REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. GROUP FOR THE THIRD QUARTER 2017

Transcription

1 REPORT OF THE BANK OCHRONY ŚRODOWISKA S.A. GROUP FOR THE THIRD QUARTER NOVEMBER

2 Contents SUMMARY RESULTS OF THE BOŚ S.A. GROUP Macroeconomic situation Financial results of the Group The balance sheet Group assets Equity and liabilities Ratios Selected operational data of the Group Bank development lines Significant events in Q Factors likely to affect performance at least in the next quarter Segment reporting Non-standard factors and events affecting performance Management Board position on the feasibility of the published forecasts Seasonal or cyclical developments Issuance, redemption and payment of debt securities or equity securities Dividends Transactions with related entities Loan or cash advance sureties or guarantees granted, where the total of running sureties or guarantees is equivalent to not less than 10% of issuer s equity Judicial or administrative proceedings under way Shareholders holding directly or indirectly, through subsidiaries, at least 5% of the total number of votes at Issuer s General Meeting BOŚ S.A. shares held by members of executive and supervisory bodies Other information issuer deems necessary for assessments of its human resources, assets, financial position, financial performance, and changes thereof, and information relevant to issuer Bank Supervisory Board Bank Management Board Major events past this report s publication date Interim consolidated income statement Interim consolidated comprehensive income statement Interim consolidated financial position statement Interim consolidated changes in equity statement INTERIM FINANCIAL STATEMENTS OF BOŚ S.A Interim income statement of the Bank Interim comprehensive income of the Bank Interim statement of financial position of the Bank Interim statement of changes in equity of the Bank I. Information on accounting principles (policy) adopted in preparing the consolidated financial statements II. Comparative data III. Adjustment of prior period errors V. Changes in consolidated contingent liabilities and assets VI. ORGANISATION OF CAPITAL GROUP

3 SUMMARY RESULTS OF THE BOŚ S.A. GROUP As at 30 September, the Bank Ochrony Środowiska S.A. Group is composed of Bank Ochrony Środowiska S.A., the parent entity to its subsidiaries: Dom Maklerski BOŚ S.A. brokerage service, BOŚ Eko Profit S.A., BOŚ Ekosystem sp. z o.o., BOŚ Capital sp. z o.o., as well as MS Wind sp. z o.o., an indirect subsidiary entity. In April the Bank Supervisory Board approved BOŚ S.A. Framework Strategy of Development of BOŚ S.A. for the years The Bank is successfully finishing implementation of the 1 st stage of the Strategy. Its purpose was to recover the Bank and launch key development projects providing potential for major improvement of results in the future. As part of the recovery program, a number of actions were conducted to restructure costs and tighten the spending discipline or improve balance sheet management. In parallel, the group implemented actions to mitigate key risks related to the Bank s operations. In the development area, despite delays, key business projects were selected and started those include a new loan process, affluent customer, preparation of the offer for strategic sectors (including agro-sector) as well as closer cooperation with shareholders (including Prosument II program, customer service points in state forest administration divisions). The restructuring of the Bank and of its balance sheet is generating material financial effects, which is reflected in the Bank s results. During the January-September period BOŚ S.A. Group reported net profit of 56.9 m versus 0.9 m PLN in the same period last year. The remedy programs carried out in the Bank and Capital Group companies resulted in the improvement of the Bank s profitability by increasing the results on banking activities and by reducing operating expenses (after excluding the Bank Guarantee Fund contribution), including costs of personnel benefits. BOŚ S.A. priority objective remains further growth of Bank s profitability. BOŚ S.A. Group improved the results on interest, commissions, dividends, net trading income and income on investment (deposit) securities, while it generated poorer result on foreign exchange and hedge accounting. The total results on the abovementioned items equalled m PLN versus m PLN in the same period in, which represent 20.2% growth. A selection of balance sheet positions and financial ratios: Item 1-3Q 1-3Q Change % PLN 000 Net interest and similar income [1] ,4 Net fee and commission income [2] ,2 Net impairment result [3] ,3 Administrative expense, including: [4] ,4 - BFG contribution and payments ,1 Net profit/loss Item 1-3Q Change PLN 000 in p.p. Interest margin on total assets [1] 1,9 1,5 0,4 Cost of risk [3] -1,4-1,4 0,0 Loans and advances qualifying for posting as impaired and actually impaired 11,4 11,0 0,4 Cost/income (C/I) [4] 64,8 74,6-9,8 Aggregate capital adequacy ratio (solvency ratio) 15,12 14,28 0,8 [1] The Group reported the biggest improvement in the net interest income, which increased by 67.9 m PLN, or 30.4% compared to the same period. The growth of the interest income primarily resulted from reducing interest costs, which were cut by 87.0 m PLN, or 29.1%. These costs were decreased by: a) reducing the costs of collected deposits and retail accounts by 32.8 m PLN, or 20.7% and costs of corporate deposits by 14.9 m PLN, or 30.4%. Interest costs were reduced by cutting interest on deposits, along with the drop of the deposits volume. An average basic interest rate on PLN deposits 3

4 collected by Bank branch network in three quarters this year dropped down to 1.60% from 1.96% in the same period last year. b) reducing the interest costs of financial instruments own derivatives by 41.0 m PLN, or 55.1%; The costs were cut mainly as a result of repurchase, in May, of high-cost Eurobonds, repurchase of M series bonds in September last year and repurchase of own G-series subordinated bonds in February this year. Improved net results translated into a high interest margin, which in the January-September period grew up to 1.9%, from 1.5% in and 1.3% in [2] The Group increased its net fee and commission result by 1.0 m PLN, i.e. 1.2% compared to the same period last year. This growth was reported primarily in the net commission income on securities transactions and amounted to 8.9 m PLN, i.e. 19.8%. [3] The ratio of net impairment write-downs (risk cost ratios) for the last 12 months to average loans and advances in this period totalled 1.4%. The key factor that contributed to the cost of risk was the posting of 97.9 m PLN in impairment write-downs on the portfolio of wind farm loans at the end of. [4] BOŚ S.A. also initiated remedy actions to reduce operating costs. The costs of BOŚ S.A. Group employee benefits were reduced by 4.1% compared to the same period, by among other things reducing the number of employees in the Bank by 10.6% (9% in the entire Group). As a result of the BFG contribution 10.4 m PLN higher the total administrative costs of the Group increased by 4.0 m PLN, or 1.4% compared to the same period last year. The total contribution set by the BFG (Bank Guarantee Fund) for the compulsory restructuring of banks for of 24.7 m PLN was posted to 1Q costs. As a result of the income growth, as well as owing to the cost optimisation programs, BOŚ S.A. Group improved its cost/income ratio (C/I) reaching the level of 64.8%, versus 74.6% in and 88.3% in According to the Strategy, BOŚ S.A. continued to develop operations in the area of financing proecology projects. As at 30 Sep. the pro-ecology loan balance totalled 4,552.6 m PLN. Loans granted for actions related to natural environment protection and activities supporting sustainable development constitute 34,3% of the Bank s total loan balance, compared to 33.5% as at the end of Q3. The total amount of contracts concluded from 1 January through 30 September for the financing of pro-ecological activities equalled m PLN. Those loans were granted mainly to finance companies operations in the area of environment protection. BOŚ S.A. Group has a portfolio of loans to finance wind farm projects amounting to a total of 2,056.8 m PLN gross (1,944.3 m PLN net), which is 15% of Bank s total (net) loan portfolio. In, market regulations applicable to RES (renewable energy sources) were amended, which included an amendment of the act on renewable energy sources which came into force on 15 July and the act on wind farm investments which came into force on 15 July. Due to a significant change of market conditions affecting the quality of the wind farm portfolio, the Bank identified risks involving potential consequences of negative scenarios of situation developments in this sector and consequently, of potential deterioration of the loan portfolio quality (in the short and long run) resulting from negative impacts of the regulatory framework. Like in the previous period, to mitigate potential intensification of the negative impact of the wind farm portfolio on the total loan portfolio s quality, the Bank continued to perform actions to structure concluded transactions. In cooperation with financial entities and borrowers, a joint position was developed to reduce the costs of operations of wind farms and to additionally capitalise the project or acquire further endorsements from sponsors and affiliated companies. As Energa Obrót S.A., in September this year, found contracts for the purchase of green certificate concluded by Energa Obrót between 2007 and 2013 null and void, the Bank closely cooperates with debtors affected by actions undertaken by Energa Obrót S.A. along with other banks participating in syndicates. Due to the complexity and multiple dimensions of the dispute, in cooperation with legal counsels of Customers and the Bank, various further scenarios are being considered. The Bank has not identified the need to make adjustments to wind farm write-downs as at 30 September (described in greater detail in point 6). 4

5 1. Macroeconomic situation In Q3 the development of the Polish economy remained higher. In the July-September period, the growth of industrial manufacturing output reached 6.3% y/y versus 4.2% y/y in Q2, construction output increased up to 19.4% y/y versus 8.6% y/y in Q2, while retail sales grew up to 7.9% versus 6.7% in Q2. In Q2 the labour market continued to pick up, as unemployment decreased, salary dynamics rose, and employment dynamics in the enterprise sector remained higher and stable. In September registered unemployment dropped down to 6.8% versus 8.3% in the same period, while the number of people out of job at the end of Q3 decreased by 207,000 compared to the same period last year. After CPI in Q2 dropped down to 1.5% in June, Q3 brought an increase of the inflation rate up to levels reported in Q1. In September CPI totalled 2.2% y/y. The main reason for the inflation growth was higher dynamics of food prices (mainly growth of prices of processed food), growth of core inflation (CPI excluding food and energy prices) and electrical energy carriers. In Q3 the Monetary Policy Council (RPP) upheld interest rates at stable levels, keeping the NBP reference rate at 1.5%. The RPP resolved to follow the previous line of stabilising the parameters of monetary policy in the nearest quarters. As NBP rates were stable, lending interest rates on the interbank market was stable as well, with WIBOR 3M at 1.73%. 5

6 In Q3 good moods generally prevailed in the global financial market, however, strongly positive prospects in Europe (observed after presidential elections in France) slowed down and foreign capital inflows to emerging markets slightly weakened after strong results in Q2. At the same time, good feedback from the material economy and no premises for permanent curbing of inflation in the developed economies resulted in greater uncertainties about prospects of monetary policies of central banks, which further translated into greater volatility of asset prices in the global financial market. In these global conditions, quotations of Polish financial assets moved without any clear trend. Over the third quarter the Polish zloty gained against the US dollar (0.9%) and Swiss frank (2.2%) while weakened against the Euro (2%). In Q3 WIG share index increased (4.1%) while prices of long-term PLN treasury securities slightly dropped. 2. Financial results of the Group 2.1. The balance sheet Item Q3 Q2 1-3Q 1-3Q Change 3Q17/ 1-3Q17/ PLN 000 2Q17 1-3Q16 Continued operations Interest and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net fee and commission income Dividend income Net trading income Result on investment (deposit) securities x 55.4 Ne hedge accounting income Foreign exchange result Other operating income Other operating expense Net impairment gains/ losses Administrative expenses Operating income Profit/loss before tax Income tax expenses NET PROFIT / LOSS Over three quarters of BOŚ S.A. Group reported net income of 56.9 m PLN versus compared to 0.9 m PLN in the same period last year. 6

7 During three quarters of BOŚ S.A. Group generated income on banking activity 20.2% higher than in the same period last year. This result equalled m PLN versus m PLN in the same period in. BOŚ S.A. Group improved its net results on interest, commissions, dividends, trading and investment (deposit) securities, and reported lower results on foreign exchange and hedge accounting. Item Q3 Q2 1-3Q 1-3Q Change % 3Q17/ 1-3Q17/ PLN 000 2Q17 1-3Q16 Total interest and similar income. on account of: Loans and advances. of which from: Banks Clients. incl.: corporate retail public finance entities other Financial instruments. of which: available for sale held to maturity held for trading Total interest and similar expense. on account of: Deposits taken. bank accounts. from: Banks Clients corporate retail public finance entities pro-ecology funds other x Loans and advances from: Banks Clients Funds entrusted to use for lending Financial instruments debt securities from own issue Hedging transactions NET INTEREST INCOME After three quarters BOŚ S.A. Group generated interest income 30.4% higher than in the same period in. Higher interest income resulted from the fact that the cost decrease outpaced income decrease. Interest and similar income decreased by PLN 19.0 m, or 3.6%, in three quarters of compared to the same period last year. Interest income from loan portfolio of public finance entities dropped by PLN 6.4 m, or 13.2% and retail customers by PLN 5.4 m, or 4.4% mainly as a result of a smaller loan volume. Average interest rate of loans granted by the Bank in three quarters : - in PLN totalled 4.30%, which means it remained at the same level as in this period in, - in foreign currencies totalled 2.24%, versus 2.11% in three quarters in. Income from financial instruments was lower by PLN 3.5 m, or 3.4%. Interest expense dropped by PLN 87.0 m, or 29.1%. This decrease is primarily owed to lower costs of collected deposits and bank accounts, which dropped by PLN 50.3 m, or 22.8%. The cost of collected deposits and accounts of the retail segment dropped by PLN 32.8 m, or 20.7%, mainly as a result of lower deposit rates but also lower deposit balance. The cost of corporate customers deposits dropped by PLN 14.9 m, or 30.4%, due to the decrease of the average deposit balance. Average interest rate of deposits collected by Bank branches in three quarters in : - in PLN totalled 1.60%, versus 1.96% in three quarters, - in foreign currencies totalled 0.63%, versus 0.34% in three quarters. 7

8 Interest expenses of financial instruments debt securities from own issue dropped by PLN 41.0 m, or 55.1%, mainly as a result of repurchasing, in May, high-cost Eurobonds, repurchasing in September M-series bonds and repurchasing in February own subordinated G-series bonds. Following the growth of net interest income, and the decrease of the balance sheet total, interest margin on total assets, calculated as a ratio of interest result to average asset balance, increased from 1.5% in up to 1.9% after three quarters. The Group increased its net fee and commission income by 1.2% in three quarters compared to the same period last year. Net fee and commission income increased by PLN 3.8 m, or 3.7% mainly as a result of PLN 8.9 m, or 19.8% higher income from securities transaction fees, and lower income from: customer account maintenance fees by PLN 0.7 m (or 2.5%), BFG commissions by PLN 4.7 m, or 95.2% and commissions for letter of credit guarantees lower by PLN 0.3 m, or 9.9%. Item Q3 Q2 PLN Q 1-3Q Change % 3Q17/ 1-3Q17/ 2Q17 1-3Q16 Total fee and commission income Fees for securities transactions Client account maintenance fees. other settlement operations in domestic and international transactions Commissions on loans Commissions on guarantees and letters of credit Commissions on BFG contributions x Portfolio management fees and other management fees Other fees Total fee and commission expense Brokerage service fees Payment card fees Commissions paid to other banks in cash operations Current account fees Euronet service fees Commissions paid for loans and advances Other fees NET FEE AND COMMISSION INCOME Fee and commission expense increased by PLN 2.9 m, or 12.5% mainly as a result of brokerage service fees which were PLN 2.7 m, or 19.4% higher, despite a slight change of payment card fees. In the analysed period the dividend income increased by PLN 0.5 m, or 9.7%. Dividend income consists of dividend paid by Kemipol sp. z o.o., in the amount of PLN 5.2 m. In the same period last year the Bank received PLN 4.8 m from Kemipol sp. z o.o. and PLN 0.3 m from WODKAN Przedsiębiorstwo Wodociągów i Kanalizacji S.A. Net trading income the BOŚ S.A. Group posted in the January-September period was PLN 45.6 m, compared with PLN 39.7 m the year before, mostly as a result of a higher trading activity income of Dom Maklerski BOŚ S.A. from CFD contracts for difference operations, and on other financial derivative instruments. Bank s trading income totalled PLN 18.7 versus PLN 19.0 m the year before. This was primarily generated by the Bank s income from FX Swap deals concluded to finance FX loan portfolio. The trading income includes also IRS transactions with corporate customers, Bank s own transactions in the interest rate market and revaluation of open FX Forward deals. 8

9 The Group s net investment securities income totalled PLN 6.8 m after a subsidiary of the Bank disposed of stocks of a GPW (Warsaw Stock Exchange) listed company while also releasing previous write-downs. Income from the foreign exchange position was PLN 13.8 m, which was 14.8% lower than in the same period last year mainly due to the lower revaluation of forward and spot instruments and weaker customer transaction results. In the first three quarters of, compared with the same period the year before, net impairment result was better and totalled PLN m, versus PLN m in the same period the year before. The balance of write-offs for loans granted to corporate clients equalled PLN 59.0 m versus PLN 53.1 m in the same period, and the balance of the retail segment totalled PLN 12.3 m versus PLN 30.0 m. The net impairment result in the corporate segment was mainly contributed by posting additional write-offs for individual significant corporate customers. In the retail segment, the writeoffs were posted for mortgage-secured loans and for risk growth in the cash loan portfolio. Administrative expenses of the Group grew by PLN 4.0 m, or 1.4%, compared with the same period last year, primarily because the Bank s BFG contribution had increased by PLN 10.4 m. The BFG contribution on the mandatory bank restructuring fund which was set to the amount of PLN 24.7 m for the whole year of, was recognised with Q1 costs. Item Q3 Q2 1-3Q 1-3Q Change % 3Q17/ 1-3Q17/ PLN 000 2Q17 1-3Q16 Employee benefits Administrative expense. of which: material costs taxes and duties contribution and payments to Bank Guarantee Fund (BFG) contribution and payments to Polish Financial Supervision Authority (KNF) contribution to cover Financial Ombudsman expenses contribution to support the Chamber of Brokerage Houses x - other x Amortization and depreciation of: fixed assets intangible assets TOTAL ADMINISTRATIVE EXPENSE Employee benefits expense of the BOŚ S.A. Group in Q3 were 4.1% (PLN 5.3 M) below the same period, as employment was reduced 10.6% at BOŚ S.A. and 9.0% at the Group. Item 30 Sep. FTEs 31 Dec. 30 Sep. 30 Sep vs. 31 Dec. Change % 30 Sep. vs. 30 Sep. Employment BOŚ S.A Employment. subsidiaries TOTAL EMPLOYMENT, BOŚ S.A. GROUP Group assets The Group s balance sheet total as of 30 Sep. was PLN and was o 6.4% below the balance as at 31 Dec.. 9

10 Changes to Group asset structure Item 30 Sep. 31 Dec. PLN 000 Change % Cash and balances with the Central Bank Amounts due from other banks Trading securities Derivative instruments Hedging derivative instruments Loans and advances to clients Investment securities: available for sale held to maturity Assets for sale - - x Intangible assets Property and equipment Income tax assets Other assets TOTAL ASSETS As at 30 September the majority of the assets, 65.2%, was constituted by loans and advances granted to clients. Their share in total assets decreased since the beginning of by 1.8 p.p. What increased was mainly the share of cash and balances with the Central Bank and amounts due from other banks Loans and cash advances to clients Item 30 Sep. 30 June 31 Dec. Change % PLN Sep. vs. 30 June 30 Sep. vs. 31 Dec. Loans to retail clients Loans to corporate clients Loans to public finance entities Loans to other clients x Total loans and advances Other receivables NET LOANS AND ADVANCES TO CLIENTS Group s loans and advances to clients totalled PLN m at the end of Q3 and was 8.9% lower than the value as of 31 Dec.. By end Q3, loans and advances volume had decreased 8.0% in the retail segment, 9.1% in the corporate segment, and 10.2% in the public finance segment, from 31 December. 10

11 Loans and cash advances to clients by segment The corporate segment held its biggest share in total loans, at 53.5% compared with 53.7% at the end of. Loans in the retail segment grew up to 33.4% of the total loans. The total amount of the retail segment loans was PLN m at the end of Q3 versus PLN m at the end of. Housing loans accounted for the biggest position in total loans with the balance sheet value of PLN m at the end of Q3 versus PLN m at the end of. 30 Sep. 30 June 31 Dec. Change % Item 30 Sep. 30 Sep. vs. 30 vs. 31 June Dec. Housing loans in PLN Housing loans in CHF Housing loans in EUR Housing loans in USD TOTAL HOUSING LOANS The biggest portion of housing loans 55.9% - is constituted by loans in foreign currencies (58.3% at the end of ). The share of CHF housing loans in the total loan portfolio of the BOŚ S.A. Group (net) is gradually decreasing and totalled 8.6% versus 9.2% at the end of. Pro-ecology loans BOŚ S.A. continued to develop the its operations in the market of financing pro-ecological projects. The pro-ecology lending balance as at 30 Sep. totalled PLN m. The share of its portfolio of loans granted to support activities contributing to environmental protection and supporting sustainable development in the total loan portfolio accounted to 34.3% of the Bank s total loan portfolio (versus 33.5% as at 30 Sep. ). 11

12 Pro-ecology loans, gross, by segment (principal value) Item 30 Sep. 30 June PLN Dec. 30 Sep. vs. 30 June Change % 30 Sep. vs. 31 Dec. Pro-ecology loans to retail clients Pro-ecology loans to corporate clients Pro-ecology loans to public finance entities PRO-ECOLOGY LOANS GROSS Contracts concluded from 1 Jan. through 30 Sep. to finance pro-ecology undertakings was PLN m. New pro-ecology loans were granted primarily to corporate clients. The loans were intended mainly for financing of operations of the companies in the environment protection area. Pro-ecology loan sales, by customer segment (principal value) Item 1Q-3Q 1Q-3Q Change % PLN 000 1Q-3Q vs. 1Q-3Q New loans to retail clients in the period New loans to corporate and public finance clients in the period NEW LOANS TO CLIENTS IN THE PERIOD Loan portfolio quality Item 30 Sep. 31 Dec. PLN 000 % PLN 000 % Loans and advances not impaired. of which: Loans and advances not past schedule Loans and advances past schedule Loans and advances qualifying for posting as impaired yet not recognised as impaired because of cash flow estimates. of which:*\ wind farms Loans and advances qualifying for posting as impaired and actually impaired. of which: wind farms Total loans and advances to clients and other banks before adjustments Write-downs on loans and advances granted to clients and other banks. of which: wind farms Other receivables Total loans and advances to clients and other banks.net. of which: clients banks At the end of Q3 impairment write-downs amounted to PLN m (of which PLN m applied to wind farms). The total write-downs increased by 0.7% (or PLN 3.8 m) versus end of. The ratio of write-downs to total value of loans and advances granted to clients and banks as at 30 Sep. totalled 4/3%, which means 0.4 percentage point growth compared to the end of. 12

13 Total loans and advances with impairment accounted for 11.4% of the total loan portfolio as of 30 Sep. and was 0.4 p.p. higher than in. Item 30 Sep. PLN June 31 Dec. 30 Sep. vs. 30 June Change % 30 Sep. vs. 31 Dec. LOANS GRANTED FOR WIND FARMS BEFORE ADJUSTMENTS without impairment indications impairment write-downs identified impairment indications impairment write-downs identified impairment impairment write-downs NET LOANS GRANTED FOR WIND FARMS At the end of the third quarter the amount of loans granted for wind farms before adjustments totalled PLN m. The balance of impairment write-downs totalled PLN m. These writedowns were posted mainly in as a result of the materialised risk that had been indicated by the Bank before, involving the financing of wind farm projects. The reason for poorer profitability of wind farm projects and consequently, deterioration of the quality of loans granted by the Bank until 2015 was the change of regulations including amendment to the act on renewable energy sources which came into force on 1 July and the act on wind farm investment projects which came into force on 15 July resulting in the decrease of prices of green certificates and the growth of fiscal charges and, as a result, the decrease of profitability of the investment projects down below the level provided for in business plans Equity and liabilities Changes in total equity and liabilities structure of the Group Amounts owed to clients, at 80.0%, was the biggest position in total assets of the Group at end Q3, their share having shrunk 2.2 p.p. from the 31 December balance. Subordinate liabilities share decreased 0.2 p.p. over the same period, while amounts owed to the Central Bank and other banks increased by 1.4 p.p. Item 30 Sep. 31 Dec. PLN 0000 Change % Amounts owed to Central Bank and other banks Derivative financial instruments Hedging derivative instruments Amounts owed to clients Debt securities issued Subordinate debt Provisions Income tax liabilities Other liabilities Total equity TOTAL EQUITY AND LIABILITIES

14 Liabilities of the Group The Group financed its activities mostly with liabilities owed to clients, specifically: cash deposits taken by the Bank outlets, loans and advances from international financial institutions, cash received from external donors to finance lending in the form of direct lines or principal subsidies (the National Fund for Environmental Protection and Water Management (Narodowy Fundusz Ochrony Środowiska i Gospodarki Wodnej), Regional Funds for Environmental Protection and Water Management (Wojewódzkie Fundusze Ochrony Środowiska i Gospodarki Wodnej), European Fund for the Development of Polish Villages (Europejski Fundusz Rozwoju Wsi Polskiej), and JESSICA (Joint European Support for Sustainable Investment in City Areas). Item 30 Sep. 30 June PLN Dec. 30 Sep. vs. 31 Dec. Change % 30 Sep. vs. 31 Dec. Corporate clients Retail clients Public finance entities Environmental funds Other clients Loans and advances received from international financial institutions Money supplied by environmental funds for lending purposes TOTAL AMOUNTS OWED TO CLIENTS BOŚ S.A. Group liabilities to clients were at PLN m on 30 Sep., 8.9% down from end. Amounts owed to clients, by segment 3. Ratios Item 1Q-3Q Change p.p. % 1Q-3Q / Return on equity (ROE) 1-0,2-3,7 3,5 Return on assets (ROA) 2 0,0-0,3 0,3 Interest margin on total assets 3 1,9 1,5 0,4 Cost of risk4-1,4-1,4 0,0 Cost / income (C/I) 5 64,8 74,6-9,8 1) net profit of the last four quarters to average equity at beginning and end of the four quarters, 2) net profit of the last four quarters to average assets at beginning and end of the four quarters, 3) net annualised interest income to average assets at the beginning and end of the period, 4) ratio of net impairment write-downs for the last 12 months to averaged loans and advances balance in that period, 14

15 5) administrative expense and other operating expense to net interest income, net fee and commission income, dividends received, net trading income, net securities trading, net hedge accounting, net FX income and other operating income. Interest margin on total assets, calculated as the (annualised) ratio of net interest income to averaged assets balance at the beginning and end of the period, increased markedly, from the level of 1.5% in the entire up to the level of 1.9% for three quarters, primarily in effect of a 30.4% increase of net interest income at the BOŚ S.A. Group, the balance sheet total dropped by 6.4%. C/I ratio amounted to 64.8%. Higher C/I ratio resulted from growing income. Income from banking activity increased by PLN 75.2 m, or 20.2%. The costs of employee benefits dropped by 4.1%, however due to the BFG contribution, PLN 10.4 m higher, the total administrative expense rose by 1.4%. Under provisions of art. 92 of the CRR Regulation, the Group is required to maintain at all times a total capital ratio at not less than 8%. Tier 1 capital ratio and Common Equity Tier 1 capital ratio should be kept at least at 6% and 4.5%, respectively. Capital ratios were posted at the following levels: Item 30 Sep. 31 Dec. Change p.p. % 30 Sep. vs. 31 Dec. Aggregate capital adequacy ratio (solvency ratio) Tier In 2006, in administrative proceedings connected with a request from the NFOŚiGW [National Fund for Environmental Protection and Water Management] to get permission for exercising voting rights from the Bank shares, the NFOŚiGW undertook to the KNF [Polish Financial Supervision Authority] to maintain the Bank s capital adequacy ratio (now referred to as aggregate capital adequacy ratio) at a level not less than 12%. The administrative proceedings in which the NFOŚiGW pledged the promise to the KNF was instituted in connection with the NFOŚiGW buying back the Bank shares from Skandinaviska Enskilda Banken. The Bank keeps to the capital requirements resulting from the KNF instruction in its financial planning and in the Bank strategy. On 22 October 2015 the KNF advised banks of the establishment of a backing buffer to boost capital requirement ratios by 1.25 p.p. In effect, as of 1 January the KNF recommended minimum capital requirement levels were up to 10.25% for Tier I capital and 13.25% for total capital requirement TCR. On 29 December the KNF recommended that the BOŚ S.A. Group maintain its own funds to provide for an additional capital requirement against risk resulting from currency-denominated mortgage loans for households, at a level of 0.72 p.p. above the total capital ratio referred to in art. 92 subpara. 1 letter c in the CRR Regulation, which should be composed at least in 75% of Tier I capital (corresponding to capital requirement at a level of 0.54 p.p. above the value of Tier 1 capital ratio referred to in art. 92 subpara. 1 letter b in the CRR Regulation) and at least in 56% of Common Equity Tier 1 capital ratio (corresponding to capital requirement at a level of 0.40 p.p. above the value of Common Equity Tier 1 capital ratio referred to in art. 92 subpara. 1 letter a in the CRR Regulation). At 31 September, the BOŚ S.A. Group maintained its capital adequacy levels above the respective KNF recommendations. 15

16 4. Selected operational data of the Group Item 30 Sep. 30 June PLN Dec. 30 Sep. vs. 30 June Change % 30 Sep. vs. 31 Dec. BANK OCHRONY ŚRODOWISKA S.A. Number of clients Number of retail clients Number of corporate and public finance entity clients Number of clients using electronic channels Number of client accounts* Payment and credit cards total Number of outlets DOM MAKLERSKI BOŚ S.A. Number of securities accounts of which online accounts Number of outlets * including savings accounts 5. Bank development lines In April, the Bank Supervisory Board approved a Framework Strategy of Development of BOŚ S.A. for the years With the Strategy approved, work was started on its operationalisation. Towards the end of June the Bank Management Board gave its general approval of the envisaged strategic initiatives. The approved list of strategic initiatives features undertakings designed to raise the effectiveness of functioning of the Bank, specifically: cost optimisation oriented activities conducive both to a restructuring of the Bank and to the provision of financial backing of efforts connected with boosting earnings. Initiatives connected with cost optimisation include efforts to ensure, among other things, cost optimisation in personnel expense management, service contract reduction or renegotiation, consolidation and optimisation of infrastructure and IT&N licences, and renegotiation of rental costs of sales network facilities moves ensuring development of the Bank, which implies endeavours to win new clients as well as to boost earnings. Development of the Bank is to be warranted by activities in areas such as: - expanding co-operation with of the Bank with Lasy Państwowe national forest management authority and its partners by improving the product offer for availability and diversity, taking advantage of the co-operation potential of companies in the BOŚ S.A. Group, - boosting sales of the Bank offer to affluent clients by setting up a separate business segment of affluent clients and establishing a structure of dedicated advisors offering suitable quality service and individual approach adequate to the needs and potentials of afluent clients, - building effective and modern electronic banking trough implementing a modern internet and mobile banking systems and a platform to manage sales processes and state-of-the-art customer service in an omni-channel architecture, - developing a comprehensive offer of products for corporate clients, by adjusting the product offer to the needs of selected industries and segments through the identification of product gaps and subsequently their elimination while highlighting the specialisation of the Bank in financing and supporting of specific industries which are prioritised in the approved Strategy, intensification of activity in small and medium enterprises segment. - developing the offer of pro-ecology products in co-operation with the National Fund for Environmental Protection and Water Management (NFOŚiGW) and its counterparts in the regions 16

17 - implementing a new loan process which will embrace: new, optimised loan processes for retail customers and institutional (ORD and ORK), new risk rating models for institutional clients, new standardised document generation processes, - changing the call center business model. In Q3 the Bank continued to put in place the assumptions underlying the adopted strategic initiatives. 6. Significant events in Q3 Awards and honorary mentions Gazeta Finansowa magazine, in its special supplement Biznes Raport awarded a distinction : - Konto Elastyczne (Flexible Account) among the Best Products for SME "Turbiny Polskiej Gospodarki", - BOŚ Factoring (recourse factoring, reverse factoring) "Turbiny Polskiej Gospodarki". BossaFX platform once more took the first place in bankier.pl website s ranking of forex brokers according to investment results of clients earned in the Forex market. Activities in the area of corporate and public finance clients The strategy the Bank pursues in the area of corporate banking involves changing the profile of conducted operations from a bank specialising in long-term financing of investment project towards a bank also servicing Clients regular operations and financing Clients trading needs, including factoring. Within this area there are two key client segments (with particular focus on Clients with an ecological profile): a corporate clients segment and a public finance entities segment. The Bank concentrates on clients of the corporate segment characterised by higher profitability and wider product ranges compared to the public finance entities segment. By fulfilling the assumptions of the Strategy, the Bank increased the sales of working capital loans by 11% y/y. The Bank also increased the share of working capital loans in its total sales figures from 68% in up to 72% in the January-September period (by the number of loan products granted) and from 53% up to 73% (by the amount of the granted loans), respectively. Within the Corporate Banking Area the Bank is building two separate subsegments: Small and Medium Enterprises subsegment, Large Enterprises subsegment. The sector of small and medium enterprises, or SME, remains one of BOŚ S.A. s largest market segments. More intensive operations within SME will allow the Bank to curb concentration. An average balance of the granted loan dropped by nearly 20%, down to PLN 2.6 m. The Bank also increased the share of loans up to PLN 5 million from 29% in up to 35% in the January- September period (by the total value of the granted loans). The number of accounts maintained for corporate clients increased by 4% and the number of transfers executed by Clients by nearly 20%. In Q3 the Bank continued activities undertaken in the specialised Corporate Client Support Call Center. The Bank is gradually reducing the volume of duties assigned to Account Managers. The Support Center executes the following customer instructions: domestic transfers, international transfers, cash request collection, ordering banking documents, e-banking instructions, opening time deposits, handling bank account statements, complaint processing. In September 1,800 contacts were made, which is more than planned by the end of. The Bank continued to sell loans financing current and investment operations, including pro-ecology activity, each time tailoring the loan transaction terms and conditions to the Client s needs. 17

18 Development of brokerage services In Q3 investment activities of Dom Maklerski BOŚ S.A. in the regulated stock market remained at the level of the same period last year. In session transactions the Company generated turnover 0.3% lower than in Q3. Such a decrease was also noted on the futures market (by 11.3% y/y). In the NewConnect market, Dom Maklerski BOŚ S.A. increased its turnover figures in Q3 by 0.4% y/y. On the WSE (Warsaw Stock Exchange) market, after three quarters Dom Maklerski BOŚ S.A. strengthened its market position. In session transactions the Company s share was 4.92% of the market, which was higher than in the same period last year (4.43%). After three quarters of this year, on the futures market Dom Maklerski BOŚ S.A. remained the market leader with a share of 22.78%. The company also held its runner-up position on the NewConnect market, with a share of 15.08%. In Q3 the Company actively participating in the processes of issuing securities on the public market. Dom Maklerski BOŚ S.A. acted as the issue agent for the issue of L-series stocks of PZ Cormay S.A. and stocks of XTPL S.A. and Cherrypick Games S.A. and was a marketer of F-series stocks of Intersport S.A. In the 3 rd quarter of Dom Maklerski BOŚ S.A. in its offer included investment funds available on Bossafund platform another Investment Fund Company, or TFI - Quercus Towarzystwo Funduszy Inwestycyjnych S.A. This is the 23 rd TFI fund in the offer of Dom Maklerski BOŚ S.A. In the past quarter BossaFX accounts gained a new functionality protection from a negative balance. It is to protect investors accounts against extraordinary market events that may result in a rapid deterioration of market turnover liquidity. In the ranking of forex brokers of Bankier.pl website, measured by the investment results of clients on the Forex market, BossaFX platform once more took the first place. Development of factoring In Bank Ochrony Środowiska S.A. factoring is handled by a state-of-the-art, specialised online system called BOŚ Faktor, which gives Clients full control of their receivables and enables 24/7 access to the Bank. The system is dedicated to automatic processing of factoring transactions. At the end of Q3 factoring transaction turnover in BOŚ S.A. reached PLN m. The Bank closed the 3 rd quarter with a factoring market share of approx. 2%. In Q3 BOŚ S.A. factoring division handled 105 factoring contracts and contractors. Retail clients segment The Bank s retail market area comprises the segments: individual clients (including VIPs) and micro businesses, housing communities, and nongovernment organisations and other non-commercial institutions (NGOs). To retail customers, Bank s largest client group, BOS S.A. offers an all-embracing range of services and a wide spectrum of pro-ecology products financing ecological solutions, and also basic products and services available on the Polish banking market (bank accounts, settlement products, payment cards, services and products for investing surplus cash, electronic banking services and loan products) plus the offer and service process for Private Banking clients provided by specialised Account Managers. In Q3 the Bank continued its activity in the retail client segment by modifying the deposit offer in order to adjust to the changing external conditions, on one hand, and to fulfil business and liquidity needs as well as to expand the investment offer by adding further closed-end investment funds (in 18

19 particularly, for VIP clients), on the other. The Bank collected subscriptions to investment certificates of the following funds: Agio Nieruchomości Komercyjnych FIZ AN (commercial real estate), Subfundusz ASZ Rynków Zagranicznych (foreign markets) managed by ALTUS TFI S.A., Subfundusz ASZ Rynku Polskiego (Polish market) managed by ALTUS TFI S.A., Altus Niestandaryzowany Sekurytyzacyjny Fundusz Inwestycyjny Zamknięty Wierzytelności (non-standardised closed-end investment fund) managed by ALTUS TFI S.A., IPOPEMA Global Bonds FIZ and Opoka Omega FIZ Subfundusz Opoka Alfa. The Bank continued to develop the offer of open investment funds to diversify solutions available to the client, tailored to individual investment needs and acceptable investment risk profile. It also achieved its business objective (including the Affluent Customer project) to increase the product saturation of clients and to increase the sales income in the retail client segment, particularly VIP. The Private Banking Center actively cooperated with the Warsaw Sales Team of Dom Maklerski BOŚ S.A., which, in its structures, has Private Banking Account Managers that offer comprehensive services to VIP clients (closely cooperating with Dom Maklerski BOŚ S.A.). Amounts owed to retail clients Actions undertaken by the Bank in Q3 regarding deposit products for retail clients were focused on: 1) Building permanent relations with Clients by promoting those Customers who actively use savings and clearing accounts as the foundation of the Client-Bank relationship, 2) Caring for the optimisation of costs of the deposit portfolio and continuous adjustment to the changing macroeconomic environment, 3) Reducing the balance of the Retail deposits in accordance with the Bank s liquidity needs. The major deposit products for retail customers that built the deposit balance in included: Current accounts, including personal accounts with the basic EKOkonto bez Kosztów account and savings accounts with the new EKOkonto Oszczędnościowe PLN account, Promotional time deposits: Ekolokata Korzystna, EKOlokata SUPERprocentująca, EKOlokata Wysoko Procentująca, EKOlokata z Bonusem, EKOlokata na Lata and EKOlokata 5 na 5, FX time deposit: EKOlokata z Frankiem in CHF. In Q3 the Bank consistently pursued the following deposit policy objectives: 1) diversifying the risk of excessive cumulation of maturing balances with a possible outflow of funds at a short time by maintaining 4, 6, 9, 12 and 24-month products in the offer and introduction of a new savings account, 2) promoting multi-product Clients: in the course of designing its offer of term deposits the Bank introduced solutions allowing for offering higher prices to Clients taking advantage of the Bank offer over and above the term deposits (with emphasis on active accounts, which are conducive to Client establishing strong ties to the Bank), 3) establishing standing relations with Clients through actions likely to boost deposit renewability levels, 4) seeking to ensure a regular rise in level and growth of deposits of current retail clients, which facilitates building of stable and high retail term deposit level 5) increasing balances of funds kept on current accounts, which helped lower the cost level of the balance as a whole 6) reducing costs by regularly changing the interest rates of term deposits and savings/deposit accounts, 7) reducing the balance of deposits of the Retail Market Area, according to Bank s liquidity needs. The deposit offer for institutional clients (microbusinesses, housing communities and NGOs), due to the variety of deposit periods (from O/N deposits to 12-month term deposits), the type of interest rate (fixed, variable), deposit form (online, branch), nature of the deposit (standard, negotiable) was not modified. In May the Bank changed the interest rate on current accounts and term deposits maintained for institutional customers. The purpose of the changes was to: adjust the offer to changing market interest rates, reducing interest expense generated by the portfolio of deposits of the microbusiness, housing 19