Financial position of the Bank

Net interest income for 2022 amounted to PLN 11,224 million, i.e. PLN 2,513 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. This effect was partially offset by the recognition in the third quarter of 2022 of a non-recurring loss charged to interest income on statutory credit holidays that reduced income on home loans by PLN 2,443 million. Net interest income in 2022 was negatively affected by a decrease in hedge accounting income and an increase in interest expense on customer deposits, resulting mainly from increases in market rates for the PLN.

Interest income in 2022 reached PLN 18,524 million and was 102.1% higher than in 2021, largely as a result of:

• an increase in revenue from financing granted to customers by PLN 7,044 million y/y – mainly related to a 3.6 p.p. increase in the average interest rate on financing granted to customers. (excluding the impact of statutory credit holidays), with a change in the structure of the average volume of loan receivables (an increase in the share of business loans at the expense of other groups of loans, mainly foreign currency housing loans);
• higher income on securities (PLN +1,388 million y/y), mainly as a result of an increase in average interest rates resulting from rising market interest rates;
• lower hedge accounting income (PLN -411 million y/y), mainly as a result of the decline in average margins on IRS transactions following the interest rate hikes for PLN, which translated into negative results presented in interest expense.

Interest expenses stood at PLN 7,300 million, up PLN 6,847 million from 2021, mainly due to:

• increase in interest expense on deposits by PLN 3,486 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;
• hedge accounting, which generated interest expense of PLN 3,142 million y/y, mainly as a result of a decline in average margins on IRS transactions following the interest rate hikes for PLN.

* 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 credit holidays) of PLN 2,443 million

The interest margin in 2022, excluding the impact of recognizing the effects of the statutory credit holidays in the third quarter of 2022, increased by 1.22 p.p. y/y to 3.82%.

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 receivables from banks, bearing interest at lower rates, increased at the expense of mainly the share of securities and the share of receivables from customers, bearing interest at the highest rates).

In 2022, the average interest rate on PKO Bank Polski S.A.’s loans was 7.6%, and the average interest rate on total deposits was 1.1%. In 2021, it was 3.5% and 0.1%, respectively.

Average interest rate of new term deposits in PLN (for individual clients and enterprises) in 2022 was equal to 4,8%.

In 2022, net fee and commission income amounted to PLN 3,818 million and was PLN 325 million higher than in the previous year. The increase was determined – among other things – by:

• higher net income on margins in Forex transactions (PLN +145 million y/y) in effect of an increase in the number of transactions;
• higher net income on cards (PLN +114 million y/y) due to the higher number of cards and higher number of transactions;
• higher net income from investment funds and brokerage activities (PLN +36 million y/y), mainly due to an increase in commission on the sale of Treasury bonds;
• higher net income on loans and insurance (PLN +31 million y/y), mainly in effect of an increase in commission on business loans, accompanied by a decline in income on housing loans and commissions for the sale of loan-linked insurance;
• stable net income on maintenance of bank accounts and other.

In 2022, other net income amounted to PLN 803 million and was PLN 520 million lower than that earned in 2021, among other things due to:

• lower net foreign exchange gains (losses) (PLN -537 million y/y), mainly as a result of the recognition in 2021 of a foreign exchange gain of approximately PLN 328 million following the decision of the Extraordinary Shareholders’ Meeting of the Bank of 23 April 2021 to offer settlements to customers and a deterioration in the gain or loss on foreign exchange transactions due to an increase in PLN interest rates and an increase in the cost of currency conversion in 2022, with an improvement in the net income on customer operations;
• lower dividend income (PLN -136 million y/y);
• higher net income on financial operations (PLN +23 million y/y) – among other things, as a result of an increase in the net income on derivatives (mainly realized on instruments embedded in structured deposits), with lower result on derecognition of assets (mainly due to high income generated on the sale of securities in 2021);
• higher net other operating income and expenses (PLN +130 million y/y), among other things as a result of:
  • a decrease in costs of provisions for returns to customers on early repayments of consumer and mortgage loans by PLN 13 million;
  • recognizing income of PLN 23 million in 2022 in respect of a decrease in liability related to providing additional capital to a subsidiary, whereas costs recognized in 2021 in this respect amounted to PLN 17 million;
  • recognition in 2022 of income from the sale of CO₂ emission allowances in the amount of PLN 18 million (in the previous year, the cost on this account amounted to PLN 60 million, which was fully offset by positive valuation of customer derivatives related to CO₂ emission allowances recognized in the net income on financial operations).

In 2022, operating expenses amounted to PLN 6,925 million and were 31.8% higher y/y. Their level was mainly determined by:

• an increase by PLN 1,232 million, i.e. 207.4% in regulatory costs, mainly as a result of the recognition 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 Borrowers’ Support Fund in the amount of PLN 307 million, with simultaneous decrease in contributions to the Bank Guarantee Fund by PLN 80 million – these costs amounted to PLN 381 million, of which PLN 264 million represented a contribution to the resolution fund (in the previous year, BGF costs stood at PLN 461 million, of which PLN 232 million represented the contribution to the resolution fund).
• an increase by PLN 207 million, or 7.6%, in the cost of employee benefits, mainly as a result of wage regulations;
• an increase by PLN 192 million, i.e. of 18.0% of tangible costs, mainly as a result of:
  • an increase in ICT costs by PLN 48 million, or 14.1%;
  • an increase in legal expenses by PLN 31 million, or 59.4%, mainly due to the handling of cases involving Swiss franc borrowers;
  • an increase in promotion and advertising costs by PLN 25 million, or 22.3%;
  • an increase in the cost of maintenance and rental of non-current assets by PLN 22 million, or 9.0%;
  • an increase in project costs by PLN 16 million, or 31.8%;
• an increase in depreciation and amortization expense by PLN 42 million, or 4.8%, 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 43.7% on an annual basis and deteriorated by 4.9 p.p. y/y, due to a greater increase in operating expenses (31.8% y/y; 9.5% y/y excluding regulatory costs), including a twofold increase in regulatory costs, than the increase in the net income on business activities (17.1% y/y), dragged down by the recognition of the impact of statutory credit holidays.

In 2022, net write-downs and impairment (including the cost of legal risk) amounted to PLN -3,168 million and deteriorated by PLN 1,857 million compared to that recorded in the previous year. This was mainly driven by the recognition of the cost of legal risk of mortgage loans in convertible currencies in the amount of PLN -1,914 million as a result of a significant change in the market environment affecting the estimated level of lawsuits and settlements, and recognition of additional allowances of PLN 103 million as a result of the materialization of risks associated with the war in Ukraine.

Net credit risk allowances stood at PLN -1,165 million, an improvement of PLN 91 million, mainly due to an improved performance on housing loans.

Net write-downs on non-financial assets amounted to PLN -89 million and deteriorated by PLN 34 million year-on-year, mainly as a result of recognizing additional impairment loss on shares in Kredobank in the amount of PLN 51.8 million.

The share of impaired loans amounted to 3.60% as at the end of 2022, down 0.30 p.p. compared to 2021, driven by an increase in the total receivables portfolio and the Bank’s package sales of receivables.

At the end of 2022, the cost of risk amounted to -0.42% and was 0.12 p.p. lower than that recorded in the previous year.

In light of the volatile macroeconomic conditions associated with rising interest rates, increasing the cost of debt service, and rising inflation, which is causing a decline in profitability and thus in customers’ repayment capacity, the Bank continues its conservative credit risk management policy and strict monitoring of the receivables portfolio.

As at the end of 2022, financing granted to customers by the Bank was PLN 223.6 billion which represents an increase by PLN 3.8 billion y/y.

The volume of corporate loans increased by PLN 10.5 billion. The volume of retail and private banking loans, on the other hand, fell by PLN 6.3 billion. The decline in retail and private banking loans was mainly in real estate loans, which were significantly negatively impacted by adjustments to the gross carrying amount (related to the recognition in the third quarter of 2022 of the impact of the statutory credit holidays in the amount of PLN 2.4 billion and the recognition of additional costs for legal risk of foreign currency loans in the amount of PLN 1.9 billion).

Excluding the impact of the above adjustments to the gross carrying amount, financing granted to customers at the end of 2022 would amount to nearly PLN 228 billion.

Retail and private banking loans and corporate loans were the main items in the structure of financing by type, with a share of 50.9% and 41.4%, respectively, at the end of 2022.

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

Amounts due to customers constitute the basic source of financing of the Bank’s assets. As at the end of 2022 amounts due to customers reached PLN 334.9 billion, which is an increase of PLN 16.8 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 +19.3 billion) and deposits of business entities (PLN +0.6 billion), accompanied by a decrease in deposits of corporate entities (PLN -3.0 billion).

In the structure of amounts due to customers by type, the main items are the retail and private banking deposits (69.5% as at the end of 2022).

In the ageing structure of customer deposits, the main items are current deposits whose share amounted to 69.8%, down 14.6 p.p. from the end of 2021 in favor of term deposits. The year-on-year increase in the share of term deposits was driven by the introduction of new interest-bearing products for the Bank’s customers, in response to the rise in market rates.

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 2022, long-term sources of financing amounted to about PLN 3.5 billion, which means a drop by PLN 4.4 billion since the end of 2021, mainly as a result of the maturity of a loan from subsidiary, PKO Finance AB.