207)
Interest expense	(166)	(87)
Costs related to short-term lease contracts	(0)	(5)
Costs related to lease contracts for low-value assets (other than short-term), non-deductible VAT expenses and service charges	(919)	(714)

Total	(2,419)	(2,021)

RIGHT-OF-USE ASSETS	31.12.2023	31.12.2022

Real estate	5,428	2,342
Cars	278	372

Total	5,706	2,714

OTHER LIABILITIES - LEASE LIABILITIES	31.12.2023	31.12.2022

Lease liabilities, due	5,766	2,811
up to 1 month	110	107
from 1 to 3 months	216	214
from 3 months to 1 year	905	942
from 1 to 5 years	2,025	1,548
after more than 5 years	2,510	-

Total	5,766	2,811

40. Notes to the statement of cash flows

Cash and cash equivalents

Cash and cash equivalents comprise: Cash, amounts at the Central Bank, current amounts due from banks, as well as cash equivalents with maturities up to 3 months from the date of acquisition.

Financial information

CASH AND CASH EQUIVALENTS	31.12.2023	31.12.2022

Cash and balances with the Central Bank (including interest accrued on mandatory reserve)	306	60,696
Amounts due from banks – current accounts	2,421	61

Total	2,727	60,757
- including restricted cash and cash equivalents	158	-

INTEREST INCOME – RECEIVED	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

From operating activities
Interest received on loans and advances to customers	1,184,155	1,005,178
Interest received on CIRS transactions	96,981	57,383
Interest received on IRS transactions	2,093	2,093
Interest received on deposits	0	14
Other interest received	2,862	2,880
From investing activities
Interest received on securities measured at fair value through other comprehensive income	66,298	32,991

Total	1,352,389	1,100,539

INTEREST EXPENSE – PAID	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

From operating activities
Interest paid on CIRS transactions	556,063	474,992
Interest paid on IRS transactions	4,584	3,207
Interest paid for extending overdraft limits	935	540
Other interest paid	9	1
From financing activities
Interest paid on loans	404,340	324,236
Interest and discount paid on mortgage covered bonds issued	308,062	198,500
Interest and Interest paid on bonds issued	108,267	92,755

Total	1,382,260	1,094,231

RECONCILIATION OF ITEMS PRESENTED IN THE STATEMENT OF FINANCIAL POSITION WITH THE STATEMENT OF CASH FLOWS			In the statement of cash flows, recognized in
	Note	31.12.2022	financing activities		operating activities			31.12.2023
	Note	31.12.2022	Incurred	Repaid	Monetary changes	Non-monetary changes, including:1)	foreign exchange gains/(losses)	31.12.2023

Amounts due to banks	30	5,635,860	14,143,881	(15,202,722)	(799)	4,524	-	4,580,744
overdraft within the limit available 1)		2,142	-	-	(489)	-	-	1,653
liability related to overdraft facilities		3,893,095	13,876,881	(15,202,722)	-	2,923	-	2,570,177
liability related to term loans		1,740,623	267,000	-	(310)	1,601	-	2,008,914
Liabilities in respect of mortgage covered bonds issued	32	12,063,629	1,750,000	(2,859,300)	(2,982)	(506,702)	(507,423)	10,444,645
Liabilities in respect of bonds issued	33	1,495,904	3,448,728	(3,058,500)	-	105,128	-	1,991,260

Total		19,195,393	19,342,609	(21,120,522)	(3,781)	(397,050)	(507,423)	17,016,649

1) Non-cash changes comprise mainly accrued interest, discount settlements and foreign exchange gains/(losses).

41. Related party transactions

41.1 Related party transactions - capital links

PKO Bank Polski SA and PKO Bank Polski SA Group entities are the Bank’s related parties.

Financial information

As at 31 December 2023

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

PKO Bank Polski SA	58,808	55,383

Total	58,808	55,383

ENTITY	LIABILITIES
ENTITY	Loans and overdraft	Acquisition of receivables	Mortgage covered bonds and bonds	Other liabilities	including derivatives

PKO Bank Polski SA	4,581,358	-	28,279	225,694	213,187
PKO BP Finat Sp. z o.o.	-	-	7,835	28	-
PKO Leasing SA	-	-	-	10	-
Prime Car Management SA	-	-	-	283	-
PKO Towarzystwo Ubezpieczeń SA	-	-	97,999	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	81,939	-	-
PKO VC -fizan	-	-	19,826	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	28,579	-	-

Total	4,581,358	-	264,457	226,015	213,187

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	6,943,956

Total	-	6,943,956

For the period from 1 January 2023 to 31 December 2023

ENTITY	Total revenues	including interest and commissions	Total costs	including interest and commissions	Net income / (expense) from financial instruments measured at fair value	Net foreign exchange gains / (losses)

PKO Bank Polski SA	21	0	871,005	850,324	(13)	(515,505)
PKO BP Finat Sp. z o.o.	-	-	431	159	-	-
PKO Leasing SA	-	-	71	3	-	-
Prime Car Management SA	-	-	100	14	-	-
PKO Towarzystwo Ubezpieczeń SA	-	-	7,060	7,060	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	5,676	5,676	-	-
PKO VC -fizan	-	-	1,433	1,433	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	1,973	1,973	-	-

Total	21	0	887,749	866,642	(13)	(515,505)

As at 31 December 2022

ENTITY	ASSETS
ENTITY	Receivables	including derivatives

PKO Bank Polski SA	508,184	508,052

Total	508,184	508,052

ENTITY	LIABILITIES
ENTITY	Loans and overdraft	Acquisition of receivables	Mortgage covered bonds and bonds	Other liabilities	including derivatives

PKO Bank Polski SA	5,486,398	-	6,977	31,401	25,664
PKO BP Finat Sp. z o.o.	-	-	6,896	22	-
PKO Leasing SA	-	-	-	86	-
Prime Car Management SA	-	-	-	293	-
PKO Towarzystwo Ubezpieczeń SA	-	-	98,585	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	80,648	-	-
PKO VC -fizan	-	-	20,200	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	24,498	-	-

Total	5,486,398	-	237,804	31,802	25,664

ENTITY	Loan commitments	Contingent commitments received

PKO Bank Polski SA	-	7,735,022

Total	-	7,735,022

For the period from 1 January 2022 to 31 December 2022

ENTITY	Total revenues	including interest and commissions	Total costs	including interest and commissions	Net income / (expense) from financial instruments measured at fair value	Net foreign exchange gains / (losses)

PKO Bank Polski SA	14	14	823,968	802,219	15	206,211
PKO BP Finat Sp. z o.o.	-	-	851	602	-	-
PKO Leasing SA	-	-	222	3	-	-
Prime Car Management SA	-	-	95	3	-	-
PKO Towarzystwo Ubezpieczeń SA	-	-	4,819	4,819	-	-
PKO Życie Towarzystwo Ubezpieczeń SA	-	-	2,882	2,882	-	-
PKO VC -fizan	-	-	1,125	1,125	-	-
Bankowe Towarzystwo Kapitałowe SA	-	-	1,074	1,074	-	-

Total	14	14	835,036	812,727	15	206,211

The Bank holds current accounts and made deposits with PKO Bank Polski SA during the reporting period. In addition, the Bank cooperates strategically with PKO Bank Polski SA. Residential loan sales as well as after-sales servicing, excluding risk management, internal audit and control, are carried out within the framework of the Outsourcing Agreement with PKO Bank Polski SA dated 16 January 2015. Assistance is also provided with respect to support activities under this agreement.

The Bank also obtains funding from PKO Bank Polski SA in the form of overdrafts bearing interest at a variable rate, i.e. a base rate increased by a margin:

■ On 29 October 2015, the Bank concluded an overdraft facility agreement with a limit of PLN 900,000 thousand for a period of 3 years with PKO Bank Polski SA. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 29 October 2025;

■ On 2 February 2017, the Bank concluded an overdraft facility agreement with a limit of PLN 1,500,000 thousand for a period of 3 years with PKO Bank Polski SA. By annexing the agreement, the amount of the limit was increased to PLN 2,000,000 thousand and the lending period was extended until 3 February 2026;

■ On 10 July 2019, the Bank concluded an overdraft facility agreement with a limit of PLN 1,000,000 thousand for a period of 3 years with PKO Bank Polski SA. As a result of signing subsequent annexes to the agreement, the amount of overdraft was increased to PLN 5,000,000 and may be used to repay liabilities in respect of the loan portfolios purchased and servicing of redemption of mortgage covered bonds, and the lending period was extended until 1 July 2025. By Annex no. 6 of 17 January 2023, the overdraft was decreased from PLN 5,000,000 thousand to PLN 4,478,000 starting from 11 February 2023, and subsequently, by Annex no. 7 of 31 August 2023, the overdraft was decreased by PLN 300,000 thousand, i.e. to PLN 4,178,000 thousand.

As at 31 December 2023, all the aforementioned facilities were drawn in the full amount.

Moreover, the Bank also obtains funding from PKO Bank Polski SA in the form of non-revolving working capital loans:

■ On 10 September 2020, the Bank concluded a non-revolving working capital facility agreement with PKO Bank Polski SA in PLN with a limit of PLN 300,000 thousand for a period of 6 years. The loan may be drawn in tranches repayable within 5 years. The tranches bear interest at a fixed rate, which is determined for each drawing separately. The Bank used PLN 210,000 thousand of that loan. The remaining amount has not been used;

■ On 11 February 2022, the Bank concluded a non-revolving working capital facility agreement with PKO Bank Polski SA in PLN with a limit of PLN 400,000 thousand for a period of 6 years. The loan will be disbursed over a period of 1 year of the date of conclusion in tranches, each of which is repayable within 5 years of its drawing. The tranches bear interest at a fixed rate, which is determined for each drawing separately. By signing annexes to the agreement, the limit was increased to PLN 2,000,000 thousand. By Annex no. 3 of 3 January 2023, the limit was decreased from PLN 2,000,000 thousand to PLN 1,700,000 thousand. The Bank used PLN 1,522,000 thousand of that loan. The remaining amount has not been used;

■ On 3 January 2023, the Bank concluded a non-revolving working capital facility agreement with PKO Bank Polski SA in PLN with a limit of PLN 300,000 thousand for a period of 7 years. The loan will be disbursed over a period of 2 years of the date of conclusion in tranches, each of which is repayable within 5 years of its drawing. The tranches bear interest at a fixed rate, which is determined for each drawing separately. By Annex no. 1 of 31 August 2023, the loan amount was increased from PLN 300,000 thousand to PLN 600,000 thousand. As at 31 December 2023, the Bank used PLN 267,000 thousand of that loan.

The Bank also has agreements with PKO Bank Polski SA relating to the issues of bonds and mortgage covered bonds as part of:

■ the Bond Issue Programme:

□ On 30 September 2015, the Bank entered into a PKO Bank Hipoteczny Bond Issuance Programme Agreement (the “Programme”) with PKO Bank Polski SA for a Programme amount of up to PLN 2 000 000 thousand over a period of 4 years, as well as an Underwriting Agreement under which the Underwriter assumes the obligation to take up the Issuer’s Bonds for its own account up to the amount of PLN 2 000 000 thousand.

□ Based on an annex signed on 30 September 2019, the parties extended both agreements for a subsequent 4-year period, and by an annex of 11 February 2020 the amount of the Programme was increased by PLN 2,000,000 thousand, i.e. to PLN 4,000,000.

□ On 16 October 2020, an annex to the Bond Issue Programme was signed, extending the maximum maturity of the bonds issued from 12 to 36 months and extending the list of the types of bonds issued from discount bonds to zero coupon bonds, fixed coupon bonds and variable coupon bonds.

□ As a result of signing an annex of 15 March 2021, the amount of the programme was increased by PLN 2,000,000 thousand, i.e. to PLN 6,000,000 thousand;

□ On 26 September 2023, an annex to the Bond Issue Programme was signed based on which the parties extended the Programme to 30 September 2026;

□ Based on an annex to the Underwriting Agreement signed on 27 September 2023, the period during which the Underwriter is obliged to take up the Issuer’s bonds was extended until 30 September 2026, while the amount was decreased to PLN 1,000,000 thousand starting from 30 September 2023;

□ On 18 July 2019, the Bank signed the Issue Agent Agreement with the PKO Bank Polski Brokerage Office, subsequently amended by an agreement of 21 December 2020. At the same time, on 18 December 2019 PKO Bank Hipoteczny signed a Dealership Agreement with PKO Bank Polski SA, on the basis of which PKO Bank Polski SA acts as a dealer with respect to bonds issued under the PKO Bank Hipoteczny SA Own Bonds Issue Programme. Based on an annex to the Dealership Agreement signed on 26 September 2023, the parties extended the term of the agreement until 30 September 2026.

■ the International Mortgage Covered Bonds Issue Programme:

□ On 14 June 2023, upon approval of the Basic Prospectus of PKO Bank Hipoteczny SA relating to the issue of mortgage covered bonds for the European market (including the Polish market) by Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg, PKO Bank Hipoteczny SA signed the Programme Agreement with PKO Bank Polski SA, on the basis of which PKO Bank Polski SA acts as the Arranger and Dealer.

On 17 November 2015, the Framework Agreement for the Sale of Receivables was concluded with PKO Bank Polski SA. Based on the agreement, the Bank purchases portfolios of receivables under mortgage backed residential loans. Further details are available in Notes 26 and 32.

Furthermore, as part of the transactions with parties related by equity, PKO BP Finat Sp. z o.o. provides to the Bank accounting services with respect to the Bank’s general administration, as well as personnel and payroll services, PKO Bank Polski SA rents office space, PKO Leasing SA and Prime Car Management SA provide vehicles under lease agreements, and PKO Towarzystwo Ubezpieczeniowe SA insures the Bank’s credit risk.

During the reporting period the Bank did not conclude any transactions with related parties other than on an arm’s length basis.

41.2 Transactions with the State Treasury and its related entities

Since the State Treasury holds 29.43% of the share capital of PKO Bank Polski SA, PKO Bank Hipoteczny SA (which is a part of the PKO Bank Polski SA Group) is a related entity of the State Treasury.

The Bank concludes the following transactions with the State Treasury and its related entities:

■ purchases of Treasury bonds issued by the State Treasury and NBP bills, which are described in Note 25 “Securities”;

■ purchases of goods and services from related entities of the State Treasury as part of the Bank’s operating activities, which are immaterial both individually and cumulatively from the financial statements perspective.

41.3 Related-party transactions – personal links

As at 31 December 2023, 6 entities were related to the Bank through members of the Management Board and Supervisory Board of PKO Bank Hipoteczny SA or their close relatives, whereas at 31 December 2022 it was 5 entities. In the aforementioned periods

■ one of the entities purchased the Bank’s bonds;

■ the Bank had an active agreement with and purchased goods and services from one of these entities.

The aforementioned transactions were conducted on an arm’s length basis.

41.4 Benefits for PKO Bank Hipoteczny SA key management personnel

The principles for determining a policy of variable remuneration components for the Bank’s managers are described in the PKO Bank Hipoteczny SA Directors’ Report for the year ended 31 December 2023 (section 6.6).

Financial information

COST OF REMUNERATION OF THE BANK’S MANAGEMENT BOARD AND SUPERVISORY BOARD	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

The Bank’s Management Board1)
Short-term employee benefits2)	3,095	1,602
Post-employment benefits	187	358
Long-term benefits3)	160	207
Share-based payments settled in cash 4)	160	518
Severance benefits	-	-
Total	3,602	2,685

The Bank’s Supervisory Board (independent Supervisory Board members)
Short-term employee benefits2)	269	158
Total	269	158

1) Including Management Board members who no longer perform their functions.

2) Short-term employee benefits comprise remuneration, social insurance contributions, employee pension plans, other benefits and the provision for not deferred variable remuneration components, which have been or will be settled within 12 months of the end of a reporting period;

3) Long-term benefits comprise provisions for deferred variable remuneration components granted in cash, which will be payable after 12 months from the end of a reporting period;

4) Share-based payments settled in cash (IAS 19) comprise cost of accruals for deferred variable remuneration components granted in the form of financial instruments, i.e. phantom shares. Phantom shares are converted into cash after the retention period.

Variable remuneration components

PROVISION FOR VARIABLE REMUNERATION COMPONENTS	31.12.2023	31.12.2022
PROVISION FOR VARIABLE REMUNERATION COMPONENTS	(for the years 2020-2023)	(for the years 2019-2022)

the Bank’s Management Board1)	2,412	2,436
other members of the management (MRT)2)	4,112	4,209

Total provisions	6,524	6,645

REMUNERATION PAID DURING THE YEAR	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022
REMUNERATION PAID DURING THE YEAR	(for the years 2019-2022)	(for the years 2017-2021)

granted in cash
the Bank’s Management Board1)	991	444
other members of the management (MRT)2)	2,021	835
granted in the form of financial instruments
the Bank’s Management Board1)	114	379
other members of the management (MRT)2	87	445

Total paid	3,213	2,103

1) Including the Management Board members who no longer perform their functions.

2) MRT – Material Risk Takers;

Loans and advances granted by the Bank to its management

In the period from 1 January to 31 December 2023 and from 1 January to 31 December 2022, no loans or advances were granted to the Bank’s management. As at 31 December 2023, the carrying amount of loans or advances granted to the Bank’s management was PLN 598 thousand, and as at 31 December 2022 it was PLN 538 thousand. The interest rate and repayment terms are consistent with the arm’s length principle.

42. Fair value of financial assets and financial liabilities

42.1 Categories of fair value measurement of financial assets and financial liabilities measured at fair value in the statement of financial position

Accounting policies

Classification of financial assets and liabilities	Individual financial assets and liabilities measured at fair value are classified by the Bank to the following categories: ■ Level 1: Prices quoted on active markets; ■ Level 2: Measurement techniques based on observable market data; ■ Level 3: Other measurement techniques. Depending on the category to which financial assets and liabilities are classified, different fair value measurement methods are applied.
Level 1 Prices quoted on active markets	Financial assets and liabilities whose fair value is measured directly on the basis of prices quoted on active markets for identical assets or liabilities (unadjusted). The Bank classifies to this category financial instruments for which there is an active market and whose fair value is determined based on the market purchase price. Securities are measured in accordance with Bondspot fixing.
Level 2 Measurement techniques based on observable market data	Financial assets and liabilities whose fair value is determined using measurement models, when all significant input data is observable on the market either directly (as prices) or indirectly (based on prices). In this category the Bank classifies financial instruments for which there is no active market, i.e. CIRS, IRS and FX forward derivatives.
Level 3 Other measurement techniques	Financial assets and liabilities whose fair values are measured using measurement models, if inputs are not based on observable market data (unobservable inputs). The Bank did not have any instruments classified to this category.
Transfers	Transfers of instruments between Level 1 and Level 2 are based on the availability of quotations from an active market as at the end of a reporting period. Instruments are transferred from Level 2 to Level 3 if an observable factor is replaced in the measurement with an unobservable one or if a new unobservable risk factor having a significant effect on the measurement of an instrument is applied. Instruments are transferred from Level 3 to Level 2 if an unobservable factor is replaced in the measurement with an observable one or if the effect of an unobservable factor on the measurement is no longer significant. There were no transfers between the fair value hierarchy levels in 2023 and 2022.

Measurement techniques and observable input data

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE	Measurement methods (techniques)	Observable input data

NBP bills	Yield curve method	Yield curves are based on money market data and OIS (Overnight Index Swap) transaction market data
CIRS	Discounted cash flow model based on profitability curves	Profitability curves are based on market rates and data for the money market, FRA (Forward Rate Agreement) transactions market, IRS (Interest Rate Swap) market, basis swap, CDS (Credit Default Swap) quotations.
IRS	Discounted cash flow model based on profitability curves	Profitability curves are based on market rates and data for the money market, FRA (Forward Rate Agreement) transactions market, IRS (Interest Rate Swap).
FX forward	Discounted cash flow model based on profitability curves	Profitability curves are based on market rates and data for the money market and the FX-Forward transactions market

Financial information

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31 DECEMBER 2023	Note	Carrying amount	Level 1	Level 2	Level 3
	Note	Carrying amount	Prices quoted on active markets	Measurement techniques based on observable market data	Other measurement techniques

Derivative hedging instruments	24	55,383	-	55,383	-
CIRS		55,353	-	55,353	-
FX forward		30	-	30	-
IRS		-	-	-	-
Securities	25	945,251	945,251	-	-
measured at fair value through other comprehensive income		945,251	945,251	-	-
Total financial assets measured at fair value		1,000,634	945,251	55,383	-

Derivative hedging instruments	24	213,187	-	213,187	-
CIRS		209,290	-	209,290	-
FX forward		527	-	527	-
IRS		3,370	-	3,370	-
Total financial liabilities measured at fair value		213,187	-	213,187	-

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31 DECEMBER 2022	Note	Carrying amount	Level 1	Level 2	Level 3
	Note	Carrying amount	Prices quoted on active markets	Measurement techniques based on observable market data	Other measurement techniques

Derivative hedging instruments	24	508,052	-	508,052	-
CIRS		507,982	-	507,982	-
FX forward		70	-	70	-
IRS		-	-	-	-
Securities	25	1,017,447	937,535	79,912	-
measured at fair value through other comprehensive income		1,017,447	937,535	79,912	-
Total financial assets measured at fair value		1,525,499	937,535	587,964	-

Derivative hedging instruments	24	25,664	-	25,664	-
CIRS		16,835	-	16,835	-
FX forward		46	-	46	-
IRS		8,783	-	8,783	-
Total financial liabilities measured at fair value		25,664	-	25,664	-

42.2 Financial assets and liabilities not presented at fair value in the statement of financial position

Accounting policies

Market values are unavailable for most financial instruments, therefore, the fair values are estimated based on a number of measurement techniques. The fair values of financial instruments are determined using a model based on estimating the present value of future cash flows by discounting the cash flows using the appropriate discount rates. The model calculations include certain simplifications and are sensitive to the assumptions adopted.

The summary of the main methods and assumptions used to estimate the fair values of financial instruments which are not measured at fair value are presented below.

In the case of some groups of financial instruments, due to a lack of expected significant differences between their carrying amount and the fair value, resulting from the characteristics of those groups (e.g. short-term nature, high correlation with market parameters, short periods of rate overstatement, unique nature of an instrument or a short period from the issue date), it was assumed that the carrying amount of the instrument approximates its fair value. This applies to the following groups of financial instruments:

■ cash and balances with the Central Bank;

■ amounts due from banks;

■ amounts due to banks (loans based on a variable rate);

■ amounts due to customers;

■ bonds issued.

Mortgage covered bonds issued – the fair value is determined based on the price observed on a regulated market (the Luxembourg Stock Exchange for EUR-denominated mortgage covered bonds and the Warsaw Stock Exchange (WSE) for mortgage covered bonds in PLN);

The model used with respect to loans and advances to customers without recognized impairment was based on the estimated present values of future cash flows, which were discounted using current interest rates taking into account the amount of credit risk margin and real repayment deadlines resulting from loan agreements. The current margin levels were determined for transactions concluded in the last quarter ended with a balance sheet date. In the case of loans with recognized impairment it is assumed that the fair value is equal to the carrying amount.

Financial information

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 DECEMBER 2023	fair value hierarchy level	measurement method	31.12.2023
	fair value hierarchy level	measurement method	carrying amount	fair value

Cash and balances with the Central Bank	N/A	amount of consideration due	306	306
Amounts due from banks	2	discounted cashflows	2,421	2,421
Loans and advances to customers, including:			17,898,707	17,314,013
residential loans 1)	3	discounted cashflows	17,898,707	17,314,013
Other financial assets	3	amount of consideration due taking into account impairment	1,072	1,072
Amounts due to banks	2	discounted cashflows	4,580,744	4,632,020
Amounts due to customers	2	discounted cashflows	3,710	3,710
Liabilities in respect of mortgage covered bonds issued	1	quotation on the regulated market	10,444,645	10,355,645
Liabilities in respect of bonds issued	2	discounted cashflows	1,991,260	1,991,260
Other financial liabilities	3	amount of consideration due	22,342	22,342

1) Due to the fact that fair value is the price that would be received for the sale of an asset in a transaction between independent, well-informed market participants interested in concluding a transaction, carried out on normal terms as at the valuation date, i.e. 31 December 2023, the Bank included in the fair value of residential loans portfolio, the impact of the potential extension to 2024 of the Statutory loan repayment holidays program described in Note 26. Loans and advances to customers. As at 31 December 2023, taking into account the status of the legislative process and public statements of the participants of the legislative process and market supervisors, the Bank based its calculations on the expert assumption that market participants assumed a 40% probability of entry into force of the Act in the version published in project.

FINANCIAL ASSETS AND LIABILITIES NOT PRESENTED AT FAIR VALUE AS AT 31 DECEMBER 2022	fair value hierarchy level	measurement method	31.12.2022
	fair value hierarchy level	measurement method	carrying amount	fair value

Cash and balances with the Central Bank	N/A	amount of consideration due	60,696	60,696
Amounts due from banks	2	discounted cashflows	61	61
Loans and advances to customers, including:			18,955,364	18,567,210
residential loans	3	discounted cashflows	18,955,364	18,567,210
Other financial assets	3	amount of consideration due taking into account impairment	98	98
Amounts due to banks	2	discounted cashflows	5,635,860	5,580,040
Amounts due to customers	2	discounted cashflows	5,577	5,577
Liabilities in respect of mortgage covered bonds issued	1	quotation on the regulated market	12,063,629	11,803,542
Liabilities in respect of bonds issued	2	discounted cashflows	1,495,904	1,495,904
Other financial liabilities	3	amount of consideration due	14,903	14,903

43. Operating segments

In 2023 and 2022 the Bank did not analyse its operations by segments due to the specific nature of its operations. The whole loan portfolio of the Bank is uniform and consists of residential loans granted to retail customers for the funding of property located in Poland. All operations of the Bank represent one segment. The main operational decision-maker is the Bank’s Management Board. The Bank’s gross profit/(loss) is analysed at the level of all operations of the Bank. Therefore, the financial data presented in the statement of financial position and the income statement is representative for the Bank as a whole, which consists of a single operating segment.

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

44. Risk management at PKO Bank Hipoteczny SA

Risk management at PKO Bank Hipoteczny SA is aimed at ensuring the financial stability of the Bank, safeguarding the value and security of the mortgage covered bonds issued and guaranteeing the safety of funds resulting from the issue of bonds and the other sources of funding the Bank’s operations. The risk management system is also intended to ensure appropriate and as comprehensive as possible information on the risk when making decisions, and to effectively embed risk management in the Bank’s organizational culture. The assumed level of risk plays an important role in the planning process.

The Bank has identified the following types of risks which are managed:

Type of risk	Section
credit risk	45
concentration risk	46
residual risk	47
liquidity risk	48
interest rate risk	49
derivative instruments risk	50
foreign exchange risk	51
model risk	52
operational risk	53
business risk	54
compliance risk	55
reputation risk	56
capital adequacy risk	57

44.1 Key risk management policies

Risk management in PKO Bank Hipoteczny SA is based in particular on the following policies:

■ the risk management process, including the lending process, is defined and regulated by strategies, policies and procedures adopted by the Management Board and approved by the Supervisory Board of PKO Bank Hipoteczny SA;

■ the Bank manages all identified types of banking risks and performs an ICAAP (Internal Capital Adequacy Assessment Process), and ILAAP (Internal Liquidity Adequacy Assessment Process) where:

a) the risk management process is appropriate to the scale of the operations and to the significance, scale and complexity of a given risk and tailored to new risk factors and sources of risk as they emerge;

b) the risk management methods, models, assumptions and systems are tailored to the scale and complexity of the risk, and periodically verified and validated;

■ the organizational structure of risk management ensures the independence of the risk function, including the property valuation and the credit decision making processes from business activities;

■ risk management is integrated with the planning and controlling systems and supports the pursuit of the Bank’s strategy in compliance with the risk management strategy, in particular in terms of risk tolerance levels;

■ the risk management process is consistent with the principles of risk management of the PKO Bank Polski SA Group, including the application of group risk models, modified to reflect the nature of activities of PKO Bank Hipoteczny SA and approved by the adequate authorities of PKO Bank Hipoteczny SA.

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Components of the risk management system

The risk management system of PKO Bank Hipoteczny SA comprises the following components:

risk identification

Risk identification consists of identifying actual and potential sources of risk and assessing the materiality of their potential influence on the financial position of the Bank. As part of the risk identification process, material types of risk for the Bank’s activities are identified. The different risks assessments are reviewed at least once a year for their materiality.

risk measurement and assessment

Risk measurement and assessment are aimed at determining the scale of threats connected with the existence of risk. Risk measurement covers defining risk measures adequate to the type and materiality of the risk and data availability. Quantitative and qualitative results of risk measurement form the basis of a risk assessment which determines the level or extent of risk. As part of risk measurement, the following tests are performed:

■ specific stress tests, conducted separately for individual types of risks, aimed at assessing the sensitivity of a risk to the occurrence of adverse market situations;

■ comprehensive stress tests, aimed at determining sensitivity of capital adequacy measures and the Bank’s results to the materialization of an adverse scenario of changes in the Bank’s environment and functioning.

Stress tests are conducted on the basis of assumptions which ensure a fair risk assessment, in particular taking into account recommendations of the Polish Financial Supervision Authority.

risk control

Risk control comprises determining risk controls appropriate for the scale and complexity of the Bank’s operations, in particular in the form of strategic tolerance limits for individual types of risks subject to monitoring, and in the event that these are exceeded, management actions are taken.

risk forecasting and monitoring

Risk forecasting and monitoring consists of preparing forecasts and monitoring deviations from forecasts or adopted reference points (e.g. limits, thresholds, plans, measures from the previous period, recommendations) and stress testing. Risk monitoring is performed with a frequency appropriate to the materiality and volatility of a specific risk type.

risk reporting

Risk reporting consists of regularly informing the authorities of the Bank about the results of risk measurement, actions taken and recommended. The scope, frequency and the form of reporting are adjusted to the management level of the recipients.

management actions

The management actions consist in determining the desired level of risk to shape the structure of assets and liabilities. Management actions may result, in particular, in:

■ risk acceptance – determining the acceptable level of risk taking into account business needs and developing management actions in the event that this level is exceeded;

■ risk reduction – mitigating the impact of risks or the effects of its materialization (e.g. by reducing or diversifying exposure to risk, setting hedging limits);

■ risk transfer – transferring the responsibility for covering potential losses (e.g. by transferring the risk to another entity using legal instruments such as insurance contracts, facility security contracts, accepting guarantees);

■ risk avoidance – discontinuance of activities that generate risk or elimination of the possibility of the occurrence of a risk factor, including, in particular, setting zero tolerance to risk.

44.2 Risk management in the Bank

Risk management is overseen by the Bank’s Supervisory Board, which is informed on a regular basis about the risk profile of PKO Bank Hipoteczny SA and about the most important actions undertaken with respect to risk management. The Bank’s Supervisory Board supervises and evaluates the risk management process, in particular based on periodical risk reports which take into account an assessment of the adequacy and effectiveness of the risk management system and information on the implementation of the Strategy and the results of stress tests, and requires the process to be reviewed if necessary.

The Bank’s Management Board is responsible for risk management, including supervising and monitoring the risk management actions taken by the Bank. The Bank’s Management Board takes key decisions affecting the risk profile of the Bank and adopts internal regulations concerning risk management. It ensures the operation of the risk management process, monitors and assesses its functioning and provides the related information to the Supervisory Board.

Risk management takes place at three independent, complementary levels:

■ the first level consists of the organizational structures performing product management, sales and customer service tasks and other organizational units whose operations generate risk, operating in accordance with internal operations;

■ the second level consists of the operations of the compliance unit as well as the identification, measurement or assessment, control, monitoring and reporting of risk, threats and irregularities – these tasks are performed by specialist organizational units operating in accordance with the Bank’s internal regulations; the purpose of these units is to develop internal regulations defining the risk management principles, methods, tools and procedures and to measure performance;

■ the third level comprises the operations of the internal audit unit, which performs independent audits of the elements of the Bank’s management system, including the risk management system and the internal control system; internal audit is separate from the first and second levels.

The independence of the levels is achieved by preserving organizational independence in the following areas:

■ the function of the second level in creating systemic solutions is independent of the function of the first level;

■ the function of the third level is independent of the functions of the first and second level.s

The following organizational units of PKO Bank Hipoteczny SA are responsible for risk management to the extent of the powers vested in them:

Risk Bureau

The Risk Bureau is responsible in particular for the management of the following risks: credit risk, concentration risk, liquidity risk, interest rate risk, foreign exchange risk, derivative instruments risk, operational, model, business risk, and the management of capital adequacy, including:

■ identification of risk factors and sources of risk;

■ measuring, assessing, as well as periodic monitoring and reporting risk levels;

■ measuring and assessing capital adequacy;

■ collaboration with the regulator in the risk area (SREP, inspections, clarifications, questionnaires, etc.);

■ supervising the security of IT systems.

The Risk Bureau may also recommend improvements to the risk management system and present opportunities to implement corrective actions with regard to infringements of the risk controls, including in particular the applicable risk tolerance limits.

Loan Bureau

The Loan Bureau is responsible for credit security and credit decisions, the restructuring and debt collection processes, and the lending process optimization and organization, including:

■ analyses of the real estate market, property valuation policies, including the principles for determining the Mortgage Lending Value (MLV);

■ monitoring the quality, completeness and value of security at the portfolio level (including the regular indexation of property value);

■ bad debt management and taking actions to recover such debt;

■ coordinating data quality management processes in the Bank.

Security and Legal Services Bureau

The Security and Legal Services Bureau is responsible for shaping the reputation risk management system.

Compliance Team

The Compliance Team is responsible, in particular, for shaping the compliance risk management system, including identification, assessment, control and monitoring of that risk, and for the related reporting.

Validation and Risk Control Officer

The Validation Officer is responsible in particular for designing model validation standards, validation of models and cooperation in this regard with the model validation unit at PKO Bank Polski SA.

Risk management is supported by the following committees:

Supervisory Board Audit and Finance Committee (“AFC”)

The Committee supports the Supervisory Board in particular by:

■ monitoring and periodically expressing its opinions on: the adequacy and effectiveness of internal controls; the adequacy and effectiveness of the risk management system, including with regard to the correct determination of allowances for expected credit losses; the degree of effectiveness of compliance risk management in the Bank; the application of corporate governance principles to supervised institutions, the internal audit and compliance principles; the adequacy and effectiveness of whistleblowing procedures (i.e. anonymous reporting of violations of the law and the ethical procedures and standards in place at the Bank);

■ developing a policy for selecting an audit firm, recommending an audit firm that would audit the Bank’s financial statements to the Supervisory Board;

■ monitoring the financial reporting process, including reviewing the interim and annual financial statements of the Bank;

■ monitoring the audit performance and independence of the registered auditor and the audit firm;

■ expressing opinions on the resolutions of the Bank’s Management Board concerning the internal control system, which are subject to Supervisory Board approval.

Supervisory Board Risk Committee (“RC”)

The Committee supports the Supervisory Board in particular by:

■ reviewing the whole current and future readiness of the Bank for taking risk, strategic directions and tasks concerning risk in the context of the Bank’s business strategy and the conditions resulting from the macroeconomic situation and the regulatory environment, and in particular the risk management strategy prepared by the Management Board and the Bank’s acceptable general risk level;

■ monitoring the conformity of the Bank’s risk-taking policy with the strategy and the financial plan;

■ analysing periodic risk reports, including the utilization of strategic risk tolerance limits and developing relevant guidelines on their basis, as well as periodic reviews of pursuance of the risk management strategy;

■ issuing opinions about capital adequacy, the rules of evaluation of creditworthiness, the risk measurement models, the impairment model;

■ reviewing the disclosure policies regarding capital adequacy, the management of capital adequacy, liquidity risk, operational risk, model risk, and impairment measurement risk;

■ reviewing the draft Rules for Setting the Mortgage Lending Value.

Assets & Liabilities Management Committee (“ALCO”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the management of liquidity risk, interest rate risk, business risk (including the risk of macroeconomic changes), foreign exchange risk, derivative instruments risk, capital risk (including the risk of excessive leverage) as well as the risk of the measurement models applicable to such risks;

■ managing the Bank’s capital adequacy;

■ reviewing documents concerning capital adequacy, equity, internal capital, stress testing, the risks mentioned above and the risk tolerance limits for those risks;

■ taking decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, and launching capital and liquidity emergency measures;

■ presenting recommendations for the relevant governing bodies of the Bank, organizational units, members of the Bank’s Management Board, project teams or task forces – within the scope of its competences.

Credit Committee (“CC”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the functions that manage credit, concentration and residual risks, as well as the risk of the models measuring such risks;

■ reviewing documents concerning the risks mentioned above, the profile and quality structure of the loan portfolio, allowances for expected credit losses, acquisition of loan portfolios and the real estate market;

■ making decisions concerning the Bank’s operations, particularly regarding the risk measures and limits, the results of the valuation of the risk models, the methodologies and models for calculation of expected credit losses, cut-offs used in the assessment of credit risk, loan receivables purchased by the Bank and individual loan transactions;

Strategy and Business Initiatives Committee (“SBIC”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the reputation and compliance risk management function;

■ reviewing documents concerning the risks mentioned above, the directions of the Bank’s development, the Bank’s strategy and the IT strategy, initiatives connected with the pursuit of the Bank’s strategy and the IT strategy, reviewing the product range, product profitability and the lending process;

■ taking decisions concerning the Bank’s operations, particularly regarding the management of these risks, as well as the risk measures and limits;

Operational and Data Quality Risk Committee (“ODQRC”)

The Committee supports the Bank’s Management Board in particular by:

■ supporting the operational risk function;

■ overseeing the functioning of the operational risk management, including tasks relating to ensuring business continuity of the Bank and the security of the information and infocommunication environment;

■ defining the strategic directions of data quality and data architecture management operations at the Bank in the context of the Data Management System (“DMS”);

■ supervising the DMS operations, which includes assessing its effectiveness and the operations of the individual organizational units of the Bank.

The Committees, the Management Board and the Supervisory Board receive regular reports concerning the different types of risk.

44.3 Identification of material risks

Materiality of different risks

The materiality of different risks is established on the basis of the review of all the Bank’s operations.

In determining the materiality criteria for the different risks, the impact of the risk on the Bank’s operations is taken into account and three types of risks are recognized:

■ material risks – subject to active management;

■ risks subject to monitoring– which are monitored for materiality;

■ other risks which have not been identified in the Bank’s operations (immaterial and unmonitored).

The materiality evaluation of the different risks is performed periodically on the basis of quantitative and qualitative data. First and foremost, the evaluation results in defining all the risks existing at the Bank; then the risks are classified to one of the two categories: material risk or risk subject to monitoring. The materiality evaluation is also performed whenever a major change occurs in the scope or profile of the Bank’s operations.

Risk types considered to be material:

■ credit risk;

■ liquidity risk, including financing risk;

■ interest rate risk;

■ operational risk;

■ business risk, including risk of macroeconomic changes;

■ model risk.

Additionally, the following types of risk are monitored by the Bank:

■ concentration risk;

■ foreign currency risk;

■ residual risk;

■ compliance risk;

■ reputational risk;

■ capital adequacy risk, including risk of excessive leverage;

■ derivative instruments risk.

The Bank has defined and monitors materiality criteria for the risks that are subject to monitoring. The fulfilment of these criteria will result in the recognition of such risk as material to the Bank.

In the Risk Management Strategy the Bank has defined a number of strategic limits defining the appetite for different risks. The limits are regularly monitored.

In the first half 2023, the Bank noted that a strategic limit for business risk was exceeded, as described in Note 54.3. None of the strategic limits for other types of risks has been exceeded in 2023.

45. Credit risk management

Credit risk is defined as the risk of the occurrence of losses due to a counterparty’s default on obligations to the Bank or as the risk of a decrease in the economic value of the Bank’s receivables as a result of a deterioration in a counterparty’s ability to service its obligations. The aim of credit risk management is to minimize losses on the loan portfolio as well as to minimize the risk of occurrence of exposures at risk of impairment, while maintaining the expected level of profitability and value of the loan portfolio.

PKO Bank Hipoteczny SA has policies for credit risk management, which are aimed at the proper risk assessment of loan transactions at the loan application stage and throughout the life of the transaction (monitoring), as well as proper safeguarding of risk by applying appropriate credit risk mitigation techniques.

The policies are executed by the Bank through the use of advanced credit risk management methods, both at the level of individual credit exposures and at the level of the entire loan portfolio of the Bank. These methods are verified and developed to ensure compliance with internal rating based requirements (IRB), i.e. an advanced credit risk measurement approach.

Starting from 17 March 2023, the Bank introduced changes to its credit risk management process to comply with the new guidelines of the PFSA relating to the application of Recommendation S. The most important modification in the process of assessment of a customer’s creditworthiness consisted in decreasing the interest rate risk buffer applied in the assessment of creditworthiness from 5% to 3%.

45.1 Credit risk measurement and assessment

PKO Bank Hipoteczny SA measures and assesses credit risk at the level of individual transactions and at the level of the entire portfolio.

The measurement and assessment of the risk of individual loan transactions is performed by PKO Bank Hipoteczny SA with the use of group risk models adapted to the specificity of PKO Bank Hipoteczny’s business and approved by the relevant governing bodies of PKO Bank Hipoteczny SA. The group risk models used by PKO Bank Hipoteczny SA are based on application data, behavioural data and data from the Credit Information Bureau. The review (monitoring) of the models and their validation are performed separately based on the Bank’s portfolio, PKO Bank Polski SA’s portfolio and the combined portfolios of both banks.

The detailed principles and scope of cooperation within the PKO Bank Polski Group regarding the group risk models are laid down in the Outsourcing Agreement with PKO Bank Polski SA described in Note 41.1. “Related-party transactions – capital links”.

In the lending process, as part of the risk assessment of an individual loan transaction, the Bank assesses the customer’s creditworthiness on a qualitative and quantitative basis and evaluates the collateral. The qualitative assessment of creditworthiness means the review of all the available customer information originating from internal and external sources of information, as well as the assessment of certain socio-demographic features describing the customer from the perspective of statistical risk as a debtor. The quantitative assessment consists of investigating the customer’s financial position in order to determine if the customer has sufficient funds for the timely repayment of liabilities, including those arising from the requested loan. Creditworthiness is assessed, among other things, based on the documentation supplied by the customer, which is verified for completeness, authenticity and consistency with the facts and the legal status. The assessment of the collateral, particularly the mortgage lending value, consists of verifying the criteria determining the acceptability and effectiveness of the collateral as a possible source of recovery of the receivable.

When purchasing receivables in respect of residential loans from PKO Bank Polski SA, the Bank also performs an assessment of the credit risks of the contracts to be purchased, in accordance with the Bank’s methodology for assessing purchased receivables. The assessment covers, in particular: the customer’s creditworthiness at the time PKO Bank Polski SA granted the loan to be transferred, the current behavioural scoring and the current timeliness of repayments, eliminating from the transfer receivables which do not satisfy the methodology criteria.

In addition, the purchased portfolios are measured by an independent third party to guarantee an unbiased valuation of the portfolios to be acquired. As part of the valuation, the costs of risk anticipated with regard to the given receivables portfolio are also assessed and are reflected in the final price which the Bank pays for the portfolio.

In order to determine the level of credit risk at the portfolio level, the Bank uses the following risk measurement and assessment methods:

■ probability of default – “PD”;

■ loss given default – “LGD”;

■ expected credit loss – “ECL”;

■ share and structure of non-performing loans – “NPL”;

■ coverage ratio – “CR”;

■ risk costs – “RC”;

■ vintage analyses;

■ stress testing.

The portfolio credit risk measurement methods allow, among other things, to determine the level of provisions for expected credit losses.

The Bank performs analyses and stress-tests regarding the effect of potential changes in macroeconomic conditions on the quality of the Bank’s loan portfolio, including analyses of the sensitivity of allowances to changes in macroeconomic conditions. The test results reported to the Bank’s governing bodies allow them to identify and take measures to mitigate the risks related to the business conducted.

The loan portfolio structure taking into account the PD parameters is presented in the table in Note 45.4.4. “Loans and advances to customers”.

45.2 Allowances for expected credit losses

PKO Bank Hipoteczny SA performs monthly reviews of credit exposures in order to identify those that are at risk of impairment or whose credit risk has increased significantly since initial recognition, to measure the impairment of credit exposures and to set up provisions for expected credit losses.

In accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms (the “CRR”), the Bank defines default of an borrower if the Bank considers that the borrower is unlikely to pay its credit obligations without recourse by the Bank, or the borrower is past due more than 90 days on any material credit obligation; indications of default are the same as the indications of impairment. The Bank follows EBA guidelines (EBA/GL/2016/07) on the application of the definition of default set out in Article 178 of the CRR. The main principles for identification of default introduced by the Bank in connection with the Guidelines are as follows:

■ consistent identification of default at the level of borrower in the PKO Bank Polski Group;

■ a borrower’s past due default occurs when amounts overdue in respect of principal, interest or fees within the PKO Bank Polski Group have exceeded materiality threshold for 90 days;

■ determining an absolute materiality threshold for all exposures at the level of PLN 400 and introducing a relative threshold for amounts overdue of 1% expressed as a ratio of credit obligations to total balance sheet exposures in the Group;

■ the contagion by default of private exposures belonging to owners of business entities which have been identified as being in default where owners have unlimited liability.

In the area of impairment measurement, the Bank applies IFRS 9, which is based on the concept of expected losses. The impairment model is applicable to financial assets which are not measured at fair value through profit or loss, and which comprise:

■ debt financial instruments in the form of credit exposures and securities;

■ off-balance-sheet financial and guarantee exposures.

In accordance with IFRS 9, impairment is measured as 12-month expected credit losses or perpetual expected credit losses. The time horizon of an expected loss depends on whether a significant increase in credit risk occurred since the moment of initial recognition. Therefore, financial assets are allocated to 3 stages.

IFRS 9 portfolio	Period of expected credit losses
Stage 1 - exposures whose credit risk has not increased materially since initial recognition and no indications of impairment have been identified	12-month expected credit losses
Stage 2 - exposures whose credit risk has increased materially since initial recognition, but no indications of impairment have been identified	lifetime expected credit losses
Stage 3 - assets with identified indications of impairment	lifetime expected credit losses

Material credit risk increase is determined taking into account the probability of insolvency and its changes in relation to the level recorded at the initial recognition of the loan. In order to assess a material credit risk increase, the Bank uses a model based on the calculation of marginal PD, i.e. the probability of default in a given month. Such probability depends on the amount of time that has passed since the inception of the exposure. Therefore, it is possible to obtain a projection of changes in credit quality over the life of an exposure, which are characteristic of retail exposures. Marginal PD curves have been determined based on historical data. Marginal PD is assigned to individual exposures by scaling the curve determined at the portfolio level to the individual exposure/customer assessment obtained using application models (which use data from loan applications) and behavioural models. The Bank identifies material credit risk increases for individual exposures based on the comparison of probability of default curves over the lifetime of an exposure on initial recognition and on a given reporting date. For each reporting date, only those parts of the initial and current PD curve are compared which correspond to the period from the reporting date to the maturity of the exposure. The comparison is based on average PD values over the life of the loan in the analysed period adjusted for present and forecast macroeconomic ratios.

The result of such comparison, referred to as α statistical value, is applied to a threshold value above which an increase in credit risk is considered material. A threshold value is determined based on historical relations between α statistical value and the occurrence of default. In this process, the probability of the following events is reduced to a minimum:

■ classifying an exposure which was not in default in the period analysed to the set of credit exposures with significantly increased credit risk (based on statistics) (type I error);

■ not classifying an exposure which was in default in the period analysed to the set of credit exposures with significantly increased credit risk (based on statistics) (type II error).

A two times or bigger increase in PD in relation to the value at the moment of recognition in the books is an indication of a significant deterioration in credit quality. With respect to credit exposures for which the current risk of insolvency does not exceed the level reflected in the price of the funding granted, the results of a comparison of PD curves as at the date of initial recognition and as at the reporting date do not entail the recognition of a significant increase in credit risk.

To identify other indications of a significant increase in credit risk, the Bank uses full quantitative and qualitative information available, including information on, among other things:

■ restructuring actions introducing favourable conditions for debtors in financial hardship (forbearance);

■ delays in repayment of a material amount of principal or interest or fees (understood as the amount exceeding PLN 400 and 1% with regard to the total combined on-balance sheet credit exposure of a borrower in the Bank and other entities of the Bank’s Group) exceeding 30 days;

■ a significant increase in LTV;

■ petitioning for bankruptcy by any of the co-borrowers;

■ putting a credit exposure under the management of restructuring and debt collection units of the Bank;

■ suspicion that a credit exposure has been obtained fraudulently;

■ use of the Borrowers Support Fund by a borrower;

■ death of a borrower (for 6 months after the date of death);

■ suspension of the execution of the loan agreement under a statutory loan repayment holidays combined with simultaneous occurrence of a delay in repayment of more than 30 days during the period from the beginning of the programme;

■ quarantine of exposures for which the indication of impairment ceased to exist in the last 3 months in Stage 2.

Indications of impairment of credit exposures comprise in particular:

■ delays in repayment of a material amount of principal or interest or fees exceeding 90 days;

■ conclusion of a restructuring agreement or applying a relief in repayment of the debt for economic or legal reasons resulting from the customer’s financial distress (until the debt is considered recoverable);

■ the Bank giving notice and requesting immediate repayment of the loan;

■ bankruptcy being declared in respect of any of the co-borrowers or the filing of a bankruptcy petition by all the borrowers;

■ death of all the borrowers;

■ a material deterioration in the borrower’s financial and economic position in respect of credit obligations to other PKO BP Group entities;

■ suspension of the execution of the loan agreement based on a statutory loan repayment holidays in connection with the borrower losing his/her job or another source of income, combined with the simultaneous occurrence of a delay in repayment exceeding 30 days during the last 12 months.

Due to the specialized nature of its business, i.e. having one type of credit product on offer, the Bank calculates its expected credit loss on the basis of one homogeneous portfolio, without applying additional segmentation. The Bank applies the portfolio method to calculate the expected credit loss.

The expected loss is calculated as the product of credit risk parameters: probability of default (PD), loss given default (LGD) and exposure at default (EAD); each of these parameters is a vector representing the number of months covering the expected credit loss horizon.

With regard to exposures classified in Stage 1, the Bank uses a 12-month horizon of estimation of the expected loss, unless the maturity is shorter than 12 months. With Stage 2 exposures, the expected loss is estimated in the time horizon until maturity. In either case, the expected loss is the sum of the losses expected in the individual periods, discounted by the effective interest rate.

In order to determine the value of assets at the time of default, the Bank determines the exposure at default parameter on the basis of future payments according to the repayment schedule and potential over- or underpayments.

In calculating the value of the ultimate expected loss, the Bank also considers estimates of the future macroeconomic conditions. In the case of the portfolio analysis, the impact of macroeconomic scenarios is taken into account in the level of specific risk parameters. The methodology of calculation of the risk parameters includes back-testing of the dependence of the value of the parameters on macroeconomic conditions. Three macroeconomic scenarios developed on the basis of the Group’s forecasts are used for the purpose of calculating expected loss (as in the identification of an indication of a material increase in credit risk) – a baseline scenario with 75% probability and two alternative scenarios: with 5% probability (an optimistic scenario) and 20% probability (a pessimistic scenario). The forecast ratios include: GDP growth rates, unemployment rate, and property price index. The ultimate expected loss is the average of expected losses in each scenario, weighted by the probability of the scenarios. The baseline scenario is based on base macroeconomic forecasts. The forecasts are prepared on the basis of quantitative models and adjusted for one-off events.

Stress scenarios refer to so-called internal shocks, where the external variables (interest rates abroad) do not change relative to the baseline scenario. Stress scenarios are developed on the basis of statistical and econometric analyses, i.e. they do not reflect the events to be described, but the projected path. Two scenarios are identified: an optimistic scenario and a pessimistic scenario. The share of scenarios for the GDP path that falls between the optimistic and the pessimistic scenario is referred to as the baseline scenario probability. Based on this assumption, GDP dynamics is projected assuming a time-varying potential growth rate of the Polish economy calculated using quarterly data provided by the Central Statistical Office. After determining the extreme paths of GDP dynamics, the values of other macroeconomic variables used in the scenarios (unemployment rate, house price index) are estimated.

The unemployment rate is calculated on the basis of a quantified relationship with the difference between the GDP dynamics and the potential economic growth rate. The result is adjusted for important structural changes occurring in the Polish economy which are not covered by the quantitative model, in particular:

■ the ageing of the Polish population (and the emergence of unsatisfied demand for labour, which will limit the scale of the increase in the unemployment rate in a situation of a slowdown in economic growth);

■ the Polish labour market reaching a state close to full employment (due to supply constraints, the space for further decline in the unemployment rate is getting smaller);

■ migrant inflows (only partially included in official statistics).

The level of the property price index is determined on the basis of changes in GDP, taking into account supply and demand conditions on the market, based on data and trends presented by the NBP in its publication "Information on housing prices and the situation on the residential and commercial real etate market in Poland" and the Group’s own analyses.

The tables below present forecasts of the main macroeconomic indices adopted as at 31 December 2023 and 31 December 2022, and the respective probabilities of occurrence assumed.

Scenario as at 31.12.2022	baseline			optimistic			pessimistic
probability	75%			5%			20%
	2024	2025	2026	2024	2025	2026	2024	2025	2026
GDP growth y/y	3.9	3.8	3.2	9.4	8.8	4.7	(1.7)	(1.7)	1.3
Unemployment rate	2.7	2.7	2.5	2.4	2.5	2.7	4.3	4.4	3.0
Property price index	107.7	115.4	118.3	115.1	130.7	134.0	100.6	101.6	104.2

Scenario as at 31.12.2022	baseline				optimistic			pessimistic
probability	75%			5%					20%
	2023	2024	2025	2023		2024	2025		2023	2024	2025
GDP growth y/y	(0.3)	2.8	2.9	5.2		8.2	6.2		(5.8)	(2.5)	(0.4)
Unemployment rate	3.9	4.7	3.9	2.9		3.4	3.1		4.3	5.3	4.3
Property price index	97.0	96.1	98.2	103.9		110.8	114.9		90.6	83.1	83.6

The Bank applies the low credit risk criterion in accordance with IFRS 9, which allows exposures considered to be at low credit risk to remain in Stage 1, irrespective of the scale of the relative deterioration in credit quality since initial recognition. In accordance with IFRS 9, credit risk of a financial instrument is considered low when:

■ the financial instrument has a low risk of default;

■ the borrower has a strong capacity to meet its contractual cash flow obligations in the near term;

■ adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations.

The Bank applies the low credit risk criterion to exposures to PKO Bank Polski SA and exposures to the State Treasury and the National Bank of Poland.

Both the process of assessing a material increase in credit risk and the process of calculating the expected loss are carried out on a monthly basis at the individual exposure level, with macroeconomic forecast data updated on a quarterly basis. A dedicated computing environment is used which enables the results to be distributed to the Group’s internal units.

Parameters of the impairment measurement model

The tables below present parameters of the impairment measurement model for non-impaired exposures. Values in the tables below are presented in PLN million, unless stated otherwise in a given column.

31.12.2023
Stage	PD range	Residential loans, net	Loan commitments	Exposure at default (EAD)	Average probability of default (PD)	Number of exposures	Average loss given default (LGD)	Average maturity in years	Allowances for expected credit losses	Exposure at default (EAD)	Average probability of default (PD)	Average loss given default (LGD)	Allowances for expected credit losses
										of which POCI
1	(0 - 0.15%]	11,858.8	69.4	11,928.8	0.07%	74,707	32.3%	20	(2.7)
	(0.15 - 0.25%]	2,658.6	12.7	2,671.4	0.19%	12,203	32.9%	21	(1.6)
	(0.25 - 0.50%]	1,602.7	8.5	1,611.3	0.35%	7,233	32.5%	21	(1.7)
	(0.50 - 0.75%]	383.3	0.2	383.5	0.61%	1,769	32.6%	21	(0.7)
	(0.75 - 2.5%]	519.3	-	519.3	1.28%	2,229	33.5%	22	(2.1)
	(2.5 - 10%]	87.0	-	87.0	4.16%	355	36.4%	21	(1.2)
	(10 - 45%]	-	-	-	-	-	-	-	-
	(45 - 100%)	-	-	-	-	-	-	-	-
2	(0 - 0.15%]	74.9	-	74.9	0.08%	384	33.6%	21	(1.0)	0.1	0.1%	19.9%	0.1
	(0.15 - 0.25%]	29.2	-	29.2	0.20%	112	33.3%	23	(0.5)	-	-	-	-
	(0.25 - 0.50%]	56.1	0.0	56.3	0.41%	205	32.7%	22	(0.9)	0.3	0.4%	34.5%	0.1
	(0.50 - 0.75%]	76.7	-	76.8	0.62%	289	33.1%	22	(1.3)	-	0.0%	0.0%	-
	(0.75 - 2.5%]	322.2	0.1	322.5	1.40%	1,430	34.3%	22	(9.2)	0.1	0.0%	0.5%	0.1
	(2.5 - 10%]	186.8	-	187.4	4.88%	816	38.1%	22	(14.0)	0.7	5.0%	35.6%	0.2
	(10 - 45%]	48.2	-	48.3	16.63%	191	40.7%	22	(9.8)	-	-	-	-
	(45 - 100%)	16.6	-	16.7	77.02%	69	52.9%	21	(11.5)	-	-	-	-

31.12.2022
Stage	PD range	Residential loans, net	Loan commitments	Exposure at default (EAD)	Average probability of default (PD)	Number of exposures	Average loss given default (LGD)	Average maturity in years	Allowances for expected credit losses	Exposure at default (EAD)	Average probability of default (PD)	Average loss given default (LGD)	Allowances for expected credit losses
										of which POCI
1	(0 - 0.15%]	11,598.7	31.2	11,633.0	0.07%	73,711	31%	21	(2.6)
	(0.15 - 0.25%]	2,703.3	3.7	2,707.6	0.19%	13,573	31.8%	21	(1.5)
	(0.25 - 0.50%]	2,353.8	1.5	2,355.8	0.33%	11,523	32.5%	21	(2.4)
	(0.50 - 0.75%]	684.9	0.9	685.9	0.61%	3,196	32.2%	21	(1.3)
	(0.75 - 2.5%]	677.6	-	677.7	1.27%	2,995	33.5%	22	(2.7)
	(2.5 - 10%]	145.1	-	145.1	4.35%	580	36.1%	23	(2.1)
	(10 - 45%]	-	-	-	-	-	-	-	-
	(45 - 100%)	-	-	-	-	-	-	-	-
2	(0 - 0.15%]	55.8	-	55.9	0.09%	295	31.6%	22	(1.0)	0.2	0.1%	29%	0.1
	(0.15 - 0.25%]	23.0	-	23.0	0.20%	98	32.8%	23	(0.4)	-	-	-	-
	(0.25 - 0.50%]	47.0	-	47.0	0.41%	160	32.8%	24	(0.4)	-	-	-	-
	(0.50 - 0.75%]	92.5	-	92.7	0.62%	347	31.9%	23	(0.8)	0.2	0.6%	43%	0.1
	(0.75 - 2.5%]	321.2	-	321.6	1.35%	1,456	33.4%	22	(5.3)	0.4	1.0%	29%	0.2
	(2.5 - 10%]	190.1	-	190.2	5.02%	879	36.7%	22	(12.0)	-	-	-	-
	(10 - 45%]	70.2	-	70.2	17.98%	281	42.0%	22	(15.0)	-	-	-	-
	(45 - 100%)	16.7	-	16.7	76.14%	85	47.4%	21	(10.3)	-	-	-	-

The tables below present parameters of the impairment measurement model for impaired exposures. Values in the tables below are presented in PLN million, unless stated otherwise in a given column.

31.12.2023
Stage	Number of months in default	Exposure at default (EAD)	Number of exposures	Average loss given default (LGD)	Allowances for expected credit losses	Exposure at default (EAD)	Average loss given default (LGD)	Allowances for expected credit losses
						of which POCI
3	[0- 12]	36.5	172	46.7%	(16.6)	0.1	51.9%	-
	[13- 24]	15.6	76	44.9%	(6.3)	0.2	37.8%	-
	[25- 36]	8.4	57	50.4%	(3.8)	0.2	86.7%	(0.1)
	[37- 48]	6.1	34	68.6%	(3.9)	0.1	80.3%	-
	[49- 60]	3.3	20	84.4%	(2.7)	-	0.0%	-
	[61- 84]	2.1	14	100.0%	(2.1)	-	0.0%	-

31.12.2022
Stage	Number of months in default	Exposure at default (EAD)	Number of exposures	Average loss given default (LGD)	Allowances for expected credit losses	Exposure at default (EAD)	Average loss given default (LGD)	Allowances for expected credit losses
						of which POCI
3	[0- 12]	30.3	150	39.5%	(11.6)	0.4	37.6%	(0.1)
	[13- 24]	14.3	88	44.2%	(5.8)	0.3	43.7%	0.1
	[25- 36]	7.5	45	56.8%	(3.9)	0.1	72.0%	0.0
	[37- 48]	5.7	33	64.8%	(3.6)	-	-	-
	[49- 60]	2.3	14	88.6%	(2.0)	-	-	-
	[61- 84]	1.6	6	100.0%	(1.6)	-	-	-

45.3 Credit risk control

The control of credit risk consists of defining tools for measuring the level of credit risks and applying risk controls to mitigate the level of credit risk, both in the lending processes and at portfolio level. The key credit risk controls are strategic credit risk tolerance limits. The Bank monitors the level of credit exposure towards its customers or groups of related customers within the meaning of the Banking Law, setting competency limits representing the maximum level of credit decision-making powers.

45.4 Credit risk forecasting and monitoring

PKO Bank Hipoteczny SA monitors credit risk at the level of individual transactions and at the level of the entire portfolio.

The monitoring of credit risk at the level of individual loan transactions is governed by the Bank’s policies concerning, among other things, the early monitoring of delays in the payment of dues.

The monitoring of credit risk at the portfolio level consists of:

■ monitoring the level of the portfolio credit risk taking into account the identified sources of credit risk and an analysis of the consequences and measures applied as part of systemic management;

■ recommending remedial actions if an increased level of credit risk is detected.

45.4.1 Maximum exposure to credit risk

The following table presents the maximum exposure to credit risk with respect to financial instruments covered by the provisions of IFRS 7 to which the requirements of IFRS 9 relating to impairment do not apply.

MAXIMUM EXPOSURE TO CREDIT RISK	31.12.2023	31.12.2022

Derivative hedging instruments	55,383	508,052

Balance sheet exposure – total	55,383	508,052

45.4.2 Amounts due from banks

AMOUNTS DUE FROM BANKS	31.12.2023	31.12.2022

Amounts not overdue, not impaired (counterparty rating A2)	2,421	61

Total, gross	2,421	61
Allowances for expected credit losses	-	-

Total, net	2,421	61

45.4.3 Securities

SECURITIES	31.12.2023	31.12.2022

Issued by the State Treasury, PLN Treasury bonds (rating A)	945,251	937,645
NBP bills	-	79,913

Total, gross	945,251	1,017,558
Allowances for expected credit losses	-	(111)

Total, net	945,251	1,017,447

45.4.4 Loans and advances to customers

The loan portfolio is characterized by a low level of impaired exposures. As at 31 December 2023, the share of impaired loan in the total loan portfolio was 0.40%, and at 31 December 2022, it was 0.32%.

The structure of overdue loans is presented below:

LOANS OVERDUE AND IMPAIRED OR IMPAIRED AS AT 31.12.2023	up to 30 days	from 30 to 90 days	more than 90 days	TOTAL

Stage 1	60,507	802	-	61,309
Stage 2	72,430	22,242	8,251	102,923
Stage 3	8,110	5,982	30,841	44,933
Total, gross	141,047	29,026	39,092	209,165
of which POCI	-	247	154	401

LOANS OVERDUE AND IMPAIRED OR IMPAIRED AS AT 31.12.2022	up to 30 days	from 30 to 90 days	more than 90 days	TOTAL

Stage 1	75,243	1,324	-	76,567
Stage 2	64,992	15,836	5,610	86,438
Stage 3	11,004	5,547	18,142	34,693
Total, gross	151,239	22,707	23,752	197,698
of which POCI	-	360	30	390

45.4.5 Financial assets subject to modification

CARRYING AMOUNT AND NET INCOME/(EXPENSE) ON MODIFICATION RECOGNIZED IN RESPECT OF FINANCIAL ASSETS IN THE CASE OF WHICH CONTRACTUAL CASH FLOWS WERE MODIFIED DURING THE REPORTING PERIOD, WHILE THE CORRESPONDING ALLOWANCE FOR EXPECTED CREDIT LOSSES WAS MEASURED AT THE AMOUNT OF LIFETIME EXPECTED CREDIT LOSSES	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Carrying amount at amortized cost before modification (stage 2)	5,859	1,837,776
Gain/(loss) recognized on modification (Stage 2) in the period	(26)	(58,724)

Carrying amount at amortized cost before modification (stage 3)	4,496	45,186
Gain/(loss) recognized on modification (Stage 3) in the period	54	(1,523)

The gross amount of financial assets for which the loss has been calculated over their whole life and which have been modified since initial recognition, for which the allowance for expected credit losses changed during the reporting period by an amount equal to a 12-month expected credit loss, was PLN 1,292,374 thousand as at 31 December 2023 and PLN 1,332,019 thousand as at 31 December 2022.

45.4.6 Forbearance practices

The Bank defines forbearance as actions aimed at changing the contractual terms agreed with a debtor, caused by the debtor’s financial distress (restructuring activities introducing concessions that would otherwise not have been granted). The purpose of forbearance activities is to restore a debtor’s ability to fulfil his obligations towards the Bank and to maximize the effectiveness of non-performing loan management, i.e. obtaining the highest recoveries while minimizing their costs.

Forbearance changes in repayment terms may consist in:

■ dividing the overdue debt into instalments;

■ changing the repayment formula (annuity instalments, decreasing instalments);

■ extending the loan period;

■ changing the interest rate;

■ changing the margin;

■ reducing the amounts due.

As a result of signing and repaying the amounts due under a forbearance agreement on a timely basis, a non-performing loan becomes a performing loan.

The granting of forbearance concessions recognized as impairment triggers results in the recognition of a default event and the classification of the credit exposure to the impaired portfolio.

The inclusion of such exposures in the portfolio of serviced exposures (discontinuation of recognition of the forbearance agreement as an impairment trigger) takes place at least 12 months after the introduction of forbearance, provided that all payments in arrears and at least six scheduled payments have been made by the customer and, in the Bank’s opinion, the current situation of the customer does not pose a threat to their compliance with the terms of the restructuring agreement.

Exposures cease to satisfy the criteria of forborne exposure when the following conditions are jointly met:

■ at least 24 months have lapsed since the forborne exposure was included in the services exposures portfolio (probation period);

■ at the end of the aforementioned probation period, the customer does not have any debt owed to the Bank overdue by more than 30 days;

■ at least 12 instalments have been repaid in the expected amounts.

Forborne exposures are monitored on a current basis. Due to the impairment trigger or a significant increase in credit risk identified in connection therewith, throughout the whole period of their recognition, allowances are recognized for these exposures in the amount of expected losses over the life horizon of the exposure.

EXPOSURES SUBJECT TO FORBEARANCE IN THE LOAN PORTFOLIO	31.12.2023	31.12.2022

Gross loans and advances to customers, including:	17,992,474	19,041,457
subject to forbearance	12,633	9,479
Allowances for expected credit losses, including:	(93,767)	(86,093)
on loans and advances subject to forbearance	(4,445)	(2,872)

Net loans and advances to customers, including:	17,898,707	18,955,364
subject to forbearance	8,188	6,607

45.4.7 Write-offs

The table below presents the outstanding amounts of loans and advances to customers, which were written down during the reporting period and which are still the subject of debt recovery activities.

RECEIVABLES WRITTEN OFF	31.12.2023		31.12.2022
RECEIVABLES WRITTEN OFF	Partly written off	Fully written off	Partly written off	Fully written off

Loans and advances to customers	-	10	92	88

The Bank applies the following criteria of writing off receivables:

■ a receivable is due in full;

■ in accordance with IAS and IFRS, the allowance for expected credit losses:

□ covers 100% of the gross carrying amount of an asset, or

□ exceeds 90% of the gross carrying amount of an asset and actions which have been or are taken with regard to the receivable have not resulted in its recovery, and an assessment of the possibility of recovering the receivables which has been conducted and taken into account, in particular, findings of a bailiff or receiver, the category of satisfaction, and ranking of the mortgage entry indicated that it will be impossible to fully recover the receivables, or inflows in respect of the repayment of the receivable in the last 12 months did not cover current interest accrued.

45.5 Credit risk reporting

Monthly and quarterly credit risk reports are prepared in the Bank. Credit risk reporting involves periodical reporting on the structure and scale of risk exposure of the Bank’s loan portfolio. The reports are submitted to the Credit Committee on a monthly basis and to the Bank’s Management Board, the Supervisory Board Risk Committee and the Supervisory Board on a quarterly basis.

45.6 Credit risk management actions

The basic credit risk management tools used by PKO Bank Hipoteczny SA comprise in particular:

■ strategic and internal (portfolio) risk tolerance limits;

■ minimum transaction conditions (i.e. the maximum value of LTV, maximum loan amount, required down payment, required collateral, the amount of a single loan to BHWN);

■ the scoring system, including specific cut-off points based on the expected credit loss (the maximum value of the product of PD and LGD for a given customer over a 12-month horizon at which a loan transaction is acceptable);

■ limits of loan exposures of Bank customers – limits defining the Bank’s appetite for credit risk resulting, among other things, from Recommendation S (such as the level of the relationship between the expenses of servicing the liabilities in respect of credit and the financial nature to customer’s income, i.e. Debt Service to Income (DStI) ratio, acceptable to the Supervisory Board);

■ competence limits – defining the maximum level of credit decision-making powers concerning the customers of the Bank; the amount of competence limits depends on the authority level at which the credit decision is made (within the Bank’s organization;

■ minimum loan margins, taking into account the costs of credit risk.

A key role in establishing minimum transaction conditions is played by the collateral policy. It is executed by setting up mortgages on the financed properties, and its main purpose is to limit credit losses resulting from the customers’ inability to repay their liabilities to the Bank. At the same time, the Bank follows the overriding principle that collateral is only accepted as a loan support instrument and may not be used as a substitute for the customer’s ability to pay his/her dues.

46. Concentration risk management

Concentration risk is analysed in the Bank in relation to lending and defined as the Bank’s excessive exposure to:

■ exposures to individual customers or groups of related customers;

■ exposures subject to common or correlated risk factors;

■ characterized by the potential to generate losses large enough to threaten the financial standing of the Bank or the ability to conduct its core operations or to lead to a significant change in the Bank’s risk profile.

As part of the management of concentration risk, the Bank performs regular risk identification, measurement, control, monitoring and reporting.

Given the high degree of dispersion of the Bank’s portfolio in terms of exposure to individual customers, the Bank identifies and assesses the concentration risk by analysing the structure of the portfolio in relation to significant risk factors (characteristics of exposure) from the point of view of credit risk, and on this basis distinguishes groups of exposures excessive concentration to which is undesirable and could generate losses in excess of the Bank’s appetite for credit risk in stress conditions.

The following table presents the loans and advances exposure concentrations measured with the share of largest exposures in the Bank’s total loan portfolio.

GROSS LOANS AND ADVANCES TO CUSTOMERS – CONCENTRATION RATIO	31.12.2023	31.12.2022

10 largest exposures	0.06%	0.06%
20 largest exposures	0.12%	0.11%
50 largest exposures	0.28%	0.26%
100 largest exposures	0.52%	0.48%

Measurement and control of the concentration risk in PKO Bank Hipoteczny SA are performed by determining the amount of exposure, which generates the risk of concentration, and comparing the amount to the set limits resulting from legal regulations and internal limits.

Internal limits of exposure are determined in respect of the Bank’s own funds and the Bank’s total credit exposure, and reflect the Bank’s credit risk appetite taking into consideration both normal and stress conditions.

The Bank mitigates concentration risk by using the following limits, the use of which is monitored and reported on a monthly basis:

■ exposure limits to a single entity or group of entities related financially or organizationally;

■ limits of concentration of internal receivables;

■ exposure limits to credit exposures for customers generating income from a commercial activity;

■ exposure limit to credit exposures for customers with a DStI ratio of over 50%.

In the period ended 31 December 2023 and in any of the previous reporting periods, the Bank did not exceed any of the concentration limits.

The Bank prepares monthly and quarterly concentration risk reports. The reports are submitted to the Credit Committee on a monthly basis and to the Bank’s Management Board, the Supervisory Board Risk Committee and the Supervisory Board on a quarterly basis.

47. Residual risk management

Residual risk is a risk arising from the effectiveness of the credit risk mitigation techniques used being lower than assumed by the Bank.

The aim of residual risk management is to ensure the effectiveness of the credit risk mitigation techniques and eliminate the risk connected with the use of loan collateral.

In view of the above and considering the specialist nature of its business, the Bank attaches particular importance to the monitoring of the collateral value. Therefore a key role in determining the minimum transaction conditions is played by the credit risk collateral policy. The mortgage policy is aimed at properly securing the credit risk to which the Bank is exposed, including the establishment of mortgage collateral affording the highest possible recovery rates in the event of the need for debt recovery activities.

The Bank’s policy regarding loan collateral and collateral valuation takes into account the provisions of the following statutory acts: the Banking Act, the Polish Covered Bonds and Mortgage Banks Act, the Land and Mortgage Registers and Mortgage Act. In addition, the matter of collateral is also addressed by the guidelines and recommendations of the Polish Financial Supervision Authority, including Recommendations F, S, and J, and the internal regulations of the Bank.

The Bank has enacted and follows the Rules for Determining the Mortgage Lending Value approved by the Polish Financial Supervision Authority, issued on the basis of the Polish Covered Bonds and Mortgage Banks Act of 29 August 1997, taking into account Recommendation F concerning the basic criteria applied by the Polish Financial Supervision Authority in approving the rules of determination of the property value for mortgage lending purposes enacted by mortgage banks.

The Mortgage Lending Value (MLV) is the value determined by the Bank, which in the Bank’s opinion reflects the level of risk associated with the property serving as collateral for loans, and is used to determine the ceiling of a granted or purchased loan secured by a mortgage on a specific property or to reach a decision by the Bank as to whether the loan secured on the property may be acquired by the Bank.

PKO Bank Hipoteczny SA determines MLV on the basis of expert valuations of the mortgage lending value of property. Such valuations are carried out with due diligence and prudence. They take into account only those property characteristics and expenditures necessary for its construction, which will be of a permanent nature and which any property holder will be able to obtain assuming rational exploitation. The expert valuation, made on a specified date, documents assumptions and parameters underlying the analysis, the process of determining the MLV and the resulting MLV proposal. The expert valuation report takes into account the analyses and forecasts concerning specific parameters for a given property that affect the credit risk assessment, as well as general factors such as: population growth, unemployment rate, and local zoning plans.

The Bank accepts the following as mandatory legal collateral for granted or acquired loans:

■ the highest priority mortgage on the property registered in the land and mortgage register;

■ the assignment of rights from the insurance policies against fire and other accidental causes for the mortgaged property underwritten on behalf of the Bank.

The following tables present the concentration ratio for the portfolio of loans and advances measured in terms of LtV based on market valuation and the value of these portfolios.

GROSS LOANS AND ADVANCES TO CUSTOMERS BY LTV BASED ON MARKET VALUATION - SHARE	31.12.2023	31.12.2022

below 50%	87.9%	82.6%
51% - 60%	7.9%	13.8%
61% - 70%	2.0%	2.9%
71% - 80%	1.7%	0.6%
81% - 90%	0.5%	0.1%
more than 90%	0.0%	0.0%
Total	100.0%	100.0%
Average LTV based on market valuation	35.0%	37.4%

GROSS LOANS AND ADVANCES TO CUSTOMERS BY LTV BASED ON MARKET VALUATION - AMOUNT	31.12.2023	31.12.2022

below 50%	15,807,095	15,731,673
51% - 60%	1,420,119	2,616,467
61% - 70%	365,880	550,054
71% - 80%	300,662	118,148
81% - 90%	98,495	25,115
more than 90%	223	-
Total, gross	17,992,474	19,041,457

The following table presents the concentration ratio for the portfolio of loans and advances by geographical region in which the property securing the loan is located.

GROSS LOANS AND ADVANCES TO CUSTOMERS - BY GEOGRAPHICAL REGION	31.12.2023	31.12.2022

Warsaw region	21.4%	21.3%
Wrocław region	12.2%	12.1%
Gdańsk region	11.5%	11.4%
Poznań region	10.6%	10.5%
Katowice region	10.0%	10.1%
Kraków region	8.1%	8.1%
Szczecin region	7.4%	7.5%
Łódź region	7.4%	7.4%
Lublin region	6.1%	6.2%
Białystok region	5.3%	5.4%

Total	100.0%	100.0%

48. Liquidity risk management

Liquidity risk is the risk of the inability to settle the Bank’s obligations when due as a result of a lack of liquid assets. Liquidity risk comprises funding risk, which is a risk of the inability to renew the required funding resources or a loss of access to new sources of funding.

Lack of liquidity may arise, in particular, from an inappropriate structure of assets and liabilities, including off-balance sheet, mismatch of cash flows, counterparty default, customers’ sudden realization of contingent commitments, the inability to roll over bonds or other market events.

The aim of liquidity risk management is to ensure a sufficient level of funds to settle present and future obligations (including potential obligations) when due, taking into account the nature of activities and requirements which may occur due to changes in market conditions. The Bank maintains a proper liquidity level by appropriate structuring of the statement of financial position and financial liabilities granted.

The Bank manages liquidity risk in order to maintain current, short-term, medium-term and long-term liquidity. The fundamental rule of the liquidity policy of PKO Bank Hipoteczny SA is to maintain an appropriate portfolio of liquid securities and stable sources of funding (in particular from the issue of mortgage covered bonds), and to ensure appropriate liquidity supporting tools. Money market instruments and unsecured bonds issued are also used in liquidity risk management.

The Bank’s Supervisory Board oversees the liquidity management policy and reviews reports concerning the Bank’s liquidity, the Bank’s liquidity risk exposure, utilization of internal limits and the consequences of liquidity risk management decisions. The Supervisory Board approves a set of strategic limits which determine liquidity risk tolerance and the rules of stress-testing with regard to liquidity.

The Bank’s Management Board oversees the liquidity risk management process and at least once a year reviews, evaluates and potentially updates internal regulations (including the policies for stress testing), informing the Supervisory Board about the results of the assessment and the implementation of liquidity risk management policies. The Management Board makes decisions about corrective actions, in particular in a situation of increased risk of a loss of the Bank’s liquidity. In the event of potential liquidity problems, the Bank’s Management Board promptly informs the Supervisory Board about the level of the Bank’s liquidity, threats and actions taken.

The Assets and Liabilities Management Committee (ALCO) establishes internal liquidity risk limits, at least once a year verifies the level of existing internal liquidity risk limits, issues recommendations for actions aimed at maintaining an acceptable level of liquidity risk by the Bank, and monitors liquidity risk on the basis of the reports obtained. The ALCO also initiates actions to protect the Bank from liquidity risk, in particular, for the purpose of implementing the banking risk management strategy adopted by the Bank.

The Treasury Bureau is responsible for the operational management of short-term liquidity and the Risk Bureau deals with overseeing this activity and with developing risk management tools and checking the observance of the limits.

48.1 Liquidity risk measurement and assessment

The Bank applies the following liquidity risk measures:

■ contractual, adjusted and stress-test liquidity gap;

■ liquidity surplus and survival horizon with no external support;

■ regulatory liquidity measures:

□ LCR (liquidity coverage ratio) – the coverage ratio of net outflows up to 1 month;

□ NSFR – net stable funding ratio;

■ the concentration of funding sources;

■ coverage ratio of long-term assets with long-term funding;

■ liquidity stress tests.

The adjusted liquidity gaps as at 31 December 2023 and as at 31 December 2022 are presented below.

LIQUIDITY GAP AS AT 31.12.2023	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months

Adjusted periodic gap	2,350,182	355,401	78,179	(622,680)	(2,375,478)	(9,499,906)	(3,739,191)	13,453,493
Adjusted cumulative periodic gap	2,350,182	2,705,583	2,783,762	2,161,082	(214,396)	(9,714,302)	(13,453,493)	-

As at 31 December 2023, in the ranges of up to 6 months, the cumulative adjusted liquidity gap was positive, which means the surplus of maturing assets increased by estimated inflows from the available overdraft limit over mature liabilities in the short and medium term.

LIQUIDITY GAP AS AT 31.12.2022	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months

Adjusted periodic gap	3,903,422	(1,928,502)	562,870	887,118	264,856	(6,512,460)	(11,859,001)	14,681,697
Adjusted cumulative periodic gap	3,903,422	1,974,920	2,537,790	3,424,908	3,689,764	(2,822,696)	(14,681,697)	-

The liquidity surplus is determined taking account of outflows of funds under stress conditions.

The liquidity surplus consists of liquid assets (comprising the main part aimed at providing protection against the most acute crises and the supplementary part providing protection against less acute, but longer lasting crises) adjusted for net stress test flows (outflows less inflows) over a 30-day horizon.

SENSITIVITY MEASURE	31.12.2023	31.12.2022

Excess liquidity in the horizon of up to 1 month	2,659,529	2,042, 700

The liquidity coverage ratio (LCR) of net outflows of up to 1 month is shown in the following table:

SENSITIVITY MEASURE	31.12.2023	31.12.2022

Liquidity coverage ratio up to 1 month (LCR)	249.9%	186.7%
LCR regulatory limit	100.0%	100.0%

The net stable funding ratio (NSFR) is presented in the table below:

SENSITIVITY MEASURE	31.12.2023	31.12.2022

Net stable funding ratio (NSFR)	106.9%	118.6%
NSFR regulatory limit	100.0%	100.0%

48.2 Liquidity risk control

The liquidity risk control consists of determining strategic tolerance limits appropriate for the scale and complexity of the Bank, and internal limits for short-, medium-, and long-term liquidity risk, which are monitored, and if overrun, the Bank initiates management actions.

48.3 Liquidity risk forecasting and monitoring

The liquidity risk exposure of PKO Bank Hipoteczny SA as at 31 December 2023 and 31 December 2022 was within the strategic and internal limits set. During 2023 and 2022 the Bank did not exceed any of the liquidity standards nor any strategic or internal limits.

The Bank regularly reviews the business assumptions which may have a material effect on the projections of liquidity risk measures. Forecasts of the basic liquidity risk measures are prepared periodically and on an on-going basis and these are juxtaposed with the internal limits.

48.4 Liquidity gap in the presentation of contractual cash flows

Liquidity gap in the presentation of contractual cash flows is a mismatch between the inflows and outflows classified in a given range. In the calculation of liquidity gap relating to cash flows, the Bank takes into account all instruments concluded as at the balance sheet date. An increase in the amount of loans granted or rolling over of funding for a consecutive period is not taken into account. However, in accordance with the Bank’s internal methodology, it is assumed that funds available under credit lines will be used, given the nature of these instruments (stand-by line used to finance current operations).

31.12.2023	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months	Total

Inflows	2,442	583,079	305,757	469,025	951,350	2,054,336	5,919,602	25,754,605	36,040,196
securities	-	409,527	-	4,632	15,468	182,313	384,761	-	996,701
loans and advances to customers	-	173,552	305,757	464,393	935,882	1,872,023	5,534,841	25,754,605	35,041,053
other	2,442	-	-	-	-	-	-	-	2,442

Outflows	-	2,328,075	1,086,331	2,051,659	2,947,102	6,020,119	3,890,674	-	18,323,960
amounts due to banks	-	11,453	60,240	70,354	151,119	2,950,194	2,023,177	-	5,266,537
liabilities in respect of mortgage covered bonds issued	-	2,212,754	146,158	805,465	2,783,226	3,066,226	1,867,447	-	10,881,276
unsecured bonds issued	-	-	863,000	1,162,000	-	-	-	-	2,025,000
disbursement of loan commitments	-	43,643	16,933	13,840	12,757	3,699	50	-	90,922
other	-	60,225	-	-	-	-	-	-	60,225

Inflows due to initialled and available revolving current account loans	2,347,456	2,174,000	971,700	117,800	-	-	-	-	5,610,956
Outflows due to repayment of current account loans used	-	-	-	-	-	3,277,956	2,000,000	333,000	5,610,956

Inflows from derivative hedging instruments	-	2,190,265	109,591	46,516	2,192,351	2,222,280	6,278	-	6,767,281
Outflows on derivative hedging instruments	-	2,137,327	185,955	74,196	2,241,709	2,413,524	7,385	-	7,060,096

Periodic gap	2,349,898	481,942	114,762	(1,492,514)	(2,045,110)	(7,434,983)	27,821	25,421,605	17,423,421

Cumulative gap	2,349,898	2,831,840	2,946,602	1,454,088	(591,022)	(8,026,005)	(7,998,184)	17,423,421

31.12.2022	on demand	0-1 month	1-3 months	3 - 6 months	6 - 12 months	12-24 months	24 - 60 months	over 60 months	Total

Inflows	60,400	296,364	350,937	534,236	1,096,190	2,555,291	6,852,047	30,368,793	42,114,258
securities	-	107,813	-	6,048	32,957	434,014	575,287	-	1,156,119
loans and advances to customers	-	188,551	350,937	528,188	1,063,233	2,121,277	6,276,760	30,368,793	40,897,739
other	60,400	-	-	-	-	-	-	-	60,400

Outflows	-	2,496,896	397,490	1,902,481	486,374	6,593,479	9,017,634	62,095	20,956,449
amounts due to banks	-	11,447	94,921	245,496	181,930	387,116	5,855,006	-	6,775,916
liabilities in respect of mortgage covered bonds issued	-	2,405,923	19,917	594,887	93,504	6,204,885	3,162,591	62,095	12,543,802
unsecured bonds issued	-	3,872	273,416	1,054,361	203,692	-	-	-	1,535,341
disbursement of loan commitments	-	11,563	9,236	7,737	7,248	1,478	37	-	37,299
other	-	64,091	-	-	-	-	-	-	64,091

Inflows due to initialled and available revolving current account loans	3,843,022	-	478,000	1,414,000	-	-	-	-	5,735,022
Outflows due to repayment of current account loans used	-	-	-	-	-	-	5,257,022	478,000	5,735,022

Inflows from derivative hedging instruments	-	2,378,046	961	48,914	20,316	4,895,442	2,401,047	2,093	9,746,819
Outflows on derivative hedging instruments	-	2,218,522	92,712	94,848	188,194	4,618,770	2,444,717	1,907	9,659,670

Periodic gap	3,903,422	(2,041,008)	339,696	(179)	441,938	(3,761,516)	(7,466,279)	29,828,884	21,244,958

Cumulative gap	3,903,422	1,862,414	2,202,110	2,201,931	2,643,869	(1,117,647)	(8,583,926)	21,244,958

48.5 Concentration of funding sources

The Bank recognizes the risk of concentration of funding sources, as an element of liquidity risk, determined by circumstances under which the funding structure becomes susceptible to the occurrence of individual events or single factors, such as sudden significant withdrawal of funds or insufficient access to new funding.

The Bank’s business model assumes that the risk of concentration of funding sources results from:

■ a high proportion of covered bonds in the funding structure (covered bonds are a stable source of funding, however the balloon nature of their redemption causes further need for a new issue or alternative source of funding to arise at redemption in most cases);

■ funding supplied by the parent;

■ issue of own bonds.

The table below presents the structure of the Bank’s funding sources:

STRUCTURE OF THE BANK’S FUNDING	31.12.2023	31.12.2022

Mortgage covered bonds issued	55.2%	58.3%
Funds from the parent entity	24.2%	26.6%
Bonds issued	10.5%	7.2%
Equity	8.7%	6.8%
Other	1.4%	1.1%

Total	100.0%	100.0%

Seeking to reduce the concentration risk of funding sources, the Bank has implemented a system of internal limits, both in short-term and long-term horizons, according to the mortgage covered bond issues carried out by the Bank. In the period ended 31 December 2023 and 31 December 2022, none of these limits were exceeded.

48.6 Liquidity stress tests

Liquidity stress tests present the impact of stressed market conditions on the level of the Bank’s liquidity. Shock analyses are carried out on the basis of scenarios involving hypothetical changes in the following factors:

■ shock changes in market parameters on financial markets;

■ the impact of extreme changes in market factors, as well as drops in prices on the real estate market on the anticipated losses on the residential loan portfolio;

■ downrating of the Bank’s counterparties and of the Bank;

■ deterioration in the creditworthiness of borrowers;

■ increase in the instability of funding sources;

■ reduced repayments and increased disbursements of mortgage loans granted;

■ inability to roll over short-term bond issues or obtain new ones;

■ inability to roll over covered bond issues or obtain new ones.

Stress test results are used in particular in:

■ monitoring the Bank’s exposure to liquidity risk under stressed conditions;

■ the process of setting internal limits for liquidity risk measures;

■ controlling liquidity maintenance, for each day of the 30-day time band;

■ the process of planning the Bank’s statement of financial position;

■ the process of determining conditions triggering the implementation of liquidity emergency plans of the Bank.

Test results are presented at the meetings of the Management Board and the Supervisory Board of the Bank.

The stress tests conducted on the basis of the Bank’s financial data as at 31 December 2023 and as at 31 December 2022 did not indicate any risk to the Bank’s business due to the occurrence of hypothetical stressed market conditions. Owing to the well-balanced funding structure, long maturities of most of its liabilities and a sufficient level of liquid assets, the Bank has a high ability to survive a liquidity crisis.

48.7 Liquidity risk reporting

The Bank prepares liquidity risk reports on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to liquidity risk and information about the utilization of the liquidity risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

48.8 Liquidity risk management actions

The risk management system of PKO Bank Hipoteczny SA comprises the following major components:

■ procedures for liquidity risk management, including in particular emergency plans;

■ internal limits limiting liquidity risk;

■ deposit and derivative transactions, including structural currency transactions and transactions for sale or purchase of securities;

■ unconditional liquidity support instruments obtained from PKO Bank Polski SA;

■ transactions ensuring long-term funding of the lending activity.

The Bank pays particular attention to matching the timing of cash flows upon the maturity of material liabilities (redemption of mortgage covered bonds).

49. Interest rate risk management

The operations of PKO Bank Hipoteczny SA are exposed to interest rate risk, which is defined as the risk of loss on balance sheet items and off-balance sheet items, sensitive to movements in the interest rates, as a result of changes in the market interest rates.

The aim of interest rate risk management is to limit any potential losses incurred due to changes in the market interest rates to an acceptable level by the proper shaping of the structure of the balance sheet items and off-balance sheet items, among other things, in terms of the matching of the repricing periods.

49.1 Interest rate risk measurement and assessment

In the process of interest rate risk management, the Bank uses the net interest income sensitivity measure, economic equity sensitivity measure, stress tests and repricing gap reports.

The net interest income sensitivity measure is a measure determining the change in net interest income arising from a sudden change in the interest rates while the economic value of equity sensitivity measure is a measure illustrating the impact of such a change on the fair value of an item in the banking portfolio. The measures are calculated assuming a parallel shift in the yield curves of 100 b.p. up and down (whichever scenario is more unfavourable), and take into account the diversification of repricing dates for individual interest items in each subsequent time band.

SENSITIVITY MEASURE	31.12.2023	31.12.2022

Net interest income sensitivity	(12,785)	(9,919)
Economic value of equity sensitivity	(1,449)	(7,192)

Stress tests are used to estimate potential losses resulting from the structure of the balance sheet and off-balance sheet items maintained in the event of the occurrence of the hypothetical scenarios within which parallel shifts in interest rate curves by ±50 bps, ±100 bps, ±200 bps and ±400 bps are arbitrarily assumed. Scenarios for changes in interest rate curves and reversed stress test scenarios are also adopted, assuming a drop in the Bank’s financial result to PLN 0 and a loss of the Bank’s economic value of 1% of its equity.

The repricing gap presents the difference between the value of the assets and liabilities exposed to interest rate risk, which are repriced within the given time band, where positions which are not repriced (fixed-interest items) are recognized at their maturity dates.

The repricing gap report presented below includes assets, liabilities and financial liabilities granted which are sensitive to changes in interest rates. They do not include contingent liabilities which are insensitive to interest rate risk, the Bank’s own funds, amounts due from banks in the form of current account balances.

31.12.2023	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	5,384,112	9,348,517	1,779,164	123,772	321,369	1,621,089	33,213	18,611,236
balances with the Central Bank	21	-	-	-	-	-	-	21
securities	762,000	-	160,000	-	-	-	-	922,000
loans and advances to customers	4,622,091	9,348,517	1,619,164	123,772	321,369	1,621,089	33,213	17,689,215

Liabilities	(6,172,698)	(3,221,700)	(1,162,000)	(2,174,000)	(2,324,000)	(1,909,000)	-	(16,963,398)
amounts due to banks	(2,568,698)	-	-	-	(150,000)	(1,849,000)	-	(4,567,698)
liabilities in respect of mortgage covered bonds issued	(3,604,000)	(2,358,700)	-	(2,174,000)	(2,174,000)	(60,000)	-	(10,370,700)
unsecured bonds issued	-	(863,000)	(1,162,000)	-	-	-	-	(2,025,000)

Derivative hedging instruments – assets	2,173,565	108,700	176	2,173,664	2,173,847	60,000	-	6,689,952
Derivative hedging instruments – liabilities	(2,103,373)	(4,651,272)	(143)	(1,978)	(366)	-	-	(6,757,132)

Periodic gap	(718,394)	1,584,245	617,197	121,458	170,850	(227,911)	33,213	1,580,658

Cumulative gap	(718,394)	865,851	1,483,048	1,604,506	1,775,356	1,547,445	1,580,658

31.12.2022	0-1 month	1-3 months	3-6 months	6-12 months	1-2 years	2-5 years	>5 years	Total

Assets, including:	6,082,898	10,526,858	1,628,113	81,380	177,326	1,691,645	45,284	20,233,504
balances with the Central Bank	60,339	-	-	-	-	-	-	60,339
securities	842,000	-	160,000	-	-	-	-	1,002,000
loans and advances to customers	5,180,559	10,526,858	1,468,113	81,380	177,326	1,691,645	45,284	19,171,165

Liabilities	(7,869,977)	(1,395,500)	(924,000)	-	(4,807,148)	(4,076,950)	(60,000)	(19,133,575)
amounts due to banks	(3,895,027)	-	-	-	-	(1,732,000)	-	(5,627,027)
liabilities in respect of mortgage covered bonds issued	(3,774,950)	(1,000,000)	-	-	(4,807,148)	(2,344,950)	(60,000)	(11,987,048)
unsecured bonds issued	(200,000)	(395,500)	(924,000)	-	-	-	-	(1,519,500)

Derivative hedging instruments – assets	2,345,264	-	162	325	4,806,492	2,344,785	60,000	9,557,028
Derivative hedging instruments – liabilities	(4,233,128)	(4,651,272)	(150)	(311)	(4,276)	(366)	-	(8,889,503)

Periodic gap	(3,674,943)	4,480,086	704,125	81,394	172,394	(40,886)	45,284	1,767,454

Cumulative gap	(3,674,943)	805,143	1,509,268	1,590,662	1,763,056	1,722,170	1,767,454

49.2 Interest rate risk control

The control of interest rate risk involves determining risk limits appropriate to the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for interest rate risk, which are subject to monitoring, and management actions are taken if they are exceeded.

49.3 Interest rate risk forecasting and monitoring

The interest rate risk exposure of PKO Bank Hipoteczny SA as at 31 December 2023 and 31 December 2022 was within the strategic and internal limits set. During 2023 and 2022, the Bank did not exceed any of the internal or strategic limits of the interest rate risk.

49.4 Interest rate risk reporting

The Bank prepares reports concerning liquidity risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to interest rate risk and information about the utilization of the interest rate risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

49.5 Interest rate risk management actions

The basic interest rate risk management tools used by PKO Bank Hipoteczny SA comprise in particular:

■ procedures concerning the management of interest rate risk;

■ internal limits on interest rate risk, among other things for basis point value sensitivity and net interest income sensitivity;

■ specification of the permitted types of interest-rate based transactions;

■ concluding acceptable transactions based on interest rate;

■ the proper selection of transaction parameters making it possible to apply natural hedges between assets and liabilities.

The Bank manages interest rate risk by matching the repricing structure of the assets and funding sources (natural hedging) and, on an as needed basis, enters into hedging transactions (derivative contracts). The Bank uses IRS and CIRS derivative transactions to hedge against interest rate risk associated with issues of fixed interest mortgage covered bonds in PLN and EUR aimed at funding variable interest rate loans.

In 2023, the Bank work on ensuring compliance with Guidelines specifying criteria for the identification, evaluation, management and mitigation of the risks arising from potential changes in interest rates and of the assessment and monitoring of credit spread risk, of institutions’ non-trading book activities (EBA/GL/2022/14), with regard to, among other things, the implementation of credit spread risk measurement (CSRBB).

50. Derivative instruments risk management

The Bank concludes derivative transactions solely in order to hedge risks related to its operations, in particular interest rate risk and foreign exchange risk. The Bank manages the derivative instruments risk as part of managing other types of risks, including credit risk, interest rate risk, foreign exchange risk and liquidity risk.

The purpose of managing the derivative instruments risk is to limit losses relating to derivative transactions, mainly resulting from the potential ineffectiveness of hedging strategies by taking appropriate, i.e. consistent with the management of other risks, positions in such instruments and by implementing appropriate procedures and controls specific for derivative instruments.

51. Foreign exchange risk management

The operations of PKO Bank Hipoteczny SA are exposed to foreign exchange risk, which is defined as the risk of loss due to changes in the foreign exchange rates generated by the maintenance of open positions in various currencies.

The aim of foreign exchange risk management is to limit any potential losses incurred due to changes in the exchange rates to an acceptable level by the proper shaping of the currency structure of the balance sheet items and loan commitments, and the use of derivative instruments.

In the process of foreign exchange risk management the Bank in particular uses individual and aggregate FX positions and stress tests. Stress tests are used to estimate the potential loss on the positions taken in foreign currencies in the event of an extraordinary situation on the FX market. The Bank uses hypothetical scenarios – which assume a hypothetical appreciation or depreciation of foreign exchange rates (20 per cent and 50 per cent).

The Bank’s FX positions are presented in the following table:

FOREIGN CURRENCY POSITION IN ‘000 PLN	31.12.2023	31.12.2022

EUR	(2,069)	130
USD	3	3

The FX VaR measure is a potential value of loss that may occur in normal market conditions at a specific time (i.e. horizon) and with an assumed level of probability related to changes in foreign exchange rates. Stress tests are used to estimate loss in the event of abrupt changes on the currency market which are not described using statistical measures by default. The Bank’s combined FX VaR for all currencies is presented in the following table:

SENSITIVITY MEASURE	31.12.2023	31.12.2022

10-day FX VaR at 99% confidence level in PLN ‘000	86.9	5.1

The foreign exchange risk exposure of PKO Bank Hipoteczny SA as at 31 December 2023 and 31 December 2022 was within the strategic and internal limits set. During 2023 and 2022 the Bank did not exceed any of the strategic or internal limits of foreign exchange risk.

The Bank closes open FX positions on an ongoing basis, and the control and reporting procedures implemented by the Bank significantly limit the impact of changes in exchange rates on the Bank’s financial performance, hence the foreign exchange risk as at 31 December 2023 and 31 December 2022 was low. The biggest FX positions of the Bank are associated with liabilities in respect of mortgage covered bonds issued in EUR and they are closed on an ongoing basis using CIRS and FX Forward derivative transactions.

The currency structure of financial assets and financial liabilities is presented in the table below:

CURRENCY STRUCTURE 31.12.2023	Currency translated to PLN
CURRENCY STRUCTURE 31.12.2023	PLN	EUR	USD	Total

FINANCIAL ASSETS
Cash and balances with the Central Bank	306	-	-	306
Amounts due from banks	198	2,220	3	2,421
Derivative hedging instruments	55,383	-	-	55,383
Securities	945,251	-	-	945,251
Loans and advances to customers	17,898,707	-	-	17,898,707
Other financial assets	1,072	-	-	1,072
Total financial assets	18,900,916	2,220	3	18,903,139

FINANCIAL LIABILITIES AND OFF-BALANCE SHEET LIABILITIES
Amounts due to banks	4,580,744	-	-	4,580,744
Derivative hedging instruments	213,187	-	-	213,187
Amounts due to customers	3,710	-	-	3,710
Liabilities in respect of mortgage covered bonds issued	3,768,818	6,675,827	-	10,444,645
Liabilities in respect of bonds issued	1,991,260	-	-	1,991,260
Other financial liabilities	17,970	4,372	-	22,342
Total financial liabilities	10,575,689	6,680,199	-	17,255,888

Contingent liabilities received	90,922	-	-	90,922

CURRENCY STRUCTURE 31.12.2022	Currency translated to PLN
CURRENCY STRUCTURE 31.12.2022	PLN	EUR	USD	Total

FINANCIAL ASSETS
Cash and balances with the Central Bank	60,696	-	-	60,696
Amounts due from banks	56	2	3	61
Derivative hedging instruments	508,052	-	-	508,052
Securities	1,017,447	-	-	1,017,447
Loans and advances to customers	18,955,364	-	-	18,955,364
Other financial assets	98	-	-	98
Total financial assets	20,541,714	2	3	20,541,719

FINANCIAL LIABILITIES AND OFF-BALANCE SHEET LIABILITIES
Amounts due to banks	5,635,860	-	-	5,635,860
Derivative hedging instruments	25,664	-	-	25,664
Amounts due to customers	5,577	-	-	5,577
Liabilities in respect of mortgage covered bonds issued	2,506,253	9,557,376	-	12,063,629
Liabilities in respect of bonds issued	1,495,904	-	-	1,495,904
Other financial liabilities	14,903	-	-	14,903
Total financial liabilities	9,684,160	9,557,376	-	19,241,536

Contingent liabilities received	37,298	-	-	37,298

The Bank prepares reports concerning foreign exchange risk on a daily, weekly, monthly and quarterly basis. Reports containing information about the exposure to foreign exchange risk and information about the utilization of the foreign exchange risk limits are submitted to the ALCO on a monthly basis and to the Management Board and the Supervisory Board of the Bank on a quarterly basis.

The basic foreign exchange rate risk management tools used by PKO Bank Hipoteczny SA comprise:

■ procedures concerning the management of foreign exchange risk;

■ limits and thresholds on foreign exchange risk, among other things on foreign exchange positions;

■ specification of the permitted types of foreign exchange transactions.

52. Model risk management

Model risk is the risk of losses resulting from wrong business decisions made on the basis of the models used.

The aim of the management of model risk is to mitigate the risk of losses resulting from a wrong business decision made on the basis of the models used by way of a properly defined and implemented model management process.

All models of significance for the Bank are subject to a process of regular and impartial validation conducted in cooperation with the Model Validation Department at PKO Bank Polski SA.

The model risk management process in PKO Bank Hipoteczny SA is consistent with the solutions in place in the PKO Bank Polski Group.

52.1 Model risk measurement and assessment

Identification of model risk consists in particular of:

■ collecting information about the models in use and those to be implemented;

■ periodical determination of significance of the models.

Assessment of model risk is aimed at determining the scale of threats connected with the existence of model risk. The assessment is carried out at the level of a single model as well as on an aggregate basis for the whole Bank.

52.2 Model risk control

The aim of the model risk control is to maintain the aggregate assessment of model risk at a level acceptable to the Bank. The control of model risk consists of defining mechanisms for diagnosing the model risk level and the risk mitigation tools.

The tools used for diagnosing model risk include in particular a strategic limit of model risk tolerance and model risk thresholds.

52.3 Model risk forecasting and monitoring

The aim of model risk monitoring is to diagnose the areas requiring management action. The following in particular are monitored as part of the model risk monitoring process:

■ updating the model risk level;

■ evaluating the utilization of the strategic limit of model risk tolerance and the values of the model risk thresholds;

■ verifying the status of implementation and evaluation of the effectiveness of the model risk mitigating actions.

52.4 Model risk reporting

The results of monitoring are presented in quarterly reports for the Management Board and annual reports for the Supervisory Board Risk Committee and the Supervisory Board containing a comprehensive assessment of model risk, including in particular:

■ information about the utilization of the strategic limit of model risk;

■ information about the level of model risk;

■ the model risk map;

■ the status of implementation of the recommendations issued after model reviews or validation;

■ suggested management actions to mitigate the model risk.

52.5 Model risk management actions

The aim of management actions is to develop the model risk management process and shape the risk level, in particular by setting acceptable risk levels and making decisions about the use of risk management supporting tools.

53. Operational risk management

Operational risk is defined as the risk of the occurrence of a loss due to non-compliance or failure of internal processes, people and systems or external events. Operational risk includes legal risk, but it does not include reputation risk and business risk. Operational risk is classified as a material risk.

The aim of operational risk management is to ensure operational and cost effectiveness and the safety of the activities conducted by reducing the occurrence of operational events and their negative consequences.

The process of operational risk management is executed at the level of the Bank as a whole and at the level of each systemic operational risk management area. Systemic operational risk management involves development of solutions which enable the Bank to exercise control over the level of operational risk so that it can accomplish its goals. Ongoing operational risk management is conducted by every employee of the Bank, within their responsibilities and tasks.

For the purpose of managing operational risk, the Bank gathers internal and external data about operational incidents, business environment factors, the results of operational risk self-assessment, data on key risk indicators in respect of operational risk (KRI) and data related to the quality of internal control.

Taking into account the scale of outsourcing and its potential impact on the operational risk profile, the Bank has prepared a risk management process related to the outsourcing of services, including sales and after sales servicing and IT services. The management of this risk, carried out by different organizational units of the Bank, includes numerous components, such as the introduction of procedures for outsourcing services for the Bank, analysing and assessing the risk associated with the outsourcing of services by the Bank, assessing the reliability and financial position of the service providers, developing contingency plans for the Bank and its service providers (in particular in the IT field), implementing adequate safeguards of the Bank’s interests in outsourcing agreements, requirements for an appropriate insurance coverage by insourcers, monitoring the proper execution of contracts and the insourcers’ position, including their periodic verification, recording incidents and losses related to the provision of services by insourcers.

53.1 Operational credit risk measurement and assessment

Operational risk is measured in order to determine the scale of threats associated with the existence of operational risk using set risk measures. Operational risk measurement covers:

■ determining the strategic operational risk tolerance limits;

■ calculating key risk indicators (KRI);

■ calculating the own funds requirement for operational risk under the BIA approach (BIA requirement);

■ stress testing;

■ calculating the internal capital level;

The operational risk self-assessment includes the identification and assessment of operational risk in relation to the Bank’s products, processes and applications, as well as organizational changes. The operational risk self-assessment is conducted once a year for the key processes or once in two years for other processes and before the introduction of new or significantly changed products, processes or applications used by the Bank, with the use of:

■ data collected on operational incidents;

■ results of inspections, proceedings and functional internal control;

■ KRIs.

53.2 Operational risk control

The aim of operational risk control is to strive to maintain the Bank’s operational risk at an acceptable level.

The control of operational risk involves determining the risk limits appropriate for the scale and complexity of the Bank’s operations, in particular strategic tolerance limits for operational risk and KRI limits, including threshold and critical values.

The strategic operational risk tolerance limits are set by the Management Board and approved by the Supervisory Board.

53.3 Operational risk forecasting and monitoring

The aim of operational risk monitoring is to control operational risk and diagnose the areas requiring management action.

In particular, the Bank regularly monitors:

■ the utilization of strategic tolerance limits and operational risk loss limits;

■ the effectiveness and timeliness of actions undertaken to reduce or transfer the operational risk;

■ the values of the KRIs;

■ the results of operational risk self-assessment;

■ the results of stress test;

■ operational incidents and their consequences.

53.4 Operational risk reporting

Operational risk information is reported for:

■ the Bank’s internal purposes, in particular: the Management Board and the Supervisory Board;

■ supervisory and regulatory bodies;

■ the shareholders and the financial market.

Operational risk information is reported for the Bank’s internal purposes on a quarterly basis. Quarterly reports contain, in particular, information about:

■ the results of the measurement and monitoring of operational risk;

■ the operational risk profile of the Bank resulting from the process of identifying and assessing the threats to products, processes and applications of the Bank;

■ the level of operational risk and the tools applied in operational risk management;

■ the actions taken to limit operational risk and the evaluation of the effectiveness of the actions taken to reduce the operational risk level;

■ recommendations, decision and suggestions of the Management Board.

The quarterly reports also include information on operational risks identified in relation to the activities outsourced by the Bank to external entities, including, in particular, PKO Bank Polski SA.

53.5 Operational risk management actions

Management actions are taken when the self-assessed operational risk, KRI or adjusted operational risk reaches an elevated or high level at the Bank.

If the risk level is elevated or high, the Bank uses the following approach:

■ risk reduction – mitigating the impact of the risk factors or the consequences of its materialization;

■ risk transfer – the transfer of responsibility for covering potential losses to a third-party;

■ risk avoidance – discontinuance of activities that generate risk or eliminate the possibility of occurrence of a risk factor.

The operational risk management process is subject to internal control including:

■ a review of the strategy and the process of operational risk management;

■ internal audit.

53.6 Operational losses incurred

In 2023, eleven (11) operational risk incidents were identified at the Bank, which generated a financial loss totalling PLN 784 thousand. In 2022 there were 9 such incidents and the total net financial loss amounted to PLN 14 thousand. The above values of financial losses remained at a low level in relation to the value of the own funds requirement for operational risk.

In order to limit losses arising from operational risk, the Bank applies ad hoc and systemic management measures. Ad hoc measures include a direct response to the identified risks, eliminating reversible irregularities and recovering losses.

54. Business risk management

Business risk is the risk of failing to achieve the assumed financial targets, including a risk of losses, resulting from adverse changes in the business environment, wrong decisions made, incorrect implementation of decisions made or failing to take proper action in response to changes occurring in the business environment. It also takes into account a risk of macroeconomic changes (a risk of deterioration in the Bank’s financial position due to the adverse effect of changing macroeconomic conditions).

Identification of business risk consists of recognizing and defining actual as well as potential factors which result from the current or contemplated business operations of the Bank and may adversely affect the Bank’s financial position, the occurrence or the volume of the Bank’s income and expenses.

54.1 Business risk measurement and assessment

Business risk is measured in order to determine the scale of threats connected with the existence of business risk using specified risk measures. Operational risk measurement covers:

■ determining the strategic operational risk tolerance limits;

■ stress testing;

■ calculating the internal capital level;

54.2 Business risk control

Control of business risk is intended to mitigate the adverse effect of internal and external factors on the financial position of the Bank. The purpose of business risk control is to define the acceptable level of business risk adequate to the Bank’s scale of operations and its impact on the functioning and the financial situation of the Bank in the form of strategic tolerance limits.

54.3 Risk forecasting and monitoring

The aim of business risk monitoring is to determine whether its level after applying risk controls reflects the admissible level and to diagnose the need to take management actions and the areas in which they have to be taken.

Particular attention is paid to monitoring the strategic business risk tolerance limit.

From July 2022 to June 2023, the Bank has noted that the strategic limit of business risk determined for C/I ratio has been exceeded. During that period, the ratio was negative (-25.2% as at the end of December 2022) due to an adjustment of the gross carrying amount of mortgage loans in PLN recognized following the introduction of the statutory loan repayment holidays described in Note 26 and charged to the income statement for 2022. Starting from July 2023, the ratio remains at a safe level in relation to the adopted thresholds for business risk.

The Bank considers business risk to be material and maintains additional internal capital for cover potential future losses resulting from that risk.

54.4 Business risk reporting

Business risk is reported via reports addressed to the ALCO, the Management Board and the Supervisory Board .

54.5 Management actions relating to risk

Management actions consist in particular of:

■ verifying and updating the quarterly financial forecasts and the financial plan taking into account measures aimed at mitigating the level of business risk in line with the set limits;

■ monitoring the level of the strategic business risk tolerance limit.

55. Compliance risk management

Compliance risk is defined at PKO Bank Hipoteczny SA as the risk of legal sanctions, incurring financial losses or the loss of reputation as a result of failure on the part of the Bank, the Bank’s employees or entities acting on its behalf to comply with the provisions of the law, internal regulations and the market standards adopted by the Bank.

The aim of compliance risk management is to:

■ maintain the Bank’s reputation as an institution acting in accordance with the law and the adopted market standards, reliable, fair and honest, among customers, employees, business partners and other market participants;

■ prevent the occurrence on the Bank’s side of financial losses or legal sanctions and cases of loss of reputation, which may be a result of a breach of the law, internal regulations or the market standards adopted by the Bank.

The identification and evaluation of compliance risk is carried out on the basis of the methodology implemented in the PKO Bank Polski SA Group for the identification and evaluation of compliance risk.

The identification of compliance risk includes the identification of potential cases of non-compliance that may occur in the processes and products and their classification to compliance risk categories.

The compliance risk assessment is carried out through:

■ estimation of the potential severity of the consequences of non-compliance in the form of:

□ financial losses, particularly in the form of administrative penalties or damages;

□ loss of reputation;

□ other legal sanctions;

■ estimation of the probability of the materialization of compliance risk.

Based on the compliance risk assessment for the individual compliance risk categories, the overall level of compliance risk for a given process and the related product is determined.

As part of compliance risk control, the Bank protects itself against or mitigates the risk by implementing compliance risk controls and ensuring that they are observed.

The following is covered by compliance risk monitoring:

■ the results of compliance risk identification and assessment;

■ in the event of non-compliance – its reasons and consequences;

■ the actions taken by the Bank as part of:

□ compliance risk management;

□ implementing the recommendations issued by internal auditors and external inspectors;

□ bringing the Bank to compliance with new legislation and standards of conduct;

□ fulfilling the recommendations regarding compliance;

■ effectiveness of the controls connected with the mitigation of compliance risk;

■ stress test results.

Information on compliance risk is reported on a quarterly basis. The recipients of the reports are: The Management Board, the Supervisory Board and the Supervisory Board Audit and Finance Committees. The reports contain, in particular, information about:

■ the results of compliance risk identification and assessment;

■ the observed cases of non-compliance in the Bank and in the financial sector;

■ the most significant changes in the regulatory environment of the Bank, as well as circumstances resulting from the activities of external supervisory and regulatory authorities;

■ the results of external inspections carried out within the Bank;

■ the most important actions undertaken as part of compliance risk management and the implementation of recommendations arising from external inspections.

The Compliance Team is responsible for the management of compliance risk. The activities of the Compliance Team are based on an annual plan approved by the Bank’s Supervisory Board. The report on the pursuit of the plan, and supplementary and summary information to the quarterly reports are presented to the Management Board, the Supervisory Board, and the Audit and Finance Committee on an annual basis.

55.1 Management of conflicts of interest

The Bank has the “Policies for managing conflicts of interests in PKO Bank Hipoteczny SA” adopted by the Management Board and approved by the Supervisory Board, which specify:

■ the objective of conflicts of interest management;

■ sources of situations when conflicts of interest may arise;

■ the process for identifying, reporting and monitoring conflicts of interest;

■ counteracting conflicts of interest and their effects;

■ tasks of the Compliance Team relating to conflicts of interest management.

The objective of managing conflicts of interest at the Bank is to ensure that all customers, the Bank related parties, suppliers and bidders are treated professionally, fairly and honestly.

The Bank manages conflicts of interest by preventing situations that may give rise to conflicts of interest, taking steps to identify, disclose and control conflicts of interest and to eliminate or limit their negative impact on the Bank’s functioning and its relations with clients and other entities.

Given the scope and the specific nature of its operations as a mortgage bank, the Bank identifies potential situations of conflicts of interest which may arise in the relationship between:

■ the Bank or its related entity and the Bank’s customer;

■ a related entity and the Bank;

■ the Bank or its related entity and a supplier or bidder or their related parties;

■ the Bank and its parent company.

A conflict of interest between the Bank or its related party and the Bank’s customer arises, in particular, when the Bank or its related party may derive a benefit as a result of the customer incurring a cost or not gaining a benefit or has an interest in a specific result of customer service that is divergent from the customer’s interest.

A conflict of interest between the Bank’s related party and the Bank may arise in particular in situations leading to a contradiction between the interests of the Bank and the interests its related party associated with a breach of impartiality or objectivity and the obligation to act in the best interests of the Bank in the course of performing duties related to employment with the Bank or carrying out activities for the Bank.

A conflict of interest between the Bank or its related party and a bidder or supplier or their related parties may arise in particular where the bidder or supplier concerned is favoured because of personal family, business or social connections.

Conflicts of interest between the Bank and the parent company may arise, in particular, when the parent company takes advantage of the subordination relationship or the flow of information (e.g. by exerting pressure to conduct business on non-market terms, access to proprietary, confidential or otherwise sensitive information).

The “Policies for managing conflicts of interests” describe in detail the procedure for identifying, reporting and monitoring conflicts of interest. In order to facilitate the identification of conflicts of interest, as well as the conflict management rules, the Bank has introduced Conflict of Interest Maps defining the typical types of conflicts of interest identified in the Bank).

The Bank limits the possibility of conflicts of interest arising and counteracts the negative consequences of their occurrence, in particular by:

■ excluding from credit decision-making an employee or a member of the Management Board, if this person has a personal or professional relationship with the customer;

■ promoting, applying and enforcing observance by the employees of the Code of Ethics which sets out ethical standards of carrying business activities by the Bank and of the Bank’s employees conduct in relations with the Bank and its customers;

■ establishing information barriers in accordance with internal regulations on the security of protected information and the flow of confidential information;

■ ensuring that Bank employees and persons acting on behalf of the Bank comply with restrictions on accepting benefits or gifts in business relationships,

■ limiting the possibility for a Bank employee or other person to represent the Bank’s interests in relations with close persons and entities related with the Bank;

■ introducing additional authorization of decisions which result in the Bank incurring liabilities in respect of the products offered to members of the Bank’s Management Board, Supervisory Board and managers, as well as persons close to them;

■ accepting declarations and notifications of conflicts of interests from bidders and suppliers;

■ obtaining assurances and relevant documents, as appropriate, from the persons and entities to which the Bank entrusted activities covered by regulations on outsourcing, confirming the implementation and enforcement of internal governance requirements, including conflict of interest rules and good practices, to ensure prudent and stable operations, including operational and reputational risk management.

The Compliance Team maintains a register of conflicts of interest and reports the conflicts of interest identified in periodical reports on managing the compliance risk addressed to the management Board of the Bank, the Audit and Finance Committee of the Supervisory Board and the Supervisory Board of the Bank.

56. Reputation risk management

Reputation risk is understood as the current or potential risk of deterioration of reputation among customers, counterparties, investors, supervisory and regulatory authorities and the general public as a result of business decisions made by the Bank, operational incidents, instances of non-compliance or other events, including security incidents.

The objective of reputation risk management is to protect the Bank’s reputation by counteracting reputation losses and limiting the negative impact of image-related events on the Bank’s reputation.

Identification of the reputation risks covers the developments observed in the Bank’s internal processes and its external environment, including in particular:

■ image-related events;

■ factors related to the business environment, i.e. quantitative and qualitative information, including in particular data describing the Bank and its external environment, which suggest the existence of reputation risk.

Information collected about image-related events includes each identified piece of information about the Bank, which adversely affects its reputation, such as:

■ information spread by the mass media;

■ information disclosed by the Bank in accordance with its internal regulations concerning the Bank’s information policies regarding contacts with investors and customers;

■ evaluations of auditing firms, analytical institutions and external supervisory and regulatory authorities;

■ public protests and demonstrations.

An assessment of reputation risk involves evaluating the impact of image-related events on the Bank’s reputation, in particular by determining the severity of losses of reputation caused by such events. The assessment of reputation loss involves the impact, credibility and the opinion-forming potential of the disclosure of an image-related event to the public.

Controlling reputation risk involves determining the reputation risk controls in the form of an internal tolerance limit for reputation risk and a single reputation loss limit.

Monitoring reputation risk consists of regular assessments of the utilization of the limits in relation to the adopted threshold values.

Information about reputation risk is reported in the form of:

■ semi-annual management reports addressed to the Management Board of the Bank;

■ information on current events which have a material impact on the Bank’s reputation and the immediate reporting of such events, should they occur, to the Management Board member responsible in accordance with the division of competences within the Management Board;

■ information provided in the annual report on the execution of the risk management macroprocess at the Bank, addressed to the Management Board and the Supervisory Board.

Based on the specific level of reputation risk management actions are taken which may cover:

■ an analysis of the reasons for the given risk occurring;

■ assessment of the effects of such a level of risk occurring;

■ preparation of proposed management actions aimed at reducing the level of reputation risk or justification of the lack of the need to take such action, e.g. in the event of incidental extraordinary events occurring.

57. Capital adequacy and the management of capital risk

Capital adequacy is a process aimed at ensuring that, for a given level of risk tolerance, the level of risk assumed by the Bank associated with the development of its business activities may be covered with capital held within a given time horizon. The process of managing capital adequacy comprises, in particular, compliance with prevailing regulatory standards and the level of risk tolerance determined at the Bank, the process of capital planning, including the policies in respect of capital sourcing.

Capital adequacy risk is the risk of failing to arrange an adequate level and structure of own funds or the inability to ensure an adequate level of equity given the business risk borne by the Bank, necessary to cover unexpected losses and satisfy regulatory requirements, making it possible for the Bank to continue independent operations. Capital adequacy risk includes the risk of excessive leverage, i.e. the risk resulting from vulnerability to threats due to financial leverage or conditional financial leverage, which may necessitate taking involuntary action modifying business plans, including the forced sale of assets which could lead to losses or to the need to adjust the valuation of other assets.

Managing the Bank’s capital adequacy covers:

■ Pillar I: minimum capital requirements specified in the legislation;

■ Pillar II: internal capital, determined by means of the Bank’s own models for the risks considered material.

The aim of capital adequacy management is to maintain, on a continuous basis, own funds at a level that is adequate to the scale and risk profile of the Bank’s activities, with due regard to regulatory requirements.

The following legal acts constituted the legal basis of the capital adequacy assessment process as at 31 December 2023:

■ Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (the “CRR”), as amended;

■ Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic;

■ the Act of 29 August 1997 “Banking Law”;

■ the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (“Macroprudential Act”);

■ the Regulation of the Minister of Finance, Funds and Regional Policy of 27 July 2021 on the detailed manner of estimating internal capital and reviewing estimation strategies and procedures by banks, and on continued maintenance of the internal capital.

The capital adequacy process is described in Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (“CRD”). The CRD has been implemented in the Polish law by way of updating the Banking Law.

The process of managing the Bank’s capital adequacy comprises:

■ defining and achieving the capital adequacy targets desired by the Bank;

■ identifying and monitoring material risks;

■ assessing internal capital to cover the individual risk types and assessing total internal capital;

■ establishing internal limits with respect to capital adequacy;

■ forecasting, monitoring, and reporting the level and structure of own capital and capital adequacy;

■ capital contingency activities.

Capital adequacy risk is classified as a risk subject to monitoring. In 2023 and since the beginning of the Bank’s operations, capital adequacy remained at a safe level above the supervisory limits.

At 31 December 2023, the total capital ratio of the Bank amounted to 20.9% (as at 31 December 2022: 18.9%). If the temporary solutions resulting from the implementation of IFRS 9 and relating to the COVID-19 pandemic had not been taken into account, the total capital ratio of the Bank would have amounted to 20.8% (as at 31 December 2022: 18.6%). All capital ratios as at 31 December 2023 and throughout the year 2023 remained at safe levels, much above the internal limits adopted by the Bank and the external capital requirements.

57.1 Own funds for the purpose of capital adequacy

The Bank’s own funds for capital adequacy purposes have been calculated in accordance with the Banking Law and the CRR with implementing legislation.

The Bank’s own funds consist entirely of common equity Tier 1 capital (CET 1). In determining its own funds, the Bank makes use of the transitional provisions specified in the table below.

BANK’S OWN FUNDS	31.12.2023	31.12.2022

Share capital	1,611,300	1,611,300
Supplementary capital	-	339,852
Retained earnings / (Accumulated losses)	(65,966)	-
Net profit for the period	165,789	(405,818)
Accumulated other comprehensive income - cash flow hedges	(74,386)	(136,426)
Accumulated other comprehensive income - financial assets measured at fair value through other comprehensive income	2,168	(4,626)
Equity	1,638,905	1,404,282

Equity adjustments	(23,781)	154,729
Net profit for the period	(165,789)	-
Net profit for the first half included in equity by permission from the PFSA	59,695	-
Accumulated other comprehensive income - cash flow hedges	74,386	136,426
Intangible assets	(0)	-
Adjustment to assets measured at fair value (AVA)	(1,139)	(1,542)
Adjustment relating to the transitional period, including:	9,066	19,845
- due to IFRS 9 implementation		6,306
- due to COVID-19 pandemic	9,066	13,539

Own funds	1,615,124	1,559,011

As at 31 December 2023, the Bank’s own funds, Tier 1 common equity capital and Tier 1 capital would have amounted to PLN 1,606,058 thousand without taking into account the transitional solution, and as at 31 December 2022 they would have amounted to PLN 1,539,166 thousand.

57.2 Capital buffers

On 19 March 2020, the Minister of Finance signed a regulation on revoking the systemic risk buffer which amounted to 3%, decreasing the regulatory requirement relating to the core Tier 1 capital ratio (CET1) and the total capital ratio (TCR) to 10.5%.

Since the beginning of 2020, the banks have been required to maintain capital ratios at the following levels:

■ Total capital ratio (TCR) = 8% + an add-on + the combined buffer requirement;

■ Tier 1 capital ratio (T1) = 6% + 75%*add-on + the combined buffer requirement;

■ Core Tier 1 capital ratio (CET1) = 4.5% + 56%*add-on + the combined buffer requirement,

where the add-on means the requirement specified in Article 138 (1) (2a) of the Banking Law and the combined buffer requirement is the sum total of the mandatory buffers, i.e.:

■ the systemic risk buffer of 2.5%;

■ the counter-cyclical buffer of 0% for loan exposures on the territory of Poland;

■ the buffer of other systemically important institution set by the PFSA on a case by case basis;

■ the systemic risk buffer of 0%.

Based on a letter from the PFSA dated 15 December 2023, PKO Bank Hipoteczny SA was obliged to maintain an additional capital buffer as part of Pillar 2 (P2G). As a result of an assessment based on regulatory stress tests conducted by the Office of the PFSA in 2023, the P2G capital buffer was determined at 0.02 p.p. above the total capital ratio referred to in Article 92(1)(c) of Regulations (EU) No 575/2013, plus an additional capital requirement referred to in Article 138(2)(2) of the Banking Law and plus the combined buffer requirement referred to in Article 55(4) of the Act on Macroprudential Supervision. The additional buffer should comprise solely common equity Tier1 capital.

PKO Bank Hipoteczny SA has not been recognized as another systemically important institution by the PFSA and therefore it is not required to satisfy the applicable additional capital requirements.

The Bank is also not required to satisfy the requirements specified in Article 138 (1) 2a of the Banking Law (add-on).

57.3 Financial leverage

The risk of excessive leverage is defined as the risk resulting from vulnerability to risks because of financial leverage or conditional financial leverage, which may necessitate taking involuntary actions to modify business plans, including the forced sale of assets which could result in losses or result in the need to adjust the valuation of other assets.

Financial leverage is defined as the relative size of a Bank’s assets, off-balance sheet obligations and contingent obligations to pay or to deliver, or to provide collateral, including obligations from received funding, commitments made, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of a Bank, compared to the Bank’s own funds.

The Bank calculates financial leverage in accordance with the CRR.

The financial leverage ratio is monitored on a monthly basis, whereas the Bank recognizes a ratio in excess of 5% to be safe and not requiring further action.

LEVERAGE	31.12.2023	31.12.2022

Leverage ratio (LR)	8.5%	7.7%

As at 31 December 2023 and 31 December 2022, the Bank’s financial leverage ratio was above the 3% level resulting from Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019.

As at 31 December 2023, the leverage ratio, without taking account of the transitional solutions resulting from the implementation of IFRS 9 and relating to COVID-19, would have amounted to 8.5%, and as at 31 December 2022 it would have amounted to 7.6%.

57.4 Requirements regarding own funds (Pillar I)

In accordance with the CRR, the Bank calculates requirements in respect of own funds for the following risk types:

■ credit risk – according to the standardized approach;

■ credit valuation adjustment (CVA) risk – according to the standardized approach;

■ settlement and delivery risk – according to the standardized approach;

■ operational risk – using the Basic Indicator Approach (BIA);

■ market risk (foreign exchange risk only) – according to basic methods.

At 31 December 2023 and as at 31 December 2022, the own fund requirements in respect of the risk of credit valuation adjustment, settlement and delivery, and market risk were nil, therefore, the total requirement in respect of own funds comprised the requirements in respect of credit and operational risk.

OWN FUNDS REQUIREMENTS	31.12.2023	31.12.2022

Credit risk	570,132	614,485
Operational risk	47,336	47,034
Total own funds requirement	617,468	661,519
Common equity Tier 1 capital ratio (CET1)	20.9%	18.9%
Tier 1 capital ratio (T1);	20.9%	18.9%

Total capital ratio (TCR)	20.9%	18.9%

OTHER NOTES

58. IBOR interest rate benchmark reform

58.1 Legal environment

Interbank Offered Interest Rates (IBORs) are commonly used as benchmark rates for determining interest rates in a broad range of contracts and financial instruments.

Within the European Union, a new standard for developing, providing and using reference rates was been determined. The legal basis for this has been laid by Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as in in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (hereinafter jointly referred to as the BMR Regulation) which, among other things:

■ determined the rules for developing and using transparent, reliable and fair reference rates;

■ specified extended controls over determination of reference rates;

■ expected reference rates to be determined, as a rule, based on actual transactions conducted on a given market.

On 10 February 2021, the European Union published an amendment to the BMR Regulation whereby the European Commission or an EU Member State was granted competence to designate a replacement for a reference rate which will cease to be developed, should such an event threaten the stability of the EU market or the Member State. The replacement was supposed to replace, by law, all references to a benchmark in cessation in all contracts and financial instruments which contain no fallback provision or contain a fallback provision that does not provide for a permanent replacement for the benchmark in cessation.

58.2 Work on the reform of the WIBOR rate in Poland

The first stage of the WIBOR reform was executed in 2020 and consisted in changing the benchmark’s calculation methodology On 16 December 2020, the Polish Financial Supervision Authority (the PFSA) issued a decision granting GPW Benchmark S.A. permission to operate as the administrator of interest rate benchmarks, including WIBOR as a critical benchmark developed in a way that had been adjusted to the requirements of the BMR Regulation.

The Act on crowdfunding for businesses and aid to borrowers of 7 July 2022 which provided for withdrawal and replacement of the WIBOR rate was a material factor determining the next stages of the WIBOR reform. The said Act contains a legal delegation to enact the replacement for WIBOR in a regulation. The process of designating a replacement for WIBOR will be governed by the law. In accordance with a regulation of the Minister of Finance, the replacement of the WIBOR rate shall apply to financial contracts and instruments which meet the requirements specified in the BMR Regulation. The regulation of the Minister of Finance will also specify a corrective margin and the date from which the replacement rate will be effective.

In July 2022, a National Working Group (NWG) for benchmark reform was established to ensure credibility, transparency and fairness of the development and application of the new interest rate benchmark.

Members of the NWG include representatives of: the Ministry of Finance, the National Bank of Poland, the Office of the Polish Financial Supervision Authority, the Bank Guarantee Fund, the Polish Development Fund, the Warsaw Stock Exchange, the National Depository for Securities, Bank Gospodarstwa Krajowego, GPW Benchmark and the representatives of banks, investment fund managers, insurance companies, factoring and leasing companies, issuers of bonds (including corporate and municipal bonds), and clearing houses.

The NWG’s work is supervised and coordinated by the Steering Committee comprising representatives of the key institutions: the Polish Financial Supervision Authority, the National Bank of Poland, the Ministry of Finance, the Bank Guarantee Fund, the Polish Development Fund and GPW Benchmark as the administrator of interest rate benchmarks, as well as the Polish Bank Association.

On 1 September 2022, the Steering Committee of the National Working Group (NWG SC) decided to choose the WIRON index as an alternative interest rate benchmark, calculated based on the actual overnight (ON) transactions concluded with large enterprises and financial institutions. WIRON is supposed to become the key interest rate benchmark within the meaning of the BMR Regulation to be used in contracts and financial instruments.

On 27 September 2022, the NWG SC adopted a Road Map specifying a schedule of actions aimed at replacing WIBOR with WIRON in accordance with the BMR. The Road Map assumed readiness to cease developing and publishing WIBOR and WIBID reference rates from the beginning of 2025. On 25 October 2023, the NWG SC decided to change the deadlines for implementing the Road Map and specified the end of 2027 as the final deadline for conversion. The NWG SC informed that neither the directions of the benchmark reform in Poland nor the scopes of the activities planned so far in the Road Map have changed.

On 13 February 2023, the Office of the Polish Financial Supervision Authority announced that WIRON had become the interest rate benchmark and that banks can use the WIRON benchmark to determine the interest rate on consumer and mortgage loans.

To date, the NWG SC adopted a number of recommendations, in particular with regard to the following:

■ a standard WIRON-based OIS transaction;

■ applying the WIRON benchmark in issues of variable interest rate debt securities;

■ principles and procedures for using the WIRON benchmark (or benchmarks from the WIRON Compound Indices Family) when concluding new contracts for benchmark-based products in PLN offered by financial market entities;

■ applying a replacement for the WIBOR benchmark in interest rate derivatives;

■ principles and procedures for converting the existing issues of debt securities in which WIBOR has been applied.

This concluded the work on recommendations relating to new banking, leasing, and factoring products and to debt securities issues and derivative instruments. Therefore, a very important reform Road Map milestone has been achieved, enabling financial institutions to take advantage of the NWG expertise to develop and implement a number of new solutions using the WIRON benchmark, including those of key importance from the perspective of residential mortgage loans.

As part of the NWG efforts, the work continues on a recommendation relating to the principles and procedures for replacing WIBOR/WIBID benchmarks with the WIRON benchmark or benchmarks from the WIRON Compound Indices Family for the existing portfolio of PLN products of the financial market entities.

58.3 Status of work at the Bank and exposure to the risk associated with the WIBOR reform

The evolving regulatory environment and migration of the market to benchmarks consistent with the BMR Regulation have an impact on the Bank’s operations through its contracts with customers and counterparties, remeasurement of financial instruments and the need to adapt IT processes and systems.

In connection with the assumed, as part of the reform, replacement of WIBOR with another benchmark, a WIBOR Benchmark Reform Taskforce (the “Taskforce”) was established within the Bank. The objective of the Taskforce is to prepare the Bank for the implementation of the new interest rate benchmark and to replace the currently used WIBOR benchmark. The Taskforce’s objectives include, in particular:

■ aligning contracts with counterparties and customers and changing the product offer;

■ aligning methodologies and tools relating to valuation and risk management;

■ aligning methodologies and tools relating to accounting (including, among other things, hedge accounting and transfer pricing);

■ implementing changes to IT systems;

■ estimating the impact of the reform on the Bank’s financial results.

Taskforce representatives actively participate in meetings of specific NWG workstreams and in the work realized at the level of the PKO Bank Polski SA.Group. At the current stage of the project implemented at Group level, work is under way to adapt the IT infrastructure and to develop internal processes and documentation.

Within the PKO Bank Polski SA Group, the Bank is working on starting, by the beginning of the third quarter, to offer residential mortgage loans based on a benchmark from the WIRON Compound Indices Family, while removing residential mortgage loans based on the WIBOR benchmark from its offering of residential mortgage loans.

The table below presents the Bank’s exposure to the WIBOR benchmark as at 31 December 2023.

	Currency translated to PLN
31.12.2023	WIBOR PLN	Fixed rate or no rate1)	Total
Financial assets
Cash and balances with the Central Bank	-	306	306
Amounts due from banks	-	2,421	2,421
Securities	945,251	-	945,251
Loans and advances to customers	15,645,686	2,253,021	17,898,707
Other financial assets	-	1,072	1,072
Total financial assets	16,590,937	2,256,820	18,847,757

Financial liabilities
Amounts due to banks	2,571,830	2,008,914	4,580,744
Amounts due to customers	-	3,710	3,710
Liabilities in respect of mortgage covered bonds issued	3,711,011	6,733,634	10,444,645
Liabilities in respect of bonds issued	-	1,991,260	1,991,260
Other financial liabilities	-	22,342	22,342
Total financial liabilities	6,282,841	10,759,860	17,042,701
Contingent liabilities granted (financing), net	61,948	28,936	90,884

1) For loans and advances to customers and the corresponding contingent liabilities (financing), also instrument based on a periodically fixed rate are presented.

NOMINAL AMOUNT of derivatives	Currency translated to PLN
31.12.2023	WIBOR PLN	Fixed rate or no rate	Total
Derivative hedging instruments
- Purchase (floating leg buy)	-	6,689,953	6,689,953
- Sale (floating leg sell)	6,752,499	4,631	6,757,130

Since a significant part of the Bank’s financial assets and financial liabilities is based on the WIBOR benchmark, the Bank is exposed to the risk associated with the replacement of that benchmark.

Within the PKO Bank Polski SA Group, the Bank is working on the risk analysis and is monitoring the risks on an ongoing basis. However, due to:

■ an absence of official information on a potential regulatory event referred to in Article 23c(1) of the BMR Regulation;

■ an absence of a regulation, or even a draft regulation, of the Minister of Finance, referred to in Article 61c of the Act of 5 August 2015 on macroprudential supervision over the financial system and on crisis management in the financial system, on the replacement benchmark;

■ absence of information on the level of a corrective spread;

■ absence of a market for hedging instruments;

and having in mind, at the same time, the current stage of work of the National Working Group and the implementation of the Road Map, the Bank believes it is currently impossible to estimate the financial impact of the WIBOR benchmark reform.

59. Events after the end of the reporting period

■ On 14 February 2024 Mr. Maciej Brzozowski submitted his resignation letter from the function of the Member of the Supervisory Board of the Bank effective 14 February 2024.

■ On 22 February 2024 Mr. Mieczysław Król submitted his resignation letter from the function of the Member of the Supervisory Board of the Bank effective at the end 22 February 2024.

■ On 23 February 2024 Mr. Stanisław Skoczylas resigned from the membership in the Bank’s Management Board and from the function of the Vice President of the Management Board of the Bank effective 29 February 2024.

Signatures of all Members of the Bank’s Management Board

28.02.2024

Katarzyna Kurkowska-Szczechowicz

President of the Management Board

Signed on Polish original

......................................................

(signature)

28.02.2024

Piotr Jaworski

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

28.02.2024

Piotr Kochanek

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

28.02.2024

Stanisław Skoczylas

Vice-President of the Management Board

Signed on Polish original

......................................................

(signature)

Signature of the person responsible for the Bank’s accounts

28.02.2024

Tomasz Rynkowski

Director, the Bank’s Chief Accountant

Signed on Polish original

......................................................

(signature)

PKO Font library: AĄBCĆDEĘFGHIJKLŁMNŃOÓPQRSŚTUWXYZŻŹ

PKO Font library: AĄBCĆDEĘFGHIJKLŁMNŃOÓPQRS

	in PLN ‘000			in EUR ‘000


SELECTED FINANCIAL DATA	period from 01.01.2023 to 31.12.2023	period from 01.01.2022 to 31.12.2022	period from 01.01.2023 to 31.12.2023		period from 01.01.2022 to 31.12.2022

Net interest income	365,267	(320,752)	80,661		(68,415)
Net fee and commission income	(3,111)	(242)	(687)		(52)
Profit / (loss) on business activities	350,635	(326,533)	77,430		(69,648)
Profit before tax	222,883	(476,770)	49,219		(101,694)
Net profit	165,789	(405,818)	36,611		(86,560)
Net comprehensive income	234,623	(622,160)	51,811		(132,705)
Net cash from/used in operating activities	2,399,918	4,329,598	529,970		923,490
Net cash from/used in investing activities	141,423	904,685	31,230		192,967
Net cash from/used in financing activities	(2,599,371)	(5,224,420)	(574,015)		(1,114,353)
Net change in cash and cash equivalents	(58,030)	9,863	(12,815)		2,104

	in PLN ‘000			in EUR ‘000

SELECTED FINANCIAL DATA	as at 31.12.2023	as at 31.12.2022	as at 31.12.2023		as at 31.12.2022

Total assets	18,935,922	20,680,531	4,355,088		4,409,589
Total equity	1,638,905	1,404,282	376,933		299,427
Share capital	1,611,300	1,611,300	370,584		343,568
Number of shares (in thousands)	1,611,300	1,611,300	1,611,300		1,611,300
Book value per share (in PLN/EUR)	1.02	0.87	0.23		0.19
Diluted number of shares (in thousands)	1,611,300	1,611,300	1,611,300		1,611,300
Diluted book value per share (in PLN/EUR)	1.02	0.87	0.23		0.19
Total capital ratio (TCR)	20.9%	18.9%	20.9%		18.9%
Common equity Tier 1 (CET1)	1,615,124	1,559,011	371,464		332,419
Own funds	1,615,124	1,559,011	371,464		332,419

Selected financial statement items have been translated to EUR at the following foreign exchange rates

items of the income statement, statement of comprehensive income and statement of cash flows – the average of the NBP exchange rates prevailing as at the last day of each month of the period	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022
	4.5284	4.6883
items of the statement of financial position – the average NBP exchange rate as at the last day of the period	31.12.2023	31.12.2022
	4.3480	4.6899

STATEMENT OF COMPREHENSIVE INCOME	Note	01.01.2023 - 31.12.2023	01.01.2022 - 31.12.2022

Net profit		165,789	(405,818)
Other comprehensive income		68,834	(216,342)
Items which may be reclassified to profit or loss		68,834	(216,342)
Cash flow hedges (gross)		76,592	(260,994)
Deferred tax		(14,552)	49,589
Cash flow hedges (net)	24	62,040	(211,405)
Remeasurement of financial assets measured at fair value through other comprehensive income (gross)		8,388	(6,095)
Deferred tax		(1,594)	1,158
Remeasurement of financial assets measured at fair value through other comprehensive income (net)		6,794	(4,937)

Total net comprehensive income		234,623	(622,160)

STATEMENT OF FINANCIAL POSITION	Note	31.12.2023	31.12.2022
ASSETS
Cash and balances with the Central Bank	22	306	60,696
Amounts due from banks	23	2,421	61
measured at amortized cost		2,421	61
Derivative hedging instruments	24	55,383	508,052
Securities	25	945,251	1,017,447
measured at fair value through other comprehensive income		945,251	1,017,447
Loans and advances to customers	26,27	17,898,707	18,955,364
measured at amortized cost		17,898,707	18,955,364
Intangible assets	28	217	66
Property, plant and equipment	28	10,104	2,808
Current income tax receivable	21	17,567	38,352
Deferred tax asset	21	-	92,886
Other assets	29	5,966	4,799
TOTAL ASSETS		18,935,922	20,680,531

LIABILITIES AND EQUITY
Liabilities
Amounts due to banks	30	4,580,744	5,635,860
measured at amortized cost		4,580,744	5,635,860
Derivative hedging instruments	24	213,187	25,664
Amounts due to customers	31	3,710	5,577
measured at amortized cost		3,710	5,577
Liabilities in respect of mortgage covered bonds issued	32	10,444,645	12,063,629
measured at amortized cost		10,444,645	12,063,629
Liabilities in respect of bonds issued	33	1,991,260	1,495,904
measured at amortized cost		1,991,260	1,495,904
Other liabilities	34	56,215	49,403
Deferred income tax provision	21	6,981	-
Provisions	35	275	212
TOTAL LIABILITIES		17,297,017	19,276,249

Equity
Share capital	36	1,611,300	1,611,300
Supplementary capital		-	339,852
Accumulated other comprehensive income		(72,218)	(141,052)
Retained earnings / (Accumulated losses)		(65,966)	-
Net profit /(loss) for the period		165,789	(405,818)
TOTAL EQUITY		1,638,905	1,404,282

TOTAL LIABILITIES AND EQUITY		18,935,922	20,680,531

Total capital ratio (TCR)	57	20.9%	18.9%
Book value (in PLN ‘000)		1,638,905	1,404,282
Number of shares (in thousands)	36	1,611,300	1,611,300
Book value per share (in PLN)		1.02	0.87
Diluted number of shares (in thousands)		1,611,300	1,611,300
Diluted book value per share (in PLN)		1.02	0.87

FOR THE YEAR ENDED 31 DECEMBER 2023	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	including:		Retained earnings / (Accumulated losses)	Net profit /(loss) for the period	Total equity
FOR THE YEAR ENDED 31 DECEMBER 2023	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Cash flow hedges	Financial assets measured at fair value through other comprehensive income	Retained earnings / (Accumulated losses)	Net profit /(loss) for the period	Total equity

1 January 2023		1,611,300	339,852	(141,052)	(136,426)	(4,626)	-	(405,818)	1,404,282
Transfer from retained earnings		-	-	-	-	-	(405,818)	405,818	-
Loss offset against supplementary capital		-	(339,852)	-	-	-	339,852	-	-
Total comprehensive income, including:		-	-	68,834	62,040	6,794	-	165,789	234,623
Net profit		-	-	-	-	-	-	165,789	165,789
Other comprehensive income		-	-	68,834	62,040	6,794	-	-	68,834

31 December 2023	36	1,611,300	-	(72,218)	(74,386)	2,168	(65,966)	165,789	1,638,905

FOR THE YEAR ENDED 31 DECEMBER 2022	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	including:		Retained earnings	Net profit /(loss) for the period	Total equity
FOR THE YEAR ENDED 31 DECEMBER 2022	Note	Share capital	Supplementary capital	Accumulated other comprehensive income	Cash flow hedges	Financial assets measured at fair value through other comprehensive income	Retained earnings	Net profit /(loss) for the period	Total equity

1 January 2022		1,611,300	332,263	75,290	74,979	311	-	94,867	2,113,720
Transfer from retained earnings		-	-	-	-	-	94,867	(94,867)	-
Transfer from profit to equity		-	7,589	-	-	-	(7,589)	-	-
Dividend paid		-	-	-	-	-	(87,278)	-	(87,278)
Total comprehensive income, including:		-	-	(216,342)	(211,405)	(4,937)	-	(405,818)	(622,160)
Net profit		-	-	-	-	-	-	(405,818)	(405,818)
Other comprehensive income		-	-	(216,342)	(211,405)	(4,937)	-	-	(216,342)

31 December 2022	36	1,611,300	339,852	(141,052)	(136,426)	(4,626)	-	(405,818)	1,404,282

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

1. Business activities of the Bank

2. Information on the composition of the Bank’s Supervisory Board and Management Board

3. Approval of the financial statement

4. Representations of the Management Board

5. Statement of compliance

6. Going concern

7. Basis for preparation of the financial statements

8. Environmental matters

9. Foreign currencies

9.1 Functional currency and currency of presentation

9.2 Transactions and balances in foreign currencies

10. General accounting policies for financial instruments

10.1 Recognition of transactions in the books of account

10.2 Derecognition of financial instruments

10.3 Classification and measurement of financial instruments

10.3.1. Financial instruments classification policies

10.3.2. Change in the classification of financial assets

10.3.3. Change in estimated contractual cash flows – Modifications

10.3.4. Measurement of purchased or originated credit-impaired financial assets (POCI)

10.3.5. Recognition of gains/(losses) on derecognition of financial instruments not measured at fair value through profit or loss and income/expense on modification

11. Material changes in accounting policies and explanation of differences between previously published reports

12. New standards and interpretations and their amendments

13. Interest income and expense

14. Fee and commission income and expense

15. Gains/(Losses) on financial transactions

16. Net foreign exchange gains / (losses)

17. Net allowances for expected credit losses

18. Administrative expenses

19. Regulatory charges

20. Tax on certain financial institutions

21. Corporate income tax

22. Cash and balances with the Central Bank

23. Amounts due from banks

24. Derivative hedging instruments

25. Securities

26. Loans and advances to customers

27. Expected credit losses

28. Intangible assets and property, plant and equipment

29. Other assets

30. Amounts due to banks

31. Amounts due to customers

32. Liabilities in respect of mortgage covered bonds issued

33. Liabilities in respect of bonds issued

34. Other liabilities

35. Provisions

36. Equity and shareholding structure of the Bank

OTHER NOTES TO THE FINANCIAL PART

37. Contingent liabilities granted and received

37.1 Contractual commitments

37.2 Loan commitments

37.3 Guarantee commitments granted

37.4 Contingent liabilities received

38. Legal claims

39. Information about leases

40. Notes to the statement of cash flows

41. Related party transactions

41.1 Related party transactions - capital links

41.2 Transactions with the State Treasury and its related entities

41.3 Related-party transactions – personal links

41.4 Benefits for PKO Bank Hipoteczny SA key management personnel

42. Fair value of financial assets and financial liabilities

42.1 Categories of fair value measurement of financial assets and financial liabilities measured at fair value in the statement of financial position

42.2 Financial assets and liabilities not presented at fair value in the statement of financial position

43. Operating segments

44. Risk management at PKO Bank Hipoteczny SA

44.1 Key risk management policies

44.2 Risk management in the Bank

44.3 Identification of material risks

45. Credit risk management

45.1 Credit risk measurement and assessment

45.2 Allowances for expected credit losses

45.3 Credit risk control

45.4 Credit risk forecasting and monitoring

45.5 Credit risk reporting

45.6 Credit risk management actions

46. Concentration risk management