Report on the activities of the Bank Pekao S.A. Group for the first half of 2011

Transcription

1 This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation. Report on the activities of the Bank Pekao S.A. Group for the first half of 2011 Warsaw, August, 2011

2 Table of Contents 1. Highlights of The Bank Pekao S.A. Group Highlights of Bank Pekao S.A Summary of Performance Income Statement short version Consolidated Income Statement short version Unconsolidated Income Statement short version Quarterly Income Statement short version Quarterly Statement of Comprehensive Income External Environment Internal Factors Description of the Group Effects of changes in the Group s structure Changes in the Statutory Bodies of the Bank The Bank s shareholding Structure Assessment of creditworthiness of Bank Pekao S.A Activity of the Bank Pekao S.A. Group Achievements of Bank Pekao S.A Achievements of subsidiaries Awards Factors which will affect the Results of the Group Description of Major Sources of Risk and Threats relating to the remaining months of Statement of Financial Position and Financial Results Structure of the consolidated Statement of Financial Position Off balance sheet items The consolidated Income Statement for the presentation purposes The structure of the net profit Provisions, deferred tax assets and liabilities Impairment losses Subsequent Events Human Resources Management Other Information Management Board position regarding the possibility of achieving previously published Forecasts The Issuer s shares held by the Management and Supervisory Board Members Related Party Transactions Accounting Principles adopted in the preparation of the Report Seasonality or cyclical nature of the Bank s activity Issuance, redemption and repayment of debt securities Pending litigations Reconciliation of Income Statement short and long form Representations of the Bank s Management Board on reliability of the presented financial statements Bank Pekao S.A. 2

3 1. Highlights of The Bank Pekao S.A. Group H H INCOME STATEMENT (IN PLN MILLION) SELECTED ITEMS Operating income* 3, , , ,052.6 Operating costs* (1,825.4) (1,805.5) (3,649.1) (3,672.8) Operating profit* 1, , , ,379.8 Profit before income tax* 1, , , ,997.5 Net profit for the period attributable to equity holders of the Bank* 1, , , ,411.7 PROFITABILITY RATIOS Return on average equity (ROE) 13.1% 13.0% 13.1% 14.1% Net interest margin 3.7% 3.7% 3.6% 3.5% Non-interest income / operating income 40.1% 39.7% 40.4% 42.1% Cost / income 48.4% 51.2% 50.6% 52.1% STATEMENT OF FINANCIAL POSITION (IN PLN MILLION) SELECTED ITEMS Total assets 131, , , ,616.1 Loans and advances to customers** 84, , , ,454.8 Amounts due to customers 97, , , ,250.0 Equity 19, , , ,371.1 STATEMENT OF FINANCIAL POSITION STRUCTURE RATIOS Net loans / total assets 64.5% 61.4% 60.3% 60.8% Securities / total assets 21.0% 22.3% 23.4% 21.0% Deposits / total assets 74.2% 74.6% 74.4% 74.5% Loans / deposits 87.0% 82.3% 81.0% 81.7% Equity / total assets 15.2% 14.2% 15.1% 14.1% Capital Adequacy Ratio 18.4% 18.0% 17.6% 16.2% EMPLOYEES AND NETWORK Total number of employees *** 20,668 21,120 20,783 20,874 Number of outlets (Bank Pekao S.A. and PJSC UniCredit Bank) 1,058 1,075 1,073 1,089 Number of ATMs (Bank Pekao S.A. and PJSC UniCredit Bank) 1,896 1,925 1,910 1,968 * Income statement includes continuing and discontinued operations. ** Including debt securities eligible for rediscounting at Central Bank and net investments in financial leases to customers. *** Starting from H including Centrum Bankowości Bezpośredniej Sp z o.o. (CBB) as a result of consolidation of the company under the full method since that date. Bank Pekao S.A. 3

4 2. Highlights of Bank Pekao S.A. H H INCOME STATEMENT (IN PLN MILLION) SELECTED ITEMS Operating income 3, , , ,692.6 Operating costs (1,673.3) (1,649.3) (3,336.4) (3,352.5) Operating profit 1, , , ,340.1 Profit before income tax 1, , , ,980.6 Net profit for the period 1, , , ,462.3 PROFITABILITY RATIOS Return on average equity (ROE) 14.5% 14.5% 13.5% 14.7% Net interest margin 3.6% 3.5% 3.5% 3.3% Non-interest income / operating income 37.4% 36.6% 38.6% 39.8% Cost / income 46.2% 48.5% 49.3% 50.1% STATEMENT OF FINANCIAL POSITION (IN PLN MILLION) SELECTED ITEMS Total assets 127, , , ,918.0 Loans and advances to customers* 81, , , ,042.9 Amounts due to customers 96, , , ,701.3 Equity 19, , , ,967.6 STATEMENT OF FINANCIAL POSITION STRUCTURE RATIOS Net loans / total assets 63.8% 58.3% 59.2% 57.6% Securities / total assets 21.6% 22.7% 24.1% 21.6% Deposits / total assets 76.1% 76.1% 76.3% 76.2% Loans / deposits 83.8% 76.7% 77.6% 75.5% Equity / total assets 15.4% 14.4% 15.2% 14.2% Capital Adequacy Ratio 18.3% 17.6% 17.2% 15.6% EMPLOYEES AND NETWORK Total number of employees 18,236 18,660 18,276 18,912 Number of outlets 1,007 1,016 1,014 1,028 Number of ATMs 1,801 1,815 1,800 1,854 * Including debt securities eligible for rediscounting at Central Bank. Bank Pekao S.A. 4

5 3. Summary of Performance The Bank Pekao S.A. Group reported solid financial results for the first half of 2011, with net profit attributable to equity holders amounting to PLN 1,362.6 million, i.e. an increase of PLN million (11.5%) in comparison to the first half of Sound results for the first half of 2011 with the operating profit increased by 13.2% in comparison with the first half of 2010 were driven mainly by higher operating income with operating costs kept under control, only marginally growing despite inflation. The strength of the capital and liquidity structure of the Bank Pekao S.A. Group is reflected by a capital adequacy ratio of 18.4% and loans to deposits ratio at the level of 87.0% at the end of June This enables for further sound and stable development of the Group s activities. The Bank continued its policy of offering only PLN mortgage loans. The residual stock of mortgage loans denominated in foreign currencies, almost entirely acquired as a result of the merger of the spun-off part of Bank BPH SA, represents 6.9% of total loans of the Bank. In the first half of 2011, the Group s operating income amounted to PLN 3,772.0 million, an increase of PLN million (7.0%) in comparison with the first half of 2010 with growth in total net interest income, dividend income and income from equity investments as well as net fee and commission income. Total net interest income, dividend income and income from equity investments in the first half of 2011 amounted to PLN 2,261.3 million and increased by PLN million (6.4%) in comparison with the first half of The increase was driven mainly by higher volumes and efficient management of interest margin. The Group s net non-interest income in the first half of 2011 amounted to PLN 1,510.7 million, an increase of PLN million (7.9%) in comparison with the first half of 2010, mainly as a result of an increase in net fee and commission income as well as an increase in trading result. In the first half of 2011, the operating costs were kept under control and amounted to PLN 1,825.4 million. They were higher than the operating costs in comparable period of 2010 by PLN 19.9 million (1.1%), well below inflation. Net impairment losses on financial assets and off-balance sheet commitments amounted to PLN million in the first half of 2011, a decrease of PLN 7.9 million (2.9%) compared with the first half of As at June 30, 2011, the ratio of impaired receivables to total receivables amounted to 6.6% and was better by 0.1 pp than that reported as at the end of As at the end of June 2011, the total amounts due to the Group s customers (including customer deposits, structured certificates of deposits, repo and sell-buy-back transactions) amounted to PLN 97,362.0 million, a decrease of PLN 2,704.1 million (2.7%) in comparison to the end of The total volume of retail customers deposits and structured certificates of deposits amounted to PLN 46,018.3 million at the end of June 2011, a decrease of PLN million (0.7%) in comparison to the end of The value of net assets of investment funds managed by Pioneer Pekao TFI S.A. amounted to PLN 17,421.4 million, a decrease of PLN million (3.5%) in comparison to the end of The total volume of corporate customers deposits and repo and sell-buy-back transactions amounted to PLN 51,343.7 million at the end of June 2011, a decrease of PLN 2,384.3 million (4.4%) as compared to the end of As at the end of June 2011, the volume of retail loans amounted to PLN 33,704.2 million, an increase of PLN 2,158.5 million (6.8%) in comparison to the end of The growth of volumes of retail loans was driven by positive dynamics in sales of key lending products. Thanks to commercial focus, the Bank s sales of consumer loans in the first half of 2011 increased by 28% and sales of PLN mortgage loans increased by 70% compared with the first half of 2010.The volume of corporate loans, non quoted securities, reverse repo transactions and securities issued by local governments increased by PLN 2,350.4 million (4.4%) as compared to the end of 2010 and amounted to PLN 56,003.8 million at the end of June Bank Pekao S.A. 5

6 4. Income Statement short version The Bank Pekao S.A. Group plans to concentrate its activities on local market and in connection with this a process aiming at disposal of the whole exposure of Bank Pekao S.A. in PJSC UniCredit has been started. In the Condensed Consolidated Interim Financial Statements of the Bank Pekao S.A. Group and in the Condensed Unconsolidated Interim Financial Statements of Bank Pekao S.A. for the period from January 1, 2011 to June 30, 2011 and in the Consolidated Financial Statements of the Bank Pekao S.A. Group and in the Unconsolidated Financial Statements of Bank Pekao S.A. for the period ended on December 31, 2010, the entire engagement in PJSC UniCredit Bank, which includes subsidiary s assets and liabilities was classified as held for sale, whereas appropriate positions of the Income Statement were presented as discontinued operations. 4.1 Consolidated Income Statement short version HI 2011 PERIOD FROM TO HI 2010 PERIOD FROM TO CONTINUING DISCONTINUED CONTINUING DISCONTINUED TOTAL TOTAL OPERATIONS OPERATIONS OPERATIONS OPERATIONS Interest income 3,347, ,614 3,454,281 3,035, ,554 3,183,476 Interest expense (1,221,214) (46,470) (1,267,684) (1,110,823) (65,011) (1,175,834) Net interest income 2,126,453 60,144 2,186,597 1,925,099 82,543 2,007,642 Dividend income and income from equity investments 49,473-49,473 47,142-47,142 Total net interest income, dividend income and income from equity 2,175,926 60,144 2,236,070 1,972,241 82,543 2,054,784 investments Fee and commission income 1,458,361 17,885 1,476,246 1,355,963 16,915 1,372,878 Fee and commission expense (226,614) (7,656) (234,270) (203,613) (8,594) (212,207) Net fee and commission income 1,231,747 10,229 1,241,976 1,152,350 8,321 1,160,671 Trading result 257,542 12, , ,864 8, ,536 Net other operating income and expenses 24,835 (732) 24,103 27,439 1,408 28,847 Net non-interest income 1,514,124 21,792 1,535,916 1,452,653 18,401 1,471,054 OPERATING INCOME 3,690,050 81,936 3,771,986 3,424, ,944 3,525,838 Personnel expenses (972,666) (18,114) (990,780) (924,088) (19,709) (943,797) Other administrative expenses (631,077) (18,795) (649,872) (638,944) (19,639) (658,583) Refunding of administrative expenses 3,551-3,551 3,522-3,522 Depreciation and amortisation (183,878) (4,453) (188,331) (200,025) (6,703) (206,728) Operating costs (1,784,070) (41,362) (1,825,432) (1,759,535) (46,051) (1,805,586) OPERATING PROFIT 1,905,980 40,574 1,946,554 1,665,359 54,893 1,720,252 Net result on other provisions (896) - (896) 1,157-1,157 Net impairment losses on financial assets and off-balance sheet commitments (258,738) (10,232) (268,970) (249,702) (27,201) (276,903) Net result on investment activity 6,532 (48) 6,484 60, ,744 PROFIT BEFORE INCOME TAX 1,652,878 30,294 1,683,172 1,477,555 27,695 1,505,250 Income tax expense (310,986) (4,560) (315,546) (271,011) (7,690) (278,701) NET PROFIT FOR THE PERIOD 1,341,892 25,734 1,367,626 1,206,544 20,005 1,226,549 attributable to equity holders of the Bank 1,336,870 25,734 1,362,604 1,201,822 20,005 1,221,827 attributable to non-controlling interest 5,022-5,022 4,722-4,722 Bank Pekao S.A. 6

7 P(in PLN thousand) 4.2 Unconsolidated Income Statement short version HI 2011 PERIOD FROM TO HI 2010 PERIOD FROM TO Interest income 3,262,890 2,956,175 Interest expense (1,216,638) (1,125,255) Net interest income 2,046,252 1,830,920 Dividend income 195, ,238 Total net interest income and dividend income 2,241,907 2,086,158 Fee and commission income 1,332,954 1,239,159 Fee and commission expense (222,762) (199,195) Net fee and commission income 1,110,192 1,039,964 Trading result 253, ,775 Net other operating income and expenses 15,714 18,001 Net non-interest income 1,379,149 1,314,740 OPERATING INCOME 3,621,056 3,400,898 Personnel expenses (881,565) (834,974) Other administrative expenses (621,356) (629,226) Refunding of administrative expenses 4,293 4,633 Depreciation and amortisation (174,633) (189,696) Operating costs (1,673,261) (1,649,263) OPERATING PROFIT 1,947,795 1,751,635 Net result on other provisions (1,087) 280 Net impairment losses on financial assets and off-balance sheet commitments (237,847) (230,396) Net result on investments activity 6,335 68,342 PROFIT BEFORE INCOME TAX 1,715,196 1,589,861 Income tax expense (289,805) (252,492) NET PROFIT FOR THE PERIOD 1,425,391 1,337,369 Bank Pekao S.A. 7

8 P(in PLN thousand) 4.3 Quarterly Income Statement short version Provided for comparability purposes. Consolidated Income Statement for Q1 and Q2 of 2011 CONTINUING OPERATIONS Q Q DISCONTINUED OPERATIONS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS Interest income 1,611,758 57,327 1,669,085 1,735,909 49,287 1,785,196 Interest expense (583,599) (24,314) (607,913) (637,615) (22,156) (659,771) Net interest income 1,028,159 33,013 1,061,172 1,098,294 27,131 1,125,425 Dividend income and income from equity investments Total net interest income, dividend income and income from equity investments TOTAL 20,671-20,671 28,802-28,802 1,048,830 33,013 1,081,843 1,127,096 27,131 1,154,227 Fee and commission income 696,670 8, , ,691 9, ,803 Fee and commission expense (104,504) (3,531) (108,035) (122,110) (4,125) (126,235) Net fee and commission income 592,166 5, , ,581 4, ,568 Trading result 137,165 7, , ,377 4, ,331 Net other operating income and expenses 9,951 (467) 9,484 14,884 (265) 14,619 Net non-interest income 739,282 12, , ,842 9, ,518 OPERATING INCOME 1,788,112 45,129 1,833,241 1,901,938 36,807 1,938,745 Personnel expenses (480,138) (9,419) (489,557) (492,528) (8,695) (501,223) Other administrative expenses (306,069) (9,633) (315,702) (325,008) (9,162) (334,170) Refunding of administrative expenses 1,879-1,879 1,672-1,672 Depreciation and amortisation (93,296) (2,399) (95,695) (90,582) (2,054) (92,636) Operating costs (877,624) (21,451) (899,075) (906,446) (19,911) (926,357) OPERATING PROFIT 910,488 23, , ,492 16,896 1,012,388 Net result on other provisions (1,428) - (1,428) Net impairment losses on financial assets and off-balance sheet commitments (127,185) (6,997) (134,182) (131,553) (3,235) (134,788) Net result on investment activity 2,292 (64) 2,228 4, ,256 PROFIT BEFORE INCOME TAX 784,167 16, , ,711 13, ,388 Income tax expense (147,073) (2,821) (149,894) (163,913) (1,739) (165,652) NET PROFIT FOR THE PERIOD 637,094 13, , ,798 11, ,736 attributable to equity holders of the Bank 634,511 13, , ,359 11, ,297 attributable to non-controlling interest 2,583-2,583 2,439-2,439 Bank Pekao S.A. 8

9 P(in PLN thousand) Consolidated Income Statement for 2010 CONTINUING OPERATIONS Q Q Q Q DISCONTINUED OPERATIONS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS Interest income 1,502,030 74,842 1,576,872 1,533,892 72,712 1,606,604 1,584,131 67,890 1,652,021 1,660,383 55,335 1,715,718 Interest expense (541,129) (30,623) (571,752) (569,694) (34,388) (604,082) (590,485) (30,557) (621,042) (624,223) (26,442) (650,665) Net interest income 960,901 44,219 1,005, ,198 38,324 1,002, ,646 37,333 1,030,979 1,036,160 28,893 1,065,053 Dividend income and income from equity investments 20,785-20,785 26,357-26,357 21,393-21,393 7,623-7,623 Total net interest income, dividend income and income 981,686 44,219 1,025, ,555 38,324 1,028,879 1,015,039 37,333 1,052,372 1,043,783 28,893 1,072,676 from equity investments Fee and commission income 672,763 8, , ,200 8, , ,209 11, , ,884 10, ,070 Fee and commission expense (104,989) (4,024) (109,013) (98,624) (4,570) (103,194) (98,960) (3,791) (102,751) (108,632) (4,675) (113,307) Net fee and commission income 567,774 4, , ,576 3, , ,249 7, , ,252 5, ,763 Trading result 133,676 2, , ,188 5, , ,381 13, , ,640 2, ,599 Net other operating income and expenses 15, ,340 11, ,507 23, ,754 13,948 (296) 13,652 Net non-interest income 716,905 8, , ,748 10, , ,079 21, , ,840 8, ,014 OPERATING INCOME 1,698,591 52,295 1,750,886 1,726,303 48,649 1,774,952 1,765,118 58,368 1,823,486 1,831,623 37,067 1,868,690 Personnel expenses (458,344) (9,443) (467,787) (465,744) (10,266) (476,010) (472,815) (9,627) (482,442) (514,253) (9,809) (524,062) Other administrative expenses (320,681) (9,304) (329,985) (318,263) (10,335) (328,598) (327,400) (11,067) (338,467) (308,982) (8,317) (317,299) Refund of administrative costs 1,700-1,700 1,822-1,822 1,070-1,070 2,613-2,613 Depreciation and amortisation (104,315) (3,189) (107,504) (95,710) (3,514) (99,224) (94,600) (3,103) (97,703) (84,584) (2,696) (87,280) Operating costs (881,640) (21,936) (903,576) (877,895) (24,115) (902,010) (893,745) (23,797) (917,542) (905,206) (20,822) (926,028) OPERATING PROFIT 816,951 30, , ,408 24, , ,373 34, , ,417 16, ,662 Net result on other provisions (52,272) - (52,272) Net write-downs of loans and provision for guarantees and commitments (127,723) (13,168) (140,891) (121,979) (14,033) (136,012) (112,211) (21,477) (133,688) (123,974) (3,363) (127,337) Net result on investment activity 34,402 (4) 34,398 26, ,346 46, ,070 13,444 (2) 13,442 PROFIT BEFORE INCOME TAX 724,467 17, , ,088 10, , ,320 13, , ,615 12, ,495 Income tax expense (131,859) (4,845) (136,704) (139,152) (2,845) (141,997) (153,960) (3,542) (157,502) (129,145) (5,825) (134,970) NET PROFIT FOR THE PERIOD 592,608 12, , ,936 7, , ,360 9, , ,470 7, ,525 Attributable to equity holders of the Bank 590,370 12, , ,452 7, , ,780 9, , ,667 7, ,722 Attributable to non-controlling interest 2,238-2,238 2,484-2,484 2,580-2,580 (2,197) - (2,197) TOTAL Bank Pekao S.A. 9

10 P(in PLN thousand) Unconsolidated Income Statement Q Q Q Q Q Q Interest income 1,571,128 1,691,762 1,460,061 1,496,114 1,542,886 1,619,032 Interest expense (583,565) (633,073) (547,602) (577,653) (590,967) (624,177) Net interest income 987,563 1,058, , , , ,855 Dividend income 118,260 77,395 32, , Total net interest income and dividend income 1,105,823 1,136, ,746 1,141, , ,855 Fee and commission income 632, , , , , ,265 Fee and commission expense (102,379) (120,383) (101,686) (97,509) (96,067) (108,666) Net fee and commission income 530, , , , , ,599 Trading result 135, , , , , ,213 Net other operating income and expenses 6,386 9,328 10,659 7,342 21,137 21,774 Net non-interest income 672, , , , , ,586 OPERATING INCOME 1,778,365 1,842,691 1,598,511 1,802,387 1,640,530 1,722,441 Personnel expenses (434,348) (447,217) (415,343) (419,631) (426,780) (469,319) Other administrative expenses (302,182) (319,174) (315,954) (313,272) (324,219) (302,526) Refunding of administrative expenses 2,236 2,057 2,348 2,285 1,513 2,982 Depreciation and amortisation (88,098) (86,535) (99,193) (90,503) (89,568) (79,184) Operating costs (822,392) (850,869) (828,142) (821,121) (839,054) (848,047) OPERATING PROFIT 955, , , , , ,394 Net result on other provisions (1,477) (28,382) Net impairment losses on financial assets and off-balance sheet commitments (116,914) (120,933) (118,118) (112,278) (105,946) (113,536) Net result on investment activity 2,226 4,109 40,471 27,871 46,693 13,374 PROFIT BEFORE INCOME TAX 839, , , , , ,850 Income tax expense (136,378) (153,427) (122,821) (129,671) (145,156) (128,677) NET PROFIT FOR THE PERIOD 703, , , , , ,173 Bank Pekao S.A. 10

11 P(in PLN thousand) 4.4 Quarterly Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Q Q Q Q Q Q Net profit 650, , , , , ,525 attributable to equity holders of the Bank 648, , , , , ,722 attributable to non-controlling interest 2,583 2,439 2,238 2,484 2,580 (2,197) Other comprehensive income Foreign currency translation differences (11,290) (16,131) 4,745 51,915 (49,514) 4,818 Change in fair value of available-for-sale financial assets (93,470) 196, ,966 (168,900) 121,548 (131,294) Change in fair value of cash flow hedges (46,167) 18,395 53,329 47,808 3,548 (37,116) Income tax expense on other comprehensive income 29,517 (38,577) (47,285) 23,233 (24,165) 63,713 Other comprehensive income (net) (121,410) 160, ,755 (45,944) 51,417 (99,879) Total comprehensive income 529, , , , , ,646 attributable to equity holders of the Bank 526, , , , , ,843 attributable to non-controlling interest 2,583 2,439 2,238 2,484 2,580 (2,197) Unconsolidated Statement of Comprehensive Income Q Q Q Q Q Q Net profit 703, , , , , ,173 Other comprehensive income Foreign currency translation differences (2) (1) (91) 45 5 (40) Change in fair value of available-for-sale financial assets (93,133) 197, ,781 (168,797) 119,983 (130,941) Change in fair value of cash flow hedges (46,167) 18,395 53,329 47,808 3,548 (37,116) Income tax expense on other comprehensive income 26,468 (40,948) (47,250) 23,217 (23,778) 32,070 Other comprehensive income (net) (112,834) 174, ,769 (97,727) 99,758 (136,027) Total comprehensive income 590, , , , , ,146 Bank Pekao S.A. 11

12 5. External Environment Basic trends in the economy Polish macroeconomic situation in the first half of 2011 was characterized by a relatively high economic growth (4.3% in the first quarter, similar growth is anticipated for the second quarter), that was a continuation of the recovery which began early in the second half of Similar growth rate is expected in the second half of Factors supporting this scenario are: an increasing growth of employment and wages, high level of EU funds spending (accelerated by the upcoming European Football Championship EURO2012) and signals of recovery in private sector investments. CPI inflation ratio reached the level of 5.0% year-on-year in May, then it declined to 4.2% year-on-year in June. In the second half of the year it is expected to be kept at elevated levels ( %), but with a tendency to reach the lower limit of the range. Increasing inflation prompted the Monetary Policy Council (MPC) to four interest rate increases since the beginning of the year, with the total effect of 100 bp increase and at the end of the first half of 2011 the reference rate amounted to 4.5%. The MPC signaled that due to the perspective of inflation stabilization and its significant decline in the first half of 2012 there has been no need for further interest rates hikes. On the other hand, the negative real interest rate may persuade the MPC to one additional rates increase by the end of In the first half of 2012, a stabilization of the central bank's reference rate is expected, while the second half could bring interest rates cuts. First half of 2011 resulted in stabilization of Polish złoty quotations against Euro in the range of The Polish złoty is expected to remain in this range also in the second half of the year, approaching the lower limit of this range at the end of December. Good macroeconomic results and perspective of exchange over a dozen of billion Euro from EU funds on the interbank market will be the factors stabilizing quotations of Polish currency. At the same time, the uncertainty about fiscal consolidation plans by the next government, which will be created after parliamentary elections in October, is a significant risk factor. If future government does not ensure realization of the fiscal consolidation plan, assuming a decrease of budget deficit below 3% of GDP in 2012 (which will require further actions to lower expenses or increase tax rates, compared to what has been proposed so far by the present government), it may meet with negative reactions of investors and credit rating agencies, which could result in higher government bond yields and weaker PLN exchange rate. In the first half of 2011, the financial results of the banking sector improved as compared to the same period of the previous year. This is mainly related to the stable macroeconomic situation (economic growth above 4%), which translates to higher income and better quality of banks loan portfolio, resulting also in lower cost of risk. In terms of volumes, a steady growth of banks deposit base was observed. Lending to households was characterized by an increase in housing loans and stagnation in consumer loans mainly due to the introduction of new regulations restricting access to such loans. Positive developments were observed in case of corporate loans as well, which can be attributed to the first signs of investment recovery in the private sector. Bank Pekao S.A. 12

13 6. Internal Factors 6.1 Description of the Group The Group s structure is presented in the Notes to the Condensed Consolidated Interim Financial Statements of the Bank Pekao S.A. Group for the period from January 1, 2011 to June 30, Effects of changes in the Group s structure Change of name, legal form and business place of the company On February 8, 2011, the legal form of OJSC UniCredit Bank Ukraine was changed from Open Joint Stock Company into Public Joint Stock Company and currently the bank s full name is Public Joint Stock Company UniCredit Bank. The seat of the bank was moved from Luck to Kiev. Liquidation of the company On October 20, 2010, the Extraordinary General Meeting of the company Holding Sp. z o.o. in liquidation took the resolution to commence the process of liquidation of the company, which is continued in Changes in the Statutory Bodies of the Bank Supervisory Board Mr. Sergio Ermotti, Member of the Supervisory Board of the Bank, resigned from position held in the Supervisory Board effective from February 23, On April 14, 2011, Mr. Federico Ghizzoni, Deputy Chairman, Secretary of the Supervisory Board has submitted a resignation from his positions in the Supervisory Board of the Bank, effective from April 30, The Ordinary General Meeting of the Bank held on April 19, 2011, has appointed into the composition of the Supervisory Board of the Bank Mrs. Alicja Kornasiewicz effective from May 1, 2011 and Mr. Alessandro Decio effective from April 19, The Supervisory Board of the Bank at the meeting held on June 1, 2011 appointed Mrs. Alicja Kornasiewicz as Chairwoman of the Supervisory Board, Mr. Jerzy Woźnicki, who has submitted his resignation from the position of the Chairman of the Supervisory Board, as Deputy Chairman of the Supervisory Board and Mr. Alessandro Decio as Secretary of the Supervisory Board. Composition of the Supervisory Board: JUNE 30, 2011 DECEMBER 31, 2010 Alicja Kornasiewicz Chairwoman of the Supervisory Board Roberto Nicastro Deputy Chairman of the Supervisory Board Jerzy Woźnicki Deputy Chairman of the Supervisory Board Alessandro Decio Secretary of the Supervisory Board Paweł Dangel Member of the Supervisory Board Oliver Greene Member of the Supervisory Board Enrico Pavoni Member of the Supervisory Board Leszek Pawłowicz Member of the Supervisory Board Krzysztof Pawłowski Member of the Supervisory Board Jerzy Woźnicki Chairman of the Supervisory Board Federico Ghizzoni Deputy Chairman, Secretary of the Supervisory Board Roberto Nicastro Deputy Chairman of the Supervisory Board Paweł Dangel Member of the Supervisory Board Sergio Ermotti Member of the Supervisory Board Oliver Greene Member of the Supervisory Board Enrico Pavoni Member of the Supervisory Board Leszek Pawłowicz Member of the Supervisory Board Krzysztof Pawłowski Member of the Supervisory Board Bank Pekao S.A. 13

14 Management Board of the Bank On April 14, 2011, Mrs. Alicja Kornasiewicz, President of the Management Board of the Bank has resigned from her position, effective on April 30, On April 14, 2011, according to the Supervisory Board unanimous decision, which entered into force on May 1, 2011, Mr. Luigi Lovaglio has been appointed the President of the Management Board of the Bank, CEO for the current common term of office of the Bank's Management Board. The appointment is effective as of the date of obtaining the approval of the Polish Financial Supervision Authority. On July 19, 2011, the Polish Financial Supervision Authority unanimously gave its consent to appoint Mr. Luigi Lovaglio as President of the Management Board of the Bank. Composition of the Management Board: JUNE 30, 2011 DECEMBER 31, 2010 Luigi Lovaglio Acting President of the Management Board, F.V.P. of the Management Board Diego Biondo Vice President of the Management Board Marco Iannaccone Vice President of the Management Board Andrzej Kopyrski Vice President of the Management Board Grzegorz Piwowar Vice President of the Management Board Marian Ważyński Vice President of the Management Board Alicja Kornasiewicz President of the Management Board Luigi Lovaglio F.V.P. of the Management Board, General Manager Diego Biondo Vice President of the Management Board Marco Iannaccone Vice President of the Management Board Andrzej Kopyrski Vice President of the Management Board Grzegorz Piwowar Vice President of the Management Board Marian Ważyński Vice President of the Management Board 6.4 The Bank s shareholding Structure As at June 30, 2011, the share capital of Bank Pekao S.A. amounted to PLN 262,367,367 and was divided into 262,367,367 shares of the following series: 137,650,000 Series A bearer shares with a par value of PLN 1 per share 7,690,000 Series B bearer shares with a par value of PLN 1 per share 10,630,632 Series C bearer shares with a par value of PLN 1 per share 9,777,571 Series D bearer shares with a par value of PLN 1 per share 373,644 Series E bearer shares with a par value of PLN 1 per share 621,411 Series F bearer shares with a par value of PLN 1 per share 500,710 Series G bearer shares with a par value of PLN 1 per share 359,840 Series H bearer shares with a par value of PLN 1 per share 94,763,559 Series I bearer shares with a par value of PLN 1 per share. All existing shares are ordinary bearer shares. There are no special preferences or limitations connected with the shares, or differences in the rights attached to them. The rights and obligations related to the shares are defined by the regulations of the Polish Commercial Companies Code and other applicable laws. Bank Pekao S.A. 14

15 The shareholders of Bank Pekao S.A. owning directly or indirectly through their subsidiaries at least 5% of the total number of voting rights at the General Meeting of Bank Pekao S.A. are as follows: SHAREHOLDER S NAME NUMBER OF SHARES AND VOTES AT THE GENERAL MEETING SHARE IN SHARE CAPITAL AND TOTAL NUMBER OF VOTES AT THE GENERAL MEETING NUMBER OF SHARES AND VOTES AT THE GENERAL MEETING JUNE 30, 2011 DECEMBER 31, 2010 SHARE IN SHARE CAPITAL AND TOTAL NUMBER OF VOTES AT THE GENERAL MEETING UniCredit S.p.A. 155,433, % 155,433, % Other shareholders 106,933, % 106,930, % Total 262,367, % 262,364, % At the date of submitting the report, the share capital of the Bank amounts to PLN 262,367,367. Since the beginning of the year until the date of submitting the report, the share capital of the Bank increased by the total amount of PLN 3,041 as a result of issue of 3,041 series G ordinary bearer shares which have been taken up by participants of share option program. The share of UniCredit S.p.A. in the share capital and the total number of votes at the General Meeting amounts for 59.24% while the share of other shareholders amounts for 40.76%. 6.5 Assessment of creditworthiness of Bank Pekao S.A. As at June 30, 2011, Bank Pekao S.A. s creditworthiness was rated as follows: FITCH RATINGS BANK PEKAO S.A. POLAND Long-term rating (IDR) A- A- Short-term rating F2 F2 Individual rating B/C - Support rating 1 - Rating outlook Stable Stable STANDARD AND POOR S* BANK PEKAO S.A. POLAND Long-term rating A- A- Short-term rating A-2 A-2 Rating outlook Stable Stable MOODY S INVESTORS SERVICE LTD. (UNSOLICITED RATING) BANK PEKAO S.A. POLAND Long-term foreign-currency deposit rating A2 A2 Short-term deposit rating Prime-1 Prime-1 Financial strength C- C-** Rating outlook Stable Negative** * The latest research analysis of Bank Pekao S.A. by agency Standard and Poor s has been published on the Bank s website: ** Average for the Polish banking sector. On February 3, 2011, Fitch Ratings has upgraded the Bank s individual rating from C to B/C and outlook of the Bank's Longterm Issuer Default Rating from Negative to Stable. The upgrade of Individual rating reflects the Bank s stable and diversified funding sources, ample capitalisation and strong brand position as well as consistency in cautious credit and market risk management. Bank Pekao S.A. 15

16 On July 20, 2011 Fitch Ratings added Viability rating to ratings of all financial institutions rated by them. This Viability rating, similar to actual Individual rating, constitutes assessment of the quality of financial institution management, what determines its intrinsic viability and financial credibility. These ratings are assigned within similar to the 19-point long-term rating scale, starting from aaa as the highest up to f as the lowest with the possibility to add + or -. Individual rating and Viability rating will run in parallel until December 31, Individual rating will be withdrawn on the beginning of year Activity of the Bank Pekao S.A. Group 7.1 Achievements of Bank Pekao S.A. Bank Pekao S.A. is a universal commercial bank providing a full range of banking services to individual and institutional clients, both in Poland and abroad. The Bank Pekao S.A. Group include financial institutions operating in banking, asset management, pension funds, brokerage services, leasing and factoring markets. The Bank offers to its clients a broad distribution network with ATMs and outlets conveniently located throughout Poland Total number of outlets 1,007 1,014 Total number of own ATMs 1,801 1,800 As at the end of June 2011, the Bank maintained 4,766.2 thousand PLN-denominated current accounts, thousand mortgage loan accounts and thousand consumer loan accounts. (in thousand) Total number of PLN current accounts* 4, ,743.0 of which packages 3, ,489.2 Number of mortgage loans accounts** of which PLN mortgage loans accounts Number of consumer loan accounts *** * Number of accounts including accounts of pre-paid cards. ** Retail customers accounts. *** Pożyczka Ekspresowa. Individual clients Loans The Bank s mortgage loans offer is systematically updated and adjusted to changing market conditions and customers needs. Intensified commercial activities continued throughout the first half of 2011 allowed to boost sales dynamics and strengthen the Bank s position with outstanding product offer on the housing loans market. In the first half of 2011, the Bank s sales of PLN mortgage loans increased by almost 70% in comparison with the first half of Bank Pekao S.A. 16

17 The Bank is still actively involved in the sale of preferential subsidized loans within the framework of the governmental program Rodzina na swoim (Family on their own). The share of such loans in the Bank s total sales remained substantial, as they accounted for nearly half of all housing loans extended by the Bank. In the first half of 2011 the Bank was consequently implementing a strategy aiming at building up its position on consumer goods financing market. The Bank s business activities were concentrated on development and adaptation of the product offer and strengthening marketing communication. In the first half of 2011, the increase of Pożyczka Ekspresowa (Express Loan) sale was observed and was by 28% higher than in the first half of It allowed for faster than the market development of volume of cash loans portfolio, which resulted in the Bank s market share increase in this area. The most important initiatives of the first half of 2011 included extension of Pożyczka Ekspresowa (Express Loan) offer with attractive loan conditions for clients, supported by the strengthened marketing communication and by dedicated promotional advertising campaigns actively promoting consumer loans offer of the Bank in the press, on TV and the Internet. Enriched offer of Pożyczka Ekspresowa (Express Loan) was also actively advertised through a numerous local marketing events. Accounts In the first half of 2011, the Bank concentrated its activities on expanding its customer base and also on offering to groups of selected clients a dedicated products tailored to their needs. Moreover, the Bank continues its activities promoting the usage of electronic bank statements accomplishing the strategy to limit the paper correspondence and support activities protecting natural environment. The ratio of number of accounts using electronic bank statements to active accounts increased by 3.8 pp in comparison to the end of 2010 and achieved the level of 59.3% in the first half of Payment cards In the first half of 2011, the Bank finalized the implementation project of pay-pass functionality for debit and credit cards and in POS terminals. All credit cards MasterCard issued or renewed from January 2011 were equipped with the pay-pass functionality. Saving and investment products In the first half of 2011, the Bank continued its activities aiming at popularizing the idea of regular saving by implementation of the Regular Savings Program My Perspective (Program Systematycznego Oszczędzania Moja Perspektywa) to the offer. This program was prepared in cooperation with Pioneer Pekao TFI. These activities were supported by campaigns in the press and on the Internet. The Bank offered to its clients also other products, which in an easy and flexible way enable regular saving such as Capital Accumulation Program PRO/JUNIOR (Program Akumulacji Kapitału PRO/JUNIOR) or Individual Pension Account Pioneer (Indywidualne Konto Emerytalne Pioneer). In the first half of 2011, the Bank introduced in cooperation with Pioneer TFI another two products to its offer: Pioneer Zmiennej Alokacji Emerging Markets SFIO, Pioneer Zmiennej Alokacji Eastern Europe Markets SFIO. In addition, the Bank s offer was extended by a fund Pioneer Akcji Aktywna Selekcja, which is an umbrella fund of Pioneer FIO, whose assets are mainly invested in carefully selected companies listed at the Warsaw Stock Exchange or other financial instruments in the form of shares. In the first half of 2011, the Bank conducted two new issues of bank securities in a form of structured deposit certificates: Certyfikat Blask Złota and Certyfikat Skarby Natury. Total subscription amount reached the record level of PLN 213 million. In the beginning of 2011, a new product in the bankassurance area was implemented into the Bank s offer i.e. repayment insurance of the credit card debt balance. It is available and is operated by the system Pekao24. Bank Pekao S.A. 17

18 In the affluent clients segment the Bank s activities were oriented at improving of the quality service for demanding clients thereof through a constant enhancement of professionalism of Personal Advisors and promoting best practices in customer service. The Bank is continuously carrying out cyclic researches on affluent client satisfaction and using received conclusions to take facilitating actions. New subscriptions of structured products: 3 months deposit Indeks na Zysk based on fx rate CHF/PLN,18 months deposit Indeks na Zysk based on price of copper, sugar and oil and 3 months deposit Indeks na Zysk based on fx rate USD/PLN were offered in the first half of 2011 to Private Banking clients. Dom Maklerski Pekao (Dom Maklerski) In the first half of 2011, Dom Maklerski concentrated its activities on an effective retail clients service on the secondary market and sales activation in the range of winning and serving retail clients interested in public offers operated by Dom Maklerski. As at the end of June 2011, Dom Maklerski ran thousand investment accounts on clients behalf, i.e. 8.1 thousand more than as at the end of As at June 30, 2011, the value of assets deposited on accounts, including structured deposit certificates, amounted to PLN 5.1 billion. Session turnovers at the stock market made by Dom Maklerski in the first half of 2011 amounted to PLN 2.2 billion and increased by 21.5% in relation to the comparable period of Actions aiming at popularization of brokerage services were related also to the extension of distribution net. In the first half of 2011, Dom Maklerski increased the number of its branches offering limited range of brokerage services for retail clients by 11. At the end of June 2011, the net of Dom Maklerski service distribution included 604 Points of Offer Accepting offering limited range of services, where clients may enter into agreement for the provision of brokerage services. Besides that, Dom Maklerski included 49 branches offering full range of services including agency in carrying out transactions on the secondary market. The basic offer was extended by additional foreign markets accessible for investors in the framework of brokerage services. According to the development of the e-channels services on the Internet service Pekao24Makler and in the mobile channel a range of improvements and modifications were implemented facilitating customer service and assuring better clients communication with the Contract Center of Dom Maklerski. Business Customers (Small and Microenterprises) In the SME segment the Bank continued its growth path in the loan activity. Due to taken initiatives in the range of procedures and assisting tools and launch of commercial campaigns sales of loans increased significantly in the first half of The volume of SME loan applications in the first half of 2011 increased by 11.3% in comparison with the first half of Within the framework of the agreement signed with the European Investment Bank (EIB) and the guarantee agreements signed with the European Investment Fund (EIF), the Bank enhanced its credit offer for SME clients by introduction of investment loans on preferential terms in the first half of In the first half of 2011, the Bank signed a co-operation agreement with Bank Gospodarstwa Krajowego on loan guarantees for SME clients. Thanks to statutory changes the access to the technological loan on favourable conditions for SME clients was facilitated. The Bank supports the initiative of the Innovation and Development Foundation (Fundacja Innowacji i Rozwoju), which is aimed at promoting these innovatory and developmental ventures taken up by Polish companies, which belong to the key tools to develop and maintain the competitive advantage. The result of the support is the number of competition winners on the local and national stages that are the clients of Bank Pekao S.A. Bank Pekao S.A. 18

19 Corporate clients In the first half of 2011, the Bank extended and improved the offer for corporate clients by implementing new products, banking services and enriching functionality of existing products. The most significant projects regarding the adaptation of the Bank s offer to the market needs include: implementation of a new service Pekao Collect FX, enabling to identify the payer and to report single currency payments, both foreign and domestic, extension of corporate payment cards offer by implementation of pre-paid cards as an alternative to cash withdrawals, money transfers or traditional vouchers. Thanks to the wide card usage and advanced technology, this card type belongs to the most attractive pre-paid products on the market, combining of selected products and financial services within the scope of Integrated Agreement into three packages differing in the range of offered products, which enable the clients to choose the Bank s services individually and use them effectively according to their needs, modification of the service PekaoPrzekaz, which is dedicated to companies setting huge amount of payments on behalf of individuals; it is especially useful when recipients do not owe a bank account, implementation of SEPA standard payment orders for corporate clients in the electronic banking system PekaoBIZNES 24, extension of the Bank s offer for loans refinanced by the European Investment Bank for medium and large corporate clients by implementation of the loans assigned for financing the projects of the public sector entities, offer extension within the service EuropeanGate Passive by implementation of SORBNET order accomplishing to facilitate the handling of international corporate clients payments within one bank. In the area of transactional services, the Bank s position concerning electronic salary payments was strengthened in the first half of 2011 thanks to a 15% increase in the number of corporate clients using Pekao Płace service in comparison to the first half of Bank Pekao S.A. constantly strengthens its market position as a leader in financing the public sector, participating in structuring infrastructure projects in this sector. The Bank, after winning a tender to provide current financial service to another big city including its all budgetary units, is currently serving six out of twelve largest Polish cities. In addition, the Bank won competitions for financing three of main airports in western and central Poland, confirming its strong position on the market of regional airports financing in Poland. Concerning issues of debt securities the Bank participated in the following transactions in the first half of 2011: organizing in cooperation with other bank the issue of municipal bonds for one of the clients amounting to PLN 600 million, signing of agreements on carrying out the bond issues for local governments amounting to PLN 300 million, carrying out of two mid-term issues for enterprises amounting to PLN 200 million, carrying out of two 10-year issues of letters of pledge amounting to PLN 400 million. In the first half of 2011, the Bank gained 8 foreign banks for cooperation and servicing the clearing in Polish złoty. In addition, it won a tender put out by a one of the global banks to handle the custody services in Poland and as a consequence to settle transactions via loro account in PLN. As regards the transactional products dedicated to correspondence banking clients the Bank reaches a very high level of STP (straight through processing) rate amounting for almost 100% of accomplished interbank and client transactions. Bank Pekao S.A. 19

20 The Bank is consistently engaged in financing commercial real estate segment. The total amount of new loan agreements signed in the first half of 2011 increased by 11% in comparison to the first half of The Bank is focusing continuously on financing construction projects and is present in all segments of commercial properties. Alternative distribution channels The number of retail and business clients using alternative distribution channels such as Internet banking platform and Contact Center is growing systematically. Pekao24 service (for the retail clients), PekaoFIRMA 24 (for SME clients) and PekaoBiznes 24 (for corporate clients) facilitate the management of financial assets, and the range of available operations is being steadily extended. Pekao24 Pekao24 is a comprehensive system dedicated to retail customers that allows to manage the funds accumulated in the accounts through the Internet, fixed-line or mobile telephone in a convenient and safe way. As at the end of June 2011 the number of Pekao24 clients totalled 1,838.1 thousand. In the first half of 2011, 1,069.7 thousand of clients logged into the electronic banking services and online transactions represented 92% of total transactions executed through the Pekao24 platform. (in thousand) Number of individuals with an access to electronic banking Pekao24 as at the end of period 1, ,566.3 Number of individuals actively using electronic banking Pekao24* 1, * A customer actively using electronic banking is a customer who logged in to the system at least once during the last quarter. The most important projects realized in 2011: introducing a token tool for generating codes for authorization of transactions executed through the Internet and telephone service of Pekao24 platform. It is an additional method of transaction authorization, alternative to PekaoToken application, SMSs codes and cards of disposable codes used by the clients, introducing of contact data of banking adviser in Pekao24 Internet service, implementation of a new functionality, allowing clients to control their accounts balances through the summary of all client s assets and liabilities, continuation of educational campaign of end users of Pekao24 service, related to the safe Internet usage. This project is also supported by Safe Internet bulletin, expansion of Internet shops list, where client can pay with an e-transfer. Pekao24Przelew is a quick money transfer method directly from client s to recipient s account without any commission, irrespective of bank account type owned, facilitating management of standing orders. Bank Pekao S.A. 20