11 Key Economic Trends 11 Monetary Policy 11 Capital Market 11 Banking Sector 12

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1 Table of Contents Financial Highlights Supervisory Board and Management Board of Bank Pekao S.A. Letter from the Chairman of the Supervisory Board 7 Letter from the President of the Management Board 8 Macroeconomic Environment 11 Key Economic Trends 11 Monetary Policy 11 Capital Market 11 Banking Sector 12 Major Developments and Internal Factors Development Directions of the Bank and the Group 13 Merger of UniCredit and HVB 13 Changes in the Pekao Group 13 Management and Supervisory Boards of the Bank 14 Appointment of the Auditor for Shareholder Structure 14 Investor Relations 15 Performance of the Bank s Shares on the WSE 15 Bank Pekao S.A. s Credit Ratings 15 Awards and Distinctions 15 Activities of the Pekao Group in 2005 Introduction Consolidated Pro Forma Statements 16 Key Factors Influencing the Group s Activity and Performance 18 Bank Pekao S.A. on the Polish Banking Services Market 18 Services to Individual Customers 19 Corporate Banking 19 Money Market 20 Custodial Services 20 Key Areas of Operation of the Group Companies 20 Brokerage Services 20 Banking Operations 21 Asset Management 21 Leasing 21 Other Financial Services 21 Other Consolidated Companies 22 Risk Management 22 Sources of Funding for the Bank's Operations 24 Credit Policy and Loan Portfolio Structure 25 Organisation, Management and Technology 27 Branch and ATM Networks 27 Alternative Delivery Channels 27 Human Resources Management 27 Balance Sheet and Financial Performance Structure of the Consolidated Balance Sheet Consolidated Profit and Loss Account 31 Net Profit 32 Corporate Social Responsibility Compliance with Norms and Good Practices Support of Sustainable Growth Environmental Protection 34 Charity Activities 35 Support of Social and Cultural Initiatives 36 Consolidated Financial Statements for the Year ended December 31st,

2 Annual Report 2005 Financial Highlights* pro forma % change CONSOLIDATED PROFIT AND LOSS ACCOUNT For the period January 1st December 31st (PLNm) Total revenues Net interest income Net fee and commission income Overhead costs Operating profit Profit before income tax Net profit CONSOLIDATED BALANCE SHEET As at December 31st (PLNm) Total assets Loans and advances to customers Investment securities Amounts due to customers Capital and reserves attributable to the Bank s equity holders MUTUAL FUNDS as at December 31st (PLNm) FINANCIAL INDICATORS Return on average equity (ROE) 19.2% 17.4% Non-interest income / total income 46.9% 47.5% Overhead costs / total income 53.2% 57.5% Net loans / balance sheet total 46.8% 44.2% Deposits / balance sheet total 75.6% 77.0% Equity / balance sheet total 13.6% 13.2% Capital Adequacy Ratio 19.5% 21.7% Profit per share (PLN) Book value per share (PLN) Bank Pekao share price as at the end of year (PLN) December to December inflation 0.7% 4.4% Yearly average inflation 2.1% 3.5% USD/PLN exchange rate as at December 31st % EUR/PLN exchange rate as at December 31st % * The financial data presented in the report were prepared as comparative data except for two areas related to IAS 39: calculation of specific provisions related to impairment accounting and valuation at amortised cost using the effective interest rate of receivables and loans. For the above mentioned financial assets, the Bank has used the prospective approach. The Bank has valued and recognised the related adjustments in the opening balance of Taking into consideration the usefulness of the financial report, the Bank has prepared pro-forma statements, which include balance sheet as at December 31st 2004 and profit and loss statement for Pro-forma statements approximate the effect of adjustments related to the above mentioned IAS 39 issues, i.e. impairment and valuation at amortised cost using effective interest rate. 4

3 Supervisory Board of Bank Pekao S.A Chairman Deputy Chairman and Secretary Deputy Chairman Members: Jerzy Woźnicki Paolo Fiorentino Andrea Moneta Paweł Dangel Fausto Galmarini Oliver Greene Enrico Pavoni Leszek Pawłowicz Jerzy Starak Management Board of Bank Pekao S.A. President, CEO Deputy President, COO Deputy President, Chief Accountant Members: Jan Krzysztof Bielecki Luigi Lovaglio Sabina Olton Przemysław Figarski Irene Grzybowski Paolo Iannone Christopher Kosmider Marian Ważyński 5

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5 To the Shareholders of Bank Polska Kasa Opieki S.A. In accordance with the adopted corporate governance principles, as defined in Best Practices in public companies issued by the Warsaw Stock Exchange, the Supervisory Board of Bank Polska Kasa Opieki S.A. submits annually a concise assessment of the Bank s situation to the General Shareholders Meeting. On behalf of the Supervisory Board, I would like to summarise the Bank s 2005 performance and present the key elements of the Board s assessment. The Bank and the Pekao Group performed exceptionally well in The consolidated net profit of more than PLN 1.5bn, generated by Bank Pekao S.A. and the Group companies, was the best in their history, the return on equity rose to 19.2% and the cost/income ratio was reduced to 53.2%. The 2005 results fully attest to the aptness of the market strategy the Bank s Management Board adopted over two years ago, whose main objective was to concentrate on the sale of key products, namely consumer and mortgage loans, mutual funds and bank cards. In the opinion of the Supervisory Board, Bank Pekao S.A. is in good economic and financial standing and meets all security requirements applicable to banking operations, in particular the regulatory requirements relating to risk management and capital adequacy. The Supervisory Board has a positive view of the Bank s achievements in mitigating risk and implementing strategic projects of key importance to the development of the Bank s business. The Bank s credit risk policy meets the standards of prudence, and the changes introduced in the credit process are subordinated to the overriding objectives of risk reduction and security enhancement. While supervising the risk management process, the Supervisory Board reviews the Management Board s periodic reports on the loan portfolio and on financial risk and operational risk control. The Bank is well positioned to take full advantage of the accelerated economic growth forecast for When combined with favourable market trends, the potential generated by the Bank in 2005 and such factors fortifying the Bank s competitive edge as the stable customer base, strong and professional Management Board, an extensive and efficient branch network as well as an effective credit risk management and cost control, should pave the way to further growth in profitability in The Supervisory Board has endorsed the motion of the Management Board and recommended that the Annual General Shareholders Meeting resolve to pay out dividend in the amount of PLN 7.40 per share. We hope that our Shareholders will see it as a satisfactory return on the invested capital. On behalf of the Supervisory Board, I would like to assure our Shareholders that a steady growth of profits and the Bank s value, achieved with due regard for the interests of all of the Bank s stakeholders, remains our priority objective. I would like to thank our customers for their trust and the Management Board and the employees of the Bank and other Group companies for their dedication and results achieved in On behalf of the Supervisory Board, I would hereby like to express our continued commitment to the implementation of the Bank s future objectives. Warsaw, April 2006 Jerzy Woźnicki Chairman of the Supervisory Board 7

6 Dear Shareholders, Customers and Employees of the Pekao Group, I have the great pleasure to submit to you, on behalf of the Management Board of Bank Polska Kasa Opieki S.A., the consolidated financial statements and the report on the operations of the Bank and the Pekao Group in It was a very good year for the Bank, and for the banking sector as a whole. We have achieved record-high results. The Pekao Group succeeded in generating a net profit of PLN 1,535m, thus exceeding the previous year s result by 23%. Further improvement of the Group s return on equity, which reached 19.2%, testifies to its strong profitability. It should be stressed that our improved net result was in a large measure attributable to a significant income growth of 9%, coupled with rigorous cost control, which has suppressed the growth of costs to 0.6%, keeping it below the inflation rate. Consequently, we managed to raise the efficiency of the Group s activities even further, by bringing down the cost/income ratio to the level of 53.2%. We have recorded a substantial growth in business volumes: our loan portfolio grew by 12% and customers savings increased by 16%. Once again, we can boast excellent results on the sale of key products, in particular mutual funds, mortgage loans denominated in the Polish złoty, and our new consumer loan, incorporated at the end of 2004 into the Bank s offering as Pożyczka ekspresowa ( Express Loan ). I wish to express our gratitude to the customers, who entrusted their savings to us. I also wish to gratefully acknowledge the contribution of our employees, whose hard work and dedication made it possible to transform the customers trust into real value, and of our shareholders, who support the Bank with their capital. Together we have created value which provides benefits to all stakeholders. In the report I am submitting to you, summarising our operations in 2005, a separate chapter has been devoted to our corporate social responsibility, which is inherent to the general concept underlying the activities of the Bank and the UniCredit group, of which we are a member. This responsibility is manifest in our quality business standards and accountability for the results, achieved with due regard to the interests of all our partners, and therefore ensuring that profits are translated into lasting value for all stakeholders: our shareholders, customers, employees, business partners, and local communities. Adherence to standards and good practices as well as commitment to the public causes by promoting sustainable growth, engaging in charitable activities, and offering support to social and cultural initiatives, are the key examples of our social responsibility discussed in the report. We expect that the external conditions in 2006 will be conducive to further reinforcement of the value we create. The prevailing economic trends in the first months of the year offer grounds for optimism. The sound economic foundations which our country has been laying for the past fifteen years, the growing economic productivity of companies, and the improvement of their competitive advantage following in its wake, are yielding concrete results. These factors boost economic development through growing export volumes, investments and higher consumption levels. The job market is gradually improving, while the policies consistently implemented by the Monetary Policy Council have checked inflation and brought historically low interest rates. 8

7 The Pekao Group is well positioned to use the favourable economic climate to its advantage. We have successfully completed the internal reorganisation processes transforming our structure and corporate culture into those of a modern commercial organisation, whose objectives comprise sales growth, generation of profit and creation of value. In 2006, we intend to focus on furthering these objectives. New opportunities and challenges related to our development come with the emergence of the first truly European financial group, created as a result of the merger of UniCredito Italiano (UCI), the Bank s strategic investor, with Bayerische HypoVereinsbank (HVB). Following the merger, a financial group was created whose operations span 19 European countries, thus supporting the idea of a united Europe and creating value for shareholders, customers and employees. Warsaw, March 21st 2006 Jan Krzysztof Bielecki President of the Management Board 9

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9 Macroeconomic Environment KEY ECONOMIC TRENDS The year 2005 was marked by moderate growth of 3.2% in GDP set against 5.3% in The primary causes of lower economic growth were the tightening of monetary policy and interest rate increases in the third quarter of 2004, introduced in response to the inflationary surge following Poland s accession to the European Union. The GDP growth rate was mainly attributable to the lower than assumed growth in the first half of As in 2004, quickly rising exports were the main growth driver, despite continued appreciation of the Polish złoty. Only in the second half of 2005 did the economic recovery begin to be stimulated also by higher investment growth, which in the fourth quarter of 2005 reached almost 10% and 6.2% for the full year. The exports and imports rose in the złoty terms by 6.1% and 0.2%, respectively. In euro terms, exports increased by 19.6% and imports by 13.0%. Consumption growth, very low in the first half of the year, started to pick up in the second half, but at a very low pace. The annual individual consumption expenditure increased by 2.3%. The labour market conditions improved: the unemployment rate fell to 17.6% from 19.1% at the end of The drop was partly due to temporary emigration of approximately 200,000 workers to other EU countries. Nevertheless, 2005 saw upward swings in the employment rate (by approx. 2.5%) and in the average wage (by 2%). These may be the first signs of a long- -awaited improvement in labour income, which should lead to a faster increase in consumption and ensure stable economic growth over the next few years. MONETARY POLICY In 2005, due to falling inflation the Polish central bank was able to begin a cycle of interest rate reductions. Following five reductions, starting from March, the reference rate fell by two percentage points to 4.5%. The reductions led to a drop in market interest rates. The 1M WIBOR decreased from 6.7% at the end of 2004 to 4.6% in December Overall, the złoty appreciated during the year, despite downward corrections in spring and autumn. Nevertheless, the appreciation has not significantly worsened the balance of payments, nor has it inhibited the recovery in growth which the country experienced over the year. It helped to absorb the surge in oil and gas prices without a rise in inflation. The fact that the higher energy prices did not affect the balance of payments demonstrated the resilience and flexibility of the Polish economy. The average annual PLN/USD exchange rate was by 11.5% lower than in 2004, while the average annual PLN/ EUR exchange rate was down by 11.2%. Due to the strength of the Polish currency, a drop in food prices connected with difficult conditions for exports to Russia, and a temporary fall in energy prices, in the second half of the year the inflation rate in Poland was the lowest in Europe and stayed below the lower band of the inflation target. The December-to-December inflation rate fell to 0.7%, while the yearly average rate was 2.1%. Developments on the stock market resulted in a very sharp growth of mutual funds assets, by more than 62%. Out of a PLN 30.5 billion increase in personal liquidity during 2005, over three quarters was attributable to increases in mutual fund holdings. The growth represented almost 45% of the PLN 53 billion increase in total liquidity in the Polish economy. CAPITAL MARKET It was another record year for the Warsaw Stock Exchange (WSE). The WSE main index (WIG) rose in 2005 faster than the indices of the major world exchanges (excluding Tokyo). The rise was driven primarily by good performance of companies, especially in the financial and natural resources sectors. Low interest rates made households and firms more inclined to invest in stocks, and given the relatively low capitalisation of the WSE the inflow of new funds strongly affected prices. The WIG index rose by 33.7% and the WIG20 (WSE blue-chip index) went up by 35.4%. The MIDWIG midcap index gained 27.6%, while the technology sector index, TechWIG, increased by 27.6%. The Bank stocks index, the WIGBanki, was 32% higher compared with the level from the last trading session of

10 Annual Report 2005 Performance of the WIG and WIG20 indices is presented in the charts below. WIG WIG20 Concurrently, the Warsaw Stock Exchange saw a significant growth of trading volume. The average daily turnover amounted to almost PLN 700m relative to PLN 430m in The structure of turnover changed: the share of foreign investment in trading for the first time exceeded 40% (from 33% in 2004), while the share of retail investment fell from 35% in 2004 to the lowest ever level of 26%. The capitalisation of listed companies, which amounted to PLN 308.4bn at the end of 2005, rose by 43.9% and represented 32% of the GDP (23% in 2004). This growth is an outcome of both higher number of listed companies and an increase in their value. Capitalisation including the value of foreign companies amounted to PLN 424.9bn, up by approx. 46%. In terms of the number of first listings, 2005 was also among the best years: 35 new companies entered the stock exchange. At the end of the year, the number of stocks quoted on the WSE was 255 (almost 11% more than in 2004). An important development was the new capital market regulations that came into force. New capital market regulations have been harmonised with the EU laws and are intended to improve the competitive position of Polish entities operating on the capital market and enhance market supervision. A single passport principle has been introduced; an issuer whose prospectus has been approved by the Polish Securities and Exchange Commission will be able to raise capital on all stock exchanges in the European Union. BANKING SECTOR Macroeconomic developments had a significant bearing on the change and structure of deposits and loans in the banking sector was another record year for banks in terms of profits. The good financial performance was chiefly due to a growth in loans and operating income, as well as better quality of loan portfolios, which enabled banks to create lower provisions. To note, the banking sector s high profitability in 2004 was largely an outcome of regulatory changes; an introduction of a lower CIT rate and less stringent prudential standards. Total loan growth reached 13.5%, after the almost flat year of Almost all of this growth occurred in the retail sector. Household loans rose by 24.1%, compared with the mere 3.5% growth in corporate loans. Mortgage loans for retail customers, denominated mostly in foreign currencies, were the main driving force of banks lending activities. Foreign currency lending to households rose in total by 48%, while foreign-currency housing loans increased by 58%. The banking supervision authorities perceived the high rate of growth in FX loans as a factor increasing the risk of impairment of borrowers credit standing and deterioration in the reputation of banks. In consequence, new regulatory solutions in that respect are to be introduced. The loan portfolio quality improved substantially. Preliminary data of the National Bank of Poland show that the share of non- -performing loans fell to 11% from 14.9% in December Deposits grew by 8.7%. Contrary to the pattern observed for loans, more dynamic growth occurred in corporate deposits (16.8%), while retail deposits rose much slower (5.4%). This means continuation of the trend observed in the previous year and reflects a slow increase in investments in the first half of According to preliminary data of the National Bank of Poland, the banking sector s net profit for 2005 amounted to PLN 9.2bn and was 28.9% higher compared with The good financial performance translated into better financial indicators for the sector. The return on equity rose to 20.8% from 17.2% in 2004, while the return on assets amounted to 1.7%, relative to 1.4% in The cost/income ratio was 60%. The capital adequacy ratio of the banking sector amounted to 14.5%, which attests that banks have sufficient funds to finance further development. High demand for banking services was accompanied by intensifying competition between banks seeking to expand their market shares. Banks increased headcount and the number of branches. Margins fell; the spread between interest rates on loans and term deposits shrank. In view of the shift of households savings from bank deposits to mutual funds, most large commercial banks are increasingly interested in developing their own mutual fund companies. 12

11 Major Developments and Internal Factors DEVELOPMENT DIRECTIONS OF THE BANK AND THE GROUP Bank Pekao S.A. is one of the leading providers of banking services in Poland, and the core of a group of financial institutions operating in such areas as asset management, pension funds, brokerage services, leasing and factoring. The Group s main objective with respect to retail customer services is to maintain its leading position by improving its product offer tailored to the specific needs of various groups of customers, as well as applying the best distribution and sales management models. The means to achieving this objective include a more precise customer segmentation, the bundling of products in attractive packages, and developing innovative distribution channels. The activities of the Group are focused on the following areas: lending to households, small and mid corporate clients as well as improving the quality of customer service. Key products for retail customers are consumer and mortgage loans, cards and mutual funds. The Group leverages the market position of Pekao Brokerage House (CDM), Pioneer Pekao Investment Management S.A and Xelion company, by promoting products which combine savings with investments in capital markets. In the area of corporate banking, the strategy assumes strengthening of the Group s market position in all main segments of the market. The Group s activities are based on further segmentation of customers and designed to take advantage of the potential of the distribution structure based on Corporate Customer Centres and Relationship Managers. The product offer will be enriched, particularly in the area of cash management services, and will include also hedging products and newly introduced liquidity management services. In addition to further development of the ATM and branch networks, the Bank intends to dynamically develop new distribution channels, such as: internet banking, telebanking and direct sales. We are continuing our efforts to improve efficiency in terms of both personnel and non-personnel costs. The Group follows a rational human resources policy, which involves flexibility in adjusting the headcount to the type and size of business, as well as promotion of training and development of employees, and their appropriate motivation with a view to hiring and retaining the best people. MERGER OF UNICREDIT AND HVB In 2005, Bank Pekao S.A. became a member of a new banking group, formed as a result of the merger of UniCredit (UCI) and HypoVereinsbank (HVB). On June 12th 2005, UniCredit and HVB disclosed their intention to join forces in creating a first truly European bank. The merger entails emergence of a new leader in the European banking sector, a leader deeply rooted in the heart of the continent, and showing a great growth potential a bank with a presence in 19 countries, with assets worth over EUR 730bn (in June 2005), 28m customers and seven thousand branches. The principal strategic objectives of the merger, which both parties regard as an amicable process, embrace: strengthening the competitive position on domestic markets (Italy, Germany and Austria), gaining the leading position in Central and Eastern Europe, building on the advantage of complementary strengths and economies of scale in asset management and investment banking, consolidating business activities in Central and Eastern Europe as well as maximising revenue and cost synergies. The information on the merger of UniCredit and HVB was published by the Bank in current report dated June 13th CHANGES IN THE PEKAO GROUP The Pekao S.A. Group is composed of financial and non-financial institutions gathered around a universal bank. The Group provides a full range of financial services available in Poland to retail and corporate customers. As at December 31st 2005, the Pekao Group comprised 16 entities: Bank Pekao S.A. as the parent company and 15 subsidiary companies, the major ones being Centralny Dom Maklerski Pekao S.A., Pekao Leasing Sp. z o.o., Pekao Faktoring Sp. z o.o., Pekao Pioneer Powszechne Towarzystwo Emerytalne S.A., Centrum Kart S.A., Pekao Financial Services Sp. z o.o. and Pekao Development Sp. z o.o. The Pekao Group holds shares in a number of associated and co-owned undertakings, the major ones being Pioneer Pekao Investment Management S.A. (49%) and Xelion. Doradcy Finansowi Sp. z o.o. (50%). There were no substantial changes in the structure of the Group in comparison to the end of A number of 13

12 Annual Report 2005 associated companies reported in consolidated financial statements under the equity method changed as a result of sale of shares in associated company Grupa Inwestycyjna NYWIG S.A. in The Bank s strategy provides for maintaining holdings in strategic companies. The current changes are to enable the Bank to focus on the key areas of its activities on the financial services market, to make investments necessary to execute the strategy, and to increase the Group s operational transparency saw a continuation of the initiatives undertaken to improve efficiency, to enhance the synergies offered by the Group s structure, and to enable a more efficient support from the Group s companies for the performance of the Bank s strategy. Together with Pirelli RE, negotiations and preparations were being carried out with a view to creating a new company, 75% owned by Pirelli RE and 25% owned by Bank Pekao S.A. Under a conditional agreement of February 15th 2006, Pirelli RE will acquire a 75% interest in Pekao Development Sp. z o.o. from Bank Pekao S.A. The company s name will be changed into Pirelli Pekao Real Estate. The transaction will be closed after a relevant approval has been obtained from the Office of Competition and Consumer Protection. Considering the attractiveness of the national economy and banking industry in Ukraine, the Bank is currently reviewing a part of the strategy for Bank Pekao (Ukraina) with a view to increasing its presence in the retail market. This would require initial outlays and enlargement of the current network. MANAGEMENT AND SUPERVISORY BOARDS OF THE BANK Management Board In 2005 there were no changes in the Management Board. The members of the Management Board are appointed for the common term, which lasts three years. They are appointed and recalled by the Supervisory Board. The Deputy Presidents and other members of the Management Board are appointed and recalled at the request of the President of the Management Board. An approval of the Banking Supervision Commission is required for appointment of two members, including the President. The Commission s approval is issued at the request of the Supervisory Board. The scope of competence and responsibilities of members of the Management Board have been set forth in the Statutes of the Bank and in the law the Code of Commercial Companies, as well as in the By-Laws of the Management Board. The scope of the Management Board s competence includes matters that are not reserved by virtue of the applicable provisions of the law or of the Bank s Statutes to the competence of the Bank s other statutory bodies. The Bank s Supervisory Board Following Mr Alessandro Profumo s resignation from the post of the Chairman and member of the Supervisory Board, Bank Pekao S.A. s Extraordinary General Shareholders Meeting of January 20th 2005 adopted a resolution on the appointment of Mr Andrea Moneta, responsible for UniCredit Group s New Europe Division, to the Supervisory Board. On the same day, the Supervisory Board elected from among its members a new Chairman, Mr Jerzy Woźnicki, who had previously held the position of a Deputy Chairman. Mr Andrea Moneta was elected a new Deputy Chairman of the Supervisory Board. APPOINTMENT OF THE AUDITOR FOR Upon expiry of an agreement with Ernst&Young Audit Sp. z o.o., under which the company audited Bank Pekao S.A. s financial statements and the Group s consolidated financial statements for the years , Bank Pekao S.A. s Management Board put forward a proposal to the General Shareholders Meeting to appoint a new auditor. On April 5th 2005, pursuant to Par of Bank Pekao S.A. s Statute and acting on the motion submitted by the Management Board and supported by the Supervisory Board, the General Shareholders Meeting resolved to appoint KPMG Audyt Sp. z o.o. as the Bank s auditor. The appointment of a qualified auditor of financial statements has been performed in compliance with Art of the Accounting Act. The newly appointed auditor will audit and review Bank Pekao S.A. s financial statements and the Group s consolidated financial statements for the years Pursuant to a resolution of UniCredito Italiano s General Shareholders Meeting, the UCI group s financial statements for the same period will be audited by KPMG S.p.A. SHAREHOLDER STRUCTURE As at December 31st 2005, the shareholder structure of Bank Pekao S.A.* was as follows: Number of shares held % of share capital and total vote at General Meeting UniCredito Italiano S.p.A. 88,121, % Other 78,359, % Total 166,481, % * Shareholders holding, directly or indirectly, 5% or more of the total vote at the General Shareholders Meeting. On January 16th 2006, Bank Pekao S.A. s share capital was increased by PLN 186,755 and on February 6th 2006 by further PLN 5,169, following the issue of Series F shares. At present, Bank Pekao S.A. s share capital amounts to PLN 166,673,611. The par value per share stands at PLN 1. In accordance with Par. 11 of the Statute, each share carries one vote at the General Shareholders Meeting. As at the date of this report, UniCredito Italiano S.p.A. s share in the Bank s share capital and in the total vote at its General Shareholders Meeting was 52.87%, while the remaining shareholders interests amounted to 47.13%. To the best of Bank Pekao S.A. knowledge, as at the date of this report, there have been no material changes in the shareholder structure. All shares of Bank Pekao S.A. are ordinary shares and no special control rights are attached to them. There are no limitations 14

13 as to the transferability of Bank Pekao S.A. s securities and no restrictions concerning the exercise of voting rights conferred by the Bank s shares. INVESTOR RELATIONS Bank Pekao S.A. adhered to the policy of active communication with minority investors through organising presentations of its quarterly results for the investor communities in Warsaw and London, participating in all of the most important investor conferences, and maintaining ongoing relations with investors and brokers. PERFORMANCE OF THE BANK S SHARES ON THE WSE The price of the Bank shares rose by 26.4%, from PLN as at December 31st 2004 to PLN during the last trading session in In 2005, the price of the Bank shares fluctuated in the range of PLN (May 11th) to PLN (September 19th). The performance of the Bank s stock in 2005 is presented below: BANK PEKAO S.A. S CREDIT RATING As at December 31st 2005, Bank Pekao S.A. had the following financial credibility ratings: Fitch Ratings Long-term rating A Short-term rating F1 Individual rating C Support rating 1 Outlook Stable Standard and Poor s Long-term rating local currency A- Long-term rating foreign currency A- Short-term rating A-2 Outlook Stable Moody s Investors Service Ltd. (unsolicited rating) Long-term deposit rating Short-term deposit rating Financial strength Outlook AWARDS AND DISTINCTIONS A2 Prime-1 C Stable Last year, Bank Pekao S.A. received a number of awards and distinctions, both domestic and foreign, the most valuable of which are discussed below. Euromoney, a financial monthly magazine, recognised Bank Pekao S.A. as the best bank in Poland in 2005 and presented it with the prestigious Award for Excellence It was the fourth time that Euromoney had awarded Bank Pekao S.A. (after 2000, 2001 and 2002). The Bank was highly estimated by the award panel for maintaining, for many years now, a leading position on the market of selling consumer loans and mutual fund units as well as for consistency in promoting mortgages denominated in the złoty, which offer more security to the borrower. The most valuable distinction received by the Bank in Poland was the title of Trustworthy Company 2005 (Spółka godna zaufania 2005), granted by the Institutional Investors Chapter of the Polish Institute of Directors (Kapituła Inwestorów Instytucjonalnych Polskiego Instytutu Dyrektorów), which engaged in the task of assessing the implementation of corporate governance principles by the companies listed on the WSE. The rating panel considered four elements of the companies operations: shareholder structure, general shareholders meetings and investor relations, financial transparency and information accessibility, and the structure and functioning of the supervisory boards. 15

14 Annual Report 2005 Activities of the Pekao Group in 2005 INTRODUCTION The consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted in the European Union, and in respect of the matters that are not regulated by the above standards, in accordance with the accounting principles as set out in the Accounting Act dated September 29th 1994 and the bylaws and regulations issued thereunder, as well as the requirements for issuers of securities admitted or sought to be admitted to trading on an official stock-exchange listing market. In the preparation of the financial statements according to IFRS, the Group has applied the admissible exemptions. The pro forma data for 2004 was prepared to ensure year to year comparability of the results. In 2005, net profit increased by 22.9% and amounted to PLN 1,534.9 million. The 2005 net profit was the best result achieved to date, which confirms the Group s capability for value creation. The increase in the net profit by PLN million in 2005 compared with the previous year was possible thanks to increased business activity that translated into higher income, particularly interest income, stable operating costs and lower cost of risk. The Group s income amounted to PLN 4,413.3 million and was 8.7% higher than in the previous year, with interest income being higher by 10.0% and other income higher by 7.3%. In 2005, the Group experienced continued positive trend in the results of its business activity, with successful sales of key products: mutual funds, a new consumer loan called Express Loan, PLN mortgage loans and credit cards. Sales of the consumer loan were more than four times higher than in the previous year. Sales of PLN mortgage loans amounted to PLN 1,668.2 million, contributing to a 21.6% growth in the mortgage loan stock. The value of mutual funds increased by 48.0%, and the number of credit cards more than doubled compared with the end of Total overhead costs including depreciation were kept under control and amounted to PLN 2,346.4 million i.e. were only 0.6% higher than in the previous year. In 2005, the Group s cost/income ratio amounted to 53.2% and was 4.3 p.p. lower than in the previous year. Impairment losses on loans and advances amounted to PLN million, 24.7% lower than in the previous year. This resulted primarily from the effective credit risk management and the improved macroeconomic situation. The ratio of non-performing loans to total loans decreased from 19.9% at the end of 2004 to 16.2% at the end of 2005 as a result of an increase in the volume of performing loans and a simultaneous decrease in the volume of non-performing loans. Savings of the Group s clients increased by PLN 8,783.9 million i.e. by 15.6% in 2005, resulting from both an increase in the savings of individual clients (up by PLN 3,992.2 million) and in corporate deposits (up by PLN 4,791.7 million). High demand contributed to a further increase in mutual funds assets, which rose by PLN 6,235.2 million in 2005, bringing the total retail savings above the PLN 45 billion level and confirming the Group s significant market share. In 2005, the loan portfolio increased by PLN 3,581.3 million, primarily due to acceleration in corporate lending, very successful sale of Express Loan and continued sales of PLN mortgage loans. CONSOLIDATED PRO FORMA STATEMENTS The financial data presented in the report were prepared as comparative data, except for two areas related to IAS 39: estimation of impairment of financial assets and valuation of loans and advances at amortised cost using the effective interest rate method. For the above mentioned financial assets, the Group has used the prospective approach. The Group has measured and recognised the related adjustments in the opening balance of Taking into consideration the usefulness of the financial report, the Group has prepared pro-forma statements, which include balance sheet as at December 31st 2004 and profit and loss statement for Pro-forma statements approximate the effect of adjustments related to the above mentioned IAS 39 issues, i.e. impairment and measurement at amortised cost using effective interest rate. 16

15 Consolidated balance sheet (PLN thousand) Assets pro forma Cash and balances with Central Bank 3,574,791 3,939,275 Debt securities eligible for rediscounting at the Central Bank 6,106 8,768 Loans and advances to banks 6,966,026 5,961,477 Financial assets held for trading 2,502,366 3,195,771 Derivative financial instruments 499, ,482 Other financial instruments at fair value through profit or loss 1,781,317 1,336,721 Loans and advances to customers 28,223,730 25,749,048 Net investment in the financial leasing 745, ,324 Investment securities 14,490,772 15,036,457 Available for sale 11,902,898 10,106,484 Held to maturity 2,587,874 4,929,973 Non-current assets held for sale 167,366 - Investments in associated undertakings 167, ,662 Intangible assets 645, ,925 Tangible fixed assets 1,441,141 1,541,645 Investment property 61, ,869 Income tax assets 182, ,339 Other assets 516, ,487 Total assets 61,971,956 59,536,433 Liabilities pro forma Amounts due to the Central Bank 1,950,710 2,151,743 Amounts due to other banks 1,997,043 1,332,557 Financial liabilities held for trading 558, ,119 Derivative financial instruments 607, ,683 Amounts due to customers 46,847,877 45,821,645 Debt securities in issue 4 23,205 Liabilities related to assets held for sale 39,663 - Current income tax liabilities 5, Provisions for deferred income tax 1 1,221 Provisions 108, ,613 Other liabilities 1,432,922 1,060,369 Total liabilities 53,549,230 51,705,414 Capital and reserves attributable to the Company s equity holders Share capital 166, ,482 Current year profit and retained earnings from previous years 1,521,895 1,242,306 Other capital and reserves 6,718,913 6,403,457 Minority interest 15,436 18,776 Total equity 8,422,726 7,831,021 Total equity and liabilities 61,971,956 59,536,433 Consolidated profit and loss statement (PLN thousand) pro forma Interest income 3,871,774 3,721,052 Interest expense (1,521,350) (1,550,999) Net interest income 2,350,424 2,170,053 Fee and commission income 1,770,087 1,644,565 Fee and commission expense (183,103) (163,115) Net fee and commission income 1,586,984 1,481,450 Dividend income Result on financial instruments at fair value 64,961 55,662 Result on investment securities 74,153 14,076 Foreign exchange result 265, ,018 Other operating income 284, ,495 Other operating expenses (213,941) (258,814) Net other operating income 71,035 48,681 Impairment losses on loans and advances (237,477) (315,648) Overhead costs (2,346,404) (2,333,437) Operating profit 1,829,422 1,409,864 Share of profit of associates 44,177 36,157 Profit before income tax 1,873,599 1,446,021 Income tax expense (338,747) (197,094) Net profit 1,534,852 1,248,927 Attributable to equity holders of the Company 1,537,712 1,252,460 Attributable to minority interest (2,860) (3,533) 17

16 Annual Report 2005 KEY FACTORS INFLUENCING THE GROUP S ACTIVITY AND PERFORMANCE In 2005, the following key factors had a bearing on the Group s operations and performance: Growth of business activity, Successful capture of opportunities created by continued changes in investment preferences of households, Effective cost management, Reduction of the costs of risk, Robust performance of the Group companies. Growth of Business Activity Favourable trends driving the Group s continued business growth were upheld. Considerable success was reported as regards sales of key products for retail customers, including mutual fund units, new consumer loans, mortgage loans denominated in the Polish złoty and credit cards. A 48% growth in the value of mutual funds was accompanied by a twofold increase in the number of credit cards relative to the end of The value of consumer loan sales rose by more than four times. There was vigorous growth in corporate customer business during the year, corporate deposits grew by 31.3%, and corporate loans increased by 9.5%. Business activity growth translated into income growth, which was particularly visible in the case of interest income and fee and commission income. Successful Capture of Opportunities Created by Continued Changes in Investment Preferences of Households In 2005, the savings structure underwent further changes, consisting primarily in a shift of household savings from bank deposits to mutual funds. The branch network of Bank Pekao S.A., CDM Pekao S.A. and Xelion. Doradcy Finansowi Sp. z o.o. serves as a distribution channel for participation units in mutual funds managed by Pioneer Pekao TFI S.A. The share of mutual funds in household savings grew during the year from 31.6% to 42.6%. In 2005, the assets under management of Pioneer Pekao TFI S.A. funds increased by PLN 6,235.2m, which corresponded to a 48% growth. Effective Cost Management General administrative expenses (including depreciation and amortisation) in 2005 amounted to PLN 2,346.4m, representing a negligible increase of 0.6% over the previous year. Such a small increase was possible thanks to a 4.1% decline in overhead expenses, which almost entirely offset an increase in personnel costs and depreciation and amortization charges (4.2% and 0.7%, respectively). The increase of 8.7% in total income drove down the cost/income ratio to 53.2%, which means a decline by 4.3 percentage points. Reduction of the Costs of Risk The combined effect of improved portfolio quality and effective credit risk management was a decrease (of 24.7%) in valuation allowances relative to the previous year. The proportion of non- -performing loans to total loans improved from 19.9% as at the end of 2004 to 16.2%, owing to larger volumes of performing loans and a reduction in the volumes of non-performing loans. Robust Performance of the Group Companies The good results reported by the Group were the product of a strong performance of both Bank Pekao S.A. and the other Group companies. The net profit posted by the companies consolidated under the full method surpassed the last year s figure by 38.1%, while the share in the net profit of companies valued under the equity method was higher by 16.4%. Factors which will Have an Effect on the Results of the Bank and the Group There is a general expectation of improvement in GDP growth, driven by stronger investments and consumption. Such an environment should support demand for corporate lending, while decreasing the growth rate of corporate deposits in the sector. The Bank expects an improving labour market and real growth of salaries, which may positively influence the operations of its related entities, mainly through growth in retail savings and higher demand for loans, especially for mortgages and consumer loans. The Group results will also be influenced by decisions of the Monetary Policy Council, which shape złoty market interest rates, by decisions of the Federal Reserve Board of the USA, which impact USD market interest rates, and decisions of the European Central Bank regarding Euro interest rates. BANK PEKAO S.A. ON THE POLISH BANKING SERVICES MARKET Bank Pekao S.A. operates in the banking services segment, tailoring its product range and service approach to suit the needs of clearly defined customer groups. The customer segmentation currently in place was introduced in mid 2002 as part of our restructuring efforts. At the same time, our organisation, product offering, and customer service model were changed. Based on the analyses and customers opinion surveys, the following basic customer groups were defined: Retail customer segment (standard services), VIP/SME segment, comprising affluent individuals, as well as micro and small-sized enterprises (individual banking), Private banking customer segment, Medium-sized enterprise segment, Large corporate customer segment. Separate business divisions were created for the purpose of serving particular customer segments. Also the credit risk management process was adjusted in line with the customer segmentation. The Bank s experience shows that the introduced segmentation allows it to better identify and satisfy the needs of separate customer groups and facilitates the creation of lasting partnership with the customers. 18

17 Services to Individual Customers Retail Banking The Bank s offer for the largest group of retail customers using standard products is among the most comprehensive ranges of such services available on the Polish banking market. For retail customers, the Bank offers a large variety of current accounts Eurokonto, term-deposits in PLN and in foreign currencies, and also the Bank s key lending products: Express Loan and mortgage loans. Eurokonto packages include assistance insurance scheme, called Pakiet Pomocny (Helpful Package), implemented in cooperation with TU Allianz Życie Polska S.A. and a Swiss company Elvia. In the light of the households changing preferences and their interest in saving forms alternative to simple bank deposits, a few years ago the Bank introduced an offering of capital market products, which has been continually expanded and which comprises units in mutual funds managed by Pioneer Pekao TFI, as well as investment programmes and combined investment and insurance schemes. Since September 2004, the Bank has offered to its customers a Pioneer IKE Programme. Pioneer IKE is a specialized investment programme, the purpose of which is to create a convenient instrument for long-term investments in units of mutual funds, in accordance with the terms and conditions set forth in the Act on Individual Pension Accounts. The Bank also offers an insurance-capital Programme Euro- Opieka, which is a combination of a long-term investment with insurance protection during the agreement period. VIP/SME Segment The Individual Banking Division provides services to affluent individuals (VIPs) and small and micro enterprises (SME). The SME customers are served by specialist advisers who assist them in using the services related to private and company accounts. Advisers help select products and services suited to the individual needs of both the company and its owner. Individuals who do not conduct business activities or who seek more individual approach, are also served by individual advisers, while small companies are served on an individual basis by customer managers. Our product mix for the VIP/SME segment is among the most extensive on the Polish market. It comprises all financial instruments available on the market, offered by the Bank and by other Group companies. Modifying its offering so as to meet the specific needs of the VIP/SME customers, the Bank has bundled its services into product packages, including Firm and Me (Firma i Ja), Business Leader (Business Lider) and Pharmacy Leader (Lider Farmacji). As part of these packages, micro and small entrepreneurs are offered: Comprehensive banking services for the company, Joint company and personal accounts in the case of the Eurokonto Business package, Convenient financing of the company s day-to-day operations, Attractive investment forms, Safe and user-friendly payment cards. Private Banking The high-net worth individuals with the largest assets are offered a private banking service model. It gives them the guarantee of comprehensive and custom-tailored service rendered by a personal adviser of the Private Banking Centre. A personal bank adviser assists customers in the selection of an optimal strategy for deploying their funds on financial markets both in Poland and abroad. While ensuring stability and security of investments, the Private Banking Centre seeks to provide its customers with significant and lasting financial benefits. Our offering for this customer segment contains all standard products of Bank Pekao S.A., as well as products and services customised to suit the needs and expectations of the customers and selected products of the Bank s strategic partner the UniCredito Italiano group. The Centre enjoys unlimited access to a variety of investment forms and to modern financial solutions thanks to its close cooperation with the Group members: Centralny Dom Maklerski Pekao S.A., Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. and Pioneer Pekao Investment Management S.A. Corporate Banking Our corporate product mix, addressed to large and medium- -sized enterprises, is among the most extensive offerings available on the market. We also provide services to the public administration, local public sector organisations, social organisations, and non-profit institutions. The banking products and services are adjusted on an ongoing basis to reflect the specific needs following from the nature, scope and scale of the customers activities. Our offering for corporate customers includes in particular: comprehensive settlement handling; short-, medium- and long- -term loans; foreign trade finance; investment banking services; cash management; guarantees and sureties; and promissory note transactions. Our corporate customers are also offered financial advisory, particularly with respect to financial structuring using all products and services available at the Bank; we also arrange and participate in a number of loan syndicates. The Bank s corporate product mix is complemented with additional financial services provided by other companies of the Group: brokerage services, leasing, factoring, asset management, strategic and corporate finance advisory services. With a view to ensuring high quality of our services, the organisation of the customer service in the Corporate Banking Division has been suited to the needs and requirements of particular customer groups. The largest companies are served by specialist customer advisers operating from our Head Office. The advisers are responsible for the choice of relevant products and services, service quality and efficiency and cooperation with the branches handling the customer s transactions. 19