Santander Bank Polska S.A.

Annual Report • Feb 16, 2024

Annual_Report_of_SBP_for_2023 . . FINANCIAL HIGHLIGHTS PLN k EUR k 31.12.2023 31.12.2022 restated 31.12.2023 31.12.2022 restated Separate financial statement I Net interest income 11 439 587 8 040 542 2 526 187 1 715 023 II Net fee and commission income 2 385 799 2 277 921 526 853 485 874 III Profit before tax 6 396 302 3 598 278 1 412 486 767 502 IV Profit for the period 4 672 978 2 449 043 1 031 927 522 373 V Total net cash flows (791 936) 16 460 847 (174 882) 3 511 048 VI Total assets 252 401 201 236 448 051 58 049 954 50 416 438 VII Deposits from banks 2 668 293 2 245 128 613 683 478 716 VIII Deposits from customers 195 365 937 185 655 260 44 932 368 39 586 187 IX Total liabilities 222 915 704 211 802 781 51 268 561 45 161 471 X Total equity 29 485 497 24 645 270 6 781 393 5 254 967 XI Number of shares 102 189 314 102 189 314 XII Net book value per share in PLN/EUR 288,54 241,17 66,36 51,42 XIII Capital ratio 21,24% 22,32% XIV Profit per share in PLN/EUR 45,73 23,97 10,10 5,11 XV Diluted earnings per share in PLN/EUR 45,73 23,97 10,10 5,11 XVI Declared or paid dividend per share in PLN/EUR 23,25 2,68 5,13 0,57 Details in Note 2.5 The data includes profits included in own funds, taking into account the applicable EBA guidelines Detailed information are described in Note 55. The following rates were applied to determine the key EUR amounts for selected financial statements line items: · for balance sheet items – average NBP exchange rate as at 31.12.2023: EUR 1 = PLN 4,3480 and as at 31.12.2022: EUR 1 = PLN 4,6899 · for profit and loss items – as at 31.12.2023 - the rate is calculated as the average of NBP exchange rates prevailing as at the last day of each month in 2023: EUR 1 = PLN 4,5284; as at 31.12.2022 - the rate is calculated as the average of NBP exchange rates prevailing as at the last day of each month in 2022: EUR 1 = PLN 4,6883 As at 31.12.2023, FX denominated balance sheet positions were converted into PLN in line with the NBP FX table no. 251/A/NBP/2023 dd. 29.12.2023 Separate Financial Statements of Santander Bank Polska for 2023 I. Separate income statement66 II. Separate statement of comprehensive income77 III. Separate statement of financial position88 IV. Separate statement of changes in equity99 V. Separate statement of cash flows1010 VI. Additional notes to financial statements1111 1. General information about issuer 1111 2. Basis of preparation of financial statements 1212 3. Risk management 3939 4. Capital management 6767 5. Net interest income 7171 6. Net fee and commission income 7272 7. Dividend income 7272 8. Net trading income and revaluation 7373 9. Gains (losses) from other financial securities 7373 10. Other operating income 7373 11. Impairment allowances for expected credit losses 7474 12. Employee costs 7474 13. General and administrative expenses 7575 14. Other operating expenses 7575 15. Corporate income tax 7575 16. Earnings per share 7676 17. Cash and balances with central banks 7676 18. Loans and advances to banks 7777 19. Financial assets and liabilities held for trading 7878 20. Hedging derivatives 7979 21. Loans and advances to customers 8080 22. Securitisation of assets 8686 23. Investment securities 8888 24. Investments in subsidiaries and associates 8989 25. Intangible assets 9292 26. Goodwill 9393 27. Property, plant and equipment 9494 28. Right of use assets 9595 29. Deferred tax assets 9696 30. Fixed assets classified as held for sale 9797 Separate Financial Statements of Santander Bank Polska for 2023 31. Other assets 9797 32. Deposits from banks 9898 33. Deposits from customers 9898 34. Subordinated liabilities 9999 35. Debt securities in issue 9999 36. Provisions for financial liabilities and guarantees granted 100100 37. Other provisions 101101 38. Other liabilities 101102 39. Share capital 102103 40. Other reserve capital 103104 41. Revaluation reserve 104105 42. Hedge accounting 105106 43. Sale and reverse sale and repurchase agreements 110111 44. Offsetting financial assets and financial liabilities 111112 45. Fair value 112113 46. Legal risk connected with CHF mortgage loans 117118 47. Contingent liabilities 122123 48. Assets and liabilities pledged as collateral 124125 49. Information about leases 125126 50. Statement of cash flows - additional information 125126 51. Related parties 126127 52. Acquisitions and disposals of investments in subsidiaries and associates 129130 53. Employee benefits 129130 54. Share based incentive scheme 131132 55. Dividend per share 132133 56. Operating segments reporting 134135 57. Events which occurred subsequently to the end of the reporting period 134135 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN I. Separate income statement for the period 1.01.2023-31.12.2023 1.01.2022-31.12.2022 restated Interest income and similar to interest 15 604 018 10 189 968 Interest income on financial assets measured at amortised cost 13 240 163 8 151 748 Interest income on financial assets measured at fair value through other comprehensive income 2 300 743 1 962 341 Income similar to interest on financial assets measured at fair value through profit or loss 63 112 75 879 Interest expense (4 164 431) (2 149 426) Net interest income Note 5 11 439 587 8 040 542 Fee and commission income 2 829 144 2 699 737 Fee and commission expense (443 345) (421 816) Net fee and commission income Note 6 2 385 799 2 277 921 Dividend income Note 7 241 567 172 181 Net trading income and revaluation Note 8 298 573 109 912 Gains (losses) from other financial securities Note 9 (12 363) (19 820) Gain/loss on derecognition of financial instruments measured at amortised cost Note 46 (316 773) (169 235) Other operating income Note 10 74 836 74 552 Impairment allowances for expected credit losses Note 11 (945 710) (798 605) Cost of legal risk associated with foreign currency mortgage loans Note 46 (2 081 557) (1 428 333) Operating expenses incl.: (3 936 495) (3 908 534) -Staff, operating expenses and management costs Note 12 and 13 (3 309 013) (3 378 652) -Amortisation of property, plant and equipment and Intangible assets (350 702) (321 549) -Amortisation of right of use asset (126 784) (125 382) -Other operating expenses Note 14 (149 996) (82 951) Tax on financial institutions (751 162) (752 303) Profit before tax 6 396 302 3 598 278 Corporate income tax Note 15 (1 723 324) (1 149 235) Profit for the period 4 672 978 2 449 043 Net earnings per share Note 16 Basic earnings per share (PLN/share) 45,73 23,97 Diluted earnings per share (PLN/share) 45,73 23,97 * details are described in Note 2.5 Notes presented on pages 11-135 constitute an integral part of this Separate Financial Statements 6 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN II. Separate statement of comprehensive income for the period: 1.01.2023-31.12.2023 1.01.2022-31.12.2022 restated Net profit for the period 4 672 978 2 449 043 Items that will be reclassified subsequently to profit or loss: 2 347 063 (1 363 397) Revaluation and sales of debt financial assets measured at fair value through other comprehensive income gross Note 23 and 41 1 832 301 (1 332 664) Deferred tax (348 137) 253 206 Revaluation of cash flow hedging instruments gross Note 41 and 48 1 065 307 (350 542) Deferred tax (202 408) 66 603 Items that will not be reclassified subsequently to profit or loss: 46 076 6 139 Revaluation of equity financial assets measured at fair value through other comprehensive income gross Note 23 and 41 72 166 8 050 Deferred and current tax (13 712) (1 529) Provision for retirement benefits – actuarial gains/losses gross Note 41 and 54 (15 282) (472) Deferred tax 2 904 90 Total other comprehensive income, net 2 393 139 (1 357 258) TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 7 066 117 1 091 785 * Details in note 2.5 Notes presented on pages 11-135 constitute an integral part of this Separate Financial Statements 7 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN III. Separate statement of financial position as at: 31.12.2023 31.12.2022 restated ASSETS Cash and balances with central banks Note 17 8 275 110 10 135 099 Loans and advances to banks Note 18 9 048 400 9 709 800 Financial assets held for trading Note 19 8 941 960 6 879 751 Hedging derivatives Note 20 1 559 374 537 924 Loans and advances to customers incl.: Note 21 140 903 101 134 842 828 - measured at amortised cost 138 093 756 132 062 037 - measured at fair value through other comprehensive income 2 798 234 2 628 660 - measured at fair value through profit and loss 11 111 152 131 Reverse sale and repurchase agreements Note 43 12 676 594 13 824 606 Investment securities incl.: Note 23 62 952 586 50 086 938 - debt securities measured at fair value through other comprehensive income 44 814 032 46 609 817 - debt securities measured at fair value through profit and loss - 62 907 - debt investment securities measured at amortised cost 17 866 218 3 156 009 - equity securities measured at fair value through other comprehensive income 272 336 200 170 - equity securities measured at fair value through profit and loss - 58 035 Assets pledged as collateral Note 48 271 933 2 157 372 Investments in subsidiaries and associates Note 24 2 377 407 2 377 407 Intangible assets Note 25 730 461 625 519 Goodwill Note 26 1 688 516 1 688 516 Property, plant and equipment Note 27 472 100 497 686 Right of use asset Note 28 449 610 437 342 Deferred tax assets Note 29 986 915 1 718 293 Fixed assets classified as held for sale Note 30 4 308 4 308 Other assets Note 31 1 062 826 924 662 Total assets 252 401 201 236 448 051 LIABILITIES AND EQUITY Deposits from banks Note 32 2 668 293 2 245 128 Hedging derivatives Note 20 829 565 1 872 039 Financial liabilities held for trading Note 19 8 834 034 7 117 867 Deposits from customers Note 33 195 365 937 185 655 260 Sale and repurchase agreements Note 43 273 547 2 158 520 Subordinated liabilities Note 34 2 585 476 2 705 885 Debt securities in issue Note 35 5 929 056 5 899 300 Lease liabilities Note 49 484 012 516 881 Current income tax liabilities 1 127 618 85 412 Provisions for financial liabilities and guarantees granted Note 36 151 294 74 012 Other provisions Note 37 741 677 463 657 Other liabilities Note 38 3 925 195 3 008 820 Total liabilities 222 915 704 211 802 781 Equity Share capital Note 39 1 021 893 1 021 893 Other reserve capital Note 40 23 369 548 22 305 509 Revaluation reserve Note 41 (275 166) (2 668 305) Retained earnings 696 244 1 537 130 Profit for the period 4 672 978 2 449 043 Total equity 29 485 497 24 645 270 Total liabilities and equity 252 401 201 236 448 051 * details in note 2.5 Notes presented on pages 11-135 constitute an integral part of this Separate Financial Statements 8 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN IV. Separate statement of changes in equity Statement of changes in equity 1.01.2023 - 31.12.2023 Share capital Own shares Other reserve capital Revaluation reserve Retained earnings and profit for the period Total Note 39 40 41 As at the beginning of the period as previously reported 1 021 893 - 22 305 509 (1 018 315) 3 986 173 26 295 260 Reclassification of specific bonds portfolio as at the beginning of the period - - - (1 649 990) - (1 649 990) As at the beginning of the period as restated 1 021 893 - 22 305 509 (2 668 305) 3 986 173 24 645 270 Total comprehensive income - - - 2 393 139 4 672 978 7 066 117 Profit for the period - - - - 4 672 978 4 672 978 Other comprehensive income - - - 2 393 139 - 2 393 139 Inclusion of share based incentive scheme - - 198 912 - - 198 912 Purchase of own shares - (48 884) - - - (48 884) Settlement of the purchase of own shares under share based incentive scheme - 48 884 (48 249) - - 635 Profit allocation to other reserve capital - - 3 289 929 - (3 289 929) - Interim dividend - - (2 375 902) - - (2 375 902) Other changes - - (651) - - (651) As at the end of the period 1 021 893 - 23 369 548 (275 166) 5 369 222 29 485 497 * Details in note 2.5 Statement of changes in equity 1.01.2022 - 31.12.2022 Share capital Own shares Other reserve capital Revaluation reserve Retained earnings and profit for the period Total Note 39 40 41 As at the beginning of the period 1 021 893 - 20 790 808 (1 311 047) 3 325 698 23 827 352 Total comprehensive income - - - (1 357 258) 2 449 043 1 091 785 Profit for the period - - - - 2 449 043 2 449 043 Other comprehensive income - - - (1 357 258) - (1 357 258) Profit allocation to other reserve capital - - 1 514 701 - (1 514 701) - Profit allocation to dividends - - - - (273 867) (273 867) As at the end of the period 1 021 893 - 22 305 509 (2 668 305) 3 986 173 24 645 270 * Details in note 2.5 Notes presented on pages 11-135 constitute an integral part of this Separate Financial Statements 9 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN V. Separate statement of cash flows for the period 1.01.2023-31.12.2023 1.01.2022-31.12.2022 restated Cash flows from operating activities Profit before tax 6 396 302 3 598 278 Adjustments for: Depreciation/amortisation 477 486 446 931 Net gains on investing activities 6 769 18 291 Interest accrued excluded from operating activities (2 011 345) (1 584 492) Dividends (240 269) (171 242) Impairment losses (reversal) 4 390 12 158 Changes in: Provisions 355 302 124 632 Financial assets / liabilities held for trading (416 804) 338 496 Assets pledged as collateral (110 353) 21 462 Hedging derivatives (1 285 031) (175 256) Loans and advances to banks 1 644 598 (3 005 112) Loans and advances to customers (17 751 486) (18 141 728) Deposits from banks 524 521 993 419 Deposits from customers 13 301 911 12 203 847 Buy-sell/ Sell-buy-back transactions (3 976 188) 2 177 770 Other assets and liabilities 1 269 265 455 901 Interest received on operating activities 12 438 286 7 898 958 Interests paid on operating activities (4 101 274) (2 243 194) Paid income tax (511 093) (683 462) Net cash flows from operating activities 6 014 987 2 285 657 Cash flows from investing activities Inflows 14 663 141 17 712 343 Sale/maturity of investment securities 12 259 146 16 255 502 Sale of intangible assets and property, plant and equipment 13 048 35 821 Dividends received 240 269 171 242 Interest received 2 150 678 1 249 778 Outflows (18 883 143) (3 978 441) Purchase of investment securities (18 433 175) (3 625 654) Purchase of intangible assets and property, plant and equipment (449 968) (352 787) Net cash flows from investing activities (4 220 002) 13 733 902 Cash flows from financing activities Inflows 6 032 802 2 325 350 Debt securities in issue 5 865 760 2 325 350 Drawing of loans 167 042 - Outflows (8 619 723) (1 884 062) Debt securities buy out (5 605 700) (1 219 340) Repayment of loans and advances (87 560) (75 149) Repayment of lease liabilities (154 407) (152 101) Dividends to shareholders (2 375 902) (273 867) Purchase of own shares (48 884) - Interest paid (347 270) (163 605) Net cash flows from financing activities (2 586 921) 441 288 Total net cash flows (791 936) 16 460 847 - including change resulting from FX differences (964 375) 302 120 Cash and cash equivalents at the beginning of the accounting period 34 490 824 18 029 977 Cash and cash equivalents at the end of the accounting period 33 698 888 34 490 824 * Details in note 2.5 Information regarding liabilities arising from financing activities relating to loans received, subordinated liabilities and the issue of debt securities were presented respectively in notes 32-35. Notes presented on pages 11-135 constitute an integral part of this Separate Financial Statements 10 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN VI. Additional notes to financial statements 1. General information about issuer Santander Bank Polska SA is a bank located in Poland, 00-854 Warszawa, al. Jana Pawła II 17, National Court Registry identification number is 0000008723, TIN os 896-000-56-73, National Official Business Register number (REGON) is 930041341. On 7.09.2018, the District Court for Wrocław-Fabryczna in Wrocław, VI Economic Unit of the National Court Register, entered into the register of entrepreneurs changes in the Bank’s statute resulting in, among others, the change of the Bank's name from the Bank Zachodni WBK SA to Santander Bank Polska SA. The immediate and ultimate parent entity of Santander Bank Polska SA is Banco Santander, having its registered office in Santander, Spain. Santander Bank Polska SA offers a wide range of banking services to individual and business customers and operates in domestic and interbank foreign markets. It also offers the following services: · intermediation in trading in securities, · leasing, · factoring, · asset/ fund management, · insurance distribution services, · trading in shares of commercial companies, · brokerage services. 11 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 2. Basis of preparation of financial statements 2.1. Statement of compliance These standalone financial statements of Santander Bank Polska S.A. were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, which are applied on a consistent basis, as at 31 December 2023, and in the case of matters not governed by the above Standards, in accordance with the provisions of the Accounting Act of 29 September 1994 (consolidated text: Journal of Law 2023, item 120) and related implementing acts as well as the requirements imposed on issuers whose securities are admitted to trading on regulated markets or issuers who have applied to have securities admitted to trading on regulated markets outlined in the Act of 29 July 2005 on Public Offering, on Conditions for the Introduction of Financial Instruments to the Organized Trading System and on Public Companies. These financial statements have been approved for publication by the Management Board of Santander Bank Polska S.A. on 15.02.2024. The separate financial statements of Santander Bank Polska SA are published on the same date as the consolidated financial statements of the Santander Bank Polska SA Group and are required by law. 2.2. Basis of preparation of financial statements These standalone financial statements have been prepared on the assumption that the Bank will continue as going concern in the foreseeable future, i.e. for a period of at least 12 months from the date on which these financial statements were prepared. In its assessment, the Management Board considered, inter alia, the impact of current situation in Ukraine and has determined that it does not create material uncertainty about the Bank's ability to continue as a going concern. Standalone financial statements are presented in PLN, rounded to the nearest thousand. These financial statements of Santander Bank Polska S.A. have been prepared in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Union and in accordance with following measurement rules: Item Balance sheet valuation rules Held-for-trading financial instruments Fair value through profit or loss Loans and advances to customers which meet the contractual cash flows test Amortized cost Loans and advances to customers which do not meet the contractual cash flows test Fair value through profit or loss Financial instruments measured at fair value through other comprehensive income Fair value through other comprehensive income Share-based payment transactions According to IFRS 2 "Share-based payment" requirements Equity investment financial assets Fair value through other comprehensive income – an option Equity financial assets-trading Fair value through profit or loss Debt securities measured at fair value through profit or loss Fair value through profit or loss Non-current assets The purchase price or production cost reduced by total depreciation charges and total impairment losses Right of use assets (IFRS 16) Initial measurement reduced by total depreciation charges and total impairment losses Non-current assets held for sale and groups of non-current assets designated as held for sale Are recognised at the lower of their carrying amount and their fair value less costs of disposal. The same accounting principles were applied as in the case of the standalone financial statements for the period ending 31 December 2022, except for changes in accounting standards p. 2.4. 12 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 2.3. New standards and interpretations or changes to existing standards or interpretations which can be applicable to Santander Bank Polska S.A. and are not yet effective and have not been early adopted. . IFRS Nature of changes Effective from Influence on Santander Bank Polska S.A. Amendments to IAS 1 The amendments affect requirements for the presentation of liabilities. Specifically, they clarify one of the criteria for classifying a liability as non-current. 1 January 2024 The amendment will not have a significant impact on financial statements. Amendments to IFRS 16 Change in the calculation of the lease liability in sale and leaseback transactions. 1 January 2024 The amendment will not have a significant impact on financial statements. Amendments to IAS 7/ IFRS 7: Supplier Finance Agreements Amendments require an entity to disclose qualitative and quantitative information about its supplier finance programs, such as terms and conditions – including, for example, extended payment terms and security or guarantees provided. 1 January 2024 The amendment will not have a significant impact on financial statements. Amendments to IAS 21: Lack of Exchangeability Amendments require disclosure of information that enables users of financial statements to understand the impact of a currency not being exchangeable. 1 January 2025 The amendment will not have a significant impact on financial statements. New standards and amendments to the existing standards issued by the IASB, but not yet adopted by EU. 13 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 2.4. Standards and interpretations or changes to existing standards or interpretations which were applied for the first time in the accounting year 2023 IFRS Nature of changes Effective from Influence on Santander Bank Polska S.A. IFRS 17 Insurance Contracts IFRS 17 defines a new approach to the recognition, valuation, presentation and disclosure of insurance contracts. The main purpose of IFRS 17 is to guarantee the transparency and comparability of insurers’ financial statements. In order to meet this requirement the entity will disclose a lot of quantitative and qualitative information enabling the users of financial statements to assess the effect that insurance contracts have on the financial position, financial performance and cash flows of the entity. IFRS 17 introduces a number of significant changes in relation to the existing requirements of IFRS 4. They concern, among others: aggregation levels at which the calculations are made, methods for the valuation of insurance liabilities, recognition a profit or loss over the period , reassurance recognition, separation of the investment component and presentation of particular items of the balance sheet and profit and loss account of reporting units including the separate presentation of insurance revenues, insurance service expenses and insurance finance income or expenses. 1 January 2023 The Bank does not identify contracts that meet the definition of an insurance contract under IFRS 17, therefore IFRS 17 does not affect financial statements. Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors Amendments to IAS 8 include definition of accounting estimates, which should help to distinguish between accounting policies and accounting estimates. 1 January 2023 The amendment does not have a significant impact on financial statements. Amendments to IAS 12 Amendments clarify how companies account for deferred tax on transactions such as leases and decommissioning obligations. 1 January 2023 The amendment does not have a significant impact on financial statements. Amendments to IAS 1 The amendment concern accounting policy disclosures with regard to the scope of such disclosures. 1 January 2023 The amendment does not have a significant impact on financial statements. The Bank conducted an analysis of its accounting policies and some of the disclosures were removed. 2.5. Comparability of previous periods Change in the classification of the specific bond portfolio – error correction In Q1 2022, the Bank’s Management Board reviewed the assets and liabilities management policy and changed the classification of the specific bond portfolio. On 1 April 2022, debt securities measured at fair value through other comprehensive income of PLN 10,521.72m were reclassified and the related fair value adjustment was reversed. Additionally, the related deferred tax asset of PLN 353.11m was derecognised. Debt investment securities measured at amortised cost of PLN 12,380.19m were recognised. The changes resulted in an increase of PLN 1,505.36m in net other comprehensive income. Detailed information about the reclassification was presented in the condensed consolidated financial statements for H1 2022 and the consolidated financial statements for 2022. In Q4 2023, the Bank received a letter from the Polish Financial Supervision Authority (KNF) recommending that: 1. when preparing subsequent consolidated and separate financial statements and condensed consolidated and separate financial statements, the Bank should: · classify the bond portfolio as financial assets measured at fair value through other comprehensive income; 14 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · reverse the effects of the reclassification made in 2022; and 2. when preparing the consolidated and separate financial statements for 2023, the Bank should correct the comparative amounts for 2022 to account for the recommendation referred to in point I in accordance with paragraph 42(a) of IAS 8. The Bank’s Management Board thoroughly analysed the regulatory recommendation and decided to implement it when preparing the financial statements for 2023. Accordingly, the Bank made a retrospective correction in these separate financial statements and classified again the portfolio of selected bonds as financial assets measured at fair value through other comprehensive income. The impact of the above correction on the published financial statements as at 31 December 2022 is presented below. Items in the separate income statement for the period: 1.01.2022 - 31.12.2022 before adjustment after Interest income and similar to income 10 189 968 - 10 189 968 Interest income on financial assets measured at amortised cost 8 305 893 (154 145) 8 151 748 Interest income on financial assets measured at fair value through other comprehensive income 1 808 196 154 145 1 962 341 Income similar to interest on financial assets measured at fair value through profit or loss 75 879 - 75 879 Items in the separate statement of comprehensive income for the period: 1.01.2022-31.12.2022 before adjustment after Net profit for the period 2 449 043 - 2 449 043 Items that will be reclassified subsequently to profit or loss: 286 593 (1 649 990) (1 363 397) Revaluation and sales of debt financial assets measured at fair value through other comprehensive income gross 704 361 (2 037 025) (1 332 664) Deferred tax (133 829) 387 035 253 206 Revaluation of cash flow hedging instruments gross (350 542) - (350 542) Deferred tax 66 603 - 66 603 Items that will not be reclassified subsequently to profit or loss 6 139 - 6 139 Total other comprehensive income, net 292 732 (1 649 990) (1 357 258) TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 2 741 775 (1 649 990) 1 091 785 Items in the separate statement of financial position as at: 31.12.2022 before adjustment after Investment securities incl.: 52 123 963 (2 037 025) 50 086 938 - debt securities measured at fair value through other comprehensive income 36 303 503 10 306 314 46 609 817 - debt investment securities measured at amortised cost 15 499 348 (12 343 339) 3 156 009 Deferred tax assets 1 331 258 387 035 1 718 293 Total assets 238 098 041 (1 649 990) 236 448 051 Revaluation reserve (1 018 315) (1 649 990) (2 668 305) Total equity 26 295 260 (1 649 990) 24 645 270 Total liabilities and equity 238 098 041 (1 649 990) 236 448 051 15 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Items in the separate statement of changes in equity for the period: 1.01.2022-31.12.2022 Revaluation reserve Total equity Revaluation reserve Total equity before before adjustment after after As at the beginning of the period (1 311 047) 23 827 352 - (1 311 047) 23 827 352 Total comprehensive income 292 732 2 741 775 (1 649 990) (1 357 258) 1 091 785 Other comprehensive income 292 732 292 732 (1 649 990) (1 357 258) (1 357 258) As at the end of the period (1 018 315) 26 295 260 (1 649 990) (2 668 305) 24 645 270 Item includes revaluation and sales of debt financial assets measured at fair value through other comprehensive income gross in the amount of PLN (2,037,025)k and deferred tax in the mount of PLN 387,035k. . 2.6 Use of estimates Preparation of financial statement in accordance with the IFRS requires the management to make subjective judgements and assumptions, which affects the applied accounting principles as well as presented assets, liabilities, revenues and expenses. The estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and assumptions are reviewed on an ongoing basis. Changes to estimates are recognised in the period in which the estimate is changed if the change affects only that period, or in the period of the change and future periods if the change affects both current and future periods. Key accounting estimates made by Santander Bank Polska S.A. Key estimates include: · Allowances for expected credit losses · Fair value of financial instruments · Estimates for legal claims · Estimates of risk arising from mortgage loans in foreign currencies · Estimates of commission reimbursement for mortgage loans in the event of early repayment Allowances for expected credit losses in respect of financial assets The IFRS 9 approach is based on estimation of the expected credit loss (ECL). ECL allowances reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. ECL allowances are measured at an amount equal to a 12-month ECL or the lifetime ECL, when it is deemed there has been a significant increase in credit risk since initial recognition (Stage 2) or impairment (Stage 3). Accordingly, the ECL model gives rise to measurement uncertainty, especially in relation to: · measurement of a 12-month ECL or the lifetime ECL; · determination of whether/when a significant increase in credit risk occurred; · determination of any forward-looking information reflected in ECL estimation, and their likelihood. As a result, ECL allowances are estimated using the adopted model developed using many inputs and statistical techniques. Structure of the models that are used for the purpose of ECL estimation consider models for the following parameters: · PD - Probability of Default, i.e. the estimate of the likelihood of default over a given time horizon (12-month or lifetime); · LGD - Loss Given Default, i.e. the part of the exposure amount that would be lost in the event of default; · EAD – Exposure at Default, i.e. expectation for the amount of exposure in case of default event in a given horizon 12-month or lifetime. 16 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Changes in these estimates and the structure of the models may have a significant impact on ECL allowances. In accordance with IFRS 9, the recognition of expected credit losses depends on changes in credit risk level which occur after initial recognition of the exposure. The standard defines three main stages for recognising expected credit losses: · Stage 1 – exposures with no significant increase in credit risk since initial recognition, i.e. the likelihood of the exposure being downgraded to the impaired portfolio (Stage 3 exposures) has not increased. For such exposures, 12-month expected credit losses are recognised. · Stage 2 – exposures with a significant increase in credit risk since initial recognition, but with no objective evidence of impairment. For such exposures, lifetime expected credit losses are recognised. · Stage 3: exposures for which the risk of default has materialised (objective evidence of impairment has been identified). For such exposures, lifetime expected credit losses are recognised. For the purpose of the collective evaluation of ECL, financial assets are grouped on the basis of similar credit risk characteristics that indicate the debtors' ability to pay all amounts due according to the contractual terms (for example, on the basis of the Bank’s credit risk evaluation or the rating process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). The characteristics chosen are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. The rating/scoring systems have been internally developed and are continually being enhanced, e.g through external analysis that helps to underpin the aforementioned factors which determine the estimates of impairment charges. In the individual approach, the ECL charge was determined based on the calculation of the total probability-weighted impairment charges estimated for all the possible recovery scenarios, depending on the recovery strategy currently expected for the customer. In the scenario analysis, the key strategies / scenarios used were as follows: · Recovery from the operating cash flows / refinancing / capital support; · Recovery through the voluntary liquidation of collateral; · Recovery through debt enforcement; · Recovery through systemic bankruptcy/recovery proceeding/liquidation bankruptcy; · Recovery by take-over of the debt / assets / sale of receivables · Recovery as part of legal restructuring. In addition, for exposures classified as POCI (purchased or originated credit impaired) - i.e. purchased or orginated financial assets that are impaired due to credit risk upon initial recognition, expected credit losses are recognized over the remaining life horizon. Such an asset is created when impaired assets are initially recognized and the POCI classification is maintained over the life of the asset. A credit-impaired assets Credit-impaired assets are classified as Stage 3 or POCI. A financial asset or a group of financial assets are impaired if, and only if, there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset or asset was recognized as POCI and that impairment event (or events) had an impact on the estimated future cash flows of the financial asset or group of financial assets that could be reliably estimated. It may not be possible to identify a single event that caused the impairment, rather the combined effect of several events may have caused the impairment. Objective evidence that a financial asset or group of assets was impaired includes observable data: · significant financial difficulty of the issuer or debtor; · a breach of contract, e.g. delay in repayment of interest or principal over 90 days in an amount exceeding the materiality threshold (PLN 400 for individual and small and medium-sized enterprises and PLN 2,000 for business and corporate clients) and at the same time relative thresholds (above 1% of the amount past due in relation to the balance sheet amount); · the Santander Bank Polska S.A., for economic or legal reasons relating to the debtor's financial difficulty, granting to the debtor a concession that the Santander Bank Polska S.A. would not otherwise consider, which fulfil below criteria: (1) restructuring transactions classified in the Stage 3 category (before restructuring decision), (2) transactions restructured in the contingency period that meet the criteria for reclassification to the Stage 3 (quantitative and/or qualitative), 17 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN (3) transactions restructured during the contingency period previously classified as non-performing due to observed customer financial difficulties, have been restructured again or are more than 30 days past due, (4) restructured transactions, where contractual clauses have been applied that defer payments through a grace period for repayment of the principal for a period longer than two years, (5) restructured transactions including debt write-off, interest grace periods or repaid in installments without contractual interest, (6) restructured transactions, where there was a decrease in the net present value of cash flows (NPV) of at least 1% compared to the NPV before the application of the forbearance measures, (7) transactions where there is a repeated failure to comply with the established payment plan of previous forbearances that has led to successive forbearances of the same exposure (transaction), (8) transactions where: · inadeguate rerepayment schedules were applied, which are related to, inter alia, repeated situations of non-compliance with the schedule, changes in the repayment schedule in order to avoid situations of non-compliance with it, or · a rep ayment schedule that is based on expectations, unsupported by macroeconomic forecasts or credible assumptions about the borrower's ability or willingness to repay was applied (9) transactions for which the Bank has reasonable doubts as to the probability of payment by the customer. · it becoming probable that the debtor will enter bankruptcy, recovery proceedings, arrangement or other financial reorganisation; · the disappearance of an active market for that financial asset because of financial difficulties; · exposures subject to the statutory moratorium, the so-called Shield 4.0 (Act of 19 June 2020 on interest subsidies for bank loans granted to entrepreneurs affected by COVID-19) - application of a moratorium on the basis of a declaration of loss of source of income. Impaired exposures (Stage 3) can be reclassified to Stage 2 or Stage 1 if the reasons for their classification to Stage 3 have ceased to apply (particularly if the borrower’s economic and financial standing has improved) and a probation period has been completed (i.e. a period of good payment behaviour meaning the lack of arrears above 30 days), subject to the following: · In the case of individual customers, the probation period is 180 days. · In the case of SME customers, the probation period is 180 days, and assessment of the customer’s financial standing and repayment capacity is required in some cases. However, the exposure cannot be reclassified to Stage 1 or 2 in the case of fraud, clients death, discontinuation of business, bankruptcy, or pending restructuring/ liquidation proceedings. · In the case of business and corporate customers, the probation period is 92 days, and positive assessment of the financial standing is required (the Bank assesses all remaining payments as likely to be repaid as scheduled in the agreement). The exposure cannot be reclassified to Stage 1 or 2 in the case of fraud, discontinuation of business, or pending restructuring/ insolvency/ liquidation proceedings. Additionally, if the customer is in Stage 3 and subject to the forbearance process ( incl. so-called Shield 4.0 moratoria), they may be reclassified to Stage 2 not earlier than after 365 days (from the start of forbearance or from the downgrade to the NPL portfolio, whichever is later) of regular payments, repayment by the client of the amount previously overdue / written off (if any) and after finding that there are no concerns as to the further repayment of the entire debt in accordance with the agreed terms of restructuring. A significant increases in credit risk One of the key elements of IFRS 9 is the identification of a significant increase in credit risk which determines the classification to Stage 2. The Bank has developed detailed criteria for the definition of a significant increase in credit risk based on the following main assumptions: · Qualitative assumptions: · Implementing dedicated monitoring strategies for the customer following the identification of early warning signals that indicate a significant increase in credit risk · Restructuring actions connected with making concessions to the customers as a result of their difficult financial standing · Delay in payment as defined by the applicable standard, i.e. 30 days past due combined with the materiality threshold · Quantitative assumptions: 18 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · A risk buffer method based on the comparison of curves illustrating the probability of default over the currently remaining lifetime of the exposure based on the risk level assessment at exposure recognition and at reporting date. Risk buffer is set in relative terms for every single exposure based on its risk assessment resulting from internal models and other parameters of exposure impacting assessment of the Bank whether the increase might have significantly increased since initial recognition of the exposure (such parameters considered types of the products, term structure as well as profitability). Risk buffer methodology was prepared internally and is based on the information gathered in the course of the decision process as well as in the process of transactions structuring. Fact that the exposure is supported by the Borrowers' Support Fund is reported as a forborne and a significant increase in credit risk (Stage 2), and in justified cases (previously identified impairment, a delay in repayment over 30 days, subsequent forbearance, no possibility to service the debt according to the current schedule) exposure is classified in Stage 3. Thresholds (determining the maximum permissible value of the probability of default (PD) as at the reporting date after the change in relation to the PD value at the moment of initial recognition) for classification into stage 2 are specified individually for each exposure. The table presents the average annual values of the PD thresholds, taking into account the time to maturity of the exposure. Average threshold (annualized) of the probability of default mortgage loans 3,18% consumer loans 13,52% Bussines loans 7,23% Exposure in Stage 2 may be re-classified into Stage 1 without probation period as soon as significant increase in credit risk indicators after its initial recognition end e.g. when the following conditions are met: clients current situation does not require constant monitoring, no restructuring actions towards exposure are taken, exposure has no payment delay over 30 days for significant amounts, no suspension of the contact due to Shield 4.0, and according to risk buffer method no risk increase occurs. Santander Bank Polska S.A. does not identify low credit risk exposures under IFRS 9 standard rules, which allows to recognize 12-month expected loss even in case of significant increase of credit risk since initial recognition. ECL measurement Another key feature required by IFRS 9 is the approach to the estimation of risk parameters. For the purpose of estimating allowances for expected losses, Santander Bank Polska S.A. uses its own estimates of risk parameters that are based on internal models. Expected credit losses are the sum of individual products for each exposure of the estimated values of PD, LGD and EAD parameters in particular periods (depending on the stage either in the horizon of 12 months or in lifetime) discounted using the effective interest rate. The estimated parameters are adjusted for macroeconomic scenarios in accordance with the assumptions of IFRS 9. To this end, the Bank determines the factors which affect individual asset classes to estimate an appropriate evolution of risk parameters. The Bank uses scenarios developed internally by the analytical team, which are updated on a monthly basis at least every six months. The models and parameters generated for the needs of IFRS 9 are subject to model management process and periodic calibration and validation. These tools are also used in the financial planning process. Determination of forward-looking information and their likelihood Forward-looking events are reflected both in the process of estimating ECL and when determining a significant increase in credit risk, by developing appropriate macroeconomic scenarios and then reflecting them in the estimation of parameters for each scenario. The final parameter value and the ECL is the weighted average of the parameters weighted by the likelihood of each scenario. Bank uses three scenario types: the baseline scenario and two alternative scenarios, which reflect the probable alternative options of the baseline scenario: upside and downside scenario. Scenario weights are determined using the expected GDP path and the confidence intervals for this forecast in such a way that the weights reflect the uncertainty about the future development of this factor. The Bank's models most often indicate the dependence of the quality of loan portfolios on the market situation in terms of the level of deposits, loans, as well as the levels of measures related to interest rates. Baseline scenario The economy entered 2023 with low momentum, very high inflation and high interest rates. We are expecting the economy to gradually be shaking off the negative effect of shocks suffered in 2022 related to war, and started reviving in the second half of 2023. Inflation is expected to slow the downward trend in 2024 and then to continue decreasing, yet remaining above the official target 2.5% for an extended time. In the baseline scenario, Poland’s GDP growth is expected to accelerate to 3.3% in 2024, and to stabilise near this level (close to the potential rate of growth) in the following years. CPI is to remain elevated, with 7.3% average growth in 2024. The government responded to rising inflation with more fiscal stimulus (cuts in taxes, new social benefits) and this is one of factors increasing the inflation’s persistence. 2023 was an election year in Poland and this was also likely to favour accommodative fiscal policy. 19 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The scenario assumes that a decline in observed inflation will encourage the central bank to continue gradual monetary policy, that started in 3rd quarter of 2023, bringing the NBP reference rate to 3.75% in 1Q25, from 6.75% at the beginning of 2023. In 2023 EURPLN was supported by declining risk of energy crisis in Europe, better sentiment in international financial markets, weaker US dollar, and rapid improvement in Polish balance of payments. The scenario assumes a stabilisation of EURPLN exchange rate near 4.50, caused on the one hand by economic growth re-acceleration, on the other hand by decline in interest rates and still high inflation gap between Poland and the euro zone. High interest rates have undermined demand for loans in 2022 and 2023, especially on the mortgage and consumer market. In general, however, loan growth is expected to gradually regain strength together with rebounding economy. Deposit growth recorded a high momentum, driven by an uptick in banking sectors’ net foreign assets, but is expected to converge towards growth rate of loans. Best case scenario The upside scenario was built under an assumption on swift disbursement of EU funds, especially of Recovery Funds, and strong inflow of workers into economy, enabling it to record higher long-term growth rates. The economy is expected to accelerate to 5.7% in 2024 and 6.2% in 2025. Higher growth will be conducive to higher CPI inflation, averaging 8.5% in 2024 and 6.9% in 2025. Strong economic growth and elevated CPI rate will encourage the NBP to start a hiking cycle in 3rd quarter of 2024, bringing the reference rate to 7.50% in the 1st quarter of 2025. Monetary easing will appear again in 2026. The Polish currency is expected to appreciate in the upcoming quarters, yet its pace will be limited by high inflation rate in Poland. EURPLN is expected to go down to 4.42 in 2024 and 4.41 in 2025. Accelerating economic activity will be positive for the demand for loans in the banking system, which will also be supportive for money creation and rise in deposits. Worst case scenario The downside scenario was built under an assumption of weaker inflow of EU funds, translating into lower investment outlays in the economy as well as on weaker inflow of workers from abroad, undermining the long-term growth potential in Poland. In 2024 the economy is expected to grow by 1.1%, followed by 1.2% in 2025. Slower growth will translate into faster disinflation, with CPI going down from 11.8% in 2023 to 6.8% in 2024 and 3.5% in 2025. Weaker growth prospects will encourage the NBP to cut interest rates further starting in 1Q24, and bring the NBP reference rate down to 1.50% in 3rd quarter of 2024. Less optimistic economic performance and low NBP interest rates will be undermining the zloty leading the rate to 4.63 in 2024 and 4.62 in 2025. Lower economic activity will negatively affect the demand for loans in the banking system, especially in the household sector, as companies could be in need of liquidity loans. Deposits will also be slowing down The tables below present the key economic indicators arising from the respective scenarios.. Scenario as at 31.12.2023 baseline best case worst case likelihood 60% 20% 20% 2024 average, next 3 years 2024 average, next 3 years 2024 average, next 3 years GDP YoY 3,3% 3,3% 5,7% 5,7% 1,1% 1,1% WIBOR 3M average 4,5% 4,0% 6,5% 6,1% 2,9% 1,7% unemployment rate % active 3,5% 3,3% 3,3% 2,8% 3,7% 3,8% CPI YoY 7,3% 3,6% 8,5% 5,1% 6,2% 2,3% EURPLN period-end 4,54 4,51 4,42 4,4 4,63 4,61 20 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Scenario as at 31.12.2022 baseline best case worst case likelihood 60% 20% 20% 2023 average, next 3 years 2023 average, next 3 years 2023 average, next 3 years GDP YoY 0,7% 3,4% 2,9% 4,6% -1,8% 1,8% WIBOR 3M average 6,8% 5,8% 9,2% 6,7% 7,8% 4,3% unemployment rate % active 3,6% 3,7% 3,0% 2,8% 3,8% 4,9% CPI YoY 11,7% 5,9% 15,6% 5,4% 13,9% 4,4% EURPLN period-end 4,69 4,62 4,6 4,48 4,81 4,81 Management ECL adjustments In the fourth quarter of 2023, in addition to ECL write-offs resulting from the complex calculation model implemented in the system, Santander Bank Polska S.A. reviewed management adjustments updating the risk level with current and expected future events, as a result of which: · the management adjustment was maintained at the same level in the amount of PLN 19,600 k on the portfolio of mortgage-secured retail loans, the risk of which may increase after the cessation of assistance activities – payment holidays, · management adjustment has been released in the amount of PLN 46,300 k on the corporate performing loan portfolio due to the observed LGD underestimation, in connection with the verification of the impact of changes and the creation of a new management adjustment in its place, · management adjustment has been released in the amount of PLN 20,250 k on the corporate Property portfolio due to increased ECB interest rates, where the risk has been reflected directly in the assessment and parameters. Adjustment was released in accordance with its validity period. · management adjustment has been released in the amount of PLN 10,690 k on the portfolio of corporate loans due to risk of overestimation in the LGD model of expected recovery from collateral in the form of guarantees of Bank Gospodarstwa Krajowego, control and corrective actions were taken to mitigate the above-mentioned risk and the model parameters were re-estimated, · management adjustment has been released in the amount of PLN 15,000 k due to the negative impact of macroeconomic factors and the deterioration of the financial situation of entities managed in the Global Relations Model operating in the sector of production/distribution and sale of household goods, due to the adjustment validity period and the lack of premise for extending the adjustment, · management adjustment has been created in the amount of PLN 27,520 k PLN on the corporate portfolio to cover the underestimation of the LGD parameter. Potential variability of ECL Significant volatility for the income statement may be reclassifications to Stage 2 from Stage 1. The theoretical reclassification of given percentage of exposures from Stage 1 with the highest risk level to Stage 2 for each type of exposure would result in an increase in write-offs according to below table. The below estimates show expected variability of loss allowances as a result of transfers between Stage 1 and Stage 2, resulting in material changes in the degree to which exposures are covered with allowances in respect of different ECL horizons. additional expected credit loss (PLN m) reclassification from stage 1 to stage 2 individual mortgage loans business Total 31.12.2023 Total 31.12.2022 1% 6,7 7,8 6,0 20,5 16,8 5% 35,3 36,8 25,8 97,9 91,0 10% 67,0 56,0 49,7 172,7 159,9 Changes in forecasts of macroeconomic indicators may result in significant effects affecting the level of created provisions. Adoption of macroeconomic parameter estimates at only one scenario level (pessimistic or optimistic) will result in a one-off change in ECL at the level below. 21 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN in PLN m change in ECL level scenario 31.12.2023 31.12.2022 individuals housing loans business Total Total pessimistic 36,7 2,8 20,9 60,4 72,1 optimistic (37,2) (3,1) (25,3) (65,6) (67,9) Based on the GDP indicator as the main factor determining the condition of the economy, Santander Bank Polska S.A. estimates that if the target level of gross domestic production will be reduced by 1% in 2024, this would translate into an increase in expected credit losses in the amount of PLN 29 637 k. The above analysis was made assuming the preservation of the relationship between macroeconomic factors. Fair value of financial instruments, including instruments which do not meet the contractual cash flows test Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Santander Bank Polska S.A. applies a methodology for measuring the fair value of credit exposures and debt instruments. In the case of the instruments with distinguishable on-balance sheet and off-balance sheet components, the extent of fair value measurement will depend on the nature of the underlying exposure, and: · the on-balance sheet portion always will be measured at fair value; · the off-balance sheet portion will be measured at fair value only if at least one of the following conditions is met: · condition 1: the exposure has been designated as measured at fair value (option) or · condition 2: the exposure may be settled net in cash or through another instrument or · condition 3: Santander Bank Polska S.A. sells the obligation immediately after its granting or · condition 4: the obligation was granted below the market conditions. The fair value is measured with the use of valuation techniques appropriate in the circumstances and for which sufficient data are available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The Bank applies following valuation techniques: · market approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business unit) · income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) date. When the income approach is used, the fair value measurement reflects the current market expectations as to the future amounts. Santander Bank Polska S.A. uses the income approach for fair value measurement relating to debt financial instruments which do not meet contractual cash flows test. In the case of credit exposures and debt instruments, the present value method within income approach is typically used. In this method, the expected future cash flows are estimated and discounted using a relevant interest rate. In the case of the present value method, Santander Bank Polska S.A. uses the following elements in the valuation: · expectations as to the future cash flows; · expectations as to potential changes in cash flow amounts and timing (uncertainties are inherent in cash flow estimates); · the time value of money, estimated using risk-free market rates; · the price of uncertainty risk inherent in cash flows (risk premium) and · other factors that market participants would take into account in the circumstances. The present value measurement approach used by Santander Bank Polska S.A. is based on the following key assumptions: · cash flows and discount rates reflect the assumptions that market participants would adopt in the measurement of an asset; · cash flows and discount rates reflect only the factors allocated to the asset which was subject to measurement; 22 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · discount rates reflect the assumptions which are in line with the cash flow assumptions; · discount rates are consistent with the key economic factors relating to the currency in which the cash flows are denominated. The fair value determination methodology developed by Santander Bank Polska S.A. provides for adaptation of the fair value measurement model to the characteristics of the financial asset subject to measurement. When determining the need for adaptation of the model to the features of the asset subject to measurement, Santander Bank Polska S.A. takes into account the following factors: · approach to the measurement (individual/collective) given the characteristics of the instrument subject to measurement; · whether a schedule of payments is available; · whether the asset subject to measurement is still offered by Santander Bank Polska S.A. and whether the products recently provided to customers can be a reference group for that asset. Other significant groups of financial instruments measured at fair value are all derivatives, financial assets held within a residual business model, debt investment financial assets held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and equity investment financial assets. These financial instruments are either measured with reference to a quoted market price for that instrument or by using a respective measurement model. Where the fair value is calculated using financial-markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis independently sourced market parameters including, for example, interest rate yield curves, securities and commodities prices, option volatilities and currency rates. Most market parameters are either directly observable or are implied from instrument prices. In justified cases, for financial instruments whose carrying amount is based on current prices or valuation models, Santander Bank Polska S.A. takes into account the need to identify additional adjustments to the fair value of the counterparty credit risk. The fair value measurement models are reviewed periodically. A summary of the carrying amounts and fair values of the individual groups of assets and liabilities is presented in Note 45. Estimates for legal claims Santander Bank Polska S.A. raises provisions for legal claims in accordance with IAS 37. The provisions have been estimated considering the likelihood of unfavourable verdict and amount to be paid, and their impact is presented in other operating income and cost. Details on the value of the provisions and the assumptions made for their calculation are provided in Notes 37, 46 and 47. Due to their specific nature, estimates related to legal claims of mortgage loans in foreign currencies are described below. Estimates of risk arising from mortgage loans in foreign currencies Due to the revolving legal situation related to mortgage loans portfolio denominated and indexed to foreign currencies, and inability to recover all contractual cash flows risk materialisation, Bank estimates impact of legal risk on future cash flows. Gross book value adjustment resulting from legal risk is estimated based on a number of assumptions, taking into account:a specific time horizon and a number of probabilities such as: · the probability of possible settlements and · the probability of submitting claims by borrowers,and · the probability in terms of the number of disputes which are described in more details in Note 46. In mid-2022, the Bank prepared a settlement scenario which reflects the level of losses for future settlements. Legal risk is estimated individually for each exposure in the event of litigation and in terms of portfolio in the absence of such. As explained in the accounting policies, Santander Bank Polska S.A. accounts for the impact of legal risk as an adjustment to the gross book value of the mortgage loans portfolio. If there is no credit exposure or its value is insufficient, the impact of legal risk is presented as a provision according to IAS 37. The result on legal risk is presented in a separate position in income statement “Cost of legal risk associated with foreign currency mortgage loans” and “Gain/loss on derecognition of financial instruments measured at amortised cost”. 23 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN In 2023, the Bank recognized PLN 2,081,557 k as cost of legal risk related to mortgage loans in foreign currencies and PLN 324,072 k as a cost of signed settlements. Detailed information about the portfolio of loans denominated in and indexed to CHF is presented in Note 46. As at 31 December 2023, the Bank also had PLN loans which used to be denominated in or indexed to CHF. Their total gross amount is PLN 262,416k before adjustment to the gross carrying amount at PLN 124,684k reducing contractual cash flows in respect of legal risk. The cost of legal risk connected with that portfolio is calculated using an approach corresponding to the general model described in Note 46. Santander Bank Polska S.A. will continue to monitor this risk in subsequent reporting periods. Details presenting the impact of the above-mentioned risk on financial statement, assumptions adopted for their calculation, scenario description and sensitivity analysis are contained in notes 46 and 47, respectively. Estimates of commission reimbursement for mortgage loans in the event of early repayment Due to lower than expected quantity of client`s claims, the Bank decided to decrease liability for the reimbursement of commission in the amount who already repaid the loan by PLN 24,200 k. The remaining liability as at 31 December 2023 amounts to PLN 16,300 k. 2.7. Judgements that may significantly affect the amounts recognized in the financial statements When applying the accounting principles, the management of Santander Bank Polska S.A. makes various judgements that may significantly affect the amounts recognized in financial statements. Assessment whether contractual cash flows are solely payments of principal and interest The key issue for Santander Bank Polska S.A.'s business, is to assess whether the contractual terms of financial assets indicate the existence of certain cash flow dates, which are only the repayment of the nominal value and interest on the outstanding nominal value. For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition and ‘interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, Santander Bank Polska S.A. considers the contractual terms of the instrument. This includes assessing whether the financial assets contain a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment the Santander Bank Polska S.A. considers: · contingent events that would change the amount and timing of cash flows, · leverage features, · prepayment and extension terms, · terms that limit Santander Bank Polska S.A.’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements), · features that modify consideration for the time value of money. A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for early termination of the contract. In addition, a prepayment feature is treated as consistent with this criterion if a financial asset is acquired or originated at a premium or discount to its contractual par amount, the prepayment amount substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable compensation for early termination), and the fair value of the prepayment feature is insignificant on initial recognition. Business Model Assessment Business models at Santander Bank Polska S.A. are determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The business model does not depend on the intentions of the Santander Bank Polska S.A. management regarding a particular instrument, which is why the model is assessed at a higher level of aggregation. All business models, quantitative and qualitative criteria used for business model assessment are described in p.2.8 regarding financial asset classification. 24 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 2.8. Material accounting policy information With the exception of the changes described in point 2.3, the Santander Bank Polska S.A. consistently applied the adopted accounting principles both for the reporting period for which the statement is prepared and for the comparative period. Foreign currency Foreign currency transactions The Polish zloty (PLN) is the functional currency of Santander Bank Polska S.A. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Resulting from these transactions monetary assets and liabilities denominated in foreign currencies, are translated at the foreign exchange rate ruling at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the reporting currency at the foreign exchange rates ruling at the dates that the fair values were determined. Foreign exchange differences arising on translation are recognised in profit or loss except for differences arising on retranslation of instruments of other entities measured at fair value through other comprehensive income, which are recognised in other comprehensive income. Financial assets and liabilities Recognition and derecognition Initial recognition Santander Bank Polska S.A. recognises a financial asset or a financial liability in its statement of financial position when, and only when, it becomes bound by contractual provisions of the instrument. A regular way purchase or sale of financial assets is recognised and derecognised, as applicable, at the settlement date. Derecognition of financial assets Santander Bank Polska S.A. derecognises a financial asset when and only when, if: · contractual rights to the cash flows from that financial asset have expired, or · Santander Bank Polska S.A. transfers a financial asset, and such operation meets the derecognition criteria. The Bank excludes financial assets from the statement of financial position, inter alia, if they are invalidated, settled, written off, overdue, materially modified or uncollectible as a result of a final court judgment. The above-mentioned components are excluded from the statement of financial position as a result of the provisions recognised for them for expected credit losses or losses due to legal risk (in the case of cancellations of CHF loans). Derecognition of financial liabilities Santander Bank Polska S.A. shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished — i.e. when the obligation specified in the contract is discharged or cancelled or expires. Classification of financial assets and financial liabilities Classification of financial assets Classification of financial assets which are not equity instruments Santander Bank Polska S.A. classifies financial asset that are not an equity instrument as subsequently measured at amortised cost or at fair value through other comprehensive income or fair value through profit or loss on the basis of both: · the business model of Santander Bank Polska S.A. for managing the financial assets and · the contractual cash flow characteristics of the financial asset (described in point 2.7). A financial asset is measured at amortised cost if both of the following conditions are fulfilled: · the financial asset is held in a business model whose purpose is to hold financial assets to collect contractual cash flows, and · the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 25 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN A financial asset is measured at fair value through other comprehensive income if both of the following conditions are fulfilled: · the financial asset is held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and · the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If a financial asset is not measured at amortised cost or at fair value through other comprehensive income, it is measured at fair value through profit or loss. Classification of financial assets which are equity instruments Santander Bank Polska S.A. measures the financial asset that is an equity instrument at fair value through profit or loss, unless Santander Bank Polska S.A. made an irrevocable election at initial recognition for particular investments in equity instruments to present subsequent changes in fair value in other comprehensive income. Business models Business models at Santander Bank Polska S.A. are determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The business model does not depend on the intentions of the Santander Bank Polska S.A. key management regarding a particular instrument. The business model refers to how Santander Bank Polska S.A. manages its financial assets in order to generate cash flows. That is, the business model determines whether cash flows will result from: · collecting contractual cash flows · selling financial assets · or both. Consequently, the business model assessment is not performed on the basis of scenarios that Santander Bank Polska S.A. does not reasonably expect to occur, such as so-called “worst case” or “stress case” scenarios. Santander Bank Polska S.A. determines the business model on the basis of the assessment of qualitative and quantitative criteria. The qualitative criteria include, m.in, how the risks associated with these assets are managed and the principles of remunerating the persons managing these portfolios. The quantitative criteria are intended to determine whether the sale of financial assets during the analysed period does not exceed the threshold values set in the internal regulations set in percentage terms. The frequency, value, timing of the sale of assets and reasons for the sale are analysed. Business model types The analysis of qualitative and quantitative criteria makes it possible to identify three basic business models applied in the operations of Santander Bank Polska S.A.: · the business model whose objective is to hold assets in order to collect contractual cash flows (hold to collect), · the business model whose objective is achieved by both collecting contractual cash flows and selling financial assets (hold to collect and sell), · the other/ residual business model (the business model whose objective is achieved by selling assets). The predominant business model in the Santander Bank Polska S.A. is a business model that involves holding assets for the purpose of generating contractual cash flows, with the exception of: · debt instruments measured at fair value through other comprehensive income held in the ALM segment and loans and advances subject to the underwriting process described below, for which a business model has been established, the purpose of which is achieved both by generating cash flows arising from the agreement, as well as through the sale of financial assets, · instruments held for trading, including debt instruments and derivatives, for which hedge accounting is not used – the appropriate business model is a different/residual business model. 26 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN A business model whose objective is to hold assets in order to collect contractual cash flows In the hold-to-maturity model, incidental sales are possible. Such sales are each time analyzed in terms of frequency, value and distribution of sales in earlier periods, reasons for these sales and expectations as to future sales operations. A business model whose objective is to hold assets in order to collect contractual cash flows spans the entire spectrum of credit activity, including but not limited to corporate loans, mortgage and consumer loans, credit cards, loans granted and debt instruments (e.g. treasury bonds, corporate bonds), which are not held for liquidity management purposes. Financial assets on account of trading settlements are substantially also recognised under this model. Such assets are recognised in the books of Santander Bank Polska S.A. on the basis of an invoice issued payable within maximum one year. A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets includes: · financial assets acquired for the purpose of liquidity management, such as State Treasury bonds or NBP bond and · loans and advances subject to underwriting, i.e. portion of credit exposures that are planned to be sold before maturity for reasons other than increase in credit risk. Other/ residual business model Other, residual, model is used for classifying assets held by Santander Bank Polska S.A. but not covered by the first or second category of the business model. They include assets from the “held for trading” category in the financial statements, such as listed equity instruments, commercial bonds acquired for trading purposes and derivatives (e.g. options, IRS, FRA, CIRS, FX Swap contracts) which are not embedded derivatives. Changing the business model Santander Bank Polska S.A. reclassifies all affected financial assets when, and only when, it changes its business model for managing financial assets. If Santander Bank Polska S.A. reclassifies a financial asset, it applies the reclassification prospectively from the reclassification date. If Santander Bank Polska S.A. reclassifies a financial asset out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is established at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in profit or loss. Classification of financial liabilities Santander Bank Polska S.A. classifies all financial liabilities as subsequently measured at amortised cost, except for: · financial liabilities measured at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value. · financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies; · financial guarantee contracts. After initial recognition , the issuer shall measure contract at the higher of: (1) amount of the expected credit loss allowance, (2) initial recognised amount, less respective accumulated income recognised as per IFRS 15; · commitments to provide a loan at a below-market interest rate. If the liability is not measured at fair value through profit or loss, the issuer shall subsequently measure it at the higher of: 1. amount of the expected credit loss allowance, 2. initial recognised amount, less respective accumulated income recognised as per IFRS 15; · contingent consideration recognised by the acquire under the business combination arrangement governed by IFRS 3. Such contingent consideration shall subsequently be measured at fair value with changes recognised in profit or loss. Embedded derivatives For financial assets, that meet the definition of hybrid contracts with an embedded derivative, a derivative that is a component of such a contract is not separated from the host contract which is not a derivative, the entire contract is assessed in terms of the contractual cash flow characteristics. 27 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Measurement of financial assets and financial liabilities Initial measurement At initial recognition, Santander Bank Polska S.A. measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, Santander Bank Polska S.A. recognises this instrument on that date as follows: · when the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, then Santander Bank Polska S.A. recognises the difference between the transaction price and the fair value at initial recognition as a gain or loss. · in all other cases, at the measurement adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, Santander Bank Polska S.A. recognises that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. At initial recognition, Santander Bank Polska S.A. shall measure trade receivables that do not have a significant financing component (determined in accordance with IFRS 15) at their transaction price (as defined in IFRS 15). Subsequent measurement of financial assets After initial recognition, Santander Bank Polska S.A. recognises a financial asset: · at amortised cost, or · fair value through other comprehensive income, or · at fair value through profit or loss. Allowances for expected credit losses are not calculated for financial assets measured at fair value through profit or loss. Subsequent measurement of financial liabilities After initial recognition, Santander Bank Polska S.A. recognises a financial liability: · at amortised cost, or · at fair value through profit or loss. Liabilities measured at amortised costs include: deposits from banks, deposits from customers, liabilities due to repo transactions, loans and advances obtained, issued debt instruments and subordinated liabilities. Liabilities are recognised as subordinated liabilities which in the event of liquidation or bankruptcy of Santander Bank Polska S.A. are repaid after satisfaction of claims of all other Santander Bank Polska S.A.’s creditors. Financial liabilities are classified as subordinated liabilities by the decision of the Polish Financial Supervision Authority issued at the request of Santander Bank Polska S.A.. Amortised cost measurement Financial assets Effective interest method Interest revenue is calculated by applying the effective interest rate to the gross carrying amount of financial assets and presented in “Net interest income”, except for credit-impaired financial assets. At the time a financial asset or a group of similar financial assets is reclassified to stage 3, interest revenue is calculated on the basis of a net value of a financial asset and presented at the interest rate used for the purpose of discounting the future cash flows for the purpose of measurement of impairment. This does not apply to POCI assets, in the case of which the interest revenue is calculated on the basis of the net carrying amount, applying the effective interest rate adjusted for credit risk over the lifetime of the asset. The credit-adjusted effective interest rate is calculated by taking into account the future cash flows adjusted for the effect of credit risk over the lifetime of the asset. The gross carrying amount of a financial asset is its amortised cost, before adjusting for any expected credit loss allowances. 28 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Purchased or originated credit-impaired assets (POCI) Santander Bank Polska S.A. distinguished the category of purchased or originated credit-risk assets. POCI are assets that are credit-impaired on initial recognition. Financial asset that were classified as POCI at initial recognition should be treated as POCI in all subsequent periods until they are derecognized. At initial recognition, POCI assets are recognized at their fair value. After initial recognition POCI assets are measured at amortized costs. Valuation of POCI assets is based on the effective interest rate adjusted for the effect of credit risk . For POCI assets (purchased or originated credit impaired) expected credit losses are recognised over the lifetime of the asset. Portfolio of mortgage loans denominated/indexed to foreign currencies Santander Bank Polska S.A. reduces the gross carrying amount of mortgage loans denominated/indexed to foreign currencies in accordance with IFRS 9 by the impact of legal risk for potential and existing disputes. In the absence of gross carrying amount or its insufficient value to cover, it records a provision in accordance with IAS 37. Modification of contractual cash flows The concept of modification Changes to the contractual cash flows in respect of the financial asset are regarded by Santander Bank Polska S.A. as modification if made in the form of an annex. Changes to the contractual cash flows arising from performance of the contractual obligations are not considered to be a modification. If the terms of the financial asset agreement change, the Santander Bank Polska S.A. assesses whether the cash flows generated by the modified asset differ significantly from cash flows generated by financial asset before modification of the terms of the asset agreement. Modification criteria When assessing whether a modification is substantial or minor, Santander Bank Polska S.A. takes into account both quantitative and qualitative criteria. Both criteria groups are each time analyzed together. Quantitative criteria To determine the significance of the impact of modifications, the so-called "10% test" is carried out which is based on a comparison of discounted cash flows of the modified financial instrument (using the original effective interest rate) with discounted (also with the original effective interest rate) cash flows of the financial instrument before modification, whose value should correspond to the value of undue capital, increased by the value of undue interest and adjusted for the amount of unsettled commission. Qualitative criteria During the qualitative analysis, Santander Bank Polska S.A. takes into account the following aspects: · adding / removing a feature that violates the contractual cash flow test result, · currency conversion - except for currency conversions resulting from the transfer of the contract for collection, · change of the main debtor - change of the contractor results in a significant modification of contractual terms and · consolidation of several exposures into one under an annex. Substantial modification Identification of substantial modification resulting in the exclusion of a financial instrument from the statement of financial position is based on qualitative and quantitative criteria described above. The occurrence of at least one of these quality criteria results in a significant modification. In the case of quantitative criteria, exceeding the "10% test" also indicates a significant modification. As a result of a significant modification, the existing financial instrument is derecognized. The new instrument is recognized at fair value. Minor modification If neither the qualitative criteria, not the quantitative are met (eg. “10% test” exceeded), the modification is regarded by Santander Bank Polska S.A. as insignificant. The change in the gross carrying amount is recognized in interest income/expense as a modification gain or loss. 29 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Write-off Santander Bank Polska S.A. directly reduces the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event. Financial asset can be written off partially or in its entirety. Santander Bank Polska S.A. writes off financial assets if at least one of the following conditions apply: · Santander Bank Polska S.A. has documented the irrecoverability of the debt; · there are no reasonable expectations of recovering the financial asset in full or in part; · the debt is due and payable in its entirety and the value of the credit loss allowance corresponds to the gross value of the exposure, while the expected debt recovery proceeds are nil; · the asset originated as a result of a crime and the perpetrators have not been identified or · Santander Bank Polska S.A. has received: · a decision on discontinuation of debt enforcement proceedings due to irrecoverability of the debt (in relation to all obligors), issued by a relevant enforcement authority pursuant to Article 824 § 1 (3) of the Polish Code of Civil Procedure, which is recognised by the creditor (Santander Bank Polska S.A.) as corresponding to the facts; or · a court decision: - dismissing a bankruptcy petition, if the insolvent debtor's assets are insufficient to cover the cost of the proceedings or suffice to cover this cost only; or - discontinuing the bankruptcy proceedings or - closing the bankruptcy proceedings. Financial assets written off are then recorded off balance sheet. Impairment General approach Santander Bank Polska S.A. recognises allowances for expected credit losses on a financial asset in respect of: · financial assets measured at amortised cost or at fair value through other comprehensive income; · lease receivables; · contract assets, i.e. the consideration to which Santander Bank Polska S.A. is entitled in exchange for the goods or services transferred to the customer in accordance with IFRS 15 Revenue from Contracts with Customers; · loan commitments and · off-balance sheet credit liabilities and financial guarantees. Details regarding the calculation are described in point 2.6 "Allowances for expected credit losses" Santander Bank Polska S.A. recognises in profit or loss, as an impairment gain or loss, the amount of expected credit losses that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised. Santander Bank Polska S.A. charges interest on exposures classified in Stage 3 on the net exposure value. Simplified approach for trade receivables and contract assets In the case of trade receivables and contract assets, Santander Bank Polska S.A. always measures the loss allowance at an amount equal to lifetime expected credit losses for trade receivables or contract assets that result from transactions that are within the scope of IFRS 15, and that do not contain a significant financing component. Contingent liabilities Santander Bank Polska S.A. creates provisions for impairment risk-bearing irrevocable contingent liabilities (irrevocable credit lines, financial guarantees, letters of credit, etc.). The value of the provision is determined as the difference between the estimated amount of available contingent exposure set using the Credit Conversion Factor (CCF) and the current value of expected future cash flows under this exposure. 30 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Santander Bank Polska S.A. raises provisions for off-balance sheet liabilities subject to credit risk, broken down into 3 stages. Gains and losses Financial instruments in amortized cost A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss through the amortisation process or in order to recognise impairment gains or losses. A gain or loss on a financial liability that is measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the financial liability is derecognised and through the amortisation process. With regard to the financial assets recognised by Santander Bank Polska S.A. at the settlement date, any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost. For assets measured at fair value, however, the change in fair value is recognised in profit or loss or in other comprehensive income. The trade date means the date of initial recognition for the purposes of applying the impairment requirements. A gain or loss on a financial asset or liability measured at fair value is recognised in profit or loss unless the asset or liability is: · a part of a hedging relationship, · an investment into an equity instrument and Santander Bank Polska S.A. has decided to present gains and losses on that investment in other comprehensive income, · a financial liability designated as measured at fair value through profit or loss and Santander Bank Polska S.A. is required to present the effects of changes in the liability's credit risk in other comprehensive income; or · is a financial asset measured at fair value through other comprehensive income and Santander Bank Polska S.A. is required to recognise some changes in fair value in other comprehensive income. Investments in equity instruments Investments in equity instruments are measured at fair value through profit or loss unless at their initial recognition Santander Bank Polska S.A. makes an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of this policy that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies. If Santander Bank Polska S.A. has elected to measure equity instruments at fair value through other comprehensive income , dividends from that investment are recognised in profit or loss. Liabilities designated as measured at fair value through profit or loss Santander Bank Polska S.A. presents a gain or loss on a financial liability that is designated as measured at fair value through profit or loss as follows: · the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, and · the remaining amount of change in the fair value of the liability is presented in profit or loss unless the treatment of the effects of changes in the liability's credit risk described in (a) would create or enlarge an accounting mismatch in the profit or loss of Santander Bank Polska S.A. If the requirements specified above would create or enlarge an accounting mismatch in the profit or loss of Santander Bank Polska S.A., Santander Bank Polska S.A. presents all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss. Santander Bank Polska S.A. presents in profit or loss all gains and losses on loan commitments and financial guarantee contracts that are designated as measured at fair value through profit or loss. Assets measured at fair value through other comprehensive income A gain or loss on a financial asset measured at fair value through other comprehensive income is recognised in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses, until the financial asset is derecognized. If the financial asset is derecognised, Santander Bank Polska S.A. accounts for the cumulative gain or loss that was previously recognised in other comprehensive income in profit or loss. Interest calculated using the effective interest method is recognised in profit or loss. 31 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Financial instruments held for trading Derivative financial instruments are recognised at fair value without any deduction for transactions costs to be incurred on sale. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price i.e. the fair value of the consideration given or received. If a hybrid contract contains a host contract that is not an asset within the scope of this IFRS 9, Santander Bank Polska S.A. separates the embedded derivative from the host contract and accounts for it as other derivatives if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract and the host contract is not carried at fair value through profit or loss. Embedded derivatives are measured at fair value with changes recognised in the profit and loss account. Hedge accounting Pursuant to paragraph 7.2.21 of IFRS 9, Santander Bank Polska S.A. chose to continue to apply the hedge accounting requirements and hedging relationships arising from IAS 39. The Santander Bank Polska S.A. uses derivative financial instruments among others to hedge its exposure to interest rate risks arising from Santander Bank Polska S.A. operational, financing and investment activities. The Santander Bank Polska S.A. discontinues hedge accounting when: · it is determined that a derivative is not, or has ceased to be, highly effective as a hedge; · the derivative expires, or is sold, terminated, or exercised; · the hedged item matures or is sold, or repaid, · the hedging relationship ceases. Fair value hedge A fair value hedge is accounted for as follows: the gain or loss from remeasuring the hedging instrument at fair value (for a derivative hedging instrument) shall be recognised in profit or loss; and the gain or loss on the hedged item attributable to the hedged risk shall adjust the carrying amount of the hedged item and be recognised in profit or loss. This rule applies if the hedged item is otherwise measured at amortised cost or is a financial asset measured at fair value through other comprehensive income. Cash flow hedge A cash flow hedge is accounted for as follows: the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised directly in other comprehensive income and the ineffective portion of the gain or loss on the hedging instrument shall be recognised in income statement. Interest income and expenses on hedged and hedging instruments are recognised as net interest income. Amounts recognised in ‘Other comprehensive income’ are reclassified to profit or loss during the period of time in which the hedged item affects the income statement. If the hedging instrument expires or is sold or the hedge accounting relationship is terminated, Santander Bank Polska S.A. discontinues hedge accounting. All profits or losses on the hedging instrument pertaining to the effective hedge recognised in other comprehensive income remains an element of equity until the forecast transaction occurs, when it is recognised in income statement. If the transaction is no longer expected to occur, the cumulative gain or loss relating to the hedging instrument recognised in other comprehensive income is reclassified to profit or loss. Repurchase and reverse repurchase transactions The Santander Bank Polska S.A. also generates/invests funds by selling/purchasing financial instruments under repurchase/reverse repurchase agreements whereby the instruments must be repurchased/resold at the previously agreed price. Securities sold subject to repurchase agreements (“repo and sell-buy-back transaction”) are not derecognised from the statement of financial position at the end of the reporting period. The difference between sale and repurchase price is treated as interest cost and accrued over the life of the agreement. Securities purchased subject to resale agreements (“reverse repo and buy-sell-back transactions”) are not recognised in the statement of financial position at the end of the reporting period. The difference between purchase and resale price is treated as interest income and accrued over the life of the agreement. 32 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The principles described above are also applied by Santander Bank Polska S.A. to transaction concluded as separate transaction of sale and repurchase of financial instruments but having the economic nature of repurchased and reverse repurchase transactions. Property, plant and equipment Owned fixed assets Property, plant and equipment including those under operating leases, are stated at cost or deemed cost less accumulated depreciation and impairment losses. Subsequent expenditure Santander Bank Polska S.A. recognises in the carrying amount of property, plant and equipment the cost of replacing part of such an asset when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to Santander Bank Polska S.A. and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated economic useful lives of each part of an item of property, plant and equipment. The estimated economic useful lives are as follows: · buildings: 22-40 years · IT equipment: 3-5 years · transportation means: 3-4 years · other fixed assets: 3-14 years. Right-of-use assets are depreciated on a straight basis overt the assets’s useful life. Depreciation rates are verified annually. On the basis of this verification, depreciation periods might be changed. Goodwill and Intangible assets Goodwill Goodwill as of the acquisition date measured as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities, contingent liabilities less impairment. Goodwill value is tested for impairment annually. Licenses, patents, concessions and similar assets Acquired computer software licenses are recognized on the basis of the costs incurred to acquire and bring to use the specific software. Expenditures that are directly associated with the production of identifiable and unique software products controlled by Santander Bank Polska S.A., and that will probably generate economic benefits exceeding expenditures beyond one year, are recognised as intangible assets. Amortisation Amortisation is charged to the income statement on a straight-line or degressive method (for intangible assets resulting from business combinations) over the estimated economic useful lives of intangible assets, which for the majority of intangibles equals to three years. Amortisation rates are verified annually. On the basis of this verification, amortisation periods might be changed. Leasing Separating elements of the leasing contract Lessee Santander Bank Polska S.A. (the lessee) does not separate non-lease components from lease components, and instead accounts for each lease component and any associated non-lease components as a single lease component for each underlying asset class where it is not possible and where the share of non-lease components is not significant compared to total net lease payments. 33 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Lease term Santander Bank Polska S.A. determines the lease term as the non-cancellable period of a lease, together with both: · periods covered by an option to extend the lease if the Santander Bank Polska S.A. (the lessee) is reasonably certain to exercise that option; and · periods covered by an option to terminate the lease if the Santander Bank Polska S.A. (the lessee) is reasonably certain not to exercise that option. The lease term is updated upon the occurrence of either a significant event or a significant change in circumstances. Santander Bank Polska S.A.as the lessee Recognition At the commencement date, Santander Bank Polska S.A. (the lessee) recognises a right-of-use asset and a lease liability. Recognition exemptions Santander Bank Polska S.A. (the lessee) does not apply the recognition and measurement requirements arising from the accounting policy to: · leases that have a leasing period of no more than 12 months at the start date; and · leases for which the underlying asset is of low value (i.e. if the net value of a new asset is lower or equal to PLN 20,000). In the case of short-term leases or leases for which the underlying asset is of low value, the Santander Bank Polska S.A. (the lessee) recognises the lease payments associated with those leases as an expense on a straight-line basis over the lease term. Other items of the statement of financial position Other trade and other receivables Trade receivables and other receivables payable within 12 months from the origination are measured at the initial recognition at par due to the immaterial effect of discounting. Trade receivables and other receivables payable within 12 months are at the balance sheet day recognised in the amount of the required payment less impairment loss. Trade payables and other liabilities Other liabilities payable within 12 months from the initial recognition are measured at par due to the immaterial effect of discounting. Like other liabilities payable within 12 months, trade payables are recognised at the balance sheet day in the amount of the payment due. Equity Equity comprises capital and funds created in accordance with applicable law, acts and the Articles of Association. Equity also includes retained earnings and prior year losses carried forward. Share capital is stated at its nominal value in accordance with the Articles of Association and the entry in the court register. Supplementary capital is created from profit allocations and share issue premiums. Reserve capital is created from profit allocations and may be earmarked for covering balance sheet losses or dividend payment. The result of valuation of management share-based incentive program is included in reserve capital (IFRS 2.53). The supplementary, reserve, general banking risk fund and share premium are presented jointly under category “Other reserve funds”. Revaluation reserve is comprised of adjustments relating to the valuation of financial assets measured at fair value through other comprehensive income and adjustments relating to the valuation of effective cash flow hedges taking into account deferred tax and actuarial gains from estimating provision for retirement. The revaluation reserve is not distributable. Except for own equity, non-controlling interests are also recognised in Santander Bank Polska S.A. capital. On derecognition of all or part of financial assets measured at fair value through other comprehensive income the total effects of periodical change in the fair value reflected in the revaluation reserve are reversed. The value of a given financial asset measured at fair value through other comprehensive income is increased or decreased by the whole amount or an adequate portion of the impairment allowance made previously. The effects of the fair value changes are removed from the revaluation reserve with a corresponding change in the income statement. 34 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The net financial result for the accounting year is the profit disclosed in the income statement of the current year adjusted by the corporate income tax charge. Custody services Income from custody services is an element of the fee and commission income. The corresponding customer assets do not form part of Santander Bank Polska S.A.’s assets and as such are not disclosed in the standalone statement of financial position. Capital payments (Dividends) Own dividends for a particular year, which have been approved by the General Meeting of Shareholders but not paid at the at the end of the reporting period are recognised as dividend liabilities in “other liabilities” item. Provisions A provision is recognised when Santander Bank Polska S.A. has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the amount is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Santander Bank Polska S.A. recognizes provisions for legal risk in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, where the estimated legal risk loss exceeds the gross value of the loan, and for settled loans, Income statement Net interest income Santander Bank Polska S.A. presents the interest income recognised at the effective interest rate and credit-adjusted effective interest rate in separate lines of the income statement: “Interest income from financial assets measured at amortised cost” and “Interest income from assets measured at fair value through other comprehensive income”. In turn, the interest income from financial assets which do not meet the contractual cash flows test is presented in line “Income similar to interest - financial assets measured at fair value through profit or loss”. Net fee and commission income Santander Bank Polska S.A. recognizes the fee and commission income that is not accounted for using the effective interest rate in such a manner so as to reflect the transfer of the goods or services promised to a customer in an amount reflecting the consideration to which it will be entitled in return for the goods or services in accordance with the 5 -stage model for recognizing income . The Bank identifies separate obligations to perform the service to which it assigns a transaction price. If the amount of remuneration is variable, the transaction price includes part or all of the variable remuneration to the extent that there is a high probability that there will be no refund of previously recognized revenues. Revenues equal to the transaction price are recognized when the service is performed or when it is performed by providing the customer with the promised good or service. The costs leading to the conclusion of the contract and the costs of performing the contract are activated and then systematically depreciated by the Bank taking into account the period of transferring goods or services to the customer. The significant commission income of the Santander Bank Polska S.A. includes: 1. Fee and commission income from loans includes fees charged by Santander Bank Polska S.A. in respect of reminders, certificates, guarantees, debt collection activities as well as commitment fees. Due to its nature, the majority of such income is taken to profit or loss on a one-off basis, i.e. when a specific operation is performed for a customer. Other income, such as a guarantee fee, is settled over time during the term of an agreement with a customer. 2. Fee and commission income from credit cards includes fees in respect of card issuance, ATM withdrawals, issuance of a new card, generation of a credit card statement or activation of optional credit card-related services. The vast majority of income is recognised at a specific point in time, i.e. when a specific operation is performed for a customer. Fees in respect of additional services related to credit cards are recognised over time. 3. Income from asset management is recognised in accordance with a 5-step model based on the value of assets provided to Santander Bank Polska S.A. for management. Pursuant to the agreements in place, Santander Bank Polska S.A. does not receive any upfront fees or additional commissions calculated after the end of the accounting year on the basis of factors beyond the Santander Bank Polska S.A.’s control. 35 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Gain/loss on derecognition of financial instruments measured at amortised cost In the event of derecognition of an asset measured at amortized cost, Santander Bank Polska S.A. in this position presents the difference in value between financial instruments. The value of this item for 2023 relates almost entirely to settlements concluded for the portfolio of mortgage loans in foreign currencies. Upon concluding a settlement with a customer, the Bank loses its rights to the foreign currency instrument and a new PLN instrument is created. In addition to settlements for the mortgage portfolio, this item presents significant modifications to other instruments like individual and corporate loans. Costs of legal risk of mortgage loans in foreign currencies This income statement line presents the total impact of the legal risk of mortgage loans denominated/indexed to foreign currencies and concerns mainly changes in the amount of the adjustment for legal risk reducing the gross carrying amount of the exposure and/or changes in the amount of the provision for legal risk, and court judgments. Net income on bancassurance For the selected loan products, where linkage to the insurance product has been identified, the Santander Bank Polska S.A. splits realised income into a portion recognised as interest income according to effective interest rate method and a portion recognised as fee income. The Santander Bank Polska S.A. qualifies distributed insurance products as linked to loans in particular if the insurance product influences contractual provisions of a loan. To determine what part of income is an integral part of the credit agreement recognised as interest income using effective interest rate, the Santander Bank Polska S.A. separates the fair value of the financial instrument offered and the fair value of the intermediation service of insurance product sold together with such instrument. The portion that represents an element of the amortised cost of the financial instrument and the portion that represents remuneration for the agency services are split in proportion to the fair value of the financial instrument and the fair value of the agency service cost, respectively, relative to the sum of the two values. The portion of income that is considered an agency fee for sales of an insurance product linked to a loan agreement is recognised by the Santander Bank Polska S.A. as fee income when the fee is charged for sales of an insurance product. The Santander Bank Polska S.A. verifies the accuracy of the assumed allocation of different types of income at least annually. Employee benefits Short-term employee benefits The Santander Bank Polska S.A.’s short-term employment benefits which include wages, bonuses, holiday pay and social insurance payments are recognised as an expense as incurred. Long-term employee benefits The Santander Bank Polska S.A.’s obligation in respect of long-term employee benefits is the amount of future benefits that employees have earned in return for their service in the current and prior periods. The accrual for retirement bonus is estimated using actuarial valuation method. The valuation of those provisions is updated at least once a year. Equity-settled share-based payment transactions For equity-settled share-based payment transactions, the entity measures the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the Santander Bank Polska S.A. cannot estimate reliably the fair value of the goods or services received, the Santander Bank Polska S.A. measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Vesting conditions included in the terms of the grant are not taken into account in estimating fair value except where those terms are dependent on market conditions. Non-market vesting conditions are taken into account by adjusting the number of awards included in the measurement of the cost of employee services so that ultimately, the amount recognised in the income statement reflects the number of vested awards. The expense related to share based payments is credited to shareholder’s equity. Where the share based payment arrangements give rise to the issue of new shares, the proceeds of issue of the shares are credited to share capital (nominal amount) and share premium (if any) when awards are exercised. 36 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Cash-settled share-based payment transactions For cash-settled share-based payment transactions, the Santander Bank Polska S.A. measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Santander Bank Polska S.A. remeasures the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. The Santander Bank Polska S.A. recognises the services received, and a liability to pay for those services, as the employees render the service. The liability is measured, initially and at each reporting date until settled, at the fair value of the share appreciation rights, by applying an option pricing model, taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which the employees have rendered the service to that date. Net trading income and revaluation Net trading income and revaluation include profits and losses resulting from changes in fair value of financial assets and liabilities classified as held for trading that are measured at fair value through profit and loss. Interest cost and income related to the debt instruments are also reflected in the net interest income. Dividend income Dividends are taken to the income statement at the moment of acquiring rights to them by shareholders provided that it is probable that the economic benefits will flow to the Santander Bank Polska S.A. and the amount of income can be measured reliably. Gain on disposal of subsidiaries, associates and joint ventures Gain or loss on the sale of shares in subsidiaries is determined as the difference between the subsidiary’s net asset value adjusted for unwritten-off portion of goodwill and the sale price. Profit on the sale of interests in associates and joint ventures is the difference between the carrying amount and their sale price. Gains or loss on other financial instruments Gains or loss on other financial instruments include: · gains and losses on disposal of equity instruments and debt instruments classified to the portfolio of financial assets measured at fair value through other comprehensive income; and · changes in the fair value of hedged and hedging instruments, including ineffective portion of cash flow hedges. Santander Bank Polska S.A. uses fair value hedge accounting and cash flow hedge accounting. Details are presented in Note 44 “Hedge accounting”. Other operating income and other operating costs Other operating income and cost include the cost of provisions for legal risk, as well as operating cost and income not directly related to the statutory activity of Santander Bank Polska S.A., including i.e. revenues and cost from the sale and liquidation of fixed assets, revenues from the sale of other services, received and paid damages, penalties and fines. Impairment losses on loans and advances The line item “Net impairment losses on loans and advances” presents impairment losses on balance sheet and off-balance sheet exposures and the gains/losses on the sale of credit receivables. Staff and general and administrative expenses The “Staff expenses” line item presents the following costs: · remuneration and social insurance (including pension benefit contributions); · provisions for unused leaves; · pension provisions; · bonus provisions; · the programme for variable components of remuneration paid to individuals holding managerial positions, a part of which is recognised as an obligation on account of share-based payment in cash, in accordance with IFRS 2 Share-Based Payment; and · employee training and other salary and non-salary benefits for employees. The line item “General and administrative expenses” presents the following costs: 37 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · maintenance and lease of fixed assets; · IT and telecommunication services; · administrative activity; · promotion and advertising; · property protection; · short term lease costs and low-value assets lease cost · charges paid to the Bank Guarantee Fund, the Financial Supervision Authority, the National Depository of Securities; · taxes and fees (property tax, payments to the National Fund for the Rehabilitation of the Disabled, municipal and administrative fees, perpetual usufruct fees); · insurance; · repairs not classified as fixed asset improvements. Tax on financial institutions Introduced by an act implemented on 1 February 2016, the tax on financial institutions is calculated on the excess of the entity’s total assets over the PLN 4 billion level; in the case of banks the excess results from the statement of turnover and balances at the end of each month. Banks are permitted to reduce the tax base by e.g. the value of own funds and the value of treasury securities. In addition, banks reduce the tax base by the value of assets purchased from the National Bank of Poland held as collateral for a refinancing credit facility granted by the latter. The tax rate for all tax payers is 0.0366% per month, and the tax is paid monthly by the 25th day of the month following the month it relates to. Santander Bank Polska S.A. reports the tax charge under “Tax on financial institutions”, separately from the income tax charge. 38 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 3. Risk management Santander Bank Polska S.A. is exposed to a variety of risks in its ordinary business activities. The objective of risk management is to ensure that the Bank takes risk in a responsible and controlled manner when maximising the value for shareholders. Risk is a possibility of materialisation of events impacting the achievement of the Bank’s strategic goals. Risk management policies are designed to identify and measure risk, define the most profitable return within the accepted risk level (risk-reward), and to continually set appropriate risk mitigation limits. Santander Bank Polska S.A. modifies and develops risk management methods on an ongoing basis, taking into consideration changes in the Group’s risk profile, economic environment, regulatory requirements and best market practice. The Management Board and Supervisory Board set the business direction and actively support the risk management strategies. This is achieved by defining the risk management and risk appetite strategy, as well as approving the key risk management policies, participation of the Management Board Members in the risk management committees, reviewing and signing off on the key risks and risk reports. The Supervisory Board continuously oversees the risk management system. The Supervisory Board approves the strategy, key risk management policies and risk appetite, and monitors the use of internal limits in relation to the current business strategy and macroeconomic environment. It conducts the reviews of the key risk areas, the identification of threats and the process of defining and monitoring remedial actions. The Supervisory Board assesses if the control activities performed by the Management Board are effective and aligned with the Supervisory Board’s policy. The assessment also includes the risk management system. The Audit and Compliance Committee supports the Supervisory Board in fulfilment of its oversight obligations. The Committee performs annual reviews of the Bank’s financial controls, and receives reports from the independent audit function and the compliance function. The Committee also receives quarterly reports on the degree of implementation of post-audit recommendations, and on that basis evaluates the quality of the actions taken. The Committee assesses the effectiveness of internal control system and risk management system. Moreover, the Committee monitors financial audits, in particular inspections carried out by the audit company, controls, monitors and assesses independence of the chartered auditor and audit company, and reports the outcomes of inspections to the Supervisory Board. In addition, the Committee develops the policy and procedure for selecting the audit company and presents to the Supervisory Board the recommendations on election, re-election and recalling of External Auditor and on the External Auditor’s fee. The Risk Committee supports the Supervisory Board in assessing the effectiveness of the internal control and risk management systems and measures adopted and planned to ensure an effective management of material risks. Moreover,in the Bank the Supervisory Board is also supported by the Remuneration Committee and the Nominations Committee, however outside the risk management area. The Management Board is responsible for the effectiveness of risk management. In particular, it introduces the organisational structure aligned with the level and profile of the risk being undertaken, split of the responsibilities providing the separation of the risk measurement and control function from the operational activity, implements and updates the written risk management strategies, and ensures transparency of the activities. The Management Board reviews the financial results of the Bank. It established a number of committees which are directly responsible for the development of the risk management methodology and monitoring of risks in particular areas. The Management Board fulfils its risk management role also through the following committees: Risk Management Committee and Risk Control Committee, where the Management Board members are supported by key risk management officers. The Risk Management Committee approves the key decisions taken by the lower-level risk committees (above established limits), approves annual limits for securities transactions as well as ALCO limits and plans for risk assessing models. The Risk Control Committee monitors the risk level across different areas of the bank’s operations and supervises the activities of lower-level risk management committees set up by the Management Board. These committees, acting within the respective remits defined by the Management Board, are directly responsible for developing risk management methods and monitoring risk levels in specific areas. The Risk Control Committee supervises the activities of the below-listed committees operating in the risk management field: Credit Risk Committee, which approves and supervises the risk management policy and risk measurement methodology as well as monitors credit risk of cpnsolidated credit portfolio or in cases pertaining to more than one business segment; Credit Policy Forum for Retail Portfolios/ SME Portfolios/ Business and Corporate Loans Portfolios, which are authorised to approve and supervise the the risk measurement policy and methodology, and monitoring credit risk only in relation to their respective business segments. The Credit Committee takes credit decisions within the assigned lending discretions. 39 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The Provisions Committee takes decisions on impairment charges in an individual and collective approach, for credit exposures, as well as other financial instruments and assets and on legal risk provisions. Moreover, the Committee formulates the methodology, reviews and verifies the adequacy of parameters applied when setting the impairment in an individual and collective approach for Santander Bank Polska SA, excluding Santander Consumer Bank, and takes decisions about debts sales. The Recovery Committee takes decisions regarding corporate clients with financial difficulties, including with respect to the relationship management strategy, approval of the causes of loss analysis and monitoring of the portfolio and effectiveness of recovery processes. Market and Investment Risk Committee, which approves and supervises the risk management policy and risk measurement methodology as well as monitors market risk in the banking book, market risk in the trading book, structural risk for the balance sheet, liquidity risk and investment risk; Model Risk Management Committee, which is responsible for model risk management as well as supervises the methodology of models used in Santander Bank Polska S.A.; The Information Management Committee is responsible for the quality and organisation of data related to risk management and other areas of the bank’s operations. The Operational Risk Management Committee (ORMCo) monitors the level, sets the direction for strategic operational risk actions in Santander Bank Polska SAin the area of business continuity, information security and fraud prevention. CyberTechRisk Forum is responsible for the evaluation and proposing changes to the IT, cybersecurity and operations strategy as well as for the monitoring of key issues related to IT, cybersecurity and operations. The Committee is also a forum for discussion on operational risk with focus on technological risk, including cyber risk; Suppliers Panel establishes standards and carries out monitoring regarding providers and services, incl. outsourcing; main forum for discussion on risk resulting from the cooperation with suppliers. The Assets and Liabilities Management Committee supervises the activity on the bank’s and the Group’s banking book, manages liquidity and interest rate risk in the banking book and is responsible for the funding and balance sheet management, including for the pricing policy. Liquidity Forum monitors liquidity position of the Bank, with a special focus on the dynamics of deposit and credit volumes, the Bank’s needs for financing and the general market situation. The Capital Committee is responsible for capital management, in particular the ICAAP. The Disclosure Committee verifies if the financial information published by Santander Bank Polska SA meets the legal and regulatory requirements. The Local Marketing and Monitoring Committee approves new products and services to be implemented in the market, taking into account the reputation risk analysis. The General Compliance Committee is responsible for setting standards with respect to the management of compliance risk and the codes of conduct adopted in the Bank. The Regulatory and Reputational Risk Committee is responsible for monitoring and taking decisions on cases relating to the compliance with law, regulatory guidelines and market/ industry standards relating to the business. The Anti-Money Laundering and Counter-Terrorism Financing Committee approves the bank’s policy on prevention of money laundering and the financing of terrorism. It approves and monitors the Group’s activities in this area. The Responsible Banking and Corporate Culture Committee is the main forum to discuss issues concerning responsible banking, sustainable development, ESG and corporate culture. It sets the direction of strategic activities and monitors the related objectives. As part of the Committee, the ESG Forum has been established to analyse challenges, opportunities and risks related to the EU Sustainable Finance agenda, including ESG risks, plan activities and coordinate their implementation at the Bank, and to submit regular reports to the Responsible Banking and Corporate Culture Committee and the Bank’s Management Board. 40 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The chart below presents the corporate governance in relation to the risk management process. The Bank has dedicated committees which are convened in crisis situations: Gold Committee, which takes decisions in crisis situations affecting Santander Bank Polska Group: it recommends the Management Board to activate the Recovery Plan, activates liquidity and capital contingency plans, and activates business continuity plans and the communication plan (if not already implemented). Silver Committee, the main special situations governance body following the activation of the contingency situation, which assesses the impact of that situation and coordinates activities as part of the special situation management, activates action plans (e.g. business continuity plans) and BAU restoration procedures, and draws lessons learned after the special situation is resolved. Bronze Group, which is responsible for the identification of and prompt response to threats or events that may pose a risk to the normal functioning of the Subsidiary and/or the Group. It identifies new threats in cooperation with the committees which manage risks on a daily basis. Risk management is in line with the risk profile resulting from risk appetite. At Santander Bank Polska risk appetite is expressed as quantitative limits and captured in the “Risk Appetite Statement” adopted by the Management Board and approved by the Supervisory Board. Global limits are used to set watch limits and shape risk management policies. Bank continuously analyses the risks to which it is exposed in its operations, identifies their sources, creates the relevant risk management mechanisms including among others the measurement, control, mitigation and reporting. The key risks include: · credit risk · concentration risk · market risk in the banking book and trading book · liquidity risk · operational risk, · compliance risk. The key rules, roles and responsibilities of the Group companies are set out in relevant internal policies relating to the management of individual risk types. 41 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Santander Bank Polska SA pays special attention to the consistency of risk management processes across the Group, which ensures adequate control of the risk exposure. The subsidiaries implement risk management policies and procedures reflecting the principles adopted by Santander Bank Polska SA. Acting under the applicable law, the bank exercises oversight of risk management in Santander Consumer Bank in line with the same oversight rules as applied to other Santander Bank Polska Group companies. The bank’s representatives on the Supervisory Board of Santander Consumer Bank are: the Management Board member in charge of the Risk Management Division and the Management Board member in charge of the Retail Banking Division. they are responsible for supervision over Santander Consumer Bank S.A. and they ensure, together with the company’s Supervisory Board, that the company operates in line with adopted plans and operational security procedures. The bank monitors the profile and level of Santander Consumer Bank S.A. risk via risk management committees of Santander Bank Polska S.A. From the point of view of negative impact of those risks on society, environment, employees, human rights and anti-corruption measures, particular importance is attached to operational risk, compliance risk and reputational risk. In addition, the bank has identified social and environmental risks (including climate risks) related to financing customers from sensitive sectors. Credit risk Santander Bank Polska S.A. credit activities focus on growing of a loan portfolio while guaranteeing its high quality, a good yield and customer satisfaction. Credit activity includes all products subject to credit risk (credit facilities), originated by the Bank or its leasing and factoring subsidiaries. Credit risk is defined as the possibility of suffering a loss as a result that a borrower will fail to meet its credit obligation, including interest and fees. Credit risk arises from the impairment of credit assets and contingent liabilities, resulting from worsening of the borrower’s credit quality. Credit risk measurement is based on the estimation of credit risk weighted assets, with the relevant risk weights representing both the probability of default and the potential loss given default of the borrower. Bank’s credit risk arises mainly from lending activities on the retail, SME, business, corporate and interbank markets. This risk is manager as part of the policy approved by the Management Board on the basis of the adopted credit procedures as well as on the basis of discretionary limits allocated to individual credit officers based on their knowledge and experience. The internal monitoring system and credit classification used by the Bank allows for an early identification of situations threatening the deterioration of the quality of the loan portfolio. Additionally the bank uses large set of credit risk mitigation tools, both collaterals (financial and non-financial) and specific credit provisions and clauses (covenants). The bank continues to develop and implement risk based methods of grading loans, allocating capital and effectiveness measurement. Risk valuation models are used for all credit portfolios. The bank regularly reviews processes and procedures for measurement, management and monitoring of the Bank’s credit portfolio risk, adjusting them to the amended laws and regulatory requirements, especially to the KNF recommendations and the EBA guidelines. .Impact of the geopolitical situation (including the conflict in Ukraine) on credit risk measurement In 2023, the bank continued to thoroughly analysed developments in the macroeconomic environment and monitored credit exposures in individual customer segments and sectors in order to promptly and duly align the credit policy parameters where required. In 2023, the bank focused on the analysis of potential impact of the geopolitical situation and the changing macroeconomic environment on customers’ standing. The analysis of macroeconomic factors covered in particular inflation and interest rates, exchange rates, as well as gas and energy prices. The bank closely monitored risk indicators of individual credit portfolios and analysed the sensitivity of customers’ risk profile to changes in the economic and geopolitical environment. In addition, credit portfolios were stress tested in terms of the impact of individual factors and their combination. The bank reviewed the portfolio of customers doing business in Ukraine, Russia, Belarus and Israeli and/or cooperating with companies from those countries, and identified customers with high exposure to negative impact of higher energy prices on the company’s standing. These risks were reflected by modifications of ratings of entities, which directly translated into the level of provisions for expected credit losses and an additional management adjustment (described in the section Management provision of the level of allowances for expected credit losses of these financial statements). This portfolio is monitored on an ongoing basis. Specific strategies were developed with respect to such customers. As at the date of preparation of the financial statements, the deteriorating quality of the cash loan portfolio is also observed, it remains at an increased level, the improvement of which is expected from 2024 due to the improvement in the quality of newly sold loans. The risk of mortgage loan portfolio is mitigated by the state payment deferral programme. However, high interest rates and lower real value of salaries due to high inflation have an increasingly negative impact on that portfolio. The impact of the above factors on the level of impairment losses are reflected by the Bank using scoring models, as well as through an additionally created management adjustment for mortgage loans (described in the section Management provision of the level of allowances for expected credit losses of these financial statements). 42 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The overall quality of the credit portfolio is still assessed as satisfactory. As part of regular reviews of ECL parameter models, the Bank takes into account the latest macroeconomic projections, using its predictive models based on historical observations of relationships between those variables and risk parameters. ECL parameters were last updated in Q4 2022 to account for the impact of the geopolitical situation on the current economic situation and macroeconomic projections. The values of macroeconomic indicators included in the calculation of ECLs are presented in section ‘Allowances for expected credit losses in respect of financial assets’. Credit risk management committees Consolidated credit risk oversight at Santander Bank Polska is performed by the Credit Risk Committee (CRC). Its key responsibilities include development and approval of the best sectoral practice, industry analyses, credit policies, individual credit discretion systems and risks grading systems. The CRC also receives advanced credit portfolio analyses and recommends to the Management Board credit risk appetite limits to ensure balanced and safe growth of the credit portfolio. The Bank also has three committees referred to as Credit Policy Forums, which deal with the key customer segments: retail segment, SME segment and the business/ corporate segment. These committees are responsible for shaping the credit policy and processes within their respective segments. If needed, their decisions may be escalated to the Credit Risk Committee. In turn, oversight over credit risk models and the risk valuation methodology is the responsibility of the Models Risk Management Committee. Risk Management Division The Risk Management Division is responsible for a consolidated credit risk management process, including management and supervision of credit delivery, defining credit policies, providing decision-making tools and credit risk measurement tools, quality assurance of the credit portfolio and provision of reliable management information on the credit portfolio. Credit Policies Credit policies refer to particular business segments, loan portfolios and banking products. They contain guidelines for the identification of the areas where specific types of risks manifest themselves, specifying the methods of their measurement and mitigation to the level acceptable to the bank (e.g. “Loan-to-Value” ratios, FX risk in the case of foreign currency loans). The bank reviews and updates its credit policies on a regular basis, aiming to bring them in line with the bank’s strategy, current macroeconomic situation, legal developments and changes in regulatory requirements. Credit Decision Making Process The credit decision-making process as a part of the risk management policy is based upon Individual Credit Discretions vested in credit officers, commensurate with their knowledge and experience within the business segments. Credit exposures in excess of PLN 50m are referred to the Credit Committee composed of senior management and top executives. Transactions above established thresholds (from PLN 48.75m to PLN 195m, depending on the transaction type) are additionally ratified by Risk Management Committee. Bank continually strives to ensure best quality credit service while satisfying the borrowers’ expectations and ensuring security of the credit portfolio. To this end, the existing system of credit discretions ensures segregation of the credit risk approval function from the sales function. Credit Grading Santander Bank Polska S.A. dynamically developes credit risk assessment tools adapting them to the KNF’s guidelines, International Accounting Standards/ International Financial Reporting Standards (IAS/IFRS) and best market practice. Bank uses credit risk grading models for its key credit portfolios, including corporate customers, SMEs, mortgage loans, property loan, cash loans, credit cards and personal overdrafts. The bank regularly monitors its credit grading using the rules specified in its Lending Manuals. Additionally, for selected models, automated process of credit grade verification is carried out based on the number of overdue days or an analysis of the customer’s behavioural data. Credit grade is also verified at subsequent credit assessments. Credit Reviews The bank performs regular reviews to determine the actual quality of the credit portfolio, confirm that adequate credit grading and provisioning processes are in place, verify compliance with the procedures and credit decisions and to objectively assess professionalism in credit management. The reviews are performed by the two specialised units: Credit Review Department and the Control Department, which are independent of the risk-taking units. Collateral In the Santander Bank Polska S.A. security model, the Collateral and Credit Agreements Department is the central unit responsible for creation and maintenance of securities. The Security Manual as a procedure describing legal standards for the application of collateral 43 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN security is managed by the Legal and Compliance Division. The Collateral and Credit Agreements Department is the owner of the security contract templates. The role of the department is to ensure that security covers are duly established and held effective in line with the lending policy for all business segments. The unit is also responsible for developing standardised internal procedures with respect to perfecting and maintaining validity of collateral as well as ensuring that establishment, monitoring and release of security covers is duly effected. Furthermore, the Collateral and Credit Agreements Department provides assistance to credit units in credit decision making and development of credit policies with respect to collateral. The unit gathers data on collateral and ensures appropriate management information. The tables below show types of collateral that can be used to secure loans and advances to customers from non-banking sector. Retail customers Type of loan/receivables Type of collateral Cash loan bills, guarantees, credit insurance Credit on liquid assets guaranty deposit, amounts frozen on account, investment funds Student loan sureties Housing loan mortgage, credit insurance, transfer of claim Leasing bills, guarantees, transfer of rights to bank’s account; court registered pledge on movables; transfer of ownership, mortgage, obligation of the leased asset supplier to buy the asset back (buy-back guarantee) Business customers Type of loan/receivables Type of collateral Commercial credit guaranty deposit, registered pledge, bills Revolving credit assignment of credit, bills, guarantees, registered pledge Building credit mortgage Investment credit mortgage, sureties, warranty Granted and with supplements guarantees, warranty Leasing bills, guarantees, transfer of rights to bank’s account; court registered pledge on movables; transfer of ownership, mortgage, obligation of the leased asset supplier to buy the asset back (buy-back guarantee) Collateral management process Before a credit decision is approved, in the situations provided for in internal regulations, the Collateral and Credit Agreements Department assesses the collateral quality and value, a process that includes: · verification of the security valuation prepared by external valuers, and assessment of the security value for business loans, · assessment of the legal status of the security for business loans,, · assessment of the investment process for the properties, · seeking legal advises on the proposed securities. The Collateral and Credit Agreements Department actively participates in credit processes, executing tasks including: · verification of signed collateral documentation received from law firms, whether complete and compliant with the Bank’s internal procedures (verification carried out before or immediately after disbursement); · registration and verification of the data in information systems, · collateral monitoring and reporting, · reporting on the status of collateral by segments, · releasing of the collateral. In managing its receivables, Bank carries out the process of collateral execution. Selection of proper action towards execution of specific collateral depends on the type of the collateral (personal or tangible). In principle the Bank aims at voluntary proceedings in the course of collateral execution. When there is no evidence of cooperation with a collateral provider, the bank’s rights are fulfilled in compliance with the law and internal regulations in the bankruptcy and enforcement proceedings. 44 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Financial effect of the accepted collateral The financial effect of the accepted collateral was calculated as a change in the credit loss allowance as a result of exclusion of the cash flow from collateral (non-performing exposures are assessed on an case-by-case basis). For other portfolios (mortgage, SME and corporate loans), this effect was calculated by adjusting the LGD parameter to the level observed for particular clients on unsecured products. The table below present financial effect of collateral of Santander Bank Polska S.A. as at 31.12.2023: 31.12.2023 Financial effect of collateral Gross Amount Allowance for impairment Financial effect of collateral Loans and advances to customers individuals 19 565 389 (1 095 436) - housing loans 51 006 587 (518 343) ( 658 594) business 70 314 319 (2 089 326) (1 175 965) Total balance sheet 140 886 295 (3 703 105) (1 834 559) Total off-balance sheet 34 479 042 (151 294) ( 43 769) The table below present financial effect of collateral of Santander Bank Polska S.A. as at 31.12.2022: 31.12.2022 Financial effect of collateral Gross Amount Allowance for impairment Financial effect of collateral Loans and advances to customers individuals 17 949 015 (1 029 170) - housing loans 50 611 667 ( 551 866) (546 663) business 66 481 615 (2 284 645) (1 052 832) Total balance sheet 135 042 297 (3 865 681) (1 599 495) Total off-balance sheet 28 898 402 (74 012) (10 471) Credit risk stress testing Stress testing is a part of the credit risk management process used to evaluate potential effects of specific events or movement of a set of financial and macroeconomic variables or change in risk profile on Santander Bank Polska condition. Stress tests are composed of assessment of potential changes in credit portfolio quality when faced with adverse conditions. The process also delivers management information about adequacy of agreed limit and internal capital allocation. Impairment calculation Santander Bank Polska posts impairment for expected losses in accordance with International Financial Reporting Standard 9 (IFRS 9). IFRS 9 introduced a new approach to the estimation of allowances for credit losses. The approach is based on estimation of the expected credit loss (ECL). ECL allowances reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. ECL allowances are measured at an amount equal to a 12-month ECL or the lifetime ECL, when it is deemed there has been a significant increase in credit risk since initial recognition. Accordingly, the ECL model gives rise to measurement uncertainty, especially in relation to: · measurement of a 12-month ECL or the lifetime ECL; · determination of when a significant increase in credit risk occurred; · determination of any forward-looking events reflected in ECL estimation, and their likelihood. In accordance with IFRS 9, the recognition of expected credit losses will depend on changes in risk after recognition of the exposure. The standard introduces three main stages for recognising expected credit losses: · Stage 1 – exposures with no significant increase in risk since initial recognition, i.e. the likelihood of the exposure being downgraded to the impaired portfolio (Stage 3 exposures) has not increased. For such exposures, 12-month expected credit losses will be recognised. · Stage 2 – exposures with a significant increase in risk since initial recognition, but with no objective evidence of default. For such exposures, lifetime expected credit losses will be recognised. 45 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · Stage 3: exposures for which the risk of default has materialised (indications of impairment have been identified). For such exposures, lifetime expected credit losses will be recognised. Lifetime expected losses are recognised also for the exposures classified as POCI (purchased or originated credit-impaired). Such an asset is created when an impaired asset is recognized, and the POCI classification is maintained throughout the life of the asset. In the case of classification into stage 3, the Bank applies objective indications of impairment, as defined in accordance with the Basel Committee’s recommendations and Recommendation R from KNF and EBA. The bank estimates ECL using both an individual approach (for individually significant exposures with objectively evidenced impairment [stage 3]) and collective approach (individually insignificant exposures with objectively evidenced impairment, and incurred but not reported losses). The Bank on a regular basis recalibrates its models and updates the forward-looking information used for estimating ECL, taking into account the impact of changes in economic conditions, modifications of the Bank’s credit policies and recovery strategies, which is designed to ensure appropriate level of impairment allowances. The tables below present Santander Bank Polska SA exposure to credit risk. Assets have been classified into respective risk grades based on the one-year probability of default arising from current credit rating (business customers) or score (personal customers) used for the purpose of business processes or, if not available, based on the one-year probability of default used for calculation of expected credit losses. The tables below present the quality of financial assets of Santander Bank Polska broken down into risk groups as at 31.12.2023 and in the comparative period. The portfolio consisis of loans and advances to clients measured at amortised cost. 31.12.2023 Loans and advances to individuals Loans and advances to individuals- mortgage loans Loans and advances to enterprises PD range Balance sheet exposures gross Off-balance sheet exposures Balance sheet exposures gross Off-balance sheet exposures Balance sheet exposures gross Off-balance sheet exposures Stage 1 from 0,00% to <0,15% 1 144 010 2 552 715 35 934 917 798 710 22 530 649 8 253 803 from 0,15% to <0,25% 652 421 643 573 1 504 114 70 4 473 319 3 008 143 from 0,25% to <0,50% 190 201 0 6 875 330 116 796 13 617 382 8 740 118 from 0,50% to <0,75% 2 522 703 347 901 1 731 851 56 034 6 391 699 5 838 993 from 0,75% to <2,50% 8 891 730 412 375 1 991 544 37 048 12 157 647 8 094 311 from 2,50% to <10,0% 3 384 316 122 771 552 343 23 627 3 925 830 999 234 from 10,0% to <45,0% 358 392 15 033 319 - 223 391 8 456 from 45,0% to <100,0% 2 732 - - - 328 - Total Stage 1 17 146 505 4 094 369 48 590 418 1 032 285 63 320 245 34 943 059 Stage 2 from 0,00% to <0,15% 23 114 19 569 271 - 8 484 0 from 0,15% to <0,25% 27 311 595 66 665 - 220 192 442 from 0,25% to <0,50% 9 893 496 312 401 - 285 897 0 from 0,50% to <0,75% 85 250 2 953 60 715 - 570 564 45 873 from 0,75% to <2,50% 316 480 12 143 189 969 1 755 947 788 140 617 from 2,50% to <10,0% 473 559 26 356 148 416 7 391 1 105 290 326 919 from 10,0% to <45,0% 211 835 153 5 127 72 663 231 59 035 from 45,0% to <100,0% 11 930 - 115 - 51 826 - Total Stage 2 1 159 371 42 716 1 352 680 9 219 3 853 273 572 887 . 46 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Default period EAD after credit risk mitigation and credit conversion factor applied Loans and advances to individuals Loans and advances to individuals- mortgage loans Loans and advances to enterprises Stage 3 up to 12 months 860 091 335 486 970 855 from 13 to 24 months 238 630 206 911 545 552 from 25 to 36 months 96 495 92 947 267 626 from 37 to 48 months 40 255 49 981 213 042 from 49 to 60 months 30 786 64 515 240 203 from 61 to 84 months 26 043 75 561 108 026 above 84 months 10 895 47 896 350 249 POCI up to 12 months 54 126 10 711 78 115 from 13 to 24 months 46 544 38 809 239 739 from 25 to 36 months 13 269 16 165 64 252 from 37 to 48 months 4 465 4 027 24 462 from 49 to 60 months 2 080 5 143 126 528 from 61 to 84 months 19 026 13 982 42 858 above 84 months 13 893 32 710 37 963 .. 31.12.2022 Loans and advances to individuals Loans and advances to individuals- mortgage loans Loans and advances to enterprises PD range Balance sheet exposures gross Off-balance sheet exposures Balance sheet exposures gross Off-balance sheet exposures Balance sheet exposures gross Off-balance sheet exposures Stage 1 from 0,00% to <0,15% 705 728 2 552 715 33 906 152 798 710 18 958 027 8 253 803 from 0,15% to <0,25% 780 511 643 573 2 319 464 70 3 972 926 3 008 143 from 0,25% to <0,50% 355 622 - 7 396 105 116 796 13 461 463 8 740 118 from 0,50% to <0,75% 4 061 684 347 901 1 762 887 56 034 6 716 054 5 838 993 from 0,75% to <2,50% 5 862 988 412 375 2 249 423 37 048 11 673 403 8 094 311 from 2,50% to <10,0% 3 616 094 122 771 619 596 23 627 4 110 850 999 234 from 10,0% to <45,0% 390 784 15 033 168 - 293 405 8 456 from 45,0% to <100,0% 4 094 - - - 371 - Total Stage 1 15 777 505 4 094 369 48 253 795 1 032 285 59 186 498 34 943 059 Stage 2 from 0,00% to <0,15% 18 666 19 490 961 - 17 293 - from 0,15% to <0,25% 28 801 595 74 931 - 92 319 442 from 0,25% to <0,50% 13 999 496 279 813 - 244 399 - from 0,50% to <0,75% 136 196 2 953 59 798 - 363 938 45 873 from 0,75% to <2,50% 233 533 12 143 147 998 1 755 1 397 861 140 617 from 2,50% to <10,0% 387 682 26 356 185 030 7 391 1 277 514 326 919 from 10,0% to <45,0% 123 366 153 5 377 72 586 712 59 035 from 45,0% to <100,0% 14 344 - 761 - 7 824 - Total Stage 2 956 586 42 716 1 244 670 9 219 3 987 860 572 887 … 47 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Default period EAD after credit risk mitigation and credit conversion factor applied Loans and advances to individuals Loans and advances to individuals- mortgage loans Loans and advances to enterprises Stage 3 up to 12 months 743 127 389 586 851 145 from 13 to 24 months 296 448 149 277 409 389 from 25 to 36 months 120 644 73 923 332 435 from 37 to 48 months 61 851 85 224 337 989 from 49 to 60 months 26 097 62 245 102 776 from 61 to 84 months 20 086 80 151 364 944 above 84 months 7 742 42 817 444 965 POCI up to 12 months 94 486 55 126 85 029 from 13 to 24 months 24 572 13 317 38 832 from 25 to 36 months 12 049 5 943 23 941 from 37 to 48 months 4 681 7 070 164 663 from 49 to 60 months 21 415 15 048 49 376 from 61 to 84 months 17 405 16 438 14 821 above 84 months 13 216 43 968 53 623 The tables below present the quality of ‘Loans and advances to business customers measured at fait value through other comprehensive income’ broken down into stages as at 31.12.2023 and in the comparative period: Loans and advances to customers measured at fair value through OCI 31.12.2023 PD Stage 1 Stage 2 Stage 3 Total od 0,00 do <0,15% 445 835 - - 445 835 od 0,15 do <0,25% 151 691 - - 151 691 od 0,25 do <0,50% 878 181 139 881 - 1 018 062 od 0,50 do <0,75% 346 910 150 493 - 497 403 od 0,75 do <2,50% 777 218 - - 777 218 Gross amount 2 599 835 290 374 - 2 890 209 Impairment (10 551) (81 464) - (91 975) Net amount 2 589 324 208 910 - 2 798 234 . . 48 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Loans and advances to customers measured at fair value through OCI 31.12.2022 PD Stage 1 Stage 2 Stage 3 Total od 0,00 do <0,15% 447 891 - - 447 891 od 0,15 do <0,25% 248 454 - - 248 454 od 0,25 do <0,50% 708 403 - - 708 403 od 0,50 do <0,75% 407 772 - - 407 772 od 0,75 do <2,50% 822 880 - - 822 881 Gross amount 2 635 400 - - 2 635 400 Impairment (6 740) - - (6 740) Net amount 2 628 660 - - 2 628 660 The tables below present the quality of financial assets of Santander Bank Polska broken down into stages and by ratings as at December 31, 2023 and in the comparative period: Stage 1 31.12.2023 Loans and advances to banks Debt and equity securities measured at fair value through other comprehensive income Debt investment securities measured at amortised cost Debt and equity securities measured at fair value through profit or loss Debt and equity instruments held for trading Credit quality level * 1 (AAA to AA-) 418 664 1 738 349 861 400 - - 2 (A+ to A-) 8 507 926 43 075 289 17 004 818 1 517 533 3 (BBB+ to BBB-) 92 159 - - - - 4 (BB+ to BB-) 2 020 - - - - 5 (B+ to B-) 132 - - - - 6 (<B-) - - - - - no external rating 27 499 - - - 1 658 Total Stage 1 9 048 400 44 813 638 17 866 218 - 1 519 191 * according to Fitch; There are no instruments classified to Stage 2 as at 31.12.2023. . Stage 3 31.12.2023 Loans and advances to banks Debt and equity securities measured at fair value through other comprehensive income Debt investment securities measured at amortised cost Debt and equity securities measured at fair value through profit or loss Debt and equity instruments held for trading Credit quality level * 1 (AAA to AA-) - - - - - 2 (A+ to A-) - - - - - 3 (BBB+ to BBB-) - - - - - 4 (BB+ to BB-) - - - - - 5 (B+ to B-) - - - - - 6 (<B-) - - - - - no external rating - 394 - - - Total Stage 3 - 394 - - - * according to Fitch 49 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Stage 1 31.12.2022 Loans and advances to banks Loans and advances to customers - Debt securities measured at amortised cost Debt and equity securities measured at fair value through other comprehensive income Debt investment securities measured at amortised cost Debt and equity securities measured at fair value through profit or loss Debt and equity instruments held for trading Credit quality level * 1 (AAA to AA-) 247 909 - 1 308 713 - 62 907 - 2 (A+ to A-) 8 846 209 - 45 298 694 3 156 009 - 227 167 3 (BBB+ to BBB-) 351 459 - - - - - 4 (BB+ to BB-) 71 219 93 898 - - - - 5 (B+ to B-) 21 - - - - - 6 (<B-) - - - - - - no external rating 192 983 722 998 - - - 2 123 Total Stage 1 9 709 800 816 896 46 607 407 3 156 009 62 907 229 290 Stage 2 31.12.2022 Loans and advances to banks Loans and advances to customers - Debt securities measured at amortised cost Debt and equity securities measured at fair value through other comprehensive income Debt investment securities measured at amortised cost Debt and equity securities measured at fair value through profit or loss Debt and equity instruments held for trading Credit quality level * 1 (AAA to AA-) - - - - - - 2 (A+ to A-) - - - - - - 3 (BBB+ to BBB-) - - - - - - 4 (BB+ to BB-) - - - - - - 5 (B+ to B-) - - - - - - 6 (<B-) - - - - - - no external rating - 63 324 - - - - Total Stage 2 - 63 324 - - - - * according to Fitch Stage 3 31.12.2022 Loans and advances to banks Loans and advances to customers - Debt securities measured at amortised cost Debt and equity securities measured at fair value through other comprehensive income Debt investment securities measured at amortised cost Debt and equity securities measured at fair value through profit or loss Debt and equity instruments held for trading Credit quality level * 1 (AAA to AA-) - - - - - - 2 (A+ to A-) - - - - - - 3 (BBB+ to BBB-) - - - - - - 4 (BB+ to BB-) - - - - - - 5 (B+ to B-) - - - - - - 6 (<B-) - - - - - - no external rating - 143 615 2 410 - - - Total Stage 3 - 143 615 2 410- - - - * according to Fitch .Loans and advances to banks are assessed using ratings. The assessment method was set out in the Bank’s internal regulations. Each institutional client (exposure) is assigned a rating by one of the reputable rating agencies (Fitch, Moody’s, S&P), in accordance with the CRR. Then, a relevant grade is allocated to the client. There are no overdue or impaired loans and advances to banks. 50 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Financial instruments from the investment securities measured at fair value and held-for-trading portfolio are assessed in accordance with the sovereign rating (treasury bonds, securities issued by the National Bank of Poland [NBP], Bank Gospodarstwa Krajowego [BGK] debt instruments). The sovereign rating is the same as the NBP/BGK rating. All have the same rating as Poland, according to Fitch it is A. For all instruments classified to Stage 1 (including also loans and advances to customers measured at fair value through other comprehensive income), there is no overdue or impairment, therefore they are classified to Stage 1. In accordance with its definition- as exposures with no significant increase in risk since initial recognition, i.e. the likelihood of the exposure being downgraded to the impaired portfolio (Stage 3) has not increased. For such exposures, 12-month expected credit losses will be recognized. Credit risk concentration Santander Bank Polska adheres to the standards provided for in the Banking Law with regard to the concentration of risk bearing exposures to a single entity or a group of entities connected in terms of capital or organisation. As at 31.12.2023, pursuant to art. 71 of the Banking Law Act, the maximum limits for the Bank amounted to: · PLN 5 908 265 k (25% of Bank’s own funds). As at 31.12.2022, pursuant to art. 71 of the Banking Law Act, the maximum limits for the Bank amounted to: · PLN 6 078 848 k (25% of Bank’s own funds). The policy pursued by the Bank aims at minimising the credit concentration risk, by for example applying more rigorous than regulatory rules in this respect. The effect of this policy is maintenance of high level of diversification of exposures towards individual customers. The analysis of the Bank’s exposures in terms of sector concentrations, proved that the bank does not have any exposures in excess of the limits imposed by the regulator in 2023. A list of the 20 largest borrowers (or capital-related group of borrowers) of Santander Bank Polska S.A. (performing loans) as at 31.12.2023: Industry code (PKD) Industry description Total credit exposure Balance sheet exposure Committed credit lines, guarantees, treasury limits and capital investments 64 OTHER FINANCIAL SERVICES 14 905 800 11 498 459 3 407 341 64 OTHER FINANCIAL SERVICES 8 028 796 1 600 356 6 428 440 64 OTHER FINANCIAL SERVICES 7 220 069 6 623 802 596 267 84 PUBLIC ADMINISTRATION 3 252 671 - 3 252 671 19 RAFINERY 2 149 725 222 615 1 927 110 64 OTHER FINANCIAL SERVICES 2 104 833 - 2 104 833 64 OTHER FINANCIAL SERVICES 1 496 560 1 444 461 52 099 61 TELECOMMUNICATION 1 307 634 420 688 886 946 35 POWER INDUSTRY 1 299 494 257 475 1 042 019 06 MINING 1 264 590 - 1 264 590 64 OTHER FINANCIAL SERVICES 1 254 499 - 1 254 499 35 POWER INDUSTRY 1 225 378 270 001 955 377 64 OTHER FINANCIAL SERVICES 1 196 880 1 196 880 - 64 OTHER FINANCIAL SERVICES 1 014 895 497 699 517 196 64 OTHER FINANCIAL SERVICES 997 676 - 997 676 64 OTHER FINANCIAL SERVICES 850 000 - 850 000 61 TELECOMMUNICATION 849 844 828 346 21 498 47 RETAIL SALES 799 264 635 999 163 265 64 OTHER FINANCIAL SERVICES 779 051 - 779 051 68 REAL ESTATE SERVICES 758 232 757 498 734 Total gross exposure 52 755 891 26 254 279 26 501 612 51 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN A list of the 20 largest borrowers (or capital-related group of borrowers) of Santander Bank Polska S.A. (performing loans) as at 31.12.2022: Industry code (PKD) Industry description Total credit exposure Balance sheet exposure Committed credit lines, guarantees, treasury limits and capital investments 64 OTHER FINANCIAL SERVICES 13 233 090 10 613 400 2 619 690 64 OTHER FINANCIAL SERVICES 5 907 120 5 316 940 590 180 64 OTHER FINANCIAL SERVICES 3 838 200 1 400 330 2 437 870 19 RAFINERY 1 688 810 280 020 1 408 790 64 OTHER FINANCIAL SERVICES 1 456 580 1 447 310 9 270 06 MINING 1 288 810 250 020 1 038 790 61 TELECOMMUNICATION 1 144 390 974 380 170 010 64 OTHER FINANCIAL SERVICES 1 049 730 1 049 730 - 68 REAL ESTATE SERVICES 976 990 933 330 43 660 61 TELECOMMUNICATION 959 000 937 870 21 130 64 OTHER FINANCIAL SERVICES 875 510 665 090 210 420 68 REAL ESTATE SERVICES 773 070 699 020 74 050 61 TELECOMMUNICATION 753 410 489 480 263 930 20 CHEMICAL INDUSTRY 712 830 569 920 142 910 35 POWER INDUSTRY 600 245 309 375 290 870 20 CHEMICAL INDUSTRY 520 470 161 380 359 090 41 CONSTRUCTION 515 180 502 410 12 770 64 OTHER FINANCIAL SERVICES 442 900 411 380 31 520 64 OTHER FINANCIAL SERVICES 421 220 - 421 220 41 CONSTRUCTION 412 830 - 412 830 Total gross exposure 37 570 385 27 011 385 10 559 000 Industry concentration The credit policy of Santander Bank Polska S.A. assumes diversification of credit exposures. Risk of particular industry affects value of the exposure limit. In order to ensure adequate portfolio diversification and control the risk of overexposure to a single industry, the Group provides funding to sectors and groups or capital units representing a variety of industries. As at 31.12.2023, the highest concentration level was recorded in the “Financial sector (14% of the Santander Bank Polska exposure), “manufacturing” sector (7%) and “real estate activities” (6%). Breakdown of non-trading business loans and advances by NACE codes: NACE sector Gross exposure 31.12.2023 31.12.2022 Agriculture, forestry and fishing 1 740 247 1 374 441 Mining and quarrying 63 046 318 010 Manufacturing 10 088 001 10 460 761 Electricity, gas, steam and air conditioningsupply 1 899 131 1 716 225 Water supply 181 000 260 760 Construction 1 891 141 1 700 553 Wholesale and retail trade 8 048 029 8 532 301 Transport and storage 1 996 237 1 755 333 Accomodation and food service activities 1 682 173 1 818 110 Information and communication 2 503 946 2 584 425 Financial and insurance activities 20 821 535 18 323 804 Real estate activities 9 197 386 9 471 541 Professional, scientific and technical activities 4 765 863 3 618 634 Administrative and support service activities 2 443 282 2 202 169 Public administration and defence, .compulsory social security 366 433 Education 200 573 182 193 Human health services and social work activities 817 975 851 405 Arts, entertainment and recreation 320 855 269 576 Other services 4 294 008 3 387 115 A Total Business Loans 72 954 794 68 827 789 52 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN B Retail (including mortgage loans) 70 583 087 68 673 608 C Loans to public sector 1 222 497 1 279 122 A+B+C Santander Bank Polska SA portfolio 144 760 378 138 780 519 D Other receivables 67 091 69 739 A+B+C+D Total Santander Bank Polska SA 144 827 469 138 850 258 Climate related risk At Santander Bank Polska S.A. environmental matters are embedded in decision-making processes. The ESG (environmental, social, governance) guidelines are used for evaluating the assets to be financed by the Bank. More broadly, issues related to climate goals, climate policy as well as initiatives and actions taken by the Bank and the Group are described in the Management Board Report on Santander Bank Polska Group Performance in 2023 (including Report on Santander Bank Polska Performance) chapter XIV “Statement on Non-Financial Information for 2023”. This document also includes quantitative disclosures. The Bank and the Group entities considered the climate-related risks when preparing the financial statements in accordance with International Financial Reporting Standards, and where necessary, the Standards were applied in a manner that takes this into account. The subject of the considerations was, in particular, the impact of environmental issues on the Bank in the context of the application of: - IAS 1: Presentation of Financial Statements - IAS 12: Income Taxes - IAS 36: Impairment of Assets - IFRS 9: Financial Instruments - IFRS 13: Fair Value - IAS 37: Provisions, Contingent Liabilities and Contingent Assets At the same time, based on the conducted analysis, no significant impact of environmental issues on the financial statements as a whole was found. The Bank and the Group entities conducted an analysis of the main transformational and physical risks, and thanks to the identification of key risks for our latitude, the risk in the sectors most affected by climate change was evaluated. This allowed for the improvement of the risk assessment process for individual business clients in these aspects. Today, this process is carried out mainly by field experts, while for the segment of the largest corporate clients, the most important ESG factors are already included in the rating assessment. At the same time, the Bank is embarking on a project that will introduce these elements into the structured process of business client risk rating assessment. At the same time, the Group launched projects aimed at identifying transformational and physical risks in a systemic and quantitative manner at the customer level. By estimating the emissivity of all business entities and retail mortgage products, the Group will be able to assess transformational risks and deliberate actions in key parts of the portfolio. It will also allow for the inclusion of environmental aspects in standard portfolio analysis processes, setting targets and limits at appropriate levels. ESG risk management as part of the risk management framework Effective identification of risks and opportunities related to climate change allows Santander Bank Polska S.A. to take measures to ensure reliance to key threats, accelerate growth, improve financial results, and build reputation. Risks related to social and environmental issues, including climate, are taken into account in the risk management system developed and implemented by the Management Board. This system operates on the basis of three lines of defense, covers all significant types of risk and the interdependencies of individual risks. In accordance with the recommendations of TCFD, the Bank performs analyzes of physical and transformational risk, including them in the taxonomy of risks typical for the Bank. In 2023, the Bank carried out an analysis of the portfolio's sensitivity to climate risks, taking into account the sensitivity assessment of the most exposed sectors included in it. The analysis was carried out in three time horizons - short (2030), medium (2040) and long (2050). Unlike the analysis carried out in previous years, it was decided to use climate scenarios defined by a group of central banks and supervisory institutions, which brings together over 130 institutions (including the largest ones, such as the European Central Bank, the Bank of England and the United States Federal Reserve System) determined to act for better understanding and management of climate risks (Network for Greening the Financial System, NGFS). 53 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The development of physical and transformation risks was analyzed in 11 sectors most sensitive to climate risks in which Banco Santander clients are active. 9 of these 11 sectors are significantly represented in Santander Bank Polska S.A. In accordance with the approach recommended by TCFD, the analysis took into account the main types of risks from both categories: physical risks (RF) and transformation risks (RT). In 2023, the methodology for assessing climate risks was improved (a description of the methodology for analyzing the materiality of risks for sectors is presented in the section on risk management, analysis of the materiality of risks). Risk assessment was on a scale of 1 to 5 (where 1 means very low risk and 5 means very high risk). The analysis was qualitative in nature, but was carried out taking into account the perspective of double materiality, i.e. considering the channels of the Bank's impact on climate change and climate change on the Bank's results. The methodology and scope of this analysis are constantly being developed to increasingly more accurately reflect the impact of climate risks on the Bank's portfolio. Physical risks The sources of physical risks are among other things extreme weather conditions such as severe storms or floods which may cause infrastructure disruption or damage in many sectors. Due to the nature of its activities, the agricultural (agro) sector is particularly exposed to physical risks, with an increased risk of soil erosion affecting crop quality and yields. In the medium and long term, physical risks have been identified related to the deteriorating hydrological situation in Poland and the threat of drought. The lack of appropriate water retention systems and water shortages may have a number of negative effects, affecting other sectors of the economy, including the energy sector. For example, power plants whose cooling systems use water from rivers may have to reduce energy production during periods of drought. There was also a fire hazard in the soft commodities sector, which could potentially cause losses, among others. in wood production. Transition risks The most sensitive sectors in the context of transition to a green economy are the sectors based on coal and other fossil fuels that dominate the Polish energy mix. There are regulatory and legal risks connected with higher costs of CO2 emissions, more stringent data reporting and gathering requirements as well as regulatory changes that may limit the operations of some high-emission businesses. Regulatory risks also involve law amendments imposing more climate-friendly solutions, which may result in higher operating costs for some companies. For example, in the automotive sector, decreasing costs of electric cars and the expected EU regulations may result in stranded assets in the petrol car supply chain. Market competition may force companies from the Bank’s portfolio to invest in more innovative vehicles. The Bank also identified market risks resulting from the impact of climate change on market variables, including consumer choice, changing interest rates and commodity prices. Reputational risks connected with an increased consumer awareness are important too. All the above risks may affect the Bank’s position, both directly and through its customers. The same exercise was conducted with respect to climate-related opportunities. The transition to a green economy enables Santander Bank Polska S.A. to help existing and future customers as well as to support economic transformation by providing relevant financing solutions. The Bank intends to continue to develop new products and services (including advisory services for customers) and earn a reputation of a trusted partner. As part of the analysis, opportunities for Santander Bank Polska S.A. were identified. The climate-related opportunities and risks identified by Santander Bank Polska S.A. have an impact on financial instruments and are included in the Bank’s main risk management processes. The impact of climate change on the business of Santander Bank Polska S.A. has been defined on a high level and further analysis will be made to quantify the influence of those risks and opportunities in more detail. Responsibility for ESG risk management The responsibility for managing climate risk and leveraging climate-related opportunities rests with the Management Board and the Supervisory Board. They support risk management strategies by approving key policies, sitting on dedicated committees, participating in reviews and approving risks and reports. The Bank’s Management Board is responsible for defining long-term action plans and approving the responsible banking strategy, including the climate strategy and its main objectives (in a short, medium and/or long term), and as part of the risk management framework. When taking decisions, the Management Board considers assessments, information and analyses of the risk management unit. Based on that, it adopts the Risk Appetite Statement, which is then approved by the Supervisory Board. Specific limits are used to set watch limits and define risk management policies. The Management Board member in charge of risk management provides the Supervisory Board members with relevant information about risk to ensure they have a full picture of the Bank’s risk profile and can make informed decisions in this respect. The Supervisory Board verifies the Bank’s management strategy and ESG risk management strategy, also in terms of the Bank’s long-term interest. When taking decisions, the Supervisory Board also considers assessments, information and analyses of the risk management unit. 54 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN There is also the Responsible Banking and Corporate Culture Committee, which provides support to the Bank’s Management Board in the performance of oversight over the responsible banking and sustainability strategy both locally and at the level of Santander Bank Polska Group. The Committee, which is chaired by the President of the Management Board, defines the strategy and annual goals related to ESG and ensures compliance with environmental and social policies of Santander Bank Polska S.A. The Committee is supported by the ESG Forum composed of senior managers representing all Divisions. The Forum analyses challenges, opportunities and risks related to the EU Sustainable Finance agenda (including ESG risks), plans activities and coordinates their implementation at the Bank, and submits regular reports to the Responsible Banking and Corporate Culture Committee and the Bank’s Management Board. The Bank does not separate ESG risk as a separate material risk, but indicates its transmission channels into: credit, market and liquidity, compliance, reputation, business and operational risks. At the same time, the analysis of risk transmission channels is constantly being deepened and the perspective of the analyzed impact is now expanded to include market risk in the trading book and liquidity risk. The use of such an approach affects the process of estimating and quantifying significant risks. A methodology was introduced for assessing the level of climate risks - physical and transition for individual climate and real estate sectors, which allowed for a portfolio analysis of the significance of climate risks for the loan portfolio. The reports in question are already presented to the appropriate committees. The development of this methodology is planned for next year based on more accurate data obtained and their use in assessing the credit risk of customers and transactions. The process of accepting sustainable financing for all segments of the Bank's operations was formalized, both at the level of transactions and loan products. In 2023, the ESG Panel was established within the Risk Management Division, whose responsibility is to certify sustainable financing in relation to internal and external regulations, thereby contributing to reducing the risk of greenwashing. The Bank started the project of calculating the carbon intensity of loan portfolios in accordance with the PCAF methodology in order to be able to analyze the carbon intensity structure in all sectors and business segments with greater accuracy. As part of this project, a series of 6 training sessions was held for all interested units of the Bank, presenting the topic of emission intensity and the methodology of its calculation in all 3 scopes. The Group is currently working to increase the accuracy of these calculations to continue work on identifying and implementing decarbonization levers. The Bank has Environmental, Social and Climate Change Risk Management Policy, approved by the Management Board. It specifies the criteria consistent with best practice and standards applicable in Santander Group and worldwide which have to be met by customers from the following sectors: oil and gas, energy production and transmission, mining and metals and soft commodities sectors in order to establish a relationship with the Bank. The activities in the above sectors have been divided into two categories: prohibited activities and activities subject to additional analysis. Specific regulations, such as the environmental and social risk analysis procedure for customers from the Corporate and Investment Banking (SCIB) segment and the Business and Corporate Banking (BCB) segment, set out implementing rules and provide a detailed description of processes for individual segments. The risk assessment of SCIB customers is performed in accordance with the solutions applied by Santander Group. ESCC (Environmental, Social and Climate Change) risk of customers/ transactions from the sectors defined in the relevant policy is analysed on a case-by-case basis using dedicated assessment questionnaires. Based on that, the local ESG risk analyst issues an opinion and recommendation, which can be positive, conditionally positive or negative. An analyst and a credit partner include the ESCC risk analysis and recommendation in a credit application for a particular customer. The assessment process is expanded to include ESCC analyses of new sensitive sectors, including: automotive, food and chemical – in particular production of plastics and agricultural chemistry. In addition, a structured analysis of plans for transition into lower emissions is carried out for customers from high-emission industries such as energy production based on fossil fuels, coal mining, airlines, and steelmaking. In 2023, the ESG risk assessment process for financed projects was formalized. The analysis used here is consistent with the Equator Principles, i.e. the market standard and common language for assessing environmental and social risk in projects among large financial institutions around the world. This assessment is made in cooperation with the business line and dedicated ESCC analysts. In the first step, it results in determining the project category depending on the potential impact on environmental and social issues, and then conducting an analysis, the detail of which depends on the category assigned. The recommendation resulting from the analysis becomes an element of the loan application. a dedicated position of ESG Risk Director was established, whose main responsibility is to ensure the adequacy of ESG risk assessment by managing the collection and analysis of field data using Business Intelligence tools, as well as initiating, supporting and coordinating ESG tasks. Policies and procedures in force in ESG areas were also analyzed and the missing elements are to be addedd. As part of the assessment process for other corporate clients, an automatic algorithm was used, enabling pre-selection of environmental and social risk. As part of that process, customers are assigned environmental flags indicating the level of risk based on the characteristics of individual companies (including their business codes). There are four types of flags: an interim one (“To be verified”) and three final ones (“Approved”, “Higher risk”, “Prohibited activity”). The Bank is in the process of developing an approach on how to introduce these elements into the structured client risk assessment process. 55 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Market risk Introduction Market risk is defined as an adverse earnings impact of changes in interest rates, FX rates, share quotations, stock exchange indices, etc. It arises both in trading and banking activity (FX products, interest rate products, equity linked trackers). Santander Bank Polska is exposed to market risk arising from its activity in money and capital markets and services provided to customers. Additionally, the bank undertakes the market risk related to the active management of balance sheet structure (assets and liabilities management). The activity and strategies on market risk management are directly supervised by the the Market and Investment Risk Committee and are pursued in accordance with the framework set out in the Market Risk Policy and the Structural Risk Policy approved by the Management Board and the Supervisory Board. Risk management structure and organisation The key objective of the market risk policy pursued by the Bank is to reduce the impact of variable market factors on the bank’s profitability and to grow income within the strictly defined risk limits while ensuring the bank’s liquidity and market value. The market risk policies of Santander Bank Polska establish a number of risk measurement and mitigation parameters in the form of limits and metrics. Risk limits are periodically reviewed to align them with the bank’s strategy. Interest rate and FX risks linked to the banking business are managed centrally by the Financial Management Division. The Division is also responsible for acquiring funding, managing liquidity and making transactions on behalf of ALCO. This activity is controlled by the measures and limits approved by the Market and Investment Risk Committee, the bank’s Management Board and the Supervisory Board. The debt securities and the interest rate and FX hedging portfolio is managed by ALCO, which takes all decisions on the portfolio’s value and structure. The market risk on the trading portfolio is managed by the Corporate and Investment Banking Department, which is also responsible for the activities of Santander Brokerage Poland. The Group’s trading activity is subject to a system of measures and limits, including Value at Risk, stop loss, position limits and sensitivity limits. These limits are approved by the Market and Investment Risk Committee, the bank’s Management Board and the Supervisory Board. The Financial Risk Department within the Risk Management Division is responsible for ongoing risk measurement, implementation of control procedures and risk monitoring and reporting. The Department is also responsible for shaping the market risk policy, proposing risk measurement methodologies and ensuring consistency of the risk management process across the Group. Owing to the fact that the Department is a part of the Risk Management Division, the risk measurement and monitoring processes are separate from the risk-taking units. The market risk of equity instruments held by Santander Brokerage Poland (shares, index-linked securities) is managed by Santander Brokerage Poland itself and supervised by the Market and Investment Risk Committee of Santander Bank Polska S.A. The bank’s Market and Investment Risk Committee, chaired by the Management Board member in charge of the Risk Management Division, is responsible for independent control and monitoring of market risk in the Bank’s banking and trading books. Risk identification and measurement The trading book of Santander Bank Polska contains securities and derivatives held by the Corporate and Investment Banking Division for trading purposes. The instruments are marked to market each day, and any changes in their value are reflected in the profit and loss. Market risk in the trading book includes interest rate risk, currency risk and repricing risk. The interest rate risk in the bank’s banking book is the risk of adverse impact of interest rate changes on the Group’s income and the value of its assets and liabilities. Interest rate risk arises primarily on transactions entered in the bank’s branches and in the business and corporate centres, as well as the transactions made in the wholesale market by the Financial Management Division. Additionally, interest rate risk can be generated by transactions concluded by other units, e.g. through acquisition of municipal/ commercial bonds or the bank’s borrowings from other sources than the interbank market. Santander Bank Polska uses several methods to measure its market risk exposure. The methods employed for the banking portfolio are the MVE and NII sensitivity measures, stress tests and Value at Risk (VaR), while the methods used for the trading portfolio include: VaR and stressed VaR, stop loss, sensitivity measures (PV01) and stress tests. The risk measurement methodology is subject to an independent initial and periodic validation, the results of which are presented for approval to the Market and Investment Risk Committee. At Santander Bank Polska, the VaR in the trading portfolio is determined using a historical method as a difference between the mark-to-market value of positions and the market values based on the most severe movements in market rates from a determined observation window. VaR is calculated separately for interest rate risk, FX risk and the two risks at the same time. VaR is also calculated for the repricing risk of the equity instruments portfolio of Santander Brokerage Poland. 56 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Due to the limitations of the VaR methodology, the bank additionally performs sensitivity measurement (showing how position values change in reaction to price/profitability movements), Stressed VaR measurement and stress tests. Risk reporting The responsibility for reporting liquidity risk rests with the Risk Management Division, specifically the Financial Risk Department. Each day, the Financial Risk Department controls the market risk exposure of the trading book in accordance with the methodology laid down in the Market Risk Policy. It verifies the use of risk limits and reports risk levels to units responsible for risk management in the trading book, to Santander Group and to the Market and Investment Risk Committee. Once a month, the Financial Risk Department provides information about the risk exposure of the trading book and selected measures to the Market and Investment Risk Committee and prepares the Risk Dashboard (in cooperation with other units of the Risk Management Division), which is presented to the Market and Investment Risk Committee. The results of market risk measurement with regard to the banking book are reported by the Financial Risk Department to persons responsible for operational management of the bank’s balance sheet structure and to persons in charge of structural risk management on a daily basis (information about the ALCO portfolio) or on a monthly basis (interest rate gap, NII and MVE sensitivity measures, stress test results, VaR). This information is also reported each month to the bank’s senior executives (the Market and Investment Risk Committee, ALCO). The selected key interest rate risk measures, including risk appetite measures defined for the bank’s banking book, are reported to the bank’s Management Board and Supervisory Board. Risk prevention and mitigation The Bank has adopted a conservative approach to risk-taking both in terms of the size of exposures and the types of products. A large portion of the Financial Market Area activity revolves around mitigating the risk related to customer transactions at the retail and corporate level. In addition, flows from customer transactions are generally for non-market amounts and tenors non-quoted directly at the market and thus risk capacity is required to manage these mismatches with wholesale transactions. In the opinion of the Management Board, the market risk limits are at a safe and relatively low level in relation to the scale of the Bank's core business and are in place to allow sufficient capacity and time to neutralise interest rate and foreign exchange risks, while at the same time allowing the Financial Market Area to hold some of portfolio positions opened to add value to the organisation. As part of the activities of the Financial Markets Area, the activity is focused on hedging the risk arising from customer transactions and on the role of a market maker, which is directly reflected in the level of limits and budgetary targets of the Financial Markets Area. The combination of transactions made by the Financial Market Area and positions transferred from the bank arising from customers’ FX and derivative activity create the overall interest rate and currency risk profilesin the bank’s trading portfolio, which are managed under the market risk policy and operational limits in place. The Financial Market Area subsequently decides either to close these positions or keep them open in line with approved strategy, market view and within the approved limits. The return earned is a mix of flow management and market making. However, there is no intention to keep aggressive trading positions. The interest rate and currency risk of the Financial Market Area is managed via the trading book in accordance with the Market Risk Policy approved by the Management Board. Accounting and risk systems help to ensure allocation of each position into appropriate books. The relevant desks are responsible for suitable risk activity (interest rate or currency risk). To ensure that the trading book positions are marketable, the bank controls the gross value of the positions (separately long and short positions) versus the entire market. This is to check if it is technically possible to close an open position one way, without taking into account other closings. The control is performed by the Financial Risk Department separately for currency positions and interest rate positions. The control results are reported to the Financial Market Area. As regards market risk in the banking book, all positions that generate repricing risk are transferred for management to the Financial Management Division, responsible for shaping the bank’s balance sheet structure, including by entering into transactions in the interbank market so as to manage the interest rate risk profile according to the approved risk strategy and in compliance with the allocated risk limits. The interest rate risk in the banking book is managed based on the following limits: · NII sensitivity limit (the sensitivity of net interest income to a parallel shift of the yield curve by 100 bp); · MVE sensitivity limit (the sensitivity of the market value of equity to a parallel shift of the yield curve by 100 bp). 57 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The sensitivity measures for 2023 and 2022 are shown in the table below. It presents the results of scenarios, in which the impact of changes in interest rates on interest income and the economic value of capital would be negative (in PLN m). NII Sensitivity MVE Sensitivity 1 day holding period 31.12.2023 31.12.2022 31.12.2023 31.12.2022 Maximum (342) (426) (722) (595) Average (280) (358) (380) (488) as at the end of the period (147) (334) (644) (494) Limit (500) (900) (925) (800) In 2023, the levels of use of the interest rate risk limit for the sensitivity of interest income (NII) were lower, and for MVE (economic value of capital) increased, compared to 2022. No RED exceeses of operational limits were observed. The increase in exposure to MVE was caused by the implementation of the strategy of hedging the sensitivity of interest income, which consequently increased the duration of the banking book portfolio. Implementation of the above hedging strategy was based mainly on concluding cash-flow hedge transactions and expanding the ALCO portfolio with fixed-coupon debt securities. In 2023, operational limits for the sensitivity of MVE in PLN and Total items were increased. VaR in the banking portfolio is calculated separately as a combined effect of EaR (Earnings-at-Risk) and EVE VaR (value at risk of the economic value of equity). The key methods of measurement of the interest rate risk in the trading book include the VaR methodology, stop loss, PV01 sensitivity measurement and stress tests. The VaR is set for open positions of the Financial Market Area using the historical simulations method. Under this method the bank estimates the portfolio value of 520 scenarios generated on the basis of historically observable changes in market parameters. VaR is then estimated as the difference between the current valuation and the valuation of the 99th percentile of the lowest valuations. The stop-loss mechanism is used to manage the risk of loss on positions subject to fair value measurement through profit or loss. Stress tests are used in addition to these measures by providing an estimate of the potential losses in the event of materialisation of the stressed conditions in the market. The assumptions of stress scenarios are based on sensitivity reports and on extreme market rate movement scenarios set using the highest daily and monthly changes in interest rates. The table below shows risk measures at the end of 2023 and 2022 for 1-day position holding period (in PLN k): Interest rate risk VAR 1 day holding period 31.12.2023 31.12.2022 Average 7 443 5 321 Maximum 14 049 14 622 Minimum 3 258 960 as at the end of the period 6 952 9 550 Limit 13 812 13 205 In 2023, VaR limits were exceeded. The excesses were recorded in the total VaR and VaR of interest rate risk in the Bank's trading book. A total of three excesses occurred in the fourth quarter. The excesses were caused by current operating activities and the activity of the Bank's clients on debt and interest rate instruments, their amount was immaterial and they were closed on the day of their identification in accordance with the assumptions of the risk management processes in the Bank's trading book. The observed average values of the VaR measure in 2023 compared to 2022 were higher, which is due to the increased variability of the observed risk factors continuing in 2023, as well as the natural increase in the scale of the Bank's business activities. In terms of the maximum level of interest rate market risk in the Bank's trading book, there are no significant changes compared to the previous year. FX risk is the risk that adverse movements in foreign exchange rates will have an impact on performance (and result in losses). This risk is managed on the basis of the VaR limit for the open currency positions in the Group’s trading portfolio and the portfolio of Santander Brokerage Poland which manages open positions linked to the market maker activity. Stress tests are used in addition to this measure by providing an estimate of the potential losses in the event of materialisation of the stressed conditions in the market. Stress tests use the currency exposure and the scenarios of extreme movements in currency rates based on historical data. Furthermore, the stop-loss mechanism is used for managing the risk of losses on trading positions. In accordance with its policy, the Bank does not maintain open positions on currency options. Transactions made with customers are immediately closed in the interbank market thus limiting the Group’s exposure to the market risk on the currency options portfolio. 58 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Open FX positions of subsidiaries are negligible and are not included in the daily risk estimation. In the case of Santander Consumer Bank S.A., it has a separate banking license and independently manages risk, which management is controlled by the Market and Investment Risk Committee of Santander Bank Polska. The table below illustrates the risk measures at the end of December 2023 and 2022 (in PLN k). FX risk VAR 1 day holding period 31.12.2023 31.12.2022 Average 749 1 021 Maximum 2 411 2 346 Minimum 81 68 as at the end of the period 648 1 144 Limit 3 542 3 301 In 2023, the VaR limit for currency risk was not exceeded. The tables below present the bank’s key FX positions as at 31 December 2023 and in the comparable period. 31.12.2023 PLN EUR CHF USD Other Total ASSETS Cash and balances with central banks 6 814 584 977 508 58 997 146 384 277 637 8 275 110 Loans and advances to banks 787 831 7 206 043 26 333 801 394 226 799 9 048 400 Loans and advances to customers 114 746 054 23 012 437 1 449 638 1 588 206 106 766 140 903 101 Investment securities 58 671 423 3 214 968 - 1 066 195 - 62 952 586 Selected assets 181 019 892 34 410 956 1 534 968 3 602 179 611 202 221 179 197 LIABILITIES Deposits from banks 1 386 837 1 254 190 5 588 19 668 2 010 2 668 293 Deposits from customers 152 097 054 30 897 821 986 876 9 502 806 1 881 380 195 365 937 Subordinated liabilities 1 017 383 1 568 093 - - - 2 585 476 Selected liabilities 154 501 274 33 720 104 992 464 9 522 474 1 883 390 200 619 706 31.12.2022 PLN EUR CHF USD Other Total ASSETS Cash and balances with central banks 8 679 447 852 099 71 968 390 655 140 930 10 135 099 Loans and advances to banks 1 005 531 8 323 293 14 193 249 235 117 548 9 709 800 Loans and advances to customers 107 851 164 22 085 511 3 983 222 899 059 23 872 134 842 828 Investment securities 47 040 401 1 755 829 - 1 290 708 - 50 086 938 Selected assets 164 576 543 33 016 732 4 069 383 2 829 657 282 350 204 774 665 LIABILITIES Deposits from banks 1 052 315 1 092 755 67 858 29 418 2 782 2 245 128 Deposits from customers 143 382 094 29 110 865 1 076 970 10 115 954 1 969 377 185 655 260 Subordinated liabilities 1 021 723 1 684 162 - - - 2 705 885 Selected liabilities 145 456 132 31 887 782 1 144 828 10 145 372 1 972 159 190 606 273 The gap in the currency position in CHF results from the surplus of mortgage loans in CHF over deposits in this currency. It is gradually decreasing due to the repayment of the mortgage portfolio. CHF loans are now largely financed using CIRS transactions. On the liabilities side, significat level of foreign currency deposits, mainly in EUR is observed. The risk attached to the prices of equity instruments listed in active markets is managed by Santander Brokerage Poland, which operates within the Corporate and Investment Banking Division. This risk is generated by own trades of Santander Brokerage Poland concluded in regulated markets (spot market instruments and futures). It is measured using a Value at Risk model based on the historical analysis method. 59 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The market risk management in Santander Brokerage Poland is supervised by the Market and Investment Risk Committee of Santander Bank Polska S.A. The Committee sets the VaR limit for Santander Brokerage Poland, approves changes in the risk measurement methodology and oversees the risk management process. The table below presents the risk measures in 2023 and 2022 (in PLN k). Equity risk VAR 1 day holding period 31.12.2023 31.12.2022 Average 379 261 Maximum 759 532 Minimum 112 98 as at end of the period 424 258 Limit 1 574 2 135 In 2023, the VaR limit for equity risk was not exceeded. Interest Rate Benchmark reform In connection with the Regulation (EU) of 2016 of the European Parliament and of the Council (2016/1011) and the decisions of ICE Benchmark Administration Limited on the gradual phasing out of the calculation and publication of reference indices from the LIBOR family, Santander Bank Polska ran the IBOR Program from 2020 to mid-2023 aimed at preparing the Bank for changes resulting from these decisions. The IBOR Program focused on changes necessary to introduce new products based on interest rate indices compliant with the BMR Regulation, in particular indices replacing the interim LIBOR (mainly GBP, EUR, CHF and USD). In the fourth quarter of 2022, the IBOR Program Steering Committee extended the scope of work to include changes resulting from the initiated reform of indicators in Poland. The reform of indicators in Poland has accelerated since the adoption of the Act of July 7, 2022 on crowdfunding of business ventures and assistance to borrowers (Journal of Laws of 2022, item 1488), which in Art. 85 regulates the procedure for discontinuing the development of the WIBOR indicator or its liquidation. Then, the National Working Group for the reform of benchmarks in Poland was established, which included, among others: introduction of a new indicator whose input data would be only one-day transactions. On September 27, 2022, the Road Map for the process of replacing the WIBID and WIBOR indicators with the WIRON indicator was published. On October 25, 2023, the assumptions of the Road Map were modified to postpone the date of conversion of the historical portfolio of contracts and instruments from WIBOR to WIRON to the end of 2027. Work at the Bank implementing the assumptions of the National Working Group is carried out as part of the WIBOR Project by a wide group of experts representing all business lines of the Bank, supported by experts from renowned consulting companies, under the supervision of the Steering Committee consisting of members of the Management Board and top-level staff. The Bank is working to introduce products based on the WIRON index to its offer in accordance with the assumptions of the Road Map. Work in Santander Bank Polska S.A. is coordinated with ongoing preparations both in subsidiaries and at the level of the entire Santander Group. The table presents break down of assets and liabilities of Santander Bank Polska as at 31 December 2023: 31.12.2023 Nominal value Assets Liabilities Assets and liabilities exposed to PLN WIBOR Cash and balances at central banks - - Loans and advances to/deposits from banks 200 000 192 000 Loans and advances to/deposits from customers 76 034 100 11 278 000 Reverse repurchase/repurchase agreements 846 300 111 200 Debt securities/ in issue 17 466 000 6 386 000 Lease receivables/liabilities - - Total value of assets and liabilities exposed to PLN WIBOR 94 546 400 17 967 200 Trading Derivatives (notional) 437 292 000 387 549 000 Hedging Derivatives (notional) 11 383 000 30 102 000 60 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN The table presents break down of assets and liabilities of Santander Bank Polska as at 31 December 2022: 31.12.2022 Nominal value Assets Liabilities Assets and liabilities exposed to PLN WIBOR Cash and balances at central banks - - Loans and advances to/deposits from banks 100 000 411 636 Loans and advances to/deposits from customers 78 980 876 9 536 291 Reverse repurchase/repurchase agreements 380 200 240 000 Debt securities/ in issue 16 894 000 1 482 000 Lease receivables/liabilities - - Total value of assets and liabilities exposed to PLN WIBOR 111 912 076 22 260 927 Trading Derivatives (notional) 291 114 000 279 756 000 Hedging Derivatives (notional) 15 557 000 10 591 000 In connection with the IBOR and WIBOR Reform, the Bank is exposed to the following risks: Business Risk: Switching to alternative benchmarks may lead to a risk of abuse or misconduct towards clients, resulting in customer complaints, penalties or reputational damage. Possible risks include: risk of misleading customers, risk of market abuse (including insider dealing and market manipulation), risk of anti-competitive practices, both during and after the transition (e.g. collusion and exchange of information) and risks caused by conflicts of interest. The Group has strong transition management structures in place to ensure risk mitigation. Price risk: The transition to alternative benchmarks and the discontinuation of the use of interest rate benchmarks may affect the pricing mechanisms applied by the Group for certain transactions, including the establishment of a Standard Variable Rate applicable to mortgage loans. For some financial instruments, it will be necessary to develop new pricing models. Risk associated with the interest rate base: This risk consists of two components: – if bilateral negotiations with the Group's counterparties are not successful before the IBOR ceases to apply, there is significant uncertainty as to the future interest rate. This situation leads to additional interest rate risk, which was not taken into account at the time of entering into contracts and is not the subject of our interest rate risk management strategy. For example, in some cases, provisions on the use of other indicators in contracts where the IBOR rate is applied, may result in the remaining period maintaining a fixed interest rate at the level of the last IBOR rate The Group works closely with all counterparties to avoid such a situation, but if it occurs, the interest rate risk management policy applied in the Group will be applied as standard and may result in liquidation of the interest rate swaps or the conclusion of new swaps to maintain the combination of variable and fixed interest rates for the debt held. – interest rate risk may also arise where the transition to alternative benchmarks for non-derivatives and derivatives held to manage the interest rate risk associated with the non-derivative occurs at different times. This risk may also occur if you switch to different rates for back-to-back derivatives at different times. The Group will monitor that the risk management referred to above is carried out in accordance with the applicable risk management principles, updated to allow for a temporary mismatch not exceeding 12 months and to establish an additional basis for interest rate swaps, if required. Hedge Accounting: If the transition to alternative benchmarks for certain contracts does not allow the application of the exemptions provided for by the Phase 2 amendments, then the effect may be to terminate the hedging relationship and, consequently, increased volatility in the income statement. This may happen if the newly designated hedging relationships are not carried out or if the non-derivative financial instruments are amended or removed from the financial statements. The Bank did not decide to change the existing hedging relationships with WIBOR. However, due to the expected replacement of the benchmark, the Bank identifies that hedging relationships in which this benchmark is present may be exposed to the risk described above related to the effectiveness of the relationship. In the case of loan agreements related to the LIBOR CHF rate, the Bank switched to RFR ratios in accordance with the decision of the European Commission, and in the case of derivatives that hedge this portfolio, the LIBOR CHF rate will change in accordance with the ISDA Protocol standard. Based on the effectiveness test based on new CHF rates - both for the loan portfolio and for the hedging instrument - the Bank assessed that there is a high probability that the effectiveness requirement of the established hedging relationships will be met in the future. 61 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Therefore, in the case of the strategies hedging the CHF loan portfolio, the Bank decided to continue the established hedging relationships based on the existing instruments. Risk of legal proceedings: In the absence of agreement on the implementation of the Interest Rate Benchmark Reform for existing contracts (e.g. due to different interpretations of the applicable provisions on the use of other benchmarks), there is a risk of litigation and protracted disputes with counterparties, which may result in additional costs, e.g. legal costs. The Group works closely with all contractors to avoid such a situation. Regulatory risk: Regulatory models and methodologies are currently being updated (e.g. to take account of new market data). There is a risk that full updates, testing and acceptance of models by regulators will not take place on time. Operational risk: We are updating our IT systems to fully manage the transition to alternative benchmarks. There is a risk that such updates will not be fully on time, resulting in additional manual procedures involving operational risk. Liquidity risk Introduction Liquidity risk is the risk that the bank fails to meet its contingent and non-contingent obligations towards customers and counterparties as a result of a mismatch of financial cash flows. The activity and strategies on liquidity risk management are directly supervised by the Market and Investment Risk Committee and are pursued in accordance with the framework set out in the Liquidity Risk Policy approved by the Management Board and the Supervisory Board. Risk management structure and organisation The objective of the Liquidity Risk Policy of Santander Bank Polska is to: · ensure the ability to finance assets and satisfy claims, both current and future, in a timely manner and at an economic price; · manage the maturity mismatch between assets and liabilities, including the intraday mismatch of cash flows; under normal and stress conditions; · set a scale of the liquidity risk in the form of various internal limits; · ensure proper organisation of the liquidity management process within the whole Santander Bank Polska; · prepare the organisation for emergence of adverse factors, either external or internal; · ensure compliance with regulatory requirements, both qualitative and quantitative. The general principle adopted by Santander Bank Polska in its liquidity management process is that all expected outflows occurring within one month in respect of deposits, current account balances, loan drawdowns, guarantee payments and transaction settlements should be at least fully covered by the anticipated inflows or available High Quality Liquid Assets (HQLA) assuming normal or predictable conditions for the Group’s operations. The HQLA category substantially includes: cash on hand, funds held in the nostro account with the NBP (National Bank of Poland) in excess of the minimum reserve requirement and securities which may be sold or pledged under repo transactions or NBP lombard loans. As at 31 December 2023, the value of the HQLA buffer was PLN 78.3 bn for the Bank and PLN 82.9 bn for the Group. The purpose of this policy is also to ensure an adequate structure of funding in relation to the growing scale of the bank’s business by maintaining structural liquidity ratios at pre-defined levels. The bank uses a suite of additional watch limits and thresholds with respect to the following: · loan-to-deposit ratio; · ratios of reliance on wholesale funding, which are used to assess the concentration of foreign currency funding from the wholesale market; · concentration of deposit; · level of encumbered assets; · ratios laid down in CRD IV/CRR – LCR and NSFR; · survival horizon under stressed conditions; · the HQLA buffer; 62 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN · the buffer of assets which might be liquidated over an intraday horizon. The internal liquidity limits, including the limits established in the Risk Appetite Statement, are set on the basis of both historical values of the selected liquidity ratios as well as their future values which are estimated against a financial plan. The limits also take into account the results of stress tests. At least once a year, Santander Bank Polska carries out the Internal Liquidity Adequacy Assessment Process (ILAAP), which is designed to ensure that the bank can effectively control and manage liquidity risk. In particular, the ILAAP ensures that the bank: · maintains sufficient capacity to meet its obligations as they fall due; · reviews the key liquidity risk drivers and ensures that stress testing reflects these drivers and that they are appropriately controlled; · provides a record of both the liquidity risk management and governance processes; · carries out assessment of counterbalancing capacity. The ILAAP results are subject to approval by the Management Board and the Supervisory Board to confirm adequacy of the liquidity level of Santander Bank Polska in terms of liquid assets, prudent funding profile and the Group’s liquidity risk management and control mechanisms. Risk identification and measurement The responsibility for identification and measurement of liquidity risk rests with the Risk Management Division, specifically the Financial Risk Department. The role of the Department is to draft liquidity risk management policies, carry out stress tests and to measure and report on risk on an ongoing basis. Liquidity is measured by means of the modified liquidity gap, which is designed separately for the PLN and currency positions. The reported future contractual cash flows are subject to modifications based on: statistical analyses of the deposit and credit base behaviour and assessment of product/ market liquidity – in the context of evaluation of the possibility to liquidate Treasury securities by selling or pledging them in repo transactions or using liquidity support instruments with NBP, as well as the possibility of transaction rolling in the interbank market. When measuring liquidity risk, the bank additionally analyses the degree of liquidity outflows arising from potential margin calls due to changes in the value of derivative transactions and collateral needs related to secured financing transactions resulting from the downgrade of the bank’s credit rating, among other things. Concurrently, liquidity is measured in accordance with the requirements laid down in the CRD IV/ CRR package and in their implementing provisions. In order to establish a detailed risk profile, the bank conducts stress tests using the eight following scenarios: · baseline scenario, which assumes non-renewability of wholesale funding; · idiosyncratic liquidity crisis scenarios (specific to the bank); · local systemic liquidity crisis scenario; · global systemic liquidity crisis scenario; · combined liquidity crisis scenario (idiosyncratic crisis and local and global systemic crisis); · deposit outflows in a one-month horizon; · scenario of accelerated deposit withdrawals via electronic channels. For each of the above scenarios, the bank estimates the minimum survival horizon. For selected scenarios, the bank sets survival horizon limits which are subsequently included in the liquidity risk appetite. In addition, the bank performs stress tests for intraday liquidity as well as reverse stress tests. Risk reporting The responsibility for reporting liquidity risk rests with the Risk Management Division, specifically the Financial Risk Department. The results of liquidity risk measurement are reported by the Financial Risk Department on a daily basis to persons in charge of operational management of the bank’s liquidity and to persons responsible for liquidity risk management (information about intraday and current liquidity, including FX funding ratios and LCR) and – on a monthly basis – to senior executives (other liquidity ratios, including regulatory ratios). 63 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN Risk prevention and mitigation The responsibility for supervision over the liquidity risk management process rests with the Assets and Liabilities Committee (ALCO), which also provides advice to the Management Board. ALCO prepares management strategies and recommends to the Management Board appropriate actions with regard to strategic liquidity management, including strategies of funding the bank’s activity. Day-to-day management of liquidity is delegated to the Financial Management Division. The Assets and Liabilities Management Department, which is a part of the Division, is responsible for developing and updating the relevant liquidity management strategies. The bank has a liquidity contingency plan approved by the Management Board and Supervisory Board to cater for unexpected liquidity problems, whether caused by external or internal factors. The plan, accompanied by stress tests, includes different types of scenarios and enables the bank to take adequate and effective actions in response to unexpected external or internal liquidity pressure through: · identification of threats to the bank’s liquidity on the basis of a set of early warning ratios which are subject to ongoing monitoring; · effective management of liquidity/ funding, using a set of possible remedial actions and the management structure adjusted to the stressed conditions; · communication with customers, key market counterparties, shareholders and regulators. In 2022, Santander Bank Polska focused on maintaining an optimal financing structure. The increase in the required reserve rate and the increase in market interest rates resulted in a tougher competition for customer deposits in the banking sector. As at 31 December 2023, the loan-to-deposit ratio was 72% compared to 78% as at 31 December 2022, the Liquidity Coverage Ratio was 201%, and 163% as at 31 December 2022. In 2023 and in the comparable period, all key regulatory ratios applicable to the bank and Group were maintained at the required levels. The tables below show the cumulated liquidity gap on the standalone level (for Santander Bank Polska S.A.) as at 31 December 2023 and in the comparable period (by nominal value). 31.12.2023 A'vista up to 1 month from 1 to 3 months from 3 to 6 months from 6 to 12 months from 1 to 2 years from 2 to 5 years above 5 years Assets 31 731 453 20 940 317 13 890 830 15 353 533 12 806 784 30 234 789 55 910 376 61 614 191 Liabilities 144 192 367 23 934 806 21 563 763 6 601 005 2 563 393 4 605 329 2 257 670 5 047 including: - Sell-buy-back transactions - 273 388 - - - - - - - Deposits from banks 2 890 791 - - - - - - - - Deposits from customers 142 553 488 23 661 419 21 563 763 4 701 005 2 563 393 200 929 139 799 5 047 - Debt securities in issue - 1 900 000 3 969 600 - - Subordinated liabilities 434 800 2 117 871 - - Lease liabilities - 10 112 22 001 30 968 59 122 88 015 105 570 168 224 Contractual liquidity gap (112 460 914) (2 994 489) (7 672 933) 8 752 528 10 243 391 25 629 460 53 652 706 61 609 144 Cummulated contractual liquidity gap (112 460 914) (115 455 403) (123 128 336) (114 375 808) (104 132 417) (78 502 957) (24 850 251) 36 758 893 Net derivatives Gross asset derivatives - 49 566 646 27 474 784 12 162 859 19 106 106 9 342 500 16 601 989 8 469 903 Gross liabilities derivatives - 49 740 638 27 240 637 12 173 600 19 026 232 9 723 619 17 084 146 8 512 279 Off Balance positions Total 51 209 834 41 909 452 365 305 685 411 334 493 731 423 367 23 -guarantees & letters of credits 16 719 678 - - - - - - - -credit lines 8 329 973 - - - - - - - * The vast majority of other financial liabilities are within the range of 1 month 64 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 31.12.2022 A'vista up to 1 month from 1 to 3 months from 3 to 6 months from 6 to 12 months from 1 to 2 years from 2 to 5 years above 5 years Assets 31 412 580 22 572 667 10 477 992 15 455 954 11 601 486 25 715 751 50 890 044 60 320 609 Liabilities 140 694 270 28 030 436 14 825 189 4 863 880 7 469 785 339 719 1 896 164 1 180 110 including: - - - - - - - - - Sell-buy-back transactions - 2 155 066 - - - - - - - Deposits from banks 2 232 441 - - - - - - - - Deposits from customers 138 461 829 25 863 461 12 455 302 4 828 661 3 882 590 249 100 102 683 14 401 - Debt securities in issue - - 2 344 950 - 3 517 425 - - - - Subordinated liabilities - - - - - - 1 674 763 1 000 000 - Lease liabilities - 11 909 24 937 35 219 69 770 90 619 118 718 165 709 Contractual liquidity gap (109 281 690) (5 457 769) (4 347 197) 10 592 074 4 131 701 25 376 032 48 993 880 59 140 499 Cummulated contractual liquidity gap (109 281 690) (114 739 459) (119 086 656) (108 494 582) (104 362 881) (78 986 849) (29 992 969) 29 147 530 Net derivatives - - - - - - - - Gross asset derivatives - 36 464 864 29 237 784 10 305 577 18 283 306 9 198 349 12 127 523 1 810 158 Gross liabilities derivatives - 36 611 513 29 043 129 10 504 596 17 807 468 9 178 467 13 039 363 1 930 353 Off Balance positions Total 40 302 947 40 636 235 441 207 874 372 736 159 911 40 150 6 123 -guarantees & letters of credits 11 311 673 - - - - - - - -credit lines 7 912 022 - - - - - - - * The vast majority of other financial liabilities are within the range of 1 month The tables below show maturity analysis of financial liabilities and receivables on the standalone level (for Santander Bank Polska S.A.) as at 31 December 2023 and in the comparable period (the undiscounted cash flow – capital and interests). 31.12.2023 A'vista up to 1 month from 1 to 3 months from 3 to 6 months from 6 to 12 months from 1 to 2 years from 2 to 5 years above 5 years Assets 31 738 427 21 721 070 15 679 771 18 380 642 17 393 994 37 709 864 70 931 564 92 804 892 Liabilities 144 401 336 24 182 826 21 918 885 6 971 840 2 878 647 4 978 351 2 490 110 5 119 including: - Sell-buy-back transactions - 273 607 - - - - - - - Deposits from banks 2 881 155 - - - - - - - - Deposits from customers 143 313 364 23 909 219 21 889 171 4 820 098 2 640 588 206 683 158 761 5 119 - Debt securities in issue - 2 089 613 152 535 4 200 401 - - Subordinated liabilities 29 714 62 129 85 524 571 267 2 331 350 - Lease liabilities - 11 046 23 182 31 924 60 891 98 365 115 096 179 268 Contractual liquidity gap (112 662 909) (2 461 756) (6 239 114) 11 408 802 14 515 347 32 731 513 68 441 454 92 799 773 Cummulated contractual liquidity gap (112 662 909) (115 124 665) (121 363 779) (109 954 977) (95 439 630) (62 708 117) 5 733 337 98 533 110 Net derivatives - 12 174 ( 340 336) ( 326 437) 530 339 440 466 892 622 108 757 Gross asset derivatives - 49 698 730 27 733 806 12 632 545 19 783 474 10 346 933 18 317 289 10 148 472 Gross liabilities derivatives - 49 861 251 27 472 682 12 647 854 19 682 053 10 676 852 18 717 522 10 166 980 Off Balance positions Total 51 209 834 41 909 452 365 305 685 411 334 493 731 423 367 23 -guarantees & letters of credits 16 719 678 - - - - - - - -credit lines 8 329 973 - - - - - - - * The vast majority of other financial liabilities are within the range of 1 month 65 Separate Financial Statements of Santander Bank Polska for 2023 In thousands of PLN 31.12.2022 A'vista up to 1 month from 1 to 3 months from 3 to 6 months from 6 to 12 months from 1 to 2 years from 2 to 5 years above 5 years Assets 31 419 274 23 454 971 11 901 455 18 693 229 16 675 192 33 755 847 66 679 048 101 286 987 Liabilities 140 888 599 28 223 382 15 083 262 5 046 108 7 792 454 553 242 2 347 710 1 241 540 including: - Sell-buy-back transactions - 2 159 469 - - - - - - - Deposits from banks 2 245 112 - - - - - - - - Deposits from customers 138 643 487 26 051 081 12 642 924 4 942 197 4 090 878 255 909 127 233 22 513 - Debt securities in issue - - 2 392 646 - 3 525 480 - - - - Subordinated liabilities - - 21 758 67 069 101 108 193 917 2 083 093 1 036 423 - Lease liabilities 12 832 25 934 36 842 74 988 103 416 137 384 182 604 Contractual liquidity gap (109 469 325) (4 768 411) (3 181 807) 13 647 121 8 882 738 33 202 605 64 331 338 100 045 447 Cummulated contractual liquidity gap (109 469 325) (114 237 736) (117 419 543) (103 772 422) (94 889 684) (61 687 079) 2 644 259 102 689 706 Net derivatives - 162 092 ( 52 198) ( 79 221) 212 843 110 706 61 085 20 799 Gross asset derivatives - 36 569 237 29 406 219 10 533 038 18 744 547 9 913 497 13 012 746 1 975 034 Gross liabilities derivatives - 36 684 731 29 248 320 10 767 018 18 333 971 9 762 493 13 770 409 2 073 586 Off Balance positions Total 40 302 947 40 636 235 441 207 874 372 736 159 911 40 150 6 123 -guarantees & letters of credits 11 311 673 - - - - - - - -credit lines 7 912 022 - - - - - - - * The vast majority of other financial liabilities are within the range of 1 month In the tables above, the liquidity gap analysis does not take into account the effect of uncertainty related to flows related to CHF-indexed mortgage loans. Due to the risks described in note 46, cash flows may occur in terms, currencies and amounts other than currently included in In the opinion of the bank, however, this will not cause problems related to compliance with the liquidity regulations in force at the bank. The Bank uses secured instruments to fund its activity to a limited degree only. However, in accordance with the existing contractual provisions, if the Group’s rating is reduced by three notches, the maximum potential additional security on account of those instruments would be PLN 70,75 m. At the same time, it should be noted that this potential obligation is not unconditional and its final value would depend on negotiations between the bank and its counterparty concerning the transactions. 66 Separate Financial Statements of Santander Bank Polska for 2023 4. Capital management Introduction It is the policy of Santander Bank Polska to maintain a level of capital adequate to the type and scale of operations and the level of risk. The level of own funds required to ensure safe operations of the bank and Santander Bank Polska Group and capital requirements estimated for unexpected losses is determined in accordance with: · The so-called CRD IV / CRR package, which consists of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR) and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV), which became effective on 1 January 2014 by the decision of the European Parliament and the European Banking Authority (EBA). · Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012. · Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures, · Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic, · These requirements include the recommendations of the KNF regarding the use of national options and higher risk weight for exposures secured by real estate mortgages, including: residential real estate, for which the amount of principal or interest installment depends on changes in exchange rates or currencies other than the currencies of revenue achieved by the debtor, where a risk weight of 150% is assigned, and office premises or other commercial real estate located in the Republic of Poland, where a risk weight of 100% is assigned, except for exposures secured on commercial real estates which are used by borrower to conduct his own business and do not generate income by rent or proceeds from their sale where a risk weight of 50% is assigned. · The Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (“Macroprudential Supervision Act”), implementing CRD IV into the Polish law with regard to, among other things, additional capital buffers to be maintained by banks. · Recommendations of the KNF regarding an additional capital requirement relating to the portfolio of FX mortgage loans for households. The Management Board is accountable for capital management, calculation and maintenance processes, including the assessment of capital adequacy in different economic conditions and the evaluation of stress test results and their impact on internal and regulatory capital and capital ratios. Responsibility for the general oversight of internal capital estimation rests with the Supervisory Board. The Management Board has delegated ongoing capital management to the Capital Committee which conducts a regular assessment of the capital adequacy of the bank and Santander Bank Polska Group, including in extreme conditions, the monitoring of the actual and required capital levels and the initiation of transactions affecting these levels (e.g. by recommending the value of dividends to be paid). The Capital Committee is the first body that defines the capital policy, principles of capital management and principles of capital adequacy assessment. All decisions regarding any increase or decrease in capital are taken ultimately by relevant authorities within the bank in accordance with the applicable law and the bank’s Statutes. Pursuant to the bank’s information strategy, details about the level of own funds and capital requirements are presented in the separate report entitled “Information on capital adequacy of Santander Bank Polska Group as at 31 December 2023”. In 2023, the Bank and Santander Bank Polska Group met all regulatory requirements regarding capital management. 67 Separate Financial Statements of Santander Bank Polska for 2023 Capital Policy As at 31 December 2023, the minimum capital ratios satisfying the provisions of the CRR and the Macroprudential Supervision Act as well as regulatory recommendations regarding additional own funds requirements under Pillar 2 at the level of Santander Bank Polska S.A. were as follows: · Tier 1 capital ratio of 9.87%; · total capital ratio of 11.87%; for Santander Bank Polska Group, those ratios were as follows: · Tier 1 capital ratio of 9.880%; · total capital ratio of 11.883%. To mitigate the risk of credit crunch arising from the Covid-19 pandemic, on 18 March 2020 the Minister of Finance, issued a regulation based on the recommendation of the Financial Stability Committee removing banks’ obligation to keep the systemic risk buffer of 3%. The released funds may be used by banks to support their lending activity and cover potential losses in the upcoming quarters. The aforementioned capital ratios take into account: · The minimum capital ratios as required by the CRR: Common Equity Tier 1 ratio at 4.5%, Tier 1 capital ratio at 6.0% and total capital ratio at 8.0%. · The KNF’s decision of 5 November 2019, under which the previous recommendations issued on 15 October 2018 and 28 November 2018 regarding an additional capital requirement for Santander Bank Polska S.A. relating to the portfolio of FX mortgage loans for households have expired: the decision followed the process of annual identification of banks with material exposure in respect of FX mortgage-backed loans which concluded that Santander Bank Polska S.A. had not reached the materiality threshold in relation to such loans. Accordingly, the KNF did not impose an additional buffer at the bank level to mitigate the risk arising from mortgage loans for individuals. · The capital buffer for Santander Bank Polska S.A. as other systemically important institution: according to the letter of 19 December 2017, the KNF identified Santander Bank Polska S.A. as other systemically important institution and imposed on it an additional capital buffer. Pursuant to the KNF’s decision of 16 December 2022 Santander Bank Polska S.A. maintains additional own funds of 1 p.p. Santander Bank Polska Group keeps the capital buffer at the same level. · The capital conservation buffer maintained in accordance with the Macroprudential Supervision Act: following adaptation to the CRR requirements, in 2019 the buffer reached the maximum level of 2.50 p.p. · The countercyclical buffer implemented by the Macroprudential Supervision Act and amended by the Minister of Finance by a way of regulation: since 1 January 2016, the countercyclical buffer has been set at 0 p.p. for credit exposures in Poland. · On 11 February 2022 the Bank received a letter from the Polish Financial Supervision Authority regarding the recommendation to reduce the risk in the Bank's operations by maintaining, both at the individual and consolidated level, the Bank's own funds to cover the additional capital charge in order to absorb potential losses resulting from from the occurrence of stress conditions (P2G recommendation). In accordance with the letter of the Polish Financial Supervision Authority of December 13, 2023 P2G capital charges of 0.37 p.p. apply both at the Bank and at the consolidated level based on supervisory stress tests carried out by the Polish Financial Supervision Authority in 2023. Components of the minimum capital requirement 31.12.2023 31.12.2022 Minimal capital ratios Common Equity Tier 1 capital ratio 4.5% 4.5% Tier 1 capital ratio 6% 6% Total capital ratio 8% 8% Additional capital requirement for Santander Bank Polska relating to the portfolio of FX mortgage loans for households no requirement no requirement The capital buffer for Santander Bank Polska as other systemically important institution ü 1 p.p. ü 1 p.p. The capital conservation buffer maintained in accordance with the Macroprudential Supervision Act ü 2.5 p.p. ü 2.5 p.p. The countercyclical buffer (BRS) ü 0 p.p. ü 0 p.p. The bank's sensitivity to an unfavorable macroeconomic scenario measured using the supervisory stress tests results (P2G) ü 0.37 p.p. ü 0.26 p.p. 68 Separate Financial Statements of Santander Bank Polska for 2023 Regulatory Capital The capital requirement for Santander Bank Polska is determined in accordance with Part 3 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR), as amended, inter alia, by Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic, which was the official legal basis as at the reporting date, i.e. 31 December 2021. Santander Bank Polska uses the standardised approach to calculate the capital requirement for credit risk, market risk and operational risk. According to this approach, the total capital requirement for credit risk is calculated as the sum of risk-weighted exposures multiplied by 8%. The exposure value for these assets is equal to the carrying amount, while the value of off-balance sheet liabilities corresponds to their balance sheet equivalent. Risk-weighted exposures are calculated by means of applying risk weights to all exposures in accordance with the CRR. The table below presents the calculation of the capital ratio for Santander Bank Polska SA as at 31 December 2023 and in the comparative period. 31.12.2023 31.12.2022 restated I Total Capital requirement (Ia+Ib+Ic+Id), of which: 8 903 375 8 716 938 Ia - due to credit risk & counterparty credit risk 7 567 011 7 513 911 Ib - due to market risk 154 424 158 477 Ic - due to credit valuation ajdustment risk 51 931 45 175 Id - due to operational risk 1 105 873 975 335 Ie - due to securitisation 24 136 24 040 II Total own funds 26 607 963 26 880 381 III Reductions 2 974 903 2 564 989 IV Own funds after reductions (II-III) 23 633 060 24 315 392 V CAD [IV/(I12.5)] 21,24% 22,32% VI Tier I ratio 19,62% 20,26% * as described in Note 2.5 Internal Capital Notwithstanding the regulatory methods for measuring capital requirements, Santander Bank Polska S.A. carries out an independent assessment of current and future capital adequacy as part of the internal capital adequacy assessment process (ICAAP). The purpose of the process is to ensure that the level and nature of own funds guarantee the solvency and stability of the bank’s and the Group’s operations. The capital adequacy assessment is one of the fundamental elements of the bank’s strategy, the process of defining risk appetite and the process of planning. In the ICAAP the Bank uses assessment models based on the statistical loss estimation for measurable risks, such as credit risk, market risk and operational risk, plus its own assessment of capital requirements for other material risks not covered by the model, e.g. reputational risk and compliance risk. The internal capital is estimated on the basis of risk parameters including the probability of default (PD) by Santander Bank Polska S.A. customers and the loss given default (LGD). The Bank performs an internal assessment of capital requirements, including under stressed conditions, taking into account different macroeconomic scenarios. Internal capital estimation models are assessed and reviewed annually to adjust them to the scale and profile of the business of Santander Bank Polska S.A. and to take account of any new risks and the management’s judgement. The review and assessment is the responsibility of the bank’s risk management committees, including: the Capital Committee. Subordinated Liabilities In 2016, the bank amended the agreement under which subordinated registered bonds were issued on 5 August 2010 and taken up by the European Bank for Reconstruction and Development. Under the new issue conditions, the maturity of the bonds has been extended 69 Separate Financial Statements of Santander Bank Polska for 2023 to 5 August 2025. Pursuant to the KNF’s decision of 18 May 2017, the bank was authorised to allocate EUR 100m of the new issue to Tier 2 capital. Since 5 August 2020, it is subject to amortization due to the final 5 years of the loan maturity according to Art. 64 CRR. As part of the strategy to increase the Tier 2 capital, on 2 December 2016 Santander Bank Polska issued own bonds of EUR 120m, allocating them to Tier 2 in accordance with the KNF’s decision of 24 February 2017. Since 3 December 2021, it is subject to amortization due to the final 5 years of the loan maturity according to Art. 64 CRR. On 22 May 2017, the bank issued additional subordinated bonds with a nominal value of EUR 137.1m and by the KNF’s decision of 19 October 2017 was authorised to allocate them to the Tier 2 capital. Since 22 May 2022, it is subject to amortization due to the final 5 years of the loan maturity according to Art. 64 CRR. On 12 June 2018, Santander Bank Polska S.A. obtained the KNF’s approval for allocating series F subordinated bonds with a total nominal value of PLN 1bn, issued on 5 April 2018, to Tier 2 capital instruments. Since 5 April 2023, it is subject to amortization due to the final 5 years of the loan maturity according to Art. 64 CRR. For more information on subordinated liabilities, see Note 34. 70 Separate Financial Statements of Santander Bank Polska for 2023 5. Net interest income Interest income and similar to interest 1.01.2023-31.12.2023 1.01.2022-31.12.2022 restated Interest income on financial assets measured at amortised cost 13 240 163 8 151 748 Loans and advances to enterprises and leasing agreements 4 883 998 3 522 776 Loans and advances to individuals, of which: 6 523 007 3 863 785 Home mortgage loans 4 003 064 1 743 984 Loans and advances to banks 799 055 409 553 Loans and advances to public sector 87 298 51 951 Reverse repo transactions 605 690 202 644 Debt securities 391 422 77 971 Interest recorded on hedging IRS (50 307) 23 068 Interest income on financial assets measured at fair value through other comprehensive income 2 300 743 1 962 341 Loans and advances to enterprises 224 159 136 346 Loans and advances to public sector 24 846 13 821 Debt securities 2 051 738 1 812 174 Income similar to interest - financial assets measured at fair value through profit or loss 63 112 75 879 Loans and advances to enterprises 1 420 4 316 Loans and advances to individuals 7 203 30 118 Debt securities 54 489 41 445 Total income 15 604 018 10 189 968 The impact of payment deferrals on the Bank’s net interest income in 2023 totalled PLN 49,298k and PLN 1,538,000k respectively. It was recognised as an adjustment to the gross carrying amount of mortgage loans due to the change of expected cash flows and a decrease in interest income. Interest expenses 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Interest expenses on financial liabilities measured at amortised cost (4 164 431) (2 149 426) Liabilities to individuals (1 783 136) (640 691) Liabilities to enterprises (1 372 931) (716 177) Repo transactions (230 299) (310 759) Liabilities to public sector (315 095) (187 113) Liabilities to banks (97 025) (75 475) Lease liability (17 901) (14 998) Subordinated liabilities and issue of securities (348 044) (204 213) Total costs (4 164 431) (2 149 426) Net interest income 11 439 587 8 040 542 71 Separate Financial Statements of Santander Bank Polska for 2023 6. Net fee and commission income Fee and commission income 1.01.2023-31.12.2023 1.01.2022-31.12.2022 eBusiness & payments 286 174 268 375 Current accounts and money transfer 389 445 419 960 Foreign exchange commissions 761 219 730 413 Credit commissions incl. factoring commissions and other 365 039 364 671 Insurance commissions 135 820 108 130 Commissions from brokerage activities 139 975 130 153 Credit cards 90 732 90 565 Debit cards 435 219 399 671 Off-balance sheet guarantee commissions 134 477 114 287 Issue arrangement fees 21 427 14 728 Distribution fees 69 617 58 784 Total 2 829 144 2 699 737 Fee and commission expenses 1.01.2023-31.12.2023 1.01.2022-31.12.2022 eBusiness & payments (82 659) (74 143) Commissions from brokerage activities (13 666) (14 722) Credit cards (9 187) (9 742) Debit cards (119 362) (116 676) Credit commissions paid (39 035) (36 805) Insurance commissions (13 899) (16 907) Finance lease commissions (564) (631) Off-balance sheet guarantee commissions (35 404) (35 707) Other (129 569) (116 483) Total (443 345) (421 816) Net fee and commission income 2 385 799 2 277 921 Included above is fee and commission income on credits, credit cards, off-balance sheet guarantees and leases of PLN 590,248 k (31.12.2022: PLN 569,524 k) and fee and commission expenses on credit cards, leases and paid to credit agents of PLN (48,222) k (31.12.2022: PLN (46,547) k) other than fees included in determining the effective interest rate, relating to financial assets and liabilities not carried at fair value through profit and loss. 7. Dividend income Dividend income 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Dividends income from subsidiaries and associates 230 455 161 907 Dividends income from investment securities measured at fair value through other comprehensive income 9 334 8 297 Dividends income from investment securities measured at fair value through profit or loss 480 1 038 Dividends income from equity financial assets held for trading 1 298 939 Total 241 567 172 181 72 Separate Financial Statements of Santander Bank Polska for 2023 8. Net trading income and revaluation Net trading income and revaluation 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Derivative instruments (8 763) (192 139) Interbank fx transactions 219 380 264 417 Net gains on sale of equity securities measured at fair value through profit or loss 21 870 9 775 Net gains on sale of debt securities measured at fair value through profit or loss 52 575 21 064 Change in fair value of loans and advances mandatorily measured at fair value through profit or loss 13 511 6 795 Total 298 573 109 912 The amounts included CVA and DVA adjustments which in 2022 and 2021 totaled PLN (6,800) k and PLN (6,917) k respectively. 9. Gains (losses) from other financial securities Gains (losses) from other financial securities 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Net gains on sale of debt securities measured at fair value through other comprehensive income 2 428 (6 303) Net gains on sale of equity securities measured at fair value through profit and loss 2 887 - Change in fair value of financial securities measured at fair value through profit or loss 11 037 (2 810) Impairment losses on securities (2 016) (1 066) Total gains (losses) on financial instruments 14 336 (10 179) Change in fair value of hedging instruments (421 094) 348 586 Change in fair value of underlying hedged positions 394 395 (358 227) Total gains (losses) on hedging and hedged instruments (26 699) (9 641) Total (12 363) (19 820) * details are described in Note 42 10. Other operating income Other operating income 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Income from services rendered 37 065 33 459 Release of provision for legal cases and other assets 7 264 10 743 Recovery of other receivables (expired, cancelled and uncollectable) 140 41 Settlements of leasing agreements/ Income from claims received from the insurer 160 1 000 Received compensations, penalties and fines 6 759 1 908 Gains on lease modifications 9 174 9 203 Other 14 274 18 198 Total 74 836 74 552 73 Separate Financial Statements of Santander Bank Polska for 2023 11.Impairment allowances for expected credit losses Impairment allowances for expected credit losses on loans and advances measured at amortised cost 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Charge for loans and advances to banks (76) (24) Stage 1 (76) (24) Stage 2 - - Stage 3 - - POCI - - Charge for loans and advances to customers (871 357) (793 795) Stage 1 (126 588) (146 267) Stage 2 (297 142) (259 567) Stage 3 (511 744) (449 398) POCI 64 117 61 437 Recoveries of loans previously written off 5 182 (4 245) Stage 1 - - Stage 2 - - Stage 3 5 182 (4 245) POCI - - Off-balance sheet credit related facilities (79 459) (541) Stage 1 (9 640) 3 947 Stage 2 (39 987) (1 042) Stage 3 (29 832) (3 446) POCI - - Total (945 710) (798 605) 12.Employee costs Employee costs 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Salaries and bonuses (1 600 721) (1 262 824) Salary related costs (265 106) (217 592) Cost of contributions to Employee Capital Plans (11 796) (8 108) Staff benefits costs (39 106) (30 638) Professional trainings (8 712) (7 119) Retirement fund, holiday provisions and other employee costs (7 678) (4 157) Restructuring provision 10 488 35 815 Total (1 922 631) (1 494 623) * Given that the collective redundancies process was completed, Santander Bank Polska S.A. released the unused portion of the restructuring provision. 74 Separate Financial Statements of Santander Bank Polska for 2023 13.General and administrative expenses General and administrative expenses 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Maintenance of premises (118 712) (104 246) Short-term lease costs (8 995) (8 116) Low-value assets lease costs (1 253) (1 213) Costs of variable lease payments not included in the measurement of the lease liability (362) (702) Non-tax deductible VAT (29 698) (24 278) Marketing and representation (146 042) (128 188) IT systems costs (409 456) (336 272) Cost of BFG, KNF and KDPW (192 059) (275 458) Cost of payment to protection system (IPS) (275) (445 704) Postal and telecommunication costs (49 402) (47 993) Consulting and advisory fees (46 056) (53 140) Cars, transport expenses, carriage of cash (54 828) (58 880) Other external services (180 044) (128 577) Stationery, cards, cheques etc. (17 846) (16 195) Sundry taxes and charges (32 766) (31 732) Data transmission (27 678) (15 825) KIR, SWIFT settlements (27 752) (29 012) Security costs (15 024) (18 979) Costs of repairs (4 745) (5 548) Cost of payment to the Borrowers Support Fund - (139 608) Other (23 389) (14 363) Total (1 386 382) (1 884 029) 14.Other operating expenses Other operating expenses 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Charge of provisions for legal cases and other assets (38 408) (18 995) Impairment loss on property, plant, equipment, intangible assets covered by financial lease agreements and other fixed assets (4 097) (11 092) Gain on sales or liquidation of fixed assets, intangible assets and assets for disposal (9 197) (11 988) Costs of purchased services (13 640) (15 044) Other membership fees (1 286) (1 071) Paid compensations, penalties and fines (50) (219) Donations paid (6 287) (5 969) Other (77 031) (18 573) Total (149 996) (82 951) 15.Corporate income tax Corporate income tax 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Current tax charge in the income statement (1 571 462) (974 196) Deferred tax charge in the income statement (170 025) (168 157) Adjustments from previous years for current and deferred tax 18 163 (6 882) Total tax on gross profit (1 723 324) (1 149 235) 75 Separate Financial Statements of Santander Bank Polska for 2023 Corporate total tax charge information 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Profit before tax 6 396 302 3 598 278 Tax rate 19% 19% Tax calculated at the tax rate (1 215 297) (683 673) Non-tax-deductible expenses (30 139) (15 789) Provisions for legal claims regarding fx loans (332 296) (234 336) The fee to the Bank Guarantee Fund (30 210) (46 575) The Borrowers Support Fund - (26 526) Tax on financial institutions (142 721) (142 937) Non-taxable income 45 804 32 513 Non-tax deductible bad debt provisions (23 370) (18 266) Adjustment of prior years tax 18 162 (6 882) Other (13 257) (6 764) Total tax on gross profit (1 723 324) (1 149 235) Deferred tax recognised in other comprehensive income 31.12.2023 31.12.2022 restated Relating to valuation of debt investments measured at fair value through other comprehensive income 241 997 590 134 Relating to valuation of equity investments measured at fair value through other comprehensive income (46 882) (33 170) Relating to cash flow hedging activity (130 716) 71 692 Relating to valuation of defined benefit plans 145 (2 759) Total 64 544 625 897 details in note 2.5 16.Earnings per share Earnings per share 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Profit for the period attributable to ordinary shares 4 672 978 2 449 043 Weighted average number of ordinary shares 102 189 314 102 189 314 Earnings per share (PLN) 45,73 23,97 Profit for the period attributable to ordinary shares 4 672 978 2 449 043 Weighted average number of ordinary shares 102 189 314 102 189 314 Diluted earnings per share (PLN) 45,73 23,97 17.Cash and balances with central banks Cash and balances with central banks 31.12.2023 31.12.2022 Cash 2 603 728 3 191 056 Current accounts in central banks 5 606 355 6 846 009 Term deposits 65 028 98 034 Total 8 275 111 10 135 099 Santander Bank Polska SA hold an obligatory reserve in a current account in the National Bank of Poland. The figure is calculated at a fixed percentage of minimal statutory reserve of the monthly average balanceof the customers’ deposits, which was 3.5% as at 31 December 2023 and 31 December 2022. In accordance with the applicable regulations, the amount of the calculated provision is reduced by the equivalent of EUR 500 k. 76 Separate Financial Statements of Santander Bank Polska for 2023 18.Loans and advances to banks Loans and advances to banks 31.12.2023 31.12.2022 Loans and advances 5 853 899 6 556 202 Current accounts 3 194 673 3 153 694 Gross receivables 9 048 572 9 709 896 Allowance for impairment (172) (96) Total 9 048 400 9 709 800 Fair value of loans and advances to banks is presented in Note 45. Loans and advances to banks 31.12.2023 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 9 709 896 - - - 9 709 896 Transfers Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - New financial assets originated 6 447 923 - - - 6 447 923 Changes in existing financial assets - - - Financial assets derecognised that are not write-offs (7 078 386) - - - (7 078 386) Write-offs - - - - - Other movements incl. FX differences (30 861) - - - (30 861) As at the end of the period 9 048 572 - - - 9 048 572 . Loans and advances to banks 31.12.2022 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 2 744 066 - - - 2 744 066 Transfers Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - New financial assets originated 6 940 987 - - - 6 940 987 Changes in existing financial assets - - - - - Financial assets derecognised that are not write-offs (198 824) - - - (198 824) Write-offs - - - - - Other movements incl. FX differences 223 667 - - - 223 667 As at the end of the period 9 709 896 - - - 9 709 896 77 Separate Financial Statements of Santander Bank Polska for 2023 19.Financial assets and liabilities held for trading 31.12.2023 31.12.2022 Financial assets and liabilities held for trading Assets Liabilities Assets Liabilities Trading derivatives 7 393 837 8 009 913 6 635 204 6 922 307 Interest rate operations 4 044 042 4 325 534 4 675 684 4 634 007 Forward 43 363 5 - Options 115 647 115 692 204 525 187 359 IRS 3 786 161 4 083 830 4 404 362 4 415 502 FRA 142 191 125 649 66 792 31 146 FX operations 3 349 795 3 684 379 1 959 520 2 288 300 CIRS 690 771 941 591 332 765 425 211 Forward 550 798 710 062 264 172 198 268 FX Swap 1 878 873 1 822 326 1 094 440 1 401 172 Spot 6 792 5 257 500 971 Options 222 561 205 143 267 643 262 678 Debt and equity securities 1 548 123 - 244 547 - Debt securities 1 519 191 - 229 290 - Government securities: 1 508 969 - 213 206 - - bonds 1 508 969 - 213 206 - Commercial securities: 10 222 - 16 084 - - bonds 10 222 - 16 084 - Equity securities: 28 932 - 15 257 - - listed 28 932 - 15 257 - Short sale - 824 121 - 195 560 Total 8 941 960 8 834 034 6 879 751 7 117 867 Financial assets and liabilities held for trading - trading derivatives include the change in the value of counterparty risk in the amount of PLN (1,923) k as at 31.12.2023 and PLN 1,242 k as at 31.12.2022. 78 Separate Financial Statements of Santander Bank Polska for 2023 The table below presents derivatives’ nominal values: Derivatives’ nominal values 31.12.2023 31.12.2022 Term derivatives (hedging) 55 400 529 39 296 968 Single-currency interest rate swap 9 832 583 11 647 671 Macro cash flow hedge -purchased (IRS) 39 604 600 4 798 700 Macro cash flow hedge -purchased (CIRS) 2 662 038 10 681 594 Macro cash flow hedge -sold (CIRS) 3 301 308 12 169 003 Term derivatives (trading) 1 027 896 528 776 940 525 Interest rate operations 706 322 363 508 540 765 -Single-currency interest rate swap 529 071 747 426 207 912 -FRA - purchased amounts 170 872 879 75 832 500 -Options 6 158 437 6 486 353 -Forward- purchased amounts 200 000 9 000 -Forward- sold amounts 19 300 5 000 FX operations 321 574 165 268 399 760 -FX swap – purchased amounts 90 827 744 77 701 126 -FX swap – sold amounts 90 785 153 78 149 123 -Forward- purchased amounts 21 215 474 17 076 145 -Forward- sold amounts 21 318 730 16 855 581 -Non-Deliverable Forward (NDF) - purchased amounts 86 960 515 889 -Non-Deliverable Forward (NDF) - sold amounts 104 761 540 017 -Window Forward – purchased amounts 4 622 49 196 -Window Forward – sold amounts 4 620 48 973 -Cross-currency interest rate swap – purchased amounts 35 295 518 17 194 355 -Cross-currency interest rate swap – sold amounts 35 535 294 17 252 483 -FX options -purchased CALL 6 252 857 10 407 548 -FX options -purchased PUT 6 944 788 11 100 888 -FX options -sold CALL 6 235 056 10 383 420 -FX options -sold PUT 6 962 588 11 125 016 Currency transactions- spot 7 686 201 1 684 133 Spot-purchased 3 843 696 841 940 Spot-sold 3 842 505 842 193 Transactions on equity financial instruments 26 363 16 309 Derivatives contract - purchased 231 700 Derivatives contract - sold 26 132 15 609 Total 1 091 009 621 817 937 935 In the case of single-currency transactions (IRS, FRA, non-FX options) only purchased amounts are presented. 20.Hedging derivatives 31.12.2023 31.12.2022 Hedging derivatives Assets Liabilities Assets Liabilities Derivatives hedging fair value 228 401 157 437 487 292 25 508 Derivatives hedging cash flow 1 330 973 672 128 50 632 1 846 531 Total 1 559 374 829 565 537 924 1 872 039 As at 31.12.2023, the line item: hedging derivatives – derivatives hedging cash flows reflects a change in the first-day valuation of forward-starting CIRS transactions of PLN (444) k and PLN (4,353) k as at 31.12.2022. 79 Separate Financial Statements of Santander Bank Polska for 2023 21.Loans and advances to customers 31.12.2023 Loans and advances to customers Measured at amortised cost Measured at fair value through other comprehensive income Measured at fair value through profit or loss Total Loans and advances to enterprises 70 314 319 2 640 475 - 72 954 794 Loans and advances to individuals, of which: 70 571 976 - 11 111 70 583 087 Home mortgage loans 51 006 587 - - 51 006 587 Loans and advances to public sector 972 763 249 734 - 1 222 497 Other receivables 67 091 - - 67 091 Gross receivables 141 926 149 2 890 209 11 111 144 827 469 Allowance for impairment (3 832 393) (91 975) - (3 924 368) Total 138 093 756 2 798 234 11 111 140 903 101 * Includes changes in gross book value described in note 46 Legal risk connected with CHF mortgage loans and impact of the payment deferrals 31.12.2022 Loans and advances to customers Measured at amortised cost Measured at fair value through other comprehensive income Measured at fair value through profit or loss Total Loans and advances to enterprises 66 481 615 2 306 972 39 205 68 827 792 Loans and advances to individuals, of which: 68 560 682 - 112 926 68 673 608 Home mortgage loans 50 611 667 - - 50 611 667 Loans and advances to public sector 950 694 328 428 - 1 279 122 Other receivables 69 739 - - 69 739 Gross receivables 136 062 730 2 635 400 152 131 138 850 261 Allowance for impairment (4 000 693) (6 740) - (4 007 433) Total 132 062 037 2 628 660 152 131 134 842 828 * Includes changes in gross book value described in note 46 Legal risk connected with CHF mortgage loans and impact of the payment deferrals 80 Separate Financial Statements of Santander Bank Polska for 2023 Impact of the legal risk of mortgage loans in foreign currency Gross carrying amount of mortgage loans in foreign currency before adjustment due to legal risk costs Impact of the legal risk of mortgage loans in foreign currency Gross carrying amount of mortgage loans in foreign currency after adjustment due to legal risk costs 31.12.2023 Mortgage loans in foreign currency - adjustment to gross carrying amount 4 877 094 3 414 431 1 462 663 Provision in respect of legal risk connected with foreign currency mortgage loans 624 354 Total 4 038 785 31.12.2022 Mortgage loans in foreign currency - adjustment to gross carrying amount 6 524 486 2 491 692 4 032 794 Provision in respect of legal risk connected with foreign currency mortgage loans 318 683 Total 2 810 375 * Includes changes in gross book value described in note 46 Legal risk connected with CHF mortgage loans of which the amount of PLN 3,289,747 k refers to loans denominated in and indexed to CHF, and the amount of PLN 124,684 k to loans in PLN subject to debt enforcement As at 31.12.2023 the fair value adjustment due to hedged risk on loans was PLN 4,563 k. Santander Bank Polska may write-off financial assets that are still subject to enforcement activity. The outstanding contractual amount of such assets written off during the year ended 31.12.2023 was PLN 207,573 k and as at 31.12.2022– PLN 72,532 k. Fair value of loans and advances to customers is presented in Note 45. Loans and advances to customers 31.12.2023 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 124 238 235 6 140 652 4 945 930 737 913 136 062 730 Transfers Transfer to Stage 1 5 738 476 (5 613 619) (124 857) - - Transfer to Stage 2 (8 794 585) 9 182 498 (387 913) - - Transfer to Stage 3 (340 189) (1 996 474) 2 336 663 - - New financial assets originated 19 725 354 - - - 19 725 354 Changes in existing financial assets 4 310 741 (824 145) (632 786) 135 605 2 989 415 Financial assets derecognised that are not write-offs (12 692 907) (413 785) (483 671) (148 591) (13 738 954) Write-offs - - (861 515) - (861 515) FX and others movements (2 100 803) (101 026) (49 052) - (2 250 881) As at the end of the period 130 084 322 6 374 101 4 742 799 724 927 141 926 149 . 81 Separate Financial Statements of Santander Bank Polska for 2023 Movements on impairment losses on loans and advances to customers measured at amortised cost for reporting period 1.01.2023 - 31.12.2023 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (433 116) (534 300) (2 898 264) (3 865 680) Transfers Transfer to Stage 1 (762 465) 709 425 53 040 - Transfer to Stage 2 345 852 (474 638) 128 786 - Transfer to Stage 3 12 942 392 300 (405 242) - New financial assets originated (170 101) - - (170 101) Changes in credit risk of existing financial assets 382 348 (577 708) (741 633) (936 993) Changes in models and risk parameters 41 030 (126 390) - (85 360) Financial assets derecognised that are not write-offs 114 823 40 565 315 204 470 592 Write-offs - - 861 515 861 515 FX and others movements 18 350 8 662 (4 090) 22 922 As at the end of the period (450 337) (562 084) (2 690 684) (3 703 105) . Reconciliation to Note 11: Impairment allowances for expected credit losses measured at amortised cost Stage 1 Stage 2 Stage 3 Total Movements on allowances for expected credit losses on loans and advances to customers measured at amortised cost for reporting period 1.01.2023 - 31.12.2023 (17 222) (27 783) 207 580 162 575 Transfers that do not go through profit and loss (91 758) (193 228) 157 243 (127 743) Write-offs - - (861 515) (861 515) Impairment allowances for expected credit losses on loans measured at fair value through other comprehensive income (14 622) (72 060) - (86 682) FX differences (2 986) (4 071) (15 052) (22 109) Total (126 588) (297 142) (511 744) (935 474) Movements on impairment losses on purchased or originated credit-impaired loans (POCI) 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period (135 014) (119 928) Charge/write back of current period 4 837 (14 452) FX differences 544 (627) Other 345 (7) As at the end of the period (129 288) (135 014) Loans and advances to customers 31.12.2022 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 114 640 236 5 513 716 4 863 261 521 983 125 539 196 Transfers Transfer to Stage 1 6 249 388 (6 138 748) (110 640) - - Transfer to Stage 2 (9 343 692) 9 765 638 (421 946) - - Transfer to Stage 3 (437 732) (1 959 730) 2 397 462 - - New financial assets originated 24 683 564 - - - 24 683 564 Changes in existing financial assets 8 822 814 (356 279) (350 498) 248 083 8 364 120 Financial assets derecognised that are not write-offs (21 328 177) (1 061 037) (265 999) (163 709) (22 818 922) Write-offs - - (637 769) - (637 769) FX and others movements 951 835 377 092 (527 941) 131 556 932 542 As at the end of the period 124 238 236 6 140 652 4 945 930 737 913 136 062 731 . 82 Separate Financial Statements of Santander Bank Polska for 2023 Movements on impairment losses on loans and advances to customers measured at amortised cost for reporting period 1.01.2022 - 31.12.2022 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (359 024) (401 685) (2 859 561) (3 620 270) Transfers Transfer to Stage 1 (148 356) 424 308 42 583 318 535 Transfer to Stage 2 206 317 (747 549) 159 311 (381 921) Transfer to Stage 3 11 812 231 776 (810 980) (567 392) New financial assets originated (135 548) - - (135 548) Changes in credit risk of existing financial assets (82 624) 33 460 (147 900) (197 064) Changes in models and risk parameters (19 360) (117 400) (1 940) (138 700) Financial assets derecognised that are not write-offs 88 450 36 480 128 344 253 274 Write-offs - - 567 476 567 476 FX and others movements 5 217 6 310 24 403 35 930 As at the end of the period (433 116) (534 300) (2 898 264) (3 865 680) . Reconciliation to Note 11: Impairment allowances for expected credit losses measured at amortised cost Stage 1 Stage 2 Stage 3 Total Movements on allowances for expected credit losses on loans and advances to customers measured at amortised cost for reporting period 1.01.2022 - 31.12.2022 (74 090) (132 616) (38 703) (245 409) Transfers that do not go through profit and loss (69 321) (129 460) 75 009 (123 772) Write-offs - - (498 325) (498 325) Impairment allowances for expected credit losses on loans measured at fair value through other comprehensive income (3 694) - - (3 694) FX differences 837 2 511 12 620 15 968 Total (146 268) (259 565) (449 399) (855 232) Loans and advances to enterprises 31.12.2023 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 59 186 499 3 936 740 2 946 387 411 989 66 481 615 Transfers Transfer to Stage 1 2 196 861 (2 181 306) (15 555) - - Transfer to Stage 2 (4 125 356) 4 185 373 (60 016) - - Transfer to Stage 3 (90 227) (887 939) 978 166 - - New financial assets originated 7 444 694 - - - 10 882 969 Changes in existing financial assets 6 972 733 (860 716) (545 451) 85 069 12 521 852 Financial assets derecognised that are not write-offs (6 315 076) (244 923) (84 982) (57 736) (14 094 117) Write-offs - - (473 111) - (311 112) FX and others movements (1 949 882) (93 956) (43 960) - 1 514 528 As at the end of the period 63 320 246 3 853 273 2 701 478 439 322 70 314 319 . 83 Separate Financial Statements of Santander Bank Polska for 2023 Movements on impairment losses on loans and advances to enterprises measured at amortised cost for reporting period 1.01.2023 - 31.12.2023 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (164 317) (339 765) (1 780 564) (2 284 646) Transfers Transfer to Stage 1 (300 992) 292 050 8 942 - Transfer to Stage 2 106 685 (135 531) 28 846 - Transfer to Stage 3 3 329 120 074 (123 403) - New financial assets originated (68 096) - - (68 096) Changes in credit risk of existing financial assets 194 274 (192 154) (226 372) (224 252) Changes in models and risk parameters 12 360 (101 620) - (89 260) Financial assets derecognised that are not write-offs 22 936 23 256 37 169 83 361 Write-offs - - 473 111 473 111 FX and others movements 15 867 8 001 (3 413) 20 455 As at the end of the period (177 954) (325 689) (1 585 684) (2 089 327) . Movements on impairment losses on purchased or originated credit-impaired loans to enterprises (POCI) 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period (59 175) (47 948) Charge/write back of current period (6 684) (11 068) FX differences 414 (145) Other 31 (14) As at the end of the period (65 414) (59 175) Loans and advances to enterprises 31.12.2022 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 48 895 196 3 901 379 2 951 940 218 981 55 967 496 Transfers Transfer to Stage 1 2 344 157 (2 319 373) (24 784) - - Transfer to Stage 2 (4 097 789) 4 213 272 (115 484) - - Transfer to Stage 3 (111 945) (1 033 283) 1 145 228 - - New financial assets originated 10 882 969 - - - 10 882 969 Changes in existing financial assets 12 717 826 (239 932) (206 524) 250 481 12 521 852 Financial assets derecognised that are not write-offs (12 942 704) (889 507) (132 101) (129 804) (14 094 117) Write-offs - - (311 112) - (311 112) FX and others movements 1 498 789 304 184 (360 776) 72 331 1 514 528 As at the end of the period 59 186 499 3 936 740 2 946 387 411 989 66 481 615 . 84 Separate Financial Statements of Santander Bank Polska for 2023 Movements on impairment losses on loans and advances to enterprises measured at amortised cost for reporting period 1.01.2022 - 31.12.2022 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (148 053) (255 216) (1 759 676) (2 162 945) Transfers Transfer to Stage 1 (40 919) 131 032 13 686 103 799 Transfer to Stage 2 80 811 (263 502) 32 301 (150 390) Transfer to Stage 3 4 115 109 510 (364 765) (251 140) New financial assets originated (34 217) - - (34 217) Changes in credit risk of existing financial assets (49 332) (60 489) (32 846) (142 667) Changes in models and risk parameters (6 320) (31 430) (24 730) (62 480) Financial assets derecognised that are not write-offs 29 735 22 262 47 526 99 523 Write-offs - - 298 253 298 253 FX and others movements (137) 8 068 9 687 17 618 As at the end of the period (164 317) (339 765) (1 780 564) (2 284 646) . Loans and advances to individuals 31.12.2023 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 64 031 301 2 203 917 1 999 544 325 920 68 560 682 Transfers Transfer to Stage 1 3 468 672 (3 359 373) (109 299) - - Transfer to Stage 2 (4 654 896) 4 982 790 (327 894) - - Transfer to Stage 3 (249 941) (1 108 045) 1 357 986 - - New financial assets originated 12 174 332 - - - 12 174 332 Changes in existing financial assets (2 667 999) (35 532) (90 596) 50 270 (2 743 857) Financial assets derecognised that are not write-offs (6 215 833) (164 648) (398 543) (90 909) (6 869 933) Write-offs - - (388 404) - (388 404) FX and others movements (148 743) (7 058) (5 043) - (160 844) As at the end of the period 65 736 893 2 512 051 2 037 751 285 281 70 571 976 Movements on impairment losses on loans and advances to individuals measured at amortised cost for reporting period 1.01.2023 - 31.12.2023 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (268 801) (194 535) (1 117 699) (1 581 035) Transfers Transfer to Stage 1 (458 667) 414 891 43 776 - Transfer to Stage 2 237 983 (337 636) 99 653 - Transfer to Stage 3 9 588 270 679 (280 267) - New financial assets originated (99 703) - - (99 703) Changes in credit risk of existing financial assets 231 220 (382 860) (514 225) (665 865) Changes in models and risk parameters 28 670 (24 770) - 3 900 Financial assets derecognised that are not write-offs 47 040 17 176 274 201 338 417 Write-offs 388 404 388 404 FX and others movements 287 661 1 156 2 104 As at the end of the period (272 383) (236 394) (1 105 001) (1 613 778) . 85 Separate Financial Statements of Santander Bank Polska for 2023 Movements on impairment losses on purchased or originated credit-impaired loans to individuals (POCI) 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period (75 839) (71 980) Charge/write back of current period 11 521 (3 384) FX differences 130 (482) Other 314 7 As at the end of the period (63 874) (75 839) . Loans and advances to individuals 31.12.2022 Gross carrying amount Stage 1 Stage 2 Stage 3 POCI Total As at the beginning of the period 65 418 747 1 612 341 1 911 322 302 999 69 245 409 Transfers Transfer to Stage 1 3 905 231 (3 819 375) (85 856) - - Transfer to Stage 2 (5 245 904) 5 552 366 (306 462) - - Transfer to Stage 3 (325 786) (926 447) 1 252 233 - - New financial assets originated 13 800 595 - - - 13 800 595 Changes in existing financial assets (4 589 153) (116 346) (143 974) (2 398) (4 851 871) Financial assets derecognised that are not write-offs (8 385 473) (171 530) (133 897) (33 905) (8 724 805) Write-offs - - (326 657) - (326 657) FX and others movements (546 956) 72 908 (167 165) 59 224 (581 989) As at the end of the period 64 031 301 2 203 917 1 999 544 325 920 68 560 682 Movements on impairment losses on loans and advances to individuals measured at amortised cost for reporting period 1.01.2022 - 31.12.2022 Stage 1 Stage 2 Stage 3 Total As at the beginning of the period (210 974) (146 467) (1 099 884) (1 457 325) Transfers Transfer to Stage 1 (107 437) 293 275 28 896 214 734 Transfer to Stage 2 125 507 (484 047) 127 010 (231 530) Transfer to Stage 3 7 698 122 266 (446 215) (316 251) New financial assets originated (101 332) - - (101 332) Changes in credit risk of existing financial assets (33 293) 93 948 (115 054) (54 399) Changes in models and risk parameters (13 040) (85 970) 22 790 (76 220) Financial assets derecognised that are not write-offs 58 715 14 219 80 818 153 752 Write-offs - - 269 224 269 224 FX and others movements 5 355 (1 759) 14 715 18 311 As at the end of the period (268 801) (194 535) (1 117 700) (1 581 036) 22.Securitisation of assets On 7 December 2018, Santander Bank Polska S.A. signed a synthetic securitisation agreement with the European Investment Fund (EIF) with respect to PLN 2,150,031k worth of cash loan portfolio. The purpose of the transaction is to release capital to finance projects supporting the development of SME, corporate and public sector customers. The agreement was activated on 28 August 2019 after the Bank had satisfied the contractual conditions precedent. The cash loan portfolio of PLN 2,150,031k (principal amount only) was secured by a guarantee. The transaction is set to expire by 10 September 2031. The transaction has been executed to transfer credit risk to the EIF and optimise the Bank’s Tier 1 capital. It is a synthetic securitisation which does not involve financing and covers the selected portfolio of cash loans which remain on the Bank’s balance sheet. The entire securitised portfolio is risk weighted in accordance with the standardised approach. 86 Separate Financial Statements of Santander Bank Polska for 2023 As part of the transaction, the securitised portfolio is divided into three tranches: senior (80%), mezzanine (18.5%) and junior, i.e. the first loss tranche (1.5%). As at the guarantee activation date, the senior tranche totalled PLN 1,720,025.0k, the mezzanine tranche was PLN 397,755.8k and the junior tranche amounted to PLN 32,250.5k. The senior and mezzanine tranches are fully guaranteed by the EIF. In addition, the mezzanine tranche is secured by a counter-guarantee from the European Investment Bank (EIB). The first loss tranche was retained by the Bank and deducted from the Common Equity Tier 1 items in accordance with Article 36(1)(k) of the CRR. Deduction from the Common Equity Tier 1 means the application of the “full deduction approach”, as stipulated in Article 245(1)(b) of the CRR. According to the terms of the transaction, losses up to the junior tranche amount are covered by the Bank, and only after this level is exceeded can they be covered from the guarantee issued by the EIF. To ensure stability of the portfolio structure, the transaction provides for a synthetic excess spread mechanism that makes it possible to allocate losses up to 1.45% of the portfolio per year outside the securitisation. As at 31 December 2023, the gross carrying amounts of the individual tranches were as follows: senior tranche: PLN 199,848k, mezzanine tranche: PLN 46,215k and junior tranche: PLN 32,293k. In the reporting period, credit losses allocated outside the securitisation structure using the synthetic excess spread mechanism totalled PLN 10,357 k. Since the activation of the transaction, losses have not exceeded the junior tranche amount and the Bank has not received any payments under the guarantee issued by the EIF. Pursuant to IFRS 9, the contractual terms of the transaction do not satisfy the criteria for not recognising the securitised assets in Santander Bank Polska statement of financial position. The table below presents the gross carrying amounts of the securitised loans, their principal amount subject to securitisation and the amount of risk retained by the Group: Transaction value - gross Transaction value by capital amount Retained Risk Value 31.12.2023 31.12.2022 31.12.2023 31.12.2022 31.12.2023 31.12.2022 Balance sheet portfolio, incl: 278 355 616 264 275 534 611 334 32 250 32 250 tranche senior 199 848 474 115 197 591 470 321 - - tranche mezzanine 46 215 109 639 45 693 108 762 - - tranche junior 32 293 32 511 32 250 32 250 32 250 32 250 Value losses allocated to Synthetic Excess Spread 10 357 18 271 10 357 18 271 - - Value of available Synthetic Excess Spread allocated to be used 5 565 8 337 5 565 8 337 - - On 31 March 2022, Santander Bank Polska S.A. signed a synthetic securitisation agreement with International Finance Corporation) (IFC) with respect to PLN 2,443,519.5k worth of cash loan portfolio with the option to increase this portfolio amount up to PLN 2,878,787.9k. The transaction with IFC is the first such transaction concluded by the Bank and entities of its capital Group with this investor. The transaction has been executed to transfer credit risk to the IFC and optimise the Bank’s Tier 1 capital. It is a synthetic securitisation which does not involve financing and covers the selected portfolio of cash loans which remain on the Bank’s balance sheet. The entire securitised portfolio is risk weighted in accordance with the standardised approach. In the sense of the CRR, this is an SRT transaction. The Bank will allocate the capital released thanks to the IFC guarantee to finance pro-environmental projects with a total value of at least USD 600 million. As part of and in line with the terms of this transaction, on 22 September 2023, the Bank concluded with IFC an additional Upsize Agreement, which allowed to increase the volume of the securitized cash loan portfolio to PLN 2,874,182.5k, which resulted in additional capital release in the amount of approximately PLN 200 million. It is worth emphasizing that, in accordance with the signed documentation, the released capital will be allocated for further financing, which is in line with the direction of ESG activities of the Bank and the World Bank (of which IFC is a part). Specifically, the Bank will allocate the equivalent of USD 100 million as part of the financing of retail loans and SMEs to customers of Ukrainian origin who on a daily basis live and work in Poland. This is the first initiative of this type in Poland that has been successfully implemented. The transaction is set to expire by 31 January 2030. As part of the transaction, the securitised portfolio is divided into three tranches: senior (82.67% of the portfolio), mezzanine (16.5% of the portfolio) and junior, i.e. the first loss tranche (0.83% of the portfolio). As at the guarantee activation date, the senior tranche totaled PLN 2,020,057.6 k, the mezzanine tranche was PLN 403,180.7 k and the junior tranche amounted to PLN 20,281.2 k. 87 Separate Financial Statements of Santander Bank Polska for 2023 The mezzanine tranche were fully guaranteed by IFC. The senior and the first loss tranches were retained by the Bank and deducted from the Common Equity Tier 1 items in accordance with Article 36(1)(k) of the CRR. Deduction from the Common Equity Tier 1 means the application of the “full deduction approach”, as stipulated in Article 245(1)(b) of the CRR. As at 31 December 2023, the gross carrying amounts of the individual tranches were as follows: senior tranche PLN 1,521,663k. mezzanine tranche PLN 303,707k and junior tranche PLN 24,018k. Pursuant to IFRS 9, the contractual terms of the transaction do not satisfy the criteria for not recognising the securitised assets in Santander Bank Polska statement of financial position. The table below presents the gross carrying amounts of the securitised loans, their principal amount subject to securitisation and the amount of risk retained by the Group: Transaction value - gross Transaction value by capital amount Retained Risk Value 31.12.2023 31.12.2022 31.12.2023 31.12.2022 31.12.2023 31.12.2022 Balance sheet portfolio, incl: 1 849 388 2 459 082 1 836 870 2 443 519 1 535 219 2 040 339 tranche senior 1 521 663 2 032 923 1 511 363 2 020 058 1 511 363 2 020 058 tranche mezzanine 303 707 405 749 301 651 403 181 - - tranche junior 24 018 20 410 23 856 20 281 23 856 20 281 23.Investment securities Investment securities 31.12.2023 31.12.2022 restated Debt investment securities measured at fair value through other comprehensive income 44 814 032 46 609 817 Government securities: 25 218 632 30 891 181 - bonds 25 218 632 30 891 181 Central Bank securities: 6 096 392 3 898 145 - bills 6 096 392 3 898 145 Other securities: 13 499 008 11 820 491 -bonds 13 499 008 11 820 491 Debt investment securities measured at fair value through profit and loss - 62 907 Debt investment securities measured at amortised cost 17 866 218 3 156 009 Government securities: 17 004 818 3 156 009 - bonds 17 004 818 3 156 009 Other securities: 861 400 - - bonds 861 400 - Equity investment securities measured at fair value through other comprehensive income 272 336 200 170 - unlisted 272 336 200 170 Equity investment securities measured at fair value through profit and loss - 58 035 - unlisted - 58 035 Total 62 952 586 50 086 938 details in note 2.5 88 Separate Financial Statements of Santander Bank Polska for 2023 Movements on investment securities 1.01.2023 - 31.12.2023 Debt investment securities measured at fair value through other comprehensive income Debt investment securities measured at fair value through profit and loss Debt investment securities measured at amortised cost Equity investment securities measured at fair value through other comprehensive income Equity investment securities measured at fair value through profit and loss Total As at the beginning of the period restated 46 609 817 62 907 3 156 009 200 170 58 035 50 086 938 Additions 384 757 873 - 14 239 339 - - 398 997 212 Disposals (sale and maturity) (388 497 135) (67 888) - - (64 121) (388 629 144) Fair value adjustment 2 214 123 4 852 - 72 166 6 185 2 297 326 Movements on interest accrued 28 743 - 472 459 - - 501 202 Impairment losses on securities (2 016) - - - - (2 016) FX differences (297 373) 129 (1 589) - (99) (298 932) As at the end of the period 44 814 032 - 17 866 218 272 336 - 62 952 586 details in note 2.5 Movements on investment securities 1.01.2022 - 31.12.2022 restated Debt investment securities measured at fair value through other comprehensive income Debt investment securities measured at fair value through profit and loss Debt investment securities measured at amortised cost Equity investment securities measured at fair value through other comprehensive income Equity investment securities measured at fair value through profit and loss Total As at the beginning of the period 67 138 415 113 733 1 421 272 191 991 - 68 865 411 Additions 159 438 467 - 1 680 423 129 59 179 161 178 198 Disposals (sale and maturity) (179 006 052) (59 179) - - - (179 065 231) Fair value adjustment (1 686 782) (4 515) - 8 050 1 705 (1 681 542) Movements on interest accrued 521 931 - 54 314 - - 576 245 Impairment losses on securities (1 066) - - - - (1 066) FX differences 204 904 12 868 - - (2 827) 214 945 Other - - - - (22) (22) As at the end of the period 46 609 817 62 907 3 156 009 200 170 58 035 50 086 938 details in note 2.5 24.Investments in subsidiaries and associates Investments in subsidiaries and associates 31.12.2023 31.12.2022 Subsidiaries 2 340 801 2 340 801 Associates 36 606 36 606 Total 2 377 407 2 377 407 89 Separate Financial Statements of Santander Bank Polska for 2023 Investments in subsidiaries as at 31.12.2023 * Name of entity Santander Inwestycje Sp. z o.o. Santander Finanse Sp. z o.o. Santander Towarzystwo Funduszy Inwestycyjnych S.A. Santander Consumer Bank S.A. Total Registered office Warszawa Poznań Poznań Wrocław Type of connection spółka zależna spółka zależna spółka zależna spółka zależna % of holding 100,00 100,00 50,00 60,00 Balance sheet value 46 600 131 032 6 755 2 156 414 2 340 801 Total assets of entity 62 035 317 689 157 560 20 062 691 20 599 975 Own funds of entity, of which: 61 729 303 618 125 269 4 544 263 5 034 879 Share capital 100 1 633 13 500 520 000 535 233 Other own funds, of which: 61 629 301 985 111 769 4 024 263 4 499 646 undistributed profit (uncovered loss) from previous years - - - 1 481 053 1 481 053 net profit (loss) 1 787 40 093 93 147 66 607 201 634 Liabilities of entity 306 14 071 32 291 15 518 428 15 565 096 Revenue 1 925 80 169 243 017 2 238 474 2 563 585 * The financial data of the subsidiaries available as at the date of preparation of these statements have been taken from unaudited financial statements of those subsidiaries Name of entity Business Santander Inwestycje Sp. z o.o. trading in shares of commercial companies as well as other securities; seeking investors for companies Santander Finanse Sp. z o.o. centralised managemet of the bank's entities: Santander Leasing S.A., Santander Faktor Sp. z o.o., Santander F24 S.A. Santander Towarzystwo Funduszy Inwestycyjnych S.A. brokerage activities: managing customer's share portfolios (listed and not listed) Santander Consumer Bank S.A. accepting savings and term deposits, granting and taking out loans and advances 90 Separate Financial Statements of Santander Bank Polska for 2023 Investments in subsidiaries as at 31.12.2022 * Name of entity Santander Inwestycje Sp. z o.o. Santander Finanse Sp. z o.o. Santander Towarzystwo Funduszy Inwestycyjnych S.A. Santander Consumer Bank S.A. Total Registered office Warszawa Poznań Poznań Wrocław Type of connection Subsidiary Subsidiary Subsidiary Subsidiary % of holding 100,00 100,00 50,00 60,00 Balance sheet value 46 600 131 032 6 755 2 156 414 2 340 801 Total assets of entity 94 683 355 387 160 388 17 014 569 17 625 027 Own funds of entity, of which: 94 372 341 893 94 236 3 845 253 4 375 754 Share capital 100 1 633 13 500 520 000 535 233 Other own funds, of which: 94 272 340 260 80 736 3 325 253 3 840 521 undistributed profit (uncovered loss) from previous years 34 610 - - 1 121 769 1 156 379 net profit (loss) 452 33 521 75 723 359 284 468 980 Liabilities of entity 311 13 494 66 152 13 169 315 13 249 272 Revenue 502 65 546 206 294 1 942 212 2 214 554 * The financial data of the subsidiaries available as at the date of preparation of these statements have been taken from unaudited financial statements of those subsidiaries Name of entity Business Santander Inwestycje Sp. z o.o. trading in shares of commercial companies as well as other securities; seeking investors for companies Santander Finanse Sp. z o.o. centralised managemet of the bank's entities: Santander Leasing S.A., Santander Faktor Sp. z o.o., Santander F24 S.A. and Santander Leasing Poland Securitization 01 Santander Towarzystwo Funduszy Inwestycyjnych S.A. brokerage activities: managing customer's share portfolios (listed and not listed) Santander Consumer Bank S.A. accepting savings and term deposits, granting and taking out loans and advances Investments in associates Country of incorporation The Bank’s share in Valuation Valuation as at the reporting date Name of associate and place of business Scope of business capital / voting power method 31.12.2023 31.12.2022 Santander Allianz Towarzystwo Ubezpieczeń na Życie S.A. Poland Warszawa insurance activity, life insurance 49,00 49,00 Purchase price 14 859 14 859 Santander Allianz Towarzystwo Ubezpieczeń S.A. Poland Warszawa insurance activity, property and personal insurance 49,00 49,00 Purchase price 13 747 13 747 POLFUND Fundusz Poręczeń Kredytowych S.A. Poland Szczecin providing lending guarantees, investing and managing funds invested in companies 50,00 50,00 Purchase price 8 000 8 000 Total 36 606 36 606 91 Separate Financial Statements of Santander Bank Polska for 2023 25.Intangible assets Intangible assets Year 2023 Licenses, patents etc. Other Expenditure on intangible assets Total Value at purchase price - beginning of the period 2 210 478 218 300 272 362 2 701 140 Additions from: - purchases - - 341 607 341 607 - transfers from expenditures 314 642 - - 314 642 Decreases from: - liquidation (125 771) - (2 008) (127 779) - transfers from expenditures - - (314 643) (314 643) - transfers - - (1 102) (1 102) Value at purchase price - end of the period 2 399 349 218 300 296 216 2 913 865 Accumulated depreciation - beginning of the period (1 900 089) (175 532) - (2 075 621) Additions/decreases from: - current year amortization (209 963) (14 138) - (224 101) - liquidation, sale 116 318 - - 116 318 Accumulated depreciation- end of the period (1 993 734) (189 670) - (2 183 404) Balance sheet value Purchase value 2 399 349 218 300 296 216 2 913 865 Accumulated depreciation (1 993 734) (189 670) - (2 183 404) As at 31 December 2023 405 615 28 630 296 216 730 461 Intangible assets Year 2022 Licenses, patents etc. Other Expenditure on intangible assets Total Value at purchase price - beginning of the period 2 041 164 218 300 246 520 2 505 984 Additions from: - purchases - - 249 570 249 570 - transfers from expenditures 219 948 - - 219 948 Decreases from: - liquidation (50 634) - (3 525) (54 159) - transfers from expenditures - - (219 918) (219 918) - transfers - - (285) (285) Value at purchase price - end of the period 2 210 478 218 300 272 362 2 701 140 Accumulated depreciation - beginning of the period (1 759 617) (155 408) - (1 915 025) Additions/decreases from: - current year amortization (178 256) (20 124) - (198 380) - liquidation, sale 37 784 - - 37 784 Accumulated depreciation- end of the period (1 900 089) (175 532) - (2 075 621) Balance sheet value Purchase value 2 210 478 218 300 272 362 2 701 140 Accumulated depreciation (1 900 089) (175 532) - (2 075 621) As at 31 December 2022 310 389 42 768 272 362 625 519 . 92 Separate Financial Statements of Santander Bank Polska for 2023 26.Goodwill As at 31 December 2023 and in the coresponding period, the goodwill covered the following item: · PLN 1,688,516 k - goodwill arising from the merger of Santander Bank Polska and Kredyt Bank on 4 January 2013. In accordance with IFRS 3 the goodwill was calculated as the surplus of the cost of acquisition over the fair value of assets and liabilities acquired. Test for impairment of goodwill arising from the merger between Santander Bank Polska and Kredyt Bank In 2023 and in the comparative period, the Bank conducted tests for impairment of goodwill arising from the merger with Kredyt Bank on 4 January 2013. The carrying amount as at 31 December 2022 was PLN 1,688,516 k (the same as at 31 December 2022). Recoverable amount based on value in use The recoverable amount of cash-generating units is the higher of fair value less costs of disposal and value in use. Value in use which is higher than the fair value less costs of disposal is measured on the basis of a discounted cash flow model relevant for banks and other financial institutions. The future expected cash flows generated by business segments of Santander Bank Polska are in line with the 3-year financial projections of the Bank’s management for 2024-2026. Taking into account the stability of Santander Bank Polska and sustainable financial performance, and comparing the value in use with the carrying amount of the cash-generating unit, no impairment was identified. Key assumptions for measuring value in use For the purposes of goodwill impairment testing Bank applies the following allocation of goodwill to historical business segments. The alocation results from the initial recognition as at acquisition date: Segment Retail Banking Segment Business and Corporate Banking Segment Corporate & Investment Banking Segment ALM and Centre Total Goodwill 764 135 578 808 222 621 122 952 1 688 516 Due to accepted valuation model, assumptions used to determine the value in use for the individual segments are the same. Financial projection The financial projection for 2024–2026 was prepared in line with the strategic and operational plans for 2024–2026 as well as macroeconomic and market forecasts. The extrapolation of cash flows beyond the period covered by the financial plan was based on growth rates reflecting the National Bank of Poland's long-term inflation target of 2.5 p.p. as at 31 December 2023. Pursuant to the financial projection, the Bank will continue to develop its products and services, focusing on the main product lines, services for retail customers, financing for SMEs, savings products and transactional banking services. Discount rate The discount rate of 11.21% used in the model is equal to the cost of capital assumed for Santander Bank Polska. Change of the discount rate by 1 percentage point would not significantly affect the value of discounted cash flows, value in use, and, consequently, the result of the impairment test. Growth rate in the period beyond the financial projections The extrapolation of cash flows beyond the 3-year period subject to the financial projection (residual value) was based on an annual growth rate of 2.5%, i.e. equal to the inflation target. Minimum regulatory capital ratio An increase in the required capital amount results in a decrease in the amount of capital available for distribution as part of the test. Under Polish law, the value of dividends payable by commercial banks in respect of their prior year profits depends on the fulfilment of the minimum criteria laid down in the KNF’s dividend policy. Details in note 4. As at 31 December 2023, no goodwill impairment was identified. 93 Separate Financial Statements of Santander Bank Polska for 2023 27.Property, plant and equipment Property, plant & equipment Year 2023 Land and buildings IT Equipment Transportation means Other fixed assets Fixed assets under construction Total Value at purchase price - beginning of the period 375 095 922 013 - 159 236 88 957 1 545 301 Additions from: - purchases - - - - 108 361 108 361 - transfers from expenditures 3 345 136 722 - 9 105 - 149 172 - transfers 1 102 - 187 - - 1 289 Decreases from: - sale, liquidation, donation (32 342) (191 986) (187) (14 981) (1 576) (241 072) - transfers from expenditures - - - - (149 171) (149 171) - transfers Value at purchase price - end of the period 347 200 866 749 - 153 360 46 571 1 413 880 Accumulated depreciation - beginning of the period (271 719) (648 957) - (126 939) - (1 047 615) Additions/decreases from: - current year amortisation (15 386) (98 361) (4) (12 850) - (126 601) - sale, liquidation, donation 26 514 191 574 187 14 344 - 232 619 - transfers - (3) (183) 3 - (183) Write down/Reversal of impairment write down Accumulated depreciation- end of the period (260 591) (555 747) - (125 442) - (941 780) Balance sheet value Purchase value 347 200 866 749 - 153 360 46 571 1 413 880 Accumulated depreciation (260 591) (555 747) - (125 442) - (941 780) As at 31 December 2023 86 609 311 002 - 27 918 46 571 472 100 Property, plant & equipment Year 2022 Land and buildings IT Equipment Transportation means Other fixed assets Fixed assets under construction Total Value at purchase price - beginning of the period 484 639 873 978 - 183 193 91 735 1 633 545 Additions from: - purchases - - - - 103 217 103 217 - transfers from expenditures 2 693 100 049 - 3 487 - 106 229 Decreases from: - sale, liquidation, donation (112 237) (52 014) - (27 442) (23) (191 716) - transfers from expenditures - - - (2) (105 941) (105 943) - transfers - - - - (31) (31) Value at purchase price - end of the period 375 095 922 013 - 159 236 88 957 1 545 301 Accumulated depreciation - beginning of the period (342 144) (607 312) - (138 658) - (1 088 114) Additions/decreases from: - current year amortisation (17 798) (91 419) - (13 952) - (123 169) - sale, liquidation, donation 89 283 49 774 - 25 671 - 164 728 Write down/Reversal of impairment write down (1 060) - - - - (1 060) Accumulated depreciation- end of the period (271 719) (648 957) - (126 939) - (1 047 615) Balance sheet value Purchase value 375 095 922 013 - 159 236 88 957 1 545 301 Accumulated depreciation (271 719) (648 957) - (126 939) - (1 047 615) As at 31 December 2022 103 376 273 056 - 32 297 88 957 497 686 94 Separate Financial Statements of Santander Bank Polska for 2023 28.Right of use assets Right of use assets Year 2023 Land and buildings Transportation means Other Total Gross value - begining of the period 926 846 25 774 8 393 961 013 Additions from: -new lease contracts 33 714 12 807 33 46 554 -lease modifications and lease period update 112 848 4 397 442 117 687 Decreases from: -lease modifications and lease period update (90 158) (19 519) (516) (110 193) Gross value - end of the period 983 250 23 459 8 352 1 015 061 Accumulated depreciation - begining of the period (500 730) (17 985) (4 956) (523 671) Additions from: - current year amortization (117 009) (8 785) (990) (126 784) Decreases from: -lease modifications (including settlement) and lease period update 68 570 18 300 508 87 378 Write down/Reversal of impairment write down * (2 420) - 46 (2 374) Accumulated depreciation- end of the period (551 589) (8 470) (5 392) (565 451) Balance sheet value Gross amount 983 250 23 459 8 352 1 015 061 Accumulated depreciation (551 589) (8 470) (5 392) (565 451) As at 31 December 2023 431 661 14 989 2 960 449 610 The recognised impairment allowance results from the closure of the bank's branches, and relates to the entire carrying amount of these branches. Right of use assets Year 2022 Land and buildings Transportation means Other Total Gross value - begining of the period 882 711 27 629 8 054 918 394 Additions from: -new lease contracts 31 022 714 364 32 100 -lease modifications and lease period update 86 860 4 698 723 92 281 -outlays 28 - - 28 Decreases from: -lease modifications and lease period update (73 775) (7 267) (748) (81 790) Gross value - end of the period 926 846 25 774 8 393 961 013 Accumulated depreciation - begining of the period (438 819) (14 894) (3 999) (457 712) Additions from: - current year amortization (115 742) (8 475) (1 165) (125 382) Decreases from: -lease modifications (including settlement) and lease period update 63 474 5 384 597 69 455 Write down/Reversal of impairment write down * (9 643) - (389) (10 032) Accumulated depreciation- end of the period (500 730) (17 985) (4 956) (523 671) Balance sheet value Gross amount 926 846 25 774 8 393 961 013 Accumulated depreciation (500 730) (17 985) (4 956) (523 671) As at 31 December 2022 426 116 7 789 3 437 437 342 The recognised impairment allowance results from the closure of the bank's branches, and relates to the entire carrying amount of these branches. 95 Separate Financial Statements of Santander Bank Polska for 2023 29.Deferred tax assets Deferred tax assets 31.12.2023 Changes recognised in other comprehensive income Changes recognised in profit or loss Changes in temporary differences 31.12.2022 restated Allowance for expected credit losses 748 462 - (11 274) (11 274) 759 736 Valuation of derivative financial instruments 1 688 290 - 71 730 71 730 1 616 560 Valuation of cash flow hedging instruments - (71 692) - (71 692) 71 692 Other provisions 212 481 - 40 320 40 320 172 161 Deferred income 209 786 - (194 037) (194 037) 403 823 Difference between the accounting value and the tax value of leased assets 93 878 (19 455) (19 455) 113 333 Unrealised interest expenses on loans, deposits and securities 149 069 - (50 246) (50 246) 199 315 Other negative temporary differences 2 674 - (761) (761) 3 436 Total assets of deferred tax 3 104 640 (71 692) (163 723) (235 415) 3 340 056 Deferred tax liabilities 31.12.2023 Changes recognised in other comprehensive income Changes recognised in profit or loss Changes in temporary differences 31.12.2022 restated Valuation of cash flow hedging instruments (130 716) (130 716) (130 716) - Valuation of investment securities 195 116 (361 849) (361 849) 556 965 Provisions for retirement allowances 146 2 903 - 2 903 (2 757) Valuation of derivative financial instruments (1 564 821) - (206 056) (206 056) (1 358 765) Unrealised interest income on loans, securities and interbank deposits (517 024) - 201 381 201 381 (718 405) Difference between the accounting value and the tax value of leased assets (85 426) - (2 331) (2 331) (83 095) Other positive temporary differences (14 999) - 705 705 (15 706) Total liabilities of deferred tax (2 117 725) (489 663) (6 301) (495 964) (1 621 763) Deferred tax assets 986 915 (561 355) (170 024) (731 379) 1 718 293 Details in Note 2.5 Deferred tax assets 31.12.2022 restated Changes recognised in other comprehensive income Changes recognised in profit or loss Changes in temporary differences 31.12.2021 Allowance for expected credit losses 759 736 - 42 628 42 628 717 108 Valuation of derivative financial instruments 1 616 560 - 628 964 628 964 987 596 Valuation of cash flow hedging instruments 71 692 66 603 - 66 603 5 089 Other provisions 172 161 - 8 193 8 193 163 967 Deferred income 403 823 - 137 360 137 360 266 463 Difference between the accounting value and the tax value of leased assets 113 333 (9 165) (9 165) 122 498 Unrealised interest expenses on loans, deposits and securities 199 315 - 144 200 144 200 55 115 Other negative temporary differences 3 436 - (1 412) (1 412) 4 847 Total assets of deferred tax 3 340 056 66 603 950 768 1 017 371 2 322 683 96 Separate Financial Statements of Santander Bank Polska for 2023 Deferred tax liabilities 31.12.2022 restated Changes recognised in other comprehensive income Changes recognised in profit or loss Changes in temporary differences 31.12.2021 Valuation of investment securities 556 965 251 677 - 251 677 305 288 Provisions for retirement allowances (2 757) 90 - 90 (2 847) Valuation of derivative financial instruments (1 358 765) - (634 974) (634 974) (723 791) Unrealised interest income on loans, securities and interbank deposits (718 405) - (499 624) (499 624) (218 781) Difference between the accounting value and the tax value of leased assets (83 095) - 4 435 4 435 (87 530) Other positive temporary differences (15 706) - 11 236 11 236 (26 942) Total liabilities of deferred tax (1 621 763) 251 767 (1 118 927) (867 160) (754 603) Deferred tax assets 1 718 293 318 370 (168 159) 150 211 1 568 080 Details in Note 2.5 Movements on deferred tax 31.12.2023 31.12.2022 restated As at the beginning of the period 1 718 293 1 568 080 Changes recognised in income statement (170 025) (168 157) Changes recognised in other comprehensive income (561 353) 318 370 Balance at the end of the period 986 915 1 718 293 Details in Note 2.5 Temporary differences recognised in other comprehensive income comprise deferred tax on available for sale securities, cash flow hedges and provisions for retirement allowances. Temporary differences recognised in the income statement comprise deferred tax on the valuation of other financial assets, allowance for impairment of loans and receivables and other assets and liabilities used in the bank’s ongoing operations. 30.Fixed assets classified as held for sale Fixed assets classified as held for sale 31.12.2023 31.12.2022 Land and buildings 4 308 4 308 Total 4 308 4 308 31.Other assets Other assets 31.12.2023 31.12.2022 Interbank and interbranch settlements - 9 389 Sundry debtors 905 658 776 984 Prepayments 95 025 107 488 Settlements of stock exchange transactions 62 092 30 749 Other 51 52 Total 1 062 826 924 662 of which financial assets * 967 750 817 122 * Financial assets include all items of Other assets, with the exception of Prepayments, Repossessed assets and Other. As at 31.12.2023 ECL allowance for other assets was PLN 50,464 k (31.12.2022 PLN 45,531 k). 97 Separate Financial Statements of Santander Bank Polska for 2023 The significant majority of 'Other assets' items are non-past due and unimpaired. The most significant items concern the companies Allianz, KDPW, WSE and a number of other entities with a good financial standing and good cooperation history, most of them rated A- (Fitch). 32.Deposits from banks Deposits from banks 31.12.2023 31.12.2022 Term deposits 553 858 162 325 Current accounts 2 114 435 2 082 803 Total 2 668 293 2 245 128 As at 31.12.2023 the adjustment of the value of the hedged risk of deposits covered by hedge accounting PLN nil (as at 31.12.2022 – PLN nil). Fair value of “Deposits from banks” is presented in Note 45. Movements in loans received from banks 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period - 6 100 Decrease (due to): - (6 100) - repayment of loans - (6 100) As at the end of the period - - 33.Deposits from customers Deposits from customers 31.12.2023 31.12.2022 Deposits from individuals 107 212 340 102 383 221 Term deposits 35 121 689 29 908 512 Current accounts 72 007 545 72 347 764 Other 83 106 126 945 Deposits from enterprises 79 675 168 74 735 188 Term deposits 16 868 037 16 840 729 Current accounts 59 740 299 55 078 144 Loans from financial institution 171 394 92 078 Other 2 895 438 2 724 237 Deposits from public sector 8 478 429 8 536 851 Term deposits 505 847 506 753 Current accounts 7 836 387 8 021 258 Other 136 195 8 840 Total 195 365 937 185 655 260 As at 31.12.2023 deposits held as collateral totaled PLN 1 893 153 k (as at 31.12.2022 - PLN 1 489 772 k). Fair value of “Deposits from customers” is presented in Note 45. 98 Separate Financial Statements of Santander Bank Polska for 2023 Movements in loans received from other financial institutions 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period 92 078 161 388 Increase (due to:) 172 784 4 430 - loans received 167 042 - - interest on loans received 5 742 4 430 Decrease (due to): (93 468) (73 740) - repayment of loans (87 560) (69 049) - interest repayment (5 908) (4 688) - FX differences and other changes - (3) As at the end of the period 171 394 92 078 The Bank did not note any violations of contractual terms related to liabilities in respect of loans received. 34.Subordinated liabilities Subordinated liabilities Redemption date Currency Nominal value Issue 1 05.08.2025 EUR 100 000 Issue 2 03.12.2026 EUR 120 000 Issue 3 22.05.2027 EUR 137 100 Issue 4 05.04.2028 PLN 1 000 000 Movements in subordinated liabilities 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period 2 705 885 2 649 991 Increase (due to): 184 062 150 281 - interest on subordinated loans 184 062 116 988 - FX differences - 33 293 Decrease (due to): (304 471) (94 387) - interest repayment (183 689) (94 387) - FX differences (120 782) - As at the end of the period 2 585 476 2 705 885 Short-term 35 962 35 588 Long-term (over 1 year) 2 549 514 2 670 297 Other details on subordinated liabilities are disclosed in Note 4. 35.Debt securities in issue Debt securities in issue on 31.12.2023 Name of the entity issuing the securities Type of securities Nominal value Currency Date of issue Redemption date Book Value (In thousands of PLN) Santander Bank Polska S.A. Bonds 1 900 000 PLN 30.03.2023 31.03.2025 1 936 502 Santander Bank Polska S.A. Bonds 3 100 000 PLN 29.11.2023 30.11.2026 3 121 357 Santander Bank Polska S.A. Bonds 200 000 EUR 22.12.2023 22.12.2025 871 197 Total 5 929 056 The total value of financial liabilities (including liabilities in respect of debt securities in issue) arising from these financial statements does not differ significantly from the projection of financial liabilities as at the end of the financial year published in relation to the bond purchase offer of 20 November 2023. 99 Separate Financial Statements of Santander Bank Polska for 2023 Debt securities in issue on 31.12.2022 Name of the entity issuing the securities Type of securities Nominal value Currency Date of issue Redemption date Book Value (In thousands of PLN) Santander Bank Polska S.A. Bonds 750 000 EUR 29.11.2021 29.11.2024 3 518 153 Santander Bank Polska S.A. Bonds 500 000 EUR 30.03.2022 30.03.2024 2 381 147 Total 5 899 300 . Movements in debt securities in issue 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period 5 899 300 4 660 882 Increase (due to): 6 028 095 2 507 304 - debt securities in issue 5 865 760 2 325 350 - interest on debt securities in issue 161 928 85 079 - FX differences - 96 875 - other changes 407 - Decrease (due to): (5 998 339) (1 268 886) - debt securities repurchase (5 605 700) (1 219 340) - interest repayment (139 804) (49 532) - FX differences (252 835) - - other changes - (14) As at the end of the period 5 929 056 5 899 300 36.Provisions for financial liabilities and guarantees granted Provisions for financial liabilities and guarantees granted 31.12.2023 31.12.2022 Provisions for financial commitments to grant loans and credit lines 124 661 56 914 Provisions for financial guarantees 25 987 16 038 Other provisions 646 1 060 Total 151 294 74 012 100 Separate Financial Statements of Santander Bank Polska for 2023 Change in provisions for financial liabilities and guarantees granted 31.12.2023 As at the begining of the period 74 012 Provision charge 217 399 Write back (137 940) Other changes (2 177) As at the end of the period 151 294 Short-term 77 743 Long-term 73 551 Change in provisions for financial liabilities and guarantees granted 31.12.2022 As at the begining of the period 73 130 Provision charge 117 259 Write back (116 719) Other changes 342 As at the end of the period 74 012 Short-term 51 393 Long-term 22 619 37.Other provisions Other provisions 31.12.2023 31.12.2022 Provisions for legal risk connected with foreign currency mortgage loans 624 354 318 683 Provisions for reimbursement of costs related to early repayment of consumer and mortgage loans 26 398 31 321 Provisions for legal claims and other 90 925 98 190 Provisions for restructuring - 15 463 Total 741 677 463 657 Change in other provisions 1.01.2023 - 31.12.2023 Provisions for legal risk connected with foreign currency mortgage loans Provisions for reimbursement of costs related to early repayment of consumer loans Provisions for legal claims and other Provisions for restructuring Total As at the beginning of the period 318 683 31 321 98 190 15 463 463 657 Provision charge/relase 346 194 - 143 167 (10 487) 478 874 Utilization (31 238) (4 923) (150 432) (4 976) (191 569) Other (9 285) (1) - - (9 285) As at the end of the period 624 354 31 321 90 925 - 741 677 * Detailed information are described in Note 46. 101 Separate Financial Statements of Santander Bank Polska for 2023 Change in other provisions 1.01.2022 - 31.12.2022 Provisions for legal risk connected with foreign currency mortgage loans Provisions for reimbursement of costs related to early repayment of consumer loans Provisions for legal claims and other Provisions for restructuring Total As at the beginning of the period 128 042 38 392 100 447 73 026 339 907 Provision charge/relase 186 880 - 74 767 (35 815) 218 761 Utilization (10 702) - (77 024) (21 748) (109 474) Other 14 463 - - - 14 463 As at the end of the period 318 683 31 321 98 190 15 463 463 657 38.Other liabilities Other liabilities 31.12.2023 31.12.2022 Settlements of stock exchange transactions 62 073 43 417 Interbank and interbranch settlements 1 231 217 1 105 216 Employee provisions 434 834 374 374 Sundry creditors 1 538 256 949 457 Liabilities from contracts with customers 129 837 122 391 Public and law settlements 168 591 149 249 Accrued liabilities 360 387 264 716 Total 3 925 195 3 008 820 of which financial liabilities * 3 626 767 2 737 180 Financial liabilities include all items of Other liabilities except of Public and law settlements and Liabilities from contracts with customers. Change in employee provisions 1.01.2023 - 31.12.2023 of which: Provisions for retirement allowances As at the beginning of the period 374 374 38 529 Provision charge 452 905 17 987 Utilization (266 376) - Release of provisions (53 959) (571) Other changes (72 110) - As at the end of the period 434 834 55 945 Short-term 378 889 - Long-term 55 945 55 945 . 102 Separate Financial Statements of Santander Bank Polska for 2023 Change in employee provisions 1.01.2022 - 31.12.2022 of which: Provisions for retirement allowances As at the beginning of the period 312 052 36 628 Provision charge 338 378 9 826 Utilization (239 293) - Release of provisions (36 763) (7 925) As at the end of the period 374 374 38 529 Short-term 335 845 - Long-term 38 529 38 529 Employee related provisions consists of items outlined in Note 53. 39.Share capital 31.12.2023 Series/issue Issue Type of preferences Limitation of rights to shares Number of shares Nominal value of series/issue in PLN k A bearer none none 5 120 000 51 200 B bearer none none 724 073 7 241 C bearer none none 22 155 927 221 559 D bearer none none 1 470 589 14 706 E bearer none none 980 393 9 804 F bearer none none 2 500 000 25 000 G bearer none none 40 009 302 400 093 H bearer none none 115 729 1 157 I bearer none none 1 561 618 15 616 J bearer none none 18 907 458 189 075 K bearer none none 305 543 3 055 L bearer none none 5 383 902 53 839 M bearer none none 98 947 990 N bearer none none 2 754 824 27 548 O bearer none none 101 009 1 010 102 189 314 1 021 893 Nominal value of one share is 10 PLN. All issued shares are fully paid. The shareholders having minimum 5% of the total number of votes at the Santander Bank Polska General Meeting of Shareholders was Banco Santander with a controlling stake of 67.41% stake and 5.01% Nationale-Nederlanden Otwarty Fundusz Emerytalny (managed by Nationale-Nederlanden Powszechne Towarzystwo Emerytalne S.A.) 103 Separate Financial Statements of Santander Bank Polska for 2023 31.12. 2022 Series/issue Issue Type of preferences Limitation of rights to shares Number of shares Nominal value of series/issue in PLN k A bearer none none 5 120 000 51 200 B bearer none none 724 073 7 241 C bearer none none 22 155 927 221 559 D bearer none none 1 470 589 14 706 E bearer none none 980 393 9 804 F bearer none none 2 500 000 25 000 G bearer none none 40 009 302 400 093 H bearer none none 115 729 1 157 I bearer none none 1 561 618 15 616 J bearer none none 18 907 458 189 075 K bearer none none 305 543 3 055 L bearer none none 5 383 902 53 839 M bearer none none 98 947 990 N bearer none none 2 754 824 27 548 O bearer none none 101 009 1 010 102 189 314 1 021 893 Nominal value of one share is 10 PLN. All issued shares are fully paid. The shareholders having minimum 5% of the total number of votes at the Santander Bank Polska General Meeting of Shareholders was Banco Santander with a controlling stake of 67.41% stake and 5.01% funds managed by Nationale-Nederlanden Powszechne Towarzystwo Emerytalne S.A.: Nationale-Nederlanden Otwarty Fundusz Emerytalny and Nationale-Nederlanden Dobrowolny Fundusz Emerytalny. 40.Other reserve capital Other reserve capital 31.12.2023 31.12.2022 General banking risk fund 649 810 649 810 Share premium 7 981 974 7 981 974 Other reserves of which: 14 737 764 13 673 726 Reserve capital 14 567 014 13 502 975 Supplementary capital 170 750 170 750 Total 23 369 548 22 305 509 Share (issue) premium is created from surplus over the nominal value of shares sold less costs of share issuance and constitutes the Bank’s supplementary capital. Reserve capital as at 31.12.2023 includes among others share option scheme charge of PLN 143,949 k and share base incentive scheme of 150,647 k and reserve capital as at 31.12.2022 includes share option scheme charge of PLN 143,949 k Other movements of other reserve capital are presented in "movements on equity" for 2023 and 2022. Statutory reserve (supplementary) capital is created from net profit appropriation in line with the prevailing banking legislation and the Bank’s Statute. The capital is not subject to split and is earmarked for covering balance sheet losses. Allocations from profit for the current year to reserve capital should amount to at least 8% of profit after tax and are made until supplementary capital equals at least one third of the Bank’s share capital. The amount of allocations is adopted by the General Meeting of Shareholders. The reserve capital is created out of allocations from the after-tax profit, in an amount resolved by the General Shareholders’ Meeting and from other sources. The reserve capital is earmarked for covering balance sheet losses, should they exceed the supplementary capital, or for other purposes, particularly for dividend pay-outs. Decisions on using the reserve capital are taken by the General Shareholders’ Meeting. 104 Separate Financial Statements of Santander Bank Polska for 2023 41. Revaluation reserve Revaluation reserve 1.01.2023 - 31.12.2023 Total gross Deferred tax adjustment Total net Opening balance restated, of which: (3 294 202) 625 897 (2 668 305) Debt securities measured at fair value through other comprehensive income (3 105 967) 590 134 (2 515 833) Equity securities measured at fair value through other comprehensive income 174 576 (33 170) 141 406 Valuation of cash flow hedging instruments (377 325) 71 692 (305 633) Actuarial gains on retirement allowances 14 514 (2 759) 11 755 Change in valuation of debt securities measured at fair value through other comprehensive income 2 216 551 (421 144) 1 795 407 Transfer from revaluation reserve to profit and loss resulting from the sale of debt securities measured at fair value through other comprehensive income (2 428) 461 (1 967) Transfer from revaluation reserve to profit and loss due to fair value measurement of securities covered by hedge accounting (381 822) 72 546 (309 276) Change in valuation of equity securities measured at fair value through other comprehensive income 72 166 (13 712) 58 454 Change in valuation of cash flow hedging instruments 382 407 (72 657) 309 750 Transfer from revaluation reserve to profit and loss resulting from cash flow hedges - - - Transfer from profit and loss to revaluation reserve resulting from cash flow hedges 682 900 (129 751) 553 149 Change in provision for retirement allowances – actuarial gains/losses gross (15 282) 2 904 (12 378) Closing balance, of which: (339 710) 64 544 (275 166) Debt securities measured at fair value through other comprehensive income (1 273 666) 241 997 (1 031 669) Equity securities measured at fair value through other comprehensive income 246 742 (46 882) 199 860 Valuation of cash flow hedging instruments 687 982 (130 716) 557 266 Actuarial gains on retirement allowances (768) 145 (623) * details in note 2.5 105 Separate Financial Statements of Santander Bank Polska for 2023 Revaluation reserve 1.01.2022 - 31.12.2022 restated Total gross Deferred tax adjustment Total net Opening balance, of which: (1 618 574) 307 527 (1 311 047) Debt securities measured at fair value through other comprehensive income (1 773 303) 336 928 (1 436 375) Equity securities measured at fair value through other comprehensive income 166 526 (31 641) 134 885 Valuation of cash flow hedging instruments (26 783) 5 089 (21 694) Actuarial gains on retirement allowances 14 986 (2 849) 12 137 Change in valuation of debt securities measured at fair value through other comprehensive income (1 693 085) 321 686 (1 371 399) Transfer from revaluation reserve to profit and loss resulting from the sale of debt securities measured at fair value through other comprehensive income 6 303 (1 198) 5 105 Transfer from revaluation reserve to profit and loss due to fair value measurement of securities covered by hedge accounting 354 118 (67 282) 286 836 Change in valuation of equity securities measured at fair value through other comprehensive income 8 050 (1 529) 6 521 Change in valuation of cash flow hedging instruments (187 104) 35 550 (151 554) Transfer from revaluation reserve to profit and loss resulting from cash flow hedges 5 195 (987) 4 208 Transfer from profit and loss to revaluation reserve resulting from cash flow hedges (168 633) 32 040 (136 593) Change in provision for retirement allowances – actuarial gains/losses gross (472) 90 (382) Closing balance, of which: (3 294 202) 625 897 (2 668 305) Debt securities measured at fair value through other comprehensive income (3 105 967) 590 134 (2 515 833) Equity securities measured at fair value through other comprehensive income 174 576 (33 170) 141 406 Valuation of cash flow hedging instruments (377 325) 71 692 (305 633) Actuarial gains on retirement allowances 14 514 (2 759) 11 755 * details in note 2.5 42.Hedge accounting Santander Bank Polska S.A. uses hedging strategies within hedge accounting in line with the risk management principles set out in note 3 to the financial statement. Details of the hedging transactions of Santander Bank Polska S.A. as at 31.12.2023 and in the comparative period are presented in the tables below: 106 Separate Financial Statements of Santander Bank Polska for 2023 Distribution of nominal values of cash flows Nominal value of hedging instruments up to 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years over 5 years Total 31.12.2023 Assets representing derivative hedging instruments 1 740 750 2 979 500 13 495 969 29 491 175 4 391 827 52 099 221 IRS 1 673 700 2 979 500 10 933 069 19 929 900 3 860 000 39 376 169 CIRS/OIS - - 2 391 400 7 137 787 531 827 10 061 014 CCIRS 67 050 - 171 500 2 423 488 - 2 662 038 Liabilities arising from derivative hedging instruments 1 738 920 2 979 500 13 558 609 30 069 635 4 391 827 52 738 491 IRS 1 673 700 2 979 500 10 933 069 19 929 900 3 860 000 39 376 169 CIRS/OIS - - 2 391 400 7 137 787 531 827 10 061 014 CCIRS 65 220 - 234 140 3 001 948 - 3 301 308 31.12.2022 Assets representing derivative hedging instruments - 2 914 117 7 121 855 15 892 305 1 199 688 27 127 965 IRS - - 2 922 220 12 000 069 614 000 15 536 289 CIRS/OIS - - - 668 143 241 938 910 081 CCIRS - 2 914 117 4 199 635 3 224 093 343 750 10 681 595 Liabilities arising from derivative hedging instruments - 3 113 150 7 298 071 16 871 424 1 332 728 28 615 373 IRS - - 2 922 220 12 000 069 614 000 15 536 289 CIRS/OIS - - - 668 143 241 938 910 081 CCIRS - 3 113 150 4 375 851 4 203 212 476 790 12 169 003 Pricing parameters for hedging instruments up to 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years over 5 years 31.12.2023 Assets representing derivative hedging instruments Average fixed interest rate 6,9600 6,6314 5,2337 5,1578 5,1424 Average exchange rate (CHF/PLN) 4,6828 4,6828 4,6828 4,6828 4,6828 Average exchange rate (EUR/PLN) 4,3480 4,3480 4,3480 4,3480 4,3480 Average exchange rate (USD/PLN) 3,9350 3,9350 3,9350 3,9350 3,9350 Liabilities arising from derivative hedging instruments Average fixed interest rate - 4,4993 3,4781 2,9840 2,3029 Average exchange rate (CHF/PLN) 4,6828 4,6828 4,6828 4,6828 4,6828 Average exchange rate (EUR/PLN) 4,3480 4,3480 4,3480 4,3480 4,3480 Average exchange rate (USD/PLN) 3,9350 3,9350 3,9350 3,9350 3,9350 31.12.2022 Assets representing derivative hedging instruments Average fixed interest rate - 3,8660 6,5588 6,4405 5,8157 Average exchange rate (CHF/PLN) - 4,7679 4,7679 4,7679 4,7679 Average exchange rate (EUR/PLN) - 4,6899 4,6899 4,6899 4,6899 Average exchange rate (USD/PLN) - 4,4018 4,4018 4,4018 4,4018 Liabilities arising from derivative hedging instruments Average fixed interest rate - 6,2953 4,9945 4,1762 1,5409 Average exchange rate (CHF/PLN) - 4,7679 4,7679 4,7679 4,7679 Average exchange rate (EUR/PLN) - 4,6899 4,6899 4,6899 4,6899 Average exchange rate (USD/PLN) - 4,4018 4,4018 4,4018 4,4018 107 Separate Financial Statements of Santander Bank Polska for 2023 Fair value hedges Santander Bank Polska Group uses fair value hedge accounting in relation to the following classes of financial instruments: · Fixed-rate debt securities in PLN, EUR and USD; · Fixed-rate securities issued by the Bank in EUR; · Fixed-rate loans in PLN granted by the Bank. To hedge the fair value, Santander Bank Polska S.A. uses Interest Rate Swaps (IRS), Currency Interest Rate Swaps (CIRS) and Overnight Index Swaps (OIS) for which the Bank pays a fixed rate and receives a variable rate. The risk being hedged is a change in the fair value of an instrument or a portfolio that is attributable to changes in market interest rates. These transactions do not hedge against changes in the fair value due to credit risk. Hedging items are measured at fair value. Hedged items are measured at amortised cost, taking into account a fair value adjustment for the risk being hedged. Since January 2016, Santander Bank Polska S.A. has used portfolio-based fair value hedge accounting in respect of interest rate risk connected with the portfolio of fixed-rate loans in PLN. To hedge the fair value, the Bank uses Interest Rate Swaps (IRS) for which the Bank pays a fixed rate and receives a variable rate. The purpose of hedging is to eliminate the risk of changes in the fair value of the fixed-rate loans portfolio resulting from movements in market interest rates. Credit margin is excluded from the hedging relationship. 31.12.2023 31.12.2022 Hedging instruments designated as fair value hedges Hedged item: Fixed-coupon bonds Hedged item: Fixed-rate loan portfolio Hedged item: Issued bonds Hedged item: Fixed-coupon bonds Hedged item: Fixed-rate loan portfolio Nominal value of hedging instrument 8 737 983 225 000 869 600 11 422 671 225 000 Hedging derivatives – assets (carrying amount) 221 617 6 228 556 466 714 20 578 Hedging derivatives – liabilities (carrying amount) 157 437 - - 25 508 - Line item in the statement of financial position that includes the hedging instrument Hedging derivatives (IRS, CIRS, OIS) Hedging derivatives (OIS) Hedging derivatives (CCIRS) Hedging derivatives (IRS and CIRS) Hedging derivatives (IRS) Hedged risk Interest rate risk Interest rate risk Interest rate risk Interest rate risk Interest rate risk Period over which instruments have impact on the Bank’s results up to 2033 up to 2024 up to 2024 up to 2029 up to 2024 31.12.2023 31.12.2022 Items subject to fair value hedge accounting Fixed-coupon bonds Fixed-rate loan portfolio Hedged item: Issued bonds Fixed-coupon bonds Fixed-rate loan portfolio Carrying amount of the hedged item, including: Assets 8 600 749 220 437 - 11 422 671 225 000 Liabilities - - 870 007 - - Accumulated amount of fair value hedge adjustments on the hedged item included in profit and loss and in the carrying amount, including: Assets 41 445 - - (519 057) (17 541) Liabilities (178 679) (4 563) (407) - - Line item in the statement of financial position that includes the hedged instrument Investment securities Loans and advances to customers Debt securities in issue Investment securities Loans and advances to customers 108 Separate Financial Statements of Santander Bank Polska for 2023 Cash flow hedging Santander Bank Polska S.A. uses hedge accounting for future cash flows with respect to variable-rate commercial and mortgage loans in PLN and denominated in EUR and CHF, with maximum maturity of 30 years. The hedging strategies used by Santander Bank Polska S.A. are designed to hedge the Bank’s exposures against the risk of changes in the value of future cash flows resulting from interest rate risk or – in the case of credit portfolios denominated in a foreign currency – also from currency risk. Hedging relationships are established using Interest Rate Swaps (IRS), Currency Interest Rate Swaps (CIRS) and Cross Currency Interest Rate Swaps (CCIRS). To measure hedge effectiveness, the Bank uses the hypothetical derivative method whereby the hedged item is reflected by a derivative transaction with specific characteristics. Hedged positions are measured at amortised cost. Hedging items are measured at fair value. If the hedging relationships are effective, changes in the fair value of hedging instruments are recognised in equity. In relation to the payment holidays introduced by the Polish government in 2022, the Bank analysed the portfolio of PLN mortgage loans in terms of sufficiency of future cash flows from the portfolio and collateral held. Excluding mortgage loans subject to payment holidays, the mortgage loan portfolio is sufficient to continue the hedging relationships. Based on the results of the analysis, in 2023 the Bank maintained all the hedging relationships in PLN. Taking into account payment holidays, the hedging relationships kept as part of hedge accounting remained effective. Furthermore, once a quarter the Bank analysed the sufficiency of the CHF mortgage loan portfolio in the context of pending court proceedings and the potential negative impact of court judgments on the value of future cash flows in CHF. Based on the results of the analyses, in 2023 the Bank terminated six hedging relationships in CHF with the total nominal value of CHF 265m. Adjusted for provisions for legal risk raised in 2023, the CHF mortgage loan portfolio was sufficient to continue the hedging relationships. At the same time, given the ruling practice on CHF mortgage loans and the Bank’s assessment regarding future lawsuits, the Bank considers the possibility to terminate the relationships in the future periods. Details of this transactions of Santander Bank Polska SA as at 31.12.2023 and at comparative period are presented in tables below: 109 Separate Financial Statements of Santander Bank Polska for 2023 31.12.2023 31.12.2022 Hedging instruments designed as cash flow hedges Hedged item: Portfolio of floating interest rate loans in PLN and EUR Hedged item: Portfolio of floating interest rate loans denominated in EUR and CHF Hedged item: Portfolio of floating interest rate loans in PLN Hedged item: Portfolio of floating interest rate loans denominated in EUR and CHF Hedged item: Issues in EUR Nominal value of hedging instrument 39 604 600 3 301 308 4 798 700 6 376 653 5 792 350 Hedging derivatives - assets (carrying amount) 1 326 620 4 353 309 - 50 322 Hedging derivatives – liabilities (carrying amount) 13 892 658 236 115 881 1 665 036 65 613 Line item in the statement of financial position that includes the hedging instrument Hedging derivatives (IRS, CIRS) Hedging derivatives (CCIRS) Hedging derivatives (IRS, CCIRS) Hedging derivatives (IRS, CCIRS) Hedging derivatives (IRS, CCIRS) Change in fair value of the hedging instrument used as the basis for recognising hedge ineffectiveness for the period 697 843 (22 081) 171 492 (158 298) (78 711) Balance of hedging gains or losses of the reporting period that were recognised in other comprehensive income 697 843 (9 860) 171 492 (125 968) (79 927) Value of hedge ineffectiveness recognised in profit or loss - (12 220) - (32 330) 1 216 Line item in the income statement that includes the recognised hedge ineffectiveness Net trading income and revaluation Net trading income and revaluation Net trading income and revaluation Net trading income and revaluation Net trading income and revaluation Hedged risk Interest rate risk Interest rate risk and currency risk Interest rate risk Interest rate risk and currency risk Interest rate risk and currency risk Period over which instruments have impact on the Bank’s results up to 2033 up to 2027 up to 2027 up to 2028 up to 2023 31.12.2023 31.12.2022 Items subject to cash flow hedge accounting Portfolio of floating interest rate loans in PLN and EUR Portfolio of floating interest rate loans denominated in EUR and CHF Portfolio of floating interest rate loans in PLN Portfolio of floating interest rate loans denominated in EUR and CHF Issues in EUR Change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period 697 843 (9 860) 171 492 (125 968) (79 927) Measurement to fair value of the hedging instrument, less deferred tax, is recognised in comprehensive income and accumulated in the Bank’s equity during the period and are presented in note 42. Impact of the IBOR reform Santander Bank Polska S.A. uses cash flow hedges and fair value hedges that are affected by the IBOR reform. The items hedged as part of hedge accounting include: · variable-rate commercial and mortgage loans in PLN, EUR and CHF; · fixed-rate mortgage loans in PLN; · fixed-rate debt securities in PLN, EUR and USD; · securities issued by the Bank in EUR. 110 Separate Financial Statements of Santander Bank Polska for 2023 As at 31 December 2023, there were 471 hedging relationships established at Santander Bank Polska S.A. The above-mentioned portfolios are hedged with IRS, CIRS and OIS transactions for PLN, EUR and USD exposures (414 relationships connected with 414 IRS transactions, 28 relationships connected with 27 CIRS transactions and 2 relationships connected with with 2 OIS transactions), and CCIRS transactions for EUR and CHF exposures (27 relationships connected with 23 CCIRS transactions). The interest rate of the foregoing derivatives is based on the following variable rates: 3M or 6M WIBOR (437 derivative transactions), 1M, 3M or 6M EURIBOR (36 derivative transactions), 3M SARON (14 derivative transactions) and USD SOFR (2 derivative transactions). The relationships are set to expire gradually by 2033: 77 relationships in 2024, 324 relationships over the next five years and 70 relationships by 2033 (including 65 relationships in 2033 alone). Detailed information about derivative and non-derivative financial instruments subject to the interest rate benchmark reform together with the summary of measures taken by the Bank to manage the risk arising from the reform and the accounting impact, including the impact on hedging relationships, is presented in Note 3 “Risk management” and in Note 42 “Hedge accounting” (section on hedging derivatives). 43.Sale and reverse sale and repurchase agreements Santander Bank Polska SA raises funds by selling financial instruments under agreements to repurchase these instruments at future dates at a predetermined price. Repo and sell-buy back transactions may cover securities from the Bank’s balance sheet portfolio. 31.12.2023 31.12.2022 Balance sheet value Balance sheet value Liabilities valued at amortised cost (contains sell-buy-back) 273 547 2 158 520 Fair value of securities held as collateral for sell-buy-back/repo transactions 271 933 2 157 372 Reverse sale and repurchase agreements 12 676 594 13 824 606 Fair value of securities held for buy-sell-back/reverse repo transactions 13 056 880 13 527 180 Reverse sale and repurchase agreements 31.12.2023 31.12.2022 Reverse sale and repurchase agreements from banks 12 166 858 13 538 405 Reverse sale and repurchase agreements from customers 509 736 286 201 Total 12 676 594 13 824 606 Sale and repurchase agreements 31.12.2023 31.12.2022 Sale and repurchase agreements from banks 108 975 2 158 520 Sale and repurchase agreements from customers 164 572 - Total 273 547 2 158 520 Securities being the subject of repo and sell-buy-back transactions constituting the Bank’s portfolio are not removed from the balance sheet, because the Bank retains all rewards (i.e. interest income on pledged securities) and risks (interest rate risk and the issuer’s credit risk) attaching to these assets. All of the above-mentioned risks and costs related to the holding of the underlying debt securities in the sell-buy-back transactions remain with the Bank, as well as power to dispose them. The Bank also acquires reverse repo and buy-sell-back transactions at the same price increased by the pre-determined amount of interest. Financial instruments covered by reverse repo and buy-sell-back transactions are not recognised in the balance sheet, because the Bank does not retain any rewards or risks attaching to these assets. Financial assets which are subject to reverse repo and buy-sell-back transactions represent a security cover accepted by the Bank which the Bank may sell or pledge. 111 Separate Financial Statements of Santander Bank Polska for 2023 Financial instruments held as security for (reverse repo) repurchase agreements may be sold or repledged under standard agreements, under the obligation to return these to the counterparty on maturity date of the transaction. 44.Offsetting financial assets and financial liabilities The bank enters into master agreements such as ISDA (International Swaps and Derivatives Association Master Agreements) and GMRA (Global Master Repurchase Agreement) providing for the possibility to terminate and settle the transaction with a counterparty in the event of default on the basis of a net amount of mutual receivables and payables. In addition, under CSA (Credit Support Annex), the counterparty hedges derivative exposures with a deposit margin. The table presents fair value amounts of derivative instruments (both held for trading and designated as hedging instruments under hedge accounting) and cash collateral covered by master agreements providing for the right of set-off under specific circumstances. The value of instruments not subject to set-off are presented separately. Gross amounts before offsetting in the statement of financial position Gross amounts set off in the statement of financial position Net amount after offsetting in the statement of financial position Amounts subject to master netting and similar arrangements not set off in the statement of financial position Net amount of exposure Amounts not subject to enforceable netting arrangements Balance sheet total Financial instruments Cash collateral received Offsetting Financial Assets and Financial Liabilities on 31.12.2023 (a) (b) (c) = (a) ‒ (b) (d) (e) (c) ‒ (d) ‒ (e) (f) (c) + (f) Assets Due from other banks - Reverse sale and repurchase agreements with other banks 12 166 858 - 12 166 858 - 12 003 370 163 488 - 12 166 858 Loans and advances to customers - Reverse sale and repurchase agreements 509 736 - 509 736 - 499 897 9 839 - 509 736 Other financial assets: - Financial derivatives 15 506 015 7 024 061 8 481 954 5 458 698 2 623 764 399 492 471 257 8 953 211 TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 28 182 609 7 024 061 21 158 548 5 458 698 15 127 031 572 819 471 257 21 629 805 Liabilities Financial derivatives 15 058 222 7 024 061 8 034 161 5 458 698 2 651 167 (75 704) 805 317 8 839 478 Sale and repurchase agreements 273 547 - 273 547 - 273 547 - - 273 547 TOTAL lIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 15 331 769 7 024 061 8 307 708 5 458 698 2 924 714 (75 704) 805 317 9 113 025 112 Separate Financial Statements of Santander Bank Polska for 2023 Gross amounts before offsetting in the statement of financial position Gross amounts set off in the statement of financial position Net amount after offsetting in the statement of financial position Amounts subject to master netting and similar arrangements not set off in the statement of financial position Net amount of exposure Amounts not subject to enforceable netting arrangements Balance sheet total Financial instruments Cash collateral received Offsetting Financial Assets and Financial Liabilities on 31.12.2022 (a) (b) (c) = (a) ‒ (b) (d) (e) (c) ‒ (d) ‒ (e) (f) (c) + (f) Assets Due from other banks - Reverse sale and repurchase agreements with other banks 13 538 405 - 13 538 405 - 13 287 408 250 997 - 13 538 405 Loans and advances to customers - Reverse sale and repurchase agreements 286 201 - 286 201 - 283 648 2 553 - 286 201 Other financial assets: - Financial derivatives 13 116 708 10 320 318 2 796 390 1 020 222 2 018 544 (242 376) 4 376 738 7 173 128 TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 26 941 314 10 320 318 16 620 996 1 020 222 15 589 600 11 174 4 376 738 20 997 734 Liabilities - Financial derivatives 14 166 897 10 320 318 3 846 579 1 020 222 2 991 825 (165 468) 4 947 767 8 794 346 Sale and repurchase agreements 2 158 520 - 2 158 520 - 2 129 677 28 843 - 2 158 520 TOTAL lIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 16 325 417 10 320 318 6 005 099 1 020 222 5 121 502 (136 625) 4 947 767 10 952 866 45.Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Below is a summary of the book values and fair values of the individual groups of assets and liabilities not carried at fair value in the financial statements. ASSETS 31.12.2023 31.12.2022restated Book Value Fair Value Book Value Fair Value Cash and balances with central banks 8 275 110 8 275 110 10 135 099 10 135 099 Loans and advances to banks 9 048 400 9 048 400 9 709 800 9 709 800 Loans and advances to clients measured at amortised cost, of which: 138 093 756 138 196 794 132 062 037 133 255 464 -individuals 18 469 953 18 558 247 16 919 845 17 687 157 -housing loans 50 488 244 49 712 063 50 059 801 50 259 196 -business 68 224 993 69 015 918 64 196 970 64 423 690 Buy-sell-back transactions 12 676 594 12 676 594 13 824 606 13 824 606 Debt investment securities measured at amortised cost 17 866 218 18 073 903 3 156 009 3 025 868 LIABILITIES Deposits from banks 2 668 293 2 668 293 2 245 128 2 245 128 Deposits from customers 195 365 937 195 375 513 185 655 260 185 636 274 Sell-buy-back transactions 273 547 273 547 2 158 520 2 158 520 Subordinated liabilities 2 585 476 2 548 323 2 705 885 2 670 073 Debt securities in issue 5 929 056 6 077 393 5 899 300 5 660 364 as described in Note 2.5 113 Separate Financial Statements of Santander Bank Polska for 2023 Below is a summary of the key methods and assumptions used in the estimation of fair values of the financial instruments shown in the table above. Financial assets and liabilities not carried at fair value in the statement of financial position The bank has financial instruments which in accordance with the IFRS are not carried at fair value in the financial statements. The fair value of such instruments is measured using the following methods and assumptions. Apart from assets that are not measured at fair value, all the other fair values fulfil conditions for classification to Level III of fair value. Loans and advances to banks: The fair value of deposits is measured using discounted cash flows at the current money market interest rates for receivables of similar credit risk, maturity and currency. In the case of demand deposits without a fixed maturity date or with maturity up to 6 months, it is assumed that their fair value is not significantly different than their book value. The process of fair value estimation for these instruments is not affected by the long-term nature of the business with depositors. Loans and advances to banks were classified in their entirety as Level 3 of the fair value hierarchy due to application of a measurement model with significant unobservable inputs. Loans and advances to customers: Carried at net value after impairment charges. Fair value is calculated as the discounted value of the expected future cash flows in respect of principal and interest payments. It is assumed that loans and advances will be repaid at their contractual maturity date. The estimated fair value of the loans and advances reflects changes in the credit risk from the moment of sanction (margins) and changes in interest rates. Loans and advances to customers were classified in their entirety as Level 3 of the fair value hierarchy due to application of a measurement model with significant unobservable inputs, i.e. current margins achieved on new credit transactions. Debt investment financial assets measured at amortized cost: fair value estimated based on market quotations. Instruments classified in category I of the fair value hierarchy. Deposits from banks and deposits from customers: Fair value of the deposits with maturity exceeding 6 months was estimated based on the cash flows discounted by the current market rates for the deposits with similar maturity dates. In the case of demand deposits without a fixed maturity date or with maturity up to 6 months, it is assumed that their fair value is not significantly different than their book value. The process of fair value estimation for these instruments is not affected by the long-term nature of the business with depositors. Deposits from banks and deposits from customers were classified in their entirety as Level 3 of the fair value hierarchy due to application of a measurement model with significant unobservable inputs. Debt securities in issue and subordinated liabilities: The bank has made an assumption that fair value of those securities is based on discounted cash flows methods incorporating adequate interest rates. Debt securities in issue and subordinated liabilities were classified in their entirety as Level 3 of the fair value hierarchy due to application of a measurement model with significant unobservable inputs. For Debt securities in issue and other items of liabilities, not carried at fair value in the financial statements, including: lease liabilities and other liabilities - the fair value does not differ significantly from the presented carrying amounts. Financial assets and liabilities carried at fair value in the statement of financial position As at 31.12.2023 and in the comparable periods the bank made the following classification of its financial instruments measured at fair value in the statement of financial position: Level I (active market quotations): debt, equity and derivative financial instruments which at the balance sheet date were measured using the prices quoted in the active market. The bank allocates to this level fixed-rate State Treasury bonds, treasury bills, shares of listed companies and WIG 20 futures. Level II (the measurement methods based on market-derived parameters): This level includes NBP bills and derivative instruments. Derivative instruments are measured using discounted cash flow models based on the discount curve derived from the inter-bank market. Level III (measurement methods using material non-market parameters): This level includes equity securities that are not quoted in the active market, measured using the expert valuation model; investment certificates measured at the balance sheet date at the price announced by the mutual fund and debt securities. This level includes also part of credit cards portfolio and loans and advances subject to underwriting, i.e. portion of credit exposures that are planned to be sold before maturity for reasons other than increase in credit risk. The objective of using a valuation technique is to determine the fair value, i.e., prices, which were obtained by the sale of an asset in in an orderly transaction between market participants carried out under current market conditions between market participants at the measurement date. 114 Separate Financial Statements of Santander Bank Polska for 2023 Level 3: Other valuation techniques. Financial assets and liabilities whose fair value is determined using valuation models for which input data is not based on observable market data (unobservable input data). In this category, the bank classifies financial instruments, which are valued using internal valuation models: LEVEL 3 VALUATION METHOD UNOBSERVABLE INPUT LOANS AND ADVANCES TO CUSTOMERS: credit cards and underwriting loans and advances; Discounted cash flow method Effective margin on loans CORPORATE DEBT SECURITIES Discounted cash flow method Credit spread SHARES IN BIURO INFORMACJI KREDYTOWEJ SA Estimation of the fair value based on the present value of the forecast results of the company The valuation assumed a payment of 100% of the net result forecasted by the company and a discount estimated at market level. SHARES IN POLSKI STANDARD PŁATNOŚCI SP. Z O.O. Estimation of the fair value based on the present value of the forecast results of the company The valuation based on the company's forecasted net financial results and the median P/E and EV/S multipliers based on the comparative group. SHARES IN SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION Estimation of the fair value based on the net assets value of the company and average FX exchange rate The valuation was based on net assets of the company and the Bank's share in the capital (ca0.048%). SHARES IN SYSTEM OCHRONY BANKÓW KOMERCYJNYCH S.A. SHARES IN KRAJOWA IZBA ROZLICZENIOWA SA Estimation of the fair value based on the net assets value of the company The valuations were based on the companies' net assets and the Bank's share in capital at the level of: -for SOBK ca. 12.9%; -for KIR and ca. 14.2%; -for WSEZ ca. 0.2%. SHARES IN WAŁBRZYSKA SPECJALNA STREFA EKONOMICZNA „INVEST-PARK” SP Z O.O. Expert valuations of capital instruments are prepared whenever required, but at least once a year. Valuations are prepared by an employee of the Department of Capital Management and Capital Investments (DZKiIK), and then verified by an employee of the Financial Risk Department (DRF) and finally accepted by a specially appointed team of Directors: Department of Capital Management and Capital Investments (DZKiIK), Financial Risk Department (DRF). ) and the Financial Accounting Area (ORF) (or employees designated by them). The valuation methodology for estimating the value of financial instruments from the DZKiIK portfolio using the expert method is included in the document "Investment strategy of Santander Bank Polska S.A. in capital market instruments. This document is subject to periodic reviews, updated at least once a year and approved by the Management Board and the Supervisory Board of the Bank. Instruments are transferred between levels of the fair value hierarchy based on observability criteria verified at the ends of reporting periods. In the case of risk factors commonly considered observable on the market, the Bank considers information on directly concluded transactions on a given market to be the primary criterion of observability, and information on the number and quality of available price quotations is an auxiliary criterion. In the period from January 1 to December 31, 2023, the following transfers of financial instruments between levels of the fair value measurement hierarchy were made: • corporate bonds were transferred from Level 2 to Level 3, for which, due to the lack of available liquid quotations and an alternative observable source of the credit spread level, available model prices using information on prices of comparable financial instruments were used for valuation, constituting an approach equivalent to the discounted flow method, and bootstrapping of the credit spread parameter; • derivatives were transferred from Level 3 to Level 2, which on the date of conclusion, due to the original maturity date and liquidity, are classified at level 3, and for which, as their period to maturity shortens, the liquidity of observable quotations increases and are transferred to level 2; The impact of estimated parameters on measurement of financial instruments for which the Bank applies fair value valuation according to Level 3 as at 31 December 2023 and in comparative period is as follows: 115 Separate Financial Statements of Santander Bank Polska for 2023 Impact on fair value +/-100 bps Fair value as at 31.12.2023 Valuation technique Unobservable factor Unobservable factor range Positive scenario Negative scenario Corporate debt securities 11 555 157 Discounted cash flow Credit spread (0.48% -0.9%) 253 915 (242 537) Loans and advances measured at fair value through other comprehensive income 2 798 234 Discounted cash flow Effective margin (0.78%-4.58%) 94 606 (88 355) Impact on fair value +/-100 bps Fair value as at 31.12.2022 Valuation technique Unobservable factor Unobservable factor range Positive scenario Negative scenario Loans and advances measured at fair value through other comprehensive income 2 628 660 Discounted cash flow Effective margin (0.85%-3.27%) 82 453 (82 453) As at 31.12.2023 and in the comparable periods the bank classified its financial instruments to the following fair value levels: 31.12.2023 Level I Level II Level III Total Financial assets Financial assets held for trading 1 544 308 7 388 154 9 498 8 941 960 Hedging derivatives - 1 559 374 - 1 559 374 Loans and advances to customers measured at fair value through other comprehensive income - - 2 798 234 2 798 234 Loans and advances to customers measured at fair value through profit or loss - - 11 111 11 111 Debt securities measured at fair value through OCI 27 162 483 6 096 392 11 555 157 44 814 032 Equity securities measured at fair value through OCI - - 272 336 272 336 Assets pledged as collateral 271 933 - - 271 933 Total 28 978 724 15 043 920 14 646 336 58 668 980 Financial liabilities Financial liabilities held for trading 824 121 8 003 969 5 944 8 834 034 Hedging derivatives - 829 565 - 829 565 Total 824 121 8 833 534 5 944 9 663 599 116 Separate Financial Statements of Santander Bank Polska for 2023 31.12.2022 Level I Level II Level III Total Financial assets Financial assets held for trading 244 547 6 623 196 12 008 6 879 751 Hedging derivatives - 537 924 - 537 942 Loans and advances to customers measured at fair value through other comprehensive income - - 2 628 660 2 628 660 Loans and advances to customers measured at fair value through profit or loss - - 152 131 152 131 Debt securities measured at fair value through OCI 32 199 894 14 407 513 2 410 46 609 817 Debt securities measured at fair value through profit and loss - - 62 907 62 907 Equity securities measured at fair value through profit and loss - - 58 035 58 035 Equity securities measured at fair value through OCI - - 200 170 200 170 Assets pledged as collateral 2 157 372 - - 2 157 372 Total 34 601 813 21 568 633 3 116 321 59 286 767 Financial liabilities Financial liabilities held for trading 195 560 6 913 952 8 355 7 117 867 Hedging derivatives - 1 872 039 - 1 872 039 Total 195 560 8 785 991 8 355 8 989 906 restated, as described in Note 2.5. The tables below show reconciliation of changes in the balance of financial instruments whose fair value is established by means of the valuation methods using material non-market parameters. Level III Financial assets 31.12.2023 Financial assets held for trading Loans and advances to customers measured at fair value through profit and loss Loans and advances to customers measured at fair value through other comprehensive income Debt securities measured at fair value through other comprehensive income Debt Investment securities measured at fair value through profit and loss Equity investment securities measured at fair value through profit and loss Equity securities measured at fair value through other comprehensive income Financial liabilities held for trading As at the beginning of the period 12 008 152 131 2 628 660 2 410 62 907 58 035 200 170 8 355 Profit or losses -recognised in income statement ---net trading income and revaluation (4 606) 26 361 161 238 - - - - (1 167) ---gains/losses from other financial securites - - - - 4 852 6 185 - -recognised in equity (OCI)-valuation change of equity instruments - - - - - - 72 166 - Purchase/ granting 1 383 12 190 1 760 240 - - - - 393 Sale - (8 102) (282 645) - (67 888) (64 122) - - Matured - (171 469) (1 407 100) - - - - - Transfer 713 - - 11 554 763 - - - (1 636) Other - - (62 159) (2 016) 129 (98) - - As at the end of the period 9 498 11 111 2 798 234 11 555 157 - - 272 336 5 944 117 Separate Financial Statements of Santander Bank Polska for 2023 Level III Financial assets 31.12.2022 Financial assets held for trading Loans and advances to customers measured at fair value through profit and loss Loans and advances to customers measured at fair value through other comprehensive income Debt securities measured at fair value through other comprehensive income Debt Investment securities measured at fair value through profit and loss Equity investment securities measured at fair value through profit and loss Equity securities measured at fair value through other comprehensive income Financial liabilities held for trading As at the beginning of the period 3 885 450 556 1 729 848 3 475 113 733 - 191 991 2 616 Profit or losses - - -recognised in income statement ---net trading income and revaluation 5 517 55 714 150 167 - - - - 6 131 ---gains/losses from other financial securites - - - - (4 515) 1 705 - -recognised in equity (OCI) - - - - - 8 050 - Purchase/ granting 4 696 126 915 1 330 740 - - 59 179 129 1 139 Sale - (24 145) (430 000) - (59 179) - - - Matured - (456 909) (154 869) - - - - - Transfer (2 089) - - - - - - (1 532) Other - - 2 774 (1 065) 12 868 (2 849) - - As at the end of the period 12 008 152 131 2 628 660 2 410 62 907 58 035 200 170 8 355 . 46.Legal risk connected with CHF mortgage loans As at 31 December 2023, the Bank had a portfolio of 20.2k CHF-denominated and CHF-indexed loans of PLN 4,752,409k gross before adjustment to the gross carrying amount at PLN 3,289,747k reducing contractual cash flows in respect of legal risk. As at 31 December 2022, the Bank had a portfolio of 27.2k CHF-denominated and CHF-indexed loans of PLN 6,524,486k gross before adjustment to the gross carrying amount at PLN 2,491,692k reducing contractual cash flows in respect of legal risk. In the case of both common courts and the Supreme Court, the ruling practice regarding loans indexed to or denominated in foreign currencies is still not unanimous. The prevailing practice is the annulment of a loan agreement due to unfair clauses concerning loan indexation and application of an exchange rate from the bank’s FX table. Some courts issue judgments as a result of which the loan is converted to PLN: the unfair indexation mechanism is removed and the loan is treated as a PLN loan with an interest rate based on a rate relevant for CHF. Other courts adjudicate partly in favour of banks: only the application of an exchange rate based on the bank’s FX table is deemed to be unfair and is replaced by an objective indexation rate, i.e. an average NBP exchange rate. Still others decide on the removal of loan indexation, as a consequence of which the loan is treated as a PLN loan with an interest rate based on WIBOR. Judgments are also passed which declare loan agreements void due to unlawful terms. Those judgments are incidental and as such, in the Bank’s view, have no significant impact on the assessment of legal risk of court cases regarding mortgage loans denominated in or indexed to CHF. Lastly, there are still rulings which are entirely favourable to banks, where conversion clauses are not deemed to be unfair and the case against the bank is dismissed. The foregoing differences in the case-law result from discrepancies in the ruling practice of the Supreme Court and the Court of Justice of the European Union (CJEU), which essentially provide guidance rather than detailed rules on how specific disputes should be adjudicated and claims settled. 118 Separate Financial Statements of Santander Bank Polska for 2023 Judgments passed by the Supreme Court in cases examined as part of the cassation procedure vary as to the effects of potential unfairness of indexation clauses: from the annulment of a loan agreement (prevailing practice) to its continuation in existence after the removal of unfair terms. For example, in three judgments passed on 19 September 2023 (file no. II CSKP 1627/22, II CSKP 1110/22, II CSKP 1495/22) the Supreme Court reiterated that an agreement can continue in force if unfair clauses are eliminated, that is if they are replaced by reference to an objective market rate or average NBP rate (the same was stated in the judgment of 28 September 2022 in case no. II CSKP 412/22, and in the dissenting opinion on case no. II CSKP 701/22). Recently, several judgments have been passed in favour of banks, whereby the court refused to examine borrowers’ cassation complaints based on similar grounds as above, that is the continuation of the agreement after elimination of unfair clauses (e.g. case no. I CSK 5082/22 and I CSK 7034/22). The Supreme Court was expected to present its stance on CHF loans in response to the questions asked by the First President of the Supreme Court in 2021 (file no. III CZP 11/21). However, as the Supreme Court’s composition has been contested, the stance will not be presented until the CJEU responds to the question concerning the procedure for the appointment of judges. The CJEU refused to respond to that question on 9 January 2024. The case has been remanded to the Supreme Court. The date of the hearing is to be set. In the resolution passed in 2021 (file no. III CZP 6/21), the Supreme Court expressed its opinion on several important matters concerning settlements between the parties in case of annulment of a loan agreement. It stated that the parties must each reimburse to the other any payments made under the agreement in accordance with the two separate claims theory. This way, the balance theory (ex officio mutual set-off of claims) was rejected. At the same time, the Supreme Court held that there are legal instruments in place, such as set-off and the right of retention, which make it possible to concurrently account for mutual settlements in relation to unjust enrichment following the invalidation of the loan agreement. As there were conflicting opinions about whether the right of retention can be exercised with respect to claims arising from a loan agreement, questions were submitted to the Supreme Court about the legal nature of a loan agreement. Courts also referred to the CJEU for a preliminary ruling. In the above resolution, the Supreme Court also pointed out that the limitation of the bank’s claims for return of unjust enrichment may not commence until the agreement is considered permanently ineffective, i.e. until the consumer takes an informed decision as to invalidity of the agreement, after they have been duly informed about the unfairness of contractual provisions and the related effects. This is in line with the opinion issued by the CJEU in respect of the limitation period for the consumer’s claims for reimbursement of instalments paid following the annulment of the agreement, stating that it would be unreasonable to assume that this period should begin to run from the date of each payment made by the consumer as the consumer might not be aware of the existence or nature of unfair terms in the agreement. The Supreme Court has not yet taken a clear position on banks’ claims going beyond reimbursement of the nominal amount of the loan principal. However, it indicated such possibility in one of its judgments in which it stated that the CJEU case-law does not preclude such consequence of the annulment of a loan agreement (file. no. V CSK 382/18). In its ruling practice, the CJEU generally gives priority to the protection of consumer’s interests violated by unfair contractual terms. At the same time, it reiterates that the main objective of Directive 93/13/EEC on unfair terms in consumer contracts is to restore the balance between the parties, i.e. to restore the legal and factual situation which the consumer would have been in had they signed the agreement without the unfair term, while not undermining the deterrent effect sought by the Directive (deterring sellers or suppliers from including unfair terms in agreements). Therefore, the court should first endeavour to keep the agreement in existence without the unfair term, where possible (i.e. if the main subject of the agreement is not changed). At the same time, the CJEU holds that it is permissible for the unfair term to be replaced by a supplementary provision of national law (even the one that entered into force after the conclusion of the agreement) or a rule which the parties have opted for. Recently, the CJEU has put forward a relatively new idea: that the parties should restore the balance through negotiations within the framework set by the court, this way protecting the consumer from adverse effects of the annulment of an agreement (particularly the need to immediately reimburse the amounts due to the bank). The CJEU takes the view that an agreement should be invalidated only as a last resort and only after the court presents the borrower with consequences of this solution and the borrower agrees to it. However, in order to ensure that the agreement can continue in existence, the court should apply all available measures, including an analysis of the possibility of removing only some of the clauses considered unfair without changing the substance of the contractual obligation. However, the prevailing practice of Polish courts is to invalidate the agreement as a result of elimination of unfair clauses. The CJEU pointed out on several occasions (e.g. C-6/22, C-349/18 to C-351/18) that settlements between the parties following the annulment of an agreement are governed by national law (provided that the objectives of Directive 93/13/EEC are met). Consequently, the national courts have the exclusive jurisdiction over claims for restitution. That said, losses arising from the annulled agreement should not be equally distributed, i.e. the consumer should not incur a half or more than a half of the related costs. The District Court for Warsaw–Śródmieście requested a preliminary ruling from the CJEU on claims of the parties for settlement of amounts arising from the non-contractual use of the capital in the case of annulment of an agreement pursuant to Directive 93/13/EEC. One case concerned the borrower’s claims against the bank for the return of profits made using the money paid by the borrower (C- 119 Separate Financial Statements of Santander Bank Polska for 2023 520/21) and the other case concerned the bank’s claims for consideration in respect of the provision of funds under a loan agreement (C-756/22). The judgment in case C-520/21 was passed on 15 June 2023. In the grounds of the judgment the CJEU stated that “in the context of the annulment in its entirety of a mortgage loan agreement on the ground that it cannot continue in existence after the removal of the unfair terms, Article 6(1) and Article 7(1) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts must be interpreted as: – not precluding a judicial interpretation of national law according to which the consumer has the right to seek compensation from the credit institution going beyond reimbursement of the monthly instalments paid and the expenses paid in respect of the performance of that agreement together with the payment of default interest at the statutory rate from the date on which notice is served, provided that the objectives of Directive 93/13 and the principle of proportionality are observed and, – precluding a judicial interpretation of national law according to which the credit institution is entitled to seek compensation from the consumer going beyond reimbursement of the capital paid in respect of the performance of that agreement together with the payment of default interest at the statutory rate from the date on which notice is served.” In its judgment, the CJEU confirmed that the effects of the annulment of an agreement are governed by the national law subject to the provisions of Directive 93/13 EEC. Consequently, claims for restitution will be assessed by the national court after examining the facts of the case. The grounds of judgment indicate that the bank’s claims going beyond the reimbursement of the loan principal are contrary to the objectives of Directive 93/13/EEC, if they would cause the bank to make a similar profit to the one intended to be earned in the performance of the agreement. The deterrent effect would thus be eliminated. However, several courts have already issued decisions (which are not yet final) stating that banks’ claims for reimbursement of the capital adjusted for changes in the time value of money are admissible and warranted. At the same time, the CJEU held that the EU law does not preclude the consumer from seeking compensation from the bank beyond reimbursement of the instalments paid. But in its grounds of judgment it asserted that such claims should be assessed in the light of all the facts of the case to ensure that potential benefits derived by the consumer after annulment of the agreement do not go beyond what is necessary to restore the legal and factual situation they would have been in if they had not concluded a defective agreement and that the benefits are not a disproportionate penalty on a seller or supplier (proportionality principle). Furthermore, as any such claims will be assessed in accordance with national laws on unjust enrichment, the decision to uphold them would be questionable as there is no actual enrichment on the part of the bank as a result of the use of funds paid by the borrower (the borrower only reimburses the money provided by the bank under an agreement declared invalid). On 11 December 2023, the CJEU issued an order in case C-756/22 concerning the bank’s restitution claims, stating that the issue in question had already been resolved in the judgment of 15 June 2023 and a separate judgment in this regard was not necessary. In its order of 12 January 2024 in case C-488/23, the CJEU maintained its stance presented in the judgment of 15 June 2023 in case C-520/21 and issued interpretation, indicating that the bank cannot seek compensation from the consumer in the form of court-ordered adjustment to the capital paid to the consumer, but only the capital and statutory late payment interest from the date of the demand for payment. On 7 December 2023, the CJEU passed a judgment in another case brought by the Polish court (C-140/22), in which it stated that the assessment of unfairness of contractual clauses is made by operation of law and the national court should examine disputable provisions ex officio. The CJEU also stressed that the consumer should be able to exercise their rights irrespective of whether they have made a statement before the court that they are aware of the consequences of the invalidity of the agreement and gives their consent to its annulment. In its judgment of 14 December 2023 in case C-28/22, the TSUE ruled on the limitation period for claims of banks and consumers but did not specifically indicate the start date of that period. It merely concluded that it cannot begin to run as from the date of the final and non-appealable judgment and that the start date for bank’s claims cannot be earlier than that for consumer’s claims. The CJEU also noted that banks may use their right of retention but it should not automatically mean the suspension of the accrual of late payment interest due to consumers. The CJEU’s rulings do not address all issues concerning the settlement of an invalidated agreement, but at the same time they refer to the issues subject to national law which have already been adjudicated by the Supreme Court. Accordingly, the final assessment of legal risk related to claims of the parties for consideration arising from the non-contractual use of the capital in the case of annulment of the agreement will still largely depend on the ruling practice of national courts with regard to the enforcement of CJEU judgments and on the opinion of the Supreme Court. As there is no unanimous ruling practice and – in the Management Board’s opinion – it is not possible to predict the Supreme Court’s decisions on individual cases and there are still questions pending preliminary ruling by the CJEU, at the date of these financial 120 Separate Financial Statements of Santander Bank Polska for 2023 statements the Bank estimated the legal risk associated with the portfolio of loans indexed to and denominated in a foreign currency using a model which considers different possible judgments (in the form of adjustment to the gross carrying amount for active exposures or provisions for inactive exposures), including those which are the subject of the request for the resolution of the entire Civil Chamber of the Supreme Court. The model can also be affected by subsequent CJEU rulings on questions referred by the Polish courts, the stance of the Supreme Court and the ruling practice of national courts. The Bank is monitoring court decisions taken with regard to foreign currency loans in terms of changes in the ruling practice. The model might also be affected by a potential intervention of legislators aimed to restore the balance between the parties following the removal of the unfair clause to protect legal relationships from mass annulment of mortgage loan agreements. In view of the above, the Bank identified the risk that in the case of lawsuits which have already been filed or are predicted to be filed based on applicable models the scheduled cash flows from the portfolio of mortgage loans denominated in and indexed to CHF might not be fully recoverable and/or that a liability might arise, resulting in a future cash outflow. Total cumulative impact of legal risk associated with foreign currency mortgage loans is recognised in line with the requirements arising from: · IFRS 9 Financial Instruments – in the case of active loans and · IAS 37 Provisions, Contingent Liabilities and Contingent Assets – in the case of loans repaid in full or if the gross carrying amount of an active loan is lower than the value of risk. The adjustment to the gross carrying amount (in accordance with IFRS 9) and provisions (in accordance with IAS 37) were estimated taking into account a number of assumptions which significantly influence the estimate reflected in the Bank’s financial statements. As at 31 December 2023, there were 12,528 pending lawsuits against the Bank over loans indexed to or denominated in CHF, with the disputed amount totalling PLN 4,769,471k. This included one class action filed under the Class Action Act and relating to 302 CHF-indexed loans with the disputed amount of PLN 50,983k. As at 31 December 2022, there were 8,637 pending lawsuits against the Bank over loans indexed to or denominated in CHF, with the disputed amount totalling PLN 2,812,580k. This included one class action filed under the Class Action Act and relating to 559 CHF-indexed loans with the disputed amount of PLN 50,983k. As at 31 December 2023, the total cumulative impact of legal risk associated with foreign currency mortgage loans in the Bank was estimated at PLN 4,038,785k, including: · IFRS 9 adjustment to the gross carrying amount at PLN 3,414,431k; · IAS 37 provision at PLN 624,354k. As at 31 December 2022, the total cumulative impact of legal risk associated with foreign currency mortgage loans in the Bank was estimated at PLN 2,810,375, including: · IFRS 9 adjustment to the gross carrying amount at PLN 2,491,692k; · IAS 37 provision at PLN 318,683k. The tables below present the total cost of legal risk connected with mortgage loans recognised in the Bank’s income statement and statement of financial position, including the cost of settlements discussed in detail in the section below. Cost of legal risk connected with foreign currency mortgage loans 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Impact of legal risk associated with foreign currency mortgage loans recognised as adjustment to gross carrying amount (1 389 437) (1 048 904) Impact of legal risk associated with foreign currency mortgage loans recognised as provision (346 194) (186 880) Other costs (345 926) (192 549) Total cost of legal risk associated with foreign currency mortgage loans (2 081 557) (1 428 333) Gain/loss on derecognition of financial instruments measured at amortised cost (316 773) (169 235) including: settlements made (324 072) (183 255) Total cost of legal risk associated with foreign currency mortgage loans and settlements made (2 405 629) (1 611 588) * Other costs include but are not limited to the costs of court proceedings and costs of enforcement of court judgments. 121 Separate Financial Statements of Santander Bank Polska for 2023 31.12.2023 31.12.2022 Adjustment to gross carrying amount due to legal risk connected with foreign currency mortgage loans 3 414 431 2 491 692 Provision in respect of legal risk connected with foreign currency mortgage loans 624 354 318 683 Total cumulative impact of legal risk associated with foreign currency mortgage loans 4 038 785 2 810 375 As at 31 December 2023, the total adjustment to the gross carrying amount and provisions for legal risk and legal provisions (for legal claims and a collective portion) accounted for 85% of the gross value of the active CHF loan portfolio (before adjustment to the gross carrying amount in line with IFRS 9). The increase in the cost of legal risk between January and December 2023 is due to an update of the number of expected settlements and expected lawsuits as well as change in total loss in respect of cases potentially lost by the Bank resulting from changes in the expected rulings and the assumed level of the likelihood of claims being resolved in favour of customers. Furthermore, the number of court judgments increased in 2022 and 2023. The Bank used a statistical model to estimate the likelihood of claims being made by borrowers in relation to both active and repaid loans based on the existing lawsuits against the Bank and the estimated growth in their number. The model assesses the so-called lifetime risk and is based on a range of behavioural characteristics related to the loan and the customer. The Bank assumes that lawsuits have been or will be filed against the Bank in relation to approx. 31.8% of loans (active and repaid). These assumptions are highly sensitive to a number of external factors, including but not limited to the ruling practice of Polish courts, the level of publicity around individual rulings, measures taken by the mediating law firms and the cost of proceedings. Customers’ interest in proposed settlements is another important aspect affecting the estimates, as is the practice of Polish courts with regard to the enforcement of CJEU rulings. The Bank expects that most of the lawsuits will be filed by the end of 2024, and then the number of new claims will drop as the legal environment will become more structured. In the Bank’s opinion, the expected number of cases estimated based on the statistical model is also characterised by uncertainty owing to such factors as: the duration of court proceedings (also estimated based on a relatively short time horizon of available statistics, which does not meet the conditions for application of quantitative methods) and the growing costs related to the instigation and continuation of court proceedings. For the purpose of calculating the costs of legal risk, the Bank also estimated how likely it is that a specific number of lawsuits will be filed and what the possible end scenarios are in this respect. The likelihood ratios differ between indexed and denominated loans. The likelihood of unfavourable ruling for the Bank is higher for the former and lower for the latter. The Bank also considered the protracted proceedings in some courts. As at 31 December 2023, 1,773 final and non-appealable judgments were issued in cases against the Bank (including those passed after the CJEU ruling of 3 October 2019), of which 1,702 were unfavourable to the Bank, and 71 were entirely or partially favourable to the Bank (compared to 705 judgments as at 31 December 2022, including 658 unfavourable ones and 47 entirely or partially favourable). When assessing these likelihoods, the Bank used the support of law firms and conducted thorough analysis of the ruling practice in cases concerning indexed and denominated loans. As the current ruling practice is not unanimous, the Bank considers the following scenarios of possible court rulings that might lead to financial losses (including one new scenario added in Q2 2023): ● Annulment of the whole loan agreement due to unfair clauses, with only the nominal of the capital to be reimbursed by the borrower ● Annulment of the loan agreement clauses identified as unfair, resulting in the conversion of the loan into PLN and maintenance of an interest rate based on a rate relevant for CHF ● Conversion of the loan to PLN with an interest rate based on WIBOR ● Rulings leading to the settlement by the borrower of the capital obtained, taking into account its real rather than notional value ● Annulment of the loan agreement clauses identified as unfair with respect to the FX differences determination mechanism, resulting in the average NBP rate to be applied. These scenarios also vary in terms of likelihood depending on the type of agreement and in terms of the level of losses incurred in case of their materialisation. They were estimated with the support of external law firms independent from the Bank. Each of these scenarios has an estimated expected loss level based on the available historical data. 122 Separate Financial Statements of Santander Bank Polska for 2023 The Bank also considers an additional scenario in which it may incur financial loss on account of additional claims made by the borrower beyond the reimbursement of the nominal amount of the instalments paid. Settlements In December 2020, the Chairman of the Polish Financial Supervision Authority (KNF) presented a proposal for voluntary settlements between banks and borrowers under which CHF loans would be retrospectively settled as PLN loans bearing an interest rate based on WIBOR plus margin. The Bank has prepared settlement proposals which take into account both the key elements of conversion of home loans indexed to CHF, as proposed by the KNF Chairman, and the conditions defined internally by the Bank. The proposals are being presented to customers. This is reflected in the model which is currently used to calculate legal risk provisions, both in terms of the impact of proposed settlements on customers’ willingness to bring the case to court and with respect to the potential outcomes of court proceedings. By 31 December 2023, the Bank made 7,681 settlements (both pre-court and following the legal dispute), of which 5,082 ones were reached in 2023. In mid-2022, the Bank prepared a settlement scenario which reflects the level of losses for future settlements. The scenario is based on acceptance levels and losses on loans as part of settlement proposals described above. The acceptance level of future settlements is affected by factors such as the interest rate of PLN loans, the CHF/PLN conversion rate, the development of the ruling practice and the duration of proceedings. Sensitivity analysis Due to the high uncertainty around both individual assumptions and their total impact, the Bank carried out the following sensitivity analysis of the estimated impact of legal risk by assessing the influence of variability of individual parameters on the level of that risk. The estimates were prepared in the form of a univariate analysis of provision value sensitivity. Taking into account the variability of the parameters outlined below, as at 31 December 2023 the impact of legal risk estimated on a collective basis is affected as follows: Scenario (PLN m) Change in the collective provision as at 31.12.2023 Change in the collective provision as at 31.12.2022 Doubling the number of customers filing a lawsuit (applies to active and inactive customers) 786 772 50% reduction in the number of customers filing a lawsuit (applies to active and inactive customers) (393) (386) Relative increase of 5% in the likelihood of losing the case 39 37 Relative decrease of 5% in the likelihood of losing the case (39) (36) For all the parameters, the variability range in the sensitivity analysis was estimated taking into account the existing market conditions. The adopted variability ranges may change depending on market developments, which may significantly affect the results of the sensitivity analysis. Taking into account the variability of the parameters outlined below, the provision for individual legal claims as at 31 December 2023 and in the comparative period is affected as follows: Scenario (PLN m) Change in the individual provision as at 31.12.2023 Change in the individual provision as at 31.12.2022 Relative increase of 5% in the likelihood of losing the case 154 91 Relative decrease of 5% in the likelihood of losing the case (154) (89) 47.Contingent liabilities Information about pending court and administrative proceedings As at 31.12.2023 the value of all litigation amounts to PLN 6,852,833 k. This amount includes PLN 1,658,069 k claimed by the Bank, PLN 5,194 ,764 k in claims against the Bank. As at 31.12.2023 the amount of all court proceedings which had been completed amounted to PLN 502,425 k. 123 Separate Financial Statements of Santander Bank Polska for 2023 As at 31.12.2023 the provisions for instigated lawsuits recognised in accordance with IAS 37 totalled PLN 533,705 k and the adjustment to gross carrying amount under IFRS 9 related to to instigated lawsuits totalled PLN 2,687,793k. In 2 874 cases against Santander Bank Polska SA, where the claim value was high (equal or above PLN 500 k), the total value of provisions for legal claims recognised in accordance with IAS 37 and the adjustment to gross carrying amount under IFRS 9 related to legal claims was PLN 1,258,559 k. As at 31.12.2022 the value of all litigation amounts to PLN 4,201,281 k. This amount includes PLN 927,871 k claimed by the Bank, PLN 3,273,410 k in claims against the Bank. As at 31.12.2022 the amount of all court proceedings which had been completed amounted to PLN 142,781 k. As at 31.12.2022 the provisions for instigated lawsuits recognised in accordance with IAS 37 totalled PLN 173,097k and the adjustment to gross carrying amount under IFRS 9 related to to instigated lawsuits totalled PLN 1,746,075k. In 1,403 cases against Santander Bank Polska SA, where the claim value was high (equal or above PLN 500 k), the total value of provisions for legal claims recognised in accordance with IAS 37 and the adjustment to gross carrying amount under IFRS 9 related to legal claims was PLN 656 613 k. Administrative penalty proceedings by the Polish Financial Supervision Authority On 22 November 2023, the Polish Financial Supervision Authority (KNF) started administrative proceedings against Santander Bank Polska S.A. that might result in a penalty being imposed on the Bank under Article 176i(1)(4) of the Act on trading in financial instruments. At this stage of the proceedings, the amount of the potential penalty cannot be estimated reliably. Off-balance sheet liabilities The value of contingent liabilities and off-balance sheet transactions are presented below. The value of liabilities granted and provision for off-balance sheet liabilities are presented also presented by categories. The values of guarantees and letters of credit as set out in the table below represent the maximum possible loss that would be disclosed as at the balance sheet day if the customers did not meet any of their obligations towards third parties. 31.12.2023 Contingent liabilities Stage 1 Stage 2 Stage 3 Total Liabilities granted 52 062 036 1 011 288 69 742 53 143 066 - financial 33 865 999 572 146 40 897 34 479 042 - credit lines 30 157 643 513 717 31 958 30 703 318 - credit cards debits 3 041 541 47 184 8 375 3 097 100 - import letters of credit 657 765 11 245 564 669 574 - term deposits with future commencement term 9 050 - - 9 050 - guarantees 18 231 664 488 753 94 901 18 815 318 Provision for financial liabilities and guarantees granted (35 627) (49 611) (66 056) (151 294) Liabilities received 50 307 819 - financial 165 218 - guarantees 50 142 601 Total 52 062 036 1 011 288 69 742 103 450 885 124 Separate Financial Statements of Santander Bank Polska for 2023 31.12.2022 Contingent liabilities Stage 1 Stage 2 Stage 3 Total Liabilities granted 40 277 456 748 904 13 179 41 039 539 - financial 28 347 974 527 576 22 852 28 898 402 - credit lines 24 470 038 482 387 12 454 24 964 879 - credit cards debits 3 047 030 35 540 8 833 3 091 403 - import letters of credit 809 145 9 649 1 565 820 359 - term deposits with future commencement term 21 761 - - 21 761 - guarantees 11 957 360 230 929 26 860 12 215 149 Provision for financial liabilities and guarantees granted (27 878) (9 601) (36 533) (74 012) Liabilities received 47 832 305 - financial - - guarantees 47 832 305 Total 40 277 456 748 904 13 179 88 871 844 48.Assets and liabilities pledged as collateral Assets pledged as collateral 31.12.2023 31.12.2022 Treasury bonds blocked for REPO transactions 271 933 2 157 372 Total 271 933 2 157 372 The Bank holds financial instruments in the form of: - debt securities measured at fair value through other comprehensive income of PLN 121,365 k and measured at amoritsed cost of PLN 40,215 k (in 2022: PLN 2,157,372 k), - financial assets held for trading in the amount of PLN 110,353 k (in 2022: PLN 0 k), which represent collateral for liabilities under buy-sell-back transactions. The liabilities were presented in Note 43 Sale and reverse sale and repurchase agreements. Apart from assets that secure liabilities that are disclosed separately in the statement of financial position when the receiving party may sell or exchange the assets for other security, the bank additionally held the following collateral for liabilities that did not meet the criterion: 31.12.2023 31.12.2022 Treasury bonds blocked with BFG 1 068 287 1 038 258 Treasury bonds blocked for loans from banks 123 679 184 980 Deposits in financial institutions as collateralised valuation of transactions 3 103 960 2 976 280 Total 4 295 926 4 199 518 Assets securing funds to cover the BGF are debt securities. In order to calculate the contribution to the deposit protection fund, Santander Bank Polska applied percentage rate of 0.25% (0.30% in 2022) of funds deposited in all accounts with the bank, being the basis for calculating the obligatory reserve. As at 31.12. 2023, assets allocated to that end totalled PLN 1,068,287 k compared with PLN 1,038,258 k a year before. In respect of financing granted in the form of bank loans, collateral is set through debt securities measured at fair value through other comprehensive income blocked in KDPW (Central Securities Depository of Poland) worth PLN 123,679 k (as at 31.12.2022- PLN 184,980 k). In 2023, deposits opened with financial institutions to secure the value of transactions totalled PLN 3,103,960 k (in 2022 – PLN 2,976,280 k). In 2023, bank accepted PLN 2,367,717 k worth of deposits securing of derivative transactions (vs. PLN 2,053,897 k in 2022). Other liabilities accepted as collateral are disclosed in Note 33. 125 Separate Financial Statements of Santander Bank Polska for 2023 49.Information about leases Lease related amounts recognized in the income statement 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Amortisation of right of use asset incl.: (126 784) (125 382) - Land and buildings (117 009) (115 742) - Transportation means (8 785) (8 475) - Other (990) (1 165) Interest expenses due to lease liabilities (17 901) (14 998) Short-term lease costs (8 995) (8 116) Low-value assets lease costs (1 253) (1 213) Costs of variable lease payments not included in the measurement of the lease liabilities (362) (702) Non-tax deductible VAT (29 698) (24 278) Total (184 993) (174 689) Lease liabilities 31.12.2023 31.12.2022 Lease liabilities (gross) 520 178 574 000 Discount (36 166) (57 119) Lease liabilities (net) 484 012 516 881 Lease liabilities gross by maturity: Short-term 132 971 150 604 Long-term (over 1 year) 387 207 423 396 Total lease liabilities (gross) 520 178 574 000 . Movements in lease liabilities 1.01.2023-31.12.2023 1.01.2022-31.12.2022 As at the beginning of the period 516 881 556 169 Additions from: 163 663 132 928 - adding a new contract 49 208 31 917 - interest on lease liabilities 17 869 14 998 - FX differences - 3 207 - update of lease term 96 586 82 806 Disposals from: (196 532) (172 216) - payment due to lease liabilities (154 407) (152 101) - interest repayment (17 869) (14 998) - FX differences (16 559) - - other changes (7 697) (5 117) As at the end of the period 484 012 516 881 50.Statement of cash flows - additional information The table below contains information on cash and cash equivalents in the cash flows statement of Santander Bank Polska SA. Cash and cash equivalents 31.12.2023 31.12.2022 Cash and balances with central banks 8 275 110 10 135 099 Receivables from interbank deposits * 19 327 386 20 457 580 Debt securities 6 096 392 3 898 145 Total 33 698 888 34 490 824 * financial assets with initial maturity below three months Santander Bank Polska SA has restricted cash in the form of a mandatory reserve held on account with the Central Bank. 126 Separate Financial Statements of Santander Bank Polska for 2023 51.Related parties The tables below present transactions with related parties. Transactions between Santander Bank Polska SA and its related entities are banking operations carried out on an arm’s length basis as part of their ordinary business and mainly represent loans, bank accounts, deposits, guarantees and leases. In the case of internal Group transactions, a documentation is prepared in accordance with requirements of tax regulations for transfer pricing. Transactions with subsidiaries 31.12.2023 31.12.2022 Assets 19 779 422 17 549 723 Loans and advances to banks 118 280 267 794 Financial assets held for trading 2 197 201 Loans and advances to customers 19 641 940 17 239 186 Other assets 17 005 42 542 Liabilities 522 695 590 583 Deposits from banks 12 167 70 197 Financial liabilities held for trading 14 012 9 041 Deposits from customers 308 812 331 439 Lease liabilities 187 677 179 890 Other liabilities 27 16 Contingent Liabilities 6 402 535 6 300 736 Sanctioned: 4 902 535 5 000 736 financial 1 297 808 1 719 730 guarantees 3 604 727 3 281 006 Received: 1 500 000 1 300 000 guarantees 1 500 000 1 300 000 Derivatives' Nominal Values 1 251 552 342 309 Cross-currency interest rate swap (CIRS) – purchased amounts 1 978 - Cross-currency interest rate swap (CIRS) – sold amounts 1 977 - Single-currency interest rate swap (IRS) 875 292 317 136 Forward-purchased 3 955 - Forward-sold 3 889 - Spot-purchased 181 832 12 570 Spot-sold 182 629 12 603 . Transactions with subsidiaries 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Income 1 066 914 630 927 Interest income 989 967 575 479 Fee and commission income 61 438 48 583 Other operating income 13 272 6 865 Net trading income and revaluation 2 237 - Expenses 18 172 23 277 Interest expenses 16 673 12 515 Fee and commission expenses 537 233 Net trading income and revaluation - 10 177 Operating expenses incl.: 962 352 Bank's staff, operating expenses and management costs 943 323 Other 19 29 127 Separate Financial Statements of Santander Bank Polska for 2023 Transactions with associates 31.12.2023 31.12.2022 Liabilities 108 911 56 243 Deposits from customers 108 911 56 243 Income 80 422 67 847 Fee and commission income 80 422 67 847 Expenses 1 920 1 679 Interest expense 1 920 1 679 Transactions with Santander Group with the parent company with other entities 31.12.2023 31.12.2022 31.12.2023 31.12.2022 Assets 12 840 432 11 475 005 3 854 1 749 Loans and advances to banks, incl: 5 895 136 6 202 306 2 090 1 749 current accounts 930 559 566 447 2 090 1 749 loans and advances 4 964 577 5 635 859 - - Financial assets held for trading 4 547 294 4 098 301 - - Reverse sale and repurchase agreements 2 395 729 1 173 532 - - Other assets 2 273 866 1 764 - Liabilities 5 609 305 10 294 407 193 002 107 941 Deposits from banks incl.: 518 331 594 353 17 244 17 142 current accounts and advances 518 331 594 353 17 244 17 142 Financial liabilities held for trading 4 206 059 3 796 232 - - Deposits from customers - - 106 950 70 288 Lease liabilities - - 25 25 Debt securities in issue 871 197 5 899 300 - - Other liabilities 13 718 4 522 68 783 20 486 Contingent liabilities 7 385 843 2 795 875 33 604 5 320 Sanctioned: 1 271 084 - 22 835 3 827 financial - - 20 000 - guarantees 1 271 084 - 2 835 3 827 Received: 6 114 759 2 795 875 10 769 1 493 guarantees 6 114 759 2 795 875 10 769 1 493 Derivatives’ nominal values 431 615 381 231 138 041 - - Cross-currency interest rate swap (CIRS) – purchased 13 849 657 6 346 764 - - Cross-currency interest rate swap (CIRS) – sold 13 632 380 6 253 250 - - Single-currency interest rate swap (IRS) 207 713 978 119 850 295 - - Forward rate agreement (FRA) 105 698 880 22 522 500 - - Options interest rate 5 715 156 5 686 116 - - FX swap – purchased amounts 32 742 241 23 128 822 - - FX swap – sold amounts 32 944 709 23 552 024 - - FX options -purchased CALL 3 887 702 5 646 198 - - FX options -purchased PUT 4 074 479 5 754 442 - - FX options -sold CALL 2 452 114 5 277 238 - - FX options -sold PUT 2 975 070 5 886 463 - - Spot-purchased 1 224 058 531 156 - - Spot-sold 1 223 140 531 264 - - Forward- purchased 1 731 221 63 919 - - Forward- sold 1 745 974 58 400 - - Window Forward – purchased amounts 2 448 24 987 - - Window Forward – sold amounts 2 174 24 203 - - 128 Separate Financial Statements of Santander Bank Polska for 2023 Transactions with Santander Group with the parent company with other entities 1.01.2023-31.12.2023 1.01.2022-31.12.2022 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Income 1 239 344 1 050 920 9 975 13 051 Interest income 311 278 28 159 11 6 Fee and commission income 21 507 14 176 229 645 Other operating income 18 317 9 662 12 400 Net trading income and revaluation 906 541 1 008 268 73 - Expenses 192 169 126 735 165 071 133 604 Interest expense 104 237 74 799 1 089 3 706 Fee and commission expense 23 200 5 456 181 348 Net trading income and revaluation - - - 3 Operating expenses incl.: 64 732 46 480 163 801 129 547 staff,operating expenses and management costs 64 678 46 478 163 675 129 547 other operating expenses 54 2 126 - Transactions with Members of Management and Supervisory Boards Remuneration of Santander Bank Polska Management Board Members, Supervisory Board Members and key management personnel Santander Bank Polska. Loans and advances granted to the key management personnel. As at 31.12.2023 and 31.12.2022 members of the Management Board were bound by the non-compete agreements which remain in force after they step down from their function. If a Member of the Management Board is removed from their function or not appointed for another term, he/she is entitled to a once-off severance pay. The severance pay does not apply if the person accepts another function in the Bank. Loans and advances have been sanctioned on regular terms and conditions. Transactions with members of Management Board Management Board Members Key Management Personnel and Key Management Personnel 1.01.2023-31.12.2023 1.01.2022-31.12.2022 1.01.2023-31.12.2023 1.01.2022-31.12.2022 Short-term employee benefits 18 171 16 665 34 783 30 145 Post-employment benefits - - 200 - Long-term employee benefits 10 170 10 645 11 756 11 786 Paid termination benefits - - 927 - Share-based payments 10 954 8 010 17 334 12 408 Total 39 295 35 320 65 000 54 339 Share-based payments for key management personnel: the amount of PLN 12,408 k includes PLN 3,256 k paid in the form of shares in 2023. The remaining portion will be paid in subsequent years in accordance with the Remuneration Policy of Santander Bank Polska Group. Management Board Members Key Management Personnel 31.12.2023 31.12.2022 31.12.2023 31.12.2022 Loans and advances made by the Bank to the Members of the Management Board/Key Management and to their relatives 3 667 4 799 15 222 19 661 Deposits from The Management Board/Key management and their relatives 7 701 10 197 14 253 16 541 The category of key management personnel includes the persons covered by the principles outlined in the “Santander Bank Polska Group Remuneration Policy”. Santander Bank Polska S.A. applies the “Santander Bank Polska Group Remuneration Policy”. The Policy has been approved by the bank’s Management Board and Supervisory Board and is reviewed annually or each time significant organisational changes are made. Persons holding key executive positions are paid variable remuneration once a year following the end of the reference period and release of the Bank’s results. Variable remuneration is awarded in accordance with bonus regulations and five-year Incentive Plan VII and is paid in cash and in the Bank’s shares. The remuneration paid in shares may not be lower than 50% of the total amount of variable remuneration. Payment of min. 40% of the variable remuneration specified above is conditional and deferred for the period of four or 129 Separate Financial Statements of Santander Bank Polska for 2023 five years. During that period, it is paid in arrears in equal annual instalments depending on the employee’s individual performance in the analysed period and the value of shares. The total estimated cost of long-term Incentive Plan VII for the Management Board and key executives is PLN 28,288 k (21,285k in 2022). Details are described in note 54. In 2023, the total remuneration paid to the Supervisory Board Members of Santander Bank Polska totalled PLN 2,187 k (2,088 k in 2022). In 2023, members of the Supervisory Board of Santander Bank Polska S.A. received remuneration from the Bank's related entities in the amount of PLN 97 k (98 k in 2022). 52.Acquisitions and disposals of investments in subsidiaries and associates Liquidation of Santander Consumer Finanse Sp. z o.o. On 23 December 2020, the General Meeting of Santander Consumer Finanse Sp. z o.o. adopted a resolution to dissolve the company and start the liquidation process. The company was liquidated on 22 November 2023. Its assets and liabilities were settled. The profit on liquidation totalled PLN 1 990k and was presented in note “Other operating income” in line other. 53.Employee benefits Staff benefits include the following categories: a) Short-term benefits (remuneration, social security contributions, paid leaves, profit distributions and bonuses and non-cash benefits provided free charge or subsidized). Value of short-term employee benefits are undiscounted, b) Post-employment benefits (retirement benefits and similar payments, life insurance or medical care provided after the term of employment). Within these categories, the companies of the Santander Bank Polska Group create the following types of provisions: Provisions for unused holidays Liabilities related to unused holidays are stated in the expected amount (based on current salaries) without discounting. Provisions for employee bonuses Liabilities related to bonuses are stated in the amount of the probable payment without discounting. Provisions for retirement allowances Based on internal regulations in respect to remuneration, the employees of the Bank are entitled to defined benefits other than remuneration: · retirement benefits, · retirement pension. The present value of such obligations is measured by an independent actuary using the projected unit credit method. The amount of the retirement and pension benefits and death-in-service benefits is dependent on length of service and amount of remuneration received by the employee. The expected present value of the benefits is calculated, taking into account the financial discount rate and the probability of an individual get to the retirement age or die while working respectively. The financial discount rate is determined by reference to up-to-date market yields of government bonds. The probability of an individual get to the retirement age or die while working is determined using the multiple decrement model, taking into consideration the following risks: possibility of dismissal from service, risk of total disability to work and risk of death. These defined benefit plans expose the Bank to actuarial risk, such as: · interest rate risk – the decrease in market yields on government bonds would increase the defined benefit plans obligations, · remuneration risk – the increase in remuneration of the Bank’s employees would increase the defined benefit plans obligations, 130 Separate Financial Statements of Santander Bank Polska for 2023 · mobility risk – changes in the staff rotation ratio, · longevity risk – the increase in life expectancy of the Bank’s employees would increase the defined benefit plans obligations. The principal actuarial assumptions adopted by an independent actuary as at 31 December 2023 are as follows: · the discount rate for future benefits at the level of 5.58% (7.33% as at 31 December 2022), · the future salary growth rate at the level of 5.00% (5,0% as at 31 December 2022), · the probable number of leaving employees calculated on the basis of historical data concerning personnel rotation in the Bank, · the mortality adopted in accordance with Life Expectancy Tables for men and women, published the Central Statistical Office, adequately adjusted on the basis of historical data of the Bank. Reconciliation of the present value of defined benefit plans obligations The following table presents a reconciliation from the opening balances to closing balances for the present value of defined benefit plans obligations. 31.12.2023 31.12.2022 As at the beginning of the period 38 530 36 628 Current service cost 2 030 1 904 Prior service cost (2 601) (1 603) Interest expense 2 704 1 129 Actuarial (gains) and losses 15 282 472 Balance at the end of the period 55 945 38 530 Sensitivity analysis The following table presents how the impact on the defined benefits obligations would have increased (decreased) as a result of a change in the respective actuarial assumptions by one percentage point as at 31 December 2023. Defined benefit plan obligations 1 percent increase 1 percent decrease Discount rate (8,19)% 8,79% Future salary growth rate 8,80% (8,27)% The following table presents how the impact on the defined benefits obligations would have increased (decreased) as a result of a change in the respective actuarial assumptions by one percentage point as at 31 December 2022. Defined benefit plan obligations 1 percent increase 1 percent decrease Discount rate (8,06)% 8,63% Future salary growth rate 8,79% (8,27)% Other staff-related provisions These are provisions for the National Fund of Rehabilitation of the Disabled, redundancies, overtime and staff training. These liabilities are stated at the amounts of expected payment without discounting. The balances of the respective provisions are shown in the table below: Provisions 31.12.2023 31.12.2022 Provisions for unused holidays 45 145 36 896 Provisions for employee bonuses 280 749 289 440 Provisions for retirement allowances 55 945 38 529 Other staff-related provisions 52 995 9 509 Total 434 834 374 374 Detailed movements on employee provisions have been presented in Note 38 131 Separate Financial Statements of Santander Bank Polska for 2023 54.Share based incentive scheme In 2022, Santander Bank Polska S.A. (“Bank”, “SAN PL”) established Incentive Plan VII (“Plan”), which is addressed to the employees of the Bank and its subsidiaries who significantly contribute to growth in the value of the organisation. The purpose of the Plan is to motivate the participants to achieve business and qualitative goals in line with the Bank’s long-term strategy and to provide an instrument that strengthens the employees’ relationship with the organisation and encourages them to act in its long-term interest. The Plan obligatorily covers all employees of Santander Bank Polska designated as material risk takers (identified employees). The list of other key participants is defined by the Bank’s Management Board and approved by the Supervisory Board. Those employees can participate in the Plan on a voluntary basis. The participants who satisfy the conditions stipulated in the Participation Agreement and the Resolution confirming the delivery of objectives will be entitled to an award which is variable remuneration in the form of the Bank’s shares classified as an equity-settled share-based payment transaction under IFRS 2 Share-based Payment. To that end, the Bank will buy back up to 2,331,000 shares from 1 January 2023 until 31 December 2033, i.e.: a) not more than 207,000 shares of SAN PL with the maximum value of PLN 55.3m in 2023; b) not more than 271,000 shares of SAN PL with the maximum value of PLN 72.4m in 2024; c) not more than 326,000 shares of SAN PL with the maximum value of PLN 87.0m in 2025; d) not more than 390,000 shares of SAN PL with the maximum value of PLN 104.1m in 2026; e) not more than 826,000 shares of SAN PL with the maximum value of PLN 220.5m in 2027; f) not more than 145,000 shares of SAN PL with the maximum value of PLN 38.7m in 2028; g) not more than 47,000 shares of SAN PL with the maximum value of PLN 12.5m in 2029; h) not more than 42,000 shares of SAN PL with the maximum value of PLN 11.2m in 2030; i) not more than 35,000 shares of SAN PL with the maximum value of PLN 9.3m in 2031; j) not more than 27,000 shares of SAN PL with the maximum value of PLN 7.2m in 2032; k) not more than 15,000 shares of SAN PL with the maximum value of PLN 4.0m in 2033. The Bank’s Management Board will buy back the shares to execute Incentive Plan VII subject to the consent from the Polish Financial Supervision Authority (“KNF”) and based on the authorisation granted by the General Meeting in a separate resolution. If it is not possible to buy back the shares (e.g. due to the lack of the KNF’s consent, illiquidity of the shares on the Warsaw Stock Exchange, share prices going beyond the thresholds defined by the General Meeting, lack of the General Meeting’s authorisation for the Management Board to buy back shares in a given year of Incentive Plan VII or lack of the General Meeting’s decision to create a capital reserve for share buyback in a given year) in the number corresponding to the value of the awards granted, SAN PL will reduce pro-rata the number of shares granted to the participant. The difference between the value of the awards granted and the value of the shares transferred by the Bank to the participants as part of the award will be paid out as a cash equivalent. Below are the vesting conditions that must be met jointly in a given year: 1) Delivery of at least 50% of the profit after tax (PAT) target of SAN PL for a given year. 2) Delivery of at least 80% of the team business targets for a given year at the level of SAN PL, Division or unit; the performance against the target is calculated as the weighted average of performance against at least three business targets defined as part of the financial plan approved by the Supervisory Board for a given year for SAN PL, Division or unit where the participant works, in particular: a) PAT (profit after tax) of SAN PL Group (excluding Santander Consumer Bank S.A.); b) ROTE (return on tangible equity expressed as a percentage calculated in line with SAN PL reporting methodology); c) NPS (Net Promoter Score calculated in line with SAN PL reporting methodology); d) RORWA (return on risk weighted assets calculated in line with SAN PL reporting methodology); e) number of customers; f) number of digital customers. 132 Separate Financial Statements of Santander Bank Polska for 2023 3) The participant’s performance rating for a given year at the level not lower than 1.5 on the 1–4 rating scale. In addition, at the request of the Bank’s Management Board, the Supervisory Board can decide to grant a retention award to a participant, if the following criteria are met: 1) the participant’s average annual individual performance rating is at least 2.0 on the 1–4 rating scale during the period of their participation in Incentive Plan VII; 2) the average annual weighted performance against the Bank’s targets in the years 2022–2026 is at least 80%, taking into account the following weights: a) 40% for the average annual performance against the PAT target; b) 40% for the average annual performance against the RORWA target; c) 20% for the average annual performance against the ESG target. The maximum number of own shares to be transferred to participants as the retention awards is 451,000. For the purpose of the Plan, in 2023 Santander Bank Polska S.A. bought back 165,406 shares (of 207,000 shares eligible for buyback) with the value of PLN 48,884,192 (from PLN 55,300,000 worth of capital reserve allocated to the delivery of the Plan for 2022). The average buyback price per share in 2023 was PLN 294.48. The Plan covers the period of five years (2022–2026). However, as the payment of variable remuneration is deferred, the share buyback and allocation will be completed by 2033. All the above shares were transferred to individual brokerage accounts of the participants. As the number of shares bought back by the Bank was sufficient to pay an award to the participants of Incentive Plan VII for 2022, on 16 March 2023 the Bank’s Management Board adopted a resolution to end the buyback in 2023. The table below presents information about the number of shares. Number of shares 2023 2022 Opening balance 65 335 - Awarded for the year 142 342 230 741 Executed for the year (104 990) (165 406) Closing balance 102 687 65 335 *the opening balance is the number of shares for 2022 deferred to future periods. In 2023, the total amount recognised in line with IFRS 2 in the Bank’s equity was PLN 198,912k, including PLN 126,030k taken to staff expenses for 2023. The latter comprises expenses incurred in 2023 and part of the costs attributable to subsequent years of the Incentive Plan as the award will be vested in stages. As at 31 December 2023, PLN 48,249k worth of shares were transferred to employees. 55.Dividend per share Recommendation of the Bank's Management Board regarding 2022 profit distribution and allocation of the undistributed profit earned on selling shares in AVIVA insurance companies. The Management Board of Santander Bank Polska S.A. hereby announces that on 22 March 2023 it issued a recommendation on distribution of 2022 profit and the profit earned on the sale of shares in AVIVA insurance companies. The recommendation was positively reviewed by the Bank's Supervisory Board. In line with the above decision, the Bank's Management Board recommends that: 1. the profit of PLN 2,449,042,525.50 earned in 2022 be distributed as follows: · PLN 72,357,000.00 - to be allocated to the capital reserve; · PLN 2,376,685,525.50 - to be allocated to the dividend reserve created by force of resolution no. 6 of the Annual General Meeting of 22 March 2021 on profit distribution and creation of capital reserve (Dividend Reserve). 133 Separate Financial Statements of Santander Bank Polska for 2023 2. the amount of PLN 840,886,574.78 representing the profit earned on the sale of shares in AVIVA insurance companies and posted under other comprehensive income be allocated to the Dividend Reserve. When taking its decision, the Management Board took into account the current macroeconomic environment as well as the recommendations and current position of the Polish Financial Supervision Authority (KNF), including that outlined in the KNF's letter of 16 March 2023, of which the Bank informed in its current report no. 13/2023 of 17 March 2023. The profit distribution recommended to the Annual General Meeting will not preclude the Management Board's potential decision to distribute profit to the shareholders in the form of interim dividend and to use the Dividend Reserve for that purpose pursuant to the authorisation given to the Management Board in accordance with § 50(4) of the Bank's Statutes. It will be contingent in particular on the positive opinion of the KNF once the CJEU takes a decision on case C-520/21 as well as economic situation and market conditions. Re distribution of profit and decision on capital reserve created On 19.04.2023 the Bank’s Annual General Meeting adopted a resolution on re distribution of profit and decision on capital reserve created on the basis of Resolution no. 6/2021 of the Bank’s Annual General Meeting of March 22,2021 1. The Bank’s Annual General Meeting distributed the Bank’s net profit earned in the accounting year from 1 January 2022 to 31 December 2022 in the amount of PLN 2,449,042,525.50 as follows: - PLN 72,357,000.00 – to be allocated to the capital reserve; - PLN 2,376,685,525.50 – to be allocated to the dividend reserve (Dividend Reserve) created by force of resolution no. 6 of the Annual General Meeting of 22 March 2021 on profit distribution and creation of capital reserve (Resolution no. 6/2021) 2. The Annual General Meeting allocates to the Dividend Reserve the amount of PLN 840,886,574.78, which represents the undistributed profit earned on the sale of shares in AVIVA insurance companies and posted under other comprehensive income Position of the Polish Financial Supervision Authority with regard to the payment of dividend by Santander Bank Polska S.A. (interim dividend). The Management Board of Santander Bank Polska S.A. informed that on 25 October 2023 it received a letter from the Polish Financial Supervision Authority (KNF) whereby the KNF stated that having analysed the current business and financial standing of the Bank and the arguments presented by the Bank, the KNF does not report any reservations to the potential payment of dividend (interim dividend) by the Bank in the amount of PLN 2,375,901,550.50 from the profit earned in the period between 1 January 2022 and 31 December 2022. The basis for the amount calculated by the Bank is the profit earned between 1 January 2022 and 31 December 2022 totalling PLN 2,449,042,525.50 reduced by: PLN 72,357,000 allocated to the reserve capital in line with resolution no. 6 of the General Meeting of 19 April 2023 with regard to the distribution of profit and the decision on the reserve capital created pursuant to resolution no. 6 of the General Meeting of 22 March 2021, and PLN 783,975 so that the quotient of the amount to be paid out as dividend and the number of shares gives the amount expressed in full grosz. Decision of Santander Bank Polska S.A. Management Board on the payout of an interim dividend. The Management Board of Santander Bank Polska S.A. informed you that pursuant to Article 349 of the Code of Commercial Companies and § 50(4) of the Bank's Statutes on 16 November 2023 it decided to pay out an interim dividend for the accounting year from 1 January 2023 to 31 December 2023 and to allocate PLN 2,375,901,550.50 to that payment ("Interim Dividend"). The Interim Dividend will be paid out of the capital reserve created for dividend payment, including interim dividends ("Dividend Reserve") by force of resolution no. 6 of the Annual General Meeting of 22 March 2021. Under Resolution no. 6 of 19 April 2023, the Annual General Meeting allocated to the Dividend Reserve the amount of PLN 2,376,685,525.50 from the net profit earned by the Bank in the accounting year from 1 January 2022 to 31 December 2022. On 16 November 2023, the Bank's Management Board received the Supervisory Board's approval for paying out an interim dividend. 102,189,314 A, B, C, D, E, F, G, H, I, J, K, L, M, N and O shares gave entitlement to the Interim Dividend. The Interim Dividend per share was: PLN 23.25. The ex-dividend date for the Interim Dividend was: 22 December 2023. The date of the Interim Dividend payment is: 29 December 2023. 134 Separate Financial Statements of Santander Bank Polska for 2023 56.Operating segments reporting Operating segments reporting were presented in “Consolidated Financial Statement of Santander Bank Polska Group for 2023” released on 16 February 2024. 57.Events which occurred subsequently to the end of the reporting period There were no major events subsequent to the end of the interim period. 135 Separate Financial Statements of Santander Bank Polska for 2023 Signatures of the persons representing the entity Date Name Function Signature 15.02.2024 Michał Gajewski President The original Polish document is signed with a qualified electronic signature 15.02.2024 Andrzej Burliga Vice-President The original Polish document is signed with a qualified electronic signature 15.02.2024 Juan de Porras Aguirre Vice-President The original Polish document is signed with a qualified electronic signature 15.02.2024 Arkadiusz Przybył Vice-President The original Polish document is signed with a qualified electronic signature 15.02.2024 Lech Gałkowski Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Artur Głembocki Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Patryk Nowakowski Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Magdalena Proga-Stępień Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Maciej Reluga Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Wojciech Skalski Member The original Polish document is signed with a qualified electronic signature 15.02.2024 Dorota Strojkowska Member The original Polish document is signed with a qualified electronic signature Signature of a person who is responsible for maintaining the accounting records Date Name Function Signature 15.02.2024 Anna Żmuda Financial Accounting Area Director The original Polish document is signed with a qualified electronic signature 136