Interim Financial Statements of Nordea Bank Polska S.A. for 2nd Quarter of 2008

Transcription

1 Interim Financial Statements of Nordea Bank Polska S.A. 2 nd quarter of

2 Financial Statements of Nordea Bank Polska S.A. Table of contents: Title Str. I. SELECTED FINANCIAL DATA... 4 II. PROFIT AND LOSS ACCOUNT... 5 III. BALANCE SHEET... 6 IV. STATEMENT OF MOVEMENTS IN EQUITY... 7 V. CASH FLOW STATEMENT... 8 VI. GENERAL INFORMATION ABOUT THE ISSUER FACTORS AND EVENTS INFLUENCING THE PROFIT EARNED IN THE SECOND OF 2008: SIGNIFICANT ACCOUNTING POLICIES SEGMENT REPORTING INTEREST INCOME AND EXPENSES AND GAINS ON FAIR VALUE MEASUREMENT NET COMMISSION INCOME GAINS ON FAIR VALUE MEASUREMENT AND REVALUATION OF FINANCIAL INSTRUMENTS OTHER OPERATING INCOME ADMINISTRATIVE EXPENSES IMPAIRMENT ON LOANS AND ADVANCES BANK S CREDIT PORTFOLIO FINANCIAL ASSETS AND FINANCIAL LIABILITIES HELD FOR TRADING CLASSIFICATION OF FINANCIAL INSTRUMENTS FAIR VALUE ASSETS PLEDGED FOR COLLATERAL

3 15. DESCRIPTION OF IMPORTANT ACHIEVEMENTS OR FAILURES OF THE ISSUER AND ITS CAPITAL GROUP IN THE PERIOD COVERED BY THE REPORT, INCLUDING THE MOST IMPORTANT RELATED EVENTS THE MANAGEMENT BOARD S VIEW ON THE FEASIBILITY OF EARLIER PROJECTIONS OF RESULTS FOR THE GIVEN YEAR IN THE LIGHT OF THE FIGURES PRESENTED IN THE QUARTERLY REPORT AS JUXTAPOSED WITH THE FORECAST FIGURES SHAREHOLDERS HOLDING MORE THAN 5% OF VOTES AT THE GENERAL MEETING OF SHAREHOLDERS (GMS) AND IN THE SHARE CAPITAL OF NORDEA BANK POLSKA S.A HOLDING OF SHARES IN THE ISSUER OR RIGHTS THERETO (OPTIONS) BY PERSONS MANAGING AND SUPERVISING THE ISSUER, ACCORDING TO THE INFORMATION AVAILABLE TO THE ISSUER PROCEEDINGS BEFORE A COURT, AN ARBITRATION TRIBUNAL A PUBLIC ADMINISTRATION AUTHORITY RELATED PARTY DISCLOSURES SURETY SHIPS FOR LOANS/ADVANCES, PROVIDED BY THE ISSUER OR GUARANTEES GRANTED BY THE ISSUER, WHOSE TOTAL AMOUNT PER ONE ENTITY EXCEEDS 10% OF THE ISSUER S EQUITY INFORMATION CONCERNING THE ISSUE, REDEMPTION AND REPAYMENT OF DEBT AND EQUITY SECURITIES CONTINGENT LIABILITIES PRINCIPLES OF CONVERSION OF THE PLN TO THE EUR SUBSEQUENT EVENTS

4 I. Selected financial data 2nd quarter incrementally period from 01/01/2008 to 30/06/2008 2nd quarter incrementally period from 01/01/2007 to 30/06/2007 EUR thousand 2nd quarter incrementally period from 01/01/2008 to 30/06/2008 2nd quarter incrementally period from 01/01/2007 to 30/06/ Interest income Commission income Profit before income tax Profit for the period Decrease in cash and cash 5 equivalents (40 083) ( ) (11 526) (71 133) 6 Loans and advances to banks Loans and advances to 7 customers Total assets Deposits from banks Deposits from customers Total liabilities Total equity Number of shares Book value per share (PLN/EUR) 21,70 17,65 6,47 6,11 15 Solvency ratio 10,87 10, Profit (loss) per share (PLN/EUR) 1,39 0,78 0,40 0,21 4

5 II. Profit and Loss Account Note 01/04/ /06/ /01/ /06/ /04/ /06/ /01/ /06/2007 Operating income Interest income Interest expenses Net interest income Commission income Commission expenses Net commission income Gains on fair value measurement and revaluation of financial instruments Other operating income Total operating income OPERATING EXPENSES Administrative expenses staff costs other administrative expenses Depreciation Total operating expenses Impairment on loans and 9 advances (1 451) (2 769) Profit before income tax Income tax Profit for the period Earnings per share 0,79 1,39 0,44 0,78 Diluted earnings per share 0,79 1,39 0,44 0,78 5

6 III. Balance Sheet ASSETS 30/06/ /12/ /06/2007 note Cash and balances with central bank Other financial assets at fair value through profit or loss Loans and advances to banks Loans and advances to customers Financial assets held for trading Intangible assets Property, plant and equipment Deferred tax assets Other assets TOTAL ASSETS LIABILITIES 01/01/ /06/ /01/ /12/ /01/ /06/2007 Deposits from banks Deposits from customers Debt securities issued Financial liabilities held for trading Other liabilities Deferred tax liabilities Subordinated liabilities Reserves TOTAL LIABILITIES Equity Share capital Other capital Retained earnings and profit for the period TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

7 IV. Statement of Movements in Equity 30/06/ /12/ /06/2007 Share capital Opening balance Increase of capital Closing balance Other capital Supplementary capital Opening balance Increase of capital Closing balance General Banking Risk Fund Opening balance Closing balance Other reserves Opening balance Employee shares Profit distribution Closing balance Retained earnings and profit for the year Opening balance Profit distribution (70 532) (50 068) (50 068) Profit for the year Closing balance TOTAL EQUITY Opening balance Increase of capital Employee shares Profit distribution Profit for the year Closing balance

8 V. Cash Flow Statement 01/04/ /01/ /04/ /01/ /06/ /06/ /06/ /06/2007 Operating activities Profit for the period Adjustment for reconciliation of net profit against net cash from operating activities (15 550) (12 644) Interest paid and received (13 309) (12 756) Income tax (3 483) (5 231) (2 293) Effect of exchange differences on operating activities (1 115) Operating activities Changes in operating assets ( ) ( ) ( ) ( ) Change in loans to financial institutions (69 131) (2 336) (22 338) Change in advances (lending business) ( ) ( ) ( ) ( ) Change in derivative instruments (11 594) (3 347) (4 557) 84 Change in assets other than financial instruments Changes in operating liabilities Change in deposits by credit institutions ( ) ( ) Change in deposits and placements by other institutions ( ) Change in other liabilities (27 202) Cash flow in operating activities ( ) ( ) ( ) ( ) Investing activities Purchase of non-current assets (10 885) (15 912) (5 875) (11 977) Sale of non-current assets Purchase of intangible assets (742) (3 332) 5 (314) Change in other financial assets ( ) ( ) (40 664) Cash flow in investing activities ( ) ( ) (43 316) Financing activities Subordinated liabilities Other Cash flow in financing activities Decrease in cash and cash equivalents (40 083) ( ) ( ) Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents ( ) Balance sheet change in cash and cash equivalents (40 083) ( ) ( ) Interest paid Interest received

9 VI. General Information about the Issuer Information about Nordea Bank Polska S.A. Nordea Bank Polska Spółka Akcyjna, further referred to as the Bank, with the registered seat in Gdynia, at ul. Kielecka 2, registered with the District Court in Gdańsk-North, 8th Commercial Division of the National Court Register on 21 November 1991 (register number: KRS ); sector according to the classification adopted by GPW- BANKI. The core business of Nordea Bank Polska S.A., based in Gdynia, according to the Polish Business Classification, is other banking activity (PKD A). The Bank provides universal banking services to all entities, business and non-business, as well as to private individuals. The Bank's shares are listed on the Warsaw Stock Exchange. 9

10 1. Factors and events influencing the profit earned in the second of 2008: The net profit recorded by the Nordea Bank Polska S.A. for the second quarter of 2008 amounted to PLN 35,8 million about 140,3% more than in the same period of 2007 (PLN 14,9 million). This was a consequence of the high dynamics of growth in the Bank s business volumes, which is reflected in the increase in the volume of loans and advances to customers by 55% and deposits by 40%. The growth in business volumes led to a significant increase in net interest income and in the result of fair value and revaluation measurement of financial instruments, which is the effect of a growing scale of spot and forward FX transactions. The role of commissions and other operating income in the period under analysis was relatively smaller. On the other hand, the upward movement of costs is kept in curb thanks to a proper savings policy, even though a major program of expansion of the retail network is in progress between June 2007 and June 2008, the number of Bank s offices increased from 48 to 98, and the headcount grew by 416 persons, reaching employees (+39%). The following table shows the key lines of the Profit and Loss Account for Q compared with the relevant figures of the previous year, including the growth rates. Selected items of the P&L account Q Q Change () Total operating income ,6% Total operating expenses ,7% Operating profit ,3% Profit before income tax ,8% Income tax ,3% Profit for the period ,3% Operating income Nordea Bank Polska S.A. s total operating income in the period from April to June 2008 reached PLN 118,41 million, 54,6% more than the corresponding figure in The main components of income were as follows: - Net interest income in the amount of PLN 73,5 shows a 98,7% increase on the second quarter of last year. Interest income rose 91,6%, whereas interest expenses 86,8%. This is a result of the earlier-mentioned major growth in the business volume, and changes in interest rates. Following consecutive decisions of the Monetary Policy Council, leading to an increase in NBP interest rates as a reaction to growing inflation, between the second quarter of 2007 and the second quarter of this year, the average interest rate on PLN loans in the Bank grew by around 185 pb (base points), whereas the rates on PLN deposits went up 152 b.p. At the same time, the interest rate on foreign currency loans went up by only 33 pb, with the rate on foreign currency deposits going down by 64 b.p. in consequence of customers giving up USD deposits following the strong reduction of interest rates on such deposits (Federal Reserve reaction to the sub-prime loan crisis in the US). The increase in interest costs was also caused by the growing difference between the 10

11 dynamics of loans and of deposits, which entailed the necessity to increase the scale of funding assets with deposits from banks. The high cost of such financing, compared to customer deposits has recently become even more pronounced because the bigger dynamics of the credit portfolio than the deposit portfolio in the Polish banking system brought to a zero the surplus liquidity which existed in the second half of 2007, thus increasing the demand for freely available money and intensifying the growth in the costs of money; - Net commission income amounting to PLN 15,4 million is only 2,1% higher than in the second half of Commission income went up 13,0%, whereas commission expenses 60,3%. The increase in commission income was by mainly a consequence of rapidly growing sales of mortgage loans and payment transactions. Customers liquidation of investment fun units led to a reduction in intermediation fees generated from the sale of participation units. On the costs side, there occurred a dynamic growth in agency fees (mortgage loans) and commission costs relating to the insurance of such loans; Gains on fair value measurement and revaluation of financial instruments amounting to PLN 26,6 million were 16,1% higher than in the corresponding period of This was mainly brought about by the result generated from FX positions (PLN 30,4 million with a dynamics ratio of 82,4%), because the upward trend in interest rates on the Polish market caused a reduction in the market valuation of financial instruments, causing a valuation loss (PLN 1,1 million in the case of the securities portfolio held by the Bank, PLN 2,6 million in the case of derivatives). Operating Expenses In the second quarter of 2008, operating expenses reached PLN 74,0 million, i.e 29,7% up on the corresponding period of the previous year, which shows a much slower growth than operating income. The individual expense items were as follows: - Staff costs (PLN 31,3 million) grew by 26,8%, mainly as a result of an increase in staffing connected with the expansion of the network of the Bank s offices and the centralization of back office and of loan related processes, as well as newly-initiated incentive programs; - Other operating expenses (PLN 37,1 milion) turned out to be 41,1%, which was connected with the expansion of the branch network and the related expenses in areas such as lease of premises, equipment, training, travel, marketing or IT costs; - Depreciation of fixed assets (PLN 5,5 million) fell 8,7% as a result of the sale of redundant noncurrent assets, which to some extent offset the increased cost of lease of office space, equipment and vehicles. Allowances for the impairment of loans and advances In the second quarter of 2008, the balance of impairment allowances for loans and advances amounted to PLN -1,5 million, which means that more allowances were reversed than established. At the same time last year, the situation was the opposite: the established allowances exceeded the 11

12 amount of reversals by PLN 0,25 million. As a result of the restructuring and collection of bad debts as well as the dynamic growth in new loans, the irregular loans to total gross loans ratio fell between June 2007 and June2008 from 3,3% to 1,7%. Balance Sheet In the period under discussion, the Bank s balance-sheet total, which serves as a convenient measure of the volume of the Bank's business, grew from PLN 7,9 to 12,3 billion, i.e. by 55%. In absolute terms the biggest growth was observed in loans and advances to customers (+ PLN 3,7 billion), followed by debt securities (+ PLN 0,3 billion) and money deposited with the central bank (+ PLN 0,3 billion). The highest growth dynamics was seen in the earlier-mentioned money deposited with the central bank (+209%), and tangible fixed assets (+80%), which grew by almost PLN 45 million in consequence of the network expansion project. On the balance sheet side, we can observe a 66% increase in shareholders equity as a result of the September 2007 issue of shares and allocation of the whole 2006 profit for reserve capital, plus the 40% growth in customers deposits. Because own funds and customers deposits turned out to be insufficient for financing the dynamically growing assets, there was a doubling of the value of deposits from banks (up PLN 1,9 billion). The following table shows the major changes in the selected key lines of the balance sheet: Selected lines (PLN million) 30/06/ /06/2007 % Change Total assets , ,8 +55,0% Gross loans and advances to customers *) , ,8 +53,9% Loans and advances to banks*) 301,9 299,3 +0,9% Deposits from customers*) 7 313, ,0 +39,6% Deposits from banks*) 3 622, ,9 +104,7% Equity**) 986,8 593,5 +66,3% *) Net of interest **) Inclusive of retained earnings and net profit YTD Assets The above-mentioned rise in loans and advances to customers (increase in overall value of portfolio by almost 55%), was not evenly distributed among the major segments of the market: the fastest growth was in loans to private customers (+87%), the volume of credit to corporate customers increased by 46%, while the amount of loans to the public sector went up only 18%. At the same time, the securities portfolio grew by more than 57%, while loans and advances to banks saw practically no change (up only 0,7%). There was also a relatively large increase in the value of tangible fixed assets (up 80%). 12

13 These changes caused a certain reshuffling in the structure of the bank s assets: the proportion of loans and advances to customers (net, including interest) did not change significantly, there was an increase in the share of liquid assets (from 2,3% to 4,0%), securities and fixed assets, with a decline in the share of loans and advances to banks (from 3,8% to 2,5%). The proportion of interest-earning assets (other than the money kept as a mandatory reserve with the central bank) went down a little (from 95,0% to 93,6%), which is the consequence of the attempt to maintain an adequate degree of liquidity. Liabilities Deposits from customers rose almost 40%, with public sector deposits growing most (up 83%), corporate deposits (+48%), and households, (+14%). As regards households, it must be mentioned that the return to term deposits is the result of the downturn on the stock market and the drop in the assets managed by investment funds and on the other hand of an increase in interest rates on deposits offered by banks. However, because the increase in deposits was not on a par with the growth in loans, the scale of external funding had to be increased as well: deposits from banks rose almost 105%. The changes in the volume and structure of liabilities as discussed above caused the proportion of funds collected from the market in the form of customer deposits to drop from 66,2% to 59,7%, whereas the proportion of bank deposits grew from 22,3% to 29,5%. At the same time we can observe a slower growth in the balance of funds on current accounts than the balance of term deposits a phenomenon which pushes up interest expenses. 13

14 2. Significant Accounting Policies Statement of compliance The financial statements of Nordea Bank Polska S.A. for the 6 month period ended 30/06/2008 have been prepared in accordance with the International Accounting Standard 34 Interim Financial Reporting as adopted by the European Union and other applicable regulations. An earlier application of standards that are not yet mandatory Other standards or amendments to the existing standards and interpretations issued by the International Financial Reporting Standards Interpretation Committee, both the approved ones and the ones pending approval by the European Commission are either not applicable to the Bank s financial statements or would not have any material influence on these financial statements. The basis of preparation of the financial statements The financial statements are presented In the Polish zloty (PLN) and rounded to the nearest thousand. These financial statements incorporate the concept of fair value of financial assets and financial liabilities measured at fair value through profit or loss, including derivative instruments, as well as financial assets classified as available-for-sale, except for such assets whose fair value cannot be reliably measured. Other financial assets and financial liabilities are carried at amortised cost (dues to and from banks and customers as well as debt securities classified as loans and receivables) or at cost less any impairment losses. The preparation of the financial statements in compliance with the IFRS requires the management to make judgements, estimates and assumptions influencing its accounting policies and the presentation of the assets and liabilities, as well as income and expenses. The estimates and assumptions are based on available historical data and a number of other factors that are deemed to be reasonable under the circumstances, the results of which constitute the basis for estimating the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and the underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period when the estimate is revised, provided that such a revision affects only that period, or in the period of the revision and in future periods if the revision affects both current and future periods. The accounting policies presented below have been applied to all the reporting periods presented in the financial statements. 14

15 Comparability with previous periods To ensure comparability of the financial data and as a consequence of implementation of IFRS 7, the following significant changes in the presentation of financial data were made compared with the 4Q of 2006: 1. The Profit and Loss Account for the period 01/01/ /06/2007 Included in Other operating income is data concerning: recoveries in the amount of PLN 475 thousand were eliminated from other operating income, and were instead presented in impairment of loans and advances. 2. In the Net interest income note, Interest costs-debt securities in the amount of PLN thousand is presented in a separate line, which was previously presented under Gains/losses on fair value measurement and revaluation for the period 01/01/ /06/2007, 3. In the Net commission income note, Commission from financial intermediation in the amount of PLN thousand was presented in a separate line, which was previously presented under Other commission income for the period 01/01/ /06/2007, Transactions in foreign currencies Transactions in foreign currencies are translated at the exchange rates applicable at the transaction date. Monetary assets and liabilities denominated in foreign currencies which are stated at historical costs are translated at exchange rates effective at that date. Exchange differences arising from translation are recognised in the profit and loss account. Non-monetary assets and liabilities denominated in foreign currencies which are stated at historical costs are translated at the exchange rates prevailing at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies which are stated at fair value are translated to the currency of reporting at the foreign exchange rates applicable at the date when their fair values were determined. Non-current assets held for sale The Bank classifies a non-current asset as held for sale when it is available for immediate sale and the sale is highly probable. These conditions are deemed to be met when a decision is made to sell the asset and an active programme to locate a buyer is initiated. The price for such an asset is determined in reference to its fair value and also taking into account the expected time of completion of the sale if it does not exceed 12 months from the date the asset was classified as held for sale. The Bank may extend that period when the delay is caused by events or circumstances beyond its control and there is sufficient evidence indicating that the sale of the asset will be completed. Immediately before classification as assets held for sale, the carrying amount of non-current assets is measured in accordance with the Bank s accounting principles. A decision to reclassify assets is made by people in charge of non-current assets as regards the determination of impairment loss on such assets. The Bank measures a non-current asset held for sale at its recoverable amount, which is the higher of its fair value less cost to sell and its value in use. 15

16 Financial assets and liabilities Classification The Bank classifies financial instruments into the following categories: - financial assets or financial liabilities at fair value through profit or loss, - loans and receivables, - other financial liabilities. The Bank does not classify financial assets into the categories: held-to-maturity or available-for-sale. (a) Financial assets or financial liabilities at fair value through profit or loss These are financial assets and liabilities meeting one of the following criteria. (1) They are classified as held-for-trading. Financial assets or financial liabilities are classified as heldfor-trading if they are acquired or incurred mainly for the purpose of being sold or repurchased in the future; They are a part of the portfolio of certain financial instruments managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivative instruments are also categorised as held-for-trading unless the derivative is a designated and effective hedging instrument. (2) Upon initial recognition they were designated by the Bank as measured at fair value through profit or loss. The Bank applies such a designation when one of the following conditions is met: - the designated financial asset or financial liability is a compound instrument containing one or more embedded derivative instruments eligible for separate recognition and the embedded derivative instrument may not considerably change the cash flows originating from the principal agreement or the separation of the derivative instrument is prohibited; - such a qualification of the asset or the liability eliminates or considerably reduces inconsistency in measurement or recognition (the so-called accounting mismatch due to the different method of measurement of assets or liabilities or different recognition of related profits or losses); - the group of financial assets or financial liabilities or both of these categories is appropriately managed and their results are measured at fair value, in line with documented principles of risk management or the Bank s investment strategy (b) Loans and receivables Loans and receivables are financial assets other than derivative instruments, whose terms of payment are defined or definable, which are not quoted in an active market, other than: - financial assets which the entity intends to sell immediately or in the near future, which it has qualified as held for trading and those that after initial recognition were designated by the entity as measured at fair value through profit or loss; - financial assets designated by the entity upon initial recognition as available for sale; or - financial assets the holder of which may not recover a substantially complete original investment for reasons other than deterioration in credit service, which are qualified as available for sale. (c) Other financial liabilities 16

17 Other financial liabilities are contractual obligations of the Bank to deliver cash or another financial asset to another entity, other than those that are held for trading or set to be measured at fair value through profit or loss. This category includes deposits from banks, deposits from customers and debt securities in issue. Recognition The Bank recognises a financial asset or a financial liability when and only when it becomes a party to the agreement for the given instrument. The Bank recognises a regular way purchase or sale of a financial asset using settlement date accounting. Loans and receivables are recognised when cash is advanced to the borrowers. Derecognition A financial asset is derecognised from the balance sheet when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers the contractual rights to receive the cash flows from the transaction transferring a material part of the risk and rewards of ownership of the financial assets. The Bank derecognises a financial liability (or a part of one) when and only when the liability has expired, that is when the contractual obligation has been met, forgiven or when it has expired. Measurement Upon initial recognition, a financial asset or a financial liability is measured at fair value increased, in the case of a financial asset or financial liability not classified at fair value through profit or loss, by transaction costs if directly attributable to the acquisition or issue of the financial asset or financial liability. Subsequently, the Bank measures financial assets, including derivatives being assets, at fair value without any deduction for transaction costs to be borne on sale or other disposal, except for: - loans and receivables (loans and advances to banks and to customers, NBP bonds), which are measured at amortised cost using the effective interest rate method - investments in associates, which are measured according to the share held by the Bank - in the net assets, allowing for any impairment losses. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest rate method except for financial liabilities measured at fair value through profit or loss (derivative financial instruments). The fair value of investments in an active market is based on current bid prices. If there is no active market for a given instrument or for unlisted securities, the Bank establishes the fair value using valuation techniques, which include recent market transactions, the analysis of discounted cash flows, option pricing models and other valuation techniques commonly applied by marketplace participants. If 17

18 it is impossible to obtain a reliable fair value measurement, unlisted financial instruments are recognised at cost and periodically tested for impairment. The fair value of debt instruments listed in active markets is measured on the basis of the current market prices for such instruments. The Bank does not hold any debt securities that are not listed in an active market and which would be classified as measured at fair value. The Bank measures the fair value of derivative financial instruments using measurement techniques. All models are approved before use and adjusted in order to ensure that the results achieved reflect the actual data and comparable market prices. All the models use observable data only, taken from an active market. The Bank has the following derivative instruments: - Forward FX transactions, currency swaps, interest rate swaps, cross-currency swaps and FRA transactions. Such transactions are measured at fair value based on the method of discounting future cash flows. - Currency options: option transactions are measured at fair value with the use of option measurement models. Gains and losses on subsequent measurement Gains and losses from a change in the fair value of a financial asset or financial liability eligible for being recognised at their fair value through profit or loss, not being a part of a hedging relationship, shall be charged to income or cost. Offsetting financial instruments A financial asset and a financial liability are offset and the net amount is presented in the balance sheet when and only when there is a legally enforceable legal right to set off the recognised amounts and when the settlement is to be carried out on a net basis or the asset is realised and the liability settled simultaneously. Hedge accounting The Bank does not apply hedge accounting. Impairment of financial assets Financial assets measured at amortised cost As at each balance-sheet date, the Bank assesses whether there is any objective evidence of impairment of any financial asset (or a group of financial assets). Objective evidence of impairment of a financial asset or a group of financial assets may be a single event or a cumulative effect of several events. The Bank has included the following examples of events in a list of objective evidence of impairment: - significant financial difficulties of the issuer or obligor, - a breach of contract such as a default or delinquency in payment of interest or principal amount, 18

19 - a concession made by the Bank to the borrower, for economic or legal reasons relating to the Borrower s financial difficulty, which the Bank would not otherwise consider; - highly probable bankruptcy of the borrower or other financial reorganisation of the borrower; - the disappearance of an active market for a given financial asset caused by financial difficulties, or - observable data indicating that there has been a measurable decrease in the estimated future cash flows related to a Bank of financial assets since their original recognition, although such a decrease cannot yet be identified with the individual financial assets in the Bank, including: - adverse changes in the payment status of the debtors (e.g. increasing number of delayed payments), or - adverse changes in the domestic or local market that are correlated (may contribute to) with the impairment of assets coming within such a Bank (e.g. increase in the unemployment rate, adverse economic or legal changes in a given sector of economy). The above list presents examples and does not exhaust all possible situations that may be considered as sufficient evidence of impairment. The Bank tests all its credit exposures for impairment. Exposures for which evidence of impairment has been found are subject to impairment testing on an individual basis. This process makes it possible to classify all the Bank s customers into the proper risk categories and to determine whether a loss has been incurred (a given exposure has become impaired). Exposures in the case of which no evidence of impairment has been found are subject to tests for incurred but not reported impairment losses ( IBNR ). The purpose of portfolio IBNR tests is to estimate the losses that have already been incurred (and influenced future cash flows that were to be settled in accordance with the agreement), but are still unidentifiable under individual impairment tests. To make portfolio tests, credit exposures are grouped in such a manner as to maintain an approximate specification of credit risk of individual sub-portfolios. The basic factors taken into account are: customer type, product type, sector, delinquency in payment. The portfolio testing at the Bank does not cover customer exposures whose objective impairment reasons have been recognised under individual impairment tests. The results of historical data analyses constituting the basis for provisioning are further revised to take account of the impact of current factors which did not exist in the past, and to eliminate the impact of the factors that existed in the past and do not exist now. If there is any objective evidence of credit exposure impairment, the amount of impairment loss is calculated as the difference between the carrying amount of the asset in question and the present value of estimated future cash flows. The time value of money is included in the calculation of estimated cash flows both in the case of expected additional payments, as well as expected results of debt recovery activity (enforcement against collateral held). When estimating the value of collateral held, the Bank takes into consideration the possible price to be obtained from a forced sale. This price is additionally reduced by the expected costs of enforcement, sale, storage, etc. 19

20 In the case of exposures towards business entities, to rate risks and carry out impairment tests, the Bank applies an internal rating system, which is to reflect the probability of default. When the probability of recovery of the loan receivables with recognized impairment does not increase and the recovery of the receivables is in practice impossible, the amount of the loan receivable is written off against the related impairment provision. Receivables that were previously written off and subsequently recovered are presented in other operating income. Property, plant and equipment and intangible assets Items of property, plant and equipment and intangible assets are initially measured at cost or deemed cost. After the initial recognition of items of property, plant and equipment as well as intangible assets as assets, the Bank carries them at cost less accumulated depreciation and any cumulative impairment losses. Goodwill All business combinations are accounted for using the acquisition method. Goodwill represents the difference between the cost of acquisition and the fair value of identifiable assets acquired. Goodwill is allocated to cash generating units and it is not subject to depreciation. Goodwill is tested for impairment on an annual basis. Subsequent expense The Bank recognises in the carrying amount of property, plant and equipment and intangible assets the cost of replacing a part of such items at the moment such a cost is incurred if the Bank is likely to obtain future economic benefits related to the assets, and the cost to buy or manufacture may be reliably measured. Other costs are charged to the profit and loss account when incurred. Depreciation Depreciation is charged to the profit and loss account on a straight-line over the economic useful life of a given tangible or intangible asset. Land is not subject to depreciation. The estimated economic useful lives are as follows: buildings and structures years machinery and equipment 3-22 years fittings 5-10 years Vehicles 5 years computer software 5 years licences 2-5 years The residual value is subject to annual estimation. Other receivables Trade and other receivables are carried at cost less any impairment losses. 20

21 Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise items maturing within three months of their acquisition date, including: Cash and balances with the central bank of unlimited disposal, Treasury bills and other eligible bills (including loans and advances to other banks, receivables from other banks and short-term securities of the State Treasury). Impairment of assets other than financial assets The carrying amounts of the Bank's assets other than deferred tax assets are reviewed as at the balance-sheet date to determine whether there is any indication of impairment. If so, the recoverable amount of the assets shall be estimated. For goodwill and intangible assets of an indefinite useful life and intangible assets not yet available for use, the recoverable amount is estimated at each balance-sheet date. An impairment loss is recognised whenever the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss account. In the case of cash generating units, impairment losses first reduce the goodwill allocated to these units (group of units), and then proportionally reduce the carrying amount of other assets in the unit (group of units). Calculation of recoverable amount The recoverable amount of other assets is the higher of an asset s net selling price and its value in use. To assess the value in use, estimated future cash flows are discounted to their present value at a pre-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the asset. In the case of assets not generating independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the assets belong. Reversal of an impairment allowance An impairment allowance in respect of goodwill is not reversed. In the case of other assets, an impairment allowance is reversed if there has been a change in the estimates used to define their recoverable amount. An impairment allowance is reversed only to the extent that the assets' carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. Equity Share capital The share capital is shown at its nominal value consistent with the Bank s Statutes. Supplementary capital The supplementary capital is established with out-of-profit payments or issue premium earned from the issue of shares less the pertinent direct costs. 21

22 Reserve capital The reserve capital comprises the fixed assets revaluation reserve, the general banking risk fund and other reserves. The revaluation reserve resulting from valuation made in previous years based on separate regulations is transferred to the supplementary capital upon the disposal of an item of property, plant and equipment (when it is sold, handed over, liquidated or recognised as missing). Employee benefits Employee benefits may be short and long-term. Employee benefits include salaries, bonuses, holiday pay, social insurance premiums and jubilee awards. Employee benefits are recognised as expenses when incurred. The liabilities due to long-term employee benefits constitute the amount of future benefits which an employee will receive in consideration of the work provided during the current period and previous periods. Provisions Provisions are recorded in the balance sheet if the Bank has such a legal or constructive obligation as a result of past events, as well as if it is probable that an outflow of economic benefits will be required to settle such an obligation. If the effect is material, the amount of provisions shall be defined based on discounted expected cash flows at a rate before tax, which reflects the current market assessment regarding the time value of money and, if applicable, risks specific to the liability. Provisions for such off-balance sheet liabilities as guarantees, letters of credit and unused credit lines are recognised in pursuance of such principles. Net interest income Interest income and expenses for all financial instruments are recognised in the profit and loss account in amounts resulting from measurement at amortised cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument, or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates the cash flows, considering all contractual terms of the financial instrument, however, it does not consider future loan losses. The calculation includes all fees and points paid or received between the parties and items constituting an integral part of the effective interest rate, and all other premiums and discounts. Once a financial asset or a Bank of similar financial assets has been written down for impairment, interest income is thereafter recognised at the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. The net interest income also includes interest accruing on past due debts, received during the reporting period. 22

23 Income and expenses on fees and commissions Commission income arises from the provision of financial services offered by the Bank and it comprises lending, Bank's credit commitment fees, card issue fees, fees for cash management, brokerage services, investment advice and financial planning, investment banking services, services related to project finance and structuring of financial transactions, as well as asset management services. Fees and commissions directly associated with the generation of financial assets or liabilities (both income and expenses) are recognised in profit or loss as an adjustment to the effective interest rate calculation. Fees and commissions received due to revolving credits, credit lines, credit cards, guarantees and letters of credit are charged to profit or loss on a straight-line basis over the period till their maturity and they are presented as commission income. Other fees and commissions related to financial services offered by the Bank, such as cash management, brokerage services, investment advice, financial planning, investment banking, investment finance, structuring financial transactions, and other asset management services, are taken to the profit and loss account the moment the service is provided. Dividends received Dividends are recognised in profit upon acquisition of the right to receive them. Gains (losses) on financial instruments at fair value and revaluation This category of result comprises: - gains and losses on the disposal of or a change in the fair value of assets and liabilities at fair value through profit or loss (including derivative financial instruments). Interest and amortisation of premiums from and discount of securities designated as at fair value are presented under net interest income. - gains and losses from the measurement of financial assets and liabilities denominated in foreign currencies (revaluation of the balance sheet position). Other income and expenses Other income and expenses comprise the profit or loss made by the Bank on its activities not related directly to the financial activity. These are especially income and costs from the sale of fixed assets, salary costs, administrative expenses. Income tax Income tax is comprised of current and deferred taxes. Income tax is accounted for in the profit and loss account. Current tax is an expected tax liability related to income taxable at the tax rate effective as at the balance-sheet date, including all adjustments to the tax liabilities of previous years. Deferred tax assets and liabilities are calculated based on the balance-sheet method by calculating temporary differences between the carrying amount of the assets and liabilities and their tax value. Deferred tax assets, including assets due to unsettled tax losses carried forward, are recognised only 23

24 to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. 24

25 3. Segment Reporting The operating activities of Nordea Bank Polska S.A. are divided into three basic segments: Retail Banking, Corporate Banking and Financial Segment. The Retail Banking segment comprises transactions made at the Bank s branch network (excluding markets transactions). It also includes the operations of the Internet Branch, which is a self-contained branch, as well as the Call Centre for Bank customers and the Retail Sales Centre. Retail services are offered to customers considered as retail customers, i.e. small businesses, private individuals running a business and individual customers. The Corporate Banking segment comprises transactions made with corporate customers (companies of high turnover), Nordic customers, municipalities, hospitals, as well as debt paper trading. It also offers markets products to customers (foreign exchange transactions). The Financial Segment comprises money market transactions, foreign exchange transactions and derivative instruments used for the purpose of managing the market risk, management of subsidiaries and debt securities transactions concluded in the interbank market. Banking income and expenses of a segment are income and expenses earned/incurred from sales to external customers, as well as internal settlements between the Bank's segments. External banking income and expenses were allocated to segments based on assumptions allocating groups of customers to specific segments (so called customer responsible units). The internal banking result is based on defined assumptions on internal transfer prices. Segment operating expenses are costs of operation of a given segment that may be directly assigned or allocated thereto. Internal transfer prices used in sales transactions between the segments are based on market prices with appropriate mark-ups The Bank's assets and liabilities are allocated to segments based on so called customer responsibility. The Corporate and Retail Divisions are assigned the customer deposits and loans for which they are respectively responsible. The assets and liabilities that may not be allocated to separate segments are accounted for under "unallocated assets" and "unallocated liabilities". Nordea Bank Polska S.A. operates exclusively in Poland. No material differences in the risk resulting from the geographical location of its outlets have been identified, therefore the issuer did not present its financial statements by geographical segments. 25