24th Mar 2006 14:57
Bank Pekao SA23 March 2006 ANNUAL REPORT OF BANK POLSKA KASA OPIEKI SPOLKA AKCYJNA Annual report for the year ended 31st December 2005 comprises: • Letter of the President of the Management Board• Report on the activities of Bank Pekao S.A. for the year 2005• Selected financial data containing basic positions of the financial statements of the Bank Pekao S.A. for the year 2005• Annual financial statements • Income statement for the year 2005 • Balance sheet as at 31 December 2005 year • Statement of changes in shareholders' equity • Statement of cash flows • Notes to the financial statements• Auditor's opinion with the report on the audit of the annual financial statements Letter from the President of the Management Board of Bank Polska Kasa Opieki S.A. On behalf of the Management Board of Polska Kasa Opieki S.A., I hereby presentthe Annual Report for the year 2005 addressed to the Bank's shareholders, itssupervisory bodies, the capital market regulators, the Polish Securities andExchange Commission and the Warsaw Stock Exchange, our customers and the publicin general.In 2005, Bank Pekao S.A. succeeded in generating a net profit of PLN 1,439m,thus exceeding the previous year's result by 23%. Further improvement of theBank's return on equity, which reached 18.2%, testifies to its strongprofitability. We would like to draw your attention to the fact that ourimproved net result was in a large measure attributable to a significant incomegrowth of 9%, coupled with rigorous cost control, which has suppressed thegrowth of costs to 0.6%, keeping it beneath the inflation rate. Consequently, wemanaged to raise the efficiency of the Group's activities even further, bybringing down the cost/income ratio to the level of 52.3%.We have recorded a substantial growth in business volumes: our loan portfoliogrew by 12% and customers' savings increased by 14%. 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 loans,incorporated in 2005 into the Bank's offering as "Pozyczka ekspresowa" ("ExpressLoan").I wish to express my gratitude to our customers, who entrusted their savings toour Bank. I also wish to gratefully acknowledge the contribution of ouremployees, whose hard work and dedication made it possible to transform thecustomers' trust into real value, and of our shareholders, who support the Bankwith their capital. Together we have created value which provides benefits toall stakeholders.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 Management Board Selected financial data containing basic positions of the Financial Statements of the Bank Pekao S.A. for the year 2005 Selected data related to the Income Statement for the year 2005 and thecomparative data for the year 2004 were prepared applying the accountingpolicies consistently in both the periods. The two areas of IAS 39 areexemptions from this rule: estimation of impairment of financial assets andvaluation of loans and advances at amortized cost using the effective interestmethod. in PLN thousand in EUR thousand 2005 2004 2005 2004Net interest income 2 250 656 2 114 724 559 405 468 046Net fee and commissionincome 1 358 695 1 369 838 337 707 303 182Operating profit 1 742 152 1 427 120 433 016 315 860Profit before income tax 1 742 152 1 427 120 433 016 315 860Net profit (loss) 1 439 416 1 236 912 357 770 273 762Net cash from operatingactivities 427 239 (3 234 889) 106 191 (715 969)Net cash used in investingactivities 1 573 197 3 511 819 391 022 777 261Net cash from financingactivities (1 088 671) (1 214 330) (270 592) (268 764)Net increase / decrease incash and cash equivalents 911 765 (937 400) 226 621 (207 472)Total assets 61 445 212 59 532 447 15 919 274 14 594 863Amounts due to the CentralBank 1 950 710 2 151 743 505 391 527 517Amounts due to other banks 1 993 601 1 350 796 516 504 331 159Amounts due to customers 46 849 748 45 860 364 12 137 869 11 243 041Equity 8 196 258 7 896 096 2 123 493 1 935 792Share capital 166 482 166 482 43 132 40 814Capital adequacy ratio 17,95 20,65 X XEarnings per 1 ordinaryshare (in PLN/EUR pershare) 8,65 7,44 2,15 1,65Diluted earnings per 1ordinary share (in PLN/EUR per share) 8,64 7,44 2,15 1,65Declared or paid dividendper share ( in PLN/EUR ) 7,40 6,40 1,84 1,42 Report on the activities of Bank Pekao S.A. for the year 2005 Warsaw, 21st March 2006 1 Introduction2 Pro forma report3 Factors and events of significance to the Bank's performance 3.1 Macroeconomic situation 3.2 Condition of the banking sector 3.3 Important factors influencing Bank's activities and results 3.4 Description of factors which will have an impact on the results of the Bank 3.5 Major sources of risk and threats 3.5.1 Liquidity risk and market risk 3.5.2 Credit risk 3.5.3 Operating risk 3.6 Directions of Bank's development 3.7 Human Resources Management 3.7.1 Trends in Personnel Policy 3.7.2 Training and Professional Development 3.7.3 Motivation Systems 3.7.4 Integrity Charter 3.7.5 Relations with Trade Unions4 Merger between UniCredit and HVB5 Bank's organizational and capital relations 5.1 Transactions with related entities 5.2 Investment plans, including equity6 Key products, services and activities of the Bank 6.1 Servicing retail customers 6.2 Private banking 6.3 VIP/SME customers' service 6.4 Corporate clients 6.5 Money markets 6.6 Custody services 6.7 Cooperation with international financial institutions 6.8 Market activity7 Management of the Bank8 The Bank's shareholding structure9 Assessment of the financial credibility of Bank Pekao S.A.10 Financial results of the Bank 10.1 Profit and loss account 10.2 Structure of the balance sheet 10.2.1 Assets 10.2.2 Liabilities 10.2.3 Off-balance sheet items11 Agreements with a company entitled to auditing of financial reports12 The position of the Management Board regarding the possibility of achieving forecasts13 Number and value of titles of execution and the value of collaterals14 Significant events after balance sheet date15 Selected financial ratios16 Representations of the Bank's Management Board17 The statement on the compliance with the Good Practices in Public Companies 2005 1 Introduction The financial statements are prepared in accordance with International FinancialReporting Standards as adopted by the European Union, and in respect to mattersthat are not regulated by the above standards, in accordance with the accountingprinciples as set out in the Accounting Act dated 29 September 1994 andrespective bylaws and regulations the requirements for issuers of securitiesadmitted or sought to be admitted to trading on an official stock-exchangelisting market. In the preparation of the financial statements according to IFRS, the Bank 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 1,439.4 million. The2005 net profit was the best result achieved to date confirming the Bank'scapability for value creation. The increase in the net profit by PLN 268.0 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 Bank's income amounted to PLN 4,141.7 million and was by 9.0% higher than in the previous year, with interest income being higher by 10.5% and other income higher by 7.2%. • In 2005, the Bank 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 sold in the Bank's network increased by 52.2% 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 2,165.3 million i.e. were only by 0.6% higher than in the previous year. In 2005, the Bank's cost / income ratio amounted to 52.3% and was 4.3 p.p. lower than in the previous year. • In 2005, impairment losses on loans and advances amounted to PLN 234.3 million, 22.3% lower than in the previous year. This resulted primarily from the effective credit risk management and improved macroeconomic situation. The ratio of non-performing loans to total loans decreased from 18.7% at the end of 2004 to 15.5% 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 Bank's clients increased by PLN 7,704.6 million i.e. by 14.3% in 2005 resulting from both an increase in the savings of individual clients (up PLN 3,086.1 million) and in corporate deposits (up PLN 4,618.5 million). High demand allowed for a further increase in assets of mutual funds sold in the Bank's network by PLN 5,330.3 million in 2005 bringing the total retail savings above the PLN 40 billion level and confirming the Bank's significant market share. • In 2005, the loan portfolio increased by PLN 3,464.3 million primarily due to acceleration in corporate lending, very successful sale of "Express Loan" and continued sales of PLN mortgage loans. 2 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 Bank has used the prospective approach. The Bank hasvalued and recognised the related adjustments in the opening balance of 2005.Taking into consideration the usefulness of the financial report, the Bank 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.) ------------- ------------Profit and loss statement 2005 2004 pro forma ------------- ------------ Interest income 3,814,563 3,661,072Interest expense (1,563,907) (1,591,139)Net interest income 2,250,656 2,069,933 ------------- ------------Fee and commission income 1,513,310 1,436,993Fee and commission expense (154,615) (142,227)Net fee and commission income 1,358,695 1,294,766 ------------- ------------Dividend income 96,746 41,081Result on financial instruments at fair value 64,871 46,645Result on investment securities 74,153 13,569Foreign exchange result 263,026 284,094Other operating income 104,459 129,976Other operating expenses (70,857) (80,547)Net other operating income 33,602 49,429 ------------- ------------Impairment losses on loans and advances (234,267) (301,751)Overhead costs (2,165,330) (2,152,088)Operating profit 1,742,152 1,345,678 ============= ============Profit before income tax 1,742,152 1,345,678Income tax expense (302,736) (174,297) ------------- ------------Net profit 1,439,416 1,171,381 ------------- ------------ (PLN ths.)Balance Sheet 31.12.2005 31.12.2004 pro forma ------------ -----------AssetsCash and balances with Central Bank 3,573,613 3,935,112Debt securities eligible for rediscountingat the Central Bank 6,106 8,768Loans and advances to banks 7,000,770 5,956,598Financial assets held for trading 2,217,887 2,939,203Derivative financial instruments 499,290 503,481Other financial instruments at fair valuethrough profit or loss 1,781,317 1,336,721Loans and advances to customers 28,727,143 26,063,226Investment securities 14,490,374 15,028,457Available for sale 11,902,500 10,098,484Held to maturity 2,587,874 4,929,973Non-current assets held for sale 37,650 0Investments in subordinated undertakings 514,666 544,801Investments in associated undertakings 42,234 28,690Intangible assets 636,048 617,982Tangible fixed assets 1,422,389 1,520,209Investment property 58,170 48,556Income tax assets 152,008 96,536Other assets 285,547 463,193 ------------ -----------Total assets 61,445,212 59,091,533 ============ =========== LiabilitiesAmounts due to the Central Bank 1,950,710 2,151,743Amounts due to other banks 1,993,601 1,350,796Financial liabilities held for trading 545,930 438,219Derivative financial instruments 607,689 623,683Amounts due to customers 46,849,748 45,860,364Debt securities in issue 17 23,205Other liabilities 1,191,819 844,265Current income tax liabilities 4,427 0Provisions for deferred income tax 0 0Provisions 105,013 95,621 ============ ===========Total liabilities 53,248,954 51,387,896 ============ =========== EquityShare capital 166,482 166,482Current year profit and retained earningsfrom previous years 1,506,779 1,393,944Other capital and reserves 6,522,997 6,143,211 ------------ -----------Total equity 8,196,258 7,703,637 ------------ -----------Total equity and liabilities 61,445,212 59,091,533 ============ =========== 3 Factors and events of significance to the Bank'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 Bank's activities and results The main factors influencing Bank'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. 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 sold in the Bank'snetwork grew by 52.2 per cent, and the number of credit cards doubled from thelevel at end of 2004. In 2005, the sales volume of "Express Loan" (PozyczkaEkspresowa) was over four times higher than in the preceding year. Businessoperations in the corporate sector also exhibited a dynamic growth rate, withdeposits and credits growing by 28.4% and 9.2%, respectively, compared with2004. 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 households Change in the structure of savings continued in 2005, mainly being a transferfrom individuals' deposits to mutual funds. Total assets of Pioneer Pekao TFIS.A. mutual funds sold in the Bank's network increased in 2005 by PLN 5,330.3million (52.2%). Effective management of overhead costs In 2005, total overhead costs including depreciation amounted to PLN 2,165.3million, 0.6% higher than in the previous year. This low increase in costs wasachieved by a reduction of 4.1% in non-personnel costs that almost offset anincrease in personnel costs and depreciation by 4.2% and 0.7% respectively. Thiscombined with a 9.0% in total income, caused the cost / income ratio to decreaseto 52.3% in 2005, 4.3 p.p. lower than in 2004.Reduction in cost of riskThe improved quality of the portfolio and effective credit risk managementresulted in impairment losses on loans and advances being 22.3% lower than in2004. The ratio of non-performing loans to total loans decreased from 18.7% atthe end of 2004 to 15.5% at the end of 2005 thanks to an increase in the volumeof performing loans and the drop in the volume of non-performing loans. 3.4 Description of factors which will have an impact on the results of the Bank 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 Bank's operations, mainly through growth in retailsavings and higher loan demand, especially for mortgages and consumer loans.The Bank 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 Bank Pekao S.A. is aimed at theoptimisation of the balance sheet and off-balance sheet structure of the Bank inrespect of 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, covers all Bank's units andsubsidiaries to evaluate their potential influence on the financial situation ofthe whole Group. Comprehensive character of risk management means, on the onehand, consideration of all material types of financial risk for the Bank and, onthe other hand, financial risk management in close relation to other types ofrisk. 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 Bank's solvency with respect to current and future planned obligations, taking into account liquidity acquisition costs and profitability of Bank's equity,- to prevent any crisis situation,- to outline solutions that would allow the Bank to endure in case a crisis situation occurred. The Bank'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 Bank 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 Bank'sliquidity stock enabling to get through potential crisis situations. According to the Banking Supervisory Authorities recommendations, the Bankapplies and monitors internal liquidity indices that reflect the ratios of totaladjusted maturating assets to total adjusted maturating liabilities The Bank has set procedures in place to protect against the liquidity riskincrease and in the event of a substantial deterioration of the Bank's financialliquidity. The emergency plan in case of deterioration of financial liquidity of the Banktakes 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 Bank'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 Bank is exposedto market risk, i.e. interest rate risk, currency risk and the price risk ofsecurities owned by the Bank and to other types of risk the sources of which arechanges in market conditions. In managing the interest rate risk of the banking book, the Bank follows theobjectives of maximising the economic value of capital and realizing thebudgeted net interest income within the adopted limits. The exposure of the Bankto changing interest rates is monitored through interest rate gap (revaluationgap) analysis, duration analysis, simulation analyses and stress testing, andback testing. The sensitivity of net interest income and the sensitivity of the economic valueof the Bank'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 Bank'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 Bank. The actual usage of VAR limits is monitoredon a daily basis. However, these limits do not protect the Bank against rare andvery significant changes on the market. Therefore, the market risk managementsystem is supplemented by the analysis of shock scenarios (stress test) in orderto estimate the effects of the changes of market parameters on the result of theBank 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 theBank's point of view reflect fair value of these instruments in the best way. 3.5.2 Credit risk 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. In order to increase security loan activities are limited by:- the limitation of maximum exposures set by the regulations of the Banking Law,- internal prudence regulations set by the Bank: - ratios of sector concentration for loan exposures to certain areas of economic activity as classified by the Polish Business Activities Classification, - limits on exposures to particular countries, foreign banks and domestic financial institutions, - ratio of significant exposures in the Bank's loan portfolio. 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 Bank is based on "The Operating RiskManagement Strategy" approved by the Supervisory Board. This document isconsistent with the "M Recommendation" published by the General Inspectorate ofBanking Supervision and with the "Unification of Capital Measurement and CapitalStandards on the International Scale" published by the Basel Committee. TheStrategy defines operating risk, provides the rules for its management anddefines the control system at the Bank. 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 Bank has securityprocedures in place, including, for example, anti-money laundering proceduresand rules for safeguarding the Bank'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 Bank's operations. 3.6 Directions of Bank's development 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 Bank's main objective in the area of retail customer services is to maintainits leading position through improving its product offer tailored to thespecific 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 Bank will concentrate on the following areas: lending tohouseholds, SME and Mid Corporate clients as well as improving quality ofcustomer service. Key products will be consumer and mortgage loans, cards and mutual funds. Fulluse of the market position of Brokerage House (CDM Pekao S.A.), Pioneer PekaoInvestment Management S.A and Xelion is being made through the promotion ofinvestment savings products. In the area of corporate banking, the strategy assumes strengthening of Bank'smarket position in all main segments of the market. The Bank'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 Bank 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. 3.7 Human Resources Management 3.7.1 Trends in Personnel Policy The principles of personnel policy are determined by Bank's mission and the keyvalues of its corporate culture. They are particularly determined by theawareness that quality of work, competences and motivation of employees are thekey success factors in striving to achieve the commercial goals of the Bank.Consequently, in 2005 the central trends in human resources management were:- focusing on the development of personnel professional skills and supporting continual expansion of their competences;- recruitment of talented employees and making them stay through effective motivation systems;- offering possibility of further development based on career paths and adequate reward for individual achievements. These priorities were accompanied by particular emphasis on promoting corporateethical values, such as equal treatment, transparency, respect, or trust. 3.7.2 Training and Professional Development The main objective of training policy in 2005 was to support execution of Bank'scommercial targets, which was reflected e.g. in increased number of sales staffand clients advisors, and consequently - in their proper training. Almost 21.4 thousand trainees participated in all forms of training conducted in2005. Training programme was based on prior analysis of employee competencies atindividual posts, based on the results of the Periodic Employee EvaluationSystem (SOOP) currently employed by the Bank. The majority of training courseswere aimed at improving the qualifications of Bank's managerial and coreoperational staff and served the purpose of efficient building of customerrelations, upgrading the quality of services offered, acquiring productsale-related skills, increasing Bank's enterprise in capital and money markets,improving qualifications of the staff dealing with credit risk. In 2005 the Bank introduced a wide-scale e-learning thus improving theeffectiveness of training. All in all, e-learning courses in MIS (ManagementInformation System), CMS (Campaign Management System) and PekaoBusiness24 wereprovided for ca. 5.5 thousand participants. In the 4th quarter of 2005preparatory works were also started for e-learning training in health and safetyat work, Personal Data Protection, and Countering Money Laundering programmes tobe offered to about 80% of Bank employees. The activities aimed at employee professional development in 2005 were enrichedby the initiative to establish an Individual Development Scheme programme forselected key managers of the Bank. The objective is to adjust adequate,individually planned and monitored development of key-position managers tolong-term corporate needs. 3.7.3 Motivation Systems The fundamental motivation system of the Bank is the MBO (Management byObjectives) that has served to support execution of tasks since 2000. Theemployees involved in the MBO system receive individual tasks upon execution ofwhich they are eligible for annual bonus. The group of employees working underMBO system is growing continually: there were nearly 2.9 thousand such employeesat the end of 2005. It included the most important posts whose role issignificant in achieving Bank's planned commercial results in a given year. In addition, contests and selling campaigns for employees of individual businessdivisions were introduced in the Bank in 2005. The objective was to increaseemployee motivation and commitment while they realized individually definedcommercial targets within the period specified for a given campaign. Those whoachieved the best results had the opportunity to participate in annualconventions organized abroad by their specific business division, and also byUniCredit Group. Affiliation with the Bank of talented employees constituted another key trend inthe personnel policy in 2005. In this respect the execution was based on:- Stock Option Plan, and- Loyalty Plan. The Stock Option Plan is offered to the Bank Management Board, other managementstaff, employees occupying key positions for realization of Bank strategy, aswell employees of subsidiaries. As of 31 December 2005, the 2003 motivation planincluded 41 persons and the overall number of shares was 653 126, of which253 271 shares can be purchased by the management staff members, and the 2004motivation plan included 46 persons and the overall number of shares was717 662, of which 391 348 shares can be purchased by the management staffmembers. According to the status current on the day of the report, the 2003motivation plan covers 41 persons and the overall number of shares is 461 202,of which 253 271 shares can be purchased by management staff members, and the2004 motivation plan covers 46 persons and the overall number of shares is717 662, of which 391 348 shares can be purchased by management staff members.The different number of 2003 motivation plan shares results from exercising theright of first option to take shares, resulting from bonds. In effect, 34persons took 191 924 shares in total. The Bank was informed that 23 personsparticipating in the plan sold 99 602 shares.In 2005, a pilot 5-Year Loyalty Plan was also introduced, aimed at maintaininghigh level of affiliation with the Bank by making selected employees covered bythe plan eligible to additional remuneration conditioned upon their continuedwork for the Bank. The first group of participants in the pilot Plan countedseveral dozen employees. 3.7.4 Integrity Charter For the newly established UniCredit Group - of which Bank Pekao S.A. is now apart - a great challenge, apart from operational integration, is the culturalintegration of the Bank community of about 130 thousand employees, whocommunicate in various languages, believe in various religions, and prefervarious life styles. To meet this challenge, UniCredit started activities aimedat propagating common values and corporate culture models of the Group. In 2005the UniCredit Integrity Charter was drawn up that contains a set of fundamentalemployee values and rules of conduct, and its universal acceptance andapplication should be a distinctive feature of Group's identity in the Europeanfinance market. The Charter was introduced by all the Group banks, in 19European countries. In 2006 it is to be implemented by Bank Pekao S.A. The Integrity Chart is a tool that helps to find a balance and reconcile profitpursuit with respect for interests of all social partners. Fairness in socialrelations is regarded by the Charter as the guarantee for durable transformationof profit into value for all the stakeholders. It identifies the valuesfundamental for the relations with each such group, indicates the models ofconduct that should be followed in these relations. According to the Charter,the values constituting the foundation of fairness are: equal treatment,respect, freedom, transparency, reciprocity, and trust. These values,universally professed and observed by employees, will shape the corporateculture and strengthen the distinctive image of the Bank in the more and morecompetitive market. 3.7.5 Relations with Trade Unions In 2005 the Bank and trade union organizations made it their aim to conclude andsign a new Collective Labour Agreement. Following negotiations, the CollectiveLabour Agreement was signed on 15 December 2005, which constitutes the basis forcontinuous development of good working environment and is conducive to stablesocial situation in the Bank. Joint work of the Employer and the trade union organizations during 2005negotiations and discussions was carried on in the form of constructive dialoguebased on mutual respect for the respective roles of the social partners. 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 Bank's organizational and capital relations 5.1 Transactions with related entities Transactions with related entities were described in the financial report of theBank for 2005. The transactions described below include non-routine transactionsexceeding 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. Bank Polska Kasa Opieki S.A. currently holds shares in Bank Pekao (Ukraina) Ltd.of a total value of UAH 34.2 million, which constitutes 82.84% of the sharecapital of Bank Pekao (Ukraina) Ltd. and gives the right to 82.84% of the votesat 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 SA On 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. 5.2 Investment plans, including equity Bank Pekao S.A.'s development strategy aims at strengthening its leadingposition in the financial sector. The development of the Bank and the Group doesnot exclude investments 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 Key products, services and activities of the Bank In order to tailor its offer to various customer groups, the Bank dividedcustomers into four basic segments: retail, private banking, VIP/SME andcorporate. 6.1 Servicing retail customers The Bank's offer for the largest group of retail customers using standardproducts is among the most comprehensive available on the Polish banking market.For retail customers, the Bank offers a large variety of current accounts -"Eurokonto", term-deposits in PLN and in foreign currencies and also Bank's keylending products: "Express Loan" and mortgage loans. Packages Eurokonto were enriched by a unique insurance assistance programme,which was prepared in cooperation with Towarzystwo Ubezpieczeniowe Allianz ZyciePolska S.A. and Elvia - insurance companies that was named Pakiet Pomocny. In response to changing preferences of households with respect to savings andconsiderable interest in alternative forms of savings, the Bank extended itsproduct offer to include the capital market products (through the sale ofparticipation units of Pioneer mutual funds), investment programmes andinvestment-insurance programmes. From September 2004, the Bank has offered to its customers a Pioneer IKEProgramme. Pioneer IKE is specialized investment Programme, the purpose of whichis to create a long-term investment in participation units of mutual funds, inaccordance with terms and conditions set forth in the Act on Individual PensionAccounts. The Bank also offers customers an insurance-capital Programme EuroOpieka, whichis a combination of a long-term investment with insurance protection during theagreement period. 6.2 Private banking The most affluent clients of the Bank are offered a private banking servicemodel. The Private Banking gives them the guarantee of comprehensive andcustom-tailored service rendered with the highest quality. A personal bankingadviser assists the client in choosing an optimal investment strategy both ondomestic and foreign financial markets. Without making any concessions asregards the stability and security of the investments, he also seeks to ensurethat clients constantly obtain material financial benefits. Apart from standard services rendered to all individual clients, the Bank offersproducts and services tailored to the customer's individual needs andexpectations. Close co-operation with the Bank's subsidiaries, such as Centralny Dom MaklerskiPekao S.A., Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych S.A. and PioneerPekao Investment Management S.A. provides unlimited access to various forms ofinvestment and sophisticated financial solutions. 6.3 VIP/SME customers' service The VIP/SME model offers affluent customers are offered an individualizedservice rendered by a professional adviser. Customers who run a small companyreceive a comprehensive banking service both for the company's account and thecustomer private accounts. VIP/ SME customers may use all services offered to all customers of the Bank aspart of the standard service offer. Adjusting the product offer to the specific needs of this segment, the Bankoffers services in the form of products packages such as "Business Lider","Eurokonto Business" "Lider Farmacji" or "Firma i Ja". The product offer structured in the form of packages provides SMEs with:- complex procedure of company's banking service,- combination of enterprise and personal account in case of the "Eurokonto Business" package,- convenient possibilities for financing the company's ongoing operations,- advantageous form of cash placements,- safe and easy to use payment cards. 6.4 Corporate clients The Bank offers one of the widest range of products on the corporate clientmarket, dedicated to large and medium companies. The Bank offers its servicesalso to public administration, local authorities and social and non-profitorganizations. Banking products are constantly adjusted to the specific customerneeds resulting from the character, range and size of its business activities. In order to ensure professional, comprehensive banking services and advisory,medium corporate clients are attended in 27 Centres for Corporate Clients.Centres for Corporate Clients coordinate sales of the products and services tomedium size enterprises, while retaining the significant role of both the Bank'sbranch (account transactions, cash deposits and withdrawals, term deposits) andthe Bank's Head Office (operations with the dealing room). Experts in foreigntrade financing, derivatives, liquidity management and investment projectssupport client Relationship Managers in the Centres for Corporate Clients. Services to large corporate clients are rendered on an individualised basis byspecialized Relationship Managers in the Bank's Head Office. In implementing theagreed individualised service polices, customer Relationship Managers areresponsible for service quality and efficiency, proper choice of bankingproducts and cooperation with Bank's branches that carry out operational servicefor the client. Apart from a wide range of traditional credit and deposit products, the Bankalso offers other financial services such as factoring and leasing services,guarantees and sureties in domestic and foreign trade and bill of exchangeoperations. The Bank also organises issuance of company and municipal bonds,convertible bonds, as well as the issuance of short-term debt securities. The Bank offers products and services relating to servicing foreign transactionsand foreign trade financing. As part of its foreign trade product portfolio, theBank offers wide range of products which facilitate cooperation with foreignpartners and allow customers to hedge against transaction risks. 6.5 Money markets The Bank maintained its strong position as market maker on the domestic marketof inter-bank transactions. In the classification of dealers of treasurysecurities prepared by the Ministry of Finance, the Bank was ranked the third.During October issue of Polish State 10-years bonds, denominated in USD, issuedfor American market, the Bank was one of two co-leaders of the issue (the onlyPolish participant of the consortium). The Bank has also strengthened its position on the market of transactions withcorporate and institutional clients. The product offer for corporate clients isbeing systematically extended which has allowed the Bank to increase turnover,especially in transactions hedging foreign exchange risk and interest rate risk. 6.6 Custody services The custodial services of the Bank are conducted on the basis of the decision ofthe Securities and Exchange Commission. The Bank's clients include domestic andforeign financial institutions, custodian and investment banks, insurancecompanies, mutual and pension funds as well as non-financial institutions. Thecustodial services offered by the Bank include: settlement of transactions ondomestic and foreign markets, client's assets custody, operating securities andcash accounts, asset valuation, dividend servicing and interest collection. In 2005, new contracts were signed for maintaining a Register and assets Custodywith 7 mutual funds, including the first-time contract with an "umbrella fund",i.e. a mutual fund with isolated sub-funds. The Bank continued to provide custody services to foreign financial institutionswithin Poland's territory and to lend securities for the purpose of ensuringsettlement liquidity. The Bank maintained its leading position in servicingdepositary receipt programmes by handling 50% of such programmes. 6.7 Cooperation with international financial institutions The Bank maintains relationships with 1,648 Polish and foreign banks.For completion of international settlements and payments, as at 31 December 2005the Bank maintained 87 nostro accounts in 52 banks located in 22 countries and113 loro accounts for 97 foreign banks located in 30 countries.The Bank intermediates the transactions on behalf of clients of other domesticbanks by keeping for 17 clients (Polish banks) 58 Loro forex accounts and 2Nostro forex accounts. 6.8 Market activity The results of the market activities in 2005 include: 31.12.2005 31.12. 2004 Change --------------------- ------------ ----------- ----------Total number of PLN current accounts (inthousand) * 3,019.2 3,038.2 (19.0)of which packages 2,176.9 2,149.6 27.3Number of mutual fund registers (inthousand) 665.3 434.9 230.4Payment cards (in thousand)** 2,673.8 2,582.5 91.3Credit 146.4 71.6 74.8Charge 269.2 294.0 (24.8)Debit (including Maestro) 2,258.2 2,216.9 41.3Total number of outlets (in items) 778 782 (4)Total number of ATMs (in items) 1,244 1,211 33Payment card accepting points 27,548 27,721 (173)of which POS 18,284 17,458 826--------------------- ------------ ----------- ----------* Number of accounts including accounts of pre-paid cards** The number of cards is calculated according to the definition used byinternational payment organizations Visa and MasterCard In 2005, the Bank continued optimisation of the network of branches and ATMs. Asat the end of December, the number of branches was 778 and ATMs - 1,244. The regional structure of the domestic network of the Bank's outlets as at 31December 2005 is show in the table below:------------------ --------- -----------Region Number of Number of outlets ATMs ------------------ --------- -----------Central 81 104Gdanski 78 137Malopolski 113 177Mazovian 86 126South-Eastern 152 216Warsaw 98 204Wielkopolski 103 167Western 67 113------------------ --------- ----------- Total 778 1,244 ------------------ --------- -----------Additionally, the Bank operated through a foreign branch in Paris. Alternative distribution channels The alternative distribution channels include all bank services that may beaccessed by fixed line phone, cellular phone and Internet. Pekao24 Service Pekao24 Service is available to:- retail clients - an integral part of the Eurokonto packages offered in traditional outlets: Standard, Plus, VIP, Akademickie, Prestige and Hipoteczne,- SME clients - offered to holders of the Eurokonto packages: Business, Firma i Ja, Business Lider, Lider Farmacji as well as to non-package accounts holders. Pekao24 allows access to the account through three different access channels:- TelePekao, which offers access to account by fixed line phone. The operation may be concluded automatically with phone keypad or with the assistance of a consultant,- PekaoSMS which enables access to the account through SMS sent from cellular phone,- PekaoInternet which gives access to own account through Internet. This service is available 7 days a week, 24 hours a day both on the territory ofPoland and from abroad. 630 thousand of retail clients (40% increase comparingto 2004) and 28.1 thousand of clients representing the SME segment were activelyusing the service (an increase of 50.5%). PekaoBiznes24 PekaoBiznes24 is a advanced internet banking system designed for corporateclients, established in the end of 2005. The system facilitates the managementof financial assets by on-line settlements throughout the entire business daybetween clients having an account at Bank Pekao S.A. and by ensuring promptsettlements with counterparties holding accounts in other banks. 7 Management 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** 5,595Total 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 was not yet taken by the Supervisory Board,however the Bank has established a reserve for that bonus amounting to PLN 3,820thousand, 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 theManagement 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 benefits remuneration bonuses or 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 Amount1 Woznicki Jerzy 1072 Dangel Pawel 713 Greene Oliver 714 Pavoni Enrico 715 Pawlowicz Leszek 716 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 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 The share in the Number of The share in the votes and statutory capital votes and statutory capital shares at and in the total shares at and in the total GSM number of votes at GSM number of votes at GSM GSM 31 December 2005 31 December 2004UniCreditoItalianoS.p.A. 88,121,725 52.93% 88,121,725 52.93%Othershareholders 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. Issuance, redemption and repayment of debt securities Issuance of registered bonds with pre-emptive rights to take up the Bank's F andG shares The 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 priceIn 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 Bank 10.1 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 1,439.4 million.2005 net profit was the best result achieved to date confirming continued growthin profitability. The increase in the net profit by PLN 268.0 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. Profit and Loss Statement for 2005 and 2004 is shown below: (PLN mil.) -------------------------- ---------- ---------- -------- 2005 2004 Change pro forma -------------------------- ---------- ---------- --------Net interest income * 2,243.7 2,029.6 10.5%Net commission income 1,358.7 1,294.8 4.9%Dividend income 96.7 41.1 135.3%Result on financial instruments at fair value 71.9 87.0 (17.4%)Result on investment securities 74.1 13.5 448.9%Foreign exchange income 263.0 284.1 (7.4%)Other operating income / cost net 33.6 49.4 (32.0%)Total income 4,141.7 3,799.5 9.0%Overhead costs (including depreciation) (2,165.3) (2,152.1) 0.6%Personnel ** (1,089.9) (1,045.9) 4.2%Non-personnel (774.6) (807.4) (4.1%)Depreciation (300.8) (298.8) 0.7%Operating profit 1,976.4 1,647.4 20.0%Impairment losses on loans and advances (234.3) (301.7) (22.3%)Pre-tax profit 1,742.1 1,345.7 29.5%Tax charge (302.7) (174.3) 73.7%-------------------------- ---------- ---------- --------Net profit 1,439.4 1,171.4 22.9%-------------------------- ---------- ---------- --------* including income on SWAP transaction** including social security charges, without cost of training Bank's incomeIn 2005, the Bank's income amounted to PLN 4,141.7 million and was by PLN 342.2million (9.0%) higher than in previous year.The growth in income was due to the development of business activity, supportedby sales oriented activities relating to the key products. The main growthfactors included interest income and fee and commission income.Interest income grew by 10.5% mainly due to an increase in volumes and betterspreads including an increase in the loan portfolio that had a positive effecton the Bank's asset structure. (PLN mil.)Net interest income 2005 2004 Change pro forma -------------------------- ----------- ---------- --------Interest income 4,906.3 4,268.3 14.9%Interest expense (2,662.6) (2,238.7) 18.9%Net interest income 2,243.7 2,029.6 10.5%Net interest margin % 4.1 3.6 0.5 p.p.-------------------------- ----------- ---------- --------The main growth factor of non-interest income was fee and commission income thatincreased by 4.9% mainly thanks to fees on mutual funds. (PLN mil.)---------------------- ------------ ----------- ---------Non-interest income 2005 2004 Change pro forma---------------------- ------------ ----------- ---------Commission income 1,513.3 1,437.0 5.3%Commission expense (154.6) (142.2) 8.7%Net commission income 1,358.7 1,294.8 4.9%Dividend income 96.7 41.1 135.3%Result on financial instruments at fair value 71.9 87.0 (17.4%)Result on investment securities 74.1 13.5 448.9%FX income 263.0 284.1 (7.4%)Other operating income / cost net 33.6 49.4 (32.0%)---------------------- ------------ ----------- ---------Total non-interest income 1,898.0 1,769.9 7.2%---------------------- ------------ ----------- --------- Total overhead costs (including depreciation)In 2005, total overhead costs including depreciation were kept under control andamounted to PLN 2,165.3 million just 0.6% higher than in 2004.In 2005, the Bank's cost / income ratio amounted to 52.3% and was by 4.3 p.p.lower than in 2004.As at the end of 2005, the Bank had 14,818 employees (a reduction of 473employees compared with the end of 2004). (PLN mil.)-------------------- ---------- ----------- -----------Overhead costs (including depreciation) 2005 2004 Change pro forma-------------------- ---------- ----------- -----------Personnel costs (1,089.9) (1,045.9) 4.2%Non-personnel costs (774.6) (807.4) (4.1%)Depreciation (300.8) (298.8) 0.7%Total (2,165.3) (2,152.1) 0.6%-------------------- ---------- ----------- ----------- Impairment losses on loans and advancesIn 2005, impairment losses on loans and advances amounted to PLN 234.3 millionand were by 22.3% 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 18.7% at the endof 2004 to 15.5% 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 (234.3) (301.8) for loan receivables (224.7) (277.2) for off-balance sheet liabilities 0.2 17.7 for financial assets (9.8) (42.2)--------------------- ---------- --------------- Adjustments for provisions, deferred tax provisions and assets (PLN mil.) 2005 2004 pro forma--------------------- ------- -----------Total provisions 105.0 95.6--------------------- ------- -----------of which: provisions for off-balance sheet liabilities 20.3 16.3 provisions for liabilities to employees 65.0 66.5 other provisions 19.7 12.8--------------------- ------- -----------Provision for deferred tax 0.0 0.0--------------------- ------- -----------Deferred tax assets 152.0 85.5--------------------- ------- ----------- Average interest rates in 2005The 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.------------------------------ ------------ 10.2 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 total assets of the Bank at the end of 2005 amounted to PLN 61,445.2 millionand were by 4.0% higher compared to the end of 2004. The table below presents Bank's balance sheet: Assets 31.12.05 31.12.04 Change pro forma PLN mil. --------------------------Cash and balances with theCentral Bank 3,573.6 3,935.1 (9.2%)Loans and advances to banks 7,000.8 5,956.6 17.5%Loans and advances tocustomers* 28,733.2 26,072.0 10.2%Securities** 18,489.6 19,304.4 (4.2%)Investments in subordinatedundertakings 592.3 573.5 3.3%Tangible and intangibleassets 2,058.8 2,138.2 (3.7%)Other assets 996.9 1,111.8 (10.3%)Total assets 61,445.2 59,091.5 4.0%------------------------ ------------- ---------- --------- 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 1,993.6 1,350.8 47.6%Amounts due to customers*** 46,849.8 45,883.6 2.1%Other liabilities 2,454.9 2,001.8 22.6%Shareholders' equity 8,196.3 7,703.6 6.4%Total liabilities and equity 61,445.2 59,091.5 4.0%------------------------ ------------- ---------- ---------* including debt securities eligible for rediscounting at the Central Bank** including financial assets held for trading and other financial instrumentsat fair value through profit or loss*** including own securities in issue 10.2.1 Assets Changes in assets structureLoans 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 28,733.2million and constituted 46.8% of the Bank assets (at the end of 2004, this ratiowas equal to 44.1%). The increase in this item in 2005 resulted mainly fromincreased 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 814.8 million (i.e. by 4.2%),and their share in total assets dropped by 2.6 p.p. reaching the level of 30.1%. 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: 3,573.6 3,935.1 (9.2%)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 advances Customer structure of loans and advances* 31.12.05 31.12.04 Change pro forma PLN mil.------------------------ ------------- ---------- ---------Loans and advances innominal value 32,845.3 30,046.4 9.3%loans 32,748.7 29,284.4 11.8%retail** 8,177.0 6,776.9 20.7%corporate 24,571.7 22,507.4 9.2%non quoted securities 96.7 565.8 (82.9%)repo transactions 0.0 196.3 xNominal valueadjustment (4,112.1) (3,974.4) 3.5%Net loans and advances 28,733.2 26,072.0 10.2%------------------------ ------------- ---------- ---------* Including debt securities eligible for rediscounting at the Central Bank. Gross loans and advances in nominal value increased by PLN 2,798.9 million in2005. This resulted from PLN 3,464.3 million increase in loans, PLN 469.1million decrease in non quoted securities and PLN 196.3 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 2,064.3 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 category: 31.12.05 31.12.04--------------------------- ------------- ------------- PLN mil. % PLN mil. % -------- ------- -------- ----------------------------------Normal 25,883.5 79.0 21,901.0 74.8Watch category 1,797.0 5.5 1,905.7 6.5Non-performing 5,068.2 15.5 5,477.7 18.7Sub standard 262.5 0.8 721.9 2.5Doubtful 493.5 1.5 456.0 1.6Lost 4,312.2 13.2 4,299.7 14.7Total loans 32,748.7 100.0 29,284.4 100.0--------------------------- -------- ------- -------- -------* according to the comparable classification In 2005, the loan volume increased by PLN 3,464.3 assisted by simultaneousdecrease in non-performing loans by PLN 409.5 million. This resulted fromeffective credit risk management and improved macroeconomic conditions. As aresult, the ratio of non-performing loans to total loans amounted to 15.5% as at31 December 2005 and was 3.2 p.p. lower compared to the end of 2004. Impairment of financial assetsFor each balance sheet date, the Bank assesses, whether there is objectiveevidence of impairment of credit receivables. The Bank classifies creditreceivables by size of engagement, into the individual and group portfolios. In the individual portfolio, each particular credit exposure is subjected to animpairment test. If there is objective evidence of impairment, the carryingamount of the receivable is reduced. If for a given exposure no objectiveevidence of impairment exists, the exposure is included in the credit portfoliosubject 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 32,683.5without impairment 27,564.5with impairment 5,119.0Impairment losses, including: (4,076.6)for loans assessed individually (1,725.7)for loans assessed in groups (2,350.9)Interest 126.3Amounts due in transit 0.1-------------------------- --------Total net value 28,733.2-------------------------- --------As of year end 2005, the gross volume of credits and loans without impairmentamounted to PLN 27,564.5 million, whereas credits and loans with impairmentamounted to PLN 5,119.0 million. The balance sheet value of impairment lossesstood at PLN 4,076.6 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 in: 31.12.05 ----------------------------- PLN mil. % ------------- ---------------------------------- PLN 26,495.9 80.8%- foreign currencies** 6,314.0 19.2%Total 32,809.9 100.0%Impairment losses (4,076.6) xTotal net 28,733.2 x--------------------- ------------- ------------* including amounts due in transit** including indexed loans PLN 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 - 73.3%, USD - 18.3% and CHF -7.9%. Receivables structure by maturity Gross receivables 31.12.05 ---------------------------------- PLN mil. % ------------- -------------------------------Current and up to 1 month 5,730.1 17.5%1-3 months 819.9 2.5%3 months - 1 year 3,022.3 9.2%1-5 years 10,187.3 31.0%Over 5 years 12,923.9 39.4%Interest 126.3 0.4%Amounts due in transit 0.1 0.0%Total 32,809.9 100.0%Impairment losses (4,076.6) xTotal net 28,733.2 x------------------- ------------- ------------Broken down by maturities, receivables with maturity over 5 years have thehighest share (39.4%), mainly attributed to a large loan for a central stateinvestment, mortgage loans and receivables for which the maturity date alreadypassed). Loan portfolio concentrationExcept for one borrower who was granted a loan for financing a central stateinvestment, the loan activities of the Bank 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 Bank's loan portfolio concentration is shaped according to the policy ofreducing the Bank's loan portfolio dependence on a narrow group of clients. The concentration of the Bank's loan portfolio is as follows: PLN mil. 31.12.05 31.12.2004---------------------------- ----------- -----------10 largest loans 5,061.0 5,051.520 largest loans 6,758.0 6,570.450 largest loans 9,678.5 9,260.4---------------------------- ----------- -----------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 Bank 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 2 830.9 687.8 143.1Client 3 793.8 397.3 396.5Client 4 749.1 749.1 0.0Client 5 704.0 606.5 97.5Client 6 624.4 386.4 238.0Client 7 622.5 118.5 504.1Client 8 602.1 526.1 76.0Client 9 530.0 139.4 390.4Client 10 514.5 314.5 200.0---------- --------------- ------------- ---------------* 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 2,217.9 2,939.2 (24.5%)debt securities 2,217.9 2,939.2 (24.5%)other securities andfinancial assets 0.0 0.0 xOther financialinstruments at fairvalue through profit orloss 1,781.3 1,336.7 33.3%Investment securities 14,490.4 15,028.5 (3.6%)available for sale 11,902.9 10,099.3 17.9%held to maturity 2,588.0 4,931.8 (47.5%)impairment (0.6) (2.6) (78.7%)Total securities 18,489.6 19,304.4 (4.2%)------------------------ ------------- ---------- ---------The largest component of the securities structure are investment securities,which at the end of 2005 accounted for 78.4% of the total securities. Thelargest value among investment securities constitute securities available forsale. 10.2.2 Liabilities Changes in the liabilities structure Funds deposited by customers represent the most significant part of the totalliabilities of the Bank. As at the end of 2005 amounts due to customers andliabilities arising from securities issued amounted to PLN 46,849.8 million andincreased by PLN 966.2 million, i.e. 2.1% during 2005. The share of those itemsin the liabilities stood at 76.2% 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 3.2%. The Bank's equity (including net profit) increased in 2005 by PLN 492.7 million.Change in the equity was mainly due to: repayment PLN 1,065.5 million in form ofdividend of the net profit for 2004 and the profit of the current year (PLN+1,439.4 million). The share of the equity in the total balance sheet amountstood 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 1,993.6 1,350.8 47.6%Amounts due to customers 46,849.8 45,883.6 2.1%Total external sources offinancing 50,794.1 49,386.1 2.9%------------------------ ------------- ---------- ---------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 46,062.3 43,665.5 5.5%retail 25,154.0 27,375.7 (8.1%)corporate 20,908.3 16,289.8 28.4%reverse repo transactions 683.0 2,046.8 (66.6%)other 104.5 163.7 (36.2%)Liabilities to customers 46,849.8 45,860.4 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 the Bank'snetwork 15,539.0 10,208.7 52.2%Total savings 61,601.3 53,874.2 14.3%including retail 40,693.0 37,606.9 8.2%------------------------ ------------- ---------- --------- Savings of the Bank's clients increased by PLN 7,727.1 million, i.e. by 14.3% in2005 resulting both from an increase in the savings of individual clients (ofPLN 3,086.1 million, i.e. 8.2%) and in corporate deposits (of PLN 4,618.8million, i.e. 28.4%) assisted by the decrease in liabilities arising fromreverse repo transactions (of PLN 1,363.8 million, i.e. 66.6%). High demandallowed for further increase in assets of mutual funds sold in the Bank'snetwork by PLN 5,330.3 million in 2005 bringing the total retail savings abovethe PLN 40 billion level confirming significant market share. Currency structure of liabilities Liabilities to customers* denominated in: 31.12.05 ----------------------------- PLN mil. % -------------- --------------------------------- PLN 33,961.7 72.5%- Foreign currency 12,888.1 27.5%Total 46,849.8 100.0%--------------------- -------------- -----------* including interest and amounts due in transit PLN prevails in the currency structure of the Bank's liabilities to customers,whose share as at the end of 2005 was 72.5%. The highest share among foreigncurrency liabilities were USD - 58.7% and EUR - 34.4%. Maturity structure of liabilities 31.12.05 ------------------------------ PLN mil. %--------------------- ------------- ----------A vista 21,013.6 45.0%Term: 25,731.8 55.0%up to one month 14,384.3 30.8%1-3 months 5,578.2 11.9%3 months - 1 year 4,705.0 10.1%1-5 years 489.9 1.0%over 5 years 574.3 1.2%Total deposits 46,745.4 100.0%Accrued interest 75.1 xAmounts due in transit 29.3 x--------------------- ------------- ----------Total amounts due to customers 46,849.8 x--------------------- ------------- ----------According to maturities, a 45.0% share is attributed to A vista deposits. Termdeposits are dominated by 1 month deposits (55.9% of all term deposits). The deposit base of the Bank is well diversified. The main sources of depositsare retail and corporate customers. The Bank does not depend on any singleclient or group of clients. 10.2.3 Off-balance sheet items As at 31 December 2005 the Bank 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, Open lines Letters of Total (Polish guarantee, of credit credit Classification of sureties Business Activity)-------- -------------------- --------- --------- -------- ------Client Producing and 0.0 500.7 3.4 504.11 processing of refinery productsClient Financial 0.0 396.5 0.0 396.52 intermediation Client Publishing 0.0 390.5 0.0 390.53 activities Client Telecommunications 84.8 156.5 48.7 290.04 Client Bank 0.0 241.1 0.0 241.15 Client Manufacturing and 0.0 238.1 0.0 238.16 distributing of gas fuelClient Self-government 0.0 200.0 0.0 200.07 administration Client Post activities 0.0 150.0 0.0 150.08 -------- -------------------- --------- --------- -------- ------ Important guarantees and sureties Granted by the Bank The Bank 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 Bank 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 Bank 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 Bank's own funds. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BPKD.L