Financial position of the Bank

Net interest income for 2023 amounted to PLN 17,215 million, i.e. PLN 5,991 million more than in the previous year. The y/y increase in the net income was mainly driven by an increase in income from financing granted to customers due to an increase in interest rates. The effect is greater due to the recognition in the third quarter of 2022 of a nonrecurring loss of PLN 2,443 million related to statutory loan holidays, reducing income on home loans (reduced by the results of the settlement of the impact of loan holidays carried out in the fourth quarter of 2023, which resulted in the reversal of the initial loss on loan holidays of PLN 83 million). Net interest income in 2023 was negatively affected by an increase in interest expense from hedge accounting and an increase in interest expense on customer deposits, resulting mainly from increases in market rates for the PLN.

Interest income in 2023 reached PLN 28,886 million and was 55.9% higher than in 2022, largely as a result of:

• an increase in revenue from financing granted to customers by PLN 7,363 million y/y – mainly related to a 1.8 p.p. increase in the average interest rate on financing granted to customers. (excluding the impact of statutory loan holidays), with a change in the structure of the average volume of loan receivables (an increase in the share of business and consumer loans at the expense of housing loans in PLN and foreign currencies);
• higher income on securities (PLN +2,523 million y/y), mainly as a result of an increase in average interest rates resulting from rising market interest rates and an increase in the average volume of the securities portfolio by nearly PLN 24.8 billion.

Interest expenses stood at PLN 11,672 million, up PLN 4,372 million from 2022, mainly due to:

• increase in interest expense on deposits by PLN 4,063 million, mainly related to an increase in average interest rates on deposits associated with increases in PLN interest rates following the MPC’s decisions and changes in the term structure involving an increase in the share of term deposits bearing interest at higher rates;
• an increase in the expense from hedge accounting to PLN 3,404 million (PLN +262 million y/y), mainly as a result of rising rates for the PLN, which narrowed the margin between the variable rate paid and the fixed rate received on IRS transactions;
• an increase in bond issue costs by PLN 243 million y/y, mainly related to the issue for the purposes of MREL.

The interest margin in 2023, excluding the impact of recognizing the effects of the statutory loan holidays in the third quarter of 2022, increased by 0.55 p.p. y/y to 4.37%.

The increase in the margin was driven by a higher return on assets, which was related to the increase in market rates in Poland, which translated to an increase in interest rates on assets to a greater extent than on liabilities. The return on assets was negatively affected by changes in the structure of interest-bearing assets (the share of securities increased at the expense of mainly the share of the highest interestbearing amounts due from customers and at the expense of the share of amounts due from banks).

In 2023, the average interest rate on the Bank’s loans was 9.4%, and the average interest rate on total deposits was 2.1%. In 2021, it was 7.6% and 1.1%, respectively.

* The indicators in 2022 were calculated excluding the impact of the recognition in the third quarter of 2022 of the effects of the Act on crowdfunding for business ventures and assistance for borrowers (so-called statutory loan holidays) of PLN 2,443 million.

In 2023, net fee and commission income amounted to PLN 3,911 million and was PLN 93 million higher than in the previous year. The increase was determined – among other things – by:

• higher net income on cards (PLN +156 million y/y) due to a change in the method of settling certain commissions with card organisations, a higher number of cards and higher transaction volumes;
• higher net income on loans and insurance (PLN +46 million y/y), mainly in effect of an increase in commission on business loans, as well as commission on insurance, with an increase in commission costs on loans;
• lower net income from handling bank and other accounts (PLN -12 million y/y), mainly as a result of incurred commission expenses on guarantees and lower account management fees, with an increase in commissions on foreign transactions, cash transactions and transfers;
• lower net income from investment funds and brokerage activities (PLN -39 million y/y), mainly due to a decrease in commission on the sale of Treasury bonds;
• lower net margin on foreign exchange transactions (PLN -58 million y/y), mainly as a result of lower commissions on exchange at table rates (including the effect of a change in the settlement method with some card organisations), with an increase in commissions on exchange at negotiated rates.

In 2023, other net income amounted to PLN 924 million and was PLN 121 million higher than that earned in 2022, among other things due to:

• an increase in dividend income by PLN 195 million (higher dividends paid by PKO Leasing, PKO TFI and PKO BP Finat);
• an increase in net foreign exchange income by PLN 189 million, mainly as a result of an improvement in the net income on currency derivatives;
• lower net other operating income and expenses (PLN -83 million y/y), among other things as a result of:
  • an increase in litigation costs reimbursed to borrowers for CHF loan settlements by PLN 28 million;
  • the recognition in 2023 of a loss on the sale of CO₂ emission allowances in the amount of PLN 26 million, which was fully offset by a positive valuation of customer derivatives related to CO₂ emission allowances recognised in net income from financial operations;
  • the recognition of income of PLN 23 million in 2022 in respect of a decrease in liability related to providing additional capital to a subsidiary, whereas income recognized in 2023 in this respect amounted to PLN 1 million.
• ower net income on financial operations (PLN -179 million y/y), among other things, as a result of a decrease in net income on derivatives (including that realised on instruments embedded in structured deposits), with higher net income on both debt instruments and equities, and an improvement in net income on derecognition of assets.

In 2023, administrative expenses amounted to PLN 6,678 million and were 3.6% lower y/y. Their level was mainly determined by:

• decrease by PLN 1,254 million, i.e. 68.7% in regulatory costs, mainly as a result of the recognition in 2022 of an expense relating to the initial contribution to the assistance fund at System Ochrony Banków Komercyjnych S.A. in the amount of PLN 956 million and the payment to the Borrower Support Fund in the amount of PLN 307 million, with simultaneous decrease in contributions to the Bank Guarantee Fund by PLN 119 million – these costs amounted to PLN 262 million and represented entirely a contribution to the mandatory bank restructuring fund (in the previous year, BGF costs stood at PLN 381 million, of which PLN 264 million represented the contribution to the resolution fund);
• an increase by PLN 645 million, or 22.0%, in the cost of employee benefits, mainly as a result of wage adjustments and an increase in headcount;
• an increase by PLN 291 million, i.e. of 23.1% of tangible costs, mainly as a result of:
  • an increase in property maintenance and rental costs by PLN 127 million, or 48.1%;
  • an increase in promotion and advertising costs by PLN 59 million, or 42.8%;
  • an increase in IT costs by PLN 40 million, or 12.7%; an increase in legal advisory costs by PLN 38 million, i.e. 45.4%, mainly in connection with the handling of cases involving Swiss franc borrowers;
  • an increase in cash management costs by PLN 27 million, or 32.1%;
• an increase in depreciation and amortization expense by PLN 71 million, or 7.8%, as a result of increased amortization of IT intangible assets

PKO Bank Polski S.A.’s operating efficiency, as measured by the C/I ratio, stood at 30.3% on an annual basis and improved by 13.4 p.p. y/y, mainly due to an increase in the net income from business activities (39.2% y/y), supported by a decrease in operating expenses (3.6% y/y) due to the absence of a significant burden of regulatory costs.

In 2023, net write-downs and impairment (including the cost of legal risk) amounted to PLN -6,697 million and deteriorated by PLN 3,529 million compared to that recorded in the previous year. The level of the result was mainly determined by the increase in the cost of legal risk of mortgage loans in convertible currencies by PLN 3,516 million as a result of an update of the parameters of the legal risk assessment model for these loans, taking into account the costs of the settlement programme, the number of settlements reached and estimates of the inflow of new court cases and their expected resolutions. The revision of the parameters adopted also accounts for the expected impact of the judgments of the Court of Justice of the European Union: the judgment of 15 June 2023 in Case C-520/21, the judgment of 14 December 2023 in Case C-28/22 and the order of 12 January 2024 in Case C-488/23 on the future case-law of the Polish courts and on a possible change in customer behaviour.

Net credit risk allowances stood at PLN -1,166 million and remained relatively unchanged from the previous year, with an increase in allowances on housing loans offset by an improvement in the net result on the corporate customer portfolio.

Net write-downs on non-financial assets amounted to PLN -100 million and deteriorated by PLN 11 million compared to the previous year, mainly due the reconstruction of additional write-downs on costs charged to the customer, while the asset depreciation write-down improved.

The share of impaired loans amounted to 3.18% as at the end of 2023, down 0.42 p.p. compared to 2022, driven by an increase in the total receivables portfolio and the Bank’s package sales of receivables.

At the end of 2023, the cost of risk amounted to -0.52% and was 0.10 p.p. lower than that recorded in the previous year.

At the end of 2023, the Bank’s liquid assets and cash stood at more than PLN 209 billion, representing an increase by PLN 57.7 billion since the beginning of the year.

The increase in liquid assets was primarily influenced by the growth of securities (banking portfolio) by PLN 58 billion, in particular for National Bank of Poland money bills and treasury bonds in PLN. Amounts due from banks also decreased by PLN 2.5 billion, with cash and balances at the Central Bank increasing by PLN 2 billion and buy-sell back transaction increase by PLN 0.4 billion.

As at the end of 2023, financing granted to customers by the Bank was PLN 240.8 billion which represents an increase by PLN 17.2 billion y/y.

The volume of corporate loans increased by PLN 11.0 billion, while the volume of retail and private banking loans increased by PLN 6.6 billion. The increase in retail and private banking loans was mainly in real estate loans, which were significantly positively impacted by the effect of the Safe 2% Loan programme with the recognition of additional costs of legal risk of foreign currency loans in the amount of PLN 2.9 billion.

Excluding the impact of the above adjustments to the gross carrying amount, financing granted to customers at the end of 2023 would amount to more than PLN 243 billion compared to PLN 225 billion at the end of 2022.

Retail and private banking loans and corporate loans were the main items in the structure of financing by type, with a share of 50.0% and 43.0%, respectively, at the end of 2023.

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

Customer deposits constitute the basic source of financing of the Bank’s assets. As at the end of 2023, amounts due to customers reached PLN 394.6 billion, which is an increase of PLN 59.7 billion since the beginning of the year. The factor that contributed to the increase in the deposit base was an increase in retail and private banking deposits (PLN +41.0 billion), corporate deposits (PLN +13.4 billion) as well as business and enterprise deposits (PLN +4.9 billion).

In the structure of amounts due to customers by type, the main items are the retail and private banking deposits (69.4% as at the end of 2023).

In the ageing structure of customer deposits, the main items are current deposits whose share amounted to 67.8%, down 2.0 p.p. from the end of 2022 in favour of term deposits.

PKO Bank Polski S.A. is an active participant of the debt securities markets, which enables it to diversify the sources of financing its operations and to adapt them to the regulatory requirements regarding long-term financial stability.

As at the end of 2023, long-term sources of financing amounted to about PLN 6.2 billion, which means an increase by PLN 2.7 billion since the end of 2022, mainly as a result of the issue of 3-year Senior Preferred Notes upon maturity of some of the EIB and CEB loans.