Financial position of the Group

Net interest income for 2023 amounted to PLN 18,318 million, i.e. PLN 6,894 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 caused primarily by higher average interest rates. In addition, the year-on-year increase in net income was affected by the recognition in the third quarter of 2022 of a non-recurring loss charged to interest income on statutory loan holidays that reduced income on home loans by PLN 3,111 million. In the fourth quarter of 2023, the Capital Group estimated the actual level of loss due to loan holidays (taking into account, among others, empirical data on the participation rate of customers using loan holidays and prepayments made by customers during the period of the statutory loan holiday programme). Based on the results of the above analysis, the level of loss due to loan holidays was updated and the current amortization of this loss was proportionally reduced. The total positive effect recognized in the books of the Capital Group amounted to PLN 105 million.

Net interest income was also positively affected by the increase in income from securities, as a result of the increase in the average interest rate and the increased average portfolio volume, as well as the increase in interest income from interbank deposits and the mandatory reserve associated with the increased interest rates and the level of the reserve resulting from the increased volume of deposits.

Higher market rates and the Bank’s increases in interest rates on deposit products drove up interest expenses, further amplified by the migration of customer funds from current accounts to term deposits. 2023 also saw an increase in interest expense from hedge accounting.

Interest income amounted to PLN 31,217 million and was 58.1% higher than in 2022. This was mainly due to:

• an increase in income from financing granted to customers by PLN 8,231 million y/y – mainly due to a 1.8 p.p. increase in the average interest rate on financing granted to customers. (excluding the impact of statutory loan holidays), resulting from an increase in market interest rates, with a change in the structure of financing (an increase in the share of business and consumer loans at the expense of the share of housing, foreign currency and PLN loans);
• higher income on securities (PLN +2,655 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 billion.

Interest expenses stood at PLN 12,899 million, up PLN 4,572 million from 2022, due to:

• an increase in interest expense on deposits by PLN 4,180 million y/y, which was attributable in particular to higher average annual interest rates in PLN following the MPC’s decisions and the resulting increase in interest rates on deposits, as well as changes in the term structure involving an increase in the share of term deposits bearing higher interest rates;
• an increase in the expense from hedge accounting to PLN 3,817 million (PLN 237 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 181 million, 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 0.58 p.p. y/y to 4.37%.

The increase in the margin was driven by higher return on assets associated with the higher average level of market rates, which translated to an increase in interest rates on assets to a greater extent than on liabilities.

In 2023, the average interest rate on PKO Bank Polski S.A.’s loans was 9.4%, and the average interest rate on total deposits was 2.2%. In 2022, 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 3,111 million.

In 2023, net fee and commission income amounted to PLN 4,626 million, and was PLN 128 million higher than in the previous year. The increase in net commission income was due to, among other things:

• higher net income on cards (PLN +144 million y/y) due to a change in the method of settling certain commissions with card organisations (settlement of transactions in foreign currencies), a higher number of cards and higher transaction volumes;
• higher income on loans, insurance and operating leases (PLN +65 million y/y), mainly as a result of an increase in commissions on operating leases and business loans with a decrease in commissions on insurance;
• higher net income from investment funds, pension funds and brokerage activities (PLN +20 million y/y), mainly as a result of higher management fees of PKO TFI S.A. with a decrease in fees for the sale of Treasury bonds;
• lower net income from handling bank and other accounts (PLN 11 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 margin on foreign exchange transactions (PLN -90 million y/y), mainly lower commissions on foreign exchange at KREDOBANK S.A. and on exchange at table rates (including settlements with card organisations), accompanied by an increase in commissions on exchange at negotiated rates.

Other net income earned in 2023 amounted to PLN 1,235 million and was PLN 97 million lower than in 2022, among other things, as an effect of:

• lower net income from financial operations (PLN -106 million y/y), partly due to a decrease in net income from derivatives (including realised on instruments embedded in structured deposits), with an increase in net income from the valuation of both debt instruments and equities, and an improvement in net income from derecognition of assets;
• • lower net insurance income (PLN -68 million y/y), mainly as a result of a decline in mortgage insurance sales and a change in actuarial assumptions regarding expected surrenders in cash loan insurance, with a simultaneous increase in the PKO DOM insurance portfolio and improved claim ratios, as well as an increase in the portfolio in insurance against the loss of value of the vehicle over time (GAP);
• lower net other operating income and expenses (PLN -58 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 y/y;
  • the recognition in 2023 of a loss on the sale of CO₂ emission allowances of PLN 26 million, which was fully offset by a positive valuation of customer derivatives related to CO2 emission allowances;
  • a decrease in donations to the PKO BP Foundation by PLN 24 million y/y, mainly as a result of the allocation of additional funds in 2022 to support Ukraine in connection with the outbreak of war and the relief efforts taken by the Foundation for Ukrainian refugees;
  • a decrease in income from other leasing activities by PLN 23 million (including lower sales of post-lease cars and lower income from early termination of agreements);
• lower dividend income (PLN -37 million y/y), mainly as a result of dividends paid in 2022 by companies held in the PKO VC portfolio (PLN +38.8 million);
• an improvement in net foreign exchange income (PLN +172 million y/y), mainly the income on currency derivatives.

In 2023, administrative expenses amounted to PLN 7,635 million and were 1.7% lower y/y. Their level was mainly determined by:

• decrease by PLN 1,265 million, i.e. 67.0% in regulatory costs, mainly as a result of the recognition in 2022 of an expense relating to the initial contribution to the aid fund at System Ochrony Banków Komercyjnych S.A. of PLN 956 million and the contribution to the Borrower Support Fund of PLN 314 million, while contributions to the Bank Guarantee Fund were lower by PLN 128 million. Contributions to the Bank Guarantee Fund amounted to PLN 280 million in 2023 and were entirely related to the contribution to the mandatory bank restructuring fund (in the previous year, the BFG’s costs amounted to PLN 409 million, including PLN 291 million as a contribution to the resolution fund);
• an increase by PLN 738 million, or 21.7%, in the cost of employee benefits, mainly as a result of wage regulations,
• an increase of PLN 326 million, i.e. of 22.3% of tangible costs, mainly as a result of:
  • an increase in property maintenance and rental costs by PLN 133 million, i.e. 46.5%, related, among other things, to the absence of the anti-inflation shield in 2023, which translated into an increase in electricity and heating costs;
  • an increase in promotion and advertising costs by PLN 71 million, or 46.4%;
  • an increase in IT costs by PLN 60 million, or 15.6%;
  • an increase in legal advisory costs by PLN 38 million, i.e. 44.0%, mainly in connection with the handling of cases involving Swiss franc borrowers;
  • an increase by PLN 27 million, or 32.2%, in cash management costs, mainly due to an increase in the transport fee and a higher number of transports.
• an increase in depreciation and amortization expense by PLN 67 million, or 6.6%, as a result of increased amortization of IT intangible assets.

PKO Bank Polski S.A. Group’s operating efficiency, as measured by the C/I ratio, stood at 31.6% 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 (40.1% y/y), with a slight decrease in administrative expenses (-1.7% y/y).

In 2023, net write-downs and impairment (including the cost of legal risk) amounted to PLN -6,850 million and deteriorated by PLN 3,327 million compared to that recorded in the previous year, which was mainly driven 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 -1,311 million and improved by PLN 234 million, mainly due to the improved quality of the portfolio of corporate entities, companies and businesses.

Net write-downs on non-financial assets amounted to PLN -109 million and deteriorated by PLN 46 million compared to the previous year, mainly due to the revaluation of real property and an increase in the impairment loss on shares in Bank Pocztowy.

The share of impaired loans amounted to 3.44% as at the end of 2023, a decrease of 0.35 p.p. compared to 2022, owing, among other things, to the improvement in the quality of the corporate client portfolio and the Bank’s package sales of receivables.

At the end of 2023, the cost of risk amounted to -0.50% and was 0.02 p.p. lower than that recorded in the previous year.

At the end of 2023, the Bank Group’s liquid assets and cash stood at around PLN 213 billion, representing an increase by PLN 60 billion since the beginning of the year.

An increase of PLN 59.4 billion was recorded on securities (banking portfolio), in particular money bills of the National Bank of Poland and treasury bonds in PLN.

Amounts due from banks decreased by PLN 1.7 billion, with cash and balances at the Central Bank increasing by PLN 1.9 billion and buy-sell back transaction increase by PLN 0.4 billion since the beginning of the year.

As at the end of 2023, financing granted to customers by the Bank’s Group was PLN 262.9 billion which represents an increase by PLN 15.3 billion y/y.

The volume of corporate loans increased by PLN 10.1 billion, while retail and private banking loans increased by PLN 5.1 billion, including real estate loans by PLN 3.7 billion and consumer loans by PLN 1.4 billion. Real estate loans grew as a result of an increase in mortgage loans in PLN (+ PLN 8.8 billion) mainly as a result of the Safe 2% Loan programme, with a decrease in mortgage loans in foreign currencies (PLN -5.1 billion) as a result of repayments, settlements signed and an increase in the provision for legal risk (impact of PLN -2.9 billion).

Excluding the impact of the above adjustment to the gross carrying amount, financing granted to customers at the end of 2023 would amount to more than PLN 265 billion compared to more than PLN 249 billion at the end of 2022.

Retail and private banking loans were the main items in the structure of financing by type, with share of 53.1% of the portfolio as at the end of 2023.

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

* including repo transactions
** including liabilities in respect of debt securities issued, subordinated liabilities, loans and advances received

The PKO Bank Polski S.A. Group finances its operations from domestic and foreign sources which come from deposits (also on the interbank market), equity and financing from the wholesale market. The financing from the wholesale market includes liabilities in respect of debt securities issued, subordinated liabilities and loans and advances received from monetary and non-monetary institutions. The main source of financing the Bank’ Group’s operations are customer deposits, which represent 85% of all sources of finance.

By maintaining an optimal financing structure, the Bank’s Group is fully capable of further development and implementation of its investment objectives.

Customer deposits constitute the basic source of financing the Bank’s Group’s assets. As at the end of 2023, amounts due to customers reached PLN 399.2 billion, which is an increase of PLN 60.3 billion over the year. The factor that contributed to the increase in the deposit base was an increase in retail and private banking deposits (PLN +41.1 billion), corporate deposits (PLN +13.7 billion) as well as business and enterprise deposits (PLN +5.1 billion).

In the ageing structure of customer deposits, the main items are current deposits whose share amounted to 67.9%, down 2.0 p.p. from the end of 2022 in favour of term deposits.

* including liabilities in respect of insurance products

* including liabilities in respect of insurance products

As at the end of 2023, long-term sources of financing amounted to nearly PLN 21,5 billion, which means an increase by PLN 0.9 billion since the end of 2022. The change resulted from:

• issue of 3-year Senior Preferred Notes of EUR 750 million;
• an increase in bonds issued by PKO Bank Hipoteczny S.A. by PLN 0.5 billion;
• maturity of some of the EIB and CEB loans;
• a decrease in bonds issued by the PKO Leasing S.A. Group by PLN 0.6 billion as a result of the early redemption of securitisation bonds associated with the termination of the programme;
• a decrease in mortgage covered bonds of PKO Bank Hipoteczny S.A. by PLN 1.6 billion.

PKO Bank Polski S.A. Group companies, including KREDOBANK S.A. with its registered office in Lviv, and its subsidiary, „KREDOLEASING” sp. z o.o., as well as debt collection and financial companies with their registered offices in Kyiv and Lviv, continue to operate in Ukraine.

KREDOBANK S.A. is an universal bank which services customers mainly in the western part of Ukraine and in Kyiv. As at the end of 2023, the Company’s head office was in Lviv; there were 68 branches, 13 of which are located in regions most affected by warfare. It grants loans mainly to corporate and medium and small enterprices (SME) customers, also under government programmes and in cooperation with foreign banks.

KREDOBANK S.A.’s priority is to ensure the safety of its employees and maintain uninterrupted operations servicing customers on an on-going basis.

The Company complies with all restrictions imposed by the National Bank of Ukraine (NBU) under martial law. KREDOBANK S.A. is included in the list of banks of systemic importance, which includes the top 15 Ukrainian banks. The bank’s status confirms the important role of the bank for the operations of the Ukrainian banking sector.

The company runs a stable and profitable business. 32 branches of KREDOBANK S.A., which are part of POWER BANKING (joint banking network, established at the initiative of the National Bank of Ukraine), continue to provide customers with services from a specific list of urgent banking services.

Based on guarantees received from the European Bank for Reconstruction and Development and European Commission funds deposited with the BGK (guaranteeing coverage of potential losses), KREDOBANK S.A. expanded lending. In February 2023, KREDOBANK S.A. signed a cooperation agreement with BGK, which covers the endorsement and discounting of letters of credit issued by the company and their post-financing within the established limit. The above transactions are available to importers who are customers of KREDOBANK S.A. and will be accepted by BGK on a case-by-case basis.

KREDOBANK S.A. also provided financing to customers as part of its cooperation with Deutsche Sparkassenstiftung für internationale Kooperation (DSIK) and the Enterprise Expansion Fund.

At the end of 2023, KREDOBANK S.A. granted UAH 9.14 billion (PLN 948 million) in new loans. Compared to 2022, lending increased by more than 100% (UAH 4.54 billion in 2022). The increase in lending was mainly related to sales in the corporate and SME segments.

KREDOBANK S.A. Group reported an increase in assets for 2023 from UAH 38,650 million to UAH 55,819 million and reported a significant net profit of UAH 1.24 billion in an environment of increased income tax, compared to UAH 0.14 billion for 2022.

In 2023, KREDOBANK S.A. received numerous awards and distinctions for its activities in Ukrainian bank rankings.

* consolidated data according to the International Financial Reporting Standards – the principles in force in the Bank’s Group.

The financial and organizational situation of the other Ukrainian companies in the Bank’s Group remained stable at the end of 2023. The companies are operating under wartime austerity, have not experienced liquidity tensions, and are maintaining relations with existing counterparties. Service restrictions and work organization are being adjusted on an ongoing basis to the current military situation.

KREDOBANK S.A. has signed an agreement with the European Bank for Reconstruction and Development (EBRD), under which it is able to release funding for Ukrainian entrepreneurs in the total amount of EUR 125 million. The cooperation relates to three areas, i.e. loan guarantees that allow loans of up to EUR 100 million to be granted, investment incentives in the form of grants from the EBRD for small and medium-sized business (sublimit of EUR 15 million out of EUR 100 million) and the opening of a EUR 25 million limit by the EBRD to finance investment projects that support foreign trade. In accordance with the risk-sharing arrangement, the EBRD secures 50% of the credit risk on the new financing of up to EUR 100 million granted by KREDOBANK S.A. for the first 50% of loans (past due more than 90 days).

Two loan tranches of EUR 50 million each (EUR 100 million in total) were disbursed until 31 December 2023. The first loan tranche was drawn down at 100% and the second at 4.8% (EUR 2.4 million). A total of 52.4% of the allocated limit was drawn down as at 31 December 2023. 143 customers received funding.

At the same time, the allocated sublimit for the first of the two tranches for investment funding of EUR 7.5 million has been completely exhausted, together with a simultaneously allocated grant of EUR 1.5 million (for any purpose). 54 customers (38%) benefited from the incentive in the form of a sub-limit, with 70% in the form of leasing. A second tranche for investment funding of EUR 7.5 million has also been released and is drawn down in 2024.

In 2023, PKO Bank Polski S.A. implemented, on an ongoing basis, the restrictions and changes resulting from the sanctions imposed on Russia and Belarus and introduced, on an ongoing basis, guidelines for the financing of and providing banking services to persons and entities having business dealings with Russia and Belarus, including those customers on whom sanctions have been or can be imposed.