Important factors influencing the Group’s activities and results

Activities of the Bank Pekao S.A. Capital Group in 2023 was mainly determined by the macroeconomic situation in the country and abroad. The economies of Poland, as well as those of its key European trading partners, felt the effects of the war in Ukraine, which began in 2022. The GDP growth rate in Poland slowed down significantly to +0.2% in 2023 compared to 5.3% achieved in 2022. Throughout last year, the Polish economy experienced a falling inflation rate, which, however, remained systematically at elevated levels, reaching in December +6.2%. Interest rates in key Western economies were systematically raised in the first half of the year and remained at high levels until the end of 2023. The Monetary Policy Council maintained elevated interest rates for most of the year, making two reductions at the end of the year (the reference rate was lowered from 6.75% to 5.75%).

The low economic growth rate in Poland last year translated into low demand for loans. This was particularly visible in the corporate segment, where the annual dynamics of loan volumes was negative. Geopolitical uncertainty and the slowdown in key trading partners (especially Germany) forced enterprises to postpone larger investment plans, limiting the demand for investment loans. Inventory accumulated by enterprises in 2022 and weakening demand in 2023 also reduced the interest of companies in working capital loans. The situation was slightly better in the retail segment. PLN mortgage loans recorded an increase, which resulted mainly from the introduction of the government program „Safe 2% Credit”. This program curbed the mortgage market in the second half of 2023. Positive dynamics were also visible in the area of consumer loans. Throughout 2023, the unemployment rate in Poland remained low and the financial situation of consumers remained stable, contributing to the good economic situation in this area.

Deposits in the banking sector, both in the retail and corporate segments, grew at a moderate pace last year. The environment of high interest rates and a more favorable deposit offer from banks than in previous years encouraged customers to allocate a larger part of their savings on term deposits. However, the pace of transfer of funds from current to term deposits turned out to be much slower than expected at the beginning of the year

Despite the slowing economy and, consequently, decreasing customer activity, banks improved their commission income in 2023. Commissions related to asset management and brokerage services were particularly positive, and they increased significantly last year due to the improving situation on the capital market.

Strong inflationary pressure in the economy translated into a significant increase in banks’ operating costs. Wages and other operating costs increased significantly, which were partially compensated by banks through the continuation of employment restructuring programs and reducing the number of branches. Bank Pekao also continued to optimize its branch network.

Last year, there was a strong decline in regulatory costs in the banking sector. In 2022, due to the economic effects of the war in Ukraine, the government introduced significant additional burdens on banks (credit holidays, additional payments to the Borrower Support Fund, Commercial Bank Protection System). These costs did not occur last year, contributing to a significant improvement in the sector’s results. Additionally, thanks to participation in the Commercial Bank Protection System, banks paid lower contributions to the Bank Guarantee Fund in 2023.

The costs of risk in the banking sector increased significantly in 2023, mainly due to growing provisions related to mortgage loans in CHF. Court decisions remained unfavorable for the sector, and the number of lawsuits from customers increased significantly. It has not been possible to develop a systemic solution to this problem. Banks were forced to add new provisions for this purpose, which significantly affected the profitability of the sector. This situation only slightly affected Bank Pekao, which created significant provisions for the CHF portfolio already in 2022. Other risk costs remained at a stable, relatively low level for most of the year.

In 2023, banks continued operational and digital transformation processes, the importance of customer service in remote channels increased, and many banking processes were digitized. New technical solutions were introduced and the functionalities of banking applications were expanded. These phenomena were accompanied by a reduction in stationary branches.

For Bank Pekao and Bank Pekao Group, as at 31 December, 2023, the minimum total capital ratio was 11.5%, the Tier 1 capital ratio was 9.5% and the Common Equity Tier 1 capital ratio was 8.0%.

On March 20, 2023, Bank Pekao S.A. received an individual recommendation from the Polish Financial Supervision Authority regarding the Bank’s dividend policy. As at December 31, 2022, Bank Pekao S.A., in terms of the basic criteria specified in the position of the Polish Financial Supervision Authority of December 6, 2022 on the dividend policy of commercial banks in 2023, and taking into account the quality of the Bank’s loan portfolio, measured by the share of non-performing receivables in the total portfolio of receivables from the non-financial sector, including debt instruments, met the requirements qualifying for the payment of up to 75% of the dividend from the Bank’s profit earned in the period January 1, 2022 – December 31, 2022. In addition, the KNF recommended Bank Pekao S.A. not taking, without prior consultation with the supervisory authority, other actions, in particular those outside the scope of current business and operating activities, which may result in a decrease in own funds, including possible dividend payments from undistributed profit from previous years and share buybacks. Based on the above recommendation and the resolution of the Ordinary General Meeting of Bank Pekao S.A. of June 6, 2023 on the distribution of profit of Bank Pekao S.A. for 2022, Bank Pekao S.A. paid a dividend of 74.9% of standalone net profit (82.8% of consolidated profit).

On 14 December, 2023 Bank received a recommendation from the Polish Financial Supervision Authority in which the PFSA recommended the Bank to limit the risk occurring in the Bank’s operations by maintaining own funds to cover the additional capital add-on in order to absorb potential losses resulting from the occurrence of stress conditions (P2G) at the level of 0.50 p.p. on standalone basis and 0.49 p.p. on consolidated basis above the value of each of the own funds requirements referred to in Art. 92 section 1 letter a-c of the regulation (EU) No. 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions increased by the additional own funds requirement referred to in Article 138(2)(2) of the Banking Law and by the combined buffer requirement referred to in Article 55(4) of the Act on macro prudential oversight. The additional capital requirement should be made up of Tier 1 funds only.

¹ The countercyclical buffer calculated as at 31 December, 2023 was 0.0X% for Bank Pekao S.A. and 0.0X% for Capital Group
² Due to the published Regulation of the Minister of Finance, the systemic risk buffer was repealed on March 19, 2020.

The buffer value effective until that date was 3% of the total risk exposure amount for all exposures located only in the territory of the Republic of Poland.

The additional capital requirement should be made up of Tier 1 funds only.

³ Pillar II Requirement (P2R), which is an additional regulatory capital requirement

The criteria specified in points 1 and 2 should be met by the bank both at the individual and consolidated level, as at the end of 2023 and on the date of the decision by the General Meeting of Shareholders on the payment of dividend.

The maximum level of dividend that can be paid from the profit earned in 2023 is limited to 75% due to the expected strengthening of the capital base in order to absorb the possible materialization of risks accumulated in the environment of the Polish banking sector.

On 7 February, 2024 Bank received a letter from Polish Financial Supervision Authority in which PFSA indicated that after analyzing the current financial, economic and capital of the Bank as well as the arguments and additional explanations presented by the Bank, PFSA does not raise any objections to the possibility of paying, in 2024, the undistributed profit in the amount of PLN 1,685,057,618.28 retained by the Bank for 2019 in the form of a dividend.

The final decision on the distribution of the profit for 2023 and its allocation to the payment of dividends will be made by the General Meeting of Shareholders.