77. Impact of the geopolitical situation in Ukraine on the PKO Bank Polski S.A. Group

Armed aggression of the Russian Federation on Ukraine have serious negative consequences for the financial system and the banking sector of Ukraine. In 2022, Ukraine’s GDP declined by 29% y/y and inflation reached 26.6%. A recovery in economic activity led to a deceleration of the GDP decline in the first quarter of 2023 to 10.5% y/y, and in the second quarter of 2023, real GDP grew by 19.5% y/y thanks to a low base effect, improved safety and the resolution of some of the logistical problems. In the second half of 2022, the economy was positively affected by high crop yields and significant budgetary spending on the reconstruction of infrastructure and defence. According to preliminary estimates, real GDP grew by 9.3% y/y in the third quarter of 2023, and the National Bank of Ukraine (hereinafter NBU) projects GDP growth of 5.7% y/y at the end of 2023.

Many companies operating in the war zone have had to suspend their operations or move production to other parts of the country or abroad. Transport and logistics between regions is hampered, infrastructure has been significantly damaged and many Ukrainian citizens have been affected by the hostilities and have left the country. All this will have long-term negative consequences for Ukraine’s economy, including its banking sector.

The warfare has adversely affected the Ukrainian banking sector through:

• disruptions to the operations of Ukrainian branches and ATMs, significant damage to or destruction of the banking infrastructure in war zones;
• a reduction in the loan portfolio due to a significant reduction in new lending, with the exception of lending under the state’s “5-7-9” programme and loans granted by state-owned banks to strategic sectors and companies. The Government’s '5-7-9′ programme was initiated by the President of Ukraine and the Cabinet of Ministers to support the development of small and medium-sized enterprises by facilitating access to bank credit, including the possibility of obtaining loans at reduced interest rates by means of state compensation of interest rates up to 5%, 7% and 9% per annum for loans in domestic currency. In 2022, the sector’s loan portfolio has decreased by 3% even including the revaluation of the foreign currency portfolio with the official UAH/USD exchange rate falling by 34% since the beginning of the year and in 2023 it declined by a further 1% y/y;
• inability of some borrowers to service their loans, deterioration of loan repayments due to the closure of many businesses, loss of sources of income for individuals, forced relocation of millions of Ukrainian citizens, which translates into an increase in the allowance for expected loan losses;
• restrictions on the foreign exchange market, including foreign exchange trading.

Nevertheless, after an outflow of funds from banks at the beginning of the war, liquidity in the banking system is increasing. In 2023, retail deposits increased by 31% (mainly in UAH – by 28% in 2022) and corporate deposits by 47% (mainly in UAH, by 18% in 2022).

The regulations of the NBU introducing simplified requirements for the day-to-day operations of banks continue to apply; however, the NBU is introducing new amendments tightening the previously introduced changes. These amendments are aimed at ensuring the timely and adequate assessment of credit risk and the adequate assessment of liquidity and capital requirements by banks. The NBU has completed a bank stability assessment, giving an insight into the genuine condition of the sector after it has gone through the most acute phase of the current war-related economic crisis. The results of the stability assessment indicated that most banks in Ukraine have sufficient capital and that the banking system as a whole has a high safety margin. Increased capital requirements have been set on the basis of the results of the stability assessment for five banks only, two of which (State Ukrgasbank and Sense Bank) have already met the requirements above the required level in December 2023. The three banks that still need a capital increase are Ukreximbank, Pravex-bank and MTB Bank. The calculated equivalent of the capital requirements of the above banks is approximately UAH 10 billion.

The NBU has also reinstated the requirement for up-to-date verification and valuation of the assets pledged as collateral for credit exposures. From 31 August 2023 onwards, banks are required to take into account existing information on the status of collateral located in territories subject to warfare. If information is obtained on the loss or damage of collateral, the bank is required to take this into account in its credit risk assessment. In addition, collateral from regions under occupation or where military operations are taking place, are not taken into account in the process of calculating the allowance for expected credit losses, unless the collateral has been verified and, in the bank’s assessment, meets the criteria set by the NBU. From 30 December 2023, the amount of operational risk is again included in the adequacy requirements in full.

Continued high inflationary pressures in 2022 have prompted the NBU to tighten monetary policy and thus increase the discount rate from the 10% level prevailing since the beginning of martial law to 25% from June 2022 onwards. The significant deceleration in inflation in 2023 provided the rationale for the start of a cycle of discount rate reductions, with the NBU cutting the discount rate to 22% in July 2023 and to 20% in September 2023, 16% in October and 15% in December 2023.

Following the outbreak of the armed aggression of the Russian Federation against Ukraine, restrictions were imposed on the lending policy of Ukrainian companies of the Group (Kredobank S.A). Granting of new financing was focused mainly on existing customers and is implemented through the analysis of each individual transaction by the bank’s analysts, incorporating additional criteria into the analysis process, such as:

• location of the place of business, ability to continue business during martial law and current restrictions; potential threat of hostile takeover, where the customer is registered and doing business
• taking into account, for credit operations, tangible and/or intangible collateral (e.g. pledge of shares, pledge of real estate, pledge of vehicles, machinery and equipment, sureties and guarantees) and risk-sharing instruments.

The Group monitors sanction regulations on an ongoing basis and implements them to the extent appropriate to its specific business.

The entire Group has introduced guidelines for the financing of and providing banking services to:

• customers conducting business whose business model is based on the benefits of active operation in the markets of Russia and Belarus or through significant links (e.g. economic, personal),
• customers on whom sanctions have been or can be imposed in connection with Russia’s aggression in Ukraine.

The Group performed an analysis of the business loans portfolio of its Polish customers from the perspective of the customers’ exposure to the adverse effects of the military conflict in Ukraine. If we adopt a threshold of at least 5% of the turnover generated from transactions with business partners from Russia, Belarus or Ukraine, the risk-exposed portfolio amounts to approx. PLN 2.46 billion.

For the purpose of the measurement of credit exposures, the Group considered the information on the scale of the Polish customers’ business relations with partners from Ukraine, Belarus and Russia, and performed an assessment of various scenarios of development of the macroeconomic situation. The exposures of these customers were classified to Stage 2 and were subject to the valuation of expected credit losses throughout their lifetime.

If the probability of a customer repaying its loan liabilities was assessed as low, the exposures were reclassified to Stage 3. Retail exposures granted to Russian, Belarusian or Ukrainian nationals, which as at 31 December 2023 amounted to PLN 151 million, were reclassified by the Group into Stage 2 and their credit risk was measured over the life of these loans As at 31 December 2023, the allowance for expected credit losses for the above portfolios amounted to PLN 80 million.

In 2023, the Group maintained a safe level of liquidity, allowing for a quick and effective response to potential threats. Analyses of the Group’s liquidity position confirm that it has a safe level of liquid assets, while maintaining a stable, dispersed deposit base, mainly from retail customers, which is characterised by moderate concentration of entities and is largely covered by guarantees from the BGF. Consequently, the Group maintains both supervisory and internal measures of liquidity risk at safe levels. KREDOBANK S.A.’s liquidity situation, despite the ongoing conflict in Ukraine, remained stable and secure. Kredobank S.A. did not experience a decline in liquidity measures or significant deposit outflows (LCR in foreign currencies of around 375%, LCR in all currencies of around 257%, NSFR of nearly 250%).

The regulatory capital adequacy ratio of Kredobank S.A. at the end of the fourth quarter of 2023 is 32.1% (with a floor of no less than 10%), the core capital adequacy ratio of Kredobank S.A. is 21.1% (with a floor of no less than 7%).

At the same time, in connection with the war in Ukraine, the Group formed a Support Group led by the Head of the Crisis Staff, whose tasks include preventing disruption to the critical processes of the PKO Bank Polski S.A. Group, exchange of information within the Group and coordination of the aid provided.

The Group takes actions to mitigate the threats associated with the war in Ukraine on an ongoing basis, in particular with respect to ensuring access to the Group’s systems, cyber security and the continuity of cash services and other processes.