Interim Results part 1 (1-5)

19th Sep 2007 07:00

Bank Pekao SA18 September 2007 Report on the activities of the Bank Pekao S.A. Group for the first half of 2007 Warsaw, September 2007 1 Highlights 2 Selected financial ratios 3 Introduction 4 Factors and events of significance to the Group's performance 4.1 Macroeconomic situation 4.2 Situation in the banking sector 4.3 Important factors influencing Group's activities and results 4.4 Major sources of risk and threats 4.4.1 Liquidity risk and market risk 4.4.2 Credit risk policy 4.4.3 Operating risk 4.5 Information about integration of Bank Polska Kasa Opieki S.A. (Pekao S.A.)and Bank BPH S.A. (BPH S.A.) 4.6 Directions of the development of the Bank and the Group 5 Organisation of the Group 5.1 The Group 5.2 Transactions with related entities 5.3 Investment plans, including equity 6 Core products, services and activities of the Group 6.1 Core products, services and activities of the Bank 6.1.1 Family banking customers' service 6.1.2 Private banking customers' service 6.1.3 VIP/SME customers' service 6.1.4 Corporate clients customers' service 6.1.5 Money markets 6.1.6 Custody services 6.1.7 Cooperation with international financial institutions 6.1.8 Basic data on market activities 6.2 Major areas of the Group's companies activities 6.2.1 Brokerage services 6.2.2 Banking activity 6.2.3 Asset management 6.2.4 Leasing activity 6.2.5 Other financial services 6.2.6 Other entities included in the consolidated financial statements 7 Financial results of the Group 7.1 Consolidated profit and loss account 7.2 Structure of net profit 7.2.1 Results of Bank Pekao S.A. 7.2.2 Results of the Bank's important related entities in the first half of 2007 7.3 Structure of the balance sheet 7.3.1 Assets 7.3.2 Liabilities 7.3.3 Off-balance sheet items 8 Management and Supervisory Boards of the Bank 8.1 Management Board of Bank Pekao S.A. 8.2 Supervisory Board of Bank Pekao S.A. 8.3 The Bank's shareholding structure 8.4 Share capital increase of Bank Pekao S.A. 8.5 Shares owned by the Members of the Bank's Management and Supervisory Boards 9 Assessment of the financial credibility of Bank Pekao S.A. 10 Debt securities issue agreements 11 Number and value of titles of execution and value of collaterals 12 Post balance sheet events 13 Representations of the Bank's Management Board 1 Highlights (PLN million) 1H2007* 1H2006 2006 2005 2004** Income statement Total income 2,549.3 2,312.8 4,699.2 4,413.3 4,058.9Costs (1,241.1) (1,166.0) (2,364.0) (2,346.4) (2,333.4)Operating income before 1,308.2 1,146.8 2,335.2 2,066.9 1,725.5provisionsPre-tax profit 1,294.2 1,073.0 2,203.8 1,873.6 1,446.0Net profit 1,043.2 865.2 1,789.7 1,534.9 1,248.9 Balance sheet Total assets 71,191.1 66,793.0 67,703.7 61,972.0 59,536.4Loans and advances to 35,095.8 29,914.6 32,747.3 28,975.7 26,305.1customers***Amounts due to customers**** 52,139.6 49,866.0 51,793.6 46,847.9 45,844.9Shareholders' equity 8,159.7 7,822.0 8,892.6 8,422.7 7,831.0 Employment and network Total number of employees 15,942 15,891 15,647 15,942 16,408Total number of outlets***** 805 781 795 780 784Total number of ATMs***** 1,334 1,257 1,292 1,244 1,211 1H2007 financial credibility Short-term rating Long-term rating Outlook ofratings IDR Fitch Ratings F1 A PositiveStandard and Poor's A-1 A StableMoody's Investors Service Prime-1 A2 StableLtd. * Including HVB Ukraine since the end of March 2007 ** Data restated according to IFRS included in the Report on the activities forthe year 2005 *** Including debt securities eligible for rediscounting at the Central Bank **** For the years 2004-2006 and the first half of 2007 data include liabilitiesfrom own securities issued ***** Bank Pekao S.A., UniCredit Bank Ltd. and since the first half of 2007 alsoHVB Ukraine 2 Selected financial ratios 1H2007* 1H2006 2006 2005 2004**Profitability ratiosReturn on average equity 24.1% 20.5% 21.1% 19.2% 17.4%(ROE)Net interest margin*** 3.9% 4.1% 4.2% 4.4% 3.8%Non-interest income / total 52.3% 50.3% 49.2% 46.9% 47.5%incomeCosts / income 48.7% 50.4% 50.3% 53.2% 57.5% Balance sheet structureratiosNet loans / balance sheet 49.3% 44.8% 48.4% 46.8% 44.2%totalDebt securities / balance 24.1% 30.1% 25.1% 30.3% 32.9%sheet totalDeposits / balance sheet 73.2% 74.7% 76.5% 75.6% 77.0%totalLoans / deposits 67.3% 60.0% 63.2% 61.9% 57.4%Equity / balance sheet total 11.5% 11.7% 13.1% 13.6% 13.2% Capital adequacy ratio 14.7% 18.4% 16.5% 19.5% 21.7% * Including HVB Ukraine since the end of March 2007 ** Data restated according to IFRS included in the Report on the activities forthe year 2005 *** Excluding buy sell back and sell buy back transactions 3 Introduction In the first half of the 2007 the net profit of the Group amounted to PLN1,043.2 million, i.e. PLN 178.0 million (20.6%) higher than in the first half of2006. The increase in the net profit was possible due to an increased businessactivity which translated into higher income, particularly fee, commission andinterest income, with operating costs under control and lower cost of risk. • The Group's total income amounted to PLN 2,549.3 million in the first half of 2007, i.e. PLN 236.5 million (10.2%) higher than last year. The main growth driver in this period was fee and commission income, which increased by 19.3%, mainly from fee and commission income on investment products. • In the first half of 2007 interest income amounted to PLN 1,216.6 million and was PLN 66.1 million (5.7%) higher than last year, mainly as a result of the increasing volumes that offset the impact of a lower yield on the debt securities portfolio. • In the first half of 2007, the Group noted a continued positive trend in the results of its business activity, with successful sales of key products: mutual funds, PLN mortgage loans and consumer loans "Express Loan". The value of mutual funds increased by 32.9% compared with the end of 2006. Sales of PLN mortgage loans amounted to PLN 1,734.3 million (70.0% higher than in the first half of 2006) contributing to a growth in mortgage stock of 23.4% in the first half of 2007. The Bank continued its policy of offering PLN mortgage loans. Sales of the "Express Loan" in the first half of 2007 amounted to PLN 938.4 million (3.0% higher than in the first half of 2006) contributing to a growth in the stock of 10.5%. • Total overhead costs (including depreciation) in the first half of 2007 amounted to PLN 1,241.1 million, i.e. PLN 75.1 million (6.4%) higher than in the first half of 2006. Overhead costs were kept under control, the increase was mainly due to the increase of variable part of personnel costs and expansion in the Ukrainian market. In the first half of 2007, the Group's cost / income ratio amounted to 48.7% and was 1.7 p.p. lower than in the previous year. • Impairment losses on loans and advances in the first half of 2007 amounted to PLN 92.3 million and were PLN 17.5 million (15.9%) lower than in the previous year. This resulted primarily from the continued effective credit risk management and improved macroeconomic situation. The ratio of impaired receivables to total receivables decreased from 11.8% at the end of 2006 to 11.3% at the end of June 2007. • Savings of the Group's clients (customer deposits and mutual funds) increased in the first half of 2007 by PLN 8,723.2 million, i.e. by 12.0%, resulting from an increase both in the savings of individual clients and in corporate deposits. The savings of retail clients increased by PLN 5,350.7 million in the first half of 2007 and reached almost the level of PLN 55 billion. In this period corporate deposits increased by PLN 3,372.5 million reaching the level of PLN 26.5 billion. • In the first half of 2007, the gross loan portfolio grew by PLN 2,473.1 million, i.e. by 6.8%. This growth was driven by successful sale of PLN mortgage loans and the "Express Loan", as well as an increase in the volume of corporate loans. 4 Factors and events of significance to the Group's performance 4.1 Macroeconomic situation In the first half of 2007, acceleration of economic growth continued. GDP growthin the first quarter of 2007 reached 7.4% comparing to 6.6% in the fourthquarter of 2006 and in the first half of 2007 it is estimated at 6.5%. In thefirst half of 2007, industrial production increased by 10.7% year on year andconstruction activity by 30.2%. Retail sales in real terms were up by 15.6%. Theboom in production was mainly driven by very high growth of investment andconsumption. Fast growth of exports continued, though it was slower than growthof imports. Fast economic growth had a positive impact on income growth rate ofThe State Budget. As a result in the first half of 2007 the deficit of The StateBudget covered less than 13% of the amount forecasted for the whole year 2007 inthe Budget Law. Very high economic growth brought further improvement on the labour market -unemployment fell to 12.4%, with employment in the enterprise sector growing4.4% year on year. Increased demand for work and higher emigration for workabroad put upward pressure on wages, which in June 2007 were 8.4% higher than inJune 2006. There is a visible growing trend of inflation since the beginning of 2007, withthe annual inflation rate at 2.6% in June. Strong internal demand, rise ofinflation and higher interest rates increased by main European banks induced theMonetary Policy Council to increase interest rates twice - in April and June -by 50 basis points all together. Expectations of further increases caused thatgrowth of yield on two- and five-year treasury bonds amounted to over 60 basispoints. Intense economic growth, higher interest rates and good budget resultsstrengthened the exchange rate of the Polish zloty by almost 2% against EUR andalmost 4% against USD. The favourable situation on the Warsaw Stock Exchange continued. Since December2006 WIG has gained 31.1% reaching on the last trading session in June 2007 thevalue 66,077.69 points. WIG20 closed at 3,759.28 points, up by 14.4%. Stockexchange turnover also increased, the total turnover of shares during the firsthalf of the year reached PLN 247.9 billion. 4.2 Situation in the banking sector Fast increase in lending continued reaching in June 2007 28.2% year on year. Themain driver of this growth was household lending, up by 37.6%. In June 2007,mortgage loans increased by 51% year on year (slightly slower than in March2007). In the first half of 2007, the growth of foreign currency loans wassignificantly weaker than PLN loans. Substantial growth of corporate investmentactivity generated acceleration in corporate loans - the growth rate rose from14.6% year on year in December 2006 to 22.2% in June 2007. Deposits growth was also significant, although the growth rate decreased from17.5% in March 2007 to 15.1% in June. However deposits of non-monetary financialentities increased sharply and grew 72.1% year on year. The increase of depositsis driven mainly by companies deposits that rose by 23.0%. Households deposits also experienced a growth rate decrease from 9.5% year onyear in March to 5.9% in June. Term deposits of households fell, as in 2006,whereas current deposits grew 27.9%. Most of the households savings were stillinvested in mutual funds, therefore assets under management in June 2007 were80.7% higher than in June last year. The dynamics of deposits and loans is shown in the table below: Change (% in relation to December) I H 2007 I H 2006 Deposits 5.1 4.9Corporate 11.5 6.8of which: companies 3.0 5.1Households 0.1 3.6Loans 15.0 9.8Corporate 11.5 5.6of which: companies 12.9 5.9Households 18.2 14.6 4.3 Important factors influencing Group's activities and results The main factors that influenced the Group's activities and results in the firsthalf of 2007 are the following: - growth of business activity, - successful capture of continued changes in investment preferences of households, - effective cost management, - cost of risk reduction, - strong results of Group's key companies. Growth of business activity In the first half of 2007, the Group noted a continued positive trend in theresults of its business activity, with successful sales of key products: mutualfunds, PLN mortgage loans and consumer loans "Express Loan". The value of mutualfunds increased by 32.9% compared with the end of 2006. Sales of PLN mortgageloans amounted to PLN 1,734.3 million (70,0% higher than in the first half of2006) contributing to a growth in the stock of 23.4% in the first half of 2007.The Bank continued its policy of offering PLN mortgage loans. Sales of the"Express Loan" in the first half of 2007 amounted to PLN 938.4 millioncontributing to a growth in the stock of 10.5%. The growth in business operations translated into growing income, mainly fee,commission and interest income. Successful capture of continued changes in investment preferences of households The change in the structure of household savings continued in the first half of2007, principally by transfer from household bank deposits to mutual funds.Pioneer Pekao TFI S.A. mutual funds were distributed through the network of BankPekao S.A., CDM Pekao S.A. and Xelion. Doradcy Finansowi Sp. z o.o. branches.Total assets of Pioneer Pekao TFI S.A. mutual funds increased in the first halfof 2007 by PLN 7,659.1 million (32.9%). Effective cost management Total overhead costs (including depreciation) in the first half of 2007 amountedto PLN 1,241.1 million, i.e. PLN 75.1 million (6.4%) higher than in the firsthalf of 2006. Overhead costs were kept under control, the increase was mainlydue to the increase of variable part of personnel costs and expansion in theUkrainian market. In the first half of 2007, the Group's cost / income ratioamounted to 48.7%, 1.7 p.p. lower than in the previous year. Cost of risk reduction In the first half of 2007, impairment losses on loans and advances amounted toPLN 92.3 million and were PLN 17.5 million (15.9%) lower than in the previousyear. This resulted primarily from the continued effective credit riskmanagement and an improved macroeconomic situation. The ratio of impairedreceivables to total receivables decreased from 11.8% at the end of 2006 to11.3% at the end of June 2007. Strong results of Group's key companies Strong results of both Bank Pekao S.A. as well as the Group's key companiescontributed to the good results of the whole Group. Centralny Dom MaklerskiPekao S.A. and Pioneer Pekao Investment Management S.A. had a significantinfluence on the growth in Group net profit. 4.4 Major sources of risk and threats Economic factors Bank Pekao S.A. and its subsidiaries are operating predominantly on theterritory of Poland. Therefore, the results of the Bank will be influenced bythe economic events occurring in this country and the worldwide events thatinfluence the domestic economy. The Polish economy expands at a high rate due to both strong internal demand andexports. It is expected, that high economic growth will continue in thenext quarters. It is visible that there is a growing pressure for wages growth which is aconsequence of the decrease in unemployment and the good financial resultsachieved by business. Growth of salaries faster than the growth of efficiencymay lead to an inflation increase. This risk supports the high probability offurther growth of interest rates. Fast economic growth creates favourable conditions for banking activities. Highgrowth rates in retail and corporate loans, as well as in the assets of mutualfunds are occurring. Improvement in the financial condition of corporates aswell as the continuation of declining unemployment decrease the cost of creditrisk. It is expected that all these trends will continue in the next quarters. Taking into consideration the strategy of increasing activity on the Ukrainianmarket, the Group results may be subject to increased influence from economictrends in Ukraine. Currently the scale of this activity is not yet significantto the results of the Group. 4.4.1 Liquidity risk and market risk The asset and liability management policy of Bank Pekao S.A. Group is aimed atthe optimisation of the balance sheet and off-balance sheet structure in respectof the assumed risk-income ratio and considering 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 Group undertakesin its business activities. The risks are monitored and controlled withreference to profitability and with reference to the capital required to take onsuch risks and they are reported on a regular basis. Financial risk management,that constitutes an important part of assets and liabilities management systemin the Group, has a comprehensive and consolidated character. It covers allBank's units and subsidiaries to evaluate their potential influence on thefinancial situation of the whole Group. The Management Board of the Bank isresponsible for achieving the strategic goals of the risk management policy. TheAsset and Liability Committee controls the capital adequacy of the Group, aswell as the level of liquidity risk and market risk (interest rate and currencyrisks) borne by the Group within the external banking supervision limits andwithin the internal limits of the Group. 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 the profitability of the Group's equity, - to prevent any crisis situation, - to define actions that would allow the Group to continue operating in the case of a potential crisis situation. 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 the Polish government, securities issued by countries andfinancial institutions with the highest ratings and those with high levels ofliquidity and desired profitability. These financial instruments constitute theBank's liquidity stock enabling it to successfully meet potential crisissituations. According to the Banking Supervisory Authorities recommendations, the Bankapplies and monitors internal liquidity indices that reflect the ratios of totaladjusted maturing assets to total adjusted maturing liabilities. The Bank has set procedures in place to protect against liquidity risk increaseand in the event of a substantial deterioration of the Bank's financialliquidity. In case of deterioration of financial liquidity of the Bank the emergency plantakes 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 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, 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 the interest rate gap(revaluation gap) analysis, duration analysis, simulation analyses, stresstesting and back testing. The objective of currency risk management is to create a currency profile of thebalance and off-balance sheet positions so that it remains within external andinternal limits. In the first half of 2007 the currency risk was low. The Bank'sexposure to currency risk is measured on a daily basis, for the internal needs,by means of Value at Risk (VaR) model, as well as by extreme conditions analysistesting that 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 Bank'sresults 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 well established valuation modelsthat from the Bank's point of view reflect the fair value of these instruments. 4.4.2 Credit risk policy The principles of the lending policy of the Group comply with those of the Bank.The Bank follows a prudent policy with respect to the assumption of credit risk,by applying established safety rules to lending activity in the individualmarket segments as well as necessary instruments limiting asset exposure to thecredit risk. Procedures of credit risk assessment applied in the Group's companies requirereconciliation with the Bank's Head Office. In accordance with the Bank's lending policy, the main focus of lendingoperations is on: - identifying the areas of intensified activity in particular client's segments, - determining concentration limits, - limitation of sector risk, - organising of decision making process for transactions with higher risk profile, - defining products parameters, lending procedures and the method of reviewing client credit ratings and monitoring compliance therewith. 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. 4.4.3 Operating risk Operating risk management is based on internal procedures approved by the Bank'sManagement Board. The procedures define the system of operating risk management,evaluation, monitoring, control/limitation, reporting, outsourcing andclassification of operations. The operating risk management control system covers both Bank Pekao S.A. and itssubsidiaries. The Bank's Management Board receives risk reports containing,among other things, an analysis of operating events by categories and regions,an analysis of risk ratios and an analysis of capital necessary to cover theoperating risk. For the purpose of mitigating operating risk, the Group has security proceduresin place, including, for example, anti-money laundering procedures and rules forsafeguarding the Bank's units, management of the continuity of operations,compliance with banking secrecy, personal data protection, and rules regulatingthe relationships between the Bank and third parties. Operating risk mitigationinstruments also include emergency plans, internal audit controls, insurancecontracts and ongoing improvement of the process quality. Moreover, in the eventof identifying any irregularities, guidance is immediately provided concerningthe scope, method and frequency of functional inspections in the specific areasof the Group's operations. 4.5 Information about integration of Bank Polska Kasa Opieki S.A.(Pekao S.A.) and Bank BPH S.A. (BPH S.A.) On 27th April 2007, the Extraordinary General Meeting of Bank Pekao S.A. passeda resolution on the integration of Bank Pekao S.A. with Bank BPH S.A., performedin a way of the spin-off of Bank BPH S.A. by transferring a part of Bank BPHS.A. property in a form of an organized part of enterprise to Bank Pekao S.A. The Division by Spin-off of Bank BPH S.A. shall be performed according to theprinciples specified in detail in the Spin-off Plan, agreed by Bank Pekao S.A.and Bank BPH S.A. on 15th November 2006, announced in the Court and EconomicJournal ("Monitor S(1)dowy i Gospodarczy") No. 239 dated 8th December 2006. In exchange for the part of Bank BPH S.A. property in a form of an organizedpart of enterprise, Bank BPH S.A. shareholders shall take up Bank Pekao S.A.Series I ordinary bearer shares with the nominal value of 1 PLN each, issued inrelation to the integration of Bank Pekao S.A. with Bank BPH S.A., performedthrough the Division by Spin-off ("Shares of Spin-off Issue"), in observance ofthe ratio 1 : 3.3. In relation to the integration of Bank Pekao S.A. with Bank BPH S.A., the sharecapital of Bank Pekao S.A. shall be increased with the amount of 94,763,559 PLN,i.e. up to the amount of 261,866,657 PLN, by the issuance in a public offer of94,763,559 Series I ordinary bearer shares with the nominal value of 1 PLN each,in order to allot Shares of Spin-off Issue to Bank BPH S.A. shareholders whoshall become the Bank Pekao S.A. shareholders on the spin-off day. The General Meeting authorized and obligated the Bank Pekao S.A. Management Board to perform all legal and factual acts necessary to execute this resolution, among other things to prepare, conduct and register the Division by Spin-off, toprepare and conduct the public offer for Shares of Spin-off Issue, to admitShares of Spin-off Issue to regulated trading carried out by the Warsaw StockExchange. Integration of Bank Pekao S.A. with Bank BPH S.A. shall be performed upon obtaining all the consents and permissions required by the provisions of law, as ofthe day of entry into register of entrepreneurs of the National Court Registryof the increase of the share capital of Bank Pekao S.A. by the issuance of theShares of Spin-off Issue. In the first half of 2007, Bank Pekao S.A. has conducted further activitiesnecessary to obtain required approvals from regulatory bodies, includingproviding additional information and answering questions raised during dedicatedmeetings with authorities. The Bank has continued preparations aiming to achieveoperational readiness for the integration, leveraging on best practices andexperience of both organisations. 4.6 Directions of the development of the Bank and the Group Bank Pekao S.A. is a universal, commercial bank, offering a full range ofbanking services to both individual and corporate clients, operating in Polandand abroad. Pekao Group's subsidiary financial institutions operate in banking,asset management, pension funds, brokerage, leasing and factoring markets. Bank Pekao S.A. aims to be the leading bank in Poland for individual customersand aims to focus on growing market share in the most profitable and fastestgrowing products (especially PLN mortgages, consumer loans, credit cards andinvestment products) while retaining market share in remaining areas.Implemented model of service provides customers with dedicated business modelsand segment-specific service levels and product offers. The Bank intends to become the best recognized corporate bank in Poland bycompetencies, customer satisfaction, and value creation. Current strategyassumes providing a wide range of products (including, but not limited to, cashmanagement, electronic banking, trade finance, leasing, factoring). Pekao plansto focus on providing non-risk bearing products, innovation / knowledge transferand advisory components that go beyond the basic corporate lending business. Forcorporate customers segmenting has been implemented to ensure presence in allattractive client segments. The Bank aims to become the market leader in Poland for standard andsophisticated treasury and investment products as well as security services,while effectively managing Pekao's assets and liabilities. The Bank makes the superior physical distribution available to its clients, withthe most convenient network footprint countrywide. Distribution network issupplemented with teams of Relationship Managers and a network of PrivateBanking offices. Physical distribution channels have been supplemented byeffective remote channels, with best in class call centre and internet bankingplatform. After completion of the Bank BPH S.A. spin-off and the transfer of part of BPHS.A.'s property to Bank Pekao S.A. in a form of a organised part of enterprise,Pekao S.A. will be the largest bank in Poland by assets, will become one of theleading financial institutions in the CEE banking sector, will offer a superiorclient service platform for Polish and international clients, and will besupported by best practice management systems. Additionally, Bank Pekao S.A. is developing its business activity in theUkrainian market, which is specified in detail in point 5.3. 5 Organisation of the Group The Pekao S.A. Group is composed of financial and non-financial institutionsgathered around a universal bank. The Group provides a full range of financialservices available in Poland to its retail and corporate customers. 5.1 The Group Bank Pekao S.A. Capital Group as at 30th June 2007 consists of Bank Pekao S.A asthe parent entity and 13 subsidiary entities. The Group's structure has changed in comparison to the Group structure presentedas at 31st December 2006. The change results from acquisition of shares of JointStock Commercial Bank HVB Ukraine by Bank Pekao that was completed on 30th March2007. Additionally, in the first half of 2007 Bank Pekao S.A. has classified theshares of Access Sp. z o.o. as non-current assets held for sale in compliancewith IFRS 5 "Non-current assets held for sale and discontinued operations". Inconsequence, the assets and the liabilities of this company were disclosedadequately as items "Non-current assets held for sale" and "Liabilities relatingto assets held for sale" in the consolidated Group financial statements. The following entities are included in the consolidated financial report as at30th June 2007: No Name of company Core activity % of Status Consolidation shareholder's method share capital1. Bank Pekao S.A. banking - parent -2. UniCredit Bank Ltd. ( f. banking 100.00 subsidiary full Bank Pekao (Ukraina) Ltd.)3. Joint Stock Commercial banking 100.00 subsidiary full Bank HVB - Bank Ukraine4. Centralny Dom Maklerski brokerage 100.00 subsidiary full Pekao S.A.5. Pekao Fundusz Kapita(3) financial 100.00 subsidiary full owy Sp. z o.o.6. Pekao Leasing Sp. z o.o. leasing 100.00 subsidiary full7. Pekao Faktoring Sp. z financial 100.00 subsidiary full o.o.8. Pekao Pioneer Powszechne financial 65.00 subsidiary full Towarzystwo Emerytalne S.A.9. Drukbank Sp. z o.o. no activities 100.00 subsidiary full performed10. Centrum Kart S.A. financial 100.00 subsidiary full11. Pekao Financial Services financial 100.00 subsidiary full Sp. z o.o.12. Pekao Access Sp. z o.o. consulting 55.26 subsidiary full13. BDK Consulting Sp. z o.o. consulting, 99.99 subsidiary full hotels, transportation14. SARL Pekao Immobilier real estate 100.00 subsidiary non- management consolidated SARL Pekao Immobilier was not consolidated with the use of the full method, due toimmateriality of it's financial data in comparison to the size of the operations ofthe whole Group. Company in consolidated financial statement was recognized at thecost of purchase. Other listed below exposures of the Group constitute investments in the associatedentities and are recognized in the consolidated report of the Group with the use ofthe equity method. Company CPF Management due to immateriality of it's financialdata was recognized at the cost of purchase. 1. Anica System S.A. information 33.84 / 13.49 subsidiary equity technology2. Central Poland Fund LLC financial 53.19 subsidiary equity intermediary3. Xelion. Doradcy Finansowi auxiliary, 50.00 subsidiary equity Sp. z o.o. financial and insurance4. Pioneer Pekao Investment financial 49.00 subsidiary equity Management S.A. intermediary5. Pirelli Pekao Real Estate real estate 25.00 subsidiary equity Sp. z o. o. management6. Krajowa Izba chamber of 22.96 subsidiary equity Rozliczeniowa S.A. settlement7. CPF Management mutual funds 40.00 subsidiary not valuated management - under equity does not method operate 5.2 Transactions with related entities Acquisition of 100% shares in Joint Stock Commercial Bank HVB Bank Ukraine On 30th March 2007 Bank Pekao S.A. purchased 1,098,342 ordinary shares with thenominal value of UAH 100 each share in Joint Stock Commercial Bank HVB BankUkraine with its seat in Kiev, in Ukraine (HVB Ukraine), of a total nominalvalue of shares of UAH 109,834,200 for the price of EUR 84,276,544.55. The acquisition of 100% shares of HVB Ukraine was effected as a result ofentering by Bank Pekao S.A., by virtue of the assignment agreement as of 20thDecember 2006, concluded with Bank UniCredito Italiano S.p.A. (UCI), into rightsof UCI, arising from the sale agreement of 1,098,342 ordinary shares of HVBUkraine, concluded on 12th September 2006 between UCI as the purchaser andBayerische Hypo- Und Vereinsbank AG as the seller. Bank Pekao S.A. currently holds shares of the total nominal value of UAH109,834,200, which constitute 100% of the share capital of HVB Ukraine and giveright to 100% votes at the general shareholders meeting of HVB Ukraine. The acquisition of shares of HVB Ukraine is a long-term capital investment andit is related to the Bank Pekao S.A. strategy to intensify its presence on theUkrainian market and it is in compliance with the Resolution of the BankingSupervision Commission No 20/KNB/06 dated 5th April 2006 concerning issuingconsent for UCI to exercising right to vote at the general meeting ofshareholders of Bank BPH S.A. Registration of UniCredit Bank Ltd. capital increase (formerly known as BankPekao (Ukraina) Ltd.) On 24th May 2007, UniCredit Bank Ltd. (a Bank subsidiary) notified Bank PekaoS.A. that on 17th May 2007 the Register of Ukrainian Banks in the National Bankof Ukraine NBU registered the amendments to the Articles of Association ofUniCredit Bank Ltd. regarding the increase of share capital of UniCredit BankLtd. by the amount of UAH 252,198,414.15. On 7th March 2007, the Extraordinary General Meeting of Shareholders ofUniCredit Bank Ltd. adopted a conditional resolution (anchored to the consent ofthe National Bank of Ukraine) on the increase of share capital of UniCredit BankLtd. by the amount of UAH 252,198,414.15. Upon registration by the National Bank of Ukraine NBU of relevant amendments tothe Bank's Articles of Association regarding the capital increase, the sharecapital of UniCredit Bank Ltd. has been increased from the amount of UAH291,475,055.85 to the amount of UAH 543,673,470.00. Bank Pekao S.A. now holds a total stake of UAH 543,673,470.00, i.e. 100% of theshare capital of UniCredit Bank Ltd. carrying 100% votes at the General Meetingof Shareholders of UniCredit Bank Ltd. 5.3 Investment plans, including equity The Group's development strategy aims at strengthening its leading position inthe financial sector. The development of the Bank and the Group does not excludeinvestments of the Bank in other financial entities. Before any decision on a potential investment is made, the Bank conductsdetailed economic analysis. Planned development of activity in Ukraine Considering the attractiveness of the Ukrainian economy and prospects fordevelopment of Ukrainian banking sector, Bank Pekao S.A. together withUniCredito Group have prepared a new strategy regarding business activity inUkraine. The strategy is aiming to create a strong banking organizationconducting activities both in the retail and corporate market segments. Development of retail business is realised through organic growth and networkexpansion on the base of UniCredit Bank Ltd. (UniCredit Bank) fully owned byBank Pekao. In order to strengthen the position in the retail market, UniCreditBank, in an innovative and dynamic way, is developing the network of branches inUkraine. At the end of June 2007 UniCredit Bank operated through network of 26branches. The activity in the corporate segment has expanded through acquisition of JointStock Commercial Bank HVB Bank Ukraine (HVB Ukraine) by Bank Pekao S.A. Bank HVBUkraine offers full range of products and services for local and internationalclients, concentrating on large and medium companies segment and is graduallydeveloping the scope of services in private banking. On 30th March 2007 BankPekao S.A. purchased 100% shares of HVB Ukraine as a result of entering by BankPekao S.A., by virtue of the assignment agreement as of 20th December 2006,concluded with Bank UniCredito Italiano S.p.A. (UCI), into rights of UCI,arising from the sale agreement of 1,098,342 ordinary shares of HVB Ukraine,concluded on 12th September 2006 between UCI as the purchaser and BayerischeHypo- Und Vereinsbank AG as the seller. At the end of June 2007 HVB Ukraineoperated through network of 5 branches. The successive step in the strategy of Bank Pekao S.A. regarding businessactivity in Ukraine is integration of HVB Ukraine and UniCredit Bank. On 3rd September 2007 the organizational merger of both banks took place and theExtraordinary General Meetings of HVB Ukraine and UniCredit Bank resolved themerger. Currently the registration process in the National Bank of Ukraine andthe state court register is under way. According to information provided by UniCredito Italiano on 5th July 2007 BankAustria Creditanstalt AG, a member of UniCredit Group, has signed an agreementto acquire approximately 95% of the share capital of Ukrsotsbank from the groupof investors represented by Interpipe Group. The structure of the Ukrainianoperations belonging to the UniCredit Group will be finally assessed followingthe transaction completion expected in last quarter of 2007 and after completionof the Spin-off transaction and of the transfer of control of Bank BPH. 6 Core products, services and activities of the Group 6.1 Core products, services and activities of the Bank Pekao offers a full range of banking services. Key products include consumerloans, mortgage loans, payment cards and investment funds. In order to tailorits offer to various customer groups, the Bank divided customers into four basicsegments: family banking, private banking, VIP/SME as well as corporate clients. 6.1.1 Family banking customers' service The Pekao product offer for the largest group of retail customers using standardproducts is among the most comprehensive available on the Polish banking market. For retail customers, Pekao offers a large variety of current accounts -"Eurokonto", term deposits in PLN and in foreign currencies and also Pekao's keylending products such as "Pozyczka Ekspresowa" (Express Loan) and PLN mortgageloans. "Eurokonto" packages were enhanced with a unique insurance assistance program,which was prepared in cooperation with Towarzystwo Ubezpieczeniowe Allianz yciePolska S.A. and Elvia Assistance Sp. z o.o., named "Pakiet Pomocny". In the first half of 2007 Bank provided the possibility to take advantage ofpreferential housing loans with subsidies to interest rate granted on the basisof Act on interest subsidy for family housing loans (Journal of Laws No. 183 of11th October 2006, with later amendments). As a result of the integration process in UniCredit Group, the Bank's customersreceived a completely unique service - free of charge cash withdrawals withBank's Maestro card from all the Group's ATMs in Europe. Since 1st August 2007the clients can use almost 13 ths. ATMs in 16 countries. In response to changing preferences of households with respect to savings andconsiderable interest in alternative forms of savings, Pekao is graduallyextending its savings product offer by introducing, among others, newinvestments products. Pekao also offers investment-insurance products such asProsperita. The systematic saving programs like "Programy Akumulacji Kapita(3)u"(Capital Accumulation Programs) (PAK PRO and PAK JUNIOR) are also offered byPekao. Since 2004, Pekao has been offering its customers "Program Pioneer IKE"(Pioneer IKE Program). The purpose of Pioneer IKE Program is to create aconvenient, long-term investment in participation units of mutual funds, inaccordance with terms and conditions set forth in the Act on Individual PensionAccounts. 6.1.2 Private banking customers' service The most affluent clients of Pekao are offered a private banking service model.The Private Banking service gives them the guarantee of a comprehensive andtailored service provided with the highest quality. A personal banking adviserassists the client in choosing an optimal investment strategy both on domesticand foreign financial markets. Without making any concessions as regards thestability and security of investments, the advisor also aims at providingclients with constant and satisfactory financial benefits. In addition to standard services rendered to all retail customers, Pekao offersproducts and services tailored to the private banking clients' individual needsand expectations. Close co-operation with Pekao's subsidiaries, such as CDM Pekao S.A., PioneerPekao Towarzystwo Funduszy Inwestycyjnych S.A. and Pioneer Pekao InvestmentManagement S.A. provides an access to various forms of investment andsophisticated financial solutions. 6.1.3 VIP/SME customers' service The VIP/SME model offers affluent customers an individualized service renderedby a professional adviser. Customers who run a small company receive acomprehensive banking service both for the company's account and the customer'sprivate accounts. VIP/ SME customers may use all the services offered to all customers of Pekao aspart of the standard service offer. Adjusting the product offer to the specific needs of this segment, Pekao offersservices in the form of products packages such as "Business Lider", "EurokontoBusiness", "Lider Farmacji" or "Firma i Ja". The product offer structured in the form of packages provides SMEs with: - comprehensive banking services for companies; - combination of enterprise and personal account within 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, including credit cards; - access to the account through remote access channels. 6.1.4 Corporate clients customers' service Pekao offers one of the widest range of products on the corporate client market,dedicated to large and medium-sized companies. Pekao offers its services also topublic administration, local authorities, social and non-profit organizations.Banking products and services are constantly tailored 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,corporate clients are served from 27 Centers for Corporate Clients (CentraKlientow Korporacyjnych). Centers for Corporate Clients coordinate sales ofbanking products and services to the clients, while retaining the significantrole of both Pekao branch (account transactions, cash deposits and withdrawals,term deposits) and Pekao's Head Office (operations with the dealing room).Experts in foreign trade financing, derivatives, current liquidity managementand investment projects support in sale and advisory process CustomerRelationship Managers in the Centers for Corporate Clients responsible forcontacts with the clients. Services to large corporate clients are rendered on an individualized basis byspecialized Relationship Managers in Pekao's Head Office. In implementing clientsecific service polices, Customer Relationship Managers are responsible forservice quality and efficiency, proper choice of banking products andcooperation with Pekao's branches that carry out operational services for theclient. In addition to traditional credit and deposit products, Pekao also offers otherfinancial services such as factoring and leasing services, guarantees andsureties in domestic and foreign trade and bill of exchange operations. Pekaoadjusted its offer to requirements of the European Regional Development Fundrelated to its funding. Additionally, Pekao organizes offerings of corporate and municipal bonds,convertible bonds, as well as issues of short-term debt securities. Pekao offers products and services relating to foreign transactions and foreigntrade financing. In addition, Pekao advises customers on the selection andstructuring of foreign transactions. 6.1.5 Money markets In the first half of 2007, the Bank maintained its position among top leaders onthe inter-bank transactions market in Poland as well as the position as marketmaker on the domestic debt market. The Bank was also an active participant inthe commercial paper market, both in the short- and long-term issues. In the first half of 2007, the Bank provided services for issuance of short-termcorporate debt securities in excess of PLN 1.2 billion, a 50% increase comparedto the first half of 2006. The activity on the long-term instruments market focused mainly on the corporatebonds segment. In the first half of 2007 the Bank, in consortium with otherbanks, placed on the market three series of bonds of two companies for the totalvalue of PLN 1.6 billion. These issues represented 58% of all corporate bonds ofmaturity over one year placed on the market in the first half of 2007. The Bank remained among the leading managers of municipal bond issue in thefirst half of 2007. As at the end of June 2007 the Bank provided services formunicipal bonds issuance in the amount of PLN 921 million, a 24% market share. 6.1.6 Custody services The custodial services of the Bank are conducted under the terms approved by thePolish Financial Supervision Authority. 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 the first half of 2007, new contracts were signed for maintaining a Registerand assets Custody with 2 new mutual funds. As at the end of June 2007, thevalue of domestic assets kept in custody was 11% higher than at the end of 2006. 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 over 50% of such programmes. 6.1.7 Cooperation with international financial institutions The Bank maintains relationships with 1,862 Polish and foreign banks. For completion of international settlements and payments, as at 30th June 2007the Bank maintained 102 nostro accounts in 55 banks located in 23 countries and122 loro accounts for 104 foreign banks located in 31 countries. The Bank intermediates transactions for clients of 15 domestic banks by keeping49 loro foreign exchange accounts and 4 nostro foreign exchange accounts. 6.1.8 Basic data on market activities Main commercial indicators: 30.06.2007 31.12.2006 Change Total number of PLN current accounts (in 3,068.3 3,054.4 13.9thousand) *of which packages 2,225.7 2,221.1 4.6Number of mortgage loans accounts (in 81.1 74.7 6.4thousand)Number of "Express Loans" accounts (in 363.1 328.4 34.7thousand)Number of mutual fund registers (in 982.8 828.9 153.9thousand)Payment cards (in thousand)** 2,746.2 2,744.6 1.6Credit 271.8 244.8 27.0Charge 196.5 211.9 (15.4)Debit (including Maestro) 2,277.9 2,287.9 (10.0)Total number of outlets (in items) 774 782 (8)Total number of ATMs (in items) 1,274 1,262 12 * Number of accounts including accounts of pre-paid cards ** Number of cards is calculated according to the definition used byinternational payment organizations Visa and MasterCard In the first half of 2007 Bank continued optimisation of the network of outletsand ATMs. As at the end of June, the numbers of outlets and ATMs were 774 and1,274, respectively. The regional structure of the domestic network of the Bank's outlets as at 30thJune 2007 is shown in the table below: Region Number of Number of outlets ATMs Central 81 108Gdanski 77 139Malopolski 112 177Mazovian 86 132South-Eastern 151 222Warsaw 96 213Wielkopolski 103 169Western 68 114Total 774 1,274 Alternative distribution channels The alternative distribution channels include all bank services that may beaccessed by fixed line telephone, cellular phone and through the 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 Plus, Agro, - 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 an account by fixed line telephone. The operation may be executed automatically with the keypad or with the assistance of a consultant, - PekaoSMS which enables access to an account through SMS sent from cellular phone, - PekaoInternet which gives access to an account through the Internet. This service is available 7 days a week, 24 hours a day both on the territory ofPoland and from abroad. As at the end of June, 798 thousand retail clients and35 thousand clients representing the SME segment were actively using Pekao24service. The most popular Pekao24 service in the first half of 2007 wasPekaoInternet - 81% of transactions were realized through this channel. The scope of services is being systematically extended. In addition to standardactivities the Bank introduced the facility to check the number and value ofparticipation units held on Pioneer IKE as well as to open accounts in PAK PROand make initial payments into these accounts. Conversion of participation unitsto other existing and newly opened Pioneer accounts has also been enabled.Customers have been given access to more history on current accounts, termdeposits and cards transactions, and they can download on-line statements. In order to increase the security of using the PekoInternet service, apart frommodern logging system, the Bank issues on-line quarterly bulletin "Bezpiecznyinternet" ("Safe Internet"), which makes it easier for the clients to be up todate with information on safe usage of internet and internet banking. The Bank has also introduced a modern ATM location service by text message.After sending a text message the customer receives a return message with theaddresses of three nearest ATMs with free of charge withdrawal. PekaoBiznes24 PekaoBiznes24 is an advanced internet banking system designed for corporateclients, established in 2005. The system facilitates the management of financialassets by on-line settlements throughout the entire business day between clientshaving an account at Bank Pekao S.A. and by ensuring prompt settlements withcounterparties holding accounts in other banks. This system is continuallydeveloped and enriched with new functionalities and new products. As at the endof June 2007, the number of customers using PekaoBiznes24 service reached around8.5 thousand. 6.2 Major areas of the Group's companies activities 6.2.1 Brokerage services Centralny Dom Maklerski Pekao S.A. (CDM) CDM (Central Brokerage House) provides the full scope of permitted brokerageservices excluding asset management. At the end of June 2007, CDM maintained over 150 thousand investment accountsand its market share was 15.5%. CDM also offered on-line access to investmentaccounts, allowing its customers to buy and sell all instruments listed on theWarsaw Stock Exchange and on the OTC market (CeTO) through the Internet. As at30th June 2007, CDM maintained 25 thousand on-line accounts, 5 thousand morethan at the end of 2006. At the end of first half of 2007, CDM in cooperation with nine companiesmanaging Mutual Funds and three Transfer Agents offered distribution of 113Open-End Mutual Funds in Client Service Points. In order to further focus on the company's core business, organizational andlegal changes are being analysed. Services of CDM on the primary market Owing to the favourable situation on the secondary market of shares, the primarymarket issuance activity was maintained. In the first half of 2007, CDM carriedout 2 public offers with share value of PLN 777 million and PLN 243 millionrespectively and organized 8 incentive programmes in the form of new shareissues. Activities on the secondary market In the first half of 2007, the favourable situation on the stock exchange wasmaintained with high levels of trading and an 31.1% increase in the WIG stockexchange index since the beginning of the year. Trading on the cash marketincreased by 51.1% in comparison to the first half of 2006 and the tradingvolume on forward contracts increased by 0.7 million contracts. Share tradingvolume exceeded PLN 244 billion, and the total trade volume on the forwardcontracts market reached 7.6 million contracts. In the first half of 2007, the Company achieved the following market positionson the Warsaw Stock Exchange: - a 31.8% share in the bond trading volume, - a 8.4% share in the stock trading volume, - a 5.2% share in the futures trading volume. 6.2.2 Banking activity UniCredit Bank Ltd. / Bank Pekao (Ukraine) Ltd. in Luck (UniCredit Bank) Since the beginning of the second half of 2006 an intensive program ofdevelopment of retail business has been implemented through organic growth andnetwork expansion on the base of UniCredit Bank Ltd. (UniCredit Bank) fullyowned by Bank Pekao. In order to strengthen the position in the retail market,UniCredit Bank in an innovative and dynamic way is developing the network ofbranches in Ukraine. At the end of June 2007 UniCredit Bank operated through a network of 26branches, serving over 27 thousand individual clients. Additionally the companydeveloped its network of sale points for payment cards and consumer loans,increasing the number to 99 points as at the end of the first half of 2007. Joint Stock Commercial Bank HVB Bank Ukraine (HVB Ukraine) The company's strategy is focused on corporate banking services in the segmentof large and medium sized companies, treasury operations and developing thescope of services in the private banking sector. At the end of June 2007 HVB Ukraine operated through a network of 5 branchesserving over 900 corporate customers. 6.2.3 Asset management Pioneer Pekao Investment Management S.A. (PPIM) PPIM manages, under a contract of management, the assets of mutual fundsbelonging to Pioneer Pekao TFI. The company also offers investment portfoliomanagement services to retail customers. As at 30th June 2007, PPIM had over 1,150 thousand investment accounts, anincrease of 175 thousand in the first half of the year. As at the end of first half of 2007, the value of net assets of Pioneer PekaoTFI S.A., managed by Pioneer Pekao Investment Management S.A. (the Bank holds49.0% of shares), totalled PLN 30,922.5 million, PLN 7,659.1 million higher thanat the end of 2006. The value of net assets of the mutual funds of Pioneer Pekao TFI S.A. is shownin the table below: PLN million 30.06.2007 31.12.2006 Change Net assets value of Pioneer Pekao TFI 30,922.5 23,263.4 32.9%Pioneer Balanced Investment Fund 7,264.7 5,699.2 27.5%Pioneer Polish Equity Investment Fund 5,370.0 2,517.7 113.3%Pioneer Stable Growth Investment Fund 3,052.8 2,964.5 3.0%Pioneer Medium Polish Market 2,805.5 874.5 220.8%Companies Investment FundPioneer Dollar Bond Plus Investment 1,491.9 1,533.9 (2.7%)FundPioneer Bond Investment Fund 1,195.2 925.9 29.1%Pioneer European Equity Investment 1,091.5 770.7 41.6%FundPioneer Money Market Investment Fund 979.7 970.5 0.9%Pioneer Growth MIX 60 Investment Fund 853.3 903.5 (5.6%)Pioneer American Equity Investment 740.2 544.4 36.0%FundPioneer Chinese Market Income & 724.0 545.9 32.6%Growth Investment FundSFIO TP S.A. 717.7 610.8 17.5%Pioneer Growth & Income MIX 40 676.4 819.2 (17.4%)Investment FundPioneer Small & Medium Companies 665.3 194.6 241.8%Investment FundPioneer Emerging Markets Equity Fund 592.4 - xPioneer Dollar Bond Investment Fund 435.8 568.5 (23.4%)Pioneer Pacific Region Income & 373.1 194.9 91.5%Growth Investment FundPioneer US Market Balanced Investment 339.7 408.3 (16.8%)FundPioneer Developed Markets SME Fund 293.5 - xPioneer Polish Market Secured 284.7 329.3 (13.5%)Investment FundPioneer Capital Protection Investment 266.3 387.0 (31.2%)FundPioneer European Bond Plus Investment 256.3 402.5 (36.3%)FundPioneer Bond Plus Investment Fund 165.0 172.7 (4.5%)Pioneer Income MIX 20 Investment Fund 137.7 188.4 (26.9%)Pioneer Deposit Investment Fund 91.8 62.6 46.6%Pioneer Japanese Market Income & 41.8 51.1 (18.2%)Growth Investment FundPioneer Far East Markets Equity Fund 16.2 - xPioneer Treasury Bond Investment Fund 0.0 561.0 xPioneer Dynamic Capital Protection 0.0 61.7 xInvestment Fund As at 30th June 2007 the net value of Pioneer Pekao TFI S.A. assets acquiredthrough Bank Pekao S.A., CDM Pekao S.A. and Xelion. Doradcy Finansowi Sp. z o.o.amounted to PLN 28,128.8 million (91.0% of total assets), compared with PLN21,359.7 million at the end of 2006 (91.8%). In the first half of 2007, the company included in its offer three newspecialist open-end investment funds - Pioneer Emerging Markets Equity Fund,Pioneer Far East Markets Equity Fund and Pioneer Developed Markets SME Fund. Pekao Pioneer Powszechne Towarzystwo Emerytalne S.A. (Pekao Pioneer PTE) The activity of Pekao Pioneer PTE - Pension Fund (OFE) management company -involves gathering and investing funds that will be paid out to the customersafter reaching retirement age. As at 30th June 2007, the number of open-end pension fund accounts was 285thousand and was 25 thousand higher compared with 31st December 2006. The numberof persons with at least one contribution recorded on the account was over 256thousand. At the end of the first half of 2007, the value of assets managed by the companywas PLN 2,277 million, which is an increase of PLN 423 million compared with theend of 2006. As at the end of June 2007, PTE had 1.6% share in the market ofopen-end pension funds, that remained unchanged from the end of 2006. In the first half of 2007, Pekao PTE achieved a 15.9% rate of return oninvestment ranking the first in results on investments among all pension funds. 6.2.4 Leasing activity Pekao Leasing Sp. z o.o. (Pekao Leasing) Pekao Leasing provides financial services supporting the financing of fixedassets, i.e. motor vehicles, machinery, equipment and office real estate -mostly through operating and finance leases. In the first half of 2007, the Company concluded 3,303 new contracts. The valueof leased assets was PLN 497.8 million. 62% of leased assets were motor vehiclesand 38% were machinery and equipment. Through the sales cooperation programme established between the Company and theBank, the value of assets leased via the Bank's branches increased to PLN 203.8million. This constitutes a 91.6% increase in sales via this distributionchannel compared with the corresponding period of 2006. 6.2.5 Other financial services Pekao Fundusz Kapitalowy Sp. z o.o. (PFK) PFK maintains corporate governance and actively searches for investorsinterested in the purchase of the shares of companies held in its portfolio. Pekao Faktoring Sp. z o.o. (Pekao Faktoring) Apart from factoring services (recourse and non-recourse factoring) the companyoffers services related to factoring, namely collecting information regardingdebtors' standing, payments collection, debt recovery, settlements accountingand monitoring of payments on an ongoing basis. Additionally, the company offersfinancial advisory and consulting services regarding the choice of businessfinancing methods, as well as extends loans relating to factoring agreements.The company cooperates with Bank Pekao S.A. in promoting existing and new salesdistribution channels. Pekao Financial Services Sp. z o.o. (PFS) The Company acts as a transfer agent for all members of the asset managementmarket namely mutual funds, pension funds, employees' pension programs andinsurers. In the first half of 2007, PFS continued its strategy of strengthening itsmarket leadership position among transfer agents on the Polish market. Thenumber of accounts of mutual and pension funds served was 2.6 million, a PLN 0.2million increase in comparison to the end of 2006. Xelion. Doradcy Finansowi Sp. z o.o. (Xelion) The company was created in response to increasing demand for a customizedservices and financial products offering and thus represents a distributionchannel supplementary to the Bank's own distribution channels. It is focused onserving affluent customers that demand highly individualised approach atconvenient locations. A broad package of modern products and financial services is tailored to theindividual needs and financial abilities of customers. An innovative model ofservice is offered to such customers, which guarantees an access not only to theBank's products but also to investment and insurance products. As at 30th June 2007 Xelion clients had the access to, among others, 69 domesticfunds, 58 foreign funds, 17 Asset Management strategies, Unit Linked productswith 35 insurance capital funds as well as an Individual Pension Fund (IKE). As at the end of June 2007, Xelion clients assets exceeded PLN 1.3 billion. Centrum Kart S.A. (CK S.A.) The company provides a comprehensive service of card system management,transaction authorization and card personalisation. In the first half of 2007 the activities of the company related mainly torendering services to Bank Pekao S.A. and continuing cooperation with Ukrainianbank UniCredit Bank Ltd. in the scope of payment cards personalization. 6.2.6 Other entities included in the consolidated financial statements Other subordinated and associated entities included in the consolidatedfinancial statement for the first half of 2007 include: Pirelli Pekao Real Estate Sp. z o.o. (Pirelli Pekao) Pirelli Pekao is one of the leading development companies on the Polish market.This company aims to become the leader in real estate development on the Polishmarket. Pekao Access Sp. z o.o. (Access) The company's main business activities include: - advice on acquisitions accompanied by advisory on the financing of transactions, - advisory projects on new markets, - advice on corporate restructuring and financing. Central Poland Fund LLC (CPF) The Company manages asset portfolios to gain a satisfactory level of growth ofcompanies' value and to gain optimum return on assets held for sale. Krajowa Izba Rozliczeniowa S.A. (KIR) The main business activities of KIR are the management of the inter-banksettlement system, which covers exchange of payment orders, registration of suchorders, determining parties' liabilities and reporting the results of inter-banksettlements made on the territory of Poland to the National Bank of Poland. Drukbank Sp. z o.o. Drukbank Sp. z o.o. does not conduct any business activities. 7 Financial results of the Group 7.1 Consolidated profit and loss account The Group's net profit generated in the first half of 2007 amounted to PLN1,043.2 million and was PLN 178.0 million (20.6%) higher than in the first halfof 2006. The results confirm high efficiency of the Pekao Group. The increase in the net profit was possible through an increased volume ofbusiness that translated into higher revenue, particularly fee, commission andinterest income, with operating costs under control and lower cost of risk. Good results of Bank Pekao S.A. were accompanied by positive results of theGroup's other subsidiary companies. The consolidated profit and loss account for the first half of 2007 and 2006 ispresented below: PLN million I H 2007 I H 2006 Change Net interest income * 1,216.6 1,150.5 5.7%Fee and commission income 1,108.5 928.9 19.3%Dividend income 2.1 1.6 31.3%Trading income 53.4 76.3 (30.0%)FX income 137.7 120.2 14.6%Other operating income / cost net 31.0 35.3 (12.2%)Total income 2,549.3 2,312.8 10.2% Overhead costs (including depreciation) (1,241.1) (1,166.0) 6.4%Personnel** (660.4) (606.3) 8.9%Non-personnel (419.9) (401.4) 4.6%Depreciation (160.8) (158.3) 1.6%Operating income 1,308.2 1,146.8 14.1%Impairment losses on loans and advances (92.3) (109.8) (15.9%)Share in net profit (loss) of the 78.3 36.0 117.5%associatesPre-tax profit 1,294.2 1,073.0 20.6%Tax charge (251.0) (207.8) 20.8% Net profit 1,043.2 865.2 20.6% Attributable to equity holders of the 1,041.2 865.0 20.4%Company Attributable to minority interest 2.0 0.2 x *Including income on SWAP transactions. ** Including social security charges, without cost of training. Group's income In the first half of 2007, the Group's total income amounted to PLN 2,549.3million, PLN 236.5 million or 10,2% higher than in the comparable period of theprevious year. The main growth driver in this period was fee and commission income, whichincreased by 19.3%, primarily from commissions on investment products. In the first half of 2007 interest income amounted to PLN 1,216.6 million andwas PLN 66.1 million (5.7%) higher than last year mainly as a result ofincreasing volumes allowing to offset the impact of a lower yield on the debtsecurities portfolio. PLN millionNet interest income* 1H 2007 1H 2006 Change Interest income 2,991.6 2,492.1 20.0%Interest expense (1,775.0) (1,341.6) 32.3%Net interest income 1,216.6 1,150.5 5.7%Net interest margin %** 3.93% 4.15% (0.22 p.p.) * Including income on SWAP transaction. ** Excluding BSB and SBB transactions. Fee and commission income increased mainly thanks to commissions on investmentproducts and commissions on loans. PLN millionNon-interest income 1H 2007 1H 2006 Change Commission income 1,244.3 1,030.9 20.7%Commission expense (135.8) (102.0) 33.1%Net commission income 1,108.5 928.9 19.3%Dividend income 2.1 1.6 31.3%Trading income 53.4 76.3 (30.0%)FX income 137.7 120.2 14.6%Other operating income / cost net 31.0 35.3 (12.2%)Total non-interest income 1,332.7 1,162.3 14.7% The Group's overhead costs (including depreciation) Total overhead costs (including depreciation) in the first half of 2007 amountedto PLN 1,241.1 million, PLN 75.1 million (6.4%) higher than in the first half of2006. Overhead costs were kept under control, the increase was mainly due to theincrease of variable part of personnel costs and expansion in the Ukrainianmarket. In the first half of 2007, the Group's cost / income ratio amounted to 48.7% andwas 1.7 p.p. lower than in the first half of 2006. As at the end of June 2007, the Group had 15,942 employees, 295 employees morethan at the end of 2006. The increase in the number of employees came mainlyfrom including HVB Ukraine in the Group and the increased business activity ofUniCredit Bank. PLN millionOverhead costs (including 1H 2007 1H 2006 Changedepreciation) Personnel costs* (660.4) (606.3) 8.9%Non-personnel costs (419.9) (401.4) 4.6%Depreciation (160.8) (158.3) 1.6%Total (1,241.1) (1,166.0) 6.4% * Including social security charges, without cost of training. Impairment losses on loans and advances In the first half of 2007, impairment losses on loans and advances amounted toPLN 92.3 million and were PLN 17.5 million (15.9%) lower than in the first halfof the previous year, benefiting from the effective credit risk management andan improved macroeconomic situation. The ratio of impaired receivables to totalreceivables decreased from 11.8% at the end of 2006 to 11.3% at the end of June2007 as a result of an increase in the total volume of receivables (includingthe effect of the consolidation of HVB Ukraine). PLN millionImpairment losses on loans and I H 2007 I H 2006 Changeadvances Total (92.3) (109.8) (15,9%)for loan receivables (100.8) (117.5) (14,2%)for off-balance sheet liabilities 8.5 7.7 10,4%for financial assets 0.0 0.0 x 7.2 Structure of net profit The components of the net profit are shown below: PLN million I H 2007 I H 2006 Net profit of Bank Pekao S.A. 1,068.2 935.6Net profit (loss) of entities consolidatedunder full methodCentralny Dom Maklerski Pekao S.A. 113.9 75.5Joint Stock Commercial Bank HVB Bank Ukraine* 15.2 -Pekao Leasing Sp. z o.o. 10.0 6.4Pekao Financial Services Sp. z o.o. 7.2 4.9Pekao Pioneer PTE S.A. 5.7 4.0Pekao Faktoring Sp. z o.o. 3.2 4.8Pekao Fundusz Kapita(3)owy Sp. z o.o.** 2.5 1.4Centrum Kart S.A. 1.2 1.7Drukbank Sp. z o.o. *** 0.0 0.0Pekao Access Sp. z o.o. (0.1) 0.8UniCredit Bank Ltd. / Bank Pekao (Ukraina) (20.6) (0.1)Ltd. in Luck****Pekao Development Sp. z o.o. ***** - 6.5 Net profit (loss) of entities valued underequity methodPioneer Pekao Investment Management S.A. 66.7 43.5Pirelli Pekao Real Estate Sp. z o.o. **** 12.0 (5.5)Krajowa Izba Rozliczeniowa S.A. 2.5 2.6Central Poland Fund LLC 0.0 0.0Xelion. Doradcy Finansowi Sp. z o.o. (4.2) (5.4)Exclusions and consolidation adjustments *** (240.2) (211.5)***Net profit (loss) of the Group 1,043.2 865.2 * the result of the company in the second quarter of 2007, ** the result of the company includes the valuation of associates based on equity method, *** the result does not include the effect of sale of shares of UniCredit Bank Ltd. inside the Group, **** change in the name of the company, ***** equity valuation of the subsidiary since the II quarter 2006 due to sale of 75% of shares which took place on 3rd April 2006, ****** includes transactions within the Group, including dividends from subsidiaries (of which PLN 138.0 million from CDM) and associates and opening balance amendments. 7.2.1 Results of Bank Pekao S.A. In the first half of 2007, the Bank's net profit amounted to PLN 1,068.2 millionand was PLN 132.6 million (14.2%) higher than in the previous year. The main items of the Bank's Profit and Loss Statement for the first half of2007 compared with data for the first half of 2006 are shown below: PLN million I H 2007 I H 2006 Change Net interest income* 1,132.6 1,106.3 2.4%Non-interest income 1,342.7 1,189.4 12.9%Total income 2,475.3 2,295.7 7.8%Overhead costs (including depreciation) (1,112.5) (1,075.1) 3.5%Operating income 1,362.8 1,220.6 11.7%Impairment losses on loans and advances (76.7) (100.9) (24.0%)Pre-tax profit 1,286.1 1,119.7 14.9%Net profit 1,068.2 935.6 14.2%Cost / Income ratio 44.9% 46.8% (1.9 p.p.) *Including income on SWAP transactions. The main items of the Bank's Balance Sheet as at the end of the first half of2007 compared with the end of 2006 are shown below: 30.06.2007 31.12.2006 Change Total gross loans to customers in PLN 37,023.6 35,891.1 3.2%million*Impaired receivables to total receivables 11.0 11.0 0.0 p.p.in %Total customers deposits in PLN million* 49,996.9 49,472.2 1.1%Total assets in PLN million 69,122.0 66,976.8 3.2%Mutual funds sold in Bank's network in PLN 24,940.0 18,881.2 32.1%millionCapital adequacy ratio in % 12.8 14.7 (1.9 p.p.) * In nominal value. 7.2.2 Results of the Bank's important related entities in the firsthalf of 2007 Centralny Dom Maklerski Pekao S.A. (CDM) In the first half of 2007, CDM made a net profit of PLN 113.9 million, comparedwith PLN 75.5 million in the same period of 2006. This good performance wasachieved through both CDM business initiatives (for example such as sale ofmutual funds) and through favourable external conditions such as dynamiceconomic growth and good market conditions evidenced by the increase in stockexchange turnover and indices as well as favourable conditions in the primarymarket. This generated increased brokerage fees and commissions, revenues fromprimary market transactions and fees from mutual funds distribution. Pioneer Pekao Investment Management S.A. (PPIM) The consolidated net profit of the PPIM for the first half of 2007 amounted toPLN 136.1 million, compared with PLN 89.0 million in the same period of 2006.The Bank's share in the net profit amounted to PLN 66.7 million. The increase inPPIM's profitability results an increase in the value of funds managed by PPIMas well as increased operational activity. The main factor contributing to theincrease of assets under management is the effective distribution network ofBank Pekao S.A. and other companies in the Group. Pekao Leasing Sp. z o.o. (Pekao Leasing) In the first half of 2007, Pekao Leasing made a net profit of PLN 10.0 million,compared with the net profit of PLN 6.4 million in the first half of 2006.Growth of interest income driven by growth in the leasing portfolio and in otheroperating income (in particular a one off receivables sale) were main drivers ofthe improvement in results. In the first half of 2007, Pekao Leasing increasedthe volume of assets under lease by 59%. UniCredit Bank Ltd. / Bank Pekao (Ukraine) Ltd. in Luck (UniCredit Bank) In the first half of 2007, the company reported a loss of PLN -20.6 million,compared with a loss of PLN -0.1 million in the first half of 2006. This lossresulted from costs connected with retail network expansion as well as intensivemarketing activities. Joint Stock Commercial Bank HVB Bank Ukraine (HVB Ukraine) Since the second quarter of 2007 the results of HVB Ukraine have beenconsolidated in the Group. In the second quarter of 2007, the company made a net profit of PLN 15.2 million. This result was achieved through the company's activities in the areasof treasury, corporate customer services in the large and medium companiessegment, with gradually increasing share of incomes achieved in private bankingservices. Xelion. Doradcy Finansowi Sp. z o.o. (Xelion) In the first half of 2007, the company incurred a net loss of PLN -8.5 millioncompared with the net loss of PLN -10.9 million in the first half of 2006. TheBank's share in the net loss amounted to PLN -4.2 million. The companyconcentrated on further development of the network of financial advisors,development of activities in other regions of Poland and further development ofthe product offer while ensuring the highest quality of services. 7.3 Structure of the balance sheet The balance sheet of Bank Pekao S.A. determines not only the amount of totalassets in the balance sheet, but also the structure of the assets andliabilities of the Group. At the end of June 2007, the share of the total assetsof Bank Pekao S.A. in the total assets of the whole Group was 97.1%. The total assets of the Group at the end of June 2007 amounted to PLN 71,191.1million and were PLN 3,487.4 million (5.2%) higher compared to the end of 2006. The table below presents the balance sheet of the Group: Assets 30.06.07 31.12.06 Change PLN % of PLN % of million total million total Cash and balances with the 4,344.9 6.1% 3,577.9 5.3% 21.4%Central BankLoans and advances to banks 10,380.0 14.6% 10,506.2 15.5% (1.2%)Loans and advances to 35,095.8 49.3% 32,747.3 48.4% 7.2%customers*Securities** 17,166.3 24.1% 17,004.6 25.1% 1.0%Investments in associated 208.2 0.3% 207.3 0.3% 0.4%undertakingsTangible and intangible 2,021.9 2.8% 2,054.3 3.0% (1.6%)assetsOther assets 1,974.0 2.8% 1,606.1 2.4% 22.9% Total assets 71,191.1 100.0% 67,703.7 100.0% 5.2% * Including debt securities eligible for rediscounting at the Central Bank andnet investment in the finance lease. ** Including financial assets held for trading and other financial instrumentsvalued at fair value through profit or loss account. Liabilities and equity 30.06.07 31.12.06 Change PLN % of PLN % of million total million totalAmounts due to the Central 1,606.9 2.3% 2,045.3 3.0% (21.4%)BankAmounts due to banks 6,529.9* 9.2% 2,010.0 3.0% 224.9%Amounts due to customers 52,139.6 73.2% 51,793.6 76.5% 0.7%Other liabilities 2,755.0 3.9% 2,962.2 4.4% (7.0%)Shareholders' equity 8,159.7 11.5% 8,892.6 13.1% (8.2%)including minority interest 15.4 0.0% 16.7 0.0% (7.8%) Total liabilities and equity 71,191.1 100.0% 67,703.7 100.0% 5.2% * Including own securities in issue. 7.3.1 Assets Changes in the structure of assets Loans and advances to customers and securities are the dominant items in thestructure of assets. As at 30th June 2007 loans and advances to customers amounted to PLN 35,095.8million and constituted 49.3% of the Group assets. The increase in this item inthe first half of 2007 resulted mainly from increased lending activities in BankPekao S.A., i.e. an increase in the corporate clients' debt, increases inconsumer loans and PLN mortgages as well as consolidation of HVB Ukraine. In the first half of 2007, the value of securities held remained on the levelsimilar to the one at the end of 2006 and their share in total assets decreasedto the level of 24.1%. Cash and balances with the Central BankAssets 30.06.07 31.12.06 Change PLN million Cash and balances with the Central 4,344.9 3,577.9 21.4%Bank including:cash 979.1 1,093.4 (10.5%)current account 2,011.7 1,120.5 79.5%reserve bond 1,312.8 1,313.1 (0.0%)other 41.3 50.9 (18.9%) Loans and advances Customer structure of loans and advances* 30.06.07 31.12.06 Change PLN million Loans and advances in nominal value 39,049.0 36,586.2 6.7%loans 38,976.4 36,503.3 6.8%retail** 11,459.6 10,269.8 11.6%corporate 27,516.8 26,233.5 4.9%non quoted securities 72.6 83.0 (12.5%)buy-sell-back 0.0 0.0 xNominal value adjustment (3,953.2) (3,839.0) 3.0%Net loans and advances 35,095.8 32,747.3 7.2% * Including debt securities eligible for rediscounting at the Central Bank andnet investment in finance lease. ** The item includes retail loans in Bank Pekao S.A. The growth of loans by PLN 2,473.1 million (6.8%) in the first half of 2007 wasdriven by growth of PLN mortgage loans and "Express Loan", as well as growth ofcorporate loans and consolidation of HVB Ukraine. In comparable terms (excludingthe effect of consolidation of HVB Ukraine) the gross loans portfolio grew byPLN 1,282.9 million or by 3.5%. Impairment of financial assets 30.06.07 31.12.06 Change PLN million Gross credit and loans 38,877.3 36,444.3 6.7%not impaired 34,479.5 32,153.2 7.2%impaired 4,397.8 4,291.1 2.5%Impairment losses, including: (3,896.6) (3,830.2) 1.7%for loans assessed individually (1,714.2) (1,626.2) 5.4%for loans assessed in groups (2,182.4) (2,204.0) (1.0%)Interest 115.1 133.2 (13.6%)Total net value 35,095.8 32,747.3 7.2% In the first half of 2007, the gross volume of not impaired credits and loansincreased by PLN 2,326.3 million and impaired credits and loans increased by PLN106.7 million. As a result, the ratio of impaired receivables to totalreceivables decreased from 11.8% at the end of 2006 to 11.3% at the end of June2007. The balance sheet value of impairment losses increased in the first half of 2007by PLN 66.4 million (1.7%) to the amount of PLN 3,896.6 million, including PLN253.7 million attributed to the impairment losses resulting from incurred butnot recognised losses (IBNR). The currency structure of the receivables from customers Receivables from customers* 30.06.07 31.12.06denominated in: PLN % PLN % million million - PLN 31,641.5 81.1% 30,107.4 82.3%- foreign currencies** 7,350.9 18.9% 6,470.1 17.7%Total 38,992.4 100.0% 36,577.5 100.0%Impairment losses (3,896.6) x (3,830.2) xTotal net 35,095.8 x 32,747.3 x * including interests and amounts due in transit ** including indexed loans There was a growth in foreign currency receivables in the first half of 2007being mainly the effect of consolidation of HVB Ukraine. PLN prevails in thecurrency structure of the receivables from customers, whose share as at 30thJune 2007 was 81.1%. The highest share among foreign currency receivables werethose denominated in EUR - 67.5%, USD - 21.3% and CHF - 4.7%. Receivable structure by maturity Gross receivables 30.06.07 31.12.06 PLN million % PLN million %Current and up to 1 month 6,447.3 16.5% 5,784.8 15.8%1-3 months 977.9 2.5% 794.0 2.2%3 months - 1 year 3,526.6 9.0% 3,695.5 10.1%1-5 years 13,397.4 34.4% 12,152.3 33.2%Over 5 years 14,522.2 37.2% 14,015.2 38.3%Interest 115.1 0.3% 133.2 0.4%Amounts due in transit 5.9 0.0% 2.5 0.0%Total 38,992.4 100.0% 36,577.5 100.0% Impairment losses (3,896.6) x (3,830.2) xTotal net 35,095.8 x 32,747.3 x Broken down by maturities, receivables with a maturity over 5 years have thehighest share (37.2%), mainly attributable to a large loan for a central stateinvestment, mortgage loans and receivables for which the maturity date alreadypassed. Loan portfolio concentration Except for one borrower that was granted a loan for financing a central stateinvestment (Client A), the exposures of the Group to any single client are notsignificant. As at 30th June 2007 Client A's debt calculated using the effective interestrate stood at PLN 1,772.4 million (nominal value of PLN 2,321.5 million). Thedebt is a result of a loan contracted for a central state investment, that sincethe beginning of 1999 has been repaid in quarterly instalments. The finalrepayment date of the loan is 30th December 2012. The loan agreement forfinancing the central state investment was concluded on 30th April 1984. Theloan is refinanced by the National Bank of Poland and guaranteed by the StateTreasury. The Group's loan portfolio concentration is shaped according to the policy ofreducing the Group's loan portfolio dependence on a narrow group of clients. The concentration of the Group's loan portfolio is as follows*:+----------------------------------+-------------------+------------------+| | 30.06.07 | 31.12.06 |+----------------------------------+----------+--------+---------+--------+| | PLN| %**| PLN | %**|| | million| | million | |+----------------------------------+----------+--------+---------+--------+|10 largest borrowers | 5,287.8| 13.6| 5,589.2| 15.3|+----------------------------------+----------+--------+---------+--------+|20 largest borrowers | 7,431.1| 18.3| 7,734.8| 21.2|+----------------------------------+----------+--------+---------+--------+|50 largest borrowers | 10,992.9| 28.2| 11,259.9| 30.8|+----------------------------------+----------+--------+---------+--------+ * This listing covers the largest borrowers (excluding banks) on the basis ofused loans. ** Ratio to gross value of credit and loans. The values of the concentration ratios shown in the table are significantlyinfluenced by the central state investment loan described above. Excluding the central state investment loan the concentration of the Group'sloan portfolio would be as follows*:+----------------------------------+-------------------+------------------+| | 30.06.07 | 31.12.06 |+----------------------------------+----------+--------+---------+--------+| | PLN| %**| PLN | %**|| | million| | million | |+----------------------------------+----------+--------+---------+--------+|10 largest borrowers | 3,768.2| 10.1| 3,989.5| 11.5|+----------------------------------+----------+--------+---------+--------+|20 largest borrowers | 5,836.7| 15.7| 6,018.5| 17.4|+----------------------------------+----------+--------+---------+--------+|50 largest borrowers | 9,300.5| 25.0| 9,464.1| 27.3|+----------------------------------+----------+--------+---------+--------+ \* This listing covers the largest borrowers (excluding banks) on the basis ofused loans. ** Ratio to gross value of credit and loans. The table below presents 10 largest borrowers* of the Group as of 30th June2007. PLN million+-------------+-------------------+------------------+----------------------+| | Total exposure| Balance sheet| Off-balance sheet|| | | exposure| exposure|+-------------+-------------------+------------------+----------------------+|Client 1 | 1,772.4| 1,772.4| 0.0|+-------------+-------------------+------------------+----------------------+|Client 2 | 856.8| 0.0| 856.8|+-------------+-------------------+------------------+----------------------+|Client 3 | 691.6| 590.3| 101.3|+-------------+-------------------+------------------+----------------------+|Client 4 | 624.8| 605.3| 19.5|+-------------+-------------------+------------------+----------------------+|Client 5 | 600.0| 374.5| 225.5|+-------------+-------------------+------------------+----------------------+|Client 6 | 538.4| 219.3| 319.1|+-------------+-------------------+------------------+----------------------+|Client 7 | 533.1| 139.5| 393.6|+-------------+-------------------+------------------+----------------------+|Client 8 | 528.9| 477.0| 51.9|+-------------+-------------------+------------------+----------------------+|Client 9 | 480.0| 252.9| 227.1|+-------------+-------------------+------------------+----------------------+|Client 10 | 455.9| 55.8| 400.1|+-------------+-------------------+------------------+----------------------+ * 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. SecuritiesSecurities 30.06.07 31.12.06 Change PLN million Financial assets as held for trading 1,793.7 2,391.4 (25.0%)debt securities 1,790.9 2,388.9 (25.0%)other securities and financial assets 2.8 2.5 12.0%Other financial instruments at fair 1,510.0 1,613.2 (6.4%)value through profit or lossInvestment securities 13,862.6 13,000.0 6.6%available for sale 13,439.7 12,582.2 6.8%held to maturity 430.7 425.6 1.2%impairment (7.8) (7.8) 0.0%Total securities 17,166.3 17,004.6 1.0% The largest component of the securities structure is investment securitiesavailable for sale, which at the end of June 2007 accounted for 78.3% of thetotal securities. 7.3.2 Liabilities Changes in the structure of liabilities Funds deposited by customers represent the most significant part of the totalliabilities of the Group. As at the end of June 2007 amounts due to customersamounted to PLN 52,139.6 million and increased by PLN 346.0 million (0.7%)during the first half of 2007. The share of those items in the liabilities stoodat 73.2% as at the end of June 2007. External sources of the Group's financing 30.06.07 31.12.06 Change PLN million Amounts due to the Central Bank 1,606.9 2,045.3 (21.4%)Amounts due to banks 6,529.9 2,010.0 224.9%Amounts due to customers 52,139.6 51,793.6 0.7%Total external sources of financing 60,276.4 55,848.9 7.9% Apart from customers' deposits and funds from interbank market, Bank also uses arefinancing loan from the National Bank of Poland for financing a loancontracted for a central state investment. Bank Pekao S.A. acquires deposits mainly in Poland. The geographical structure of the deposits acquired by domestic branches of BankPekao S.A. at the end of June 2007 was as follows (% of total deposits): Region 30.06.07 31.12.06 Warsaw 34.4% 33.9%South-Eastern 11.5% 12.2%Malopolski 11.0% 11.5%Wielkopolski 9.9% 9.2%Gdanski 9.5% 9.5%Mazovian 8.8% 8.9%Western 8.3% 8.2%Central 6.6% 6.6%Total 100.0% 100.0% Deposits 30.06.07 31.12.06 Change PLN million Customer deposits 50,510.5 49,446.4 2.2%retail 24,006.1 26,314.5 (8.8%)corporate 26,504.4 23,131.9 14.6%sell-buy-back 1,497.5 2,230.3 (32.9%)other 131.6 116.9 12.6%Liabilities to customers 52,139.6 51,793.6 0.7%Mutual funds 30,922.5 23,263.4 32.9%including sold in the Group's 28,128.8 21,359.7 31.7%networkTotal savings 81,433.0 72,709.8 12.0%including retail 54,928.6 49,577.9 10.8% Savings of the Group's clients (customer deposits and mutual funds) increased byPLN 8,723.2 million, up by 12.0% in the first half of 2007 resulting from anincrease both in savings of individual clients and in corporate deposits. Highervolume of savings of the Group's clients reported as at 30th June 2007 is alsoinfluenced by consolidation of HVB Ukraine. In comparable terms (excluding theeffect of consolidation of HVB Ukraine) savings of the Group's clients increasedby PLN 8,213.3 million, i.e. by 11.3%. The savings of retail clients increased by PLN 5,350.7 million in the first halfof 2007 as a result of a dynamic increase in mutual funds (by PLN 7,659.1million). At the end of June 2007 total retail savings almost reached the level of PLN 55billion. Corporate deposits increased in the first half of 2007 by PLN 3,372.5 millionreaching the level of PLN 26.5 billion. Currency structure of liabilities Liabilities to customers* 30.06.07 31.12.06denominated in: PLN million % PLN % million - PLN 40,320.5 77.3% 38,687.1 74.7%- Foreign currency 11,819.1 22.7% 13,106.5 25.3%Total 52,139.6 100.0% 51,793.6 100.0% * Including interest and amounts due in transit PLN prevails in the currency structure of the Group's liabilities to customers,its share as at the end of June 2007 was 77.3%. The highest shares among foreigncurrency liabilities were USD - 51.5% and EUR - 39.3%. Maturity structure of liabilities Maturity structure of 30.06.07 31.12.06liabilities PLN million % PLN million % Up to one month 40,929.2 78.5% 38,501.4 74.3%1-3 months 5,731.4 11.1% 6,470.1 12.5%3 months - 1 year 3,787.2 7.2% 4,503.5 8.7%1-5 years 1,517.5 2.9% 1,975.9 3.8%Over 5 years 174.3 0.3% 342.7 0.7%Total amounts due to 52,139.6 100.0% 51,793.6 100.0%customers According to maturities, liabilities are dominated by liabilities up to onemonth inclusive (78.5% of all liabilities). The Group does not depend on any single client or group of clients. 7.3.3 Off-balance sheet items As of 30th June 2007 the Group provides service of the following 10 borrowerswith the highest amount of off-balance sheet liabilities *: PLN million+--------+----------------------------+------------+---------+--------+-------+|Client |Industry by PKD (Polish |Endorsement,| Open |Letters | Total || |Classification of Business | guarantee, |lines of | of | || |Activity) | sureties | credit | credit | |+--------+----------------------------+------------+---------+--------+-------+|Client 1|Manufacture and distribution| 251.9| 604.9| 0.0| 856.8|| |of gas and gaseous fuels | | | | |+--------+----------------------------+------------+---------+--------+-------+|Client 2|Wholesale of fuels | 3.0| 324.3| 72.8| 400.1|+--------+----------------------------+------------+---------+--------+-------+|Client 3|Publishing activities | 2.8| 390.5| 0.3| 393.6|+--------+----------------------------+------------+---------+--------+-------+|Client 4|Manufacture of petroleum | 0.0| 319.1| 0.0| 319.1|| |products | | | | |+--------+----------------------------+------------+---------+--------+-------+|Client 5|Construction | 171.8| 75.0| 0.0| 246.8|+--------+----------------------------+------------+---------+--------+-------+|Client 6|Production of food | 0.0| 229.7| 0.0| 229.7|+--------+----------------------------+------------+---------+--------+-------+|Client 7|Telecommunications | 64.1| 163.0| 0.0| 227.1|+--------+----------------------------+------------+---------+--------+-------+|Client 8|Financial intermediation | 0.0| 225.5| 0.0| 225.5|+--------+----------------------------+------------+---------+--------+-------+|Client 9|Production and distribution | 100.5| 103.5| 0.0| 204.0|| |of electricity | | | | |+--------+----------------------------+------------+---------+--------+-------+|Client |Manufacture of petroleum | 0.0| 195.4| 0.0| 195.4||10 |products | | | | |+--------+----------------------------+------------+---------+--------+-------+ * data do not include underwritten debt securities issues Important guarantees and sureties Granted by the Group The Group follows a prudent policy with respect to granting guarantees. As of30th June 2007 Group's exposure related to guarantees in amount of at least PLN100 million referred to the following borrowers (PLN million) *:Client 1 251.9Client 2 171.8Client 3 158.8Client 4 100.7Client 5 100.5 * data do not include underwritten debt securities issues Granted to the Bank exceeding the amount of PLN 250 million (PLN million): Surety 1 2,320.7Surety 2 650.0Surety 3 476.9Surety 4 450.0Surety 5 300.0Surety 6 274.7Surety 7 263.5 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 the first half of 2007 the Bank did not grant sureties of loans or guaranteesto any single entity or subsidiary of that entity, the total value of whichwould have exceeded 10% of the Bank's own funds. 8 Management and Supervisory Boards of the Bank 8.1 Management Board of Bank Pekao S.A. On 26th April 2007, the Supervisory Board appointed the following Members of theManagement Board for the period of common term of office, lasting three years,beginning as of 27th April 2007: Composition of the Management Board Composition of the Management Board as at 30.06.2007 as at 31.12.2006 1. Jan Krzysztof Bielecki 1. Jan Krzysztof Bielecki President, CEO President, CEO 2. Luigi Lovaglio 2. Luigi Lovaglio Vice President, General Manager Deputy President, COO 3. Paolo Iannone 3. Sabina Olton Member of the Management Board Deputy President, Chief Accountant 4. Christopher Kosmider 4. Przemyslaw Figarski Member of the Management Board Member of the Management Board 5. Marian Wazynski 5. Irene Grzybowski Member of the Management Board Member of the Management Board 6. Paolo Iannone Member of the Management Board 7. Christopher Kosmider Member of the Management Board 8. Marian Wazynski Member of the Management Board The members of the Management Board are appointed for the common term office,which lasts 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 Board of the Bank, including thePresident of the Management Board follows the approval of the BankingSupervision Commission. The Supervisory Board has to advise the Commission toexpress 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. 8.2 Supervisory Board of Bank Pekao S.A. The composition of the Supervisory Board as at 30th June 2007 has not changed incomparison to the composition as at 31st December 2006. The Extraordinary General Meeting of Bank Pekao S.A. held on 25th July 2007appointed Mr. Federico Ghizzoni and Mr. Krzysztof Pawlowski as members of theSupervisory Board of Bank Pekao S.A. for the current common term of office ofthe Supervisory Board. The Supervisory Board of Bank Pekao S.A. appointed Mr. Federico Ghizzoni to theposition of Deputy Chairman of the Supervisory Board. In June 2007 Mr. Andrea Moneta, Deputy Chairman and Member of the SupervisoryBoard and Mr. Jerzy Starak, Member of the Supervisory Board, submittedresignations from their positions in the Supervisory Board of the Bank effectivefrom 24th July 2007. Composition of the Supervisory Board Composition of the Supervisory Board as at 25.07.2007 as at 30.06.2007 1. Jerzy Woznicki 1. Jerzy Woznicki Chairman Chairman 2. Paolo Fiorentino 2. Paolo Fiorentino Deputy Chairman, Secretary Deputy Chairman, Secretary 3. Federico Ghizzoni 3. Andrea Moneta Deputy Chairman Deputy Chairman 4. Pawel Dangel 4. Pawe(3) 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. Krzysztof Pawlowski 9. Jerzy Starak Member of the Supervisory Board Member of the Supervisory Board 8.3 The Bank's shareholding structure The 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 Share in the Number of Share in the shares and share capital shares and share capital votes at and in total votes at and in total GSM votes at GSM GSM votes at GSM 30th June 2007 31st December 2006 UniCredito Italiano 88,121,725 52.73% 88,121,725 52.83%S.p.A.Other shareholders 78,981,373 47.27% 78,686,532 47.17%Total 167,103,098 100.00% 166,808,257 100.00% In the first half of 2007, the share capital of the Bank was increased by PLN294,841 as a result of the issue of 294,841 series F ordinary bearer shares. Theshare capital of the Bank currently amounts to PLN 167,103,098. The share ofUniCredito Italiano S.p.A. in the share capital and the total number of votes atthe General Meeting amounts to 52.73% while the share of other shareholdersstands for 47.27%. According to the information known by the Bank, as at the date of submittingthis report no significant changes were made in the shareholding structure. 8.4 Share capital increase of Bank Pekao S.A. In the first half of 2007 the share capital of the Bank has been increased bythe total amount of PLN 294,841 as a result of issue of 294,841 series Fordinary bearer shares. The share capital of the Bank amounts currently to PLN167,103,098 and is divided into: - 137,650,000 series A ordinary bearer shares with nominal value of PLN 1.00each, - 7,690,000 series B ordinary bearer shares with nominal value of PLN 1.00 each, - 10,630,632 series C ordinary bearer shares with nominal value of PLN 1.00each, - 9,777,571 series D ordinary bearer shares with nominal value of PLN 1.00 each, - 373,644 series E ordinary bearer shares with nominal value of PLN 1.00 each, - 621,411 series F ordinary bearer shares with nominal value of PLN 1.00 each, - 359,840 series H ordinary bearer shares with nominal value of PLN 1.00 each. Total number of votes at the Bank's General Shareholders Meeting under allissued shares is 167,103,098. The increase was conducted as a result ofregistration on buyers accounts of 294,841 series F ordinary bearer sharesissued within the conditional share capital increase on the base of ResolutionNo. 7 of the Extraordinary General Shareholders Meeting of the Bank conducted on25th July 2003 on contingent increase of the statutory capital, exclusion of thepre-emptive rights on the series F and G shares of the Bank and amendment to theStatute of the Bank. The Bank's conditional share capital increase have been registered by WarsawDistrict Court, XIX Economic Division of the National Court Registry on 17thSeptember 2003, which was reported by Bank in current report 107/2003 dated 19thSeptember 2003. 8.5 Shares owned by the Members of the Bank's Management andSupervisory Boards According to the Bank's knowledge, as at 30th June 2007 members of the Bank'smanagement and supervisory bodies held 98,446 shares of Bank Pekao S.A. 30.06.2007 31.12.2006Name Number of shares Name Number of sharesJan Krzysztof 20 000Bielecki Luigi Lovaglio 65 357 Luigi Lovaglio 32 679Marian Wazynski 13 089 Marian Wazynski 5 834Total 98 446 Total 32 679 The change in the number of shares in relation to the amount reported as at 31stDecember 2006 stems from taking up Bank's shares ensuing from incentiveprogramme for the year 2003. 9 Assessment of the financial credibility of Bank Pekao S.A. As at 30th June 2007, Bank Pekao S.A. had the following financial credibilityratings: Fitch RatingsLong-term rating (IDR) AShort-term rating F1Individual rating B/CSupport rating 1Outlook of IDR Positive Standard and Poor'sLong-term rating AShort-term rating A-1Outlook Stable Moody's Investors Service Ltd. (Moody's rating is unsolicited)Long-term deposit rating A2Short-term deposit rating Prime-1Financial strength COutlook Stable 10 Debt securities issue agreements Issuance of bonds of Bank Pekao S.A. On the basis of Resolution No. 6 of the Bank's Extraordinary General Meetingdated 25th July 2003 on the issue of registered bonds under an incentiveprogramme, the Bank issued 415 thousand registered A series bonds and 415thousand registered B series bonds with pre-emptive rights to take up the Bank'sF series shares, and 415 thousand registered C series bonds and 415 thousandregistered D series bonds with pre-emptive rights to take up the Bank's G seriesshares. 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 Banku Pekao S.A. Each Bond entitles to take up 1 ordinary bearer share of the Bank. The nominal value of one bond is PLN 0.01. 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. All the pre-emptive rights to take up F series shares pursuant to theimplementation of the right of priority ensuing from the A and B series bondswere executed. C series bonds are available for purchase from the Trustee by the eligiblepersons until 30th December 2007. D series bonds will be available for purchase from the Trustee by the eligiblepersons in the period from the 31st day after the date of the GeneralShareholders' Meeting, approving financial statements for the financial year2007 until 30th December 2008. Bank acquired 120,159 registered series B bonds from Pekao Faktoring Sp. z o.o.,for the purpose of redemption, and the total of 294,841 series B bonds fromeligible persons, upon the request thereof for early redemption, pursuant to theimplementation of the right of priority to take up the Bank's shares ensuingfrom the bonds, for the purpose of redemption thereof. All Bonds which are not sold off by the Trustee by 30th December 2007 and 2008shall be acquired by the Bank on 31st December 2007 and 2008 respectively to beredeemed at their nominal value. The execution of the pre-emptive rights to take up G series shares can beexercised in the following periods: - in respect of C series bonds - from 1st January 2008 to 31st December 2012, - in respect of D series bonds - from 1st January 2009 to 31st December 2012. Issuance of bonds of Joint Stock Commercial Bank HVB Bank Ukraine On 24th January 2006 HVB Ukraine issued 79,000 bonds of face value 1,000 UAHeach bond, of total face value 79,000,000 UAH. The purpose of this issue was toacquire the funds for financing the development of the lending activity. Theissue offering was addressed to the selected investors. In the issue HVB Ukraineoffered bonds with put option, common, interest bearing, registered, withdiscount to the face value. For the first two years the coupon interest is fixedat 8.8% p.a., the interest rate for the last two years will be announced twoweeks before the put option date. The date of the bond maturity is 18th January2010 and the put option date is 22nd January 2008. 11 Number and value of titles of execution and value of collaterals The collateral used by the Bank within its activities includes: transfers ofownership and pledges, mortgages, transfer of rights to insurance policies,sureties under the Civil Code, transfer of debt, appropriation of assets in bankaccounts, guarantees, deposits and others. For corporate clients, the total value of the collateral for impairedtransactions as at 30th June 2007 amounted to PLN 1,997.5 million. During thefirst half of 2007, 401 titles of execution were issued on behalf of the Bank inthe total amount of PLN 255.0 million; 1,358 executive actions were taken forthe total amount of PLN 291.0 million; 209 civil law agreements totalling PLN79.8 million were signed. 12 Post balance sheet events Apart from the event described in point 5.3, no other significant eventsoccurred after the balance sheet date which were not reflected in the financialstatements. 13 Representations of the Bank's Management Board The Management Board of Bank Pekao S.A. declares to its best knowledge that: - the semi-annual financial statements and comparative figures have been prepared in accordance with the binding accounting policies and that they reflect in a true, fair and clear manner the Bank Pekao S.A. Group financial position and its results, - the semi-annual Report on the activities for the first half of 2007 provides the true picture of the Bank Pekao S.A. Group development, achievements and situation, including the main risks and threats. The Management Board of Bank Pekao S.A. declares that the registered auditcompany performing the review of the semi-annual financial statements of theBank Pekao S.A. Group has been selected in line with the binding legalregulations. The company and the registered auditors performing the review meetthe requirements indispensable for issuing an objective and independent reviewreport, in line with the relevant provisions of the Polish law. This information is provided by RNS The company news service from the London Stock Exchange

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