Interim Financial Statements of Nordea Bank Polska S.A. 2nd quarter of 2007

Transcription

1 Interim Financial Statements of Nordea Bank Polska S.A. 2nd quarter of 2007

2 Selected financials In thousand of PLN In thousand of EUR period period period period from from from from 01/01/2007 to 01/01/2006 to 01/01/2007 to 01/01/2006 to 30/06/ /06/ /06/ /06/ Interest income Commission income Profit before income tax Profit for the period Decrease in cash and cash 5 equivalents ( ) (10 514) (71 133) (2 696) 6 Loans and advances to banks Loans and advances to customers Total assets Deposits from banks Deposits from customers Total liabilities Total equity Number of shares Book value per share (PLN 14 /EUR) 17,65 16,08 6,11 3,98 15 Capital adequacy ratio 10,40 10, Earnings per share (PLN/EUR) 0,78 0,70 0,21 0,18

3 Profit and Loss Account OPERATING INCOME 01/04/ /01/ /04/ /01/2006 Note 30/06/ /06/ /06/ /06/2006 Interest income Interest expenses Net interest income Commission income Commission expenses Net commission income Gains on fair value measurement and revaluation of financial instruments Other operating income Total operating income OPERATING EXPENSES Administrative expenses staff costs other administrative expenses Depreciation Total operating expenses Impairment on loans and advances (692) (1 493) Profit before income tax Income tax Profit for the period /04/ /01/ /04/ /01/ /06/ /06/ /06/ /06/2006 Earnings per share 0,44 0,78 0,43 0,70 Diluted earnings per share 0,44 0,78 0,43 0,70 3

4 Balance Sheet ASSETS 01/01/ /01/ /01/2006 Note 30/06/ /12/ /06/2006 Cash and balances with central bank Other financial assets at fair value through profit or loss Loans and advances to banks Loans and advances to customers Financial assets held for trading Investments in subordinates Intangible assets Property, plant and equipment Deferred tax assets Other assets TOTAL ASSETS LIABILITIES 01/01/ /01/ /01/ /06/ /12/ /06/2006 Deposits from banks Deposits from customers Debt securities issued Financial liabilities held for trading Other liabilities Deferred tax liabilities Subordinated liabilities Reserves TOTAL LIABILITIES Equity Share capital Supplementary capital Reserve capital Profit for the period Total equity TOTAL LIABILITIES

5 Statement of Movements in Equity Share Supplementary Reserve Retained earnings and profit for the Total capital capital capital period equity Balance at 1/01/ Distribution of profit for (50 068) - Profit for the period Balance at the end of 30/06/ Share Supplementary Reserve Retained earnings and profit for the Total capital capital capital period equity Balance at 1/01/ Distribution of profit for ( ) - Coverage of retained losses - (16 805) Profit for the period Balance at the end of 31/12/ Share Supplementary Retained earnings Total capital capital Reserve capital and profit for the period equity Balance at 1/01/ Distribution of profit for ( ) - Coverage of retained losses - (16 805) Profit for the period Balance at the end of 30/06/

6 Cash Flow Statement 01/04/ /01/ /04/ /01/ /06/ /06/ /06/ /06/2006 Operating activities Profit for the period Adjustment for reconciliation of net profit against net cash from operating activities (15 550) (12 644) (2 008) (719) Interest paid and received (13 309) (12 756) (690) 620 Income tax (2 293) (1 379) (1 379) Effect of exchange differences on operating activities 52 (1 115) Operating activities Changes in operating activities ( ) ( ) ( ) ( ) Change in loans to financial institutions (2 336) (22 338) (4 356) (80 303) Change in advances (lending business) ( ) ( ) ( ) ( ) Change in derivative instruments (4 557) 84 (535) (1 870) Change in other assets except for financial instruments Changes in operating liabilities Change in deposits by financial institutions (92 870) Change in deposits and advances by other institutions ( ) Change in other liabilities (27 202) Cash flow in operating activities ( ) ( ) ( ) Investing activities Acquisition of fixed assets (5 875) (11 977) (1 860) (3 026) Sale of fixed assets Acquisition of intangible assets 5 (314) (10) (58) Sale of intangible assets (40 664) (29 768) Cash flow in investing activities (43 316) (31 593) Financing activities Subordinated liabilities Other Cash flow in financing activities Decrease in cash and cash equivalents ( ) ( ) (10 514) Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents ( ) Balance sheet change in cash and cash equivalents ( ) ( ) (10 514) Interest paid Interest received

7 General Information about the Issuer Information about Nordea Bank Polska S.A. Nordea Bank Polska S.A. is a bank with the registered seat in Poland: Gdynia,ul. Kielecka 2, NIP , REGON , registered with the District Court in Gdańsk-North in Gdańsk, 8th Commercial Division of the National Court Register under number KRS: The Bank provides universal banking services to all entities, business and non-business alike, as well as to private individuals. The Bank's shares are listed on the Warsaw Stock Exchange. 7

8 1. Description of key factors influencing the performance in the second quarter of 2007: The net profit recorded by the Nordea Bank Polska S.A. for the second quarter of 2007 amounted to PLN 14.9m. This is 3% more than the result posted in the same period of 2006 (PLN14.5 m). The following table summarises the changes that occurred in the principal lines of Nordea Bank Polska SA s profit and loss account for the second quarter of 2007 compared with the same period last year : Selected items of the profit and loss account (PLN thousand) 1Q Q 2006 Change Total operating income ,7% Total operating expenses ,9% Operating result ,8% Profit before tax ,1 Income tax ,1% Net profit ,0% When analysing the results, one should remember that the basis of comparison, that is the results for the second quarter of 2006 is not typical as it includes the outcome of successful debt collection activities (the recovery of interest from restructured loans), which balances out the effect of the factors positively influencing the current period s results: - a dynamic growth in the business volume (a 23% increase in the balance sheet total), - favourable changes in the structure of assets and liabilities (a dynamic growth in the credit portfolio with the reducing volume of deposits placed with banks, a smaller proportion of irregular loans, a dynamic increase in the balances of current accounts with term deposits remaining almost stable), - a higher proportion of commission income. What is also visible is a major increase in operating expenses, caused by the commenced project aiming at the centralization of back office functions on the Bank and at a considerable extension of the retail network. Operating income The total operating income earned by the Nordea Bank Polska S.A. in the second quarter of amounted to PLN 76.6 m. This represents a 21% increase compared with the amount achieved in the corresponding period of The most important income items were as follows: - net interest income reached (2,3% less than in the second quarter of 2006). On the interest income side 16% higher- this is the result of a 23% increase of the volume of working assets (income-generating), resulting from a high dynamics of receivables from 8

9 customers (a global increase in net figures of around 46% - mainly mortgage loans to private individuals and investment loans to corporate customers, as well as an upward trend of the interest rates on loans, especially those denominated in foreign currencies. The mismatch between the increase in interest income and the increase in the volume is the consequence of an overstatement of the reference base - i.e. the income generated in the second quarter of by the result of effective debt recovery actions carried out in that period (recovery of interest on restructured loans). Interest costs went up 33% as a result of an increase in the balance of cost generating liabilities (24%), an increase in the interest rates on foreign currency deposits (an average of 60 base points) as well as a growth in the amount of deposits representing higherinterest bearing forms of current accounts (progressive accounts where the interest rate goes up in line with the balance or overnight deposits); - net commission income amounted to KPLN ( 51,6% more than in the second quarter of 2006). This is the consequence of an increase in commission income by 45,1% and commission costs by 22,5%. It must be mentioned here that on the one hand it is the result of a dynamic sale of mortgage loans, intermediation in the investment fun products and a growing scale of payment operations (current accounts, payment cards). On the other hand we are observing here growing costs of loan insurance, fees paid to credit agents and the costs of payment operations; - result of fair value measurement and revaluation of financial assets in the second quarter of 2007 at the level of KPLN is 68% higher than in the same period of the previous year. This was mainly brought about by a favourable growth in derivative instrument operations (swap and forward), foreign currency exchange and foreign exchange positions. Operating expenses In the second quarter of 2007, operating expenses reached 51,8 mpln, which is 39,1% more than in the same period last year. The specific cost items were as follows: - staff costs: amounting to turned out to be 27,7% in consequence of raising both the salary level and the headcount (by 15,8%, comparing the number of FTEs at the end of March 2006 and March 2007) as well as structural changes coming from the expansion of the Bank s branch network and the centralization of back office functions (the number of staff employed in the branches between June 2006 and June 2007 increased by 22,5%, whereas the number of staff in the Head Office by 10,1%); - other administrative expenses ( ) were 51,9% higher than those posted in the second quarter of 2006; - the cost of depreciation of fixed assets (6 018 ) fell 3,7% following a decrease in the volume of fixed assets caused (disposal of redundant office space and the outsourcing of the car fleet). 9

10 Balance sheet The table below presents the changes occurring in the selected most important components of the balance sheet between the end of the second quarter of 2007 and the same period of last year: Selected items (PLN million) Change % Balance-sheet total 7 939, ,9 +23% Loans and advances to customers, net 6 730, ,2 +46% Loans and advances to banks 300, ,0-72% Loans and advances from customers *) 5 256, ,5 +22% Loans and advances from banks**) 1 951, ,2 +31% Shareholders' equity 593,5 540,7 10% *) Including liabilities due to the issue of debt securities **) At 30/06/2007, inclusive of the subordinated loan. The scale of business of the Bank as measured by total assets at the end of June 2007 reached 7 939,8 mpln. Compared to the same period of 2006, the Bank posted a 23% growth in the scale of operations. A high dynamics and a growth in absolute values was observed mainly in receivables from customers and in their deposits, whereas there was a significant decline in receivables from banks. A 10% increase in equity results mainly from the allocation of the whole 2006 profit for the increasing of reserve capital. The receiving of a subordinated loan in the amount of 79 mchf (the equivalent of 179,6 mpln as at ) will allow the Bank to fulfill the capital adequacy requirements in correspondence with the dynamically growing credit portfolio. Credit portfolio The gross volume of credit (without interest, including commercial paper and municipal bonds) grew in the period under analysis by 43%. PLN receivables went up by 40,4%, whereas the foreign currency equivalent of receivables went up by 48,4%. In view of the fact that the PLN exchange rates in relation to the main currencies in which loans are granted (EUR and the Swiss frank) as at were strengthened in comparison to the rates observed 12 months earlier, it can be said that the increase in the volume of granted foreign currency loans is in fact a little lower. An especially high dynamics was seen in the case of mortgage loans for private individuals, operating loans for corporate customers and public sector units. In absolute terms, the increase in the volume of loans granted in PLN is almost two times bigger (+1,3 bnpln) than in the case of foreign currency loans (+0,7 bnpln), but it must be pointed out that in practice this represents only an increase in mortgage loans granted in CHF (+0,741 bnpln). Loans in USD went down by 30% (the result of an increase in the interest rate of the American currency). It must be stressed that the dynamics of the credit portfolio in Nordea Bank Polska S.A. over the analysed period is higher than in the banking sector. Whereas between June 2006 and June 2007 receivables from the non-financial sector and from the budget sector in the whole banking sector went up by 29%, in Nordea Bank Polska S.A. they went up by almost 44%. We also 10

11 observe an improvement in the quality of the credit portfolio resulting from loan restructuring and intensive debt recovery activities. A favourable change was also observed in the case of the structure of assets: the percent of more profitable receivables from customers went up from 72% to 85%, whereas the share of receivables from banks went down from 16% to 3%. The share of interest income generating assets (with the exclusion of funds maintained on the current account in the NBP as the mandatory reserve) is stable at 95%. Deposit base The amount of liabilities to customers at the end of the second quarter of 2007 was 22% higher than at the end of June In absolute terms this growth was mainly influenced by deposits from corporate customers (+540 mpln) and from the budget sector (+222 mln zł.), to a lesser extent from private individuals (+110 mln zł). A similar trend is observed in the whole banking sector: excess liquidity of corporations is deposited with banks as term deposits while any free funds owned by households are more and more often invested in alternative forms of savings (mainly investment funds). What is also a positive factor from the point of view of interest costs is the fact that the growth in the balance of funds on current accounts (+34%) significantly exceeded the growth in the volume of time deposits (+13%). Liabilities to banks in the period under analysis went up by 19% as a result of an increase in the volume of inter-bank deposits. Despite a significant growth in the volume of deposits from customers and from banks, their share in the balance sheet total went down a little: 66,2% (66,9% in June 2006) and 22,3% (23,1% in June 2006). The share of cost generating liabilities went up in the same period to 90,9%, taking into account the subordinated loan, compared to 90,2% for the first half of 2006). This is the consequence of the decline in the share of the Bank s capital in the balance sheet total from 8,4% at the end of June 2006 to 7,5% at the end of June

12 2. Significant Accounting Policies Statement of compliance The financial statements of Nordea Bank Polska S.A. for the 6 month period ended 30 June 2007 have been prepared in accordance with the International Accounting Standard 34 Interim Financial Reporting as adopted by the European Union and other applicable regulations. These are the first interim financial statements in which the Bank applied IFRS 7 (financial instruments disclosures) which had been approved by the European Union. The financial statements were approved for publication on... An earlier application of standards that are not yet mandatory Other standards or amendments to the existing standards and interpretations issued by the International Financial Reporting Standards Interpretation Committee, both the approved ones and the ones pending approval by the European Commission are either not applicable to the Bank s financial statements or would not have any material influence on these financial statements. The basis of preparation of the financial statements The financial statements are presented In the Polish zloty (PLN) and rounded to the nearest thousand. These financial statements incorporate the concept of fair value of financial assets and financial liabilities measured at fair value through profit or loss, including derivative instruments, as well as financial assets classified as available-for-sale, except for such assets whose fair value cannot be reliably measured. Other financial assets and financial liabilities are carried at amortised cost (dues to and from banks and customers as well as debt securities classified as loans and receivables) or at cost less any impairment losses. The preparation of the financial statements in compliance with the IFRS requires the management to make judgements, estimates and assumptions influencing its accounting policies and the presentation of the assets and liabilities, as well as income and expenses. The estimates and assumptions are based on available historical data and a number of other factors that are deemed to be reasonable under the circumstances, the results of which constitute the basis for estimating the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and the underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period when the estimate is revised, provided that such an estimation affects only that period, or in the period of the revision and in future periods if the revision affects both current and future periods. The accounting policies presented below have been applied to all the reporting periods presented in the financial statements. 12

13 Comparability with previous periods To ensure comparability of the financial data and as a consequence of implementation of IFRS 7, the following significant changes in the presentation of financial data were made compared with 30/06/2006: 1. The Profit and Loss Account for the period 01/01/ /06/ Included in Other operating income : o change (decrease) in the value of subsidiaries measured at cost in the amount of PLN (20) thousand, which was previously disclosed separately in the profit and loss account o Dividend income of PLN 75 thousand, which was previously disclosed separately in the profit and loss account o Sale of fixed assets and intangible assets in the amount of PLN 2 thousand, which was previously disclosed separately in the profit and loss account 2. In the Note Net commission income, Commission from financial intermediation in the amount of PLN 465 ths was presented in a separate line, which items was previously presented under Other commission income for the period 01/01/ /06/ The Balance Sheet at 30/06/ Under Other financial assets at far value through profit or loss, the following were presented: o Treasury bills and other debt securities eligible for rediscounting with the central bank in the amount of PLN 456,588 thousand, which was previously disclosed separately in the Balance Sheet o Shares amounting to PLN 395 thousand, which were previously disclosed separately in the Balance Sheet o under Loans and advances to banks, financial data previously presented under Debt securities in the amount of PLN 37,615 thousand were added, which were previously disclosed separately in the Balance Sheet - Prepayments in the amount of PLN 3,153 thousand, which were previously disclosed separately in the Balance Sheet, were presented under Other assets - Accruals in the amount of PLN 14,363 thousand, which were previously disclosed separately in the Balance Sheet, were presented under Other liabilities. 4. The Balance Sheet at 31/12/ Under Other financial assets at far value through profit or loss (assets), the following were presented: o Treasury bills and other debt securities eligible for rediscounting with the central bank in the amount of PLN thousand, which were previously disclosed separately in the Balance Sheet o Shares PLN 986 thousand, which were previously disclosed separately in the Balance Sheet 13

14 - Financial data previously presented under Debt securities in the amount of PLN 38,409 thousand were added under Loans and advances to banks (assets), which were previously disclosed separately in the Balance Sheet - Prepayments in the amount of PLN thousand, which were previously disclosed separately in the Balance Sheet, were presented under Other assets - Accruals in the amount of PLN thousand, which were previously disclosed separately in the Balance Sheet, were presented under Other liabilities. Transactions in foreign currencies Transactions in foreign currencies are translated at the exchange rates applicable at the transaction date. Monetary assets and liabilities denominated in foreign currencies which are stated at historical costs are translated at exchange rates effective at that date. Exchange differences arising from translation are recognised in the profit and loss account. Non-monetary assets and liabilities denominated in foreign currencies which are stated at historical costs are translated at the exchange rates prevailing at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies which are stated at fair value are translated to the currency of reporting at the foreign exchange rates applicable at the date when their fair values were determined. Financial assets and liabilities Classification The Bank classifies financial instruments into the following categories: - financial assets or financial liabilities at fair value through profit or loss, - loans and receivables, - other financial liabilities. The Bank does not classify financial assets into the categories: held-to-maturity or available-for-sale. (a) Financial assets or financial liabilities at fair value through profit or loss These are financial assets and liabilities meeting one of the following criteria. (1) They are classified as held-for-trading. Financial assets or financial liabilities are classified as heldfor-trading if they are acquired or incurred mainly for the purpose of being sold or repurchased in the future; They are a part of the portfolio of certain financial instruments managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivative instruments are also categorised as held-for-trading unless the derivative is a designated and effective hedging instrument. (2) Upon initial recognition they were designated by the Bank as measured at fair value through profit or loss. The Bank applies such a designation when one of the following conditions is met: - the designated financial asset or financial liability is a compound instrument containing one or more embedded derivative instruments eligible for separate recognition and the embedded 14

15 derivative instrument may not considerably change the cash flows originating from the principal agreement or the separation of the derivative instrument is prohibited ; - such a qualification of the asset or the liability eliminates or considerably reduces inconsistency in measurement or recognition (the so-called accounting mismatch due to the different method of measurement of assets or liabilities or different recognition of related profits or losses); - the group of financial assets or financial liabilities or both of these categories is appropriately managed and their results are measured at fair value, in line with documented principles of risk management or the Bank s investment strategy. (b) Loans and receivables Loans and receivables are financial assets other than derivative instruments, whose terms of payment are defined or definable, which are not quoted in an active market, other than: - financial assets which the entity intends to sell immediately or in a near future, which it has qualified as held for trading and those that after initial recognition were designated by the entity as measured at fair value through profit or loss; - financial assets designated by the entity upon initial recognition as available for sale; or - financial assets the holder of which may not recover a substantially complete original investment for reason other than deterioration in credit service, which are qualified as available for sale. (c) Other financial liabilities Other financial liabilities are contractual obligations of the Bank to deliver cash or another financial asset to another entity, other than those that are held for trading or set to be measured at fair value through profit or loss. This category includes deposits from banks, deposits from customers and debt securities in issue. Recognition The Bank recognises a financial asset or a financial liability when and only when it becomes a party of the agreement for the given instrument. The Bank recognises a regular way purchase or sale of a financial asset using settlement date accounting. Loans and receivables are recognised when cash is advanced to the borrowers. Derecognition A financial asset is derecognised from the balance sheet when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers the contractual rights to receive the cash flows from the transaction transferring a material part of the risk and rewards of ownership of the financial assets. 15

16 The Bank derecognises a financial liability (or a part of one) when and only when the liability has expired, that is when the contractual obligation has been met, forgiven or when it has expired. Measurement Upon initial recognition, a financial asset or a financial liability is measured at fair value increased, in the case of a financial asset or financial liability not classified at fair value through profit or loss, by transaction costs if directly attributable to the acquisition or issue of the financial asset or financial liability. Subsequently, the Bank measures financial assets, including derivatives being assets, at fair value without any deduction for transaction costs to be borne on sale or other disposal, except for: - loans and receivables (Loans and advances to banks and to customers, NBP bonds), which are measured at amortised cost using the effective interest rate method - investments in associates, which are measured according to the share held by the Bank in the net assets, allowing for any impairment losses. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest rate method except for financial liabilities measured at fair value through profit or loss (derivative financial instruments). The fair value of investments in an active market is based on current bid prices. If there is no active market for a given instrument or for unlisted securities, the Bank establishes the fair value using valuation techniques, which include recent market transactions, the analysis of discounted cash flows, option pricing models and other valuation techniques commonly applied by marketplace participants. If it is impossible to obtain a reliable fair value measurement, unlisted financial instruments are recognised at cost and periodically tested for impairment. The fair value of debt instruments listed in active markets is measured on the basis of the current market prices for such instruments. The Bank does not hold any debt securities that are not listed in an active market and which would be classified as measured at fair value. The Bank measures the fair value of derivative financial instruments using measurement techniques. All models are approved before use and adjusted in order to ensure that the results achieved reflect the actual data and comparable market prices. All the models use observable data only, taken from an active market. The Bank has the following derivative instruments: - Forward FX transactions, currency swaps, interest rate swaps, cross-currency swaps and FRA transactions. Such transactions are measured at fair value based on the method of discounting future cash flows. - Currency options: option transactions are measured at fair value with the use of option measurement models. 16

17 Gains and losses on subsequent measurement Gains and losses from a change in the fair value of a financial asset or financial liability eligible for being recognised at their fair value through profit or loss, not being a part of a hedging relationship, shall be charged to income or cost. Offsetting financial instruments A financial asset and a financial liability are offset and the net amount is presented in the balance sheet when and only when there is a legally enforceable legal right to set off the recognised amounts and when the settlement is to be carried out on a net basis or the asset is realised and the liability settled simultaneously. Hedge accounting The Bank does not apply hedge accounting. Impairment of financial assets Financial assets measured at amortised cost As at each balance-sheet date, the Bank assesses whether there is any objective evidence of impairment of any financial asset (or a group of financial assets). Objective evidence of impairment of a financial asset or a group of financial assets may be a single event or a cumulative effect of several events. The Bank has included the following examples of events in a list of objective evidence of impairment: - significant financial difficulties of the issuer or obligor, - a breach of contract such as a default or delinquency in payment of interest or principal amount, - a concession made by the Bank to the borrower, for economic or legal reasons relating to the Borrower s financial difficulty, which the Bank would not otherwise consider; - highly probable bankruptcy of the borrower or other financial reorganisation of the borrower; - the disappearance of an active market for a given financial asset caused by financial difficulties, or - observable data indicating that there has been a measurable decrease in the estimated future cash flows related to a Bank of financial assets since their original recognition, although such a decrease cannot yet be identified with the individual financial assets in the Bank, including: - adverse changes in the payment status of the debtors (e.g. increasing number of delayed payments), or - adverse changes in the domestic or local market that are correlated (may contribute to) with the impairment of assets coming within such a Bank (e.g. increase in the unemployment rate, adverse economic or legal changes in a given sector of economy). The above list presents examples and does not exhaust all possible situations that may be considered as sufficient evidence of impairment. The Bank tests all its credit exposures for impairment. Exposures for which evidence of impairment has been found are subject to impairment testing on an individual basis. This process makes it possible to classify all the Bank s customers into the proper risk 17

18 categories and to determine whether a loss has been incurred (a given exposure has become impaired). Exposures in the case of which no evidence of impairment has been found are subject to tests for incurred but not reported impairment losses ( IBNR ). The purpose of portfolio IBNR tests is to estimate the losses that have already been incurred (and influenced future cash flows that were to be settled in accordance with the agreement), but are still unidentifiable under individual impairment tests. To make portfolio tests, credit exposures are grouped in such a manner as to maintain an approximate specification of credit risk of individual sub-portfolios. The basic factors taken into account are: customer type, product type, sector, delinquency in payment. The portfolio testing at the Bank does not cover customer exposures whose objective impairment reasons have been recognised under individual impairment tests. The results of historical data analyses constituting the basis for provisioning are further revised to take account of the impact of current factors which did not exist in the past, and to eliminate the impact of the factors that existed in the past and do not exist now. If there is any objective evidence of credit exposure impairment, the amount of impairment loss is calculated as the difference between the carrying amount of the asset in question and the present value of estimated future cash flows. The time value of money is included in the calculation of estimated cash flows both in the case of expected additional payments, as well as expected results of debt recovery activity (enforcement against collateral held). When estimating the value of collateral held, the Bank takes into consideration the possible price to be obtained from a forced sale. This price is additionally reduced by the expected costs of enforcement, sale, storage, etc. In the case of exposures towards business entities, to rate risks and carry out impairment tests, the Bank applies an internal rating system, which is to reflect the probability of default. When the probability of recovery of the loan receivables with recognized impairment does not increase and the recovery of the receivables is in practice impossible, the amount of the loan receivable is written off against the related impairment provision. Receivables that were previously written off and subsequently recovered are presented in other operating income. Property, plant and equipment and intangible assets Items of property, plant and equipment and intangible assets are initially measured at cost or deemed cost. After the initial recognition of items of property, plant and equipment as well as intangible assets as assets, the Bank carries them at cost less accumulated depreciation and any cumulative impairment losses. Goodwill All business combinations are accounted for using the acquisition method. Goodwill represents the difference between the cost of acquisition and the fair value of identifiable assets acquired. 18

19 Goodwill is allocated to cash generating units and it is not subject to depreciation. Goodwill is tested for impairment on an annual basis. Subsequent expenses The Bank recognises in the carrying amount of property, plant and equipment and intangible assets the cost of replacing a part of such items at the moment such cost is incurred if the Bank is likely to obtain future economic benefits related to the assets, and the cost to buy or manufacture may be reliably measured. Other costs are charged to the profit and loss account when incurred. Depreciation Depreciation is charged to the profit and loss account on a straight-line over the economic useful life of a given tangible or intangible asset. Land is not subject to depreciation. The estimated economic useful lives are as follows: buildings and structures machinery and equipment fittings Vehicles computer software licences years 3-22 years 5-10 years 5 years 5 years 2-5 years The residual value is subject to annual estimation. Other receivables Trade and other receivables are carried at cost less any impairment losses. Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise items maturing within three months of their acquisition date, including: Cash and balances with the central bank of unlimited disposal, Treasury bills and other eligible bills (including loans and advances to other banks, receivables from other banks and short-term securities of the State Treasury). Impairment of assets other than financial assets The carrying amounts of the Bank's assets other than deferred tax assets are reviewed as at the balance-sheet date to determine whether there is any indication of impairment. If so, the recoverable amount of the assets shall be estimated. For goodwill and intangible assets of an indefinite useful life and intangible assets not yet available for use, the recoverable amount is estimated at each balance-sheet date. An impairment loss is recognised whenever the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss account. 19

20 In the case of cash generating units, impairment losses first reduce the goodwill allocated to these units (group of units), and then proportionally reduce the carrying amount of other assets in the unit (group of units). Calculation of recoverable amount The recoverable amount of other assets is the higher of an asset s net selling price and its value in use. To assess the value in use, estimated future cash flows are discounted to their present value at a pre-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the asset. In the case of assets not generating independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the assets belong. Reversal of an impairment allowance An impairment allowance in respect of goodwill is not reversed. In the case of other assets, an impairment allowance is reversed if there has been a change in the estimates used to define their recoverable amount. An impairment allowance is reversed only to the extent that the assets' carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. Equity Share capital The share capital is shown at its nominal value consistent with the Bank s statues. Supplementary capital The supplementary capital is established with out-of-profit payments or issue premium earned from the issue of shares less the pertinent direct costs. Reserve capital The reserve capital comprises the fixed assets revaluation reserve, the general banking risk fund and other reserves. The revaluation reserve resulting from valuation made in previous years based on separate regulations is transferred to the supplementary capital upon the disposal of an item of property, plant and equipment (when it is sold, handed over, liquidated or recognised as missing). Employee benefits Employee benefits may be short and long-term. Employee benefits include salaries, bonuses, holiday pay, social insurance premiums and jubilee awards. Employee benefits are recognised as expenses when incurred. The liabilities due to long-term employee benefits constitute the amount of future benefits which an employee will receive in consideration of the work provided during the current period and previous periods. 20

21 Provisions Provisions are recorded in the balance sheet if the Bank has such a legal or constructive obligation as a result of past events, as well as if it is probable that an outflow of economic benefits will be required to settle such an obligation. If the effect is material, the amount of provisions shall be defined based on discounted expected cash flows at a rate before tax, which reflects the current market assessment regarding the time value of money and, if applicable, risks specific to the liability. Provisions for such off-balance sheet liabilities as guarantees, letters of credit and unused credit lines are recognised in pursuance of such principles. Net interest income Interest income and expenses for all financial instruments are recognised in the profit and loss account in amounts resulting from measurement at amortised cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument, or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates the cash flows, considering all contractual terms of the financial instrument, however, it does not consider future loan losses. The calculation includes all fees and points paid or received between the parties and items constituting an integral part of the effective interest rate, and all other premiums and discounts. Once a financial asset or a Bank of similar financial assets has been written down for impairment, interest income is thereafter recognised at the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. The net interest income also includes interest accruing on past due debts, received during the reporting period. Income and expenses on fees and commissions Commission income arises from the provision of financial services offered by the Bank and it comprises lending, Bank's credit commitment fees, card issue fees, fees for cash management, brokerage services, investment advice and financial planning, investment banking services, services related to project finance and structuring of financial transactions, as well as asset management services. Fees and commissions directly associated with the generation of financial assets or liabilities (both income and expenses) are recognised in profit or loss as an adjustment to the effective interest rate calculation. Fees and commissions received due to revolving credits, credit lines, credit cards, guarantees and letters of credit are charged to profit or loss on a straight-line basis over the period till their maturity and they are presented as commission income. 21

22 Other fees and commissions related to financial services offered by the Bank, such as cash management, brokerage services, investment advice, financial planning, investment banking, investment finance, structuring financial transactions, and other asset management services, are taken to the profit and loss account the moment the service is provided. Dividends received Dividends are recognised in profit upon acquisition of the right to receive them. Gains (losses) on financial instruments at fair value and revaluation This category of result comprises: - gains and losses on the disposal of or a change in the fair value of assets and liabilities at fair value through profit or loss (including derivative financial instruments). Interest and amortisation of premiums from and discount of securities designated as at fair value are presented under net interest income. - gains and losses from the measurement of financial assets and liabilities denominated in foreign currencies (revaluation of the balance sheet position). Other income and expenses Other income and expenses comprise the profit or loss made by the Bank on its activities not related directly to the financial activity. These are especially income and costs from the sale of fixed assets, salary costs, administrative expenses. Income tax Income tax is comprised of current and deferred taxes. Income tax is accounted for in the profit and loss account. Current tax is an expected tax liability related to income taxable at the tax rate effective as at the balance-sheet date, including all adjustments to the tax liabilities of previous years. Deferred tax assets and liabilities are calculated based on the balance-sheet method by calculating temporary differences between the carrying amount of the assets and liabilities and their tax value. Deferred tax assets, including assets due to unsettled tax losses carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. 22

23 7. Segment Reporting The operating activities of Nordea Bank Polska S.A. are divided into three basic segments: Retail Banking, Corporate Banking and Financial Segment. The Retail Banking segment comprises transactions made at the Bank s branch network (excluding markets transactions). It also includes the operations of the Internet Branch, which is a self-contained branch, as well as the Call Centre for Bank customers and the Retail Sales Centre. Retail services are offered to customers considered as retail customers, i.e. small businesses, private individuals running a business and individual customers. The Corporate Banking segment comprises transactions made with corporate customers (companies of high turnover), Nordic customers, municipalities, hospitals, as well as debt paper trading. It also offers markets products to customers (foreign exchange transactions). The Financial Segment comprises money market transactions, foreign exchange transactions and derivative instruments used for the purpose of managing the market risk, management of subsidiaries and debt securities transactions concluded in the interbank market. Banking income and expenses of a segment are income and expenses earned/incurred from sales to external customers, as well as internal settlements between the Bank's segments. External banking income and expenses were allocated to segments based on assumptions allocating groups of customers to specific segments (so called customer responsible units). The internal banking result is based on defined assumptions on internal transfer prices. Segment operating expenses are costs of operation of a given segment that may be directly assigned or allocated thereto. Internal transfer prices used in sales transactions between the segments are based on market prices with appropriate mark-ups The Bank's assets and liabilities are allocated to segments based on so called customer responsibility. The Corporate and Retail Divisions are assigned the customer deposits and loans for which they are respectively responsible. The assets and liabilities that may not be allocated to separate segments are accounted for under "unallocated assets" and "unallocated liabilities". Nordea Bank Polska S.A. operates exclusively in Poland. No material differences in the risk resulting from the geographical location of its outlets have been identified, therefore the issuer did not present its financial statements by geographical segments. 23

24 The Balance Sheet of Nordea Bank Polska S.A. (at 30/06/2007) ASSETS 30/06/2007 Corporate Retail Financial Total Segment Segment Segment 1. Assets including fixed assets and intangible assets Investment in associates measured with the equity method Other assets (unallocated) TOTAL ASSETS LIABILITIES 30/06/2007 Corporate Retail Financial Total Segment Segment Segment 1. Segment s liabilities Other liabilities (unallocated) Equity TOTAL LIABILITIES The Profit and Loss Account of Nordea Bank Polska S.A. (01/01/ /06/2007) Corporate Retail Financial Exclusions Total Segment Segment Segment Total segment s income ( ) Segment s income (external) Segment s income (internal) ( ) Total segment s costs ( ) ( ) ( ) (57 596) Segment s costs (external) ( ) (50 450) (91 663) (25 748) - Segment s costs (internal) - (66 410) (33 329) (23 311) Depreciation (11 560) - (3 023) (8 537) - Dividends received Change in impairment allowances on receivables (2 007) (1 779) (228) - - Impairment allowances (7 014) (3 913) (3 101) - - Recoveries Change in investments in subsidiaries measured with the equity method Segment s profit (loss) (4 858) - Other income (unallocated) Other costs (unallocated)) (38 470) Profit before income tax Income tax (9 026) Profit for the period