37. Provisions

The provisions are recognized when the Group has a present obligation (legal or constructive) resulting from the past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

If the effect of the time value of money is material, the amount of a provision is established by discounting forecasted future cash flows to the present value, using the discount rate reflecting current market estimates of the time value of money and the possible risk associated with the obligation.

The provisions include provisions for litigation and claims (in this provision for legal risk regarding foreign currency mortgage loans in CHF and provision for early repayments of consumer loans), provisions relating to long-term employee benefits, in this those measured by an actuary and provisions for restructuring costs. The provision for restructuring costs is recognized when the general recognition criteria for provisions and detailed criteria for recognition of provisions for restructuring cost under IAS 37 ‘Provisions, contingent liabilities and contingent assets’ are met. The amount of employment restructuring provision is calculated by the Group on the basis of the best available estimates of direct outlays resulting from restructuring activities, which are not connected with the Group’s current activities.

The provisions are charged to the income statement, except for actuarial gains and losses from the measurement of the defined benefit plans obligations, which are recognized in other comprehensive income.

Changes in provisions in the reporting period

Provisions for litigation and claims include court, administrative and other legal proceedings. Provisions for litigation and claims were estimated in the amount of expected outflow of resources embodying economic benefits.

Provisions for litigation and claims also include the part of total provision created for legal risk related to foreign currency mortgage loans in CHF, in part relating to exposures already repaid (fully or partially). Details about the above provisions are presented in Note 47.3.

An issue related to the judgment of the Court of Justice of the European Union regarding consumer credit agreements

On 11 September 2019, the Court of Justice of the European Union (hereinafter the ‘CJEU’) issued a judgment in Case C-383/18 concerning preliminary questions regarding the consumer’s right to reduce the total cost of loan in the event of early repayment of consumer loan.

The Group analyzed the legal risk resulting from the above judgment and in accordance with IAS 37 ‘Provisions, contingent liabilities and contingent assets,’ assessed the probability of cash outflow as a refund of commission in connection with early repayment of loans made by borrowers before the abovementioned judgment of the CJEU.

For the purpose of estimating the aforementioned provision, the Group performed an analysis of data on early repayment of loans and complaints. As a result of the above, the Group has determined a matrix of probability of repayment depending on the amount of commission to be repaid and the period when the earlier repayment was made. The assumed level of complaints is 22%.

As at 311 December 2021 the provision regarding early repayment of consumer loans made before the judgment of the CJEU (i.e. before 11 September 2019) amounts to PLN 16.1 million (as at 31 December 2020 – PLN 19.7 million) and includes an increase in the provision in the amount of PLN 13.5 million during the year 2021.

The estimates required the Group to adopt expert assumptions and are associated with uncertainty. The Group monitors the validity of all assumptions adopted in the process of creating the above provision on an ongoing basis.

In connection with the above, the Group performed a sensitivity analysis with regard to the significant parameters of the provision, where a change in the level of these parameters would have the following impact on the amount of the provision:

In the case of early repayment of loans made by borrowers after the judgment of the CJEU (i.e. after 11 September 2019), the Group automatically reduces the borrower’s total cost of loan and returns the funds to the customer.

In addition, with respect to balance sheet exposures as at 31 Decembr 2021, the Group estimated possible future prepayments of these exposures. In accordance with the above, the Group recognized the amount of PLN 13.8 million in ‘Other liabilities’ (as at 31 December 2020 – PLN 10 million).

The Management Board of Bank Pekao S.A. informed in the current report No. 8/2021 that on 3 March 2021, in accordance with the Act of 13 March 2003 on special rules of terminating employment contracts for reasons not attributable to the employees, adopted a resolution on the intended collective redundancies and the start of the consultation procedure for collective redundancies.

The Bank estimated all the costs of termination of employment contracts and amendment of terms and conditions of employment the Bank’s employees related to the collective redundancies for the amount of PLN 120 million and the restructuring provision in this amount was created in the Bank’s accounting books. The balance of the restructuring provision as at 31 December 2021 relates to payments made in 2022.

Provisions for defined benefits plans consist of provisions for retirement benefits and death-in-service benefits. The present value of such obligations is measured by an independent actuary using the projected unit credit method.

Other provisions include in particular provisions for other employee benefits.