Annual Rep Consolidated P1

24th Mar 2006 14:56

Bank Pekao SA23 March 2006 ANNUAL CONSOLIDATED REPORT OF BANK POLSKA KASA OPIEKI SPOLKA AKCYJNA ( www.pekao.com.pl ) Annual consolidated report for the year ended 31st December 2005 comprises: * Letter of the President of the Management Board* Report on the activities of the Bank Pekao S.A. Group for the year 2005* Selected financial data containing basic positions of the consolidated financial statements of the Bank Pekao S.A. Group for the year 2005* Annual consolidated financial statements: * Consolidated Income statement * Consolidated balance sheet * Statement of changes in equity * Consolidated statement of cash flows * Notes to the financial statements * Auditor's opinion with the report on the audit of the annual consolidated financial statements Letter from the President of the Management Board of Bank Polska Kasa Opieki S.A.On behalf of the Management Board of Bank Polska Kasa Opieki S.A., I herebypresent the consolidated 2005 annual report addressed to the Bank'sshareholders, its supervisory bodies, the capital market regulators, the PolishSecurities and Exchange Commission and the Warsaw Stock Exchange, our customersand the public in general. In 2005, the Pekao Group succeeded in generating a net profit of PLN 1,535m,thus exceeding the previous year's result by 23%. Further improvement of theGroup's return on equity, which reached 19.2%, testifies to its strongprofitability. It should be stressed that our improved net result was in a largemeasure attributable to a significant income growth of 9%, coupled with rigorouscost control, which has suppressed the growth of costs to 0.6%, keeping itbeneath the inflation rate. Consequently, we managed to raise the efficiency ofthe Group's activities even further, by bringing down the cost/income ratio tothe level of 53.2%. We have recorded a substantial growth in business volumes: our loan portfoliogrew by 12% and customers' savings increased by 16%. Once again, we can boastexcellent results on the sale of key products, in particular investment funds,mortgage loans denominated in the Polish zloty, and our new consumer loan,incorporated in the end of 2004 into the Bank's offering as "Pozyczkaekspresowa" ("Express Loan"). I wish to express our gratitude to the customers, who entrusted their savings tous. I also wish to gratefully acknowledge the contribution of our employees,whose hard work and dedication made it possible to transform the customers'trust into real value, and of our shareholders, who support the Bank with theircapital. Together we have created value which provides benefits to allstakeholders. We expect that the external conditions in 2006 will be conducive to furtherconstructive cooperation towards reinforcing created value. The prevailingeconomic trends in the first months of the year offer grounds for optimism. Thesound microeconomic foundations which our country has been laying for the pastfifteen years, the upswing in economic productivity, and the improvement ofcompetitive advantages following in its wake are yielding concrete results.These factors boost economic development through growing export volumes,investments and higher consumption levels. The job market is graduallyimproving, while the policies consistently implemented by the Monetary PolicyCouncil have checked inflation and brought historically low interest rates.The Pekao Group is well positioned to use the favourable economic climate to itsadvantage. We have successfully completed the internal reorganisation processestransforming our structure and corporate culture into those of a moderncommercial organisation, whose objectives comprise sales growth, generation ofprofit and creation of value. In 2006, we intend to focus on furthering theseobjectives. New opportunities and challenges related to our development have come with theemergence of the first truly European financial group, created as a result ofthe merger between UniCredito Italiano (UCI), the Bank's strategic investor, andBayerische Hypo-und Vereinsbank (HVB). Following the merger, a financial groupwas created whose operations span 19 European countries, thus supporting theidea of a united Europe and creating value for shareholders, customers andemployees. Warsaw, March 21st 2006 Jan Krzysztof Bielecki - President of the ManagementBoard Selected financial data containing basic positions of the Consolidated Financial Statements of the Bank Pekao S.A. Group for the year 2005 Selected data related to the Consolidated Financial Statement of Bank Pekao S.A.Group for the year 2005 and the comparative data for the year 2004 were preparedapplying the accounting policies consistently in both the periods. The two areasof IAS 39 are exemptions from this rule: estimation of impairment of financialassets and valuation of loans and advances at amortized cost using the effectiveinterest method. in '000 PLN in '000 EUR 2005 2004 2005 2004Net interest income 2 350 424 2 214 844 584 203 490 205Net fee and commissionincome 1 586 984 1 556 522 394 448 344 500Operating profit 1 829 422 1 491 306 454 707 330 067Profit before incometax 1 873 599 1 527 463 465 687 338 069Net profit (loss) 1 534 852 1 314 458 381 491 290 925Net profit (loss)attributable to equityholders of the Company 1 537 712 1 317 991 382 202 291 707Net profit (loss)attributable tominority interest (2 860) (3 533) (711) (782)Net cash fromoperating activities (15 289) (2 895 886) (3 800) (640 938)Net cash used ininvesting activities 1 494 768 3 338 764 371 528 738 959Net cash fromfinancing activities (1 088 684) (1 214 354) (270 595) (268 769)Net increase /decrease in cash andcash equivalents 390 795 (771 476) 97 133 (170 749)Total assets 61 971 956 59 977 347 16 055 743 14 703 934Amounts due to theCentral Bank 1 950 710 2 151 743 505 391 527 517Amounts due to otherbanks 1 997 043 1 332 557 517 395 326 687Amounts due tocustomers 46 847 877 45 821 645 12 137 385 11 233 549Equity attributable tothe Company's equityholders 8 407 290 8 004 705 2 178 167 1 962 418Minority interest 15 436 18 776 3 999 4 603Share capital 166 482 166 482 43 132 40 814Number of shares 166 481 687 166 481 687 166 481 687 166 481 687Book value per share (in PLN/EUR per share) 50,50 48,08 13,08 11,79Diluted book value pershare (in PLN/EUR pershare) 50,48 48,08 13,08 11,79Capital adequacy ratio 19,47 21,71 x xEarnings per 1ordinary share (inPLN/EUR per share) 9,24 7,93 2,30 1,76Diluted earnings per 1ordinary share (inPLN/EUR per share) 9,23 7,93 2,29 1,76Declared or paiddividend per share (inPLN/EUR per share) 7,40 6,40 1,84 1,42 Report on the activities of the Bank Pekao S.A. Group for the year 2005 Warsaw, 21st March 2006 1 Introduction2 Consolidated pro forma report3 Factors and events of significance to the Group's performance3.1 Macroeconomic situation3.2 Condition of the banking sector3.3 Important factors influencing Group's activities and results3.4 Description of factors which will have an effect on the results of the Bankand the Group3.5 Major sources of risk and threats3.5.1 Liquidity risk and market risk3.5.2 Credit risk3.5.3 Operating risk3.6 Directions of the development of the Bank and the Group4 Merger between UniCredit and HVB5 Organisation of the Group5.1 The Group5.2 Transactions with related entities5.3 Investment plans, including equity6 Major areas of the Group's companies activities6.1 Brokerage services6.2 Banking activity6.3 Asset management6.4 Leasing activity6.5 Other financial services6.6 Other entities included in the consolidated financial statements7 Management and Supervisory Boards of the Bank8 The Bank's shareholding structure9 Assessment of the financial credibility of Bank Pekao S.A.10 Financial results of the Group10.1 Structure of net profit10.2 Consolidated profit and loss account10.3 Structure of the balance sheet10.3.1 Assets10.3.2 Liabilities10.3.3 Off-balance sheet items11 Agreements with a company entitled to auditing of financial reports12 The position of the Management Board regarding the possibility of achievingforecasts13 Number and value of titles of execution and value of collaterals14 Significant events after balance sheet date15 Selected financial ratios16 Representations of the Bank's Management Board 1 Introduction The consolidated financial statements are prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union,and in respect to matters that are not regulated by the above standards, inaccordance with the accounting principles as set out in the Accounting Act dated29 September 1994 and respective bylaws and regulations the requirements forissuers of securities admitted or sought to be admitted to trading on anofficial stock-exchange listing market. In the preparation of the financial statements according to IFRS, the Group hasapplied the admissible exemptions. The pro forma data for 2004 was prepared to ensure year to year comparability ofthe results. In 2005, net profit increased by 22.9% and amounted to PLN 1,534.9 million. The2005 net profit was the best result achieved to date confirming the Group'scapability for value creation. The increase in the net profit by PLN 286.0 million in 2005 compared with theprevious year was possible thanks to increased business activity that translatedinto higher income, particularly interest income, stable operating costs andlower cost of risk. • In 2005, the Group's income amounted to PLN 4,413.3 million and was by 8.7% higher than in the previous year, with interest income being higher by 10.0% and other income higher by 7.3%. • In 2005, the Group experienced continued positive trend in the results of its business activity, with successful sales of key products: mutual funds, new consumer loans "Express Loan", PLN mortgage loans and credit cards. Sales of consumer loans were more than four times higher than in the previous year. Sales of PLN mortgage loans amounted to PLN 1,668.2 million contributing to a growth in the stock of 21.6%. The value of mutual funds increased by 48.0% and the number of credit cards more than doubled compared with the end of 2004. • In 2005, total overhead costs including depreciation were kept under control and amounted to PLN 2,346.4 million i.e. were only by 0.6% higher than in the previous year. In 2005, the Group's cost / income ratio amounted to 53.2% and was 4.3 p.p. lower than in the previous year. • In 2005, impairment losses on loans and advances amounted to PLN 237.5 million, 24.7% lower than in the previous year. This resulted primarily from the effective credit risk management and the improved macroeconomic situation. The ratio of non-performing loans to total loans decreased from 19.9% at the end of 2004 to 16.2% at the end of 2005 as a result of an increase in the volume of performing loans and a simultaneous decrease in the volume of non-performing loans. • Savings of the Group's clients increased by PLN 8,783.9 million i.e. by 15.6% in 2005 resulting from both an increase in the savings of individual clients (up PLN 3,992.2 million) and in corporate deposits (up PLN 4,791.7 million). High demand allowed for a further increase in mutual funds assets by PLN 6,235.2 million in 2005 bringing the total retail savings above the PLN 45 billion level and confirming the Group's significant market share. • In 2005, the loan portfolio increased by PLN 3,581.3 million primarily due to acceleration in corporate lending, very successful sale of "Express Loan" and continued sales of PLN mortgage loans. 2 Consolidated pro forma report The financial data presented in the report were prepared as comparative dataexcept for two areas related to IAS 39: calculation of specific provisionsrelated to impairment accounting and valuation at amortised cost using theeffective interest rate of receivables and loans. For the above mentionedfinancial assets, the Group has used the prospective approach. The Group hasvalued and recognised the related adjustments in the opening balance of 2005.Taking into consideration the usefulness of the financial report, the Group hasprepared pro-forma statements, which include balance sheet as at 31 December2004 and profit and loss statement for 2004. Pro-forma statements approximatethe effect of adjustments related to the above mentioned IAS 39 issues, i.e.impairment and valuation at amortised cost using effective interest rate. (PLN ths.) ------------ -----------Consolidated profit and loss statement 2005 2004 pro forma ------------ ----------- Interest income 3,871,774 3,721,052Interest expense (1,521,350) (1,550,999)Net interest income 2,350,424 2,170,053 ------------ -----------Fee and commission income 1,770,087 1,644,565Fee and commission expense (183,103) (163,115)Net fee and commission income 1,586,984 1,481,450 ------------ -----------Dividend income 348 9Result on financial instruments at fair value 64,961 55,662Result on investment securities 74,153 14,076Foreign exchange result 265,398 289,018Other operating income 284,976 307,495Other operating expenses (213,941) (258,814)Net other operating income 71,035 48,681 ------------ -----------Impairment losses on loans and advances (237,477) (315,648)Overhead costs (2,346,404) (2,333,437)Operating profit 1,829,422 1,409,864 ------------ -----------Share of profit of associates 44,177 36,157Profit before income tax 1,873,599 1,446,021 ------------ -----------Income tax expense (338,747) (197,094)Net profit 1,534,852 1,248,927 ============ ===========Attributable to equity holders of the Company 1,537,712 1,252,460Attributable to minority interest (2,860) (3,533) (PLN ths.)Consolidated balance sheet 31.12.2005 31.12.2004 ------------ pro forma ------------AssetsCash and balances with Central Bank 3,574,791 3,939,275Debt securities eligible forrediscounting at the Central Bank 6,106 8,768Loans and advances to banks 6,966,026 5,961,477Financial assets held for trading 2,502,366 3,195,771Derivative financial instruments 499,290 503,482Other financial instruments at fairvalue through profit or loss 1,781,317 1,336,721Loans and advances to customers 28,223,730 25,749,048Net investment in the finance lease 745,891 547,324Investment securities 14,490,772 15,036,457Available for sale 11,902,898 10,106,484Held to maturity 2,587,874 4,929,973Non-current assets held for sale 167,366 -Investments in associated undertakings 167,814 124,662Intangible assets 645,457 631,925Tangible fixed assets 1,441,141 1,541,645Investment property 61,259 102,869Income tax assets 182,180 127,339Other assets 516,450 729,487 ------------ ------------Total assets 61,971,956 59,536,433 ============ ============ ------------ ------------LiabilitiesAmounts due to the Central Bank 1,950,710 2,151,743Amounts due to other banks 1,997,043 1,332,557Financial liabilities held for trading 558,973 590,119Derivative financial instruments 607,689 623,683Amounts due to customers 46,847,877 45,821,645Debt securities in issue 4 23,205Liabilities related to assets held forsale 39,663 -Current income tax liabilities 5,621 256Provisions for deferred income tax 1 1,221Provisions 108,727 100,613Other liabilities 1,432,922 1,060,369 ============ ============Total liabilities 53,549,230 51,705,414 ============ ============ Capital and reserves attributable to the Company'sequity holdersShare capital 166,482 166,482Current year profit and retainedearnings from previous years 1,521,895 1,242,306Other capital and reserves 6,718,913 6,403,457 Minority interest 15,436 18,776 ------------ ------------Total equity 8,422,726 7,831,021 ------------ ------------Total equity and liabilities 61,971,956 59,536,433 ============ ============ 3 Factors and events of significance to the Group's performance 3.1 Macroeconomic situation The year 2005 was marked with moderate, 3.2% growth in GDP against 5.3% in 2004.The GDP growth rate was mainly attributed to the lower than assumed growth ratein the first half of 2005. In the following quarters, the growth tendencyprevailed, with increasing GDP growth rates noted (in current prices). Companiescontinue to exhibit good economic condition. In regards to inflation, the growth rate of consumer prices slowed. As of yearend, the year to year inflation stood at 0.7%. The prices of industrialproduction continued to fall until November, growing slightly in December.Production output increased by 4.0% in 2005. Construction output was 7.4% higherthan 2004. Despite fast sales growth, the investment boom became more visible inthe second part of 2005. Year on year, investments grew by 6.2%. The public finance sector deficit (calculated according to Polish methodology)has decreased by over 1 p.p. to 3.5% of GDP. The public debt to GDP ratio stayedunder the 55% threshold. The elimination of barriers to foreign trade, mainly within the European Unionresulted in growing revenues (in euro), and the export growth rate higher thanimport growth rate; the negative foreign trade balance was nearly half theprevious year's figure. Based upon its assessment of economic development, the Monetary Policy Councilcut the reference interest rate from 6.5% to 4.5%. The condition of the labour market also improved, with the number of unemployedfalling (partly due to temporary emigration of 200 thousand employees to theEU), with the simultaneous increase in the number of employed within Poland. 3.2 Condition of the banking sector The developments in the macroeconomic situation had also impact on the growthrate and structure of banking sector credits and deposits. Total deposits andtotal credits grew 9.4% and 11.8%, respectively. The deposit growth was mainlyattributed to the high growth (by 16.8%) of corporate deposits, driven by thegrowing income of the enterprise sector, growing investments and weak pressurefor salary increases. Simultaneously, the continuing economic prosperity causedfurther demand for corporate credit, which grew by 2.8%. In 2005, the year to year growth rate of household credit reached 22.8% against13.8% in 2004, with mortgage loans being main growth driver (+40.8%).The growth rate in household deposits reached the level of 3.6% by year end.This growth rate was substantially impacted by the continued change in thestructure of households' savings. In 2005, total volume of mutual fundsincreased by 62.4%, and their share in total household' savings increased to23.1%. Changes in the dynamics of deposits and loans are presented below: -------------------------- ------------------------ Change (%) ------------------------ 2005 2004-------------------------- ------------- ------------Deposits 9.4 8.4Corporate 19.0 24.2of which: companies 16.8 24.7Households 3.6 0.6Loans 11.8 3.3Corporate 3.4 (3.5)of which: companies 2.8 (3.9)Households 22.8 13.8-------------------------- ------------- ------------ 3.3 Important factors influencing Group's activities and results The main factors influencing Group's activities and results in 2005 include:- Growth of business activity.- Successful capture of continued changes in investment preferences of households.- Effective cost management.- Reduction in cost of risk,- Strong results of Group's companies. Growth of business activity In 2005, positive trends continued in business development. Considerable successwas achieved in the sales of key products: mutual funds, new consumer loans, PLNmortgage loans and credit cards. The value of mutual funds grew by 48.0 percent, and the number of credit cards doubled from the level at year end 2004. In2005, the sales volume of "Express Loan" (Pozyczka Ekspresowa) was over fourtimes higher than in the preceding year. Business operations in the corporatesector also exhibited a dynamic growth rate, with deposits and credits growingby 31.3% and 9.5%, respectively, compared with 2004. The growth in business operations translated to growing income, mainly interestincome as well as fees and commission income. Successful capture of continued changes in investment preferences of householdsChange in the structure of savings continued in 2005, mainly being a transferfrom individuals' deposits to mutual funds. Pioneer Pekao TFI S.A. mutual fundswere distributed through the network of Bank Pekao S.A., CDM Pekao S.A. andXelion. Doradcy Finansowi Sp. z o.o. branches. The share of mutual funds inhouseholds' savings of the Group increased during the year from 31.6% to 42.6%.Total assets of Pioneer Pekao TFI S.A. mutual funds increased in 2005 by PLN6,235.2 million (48.0%). Effective management of overhead costs In 2005, total overhead costs including depreciation amounted to PLN 2,346.4million, 0.6% higher than in the previous year. This low increase in costs wasachieved by a reduction of 4.2% in non-personnel costs almost offset an increasein personnel costs and depreciation by 4.1% and 0.4% respectively. This combinedwith a 8.7% in total income caused the Group's cost / income ratio to decreaseto 53.2% in 2005, 4.3 p.p. lower than in 2004. Reduction in cost of risk The improved quality of the portfolio and effective credit risk managementresulted in impairment losses on loans and advances being 24.7% lower than in2004. The ratio of non-performing loans to total loans decreased from 19.9% atthe end of 2004 to 16.2% at the end of 2005 thanks to an increase in the volumeof performing loans and the drop in the volume of non-performing loans. Strong results of Group's companies Strong results of both Bank Pekao S.A. as well as the Group's companiescontributed to the good results of the whole Group. In 2005, almost all thecompanies improved their results. The net profit of the entities consolidatedunder full method was by 38.1% higher than in the previous year, and the shareof the net profit of the entities valued under equity method was higher by16.4%. 3.4 Description of factors which will have an effect on the results of the Bank and the Group There is a general expectation of improvement in GDP growth, driven by strongerinvestment and consumption. Such an environment should support demand forcorporate lending, while decreasing the growth rate of corporate deposits in thesector. The Bank expects an improving labour market and real growth of salaries, whichmay positively influence the related entities operations, mainly through growthin retail savings and higher loan demand, especially for mortgages and consumerloans. The Group results will also be influenced by decisions of Monetary PolicyCouncil, which shape zloty market interest rates and by decisions of FederalReserve Board of the USA, which impact USD market interest rates. 3.5 Major sources of risk and threats Economic factors Bank Pekao S.A. is operating predominantly on the territory of Poland.Therefore, the results of the Bank will be influenced by the economic eventsoccurring in this country and the worldwide events that influence the domesticeconomy. 3.5.1 Liquidity risk and market risk The asset and liability management policy of the Bank Pekao S.A. Group is aimedat the optimisation of the balance sheet and off-balance sheet structure of theBank in respect to the assumed risk/income ratio and a comprehensive view of theinfluence of different types of risk (mainly credit risk, interest rate risk,liquidity risk, currency risk and operational risk), which the Bank undertakesin its business activities. The risks are monitored and controlled withreference to profitability and with reference to the capital required to take onsuch risks. Financial risk management, constituting an important part of the assets andliabilities management system in the Bank has a comprehensive and consolidatedcharacter. It covers all Bank's units and subsidiaries to evaluate theirpotential influence on the financial situation of the whole Group. Comprehensivecharacter of risk management means, on the one hand, consideration of allmaterial types of financial risk for the Bank and, on the other hand, financialrisk management in close relation to other types of risk. The Management Board of the Bank is responsible for achieving the strategicgoals of risk management policy. The Asset and Liability Committee monitors and controls the capital adequacy ofthe Bank, as well as the level of liquidity risk and market risk (interest rateand currency risks) borne by the Bank within the external banking supervisionlimits and within the internal limits of the Bank.Liquidity risk The objective of managing the liquidity risk is: - to ensure and maintain the Group's solvency with respect to current and future planned obligations, taking into account liquidity acquisition costs and profitability of Group's equity,- to prevent any crisis situation,- to outline solutions that would allow the Group to endure in case a crisis situation occurred. The Group's investments both in PLN and foreign currencies are carried out inaccordance with the requirements of the Banking Law and the recommendations ofthe National Bank of Poland (NBP). The Group invests primarily in treasurysecurities of Polish government, securities issued by countries and financialinstitutions with the highest ratings and those with high levels of liquidityand desired profitability. These financial instruments constitute the Group'sliquidity stock enabling to get through potential crisis situations. According to the Banking Supervisory Authorities recommendations, the Groupapplies and monitors internal liquidity indices that reflect the ratios of totaladjusted maturating assets to total adjusted maturating liabilitiesThe Group has set procedures in place to protect against the liquidity riskincrease and in the event of a substantial deterioration of the Group'sfinancial liquidity. The emergency plan in case of deterioration of financial liquidity of the Grouptakes into consideration four levels of liquidity risk, depending on the amountand duration of cash outflow from the non-banking clients' accounts. The planalso determines the sources from which the expected cash outflows will becovered and states to what extent the Group's Management is responsible formaking necessary decisions in order to restore the required financial liquiditylevel. Both the emergency plan and the possibility of obtaining cash fromsources specified in this plan are subject to the periodic verification. Market risk In its trading, retail, corporate and investment activities, the Group isexposed to market risk, i.e. interest rate risk, currency risk and the pricerisk of securities owned by the Group and to other types of risk the sources ofwhich are changes in market conditions. In managing the interest rate risk of the banking book, the Group follows theobjectives of maximising the economic value of capital and realizing thebudgeted net interest income within the adopted limits. The exposure of theGroup to changing interest rates is monitored through the interest rate gap(revaluation gap) analysis, duration analysis, simulation analyses and stresstesting, and back testing. The sensitivity of net interest income and the sensitivity of the economic valueof the Group's capital to changes in interest rates was maintained within theestablished internal limits. The objective of the currency risk management is to create a currency profile ofthe balance and off-balance sheet positions so that it remains within externaland internal limits. In 2005 the currency risk was low. The Group's exposure tocurrency risk is measured on a daily basis, for the internal needs, by means ofValue at Risk (VaR) model, as well as by extreme conditions analysis testingthat is supplementary to the VaR method. The VaR method is an integral component of the market risk management of allinvestment portfolios in the Group. The actual usage of VAR limits which ismonitored on a daily basis. However, these limits do not protect the Groupagainst rare and very significant changes on the market. Therefore, the marketrisk management system is supplemented by the analysis of shock scenarios(stress test) in order to estimate the effects of the changes of marketparameters on the result of the Group should such events occur. Instruments in the trading portfolio and in the available for sale portfolio, aswell as derivative instruments are valued regularly using current market pricesor, if the quotations are not available, using models of valuation that from theGroup's point of view reflect fair value of these instruments in the best way. 3.5.2 Credit risk The principles of the lending policy of the Group comply with those of the Bank.The Bank follows a prudent policy with respect to the assumption of credit risk,by applying established safety rules to lending activity in the individualmarket segments as well as necessary instruments limiting asset exposure to thecredit risk. Credit risk is assessed in two dimensions: the borrower's risk and the riskgenerated by the transactions, in accordance with Manual on Loan Procedures ofBank Pekao S.A. In order to evaluate environmental risk, the standards set bythe EBRD are applied. In accordance with the Bank's lending policy, the main directions of mitigatingcredit risk are followed: - diversification of the objective and subjective structure of the portfolio along with the current analysis of the portfolio structure to ensure early identification of threats arising from excessive commitments and introduction of appropriate limitations,- limitation of lending in certain areas of activities,- acting with special care in lending to higher risk areas,- transfer of competencies to decide on loan transactions with higher risk to the Bank's Head Office,- preferences to grant loans to areas characterised by the relatively lowest risk. Under the guidelines of UniCredito Italiano, the Bank undertakes continuingrationalisation of the lending process aimed at improving its efficiency andsecurity. In particular, the Bank is working on the improvement of proceduresand tools for credit risk measurement and monitoring. In the second half of2005, in order to reduce the risk level, a new client monitoring process wasimplemented. 3.5.3 Operating risk The operating risk management in the Group is based on "The Operating RiskManagement Strategy" approved by the Supervisory Board of a parent entity. Thisdocument is consistent with the "M Recommendation" published by the GeneralInspectorate of Banking Supervision and with the "Unification of CapitalMeasurement and Capital Standards on the International Scale" published by theBasel Committee. The Strategy defines operating risk, provides the rules for itsmanagement and defines the control system at the parent entity. Bank Pekao S.A. defines operating risk as the risk of loss arising from errors,violation of regulations, operation breakdown or damage caused by the internalprocesses, people, systems or external events. The operating risk management control system covers both Bank Pekao S.A. and itssubsidiaries. The Bank's Management Board receives risk reports containing,among others, an analysis of operating events by categories and regions, ananalysis of risk ratios and an analysis of capital necessary to cover theoperating risk. For the purpose of mitigating the operating risk, the Group has securityprocedures in place, including, for example, anti-money laundering proceduresand rules for safeguarding the Group's units, management of the continuity ofoperations, compliance with the banking secrecy, personal data protection, aswell as rules regulating the relationships between the Bank and third parties.The operating risk mitigation instruments also include emergency plans, internalaudit controls, insurance contracts and ongoing improvement of the processquality. Moreover, in the event of identifying any irregularities, guidance isimmediately provided concerning the scope, method and frequency of functionalinspections in the specific areas of the Group's operations. 3.6 Directions of the development of the Bank and the Group Bank Pekao S.A. is one of the leading providers of banking services in Polandand includes financial institutions operating in the area of asset management,pension funds, brokerage services, leasing and factoring activities. The Group's main objective in the area of retail customer services is tomaintain its leading position through improving its product offer tailored tothe specific needs of various groups of customers as well as applying the finestdistribution and sales management models. Realization of this objective is beingsupported by continuing actions, including profound customer segmentation,packages of products and development of innovative distribution channels. The activities of the Group will concentrate on the following three areas:lending to households, SME and Mid Corporate clients as well as improvingquality of customer service. Key products for retail customers will be consumer and mortgage loans, cards andmutual funds. Full utilisation of the market position of Brokerage House (CDMPekao S.A.), Pioneer Pekao Investment Management S.A and Xelion is being madethrough the promotion of investment savings products. In the area of corporate banking, the strategy assumes strengthening of Group'smarket position in all main segments of the market. The Group's activities arebased on further segmentation of customers. They are focused on using thepotential of a distribution structure based on Corporate Customer Centres andRelationship Managers. The product offer will be enriched, particularly in thearea of transaction banking, leveraging also on hedging products and recentlyintroduced cash management. In addition to further development of ATM and branch network, the Bank intendsto dynamically develop new distribution channels, such as: internet banking,telebanking and direct sales. Further activities will be continued in order to improve effectiveness of bothpersonnel and non-personnel costs. The Group follows a rational human resourcespolicy, encompassing flexibility in adjusting of the headcount to the type andlevel of business activity, and also promoting the training and development ofemployees and their appropriate motivation in order to hire and retain the bestemployees. 4 Merger between UniCredit and HVB In 2005, Bank Pekao S.A. has become a member of a new banking group, establishedby the merger between UniCredit and Hypovereinsbank (HVB). On 12 June 2005,UniCredit and HVB announced they are joining forces to establish the first trulyEuropean bank. The merger marks the emergence of a new force in Europeanbanking, "originating from the heart of the Continent" with enormous growthpotential; a bank with assets of over EUR 730 billion, operating in 19countries, with a customer base of 28 million and 7 thousand branches. The basic strategic goals of the merger, perceived by both parties as a friendlyprocess, include the enhancement of competitive position on domestic markets(Italy, Germany Austria) and achieving of leading position in Central andEastern Europe, utilisation of complementary strengths and effects of scale insuch business areas, as asset management and investment banking, theconsolidation of operations in Central and Eastern Europe and the maximisationof revenues- and cost-related synergies. The information on the merger between UniCredit and HVB was published by theBank in current report No. 19/2005, dated 13 June 2005. 5 Organisation of the Group The Pekao S.A. Group is composed of financial and non-financial institutionsgathered around a universal bank. The Group provides a full range of financialservices available in Poland to its retail and corporate customers. 5.1 The Group Bank Pekao S.A. Capital Group at day 31.12.2005 consists of Bank Pekao S.A. asthe parent entity and 15 subsidiaries. As at 31.12.2005, there were nosubstantial changes in the structure of the Group in comparison to the end of2004. A number of associated companies reported in consolidated financial statementsunder equity method has changed as a result of sale of shares in associatedcompany "Grupa Inwestycyjna NYWIG S.A." in 2005. The following entities are included in the consolidated financial report at31.12.2005: No Name of company Core activity % of Status Consolidation shareholder's method share capital 1. Bank Pekao S.A. banking - parent - 2. Bank Pekao (Ukraina) Ltd. banking 100.00 subsidiary full 3. Centralny Dom Maklerski Pekao S.A. brokerage 100.00 subsidiary full 4. Pekao Fundusz Kapitalowy Sp. z o.o. financial 100.00 subsidiary full 5. Pekao Leasing Sp. z o.o. leasing 100.00 subsidiary full 6. Pekao Faktoring Sp. z o.o. financial 100.00 subsidiary full 7. Pekao Pioneer Powszechne Towarzystwo Emerytalne S.A. financial 65.00 subsidiary full 8. Drukbank Sp. z o.o. no activities performed 100.00 subsidiary full 9. Centrum Kart S.A. financial 100.00 subsidiary full10. Pekao Financial Services Sp. z o.o. financial 100.00 subsidiary full11. Pekao Development Sp. real estate z o.o. management 100.00 subsidiary full12. Pekao Access Sp. z o.o. consulting 55.26 subsidiary full13. BDK Consulting Sp. z o.o. consulting, hotels, transportation 99.99 subsidiary full The companies listed below were not consolidated, due to the insignificant size of their operations in comparison to the size of the operations of the whole Group. Companies that were not consolidated, in the consolidated financial statements are recognized at the cost of purchase established on 01.01.2004 14. Fabryka Maszyn manufacturing of w Janowie Lubelskim Sp. spare parts to z o.o. building machinery 86.68 subsidiary non-consolidated15. Pekao Immobilier s.a.r.l. real estate management 100.00 subsidiary non-consolidated16. Nowe Ogrody Sp. z o. o. real estate management and 9800 subsidiary non-consolidated sale Other listed below exposures of the Group constitute investments in theassociated entities and are recognized in the consolidated report of the Groupusing the equity method. Companies that were not revalued, were recognized inthe consolidated financial report at cost established on 01.01.2004. Companieswere not revalued due to the immateriality of the financial results of thesecompanies. 1. Anica System S.A. IT 33.84 / 13.49 co-subsidiary equity2. Central Poland Fund LLC financial intermediary 53.19 subsidiary equity3. Xelion. Doradcy Finansowi auxiliary, Sp. z o.o. financial and insurance 50.00 subsidiary equity4. Pioneer Pekao Investment financial Management S.A. intermediary 49.00 subsidiary equity5. Krajowa Izba Rozliczeniowa chamber of S.A. settlement 22.96 subsidiary equity6. Hotel Jan III Sobieski Sp. z o.o. hotel 37.50 subsidiary equity7. Fabryka Sprzetu Okretowego manufacturing of "Meblomor" S.A. ship equipment 23.81 subsidiary equity8. CPF Management mutual funds 40.00 subsidiary not valuated management-dose under equity not operate method9. Pracownicze Towarzystwo management of 39.56 subsidiary not valuated Emerytalne "Nowy Swiat" employee pension under equity S.A. fund method 5.2 Transactions with related entities Transactions with related entities were described in the financial report of theGroup for 2005. The transactions described below include non-routinetransactions exceeding the amount of EUR 500,000. Opening a credit line for Bank Pekao (Ukraina) Ltd. On 15 April 2005, Bank Pekao S.A. signed with Bank Pekao (Ukraina) Ltd. (theBank's subsidiary) a framework agreement on the opening of a revolving creditline up to the equivalent of USD 18.0 million for a period of three years fromthe date of signing the agreement. As at the date of signing the agreement, theamount of the facility in Polish zlotys was PLN 57,578,400 at the averageexchange rate announced by the National Bank of Poland on 14.04.2005. Bank Pekao (Ukraine) Ltd will pay to Bank Pekao S.A. commission for using thefacility and interest is determined each time the credit line is utilised (ateach tranche drawdown) at the current money market rate for a given currency(USD, EUR, PLN). The agreement was signed on an arm's length basis. Registration of the share capital increase of Bank Pekao (Ukraina) Ltd. Upon registration by the National Bank of Ukraine of the relevant amendments toBank Pekao (Ukraina) Ltd.'s Articles of Association regarding the increase inthe share capital of Bank Pekao (Ukraina) Ltd., the share capital was increasedfrom UAH 33.0 million to UAH 41.2 million. Currently, Bank Polska Kasa Opieki S.A. holds directly shares in Bank Pekao(Ukraina) Ltd. of a total value of UAH 34.2 million, which constitutes 82.84% ofthe share capital of Bank Pekao (Ukraina) Ltd. and gives the right to 82.84% ofthe votes at the General Shareholders' Meeting of Bank Pekao (Ukraina) Ltd. The remaining 17.6% of the shares in the share capital of Bank Pekao (Ukraina)Ltd. totalling UAH 7.1 million are held by Drukbank Sp. z o.o. (a wholly-ownedsubsidiary of Bank Polska Kasa Opieki S.A.) and give the right to 17.16% of thevotes at the General Shareholders' Meeting of Bank Pekao (Ukraina) Ltd. Conclusion of agreement between Bank Pekao S.A. and Grupa Inwestycyjna NYWIG SAOn 30 December 2005, an agreement was concluded for the sale of GI NYWIG S.A.shares to Grupa Inwestycyjna NYWIG SA, by virtue of which the Bank sold to GINYWIG SA 1,230 registered shares privileged as to the share in dividend and tothe distribution of property upon the winding-up of the Company, with the parvalue of PLN 300 each, comprising 24.6% of the share capital of GI NYWIG S.A.and carrying 24.6% of votes at the General Meeting of Shareholders of GI NYWIGS.A. The sale price was PLN 3.4 million.The Bank now holds no shares of GI NYWIG S.A. 5.3 Investment plans, including equity Group's development strategy aims at strengthening its leading position in thefinancial sector. The development of the Bank and the Group does not excludeinvestments of the Bank in other financial entities. Before any decision on a potential investment is made, the Bank conductsdetailed economic analysis. The agreement establishing Pirelli Pekao Real Estate On 15 February 2006, agreement was signed for the setting up of Pirelli PekaoReal Estate, a joint venture company with the participation of 75% by Pirelli REand 25% by Bank Pekao S.A. has been signed. Pirelli RE will acquire from Bank Pekao S.A. 75% of the shares of PekaoDevelopment Sp. z o.o. The Company business name will be changed to PirelliPekao Real Estate. Closing of the transaction is scheduled for the end of March, subject toapproval by the Polish Antitrust Authority. Planned development of activity in Ukraine Considering the attractiveness of the Ukrainian economy and banking industry inUkraine, the Bank is currently reviewing a part of the strategy for Bank Pekao(Ukraina) toward higher presence in the retail market. The presence in theretail market will require investment in set up and enlargement of the currentnetwork. 6 Major areas of the Group's companies activities The key products, services and business areas of Bank Pekao S.A. are describedin the Report on the activities of Bank Pekao S.A. 6.1 Brokerage services Centralny Dom Maklerski Pekao S.A. (CDM)The Bank's share in the share capital and in total votes at the GeneralShareholders Meeting of this company is 100%. The value of the company's equityas at 31 December 2005 was PLN 305.5 million. CDM provides the full scope of services (permitted to brokerage houses),excluding asset management. At the end of 2005, CDM maintained 141.1 thousandinvestment accounts and its market share was 16.3%. CDM also offered on-lineaccess to investment accounts, allowing its customers to buy and sell allinstruments listed on the Warsaw Stock Exchange and on the OTC market (CeTO)through the Internet. As at the end of 2005, CDM maintained 19.5 thousandon-line accounts. Services of CDM on the primary market Thanks to the favourable situation on the secondary market of shares, also theprimary market maintained increased activity. In 2005, CDM (Central BrokerageHouse) carried out 7 public offers, including 2 initial public offers (IPOs).The Company also carried out the first redemption of the company's treasurystock held on the Polish market within a public call option. The redemptionvalue stood at PLN 120 million. Additionally, CDM was a member of a consortiumin 4 public offers. The total value of share issues carried out by CDM on theprimary market was PLN 874 million. In 2005, the Company continued activities relating to sale and servicingwholesale bonds, bridge bonds and investment bonds. Fixed and variable interestrate bonds as well as zero coupon bonds were issued as part of the wholesalebonds offer. In 2005, the total value of treasury bonds sold outside theregulated market amounted to PLN 329 million. In 2005, CDM cooperated with ten companies managing Mutual Funds and threeTransfer Agents in respect of the distribution of 75 Open-End Mutual Funds. Activities on the secondary market In 2005, the favourable situation on the stock exchange was maintained. The highlevel of trading was accompanied by an increase in the WIG stock exchange index,which has increased by 35% since the beginning of the year. Trading on the cashmarket increased by 60.0% and the trading volume on forward contracts increasedby almost 3,539 thousand contracts. The share trading volume exceeded PLN 175billion, and the total trade volume on the forward contracts market reached 10.8million contracts. In 2005, the Company achieved: - a 31.4% share in the bond trading volume at the Warsaw Stock Exchange (35.6% in 2004);- a 12.7% share in the stock trading volume at the Warsaw Stock Exchange (13.9% in 2004);- a 9.1% share in the futures trading volume at the Warsaw Stock Exchange (8.7% in 2004). 6.2 Banking activity Bank Pekao (Ukraine) Ltd. in Luck (Bank Pekao (Ukraine))As at 31 December 2005, the value of the company's equity amounted to PLN33.5 million. As at 31 December 2005, Bank Pekao S.A. held directly 82.84% of shares in theshare capital and in total votes at the General Shareholders Meeting. The othershareholder of the Ukrainian bank is Drukbank Sp. z o.o. (17.16% of shares inthe shareholding structure) with the Bank as its sole owner. Bank Pekao (Ukraine) is a universal commercial bank specialising in settlementsof foreign trade transactions and supporting the Polish-Ukrainian andItalian-Ukrainian trade. It offers a broad range of banking services andguarantees high quality of customer services and customisation of its offer tothe needs of customers. Bank Pekao (Ukraine) provides services through two branches located in Kiev andin Luck. 6.3 Asset management Pioneer Pekao Investment Management S.A. (PPIM)The Bank's share in the company's share capital and in total votes at theGeneral Shareholders Meeting is 49.0%. The value of PPIM's equity as at 31December 2005 was PLN 218.7 million. PPIM manages, under a contract of management, the assets of mutual fundsbelonging to Pioneer Pekao TFI. The company offers also investment portfoliomanagement services to retail customers. In 2005, the value of net assets of Pioneer Pekao TFI S.A., the company managedby Pioneer Pekao Investment Management S.A. (the Bank holds 49.0% of shares)totalled to PLN 19,237.5 million and was higher by PLN 6,235.2 million ascompared with the end of 2004. As at 31 December 2005, the Company had 805.5thousand investment accounts, an increase by 41.3% in 2005. The value of net assets of the mutual funds of Pioneer Pekao TFI S.A. is shownin the table below:(PLN million) 31.12.2005 31.12.2004 Change--------------------------- ---------- --------- ---------Net assets value of Pioneer Pekao TFI 19,237.5 13,002.3 48.0%--------------------------- ---------- --------- ---------Pioneer Balanced Investment Fund 3,760.2 2,629.7 43.0%Pioneer Stable Growth Investment Fund 2,776.2 1,989.4 39.5%Pioneer Dollar Bond Plus Investment Fund 2,279.2 2,234.3 2.0%Pioneer Treasury Bond Investment Fund 1,742.5 697.7 149.7%Pioneer Money Market Investment Fund 1,261.5 603.5 109.0%Pioneer Bond Investment Fund 1,235.6 1,293.4 (4.5%)Pioneer Polish Equity Investment Fund* 997.7 788.0 26.6%Pioneer Dollar Bond Investment Fund 963.0 905.4 6.4%Pioneer Capital Protection Investment Fund 860.9 581.5 48.0%Pioneer European Bond Plus Investment Fund 699.2 490.0 42.7%Pioneer Growth & Income MIX 40 InvestmentFund 528.2 - xPioneer US Market Balanced Investment Fund 291.6 - xPioneer American Equity Investment Fund 287.1 153.8 86.7%Pioneer European Equity Investment Fund 276.5 63.4 336.1%Pioneer Bond Plus Investment Fund 260.6 173.0 50.6%Pioneer Growth MIX 60 Investment Fund 222.9 - xPioneer Income MIX 20 Investment Fund 197.3 - xPioneer Dynamic Capital ProtectionInvestment Fund 105.6 - xPioneer Small & Medium Polish MarketCompanies Investment Fund 25.2 - xPioneer Deposit Investment Fund 5.6 - xPioneer Arbitrage Investment Fund - 69.7 (100.0%)SFIO TP S.A. 460.9 329.5 39.9%--------------------------- ---------- --------- ------------------------------------ ---------- --------- ---------Net assets value of TFI (market) 61,283.5 37,726.4 62.4%--------------------------- ---------- --------- ---------Market share of Pioneer Pekao TFI 31.4% 34.5% (3.1)p.p.--------------------------- ---------- --------- ---------*Pioneer Aggressive Investment Fund previously In the 2005, the Company included in its offer a new specialist open investmentfund - Pioneer Dynamic Capital Protection Investment Fund. Pekao Pioneer Powszechne Towarzystwo Emerytalne S.A. (Pekao Pioneer PTE) The Bank's share in the company's share capital and in total votes at theGeneral Shareholders Meeting is 65.0%. The value of Pekao Pioneer PTE's equityamounted to PLN 36.3 million as at 31 December 2005. The activity of Pekao Pioneer PTE - Pension Fund (OFE) management company -involves gathering and investing funds that will be paid out to the customersafter reaching retirement age. As at the end of 2005, the number of clients - members of open-end pension fundwas 241.6 thousand that represented 2.1% of market share. The number of personswith at least one contribution recorded on the account increased by 10.7thousand as compared to the end of 2004 and amounted to 223.0 thousand. At theend of 2005, the value of assets managed by the company was PLN 1,351.0 million,which is an increase of PLN 337.2 million compared with the end of 2004. 6.4 Leasing activity Pekao Leasing Sp. z o.o. (Pekao Leasing) The Bank's share in the share capital of Pekao Leasing and in total votes at theShareholders Meeting is 100%. As at 31 December 2005, the value of equity wasPLN 70.7 million. Pekao Leasing provides financial services supporting selling and buying fixedassets i.e. motor vehicles, machines and equipment and also office real estate -mostly by operational and financial leasing. In 2005, the Company concluded 4,133 new contracts. The value of leased assetswas PLN 610.5 million. The majority of leased assets accounted for motorvehicles - 56.7% (compared with 70.7% in 2004) and machines and equipment -35.8% (16.1% accordingly). 6.5 Other financial services Pekao Fundusz Kapitalowy Sp. z o.o. (PFK)The Bank's share in the share capital of PFK and in total votes at theShareholders Meeting is 100%. As at 31 December 2005 the company's equity wasPLN 49.1 million. In accordance with the business strategy, PFK is searching for investorsinterested in the purchase of the shares of companies held in its portfolio. Pekao Faktoring Sp. z o.o. (Pekao Faktoring) The Bank's share in the share capital of Pekao Factoring and in total votes atthe Shareholders Meeting is 100%. The value of the company's equity as at 31December 2005 was PLN 60.6 million. Apart from factoring services (recourse and non-recourse factoring) the companyoffers services related to factoring, i.e. collecting information regardingdebtors' standing and monitoring of payments on ongoing basis. Additionally, thecompany offers financial advisory and consulting services regarding the choiceof business financing methods, as well as extends loans relating to factoringagreements. The company cooperates with Bank Pekao S.A. in the area ofdevelopment of new and activating existing sales distribution channels. Pekao Financial Services Sp. z o.o. (PFS) The Bank's share in the share capital of PFS and in total votes at theShareholders Meeting of this company is 100%. As at 31 December 2005, thecompany's equity was PLN 20.5 million (including a PLN 7 million refundablecontribution made by Bank Pekao S.A.). The Company acts as a transfer agent for members of the assets management marketi.e. mutual funds, pension funds, employees' pension programs and insurers.In 2005, PFS continued its strategy of strengthening its market position on thePolish market of transfer agents. The number of serviced accounts of mutual andpension funds amounted to 2.21 million and increased by 9% as compared to theend of 2004. Xelion. Doradcy Finansowi Sp. z o.o. (Xelion) The company is owned by the following two shareholders: Bank Pekao S.A. andUniCredito Italiano S.p.A. with its registered office in Genua, with 50% sharesin the share capital and in total number of votes at the General ShareholdersMeeting each. As at 31 December 2005, the company's equity was PLN 40.5 millionThe company was created in response to increasing demand for customized servicesand financial products offer. It is focused on servicing affluent customers thatdemand highly individualised approach at convenient locations. Centrum Kart S.A. (CK S.A.) The Bank's share in the share capital of CK S.A. and in total votes at theGeneral Shareholders Meeting is 100%. As at 31 December 2005, the value ofequity was PLN 30.3 million The company provides a comprehensive servicing of card system management,transaction authorization and card embossment. 6.6 Other entities included in the consolidated financial statements Other subordinated and associated entities included in the consolidatedfinancial statement for 2005 include: Pekao Development Sp. z o.o. (Pekao Development) The Bank's share in the share capital of Pekao Development and in total votes atthe General Shareholders Meeting is 100%. As at 31 December 2005, the value ofthe company's equity was PLN 76.3 million. In 2005, business activities of Pekao Development mainly included therealisation of housing projects. On 15 February 2006, the agreement for the setting up of Pirelli Pekao RealEstate, a joint venture company with the participation of 75% stake held byPirelli RE and 25% by Bank Pekao S.A. has been signed. Pirelli RE will acquirefrom Bank Pekao S.A. 75% shares of Pekao Development. The Company business namewill be changed to Pirelli Pekao Real Estate. Pekao Access Sp. z o.o. (Access) The Bank's share in the share capital of Access and in total number of votes atthe Shareholders Meeting is 55.3%. As at the end of 2005, the value of thecompany's equity was PLN 2.7 million. The company's main business activities include: - advisory on acquisitions accompanied by advisory on obtaining transactions' finance,- advisory projects on new markets,- advisory on restructuring accompanied by obtaining finance. Central Poland Fund LLC (CPF) The Bank's share in the share capital of CPF and in total votes at theShareholders Meeting is 53.2%. As at 31 December 2005, the value of CPF's equitywas PLN 6.4 million. CPF is focused on managing of asset portfolios that include companies' shares.In 2005, one of the company's included in the portfolio was sold. Krajowa Izba Rozliczeniowa S.A. (KIR) The Bank's share in the share capital of KIR and in total votes at the GeneralShareholders Meeting is 23.0%. As at the end of 2005, the value of KIR's equitywas PLN 94.0 million. The main business activities of KIR include management of inter-bank settlementsystem, which covers exchange of payment orders, registration of such orders,determining parties' liabilities and reporting the results of inter-banksettlements made on the territory of Poland to the National Bank of Poland. Hotel Jan III Sobieski Sp. z o.o. The company's business activities include the management of Hotel Jan IIISobieski in Warsaw. Drukbank Sp. z o.o. Drukbank Sp. z o.o. did not conduct any business activities in 2005. Thecompany's profit includes valuation of the company's shares in Bank Pekao(Ukraine) Ltd. 7 Management and Supervisory Boards of the Bank Management Board of Bank Pekao S.A.---- ----------------------------- --- ---------------------- 31.12.2005 31.12.2004 1. Jan Krzysztof Bielecki 1. Jan Krzysztof Bielecki President, CEO President, CEO 2. Luigi Lovaglio 2. Luigi Lovaglio Deputy President, COO Deputy President, COO 3. Sabina Olton 3. Sabina Olton Deputy President, Deputy President, Chief Accountant Chief Accountant 4. Przemyslaw Figarski 4. Przemyslaw Figarski Member of the Management Board Member of the Management Board 5. Irene Grzybowski 5. Irene Grzybowski Member of the Management Board Member of the Management Board 6. Paolo Iannone 6. Paolo Iannone Member of the Management Board Member of the Management Board 7. Christopher Kosmider 7. Christopher Kosmider Member of the Management Board Member of the Management Board---- ----------------------------- --- ---------------------- 8. Marian Wazynski 8. Marian Wazynski Member of the Management Board Member of the Management Board---- ----------------------------- --- ----------------------In 2005 there were no changes in the Management Board. The members of the Management Board shall be appointed for the common term,which shall last three years. The Supervisory Board appoints and recalls the members of the Management Boardof the Bank. The Deputy Presidents and members of the Management Board of theBank are appointed and recalled at the request of the President of theManagement Board of the Bank. Appointment of two members of the Management Boardof the Bank, including the President of the Management Board follows theapproval of the Banking Supervision Commission. The Supervisory Board has toadvise the Commission to express its approval. The scope of operations and scope of actions of Members of the Management Boardof the Bank have been set forth under Statutes of the Bank and the law - theCode of Commercial Companies ksh, as well as the By-Laws of the Management Boardof the Bank. The scope of operations of the Management Board of the Bankincludes matters not reserved by virtue of the binding provisions of the law orof the Statutes of the Bank to the competence of the Bank's other statutorybodies. Supervisory Board of Bank Pekao S.A.---- ----------------------------- --- ---------------------- 31.12.2005 31.12.2004 1. Jerzy Woznicki 1. Alessandro Profumo Chairman Chairman 2. Paolo Fiorentino 2. Paolo Fiorentino Deputy Chairman, Secretary Deputy Chairman, Secretary 3. Andrea Moneta 3. Jerzy Woznicki Deputy Chairman Deputy Chairman 4. Pawel Dangel 4. Pawel Dangel Member of the Supervisory Board Member of the Supervisory Board 5. Fausto Galmarini 5. Fausto Galmarini Member of the Supervisory Board Member of the Supervisory Board 6. Oliver Greene 6. Oliver Greene Member of the Supervisory Board Member of the Supervisory Board 7. Enrico Pavoni 7. Enrico Pavoni Member of the Supervisory Board Member of the Supervisory Board 8. Leszek Pawlowicz 8. Leszek Pawlowicz Member of the Supervisory Board Member of the Supervisory Board---- ----------------------------- --- ---------------------- 9. Jerzy Starak 9. Jerzy Starak Member of the Supervisory Board Member of the Supervisory Board---- ----------------------------- --- ----------------------Mr. Alessandro Profumo resigned on 19 January 2005 from his function as Chairmanand Member of the Bank Supervisory Board. The Extraordinary General Meeting of the Bank held on 20 January 2005 appointedMr. Andrea Moneta to sit on the Bank Supervisory Board for the joint term inoffice. On 20 January 2005, the Bank Supervisory Board appointed Mr. Jerzy Woznicki, thehitherto Deputy Chairman of the Supervisory Board as the Chairman of theSupervisory Board, and Mr. Andrea Moneta as the Deputy Chairman of theSupervisory Board. Management Board and Supervisory Board Remuneration (PLN ths.) 2005Management Board of the BankShort-term employee benefits* 13,313Post- employment term benefits -Other long- term benefits -Termination benefits -Share-based payments** 5,595 Total 18,908Supervisory Board of the BankShort-term employee benefits* 462Post-employment term benefits -Other long- term benefits -Termination benefits -Share-based payments** - Total 462Grand total 19,370 * Short term employee benefits comprise of: base salaries, bonuses and otherbenefits, in particular cost of life insurance polices, health insurance andhealthcare, children education costs. Decision about the bonuses for 2005 wasnot yet taken by the Supervisory Board, however the Bank has established areserve for that bonus amounting to PLN 3,820 thousand, included above. ** The value of Share-based payments was established as part of Payroll/EmployeeExpenses recognized by the Group, according to IFRS 2 during the reportingperiod, representing the amortization of initial fair value of options(pre-emptive rights to take up the Bank's shares) pertaining to options grantedto members of the Management Board of the Bank. Total value of salaries, rewards and benefits (in cash, nature and in kind) paidor due to Management Board Members and Supervisory Board Members in 2005 (PLNthousand) No. Name 2005 base salary and 2005 other Total 2005 2004 bonus expense (paid or benefits remuneration bonuses payable) (paid) expense paid in 2005 1 Bielecki Jan 1,265 52 1,317 1,450 Krzysztof 2 Figarski 734 24 758 527 Przemyslaw Lech 3 Grzybowski 1,596 72 1,668 173 Irene * 4 Iannone Paolo 932 237 1,169 258 ** 5 Kosmider 627 31 658 524 Christopher 6 Lovaglio 2,648 11 2,659 1,001 Luigi*** 7 Olton 505 0 505 508 Sabina 8 Wazynski 739 20 759 409 Marian 2005 Bonus 3,820 0 3,820 0 provision *** * Total 12,866 447 13,313 4,850 * The amount stated for Mrs Irene Grzybowski includes the amount of PLN 700 ths.presented as receivable in 2004. ** In the amount reported for Mr Paolo Iannone it is included the amount of PLN1,331 ths. which is paid by UniCredito Italiano and is refunded by the Bank. *** In the amount reported for Mr Luigi Lovaglio it is included the amount ofPLN 3,418 ths. which is paid by UniCredito Italiano and is refunded by the Bank. **** A decision on 2005 bonuses for management Board Memebers has not been takenyet by the Supervisory Board, however a provision in amount of PLN 3,820 ths.has been created for that purpose. In 2005, Management Board Members have not received any compensation - in anyform, and they do not have any receivables by that title from subsidiaries,jointly controlled companies, and associated companies. The Bank's total accumulated expense for stock options granted to managementunder the 2003 and 2004 programs, that may be exercised by Management BoardMembers in the period between 2006 and 2012 (subject to fulfilment of givenconditions) amounts to PLN 5,595 ths. No options were granted to or exercised byManagement Board Members in 2005. In 2005, Management Board Members did not received any compensation, in anyform, nor are they entitled to any such amounts receivable from subsidiaries,jointly controlled companies, and associated companies of the Bank. Total value of remuneration paid to Supervisory Board Members in 2005 (PLN ths.)No. Name Amount 1 Woznicki Jerzy 107 2 Dangel Pawel 71 3 Greene Oliver 71 4 Pavoni Enrico 71 5 Pawlowicz Leszek 71 6 Starak Jerzy 71 Total 462 In 2005, Supervisory Board Members have not received any compensation - in anyform, and they do not have any receivables by that title from subsidiaries,jointly controlled companies, and associated companies Remuneration of members of the Management Boards and Supervisory Boards of thesubsidiary companies(PLN ths.) 2005Management Board of the BankShort-term employee benefits 11,087After employment term benefits -Other long- term benefits -Benefits regarding termination of job agreement 608Share-based payments - Total 11,695Supervisory Board of the BankShort-term employee benefits 143After employment term benefits -Other long- term benefits -Benefits regarding termination of job agreement -Share-based payments - Total 143 8 The Bank's shareholding structure Table below shows the Bank's shareholders who have (directly or indirectlythrough subsidiaries) at least 5% of total votes at the Bank's GeneralShareholders Meeting: Shareholder Number of votes and shares at GSM The share in the statutorycapital and in the total number of votes at GSM Number of votes and shares atGSM The share in the statutory capital and in the total number of votes at GSM 31 December 2005 31 December 2004 UniCredito Italiano S.p.A. 88,121,725 52.93% 88,121,725 52.93%Other shareholders 78,359,962 47.07% 78,359,962 47.07%-------------- --------- ------------ --------- ------------ Total 166,481,687 100.00% 166,481,687 100.00%-------------- --------- ------------ --------- ------------On 16 January 2006 share capital of the Bank was increased by the total amountof PLN 186,755 and on 6 February 2006 by PLN 5,169 as a result of issue series Fordinary bearer shares. The share capital of the Bank amounts currently to PLN166,673,611. The share of UniCredito Italiano S.p.A. in the share capital andthe total number of votes at the General Meeting amounts to 52.87% while theshare of other shareholders stands for 47.13% According to the information known by the Bank, as at the date of submittingthis report no significant changes were made in the shareholding structure. All stocks of Bank Pekao S.A. are common stock. The owners of the Bank's shareshave no special control powers resulting from owning the shares.The Bank's shares contain no restrictions on voting or transfer of ownership. Shares owned by the members of the Bank's Management and Supervisory Boards According to the Bank's information, as at the date of submitting this report,Mrs. Sabina Olton owned 10,000 shares of Bank Pekao S.A. with a total nominalvalue of PLN 10,000.The number of the Bank's shares held by the members of the Bank's management hasnot changed as compared with the end of 2004. Management Options Programme An incentive programme in the form of management options is in force in the BankPekao S.A. Group. The programme covers the Management Board and other keymanagers essential for implementing the Bank's strategy and selected employeesof the subsidiaries. As at 31 December 2005, 41 people participate in the incentive programme for theyear 2003. The total number of shares offered under this programme was 653,126,of which 253,271 shares will be offered to the management. The incentiveprogramme for the year 2004 has 46 participants and the total number of sharesoffered is 717,662, of which 391,348 shares will be offered to the management. As at the date of submitting this report, 41 people participate in the incentiveprogramme for the year 2003. The total number of shares offered under thisprogramme was 461,202, of which 253,271 shares will be offered to themanagement. The incentive programme for the year 2004 has 46 participants andthe total number of shares offered is 717,662, of which 391,348 shares will beoffered to the management. The change in the number of shares in the incentive programme for 2003 resultsfrom execution of pre-emptive right to acquire the Bank's shares that resultsfrom the bonds. As a result of this execution 34 persons acquired 191,924 sharesin total. The Bank was also informed that 23 persons participating in theprogramme sold 99,602 shares. Issuance, redemption and repayment of debt securities Issuance of registered bonds with pre-emptive rights to take up the Bank's F andG sharesThe Bank issued 415 thousand registered A series bonds and 415 thousandregistered B series bonds with pre-emptive rights to take up the Bank's F seriesshares, and 415 thousand registered C series bonds and 415 thousand registered Dseries bonds with pre-emptive rights to take up the Bank's G series shares.1,660 of the Bank's registered bonds were allocated to Pekao Faktoring (theBank's subsidiary) acting as the Trustee, and registered in the Bonds Registerof Centralny Dom Maklerski Pekao S.A. The Bonds were issued on the basis of Resolution No. 6 of the Bank'sExtraordinary General Meeting dated 25 July 2003 on the issue of registeredbonds under an incentive programme. Each Bond entitles to take up 1 ordinary bearer share of the Bank:- 1 A series bond entitles taking up 1 F series share;- 1 B series bond entitles taking up 1 F series share;- 1 C series bond entitles taking up 1 G series share;- 1 D series bond entitles taking up 1 G series share. The nominal value of one bond is PLN 0.01.The total value of the issued A, B, Cand D series bonds amounts to PLN 16,600. The issue price of one bond is equalto its nominal value. The bonds do not bear interest. The bonds are not secured. The issue price of F series shares amounts to PLN 108.37, and of G series sharesPLN 123.06. In current reports No. 3/2006 and 18/2006, the Management Board of the Bankinformed of the acquisition by the Bank of 88,430 registered series A bonds fromPekao Faktoring Sp. z o.o., with the purpose of redemption, and the total of191,924 series A bonds from eligible persons, upon the request thereof for earlyredemption, pursuant to the implementation of the priority right to take-up theBank's shares ensuing from the bonds, for the purpose of redemption thereof. The period of acquisition of series A bonds from the Trustee by eligible personslasted from 6 May until 30 December 2005. Bonds of the other series will be available for purchase from the Trustee by theeligible persons in the following periods: - B series bonds in the period from the 31st day after the date of the General Shareholders' Meeting, approving financial statements for the financial year 2005 until 30 December 2006.- C series bonds in the period from the 31st day after the date of the General Shareholders' Meeting, approving financial statements for the financial year 2006 until 30 December 2007.- D series bonds in the period from the 31st day after the date of the General Shareholders' Meeting, approving financial statements for the financial year 2007 until 30 December 2008. All Bonds which are not sold off by the Trustee by 30 December 2006, 2007 and2008 respectively shall be acquired by the Bank on 31 December 2006, 2007 and2008 respectively to be redeemed at their nominal value.The execution of the pre-emptive rights to take up F and G series shares can beexercised in the following periods: - in respect of A series bonds - from 1 January 2006 to 31 December 2010;- in respect of B series bonds - from 1 January 2007 to 31 December 2010;- in respect of C series bonds - from 1 January 2008 to 31 December 2012;- in respect of D series bonds - from 1 January 2009 to 31 December 2012. 9 Assessment of the financial credibility of Bank Pekao S.A. As at 31 December 2005, Bank Pekao S.A. had the following financial credibilityratings:Fitch Ratings--------------------------------------------------------------------------------Long-term rating AShort-term rating F1Individual rating CSupport rating 1Outlook Stable--------------------------------------------------------------------------------Standard and Poor's--------------------------------------------------------------------------------Long-term rating local currency A-Long-term rating foreign currency A-Short-term rating A-2Outlook Stable--------------------------------------------------------------------------------Moody's Investors Service Ltd.(unsolicited rating)--------------------------------------------------------------------------------Long-term deposit rating A2Short-term deposit rating Prime-1Financial strength COutlook Stable-------------------------------------------------------------------------------- Investor relations The Bank continued the policy of active communication with minorityshareholders. Certain communications standards have been worked out andimplemented, such as the quarterly presentations of results achieved publishedboth on Warsaw Stock Exchange and on London Stock Exchange, participation in themost important conferences enabling direct communication with investors. The Bank's quoted price In 2005, the price of the Bank's share increased from PLN 138.00 (as at 31December 2004) to PLN 174.50 as at the end of December 2005, i.e. by 26.4%.During the year, the quoted price of the Bank's share fluctuated from PLN 124.00as at 11 May 2005 to PLN 187.00 on 19 September 2005. Awards and Prizes The previous year was marked with foreign and domestic prizes and awardsbestowed upon the Bank. The most important of them are discussed below.Bank Pekao S.A. was announced by Euromoney monthly to be the best bank in Polandin 2005; the Bank was also honoured with the prestigious Award for Excellence2005. It is the fourth Euromoney award for Bank Pekao S.A. - the Bank alreadyreceived three such awards in the years 2000, 2001 and 2002.The authors of theranking list gave Bank Pekao S.A. very high credits for maintaining for yearsits leading position on the retail credit and mutual funds sales market, as wellas for consequence in promoting customer-friendly PLN mortgage credits.The most important national distinction is the "Trustworthy Company of 2005",bestowed upon the Bank by the Corporate Investors' Chapter of the PolishInstitute of Directors upon evaluation of corporate governance at companieslisted on the Warsaw Stock Exchange GPW. The Chapter evaluated the followingfour elements of company operations: ownership structure, General Meeting andinvestor relations, financial transparency and availability of information, andthe structure and functioning of the Supervisory Board. Out of 54 evaluatedcompanies, 11 received the title of "Trustworthy Company". 10 Financial results of the Group 10.1 Structure of net profit The structure of the profit and loss account for the Group: PLN mil.----------------------------- ---------- ---------- 2005 2004 pro forma----------------------------- ---------- ----------Net profit of Bank Pekao S.A. 1,439.4 1,171.4Net profit (loss) of entities consolidated under fullmethod 157.7 114.2Centralny Dom Maklerski Pekao S.A. 92.5 77.7Pekao Development Sp.zo.o. 30.2 7.6Pekao Financial Services Sp.zo.o. 13.1 8.8Pekao Faktoring Sp. z o.o. 9.6 6.6Pekao Pioneer PTE S.A. 8.1 5.6Pekao Leasing Sp. z o.o. 0.8 1.2Centrum Kart S.A. 2.6 0.9Drukbank Sp. z o.o. 0.5 (1.7)Pekao Fundusz Kapitalowy Sp. z o.o.* (0.4) (0.2)Pekao Access Sp.zo.o. 0.5 0.9Bank Pekao (Ukraina) Ltd. in Luck 0.2 (1.5)Pekao Uslugi Korporacyjne S.A. - 8.3Net profit (loss) of entities valued under equity method 43.2 37.1Pioneer Pekao Investment Management S.A. 51.9 36.5Krajowa Izba Rozliczeniowa S.A. 6.7 7.2Grupa Inwestycyjna Nywig S.A. 0.0 0.1Central Poland Fund LLC (4.0) 0.9Xelion. Doradcy Finansowi Sp.zo.o. (11.4) (11.1)Trinity Management Sp.zo.o. - 6.3NFI Jupiter S.A. - (2.8)Consolidation eliminations and adjustments ** (105.4) (73.8)----------------------------- ---------- ----------Net profit of the Group 1,534.9 1,248.9----------------------------- ---------- ----------* the result of the company includes valuation of related entities using equitymethod * include transactions within the Group, including dividends paid bysubordinated entities An explanation of the results achieved by Bank Pekao S.A. was included in thereport on the activities of Bank Pekao S.A., which is an integral part of theSAB-R financial statements for the year 2005. Results of the Bank's related entities in 2005 Centralny Dom Maklerski Pekao S.A. (CDM) In 2005, CDM made a net profit of PLN 92.5 million, compared with the net profitof PLN 77.7 million in 2004. This good performance occurred as a result of theactivities undertaken by CDM in 2005 as well as favourable economic conditions:the increase in macroeconomic ratios and the resulting increase in stockexchange turnover and indices resulted in a high amount of commission earned byCDM. Pioneer Pekao Investment Management S.A. (PPIM) The consolidated net profit of the PPIM for 2005 was by 42.0% higher whencompared with 2004 and amounted to PLN 106.0 million. The Bank's share in thenet profit amounted to PLN 51.9 million. The increase in PPIM's profitability isof permanent nature and is connected with an increase in the value of assetsheld by investment funds. The main factor contributing to this increase is theeffective distribution network of Bank Pekao S.A. and the companies of theGroup. Pekao Development Sp. z o.o. (Pekao Development) In 2005, Pekao Development made a net profit of PLN 30.2 million, compared withPLN 7.6 million in 2004. The increase in profits in 2005 is due to greaternumber of the company's projects. Pekao Financial Services Sp. z o.o. (PFS) In 2005, the company made a net profit of PLN 13.1 million, compared with PLN8.8 million in 2004. The significant improvement of the result was mainly due toan increase in the number of accounts kept for participants of investment fundsand pension funds. Krajowa Izba Rozliczeniowa S.A. (KIR) In 2005, net profit of KIR amounted to PLN 29.2 million (Bank's share: PLN6.7 million) and was by PLN 2.2 million lower when compared with 2004.Pekao Faktoring Sp. z o.o. (Pekao Faktoring)In 2005, the company made a net profit of PLN 9.6 million, which was by PLN 3.0million higher than in 2004. This increase was due to the successful floating ofnew products and increase in the number of customers. Pekao Pioneer PTE S.A. (PTE) In 2005, the company reported a net profit of PLN 8.1 million (Bank's share: PLN5.3 million), compared with PLN 5.6 million in 2004. Increase in financialresult was achieved thanks to higher inflow of current contribution andmaintained cost control. Central Poland Fund LLC (CPF) In 2005, the company made a loss of PLN -7.4 million (Bank's share: PLN -4.0million), in comparison with the net profit of PLN 0.9 million earned in 2004.The loss incurred in 2005 was mainly due to the loss arising on the valuation ofshares in portfolio companies. Xelion. Doradcy Finansowi Sp. z o.o. In 2005, the company incurred a net loss of PLN -22.9 million (Bank's share:PLN -11.4 million). In 2005, the company concentrated on further development ofthe network of financial advisors, development of activities in other regions ofPoland and further development of the product offer while ensuring the highestquality of services. Consolidation adjustments Consolidation adjustments amounted to PLN -105.4 million and resulted mainlyfrom: - dividends paid: PLN -96.6 million,- amortisation of the costs associated with the purchase of the Epoka, Pioneer and Rodzina open-end pension funds by Pekao Pioneer PTE in 2001, as well as the costs associated with the purchase of PTE shares by the Bank in 2000: PLN - 12.8 million,- other adjustments: PLN +4.0 million. 10.2 Consolidated profit and loss account In order to ensure that the data for 2005 and 2004 is comparable, previous yearprofit and loss account data was adjusted and is presented as pro forma data inthis paragraph. In 2005, the net profit increased by 22.9% and amounted to PLN 1,534.9 million.2005 net profit was the best result achieved to date confirming continued growthin Group's profitability. The increase in the net profit by PLN 286.0 million in 2005 compared with theprevious year was possible thanks to increased business activity whichtranslated into higher income, particularly interest income, stable operatingcosts and lower cost of risk. Apart from the good results of the Bank Pekao S.A., the results of the Group'scompanies, which were better than in the previous year, contributed to theimprovement in the overall Group result. Consolidated Profit and Loss Statement for 2005 and 2004 is shown below: (PLN mil.)-------------------------- ------------ ---------- -------- 2005 2004 Change pro forma-------------------------- ------------ ---------- --------Net interest income * 2,343.5 2,129.7 10.0%Net commission income 1,587.0 1,481.4 7.1%Dividend income 0.3 0.0 xResult on financial instruments at fair 71.9 96.0 (25.1%)valueResult on investment securities 74.2 14.1 426.2%Foreign exchange income 265.4 289.0 (8.2%)Other operating income / cost net 71.0 48.7 45.8%Total income 4,413.3 4,058.9 8.7%Overhead costs (including depreciation) (2,346.4) (2,333.4) 0.6%Personnel ** (1,203.0) (1,155.6) 4.1%Non-personnel (820.5) (856.1) (4.2%)Depreciation (322.9) (321.7) 0.4%Operating profit 2,066.9 1,725.5 19.8%Impairment losses on loans and advances (237.5) (315.6) (24.7%)Share in the profit (loss) of associates 44.2 36.1 22.4%Pre-tax profit 1,873.6 1,446.0 29.6%Tax charge (338.7) (197.1) 71.8%-------------------------- ------------ ---------- --------Net profit 1,534.9 1,248.9 22.9%-------------------------- ------------ ---------- -------- Attributable to equity holders of the 1,537.7 1,252.5 22.8% Company ----------- ---------- -------- --------------------------- Attributable to minority interest (2.9) (3.5) (17.1%) --------------------------- ----------- ---------- -------- * including income on SWAP transaction ** including social security charges, without cost of training Group's income In 2005, the Group's income amounted to PLN 4,413.3 million and was by PLN 354.4million (8.7%) higher than in the previous year. The growth in income was due to the development of business activity, supportedby sales oriented activities relating to the key products of both the Bank andthe other Group companies. The main growth factors included interest income andfee and commission income. Interest income grew by 10.0% mainly due to an increase in volumes and betterspreads including an increase in the loan portfolio that had a positive effecton the Group's asset structure. (PLN mil.)Net interest income 2005 2004 Change-------------------------- ----------- pro forma -------- ----------Interest income 4,963.5 4,328.3 14.7%Interest expense (2,620.0) (2,198.5) 19.2%Net interest income 2,343.4 2,129.7 10.0%Net interest margin % 4.3 3.8 0.5 p.p-------------------------- ----------- ---------- --------The main growth factor of non-interest income was fee and commission income thatincreased by 7.1% mainly thanks to fees on mutual funds. (PLN mil.)---------------------- ------------ ----------- ---------Non-interest income 2005 2004 Change pro forma ---------------------- ------------ ----------- ---------Net commission income 1,587.0 1,481.4 7.1%Dividend income 0.3 0.0 xResult on financial instruments at fair value 71.9 96.0 (25.1%)Result on investment securities 74.2 14.1 426.2%FX income 265.4 289.0 (8.2%)Other operating income / cost net 71.0 48.7 45.8%---------------------- ------------ ----------- ---------Total non-interest income 2,069.8 1,929.2 7.3%---------------------- ------------ ----------- --------- Total overhead costs (including depreciation) In 2005, total overhead costs including depreciation were kept under control andamounted to PLN 2,346.4 million i.e. were only by 0.6% higher than in theprevious year. In 2005, the Group's cost / income ratio amounted to 53.2% and was by 4.3 p.p.lower than in the previous year. As at the end of 2005, the Group had 15,937 employees (a reduction of 471employees compared with the end of 2004). (PLN mil.)-------------------- ---------- ----------- -----------Overhead costs (including depreciation) 2005 2004 Change pro forma-------------------- ---------- ----------- -----------Personnel costs (1,203.0) (1,155.6) 4.1%Non-personnel costs (820.5) (856.1) (4.2%)Depreciation (322.9) (321.7) 0.4% Total (2,346.4) (2,333.4) 0.6%-------------------- ---------- ----------- -----------Impairment losses on loans and advances In 2005, impairment losses on loans and advances amounted to PLN 237.5 millionand were by 24.7% lower than in the previous year. This resulted primarily fromeffective management of credit risk and the improved macroeconomic situation.The ratio of non-performing loans to total loans decreased from 19.9% at the endof 2004 to 16.2% at the end of 2005 as a result of an increase in the volume ofperforming loans and a simultaneous decrease in the volume of non-performingloans. Write-offs for revaluation of assets: (PLN mil.)--------------------- ---------- --------------- 2005 2004 pro forma--------------------- ---------- --------------- Total (237.5) (315.6)for loan receivables (including financialleasing) (237.3) (295.7)for off-balance sheet liabilities 0.2 (3.2)for financial assets (0.4) (16.7)--------------------- ---------- --------------- Adjustments for provisions, deferred tax provisions and assets(PLN mil.)--------------------- ---------- --------------- 2005 2004 pro forma--------------------- ---------- ---------------Total provisions 108.7 100.6of which:provisions for off-balance sheet liabilities 20.3 16.3provisions for liabilities to employees 66.0 67.7other provisions 22.4 16.6--------------------- ----------- ------------Provision for deferred tax 0.0 1.2--------------------- ----------- ------------Deferred tax assets 182.2 114.2--------------------- ----------- ------------ Average interest rates in Bank Pekao S.A. in 2005 The average nominal interest rates for the basic types of the PLN and foreigncurrency deposits: -------------------------- ----------------- PLN retail deposits 2.88% p.a.- PLN corporate clients deposits 1.13% p.a.- foreign currency retail deposits 1.02% p.a.- foreign currency corporate clients deposits 0.66% p.a.-------------------------- ----------------The average nominal interest rates for the PLN loans:------------------------------ ------------- base floating rate 19.25% p.a.- base fixed interest rate 19.25% p.a.- base interest rate for construction and mortgage loans 8.74% p.a.------------------------------ ------------ 10.3 Structure of the balance sheet In the financial statements for 2005, the presentation of balance sheet figuresas at 31 December 2004 has been restated to ensure comparability. The balance sheet of Bank Pekao S.A. dominates the balance sheet of the Group.Not only does it determine the amount of total assets in balance sheet, but alsothe structure of the assets and liabilities. As at the end of 2005, the share ofthe total assets of Bank Pekao S.A. in the total assets of the whole Group was99.2%. The total assets of the Group at the end of 2005 amounted to PLN 61,972.0million and were by 4.1% higher compared to the end of 2004. The table below presents Group's balance sheet: Assets 31.12.05 31.12.04 Change------------------------ ------------- pro forma --------- ---------- PLN mil. --------------------------------------------Cash and balances with theCentral Bank 3,574.8 3,939.3 (9.3%)Loans and advances to banks 6,966.0 5,961.5 16.8%Loans and advances tocustomers* 28,975.7 26,305.1 10.2%Securities** 18,774.5 19,568.9 (4.1%)Investments in subordinatedundertakings 167.9 124.7 34.6%Tangible and intangibleassets 2,086.6 2,173.6 (4.0%)Other assets 1,426.5 1,463.3 (2.5%)Total assets 61,972.0 59,536.4 4.1%------------------------ ------------- ---------- --------- Liabilities and equity 31.12.05 31.12.04 Change------------------------ ------------- pro forma --------- ---------- PLN mil. --------------------------------------------Amounts due to the CentralBank 1,950.7 2,151.7 (9.3%)Amounts due to banks 1,997.0 1,332.6 49.9%Amounts due to customers*** 46,847.9 45,844.9 2.2%Other liabilities 2,753.6 2,376.2 15.9%Shareholders' equity 8,422.7 7,831.0 7.6%including minority interest 15.4 18.8 (18.1%)------------------------ ------------- ---------- ---------Total liabilities and equity 61,972.0 59,536.4 4.1%------------------------ ------------- ---------- --------- * including debt securities eligible for rediscounting at the Central Bank andleasing receivables ** including financial assets held for trading and other financial instrumentsat fair value through profit or loss *** including own securities in issue 10.3.1 Assets Changes in assets structure Loans and advances to customers and securities are the dominant items in thestructure of assets. As at the end of 2005, loans and advances to customers amounted to PLN 28,975.7million and constituted 46.8% of the Group assets (at the end of 2004, thisratio was equal to 44.2%). The increase in this item in 2005 resulted mainlyfrom increased lending activities in the area of consumer loans and PLN mortgageloans as well as increase in lending to corporate clients'. In 2005, the volume of securities decreased by PLN 794.4 million (i.e. by 4.1%),and their share in total assets dropped by 2.6 p.p. reaching the level of 30.3%. Cash and balances with the Central Bank------------------------ ---------Assets 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN mil. ------------------------ -------------------- ---------Cash and balances withthe Central Bank,including: 3,574.8 3,939.3 (9.3%)cash 1,110.0 1,081.3 2.7%current account 1,078.1 1,474.7 (26.9%)reserve bonds 1,313.1 1,313.1 0.0%other 73.6 70.2 4.9%------------------------ ------------- ---------- --------- Loans and advancesCustomer structure of loans and advances* ------------------------ --------- 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN million ------------------------ -------------------- ---------Loans and advances innominal value 33,331.9 30,608.6 8.9%loans 33,235.2 29,653.9 12.1%retail** 8,177.0 6,776.9 20.7%corporate 25,058.2 22,877.0 9.5%non quoted securities 96.7 565.8 (82.9%)repo transactions 0.0 388.9 xNominal valueadjustment (4,356.2) (4,303.5) 1.2%Net loans and advances 28,975.7 26,305.1 10.2%------------------------ ------------- ---------- --------- * including debt securities eligible for rediscounting at the Central Bank andleasing receivables Gross loans and advances in nominal value increased by PLN 2,723.3 million in2005. This resulted from PLN 3,581.3 million increase in loans, PLN 469.1million decrease in non quoted securities and PLN 388.9 million decrease inreceivables from repo transactions. Increase in the gross loan portfolio in 2005 results primarily from an increasein loans granted to corporate customers (by PLN 2,181.2 million), increase inthe volume of "Express Loan" (by PLN 1,292.7 million) and PLN mortgage loans (byPLN 937.9 million). Loan portfolio qualityLoans* (gross principal) in 31.12.05 31.12.04category: ------------- ---------------------------------------- PLN mil. % PLN mil. % --------------------------- -------- ------- -------- -------Normal 25,979.4 78.2 21,833.0 73.6Watch category 1,882.7 5.7 1,905.7 6.4Non-performing 5,373.2 16.2 5,915.2 19.9Sub standard 290.6 0.9 768.4 2.6Doubtful 515.5 1.6 481.4 1.6Lost 4,567.0 13.7 4,665.4 15.7Total loans 33,235.2 100.0 29,653.9 100.0--------------------------- -------- ------- -------- -------* according to the comparable classification In 2005, the loan volume increased by PLN 3,581.3 assisted by simultaneousdecrease in non-performing loans by PLN 542.0 million. This resulted fromeffective credit risk management and improved macroeconomic conditions. As aresult, the ratio of non-performing loans to total loans amounted to 16.2% as at31 December 2005 and was 3.7 p.p. lower compared to the end of 2004. In the financial statement drawn in keeping with the International FinancialReporting Standards, receivables from customers are broken down by receivablesfrom credits and loans and receivables from financial leasing. ------------------------ ---------Structure of receivables fromcustomers 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN mil. ------------------------ -------------------- ---------Receivables from credit andloans* 28,229.8 25,757.8 9.6%Receivables from financialleasing 745.9 547.3 36.3%Total receivables fromcustomers 28,975.7 26,305.1 10.2%------------------------ ------------- ---------- --------- * Including debt securities eligible for rediscounting at the Central Bank.Impairment of financial assets For each balance sheet date, the Group assesses, whether there is objectiveevidence of impairment of credit and leasing receivables. The Group classifiescredit and leasing receivables by size of engagement, into the individual andgroup portfolios. In the individual portfolio, each particular credit and leasing exposure issubjected to an impairment test. If there is objective evidence of impairment,the carrying amount of the receivable is reduced. If for a given exposure noobjective evidence of impairment exists, the exposure is included in the creditportfolio subject to group assessment. In a group portfolio, groups of similar credit risk profile are identified,which are then assessed collectively for the impairment.(PLN mil.) 31.12.05-------------------------- --------Gross credit and loans 33,243.0without impairment 27,750.0with impairment 5,493.0Impairment losses, including: (4,393.9)for loans assessed individually (1,940.1)for loans assessed in groups (2,453.8)Interest 126.6Amounts due in transit 0.1-------------------------- --------Total net value 28,975.7-------------------------- --------As of year end 2005, the gross volume of credits and loans without impairmentamounted to PLN 27,750. million, whereas credits and loans with impairmentamounted to PLN 5,493.0 million. The balance sheet value of impairment lossesstood at PLN 4,393.9 million, including PLN 227.2 million attributed to theimpairment losses resulting from incurred but not recognised losses (IBNR). The currency structure of the receivables from customers -----------------------Receivables from customers* denominated 31.12.05in: PLN mil. %--------------------- ------------- ------------ - PLN 26,958.3 80.8%- foreign currencies** 6,411.4 19.2% Total 33,369.7 100.0%Impairment looses (4,393.9) xTotal net 28,975.7 x--------------------- ------------- ------------* including amounts due in transit** including indexed loansPLN prevails in the currency structure of the receivables from customers, whoseshare as at the end of 2005 was 80.8%. The highest share among foreign currencyreceivables had those denominated in EUR - 72.7%, USD - 18.7% and CHF -7.8%.Receivable structure by maturityGross receivables 31.12.05------------------- ----------------------- ------------ PLN mil. %------------------- ------------- ------------Current and up to 1 month 6,048.5 18.1%1-3 months 931.1 2.8%3 months - 1 year 3,351.4 10.0%1-5 years 9,902.0 29.7%Over 5 years 13,009.9 39.0%Interest 126.6 0.4%Amounts due in transit 0.1 0.0% Total 33,369.7 100.0%Impairment losses (4,393.9) xTotal net 28,975.7 x------------------- ------------- ------------ Broken down by maturities, receivables with maturity over 5 years have thehighest share (39.0%), mainly attributed to a large loan for a central stateinvestment, mortgage loans and receivables for which the maturity date alreadypassed). Loan portfolio concentration Except for one borrower who was granted a loan for financing a central stateinvestment, the loan activities of the Group are not dependent on any singleclient. As at 31 December 2005 Client A's debt calculated using the effective interestrate stood at PLN 2,137.8 million (nominal value of PLN 2,958.7 million). Thedebt is a result of a loan contracted for a central state investment, whichstarting from the beginning of 1999 is being repaid quarterly. The finalrepayment date of the loan is 30 December 2012. The loan agreement for financingthe central state investment was concluded on 30 April 1984. The loan isrefinanced by the National Bank of Poland and guaranteed by the State Treasury.The Group's loan portfolio concentration is shaped according to the policy ofreducing the Group's loan portfolio dependence on a narrow group of clients.The concentration of the Group's loan portfolio is as follows: ------------------------- 31.12.05 31.12.2004 --------- -------- PLN mil. ------------------------- --------------- --------10 largest loans 5,007.2 5,051.520 largest loans 6,626.9 6,561.750 largest loans 9,347.8 9,012.8------------------------- --------- --------The values of the concentration ratios shown in the table are significantlyinfluenced by the central state investment loan described above. The table below presents 10 largest borrowers* of the Group as of 31 December2005.PLN mil. Total exposure Balance sheet exposure Off-balance sheet exposure---------- --------------- ------------- ---------------Client 1 2,149.8 2,137.8 12.0Client 2 749.1 749.1 0.0Client 3 704.0 606.5 97.5Client 4 624.4 386.4 238.0Client 5 622.5 118.5 504.0Client 6 602.1 526.1 76.0Client 7 530.0 139.4 390.4Client 8 514.5 314.5 200.0Client 9 340.4 340.4 0.0Client 338.8 338.8 0.010 --------------- ------------- -------------------------* This data does not include exposure related to the shares and othersecurities, derivatives or loan exposure to banks. This list entails exposure toone entity, i.e. without exposure to related entities. Securities------------------------ ---------Securities 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN mil. ------------------------ -------------------- ---------Financial assets asheld for trading 2,502.4 3,195.7 (21.7%)debt securities 2,499.2 3,192.0 (21.7%)other securities andfinancial assets 3.2 3.7 (13.5%)Other financialinstruments at fairvalue through profit orloss 1,781.3 1,336.7 33.3%Investment securities 14,490.8 15,036.5 (3.6%)available for sale 11,903.5 10,114.2 17.7%held to maturity 2,588.0 4,931.8 (47.5%)impairment (0.7) (9.5) (92.6%)Total securities 18,774.5 19,568.9 (4.1%)------------------------ ------------- ---------- --------- The largest component of the securities structure are investment securities,which at the end of 2005 accounted for 77.4% of the total securities. Thelargest value among investment securities constitute securities available forsale. 10.3.2 Liabilities Changes in the liabilities structure Funds deposited by customers represent the most significant part of the totalliabilities of the Group. As at the end of 2005 amounts due to customers andliabilities arising from securities issued amounted to PLN 46,847.9 million andincreased by PLN 1,003.0 million, i.e. 2.2% during 2005. The share of thoseitems in the liabilities stood at 75.6% as at the end of 2005. In 2005, amounts due to Central Bank fell by PLN 201.0 million as a result ofpartial repayment of the refinancing loan for the central state investment. Theshare of this item in the liabilities was 3.1%. The Group's equity (including net profit) increased in 2005 by PLN 591.7million. Change in the equity was mainly due to: repayment PLN 1,065.5 millionin form of dividend of the net profit for 2004 and the profit of the currentyear (PLN +1,534.9 million). The share of the equity in the total balance sheetamount stood at 13.3% as of 31 December 2005. Sources of financing As at the end of 2005 amounts due to customers represented 92.2% of the totalexternal sources of financing, and their share decreased by 0.7 p.p. incomparison to the end of 2004. Financing on the interbank market accounts for 3.9% of external sources of thefinancing of the Bank's activities. The Bank also takes advantage of the refinancing loan from NBP in order tofinance the central state investment. The amount due to NBP decreased in 2005 byPLN 201.0 million to the level of PLN 1,950.7 million. External sources of financing ------------------------ --------- 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN mil. ------------------------ -------------------- ---------Amounts due to the CentralBank 1,950.7 2,151.7 (9.3%)Amounts due to banks 1,997.0 1,332.6 49.9%Amounts due to customers 46,847.9 45,821.6 2.2%Total external sources offinancing 50,795.6 49,305.9 3.0%------------------------ ------------- ---------- ---------Bank Pekao S.A. acquires deposits mainly in Poland. The geographical structure of the deposits acquired by domestic branches of BankPekao S.A. as at the end of 2005 in comparison to the end of 2004 was asfollows: % of total depositsRegion 31.12.05 31.12.04--------------------- --------------- --------------Warsaw 31.9 28.9South-Eastern 12.6 13.4Malopolski 12.4 12.9Wielkopolski 9.4 9.3Gdanski 9.2 9.2Mazovian 9.0 9.7Western 8.3 8.8Central 7.2 7.8--------------------- --------------- -------------- Total 100.0 100.0 --------------------- --------------- -------------- There were no significant changes in the regional structure of the depositsacquired by domestic branches during 2005.Savings ------------------------ --------- 31.12.05 31.12.04 Change ------------- pro forma ---------- PLN mil. ------------------------ -------------------- ---------Customer deposits 46,013.7 43,465.0 5.9%retail 25,894.1 28,137.1 (8.0%)corporate 20,119.6 15,327.9 31.3%reverse repo transactions 729.7 2,142.4 (65.9%)other 104.5 237.5 (56.0%)Liabilities to customers 46,847.9 45,844.9 2.2%Bank Pekao S.A. bonds(principal) 0.0 22.5 xMutual funds 19,237.5 13,002.3 48.0%including sold in theGroup's network 15,539.0 11,857.2 31.1%Total savings 65,251.2 56,467.3 15.6%including retail 45,131.6 41,139.4 9.7%------------------------ ------------- ---------- --------- Savings of the Group's clients increased by PLN 8,783.9 million (15.6%) in 2005resulting both from an increase in the savings of individual clients (of PLN3,992.2 million, i.e. 9.7%) and in corporate deposits (of PLN 4,791.7 million,i.e. 31.3%) assisted by the decrease in liabilities arising from reverse repotransactions (of PLN 1,412.7 million, i.e. 65.9%). High demand for mutual fundsallowed for further increase in mutual funds assets by PLN 6,235.2 million in2005 bringing the total retail savings above the PLN 45 billion level confirmingGroup's significant market share. Currency structure of liabilities Liabilities to customers* denominated 31.12.05in: -------------------------------------------- PLN mil. % -------------- --------------------------------- PLN 33,939.0 72.4%- Foreign currency 12,908.9 27.6% Total 46,847.9 100.0% --------------------- -------------- -----------* including interest and amounts due in transit PLN prevails in the currency structure of the Group's liabilities to customers,whose share as at the end of 2005 was 72.5%. The highest share among foreigncurrency liabilities were USD - 58.6% and EUR - 34.5%.Maturity structure of liabilities 31.12.05 --------------------- --------------------- PLN mil. % --------------------- ------------- ----------A vista 20,952.2 44.8%Term: 25,791.2 55.2%up to one month 14,404.1 30.8%1-3 months 5,626.6 12.0%3 months - 1 year 4,696.2 10.0%1-5 years 489.9 1.0%over 5 years 574.3 1.2%Total deposits 46,743.4 100.0%Accrued interest 75.1 xAmounts due in transit 29.3 x--------------------- ------------- ----------Total amounts due to customers 46,847.9 x--------------------- ------------- ---------- According to maturities, a 44.8% share is attributed to A vista deposits. Termdeposits are dominated by 1 month deposits (55.2% of all term deposits).The deposit base of the Group is well diversified. The main sources of depositsare retail and corporate customers. The Group does not depend on any singleclient or group of clients. 10.3.3 Off-balance sheet items As at 31 December 2005 the Group had the following open off-balance sheetliabilities for an amount equal to or greater than PLN 150 million:PLN mil.Client Industry by PKD Endorsement, guarantee, sureties Open lines of credit Letters of credit Total-------- (Polish -------- --------- -------- ------ Classification of Business Activity) ---------------------Client Producing and 0.0 500.7 3.4 504.11 processing of refinery productsClient Publishing 0.0 390.5 0.0 390.52 activitiesClient Telecommunications 84.8 156.5 48.7 290.03Client Manufacturing and 0.0 238.1 0.0 238.14 distributing of gas fuelClient Self-government 0.0 200.0 0.0 200.05 administrationClient Post activities 0.0 150.0 0.0 150.06 -------- --------------------- -------- --------- -------- ------ Important guarantees and sureties Granted by the Group The Group pursues a conservative policy in relation to the guarantees andsureties and maintains the following significant single guarantees:PLN mil.------------ -------------Guarantee 1 84.8Guarantee 2 81.6Guarantee 3 74.2Guarantee 4 63.7Guarantee 5 40.0Guarantee 6 38.4Guarantee 7 26.0------------ -------------Granted to the Group exceeding the amount of PLN 200 million:PLN mil.------------ -------------Surety 1 2,958.7Surety 2 530.2Surety 3 300.0Surety 4 277.7Surety 5 230.0Surety 6 200.0------------ -------------The largest surety (in terms of amount) is the surety received from the StateTreasury and relating to the repayment of the loan for central state investment.In 2005 the Group did not grant sureties of loans or guarantees to any singleentity or subsidiary of that entity, the total value of which would haveexceeded 10% of the Group's own funds. 11 Agreements with a company entitled to auditing of financial reports (PLN ths.) 2005 2004 ------------------------- ------------- -------------Audit fees in relation to the Parent Company (1) 3,582 3,292Audit fees in relation to Subsidiaries (2) 1,288 1,432Audit related fees - 30------------------------- ------------- ------------- The amounts above do not include value added tax (VAT)(1) Audit fees consist of amounts paid to KPMG Audyt Sp. z o.o. for professionalservices rendered for the audit of the Bank Pekao S.A annual separate andconsolidated financial statements. In relation to year 2005 the entityauthorized to audit financial statements of the Bank is KPMG Audyt Sp. z o. o.in accordance with the contract dated 16 May 2005, with appendixes, covering theyears 2005 and 2006. In relation to the year 2004 the entity authorized to audit financial statementsof the Bank was Ernst & Young Sp. z. o. o. in accordance with the contract dated28 October 2002, with appendixes, covering the years from 2002 to 2004(2) Audit fees consist of amounts paid to KPMG Audyt Sp. z o.o. for professionalservices rendered for the audit of the Group subsidiaries" financial statementsin the year 2005. (in the year 2004 paid to Ernst & Young Sp. z o.o.) 12 The position of the Management Board regarding the possibility ofachieving forecasts The Bank has not published the forecast of financial results for 2005. 13 Number and value of titles of execution and value of collaterals The collateral used by the Bank within its activities includes: transfers ofownership and pledges, mortgages, transfer of rights to insurance policies,sureties under the Civil Code, transfer of debt, appropriation of assets in bankaccounts, guarantees, deposits and others. For corporate clients, the total value of the collateral for transactionsclassified into III and IV risk category as at 31 December 2005 amounted to PLN2,615.6 million. During 2005, 858 titles of execution were issued on behalf ofthe Bank in the total amount of PLN 366.2 million; 1,116 executive actions weretaken for the total amount of PLN 353.2 million; 443 civil law agreementstotalling PLN 462.4 million were signed. 14 Significant events after balance sheet date Share capital increase of the Bank On 16 January 2006 share capital of the Bank was increased by the total amountof PLN 186,755 and on 6 February 2006 by PLN 5,169 as a result of issue of total191,924 series F ordinary bearer shares. The share capital of the Bank amountscurrently to PLN 166,673,611 and is divided into: - 137,650,000 series A ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 7,690,000 series B ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 10,630,632 series C ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 9,777,571 series D ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 373,644 series E ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 191,924 series F ordinary bearer shares with nominal value of PLN 1.00 (one) each,- 359,840 series H ordinary bearer shares with nominal value of PLN 1.00 (one) each. The total number of votes at the Bank's General Shareholders Meeting under allissued shares is 166,673,611. The increase was conducted as a result ofregistration on buyers accounts of 191,924 series F ordinary bearer sharesissued within the conditional share capital increase on the base of ResolutionNo. 7 of the Extraordinary General Shareholders Meeting of the Bank conducted on25 July 2003 on contingent increase of the statutory capital, exclusion of thepre-emptive rights on the series F and G shares of the Bank and amendment to theStatute of the Bank. 15 Selected financial ratios 2005 2004 pro forma------------------------------ --------- ---------Profitability ratiosReturn on average equity (ROE) 19.2% 17.4%Net interest margin includingincome on SWAP transactions 4.3% 3.8%Non-interest income / totalincome 46.9% 47.5%Operating costs (includingdepreciation) / total income 53.2% 57.5%------------------------------ --------- --------- 31 December 31 December 2005 2004 pro forma------------------------------ --------- ---------Balance sheet structure ratiosNet loans / balance sheettotal 46.8% 44.2%Debt securities / balancesheet total 30.3% 32.9%Deposits / balance sheet total 75.6% 77.0%Equity / balance sheet total 13.6% 13.2%Asset quality ratios (according to the NBP methodology) Non-performing loans / grosstotal loans 16.2% 19.9%Non-performing loans / equity 63.8% 75.5%Capital adequacy ratio 19.5% 21.7%------------------------------ --------- --------- 16 Representations of the Bank's Management Board The Management Board of Bank Pekao S.A. declares to its best knowledge that: - the consolidated annual financial statements and comparative figureshave been prepared in accordance with the binding accounting policies and thatthey reflect in a true, fair and clear manner the Bank Pekao S.A. Groupfinancial position and its results, - the consolidated annual Report on the activities for 2005 provides thetrue picture of the Bank Pekao S.A. Group development, achievements andsituation, including the main risks and threats. The Management Board of Bank Pekao S.A. declares that the registered auditcompany performing the auditing of the consolidated annual financial statementsof the Bank Pekao S.A. Group has been selected in line with the binding legalregulations. The company and the registered auditors performing auditing meetthe requirements indispensable for issuing an objective and independent auditopinion, in line with the relevant provisions of the Polish law. Signatures of all Members of the Bank's Management Board 21.03.2006 Jan Krzysztof Bielecki President, CEO --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Luigi Lovaglio Deputy President, COO --------- ------------ --------------------- Date First Name / Family Name Position / Function Deputy President21.03.2006 Sabina Olton Chief Accountant --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Przemyslaw Figarski Member of Management Board --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Irene Grzybowski Member of Management Board --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Paolo Iannone Member of Management Board --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Christopher Kosmider Member of Management Board --------- ------------ --------------------- Date First Name / Family Name Position / Function 21.03.2006 Marian Wazynski Member of Management Board --------- ------------ --------------------- Date First Name / Family Name Position / Function This information is provided by RNS The company news service from the London Stock Exchange

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