Financial position of the Group

Net interest income for 2022 amounted to PLN 11,813 million, i.e. PLN 1,931 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 3,111 million. 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. 2022 also saw a decline in interest income from hedge accounting. In turn, net interest income was positively affected by an increase in income from securities, mainly as a result of an increase in the average interest rate.

Interest income amounted to PLN 20,140 million and was 90.6% higher than in 2021. This was mainly due to:

• an increase in income from financing granted to customers by PLN 7,338 million y/y – mainly due to a 3.8 p.p. increase in the average interest rate on financing granted to (excluding the impact of statutory credit holidays), resulting from an increase in market interest rates, with a change in the structure of financing (an increase in the share of business loans at the expense of the share of housing, foreign currency and PLN loans);
• higher income on securities (PLN +1,481 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 -384 million y/y), mainly related to a significant drop in margins associated with an increase in market interest rates for the PLN.

Interest expenses stood at PLN 8,327 million, up PLN 7,641 million from 2021, mainly due to:

• an increase in interest expense on deposits by PLN 3,515 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;
• hedge accounting, which generated interest expense of PLN 3,580 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 3,111 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 1.20 p.p. y/y to 3.90%.

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. Interest income 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 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 7.8%, and the average interest rate on total deposits was 1.1%. In 2021, it was 3.7% 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 4,951 million, and was PLN 574 million higher than in the previous year. The increase in net commission income was due to, among other things:

• higher income on loans, insurance and operating leases (PLN +247 million y/y), mainly as a result of an increase in commission income on business loans, leasing and factoring, and an increase in income from offering insurance products, accompanied by a decrease in income on housing loans;
• higher net income on margins in Forex transactions (PLN +229 million y/y), mainly in effect of an increase in the number of transactions;
• higher net income on cards (PLN +115 million y/y) due to the higher number of cards and higher number of transactions;
• lower net income from investment funds, pension funds and brokerage activities (PLN -10 million y/y), mainly due to a decrease in commissions for fund management and for the sale of units and commissions on securities exchange trading on the stock market, with an increase in commissions for the sale of Treasury bonds;
• higher net income from maintaining bank accounts and other income (PLN -8 million y/y), due to, among other things, a decrease in fees on high account balances and an increase in the cost of clearing services.

Other net income earned in 2022 amounted to PLN 553 million and was PLN 333 million lower than in 2021, among other things, as an effect of:

• lower net foreign exchange gains (losses) (PLN -509 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;
• maintaining the net income on financial operations at a similar level (PLN -5 million y/y);
• higher net other operating income and expenses (PLN +142 million y/y), among other things as a result of:
  • an increase in income from other operations of the PKO Leasing S.A. Group of PLN 28 million (among other things, the sale of post-lease cars, settlement of damages and insurance premiums, income from early termination of agreements);
  • an increase in revenues from hotel operations of Sopot Zdrój sp. z o.o. by PLN 23 million;
  • a decrease in costs of provisions for returns to customers on early repayments of consumer and mortgage loans by PLN 13 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 7,850 million and were 28.3% higher y/y. Their level was mainly determined by:

• an increase by PLN 1,247 million, e. 194.2% 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 314 million, with simultaneous decrease in contributions to the Bank Guarantee Fund by PLN 73 million – these costs amounted to PLN 409 million, of which PLN 291 million represented a contribution to the resolution fund (in the previous year, BGF costs stood at PLN 482 million, of which PLN 253 million represented the contribution to the resolution fund);
• an increase of PLN 253 million, or 9%, in the cost of employee benefits, mainly as a result of wage regulations;
• an increase of PLN 202 million, i.e. of 8% of tangible costs, mainly as a result of: an increase in ICT costs by PLN 44 million, or 10.3%;
  • an increase in legal expenses by PLN 27 million, or 45.5%, mainly due to the handling of cases involving Swiss franc borrowers;
  • an increase in promotion and advertising costs by PLN 22 million, or 17.2%;
  • an increase in the cost of maintenance and rental of non-current assets by PLN 21 million, or 7.8%;
• an increase in depreciation and amortization expense by PLN 32 million, or 2%, 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 45.3% on an annual basis and deteriorated by 4.9 p.p. y/y, due to a greater increase in operating expenses (28.3% y/y; 8.9% y/y excluding regulatory costs), including a nearly twofold increase in the level of regulatory costs, than the increase in the net income on business activities (14.3% 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 -3,523 million and deteriorated by PLN 2,056 million compared to that recorded in the previous year, which 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.

Net credit risk allowances stood at PLN -1,546 million, down by PLN 125 million as a result of recognition of additional allowances with respect to the war in Ukraine in the amount of PLN 303 million, with lower allowances on loans in the Bank and in the PKO Leasing S.A. Group.

Net write-downs on non-financial assets amounted to PLN -63 million and deteriorated by PLN 17 million year-on-year, mainly as a result of recognizing an impairment loss on customer relationships with Raiffeisen Leasing S.A. in the amount of PLN 21 million.

The share of impaired loans amounted to 3.80% as at the end of 2022 (a 0.18 p.p. decrease compared with 2021), owing to the Bank’s package sales of receivables, among other things.

At the end of 2022, the cost of risk amounted to -0.53% and was 0.02 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 of the Bank’s Group and strict monitoring of the receivables portfolio.

As at the end of 2022, financing granted to customers by the Bank’s Group was PLN 246.4 billion which represents a decrease by PLN 1.2 billion y/y.

The volume of corporate loans increased by PLN 9.7 billion, with a PLN 10.8 billion decrease in the volume of retail and private banking loans, including real estate loans by PLN 10.2 billion and consumer loans by PLN 0.5 billion.

In 2022, the level of financing granted to customers was significantly negatively impacted by adjustments to the gross carrying value of the housing loan portfolio (related to the recognition in the third quarter of the impact of the statutory credit holidays in the amount of PLN 3.1 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 more than PLN 251 billion.

Retail and private banking loans were the main items in the structure of financing by type, with share of 54.2% of the portfolio as at the end of 2022.

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

* _{including repo transactions}
** _{including issues of securities, 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 issues of securities, 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 PKO Bank Polski S.A 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 2022, amounts due to customers reached PLN 339.6 billion, which is an increase of PLN 17.3 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 +19.0 billion) and deposits of business entities (PLN +0.9 billion), accompanied by a decrease in deposits of corporate entities (PLN -2.6 billion).

In the ageing structure of customer deposits, the main items are current deposits whose share amounted to 69.7%, down 14.1 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.

* including liabilities in respect of insurance products

* including liabilities in respect of insurance products

As at the end of 2022, long-term sources of financing amounted to nearly PLN 21 billion, which means a drop by PLN 8 billion since the end of 2021. The change resulted from:

• maturity of PKO Finance AB’s issue of PLN 3.5 billion;
• a decrease in bonds issued by PKO Bank Hipoteczny S.A. by PLN 2.2 billion;
• a decrease in bonds issued by the PKO Leasing S.A. Group by PLN 1.5 billion;
• a decrease in mortgage covered bonds of PKO Bank Hipoteczny S.A. by PLN 1.1 billion.