MANAGEMENT BOARD S REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. FOR THE YEAR 2016

Transcription

1 MANAGEMENT BOARD S REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. FOR THE YEAR 2016 Warsaw, March 2017

2 TABLE OF CONTENTS SUMMARY OF THE PERFORMANCE OF THE BOŚ S.A. IN I. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE BANK MACROECONOMIC SITUATION SIGNIFICANT EVENTS IN FACTORS THAT MAY AFFECT THE PERFORMANCE OF THE BANKING SECTOR AND THE BANK S RESULTS II. FINANCIAL RESULTS AND ACTIVITES OF THE BANK INCOME STATEMENT Bank s income statement BALANCE SHEET Bank s assets Changes in the structure of assets Loans and advances Loans granted in the reporting period Loan portfolio quality Bank s loan portfolio quality Equity and total liabilities of the Bank Sources and funding for the Bank s operations Liabilities to customers Information about loans taken and loans agreements signed Information about loans and advances drawn, loan and surety or guarantee agreements not relating to the Bank s operating activities Contingent assets and liabilities Loans, sureties and guarantees granted to subsidiaries DIFFERENCE BETWEEN FORECASTS AND ACHIEVED RESULTS DEVELOPMENT STRATEGY OF THE BANK THE SHARE OF BOŚ S.A. IN THE SECTOR MAIN PRODUCTS, SERVICES AND BUSINESS AREAS OF THE BANK Banking products Number of serviced clients, accounts, payment cards and branches Proecological offer Corporate clients segment Public finance segment Retail clients segment JESSICA initiative Cooperation with foreign financial institutions III. RISK MANAGEMENT OF THE BANK CREIDT RISK FINANCIAL RISK Liquidity risk Interest rate risk Interest rate risk in the banking book Interest rate risk in the trading book Currency risk OPERATIONAL AND COMPLIANCE RISK Operational risk Compliance risk IV. SUPPLEMENTARY INFORMATION

3 1. FINANCIAL RESOURCES MANAGEMENT DEPENDENCE ON PARTNERS RELATED-PARTY TRANSACTIONS SEASONALITY OR CYCLICALITY INFORMATION ON BANK S AGREEMENTS Significant agreements Agreements with the Central Bank and regulatory bodies Agreements with the entity authorized to audit financial statements Fees of the entity authorized to audit financial statements FACTORS AND UNUSAL EVENTS COURT PROCEEDINGS CHANGES IN BASIC PRINCIPLES OF MANAGEMENT INFORMATION ON DIVIDENDS VALUE OF COLLATERAL ACCEPTED BY THE BANK MAIN INVESTMENTS EMPLOYEES Trainings Management share option scheme Variable compensation policy for executives of BOŚ S.A Shares held by members of management and supervisory bodies Remuneration of key management personnel Contracts relating to compensatory payments to members of executive bodies POST BALANCE SHEET EVENTS V. CORPORATE GOVERNANCE STATEMENT CORPORATE GOVERNANCE PRINCIPLES INTERNAL CONTROL SHAREHOLDERS AND RIGHTS ATTACHED TO SHARES BANK S GOVERNING BODIES CONFLICT OF INTEREST REMUNERATION POLICY VI. CORPORATE SOCIAL RESPOSIBILITY BANK BOŚ FOUNDATION STRATEGIC SOCIAL ENGAGEMENT OF THE BANK

4 SUMMARY OF THE PERFORMANCE OF THE BOŚ S.A. IN 2016 The net result of Bank Ochrony Środowiska S.A. for 2016 amounted to PLN million and was PLN 28.7 million lower compared with the corresponding period of the previous year. The key factor affecting the final amount of the Bank s result was the recognition of impairment losses on the loans in the wind farm loan portfolio (hereinafter: WFP ) at an amount of PLN 98.5 million. Additionally, the Bank recognized an impairment loss of PLN 11.3 million on its investment in the BOŚ EkoProfit subsidiary, which is involved indirectly, through the MS Wind company, in a wind farm investment project. The wind farm loans were granted prior to 2016, particularly in , during the intensification of the lending campaign in this segment. The increased amount of impairment losses recognized on this portfolio is the outcome of the Management Board s accounting for the consequences of the decisions taken in previous years, which led to a significant increase in the level of the risk and concentration in the Bank s loan portfolio. The precautionary actions of the Management Board are aimed to mitigate the potential risks of realization of the negative scenario of the market development of this segment, and simultaneously they are part of the remedial actions taken to mitigate credit risk and achieve a permanent improvement in the Bank s performance. BOŚ S.A. has a portfolio of loans for the financing of wind farm investments, with a total value of PLN 2.2 billion, accounting for 16% of the Bank s overall loan portfolio. In 2016 amendments were made to regulations concerning the RES sector, including to the law on renewable energy sources, which became effective on 1 July 2016 and the law on wind farm investments, which became effective on 15 July Due to a significant change of market conditions affecting the quality of the wind farm loan portfolio, the Bank has identified risks associated with potential effects of negative development scenarios in this sector and, consequently, potential deterioration of the quality of the loan portfolio (within a short- and mid-term) due to an adverse impact of the regulatory environment. The total result from the impairment of loans and financial assets in 2016 amounted to PLN million and was PLN million lower than in the previous year. Had the total result on the impairment of the portfolio of wind farm financing loans and financial assets been excluded from the statement of profit or loss, the Bank would have earned a net profit for 2016 of PLN 23.6 million i.e. PLN 62.9 more than in the corresponding period of the previous year. The improved performance of the Bank (having excluded the impairment of the wind farm portfolio) is due to the significant improvement of the net interest income and the simultaneous reduction of administrative expenses resulting from the successful implementation of the Framework Development Strategy of Bank Ochrony Środowiska S.A. for and its Recovery Program. Impact of impairment allowances related to wind farms portfolio s assets on Bank s results in 2016 (in PLN million) Reporting approach Excluding allowances related to WFP* in 2016 Net result 2015 Net interest income Net fee and commission income Other income Allowances for wind farms portfolio (WFP) Allowances for subsidiaries connected with WFP Net impairment result excluding WFP and subsidiaries General administrative expense Tax charges Net result 2016 * WFP wind farms portfolio 4

5 The effects of the actions taken as part of the implementation of the Framework Development Strategy caused an improvement in the results on the Bank s core operations, resulting in, among others, an increase in the interest margin from 1.3% in 2015 to 1.5% in This caused a decrease in the negative variance of the Bank from the peer bank group defined by the KNF (Polish Financial Supervision Authority), which recorded a 0.04 p.p. decrease in the interest margin after three quarters of 2016 compared with Additionally, thanks to cost optimization activities BOŚ S.A. improved its C/I ratio from 84.2% in 2015 to 68.9% in The levels of selected items of the Bank s balance sheet and statement of profit or loss compared with 2015, on an actual basis and excluding the effect of the impairment of wind farm financing assets, are presented in the table below. Item With WFP* 2016 Without WFP* 2015 With WFP* Change (p.p.) Without WFP* Selected balance sheet items (in PLN thousand) Loans and advances to cllients [1] Liabilities to clients Liabilities due to issue of bank securities Equity Total assets Selected income statement items (in PLN thousand) Net interest income [2] Net fee and commission income [3] Net impairment result General administrative expenses [4] Net profit/ loss x X Selected ratios (%) Interest margin on total assets [5] Cost of Risk Share of loans having indications of impairment and loans which are imapired 11.1 x X Cost-to income ratio (C/I) [6] Total capital adequacy ratio (capital adequacy ratio) x x Definitions of ratios have been provided in points II.1 and II *WFP wind farms portfolio In addition to the adverse impact of the recognition of impairment losses on the wind farm portfolio, the financial performance of BOŚ S.A. for 2016 was affected in particular by the following factors: [1] The carrying amount of loans and advances granted to the Bank s customers as at the 2016 yearend was PLN 14,038.3 million and decreased by 2.4% compared with the 2015 year-end. At the same time, as part of implementing the Bank s Strategy, the structure of the loan portfolio was changed in order to increase the share of loans with higher margins. The share of loans granted to corporate customers increased to 53.9%, whereas the share of loans granted to public finance entities and retail customers decreased. The increase in the balance of corporate loans amounted to PLN million i.e. 1.9%, with a simultaneous decrease of PLN million i.e. 14.8% in the balance of loans to public finance entities and of PLN million i.e. 3.6% to retail customers. [2] The net interest income earned in 2016 was PLN 47.2% million i.e. 18.6% higher relative to This was possible mainly due to the increase in the average balance of loans and a decrease of the share of high-cost bonds in the Bank s equity and liabilities and their replacement with cheaper funding in the form of deposits. [3] The net fee and commission income of the Bank decreased by 7.2% in 2016 compared with This was due to the decrease in the fees for servicing customer accounts by PLN 5.5 million i.e. 11.2% and the decrease in the commission for guarantees and letters of credit by PLN 3.3 million i.e. 42.4%. [4] The total result from the impairment of loans and financial assets in 2016 amounted to PLN million and was PLN million lower than in the previous year. The key factor causing the 5

6 increase in the level of impairment at the Bank was the recognition of impairment losses on the wind farm portfolio, which accounted for half of the total increase in the impairment losses. [5] Attention should be paid to the PLN 51.6 million i.e. 14.6% decrease in administrative expenses, mainly due to the decrease in BGF (Banking Guarantee Fund) costs by PLN 21.3 million i.e. 36.7%, non-personnel expenses by PLN 12.3 million i.e. 11.8%, depreciation and amortization expense by PLN 6.9 million i.e. 15.8%, and employee benefit expenses by PLN 2.3 million i.e. 1.7% relative to The decline in employee benefit expenses was due to both the reduction of employment and the decrease of the compensation of Management Board Members and part of management personnel. The full effects of these activities will be reflected in the results for the subsequent periods. [6] The rise in the interest margin was largely due to the progressing change in the structure of the Bank s equity and liabilities. In addition to the replacement of high-cost (foreign currency and PLN) bonds with funds obtained from customers, the interest margin earned by the Bank was positively influenced by the successive reduction of the interest rates of customer deposits, including both term deposits and savings accounts. Despite falling interest rates, BOŚ s offering continued to be attractive to customers, which is reflected in their continuing interest in the deposits offered by the Bank. [7] The factors which caused a 15.3% decrease (improvement) in the costs to income (C/I) ratio in 2016 compared with the previous year included, in addition to the decrease in administrative expenses, the rise in the Bank s revenue from its core operations, mainly from interest, with a lower amount of one-off revenues such as revenue from sale of debt securities. BOŚ S.A. developed its operations on the market of funding of pro-ecological projects and, in accordance with its Strategy, increased the share of loans granted for activities supporting environmental protection and sustainable development in its loan portfolio. The balance of pro-ecological loans as at 31 December 2016 amounted to PLN 5.0 million, which accounted for 34.5% of the total loan balance at the Bank. In 2016 changes were also made to the structure of equity and liabilities. Due to implementing the new Strategy, the Bank increased its share capital in The value of the share issue was PLN 400 million. The share capital increase enables the Bank to continue its organic development and generate funds for pursuing its mission in the area of funding ecological and sustainable development investments. At the end of December 2016, the share of the Bank s equity in total assets amounted to 8.5%. The share of liabilities under debt securities issued fell (by 7.1 p.p.). In May 2016 the Bank redeemed its 6% fixed-rate bonds issued in 2011 for an amount of EUR 250 million. The redemption of bonds had a significant impact on the reduction of the Bank s financing costs and a positive impact on its performance in the following quarters. The share of amounts due to customers in the Bank s equity and liabilities rose by 6.2 p.p. to 83.0% as at 31 December The value of amounts due to customers as at 31 December 2016 was PLN 17,097.2 million and increased by 7.1% compared with the balance as at the 2015 yearend. At the 2016 year-end, the volume of retail deposits amounted to PLN 10,289.1 million and increased by 28.5% compared with the 2015 year-end balance. The most important management activities include the change of the Bank s business model and, in consequence, the increase of the efficiency of its operations, assuring stable sources of funding and expanding the Bank s activity in the area of widely defined environmental protection. In accordance with its earlier communications, the Bank has been expanding its operations in the segment of micro-, small and medium enterprises. The Bank implemented a new model of customer service for small enterprises based on the whole network of the Bank s branches. At the same time, the Bank continued to develop its private banking offer for affluent clients. In the 4th quarter of 2016, the Bank implemented a project of acquiring Euro deposits from private individuals in Poland and abroad, which will allow for a decrease of the currency mismatch. The Bank also developed alternative distribution channels by streamlining the process of submitting credit applications through the Bank s website, or by increasing call centers selling functionalities. In addition, the Bank has undertaken a number of activities in the area of centralizing and facilitating credit analysis processes and has been actively seeking to reduce its administrative expenses. The Bank s total capital ratio at the 2016 year-end was 14.43%, compared with 12.13% at the 2015 yearend. The Tier 1 capital ratio was 11.46% as at 31 December 2016, compared with 9.12% at the 2015 year-end. On 12 July 2016, the Court registered the increase of the Bank s share capital by way of the issuance of class U ordinary bearer shares and the related amendment to the Bank s Statutes. On 22 December 2016, the Bank obtained KNF s consent for including the capital increase in its capital adequacy ratio. 6

7 I. FACTORS AND EVENTS AFFECTING THE FINANCIAL POSITION OF THE BANK 1. MACROECONOMIC SITUATION In 2016, the GDP growth rate decreased to 2.8%, compared with 3.9% in The decrease of activity in the national economy was mainly due to the drop in capital expenditures. In 2016, the value of investments decreased by 5.5%, compared with a 6.1% increase in the previous year. The visible weakening of investments in 2016 was due to weaker public as well as private investment activities. At the same time, the factor supporting the economic growth in 2016 was the accelerated dynamics of private consumption, which increased by 3.6% compared with the 3.2% increase in Consumption growth was stimulated by the growth in social transfers (the Family 500+ Program), negative prices dynamics in the economy (increasing the real purchasing power of households) and an improvement on the labor market. In 2016 the registered unemployment rate fell to 8.3% at the year-end, compared with 9.7% in December In 2016 the number of unemployed decreased by 229 thousand persons to 1,335 thousand persons at the year-end % y/y GDP comsuption investments (P) 4q09 4q10 4q11 4q12 4q13 4q14 4q15 4q In 2016 the overall price level in the economy remained low, clearly below the NBP inflation target (2.5%). For the first ten months the CPI index was negative, which was due to the low dynamics of fuel prices (the effect of the decrease in the crude oil prices), food prices, regulated prices as well as moderate demand and cost pressure in the economy. At the end of the year the CPI index was in the growing trend due to the fact that the fuel and processed food prices went upward (with a very low level of the statistical reference base from the previous year). As a result, at the year-end the CPI index rose to 0.8% y/y, compared with -0.5% at the 2015 year-end. The average annual inflation rate in 2016 was -0.6%, compared with -0.9% in ,0 4,0 % y/y CPI CPI excluding food and energy prices 2,0 0,0-2,0 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Source: GUS, NBP All over the year 2016 the Monetary Policy Council (the MPC) conducted a policy of stable interest rates the NBP reference rate was at the level of 1.5%. In 2016 the composition of the MPC changed due to the expiration of the term of 9 out of 10 members of the Council (including the President of the National Bank of Poland). The new MPC continued its previous monetary policy and clearly indicated that it intended to 7

8 stabilize monetary policy parameters. This message was maintained by the MPC throughout the whole year. In 2016, with stable NBP interest rates, the interbank loan interest rates were stable at the yearend WIBOR 3M was 1.73%, slightly above its level at the 2015 year-end (1.72%). 6,0 % 4,0 2,0 NBP reference rate WIBOR 3M 5y-bonds profitability 0,0 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Source: NBP Year 2016 was characterized by an increased volatility of financial asset quotations on the global financial market. In the 1st quarter, this increased volatility was stimulated by growing concerns about the condition of emerging economies, in 2nd quarter the referendum on the Great Britain s future in the EU, and at the year-end Donald Trump s unexpected victory in the U.S. presidential election. All over the year financial markets were significantly affected by the volatility of market expectations regarding the outlook for the monetary policy of the main central banks, including in particular the U.S. Federal Reserve. At the year-end, due to the inflow of favorable information from the U.S. economy (as well as other major economies), the rise of raw material prices (stimulating expectations of higher inflation), increased expectations for an expansive fiscal policy in the U.S. under Donald Trump s administration and the rhetoric of the representatives of the U.S. Federal Reserve, there was a rise in market expectations concerning the pace and size of interest rate increases in the U.S. In the 4th quarter, this resulted in a conspicuous increase of Treasury bond yields in the prime markets (the U.S. and Germany), dollar appreciation and a fall of the demand for the financial assets of emerging markets. 5,0 PLN 4,5 4,5 4,0 3,5 4,0 3,0 3,5 2,5 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Source: NBP PLN/EUR PLN/USD (P) PLN/CHF (P) In 2016, the situation on the Polish financial market was heavily influenced by the trends on the global financial markets. The increased volatility on the global financial market resulted in an increased volatility on the domestic financial market. The decline in the demand for the assets of emerging markets resulted in the pressure on PLN depreciation. This trend was additionally strengthened by the uncertainty regarding the future economic policy (e.g. uncertainty around the final version of the act on the aid for persons indebted in foreign currencies, which expired in the second half of the year as a result of the President s Chancellery submitting draft legislation to resolve this issue) as well as the lowering of Poland s credit rating by the Standard&Poor credit rating agency. Throughout the whole year 2016 the Polish zloty depreciated against the U.S. dollar (4.5%), euro (4.2%) and the Swiss franc (2.0%). The increased yields of Treasury bonds on prime markets combined with the fall in the demand for the assets of emerging markets and decreased expectations for further easement of the MPC monetary policy brought about a noticeable rise of the yields of Treasury bonds denominated in PLN. The yields of 10-year Treasury bonds increased by approx. 60 base points during the year, reaching 3.60% at the year-end. 8

9 2. SIGNIFICANT EVENTS IN 2016 Awards and distinctions The EKOlokata SUPERprocentująca BOŚ was recognized as the second most attractive deposit on the market in Rzeczpospolita s ranking of 31 March 2016 The BOŚ EKOprofit savings account was ranked as No. 2 in Parkiet s listing of 31 March The BOŚ S.A. team of economists took position No. 1 in the forecasting contest of Parkiet in the category of the most accurate forecasts of macroeconomic and market indices after the 1st quarter of 2016, 11 April 2016 and after the 3rd quarter of 2016; 10 October The Bank was listed by Comperia.pl in its TOP5 ranking of banks offering mutual fund units; 10 May Dom Maklerski Banku Ochrony Środowiska [The Brokerage House of BOŚ] received the WSE Special Award and the title of the Broker of the Year 2015; 13 May The Bank as a member of the jury of the ENACTUS Poland 2016 international students contest; 7 June EKOlokata 12M BOŚ No. 1 in the ranking of Puls Biznesu; 28 June BOŚ S.A. took position No. 1 in the banks clients satisfaction survey conducted among Parkiet readers, published on 8 September BOŚ S.A. received grade 3.9 in the 5-grade scale. The average for the whole survey was 2.6. BOŚ S.A. was ranked 3rd in the Newsweek s Friendly Bank the 2016 Bank ranking published in September 2016, in the Mortgage Banking category. Position No. 2 for EKOlokata z Bonusem in the listing of 1-year deposits with the highest interest rates, published by Bankier.pl on 25 October Framework Development Strategy of Bank Ochrony Środowiska S.A and Corporate Recovery Program On 20 April 2016 the Bank s Supervisory Board adopted a resolution approving the Framework Development Strategy of Bank Ochrony Środowiska S.A. for The main assumptions of BOŚ s Strategy were communicated to the public in current report no. 25/2016. Due to the reporting loss for 2015 and the requirements included in Article 142 of the Banking Law, on 30 March 2016 the Bank provided the Polish Financial Supervision Authority (KNF) with the Corporate Recovery Program of BOŚ S.A., approved by the Supervisory Board, which, after the recommended improvements, was accepted by KNF on 14 December The Bank s Development Strategy for and the Corporate Recovery Program of BOŚ S.A. were prepared so as to be coherent in terms of the assumptions, directions and objectives. The primary objective of BOŚ S.A. for the period is to increase the Bank s profitability above the average profitability in the banking sector. A more detailed discussion of the Strategy assumptions is included in Section 2, item 4. Share capital increase In the first half of 2016, the Bank carried out the share capital increase by issuance of U-series shares in private subscription mode. The value of newly issued shares amounted to PLN 400 million. The share capital increase was registered by the Court on 12 July In reply to the Bank s application of 9 September 2016, on 22 December 2016 the Polish Financial Supervision Authority issued a decision permitting the Bank to classify the newly issued shares under the Tier 1 core capital, in accordance with Article 26 Clause 3 in conjunction with Article 28 of the CRR Regulation. Redemption of bonds On 11 May 2016, BOS Finance AB based in Sweden, for which the Bank was the sole shareholder, redeemed its 6% fixed-rate bonds issued in 2011 for an amount of EUR 250 million. The redemption of these bonds resulted in a significant reduction of the Bank s financing costs and had a positive effect on its performance in the following quarters. The Management Board of BOŚ S.A. notified the public of the fact that, on 9 May 2016, the Bank made a refund of the deposit, together with interest, of EUR 265 million to its subsidiary BOS Finance AB based in Sweden, in accordance with the Deposit Agreement of 11 May 2011 (current report no. 30/2016). BOS Finance AB deposited the funds obtained from the issuance of the Eurobonds, amounting to EUR 250 million, in the Bank s account, to secure any claims arising from the guarantee of the fulfillment of BOS Finance AB s liabilities under the issued Eurobonds. These funds were used to pay BOS Finance s liabilities under issued Eurobonds on 11 May In the 3rd quarter of 2016, the Bank redeemed its own U-series bonds for an amount of PLN 10 million (current report no. 52/2016). 9

10 Cost optimization The Bank s performance improved thanks to actions taken in the following areas: optimization of costs of security services (11% reduction of actual costs for 2016 relative to 2015) while maintaining the required level of safety at the Bank. The activities taken in to optimize the IT&N expenses brought about savings in 2016 of approx. PLN 1.49 million (5.18%), despite the increase in servicing costs due to development works and the valorization of fees compared with costs incurred in Actual 2015 PLN 28.7 million Actual 2016 PLN 27.2 million Difference PLN 1.5 million The replacement of the hardware platform forming the core of the server infrastructure for production and testing systems of the Bank, which took place in the 1st half of 2016, definitely reduced the risk of a breakdown and made it possible to reduce the costs of servicing hardware and system software. In addition, by increasing servers speed and aggregate efficiency it enabled the Bank to increase the number of served accounts. In 2016, activities were taken to reorganize the network of the Bank s outlets, involving their liquidation and reallocation, and additionally a standard branch was developed in terms of its functioning and image. Their aim was to improve performance of the Bank s network of outlets and the efficiency of the Bank s operations. The outcome was the reallocation of two and liquidation of eight outlets of the Bank, which generated savings of over PLN 1 million in Non-personnel expenses such as: costs of rent, lease of cars, printing, purchase of materials and services were reduced. Rating change by Fitch Ratings Ltd In February 2016 (current report no. 17/2016) Fitch Ratings Ltd downgraded the long-term rating (IDR) from BB to B+ with a stable outlook. As a result, the other ratings of the Bank were also downgraded. The main reason for this decision indicated by the Agency in its report was the significantly impaired ability of the Bank to absorb losses due to the new banking tax and the poor quality of its assets. The level of the rating resulted from the Agency s opinion on the Bank s limited ability to obtain extraordinary support from the Government, mainly due to the BRRD (the Bank Recovery and Resolution Directive). In the Agency s opinion, government institutions could undertake anticipatory action to avoid the Bank s exceeding regulatory capital requirements due to the Government s indirect share in the Bank s equity and its role in the funding of pro-ecological projects in Poland. Banking tax Under Article 3 and Article 4 item 1 of the Act of 15 January 2016 on the tax from certain financial institutions (consolidated text: Journal of Laws 2016 item 68; hereinafter: the FIN Tax Act ), starting from 1 February 2016 the Bank is a taxpayer in respect of tax from certain financial institutions (hereinafter the FIN tax ). At the same time, under Article 11 Clause 2 item 1 of the FIN Tax Act, taxpayers covered by a recovery program as referred to in Article 142 Clauses 1-3 of the Banking Law are exempt from the FIN tax. Due to the Bank being subject to a recovery program pursuant to Article 142 of the Banking Law, the Bank s results are not charged with the banking tax. Projects related to Bank s Compliance In 2016 the Bank completed the implementation of nine projects which resulted from the need to ensure the Bank s compliance with legal and/or regulatory requirements of supervisory institutions as well as from business initiatives. In particular, the following projects were implemented: The Family 500+ ( Rodzina 500+ )project, the aim of which was to enable the Bank s customers having access to e-banking services to use the ZUS portal, and in particular to submit an application under the Family 500+ Program; The EMIR II project, the aim of which was to implement solutions to ensure the Bank s compliance with the requirements arising from Regulation (EU) of the European Parliament and of the Council No. 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (referred to as the EMIR Regulation ) on the clearing of derivative transactions through the CCPs. Act on Renewable Energy Sources On 28 June 2016 the President of the Republic of Poland signed the amended Act on Renewable Energy Sources (the RES Act), which became effective on 1 July The significant change arising from the amended RES Act is the cancellation of the requirement for an obligated seller to purchase renewable energy from entities generating energy from renewable sources with a capacity of more than 500 kw 10

11 (vacatio legis until the end of 2017). The price of electricity generated in such RES units will be shaped by the wholesale market. Another factor which is unfavorable to RES investors is the lack of a legislation initiative increasing the mandatory share of RES energy in 2017, which results from the issued Regulation of 17 October The maintenance of the so-called RES obligation index at the level of 16% (including 0.6% for biogas) in 2017 will lead to further oversupply of the green certificates on the market. The amended RES Act introduced new rules for settlements made by energy generators using RES microunits with a capacity up to 40 kw as well as amended the rules for the auction system in which investors constructing larger RES units would operate. The amendments to the auction system mainly concerned an increased promotion of technologies generating energy in a more stable and predictable manner. On 30 December 2016 the first pilot auctions for the sale of electricity were held. Three of them were successfully settled for existing agricultural biogas plants with a capacity up to 1 MW and units with the level of CO 2 emission not exceeding 100 kg/mwh and production not exceeding 3,504 MWh/MW/year as well as new units with a capacity up to 1 MW. To supplement the December session, the Ministry of Energy and URE planned an additional auction in the first months of A significant advantage of the auction system is the elimination of the risk of volatile prices of green certificates. However, there is a risk that the investor may have to pay a fine if the total amount of energy generated in the period of the consecutive three years of the unit s operation does not reach at least 85% of the level declared in the auction. Act on Wind Power Plant Investments On 22 June 2016, the President of the Republic of Poland signed an Act on Wind Power Plant Investments, which became effective on 15 July The Act gives rise to a number of restrictions for the newly established and existing wind power plants. Under this Act, the location of a wind power plant will only be possible on the sites indicated in the local zoning plan, which must also determine the maximum total height of the wind power plant. The Act introduces restrictions for the minimal distance of wind power plants from residential buildings. The existing wind power plants which do not meet the distance criterion cannot be expanded; only renovation and works required to keep them in operation are permitted. The Act extends the taxable base under the real estate tax to 100% of the total value of the investment (previously this tax was charged on the value of the foundation of the turbine and tower), which will have an adverse effect on the profitability of such investments due to increased tax burdens imposed on energy generators. In reply to numerous queries regarding the application of the provisions of the Act concerning taxation, the Ministry of Development and Finance published its letter of 2 December 2016, in which it presented a clear viewpoint that, as of 1 January 2017, the entire wind power plant is subject to the real estate tax. The business and legal communities are seeking to amend the provisions of the Act relating to this matter. Law on Environmental Protection On 7 December 2016, the Polish Sejm received the Private Members Bill on Amendments to the Law on Environmental Protection, which aims to change the method of electing the authorities of the Voivodeship Funds for Environmental Protection and Water Management (VFEPWM) (Wojewódzki Fundusz Ochrony Środowiska i Gospodarki Wodnej - WFOŚiGW) and transfers the election of members of the voivodeship funds supervisory boards from the local self-government to central government. If the amendments come into force in the form envisaged in the bill, this will in practice mean a change of the VFEPWM s status from self-governmental legal entity to an entity reporting to the NFEPWM (NFOŚiGW). EU programs The solutions covered by the EU programs are being implemented in the national legal and institutional system. Promoted directions include support for transition to low-emission economy and adjustment to climate changes and effective resource management. The funds will be distributed, among others, under the Infrastructure and Environment Operational Program and the Regional Operational Programs, under which the first application enrolments have already been announced. The triggering of investment activities will increase the demand for funding from banks to supplement the EU funds available to investors. 11

12 3. FACTORS THAT MAY AFFECT THE PERFORMANCE OF THE BANKING SECTOR AND THE BANK S RESULTS Factors which may affect the Bank s performance in the upcoming quarters include: The effects of possible regulatory solution of the issue of housing loans expressed in CHF and in other currencies On 19 October 2016, the Lower Chamber of Polish Parliament i.e. the Sejm of the Republic of Poland commenced works on the three draft regulations with a view to solving the issue of housing loans denominated in CHF or in other foreign currencies, including on the draft regulation proposed by the President of the Republic of Poland being the Act on the principles of certain receivables resulting from loan or borrowing agreements, on the parliamentary draft of the Act on the restructuring of loans denominated in or indexed to currencies other than Polish currency, and on establishing a prohibition of issuing such loans, and on the Act on specific principles of restructuring of foreign currency housing loans in connection with fluctuations of foreign exchange against Polish zloty. As at the date of the publication of this report, the final wording of this Act is not known. The implementation of the proposed initiatives in the matter of translation of foreign currency loans would have negative impact on the financial results of the entire banking sector and of BOŚ S.A. Significant depreciation of PLN against CHF and EUR In the event of a significant depreciation of PLN against CHF or EUR which persists over a long period of time, this would cause an increase in the volume of foreign currency loans, which, on one hand, means an increase in the capital requirement for such loans, and on the other hand, the need to ensure sufficiently increased financing. In the event of a permanent significant depreciation of PLN against foreign currencies, especially CHF, one should expect deterioration of the quality of the portfolio of mortgage loans denominated in foreign currencies. Risk of increased volatility on the global financial market and downgraded rating for both the country and the Bank The effects for the Bank may include, among others, an increased cost of external funding as well as impeded access to overseas funding and realization of currency and interest rate risk management transactions. Potential change in the fees for the BGF A change in the methodology of calculating the amount of fees for the BGF and basing the amount of the fee on, among others, the risk profile of the Bank compared with other banks means that the amount of the fee for the BGF may change. Potential additional payment to the Borrowers Support Fund Additional payments to the Borrowers Support Fund cannot be precluded. Banking tax According to the Act on tax for certain financial institutions, from 1 February 2016, banks were burdened with so-called banking tax, paid according to the size of assets (netted of by selected positions). Banking tax will not be applicable for BOŚ S.A. during the ongoing realization of the Recovery Program. Implementation of IFRS 9 The implementation, as of 1 January 2018, of International Financial Reporting Standard 9 (IFRS 9) will result in amendments to at least three areas (1) the model of impairment measurement / impairment methodology, (2) the model of classification and measurement of financial instruments and (3) hedge accounting. From the economic perspective, any charges arising from the implementation of the new model of measurement of impairment at the moment of transition to IFRS 9 on 1 January 2018 may adjust equity or profit and loss at the amount of the difference between the level of impairment losses determined under IFRS 9 and the current level of impairment losses determined under IAS 39. The new method of classification and measurement of assets may result in the adjustment of equity at the moment of transition to IFRS 9 and an increased volatility of profit and loss in subsequent periods due to the potential requirement to measure part of the assets held at fair value through profit or loss. In order to implement IFRS 9, a dedicated project was developed in the Bank and the Bank obtained the support of a reputable consulting firm. Project works relating to technical advisory in the abovementioned areas are planned to be completed in the 1st half of 2017, whereas the implementation works in IT systems will be completed in the 4th quarter of Currently, it is not possible to estimate the potential impact of IFRS 9 on the financial position and the Bank s capital the related work is still in progress. 12

13 Risk of interest rates, for both PLN and foreign currencies, remaining low or subsequently decreasing Potential further decreases of interest rates would result in the narrowing of the Bank s net interest margin and the decrease of its net interest income due to, among others, statutory limitations in the amount of interest charged, inability to further reduce interest rates for current accounts, or contractual clauses precluding the consideration of the effects of negative interest rates in the case of wholesale financing in foreign currencies. Recognition of allowances for impaired exposures Due to the nature of its operations (involvement in environmental projects), when engaging in transactions with a relatively high value the Bank tends to maximize the use of collateral to secure against potential risks. The impairment allowances recognized against the gross carrying amount of exposures take into consideration the level of accepted collateral. 13

14 II. FINANCIAL RESULTS AND ACTIVITES OF THE BANK 1. INCOME STATEMENT 1.1. Bank s income statement Due to materialization of the risk associated with providing loans to fund investments in Renewable Energy Sources, as previously indicated by the Bank, in 2016 BOŚ S.A. carried out a restructuring of its wind farm loan portfolio, which resulted in the recognition of additional allowances of PLN 98.5 million for loans and PLN 11.3 million for subsidiaries. As a consequence the Bank incurred a net loss of PLN 68.0 million. The reason for the deterioration of the profitability of wind farms investments, and thus the deterioration of the quality of loans granted by the Bank until the year 2015, was the change of legal regulations, including the amendment of the Act on Renewable Energy Sources, which became effective on 1 July 2016 and the Act on Wind Farm Investments, which became effective on 15 July 2016, resulting in the decrease of the prices of green certificates and the increase of fiscal burdens, and, accordingly, the decrease of investments profitability below the level assumed in the business plans. Item 2016 with WFP* PLN thousand without WFP * 2015 Change [%] with WFP* without WFP * Continued operations Interest and similar income Interest and similar expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Dividend income Net trading income Result on investment securities Result on hedge accounting Foreign exchange result Other operating income Other operating expenses Net impairment losses General administrative expenses Operating profit Net profit/ loss Income tax charges NET PROFIT/ LOSS * WFP - wind farms portfolio The consistent efforts to improve the Bank resulted in a significant growth of revenues and a conspicuous reduction of administrative expenses. As a result, after excluding the impairment allowances for the assets associated with the funding of wind farm investments, BOŚ S.A. would have earned a net profit for 2016 of PLN 23.6 million, i.e. PLN 62.9 million higher than the 2015 result. BOŚ S.A. s result on banking operations for 2016 was 4.1% higher compared with the corresponding period of This result amounted to PLN million, compared with PLN million in BOŚ S.A. improved its net interest income, net trading income, dividend income and the result on hedge accounting, with a slightly worse net fee and commission income, result on investment securities and foreign exchange result. 14

15 301.0 Results on banking activity of the Bank (PLN million) Net interest income Net fee and commission income Dividend income Net trading income Result on investment securities Result on hedge accounting Foreign exchange result In 2016, the net interest income of BOŚ S.A. was 18.6% higher than in 2015 and amounted to PLN million, compared with PLN million in Interest income (PLN million) Heding trasactions Financial instrument Public finance loans Retail client loans Corporate clients loans Loans and advaces to banks Interest and similar income increased in 2016 by PLN 36.1 million i.e. 5.5% compared with This increase was due to higher interest income on the portfolio of loans to corporate customers increase by PLN 64.0 million i.e. 24.4%, mainly due to the 18.3% increase of the average balance of corporate loans compared with Interest income on loans and advances to retail customers decreased by PLN 3.1 million i.e. 1.9%, and on loans to public finance entities decreased by PLN 15.5 million i.e. 20.0%. Revenue from financial instruments was lower by PLN 6.9 million i.e. 4.7%. Interest expense decreased by PLN 11.1 million i.e. 2.8%. This was mainly due to the decrease of the costs of financial instruments, which amounted to PLN 45.2 million i.e. 33.8% and was due to the redemption of high-cost Eurobonds in May 2015 and their replacement with cheaper financing in the form of deposits. Costs of accepted deposits and the retail segment accounts increased by PLN 59.5 million i.e. 40.0%, mainly due to the increase in the average balance of retail segment liabilities in 2016, which was 15

16 higher by PLN 1.8 billion i.e. 24.7% compared with Interest expense on accepted term deposits and deposits and accounts of corporate customers decreased by PLN 20.0 million i.e. 22.4%, and of public finance entities by PLN 3.4 million i.e. 18.6%. Interest expense on loans and advances decreased by PLN 3.2 million i.e. 52.4% due to the decrease in the volume of loans and advances received by the Bank. Interest expense (PLN million) Hedging transactions Financial instruments Funds to be disbursed as loans Loans and advances expenses Expenses related to savings accounts, current accounts and deposits The Bank s net fee and commission income decreased in 2016 by 7.2% compared with Fee and commission income decreased by PLN 5.5 million i.e. 6.4%, mainly due to the PLN 5.5 million i.e. 11.2% decrease in charges for the servicing of customers accounts and the PLN 3.3 million i.e. 42.4% decrease in the commission on guarantees and letters of credit. Fee and commission income (PLN million) Other fees Commissions on quarantees and letters of credit BFG charges Commissions on loans Charges for customer accounts, other clearing operations in domestic and foreign trade Fee and commission expense decreased by PLN 0.1 million i.e. 1.0%, mainly due to the PLN 1.5 million i.e. 54.9% decrease in charges for current accounts (due to the withdrawal from the Bank s offer and conversion of the accounts with bonuses to customers), with charges for Euronet services higher by PLN 0.8 million i.e % and charges for payment cards higher by PLN 0.8 million i.e. 13.9%. 16

17 Fee and commission expense (PLN million) Commissions on loans and advances granted Charges for Euronet services Current accounts fees Commissions paid to other banks for cash transactions Payment cards fees Brokerage services fees Dividend income in 2016 increased by PLN 1.8 million, i.e. 12.9% compared to 2015 and amounted to PLN 15.4 million. Dividends received n 2016 includes, among others: dividend from Dom Maklerski BOŚ S.A. amounted to PLN 8.0 million (PLN 6.5 million in 2015) and BOŚ Ekosystem sp. z o.o. amounted to PLN 2.3 million, Kemipol sp. z o.o. amounted to PLN 4.8 million (PLN 4.9 million in 2015) and WODKAN Przedsiębiorstwo Wodociągów i Kanalizacji S.A. amounted to PLN 0.3 million (PLN 0.2 million in 2015). Net trading income in 2016 increased to PLN 36 million compared to PLN 24.9 million in The highest share in this profit had profit from FX swap transactions (PLN 24.7 million) made in order to finance the foreign currency loans portfolio. Net trading income includes also IRS transactions made with corporate clients, own Bank s transactions made on interest rate market and revaluation of open FX Forward transactions. Result on investment securities amounted to PLN 0.6 million compared to PLN 25.1 million in High profit on investment securities in 2015 was a result of favorable changes of the Treasury bonds prices and sale of bonds from available for sale portfolio by the Bank. Foreign exchange result amounted to PLN 19.2 million in 2016 compared to PLN 34.9 million in The decrease was due to revaluation of FX Forward and client s transactions. In 2016 the net impairment result amounted to PLN million and was less favourable than in 2015 which amounted to PLN million. The impact on such result had allowances created for loans granted to corporate clients amounted to PLN million, retail clients amounted to PLN million and other clients amounted to PLN -0.2 million and reversal of allowances for off-balance sheet receivables amounted to PLN 1.8 million. The net impairment result in the corporate segment was mainly affected by the increase of the risk arising from the decline in the profitability of wind farm investment projects and the recognition of additional allowances for individually significant corporate customers. In the retail segment, additional allowances were recognized for mortgage loans and due to the increase of the risk in the portfolio of cash advances. 17

18 354.7 General administrative expense (PLN million) Depreciation Non-personnel expense Employee benefits The Bank s administrative expenses decreased by PLN 51.6 million i.e. 14.6% compared with 2015, mainly due to the decrease of costs associated with the BGF contribution by PLN 21.3 million i.e. 36.7%, nonpersonnel expenses by PLN 12.3 million i.e. 11.8%, costs of contribution to the Lenders Support Fund by PLN 9.0 million and depreciation expense by PLN 6.9 million i.e. 15.8%, with an increase of the fee due to the KNF by PLN 0.2 million and to the Financial Ombudsman by PLN 0.1 million. Due to the implementation of the Bank s Recovery Program the Bank s result for the 2nd, 3rd and 4th quarter of 2016 was not charged with the banking tax. The tax paid by the Bank for February and March 2016 was refunded and increased the result for the 2nd quarter of The employee benefit expense decreased by PLN 2.3 million i.e. 1.7% compared with The decrease in the employee benefit expense was due to, among others, the reduction of employment, which decreased in the Bank by 5.4% to 1,431 FTE compared with the 2015 year-end, as well as due to the reduction of the compensation of Management Board Members and part of management personnel. Efficiency and security of Bank s activity The following table presents key profitability and efficiency ratios of the Bank, along with their calculation methodology: % Item 2016 Change ( p.p.) with 2015 without WFP without WFP * with WFP * WFP * * Return on equity (ROE) Return on assets (ROA) Interest margin on total assets Cost of Risk Cost-to-income ratio (C/I) ) net profit relative to the average balance of equity at the beginning and at the end of the period, 2) net profit relative to the average balance of total assets at the beginning and at the end of the period, 3) net interest income relative to the average balance of total assets at the beginning and at the end of the period, 4) impairment allowances relative to the average value of loans and advances to customers at the beginning and at the end of the period, 5) general and administrative expenses: relative to net interest income, net fee and commission income, dividend income, net trading income, net investment income, net gain/loss on hedge accounting, net foreign exchange gains/losses and net income on other operations * WFP - wind farms portfolio The cost-to-income ratio (C/I) was 68.9% in This ratio decreased by 15.3 p.p. compared to 2015 due to higher income, mainly interest income as well as lower costs, including lower BFG charges, lower contribution to Borrowers Support Fund, non-personnel expenses and employee benefits. According to the Article 92 Regulation of the European Parliament and of the Council (EU) No 575/2013 of 26 June 2013 (CRR), Bank is required to maintain a total capital ratio of at least 8%. Tier I capital ratio and core capital ratio Tier I should amount at least 6% and 4.5%, respectively. 18

19 Capital adequacy ratio of Banks were as follows: Item Change (p.p.) % Total capital ratio Tier 1 ratio In 2006, during the administrative proceedings related to National Fund for Environmental Protection and Water Management NFEPWM (Narodowy Fundusz Ochrony Środowiska i Gospodarki Wodnej NFOŚiGW ) obtaining the permit to exercise voting rights from the shares of the Bank, the NFEPWM has committed to the PFSA to maintain the capital adequacy ratio (currently referred to as total capital ratio- TCR) of at least 12%. The administrative proceedings mentioned above, in which the NFEPWM is obliged by the PFSA to maintain its capital adequacy ratio at a higher level, was the result of the transaction of acquisition by NFEPWM of Bank s shares from Skandinaviska Enskilda Banken. The Bank accounts for its obligation towards the PFSA to maintain the capital requirements both in its financial plans and strategy. On 22 October 2015, the Polish Financial Supervision Authority informed banks about implementation of an additional capital buffer increasing by 1.25 p.p. the requirements for capital ratios. As a result, from 1 January 2016, the minimum capital ratios recommended by the PFSA increased to 10.25% for the Tier 1 capital ratio and to 13.25% for the TCR ratio. On 19 October 2016, the Polish Financial Supervision Authority recommended maintaining by the Bank of own funds to cover additional capital requirements to hedge against the risk arising from foreign currency mortgage loans for households at the level of 0.74 p.p. above the TCR ratio referred to in Article 92 section 1 letter c of the CRR Regulation, which should be composed of, in at least 75% of the Tier I capital (which matches the capital requirement at the level of 0.56 p.p. above the value of Tier I capital which is referred to in Article 92 section 1. letter b of the CRR Regulation) and in at least 0.56% of the Tier I core capital (which matches the capital requirement at the level of 0.41 p.p. above the value of Tier I core capital ratio referred to in Article 92 section 1. letter a of the CRR Regulation). As 31 December 2016, the level of capital adequacy of the Bank was above the levels recommended by the Polish Financial Supervision Authority. 2. BALANCE SHEET As at 31 December 2016, the total assets amounted to PLN 20,602.6 million and were lower by o 0.9% in comparison to the end of year Bank s assets Changes in the structure of assets Item PLN thousand Change [%] Cash and balances with the Central Bank Receivables from other banks Securities held for trading Derivative financial instruments Hedging derivatives Loans and advances to customers Investment securities: available for sale held to maturity Investments in subsidiaries Intangible assets Property, plant and equipment Income tax assets Other assets Total assets

20 As at 31 December 2016, loans and advances to clients had the largest share in the total assets (68.1%). Their share in the total assets value decreased during year by o 1.1 p.p. The second highest share in total assets had investment securities (26.3%). Their share increased by 2.3 p.p. compared to the end of the year Loans and advances At the end of 2016, the carrying amount of loans and advances granted to the Bank s clients amounted to PLN million and decreased by 2.4% in comparison to the end of Item PLN thousand Change [PLN thousand] Change [%] Loans granted to retail clients Loans grated to corporate clients Loans granted to public finance clients Loans grated to other clients Total Loans and advances Other receivables NET LOANS AND ADVANCES GRANTED TO CUSTOMERS In 2016 corporate loans increased by PLN million, i.e. 1.9% whereas public finance loans decreased by PLN million, i.e. 14.8% and retail loans decreased by PLN million, i.e. 3.6%. The change in these positions was a result of the policy related to granting loans with higher margin. Loans and advances to customers segment structure % 53.9% 33.3% 51.6% 13.2% 15.1% Retail customers Corporate customers Public finance customers The share of loans granted to corporate clients in the whole loan portfolio amounted to 53.9%, whereas loans granted to retail customers 32.9%. The major part of loan portfolio represents mortgage loans which carrying amount was PLN million at the end of 2016 compared to PLN million at the end of

21 Item PLN thousand Change [%] Mortgage loans in PLN Mortgage loans in CHF Mortgage loans in EUR Mortgage loans in USD TOTAL MORTGAGE LOANS The share of mortgage loans denominated to foreign currencies in total mortgage loans amounted to 58.3% (58.4% at the end of 2015). The share of CHF mortgages in the whole Bank s net loan portfolio amounted to 9.2% and decreased by 0.1 p.p. as compared to the end of The average base interest rate on loans granted by the Bank: 4.30% in 2016 vs. 4.30% in 2015 for PLN loans, 2.11% in 2016 vs. 2.27% in 2015 for foreign currency loans Loans granted in the reporting period In 2016 the Bank granted loans totaled million (excluding overdraft facilities), which represents 47.7% decrease in comparison to 2015 (measured by the principal at the loan extension date). The major part of loans was granted to corporate clients. Item Change PLN thousand % Corporate loans granted during the year Retail loans granted during the year Public finance sector loans granted during the year LOANS GRANTED TO CLIENTS DURING THE YEAR Loan portfolio quality Bank s loan portfolio quality At the end of 2016 impairment allowances amounted to PLN million and increased by 47.7%, (i.e. PLN million) as compared to the end of The share of impairment allowances in total gross loans granted to customers and banks as at 31 December 2016 was 3.9% and increased by 1.3 p.p. as compared to the end of Item PLN thousand % PLN thousand % Loans and advances which are not impaired, including: Loans and advances which are not past due Loans and advances which are past due Loans and advances having indications of impairment, but not showing the loss of value due to the expected cash flow wind farms Loans and advances having indications of impairment and showing loss of value wind farms Total gross loans and advances to customers and other banks Impairment allowances on loans and advances to customers and other banks, including wind farms Other receivables Total net loans and advances to customers and other banks, of which: clients banks

22 The share of gross impaired loans in the portfolio was 11.1% (including wind farms: 3.8%) as at 31 December 2016 as compared to 7.0% at the end of Equity and total liabilities of the Bank The share of liabilities to customers in total liabilities increased by 6.2 p.p. to 83.0% as at 31 December The share of liabilities due to issue of bank securities decreased (by 7.1 p.p.). The share of Bank s equity in total equity and liabilities amounted to 8.5% as at 31 December The amount of the equity includes share capital increase registered in 12 July Item Change [%] PLN thousand Liabilities to the Central Bank and other banks Derivative financial instruments Derivative hedging instruments Liabilities to clients Liabilities due to issue of bank securities Subordinated liabilities Provisions Other liabilities Total equity TOTAL EQUITY AND LIABILITIES Sources and funding for the Bank s operations Liabilities to customers The main source of financing of the Bank s activities is from the amounts due to customers, including: deposits acquired by the Bank s network of outlets, loans and advances received from international financial institutions, funds obtained from third party donors for lending activities in the form of direct credit facilities, additional payments to interest or capital (the National Fund for Environmental Protection and Water Management, Voivodeship Funds for Environmental Protection and Water Management and the European Fund for the Development of Polish Villages, JESSICA Urban Development Fund). Amounts due to customers as at 31 December 2016 amounted to PLN 17,097.2 million and were 7.1% higher compared with the 2015 year-end. Item Change [%] PLN thousand Corporate customers Retail customers Public sector customers Eco funds Other clients Loans from international financial institutions Funds to be disbursed as loans TOTAL LIABILITIES TO CLIENTS At the end of 2016 the volume of retail deposits amounted to PLN million and increased by 28.5% as compared to the end of As at 31 December 2016 liabilities to corporate customers amounted to PLN million. They decreased by 18.3% as compared to 31 December The liabilities to public finance sector also slightly decreased by 0.8%. 22

23 Liabilities to clients segment structure % 35.1% 0.4% 7.2% 60.2% 0.3% 8.8% 5.2% 50.1% 0.6% 0.4% 4.9% Corporate customers Retail customers Public sector customers Eco funds Other clients Loans from international financial institutions Funds to be disbursed as loans There was a significant decrease in the balance of liabilities under debt securities issued. At the 2016 yearend these liabilities amounted to PLN million, compared with PLN 2,318.1 million at the 2015 yearend, which means a decline of 64.2%. The average base interest rate on deposits acquired through the network of the Bank s branches: 1.93% in 2016 vs. 2.01% in 2015 for PLN deposits 0.36% in 2016 vs. 0.25% in 2015 for foreign currency deposits Information about loans taken and loans agreements signed Information about loans taken as at 31 December 2016: Creditor Loan amount Amount available Curren cy Agreemen t date Maturity date Council of Europe Development Bank, Paris EUR Kreditanstalt für Wiederaufbau, Frankfurt EUR I tranche II tranche European Investment Bank, Luxembourg EUR* Council of Europe Development Bank, Paris EUR* I tranche II and III tranche European Investment Bank, Luxembourg EUR I, II and III tranche Kreditanstalt fur Wiederaufbau, Frankfurt EUR Council of Europe Development Bank, Paris EUR European Investment Bank, Luxembourg EUR Council of Europe Development Bank, Paris EUR European Investment Bank, Luxembourg EUR Total EUR * utilization in PLN or EUR I tranche II tranche III tranche I tranche II tranche III tranche I tranche II tranche III tranche I tranche II tranche