This document is a translation of a document originally issued in Polish. The only binding version is the original Polish version. The PKO Bank Polski SA Directors’ Report for the year 2016 Report publication date: 6 March 2017 This document is a translation of a document originally issued in Polish. The only binding version is the original Polish version. THE PKO BANK POLSKI SA DIRECTORS’ REPORT FOR THE YEAR 2016 TABLE OF CONTENTS 1. INTRODUCTION ............................................................................................................................................................................................................................................................................ 4 1.1 CHARACTERISTICS OF THE PKO BANK POLSKI SA ACTIVITY ....................................................................................................................................................................................... 4 1.2 COMPETITIVE ADVANTAGES OF PKO BANK POLSKI SA ................................................................................................................................................................................................ 6 1.3 PKO BANK POLSKI SA – HISTORICAL BACKGROUND .................................................................................................................................................................................................... 7 1.4 THE MAIN EVENTS OF 2016 .................................................................................................................................................................................................................................................... 8 1.5 DIRECTIONS OF DEVELOPMENT OF THE PKO BANK POLSKI SA .............................................................................................................................................................................. 11 1.6 THE PKO BANK POLSKI SA AGAINST ITS PEER GROUP ............................................................................................................................................................................................... 13 2. EXTERNAL BUSINESS ENVIRONMENT ................................................................................................................................................................................................................................. 15 2.1 MACROECONOMIC ENVIRONMENT .................................................................................................................................................................................................................................... 15 2.2 SITUATION ON THE FINANCIAL MARKET............................................................................................................................................................................................................................ 16 2.3 SITUATION IN THE POLISH BANKING SECTOR ................................................................................................................................................................................................................. 17 2.4 REGULATORY ENVIRONMENT ................................................................................................................................................................................................................................................ 19 2.5 TENDENCIES IN THE POLISH AND GLOBAL ECONOMIES IN 2016 AND THEIR EFFECT ON THE BANK’S RESULTS ...................................................................................... 21 3. FINANCIAL RESULTS OF THE PKO BANK POLSKI SA ................................................................................................................................................................................................... 23 3.1 KEY FINANCIAL INDICATORS ................................................................................................................................................................................................................................................ 23 3.2 INCOME STATEMENT ................................................................................................................................................................................................................................................................ 24 3.3 STATEMENT OF FINANCIAL POSITION ................................................................................................................................................................................................................................ 29 4. EQUITY AND CAPITAL ADEQUACY RATIO............................................................................................................................................................................................................................ 34 4.1 EQUITY AND ITS PROFITABILITY ............................................................................................................................................................................................................................................ 34 4.2 THE CAPITAL ADEQUACY MEASURES .................................................................................................................................................................................................................................. 34 4.3 DIVIDEND ................................................................................................................................................................................................................................................................................... 35 5. ACTIVITIES OF BANK POLSKI SA ........................................................................................................................................................................................................................................ 36 5.1 SEGMENTS OF ACTIVITIES OF PKO BANK POLSKI SA ................................................................................................................................................................................................. 36 5.1.1 RETAIL SEGMENT ...................................................................................................................................................................................................................................................................... 37 5.1.2 CORPORATE AND INVESTMENT SEGMENT ........................................................................................................................................................................................................................ 46 5.2 MARKET POSITION OF PKO BANK POLSKI SA .............................................................................................................................................................................................................. 51 5.3 INTERNATIONAL COOPERATION ........................................................................................................................................................................................................................................... 51 5.4 SPONSORSHIP ACTIVITIES REALIZED BY PKO BANK POLSKI SA ............................................................................................................................................................................. 52 5.5 CHARITY ACTIVITIES OF THE PKO BANK POLSKI SA’S FOUNDATION .................................................................................................................................................................... 55 5.6 PRIZES AND AWARDS GRANTED TO THE BANK ............................................................................................................................................................................................................... 56 6. RISK MANAGEMENT ................................................................................................................................................................................................................................................................ 61 6.1 PRINCIPLES OF RISK MANAGEMENT ................................................................................................................................................................................................................................... 61 6.1.1 CREDIT RISK ............................................................................................................................................................................................................................................................................... 65 6.1.2 INTEREST RATE RISK ................................................................................................................................................................................................................................................................. 69 6.1.3 CURRENCY RISK ........................................................................................................................................................................................................................................................................ 70 6.1.4 LIQUIDITY RISK MANAGEMENT