Annual report 2013 of mbank S.A. Group

Transcription

1 Selected financial data The selected financial data are supplementary information to these Consolidated Financial Statements of for in PLN 000 in EUR 000 Year ended Year ended Year ended Year ended restated restated Annual report 2013 of mbank.pl I. Interest income II. Fee and commission income III. Net trading income IV. Operating profit V. Profit before income tax VI. Net profit attributable to Owners of mbank S.A VII. Net profit attributable to non-controlling interests VIII. Net cash flows from operating activities ( ) ( ) IX. Net cash flows from investing activities ( ) ( ) (34 902) (51 836) X. Net cash flows from financing activities ( ) ( ) ( ) (96 075) XI. Net increase / decrease in cash and cash equivalents ( ) ( ) XII. Basic earnings per share (in PLN/EUR) XIII. Diluted earnings per share (in PLN/EUR) XIV. Declared or paid dividend per share (in PLN/EUR) 10, w tys. zł Stan na dzień w tys. EUR Stan na dzień przekształcony przekształcony I. Total assets II. Amounts due to the Central Bank III. Amounts due to other banks IV. Amounts due to customers V. Equity attributable to Owners of mbank S.A VI. Non-controlling interests VII. Share capital VIII. Number of shares IX. Book value per share ( in PLN/EUR) 242,55 227,69 58,49 55,69 X. Capital adequacy ratio 19,38 18,73 19,38 18,73 The following exchange rates were used in translating selected financial data into euro: for items of the consolidated statement of financial position exchange rate announced by the National Bank of Poland as at 31 December 2013: EUR 1 = and 31 December 2012: EUR 1 = PLN for items of the consolidated income statement exchange rate calculated as the arithmetic mean of exchange rates announced by the National Bank of Poland as at the end of each month of 2013 and 2012: EUR 1 = PLN and EUR 1 = PLN respectively. mbank S.A. ul. Senatorska 18, Warszawa tel , fax

2 Corporate Responsibility of mbank S.A.

3 Table of content Letter of the President of the Management Board of mbank S.A. to the Shareholders 2 Letter of the Chairman of the Supervisory Board of mbank S.A. to the Shareholders 6 Opinion of the Supervisory Board of mbank S.A. 8 Letter of the President of the Management Board of mbank S.A. to the Shareholders Cezary Stypułkowski President of the Management Board Dear Shareholders, 2013 was a difficult time for the Polish economy and the entire financial sector. At the end of 2012, there was no doubt that the Polish economy was entering a phase of clear slowdown, which would lead to a significant interest rate easing cycle. In such environment, we looked towards 2013 as a period of major challenges for our Group: not only did we have to maintain satisfactory return on Your investment in an unfavourable market environment but also we tasked ourselves with the implementation of two ground-breaking projects in the history of the Group: rebranding and the launch of a new transactional platform for retail clients New mbank. We closed 2013 with a slightly higher net profit compared to 2012, which was also the Group s highest ever net profit. At the same time, both the rebranding and the launch of the new transactional platform in Retail Banking were completed in accordance to the objectives set in the Bank s Strategy for Clearly, the key milestone of the past year from the perspective of the entire Group was the rebranding: the unification of the entire Group of the former BRE Bank under one common brand mbank. This historical event closed the 27-year-long chapter of the highly acknowledged brand of BRE (formerly Bank Rozwoju Eksportu). Notwithstanding the many positive memories associated with this brand, I believe that the integration under the name of mbank, the strongest brand in our portfolio, will allow us to reach out more effectively with our offering to all groups of clients, with optimally use of the competencies of our employees and infrastructure. In 2013, revenues generated by the Group reached nearly PLN 3.7 billion despite our interest revenue decreasing by nearly 13% in the wake of interest rate cuts. In anticipation of this unfavourable dynamic, which is typical for an economic slowdown, the Bank pursued a very prudent deposit policy which largely offset the lower revenue from lending, setting us apart from the peer group.

4 In addition, the fee and commission income improved by 6% despite a significant reduction of interchange fees for card transactions; the increase can be attributed, among other factors, to a strong growth in the number of card transactions as well as higher commission income generated by our Corporate and Investment Banking businesses. As a result of our continued cost discipline, the cost to income ratio decreased during the year to 45.7%, placing the Group among the most efficient institutions on the Polish market. In addition, the Group s strong efficiency should be viewed in the context of significant investments made in connection with the rebranding process and the introduction of the new transactional platform of Retail Banking. The growth in revenues of the Group combined with continued cost discipline and a sound quality of the loan portfolio allowed the Group to generate a record-high profit before tax and net profit of PLN 1.5 billion and PLN 1.2 billion, respectively. Retail Banking contributed the largest share of the profit before income tax (60%) and generated around 58% of Group revenues. Prudent management of deposit rates, high sales of non-mortgage loans and growing transactional activity of customers helped to improve the results of the segment. In 2013, we added nearly 235 thousand individuals to our customer base, which means that 4.4 million clients have already put their trust in us. Importantly, the growth in the number of retail customers resulted in an increase of deposit volumes of the Group in spite of a significant reduction of the offered interest rates. The value of the Retail Banking deposit portfolio stood at PLN 34.2 billion, representing an increase of 3% year on year. At the same time, our loan portfolio increased by under 2% to PLN 38.3 billion despite rapid repayments of our heritage FX mortgage loans. It is also important to note that our operations in the Czech Republic and Slovakia make increasing contributions to the balance sheet and the results of the Group. These two countries have gained the trust of nearly 700 thousand customers, attracted PLN 4.9 billion in deposits and PLN 2.1 billion in loans for the Group with growth rates much higher than those reported on the Polish market. The segment of Corporates and Financial Markets successfully continued the strategy of growing the customer base and its transactional activity. The segment generated 39% of the profit before income tax and nearly 41% of Group revenues. Focused sales initiatives resulted in record-high acquisition of corporate clients whose number increased to 16.3 thousand. The Group s corporate deposit volumes grew by 10% and the value of corporate loans granted to the Bank s clients increased by 4%, which I consider to be a very good result in the conditions of weaker demand for investment loans. It is also important to note that the results of our subsidiaries improved and we are back on track of growth in many areas including leasing, factoring, insurance and private banking, which is reflected in all the main income lines. I am certain that the continued integration of the subsidiaries with the Group aimed at the development of a comprehensive offer focused on customers needs will be fundamental to our competitive advantage in the coming years. In 2013, the Group continued its efforts geared towards diversification and strengthening of its financing profile. The strong growth rate of deposits, which stood at nearly PLN 62 billion at the end of 2013, greatly contributed to the reduction of the loans to deposits ratio to 110.6%. We are successfully confirmed our presence on the domestic and international debt markets, as demonstrated by two issues of bonds in the Swiss franc and the Czech crown at CHF 200 million and CZK 500 million as well as an issue of PLN 500 million of subordinated bonds on the Polish market. In 2014, as the first bank in Poland, we are planning to start issuing covered bonds secured with mortgages of our customers acquired by the Retail Banking Segment, to extend the maturities for financing of longer-term loans. For many years now, our relationships with retail customers have been based on a transparent and highly functional current account, which provides quick and easy access to the broadest financial product offer on the market. In turn, our corporate clients have for more than two decades used our innovative and acknowledged offer rooted in deep relationships and understanding of their changing needs. In 2013, in both Retail and Corporate Banking Segments, the Group introduced important qualitative modifications relevant from the perspective of clients. The New mbank, which was launched in June, introduced the Polish market to unprecedented ease and transparency of all daily and more complex transactions directly linked to a functional current account. I am certain that both the online platform and its mobile arm will constitute the Bank s major competitive advantage in acquiring new clients and growing the profitability of the Group. At the same time, our Corporate and Investment Banking has successfully initiated the process of combining the offer of services on the debt and equity markets and M&A advisory within a single integrated offer for clients. In 2013, the Bank and its subsidiaries received many awards which acknowledge the Group s quality of service, its close relationships with clients, and its innovative approach to product development. The key awards include the first place for mobile banking in the Newsweek s Friendly Bank ranking, and the prize for Best Bank in Poland in the annual Best Emerging Market Banks in CEE contest organized by Global Finance. In addition, New mbank was named the most disruptive innovation in the world in the contest Distribution and Marketing Innovation Awards organised by Efma and Accenture as well as won twice the prestigious Best of Show award in the Finovate conferences in London and New York, dedicated to innovations in the financial services industry. I am pleased to inform You that the Group s solid profitability and capitalisation will allow us to again pay out a dividend. In 2014, we would like to continue the policy of gradual increase of dividend payments. The Shareholders should also be satisfied with the nearly 58% rate of return on the investment in the Bank s shares during I would like to thank You, our Shareholders, for Your trust and support over the years. I also thank our clients for their loyalty and appreciation for our institution and its offer. I thank the Supervisory Board for good co-operation and unwavering support. I also wish to thank our employees whose deep engagement contributed to the success of the Bank and the Group s subsidiaries throughout I strongly believe that we are well prepared to take the full advantage of the rapidly recovering economy to the benefit of our clients and shareholders. Yours faithfully, Cezary Stypułkowski 3 4

5 Letter of the Chairman of the Supervisory Board of mbank S.A. to the Shareholders Dear Shareholders, The past year 2013 was a turning point for the Bank and it brought many reasons for satisfaction. The most important of those was the completed rebranding, the first major exercise changing the name and the brand in the history of the Bank, which had multiple functions: it has reorganised the existing brands and consolidated the image of the Bank according to the One Bank concept while refreshing and rejuvenating the image with an innovative colour palette. This has been welcomed by the market. The rebranding has afforded an opportunity of uplifting the existing transactional service of mbank, and has been acknowledged and rewarded in multiple contests already at the design stage. Today, your mbank stands for a combination of the 27-year-long history of the Bank, which reflects maturity, stability and a renowned and well-established position in the banking industry, with lasting novelty synonymous to youth and vigour, agility, embracing change, continuous client-centrism focused on customers needs, and trend-setting. The success of 2013 was reflected in the financial results. The profits were similar to those of the record-breaking year The consolidated pre-tax profit was PLN 1,517.7 million in 2013, an increase of 3.6% year on year; the consolidated net profit attributable to the shareholders of mbank S.A. was PLN 1,206.4 million (+0.8% year on year). In 2013, as in previous years, the Supervisory Board actively monitored and analysed the situation of mbank S.A. and remained in constant communication with the Management Board, participating in consultations on all major aspects of the activity of the Bank. The Supervisory Board held six meetings. As in previous years, Supervisory Board Members participated in four standing committees: the Executive Committee, the Audit Committee, the Remuneration Committee, and the Risk Committee. The current term of office of the Supervisory Board, which began on 30 March 2011, comes to an end with the Ordinary General Meeting of Shareholders in

6 The composition of the Supervisory Board has been exceptionally comprehensive and diversified in this term as the selection of Members reflects the ambition to diversify their professional experience, expertise and skills. The Members include bank managers with experience in different business lines (including retail banking, corporate banking, capital markets, treasury, finance, and risk) as well as representatives of science and non-banking business sectors, including the industry. The competences of Supervisory Board Members span all the areas of the Bank s activities. All Members have theoretical expertise and practical experience in the areas of activity of mbank S.A. including its specificity; together, they are an excellent and effective team of experts. In conclusion, with a view to the ending term of office of the Supervisory Board, I would like to extend thanks on behalf of the Supervisory Board to the Management Board for their constructive and efficient co-operation and to the Shareholders for your trust in the activity of mbank. I also thank all the Members of the Supervisory Board for their dedication and great contribution to the work of the Supervisory Board. I wish the next Supervisory Board fruitful co-operation with the Management Board in pursuit of their goals. Maciej Leśny Chairman of the Supervisory Board Opinion of the Supervisory Board of mbank S.A. on the situation of the Bank in 2013 including assessment of the internal control system and the Bank s relevant risk management system Base: Rule III.1(1) of the Best Practices of WSE Listed Companies The year 2013 brought a further slow-down of the growth rate of the Polish economy combined with falling inflation. Economic growth started to rise only in the second half of the year. While the past year was less successful for the banking sector in terms of financial results, the consolidated pre-tax profit of the increased by 3.6% year on year and stood at PLN 1,517.7 million while the consolidated net profit attributable to the shareholders of the Bank was similar to that of 2012 and stood at PLN 1,206.4 million, i.e., increased by 0.8% year on year. The total income stood at PLN 3,673.5 million in 2013, growing by 2.9% year on year. Its main components, i.e., net interest income and net fee and commission income changed by -2.4% and +6.1%, respectively, year on year. In 2013, the total net interest income and net fee and commission income contributed 83.3% of the mbank Group s total profit; in the opinion of the Supervisory Board, this is a reasonable proportion for the banking business. Considering the macroeconomic conditions for the Bank in 2013, specifically the falling market interest rates, the Supervisory Board acknowledges the generated results. The Supervisory Board notes with special satisfaction that the s high profitability is very stable. This is also corroborated by a comparison with The stability has remained uninterrupted in the past three years and was even combined with subsequent profitability records. In the opinion of the Supervisory Board, in addition to generating high and stable profitability, the Bank and its subsidiaries keep costs under control. In the past three years, the upward or downward variation in costs including amortisation and depreciation oscillated around 1% year on year. Meanwhile, the effectiveness of the mbank Group as measured by the cost/income ratio improved for another consecutive year. The ratio stood at 45.7% in 2013 as compared to 46.5% in 2012 and 47.7% in The Supervisory Board has no reservations to the level of net loan loss provisions, which stood at PLN million in The Supervisory Board notes with satisfaction that 2013 was another consecutive year of growth in the Bank s deposit base. It increased by 6.4% to PLN 61.7 billion in By comparison, the growth in 2012 was 6.9%. At the 2013 year-end, deposits financed no less than 59.1% of assets (56.8% in 2012). 7

7 In the opinion of the Supervisory Board, the activity of the Bank in 2013 ensured full safety of assets. The consolidated capital adequacy ratio under the AIRB approach and the consolidated Core Tier 1 ratio stood at 19.38% and 14.21%, respectively, at the end of Their levels were significantly higher than at the 2012 year-end (then at 18.73% and 13.00%, respectively), when they already largely exceeded the legally required minimum. Considering all the factors outlined above, the Supervisory Board gives a positive opinion on the situation of mbank S.A. in The Supervisory Board appreciates the engagement and efforts of the Bank s Management Board and employees in the past year, aimed at growing the long-term shareholder value of the Bank. At the same time, the Supervisory Board trusts that these efforts will continue in 2014 and beyond. The Supervisory Board thanks the Shareholders for their confidence in the activity of mbank. Furthermore, the Bank has a range of committees whose functions relate directly to risk management in the mbank Group. These include among others: the Credit Committee of the Management Board of the Bank, the Data Quality Management Committee, the Capital Management Committee, the Assets and Liabilities Management Committee. The Supervisory Board gives a positive opinion on the risk management system in mbank SA. In the opinion of the Supervisory Board, the system covers all risks which are relevant to the Bank and the Group. Maciej Leśny Assessment of the internal control system and the Bank s relevant risk management system The internal control system in mbank S.A. is comprised of institutional controls exercised by the Internal Audit Department, as well as functional controls. The Supervisory Board has an Audit Committee which monitors internal audit matters on an on-going basis. The Internal Audit Department is functionally subordinated and reports to the Audit Committee. The Audit Committee of the Supervisory Board was regularly appraised of a broad range of audit-related issues in 2013 including, among others, assessments of the internal control and risk management systems, implementation of major audits in the Bank and subsidiaries of the Group. The Audit Committee reviewed and approved the 2013 Audit Plan. Furthermore, the Chairman of the Supervisory Board received copies of reports of all audits conducted in the Bank and subsidiaries of the Group by the Internal Audit Department. The Audit Committee of the Supervisory Board was also supported by the external auditor who regularly reported the findings and conclusions of its audits of the financial statements in The Supervisory Board gives a positive opinion on the internal control system in mbank S.A. including both its functional and institutional part. On matters of risks, the Supervisory Board acts through its Risk Committee, which exercises on-going supervision of all risks, in particular credit risk (including concentration risk), market risk, operational risk, liquidity risk, and business risk. The Risk Committee issues recommendations on significant exposures carrying the risk of a single business entity. Furthermore, the Risk Committee reviewed many major risk issues in 2013 including macroeconomic factors, the real estate market strategy, and the Treasury securities portfolio.

8 Independent Registered Auditor s Opinion to the General Shareholders Meeting and the Supervisory Board of mbank S.A.

9 Table of content Independent auditors opinion 2 Long-form auditors report on the consolidated financial statements for the year ended 31 December I. General notes 5 Background 5 Group Structure 8 Consolidated Financial Statements 10 Analytical Review 13 II. Detailed report 16 Completeness and accuracy of consolidation documentation 16 Accounting policies for the valuation of assets and liabilities 16 Structure of assets, liabilities and equity 16 Consolidation adjustments 17 Disposal of all or part of shares in a subordinated entity 17 Items which have an impact on the group s result for the year 17 The appropriateness of the departures from the consolidation methods and application of the equity accounting as defined in International Financial Reporting Standards as adopted by the EU 17 Issues specific for the audit of banks 17 Explanatory Notes 17 Directors Report 17 Conformity with Law and Regulations 17 Work of Experts 18 Independent auditor s opinion To the General Shareholders Meeting mbank S.A. 1. We have audited the attached consolidated financial statements of ( the Group ), for which the holding company is mbank S.A. (until 22 November 2013 operating under the name BRE Bank SA, the Bank ) located in Warsaw at Senatorska 18, for year ended 31 December 2013 containing the consolidated income statement and the consolidated statement of comprehensive income for the period from 1 January 2013 to 31 December 2013, the consolidated statement of financial position as at 31 December 2013, the consolidated statement of changes in equity and the consolidated statement of cash flows for the period from 1 January 2013 to 31 December 2013 and explanatory notes to the financial statements ( the attached consolidated financial statements ). 2. The truth and fairness 1 of the attached consolidated financial statements, the preparation of the attached consolidated financial statements in accordance with the required applicable accounting policies and the proper maintenance of the consolidation documentation are the responsibility of the Bank s Management Board. In addition, the Bank s Management Board and Members of the Supervisory Board are required to ensure that the attached consolidated financial statements and the Directors Report meet the requirements of the Accounting Act dated 29 September 1994 (Journal of Laws with subsequent amendments the Accounting Act ). Our responsibility was to audit the attached consolidated financial statements and to express an opinion on whether, based on our audit, these financial statements comply, in all material respects, with the required applicable accounting policies and whether they truly and fairly 2 reflect, in all material respects, the financial position and results of the operations of the Group. 3. We conducted our audit of the attached consolidated financial statements in accordance with: chapter 7 of the Accounting Act, national auditing standards issued by the National Council of Statutory Auditors, in order to obtain reasonable assurance whether these financial statements are free of material misstatement. In particular, the audit included examining, to a large extent on a test basis, documentation supporting the amounts and disclosures in the attached consolidated financial statements. The audit also included assessing the accounting principles adopted and used and significant estimates made by the Bank s Management Board, as well as evaluating the overall presentation of the attached consolidated financial statements. We believe our audit has provided a reasonable basis to express our opinion on the attached consolidated financial statements treated as a whole. 1 Translation of the following expression in Polish: rzetelność i jasność 2 Translation of the following expression in Polish: rzetelne i jasne 2

10 4. Consolidated financial statements for the prior financial year ended 31 December 2012 ( Consolidated financial statements for 2012 ) were subject to an audit by another key certified auditor acting on behalf of another authorised audit firm, who issued an unqualified opinion on these financial statements, dated 7 March The consolidated financial statements for 2012 were restated to the comparative data, as described in Note 2.33 of the attached financial statements. 5. In our opinion, the attached consolidated financial statements, in all material respects: present truly and fairly all information material for the assessment of the results of the Group s operations for the period from 1 January 2013 to 31 December 2013, as well as its financial position 3 as at 31 December 2013; have been prepared in accordance with International Financial Reporting Standards as adopted by the EU; are in respect of the form and content, in accordance with the legal regulations governing the preparation of financial statements. Long-form auditor s report on the consolidated financial statements for the year ended 31 December We have read the Directors Report for the period from 1 January 2013 to 31 December 2013 and the rules of preparation of annual statements ( the Directors Report ) and concluded that the information derived from the attached consolidated financial statements reconciles with these financial statements. The information included in the Directors Report corresponds with the relevant regulations of the Decree of the Minister of Finance dated 19 February 2009 on current and periodic information published by issuers of securities and conditions for recognition as equivalent the information required by laws of non-eu member states (Journal of Laws with subsequent amendments). on behalf of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. (formerly: Ernst & Young Audit sp. z o.o.) Rondo ONZ 1, Warsaw Reg. No 130 Key Certified Auditor Dominik Januszewski certified auditor No Warsaw, 3 March Translation of the following expression in Polish: sytuacja majątkowa i finansowa 3 4

11 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) I. General notes 1. Background The holding company of the (hereinafter the Group or the Capital Group ) is mbank S.A. ( the holding company, the Bank ). The holding company was incorporated on the basis of a Notarial Deed dated 11 December The Bank s registered office is located in Warsaw at Senatorska 18. On 22 November 2013 the National Court Register registered the name change of the Bank from BRE Bank SA to mbank S.A. The holding company is an issuer of securities as referred to in art. 4 of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council of the European Union of 19 July 2002 on the application of international accounting standards (EC Official Journal L243 dated 11 September 2002, page 1, polish special edition chapter 13, title 29 page 609) and, based on the article 55.5 of the Accounting Act dated 29 September 1994 (Journal of Laws with subsequent amendments the Accounting Act ), prepares consolidated financial statements of the Group in accordance with International Financial Reporting Standards as adopted by the EU. The holding company was entered in the Register of Entrepreneurs of the National Court Register under no. KRS on 11 July The Bank was issued with tax identification number (NIP) on 13 December 2013 and statistical number (REGON) on 9 December The holding company is part of the Commerzbank AG Capital Group. The principal activities of the holding company are as follows: accepting a-vista and term deposits and maintaining deposit accounts, maintaining other bank accounts, conducting bank monetary settlements, granting loans and cash advances, cheque and bill of exchange transactions and transactions in warrants, granting and confirming of suretyships, issuing and confirming bank guarantees and letters of credit, intermediary services in cash transfers and foreign currency settlements, issuing bank securities, performing commissioned activities relating to issue of securities, safekeeping of objects and securities and offering safety deposit box services to clients, forward financial transactions, forward financial transactions, purchasing and sale of debts, performing bank representative actions as provided for in the Bonds Act, purchasing and sale of foreign currencies, issuing payment cards and performing transactions with the use of cards, issuing e-money instruments. The operations of the Group s subsidiaries, jointly controlled entities and associates include the following activities: factoring services; leasing of properties; administration of buildings; raising funds for the holding company; trading in securities; offering holding company s product to third parties; provide comprehensive wealth management services; providing mortgage loans; insurance activities; providing services in the field of data and document management; development and assessment of investment projects and their realisation; realization of developer projects. As at 31 December 2013, the Bank s issued share capital amounted to thousand zlotys and was divisible into shares. As at 31 December 2013, the ownership structure of the Bank s issued share capital was as follows: Number of shares Number of votes Par value of shares (in zlotys) % of issued share capital Commerzbank AG % ING Powszechny Fundusz Emerytalny % Aviva Otwarty Fundusz Emerytalny Aviva BZ WBK % Others % Total % 052 ===== ===== ===== ===== The following changes took place in the ownership structure of the Bank s issued share capital during the financial year ended 31 December 2013 and after the balance sheet date until the date of this opinion: On 2 August 2013, the Bank received from AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK ("Aviva OFE") notification of exceeding 5% of the total number of votes at the General Meeting of the Bank Prior to the acquisition of shares Aviva OFE held shares of the Bank, representing 4.9% of the share capital (issued shares) This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language. 5 6

12 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) of the Bank and carrying votes at the General Meeting of the Bank, which represented 4.9% of total votes. Following the acquisition, as at 31 July 2013, Aviva OFE held shares of the Bank, representing 5.1% of the share capital of the Bank and carrying votes at the General Meeting of the Bank, which were representing 5.1% of the total number of votes. Movements in the issued share capital of the holding company in the financial year were as follows: Number of shares Par value of shares (in zlotys) Opening balance Increase/ decrease in share capital Closing balance ===== ===== In 2013, the National Deposit for Securities has registered shares of the Bank issued under the conditional share capital increase of the Bank by issuing shares with pre-emptive rights of the existing shareholders, in order to allow for the acquisition of the Bank shares to participants of incentive programs. Following registration of the shares of the Bank's share capital of the Bank increased in 2013 by 140 thousand zlotys. As at 31 December 2013, the holding company s Management Board was composed of: Cezary Stypułkowski Przemysław Gdański Lidia Jabłonowska-Luba Hans Dieter Kemler Cezary Kocik Jarosław Mastalerz Jörg Hessenmüller - President - Vicepresident - Vicepresident - Vicepresident - Vicepresident - Vicepresident - Vicepresident The following changes in Management Board of the Holding Company took place in the reporting period: under the resolution of Supervisory Board dated 11 April 2013 Ms Lidia Jabłonowska- Luba was appointed to the Management Board of the Bank with the effect from 12 April On September 17, 2013, the Polish Financial Supervision Authority granted consent to the appointment of Ms Lidia Jabłonowska-Luba as Vicepresident of Management Board; on 11 April 2013 Mr Wiesław Thor ceased to be Vicepresident of the Management Board due to the end of the term. In the period from the reporting date to the date of the opinion there were no changes in the Management Board of the Bank. 2. Group Structure As at 31 December 2013, the Bank S.A. Group consisted of the following subsidiaries (direct or indirect): Entity name Aspiro S.A. BDH Development Sp. z o.o. BRE Agent Ubezpieczeniowy Sp. z o.o. BRE Ubezpieczenia Sp. z o.o. BRE Ubezpieczenia TUiR S.A. BRE Finance France S.A. Dom Maklerski mbanku S.A. Garbary sp. z o.o. mcentrum Operacji Sp. z o.o. mbank Hipoteczny S.A. Consolidatio n method Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Type of opinion in the audit in the audit in the audit in the audit unqualified opinion in the audit in the audit in the audit in the audit in the audit Name of authorised entity that audited financial statements Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young et Associés Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Balance sheet date 31 December December December December December December December December December December 2013 This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language. 7 8

13 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mfactoring S.A. mlocum S.A. mleasing S.A. MLV 45 sp. z o.o sp.k. mwealth Management S.A. Transfinance a.s. Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting Acquisition accounting in the audit in the audit in the audit in the audit in the audit in the audit Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Ernst & Young Audit, s.r.o. 31 December December December December December December Consolidated Financial Statements 3.1 Auditors opinion and audit of consolidated financial statements Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. (formerly: Ernst & Young Audit sp. z o.o.) with its registered office in Warsaw, at Rondo ONZ 1, is registered on the list of entities authorised to audit financial statements under no Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. (formerly: Ernst & Young Audit sp. z o.o.) was appointed by General Shareholders Meeting on 11 April 2013 to audit the Group s financial statements. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. (formerly: Ernst & Young Audit sp. z o.o.) and the key certified auditor in charge of the audit meet the conditions required to express an impartial and independent opinion on the financial statements, as defined in Art and 56.4 of the Act on statutory auditors and their selfgovernance, audit firms authorized to audit financial statements and public oversight, dated 7 May 2009 (Journal of Laws 2009, No. 77, item 649 with subsequent amendments). Under the contract executed on 20 May 2013 with the holding Bank s Management Board, we have audited the consolidated financial statements for the year ended 31 December Our responsibility was to express an opinion on the consolidated financial statements based on our audit. The auditing procedures applied to the consolidated financial statements were designed to enable us to express an opinion on the consolidated financial statements taken as a whole. Our procedures did not extend to supplementary information that does not have an impact on the consolidated financial statements taken as a whole. Details of the type and impact of changes in entities included in the consolidation as compared to the prior year may be found in Note 1 of explanatory notes ( the explanatory notes ) to the consolidated financial statements of the Group for the year ended 31 December This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language. 9 10

14 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) Based on our audit, we issued an auditors unqualified opinion dated 3 March 2014, stating the following: To the General Shareholders Meeting mbank S.A. 1. We have audited the attached consolidated financial statements of ( the Group ), for which the holding company is mbank S.A. (until 22 November 2013 operating under the name BRE Bank SA, the Bank ) located in Warsaw at Senatorska 18, for year ended 31 December 2013 containing the consolidated income statement and the consolidated statement of comprehensive income for the period from 1 January 2013 to 31 December 2013, the consolidated statement of financial position as at 31 December 2013, the consolidated statement of changes in equity and the consolidated statement of cash flows for the period from 1 January 2013 to 31 December 2013 and explanatory notes to the financial statements ( the attached consolidated financial statements ). 2. The truth and fairness 1 of the attached consolidated financial statements, the preparation of the attached consolidated financial statements in accordance with the required applicable accounting policies and the proper maintenance of the consolidation documentation are the responsibility of the Bank s Management Board. In addition, the Bank s Management Board and Members of the Supervisory Board are required to ensure that the attached consolidated financial statements and the Directors Report meet the requirements of the Accounting Act dated 29 September 1994 (Journal of Laws with subsequent amendments the Accounting Act ). Our responsibility was to audit the attached consolidated financial statements and to express an opinion on whether, based on our audit, these financial statements comply, in all material respects, with the required applicable accounting policies and whether they truly and fairly 2 reflect, in all material respects, the financial position and results of the operations of the Group. 3. We conducted our audit of the attached consolidated financial statements in accordance with: chapter 7 of the Accounting Act, national auditing standards issued by the National Council of Statutory Auditors, in order to obtain reasonable assurance whether these financial statements are free of material misstatement. In particular, the audit included examining, to a large extent on a test basis, documentation supporting the amounts and disclosures in the attached consolidated financial statements. The audit also included assessing the accounting principles adopted and used and significant estimates made by the Bank s Management Board, as well as evaluating the overall presentation of the attached consolidated financial statements. We believe our audit has provided a reasonable basis to express our opinion on the attached consolidated financial statements treated as a whole. 4. Consolidated financial statements for the prior financial year ended 31 December 2012 ( Consolidated financial statements for 2012 ) were subject to an audit by another key certified auditor acting on behalf of another authorised audit firm, who issued an unqualified opinion on these financial statements, dated 7 March The consolidated financial statements for 2012 were restated to the comparative data, as described in Note 2.33 of the attached financial statements. 1 Translation of the following expression in Polish: rzetelność i jasność 2 Translation of the following expression in Polish: rzetelne i jasne 5. In our opinion, the attached consolidated financial statements, in all material respects: present truly and fairly all information material for the assessment of the results of the Group s operations for the period from 1 January 2013 to 31 December 2013, as well as its financial position 3 as at 31 December 2013; have been prepared in accordance with International Financial Reporting Standards as adopted by the EU; are in respect of the form and content, in accordance with the legal regulations governing the preparation of financial statements. 6. We have read the Directors Report for the period from 1 January 2013 to 31 December 2013 and the rules of preparation of annual statements ( the Directors Report ) and concluded that the information derived from the attached consolidated financial statements reconciles with these financial statements. The information included in the Directors Report corresponds with the relevant regulations of the Decree of the Minister of Finance dated 19 February 2009 on current and periodic information published by issuers of securities and conditions for recognition as equivalent the information required by laws of non-eu member states (Journal of Laws with subsequent amendments). We conducted the audit of the consolidated financial statements during the period from 20 May 2013 to 3 March We were present at the Bank s head office from 20 May 2013 to 3 March Representations provided and data availability The Management Board of the holding company confirmed its responsibility for the truth and fairness 4 of the consolidated financial statements and the preparation of the financial statements in accordance with the required applicable accounting policies, and the correctness of consolidation documentation. The Board stated that it provided us with all financial statements of the Group companies included in the consolidated financial statements, consolidation documentation and other required documents as well as all necessary explanations. We also obtained a written representation dated 3 March 2014, from the Management Board of the holding company confirming that: the information included in the consolidation documentation was complete, all contingent liabilities had been disclosed in the consolidated financial statements, and all material events from the balance sheet date to the date of the representation letter had been disclosed in the consolidated financial statements, and confirmed that the information provided to us was true and fair to the best of the holding company Management Board s knowledge and belief, and included all events that could have had an effect on the consolidated financial statements. At the same time declare that during the audit of the consolidated financial statements, there were no limitations of scope. 3 Translation of the following expression in Polish: sytuacja majątkowa i finansowa 4 Translation of the following expression in Polish: rzetelność i jasność This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language

15 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) 3.3 Consolidated financial statements for prior financial year The consolidated financial statements of the Group for the year ended 31 December 2012 were audited by Agnieszka Accordi-Krawiec, key certified auditor no , acting on behalf of PricewaterhouseCoopers Sp. z o.o., Registered Audit Company No The key certified auditor issued an unqualified opinion on the consolidated financial statements for the year ended 31 December The consolidated financial statements for the year ended 31 December 2012 were approved by the General Shareholders Meeting on 11 April The consolidated financial statements of the Group for the financial year ended 31 December 2012, together with the auditors opinion, a copy of the resolution approving the consolidated financial statements and the Directors Report, were filed on 18 April 2013 with the National Court Register * Total assets Shareholders equity Net profit/ loss % 18.73% Profitability ratio 90.44% 88.17% result before taxation overhead costs and amortization 4. Analytical Review 4.1 Basic data and financial ratios Presented below are selected financial ratios indicating the economic or financial performance of the Bank for the years The ratios were calculated on the basis of financial information included in the consolidated financial statements for year ended 31 December 2012, which were subject to an audit by another key certified auditor acting on behalf of another authorised audit firm, who issued an unqualified opinion on these consolidated financial statements, dated 7 March The consolidated financial statements for 2012 were restated to the comparative data, as described in Note 2.33 of the consolidated financial statements. Cost to income ratio 45.68% 46.53% overhead costs and amortization total operating income less other operating expenses 5 Return on equity (ROE) 12.17% 13.54% net result average shareholders equity 6 Return on assets 1.17% 1.19% net result average assets 7 Rate of inflation: Yearly average 0.9% 3.7% December to December 0.7% 2.4% 5 Total operating income less other operating expenses amounted to net interest income, net fee and commission income, dividend income, net trading income, gains less losses from investment securities, investments in subsidiaries and associates and other operating income less other operating expense. 6 Average shareholders equity is the average of opening and closing balance of total equity in the particular period. 7 Average assets are the average of opening and closing balance of total assets in the particular period. *Restated data This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language

16 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) 4.2 Comments II. Detailed report The following trends may be observed based on the above financial ratios: Profitability ratio increased from 88.17% in 2012 to 90.44% in Cost to income ratio decreased from 46.53% in 2012 to 45.68% in Return on equity decreased from 13.54% in 2012 to 12.17% in Return on assets decreased from 1.19% in 2012 to 1.17% in As of 31 December 2013 the capital adequacy ratio of the Group accounted for 19.38% in comparison to 18.73% as of 31 December Going concern Nothing came to our attention during the audit that caused us to believe that the holding company is unable to continue as a going concern for at least twelve months subsequent to 31 December 2013as a result of an intended or compulsory withdrawal from or a substantial limitation in its current operations. In Note 2.1 of the explanatory notes to the audited consolidated financial statements for the year ended 31 December 2013, the Management Board of the holding company has stated that the financial statements of the Group entities included in the consolidated financial statements were prepared on the assumption that these entities will continue as a going concern for a period of at least twelve months subsequent to 31 December 2013 and that there are no circumstances that would indicate a threat to its continued activity. 1. Completeness and accuracy of consolidation documentation During the audit no material irregularities were noted in the consolidation documentation which could have a material effect on the audited consolidated financial statements, and which were not subsequently adjusted. These would include matters related to the requirements applicable to the consolidation documentation (and in particular eliminations relating to consolidation adjustments). 2. Accounting policies for the valuation of assets and liabilities The Group s accounting policies and rules for the presentation of data are detailed in note 2 of the explanatory notes to the Group s audited consolidated financial statements for the year ended 31 December Structure of assets, liabilities and equity The structure of the Group s assets and equity and liabilities is presented in the audited consolidated financial statements for the year ended 31 December The data disclosed in the consolidated financial statements reconcile with the consolidation documentation. 3.1 Goodwill on consolidation and amortisation The method of determining goodwill on consolidation, the method of determining impairment of goodwill, the impairment charged in the financial year and up to the balance sheet date were presented in note 2 of the explanatory notes to the audited consolidated financial statements. 3.2 Shareholders funds including non-controlling interest The amount of shareholders funds is consistent with the amount stated in the consolidation documentation and appropriate legal documentation. Non-controlling interest amounted to thousand zlotys as at 31 December It was correctly calculated and is consistent with the consolidation documentation. Information on shareholders funds has been presented in notes of the explanatory notes to the audited consolidated financial statements. 3.3 Financial year The financial statements of all Group companies forming the basis for the preparation of the consolidated financial statements were prepared as at 31 December 2013 and include the financial data for the period from 1 January 2013to 31 December This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language

17 mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) mbank S.A.GROUP Long-form auditors report for the year ended 31 December 2013 (in thousand zlotys) 4. Consolidation adjustments 4.1 Elimination of inter-company balances (receivables and liabilities) and intercompany transactions (revenues and expenses) of consolidated entities. All eliminations of inter-company balances (receivables and liabilities) and inter-company transactions (revenues and expenses) of the consolidated companies reconcile with the consolidation documentation. 4.2 Elimination of unrealised gains/losses of the consolidated companies, included in the value of assets, as well as relating to dividends All eliminations of unrealised gains/losses of the consolidated companies, included in the value of assets, as well as relating to dividends reconcile with the consolidation documentation. 5. Disposal of all or part of shares in a subordinated entity During the financial year the Group did not sell any shares in subordinated entities. 6. Items which have an impact on the group s result for the year Details of the items which have an impact on the Group s result for the year have been included in the audited consolidated financial statements for the year ended 31 December The appropriateness of the departures from the consolidation methods and application of the equity accounting as defined in International Financial Reporting Standards as adopted by the EU During the process of preparation of the consolidated financial statements there were no departures from the consolidation methods or application of the equity accounting 8. Issues specific for the audit of banks We have addressed the issue of complying by mbank S.A. ( the Bank ) with the obligatory norms mitigating banking risks and the issue of correctness of calculation of capital adequacy ratio in our audit report dated 3 March 2014, supplementing the independent auditors opinion on the financial statements of the Bank for the year ended 31 December Directors Report We have read the Directors Report for the period from 1 January 2013 to 31 December 2013 and the rules of preparation of annual statements ( the Directors Report ) and concluded that the information derived from the attached consolidated financial statements reconciles with these financial statements. The information included in the Directors Report corresponds with the relevant regulations of the Decree of the Minister of Finance dated 19 February 2009 on current and periodic information published by issuers of securities and conditions for recognition as equivalent the information required by laws of non-eu member states (Journal of Laws with subsequent amendments). 11. Conformity with Law and Regulations We have obtained a letter of representations from the Management Board of the holding company confirming that no laws, regulations or provisions of the Group entities Articles of Association were breached during the financial year. 12. Work of Experts During our audit we have taken into account the results of the work of the independent property appraisers in the calculation of the level of loan loss provisions the Group took into consideration the value of collateral established in valuations performed by property appraisers engaged by the Group. on behalf of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. (formerly: Ernst & Young Audit sp. z o.o.) Rondo ONZ 1, Warsaw Reg. No 130 Key Certified Auditor (-) Dominik Januszewski certified auditor No Explanatory Notes The explanatory notes to the consolidated financial statements for the year ended 31 December 2013 were prepared, in all material respects, in accordance with International Financial Reporting Standards as adopted by the EU. Warsaw, 3 March 2014 This is a translation of a document originally issued in the Polish language. This is a translation of a document originally issued in the Polish language

18 Consolidated Financial Statements in accordance with the International Financial Reporting Standards

19 Table of content Selected financial data 3 Consolidated income statement 3 Consolidated statement of comprehensive income 3 Consolidated statement of financial position 3 Consolidated statement of changes in equity 3 Consolidated statement of cash flows 3 Explanatory notes to the consolidated financial statements 3 2

20 Selected financial data Contents The selected financial data are supplementary information to these Consolidated Financial Statements of for Year ended in PLN '000 in EUR '000 Year ended restated Year ended The following exchange rates were used in translating selected financial data into euro: Year ended restated I. Interest income II. Fee and commission income III. Net trading income IV. Operating profit V. Profit before income tax VI. Net profit attributable to Owners of mbank S.A VII. Net profit attributable to non-controlling interests VIII. Net cash flows from operating activities ( ) ( ) IX. Net cash flows from investing activities ( ) ( ) (34 902) (51 836) X. Net cash flows from financing activities ( ) ( ) ( ) (96 075) XI. Net increase / decrease in cash and cash equivalents ( ) ( ) XII. Basic earnings per share (in PLN/EUR) XIII. Diluted earnings per share (in PLN/EUR) XIV. Declared or paid dividend per share (in PLN/EUR) in PLN '000 in EUR ' restated restated I. Total assets II. Amounts due to the Central Bank III. Amounts due to other banks IV. Amounts due to customers V. Equity attributable to Owners of mbank S.A VI. Non-controlling interests VII. Share capital VIII. Number of shares IX. Book value per share ( in PLN/EUR) X. Capital adequacy ratio for items of the consolidated statement of financial position exchange rate announced by the National Bank of Poland as at 31 December 2013: EUR 1 = and 31 December 2012: EUR 1 = PLN for items of the consolidated income statement exchange rate calculated as the arithmetic mean of exchange rates announced by the National Bank of Poland as at the end of each month of 2013 and 2012: EUR 1 = PLN and EUR 1 = PLN respectively. As at As at Consolidated income statement... 5 Consolidated statement of comprehensive income... 6 Consolidated statement of financial position... 7 Consolidated statement of changes in equity... 8 Consolidated statement of cash flows... 9 Explanatory notes to the consolidated financial statements Information regarding the Group of mbank S.A Description of relevant accounting policies Accounting basis Consolidation Interest income and expenses Fee and commission income Revenue and expenses from sale of insurance products bundled with loans Insurance premium revenue Compensations and benefits, net Segment reporting Financial assets Reinsurance assets Offsetting financial instruments Impairment of financial assets Financial guarantee contracts Cash and cash equivalents Sell-buy-back, buy-sell-back, reverse repo and repo contracts Derivative financial instruments and hedge accounting Gains and losses on initial recognition Borrowings and deposits taken Intangible assets Tangible fixed assets Inventories Non-current assets held for sale and discontinued operations Deferred income tax Assets repossessed for debt Prepayments, accruals and deferred income Leasing Provisions Post-employment employee benefits and other employee benefits Equity Valuation of items denominated in foreign currencies Trust and fiduciary activities New standards, interpretations and amendments to published standards Comparative data Financial and Insurance Risk management Division of responsibilities in the risk management process Structure of the risk management process documentation Management of Different Types of Risk Credit risk management Concentration of assets, liabilities and off-balance sheet items Market risk Currency risk Interest rate risk Liquidity risk Insurance risk management Fair value of financial assets and liabilities Other activities Major estimates and judgments made in connection with the application of accounting policy principles Business segments Net interest income Net fee and commission income

21 8. Dividend income Net trading income Other operating income Overhead costs Other operating expenses Net impairment losses on loans and advances Income tax expense Earnings per share Other comprehensive income Cash and balances with central bank Loans and advances to banks Trading securities Derivative financial instruments Hedge accounting Loans and advances to customers Investment securities Intangible assets Tangible assets Other assets Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Other liabilities Provisions Assets and liabilities for deferred income tax Proceedings before a court, arbitration body or public administration authority Off-balance sheet liabilities Pledged assets Registered share capital Share premium Retained earnings Other components of equity Dividend per share Cash and cash equivalents Share-based incentive programmes Transactions with related entities Acquisitions and disposals Information about the registered audit company Capital adequacy ratio / capital adequacy Events after the balance sheet date Consolidated income statement restated Interest income Interest expense 6 ( ) ( ) Net interest income Fee and commission income Fee and commission expense 7 ( ) ( ) Net fee and commission income Dividend income Net trading income, including: Foreign exchange result Other net trading income and result on hedge accounting Gains less losses from investment securities, investments in subsidiaries and associates Other operating income Net impairment losses on loans and advances 13 ( ) ( ) Overhead costs 11 ( ) ( ) Amortisation 24,25 ( ) ( ) Other operating expenses 12 ( ) ( ) Operating profit Profit before income tax Income tax expense 14 ( ) ( ) Net profit Net profit attributable to: Year ended 31 December - Owners of mbank S.A Non-controlling interests Net profit attributable to Owners of mbank S.A Weighted average number of ordinary shares Basic earnings per share (in PLN) Weighted average number of ordinary shares for diluted earnings Diluted earnings per share (in PLN) Note Notes presented on pages constitute an integral part of these Consolidated Financial Statements. 5 6

22 Consolidated statement of comprehensive income Consolidated statement of financial position Year ended 31 December restated Net profit Other comprehensive income net of tax, including: 16 ( ) Items that may be reclassified subsequently to the the income statement ( ) Exchange differences on translation of foreign operations (net) (2 116) (1 815) Change in valuation of available for sale financial assets (net) ( ) Items that will not be reclassified to the income statement (709) 225 Actuarial gains and losses relating to post-employment benefits (net) (709) 225 Total comprehensive income (net) Total comprehensive income (net), attributable to: - Owners of mbank S.A Non-controlling interests Note ASSETS Note restated restated Cash and balances with the Central Bank Loans and advances to banks Trading securities Derivative financial instruments Loans and advances to customers Hedge accounting adjustments related to fair value of hedged items Investment securities Intangible assets Tangible assets Current income tax assets Deferred income tax assets Other assets T o t a l a s s e t s LIABILITIES AND EQUITY L i a b i l i t i e s Amounts due to the Central Bank Amounts due to other banks Derivative financial instruments Amounts due to customers Debt securities in issue Hedge accounting adjustments related to fair value of hedged items 21 (4 349) Other liabilities Current income tax liabilities Deferred income tax liabilities Provisions Subordinated liabilities T o t a l l i a b i l i t i e s E q u i t y Equity attributable to Owners of mbank S.A Share capital: Registered share capital Share premium Retained earnings: Profit from the previous years Profit for the current year Other components of equity Non-controlling interests T o t a l e q u i t y T o t a l l i a b i l i t i e s a n d e q u i t y Capital adequacy ratio *) Book value Number of shares Book value per share (in PLN) *) data relating to the capital adequacy ratio for comparative periods has not been restated Notes presented on pages constitute an integral part of these Consolidated Financial Statements. Notes presented on pages constitute an integral part of these Consolidated Financial Statements. 7 8

23 Consolidated statement of changes in equity Changes in equity from 1 January to 31 December 2013 Share capital Retained earnings Other components of equity Total equity Non-controlling interests Equity attributable to Owners of mbank S.A., total Actuarial gains and losses relating to postemployment benefits Valuation of available for sale financial assets Exchange differences on translation of foreign operations Profit for the current year attributable to Owners of mbank S.A. Profit from the previous years General banking risk reserve Other reserve capital Other supplementary capital Note Share premium Registered share capital Equity as at 1 January restated Total comprehensive income (2 116) ( ) (709) Dividends paid ( ) ( ) - ( ) Transfer to General Risk Fund (44 000) Transfer to supplementary capital ( ) Issue of shares 37, Other changes Stock option program for employees value of services provided by the employees settlement of exercised options (10 565) Equity as at 31 December (15 760) (2 010) (484) Changes in equity from 1 January to 31 December 2012 Other components of equity Share capital Retained earnings Total equity Non-controlling interests Equity attributable to Owners of mbank S.A., total Actuarial gains and losses relating to postemployment benefits Valuation of available for sale financial assets Exchange differences on translation of foreign operations Profit for the current year attributable to Owners of mbank S.A. Profit from the previous years General banking risk reserve Other reserve capital Other supplementary capital Share premium Registered share capital Note Equity as at 1 January before restatement - changes to accounting policies (85 379) (85 379) - (85 379) Equity as at 1 January restated Total comprehensive income (1 815) Transfer to General Risk Fund ( ) Transfer to reserve capital (10 000) Transfer to supplementary capital ( ) Issue of shares 37, Stock option program for employees value of services provided by the employees settlement of exercised options (7 676) Equity as at 31 December restated Notes presented on pages constitute an integral part of these Consolidated Financial Statements. Consolidated statement of cash flows Year ended 31 December Note restated A. Cash flows from operating activities ( ) Profit before income tax Adjustments: ( ) Income taxes paid ( ) ( ) Amortisation 10,24, Foreign exchange (gains) losses related to financing activities ( ) (Gains) losses on investing activities (13 600) (10 226) Impairment of investments in subsidiaries Dividends received 8 (26 856) (13 902) Interest income (income statement) 6 ( ) ( ) Interest expense (income statement) Interest received Interest paid ( ) ( ) Changes in loans and advances to banks ( ) Changes in trading securities ( ) (522) Changes in assets and liabilities on derivative financial instruments ( ) Changes in loans and advances to customers ( ) Changes in investment securities ( ) Changes in other assets (87 423) (39 754) Changes in amounts due to other banks ( ) Changes in amounts due to customers Changes in debt securities in issue Changes in provisions Changes in other liabilities ( ) ( ) Net cash generated from operating activities ( ) B.Cash flows from investing activities ( ) ( ) Investing activity inflows Disposal of shares in subsidiaries, net of cash disposed Disposal of intangible assets and tangible fixed assets Dividends received Other investing inflows Investing activity outflows Acquisition of shares in subsidiaries Purchase of intangible assets and tangible fixed assets Other investing outflows 1 - Net cash used in investing activities ( ) ( ) C. Cash flows from financing activities ( ) ( ) Financing activity inflows Proceeds from loans and advances from other banks Proceeds from other loans and advances Issue of debt securities Increase of subordinated liabilities Issue of ordinary shares Financing activity outflows Repayments of loans and advances from other banks Repayments of other loans and advances Redemption of debt securities Acquisition of shares in subsidiaries - increase of involvement Payments of financial lease liabilities Dividends and other payments to shareholders Interest paid from loans and advances received from other banks and from subordinated liabilities Net cash generated from financing activities ( ) ( ) Net increase / decrease in cash and cash equivalents (A+B+C) ( ) Effects of exchange rate changes on cash and cash equivalents (27 980) (31 147) Cash and cash equivalents at the beginning of the reporting period Cash and cash equivalents at the end of the reporting period Notes presented on pages constitute an integral part of these Consolidated Financial Statements. 9 10

24 Explanatory notes to the consolidated financial statements 1. Information regarding the Group of mbank S.A. The Group of mbank S.A. (the Group ) consists of entities under the control of mbank S.A. (the Bank ) of the following nature: strategic: shares and equity interests in companies supporting particular business lines of mbank S.A. (corporates and financial markets segment, retail banking segment and other) with an investment horizon not shorter than 3 years. The formation or acquisition of these companies was intended to expand the range of services offered to the clients of the Bank; other: shares and equity interests in companies acquired in exchange for receivables, in transactions resulting from composition and work out agreements with debtors, with the intention to recover a part or all claims to loan receivables and insolvent companies under liquidation or receivership. The parent entity of the Group is mbank S.A., which is a joint stock company registered in Poland and a part of Commerzbank AG Group. The head office of the Bank is located at 18 Senatorska St., Warsaw. The shares of the Bank are listed on the Warsaw Stock Exchange. As at 31 December 2013, covered by the Consolidated Financial Statements comprised the following companies: mbank S.A., the parent entity Bank Rozwoju Eksportu SA (Export Development Bank) was established by Resolution of the Council of Ministers N 99 of 20 June The Bank was registered pursuant to the legally valid decision of the District Court for the Capital City of Warsaw, 16 th Economic Registration Division, on 23 December 1986 in the Business Register under the number RHB The 9 th Extraordinary Meeting of Shareholders held on 4 March 1999 adopted the resolution changing the Bank s name to mbank S.A.. The new name of the Bank was entered in the Business Register on 23 March On 11 July 2001, the District Court in Warsaw issued the decision on the entry of the Bank in the National Court Register (KRS) under number KRS On 22 November 2013, the District Court for the Capital City of Warsaw, 12 th Commercial Division of the National Court Register, registered the amendments to the Bank s By-lows arising from Resolutions N 26 and Resolutions N 27 of the 26 th Annual General Meeting of mbank S.A., which was held on 11 April With the registration of changes in By-lows, the name of the Bank has changed from the current BRE Bank Spółka Akcyjna on mbank Spółka Akcyjna (abbreviated mbank S.A.). According to the Polish Classification of Business Activities, the business of the Bank was classified as Other monetary intermediation under number 6419Z. According to the Stock Exchange Quotation, the Bank is classified as Banks sector as part of the Finance macro-sector. According to the By-laws of the Bank, the scope of its business consists of providing banking services and consulting and advisory services in financial matters, as well as of conducting business activities within the scope described in its By-laws. The Bank operates within the scope of corporate, institutional and retail banking (including private banking) throughout the whole country and operates trade and investment activities as well as brokerage activities. The Bank provides services to Polish and international corporations and individuals, both in the local currency (Polish Zloty, PLN) and in foreign currencies. The Bank may open and maintain accounts in Polish and foreign banks, and can possess foreign exchange assets and trade in them. The Bank conducts retail banking business in Czech Republic and Slovakia through its foreign mbank branches in these countries. As at 31 December 2013 the headcount of mbank S.A. amounted to FTEs (Full Time Equivalents) and of the Group to FTEs (31 December 2012: Bank FTEs, Group FTEs). As at 31 December 2013 the employment in mbank S.A. was persons and in the Group persons (31 December 2012: Bank persons, Group persons). In connection with the change of the name of the Bank, most of mbank S.A. companies also changed their names by entering the prefix m. BRE Faktoring changed its name to mfaktoring, BRE Leasing to mleasing, BRE Bank Hipoteczny to mbank Hipoteczny, BRE Wealth Management to mwealth Management, BRE Centrum Operacji to mcentrum Operacji, BRE.locum to mlocum and Dom Inwestycyjny BRE Banku is currently Dom Maklerski mbanku. The business activities of the Group are conducted in the following business segments presented in detail in Note 5. Corporates and Financial Markets Segment, including: Corporates and Institutions mfaktoring S.A., subsidiary The company operates in Poland and provides factoring services for domestic, export and import transactions. It is a member of the Polish Factors Association and Factors Chain International. mbank holds an indirect stake (through MLV 45 Sp. z o.o. spółka komandytowa, its subsidiary) of 100% of the share capital and 100% of votes at the General Meeting of the company. mleasing Sp. z o.o., subsidiary The company s core business is to lease chattels such as: machinery, equipment, technology lines, passenger cars, vans and trucks, tractors, trailers and semi-trailers, buses, vehicles, special equipment, ships, aircraft, rolling stock, office equipment, computer hardware. mleasing s offer for corporate clients includes leasing of real estate, mainly offices, hotels, warehouses and logistics centres, petrol stations, public buildings and municipal infrastructure. The company has a network of offices in the largest cities of Poland. mbank holds indirectly through its subsidiary MLV 45 Sp. z o.o. spółka komandytowa 100% shares of mleasing. Garbary Sp. z o.o., subsidiary The only business of the company is to administer the buildings of a former meat factories located at 101/111 Garbary St. in Poznań. MLV 45 Sp. z o.o. spółka komandytowa, subsidiary The company was founded as a result of the transformation of BRE Holding Sp. z o.o. into commandite company. The company s assets consists of 100% shares of mleasing Sp. z o.o., 100% shares of mfaktoring S.A., 75.71% shares of mbank Hipoteczny S.A. and 79.99% shares of mlocum S.A. Transfinance a.s., subsidiary Transfinance a.s. provides factoring services to small and medium-sized enterprises in the Czech Republic. Its services include domestic and international factoring. The core business of the company also includes purchase of collections, letters of credit, bank guarantees, as well as forfeiting. The Bank holds 100% of Transfinance s shares. Trading and Investment BRE Finance France S.A., subsidiary The core business of the company is to raise funds for the Bank by issuing euro-notes on international financial markets. In October 2012, the company issued Eurobonds with a nominal value of EUR thousand with maturity date in In 2013, the company has issued the following tranches of Eurobonds maturing in 2018: nominal value of CHF thousand and the nominal value of CZK thousand. Dom Maklerski mbanku S.A., subsidiary The company s core business is to provide services related to trading in securities, rights in property other than securities, and other financial instruments on the capital market in accordance with the applicable law and the licences held by the company. Retail Banking Segment (including Private Banking) Aspiro S.A., subsidiary Aspiro S.A. offers mbank S.A. and third party banks products. Its offer includes mortgage loans, business products, cash loans, insurance products and leasing. It has a national distribution network comprising 24 Stationary Financial Centres, 21 Mobile Financial Centres, 68 mkiosks, including 6 Partner mkiosks. mbank Hipoteczny S.A., subsidiary The core business of mbank Hipoteczny S.A. is to grant mortgage loans to finance commercial real estate, residential development projects and local government investments. The company issues mortgage and public bonds to finance its lending operation. mwealth Management S.A., subsidiary The company s core business is to provide comprehensive wealth management services. In 2011, a new business model focused on offering investment related advice was implemented. The Company continues 11 12

25 its strategic direction communicated as a change in the offer "From Asset Manager for Wealth Manager." The new model provides advice on all assets, financial and non-financial, focusing on client business plans and assistance in this regard. BRE Ubezpieczenia TUiR S.A., subsidiary, insurer The core business of the company is insurance activity within the scope of the second division of underwriting property and casualty insurance. The company sells its products through the Internet platform developed in cooperation with retail branches of the Bank. Also, typical products known as bancassurance for customers of the Bank are sold via an insurance agent, the company BRE Ubezpieczenia Sp. z o.o. The Bank holds indirectly, through its subsidiary Aspiro S.A., 100% of the company s shares. BRE Ubezpieczenia Sp. z o.o., subsidiary, insurance agent The core business of the company involves services provided as an insurance agent and services within the scope of settlements due to insurance agreements of insured persons. Its direct parent entity is BRE Ubezpieczenia TUiR SA. The Bank holds indirectly, through its subsidiary Aspiro S.A., 100% of the company s shares. BRE Agent Ubezpieczeniowy Sp. z o.o., subsidiary, insurance agent The core business of the company is to provide services as an insurance agent within the scope of settlements and administration of the low contribution insurance contracts in credits. Its direct parent entity is BRE Ubezpieczenia TUiR SA. The Bank holds indirectly, through its subsidiary Aspiro S.A., 100% of the company s shares. Other mcentrum Operacji Sp. z o.o., subsidiary The core business of the company is i.a. providing services in the field of data and document management, as well as an electronic archive, a traditional archive, business processes and transaction banking. mlocum S.A., subsidiary mlocum S.A. is a property developer operating in the primary market of residential real estate. The company develops and assesses investment projects; arranges, supervises and manages building designs and construction work; acts as a 'substitute investor'; sources funds for investment. The Bank holds indirectly, through MLV 45 Sp. z o.o spółka komandytowa, 79.99% of the shares of the company. BDH Development Sp. z o.o., subsidiary The company's core business is implementation and completion of development projects on the basis of residential property taken over by through restructuring and recovery of investment loans, in order to recover the greatest possible value of the real estate taken over. The Bank holds 100% of the shares of the company. Other information concerning companies of the Group From the beginning of 2013, there was a change in the assignment to a segment of mbank Hipoteczny. The company was assigned to the Retail Banking Segment (previously was part of Trading and Investment). In June 2013, the Group ceased to consolidate the subsidiary MLV 35 Sp. z o.o. spółka komandytowoakcyjna in connection with its liquidation process. On July 15, 2013, the request was filed to remove the company from the register of companies (KRS), which took place on 3 September In the third quarter of 2013, BRE Holding Sp. z o.o. was transformed into MLV 45 Sp. z o.o. spółka komandytowa. The transformation was related to the planned creation of the Capital Tax Group within the. In November 2013, mbank S.A. acquired 100% shares in BDH Development Sp. z o.o. The company was consolidated with the full method. Information concerning the business conducted by the Group s entities is presented under Note 5 Business Segments of these Consolidated Financial Statements. The consolidated financial statements of the Bank cover the following companies: The Management Board of mbank S.A. approved these Consolidated Financial Statements for issue on 3 March Description of relevant accounting policies The most important accounting policies applied to the drafting of these Consolidated Financial Statements are presented below. These principles were applied consistently over all presented periods Accounting basis These Consolidated Financial Statements of have been prepared for the 12-month period ended 31 December The Consolidated Financial Statements of have been prepared in compliance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union, according to the historical cost method, as modified by the revaluation of available for sale financial assets, financial assets and financial liabilities measured at fair value through the income statement as well as all derivative contracts. The preparation of the financial statements in compliance with IFRS requires the application of specific accounting estimates. It also requires the Management Board to use its own judgment when applying the accounting policies adopted by the Group. The issues in relation to which a greater degree of judgment is required, more complex issues, or such issues where estimates or judgments are material to the consolidated financial statements are disclosed in Note 4. These consolidated financial statements were prepared under the assumption that the Group continues as a going concern in the foreseeable future, i.e. in the period of at least 12 months following the reporting date. As of the date of approving these statements, the Bank Management Board has not identified any events that could indicate that the continuation of the operations by the Group is endangered Consolidation Subsidiaries Company Share in voting rights (directly and indirectly) Consolidation method Share in voting rights (directly and indirectly) Consolidation method Aspiro S.A. 100% full 100% full BDH Development Sp. z o.o. 100% full - - BRE Agent Ubezpieczeniowy Sp. z o.o. 100% full 100% full BRE Ubezpieczenia Sp. z o.o. 100% full 100% full BRE Ubezpieczenia TUiR S.A. 100% full 100% full Dom Maklerski mbanku S.A. 100% full 100% full Garbary Sp. z o.o. 100% full 100% full mbank Hipoteczny S.A. 100% full 100% full mcentrum Operacji Sp. z o.o. 100% full 100% full mfaktoring S.A. 100% full 100% full mleasing Sp. z o.o. 100% full 100% full mwealth Management S.A. 100% full 100% full MLV 35 Sp. z o.o. spółka komandytowo - akcyjna % full MLV 45 Sp. z o.o. spółka komandytowa (previously BRE Holding Sp. z o.o.) 100% full 100% full Transfinance a.s. 100% full 100% full BRE Finance France S.A % full 99.98% full mlocum S.A % full 79.99% full Subsidiaries comprise entities, regardless of the nature of the involvement with an entity (including special purpose vehicles) over which the Group controls the investee. The control is achieved when the Group has power over the investee, is exposed or has rights, to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting rights of an investee, it considers all relevant facts and circumstances in assessing whether it has power over the investee, including a contractual arrangements between the Group and other vote holders, rights arising from other contractual arrangements, the Group s voting rights and potential voting rights. If facts and circumstances indicate that there are changes in at least one of the three elements of control listed above, the Group reassess whether it controls an investee. The consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The consolidated financial statements combine items of assets, liabilities, equity, income and expenses of the parent with those of its subsidiaries eliminating the carrying 13 14

26 amount of the parent s investment in each subsidiary and the parent s portion of equity of each subsidiary. Thus arises goodwill. If goodwill has negative value, it is recognised directly in the income statement (see Note 2.19). The profit or loss and each component of other comprehensive income is attributed to the Group s owners and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. If the Group loses control of a subsidiary, it shall account for all amounts previously recognised in other comprehensive income in relation to that subsidiary on the same basis as would be required if the Group had directly disposed of the related assets or liabilities. Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transaction (i.e. transactions with owners in their capacity as owners). Intra-Group transactions, balances and unrealised gains on transactions between companies of the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The company also applies accounting policies in line with IFRS 3 Business Combinations to combinations of bussines under common control in the case of the economic content of the transaction. Consolidation does not cover those companies whose scale of business operations is immaterial in relation to the volume of business of the Group. Those companies were recognised at cost less impairment. Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are settled using the equity method of accounting and they are initially recognised at cost. The share of the Group in the profits (losses) of associates since the date of acquisition is recognised in the income statement, whereas its share in other comprehensive income since the date of acquisition in other comprehensive income. The carrying amount of the investment is adjusted by the total changes of share of net assets. When the share of the Group in the losses of an associate becomes equal to or greater than the share of the Group in that associate, possibly covering receivables other than secured claims, the Group discontinues the recognition of any further losses, unless it has assumed obligations or has settled payments on behalf of the respective associate. Unrealised gains on transactions between the Group and its associates are eliminated proportionally to the extent of the Group s interest in the respective associate. Unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies applied by associates have been adjusted, wherever necessary, to assure consistency with the accounting principles applied by the Group Interest income and expenses All interest income on financial instruments carried at amortised cost using the effective interest rate method is recognised in the income statement as well as interest income from financial assets held for trading and available for sale. The effective interest rate method is a method of calculation of the amortised initial value of financial assets or financial liabilities and allocation of interest income or interest expense to the proper periods. The effective interest rate is the interest rate at which the discounted future payments or future cash inflows are equal to the net present carrying value of the respective financial asset or liability. When calculating the effective interest rate, the Group estimates the cash flows taking into account all the contractual terms of the financial instrument, but without taking into account possible future losses on account of non-recovered loans and advances. This calculation takes into account all the fees paid or received between the parties to the contract, which constitute an integral component of the effective interest rate, as well as transaction expenses and any other premiums or discounts. Following the recognition of an impairment loss on a financial asset or a group of similar financial assets, the interest income is calculated on the net value of financial assets and recognised using the interest rate at which the future cash flows were discounted for the purpose of valuation of impairment. Interest income includes interest and commissions received or due on account of loans, inter-bank deposits or investment securities recognised in the calculation of the effective interest rate. Interest income, including interest on loans, is recognised in the income statement and on the other side in the statement of financial position as part of receivables from banks or from other customers. The calculation of the effective interest rate takes into account the cash flows resulting from only those embedded derivatives, which are strictly linked to the underlying contract. Income and expenses related to the interest component of the result on interest rate derivatives and resulting from current calculation of swap points on currency derivatives classified into banking book are presented in the interest results in the position Interest income/expense on derivatives classified into banking book. The banking book includes transactions, which are not concluded for trading purposes i.e. not aimed at generating a profit in a short-term period (up to 6 months) and those that do not constitute hedging a risk arising from the operations assigned into trading book. Interest income and interest expenses related to the interest measurement component of derivatives concluded as hedging instruments under fair value hedge are presented in the interest result in the position interest income/expense on derivatives concluded under the hedge accounting Fee and commission income Income on account of fees and commissions is recognised on the accrual basis, at the time of performance of the respective services. Fees charged for the granting of loans which are likely to be drawn down are deferred (together with the related direct costs) and recognised as adjustments of the effective interest rate charge on the loan. Fees on account of syndicated loans are recognised as income at the time of closing of the process of organisation of the respective syndicate, if the Group has not retained any part of the credit risk on its own account or has retained a part of the risk of a similar level as other participants. Commissions and fees on account of negotiation or participation in the negotiation of a transaction on behalf of a third party, such as the acquisition of shares or other securities, or the acquisition or disposal of an enterprise, are recognised at the time of realisation of the respective transaction. The same principle is applied in the case of management of client assets, financial planning and custody services, which are continuously provided over an extended period of time. Fee and commissions collected by the Group on account of issuance, renewal and change in the limit of credit and payment cards, guarantees granted as well as opening, extension and increase of letters of credit are accounted for a straight-line basis. Fee and commissions collected by the Group on account of cash management operations, keeping of customer accounts, money transfers and brokerage business activities are recognised directly in the income statement. Additionally, fee and commission income on insurance activity comprises income on services provided by an insurance agent and income on account of payments for arranging instalments for a premium for insurance products sold through the Internet platform. The fee for the distribution of premium installment is settled in accordance with the duration of the policy. Income on account of services provided as an insurance agent is recognised at the time of performance of the services in the net amount, after deduction of expenses of services provided by the entities from outside of the Group. The Group's fee and commission income comprises also income from offering insurance products of third parties. In case of selling insurance products that are not bundled with loans, the revenues are recognized as upfront income or in majority of cases settled on a monthly basis Revenue and expenses from sale of insurance products bundled with loans The Group treats sold insurance products as bundled with loans, in particular when insurance product is offered to the customer only with the loan, i.e. it is not possible to purchase from the Group the insurance product which is identical in a legal form, content and economic conditions without purchasing the loan. Revenue and expenses from sale of insurance products bundled with loans are split into interest income and fee and commission income based on the relative fair value analysis of each of these products. The remuneration included in interest income is recognised over time as part of effective interest rate calculation for the bundled loan. The remuneration included in fee and commission income is recognised partly as upfront income and partly including deferring over time based on the analysis of the stage of completion of the service. Expenses directly linked to the sale of insurance products are recognised using the same pattern as in case of income observing the matching concept. A part of expenses is treated as an element adjusting the calculation of effective interest rate for interest income and the remaining part of expenses is recognised in fee and commission expenses as upfront cost or as cost accrued over time. The Group estimates also the part of remuneration which in the future will be returned due to early termination of insurance contract and appropriately decreases interest income or fee and commission income to be recognised

27 2.6. Insurance premium revenue Insurance premium revenue accomplished upon insurance activity is recognised at the policy issue date and calculated proportionally over the period of insurance cover. Insurance premium revenue is recognised under other operating income in the consolidated financial statements of the Group Compensations and benefits, net Compensations and benefits, net relate to insurance activity. They comprise payoffs and charges made in the reporting period due to compensations and benefits for events arising in the current and previous periods, together with costs of claims handling and costs of enforcement of recourses, less received returns, recourses and any recoveries, including recoveries from sale of remains after claims and reduced by reinsurers share in these positions. Costs of claims handling and costs of enforcement of recourses also comprise costs of legal proceedings. The item also comprises compensations and benefits due to coinsurance activity in the part related to the share of the Group. Compensations and benefits, net are recognised together with insurance premium revenue recognition under other operating income in the consolidated financial statements of the Group Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the Group), whose operating results are regularly reviewed by the Group's chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. As defined in IFRS 8, the Group has determined the Management Board of the Bank as its chief operating decision-maker. In accordance with IFRS 8, the Group has the following business segments: Retail Banking, Corporates and Financial Markets including the sub-segments Corporates and Institutions as well as Trading and Investment Acivity, and the Other business Financial assets The Group classifies its financial assets to the following categories: financial assets valued at fair value through the income statement; loans and receivables; financial assets held to maturity; financial assets available for sale. The classification of financial assets is determined by the Management at the time of their initial recognition. Standardised purchases and sales of financial assets at fair value through the income statement, held to maturity and available for sale are recognised on the settlement date the date on which the Group delivers or receives the asset. Changes in fair value in the period between trade and settlement date with respect to assets carried at fair value is recognised in profit or loss or in other components of equity. Loans are recognised when cash is advanced to the borrowers. Derivative financial instruments are recognised beginning from the date of transaction. A financial asset is de-recognized if Group loses control over any contractual rights attached to that asset, which usually takes place if the financial instrument is disposed of or if all cash flows attached to the instrument are transferred to an independent third party. Financial assets valued at fair value through the income statement This category comprises two subcategories: financial assets held for trading and financial assets designated at fair value through the income statement upon initial recognition. A financial asset is classified in this category if it was acquired principally for the purpose of short-term resale or if it was classified in this category by the companies of the Group. Derivative instruments are also classified as held for trading, unless they were designated for hedging. Disposals of debt and equity securities held for trading are accounted according to the weighted average method. The Group classifies financial assets/financial liabilities as measured at fair value through the income statement if they meet either of the following conditions: assets/liabilities are classified as held for trading i.e. they are acquired or incurred principally for the purpose of selling or repurchasing them in the near term, they are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit making or they are derivatives (except for derivatives that are designated as and being effective hedging instruments), upon initial recognition, assets/liabilities are designated by the entity at fair value through the income statement. If a contract contains one or more embedded derivatives, the Group designates the entire hybrid (combined) contract as a financial asset or financial liability at fair value through the income statement unless: the embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract; or it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost. The Group also designates the financial assets/financial liabilities at fair value through the income statement when doing so results in more relevant information, because either: it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or a group of financial assets, financial liabilities or both is properly managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. Financial assets and financial liabilities classified to this category are valued at fair value upon initial recognition. Interest income/expense on financial assets/financial liabilities designated at fair value (Note 2.3), except for derivatives the recognition of which is discussed in Note 2.15, is recognised in net interest income. The valuation and result on disposal of financial assets/financial liabilities designated at fair value is recognised in trading income. Loans and receivables Loans and receivables consist of financial assets not classified as derivative instruments, with payments either determined or possible to determine, not listed on an active market. They arise when the Group supplies monetary assets, goods or services directly to the debtor without any intention of trading the receivable. Held to maturity investments Investments held to maturity comprise listed on active markets financial assets, not classified as derivative instruments, where the payments are determined or possible to determine and with specified maturity dates, and which the Group intends and is capable of holding until their maturity. In the case of sale by the Group before maturity of a part of assets held to maturity which cannot be deemed insignificant the held to maturity portfolio is tainted, and there with all the assets of this category are reclassified to the available for sale category. In reporting periods presented in these financial statements, there were no assets held to maturity at the Group. Available for sale investments Available for sale investments consist of investments which the Group intends to hold for an undetermined period of time. They may be sold, e.g., in order to improve liquidity, in reaction to changes of interest rates, foreign exchange rates, or prices of equity instruments. Interest income and expense from available for sale investments are presented in net interest income. Gains and losses from sale of available for sale investments are presented in gains and losses from investment securities. Available for sale financial assets and financial assets measured at fair value through the income statement are valued at the end of the reporting period according to their fair value. Loans and receivables, as well as investments held to maturity are measured at adjusted cost of acquisition (amortised cost), applying the effective interest rate method. Gains and losses resulting from changes in the fair value of financial assets measured at fair value through the income statement are recognised in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available for sale financial assets are recognised in other comprehensive income until the derecognition of the respective financial asset in the statement of financial position or until its impairment: at such time the aggregate net gain or loss previously recognised in other comprehensive income is now recognised in the income statement. However, interest 17 18

28 calculated using the effective interest rate is recognised in the income statement. Dividends on available for sale equity instruments are recognised in the income statement when the entity s right to receive payment is established. The fair value of quoted investments in active markets is based on current market prices. If the market for a given financial asset is not an active one, the Group determines the fair value by applying valuation techniques. These comprise recently conducted transactions concluded according to normal market principles, reference to other instruments, discounted cash flow analysis, as well as valuation models for options and other valuation methods generally applied by market participants (see Note 20). If the application of valuation techniques does not ensure obtaining a reliable fair value of investments in equity instruments not quoted on an active market, they are stated at cost Reinsurance assets The Group transfers insurance risks to reinsurers in the course of typical operating activities in insurance activity. Reinsurance assets comprise primarily reinsurers share in technical-insurance provisions. The amounts of settlements with reinsurers are estimated according to relevant reinsured polices and reinsurance agreements. Tests for impairment of reinsurance assets are carried out if there is objective evidence that the reinsurance asset is impaired. Impairment loss of reinsurance asset is calculated if either there is an objective evidence that the Group might not receive the receivable in accordance with the agreement or the value of such impairment can be reliably assessed. If in a subsequent period the impairment loss is decreasing and the decrease can be objectively related to an event occurring after the recognition of impairment, then the previously recognised impairment loss is reversed as an adjustment of the impairment loss through the consolidated income statement. The reversal cannot cause an increase of the carrying amount of the financial asset more than the amount which would constitute the amortised cost of this asset on the reversal date if the recognition of the impairment did not occur at all Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously Impairment of financial assets Assets carried at amortised cost At the end of the reporting period, the Group estimates whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the future cash flows of the financial asset or group of financial assets that can be reliably estimated. Loss events were divided into definite ( hard ) loss events of which occurrence requires that there is a need to classify the client into the default category, and indefinite ( soft ) loss events of which occurrence may imply that there is a need to classify the client into the default category. The Group first assesses whether objective indications exist individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that for the given financial asset assessed individually there are no objective indications of its impairment (regardless of whether that particular item is material or not), the given asset is included in a group of financial assets featuring similar credit risk characteristics, which is subsequently collectively assessed in terms of its possible impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is impairment indicator for impairment of loans and receivables or investments held to maturity and recognised at amortised cost, the impairment amount is calculated as the difference between the carrying value in the statement of financial position of the respective asset and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying value of the asset is reduced through the use of an allowance account, and the resulting impairment loss is charged to the income statement. If a loan or held to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of collective evaluation of impairment, the credit exposures are grouped in order to ensure the uniformity of credit risk attached to the given portfolio. Many different parameters may be applied to the grouping into homogeneous portfolios, e.g., the type of counterparty, the type of exposure, estimated probability of default, the type of collateral provided, overdue status outstanding, maturities, and their combinations. Such features influence the estimation of the future cash flows attached to specific groups of assets as they indicate the capabilities of repayment on the part of debtors of their total liabilities in conformity with the terms and conditions of the contracts concerning the assessed assets. Future cash flows concerning groups of financial assets assessed collectively in terms of their possible impairment are estimated on the basis of contractual cash flows and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. For the purpose of calculation of the amount to be provisioned against balance sheet exposures analysed collectively, the probability of default (PD) method has been applied. By proper calibration of PD values, taking into account characteristics of specific products and emerging periods for losses on those products, such PD values allow already arisen losses to be identified and cover only the period in which the losses arising at the date of establishment of impairment should crystallise. When a loan is uncollectible, it is written off against the related provision for impairment. Before any loan is written off, it is necessary to conduct all the procedures required by the Group and sets the amount of the loss. Subsequent recoveries of amounts previously written off reduce the amount of the provision for loan impairment in the income statement. If in a subsequent period the impairment loss amount is decreasing and the decrease can be related objectively to an event occurring after the impairment was recognised (e.g., improvement of the debtor s credit rating), then the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recorded in the income statement. Assets measured at fair value At the end of the reporting period the Group estimates whether there is an objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity instruments classified as assets available for sale, a significant or prolonged decline in the fair value of the security below its cost resulting from higher credit risk is considered when determining whether the assets are impaired. If such kind of evidence concerning available for sale financial assets exists, the cumulative loss determined as the difference between the cost of acquisition and the current fair value is removed from other comprehensive income and recognised in the income statement. The above indicated difference should be reduced by the impairment concerning the given asset which was previously recognised in the income statement. Impairment losses concerning equity instruments recorded in the income statement are not reversed through the income statement, but through other comprehensive income. If the fair value of a debt instrument classified as available for sale increases in a subsequent period, and such increase can be objectively related to an event occurring after the recording of the impairment loss in the income statement, then the respective impairment loss is reversed in the income statement. Renegotiated agreements The Group considers renegotiations on contractual terms of loans and advances as impairment indicator unless the renegotiation was not due to the situation of the debtor but had been carried out on normal business terms. In such a case the Group makes an assessment whether the impairment should be recognised on either individual or group basis Financial guarantee contracts The financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. When a financial guarantee contract is recognised initially, it is measured at the fair value. After initial recognition, an issuer of such a contract measures it at the higher of: the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and 19 20

29 the amount initially recognised less, when appropriate, cumulative amortization recognised in accordance with IAS 18 Revenue Cash and cash equivalents Cash and cash equivalents comprise items with maturities of up to three months from the date of their acquisition, including: cash in hand and cash held at the Central Bank with unlimited availability for disposal, Treasury bills and other eligible bills, loans and advances to banks, amounts due from other banks and government securities acquired for the purpose of short-term resale Sell-buy-back, buy-sell-back, reverse repo and repo contracts Repo and reverse-repo transactions are defined as selling and purchasing securities for which a commitment has been made to repurchase or resell them at a contractual date and for a specified contractual price and are recognised when the money is transferred. Securities sold with a repurchase clause (repos/sell buy back) are reclassified in the financial statements as pledged assets if the entity receiving them has the contractual or customary right to sell or pledge them as collateral security. The liability towards the counterparty is recognised as amounts due to other banks, deposits from other banks, other deposits or amounts due to customers, depending on its nature. Securities purchased together with a resale clause (reverse repos/buy sell back) are recognised as loans and advances to other banks or other customers, depending on their nature. When concluding a repo or reverse repo transaction, sells or buys securities with a repurchase or resale clause specifying a contractual date and price. Such transactions are presented in the statement of financial position as financial assets held for trading or as investment financial assets, and also as liabilities in the case of sell-buy-back transactions and as receivables in the case of buy-sell-back transactions. Securities borrowed by the Group are not recognised in the financial statements, unless they are sold to third parties. In such case the purchase and sale transactions are recorded with a gain or a loss included in trading income. The obligation to return them is recorded at fair value as amounts due to customers. Securities borrowed under buy-sell-back transactions and then lent under sell-buy-back transactions are not recognised as financial assets. As a result of sell-buy-back transactions concluded on securities held by the Group, financial assets are transferred in such way that they do not qualify for derecognition. Thus, the Group retains substantially all risks and rewards of ownership of the financial assets Derivative financial instruments and hedge accounting Derivative financial instruments are recognised at fair value from the date of transaction. Fair value is determined based on prices of instruments listed on active markets, including recent market transactions, and on the basis of valuation techniques, including models based on discounted cash flows and options pricing models, depending on which method is appropriate in the particular case. All derivative instruments with a positive fair value are recognised in the statement of financial position as assets, those with a negative value as liabilities. The best fair value indicator for a derivative instrument at the time of its initial recognition is the price of the transaction (i.e., the fair value of the paid or received consideration). If the fair value of the particular instrument may be determined by comparison with other current market transactions concerning the same instrument (not modified) or relying on valuation techniques based exclusively on market data that are available for observation, then the Group recognises the respective gains or losses from the first day in accordance with the principles described under Note Embedded derivative instruments are treated as separate derivative instruments if the risks attached to them and their characteristics are not strictly linked to the risks and characteristics of the underlying contract and the underlying contract is not measured at fair value through the income statement. Embedded derivative instruments of this kind are measured at fair value and the changes in fair value are recognised in the income statement. In accordance with IAS 39 AG 30: (i), there is no need to separate the prepayment option from the host debt instrument for the needs of consolidated financial statements, because the option s exercise price is approximately equal on each exercise date to the amortised cost of the host debt instrument. If the value of prepayment option was not to be closely related to the underlying debt instrument, the option should be separated and fair valued in the consolidated financial statements of the Group; (ii), exercise price of a prepayment option reimburses the lender for an amount up to the approximate present value of lost interest for the remaining term of the host contract. Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the host contract over the effective interest rate the entity would receive at the prepayment date if it reinvested the principal amount prepaid in a similar contract for the remaining term of the host contract. The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument in accordance with IAS 32. The method of recognising the resulting fair value gain or loss depends on whether the given derivative instrument is designated as a hedging instrument, and if it is, it also depends on the nature of the hedged item. The Group designates some derivative instruments either as (1) fair value hedges against a recognised asset or liability or against a binding contractual obligation (fair value hedge), or as (2) hedges against highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge). Derivative instruments designated as hedges against positions maintained by the Group are recorded by means of hedge accounting, subject to the fulfilment of the criteria specified in IAS 39: At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity s risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. The hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship. For cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss. The effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured. The hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated. The Group documents the objectives of risk management and the strategy of concluding hedging transactions, as well as at the time of concluding the respective transactions, the relationship between the hedging instrument and the hedged item. The Group also documents its own assessment of the effectiveness of fair value hedging and cash flow hedging transactions, measured both prospectively and retrospectively from the time of their designation and throughout the period of duration of the hedging relationship between the hedging instrument and the hedged item. Due to the split of derivatives classified into banking book and into trading book, the Group applies a different approach to the presentation of interest income/expense for each of these groups of derivatives that is described in Note 2.3 Interest income and expenses. The remaining result from fair value measurement of derivatives is recognised in Net trading income. Fair value hedges Changes in the fair value of derivative instruments designated and qualifying as fair value hedges are recognised in the income statement together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. In case a hedge has ceased to fulfil the criteria of hedge accounting, the adjustment to the carrying value of the hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity. The adjustment to the carrying amount of the hedged equity security remains in other comprehensive income until the disposal of the equity security. Cash flow hedges The effective part of the fair value changes of derivative instruments designated and qualifying as cash flow hedges is recognised in other comprehensive income. The gain or loss concerning the ineffective part is recognised in the income statement of the current period. The amounts recognised in other comprehensive income are transferred to the income statement and recognised as income or cost of the same period in which the hedged item will affect the income statement (e.g., at the time when the forecast sale that is hedged takes place). In case the hedging instrument has expired or has been sold, or the hedge has ceased to fulfil the criteria of hedge accounting, any aggregate gains or losses recognised at such time in other comprehensive income remain in other comprehensive income until the time of recognition in the income statement of the forecast 21 22

30 transaction. When a forecast transaction is no longer expected to occur, the aggregate gains or losses recorded in other comprehensive income are immediately transferred to the income statement. Derivative instruments not fulfilling the criteria of hedge accounting Changes of the fair value of derivative instruments that do not meet the criteria of hedge accounting are recognised in the income statement of the current period. The Group holds the following derivative instruments in its portfolio: Market risk instruments: Futures contracts for bonds, index futures Options for securities and for stock-market indices Options for futures contracts Forward transactions for securities Commodity swaps Interest rate risk instruments: Forward Rate Agreement (FRA) Interest Rate Swap (IRS), Overnight Index Swap (OIS) Interest Rate Options Foreign exchange risk instruments: Currency forwards, fx swap, fx forward Cross Currency Interest Rate Swap (CIRS) Currency options Gains and losses on initial recognition The best evidence of fair value of a financial instrument at initial recognition is the transaction price (i.e., the fair value of the payment given or received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (without modification) or based on a valuation technique whose variables include only data from observable markets. The transaction for which the fair value determined using a valuation model (where inputs are both observable and non-observable data) and the transaction price differ, the initial recognition is at the transaction price. The Group assumes that the transaction price is the best indicator of fair value, although the value obtained from the relevant valuation model may differ. The difference between the transaction price and the model value, commonly referred to as day one profit and loss, is amortised over the period of time. The timing of recognition of deferred day one profit and loss is determined individually. It is either amortised over the life of the transaction, deferred until the instrument s fair value can be determined using market observable date, or realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred day one profits and losses Borrowings and deposits taken Borrowings (including deposits) are initially recognised at fair value reduced by the incurred transaction costs. After the initial recognition, borrowings are recorded at adjusted cost of acquisition (amortised cost). Any differences between the amount received (reduced by transaction costs) and the redemption value are recognised in the income statement over the period of duration of the respective agreements according to the effective interest rate method Intangible assets Intangible assets are recognised at their cost of acquisition adjusted by the costs of improvement (rearrangement, development, reconstruction or modernisation) and accumulated amortization. Accumulated amortization is accrued by the straight line method taking into account the expected period of economic useful life of the respective intangible assets. Goodwill Goodwill as of the acquisition date is measured as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquire over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is not amortised, but it is tested annually for impairment, and it is carried in the statement of financial position at cost reduced by accumulated impairment losses. Goodwill impairment losses should not be reversed. Gains and losses on the disposal of the activity include the carrying amount of goodwill relating to the sold activity. Goodwill is allocated to cash generating units or groups of cash generating units for the purpose of impairment testing. The allocation is made as at the date of purchase to those cash-generating units or groups of cash generating units that are expected to benefit from the business combination in which the goodwill arose, not bigger than operating segments in accordance with IFRS 8. Computer software Purchased computer software licences are capitalised in the amount of costs incurred for the purchase and adaptation for use of specific computer software. These costs are amortised on the basis of the expected useful life of the software (2-11 years). Expenses attached to the maintenance of computer software are expensed when incurred. Expenses directly linked to the development of identifiable and unique proprietary computer programmes controlled by the Group, which are likely to generate economic benefits in excess of such costs expected to be gained over a period exceeding one year, are recognised as intangible assets. Direct costs comprise personnel expenses directly related to the software. Capitalised costs attached to the development of software are amortised over the period of their estimated useful life. Computer software directly connected with the functioning of specific information technology hardware is recognised as Tangible fixed assets. Development costs The Group identifies development costs as intangible asset as the asset will generate probable future economic benefits and fulfil the following requirements described in IAS 38, i.e., the Group has the intention and technical feasibility to complete and to use the intangible asset, the availability of adequate technical, financial and other resources to complete and to use the intangible asset and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Development costs useful lives are finite and the amortization period does not exceed 3 years. Amortization rates are adjusted to the period of economic utilisation. The Group shows separately additions from internal development and separately those acquired through business combinations. Development expenditure comprises all expenditure that is directly attributable to research and development activities. Intangible assets are tested in terms of possible impairment always after the occurrence of events or change of circumstances indicating that their carrying value in the statement of financial position might not be possible to be recovered Tangible fixed assets Tangible fixed assets are carried at historical cost reduced by depreciation. Historical cost takes into account the expenses directly attached to the acquisition of the respective assets. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only where it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Any other expenses incurred on repairs and maintenance are expensed to the income statement in the reporting period in which they were incurred. Land is not depreciated. Depreciation of other fixed assets is accounted for according to the straight line method in order to spread their initial value reduced by the residual value over the period of their useful life which is estimated as follows for the particular categories of fixed assets: Buildings and structures Equipment Vehicles Information technology hardware Investments in third party fixed assets Office equipment, furniture years, 5-15 years, 5 years, years, years or the period of the lease contract, 5-10 years. Land and buildings consist mainly of branch outlets and offices. Residual values and estimated useful life periods are verified at the end of the reporting period and adjusted accordingly as the need arises. Depreciable fixed assets are tested in terms of possible impairment always after the occurrence of events or change of circumstances indicating that their carrying value in the statement of financial position might 23 24

31 not be possible to be recovered. The value of a fixed asset carried in the statement of financial position is reduced to the level of its recoverable value if the carrying value in the statement of financial position exceeds the estimated recoverable amount. The recoverable value is the higher of two amounts: the fair value of the fixed asset reduced by its selling costs and the value in use. If it is not possible to estimate the recoverable amount of the individual asset, the Group shall determine the recoverable amount of the cash-generating unit to which the asset belongs (cash-generating unit of the asset). Gains and losses on account of the disposal of fixed assets are determined by comparing the proceeds from their sale against their carrying value in the statement of financial position and they are recognised in the income statement Inventories Inventories are stated at the lower of: cost of purchase/cost of construction and net realisable value. Cost of construction of inventories comprises direct construction costs, the relevant portion of fixed indirect production costs incurred in the construction process and the borrowing costs, which can be directly allocated to the purchase or construction of an asset. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling costs. The amount of any inventory writedowns to the net realisable value and any inventory losses are recorded as costs of the period in which a write-down or a loss occurred and they are classified as other operating costs. Reversals of inventory write-downs resulting from increases in their net realisable value are recorded as a reduction of the inventories recognised as cost of the period in which the reversals took place. Inventory issues are valued through detailed identification of the individual purchase prices or costs of construction of the assets which relate to the realisation of the individual separate undertakings. In particular, inventories comprise land and rights to perpetual usufruct of land designated for use as part of construction projects carried out. They also comprise assets held for lease as well as assets taken over as a result of terminated lease agreements Non-current assets held for sale and discontinued operations The Group classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such assets (or disposal groups) and its sale must be highly probable, i.e., the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets held for sale are priced at the lower of: carrying value and fair value less costs to sell. Assets classified in this category are not depreciated. When criteria for classification to non-current assets held for sale are not met, the Group ceases to classify the assets as held for sale and reclassifies them into appropriate category of assets. The Group measures a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of: its carrying amount at a date before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortization or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale, and its recoverable amount at the date of the subsequent decision not to sell. Discontinued operations are a component of the Group that either has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operation or is a subsidiary acquired exclusively with a view to resale. The classification to this category takes places at the moment of sale or when the operation meets criteria of the operation classified as held for sale, if this moment took place previously. Disposal group which is to be taken out of usage may also be classified as discontinued operation Deferred income tax The Group creates a deferred income tax on the temporary difference arising between the carrying amount of an asset or liability in the statement of financial position and its tax base. A taxable net difference is recognised in liabilities as Provisions for deferred income tax. A deductible net difference is recognised under Deferred income tax assets. Any change in the balance of the deferred tax assets and liabilities in relation to the previous accounting period is recorded under the item Income Tax. The balance sheet method is applied for the calculation of the deferred corporate income tax. Liabilities or assets for deferred corporate income tax are recognised in their full amount according to the balance sheet method in connection with the existence of temporary differences between the tax value of assets and liabilities and their carrying value. Such liabilities or assets are determined by application of the tax rates in force by virtue of law or of actual obligations at the end of the reporting period. According to expectations such tax rates applied will be in force at the time of realisation of the assets or settlement of the liabilities for deferred corporate income tax. The main temporary differences arise on account of impairment write-offs recognised in relation to the loss of value of credits and granted guarantees of repayment of loans, amortization of fixed assets and intangible assets, finance leases treated as operating leases for tax purposes, revaluation of certain financial assets and liabilities, including contracts concerning derivative instruments and forward transactions, provisions for retirement benefits and other benefits following the period of employment, and also deductible tax losses. Deferred income tax assets are recognised to the extent it is probable that there will be sufficient taxable profits to allow them to recover. If the forecast amount of income determined for tax purposes does not allow the realisation of the asset for deferred income tax in full or in part, such an asset is recognised to the respective amount, accordingly. The above described principle also applies to tax losses recorded as part of the deferred tax asset. The Group presents the deferred income tax assets and liabilities netted in the statement of financial position separately for each subsidiary undergoing consolidation. Such assets and provisions may be netted against each other if the Group possesses the legal rights allowing it to simultaneously account for them when calculating the amount of the tax liability. In the case of the Bank, the deferred income tax assets and provisions are netted against each other separately for each country where the Bank conducts its business and is obliged to settle corporate income tax. The Group discloses separately the amount of negative temporary differences (mainly on account of unused tax losses or unutilised tax allowances) in connection with which the deferred income tax asset was not recognised in the statement of financial position, and also the amount of temporary differences attached to investments in subsidiaries and associates for which no deferred income tax provision has been formed. Deferred income tax for the Group is provided on assets or liabilities due to temporary differences arising from investments in subsidiaries and associates, except where, on the basis of any probable evidence, the timing of the reversal of the temporary difference is controlled by the Group and it is possible that the difference will not reverse in the foreseeable future. Deferred income tax on account of revaluation of available for sale investments and of revaluation of cash flow hedging transactions is accounted for in the same way as any revaluation, directly in other comprehensive income, and it is subsequently transferred to the income statement when the respective investment or hedged item affects the income statement Assets repossessed for debt Repossessed collateral represents financial and non-financial assets acquired by the Group in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equipment, financial assets or other assets depending on their nature and the Group's intention in respect of recovery of these assets. In case the fair value of repossessed collateral exceeds the receivable from the debtor, the difference constitutes a liability toward the debtor. Repossessed assets are subsequently measured and accounted for in accordance with the accounting policies relevant for these categories of assets Prepayments, accruals and deferred income Prepayments are recorded if the respective expenses concern the months succeeding the month in which they were incurred. Prepayments are presented in the statement of financial position under Other assets. Accruals include costs of supplies delivered to the Group but not yet resulting in its payable liabilities. Deferred income includes received amounts of future benefits. Accruals and deferred income are presented in the statement of financial position under the item Other liabilities. Deferred income comprises reinsurance and co-insurance commissions, resulting from insurance agreements included in reinsurance and co-insurance agreements, which are subject to settlement over the period in the proportional part to the future reporting periods

32 Acquisition costs in the part attributable to future reporting periods are subject to settlement, proportionally to the duration of the relevant insurance agreements Leasing as a lessor In the case of assets in use on the basis of a finance lease agreement, the amount equal to the net investment in the lease is recognised as receivables. The difference between the gross receivable amount and the present value of the receivables is recognised as unrealised financial income. Revenue from leasing agreements is recognised as follows: Interests on finance lease Revenue from finance lease is recognised on the accruals basis, based on the fixed rate of return calculated on the basis of all the cash flows related to the realisation of a given lease agreement, discounted using the lease interest rate. Net revenue from operating lease Revenue from operating lease and the depreciation cost of fixed assets provided by the Group under operating lease, incurred in order to obtain this revenue are recognised in net amount as other operating income in the profit and loss account. Revenue from operating lease is recognised as income on a straight-line basis over the lease period, unless application of a different systematic method better reflects the time allocation of benefits drawn from the leased asset. as a lessee The leases entered into by the Group are primarily operating leases. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease Provisions The value of provisions for contingent liabilities such as unutilised guarantees and (import) letters of credit, as well as for unutilised irreversible unconditionally granted credit limits, is measured in compliance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. According to IAS 37, provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Technical-insurance provisions for unpaid claims, benefits and premiums concern insurance activity. Provision for unpaid claims and benefits is created in the amount of the established or expected final value of future claims and benefits paid in connection with events before the reporting period date, including related claims handling costs. Provision for unpaid claims and benefits which were notified to the insurer and in relation to which the information held does not enable to assess the value of claims and benefits is calculated using the lump sum method. Provision for premiums is created individually for each insurance agreement as premium written, attributed to subsequent reporting periods, proportionally to the period for which the premium was written on the daily basis. However, in case of insurance agreements whose risk is not evenly apportioned over the period of duration of insurance, provision is created proportionally to the expected risk in subsequent reporting periods. At each reporting date, the Group tests for adequacy of technical-insurance provisions to ensure whether the provisions deducted by deferred acquisition costs are sufficient. The adequacy test is carried out using up-to-date estimates of future cash flows arising from insurance agreements, including costs of claims handling and policy-related costs. If the assessment reveals that the technical-insurance provisions are insufficient in relation to estimated future cash flows, then the whole disparity is promptly recognised in the consolidated income statement through impairment of deferred acquisition costs or/and supplementary provisions Post-employment employee benefits and other employee benefits Post-employment employee benefits The Group forms provisions against future liabilities on account of post-employment benefits determined on the basis of an estimation of liabilities of that type, using an actuarial model. The Group uses a principle of recognition of actuarial gains or losses from the measurement of post-employment benefits related to changes in actuarial assumptions in other comprehensive income. The Group recognizes service cost and net interest on the net defined benefit liability in profit or loss. Benefits based on shares The Bank runs programmes of remuneration based on and settled in own shares as well as based on shares of the ultimate parent of the Bank and settled in cash. These benefits are accounted for in compliance with IFRS 2 Share-based Payment. The fair value of the service rendered by employees in return for options and shares granted increases the costs of the respective period, corresponding to own equity in the case of transactions settled in own shares and liabilities in the case of cash-settled transactions based on shares of the ultimate parent of the Bank. The total amount which needs to be expensed over the period when the outstanding rights of the employees for their options and shares to become exercisable are vested is determined on the basis of the fair value of the granted options and shares. There are no market vesting conditions that shall be taken into account when estimating the fair value of share options and shares at the measurement date. Non-market vesting conditions are not taken into account when estimating the fair value of share options and shares but they are taken into account through adjustment on the number of equity instruments. At the end of each reporting period, the Bank revises its estimates of the number of options and shares that are expected to become exercised. In accordance with IFRS 2 it is not necessary to recognise the change in fair value of the share-based payment over the term of the programmes. In case of the part of the programme based on cash-settled share-based payments, until the liability related to the cash-settled share-based payments transactions is settled the Bank measures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. In addition, in one of the Group's subsidiaries there is an incentive programme based on phantom shares. These payments meet the definition of cash-settled transactions based on own shares Equity Equity consists of capital and own funds attributable to owners of the Bank, and non-controlling interest created in compliance with the respective provisions of the law, i.e., the appropriate legislative acts, the By-laws or the Company Articles of Association. Registered share capital Share capital is presented at its nominal value, in accordance with the By-laws and with the entry in the business register. Own shares In the case of acquisition of shares or equity interests in the Bank by the Bank the amount paid reduces the value of equity as own shares until the time when they are cancelled. In the case of sale or reallocation of such shares, the payment received in return is recognised in equity. Share premium Share premium is formed from the share premium obtained from the issue of shares reduced by the attached direct costs incurred with that issue. Share issue costs Costs directly connected with the issue of new shares or reduce the proceeds from the issue recognised in equity. Retained earnings Retained earnings include: other supplementary capital, other reserve capital, general banking risk reserve, undistributed profit for the previous year, net profit (loss) for the current year. Other supplementary capital, other reserve capital and general banking risk reserve are formed from allocations of profit and they are assigned to purposes specified in the By-laws or other regulations of the law. Moreover, other reserve capital comprises valuation of employee options. Dividends for a given year, which have been approved by the General Meeting but not distributed at the end of the reporting period, are shown under the liabilities on account of dividends payable under the item Other liabilities. Other components of equity Other components of equity result from: 27 28

33 valuation of available for sale financial instruments, exchange differences on translation of foreign operations, actuarial gains and losses relating to post-employment benefits Valuation of items denominated in foreign currencies Functional currency and presentation currency The items contained in financial reports of particular entities of the Group, including foreign branches of the Bank, are valued in the currency of the basic economic environment in which the given entity conducts its business activities ( functional currency ). The financial statements are presented in the Polish zloty, which is the presentation currency of the Group and the functional currency of the Bank. Transactions and balances Transactions denominated in foreign currencies are converted to the functional currency at the exchange rate in force at the transaction date. Foreign exchange gains and losses on such transactions as well as balance sheet revaluation of monetary assets and liabilities denominated in foreign currency are recognised in the income statement. Foreign exchange differences arising on account of such monetary items as financial assets measured at fair value through the income statement are recognised under gains or losses arising in connection with changes of fair value. Foreign exchange differences on account of such monetary assets as equity instruments classified as available for sale financial assets are recognised under other comprehensive income. Changes in fair value of monetary items available for sale cover foreign exchange differences arising from valuation at amortised cost, which are recognised in the income statement. Items of the statement of financial position of foreign branches are converted from functional currency to the presentation currency with the application of the average exchange rate as at the end of the reporting period. Income statement items of these entities are converted to presentation currency with the application of the arithmetical mean of average exchange rates quoted by the National Bank of Poland on the last day of each month of the reporting period. Foreign exchange differences so arisen are recognised in other comprehensive income. Companies belonging to the Group The performance and the financial position of all the entities belonging to the Group, none of which conduct their operations under hyperinflationary conditions, the functional currencies of which differ from the presentation currency, are converted to the presentation currency as follows: assets and liabilities in each presented statement of financial position are converted at the average rate of exchange of the National Bank of Poland (NBP) in force at the end of this reporting period; revenues and expenses in each income statement are converted at the rate equal to the arithmetical mean of the average rates quoted by NBP on the last day of each of 12 months of each presented periods; whereas all resulting foreign exchange differences are recognised as a distinct item of other comprehensive income. Upon consolidation, foreign exchange differences arising from the conversion of net investments in companies operating abroad are recognised in other comprehensive income. Upon the disposal of a foreign operation, such foreign exchange differences are recognised in the income statement as part of the profit or loss arising upon disposal. Leasing business Gains and losses on foreign exchange differences from the valuation of liabilities on account of credit financing of purchases of assets under operating leasing schemes are recognised in the income statement. In the operating leasing agreements recognised in the statement of financial position the fixed assets subject to the respective contracts are recognised at the starting date of the appropriate contract as converted to PLN, whereas the foreign currency loans with which they were financed are subject to valuation according to the respective foreign exchange rates. In the case of finance lease agreements the foreign exchange differences arising from the valuation of leasing receivables and liabilities denominated in foreign currency are recognised through the income statement at the end of the reporting period Trust and fiduciary activities mbank S.A. operates trust and fiduciary activities including domestic and foreign securities and services provided to investment and pension funds. Dom Maklerski mbanku S.A. operates trust and fiduciary activities in connection with the handling of securities accounts of the clients. The assets concerned are not shown in these financial statements as they do not belong to the Group. Other companies belonging to the Group do not conduct any trust or fiduciary activities New standards, interpretations and amendments to published standards These financial statements comply with all the International Accounting Standards and the International Financial Reporting Standards endorsed by the European Union, and the interpretations related to them, except for those standards and interpretations listed below which await endorsement of the European Union or which have been endorsed by the European Union but entered or will enter into force after the balance sheet date. In the period covered by the financial statements, the Group decided for early application of IFRS 10, IFRS 11, IFRS 12 and amendments to IFRS 10, IFRS 11 and IFRS 12. In relation to other standards and interpretations that have been approved by the European Union, but entered or will enter into force after the balance sheet date, the Group did not use the possibility of early application. Published Standards and Interpretations which have been issued and binding for the Group for annual periods starting on 1 January 2013: Standards and interpretations approved by the European Union: IFRS 10, Consolidated Financial Statements, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December IFRS 10 supersedes those parts of IAS 27 Consolidated and Separate Financial Statements that address when and how an investor should prepare consolidated financial statements, and eliminates interpretation SIC-12 Consolidation - Special purpose entities in its entirety. The objective of IFRS 10 is to have a single basis for consolidation for all entities, regardless of the nature of the investee. It was decided that control is such a basis. The principle of control sets out the following three elements of control: power over the entity in which the investment was made, exposure or rights to variable returns from involvement with the investee, and the ability to use power over the investee to affect the amount of the investor's return. IFRS 10 provides detailed guidance on how to apply the control principle in a number of situations, including agency relationships and holdings of potential voting rights. An investor should reassess whether it controls an investee if there is a change in facts and circumstances. The application of the standard had no significant impact on the financial statements in the period of its initial application. IFRS 11, Joint Arrangements, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December IFRS 11 supersedes IAS 31 Interests in Joint Ventures and interpretation SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Ventures. The new standard classifies joint agreements as either joint operations (joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities) or joint ventures (joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement). IFRS 11 requires the use of the equity method of accounting for interests in joint arrangements, thereby eliminating the proportionate consolidation method. The existence of a separate legal vehicle is no longer the key factor of classification. Transitional provisions vary depending on the joint arrangements classification under IAS 31. The application of the standard had no significant impact on the financial statements in the period of its initial application. IFRS 12, Disclosure of Interests in Other Entities, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December The new standard requires extensive disclosures relating to a reporting entity's interests in subsidiaries, associates, joint arrangements, and unconsolidated structured entities. An entity is also required to disclose information that enables users of its financial statements to evaluate the nature of and risks associated with its interests in other entities and the effects of those interests on its financial statements

34 The application of the standard had no significant impact on the financial statements in the period of its initial application. IFRS 13, Fair Value Measurement, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December The new standard clarifies the definition of fair value, sets out a framework for measuring fair value and requires disclosures on fair value measurements. The standard does not specify requirements on when fair value measurement is required. It only prescribes the various valuation techniques that can be used to determine fair value, if required by other standards. The standard applies to both financial and non-financial items measured at fair value. The application of the standard had no significant impact on the financial statements in the period of its initial application. Additional disclosures where it is required, are included in the individual notes relating to the assets and liabilities whose fair values were determined. The fair value hierarchy is presented under Note IAS 19 (Amended), Employee Benefits, published by the International Accounting Standards Board on 16 June 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 5 June The amendments modify the settlement methods for defined benefit plans and termination benefits. The amendments aim at improving the quality of financial reporting of employee benefits through: introducing a more comprehensible form of presenting changes in liabilities relating to defined benefits and fair value of the plan assets, eliminating certain presentation methods allowed under IAS 19, thus improving comparability, clarifying the requirements which previously led to differences in the practices applied, and improving the quality of disclosures about risks arising from defined benefit plans. The amended standard requires immediate recognition of all estimated changes in liabilities relating to defined benefits and plan assets, which eliminates the corridor method and accelerates the recognition of past service costs. The Group has applied retrospectively IAS 19 Employee benefits (changes in 2011) in accordance with the transitional provisions of this standard. IAS 27, Separate Financial Statements, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December IAS 27 and IFRS 10 supersede IFRS 27 Consolidated and Separate Financial Statements. The name of the standard was changed. The amended standard applies only to separate financial statements. The previous guidance and the required disclosures relating to separate financial statements remain unchanged. The application of the standard had no significant impact on the financial statements in the period of its initial application. IAS 28, Investments in Associates and Joint Ventures, published by the International Accounting Standards Board on 12 May 2011, binding for annual periods beginning on or after 1 January The standard was endorsed by the European Union on 11 December It supersedes IAS 28 Investments in Associates. The standard was amended to reflect the requirements of IFRS 11 and IFRS 12. The standard sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. Moreover, the standard incorporates SIC-13 (jointly controlled entities - non-monetary contributions by ventures). The disclosure requirements have been removed from the standard and specified in IFRS 12. The application of the standard had no significant impact on the financial statements in the period of its initial application. Amendments to IAS 1, Presentation of Items of Other Comprehensive Income, published by the International Accounting Standards Board on 16 June 2011, binding for annual periods beginning on or after 1 July The amendments were endorsed by the European Union on 5 June The amendments address the grouping of items of other comprehensive income (OCI). The amendments require that items of OCI be divided into: items that would be reclassified into profit or loss in future periods, items that would not be reclassified into profit or loss in future periods. The standard allows an entity to present items of OCI either before tax or net of tax. However, if the items are presented before tax then the tax related to each of the two groups of OCI items (those that might be reclassified and those that will not be reclassified) must be shown separately. The amendments leave entities the possibility to present their profit or loss and other comprehensive income in a single statement (Statement of profit or loss and other comprehensive income) or in two separate statements. The Group made retrospective changes to the presentation of other comprehensive income in the consolidated financial statements. The adoption of these changes had no impact on the financial position or the comprehensive income of the Group. Amendments to IFRS 7, Disclosures - Offsetting Financial Assets and Financial Liabilities, published by the International Accounting Standards Board on 16 December 2011, binding for annual periods beginning on or after 1 January The amendments were endorsed by the European Union on 13 December The standard sets out the required disclosures to include information that will enable investors and other users of financial statements to evaluate the effect or potential effect of offsetting financial assets and liabilities on an entity's financial position. The standard requires quantitative and qualitative disclosures on the financial assets and liabilities subject to offsetting. At the reporting date, the entity is obliged to disclose detailed quantitative information, separately for financial assets and financial liabilities, in tabular format. The application of the standard had no significant impact on the financial statements in the period of its initial application. Improvements to IFRS , modifying 5 standards, published by the International Accounting Standards Board on 17 May 2012, in majority binding for annual periods starting on or after 1 January The amendments are aimed at simplifying the process of transition to IFRS, as well as explanation or elimination accidental inconsistencies in the published standards. The application of the standard had no significant impact on the financial statements in the period of its initial application. IAS 1 Clarification of the requirement for comparative data (change) These amendments clarify the difference between voluntary additional comparative information and the minimum required comparative information. The Group must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The amendments clarify that the opening statements of the financial position / consolidated balance sheet at the beginning of the comparative period (as at 1 January 2012 for the Group) presented as a result of retrospective restatement or reclassification of items in consolidated statement of financial position / consolidated balance does not have to be accompanied by comparative information in the related notes. As a result, the Group has not included comparative information in respect of the opening position of the opening statement financial position as at 1 January The amendments affect presentation only and have no impact on the Group's financial position or performance. Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets, published by the International Accounting Standards Board on 29 May 2013, binding for annual periods starting on or after 1 January The Standard introduces for non-financial assets the requirement of disclosure the recoverable amount for each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison with the total carrying amount of goodwill or intangible assets with indefinite useful lives, i.e. not only for unit, for which an impairment loss has been recognized or reversed during the period. The application of the amended standard had no significant impact on the financial statements in the period of its initial application. Government Loans (Amendments to IFRS 1) concerning government loans, were published in March 2012 by the International Accounting Standards Board (IASB) and apply to annual periods starting on 1 January 2013 or after that date

35 Amendments concerning government loans and borrowings granted to an entity on preferential terms (interest rate below the market rate) allow releasing those who are adopting the IFRS in financial statements for the first time from presenting full accounting records of these transactions. Therefore, these amendments implement the same exemption for those who are adopting the IFRS in financial statements for the first time as applicable to other. The application of the amended standard had no significant impact on the financial statements in the period of its initial application. Published Standards and Interpretations which have been issued but are not yet binding or have not been adopted early: Standards and interpretations approved by the European Union: Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities, published by the International Accounting Standards Board on 16 December 2011, binding for annual periods beginning on or after 1 January The amendments were endorsed by the European Union on 13 December The amendments aim to eliminate inconsistencies identified in applying some of the offsetting financial assets and liabilities criteria. The amendments clarify the criteria that must be met by an entity planning to offset financial assets and financial liabilities in the balance sheet, by: clarifying the meaning of 'currently has a legally enforceable right to set off', and explaining when some gross settlement systems may be considered equivalent to net settlement of financial assets and liabilities. The Group is of the opinion that the application of the amended standard will have no significant impact on the financial statements in the period of its initial application. Amendments to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting, published by the International Accounting Standards Board on 27 June 2013, binding for annual periods starting on or after 1 January The amended IAS 39 provided relief from discontinuing the hedge accounting for a derivative that has been designated as a hedging instrument in an existing hedging relationship if the derivative is novated to a central counterparty following the introduction of a new law or regulation and it meets certain criteria. The Group is of the opinion that the application of the amended standard will have no significant impact on the financial statements in the period of its initial application. Amendments to IFRS 10, IFRS 12 and IAS 27, Investment Entities, published by the International Accounting Standards Board on 31 October 2012, binding for annual periods starting on or after 1 January The amendments were endorsed by the European Union on 20 November The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. These amendments require an investment entity to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and separate financial statements. The amendments also introduce new disclosure requirements for investment entities in IFRS 12 and IAS 27. The Bank does not meet the definition of an investment entity, therefore the use of the standard will not have a significant impact on the financial statements. Standards and interpretations not yet approved by the European Union: IFRS 9, Financial Instruments Part 1: Recognition and Measurement, published by the International Accounting Standards Board on 12 November 2009, supersedes the parts of IAS 39 addressing classification and measurement of financial assets. On 28 October 2010, new requirements addressing classification and measurement of financial liabilities were added to IFRS 9. The new standard is binding for annual periods beginning on or after 1 January The standard introduces a single approach to classification of financial assets in only two categories: measurement at amortised cost or fair value. The classification is made on initial recognition and is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial instruments. The majority of requirements of IAS 39 addressing the classification and measurement of financial liabilities have been transferred to IFRS 9 unchanged. The key change is the obligation imposed on entities to present the effects of changes in the entity's own credit risk in respect of financial liabilities measured at fair value through income statement, in other comprehensive income. The Group is of the opinion that the application of the standard on recognition and measurement of financial instruments will have an impact on the presentation of these instruments in the financial statements. The real impact of the IFRS 9 application will be possible to estimate after the publication of the final, complete version of the standard. IFRS 14, Regulatory Deferral Accounts, published by the International Accounting Standards Board on 30 January 2014, binding for annual periods starting on or after 1 January The Standard permits an entity that adopts IFRS to continue to use, in its first and subsequent IFRS financial statements, its previous accounting policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances. The Standard requires to present regulatory deferral account balances as separate line items in the statement of financial position and to present movements in those account balances as separate line items in the statement of profit and loss and other comprehensive income. The disclosures to identify the nature of, and risks associated with, the rate regulation that has resulted in the recognition of regulatory deferral account balances are also required. The Group is of the opinion that the application of the amended standard will have no significant impact on the financial statements in the period of its initial application. IAS 19 (Amended), Defined Benefit Plans: Employee Contributions, published by the International Accounting Standards Board on 21 November 2013, binding for annual periods starting on or after 1 July The amendment relates only to contributions for defined benefit plans from employees or third parties. The amendment of the Standard is aimed at clarification and simplification the accounting requirements for contributions independent of the number of years of service, i.e. contributions that are a fixed percentage of the employee s salary, a fixed amount throughout the service period or dependent on the employee s age. In accordance with the amendment of the Standard such contributions should be recognized as a reduction in the service cost in the period in which the related service is rendered, instead of attributing the contributions to the periods of service. The Group is of the opinion that the application of the amended standard will have no significant impact on the financial statements in the period of its initial application. IFRIC 21, Levies, published by International Financial Reporting Standard Interpretations Committee on 20 May 2013, binding for annual periods starting on or after 1 January The published interpretation is aimed at defining the moment of recognition of a liability to pay a levy if that liability is within the scope of IAS 37 or whose timing and amount is certain not addressing whether the recognition of a liability to pay a levy gives rise to an asset or an expense. The Group believes that the application of IFRIC 21 will have no impact on the total level of recognised fees of the financial year, but it may have an impact on the level of such costs recognised in each quarter of the financial year. Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance, published by the International Accounting Standards Board on 31 October 2012, binding for annual periods starting on or after 1 January The amendments clarify the date of initial application of IFRS 10 as the beginning of the annual reporting period in which IFRS 10 is applied for the first time. They precise also there is no requirement to adjust comparative periods, if the consolidation conclusion reached at the date of initial application is the same when applying IAS 27/SIC 12. Moreover, the amendments clarify additional relief from adjustment of comparative information for periods prior to the immediately preceding period in transition to IFRS 10, IFRS 11 and IFRS 12. The Group is of the opinion that the application of the amended standards had no significant impact on the financial statements in the period of their initial application. Annual Improvements to IFRSs , published by the International Accounting Standards Board on 12 December 2013, in majority binding for annual periods starting on or after 1 July

36 The improvements to the following standards were implemented during the cycle: IFRS 2 in terms of changing definitions: vesting condition, market condition and adding definitions: service condition and performance condition, IFRS 3 in terms of clarification of classification a contingent consideration by an acquirer, IFRS 8 in terms of disclosure requirement of judgments made by management in applying the aggregation criteria for operating segments and disclosure of reconciliation of the total of the reportable segments assets to the total assets, IFRS 13 in terms of clarification of doubts for the possibility of simplified measurement of short-term receivables and payables without discounting, when the effect of not discounting is immaterial, IAS 16 and IAS 38 in terms of proportionate restatement of accumulated depreciation or amortization, respectively, when an item of property, plant and equipment or intangible asset, respectively is revalued, IAS 24 in terms of identifying related party which provides key management personnel services to the reporting entity or to the parent of the reporting entity. The Group is of the opinion that the application of the amended standards will have no significant impact on the financial statements in the period of their initial application. Annual Improvements to IFRSs , published by the International Accounting Standards Board on 12 December 2013, binding for annual periods starting on or after 1 July The improvements to the following standards were implemented during the cycle: IFRS 1 in terms of clarification of using the IFRSs that are effective by the first-time adopter, IFRS 3 in terms of the elimination from its scope the accounting for the formation of joint arrangement defined in IFRS 11 in the financial statements of the joint arrangement itself, IFRS 13 in terms of the clarification of the exception for measuring the fair value of a group of financial assets and financial liabilities based on price that would have been achieved for sale of net long position or transfer net short position in case of exposure to a specific risk, IAS 40 in terms of the clarification the reference between IFRS 3 and IAS 40 related to classification of property as investment property or owner-occupied property. The Group is of the opinion that the application of the amended standards will have no significant impact on the financial statements in the period of their initial application Comparative data In 2013, the Group introduced changes in its accounting policies described below, which led to the restatement of comparative information presented in these consolidated financial statements. a) Actuarial gains and losses In 2013, the Group introduced a change of accounting policies in the presentation of actuarial gains or losses from the measurement of post-employment benefits. On the basis of the application of revised IAS 19 the Group introduced a principle of recognition of actuarial gains or losses from the measurement of post-employment benefits related to changes in actuarial assumptions in other comprehensive income and not as previously in profit or loss. completion of the service. Expenses directly linked to the sale of insurance products are recognised using the same pattern as in case of income. This means that part of expenses is treated as an element adjusting the calculation of effective interest rate for interest income and the remaining part of expenses is recognised in fee and commission expenses as upfront cost or as cost accrued over time. The Group estimates also the part of remuneration which in the future will be returned due to early termination of insurance contract and appropriately decreases interest income or fee and commission income to be recognised. The restatement of comparative data for the year 2012 due to this change resulted in a decrease of consolidated net profit for the year 2012 by the amount of PLN thousand and a decrease of the total consolidated equity as at 31 December 2012 by the amount of PLN thousand. The changes in accounting policy caused a decrease of a total amount of consolidated equity as at 31 December 2013 by the amount of PLN thousand compared to the level of equity that would have been recognised if the accounting approach applied to the end of 2012 will be still valid. The following tables present the impact of the changes in accounting policies introduced in 2013 on comparative data for respective reporting periods presented in these consolidated financial statements. Adjustments in the consolidated statement of financial position. ASSETS before restatement Restatement after restatement before restatement Restatement after restatement Loans and advances to customers ( ) ( ) Deferred income tax assets Other items of assets T o t a l a s s e t s (91 063) (85 379) LIABILITIES AND EQUITY T o t a l l i a b i l i t i e s E q u i t y Equity attributable to Owners of mbank S.A (91 063) (85 379) Share capital Retained earnings: (91 288) (85 379) Profit for the previous year (85 379) (85 379) Net profit for the current year (5 909) Other components of equity Non-controlling interests T o t a l e q u i t y (91 063) (85 379) T o t a l l i a b i l i t i e s a n d e q u i t y (91 063) (85 379) The restatement of comparative data for the year 2012 due to this change resulted in a reduction of net profit for the year 2012 by the amount of PLN 225 thousand and an increase in actuarial gains or losses relating to post-employment benefits, presented in other components of equity, by the same amount. The adjustment had no impact on the total amount of equity as at 31 December b) Recognition of income and expenses from selling insurance products attached to loans In 2013, the Group introduced a change of its accounting policies regarding recognition of income and expenses from selling insurance products attached to loans. Due to fact that the purchase of insurance products attached to loans by the Group s clients has always voluntary character, in 2012 and before the Group treated such insurance contracts as separate products and income from the sale of insurance products attached to loans was in most cases recognised as an upfront income. At the same time, in cases where for certain products and certain sales channels intermediary costs of selling insurance products existed, the Group considered such costs as costs related to sale of loans. As a result, in cases where intermediary costs existed, they were deemed as part of the effective interest rate calculation for loans. In 2013, also as a result of a detailed guidance provided by the Polish Financial Supervision Authority in December 2013, the Group verified its approach towards the recognition of bancassurance income and adhered to the afore-mentioned guidance. As a result of this change the Group implemented the recommended definition of bundled products and retrospectively implemented the policy of recognition of income and expenses from sale of insurance products attached to loans split into interest income and fee and commission income based on the relative fair value analysis of each of these products. The remuneration included in interest income is recognised over time as part of effective interest rate calculation for the bundled loan. The remuneration included in fee and commission income is recognised partly as upfront income and partly including deferring over time based on the analysis of the stage of 35 36

37 Adjustments in the consolidated income statement. Adjustments in the consolidated statement of cash flows. the period from to before restatement Restatement from to after restatement the period from to before restatement Restatement from to after restatement Interest income Interest expense ( ) (352) ( ) Net interest income Fee and commission income (57 074) Fee and commission expense ( ) ( ) Net fee and commission income (53 334) Dividend income Net trading income Gains less losses from investment securities, investments in subsidiaries and associates Other operating income Net impairment losses on loans and advances ( ) - ( ) Overhead costs ( ) 74 ( ) Amortisation ( ) - ( ) Other operating expenses ( ) - ( ) Operating profit (7 295) Profit before income tax (7 295) Income tax expense ( ) ( ) Net profit (5 909) Net profit attributable to: - Owners of mbank S.A (5 909) Non-controlling interests Basic earnings per share (in PLN) Diluted earnings per share (in PLN) Adjustments in the consolidated statement of comprehensive income. the period from to before restatement Restatement from to after restatement Net profit (5 909) Other comprehensive income net of tax, including: Items that may be reclassified subsequently to the the income statement Exchange differences on translation of foreign operations (net) (1 815) - (1 815) Change in valuation of available for sale financial assets (net) Items that will not be reclassified to the income statement Actuarial gains and losses relating to post-employment benefits (net) Total comprehensive income net of tax, total (5 684) Total comprehensive income (net), attributable to: - Owners of mbank S.A (5 684) Non-controlling interests A. Cash flows from operating activities Profit before income tax (7 295) Adjustments: Income taxes paid ( ) - ( ) Amortisation, including amortisation of fixed assets provided under operating lease Foreign exchange (gains) losses related to financing activities ( ) - ( ) (Gains) losses on investing activities (10 226) - (10 226) Impairment of investments in subsidiaries Dividends received (13 902) - (13 902) Interest income (income statement) ( ) (46 317) ( ) Interest expense (income statement) Interest received Interest paid ( ) (74) ( ) Changes in loans and advances to banks ( ) - ( ) Changes in trading securities (522) - (522) Changes in assets and liabilities on derivative financial instruments Changes in loans and advances to customers Changes in investment securities Changes in other assets (39 754) - (39 754) Changes in amounts due to other banks ( ) - ( ) Changes in amounts due to customers Changes in debt securities in issue Changes in provisions Changes in other liabilities ( ) - ( ) Net cash generated from operating activities B.Cash flows from investing activities ( ) - ( ) C. Cash flows from financing activities ( ) - ( ) Net increase / decrease in cash and cash equivalents (A+B+C) Effects of exchange rate changes on cash and cash equivalents (31 147) - (31 147) Cash and cash equivalents at the beginning of the reporting period Cash and cash equivalents at the end of the reporting period The above described and presented changes of comparative data are included in these consolidated financial statements in all the notes to which such changes regarded. 3. Financial and Insurance Risk management The mbank Group manages risks on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines. The risk management functions and roles are released on all of the levels of the organizational structure, starting at the level of the Supervisory Board down to each business unit. Risk management is streamlined in unified process run by specialized organizational units Division of responsibilities in the risk management process According to the Group s Strategy One Bank for Clients and Employees, approved by the Management Board and the Supervisory Board, the Bank has modernised the Risk Area s organisational structure in order to reflect the client-centric approach and integrated responsibility for all risks. The mbank Group risk management concept is based on three lines of defence which represent: Underlying responsibility of Business for risk risk management in Business operations; Responsibility of the Risk Area understood as defining processes, providing substantive support, making business decisions, as well as measuring, mitigating, monitoring and reporting the Group s risks. This line of defence ensures independent supervision over the underlying responsibility of the Bank for risk ; Role of the internal audit function defined as providing independent assessment of Business and Risk

38 Risk responsibilities are based on the following pillars of organisational management: CLIENT-CENTRIC understanding Risk clients needs; ONE RISK integrated approach on risk management and accountability to clients for all risks defined in the Risk Catalogue; RISK VS. RETURN RATE supporting Business in the decision-making process and defining the Bank s risk appetite based on the long-term relation of risk to the return rate. A new initiative of the Risk Area was added in 2013 to the One Bank Strategy implemented in : Approach to Risk Management. It includes a range of projects grouped in five themes: Strengthening the Business-Risk Dialogue; Review of risk appetite definitions Improvement of the credit process Improvement of Risk employee competences; Simplification and integration of the Risk IT structure. One of the outcomes of Risk efforts in the implementation of the One Bank Strategy was the establishment of the Risk Forum in early The Risk Forum includes the following committees which are the decisionmaking and communication platforms based on the concept of strengthening the Business-Risk dialogue: Retail Banking Risk Committee (KRD); Corporate and Investment Banking Risk Committee (KRK); Financial Markets Risk Committee (KRF). Authorities of the Bank: Supervisory Board, through its Risk Committee, exercises constant supervision over the Bank's operations in the risk taking area, which includes approving the Risk Management Strategy and supervising its execution. Management Board of the Bank develops the Risk Management Strategy of and is responsible for establishing and implementing the principles of managing individual risk types and for their coherence with the Risk Management Strategy. Moreover, the Management Board defines the organisational structure of the Bank, ensuring the separation of roles, and allocates the tasks and responsibility to individual units. Directors of the Bank: Board Member, Chief Risk Officer is responsible for organising, developing and implementing the process of identifying, measuring, monitoring and controlling credit risk, market risk, operational risk and liquidity risk in mbank Group. Committees: Risk Committee of mbank S.A. (till ) was responsible, in particular, for establishing the principles of identifying, measuring, monitoring and controlling risk and for setting strategic risk limits. From , responsibilities of the Risk Committee of mbank S.A. have been forwarded to the Business and Risk Forum of mbank Group, playing the role of a decision and communication platform for the risk management area and individual business lines, consisting of: Retail Banking Risk Committee, Corporate and Investment Banking Risk Committee, Financial Markets Risk Committee. In particular, the committees listed above perform the following tasks: taking decisions and making recommendations concerning: rules for managing the risk of products offered or planned to be offered by business lines and particular client segments, risk appetite of business lines, the definitions and the risk limits levels in relation to the activities of the business line; setting priorities and directions of changes in the organization of the processes and tools for risk assessment; based on the provided reports and information, the assessment of: the quality and efficiency of transaction portfolios or customer segments, the operational risk and other non-financial risks and approving/initiating the recovery plans, the quality of the data used to assess the risk and to calculate the capital requirement, the early risk symptoms and approving/initiating remedial actions. Taking into account the external regulatory limitations, the above tasks are performed also in relation to the subsidiaries. Assets and Liabilities Committee of the mbank Group (ALCO) is responsible, in particular, for developing the Bank's strategy on the structure of assets and liabilities, obligations, and off-balance sheet items, with the aim of optimizing funds allocation. Capital Management Committee is responsible, in particular, for managing capital, which includes also issuing recommendations for the Management Board of the Bank on measures in respect of capital management, capital level and structure, and on increasing the effectiveness of capital utilisation, and recommendations on the Bank's internal procedures related to capital management and capital planning. Data Quality Management Committee for the purpose of calculating the Bank's regulatory capital requirement (AIRB; till ) was responsible, in particular, for creating conditions for the implementation and development of an effective system for managing the quality of credit portfolio data in order to ensure compliance with the requirements of the advanced internal ratings based approach (AIRB), used to calculate the capital requirement for credit risk. From 2014, all tasks of this committee have been forwarded to the Retail Banking Risk Committee, the Corporate and Investment Banking Risk Committee, the Financial Markets Risk Committee and the Data Quality and IT Systems Development Committee. Data Quality and IT Systems Development Committee (from ), is responsible for the tasks and decision making process in scope of principles and structure of operation of the data quality management system, approving operational standards of data management, assessing the effectiveness of the data quality management system, initiating actions aimed at improving data quality at the Bank, in particular, taking into account the needs related with calculating the regulatory capital requirements of the Bank under the AIRB approach. Credit Committee of the Bank's Management Board (KKZB) is responsible, in particular, for: making credit decisions concerning companies in accordance with the decision-making matrix, depending on the rating and amount of exposure, making decisions on debt conversion into shares, stocks, etc., making decisions on taking over properties in return for debts, making any other decisions going beyond the jurisdiction of the lower-level decision-making authorities. Credit Policy Committee of the Retail Banking (KPK; till ) was responsible, in particular, for: approving or amending the decision-making methodology for granting credit products of the retail banking, making decisions on admitting credit products to or withdrawing them from sale, monitoring the quality and profitability of the credit products portfolio, and making decisions on measures to be taken in the case of negative occurrences related with the quality or profitability of that portfolio. From , all tasks of KPK have been forwarded to the Retail Banking Risk Committee being a part of the Business and Risk Forum of mbank Group. Credit Committee of the Retail Banking (KKD) is responsible, in particular, for: making individual credit decisions concerning retail clients in the case when the total exposure to such a client, the transaction amount or the AIRB risk parameters (PD/LGD/EL) defined for the client/transaction reach a specified threshold set for this decision-making level, 39 40

39 making decisions on granting decision-making powers to individual employees of the Bank, or on changing or revoking those powers. Other units: 1. Organisational units of the Risk Area The function of management at the strategic level and the function of control of credit, market, liquidity and operational risks and risk of models used to quantify the aforesaid risk types are performed in the Risk Area supervised by the Chief Risk Officer. The chart below presents the organisational structure of this area. Retail Risk Department Corporate Risk Assessment Department The roles played by particular units in the process of identifying, measuring, monitoring and controlling risk, which also includes assessing individual credit risk posed by clients and establishing the client selection rules, have been strictly defined. Within the scope of their powers, the units develop methodologies and systems supporting the aforesaid areas. Furthermore, the risk control units also report on risk and support the major authorities of the Bank. Retail Risk Department: development of risk management principles and processes, acceptance of retail banking products, including the impact on the different types of risk and capital requirements, development of reports for monitoring of risk management policies, development and management of systems supporting the risk assessment and decision-making process, setting up decision-making rules, making credit decisions (for private individuals and micro-business clients), administration of the loan portfolio, collection, restructuring and development of policies for these processes, credit fraud prevention and operational risk control in the credit process. Corporate Risk Assessment Department: developing and implementing the credit policy (excluding the retail banking), controlling and managing credit risk of the Bank and the Group, excluding the retail banking area, including the scope of exposures subject to supervision, restructuring and debt collection carried out by the Debt Restructuring and Collection Department, early identification of non-default clients at risk of losing their creditworthiness. Corporate Risk Processes Department: Vice-President of the Management Board & CRO Corporate Risk Processes Department Financial Markets Risk Department Integrated Risk and Capital Management Department organising corporate credit process and supervision over its realisation by the Bank and mbank Group entities, creating Bank s credit policy in the scope of Industry-based Risk Appetite, analysing and reporting within active management of corporate credit risk, Projects and Risk Architecture Management Department Foreign Branches Risk Department (from ) creating the methodology - and monitoring the quality of rating models for corporate, financial and retail clients, administrating non-standard credits within corporate banking area. Financial Markets Risk Department: identifying, measuring and controlling market risk, liquidity risk, and interest rate risk of the banking book, in particular preparing of limits proposal for above mentioned risk types, developing methods for measuring particular risk types, and integrating the control of market risk, liquidity risk, and interest rate risk of the banking book at the Bank and mbank Group, measuring and controlling counterparty risk due to transactions assigned to financial markets area and derivatives transactions with bank customers, as well as preparing and developing the methods for determining credit exposure due to derivatives transactions, ensuring methodological adequacy of the techniques of valuing financial instruments included in the portfolios of the Financial Markets Department, the Treasury Department, the Brokerage Bureau, the Financial Markets Sales Department and the mezzanine finance transactions of the Structured and Mezzanine Finance Department, organising the following processes: process of admitting to trading the financial instruments concluded by organisational units of the financial markets area, process of assessing the adequacy of internal capital (ICAAP) with respect to market risk, liquidity risk, and interest rate risk of the banking book, process of measuring economic capital for market risk, and supervising their execution, calculating and monitoring of P&L of business units from financial markets area, independent operational control of the risk generated by the Financial Markets Department, the Treasury Department and the Financial Markets Sales Department in the scope of trading in financial instruments in particular control of: stop-loss limits utilisation, market conformity of the transactions concluded by business units of financial markets area, and reporting in this respect to the Management Board of the Bank and to respective collegial bodies of the Bank. Integrated Risk and Capital Management Department: integration of risk and capital within the ICAAP, validation of quantitative models, the Internal Control System, Supervisory Review and Evaluation Process, control of capital adequacy as well as planning and limiting risk capital, integration of risk valuation (economic capital, reserves, stress tests), integration of non-financial risks, including operational risk, measuring of the effectiveness capital based on risk adjusted capital measures Projects and Risk Architecture Management Department: Risk Projects Portfolio Management, competence centre in the area of process management, development and optimization of the architecture of Risk processes, management of the IT applications of Risk (maintenance and development), risk data management and cooperation with the Finance Division within the scope of centralized management information system

40 Foreign Branches Risk Department: credit risk managing in the retail banking, supporting the credit risk assessment process and taking part in the decision making process regarding credits for the foreign branches, credits managing / settling in the foreign branches, handling the vindication process and performing the control in scope of the operational risk in the credit process for the credit products in foreign branches. 2. Organizational units outside the Risk Area are in charge of the management and control of other risks identified in mbank Group s activity (business risk, strategic risk, capital risk, reputational risk, insurance risk, legal risk, IT system risk, personnel and organisational risk, security risk and compliance risk). 3. Business units take part in managing particular risk types by means of taking risk into account in business decisions, in preparing the product offer and in the client acquisition process. The units assume the ultimate responsibility for taking risk within the set limits and for developing the Bank's results. Control units: Internal Audit Department (DAW) carries out independent review of the process of identifying, taking, measuring, monitoring and controlling risk as part of its internal control and audit function. Compliance Department (DC) is responsible for establishing standards of managing the risk of noncompliance of internal regulations and standards of the Bank's operation with applicable law Structure of the risk management process documentation The risk management strategy implemented by mbank Group is documented accordingly and linked to the Strategy of mbank Group and Mid-term Plan of mbank Group. The documentation of the risk management strategy is an important component of the documentation of the internal capital adequacy assessment process at the Bank and mbank Group (ICAAP). Strategies and policies for managing particular risk types: 1. Risk Management Strategy of the The document was approved by the Management Board and the Supervisory Board. It is associated with the mbank Group Strategy as well as with the Mid-Term Plan for the mbank Group. 2. Credit Risk Management Strategy in mbank S.A. and the mbank Group (ICAAP) The document describes the credit risk management process in the Bank and the Group, including its organisation, and the principles of setting the acceptable risk level, both in the retail and corporate area. 3. Strategy and Policy of Operational Risk Management in mbank S.A. The document describes the organisation of the operational risk management process in the Bank, and the Bank's policy in respect of individual areas of operational risk. 4. Market Risk Strategy The document describes the market risk management process in the Bank, in particular the setting of the acceptable level and structure of market risk. 5. Liquidity Risk Management Strategy in mbank S.A. The document describes the liquidity risk management process (both at the strategic and operational level), the principles of limiting risk, and the emergency plans of the Bank. 6. Compliance Policy in mbank S.A. The document describes the process of organising compliance risk management, including the role of the Bank's authorities in the process, the role of the Compliance Department, and obligations of the Bank's employees in implementing the policy. 7. Capital Management Policy of the The document describes the capital strategy of mbank Group, including the capital goals, the preferred capital structure, the capital plan for the coming years, and the emergency capital plan. The documents listed above are subject to annual review in accordance with the principles laid down in "Review of the internal capital adequacy assessment process (ICAAP) in the ". 8. Limit Book in mbank S.A. The document features a description of standardized frameworks both for the process and limits system, which are widely used in managing and controlling risk all over the mbank Group. The frameworks ensure fine application of the risk appetite to the certain risk limiting in the particular areas, and guarantee fulfilling the regulatory requirements. ICAAP documentation: 1. Internal Capital Adequacy Assessment Process (ICAAP) in the The document describes the internal capital adequacy assessment process taking place in the Group and the course of the individual process components, including: identification and assessment of risk relevance, principles of calculating and aggregating internal capital, stress tests, limits on risk capital, and principles of reviewing the process. 2. Rules for estimating capital for hard to quantify risks 3. The concept of Risk Coverage Potential in 4. Principles of Prudent and Stable Management of mbank S.A. The document describes the principles of prudent and stable management of the Bank within the framework of the strategic planning process, risk management system, internal control system, and capital management Management of Different Types of Risk Credit risk management is an integrated and continuous operational process involving actions and decisions concerning individual transactions and exposures as well as portfolios. The Group actively manages credit risk in order to optimise risk level. For this purpose, uniform credit risk management rules are applied across the Bank s structure and its subsidiaries; they are based, among others, on separation of the credit risk rating function and the sales function at all levels up to the Management Board. A similar approach is applied to administration of credit risk exposures as this function is performed in the risk area and the operating area and is independent from sales functions. The model of Group-wide risk management assumes participation in the process of Bank s Risk Area organizational units. The segregation of responsibilities in the process is as follows: The Retail Risk Department (DRY) is responsible for management of credit risk and other risk types in mbank s retail banking on the domestic markets and in foreign branches (Czech Republic and Slovakia). The main operational responsibilities of DRY include: credit risk rating and credit decisionmaking for individual exposures and transactions, mitigation of operational risk (credit frauds), supervision over the automated credit process, administration of credit agreements concluded with retail clients and their monitoring, collection of credit receivables via telephone and legal collection of credit receivables. Furthermore, DRY develops rules of credit risk rating and principles of calculating the creditworthiness of retail clients. Moreover, the Department is responsible for implementing the assessment principles in the tools supporting the credit decision-making process, reports on the quality of the credit portfolio, and monitors the quality of data used in the risk assessment process. To the extent permitted by external regulations DRY participates in the credit risk management process of the subsidiaries having credit risk bearing retail products in the offer. The Corporate Risk Assessment Department (DOR) is responsible for management of the quality of the corporate loans portfolio of the Bank and subsidiaries of mbank Group and also responsible for restructured exposures and subject to a restructuring. DOR s key functions include: decisions on and recommendations for individual exposures and transactions of companies and groups of companies 43 44

41 which are clients of the Bank, assessment of and recommendations for large exposures accepted by subsidiaries of mbank Group, monitoring the structure of exposures in the risk portfolio, in particular by sector, and the related concentration risk, calculation of the clients probability of default (PD) and expected loss (EL) ratings for banks and international financial institutions and related exposure limits and monitoring their utilisation, management of credit risk of exposures by country (setting and monitoring the utilisation of limits). The more extensive scope of credit risk controlling functions at Group level is performed by a dedicated organizational unit: the mbank Group Credit Risk Division at the Corporate Risk Assessment Department. The main functions of the Division include: analysis of credit risk of new exposures of subsidiaries, monitoring credit risk of the largest exposures, analysis of the quality of the risk portfolio, participation in development and modification projects of the risk management strategy, policies and rules in subsidiaries, supervision over plans and methodologies of establishing and releasing provisions, as well as audits of the largest exposures for all liabilities of the Group Corporate Risk Processes Department (DPR) responsible for: compiling the corporate credit risk strategy, shaping the credit policy within the corporate banking area, creating through portfolio analyses, including industry-based division, products and concentration; compiling reports and statements for financial supervision bodies, the Bank s governing bodies and the Bank s organisational units, from the scope of credit-warranty portfolio of Bank and mbank Group entities. DPR compiles and introduces rules governing corporate risk process, monitors its efficiency, manages applications supporting credit process and provides support for their users. Within the area of the Department s responsibilities lies development and quality control of the rating models for corporate, financial and individual clients of mbank and mbank Group entities. Additionally, DPR manages the reserves for credit risk in the area of corporate banking, conducts settlement and accounting service of credits and guarantees issued by Structured and Mezzanine Finance Department (DFS) and collected debts from Restructuring and Debt Collection Department portfolio. Integrated Risk & Capital Management Department (DKR) is responsible for the portfolio provision for loans and advances to corporates and retail, integration of risk valuation (economic capital, stress tests, RWA) and validation of quantitative models. Decision-making for credit exposures in the corporate area. Credit decisions are consistent with rules accepted by the Corporate Risk Policy. Levels of decision-making competences are determined by a decision-making matrix. The determination of level of decision-making authority for credit decision is based on EL rating and total exposure on client/group of affiliated entities. The total exposure takes into account the client/group of affiliated entities exposures in the whole mbank Group. Additionally, based on obtained CVaR, the decision-making authority level can be raised all the way to the Management Board. Decision-making for credit exposures in the retail banking area. Due to a different profile of retail banking clients, the accepted amount of exposure per client and standardisation of products offered to those clients, the credit decision-making process differs from that applied to corporate clients. The decision-making process is automated to a large extent, both in terms of acquiring data on the borrower from internal and external data sources, and in terms of risk assessment by means of scoring techniques and with the application of standardised decision-making criteria. The tasks, which are not automated concern mainly the verification of credit documentation and potential derogations when a decision is made with the escalation to the appropriate decision-making level in accordance with the applicable rules. In addition, in case of mortgage loans, the present value of the collateral is established and its compliance with the binding credit policy including acceptable LtV (Loan to Value) is assessed. These functions are performed by operating units located within the Retail Risk Department, i.e., in the Risk Area, in complete separation from sales functions. Starting from 2013 mortgage loans to retail customers are also granted by mbank Hipoteczny. The credit process and the principles of risk assessment are consistent with the solutions used in mbank - the main difference is another method of property valuation, i.e. the use of the mortgage lending value instead of market value. Market risk management is performed in a single process by the Financial Markets Risk Department (DRR). The Financial Markets Risk Department (DRR) is responsible for measurement of exposures to market risk of the Bank s front-office units portfolios by the use of market risk measures: Value at Risk (VaR) and stress tests. DRR controls and monitors on a daily basis utilisation of the limits for these risk measures established by the Management Board and the Risk Committee of mbank S.A. (since Financial Markets Risk Committee) and provides daily and periodical reporting on the market risk exposure to managers of the Bank s front-office units, to the Risk Committee of mbank S.A. (since Financial Markets Risk Committee), and directly to the Vice-president of the Management Board - Chief Risk Officer. Moreover, DRR develops market risk measurement methodologies, pre-settlement counterparty risk of derivative transactions, and establishes valuation models for financial instruments. Moreover the Financial Markets Risk Department calculates and reconciles daily financial results on transactions carried out by the front-office units and provides daily valuation of financial instruments to the Finance Area. The valuation of derivative transactions with the Bank s clients is also delivered to the business units responsible for managing clients (investment and corporate area). Valuations prepared by DRR are the basis for managing collaterals for concluded transactions on derivative instruments. DRR is responsible for the administration of the front-office IT systems, i.e. administration of users access rights to the systems, parameterization in the systems of financial instruments, as well as counterparties and issuers and is responsible for market data input to the systems. DRR monitors utilization of counterparty limits (pre-settlement, settlement, issuer and country risk limits) and escalates if limits are exceeded. Moreover, DRR verifies the market conformity of the transactions concluded by the front-office units and supervises the process of modification and deletion of deals in the front-office systems. Liquidity risk management aims at ensuring and maintaining the Bank s and the Group s ability to fulfil both current and future liabilities taking into account the cost of liquidity. The liquidity management process consists of procedures that aim at identification, measurement, controlling, monitoring, reducing and defining the acceptable level of exposure to risks. This process can be divided into two main elements in the operational sense: the part involving all forms of liquidity management and the part of controlling and monitoring liquidity risk. The Assets and Liabilities Management Committee, the Risk Committee of mbank S.A. (since Financial Markets Risk Committee) and the Management Board of the Bank are responsible for liquidity management on the strategic level. Below mentioned organisational units are responsible for liquidity management and control. The Financial Markets Settlement and Services Department (DOF) is responsible for operational supervision over cash flows in accounts. The Treasury Department (DS) is responsible for providing necessary funds for settlements in the Bank s accounts, implementing strategic recommendations made by the mbank Group Assets and Liabilities Management Committee, calibrating the structure of the future cash flows within the limits imposed by the Management Board and the Risk Committee of mbank S.A. (since Financial Markets Risk Committee), maintaining defined securities portfolios kept to secure liquidity within the limits imposed by the Management Board, the Risk Committee of mbank S.A. (since Financial Markets Risk Committee) and the mbank Group Assets and Liabilities Management Committee. The Treasury Department is supported in these functions by the Financial Institutions Department, in relation to funding from domestic and foreign banks and international financial institutions, and the Financial Markets Department, in relation to issues of the Bank s debt securities. The Financial Markets Risk Department (DRR) is in charge of controlling and monitoring liquidity risk of the Bank on the strategic level and reporting to the Vice-president of the Management Board - Chief Risk Officer, the Risk Committee of mbank S.A. (since the Financial Markets Risk Committee) and the mbank Group Assets and Liabilities Management Committee. The Department monitors financial liquidity on a daily basis using methods based on cash flow analysis. Liquidity risk measurement is based on the regulatory model and an internal model, which has been established taking into consideration the specific character of the Bank, the volatility of the deposit base, the level of funding concentration, and the projected development of particular portfolios. Operational risk management is performed in mbank and, at the consolidated level, in mbank Group. The Integrated Risk and Capital Management Department (DKR) is responsible for operational risk controlling and monitoring in the Bank and in mbank Group. Operational risk is understood at mbank as the risk of losses resulting from inadequate or faulty internal processes, systems, errors or actions of a Bank employee, and from external events; in particular, operational risk covers legal risk. As a part of the operational risk control activities, mbank collects data about operational risk events and losses of the Group, regularly carries out the operational risk self-assessment process within organisational units, collects and monitors key risk indicators, and develops and performs operational scenario analyses in order to identify exposure to potential high-severity events. At the same time, the function maintains communication channels with all areas of the Bank (business and support areas) for remedial action once the systems spot critical patterns of operational risk in any area. Within the scope of its operational risk control function, the Integrated Risk and Capital Management Department closely co-operates with other units and projects within the Bank involved in operational risk, in particular with the Compliance Department, the Legal Department, the Internal Audit Department and the security area. The results of operational risk controlling and monitoring are regularly reported to the Risk Committee of the Supervisory Board, the Management Board of the 45 46

42 Bank, the Risk Committee of mbank S.A. (since Business and Risk Forum of mbank Group), and the Chief Risk Officer Credit risk management Credit policy mbank Group manages credit risk based on supervisory requirements and market best practises. Credit policy, established separately for retail banking and corporate banking, plays the key role in the credit risk management process. It includes i.a.: product groups and target customer groups, acceptance criteria together with cut-off levels, criteria for acceptance of financed subjects and collaterals, rules for avoiding concentration risk, rules for selected industries and customers segments Collateral accepted Collateral accepted for granted credit products. The collateral policy is an important part of the credit policy. It provides that, in making a decision about granting a credit risk bearing product, the Bank strives to obtain collateral that would be adequate to the accepted risk. The quality of the proposed tangible collateral is assessed according to its liquidity and market value (or the mortgage lending value in case of mbank Hipoteczny), and the quality of personal collateral is assessed according to the financial situation of the guarantor. Moreover, the impact of collateral on limitation on the impairment of the loan portfolio is a significant factor in the assessment of the collateral's quality. The quality of accepted collateral is correlated to the amount of the product bearing credit risk and the level of risk related to granting such a product. The collateral most frequently accepted by the Bank includes: mortgage on real estate, cession of receivables (cession of rights), registered pledge, transfer of ownership to collateral (partial or conditional), monetary deposit, guarantee deposit or cash blocked, bill of exchange, guarantees and warranties, a letter of comfort issued by a company whose reliability and fairness is known on the international financial markets. In the case of personal collateral (e.g. warranty, guarantee), the situation and reliability of the entity issuing such collateral is evaluated against the standards applicable to the assessment of borrowers. In the case of tangible collateral, the internal Group rules are applied. The value of fixed assets taken as collateral is determined on the basis of an estimate prepared by a certified expert. These estimates submitted to the Bank is verified by a team of specialists situated in the Risk Area, who verify the correctness of the market value assumptions and assess the liquidity of the collateral from the Bank s point of view. The following factors are taken into account in the verification process: a) for collateral on real estate: type of real estate, legal status, description of land, designation in the local land development plan, technical description of buildings and structures, situation on the local market, other price-making factors, b) for collateral on plant and machinery: general application and function in the technological process/possibilities of alternative use, technical description and parameters, exploitation and maintenance conditions, availability of similar devices and machinery, current market situation, forecasts of demand for specific machinery in connection with the situation in the industrial sectors applying such machinery. c) for collateral on inventories: formal and legal requirements related to specific products (e.g., a security certificate CE for electrical equipment, certificates issued by National Institute of Public Health, etc.), saleability, warehousing conditions required (e.g., for paper materials sensitive to humidity, precise materials sensitive to pollution, etc.), security and insurance of both the warehouse and the goods stored therein. Collateral accepted for transactions in derivative instruments. The Bank manages the risk of derivative instruments. Credit exposures arising from concluded derivative transactions are managed as a part of clients general credit limits, taking into account potential impact of changes in market parameters on the value of the exposure. Existing master agreements with contractors obligate the Bank to monitor the value of exposure to the client on a daily basis and provide for additional collateral against the exposure to be contributed by the client if the exposure value increases or the limit is exceeded. In case of default, the master agreements provide for early settlement of the transaction with the client. Collateral on securities resulting from buy-sell-back transactions. The Bank accepts collateral in the form of securities in connection with the buy-sell-back transactions concluded. Depending on the agreement such collateral may be sold or repledged. Hedge Accounting. The Group has been applying fair value hedge accounting. The interest rate risk is the only type of risk hedged under hedge accounting. At the end of each month, the Group evaluates effectiveness of the applied hedging by carrying out analysis of changes in fair value of the hedged and hedging instruments in respect of the hedged risk. The Group hedges against the risk of change in fair value of a part of the portfolio of mortgage loans for a fixed interest rate granted by foreign branches of mbank in Czech Republic and fair value hedge accounting of Eurobonds issued BRE Finance France (BFF). The hedged risk results from changes in interest rates. The hedged items are respectively: a part of the portfolio of mortgage loans for a fixed interest rate denominated in CZK and granted by the foreign branches of mbank in Czech Republic and Eurobonds with a nominal value of: EUR thousand, CHF thousand and CZK thousand issued by BFF. IRS is the hedging instrument swapping the fixed interest rate for a variable interest rate. Adjustment to the fair value of the hedged assets and the valuation of hedging instruments is recognised in the profit and loss account in the income from trading operation. Collaterals accepted by the mbank Group companies. The mbank Group companies accept various forms of legal collateral of credit risk-bearing products. Their list depends on the specific nature of activities, type of offered products and transaction risk. mbank Hipoteczny applies mortgage on the financed real estate as the basic collateral. Additional collateral may include bills of exchange or civil surety by the borrowing company s owners, as well as pledge on shares in the borrower s company. Loan insurance in an insurance company approved by the Bank may be accepted for a period necessary to effectively set up collateral. mleasing applies types of collateral that are most similar to those of mbank. It accepts both standard personal collateral bill of exchange and civil surety, letters of comfort, guarantees and tangible collateral ordinary and capped mortgage, registered liens, transfer of ownership of collateral, transfer of receivables and cession of receivables and rights to an insurance policy, and deposits. mleasing also accepts declarations of voluntary submission for enforcement. mfaktoring accepts only highly liquid collateral. Apart from own blank bills of exchange, these are mainly bill of exchange surety of the owners of the customer's company, cession of receivables from bank accounts (mainly those maintained by mbank), insurance of receivables, cession of rights from insurance policies in respect of receivables, concluded by customers. In the case of providing services to several companies belonging to one group, a customary form of collateral is a power of attorney to perform cross-settlement of agreements concluded with the particular companies

43 Insurance companies, which secure their activities against credit risk, by implementing a policy of safe allocation of all resources and using comprehensive reinsurance, do not have any additional collateral for assets exposed to credit risk Rating system. The rating system is a key element of the credit risk management process in the corporate area. It consists of two main elements: customer rating (PD-rating) describes the probability of default (PD), credit rating (EL-rating) describes expected loss (EL) and takes into consideration both customer risk (PD) and transaction risk (LGD, Loss Given Default loss resulting from default). EL can be described as PD*LGD. EL indicator is used mainly at the credit decision-making stage. The rating produces relative credit risk measures, both as percentages (PD%, EL%) and on a conventional scale from 1.0 to 6.5 (PD-rating, EL-rating) for corporations (sales over PLN 30 million) and SMEs (sales below PLN 30 million). PD rating calculation is a strictly defined process, which comprises seven steps including: financial analysis of annual reports, financial analysis of interim figures, assessment of timeliness of presenting financial statements, analysis of qualitative risks, warning indicators, level of integration of the debtor s group, and additional discretionary criteria. Credit rating based on expected loss (EL) is created by combining customer risk rating and transaction risk rating, which results from the value of exposure (EAD, Exposure at Default) and the character and coverage with collateral for transactions concluded with the client (LGD). EAD represents actual balance sheet exposure increased by the expected level of off-balance sheet items of the Bank to be converted to balance sheet items at the date of default. LGD, described as % of EAD, is a function of possibly executed value of tangible and financial collateral and depends on the type and the value of the collateral, the type of transaction and the ratio of recovery from sources other than collateral. The rating system generates the borrower s probability of default directly in the form of a PD ratio, expressed as a percentage on a continuous scale. Rating classes are calculated on the basis of procedures of dividing percentage PD into groups based on geometric stepladder. In external reporting, the Bank maps the internal PD rating scale onto external ratings. The table below presents the mapping system. Subportfolio PD-rating No rating S&P AAA AA+ AA, AA- A+, A A- BBB+ BBB BBB- BB+ BB BB- B+ B+ B B- B- CCC+ Investment Grade Non-Investment Grade The following models comprised by the rating system are used in the retail banking area: Loss Given Default (LGD) model, which covers the entire retail portfolio. In the model, loss is defined as a function dependent on the level of recovery from clients own payments and possible value of collateral using real estate collected in enforcement procedures. Credit Conversion Factor (CCF) model, which covers the entire retail banking portfolio. The model is based on historical data. The Credit Conversion Factor is an integral part of EAD (CCF as a level of offbalance sheet items converted to balance sheet items at the date of default). PD model with a modular structure, which integrates application and behavioural models in the retail banking area as well as models which use Credit Information Bureau (BIK) data. All models are subject to periodical reviews and a process of validation as well as compliance checks with applicable regulations. All mbank Group companies, whose operations are burdened with credit risk, before concluding an agreement and upon its performance, apply a monitoring process to estimate the risk using rating systems. The systems are different for different types of operations, with the exception of all factoring companies, which use the same solution, moreover lease contracts and mortgage loans are concluded on the basis of individual systems. The common feature is a two-stage methodology: at the first stage the customer rating is assigned and at the second stage the rating of the transaction/portfolio is established. Both abovementioned ratings constitute credit risk rating. Quantitative indicators and qualitative features with material impact on the risk are evaluated. Particular risk classifications (client/transaction) are emphasized differently depending on the nature of the operations and the evaluated product. Rating systems that are used by the Group s companies were created either on the basis of mbank s systems or by an application of an expert based approach. CCC down to CCn/a C, D-I, D-II Default Method of calculating the portfolio provision (IBNI Incurred But Not Identified Losses) for loans and advances to corporates and retail, based on the rating systems Corporate portfolio The portfolio provision is formed on the credit portfolio of customers not classified to the default category. The amount of provisions is an estimate of incurred losses resulting from arisen economic events which haven t been identified by Bank at the provisions calculation date. The probability of disclosure of a loss is modeled by logistic regression based on financial indicators and qualitative data. The model is calibrated on the Bank s internal data, comprising a several years period of observation of the corporate portfolio. On the basis of the monitoring period existing in the Bank, it was estimated that 6-8 months (depending on the size of the company) is the average period between the loss event occurrence and the possibility of its identification by the Bank (loss identification period LIP ). Therefore, the Bank performs calculations on the basis of 6-8-month horizon for probability of default obtained via scaling the original 12-month PD-rating coming from the corporate PD model. The value of incurred loss is assumed at the level of the expected value of exposure in case of default (EAD) multiplied by LGD (parameter describing the loss resulting from the lack of loan repayment), calculated by corporate LGD/EAD model and multiplied by PD. In the opinion of the Management Board, the profile of the corporate rating system as a model sensitive to changes in economic cycle (Point-in-Time) as well as recognition of interim financial data and warning indicators as rating assessment drivers should ensure adequate reflection of the amounts of the calculated portfolio provision to the changing market environment Retail portfolio Starting from November 2013 the Group aligned its Impairment credit risk parameters in retail area with the corresponding ones derived from Basel II oriented methods after necessary adjustments aimed at elimination of differences between IAS 39 and Basel II approaches. The major change was the way of recognition of default status that under new assessment is based on all credit data of the individual person instead of formerly purely one product data. The more conservative approach towards recognition of impaired status (collection of all past due amounts from all products, considering the oldest date from past due data) resulted in two offsetting effects: 1. Earlier recognition of impaired status that gave larger amount of impaired portfolio, 2. Higher estimated recoveries from such a defined portfolio due to naturally higher rate of return to a normal situation for customers that have previously recognized impairment. In case of LGD model the Bank changed its approach to collateral effects from unconditional recognition towards conditional one defined by probability (dependent on specifics of work out process) of collateral realization and recognized partial recoveries as well as broader range of recoveries coming from natural cures. Additionally, the Group re-assessed the length of Loss Identification Period for retail and corporate portfolio based on current internal data concerning bank s processes and abilities to detect the loss situations. The result was extension of retail LIP to uniform 12-month period and shortening of corporate LIP to 6-8 months according to the customer size. The LLP impact of the methodology alignment is not material, however it translates into higher volume of impaired loans, which leads to a lower adjusted provisioning coverage ratio Measurement of impairment of corporate portfolio The Bank measures impairment of loan exposures in accordance with the International Accounting Standards 39. The intranet application IMPAIRMENT-KORPO is a tool used to calculate impairment losses for impaired exposures granted to corporate customers and banks. The classification of customers to default portfolio and calculation of impairment write-off is as follows: a) identifying impairment indicator on individual basis (loss events) and if they exist, classifying a customer to a default category; b) assessing estimated future cash flows (repayments) both from collateral and from repayments by a customer; c) calculating impairment losses taking into account the future amount of estimated discounted cash flows using the effective interest rate; d) booking of impairment losses (specific provisions). Loss events were divided into definite ( hard ) loss events of which occurrence requires the client to be classified into the default category, and indefinite ( soft ) loss events of which occurrence may imply that 49 50

44 there is a need to classify the client into the default category. In the case of indefinite loss events, credit analyst assesses additionally whether the event impacted adversely the obligor's creditworthiness. Indefinite loss events have been introduced so that credit analysts who are responsible for identification of default cases pay attention to cases that may potentially increase the credit risk of the debtor, which may result in the loss of the debtor's ability to repay loan the Bank. The list of definite loss events: 1. The number of days from which any exposure being the obligor's credit obligation becomes overdue is above 90 days and the overdue amount exceeds PLN 3, The Bank has sold exposures with a significant economic loss related to the change of the debtor creditworthiness. 3. The Bank performed enforced restructuring of the exposure, which resulted in the change of the loan/transaction service schedule due to the lack of possibility of the obligor to meet his obligations under loan/transaction agreement, as initially stipulated, which resulted in: a) reduction of financial obligations by remitting part of these obligations, or b) postponing the repayment of the substantial part of the principal, interest or (if it refers to) commission; provided that the lack of approval for restructuring would cause more than 90 calendar days delay in repayment of substantial part of the obligation. 4. Filing by the Bank, the parent or subsidiary entity of the Bank a bankruptcy motion against debtor or filing similar motion in respect of credit obligations of the debtor towards the Bank, the parent or subsidiary entity of the Bank. 5. Bankruptcy of debtor or acquiring by him a similar legal protection resulting in his evasion of or delay in repayment of credit obligations towards the Bank, the parent or subsidiary entity of the Bank. 6. Termination of part or whole credit agreement by the Bank and the beginning of restructuring/collection procedures. 7. Client s fraud. The list of required conditions for indefinite loss events is prepared separately for each following entity type: a) governments and central banks, b) banks, c) corporations, including specialised lending, d) local government units, e) insurers, f) pension fund managing companies, investment fund managing companies. Defining separately the conditions for indefinite loss events for particular types of entities aimed at reflecting specificity of particular types of entities in identification of loss events. In order to assess if the impairment loss has occurred, identification of credit exposures with premises for impairment is carried out. Subsequently the comparison of the gross balance sheet credit exposure with the value of estimated future cash flows discounted at the original effective interest rate is carried out, which results in the ascertainment whether the impairment loss has occurred. If the discounted value of future cash flow is higher than the gross balance sheet value, the impairment charge is not recognised. In case of specific situation, when the future cash flows are clearly dependent on individual events with binary character of occurrence, the Bank estimates the probability of such events as the basis for calculating the impairment charge Measurement of impairment of retail portfolio In the Bank s retail division losses for impaired exposures are calculated, similarly to the corporate division, with the usage of the IMPAIRMENT application. Retail exposures are considered impaired when the natural person with the given product obligation is in default status in accordance with the AIRB methodology implemented in the Bank, i.e.: a) the total sum of overdue exposures for all products exceeds PLN 500 and the eldest delay is more than 90 days, b) one of the contracts has been identified as fraudulent, c) one of the contracts is restructured, d) the Bank applies for instigating enforcement proceedings, bankruptcy proceedings or reorganisation proceedings (resulting in a potential discontinuation of or delay in payments) against the debtor, e) the debtor intends to challenge his credit obligation in court. The estimate of provision for impaired contracts is made based on the LGD model for default customers. On the basis of historical data, the model estimates the future discounted recovery being contingent upon the type of contract, collateral level and the period of customers default. The table below shows the percentage of the Group s balance sheet and off-balance sheet items relating to loans and advances and the coverage of the exposure with impairment provision for each of the Group s internal rating categories (description of the rating model is given above). Sub-portfolio Exposure (%) Provision coverage (%) Exposure (%) *) position other concerns these entities, which do not use the same systems as mbank S.A. Provision coverage (%) other *) Default category Total % of the loans and advances portfolio for balance sheet and off-balance sheet exposures is categorised in the top two grades of the internal rating system (31 December 2012: 58.77%). In view of the loans and advances without impairment loss, the Bank presents the situation of the portfolio as of December 2012 and December 2013 in accordance with two different scales of measurement of PD parameter which are consistent with the methodologies of calculating impairment losses at the given dates. The differences in the portfolio distributions in particular rating categories as of the two given dates are resulting directly from the way of data presentation which are in line to the methodologies effective at the end of 2013 and 2012 Group does not record material deterioration of the quality of the loan portfolio in IBNR category and the presented results include only the effect of scaling arising from the extension of the default definition. The change is immaterial and results directly from methodological changes which are described in Note In order to reflect the credit risk embedded in derivative instruments the Group uses correction to fair value that takes into account the element of credit risk of the counterparty. Write off due to credit risk of contractor is based on expected loss until maturity of the contract and is calculated on customer level. The value of the write off affects income statements and is reported as a correction to the total value of derivatives. The table below presents the percentage of derivatives which constitute the component of financial assets and percentage of correction to fair value due to credit risk of the counterparty in the total carrying value for each of the Group s internal rating categories (description of the rating model is given above)

45 Loans and advances neither past due nor impaired Sub-portfolio Fair value Provision coverage (%) Fair value Provision coverage (%) December 2013 Individuals Corporate entities including: Term loans Total - Loans Loans and Other Reverse repo / Public sector and advances advances to receivables Current Current corporate & housing and medium & small buy-sell-back to customers banks Sub-portfolio Term loans Other accounts accounts institutional mortgage loans enterprises transactions enterprises other *) Default category Total Total December 2012 Individuals Corporate entities Maximum exposure to credit risk The Group has no financial instruments which maximum exposure to credit risk would differ from their net carrying amounts with the exception of off-balance sheet exposures, which are described under Note Loans and advances to customers and banks Loans and advances to customers exposure in PLN ' share/coverage (%) exposure in PLN '000 share/coverage (%) Neither past due nor impaired Past due but not impaired Impaired Total, gross Sub-portfolio Current accounts Term loans including: housing and mortgage loans Current accounts corporate & institutional enterprises Term loans medium & small enterprises Reverse repo / buy-sell-back transactions Public sector Other receivables Total - Loans and advances to customers other *) Default category Total *) position other concerns these entities, which do not use the same rating systems as mbank S.A. Loans and advances to banks Differences in the portfolio distributions in each category of the rating model for two presented dates arise directly from the method of presentation described above in Note Other Provision (provision for impaired loans and advances as well as IBNI provision) ( ) 3.36 ( ) 3.63 Loans and advances past due but not impaired Total, net The table below shows amounts due from banks: Loans and advances to banks exposure in PLN ' share/coverage (%) exposure in PLN '000 share/coverage (%) Neither past due nor impaired Past due but not impaired Impaired Total, gross Provision (provision for impaired loans and advances as well as IBNI provision) (289) 0.01 (559) 0.01 Total, net The total amount of recognized provision for loans and advances is PLN thousand (as at 31 December 2012: PLN thousand) of which PLN thousand (as at 31 December 2012: PLN thousand) represents the individually impaired loans and advances to customers and the remaining amount of PLN thousand represents the portfolio provision (as at 31 December 2012 PLN thousand). Further information on the impairment allowance for loans and advances to banks and to customers is provided in Notes 18 and % of the loans and advances portfolio is considered to be neither past due nor impaired (31 December 2012: 90.32%). Gross amounts of loans and advances, which were past due but not impaired are presented below by classes of assets. No impairment is recognised in respect of loans and advances past due for less than 90 days, unless other available information indicates their impairment. 31 December 2013 Current accounts Individuals Term loans including: housing and mortgage loans Current accounts corporate & institutional enterprises Corporate entities Term loans medium & small enterprises Reverse repo / buy-sell-back transactions Public sector Loans and advances to banks Past due up to 30 days Past due days Past due days Past due over 90 days Total December 2012 Current accounts Individuals Term loans including: housing and mortgage loans Current accounts corporate & institutional enterprises Corporate entities Term loans medium & small enterprises Reverse repo / buy-sell-back transactions Other Public sector Other receivables Total - Loans and advances to customers Loans and advances to banks Past due up to 30 days Past due days Past due days Past due over 90 days Total Other Other receivables Total - Loans and advances to customers Loans and advances individually impaired Loans and advances individually impaired amounted to PLN thousand (as at 31 December 2012: PLN thousand). Gross amounts of loans and advances individually impaired (i.e., before taking into consideration the cash flows from collateral held and expected repayments) are presented below by classes of assets

46 31 December 2013 Loans and advances with impairment Provisions for loans and advances with impairment 31 December 2012 Loans and advances with impairment Provisions for loans and advances with impairment Current accounts Individuals Term loans including: housing and mortgage loans The Group is characterized by a conservative approach in the area of verification of collateral value and setting of acceptable LtV levels. The policy, in this respect, imposes particularly significant restrictions in case of transactions with probability of default higher than average (non-purpose loans and consolidation loans) and/or secured on low-liquid real estate (localized on not well developed markets). Financial effect of collaterals As at 31 December 2013 Current accounts Corporate entities Term loans Reverse repo / corporate & medium & small buy-sell-back institutional enterprises transactions enterprises Other receivables ( ) ( ) ( ) ( ) ( ) ( ) - (54 664) - - ( ) ( ) ( ) ( ) ( ) ( ) ( ) - (66 840) - - ( ) - Gross amount Other Provisions created Public sector Total - Loans and advances to customers Loans and advances to banks Provisions Financial effect of without cash flow collaterals from collaterals Balace sheet data Loans and advances to banks (289) - (289) Loans and advances to customers, including: ( ) ( ) Loans to individuals: ( ) ( ) Current accounts ( ) ( ) Term loans, including: ( ) ( ) housing and mortgage loans ( ) ( ) Loans to corporate clients: ( ) ( ) Current accounts ( ) ( ) Term loans: ( ) ( ) corporate & institutional enterprises ( ) ( ) medium & small enterprises ( ) ( ) Loans and advances to public sector (11 797) (17 690) Total balance sheet data ( ) ( ) Off-balance sheet data: Loan commitments and other commitments (34 720) (58 792) Guarantees, banker's acceptances, documentary and commercial letters of credit (21 348) (36 775) Total off-balance sheet data: (56 068) (95 567) As at 31 December 2012 Gross amount Provisions created Provisions Financial effect of without cash flow collaterals from collaterals Balace sheet data Loans and advances to banks (559) (3 998) Loans and advances to customers, including: ( ) ( ) Loans to individuals: ( ) ( ) Current accounts ( ) ( ) Term loans, including: ( ) ( ) housing and mortgage loans ( ) ( ) Loans to corporate clients: ( ) ( ) Current accounts ( ) ( ) Term loans: ( ) ( ) corporate & institutional enterprises ( ) ( ) medium & small enterprises ( ) ( ) Loans and advances to public sector (12 326) (22 094) Total balance sheet data ( ) ( ) Off-balance sheet data: Loan commitments and other commitments (25 614) (47 509) Guarantees, banker's acceptances, documentary and commercial letters of credit (20 848) (35 438) Total off-balance sheet data: (46 462) (82 947) Other financial assets The above note presents quality of other financial assets included in Note 26 Other assets Debt Instruments: treasury bonds and other eligible debt securities 98.44% of the investments in debt securities is rated at least on A- credit rating (31 December 2012: 98.73%). Information about impairment allowance for investment debt securities occurs under Note Repossessed collateral Gross other financial assets, including: Not past due Past due over 90 days Provisions for impaired assets (negative amount) (15 729) (20 025) Net other financial assets (Note 26) December 2013 Rating Government bonds Trading securities Treasury bills Other debt securities Investment debt securities AAA AA- to AA A- to A BBB+ to BBB BB+ to BB B+ to B Lower than B Unrated Total December 2012 Rating Government bonds Trading securities Treasury bills Other debt securities Investment debt securities AAA AA- to AA A- to A BBB+ to BBB BB+ to BB B+ to B Lower than B Unrated Total The Group classifies repossessed collaterals as assets repossessed for debt and measures them in accordance with the adopted accounting policies described in paragraph Repossessed collaterals classified as assets held for sale shall be put up for sale on an appropriate market and sold at the soonest possible date. The process of selling collaterals repossessed by the Bank is arranged in line with the policies and procedures specified by the units managing the collection process for individual types of repossessed collaterals. The policy of the companies of the Group is to sell repossessed assets or - in the case of leases - lease them out again to another customer. Cases in which the repossessed collateral is used for own needs are rare such a step must be economically justified and reflect the Group companies urgent need, and must at each time be approved by their Management Boards. In 2013, the Group did not have any repossessed collaterals that were difficult to sell. As at 31 December 2013, value of repossessed collaterals was PLN thousand (31 December 2012: PLN thousand) included mainly real estate which constitute collaterals for mortgage loans and leasing assets. The value of repossessed collaterals was included in the item inventories under Note 26. Total Total 55 56

47 3.5. Concentration of assets, liabilities and off-balance sheet items Geographic concentration risk In order to actively manage the risk of concentration by country, the Group: complies with the formal procedures aimed at identifying, measurement and monitoring this risk. complies with the formal limits mitigating the risk by country and the procedures to be followed when the limits are exceeded. uses a management reporting system, which enables monitoring the risk level by country and supports the decision-making process related to management. maintains contacts with a selected group of the largest banks with good ratings, which are active in handling foreign transactions. On some markets, where the risk is difficult to estimate, the Group avails itself of the services of its foreign correspondent banks, e.g. Commerzbank, and insurance in the Export Credit Insurance Corporation ( KUKE ), which covers the economic and political risk. Sector concentration risk If the exposure of the Bank is concentrated in a specific sector, the Group monitors its share in the financing of the whole sector and the standing of each customer of the Group vs. the rest of the sector. For this purpose, the Group uses a statistical database, in which each financial parameter of each of the Bank's customers is mapped onto a decile grid of the parameter for the whole industry. This enables the Group to monitor its industry-related risk to its portfolio when the standing of the whole industry undergoes rapid changes under the influence of external factors. Sector limits are set for sectors defined by the Bank in accordance with the internal Bank s regulations, in quarterly reporting periods. Monitoring and analysis covers all the sectors in which the Bank s exposure exceeds 5% of the total amount of exposures at the end of a given reporting period, the so-called sensitive sectors and sectors additionally indicated by the Chief Risk Officer. Unless the Bank's Management Board Credit Committee decides otherwise, an exposure limit is set for the Group in any sector on a level not higher than: 12% of the gross loan portfolio in the prior reporting period for low risk sectors; 10% of the gross loan portfolio in the prior reporting period for medium risk sectors; 5% of the gross loan portfolio in the prior reporting period for high risk sectors. In the case of exceeding any sector limit or an expectation that such a limit may be exceeded in the next reporting period, activities preventing the exceeding of limits are implemented. The table below presents the structure of concentration of s exposures in particular sectors. The structure of concentration of carrying amounts of exposure of Principal exposure Principal exposure No. Sectors (in PLN million) % (in PLN million) % Household customers Real estate management Transport and travel agencies Public administration Building industry Power industry and heat engineering Motorization Metals Chemistry and plastic processing Groceries Liquid fuels and natural gas Building materials Wood and furniture Other retail trade Other wholesale trade Meat processing industry Pharmaceuticals and health care Stimulants Telecommunication Hotels and restaurants Management, consulting, advertising Leasing and renting In 2013, the total exposure of the Group in the above sectors (excluding household customers) amounts to 34.18% of the credit portfolio (2012: 33.80%). The risk of investing in these sectors (in a 3-point scale, i.e., low, medium, high) estimated by the Group s credit risk advisors as at the end of 2013 and 2012, was assessed as follows: No. Sectors Real estate management medium medium 2. Transport and travel agencies medium medium 3. Public administration low low 4. Building industry high high 5. Power industry and heat engineering medium medium 6. Motorization high high 7. Metals high high 8. Chemistry and plastic processing medium medium 9. Groceries medium medium 10. Liquid fuels and natural gas medium medium 11. Building materials medium medium 12. Wood and furniture medium high 13. Other retail trade medium medium 14. Other wholesale trade medium medium 15. Meat processing industry medium medium 16. Pharmaceuticals and health care medium medium 17. Stimulants medium medium 18. Telecommunication medium medium 19. Hotels and restaurants medium medium 20. Management, consulting, advertising medium n/a 21. Leasing and renting medium medium 57 58

48 Large exposures concentration risk The purpose of management of the risk of concentration of large exposures is to regularly monitor and control exposures for compliance with the legal limits. In order to ensure safety against the risk of exceeding the regulatory limits in companies of the Group: internal limits are set, which are lower than those specified in the Banking Law, for customers whose exposures exceed 5% of equity a process of bookings (permits) is introduced in respect of exposure limits, a weekly large exposure report is maintained for participants of the lending and investment processes. These activities have a direct impact on the decisions of the Group concerning the approval of increase and undertaking of exposures to customers. The exposure related to each borrower (including banks and brokers) is additionally limited by application of detailed balance sheet and off-balance sheet exposure limits and daily risk limits for transactions such as forward currency contracts. The actual exposure is compared to the maximum limits on a daily basis. The level of exposure to credit risk is managed by regular reviews of the existing and potential borrowers' ability to repay principal and interest; if necessary, credit limits are changed. The level of exposure to credit risk is also managed by accepting collaterals and guarantees Market risk In the process of organisation of the market risk management, the Bank follows rules and requirements set forth in Polish Financial Supervision Authority (KNF) regulations and recommendations, in particular in Recommendations A and I. The fundamental principle applied in the organisation of the market risk management in the Bank is the separation of risk control and monitoring functions from structures undertaking and operationally managing Bank s risk positions. Monitoring and controlling of the market risk is performed by the Financial Markets Risk Department in the Risk Area of the Bank under supervision of the Chief Risk Officer, while the market risk positions are operationally managed by Financial Markets Department, Brokerage Bureau and Treasury Department reporting to the Management Board member in charge of financial markets. The Brokerage Bureau is an organisational unit of the Bank separated from the Financial Markets Department focusing its activity on financial instruments subject to trading on the Warsaw Stock Exchange (WSE). Moreover, the investment positions sensitive to market risk factors (e.g. prices of shares listed on the WSE) are managed in the Structured and Mezzanine Finance Department (DFS) operating in the Corporate & Investment Banking area. In the course of Bank s operations, the Bank is exposed to market risk, which is defined as a risk resulting from unfavourable change of the current valuation of the Bank s open positions in interest rate, foreign currency and equity instruments due to changes of the appropriate market risk factors, in particular interest rates, foreign exchange rates, stock share prices and indices, implied volatilities of relevant options and credit spreads. The Bank identifies market risk primarily on the trading book positions valuated at fair value (either directly to market prices or via models) and as such may lead to losses reported in Bank s financial results. Furthermore, the Bank assigns market risk to its banking positions independently of the accounting rules of calculating financial results on these positions. In particular, in order to reflect the interest rate risk of the retail and corporate banking products with unspecified interest revaluation dates or rates administered by the Bank, the Bank uses the so-called replicating portfolio models. In 2013 there was implemented in the Bank the concept of capital modelling which was reflected in market risk measurement at the level of business units portfolios of the Bank. Market risk measures applicable to interest rate banking book positions are based on net present value (NPV) models. Exposure to market risk is quantified by measurement of the value at risk (VaR) and by stress tests scenario analyses. Market risk, in particular interest rate risk of the banking book is also quantified by calculation of the earnings at risk (EaR) measure for the banking portfolio. In order to mitigate market risk exposure, by decision of Management Board (with respect to mbank portfolio) and mbank the Risk Committee of mbank S.A. (since Financial Markets Risk Committee; with respect to business lines portfolios) VaR limits and stress tests limits (management action triggers) are established. Value at Risk In 2013, Bank s market risk exposure, as measured by the value at risk (VaR, for one day holding period, at 97.5% confidence level), was in relation to the established limits on moderate level. The average utilisation of VaR limit for Financial Markets Department, whose positions consist primarily of trading book portfolios, amounted to 23% (PLN 1.4 million), for the Brokerage Bureau (BM) 18% (PLN 0.4 million), while for the Treasury Department, whose positions are classified solely to the banking book, it was 39% (PLN 15.8 million) for the positions without capital modelling and 41% (PLN 13.1 million) for the positions with capital modelling. The average utilisation of the VaR limit for the position of the Structured and Mezzanine Finance Department (DFS) in shares listed in the Warsaw Stock Exchange accounted for 74% (PLN 5.6 million). In 2013, the VaR figures for mbank s portfolio were driven mainly by portfolios of instruments sensitive to interest rates the banking book T-bonds portfolios managed by Treasury Department and the trading book portfolios and interest rate exchange positions managed by Financial Markets Department. Second most significant portfolio having impact on the Bank s risk profile were positions of DFS, where crucial risk factor remains the rate of PZU shares, due to holding significant position in shares of the company. The DFM portfolios of instruments sensitive to changes in exchange rates like FX spots, currency options, as well as the exposure of BM to equity price risk and risk of implied volatility of options traded on the Warsaw Stock, had a relatively low impact on the Bank s risk profile. mbank VaR The tables below present VaR statistics from two perspectives. The first table compares the 2013 data with 2012 figures (the values presented in the table were calculated for the Bank s portfolio excluding the DFS positions). PLN 000's VaR IR interest rate risk VaR FX currency risk VaR EQ equity risk The table below presents analogous VaR statistics for the Bank s portfolio including the DFS positions, and takes into account the PZU shares transferred to DFS on November Stress testing Mean Maximum Minimum Mean Maximum Minimum VaR IR VaR FX VaR EQ VaR PLN 000's Mean Maximum Minimum Mean Maximum Minimum VaR IR VaR FX VaR EQ VaR Stress tests are additional measures of market risk, supplementing the measurement of the value at risk, which show the hypothetical changes in the current valuation of the Bank's portfolios, which would take place as a result of realisation of the so-called stress scenarios i.e. market situations at which the risk factors would reach specified extreme values in a one-day period. In February 2013 there were implemented significant changes in the methodology of stress tests, which was subsequently modified in August Standard stress test designated for standard risk factors: currency exchange rates, interest rates, stock prices and their volatility, as well as a stress test, which involves changes in credit spreads, were defined. In this way, there was addressed among others, the need for covering in stress tests analysis the independent effect of basis risk (the spread between interest rates on government bonds and IRS), which the Bank is exposed to, due to maintaining a portfolio of Treasury bonds. Average utilisation of stress test limits in mbank in 2013 amounted to 59% (PLN 921,4 million). The average utilisation of the limits in 2013 for the Treasury Department portfolio without capital modelling was 75% (PLN million) and 86% (PLN 814 million) including capital modelling. For the Financial Markets Department portfolio the average utilisation was 26% (PLN million) and for BM portfolio 8% (PLN 0.9 million)

49 Market risk of mbank Group The main sources of market risk of the mbank Group are the Bank s positions. The table below shows VaR statistics (at 97.5% confidence level for a one-day holding period) for mbank Group (i.e. mbank, mbank Hipoteczny, mleasing, Dom Maklerski mbanku) in 2013 for individual members of the Group in which market risk positions were identified and their decomposition to the VaRs corresponding to the main risk factor types interest rate risk (VaR IR), foreign exchange risk (VaR FX), and equity prices risk (VaR EQ). The table below presents VaRs for mbank as of the end of 2013, including the positions of DS, DFM, BM and DFS. PLN 000's mbank Group mbank mbh mleasing DM mbanku VaR IR VaR FX VaR EQ VaR Mean VaR Maximum VaR Minimum VaR For comparison, at the end of 2012 VaR for the mbank Group was PLN thousand, including VaR for mbank at PLN thousand, mbank Hipoteczny PLN 129 thousand, mleasing PLN 253 thousands and Dom Maklerski mbanku PLN 58 thousand. PLN 000's mbank Group mbank mbh mleasing DM mbanku BRE GOLD VaR IR VaR FX VaR EQ VaR Mean VaR Maximum VaR Minimum VaR Currency risk The Group is exposed to changes in currency exchange rates. The following tables present the exposure of the Group to currency risk as at 31 December 2013 and 31 December The tables present assets and liabilities of the Group at balance sheet carrying amount, for each currency: PLN EUR USD CHF CZK Other Total ASSETS Cash and balances with the Central Bank Loans and advances to banks Trading securities Derivative financial instruments (5 331) Loans and advances to customers Hedge accounting adjustments related to fair value of hedged items Investment securities Intangible assets Tangible fixed assets Other assets, including tax assets T o t a l a s s e t s LIABILITIES Amounts due to the Central Bank Amounts due to other banks Derivative financial instruments (18 436) Amounts due to customers Debt securities in issue Hedge accounting adjustments related to fair value of hedged items - debt securities in issue - (4 256) (249) - (4 349) Other liabilities including tax liabilities Provisions Subordinated liabilities T o t a l l i a b i l i t i e s Net on-balance sheet position (85 749) ( ) Loan commitments and other commitments Guarantees, banker's acceptances, documentary and commercial letters of credit PLN EUR USD CHF CZK Other Total ASSETS Cash and balances with the Central Bank Loans and advances to banks Trading securities Derivative financial instruments Loans and advances to customers Hedge accounting adjustments related to fair value of hedged items Investment securities Intangible assets Tangible fixed assets Other assets, including tax assets T o t a l a s s e t s LIABILITIES Amounts due to the Central Bank Amounts due to other banks Derivative financial instruments Amounts due to customers Debt securities in issue Hedge accounting adjustments related to fair value of hedged items - debt securities in issue Other liabilities including tax liabilities Provisions Subordinated liabilities T o t a l l i a b i l i t i e s Net on-balance sheet position ( ) ( ) Loan commitments and other commitments Guarantees, banker's acceptances, documentary and commercial letters of credit

50 3.8. Interest rate risk mbank S.A. In the process of managing interest rate risk of the banking book, the risk monitoring and control functions are performed by the Financial Markets Risk Department supervised by the Vice-president of the Board - Chief Risk Officer, whereas operational management of risk positions takes place in the Treasury Department supervised by the Vice-president of the Board, Head of Financial Markets. This way the Bank ensures independence of risk measurement, monitoring and control functions from operational activity, which gives rise to the positions taken by the bank. Interest rate risk of the banking book results from the exposure to the bank's interest income and capital art risk, due to adverse change in the levels of interest rates. Guided by the KNF recommendations, in particular Recommendation G, the Bank monitors the banking book structure in terms of repricing gap as well as basis risk, yield curve risk and customer option risk. The basic measures used to control interest rate risk in the banking book are the repricing gap and the net interest earnings exposed to risk (EaR - Earnings at Risk). Moreover, the Bank performs also stress test analyses aimed to estimate the impact of adverse interest rate fluctuations on net interest earnings and the economic value of the banking portfolio. Interest rate risk of the banking book is also quantified using market risk measures: Value at Risk and stress tests. Exposure to interest rate risk is limited for the banking portfolio by means of repricing gap limits (management action triggers) and market risk limits imposed on the value at risk (VaR) and stress tests. The utilisation of all those limits is monitored and controlled on a daily basis. Interest income subject to risk As of 31 December 2013 and 31 December 2012, a sudden, permanent and unfavourable shift of market interest rates by 100 basis points for all maturities would result in decrease in the interest within 12 months after the year-end date by the following amounts: To calculate these values, the Bank assumed that the structure of financial assets and liabilities disclosed in the financial statements as of above indicated dates would be fixed during the year and the Bank would not take any measures to change related exposure to interest rate change risk. In calculation there were included positions resulted from modelling of repricing period according to replicating portfolio method. Since January 2013 changes in methodology of EaR calculations have been applied, which had considerable influence on differences in this measure values between 2012 and Applied changes, due to low level of interest rates in some currencies particularly in CHF, introduced rational restrictions in interest rates values used in EaR calculations, which has been reflected in EaR final results. Moreover the methodology of EaR calculation has been developed by including parameters reflecting interest rates elasticity of particular product groups on market rates changes as well as including in EaR calculations specifics of interest rate formula of particular products. Stress tests in PLN million currency in PLN million currency PLN PLN 7.18 EUR EUR 1.02 USD 2.17 USD 0.52 CHF CHF 4.63 CZK 8.30 CZK The Bank runs also other analyses of the changes of the economic value of the banking book under stress test scenarios. Under the stress test, which assumes unfavourable shift of the interest rates for respective currencies by 200 bps, the economic value of the banking book at the end of 2013 would change by PLN 273 million (at the end of 2012: PLN 58 million). During the calculation of these values no correlation between currencies was taken into account and it was assumed that taking into account small interest rate values after the negative shift cannot become less than or equal to zero. Important position in banking portfolio, in respect of fair value calculations, is debt securities portfolio in PLN (NBP bills, Polish Treasury bonds and bills). Interest rate risk of this portfolio is calculated additionally using stress test methodology implemented in 2013 (described above in p. 3.5). The methodology includes changes of market interest rates scenarios as well as credit spread, which in case of treasury debt securities may reflect basis risk (spread changes between government and swap curve). As of the end of 2013, calculated change in fair value of potential stress test realization in respect of above-mentioned debt securities amounted to 655 million PLN (comp. to nominal value of the portfolio million PLN). mbank Hipoteczny S.A. Repricing date misfit gap and interest earnings at risk (EaR) based on the former are the key interest rate risk measures at mbank Hipoteczny S.A. As at 31 December 2013 and 31 December 2012 a sudden, lasting and disadvantageous change of market interest rates by 100 basis points for all maturities would result in decrease in the annual interest income by the following amounts: To calculate these values, the Bank assumed that the structure of financial assets and liabilities disclosed in the financial statements as of above indicated dates would be fixed during the year and the mbank Hipoteczny would not take any measures to change related exposure to interest rate change risk. mleasing Sp. z o.o. in PLN million currency in PLN million currency mleasing Sp. z o.o. performs risk analysis based on the following risk factors: interest rates; fx rates. The sensitivity of individual transactions to the risk factors is calculated by adding the shock rate and analysing its impact on the present value of the portfolio (MTM). As at 31 December 2013 and 31 December 2012 a sudden, lasting and disadvantageous change of market interest rates by 100 basis points for all maturities would result in decrease in the annual interest income by the following amounts: interest rate risk PLN 5.00 PLN 0.05 EUR 0.09 EUR 0.01 USD 0.01 USD in PLN million currency in PLN million currency 3.70 PLN 3.10 PLN 1.40 EUR 1.60 EUR 0.00 USD 0.00 USD 0.00 CHF 0.01 CHF 0.00 JPY 0.01 JPY The following tables present the Group's exposure to interest rate risk. The tables present the Group s financial instruments at carrying amounts, categorised by the earlier of contractual repricing or maturity dates Up to 1 month 1-3 months 3-12 months 1-5 years More than 5 years Non-interest bearing ASSETS Cash and balances with the Central Bank Loans and advances to banks Trading and investment securities Loans and advances to customers Other assets and derivative financial instruments T o t a l a s s e t s LIABILITIES Amounts due to the Central Bank Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Other liabilities and derivative financial instruments Total liabilities Total interest repricing gap ( ) ( ) ( ) Total 63 64

51 Up to 1 month 3.9. Liquidity risk 1-3 months 3-12 months mbank S.A. The objective of liquidity risk management is to ensure and maintain the Bank s ability to fulfil both current and future commitments. The Bank achieves this objective by diversifying stable funding sources in terms of client group (from whom acquires deposits), product and currency groups, and at the same time, optimizes its balance sheet in terms of profitability. Long-term activities of mbank in this scope are carried out taking into account conditions on funding capacity and business profitability. In 2013, the liquidity situation was closely monitored and kept at a level adequate to the Bank's needs by adjusting the deposit base and securing additional funding sources depending on the development of lending activity and other funding needs. The strategic assumptions concerning the diversification of funding sources and profitable structure of the balance sheet are reflected in the financial plan of mbank Group defined by appropriate measures, e.g. L/D ratio (Loans to Deposits). The Bank measures a specific relation of loans to deposits in order to maintain a stable structure of its balance sheet. In 2013, L/D ratio improved from 115.7% to 110.6% The Bank aims at building a stable deposit base by offering to clients deposit and investment products, regular and specific-purpose savings offerings, as well as operating deposits of the subsidiaries. Means acquired from the Bank s clients constitute the major funding source for the business activity. The second largest funding source is the portfolio of long-term loans from banks (with maturities over 1 year), in particular from Commerzbank (Note 27). The loans together with subordinated loans (Note 30) are the core funding source for the portfolio of mortgage loans in CHF. According to the suspension of granting new mortgage loans in CHF, Bank s receivables in this currency have been decreasing successively along with credit repayments. The funds obtained from the repayment of the said loans are used to reduce the Bank's debt in CHF owed mbank's main shareholder. In 2013, the debt to Commerzbank A.G. was reduced by CHF 830 million. Moreover, in order to acquire funding (also in foreign currencies) the Bank uses mid-term and long-term instruments, including credit line facilities within Commerzbank Group and on the international market (debts from EBI) as well as FX swap transactions. In H2 of 2013, under the Euro Medium Term Note Program (EMTN), the Bank acquired new funds amounted to CHF 200 million and CZK 500 million. When making funding-related decisions, in order to match the term structure of its funding sources with the structure of long-term assets, the Bank takes into consideration the supervisory liquidity measures and limits, as well as the internal liquidity risk limits. In order to ensure that the liquidity risk management process is effective, the Management Board of the Bank lies down an adequate organizational structure and delegates powers to dedicated units and Committees. The existing process covers the liquidity risk management area at both the strategic and operational level, and the liquidity risk measurement and control area. As part of liquidity risk management, a range of risk measures are being analysed. The basic measure reflecting the Bank's liquidity situation is the mismatch account of future cash flows, and the mismatch gap related with it. It covers all the assets, liabilities and off-balance sheet items of the Bank in all the currencies and time-bands set by the Bank. The aim to secure liquidity is carried out by active management of the structure of future cash flows and in maintaining sufficient liquidity buffer. In 2013, the Bank held liquidity surplus, adequate to Bank s business activity and current market situation, in the form of a portfolio of liquid treasury and money market securities that may be pledged or sold at any time without any considerable loss in value. In accordance with KNF Resolution No. 386/2008 on establishing liquidity 1-5 years More than 5 years Non-interest bearing ASSETS Cash and balances with the Central Bank Loans and advances to banks Trading and investment securities Loans and advances to customers Other assets and derivative financial instruments T o t a l a s s e t s LIABILITIES Amounts due to the Central Bank Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Other liabilities and derivative financial instruments Total liabilities Total interest repricing gap ( ) ( ) Total measures binding on banks, the Bank calculates the supervisory liquidity measures. In 2013, the supervisory limits on short-term and long-term liquidity measures were not exceeded. Moreover, in line with the Resolution, the Bank conducts an in-depth analysis of long-term liquidity and sets internal limits (management action triggers) on involvement in long-term assets. Relevant analysis of the stability and structure of the funding sources, including the core and concentration level of term deposits and current accounts are performed. Additionally, the Bank analyses the variability of the balance sheet and offbalance sheet items, in particular the open credit line facilities and current account and overdrafts limits utilisation. The ongoing analysis covers not only liquidity under normal conditions, but also on the assumption of a potential liquidity loss. In order to determine the Bank's resistance to major unfavourable events, the Bank conducts scenario analyses covering extreme assumptions on the operation of financial markets and behavioral events relative to the Bank's clients. The Bank has also adequate procedures in case mbank is threatened with financial liquidity loss. For the purpose of current monitoring of liquidity, the Bank establishes values of realistic, cumulated gap of cash flows misfit. The gap is calculated on the basis of contractual cash flows (Note 3.9.1). Cash flows in portfolios of non-banking customers deposits, overdrafts and term loans are mainly amended. In the calculation of the liquidity measures the Bank takes into account the possibilities of raising the funds by selling or pledging the debt securities from Bank s Liquidity Reserves. Value of realistic, cumulative gap of cash flows misfit (in PLN million) Time range up to 3 working days up to 7 calendar days up to 15 calendar days up to 1 month up to 2 months up to 3 months up to 4 months up to 5 months up to 6 months up to 7 months up to 8 months up to 9 months up to 10 months up to 11 months up to 12 months The above values should be interpreted as liquidity surplus in relevant time buckets. Decrease of values noticed in year 2013 resulted mainly from repayment of the Bank's debt owed to Commerzbank, mbank's main shareholder, in amount equivalent to million PLN, which has been mainly covered by liquid assets and partially replaced by new own bonds issue, by simultaneous taking into account in the ANL Gap as of the end of 2013, outstanding debt towards Commerzbank to be repaid in 2014 in amount equal to the equivalent of million PLN. Additional factor, that negatively influenced liquidity gap was the increase of customer loans portfolio exceeding funds acquired from term deposits and current accounts (loans portfolio increase in relation to funds raised on deposits amounted to 880 million PLN - with fixed exchange rate as of 31 December 2013 used in calculations). mbank Hipoteczny S.A. Liquidity risk is the risk of inability to finance assets and meet obligations on time in the course of normal operations of the Bank or in other conditions which may be foreseen without the need to sustain a loss. The strategic goal of the liquidity risk management is to ensure the Bank's ability to meet its obligations on time and finance increasing assets as well as to minimize the influence of this risk on the Bank's financial result. The Bank manages liquidity risk by ensuring current, short, medium and long-term liquidity. The Bank sets out the rules for risk identification, measurement, assessment, monitoring and reporting. The market liquidity risk management requires the Bank to diversify its funding sources mainly within cooperation with mbank S.A. The Bank finances its long-term assets predominantly by issuing mortgage and public covered bonds with long maturities, and next by collecting long-term deposits. The Bank's current funding needs 65 66

52 are satisfied on the inter-bank market and by the issue of short-term bonds, client deposits and servicing of client current accounts. The Bank has in place a special emergency plan in case of a liquidity crisis. The plan specifies cases of crisis situations posing a threat to liquidity or to fx and interest rate risk management. It also identifies Bank's alternative funding sources and sets out a general scheme of managing crisis situations at the Bank. The Bank ensures immediate and current liquidity by maintaining the liquidity portfolio composed of easily liquidated instruments. The current and short-term liquidity is monitored with the use of liquidity ratios with the time horizon of 1 week and 1 month respectively. Additionally, the Bank limits the size of exposure within the cumulative liquidity gap in the periods of 1 month, 3 months, 6 months, 1 year and 2 years. In 2013, the liquidity ratios up to 1 month were between 34.09% and 53.75% and the average liquidity ratio was 43.41%. As at 31 December 2013, this ratio was 36.02%. The liquidity ratio up to 1 month at 36.02% results from including unconditional stand-by lines of credit in the total amount of PLN 150 million (2012: PLN 200 million). mleasing Sp. z o.o. The purpose of liquidity management policy in mleasing is a maintenance of balance sheet structure and off balance sheet transactions, which ensure a constant cash flows of the company including the nature of business and needs that may arise as a result of changes in the financial markets or arising from creditors and customers behaviour. Ensuring of continued liquidity concerns both normal, stable operating conditions and the conditions of higher probability of loss. mleasing manages its liquidity risk by matching the maturity of amounts receivable under leasing contracts with the maturity of credit liabilities on the basis of cash flow reports. In addition, the company has open sources of refinancing for periods exceeding 6 months. Liquidity risk management policy covers the basic principles of risk management and methods of measurement and control as well as ways to deal with the threat of liquidity. Parallel to the liquidity risk control performed by the Management Board, the independent liquidity risk control is carried out by mbank S.A. The base method of analysis and risk measurement is contractual approach, i.e. mismatch calculation of future cash flows, commonly known as gap mismatch. Using this method the contractual cash flows for all currencies and all balance sheet and off-balance sheet items are determined. mleasing also uses the real financial cash flows method, based on scenarios. Real cash flows are created in two versions: basic and stress test. Assumptions for each scenario are based on sales plans prepared by sales departments, based on an analysis of liquidity and substitutability of the leasing portfolios and loans and debt instruments Cash flows from transactions in non-derivative financial instruments The table below shows cash flows the Group is required to settle, resulting from financial liabilities. The cash flows have been presented as at the year-end date, categorised by the remaining contractual maturities. The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the year-end date. The amounts disclosed in maturity dates analysis are undiscounted contractual cash flows. Liabilities (by contractual maturity dates) as at Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Amounts due to the Central Bank Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Technical-insurance provisions Other liabilities Total liabilities Assets (by remaining contractual maturity dates) Total assets Net liquidity gap ( ) ( ) Liabilities (by contractual maturity dates) as at The assets which ensure the payment of all the liabilities and lending commitments comprise cash in hand, cash at the Central Bank, cash in transit and treasury bonds and other eligible bonds; amounts due from banks; loans and advances to customers. In the normal course of business, some of the loans granted to customers with the contractual repayment date falling due within the year, will be prolonged. Moreover, a part of debt securities, were pledged as collateral for liabilities. The Group could ensure cash for unexpected net outflows by selling securities and availing itself of other sources of financing, such as the market of securities secured with assets Cash flows from derivatives Derivative financial instruments settled in net amounts Derivative financial instruments settled in net amounts by the Group comprise: Futures, Forward Rate Agreements (FRA), Options, Warrants, Interest rate swaps (IRS), Cross currency interest rate swaps (CIRS), Security forwards. Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Amounts due to the Central Bank Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Technical-insurance provisions Other liabilities Total liabilities Assets (by remaining contractual maturity dates) Total assets Net liquidity gap ( ) The table below shows derivative financial liabilities of the Group, which will be settled on a net basis, grouped by appropriate remaining maturities as at the balance sheet date. The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the balance sheet date. The amounts disclosed in the table are discounted contractual outflows for transactions with negative valuations as at the end of Derivatives settled on a net basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Forward Rate Agreements (FRA) Overnight Index Swaps (OIS) Interest Rate Swaps (IRS), including: Cross Currency Interest Rate Swaps (CIRS) Options Futures contracts Other Total derivatives settled on a net basis Derivatives settled on a net basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Forward Rate Agreements (FRA) Overnight Index Swaps (OIS) Interest Rate Swaps (IRS) Cross Currency Interest Rate Swaps (CIRS) Options Other Total derivatives settled on a net basis

53 Derivative financial instruments settled in gross amounts Derivative financial instruments settled in gross amounts by the Group comprise foreign exchange derivatives: currency forwards and currency swaps. The table below shows derivative financial liabilities/assets of the Group, which will be settled on a gross basis, grouped by appropriate remaining maturities as at the Balance Sheet date. The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the balance sheet date Derivatives settled on a gross basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Currency derivatives: -outflows inflows Derivatives settled on a gross basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Currency derivatives: -outflows inflows The amounts disclosed in the table are undiscounted contractual outflows/inflows. The amounts presented in the table above are nominal cash flows of currency derivatives, which have not been settled, while the Note 20 shows nominal values of all open derivative transactions. Detailed data concerning liquidity risk related to off-balance sheet items are presented in the Note Insurance risk management The risk connected with insurance contracts is the possibility of occurrence of the insurance event and the uncertainty of the amount of the resulting claim the insurer is to pay by virtue of this event. By the very nature of an insurance contract, this risk is random and therefore unpredictable. For the portfolio of insurance contracts where for creating new products, calculating premiums as well as producing financial plans for subsequent periods the theory of probability is applied, the basic risk is the risk of discrepancy between actual claims and their expected values. As loss ratio-based estimates are usually based on historic values, there is the risk that their actual realisation will differ from their expected realisation with regard to factors changing over the period such as: demographic structure of insured persons upon collective health insurance, regulations of the law concerning the insurance market, other regulations of the law affecting the insurance market. Too small insurance portfolio, which does not enable the Law of Great Numbers to function but also does not provide sufficient statistical information for proper risk management is also a factor increasing the risk of discrepancy between loss ratio-based estimates and their actual realisation. In order to decrease this risk, the Group concentrates primarily on increasing given insurance risk portfolios while limiting the risk as well as the amount of individual risks insured on the Group s share by application of profound reinsurance. Another source of insurance risk is insurance fraud, which occurs in a higher or lesser degree in most of insurance products. This phenomenon consists in fraudulent claims for compensations or benefits, which are not due actually. Methods limiting the results of occurrence of the above indicated phenomenon include among others: preventive actions taken up by insurance companies (registers etc.) as well as procedures preventing acceptance of such risk for insurance and relevant procedures of claims handling. In 2013, the Group offered short-term property and personal insurance contracts both in individual and collective models. However, the collective model is applied to the sale of insurance portfolio known as bancassurance. The Group also offers individual agreements in co-insurance with other insurers. Individual agreements are usually concluded for one year with the possibility of renewal with the exception of tourist insurance agreements which are concluded for the duration of the trip, i.e., from 1 to 90 days. Once a year the Group has the right to propose new conditions while renewing the agreement or may not propose such renewal at all. Collective agreements are concluded in perpetuity. However, the Group has the right to propose new conditions at any time with a three-month notice with the exception of financial agreements where the agreement conditions can be changed by mutual agreement or with a twelve-month notice. The Group reinsures insurance contracts upon reinsurance agreements. Concentration of insurance risk is presented in accordance with the breakdown by the groups and the scope of risks defined by the Polish Financial Supervision Authority as well as according to the individual and collective sale model. The concentration of insurance risk stated in provisions for compensations and benefits Gross risk share % share % casualty % % disease % % casco of land vehicles % % damages caused by elements % % other material damages % % civil liability due to owing and usage of land vehicles % % civil liability % 766 1% loan % % guarantee 494 0% 697 1% different financial risks 215 0% 353 0% protection by law 161 0% 178 0% providing help % % Gross provision for compensations and benefits % % Risk on own share share % share % casualty % % disease % % casco of land vehicles 714 1% 809 2% damages caused by elements % % other material damages % % civil liability due to owing and usage of land vehicles % % civil liability 758 1% 560 1% loan % % guarantee 494 1% 697 1% different financial risks 215 0% 353 1% protection by law 161 0% 178 0% providing help % % Provisions for compensations and benefits on own share % % Gross risk share % share % individual % % group % % Provisions for compensations and benefits % % Risk on own share share % share % individual % % group % % Provisions for compensations and benefits on own share % % Sensitivity analysis of provisions for damages Change of ULR ratio (%) Change of IBNR provision (%) IBNR provision (PLN '000) Change of the value of IBNR provision (PLN '000) The impact on profit after reinsurance (PLN '000) (20) (20) (25) (26) (23 634) (21 218) (10) (10) (13) (13) (11 939) (10 708) (6 416) (6 140) (12 865) (12 385) With regard to the accepted methodology of calculation of the IBNR provision ( Naive Loss Ratio and Bornhuetter-Ferguson ), total provisions for compensations and benefits together with costs of claims handling are generally linearly dependent on the assumed loss-based ratio, ULR ( Ultimate Loss Ratio ), 69 70

54 accepted for calculation of the IBNR provision with the exception of situations when the ratio calculated only on the basis of damages claimed in a given group of insurance exceeds the accepted value of ULR. However, the IBNR provision alone is sensitive to changes of assumed loss-based ratios. Sensitivity analysis was carried out simultaneously for all insured risks of the portfolio, through a change of predicted IBNR ratios with other parameters of the model being unchanged. The following table presents changes of the IBNR provision depending on changes of parameters of predicted ULR ratios. PLN ' Own resources Margin of solvency Minimal guarantee capital /3rd of margin of solvency Own resources surplus for coverage of margin of solvency Guarantee capital Own resources surplus for coverage of guarantee capital Provisions adequacy analysis The Group carried out a provisions adequacy analysis, which showed that technical-insurance provisions (reduced by deferred acquisition costs) as at 31 December 2013 were created at a level sufficient to cover commitments arising from insurance agreements till 31 December Capital management Since the start of business of BRE Ubezpieczenia TUiR SA, i.e., 15 January 2007, capital management in insurance companies is connected with the aspiration for maintenance of regular adequacy. The purpose of the Group within the scope of capital management is the maintenance of the capacity of insurance companies of the Group for continuance of business and maintenance of an optimal structure of capital in order to reduce costs of capital. For this purpose, the Group constantly monitors the value of its own resources in relation to the margin of solvency and guarantee capital in accordance with capital requirements imposed by regulations binding in Poland (Insurance Activity Act and Accounting Act with relevant decrees). In accordance with these regulations, the company BRE Ubezpieczenia TUiR SA is obliged to hold own resources in the value not lower than the margin of solvency and not lower than the guarantee capital. The guarantee capital equals the bigger of: one-third of the margin of solvency or minimum value of the guarantee capital. The Decree of Minister of Finance, which takes into account the necessity of ensuring solvency of companies conducting insurance activities, determines the manner of calculation of the solvency margin and minimum value of the guarantee capital. Own resources of the company are the assets of the insurance company, excluding: assets assigned for coverage of all expected commitments, intangible assets other than DAC (Deferred Acquisition Cost), own shares held by the insurance company, deferred income tax assets. The company BRE Ubezpieczenia TUiR SA is guided only by the law requirements in calculating the solvency margin and the minimum guarantee capital. Insurance companies check the compliance of capital with law requirements as at the end of each reporting period. Within the whole year 2012 and 2011 the law requirements were met. The following table presents own resources of the company BRE Ubezpieczenia TUiR SA and coverage of the solvency margin and the guarantee capital as at 31 December 2013 and 31 December Fair value of financial assets and liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction of selling the asset or transferring a liability occurs either: on the main market for the asset or liability, in the absence of a main market, for the most advantageous market for the asset or liability. The main and the most advantageous markets must be both available to the Group. Following market practices the Group values open positions in financial instruments using either the markto-market approach or is applying pricing models well established in market practice (mark-to-model method) which use as inputs market prices or market parameters, and in few cases parameters estimated internally by the Group. All significant open positions in derivatives (currency or interest rates) are valued by relevant market models using prices observable in the market. Domestic commercial papers are markto-model (by discounting cash flows), which in addition to market interest rate curve uses credit spreads estimated internally. The Group estimated that the fair value of short-term financial liabilities (less than 1 year) is equal to the balance sheet values of such items. In addition, the Group assumed that the estimated fair value of financial assets and financial liabilities longer than 1 year is based on discounted cash flows using appropriate interest rates. The following table presents a summary of balance sheet values and fair values for each group of financial assets and liabilities not recognised in the statement of financial position of the Group at their fair values Carrying value Fair value Carrying value Fair value F i n a n c i a l a s s e t s Loans and advances to banks Loans and advances to customers Loans and advances to individuals current accounts term loans including: housing and mortgage loans Loans and advances to corporate entities current accounts term loans corporate & institutional enterprises medium & small enterprises reverse repo / buy sell back transactions other Loans and advances to public sector Other receivables F i n a n c i a l l i a b i l i t i e s Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities The following sections present the key assumptions and methods used by the Group for estimation of the fair values of financial instruments: Loans and advances to banks and loans and advances to customers. The fair value for loans and advances to banks and loans and advances to customers is disclosed as the present value of future cash flows using current interest rates including appropriate credit spreads and is based on the expected maturity of the respective loan agreements. The level of credit spread was determined based on market quotation of median credit spreads for Moody s rating grade. Attribution of a credit spread to a given credit exposure is based on a mapping between Moody s rating grade and internal rating grades of mbank. To reflect the fact that the majority of the Bank s exposures is collateralised whereas the median of market quotation is centred around unsecured issues, the Bank performed appropriate adjustments. Available for sale financial assets. Listed available for sale financial instruments held by the Group are valued at fair value. The fair value of debt securities not listed at an active market is calculated using a discounted cash flow approach based on current interest rates (including the appropriate credit spread). The model of spread determination in the case of illiquid commercial papers was extended in order to reflect the costs of unexpected loss component of the credit spread more precisely. Financial liabilities. Financial instruments representing liabilities for the Group include the following: Contracted borrowings; Deposits; 71 72

55 Issues of debt securities; Subordinated liabilities. The fair value for these financial liabilities with more than 1 year to maturity is based on principle and interest cash flows discounted using appropriate interest rates. For received loans the Group used the swap amended by quotations of Commerzbank CDS for exposures in EUR (and for the loans received from European Investment Bank in EUR, EIB yield curve), quotations of issued bonds under EMTN program for the exposures in foreign currencies and the swap curve amended by credit spread for the exposures in PLN. In case of deposits the Group used the curve based on overnight rates, term cash rates, as well as FRA contracts up to 1 year and IRS contracts over 1 year for appropriate currencies and maturities. For debt securities in issue the Group used the prices directly from the market for these securities. For the purpose of measurement of subordinated liabilities the Group used obtained primary market spreads of subordinated bonds issued by the Group and if required corresponding cross-currency basis swap levels for the respective maturities. The Group assumed that the fair values of these instruments with less than 1 year to maturity was equal to the carrying amounts of the instruments. The table below presents the fair value hierarchy of financial assets and liabilities measured at fair value in accordance with the assumptions and methods described above, exclusively for disclosure as at 31 December Including: Level 1 In level 1, the Group included the fair value of bonds issued by BRE Finance France, the subsidiary of the Bank (Note 29). For issued debt securities, the Group applied prices directly from the market for these securities. Level 2 Level 1 Level 2 Level 3 Quoted prices in Valuation techniques active markets based on observable market data Other valuation techniques VALUATION ONLY FOR PURPOSES OF DISCLOSURE FINANCIAL ASSETS Loans and advances to banks Loans and advances to customers FINANCIAL LIABILITIES Amounts due to other banks Amounts due to customers Debt securities in issue Subordinated liabilities Total financial assets Total financial liabilities Level 2 includes the fair value of long-term loans received from banks, the fair value of long-term deposits placed by customers and the fair value of the loan received from the EIB (Note 28). In addition, at level 3, the Group has presented subordinated liabilities. The fair value of financial liabilities with more than 1 year to maturity is based on principle and interest cash flows discounted using appropriate interest rates. For received loans in EUR the Group used the swap curve amended by the spread determined based on observable Commerzbank CDS quotations in EUR for various maturities and a fixed spread which represents the assumed credit spread differential for Group risk (derived from market quotation of bond issued under the EMTN program). For the loans in other currencies, the above spreads for EUR were applied and cross currency swaps quotations to EUR. In case of the loans received from European Investment Bank in EUR, the Group used EIB yield curve and the value of margin which was agreed upon the last contract for the loan in December Based on the assumption of fixed margin (irrespectively from maturity), the spread of Group to market swap curve was estimated. In case of deposits the Group used the curve based on overnight rates, term cash rates, as well as FRA contracts up to 1 year and IRS contracts over 1 year for appropriate currencies and maturities. For debt securities in issue the Group used the prices directly from the market for these securities. For the purpose of measurement of subordinated liabilities the Group used obtained primary market spreads of subordinated bonds issued by the Group and if required corresponding cross-currency basis swap levels for the respective maturities. Level 3 Level 3 includes the fair value of loans and advances to banks and loans and advances to customers. The fair value for loans and advances to banks and loans and advances to customers is disclosed as the present value of future cash flows using current interest rates including appropriate credit spreads and is based on the expected maturity of the respective loan agreements. The level of credit spread was determined based on market quotation of median credit spreads for Moody s rating grade. Attribution of a credit spread to a given credit exposure is based on a mapping between Moody s rating grade and internal rating grades of mbank. To reflect the fact that the majority of the Group s exposures is collateralised whereas the median of market quotation is centred around unsecured issues, the Group performed appropriate adjustments. Level 3 includes also the fair value of mortgage bonds and bonds issued by mbank Hipoteczny. For the valuation of the Group has applied the technique of estimation of interest flow using swap curve and discounting with the rate amended by credit spread which is obtainable in case of issue depending on currency and maturity of financial instrument. The following table presents the hierarchy of fair values of financial assets and liabilities recognised in the statement of financial position of the Group at their fair values Including: RECURRING FAIR VALUE MEASUREMENTS FINANCIAL ASSETS Level 1 Level 2 Level 3 Quoted prices in Valuation techniques active markets based on observable market data Other valuation techniques TRADING SECURITIES Debt securities government bonds deposit certificates banks bonds corporate bonds Equity securities listed unlisted DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments held for trading interest rate derivatives foreign exchange derivatives market risks derivatives INVESTMENT SECURITIES Debt securities government bonds money bills banks bonds corporate bonds communal bonds Equity securities listed unlisted TOTAL FINANCIAL ASSETS Including: FINANCIAL LIABILITIES Level 1 Level 2 Level 3 Quoted prices in Valuation techniques active markets based on observable market data Other valuation techniques Derivative financial instruments Derivative financial instruments held for trading interest rate derivatives foreign exchange derivatives market risks derivatives Derivative financial instruments held for trading derivatives designated as fair value hedges Total financial liabilities TOTAL RECURRING FAIR VALUE MEASUREMENTS FINANCIAL ASSETS FINANCIAL LIABILITIES In case of financial instruments valuated in repetitive way to fair value, classified as level 1 and 2 in hierarchy of fair value in year 2013 there were no movements observed between 1 and 2 level. The bank s 73 74

56 Financial Market Risk Department observes a potential migration between the different fair value levels on the basis of internal guidelines. There are two cases which allow for a reclassification: change of availability of market parameters used to marked-to-market valuation for T-bonds or a change in liquidity of option on WIG20 index market. In case of T-bonds, if there is no market price for more than 2 business days, the methods of valuation is changed, i.e. change from marked-to-market valuation to marked-to-model valuation under the assumption that the valuation model for the respective type of fixed income securities has been already approved. Return to marked-to-market valuation takes place after 5 business days in which market prices are continuously available. In case of options on the WIG20 index the utilization of an internal model or marked-to-market valuation depends on the liquidity of the options market. If a marked-to-model method is applied and the market is liquid for successive 3 months the valuation approach changes from a marked-to-model towards the marked-to-market method. In case a marked-to-market model is utilized and the market is illiquid in a given month the valuation approach is adjusted towards a marked-to-model valuation at least until the beginning of the next month. In 2013 a reclassification of exotic options embedded in investment deposits (options on basket of underlyings such as commodities or indexes) within the fair hierarchy was observed from level 2 to level 3. The Fair value of reclassified instruments as of was equal to PLN 0.5 thousand (the value contains transactions with clients and opposite back-to-back transactions on interbank market, for transactions with clients as of 31 December 2013 the fair value was PLN 404 thousand). The presented in note value of PLN 407 thousand applies to options sold (liabilities) and purchased (assets). The reclassification was made due to a review of valuation methods, in which there was identified that variables such as volatilities of underlyings and their correlations, which are estimated in internal model due to lack of quotations for this variables, have significant impact on their fair value. Liabilities Measured at Fair Value Based on Level 3 Derivative financial instruments and other trading liabilities Other financial liablitities Transfers into Level As at the end of the period Assets Measured at Fair Value Based on Level 3 - changes in 2013 Debt trading securities Equity trading securities Derivative financial instruments Debt investment securities Equity investment securities As at the beginning of the period Gains and losses for the period: (11) (53) (3 408) Recognised in profit or loss: (11) (53) Net trading income (11) (53) Gains less losses from investment securities, investments in subsidiaries and associates Recognised in other comprehensive income: (3 408) Available for sale financial assets (3 408) Purchases Redemptions ( ) (884) Sales ( ) - - ( ) (13 851) Issues (452) Settlements Transfers into Level As at the end of the period Including: Financial assets Level 1 Level 2 Level 3 Quoted prices in Valuation techniques active markets based on observable market data Other valuation techniques Trading securities Debt Equity Derivative financial instruments, including Investment securities Debt Equity Total financial assets Financial liabilities Derivative financial instruments Derivative financial instruments held for hedging Total financial liabilities Transfers between levels in 2012 According to the fair value methodology applied by the Group, financial assets and liabilities are classified as follows: Level 1: prices quoted on active markets for the same instrument (without modification); Level 2: valuation techniques based on observable market data; Level 3: valuation methods for which at least one significant input data is not based on observable market data. Level 1 As at 31 December 2013, at level 1 of the fair value hierarchy, the Group has presented the fair value of held for trading government bonds in the amount of PLN thousand (see Note 19) and the fair value of investment government bonds in the amount of PLN thousand (31 December 2012 respectively: PLN thousand and PLN thousand). Level 1 also includes the fair value of local government bonds in the amount of PLN thousand (31 December 2012: PLN thousand) and fair value of bonds issued by one bank in the amount of PLN 99 thousand (31 December 2012: 0). In addition, as at 31 December 2013 level 1 includes the value of the shares of listed companies in the amount of PLN thousand, including the value of shares in PZU S.A. in the amount of PLN thousand (31 December 2012, respectively: PLN thousand and PLN thousand). These instruments are classified as level 1 because their valuation is directly derived by applying current market prices quoted on active and liquid financial markets. Level 2 Level 2 of the fair vale hierarchy includes the fair values of short term bills issued by NBP in the amount of PLN thousand (31 December 2012: PLN thousand), whose valuation is based on a NPV model (discounted future cash flows) fed with interest rate curves generated by transformation of quotations taken directly from active and liquid financial markets. In addition, the level 2 category includes the valuation of derivative financial instruments borne on models consistent with market standards and practices, using parameters taken directly from the markets (e.g., foreign exchange rates, implied volatilities of fx options, stock prices and indices) or parameters which transform quotations taken directly from active and liquid financial markets (e.g., interest rate curves). As at 31 December 2013 and 31 December 2012, level 2 also includes the value of options referencing on the WIG 20 index, listed on the Stock Exchange due to changes in the valuation of these options from market quotations towards the application of the Group s own valuation model. Change in valuation was due to the limited liquidity of the market in which these options are listed, hence using the Group s valuation model provides for a higher quality of fair values compared to the previous approach. Level 3 Transfers into Level 1 Transfers out of Level 1 Transfers into Level 2 Transfers out of Level 2 Trading securities Equity Assets Measured at Fair Value Based on Level 3 - changes in 2012 Debt trading securities Equity trading securities Derivative financial instruments Debt investment securities Equity investment securities As at the beginning of the period Gains and losses for the period: Recognised in profit or loss Recognised in other comprehensive income Purchases Redemptions ( ) (467) Sales ( ) - - ( ) (26 403) Issues Settlements (3 177) Transfers out of Level (27) As at the end of the period Level 3 of the hierarchy presents the fair values of commercial debt securities issued by local banks and companies (bonds, mortgage bonds and deposit certificates) in the amount of PLN thousand (31 December 2012: PLN thousand). The above mentioned debt instruments are classified as level 3 because in addition to parameters which transform quotations taken directly from active and liquid financial markets (interest rate curves), their valuation uses credit spread estimated by the Bank by means of an internal credit risk model. The model uses parameters (e.g., rate of recovery from collateral, rating migrations, default ratio volatilities) which are not observed on active markets and hence were generated by statistical analysis

57 In case of corporate and municipal bonds valuated to fair value in repetitive way, classified on level 3 the average credit spread used as of 31 December 2013 is 46,4 b.p. In case of exotic option on the basket of underlyings, considering the Bank s limited exposure in terms of fair value and the fact that these positions only have an immaterial impact on the Bank s P/L, we disclose information concerning the drivers potentially causing uncertainty in the estimation of unobservable variables: volatilities and correlations between underlyings in a given basket (commodities and indexes) used for valuation as of end of 2013 were calculated on the basis of available historical quotations of underlyings. If the credit spread used in the valuation increases by 20 basis points, the value of commercial debt securities would decrease by PLN 3.9 million. Moreover, level 3 covers mainly the fair value of equity securities amounting to PLN thousand valuated using the market multiples method. The market multiples method, consists of valuating the equity capital of a company by using a relation between the market values of the own equity capital or market values of the total capital invested in comparable companies (goodwill) and selected economic and financial figures Other activities The Group provides custody, trustee, corporate administration, investment management and advisory services to third parties. In connection with these, the Group makes decisions concerning the allocation, purchase and sale of a wide variety of financial instruments. Assets held in a fiduciary capacity are not included in these financial statements. 4. Major estimates and judgments made in connection with the application of accounting policy principles The Group applies estimates and adopts assumptions which impact the values of assets and liabilities presented in the subsequent period. Estimates and assumptions, which are continuously subject to assessment, rely on historical experience and other factors, including expectations concerning future events, which seem justified under the given circumstances. Last such verification was performed in November 2013 and it did not have material impact on the overall level of provisions for loans and advances, however it had an impact on the structure of these provisions as well as on the level of loans and advances for which impairment was recognized. The detailed description of the changes implemented as a result of this verification is included under Note of these consolidated financial statements. Impairment of loans and advances The Group reviews its loan portfolio in terms of possible impairments at least once per quarter. In order to determine whether any impairment loss should be recognised in the income statement, the Group assesses whether any evidence exists that would indicate some measurable reduction of estimated future cash flows attached to the loan portfolio. The methodology and the assumptions (on the basis of which the estimated cash flow amounts and their anticipated timing are determined) are regularly verified. Fair value of derivative instruments The fair value of financial instruments not listed on active markets is determined by applying valuation techniques. All the models are approved prior to being applied and they are also calibrated in order to assure that the obtained results indeed reflect the actual data and comparable market prices. As far as possible, observable market data originating from an active market are used in the models. Impairment of available for sale investments The Group reviews its debt securities classified as available for sale investments at each reporting date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances. The Group also records impairment charges on available for sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost. Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available, against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits. Revenue and expenses from sale of insurance products bundled with loans Revenue and expenses from sale of insurance products bundled with loans are split into interest income and fee and commission income based on the relative fair value analysis of each of these products. The remuneration included in fee and commission income is recognised partly as upfront income and partly including deferring over time based on the analysis of the stage of completion of the service. As a result of changes in accounting policies, the Group leads in case of insurance policies bundled with loans to upfront recognition less than 10% of bancassurance income associated with cash and car loans and 0% to approximately 25% of bancassurance income associated with mortgage loans. Recognition of the remaining part of the income is spread over the economic life of the associated loans. Expenses directly linked to the sale of insurance products are recognised using the same pattern. Liabilities due to post-employment employee benefits The costs of post-employment employee benefits are determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, future salary increases, mortality rates and other factors. Due to the long term nature of these liabilities, such estimates are subject to significant uncertainty. Technical-insurance provisions Provision for unpaid claims and benefits which were reported to the insurer and in relation to which the information held does not enable to make an assessment of claims and benefits, is calculated using a lump sum method. Values of lump sum-based ratios for particular risks were established on the basis of information concerning the average value of claims arising from the given risk. As at 31 December 2013, provisions for claims incurred but not reported to the insurer (IBNR) were calculated using the actuarial methods (Naive Loss Ratio and Bornhuetter-Ferguson). The expected loss ratios are composed on the basis of available market studies concerning loss arising from the given group of risks. 5. Business segments Following the adoption of management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the Bank s Management Board (the chief operating decision-maker), which is responsible for allocating resources to the reportable segments and assesses their performance. The classification by business segments is based on client groups and product groups defined by homogenous transaction characteristics. The classification is consistent with sales management and the philosophy of delivering complex products to the Bank s clients, including both standard banking products and more sophisticated investment products. The method of presentation of financial results coupled with the business management model ensures a constant focus on creating added value in relations with clients of the Bank and Group companies and should be seen as a primary division, which serves the purpose of both managing and perceiving business within the Group. Under the rebranding process, on 25 November 2013, their names changed BRE Bank and MultiBank. Entities of the former BRE Bank Group merged under the name mbank S.A. Ultimately, the rebranding process will cover all the outlets of the former BRE Bank Group with all its branches getting a new logo. The process will be completed during Additionally, in accordance with the strategy, all retail and corporate branches of the Bank will have been re-organized and repositioned by 2018 to provide a full range of services to all mbank S.A. clients. The Group conducts its business through different business segments, which offer specific products and services targeted at specific client groups and market segments. The Group currently conducts its operations through the following business segments: The Retail Banking segment, which divides its customers into mbank customers and Private Banking customers and which offers a full range of the Bank s banking products and services as well as specialized products offered by a number of subsidiaries belonging to the Retail Banking segment. The key products in this segment include current and savings accounts (including accounts in foreign currencies), term deposits, lending products (retail mortgage loans and nonmortgage loans such as cash loans, car loans, overdrafts, credit cards and other loan products), debit cards, insurance products, investment products and brokerage services offered to both individual customers and to micro-businesses. The results of the Retail Banking segment include the results of foreign branches of mbank in the Czech Republic and Slovakia. The Retail Banking segment also includes the results of mbank Hipoteczny S.A., mwealth Management S.A., Aspiro S.A. as well as BRE Ubezpieczenia TUiR S.A., BRE Ubezpieczenia Sp. z o.o. and BRE Agent Ubezpieczeniowy Sp. z o.o. The Corporates and Financial Markets segment, which is divided into two sub-segments: Corporates and Institutions sub-segment (business line), which targets small, medium and large-sized companies and public sector entities. The key products offered to these customers include transactional banking products and services including current account 77 78

58 products, multi-functional internet banking, tailor-made cash management and trade finance services, term deposits, foreign exchange transactions, a comprehensive offer of short-term financing and investment loans, cross-border credit, project finance, structured and mezzanine finance services, investment banking products including foreign exchange options, forward contracts, interest rate derivatives and commodity swaps and options, structured deposit products with embedded options (interest on structured deposit products are directly linked to the performance of certain underlying financial instruments such as foreign exchange options, interest rate options and stock options), debt origination for corporate clients, treasury bills and bonds, non-government debt, medium-term bonds, buy sell back and sell buy back transactions and repo transactions, as well as leasing and factoring services. The Corporates and Institutions sub-segment includes the results of the following subsidiaries:, mleasing Sp. z o.o., mfaktoring S.A., MLV 45 Sp. z o.o. spółka komandytowa (previously BRE Holding Sp. z o.o.), Transfinance a.s., Garbary Sp. z o.o., as well as the results achieved by MLV 35 Sp. z o.o. spółka komandytowo-akcyjna until the date of cessation of consolidation, due to the liquidation process of the company. The Trading and Investment sub-segment (business line) consists primarily of treasury, financial markets, and financial institutions operations, manages the liquidity, interest rate and foreign exchange risks of the Bank, its trading and investment portfolios, and conducts market making in PLN denominated cash and derivative instruments, debt origination for financial institutions. The Bank also maintains an extensive correspondent banking network and also develops relationships with other banks providing products such as current accounts, overdrafts, stand alone and syndicated loans and loans insured by KUKE to support the Polish export market. This sub-segment also includes the results of BRE Finance France S.A. and Dom Maklerski mbanku S.A. Operations which are not included in the Retail Banking segment and the Corporates and Financial Markets segment are reported under Other. This segment includes the results of mlocum S.A., mcentrum Operacji Sp. z o.o. and BDH Development Sp. z o.o. The principles of segment classification of the Group s activities are described below. Transactions between the business segments are conducted on regular commercial terms. Allocation of funds to the Group companies and assigning them to particular business segments results in funding cost transfers. Interest charged for these funds is based on the Group s weighted average cost of capital and presented in operating income. Internal fund transfers between the Bank s units are calculated at transfer rates based on market rates. Transfer rates are determined on the same basis for all operating units of the Bank and their differentiation results only from currency and maturity structure of assets and liabilities. Internal settlements concerning internal valuation of funds transfers are reflected in the results of each segment. Assets and liabilities of a business segment comprise operating assets and liabilities, which account for most of the statement of financial position, whereas they do not include such items as taxes or loans. The separation of the assets and liabilities of a segment, as well as of its income and costs, is done on the basis of internal information prepared at the Bank for the purpose of management accounting. Assets and liabilities for which the units of the given segment are responsible as well as income and costs related to such assets and liabilities are attributed to individual business segments. The financial result (profit/loss) of a business segment takes into account all the income and cost items attributable to it. The business operations of particular companies of the Group are attributed to business segments (including consolidation adjustments). From the beginning of 2013, there was a change in the assignment to a segment of mbank Hipoteczny S.A. The company was assigned to the Retail Banking segment (previously was part of Trading and Investment sub-segment). This change was made in connection with the new strategy adopted by mbank Hipoteczny S.A., which assumes that the company will be in the future a source of funding for mortgages offered to retail customers. According to above-mentioned change, the comparative data concerning business segments of the Group were restated to reflect changes in presentation made to the current financial year. The primary basis used by the Group in the segment reporting is business line division. Additionally, the Group s activity is presented by geographical areas reporting broken down into Poland and foreign countries. Foreign countries segment include activity of mbank s foreign branches in Czech Republic and Slovakia as well as activity of foreign subsidiaries Transfinance a.s. and BRE Finance France S.A. Business segment reporting on the activities of for the period from 1 January to 31 December 2013 (PLN'000) Corporates & Financial Markets Corporates & Institutions Trading & Investment Retail Banking (including Private Banking) Total figure for the Group Statement of financial position reconciliation/ income statement reconciliation Net interest income (9 109) sales to external clients (4 773) sales to other segments ( ) (4 336) - - Net fee and commission income (3 780) sales to external clients (3 806) sales to other segments (12 393) (20 602) Dividend income Trading income (67) Gains less losses from investment securities, investments in subsidiaries and associates Other operating income (19 843) Net impairment losses on loans and advances ( ) 807 ( ) (48) - ( ) ( ) Overhead costs ( ) ( ) ( ) (32 083) ( ) ( ) Amortization and depreciation (70 011) (12 198) ( ) (3 164) - ( ) ( ) Other operating expenses (38 148) (2 087) (71 938) (98 085) - ( ) ( ) Gross profit of the segment Income tax ( ) ( ) Net profit attributable to Owners of mbank S.A Net profit attributable to non-controlling interests Assets of the segment Liabilities of the segment Other items of the segment Expenditures incurred on fixed assets and intangible assets ( ) (10 192) ( ) (181) - ( ) Other costs/ income without cash outflows/ inflows* other non-cash costs (369) ( ) ( ) - other non-cash income * Other costs/income without cash outflows/inflows includes income and expenses arising from valuation of trading financial instruments and foreign exchange result as well as changes in technical-insurance provisions. Other Eliminations

59 Business segment reporting on the activities of for the period from 1 January to 31 December 2012 (PLN'000) Corporates & Financial Markets Corporates & Institutions Trading & Investment Retail Banking (including Private Banking) Other Eliminations Total figure for the Group Statement of financial position reconciliation/ income statement reconciliation Net interest income (13 722) sales to external clients (698) sales to other segments ( ) (13 024) Net fee and commission income (2 739) sales to external clients (2 739) sales to other segments (17 331) (20 564) Dividend income Trading income (516) Gains less losses from investment securities, investments in subsidiaries and associates (974) Other operating income (44 392) Net impairment losses on loans and advances ( ) (15 383) ( ) (7) - ( ) ( ) Overhead costs ( ) ( ) ( ) (37 207) ( ) ( ) Amortization and depreciation (79 350) (11 550) ( ) (3 090) - ( ) ( ) Other operating expenses (40 492) (1 240) (68 463) (76 305) - ( ) ( ) Gross profit of the segment (972) Income tax ( ) ( ) Net profit attributable to Owners of mbank S.A Net profit attributable to non-controlling interests Assets of the segment Liabilities of the segment Other items of the segment Expenditures incurred on fixed assets and intangible assets ( ) (24 152) (86 477) (1 834) - ( ) Other costs/ income without cash outflows/ inflows* other non-cash costs (877) ( ) ( ) - other non-cash income * Other costs/income without cash outflows/inflows includes income and expenses arising from valuation of trading financial instruments and foreign exchange result as well as changes in technical-insurance provisions. The geographical areas reporting Geographical areas reporting on the acivities of mbank Group for the period from 1 January to 31 December Poland Foreign Countries Total Poland Foreign Countries Total Net interest income Net fee and commission income Dividend income Trading income Gains less losses from investment securities, investments in subsidiaries and associates Other operating income Net impairment losses on loans and advances ( ) (10 310) ( ) ( ) (14 148) ( ) Overhead costs ( ) (94 727) ( ) ( ) (78 130) ( ) Amortization and depreciation ( ) (4 553) ( ) ( ) (4 838) ( ) Other operating expenses ( ) (7 768) ( ) ( ) (9 115) ( ) Gross profit of the segment Income tax ( ) ( ) Net profit attributable to Owners of mbank S.A Net profit attributable to non-controlling interests Assets of the segment, including: tangible assets deferred income tax assets Liabilities of the segment

60 6. Net interest income Interest income Year ended 31 December Loans and advances including the unwind of the impairment provision discount Investment securities Cash and short-term placements Trading debt securities Interest income on derivatives classified into banking book Interest income on derivatives concluded under the hedge accounting Other Total interest income Interest expense Arising from amounts due to banks ( ) ( ) Arising from amounts due to customers ( ) ( ) Arising from issue of debt securities ( ) ( ) 7. Net fee and commission income Fee and commission income Payment cards-related fees Credit-related fees and commissions Commissions from insurance activity Commissions from bank accounts Commissions from money transfers Fees from brokerage activity Commissions for agency service regarding selling products of external financial entities Year ended 31 December Commissions due to guarantees granted and trade finance commissions Commissions on trust and fiduciary activities Fees from portfolio management services and other management-related fees Other Fee and commission income Fee and commission expense Payment cards-related fees ( ) ( ) Commissions paid to external entities for sale of the Bank s products (59 035) (65 142) Discharged brokerage fees (26 191) (23 966) Insurance activity-related fees (3 628) (10 471) Other discharged fees ( ) ( ) Total fee and commision expense ( ) ( ) Year ended 31 December Fee and commission income from insurance contracts - Income from insurance intermediation Income from insurance policies administration Total fee and commission income from insurance contracts Dividend income Year ended 31 December Trading securities Securities available for sale Total dividend income

61 9. Net trading income Foreign exchange result includes profit/(loss) on spot transactions and forward contracts, options, futures and translation of assets and liabilities denominated in foreign currencies. Interest-bearing instruments include the profit/(loss) on money market instrument trading, swap contracts for interest rates, options and other derivative instruments. Equity instruments include the valuation and profit/(loss) on global trade in equity securities. Market risk instruments include profit/(loss) on: bond futures, index futures, security options, stock exchange index options, and options on futures contracts as well as the result from securities forward transactions and commodity swaps. The Group applies fair value hedge accounting for part of the portfolio of fixed interest rate mortgage loans granted by foreign branches of the Bank in the Czech Republic. An Interest Rate Swap is the hedging instrument changing the fixed interest rate to a variable interest rate. In addition, from October 2012 the Group applies fair value hedge accounting of Eurobonds issued by BRE Finance France S.A., subsidiary of mbank. An Interest Rate Swap is the hedging instrument changing the fixed interest rate to a variable interest rate. In both cases described above, the risk of changes in interest rates is the only type of risk hedged within hedge accounting applied by the Group. The result of the valuation of hedged items and hedging instruments is presented in the above note. 10. Other operating income Year ended 31 December Foreign exchange result Net exchange differences on translation Net transaction gains/(losses) Other net trading income and result on hedge accounting Interest-bearing instruments Equity instruments Market risk instruments Result on hedge accounting, including: Net profit on hedged items (3 705) - Net profit on hedging instruments Total net trading income Year ended 31 December Income from insurance activity net comprises income from premiums, reinsurance and co-insurance activity, reduced by claims paid and costs of claims handling and adjusted by the changes in provisions for claims connected with the insurance activity conducted within mbank Group. Net income from operating lease consists of income from operating lease and related depreciation cost of fixed asset provided by the Group under operating lease, incurred to obtain revenue. In 2012, as a result of the analysis of tangible fixed assets, the Group had made write-offs of investments in real estate and leasehold improvements (Note 12) and reversal of write-offs created in the previous reporting periods. The total impact of write-offs and reversal of write-offs was negative and amounted to PLN thousand. Net income from insurance activity generated in 2013 and 2012 respectively, is presented below. Income from premiums Premiums attributable Change in provision for premiums Premiums earned Reinsurer's shares - Gross premiums written (72 131) (74 135) - Change in unearned premiums reserve (2 098) Reinsurer's share in premiums earned (74 229) (68 225) Net premiums earned Claims and benefits - Claims and benefits paid out in the current year including costs of liquidation before tax - Change in provision for claims and benefits paid out in the current year including costs of liquidation before tax - Reinsurer's share in claims and benefits paid out in the current year including costs of liquidation - Change in provision for reinsurer's share of claims and benefits paid out in the current year including costs of liquidation Year ended 31 December (73 133) (60 519) (13 287) (23 214) Claims and benefits net (25 278) (30 215) - Other costs net of reinsurance (3 744) (4 515) - Other operating income 8 (67) - Costs of expertise and certificates concerning underwriting risk (221) (291) Income from sale or liquidation of fixed assets, intangible assets, assets held for sale and inventories Total net income from insurance activity Income from insurance activity net Income from services provided Net income from operating lease Income due to release of provisions for future commitments Income from recovering receivables designated previously as prescribed, remitted or uncollectible Income from compensations, penalties and fines received Net income from operating lease generated in 2013 and 2012 respectively, is presented below. Year ended 31 December Net income from operating lease, including: - Income from operating lease Depreciation cost of fixed assets provided under operating lease (51 794) (51 557) Release of impairment provisions for tangible fixed assets and intangible assets Total net income from operating lease Other Total other operating income Income from sale or liquidation of tangible fixed assets, intangible assets as well as assets held for disposal comprises primarily income of the company mlocum S.A. from developer activity. Income from services provided is earned on non-banking activities

62 11. Overhead costs Costs of services provided concern non-banking services. Material costs consist of tangible assets operating lease payment costs (mainly real estate) of PLN thousand (2012: PLN thousand). Staff-related expenses in 2013 and 2012 are presented below. 12. Other operating expenses Year ended 31 December Staff-related expenses ( ) ( ) Material costs ( ) ( ) Taxes and fees (30 011) (25 069) Contributions and transfers to the Bank Guarantee Fund (58 228) (60 454) Contributions to the Social Benefits Fund (6 782) (6 511) Other (215) (856) Total overhead costs ( ) ( ) Year ended 31 December Wages and salaries ( ) ( ) Social security expenses (98 847) (94 718) Employee contributions related to post-employment benefits (857) (1 057) Remuneration concerning share-based payments, including: (15 886) (12 216) - share-based payments settled in mbank S.A. shares (15 759) (11 365) - cash-settled share-based payments (127) (851) Other staff expenses (34 676) (38 662) Staff-related expenses, total ( ) ( ) Costs arising from sale or liquidation of fixed assets, intangible assets, assets held for resale and inventories ( ) (64 167) Provisions for future commitments (42 593) (51 603) Costs arising from provisions created for other receivables (excluding loans and advances) Year ended 31 December (4 624) (6 491) Donations made (2 726) (2 764) Costs of sale of services (1 799) (1 597) Compensation, penalties and fines paid (718) (1 303) Costs arising from receivables and liabilities recognised as prescribed, remitted and uncollectible (478) (137) Impairment provisions created for tangible fixed assets and intangible assets - (15 387) Other operating costs (42 524) (43 051) 13. Net impairment losses on loans and advances 14. Income tax expense Year ended 31 December Net impairment losses on amounts due from other banks (Note 18) Net impairment losses on loans and advances to customers (Note 22) ( ) ( ) Changes in provisions on off-balance sheet items (Note 32) (9 575) (15 957) Total net impairment losses on loans and advances ( ) ( ) Year ended 31 December Current tax ( ) ( ) Deferred income tax (Note 33) (65 686) Total income tax ( ) ( ) Profit before tax Tax calculated at Polish current tax rate (19%) ( ) ( ) Effect of different tax rates in other countries (12) (1) Income not subject to tax *) Costs other than tax deductible costs **) (47 659) (20 131) Other positions affecting income tax Deferred tax losses incurred by mbank branch in the Czech Republic in Losses of branches of mbank S.A. in Slovakia (1 710) (1 534) Income tax expense ( ) ( ) Effective tax rate calculation Profit before income tax Income tax ( ) ( ) Effective tax rate 20.34% 18.13% *) includes i.a. a positive result of branch in Czech Republic (excluded from taxation in Poland). **) includes non-deductible costs according to Article 16 item 1 of Corporate Income Tax Act from 15 February 1992 (Journal of Laws No 21, item 86), i.a. non-deductible costs concerning permanent differences on several transactions of sale of retail and corporate impaired loan portfolios in the Bank resulting in tax expense in amount about PLN thousand and provisions on an incentive programme for the Management Board Members of the Bank resulting in tax expense in amount about PLN thousand. Information about deferred income tax is presented in Note 33. The tax on the Group s profit before tax differs from the theoretical amount that would arise using the basic tax rate of the parent as presented above. Total other operating expenses ( ) ( ) In 2012, as a result of the analysis of tangible fixed assets the Group had made write-offs of investments in real estate and leasehold improvements and reversal of write-offs created in the previous reporting periods (Note 10). The total impact of write-offs and reversal of write-offs was negative and amounted to PLN thousand. Costs arising from sale or liquidation of fixed assets, intangible assets, assets held for resale and inventories comprise primarily the expenses incurred by mlocum in connection with its developer activity. In 2013, provisions for future commitments include provisions for legal proceedings of PLN thousand (2012: PLN thousand) (Note 32)

63 15. Earnings per share Earnings per share for 12 months Basic: According to IAS 33, the Bank prepares a calculation of the diluted earnings per share taking into account contingently issuable shares as part of the incentive programmes described in the Note 43. The calculations did not include those elements of the incentive programmes, which were antidilutive for the presented periods that could potentially dilute basic earnings per share in the future. The basic earnings per share are computed as the quotient of the Bank stockholders' share of the profit and the weighted average number of ordinary shares during the year. The diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares as if all possible ordinary shares causing the dilution were replaced with shares. The Bank has one category of potential ordinary shares causing the dilution: share options. The number of diluting shares is computed as the number of shares that would be issued if all share options were executed at the market price, determined as the average annual closing price of the Bank s shares. 16. Other comprehensive income Net profit attributable to Owners of mbank S.A Weighted average number of ordinary shares Net basic profit per share (in PLN per share) Diluted: Net profit attributable to Owners of mbank S.A., applied for calculation of diluted earnings per share Weighted average number of ordinary shares Adjustments for: - share options Weighted average number of ordinary shares for calculation of diluted earnings per share Diluted earnings per share (in PLN per share) Disclosure of tax effects relating to each component of other comprehensive income Items that may be reclassified subsequently to the the income statement Before-tax amount Tax (expense) benefit Net amount Before-tax amount Tax (expense) benefit Net amount ( ) ( ) (67 060) Exchange differences on translation of foreign operations (2 116) - (2 116) (1 815) - (1 815) Change in valuation of available for sale financial assets ( ) ( ) (67 060) Items that will not be reclassified to the income statement Year ended 31 December 2013 Year ended 31 December 2012 (875) 166 (709) 278 (53) 225 Actuarial gains and losses relating to post-employment benefits (875) 166 (709) 278 (53) 225 Total other comprehensive income ( ) ( ) (67 113) The table below presents detailed information concerning other comprehensive income for the years 2013 and Items that may be reclassified subsequently to the the income statement In 2013 and 2012, a change in the valuation of treasury bonds had a considerable impact on other components of equity. Negative change in the valuation of debt instruments in 2013 compared to 2012 was driven by an increase in the bond market yield curve provoking reduction in the valuation of bonds held by the Bank at the end of 2012 and bonds purchased in Furthermore, the Group made a profit on the sale of bonds classified as available for sale, held as at the end of 2012, in the gross amount of PLN thousand. In 2013, the unrealized gains on equity instruments include positive valuation of shares in PZU SA in amount PLN thousand, (in 2012, the unrealized loss of PLN thousand). 17. Cash and balances with central bank ( ) Exchange differences on translating foreign operations (2 116) (1 815) Unrealised gains (positive differences) arising during the year (net) Unrealised losses (negative differences) arising during the year (net) (8 494) (4 493) Available-for-sale financial assets ( ) Unrealised gains on debt instruments arising during the year (net) Unrealised losses on debt instruments arising during the year (net) ( ) (23 979) Reclassification adjustments of gains (losses) on debt instruments to the income statement (net) (37 794) (26 818) Unrealised gains on equity instruments arising during the year (net) Unrealised losses on equity instruments arising during the year (net) - (1 021) Reclassification adjustments of gains (losses) on equity instruments to the income statement (net) Year ended 31 December (9 574) (130) Items that will not be reclassified to the income statement (709) 225 Actuarial gains and losses relating to post-employment benefits (709) 225 Actuarial gains Actuarial losses (744) - Total other comprehensive income (net) ( ) Cash in hand Current account Total cash and balances with the Central Bank (Note 42) On the basis of the Act on the National Bank of Poland of 29 August 1997, mbank and mbank Hipoteczny hold a mandatory reserve deposit. The arithmetic mean of daily balances of the mandatory reserve which mbank and mbank Hipoteczny were obliged to maintain during a given period in the current account with NBP amounted to: PLN thousand for the period from 31 December 2013 to 30 January 2014, PLN thousand for the period from 31 December 2012 to 30 January 2013, As at 31 December 2013, the former part of the reserve bore 2.48% interest (31 December 2012: 4.05%)

64 18. Loans and advances to banks 19. Trading securities The following table presents receivables from Polish and foreign banks: Current accounts Placements with other banks (up to 3 months) Included in cash equivalents (Note 42) Loans and advances Term placements with other banks Reverse repo / buy-sell-back transactions Other receivables Total (gross) loans and advances to banks Provisions created for loans and advances to banks (negative amount) (289) (559) Total (net) loans and advances to banks Short-term (up to 1 year) Long-term (over 1 year) Loans and advances to Polish banks (gross) Provisions created for loans and advances to Polish banks (118) (79) Loans and advances to foreign banks (gross) Provisions created for loans and advances to foreign banks (171) (480) Total (net) loans and advances to banks As at 31 December 2013, the variable rate loans to banks amounted to PLN thousand and the fixed rate loans to banks amounted to PLN thousand (as at 31 December 2012 variable rate loans to banks amounted to PLN thousand and fixed rate loans to PLN thousand). As at 31 December 2013 and 31 December 2012, the term placements with other banks were fixed rated and amounted to PLN thousand and PLN thousand respectively. An average deposit interest rate for deposits in other banks and loans granted to banks amounted to 1.42% (31 December 2012: 2.16%). The following table presents the changes in provisions for losses on amounts due from banks: Provisions for loans and advances to banks as at the beginning of the period (559) (1 027) Provisions created (Note 13) (1 664) (3 793) Release of provisions (Note 13) Foreign exchange differences (12) 31 Provisions for loans and advances to banks as at the end of the period (289) (559) As at 31 December 2013 and 31 December 2012, the amount of provisions for loans and advances to banks relates in total to receivables without loss. Trading securities without pledge Trading securities include securities used to secure sell-buy-back transactions with customers, the market value of which as at 31 December 2013 amounted to PLN thousand (31 December 2012: PLN thousand). 20. Derivative financial instruments Pledged trading securities Total trading securities Trading securities without pledge Pledged trading securities The Group uses the following derivative instruments for economic hedging and for other purposes: Total trading securities Debt securities: Issued by government government bonds treasury bills Other debt securities bank's bonds deposit certificates corporate bonds Equity securities: listed unlisted Total debt and equity securities: Forward currency transactions represent commitments to purchase foreign and local currencies, including outstanding spot transactions. Futures for currencies and interest rates are contractual commitments to receive or pay a specific net value, depending on currency rate of exchange or interest rate variations, or to buy or sell a foreign currency or a financial instrument on a specified future date for a fixed price established on the organised financial market. Because futures contracts are collateralised with fair-valued cash or securities and the changes of the face value of such contracts are accounted for daily in reference to stock exchange quotations, the credit risk is marginal. FRA contracts are similar to futures except that each FRA is negotiated individually and each requires payment on a specific future date of the difference between the interest rate set in the agreement and the current market rate on the basis of theoretical amount of capital. Currency and interest rate swap contracts are commitments to exchange one cash flow for another cash flow. Such a transaction results in swap of currencies or interest rates (e.g., fixed to variable interest rate) or combination of all these factors (e.g., cross-currency CIRS). With the exception of specific currency swap contracts, such transactions do not result in swaps of capital. The credit risk of the Group consists of the potential cost of replacing swap contracts if the parties fail to discharge their liabilities. This risk is monitored daily by reference to the current fair value, proportion of the face value of the contracts and market liquidity. The Group evaluates the parties to such contracts using the same methods as for its credit business, to control the level of its credit exposure. Due to the application of fair value hedge accounting for part of the portfolio of fixed interest rate mortgage loans granted by foreign branches of the Bank in the Czech Republic and fair value hedge accounting of Eurobonds issued by BRE Finance France S.A. within interest rate swaps, the Group distinguished instruments that hedge the risk of changes in interest rate. Result from valuation of the hedged item and hedging instruments is presented in this consolidated financial statement in item Net income from other trading operations and hedge accounting in Note 9. Currency and interest rate options are agreements, pursuant to which the selling party grants the buying party the right, but not an obligation, to purchase (call option) or sell (put option) a specific quantity of a foreign currency or a financial instrument at a predefined price on or by a specific date or within an agreed period. In return for accepting currency or interest rate risk, the buyer offers the seller a premium. An option can be either a public instrument traded at a stock exchange or a private instrument negotiated between the Group and a customer (private transaction). The Group is exposed to credit risk related to purchased options only up to the balance sheet value of such options, i.e. the fair value of the options. Market risk transactions include futures contracts as well as commodity options, stock options and index options. Face values of certain types of financial instruments provide a basis for comparing them to instruments disclosed in the statement of financial position but they may not be indicative of the value of the future cash flows or of the present fair value of such instruments. For this reason, the face values do not indicate the level of the Group's exposure to credit risk or price change risk. Derivative instruments can have 91 92

65 positive value (assets) or negative value (liabilities), depending on market interest or currency exchange rate fluctuations. The aggregate fair value of derivative financial instruments may be subject to strong variations. The following table presents the fair values of the derivatives: As at 31 December 2013 Derivatives held for trading Foreign exchange derivatives Purchase Disposal Assets Liabilities - Currency forwards Currency swaps Cross-currency interest rate swaps OTC currency options bought and sold Total OTC derivatives Currency futures Total foreign exchange derivatives Interest rate derivatives Contract amount Fair value - Interest rate swap, OIS Forward rate agreements OTC interest rate options Total OTC interest rate derivatives Interest rate futures Total interest rate derivatives Market risk transactions Total derivative assets / liabilities held for trading Derivatives held for hedging Derivatives designated as fair value hedges Interest rate swaps Total derivatives held for hedging Total recognised derivative assets/ liabilities Total recognised derivative assets/ liabilities and other trading liabilities Short-term (up to 1 year) Long-term (over 1 year) As at 31 December 2012 Derivatives held for trading Foreign exchange derivatives Contract amount Fair value Purchase Disposal Assets Liabilities - Currency forwards Currency swaps Cross-currency interest rate swaps OTC currency options bought and sold Total OTC derivatives Currency futures Total foreign exchange derivatives Derivatives held for hedging Derivatives designated as fair value hedges Interest rate swaps Total derivatives held for hedging Total recognised derivative assets/ liabilities Total recognised derivative assets/ liabilities and other trading liabilities In both reporting periods, market risk transactions comprise the fair values of: stock index options, shares and other equity securities, futures for commodities, swap contracts for commodities. Under financial derivative instruments the Group presented derivative instruments in the amount of PLN thousand (liabilities), which have been separated from the structured investment deposits (31 December 2012: PLN thousand). As at 31 December 2013 and 31 December 2012, the Group did not have any financial assets and liabilities designated upon initial recognition as at fair value through the income statement. 21. Hedge accounting The Group applies fair value hedge accounting. The interest rate risk is the only type of risk hedged for which hedge accounting is applied. At the end of each month, the Group evaluates effectiveness of the applied hedging by carrying out analysis of changes in fair value of the hedged and hedging instruments in respect of the hedged risk. Description of the hedging relation The Group hedges against the risk of change in fair value: a part of the portfolio of mortgage loans for a fixed interest rate granted by foreign branches of mbank in Czech Republic. The hedged risk results from changes in interest rates, fixed interest rate Eurobonds issued by BRE Finance France S.A. (BFF), subsidiary of mbank. The hedged risk results from changes in interest rates. Hedged items The hedged items are: a part of the portfolio of mortgage loans for a fixed interest rate denominated in CZK and granted by foreign branches of mbank in Czech Republic, fixed interest rate Eurobonds issued by BFF with a nominal value of EUR thousand, fixed interest rate Eurobonds issued by BFF with a nominal value of CHF thousand, fixed interest rate Eurobonds issued by BFF with a nominal value of CZK thousand, Hedging instruments IRS is the hedging instrument swapping the fixed interest rate for a variable interest rate. Presentation of the result from hedged and hedging transactions Short-term (up to 1 year) Long-term (over 1 year) Fair value adjustment of the hedged assets and liabilities as well as valuation of the hedging instruments are recognised in the income statement as the income from trading operation. Interest rate derivatives - Interest rate swap, OIS Forward rate agreements OTC interest rate options Total OTC interest rate derivatives Total interest rate derivatives Market risk transactions Total derivative assets / liabilities held for trading

66 22. Loans and advances to customers Movements in provisions for loans and advances Loans and advances to individuals: current accounts term loans, including: housing and mortgage loans Loans and advances to corporate entities: current accounts term loans: corporate & institutional enterprises medium & small enterprises reverse repo / buy-sell-back transactions other Loans and advances to public sector Other receivables Total (gross) loans and advances to customers Provisions for loans and advances to customers (negative amount) ( ) ( ) Total (net) loans and advances to customers Short-term (up to 1 year) Long-term (over 1 year) In 2013, the Bank sold in several transactions, retail and corporate impaired loan portfolios (default portfolios). The nominal value of sales transactions amounted to PLN thousand (including corporate portfolio of PLN thousand). Sold receivables, in the majority of cases, were highly covered by impairment provisions, and above mentioned transactions have had a significant impact on reducing the defaulted portfolio at the end of 2013 and coverage ratio. As at 31 December 2013, variable rate credits amounted to PLN thousand and fixed rate credits amounted to PLN thousand (as at 31 December 2012 respectively: PLN thousand and PLN thousand). The values mentioned above relate to loans granted to individual clients, corporate clients and the budget sector. An average interest rate for loans granted to customers (excluding reverse repos) amounted to 4.01% (31 December 2012: 4.60%). Provisions for loans and advances: Incurred but not identified losses Gross balance sheet exposure Impairment provisions for exposures analysed according to portfolio approach ( ) ( ) Net balance sheet exposure Receivables with impairment Gross balance sheet exposure Provisions for receivables with impairment ( ) ( ) Net balance sheet exposure MOVEMENTS IN PROVISIONS FOR LOANS AND ADVANCES TO CUSTOMERS AS OF 2013 Provisions as at Provisions created Loans and advances include receivables under finance leases. Release of provisions Reclassification and foreign exchange differences Write-offs Provisions as at Loans and advances to individuals ( ) ( ) (18 078) ( ) Current accounts ( ) ( ) (17 120) ( ) Term loans, including: ( ) ( ) (958) ( ) Housing and mortgage loans ( ) ( ) ( ) Loans and advances to corporate entities ( ) ( ) ( ) Current accounts ( ) ( ) ( ) Term loans, including: ( ) ( ) (27 363) ( ) Corporate & institutional enterprises ( ) ( ) ( ) Medium & small enterprises ( ) ( ) (28 634) ( ) Other (58 997) (10 901) 683 (4 369) (55 464) Loans and advances to public sector (12 326) (724) (2) - (11 797) Total movements for loans and advances to customers ( ) ( ) (11 245) ( ) MOVEMENTS IN PROVISIONS FOR LOANS AND ADVANCES TO CUSTOMERS AS OF 2012 Provisions as at Provisions created Release of provisions Reclassification and foreign exchange differences Write-offs Provisions as at Loans and advances to individuals ( ) ( ) ( ) Current accounts ( ) ( ) ( ) Term loans, including: ( ) ( ) ( ) Housing and mortgage loans ( ) ( ) ( ) Loans and advances to corporate entities ( ) ( ) ( ) Current accounts ( ) ( ) ( ) Term loans, including: ( ) ( ) ( ) Corporate & institutional enterprises ( ) ( ) ( ) Medium & small enterprises ( ) ( ) (15 639) ( ) Other (64 003) (13 405) (58 997) Loans and advances to public sector (3 708) (57 417) (204) - (12 326) Total movements for loans and advances to customers ( ) ( ) ( ) Gross investment in finance leases, receivable: not later than 1 year later than 1 year and not later than 5 years later than 5 years Unearned future finance income on finance leases (negative amount) ( ) ( ) Net investment in finance leases Net investment in finance leases, receivable: - not later than 1 year later than 1 year and not later than 5 years later than 5 years Net investment in finance leases Impairment provisions for finance leases receivable ( ) ( ) Net carrying amount of finance leases receivable Unguaranteed residual value accruing to the lessor

67 23. Investment securities Movements in investment securities Investment securities without pledge Pledged investment securities Presented above value of equity securities includes provisions for impairment of PLN thousand (31 December 2012: PLN thousand). As at 31 December 2013, listed equity securities include fair value of PZU shares in amount of PLN thousand (31 December PLN thousand). As at 31 December 2013, the carrying values of debt securities with fixed interest rates amounted to PLN thousand and debt securities with variable interest rates PLN thousand (31 December 2012: PLN thousand and PLN thousand). The above includes government bonds and treasury bills under the Bank Guarantee Fund (BFG), investment government bonds pledged as sell-buy-back transactions and government bonds pledged as collateral for the loans received from the European Investment Bank and government bonds pledged as collateral for deposit placed by the client. In accordance with the BFG Law of 14 December 1994, the Group held PLN thousand, at face value PLN thousand of treasury securities (bonds and bills) disclosed in its statement of financial position as at 31 December 2013 (31 December 2012: fair value PLN thousand; face value PLN thousand), which were used as security under the Bank Guarantee Fund and they were deposited in a separate account respectively: money bonds at the National Bank of Poland and bonds at the National Depository of Securities. Gains and losses from investment securities include: Total investment securities Investment securities without pledge Pledged investment securities Total investment securities Debt securities Issued by government government bonds treasury bills Issued by central bank Other debt securities bank's bonds corporate bonds communal bonds Equity securities: Listed Unlisted Total debt and equity securities: Short-term (up to 1 year) Long-term (over 1 year) Year ended 31 December Sale/redemption of financial assets available for sale, investments in subsidiaries and associates Reversal of impairment of investments in subsidiaries (452) Total gains and losses from investment securities In 2013, the item Sale/redemption of financial assets available for sale, investments in subsidiaries and associates includes profit on sale of government bonds in the amount of PLN (in 2012: PLN thousand). In 2012, the amount of PLN thousand includes mainly the result of the sale of government bonds in amount of PLN thousand and profit on sale of CERI International Sp. z o.o. in the amount of PLN thousand, as a result of reorganization of outsourcing services in the mbank Group Investment securities As at the beginning of the period Exchange differences (35 272) (23 666) Additions Disposals (sale, redemption and forfeiture) ( ) ( ) Gains / (losses) from impairment of equity securities and debt securities available for sale (452) Gains / (losses) from changes in fair value ( ) As at the end of the period Movements in provisions for losses on investment securities Provisions for losses on equity securities Listed As at the beginning of the period (125) (125) As at the end of the period (125) (125) Unlisted As at the beginning of the period (10 845) (13 132) Allowance for impairment (452) (605) Amounts written off during the period as uncollectible Amounts recovered during the period As at the end of the period (11 297) (10 845) Total provisions for investment securities As at the beginning of the period (10 970) (13 257) Allowance for impairment (452) (605) Amounts written off during the period as uncollectible Amounts recovered during the period As at the end of the period (11 422) (10 970) 24. Intangible assets Development costs Goodwill Patents, licences and similar assets, including: computer software Other intangible assets Intangible assets under development Total intangible assets In 2013, the Group performed impairment tests of intangible assets under development and of goodwill. As a result of the tests, there was not stated impairment

68 Movements in intangible assets 25. Tangible assets Movements in intangible assets from 1 January to 31 December 2013 Gross value of intangible assets as at the beginning of the period: including: acquired computer software Other intangible assets Increase (due to) purchase transfer from fixed assets under construction transfer from intangible assets under development development costs other increases Decrease (due to) (17 938) (32 752) (11 085) (285) ( ) - ( ) - liquidation (17 938) (28 146) (7 992) (283) - - (46 367) - transfer to intangible assets given to use ( ) - ( ) - other decreases - (4 606) (3 093) (2) (21 141) - (25 749) Gross value of intangible assets as at the end of the period: Accumulated amortization as at the beginning of the period: (22 985) ( ) ( ) (18 302) - - ( ) Amortization for the period (due to) (44 493) (32 137) (808) - - (27 471) - amortization (108) (76 497) (42 972) (1 091) - - (77 696) - liquidation other decreases Accumulated amortization as at the end of the period: Impairment losses as at the beginning of the period: (5 155) ( ) ( ) (19 110) - - ( ) - (7) (7) (7) - increase - (10) (10) - decrease Impairment losses as at the end of the period: Net value of intangible assets as at the end of the period: Movements in intangible assets from 1 January to 31 December 2012 Gross value of intangible assets as at the beginning of the period: Development costs Acquired patents, licences and other similar assets Intangible assets under development Goodwill Total intangible assets - (10) (10) including: acquired computer software Other intangible assets Increase (due to) purchase transfer from fixed assets under construction transfer from intangible assets under development development costs other increases Decrease (due to) (4 490) (92 878) (77 490) (266) (54 673) - ( ) - liquidation (4 490) (91 774) (76 686) - (62) - (96 326) - transfer to intangible assets given to use (35 780) - (35 780) - other decreases - (1 104) (804) (266) (18 831) - (20 201) Gross value of intangible assets as at the end of the period: Accumulated amortization as at the beginning of the period: (27 176) ( ) ( ) (17 236) - - ( ) Amortization for the period (due to) (1 066) amortization (282) (82 203) (55 627) (1 024) - - (83 509) - other increases (85) - - (85) - liquidation other decreases Accumulated amortization as at the end of the period: Impairment losses as at the beginning of the period: (22 985) ( ) ( ) (18 302) - - ( ) - (7) (7) - (40) - (47) - increase (17) (17) - decrease Impairment losses as at the end of the period: Net value of intangible assets as at the end of the period: Development costs Acquired patents, licences and other similar assets Intangible assets under development Goodwill Total intangible assets - (7) (7) (7) Movements in tangible assets Tangible assets, including: land buildings and structures equipment vehicles other fixed assets Fixed assets under construction Total tangible assets Movements in tangible assets from 1 January to 31 December 2013 Gross value of tangible assets as at the beginning of the period: Land Buildings and structures Equipment Vehicles Other fixed assets Tangible assets under construction Total Increase (due to) purchase transfer from tangible assets under construction other increases Decrease (due to) (61) (1 271) (18 430) (68 114) (28 066) (41 915) ( ) - sale - (702) (2 938) (63 897) (2 281) - (69 818) - liquidation - (177) (14 820) - (24 784) - (39 781) - transfer to tangible assets (39 948) (39 948) - transfer to intangible assets (493) (493) - other decreases (61) (392) (672) (4 217) (1 001) (1 474) (7 817) Gross value of tangible assets as at the end of the period: Accumulated depreciation as at the beginning of the period: (85 293) ( ) ( ) ( ) - ( ) Depreciation for the period (due to) - (6 573) (40 990) (13 726) (18 899) - (80 188) - depreciation charge - (7 319) (58 373) (57 071) (39 225) - ( ) - other increases - - (192) - (1 230) - (1 422) - sale liquidation other decreases Accumulated depreciation as at the end of the period: Impairment losses as at the beginning of the period: (91 866) ( ) ( ) ( ) - ( ) - (49 270) (207) - (2 695) (180) (52 352) - decrease Impairment losses as at the end of the period: Net value of tangible assets as at the end of the period: (49 270) - - (131) (180) (49 581)

69 Movements in tangible assets from 1 January to 31 December 2012 Land Buildings and structures Equipment Vehicles Other fixed assets Tangible assets under construction Gross value of tangible assets as at the beginning of the period: Increase (due to) purchase transfer from tangible assets under construction other increases Decrease (due to) (700) (10 086) ( ) (48 472) (32 736) (57 937) ( ) - sale (700) (10 000) (15 114) (45 326) (8 942) - (80 082) - liquidation - (67) (20 488) - (2 637) - (23 192) - transfer to tangible assets (54 830) (54 830) - transfer to intangible assets (214) (214) - other decreases - (19) (71 476) (3 146) (21 157) (2 893) (98 691) Gross value of tangible assets as at the end of the period: Accumulated depreciation as at the beginning of the period: (81 251) ( ) (92 364) ( ) - ( ) Depreciation for the period (due to) - (4 042) (25 770) (12 911) depreciation charge - (7 242) (56 177) (57 379) (42 867) - ( ) - other increases - - (1) (1) - sale liquidation other decreases Accumulated depreciation as at the end of the period: (85 293) ( ) ( ) ( ) - ( ) Impairment losses as at the beginning of the period: (51 686) - - (131) (136) (51 953) - increase - (12 500) (207) - (2 619) (44) (15 370) - decrease Impairment losses as at the end of the period: (49 270) (207) - (2 695) (180) (52 352) Net value of tangible assets as at the end of the period: The recoverable value of impaired tangible assets is the net sale price determined on the basis of market prices for similar assets. As part of its activities as a lessor, the mbank Group presents within tangible assets those assets which are leased to third parties under operating lease agreements. The table below presents future minimum lease payments under non-cancellable operating lease agreements with the Group as a lessor. Minimum lease payments under non-cancellable operating lease The Group presents depreciation of tangible assets leased under operating lease agreements as Net income from operating lease (Note 10). Total Up to 1 year Over 1 year up to 5 years Over 5 years Total Other assets The value of inventories results primarily from the business of the companies: mlocum and mleasing. Throughout the year 2013 and 2012, the Group did not capitalize borrowing costs. As at 31 December 2013, other assets in amount of PLN thousand include receivables of Dom Maklerski from the National Depository of Securities in amount of PLN thousand (31 December 2012: PLN thousand). As at 31 December 2013, the above note includes financial assets in amount of PLN thousand (31 December 2012: PLN thousand). 27. Amounts due to other banks Other, including: debtors receivables from income tax interbank balances other accruals accrued income inventories receivables resulting from insurance premiums other Total other assets Short-term (up to 1 year) Long-term (over 1 year) Current accounts Term deposits Loans and advances received Repo / sell-buy-back transactions Liabilities in respect of cash collaterals Payables to be settled Other Amounts due to other banks Short-term (up to 1 year) Long-term (over 1 year) As at 31 December 2013, the fixed rate term deposits accepted from other banks amounted to PLN thousand (31 December 2012: PLN thousand). In both periods, there were no variable rate term deposits. As at 31 December 2013 and as at 31 December 2012, loans and advances received, were variable rate loans. The average interest rate for loans and deposits obtained from banks in 2013 amounted to 1.31% (31 December 2012: 1.42%). mbank S.A. did not provide collateral related to loans from other banks. The Group did not note any violations of contractual terms related to liabilities in respect of loans received

70 28. Amounts due to customers As at 31 December 2013, the majority of the deposits from retail and corporate customers bore fixed interest rates. The average interest rate for amounts due to customers (excluding repos) amounted to 2.02% (31 December 2012: 3.11%). As at 31 December 2013, the balance of loans and advances received included a loan received from European Investment Bank amounting to PLN thousand (31 December 2012: PLN thousand). The loan was collateralized with treasury bonds, which have been presented under Note 23 and Note Debt securities in issue Individual customers: Current accounts Term deposits Other liabilities: liabilities in respect of cash collaterals other Corporate customers: Current accounts Term deposits Loans and advances received Repo transactions Other liabilities: liabilities in respect of cash collaterals other Public sector customers: Current accounts Term deposits Other liabilities: liabilities in respect of cash collaterals other Total amounts due to customers Short-term (up to 1 year) Long-term (over 1 year) As at 31 December 2013 Debt securities in issue by category Nominal value Contractual interest rate Guarantee/collateral Redemption date Carrying value Short-term issues Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Long-term issues Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Bonds (in EUR) % guarantee Bonds (in PLN) % no collateral Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in EUR) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Bonds (in CHF) % guarantee Mortgage bonds (in EUR) % mortgage bond register Bonds (in CZK) % guarantee Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Debt securities in issue (carrying value in PLN '000) As at 31 December 2012 Debt securities in issue by category Nominal value Contractual interest rate Guarantee/collateral Redemption Carrying value date Short-term issues Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Deposit certificates (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Mortgage bonds (in PLN) % mortgage bond register Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Bonds (in PLN) % no collateral Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register

71 Long-term issues Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Bonds (in EUR) % guarantee Bonds (in PLN) % no collateral Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bonds publicly registered Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Mortgage bonds (in EUR) % mortgage bond register Mortgage bonds (in PLN) % mortgage bond register Debt securities in issue (carrying value in PLN '000) The Group did not note any violations of contractual terms related to liabilities in respect of issued debt securities. On 25 September 2013, BRE Finance France S.A. (BFF) - a subsidiary of mbank (the Bank holds 99.98% of its shares) issued the next tranche of Eurobonds with a nominal value of CHF thousand (PLN thousand at the average exchange rate of the National Bank of Poland as at 25 September 2013) maturing on 8 October The settlement of the issue took place on 8 October On 8 October 2013, on the basis of the agreement concluded on 25 September 2013, the funds coming from the issue in the amount of CHF thousand (PLN thousand at the average exchange rate of the National Bank of Poland as at 25 September 2013), were placed by BFF in mbank as a security deposit to back the guarantee issued by the Bank to secure payment of any amounts payable on debt securities issued under Eurobond Issue Programme. On 22 November 2013, BFF issued the next tranche of Eurobonds with a nominal value of CZK thousand (equivalent to PLN at the average exchange rate of the National Bank of Poland as at 22 November 2013) maturing on 6 December The settlement of the issue took place on 6 December On 6 December 2013, the funds raised from the issue in the amount of CZK thousand, on the basis of the agreement concluded on 22 November 2013, were deposited by BFF in mbank S.A. as the security deposit to back the guarantee in amount of CZK to secure the payment obligations from the Eurobonds. On 4 October 2012, BRE Finance France S.A. issued Eurobonds with a nominal value of EUR thousand (PLN thousand at the average exchange rate of the National Bank of Poland as at 4 October 2012) maturing on 12 October On 4 October 2012, mbank guaranteed the payment of any amounts payable on debt securities issued under Euro Medium Term Note Programme. Guarantee was given for the duration of the Programme. The funds comprising the security deposit signed on 4 October 2012 under the agreement between mbank and the Company are used to back the guarantee issued by the Bank to secure the payment obligations from the Eurobonds. The amount of security deposit is EUR thousand (PLN thousand at the average exchange rate of the National Bank of Poland as at 4 October 2012). The amount of the security deposit shall remain the property of the Bank until the date of repayment of Eurobonds on 12 October Movements in debt securities in issue As at 31 December 2013, the nominal value of receivables constituting collateral for the issue of mortgage covered bonds amounted to PLN thousand (31 December 2012: PLN thousand). According to legal requirements, the nominal value of mortgage covered bonds issued cannot exceed 60% of the value of the related real estate. At 31 December 2013, this amount in the register of collateral of mortgage bond amounted to PLN thousand (31 December 2012: PLN thousand). Both, as at 31 December 2013 and as at 31 December 2012, covered bonds were secured with receivables secured with mortgage entered as the first item in the land and mortgage register. The value of receivables constituting collateral for the issue of public sector covered bonds amounted to PLN thousand as at 31 December 2013 compared with PLN thousand as at 31 December Subordinated liabilities As at the beginning of the period Additions (issue) Disposals (redemption) ( ) ( ) Exchange differences Other changes Debt securities in issue as at the end of the period SUBORDINATED LIABILITIES As at 31 December 2013 Nominal value Currency Terms of interest rate (%) Effective interest rate (%) Redemption date As at the end of the period (in PLN '000) - Commerzbank AG CHF 3M LIBOR + 1.2%* Commerzbank AG CHF 3M LIBOR + 1.4%** 1.42 perpetual 1) Commerzbank AG CHF 3M LIBOR + 2.0%*** Commerzbank AG CHF 3M LIBOR + 2.2%**** 2.22 perpetual 1) Commerzbank AG CHF 3M LIBOR + 4.0% 4.02 perpetual 1) Commerzbank AG CHF 3M LIBOR + 2.5% Investors not associated with SUBORDINATED LIABILITIES As at 31 December PLN 6M WIBOR % Nominal value Currency Terms of interest rate (%) Effective interest rate (%) Redemption date As at the end of the period (in PLN '000) - Commerzbank AG CHF 3M LIBOR + 1.2%* Commerzbank AG CHF 3M LIBOR + 1.4%** 1.42 perpetual 1) Commerzbank AG CHF 3M LIBOR + 2.0%*** Commerzbank AG CHF 3M LIBOR + 2.2%**** 2.24 perpetual 1) Commerzbank AG CHF 3M LIBOR + 4.0% 4.01 perpetual 1) Commerzbank AG CHF 3M LIBOR + 2.5% * Margin amounting to 0.7% was in force for the period of first five years. From June 2012, margin amounting to 1.2% is in force. ** Margin amounting to 1.4% is in force up to December Within the period of next years it will be equal to 3.4%. *** Margin amounting to 2.0% is in force from December **** Margin amounting to 2.2% is in force up to January Within the period of next years it will be equal to 4.2%. 1) Debt securities become due on the initiative of the Bank no earlier than two years after the issue date or on the initiative of Commerzbank, not earlier than five years after the issue date, after obtaining the approval of the Polish Financial Supervision Authority. The effective interest rate specified in the tables above is the interest rate at the inception day of the last interest period. In 2013 and in 2012, the Group did not note any delays in repayments of interest instalments and was not in default of any other contractual provisions related to its subordinated liabilities

72 Subordinated liabilities include the amount of issued subordinated debt securities with an indefinite maturity term. In the calculation of the capital adequacy ratio the funds raised through these issues were included in the Bank s own funds calculation. The Bank received the approvals of Polish Financial Supervision Authority (KNF) for the inclusion of the funds obtained from the issues into the Group s supplementary capital. With respect to the issue as at 3 December 2013, the Bank applied to the Polish Financial Supervision Authority in accordance with Article 127, item 3, point 2, letter b) of the Banking Law, for approval to subject the financial liabilities in the amount of PLN thousand obtained from the above mentioned issue into the Group s supplementary capital and received the consent on 14 February As at 31 December 2013, these bonds were not included in the Group's own funds. Movements in subordinated liabilities 31. Other liabilities As at 31 December 2013, the presented note includes financial liabilities of PLN thousand (as at 31 December 2012: PLN thousand). Cash flows resulting from those financial liabilities are presented under the Note The other components of presented liabilities, except for part of accrual of pension benefits that were calculated on actuarial basis, as a rule, are short term liabilities. Movements in provisions for post-employment employee benefits As at the beginning of the period Additions (issue) Exchange differences (4 940) ( ) Other changes Subordinated liabilities as at the end of the period Short-term (up to 1 year) Long-term (over 1 year) Other liabilities, including tax liabilities interbank settlements creditors accrued expenses deferred income reinsurance liabilities provisions for post-employment employee benefits provisions for holiday equivalents provisions for other employee benefits other Total other liabilities Provisions for post-employment employee benefits As at the beginning of the period (by type) pension and disability provisions provisions for death severance provisions for Social Benefit Fund Change in the period (due to) (183) Change in the period (due to) (183) Provisions created, due to: pension and disability provisions provisions for death severance provisions for Social Benefit Fund Interest expense, due to: pension and disability provisions provisions for death severance provisions for Social Benefit Fund Actuarial gains and losses recognised in other comprehensive income (Note 15), due to: 875 (245) pension and disability provisions 420 (331) provisions for death severance provisions for Social Benefit Fund Reduction / elimination of the plan, due to: (31) 31 pension and disability provisions (31) 31 Benefits paid, due to: (757) (1 204) pension and disability provisions (600) (613) provisions for death severance 1 (145) provisions for Social Benefit Fund (158) (446) As at the end of the period (by type) pension and disability provisions provisions for death severance provisions for Social Benefit Fund Short-term (up to 1 year) pension and disability provisions provisions for death severance provisions for Social Benefit Fund Long-term (over 1 year) pension and disability provisions provisions for death severance provisions for Social Benefit Fund Breakdown of actuarial gains and losses Change in financial assumptions, due to: (7) - pension and disability provisions (7) - Change in demographic assumptions, due to: 26 (177) pension and disability provisions 182 (143) provisions for death severance (163) (35) provisions for Social Benefit Fund 7 1 Other changes, due to: 856 (68) pension and disability provisions 245 (188) provisions for death severance provisions for Social Benefit Fund

73 32. Provisions * includes valuation of financial guarantees For off-balance sheet granted contingent liabilities * For legal proceedings Technical-insurance provisions Other Total provisions Provision policies for technical-insurance provisions and provisions for off-balance sheet commitments granted are described in Note 2.26 and Note respectively. Estimated dates of granted contingent liabilities realisation are presented in Note 35. Reinsurer's share, including: - Provision for losses raised and costs of liquidation IBNR Provision for premiums Reinsurer's share, total Insurance provisions net, including - Provision for losses raised and costs of liquidation IBNR Provision for premiums Provision for the insurers' share in technical profit - 87 Insurance provisions net, total The estimated cash flow due to created provisions for legal proceedings and other provisions is expected to crystalise over 1 year. Movements in the provisions Provisions for off-balance sheet granted contingent liabilities Incurred but not identified losses As at the beginning of the period (by type) For off-balance sheet granted contingent liabilities For legal proceedings Technical-insurance provisions Other Change in the period (due to) increase of provisions, due to: for off-balance-sheet granted contingent liabilities (Note 13) for legal proceedings technical-insurance provisions other release of provisions, due to: ( ) ( ) for off-balance-sheet granted contingent liabilities (Note 13) ( ) ( ) for legal proceedings (2 190) (256) other (4 523) - - write-offs (20 942) (2 697) - utilization (150) - - foreign exchange differences (74) (1 380) As at the end of the period (by type) For off-balance sheet granted contingent liabilities For legal proceedings Technical-insurance provisions Other Off-balance sheet contingent liabilities Provisions for off-balance sheet contingent liabilities analysed according to portfolio approach (negative amount) 33. Assets and liabilities for deferred income tax Assets and liabilities for deferred income tax are calculated for all temporary differences in accordance with the balance sheet method, using an effective income tax rate of 19% in 2013 and Assets and liabilities for deferred income tax are not recognised as short term assets and liabilities. Changes in assets and liabilities for deferred income tax are presented below. (24 927) (21 936) Net off-balance sheet contingent liabilities Off-balance sheet granted contingent liabilities with impairment Off-balance sheet contingent liabilities Provisions for off-balance sheet contingent liabilities analysed individually (negative amount) (31 141) (24 526) Net off-balance sheet contingent liabilities Deferred income tax assets As at Recognised in the income statement Recognised in other comprehensive income Other changes As at Interest Valuation of derivative financial instruments ( ) Valuation of investment securities (11 678) Provisions for impairment of loans and advances (27 746) Provisions for employee benefits (1 270) Other provisions Prepayments/accruals (5 398) Tax losses carried forward Technical-insurance provisions Differences between carrying and tax value of lease Other negative temporary differences (17 338) - (706) Total deferred income tax assets ( ) 166 (706) Insurance provisions and reinsurance assets Insurance provisions gross, including: Provision for losses raised and costs of liquidation IBNR Provision for premiums Provision for the insurers' share in technical profit - 87 Insurance provisions gross, total Deferred income tax liabilities As at Recognised in the income statement Recognised in other comprehensive income Other changes As at Interest (50 461) (44 502) Valuation of derivative financial instruments - (6 173) - - (6 173) Valuation of investment securities ( ) (93 616) Interest and fees received in advance (38 339) (35 767) Difference between tax and book value of tangible and intangible assets (25 680) (8 933) - - (34 613) Prepayments regarding amortization of applied investment relief (18 657) (18 657) Other positive temporary differences (52 073) (13 157) Total deferred income tax liabilities ( ) ( )

74 Deferred income tax assets As at Recognised in the income statement Recognised in other comprehensive income Other changes As at Interest Valuation of derivative financial instruments Valuation of investment securities (4 492) Provisions for impairment of loans and advances (7 362) Provisions for employee benefits (4 120) (53) Other provisions Prepayments/accruals Tax losses carried forward (3 798) Differences between carrying and tax value of lease Other negative temporary differences (377) Total deferred income tax assets (4 545) (377) Deferred income tax liabilities As at Recognised in the income statement Recognised in other comprehensive income Other changes As at Interest (49 329) (1 132) - - (50 461) Valuation of derivative financial instruments Valuation of investment securities ( ) (62 568) - ( ) Interest and fees received in advance (37 312) (1 027) - - (38 339) Difference between tax and book value of tangible and intangible assets (29 114) (25 680) Prepayments regarding amortization of applied investment relief (18 657) (18 657) Other positive temporary differences (44 762) (7 280) - (31) (52 073) Total deferred income tax liabilities ( ) (62 568) (31) ( ) Deferred income tax included in the income statement Interest Valuation of derivative financial instruments ( ) Valuation of securities Provisions for impairment of loans and advances (27 746) (7 362) Provisions for employee benefits (1 270) (4 120) Other provisions Prepayments/accruals (5 398) 166 Interest and fees received in advance (1 027) Difference between tax and book value of tangible and intangible assets (8 933) Differences between carrying and tax value of lease Tax losses carried forward (3 798) Other temporary differences Total deferred income tax included in the profit and loss account (Note 14) (65 686) In calculation of deferred tax asset the Group has taken into account tax losses incurred by foreign branch in Czech Republic in years The tax losses incurred by foreign branch in Slovakia were not taken into account by the Bank in this calculation. Including losses of Czech branch and excluding losses of Slovak branch in deferred tax asset calculation resulted from assessment of the tax base in the current year and in the subsequent fiscal years (including the periods scheduled for settlement of tax losses), in the Czech Republic and Slovakia, respectively. On the basis of adopted financial projections and the level of tax base for 2013 it could be stated that in the case of: (i) losses of the Czech branch - reaching the tax base making it possible to deduct the tax losses or a higher tax base is probable, (ii) losses of the Slovak branch - reaching the tax base making it possible to offset negative temporary differences and deduct tax losses is not probable. Right to tax losses settlement expires between 2014 and 2016 year. Due to the improbability of occurrence of taxable income enabling to use tax losses incurred in Garbary Sp. z o.o, the Group does not include those losses in the deferred tax asset calculation. The total amount of unused tax losses not included in the calculation of deferred tax assets amounted to PLN thousand at the end of 31 December 2013 and PLN thousand at the end of 31 December Right to tax losses settlement expires between 2014 and 2019 year. The Group recognizes deferred tax liabilities or assets related to temporary differences arising from investments in subsidiaries and associates except that the implementation of the temporary differences is controlled by the Group and it is probable that in the foreseeable future, these differences will not be reversed. At the end of 2013 the Group did not include settlements on temporary differences in the total amount of PLN thousand incurred due to investments in subsidiaries and affiliated companies in deferred tax calculation and PLN thousand at the end of Deferred tax assets are recognised, because it is probable that future taxable profit will occur. 34. Proceedings before a court, arbitration body or public administration authority As at 31 December 2013, the Bank was not involved in any proceedings before a court, arbitration body, or public administration authority concerning liabilities of the Bank or its subsidiaries, which represent at least 10% of the Bank s equity. Moreover, the total value of claims concerning liabilities of the Bank or its subsidiary in all proceedings before a court, an arbitration body or a public administration authority as at 31 December 2013 was also not higher than 10% of the Bank s equity. The Bank monitors the status of all legal proceedings brought against the Bank and the level of required provisions. Report on major proceedings brought against the Bank 1. Lawsuit brought by Bank BPH SA ( BPH ) against Garbary Sp. z o.o. ( Garbary ) BPH brought the case to court on 17 February The value of the dispute was estimated at PLN thousand. The purpose was to cancel actions related to the creation of Garbary and the contribution in kind. The dispute focuses on determination of the value of the right to perpetual usufruct of land and related buildings that ZM Pozmeat SA contributed in kind to Garbary as payment for a stake in ZM Pozmeat SA share capital worth PLN thousand. On 6 June 2006, the District Court in Poznań issued a verdict according to which the claims were dismissed in their entirety. The claimant filed an appeal against that verdict. On 6 February 2007, the Court of Appeal dismissed the claimant s appeal. The claimant filed the last resort appeal against the ruling of the Court of Appeal. On 2 October 2007, the Supreme Court revoked the ruling of the Court of Appeal and referred the case back. After re-examining the case, the Court of Appeal dismissed the ruling of the District Court in Poznań on 4 March 2008 and referred the case back. On 16 September 2010, the District Court in Poznań dismissed the claim in whole. On 19 October 2010, BPH filed an appeal against the ruling in question. On 24 February 2011, the Court of Appeal made a decision on revoking the ruling and discontinuance of proceedings involving Bank Pekao S.A. (the Bank entered in the proceedings as successor of BPH) justified by lack of title to bring the action before the court on the side of the Bank. The case was returned to the court of the first instance where it will be continued with the participation of BPH as the claimant. Bank Pekao SA filed the last resort appeal against the aforesaid decision with the Supreme Court. On 25 April 2012, the Supreme Court revoked the aforesaid decision of the Court of Appeal and referred the case back. 2. Lawsuit brought by Bank BPH SA against the Bank and Tele-Tech Investment Sp. z o.o. ( TTI ) On 17 November 2007, BPH brought to court a case for damages in the amount of PLN thousand plus statutory interest from 20 November 2004 to the date of payment, due to alleged illegal actions such as the sale by ZM Pozmeat SA to TTI of all shares in the equity of Garbary Sp. z o.o. (previously Milenium Center Sp. z o.o.), an important part of its assets, while ZM Pozmeat SA was at risk of insolvency. In its reply to the claim, the Bank petitioned the Court for dismissing the claim on the grounds of there being no legal basis for allowing the claim. On 1 December 2009, the Court decided to suspend the case until the completion of Pozmeat's bankruptcy proceedings. On 26 January 2011, the court has decided to reinstate suspended proceedings due to the closing of the insolvency procedure. On 5 June 2012, the court once again decided to suspend the proceedings until the case filed by Bank BPH SA against Garbary Sp. z o.o. is finally settled. 3. Claims of clients of Interbrok 170 entities who were clients of Interbrok Investment E. Dróżdż i Spółka Spółka jawna (hereinafter referred to as Interbrok) called the Bank for amicable settlement in the total amount of PLN thousand and via the District Court in Warsaw. In addition, 9 legal compensation suits have been delivered to the Bank. Eight of the nine suits where placed by former clients of Interbrok for the total amount of PLN 800 thousand with the reservation that the claims may be extended up to the total amount of PLN thousand. Plaintiffs allege that the Bank aided in Interbrok s illegal activities, which caused damage to plaintiffs. The District Court in Warsaw settled 8 of the aforementioned court cases and dismissed actions in all cases. As a consequence of the Court of Appeal verdict on 4 March 2010, one of the judgments becomes final and valid. On 22 June 2011, the Supreme Court dismissed the plaintiff's cassation appeal in the said case. As far as the remaining cases are concerned, on 21 December 2010 and 17 January 2012, the Court of Appeals revoked the judgments of the District Court and remanded the cases to the District Court in Warsaw for re-examination. On 23 May 2013, the District Court in Warsaw upon re-examination of the case of 6 former clients of Interbrok dismissed

75 actions for a total of PLN 600 thousand. The court case was in whole appealed against by all plaintiffs, whereas in relations to one plaintiff the appeal was rejected. In the 9th case the value of the subject of litigation amounts to PLN thousand together with statutory interest and legal costs. The amount set forth in the petition is to cover the receivables, acquired by the Plaintiff by way of assignment, due to parties aggrieved by Interbrok on account of the reduction (as a result of Interbrok s bankruptcy) of the receivables by a return of the deposits paid by the aggrieved for making investments on the forex market. The Plaintiff claims the Bank s liability on the grounds of the Bank s aiding to commit the illicit act of Interbrok involving the pursuit of brokerage activity without a permit. At present, the case is being heard by the court of first instance. In all court cases the Bank moves for dismissal of the claims in entirety and objects to charges raised in the legal suits. The legal analysis of the abovementioned claims indicates that there are not significant grounds to state that the Bank bears liability in the case. Therefore, mbank Group did not create provisions for the above claims. 4. Class action against mbank S.A. On 4 February 2011, mbank S.A. received a class action brought to the District Court in Łódź on 20 December 2010 by the Municipal Ombudsman who represents a group of 835 persons retail clients of mbank. The petitioners demand that a responsibility of the Bank is determined for improper performance of mortgage credit agreements. In particular, it was indicated that the Bank improperly applied provisions of the agreements concerning interest rates adjustment, namely that the Bank did not reduce interest rates on loans, although, according to the petitioners, it should have. The Bank rejects the above reasoning. On 18 February 2011, the Bank submitted a formal answer to the court, in which it applied for a dismissal of the claim as a whole. On 6 May 2011, the District Court in Łódź decided to reject the application of mbank S.A. for dismissing the claim and decided that the case will proceed as a class action. On 13 June 2011, mbank S.A. lodged a complaint against this decision with the Court of Appeal in Łódź. On 28 September 2011, the Court of Appeal dismissed the complaint of mbank S.A. Currently, the case proceeds as a class action. The time for joining the class ended in March As at 17 October 2012, the approved class consisted of members. Moreover, the District Court in Łódź ruled against setting up a cash deposit for mbank S.A. requested by the Bank. The Bank lodged a complaint against this ruling. On 29 November 2012, the Court of Appeal in Łódź dismissed the Bank s complaint about setting up the cash deposit. The ruling is valid and the Plaintiff is not obliged to pay the cash deposit. The final response to the petition was sent in January, while the Plaintiff replied to it in a pleading filed on 15 February By a decision dated 18 February 2013, the District Court in Łódź decided to refer the case to mediation. In a letter dated 26 February 2013, the Municipal Consumer Ombudsman raised an objection to the mediation. On 22 June 2013, a trial was conducted, and on 3 July 2013, the Court announced its judgment in which it took into account the action in its entirety acknowledging that the Bank improperly performed the agreement whereby the consumers sustained a loss. On 9 September 2013, the Bank made an appeal against the judgement and the date of a hearing was set on 25 March The verdict of the first instance court does not significantly influence the Bank s perception of the legal risk in this case. As at 31 December 2013, the Bank was not involved in any proceedings before a court, arbitration body, or public administration authority concerning receivables of the Bank or its subsidiaries, which represent at least 10% of the Bank s equity. The total value of claims concerning receivables of the Bank or its subsidiaries in all proceedings before a court, an arbitration body or a public administration authority underway at 31 December 2013 was also not higher than 10% of the Bank s equity. Taxes On 7 January 2013 Director of the Treasury Control Office in Warsaw (Urząd Kontroli Skarbowej w Warszawie) initiated audit proceedings and then tax audit within audit proceedings in mbank S.A. concerning reliability of declared tax bases and correctness of calculation and payment of corporate income tax for the year Audit proceedings and tax audit are still pending. Within the period from 24 August 2012 to 3 September 2012, officer of the First Mazovian Treasury Office in Warsaw (Pierwszy Mazowiecki Urząd Skarbowy w Warszawie) carried out audit proceedings and tax audit in mbank Hipoteczny S.A., concerning correctness of the settlement of the value added tax for June The audit did not identify any irregularities. The tax authorities, may inspect at any time the books and records within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The Management Board is not aware of any circumstances, which may give rise to a potential tax liability in this respect. 35. Off-balance sheet liabilities Off-balance sheet liabilities of the Group comprise: Loan commitments The amounts and deadlines by which the Group will be obliged to realise its off-balance sheet liabilities by granting loans or other monetary services are presented in the table below. Guarantees and other financial facilities Guarantees are presented in the table below based on the earliest contractual maturity date. Operating lease liabilities Where a company of the Group is a lessee, the minimum future lease payments as part of irrevocable operating lease agreements are presented in the table below. The following table presents the Group s off-balance sheet commitments granted and received as well as nominal value of open positions of derivative transactions as at 31 December 2013 and 31 December The above operating lease liabilities relate to the lease of buildings. Up to 1 year 1-5 years Over 5 years Total I Contingent liabilities granted and received II Commitments granted Financing a) Loan commitments b) Operating lease commitments Guarantees and other financial facilities a) Banker's acceptances b) Guarantees and standby letters of credit c) Guarantees of issues underwritten c) Documentary and commercial letters of credit Other commitments Commitments received Financial commitments received Guarantees received Derivative financial instruments (nominal value of contracts) Interest rate derivatives Currency derivatives Market risk derivatives Total off-balance sheet items Up to 1 year 1-5 years Over 5 years Total I Contingent liabilities granted and received II Commitments granted Financing a) Loan commitments b) Operating lease commitments Guarantees and other financial facilities a) Banker's acceptances b) Guarantees and standby letters of credit d) Documentary and commercial letters of credit Other commitments Commitments received Guarantees received Derivative financial instruments (nominal value of contracts) Interest rate derivatives Currency derivatives Market risk derivatives Total off-balance sheet items

76 The leasing agreement for the Bank's headquarters is the most important leasing agreement concluded by the Bank. According to the agreement, the leasing period ends on 30 June The agreement has been concluded for a definite period and, in principal, is not subject to early termination. The agreement provides for the possibility of purchasing the leased object upon a written application of the lessee at least 6 months and no more than 12 months prior to the termination of the leasing agreement, as well as the pre-emptive right under the conditions specified in the agreement. Under the agreement, the Bank shall ensure proper maintenance of the object of leasing. The nominal values of derivatives are presented in Note 20. As at 31 December 2013, apart from financial commitments granted by the Bank, the largest impact on the amount of financial commitments granted had commitments granted by mfaktoring and mbank Hipoteczny respectively in amount of PLN thousand and PLN thousand. 36. Pledged assets Assets are pledged as collaterals in sell-buy-back agreements made with other banks and deposits are held as collateral for futures and options contracts and in relation to the membership in stock exchanges. Deposits are held in the Central Bank, representing obligatory reserves required by the law. 37. Registered share capital The total number of ordinary shares as at 31 December 2013 was shares (31 December 2012: ) at PLN 4 nominal value each (31 December 2012: PLN 4). All issued shares were fully paid up. * As at the end of the reporting period Pledged assets, including: Trading securities (Note 19), including: pledged asset with the right to repledge Investment securities (Note 23), including: pledged asset with the right to repledge Liabilities arising from pledged assets, including: Sell-buy-back transactions (Note 27, 28), including sell-buy-back transactions concerning securities which are subject to buy-sellback transaction Loan received from the European Investment Bank Deposit placed by the client Funds guaranteed under the Bank Guarantee Fund REGISTERED SHARE CAPITAL (THE STRUCTURE) AS AT 31 DECEMBER 2013 Share type Type of preference Type of restrictions Number of shares Series / issue value Paid up Year of registration ordinary bearer* fully paid in cash 1986 ordinary registered* fully paid in cash 1986 ordinary bearer fully paid in cash 1994 ordinary bearer fully paid in cash 1995 ordinary bearer fully paid in cash 1997 ordinary bearer fully paid in cash 1998 ordinary bearer fully paid in cash 2000 ordinary bearer fully paid in cash 2004 ordinary bearer fully paid in cash 2005 ordinary bearer fully paid in cash 2006 ordinary bearer fully paid in cash 2007 ordinary bearer fully paid in cash 2008 ordinary bearer fully paid in cash 2010 ordinary bearer fully paid in cash 2011 ordinary bearer fully paid in cash 2012 ordinary bearer fully paid in cash 2013 Total number of shares Total registered share capital Nominal value per share 4 Commerzbank AG is a shareholder holding over 5% of the share capital and votes at the General Meeting and as at 31 December 2013 it held 69.60% of the share capital and votes at the General Meeting of mbank S.A. Pursuant to a notice dated 8 July 2011, the Bank informed in the current report No.46/2011, that ING Powszechny Fundusz Emerytalny (Fundusz) became the owner of mbank shares representing more than 5% of the votes at the General Meeting of mbank. Prior to this acquisition of shares, Fundusz held shares of mbank, which constituted 4.96% of mbank s share capital and entitled it to exercise votes at the General Meeting of mbank, which represented 4.96% of the total number of votes at the General Meeting of mbank. On 8 July 2011, there were shares of mbank at the Fund's securities account. It constitutes 5.44% of mbank's share capital which entitles to exercise votes at the General Meeting of mbank, representing 5.44% of the total number of votes at the General Meeting of mbank. On 2 August 2013, mbank received from AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK ("Aviva OFE") notification of exceeding 5% of the total number of votes at the General Meeting of mbank. Prior to the acquisition of shares Aviva OFE held shares of mbank, representing 4.91% of the share capital (issued shares) of mbank and carrying votes at the General Meeting of mbank, which represented 4.91% of total votes. Following the acquisition, as at 31 July 2013, Aviva OFE held shares of mbank, representing 5.08% of the share capital (number of issued shares) of mbank and carrying votes at the General Meeting of mbank, which were representing 5.08% of the total number of votes. In 2013, the National Depository of Securities (KDPW) has registered shares of mbank, which were issued as part of the conditional increase in the share capital of the Bank by issuance of shares with no subscription rights for the existing shareholders in order to enable beneficiaries of the incentive programmes to take up shares in mbank S.A. As a result of the above registration, in the year 2013 the Bank's share capital increased by PLN Share premium Share premium is formed from the share premium obtained from the issue of shares reduced by the direct costs incurred with that issue. This capital is intended to cover all losses that may result from the business activity of the Bank. The increase of share premium in 2012 and 2011 results from the issue of shares under incentive programmes described under Note Retained earnings Retained earnings include: other supplementary capital, other reserve capital, general banking risk reserve, profit (loss) from the previous year and profit for the current year. Other supplementary capital, other reserve capital and general banking risk reserve are created from profit for the current year and their aim is described in the By-laws or in other regulations of the law Other supplementary capital Other reserve capital General banking risk reserve Profit from the previous year (15 760) Profit for the current year Total retained earnings According to the Polish legislation, each bank is required to allocate 8% of its net profit to a statutory undistributable other supplementary capital until this supplementary capital reaches 1/3 of the share capital. In addition, the Group transfers some of its net profit to the general banking risk reserve to cover unexpected risks and future losses. The general banking risk reserve can be distributed only on consent of shareholders at a general meeting

77 40. Other components of equity 41. Dividend per share On 11 April 2013, the XXVI Ordinary General Meeting of mbank S.A. adopted a resolution regarding the distribution of the profit with the decision to pay a dividend for the year The dividend to the shareholders contributed an amount of PLN , wherein the amount of the dividend per one share was PLN 10. Number of shares eligible for dividend was The dividend date was fixed for the 15th of May Payment of the dividend was on 29 May Cash and cash equivalents For the purpose of the statement of cash flows, the balance of cash and cash equivalents comprises the following balances with maturities shorter than 3 months. 43. Share-based incentive programmes 2008 Incentive Programme for the Management Board Members of the Bank Exchange differences on translating foreign operations (2 010) 106 Unrealized gains (positive differences) Unrealized losses (negative differences) (19 163) (11 463) Available-for-sale financial assets Unrealized gains on debt instruments Unrealized losses on debt instruments (7 808) (9 996) Unrealized gains on equity instruments Deferred income tax (39 787) (84 269) Actuarial gains and losses relating to post-employment benefits (484) 225 Actuarial gains Actuarial (losses) (918) - Deferred income tax 113 (53) Total other components of equity Cash and balances with the Central Bank (Note 17) Loans and advances to banks (Note 18) Trading securities (Note 19) Total cash and cash equivalents On 14 March 2008 the Ordinary General Meeting of mbank, by adopting a relevant resolution, expressed consent to carry out an incentive programme for Members of the Bank's Management Board at mbank. Under the programme Members of the Bank's Management Board have the right to take up bonds with priority right with respect to acquisition of shares of the ultimate parent entity, Commerzbank AG. In 2010, the programme was changed in the part concerning shares of Commerzbank, so that Members of the Management Board may obtain the right to receive cash equivalent corresponding to the value of the shares of Commerzbank calculated based on the average share price on the date when the right to receive the equivalent originated. All the rights under payments settled in cash equivalent based on shares of Commerzbank and all the rights under payments settled in mbank S.A. shares within the framework of the programme have already been granted. Payments are settled in three equal deferred tranches: 12, 24 and 36 months form the date of acquiring the rights for a given year of the programme by the Manager. The last settlements of the programme are scheduled for Cash bonus under the programme was paid for and presented as an obligation to employees and referred to profit and loss account in a given year for which it was awarded. The bonds may be acquired by the Entitled Persons over the years , provided that their employment continues. The right to take up shares under the conditional capital increase, resulting from bonds, may be exercised by the Entitled Persons in the period from acquisition of bonds to 31 December Obtaining the right to acquire bonds and the number of bonds depend on the level of fulfillment of the following conditions: individual assessment of the Entitled Person by the Supervisory Board, net ROE of in the financial year for which the shares are granted and making a consolidated profit before tax of or consolidated profit before tax of particular business lines of mbank Group for a given financial year. Share-Based Payments Settled in Cash All rights under payments settled as a cash equivalent based on Commerzbank shares under the program have already been granted. Since payments are settled in three equal annual deferred tranches on the lapse of, respectively, 12, 24 and 36 months from the date of acquisition by the Manager of the right for a given year of the program, the cost of Commerzbank share-based payments settled in cash were recognised in the income statement in correspondence with liabilities to employees. The last settlements under the programme are in Share-Based Payments Settled in mbank S.A. Shares All rights under payments settled as a cash equivalent based on mbank S.A. shares under the program have already been granted. Since payments are settled in three equal annual deferred tranches on the lapse of, respectively, 12, 24 and 36 months from the date of acquisition by the Manager of the right for a given year of the program, the cost of share-based payments settled in cash are still recognised in the income statement in correspondence with other reserve capital. The last settlements under the programme are in This is equity-settled share-based program. The table below presents the number and weighted average exercise prices of share options related to the 2008 incentive programme for Management Board Members of the Bank Number of options Weighted average exercise price (in PLN) Number of options Weighted average exercise price (in PLN) Outstanding at the beginning of the period Granted during the period Forfeited during the period Exercised during the period* Expired during the period Outstanding at the end of the period Exercisable at the end of the period * In 2013, the weighted average exercise price of the shares at the option exercise date was PLN (in 2012 PLN ) Incentive Programme for the Management Board Members of the Bank On 7 December 2012, the Supervisory Board, in accordance with the recommendation of the Remuneration Committee, adopted Rules of the Incentive Programme at mbank S.A. which replaced the Rules of the Incentive Programme at mbank S.A. of 14 March Under the programme, Members of the Bank's Management Board have the right to receive a bonus, including "cashless bonus" paid in the Bank's shares, including phantom shares. The net ROE of mbank S.A. Group forms the basis for acquisition by Members of the Management Board of the right to bonus and calculation of the base amount to determine the amount of bonus for a given financial year. Equivalent of 50% calculated based on the base amount of ROE constitutes the so-called guaranteed bonus in respect of achievement of financial result. As regards the remaining 50% of the base amount, the Executive Committee of the Supervisory Board may grant the so-called discretionary bonus if it decides that a given Member of the Management Board achieved the annual/multi-year business and development objective and taking into account the situations on financial markets in the last/previous financial periods. 40% of the bonus due to a Member of the Management Board for a given financial year, constituting the sum of the guaranteed bonus and discretionary bonus, is paid in the form of cash payment, the remaining 60% will be paid as a cashless bonus in three equal annual deferred tranches: 12, 24 and 36 months form the date of acquiring by the Member of the Management Board the rights to the cashless bonus. The conditions for receiving the cashless bonus and its amount depend on net ROE in the financial year for which the cashless bonus is awarded, assessment of financial standing of the Bank by the Remuneration Committee and assessment of work of a given Member of the Management Board for a period longer than one financial year. The Supervisory Board on the basis of recommendations issued by the Remuneration Committee may make a decision on suspending in whole or limiting the right to acquire bonds with priority right to take up the shares of the Bank in whole or in part of the deferred tranche due to the later assessment of the performance of the Member of the Management Board over a period of time longer than one financial year (i.e. for the period of at least 3 years), which takes into account the business cycle of the Bank as well as the risk related to the bank's operation, but only when the acts or omissions of the Member of the

78 Management Board had a direct and adverse impact on the bank's financial result and market position within the assessment period. The Supervisory Board, on the basis of the recommendation of the Remuneration Committee of the Supervisory Board may make a decision on suspending in whole or decreasing the bonus amount for a given financial, as well as in the scope of the bonus or deferred tranche not paid out yet, in the situation referred to in Article 142 (1) of the Banking Law Act. Suspending in whole or decreasing the bonus, as well as any deferred tranche by the Remuneration Committee of the Supervisory Board can also apply to the bonus and/or the deferred tranche not paid out to the Member of the Management Board upon termination or expiry of the management contract. In 2014 Members of the Management Board will obtain the possibility of acquiring bonds with the priority right to take up shares of the Bank within Tranche I of the cashless bonus for The table below presents the number of share options related to the 2012 incentive programme for Management Board Members of the Bank. Cash Part of the Bonus The bonus at 40% of the base amount for the year is recognised as a liability to employees and charged to the income statement in the year for which it was granted. Share-Based Payments Settled in mbank S.A. Shares A bonus at 60% of the base amount constitutes a payment settled in mbank S.A. shares. The cost of this part of the programme is charged to the income statement and recognised in correspondence with other reserve capital. The cost of payments settled in shares is recognised in the income statement for the last year of the previous program, i.e. the year 2012 and as of the date of award of a new 5-year program, i.e., as of 2013, for all years of the program ( ) until the acquisition date of rights to the program for the year and, subsequently, until the date of the last deferred payment (payments are settled in three equal annual deferred tranches on the lapse of, respectively, 12, 24 and 36 months from the date of acquisition by the Manager of the right for a given year of the program). This is equity-settled share-based program Incentive Programme for Key Managers of mbank Group On 27 October 2008 the Extraordinary General Meeting of the Bank adopted an incentive programme for the key management staff of. The programme participants include: Bank Directors; Representatives of key management Number of options Weighted average exercise price (in PLN) Outstanding at the beginning of the period - - Granted during the period Forfeited during the period - - Exercised during the period - - Expired during the period - - Outstanding at the end of the period Exercisable at the end of the period - - They are responsible for taking decisions which have material impact on the implementation of a strategy specified by the Bank's Management Board, the Group's results, stability and security of business and development and creating added value of the organization. In 2010, the Management Board of the Bank decided to launch the programme and approved the list of participants for Tranche III. Within Tranche III 13,000 options were granted. In 2011 within the Tranche IV and V programme 20,000 options and 19,990 options were granted. The rights started to be exercised in 2012 for Tranche III, in 2013 for Tranche IV and the process will last till 31 December The rights under Tranche V may be exercised after meeting specified conditions concerning acquisition of rights in the period from 1 May 2014 to 31 December The conditions for acquiring rights refer to being in an employment relationship throughout the term of the Tranche, obtaining an economic ratio for mbank S.A. Group specified by the Management Board and obtaining a specific appraisal by the programme participant in each year of the Tranche. In 2011 a decision was taken on suspension of the programme and not activating the remaining tranches. Share-Based Payments Settled in mbank S.A. Shares The cost of the programme for key managers is charged to the income statement and recognised in correspondence with other reserve capital. The cost of payments settled in shares is recognised in the income statement as of the date of award of the program until the acquisition date of rights, i.e.: - from to for Tranche III; - from to for Tranche IV; - from to for Tranche V. This is equity-settled share-based program. The table below presents the number and weighted average exercise prices of share options related to the 2008 incentive programme for key managers of mbank Group. Number of options Weighted average exercise price (in PLN) Options outstanding at the end of 2012 and 2013 expire on 31 December Number of options Employee programme for key management staff of mbank Group of 2013 Weighted average exercise price (in PLN) Outstanding at the beginning of the period Granted during the period Forfeited during the period Exercised during the period Expired during the period Outstanding at the end of the period Exercisable at the end of the period On 11 April 2013, the Extraordinary General Meeting of the Bank adopted a resolution amending the rules of the employee programme, which replaced the incentive programme for key management staff of mbank Group of 2008, whereas as regards the persons who acquired bonds or were granted right to acquire bonds in Tranches III, IV and V the programme will be carried out under the existing principles. The aim of the programme is to ensure growth in the value of the Company's shares by linking the interest of the key management staff of with the interest of the Company and its shareholders and implementing in variable components of remuneration of the persons holding managerial positions at in accordance with the Resolution of the Polish Financial Supervision Authority. The programme will be applied with reference to employees having a material impact on the risk profile of, in particular Members of the Management Board of strategic subsidiaries, Bank Directors and key staff of mbank, whose decisions have a significant impact on the implementation of the strategy specified by the Bank's Management Board, results of, growth in the value of the Bank. Starting from Tranche VI the right granted to the Entitled Person to acquire bonds will be divided into three equal parts, which may be exercised after 12, 24 and 36 months from the date of granting this right, in accordance with the internal regulations adopted in specifying rules of variable remuneration of the employees having a material impact on the risk profile at. The Entitled Persons will obtain in 2015 the possibility of acquiring bonds with the priority right to take up shares of the Bank within Tranche VI. The bonds may be acquired by the Entitled Persons during the Programme Term, but not later than by 31 December The condition for obtaining the right to acquire bonds in the scope of Tranches VI-VIII is reaching the economic ratio set in order to carry out the Program separately by the relevant authorities of the Bank and particular Bank subsidiaries. The Bank's Management Board/Supervisory Board of the Company, where the Program is carried out may take a decision on suspending the Program in whole or decreasing the number of bonds or the number of bonds deferred in a given tranche for the Entitled Person in the case of occurrence of the situations, referred to in Article 142 (1) of the Banking Law Act, occurrence of balance sheet loss or loss of liquidity, meeting the conditions set forth in the agreements with the program participants, forming the basis for work certificate or other services for the Bank and subsidiaries

79 Cash Part of the Bonus The bonus in the amount of 50% of the base amount for the year is recognised as a liability to employees and charged to the income statement in the year for which it was granted. Share-Based Payments Settled in mbank S.A. Shares As payments are settled in three equal annual deferred tranches on the lapse of, respectively, 12, 24 and 36 months from the date of acquisition by the program participants of the right for a given year of the program, the cost of this part of the programme is charged to the income statement and recognised in correspondence with other reserve capital. This is equity-settled share-based program. Summary of the Impact of the Programmes on the Bank s Balance Sheet and Income Statement Share-Based Payments Settled in Shares The table below presents changes in other reserve capital generated by the above mentioned incentive programmes for share-based payments settled in mbank S.A. shares. Incentive Programs Share-Based Payments Settled in Cash The incentive programme for the Management Board of the Bank in the part comprising Commerzbank shares has no impact on other reserves as its cost is taken to the income statement in correspondence with liabilities. The value of provided services associated with this part of the programme was PLN 0 in 2013 (31 December 2012: PLN 533 thousand) (Note 11). As at 31 December 2013, liabilities due to this programme amounted to PLN thousand (31 December 2012: PLN thousand). Cash Payments The cost of the cash part of the programmes is presented in Note 11 Overhead costs. 44. Transactions with related entities As at the beginning of the period value of services provided by the employees (Note 11) settlement of exercised options (10 565) (7 676) As at the end of the period mbank S.A. is the parent entity of the and Commerzbank AG is the ultimate parent of the Group as well as the direct parent of mbank S.A. Up to 27 December 2012, the direct parent of mbank S.A. was Commerzbank Auslandsbanken Holding AG, 100% subsidiary of Commerzbank AG. Transaction of purchase of mbank s shares by Commerzbank AG from Commerzbank Auslandsbanken Holding AG is described in Note 37. All transactions between the Bank and related entities were typical and routine transactions concluded on terms, which not differ from arm s length terms, and their nature, terms and conditions resulted from the current operating activities conducted by the Bank. Transactions concluded with related entities as a part of regular operating activities include loans, deposits and foreign currency transactions. The Group provides standard financial services to the Bank s key management personnel, Members of the Supervisory Board of the Bank and close members of their families, which comprise i.e.: maintaining bank accounts, taking deposits, granting loans or other financial services. In the Bank s opinion, these transactions are concluded on market terms and conditions. Pursuant the Banking Law, the extension of a loan, cash advance, bank guarantee or other guarantee to the Members of the Management Board and Supervisory Board of the Bank, persons holding managerial positions at the Bank as well as at entities related financially or organisationally therewith, is governed by the By-Laws adopted by the Supervisory Board of mbank S.A. The By-Laws set out detailed rules and debt limits for loans, cash advances, bank guarantees, and other guarantees in relation to aforementioned persons and entities, which are consistent with the Bank's internal regulations defining the competences of granting credit decisions concerning retail and corporate clients of the Bank. A decision to grant a loan, cash advances, bank guarantee or other guarantee to a Member of the Management Board and Supervisory Board of the Bank, person holding managerial position at the Bank or an entity related financially or organisationally therewith in excess of the limits set by the Banking Law is taken by the resolution of the Management Board and by the resolution of the Supervisory Board. The terms and conditions of such loans, cash advances, bank guarantees or other guarantees, including in particular those related to interest rates as well as fees and commissions, cannot be more advantageous than the terms and conditions offered by the Bank to its retail or corporate clients, respectively. The table below presents the values of transactions between the Bank and companies of mbank Group and: Members of the Supervisory Board and the Management Board of mbank, key executive management of mbank, Members of the Supervisory Board and the Management Board of Commerzbank and other related persons and entities, as well as Commerzbank AG Group entities. The amounts of transactions include assets, liabilities and related costs and income as at 31 December 2013 and 31 December 2012 and for the respective periods then ended are as follows. PLN (000's) As at the end of the period Statement of Financial Position Assets Liabilities Income Statement Interest income Interest expense (1 597) (1 266) (114) (316) ( ) ( ) Fee and commission income Fee and commission expense Other operating inccome Overhead costs, amortisation and other operating expenses 0 (1) (70) - (9 022) (12 309) Contingent liabilities granted and received Other related persons and entities include: close members of the family of Members of the Supervisory and the Management Board of mbank, key executive management of mbank, Members of the Supervisory Board and the Management Board of Commerzbank, entities controlled or jointly controlled by above mentioned persons and mbank s subsidiaries not consolidated by acquisition method. In 2013 and 2012 no provisions were created in connection with credits granted to related entities. Management Board Remuneration Supervisory Board, Management Board and key management personnel of mbank S.A. as well as Supervisory Board and Management Board of Commerzbank AG Other related persons * Commerzbank AG Liabilities granted Liabilities received On 11 April 2013, the Supervisory Board of mbank S.A. appointed the Management Board of mbank S.A. for a joint five-year term, with the following members: 1. Cezary Stypułkowski President of the Management Board, Chief Executive Officer, 2. Lidia Jabłonowska-Luba Vice-President of the Management Board, Chief Risk Officer, 3. Przemysław Gdański Vice-President of the Management Board, Head of Corporate and Investment Banking, 4. Jörg Hessenmüller Vice-President of the Management Board, Chief Financial Officer, 5. Hans-Dieter Kemler Vice-President of the Management Board, Head of Financial Markets, 6. Cezary Kocik Vice-President of the Management Board, Head of Retail Banking, 7. Jarosław Mastalerz Vice-President of the Management Board, Head of Operations and IT. On 17 September 2013, mbank S.A. was informed that the Polish Financial Supervision Authority granted its consent to appoint Mrs. Lidia Jabłonowska-Luba as Vice President of the Management Board in charge of risk management at mbank and Chief Risk Officer. From 12 April 2013 to the date of approval by the Polish Financial Supervision Authority to appoint Mrs. Lidia Jabłonowska-Luba for the position of Vice President of the Management Board responsible for the risk management of the Bank and for the post of Chief Risk Officer, these duties were temporarily assigned to Mr. Cezary Stypułkowski, President of the Management Board of mbank S.A. Information on the salaries, bonuses and benefits paid and due to the Members of the Management Board of the Bank who were performing their functions at the end of 2012, as at 31 December 2013 and 31 December 2012, is presented below

80 Remuneration paid in 2013 (in PLN) Basic salary Other benefits Bonus for 2012 * The settlement relates to an incentive programme for members of the Management Board in 2008, in a part based on the shares of Commerzbank. In 2013, eligible Members of the Board received a cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for 2009, the second tranche of the incentive programme for 2010 and the first tranche of the incentive programme for Remuneration of the former Management Board Members paid in the year * The settlement relates to an incentive programme for members of the Bank Management Board in 2008, in a part based on the shares of Commerzbank. In 2013, entitled former Members of the Management Board received: Mr. Wiesław Thor - cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for 2009, the second and third tranche of the incentive programme for 2010 and the first, second and third tranche of the incentive programme for 2011; Mr. Mariusz Grendowicz - cash equivalent for Commerzbank shares in settlement of the second tranche of the incentive programme for In 2013, Mr. Wiesław Thor, who acted as Vice-President of the Bank until 11 April 2013, was paid bonus for 2012 in the amount of PLN thousand. In 2013, was also paid bonus for 2012 in amount of PLN thousand for Mr. Christian Rhino who acted as the Member of the Board until 31 March Remuneration of the Management Board Members paid in the year Cash settlement of the incentive program based on Commerzbank shares* 1. Cezary Stypułkowski Lidia Jabłonowska-Luba Przemysław Gdański Joerg Hessenmueller Hans-Dieter Kemler Cezary Kocik Jarosław Mastalerz Total Basic salary Remuneration paid in 2013 (in PLN) Other benefits, payoff and compensations Bonus for 2012 Remuneration of the former Management Board Members who ceased performing their functions in the year 2013 Cash settlement of the incentive program based on Commerzbank shares* 1. Wiesław Thor Remuneration of the former Management Board Members who ceased performing their functions in the year Christian Rhino Remuneration of the former Management Board Members who ceased performing their functions in the year Mariusz Grendowicz Total Remuneration paid in 2012 (in PLN) Basic salary Other benefits Bonus for 2011 Cash settlement of the incentive program based on Commerzbank shares* Supplement of bonus for 2008 ** 1. Cezary Stypułkowski Wiesław Thor Przemysław Gdański Joerg Hessenmueller Hans-Dieter Kemler Cezary Kocik Jarosław Mastalerz Total * The settlement relates to an incentive programme for members of the Bank Management Board in 2008, in a part based on the shares of Commerzbank. In 2012, entitled former Members of the Management Board received cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for 2008, the second tranche of the incentive programme for 2009 and the first tranche of the incentive programme for ** In 2012, eligible members of the Board were paid an extra amount in addition to the bonus for 2008, representing compensation for the exclusion from the calculation of bonus for 2008, the effects of one-off transaction. Remuneration of the former Management Board Members paid in the year Basic salary Other benefits, payoff and compensations Remuneration paid in 2012 (in PLN) Bonus for 2011 Cash settlement of the incentive program based on Commerzbank shares* Supplement of bonus for 2008 ** Remuneration of the former Management Board Members who ceased performing their functions in the year Karin Katerbau Christian Rhino Remuneration of the former Management Board Members who ceased performing their functions in the year Mariusz Grendowicz Remuneration of the former Management Board Members who ceased performing their functions in the year Andre Carls Total * The settlement relates to an incentive programme for members of the Bank Management Board in 2008, in a part based on the shares of Commerzbank. In 2012, entitled former Members of the Management Board received: Mrs. Karin Katerbau - cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for 2008, the second tranche of the incentive programme for 2009 and the first tranche of the incentive programme for 2010; Mr. Christian Rhino - cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for 2008, the second and third tranches of the incentive programme for 2009, the first, second and third tranche of the incentive programme for 2010 and first, second and third tranche of the incentive programme for 2011; Mr. Mariusz Grendowicz - cash equivalent for Commerzbank shares in settlement of the first tranche of the incentive programme for 2010, Mr. Andre Carls cash equivalent for Commerzbank shares in settlement of the third tranche of the incentive programme for ** In 2012, eligible members of the Board were paid an extra amount in addition to the bonus for 2008, representing compensation for the exclusion from the calculation of bonus for 2008, the effects of one-off transaction. In 2012, Mrs. Karin Katerbau who acted as Vice-President of the Bank until 15 April 2012, was paid bonus for 2011 in amount of PLN thousand. In 2012, was also paid bonus for 2011 in amount of PLN thousand for Mr. Christian Rhino who acted as the Member of the Board until 31 March The total compensation of members of the Management Board consists of: basic salary, bonuses, termination payments of management agreement, prohibition of competitiveness payment, insurance costs, accommodation costs. The above mentioned benefits are short-term employee benefits. In accordance with the Bank's remuneration system in force, the members of the Management Board of the Bank may be eligible to receive bonuses for the year 2013, which would be paid out in As a result provision created for the cash bonus payment for the members of the Management Board for 2013 amounts to PLN as of 31 December The final decision concerning the level of the bonus will be taken by the Remuneration Committee of the Supervisory Board by 31 March In 2013 and 2012, the members of the Management Board of mbank S.A. did not receive compensation for their role as members of the management boards and supervisory boards of the Bank s related companies. The total amount of remuneration received in 2013 by Bank s Management Board members was PLN (2012: PLN ). Information on the rules of payment other component of remuneration (severance payment) for the members of the Management Board From the date of appointment of the members of the Management Board for the new term, i.e. from the date of General Shareholders Meeting approving the financial results for the year 2012 all members of the Management Board, in case of cancellation the managers from the Management Board before the expiration of the term, have got the severance payment in the amount which depends on years spent with the organization and is calculated as follows: (i) 4 monthly salaries if the member held his post for a period shorter than 1 year, (ii) 8 monthly salaries if the member held his position for more than 1 year but less than 2 years and (iii) 12 monthly salaries if the member held his post for more than 2 but less than 5 years, (iv) 18 monthly salaries if the member held his post for more than 5 years. If not appointed for

81 next term of the office, the Management Board members are entitled to severance in the amount of 12 monthly salaries. Supervisory Board Compensation The composition of the Supervisory Board at the end of 2013 was as follows: 1. Maciej Leśny Chairman of the Supervisory Board, Chairman of the Executive Committee, Member of the Risk Committee, Member of the Audit Committee, Member of the Remuneration Committee, 2. Martin Zielke - Deputy Chairman of the Supervisory Board, 3. Andre Carls Member of the Supervisory Board, Chairman of the Remuneration Committee, Member of the Executive Committee, Member of the Audit Committee, 4. Stephan Engels - Member of the Supervisory Board, Chairman of the Audit Committee, 5. Dirk Wilhelm Schuh - Member of the Supervisory Board, Chairmen of the Risk Committee, 6. Martin Blessing - Member of the Supervisory Board, Member of the Executive Committee, 7. Thorsten Kanzler- Member of the Supervisory Board, Member of the Risk Committee, 8. Teresa Mokrysz Member of the Supervisory Board, Member of the Audit Committee, 9. Waldemar Stawski Member of the Supervisory Board, Member of the Risk Committee, 10. Jan Szomburg Member of the Supervisory Board, Member of the Executive Committee, 11. Wiesław Thor - Member of the Supervisory Board, 12. Marek Wierzbowski Member of the Supervisory Board, Member of the Remuneration Committee. On 11 April 2013, the XXVI Ordinary General Meeting of mbank S.A. appointed with the effect from 12 April 2013, Mr. Wieslaw Thor and Mr. Martin Blessing for the post of Members of the Supervisory Board of mbank S.A. for the joint term of office of the Supervisory Board of mbank S.A. Until 11 April 2013, Mr. Wieslaw Thor posted as Vice President of the Management Board, Chief Risk Officer. On 13 November 2013, Mr Maciej Leśny, Chairman of the Supervisory Board, received from Mr Ulrich Sieber, Member of the Supervisory Board and Deputy Chairman, a letter of resignation from his function as of 30 November The resignation is related to termination the mandate of Mr Sieber as a Member of the Management Board of Commerzbank AG, of which Commerzbank AG announced in its public information on 6 November On 12 December 2013, the Supervisory Board of mbank S.A. appointed Mr Martin Zielke as Member of the Supervisory Board of mbank S.A. effective as of 12 December 2013 for the common term of the Supervisory Board. Information about the Supervisory Board members salaries, bonuses and benefits paid as at 31 December 2013 and 31 December 2012 is presented below. Remuneration paid in 2013 (in PLN) * On 30 November 2013, Mr. Urlich Sieber resigned from the office Remuneration paid in 2012 (in PLN) 1. Maciej Leśny Andre Carls Stephan Engels Thorsten Kanzler Teresa Mokrysz Waldemar Stawski Jan Szomburg Dirk Wilhelm Schuh Marek Wierzbowski Martin Blessing Wiesław Thor Martin Zielke - - Ulrich Sieber* Eric Strutz** Sascha Klaus*** Total ** On 13 February 2012, Mr. Eric Strutz resigned from the office *** On 25 July 2012, Mr. Sascha Klaus resigned from the office. In accordance with the wording of paragraph 11(j) of the By-laws of mbank S.A. the General Meeting determines remuneration for members of the Supervisory Board in a resolution. Remuneration of the Management Board members is determined by the Supervisory Board (paragraph 22.1(e) of the By-laws of mbank S.A. The total compensation of Members of the Supervisory Board, the Management Board and other key executive management of the Bank that perform their duties in 2013 amounted to PLN (2012: PLN ). Information regarding proprietary position in Bank shares by Members of the Management Board and by Members of the Supervisory Board As at 31 December 2013, the Bank shares were held by one Member of the Management Board, Mr. Przemysław Gdański shares. As at 31 December 2012, the Bank shares were held by one Member of the Management Board, Mr. Przemysław Gdański shares. As at 31 December 2013, one Member of the Supervisory Board of mbank S.A. held shares of mbank, Mr. Wiesław Thor shares. As at 31 December 2012, the Members of the Supervisory Board of mbank S.A. had no Bank shares. 45. Acquisitions and disposals At the turn of Q2 and Q3 2013, the liquidation process of the company MLV 35 Sp. z o.o. spółka komandytowo-akcyjna was ended. The company was removed from the Register of Entrepreneurs (KRS) on 3 September In November 2013, mbank S.A. acquired 100% shares of BDH Development Sp. z o.o. The company's core business is implementation and completion of development projects on the basis of residential property taken over by through restructuring and recovery of investment loans, in order to recover the greatest possible value of the real estate taken over. 46. Information about the registered audit company The registered audit company with whom mbank S.A. signed an agreement is Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. The agreement to conduct an audit of stand-alone financial statements of mbank S.A. and consolidated financial statements of was signed on 20 May The choice of a new auditor to audit the financial statements of mbank S.A. and consolidated financial statements of for the years 2013 and 2014 had been made on 11 April 2013 by XXVI Annual General Meeting of mbank S.A., acting under section 11 letter. n) of the By-Lows of the Bank. The total amount of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. gross remuneration related to the audit and review of stand-alone financial statements and consolidated financial statements of mbank S.A. was PLN thousand in In 2013, the total amount of remaining gross remuneration paid to Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. in respect of other services for mbank S.A. was PLN 95 thousand. In addition, in 2013 the company PricewaterhouseCoopers Sp. z o.o., the previous auditor of mbank S.A., was paid the gross remuneration in the amount of PLN 332 thousand for the audit and review of financial statements and consolidated financial statements of mbank S.A. and the gross remuneration for other services to mbank S.A. in the amount of PLN thousand. In 2012, the registered audit company with which mbank S.A. signed an agreement was PricewaterhouseCoopers Sp. z o.o., and the total amount of gross remuneration related to the audit and review of stand-alone financial statements and consolidated financial statements of mbank S.A. was PLN thousand. In 2012, the total amount of PricewaterhouseCoopers Sp. z o.o. gross remuneration related to consulting services for mbank S.A. was PLN thousand. 47. Capital adequacy ratio / capital adequacy One of the main tasks of the balance sheet management is to ensure an appropriate level of capital. Within the framework of the capital management policy of mbank Group, mbank S.A. prepares the guidelines for the most effective planning and utilisation of capital basis which:

82 are compliant with external and internal regulations in force, guarantee a continuity of financial targets achievement, which render an appropriate rate of return for shareholders, ensure the maintenance of a strong capital basis being of fundamental support for business development. The capital management policy in mbank Group is based on: 1. Maintenance of an optimal level and structure of own funds with the application of available methods and means (retention of net profit, subordinated loan, issue of shares, etc.), 2. Effective utilisation of existing capital, among others through application of a set of measures of effective utilisation of the capital, limitation of activities that do not provide an expected rate of return and development of products with lower capital absorption. Effective utilisation of capital is an integral part of the capital management policy oriented at reaching an optimal rate of return on capital and, as a result, forming a stable fundament of reinforcement of the capital basis in future periods. This enables to maintain the consolidated capital adequacy ratio (calculated as a quotient of own funds to the total capital requirement multiplied by 12.5,) at least on the level required by the supervision authority (the Polish Financial Supervision Authority - KNF). In 2013, the strategic goals of mbank Group were aimed at maintaining the consolidated capital adequacy ratio above 15% and the consolidated Tier 1 capital adequacy ratio above 12%. Capital adequacy ratio The calculation of the consolidated capital adequacy ratio, the consolidated own funds and the consolidated total capital requirement in mbank Group is made according to the following regulations: Banking Act of 29 August 1997 (Dz.U. from the year 2002 No 72, item 665) with further amendments, Resolution No. 325/2011 of the Polish Financial Supervision Authority of 20 December 2011 (Dz. Urz. KNF from 2011 No 13 item 49), Resolution No. 76/2010 of the Polish Financial Supervision Authority of 10 March 2010 (Dz. Urz. KNF from 2010 No 2 item 11) with further amendments, Resolution No. 258/2011 of the Polish Financial Supervision Authority of 4 October 2011 (Dz. Urz. KNF from 2011 No 11 item 42), Resolution No. 208/2011 of the Polish Financial Supervision Authority of 22 August 2011 (Dz. Urz. KNF from 2011 No 9 item 34) with further amendments, Resolution No. 384/2008 of the Polish Financial Supervision Authority of 17 December 2008 (Dz. Urz. KNF from 2008 No 8 item 38) with further amendments, Resolution No. 387/2008 of the Polish Financial Supervision Authority of 17 December 2008 (Dz. Urz. KNF from 2008 No 8 item 41). Own funds contain: required capital including: principal funds (paid-up and registered capital, capital surplus and reserve capital, excluding any liabilities due to preference shares), additional items of required capital (a general risk reserve held against unidentified risk arising from banking activity, prior period undistributed profit, profit under authorisation and net profit from the current reporting period, calculated in accordance with current accounting principles, reduced by the expected burdens and dividends, in the amounts not higher than the amount of profit verified by external auditors and other items specified by the KNF), items deducted from required capital (own shares in possession of the bank, priced at the balance sheet value including impairment losses, intangible assets priced at balance sheet value, prior period losses, loss pending confirmation, current period net losses and other deductions from the required capital specified by KNF), supplementary funds including: balance sheet items included in supplementary funds with the consent of the KNF (including subordinated debts, liabilities resulting from securities of unspecified maturity and other similar instruments), additional items of supplementary funds specified by KNF, items specified by KNF, the aim of which is to carry out safe activity and to correctly manage risk, deductions of supplementary funds specified by KNF. The total capital requirement contains (while assuming the possession of a trading book) capital requirements for: credit risk, market risk, including the total requirement for foreign exchange risk, commodity price risk, equity price risk, specific risk of debt instrument prices and general interest rate risk, settlement, delivery and counterparty risk, excess of the exposure concentration limit, excess of qualified holdings, operational risk. Starting from 31 December 2012 in calculation of the consolidated capital adequacy ratio of mbank Group the total capital requirement is determined taking into account capital requirement for credit risk with the application of the A-IRB approach according to the annex No. 5 to the Resolution No. 76/2010 of KNF of 10 March 2010 (with further amendments) and is maintained at the level based on 80% of the total capital requirement determined taking into account the capital requirement for credit risk calculated under the standardised approach according to the article 14 of Resolution No. 76/2010 of KNF of 10 March 2010 (with further amendments). Moreover in the calculation of the consolidated capital adequacy ratio, the capital requirement for credit risk of mbank Hipoteczny with the application of IRB slotting approach is taken into account. Additionally consolidated own funds are calculated with the application of the deduction derived from the A-IRB approach. The total capital requirement of mbank Group as of 31 December 2013 amounted to PLN thousand, including PLN thousand of capital requirement for credit risk. The consolidated capital adequacy ratio of mbank Group as of 31 December 2013 amounted to 19.38%. Additionally the consolidated Tier 1 capital adequacy ratio of mbank Group amounted to 14.21%. Data relating to the capital adequacy ratio for comparative periods has not been restated. In the Group opinion, capital adequacy ratio is a regulatory and not accounting measure and should not be subject to retrospective conversion. Apart of this, any retrospective restatement of calculating capital adequacy ratios would not affect significantly their level. Internal capital mbank Group adjusts the own funds to the level and the type of risk, mbank Group is exposed to, and to the nature, the scale and the complexity of its business activity. For that purpose, the ICAAP process (Internal Capital Adequacy Assessment Process) was prepared and implemented in mbank Group, the aim of which is to maintain the own funds at the level adequate to the risk profile and the risk level of the activity of mbank Group. The internal capital is the amount of capital estimated for mbank Group to cover all material risks identified in the activity of mbank Group. The internal capital is the total sum of the economic capital to cover the kinds of risk included in the process of the economic capital calculation and the capital required to cover other kinds of risk (including difficult to measure kinds of risk). The internal capital adequacy assessment process is continuous in mbank Group and is composed of six stages implemented by organizational units of mbank and the mbank Group entities. The process includes: stock-taking of risk in the activity of mbank Group, calculation of internal capital for coverage of risk, capital aggregation, stress tests, planning and allocation of economic capital to business lines and the mbank Group entities, monitoring consisting in a permanent identification of risk involved in the business of mbank Group and the analysis of the level of capital for risk coverage. The internal capital adequacy assessment process is accepted by the Supervisory Board of mbank S.A. The whole internal capital adequacy assessment process is reviewed annually. The Management Board of mbank S.A. is responsible for the internal capital adequacy assessment process. Due to the fact that both, the total capital requirement of mbank Group calculated according to the Resolution No. 76/2010 (with further amendments) and the internal capital estimated for mbank Group according to the Resolution No. 258/2011 are lower than consolidated own funds, the consolidated own funds as of 31 December 2013 were maintained on the level consistent with the requirements of Banking Act

83 Capital adequacy Own funds: - Share capital Supplementary fund Reserve fund Unrealised gains and losses on available for sale financial instruments and exchange differences from conversion Profit for the current year Investments in financial institutions (32 566) (30 818) - Additional increase Additional decrease ( ) ( ) - Intangible assets ( ) ( ) - Subordinated liabilities I. Total own funds Capital charges II. Credit risk, including with application of standardised approach with application of AIRB approach III. Foreign exchange risk - - IV. Equity position risk V. Specific risk of debt instruments VI. General interest rate risk VII. Settlement, delivery and counterparty credit risk VIII. Commodity risk - - IX. Operational risk X. Other and transitional capital requirements XI. Total capital charge XII. Total risk exposure amount XIII. Capital adequacy ratio (%) 19.38% 18.73% XIV. Internal capital Events after the balance sheet date After balance sheet date, significant events did not occur in the Group. Management Board Report on the Performance of in

84 Table of content History of mbank Group key highlights of mbank Group 8 The economy and the banking sector in mbank Group Strategy for Ratings of mbank and the Group subsidiaries 30 mbank shareholders and share price on WSE 32 Financial results of mbank Group in mbank Group in the financial services market in Corporates and Financial Markets Segment 50 mbank s Retail Banking segment Other activities of mbank Group 76 Main change directions and types of risk of the mbank Group s activities 77 HR development 93 Investments 97 mbank and social corporate responsibility 97 Statement of mbank on application of Corporate Governance principles in Statements of the Management Board 123 Management Board Report on the Performance of in

85 Table of content 1. History of mbank Group key highlights of mbank Group in numbers Quarterly summary of Key projects of mbank Group in Distinctions and awards The economy and the banking sector in From hell to heaven: the economy at a turning point The banking sector Situation on the capital markets Situation on the Treasury bond market Situation on the housing market Changes in recommendations of the Polish Financial Supervision Authority (PFSA) and legal regulations concerning banks Expected trends in the economy in 2014 and their impact on the banking sector mbank Group Strategy for Ratings of mbank and the Group subsidiaries Fitch rating Standard & Poor s rating Moody s rating based on publicly available information Ratings of Poland, mbank and Commerzbank - comparison mbank shareholders and share price on WSE mbank shares mbank shareholders Investor relations (IR) at mbank Financial results of mbank Group in Change in the approach toward recognition of income and expenses from selling insurance products attached to loans Profit and Loss Account of mbank Group Changes in the Consolidated Statement of Financial Position Performance indicators mbank Group in the financial services market in Corporates and Financial Markets Segment Corporates and Institutions Corporate clients (mbank) Product and service offer Corporate Banking network Subsidiaries within the Corporates and Institutions area Trading and Investment Activity Financial Institutions mbank s custody services Trading and Investment Activity subsidiaries mbank s Retail Banking segment Retail Banking in Poland Retail customers Product offering Mortgage customer profile Branch network Retail Banking in the Czech Republic and Slovakia Economy and banking sector in the Czech Republic Economy and banking sector in Slovakia Summary of Foreign operations of mbank Retail customers Retail Banking offer development Branch network Retail Banking subsidiaries Other activities of mbank Group Main change directions and types of risk of the mbank Group s activities Main directions of change in the management of risk area Main risks of the mbank Group s business Credit risk Quality of the loan portfolio Market risk Liquidity risk Operational risk Capital adequacy HR development Changes in employment Training and development mbank Group s incentive system MbO (Management by Objectives) planning and assessment system Investments mbank and social corporate responsibility mbank Foundation Other social oriented activities Statement of mbank on application of Corporate Governance principles in Corporate Governance Principles binding on mbank Application of Corporate Governance Principles Internal control and risk management systems with regard to the process of preparing financial statements of mbank Significant blocks of shares Special control rights and limitations concerning the shares Principles of appointing and dismissing Management Board Members Amendments to the Company s By-Laws General Meeting procedures and authority, shareholder rights and exercise procedures General Meeting procedures Fundamental authority of the General Meeting Shareholder Rights General Meeting in Composition of and changes in the Management Board and the Supervisory Board of the Bank and their procedures Composition of the Management Board Authority and principles of operation of the Management Board Composition of the Supervisory Board - changes in Authority and principles of operation of the Supervisory Board Operation of the Supervisory Board and its Commissions in Statements of the Management Board

86 1. History of mbank Group Composition of mbank Group Establishment of Bank Rozwoju Eksportu as a joint-stock company with aim to service the needs of Poland s expanding export-oriented companies Receipt of credit line facilities from the World Bank and International Finance Corporation; BRE Bank becomes a member of the international settlement system SWIFT Start of BRE Bank Group: BRE Brokers, the Group s first subsidiary is established Listing of BRE Bank on the Warsaw Stock Exchange Signing of a strategic partnership agreement with Commerzbank AG Poland s first Private Banking offer is launched Merger with Polski Bank Rozwoju SA Establishment of mbank the first Internet-only bank in Poland completed in just one hundred days Launch of MultiBank, the second retail arm of BRE Bank, targeting affluent customers Start of ibre, a modern Internet banking system for companies Foreign expansion of retail operations, the first branches of mbank are set up in the Czech Republic and Slovakia Successful issue of new shares, in which the Bank raises nearly PLN 2 billion mbank s mobile transactional platform for ios and Android is launched One Bank Strategy for is announced Rebranding Group brands are replaced with the strongest name: mbank New mbank transactional platform is launched The composition of mbank Group by business segments and areas according to 2013 reporting rules was as follows: Segment Bank Consolidated subsidiaries mbank Group Corporates and Financial Markets Corporates and Institutions Corporations (capital groups) Large Companies SMEs Structured and Mezzanine Finance mfaktoring S.A. mleasing Sp. z o.o. Garbary Sp. z o.o. (company in restructuring) Transfinance a.s. (a factoring company in the Czech Republic) MLV 45 Sp. z o.o. Sp. k. (former BRE Holding Sp. z o.o.) Other subsidiaries Trading and Investment Activity Risk and Liquidity Management Financial Markets Brokerage House Financial Institutions Dom Maklerski mbanku S.A. (brokerage house) BRE Finance France S.A. (special purpose entity reserved for financing activities of the Bank) mlocum S.A. (a real estate developer) Retail Banking Retail customers and microenterprises Private Banking Affluent retail customers Aspiro S.A. mbank Hipoteczny S.A. mwealth Management S.A. BRE Ubezpieczenia TUiR S.A. (an insurance company) BRE Ubezpieczenia Sp. z o.o. BRE Agent Ubezpieczeniowy Sp. z o.o. mcentrum Operacji Sp. z o.o. (outsourcing services provider) BDH Development Sp. z o.o. (a real estate management company) Since January 1, 2013, mbank Hipoteczny was transferred to the Group s Retail Banking segment (previously it operated as part of the Trading and Investment Activity business segment) following a change in its strategy which assumes that the company will in the future become an important provider of funding for housing loans offered to the Group s retail clients by way of issuing of covered bonds backed by residential mortgage loans. In H2 2013, changes aimed at strengthening of the integration of corporate and investment banking offering of the Bank were introduced, partially amending the activities of the two business lines. The scope 5 6

87 of activities of Corporates and Institutions was extended to include investment banking services for corporates and its name was changed to Corporate and Investment Banking while Trading and Investment Activity segment was renamed to Financial Markets. Taking into consideration that the above changes took place during the year, the financial statements for 2013 present the previous organizational structure. Compared to the end of 2012 the list of consolidated subsidiaries changed. In Q3 2013, BRE Holding Sp. z o.o., established in 2007, was transformed into MLV 45 Sp. z o.o. Sp.k., while in Q the Bank acquired 100% of shares in BDH Development Sp. z o.o. BDH Development Sp. z o.o. has not been assigned to any business line and is shown as Other subsidiaries. Under IFRS, all of the above subsidiaries are consolidated by way of acquisition accounting. The business of selected subsidiaries is briefly described in sections covering the relevant business lines. The Bank s interest in the equity of the consolidated companies was as follows: Company name mbank s stake in equity Aspiro S.A. 100% BDH Development Sp. z o.o. 100% BRE Agent Ubezpieczeniowy Sp. z o.o. 100% BRE Ubezpieczenia Sp. z o.o. 100% BRE Ubezpieczenia TUiR S.A. 100% Dom Maklerski mbanku S.A. 100% Garbary Sp. z o.o. 100% mbank Hipoteczny S.A. 100% mcentrum Operacji Sp. z o.o. 100% mfaktoring S.A. 100% mleasing Sp. z o.o. 100% mwealth Management S.A. 100% MLV 35 Sp. z o.o. S.K.A. - MLV 45 Sp. z o.o. Sp. k. 100% Transfinance a.s. 100% BRE Finance France S.A % mlocum S.A % Authorities of mbank S.A. Supervisory Board of mbank S.A. As of December 31, 2013, the Supervisory Board was composed of the following persons: 1. Maciej Leśny Chairman of the Supervisory Board (independent Member) 2. Martin Zielke Deputy Chairman of the Supervisory Board 3. Martin Blessing Member of the Supervisory Board 4. Andre Carls Member of the Supervisory Board 5. Stephan Engels Member of the Supervisory Board 6. Thorsten Kanzler Member of the Supervisory Board 7. Teresa Mokrysz Member of the Supervisory Board (independent Member) 8. Dirk Wilhelm Schuh Member of the Supervisory Board 9. Waldemar Stawski Member of the Supervisory Board (independent Member) 10. Jan Szomburg Member of the Supervisory Board 11. Wiesław Thor Member of the Supervisory Board 12. Marek Wierzbowski Member of the Supervisory Board (independent Member). On April 11, 2013, the 26 th Annual General Meeting of the Bank appointed Martin Blessing and Wiesław Thor as Members of the Supervisory Board as of April 12, The appointment of new Members of the Supervisory Board increased the number of members of this authority from 10 to 12. On November 13, 2013, Ulrich Sieber resigned from his position as Member and Deputy Chairman of the Supervisory Board as of November 30, The resignation was linked to Mr Sieber's ending term of office on the Management Board of Commerzbank AG. Martin Zielke was appointed as new Member and Deputy Chairman of the Supervisory Board as of December 12, 2013, until the end of the current term of office of the Supervisory Board. Management Board of mbank S.A. As of December 31, 2013, the Management Board was composed of the following persons: 1. Cezary Stypułkowski President of the Management Board, Chief Executive Officer 2. Lidia Jabłonowska-Luba Deputy President of the Management Board, Chief Risk Officer 3. Przemysław Gdański Deputy President of the Management Board, Head of Corporate and Investment Banking 4. Jörg Hessenmüller Deputy President of the Management Board, Chief Financial Officer 5. Hans-Dieter Kemler Deputy President of the Management Board, Head of Financial Markets 6. Cezary Kocik Deputy President of the Management Board, Head of Retail Banking 7. Jarosław Mastalerz Deputy President of the Management Board, Chief Operations Officer. The composition of the Bank's Management Board was changed in the first half of 2013 as a result of the Management Board's term of office ending as of the Annual General Meeting in 2013 as well as the appointment of Wiesław Thor to the Supervisory Board of the Bank. On April 11, 2013, Lidia Jabłonowska-Luba was appointed to the position of the Management Board Member. Until the time the Polish Financial Supervision Authority granted consent to the appointment of Lidia Jabłonowska-Luba as Deputy President of the Management Board in charge of risk management and Chief Risk Officer of the Bank, i.e. until September 17, 2013, the responsibilities were temporarily entrusted to Cezary Stypułkowski, President of the Management Board. Detailed profiles of Members of the Supervisory Board and the Management Board of mbank are presented in the chapter entitled Statement of mbank on application of Corporate Governance principles. 7 8

88 key highlights of mbank Group 2013 was a breakthrough year for the Bank. The organisation that had so far provided its services to different groups of clients, ranging from young people, affluent clients and micro-enterprises to largest corporations under various names, adopted one common brand, mbank, to represent its entire banking offering. On November 25, 2013, BRE Bank and MultiBank brands were merged into the existing mbank brand, which itself underwent a re-design and modernisation. The change marked a pivotal milestone for the Group s aim of consolidating its broad product and services offering around its clients in numbers Key financial data Prudent risk management Increase of loan loss provisions by PLN 33 million or 7.5% year on year due to higher provisions in Retail Banking Segment in Poland and in mbank Hipoteczny Loan Loss Provisions Cost of Risk (bps) PLN M High net profit allowing for dividend payment mbank Group s profit before income tax of PLN 1,518 million in 2013 (+PLN 53 million or 3.6% year on year). Increase of net profit attributable to mbank s Shareholders by PLN 9 million or 0.8% year on year. Net ROE of 13.1%. 14.6% 13.1% 1,197 1, Net income Improving income and efficient cost management Net ROE PLN M Capitalisation A balance sheet that significantly surpasses all regulatory requirements 13.00% 14.21% 18.73% 19.38% Capital Adequacy Ratio Core Tier 1 Full compliance with Basel III liquidity ratios 187% 146% 118% 113% NSFR LCR regulatory minimum (100%) Resilient core revenues Increase of net fee and commission income by PLN 48 million or 6.1% year on year despite a reduction of interchange fee. Slight decrease of net interest income by 2.4% year on year due to record low interest rates. Increase of total income by PLN 102 million or 2.9% year on year to a record level of PLN 3.7 billion. 3,572 3, ,280 2, Trading and Other Income Net Fee and Commission Income Net Interest Income 46.5% 45.7% PLN M PLN M Development of deposits Increase of total deposits of PLN 3,690 million or 6.4% year on year. Increase of retail deposits volume of PLN 969 million or 2.9% year on year. Increase of corporate deposits volume of PLN 2,504 million or 10.3% year on year. Development of deposits and loans 57, , ,249 26,753 33,234 34, Public sector Corporate clients Individual clients PLN M Improved efficiency despite significant investments in the future growth Decrease of cost to income ratio by 0.8 percentage point at the end of Increase of administrative costs (including amortisation and depreciation) by PLN 17 million or 1.0% year on year. 1,661 1,678 1,466 1, Staff, material & other costs Depreciation & Amortization Cost/Income ratio Development of gross loans Increase in gross loan book value of PLN 1,106 million or 1.6% year on year. Increase of lending to corporate clients of PLN 1,070 million or 3.8% year on year. Increase of lending to retail clients of PLN 604 million or 1.6% year on year. 69,475 70,582 3,366 2,799 28,405 29,475 37,704 38, Other (inc. Public sector) Corporate clients Individual clients PLN M 9 10

89 Business lines key data Retail Banking Corporate Banking Trading and Investment Activity Profit before income tax: PLN million Number of branches: 168 Profit before income tax: PLN million Number of branches: 47 Profit before income tax: PLN 15.1 million Dom Maklerski mbanku: 4 IPO transactions: PLN 292 million Number of clients: 4.4 million Increase in loans: 1.6% Increase in deposits: 2.9% Number of clients: 16,3 thousand Increase in loans: 3.8% Increase in deposits: 10.3% Two tranches of eurobonds: CHF 200 million CZK 500 million Market share of Treasury bills and bonds: 10.9% 2.2. Quarterly summary of 2013 Q1 Q3 Record high client acquisitions (93.5 thou. new retail clients and 201 new corporate clients added). The Bank named the Best Bank in Poland in the annual Best Emerging Market Banks in Central and Eastern Europe contest organized by Global Finance magazine. New mbank named the best online and mobile bank in the world in a contest organized by Efma a global banking organization. Issue of another tranche of eurobonds with a nominal value of CHF 200 million under the EMTN Programme. Launch of a new online retail banking platform on June 4. Announcement of the commencement of rebranding proceedings of the Group in which BRE Bank and MultiBank brands were to be replaced with mbank brand. Replacement of BRE Bank and MultiBank brands with mbank brand on November 25. Issue of subordinated bonds with a nominal value of PLN 500 million. Q2 Q4 BRE Bank, mbank and MultiBank under one brand mbank 11

90 2.3. Key projects of mbank Group in 2013 Rebranding On June 4, 2013, the Bank announced the commencement of rebranding proceedings of the Group, which ultimately led to the replacement of BRE Bank and MultiBank brands with mbank brand. The decision of introducing a homogenous brand for the whole Group (including its subsidiaries) aims at full exploitation of the Group s potential. It is a response to the changing reality in which the market requires from the Bank greater flexibility, simplicity and adaptation. The creation of a single brand will enable the Bank to strengthen its position in the banking market with optimal use of marketing budgets. The choice of mbank as the lead brand for the Group was predominantly driven by its popularity among customers as well as potential for further, dynamic development. Having operated on the Polish market for 14 years, and in the Czech Republic and Slovakia for 7 years, the mbank brand has become a synonym of friendly and innovative banking. recognizable and coherent image on a domestic 27 years of experience in servicing various clients friendly and innovative banking common identity ľ together with diversity Already in June customers were able to notice the first changes. The logotype and the website were redesigned and a new Premium offer (for Affluent Clients) was launched and a new transactional platform was prepared as part of the New mbank project (further details in the subsequent section of this chapter). The rebranding changes and were concentrated recognizable foreign and 27 years of friendly common market coherent image on experience in and identity mainly in the field of a domestic and servicing various innovative together with image adjustment, foreign market clients banking diversity though their principal goal was to create coherent banking offer that unites the experience of BRE Bank together with retail brands: mbank and MultiBank, as well as Private Banking & Wealth Management. As a consequence of these changes, customers have gained access to the best products and financial services, heretofore offered under several signboards, in one place. The new logo of the Group does not imply a change to the model of neither corporate nor retail customer service. Advisors in all branches across Poland will remain at customers disposal. Rebranding Calendar August 2, 2012 Announcement of the Group s New Strategy for June 4, 2013 November 25 listopada 25, 2013 December grudzień January styczeń 2014 As part of the rebranding process, the former internet websites of mbank, MultiBank and BRE Bank were replaced with one common website: The process of rebranding did not require any customer involvement such as the need to sign new agreements or to contact the Bank in any way. Ultimately, the rebranding will cover the whole network of the Group s branches. This process will be finished by the end of 2014 while until 2018 all retail and corporate branches will be unified and ready to serve all customers with its wide offer. The process of rebranding involved an intensive informational campaign. The communication process was prepared by the employees from across the Bank with the support of customer assistants and telephone consultants. New mbank Work on mbank s new, innovative online retail banking platform were commenced in Q As part of the project called New mbank, a team of 200 employees designed a platform responding to the changing customers needs and offering a wide range of functionalities, previously unavailable on a domestic and European market. At the beginning of 2013, the design team of New mbank participated in a prestigious conference Finovate Europe, during which the project was presented. The presentation itself was appreciated by the experts in London and New mbank was named Best of Show. It is worth to mention, that Finovate Europe is one of the most prestigious cyclical conferences dedicated to innovations in the financial services industry. Change of mbank s internet logotype. Launch of the New mbank platform. Creation of a new Internet website. BRE Bank, MultiBank and BRE Private Banking & Wealth Management change their names into mbank. The re-designed internet website provides an easy access point to all relevant products and services of the Group. Rebranding of Group subsidiaries, which were assigned new logotypes and names with m prefix. The unification of branch network branding is commenced. The new logotype becomes visible across the country

91 The service was launched on June 4, The core idea guiding the Bank during the platform design was to simplify it and make it more ergonomic and quicker in use. This was accomplished through minimizing the number of clicks and screens necessary to conclude a transfer, check the account s history or buy a banking product. The new platform seeks to encourage customers to make use of products and services more frequently. The new platform is not only about the design but it also introduces over 200 new functionalities, among which include the popular discount programme mokazje and the Personal Financial Management tool (PFM) which facilitates the management of the household budget. Starting from July 1, 2013, every mbank client having active access to the new version of the transactional system may also receive 24-hour assistance offered by on-line experts via video, voice or text chat. The new virtual branches help clients in handling the majority of banking issues. From September 16, 2013, the services of on-line experts were also made available to potential mbank customers. In the autumn edition of the Finovate conference in New York, mbank repeated its success from London and once again won a prestigious "Best of Show" award. Experts' attention was captured by the innovative solutions offered to mbank s clients in the new transactional service. During the year, additional prizes and awards, such as Distribution and Marketing Innovation Awards, organised by Efma and Accenture, were granted to New mbank highlighting the early positive reception of the new platform by recognized experts (more details in Distinctions and Awards section). Finally, mbank s new transactional service has been recognised by Forrester Research, one of the world s most acknowledged business research firms, as a benchmark for other banks. It is the first such prestigious report on a Polish financial institution and the Polish online industry. The report offers a detailed analysis and presents recommendations for banks and technology companies aiming at implementing similar projects. Euro Medium Term Note Programme In 2012, the Management Board of the Bank informed that BRE Finance France SA as the issuer and the Bank as the issue underwriter signed an agreement for a Euro Medium Term Note Programme (EMTN) for a total amount of up to EUR 2 billion. Under the EMTN Programme, the issuer gained the right to issue debt securities in multiple tranches, various currencies and with diverse interest structure. Fitch Ratings and Standard & Poor s Rating Services assigned respectively "A" and "BBB+" ratings to the Euro Medium Term Note Programme. In 2012, BRE Finance France issued the first tranche of eurobonds with a nominal value of EUR 500 million, maturing in The interest on eurobonds was set at 2.75% per annum. In 2013, two more tranches of eurobonds were issued: On September 25, 2013, BRE Finance France issued eurobonds with a nominal value of CHF 200 million, maturing in The interest on eurobonds is 2.50% per annum. Receipts from the issue of debt securities have been remitted by the issuer to the Bank as issue underwriter in the form of a cash deposit. The Bank will pay BRE Finance France, the provider of the cash deposit, fixed interest on an annual basis, and an additional repurchase premium amounting to CHF 1,033 thousand. On September 26, 2013, the newly issued tranche of eurobonds was assigned with ratings in accordance with those assigned to the EMTN Programme. The settlement of the issue took place on October 8, On November 22, 2013, BRE Finance France issued another tranche of eurobonds with a nominal value of CZK 500 million, maturing in 2018 (under the conditions of a private placement ). The interest on the bonds was set at 2.32% per annum and the settlement of the issue took place on December 6, Distinctions and awards In 2013, mbank Group was appreciated for its business activities, technological solutions as well as investor relations and reporting. The most important awards and distinctions include: The Bank and Corporate Banking: The Bank was named Best Bank in Poland in the annual contest Best Emerging Market Banks in Central and Eastern Europe organized by Global Finance Magazine. The international jury based their assessment on a research conducted via surveys, as well as analysts and banking advisors assessment. There were several factors taken into consideration, including: growth in assets, financial results, quality of customer service, and innovations. The Bank ranked sixth in the Safest Emerging Market Banks in Central and Eastern Europe contest organised by Global Finance magazine. The ranking was based on the evaluation of long-term credit ratings assigned to banks by Moody s, Standard & Poor s and Fitch Ratings. The Bank received the "Best Online Treasury Services" award from Global Finance magazine in the Best Corporate/Institutional Internet Banks category. mbank was the only Polish bank awarded in the World s Best Internet Bank 2013 contest. The winners were recognized for their effective strategies of acquiring and servicing of online clients, the growth in their number, the offer available online, the client benefits for actively using Internet services as well as website design and functionality. For the second time, the currency exchange platform mbank CompanyNet FX was named the best solution of its kind in Poland and won in the "Best in On-line Treasury Services" category of a contest organized by Global Finance. The annual report of the Group won "The Best of the Best" award for the best annual report 2012 in the contest for listed companies organized by the Tax and Accounting Institute. Moreover, the online version of the annual report was awarded in the Best On-line Annual Report category. The Bank was recognized as one of the top employers for talented people in the Employer Branding Stars contest organized by HRstandard.pl and the Employer Branding Institute. The jury comprised of HR, internal communication, PR, media, employer branding, advertising, marketing and social media experts. Retail Banking: In the twelfth edition of the prestigious "Newsweek's Friendly Bank" ranking in 2013, mbank was named, for the second time, the best institution offering mobile banking, while MultiBank, for the third consecutive time was ranked among the top traditional banks. New mbank as the only institution received two awards in a contest organized by Efma a global banking organization. It was named the best online and mobile bank in the world and was awarded in Most Disruptive Innovation category for being the most innovative in the banking sector. The participants of the contest included the world s largest and most renowned financial institutions from all continents, which adds to the success of New mbank s platform

92 In the contest organized by the Banking-Magazine, mbank s information service was named the best website among all Polish banks websites in the category of commercial banking. The jury assessed 33 websites of commercial banks and 371 of cooperative banks paying careful attention to the layout and, most importantly, usefulness, lucidity and clarity of information provided. Additional points were also granted for an appropriate graphic composition and other functionalities. MultiBank was granted an award for the Quality of Service, winning in the area of finance category for the fifth time. Users of the website jakoscobslugi.pl were the jury. The Polish Customer Satisfaction Index, which is based on the customers assessment, amounted to 93.6% for MultiBank, while the overall index in the area of finance (banking, finance, insurance) stood at 69.0%. MultiBank s score was the highest among all classified financial institutions included in the research. Once more, MultiBank topped the ranking of Jakość na bank TNS Polska (Quality you can bank on by TNS Poland). The research which was conducted by TNS Polska, Deloitte and Puls Biznesu involved mysterious shoppers visiting the branches of 22 banks, assessing the standard of provided services (inter alia aesthetics of the branch, appearance of the employee, neatness of the workplace and, most importantly, the analysis of needs and presentation of the offer). MultiBank improved its last year s result by 1.5 p.p. to an all-time high level of 83.3%. mbank was appreciated with an Effie award for the advertising campaign of msaver, which rewards are most effective advertising campaigns,. mbank Group subsidiaries: Dom Maklerski mbanku was once again appreciated by the market with two of its stock analysts receiving a top ranking for their knowledge and advice in the Parkiet business daily survey of 21 stock exchange analysts. The Private Banking offer of mbank was named the best in Poland for the sixth time by Euromoney magazine. The quality of the offer together with the customer service and a range of available products were assessed. Each year, Euromoney conducts a survey among financial institutions offering services to affluent clients worldwide. In Poland, services provided by mweath Management have been winning this each year since The economy and the banking sector in From hell to heaven: the economy at a turning point The Polish GDP growth slowed down further in 2013 from 1.9% in 2012 to 1.6% (the lowest GDP growth rate since 2002). The slow-down of GDP growth was accompanied by a rapidly falling inflation: the average annual CPI stood at 0.9% compared to 3.7% in However, it would be wrong to assume that the year was definitely worse for the markets: in 2013 the economy entered a path of acceleration while 2012 was a time of slow-down. Nowy mbank najbardziej przełomową innowacją na świecie New mbank the most Bankowcy z całego świata są zgodni - nowy serwis transakcyjny mbanku to przełomowa innowacja w światowej bankowości. disruptive innovation in the world A series of negative developments early in the year (further slow-down of the Polish GDP rate, fast-falling inflation) prompted the Monetary Policy Council (MPC) to continue the monetary policy relaxation cycle but the strategy of small steps was disrupted: the interest rates were cut by 50 basis points in March and kept stable in April. As the monetary policy relaxation cycle was definitively ended in July, the main reference rate of the National Bank of Poland (NBP) was at a historical low of 2.50%. The monetary policy in the second half of the year was dominated by dovish rhetoric and experiments in communication (a pledge to keep the rates unchanged). 17

93 The beginning of the year was favourable for the Polish currency: opposing trends (inflow of portfolio capital into the Polish bond market which strengthened the zloty and the unprecedented relaxation of the monetary policy) kept the Polish zloty within a narrow volatility range. It was not until the sudden shift of expectations of the US Federal Reserve s (Fed) termination of its asset purchase programme that the situation on the currency market reversed: the zloty depreciated within a month to 4.37 against EUR and 3.38 against USD so that the NBP was forced to intervene in early June to curb market volatility and indirectly support the Polish debt market. Starting in July, bolstered by good foundations of the Polish economy, the Polish zloty began to appreciate and eventually recovered by the end of the year (4.15 to EUR and 3.00 to USD). GDP growth and inflation When the Polish economy closed 2012 at a GDP rate of c. 1% in Q4 (according to preliminary estimates, later revised to 0.7%), a recovery in 2013 was a hope shared by everyone. Nevertheless, the slow-down of the Polish GDP rate continued into all of Q1 (GDP grew by only 0.5% in Q1 2013) and the economy produced a number of negative surprises until May. It was not until the second half of the year that the economy picked up and the GDP grew by 1.6% in Looking at the chronology of events, the following factors were the drivers of the recovery: A positive stimulus came from Poland s main trade partners: first, stabilisation in the euro zone; next, an end to a nearly two-year-long recession and a transition into slow growth. Another factor was the continued expansion of Polish exporters into new markets (including former USSR countries). Consumer demand was boosted by low inflation (mainly food and fuel prices) and revived consumer credit (as a result of low interest rates and relaxation of Recommendation T by PFSA). The job market was very resilient to weak economic conditions; as a result, the extent of job cuts and additional unemployment was relatively small compared to the previous phases of the economic slow-down. 10 The monetary policy was dramatically relaxed; in addition to the immediate effect of lower debt costs for households it also impacted the structure of household assets (migration of savings from bank accounts into investment funds or their spending), which bolstered consumer spending. Contribution to GDP growth Interest rates In view of the protracted slow-down and falling inflation, the MPC started the year with yet another, third consecutive interest rate cut by 25 bps. After another reduction in February, the Council started preparations to end the monetary policy relaxation cycle and announced the end of cuts in March (with a surprising 50 bps cut). When statistics clearly confirmed that the economy was not moving, the cycle was reopened. The last cut decided at the July meeting in the context of the first signs of economic recovery was accompanied by the definitive announcement of an end to that phase of the monetary policy. Within nine months, the Monetary Policy Council cut the rates by 225 bps and brought the main reference rate to its record low of 2.5%. CPI inflation and NBP reference rate Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 The subsequent months were a quiet time for the monetary policy as the economy and inflation remained under close scrutiny. In its communications, however, the MPC remained dovish; in September, following in the footsteps of the Fed, the Bank of England and the European Central Bank, the Monetary Policy Council began to communicate the stability of the rates, initially until the year s end, and later until mid The banking sector Core inflation (%) CPI inflation (%) WIBOR 3M (%) Repo rate (%) forecast The financial results of the Polish banking sector in 2013 were similar to those registered in The net profit of the sector was PLN 15.4 billion, compared to PLN 15.5 billion in 2012 (-0.3%). It should be noted that monthly results in 2013 were somewhat less stable than in Barring unforeseen circumstances in 2014, the net profit of the banking sector is most likely to remain stable. The net profit of the banking sector decreased mainly due to lower income (-5.6%), which stood at PLN 55.5 billion in 2013 compared to PLN 58.8 billion in The decrease in income was driven by all income lines including net interest income which was impacted by the easing of the monetary policy by the NBP (down by PLN 1.3 billion i.e. -3.8% year on year) and other income (down by PLN 1.4 billion, i.e %). The banks were able to maintain cost discipline in The operating costs of banks stood at PLN 27.6 billion in 2013 compared to PLN 27.8 billion in 2012, a decrease of 0.8%. The quality of the banks loan portfolios improved modestly in 2013, leading to a decrease of loan loss provisions by 9.7% year on year to PLN 7.5 billion in Investments Net exports Consumption Inventories GDP (YoY %) The sharp decrease of inflation continued in the first half of the year. Inflation remained within the NBP s acceptable variation band only in January 2013 (1.7%) and continued to fall in the months that followed. The annual CPI reached 0.2% in June. Although one-off factors (food prices and municipal waste fees) pushed the CPI up to 1.1%, the second half of the year was a time of low and stable inflation. The average annual CPI stood at 0.9% in 2013, the lowest since The sector s capital adequacy continued to improve in Similar to 2012, the capital adequacy ratio was on the rise and stood at 15.75% at the end of 2013 compared to 14.74% at the end of Likewise, the Core Tier 1 ratio increased from 13.13% at the end of 2012 to 14.21% at the end of

94 In terms of the product offer, the trends in Polish banking sector were as follows: Banks gradually relaxed their lending criteria and conditions, in particular for lending to small and medium-sized enterprises. The quality of the loan portfolio improved across all market segments. The improvement was particularly visible in respect of retail consumer loans as well as SME loans. Interest rates on loans and deposits decreased as a result of the NBP rate cuts. Credit margins in consumer and corporate banking decreased with improving credit risk while margins on housing loans remained broadly stable. Mobile banking and cashless payments continued to expand. Bank Gospodarstwa Krajowego (BGK) opened a de minimis loan guarantee scheme in co-operation with commercial banks. De minimis guarantee is granted under the government programme supporting entrepreneurship which dedicates funds to guaranteeing the repayment of working capital loans given to micro, small and medium-sized enterprises. The guarantees granted in 2013 stood at c. PLN 7 billion. Corporate loans and deposits 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 The total assets of the Polish banking sector increased by 4.2% year on year and crossed the mark of PLN 1.4 trillion in As for liabilities and equity, equity grew more dynamically (+5.0%) than liabilities (+4.1%). Household loans and deposits 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 The trajectories of loans and deposits were convergent in 2012 (on the decrease across all segments) but parted in 2013: lending for households accelerated while corporates began to place more of their excess in form of bank deposits. On the other hand, corporate loans remained stable compared to 2012 while household deposit growth slowed down month after month. In more details, the developments were as follows: The volume of household deposits in 2013 grew by PLN 32.2 billion, i.e. 6.2% to PLN billion in 2013 (the lowest increment since 2004). The volume of household loans increased in 2013 by PLN 22.3 billion from PLN billion at the end of 2012 to PLN billion. The growth was clearly stronger than in 2012 but still far below the historical benchmark. With a relatively weak zloty (which depreciated only modestly against EUR and did not budge in relation to CHF compared to 2012), the growth in housing loans was driven not so much by the FX effect as by actual new lending. The recovery of consumer loans should also be noted: consumer credit increased by PLN 3.2 billion, the most since Dec-10 Household deposits (YoY %) Household loans (YoY %) Mortgage loans (YoY %) Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Corporate deposits (YoY %) Corporate loans (YoY %) Corporate investment loans (YoY %) Corporate deposit levels in 2013 were driven by macroeconomic conditions and the resultant financial standing of companies. The improved profits in the corporate sector (owed both to a better cost discipline and growing income, especially in H2 2013) boosted the expansion of companies bank deposits from PLN billion at the end of 2012 to PLN billion at the end of 2013 (i.e. up by 9.7%). Corporate loans granted during the year slightly increased by 2.1% year on year and stood at PLN million at the end of Although the low growth rate of corporate loans in 2013 was similar to that of 2012, the structure of new loans shifted from working capital loans to investment loans in The latter increased by 6.5% in 2013, much more than in the same phase of the previous credit cycle in Similarly to previous years, the banking sector continued the consolidation trend through 2013 with mergers and acquisitions involving institutions among the top ten banks. As a result, the number of commercial banks in Poland decreased once again, from 45 at the end of 2012 to 41 at the end of The trend led to a higher concentration in the Polish banking sector: the share of the top five banks in the total assets of the sector increased from 45% to 50% at the end of Situation on the capital markets 2013 was relatively favourable for stock exchange investors. After a difficult first half of the year, shareholders of public companies recovered some ground as the WIG index rose in the summer and autumn to levels unseen since However, the uptrend on the broad market was mainly driven by small and medium-sized stocks while the blue-chip index WIG20 did not breach the peak set in January The outlook for the capital market in 2013 stood in the shadow of the pension system reform. While the initial reaction to the planned transfer of assets from open-ended pension funds was strongly negative, the sentiment turned positive in the autumn with optimistic estimates of pension fund investments on the capital market after the reform. The Warsaw Stock Exchange (WSE) was once again in the negative territory at the end of the year (due to a weaker sentiment on the emerging markets stock exchanges and turbulences around the pension system reform); eventually, WIG closed the year with 8.1% increase while WIG20 dropped by the same proportion. Even more than in 2012, the main driver of rising stock prices on the Warsaw Stock Exchange was the growing interest of retail clients as demonstrated by record-high cash flows into investment funds

95 Mutual funds inflows and WIG Index 3.5. Situation on the housing market Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec The situation on the Polish housing market in 2013 was largely driven by the prevailing economic slowdown, the weak condition of construction sector companies, and less active bank lending for the purchase of real estate. These factors resulted in a reduction of prices on the real estate market in H and a stabilisation in the subsequent months. Afordability index in major Polish cities* 1,0 0,9 0,8 0,7 0,6 0,5 0,4 0, H Gdańsk Łódź Poznań Wrocław Warsaw Kraków Net monthly inflow into mutual funds - 3-month moving average (LHS, PLN M) WIG Index (RHS) * Afordability of 1 square metre with an average gross income It was also another year of dynamic growth of the Polish capital market. There were 23 IPOs on the WSE s main market in 2013 (including 7 transfers from New Connect), which was more than the 19 IPOs in Situation on the Treasury bond market Despite the downtrend which prevailed until May, 2013 was not successful for Polish Treasury bonds. As the market suffered losses in H2 2013, the weighted average return rate on the bond portfolio was only 1.6%. This was mainly driven by global factors: with an improving outlook of the US economy, yields on the main markets continued to rise triggered by the announcement of reduced quantitative easing in the US. In Poland, an emotional though short-lived sell-out of Polish bonds followed the announcement of an open-ended pension fund system reform in September involving the planned transfer of Treasury bonds from the portfolios of open-ended pension funds to the Social Security Institution (SSI) for cancellation. For a while, the yields of 10-year bonds approached 5%. The transfer of bond portfolios from open-ended pension funds to the Social Security Institution and the cancellation of the bonds (i.e. converting liabilities towards open-ended pension funds into future government debt owed directly to pensioners) took place on February 4, 2014, and reduced public debt by PLN 134 billion (9% of GDP). Government debt under EU methodology decreased from 57.3% to c. 49% of GDP. The share of foreign investors in the PLN debt market automatically increased from 33% to 43%. The elimination of local investors with a longer investment horizon and the increase of the share of foreign investors in financing government debt is likely to boost the sensitivity of Polish bonds to the sentiment on the main markets. In H1 2014, the attractiveness of Polish bonds may still be driven by low inflation and relatively high real rates. Although the Monetary Policy Council (MPC) closed the door to further rate cuts, it may play out the expectations of monetary tightening in the coming months. However, in view of their significant weight in the global emerging market bond indices, Polish bonds may not be completely resilient to the liquidation of positions, for instance by Exchange Traded Funds (ETF). Yet, the scale of the price drops should be incomparably lower than that on unbalanced emerging markets. Poland as well as other CEE countries (Hungary, Romania) have eliminated many imbalances and are substantially perceived as euro zone satellites (they respond to euro zone growth impulses). In H2 2014, in addition to global factors (the end of quantitative easing in the EU, continued economic recovery in the USA and higher yields on US Treasuries), Polish bonds may be influenced by the normalisation of NBP interest rates. As for demand, an important development affecting the purchase decisions of buyers in the popular segment was the anticipated launch of the scheme Mieszkanie dla Młodych (Flats for Youth) which started in January The reduction of real estate prices combined with interest rate cuts and steady growth of income improved the sales performance in the segment of cash buyers who deferred the decision to buy an apartment until a reduction of prices on offer. In addition, the growth of sales was largely driven by the activity of clients willing to borrow 100% of real estate value. According to the new Recommendation S of the Polish Financial Supervision Authority, prospective borrowers will be unable to get a loan without own equity contribution. Residential real estate market in Poland thousand Maintenance of low interest rates should favour purchase decisions in 2014 owing to a lower cost of credit. Demand on the real estate market in 2013 was largely driven by a negative sentiment in the construction industry and the impact of the 2012 Real Estate Developer Law. The position of real estate developers should improve with a gradual decrease of supply in the coming years as the Home for Rent Fund opens while the number of granted construction permits and the number of new construction projects drop. On the commercial property market, the volume of transactions in 2013 remained stable year on year (at c. EUR 2.8 billion). The key cities with the highest sales of commercial properties were still Warsaw, Number of apartments released Number of building permissions granted 184 Number of buildings started

96 Kraków, Wrocław, Poznań and Gdańsk; however, demand of outsourcing centres for office space in Poland drives growth in smaller cities such as Olsztyn and Bydgoszcz. The office space market remains the tenant s market while the retail space market shows symptoms of saturation in the segment of large-format properties Changes in recommendations of the Polish Financial Supervision Authority (PFSA) and legal regulations concerning banks Legal act / Recommendation Effective date / Summary of new requirements Impact on main areas of the Bank Recommendation J The Recommendation covers best practice for credit risk management for mortgage-secured credit exposures and exposures for which mortgages are the target collateral. It concerns banks collection and processing of data on the real estate market included in proprietary and interbank databases. The new provisions apply to all banks whose share of mortgage-secured exposures is more than 10% of the loan portfolio. Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer NO YES NO YES YES the regulation has relevant impact on an area NO the regulation has no or limited impact on an area 2014 Recommendation T Recommendation M The Recommendation covers all retail loans other than mortgage-secured loans and loans for the acquisition of securities. According to the guidelines, the borrowers debt to income ratio (DtI) should be set by the bank s Management Board and defined in the Risk Management Strategy approved by the bank s Supervisory Board. The Recommendation includes specific guidelines on the scope and mode of application of simplified credit rating rules including amount thresholds, lack of income estimates, and a required scope of data. The amendment of Recommendation M concerns operations within an organisation (IT system failures, procedure gaps, etc.). Banks are required among others to develop risk maps, to draft procedures mitigating operational risk, and to run tests and simulations. Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer NO YES NO YES NO YES NO NO Capital Requirement Regulation (CRR) Foreign Account Compliance Act (FATCA) Payment Services Act CRR raises capital requirements including stricter requirements for the calculation of core and supplementary capital, stricter Core Tier 1 limit, capital leverage, new capital requirement CVA and new liquidity requirements LCR and NFSR. CRR imposes stricter reporting requirements. FATCA imposes the implementation of identification and monitoring of bank client status and the reporting of details of assets and investments held by US tax residents at non-us banks. Noncompliance with FATCA results in a 30% tax rate charged at the source on all financial transfers from the USA to a foreign financial institution which is not a party to FATCA. The Act changes the interchange fee to 0.5%. The amendment increases banks responsibility for unauthorised payment transactions and other transactions above EUR 150. Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) YES YES YES NO NO YES YES YES NO YES YES Clients and offer YES 25 26

97 Recommendation U Recommendation D European Market Infrastructure Regulation (EMIR) The Recommendation aims at eliminating conflicts of interest where a bank represents borrowers as a party to an insurance contract and charges fees from insurance companies as an intermediary. The Recommendation aims at improving the quality of relations between banks and insurers with regard to insurance products offered to clients. The amended Recommendation improves the quality of IT management and IT security in banks combined with improved supervision in these areas. The amendment covers mainly management of data and its quality, relations between business and IT units, the management information system in the area of IT and information security as well as cloud computing. EMIR imposes the obligation of clearing trades through central counterparties and reporting trades to trade repositories. EMIR imposes new risk management requirements. Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer NO YES YES YES NO YES NO NO NO YES NO YES The position of the Polish Financial Supervision Authority (PFSA) concerning dividend policy of financial institutions On December 10, 2013, the Polish Financial Supervision Authority announced its position concerning the dividend policy of financial institutions (banks, insurance and reinsurance corporations, mutual funds and brokerage houses). According to the PFSA recommendations, banks entitled to payout 100% of the profit are obliged to have to fulfil all of the following requirements: The bank is not subject to a recovery programme. Capital Adequacy Ratio exceeds 12%. Core Tier 1 Ratio exceeds 9%. The simulation of Capital Adequacy Ratio and Core Tier 1 Ratio for the end of 2014 in the referential stress test exceeds 12% and 9% respectively. The BION assessment (performed by the PFSA), both in the category of capital and its total score, is not worse than Expected trends in the economy in 2014 and their impact on the banking sector According to mbank s Chief Economist, 2014 will see a further acceleration of GDP growth (up to c. 4% in Q4) while the average annual GDP rate should reach 3.5%. This year, the growth will be mainly driven by domestic demand (private consumption, private and public investments) supported by a strong and dynamic labour market (the rise of salaries will be a visible trend in 2014 with a large positive potential that is often underestimated). Inflation, which will remain under the influence of the comparative base effect for most the year, should cross the mark of 1.5% in mid-year, back within the NBP s acceptable range of variation from the inflation target. However, the dovish stance of the Monetary Policy Council will not change until inflation clearly steps up in late 2014 due to demand factors and mounting salary and price pressures. According to mbank s Chief Economist, 2014 will bring two interest rate hikes, which in the longer term will trigger a classic monetary policy tightening cycle (at least 100 bps in aggregate). Recommendation S Act on the Banking Guarantee Fund The amendments include restrictions on FX lending and maximum tenors of loans. Restrictions are imposed on debt to income ratio (DtI) and loan to value ratio (LtV), as well as the minimum contribution of clients and on clients earning irregular or unstable income. The Act imposes a precautionary contribution to a stability fund. The contribution is equal to a rate, not higher than 0.2%, times the basis of the annual fee (risk weighted assets). Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer Capital base IT and HR Financial results (net of IT/HR cost) Clients and offer NO NO YES YES NO YES YES NO Continued economic growth will reflect on monetary aggregates. As a consequence, the environment of the banking business in 2014 is expected to experience the following trends: The accumulation of corporate deposits will continue in 2014, reflecting the improving financial performance of companies. However, the comparative base effect will curb the scale of potential improvement of the growth dynamics: the Bank expects corporate deposits to rise by more than 10% in Corporate loan volumes, in turn, should grow dynamically owing to the comparative base effect but also due to an improved economic environment and the resultant constraints on the ability to finance business with own funds. The Bank expects corporate loans to grow by c. 8% in mbank expects the growth in retail deposits to accelerate from the cyclical low in 2013 to c. 8-9% at the year s end. The accumulation of household deposits will be bolstered mainly by continued improvement on the job market and a growing nominal income base of households (owing to rising salaries). As interest rates on deposits are not expected to rise significantly, savings and build-up of a liquidity buffer are unlikely to be the key to clients decisions. Finally, retail loan volumes should expand materially in In mortgage lending, the negative impact of Recommendation S (minimum contribution requirement) should be more than offset by the impact of improving consumer sentiment. Consumer loan volumes are also expected to grow although the comparative base effect will curb the consumer loan growth rate in H

98 4. mbank Group Strategy for The Supervisory Board of the Bank approved the Strategy of the Bank and the Group in The main concept underlying the adopted Strategy is One Bank: a more integrated and client-centric organisation. The One Bank concept is based on the following foundations: One Team employees focused on the attainment of common strategic objectives. One Brand uniform image of the Group replacing the three main brands of the Group with the strongest brand in the portfolio: mbank. One Network universal profile of mbank branches integrating sales and post-sale activities for all retail and corporate banking clients. One Group closer co-operation and business integration within the Group aimed at strengthening the long-term competitive advantage in building lasting client relationships. A number of steps initiated or completed in 2013 derived from the goals of the One Bank Strategy are summarised below: Reorganisation Introduction of a range of modifications to the Bank s organisational structure, mainly in the corporate and investment banking areas. The scope of activities of Corporates and Institutions was extended to include investment banking for corporates, i.e. the raising of capital through the issue of shares (ECM), issue of corporate bonds (DCM) and M&A advisory. The new organisation should support mbank s competitive advantage in the corporate banking in Poland in the future. (for more information please refer to section 9. Corporates and Financial Markets Segment). Milestone Rebranding Launch of New mbank 2013 Summary Merger of the entities of the former BRE Bank Group under the mbank brand on November 25. The Bank s new identity based on the market success and the unique strength of the mbank brand supports recognition across all client segments. Launch of a new transactional platform for retail clients on June 4 (coinciding with the presentation of mbank s new logo). The main goal of the new platform was to make the online service even simpler and faster. The New mbank includes more than 200 new functionalities and improvements. Launch of the New mbank platform for clients of the Czech and Slovak branches in February Balance sheet management Optimizing the Bank s balance sheet from both the profitability and the structural perspective, through increasing the share of customer deposit funding, further diversification of the funding base, as well as increasing the share of higher yielding assets. The second edition of the development programme Our People Make the Difference which awards those employees who inspire others. Candidates were nominated by mbank employees and the winners were awarded in seven different categories, among others related to innovative thinking (of every employee), effective co-operation and mutual support between areas. (for more information please refer to section Training and development). (for more information please refer to section 2.3. Key projects of mbank Group in 2013)

99 Strategic financial targets According to the Strategy, the Group s actions until 2016 will be organised by the following financial targets: Strategy Financial Target As of December 31, 2013 Loan to deposit ratio at c. 115% by % Net stable funding ratio (NFSR): minimum 110% 113% Core Tier 1 ratio: c. 11% * 14.2% * Cost/income ratio (C/I): maximum 48% 45.7% RoE pre-tax: minimum 15% 16.5% RoA net: minimum 1.4% 1.1% * Core Tier 1 under AIRB. Plans and Strategy implementation in 2014 In 2013, the Bank prepared a project of reorganizing the network of mbank outlets. The new model aims to create a unified and integrated network of branches for retail and corporate clients of the Bank and the Group focusing on: Adjusting the new network model to changing behaviours of the Bank s clients from different segments and to alternative access channels used by clients. Increasing the network availability to all the Bank s clients. Offering products of the entire Group in universal branches. Cutting costs while maintaining the current level of service as well as boosting the effectiveness. The first branch in the new format will be opened in Szczecin in H More outlets will start operating according to the timeline of expiry of existing lease contracts and based on the experience gained in the first implementations of the new model. In 2014, an important challenge for the Bank will be to refine and implement a strategy for improving the position of mbank in the segment of micro, small and medium-sized enterprises. In order to achieve the ambitious goal of increasing income in this competitive segment, the Bank is implementing a project of introducing innovative changes in its product offer, sales model and key banking processes based on the expertise of the Bank's business lines and the best solutions adopted in the Polish and foreign banking sector. As a result, already in 2014 corporate clients using the New mbank platform will be offered new products and functionalities streamlining the daily management of the company's finances. mbank also plans to significantly accelerate and optimize key processes such as the credit process and selected acquisition processes. In 2014, mbank as the first bank in Poland plans to start issuing covered bonds secured with housing loans acquired by Retail Banking in order to further diversify its funding profile and to extend the maturities of its funding base. The launch of the New mbank platform for the customers of the foreign branches in the Czech Republic and Slovakia will continue. In the next step, the new transactional platform will be available to the clients of the former MultiBank. Furthermore, the Bank is planning to strengthen the sales and marketing functions of mbank s foreign operations aimed at dynamic growth of the revenue in the Czech Republic and Slovakia. Taking into account the current market position of the foreign branches and the record-high increase of income in 2013, the growth potential in both countries in 2014 is greater than in Poland. 5. Ratings of mbank and the Group subsidiaries 5.1. Fitch rating On May 20, 2013, Fitch Ratings affirmed its current credit ratings for mbank with a stable outlook for longterm rating. Fitch Ratings Ltd. ratings of mbank Long term Issuer Default Rating (IDR) Short-term IDR Viability rating Support rating 1 Rating of senior unsecured debt issued under the Euro Medium Term Note Programme (EMTN) Issue of EUR 500 million bonds (October 2012) and CHF 200 million bonds (October 2013) by BRE Finance France A (outlook stable) According to the rating agency, the stand-alone viability rating reflects the Bank s good liquidity situation, high internal capacity to generate capital and relatively conservative risk management rules. Other factors determining the viability rating include a substantial FX loans portfolio, high share of Commerzbank in the long-term funding structure and economic downturn in Poland in F1 bbb- A; F1 The long-term rating is also influenced by a very high probability of parental support from Commerzbank if needed. mbank Hipoteczny s and mleasing s rating At the end of 2013, Fitch ratings assigned to mleasing and mbank Hipoteczny were as follows: Fitch Ratings Ltd. ratings of mbank Hipoteczny and mleasing Long term IDR Short-term IDR Support rating 1 A A (outlook stable) The ratings were affirmed on May 20, Furthermore, Fitch Ratings assigned an "A" rating to mortgage and public sector covered bonds issued by mbank Hipoteczny Standard & Poor s rating In 2013, Standard & Poor s Rating Services (S&P s) assigned a solicited rating to mbank for the first time. On June 6, 2013, S&P's assigned the long-term rating of the Bank at "BBB+" and the short-term rating at "A-2". The long-term rating carries a negative outlook due to a negative outlook of the Commerzbank AG's rating. Until June 6, 2013, the Bank was rated at "BBBpi" based solely on publicly available information. In its rationale for mbank's rating, S&P s emphasized that it reflects the "bbb-" reference rating applied to all commercial banks in Poland and the agency's opinion concerning "adequate" business position of the Bank, "adequate" capital position and profitability, "adequate" risk assessment and liquidity. S&P's determined the stand-alone credit profile of mbank at "bbb-". S&P's emphasized that potential support provided by Commerzbank to mbank as its "strategically important" subsidiary has a positive influence on its long-term rating. F

100 Standard & Poor s ratings of mbank Long-term deposits rating BBB+ (negative outlook) Short-term deposits rating A-2 Stand-alone credit profile (SACP) bbb- Rating of Euro Medium Term Note Programme (EMTN) BBB+ No preferred shares, each share represents one vote at the General Meeting. Nominal value per share: PLN Registered share capital: PLN 168,696 thousand, fully paid up. Listing on the Warsaw Stock Exchange (WSE) since Membership in the following WSE indices: WIG, WIG-Poland, WIG20, WIG30 and WIG-Banks; the shares participate also in the derivative indices based on WIG20 and WIG30. Issue of EUR 500 million bonds (October 2012) and CHF 200 million bonds (October 2013) by BRE Finance France 5.3. Moody s rating based on publicly available information BBB+ In 2013, the total number of shares increased by 35,037 shares issued as part of an incentive programme for mbank key employees. Consequently, the registered share capital increased by PLN 140 thousand. mbank's share price performance during 2013 On March 28, 2013, the Bank terminated the rating agreement with Moody's Investors Service. Since then the Bank has been excluded from the rating process and received the "non-participating issuer" status. Moody's ratings are based solely on publicly available information. PLN 600 November 25, Maximum price PLN The ratings of mbank are as follows: Moody s ratings of mbank based on publicly available information January 15, Minimum price PLN Long-term deposits rating Short-term rating Bank s Financial Strength Rating (BFSR) Baa3 (stable outlook)* Prime-3 D /ba2/ (stable outlook) * The last downgrade from Baa2 occurred on April 29, 2013, and was driven by the downgrade of Commerzbank's rating from "A3" to "Baa1". On September 11, 2013, Moody s withdrew the rating for the Bank s Euro Medium Term Note Programme. In 2013, mbank Hipoteczny terminated its cooperation with Moody's Investors Service. The agency withdrew its ratings for covered bonds issued by mbank Hipoteczny on May 21, All ratings for mbank Hipoteczny were withdrawn on July Ratings of Poland, mbank and Commerzbank - comparison The table below compares the long-term ratings (in FX) of Poland, mbank and Commerzbank as of December 31, Rating agency Poland mbank S.A. Commerzbank AG Fitch Ratings A- (stab.) A (stab.) A+ (stab.) Standard & Poor s A- (stab.) BBB+ (neg.) A- (neg.) Moody s A2 (stab.) Baa3 (stab.) * Baa1 (stab.) Rating outlook in brackets: stab. stable, neg. negative * "Non-participating issuer, rating based solely on publicly available information. 6. mbank shareholders and share price on WSE 6.1. mbank shares As of December 31, 2013, the Bank s share capital had the following key characteristics: Total number of mbank shares: 42,171,013 ordinary and bearer shares Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 In 2013, the domestic stock market was influenced positively by a gradual improvement in the economic situation in Poland and worldwide. This factor was counterweighted by investors' concerns about the effects of limiting of the Fed's bond purchase programme, the intended Polish pension system reform and its anticipated negative consequences for pension funds and the stock exchange. In 2013, the broad market index on the WSE increased by 8.1%, a figure much lower compared to the developed markets including Wall Street (S&P %; Dow Jones +26.5%), Frankfurt (DAX +25.5%), Paris (CAC %), London (FTSE %), Zürich (Swiss Market Index: +20.2%) or Tokyo (Nikkei %). The largest companies were the worst performing stocks. WIG20 decrease of 7.0% was driven predominantly by falling prices of commodity, energy and fuel companies. However, bank shares increased supported by better-than-expected results in a low interest rate environment. WIG- Banks increased by 20.5% in Small and medium-sized companies reported strong results supporting the mwig40 gain of 31.1%. mbank shares outperformed the market and the banking industry index for a third year in a row. The closing price for mbank shares at the last session in 2013 (December 30) stood at PLN 500.0, which represents an increase of 53.4% compared to the price reported at the last session in 2012, and an increase by 57.8% compared to the dividend-adjusted price at the end of The lowest price of mbank shares was reported on January 15, 2013 (PLN 311.4), while the highest price was reached on November 25, 2013 (PLN 568.0). mbank s market capitalisation amounted to PLN 21.1 billion (EUR 5.1 billion) at the end of 2013 compared to PLN 13.7 billion (EUR 3.4 billion) at the end of Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec

101 In 2013, the daily average trading volume in mbank shares stood at PLN 11.9 million (PLN 7.6 million in 2012). The rise in mbank's trading volume was in line with the general trend observed in 2013 on the Warsaw Stock Exchange. At the end of 2013, the trading multiples for the Bank s shares were as follows: P/BV (price/book value) ratio stood at 2.1 compared to 1.4 a year earlier. P/E (price/earnings) ratio stood at 17.5 compared to 11.4 a year earlier mbank shareholders Commerzbank AG is mbank s strategic shareholder. The stake of Commerzbank has been increasing gradually, from 21.0% in 1995 through 50.0% in 2000, to the level of 72.2% in Starting from 2005, Commerzbank s stake has declined slightly due to the implementation of the managerial options programme in the Bank. As at the end of 2013, Commerzbank AG held 69.6% of shares and votes at the General Meeting. 30.4% of mbank shares in free float are held mostly by financial investors. At the end of 2013, the major investor was ING Otwarty Fundusz Emerytalny, which held 5.76% shares and votes at the General Meeting. AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK was the second largest non-strategic shareholder of mbank, which on December 31, 2013, held 5.11% of shares. The remaining shareholders (individual and institutional investors, in particular Polish pension funds, and Polish and foreign investment funds) do not exceed the 5.0% threshold of votes at the General Meeting. Areas of cooperation with Commerzbank Under a strategic agreement signed in 1994, mbank has received several capital injections from Commerzbank, the last of which in 2010 totalled approximately PLN 1.4 billion as Commerzbank acquired approximately 70.0% of new issue of shares during mbank s capital increase. In addition, mbank has received subordinated loans in CHF totalling CHF 950 million. These were equivalent to approximately PLN 3.3 billion at the end of 2013 compared to PLN 3.2 billion at the end of Moreover, the Bank received funding from Commerzbank in form of credit lines (excluding subordinated loans), which stood at PLN 14.4 billion at the end of 2013 compared to PLN 17.2 billion at the end of A technical co-operation agreement with Commerzbank gives mbank access to the network of Commerzbank and its correspondent banks around the world. In addition, Commerzbank offers its knowhow to mbank under separate agreements, enabling co-operation in many areas including the servicing of international clients (including Commerzbank clients), compliance and money laundering prevention and shared reporting systems in accounting and controlling. In the key area of Risk control the co-operation concerns especially the exchange of experiences regarding the implementation of new European regulations. Within the basic agreement on methodologies between mbank and Commerzbank, mbank is fully responsible and ensures decision independence in all Risk Management areas, especially in credit operation. Finally, mbank participates in the Commerzbank Group multi-year business and financial planning system Investor relations (IR) at mbank mbank has traditionally paid close attention to ensuring effective communication with its investors and analysts. In 2013, the Investor Relations representatives participated in meetings with more than 260 investors and stock analysts. Furthermore, analysts and investors of mbank are kept informed on important events related to mbank Group via monthly newsletters and s. It is our ambition to create a bank which accurately identifies and skilfully addresses the needs of different clients Cezary Stypułkowski, President of mbank S.A. Four direct and on-line conferences for analysts and investors were held in 2013 to discuss the Bank s quarterly results. For viewers' convenience, the conferences were broadcast on-line in Polish and English, and are available for replay on the official website of the Bank. In addition, after the publication of the Group's quarterly results, institutional investors were invited to participate in individual and group meetings with the President of the 35

102 Management Board to discuss issues related to the Group and its financial performance. In 2013, 65 pension and investment fund managers took part in more than 20 meetings. In 2013 foreign roadshows were an important element of the Investor Relations activities focussed on communicating changes in the Group. The Bank took part in five roadshows (in the United States, Canada, United Kingdom and Continental Europe) tailored to its specific needs. Furthermore, the representatives of mbank took part in two foreign investor conferences (in Prague and New York) and two domestic events. In line with the practice of the past years, two specialist due-diligence sessions were organised as part of regular meetings with the Bank s rating agencies. The Internet site of the Bank s investor relations ( is a source of information on mbank Group, including the shareholding structure of mbank, Annual Meetings, ratings, performance of the Bank shares on the WSE, and gives access to periodic and current reports, and details on research analyst consensus estimates for the Group. mbank Group and its performance are monitored by analysts representing banks and brokers. At the end of 2013, mbank was covered by 18 analysts representing both domestic and foreign institutions. 7. Financial results of mbank Group in Change in the approach toward recognition of income and expenses from selling insurance products attached to loans In 2013 the Group introduced a change to its accounting policies regarding the recognition of income and expenses related to sales of insurance products attached to loans. As the Group does not compel its clients to utilize its bancassurance offers and the purchase of insurance products has a voluntary character, it has thus for reported the income from sale of insurance products on a stand-alone basis and not according to the reporting requirements for bundled products. Given the evolving trends in the banking industry in Poland and beyond for bancassurance products, the Group amended its accounting policies in that respect already during 2013 which led to: Creation of provisions to reflect for premium claw back risk due to early termination of insurance contract A more conservative reflection of the intermediation costs associated with sale of insurance products Starting from July 2013, implementation of stage of completion analysis for recognition of income on sale of insurance products which resulted in reporting c. 1/3 of this income upfront after taking into account the claw back provisions. The Group assumed this accounting approach to be compliant with the respective International Financial Reporting Standards concepts and rules as well as appropriate with regards to the economic behaviour of both the clients and the Bank. In December 2013 the Group received (together with all other banks in Poland) a detailed guidance from the Polish Financial Supervision Authority on how to account for bancassurance business, which in particular defined a wider, more restrictive definition of bundled products. The Group implemented the recommended definition of bundled products and consequently adjusted its accounting approach towards its bancassurance business conducted in 2013 as well as in prior years. The retrospective implementation of the changes in accounting policy led to the restatement of the Group s (and the Bank s) opening balance as of January 1, 2012 and consequently as of January 1, 2013, as well as the financial results reported for 2012 and for the three quarters of The amended accounting policy leads in case of insurance policies bundled with loans to upfront recognition of less than 10% of bancassurance income associated with cash and car loans and 0% to approximately 25% of bancassurance income associated with mortgage loans. Recognition of the remaining part of the income is spread over the economic life of the associated loans. Expenses directly linked to the sale of insurance products are recognised using the same pattern. Given the sales pattern of bancassurance products as well as the adjustments made to the accounting approach in 2013, the newly implemented bancassurance accounting policy led to the decrease of the consolidated and stand-alone equity of the Group and the Bank as of December 31, 2013, by PLN 88.8 million compared to the accounting approach applied until Q The description of the accounting policy concerning bancassurance products is included in note Comparative Data to Consolidated Financial Statements for 2013, in accordance with the International Financial Reporting Standards. The tables illustrating the restated results for 2012 and 2013 are presented below. PLN thou Interest income 4,523,117 3,949,971 Interest expenses (2,243,520) (1,724,160) Net interest income 2,279,597 2,225,811 Fee & commission income 1,216,879 1,303,834 Fee & commission expenses (430,333) (469,096) Net fee & commission income 786, ,738 Dividend income 13,902 26,856 Net trading income, including 356, ,978 Foreign exchange result 324, ,545 Other trading income and hedge accounting result 32,536 60,433 Gains less losses from investment securities 44,966 78,578 Other operating income 275, ,821 Net impairment losses on loans and advances (444,635) (477,778) Overhead costs (1,465,714) (1,490,153) Amortization and depreciation (195,617) (187,890) Other operating expenses (186,500) (210,258) Operating profit 1,464,808 1,517,703 Profit before income tax 1,464,808 1,517,703 Income tax expense (266,906) (308,725) Net profit (loss) 1,197,902 1,208,978 - attributable to mbank S.A. 1,197,321 1,206,375 - attributable to minority interest 581 2,

103 7.2. Profit and Loss Account of mbank Group In 2013, mbank Group reported a profit before income tax of PLN 1,517.7 million, compared to PLN 1,464.8 million a year earlier (up by PLN 52.9 million or 3.6%). Net profit attributable to the shareholders of mbank reached PLN 1,206.4 million, compared to PLN 1,197.3 million in 2012 (up by PLN 9.1 million or 0.8%). mbank Group's profit PLN M 1, , , , Profit before income tax Net profit attributable to mbank's shareholders The Group s profit before income tax in 2013 was predominantly a result of: Increase of total income to PLN 3,673.5 million driven by higher net fee and commission, gains less losses on investment securities, net other operating income and higher dividend income. Increase of operating expenses (including depreciation and amortisation) to PLN 1,678.0 million year on year. Increase of effectiveness measured by the cost to income ratio which stood at 45.7% in 2013 (46.5% in 2012). Continued high quality of the loan portfolio resulting in net impairment of loans and advances amounting to PLN million in 2013 compared to PLN million a year earlier. Continued organic growth and business expansion as demonstrated by: Growing retail customer base in Poland, the Czech Republic and Slovakia which reached 4,368 thousand (+235 thousand customers in 2013); Growing number of corporate customers which reached the historically highest number of 16,333 customers (+1,238 in 2013). The Group s net loans and advances increased by 1.9% in 2013 while customer deposits increased by 6.4%. Consequently, the Group s loans to deposits ratio decreased from 115.5% in 2012 to 110.6%. The changes in the Group's results translated into the following profitability ratios: Gross ROE of 16.5% (18.0% at the end of 2012); Net ROE of 13.1% (14.6% at the end of 2012). The Group s capital ratios remained sound. The capital adequacy ratio stood at 19.38% at the end of December 2013, compared to 18.73% in Core Tier 1 ratio reached 14.21% compared to 13.00% Record net profit of PLN1.2 billion 39

104 at the end of The improvement of the ratio was predominantly driven by recognition of the profit in the Group s own funds. mbank Group s income In 2013, total income generated by mbank Group amounted to PLN 3,673.5 million compared to PLN 3,570.7 million in 2012 (up by PLN million or 2.9%). The increase was predominantly driven by growth of net fee and commission income and gains less losses on investment securities. In 2013 mbank Group also generated higher dividend income and higher net other operating income. The average interest rate on mbank s deposits and loans is presented in the following table: Retail Banking (in Poland and foreign operations) Average interest rate (mbank) Corporates and Institutions Total mbank Total income PLN M 2, , Deposits PLN 3.6% 2.5% 4.1% 2.4% 3.8% 2.5% FX 0.9% 0.9% 0.3% 0.2% 0.6% 0.6% Loans Total PLN 9.8% 8.8% 6.1% 4.5% 7.5% 6.3% FX 2.1% 2.0% 2.3% 2.3% 2.2% 2.1% Mortgage loans PLN 6.1% 4.6% FX 2.1% 2.0% Net interest income Net fee & commission income Dividend income Net trading income Gains less losses from investment securities Net other operating result Net interest income remained the Group s largest revenue source and reached PLN 2,225.8 million compared to PLN 2,279.6 million in 2012 (down by 2.4% year on year). The decrease was a result of lower interest income (-12.7%) driven by falling market interest rates and was partly compensated by higher loans volume. Compared to 2012, interest cost decreased by 23.1% and was mainly driven by a proactive pricing policy regarding customer deposits. Loans and advances remained the main source of interest income (71.9%). Lower levels of market interest rates resulted in a decrease of interest income by PLN million or 13.0%. In 2013, interest income from investment securities increased by PLN 13.5 million or 1.6%. The change was driven by a higher volume of government bonds. Interest income from debt securities held for trading decreased by PLN 27.2 million or 38.4% driven by decreasing volume of this asset category. At the same time, there was a decrease of interest income from cash and short-term deposits (down by PLN 48.8 million or 38.2%). Interest income structure PLN M Lower net interest income triggered a decrease in the net interest margin generated by mbank Group. The margin, calculated as a relation between net interest income and average interest-bearing assets, stood at 2.2% in 2013 compared to 2.4% in , , Other Trading securities Derivatives Cash and short term investments 3, ,841.2 Investment securities Loans and advances 41 42

105 The decrease of interest costs was attributed to lower costs in respect of customer deposits (down by PLN million or 29.6% year on year), and driven by decreasing market interest rates throughout Interest costs associated with amounts due to banks decreased by PLN 96.1 million or 27.2% due to repayment of a part of loans from Commerzbank. An increase of interest expenses from issuing debt securities was attributed to the issue of CHF 200 million and CZK 500 million under the EMTN programme (up by PLN 9.6 million or 5.3%). Net fee and commission income, accounting for 23.0% of mbank Group income, remained stable compared to In 2013, net fee and commission income amounted to PLN million, representing an increase by PLN 48.2 million or 6.1% compared to Fee and commission income structure PLN M 1, , Other Sale of third party financial products Money transfers Brokerage Accounts Net impairment losses on loans and advances In 2013, net impairment losses on loans and advances in mbank Group amounted to PLN million, compared to PLN million in 2012 (+PLN 33.2 million or 7.5%). The economic slowdown observed mainly in H had an adverse effect on the financial situation of the Bank's customers, partially compensated by a series of reductions of market interest rates. In Retail Banking, risk costs increased by PLN 35.2 million or 13.4%. The growth was driven by higher impairment losses in Retail Banking in Poland due to the gradual change of the Bank s loan structure towards consumer loans. Moreover, the increase of impairment losses was observed in mbank Hipoteczny. Net impairment losses on loans and advances PLN M Corporates & Financial Markets Retail Banking Insurance Loans and advances Payment cards The Group reported an increase of fee and commission income by PLN 86.9 million or 7.1%. Commissions from credit cards increased by 5.1%. A decrease of interchange fees was compensated by greater number of transactions executed by clients. A growing client base was coupled with increasing commissions from bank accounts (+21.5%). Fees from brokerage activity increased by 19.4%, due to increased number of public offerings in 2013 arranged by Dom Maklerski mbanku. Credit related fees and commissions improved mainly due to higher sales of non-mortgage loans. Dividend income amounted to PLN 26.9 million in 2013, representing an increase of PLN 13.0 million compared to The rise was attributed to higher dividend payment received from PZU S.A. compared to Net impairment losses on loans and advances in Corporates and Financial Markets amounted to PLN million in 2013 compared to PLN million in Despite the economic slowdown observed in the reported period, impairment losses remained flat due to effective diversification of the loan portfolio and prudent credit policies in the past years. Overhead costs of mbank Group Total overhead costs of mbank Group (including amortization and depreciation) reached PLN 1,678.0 million, which represents an increase by 1.0% compared to Overhead costs and amortization PLN M 1, , Other Net trading income amounted to PLN million in 2013 and was lower by PLN 13.5 million or 3.8% compared to The decrease was driven by lower FX result by PLN 41.5 million or 12.8% mainly due to a change in the FX swap portfolio structure. Net other trading income was higher by PLN 27.9 million or 85.8% due to growing number of IRS transactions executed by corporate clients. Gains less losses on investment securities in 2013 amounted to PLN 78.6 million compared to PLN 45.0 million in The increase was achieved due to profits realized on sales of government bonds. Additionally, mbank Group earned profits from the sale of its stake in MasterCard and VISA in the amount of PLN 13.4 million. Net other operating income (other income net of operating costs) amounted to PLN million in 2013 (up by PLN 75.3 million year on year). The growth was mainly driven by higher sales of apartments by mlocum and VAT refund received by mleasing in the amount of PLN 21.5 million. At the same time, the Group booked higher provisions for legal risk in both Retail Banking and Corporates and Institutions segments Amortization and Depreciation Material costs Staff-related expenses 43 44

106 In 2013, personnel costs remained stable at the level of PLN million. The number of FTEs in mbank Group decreased from 6,138 at the end of 2012 to 6,073 at the end of In 2013, material costs rose by PLN 22.3 million or 4.0%. Expenses incurred in the field of information technology also increased, which was mainly the result of IT investments in the New mbank platform. Despite expenses related to the implementation of the new transactional platform of mbank and the rebranding campaign, marketing costs remained stable compared to Amortization and depreciation costs decreased in 2013 due to lower amortization of intangible assets. Continued cost management allowed the Group to further improve its efficiency measured by the cost/income ratio which stood at 45.7% at the end of 2013 compared to 46.5% a year earlier. Retail Banking In 2013, Retail Banking generated a profit before income tax of PLN million, which represents an increase of PLN 52.5 million or 6.1% compared to Retail Banking - decomposition of profit before income tax PLN M 1, , Contribution of business segments and lines to the financial result The data presented below is based on internal management system of the Bank. The chart below illustrates the contribution of individual business areas to the profit before income tax of mbank Group Profit (loss) before income tax by business line of mbank Group PLN M , , Net interest income Net fee & commission income Net trading income Gains less losses from investment securities Dividend income Net other operating income Overhead costs and amortization Net impairement losses on loans and advances Retail Banking Corporates and Institutions Retail Banking had the largest share in the Group s profit before income tax and its contribution reached 60.1% at the end of The contribution of Corporates and Financial Markets constituted 38.8% of the Group s profit before income tax and covered the result of Corporates and Institutions (37.8%) and Trading and Investment Activity (1.0%). Gross profit contribution by business segments 2012 Trading and Investment Activity -0.9 Other and eliminations 2013 Total Group The profit before income tax of Retail Banking in 2013 was predominantly driven by: Increase of total income by PLN 80.2 million or 3.9% year on year to PLN 2,124.2 million. Net interest income grew by PLN 30.5 million or 2.1%, while net fee and commission income increased by PLN 31.2 million or 7.3%. Decrease of overhead costs (including amortization and depreciation) by PLN 7.4 million or 0.8% year on year. Increase of net impairment of loans and advances compared to 2012 by PLN 35.1 million or 13.4% reported in Retail Banking in Poland and mbank Hipoteczny. 6.3% 1.0% 1.1% 35.0% 37.8% 58.7% 60.1% Retail Banking Corporates and Institutions Trading and Investment Activity Other 45 46

107 Corporates and Financial Markets Corporates and Institutions In 2013, the Corporates and Institutions segment generated a profit before income tax of PLN million (up by PLN 60.6 million or 11.8% year on year). Trading and Investment Activity In 2013, Trading and Investment Activity generated a profit before income tax of PLN 15.1 million, which represents a decrease by PLN 78.5 million or 83.9% compared to Trading and Investment Activity - decomposition of profit before income tax Corporates and Institutions - decomposition of profit before income tax PLN M PLN M Net interest income Net fee & commission income Net trading income Gains less losses from investment securities Dividend Income Net other operating income Overhead costs and amortization Net impairement losses on loans and advances Net interest income Net fee & commission income Net trading income Gains less losses from investment securities Dividend Income Net other operating income Overhead costs and amortization Net impairement losses on loans and advances The profit before income tax of Corporates and Institutions in 2013 was predominantly driven by: Increase of total income by PLN 79.0 million or 6.2% year on year to PLN 1,348.0 million. Net interest income increased by PLN 26.0 million or 3.6%, while net fee and commission income remained almost flat. The increase of dividend income in 2013 was attributed to a higher dividend payment received from PZU S.A. Stable overhead costs (including depreciation and amortization) at the level of PLN million (increase by PLN 4.3 million or 0.7%). Increase of net impairment of loans and advances compared to 2012 by PLN 14.1 million or 8.5%. The profit before income tax of Trading and Investment Activity in 2013 was predominantly driven by: Decrease of total income by PLN 94.7 million or 38.5% year on year to PLN million. Net interest income fell by PLN million or 85.7% to PLN 19.1 million. Net fee and commission increased by PLN 15.2 million or 40.5% due to higher fees from brokerage activities generated by Dom Maklerski mbanku. Net trading income decreased by PLN 14.9 million. Gains less losses on investment securities improved considerably helped by favourable conditions on the government bonds market and profits realized from the partial sale of the bond portfolio. Stable overhead costs (including depreciation and amortization) at the level of PLN million (up by PLN 0.2 million or 0.1%). Lack of net impairment losses on loans and advances, while in 2012 this position was influenced by PLN 15.4 million write-offs from losses on corporate bonds portfolio

108 Financial results of mbank Group subsidiaries In 2013, the consolidated profits before income tax generated by mbank Group subsidiaries based on a comparable number of subsidiaries amounted to PLN million compared to PLN million a year earlier. The graph below presents the net profit of the subsidiaries in 2013 compared to Loans and advances to customers had the largest share in the balance sheet (65.4% of total assets at the end of 2013 compared to 65.5% at the end of 2012). The volume of net loans and advances to customers increased by PLN 1,263.6 million or 1.9% compared to the end of Net profit of consolidated subsidiaries PLN M Gross loans and advances to retail customers increased by PLN million or 1.6%. Housing and mortgage loans decreased year on year by PLN million or 1.4% mainly due to declining portfolio of mortgage loans denominated in CHF. In 2013, mbank Group sold mortgage loans in the amount of PLN 2,079.0 million, which represents an increase by 2.9% compared to At the same time, the value of non-mortgage loans granted by the Group amounted to PLN 3,731.1 million (+9.9%). Excluding the FX effects, retail loans increased by approximately 1.9% At the same time, gross loans and advances to corporate customers increased by PLN 1,069.9 million or 3.8%. Excluding reverse repo/buy sell back transactions and FX fluctuations, the value of loans to corporate clients decreased by approximately 0.9% compared to Gross loans and advances to the public sector decreased by PLN million or 19.3%. mleasing BRE Ubezpieczenia Dom Maklerski mbanku mfaktoring mwealth Management mlocum mbank Hipoteczny Transfinance MLV 35 BRE Finance France Aspiro mcentrum Operacji Garbary Loans and advances to customers (gross) PLN M 69, , , ,698.5 Other loans In particular, the following subsidiaries improved their results in a year on year comparison: mleasing, BRE Ubezpieczenia, mfaktoring, Dom Maklerski mbanku, mwealth Management and mlocum Changes in the Consolidated Statement of Financial Position 28, ,475.3 Public sector Changes in assets of mbank Group In 2013, the assets of mbank Group increased by PLN 2,137.8 million or 2.1% to PLN 104,282.8 million as of December 31, The table below presents the changes in the assets of mbank Group in 2013: Assets Cash and balances with Central Bank Loans and advances to banks in PLN million share in % in PLN million share in % Difference YoY change 4, % 1, % (3,168.7) (65.8%) 3, % 3, % (473.4) (12.0%) Trading securities 1, % % (387.8) (33.7%) Derivative financial instruments Loans and advances to customers 2, % 2, % (453.1) (16.2%) 66, % 68, % 1, % Investment securities 19, % 25, % 5, % 37, , Corporate customers Individual customers Investment securities constituted the Group s second largest asset category (24.3% of total assets). During 2013, their value increased by PLN 5,348.4 million or 26.8%. The government bond portfolio increased by 61.6% year on year, while the portfolio of debt securities issued by the central bank decreased by 20.9%. Remaining assets in the balance sheet of the Group accounted for 10.3% of mbank total assets. Intangible assets % % % Tangible fixed assets % % (64.3) (8.3%) Other assets 1, % 1, % % Total assets 102, % 104, % 2, % 49 50

109 Changes in the liabilities of mbank Group The table below presents the changes in the liabilities of mbank Group in 2013: Liabilities and Equity in PLN million share in % in PLN million share in % Difference YoY change Amounts due to other banks 21, % 19, % (1,886.7) (8.9%) Derivative financial instruments 3, % 2, % (1,017.0) (29.3%) Amounts due to customers 57, % 61, % 3, % Debt securities in issue 4, % 5, % % Subordinated liabilities 3, % 3, % % Other liabilities 1, % 1, % (336.2) (18.3%) Total liabilities 92, % 94, % 1, % Total equity 9, % 10, % % Total liabilities and equity 102, % 104, % 2, % Amounts due to customers, which accounted for 59.1% of liabilities at the end of 2013, (compared to 56.8% a year earlier), remained the dominant funding source of mbank Group. Amounts due to customers increased by PLN 3,689.9 million or 6.4% in 2013 and reached PLN 61,673.5 million. The increase was observed mainly in amounts due to corporate customers (up by PLN 2,504.2 million or 10.3%). Excluding repo transactions, amounts due to corporate customers decreased by approximately 1.1%. Amounts due to retail customers grew by PLN million or 2.9%. Current accounts increased by 15.2%. Term deposits of retail customers decreased by 18.4% year on year. Due to low interest rates, part of the funds on maturing term deposits was transferred to investment funds available through mbank s Investment Fund Supermarket. Amounts due to other banks decreased by PLN 1,886.7 million or 8.9% compared to the end of 2012 and reached PLN 19,224.2 million at the end of The change resulted mainly from the repayment of loans granted by Commerzbank Group (CHF 830 million and USD 100 million). The share of debt securities in issue in the funding structure of mbank Group increased from 4.8% at the end of 2012 to 5.2% at the end of 2013, mainly due to the issue of CHF 200 million and CZK 500 million eurobonds under the EMTN programme. In 2013, the Bank also issued 10-year subordinated bonds in the amount of PLN 500 million. The share of equity in the liabilities and equity of mbank Group increased from 9.4% at the end of December 2012 to 9.8% at the end of 2013 due to the retention of the Group's net profit Performance indicators The Group achieved lower return on equity compared to 2012 due to an increase of the capital base. Compared to the banking sector, mbank Group achieved higher return on equity and better efficiency in terms of cost to income ratio. Net interest margin of mbank Group remained lower than net interest margin of the banking sector. The key performance indicators of mbank Group compared to the banking sector were as follows: Amounts due to customers PLN M Banking sector in 2013 Net ROA 1.23% 1.14% 1.11% 61,673.5 Gross ROE 18.0% 16.5% 13.4% 57, Public sector Net ROE 14.6% 13.1% 10.8% Cost to Income ratio 46.5% 45.7% 53.1% Net interest margin 2.4% 2.2% 2.5% 24, ,752.9 Core Tier 1 ratio 13.00% 14.21% 14.21% Capital adequacy ratio 18.73% 19.38% 15.75% 33, , Corporate customers Individual customers Net ROA = net profit (including minority shareholders) / average assets; Gross ROE = pre-tax profit / equity (including minority shareholders, excluding current year s profit); Net ROE = net profit (including minority shareholders) / equity (including minority shareholders, excluding current year s profit); C/I = overhead costs + depreciation / net income (including net other operating income/costs); Net interest margin = net interest income / average interest earning assets; Core Tier 1 ratio = core funds after deductions / risk weighted assets. Capital Adequacy ratio = own funds (core funds and supplementary funds after deductions) / risk weighted assets; 8. mbank Group in the financial services market in 2013 At the end of 2013, mbank was among the largest Polish banks across all relevant market segments. Most of the Group subsidiaries also rank high in their respective market segments. The table below presents the market share and the position of mbank and of selected subsidiaries at the end of 2013 compared to 2012: 51 52

110 Business category Market position in 2013* Market Share Corporate Banking Corporate loans 5.9% 6.3% Corporate deposits 8.3% 8.7% Leasing 5.9% 7.0% Factoring Poland 7 8.3% 8.8% Czech Republic % 14.1% Retail Banking in Poland Total loans 6.2% 6.5% Of which mortgage loans 7.4% 7.9% Non-mortgage loans 4.4% 4.2% Deposits 5.0% 5.3% Strong capitalisation with Capital Adequacy Ratio at 19.4 % Retail Banking in the Czech Republic Total loans 1.0% 0.8% Of which mortgage loans 1.3% 1.1% Non-mortgage loans 0.3% 0.3% Deposits 1.1% 1.0% Retail Banking in Slovakia Total loans 0.5% 0.4% Of which mortgage loans 0.6% 0.4% Non-mortgage loans 0.2% 0.2% Deposits 1.6% 1.3% Investment Banking Financial markets 54

111 Treasury bills and bonds 10.9% 8.9% IRS/FRA 25.2% 24.5% FX spot and forward 10.7% 7.8% Non-Treasury securities Short-term debt securities % 12.0% Corporate bonds % 16.3% Bank debt securities** % 29.8% Brokerage Equities trading 9 4.1% 4.9% Futures % 15.5% 9.1. Corporates and Institutions 2013 was a challenging year for Corporate Banking. Banks operated in a period of low interest rates and economic slowdown, which contributed to lower corporate activity and reduced investment demand. The weaker investment demand negatively impacted the volume of loans to corporate customers, which after excluding reverse repo/buy sell back transactions and FX fluctuations, decreased by approximately 0.9% compared to Record low market interest rates have additionally put significant pressure on the Bank s product margins. The market for loans to enterprises increased by 1.8% year on year compared to 0.7% increase in 2012, while the corporate deposits market increased by 9.6% compared to negative dynamics (-6.6%) in Throughout 2013 the Bank intensified its sales efforts, which resulted in record-high acquisition of corporate clients. In 2013, mbank acquired 2,997 new clients thus increasing its corporate client base to 16,333 entities. The acquisition of new clients positively impacted the value of funds deposited on current accounts which increased by 22.4% compared to the end of 2012 and stood at the historically highest level of PLN 5,890 million. A high volume of current deposits underpins continuous development of transactional banking, which is of vital importance for the Bank due to its growth potential and strengthened cooperation with clients Corporate clients (mbank) Options % 16.8% Source: Own calculations based on data form mbank, NBP, WSE, CNB, NBS, Fitch Polska, Polish Factors Association, Polish Association of Leasing Companies, press reports * where determinable ** excluidng road bonds issued by Bank Gospodarstwa Krajowego (BGK) 9. Corporates and Financial Markets Segment The Corporates and Financial Markets segment of mbank offers its corporate banking and institutional customers a broad range of products and services, including current accounts, internet banking based cash management services, term deposits, foreign exchange transactions, short-term financing and investment loans, cross-border credit, project finance and trade finance solutions, structured and mezzanine finance services, and investment banking services and products. The Bank distributes its products and services through a fully dedicated network of corporate branches and offices, as well as through its innovative corporate banking internet platform mbank CompanyNet. During 2013, mbank acquired 2,997 new corporate clients, of which 71.5% were K3 clients and 24.3% were K2 clients. The total number of clients reached 16,333 companies at the end of December 2013 (+1,238 year on year). K1 represents the segment of largest corporations with annual sales of over PLN 500 million; K2 is the segment of medium-sized corporations with annual sales between PLN 30 and 500 million and K3 is the segment of small and medium-sized companies with annual sales up to PLN 30 million. Clients 16,333 15,095 1,255 1,228 5,022 4,583 9,284 10, K3 K2 K1 Historically, the Corporates and Financial Markets segment included two business lines: Corporates and Institutions, which covered the key area of customer relations, and Trading and Investment Activity connected with managing liquidity, market risk and relations with financial institutions. In the second half of 2013, the scope of operations and the names of both business lines were changed to reflect the re-organization of these activities. The scope of activities of Corporates and Institutions was extended to include investment banking services for corporates, i.e. equity and debt capital market transactions as well as M&A advisory and therefore its name was changed to Corporate and Investment Banking. Moreover, to allow a clear identification of the scope of operations connected with financial market operations, Trading and Investment Activity was renamed to Financial Markets. Taking into consideration that the above changes took place during the year, the financial statements for 2013 present the previous organizational structure. The relevant changes will be introduced to the Group s reporting starting from Q

112 Product and service offer Loans The value of loans of mbank s corporate clients amounted to PLN 26,281 million at the end of December 2013, compared to PLN 25,160 million a year earlier (+4.5% year on year). Loans PLN M 26,281 25, ,022 3,285 10,749 10,783 9,517 9,425 2,862 2, K3 K2 K1 Reverse repo/buy sell back transactions Other Loans granted to enterprises amounted to PLN 15,765 million at the end of December 2013, compared to PLN 16,541 million a year earlier (-4.7% year on year). At the same time, the market for loans to enterprises was up by 1.8%. The market share of mbank s lending to enterprises stood at 5.9% at the end of December 2013, compared to 6.3% a year earlier. At the end of 2013, the loan to deposit ratio for enterprises in the Bank stood at 87.7% and was considerably lower compared to the market average of 123.4%. Loans granted to local governments amounted to PLN 1,469 million at the end of December 2013, compared to PLN 1,830 million a year earlier (-19.7% year on year). Deposits The value of deposits of the Bank s corporate clients stood at PLN 24,555 million at the end of December 2013, compared to PLN 22,017 million a year earlier (+11.5% year on year). Deposits PLN M 24, thousand corporate clients 22, ,882 8,062 8, ,290 7,189 9,507 3,250 3, K3 K2 K1 Repo transactions Other 58

113 Deposits on current accounts made by mbank s corporate clients increased to PLN 5,890 million at the end of December 2013, which represents a growth of 22.4% year on year Corporate deposits reached PLN 17,972 million at the end of 2013, compared to PLN 17,175 million a year earlier (+4.6% year on year). At the same time, the market of corporate deposits increased by 9.6%. The share of mbank in corporate deposits market fell to 8.3% at the end of December 2013, compared to 8.7% a year earlier. Deposits of local governments amounted to PLN million at the end of December 2013, compared to PLN million a year earlier (+58.4% year on year). Structured finance, project finance and syndicated loans The Structured Finance area in Corporate Banking includes M&A finance, project finance, mezzanine and syndicated finance. Throughout 2013, the Bank remained a major player on the market and participated in 43 syndicated and bilateral loan transactions. The total exposure of the Bank in respect of syndicated and bilateral loans stood at PLN 1,796 million. European Funding Programmes On February 22, 2013, the Bank signed a credit line facility agreement, worth EUR 100 million with the European Investment Bank (EIB) providing the financing of long-term investment projects in agriculture, industry and services rendered by small and medium-sized enterprises (companies employing up to 250 people) as well as mid-caps (companies employing from 250 to 3 thousand people). Due to the use of the entire credit line, on November 20, 2013, mbank signed another agreement with EIB worth EUR 100 million. Guarantee Line de minimis On March 4, 2013, a cooperation agreement was signed with Bank Gospodarstwa Krajowego (BGK) concerning the Portfolio Guarantee Line de minimis. The agreement was signed within the framework of the government programme entitled "Support for Entrepreneurship using BGK sureties and guarantees", which provides financing guarantees for the repayment of loans granted micro-enterprises as well as small and medium-sized enterprises. The limit of guarantees assigned to mbank by BGK amounts to PLN 900 million, which allows the Bank to grant about PLN 1.5 billion of working capital loans backed by guarantees. The first BGK credit guarantees were offered to mbank clients at the beginning of April As of December 31, 2013, the value of working capital loans backed by de minimis guarantees stood at PLN million (including retail loans for microenterprises in the amount of PLN 38.1 million). Development of transactional banking Cash management is the area of Corporate Banking, which offers innovative solutions facilitating planning, monitoring and management of the funds with the highest liquidity, cash processing and electronic banking. These solutions facilitate everyday financial operations, increase the efficiency of cash flows management and help to optimize costs and interest income. mbank Group s comprehensive cash management offer, supporting the Group s long-term relationships with corporate clients, was reflected in the following figures: The number of domestic transfers made by corporate clients in 2013 increased by 16.3% year on year. The number of foreign transfers made by corporate customers increased by 13.3% in 2013; the most dynamic growth was observed in the case of SEPA transfers, which increased by 46.3% year on year. The total number of corporate cards issued in 2013 grew by 114.6% compared to the end of 2012; the most dynamic growth was observed in prepaid cards (+118.8% year on year). Over 833 thousand cards were issued as Electronic Money Instrument (the number of cards issued at the end of 2013). The number of mbank CompanyNet clients increased by 14.8% year on year. Currently, there are 70,147 active authorisations allowing the entitled employees of mbank s clients to cooperate with the Bank. Development of the Corporate Banking offer The Corporate Banking area of mbank continued its efforts to expand the product offer, to streamline processes and to implement solutions aimed at increasing the satisfaction of the Bank's corporate clients. The area s major projects in 2013 included: Launch of the SCORE Service. The Bank launched a new service based on SWIFT For Corporates. SCORE allows the Bank to satisfy the requirements of cross-border capital groups or large corporations which use a centralised model for managing cash held by their subsidiaries located worldwide. SWIFT messages delivered directly to the client via SCORE provide access to information on executed instructions and balances of accounts kept with the Bank. Introduction of Private label cards. Private label cards bear no logo of any payment organisation and allow the issuer to restrict their acceptance, e.g. to a specific retail chain or a single retailer. With no additional financial cost, companies may issue cards accepted only in their outlets, thus ensuring that funds will ultimately return to the company. Visa Money Currency Prepaid Card. This bearer card is issued as electronic money instrument, either in a the standard design or in a design selected individually by the client. Since it may be settled in one of the following currencies: the US dollar, euro or British pound, the currency card is dedicated especially to payments made abroad. BlueCash Instant Transfer this new service offered by the Bank allows for instant execution of domestic credit transfers in the Polish zloty within a group of 25 banks. The new solution is available via mbank s CompanyNet electronic banking system to the Bank's clients authorised to submit domestic transfers. Under the BlueCash Instant Transfer service the beneficiary's bank account is credited within 15 minutes after authorisation of the payment order in the mbank CompanyNet system. The Bank became first on the market to launch mobile banking functionalities for corporate clients - mbank CompanyMobile. It offers a comprehensive solution ensuring full control over the company's finance with the use of a smartphone or tablet. mbank CompanyMobile is available on 4 operating systems (Android, IOS, Windows phone, BlackBerry). The new solution ensures swift authorisation of orders and access to key information necessary to manage the company's finance. Escrow Account integrated with Cash Pool service. The solution combines the best features of both products, the Bank verifies the terms and conditions for withdrawals from the Escrow account, and allows optimizing liquidity management (cash pool). Cards without an account agreement - cards offered to clients who did not sign an Integrated Bank Account Agreement but are willing to use products offered by mbank. Within this project, the Bank offers 7 types of prepaid cards issued as Electronic Money Instrument, settled in zlotys and in foreign currency (with standard or personalized graphics). Comprehensive cashless service during the Harley Davidson Super Rally in Poland. The payment process was based on prepaid cards issued by the Bank, featuring the logo of the Harley Davidson Club. The cards were the only means of payment used by Harley Davidson enthusiasts during the rally. The Bank was the only bank in Poland to organise a cashless payment system during a mass event, and to provide the participants, sub-contractors and organisers with uniform payment rules as well as secure and fast cash payments

114 SME and corporates Corporate Banking network The Bank serves its corporate customers through a network of 29 branches and 18 corporate bureaus. The following map presents Corporate Banking network branch (the colour intensity reflects the number of outlets in particular region): Zachodnio- Pomorskie 2 Lubuskie Dolnośląskie Pomorskie Wielkopolskie 1 2 Kujawsko- Pomorskie Opolskie Śląskie Łódzkie 3 Warmińsko-Mazurskie Mazowieckie Świętokrzyskie 2 1 Małopolskie Podlaskie Lubelskie Podkarpackie Subsidiaries within the Corporates and Institutions area Financing offer in the form of leasing or rent, and car fleet management 1 st position on the real estate market 4 th position on the leasing market in Poland At the end of 2013, the company was the sixth largest leasing service provider in Poland with a market share of 6.1% in the movables segment and maintained the leadership position in the real estate segment with a market share of 24.3%. The value of contracts concluded by mleasing in 2013 stood at PLN 2.4 billion, compared to PLN 2.2 billion a year earlier (+11.1% year on year). At the end of 2013, the overall market share of mleasing (the movables and real estate market) was 7.0%. Pickup in demand during the last months of 2013 boosted sales compared to The sales growth was mainly observed in the segment of vehicles, machinery and equipment. The company s profit before income tax reported in 2013 reached PLN 64.4 million, which represents an increase by 26.3% year on year

115 In 2013, within the framework of the One Bank Strategy, in order to create a comprehensive offer for customers, mleasing implemented a "Leasing in Retail" programme, dedicated to micro-, small- and medium- enterprises, which may enter into a lease contract for vehicles up to 3.5 tons. The combined efforts of Retail Banking segment and mleasing provide clients with an innovative, on-line product, requiring only a single customer order document. Domestic and export factoring with recourse, non-recourse factoring, import guarantees 20 years on the market, one of the pioneers of factoring in Poland 7 th position on the factoring market in Poland, with 8.2% market share The growth in factoring turnover in Poland reached 15.5% (according to the Polish Factors Association), with the outstanding value of financed invoices at PLN 96.6 billion in mfaktoring generated turnover of PLN 8.0 billion in 2013 (+11.8% year on year), which enabled the company to maintain its 7 th position on the factoring market. In 2013, the profit before income tax reported by mfactoring reached PLN 18.5 million (+3.1% year on year), being the best result of the company in its 20-year history. Domestic, import and export factoring 4 th position place on the factoring market in the Czech Republic, with 17.3% market share Focus on serving small and medium-sized enterprises and on international factoring Transfinance a.s. provides factoring services for small and medium-sized enterprises in the Czech Republic. In 2013, Transfinance reported a turnover of PLN 4.1 billion compared to PLN 3.3 billion in 2012 (+22.9% year on year) driven by increases in both export and import factoring, with limited growth in the turnover of domestic factoring. In 2013, Transfinance reported a profit before income tax of PLN 3.2 million, compared to PLN 3.1 million a year earlier (+6.5% year on year), resulting from an increase in income while maintaining a stable cost base. MLV 45 Sp. z o.o. Sp. k. MLV 45 Sp. z o.o. Sp. k. is a company established as a result of the transformation of BRE Holding in Q BRE Holding Sp. z o.o. was established in November 2007 with the Bank as its sole shareholder. The assets of the company comprise shares in mbank Hipoteczny S.A., mfaktoring S.A., mleasing Sp. z o.o. and mlocum S.A., valued at PLN million in total Trading and Investment Activity The Trading and Investment Activity in 2013 comprised: Management of mbank's liquidity as well as its assets and liabilities (including deposit and loan portfolio interest risk management). In order to manage the Bank's liquidity a number of transactions are executed, including money market transactions, currency swaps, interest rate derivative transactions, T-bond, T-bill and NBP bill purchase transactions, as well as repo transactions. Management of mbank's interest rates and currency risk, trading in FX interbank instruments (spot transactions and derivatives), trading in interest rate instruments (T-bonds and T-bills, interest rate derivatives), commodity derivatives, shares, equity and stock index derivatives; trading in non- Treasury securities. Direct sale of financial market products to corporate banking clients and non-banking financial institutions (such as insurance companies, pension and investment funds and assets management companies) and selected private banking clients. Origination of debt securities for corporate banking clients and banks, as well as trading in these securities. As of Q1 2014, this segment was moved to the Corporate and Investment Line (previously Corporates and Institutions, more information in Chapter 9. Corporates and Financial Markets Segment). In 2013, mbank organised or co-organised a number bond issues on the domestic market for corporate issuers and banks, in particular for: Sygnity S.A. - PLN 100 million mid-term bond issue programme Elemental Holding S.A. PLN 30 million mid-term bond issue programme Siódemka S.A. PLN 60 million mid-term bond issue programme Enea Wytwarzanie S.A. - PLN 746 million bond issue programme TAURON Polska Energia S.A. - PLN 5 billion bond issue programme Gino Rossi S.A. PLN 35 million bond issue programme Eurocash S.A. - PLN 500 million bond issue programme Bank Pocztowy S.A. - PLN 300 million short-term bond issue programme. The value of unredeemed banks debt securities (excluding the road bonds issued by BGK) arranged or coarranged by mbank amounted to c. PLN 7.3 billion, compared to PLN 5.8 billion at the end of The largest issues in 2013 were the PLN 350 million bond issues for BOŚ Bank arranged by mbank. Other major deals included a EUR 80 million covered bond issue for mbank Hipoteczny and bond issues for Credit Agricole Bank Polska at PLN 174 million, Santander Bank PLN 160 million, Getin Noble Bank PLN 185 million, BGŻ Bank PLN 228 million. Moreover, mbank placed ten-year subordinated bonds of mbank worth PLN 500 million with a five-year call option, sold on the domestic market. In 2013, the profit before income tax of the company, whose revenues are generated mostly from dividend, reached PLN 40.5 million compared to PLN 26.5 million in Garbary Sp. z o.o. The company is a part of the Bank s portfolio since May Garbary s only asset is a piece of land with buildings at 101/111 Garbary St., Poznań, including a meat plant facility (currently not in use) subject to protection as a historical monument

116 mbank on the Non-Treasury Debt Markets as of PLN M Market mbank 37,787 22,977 19,151 7,287 5,165 2,899 Short-term debt Corporate debt Mid-term bank debt 15.1% 13.7% 31.7% Modification of the sales structure by appointing new special job positions for commodity products separate from the existing position of financial market specialist; appointment of the job positions and the team mentioned above allows the other financial market specialists to focus better on flow transactions and, consequently, to further grow the sales of hedging transactions to clients. Appointment of a special team of experts in structured finance projects of mbank and Group subsidiaries (mleasing, mbank Hipoteczny). The team offers financial market transactions which hedge the risks of existing projects. Continued improvement of processes facilitating financial market transactions and implementation of further modifications which support activation of products, contacts with the Bank and confirmation of transactions; development of the telecommunication infrastructure. Implementation of a new mobile banking application with FX functionalities. The application is supported by all leading platforms of mobile telecommunication devices. The module allows clients among others to exchange currencies, check FX rates in real time and place bids. Amendment of the strategy of selling investment banking products to clients in the financial sector, including creation of the Institutional Clients Department which provides a comprehensive offer of products and services to clients in the sector. The new organisation of the sales line provides the Bank s clients with comprehensive service from a single unit of the Bank which ensures relationship management and access to a full product range Financial Institutions 84.9% market position - 3 In 2013, mbank offered investors for the first time its bonds denominated in CHF under the Euro Medium Term Note Programme (EMTN). The bonds maturing on October 8, 2018 were issued and priced on September 25, 2013 and the issue was worth CHF 200 million. The yield on the bonds was 2.52%. The transaction is a key element of the One Bank Strategy, which aims at diversifying the financing base and ensure stable refinancing of the CHF mortgage loans portfolio on attractive terms. Furthermore, mbank once again was ranked first in the NBP Dealer Activity Index ranking and held the status of Treasury Securities Dealer. mbank s market shares in selected fixed income market segments are presented below. Treasury bills & Bonds 10.9% 86.3% IRS/FRA market position % 68.3% market position - 1 FX Spot & Forward 10.7% Relations with financial institutions are managed by the Trading and Investment Activity business line. The activities include funding from other banks and placements with other banks. As of December 31, 2013, the Bank had 23 active loans amounting to the equivalent of PLN 24,971 million, of which PLN 16,703 million were drawn. In 2013, 1 loan in CHF, 1 loan in USD and 5 loans in EUR, amounting to PLN 3,595 million in total, were repaid at maturity. Additionally, the Bank contracted 3 new loans in EUR, amounting to PLN 912 million in total. mbank s total exposure under loans from other banks was by PLN 3,131 million lower than at the end of At 2012 exchange rates, the decrease would amount to PLN 2.4 million. The Bank s exposure under loans granted to other banks reached the equivalent of PLN million as of December 31, The Bank s portfolio included 30 active short-term and long-term loans granted to other banks. Finally, mbank maintained its leading position in export financing (mid-term loans insured with the Export Credit Insurance Corporation - KUKE) and continued to foster trade finance relations with correspondent banks mbank s custody services mbank s custody clients comprise local and foreign financial institutions, banks which offer custodian and investment services, pension funds and investment funds, insurance companies, asset management institutions, and non-financial institutions. 89.1% 74.8% mbank Enhancement of sales of investment banking products Market 89.3% In 2013, the work initiated in 2012 on the investment banking product sales model was continued in order to further increase the volume of sales of financial market products. The key initiatives aimed at increasing the transaction volumes and revenue generated from co-operation with clients included: mbank provides services including settlement of transactions in securities registered in local and foreign markets, safe-keeping of clients assets, maintenance of securities accounts and registers of securities in non-public trading, maintenance of asset registers of pension funds and investment funds, monitoring of the valuation of their assets and the processing of corporate actions was another successful year for mbank in the area of custody services. The total value of clients assets in safe-keeping increased by c. 15% year on year while the number of cleared transactions increased by 21% in The total net asset value of the serviced investment and pension funds increased by c. 18% year on year

117 Business 9.4. Trading and Investment Activity subsidiaries Comprehensive brokerage and capital market services for individuals and institutions as well as issues The largest number of brokerage accounts on the Polish market, handling nearly 300 thou. customers Equities market share 4.1% and 9 th position on the market Futures market share 17.5% and 2 nd position on the market Options market share 20.3% and 1 st position on the market Dom Maklerski mbanku (mdm) is a brokerage house providing services to major Polish institutional investors (pension funds, investment funds and asset management) as well as selected international funds and retail clients active on the WSE and foreign markets. At the end of 2013, the number of clients of mdm stood at thousand and increased by 1.6 thousand year on year. In 2013, Dom Maklerski mbanku (acting as the offering side) arranged IPOs of four companies: Tarczyński S.A. (PLN 45 million), Capital Park, S.A. (PLN 136 million), Elemental S.A. (PLN 61.2 million) and VISTAL Gdynia (PLN 50.1 million). In addition, mdm participated in consortias in the IPOs of privatized companies PHN and ENERGA. Private Banking In 2013, the company generated a profit before income tax of PLN 25.0 million, which represents an increase of 22.5% compared to 2012 (PLN 20.4 million in 2012). The improvement was mainly driven by the increase of commission income on higher capital markets activity and increased trading volumes. BRE Finance France S.A. BRE Finance France (BFF) is a special purpose vehicle set up to acquiring funds on the international markets through the issue of eurobonds. In 2012, The Euro Medium Term Note Programme was renewed. In 2013, the company issued 2 tranches of eurobonds: CHF 200 million and CZK 500 million bonds maturing in In 2013, BFF registered a profit before income tax of PLN 119 thousand compared to a loss of PLN 8 thousand in mbank s Retail Banking segment 2013 brought about two significant developments impacting retail customers of the Bank. The first among them was the launch of the new online transactional system (for more information regarding the New mbank project please refer to section 2.3. Key projects of mbank Group in 2013) introducing a number of new functionalities and a new, highly visual and ergonomic user interface. The launch of New mbank in June 2013 coincided with the refreshing of mbank logo and was followed by the full rebranding of the existing Group brands under the mbank brand in November 2013 (for more information regarding the rebranding process please refer to section 2.3. Key projects of mbank Group in 2013). From the perspective of the Retail Banking segment a uniform brand together with a unified product offering of mbank and former MultiBank bring a greater cross-selling potential, new opportunity for optimisation of the sales process, and a more effective utilisation of the electronic infrastructure and the branch network

118 10.1. Retail Banking in Poland The graph below presents the structure of the Bank s loan portfolio Retail customers The Bank has remained among the market leaders in acquiring new retail customers for several years. At the end of 2013, the number of retail banking clients in Poland increased by 167 thousand, i.e., 4.7% year on year, and stood at 3.7 million. Customers served in Poland include individuals as well as microenterprises. There were 486 thousand microenterprises at the end of December 2013, including 23.3 thousand acquired in Customers thousand 3,528 3, ,524 3,691 Retail loan portfolio structure credit cards and credit line charge cards facilities and 3.2% overdrafts 8.5% cash loans 5.7% other loans 1.8% The graph presents the change in the number of retail clients in Product offering Retail Banking Private Banking mortgage loans 80.8% Loans In 2013, changes in the Bank s credit policy were mainly designed to adjust the regulations with the provisions of Recommendation T. Banks were granted more independence in the individual setting of acceptable risk parameters depending on the specificity of their business and risk appetite, while preserving the existing necessary conservative approach to these parameters. Loans PLN M 35, , , ,761.4 The value of the Bank s retail mortgage loans in Poland decreased by PLN million or 1.5% year on year. The main parameters of the retail mortgage loan portfolio excluding Private Banking were as follows: Retail mortgage loans (excl. Private Banking) Balance sheet value (PLN billion) The value of gross loans granted to Retail Banking clients stood at PLN 36,009.6 million at the end of December 2013, compared to PLN 35,874.9 million a year earlier which represents an increase of PLN million or 0.4% year on year. 29, , Mortgage loans Non-mortgage loans Average maturity (years) Average value (PLN thousand) Average LTV (%) 79.4% 78.4% NPL (%) 1.8% 2.2%* * In Q the Group modified its impairment credit risk parameters as part of its AIRB measurement methodology. The modified approach introduces a client view of recognizing default cases in lieu of a previously applied product view (resulting in more conservative client-oriented approach and therefore an increase of NPL ratio). For the sake of comparability, the NPL ratio is presented under the product view methodology; the NPL ratio under the newly implemented client view methodology stood at 4.4% at the end of The increase of the NPL ratio of mortgage loans in 2013 was driven by a further decrease of the mortgage loan portfolio and its natural ageing. The non-mortgage loan portfolio increased by PLN million or 9.6% at the end of The fastest-growing loans included cash loans and credit lines owing to rising utilisation of global limits granted to existing clients. Deposits and investment funds At the end of December 2013, retail deposits stood at PLN 29,047.7 million compared to PLN 29,473.7 million a year earlier, which represents a decrease of PLN million or 1.4% year on year. The improvement on the financial markets encouraged mbank clients to reallocate their funds towards higher yielding investments such as stock and bond funds. mbank s offer includes an open platform of investment funds the Investment Funds Supermarket, which allows clients to buy shares in Polish and foreign investment funds. At the end of 2013, assets placed with investment funds through the intermediation of mbank stood at PLN 4,482.8 million, representing an increase of PLN 1,828.3 million or 68.9% year on year

119 Deposits PLN M Mutual Funds PLN M 29, , , , Cards The number of debit cards issued in the Retail Banking Area in Poland reached 5,683.6 thousand, which represents an increase of thousand cards or 18.8% year on year. The number of issued credit cards stood at thousand at the end of 2013, representing an increase of 55.9 thousand or 7.9% year on year. In 2013, the Bank s activities aimed at the development of the card business focused on maintaining a high growth rate of newly issued cards, supported by demand from existing and new customers and increasing the number of transactions with mbank credit cards in the total number of transactions on the market. Brokerage and insurance services The number of Bank clients using brokerage services was stable in Clients held investment accounts with mbank s ebroker service, 6.1 thousand more than at the end of Clients of former MultiBank held 32.9 thousand accounts with the Brokerage Service, i.e., 0.7 thousand more than in In 2013, Dom Maklerski mbanku (mdm) launched an advanced application for clients and employees compatible with the Universal Trading Platform (UTP) implemented by the Warsaw Stock Exchange. UTP is the trading platform used by NYSE Euronext exchanges and many other markets. A mobile transactional system for ios (iphone) was also added to mdm s brokerage offer. 4.4 million retail customers In 2013, income from premiums written on stand-alone insurance products (insurance not bundled with credit products) increased, predominantly driven by accident insurance, Assistance 24h insurance and the Safe Card package. In H2 2013, following an information and sales campaign of motor hull and liability insurance under the motto New mbank = New Insurance Prices, the Bank sold more than 7 thousand new insurance policies. Retail Banking offer development The implementation of the new transactional system and the Group s rebranding afforded an opportunity to introduce new or largely modified credit, deposit and investment products including: The sale of insurance (motor, travel, property insurance) products to mbank s customers is performed by former MultiBank s Insurance Centre and mbank s Insurance module operated by the company BRE Ubezpieczenia TUiR. In addition to standard insurance products, it also offers bancassurance products (insurance of mortgage loans, cash loans, car loans, insurance packages attached to credit cards and current accounts), which are very popular with customers. 72

120 For individual customers: Launch of a fully remote credit process for new customers in non-mortgage lending. Implementation of an application supporting the transmission of the client s transaction history details from the primary bank (which maintains the client s primary bank account) to mbank for the client s credit rating. Launch of the process of on-line opening of PLN and currency saving accounts and term deposits with accounts for new customers. Introduction of Revolving Loan Insurance for natural persons; the insurance covers death and complete or partial inability to work following an accident. Subscription of investment certificates of closed-end investment funds (Legg Mason Concentrated Equity and PKO Global Strategy). Implementation of mobile NFC (Near Field Communication) cards in partnership with two mobile network operators (T-Mobile and Orange). The technology allows mbank clients to pay in shops using their mobile phones. New deposits: Variety Basket investment deposit based on prices of commodities such as cocoa, coffee and sugar Born Winners structured deposit based on valuations of 5 listed companies Lions of the Trading Floor II structured deposit based on WIG20 index Autumn Treasures deposit for new funds. Introduction of insurance of electronic devices and household equipment. Implementation of the 2-in-1 card which combines a credit card with a cash loan and the Your Liability and Your Travel Insurance on credit cards for retail customers. Furthermore, clients who hold mbank payment cards can benefit from a new discount program called mokazje. It is the first European implementation of merchant funded rewards program. mbank uses its real-time CRM engine to identify patterns in customers transactions and to match those patterns to relevant merchant offers. Customers have access to the mokazje program within their transaction history or though dedicated tab in the internet banking. mokazje are also available using dedicated Facebook application and New mbank mobile applications. For micro-, small and medium enterprises: Launch of de minimis loan guarantees under an agreement with Bank Gospodarstwa Krajowego. The Agreement supports broader accessibility of loans for SMEs. In 2013, nearly 500 clients used the products and the loans with de minimis guarantees for microenterprises stood at PLN 38.1 million. European Investment Bank (EIB) loans for natural persons who carry out an economic activity, selfemployed professionals, civil partnerships and joint stock companies which employ less than 250 staff. Implementation of the process of on-line opening of business accounts for existing and new clients. Implementation of the process of opening of accounts for limited liability companies, associations, foundations and co-operatives. Introduction of the mbusiness account with a POS terminal (featuring a free-of-charge cash services at mbank branches and free-of-charge transfers from the corporate account). Modification of the risk scoring process whereby credit decisions are made based on scans of documents sent by an adviser to an analyst. For Private Banking and Wealth Management clients Launch of the FIZelina application which supports non-public issues of closed-ended fund certificates. The main idea behind the application was to ensure uniformity of offering documentation and facilitate the subscription process. Another important goal of the implementation was to enhance the processing of non-public issues. Introduction of a new Aggressive SME Strategy developed for investors interested in above-average profits who accept high risk (strategies managed by mwealth Management ranked at the top of the Asset Manager ranking published by the Gazeta Giełdy Parkiet daily) Mortgage customer profile mbank attaches special importance to maintaining the highest quality of its loan portfolio, including mortgage-secured exposures which represent a significant proportion of the Bank s retail loans. In this context, the mortgage customer profile is a particularly important source of information and it is regularly reviewed by the Bank. This allows mbank to better understand the risk inherent in lending, to assess the customers satisfaction with the Bank, and to build a tailored lending offer. Regular surveys conducted by mbank on a large sample of borrowers are an important source of information on the Bank s mortgage customers. The surveys include a 2013 CATI survey (i.e. Computer Assisted Telephone Interview) conducted on a sample of more than 3.2 thousand mortgage customers of the Bank. The survey methodology was based on a randomly selected sample of original holders of mortgage loans including weights adjusted to the market benchmark profile in terms of the customers gender and the currency of the loan. The market data were sourced from the 2012 Retail Banking Audit (ABD) performed by TNS Polska. The review indicates a positive positioning of mbank in the context of the present and prospective quality of the housing loan portfolio. The favourable demographics and social characteristics of the Bank s customers is reflected in the highly regular payment of loan instalments, as well as a strong potential for further cross-selling of other banking products. Selected results of the survey are presented in the charts below. Customer age 83% Clients < 45 below 34 37% 35% 46% 17% mbank and more 35% 30% Market* 70% Clients < 45 Customer domicile by number of inhabitants *Source: ABD Survey 83% of mbank s mortgage customers are less than 45 years old, as compared to a market benchmark of 70%. Furthermore, the proportion of the Bank s customers who live in larger cities is much higher than the benchmark. As the number of job openings and the amount of salaries increase with the size of the urban center, the current age and domicile structure of mbank s mortgage customers is conducive to a timely loan repayment. Furthermore, mbank s mortgage loan portfolio is concentrated in areas of low unemployment owing to the Bank s strategy of locating retail branches in Poland s most attractive regions. No less than 59% of the Bank s mortgage customers live in Poland s biggest and dynamically growing cities: Warsaw, Kraków, Poznań, Łódź, Wrocław, and the Tricity. 59% 18% 23% mbank Over 100 thou thou. Below 20 thou. 33% 34% 33% Market* 73 74

121 Participation in providing for client's household Monthly client's individual net income As of June 30, 2013, the mbank network, managed through Aspiro, covered 92 locations (24 Financial Centres, 62 mkiosks and 6 partner mkiosks) and 21 Agent Service Points across Poland. 9% 18% 17% 1% Equal Mainly client or client's partner Only client or client's partner Single-person household No answer 55% * Source: ABD survey * Source: 2011 Social Diagnosis Nearly 80% of mbank s mortgage customers declare an income above PLN 3 thousand, compared to a benchmark of only 26%. In addition, mbank s customers are statistically more affluent as measured by disposable income per household member compared to the benchmark. Importantly, loan repayment is a liability of two members of a household in case of as many as 73% of all loans granted by the Bank. This ensures better safety of debt payment in the event of any problems on the labour market. Education 0% 3% 23% 77% Primary Secondary and Vocational Higher 43% 55% mbank Market* mbank Market* 19% 43% 74% 38% 17% Below PLN 3000 PLN Over PLN 6001 Monthly income per person in the client's household 17% 28% 55% 29% 27% Below PLN 1500 PLN PLN Over PLN 4000 Occupation 27% 24% 3% 2% 33% 6% 5% 9% 26% 10% 8% Managers and businessmen Economists Engineers Lawyers Doctors and Pharmacists Other Specialists Others Moreover, mbank branch network operates through 133 outlets of former MultiBank (71 Financial Service Centres and 62 Partner Outlets) and the number remained unchanged compared to the end of The former MultiBank network is focused predominantly on larger urban areas reflecting the affluent target client group it services. According to the One Bank Strategy, until 2018 all retail and corporate branches will be unified and ready to serve all customers with its wide offer. The following map presents mbank and MultiBank branch network in Poland (the colour intensity reflects the number of outlets in particular region). 133 d 92 5 Zachodnio- Pomorskie 4 2 Lubuskie Dolnośląskie Pomorskie Wielkopolskie Kujawsko- Pomorskie Opolskie Łódzkie Śląskie Warmińsko-Mazurskie Podlaskie 12 Mazowieckie Świętokrzyskie Małopolskie Lubelskie Podkarpackie % 89% 1% mbank Market* * Source: ABD survey Fixed-term contract Indefinite contract Retail Banking in the Czech Republic and Slovakia Economy and banking sector in the Czech Republic The vast majority of mbank s mortgage customers have a better educational and professional profile than the benchmark: nearly 90% are employed under contracts of indeterminate duration, while their professions are sought after and well-paid. Similarly to previous years, mbank plans to continue and expand the reviews of its customer base in 2014 to support both the on-going monitoring of the loan portfolio characteristics as well as to enhance the supporting information accompanying the future issues of covered bonds backed by retail mortgage loans Branch network The size and scope of the Bank s retail branch network reflects its focus on areas with high growth potential as well as the bank s focus on other distribution channels (including internet, mobile and telephone banking) which continue to attract a rapidly growing number of client interactions effectively supporting the traditional branch based service offering. GDP, inflation, interest and FX rates For the entire 2013, the Czech National Bank (CNB) forecasts a GDP decrease of 1.3%, after the economy contraction in 2012, when the GDP also decreased by 1.2% compared to The gross domestic product was declining in all quarters of 2012, as the economic recession was gradually deepening during the year. The main causes of the unfavourable development were: decreasing domestic demand of households for goods and services for final consumption as well as demand of investors for fixed capital. Despite the increasing active balance, the external trade was not able to compensate the domestic demand development any more. The year on year growth of consumer prices slowed down to 1.4% in December 2013, compared with 2.4% at the end of The same value of 1.4% reached also the average inflation rate for 2013, dropping by 1.9 percentage point from the preceding year level of 3.3%, and was the lowest since Throughout 2013 the interest rates remained unchanged and the repo rate was maintained at 0.05%. In November 2013, the CNB started forex interventions with the aim to weaken the currency and further 75 76

122 relax monetary conditions. According to the declaration of the central bank s governor, CNB will keep the exchange rate close to CZK 27 to the euro till at least the beginning of The seasonally adjusted unemployment rate reached 6.8 % in December 2013 and decreased by 0.4 percentage point year on year. According to the forecast of the Czech National Bank on the economic situation in the Czech Republic for 2014, average annual inflation adjusted for the effects of changes in indirect taxes in 2014 will reach 1.0% (0.2% for Q1, with an expected increase to 1.9 % at the end of the year). GDP growth in 2014 is expected to accelerate to the level of 2.2%, which means that the Czech economy is going to expand more dynamically in comparison to What is more, further relaxation of monetary policy in the Czech Republic will result in lowering interest rates to 0.4% in An increase in the level of interest rates is expected in The Czech Republic: Household Loans and Deposits 14% 12% 10% 8% 6% 4% 2% Banking sector 0% The total assets of the Czech banking sector stood at CZK 5.2 billion at the end of December. In the last months of 2013, all loan segments experienced improvements or stabilisation: mortgages remain the major driver both in terms of volumes and growth momentum, while corporate lending recovered to 4% year on year following zero growth in Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Household deposits (YoY %) Household loans (YoY %) Mortgage loans (YoY %) Dec-13 The Czech Republic: Corporate Loans and Deposits 20% 15% 10% 5% 0% -5% -10% Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Corporate loan demand in the Czech Republic has already recovered to some extent. Long-term loans have the largest share in the overall stock of corporate loans and their volume had been rising since autumn The share of non-performing loans in the total volume of loans to non-financial corporations has been declining since 2011, amounting to 7.1% in December After only moderate growth of corporate deposits in H1 2013, the volume started to show cyclical improvement following better business perspectives. Dec-11 Corporate deposits (YoY %) Corporate loans (YoY %) Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 The volume of loans to households grew at low, but stable pace throughout As regards the breakdown of loans to this sector by purpose, loans for house purchase were the largest item, accounting for 72% of the total volume of loans to households. Banks in the Czech Republic granted 92.6 thou. mortgage loans worth a record CZK billion to citizens in 2013, the volume of the newly granted loans being almost 23% higher compared with Unlike the previous years, the overall production was influenced by the trend of refinancing, which accounted for about one-third of the total production. In 2012, banks provided 73.6 thou. mortgage loans worth CZK billion in total to citizens, which was an annual increase of 2.1% in the volume of the newly granted loans. The share of non-performing loans in the total volume of loans to households was 5.0% in December Household deposits have still grown, however the growth pace has been showing consistent declining trend over the recent years Economy and banking sector in Slovakia GDP, inflation and interest rates A year on year economic growth continued in the Slovak Republic in Q Compared with the analogical period of 2012, the GDP growth rate increased at constant prices by 1 percentage point to 0.9%. Economic development was affected by a growth of non-domestic demand and a fall of domestic demand. Export of goods and services increased by 1.9% whilst there was a decline of imports of goods and services by 0.4%. Domestic demand fell by 1.2% as a result of a reduction in production of gross capital by 6.4% whereas production of gross fixed capital decreased by 9.8%. In Q1-Q3 2013, the GDP moderated by 1.6 percentage point to 0.7% year on year. In 2012, a year on year growth rate of GDP reached 2.0% at constant prices and was higher by 1.2 percentage point compared with In December 2013, annual inflation reached a value of 0.4% in total, and core inflation stood at 0.4% as well. Average annual inflation rate measured by harmonized index of consumer prices amounted to 1.5% for In Slovakia, as a member of euro zone, the key interest rate, set by the European Central Bank (ECB), decreased by 0.25 percentage point to 0.25% on November 7, Unemployment in Slovakia remained at 13.5% in December 2013, the same figure as in November when it was record-low in over one year. According to the National Bank of Slovakia s forecasts, the country s economy output is expected to increase by 2.3% of GDP in 2014 and 3.3% in The foreseen upgrade in development trajectory is due to faster growth of the domestic economy in 2014 and the expected improvement in export performance in More favourable expansion in investments and higher growth of consumption by the public administration should translate into inflation deceleration to 0.6%, whereas consumer demand should accelerate to 1.9%. The significant decrease of inflation is expected to result in a real salaries increase and 77 78

123 Personal Banking household consumption rebound. The situation on the job market remains stable, indicating a gradual growth of employment in H Banking sector The total volume of bank loans in the country grew by 3.9% to EUR 37.0 billion, thanks to the growing debt of the population. Client deposits at banks increased by 4.3% to EUR 44.6 billion in Slovakia: Corporate Loans and Deposits 20% 15% 10% 5% 0% -5% -10% Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Corporate deposits (YoY %) Corporate loans (YoY %) Jun-13 Aug-13 Oct-13 Dec-13 Premium Banking Lending to enterprises continued to decline year on year, but the decrease in corporate loans was not homogeneous with regard to the structure of the economy, whereas the segment of small and mediumsized enterprises recorded even a moderate increase in loans. December 2013 was the first month since the end of H when corporate loans recorded a marginal increase. As demand for loans being weak, credit standards maintained a moderately tightening trend that was reflected mainly in the interest margins on smaller loans. The margins on mid-sized and large loans remained on a stable trajectory. The share of non-performing loans in the total volume of loans to non-financial corporations amounted to 7.5% at the end of 2013, compared to 7.4% at the end of The corporate deposit base showed significant increase in Q4 2013, after the previous contraction. Slovakia: Household Loans and Deposits 18% 15% 12% 9% 6% 3% 0% -3% Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Household deposits (YoY %) Household loans (YoY %) Mortgage loans (YoY %) 79

124 Retail lending in Slovakia continued to grow rapidly in recent years, mainly due to housing loan acceleration, with the year on year pace close to 10% in Compared with other EU countries, the ratio of household debt to disposable income has been very low in Slovakia, however, at the same time, it has been rising at the fastest pace in Europe. The current low interest rates have supported a demand for loans for housing purposes but this development have not exerted pressure on real estate prices. House prices in Slovakia fell again in Q and reached the lowest level in over 6 years. The prices were thus the lowest since the spring of 2007 and dropped by 2.6% year on year. No significant changes are expected on the Slovak real estate market in the near future. One reason for this is the fact that a significant part of new loans is not used for gaining new housing but for refinancing of older, less advantageous loans. The average LTV (i.e. Loan to Value ratio) ratio for new loans continued to hover around 70% in Retail deposits grew at a slower and declining pace during 2013 (+2.1% in comparison to +3.4% growth in 2012), due to the shift of funds from time deposits to sight deposits, daily time deposits and deposits redeemable at notice. There was also some movement of funds out of bank accounts into investment funds Summary of Foreign operations of mbank mbank in the Czech Republic and Slovakia provides its retail banking services to individual clients. The Bank offers products such as current accounts, savings accounts, payment and credit cards, overdrafts or housing loans. In addition, clients of mbank in the Czech Republic are provided with financial advisory services. mbank in the Czech Republic mbank in Slovakia 2013 in figures Profit before income tax totalled PLN 14.4 million, up by 16.9% year on year. The Bank generated total income in amount of PLN 88.1 million compared to PLN 72.5 million in 2012 (+21.5%). The key driver of improved performance was the higher net interest income (+16.1% year on year) and net fee and commission income (+36.9% year on year). Mortgage loans of mbank clients stood at 1.3% of the mortgage loans market. Deposits of mbank clients stood at 1.1% of the retail deposits market Retail customers Mortgage loans of mbank clients stood at 0.6% of the mortgage loans market. Deposits of mbank clients stood at 1.6% of the retail deposits market. mbank in the Czech Republic and Slovakia had thousand clients at the end of December 2013 (486.4 thousand at mbank CZ and thousand at mbank SK). In 2013 the Bank acquired 67 thousand new clients. The graph presents the change in the number of retail clients in Customers thousand Retail Banking offer development Loans and deposits At the end of December 2013, the value of loans granted by mbank in the Czech Republic and Slovakia stood at PLN 2,129.1 million (mbank CZ - PLN 1,712.0 million, mbank SK - PLN million), which represents an increase by PLN million or 20.3% year on year. At the end of December 2013, the value of deposits collected by mbank in the Czech Republic and Slovakia totalled PLN 4,850.2 million (mbank CZ - PLN 3,076.8 million, mbank SK - PLN 1,773.4 million), which represents an increase by PLN 465 million or 10.6% year on year. At the end of 2012 and 2013, the structure of the Bank s retail loans and deposits was as follows: Loans PLN M Cards 1, At the end of December 2013, the total number of debit and credit cards issued in the Czech Republic and Slovakia reached 1,026.7 thousand and 37.5 thousand respectively. Development of the product offer Launch of a remote credit process for non-mortgage loans in the Czech Republic and Slovakia. Implementing an on-line process of opening accounts in the Czech Republic. Extending the availability of the call center (up to seven days per week). Expanding the list of external partners offering mbank loans in the Czech Republic and Slovakia Branch network 1, Czech Republic Slovakia Deposits PLN M 2, , , Czech Republic Slovakia 1,773.4 The number of foreign mbank outlets remained unchanged compared to the end of In the Czech Republic, the network consists of 26 outlets (9 Financial Centres and 17 mkiosks), and 9 in Slovakia (4 Financial Centres and 5 mkiosks) Czech Republic Slovakia 81 82

125 The following map presents mbank branch network in the Czech Republic and Slovakia (the colour intensity reflects the number of outlets in particular regions): Retail Banking subsidiaries The Czech Republic: The offer comprises loans, deposits, insurance products, investments and savings for both individual customers and companies Cheb Karlovy Vary Plzen 1 1 Klatovy 1 Most Kladno 1 Ceské Budejovice Liberec Decin 1 1 Usti nad Labem Jablonec Broumov 1 Mlada Boleslav Prague 5 3 Hradec Kralove 1 1 Pardubise Kolín Jihlava Prostejov Tabor Brno Trebic Znojmo 1 Krnov Opava Ostrava 2 1 Olomouc Frydek Mistek Prerov 1 1 Zlin An open platform for financial services sale on the intermediaries market Over 600 experienced advisors At the end of 2013, Aspiro offered products of 23 different financial institutions, including mbank. Currently the offering covers 45 products, including mortgage loans, cash loans, insurance products, investment products, leasing and factoring. The sales of cash loans through the Aspiro network increased by 27.9% in Despite the crisis observed in the car market, Aspiro reported a 5.3% sales growth in the reported period. Amid worsening market environment and modification of mbank s policy on mortgage products, the sales fell by 29.1% year on year. The company closed 2013 with a profit before income tax of PLN 0.3 million compared to the loss before tax of PLN 1.6 million a year earlier. The improvement of Aspiro s financial performance resulted from, among others, the benefits arising from the reorganization of the company s sales network. 9 The largest mortgage bank in Poland 17 The offer includes financing of commercial projects, the public sector and individual clients, market analysis and advisory services for investors and operators of commercial real estate industry Slovakia: The largest issuer of covered bonds in Poland 70% market share; PLN 2.5 billion securities traded Trnava 2 2 Bratislava 1 Zilina Martin Trencin Partizanske 1 Nitra Novy Zamky 1 Ruzomberek Banska Bystrica Zvolen Lucenec Poprad Roznava 4 5 Presov Kosice Bardejov 1 Humenne 1 Michalovce Cierna mbank Hipoteczny (mbh) specialises in offering mortgage loans to commercial and residential developers as well as local governments. The company is Poland s largest issuer of mortgage and public covered bonds to finance its lending operations. mbank s gross loan portfolio remained stable year on year and stood at PLN 4.1 billion in 2013 (a decrease of 0.8% year on year). The nominal value of covered bonds issued by mbh stood at PLN 2.3 billion at the end of Q4 2013, including PLN 80 million and EUR 80 million issued in Starting from 2012, mbank Hipoteczny has been active on the primary market s EUR debt segment, which is reflected in the currency structure of its issues. The total value of EUR-denominated issues was for the first time higher than the value of PLN issues in 2013 and for the first time one of mbh s the first mortgage bond issues was acquired exclusively by foreign institutional investors. Due to its position and experience, mbh was actively involved in the legal and regulatory work on issuance of covered bonds. The efforts resulted in a draft amendment of the Covered Bonds Act and amendments to other Acts which refer to the Covered Bonds Act. The goal of the efforts which set the direction of legislative work is to better use the opportunities opened by covered bonds as a source of financing the Bank s lending and to implement the provisions of CRD IV/CRR. According to the Group s Strategy, covered bonds should become a long-term source of refinancing and the 2014 target is to issue PLN 1 billion of covered bonds

126 In this respect, the co-operation between mbh and mbank particularly relevant. According to the plan, mbank Hipoteczny s retail mortgage portfolio will be financed with new covered bond issues. The first covered bonds secured with receivables under new loans granted to retail clients will be issued at the turn of Q1 to Q In 2013, mbh reported a profit before income tax of PLN 7.2 million (-50.2% year on year), predominantly driven by higher loan loss provisions, which increased by PLN 5.8 million. 11. Other activities of mbank Group Back-office processes for mbank Group Settlements servicing and database administration Private Banking & Wealth Management services Comprehensive asset management by the company s experts and specialists from cooperating companies mbank Private Banking recognized the best in Poland by the Euromoney Magazine for the 6 th time In 2013, the company continued the development of its comprehensive wealth management services, including investment advisory and asset management. At the end of 2013, assets under management held by the company were growing dynamically and were worth PLN 4.8 billion, representing an increase of 31.3% compared to the end of In the asset management area, the company reported high rates of return on the strategies managed by mwealth Management. The company continued the expansion of its investment advisory model. Compared to the end of 2012, assets subject to investment advisory increased by 60.3% and reached PLN million. In 2013, the company s operating revenues stood at PLN 34.0 million and increased by 64.3% year on year. The profit before income tax reached PLN 16.7 million compared to PLN 10.0 million in Documentation storage in electronic and paper form, confidential data protection In 2013 the key project of the company aimed at adjusting its service model to operate predominantly using electronic documents. The company actively supported the implementation of One Bank Strategy of the Group, especially in the area of Simple Processes in Banking, IT and Operations areas improvement and the building One Branch Network. In 2013, mcentrum Operacji (mco) started to cooperate with mbank Hipoteczny in handling housing loans to retail clients. In 2013, mco generated a profit before income tax of PLN 0.5 million, compared to PLN 11.3 million in In the previous year, the company's result was impacted by the recognition of the profit on the sale of CERI International. A leading real estate developer Activities in Kraków, Łódź, Wrocław, Warszawa, Poznań and Sopot Completion of 28 residential projects, covering 3,4 thousand flats mbank s in-house built insurance operations Offering bancassurance and stand-alone products Strong degree of integration with mbank In the direct area, premiums written decreased by 10.3 % year on year to PLN million in Gross written premiums in the bancassurance area amounted to PLN million (excluding investment products), which represents an increase of 8.1% compared to The increase was triggered by growth in stand-alone products, cards and accounts (up by 53.4 %, 62.5 % and 10.9% year on year respectively). Gross written premiums from the cooperation with mleasing further decreased by 12.9% to PLN million in 2013, along with the decrease of the value of leased properties and deterioration of penetration ratios. In 2013 the company s product range was extended among others by the Revolving Loan Repayment Insurance for natural persons, and Third Party Liability Insurance and Your Journey insurance services for individual clients. Member of Polish Developers Association (Polski Związek Firm Deweloperskich) mlocum is a property developer, operating on the primary market for residential real estate. The company carries out residential projects in major Polish cities, such as Kraków, Łódź, Warszawa, Wrocław, Poznań and Sopot. In 2013, the company sold 290 apartments, compared to 155 apartments in In 2013, mlocum reported a profit before income tax of PLN 16.2 million, compared to PLN 3.8 million in 2012 driven by increased sales of apartments and an improved pricing environment. BDH Development Sp. z o.o. In November 2013, mbank purchased 100% of shares in BDH Development Sp. z o.o. The company's business consists in carrying out and completing construction projects connected with the real estate taken over by mbank Group subsidiaries in the process of restructuring and investment debt collection with the aim of the most effective value recovery from the estate taken over. BRE Ubezpieczenia Group generated a profit before income tax of PLN 61.6 million, which represents an increase of PLN 3.0 million compared to The improved result was driven by higher volume of investment premiums in the bancassurance area and strict cost policy, especially in the area of marketing campaigns

127 12. Main change directions and types of risk of the mbank Group s activities Main directions of change in the management of risk area The Group manages risks on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines. According to the Group s Strategy One Bank for Clients and Employees for , approved by the Management Board and the Supervisory Board, the Bank has modernised the Risk Area s organisational structure in order to reflect the client-centric approach and integrated responsibility for all kind of risks. The mbank Group risk management concept is based on three lines of defence which represent: Primary responsibility of Business for risk risk management in Business operations. Responsibility of the Risk area understood as defining processes, providing substantive support, making business decisions, as well as measuring, mitigating, monitoring and reporting the Group s risks. This line of defence ensures independent supervision of the underlying responsibility of the Bank for risk. Role of internal audit defined as providing independent assessment of business and risk. The Bank s Risk Area operates within the following organisational structure: Deputy President of the Management Board and CRO Retail Risk Department Developing risk management rules and processes. Accepting products, taking into account impact on different risks and regulatory and economic capital requirements. Defining credit risk strategy, including reporting policies. Defining credit procedures and processes. Methodology of credit decision-making. Credit risk assessment. Credit decisions for retail products. Administering the credit portfolio. Debt enforcement and restructuring and process methodologies. Developing creditworthiness models. Portfolio analysis. Preventing credit fraud and controlling operational risk in the credit process. Corporate Risk Assessment Department Corporate Risk Processes Department Financial Markets Risk Department Integrated Risk and Capital Management Department Developing credit policies for corporate clients, countries, financial institutions. Credit decision-making (or participation) for regular and irregular exposures, taking into account impact on operational, reputation and liquidity risks, capital requirements and return on equity. Analysis, assessment and controlling of credit risk of countries, banks, international financial institutions and non-financial clients of the Bank and the Group subsidiaries. Early Warning (EW) of impaired corporate client creditworthiness including management of the Watch List (WL). Controlling compliance with credit limits of countries, banks, international financial institutions and non-financial clients of the Bank and the Group subsidiaries. Managing the Bank s credit risk provisions. Managing the corporate credit process. Defining and administering credit instructions and procedures. Development of scoring models. Modelling (Retail and Corporate Banking). Sector analysis and recommendations (defining sector risk appetite). Preparing reports and ensuring reporting of credit risk parameters. Managing and developing the credit decision-making system. Supporting Business in the optimisation of the Bank s credit client service processes. Settlement and accounting for non-standard corporate clients. Measuring, controlling and monitoring market risk, interest rate risk of the banking book, liquidity risk and counterparty risk. Methodologies of measuring market risk, interest rate risk of the banking book, liquidity risk and counterparty risk. Methodologies of valuation of financial instruments. Controlling and valuation of transactions and results of front-office units. Substantive administration of front-office systems and the risk measurement system. Controlling the Bank s participation in WIBID/WIBOR fixing. Risk and capital integration under ICAAP (Internal Capital Adequacy Assessment Process). Controlling capital adequacy, planning and limiting risk capital. Integrating risk valuation (economic capital, provisions, stress testing). Integrating non-financial risks including operational risk. Validating quantitative models. Internal control system. SREP Supervisory Review & Evaluation Process

128 Projects and Risk Architecture Management Department Managing the risk project portfolio. Competence centre for process management. Developing and optimising risk process architecture. Managing risk IT applications of Risk area (business maintenance and development). Managing risk data and co-operating with Finance area within the centralised MIS Main risks of the mbank Group s business The Management Board of mbank takes measures necessary to ensure that mbank manages all significant risks arising from the implementation of the adopted business strategy. Within the Group s risk inventory process implemented under the principles of ICAAP, the following risks were inherent to the operations of the Group: Foreign Branches Risk Department (from February 1, 2014) Managing Retail Banking credit risk, credit risk assessment process, participating in client s credit decision making. Credit administering and settlements. Debt enforcement and restructuring, controlling operational risk in the credit process. Insurance risk Strategic risk Risk responsibilities are based on the following pillars of organisational management: Client-Centric Approach understanding the needs of the Risk area clients. One risk integrated approach on risk management. Risk v. return rate supporting Business in the decision-making process and defining the Bank s risk appetite on the basis of long-term relationship between risk and rate of return. Business risk Capital risk Reputation risk Liquidity risk Operational risk A new initiative of the Risk Area was added in 2012 to the One Bank Strategy implemented in : Approach to Risk Management. It includes a range of projects grouped in five themes: Strengthening the business-risk Dialogue. Review of risk appetite definitions. Improvement of the credit process. Improvement of Risk employee competences. Simplification and integration of the risk IT structure. One of the outcomes of risk efforts in the implementation of the One Bank Strategy was the establishment of the Risk Forum in early The Risk Forum includes the following committees which are the decisionmaking and communication platforms based on the concept of strengthening the business-risk dialogue: Retail Banking Risk Committee (KRD). Corporate and Investment Banking Risk Committee (KRK). Financial Markets Risk Committee (KRF). The Bank monitors all the aforementioned risks within ICAAP. Due to the specificity and characteristics of the portfolio, the section presents the rules of monitoring credit risk, operational risk, liquidity risk, market risk of the trading book as well as interest rate risk of the banking book in the mbank Group using risk measures applied by mbank and taking into account differences in the profile and scale of business of particular Group subsidiaries Credit risk Market risk Credit risk Risk described in the latter sections of the chapter The Bank organises credit risk management processes in line with the principles and requirements set out in the resolutions and recommendations of PFSA which address issues related to credit risk management, in particular Recommendation S. Credit risk management tools Credit risk inherent in financing of mbank Group clients is assessed based on shared statistical models (developed for the AIRB approach) and uniform tools, and is based on common definitions of terms and parameters used in the credit risk management and rating process. mbank ensures their cohesion at Group level

129 The Group uses different models for particular client segments. The rules governing the clear assignment of clients to a system are defined in the Group s internal regulations. mbank and the Group subsidiaries in their credit risk management process use the core risk measures defined under the AIRB approach: PD Probability of Default (%) LGD Loss Given Default (%) EAD Exposure at Default (amount) EL Expected Loss (amount) as well as related measures including: RD Risk Density, which is defined as EL to EAD (%) LAD - Loss at Default, where PD=100% (amount). In the decision-making process, for reporting and communication with business units, PD and EL are expressed in the language of rating classes whose definitions (Masterscale) are uniform across the Commerzbank Group. In its credit risk management process, the Bank also attaches great importance to the assessment of unexpected loss risk. Capital required to cover unexpected loss is estimated at a confidence level of 99.91%. For this purpose, the Bank uses the following measures: RWA Risk Weighted Assets used under the AIRB approach to calculate regulatory capital required to cover credit risk (unexpected loss) CVaR Credit Value at Risk, or economic capital required to cover the risk of unexpected credit loss, calculated according to the Bank s internal methodology in the ECVaR model which measures the frequency and severity of particular losses conditioned also by the exposure value. As a result, the share of capital charges of particular clients grows more than proportionally along with the rise in the client's exposure, which results in adequate identification of risk concentration by the model. In managing mortgage-secured credit exposure for different types of real estate and also for different products, the Group uses the LtV ratio - Loan to Value, i.e., the loan amount to the market (or mortgage banking) value of the real estate which secures the loan. Thanks to its simplicity, this measure is broadly used in communication with clients and in the construction of price matrices for credit products. Stress testing is an additional tool of credit risk assessment which supplements VaR measurement of credit risk. Stress testing of the economic capital required to cover credit risk is measured quarterly. Stress tests of credit risk are two-dimensional, analysed separately and jointly: The analysis of sensitivity of ECVaR model indications to assumptions concerning credit exposures (e.g., correlation) i.e., parametric tests. The analysis of extreme credit losses on the assumption of an unfavourable macroeconomic situation i.e., macroeconomic tests in which an econometrical model forecasts values of input parameters for the economic capital model (PD, LGD) based on assumptions of the Chief Economist about macro parameters in the case of the negative economic scenario. The risk parameters developed according to the above scenario form the basis for calculating economic capital both before and after the assumptions of parametric tests are taken into account. In addition to the tools listed above, which are applied both in corporate and in retail credit risk measurement, the Group uses tools specific to these areas. For corporate credit risk, the mbank Group estimates maximum exposure to a client / group of related clients using the following credit risk mitigating measures: MBPZO Maximum Safe Total Exposure, which defines the maximum level of financial debt of an entity from financial institutions calculated under the Bank s methodology, approved by mbank s competent decision-making body. LG General Limit, which defines the level of credit risk financial exposure to a client / group of related clients acceptable to the Group, approved by mbank s competent decision-making body. LG includes a structured limit and products granted outside the structured limit, including exposures of both mbank and the Group s companies. To minimise credit risk, the Group uses a broad range of collateral for credit products, also necessary to actively manage the capital requirement. In their assessment of the quality of risk products, mbank and mleasing use the MRV ratio Most Realistic Value, which reflects the worst-case scenario of debt enforcement through forced sale of collateral. In addition, the decision-making process and the assessment of profitability per client in the CRM system use the RAROC ratio Return on Risk Adjusted Capital, or return on the capital invested in risk products. Retail credit risk measures are constructed to reflect the characteristics of this customer segment and, in the case of portfolio measures, the high granularity of the loan portfolio: DtI Debt-to-Income, i.e., monthly credit payments to the net income of a household, used for individual customers. DPD Days-Past-Due, a family of portfolio risk measures based on the number of days past due date (e.g., share of contracts which are from 31 to 90 days past due date in the total portfolio by number or by value). Vintage ratios, which represent the quality of cohorts of loans disbursed within a certain time bracket (e.g., each quarter) at a different phase of their lifetime, based on DPD. RC LLP Risk Cost LLP, the cost of risk for a loan portfolio (segment), i.e., increment in loan loss provisions to the performing loan portfolio balance. Roll-rates, which measure the migration of contracts between days-past-due brackets (1-30, 31-60, DPD, etc.). Credit risk strategy Corporate Banking The Strategy of the Group s corporate credit risk management is closely correlated with the One Bank Strategy and aims to improve co-operation in credit risk measurement and management as well as to safely define risk appetite. According to ICAAP assumptions, the Strategy is complemented by detailed credit policies and banking procedures both in mbank and the Group subsidiaries which generate credit risk and impact the quality of corporate credit risk management. The implementation of uniform risk measures and risk controlling processes at Group level takes into account the specificities of the Group entities. The Bank makes sure that the process does not affect client relations. The diversified approach to corporate clients is tied to the client s risk level as measured by PD and credit risk concentration measured with LaD or CVaR of a client or group of related clients, taking into account the exposure of the Group subsidiaries. The credit decision-making system is consistent with the Corporate Credit Risk Management Strategy and the approved principles of the Credit Risk Policy. The competent decision-making levels are defined in a decision-making matrix. On that basis, depending on the EL rating and the aggregate exposure of a client or group of related clients, the appropriate decision-making level responsible for the credit decision is assigned. In addition, based on CVaR, decision-making may be elevated up to the Management Board of the Bank

130 The Bank manages credit risk and the integrated operational process within the Group in a comprehensive manner. Risk management is supported by analyses of mbank Group credit portfolio structure and the resulting formal limits, guidelines and recommendations on the Group s exposure to selected companies, sectors and geographic markets. In its current credit risk management and determination of concentration risk, mbank performs quarterly portfolio analyses using a Steering Matrix which incorporates PD rating and LAD v. CVaR. In order to mitigate the risk of lending and guarantees, mbank Group classifies and monitors credit risk products. The Group uses write-offs and provisions under the International Financial Reporting Standards (IFRS). mbank also controls the credit portfolio on quarterly basis including an analysis of the dynamics of change in the size and (sector) segmentation of the credit portfolio, client risk (PD rating), the quality of collateral against credit exposures, the scale of change in EL, Risk Density, and default exposures. In Corporate Banking, the Group avoids concentration in industries and sectors whose credit risk is considered excessively high. The acceptable risk level is defined taking into account market segmentation and sector concentration limits. In compliance with PFSA s Recommendation S, the Bank has identified a mortgage-secured credit exposure portfolio, not only in Retail Banking but also in Corporate Banking. mbank manages the mortgage-secured credit exposure portfolio risk with a focus on defining an optimised portfolio structure in terms of quality (rating), currencies, country regions, tenors, and types of properties. The main principles of mortgage-secured credit exposure risk management in Corporate and Investment Banking, the risk profile, the division of responsibilities, the rules of determining internal limits, and the rules of reporting are set out in the mbank Mortgage-Secured Credit Exposure Risk Management Policy. Credit risk strategy Retail Banking Lending in Retail Banking is a key segment of the mbank Group s business model, both in terms of the share in total assets and the contribution to its profits. mbank s retail credit offer covers a broad range of products financing the needs of individual customers (OF) and small companies (MF). The scope and construction of the offer derive from the One Bank Strategy, whereby credit products in combination with the state-of-the-art transactional platform, savings and insurance products address all financial needs of clients within the Group. Apart from the Polish market, Retail Banking credit products are offered (since 2007) through the foreign branches (OZ) of mbank in the Czech Republic (CZ) and Slovakia (SK) in an online banking model similar to that operating in Poland (under the mbank brand) since The share of the foreign branches exposure portfolio was less than 6% of the aggregate retail portfolio at the end of 2013 (by value). The Bank ensures the coherence of the credit risk management policy on all markets; any differences in specific rules or parameter values derive from the specificities of local markets or different goals of business strategies and are at each time subject to approval by the Retail Banking Risk Committee. As credit exposures are highly granular (more than 1.7 million active loans), the Retail Banking credit risk management process is based on a portfolio approach. This is reflected in the statistical profile of risk rating models including the models which fulfil the regulatory requirements of the Advanced Internal Ratings- Based approach (AIRB). The AIRB parameters (PD, LGD and EL) are used widely in order to estimate credit requirements, to determine acceptance criteria and terms of transactions, and to report risks. Furthermore, Retail Banking credit risk management has the following characteristics: High standardisation and automation of the credit granting process, including decision-making, both in acquisition, post-sale services, and debt collection. Little (as compared to Corporate Banking) discretionary competences in the decision-making process (e.g., no discretionary adjustment of clients ratings). Alignment of decision-making endowment with mass acquisition, including automation of decisionmaking for selected transactions. Extensive risk reporting system based on portfolio analysis of credit exposure quality, including vintage analysis and days-past-due analysis. Under the portfolio approach, exposures are classified (separately for each market) as ML (mortgagesecured products) or NML (unsecured products or products with collateral other than mortgage). Furthermore, the segmentation includes products for individuals (ML OF, NML OF) and products for business clients (ML MF, NML MF). The segmentation serves two main functions: Ensuring correct alignment of risk rating methods (models, procedures, required documentation) with the client s risk profile, exposure and business requirements. Defining homogeneous transaction sub-portfolios to enable adequate quantitative assessment of quality in the context of the generated income margin. The main point of reference in the Retail Banking credit risk management process is risk appetite defined in correlation with the One Bank Strategy which provides for: Optimisation of the balance-sheet structure in terms of profitability and financing by reducing the growth rate of credit portfolios with long tenors (and low margins) while supporting growth of shortterm loans (with high margins). Developing long-term financing of the Group with covered bonds issued against retail mortgage loans. Taking into account the above goals of the Strategy, the Bank continued to focus its NML policies on lending to existing clients with a high creditworthiness (c. 4/5 of NML acquisitions) while systematically growing the acquisition of external clients. To reduce operational risks of accepting new clients, the Bank develops its credit policy using, among others, credit testing and is actively developing its fraud prevention system. For long-term loans (ML segment), the Bank maintains a conservative policy of borrower creditworthiness and credit rating to offset the higher probability of systemic risks materialising within the lifetime of a loan. In view of the current low interest rate environment, in its creditworthiness rating the Bank focuses among others on long-term interest rate estimates. In retail mortgage lending, in order to mitigate the risk of impairment of mortgage collateral in relation to the value of credit exposure, the Bank addresses its credit offer mainly to clients who buy properties, within large urban areas. As of 2014, the Bank will introduce modifications to the rules of mortgage lending (mainly to make them more restrictive) as stipulated in Recommendation S, including gradual reduction of the maximum LtV and the requirement of the compliance of loan currency to currency of the borrower s income. The modifications will facilitate a programme of cooperation between mbank and mbank Hipoteczny which started in Q and aimed at sales of housing loans to the Groups retail clients. According to the plan s assumptions, retail housing loan portfolio of mbank Hipoteczny will be financed by issuing covered bonds backed by residential mortgage loans. In its credit risk management process, the Bank attaches great importance to communication between Risk and Retail Banking. The Retail Banking Credit Policy Committee, established in 2010, is a platform of decision-making and dialogue between the two business lines. As of 2014, the Committee has been transformed into the Retail Banking Risk Committee. Under a new concept it covers both credit risk and all secondary risks (reputation risk, legal risk, operational risk, data quality risk, etc.)

131 Quality of the loan portfolio The share of default exposures in gross loans and advances to clients as of December 31, 2013 was 6.3% compared to 5.2% in Provisions for loans and advances decreased from PLN 2,528.5 million at the end of 2012 to PLN 2,371.4 million at the end of 2013, and the IBNI (Incurred But Not Identified) loss provision increased from PLN million to PLN million over that period. The ratio of provisions to default loans (coverage ratio) stood at 47.8%, compared to 64.1% a year earlier. At the end of November 2013, mbank brought credit risk parameters used for the impairment valuation in the retail banking area into compliance with analogous parameters applied under the AIRB methodology after having eliminated differences between the approach under the IFRS 39 and the principles of Basel II. The main change lied in the identification of default. Under the new estimates, a default is identified based on all available credit data of the client ( client view ), whereas the old approach was entirely product-based ( product view ). The more conservative approach led to: Earlier identification of impaired status and consequently, higher volume of impaired loan portfolio. Higher estimates of recoveries from the portfolio due to a higher rate of return to a normal situation by clients prudentially classified as defaulting on their credit obligations. As a result of the above changes a default on one of exposures by a single client leads to the same treatment of all other credit products of that client. Previously, a default on a specific exposure by a client did not automatically impact the risk treatment of the remaining exposures of that client. Consequently, a larger amount of impaired loans is reported on the Group level, at the same time benefiting from significantly higher profitability of natural recovery. Similarly aggregation of past due amounts from all credit products and recognition of the oldest past due date result in a significant increase of the impaired loans volume. In 2013, the Bank sold retail and corporate impaired loan portfolios (default portfolios). The nominal value of sales transactions amounted to PLN million (including corporate portfolio of PLN million). Sold receivables, in the majority of cases, were highly covered by impairment provisions, and above mentioned transactions have had a significant impact on reducing the defaulted portfolio at the end of 2013 and coverage ratio. The table below presents the quality of the credit portfolio of mbank Group as of December 31, 2013, compared to December 31, Quality of mbank Group's Loan Portfolio PLN M PLN M Loans and advances to customers (gross) 70, ,475.4 Not impaired 66, ,852.1 Impaired 4, ,632.3 Impaired as % of gross exposure 6.3% 5.2% Provisions for loans and advances to customers 2, ,528.5 Provisions for not impaired exposures Provisions for impaired exposures 2, ,329.8 Coverage ratio impaired exposures 47.8% 64.1% Coverage ratio for gross portfolio 3.4% 3.6% Loans and advances to individuals (gross) 38, ,704.1 Not impaired 35, ,397.7 Impaired 2, ,306.4 Impaired as % of gross exposure 6.2% 3.5% Loans and advances to corporate entities (gross) 29, ,405.4 Not impaired 27, ,079.5 Impaired 2, ,325.9 Impaired as % of gross exposure 7.0% 8.2% Loans and advances - other customers (gross) 2, ,365.9 Not impaired 2, ,365.9 Impaired - - Impaired as % of gross exposure 0.0% 0.0% Market risk mbank organises market risk management processes in line with the principles and requirements set out in the resolutions and recommendations of PFSA which address issues related to market risk management, in particular Recommendations A and I. Tools and measures In its business, mbank is exposed to market risk, i.e., the risk of unfavourable changes in the present value of financial instruments in the Bank s portfolios due to changes in market risk factors: interest rates, FX rates, prices of securities, the implied volatility of options, and credit spreads. The Bank identifies market risk related with positions of the trading book measured at fair value (using the direct measurement method or the model measurement method) which may materialise in the form of losses reflected in mbank's financial performance. Moreover, the Bank attributes market risk to the banking book positions, regardless of the methods for calculating earnings generated from those positions used for the purpose of accounting reporting. In particular, in order to measure the interest rate risk of Retail and Corporate Banking products without a fixed interest revaluation date or with rates administered by the Bank, the Bank uses replicating portfolio models. In 2013, the Bank introduced the capital modelling concept, which is reflected in market risk measurement at the level of the Bank s internal organisational structures. Market risk measures of the interest positions of the banking book are calculated with the use of net present value (NPV) models. Market risk exposure is quantified by measurement of Value at Risk (VaR) and by use of stress tests

132 Stress testing reflects the hypothetical change in the present valuation of mbank s portfolios that would occur as a result of stress-test scenarios, i.e., specific stressed values of risk factors in a one-day time horizon. The stress testing methodology was largely modified in February 2013 and August A standard stress test was defined for standard risks: FX rates, interest rates, stock prices and their volatility, as well as a stress test including change of credit spreads. This addressed among others the requirement for stress tests to cover independent impact of underlying risk (spread between T-bond yields and IRS rates) to which the Bank is exposed by holding a portfolio of T-bonds. Market risk, in particular interest rate risk of the banking book, is also quantified by measurement of Earning at Risk (EaR) of the banking book. The EaR methodology was modified in January 2013, which resulted in a significant difference in EaR in 2012 and in In view of low interest rates in some currencies, especially CHF, the modifications imposed rational limitations on interest rates used in EaR calculations, especially for CHF, as reflected in EaR values. In addition, the EaR methodology was expanded to include parameters of flexibility of interest rates for individual product groups depending on market change of interest rates and to differentiate EaR depending on the structure of interest rates for individual products (reflecting the impact of interest rate multipliers applied in the formula). Strategy The main principle of organisation of the market risk management process stipulates separation between the market risk monitoring and control function and the functions related with opening and maintaining open market risk positions. The market risk monitoring and control functions are performed by the Financial Markets Risk Department (DRR) in the Risk Area of the Bank supervised by the Deputy President of the Management Board and Chief Risk Officer, whereas operational management of market risk positions takes place in the Financial Markets Department (DFM), the Brokerage House (BM) and the Treasury Department (DS) supervised by the Member of the Management Board of mbank responsible for the Financial Markets Area. BM is an organisational unit of mbank which was separated from the DFM structure and carries out its operations focusing on financial instruments traded on the WSE. In addition, investment positions sensitive to market risk factors (to prices of shares listed on the Warsaw Stock Exchange) are managed by the Structured and Mezzanine Finance Department (DFS), which is part of the Corporate and Investment Banking area. In order to limit the level of exposure to market risk, the Bank s Management Board (for the Bank portfolio) and the Bank s Financial Markets Risk Committee (for portfolios of business units) set binding VaR limits, stress test limits which are warning thresholds, as well as maturity gap limits which are warning thresholds. Measuring mbank s risk Value at Risk In 2013, the Bank s market risk exposure, measured by Value at Risk (VaR, for one day holding period, at 97.5% confidence level), was moderate in relation to the established limits. The average utilisation of VaR limits for the portfolio of the Financial Markets Department (DFM), whose positions consist primarily of trading book portfolios, amounted to 23% (PLN 1.4 million), for the Brokerage Bureau (BM) 18% (PLN 0.4 million), and for the Treasury Department (DS), whose positions are classified solely in the banking book 39% (PLN 15.8 million) for the positions without capital modelling, and 41% (PLN 13.1 million) for the positions with capital modelling. The average utilisation of the VaR limit for the position of the Structured and Mezzanine Finance Department (DFS) in shares listed in the Warsaw Stock Exchange was 74% (PLN 5.6 million). In 2013, the VaR figures for the Bank s portfolio were driven mainly by portfolios of instruments sensitive to interest rates the banking book T-bonds portfolios managed by DS and the trading book portfolios and interest rate swap positions managed by DFM. The second major factor impacting the Bank s risk profile was the DFS equities portfolio, where the PZU share price is a significant risk due to the maintained large position in the company by the Bank. The DFM portfolios of instruments sensitive to changes in exchange rates, such as FX futures and options, and the exposure of the BM portfolios to equity price risk and the risk of implied variability of options traded on the WSE had a relatively low impact on the Bank s risk profile. The tables below present VaR statistics in 2013 compared to 2012 (the values presented in the table were calculated for the Bank s portfolio excluding the DFS positions). PLN thousand VaR IR VaR FX VaR EQ VaR VaR IR interest rate risk VaR FX - FX risk VaR EQ stock price risk The table below presents analogous VaR statistics for the Bank s portfolio including the DFS positions, and takes into account the PZU shares transferred to DFS in November VaR IR interest rate risk VaR FX - FX risk VaR EQ stock price risk Stress testing In 2013, the average utilisation of the stress test limits in mbank was 59% (PLN million). The average utilisation of the stress test limits in 2013 was 75% (PLN million) for the portfolio held by DS without capital modelling and 86% (PLN 814 million) with capital modelling. The average utilisation of the limit was 26% (PLN million) for the DFM portfolio and 8% (PLN 0.9 million) for the BM portfolio. Interest rate risk of the banking book average maximum minimum average maximum minimum PLN thousand VaR IR 15,155 16,034 22,806 6,774 6,162 11,146 14,368 6, , , ,171 16,142 22,633 7,043 6,171 11,241 14,885 6, average max min 15,155 16,034 22,806 6,774 VaR FX , VaR EQ 7,268 5,659 7,451 4,551 VaR 16,910 17,622 23,556 10,840 In 2013, the interest rate risk of the banking book as measured by EaR, i.e., potential decrease of interest income within 12 months assuming an unfavourable 100 bps change of market interest rates (decrease of interest rates for each currency) and based on a stable value of the portfolio over the period, was moderate for positions in PLN and low for positions in CZK, CHF, USD and EUR due to the small interest rate position gap in these currencies and/or currently low interest rates which prevent a 100 bps decrease. At the end of 2013, EaR was PLN 70.9 million for PLN, PLN 0.5 million for CHF, PLN 4.6 million for CZK, PLN 7.2 million for EUR, and PLN 1.0 million for USD

133 The table below presents the potential decrease in interest income over 12 months assuming an unfavourable 100 bps change of market interest rates in a given currency. PLN million Measuring mbank Group s market risk The main sources of market risk of the mbank Group are mbank s positions. The table below shows VaR statistics (at 97.5% confidence level for a one-day holding period) for the mbank Group in 2013 for individual members of the Group in which market risk positions were identified (i.e., portfolios of mbank, mbank Hipoteczny, mleasing, Dom Maklerski mbanku) and their decomposition to the VaRs corresponding to the main risk factor types interest rate risk (VaR IR), foreign exchange risk (VaR FX), and stock prices / index value risk (VaR EQ). The table below presents VaRs for mbank at the end of 2013 including the positions of DS, DFM, BM and DFS. PLN thousand mbank Group mbank mbh mleasing mdm VaR IR 16,334 16, VaR FX VaR EQ 5,680 5, VaR average 17,776 17, VaR max 23,844 23, VaR min 10,668 10, ,152 16, For comparison, at the end of 2012, VaR for the mbank Group was PLN 9,999 thousand, including VaR of mbank at PLN 9,879 thousand, mbank Hipoteczny PLN 129 thousand, mleasing PLN 253 thousand, mbank Brokerage House PLN 58 thousand Liquidity risk average max min average max min PLN USD EUR CHF CZK mbank organises liquidity risk management processes in line with the principles and requirements defined in PFSA Resolution No. 258/2011 of October 4, 2011, PFSA Resolution No. 386/2008 of December 17, 2008, on establishing liquidity measures binding on banks, and best practice, in particular PFSA recommendations on liquidity risk management (Recommendation P). Tools and measures In its operations, mbank is exposed to liquidity risk, i.e., the risk of being unable to honour its payment obligations, arising from the Bank s balance-sheet and off-balance-sheet positions, on terms advantageous to the Bank and at a reasonable price. In terms of its sources, liquidity risk may result from internal factors (reputation risk resulting for instance in excessive withdrawal of cash by Bank clients, materialisation of credit risk) and external factors (turbulences and crises on the financial markets, country risk, turbulences in the operation of clearing systems). For this purpose, the Bank has defined a set of liquidity risk measures and a system of limits and warning thresholds which protect the Bank s liquidity in the event of unfavourable internal or external conditions. Independent measurement, monitoring and controlling of liquidity risk is performed daily by the Financial Markets Risk Department. The main measures used in liquidity risk management of the Bank include ANL (Available Net Liquidity), the regulatory measures (M1, M2, M3, M4), and LCR and NSFR for analysis only. ANL reflects the projected future cash flow gap of assets, liabilities and off-balance-sheet commitments of the Bank, which represents potential risk of being unable to meet liabilities within a specific time horizon and under a certain scenario. ANL cash flow projections are based on crisis scenarios which include excessive withdrawal of cash by the Bank s clients and being unable to liquidate some assets due to an external crisis. Strategy The liquidity strategy is pursued by active management of the balance sheet structure and future cash flows as well as maintenance of liquidity reserves adequate to liquidity needs depending on the activity of the Bank and the current market situation. The Bank manages liquidity risk at two levels: strategic (within committees of the Bank) and operational (Treasury Department). The liquidity risk limit system is based mainly on defining acceptable gaps for ANL tenors in specific time horizons and for different liquidity risk profiles (for all currencies in aggregate converted to PLN) and for specific foreign currencies. Measuring mbank s liquidity risk The liquidity of mbank remained safe in 2013, as reflected in the high surplus of liquid assets over shortterm liabilities in the ANL tenors and in the regulatory measures. The table below presents the ANL gap for tenors up to 1M and 1Y in 2013 as well as the regulatory measures M1, M2 and LCR: Measure* ANL 1M 7,426 ANL 1Y 6,964 M1 10, average 2013 max min 10,788 13,564 7,371 9,698 12,823 5,967 11,887 15,998 8,139 M LCR (*) ANL and M1 are shown in PLN million, M2 and LCR are relative measures presented as decimals

134 The long-term coverage measures (M3, M4) were stable and safe, above the minimum set by the regulator at 1. In particular, M3 ranged from 5.04 to 6.48 and M4 ranged from 1.25 to 1.32 in Measuring the Group s liquidity risk The mbank Group s liquidity risk is measured including mbank Hipoteczny and mleasing. The Bank monitors liquidity risk of those subsidiaries (daily, as of September 2013) with ANL in order to protect liquidity also at mbank Group level in case of unfavourable events (crises). the capital adequacy ratio at a level higher than the statutory minimum, at the same time covering all significant risks identified in the Bank s operations. mbank s capital targets are being set based on the regulatory requirements and simulated capital needs to cover unfavourable changes in the external environment and within the Bank. Capital Adequacy of mbank Group The liquidity of the mbank Group in 2013 was safe, as reflected in the high surplus of liquid assets over short-term liabilities in the ANL tenors calculated at Group level. The table below presents the ANL gap for tenors up to 1M and 1Y as of September 2013 at mbank Group level: PLN million average 2013 max min 8, % 10.40% 9, % 9.59% 18.73% 13.00% 11,565 11, % 14.21% ANL 1M 7,754 10,043 12,126 7,694 4,513 5,282 4,938 4,706 ANL 1Y 6,110 7,897 10,320 5, Operational risk mbank organises the operational risk management process taking into account the regulatory requirements. PFSA resolutions and recommendations (including Recommendation M in particular) constitute a starting point for developing the framework of the operational risk control and management system in the mbank Group. The Bank understands operational risk as the possibility of incurring a loss arising from inadequate or defective internal processes, systems, errors or actions taken by the Bank s employee or from external events. Additionally, operational risk includes legal risk. The operational risk control and management system, with its classification of roles and responsibilities, forms an organisational basis and the necessary structures in order to enable expedient and effective control and management of operational risk at every level of mbank s organisational hierarchy. The structure of operational risk control and management covers in particular the role of the Management Board of the Bank, the Business and Risk Forum, the Chief Risk Officer, the Integrated Risk and Capital Management Department, and the tasks assigned to persons managing operational risk in particular organisational units and business areas of the Bank. The operational risk control and management process at mbank is developed and co-ordinated by the central operational risk control function while operational risk management takes place in every organisational unit of the Bank and in every subsidiary of the mbank Group. It consists in identifying and monitoring operational risk and taking actions aimed to avoid, mitigate or transfer operational risk. The entire operational risk control process is supervised by the Supervisory Board of the Bank through the Risk Committee of the Supervisory Board. In 2014, mbank is planning to implement Risk Management Effectiveness Self-Assessment in order to identify key risks embedded in the Bank s processes and to assess effectiveness of their management. The Self-Assessment results will be used to optimise and improve the Bank s operational risk management system Capital adequacy The Capital Management Policy at mbank is based on two main pillars: Maintenance of an optimal level and structure of own funds, with the use of available methods and means (retained net profit, issue of shares, subordinated loans, etc.). Effective use of the existing capital by applying a system of capital utilisation measures resulting in reduction of the activity that is not generating the expected return and development of products with lower capital absorption. On December 3, 2013, mbank issued subordinated bonds with a total nominal value of PLN 500 million maturing in On February 14, 2014, the Polish Financial Supervision Authority granted permission to include in the calculation of Tier 2 capital of mbank the amount of PLN 500 million, constituting a subordinated liability due to bonds issue. 13. HR development Changes in employment Total own funds (PLN M) Total capital charge (PLN M) Capital adequacy ratio (%) Core Tier 1 (%) The total employment in mbank Group expressed in full time equivalents (FTE) amounted to 6,073 FTE at the end of 2013, compared to 6,138 FTE a year earlier (-1.1%). Employment at mbank amounted to 4,696 FTE at the end of 2013 and was lower by 32 FTE or 0.7% compared to 2012, due to organizational changes in mbank Group and shift of part of FTEs from Risk area to one of the subsidiaries within the Group mbank Hipoteczny. At the end of 2013, employment in the Group subsidiaries stood at 1,377 FTE compared to 1,410 FTE in 2012 (-2.3%). Maintaining an adequate level of capital is one of the main tasks of managing the balance sheet of a bank. The Management Board of mbank ensures consistency of the capital and risk management process by means of a system of strategies, policies, procedures and limits for the management of particular risks which constitute the ICAAP architecture. Furthermore, in line with the Capital Management Policy applicable at mbank, mbank maintains an optimum level and structure of own funds, guaranteeing maintenance of

135 The Group s employment breakdown per company and by business lines at the Bank is presented below: Headcount in mbank Group Headcount in mbank by business lines in FTE at the end of 2013 mbank Hipoteczny; 150 Dom Maklerski mbanku; 147 mleasing; 321 mcentrum Operacji; 375 mbank; 4,696 The Bank's employees are relatively young: 61% are younger than 35 years. Employees are also welleducated: above 83% are university graduates. Many employees undertake post-graduate studies and internal MBA studies, thus acquiring new professional qualifications Training and development A development planning process was carried out in 2013 across the organisation and at all managerial levels. The teams performance needs were identified in relation to their business targets. The competences and knowledge necessary for effective performance of tasks were defined. Tools adequate to the defined needs were selected. As a result, development plans for employees were designed in close relationship with the teams business targets in order to directly support their achievement. The improvement of mbank employees qualifications increasingly relies on development means other than traditional training. In 2013, special emphasis was put on activation of on-the-job learning of new skills (participation in projects, workshops, etc.) as well as internal knowledge transfer (including topical discussion meetings to exchange professional experience as well as temporary delegation of employees to other teams). Internal knowledge transfer mbank employs experts of huge potential in all business areas. The Bank unlocks their potential and creates conditions where employees can transfer knowledge to other employees. mbank maintains an expert knowledge exchange system and organises meetings to present employees interests and achievements outside the Bank. In 2013, the Bank designed development programmes which support effective transfer of skills and knowledge: programmes for managers (including improvement of management by coaching and development work with the manager s team) as well as train-the-trainer programmes (addressed to the Bank s employees who are internal trainers). Internal mobility BRE Ubezpieczenia; 103 Other; 281 in FTE at the end of ,728 4,696 1,816 1,762 1,765 1, , Support Retail Banking Trading and Investment Activity Corporates and Institutions The Bank s internal recruitment ratios continued to improve in Employee transfers between organisational units as a form of recruitment successfully conclude no less than 45% of mbank s recruitment procedures (excluding mass procedures, e.g., at the call centre). The internal job market gives more and more employees a real opportunity of effective development within the organisation. Our people make the difference In 2013, mbank organised the second edition of the contest Our people make the difference aimed at supporting the new Strategy of the Bank. The programme awarded the forward looking employees who inspire others, constantly learn new things and expand their horizons. Employees were awarded in seven different categories. By introducing the categories, the Bank intended to show how important, in the light of the new Strategy and challenges faced by the Bank, is the role of managers, adaptation of new employees to the organisational culture, mutual support between areas, innovative thinking of every employee and effective co-operation. The Bank appointed a special committee to select the winners from among the candidates nominated by mbank employees. Young Talents Looking forward - one of mbank s organisational values materializes in activities addressed to students and graduates. In 2013, 10 students served their traineeship in various units of the bank, preparing for effective work in the target job position. Just like regular employees, they are subject to formal multidimensional assessment. All were offered jobs and now are full-time employees of mbank. The Bank will accept 15 student interns selected in a multi-step recruitment process in Participants of the Young Talent Development Programme (which covers internships and apprenticeships in mbank) are hired under employment agreements and enjoy the same job benefits as the bank s fulltime employees mbank Group s incentive system The incentive system of mbank is based on the remuneration policy and intangible elements (e.g. possibility of career development). The incentive system plays a key role in developing corporate culture and builds a competitive advantage by acquiring and retaining competent employees. The remuneration policy at mbank covers both the base salary (fixed component) as well as the variable part depending on the objectives achieved by the whole organisation and by individual employees. In 2013, incentive programmes both for the Management Board Members and Key Managers were implemented. Incentive Programmes for the Management Board Members of the Bank On March 14, 2008 the Ordinary General Meeting of mbank, by adopting a relevant resolution, adopted an incentive programme for the Management Board of the Bank. Under the programme the Management Board Members have the right to take up bonds with priority right with respect to acquisition of shares of the ultimate parent entity, Commerzbank AG. In 2010, the programme was changed in the part concerning shares of Commerzbank, so that the Management Board Members may obtain the right to receive cash equivalent corresponding to the value of the shares of Commerzbank calculated based on the average share price on the date when the right to receive the equivalent originated. All the rights under payments settled in cash equivalent based on shares of Commerzbank and all the rights under payments settled in mbank shares within the framework of the programme have already been granted. Payments are settled in three equal deferred tranches and the last settlements of the programme are scheduled for The bonds may be acquired by the authorized persons over the years , provided that their employment continues. Obtaining the right to acquire bonds and the number of bonds depend on the level of fulfilment of the following conditions: Individual assessment of the Management Board Member by the Supervisory Board. Net ROE of mbank Group in the financial year for which the shares are granted. Generation of a consolidated profit before income tax of mbank Group or consolidated profit before income tax of particular business lines of the Group for a given financial year

136 On December 7, 2012, the Supervisory Board, adopted a new Inventive Programme at mbank which replaced the currently applicable programme signed on March 14, Under the new programme, the Management Board Members have the right to receive a bonus, including "cashless bonus", paid in the Bank's shares, including phantom shares (i.e. virtual shares). The acquisition of the bonus right by the Management Board member and estimation of the basis amount used to calculate the bonus are based on Net ROE of mbank Group. Equivalent of 50% calculated based on the base amount of ROE constitutes the so-called guaranteed bonus in respect of achievement of financial result. As regards the remaining 50% of the base amount, the Executive Committee of the Supervisory Board may grant the so-called discretionary bonus if it decides that a given the Management Board Member achieved the annual/multi-year business and development objective and taking into account the situations on financial markets. 40% of the bonus due to the Management Board Member for a given financial year, constituting the sum of the guaranteed bonus and discretionary bonus, is paid in the form of cash payment, the remaining 60% will be paid as a cashless bonus in three equal annual deferred tranches. The conditions for receiving the cashless bonus and its amount depend on: Net ROE in the financial year for which the cashless bonus is awarded. Assessment of financial standing of the Bank by the Remuneration Committee. Assessment of the performance of the Management Board Member for a period longer than one financial year. In 2014, Members of the Management Board will obtain the possibility of acquiring bonds with the priority right to take up shares of the Bank within Tranche I of the cashless bonus for Incentive Programmes for Key Managers of mbank Bank Group On October 27, 2008, the Extraordinary General Meeting of the Bank adopted an incentive programme for the key management staff of mbank Group. In 2010, the Management Board of the Bank decided to launch the programme and approved the list of participants for Tranche III. Within Tranche III 13,000 options were granted. In 2011 within the Tranche IV and V programme 20,000 options and 19,990 options were granted. The rights started to be exercised in 2012 for Tranche III, in 2013 for Tranche IV and the process will last till December 31, The rights under Tranche V may be exercised after meeting specified conditions concerning acquisition of rights in the period from May 1, 2014 to December 31, The conditions for acquiring rights refer to: Being in an employment relationship throughout the term of the Tranche. Obtaining an economic ratio for mbank Group specified by the Management Board. Obtaining a specific appraisal by the programme participant in each year of the Tranche. In 2011, the Programme was suspended and the remaining tranches were not activated. On April 11, 2013, the Extraordinary General Meeting of the Bank adopted a resolution amending the rules of the employee programme, which replaced the incentive programme for key management staff of mbank Group of 2008, whereas as regards the persons who acquired bonds or were granted right to acquire bonds, the programme will be carried out under the existing principles. The aim of the programme is to ensure growth in the value of the Company's shares by linking the interest of the key management staff of mbank Group with the interest of the Company and its shareholders and implementing in mbank Group variable components of remuneration of the persons holding managerial positions at mbank Group in accordance with the Resolution of the Polish Financial Supervision Authority. The entitled persons will obtain in 2015 the possibility of acquiring bonds with the priority right to take up shares of the Bank within Tranche VI. The bonds may be acquired during the Programme Term, but not later than by December 31, The condition for obtaining the right to acquire bonds in the scope of Tranches VI-VIII is reaching the economic ratio set in order to carry out the Program separately by the relevant authorities of the Bank and particular Bank subsidiaries. The Bank's Management Board/Supervisory Board of the subsidiary, where the Program is carried out, may take a decision on suspending the Program in whole or decreasing the number of bonds or the number of bonds deferred in a given tranche in justified cases. Detailed information on the incentive programmes are presented in note 43 to Consolidated Financial Statements for 2013, in accordance with the International Financial Reporting Standards MbO (Management by Objectives) planning and assessment system 2013 was the third consecutive year of operation of the coherent system for planning and assessment (MbO - Management by Objectives). During this period, mbank worked intensively on developing the system and clarifying the coherent and internally transparent rules for setting and cascading objectives, in order to raise the awareness about targets among all the employees and the entire organisation. By the end of 2013, based on more than 3-year experience, the process of setting and cascading the 2014 objectives was implemented in the Bank and in selected Group subsidiaries. The stronger understanding of the strategic objectives of the Bank and the Group will allow the organisation to focus the employees' involvement on the most important issues, right from the start and at the same time, will result in notable effectiveness and time savings. The MbO system has several functions in the organization: It translates directly into the Bank s and the Group s performance imposes discipline and involves the entire organization in the achievement of results It forms a direct communication platform forwarding information on the role and involvement of an individual employee in developing the organization and achieving the strategic objectives of the Bank. 14. Investments In 2013, investment spending was higher compared to the past years. Investments by the Group amounted to PLN million, compared to PLN million in 2012, whereas the Bank spent PLN million compared to PLN million a year earlier. The majority of investment spending at the Bank, i.e. PLN million was related to the information technology area (IT). Expenditures in the IT area resulted from the implementation of the new online retail banking platform (New mbank). Investments in the logistics and security area, amounting to PLN 20.7 million were related to the development and modernisation of the corporate branch network and the Head Office (in Warsaw and in Łódź) as well as the purchase of new equipment for the Bank s retail outlets. 15. mbank and social corporate responsibility Banks play an important role in the economy and the society. For a number of years, the Group has strived to accompany its commercial success with efforts to support valuable projects that benefit the society. That role is played mainly by the mbank Foundation in addition to numerous volunteer employee projects and initiatives supported by the Bank mbank Foundation mbank Foundation (mfoundation), established in 1994, was one of the first such foundations in the banking sector and is the expression of the social involvement of mbank. The mission of mfoundation is to support programs aimed at enhancing education and quality of life through actions coherent with the image and policy of mbank

137 In 2014, mfoundation celebrates its 20th anniversary. The strategy of the Foundation changed in the wake of rebranding. On November 13, 2013, the Council of the Foundation set a new direction for the mfoundation activity for The new strategy focuses on mathematical education since mbank believes that mathematics is the foundation of logical thinking. The Bank wants to develop and stimulate mathematical reasoning, and prove that the ability to calculate effectively is interesting and necessary in everyday life. Following the new direction mbank will not only continue to cooperate with organizations supported so far but also becomes open to new possibilities. Plans of the Foundation include grant and scholarship programmes, contests for schools, non-governmental organizations and teachers as well as a volunteering programme for the Group employees. The Foundation aims to reach children, teenagers and their parents, as well as teachers, students and young academics. Scholarship programmes are a chance for children from different backgrounds interested in mathematics with above-average academic performance to pursue further education. Programmes for teachers allow them to expand competence and gain knowledge about the right approach to talented students. mbank is convinced that due to the new strategy of the Foundation it will contribute to the development of mathematical skills of young Poles. In 2013, the Foundation disbursed PLN 1,681 thousand on its statutory objectives. mbank Foundation disbursements PLN thou. 1,357 2,316 3,211 2,985 2,889 2,895 2,471 1,681 The Foundation supported the following projects in 2013: mbank Foundation and the CASE ( Centre for Social and Economic Research ) continued their cooperation which consists in organizing seminars and conferences for researchers, experts and practitioners of management concerning the transition of the Polish economy (mbank CASE Seminars). The Educational Enterprise Foundation (FEP) continuing support for the Bridge Scholarship Programme (financial assistance to freshmen students from underprivileged backgrounds). In 2013, the Foundation endowed 25 scholarships. In addition, 26 scholarships were granted to students of faculties such as: economics, finance and accounting, and international relations participating in contests organized by the Foundation and FEP. The ABC XXI - All of Poland Reads to Kids Foundation - co-funding of the 11th edition of the Foundation s social campaign and organisation of the Polish Week of Reading to Kids. The Gdansk Institute for Market Economics - co-funding of the project developed during the 8th Civic Congress "How to modernize Poland - from the development of infrastructure to new attitudes and behaviours". The Friends of Art Foundation AUREA PORTA - co-funding of the project entitled "Digitalizing and archiving of composer, dramatic, graphic and journalistic works of professor Bogusław Schaeffer and popularizing his work by creating a dedicated website". The Foundation for Social and Economic Initiatives (FISE) - sponsoring the prize in the Competition for the Best Social Enterprise of the Year. The Zygmunt Noskowski Foundation - implementation of the project entitled "Mr Lutosławski". The Friends of Integration Association - co-funding of the 11th edition of the "Barrier Free Man - edition 2013" (contest promoting people who achieved success despite their disability). The SYNAPSIS Foundation - co-funding of the observation and therapeutic project consisting in diagnosis of pervasive developmental disorder (autism spectrum) among children. Polish museums - co-funding of exhibitions, expositions and publications. Local libraries and schools - funding the purchase of books and teaching aids. Moreover, just like in the previous years, the Foundation supported other entities implementing projects in the areas covered by the strategy of the Foundation and its statutory objectives Other social oriented activities The structure of the statutory expenditures was as follows: Education, science and entrepreneurship 56.6% Healthcare and social welfare 29.3% Culture and protection of national heritage 14.1% In 2013, the Foundation continued to work with its regular partners and supported the implementation of one-off projects. "Let s Do Good Together" In 2013, Bank employees participated in four editions of the Let s Do Good Together volunteer programme. Since several years, Bank employees have been supporting orphanages, nursing homes, social care centres, community centres and public schools, hospitals, kindergartens, animal shelters, foundations and associations. Every three months, the jury selects 5 to 10 projects out of the submitted applications, which receive funding in the amount of PLN 2,500. Throughout 2013, 33 projects were accomplished. "Tomorrow Belongs to Women" Tomorrow Belongs to Women" is a support programme addressed to all the women working at mbank. As part of the project the Bank organises meetings with experts, networking discussions and other activities making it easier for women working at the Bank to achieve the work-life balance. The key themes of the meetings were selected based on suggestions from women working at the Bank given in an internal questionnaire

138 16. Statement of mbank on application of Corporate Governance principles in Corporate Governance Principles binding on mbank The set of corporate governance principles binding on mbank is contained in the document "Code of Best Practice for WSE Listed Companies". Since 1 January 2013, the version of "Code of Best Practice for WSE Listed Companies" including amendments introduced by resolution of the WSE Board No. 19/1307/2012 November of 21, 2012, has been in force. The text of the Code of Best Practice for WSE Listed Companies is available on the website of the Warsaw Stock Exchange ( and a link to this site is also available on mbank's website ( In its internal statutory documents, the Bank has integrated the regulations concerning the corporate governance principles, in particular those relating to the rules of operation of the General Meeting and the Supervisory Board (and its standing committees) as well as the rights of the shareholders and the Supervisory Board. Irrespective of the Code of Best Practice for WSE Listed Companies, mbank undertook to abide by best industry practices developed by the Polish Bank Association. In 2013, the Polish Bank Association amended the existing Good Banking Practice Principles by adopting the Code of Banking Ethics at the 25 th General Meeting of the Polish Bank Association held on 18 April The Code of Banking Ethics is a set of principles referring to banks, their employees, and persons acting as intermediaries in banking activities. The document includes two parts: Code of Best Banking Practice and Code of Employee Ethics. The former describes the rules governing relations with clients and employees, rules for handling claims/complaints filed by clients, rules governing relations between banks and other financial institutions, and rules for cooperation between banks and local communities. The latter describes basic rules of conduct for bank employees governing relations with external and internal partners. One of the orders of the President of the Management Board of mbank obliges Bank employees to read the Code of Banking Ethics and to abide by the rules specified therein. The Code of Banking Ethics is available on the website of the Polish Bank Association ( Application of Corporate Governance Principles In 2013, mbank was applying the corporate governance principles, with the exception of rule no. 10 point 2 chapter IV of the document Code of Best Practice for WSE Listed Companies. A message about exclusion of this rule was sent to the WSE via the EBI (Elektroniczna Baza Informacji - Electronic Database) system on March 7, The above rule stipulates the obligation to ensure that shareholders have the possibility to participate in the general meeting with the use of means of electronic communication. For many years mbank has broadcasted General Meetings in real time, however, without the possibility to engage in two-way on-line communication by allowing shareholders to speak during the General Meeting from a different location. The Bank's By-laws and the Standing Rules of the General Meeting do not provide for the possibility to actively participate in general meetings with the use of means of electronic communication. Furthermore, in the opinion of the Management Board of the Bank, in the absence of developed market practice, the organisation of general meetings with the use of means of electronic communication bears legal and technical risks. Binding provisions of law do not define the status of a shareholder participating in the general meeting with the use of means of electronic communication who does not take a part in voting, which generates unnecessary legal risks. In the opinion of the Management Board of mbank, the rules for participating in general meetings, currently applicable at the Company, allow effective execution of rights arising from shares and protect the interests of all shareholders, even the minority shareholders. The Company does not exclude the possibility to apply the above rule in the future on the basis of developed market standards. The following points of the Recommendations require an additional commentary: Point 5 of the Recommendations regarding the remuneration policy. In accordance with the recommendation, mbank has a remuneration policy which determines the form, structure and level of remuneration, including the remuneration of members of the supervisory and management bodies of the Company. The remuneration system ensures a linkage between the remuneration of senior managers and the financial results of the Company. The remuneration system integrates a range of principles derived from the Commission Recommendation of 14 December 2004, fostering an appropriate regime for the remuneration of directors of listed companies (2004/913/EC) supplemented by the Commission Recommendation of April 30, 2009 (2009/385/EC). These principles include among others: determination of fixed and variable components of remuneration of the Management Board by the Remuneration Committee, a linkage of the variable components of remuneration with pre-defined performance criteria, detailed regulations concerning the option scheme, and specification of the total remuneration and its components of individual members of the Management Board and the Supervisory Board in the notes to the annual financial statements. However, the Commission Recommendations were not used as a model for the remuneration system of the Bank and not all the provisions of the Recommendations were applied. In particular, the remuneration policy is not a separate item on the agenda of every Ordinary General Meeting and is not submitted for a vote. Point 9 of the Recommendations which calls for ensuring a balanced proportion of women and men in management and supervisory functions in companies. The Bank ensures equal access of men and women to management positions, which is not based on a predetermined parity. The persons sitting on the Bank's Management Board and Supervisory Board should display the highest competence, be adequately educated and experienced. Other factors, such as gender, are not a determinant in this respect. The Bank is of the opinion that it would be unjustified to introduce regulations based on pre-established parities, and leaves the decision on selecting members of the Management Board and Supervisory Board in the hands of duly authorised bodies of the Company. Since the Ordinary General Meeting held in 2002, the 12-member Supervisory Board of mbank has had one female member - Teresa Mokrysz. At the same time, Ms Mokrysz is a member of the Audit Committee of the Supervisory Board. The 7-member Management Board of mbank has also one female member - Lidia Jabłonowska-Luba, Chief Risk Officer. mbank attaches a lot of weight to open, transparent and effective information policy. On a regular basis, the representatives of the Management Board and the Investor Relations Team actively participate in meetings with investors, both in Poland and abroad. The website operated by the Company has become an important communication platform. In the investor relations section the Bank publishes information on the shareholders of mbank, Annual Meetings, ratings, the Euro Medium Term Note Programme, quotations of the Bank's shares on the WSE, analysts' recommendations, consensus of mbank Group's forecasted performance, and the target share price. All those interested may review annual statements, periodic and current reports, presentations on the strategy and performance of mbank Group, monthly newsletter for investors and analysts as well as Investor Calendar. mbank has been also publishing an on-line version of its annual report, which provides convenient and highly interactive access to financial data of mbank Group. In 2012, the Bank launched mbank Analyzer, an innovative and interactive tool which allows users to analyse financial and business data of mbank Group from different angles. Additionally, the information is accompanied by webcasts of meetings with analysts at which the financial results of mbank Group are presented (more information in chapter Investor Relations (IR) function at mbank )

139 The website has a section dedicated to corporate governance and best practice, which includes among others the By-laws and rules of the Bank's bodies, statements on the application of corporate governance principles, principles of remunerating the Management Board and the Supervisory Board, information on incentive programmes, rules for changing the entity entitled to audit financial statements, and information on the participation of men and women in statutory bodies of mbank Internal control and risk management systems with regard to the process of preparing financial statements of mbank mbank is equipped with the internal control system which supports Bank management by ensuring the effectiveness of the Bank's operation, reliability of financial reports as well as compliance of the Bank's operation with the provisions of law and internal regulations applicable at the Bank. The internal control system includes the following: functional control internal audit. risk monitoring and risk control mechanisms monitoring compliance of the Bank s operation with the provisions of law and internal regulations The purpose of functional control is to ensure compliance of the activities performed with the applicable rules, the provisions of law, the Bank s internal regulations and good practice in this respect, to monitor the effectiveness and adequacy of the control mechanisms implemented, and what is more to respond to any irregularities as they arise. Functional control is a system applicable to each organisational unit and process. The monitoring of risk control mechanisms and compliance of the Bank s operation with the provisions of law and internal regulations is executed as part of functional control and controls carried out by specialised risk and compliance units. The adequacy and effectiveness of the internal control system is subject to independent assessment of the Internal Audit Department (DAW). DAW operates on a basis of the Banking Law, mbank s internal regulations, International Standards for the Professional Practice of Internal Auditing, and best business practice in this respect. The audit results are reported to the President of the Management Board, Chief Risk Officer and the Chairman of the Supervisory Board of the Bank. The process of preparing financial data for reporting needs is automated and based on the General Ledger of the Bank. Preparation of data in source systems is subject to formalised operational and acceptance procedures. Creating the General Ledger of the Bank takes place within a process covering respective internal controls. Manual adjustments are subject to special controls. The process of monitoring the operational risk which occurs in the preparation of financial statements in the Bank includes mechanisms which effectively ensure the security of IT systems. mbank has in place a business continuity plan which covers also the IT systems used in the process of preparing financial statements. Financial statements of mbank and the Group are prepared by the Financial Reporting Department. The responsibility for keeping accounting books and administering the model chart of accounts lies with the Accounting Department. Both departments report to the Deputy President of the Management Board, Chief Financial Officer. The prepared financial statements are submitted to the Management Board for verification. The Audit Committee of the Supervisory Board receives information on the quarterly financial statements and on profit and loss before it is published. After in-depth discussions with the Bank s external auditor and the Management Board of the Bank, the Audit Committee recommends whether the Supervisory Board should approve or reject the annual financial statements. The annual and semi-annual financial statements of the Bank are subject to an independent audit and a review by a statutory auditor. The selection of the statutory auditor of the Bank requires a resolution of the General Meeting. The Audit Committee of the Supervisory Board issues an opinion on the selection of the statutory auditor. mbank observes the rule stipulating that the key statutory auditor should change at least once every five years. This is in line with Article 89 of the Act on Statutory Auditors and their Self-Government, Entities Entitled to Audit Financial Statements and Public Supervision dated 7 May 2009 (Journal of Laws of 2009, No. 77, item 649). Furthermore, mbank abides all recommendations issued by the Polish Financial Supervision Authority regarding the change of statutory auditors. In 2013, the Ordinary General Meeting of the Bank appointed Ernst & Young Audit sp. z o.o. as auditor to examine the Bank s financial statements and consolidated financial statements of the Capital Group for 2013 and PricewaterhouseCoopers Sp. z o.o. was the previous auditor. The procedures of cooperation of the Bank and the external auditor ensure that all the important issues related to the recognition of economic events in the books and financial statements are being consulted on an ongoing basis. All the subsidiaries of mbank Group consolidated for the purpose of consolidated financial statements are obliged to apply uniform accounting policies with respect to the recognition of measurement and disclosures in accordance with the International Accounting Standards. The Financial Reporting Department monitors the reporting packages prepared by the subsidiaries in terms of their correctness, completeness, coherence and continuity of data. The control functions with respect to the Group subsidiaries are performed by representatives of mbank sitting on the Supervisory Boards of the subsidiaries. The aspiration to ensure the highest standards of financial statements is reflected in the high quality of reporting. mbank was the winner of "The Best Annual Report 2012" contest in the category of on-line annual reports. It also won the special award "The Best of the Best for the best annual report. These are yet another awards won by mbank in contests organised by the Institute of Accounting and Taxes (IRiP). So far, the Bank has emerged as winner or received other distinctions in the category of financial institutions four times Significant blocks of shares Commerzbank AG is the majority shareholder of mbank. The share of Commerzbank has been increasing from 21.00% in 1995, to 50.00% in 2000 and 72.16% in Starting from 2005, the share has declined slightly due to the implementation of the managerial options programme in mbank. At the end of 2013, Commerzbank held 29,352,897 shares of mbank, which accounted for 69.60% of the share capital and votes at the General Meeting % of mbank shares in free float are held by institutional investors, in particular Polish pension funds, and Polish and foreign investment funds and individual investors. ING Otwarty Fundusz Emerytalny and AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK exceeded the 5% threshold of shares and votes at the General Meeting, which obligated them to announce the shares purchase. Shareholder Status as of Percentage of share capital and total number of votes Commerzbank AG 69.60% ING Otwarty Fundusz Emerytalny 5.76%* AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK 5.11%* *Information about the share capital of ING Otwarty Fundusz Emerytalny and AVIVA Otwarty Fundusz Emerytalny Aviva BZ WBK presented on a basis of annual asset structure of AVIVA OFE and ING OFE as of The strategic shareholder of mbank, Commerzbank AG, is a leading German bank with a history dating back to 1870, which provides its services to private and corporate customers

140 The German government - currently the largest shareholder of Commerzbank - holds a 17% stake in the share capital through the Germany's Financial Market Stabilisation Fund (SoFFin). Institutional investors hold about 47% of shares in free float (the largest investors - BlackRock and Capital Group - hold more than 5%). Individual investors hold about 26% of shares. With the segments Private Customers, Small and Medium-sized Enterprises (Mittelstandsbank), Corporates & Markets, Central & Eastern Europe, Commerzbank offers its customers an attractive portfolio of products and services. Commerzbank is a strong partner for the export-oriented SME sector in Germany and worldwide. With a total of more than 1,200 branches in Germany, Commerzbank has one of the densest networks of branches among German banks. Moreover, Commerzbank operates in more than 52 countries. It provides its services to nearly 15 million individual clients and about 1 million corporate clients. At the end of 2013, Commerzbank Group held assets of EUR billion and total capital of EUR 26.9 billion. Commerzbank Group employs 52.9 thousand employees, including 41.1 thousand in Germany Special control rights and limitations concerning the shares Pursuant to the By-laws of mbank, all the existing shares give the right to one vote at the General Meeting. There are no preferred shares. The control rights of Commerzbank AG as the parent entity of mbank are a result of the number of shares held, their percentage share in the equity, and the number of votes at the General Meeting of mbank. The By-laws of mbank do not impose any limitations on the exercise of the voting right. There are no provisions which would separate the equity rights attached to securities from the holding of securities. Furthermore, there are no limitations on the transfer of the property right to securities issued by the Bank Principles of appointing and dismissing Management Board Members Pursuant to the By-laws of mbank, the Management Board is composed of at least three members appointed for a joint term of 5 years. At least half of the Management Board members, including the President of the Management Board, must hold Polish citizenship. The President of the Management Board, the Deputy Presidents of the Management Board and the other Members of the Management Board are appointed and dismissed by the Supervisory Board, acting pursuant to the provisions of the Banking Law and considering relevant qualifications for the assigned functions. The Polish Financial Supervision Authority (PFSA) approves two Members of the Management Board of the Bank: the President of the Management Board and the member responsible for developing and implementing the Bank s credit policy and risk management. In accordance with the Code of Commercial Partnerships and Companies, a Member of the Management Board may also be dismissed or suspended by the General Meeting. The mandate of a Member of the Management Board expires at the latest on the day of the General Meeting that approves the financial statements for the last full financial year of the term of that Management Board Member. The mandate of a Member of the Management Board also expires if the member dies, resigns from his position or is recalled. The mandate of a Member of the Management Board appointed before the end of the term expires on the expiration of mandates of the other Members of the Management Board Amendments to the Company s By-Laws Amendments to the By-Laws of mbank require adoption of a resolution by the General Meeting of mbank and registration of the adopted amendment in the National Court Register. Before the General Meeting of mbank is presented with a draft resolution concerning amendment to the By-Laws, the Management Board of mbank adopts a resolution on the proposed amendment by approving the draft resolution of the General Meeting, and then the draft is presented to the Supervisory Board of mbank for approval. Under the Code of Commercial Partnerships and Companies, the resolution on amendments to the By-Laws is passed by a majority of 75% of votes. In accordance with Article 34.2 of the Banking Law Act of 29 August 1997, any amendment to the Bank s By-laws requires the authorisation of the Polish Financial Supervision Authority where such amendment relates to: The Bank s registered business name The Bank's registered office, objects and scope of the Bank's operation The bodies and their competences, including particularly the competences of the Members of the Management Board appointed with the approval of the Polish Financial Supervision Authority and the decision-making principles, the basic organisational structure of the Bank, the procedures applicable to making legally binding statements regarding property rights and obligations, the procedures for issuing internal regulations and the procedure for making decisions on assuming obligations or disposing of assets whose total value with regard to a single entity exceeds 5% of the Bank s own funds The principles of functioning of the internal control system The own funds and the financial management principles Shares preferred or limited as to voting rights. The latest amendments to the By-laws of BRE Bank SA (currently mbank S.A.) were introduced by Resolution No. 27 of the 26 th General Meeting held on April 11, The Resolution is available on the website of mbank General Meeting procedures and authority, shareholder rights and exercise procedures General Meeting procedures The General Meeting is convened and prepared pursuant to the provisions of the Code of Commercial Partnerships and Companies, the Bank s By-laws, and the Standing Rules of the General Meeting. Both the By-laws and the Standing Rules of the General Meeting are available on the website of mbank. The General Meeting (GM) convened by the Management Board in the way of an ordinary procedure is held once a year, no later than in June. The Supervisory Board may convene an Ordinary General Meeting if the Management Board fails to convene it within the time limits set out in the By-laws and an Extraordinary General Meeting, if the Supervisory Board considers it necessary. In addition, under specific circumstances, the shareholders have the right to convene a General Meeting or to request for a General Meeting to be convened. Shareholders may participate in the General Meeting and cast their votes either in person or by proxies. One proxy may represent more than one shareholder. Subject to the cases defined in the Code of Commercial Partnerships and Companies, the General Meeting is valid regardless of the number of shares represented at the General Meeting. All matters submitted to the General Meeting are previously submitted to the Supervisory Board for consideration. Subject to specific exceptions, resolutions of the General Meeting are passed in an open ballot by a simple majority of votes, unless the Code of Commercial Partnerships and Companies or the mbank Bylaws impose a stricter requirement for the passing of resolutions on specific issues. A secret ballot is required in the case of elections and motions to dismiss members of the Bank's authorities or liquidators, motions to call members of the Bank's authorities or liquidators to account, and motions concerning personal issues. In addition, a secret ballot is required if requested by at least one shareholder present or represented at the General Meeting. Voting takes place with the use of a computer system, which also counts the votes. The correct course of voting is supervised by the three-member Returning Committee elected from among the candidates put forward by the Chairman of the Meeting. The By-laws and Standing Rules of the General Meeting do not provide for the possibility to vote by mail or with the use of electronic means of communication

141 The Bank's Supervisory Board is elected in a secret ballot by the General Meeting. Prior to the election to the Supervisory Board, the General Meeting determines the number of Members of the Supervisory Board of the given term within the limits specified in the By-laws Fundamental authority of the General Meeting The following matters require a resolution of the General Meeting in addition to other matters set out in the Code of Commercial Partnerships and Companies: Examination and approval of the report of the Management Board on the Bank s operation and financial statements for the past financial year Adoption of resolutions on the distribution of profit or coverage of losses Vote of discharge of duties for members of the Bank's authorities Election and dismissal of Members of the Supervisory Board Amendment to the By-laws Increase or reduction of the Bank's share capital Adoption of resolutions concerning the cancellation of shares and resolution to cancel shares, in particular setting the policy of share cancellation not regulated in the By-laws Creation and winding up of special purpose funds Issue of convertible bonds or preferred bonds Eestablishment of the principles of remunerating Members of the Supervisory Board Liquidation of the Bank or its merger with another bank Appointment of liquidators Matters submitted by the Supervisory Board Matters submitted by shareholders in accordance with the By-laws Election of an entity qualified to audit financial statements as statutory auditor of the Bank Shareholder Rights The shareholders have the right to participate in the profit reported in the audited financial statements and allocated by the General Meeting to be paid to the shareholders. The shareholders representing at least one-half of the share capital or at least one-half of the total number of votes in the Company may convene an extraordinary general meeting. The shareholders appoint the chairman of such meeting. The shareholder(s) representing at least one-twentieth of the share capital may request that the Management Board convene an extraordinary general meeting and that specific items be put on the agenda for such meeting. Only persons who are shareholders of the Bank sixteen days before the date of the General Meeting ( record day ) have the right to participate in the General Meeting of the Bank. The shareholder(s) of the Bank representing at least one-twentieth of the share capital may request that specific items be put on the agenda for the Ordinary General Meeting. The request should be submitted to the Management Board of the Bank no later than twenty-one days prior to the date of the Ordinary General Meeting. Documents to be presented to a General Meeting, including draft resolutions, are published on the website of the Bank as of the date of calling the General Meeting. Shareholders may participate in the General Meeting and cast their votes either in person or by proxies. A shareholder has the right to: Vote, propose motions and raise objections Justify his or her position briefly Stand for election for Chairman of the General Meeting and propose a candidate for Chairman of the General Meeting to be noted in the minutes Take the floor during the proceedings and make a reply Table draft resolutions concerning the items put on the agenda Propose amendments and additions to draft resolutions on the agenda for the General Meeting before the discussion on the item covering the draft resolution concerned by the proposal is closed Propose formal motions relating to the proceedings and the voting procedure Propose candidates for the Bank s Supervisory Board in writing to the Chairman of the General Meeting or orally to the minutes Review the book of minutes and request a copy of resolutions authenticated by the Management Board Take legal action to have a resolution of the General Meeting annulled where the shareholder voted against a resolution of the General Meeting and after its adoption raised an objection to the minutes or the shareholder was unreasonably prevented from participating in the General Meeting or the shareholder was not present at the General Meeting as a result of it being convened incorrectly or the adopted resolution not being on the agenda Take legal action against the Company to have a resolution of the General Meeting annulled where the resolution is in breach of law. The Management Board is obliged to provide the shareholder, at the shareholder s request, with information concerning the Company if this is justified by the assessment of an issue on the agenda. The Management Board should refuse information if: This could damage the Company or its associated company or subsidiary, in particular due to disclosure of technical, trade or organisational secret of the Company This could expose a Member of the Management Board to criminal, civil or administrative liability. In justified cases, the Management Board may provide information in writing no later than two weeks after the General Meeting is adjourned. The General Meetings take place on the Bank's premises in Warsaw and are broadcast on-line. The General Meetings may be attended by the representatives of the media General Meeting in 2013 The 26 th Ordinary General Meeting was held on April 11, The Meeting was attended by shareholders or their proxies representing in total 85.11% of shares in the Company's share capital. In addition to standard resolutions on approving the financial statements and the reports of the Management Board of mbank and mbank Group for 2012, selecting the auditor, vote of discharge of duties for members of the Supervisory Board and the Management Board of the Bank for 2012, the following resolutions were adopted: resolution on changing the registered name of the Bank, amendments to the By-laws of the Bank and rules for the implementation of the incentive programme by mbank S.A. The resolutions adopted by the 26 th General Meeting and the detailed voting results are available on in the section dedicated to General Meetings of Shareholders

142 16.9. Composition of and changes in the Management Board and the Supervisory Board of the Bank and their procedures Composition of the Management Board The Management Board is composed of at least three members appointed for a joint term of 5 years. At least half of the Members of the Management Board, including the President of the Management Board, must hold Polish citizenship, be habitually resident in Poland, speak Polish and have experience on the Polish market which can be used while managing the Bank. The Members of the Management Board manage selected areas of the Bank's operation within the scope determined by the President of the Management Board. The division of powers of the Members of the Management Board has been described in detail in the Management Board's resolutions. The composition of the Management Board changed in 2013 as a result of the Management Board's term of office ending as of the Ordinary General Meeting in 2013 and due to the appointment of Wiesław Thor to the Supervisory Board of the Bank. On April 11, 2013, the Supervisory Board elected the following Members of the Management Board of the Bank for a joint 5-year term: 1. Cezary Stypułkowski - President of the Management Board, Chief Executive Officer Detailed information about the Members of the Management Board is presented below. Cezary Stypułkowski - President of the Management Board, Chief Executive Officer Born in 1956, Cezary Stypułkowski holds a Ph.D. in corporate law from the University of Warsaw. He studied at Columbia University Business School in New York as a member of the Fulbright Program in He worked in government administration in the 1980s, among others as secretary to the Economic Reform Committee of the Council of Ministers and, in 1987, as advisor to the Prime Minister. From February 1991 he chaired the Management Board of Bank Handlowy S.A. for more than 12 years. He was President of PZU Group between June 2003 and June In December 2006, he became Managing Director of J.P. Morgan Investment Bank responsible for Central and Eastern Europe. Cezary Stypułkowski was also a member of the Deutsche Bank International Advisory Board, INSEAD International Advisory Board, Institute of International Finance in Washington and Geneva Association. He was appointed President of the Management Board of the Bank on August 2, 2010, acting President of the Management Board of the Bank as of October 1, 2010, approved as President of the Management Board by the Polish Financial Supervision Authority on October 27, Przemysław Gdański - Deputy President of the Management Board, Head of Corporate Banking 3. Jörg Hessenmüller - Deputy President of the Management Board, Chief Financial Officer 4. Lidia Jabłonowska-Luba Deputy President of the Management Board, Chief Risk Officer 5. Hans-Dieter Kemler Deputy President of the Management Board, Head of Investment Banking 6. Cezary Kocik - Deputy President of the Management Board, Head of Retail Banking 7. Jarosław Mastalerz - Deputy President of the Management Board, Chief Operations Officer. Lidia Jabłonowska-Luba became a new Member of the Management Board responsible for risk management. On September 17, 2013, the Polish Financial Supervision Authority granted consent to the appointment of Lidia Jabłonowska-Luba as Member of the Management Board in charge of risk management at the Bank and Chief Risk Officer. Until then the President of the Management Board Cezary Stypułkowski acted as Chief Risk Officer. On August 1, 2013, changes aimed at closer integration of corporate and investment banking became effective and hence the scopes of responsibilities of two Members of the Management Board were partly changed. The scope of operation of the Corporate Banking Line supervised by the Deputy President Przemysław Gdański was extended by investment banking services for enterprises. At the same time, the Investment Banking Line supervised by the Deputy President Hans Kemler was renamed Financial Markets Line. Przemysław Gdański - Deputy President of the Management Board, Head of Corporate and Investment Banking Born in 1967, graduated from the University of Gdańsk (major: International Trade) and completed a one-year programme in international banking and finance at Loughborough University in the UK. In 2012 he completed the Advanced Management Program (AMP) at IESE Business School. He has been working in corporate banking for over 20 years. In , he worked for IBP Bank S.A. (BRE Bank was one of its shareholders), then for ABN Amro Bank in Poland, Romania and in the headquarters in Amsterdam. In he was the Managing Director of Large Corporates Division in BPH Bank S.A. From May to November 2006 he was CEO and General Director of Calyon Bank Polska and Calyon Branch in Poland. In November 2006, he took the position of Deputy President of the Management Board of BPH Bank, responsible for corporate banking and real estate financing. After the merger of a part of BPH Bank and Pekao SA, Mr Gdański was appointed Deputy President of the Management Board, responsible for Corporate Banking, Markets and Investment Banking of Pekao SA. Member of the Management Board of the Bank since November 19, Jörg Hessenmüller - Deputy President of the Management Board, Chief Financial Officer Born in He graduated from the Hochschule für Bankwirtschaft in Frankfurt am Main in 1997 and was awarded a master's degree in management (Diplom-Betriebswirt (FH)). From 1989 to 2009 he worked for Dresdner Bank, holding the position of, among others, Head of Financial Control responsible for London, New York, Moscow, Sao Paulo and Asia. In 2009 Jörg Hessenmüller was appointed Managing Director in Commerzbank Group and worked as Head of Investment Banking Finance, Group Finance, responsible for controlling and management reporting on: Corporates and Financial Markets, Portfolio Restructuring Unit, Group Treasury and Public Finance. Member of the Management Board of the Bank since April 16,

143 Lidia Jabłonowska-Luba Deputy President of the Management Board, Chief Risk Officer Born in 1963, graduated from the Mathematics Institute of the University of Gdańsk. From 1994 to 2001 Lidia Jabłonowska-Luba worked for Schroder Salomon Smith Barney Poland, advising clients, financial institutions in particular on M&A and public equity transactions. In 2002, Lidia Jabłonowska-Luba joined Citigroup in Poland, first as Head of Financial Institutions & Public Sector Division and since November 2003 as Member of the Management Board in charge of finance and operational risk management, capital management and implementation of the New Capital Accord. In April 2008, Lidia Jabłonowska-Luba joined KBC Group as Deputy President of the Management Board of Kredyt Bank supervising the bank's Finance and Risk Division. She was also an advisor to the CEO of Warta S.A. and TUnŻ Warta S.A. In March 2010, she was appointed Senior General Manager at KBC Group in Brussels responsible for managing all risk types in the group, including model development and validation, risk policies and procedures, risk support for business decisions, supervision and reporting, ICAAP and ORSA processes, capital adequacy policy and technological support for risk management. Member of the Management Board of the Bank since April 12, Hans-Dieter Kemler Deputy President of the Management Board, Head of Financial Markets Born in 1968, graduated from the Westphalian Wilhelm University of Münster in Between 1991 and 1992, worked in Bond Trading Department at Dresdner Bank. Between 1996 and 1998, employed with Sal. Oppenheim jr. & Cie. KGaA, Financial Markets Department in Frankfurt am Main. From 1998 to 2005, Head of the Corporate Risk Advisory in the Head Office of Commerzbank. Since 2005, member of the senior management of Commerzbank responsible for international public finance. He also acted as a managing director at Erste Europäische Pfandbrief- und Kommunalkreditbank AG in Luxemburg. Member of the Management Board of the Bank since July 10, Cezary Kocik - Deputy President of the Management Board, Head of Retail Banking Born in 1971, graduated from the University of Łódź. Holder of a degree in Finance and Banking and a securities broker license. In , securities broker at Dom Maklerski Banku PBG. In 1996, employed with Bank PBG in the area of investment banking, debt collection and restructuring. In 1999, employed with Pekao S.A., in particular as branch manager in Łódź. Mr Kocik has been working in the Bank since 2004, first as director of the Credit Risk Management Department, then director of the MultiBank Sales and Marketing Department, and since 2008 as Managing Director for Retail Banking sales and business processes. Member of the Management Board of the Bank since April 1, Jarosław Mastalerz Deputy President of the Management Board, Chief Operations Officer Born in In 1996, graduated from the Faculty of Economics and Foreign Trade at the University of Łódź. Between 1996 and 1998, he worked in the Audit Department of PricewaterhouseCoopers. In , Marketing Director and then Financial Director in Zurich Group. After the take-over of the Polish Zurich operations by Generali in 2003, he worked as a Financial Director (also responsible for bank assurance) at Generali TU and Generali TUnŻ. Since 2006, Mr Mastalerz has been working for BRE Bank Group (currently mbank Group). Co-author of the insurance project BRE Ubezpieczenia. President of the Management Board of BRE Ubezpieczenia and BRE Ubezpieczenia TUiR. Member of the Management Board of the Bank since August 1, Head of Retail Banking until March 30, On April 1, 2012 appointed as Member of the Management Board for Operations and IT Authority and principles of operation of the Management Board The Members of the Management Board are jointly liable for the overall operation of the Bank. They work collegially and inform each other about the most important matters concerning the Bank for which particular Members of the Management Board are responsible. The Management Board may appoint standing committees or teams to perform specific functions or to co-ordinate the work of organisational units of the Bank or to perform specific tasks. The following committees led by Members of the Management Board operate at mbank: Resource Management Committee (chairperson: Cezary Stypułkowski) Capital Management Committee (chairperson: Jörg Hessenmüller) Foreign Branch Supervision Committee of mbank S.A. (chairperson: Cezary Kocik) Retail Banking Risk Committee (chairperson: Lidia Jabłonowska-Luba) Financial Markets Risk Committee (chairperson: Lidia Jabłonowska-Luba) IT Architecture Committee of mbank S.A. (chairperson: Jarosław Mastalerz) IT Projects Committee of mbank S.A. (chairperson: Jarosław Mastalerz). Data Quality and IT Systems Development Committee (chairperson: Jörg Hessenmüller) Assets and Liabilities Management Committee of mbank Group (chairperson: Hans-Dieter Kemler) Credit Committee of the Bank's Management Board (chairperson: Lidia Jabłonowska-Luba) Corporate and Investment Banking Risk Committee (chairperson: Lidia Jabłonowska-Luba) The Management Board manages the Bank s business, represents the Bank and defines the guidelines for the Bank s operation, especially for the areas subject to risks, including the credit policy, the investment policy, the Bank s assets and liabilities management policy, and the guarantee policy. The Management Board presents to the Supervisory Board comprehensive information on all significant aspects of the Bank's operation and risks related to its operation as well as risk management methods, on a regular basis. The Management Board operates pursuant to its Rules approved by the Supervisory Board (available on the Bank's website). The Rules determine among others the issues which require consideration of the Management Board as a collegial body and adoption of a resolution of the Management Board. All resolutions are adopted by a majority of votes of the Management Board Members present at the meeting, and in the case of an equal number of opposing votes, the President of the Management Board has the casting vote. The Members of the Management Board strive to adopt resolutions by consensus. Pursuant to best practice principle, the Rules of the Management Board stipulate that a Member of the Management Board should abstain from participating in decision-making on such matters where a conflict of interest arises or may potentially arise between the Bank and the Member of the Management Board, his or her spouse or relatives. Rules and levels of remuneration of Members of the Management Board are determined by the Remuneration Committee of the Supervisory Board. Total remuneration of the Members of the Bank's Management Board includes a fixed and a variable part. Under the Incentive Programme for Members of the Bank's Management Board of 2012 the Members of the Bank's Management Board have the right to receive a bonus, including a cashless bonus paid in the Bank's shares, including phantom shares (i.e. virtual shares). The net ROE of mbank Group forms the basis for acquisition by the Members of the Management Board of the right to a bonus and for calculation of the base amount necessary to determine the amount of the bonus for a given financial year. Equivalent of 50% of the base amount calculated based on the amount of

144 ROE constitutes a so-called guaranteed bonus in respect of achievement of financial result. As regards the remaining 50% of the base amount, the Executive Committee of the Supervisory Board may grant a socalled discretionary bonus if it decides that a given Member of the Management Board achieved the annual/multi-year business and development objective, taking into account the situation on financial markets in the last/previous financial period/s. 40% of the bonus of a Member of the Management Board for a given financial year, constituting the sum of the guaranteed bonus and discretionary bonus, is paid in cash, the remaining 60% is paid as a cashless bonus in three equal annual deferred tranches after: 12, 24 and 36 months from the date of acquiring by the Member of the Management Board of the right to a cashless bonus. The conditions for receiving a cashless bonus and its amount depend on net ROE in the financial year for which the cashless bonus is awarded, assessment of the financial standing of the Bank by the Remuneration Committee and assessment of the performance of a given Member of the Management Board in a period longer than one financial year. Furthermore, in 2012 and 2013 the remuneration of the Members of the Bank's Management Board still included settlements under the 2008 incentive programme. All rights related to payments settled in the money equivalent based on Commerzbank shares and all rights related to payments settled in mbank shares under this programme have already been granted. Detailed information on the incentive programme for the Members of the Bank's Management Board is presented in the chapter entitled "mbank Group s incentive system". Total remuneration of the Management Board for the last two years is presented below: 2013 (PLN thousand) Members of the Management Board who performed their function on December 31, 2013 Former Members of the Management Board Basic remuneration Other profits Bonus for 2012 Remuneration paid in 2013 Cash settlement of the incentive programme based on Commerzbank shares 9, , , , , Total 9, , , (PLN thousand) Members of the Management Board who performed their function on December 31, 2012 Former Members of the Management Board Basic remuneration Other profits Bonus for 2011 Remuneration paid in 2012 Cash settlement of the incentive programme based on Commerzbank shares Additional bonus for , , , , , , Total 10, , , , ,536.9 Information on the remuneration received by particular Members of the Management Board is presented in note 44 to Consolidated Financial Statements for 2013 in accordance with the International Financial Reporting Standard, while the detailed description of the share-based incentive programme for the Management Board is presented in note 43 to Consolidated Financial Statements for Composition of the Supervisory Board - changes in 2013 The Supervisory Board acts on the basis of adopted Rules and performs the functions provided for in the By-laws of the Bank, the Code of Commercial Partnerships and Companies, and the Banking Law Act. The By-laws of mbank provide that the Supervisory Board consists of no less than five Members elected by the General Meeting for a joint term of three years. The number of the Supervisory Board Members is defined by the General Meeting. A Member of the Supervisory Board whose mandate expired in the course of the joint term of the Supervisory Board may be replaced with another person, elected by the Supervisory Board. At least half of all Supervisory Board members, including the Chairman, shall have Polish citizenship. Pursuant to the statutory requirement, at least two Supervisory Board Members are independent, unless the General Meeting decides otherwise. The independence criteria of the Supervisory Board Members were introduced by the Resolution No 23 of the XXI Ordinary General Meeting dated March 14, 2008, and are stipulated in the Rules of the Supervisory Board. The 26 th General Meeting of BRE Bank held on April 11, 2013, extended the composition of the Supervisory Board by appointing Martin Blessing and Wiesław Thor as Members of the Supervisory Board as of April 12, On November 13, 2013, Ulrich Sieber resigned from his position as Member and Deputy Chairman of the Supervisory Board as of November 30, The resignation was linked to Mr Sieber's ending term of office in the Commerzbank AG Management Board. Pursuant to a Resolution of the Supervisory Board of the Bank dated December 12, 2013, Martin Zielke was appointed as Member of the Supervisory Board of the Bank until the end of the term of office of the current Supervisory Board. Composition of the Supervisory Board at the end of 2013 is presented in the table below. Maciej Leśny - Chairman of the Bank's Supervisory Board In 1969 Maciej Leśny completed his studies at the Faculty of Economic Sciences at the Warsaw University. During his professional career, Mr Leśny worked for 6 years in the shipbuilding industry in Gdańsk and 8 years for Zakłady Elektronicznej Techniki Obliczeniowej. For more than 22 years he had worked in the central state administration, including 8 years in the position of Undersecretary of State: in the Ministry of Foreign Economic Co-operation; the Ministry of Economy; the Ministry of Economy, Labour and Social Policy; and finally in the Ministry of Infrastructure. He completed post-graduate studies and training in the United States the Michigan University (Business School of Administration) and De Paul University (Chicago). In , as a scholarship holder of the US government, Mr Leśny studied at the American University in Washington, DC. During his scholarship he served a four-month internship at the World Bank and completed a privatization training course in the International Monetary Fund. From March 1994 to 1998, Chairman of the Supervisory Board of BRE Bank. By December 2001, Member of the Supervisory Board. In 2004, Mr Leśny was reelected Chairman of the Supervisory Board. Martin Zielke Deputy Chairman of the Supervisory Board Mr Zielke studied at Göttingen University in , Master s degree (Diplom-Kaufmann) in Economics graduated in In he worked for Deutsche Bank AG, Kassel Branch. In he worked for Dresdner Bank AG in Frankfurt am Main. In , Mr Zielke was the manager of sub-project relating to retail

145 customer strategy. In 1997, he was the head of new market positioning project. In , Mr Zielke was the Regional Head of Retail Banking, Northern Region. In , Mr Zielke was the Head of special project on retail banking / Area Head of Business Development Later, until May 2001 he was a Regional Head of Portfolio Investment, Member of Operative Management Team in Deutsche Bank 24. In June-December 2001, Mr Zielke was the Regional Head of Financing Retail Banking with Deutsche Hyp, Frankfurt am Main. In January 2002 December 2004, he was the Group Manager, Retail Banking, Commerzbank AG, Frankfurt am Main. In January March 2006, Mr Zielke was the Group Manager Corporate Banking Commerzbank AG, Frankfurt am Main. From April 2006 to December 2007, Mr Zielke was the Member of the Board of Managing Directors of Eurohypo Aktiengesellschaft, Eschborn. From February 2008 to November 2010, Mr Zielke was the Group Manager, Group Finance Division, Commerzbank AG, Frankfurt am Main. Since November 2010 he has been a Member of the Board of Managing Directors of Commerzbank AG, responsible for the Private Clients Segment. Member of the Supervisory Boards of Comdirect Bank AG, Commerz Real AG and Commerz Real Investmentgesellschaft mbh. Martin Blessing Member of the Supervisory Board Martin Blessing studied Business Administration at Frankfurt and St. Gallen Universities. In 1988 he was awarded an MBA from the University of Chicago. Between 1989 and 1996 he worked for McKinsey in Frankfurt am Main and New York, becoming a Partner in In 1997 he joined Dresdner Bank AG, where he was Joint Manager of the Department for Private Customers. From 2000 to 2001 Mr Blessing has been Chairman of the Board of Advance Bank AG in Munich. Martin Blessing was appointed to the Board of Managing Directors of Commerzbank AG in 2001 and became the Chairman of the Board of Managing Directors in Stephan Engels Member of the Supervisory Board Stephan Engels studied Business Administration at the University of St. Gallen. Between he worked at Daimler-Benz AG s internal audit department. Afterwards he headed the Regional Controlling Europe at debis AG for three years. From 1996 to 2000 he served as Chief Financial Officer at debis AirFinance B.V. In 2000 he joined DaimlerChrysler Bank AG, lastly as Member of the Board for Credit then Chief Financial Officer & IT. From 2003 he worked at DaimlerChrysler Services AG, lastly as a Member of the Board for Finance, Controlling, Risk Management & Strategy. From he was a Member of the Executive Committee of Mercedes-Benz Car Group for Finance & Controlling and Head of Management Group Controlling at Daimler AG. Since April 2012 he is a Member of the Board of Managing Directors at Commerzbank AG. Andre Carls Member of the Supervisory Board Having studied business economics and completed a doctorate at the University of Cologne, Dr Carls joined Commerzbank through an international trainee programme in He subsequently held various positions in Corporate Finance and Capital Markets in Frankfurt and from 1998 to 2000 was Executive Director of the investment banking division of Commerzbank in London. From 2000 to 2008 Dr Carls was a member of the Board of Managing Directors of comdirect bank AG, from September 2002 to November 2004 as CFO and from November 2004 to March 2008 as CEO of comdirect bank AG. From March 2008 to September 2008 he held the position as Deputy President of the Management Board and CFO of BRE Bank SA. From March 2008 to December 2013 Dr Carls has been CEO of Commerzbank Auslandsbanken Holding AG and CEO of Central & Eastern Europe-Holding of Commerzbank AG. In January 2014, Dr Carls became Divisional Board Member in the Mittelstandsbank of Commerzbank AG. Thorsten Kanzler - Member of the Supervisory Board Thorsten Kanzler studied mechanical engineering and economics at the University of Technology in Darmstadt (Germany), where he obtained the Diplom-Wirtschaftsingenieur (M.Sc. Eng.). From 1991 to 2004 he was employed at Deutsche Bank AG on various positions in the treasury and risk management area in Frankfurt, New York, Sydney and London. Between 2004 and 2007, Mr Kanzler was Group Treasurer and Divisional Board Member of Corporate & Investment Banking in WestLB AG in Düsseldorf. From May 2007, Mr Kanzler was Head of Group Treasury & Capital Management at Dresdner Bank AG in Frankfurt am Main. Since the beginning of 2009, Mr Kanzler has been Divisional Board Member for Group Treasury at Commerzbank AG. Mr Kanzler is responsible for assets and liabilities management, risk management of the banking books, capital management and funding. Teresa Mokrysz Member of the Supervisory Board Ms Mokrysz graduated from the University of Economics in Katowice in In 1990, she created the Mokate brand, one of the most recognisable Polish brands in the world. She transformed a small family firm into a global business. As one of the owners, Ms Mokrysz runs eight Mokate enterprises headquartered in Poland and in other countries of Central Europe. She built manufacturing plants in the Polish towns of Żory and Ustroń from scratch and developed the manufacturing plant located nearby Prague, Czech Republic (producing coffee, tea and intermediate goods for food industry). Under her leadership the company entered nearly 70 markets, selling its products on all continents. Ms Mokrysz was a winner of the Leader of the Decade title given by Gazeta Wyborcza daily, and the Success of the Decade title by the Businessman Magazine. In 2000, the International Foundation for Women s Entrepreneurial Spirit from Los Angeles awarded Ms Mokrysz the title of "the most entrepreneurial woman of the world". Founder of scholarships for talented and impoverished youth, provides financial support to health care institutions, nursing homes, children's homes and schools. Dirk Wilhelm Schuh - Member of the Supervisory Board Dirk Schuh is a graduate of the Frankfurt School of Finance and Management, Bankakademie. Mr Schuh was employed with Dresdner Bank AG for 19 years. In he was a team leader in the credit risk department of the head office of Dresdner Bank. From 1992 to 1995 Mr Schuh was a branch director in Dortmund. In 1996, Mr Schuh was responsible for the development of the corporate banking strategy in the head office. In 1997, he was responsible for the corporate banking area in Dresdner Bank in Dresden. In 1998, Mr Schuh was appointed regional manager for the south-east region in Leipzig. In 2000, Mr Schuh was spokesperson for the Management Board of Deutsche Hypothekenbank Frankfurt Hamburg AG. In 2002, he was appointed deputy chairman of the Management Board of Eurohypo AG. In 2008, Mr Schuh was employed with Commerzbank Group as head of operations and credit risk. From 2009 to 2012 he was Divisional Board Member Group Credit Risk Management and Group Chief Credit Officer. Since November 2012 Mr Schuh has been Divisional Board Member Group Credit Risk Non-Core Assets and also since November 2013, Mr Schuh has been spokesperson of the Management Board of Hypothekenbank Frankfurt AG (formerly known as Eurohypo). Waldemar Stawski - Member of the Supervisory Board Graduate of the Gdańsk Technical University and post-graduate studies in: Accounting and Finance ( ), Financial Analysis in Business Management ( ), Microprocessors in

146 Energoelectronics and Propulsions ( ), Didactics and Pedagogy ( ). In he underwent domestic and foreign training on banking, finance and bank's organization. Mr Stawski holds the Accounting Certificate issued by the Minister of Finance and is authorised to provide bookkeeping services. He passed the exam for the candidates for members of supervisory boards at state-owned companies (certificate MPW 8 April 1995). In , Mr Stawski was a member of the teaching staff of the Martime University of Gdynia. In 1991, he became an employee of Pomorski Bank Kredytowy. In 1993, Mr Stawski became a branch director in Gdynia. In , he was Director of the Regional Branch of PKO BP in Gdańsk. In 2000, Mr Stawski was appointed Deputy President of the Management Board of PKO BP SA responsible for managing the treasury, corporate clients, capital market and corporate governance areas. From June 2002 to February 2003, Mr Stawski was Chairman of the Team of Receivers for Wschodni Bank Cukrownictwa SA. Then, Member of the Management Board of CTL Logistics SA and General Director of the Polish Association of Transport and Logistics Employers. In 2006, Mr Stawski became consultant of ALDAZ Sp. z o.o. Mr Stawski currently acts as Director at Zarzecki, Lasota i Wspólnicy Sp. z o.o. In 2012, Mr Stawski was elected Member of the Management Board of Gdańsk Business Club of which he has been a member since In 2012, he was appointed to the Council of the Martime University of Gdynia. Jan Szomburg Member of the Supervisory Board Jan Szomburg graduated the University of Gdańsk, PhD in economics. Mr Szomburg previously worked as an assistant and then as a lecturer at the University of Gdańsk. He was a founder and the President of the Management Board of the Gdańsk Institute for Market Economics. In 1990s, Mr Szomburg was Chairman of the Supervisory Board of Polski Bank Rozwoju and Bank Gdański. He was also an advisor to the ownership transformation minister, a member of the Prime Minister's Ownership Transformation Council. At present, Mr Szomburg is the President of the Management Board of the Institute for Market Economics. Wiesław Thor Member of the Supervisory Board Wiesław Thor graduated from the Central School of Planning and Statistics (currently Warsaw School of Economics - SGH), training program Train the Trainer organised by KPMG and the South Carolina Business School, and summer school of banking at McIntire University Business School. Employed with BRE Bank since 1990 in the following positions: Specialist, Division Head, Deputy Director of the Warsaw Branch, Director of the Credit Department, and Chief Risk Officer from May From August 1, 2002, Country Risk Manager at Bank Handlowy S.A. in Warsaw. On November 2, 2002, Mr Thor was appointed Member of the Management Board of BRE Bank, Chief Risk Officer. He was Deputy President of the Management Board of BRE Bank from March 15, 2008 to April 11, Lecturer at the Warsaw Institute of Banking and SGH. Long-time Member of the Steering Committee of the Risk Management Association (formerly: Robert Morris Association European Credit & Risk Management Round Table) and Member of PRMIA Polska. Marek Wierzbowski - Member of the Supervisory Board Professor ordinarius at the University of Warsaw, legal advisor, the founding partner of the law firm "Prof. Marek Wierzbowski & Partners Advocates and Legal Counselors", member of the Public Procurement Council, President of the Arbitration Court of the Chamber of Brokerage Houses, Deputy Chairman of the Supervisory Board of the Warsaw Stock Exchange, member of the Board of Directors of the Polish-U.S. Fulbright Commission, member of the Council in the European Law Institute based in Vienna. He was the deputy dean of the Faculty of Law and Administration, as well as deputy chancellor of the University of Warsaw. For many years he was an associate of law firms Weil Gotshal & Manages and Linklaters. In his legal practise he managed legal teams, supporting numerous transactions, including sales of shares in connection with privatization of large enterprises. He participated in establishing brokerage houses. Mr Wierzbowski represented the Securities and Exchange Commission and the Commission for Banking Supervision in the Supreme Administrative Court. He was an advisor to the Minister of Privatisation, the Minister of Treasury and the President of the Energy Regulatory Office. He was also the deputy president of the Court of Arbitration at the Polish Chamber of Commerce. The composition of the Supervisory Board reflects the care exercised to achieve the greatest possible diversification of members both in terms of their professional experience as well as their knowledge and skills. The Supervisory Board is composed of representatives of mbank's main shareholder, specialists of science and business, and persons having vast legal knowledge and banking expertise. Independent Members of the Supervisory Board of mbank are: Maciej Leśny, Teresa Mokrysz, Waldemar Stawski and Marek Wierzbowski. Jan Szomburg does not meet the criteria of an independent member as he was the chairman of the Supervisory Board for over 12 years, whereas Wiesław Thor is not an independent member as he was a Member of the Management Board at mbank, and holding the function of Member of the Management Board at the Bank in the past five years is one of the reasons why a Member of the Supervisory Board cannot be considered an independent member. Martin Blessing, Andre Carls, Stephan Engels, Thorsten Kanzler, Dirk Wilhelm Schuh and Martin Zielke are not independent members due to their relation with the main shareholder of mbank. The term of the Supervisory Board expires on the day of the General Meeting in Authority and principles of operation of the Supervisory Board The Supervisory Board exercises permanent supervision over the activities of the Bank in all areas of its business. In addition to the rights and obligations prescribed by law and the By-laws, the responsibilities of the Supervisory Board shall specifically include the following matters: Approving the proposals of the Management Board concerning the essential organizational structure of the Bank which shall be construed as separated structurally and organizationally basic areas of the Bank's operation reporting to particular members of the Management Board Approving the Bank s annual financial plans and multi-annual development plans Examination of all motions and matters subject to resolutions of the General Meeting of Shareholders Issuance or approval of rules provided for in the By-laws Defining management contracts and setting remuneration for members of the Board of Management Receipt of information on formation, acquisition, closing and disposal of branches, permanent establishments and parts of a business as well as of initiation and termination of lines of business and fields of activity in advance Approval of conclusion or amendment of each significant agreement or arrangement with the members of the Management Board or the Supervisory Board Approval of conclusion, amendment or termination of any significant affiliation agreements or cooperation treaties Receipt of information on expected deviations from the annual budget Issuing general guidelines for the Management Board regarding the level and structure of remuneration for senior management of the Bank

147 Approval of the policy of variable items of remuneration of the persons holding managerial positions at the Bank. Meetings of the Supervisory Board are convened by the Chairman of the Supervisory Board on his or her own initiative or on request of the Management Board or on request of the Supervisory Board Member at least three times a year. All the Management Board Members participate in meetings of the Supervisory Board except for those agenda items which directly concern the Management Board or its Members. The Supervisory Board can pass resolutions provided that at least half of its members are present at the meeting while all the members have been invited. In exceptional cases, members of the Supervisory Board may pass resolutions by casting their votes in writing, with the mediation of another member of the Supervisory Board. No votes can be cast in writing on issues added to the agenda in the course of the meeting of the Supervisory Board. Resolutions of the Supervisory Board shall be passed by an ordinary majority of votes and in case of an equal number of votes, the vote of the Chairman of the Supervisory Board shall prevail. No resolution should be passed without the consent of the majority of the Independent Members of the Supervisory Board on the following matters: Any benefits provided by the Bank or any entities associated with the Bank to the Members of the Management Board Consent for the Bank to enter into a significant agreement with an entity associated with the Bank, a member of the Supervisory Board or the Management Board, or entities associated with them. Adoption of resolution in contravention with the above mentioned requirement shall not, however affect its validity, if adopted in accordance with the provisions. The Supervisory Board has 4 Committees: the Executive Committee, the Risk Committee, the Audit Committee, and the Remuneration Committee. Members of individual committees are presented below (in the first places - chairman of the committee). Executive Committee Risk Committee Audit Committee Maciej Leśny Martin Blessing Andre Carls Jan Szomburg Dirk Wilhelm Schuh Thorsten Kanzler Maciej Leśny Waldemar Stawski Stephan Engels Andre Carls Maciej Leśny Teresa Mokrysz Remuneration Committee Andre Carls Maciej Leśny Marek Wierzbowski The tasks of the Executive Committee involve, in particular, exercising regular supervision over the Bank s operation in the periods between meetings of the Supervisory Board. The Executive Committee authorises the Management Board to acquire, encumber or dispose of real estate, perpetual leasehold, or interests in real estate, shares or equity interests in companies, and other fixed assets if the value of the transaction exceeds 1% of the Bank s own funds. Such authorisation is not required if the aforesaid acquisition took place as part of enforcement or bankruptcy proceedings, including the bankruptcy proceeding with the possibility to make an arrangement or other settlement with the Bank's debtor or in the case of the sale of assets so acquired. The Audit Committee issues opinions about the selection of the Bank s statutory auditor by the General Meeting, recommends whether the Supervisory Board should approve or reject financial statements, exercises regular supervision over the internal control system at the Bank, and approves changes proposed by the Management Board of the Bank as regards the head of the Internal Audit Department. The Audit Committee must be composed of at least one independent Supervisory Board Member with qualifications and experience in accounting and finance. The Risk Committee has among others the following tasks: exercising permanent supervision over credit risk, market risk, operational risk and liquidity risk. Moreover, the Risk Committee issues recommendations for approval or rejection of exposures posing single entity risk, in accordance with the parameters defined by the Supervisory Board at the time. Moreover, the Risk Committee issues recommendations for approval or rejection of the transactions, provided for in the Banking Law, between the Bank and Members of the Bank's authorities, and recommendations for approval or rejection of the Bank s information policy regarding risk management. The tasks of the Remuneration Committee include: reviewing the remuneration principles and amounts of remuneration paid to Members of the Management Board, setting the remuneration levels, presenting opinions concerning approval for Members of the Management Board of mbank S.A. to engage in competitive activity, issuing recommendations to the Supervisory Board regarding the general guidelines for the Management Board on the level and structure of remuneration for the Bank's senior management and the policy of variable components of remuneration paid to persons holding managerial positions at the Bank. Moreover, the Committee monitors the level and structure of the remuneration paid to senior managers. All standing committees of the Supervisory Board make reports pertaining to their performance in the past reporting period available to shareholders. The aforesaid reports are appended to the set of materials for the Ordinary General Meeting. The amount of monthly remuneration of the Members of the Supervisory Board was set in Resolution No. 26 adopted by the 25th General Meeting of BRE Bank held on 30 March The Chairperson of the Supervisory Board earns PLN 17,000 monthly, the Deputy Chairperson - PLN 14,500 monthly, while members of the Supervisory Board earn PLN 12,000 monthly. Additional monthly remuneration is granted for participation in standing committees: 50% of the monthly basic remuneration for the first committee and 25% for participating in every other committee. Total remuneration for the participation in committees cannot exceed 75% of the basic remuneration. Total remuneration of the Supervisory Board paid in is presented in the table below. Year Remuneration in PLN thousand 2, ,283.7 Detailed information about the remuneration amounts paid to individual Members of the Supervisory Board is included in explanatory note no. 44 to Consolidated Financial Statements 2013 in accordance with the International Financial Reporting Standards Operation of the Supervisory Board and its Commissions in 2013 In 2013 the Supervisory Board cooperated with the Management Board closely and regularly on the implementation of main strategic assumptions of the Bank, including rebranding which took place in In 2013, the Supervisory Board held 6 meetings and adopted 57 resolutions. The resolutions covered all areas of the Bank's operation and were consistent with the scope of supervisory functions specified in laws, KNF's recommendations and internal regulations of the Bank. The adopted resolutions concerned among others: Adoption of the Capital Management Policy Allocation of funds to the mbank Foundation Acceptance of financial statements of mbank, mbank Group and of other materials for the OGM Adoption of the Financial Plan for 2014 and for the Med-Term Plan for Adoption of the information policy in the scope of capital adequacy Adoption of the investment policy in the scope of Mezzanine Finance Approval of the general organisational structure of mbank Adoption of the remuneration system at mbank, including the policy and rules for remunerating risktakers at the Bank

148 Approval of the Employee Incentive Programme Regulations, Information Memorandum drawn up to implement the Employee Incentive Programme and set dates for acquiring shares under the Programme Appointment of the Management Board for a new term Adoption of the rules for planning and evaluating MbO objectives for Management Board Members, as well as approving MbO objectives for 2014 Adoption of the new wording of mbank By-laws, Rules of the Supervisory Board of mbank and the Rules of the Management Board of mbank, Rules of the Audit Committee, Rules of the Remuneration Committee and Rules of Risk Committee of the Supervisory Board of mbank Acceptance of the Internal Audit Plan for 2013 Approval of the risk management strategy Approval of the market risk strategy. Adoption of the compliance policy and approval of the report from the compliance risk management Adoption of the Policy of Managing Conflicts of Interest Adoption of the strategy list and policies requiring acceptance of the Risk Committee of the Supervisory Board and approval of Supervisory Board Furthermore, current results of mbank Group and its particular business areas were discussed and evaluated in a systematic, regular manner at the meetings of the Supervisory Board with reference to the financial plan. Attendance of the Supervisory Board Members at meetings and participation in the Committees in 2013 is presented in the table. Martin Blessing (since April 12, 2013) Attendance* 4/4 Executive Committee X (since April 12, 2013) Risk Committee Audit Committee Remuneratio n Committee Andre Carls 6/6 X X X Stephan Engels 3/6 X Thorsten Kanzler 5/6 X Maciej Leśny 6/6 X X X X Teresa Mokrysz 4/6 X Dirk Wilhelm Schuh 6/6 X Ulrich Sieber (until November 30, 2013) 3/5 X (until April 11, 2013) Waldemar Stawski 6/6 X Jan Szomburg 5/6 X Marek Wierzbowski 5/6 X Wiesław Thor (since April 12, 2013) 4/4 * Attendance at meetings / number of meetings during a term of office In performing its function of ongoing supervision of the Bank s operation in the periods between meetings of the Supervisory Board, the Executive Committee co-operated closely with the Management Board and was informed about the situation in the Bank on an ongoing basis. Apart from meetings of Supervisory Board, Member of the Committee has regular meetings with Members of the Management Board discussing the most important current issues of the Bank. Under the By-laws of the Bank, the Executive Committee took decisions on transactions exceeding 1% of the Bank's own funds. The Committee held four meetings in 2013 and discussed, among others, the following: Appointment of a new external auditor for mbank and mbank Group Co-operation with the Bank's external auditor Scope of the audit of the financial statements for 2013 Assessment of and supervision over the Internal Audit Department Compliance of the process of preparing financial statements with the law and applicable regulations Conclusions from the audit of the annual financial statements of BRE Bank Group for 2012 Assessment of and supervision over the internal control and risk management system at mbank in 2012 Approval of reports of the Compliance Department. The Audit Committee recommended that the Supervisory Board approve the following: Reports of the Management Board on operation of BRE Bank and mbank Group in 2012, and Financial Statements for 2012 Appointment of a new external auditor Annual report on compliance risk management at BRE Bank in 2012 Report of the Outsourcing Coordinator in respect to the implementation of the Outsourcing Policy at mbank in 2012 Annual report on supervising the processes of handling claims and complaints at BRE Bank in 2012 Audit Plans of the Internal Audit Department for At its meetings in 2013 the Risk Committee regularly discussed the quarterly risk reports (capital adequacy, liquidity risk, credit risk, operational risk, market risk and interest rate risk), and a range of issues related with the credit portfolio. Other major issues considered by the Committee included the largest exposures, development of risk parameters and of loan loss provisions at the Bank and in the Group. In 2013, the Risk Committee issued 73 recommendations concerning exposures posing single entity risk in accordance with the parameters defined by the Supervisory Board. The Remuneration Committee held two meetings in 2013 and discussed the issues concerning adoption of: Regulations of Incentive Programme at mbank MbO objectives for Members of the Management Board of mbank Amendments to Management Contracts of Members of the Management Board "Remuneration policy of mbank Identification of risk takers at mbank and rules for their remuneration "Rules for planning and management by objectives assessment (MbO) for Members of the Management Board of mbank. In 2013 the Remuneration Committee took 30 decisions and submitted recommendations on the above issues to the Supervisory Board. The Audit Committee has been regularly informed about the results and the financial standing of the Bank and mbank Group and has been receiving and analysing information on actions taken in the key risk areas

149 17. Statements of the Management Board True and fair picture in the presented reports The Management Board of mbank S.A. declares that according to their best knowledge: The annual consolidated financial statements and the comparative figures were prepared in compliance with the binding accounting principles and present a true, fair and clear picture of the financial position and the condition of the assets of as well as its financial performance. The report of the Management Board on the business of the mbank Group in 2013 presents a true picture of the developments, achievements, and situation of the, including a description of the main risks and threats. Appointment of the auditor The Auditor authorised to audit financial statements and performing the audit of the annual financial statements of for 2013 Ernst & Young Audyt Polska Spółka z ograniczoną odpowiedzialnością Sp. k. - was appointed in compliance with legal regulations. The audit company and its auditors fulfilled the conditions necessary for an impartial and independent audit report in compliance with respective provisions of Polish law and professional standards. Signatures of the Management Board of mbank S.A. Date First and last name Position Signature Cezary Stypułkowski President of the Management Board, General Director of the Bank Lidia Jabłonowska-Luba Deputy President of the Management Board, Chief Risk Officer Przemysław Gdański Deputy President of the Management Board, Head of Corporate and Investment Banking Jörg Hessenmüller Deputy President of the Management Board, Chief Financial Officer Hans-Dieter Kemler Deputy President of the Management Bard, Head of Financial Markets Cezary Kocik Deputy President of the Management Board, Head of Retail Banking mbank. Mobile bank Jarosław Mastalerz Deputy President of the Management Board, Head of Operations and Information Technology 131