Management Board Report of the Alior Bank S.A. Group for 2016 Contents Letter from the CEO .................................................................................... 3 Letter from the Chair of the Supervisory Board .............................................. 4 I. Summary of Alior Bank’s operations in 2016 ........................................... 5 II. Alior Bank on the Warsaw Stock Exchange ........................................... 10 Quotations of Alior Bank’s shares on the WSE in 2016 ........................... 10 Ratings ............................................................................................ 11 III. External environment of the Bank’s operations ..................................... 12 IV. Basic structural and financial data of the Polish banking sector in 2016 .... 17 V. Financial results of the Alior Bank S.A. Group ....................................... 20 VI. Operations of Alior Bank S.A. .............................................................. 33 VII. Business overview of the Alior Bank S.A. Group companies .................... 56 VIII. Events and contracts significant to the business operations of Alior Bank S.A.’s Group ............................................................................................ 59 IX. Public Subordinated Bond Issue Scheme .............................................. 73 Other significant events ..................................................................... 76 X. Report on Alior Bank’s Risk exposure ................................................... 76 XI. Contingent liabilities .........................................................................102 XII. Internal control system .....................................................................103 XIII. Corporate social responsibility ...........................................................105 XIV. Controls applied in the process of preparing the financial statements ......110 XV. Corporate Governance ......................................................................112 Shareholders of Alior Bank S.A. .........................................................114 Alior Bank S.A.’s authorities ..............................................................116 Remuneration policy ................................................................................131 Remuneration of the Management Board and Supervisory Board members of Alior Bank S.A. in 2016 .....................................................................137 XVI. Assessment of the operations of Alior Bank and prospects for 2017 .......139 XVII.Management Representations ............................................................141 Appointing a registered auditor ..........................................................141 Policies adopted in the preparation of financial statements ....................141 Material contracts .............................................................................141 Court proceedings in progress............................................................142 Management Board Report of the Alior Bank S.A. Group for 2016 2 Letter from the CEO Dear Sir / Madam, A very intense year 2016 has just ended. First of all we financed the acquisition of the core business of Bank BPH. For several years we have been of the opinion that the Polish banking sector is at the beginning of its consolidation process. In 2014 we began our part of this process by acquiring Meritum Bank. However, it was the acquisition of Bank BPH that was the true watershed moment. This allowed the Bank’s balance sheet total to increase by more than 30% and thus Alior Bank joined the group of 10 leading banks in Poland. The acquisition of a highly attractive customer base will allow significant acceleration of development and increase in profitability. Bank BPH is also an excellent supplement to the product offer of Alior, in particular in respect of business customers. The year 2016 was also a period of significant increase in loans in all segments. The hard work of all our bankers enabled achieving, for the first time in history, over net PLN 6 billion of loans. So that the bank's profit compared with the previous year, excluding, introduced this year, banking tax and one-off events associated with the purchase of the core business of Bank BPH, increased by more than 50%. It was also a very demanding period due to the increased regulatory requirement. Already in the 4th quarter of 2015, we were aware of the increase in capital requirements of 125 base points. This is quite a challenge for a dynamically developing bank. Thanks to the support of our key shareholder – the PZU Group – we managed to implement an innovative capital guarantee instrument, the operation of which enabled us to meet the new, increased capital requirements until the capital increase following from the share issue. At Alior Bank we have always perceived the future as a chance and possibility. Soon we will have the pleasure of sharing with you the assumptions for the new strategy for the years 2017–2020. I am certain that the pursuit of the Bank’s new strategy will bring about positive effects for our customers, employees and shareholders. You are cordially invited to read the Report. Yours faithfully, Wojciech Sobieraj CEO Management Board Report of the Alior Bank S.A. Group for 2016 3 Letter from the Chair of the Supervisory Board Dear Sir / Madam, This year was yet another in Alior Bank’s dynamic development. More importantly, this was achieved while pursuing the plan for the acquisition of the core business of Bank BPH. The Management Board of Alior Bank abided by its declarations made at the beginning of the previous year, which is a positive signal for both its current and future shareholders. The very efficiently conducted acquisition, financing and integration of the core business of Bank BPH confirmed the competencies of Alior Bank in respect of mergers and acquisitions, attained on the acquisition of Meritum Bank. The fact that the transaction allowed Alior Bank to significantly strengthen its equity position by the option to acquire additional funds on the issue of shares which financed the acquisition and the gain from a bargain purchase is a very important factor. The increased scale of operations of Alior Bank related to the merger which took place this year in connection with the pursuit of the new strategy for the years 2017–2020 will enable a further increase in shareholder value and the pursuit of new, ambitious and favourable business projects. On behalf of the Supervisory Board, I would like to cordially thank the Management Board and all the employees for their commitment and I wish them further success in 2017. Yours faithfully, Michał Krupiński Chair of the Supervisory Board Management Board Report of the Alior Bank S.A. Group for 2016 4 I. Summary of Alior Bank’s operations in 2016 Major business events and initiatives executed in 2016 On 31 March 2016 Alior Bank concluded an agreement with GE Capital Group for the acquisition of a spun-off part of Bank BPH. The transaction did not include the purchase of the mortgage loan portfolio denominated in CHF, in other foreign currencies and in Polish zlotys, or BPH TFI. The acquisition of the Core Operations of Bank BPH was financed by issuing ordinary I- series shares with pre-emptive rights, of PLN 2.2 billion, on behalf of the current shareholders. The issue of I-series shares took place in May 2016. The respective registration of the increase in the Bank’s share capital in the Register of Businesses was made on 24 June 2016. As at 4 November 2016, the District Court for the capital city of Warsaw in Warsaw, 13th Business Department of the National Court Register, registered the increase in Alior Bank’s share capital by way of issuing 51 ordinary bearer J-series shares with a nominal value of PLN 10.00 each in the Register of Businesses. The capital increase is related to the spin- off of part of Bank BPH. Together with the registration of the capital increase part of Bank BPH in the form of an organized part of the enterprise of Bank BPH was spun off. The spin- off covered all the assets and liabilities of the Core Business of Bank BPH covered by the Demerger Plan and their transfer to Alior Bank. Thus, the demerger of Bank BPH became effective and the Core Business of Bank BPH officially became part of Alior Bank. The operational merger of both banks is planned at the end of the 1st quarter of 2017. The acquisition of the spun-off part of Bank BPH is one of the features of the development strategy of Alior Bank which has been frequently communicated and consistently effected by the Management Board of Alior Bank, and which is based on dynamic organic growth and acquisitions, connected with achieving the highest levels of return on equity. As a result of the transaction Alior Bank has reinforced its position on the consolidating Polish banking market. Alior Bank expects annual target synergies of about PLN 300 million before tax, without accounting for about PLN 160 million of synergies resulting from implementing the Business Transformation Plan. According to expectations the target level of synergy will be achieved in 2019. Furthermore, in connection with the acquisition of the spun-off part of Bank BPH, negative goodwill was recognized, which increased the value of the Bank’s income in 2016 by PLN 508.1 million. Additionally a decision was taken to charge the restructuring reserve of PLN 268.1 million to the income statement for 2016. Simultaneously,