4th Aug 2006 13:20
Bank Pekao SA04 August 2006 BANK POLSKA KASA OPIEKI SPOLKA AKCYJNA Interim financial statements of the Bank Pekao S.A. Group for the second quarter of 2006 prepared according to the International Financial Reporting Standards 1 Summary 2 Accounting principles adopted in the preparation of the quarterly report 3 Financial statement 4 Additional information 4.1 The Group 4.2 Achievements of Bank Pekao S.A. 4.3 Achievements of subsidiaries 4.3.1 Pioneer Pekao TFI S.A. 4.3.2 Centralny Dom Maklerski Pekao S.A. (CDM) 4.4 Results achieved in the first half of 2006 and the factors which influencedthese results 4.4.1 Results of the Group 4.4.2 The structure of the net profit 4.5 Segment reporting 4.6 Adjustments for provisions, deferred tax provision and assets 4.7 Write-offs for revaluation of assets 4.8 Information on contingent assets and liabilities 4.9 Post balance sheet events 4.10 Divestment to Pirelli RE of a 75% stake in the share capital of PekaoDevelopment 4.11 Appointment of Members of the Supervisory Board of Bank Pekao S.A. for newcommon term of office 4.12 Share capital increase of Bank Pekao S.A. 4.13 Plaintiff to the court to repeal resolutions of Bank's GSM 4.14 Seasonality or cyclical nature of the Bank's activity 4.15 Issuance, redemption and repayment of debt securities 4.16 Dividend paid 4.17 Effects of changes in the Group's structure 4.18 The position of the Management Board regarding the possibility of achievingpreviously published forecasts 4.19 The information about the shareholders owning at least 5% of the totalnumber of votes at the General Meeting of Bank Pekao S.A. 4.20 The Issuer's shares held by the Management and Supervisory Board members 4.21 Pending litigations 4.22 Information about integration of Bank Polska Kasa Opieki S.A. (Pekao S.A.)and Bank Przemyslowo - Handlowy S.A. (BPH S.A.) 4.23 Transactions of related entities 4.24 Loan or credit sureties and guarantees given 4.25 Factors which will affect the results of at least the next quarter 1 Summary In this quarterly report the Bank and the Group present their results inaccordance with the International Financial Reporting Standards (IFRS). The Group's consolidated financial statements and the Bank's individualfinancial statements fulfil the requirements of International AccountingStandard - IAS 34 "Interim Financial Reporting". Net profit of the Group in the second quarter of 2006 was the best quarterlyresult achieved to date and amounted to PLN 446.9 million. In the first half ofthe 2006 the net profit amounted to PLN 865.2 million, i.e. 19.3% higher than inthe first half of 2005. The increase in the net profit was possible thanks to increased businessactivity which translated into higher income, particularly fee and commissionincome, with stable operating costs and lower cost of risk. • Group's income amounted to PLN 2,312.8 million in the first half of 2006 and was by 7.9% higher than in the previous year, with interest income being higher by 2.1% and other income higher by 14.2%. • In the first half of 2006, the Group noted a continued positive trend in the results of its business activity, with successful sales of key products: consumer loans "Express Loan", PLN mortgage loans, mutual funds and credit cards. Sales of the "Express Loan" in the first half of 2006 were 32.4% higher than in the previous year reaching PLN 911.3 million. Sales of PLN mortgage loans amounted to PLN 1,020.4 million contributing to a growth in the stock of 16.5% in the first half of 2006. The value of mutual funds increased by 5.1% and the number of credit cards increased by 30.0% compared with the end of 2005. • In the first half of 2006, total overhead costs including depreciation were kept under control and amounted to PLN 1,166.0 million, i.e. were by 1.1% higher than in the previous year. In the first half of 2006, the Group's cost / income ratio amounted to 50.4% and was by 3.4 p.p. lower than in the previous year. • In the first half of 2006, impairment losses on loans and advances amounted to PLN 109.8 million and were 14.6% lower than in the previous year. This resulted primarily from the effective credit risk management and improved macroeconomic situation. The ratio of impaired receivables to total receivables decreased from 15.6% at the end of 2005 to 14.8% at the end of June 2006. • Savings of the Group's clients increased by PLN 2,578.7 million i.e. by 4.0% in the first half of 2006 resulting from an increase both in the savings of individual clients and in corporate deposits. The savings of retail clients increased by PLN 1,032.1 million in the first half of 2006 and exceeded the level of PLN 46 billion confirming Group's significant market share. Corporate deposits increased by PLN 1,546.6 million in the first half of 2006. • In the first half of 2006, the gross loan portfolio grew by PLN 993.4 million, i.e. by 3.0% . This growth was driven by successful sale of the "Express Loan" and PLN mortgage loans and an increase in the volume of corporate loans. 2 Accounting principles adopted in the preparation of the quarterlyreport The interim consolidated report of the Group of Bank Pekao S.A. and the standalone report of Bank Pekao S.A. were prepared in compliance with theInternational Financial Reporting Standards (IFRS), published by theInternational Accounting Standards Board. The presented report meets the requirements of the International AccountingStandard 34 related to interim financial reports and of the Decree of theCouncil of Ministers dated19th October 2005 on current and periodic information submitted by the issuersof securities. The consolidated financial report of the Group and enclosed financial report ofthe Bank have been prepared in accordance with the accounting principles appliedfor the purpose of asset and liabilities valuation and measurement of financialresults, as disclosed in the consolidated report and the stand alone report ofBank Pekao S.A. for the year 2005, published on 22nd March 2006. There were no changes of accounting principles in the first half of 2006financial reports in comparison to the accounting principles applied for theGroup and the Bank annual reports for the year 2005. In this report the data have been presented in a manner assuring comparability. 3 Financial statement Financial statements CONSOLIDATED INCOME STATEMENT (in II Quarter II Quarters II Quarter II Quarters'000 PLN) 2006 period 2006 2005 period 2005 from Cumulative from Cumulative 06-04-01 to period from 05-04-01 to period from 06-06-30 06-01-01 to 05-06-30 05-01-01 to 06-06-30 05-06-30 Interest income 939 937 1 855 033 1 006 024 1 954 316Interest expense (367 293) (711 151) (416 013) (822 238)Net interest income 572 644 1 143 882 590 011 1 132 078Fee and commission income 524 707 1 030 916 424 787 830 083Fee and commission expense (55 899) (102 040) (43 591) (82 468)Net fee and commission income 468 808 928 876 381 196 747 615Dividend income 1 638 1 638 48 48Result on financial instruments at 16 870 19 397 27 709 53 186fair valueResult on investment securities 31 441 63 412 18 769 33 818Foreign exchange result 67 916 120 236 67 411 146 478Other operating income 39 714 88 981 68 341 135 470Other operating expenses (20 245) (53 661) (50 806) (104 460)Net other operating income 19 469 35 320 17 535 31 010Net impairment losses on financial (51 385) (109 760) (65 323) (128 629)assets and net provisions forguarantees and commitmentsOverhead costs (583 582) (1 165 973) (577 804) (1 153 489)Operating profit 543 819 1 037 028 459 552 862 115Share of profit (loss) of 15 226 35 988 10 619 22 149associates and joint ventureentities valued at the equitymethodProfit before income tax 559 045 1 073 016 470 171 884 264Income tax expense (112 154) (207 808) (75 269) (158 871) Net profit for the period 446 891 865 208 394 902 725 393 1. Attributable to equity holders 446 132 864 992 395 833 727 296of the Company2. Attributable to minority 759 216 (931) (1 903)interest Earnings per share (in PLN pershare)- basic for the period 5,19 4,37- diluted for the period 5,18 4,37 CONSOLIDATED BALANCE SHEET (in '000 PLN) 30.06.2006 31.12.2005 30.06.2005 Assets Cash and balances with Central Bank 3 027 986 3 574 791 3 200 041 Debt securities eligible for rediscounting 4 010 6 106 8 851 at the Central Bank Loans and advances to banks 9 051 044 6 966 026 7 286 094 Financial assets as held for trading 2 698 602 2 502 366 2 508 823 Derivative financial instruments 621 118 499 290 631 694 Other financial instruments at fair value 1 689 741 1 781 317 1 736 328 through profit or loss Loans and advances to customers 29 050 716 28 223 730 26 739 530 Net investment in the finance lease 859 868 745 891 638 502 Investment securities 15 736 070 14 490 772 14 477 687 1. Available for sale 14 256 522 11 902 898 11 694 383 2. Held to maturity 1 479 548 2 587 874 2 783 304 Assets of disposal group classifield as 53 165 167 366 - held for sale Investments in associated undertakings 155 040 167 814 149 312 Intangible assets 610 239 645 457 629 512 Tangible fixed assets 1 418 154 1 441 141 1 489 705 Investment property 58 359 61 259 99 384 Income taxes 277 135 182 180 170 943 1. Current tax assets - 886 317 2. Deferred income tax assets 277 135 181 294 170 626 Other assets 1 481 719 516 450 750 210Total assets 66 792 966 61 971 956 60 516 616 Liabilities and Shareholders' equity'Liabilities Amounts due to the Central Bank 1 838 971 1 950 710 2 054 190 Amounts due to other banks 4 484 353 1 997 043 2 081 117 Financial liabilities as held for trading 554 825 558 973 90 424 Derivative financial instruments 568 654 607 689 736 257 Amounts due to customers 49 866 024 46 847 877 45 993 771 Debt securities in issue 2 4 2 Liabilities directly associated with assets - 39 663 - classified as held for sale Current income tax liabilities 97 278 5 621 117 570 Provisions for deferred income tax - 1 2 866 Provisions 90 071 108 727 106 176 Other liabilities 1 470 772 1 432 922 1 609 508Total liabilities 58 970 950 53 549 230 52 791 881 Shareholders' equityCapital and reserves attributable to the 7 806 799 8 407 290 7 708 279Company's equity holders Share capital 166 808 166 482 166 482 Other capital and reserves 6 881 567 6 718 913 6 840 789 Prior and current year profits 758 424 1 521 895 701 008Minority interest 15 217 15 436 16 456Total Shareholders' equity 7 822 016 8 422 726 7 724 735Total liabilities and Shareholders' equity 66 792 966 61 971 956 60 516 616 Capital adequacy ratio 18,43 19,47 19,94Book value 7 806 799 8 407 290 7 708 279Number of shares 166 808 257 166 481 687 166 481 687 Book value per share ( in PLN per share) 46,80 50,50 46,30Diluted number of shares 166 935 209 166 558 940 166 509 483 Diluted book value per share (in PLN per share) 46,77 50,48 46,29 CONSOLIDATED STATEMENT OF CHANGES II IV II Quarters Quarters Quarters (current (previous (previous year) year) year)IN SHAREHOLDERS' EQUITY from 1 Jan from 1 Jan from 1 Jan(in '000 PLN ) 2006 to 30 2005 to 31 2005 to 30 Jun 2006 Dec 2005 Jun 2005Shareholders equity at the beginning of the 8 422 726 8 023 481 8 023 481perioda) adjustments related to IFRS/IAS - (192 460) (192 460)introductionAdjusted shareholders equity at the 8 422 726 7 831 021 7 831 021beginning of the period1. Share capital at the beginning of the 166 482 166 482 166 482perioda) Increase 326 - -- new shares issue 326 - -b) Decrease - - -1. Share capital at the end of the period 166 808 166 482 166 4822. Earnings from previous years at the 1 521 895 1 512 265 1 512 265beginning of the perioda) adjustments related to IFRS/IAS - (192 460) (192 460)introductionb) change of consolidation method - - -2. Adjusted earnings from previous years at 1 521 895 1 319 805 1 319 805the end of the perioda) Increase 34 118 1 761 21 918- adjustment related to IFRS/IAS - - 16 575introduction- other 34 118 1 761 5 343b) Decrease (1 662 581)(1 337 383)(1 368 011) - appropriation to general banking risk fund (70 000) - -- appropriation to other reserve capital (346 418) (271 900) (277 518)- appropriation to reserve capital (8 890) - -- dividend (1 234 381)(1 065 483)(1 065 483) - other (2 892) - (25 010)2. Earnings from previous years at the end (106 568) (15 817) (26 288)of the period3. Other capital and reserves at the 6 718 913 6 325 958 6 325 958beginning of the period3. Adjusted other capital and reserves at 6 718 913 6 325 958 6 325 958the beginning of the perioda) Increase 463 479 393 691 514 810- appropriation of net profit 425 308 271 900 277 518- share premium on issue of new shares 34 851 - -- valuation of securities available for sale - 107 867 227 312(net)- employee share option proceeds 2 939 11 893 2 831- foreign exchange differences on 60 - -subordinated companies- release of provisions for restructuring 321 - 7 149fund- other - 2 031 -b) Decrease (300 825) (736) 21- valuation of securities available for sale (268 952) - -(net)- foreign exchange differences on - (736) -subordinated companies- other (31 873) - 213. Other capital and reserves at the end of 6 881 567 6 718 913 6 840 789the period4. Net profit 864 992 1 537 712 727 296II. Shareholders' equity at the end of the 7 806 799 8 407 290 7 708 279periodIII. Minority interest at the beginning of 15 436 18 776 18 776the perioda) Decrease (219) (3 340) (2 320)- net profit 216 (2 860) -- other (435) (480) (2 320)IV. Minority interest at the end of the 15 217 15 436 16 456periodTotal equity 7 822 016 8 422 726 7 724 735 CONSOLIDATED STATEMENT OF CASH FLOW II Quarter II Quarters II Quarter II Quarters (current cumulative (previous cumulative year) (current year) (previous year) year)(in '000 PLN) from 1 from 1 Jan from 1 from 1 Jan April 2006 2006 to 30 April 2005 2005 to 30 to 30 June June 2006 to 30 June June 2005 2006 2005A. Cash flow from operating activities -indirect method I. Net profit (loss) 446 132 864 992 395 833 727 296Adjustments: 226 268 1 915 387 (1 193 437) (831 684)Deprecation 78 460 157 773 80 769 161 244Share of profit of associates (15 226) (35 988) (10 619) (22 149)Foreign exchange differences 50 756 63 683 (92 222) (200 355)(Profit) loss on investing activities (8 730) (46 741) (17 682) (32 731)Impairment (11 527) (11 532) - -Interest and dividend (223 216) (422 246) (196 895) (462 801)Change in loans and advances to banks (457 117) (1 165 605) 105 996 (344 231)Change in financial assets as held for (739 416) (104 660) 114 279 287 341trading and other financial instruments atfair value through profit or lossChange in derivative financial instruments (138 942) (121 828) (78 887) (128 212)Change in loans and advances to customers (524 921) (824 890) (1 087 161) (990 565)Change in net investment in the finance (76 375) (113 977) (33 609) (91 178)leaseChange in investment securities available 570 570 13 178 -for saleChange in deferred income tax assets 333 (31 949) (107 380) (95 176)Change in other assets (664 634) (849 847) 64 507 (166 234)Change in amounts due to banks 2 322 966 2 375 571 (803 975) 651 007Change in liabilities as held for trading (690 946) (4 148) (499 695) (499 695)Change in derivative financial instruments 44 888 (39 035) 196 983 112 574and other financial liabilities at fairvalue through profit or lossChange in amounts due to customers 1 371 931 3 018 147 68 652 172 126Change in debt securities in issue - - (352) -Change in provisions (10 674) (18 656) 250 183 5 563Change in other liabilities (145 060) (30 860) 733 930 665 776Income tax paid (49 333) (117 727) (91 279) (120 992)Current tax 112 481 239 332 197 842 267 004Net cash from operating activities 672 400 2 780 379 (797 604) (104 388) B.Cash flows from investing activities Investing activity inflows 10 183 634 17 494 452 11 475 835 15 505 287Sale of investment securities 9 918 097 17 105 224 11 275 550 15 203 026Proceeds from sale of intangible assets and 2 189 8 228 1 209 2 055tangible fixed assetsOther investing inflows 263 348 381 000 199 076 300 206Investing activity outflows (9 794 324)(18 703 015)(8 973 257) (14 071 061) Purchase of associates - - (25 000) (25 000)Purchase of investment securities (9 723 747)(18 606 583)(8 868 178) (13 938 091) Purchase of intangible assets and tangible (70 216) (96 041) (80 344) (107 907)fixed assetsOther investing outflows (361) (391) 265 (63)Net cash used in investing activities 389 310 (1 208 563) 2 502 578 1 434 226 C. Cash flows from financing activities Financing activity inflows 8 115 35 177 2 2Issue of debt securities - - 2 2Issue of ordinary shares 8 115 35 177 - -Financing activity outflows (1 234 381)(1 234 385) (1 088 688) (1 088 688) Redemption of debt securities - (4) (22 479) (22 479)Dividends and other payments to (1 234 381)(1 234 381) (1 065 483) (1 065 483)shareholders Other financing outflows - - (726) (726)Net cash from financing activities (1 226 266)(1 199 208) (1 088 686) (1 088 686) D. Total net cash flow (A.III+/-B.III+/ (164 556) 372 608 616 288 241 152-C.III)E. Net change in cash and cash equivalents (164 556) 372 608 616 288 241 152F. Cash and cash equivalents at the 8 204 385 7 667 221 6 901 290 7 276 426beginning of the periodG. Cash and cash equivalents at the end of 8 039 829 8 039 829 7 517 578 7 517 578the period (F+/- D) QUARTERLY INDIVIDUAL FINANCIAL REPORTQUARTERLY INDIVIDUAL FINANCIAL REPORT INCOME STATEMENT (in '000 PLN) II Quarter II Quarters II Quarter II Quarters 2006 period 2006 2005 period 2005 from Cumulative from Cumulative 06-04-01 to period from 05-04-01 to period from 06-06-30 06-01-01 to 05-06-30 05-01-01 to 06-06-30 05-06-30 Interest income 924 019 1 824 170 991 495 1 927 146Interest expense (373 847) (724 368) (427 357) (847 675)Net interest income 550 172 1 099 802 564 138 1 079 471Fee and commission income 424 793 849 757 369 913 715 930Fee and commission expense (45 502) (82 998) (38 194) (69 206)Net fee and commission income 379 291 766 759 331 719 646 724Dividend income 170 025 170 025 25 073 96 573Result on financial instruments at 17 575 19 451 28 201 51 863fair valueResult on investment securities 31 441 63 412 18 769 33 818Foreign exchange result 67 129 119 190 67 206 146 566Other operating income 72 892 89 626 28 801 50 649Other operating expenses (17 218) (32 518) (24 465) (38 376)Net other operating income 55 674 57 108 4 336 12 273Net impairment losses on financial (51 042) (100 914) (63 057) (126 620)assets andnet provisions for guarantees andcommitments Overhead costs (538 281) (1 075 127) (537 753) (1 068 286)Operating profit 681 984 1 119 706 438 632 872 382Profit before income tax 681 984 1 119 706 438 632 872 382Income tax expense (99 763) (184 068) (67 268) (141 444) Net profit for the period 582 221 935 638 371 364 730 938 Earnings per share (in PLN pershare) - basic for the period 5,61 4,39 - diluted for the period 5,61 4,39 BALANCE SHEET (in '000 PLN) 30.06.2006 31.12.2005 30.06.2005Assets Cash and amounts due from Central Bank 3 026 392 3 573 613 3 197 714 Debt securities eligible for 4 010 6 106 8 851 rediscounting at the Central Bank Loans and advances to banks 9 032 943 7 000 770 7 289 940 Financial assets held for trading 2 348 399 2 217 887 2 220 737 Derivative financial instruments 621 108 499 290 631 709 Other financial instruments at fair 1 689 741 1 781 317 1 736 328 value through profit or loss Loans and advances to customers 29 552 124 28 727 143 27 246 722 Investment securities 15 735 602 14 490 374 14 476 084 1. Available for sale 14 256 054 11 902 500 11 692 780 2. Held to maturity 1 479 548 2 587 874 2 783 304 Non-current assets held for sale 41 226 37 650 - Shares in subsidiaries 514 668 514 666 544 801 Shares in associates 51 092 42 234 47 060 Intangible assets 601 922 636 048 618 182 Tangible fixed assets 1 398 189 1 422 389 1 469 610 Investment property 55 378 58 170 45 863 Income taxes 249 986 152 008 145 259 1. Current tax assets - - - 2. Deferred income tax assets 249 986 152 008 145 259 Other assets 1 262 604 285 547 471 635Total assets 66 185 384 61 445 212 60 150 495 Liabilities and Shareholders' equityLiabilities Amounts due to the Central Bank 1 838 971 1 950 710 2 054 190 Amounts due to other banks 4 322 283 1 993 601 2 081 439 Financial liabilities held for trading 501 116 545 930 85 860 Derivative financial instruments 568 706 607 689 736 257 Amounts due to customers 49 857 714 46 849 748 46 029 168 Debt securities in issue 12 17 17 Current income tax liabilities 93 828 4 427 114 081 Provisions for deferred income tax - - - Provisions 87 859 105 013 102 500 Other liabilities 1 247 895 1 191 819 1 348 746Total liabilities 58 518 384 53 248 954 52 552 258 Shareholders' equity Share capital 166 808 166 482 166 482 Profit for the year and retained 935 638 1 506 779 798 301 earnings Other capital and reserves 6 564 554 6 522 997 6 633 454Total Shareholders' equity 7 667 000 8 196 258 7 598 237Total liabilities and Shareholders' equity 66 185 384 61 445 212 60 150 495 Capital adequacy ratio 16,31 17,95 18,48 II IV II Quarters Quarters Quarters (current (previous (previous year) year) year) (in '000 PLN) from 1 Jan from 1 Jan from 1 Jan 2006 to 30 2005 to 31 2005 to 30 Jun 2006 Dec 2005 Jun 2005 I. Shareholders equity at the 8 196 258 7 896 096 7 903 625 beginning of the period a) adjustment related to IFRS/IAS - (192 460) (199 988) introduction I. Adjusted shareholders equity at the 8 196 258 7 703 636 7 703 637 beginning of the period 1. Share capital at the beginning of 166 482 166 482 166 482 the period a) Increase 326 - - - new shares issue 326 - - b) Decrease - - - 1.2. Share capital at the end of the 166 808 166 482 166 482 period 2. Retained earnings (loss) from 1 506 779 1 602 824 1 444 257 previous years at the beginning of the period a) adjustments related to IFRS/IAS - (192 460) (33 893) introduction 2. Adjusted retained earnings (loss) 1 506 779 1 410 364 1 410 364 from previous years at the beginning of the period a) Increase - - - b) Decrease (1 506 779)(1 343 001)(1 343 001) - appropriation to general banking (70 000) - - risk fund - appropriation to reserve capital (202 398) (277 518) (277 518) - dividends (1 234 381)(1 065 483)(1 065 483) 2. Retained earnings (loss) at the end - 67 363 67 363 of the period 3. Other capital at the beginning of 6 522 997 6 126 790 6 292 886 the period - adjustments related to IFRS/IAS - - (166 095) introduction 3.Adjusted other capital at the 6 522 997 6 126 790 6 126 791 beginning of the period a) Increase 310 509 396 693 506 704 - appropriation of net profit 272 398 277 518 277 518 - issue of shares under its' nominal 34 851 - - value - valuation of securities available - 107 282 226 355 for sale; in which: gains and losses from valuation of securities - 130 707 279 633 available for sale provision for deferred income tax - (23 425) (53 278) - valuation of management options 2 939 11 893 2 831 - foreign exchange differences on 321 - - branches abroad b) Decrease (268 952) (486) (41) - valuation of securities available (268 952) - - for sale; in which: gains and losses from valuation of securities (331 958) - - available for sale provision for deferred income tax 63 006 - - - foreign exchange differences on - (486) (41) branches abroad 3. Other capital at the end of the 6 564 554 6 522 997 6 633 454 period 4. Net profit 935 638 1 439 416 730 938 II. Shareholders' equity at the end of 7 667 000 8 196 258 7 598 237 the period CASH FLOW STATEMENT II Quarter II II Quarter II Quarters (current Quarters (previous cumulative year) cumulative year) (previous (current year) year) (in '000 PLN) from 1 from 1 Jan from 1 from 1 Jan April 2006 2006 to 30 April 2005 2005 to 30 to 30 June June 2006 to 30 June June 2005 2006 2005 A. Cash flow from operating activities - indirect method I. Net profit (loss) 582 221 935 638 371 364 730 938 Adjustments: 29 465 1 651 332 (1 259 331) (492 461) Depreciation 75 042 150 607 74 754 150 640 Foreign exchange differences 50 662 63 620 (98 599) (206 733) (Profit) loss on investing activities 8 015 (64 542) 39 369 (32 800) Impairment - - 6 630 6 630 Interest and dividend (391 631) (590 661) (293 465) (559 265) Change in loans and advances to banks (468 850)(1 169 398) (231 465) 59 930 Change in financial assets as held for (717 796) (38 936) (746 630) 318 859 trading and other financial instruments at fair value through profit or loss Change in derivative financial (138 946) (121 818) (78 903) (128 228) instruments Change in loans and advances to (473 674) (822 885) (883 471) (1 183 579) customers Change in investment securities 15 565 (37 492) (53 223) available for sale Change in deferred income tax assets (2 715) (34 972) (79 668) (48 723) Change in other assets (849 882) (989 186) 233 034 (21 410) Change in amounts due to banks 2 179 315 2 216 943 (574 554) 633 090 Change in liabilities as held for (702 059) (44 814) 85 860 (352 359) trading Change in derivative financial 44 925 (38 983) 196 983 112 574 instruments Change in amounts due to customers 1 366 526 3 007 966 965 482 168 804 Change in debt securities in issue - - (352) - Change in provisions (10 865) (17 154) 2 081 6 879 Change in other liabilities (1 275) 25 494 52 180 495 777 Income tax paid (39 821) (99 554) (84 010) (113 723) Current tax 102 479 219 040 192 905 254 399 Net cash from operating activities 611 686 2 586 970 (887 967) 238 477 B.Cash flows from investing activities Investing activity inflows 10 275 300 17 620 393 11 479 582 15 561 734 Sale of investment securities 9 899 971 17 127 285 11 205 639 15 185 935 Proceeds from sale of intangible 660 787 1 007 1 734 assets and tangible fixed assets Other investing inflows 374 669 492 321 272 936 374 065 Investing activity outflows (9 787 682)(18 692 599)(8 969 953)(14 055 666) Purchase of associates - - (25 000) (25 000) Purchase of investment securities (9 723 747)(18 606 583)(8 868 178)(13 928 219) Purchase of intangible assets and (63 935) (86 016) (77 103) (102 447) tangible fixed assets Other investing outflows - - 328 - Net cash used in investing activities 487 618 (1 072 206) 2 509 629 1 506 068 C. Cash flows from financing activities Financing activity inflows 8 114 35 176 17 17 Issue of debt securities - - 17 17 Issue of ordinary shares 8 114 35 176 - - Financing activity outflows (1 234 381)(1 234 386)(1 088 688)(1 088 688) Redemption of debt securities - (5) (22 479) (22 479) Dividends and other payments to (1 234 381)(1 234 381)(1 065 483)(1 065 483) shareholders Other financing outflows - - (726) (726) Net cash from financing activities (1 226 267)(1 199 210) (1 088 671)(1 088 671) D. Total net cash flow (A.III+/-B.III+ (126 963) 315 554 532 991 655 874 /-C.III) E. Net change in cash and cash (126 963) 315 554 532 991 655 874 equivalents F. Cash and cash equivalents at the 8 131 091 7 688 574 6 899 692 6 776 809 beginning of the period G. Cash and cash equivalents at the 8 004 128 8 004 128 7 432 683 7 432 683 end of the period (F+/- D) Selected financial statements translated into EUR: in PLN ths. in EUR ths. Position II Quarters II Quarters II Quarters II Quarters of 2006 of 2005 of 2006 of 2005Net interest income 1 143 882 1 132 078 293 288 277 436Net fee and commission income 928 876 747 615 238 161 183 217Operating profit 1 037 028 862 115 265 891 211 277Profit before income tax 1 073 016 884 264 275 118 216 705Net profit (loss) 865 208 725 393 221 837 177 771Net profit (loss) attributable to equity 864 992 727 296 221 782 178 237holders of the CompanyNet profit (loss) attributable to 216 (1 903) 55 (466)minority interestNet cash from operating activities 2 780 379 (104 388) 712 881 (25 582)Net cash used in investing activities (1 208 563) 1 434 226 (309 872) 351 483Net cash from financing activities (1 199 208) (1 088 686) (307 473) (266 802)Net increase / decrease in cash and cash 372 608 241 152 95 536 59 099equivalentsTotal assets 66 792 966 60 516 616 16 519 010 14 978 990Amounts due to the Central Bank 1 838 971 2 054 190 454 808 508 450Amounts due to other banks 4 484 353 2 081 117 1 109 055 515 115Amounts due to customers 49 866 024 45 993 771 12 332 696 11 384 315Minority interest 15 217 16 456 3 763 4 073Equity attributable to the Company's 7 806 799 7 708 279 1 930 751 1 907 943equity holdersShare capital 166 808 166 482 41 254 41 207Number of shares 166 808 257 166 481 687 166 808 257 166 481 687Book value per share ( in zl/EUR per 46,80 46,30 11,57 11,46share)Diluted book value per share (in zl/EUR 46,77 46,29 11,57 11,46per share)Earnings per 1 ordinary share (in zl/EUR 5,19 4,37 1,33 1,07per share)Diluted earnings per 1 ordinary share (in 5,18 4,37 1,33 1,07zl/EUR per share)Declared or paid dividend per share (in 7,40 6,40 1,84 1,42zl/EUR per share)Capital adequacy ratio 18,43 19,94 x xRisk weighted assets 34 289 023 31 314 360 x xCore funds 6 625 266 6 760 141 x xSupplementary funds (171 913) 216 537 x x 4 Additional information 4.1 The Group Bank Pekao S.A. Capital Group as at 30 June 2006 consists of Bank Pekao S.A asthe parent entity and 13 subsidiaries. The composition of the Group as at 30June 2006 in comparison to the structure presented as at 31st March 2006 haschanged. Change relates to two subsidiaries and results from the sale of 75% shares ofPekao Development Sp. z o.o to Pirelli & C Real Estate S.p.A. The transactiontook place on 3 April 2006. The effect of sale of 75% of shares of Pekao Development Sp. z. o.o was asfollows (PLN ths.): Value of net assets sold 62 085Gross gain on sale 14 665Sale price (cash inflow) 76 750 As a result of this transaction Bank's share in Pekao Development Spolka z o.o.has been reduced to 25% (name of the company has also changed to: Pirelli PekaoReal Estate Spolka z o.o.). Financial data of this company starting from thesecond quarter is presented in Group's consolidated report under the equitymethod and is reported among associated entities. Moreover, in the aftermath of Pekao Development Sp. z o.o. sale, Group's controlover Nowe Ogrody Sp. z o.o., being an ownership of Pekao Development, hasdiscontinued. The following entities are included in the consolidated financial report as at30 June 2006: No Name of company Core activity % of Status Consolidation shareholder's method share capital1. Bank Pekao S.A. banking - parent -2. UniCredit Bank Ltd. banking 100,00 subsidiary full (ex Bank Pekao (Ukraine) Ltd. )3. Centralny Dom brokerage 100,00 subsidiary full Maklerski Pekao S.A.4. Pekao Fundusz financial 100,00 subsidiary full Kapitalowy Sp. z o.o.5. Pekao Leasing Sp. z leasing 100,00 subsidiary full o.o.6. Pekao Faktoring Sp. z financial 100,00 subsidiary full o.o.7. Pekao Pioneer financial 65,00 subsidiary full Powszechne Towarzystwo Emerytalne S.A.8. Drukbank Sp. z o.o. no activities 100,00 subsidiary full performed9. Centrum Kart S.A. financial 100,00 subsidiary full10. Pekao Financial financial 100,00 subsidiary full Services Sp. z o.o.11. Pekao Access Sp. z consulting 55,26 subsidiary full o.o.12. BDK Consulting Sp. z consulting, 99,99 subsidiary full o.o. hotels, transportationThe companies listed below were not consolidated, due to the insignificant size oftheir operations in comparison to the size of the operations of the whole Group.Companies that were not consolidated, in the consolidated financial statements arerecognized at the cost of purchase.13. Fabryka Maszyn manufacturing 86,68 subsidiary non-consolidated w Janowie Lubelskim of spare parts Sp. z o.o. to building machinery14. Pekao Immobilier real estate 100,00 subsidiary non-consolidated s.a.r.l. managementOther 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. Companies that were not revalued, were recognized in theconsolidated financial report at the cost of purchase. Companies were not revalueddue to the immateriality of their financial results.1. Anica System S.A. IT 33,84 / 13,49 associate equity2. Central Poland Fund financial 53,19 associate equity LLC intermediary3. Xelion. Doradcy auxiliary, 50,00 associate equity Finansowi Sp. z o.o. financial and insurance4. Pioneer Pekao financial 49,00 associate equity Investment Management intermediary S.A.5. Pirelli Pekao Real real estate 25,00 associate equity Estate Sp. z o. o. management6. Krajowa Izba chamber of 22,96 associate equity Rozliczeniowa S.A. settlement7. Hotel Jan III Sobieski hotel 37,50 associate equity Sp. z o.o.8. Fabryka Sprzetu manufacturing 23,81 associate equity Okretowego of ship "Meblomor" S.A. equipment9. CPF Management mutual funds 40,00 associate not valuated management-dose under equity not operate method 4.2 Achievements of Bank Pekao S.A. Commercial activity The performance in the first half of 2006 was primarily the result of a furtherdevelopment in Bank's business activity. The key success factor was theincreased sales pace, particularly in consumer loans, PLN mortgage loans andmutual funds. In the first half of 2006, sales of the "Express Loan" ("Pozyczka Ekspresowa")were 32.4% higher than in the first half of 2005 with total sales reaching PLN911 million, of which PLN 548 million sold in the second quarter alone. In the first half of 2006, the sales of mortgage loans amounted to PLN 1,020million (28.7% higher compared to the first half of 2005) with PLN 615 millionof mortgage loans sold in the second quarter alone. The Bank continued itspolicy of offering PLN mortgage loans. The Pekao Group confirmed its leading position in the mutual funds market - atthe end of June 2006 market share of mutual funds managed by PPIM S.A. amountedto 26.2%. Key commercial indicators: 30.06.2006 31.12.2005 ChangeTotal number of PLN current accounts (in 3,026.1 3,019.2 6.9thousand) *of which packages 2,190,9 2,176.9 14.0Number of mortgage loans accounts (in 66.0 60.3 5,7thousand)Number of "Express Loans" accounts (in 239.8 166.6 73,2thousand)Number of mutual fund registers (in 742.4 665.3 77,1thousand)Payment cards (in thousand)** 2,695.6 2,673.8 21,8Credit 190.0 146.4 43,6Charge 240.1 269.2 (29,1)Debit (including Maestro) 2,265.5 2,258.2 7,3Total number of outlets (in items) 779 778 1Total number of ATMs (in items) 1,257 1,244 13 * number of accounts including accounts of pre-paid cards ** the number of cards is calculated according to the definition used byinternational payment organizations Visa and MasterCard 4.3 Achievements of subsidiaries 4.3.1 Pioneer Pekao TFI S.A. As at 30 June 2006, the net asset value of Pioneer Pekao TFI S.A., a companymanaged by Pioneer Pekao Investment Management S.A. (in which the Bank holds a49% share), amounted to PLN 20,222.5 million and was higher by PLN 985.0 millioncompared with the end of 2005. As at 30 June 2006, the Company had 877.0thousand open accounts (an increase by 8.9% during the first half of 2006). The net asset value of Pioneer Pekao TFI S.A. mutual funds is presented in thetable below: (PLN million) 30.06.2006 31.12.2005 Change Net assets value of Pioneer Pekao 20,222.5 19,237.5 985.0TFI- bond and money market funds 6,818.0 9,308.0 (2,490.0)- equity funds 3,028.4 1,586.5 1,441.9- balanced funds 10,376.1 8,343.0 2,033.1 4.3.2 Centralny Dom Maklerski Pekao S.A. (CDM) In the first half of 2006, CDM provided the full scope of services (permitted tobrokerage houses), excluding asset management. After 6 months of 2006, the Company achieved: - a 30.5% share in the bond trading volume at the Warsaw StockExchange, - a 13.1% share in the stock trading volume at the Warsaw StockExchange, - a 7.9% share in the futures trading volume at the Warsaw StockExchange. At the end of June 2006, CDM maintained 139.3 thousand investment accounts andits market share was 15.9%. CDM offered also 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 atthe end of June 2006, CDM maintained 16.8 thousand on-line accounts, i.e. a 1.5thousand increase in comparison to December 2005. 4.4 Results achieved in the first half of 2006 and the factors whichinfluenced these results 4.4.1 Results of the Group In the second quarter of 2006 the Group achieved another quarterly record of netprofit which amounted to PLN 446.9 million. Net profit of the Group in the first half of 2006 amounted to PLN 865.2 million,i.e. 19.3% higher than in the first half of 2005. The increase in the net profit was possible thanks to increased businessactivity which translated into higher income, particularly fee and commissionincome, with stable operating costs and lower cost of risk. Good results of Bank Pekao S.A. were accompanied by positive results of theGroup's companies. The consolidated profit and loss account for the first half of 2006 and 2005 ispresented below: (PLN million) I H 2006 I H 2005 ChangeNet interest income * 1,150.5 1,126.6 2.1%Fee and commission income 928.9 747.6 24.3%Dividend income 1.6 0.0 xTrading income 76.3 92.5 (17.5%)FX income 120.2 146.5 (18.0%)Other operating income / cost net 35.3 31.0 13.9%Total income 2,312.8 2,144.2 7.9%Overhead costs (including depreciation) (1,166.0) (1,153.5) 1.1%Personnel (606.2) (595.2) 1.8%Non-personnel (401.4) (397.0) 1.1%Depreciation (158.3) (161.3) (1.9%)Operating income 1,146.8 990.7 15.8%Impairment losses on loans and advances (109.8) (128.6) (14.6%)Share in net profit (loss) of the 36.0 22.2 62.2%associatesPre-tax profit 1,073.0 884.3 21.3%Tax charge (207.8) (158.9) 30.8%Net profit 865.2 725.4 19.3%Attributable to equity holders of the 865.0 727.3 18.9%CompanyAttributable to minority interest 0.2 (1.9) x * including income on SWAP transactions. The Group's income In the first half of 2006, the Group's income amounted to PLN 2,312.8 millionand was by PLN 168.6 million (7.9%) higher than in the comparable period of theprevious year. The growth in income was due to the development of business activity, supportedby pro-sales activities relating to the key products of both the Bank and theother Group companies. The main growth factors included fee and commissionincome as well as interest income. Fee and commission income increased by 24.3% primarily thanks to commissions oninvestment products and loans. Interest income grew by 2.1%, among others, as a result of improving asset mixwhich was driven by increasing share of loans. This contributed to offsettingthe impact of declining interest rates in the market. The Group's overhead costs (including depreciation) Overhead costs (including depreciation) in the first half of 2006 remained undercontrol and amounted to PLN 1,166.0 million, i.e. were 1.1% higher compared withthe previous year. In the first half of 2006, the Group's cost / income ratio amounted to 50.4% andwas by 3.4 p.p. lower than in the previous year. As at the end of June 2006, the Bank had 14,742 employees (a reduction of 76employees compared with the end of 2005), and the Group had 15,891 employees (51employees less than at the end of 2005, which includes the decrease inemployment due to divestment of Pekao Development). Impairment losses on loans and advances In the first half of 2006, impairment losses on loans and advances amounted toPLN 109.8 million and were by 14.6% lower than in the previous year. Thisresulted primarily from the effective credit risk management and improvedmacroeconomic situation. The ratio of impaired receivables to total receivables(1) decreased from 15.6% at the end of 2005 to 14.8% at the end of June 2006 asa result of an increase in the volume of not impaired receivables and a decreasein the volume of impaired receivables. Loans In the first half of 2006, the gross loans portfolio grew by PLN 993.4 million,i.e. by 3.0%. This growth was driven by: - the growth in the volume of corporate loans of PLN 313.2 million (by1.2%); - the growth in the volume of retail loans of PLN 680.2 million (by 8.3%). (PLN million) 30.06.2006 31.12.2005Gross loans (principal) 34,228.6 33,235.2corporate (principal) 25,371.4 25,058.2retail (principal) 8,857.2 8,177.0 Savings Savings of the Group's clients increased by PLN 2,578.7 million i.e. by 4.0% inthe first half of 2006 resulting from an increase both in the savings ofindividual clients and in corporate deposits. The savings of retail clients increased by PLN 1,032.1 million in the first halfof 2006 as a result of increase in deposits (by PLN 47.1 million) and in mutualfunds (by PLN 985.0 million). Due to unfavourable situation on the stockexchange in the second quarter, which resulted in negative valuation of mutualfunds (PLN -263 million), funds in the second quarter decreased by PLN 116.7million. At the end of June 2006 total retail savings reached the PLN 46 billion levelconfirming Group's significant market share. Corporate deposits increased by PLN 1,546.6 million in the first half of 2006. (PLN million) 30.06.2006 31.12.2005Deposits (principal) 47,607.4 46,013.7corporate (principal) 21,666.2 20,119.6retail (principal) 25,941.2 25,894.1Pioneer Pekao TFI mutual funds 20,222.5 19,237.5incl. distributed through the 18,868.4 18,009.2Group's networkTotal savings 67,829.9 65,251.2incl. retail 46,163.7 45,131.6 4.4.2 The structure of the net profit The structure of the net profit of the Group is shown in the following table: (PLN million) I H 2006 I H 2005Net profit of Bank Pekao S.A. 935.6 730.9Net profit (loss) of entities consolidated 105.9 72.6under full methodCentralny Dom Maklerski Pekao S.A. 75.5 43.7Pekao Development Sp. z o.o. * 6.5 10.5Pekao Leasing Sp. z o.o./Leasing Fabryczny 6.4 1.9Sp. z o.o.Pekao Financial Services Sp. z o.o. 4.9 6.6Pekao Faktoring Sp. z o.o. 4.8 4.0Pekao Pioneer PTE S.A. 4.0 2.7Centrum Kart S.A. 1.7 1.1Pekao Fundusz Kapitalowy Sp. z o.o.** 1.4 0.8Pekao Access Sp. z o.o. 0.8 0.3Drukbank Sp. z o.o. 0.0 1.0UniCredit Bank Ltd. / Bank Pekao (Ukraine) (0.1) 0.0Ltd. in Luck***Net profit (loss) of entities valued under 35.2 21.8equity methodPioneer Pekao Investment Management S.A. 43.5 25.4Krajowa Izba Rozliczeniowa S.A. 2.6 3.0Central Poland Fund LLC 0.0 (0.7)Xelion. Doradcy Finansowi Sp. z o.o. (5.4) (5.9)Pirelli Pekao Real Estate Sp. z o.o. **** (5.5) -Grupa Inwestycyjna Nywig S.A. - 0.0Exclusions and consolidation adjustments**** (211.5) (99.9)*Net profit (loss) of the Group 865.2 725.4 * equity valuation of the subsidiary since the II quarter 2006 due to sale of75% of shares which took place on 3 April 2006. Net profit presented equals toI quarter 2006 result, ** the result of the company includes the valuation of associates based onequity method, *** change in the name of the company, **** Bank's share in net result for II quarter 2006, ***** include transactions within the Group, including dividends fromsubsidiaries and associates. The results of Bank Pekao S.A. The main items from the profit and loss account of the Bank are as follows: (PLN million) I H 2006 I H 2005 Change Net interest income* 1,106.3 1,074.0 3.0%Non-interest income 1,189.4 993.3 19.7%Total income 2,295.7 2,067.3 11.1%Overhead costs (including depreciation) (1,075.1) (1,068.3) 0.6%Operating income 1,220.6 999.0 22.2%Impairment losses on loans and advances (100.9) (126.6) (20.3%)Pre-tax profit 1,119.7 872.4 28.3%Net profit 935.6 730.9 28.0% * including income on SWAP operations The main items of the Bank's balance sheet at the end of June 2006 in comparisonwith the end of 2005 are as follows: 30.06.2006 31.12.2005 Change Total gross loans in PLN million* 33,551.3 32,748.7 2.5%Impaired receivables to total receivables 14.0 14.7 (0.7 p.p.)in %Total deposits in PLN million* 47,602.8 46,062.3 3.3%Total assets in PLN mil. 66,185.4 61,445.2 7.7%Mutual funds sold in Bank's network in PLN 16,629.3 15,539.0 7.0%millionCapital adequacy ratio in % 16.3 18.0 (1.7 p.p.) * the nominal value 4.5 Segment reporting Segment reporting of the Pekao Group covers following areas: - Retail banking area - full-range of banking activity related toretail clients and small and micro companies with annual turnover not exceedingPLN 10 million, and also income of companies consolidated under the full methodand assigned to retail activity, - Corporate banking area - full-range of banking activity related tomedium and large companies, and also income of companies consolidated under thefull method and assigned to corporate activity, - Treasury and Investment activities area - Bank's involvement oninter-bank market, in debt securities and capital investments in companies,which are not a part of other segments, and also income of companiesconsolidated under the full method and assigned to this activity. Information on main segments' results for the first half of 2006: (PLN million) Retail Corporate Treasury and Total banking Investment banking area area banking areaInterest income 715.7 219.5 208.6 1,143.8Non-interest income 884.1 222.5 62.4 1,169.0Total income 1,599.8 442.0 271.0 2,312.8 Information on main segments' results for the first half of 2005*: (PLN million) Retail Corporate Treasury and Total banking investment banking area area banking areaInterest income 712.4 249.1 170.6 1,132.1Non-interest income 707.0 234.9 70.2 1,012.1Total income 1,419.4 484.0 240.8 2,144.2 * data comparable with the first half of 2006, different than published forfirst half of 2005 due to changes in methodology for allocation of revenues bysegment. 4.6 Adjustments for provisions, deferred tax provision and assets (PLN million) Group Bank Pekao S.A. 30.06.2006 31.12.2005 30.06.2006 31.12.2005Total provisions 90.1 108.7 87.9 105.0of which:provisions for off-balance 12.7 20.3 12.6 20.3sheet liabilitiesprovisions for liabilities to 61.5 66.0 60.4 65.0employeesother provisions 15.9 22.4 14.9 19.7Provision for deferred tax 0.0 0.0 0.0 0.0Deferred tax assets 277.1 181.3 250.0 152.0 4.7 Write-offs for revaluation of assets (PLN million) Group Bank Pekao S.A. I H 2006 I H 2005 I H 2006 I H 2005Total (109.8) (128.6) (100.9) (126,6)for loan receivables (117.5) (122.5) (108.6) (120,4)for off-balance sheet 7.7 (6.1) 7.7 (6,2)liabilitiesfor financial assets 0.0 0.0 0.0 0.0 4.8 Information on contingent assets and liabilities CONSOLIDATED OFF-BALANCE SHEET ITEMS (inPLN ths.) 30.06.2006 31.12.2005Contingent liabilities granted and 20 361 784 15 994 786receivedLiabilities granted: 16 183 880 12 404 368financial 14 192 107 10 990 273guarantees 1 991 773 1 414 095Liabilities received: 4 177 904 3 590 418financial 1 267 445 457 353guarantees 2 910 459 3 133 065Financial derivatives 94 487 702 65 182 224currency transactions 37 439 901 25 795 810Interest rate transactions 49 685 533 38 548 574securities transactions 7 362 268 837 840Other 7 066 428 6 615 255TOTAL OFF-BALANCE SHEET ITEMS 121 915 914 87 792 265 (PLN ths.) 4.9 Post balance sheet events No significant events occurred after the balance sheet date which were notreflected in the financial statements. 4.10 Divestment to Pirelli RE of a 75% stake in the share capital of PekaoDevelopment On 3 April 2006, Bank Pekao S.A. divested of to Pirelli & C Real Estate S.p.A.26,572 shares of Pekao Development Sp. z o.o. (Bank's subsidiary) representingthe total par value of PLN 26,572,000, comprising a 75% stake in the Company'sshare capital, and carrying 75% of votes in the General Meeting of PekaoDevelopment Sp. z o.o. The net book value of sold shares on the balance sheet ofBank Polska Kasa Opieki S.A. is equal to their total par value. As a result of this transaction Pirelli Pekao Real Estate Sp. z o.o. was foundedin which Bank Polska Kasa Opieki S.A. currently holds 8,858 shares representingthe total value of PLN 8,858,000, comprising a 25% stake in the share capital ofthis company and carrying 25% of votes in the General Meeting of Shareholders. 4.11 Appointment of Members of the Supervisory Board of Bank Pekao S.A. fornew common term of office On 4 May 2006, the Ordinary General Meeting of Bank Pekao S.A. appointed Membersof the Supervisory Board of Bank Pekao S.A. for the period of common term ofoffice of the Supervisory Board, lasting three years, which will began on 5 May2006. The Supervisory Board was constituted on the meeting held on 5 June 2006 with: Mr. Jerzy Woznicki as Chairman of the Supervisory Board, Mr. Paolo Fiorentino as Deputy Chairman, Secretary of the Supervisory Board, Mr. Andrea Moneta as Deputy Chairman of the Supervisory Board, Mr. Pawel Dangel as a Member of the Supervisory Board, Mr. Fausto Galmarini as a Member of the Supervisory Board, Mr. Oliver Greene as a Member of the Supervisory Board, Mr. Enrico Pavoni as a Member of the Supervisory Board, Mr. Leszek Pawlowicz as a Member of the Supervisory Board, Mr. Jerzy Starak as a Member of the Supervisory Board. 4.12 Share capital increase of Bank Pekao S.A. The share capital of the Bank was increased: - on 16 January 2006 by the total amount of PLN 186,755, - on 6 February 2006 by PLN 5,169, - on 24 March 2006 by PLN 58,564, - on 29 March 2006 by PLN 1,145, and - on 21 April 2006 by PLN 74,937, as a result of issue of total 326,570 series F ordinary bearer shares. The sharecapital of the Bank amounts currently to PLN 166,808,257 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, - 326,570 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 166,808,257. The increase was conducted as a result ofregistration on buyers accounts of 326,570 series F ordinary bearer sharesissued within the conditional share capital increase on the base of ResolutionNo. 7 of the Extraordinary General Shareholders Meeting of the Bank conducted on25 July 2003 on contingent increase of the statutory capital, exclusion of thepre-emptive rights on the series F and G shares of the Bank and amendment to theStatute of the Bank. 4.13 Plaintiff to the court to repeal resolutions of Bank's GSM On 22 June 2006 Bank Pekao S.A. received from Bank's shareholder, who on theAnnual General Meeting of the Bank on 4 May 2006 represented 50 votes, aplaintiff to the court to make invalid resolutions No. 12 and 13 of the AGM ofthe Bank of 4th May 2006 and to repeal resolutions No. 4-8 and 11 of the AGM of4 May 2006. In the Bank's opinion the whole plaintiff is groundless. 4.14 Seasonality or cyclical nature of the Bank's activity The demand for the financial services offered by the Bank is stable, and so theimpact of seasonal changes is immaterial. Due to the nature of the Bank'sactivity, it is not subject to seasonal or cyclical changes. 4.15 Issuance, redemption and repayment of debt securities Issuance of registered bonds with pre-emptive rights to take up the Bank's F andG shares The Bank issued 415 thousand registered A series bonds and 415 thousandregistered B series bonds with pre-emptive rights to take up the Bank's F seriesshares, and 415 thousand registered C series bonds and 415 thousand registered Dseries bonds with pre-emptive rights to take up the Bank's G series shares. 1,660 of the Bank's registered bonds were allocated to Pekao Faktoring (theBank's subsidiary) acting as the Trustee, and registered in the Bonds Registerof Centralny Dom Maklerski Banku Pekao S.A. The Bonds were issued on the basis of Resolution No. 6 of the Bank'sExtraordinary General Meeting dated 25 July 2003 on the issue of registeredbonds under an incentive programme. Each Bond entitles to take up 1 ordinary bearer share of the Bank: 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. The Bank acquired 88,430 registered series A bonds from Pekao Faktoring Sp. zo.o., for the purpose of redemption, and the total of 326,570 series A bondsfrom eligible persons, upon the request thereof for early redemption, pursuantto the implementation of the right of priority to take up the Bank's sharesensuing from the bonds, for the purpose of redemption thereof. As at the day of submitting this report, all the pre-emptive rights to take up Fseries shares pursuant to the implementation of the right of priority ensuingfrom the A series bonds were executed. B series bonds are available for purchase from the Trustee by the eligiblepersons until 30 December 2006. Bonds of the other series will be available for purchase from the Trustee by theeligible persons in the following periods: - C series bonds in the period from the 31st day after the date of theGeneral Shareholders' Meeting, approving financial statements for the financialyear 2006 until 30 December 2007. - D series bonds in the period from the 31st day after the date of theGeneral Shareholders' Meeting, approving financial statements for the financialyear 2007 until 30 December 2008. All Bonds which are not sold off by the Trustee by 30 December 2006, 2007 and2008 respectively shall be acquired by the Bank on 31 December 2006, 2007 and2008 respectively to be redeemed at their nominal value. The execution of the pre-emptive rights to take up F and G series shares can beexercised in the following periods: - in respect of B series bonds - from 1 January 2007 to 31 December 2010, - in respect of C series bonds - from 1 January 2008 to 31 December 2012, - in respect of D series bonds - from 1 January 2009 to 31 December 2012. 4.16 Dividend paid Pursuant to Resolution No. 8 of the General Meeting of Bank Pekao S.A., PLN 7.40per one share was appropriated for the payment of dividend for 2005, i.e. 15.6%higher compared to the dividend for 2004 (PLN 6.40 per one share). Theex-dividend date was determined at 19 May 2006 and the date of dividend paymentat 2 June 2006. All the Bank's shares are ordinary shares. 4.17 Effects of changes in the Group's structure Effects of changes in the Group's structure are discussed in point 4.1. 4.18 The position of the Management Board regarding the possibility ofachieving previously published forecasts The Bank has not published the forecast of financial results for 2006. 4.19 The information about the shareholders owning at least 5% of the totalnumber of votes at the General Meeting of Bank Pekao S.A. The shareholders of Bank Pekao S.A. owning directly or indirectly through theirsubsidiaries at least 5% of the total number of voting rights at the GeneralMeeting of Bank Pekao S.A. are as follows: Shareholder's name # of Share in share # of Share in share shares and capital and total shares and capital and total votes at number of votes at votes at number of votes at the the General the the General General Meeting General Meeting Meeting Meeting 30 June 2006 31 December 2005UniCredito Italiano 88,121,725 52.83% 88,121,725 52.93%S.p.A.Other shareholders 78,686,532 47,17% 78,359,962 47.07%Total 166,808,257 100,00% 166,481,687 100.00% In the first half of 2006 share capital of the Bank was increased by the totalamount of PLN 326,570 as a result of issue of series F ordinary bearer shares. According to the information known by the Bank, as at the date of submittingthis report no significant changes were made in the shareholding structure. 4.20 The Issuer's shares held by the Management and Supervisory Boardmembers According to the Bank's knowledge, as at the date of submitting this report themembers of the Bank's management and supervisory bodies held 72,513 shares ofBank Pekao S.A. All these shares were held by members of the Bank's management. The Bank Pekao S.A. Capital Group is running an incentive programme in the formof management stock options. The Programme covers the Management Board of theBank, the remaining managerial staff, key employees for realisation of Bank'sstrategy, as well as employees of subsidiaries. The incentive programme for 2003 covers 39 people on the day of conveying thereport, with a total of 294,841 shares, 126,635 of which will be available forthe management. The incentive programme for 2004 includes 44 persons for a total 691,921 shares,391,348 of which will be able to be purchased by the management. The change in the number of shares in the incentive programme for 2003 inrelation to the amount in the annual report for 2005 stems from enacting thepriority principle in Bank's shares acquisition resulting from bonds. Therefore,41 persons effectively acquired a total of 326,570 shares. The Bank has beeninformed that 33 persons participating in the programme have sold 202,367shares since the beginning of 2006. 4.21 Pending litigations In the second quarter of 2006 the number of the legal proceedings in courts,appropriate bodies of arbitration or public administration bodies, concerningthe liabilities of the Group was 424. The total value of them was PLN 745.3million. The number of legal proceedings concerning the receivables was 3.155 attotal value of PLN 898.6 million. The legal proceedings involving the largest amounts in receivables groupinclude: - The action brought by Bank Pekao S.A., Paris branch against LA HUPPEregarding the vindication of the loan receivables. The value of the subject oflitigation amounts to EUR 23.6 million. The proceedings were instituted onDecember 23, 1998. - The action in the course of proceedings brought by Pekao Leasing Sp.z o.o. against Salomon Industries S.A. The value of the subject of litigationamounts to PLN 67.4 million. The proceedings were instituted on December 15,2003. - The action in the course of proceedings brought by Pekao Leasing Sp.z o.o. against Royal Grant S.A. The value of the subject of litigation amountsto PLN 53.5 million. The proceedings were instituted on December 15, 2003. According to the issuer's opinion any single proceeding that was in progress incourts, appropriate bodies of arbitration or public administration bodies in thesecond quarter of 2006, as well as all the proceedings together do not createany threat to financial liquidity of the Bank. 4.22 Information about integration of Bank Polska Kasa Opieki S.A. (PekaoS.A.) and Bank Przemyslowo - Handlowy S.A. (BPH S.A.) On the 5th April 2006 the Banking Supervision Commission approved UniCreditoItaliano S.p.A. (UniCredito) exercising its voting rights at Bank BPH S.A.General Shareholders Meeting. On 22nd May 2006 the Program for the integration of Bank Pekao S.A. and Bank BPHS.A. has been launched. The first phase has been focused on the preliminaryselection of assets to be disposed in line with the Agreement between UniCreditoand Ministry of Treasury of 19th April 2006, and comparison of the businessmodels of the two banks. So far 14 taskforces focusing on business and functional areas, and coordinatedby Program Management Office, have been launched involving circa 300 people inboth banks. The overall process is supervised by Steering Committee with members fromUniCredito, BPH S.A. and Pekao S.A. 4.23 Transactions of related entities In the first half of 2006, the Bank and its subsidiaries have not concluded anytransactions with related entities other than typical and routine transactionswhose aggregate value exceeded the equivalent of EUR 500 thousand. 4.24 Loan or credit sureties and guarantees given In the first half of 2006, the Bank and its subsidiaries did not give anysureties or guarantees in respect of loans or advances to any single entity or asubsidiary of that entity, as a result of which the total value of the existingsureties and guarantees would equal 10% of the Bank's equity. 4.25 Factors which will affect the results of at least the next quarter Bank Pekao S.A. and its subsidiaries mainly run their business on the territoryof Poland which therefore makes Bank's results dependent on economic developmentof the country and economic trends. Polish economy expands at high rate due to effects accomplished in the past fewyears in significant growth in work efficiency which led to improvingcompetitiveness of polish companies and keeping high growth rate of export.Domestic demand has also clearly improved. It is expected that positive trendsobserved in economy development will continue in the next quarters. Acceleration of economic growth rate, high prices of energy raw materials andinfluence of drought on food prices will have impact on gradual inflationincrease from currently low base. Additionally central banks of the worldbiggest economies continue the process of strict monetary policy. Thereforeinterest rates in Poland can be expected to become stable in current year. Fast economic growth makes favourable conditions for banks activities progress.Gradual acceleration of growth rate in retail and corporate customers loans andin the level of retail savings is observed. Improvement in corporate financialsituation as well as continuation in declining unemployment decrease the costsof credit risk. It is expected that all above trends will continue in the nextquarters. -------------------------- (1) loan receivables without buy-sell-back transactions and not quotedsecurities, measured at amortized cost, using effective interest rate This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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