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Report 2022

Bank in 2022

Important factors influencing the Group’s activities and results

Activities of the Bank Pekao S.A. Capital Group in 2022 was mainly determined by the macroeconomic situation in the country and abroad.

The key factor affecting the economy last year was the outbreak of war in Ukraine, which brought a number of economic consequences: a sharp increase in the prices of energy and agricultural raw materials on global markets, a sharp increase in inflation, an increase in geopolitical risk in the region of Central and Eastern Europe, reaction to the crisis of key banks central banks, resulting in a strong increase in interest rates in Europe and the United States, and deterioration of the economic growth prospects for Poland and key Western economies.

In the Polish economy, we observed a systematic decline in the GDP growth rate from quarter to quarter, accompanied by a very strong increase in the rate of inflation, which in the second half of the year reached high, double-digit levels. The unprecedented pace of price growth resulted in the reaction of the Monetary Policy Council, which in 2022 raised interest rates by 5 p.p (the reference rate increased from 1.75% to 6.75%).

The complex economic situation in 2022 translated to varying degrees into individual areas of the banking sector in Poland. Rising interest rates hit primarily the retail segment. The declining creditworthiness of households even caused a collapse on the mortgage loan market. The situation in the area of cash loans was more stable, but also in this segment the banking sector recorded negative dynamics. The situation in the corporate segment was much more favorable. Rising inflation translated into an increase in the demand for working capital on the part of enterprises. This resulted in a strong increase in the demand for loans, both in the segment of large corporations and in the banking sector of small and medium-sized enterprises. Deposits in the banking sector, both in the retail and corporate segments, grew at a moderate pace last year.

An extremely positive development for the banking sector in 2022 was the strong increase in NBP interest rates. This had a very clear impact on net interest income, which grew at a high two-digit rate last year. We observed the repricing of the loan portfolio, parallel to the increase in market interest rates, with a clearly slower pace of adjustment on the deposit side. Banks significantly made their deposit offer more attractive in the second quarter of 2022 and systematically improved it until the end of the year. Despite this, the flow of funds from current accounts to term accounts was at a moderate pace. This allowed the sector to record a very high interest margin due to the relatively low cost of financing.

Despite the quarter-on-quarter slowdown in the economy and, consequently, decreasing customer activity, the banks were able to improve their fee and commission income. This is mainly the effect of the relatively favorable economic situation in the first half of 2022. Most categories of bank commissions grew. The exception were commissions related to asset management and brokerage services, which fell last year due to the difficult situation on the capital market.

Strong inflationary pressure in the economy translated into a significant increase in the operating costs of banks. Wages and other operating costs of the banks were clearly on the rise. This factor was partly compensated by the banks by continuing employment restructuring programs and reducing the number of branches. Bank Pekao also continued to optimize its branch network and carried out another employment restructuring programme.

The significant increase in regulatory costs was of key importance for the results of the banking sector in 2022. In response to the economic crisis and inflation shock caused by the outbreak of a full-scale war in Ukraine, the Polish government introduced a program to support mortgage borrowers. The program included the „payment moratoria” and the Borrower Support Fund. The costs of these programs for Bank Pekao amounted to PLN 2.0 billion and PLN 169 million, respectively. In addition, an institutional protection system for commercial banks (IPS) was introduced, participation in which involved a cost of PLN 482 million for Bank Pekao. The funds obtained through the establishment of IPS by 8 key Polish banks were used in the process of forced restructuring of Getin Noble Bank, which allowed to reduce the systemic risk for the sector. In return for participation in the IPS programme, BFG reduced annual fees for banks participating in this programme. BFG contributions for Bank Pekao decreased in 2022 to PLN 267 million (-8% y/y).

The cost of risk in the banking sector increased in 2022, mainly due to the growing provisions related to mortgage loans in Swiss franc. In the past year, judicial decisions remained unfavorable for the sector, and the number of lawsuits by clients also increased significantly. No systematic solution to this problem has been found. Banks were forced to create additional provisions on this account, which significantly affected the profitability of the sector. It should be noted that the problem of CHF loans is marginal from the point of view of Bank Pekao. The gross value of the CHF portfolio is less than 2% of the bank’s entire portfolio and is largely reserved. Other costs of risk remained at a stable, relatively low level for most of the year.

According to the data of the Polish Financial Supervision Authority (KNF), the aggregated net profit of the banking sector in 2022 amounted to PLN 12.5 billion and doubled (+108%) compared to the corresponding period of 2021. Its volatility was increased by provisions made by banks increasing the cost of risk (+45% compared to 2021). The operating result, which does not include such one-off events, increased by 59% in 2022 after an increase of 20% in 2021.

In 2022, banks continued processes related to operational and digital transformation. The importance of customer service in remote channels grew, and many banking processes were digitized. Many technical innovations were introduced and functionalities of banking applications were expanded, which allowed to reduce the number of bank branches.

PLN 12.5
net profit of the banking sector
increase in operating profit

In terms of capital requirements, in accordance with the law, Bank Pekao S.A. Group should maintain minimum levels of capital ratios at regulatory level of Pillar I resulting from the CRR Regulation, the Pillar II requirement under the Banking Law and the combined buffer requirement resulting from the Act on Macroprudential Supervision.

  • Total capital ratio (TCR) – 8%,
  • Tier I (T1) capital ratio – 6%,
  • Common Equity Tier I (CET1) ratio – 4.5%.

Under Pillar II, the Bank Pekao S.A. Capital Group has no additional capital requirement (P2R). This is related to the decision of the Polish Financial Supervision Authority stating the expiry of the previous decision of the supervisor, on the basis of which the Polish Financial Supervision Authority recommended compliance, at the consolidated level, with an additional requirement for own funds above the value resulting from the requirements calculated in accordance with the detailed rules set out in Regulation (EU) No. 575/2013 on prudential requirements for credit institutions. The above decision of Bank Pekao S.A. received on February 18, 2022

  • conservation buffer at 2.5%,
  • other systemically important institution buffer at 1.00%,
  • countercyclical buffer at 0.00%1,
  • systemic risk buffer at 0.00%2.

1) The countercyclical buffer calculated as at 31 December, 2022 was 0.0011% for the Bank Pekao S.A. Group.

2) Due to the published Regulation of the Minister of Finance, the systemic risk buffer was repealed on March 19, 2020. The buffer value effective until that date was 3% of the total risk exposure amount for all exposures located only in the territory of the Republic of Poland.

For the Pekao Group, as at 31 December, 2022, the minimum total capital ratio was 11.51%, the Tier 1 capital ratio was 9.51% and the Common Equity Tier 1 capital ratio was 8.01%.

In December 2022, the BFG informed banks about the minimum requirement for own funds and eligible liabilities (so-called MREL), which the sector must meet at the end of 2023. In the case of Bank Pekao, BFG set target minimal level of MREL requirement at 15.36% of the total risk exposure amount (TREA), and 5.91% of the total exposure measure (TEM). Target minimal level of MREL which must be fulfilled with own funds and eligible liabilities meeting the subordination requirement at the abovementioned date is 13.98% in relation to TREA, and 5.55% in relation to TEM. Abovementioned requirement is to be met from 31st December 2023 onwards. The BGF has also set a path to meet the above-mentioned requirements, both at the consolidated and individual level. Meeting these requirements will require banks to increase MREL capitals, including primarily the issue of debt securities that meet the criteria for inclusion in MREL capitals.

On February 24, 2022, Bank Pekao S.A. received an individual recommendation from the Polish Financial Supervision Authority regarding the Bank’s dividend policy. As at 31 December, 2021, Bank Pekao S.A. met the requirements for payment of up to 100% dividend from the Bank’s profit earned in period from January 1, 2021 to December 31, 2021. In addition, the KNF recommended Bank Pekao S.A. not taking, without prior consultation with the supervisory authority, other actions, in particular those outside the scope of current business and operating activities, which may result in a decrease in own funds, including possible dividend payments from undistributed profit from previous years (i.e. from 2020 and earlier) and share buybacks.

Based on the above recommendation and the resolution of the Ordinary General Meeting of Bank Pekao S.A. of June 15, 2022 on the distribution of profit of Bank Pekao S.A. for 2021, Bank Pekao S.A. paid a dividend of 50.5% of the net profit.

The level of net profit in 2021 allocated for dividend

On December 27, 2022 Bank received a recommendation from the Polish Financial Supervision Authority in which the PFSA recommended the Bank to limit the risk occurring in the Bank’s operations by maintaining own funds to cover the additional capital add-on in order to absorb potential losses resulting from the occurrence of stress conditions (P2G) at the level of 0.43 p.p. on standalone basis and 0.42 p.p. on consolidated basis above level of total capital ratio described in the article 92(1) letter c of the regulation (EU) No. 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions increased by the additional own funds requirement referred to in Article 138(2)(2) of the Banking Law and by the combined buffer requirement referred to in Article 55(4) of the Act on macro prudential oversight. The additional capital requirement should be made up of  Tier 1 funds only.

  1. The dividend up to 50% of the profit from 2022 may be paid out only by banks that meet the following criteria at the same time:
    • not in the middle of recovery program or recovery plan;
    • positively assessed as part of the Supervisory Audit and Assessment process (final BION grade not worse than 2.5),
    • having a leverage ratio (LR) at above 5%,
    • having Common Equity Tier I (CET1) ratio not lower than the required minimum: 4.5% + 56% * P2R1 requirement + combined buffer requirement2,
    • having Tier I (T1) capital ratio not lower than the required minimum: 6% + 75% * P2R requirement + combined buffer requirement3,
    • having Total Capital Ratio (TCR) not lower than the required minimum: 8% + P2R requirement + combined buffer requirement4,
  2. The dividend up to 75% of the profit from 2022 can be paid out only by banks that meet the criteria for the 50% payout, taking into account, as part of the capital criteria, the bank’s sensitivity to unfavorable macroeconomic scenario (P2G buffer).
  3. The amount up to 100% of the profit from 2022 may be paid out only by banks that meet the criteria for the payment of 75%, and at the same time those whose portfolio of receivables from the non-financial sector is characterized by good credit quality (share of NPL, including debt instruments, at a level not exceeding 5%).

1 Pillar II Requirement (P2R), which is an additional regulatory capital requirement.

2 For the purposes of the dividend policy, increased by 3 p.p. supervisory buffer.

3 For the purposes of the dividend policy, increased by 3 p.p. supervisory buffer.

4 For the purposes of the dividend policy, increased by 3 p.p. supervisory buffer.

The criteria set out in items 1-3, the bank should meet both on an individual and consolidated level.

  1. Criterion 1 – based on the share of foreign currency mortgage loans for households in the entire portfolio of receivables from the non-financial sector:
    • banks with a share exceeding 5% – dividend rate adjustment by 20 p.p.
    • banks with a share exceeding 10% – dividend rate adjustment by 40 p.p.
    • banks with a share exceeding 20% – dividend rate adjustment by 60 p.p.
    • banks with a share exceeding 30% – dividend rate adjustment by 100 p.p.
  2. Criterion 2 – based on the share of loans granted in 2007 and 2008 in the portfolio of foreign currency mortgage loans for households:
    1. banks with a share exceeding 20% – dividend rate adjustment by 30 p.p.
    2. banks with a share exceeding 50% – dividend rate adjustment by 50 p.p.,

wherein the total value of the correction (maximum 100%) is the sum of the corrections resulting from both criteria.

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