36. Provisions

[Financial notes are presented in PLN thousand]

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.

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 include the following titles:

1) provision for early repayment of consumer loans

As a result of the judgment of the Court of Justice of the European Union (hereinafter the ,CJEU,) 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 repayments is 25% of the entire population covered by the above-mentioned event (22% in 2021).

As at 31 December 2022 the provision regarding early repayment of consumer loans made before the judgment of the CJEU (i.e. before 11 September 2019) amounts to PLN 13.2 million (as at 31 December 2021 – PLN 16.1 million) and includes an increase in the provision in the amount of PLN 7.5 million during the year 2022.

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.

2) provision for early repayment of mortgage loans

The Group also reimburses its customers a part of the mortgage loan costs incurred, in the event of early full and partial repayment of the mortgage loan resulting in a shortening of the loan period, granted to consumers under a loan agreement concluded from 22 July 2017 (date of entry into force of the Act on Mortgage Loans and Supervision of Mortgage Brokers and Agents).

As at 31 December 2022, the balance of the provision created for this purpose is PLN 22.1 million.

3) provision for legal risk related to foreign currency mortgage loans in CHF

As presented in the Note 46.3, the Bank recognizes in the item Provisions the part of the provision attributable to exposures that have already been repaid (fully or partially).

The balance of the restructuring provision as at 31 December 2022 relates mainly to the estimated costs of restructuring the branch network.

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 and provisions for reimbursement customers of increased margins on mortgage loans before establishing a mortgage, in connection with the entry into force of the Act of 5 August 2022 on the amendment to the Act on Mortgage Loans and on the supervision of mortgage brokers and agents and the act amending the act on personal income tax, the act on corporate income tax and some other acts.