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Domestic commercial banks ... 38 41 45 Branches of foreign credit institutions ... 28 28 25 Cooperative banks ... 565 571 572 Source: PFSA’s monthly data on the banking sector – December 2014.

According to data from the PFSA, as of the end of December 2014, banks with a majority of private capital dominated constituting 92% (578 entities) of all banking institutions operating in Poland. The sector is characterised by a significant presence of international banks, and currently seven out of the ten largest commercial banks (by assets) are controlled by foreign parents.

Consolidation on the Polish banking market and the increasing use of IT solutions in banking services have caused the number of bank branches to dwindle. In the period from December 2012 to December 2014, the number of bank branches in Poland decreased by 181 locations and amounted to 7,353 as of the end of 2014. Competitive Landscape of the Polish Banking Sector

The level of competition in the Polish banking sector is relatively high due to its low level of concentration. Among the other factors having an impact on competition is a recent trend for consolidation. e.g. in 2013: the merger of BZ WBK and Kredyt Bank, the acquisition of Dexia Kommunalkredit Polska by Getin Noble Bank, and the acquisition of the retail operations of DnB Nord Polska by Getin Noble Bank; and in 2014: the merger of Nordea Bank Polska with PKO Bank Polski and the merger of Bank BGŻ with BNP Paribas.

The table below shows the Herfindahl index (used for measuring concentration ranging from 0 to 10,000, where a higher value of the index shows higher concentration) and the share of the total assets of credit institutions in the countries of the European Union (based on 2013 data).

Country

Herfindahl index

(index points)

Share of the five largest credit institutions in total assets (%) Finland………. 3,080 84.1 Estonia………. 2,483 89.7 Greece……… 2,136 94.0 Netherlands………. 2,104 83.8 Lithuania……… 1,892 87.1 Cyprus……… 1,486 62.6

Country

Herfindahl index

(index points)

Share of the five largest credit institutions in total assets (%) Malta………. 1,458 76.50 Slovakia………. 1,215 70.3 Portugal………. 1,196 70.6 Denmark……… 1,160 68.4 Slovenia………. 1,045 57.1 Latvia………. 1,037 64.1 Czech Republic………. 999 62.8 Belgium………. 979 64.0 Sweden………. 876 58.3 Hungary………. 836 51.9 Romania………. 821 54.4 Spain………. 757 56.2 Bulgaria………. 730 49.9 Ireland……… 674 47.8 Poland………. 586 45.2 France……… 551 45.9 United Kingdom……… 525 43.7 Italy……… 406 39.6 Austria………. 405 36.7 Luxembourg………. 357 33.7 Germany……… 266 30.6 Source: ECB

The concentration ratio of the Polish banking sector, measured by the share of the total assets of the five largest banks in the total assets of the sector, as of the end of 2014 increased to 48.5%, and the share of the five largest banks in deposits and loans in the non-financial sector increased to 54.9% and 48.9%, respectively, according to PFSA data. The concentration ratio in 2014 increased by 2.4 p.p. compared with 2013 in terms of total assets. In terms of deposits, the concentration increased by 9.0 p.p. as compared with 2013. In terms of loans to the non- financial sector, the concentration increased by 6.4 p.p. as compared with 2013.

The table below presents the market concentration of the five largest banks.

As at 31 December

2014 2013 2012

(%)

Assets... 48.5 46.1 45.0 Deposits ... 54.9 45.9 44.2 Loans to non-financial sector ... 48.9 42.5 39.1 Source: PFSA

The lingering uncertainty as to the direction of economic trends in Poland (caused by, inter alia, the economic downturn in the Eurozone), as well as lower credit appetite among households and businesses in the years 2012 and 2013 translated into a limited increase in the scale of operations of banks as measured by the balance-sheet sum. In that period, the year-on-year rate of asset growth in the Polish banking sector was approximately 4.2% and was significantly lower than that seen in the years 2010 and 2011. In 2014, the economic upturn brought about a 9% increase in the rate of asset growth in the banking sector.

Banks in Poland finance their operations from stable sources, mainly deposits. A reduction in the base interest rates translated into lower interest rates of bank deposits, which in turn had an adverse effect on households’ propensity to save. Consequently, in the years 2012 to 2014, the share of commitments to clients remained at a relatively stable level.

In the years 2012 and 2013 the credit (lending) activity growth rate was somewhat restricted. Due to greater credit risks caused by worsening macroeconomic conditions, the majority of banks maintained restrictive credit policies. Retail lending growth during 2012 and 2013 was negatively impacted by the implementation of the PFSA’s Recommendations S and T, as well as the ending of the “Rodzina na swoim” program (a government program providing an eight-year interest repayment subsidy in respect of eligible new mortgages granted by

However, since the beginning of 2013, banks have systematically mitigated credit conditions. Since the beginning of 2013, banks have gradually eased the criteria and conditions for granting loans. As the economy began to recover, demand for business loans increased and banking sector balances started to record growth. Corporate lending was driven predominantly by investments in upgrading existing production capacity and infrastructure rather than new development projects. According to the PFSA’s data, in 2014, the credit growth rate was approximately 7% on a year-on-year basis.

Financial Situation of the Polish Banking Sector

The table below presents the basic financial data for the banking sector.

As at 31 December

2014 2013 2012

(in PLN billion)

Polish banks’ aggregate assets ... 1,532.6 1,405.7 1,350.2 Deposits from the non-financial sector ... 854.1 775.4 724.0 Loans to the non-financial sector ... 895.5 837.8 810.4 Source: PFSA

Total assets

The main structural driver for significant growth, both in the value of deposits and customer loans, is the low level of banking intermediation in Poland compared with other EU Member States. The aggregate assets of banks in the Polish banking sector as of 31 December 2013 amounted to 86% of Poland’s GDP for the year compared with the average in the Eurozone of approximately 309%. As of the end 2014, the aggregate assets of banks in the Polish banking sector amounted to 89% compared with the average in the Eurozone of approximately 310% (based on calculations prepared by the Bank).

As of 31 December 2013 and 31 December 2012, the total assets of the banking sector amounted to, respectively, PLN 1,405.7 billion and PLN 1,350.2 billion and in 2013 were 4.1% higher than as of 31 December 2012. At the end of 2014, total assets of the banking sector were 9.0% higher than in 2013 and amounted PLN 1,532.6 billion.

Loans

The “Senior loan officer opinion survey on bank lending practices and credit conditions” survey of 26 banks conducted by the NBP with regard to the expectations for the first quarter of 2015 (carried out in December 2014 and January 2015) identified certain trends which are discussed below. According to the survey, in the fourth quarter of 2014, banks eased their lending policy towards large enterprises and SMEs. In the assessment of the banks, the risk associated with the economic downturn was lower, and the situation of the largest borrowers continued to improve. In the survey, the banks expressed the expectation that they will further ease their lending policies for businesses, especially SMEs, and anticipated an increase in demand for loans.

As in previous surveys, the majority of the banks had not changed the standards for granting housing loans. The banks that had eased their lending policies mainly pointed to a change in competitive pressures as the reason. Individual banks which tightened their lending policies pointed to the implementation of Recommendation S and more precise rules governing the calculation of the value of real estate. According to the banks, the demand for housing loans has not changed to a significant extent. Many banks have announced a tightening of their lending policies in the housing loan segment and simultaneously expect a fall in demand for these loans.

In the fourth quarter of 2014, banks experienced growing demand for consumer loans, which was mainly accounted for by a growth in demand for the financing of durable goods and the better economic situation of households. The banks expect a growth in demand for consumer loans given the significant easing of lending policy.

In 2014, the credit growth rate for both businesses and households accelerated, partly due to a general improvement in economic conditions, including a better situation on the job market, as well as an environment of low interest rates.

As at 31 December

(in PLN billion) Change (%) 2014 2013 2012 2014/2013 2013/2012

Loans to the non-financial sector, of which .... 895.5 837.8 810.4 6.9 3.4 - to businesses and non-commercial

As at 31 December

(in PLN billion) Change (%) 2014 2013 2012 2014/2013 2013/2012

- to households: ... 588.5 554.6 533.2 6.2 4.0 Source: PFSA

Amounts due from households constitute the majority of the amounts due from non-financial entities. As of the end of 2014, amounts due from households comprised 65.7% of the gross amounts due from the non-financial sector and 38.4% of the banks’ total assets. In 2013 and 2012, amounts due from households also constituted the majority of the amounts due from non-financial entities.

Thus, the scale of changes during last three years was not significant. This direction of changes in the structure of amounts due from non-financial entities corresponds with the trends currently prevailing in the banking sector of developed countries. However, the predominance of loans to households in the total loans to non-financial entities is unusual for EU banking systems.

The table below shows the breakdown of loans granted to households.

As at 31 December

(in PLN billion) Change (%) Breakdown of loans granted to households 2014 2013 2012 2014/2013 2013/2012

Total ... 588.9 554.6 533.3 6.2 4.0 Breakdown by product Housing ... 355.9 335.7 321.8 6.0 4.3 - in PLN ... 190.4 167.0 143.5 14.0 16.4 - in foreign currencies ... 165.5 168.7 178.3 (1.9) (5.4) Consumer (individuals) ... 131.6 126.3 123.4 4.2 2.4 - credit cards ... 12.7 12.2 12.6 4.1 (3.2) - car instalment loans ... 4.2 4.8 5.7 (12.5) (15.8) - other instalment loans ... 52.3 50.0 48.9 4.6 2.2 - other consumer loans ... 62.4 59.3 56.2 5.2 5.5 Other ... 101.4 92.6 88.1 9.5 5.1 - operating ... 38.8 34.5 31.0 12.5 11.3 - investment ... 31.7 30.4 28.8 4.3 5.6 - other real property ... 10.7 10.1 9.6 5.9 5.2 - other amounts due... 20.2 17.6 18.7 14.8 (5.9) Source: PFSA

In 2014, the housing loan growth rate in the household segment was higher than in 2013 (6% year-on-year, as opposed to 4.3% year-on-year in 2013) thanks to the relatively positive climate on the housing market.

The consumer loan growth rate also increased in 2014 in all categories of consumer loans except car loans. The growth rate of other household loans (mainly operating facilities for micro-businesses) accelerated and was almost twice as high as in 2013.

The table below presents the breakdown of loans granted to enterprises.

As at 31 December (in PLN billion) Change (%) Breakdown of loans granted to enterprises 2014 2013 2012 2014/2013 2013/2012

Total ... 300.9 278.0 272.2 8.2 2.1 Breakdown by entity and product

1) SMEs ... 175.7 163.9 164.8 7.2 (0.5) - operating ... 62.6 59.0 62.3 6.1 (5.3) - investment ... 53.4 50.5 47.2 5.7 7.0 - real property ... 42.7 40.8 42.0 4.7 (2.9) – other ... 17.0 13.6 13.3 25.0 2.3 2) Large corporations ... 125.2 114.1 107.4 9.7 6.2 - operating ... 50.1 50.3 47.1 (0.4) 6.8 - investment ... 42.7 36.5 34.4 17.0 6.1 (4.5) (4.3)

As at 31 December (in PLN billion) Change (%) Breakdown of loans granted to enterprises 2014 2013 2012 2014/2013 2013/2012

– other ... 24.0 18.4 16.7 29.7 10.8 Source: PFSA

The economic upturn in 2014 translated into a significant growth in lending to businesses. In 2014, the growth rate for these loans was almost four times higher year-on-year than in 2013.

In the period from 2012 to 2014, the business loan portfolio increased by 10.5%, from PLN 272.2 billion as of the end of 2012 to PLN 300.9 billion as of the end of 2014. Changes occurred in the Small and Medium Enterprise (SME) segment, which increased its debt by PLN 10.9 billion (6.6%), as well as in large enterprises, which increased by PLN 17.8 billion (16.6%).

Deposits

The table below presents the deposit base of the non-financial sector.

As at 31 December (in PLN billion) Change (%) Deposits of the non-financial sector 2014 2013 2012 2014/ 2013 2013/ 2012

Deposits of the non-financial sector, of which: ... 854.1 775.4 724.0 10.1 7.1 - to businesses ... 229.4 209.7 191.3 9.4 9.6 - to households ... 606.4 548.2 516.0 10.6 6.2 - to non-commercial institutions ... 18.3 17.5 16.7 4.6 4.8 Source: PFSA

The systematic increase in the deposit base in the analysed period is the result of favourable macroeconomic conditions and relatively good market trends in the banking sector. The situation on the deposit market was positively influenced by lower competition on the part of investment fund participation units as a result of increased aversion to risk resulting from a downturn in the stock exchange market and increased geopolitical risk due to the situation in Ukraine and Russia. In 2013, the growth rate of deposits was moderate, with banks being challenged by the environment of low and falling interest rates and the slackening of economic growth. The reduction of the NBP’s interest rates translated into a major reduction in the interest rates for deposits, which in turn caused a reduction in the growth of deposits on account of interest on existing term deposits and adversely affected the propensity of clients to save, as well as lead to clients searching for alternative forms of saving. In 2014, the dynamics of deposit growth accelerated despite the persisting record low interest rates. An increase in the deposit base was aided by an improvement of economic conditions and the associated increase in salaries, which had a positive influence on the financial situation of households and businesses. In 2014, the growth in the non-financial sector (10.1%) was primarily caused by a growth in the volume of household deposits that was almost twice as large as in the preceding year (an increase from PLN 548.2 billion in 2013 to PLN 606.4 billion in 2014). Furthermore, the situation on the market for deposits made by businesses stabilised as they increased in 2014 following a fall in 2012, from PLN 191.3 billion to PLN 229.4 billion.

Financial results

The table below shows the financial results of the Polish banking sector:

For the year ended 31 December (in PLN billion) Change (%) 2014 2013 2012 2014/2013 2013/2012

Profit on banking activities ... 57.7 55.5 58.8 4.0 (5.6) Net profit/(loss) ... 16.2 15.2 15.5 6.6 (1.9) ROE (%) ... 10,2% 10.1% 11.2% n/a n/a Source: the PFSA; ROE 2012

In 2013 and 2014, despite weakened profits from banking activities, the net profit level in the Polish banking sector reached a historic high, which was aided by a strong reduction in base interest rates and a fall in the interest and commission margins. The scale of the fall in the margins was curbed by an improvement in cost effectiveness and lower impairment charges connected with the more stable quality of loan portfolios.

In 2013, profit from banking activities fell and was 5.6% lower than in 2012, with net profit being 1.9% lower. In 2014, the net profit was the highest in the history of the Polish banking sector at PLN 16.2 billion, 6.6% higher than in 2013. This improvement was due to the completion of the process of the adaptation of the deposit and lending policy of banks to suit the functioning of banks in an environment of low interest rates and stronger control of operating costs.

Key Trends in the Polish Banking Sector Convergence in the Polish Banking Sector

There is strong potential for further growth of the banking industry in Poland. The aggregate assets of the Polish banking sector as of 31 December 2013 amounted to 86% of Poland’s GDP for the year as compared to the average in the Eurozone, which was 309%. As of 31 December 2014, the aggregate assets of the Polish banking sector amounted to 89% of Poland’s GDP, compared to the average in the Eurozone, which was 310% (internal calculations of the Bank prepared based on data from Eurostat, the ECB, GUS and the PFSA).

Consolidation Trends

For a description of the consolidation trends, see “Competitive Landscape of the Polish Banking Sector”. Growing Importance of Alternative Distribution Channels and Products

In recent years, alternative distribution channels, in particular internet banking and mobile banking, are becoming of increasing importance. Moreover, new products, such as markets for financial advisory services, wealth management, insurance products and various investment funds in Poland have seen significant growth and are likely to be a significant driver for profitability in the future.

The impact of the ageing population of Poland on banking products and services

The banking sector in Poland has to deal with a growing proportion of the population being above the age of fifty. According to the forecasts of the Polish Central Statistical Office (GUS), in 2020, the median age of the Polish population will be over 40, and in 2035 it will be near 50. After 2025, there will be a drastic increase in the proportion of octogenarians in the population, and at the end of the forecast horizon (i.e. in 2050), every third Pole will be a senior citizen (based on the population forecast for the years 2014 to 2050 prepared by GUS in October 2014). Banks will be forced to adjust their product ranges to take account of the changing demographic structure.

Shift away from FX Mortgage Lending

The activities of the PFSA involving the issuance of Recommendation S, coupled with a higher awareness of exchange rate risks on the part of clients and banks, caused a decline in the volume of housing loans granted in foreign currencies in the years 2012–2014. New sales are dominated by PLN lending, while FX mortgages are becoming an increasingly rare product offered to selected customers only as banks seek to avoid potential difficulties in gathering FX funding. There has been a significant change in the FX structure of housing loans, but loans in foreign currencies continue to account for 46.5% of such portfolio (as at the end of 2014), with the largest share being accounted for by CHF loans.

Given the above situation, banks in Poland and in other countries have been faced with the challenge posed by the decision of the Swiss National Bank (SNB) of 15 January 2015 on discontinuing the minimum exchange EUR/CHF rate and lowering the main interest rate to –0.75%. That decision caused an increase in the risk associated with the CHF loan portfolios held by banks in Poland.

In relation to the risks associated with the FX loan portfolio, in particular the high share of loans with an LTV ratio exceeding 100%, the PFSA anticipates that it might apply individual capital measures within the framework of pillar 2 (Single Resolution Mechanism). The rules governing the application of capital measures are set out in the “Guidelines on capital measures for foreign currency lending to unhedged borrowers under the supervisory review and evaluation process (SREP)” issued by the European Banking Authority.

Capital Adequacy

Over the course of the past three years, banks have maintained a strong capital base. The following table shows the capital adequacy ratios and own equity of the Polish banking sector as of the dates indicated, as reported by the PFSA:

31 December 2014 30 June 2014 31 December 2013 30 June 2013 31 December 2012 30 June 2012

Capital adequacy ratio ... 14.7% 14.8% 15.7% 15.2% 14.7% 13.6% Own funds for capital adequacy (in

PLN billion) ... 136.9 135.4 138.6 136.0 129.0 123.3 Source: PFSA

Two key factors have contributed to the strengthening capital base of the Polish banking sector: capital accumulation and equity issuances. In recent years banks have been increasing their equity, mainly by retaining their profits.

banks means that the Tier 1 capital ratio and the common equity Tier 1 ratio significantly exceeded the requirements set by the new regulations.

Asset Quality

In the second half of 2012 and the first half of 2013, the quality of the loan portfolio deteriorated in response to a significant weakening of economic growth and the poor situation on the job market. This situation was primarily caused by a deterioration in the quality of loans extended to corporate clients. In 2012, the NPL ratio of corporate portfolios increased due to the weak condition of the construction sector. Notably, the credit quality of large corporate clients is materially better than that of SMEs. Starting from the second half of 2013, the quality of the corporate loan portfolio has been systematically improving.

During that time, the quality of the household loan portfolio remained stable and improved significantly towards the end of 2014. That beneficial situation was largely brought about by sale transactions in the NPL portfolio (mainly comprising consumer loans), the reduction of the NBP’s interest rates that lowered the costs of servicing loans, and the strengthening of the credit risk management process.

The NPL ratio in the mortgage loan portfolio has not grown significantly, which is in part due to the fact that a large part of the portfolio has not yet been sufficiently seasoned (which is expected to take place in several years). The overall level of non-performing loans is currently relatively high compared to recent historical levels, but the pace of growth in NPL ratios has levelled off. The table below sets out the NPL ratios of various types of