PKO Bank Polski Group A taste of covered bonds out of Poland. Credit update

Transcription

1 PKO Bank Polski Group A taste of covered bonds out of Poland Credit update September 2017

2 Key investment highlights Large and stable economy with solid GDP real growth Polish banking sector with strong capital base and healthy liquidity Developing residential property market with stable prices High potential for further growth in residential mortgages Regulated legislative regime aiming to protect covered bond investors Leader of Polish banking sector with dominant position in mortgages Bank Hipoteczny A specialized mortgage bank regularly issuing covered bonds collateralised exclusively with PLN residential mortgages and rated by Moody s at country ceiling level (Aa3) 2

3 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 3

4 Poland - one of the fastest developing countries in the EU with solid GDP growth Cumulative GDP real growth (%) 80% 60% 40% 20% 0% -20% Source: Eurostat, GUS 26.3% 50.4% (f) Denmark (2016: 1.1%) Germany (2016: 1.9%) Spain (2016: 3.2%) 60.6% 2018 (f) France (2016: 1.2%) Italy (2016: 0.9%) Czech Republic (2016: 2.4%) Poland (2016: 2.7%) EU funds average annual allocation as GDP percentage ( budget) (%) 2.9% 2.1% 0.5% 0.4% 0.2% 0.1% 0.1% Source: Eurostat, European Structural & Investment Funds Polish export structure by countries in 2016 (%) 49.3% Germany Czech Republic Italy Source: Eurostat 27.3% 6.6% 5.4% 4.8% 6.6% United Kingdom France Others The longest period of continuous GDP real growth 1 (years) Poland 1992-YTD Australia 1992-YTD 30 Finland Austria Norway Netherlands Decomposition of gross value added in Poland in 2016 (%) 2% 26% 65% 7% Agriculture, forestry and fishing Industry (except construction) Construction Services Private and public debt for 2016 (% of GDP) 208% 1 38% 143% 1 147% 96% 99% 133% 117% 1 99% 1 Denmark France Spain Italy Germany Poland Czech Rep. 68% Constitutional limit for public debt 60% 82% 54% 68% 1 37% Source: World Bank 1 Data since 1961 Source: Eurostat Source: Eurostat Private debt Public debt 1 Data for

5 Poland large EU country generating wealth for its citizens Gross disposable income (EUR ths, PPP) Country Change % Abs change Poland % 5.5 Denmark % 5.2 Germany % 5.8 Czech Rep % 2.7 France % 4.0 Italy % 1.3 Spain % 1.0 Source: Eurostat Population in selected EU countries as of 1 January 2017 (in mn) 1 Data for 2014 Unemployment rate (%) % 9.0% 7.5% % 5.2% 4.4% (f) 2018 (f) Denmark Germany Spain France Italy Czech Rep. Poland Source: Eurostat, European Commission (forecast Spring 2017) HICP (Harmonised Index of Consumer Prices) (%) % -0.7% 2.1% (f) 2018 (f) Position Germany France Italy Spain Poland Czech Rep. Denmark Denmark Germany Spain France Italy Czech Rep. Poland Source: Eurostat Source: Eurostat, European Commission (forecast Spring 2017) 5

6 Polish banking sector a strong capital base TCR, Tier 1 and capital to assets ratio as of 2016 (%) Min. regulatory TCR 13.25% Capital to assets ratio Tier 1 TCR 20.7% 18.4% 7.4% 18.8% 17.7% 16.3% 16.1% 6.0% 9.5% 17.6% 16.7% 14.8% 16.2% 14.1% 13.1% 7.6% 7.8% 5.7% 13.8% 11.3% 5.5% Source: IMF, KNF Denmark Germany Poland France Czech Rep. Spain Italy KPIs of the Polish banking sector as of 2016 Key market parameters KPIs Banking sector Total Capital Ratio (TCR) 17.7% ROE 7.8% ROA 0.8% WIBOR 3M % % % C/I 56.2% Capital to assets ratio 9.5% Total NPL ratio 6.1% EUR/PLN Source: IMF, KNF Source: NBP, Reuters 6

7 combined with high potential for further growth Banking sector assets to GDP ratio by country as of 2016 (%) 328% 324% 322% Total assets of the Polish banking sector (PLN bn) CAGR = 4.8% 226% 1,295 1,350 1,406 1,532 1,600 1, % 126% 92% Denmark France Spain Germany Italy Czech Republic Source: PKO BH calculation based on ECB data Poland Source: KNF Loans-to-deposits ratio for households and non-financial corporations as of 2016 (%) 274% Market position by total assets as of H (%) 16% PKO BP Group: PEKAO 10% BZ WBK 119% 112% 108% 99% 91% 79% Denmark Spain France Italy Germany Poland Czech Republic Source: ECB 51% 7% Source: KNF, bank financial statements 7% 9% mbank ING Others 7

8 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 8

9 Developing residential market with stable prices Dwellings per 1,000 inhabitants in selected EU countries for Spain France Italy Germany Czech Rep. Poland Source: Deloitte Property Index report published in July Data as of 2015 Number of dwellings in Poland (ths) 13,587 13,723 13,853 13,983 14, Dwelling transaction prices (PLN ths/sqm) on primary market (LHS) and affordability (RHS) biggest cities' average price Affordability (Sqm per average monthly salary) Source: PKO BH calculation based on NBP and GUS data 0,80 0,75 0,70 0,65 0,60 0,55 0, Outstanding Completed Source: GUS Dwelling ownership status for 2015 (%) 16% 27% 22% 73% 56% 60% 48% 26% 22% 47% 33% 11% 17% 18% 26% 31% 31% 36% 37% Poland Italy Czech Rep. Germany Spain France Denmark Source: Eurostat Mortgage Ownership w/o mortgage Rental 14% 49% Dwelling transaction prices (PLN ths/sqm) on secondary market (LHS) and affordability (RHS) biggest cities' average price Affordability (Sqm per average monthly salary) Source: PKO BH calculation based on NBP and GUS data ,85 0,80 0,75 0,70 0,65 0,60 0,55 0,50 9

10 and strong potential for further mortgage growth Total outstanding residential mortgage loans to GDP ratio for 2016 (%) Outstanding value of residential mortgage loans in Poland (PLN bn) as % of total assets 88.0% 48.9% 44.8% 42.3% EU 28 = 47.1% CAGR = 3.4% % 11% 12% 12% 13% 14% 22.0% 21.7% 20.0% 15% 13% 12% 11% 10% 9% Denmark Spain France Germany Italy Poland Czech Rep. Source: European Mortgage Federation FX denominated PLN denominated Source: NBP, KNF NPL % of mortgage loans in the Polish banking sector Value of newly signed residential mortgage loans in Poland (PLN bn) 5% 4% 3% 2% 1% 0% PLN denominated FX denominated Source: PKO BH calculation based on NBP data % 2.6% % 95% 99% 99% 98% 98% 21% 5% 1% 1% 2% 2% FX denominated PLN denominated Source: Polish Banking Association 10

11 Significant space for covered bond expansion in the funding structure Polish banking sector funding structure as of 2016 (%) Mortgage covered bonds to residential mortgages ratio in Europe as of 2016 (%) 158.6% 5% 7% vs. 42.7% 37.4% 37.7% 21.2% 15.6% Europe 1 = 26.7% 2.4% Denmark Spain Czech Republic Source: PKO BH calculation based on EMF data Italy France Germany Poland Banking groups in Poland by total assets as of H (PLN bn) 88% Deposits Debt securities and subordinated liabilities Other liabilities (without equity) Source: Calculated by PKO BH based on KNF data PKO BP PEKAO BZ WBK mbank ING BGŻ BNP Paribas Source: Banks financial statements and press releases Millennium Getin Alior Bank mortgage bank in the group mortgage bank under construction 1 Average calculated for selected European countries: Belgium, Czech Republic, Denmark, Finland, Germany, Hungary, Ireland, Italy, Poland, Portugal, United Kingdom, Spain, France, Sweden 11

12 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 12

13 PKO Group the leader in the Polish banking sector General description of PKO Group: Leader in the Polish banking sector in terms of total assets, net income, total equity, loan and deposit portfolios, number of customers and size of distribution network Long-term debt rating by Moody s at A3 One of 25 leading banks in Europe in terms of market capitalization In 2016 PKO Bank Polski was selected Bank of the Year in Poland in the annual ranking created by the industry magazine The Banker Listed on the Warsaw Stock Exchange since 2004 As of H the State Treasury owned 29.43% of PKO Bank Polski shares PKO Bank Polski was identified by the Polish FSA as an institution of systemic importance, which is associated with the imposition of 0.75 p.p. capital buffer of total risk exposure Total equity of PKO Group was PLN 34.3 bn as of H m Retail segment customers (incl. SMEs) 1.2 K Branches Market position by total assets as of H (PLN bn) # m Users with access to e-banking (incl. SMEs) 0.79 K Agencies K SME customers 3.2 K ATMs 14.5 K Corporate segment customers 28.8 K Group employment PKO BP PEKAO BZ WBK mbank ING BGŻ BNP Paribas Group: Millennium Getin Alior Bank Source: PKO BP 2017 semiannual reports Source: Bank financial statements 13

14 showing excellent and predictable results as well as leadership in residential mortgages Key financial data of PKO Group (PLN bn) Assets of PKO Group (PLN bn) CAGR = 6.5% H H H1 2017/ H change Net profit (PLN mn) 1,382 1, % Assets % Loans % Deposits % Equity % Source: PKO BP financial statements Key performance indicators of PKO Group for H KPIs PKO Group Banking sector 1 TCR 16.85% 17.7% ROE 8.4% 7.8% ROA 1.0% 0.8% C/I 47.9% 56.2% Capital to assets ratio 11.7% 9.5% Total NPL ratio 5.7% 6.1% NPL ratio for PLN residential mortgage loans 1.9% 2.6% Source: KNF, NBP, PKO Group annual reports, World Bank 1. As of H Source: PKO BP financial statements Breakdown of PKO Group residential mortgage loan portfolio (PLN bn) H PLN FX Source: Calculated by PKO BH based on PKO BP financial statements and investor presentations Market share in residential mortgage loans as of H (%) Source: PKO BP annual reports 74.1% Residential mortgage loans 25.9% Other assets PKO Group Others 14

15 PKO Group solid funding and capital base Transitional CET1: Impact of the 2018 Adverse Scenario from FY15 Starting Point DNB PKO BP Swedbank CMC-CIC Jyske Danske SEB Nordea VWFS BNPP SHB Criteria Caixa Intesa Lloyds Credit Ag. HSBC UBI BPCE SocGen Unicredit LBP Sabadell Helaba BBVA KBC BFA Tendora ING Santander Popolare Barclays Erste OTP Raiffeisen Nord/LB Belfius OP Dekabank Nykredit Rabobank DB BOI ABN Popular Commerzbank BayernLB LBBW BNG NRW Bank RBS AIB BMPS 0.0% -1.8% -1.9% -2.0% -2.1% -2.1% -2.3% -2.4% -2.4% -2.5% -2.7% -2.7% -2.7% -2.9% -3.0% -3.1% -3.2% -3.3% -3.4% -3.5% -3.5% -3.5% -3.7% -3.8% -3.9% -3.9% -3.9% -4.0% -4.1% -4.1% -4.2% -4.2% -4.3% -4.3% -4.5% -4.6% -4.9% -5.3% -5.4% -5.4% -5.6% -6.0% -6.1% -6.4% -6.9% -6.9% -7.1% -7.4% -7.5% -8.5% -14.2% Source: 2016 EU WIDE STRESS TEST Results, 29 July 2016 PKO Group funding structure as of H (%) PKO Group deposit structure as of H (%) 11% 7% 82% Deposits Debt securities and subordinated liabilities Other liabilities (without equity) 5% 23% 72% Amounts due to retail clients Amounts due to corporate entities Amounts due to state budget entities Source: Calculated by PKO BH based on PKO BP financial statements Source: Calculated by PKO BH based on PKO BP financial statements 15

16 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 16

17 Robust regulatory regime EUR 100, Covered bond and mortgage banks in Poland are regulated by the Polish Covered Bond Act, the Banking Law, the Bankruptcy Law, resolutions of the Finance Ministry and the Polish FSA recommendations (each revised in ) Mortgage Covered Bond Collateral xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx 2. By law, only specialized mortgage banks are entitled to issue covered bonds in Poland 3. Constant supervision by the independent Cover Pool Monitor (appointed by the Polish FSA) over mortgage bank activities and its cover pool 4. Conservative approach of determining the mortgage lending value (through-the-cycle) of real estate with rules approved by the Polish FSA 5. Strict regulatory limits on mortgage banks and covered bonds including: min. 10% overcollateralisation (OC) liquidity buffer to cover covered bond 6M interest coverage and liquidity tests 6. Mandatory FX risk limitation 7. Segregation of assets in the cover pool (only mortgages, cash, sovereign debt or similar 1 ) 8. Covered bonds exempt from bail-in protocol (BRRD) 2 9. Legally defined and predictable bankruptcy procedure (not at the discretion of the issuer) designed to achieve best-possible outcome for covered bond holders (maturity extension by 12 months in case of issuer bankruptcy, switching into pass-through structure only if either or both asset coverage test or liquidity test fails, bondholders with option to intervene) 1 Securities issued or guaranteed by the State Treasury of the Republic of Poland, the National Bank of Poland, the ECB, governments and central banks of the EU and OECD member states (except for states that have restructured their external debt in the past five years). 2 In the event of compulsory restructuring of mortgage banks, covered bonds may be subject to compulsory write-down and/or conversion to the extent the value of the covered bonds exceeds the value of the cover pool. 17

18 Stringent regulatory limits Cover pool composition with min. 10% OC and 6M liquidity buffer Mortgage Lending Value Market Value 5 25% haircut Min. 6M CB interest Overcollateralisation: 10% 25% Lending Limit MIN of Market Value 80% 1 x or 100% x Mortgage Lending Value 85% 100% Funding (covered bond) Limit MIN of Mortgage Lending Value 80% 2 x or 100% x Loan Value Cover pool Covered bonds Coverage test (at least every 6 months) Liquidity test (at least every 3 months) Mortgage loans Substitute assets Liquidity buffer 1 Up to 90% only if low equity stake insurance is in place 2 For residential mortgage loans, while 60% for commercial mortgage loans 18

19 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 19

20 PKO Group established PKO Bank Hipoteczny to be a regular issuer of covered bonds leveraging on its leading position in residential mortgages PKO Bank Hipoteczny as a stand-alone Bank: Started its operations in April 2015 Profitable since 1H 2016 Total assets: PLN 12.1 bn TCR/CET1: 16.7% Cover pool: PLN bn Covered bonds issued PLN 6.2 bn 1 : including three PLN benchmarks (PLN 1.5 bn) and two EUR benchmarks (EUR 1 bn) The winner of The Covered Bond Report s Award for Exellence 2017: Pioneer I II PKO Bank Hipoteczny as a subsidiary of PKO Bank Polski: PKO Bank Polski holds 100% of shares in PKO Bank Hipoteczny PKO Bank Polski declared financial support for PKO Bank Hipoteczny to keep its liquidity and capital adequacy ratios above regulatory limits, but does not guarantee to cover its obligations Synergies within PKO Group: Joint mortgage product Use of PKO Group resources (distribution network, IT infrastructure) PKO Group know-how and risk assessment standards PKO Bank Hipoteczny diversifies funding sources of PKO Group III IV PKO Bank Hipoteczny as an issuer of covered bonds complies with: Strict regulatory limits on mortgage banks and covered bonds Conservative approach to determine the mortgage lending value (through-thecycle) of real estate Constant supervision by the independent Cover Pool Monitor (appointed by the Polish FSA) over mortgage bank activities and its cover pool 1 As of 8 September

21 Dynamic development of covered bonds and PLN-denominated residential mortgage loan porfolio Covered bonds issued (PLN mn) 1 Covered bonds characteristics: CRR compliant 3,110 2,980 Solvency II compliant LCR level 1 (for EUR benchmarks) ECB repo eligible (EUR) 30 Source: H 2017 NBP repo eligible (PLN) ECB CBPP eligible X Residential mortgage loan portfolio outstanding (PLN mn) Share capital (PLN mn) 8,248 11, , H Sept 2017 Source: PKO BH financial statement Source: PKO BH financial statement 1 EUR denominated issues converted by EUR/PLN NBP fixing rate as of

22 Only high quality PLN residential mortgage loans granted by PKO Group NEW ORIGINATION TRANSFER PKO Group annual origination of PLN residential mortgages (PLN 12 bn as of 2016) New origination of PKO Bank Hipoteczny Joint product with PKO Bank Polski (one credit application to two banks) distributed through sales network of PKO Bank Polski Mortgage lending value (MLV) set by PKO Bank Hipoteczny according to procedures approved by the Polish FSA (5-15% haircut to market value assessed by an independent external valuator) Credit decisions based on PKO Group risk assessment standards PKO Group portfolio of PLN residential mortgages (PLN 70 bn as of 1H 2017) 1 Transfer of PKO Group receivables to PKO Bank Hipoteczny Transfer of PLN residential mortgages not in arrears Mortgage lending value (MLV) set by PKO Bank Hipoteczny according to procedures approved by the Polish FSA (15-25% haircut to market comparable transactions selected by an independent external valuator) PKO Bank Hipoteczny share in origination of PKO Group up to 25-30% Significant share of PKO Group PLN residential mortgages eligible for transfer Post-sales services provided by PKO Bank Polski based on outsourcing agreement 1. Calculated by PKO BH based on PKO BP financial statements and investor presentations 22

23 Robust lending criteria Criteria Polish banking regulations 1 LtV (market value) 80% 1 2 LtMLV (mortgage lending value) 100% Polish regulations on mortgage banks 3 First-ranking lien in mortgage register 4 Legal title: ownership or perpetuity 5 PLN loans only PKO Group criteria (current offer) 6 7 Residential mortgages (principal dwelling only) Contractual maturity up to 35 years 8 Interest rate: floating 9 New construction (selectively) and secondary market PKO Bank Hipoteczny criteria 10 Collateral: flats or houses 11 Not in arrears (in case of pooling) Subject to approval of the Cover Pool Monitor, the receivables are registered in the cover pool 1 Up to 90% only if low equity stake insurance is in place 23

24 for a high-quality cover pool of purely residential mortgages in PLN PKO Bank Hipoteczny cover pool as of 8 September 2017 Cover pool growth (PLN mn) 6,868 8,291 9,594 Mortgages PLN only Mortgages residential only 3,789 4,735 Overcollateralisation above regulatory limits ,676 Number of loans: 52,157 Average loan value PLN k (ca EUR 42.1 k) Cover pool structure 2 (%) 3% Average indexed LtV 58.1% Seasoning: 39 months PLN residential mortgage loans Features of standard residential mortgage loan 97% PLN Treasury Bonds Variable interest rate with 3M reset 1 Amortized monthly For own housing purposes Source: PKO BH data including including 1. Accounts for 99,89% of mortgage loans in the cover pool 2. Without hedging instruments included into cover pool with net value of PLN -44 mn 24

25 with good diversification and low LtV ratio Cover pool composition by loan seasoning as of 8 September 2017 (%) WA seasoning=39 months Cover pool composition by LtV as of 8 September 2017 (%) WA indexed LtV = 58.1% 18% 12% Up to 12months months 22% months 19% 14% 17% 19% 20% 11% 33% 15% months 60 months 40% (40-50%] (50-60%] (60-70%] (70-80%] (80-90%] (90%- 100%] 0% Cover pool composition by geographical location as of 8 September 2017 Gdańsk (%) Poznan Wroclaw Zachodniopomorskie 3.7% Lubuskie 2.3% Pomorskie 7.0% Kujawsko- Pomorskie 4.8% Wielkopolskie 8.9% Dolnośląskie 9.5% Opolskie Cracow Warmińsko- Mazurskie 3.5% Mazowieckie 23.6% Łódzkie 5.0% Lubelskie 4.8% Świętokrzyskie 1.7% Śląskie 1.2% 10.4% Małopolskie 7.4% Podlaskie 2.8% Podkarpackie 3.3% Warsaw Lodz Cover pool composition by loan value as of 8 September 2017 (%) 32% 5% 35% 29% WA loan value = PLN 179.1k (ca EUR 42.1 k) PLN 150 K (PLN K] (PLN K] > PLN 500 K Source: PKO BH data including 25

26 Rating at country ceiling level Government of Poland rating A2/P-1 stable outlook PKO Bank Polski rating A3/(P)P-2 stable outlook PKO Bank Hipoteczny rating Baa1/P-2 stable outlook +2 notches +3 notches +4 notches PKO Bank Hipoteczny Covered Bond Rating (PLN & EUR) Aa3 Poland country ceiling = Aa3 TPI Leeway: 3 notches PKO Bank Hipoteczny covered bond rating is based on: High quality of cover pool Statutory OC at the minimum level of 10% (Moody s requires 0%) 1 Legally defined and predictable bankruptcy procedure

27 The issuer of the first ever EUR benchmark covered bond out of Poland Key features of EUR issue Issue date 24 October 2016 Size EUR 500,000,000 Maturity date 24 June 2022 (long 5 years) PKO Group carried out Poland s first ever benchmark issue of Euro-denominated covered bonds with a value of 500 million euro Distribution by investor type Margin Price / yield Coupon Listing MS + 18 bp. (3 bp. over govies) %/ 0.178% p.a % p.a. LuxSE and Warsaw Stock Exchange Central banks/ Official institutions 14% INS/PFs 10% Fund Managers 55% ISIN XS Rating by Moody s Aa3 Banks 21% Demand vs issue amount (EUR mn) ca. 1,500 ca. 90 investors Distribution by investor jurisdiction Switzerland 4% Benelux 4% UK 5% Others 4% Demand (order value) Source: PKO Bank Hipoteczny 500 ca. 80 investors Issue value 79 inwestorów Covered bonds issued by PKO Bank Hipoteczny are eligible for repo transactions with the European Central Bank Austria 8% CEE 10% Nordics 19% Source: PKO Bank Hipoteczny Germany 46% 27

28 followed by second EUR benchmark covered bond in March 2017 Key features of EUR issue Issue date 30 March 2017 Size EUR 500,000,000 Distribution by investor type Official Institutions 9% Maturity date Margin 24 January 2023 (short 6 years) MS + 27 bp. (3 bp. over govies) INS/PFs 13% Fund Managers 44% Price / yield %/ 0.63% p.a. Coupon 0.625% p.a. Listing LuxSE and Warsaw Stock Exchange Banks 34% ISIN XS Rating by Moody s Demand vs issue amount (EUR mn) ca. 800 Aa3 Distribution by investor jurisdiction Nordics 5% France Switzerland 4% 3% 500 Italy 6% ca.70 investors Demand (order value) ca. 65 investors Issue value Covered bonds issued by PKO Bank Hipoteczny are eligible for repo transactions with the European Central Bank BeNeLux 6% CEE 7% UK 9% Germany 51% Source: PKO Bank Hipoteczny Source: PKO Bank Hipoteczny Austria 9% 28

29 1 Overview of the Polish economy and its banking sector 2 Polish property market and residential mortgage lending 3 PKO Group overview 4 Polish statutory covered bond framework aligned with the best EU benchmarks 5 PKO s dedicated covered bond issuer PKO Bank Hipoteczny & cover pool description 6 Appendices 29

30 PKO Bank Hipoteczny covered bond maturity profile PKO Bank Hipoteczny covered bond maturity profile as of (PLN mn) 2, ,126 1,265 2, EUR Covered Bonds 1 PLN Covered Bonds Source: PKO Bank Hipoteczny cover pool report 1 Calculated using NBP EUR/PLN fixing rate as of EUR Poland Sovereign Curve (I-spread) Source: Bloomberg, data as of Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

31 Dwelling transaction prices and affordability on primary and secondary market Dwelling transaction prices (PLN ths/sqm) on primary market (LHS) and affordability (RHS) Warsaw average price Source: PKO BH calculation based on NBP and GUS data 1,00 0,80 0,60 0,40 0,20 0,00 Affordability in Warsaw (Sqm per average monthly salary) Dwelling transaction prices (PLN ths/sqm) on secondary market (LHS) and affordability (RHS) Warsaw average price Source: PKO BH calculation based on NBP and GUS data ,90 0,70 0,50 0,30 Affordability in Warsaw (Sqm per average monthly salary) Source: PKO BH calculation based on NBP and GUS data Dwelling transaction prices (PLN ths/sqm) on primary market (LHS) and affordability (RHS) Dwelling transaction prices (PLN ths/sqm) on secondary market (LHS) and affordability (RHS) biggest cities' average price (without Warsaw) 10 cities' average price Affordability in 6 biggest cities' without Warsaw (Sqm per average monthly salary) Affordability in 10 biggest cities' (Sqm per average monthly salary) Source: PKO BH calculation based on NBP and GUS data 1,00 0,80 0,60 0,40 0, biggest cities' average price (without Warsaw) 10 cities' average price Affordability in 6 biggest cities' without Warsaw (Sqm per average monthly salary) Affordability in 10 biggest cities' (Sqm per average monthly salary) ,20 1,00 0,80 0,60 0,40 6 biggest cities without Warsaw: Gdansk, Gdynia, Lodz, Krakow, Poznan, Wroclaw 10 cities: Bialystok, Bydgoszcz, Katowice, Kielce, Lublin, Olsztyn, Opole, Rzeszow, Szczecin, Zielona Gora 31

32 Covered bonds are becoming strategic funding tool of PKO Group Key features of PLN issue #1 Key features of PLN issue #2 Key features of PLN issue #3 Key features of PLN issue #4 Issue date 27 Apr 2016 Issue date 17 June 2016 Issue date 28 April 2017 Issue date 22 June 2017 Size 500,000,000 PLN Size 500,000,000 PLN Size 500,000,000 PLN Size 265,000,000 PLN Maturity date 28 Apr 2021 Maturity date 18 June 2021 Maturity date 18 May 2022 Maturity date 10 September 2021 Coupon WIBOR 3M % (30bp over govies) Coupon WIBOR3M +0.59% (19bp over govies) Coupon WIBOR 3M +0.69% (23bp over govies) Coupon 2.69% (25bp over govies) Listing Warsaw Stock Exchange and BondSpot Listing Warsaw Stock Exchange and BondSpot Listing Warsaw Stock Exchange and BondSpot Listing Warsaw Stock Exchange and BondSpot ISIN code PLPKOHP00025 ISIN code PLPKOHP00033 ISIN code PLPKOHP00041 ISIN code PLPKOHP00058 Rating by Moody s Aa3 Rating by Moody s Aa3 Rating by Moody s Aa3 Rating by Moody s Aa3 PKO Group has become a regular covered bond issuer Distribution (by investor jurisdiction) 26% Domestic 74% Foreign Source: PKO Bank Hipoteczny 32

33 PKO Group stable long-term growth of PKO Group financial results PKO Group consolidated financial results Financial results (bln PLN) CAGR Assets % Loans % Deposits % Equity % Income (banking operation result) % OPEX % Impairment allowance and write-downs % Net profit % Financial indicators, % Interest margin Cost of risk Interest margin after cost of risk C/I ROE ROA TCR Tier 1 bd L/D Source: PKO Group financial statements and PKO Group Director s Reports prepared according to Polish GAAP 33

34 PKO Group - the highest leverage ratio in all countries covered by EBA stress tests Aggregate figures by Countries PKO Bank Polski leverage ratio Dec-15 Poland represented by PKO Bank Polski achieved the highest leverage ratio amongst all countries covered by the EBA stress tests In the adverse scenario the leverage ratio would decrease to 7.9% staying significantly above the average. Source: 2016 EU WIDE STRESS TEST Results, 29 July

35 PKO BH financials Net profit (mn PLN) Assets (mn PLN) Covered bond outstanding (mn PLN) PKO BH Issues ,610 12,134 3,242 6, H Source: PKO BH financial statements Equity (mn PLN) 2016 H Source: PKO BH financial statements Residential mortgage loan portfolio (mn PLN) 2016 H vs Polish CB market value as of 30 June 2017 PLN ,248 11, mn 2016 H Source: PKO BH financial statements 2016 H Source: PKO BH financial statements Source:

36 PKO Bank Hipoteczny: A strong balance sheet and capital base supporting a growing loan portfolio Growing assets: Total asset value: PLN 12.1 bn YoY growth of loan portfolio: 39.9% Balance sheet as of 30 June 2017 Balance sheet total: PLN 12.1 bn Other 4.9% Healthy financial standing: Leverage ratio: 7.6% TCR: 16.7% LCR: 280% 50.4% Covered bonds issued The portfolio and the cover pool are composed of well-diversified high quality residential mortgages: Purely PLN residential mortgages Portfolio LtV: 58.1% 1 NPL: 0% Residential mortgages (PLN-denominated only) 95.1% 15.8% Unsecured bonds issued Low risk assets: Investment portfolio consists only of low risk Polish Treasury Bonds. 1 As of 8 September 2017 All data as of 30 June 2017 Source: PKO BH financial statement Assets 14.7% 10.3% 7.8% Equity 1% Other Equity and liabilities Deferred payment for transfered loans due to PKO BP Credit line 36

37 Cover pool with hedged FX and interest rate risk PLN 9.6 bn Data as of 8 September 2017 PLN 0.3 bn ( TBonds) PLN 2.2 bn (EUR ca 0.5 bn) Excess cover pool for next covered bonds PLN 9.3 bn PLN residential mortgage loans WIBOR 3M 3M WIBOR* PLN 1.2 bn PLN 4.4 bn (EUR 1 bn) EUR denominated Fixed rate PLN 0.3 bn PLN denominated Fixed rate PLN 1.5 bn PLN denominated 15% OC internal limit FX and interest rate risks are hedged with CIRSs and FX forwards Interest rate risks are hedged with IRS FX and interest rate reset aligned with the cover pool FX and interest rate risks are hedged with CIRSs, IRS and FX forwards (PKO Bank Polski as the counterparty). They are compliant with Moody s requirements i.e.: one-sided collateral triggered at A3/Baa1 for CIRSs (posted by the swap counterparty) counterparty replacement rule triggered at Baa1/Baa2 for CIRSs 12-month extension of CIRSs in case of Bank s default (replicates the covered bond structure) WIBOR 3M Cover pool Covered bonds 37

38 Financials PKO Group as of H PKO BH as of H Selected financial data (PLN mn) Selected financial data (PLN mn) Net interest income 4,160 Net fees and commissions 1,443 Impairment allowance and write-downs (783) General administrative expenses (2,938) Operating result 1,916 Profit before income tax 1,927 Net profit 1,386 Total assets 286,389 Loans 204,620 Net interest income 62.2 Net fees and commissions (2.1) Impairment allowance and write-downs (1.5) General administrative expenses (19.6) Operating result 34.0 Profit before income tax 34.0 Net profit 25.1 Total assets 12,134.5 Loans 11,538.6 Deposits 207,248 Deposits N/A Total equity 34,340 Share capital 1,250 Capital adequacy ratio 16.85% Tier 1 Basic funds (CET 1) 30,276 Total own funds 34,340 Total equity Share capital 950 Capital adequacy ratio 16.7% Tier 1 Basic funds (CET 1) Total own funds Source: PKO BP financial statements, PKO BH financial statement 38

39 PKO Bank Hipoteczny is the sole Polish issuer of covered bonds purely backed by prime PLN residential mortgages Starting date Cover pool by purpose of loan only residential loans low credit risk commercial & residential loans commercial & residential loans PLN EUR USD Cover pool by loan currency PLN no currency exposure PLN/EUR/USD PLN/EUR/USD/CHF Covered bonds ratings 1 Aa3/-/- country ceiling level -/-/A -/-/A CB issues 2016 PLN 1,000 mn EUR 500 mn largest in Poland PLN 850 mn EUR 168 mn PLN 50 mn Total CB outstanding as of 30 June 2017 PLN 1,795 mn EUR 1,025 mn largest in Poland PLN 3,135 mn EUR 484 mn PLN 895 mn EUR 86.5 mn 1 Moody s / S&P / Fitch Source:

40 Enhanced Polish statutory covered bond framework Prior legislation Current legislation Increase in: Structure Hard bullet Maturity extension & bondholders entitled with option to intervene Protection Minimum level of overcollateralisation (OC) 0% 10% Liquidity buffer to cover CB 6M interest No Yes 2 Supply Maximum covered bond limit (as LtMLV of residential mortgages) 60% 80% 3 Withholding tax Yes No Demand Separate limit for Polish open pension funds (OFE) on covered bonds of a single issuer No Yes (5% of assets) 40

41 Regulatory safeguards built into bankruptcy procedure Process Covered bond repayment Recourse and Priorities Hedging P1. Clear process of bankruptcy declaration P2. Clear deadlines for key actions of bankruptcy procedure defined in the legal framework C1. Avoidance of time subordination C2. Explicit rules for early repayment of covered bonds C3. Explicit procedure for treatment of covered bonds which became due before declaration of bankruptcy R1. Dual recourse (separate bankruptcy asset pool and general bankruptcy estate) R2. Clearly defined order of priorities of payments from the separate bankruptcy asset pool H1. Hedging arrangements will survive declaration of bankruptcy and extended by 12 months H2. Possibility of the bankruptcy receiver to enter into hedging transactions (provided tests are passed) Covered bondholders entitled with option to intervene in bankruptcy procedure Coverage test passed passed failed Liquidity test passed failed n/a Covered bonds repayment Holders option 1. Covered bonds repaid according to terms and conditions of the covered bonds, taking 12 months extension into account 2. Receiver may enter into hedging transactions Resolution of covered bondholders with 2/3 majority to sell the separate bankruptcy asset pool to another bank 1. Maturity date of all covered bonds extended to the date falling three years after the latest cover asset maturity date 2. Distinct rules for pro-rata repayment before extended maturity date Resolution of covered bondholders with 2/3 majority 1. to disapply maturity extension or 2. to sell cover assets to another bank or non-bank Probability of Default according to Moody s Idealised Cumulative Default Probabilities table: Baa1: 5Y 1.10%; 7Y 1.67%; 10Y 2.60% A3: 5Y 0.73%; 7Y 1.11%; 10Y 1.80% 41

42 Details on protective features of the Polish Covered Bond framework in case of issuer bankruptcy (1/4) Clear and straightforward process of bankruptcy declaration In case of insufficient assets to satisfy all the bank s obligations, according to the balance sheet prepared as at the last day of the relevant reporting period, the management board, the receiver or the liquidator must promptly notify the KNF A creditor of the bank, including a holder of debt securities issued by the bank, cannot file a bankruptcy procedure concerning a mortgage bank. Before declaring the bank's bankruptcy, the bankruptcy court will question a representative of the KNF, the members of the bank's management board and receiver, and the liquidator regarding the grounds for declaring the bank bankrupt Clearly defined order of priorities of payments from the separate bankruptcy asset pool Costs of liquidating the separate bankruptcy asset pool which include the trustee's fee, interest and other ancillary payments under the covered bonds Outstanding principal amount of the covered bonds and the hedging instruments 42

43 Details on protective features of the Polish Covered Bond framework in case of issuer bankruptcy (2/4) Clear deadlines for key actions of bankruptcy procedure defined in the legal framework On day one of the declaration of mortgage bank s bankruptcy: Bankruptcy administration put in place (=bankruptcy receiver) and management and supervisory bodies of the bank dissolved Appointment of trustee (kurator) to represent the holders of the covered bonds in the bankruptcy proceedings Constitution of the separate bankruptcy asset pool (confirmation of ring-fencing) on the basis of the cover pool register and additionally including: assets in the liquidity buffer, proceeds from payments under receivables in the cover pool, assets acquired by the mortgage bank in exchange for assets in the cover pool Rejection of set-off of claims of the bank s creditors with the bank s claims against these creditors included in the separate bankruptcy asset pool (in principle) Application of rules concerning satisfaction of claims of the holders of covered bonds to satisfaction of claims of counterparties to hedging transactions entered in the cover pool register Maturity of all outstanding covered bonds is extended by 12 months. Due interest under the covered bonds is paid in the manner set out in the terms and conditions of the covered bonds Within 21 days from the declaration of mortgage bank s bankruptcy: Trustee to report to the bankruptcy estate the aggregate principal amount of all outstanding covered bonds due before and after the date of declaration of bankruptcy and the aggregate amount of all interest Within 3 months from the declaration of mortgage bank s bankruptcy: Bankruptcy receiver is required to conduct the coverage and liquidity tests on the basis of separate bankruptcy asset pool for the mortgage cover bonds Depending on results of the tests, one of the three scenarios will be triggered Within 1 month from the announcement of the test results: Deadline for requesting a meeting of covered bond holders 43

44 Details on protective features of the Polish Covered Bond framework in case of issuer bankruptcy (3/4) Explicit rules for early repayment of covered bonds Both tests are positive: The claims under the covered bonds are satisfied in accordance with the terms and conditions of the covered bonds, taking into account the extension of maturity of the covered bonds by 12 months A meeting of holders may, within 2 months from the date of announcing the results of the tests, request the receiver, by way of resolution adopted with a majority of two-thirds of votes of holders of the outstanding covered bonds, to sell all receivables and rights in the separate bankruptcy asset pool: - to another mortgage bank together with transferring to the purchaser all obligations of the bankrupt bank under the covered bonds; or - to another bank or another mortgage bank without transferring to the purchaser the obligations of the bankrupt bank under the covered bonds Proceeds from asset sale (interest under the outstanding covered bonds payable in the next six months + amount of claims of holders of the covered bonds which became due before the date of declaration of bankruptcy and were not paid before that date) >= 5% of the principal amount of the outstanding covered bonds These proceeds will be paid pro-rata to the holders of the covered bonds on the next interest payment date, but not earlier than 14 days after the day on which the decision of the judge-commissioner approving the receiver's report on the progress of the bankruptcy proceedings becomes final and binding 44

45 Details on protective features of the Polish Covered Bond framework in case of issuer bankruptcy (4/4) Explicit rules for early repayment of covered bonds At least one test is negative: The maturity date of the covered bonds, including the covered bonds which became due before the date of declaration of bankruptcy, is extended to the date falling three years after the latest maturity date of a mortgage bank's receivables in the cover pool Proceeds under the loans received by the bank (interest payable in the next six months + costs of bankruptcy proceedings) >= 5% of the principal amount of the outstanding covered bonds These proceeds will be paid pro rata to the holders of the covered bonds on the next interest payment date, but not earlier than 14 days after the day on which the decision of the judge-commissioner approving the receiver's report on the progress of the bankruptcy proceedings becomes final and binding A meeting of the holders may adopt a resolution on disapplying the extension of the maturity date or on the sale of the assets in the cover pool. The assets in the cover pool may be sold to another bank which is not a mortgage bank without transferring to the purchaser the obligations of the bankrupt bank under the covered bonds. The assets in the cover pool, possession of which is not restricted to banks, may also be sold to an entity which is not a bank 45

46 To ensure the safety of the Cover Bonds the Bank is obliged to perform the Coverage Test cover pool Core assets Substitute assets Hedging instruments Liquidity buffer Principal amount of outstanding covered bonds Costs of liquidating bankruptcy asset pool Due and unpaid interest The coverage test verifies whether the value of assets in a cover pool allows for full satisfaction of all claims under outstanding covered bonds. The coverage test must be performed every six months. The test is performed based on the following sets of data: real data as of day of testing scenarios concerning changes of FX rates 46

47 and the Liquidity test 6M Substitute assets Liquidity buffer Net proceeds under hedging instruments for the next 6 months Interest payable in the next 6 months Principal amount of covered bonds that fall due in the next 6 months Cost for the next 6 months of liquidating bankruptcy asset pool 12M Substitute assets Liquidity buffer Net proceeds under hedging instruments for the next 12 months Interest under receivables in the cover pool for the next 12 months Repayment of principal of receivables in the cover pool for the next 12 months Interest payable in the next 12 months Principal amount of covered bonds that fall due in the next 12 months Obligations towards holders that became due but were not paid before the date of declaration of bankruptcy Cost for the next 12 months of liquidating bankruptcy asset pool The purpose of the liquidity test is to verify that assets in a cover pool are sufficient for full satisfaction of all claims under outstanding covered bonds even if their maturity is extended in bankruptcy proceedings. The liquidity test must be performed at least every three months. The test is performed based on the following sets of data: real data as of day of testing scenarios concerning changes of FX rates scenarios concerning the shift of interest rate curves 47

48 Disclaimer This presentation (the Presentation ) has been prepared by PKO Bank Hipoteczny S.A. ( PKO BH SA, Bank ) solely for use by investors or analysts and should not be treated as a part of any an invitation or offer to sell any securities, invest or deal in or a solicitation of an offer to purchase any securities or recommendation to conclude any transaction, in particular with respect to securities of PKO BH S.A. The information contained in this Presentation is derived from publicly available sources which Bank believes are reliable, but PKO BH SA does not make any representation as to its accuracy or completeness. PKO BH SA shall not be liable for the consequences of any decision made based on information included in this Presentation. The information contained in this Presentation has not been independently verified and is, in any case, subject to changes and modifications. In no event may the content of this Presentation be construed as any type of explicit or implicit representation or warranty made by PKO BH SA or, its representatives. Likewise, neither PKO BH SA nor any of its representatives shall be liable in any respect whatsoever (whether in negligence or otherwise) for any loss or damage that may arise from the use of this Presentation or of any information contained herein or otherwise arising in connection with this Presentation. PKO BH SA does not undertake to publish any updates, modifications or revisions of the information, data or statements contained herein should there be any change in the strategy or intentions of PKO BH SA, or should facts or events occur that affect PKO BH SA s strategy or intentions, unless such reporting obligations arises under the applicable laws and regulations. This Presentation contains certain market information relating to the banking sector in Poland, including information on the market share of certain banks and PKO BH SA. Unless attributed exclusively to another source, such market information has been calculated based on data provided by third party sources identified herein and includes estimates, assessments, adjustments and judgments that are based on PKO BH SA s experience and familiarity with the sector in which PKO BH SA operates. Because such market information has been prepared in part based upon estimates, assessments, adjustments and judgments and not verified by an independent third party, such market information is, unless otherwise attributed to a third party source, to a certain degree subjective. While it is believed that such estimates, assessments, adjustments and judgments are reasonable and that the market information prepared is appropriately reflective of the sector and the markets in which PKO BH SA operates, there is no assurance that such estimates, assessments and judgments are the most appropriate for making determinations relating to market information or that market information prepared by other sources will not differ materially from the market information included herein. PKO BH SA hereby informs persons viewing this Presentation that the only source of reliable data describing PKO BH SA s financial results, events or indexes are current or periodic reports submitted by PKO BH SA in satisfaction of its disclosure obligation under Polish law. This Presentation is not for release, directly or indirectly, in or into the United States of America, Australia, Canada or Japan. This document is for the use of the addressees only and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of PKO BH S.A. 48

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