Bank Pekao S.A.

Separate FS_Bank_Pekao_31.12.2023 1 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation. Warsaw, February 2024 Bank Pekao S.A. 2 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) I. Separate income statement ................................................................................................................................................................. 4 II. Separate statement of comprehensive income .................................................................................................................................. 5 III. Separate statement of financial position ............................................................................................................................................ 6 IV. Separate statement of changes in equity ........................................................................................................................................... 7 V. Separate cash flow statement .............................................................................................................................................................. 9 VI. Notes to the separate financial statements ...................................................................................................................................... 11 1. General information ............................................................................................................................................................................ 11 2. Business combinations ...................................................................................................................................................................... 11 3. Statement of compliance .................................................................................................................................................................... 11 4. Significant accounting policies ......................................................................................................................................................... 17 4.1. Basis of preparation of Separate Financial Statements........................................................................................................17 4.2. Foreign currencies ................................................................................................................................................................... 18 4.3. Valuation of financial assets and liabilities ............................................................................................................................ 19 4.4. Significant estimates and assumptions ................................................................................................................................. 24 5. Interest income and expense ............................................................................................................................................................. 26 6. Fee and commission income and expense ...................................................................................................................................... 29 7. Dividend income ................................................................................................................................................................................. 30 8. Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result ............. 30 9. Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss .......................... 31 10. Net allowances for expected credit losses ....................................................................................................................................... 32 11. Other operating income and expenses ............................................................................................................................................. 33 12. General administrative expenses and depreciation ........................................................................................................................ 34 13. Income tax ........................................................................................................................................................................................... 35 14. Earnings per share .............................................................................................................................................................................. 39 15. Dividends ............................................................................................................................................................................................. 39 16. Cash and cash equivalents ................................................................................................................................................................ 40 17. Loans and advances to banks ........................................................................................................................................................... 40 18. Derivative financial instruments (held for trading) .......................................................................................................................... 41 19. Hedge accounting ............................................................................................................................................................................... 45 20. Loans and advances to customers ................................................................................................................................................... 52 21. Securities ............................................................................................................................................................................................. 54 22. Assets pledged as security for liabilities .......................................................................................................................................... 56 23. Assets held for sale ............................................................................................................................................................................ 58 24. Investments in subsidiaries ............................................................................................................................................................... 59 25. Investments in associates .................................................................................................................................................................. 60 26. Intangible assets ................................................................................................................................................................................. 61 27. Property, plant and equipment .......................................................................................................................................................... 64 28. Other assets ........................................................................................................................................................................................ 67 29. Amounts due to other banks ............................................................................................................................................................. 67 30. Financial liabilities held for trading ................................................................................................................................................... 68 31. Amounts due to customers ................................................................................................................................................................ 68 32. Debt securities issued ........................................................................................................................................................................ 69 33. Subordinated liabilities ....................................................................................................................................................................... 69 34. Provisions ............................................................................................................................................................................................ 71 35. Other liabilities .................................................................................................................................................................................... 72 36. Defined benefit plans .......................................................................................................................................................................... 73 37. Share-based payments ....................................................................................................................................................................... 74 38. Leasing ................................................................................................................................................................................................. 76 39. Contingent commitments and litigation and claims ........................................................................................................................ 79 40. Equity ................................................................................................................................................................................................... 82 41. Additional information to the cash flow statement .......................................................................................................................... 84 42. Related party transactions ................................................................................................................................................................. 84 Bank Pekao S.A. 3 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43. Risk management and fair value ....................................................................................................................................................... 93 43.1. Organizational structure of risk management ....................................................................................................................... 94 43.2. Credit risk .................................................................................................................................................................................. 94 43.3. Legal risk regarding foreign currency mortgage loans in CHF .......................................................................................... 142 43.4. Market risk ............................................................................................................................................................................... 148 43.5. Liquidity risk ........................................................................................................................................................................... 151 43.6. Operational risk ...................................................................................................................................................................... 154 43.7. Climate risk ............................................................................................................................................................................. 155 43.8. Capital management ............................................................................................................................................................... 156 43.9. Fair value of financial assets and liabilities ......................................................................................................................... 158 44. Subsequent events ........................................................................................................................................................................... 165 Glossary ......................................................................................................................................................................................................... I Bank Pekao S.A. 4 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) I. Separate income statement NOTE 2023 2022 RESTATED Interest income 5 17 127 10 519 Interest income calculated using the effective interest method 17 070 10 483 Financial assets measured at amortised cost 15 120 9 640 Financial assets measured at fair value through other comprehensive income 1 950 843 Other interest income related to financial assets measured at fair value through profit or loss 57 36 Interest expense 5 (5 539) (2 510) Net interest income 11 588 8 009 Fee and commission income 6 3 196 3 116 Fee and commission expense 6 (850) (757) Net fee and commission income 2 346 2 359 Dividend income 7 268 257 Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result 8 487 170 Result on fair value hedge accounting 19 - 3 Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss 9 15 (4) Net allowances for expected credit losses 10 (427) (1 879) including: legal risk regarding foreign currency mortgage loans 114 (1 185) Operating income 11 109 130 Operating expenses 11 (530) (604) including: legal risk regarding foreign currency mortgage loans (403) (319) General administrative expenses and depreciation 12 (5 297) (5 429) PROFIT BEFORE INCOME TAX 8 559 3 012 Income tax expense 13 (1 841) (1 114) NET PROFIT 6 718 1 898 Earnings per share (in PLN per share) basic for the period 14 25.60 7.23 diluted for the period 14 25.60 7.23 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. Bank Pekao S.A. 5 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) II. Separate statement of comprehensive income NOTE 2023 2022 Net profit 6 718 1 898 Other comprehensive income Item that are or may be reclassified subsequently to profit or loss: Impact of revaluation of debt financial instruments and loan measured at fair value through other comprehensive income (net): 752 (640) profit/loss on fair value measurement 768 (621) profit/loss reclassification to income statement after derecognition (16) (19) Impact of revaluation of derivative instruments hedging cash flows (net) 19 1 617 (983) Items that will never be reclassified to profit or loss: Impact of revaluation of investments in equity instruments designated at fair value through other comprehensive income (net) 64 (48) Remeasurements of the defined benefit liabilities (net) (23) (9) Other comprehensive income (net of tax) 2 410 (1 680) Total comprehensive income 9 128 218 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. Bank Pekao S.A. 6 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) III. Separate statement of financial position NOTE 31.12.2023 31.12.2022 RESTATED 01.01.2022 RESTATED ASSETS Cash and cash equivalents 16 14 836 18 211 8 274 Loans and advances to banks 17 426 626 422 Derivative financial instruments (held for trading) 18 9 350 15 134 7 967 Hedging instruments 19 805 280 78 Loans and advances to customers 20 141 707 142 426 143 425 Securities 21 117 399 86 151 72 925 Assets pledged as security for liabilities 22 1 648 930 846 Assets held for sale 23 32 12 13 Investments in subsidiaries 24 1 922 1 742 1 577 Investments in associates 25 42 42 42 Intangible assets 26 1 546 1 408 1 446 Property, plant and equipment 27 1 798 1 501 1 745 Income tax assets 786 1 547 1 563 1. Current tax assets - 267 198 2. Deferred tax assets 13 786 1 280 1 365 Other assets 28 2 180 1 695 952 TOTAL ASSETS 294 477 271 705 241 275 EQUITY AND LIABILITIES Liabilities Amounts due to other banks 29 2 826 4 135 5 069 Financial liabilities held for trading 30 757 875 640 Derivative financial instruments (held for trading) 18 9 308 15 539 7 979 Amounts due to customers 31 234 541 210 989 195 451 Hedging instruments 19 1 429 3 176 2 222 Debt securities issued 32 4 078 5 894 179 Subordinated liabilities 33 2 781 2 789 2 761 Income tax liabilities 1 462 - - 1. Current tax liabilities 1 462 - - 2. Deferred tax liabilities 13 - - - Provisions 34 1 871 1 394 936 Other liabilities 35 5 529 4 725 2 939 TOTAL LIABILITIES 264 582 249 516 218 176 Equity Share capital 40 262 262 262 Other capital and reserves 40 21 230 18 344 18 915 Retained earnings and net profit for the period 40 8 403 3 583 3 922 TOTAL EQUITY 29 895 22 189 23 099 TOTAL LIABILITIES AND EQUITY 294 477 271 705 241 275 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. 7 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million) ) Bank Pekao S.A. IV. Separate statement of changes in equity OTHER CAPITAL AND RESERVES SHARE CAPITAL TOTAL OTHER CAPITAL AND RESERVES SHARE PREMIUM GENERAL BANKING RISK FUND OTHER RESERVE CAPITAL REVALUATION RESERVES OTHER RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD TOTAL EQUITY Note 40 40 40 Equity as at 1.01.2023 262 18 344 9 137 1 983 10 254 (3 263) 233 3 583 22 189 Comprehensive income - 2 410 - - - 2 410 - 6 718 9 128 Other components of comprehensive income (net) - 2 410 - - - 2 410 - - 2 410 Remeasurements of the defined benefit liabilities (net of tax) - (23) - - - (23) - - (23) Revaluation of debt securities and loans measured at fair value through other comprehensive income (net of tax) - 752 - - - 752 - - 752 Revaluation of investments in equity instruments designated at fair value through other comprehensive income (net of tax) - 64 - - - 64 - - 64 Revaluation of cash flow hedging financial instruments (net of tax) - 1 617 - - - 1 617 - - 1 617 Net profit for the period - - - - - - - 6 718 6 718 Appropriation of retained earnings - 476 - - 476 - - (1 898) (1 422) Dividend paid - - - - - - - (1 422) (1 422) Profit appropriation - 476 - - 476 - - (476) - Other - - - - 8 (8) - - - Result on sales of investments in equity instruments designated at fair value through other comprehensive income (net of tax) - - - - 8 (8) - - - Equity as at 31.12.2023 262 21 230 9 137 1 983 10 738 (861) 233 8 403 29 895 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. 8 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million) ) Bank Pekao S.A. OTHER CAPITAL AND RESERVES SHARE CAPITAL TOTAL OTHER CAPITAL AND RESERVES SHARE PREMIUM GENERAL BANKING RISK FUND OTHER RESERVE CAPITAL REVALUATION RESERVES OTHER RETAINED EARNINGS AND NET PROFIT FOR THE PERIOD TOTAL EQUITY Note 40 40 40 Equity as at 1.01.2022 262 18 916 9 137 1 983 9 146 (1 583) 233 3 922 23 100 Comprehensive income - (1 680) - - - (1 680) - 1 898 218 Other components of comprehensive income (net) - (1 680) - - - (1 680) - - (1 680) Remeasurements of the defined benefit liabilities (net of tax) - (9) - - - (9) - - (9) Revaluation of debt securities and loans measured at fair value through other comprehensive income (net of tax) - (640) - - - (640) - - (640) Revaluation of investments in equity instruments designated at fair value through other comprehensive income (net of tax) - (48) - - - (48) - - (48) Revaluation of cash flow hedging financial instruments (net of tax) - (983) - - - (983) - - (983) Net profit for the period - - - - - - - 1 898 1 898 Appropriation of retained earnings - 1 108 - - 1 108 - - (2 237) (1 129) Dividend paid - - - - - - - (1 129) (1 129) Profit appropriation - 1 108 - - 1 108 - - (1 108) - Equity as at 31.12.2022 262 18 344 9 137 1 983 10 254 (3 263) 233 3 583 22 189 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. Bank Pekao S.A. 9 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) V. Separate cash flow statement NOTE 2023 2022 Cash flow from operating activities – indirect method Profit before income tax 8 559 3 012 Adjustments for: 23 718 15 175 Depreciation and amortization 12 584 571 (Gains) losses on investing activities (53) (79) Net interest income 5 (11 588) (8 009) Dividend income 7 (268) (257) Interest received 19 585 9 873 Interest paid (5 373) (2 032) Income tax paid (180) (707) Change in loans and advances to banks 210 (193) Change in derivative financial instruments (assets) 5 784 (7 167) Change in loans and advances to customers 807 1 515 Change in securities (including assets pledged as security for liabilities) (3 128) (1 212) Change in other assets 52 (2 729) Change in amounts due to banks (988) (642) Change in financial liabilities held for trading (117) 235 Change in derivative financial instruments (liabilities) (6 230) 7 560 Change in amounts due to customers 23 412 15 285 Change in debt securities issued (69) (25) Change in subordinated liabilities (8) 28 Payments for short-term leases and leases of low-value assets (1) (1) Change in provisions 477 458 Change in other liabilities 810 2 703 Net cash flows from operating activities 32 277 18 187 Cash flow from investing activities Investing activity inflows 1 330 878 168 304 Sale and redemption of securities measured at amortised cost and at fair value through other comprehensive income 1 330 630 168 004 Sale of intangible assets and property, plant and equipment 26, 27 8 68 Dividend received 7 240 232 Investing activity outflows (1 362 997) (180 689) Acquisition of subsidiaries and associates 24, 25 (180) (165) Acquisition of securities measured at amortised cost and at fair value through other comprehensive income (1 361 883) (180 049) Acquisition of intangible assets and property, plant and equipment 26, 27 (934) (475) Net cash flows from investing activities (32 119) (12 385) Bank Pekao S.A. 10 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) NOTE 2023 2022 Cash flows from financing activities Financing activity inflows 4 114 8 874 Issue of debt securities 41 4 114 8 874 Financing activity outflows (7 647) (4 739) Repayment of loans and advances received from banks 41 (272) (309) Redemption of debt securities 41 (5 866) (3 191) Dividends and other payments to shareholders 15 (1 422) (1 129) Payments for the principal portion of the lease liabilities 41 (87) (110) Net cash flows from financing activities (3 533) 4 135 Total net cash flows (3 375) 9 937 including: effect of exchange rate fluctuations on cash and cash equivalents held (266) 96 Net change in cash and cash equivalents (3 375) 9 937 Cash and cash equivalents at the beginning of the period 18 211 8 274 Cash and cash equivalents at the end of the period 41 14 836 18 211 Notes to the financial statements presented on pages 11 - 165 constitute an integral part of the separated financial statements. Bank Pekao S.A. 11 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) VI. Notes to the separate financial statements 1. General information Bank Polska Kasa Opieki Spółka Akcyjna (hereafter “Bank Pekao S.A.” or “the Bank”), with its headquarters in Poland 01-066, Żubra Street 1 Warsaw, was incorporated on 29 October 1929 in the Commercial Register of the District Court in Warsaw and has been continuously operating since its incorporation. Bank Pekao S.A. is registered in the National Court Registry – Enterprise Registry of the Warsaw District Court, XIII Commercial Division of the National Court Registry in Warsaw under the reference number KRS 0000014843 (no changes in the name or identification data compared to the previous reporting period). The Bank’s shares are quoted on the Warsaw Stock Exchange (WSE). The Bank’s securities, traded on regulated markets, are classified in the banking sector. Bank Pekao S.A. is a universal commercial bank, offering a broad range of banking services on domestic financial markets, provided to retail and corporate clients, in compliance with the scope of services, set forth in the Bank’s Articles of Association. The Bank runs both PLN and forex operations, and it actively participates in both domestic and foreign financial markets. Moreover, acting through its subsidiaries, the Bank provides stockbroking, leasing, factoring operations and offering other financial services. The Bank Pekao S.A. Group’s activities do not show any significant cyclical or seasonal changes. According to IFRS 10 “Consolidated financial statements”, the parent entity of Bank Pekao S.A. is Powszechny Zakład Ubezpieczeń S.A. (hereinafter “PZU S.A.”) with its registered office in Warsaw at Rondo Daszyńskiego 4, which is 34.2% owned by the State Treasury. The Bank also prepares Consolidated Financial Statements of Bank Pekao S.A. Group. The share ownership structure of the Bank is presented in the Note 6.1 of the Report on the activities of Bank Pekao S.A. Group for the year 2023. 2. Business combinations There were no business combinations in 2023 and 2022. 3. Statement of compliance The annual separate financial statements (“financial statements”) of Bank Pekao S.A. have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and in respect to matters that are not regulated by the above standards, in accordance with the requirements of the Accounting Act dated 29 September 1994 (Official Journal from 2019, item 351 with further amendments) and respective operating regulations, and in accordance with the requirements for issuers of securities admitted or sought to be admitted to trading on an official stock exchange listing market. Details of the Bank’s accounting policies, including changes thereto, are included in the Note 4. These Separate Financial Statements were approved for publication by the Bank’s Management Board on 20 February 2024 . Bank Pekao S.A. 12 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 3.1. New standards, interpretations and amendments to published standards that have been approved and published by the European Union and are effective on or after 1 January 2023 STANDARD / INTERPRETATION DESCRIPTION IMPACT ASSESSMENT IFRS 17 " Insurance contracts " The new standard requires insurance liabilities to be measured at a current fulfilment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 " Insurance Contracts " and related interpretations while applied. The Bank analysed the products offered, whether they meet the definition of insurance contracts in the light of IFRS 17. The results of the analysis show that the products offered by the Bank do not carry significant insurance risk and are not insurance contracts. Thus, the new standard did not have a material impact on the financial statements in the period of their first application. IAS 1 (amendment) " Presentation of financial statement " and " IFRS Practice Statement 2: Disclosure of accounting policies " The amendments to IAS 1 include: • an entity is required to disclose its material accounting policy information instead of its significant accounting policies, • clarification that accounting policy information may be material because of its nature, even if the related amounts are immaterial, • clarification that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements, and • clarification that if an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information. The standard’s amendments did not have a material impact on the financial statements in the period of their first application. IAS 8 (amendment) " Accounting policies, changes in accounting estimates and errors " The amendments to IAS 8 include: • the definition of a change in accounting estimates is replaced with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty, • clarification that a change in accounting estimate that results from new information or new developments is not the correction of an error. In addition, the effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors, • clarification that a change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. The effect of the change relating to the current period is recognized as income or expense in the current period. The effect, if any, on future periods is recognized as income or expense in those future periods. The standard’s amendments did not have a material impact on the financial statements in the period of their first application. IAS 12 (amendment) " Income taxes " The amendments introduce the requirement to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments will mainly apply to transactions such as leases for the lessee and decommissioning obligations . The standard’s amendments did not have a material impact on the financial statements in the period of their first application. IFRS 17 (amendment) “Insurance contracts” and IFRS 9 (amendment) " Financial instruments” The main amendment regards entities that first apply IFRS 17 and IFRS 9 at the same time. The amendment regards financial assets for which comparative information is presented on initial application of IFRS 17 and IFRS 9, but where this information has not been restated for IFRS 9. Under the amendment, an entity is permitted to present comparative information about a financial asset as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset before. In applying the classification overlay to a financial asset, an entity is not required to apply the impairment requirements of IFRS 9. There are no changes to the transition requirements in IFRS 9. The change in standards does not apply to the Bank, which has already applied IFRS 9. Bank Pekao S.A. 13 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) STANDARD / INTERPRETATION DESCRIPTION IMPACT ASSESSMENT IAS 12 (amendment) " Income taxes " The amendments give companies temporary relief from accounting for deferred taxes arising from the Organisation for Economic Co-operation and Development’s ( " OECD " ) international tax reform. The OECD published the Pillar Two model rules in December 2021 to ensure that large multinational companies would be subject to a minimum 15% tax rate. The amendments to IAS 12 include: • an exception to the requirements in IAS 12 that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes. An entity has to disclose that it has applied the exception, • a disclosure requirement that an entity has to disclose separately its current tax expense (income) related to pillar two income taxes, • a disclosure requirement that state that in periods in which pillar two legislation is enacted or substantively enacted, but not yet in effect, an entity discloses known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to pillar two income taxes arising from that legislation, the requirement that an entity applies the exception and the requirement to disclose that it has applied the exception immediately upon issuance of the amendments and retrospectively in accordance with IAS 8. The remaining disclosure requirements are required for annual reporting periods beginning on or after 1 January 2023. The standard’s amendments did not have a material impact on the financial statements in the period of their first application. 3.2. New standards, interpretations and amendments to published standards that have been published by the International Accounting Standards Board (IASB) and approved by the European Union but are not yet effective STANDARD/ INTERPRETATION DESCRIPTION IMPACT ASSESSMENT IAS 1 (amendment) " Presentation of financial statements " The amendments affect requirements in IAS 1 for the presentation of liabilities. In particular, these amendments clarify that the classification of liabilities as current or non-current is only affected by covenants with which an entity is required to comply on or before the reporting date. In addition, an entity has to disclose information in the notes that enables users of financial statements to understand the risk that non- current liabilities with covenants could become repayable within twelve months. Date of application: annual periods beginning on or after 1 January 2024. The Bank claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application. IFRS 16 (amendment) " Leases " The amendments to IFRS 16 specifies the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction, to ensure the seller-lessee does not recognise any amount of the gain or loss that relates to the right of use it retain. A sale and leaseback transaction involves the transfer of an asset by an entity (the seller-lessee) to another entity (the buyer-lessor) and the leaseback of the same asset by the seller-lessee. Date of application: annual periods beginning on or after 1 January 2024. The Bank claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application. Bank Pekao S.A. 14 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 3.3. New standards, interpretations and amendments to published standards that have been published by the International Accounting Standards Board (IASB) and not yet approved by the European Union STANDARD/ INTERPRETATION DESCRIPTION IMPACT ASSESSMENT IAS 7 (amendment) " Statement of cash flows " and IFRS 7 (amendment) " Financial instruments: Disclosures " The “Supplier Finance Arrangements " (amendments to IAS 7 and IFRS 7) include: • do not define supplier finance arrangements. Instead, the amendments describe the characteristics of an arrangement for which an entity is required to provide the information. The amendments note that arrangements that are solely credit enhancements for the entity or instruments used by the entity to settle directly with a supplier the amounts owed are not supplier finance arrangements. • entities will have to disclose in the notes information that enables users of financial statements to assess how supplier finance arrangements affect an entity’s liabilities and cash flows and to understand the effect of supplier finance arrangements on an entity’s exposure to liquidity risk and how the entity might be affected if the arrangements were no longer available to it, • adding to IAS 7 additional disclosure requirements about:  the terms and conditions of the supplier finance arrangements,  for the arrangements, as at the beginning and end of the reporting period: a) the carrying amounts of financial liabilities that are part of the arrangement and the associated line item presented, b) the carrying amount of financial liabilities disclosed under a) for which suppliers have already received payment from the finance providers, c) the range of payment due dates of financial liabilities disclosed under a) and comparable trade payables that are not part of a supplier finance arrangement; and  the type and effect of non-cash changes in the carrying amounts of the financial liabilities that are part of the arrangement, • add supplier finance arrangements as an example within the liquidity risk disclosure requirements in IFRS 7. Date of application: annual periods beginning on or after 1 January 2024. The Bank claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application. IAS 21 (amendment) " The Effects of Changes in Foreign Exchange Rates " The amendment to IAS 21: • specify when a currency is exchangeable into another currency and when it is not — a currency is exchangeable when an entity is able to exchange that currency for the other currency through markets or exchange mechanisms that create enforceable rights and obligations without undue delay at the measurement date and for a specified purpose; a currency is not exchangeable into the other currency if an entity can only obtain an insignificant amount of the other currency, • specify how an entity determines the exchange rate to apply when a currency is not exchangeable — when a currency is not exchangeable at the measurement date, an entity estimates the spot exchange rate as the rate that would have applied to an orderly transaction between market participants at the measurement date and that would faithfully reflect the economic conditions prevailing, • require the disclosure of additional information when a currency is not exchangeable — when a currency is not exchangeable an entity discloses information that would enable users of its financial statements to evaluate how a currency’s lack of exchangeability affects, or is expected to affect, its financial performance, financial position and cash flows. Date of application: annual periods beginning on or after 1 January 2025. The Bank claims that the standard’s amendments will not have a material impact on the financial statements in the period of its first application. Bank Pekao S.A. 15 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 3.4. Interest rate benchmark reform A fundamental reform of the main interest rate benchmarks (the "IBOR reform") is under way. Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indexes used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/ EC and 2014/17/ EU and Regulation (EU) No 596/2014 (hereinafter the "BMR Regulation") sets out the operating rules and responsibilities of benchmark administrators and of the entities using these benchmarks. The new rules are to make the indicators more credible, transparent and reliable. As a result of the IBOR reform, individual indicators were adjusted to the new rules (e.g. WIBOR, EURIBOR) or liquidated (e.g. LIBOR) and replaced with alternative indicators. The greatest impact of the IBOR reform on the Bank is observed in the field of financial instruments, in particular loans. The Bank monitors the progress of the transition to the new benchmarks by reviewing the total volumes of contracts where the current benchmark is subject to IBOR reform and an alternative benchmark has not yet been introduced (hereinafter " non- reformed contract " ). At the same time, the Bank continues the process of annexing contracts concluded before the entry into force of the BMR Regulation. Following the recommendations of the supervisory authorities, the Bank decided not to use the LIBOR ratios in newly granted loans and credits with variable interest rates. The table below shows the IBOR to which the Bank has had exposure, the new reference rates to which these exposures have or are transitioning, and the transition status. CURRENCY INDICATOR BEFORE REFORM INDICATOR AFTER REFORM STATUS AS AT 31.12.2023 PLN WIBOR WIRON In progress CHF LIBOR CHF SARON, SARON Compound Completed USD LIBOR USD SOFR, Term SOFR In progress GBP LIBOR GBP SONIA, Term SONIA In progress WIBOR In July 2022, at the request of financial market participants, the Office of the Polish Financial Supervision Authority established the National Working Group for Benchmark Reform ( " NWG " ). The aim of the NWG is to prepare the process of effective implementation of the new reference index on the Polish financial market and to replace it with the currently used reference index of the WIBOR interest rate in such a way as to ensure the safety of the financial system. In September 2022, the Steering Committee of the National Working Group ( " SC NWG " ) selected the WIRON index as an alternative to WIBOR. WIRON is the Warsaw Deposit Market Index - a transactional index developed on the basis of deposit transactions concluded by data providers with financial institutions and large enterprises. WIRON has been published by GPW Benchmark since the beginning of August 2022. Ultimately, WIRON is to become a key interest rate reference indicator within the meaning of the BMR Regulation, which will be used in financial contracts, financial instruments and by investment funds. In the course of the work of the NWG, the tasks required to be performed by market participants were identified, prioritized and time-consuming were estimated in order to correctly and safely replace the previously used WIBOR reference indicators with the new indicator. In October 2023, the SC NWG Committee decided to change the maximum deadlines for the implementation of the Road Map, which assumes a bottom-up shift of the financial sector away from the use of WIBOR in favor of newly concluded contracts and financial instruments using a fixed interest rate or new RFR-type reference indicators. SC NWG indicated the final moment of conversion at the end of 2027. LIBOR GBP As previously announced, on 31 March 2023, 1- and 6-month GBP LIBOR rates were published for the last time using the synthetic method. The publication of the 3-month synthetic LIBOR GBP rate will end at the end of March 2024. The Bank is actively pursuing active transformations to remove the reference to GBP LIBOR in loan agreements. LIBOR USD In April 2023, the FCA decided to oblige ICE Benchmark Administration Limited (IBA), the administrator of LIBOR benchmarks, to continue to publish USD LIBOR rates for 1, 3 and 6 months using a non-representative "synthetic" method. The publication of synthetic USD LIBOR rates will end on 30 September 2024. The Bank’s portfolio includes loan agreements based on USD LIBOR with a maturity exceeding September 2024. In the field of loan agreements, the Bank is considering proposing to clients an annex removing the reference to USD LIBOR. Bank Pekao S.A. 16 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial assets other than derivative instruments and off-balance sheet commitments granted The tables below show the total amounts of unreformed non-derivative financial assets and off-balance sheet commitments granted as at 31 December 2023 and 31 December 2022. The amounts of non-derivative financial assets are presented in their gross carrying amounts, and off-balance sheet commitments granted are presented according to the amount of liabilities. 31.12.2023 WIBOR LIBOR USD LIBOR GBP Cash and cash equivalents 217 - - Loans and advances to banks 276 - - Loans and advances to customers 99 984 1 567 121 Securities 18 815 - - Assets pledged as security for liabilities - - - Off-balance sheet commitments 10 262 105 - 31.12.2022 WIBOR LIBOR USD LIBOR GBP Cash and cash equivalents 544 - - Loans and advances to banks 172 - - Loans and advances to customers 109 621 986 154 Securities 13 937 - - Assets pledged as security for liabilities 88 - - Off-balance sheet commitments 8 106 208 1 Financial liabilities other than derivative instruments The tables below present the total amounts of unreformed non-derivative financial liabilities at the carrying amount as at 31 December 2023 and 31 December 2022. Derivative financial instruments and hedge accounting The table below presents the total amount of unreformed derivative financial instruments as at 31 December 2023 and 31 December 2022. The Bank expects both legs of the FX swaps to be reformed simultaneously. 31.12.2023 WIBOR LIBOR USD LIBOR GBP Amounts due to other banks 21 - - Financial liabilities held for trading 82 - - Loans and advances to customers 7 810 6 - Debt securities issued 1 541 - - Subordinated liabilities 2 781 - - 31.12.2022 WIBOR LIBOR USD LIBOR GBP Amounts due to other banks 337 - - Financial liabilities held for trading 65 - - Loans and advances to customers 10 583 68 - Debt securities issued 4 938 - - Subordinated liabilities 2 789 - - 31.12.2023 WIBOR LIBOR USD LIBOR GBP Derivative financial instruments (held for trading, assets) 7 963 32 - Hedging instruments (assets) 536 - - Derivative financial instruments (held for trading, liabilities) 8 036 28 - Hedging instruments (liabilities) 1 396 - - 31.12.2022 WIBOR LIBOR USD LIBOR GBP Derivative financial instruments (held for trading, assets) 12 937 98 - Hedging instruments (assets) 165 - - Derivative financial instruments (held for trading, liabilities) 13 633 64 - Hedging instruments (liabilities) 3 170 - - Bank Pekao S.A. 17 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Impact of the IBOR reform on hedge accounting As part of the established hedging relationships, the Bank identifies the following interest rate benchmarks: WIBOR, EURIBOR. As of the reporting date, these benchmarks rates are quoted and available each day and resulting cash flows are exchanged with its counterparties as usual. In the case of EURIBOR the Bank assessed that, there is currently no uncertainty about the timing or amounts of cash flows arising from the IBOR reform. The indicator has been adapted to the requirements of the European Union Benchmark Regulation (BMR Regulation) and are developed by Administrators with the approval of supervisory authorities. The Bank not anticipate changing the hedged risk to a different benchmarks. In the case of WIBOR, in the Bank's opinion, there is uncertainty as to the dates and amounts of cash flows for the new index. Such uncertainty may affect the assessment of the effectiveness of the relationship and the high probability of the hedged item. For the purposes of these assessments, the Bank assumes that the interest rate benchmark on which the cash flows from the hedged item and/or hedging instrument are based will not change as a result of the WIBOR reform. The list of hedging relationships and the nominal amounts of hedging instruments designated thereto, which may be affected by the cessation of the LIBOR interest rate benchmarks are presented in the Note 19. Regarding the hedging instruments, the Bank joined ISDA Fallbacks Protocol and actively cooperates with counterparties in order to implement rules of conduct in line with the ISDA methodology. 4. Significant accounting policies 4.1. Basis of preparation of Separate Financial Statements General information The financial statements have been prepared in Polish zloty, and all data in the financial statements are presented in PLN million (PLN ‘000 000), unless indicated otherwise. The financial statements have been prepared on a going concern basis on the assumption that the Bank will continue its business operations substantially unchanged in scope for a period of at least one year from the balance sheet date. The accounting principles as described below have been consistently applied for all the reporting periods. The principles have been applied consistently by all the Bank entities. The separate financial statements have been prepared on the historical cost basis, except for significant items of financial assets and liabilities, for which the measurement method is presented in the Note 4.3. The separate financial statements include the requirements of all the International Financial Reporting Standards and International Accounting Standards approved by the European Union and related interpretations. Changes in published standards and interpretations, which became effective on or after 1 January 2023, had no material impact on the Bank’s financial statements. The financial statements does take into consideration interpretations and amendments to Standards, pending approval by the European Union or approved by the European Union but came into force or shall come into force after the balance sheet date (Note 3.2 and Note 3.3). In the Bank’s opinion, amendments to Standards and interpretations will not have a material impact on the separate financial statements of the Bank. Comparability of financial data In the separate financial statements for the year ended on 31 December 2023, the Bank made the following changes to the accounting principles: 1) change in the method of presenting cash in the statement of financial position Loans and advances to banks with a maturity of up to 3 months, previously presented under the item "Loans and advances to banks", are now presented under the item "Cash and cash equivalents" (previously named "Cash and due from Central Bank"). Those changes result from adapting the presentation to the position of the IFRS Interpretation Committee and the requirements of IAS 7 "Statement of Cash Flows". The above-mentioned changes in accounting principles made it necessary to restate the comparative data, but they did not affect the balance sheet total. Bank Pekao S.A. 18 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The impact of changes on the comparative data of the separate statement of financial position is presented in the tables below. SEPARATE STATEMENT OF FINANCIAL POSITION DATA FOR 31.12.2022 BEFORE RESTATEMENT RESTATEMENT DATA FOR 31.12.2022 AFTER RESTATEMENT Cash and cash equivalents (before " Cash and due from Central Bank " ) 13 435 4 776 18 211 Loans and advances to banks 5 402 (4 776) 626 SEPARATE STATEMENT OF FINANCIAL POSITION DATA FOR 01.01.2022 BEFORE RESTATEMENT RESTATEMENT DATA FOR 01.01.2022 AFTER RESTATEMENT Cash and cash equivalents (before " Cash and due from Central Bank " ) 4 697 3 577 8 274 Loans and advances to banks 3 999 (3 577) 422 2) change in the method of presentation of interest income and expenses on hedging derivatives and costs related to cash turnover in the income statement The Bank recognized income and expenses from interest on hedging derivatives together with interest on hedged items. The introduced change results from adapting the presentation to the provisions of IFRS 9 " Financial Instruments". Moreover, the Bank changed the method of presenting costs related to cash turnover. These costs are currently presented in the item "Fee and commission expense". Before the change, they were presented in the item "General administrative expenses and depreciation". The introduced change results from adaptation to the observed market practice in this respect and, in the Bank's opinion, better reflects the nature of these transactions by recognizing both the income and the cost related to cash turnover in net fee and commission income. The changes in the accounting principles indicated above made it necessary to restate the comparative data, but they did not affect the level of the presented financial result. The impact of changes on the comparative data of the separate income statement is presented in the table below: SEPARATE INCOME STATEMENT DATA FOR 2022 BEFORE RESTATEMENT RESTATEMENT DATA FOR 2022 AFTER RESTATEMENT Change in the method of presentation of interest income and expenses on hedging derivatives: Interest income 10 523 (4) 10 519 Interest income calculated using the effective interest method 10 900 (417) 10 483 Financial assets measured at amortised cost 10 042 (402) 9 640 Financial assets measured at fair value through other comprehensive income 859 (16) 843 Other interest income related to financial assets measured at fair value through profit or loss (377) 413 36 Interest expense (2 514) 4 (2 510) Change in the method of presentation of costs related to cash turnover: Fee and commission expense (660) (97) (757) General administrative expenses and depreciation (5 526) 97 (5 429) 4.2. Foreign currencies • Transactions and balances Foreign currency transactions are calculated into the functional currency using the spot exchange rate from the date of the transaction. Gains and losses from foreign currency translation differences resulting from settlements of such transactions and from the statement of financial position valuation of monetary assets and liabilities expressed in foreign currencies are recognized in the income statement. • Foreign currency translation differences arising from non-monetary items, such as equity instruments classified as financial assets measured at fair value through the profit or loss are recognized together with the changes in the fair value of that item in the income statement. • Foreign currency translation differences arising from non-monetary items such as equity instruments classified as financial assets measured at fair value through other comprehensive income are recognized in the revaluation reserves. Bank Pekao S.A. 19 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 4.3. Valuation of financial assets and liabilities Financial assets At the moment of the initial recognition the financial assets are classified into the following categories: • financial assets measured at amortised cost, • financial assets measured at fair value through other comprehensive income, • financial assets measured at fair value through profit or loss. The above mentioned classification is based on the entity’s business model for managing the financial assets and the characteristics regarding the contractual cash flows (i.e. whether the contractual payments are solely payments of principal and interest on the principal amount outstanding (i.e. " criterion SPPI " ). The financial assets could be classified depending on the Bank’s business model to the following categories: • a business model whose objective is to hold financial assets in order to collect contractual cash flows, • a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, • other business model than business model whose objective is to hold financial assets in order to collect contractual cash flows and business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Classification, presentation and measurement of financial assets FINANCIAL ASSETS CLASSIFICATION SIGNIFICANT ITEMS INCLUDED PRESENTATION AND MEASUREMENT Measured at amortised cost To this category, the Bank classifies financial assets included in the following items of the Statement of financial position: • " Cash and cash equivalents " , • " Loans and advances to banks " , • "Loans and advances to customers", • " Securities " . Financial assets are measured at amortised cost if at the same time they meet the following two criteria and were not designated for measurement at fair value through profit or loss: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criteria are met). Upon initial recognition, these assets are measured at fair value increased by transaction costs that are directly attributable to the acquisition or issue of a financial asset. After initial recognition, these assets are measured at amortised cost using the effective interest rate. The calculation of the effective interest rate includes all commissions paid and received by the parties, transaction costs and other bonuses and discounts constituting an intergrated part of the effective interest rate. Interest accrued using the effective interest rate is recognized in net interest income. Since the impairment recognition, the interest recognized in the income statement is calculated based on the net carrying amount, whereas the interest recognized in the statement of financial position is accrued on the gross carrying amount. Allowances for expected credit losses reduce the gross carrying amount of assets, on the other hand they are recognized in the income statement under " Net allowances for expected credit losses " . Measured at fair value through other comprehensive income To this category, the Bank classifies financial assets included in the following items of the Statement of financial position: • "Loans and advances to customers" , • " Securities " , • " Assets pledged as security for liabilities ". Financial assets (excluding equity instruments) are measured at fair value through other comprehensive income when they simultaneously meet the following two conditions and have not been designated for measurement at fair value through profit or loss: • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criteria are met). Interest accrued using the effective interest rate is recognized in net interest income. The effects of changes in fair value are recognized in other comprehensive income until the asset is excluded from the statement of financial position, when accumulated profit or loss is recognized in the income statement under “Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss”. An allowance for expected credit losses from financial assets that are measured at fair value through other comprehensive income is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. On the other hand, an expected credit risk allowance is recognized in the income statement under " Net allowances for expected credit losses " . Bank Pekao S.A. 20 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Classification, presentation and measurement of financial assets FINANCIAL ASSETS CLASSIFICATION SIGNIFICANT ITEMS INCLUDED PRESENTATION AND MEASUREMENT Measured at fair value through profit or loss To this category, the Bank classifies financial assets included in the following items of the Statement of financial position: • " Derivative financial instruments (held for trading) " , • "Loans and advances to customers" , • " Hedging instruments " , • " Securities " , • " Assets pledged as security for liabilities " . Loans and advances to customers recognized in a model other than the model held to obtain contractual cash flows and the model held to obtain contractual cash flows and for sale, or those that do not meet the SPPI criterion. At initial recognition, the Bank may irrevocably designate selected financial assets that meet the amortised cost measurement criteria or at fair value through other comprehensive income for measurement at fair value through profit or loss if it eliminates or significantly reduces the accounting mismatch that would otherwise arise from measuring assets at different methods. Changes in the fair value of assets, which occur during the period from transaction date to transaction settlement date, shall be recognized similarly as in the case of the asset held. Derivative instruments are recognized on transaction dates. Classification, presentation and measurement of financial liabilities FINANCIAL LIABILITIES CLASSIFICATION SIGNIFICANT ITEMS INCLUDED PRESENTATION AND MEASUREMENT Measured at amortised cost To this category, the Bank classifies financial assets included in the following items of the Statement of financial position: • "Amounts due to other banks" , • "Amounts due to customers" , • "Debt securities issued", • " Subordinated liabilities " . The measurement of financial liabilities at amortised cost is performed using the effective interest rate. When the financial liability at amortised cost is derecognised, the gain or loss is recognised in the profit and loss in the item " Profit (loss) on derecognition of financial assets and liabilities not measured at fair value through profit or loss " . Measured at fair value through profit or loss To this category, the Bank classifies financial assets included in the following items of the Statement of financial position: • "Financial liabilities held for trading" , • "Derivative financial instruments (held for trading)", • "Hedging instruments" . Measurement and presentation of financial liabilities measured at fair value through profit or loss follow the same principles as for financial assets measured at fair value through profit or loss. The business model assessment The assessment of the business model is made at the initial recognition of the asset. The business model criteria refers to the way the Bank’s managing financial assets in order to generate cash flows. The Bank evaluates the purpose of the business model, to which the particular financial assets are classified on the level of particular portfolios of the assets – performing the analysis on those portfolio level is a reliable reflection of the Bank’s business activities regarding these models and also reflects to information analysis of those activities provided to the Bank’s management. The assessment of the business model is based on the analysis of the following information regarding the portfolio of the financial assets: • applied policies and business aims for the particular portfolio and its practical implementation. In particular, the management's strategy regarding the acquisition of revenues from contractual interest payments, maintaining a specific interest rate profile of the portfolio, managing the liquidity gap and obtaining cash flows as a result of the sale of financial assets is assessed, • the manner in which the profitability of the portfolio is assessed and reported to the Bank's Management Board, • types of risk that affect the profitability and effectiveness of a given business model (and financial assets held under this business model) and the manner of managing the identified types of risk, • the way in which the managers of business operations are remunerated under a given business model - e.g. whether the remuneration depends on changes in the fair value of financial assets or the value of contractual cash flows obtained, • frequency, value and moment of sale of financial assets made in prior reporting periods, the reasons for these sales and expectations regarding future sales activity. However, information on sales activity is analyzed taking into account the overall assessment of the Bank's implementation of the adopted method of managing financial assets and generating cash flows. Bank Pekao S.A. 21 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Before making a decision regarding allocating a portfolio of financial assets to a business model which purpose is to obtain contractual cash flows, the Bank reviews and evaluates significant and objective quantitative data influencing the allocation of asset portfolios to the relevant business model, in particular: • the value of sales of financial assets made within the particular portfolios, • the frequency of sales of financial assets as part of particular portfolios, • expectation analysis regarding the value of planned sales of financial assets and their frequency of the particular portfolios, this analysis is carried out on the basis of probable scenarios of the Bank's business activities in the future. The portfolios of financial assets from which sales are made that do not result from an increase in credit risk meet the assumptions of the business model, which purpose is to obtain contractual cash flows, provided that these sales: • are at low volume (even with a relatively high frequency of sales), or • are made rarely - as a result of one-off events, which the probability to occur again in the future, according to the Bank’s professional judgment is rare (even with a relatively high volume), or • they occur close to the maturity date of the financial assets being sold, and the revenue obtained from such sales is similar to those which could be obtained from remaining contractual cash flows as if the financial asset was held in the Bank's portfolio to the original maturity date. The following sales are excluded from the analysis of sales value: • the sales resulting from an increase in the credit risk of financial assets, regardless of their frequency and volume, • the sales resulting from one-off events, which the probability to occur again in the future, according to the Bank’s professional judgment is rare, • the sales made close to maturity. A held to obtain contractual cash flows or sale business model includes a portfolio of financial assets whose purpose is, in particular, managing current liquidity levels, maintaining the assumed profitability profile and/or adjust the duration of the asset and financial liabilities, and a level of sales are higher than for those financial assets classified in a model which purpose is to obtain contractual cash flows. The business model comprising financial assets held for sale and other includes assets that do not meet the criteria to be classified into the business model, which purpose is to obtain contractual cash flows the business model which purpose is to obtain contractual cash flows or sales and also acquiring cash flows from interest and capital is not the main business target. Assessment, whether the contractual payments are solely payments of principal and interest on the principal amount outstanding (SPPI criteria) For the purposes of assessing cash flow characteristics, "principal" is defined as the fair value of a financial asset at the time of initial recognition. "Interest" is defined as the time value of money and the credit risk related to the unpaid part of principal and also other risks and costs associated with a standard loan agreement/a security (e.g. liquidity risk or administrative costs) and margin. When assessing whether the contractual cash flows constitute solely payments of principal and interest, the Bank analyzes contractual cash flows. This analysis includes an assessment whether the contractual terms include any provisions that the contractual payments could be changed or the amount of the contractual payments could be changed in a way that from an economic point of view they will not only represent repayments of principal and interest on the outstanding principal. When making this assessment, the Bank takes into account the occurrence of, among others: • conditional events that may change the amount or timing of the payment, • financial leverage (for example, interest terms include a multiplier greater than 1), • terms regarding the extension of the contract or prepayment option, • terms that the Bank’s cash flow claim is limited to a specified assets (eg non-recourse assets), • terms that modify the time value of money – e.g. mismatch of the frequency of the revaluation of the reference interest rate to its tenor. The SPPI test is conducted for each financial asset classified into the business model, which purpose is to obtain contractual cash flows or a business model which purpose is to obtain contractual cash flows or sale, as at the initial recognition date or as at the latest significant annex date changing the terms of contractual cash flows. The Bank performs an SPPI test at the level of homogeneous groups of standard products or at the level of a single contract for non-standard products or at the level of ISIN code for debt securities. Bank Pekao S.A. 22 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) In situation when the time value of money is modified for a particular financial asset, the Bank is required to make an additional assessment (i.e. Benchmark Test) to determine whether the contractual cash flows are still solely payments of principal and interest on the principal amount outstanding by determining how different the contractual (undiscounted) cash flows could be from the (undiscounted) cash flows that would arise if the time value of money element was not be modified (the benchmark cash flows). Benchmark Testing is not permitted for situation that some terms modify contractual cash flows, such as the built-in leverage element. Purchased or originated credit-impaired financial assets (POCI) The Bank distinguishes the category of purchased or originated credit-impaired assets. POCI are assets that are credit- impaired on initial recognition. Financial assets that were classified as POCI at initial recognition should be treated as POCI in all subsequent periods until they are derecognition. POCI assets may arise through: • by purchasing a contract that meets the definition of POCI (e.g. as a result of a merger with another entity or purchase of a portfolio of assets), • by concluding a contract that is POCI at the time of original granting (e.g. granting a loan to a customer in a bad financial condition), • by modifying the contract (e.g. under restructuring) qualifying this contract to be derecognised, resulting in a recognitionof a new contract meeting the definition of POCI. Conditions for qualifying a contract to be derecognised are described below. At initial recognition, POCI assets are recognized in the balance sheet at their fair value, in particular they do not have recognized impairment allowance. POCI assets do not constitute a separate accounting category of financial assets. They are classified into accounting categories in accordance with the general principles for classification of financial assets. The categories in which POCI assets may exist are a category of financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income. Investments in equity instruments For investments in equity instruments not held for trading, the Bank may irrevocably choose to present changes in their fair value in other comprehensive income. The Bank makes a decision in this respect based on an individual analysis of each investment. In such a case the amounts presented in other comprehensive income are never subsequently transferred to profit or loss. In case of sale of an equity investment elected to be measured at fair value through other comprehensive income, profits/losses from fair value measurement are transferred to the item " Other reserve capital " . Equity investments not designated for measurement at fair value through other comprehensive income at the initial recognition are measured at fair value through profit or loss. Changes in the fair value of such investments, as well as the result on sales, are recognized in the income statement under " Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result " . Dividends from equity instruments, both measured at fair value through profit or loss and designated for valuation through other comprehensive income, are recognized in the income statement when the Bank's right to receive payment is established. Reclassification of financial asset Financial assets are not reclassified in the reporting periods following the initial recognition, except for the reporting period following the change of the business model for managing financial assets by the Bank. The reclassification of financial assets is applied prospectively from the reclassification date - without restatement of previously recognized gains or losses (including impairment gains or losses) or interest. The following are not changes in business model: • a change in intention related to particular financial assets (even in circumstances of significant changes in market conditions), • the temporary disappearance of a particular market for financial assets, • a transfer of financial assets between parts of the entity with different business models. Bank Pekao S.A. 23 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Modifications of financial assets If the terms of the financial asset agreement change, the Bank assesses whether the cash flows generated by the modified asset differ significantly from those generated by the asset before modifying the terms of its agreement. If a significant difference is identified, (defined by the quantitative criteria presented below) the original financial asset is derecognised, and the modified financial asset is recognized in the books at its fair value. Income or expense arising as at the date of determining the effects of the substantial modification is recognized in the profit and loss in the item “Profit (loss) on derecognition of financial assets and liabilities not measured at fair value through profit or loss”. If the cash flows generated by the modified financial asset are not materially different from the original cash flows, the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognizes the result resulting from a non-substantial modification in correspondence with interest income. Quantitative information about financial assets that were subject to modification that didn’t result in derecognition was presented in the Note 43.2. The assessment whether a given modification of financial assets is significant or non-substantial modification depends on the fulfillment of qualitative and quantitative criteria. The Bank has adopted the following quality criteria to determine substantial modifications: • currency conversion, unless it results from existing contractual provisions or requirements of applicable legal regulations, • change (replacement) of the debtor, excluding the addition/departure of the joint debtor or taking over the loan in inheritance, • consolidation of several exposures into one under an annex or settlement/restructuring agreement. The occurrence of at least one of these criteria results in a substantial modification. The Bank has adopted the following quantitative criteria to determine substantial modifications: • extension of the loan term by at least one year and at least a doubling of the residual maturity to the original maturity (meeting both conditions jointly), or • increasing the current loan amount/credit limit by at least 10%. If the terms of a financial asset agreement are modified, and the modification does not result in derecognition of the asset from the balance sheet, the determination, whether the credit risk of a given asset significantly increases, is made by comparing: • lifetime PD on the reporting date, based on modified conditions, with • lifetime PD estimated on the basis of data valid at the date of initial recognition and initial contractual terms. In the case of modification of financial assets, the Bank analyzes whether the modification has improved or restored the Bank's ability to collect interest and principal. As part of this process, the Bank assesses the borrower's ability to pay in relation to modified terms of agreement. De-recognition of financial instruments from the statement of financial position Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or when the Bank transfers the contractual rights to receive the cash flows in a transaction in which substantially all risk and rewards of ownership of the financial asset are transferred. The Bank derecognizes a credit or a loan receivable, or its part, when it is sold. Additionally, the Bank writes-off a receivable against the corresponding impairment allowances (completely or partially) when the debt redemption process is completed and when no further cash flows from the given receivable are expected (i.e. the created write-down covers almost the entire gross value of the loan/advance). The value of contractual cash flows required under contracts of financial assets, which were written-off in 2023 and are still subject to enforcement proceedings as at 31 December 2023, is PLN 1 367 million (as at 31 December 2022 - PLN 649 million). Accumulated profits and losses that have been recognized in other comprehensive income from equity instruments designated to be measured at fair value through other comprehensive income are not recognized in the profit and loss account when these financial instruments are removed from the balance sheet. The Bank derecognizes a financial liability, or its part, when the liability expires. The liability expires when the obligation stated in the agreement is settled, redeemed or the period for its collection expires. Bank Pekao S.A. 24 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Repo and reverse-repo agreements Repo and reverse-repo transactions, as well as sell-buy back and buy-sell back transactions are classified as sales or purchase transactions of securities with the obligation of resale or repurchase at an agreed date and price. Sales transactions of securities with the repurchase obligation granted (repo and sell-buy back) are recognized as at transaction date in amounts due to other banks or amounts due to customers from deposits depending upon the counterparty to the transaction. Securities purchased in reverse-repo and buy-sell back transactions are recognized as loans and receivables from banks or as loans and receivables from customers, depending upon the counterparty to the transaction. The difference between the sale and repurchase price is recognized as interest income or expense, and amortised over the contractual life of the contract using the effective interest rate method. Other significant accounting policies Other significant accounting policies are presented in the Notes below. NOTE TITLE NOTE NUMBER Interest income and expense 5 Fee and commission income and expense 6 Dividend income 7 Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result 8 Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss 9 Net allowances for expected credit losses 10 Other operating income and expenses 11 General administrative expenses and depreciation 12 Income tax 13 Derivative financial instruments (held for trading) 18 Hedge accounting 19 Assets held for sale 23 Investments in subsidiaries 24 Investments in associates 25 Intangible assets 26 Property, plant and equipment 27 Other assets 28 Provisions 34 Other liabilities 35 Share-based payments 37 Leasing 38 Contingent commitments and litigation and claims 39 Equity 40 4.4. Significant estimates and assumptions The preparation of financial statements in accordance with IFRS requires the Management Board of the Bank to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Estimates and assumptions are reviewed on an ongoing basis by the Bank and rely on historic data and other factors including expectation of the future events which seems justified in given circumstances. Estimates and underlying assumptions are subject to a regular review. Revisions to accounting estimates are recognised prospectively starting from the period in which the estimates are revised. Information on the areas of significant estimates in these financial statements is presented below. 4.4.1. Impairment Impairment of financial instruments to customers, expected credit losses With regard to all financial assets that are measured at amortised cost or at fair value through other comprehensive income and off-balance sheet liabilities, i.e. financial guarantees or loan commitments, the Bank creates the allowance according to IFRS 9 based on the expected credit losses and taking into account forecasts and expected future economic conditions in the context of credit risk. Bank Pekao S.A. 25 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The process of estimating expected credit losses requires the use of significant estimates, in particular in the area of: 1) assumptions regarding macroeconomic forecasts and possible scenarios how these forecasts will develop in the future, 2) possible expert adjustments in relation to industries where the Bank identifies an increased risk and the models used do not fully reflect the risks of these industries, 3) rules (thresholds) for identifying a significant increase in credit risk. More information on the principles applied by the Bank for determining expected credit losses and the significant assumptions applied in this area are presented in the Note 43.2. Impairment of non-current assets (including goodwill) At each balance sheet date the Bank reviews its non-current assets for indications of impairment. The Bank performs an impairment test of goodwill on a yearly basis or more often if impairment triggers occur. Where such indications exist, the Bank makes a formal estimation of the recoverable value (of a given assets or – in the case of goodwill - all cash-generating units to which the goodwill relates). If the carrying amount of a given asset is in excess of its recoverable value, impairment is defined and a write-down is recorded to adjust the carrying amount to the level of its recoverable value. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value-in-use. Estimation of the value-in-use of an assets (or cash generating unit) requires assumptions to be made regarding, among other, future cash flows which the Bank may obtain from the given asset (or cash generating unit), any changes in amount or timing of occurrence of these cash flows and other factors such as the lack of liquidity. The adoption of different measurement assumptions may affect the carrying amount of some of the group’s non-current assets. As at 31 December 2023, the Bank assessed whether the current market conditions have an impact on the impairment of non- current assets. As a result of this analysis, no need was found to make impairment allowances of non-current assets, including goodwill. The main assumptions used in the goodwill impairment test are presented in the Note 26. 4.4.2. Provisions for legal risk related to foreign currency mortgage loans in CHF As at 31 December 2023 the Bank assessed the probability of the impact of legal risk regarding foreign currency mortgage loans in CHF on the expected cash outflows resulting from this risk. Key elements of the estimate include: 1) a forecast of the number of disputes, 2) expected decisions/rulings of the courts, 3) customers' willingness to conclude settlements with the Bank. Details on the main assumptions used to estimate the provisions for legal risk regarding foreign currency mortgage loans in CHF are presented in the Note 43.3. 4.4.3. Other estimation areas Measurement of derivatives, unquoted debt securities measured at fair value through other comprehensive income and loans and advances to customers measured at fair value through other comprehensive income and measured at fair value through profit or loss The fair value of non-option derivatives, debt securities measured at fair value through other comprehensive income and loans and advances to customers measured at fair value through other comprehensive income and measured at fair value through profit or loss that do not have a quoted market price on an active market is measured using valuation models based on discounted cash flows. Options are valued using option valuation models. Variables used for valuation purposes include, where possible, the data from observable markets. However, the Bank also adopts assumptions concerning counterparty’s credit risks which affect the valuation of instruments. The adoption of other measurement assumptions may affect the valuation of these financial instruments. The assumptions used for fair value measurement are described in detail in the Note 43.9. Provisions for defined benefit plans The main actuarial assumptions applied to estimatio of provisions for defined benefit plans, such as the discount rate and the salary increase rate, were presented in the Note 36. Bank Pekao S.A. 26 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Provisions for commission refunds in the event of early repayment of loan As at 31 December 2023 the Bank assessed the legal risk arising from the judgment of the Court of Justice of the European Union (hereinafter the “CJEU”) on consumer loans and estimated the possible amount of cash outflow as a refund of commission to the customer in relation to early repayment of consumer loans (for loans prepaid before the judgment of the CJEU, i.e. before 11 September 2019). In addition, with regard to balance-sheet exposures as at 31 December 2023, the Bank estimated the possible prepayments of these exposures in the future. The estimates required the Bank to adopt expert assumptions primarily regarding the scale of complaints and amounts reimbursed for prepaid loans before the CJEU judgment, as well as the expected scale of prepayments and future returns for balance sheet exposures, and are associated with significant uncertainty. Details on the estimated provision for early repayment of consumer loans together with the sensitivity analysis are presented in the Note 34. 5. Interest income and expense Significant accounting policies Interest income includes interest and commission fees received or due from loans, interbank deposits and securities measured at amortised cost recognized in the calculation of effective interest rate of loans and financial assets measured at fair value through other comprehensive income or through profit or loss and hedging derivatives. The effective interest rate is the discount rate of estimated future cash inflows and payments made during the expected period until the expiry date of the financial instruments. The calculation of the effective interest rate includes all commissions paid and received by parties to the agreement, transaction costs and all other premiums and discounts, comprising an integral part of the effective interest rate. Gross carrying amount of the financial asset is the basis for interest income calculation except for credit-impaired financial assets ( " in Stage 3 " ) and purchased or originated credit-impaired financial assets (POCI assets). At the recognition of impairment of financial assets measured at amortised cost or financial assets measured at fair value through other comprehensive income, the interest income is still recognized in profit or loss but is calculated by applying the effective interest rate to the gross carrying amount less the impairment charges. Interest expense related to liabilities associated with client accounts and debt securities issued are recognized in the profit or loss using the effective interest rate. Income and expense from bancassurance The Bank splits the remuneration for sale of insurance products linked to loans into separate components, i.e. dividing the remuneration into proportion of fair value of financial instrument and fair value of intermediary service to the sum of those values. The fair values of particular components of the remuneration are determined based on market data to a highest degree. The particular components of the Bank’s remuneration for sale of insurance products linked to loans are recognized in the income statement according to the following principles: • remuneration from financial instrument – as part of effective interest rate calculation, included in interest income, • remuneration for intermediary service – upfront at the time when the insurance product in sold, included in fee and commission income. Additionally the Bank estimates the part of the remuneration which will be refunded in the future (e.g. due to early termination of insurance contract, early repayment of loan). The estimate of the provision for future refunds is based on the analysis of historical data and expectations in respect to refunds trend in the future. Bank Pekao S.A. 27 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data Interest income for 2023 2023 FINANCIAL ASSETS MEASURED AT AMORTISED COST FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Interest income calculated using the effective interest method 15 120 1 950 - 17 070 Loans and advances 11 333 17 - 11 350 Interbank placements 773 - - 773 Reverse repo transactions 374 - - 374 Debt securities 2 640 1 933 - 4 573 Other interest income related to financial assets measured at fair value through profit or loss - - 57 57 Loans and other receivables from customers - - 19 19 Debt securities held for trading - - 38 38 Total () 15 120 1 950 57 17 127 () including revenues from derivative hedging instruments in the amount of minus PLN 993 million. Interest income for 2022 2022 FINANCIAL ASSETS MEASURED AT AMORTISED COST FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Interest income calculated using the effective interest method 9 640 843 - 10 483 Loans and advances () 7 732 20 - 7 752 Interbank placements 512 - - 512 Reverse repo transactions 229 - - 229 Debt securities 1 167 823 - 1 990 Other interest income related to financial assets measured at fair value through profit or loss - - 36 36 Loans and other receivables from customers - - 11 11 Debt securities held for trading - - 25 25 Total () 9 640 843 36 10 519 () including the cost estimated by the Bank related to the possible modification of PLN mortgage loan agreements granted to consumers due to their suspension of loan repayments in the amount of PLN 1 883 million. () including revenues from derivative hedging instruments in the amount of minus PLN 418 million. Modification of expected cash flows related to mortgage loan agreements in PLN According to par. 5.4.3 of IFRS 9, introduced by the Act on social financing for business ventures and support to borrowers, rights for customers to suspend their loan repayments in the period from July 2022 to December 2023, constitutes a modification of the expected cash flows and requires the adjustment of the gross carrying amount of the abovementioned loans by designating and recognizing in the Bank's financial result the estimated cost resulting from the above-mentioned permissions as the difference between: 1) the present value of the expected cash flows from the loan portfolio that meets the criteria of the Act (gross carrying amount of this portfolio), 2) the present value of the expected cash flows from the loan portfolio, determined based on the modified cash flows taking into account the terms of the Act (i.e. the possibility of suspending the repayment of loan installments within the specified time frame with the simultaneous extension of the loan period) discounted with the current effective interest rate of the above-mentioned portfolio, taking into account the estimated level of participation of eligible customers who, in the Bank's opinion, will exercise this right. On the date of entry into force of the provisions in question (July 2022), the Bank estimated and included in the financial results the cost related to the modification of PLN mortgage loan agreements granted to consumers due to the suspension of loan repayments at the gross amount of PLN 2 338 million, assuming the expert-estimated participation rate (use of the rights under the Act) at the level of 85% and assuming the maximum size (i.e. 8 installments) of using the right by customers. In addition, the Bank assumed that a part (50%) of the amounts suspended by customers will be used by them to repay loans. Bank Pekao S.A. 28 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The final participation rate (use of the rights arising from the Act) was approximately 70% compared to the estimated level of 72%, and the early loan repayment rate related to the use of the above-mentioned rights was approximately 68% compared to the assumed level of 60%. As a result of the above, in 2022 the Bank included in its results PLN 1 883 million of the cost related to the total expected modification of PLN mortgage loan agreements granted to consumers due to their suspension of loan repayments, of which during the period of validity of the above-mentioned regulations (2022 and 2023) it was actually realized in the amount of PLN 1 778 million, and the remaining amount, i.e. PLN 105 million, was recognized in interest income in 2023. The tables below presents the structure and gross carrying amount of loans as at 31 December 2023 and 31 December 2022 for which repayment was suspended. 31.12.2023 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) GROSS CARRYING AMOUNT STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIINATED CREDIT- IMPAIRED (POCI) TOTAL Mortgage loans 31 682 3 760 - 404 19 35 865 Other loans and advances 1 1 - - - 2 Total 31 683 3 761 - 404 19 35 867 31.12.2022 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) GROSS CARRYING AMOUNT STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIINATED CREDIT- IMPAIRED (POCI) TOTAL Mortgage loans 35 873 2 863 1 243 9 38 989 Other loans and advances - 2 - - - 2 Total 35 873 2 865 1 243 9 38 991 The Bank does not identify an increase in credit risk if customers use the suspension of loan repayment. Interest expense 2023 2022 Deposits from customers (4 715) (1 831) Interbank deposits (79) (83) Repo transactions (266) (232) Loans and advances received (18) (10) Leasing (25) (15) Debt securities (436) (339) Total () (5 539) (2 510) () including the expenses from hedging derivative instruments in the amount for 2023 plus PLN 29 million and for 2022 in the amount plus PLN 4 million. Bank Pekao S.A. 29 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 6. Fee and commission income and expense Significant accounting policies Fee and commission income is generated from financial services provided by the Bank and are measured based on the remuneration specified in the contract with the client. Fee and commission income includes, among others: fees for granting loans (without schedules), for committing to grant a loan, fees for issuing cards, for card transactions, for servicing and selling investment and insurance products, for servicing bank accounts, for cash deposits and withdrawals, for trustee services, for securities operations and margins obtained on currency exchange transactions. Fee and commision income and expense directly attributable to financial asset or financial liability origination with specific repayment schedules are accounted for using the effective interest rate and recognized in the profit and loss account under the item of interest income or expense and have been described above. The accounting policies relating to such income and expenses are described in Note 5. Fee and commission income related to financial assets without specific repayment schedules (mainly overdrafts, working capital loans, credit card loans) and from the issuance, extension of the deadline, increase in the amount of guarantees and letters of credit, are amortised using the straight-line method over the life of the product to which they relate and are recognized in the income statement in the item "Fee and commission income". Commissions and fees for committing to grant loans that are most likely to be granted are deferred and, when the financial assets are initially recognized, they are settled using the effective interest rate or on a straight-line basis, depending on the type of loan they concern. In the case of other fees and commissions related to financial services offered by the Bank, a five-stage revenue recognition model is applied, i.e.: 1) identyfying the contract, 2) indication of the elements (individual obligations) contained in the contract, 3) determinig the price, 4) allocating the price to individual element of the contract, 5) recognition of revenue after meeting the conditions related to individual elements of the contract. The Bank applies the above model each time and recognizes income from commissions and fees: 1) once (when a service has been performed and control over the service has been transferred to the other party to the contract), 2) over time, when the service is provided over a period of time. The above settlement model is used primarily for services such as: fees for issuing cards, for card transactions, for servicing and selling investment products, for servicing bank accounts, for cash deposits and withdrawals, for custody services, for securities operations and margins obtained on currency exchange transactions. The accounting policies relating income and expenses from bancassurance are described in Note 5. Financial data Fee and commission income 2023 2022 Accounts maintenance, payment orders and cash transactions 612 715 Payment cards 854 749 Loans and advances 423 364 Margin on foreign exchange transactions with clients 723 743 Service and sell investment and insurance products 156 161 Securities operations 170 117 Custody activity 70 73 Guarantees, letters of credit and similar transactions 98 96 Other 90 98 Total 3 196 3 116 Bank Pekao S.A. 30 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Fee and commission expense 2023 2022 Payment cards (493) (435) Cash turnover (98) (97) Money orders and transfers (23) (27) Securities and derivatives operations (60) (57) Acquisition services (111) (86) Custody activity (22) (22) Accounts maintenance (6) (6) Other (37) (27) Total (850) (757) 7. Dividend income Significant accounting policies Dividends from equity instruments, both measured at fair value through profit or loss and designated for valuation through other comprehensive income, are recognized in the income statement when the Bank's right to receive payment is established. Financial data Income from dividends 2023 2022 Subsidiaries 237 228 Associates 1 1 Issuers of securities measured at fair value through profit or loss 2 2 Issuers of equity instruments designated at fair value through other comprehensive income 28 26 Total 268 257 8. Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result Significant accounting policies Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result Result on financial assets measured at fair value through profit or loss includes: • Foreign exchange result T he foreign exchange gains (losses) are calculated taking into account the positive and negative foreign currency translation differences, whether realized or unrealized from the daily valuation of assets and liabilities denominated in foreign currencies. The revaluation is perform using the average exchange announced by the NBP on the balance sheet date. Moreover, the foreign exchange result includes swap points from derivative transactions, entered into by the Bank for the purpose of managing the Bank’s liquidity in foreign currencies. • Result on derivatives, loans and advances to customers and securities measured at fair value through profit or loss. The income referred to above includes gains and losses realized on a sale or a change in the fair value of financial assets and liabilities measured at fair value through profit or loss. The accrued interest and unwinding of a discount or a premium on loans and advances to customers and debt securities measured at fair value through profit or loss is presented in the net interest income. Bank Pekao S.A. 31 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result 2023 2022 Gains/losses on loans and advances to customers measured mandatorily at fair value through profit or loss 9 1 Gains/losses on securities measured mandatorily at fair value through profit or loss 43 1 Foreign exchange result 276 162 Gains/losses on derivatives 127 (9) Gains/losses on securities held for trading 32 15 Total 487 170 9. Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss Significant accounting policies The result on derecognition of financial assets and liabilities not measured at fair value through profit or loss concerns: a) the result on the sale of financial assets and liabilities that are not measured at fair value through profit or loss, b) results due to substantial modification. Financial data Realized gains 2023 2022 Financial assets measured at amortised cost 36 11 Financial assets measured at fair value through other comprehensive income 20 25 Financial liabilities measured at amortised cost - - Total 56 36 Realized losses 2023 2022 Financial assets measured at amortised cost (41) (40) Financial assets measured at fair value through other comprehensive income - - Financial liabilities measured at amortised cost - - Total (41) (40) Net realized profit / loss 15 (4) Bank Pekao S.A. 32 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 10. Net allowances for expected credit losses Significant accounting policies A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: 1) significant financial difficulty of the issuer or the borrower, 2) a breach of contract, such as a default or past due event, 3) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider, 4) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization, 5) the disappearance of an active market for that financial asset because of financial difficulties, or 6) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. The Bank recognises a loss allowance for expected credit losses on a financial asset that is measured at amortised cost or at fair value through other comprehensive income, a financial lease receivable, a contract asset or a loan commitment and a financial guarantee contract. A loss allowance for financial assets that are measured at fair value through other comprehensive income is recognised in other comprehensive income and is not reducing the carrying amount of the financial asset in the statement of financial position. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the Bank measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. At each reporting date, the Bank measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. For financial instruments in Stage 3, the Bank measures the expected credit losses in the amount equal to the expected credit losses over the life of such instruments. The Bank recognises in profit or loss, changes in expected credit losses and impairment losses occurring in the reporting period. For loan commitments and financial guarantee contracts, the date that the Bank becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements. Since initial recognition of POCI assets, the Bank recognises the cumulative changes in lifetime expected credit losses as a loss allowance for purchased or originated credit-impaired financial assets. At each reporting date, the Bank recognises in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. The Bank measures the loss allowance at an amount equal to lifetime expected credit losses for: 1) trade receivables or contract assets that result from transactions that are within the scope of IFRS 15, 2) receivables that result from transactions that are within the scope of IFRS 16 ( other than receivables from finance lease) . Expected credit losses are not recognized for impairment of equity instruments. The methodology for calculating expected credit losses is described in detail in " The description of the model for impairment allowance " in the Note 43.2. Financial data Net allowances for expected credit losses 2023 2022 Receivables from banks and cash and cash equivalents 10 (21) Loans and other financial assets measured at amortised cost () (324) (1 866) including: legal risk regarding foreign currency mortgage loans 114 (1 185) Debt securities measured at amortised cost (7) (9) Loans measured at fair value through other comprehensive income 4 2 Debt securities measured at fair value through other comprehensive income 3 17 Off-balance sheet commitments (113) (2) Total (427) (1 879) () In 2023 the Bank sold a portfolio of loan receivables with a total gross carrying amount of PLN 516 million. The realized gross result on the transaction was PLN 98 million. Bank Pekao S.A. 33 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 11. Other operating income and expenses Significant accounting policies Other operating income includes mainly revenues from received compensations, revenues from operating leases, recovery of debt collection costs and miscellaneous revenues. Other operating expenses include mainly the costs of provision for legal claims, cost of provisions for current and future legal risk related to foreign currency mortgage loans in CHF (including costs of legal representation and interest for delay), debt collection costs, impairment allowance on fixed and other assets, client claims, compensation paid and miscellaneous expenses. Miscellaneous revenues and costs mainly consist of annual settlements related to changes in the VAT ratio. Financial data Other operating income 2023 2022 Gains on disposal of property, plant and equipment 18 52 Premises rental income, terminals and IT equipment 37 34 Compensation, recoveries, penalty fees and fines received 10 11 Miscellaneous income 24 10 Recovery of debt collection costs 15 15 Other 5 8 Total 109 130 Other operating expenses 2023 2022 Provision for liabilities disputable and other provisions () 13 (157) Provision for legal risk regarding foreign currency mortgage loans (403) (319) Credit and factoring debt collection costs (37) (31) Loss on disposal of property, plant and equipment and intangible assets (1) - Card transactions monitoring costs (20) (20) Sundry expenses (4) (7) Costs of litigation and claims (33) (14) Impairment allowance on fixed assets, litigations and other assets (18) (48) Compensation, penalty fees and fines (2) (2) Other (25) (6) Total (530) (604) () The item also includes the provision for commission reimbursements in case of previously repaid consumer loans repaid before the CJEU judgment and the provision for refunds of commissions on prepaid mortgage loans (Note 34). Bank Pekao S.A. 34 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 12. General administrative expenses and depreciation Significant accounting policies General administrative expenses Personnel expenses and other employee benefits mainly include wages and salaries, social insurance and share based payments costs which are described in detail in the Note 37. Other administrative expenses mainly include the tax of certain financial institutions, maintenance costs of Bank’s fixed assets, IT and telecommunications infrastructure also marketing and advertising costs. This cost category also includes contributions and payments to the Bank Guarantee Fund (quarterly contributions to the banks’ guarantee fund and annual contribution to the banks’ compulsory resolution fund paid once a year), the fee paid to the aid fund established in the Protection Scheme Managing Entity and a mandatory fees to the Polish Financial Supervision Authority (to cover the cost of banking supervision and to cover the costs of supervision over the capital market) which Bank recognizes in the profit or loss at the time of the obligating event. Depreciation Depreciation expense for property, plant and equipment and investment properties and the amortization expense for intangible assets are calculated using straight line method over the expected useful life of an asset. Depreciated value is defined as the purchase price or cost to develop a given asset, less residual value of the asset. Depreciation rates and residual values of assets, determined for balance-sheet purposes, are subject to regular reviews, with results of such reviews recognized in the same period. The statement of financial position depreciation and amortization rates applied to property, plant and equipment, investment properties and intangible assets are as follows: a) depreciation rates applied for non-current assets Buildings and structures and cooperative ownership rights to residential premises and cooperative ownership rights to commercial premises 1.5% – 10.0% Technical equipment and machines 4.5% – 30.0% Vehicles 7% – 25.0% b) amortization rates for intangible assets Licenses and patents 10.0% – 50.0% Assets under construction 12.5% – 33.3% Other intangible assets 12.5% – 33.3% Land, non-current assets under construction and intangible assets under development are not subject to depreciation and amortization. Depreciation are charged to the income statement in the item " General administrative expenses and depreciation " , whereas the impairment losses are charged to the income statement in the item “Other operating expenses”. Financial data Personnel expenses 2023 2022 Wages and salaries (2 001) (1 696) Insurance and other charges related to employees (373) (302) Share-based payments expenses (35) (21) Total (2 409) (2 019) Bank Pekao S.A. 35 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Other administrative expenses 2023 2022 Overheads (1 170) (1 008) Tax on certain financial institutions (879) (866) Fee paid for the Protection Scheme () - (482) Contributions to the Bank Guarantee Fund, including: (188) (265) to the resolution fund (188) (208) to the banks’ guarantee fund - (57) Contributions to the Borrowers Support Fund () - (158) Fees to cover costs of supervision over banks (KNF) (30) (27) Other taxes and fees (37) (33) Total (2 304) (2 839) (*) The fee paid to the aid fund established in the Protection Scheme Managing Entity referred to in Art. 4 para. 1 point 9a of the Act of 29 August 1997 - Banking Law. () Estimated costs of additional contributions to the Borrowers Support Fund ("BSF"), resulting from an Art. 89 para. 1 of the Act of 7th July 2022 on social financing for business ventures and support to borrowers, which obliges lenders to contribute a total of PLN 1.4 billion to the BSF by 31 December 2023. Depreciation 2023 2022 Property, plant and equipment (299) (297) Intangible assets (285) (274) Total (584) (571) Total administrative expenses and depreciation (5 297) (5 429) 13. Income tax Significant accounting policies Income tax expense comprises current and deferred tax. The income tax expense is recognized in the income statement excluding the situations when it is recognized directly in equity. The current tax is the tax payable of the Bank entities on their taxable income for the period, calculated based on binding tax rates, and any adjustment to tax payable in respect of previous years. The receivables resulting from taxes are disclosed if the Bank’s companies has sufficient certainty that they exist and that they will be recovered. Deferred tax assets and deferred tax liabilities are calculated, using the balance sheet method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax is determined using tax rates based on legislation enacted or substantively enacted at the balance sheet date and expected to apply when the deferred tax asset or the deferred tax liability is realized. A deferred tax asset is recognized for negative temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. A deferred tax liability is calculated using the balance sheet method based on identification of positive temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Bank Pekao S.A. 36 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data The below additional information notes present the Bank gross profit’s. Reconciliation between tax calculated by applying the current tax rate to accounting profit and the actual tax charge presented in the separate income statement. 2023 2022 Profit before income tax 8 559 3 012 Tax charge according to applicable tax rate 1 626 572 Permanent differences: 215 542 Non-taxable income (69) (57) Non tax deductible costs including: 284 592 Bank Guarantee Fund fee 36 50 banking tax 167 165 the provision for legal risk regarding foreign currency mortgage loans 19 284 allowances for expected credit losses 58 56 other non-tax deductible costs 4 37 Impact of other tax rates applied in accordance with art.19.1.2 of CIT Act - - Tax relieves not included in the income statement - - Other - 7 Effective income tax charge on gross profit 1 841 1 114 Effective tax rate 21.51% 36.99% The applied tax rate of 19% is the corporate income tax rate binding in Poland. The basic components of income tax charge presented in the income statement and equity 2023 2022 INCOME STATEMENT Current tax charge in the income statement (1 918) (646) Adjustments related to the current tax from previous years 10 13 Other taxes (e.g. withholding tax) (2) (2) Current tax (1 910) (635) Occurrence and reversal of temporary differences 69 (479) Deferred tax 69 (479) Tax charge in the separate income statement (1 841) (1 114) EQUITY Current tax (2) - Income and costs disclosed in other comprehensive income: revaluation of financial instruments - cash flows hedges (379) 231 fair value revaluation through other comprehensive income (176) 150 Tax on items that are or may be reclassified subsequently to profit or loss (555) 381 Fair value revaluation through other comprehensive income – equity securities (13) 11 Remeasurements the defined benefit liabilities 5 2 Tax charge on items that will never be reclassified to profit or loss (8) 13 Deferred tax (563) 394 Total charge (2 406) (720) 37 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. CHANGES IN TEMPORARY DIFFERENCES IN 2023 OPENING BALANCE CHANGES RECOGNIZED IN CHANGES RESULTING FROM CHANGES IN THE SCOPE OF CONSOLIDATION AND OTHER CLOSING BALANCE TOTAL DEFERRED TAX IN THE INCOME STATEMENT IN EQUITY THE INCOME STATEMENT EQUITY THE INCOME STATEMENT EQUITY TOTAL DEFERRED TAX IN THE INCOME STATEMENT IN EQUITY DEFFERED TAX LIABILITY Accrued income – securities 833 833 - (362) - - - 471 471 - Accrued income – loans 175 175 - (4) - - - 171 171 - Positive valuation of financial assets 15 15 - 681 - - - 696 696 - Accelerated depreciation 140 140 - 14 - - - 154 154 - Investment relief 3 3 - - - - - 3 3 - Paid intermediation costs 197 197 - 13 - - - 210 210 - Other 15 15 - (12) - - - 3 3 - Gross deferred tax liability 1 378 1 378 - 330 - - - 1 708 1 708 - DEFFERED TAX ASSET Accrued expenses – securities - - - - - - - - - - Accrued expenses – deposits and loans 278 278 - (141) - - - 137 137 - Negative valuation of financial assets 934 183 751 543 (569) - - 908 726 182 Income received to be amortised over time from loans and current accounts 272 272 - (26) - - - 246 246 - Loan provisions charges 897 897 - (17) - - - 880 880 - Personnel related provisions 115 103 12 12 6 - - 133 115 18 Accruals 33 33 - 8 - - - 41 41 - Previous year losses - - - - - - - - - - Other 129 129 - 20 - - - 149 149 - Gross deferred tax assets 2 658 1 895 763 399 (563) - - 2 494 2 294 200 Deferred tax charge X X X 69 (563) - - X X X Net deferred tax assets 1 280 517 763 X X X X 786 586 200 Net deferred tax liability - - - X X X X - - - 38 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. CHANGES IN TEMPORARY DIFFERENCES IN 2022 OPENING BALANCE CHANGES RECOGNIZED IN CHANGES RESULTING FROM CHANGES IN THE SCOPE OF CONSOLIDATION AND OTHER CLOSING BALANCE TOTAL DEFERRED TAX IN THE INCOME STATEMENT IN EQUITY THE INCOME STATEMENT EQUITY THE INCOME STATEMENT EQUITY TOTAL DEFERRED TAX IN THE INCOME STATEMENT IN EQUITY DEFFERED TAX LIABILITY Accrued income – securities 38 38 - 795 - - - 833 833 - Accrued income – loans 106 106 - 69 - - - 175 175 - Positive valuation of financial assets - - - 15 - - - 15 15 - Accelerated depreciation 143 143 - (3) - - - 140 140 - Investment relief 4 4 - (1) - - - 3 3 - Paid intermediation costs 197 197 - - - - - 197 197 - Other - - - 15 - - - 15 15 - Gross deferred tax liability 488 488 - 890 - - - 1 378 1 378 - DEFFERED TAX ASSET Accrued expenses – securities - - - - - - - - - - Accrued expenses – deposits and loans 2 2 - 276 - - - 278 278 - Negative valuation of financial assets 538 179 359 4 392 - - 934 183 751 Income received to be amortised over time from loans and current accounts 300 300 - (28) - - - 272 272 - Loan provisions charges 803 803 - 94 - - - 897 897 - Personnel related provisions 109 99 10 4 2 - - 115 103 12 Accruals 24 24 - 9 - - - 33 33 - Previous year losses - - - - - - - - - - Other 77 77 - 52 - - - 129 129 - Gross deferred tax assets 1 853 1 484 369 411 394 - - 2 658 1 895 763 Deferred tax charge X X X (479) 394 - - X X X Net deferred tax assets 1 365 996 369 X X X X 1 280 517 763 Net deferred tax liability - - - X X X X - - - Bank Pekao S.A. 39 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) In the opinion of the Bank the deferred tax asset in the amount of PLN 786 million reported as at 31 December 2023 is sustainable in total amount. The analysis was performed based on the past results of the company and assumed results in the future periods. The analysis assumed the five years’ time horizon. As at 31 December 2023 and 31 December 2022, there were no temporary differences related to investments in subsidiaries and associates, for which deferred tax liability was not created as a result of meeting the conditions of controlling the terms of temporary differences’ reversing and being probable that these differences will not reversein foreseeable future . As at 31 December 2023 and 31 December 2022, there were no temporary differences, unused tax losses and unused tax relieves which were not included in the deferred tax assets. 14. Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of the ordinary shares outstanding during the period. 2023 2022 Net profit 6 718 1 898 Weighted average number of ordinary shares in the period 262 470 034 262 470 034 Earnings per share (in PLN per share) 25.60 7.23 Diluted earnings per share Diluted earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of the ordinary shares outstanding during the given period adjusted for all potential dilution of ordinary shares. As at 31 December 2023 and 31 December 2022 there were no diluting instruments in the Bank. 2023 2022 Net profit 6 718 1 898 Weighted average number of ordinary shares in the period 262 470 034 262 470 034 Weighted average number of ordinary shares for the purpose of calculation of diluted earnings per share 262 470 034 262 470 034 Diluted earnings per share (in PLN per share) 25.60 7.23 15. Dividends As at the date of approval of these financial statements for publication, the Management Board of the Bank did not make a decision on the recommendation regarding the payment of dividend for 2023. The Bank will inform in a separate communication about the decision made in this regard. Bank Pekao S.A. 40 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 16. Cash and cash equivalents Significant accounting policies Cash and cash equivalents include cash in hand, amounts due from the National Bank of Poland, as well as amounts due from banks with a maturity of up to 3 months. Principles of classification and measurement are described in the Note 4.3. Financial data Cash and cash equivalents 31.12.2023 31.12.2022 Cash 3 990 4 317 Current account and deposits at Central Bank 8 459 9 126 Amounts due from banks with a maturity of up to 3 months 2 399 4 776 Gross carrying amount 14 848 18 219 Impairment allowances (12) (8) Net carrying amount 14 836 18 211 The currency structure for the Cash and due from Central Bank item is presented in the Note 43.4 in the section on currency risk. Bank is required to held on current account in the Central Bank the average monthly balance comply with the mandatory reserve declaration. As at 31 December 2023 the interest rate of funds held on the mandatory reserve account is at 5.75% (as at 31 December 2022 - 6.75%). Restricted availability cash and cash equivalents as at 31 December 2023 amounted to PLN 8 336 million (as at 31 December 2022 - PLN 7 389 million). 17. Loans and advances to banks Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data Loans and advances to banks by product type 31.12.2023 31.12.2022 Interbank placements 81 276 Loans and advances 351 371 Total gross amount 432 647 Impairment allowances (6) (21) Total net amount 426 626 Loans and advances to banks by contractual maturity 31.12.2023 31.12.2022 Loans and advances to banks, including: up to 1 month - - between 1 and 3 months - - between 3 months and 1 year 101 491 between 1 and 5 years 256 98 over 5 years 52 58 past due 23 - Total gross amount 432 647 Impairment allowances (6) (21) Total net amount 426 626 The currency structure for the Loans and advances to banks item is presented in the Note 43.4 in the section on currency risk. Bank Pekao S.A. 41 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 18. Derivative financial instruments (held for trading) Significant accounting policies The Bank acquires the derivative financial instruments: currency transactions (spot, forward, currency swap and currency options, CIRS), exchange rate transactions (FRA, IRS, CAP), derivative transactions based on security prices, indices of stocks and commodities. Derivative financial instruments are initially recorded at fair value as at the transaction date and subsequently re-measured at fair value at each balance sheet date. The fair value is established on the basis of market quotations for an instrument traded in an active market, as well as on the basis of valuation techniques, including models using discounted cash flows and options valuation models, depending on which valuation method is appropriate. Positive valuation of derivative financial instruments is presented in the statement of financial position in the line " Derivative financial instruments (held for trading) " on an asset side, whereas the negative valuation – " Derivative financial instruments (held for trading) " on a liabilities side. In case of contracts that are not financial instruments with a component of an instrument meeting the above conditions the built-in derivative instrument is classified in accordance with assets or liabilities of derivatives financial instruments with respect to the income statement in accordance with derivative financial instruments valuation principles. The method of recognition of the changes in the fair value of an instrument depends on whether a derivative instrument is classified as held for trading or is designated as a hedging item under hedge accounting. The changes in fair value of the derivative financial instruments held for trading are recognized in the income statement. Derivative financial instruments at the Bank In its operations the Bank uses different financial derivatives that are offered to the clients and are used for managing risks involved in the Bank’s business. The majority of derivatives at the Bank include over-the-counter contracts. Regulated stock exchange contracts (mainly futures) represent a small part of those derivatives. Derivative foreign exchange transactions include the obligation to buy or sell foreign and domestic currency assets. Forward foreign exchange transactions are based on the foreign exchange rates, specified on the transaction date for a predefined future date. These transactions are valued using the discounted cash flow model. Cash flows are discounted according to zero-coupon yield curves, relevant for a given market. Foreign exchange swaps are a combination of a swap of specific currencies as at spot date and of reverse a transaction as at forward date with foreign exchange rates specified in advance on transaction date. Transactions of such type are settled by an exchange of assets. These transactions are valued using the discounted cash flow model. Cash flows are discounted according to zero-coupon yield curves relevant for a given market. Foreign exchange options with delivery are defined as contracts, where one of the parties, i.e. the option buyer, purchases from the other party, referred to as the option writer, at a so-called premium price the right without the obligation to buy (call option) or to sell (put option), at a specified point of time in the future or during a specified time range a foreign currency amount specified in the contract at the exchange rate set during the conclusion of the option agreement. In case of options settled in net amounts, upon acquisition of the rights, the buyer receives an amount of money equal to the product of notional and difference between spot ad strike price. Barrier option with one barrier is a type of option where exercise of the option depends on the underlying crossing or reaching a given barrier level. A barrier may be reached starting from lower ("UP") or from higher ("DOWN") level of the underlying instrument. "IN" options start their lives worthless and only become active when a predetermined knock-in barrier price is breached. "OUT" options start their lives active and become null and void when a certain knock-out barrier price is breached. Foreign exchange options are priced using the Garman-Kohlhagen valuation model (and in case of barrier and Asian options using the so-called expanded Garman-Kohlhagen model). Parameters of the model based on market quotations of plain-vanilla at-the-money options and market spreads for out-of-the-money and in-the-money options (volatility smile) for standard maturities. Derivatives related to interest rates enable the Bank and its customers to transfer, modify or limit interest rate risk. In the case of Interest Rate Swaps (IRS), counterparties exchange between each other the flows of interest payments, accrued on the nominal amount identified in the contract. These transactions are valued using the discounted cash flow model. Floating (implied) cash flows are estimated on base of respective IRS rates. Floating and fixed cash flows are discounted by relevant zero-coupon yield curves. Forward Rate Agreements (FRA) involve both parties undertaking to pay interest on a predefined nominal amount for a specified period starting in the future and charged according to the interest rate determined on the day of the agreement The parties settle the transaction on value date using the reference rate as a discount rate in the processof discounting the difference between the FRA rate (forward rate as at transaction date) and the reference rate. These transactions are valued using the discounted cash flow model. Bank Pekao S.A. 42 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Cross currency IRS involves both parties swapping capital and interest flows in different currencies in a specified period. These transactions are valued using the discounted cash flow model. Valuation of Basis Swap transactions (cross currency IRS with floating coupon) takes into account market quotations of basis spread (Basis swap spread). In the case of forward transactions on securities, counterparties agree to buy or sell specified securities on a forward date for a payment fixed on the date of transaction. Such transactions are measured based upon the valuation of the security (mark- to-market or mark-to-model) and valuation of the related payment (method of discounting cash flows by money market rate). Interest rate options (cap/floor) are contracts where one of the parties, the option buyer, purchases from the other party, the option writer, at a so-called premium price, the right without the obligation to borrow (cap) or lend (floor) at specified points of time in the future (independently) amounts specified in the contract at the interest rate set during the conclusion of the option. Contracts are net-settled (without fund location) at agreed time. Transactions of this type are valued using the Normal model (Bachelier model). The model is parameterized based upon market quotations of options as at standard quoted maturities. Interest rate futures transactions refer to standardized forward contracts purchased on the stock market. Futures contracts are measured based upon quotations available directly from stock exchanges. Commodity swap contracts are obligations to net settlement equivalent to the execution of a commodity buy or sell transaction at the settlement price according to determination rules set at the trade inception. Commodity instruments are valued with the discounted cash flows method, which includes commodity prices term structure. Asian commodity options are contracts with the right to buy or sell a certain amount of commodity on a expiry date at the specified price, where settlement price is based on an average level established on the basis of a series of commodity price observations in the period preceding the maturity date of the option. Commodity options are valued with the Black-Scholes model that includes moment matching of commodity price distribution for the arithmetic average. Derivative financial instruments embedded in other instruments The Bank uses derivatives financial instruments embedded in complex financial instruments, i.e. such as including both a derivative and base agreement, which results in part of the cash flows of the combined instrument changing similarly to cash flows of an independent derivative. Derivatives embedded in other instruments cause part or all cash flows resulting from the base agreement to be modified as per a specific interest rate, price of a security, foreign exchange rate, price index or interest rate index. The Bank has deposits and certificates of deposits on offer which include embedded derivatives. As the nature of such instrument is not strictly associated with the nature of the deposit agreement, the embedded instrument is separated and classified into the portfolio held-for-trading. The valuation of such instrument is recognized in the income statement. Embedded instruments include simple options (plain vanilla) and exotic options for single stocks, commodities, indices and other market indices, including interest rate indices, foreign exchange rates and their related baskets. All embedded options are immediately closed back-to-back on the interbank market. Currency options embedded in deposits are valued as other currency options. Exotic options embedded in deposits as well as their close positions are valued using the Monte-Carlo simulation technique assuming Geometric Brownian Motion model of risk factors. Model parameters are determined first of all on the basis of quoted options and futures contracts and in their absence based on statistical measures of the underlying instrument dynamic. Risk involved in financial derivatives Market risk and credit risk are the basic types of risk, associated with derivatives. At the beginning, financial derivatives usually have a small market value or no market value at all. It is a consequence of the fact that derivatives require no initial net investments, or require a very small net investment compared to other types of contracts, which display a similar reaction to changing market conditions. Derivatives gain positive or negative value as a result of change in specific interest rates, prices of securities, prices of commodities, currency exchange rates, price index, credit standing or credit index or another market parameter. In case of such changes, the derivatives held become more or less advantageous than instruments with the same residual maturities, available at that moment on the market. Credit risk related to derivative contracts is a potential cost of concluding a new contract on the original terms and conditions if the other party to the original contract fails to meet its obligations. In order to assess the potential cost of replacement the Bank uses the same method as for credit risk assessment. In order to control its credit risk levels the Bank performs assessments of other contract parties using the same methods as for credit decisions. The following tables present nominal amounts of financial derivatives and fair values of such derivatives. Nominal amounts of certain financial instruments are used for comparison with balance sheet instruments but need not necessarily indicate what the future cash flow amounts will be or what the current fair value of such instruments is and therefore do not reflect the Bank’s credit or price risk level. Bank Pekao S.A. 43 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data Fair value of trading derivatives 31.12.2023 ASSETS LIABILITIES Interest rate transactions Interest Rate Swaps (IRS) 8 314 8 185 Forward Rate Agreements (FRA) 63 58 Options 48 50 Other - - Foreign currency and gold transactions Cross-Currency Interest Rate Swaps (CIRS) 138 201 Currency Forward Agreements 154 322 Currency Swaps (FX-Swap) 358 205 Options for currency and gold 6 25 Transactions based on equity securities and stock indexes Options 3 3 Other - - Transactions based on commodities and precious metals Options 6 6 Other 260 253 Total 9 350 9 308 31.12.2022 ASSETS LIABILITIES Interest rate transactions Interest Rate Swaps (IRS) 13 486 13 346 Forward Rate Agreements (FRA) 40 37 Options 99 110 Other 5 - Foreign currency and gold transactions Cross-Currency Interest Rate Swaps (CIRS) 192 790 Currency Forward Agreements 467 317 Currency Swaps (FX-Swap) 353 469 Options for currency and gold 50 39 Transactions based on equity securities and stock indexes Options 2 2 Other - - Transactions based on commodities and precious metals Options - - Other 440 429 Total 15 134 15 539 Derivative financial instruments are measured at fair value through profit or loss. Bank Pekao S.A. 44 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Nominal value of trading derivatives CONTRACTUAL MATURITY 31.12.2023 UP TO 1MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL Interest rate transactions Interest Rate Swaps (IRS) 3 779 13 222 56 747 182 935 33 583 290 266 Forward Rate Agreements (FRA) 13 235 24 595 62 008 2 179 - 102 017 options 8 395 684 2 586 2 375 6 048 other 198 - - - - 198 Foreign currency transactions Cross-Currency Interest Rate Swaps (CIRS) - currency bought 1 153 311 1 716 2 390 162 5 732 Cross-Currency Interest Rate Swaps (CIRS) - currency sold 1 136 292 1 673 2 494 168 5 763 Currency Forward Agreements - currency bought 3 627 2 255 3 635 1 422 - 10 939 Currency Forward Agreements - currency sold 3 642 2 294 3 746 1 437 - 11 119 Currency Swaps (FX-Swap) – currency bought 19 335 3 673 1 905 199 - 25 112 Currency Swaps (FX-Swap) – currency sold 19 275 3 627 1 849 197 - 24 948 options bought 242 261 749 82 - 1 334 options sold 248 278 814 88 - 1 428 Transactions based on equity securities and stock indexes options - 85 197 - - 282 other - - - - - - Transactions based on commodities and precious metals options 75 - - - - 75 other 1 016 1 464 1 457 116 - 4 053 Total 66 969 52 752 137 180 196 125 36 288 489 314 CONTRACTUAL MATURITY 31.12.2022 UP TO 1MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL Interest rate transactions Interest Rate Swaps (IRS) 920 8 028 42 220 184 544 44 977 280 689 Forward Rate Agreements (FRA) 3 917 7 348 22 413 400 - 34 078 options 11 31 4 107 2 379 2 906 9 434 other 473 - - - - 473 Foreign currency transactions Cross-Currency Interest Rate Swaps (CIRS) - currency bought 7 2 204 717 5 641 281 8 850 Cross-Currency Interest Rate Swaps (CIRS) - currency sold 8 2 241 783 5 950 349 9 331 Currency Forward Agreements - currency bought 8 275 6 921 6 540 1 876 - 23 612 Currency Forward Agreements - currency sold 8 201 6 875 6 463 1 962 - 23 501 Currency Swaps (FX-Swap) – currency bought 12 231 6 134 9 211 415 - 27 991 Currency Swaps (FX-Swap) – currency sold 12 242 6 192 9 201 397 - 28 032 options bought 1 051 734 870 184 - 2 839 options sold 1 047 735 883 201 - 2 866 Transactions based on equity securities and stock indexes options 17 36 442 278 - 773 other - - - - - - Transactions based on commodities and precious metals options - - - - - - other 1 366 969 2 277 381 - 4 993 Total 49 766 48 448 106 127 204 608 48 513 457 462 Bank Pekao S.A. 45 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 19. Hedge accounting Significant accounting policies Derivative hedging financial instruments are initially recorded at fair value as at the transaction date and subsequently re- measured at fair value at each balance sheet date. The fair value is established on the basis of market quotations for an instrument traded in an active market, as well as on the basis of valuation techniques, including models using discounted cash flows and options valuation models, depending on which valuation method is appropriate. Positive valuation of derivative hedging financial instruments is presented in the statement of financial position in the line " Hedging instruments " on an asset side, whereas the negative valuation – " Hedging instruments " on a liabilities side. The Bank designates some of its derivative instruments as hedging items in applying hedge accounting. The Bank decided to take advantage of the choice which gives IFRS 9 and continues to apply the hedge accounting requirements of IAS 39. This decision will apply to all hedging relationships, for which the Bank applies and will apply hedge accounting in the future. The Bank implemented fair value hedge accounting as well as cash flow hedge accounting. 19.1. Fair value hedge accounting Fair value hedge accounting significant accounting principles Changes in the measurement to fair value of financial instruments indicated as hedged positions are recognized - in the part ensuing from hedged risk - in the income statement. In the remaining part, changes in the carrying amount are recognized in accordance with the principles applicable for the given class of financial instruments. Changes in the fair market valuation of derivative financial instruments, indicated as hedging positions in fair value hedge accounting, are recognized in the profit or loss in the same caption, in which the gains/losses from change in the value of hedged positions are recognized i.e. in the item "Net income from fair value hedge accounting". Interest income on derivative instruments hedging interest positions hedged is presented as interest margin. The Bank ceases to apply hedge accounting, when the hedging instrument expires, is sold, dissolved or released (the replacement of one hedging instrument with another or extension of validity of given hedging instrument is not considered an expiration or release, providing such replacement or extension of validity is a part of a documented hedging strategy adopted by given unit), or does not meet the criteria of hedge accounting or the Bank ceases the hedging relation. An adjustment for the hedged risk on hedged interest position is amortised in the income statement at the point of ceasing to apply hedge accounting. Characteristics of fair value hedge accounting The Bank applies fair value hedge accounting for fixed coupon debt securities denominated in PLN and EUR, hedged with interest rate swap (IRS) transactions in the same currencies. The Bank hedges component of interest rate risk related to the fair value changes of the hedged item resulting exclusively from the volatility of market interest rates (WIBOR, EURIBOR). In the past, hedged risk component accounted for a significant portion of changes in fair value of the hedged item. The approach of the Bank to market risk managemant, including interest rate risk, and details regarding exposure of the Bank to interest rate risk are disclosed in the Note 43.4. The use of derivative instruments to hedge the exposure to changes in interest rates generates counterparty credit risk of derivative transactions. The Bank mitigates this risk by requiring the counterparties to post collateral deposits and by settling derivative transactions through Central Counterparty Clearing Houses (CCPs) whch apply a number of mechanisms allowing systemic reduction of the risk of default on obligations under concluded transactions. The Bank applies fair value hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting fair value changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated. Bank Pekao S.A. 46 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) According to the approach of the Bank, hedge ratio is determined as ratio of fair value of the hedged item to fair value of the hedging instrument. A hedging relationship is considered effective if all of the following criteria are met: • high effectiveness of the hedge can be expected on the basis of comparison of critical terms of the hedged item and the hedging instrument, • in each reporting period, hedge ratio is within 80% - 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal than the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument, • in each reporting period, simulation of hedge ratio in assumed evaluation of market reference rates scenarios is within 80% - 125% range. As regards fair value hedge relationships, the main sources of ineffectiveness are: • impact of the counterparty credit risk and own credit risk of the Bank on the fair value of the hedging transactions (IRS), which is not reflected in the fair value of the hedged item, • differences in maturities of the interest rate swaps and debt securities, • differences in coupon amounts generated by the hedged item and hedging instruments. Financial data for fair value hedge accounting The tables below present interest rate swaps which are used by the Bank as instruments hedging interest rate risk in fair value hedge accounting as of 31 December 2023 and 31 December 2022. Nominal values and interest rates of hedging derivatives - fair value hedge CONTRACTUAL MATURITY 31.12.2023 HEDGING RELATIONSHIP CURRENCY UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS TO 1 YEAR BETWEEN 1 TO 5 YEARS OVER 5 YEARS TOTAL Nominal value - - - 200 - 200 PLN Average fixed interest rate (%) - - - 5.8 - 5.8 Nominal value 204 - - 500 141 845 FVH IRS bonds EUR Average fixed interest rate (%) 4.8 - - 4.0 4.6 4.3 Total nominal value 204 - - 700 141 1 045 CONTRACTUAL MATURITY 31.12.2022 HEDGING RELATIONSHIP CURRENCY UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS TO 1 YEAR BETWEEN 1 TO 5 YEARS OVER 5 YEARS TOTAL Nominal value - - - 200 - 200 PLN Average fixed interest rate (%) - - - 7.2 - 7.2 Nominal value 94 - - 760 152 1 006 FVH IRS bonds EUR Average fixed interest rate (%) 2.4 - - 1 1.1 1.1 Total nominal value 94 - - 960 152 1 206 Bank Pekao S.A. 47 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Impact of fair value hedge (interest rate risk hedging) on balance sheet and financial result FVH IRS BONDS – IRS HEDGING DEBT SECURITIES MEASURED AT 31.12.2023 AMORTISED COST FAIR VALUE THROUGHT OTHER COMPREHENSIVE INCOME TOTAL Hedging instruments Nominal value 200 845 1 045 Carrying amount – assets 9 45 54 Carrying amount – liabilities - 1 1 Balance sheet item in which hedging instrument is reported Hedging instruments Hedging instruments Hedging instruments Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency (13) (33) (46) Amount of hedge ineffectiveness recognized in the income statement "Result on fair value hedge accounting" - - - Hedged item Carrying amount – assets 191 823 1 014 Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets (9) (36) (45) Balance sheet item in which hedged item is reported Hedging instruments Hedging instruments Hedging instruments Change in the value of hedged item used for estimating hedge inefficiency in the reporting period 13 33 46 Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued - - - FVH IRS BONDS – IRS HEDGING DEBT SECURITIES MEASURED AT 31.12.2022 AMORTISED COST FAIR VALUE THROUGHT OTHER COMPREHENSIVE INCOME TOTAL Hedging instruments Nominal value 200 1 006 1 206 Carrying amount – assets 22 67 89 Carrying amount – liabilities - 5 5 Balance sheet item in which hedging instrument is reported Hedging instruments Hedging instruments Hedging instruments Amount of changes in fair value of the hedging instrument in the reporting period used for estimating hedge inefficiency 15 168 183 Amount of hedge ineffectiveness recognized in the income statement "Result on fair value hedge accounting" - 3 3 Hedged item Carrying amount – assets 178 966 1 144 Accumulated amount of the adjustment to the fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets (22) (58) (80) Balance sheet item in which hedged item is reported Hedging instruments Hedging instruments Hedging instruments Change in the value of hedged item used for estimating hedge inefficiency in the reporting period (15) (165) (180) Accumulated amount of the adjustment to the fair value of the hedged item remaining in the balance sheet for those hedged items for which adjustments of the balance sheet item for adjustment to fair value has been discontinued - - - Bank Pekao S.A. 48 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 19.2. Cash flow hedge accounting Cash flow hedge accounting significant accounting principles Changes in the fair value of the derivative financial instruments indicated as cash flow hedging instruments are recognized: • directly in the caption "Revaluation reserves" in the part constituting the effective hedge, • in the income statement in the line "Result on financial assets and liabilities held for trading and foreign exchange result" in the part representing ineffective hedge. The amounts accumulated in the "Revaluation reserves" are transferred to the income statement in the period, in which the hedge is reflected in the income statement and are presented in the same lines as individual components of the hedged position measurement, i.e. the interest income from hedging derivatives in cash flow hedge accounting is recognized in the interest result, whereas gains/losses from foreign exchange revaluation are presented in the foreign exchange gains (losses). The Bank ceases to apply hedge accounting when the hedging instrument expires or is sold, or if the Bank revokes the designation, or when hedge no longer meets the criteria for hedge accounting. In such cases, the accumulated gains or losses related to such hedging item, initially recognized in “Revaluation reserves”, if the hedge was effective, are still presented in equity until the planned transaction was closed and recognized in the income statement. If the planned transaction is no longer probable, the cumulative gains or losses recognized in "Revaluation reserves" are transferred to the income statement for the given period. Characteristics of cash flow hedge accounting The Bank applies: • interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR, EURIOR), generated by portfolios of variable-rate loans denominated in PLN and EUR, • currency swaps (FX-Swap) to hedge the exposure to the currency risk, generated by both, portfolios of loans denominated in EUR and portfolios of current and term deposits denominated in USD, • interest rate swaps (IRS) to hedge the exposure to interest rate risk related to the volatility of market reference rates (WIBOR, EURIBOR), generated by portfolio of deposits denominated in PLN and EUR, which economically constitute a long-term, variable-rate liability. In 2022, Bank extended the existing relationship (CFH IRS loans) with the current and future cash flows resulting from floating interest rate loans and bonds in EUR held by Bank, as well as intrest rate swap transactions hedging the interest rate risk in EUR. In 2022, the Bank stopped applying hedge accounting principles to one hedging relationship as a result of the expiry of hedging instruments: currency-interest swaps (basis swap) hedging a portfolios of loans and lease receivables with a floating interest rate in EUR and a portfolio of deposits in PLN economically constituting a long-term liability with a floating interest rate. Discontinuation of hedge accounting under the above-mentioned relationship had no impact on the income statement. Approach of the Bank to hedging interest rate risk through cash flow hedge accounting is the same as the approach applied in the fair value hedge accounting as described above, i.e. only the component of interest rate risk related exclusively to volatility of market reference rates (in the case of cash flows hedge: WIBOR, EURIBOR) is hedged. Approach of the Bank to market risk management, including interest rate risk and currency risk, and details regarding the Bank’s interest rate risk and currency risk exposure are disclosed in the Note 43.4. As in the case of the fair value hedge, using derivative instruments to hedge the exposure to interest rate risk and currency risk generates counterparty credit risk of the derivative transactions, which is not compensated by the hedged item. The Bank manages this risk in a way similar to fair value hedge. The Bank applies cash flow hedge accounting to a hedging relationship if it is justified to expect that the hedge will be highly effective in achieving offsetting cash flow changes attributable to the hedged risk in the future and if assessment of hedge effectiveness indicates high effectiveness in all financial reporting periods for which the hedge was designated. The assessment is conducted using hypothetical derivative method. Bank Pekao S.A. 49 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) According to the approach of the Bank, a hedging relationship is considered effective if all of the following criteria are met: • correlation coefficient between market reference rate of hedged items and market reference rate of hedging instrument is high, • forecasted interest flows generated by hedged items are not lower than forecasted interest flows generated by hedging instruments, • in each reporting period, ratio of the fair value of the hedged item to the fair value of the hedging instrument is within 80% - 125% range or relation of inefficiency amount to nominal value of the hedged item is less or equal to the threshold specified in documentation of the hedging relationship, where inefficiency amount is calculated as the sum of cumulative fair value changes of the hedged item and the hedging instrument, • in each reporting period, simulation of hedge ratio in assumed evolution of market rates scenarios is within 80% - 125% range. In the case of hedging interest rate and currency risk of portfolios of loans and deposits, the manner of managing these portfolios was adopted allowing for regular inclusion of new transactions in the hedging relationship and exclusion of transactions from the hedging relationship as a result of repayment or classification to non-performing category. As a result, the exposure of these portfolios to interest rate and currency risk is constantly changing. Because of frequent changes to term structure of the portfolio, the Bank dynamically assigns the hedged items and allows for matching of hedging instruments to these changes. As regards cash flow hedge relationships, the main sources of ineffectiveness are: • impact of counterparty and the Bank’s own credit risk on the fair value of the hedging instruments, i.e. interest rate swap (IRS), cross-currency interest rate swap (basis swap), currency swap (FX swap) which is not reflected in the fair value of the hedged item, • differences in repricing frequency of the hedging instruments and and hedged loans and deposits. Financial data for cash flow hedge accounting Nominal values and rates of hedging derivatives – cash flow hedge CONTRACTUAL MATURITY 31.12.2023 HEDGING RELATIONSHIP CURRENCY UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS TO 1 YEAR BETWEEN 1 TO 5 YEARS OVER 5 YEARS TOTAL Nominal value 70 714 5 665 16 658 4 928 28 035 PLN Average fixed interest rate (%) 0.4 1.1 2.1 2.9 4.3 2.9 Nominal value - - - 2 174 - 2 174 CHF IRS loans EUR Average fixed interest rate (%) - - - 3.1 - 3.1 Nominal value - - 20 1 767 140 1 927 CFH IRS deposits PLN Average fixed interest rate (%) - - 5.6 6.6 6.4 6.5 Nominal value 223 2 819 2 644 - - 5 686 EUR/PLN Average EUR/PLN exchange rate 4.6 4.7 4.6 - - 4.7 Nominal value - - - - - - USD/PLN Average USD/PLN exchange rate - - - - - - Nominal value 1 292 1 293 1 108 - - 3 693 CFH FX Swap deposits/loans EUR/USD Average EUR/USD exchange rate 1.1 1.1 1.1 - - 1.1 Total nominal value 1 585 4 826 9 437 20 599 5 068 41 515 Bank Pekao S.A. 50 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) CONTRACTUAL MATURITY 31.12.2022 HEDGING RELATIONSHIP CURRENCY UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS TO 1 YEAR BETWEEN 1 TO 5 YEARS OVER 5 YEARS TOTAL Nominal value - 200 3 372 17 010 7 959 28 541 CHF IRS loans PLN Average fixed interest rate (%) - 1.1 1.3 1.7 4.7 2.5 Nominal value - 5 25 116 198 344 CFH IRS deposits PLN Average fixed interest rate (%) - 7.4 6.2 7.3 6 6.5 CFH CIRS deposits/ loans EUR/PLN Nominal value 268 606 1 549 - - 2 423 Nominal value 937 490 954 - - 2 381 EUR/PLN Average EUR/PLN exchange rate 4.8 5.1 4.8 - - 4.9 Nominal value - - - - - - USD/PLN Average USD/PLN exchange rate - - - - - - Nominal value 469 1 440 472 - - 2 381 CFH FX Swap deposits/loans EUR/USD Average EUR/USD exchange rate 1.1 1.1 1.1 - - 1.1 Total nominal value 1 674 2 741 6 372 17 126 8 157 36 070 Impact of cash of hedge on balance sheet and financial result INTEREST RATE RISK INTEREST RATE RISK / CURRENCY RISK HEDGE IN RELATIONSHIP as at 31.12.2023 CFH IRS LOANS CFH IRS DEPOSITS CFH CIRS CFH FX SWAP Hedging instruments Nominal value 30 209 1 927 - 9 379 Carrying amount – assets 547 14 - 190 Carrying amount – liabilities 1 357 40 - 31 Balance sheet item in which hedging instrument is reported Hedging instruments Hedging instruments Hedging instruments Hedging instruments Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness 2 024 (46) 4 12 Gains or losses resulting from hedging, recognized in other comprehensive income (net) 1 637 (37) 5 8 Amount of hedge ineffectiveness recognized in the income statement in item "Result on financial assets and liabilities measured at fair value through profit or loss" 4 - - - Hedged item Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period (2 021) 46 (4) (12) Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period (net) (598) (16) - 6 Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied (net) - - (14) - Bank Pekao S.A. 51 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Impact of cash of hedge on balance sheet and financial result INTEREST RATE RISK INTEREST RATE RISK / CURRENCY RISK HEDGE IN RELATIONSHIP as at 31.12.2022 CFH IRS LOANS CFH IRS DEPOSITS CFH CIRS CFH FX SWAP Hedging instruments Nominal value 28 541 344 2 423 4 762 Carrying amount – assets 104 39 - 48 Carrying amount – liabilities 3 089 13 68 1 Balance sheet item in which hedging instrument is reported Hedging instruments Hedging instruments Hedging instruments Hedging instruments Change in the fair value of the hedging instrument used for estimating hedge ineffectiveness (1 250) 20 (4) 9 Gains or losses resulting from hedging, recognized in other comprehensive income (net) (1 013) 16 (25) 8 Amount of hedge ineffectiveness recognized in the income statement in item "Result on financial assets and liabilities measured at fair value through profit or loss" 1 - - - Hedged item Amount of change in the fair value of a hypothetical derivative representing the hedged item used for estimating the hedge ineffectiveness in the reporting period 1 234 (20) 4 (9) Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting will be continued after the end of the reporting period (net) (2 235) 21 (5) (2) Revaluation reserve due to cash flow hedge accounting for relationships for which hedge accounting is no longer applied (net) - - (18) - Changes in the revaluation reserve from the valuation of hedging derivatives in cash flow hedge accounting 2023 2022 Opening balance (2 239) (1 256) INTEREST RATE RISK Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period (net) 1 600 (997) Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item (net) - - INTEREST RATE RISK/CURRENCY RISK Gains or losses resulting from hedging, recognized in other comprehensive income during the reporting period (net) 13 (17) Part of the loss transferred to the income statement due to the lack of expectation of materialization of the hedged item (net) 4 31 Closing balance (622) (2 239) Bank Pekao S.A. 52 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 20. Loans and advances to customers Significant accounting policies Loans and advances to customers include amounts due from loans and advances granted, finance lease and factoring receivables. Loans and advances to customers are classified in the individual measurement categories in accordance with the principles for selecting the business model and evaluating the characteristics of contractual cash flows referred to in the Note 4.3. Financial data Loans and advances to customers by product type 31.12.2023 AMORTISED COST FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Mortgage loans 75 091 51 7 75 149 Current accounts 13 641 - - 13 641 Operating loans 13 433 - 8 13 441 Investment loans 26 495 82 8 26 585 Cash loans 13 505 - - 13 505 Payment cards receivables 1 189 - - 1 189 Factoring 2 130 - - 2 130 Other loans and advances 3 208 - 226 3 434 Reverse repo transactions 1 703 - - 1 703 Gross carrying amount 150 395 133 249 150 777 Impairment allowances () () (9 070) - - (9 070) Carrying amount 141 325 133 249 141 707 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 1 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 379 million. 31.12.2022 AMORTISED COST FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Mortgage loans 72 086 50 9 72 145 Current accounts 15 075 - - 15 075 Operating loans 14 639 - 12 14 651 Investment loans 26 771 253 11 27 035 Cash loans 12 767 - - 12 767 Payment cards receivables 1 091 - - 1 091 Factoring 2 527 - - 2 527 Other loans and advances 5 185 - 152 5 337 Reverse repo transactions 1 338 - - 1 338 Gross carrying amount 151 479 303 184 151 966 Impairment allowances (*) () (9 540) - - (9 540) Carrying amount 141 939 303 184 142 426 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 4 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 575 million. Bank Pekao S.A. 53 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Loans and advances to customers by customer type 31.12.2023 AMORTISED COST GROSS CARRYING AMOUNT IMPAIRMENT ALLOWANCES () CARRYING AMOUNT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Corporate 71 289 (5 362) 65 927 133 13 66 073 Individuals 78 103 (3 700) 74 403 - 227 74 630 Budget entities 1 003 (8) 995 - 9 1 004 Loans and advances to customers 150 395 (9 070) 141 325 133 249 141 707 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 1 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 379 million. 31.12.2022 AMORTISED COST GROSS CARRYING AMOUNT IMPAIRMENT ALLOWANCES () CARRYING AMOUNT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Corporate 75 210 (5 656) 69 554 303 18 69 875 Individuals 74 835 (3 763) 71 072 - 152 71 224 Budget entities 1 434 (121) 1 313 - 14 1 327 Loans and advances to customers 151 479 (9 540) 141 939 303 184 142 426 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income in the amount of PLN 4 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 575 million. Loans and advances to customers by contractual maturity 31.12.2023 AMORTISED COST FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Loans and advances to customers, including: up to 1 month 18 904 - 2 18 906 between 1 and 3 months 5 459 - 5 5 464 between 3 months and 1 year 14 519 51 16 14 586 between 1 and 5 years 46 653 82 192 46 927 over 5 years 59 829 - 31 59 860 past due 5 031 - 3 5 034 Gross carrying amount 150 395 133 249 150 777 Impairment allowances () () (9 070) - - (9 070) Carrying amount 141 325 133 249 141 707 (*) The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 1 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 379 million. Bank Pekao S.A. 54 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Loans and advances to customers by contractual maturity 31.12.2022 AMORTISED COST FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME FAIR VALUE THROUGH PROFIT OR LOSS TOTAL Loans and advances to customers, including: up to 1 month 21 974 1 2 21 977 between 1 and 3 months 4 688 3 5 4 696 between 3 months and 1 year 14 771 62 19 14 852 between 1 and 5 years 45 648 237 129 46 014 over 5 years 59 120 - 25 59 145 past due 5 278 - 4 5 282 Gross carrying amount 151 479 303 184 151 966 Impairment allowances () () (9 540) - - (9 540) Carrying amount 141 939 303 184 142 426 () The impairment allowance for loans and advances to customers measured at fair value through through other comprehensive income in the amount of PLN 4 million is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 575 million. The currency structure for the Loans and advances to customers item is presented in the Note 43.4 in the section on currency risk. 21. Securities Significant accounting policies Securities are classified in the individual measurement categories in accordance with the principles for selecting the business model and evaluating the characteristics of contractual cash flows referred to in the Note 4.3. Financial data 31.12.2023 31.12.2022 Debt securities held for trading 2 667 1 757 Debt securities measured at amortised cost 92 593 62 459 Debt securities measured at fair value through other comprehensive income 21 536 21 386 Equity instruments held for trading 4 2 Equity instruments designated for measurement at fair value through other comprehensive income 389 360 Equity instruments mandatorily measured at fair value through profit or loss 210 187 Total 117 399 86 151 Debt securities held for trading 31.12.2023 31.12.2022 Debt securities issued by central governments 1 082 674 T - bills - - T- bonds 1 082 674 Debt securities issued by banks 375 31 Debt securities issued by business entities 1 208 1 052 Debt securities issued by local governments 2 - Total 2 667 1 757 Bank Pekao S.A. 55 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Debt securities measured at amortised cost 31.12.2023 31.12.2022 Debt securities issued by central governments 42 645 27 797 T-bills 8 715 3 034 T-bonds 33 930 24 763 Debt securities issued by central banks 18 502 12 246 Debt securities issued by banks 15 873 9 819 Debt securities issued by business entities 11 144 8 880 Debt securities issued by local governments 4 429 3 717 Total 92 593 62 459 including impairment of assets (156) (154) Debt securities measured at fair value through other comprehensive income 31.12.2023 31.12.2022 Debt securities issued by central governments 6 980 7 671 T-bills - - T-bonds 6 980 7 422 Other - 249 Debt securities issued by central banks 999 999 Debt securities issued by banks 3 327 4 338 Debt securities issued by business entities 8 613 6 788 Debt securities issued by local governments 1 617 1 590 Total 21 536 21 386 including impairment of assets () (66) (68) () The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the "Revaluation reserve" item and does not reduce the carrying amount. Equity securities held for trading 31.12.2023 31.12.2022 Shares 4 2 Total 4 2 Equity instruments designated for measurement at fair value through other comprehensive income The portfolio of equity instruments designated for measurement at fair value through other comprehensive income includes the following investments. FAIR VALUE AS AT 31.12.2023 DIVIDENDS RECOGNIZED IN 2023 Entity X from construction sector 9 - Entity Y from construction sector 10 - Entity Z from construction sector 12 - Entity providing credit information 321 26 Infrastructure entity of Polish banking sector 29 2 Intermediary in transactions among financial entities 8 - Total 389 28 Bank Pekao S.A. 56 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) FAIR VALUE AS AT 31.12.2022 DIVIDENDS RECOGNIZED IN 2022 Entity X from construction sector 49 - Entity Y from construction sector 8 - Entity Z from construction sector 10 - Entity providing credit information 270 24 Infrastructure entity of Polish banking sector 15 2 Intermediary in transactions among financial entities 8 - Total 360 26 Equity instruments mandatorily measured at fair value through profit or loss 31.12.2023 31.12.2022 Shares 210 187 Total 210 187 Debt securities according to contractual maturity 31.12.2023 31.12.2022 Debt securities, including: up to 1 month 24 470 16 461 between 1 and 3 months 11 628 6 705 between 3 months and 1 year 16 757 7 517 between 1 and 5 years 44 725 42 167 over 5 years 19 216 12 752 Total 116 796 85 602 The currency structure for the Securities item is presented in the Note 43.4 in the section on currency risk. 22. Assets pledged as security for liabilities Significant accounting policies In the financial statement, the Bank presents separately assets securing liabilities, where the recipient has the right to sell these assets or exchange them for another security. Classification of assets to individual measurement categories is made in accordance with the principles of determining the business model and assessing the characteristics of the contractual cash flows, referred to in the Note 4.3. Financial data TYPE OF TRANSACTION AS AT 31.12.2023 SECURITY CARRYING VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES NOMINAL VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES VALUE OF LIABILITIES SUBJECT TO SECURITY Repo transactions Bonds held for trading (measured at fair value through profit or loss) - - - Repo transactions Bonds measured at fair value through other comprehensive income 1 648 1 657 1 649 Total 1 648 1 657 1 649 TYPE OF TRANSACTION AS AT 31.12.2022 SECURITY CARRYING VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES NOMINAL VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES VALUE OF LIABILITIES SUBJECT TO SECURITY Repo transactions Bonds held for trading (measured at fair value through profit or loss) 51 56 51 Repo transactions Bonds measured at fair value through other comprehensive income 879 914 879 Total 930 970 930 The collateral is established in line with the applicable money market standards for this type of transaction. Bank Pekao S.A. 57 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Apart from assets pledged as security for liabilities presented separately in the statement of financial position, the Bank also identifies securities for liabilities which do not meet the separate presentation criterion in accordance with IFRS 9. TYPE OF TRANSACTION AS AT 31.12.2023 SECURITY CARRYING VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES NOMINAL VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES VALUE OF LIABILITIES SUBJECT TO SECURITY Coverage of Fund for protection of guaranteed assets to the benefit of the Bank Guarantee Fund Bonds 725 710 - Coverage of payment commitments to the guarantee fund for the Bank Guarantee Fund Bonds 308 300 173 Coverage of payment commitments to the resolution fund for the Bank Guarantee Fund Bonds 621 650 369 Lombard and technical loan Bonds 8 425 8 462 - Other loans Bonds 61 62 53 Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW) Cash deposits 53 53 - Derivatives Bonds 24 24 - Uncommitted Collateralized Intraday Technical Overdraft Facility Agreement Bonds 27 30 - TYPE OF TRANSACTION AS AT 31.12.2022 SECURITY CARRYING VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES NOMINAL VALUE OF ASSETS PLEDGED AS SECURITY FOR LIABILITIES VALUE OF LIABILITIES SUBJECT TO SECURITY Coverage of Fund for protection of guaranteed assets to the benefit of the Bank Guarantee Fund Bonds 741 710 - Coverage of payment commitments to the guarantee fund for the Bank Guarantee Fund Bonds 310 300 173 Coverage of payment commitments to the resolution fund for the Bank Guarantee Fund Bonds 613 650 369 Lombard and technical loan Bonds 6 483 6 648 - Other loans Bonds 276 284 207 Coverage of the Guarantee Fund for the Settlement of Stock Exchange Transactions to Central Securities Depository (KDPW) Cash deposits 36 36 - Derivatives Bonds 37 36 15 Uncommitted Collateralized Intraday Technical Overdraft Facility Agreement Bonds 28 33 - The estabilishment of securities is a consequence of: • in the case of items relating to Bank Guarantee Fund – binding provisions of the Law on Banking Guaranty Fund BFG, • in the case of item relating to "Lombard and technical loan" – policy and standards, applied by the National Bank of Poland NBP, • in case of items relating to "Other loans" and "Derivatives" – terms and conditions of the agreement, entered between the Bank and its clients, • in case of item relating to Central Securities Depository KDPW – with the status of the clearing member for brokerage transactions. Bank Pekao S.A. 58 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 23. Assets held for sale Significant accounting policies Non-current assets held for sale and discontinued operations Non-current assets held for sale include assets, the carrying amount of which is to be recovered by way of resale and not from their continued use. The only assets classified as held for sale are those available for immediate sale in their present condition, and the sale of which is highly probable, i.e. when the decision has been made to sell a given asset, an active program to identify a buyer has been launched and the divestment plan is completed. Moreover, such assets are offered for sale at a price which approximates its present fair value, and it is expected that the sale will be recognized as completed within one year from the date of such asset is reclassified into this category. Non-current assets held for sale are recognized at the carrying amount or at fair value reduced by the cost of such assets, whichever is lower. Assets classified in this category are not subject to depreciation. A discontinued operation is a component of the Bank’s business which constitutes a separate line of business or a geographical area of operations, which was sold, made available for sale or to be disposed, or is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as held for sale, the comparative figures in the income statement are represented as if the operation had been discontinued from the beginning of the comparative period. As at 31 December 2023 and 31 December 2022 non-current assets classified as held for sale are identified non-current assets meeting requirements of IFRS 5 " Non-current Assets Held for Sale and Discontinued Operations " : • real estate, • other property, plant and equipment. Financial data 31.12.2023 31.12.2022 ASSETS HELD FOR SALE Property, plant and equipment 32 12 Total assets 32 12 The changes in the balance of assets held for sale 2023 2022 ASSETS HELD FOR SALE Opening balance 12 13 Increases including: 26 28 transfer from property, plant and equipment 26 27 other - 1 Decreases including: (6) (29) disposal (6) (29) Closing balance 32 12 The effect of disposal of assets held for sale 2023 2022 Sales revenues 20 47 Net carrying amount of disposed assets (including sale costs) (6) (29) Profit/loss on sale before income tax 14 18 Bank Pekao S.A. 59 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 24. Investments in subsidiaries Significant accounting policies Investments in subsidiaries is carried at purchase price taking into account impairment allowances. In the event of sale of investments in subsidiaries, which results in the loss of control, the Bank measures the fair value of the remaining investment and adopts this value as a new cost for the purposes of subsequent valuation. The excess of the fair value of the investment over the carrying amount is recognized by the Bank under “Gain (losses) on subsidiaries”. At each balance sheet date, the Bank assesses whether there are any indicators of impairment of investments made in subsidiaries. If there is such evidence, the Bank estimates the value in use of the investment or the fair value less costs to sell an asset, whichever is higher, and if the carrying amount of an asset exceeds its recoverable amount, the Bank recognizes an impairment allowance in the income statement. Financial data Condensed information about subsidiaries as at 31 December 2023 (*) NAME OF ENTITY LOCATION ACTIVITIES ASSETS LIABILITIES REVENUES NET PROFIT /LOSS % OF SHARES CARRYING AMOUNT OF SHARES Pekao Investment Banking S.A. Warsaw Brokerage services 260 16 40 14 100 274 Pekao Faktoring Sp. z o.o. Lublin Factoring 7 440 7 376 496 13 100 50 Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) Warsaw Business consulting 56 - 3 2 100 51 Pekao Financial Services Sp. z o.o. Warsaw Transferable agent 57 20 76 7 66.5 4 Pekao Leasing Sp. z o.o. Warsaw Lease services 13 076 12 517 891 96 100 279 Centrum Kart S.A. Warsaw Additional financial services 131 75 1 3 100 18 Pekao Bank Hipoteczny S.A. Warsaw Banking services 3 565 3 282 272 (109) 100 614 Pekao Property S.A. (in liquidation) Warsaw Real estate development services 26 - 1 1 100 25 Pekao Direct Sp. z o.o. (ex. Centrum Bankowości Bezpośredniej Sp. z o.o.) Cracow Call-center services 53 36 58 3 100 1 Pekao Investment Management S.A. () Warsaw Holding 281 46 254 95 100 606 Total 1 922 () Data available at the date of financial statements. () Consolidated data together a company of Pekao TFI S.A. Condensed information about subsidiaries as at 31 December 2022 () NAME OF ENTITY LOCATION ACTIVITIES ASSETS LIABILITIES REVENUES NET PROFIT /LOSS % OF SHARES CARRYING AMOUNT OF SHARES Pekao Investment Banking S.A. Warsaw Brokerage services 245 6 32 10 100 274 Pekao Faktoring Sp. z o.o. Lublin Factoring 5 426 5 332 344 43 100 50 Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) Warsaw Business consulting 53 - 1 1 100 51 Pekao Financial Services Sp. z o.o. Warsaw Transferable agent 55 19 69 6 66.5 5 Pekao Leasing Sp. z o.o. Warsaw Lease services 11 282 10 719 612 100 100 279 Centrum Kart S.A. Warsaw Additional financial services 127 73 0 9 100 18 Pekao Bank Hipoteczny S.A. Warsaw Banking services 3 343 3 140 134 (164) 100 434 Pekao Property S.A. (in liquidation) Warsaw Real estate development services 26 - - - 100 25 Pekao Direct Sp. z o.o. (ex. Centrum Bankowości Bezpośredniej Sp. z o.o.) Cracow Call-center services 38 21 40 2 100 1 Pekao Investment Management S.A. () Warsaw Holding 248 30 219 62 100 606 Total 1 742 (*) Data available at the date of financial statements. () Consolidated data together a company of Pekao TFI S.A. Bank Pekao S.A. 60 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in investment into subsidiaries 2023 2022 Opening balance 1 742 1 577 Increases, including: 180 165 purchase of shares in Pekao Bank Hipoteczny S.A. 180 165 Decreases, including - - changes of impairment allowances - - Closing balance 1 922 1 742 The structure of investments in subsidiaries 31.12.2023 31.12.2022 Investment in subsidiaries, including: banks 614 434 other financial institutions 1 232 1 232 non-financial institutions 76 76 Total 1 922 1 742 25. Investments in associates Significant accounting policies Investments in associates is carried at purchase price taking into account impairment allowances. At each balance sheet date, the Bank assesses whether there are any indicators of impairment of investments made in associates. If there is such evidence, the Bank estimates the value in use of the investment or the fair value less costs to sell an asset, whichever is higher, and if the carrying amount of an asset exceeds its recoverable amount, the Bank recognizes an impairment allowance in the income statement. Financial data Information about associates as at 31 December 2023 NAME OF ENTITY LOCATION ACTIVITIES ASSETS LIABILITIES REVENUES NET PROFIT/LOSS % OF SHARES CARRYING AMOUNT OF SHARES Krajowy Integrator Płatności S.A. Poland A company providing services as a domestic payment institution, operator of the Tpay.com system 137 89 75 16 38.33 42 Total 42 Information about associates as at 31 December 2022 NAME OF ENTITY LOCATION ACTIVITIES ASSETS LIABILITIES REVENUES NET PROFIT/LOSS % OF SHARES CARRYING AMOUNT OF SHARES Krajowy Integrator Płatności S.A. Poland A company providing services as a domestic payment institution, operator of the Tpay.com system 115 81 64 11 38.33 42 Total 42 Bank Pekao S.A. 61 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in investment into associates 2023 2022 Opening balance 42 42 Increases, including: - - purchase of shares in Krajowy Integrator Płatności S.A. - - Decreases - - Closing balance 42 42 The structure of investments in associates 31.12.2023 31.12.2022 Investment in subsidiaries, including: banks - - other financial institutions 42 42 non-financial institutions - - Total 42 42 As at 31 December 2023 and 31 December 2022, the Bank did not have the investment in entities under common control. 26. Intangible assets Significant accounting policies Goodwill Goodwill is defined as a surplus of the purchasing price over the fair value of acquired assets, assumed liabilities and contingent liabilities of the acquired subsidiary, associate or a unit under joint control. Goodwill at initial recognition is carried at purchase price reduced by any accumulated impairment losses. Impairment is determined by estimating the recoverable value of the cash generating unit, to which given goodwill pertains. If the recoverable value of the cash generating unit is lower than the carrying amount an impairment charge is made. Impairment identified in the course of such tests is not reversed. Goodwill on acquisition of subsidiaries is presented in intangible assets and goodwill on acquisition of associates is presented under the caption "Investments in associates". Other intangible assets Intangible assets are assets controlled by the Bank which do not have a physical form which are identifiable and represent future economic benefits for the Bank directly attributable to such assets. These assets include: • computer software licenses, • copyrights, • costs of completed development works. Intangible assets are initially carried at purchase price. Subsequently intangible assets are stated at cost less accumulated amortization and accumulated impairment losses. Intangible assets with a definite useful life are amortised over their estimated useful life. Intangible assets with indefinite useful life are not amortised. All intangible assets are reviewed on a periodical basis to verify if any significant impairment triggers occurred, which would require performing a test for impairment and a potential impairment charge. As far as intangible assets with indefinite useful life and those still not put into service are concerned, impairment test is performed on a yearly basis and additionally when impairment triggers are identified. Bank Pekao S.A. 62 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data 31.12.2023 31.12.2022 Intangible assets, including: 1 492 1 354 research and development expenditures 190 2 licenses and patents 686 790 other 2 3 assets under construction 614 559 Goodwill 54 54 Total 1 546 1 408 The item "Goodwill" contains: • goodwill that was transferred to Bank Pekao S.A. on integration with Bank BPH S.A. It represents the goodwill recognized upon acquisition of Pierwszy Komercyjny Bank S.A. in Lublin ("PKBL") by Bank BPH S.A. and relates to those branches of the PKBL which were transferred to Bank Pekao S.A. as a result of integration with Bank BPH S.A. It is determined the smallest identifiable cash-generating units ("CGU") relating mainly to the Bank’s retail segment, to which the goodwill has been allocated in the amount of PLN 52 million, • goodwill recognized upon acquisition of Spółdzielcza Kasa Oszczędnościowo – Kredytowa im. Mikołaja Kopernika by Bank Pekao S.A. It is determined the CGU relating to the Bank’s retail segment, to which the goodwill has been allocated in the amount of PLN 1 million, • goodwill resulting from the acquisition of Idea Bank S.A. by Bank Pekao S.A. It is determined the CGU relating to the Bank’s retail segment, to which the goodwill has been allocated in the amount of PLN 1 million. In respect to the goodwill, the impairment tests are performed annually, irrespective of whether there is any indication that it may be impaired. The impairment tests are performed by comparing the carrying amount of the CGU, including the goodwill, with the recoverable amount of the CGU. The recoverable amount is estimated on the basis of value in use of the CGU. The value in use is the present, estimated value of the future cash flows for the period of 5 years, taking into account the residual value of the CGU. The residual value of the CGU is calculated based on an extrapolation of cash flows projections beyond the forecast period using the growth rate presented in the table below. The forecasts of the future cash flows are based on the assumptions included the budget for 2024 and financial plan for 2025-2028. To discount the future cash flows, it is applied the discount rates, which includes the risk-free rate and the risk premium. The growth rates and discount rates used in the impairment tests for goodwill are as follows: 31.12.2023 31.12.2022 GROWTH RATE DISCOUNT RATE GROWTH RATE DISCOUNT RATE PKBL 3.50% 10.53% 3.50% 12.88% The impairment tests performed as at 31 December 2023 and 31 December 2022 showed the surplus of the recoverable amount over the carrying amount of the CGU, and therefore no CGU impairments were recognized. Sensitivity analysis Estimating the recoverable amount is a complex process and requires the use of subjective assumptions. Relatively small changes in key assumptions may have a significant effect on the measurement of the recoverable amount. The table below presents the surplus of recoverable amounts over the carrying amounts under the current assumptions and the maximum discount rates at which the carrying amounts and recoverable amounts of each CGU are equalized. 31.12.2023 31.12.2022 SURPLUS MARGINAL VALUE OF THE DISCOUNT RATE SURPLUS MARGINAL VALUE OF THE DISCOUNT RATE PKBL 140 17.98% 11 13.46% Bank Pekao S.A. 63 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in “Intangibles assets” in the course of the reporting period 2023 RESEARCH AND DEVELOPMENT COSTS LICENSES AND PATENTS OTHER ASSETS UNDER CONSTRUCTION GOODWILL TOTAL GROSS VALUE Opening balance 76 3 664 39 559 54 4 392 Increases including: 216 167 - 437 - 820 acquisitions - - - 315 - 315 transfer from investments outlays 214 162 - - - 376 the work carried out on their own - - - 122 - 122 other 2 5 - - - 7 Decreases, including: (1) (6) (1) (382) - (390) liquidation and sale (1) (6) (1) - - (8) transfer from investments outlays - - - (376) - (376) other - - - (6) - (6) Closing balance 291 3 825 38 614 54 4 822 ACCUMULATED AMORTIZATION Opening balance 74 2 874 36 - - 2 984 Amortization 16 268 1 - - 285 Liquidation and sale (1) (6) (1) - - (8) Other - - - - - - Closing balance 89 3 136 36 - - 3 261 IMPAIRMENT Opening balance - - - - - - Increases 12 3 - - - 15 Decreases - - - - - - Closing balance 12 3 - - - 15 NET VALUE Opening balance 2 790 3 559 54 1 408 Closing balance 190 686 2 614 54 1 546 Bank Pekao S.A. 64 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in “Intangibles assets” in the course of the reporting period 2022 RESEARCH AND DEVELOPMENT COSTS LICENSES AND PATENTS OTHER ASSETS UNDER CONSTRUCTION GOODWILL TOTAL GROSS VALUE Opening balance 76 3 682 37 499 54 4 348 Increases including: 1 360 3 415 - 779 acquisitions - - - 328 - 328 transfer from investments outlays 1 352 2 - - 355 the work carried out on their own - - - 87 - 87 other - 8 1 - - 9 Decreases, including: (1) (378) (1) (355) - (735) liquidation and sale - (59) - - - (59) transfer from investments outlays - - - (355) - (355) other () (1) (319) (1) - - (321) Closing balance 76 3 664 39 559 54 4 392 ACCUMULATED AMORTIZATION Opening balance 73 2 794 35 - - 2 902 Amortization 1 272 1 - - 274 Liquidation and sale - (59) - - - (59) Other () - (133) - - - (133) Closing balance 74 2 874 36 - - 2 984 IMPAIRMENT Opening balance - - - - - - Closing balance - - - - - - NET VALUE Opening balance 3 888 2 499 54 1 446 Closing balance 2 790 3 559 54 1 408 () including: changes related to the reclassification of part of IT expenses from intangible assets to costs settled over time. In the period from 1 January to 31 December 2023 the Bank acquired intangible assets in the amount of PLN 315 million (in 2022 – PLN 328 million). In the period from 1 January to 31 December 2023 and in 2022 there have been no intangible assets whose title is restricted and pledged as security for liabilities. Contractual commitments As at 31 December 2023 the contractual commitments for the acquisition of intangible assets amounted to PLN 121 million, whereas as at 31 December 2022 – PLN 82 million. 27. Property, plant and equipment Significant accounting policies Property, plant and equipment are defined as controlled non-current assets and assets under construction. Non-current assets include certain tangible assets with an expected useful life longer than one year, which are maintained for the purpose of own use. Property, plant and equipment are recognized at historical cost less accumulated depreciation and accumulated impairment write downs. Historical cost consists of purchase price or development cost and costs directly related to the purchase of a given asset. Each component of property, plant and equipment, the purchase price or production cost of which is significant compared to the purchase price or production cost of the entire item is a subject to separate depreciation. The Bank separates the initial value of property, plant and equipment into its significant parts. Subsequent expenditures relating to property plant and equipment are capitalized only when it is probable that such expenditures will result in future economic benefits to the Bank, and the cost of such expenses can be reliably measured. Bank Pekao S.A. 65 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Service and maintenance costs of property, plant and equipment are expensed in the reporting period in which they have been incurred. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense. Financial data 31.12.2023 31.12.2022 Non-current assets , including: 1 630 1 376 land and buildings 1 089 880 machinery and equipment 353 333 transport vehicles 67 65 other 121 98 Non-current assets under construction and prepayments 168 125 Total 1 798 1 501 Changes in “Property, plant and equipment” in the course of the reporting period 2023 LANDS AND BUILDINGS MACHINERY AND EQUIPMENT MEANS OF TRANSPORTATION OTHER NON-CURRENT ASSETS UNDER CONSTRUCTION TOTAL GROSS VALUE Opening balance 2 713 1 470 90 450 125 4 848 Increases, including: 391 147 16 50 256 860 acquisitions 325 24 15 - 255 619 transfer from non-current assets under construction 33 120 1 50 - 204 other 33 3 - - 1 37 Decreases, including: (328) (53) (16) (12) (213) (622) liquidation and sale (216) (53) (16) (12) - (297) transfer to non-current assets held for sale (96) - - - - (96) transfer from non-current assets under construction - - - - (204) (204) other (16) - - - (9) (25) Closing balance 2 776 1 564 90 488 168 5 086 ACCUMULATED DEPRECIATION Opening balance 1 771 1 133 25 352 - 3 281 Increases, including: 154 114 10 26 - 304 depreciation 151 112 10 26 - 299 other 3 2 - - - 5 Decreases, including: (302) (40) (12) (11) - (365) liquidation and sale (212) (40) (12) (11) - (275) transfer to non-current assets held for sale (70) - - - - (70) other (20) - - - - (20) Closing balance 1 623 1 207 23 367 - 3 220 IMPAIRMENT Opening balance 62 4 - - - 66 Increases 3 - - - - 3 Decreases (1) - - - - (1) Closing balance 64 4 - - - 68 NET VALUE Opening balance 880 333 65 98 125 1 501 Closing balance 1 089 353 67 121 168 1 798 Bank Pekao S.A. 66 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in “Property, plant and equipment” in the course of the reporting period 2022 LANDS AND BUILDINGS MACHINERY AND EQUIPMENT MEANS OF TRANSPORTATION OTHER NON-CURRENT ASSETS UNDER CONSTRUCTION TOTAL GROSS VALUE Opening balance 2 820 1 435 106 460 109 4 930 Increases, including: 54 77 6 10 136 283 acquisitions 8 - 4 - 136 148 transfer from non-current assets under construction 22 77 2 10 - 111 other 24 - - - - 24 Decreases, including: (161) (42) (22) (20) (120) (365) liquidation and sale (93) (37) (22) (20) - (172) transfer to non-current assets held for sale (65) (5) - - - (70) transfer from non-current assets under construction - - - - (111) (111) other (3) - - - (9) (12) Closing balance 2 713 1 470 90 450 125 4 848 ACCUMULATED DEPRECIATION Opening balance 1 706 1 071 33 350 - 3 160 Increases, including: 162 103 10 22 - 297 depreciation 162 103 10 22 - 297 other - - - - - - Decreases, including: (97) (41) (18) (20) - (176) liquidation and sale (59) (36) (18) (20) - (133) transfer to non-current assets held for sale (38) (5) - - - (43) other - - - - - - Closing balance 1 771 1 133 25 352 - 3 281 IMPAIRMENT Opening balance 24 1 - - - 25 Increases 44 3 - - - 47 Decreases (6) - - - - (6) Closing balance 62 4 - - - 66 NET VALUE Opening balance 1 090 363 73 110 109 1 745 Closing balance 880 333 65 98 125 1 501 In the period from 1 January to 31 December 2023 the Bank acquired property, plant and equipment in the amount of PLN 619 million (in 2022 - PLN 148 million), while the net carrying amount of property, plant and equipment sold amounted to PLN 4 million (in 2022 - PLN 33 million). The amount of compensations received from third parties for impairment of loss of property, plant and equipment items recognized in the income statement for 2023 stood at PLN 1 million (in 2022 - PLN 2 million). In the period from 1 January to 31 December 2023 and in 2022 there have been no property, plant and equipment whose title is restricted and pledged as security for liabilities. Contractual commitments As at 31 December 2023 the contractual commitments for the acquisition of property, plant and equipment amounted to PLN 20 million (as at 31 December 2022 – PLN 12 million). Bank Pekao S.A. 67 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 28. Other assets Significant accounting policies Financial assets included in item “Other assets” are measured at the amounts due, which also comprises any potential interest on such assets, taking into consideration provisions for expected credit losses. Non-financial assets are measured in accordance with the valuation principles applicable to specific categories of assets recognized in this item. Prepaid expenses represent expenditures, which will be amortised against income statement in the forthcoming reporting periods. Financial data 31.12.2023 31.12.2022 Prepaid expenses 130 92 Accrued income 304 233 Interbank and interbranch settlements 18 14 Other debtors 250 256 Card settlements 1 478 1 100 Total 2 180 1 695 29. Amounts due to other banks Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data Amounts due to other banks by product type 31.12.2023 31.12.2022 Current accounts 696 828 Interbank deposits and other liabilities 1 654 2 559 Loans and advances received 476 697 Repo transactions - 51 Lease liabilities - - Total 2 826 4 135 The currency structure for the Amounts due to other banks item is presented in the Note 43.4 in the section on currency risk. Bank Pekao S.A. 68 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 30. Financial liabilities held for trading Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data 31.12.2023 31.12.2022 Debt securities ("short sale") 757 875 Total 757 875 Financial liabilities held for trading by issuer and product type 31.12.2023 31.12.2022 Debt securities issued by central governments 757 875 t- bonds 757 875 Total 757 875 Financial liabilities held for trading by maturity 31.12.2023 31.12.2022 Debt securities, including: up to 1 month - - between 1 and 3 months - - between 3 months and 1 year - 44 between 1 and 5 years 39 669 over 5 years 718 162 Total 757 875 The currency structure for the Financial liabilities held for trading item is presented in the Note 43.4 in the section on currency risk. 31. Amounts due to customers Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data Amounts due to customers by entity and product type 31.12.2023 31.12.2022 Amounts due to corporate, including: 83 115 77 054 current accounts 62 317 58 157 term deposits and other liabilities 20 798 18 897 Amounts due to budget entities, including: 17 282 13 759 current accounts 15 528 12 159 term deposits and other liabilities 1 754 1 600 Amounts due to individuals, including: 131 910 118 990 current accounts 93 170 87 559 term deposits and other liabilities 38 740 31 431 Repo transactions 1 649 879 Lease liabilities 585 307 Total 234 541 210 989 The currency structure for the Amounts due to customers item is presented in the Note 43.4 in the section on currency risk. Bank Pekao S.A. 69 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 32. Debt securities issued Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data Debt securities issued by type 31.12.2023 31.12.2022 Certificates of deposit 4 078 5 894 Total 4 078 5 894 The Bank redeems its own debt securities issued on a timely basis. The currency structure for the Debt securities issued item is presented in the Note 43.4 in the section on currency risk. 33. Subordinated liabilities Significant accounting policies Principles of classification and measurement are described in the Note 4.3. Financial data On 30 October 2017, the Bank issued 10 years subordinated bonds with a total nominal value of PLN 1.25 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 21 December 2017 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms . The bonds were introduced to trading on the ASO Catalyst market. On 15 October 2018, the Bank issued 10 years subordinated bonds with a total nominal value of PLN 0.55 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 16 November 2018 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms . The bonds were introduced to trading on the ASO Catalyst market. On 15 October 2018, the Bank issued 15 years subordinated bonds with a total nominal value of PLN 0.20 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 18 October 2018 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms . The bonds were introduced to trading on the ASO Catalyst market. On 4 June 2019, the Bank issued 12 years subordinated bonds with a total nominal value of PLN 0.35 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 8 July 2019 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms . The bonds were introduced to trading on the ASO Catalyst market. On 4 December 2019, the Bank issued 12 years subordinated bonds with a total nominal value of PLN 0.40 billion. The funds from the issue were designated – after receiving the approval of the Polish Financial Supervision Authority on 10 December 2019 – to increase the Bank's supplementary capital, pursuant to art. 127 para. 2 point 2 of the Banking Law and art. 63 of Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms . The bonds were introduced to trading on the ASO Catalyst market. Bank Pekao S.A. 70 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Subordinated liabilities by type TYPE OF TRANSACTION NOMINAL AMOUNT CURRENCY INTEREST RATE ISSUE DATE MATURITY DATE SPECIAL TERMS BALANCE SHEET VALUE AS AT 31.12.2023 Subordinated bonds 1 250 PLN variable, WIBOR 6M + margin 30.10.2017 29.10.2027 Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA 1 266 Subordinated bonds 550 PLN variable, WIBOR 6M + margin 15.10.2018 16.10.2028 Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA 558 Subordinated bonds 200 PLN variable, WIBOR 6M + margin 15.10.2018 14.10.2033 Call option giving the Bank the right of early redemption within 10 years from the issue date, subject to the approval of the PFSA 203 Subordinated bonds 350 PLN variable, WIBOR 6M + margin 04.06.2019 04.06.2031 Call option giving the Bank the right of early redemption within 7 years from the issue date, subject to the approval of the PFSA 352 Subordinated bonds 400 PLN variable, WIBOR 6M + margin 04.12.2019 04.06.2031 Call option giving the Bank the right of early redemption within 6.5 years from the issue date, subject to the approval of the PFSA 402 TOTAL 2 750 2 781 TYPE OF TRANSACTION NOMINAL AMOUNT CURRENCY INTEREST RATE ISSUE DATE MATURITY DATE SPECIAL TERMS BALANCE SHEET VALUE AS AT 31.12.2022 Subordinated bonds 1 250 PLN variable, WIBOR 6M + margin 30.10.2017 29.10.2027 Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA 1 269 Subordinated bonds 550 PLN variable, WIBOR 6M + margin 15.10.2018 16.10.2028 Call option giving the Bank the right of early redemption within 5 years from the issue date, subject to the approval of the PFSA 560 Subordinated bonds 200 PLN variable, WIBOR 6M + margin 15.10.2018 14.10.2033 Call option giving the Bank the right of early redemption within 10 years from the issue date, subject to the approval of the PFSA 204 Subordinated bonds 350 PLN variable, WIBOR 6M + margin 04.06.2019 04.06.2031 Call option giving the Bank the right of early redemption within 7 years from the issue date, subject to the approval of the PFSA 353 Subordinated bonds 400 PLN variable, WIBOR 6M + margin 04.12.2019 04.06.2031 Call option giving the Bank the right of early redemption within 6.5 years from the issue date, subject to the approval of the PFSA 403 TOTAL 2 750 2 789 The currency structure for the Subordinated liabilities item is presented in the Note 43.4 in the section on currency risk. Bank Pekao S.A. 71 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 34. Provisions Significant accounting policies The provisions are recognized when the Bank has a present obligation (legal or constructive) resulting from the past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, the amount of a provision is established by discounting forecasted future cash flows to the present value, using the discount rate reflecting current market estimates of the time value of money and the possible risk associated with the obligation. The provisions include provisions for litigation and claims (in this provision for legal risk regarding foreign currency mortgage loans in CHF and provision for early repayments of consumer loans), provisions relating to long-term employee benefits, in this those measured by an actuary and provisions for restructuring costs. The provision for restructuring costs is recognized when the general recognition criteria for provisions and detailed criteria for recognition of provisions for restructuring cost under IAS 37 "Provisions, contingent liabilities and contingent assets" are met. The amount of employment restructuring provision is calculated by the Bank on the basis of the best available estimates of direct outlays resulting from restructuring activities, which are not connected with the Bank’s current activities. The provisions are charged to the income statement, except for actuarial gains and losses from the measurement of the defined benefit plans obligations, which are recognized in other comprehensive income. Financial data Changes in provisions in the reporting period 2023 PROVISIONS FOR LITIGATION AND CLAIMS () RESTRUCTURING PROVISION PROVISONS FOR DEFINED BENEFIT PLANS PROVISIONS FOR UNDRAWN CREDIT FACILITIES AND GUARANTEES ISSUED OTHER PROVISIONS () TOTAL Opening balance 538 11 239 449 157 1 394 Provision charges/revaluation 420 - 32 466 55 973 Provision utilization (89) (5) (12) - (37) (143) Provision releases (19) - - (352) (11) (382) Foreign currency exchange differences - - - (11) - (11) Other changes - - 28 - 12 40 Closing balance 850 6 287 552 176 1 871 Short term - 6 23 141 27 197 Long term 850 - 264 411 149 1 674 (*) Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 772 million and a provision for early repayments of consumer loans in the amount of PLN 11 million as at 31 December 2023. () Including provisions for refunds to customers of increased mortgage loan margins before establishing a mortgage in the amount of PLN 84 million as at 31 December 2023. 2022 PROVISIONS FOR LITIGATION AND CLAIMS () RESTRUCTURING PROVISION PROVISONS FOR DEFINED BENEFIT PLANS PROVISIONS FOR UNDRAWN CREDIT FACILITIES AND GUARANTEES ISSUED OTHER PROVISIONS () TOTAL Opening balance 194 17 235 441 49 936 Provision charges/revaluation 374 - 24 345 133 876 Provision utilization (23) (6) (30) - (25) (84) Provision releases (9) - - (344) - (353) Foreign currency exchange differences 2 - - 7 - 9 Other changes - - 10 - - 10 Closing balance 538 11 239 449 157 1 394 Short term 4 11 6 111 - 132 Long term 534 - 233 338 157 1 262 () Including the provision for legal risk regarding foreign currency mortgage loans in CHF in the amount of PLN 425 million and a provision for early repayments of consumer loans in the amount of PLN 35 million as at 31 December 2022. () Including provisions for refunds to customers of increased mortgage loan margins before establishing a mortgage in the amount of PLN 106 million as at 31 December 2022. Bank Pekao S.A. 72 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Provisions for litigation and claims Provisions for litigation and claims include court, administrative and other legal proceedings. Additionally, this item includes a provision for early repayment of consumer and mortgage loans created as a result of the judgment of the Court of Justice of the European Union (hereinafter the "CJEU") of 11 September 2019 in Case C-383/18 concerning preliminary questions regarding the consumer's right to reduce the total cost of loan in the event of early repayment of consumer loan. Bank analyzed the legal risk resulting from the above judgment and in accordance with IAS 37 "Provisions, contingent liabilities and contingent assets", assessed the probability of cash outflow as a refund of commission in connection with early repayment of loans made by borrowers before the abovementioned judgment of the CJEU. As at 31 December 2023 the provision regarding early repayment of consumer loans made before the judgment of the CJEU (i.e. before 11 September 2019) and mortgage loans amounts to PLN 11 million in total (as at 31 December 2022 PLN 35 million). Provisions for litigation and claims were estimated in the amount of expected outflow of resources embodying economic benefits. Restructuring provision The balance of the restructuring provision is primarily related to the estimated costs of restructuring the branch network. Provisions for defined benefits plans Provisions for defined benefits plans consist of provisions for retirement benefits and death-in-service benefits. The present value of such obligations is measured by an independent actuary using the projected unit credit method. Other provisions Other provisions include in particular provisions for other employee benefits and provisions for reimbursement customers of funds due to increased margins on mortgage loans before establishing a mortgage, accrued and collected from customers before the entry into force of the Act of 5 August 2022 on the amendment to the Act on Mortgage Loans and on the supervision of mortgage brokers and agents and the act amending the act on personal income tax, the act on corporate income tax and some other acts. 35. Other liabilities Significant accounting policies Deferred income and accrued expenses (liabilities) This caption includes primarily commission income settled using the straight line method and other income charged in advance, that will be recognized in the income statement in the future periods. Accrued expenses include accrued costs resulting from services provided for the Bank by counterparties which will be settled in future periods, accrued payroll and other employee benefits (including annual and Christmas bonuses, other bonuses and awards and accrued holiday pay). Deferred income and accrued expenses are presented in the statement of financial position under the caption "Other liabilities". Financial data 31.12.2023 31.12.2022 Deferred income 249 225 Provisions for holiday leave 62 60 Provisions for other employee-related liabilities 264 256 Provisions for administrative costs 234 190 Other costs to be paid (*) () 155 197 Other creditors 784 754 Payment commitments in respect of a contribution to the Bank Guarantee Fund 543 543 Interbank and interbranch settlements 2 101 1 584 Card settlements 1 137 916 Total 5 529 4 725 () In this as at 31 December 2023 PLN 47 million of provision for future refunds of the part of the remuneration for sale of insurance products linked to loans (PLN 40 million as at 31 December 2022). () Including as at 31 December 2023 the amount of PLN 6 million concerning liabilities for current returns related to early repayments of mortgage loans (PLN 19 million as at 31 December 2022). Bank Pekao S.A. 73 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 36. Defined benefit plans Based on internal regulations in respect to remuneration, the employees of the Bank or their families are entitled to defined benefits other than remuneration: a) retirement benefits, b) death-in-service benefits. The present value of such obligations is measured by an independent actuary using the projected unit credit method. The amount of the retirement benefits and death-in-service benefits is dependent on length of service and amount of remuneration. The expected amount of the benefits is discounted actuarially, 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 market yields at the end of reporting period on 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, • longevity risk – the increase in life expectancy of the Bank’s employees would increase the defined benefit plans obligations. The principal actuarial assumptions as at 31 December 2023 are as follows: • the discount rate at the level of 5.1% (6.7% as at 31 December 2022), • the future salary growth rate at the level of 2.5% (3.5% 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. 2023 2022 Opening balance 239 235 Current service cost 16 12 Interest expense 16 11 Remeasurements of the defined benefit obligations: 28 11 actuarial gains and losses arising from changes in demographic assumptions 1 (19) actuarial gains and losses arising from changes in financial assumptions (3) (9) actuarial gains and losses arising from experience adjustments 30 39 Contributions paid by the employer (12) (30) Closing balance 287 239 Bank Pekao S.A. 74 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 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 percent. DEFINED BENEFIT PLANS OBLIGATIONS 31.12.2023 1 PERCENT INCREASE 1 PERCENT DECREASE Discount rate (19) 21 Future salary growth rate 21 (19) DEFINED BENEFIT PLANS OBLIGATIONS 31.12.2022 1 PERCENT INCREASE 1 PERCENT DECREASE Discount rate (16) 18 Future salary growth rate 18 (16) Maturity of defined benefit plans obligations The following table presents the maturity profile of the defined benefit plans obligations 31.12.2023 31.12.2022 The weighted average duration of the defined benefit plans obligations (in years) 7.2 7.4 37. Share-based payments Significant accounting policies Bank’s Pekao S.A. phantom shares-settled share-based payment transaction The cost of transactions settled with employees in phantom shares is measured by reference to the fair value of the liability as of the balance sheet date. The fair value of the liability is estimated based upon the Bank’s shares price on the (WSE) as of the balance sheet date and expected number of phantom shares to which full rights will be acquired. The cost of phantom share-based payments is recognized in personnel expenses together with the accompanying increase in the value of liabilities towards employees presented in "Provisions". The accumulated cost recognized for transactions settled in phantom shares for each balance sheet date until the vesting date reflects the extent of elapse of the vesting period and the number of rights to shares the rights to which – in the opinion of the Bank’s Management Board for that date based on best available estimates of the number of phantom shares – will be eventually vested. Characteristics of Variable Remuneration System for the Management Team The system of variable remuneration is addressed to Employees defined in the Bank as persons in managerial positions, who have a significant impact on the risk profile of the Bank and who are key employees for the fulfillment of the Bank’s strategy, risk management and long-term increase of the Bank’s income. The aim of the system is to support the execution of the Bank’s operational strategy, its risk management and to limit conflict of interests. Under the system the participant who is a member of the Management Board may receive an individual bonus, while a participant who is not a member of the Management Board may receive a bonus based on the bonus pool approach ensuring comprehensive performance measurement at an individual level, organizational unit and results of the entire Bank as well as risk assessment’ verification of the Participant’s compliant behaviour with respect to law provisions and standards adopted by the Bank. The compensation consists of cash payment and cash-settled share based payment realized in the form of phantom shares as cash equivalent amounting to the value of granted phantom shares. 75 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Financial data During the reporting period ending on 31 December 2023 the Bank had the following share-based payments transactions SYSTEM 2019 () SYSTEM 2020 () SYSTEM 2021 () SYSTEM 2022 () SYSTEM 2023 () Transaction type Cash-settled share based payments Start date of the assessment period 1 January 2019 1 January 2020 1 January 2021 1 January 2022 1 January 2023 Program announcement date January 2019 January 2020 January 2021 January 2022 January 2023 Program granting date 15 July 2020 8 July 2021 7 July 2022 16 June 2023 Date of the Supervisory Board meeting at which the 2022 assessment will be made and the bonus will be awarded (and in the case of participants who are not members of the Management Board, the date of the Bank's Management Board meeting at which the bonus pool for 2022 will be launched and the 2022 assessment will be presented) Number of instruments granted (pcs) 145 481 135 996 132 363 222 760 To be determined on the date the program is awarded Maturity date 31 July 2024 31 July 2025 31 July 2026 31 July 2028 (the whole programme) 31 July 2029 (the whole programme) Vesting date for Management Board Members and Executive Vice President • 60% in the year of program granting (settlement after 1 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) (**) • 16% after 1 year from program granting date (settlement after 1 year retention period) • 16% after 2 years from program granting date (settlement after 1 year retention period) • 8% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) () • 16% after 1 year from program granting date (settlement after 1 year retention period) • 16% after 2 years from program granting date (settlement after 1 year retention period) • 8% after 3 years from program granting date (settlement after 1 year retention period) Vesting date for remaining participants • 60% in the year of program granting (settlement after 2 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) 1 • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) • 13.3 (3)% after 1 year from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 2 years from program granting date (settlement after 1 year retention period) • 13.3 (3)% after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) () • 16% or 20% after 1 year from program granting date (settlement after 1 year retention period) • 16% or 20% after 2 years from program granting date (settlement after 1 year retention period) • 8% or zero after 3 years from program granting date (settlement after 1 year retention period) • 60% in the year of program granting (settlement after 1 years retention period) () • 16% or 20% after 1 year from program granting date (settlement after 1 year retention period) • 16% or 20% after 2 years from program granting date (settlement after 1 year retention period) • 8% or zero after 3 years from program granting date (settlement after 1 year retention period) Vesting conditions Risk assessment, Compliance assessment, Continuous employment, Reaching the aim based on financial results of the Bank for a given period Program settlement () In the period until 31 December 2023, the programs implemented before 2019 were also in force. The payments of these were subject to deferral or retention in the period covered by the report. () The participant will receive a cash payment amounting to the number the possessed phantom shares times the average closing price of the Bank’s shares at the Warsaw Stock Exchange for 30 calendar days preceding the day of the Supervisory Board meeting, where it evaluates the Bank's financial statements for a given year and benefits from acquired phantom shares in the amount corresponding to the dividend paid to shareholders during the retention period for shares acquired by the participant. () If the variable remuneration for a given year exceeds a particularly high amount, then 60% of the variable remuneration is deferred. Bank Pekao S.A. 76 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Since January 2019, the System of Variable Remuneration for the Management Team has been in force, reflecting the provisions of the resolution of the General Meeting of the Bank on adjusting the remuneration of members of the management board to the requirements of the Act on the principles of determining the remuneration of persons managing certain companies. For the System 2019, 2020, 2021, 2022 and 2023 the fair value of the program was estimated based upon the Bank’s shares price on the WSE as of the balance sheet date and expected number of phantom shares to which the rights will be acquired. For the System 2023, as of 31 December 2023 the Bank prepared the program valuation, presuming that the phantom shares were granted on 31 December 2023. This value will be changed at the actual date of granting the program. The system of variable remuneration realized in the form of phantom shares is a program settled in cash, and therefore its fair value is adjusted on each balance sheet date until the the program settlement, which in case of this program coincides with the vesting date. The carrying amount of liabilities for cash-settled phantom shares amounted to PLN 65 million as at 31 December 2023 (as at 31 December 2022 – PLN 51 million). The total intrinsic value of liabilities for vested rights to phantom shares amounted to PLN 56 million as at 31 December 2023 (as at 31 December 2022 – PLN 29 million). The remuneration expenses for 2023 relating to the system of variable remuneration in the form of phantom shares amounted to PLN 35 million (in 2022 - PLN 21 million). The table below presents changes in the number of Bank’s phantom shares (in PLN thousand). 2023 2022 Opening balance 338 345 Granted during the year 223 132 Redeemed during the year - - Exercised during the year (191) (139) Terminated during the year - - Existing at the period-end 370 338 The table above does not present the number of shares granted in respect of System 2023. This number will be determined in 2023 after the Supervisory Board assessed the Bank's financial statements and assessed the achievement of individual goals for 2023, compliance assessment and risk assessment . The hypothetical number of shares determined on the basis of the reference value of the designated bonuses to each of the program participants and arithmetic mean of the Bank’s share price on the WSE in December 2023 amounts to 138 500 . 38. Leasing Significant accounting policies At inception of a contract, the Bank assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Bank is a party to lease contracts, based on which the Bank accepts the right to use an identified asset for a period of time in exchange for consideration. The Bank is also a party to lease contracts, based on which the Bank transfers the right to use of an identified asset for a period of time in exchange for consideration. The Bank as a lessee The Bank, as a lessee, recognizes the lease contract as a component of the right-to-use assets and the corresponding lease liability on the date when the subject of the lease is available for use. Each lease payment is allocated between the liability and accrued interest on the liability. Interest expense is recognized in the income statement over the lease term to obtain a constant periodic interest rate on the remaining balance of the lease liability. The right-of-use asset is depreciated on a straight-line basis over the shorter of two periods: the useful life of the asset or the lease term. The Bank recognizes the right-of-use assets in the item of the statement of financial position “Property, plant and equipment” and lease liabilities - in the item of the statement of financial position “Amounts due to customers” or “Amounts due to banks”. Bank Pekao S.A. 77 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The right-of-use assets are measured at cost, comprising: • the amount of the initial measurement of the lease liability, • any lease payments made at or before the commencement date, less any lease incentives received, • any initial direct costs incurred by the lessee, and • an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located, if the lessee incurs liabilities regarding these costs. On the date when the lease commences, the Bank, as a lessee, measures the lease liability in the present value of lease payments outstanding as at that date. The lease liabilities include the current value of the following lease payments: • fixed payments less any lease incentives receivable, • variable lease payments that depend on an index or a rate, • amounts expected to be payable by the lessee under residual value guarantees, • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease. The lease payments are discounted using the interest rate implicit in the lease, if the rate can be readily determined, or the Bank’s incremental borrowing rate. After the lease commencement date, the Bank taken into account changes in lease payments (resulting, inter alia, from changes in the index, rate, lease term), by remeasuring the lease liabilities and the right-of-use assets. The Bank does not recognize the right-of-use assets and lease liabilities for short-term lease contracts and lease contracts of low-value assets. Short-term lease payments and payments for leases of low-value assets are recognized as an expense in the income statement on a straight-line basis. Short-term lease contracts are lease contracts that have a lease term of 12 months or less. Low-value assets include mainly lease of space (land) for ATMs. The Bank as a lessor At commencement date of a lease, the Bank, as a lessor, classifies each lease contract as an operating lease or a finance lease. The Bank classifies a lease as a finance lease whether it transfers substantially all the risks and rewards of ownership of an underlying asset. Conversely, if substantially all the risks and rewards of ownership of the underlying asset are not transferred, the lease is considered to be an operating lease. In the process of determining the classification of a lease contract, the Bank takes into account elements such as whether the lease term accounts for the major part of the economic life of the underlying asset. Finance lease At the commencement date, the Bank, as a lessor, recognizes assets held under a finance lease in its statement of financial position and present them as a receivables from finance lease (presented in item "Loans and advances to customers") at an amount equal to the net investment in the lease, i.e. at present value of lease payments and any unguaranteed residual value assigned to the Bank. At the finance lease commencement date, the lease payments included in the measurement of the net investment in the lease comprise the following payments for the right to use the underlying asset during the lease term that are not received at the commencement date: • fixed payments, less any lease incentives payable, • variable lease payments that depend on an index or a rate, • any residual value guarantees provided to the Bank as a lessor, • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease. During the lease term, the Bank, as a lessor, recognizes interest income, based on a pattern reflecting a constant periodic rate of return on the Bank's net investment in the lease. Lease payments paid over the lease term, reduce both the principal and the accrued interest. The Bank applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease. The estimated unguaranteed residual values used in computing the gross investment in the lease are regularly reviewed by the Bank. Operating lease During the lease term, the Bank, as a lessor, recognizes lease payments from operating lease as income on a straight-line basis and presents them in the item "Other operating income". The depreciation of leased assets is recognized in accordance with the principles applied by the Bank for property, plant and equipment. Bank Pekao S.A. 78 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial data The Bank as a Lessor As a lessor, the Bank appears in contracts for the lease of premises, terminals and IT equipment classified as operating leases. In 2023, the Bank recognized revenues from this in the amount of PLN 37 million (in 2022 - PLN 35 million). The table below presents the maturity analysis of lease payments, presenting the undiscounted lease payments to be received after the balance sheet date. 31.12.2023 31.12.2022 Up to 1 year 4 4 Between 1 and 2 years 1 1 Over 2 years - 1 Total 5 6 The Bank as Lessee As a lessee, the Bank acts in building, cars and IT infrastructure lease contracts. Information on lease contracts in which the Bank acts as a lessee is presented below. Right-of-use assets included in the item "Property, plant and equipment". 2023 LANDS AND BUILDINGS MACHINERY AND EQUIPMENT MEANS OF TRANSPORT TOTAL Opening balance 228 - 64 292 Depreciation (95) (1) (9) (105) Additions to right-of-use assets 325 24 15 364 Lease change 33 - - 33 Derecognition of right-of-use assets (1) (12) (3) (16) Closing balance 490 11 67 568 2022 LANDS AND BUILDINGS MACHINERY AND EQUIPMENT MEANS OF TRANSPORT TOTAL Opening balance 323 - 73 396 Depreciation (102) - (10) (112) Additions to right-of-use assets 8 - 4 12 Lease change 17 - - 17 Derecognition of right-of-use assets (18) - (3) (21) Closing balance 228 - 64 292 Lease liabilities 31.12.2023 31.12.2022 Amounts due to other banks - - Amounts due to customers 585 307 Total 585 307 Amounts recognized in income statement LEASES UNDER IFRS 16 2023 2022 Interest expense on lease liabilities (25) (15) Expenses relating to short-term leases presented in "Other administrative expenses" - - Expenses relating to leases of low-value assets, excluding short- term leases of low-value assets presented in "Other administrative expenses" - (1) Amounts recognized in cash flow statement In 2023, total cash outflow for leases amounted to PLN 102 million ( as at 31 December 2022 – PLN 126 million). Bank Pekao S.A. 79 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 39. Contingent commitments and litigation and claims Significant accounting policies Contingent liabilities and commitments The Bank enters into transactions which are not recognized in the statement of financial position as assets or liabilities, but which result in contingent liabilities and commitments. Contingent liabilities are characterized as: • a potential obligation the existence of which will be confirmed upon occurrence or non-occurrence of uncertain future events that are beyond the control of the Bank (e.g. litigations), • a current obligation which arises as a result of past events but is not recognized in the statement of financial position as it is improbable that it will result in an outflow of benefits to settle the obligation or the amount of the obligation cannot be reliably measured (mainly: unused credit lines and guarantees and letters of credit issued). Financial guarantees and loan commitments Financial guarantees are contracts that require the Bank as their issuer to make specified payments to compensate the holder for a loss it incurs due to failure to make payment when due by the specified debtor in accordance with the original or modified terms of a debt instrument. Financial guarantees are measured at the higher of: • the amount of the loss allowance, or • the amount initially recognised less the cumulative amount of income recognised in accordance with the principles of IFRS 15. Loan commitments are binding commitments to extend credit under certain prespecified terms and conditions. Financial data Court cases As of 31 December 2023 the following court cases for payment are pending with involvement of the Bank, that are important in view of the value of the object of litigation in the group of liabilities (against the Bank): • brought by the association – a claim for payment of damages against the Bank and 3 other legal person for damages incurred in connection with irregularities committed by the defendants, according to the association, when offering the purchase of premises and financing the construction of a condohotel; value of the object of litigation PLN 86 703 762, litigation initiation date – 14 November 2022, in the present factual and legal circumstances the Bank assesses the funds outflow risk as possible, • brought by the receiver for a joint stock company in liquidation bankruptcy – lawsuit for payment of compensation for a damage incurred as a result of the Bank’s demanding immediate payment of the amounts due in virtue of payment of the price from the credit receivables transfer agreement and conducting debt enforcement collection of the portion of the price remaining for payment by a court enforcement officer, value of the object of litigation PLN 57 450 130, litigation initiation date – 30 April 2015, in the present factual and legal circumstances the Bank assesses the funds outflow risk as possible, • brought by a natural person – lawsuit for payment by the Bank of an amount charged by virtue of settlement of financial future or forward transactions, value of the object of litigation PLN 38 916 555.18, litigation initiation date 2 October 2016, on 6 May 2019 the Regional Court in Warsaw issued a sentence ordering the Bank to pay the amount of PLN 3 392 349.18 and as to the remainder the Court dismissed the suit, the sentence is not legally valid, the Bank and the plaintiff appealed against the judgment. On the 16 December 2020 the Court of Appeal in Warsaw quashed the sentence of the Regional Court in its entirety and remitted the case to that Court. In the present factual and legal circumstances the Bank assesses the funds outflow risk in the amount of PLN 35 524 206.00 as possible (the amount of PLN 3 392 349.18 was paid), • brought by a natural person – lawsuit for invalidation of the loan agreement and legal collateral agreements and payment of undue benefit, damages and compensation; value of the object of litigation PLN 30 469 753.05, litigation initiation date – 22 June 2023, in the present factual and legal circumstances, the Bank assesses the funds outflow risk as possible, • brought by a legal person – lawsuit for payment of damages for a tort and improper performance of a bank account agreement in connection with the execution of pament instructions from the plaintiff’s bank accounts, value of the object of litigation PLN 14 579 152.50, litigation initiation date – 17 August 2015, in the prezent factual and legal circumstances, the Bank assesses the funds outflow risk as possible. None of the litigations pending in year 2023 before the court, authority competent for arbitrary proceedings or a body of public administration posed a threat for financial liquidity of the Bank. The Bank created provisions for litigations against the Bank entities which, according to the legal opinion, are connected with a risk of the funds outflow resulting from the fulfillment of the obligation. The value of the provisions as at 31 December 2023 is PLN 850 million (PLN 538 million as at 31 December 2022). In addition, as at 31 December 2023 the Bank assessed the legal risk of foreign currency mortgage loans in CHF and created a provision related to this risk. Details are presented in the Note 43.3. Bank Pekao S.A. 80 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Proceedings of the Office of the Polish Financial Supervision Authority On 22 November 2023, the Polish Financial Supervision Authority (“KNF”) started administrative proceedings against the Bank 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. Proceedings of the Office of Competition and Consumer Protection Proceedings of the President of the Office of Competition and Consumer Protection regarding irregularities in the area of complaints In a letter of 10 November 2023, the President of the Office of Competition and Consumer Protection ("UOKiK") initiated proceedings against the Bank regarding the Bank's use of practices violating the collective interests of consumers, consisting of: • failure to respond to consumer complaints without undue delay, no later than within 30 days, and in particularly complicated cases - within 60 days, • failure to indicate in the information provided to the customer filing a complaint the reason for the delay that makes it impossible to consider the complaint and provide a response without undue delay, no later than within 30 days, and the circumstances that must be established in order to consider the case. In December 2023, the Bank submitted an application to the President of the Office of Competition and Consumer Protection with a request for a commitment decision. The Bank is waiting for the decision of the President of the Office of Competition and Consumer Protection in this matter. At the same time, as at 31 December 2023, the Bank created a provision in the amount of PLN 12 million regarding the implementation of the commitment proposal presented to the President of the Office of Competition and Consumer Protection. Proceedings of the President of the Office of Competition and Consumer Protection regarding unauthorized transactions On 23 June 2021, the President of the Office of Competition and Consumer Protection initiated explanatory proceedings to initially determine whether the Bank's actions taken after consumers reported unauthorized payment transactions may justify the initiation of proceedings regarding practices violating the collective interests of consumers or proceedings regarding to recognize the provisions of the standard contract as prohibited. On 8 February 2024, the President of the Office of Competition and Consumer Protection initiated proceedings (decision delivered on 13 February 2024) regarding practices violating the collective interests of consumers regarding unauthorized payment transactions. The charges brought are: • failure to refund the amount of an unauthorized payment transaction to the customer within the D+1 deadline despite the lack of premises for such refusal, • misleading consumers as to the Bank's obligations and the distribution of the burden of proving the authorization of a payment transaction. The proceedings are the result of the explanatory proceedings of the President of the Office of Competition and Consumer Protection initiated in June 2021 and the collection of evidence in the case. After reviewing the materials collected by the President of the Office of Competition and Consumer Protection in this matter and obtaining legal opinions, the Bank will assess the risk of imposing a financial penalty. As at 31 December 2023, the Bank did not recognize a provision for these proceedings. Financial commitments granted Financial commitments granted by entity 31.12.2023 31.12.2022 Financial commitments granted to: banks 1 676 1 392 customers 55 513 56 951 budget entities 699 727 Total 57 888 59 070 Bank Pekao S.A. 81 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Guarantees issued Guarantees issued by entity 31.12.2023 31.12.2022 Issued to banks: 2 567 4 053 guarantees 2 141 3 027 securities’ underwriting guarantees - 1 000 sureties 406 - confirmed export letters of credit 20 26 Issued customers entities 27 592 23 860 guarantees 13 427 13 197 securities’ underwriting guarantees 1 639 2 223 sureties 12 526 8 440 Issued to budget entities : 568 959 guarantees 22 23 securities’ underwriting guarantees 546 936 Total 30 727 28 872 Off-balance sheet commitments received Off-balance sheet commitments received by entity 31.12.2023 31.12.2022 Financial received from: 126 1 420 banks 126 253 customers - 1 167 budget entities - - Guarantees received from: 31 426 40 119 banks 15 383 13 768 customers 13 711 13 698 budget entities 2 332 12 653 Total 31 552 41 539 Moreover, the Bank has the ability to obtain financing from National Bank of Poland secured securities. Bank Pekao S.A. 82 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 40. Equity Significant accounting policies Equity is comprised of the capital and funds created by the companies of the Bank in accordance with the binding legal regulations and the appropriate laws and Articles of Association. Equity also includes retained earnings. Subsidiaries’ equity line items, other than share capital, are added to the relevant equity line items of the parent company, in the proportion of the Bank’s interest. The equity of the Bank includes only those parts of the subsidiaries’ equity which were created after the date of purchase of shares or stocks by the parent entity. The Bank equity consists of the following: a) share capital - applies only to the capital of the Bank as the parent entity and is presented at nominal value specified in the Articles of Association and in the entry in the Enterprises Registry, b) " issue premium " - surplus generated during share issues over the nominal value of such issues, remaining after the issue costs are covered. Moreover, this item also includes a change in the value of minority shares, ensuing from an increase of the share of the Parent entity in Bank’s share capital, c) the general banking risk fund is established at Bank Pekao S.A. in keeping with the Banking Act dated 29 August 1997 from profit after tax, d) other reserve capital utilized for the purposes defined in the Statute is created from appropriations of profits, e) revaluation reserve includes the impact of revaluation of debt financial instruments measured at fair value through other comprehensive income, revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income, revaluation of derivative instruments hedging cash flows, r emeasurements of the defined benefit liabilities and the value of deferred tax for items classified as temporary differences, recognized as valuation allowance. In the statement of financial position, the valuation allowance is presented as net value, f) other capital: • other supplementary capital, established in keeping with provisions under the Articles of Association of companies from profit appropriations, • bonds convertible to shares - includes the fair value of financial instruments issued as part of transactions settled in equity instruments, • brokerage activity fund for stock broking operations, carried out by Bank Pekao S.A., • retained earnings from prior periods includes undistributed profit and uncovered losses generated/incurred in prior periods by subsidiaries consolidated full method, • net profit/loss which constitutes profit/loss presented in the income statement for the relevant period. Net profit is after accounting for income tax. Financial data Share capital Shareholding structure CLASS/ISSUE TYPE OF SHARES NUMBER OF SHARES NOMINAL VALUE OF CLASS/ISSUE (IN PLN THOUSAND) EQUITY COVERAGE REGISTRATION DATE DIVIDEND RIGHTS (FROM DATE) A Common bearer stock 137 650 000 137 650 fully paid-up 21.12.1997 01.01.1998 B Common bearer stock 7 690 000 7 690 fully paid-up 06.10.1998 01.01.1998 C Common bearer stock 10 630 632 10 631 fully paid-up 12.12.2000 01.01.2000 D Common bearer stock 9 777 571 9 777 fully paid-up 12.12.2000 01.01.2000 E Common bearer stock 373 644 374 fully paid-up 29.08.2003 01.01.2003 F Common bearer stock 621 411 621 fully paid-up 29.08.2003 19.05.2006 G Common bearer stock 603 377 603 fully paid-up 29.08.2003 15.05.2008 H Common bearer stock 359 840 360 fully paid-up 12.08.2004 01.01.2004 I Common bearer stock 94 763 559 94 764 fully paid-up 29.11.2007 01.01.2008 Total number of Shares (pcs) 262 470 034 Total share capital in PLN thousand 262 470 Nominal value per share = PLN 1.00 Bank Pekao S.A. 83 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Change in the number of shares (pcs) 2023 ISSUED AND FULLY PAID-UP SHARES TOTAL Opening balance 262 470 034 262 470 034 Closing balance 262 470 034 262 470 034 2022 ISSUED AND FULLY PAID-UP SHARES TOTAL Opening balance 262 470 034 262 470 034 Closing balance 262 470 034 262 470 034 Other capital and reserves, retained earnings and profit for the period The table below presents the structure of the Bank’s equity attributable to equity holders of the Bank 31.12.2023 31.12.2022 Share premium 9 137 9 137 General banking risk fund 1 983 1 983 Other reserve capital 10 738 10 254 Revaluation reserves, in this: (861) (3 263) remeasurements of the defined benefit liabilities (net of tax) (76) (53) revaluation of debt securities and loans measured at fair value through other comprehensive income (net of tax) (372) (1 124) revaluation or sale of investments in equity instruments designated at fair value through other comprehensive income (net of tax) 209 153 revaluation of cash flow hedging financial instruments (net of tax) (622) (2 239) Other supplementary capital, in this: 233 233 supplementary capital 189 189 bonds convertible into shares - equity component 29 29 fund for brokerage activities 15 15 Other capital and reserves 21 230 18 344 Retained earnings 1 685 1 685 Net profit for the period 6 718 1 898 Retained earnings and net profit for the period 8 403 3 583 Total 29 633 21 927 The net profit of the Bank for 2022 in the amount of PLN 1 898 million was distributed in the following way: PLN 1 422 million was allocated to the payment of dividends, and the remaining part of the net profit in the amount of PLN 476 million was allocated to reserve capital. Bank Pekao S.A. 84 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 41. Additional information to the cash flow statement Changes in liabilities arising from financing activities NON-CASH CHANGES BALANCE AS AT 1.01.2023 CHANGES FROM FINANCING CASH FLOWS THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES OTHER CHANGES BALANCE AS AT 31.12.2023 Debt securities issued 5 894 (1 752) (90) 26 4 078 Subordinated liabilities 2 789 - - (8) 2 781 Loans and advances received 697 (272) (33) 84 476 Lease liabilities 307 (87) (15) 380 585 Total 9 687 (2 111) (138) 482 7 920 NON-CASH CHANGES BALANCE AS AT 1.01.2022 CHANGES FROM FINANCING CASH FLOWS THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES OTHER CHANGES BALANCE AS AT 31.12.2022 Debt securities issued 179 5 683 - 32 5 894 Subordinated liabilities 2 761 - - 28 2 789 Loans and advances received 1 069 (309) 20 6 786 Lease liabilities 388 (110) - 30 308 Total 4 397 5 264 20 96 9 777 42. Related party transactions The transactions between the Bank and related parties are typical transactions arising from current operating activities conducted by the Bank. Such transactions mainly include loans, deposits, foreign currency transactions and guarantees. The cr e dit granting process applicable to the Bank’s management and entities related to the Bank According to the Banking Act, credit transactions with Members of the Bank’s Management Board and Supervisory Board, persons holding managerial positions at the Bank, with the entities related financially or organizationally therewith, shall be effected according to Regulation adopted by the Supervisory Board of the Bank. The Regulation provides detailed decision-making procedures, applicable to transactions with such persons and entities, also defining the decision-making levels authorized to take decisions. In particular, the transactions with the Members of the Bank’s Management Board or Supervisory Board or with an entity related therewith financially or organizationally, are subject to decisions taken by the Bank’s Management Board and Supervisory Board. Members of the Bank’s Management Board and entities related therewith financially or organizationally may take advantage of credit products offered by the Bank on standard terms and conditions of the Bank. In particular, the Bank may not offer more advantageous credit interest rates to such persons or entities. Credit risk assessment is performed using the methodology applied by the Bank, tailored to the client’s segment and type of transaction. In case of entities related to the Bank, the standard credit procedures are applied, with transaction-related decisions taken exclusively at level of the Bank’s Head Office. 85 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Related party transactions as at 31 December 2023 NAME OF ENTITY RECEIVABLES FROM LOANS, ADVANCES AND PLACEMENTS SECURITIES RECEIVABLES FROM REVALUATION OF DERIVATIVES OTHER RECEIVABLES LIABILITIES FROM LOANS AND DEPOSITS LIABILITIES FROM REVALUATION OF DERIVATIVES OTHER LIABILITIES PZU S.A. – the Bank‘s parent entity - - - 3 289 - - Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities 11 - - 7 399 7 1 Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - - - - 140 - - Pekao Leasing Sp. z o.o. 1 028 4 160 9 - 56 4 - Pekao Faktoring Sp. z o.o. 1 672 3 308 - - 10 - - Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) - - - - 56 - - Centrum Kart S.A. - - - 1 29 - 5 Pekao Financial Services Sp. z o. o. - - - - 15 - - Pekao Bank Hipoteczny S.A. 490 1 281 24 - 18 10 - Pekao Property S.A. (in liquidation ) - - - 6 26 - - Pekao Direct Sp. z o.o. - - - - 14 - 12 Pekao Investment Management S.A. - - - - 3 - - Pekao TFI S.A. (PIM S.A. subsidiary) - - - 7 42 - - PEUF Sp. z o.o. (Pekao Leasing Sp. z o.o. subsidiary) - - - - 13 - - Associates Krajowy Integrator Płatności S.A. - - - - 39 - - Total of Bank Pekao S.A. Group entities 3 190 8 749 33 14 461 14 17 Key management personnel of the Bank Pekao S.A. 2 - - - 11 - - Total 3 203 8 749 33 24 1 160 21 18 86 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Related party transactions as at 31 December 2022 NAME OF ENTITY RECEIVABLES FROM LOANS, ADVANCES AND PLACEMENTS SECURITIES RECEIVABLES FROM REVALUATION OF DERIVATIVES OTHER RECEIVABLES LIABILITIES FROM LOANS AND DEPOSITS LIABILITIES FROM REVALUATION OF DERIVATIVES OTHER LIABILITIES PZU S.A. – the Bank‘s parent entity - - 4 - 185 - - Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities 4 - 3 - 235 2 - Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - - - - 143 - - Pekao Leasing Sp. z o.o. 1 588 2 947 2 - - 8 - Pekao Faktoring Sp. z o.o. 1 102 2 183 - - 7 - - Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) - - - - 53 - - Centrum Kart S.A. - - - 1 43 - 6 Pekao Financial Services Sp. z o. o. - - - - 15 - - Pekao Bank Hipoteczny S.A. 838 1 235 44 - - 11 - Pekao Property S.A. (in liquidation ) - - - 6 25 - - Pekao Direct Sp. z o.o. - - - - 19 - 10 FPB – Media Sp. z o. o. (in bankruptcy) 9 - - - - - Pekao Investment Management S.A. - - - - 1 - - Pekao TFI S.A. (PIM S.A. subsidiary) - - - 6 15 - - PEUF Sp. z o.o. (Pekao Leasing Sp. z o.o. subsidiary) - - - - 8 - - Associates Krajowy Integrator Płatności S.A. - - - - 37 - - Total of Bank Pekao S.A. Group entities 3 537 6 365 46 13 366 19 16 Key management personnel of the Bank Pekao S.A. 1 - - - 9 - - Total 3 542 6 365 53 13 795 21 16 87 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Income and expenses from transactions with related parties for the period from 1 January to 31 December 2023 NAME OF ENTITY INTEREST INCOME INTERES EXPENSE FEE AND COMMISSION INCOME FEE AND COMMISSIO EXPENSE INCOME FROM DERIVATIVES AND OTHER EXPENSES FROM DERIVATIVES AND OTHER PZU S.A. – the Bank‘s parent entity (2) (21) 24 - 2 (9) Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities - (18) 27 - 1 (61) Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - (9) - - - - Pekao Leasing Sp. z o.o. 267 (5) 19 - 9 - Pekao Faktoring Sp. z o.o. 203 (1) 10 - - - Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) - (3) - - - - Centrum Kart S.A. - (1) 2 - 9 (62) Pekao Financial Services Sp. z o.o. - - - - - - Pekao Bank Hipoteczny S.A. 140 (1) 1 - 1 (3) Pekao Direct Sp. z o.o. - - - (56) 2 (58) Pekao Property S.A. (in liquidation) - (1) - - - - Pekao Investment Management S.A. - (1) - - - - Pekao TFI S.A. (PIM S.A. subsidiary) - (5) 59 - - - PEUF Sp. z o.o. (Pekao Leasing Sp. z o.o. subsidiary) - - - - - - Associates Krajowy Integrator Płatności S.A. - (1) - - - - Total of Bank Pekao S.A. Group entities 610 (28) 91 (56) 21 (123) K ey management personnel of the Bank Pekao S.A. - - - - - - Total 608 (67) 142 (56) 24 (193) 88 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Income and expenses from transactions with related parties for the period from 1 January to 31 December 2022 NAME OF ENTITY INTEREST INCOME INTERES EXPENSE FEE AND COMMISSION INCOME FEE AND COMMISSIO EXPENSE INCOME FROM DERIVATIVES AND OTHER EXPENSES FROM DERIVATIVES AND OTHER PZU S.A. – the Bank‘s parent entity (2) (9) 14 - - (3) Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities - (12) 22 - 1 (44) Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - (5) - - - - Pekao Leasing Sp. z o.o. 181 (5) 20 - 1 (3) Pekao Faktoring Sp. z o.o. 113 - 10 - 1 - Pekao Fundusz Kapitałowy Sp. z o.o. (in liquidation) - (1) - - - - Centrum Kart S.A. - - 2 - 9 (61) Pekao Financial Services Sp. z o.o. - - - - - - Pekao Bank Hipoteczny S.A. 114 - 2 - 1 (10) Pekao Direct Sp. z o.o. - - - (41) 2 (51) Pekao Property S.A. (in liquidation) - - - - - - Pekao Investment Management S.A. - - - - - - Pekao TFI S.A. (PIM S.A. subsidiary) - (1) 72 - - - PEUF Sp. z o.o. (Pekao Leasing Sp. z o.o. subsidiary) - - - - - - Associates Krajowy Integrator Płatności S.A. - - - - - - Total of Bank Pekao S.A. Group entities 408 (12) 106 (41) 14 (125) K ey management personnel of the Bank Pekao S.A. - - - - - - Total 406 (33) 142 (41) 15 (172) 89 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Off-balance sheet financial commitments and guarantees as at 31 December 2023 GRANTED RECEIVED NAME OF ENTITY FINANCIAL GUARANTEES FINANCIAL GUARANTEES PZU S.A. – the Bank‘s parent entity 3 15 - - Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities 13 10 - - Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - - - - Pekao Leasing Sp. z o.o. 4 402 12 527 - - Pekao Faktoring Sp. z o.o. 2 675 5 953 - - Centrum Kart S.A. - 3 - - Pekao Financial Services Sp. z o. o. - 1 - - Pekao Bank Hipoteczny S.A. 1 254 1 300 - - Pekao Direct Sp. z o.o. - - - - Pekao TFI S.A. (PIM S.A. subsidiary) - - - - Associates Krajowy Integrator Płatności S.A. - 2 - - Total of Bank Pekao S.A. Group entities 8 331 19 786 - - K ey management personnel of the Bank Pekao S.A. - - - - Total 8 347 19 811 - - 90 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Off-balance sheet financial commitments and guarantees as at 31 December 2022 GRANTED RECEIVED NAME OF ENTITY FINANCIAL GUARANTEES FINANCIAL GUARANTEES PZU S.A. – the Bank‘s parent entity 3 15 - - Entities of PZU S.A. Group excluding the Bank Pekao S.A. Group entities 10 10 - - Bank Pekao S.A. Group entities Subsidiaries Pekao Investment Banking S.A. - - - - Pekao Leasing Sp. z o.o. 3 786 10 126 - - Pekao Faktoring Sp. z o.o. 3 537 4 361 - - Centrum Kart S.A. - 3 - - Pekao Financial Services Sp. z o. o. - 1 - - Pekao Bank Hipoteczny S.A. 920 2 300 - - Pekao Direct Sp. z o.o. - - - - Pekao TFI S.A. (PIM S.A. subsidiary) - - - - Associates Krajowy Integrator Płatności S.A. - 2 - - Total of Bank Pekao S.A. Group entities 8 243 16 793 - - K ey management personnel of the Bank Pekao S.A. 1 - - - Total 8 257 16 818 - - 91 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Transactions with the State Treasury and significant transactions with entities related to the State Treasury The Bank's transactions with the State Treasury were mostly related to treasury securities and banking services. These transactions are concluded and settled on terms obtainable by customers who are not related parties. Significant transactions with the State Treasury and its related entities in accordance with the exception contained in IAS 24.25 are presented below. In relation to significant transactions with entities related to the State Treasury, the following presents the exposure, liabilities and off-balance sheet liabilities, as well as the impact on the income statement for clients who appear in at least one of the groups: 20 largest clients on the assets side, 20 largest clients on the liabilities side and the 20 largest clients with off-balance sheet financial and guarantee commitments granted. Significant balance sheet transactions with the State Treasury and its related entities as at 31 December 2023 NAME OF ENTITY RECEIVABLES FROM LOANS, ADVANCES AND PLACEMENTS SECURITIES RECEIVABLES FROM REVALUATION OF DERIVATIVES LIABILITIES FROM LOANS AND DEPOSITS LIABILITIES FROM REVALUATION OF DERIVATIVES State Treasury - 42 460 17 99 - Entities related to the State Treasury 3 852 18 839 232 17 307 272 Total 3 852 61 299 249 17 406 272 Significant balance sheet transactions with the State Treasury and its related entities as at 31 December 2022 NAME OF ENTITY RECEIVABLES FROM LOANS, ADVANCES AND PLACEMENTS SECURITIES RECEIVABLES FROM REVALUATION OF DERIVATIVES LIABILITIES FROM LOANS AND DEPOSITS LIABILITIES FROM REVALUATION OF DERIVATIVES State Treasury - 32 343 - 28 15 Entities related to the State Treasury 3 355 16 149 407 17 926 541 Total 3 355 48 492 407 17 954 556 Income and expenses from significant transactions with the State Treasury and its related entities for the period from 1 January to 31 December 2023 NAME OF ENTITY INTEREST INCOME INTERES EXPENSE FEE AND COMMISSION INCOME INCOME FROM DERIVATIVES AND OTHER EXPENSES FROM DERIVATIVES AND OTHER State Treasury 1 138 (13) 54 9 (25) Entities related to the State Treasury 737 (1 016) 78 670 (728) Total 1 875 (1 029) 132 679 (753) Income and expenses from significant transactions with the State Treasury and its related entities for the period from 1 January to 31 December 2022 NAME OF ENTITY INTEREST INCOME INTERES EXPENSE FEE AND COMMISSION INCOME INCOME FROM DERIVATIVES AND OTHER EXPENSES FROM DERIVATIVES AND OTHER State Treasury 689 (94) 6 176 (175) Entities related to the State Treasury 604 (572) 59 1 003 (829) Total 1 293 (666) 65 1 179 (1 004) 92 (w tys. zł) Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Significant off-balance sheet financial commitments and guarantees with the State Treasury and its related entities as at 31 December 2023 GRANTED RECEIVED NAME OF ENTITY FINANCIAL GUARANTEES FINANCIAL GUARANTEES State Treasury 200 - - - Entities related to the State Treasury 6 091 744 - - Total 6 291 744 - - Significant off-balance sheet financial commitments and guarantees with the State Treasury and its related entities as at 31 December 2022 GRANTED RECEIVED NAME OF ENTITY FINANCIAL GUARANTEES FINANCIAL GUARANTEES State Treasury 200 - - - Entities related to the State Treasury 15 572 1 363 5 - Total 15 772 1 363 5 - Bank Pekao S.A. 93 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Remuneration expenses of the Bank’s Management Board and Supervisory Board Members VALUE OF BENEFITS 2023 2022 Management Board of the Bank Short-term employee benefits () 16 14 Post- employment benefits - - Long-term benefits () 1 1 Share-based payments () 8 4 Total 25 19 Supervisory Board of the Bank Short-term employee benefits () 2 1 Total 2 1 () Short-term employee benefits include: base salary, bonuses and other benefits due in next 12 months from the date of the balance sheet. () The item "Other long-term benefit" includes: provisions for deferred bonus payments. () The value of share-based payments is a part of Personnel Expenses, recognized according to IFRS 2 during the reporting period in the income statement, representing the settlement of fair value of shares, including phantom shares, granted to the Members of the Bank’s Management Board. The Bank’s Management Board and Supervisory Board Members did not receive any remuneration from subsidiaries and associates in 2023 and 2022. 43. Risk management and fair value The risk management policy of the Bank aims at optimizing the structure of balance and off-balance sheet items taking into consideration the assumed risks-income relation and overall impact of various risks that the Bank undertakes in conducting its business activities. Risks are monitored and controlled with reference to profitability and capital coverage and are regularly reported in accordance with rules presented below. All significant risks incurred in the course of the Bank ’s operations are described in the further part of the Note. NOTE TITLE NOTE NUMBER Organizational structure of risk management 43.1 Credit risk 43.2 Legal risk regarding foreign currency mortgage loans in CHF 43.3 Market risk 43.4 Liquidity risk 43.5 Operational risk 43.6 Climate risk 43.7 Capital management 43.8 Fair value of financial assets and liabilities 43.9 Bank Pekao S.A. 94 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43.1. Organizational structure of risk management Supervisory Board The Supervisory Board provides supervision over implementation of the risk management system, assessing its adequacy and effectiveness. The Supervisory Board is responsible for approving the risk management strategy, including the objectives and main principles of risk management, taking into account the risk appetite, and for monitoring its compliance. Moreover, the Supervisory Board supervises the compliance of the Bank’s policy with respect to risk taking with the Bank’s strategy and financial plan. Carrying out their tasks, the Supervisory Board is assisted by the Risk Committee and the Audit Committee. Management Board The Management Board is responsible for the development, implementation and functioning of risk management processes by, among others, introduction of relevant, internal regulations, taking into consideration the results of internal audit inspections. The Management Board develops the risk management strategy and determines the risk appetite. The Management Board is responsible for the effectiveness of the risk management system, internal control system and internal capital assessment process. Moreover, the Management Board introduces the essential adjustments or improvements to those processes and systems whenever necessary. This need may be a consequence of changes to risk levels of the Bank’s operations, business environment factors or irregularities in the functioning of processes or systems. Periodically, the Management Board submits to the Supervisory Board concise information on the types, scale and significance of risks the Bank is exposed to, as well as on methods used in the management of such risks. The Management Board is responsible for assessing, whether activities such as identification, measurement, monitoring, reporting and control or mitigation are carried out appropriately within the scope of the risk management process. Moreover, the Management Board examines whether the management at all levels is effectively managing the risks within the scope of their competence. Committees Performing these risk management tasks, the Management Board is supported by the relevant committees: • Assets, Liabilities and Risk Management Committee - in market risk management, liquidity and capital adequacy, • Liquidity and Market Risk Committee, acting as support for the Assets, Liabilities and Risk Management Committee – in liquidity and market risk management, • Operational Risk Committee – in operational risk management, • Credit Risk Committee – in analyzing the Bank's credit risk profile, making important decisions within the area of credit risk management and issuing opinions on the credit risk strategy and policy, • Credit Committee – in making credit decisions within the powers, and in the case of issuing recommendations on the largest transactions presented to the Management Board for decision, • Safety Committee – in the field of security and business continuity management, • Model Risk Committee – in model risk management, • Recovery Plan Committee – for supporting the proces of creating, maintaining and updating the Recovery Plan prepared in accordance with applicable law. 43.2. Credit risk Credit risk is one of the basic risks associated with activities of the Bank . The percentage share of credits and loans in the Bank ’s statement of financial position makes the maintenance of this risk at safe level essential to the Bank ’s performance. The process of credit risk management is centralized and managed mainly by Risk Management Division units, situated at the Bank Head Office or in local units. Risk management process covers all credit functions – credit analysis, making credit decisions, monitoring and loan administration, as well as restructuring and collection. These functions are conducted in compliance with the Bank’s credit policy, adopted by the Bank’s Management Board and the Bank’s Supervisory Board for a given reporting year. The effectiveness and efficiency of credit functions are achieved using diverse credit methods and methodologies, supported by advanced IT tools, integrated into the Bank’s general IT system. The Bank’s procedures facilitate credit risk mitigation, in particular those related to transaction risk evaluation, to establishing collateral, setting authorization limits for granting loans and limiting of exposure to some areas of business activity in line with current client’s segmentation scheme in the Bank. Credit granting authorizations, restrictions on crediting the specific business activities as well as internal and external prudential standards include not only credits, loans and guarantees, but also derivatives transactions and debt securities. The Bank’s lending activity is limited by the restrictions of the external regulation as well as internal prudential standards in order to increase safety. These restrictions refer in particular to credit exposure concentration, credit quality ratios and exposure limits for particular foreign countries, foreign banks and domestic financial institutions. Bank Pekao S.A. 95 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The Bank established the following portfolio limits in the Bank’s strategy or credit risk policy: • exposure limits for sectors of economy, • limits on the concentration of the largest exposures to entities / groups of related entities, • limits for main business lines and currency receivables, • product limits (mortgage loans to private individuals, exposures to business entities secured by mortgage, inculidng financing commercial real estate). The internal limits system operating in the Bank also includes a number of detailed limits supporting key limits set out in the strategy and credit risk policy. Moreover, the Bank limits higher risk credit transactions, marked by excess risk by restricting the decision-making powers in such cases to higher-level decision-making bodies. The management of the Bank’s credit portfolio quality is further supported by regular reviews and continuous monitoring of timely loan repayments and the financial condition of the borrowers. Armed conflict in Ukraine In connection with Russia’s armed attack on Ukraine, which has been ongoing since 2022, the Bank identifies the following threats in the area of credit risk: • credit loss risk for exposures to entities from Russia, Belarus and Ukraine, with the Bank’s exposure in this regard mostly covered by KUKE policies, • the risk that the conflict will translate into deterioration of the economic and credit conditions for the rest of the portfolio (through the raw material price growth channel, disruption of economic relations, deterioration of consumer sentiment, etc.). As at 31 December 2023, the Bank’s balance sheet net exposure to countries involved in the conflict amounted to PLN 129 million (which represents 0.09% of the Bank’s total exposure), as at 31 December 2022 amounted to PLN 225 million (which represents 0.15% of the Bank’s total exposure). The tables below present the Bank’s exposures to countries involved in the armed conflict in Ukraine as at 31 December 2023 and 31 December 2022. 31.12.2023 UKRAINE RUSSIA BELARUS TOTAL Balance sheet exposures Loans and advances to banks - - 60 60 Loans and advances to customers (including receivables from finance leases) 32 - 39 71 Gross carrying amount 32 - 99 131 Impairment allowances (1) - (1) (2) Net carrying amount 31 - 98 129 Off- balance sheet exposures Financial commitments granted - - - - Guarantees issued - - - - Total nominal value - - - - Impairment allowances of off-balance sheet commitments granted - - - - 31.12.2022 UKRAINE RUSSIA BELARUS TOTAL Balance sheet exposures Loans and advances to banks - - 128 128 Loans and advances to customers (including receivables from finance leases) 38 - 63 101 Gross carrying amount 38 - 191 229 Impairment allowances (1) - (3) (4) Net carrying amount 37 - 188 225 Off- balance sheet exposures Financial commitments granted - - - - Guarantees issued - 70 - 70 Total nominal value - 70 - 70 Impairment allowances of off-balance sheet commitments granted - (7) - (7) Bank Pekao S.A. 96 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Rating models utilized in the credit risk management process For credit risk management purposes, the Bank uses the internal rating models depending on the client’s segment and/or exposure type. The rating process is a significant element of credit risk assessment in relation to clients and transactions, and constitutes a preliminary stage of the credit decision-making process of granting a new credit or changing the terms and conditions of an existing credit and of the credit portfolio quality monitoring process. In the credit risk measurement the following three parameters are used: PD, LGD and EAD. PD is the probability of a client’s failure to meet its obligations and hence the violation of contract terms and conditions by the borrower within one year horizon, such default may be subject-matter or product-related. LGD indicates the estimated value of the loss to be incurred for any credit transaction from the date of occurrence of such default. EAD reflects the estimated value of credit exposure as at such date. The risk parameters based on the rating models are designed for calculation of the expected losses resulted from credit risk. The value of expected loss is one of the significant assessment criteria taken into consideration by the decision-making bodies in the course of the crediting process. In particular, this value is compared to the requested margin level. The level of minimum margins for given products or client segments is determined based upon risk analysis, taking into consideration the value of risk parameters assessed. The client and transaction rating, as well as other credit risk parameters hold a significant role in the Credit Risk Management Information System. For each rating model, the credit risk reports provide information on the comparison between the realized parameters and the theoretical values for each rating class. Credit risk reports are generated on a monthly basis, with their scope varying depending upon the recipient of the report (the higher the management level, the more aggregated the information presented). Credit risk reports are being used in the credit risk management process. For internal purposes, within the Bank the following rating models are used, developed in accordance with provisions 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: 1) For the retail clients, the Bank uses the following models applicable for: • micro-enterprises, • private individuals, dividing clients into: o mortgage loans (secured by mortgage) o consumer loans (consumer), o credit cards, o renewable limits. 2) For the corporate clients, the Bank uses rating models dividing clients into: • corporate clients (corporations), • small and medium enterprises (SME), • local government units. 3) For specialized lending the Bank uses a slotting criteria approach to the Internal Ratings Based Approach, which consists of the use of supervisory classes in the process of assigning risk weights. 4) For specialized lending the Bank uses a slotting criteria approach to the Internal Ratings Based Approach, which consists of the use of supervisory classes in the process of assigning risk weights. In 2022, the Bank started the process of adjusting the rating scale for internal rating models in line with the rating scale applicable to external ratings - called Masterscale. Bank Pekao S.A. 97 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The Masterscale is presented in the table below: CLASS DESCRIPTION AA AA- High quality A+ A A- Strong payment capacity BBB+ BBB BBB- Adequate payment capacity Investment grade BB+ BB BB- Likely to fulfil obligations outgoing uncertainty B+ B B- High credit risk CCC Very high credit risk CC C Near default with possibility of recovery Speculative grade At the end of 2023, the rating models within the corporate client / enterprise segment and the private individuals within retail clients segment were mapped to the Masterscale. The following exposure types are not covered by internal rating models: 1) retail exposures immaterial in terms of size and perceived risk profile: • overdrafts , • exposures related to the Building Society (Kasa Mieszkaniowa) unit, • other loans . 2) corporate clients: • exposures to stock exchanges and other financial intermediators, • exposures to insurance companies, • project financing, • purchased receivables, • exposures to investment funds, • exposures to leasing companies and financial holding companies, • other loans immaterial in terms of size and perceived risk profile. 3) exposures to regional governments and local authorities which are not treated as exposures to central governments, for which the number of significant counterparties is limited. Bank Pekao S.A. 98 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The tables below present the quality of the loan portfolio. The distribution of rated portfolio for retail client segment (excluding impaired loans) 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO MICRO-ENTERPRISES (MASTERSCALE) AA 0% <= PD <= 0.01000% 8 - 8 49 - 49 1.7% AA- 0.01000% < PD <= 0.01700% 9 - 9 30 - 30 1.2% A+ 0.01700% < PD <= 0.02890% 21 - 21 60 - 60 2.4% A 0.02890% < PD <= 0.04913% 31 - 31 64 2 66 2.9% A- 0.04913% < PD <= 0.08352% 42 - 42 85 - 85 3.8% BBB+ 0.08352% < PD <= 0.14199% 67 1 68 103 1 104 5.1% BBB 0.14199% < PD <= 0.24138% 107 - 107 125 2 127 6.9% BBB- 0.24138% < PD <= 0.41034% 150 2 152 119 5 124 8.2% BB+ 0.41034% < PD <= 0.69758% 200 6 206 91 3 94 8.9% BB 0.69758% < PD <= 1.18588% 245 18 263 67 6 73 10.0% BB- 1.18588% < PD <= 2.01599% 303 31 334 37 2 39 11.0% B+ 2.01599% < PD <= 3.42719% 251 53 304 23 2 25 9.7% B 3.42719% < PD <= 5.82622% 405 51 456 161 2 163 18.3% B- 5.82622% < PD <= 9.90458% 89 34 123 9 1 10 3.9% CCC 9.90458% < PD <= 16.83778% 41 20 61 3 1 4 1.9% CC 16.83778% < PD <= 28.62423% 23 22 45 2 1 3 1.4% C 28.62423% < PD <= 100% 21 66 87 1 3 4 2.7% Total 2 013 304 2 317 1 029 31 1 060 100.0% PRIVATE INDIVIDUALS MORTGAGE LOANS (SECURED MORTGAGE) (MASTERSCALE) AA 0% <= PD <= 0.01000% 863 40 903 9 1 10 1.4% AA- 0.01000% < PD <= 0.01700% 1 091 47 1 138 19 1 20 1.8% A+ 0.01700% < PD <= 0.02890% 2 271 83 2 354 52 2 54 3.8% A 0.02890% < PD <= 0.04913% 4 101 140 4 241 111 1 112 6.9% A- 0.04913% < PD <= 0.08352% 6 082 185 6 267 213 3 216 10.3% BBB+ 0.08352% < PD <= 0.14199% 8 136 276 8 412 340 3 343 13.9% BBB 0.14199% < PD <= 0.24138% 9 487 365 9 852 442 6 448 16.4% BBB- 0.24138% < PD <= 0.41034% 8 860 468 9 328 373 4 377 15.4% BB+ 0.41034% < PD <= 0.69758% 6 656 461 7 117 332 6 338 11.8% BB 0.69758% < PD <= 1.18588% 4 200 495 4 695 223 4 227 7.8% BB- 1.18588% < PD <= 2.01599% 1 831 738 2 569 105 3 108 4.2% B+ 2.01599% < PD <= 3.42719% 569 851 1 420 31 3 34 2.3% B 3.42719% < PD <= 5.82622% 177 649 826 8 3 11 1.3% B- 5.82622% < PD <= 9.90458% 58 481 539 2 4 6 0.9% CCC 9.90458% < PD <= 16.83778% 35 365 400 - 3 3 0.6% CC 16.83778% < PD <= 28.62423% 17 234 251 1 1 2 0.4% C 28.62423% < PD <= 100% 8 510 518 - 3 3 0.8% Total 54 442 6 388 60 830 2 261 51 2 312 100.0% CASH LOANS (CONSUMER) (MASTERSCALE) AA 0% <= PD <= 0.01000% 23 - 23 - - - 0.2% AA- 0.01000% < PD <= 0.01700% 32 - 32 - - - 0.3% A+ 0.01700% < PD <= 0.02890% 64 1 65 - - - 0.6% A 0.02890% < PD <= 0.04913% 127 2 129 - - - 1.2% A- 0.04913% < PD <= 0.08352% 251 7 258 - - - 2.3% BBB+ 0.08352% < PD <= 0.14199% 416 11 427 - - - 3.9% BBB 0.14199% < PD <= 0.24138% 628 18 646 - - - 5.8% BBB- 0.24138% < PD <= 0.41034% 947 36 983 - - - 8.9% Bank Pekao S.A. 99 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO BB+ 0.41034% < PD <= 0.69758% 1 205 53 1 258 - - - 11.4% BB 0.69758% < PD <= 1.18588% 1 368 86 1 454 - - - 13.1% BB- 1.18588% < PD <= 2.01599% 1 497 136 1 633 - - - 14.6% B+ 2.01599% < PD <= 3.42719% 1 286 177 1 463 - - - 13.2% B 3.42719% < PD <= 5.82622% 906 192 1 098 - - - 9.9% B- 5.82622% < PD <= 9.90458% 473 200 673 - - - 6.1% CCC 9.90458% < PD <= 16.83778% 196 170 366 - - - 3.3% CC 16.83778% < PD <= 28.62423% 80 138 218 - - - 2.0% C 28.62423% < PD <= 100% 45 307 352 - - - 3.2% Total 9 544 1 534 11 078 - - - 100.0% CREDIT CARDS (MASTERSCALE) AA 0% <= PD <= 0.01000% 58 - 58 579 - 579 19.4% AA- 0.01000% < PD <= 0.01700% 27 - 27 210 - 210 7.3% A+ 0.01700% < PD <= 0.02890% 38 - 38 245 - 245 8.7% A 0.02890% < PD <= 0.04913% 45 - 45 253 - 253 9.1% A- 0.04913% < PD <= 0.08352% 58 - 58 261 - 261 9.8% BBB+ 0.08352% < PD <= 0.14199% 72 - 72 237 - 237 9.5% BBB 0.14199% < PD <= 0.24138% 75 - 75 196 - 196 8.3% BBB- 0.24138% < PD <= 0.41034% 84 - 84 160 - 160 7.5% BB+ 0.41034% < PD <= 0.69758% 87 1 88 117 - 117 6.3% BB 0.69758% < PD <= 1.18588% 70 2 72 71 2 73 4.4% BB- 1.18588% < PD <= 2.01599% 55 6 61 41 3 44 3.2% B+ 2.01599% < PD <= 3.42719% 31 15 46 18 8 26 2.2% B 3.42719% < PD <= 5.82622% 10 21 31 4 9 13 1.4% B- 5.82622% < PD <= 9.90458% 5 19 24 2 7 9 1.0% CCC 9.90458% < PD <= 16.83778% 3 14 17 - 3 3 0.6% CC 16.83778% < PD <= 28.62423% 2 12 14 - 2 2 0.5% C 28.62423% < PD <= 100% - 20 20 - 1 1 0.6% Total 720 110 830 2 394 35 2 429 100.0% LIMITS (MASTERSCALE) AA 0% <= PD <= 0.01000% 3 - 3 184 - 184 18.5% AA- 0.01000% < PD <= 0.01700% 3 - 3 103 - 103 10.5% A+ 0.01700% < PD <= 0.02890% 5 - 5 111 - 111 11.5% A 0.02890% < PD <= 0.04913% 8 - 8 96 - 96 10.3% A- 0.04913% < PD <= 0.08352% 13 - 13 76 - 76 8.8% BBB+ 0.08352% < PD <= 0.14199% 19 - 19 58 - 58 7.6% BBB 0.14199% < PD <= 0.24138% 25 - 25 45 - 45 6.9% BBB- 0.24138% < PD <= 0.41034% 28 - 28 32 - 32 6.0% BB+ 0.41034% < PD <= 0.69758% 30 1 31 23 - 23 5.4% BB 0.69758% < PD <= 1.18588% 27 1 28 16 - 16 4.4% BB- 1.18588% < PD <= 2.01599% 21 2 23 10 1 11 3.4% B+ 2.01599% < PD <= 3.42719% 13 5 18 5 2 7 2.5% B 3.42719% < PD <= 5.82622% 5 8 13 1 2 3 1.6% B- 5.82622% < PD <= 9.90458% 2 6 8 - 1 1 0.9% CCC 9.90458% < PD <= 16.83778% 2 5 7 - 1 1 0.8% CC 16.83778% < PD <= 28.62423% 1 4 5 - - - 0.5% C 28.62423% < PD <= 100% - 4 4 - - - 0.4% Total 205 36 241 760 7 767 100.0% Retail client segment - total 66 924 8 372 75 296 6 444 124 6 568 Bank Pekao S.A. 100 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The distribution of rated portfolio for retail client segment (excluding impaired loans) 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO MICRO-ENTERPRISES 1 0% <= PD < 0.06% 1 - 1 5 - 5 0.2% 2 0.06% <= PD < 0.14% 112 - 112 135 - 135 7.8% 3 0.14% <= PD < 0.35% 411 3 414 251 2 253 21.1% 4 0.35% <= PD < 0.88% 539 31 570 181 22 203 24.5% 5 0.88% <= PD < 2.10% 506 47 553 100 12 112 21.0% 6 2.10% <= PD < 4.00% 256 50 306 39 7 46 11.1% 7 4.00% <= PD < 7.00% 133 40 173 28 3 31 6.5% 8 7.00% <= PD < 12.00% 62 24 86 6 1 7 3.0% 9 12.00% <= PD < 22.00% 35 39 74 4 2 6 2.5% 10 22.00% <= PD < 100% 9 61 70 1 3 4 2.3% Total 2 064 295 2 359 750 52 802 100.0% PRIVATE INDIVIDUALS MORTGAGE LOANS (SECURED MORTGAGE) (MASTERSCALE) AA 0% <= PD <= 0.01000% 1 112 69 1 181 6 - 6 2.0% AA- 0.01000% < PD <= 0.01700% 1 352 66 1 418 8 2 10 2.4% A+ 0.01700% < PD <= 0.02890% 2 654 131 2 785 18 1 19 4.7% A 0.02890% < PD <= 0.04913% 4 415 199 4 614 37 2 39 7.8% A- 0.04913% < PD <= 0.08352% 6 221 264 6 485 72 3 75 11.0% BBB+ 0.08352% < PD <= 0.14199% 7 949 355 8 304 103 3 106 14.1% BBB 0.14199% < PD <= 0.24138% 8 827 456 9 283 117 6 123 15.8% BBB- 0.24138% < PD <= 0.41034% 7 962 582 8 544 130 4 134 14.6% BB+ 0.41034% < PD <= 0.69758% 5 678 460 6 138 92 6 98 10.5% BB 0.69758% < PD <= 1.18588% 3 721 310 4 031 72 2 74 6.9% BB- 1.18588% < PD <= 2.01599% 1 818 414 2 232 41 2 43 3.8% B+ 2.01599% < PD <= 3.42719% 660 644 1 304 19 2 21 2.2% B 3.42719% < PD <= 5.82622% 219 578 797 6 3 9 1.3% B- 5.82622% < PD <= 9.90458% 46 527 573 1 4 5 1.0% CCC 9.90458% < PD <= 16.83778% 2 404 406 - 3 3 0.7% CC 16.83778% < PD <= 28.62423% 1 291 292 - 1 1 0.5% C 28.62423% < PD <= 100% - 430 430 - 3 3 0.7% Total 52 637 6 180 58 817 722 47 769 100.0% CASH LOANS (CONSUMER) (MASTERSCALE) AA 0% <= PD <= 0.01000% 27 1 28 - - - 0.3% AA- 0.01000% < PD <= 0.01700% 33 1 34 - - - 0.3% A+ 0.01700% < PD <= 0.02890% 67 2 69 - - - 0.7% A 0.02890% < PD <= 0.04913% 133 3 136 - - - 1.3% A- 0.04913% < PD <= 0.08352% 252 11 263 - - - 2.6% BBB+ 0.08352% < PD <= 0.14199% 405 15 420 - - - 4.1% BBB 0.14199% < PD <= 0.24138% 598 26 624 - - - 6.2% BBB- 0.24138% < PD <= 0.41034% 890 47 937 - - - 9.2% BB+ 0.41034% < PD <= 0.69758% 1 112 83 1 195 - - - 11.8% BB 0.69758% < PD <= 1.18588% 1 190 132 1 322 - - - 13.0% BB- 1.18588% < PD <= 2.01599% 1 230 196 1 426 - - - 14.1% B+ 2.01599% < PD <= 3.42719% 1 022 256 1 278 - - - 12.6% B 3.42719% < PD <= 5.82622% 681 262 943 - - - 9.3% B- 5.82622% < PD <= 9.90458% 350 245 595 - - - 5.9% CCC 9.90458% < PD <= 16.83778% 139 201 340 - - - 3.3% CC 16.83778% < PD <= 28.62423% 48 167 215 - - - 2.1% C 28.62423% < PD <= 100% - 327 327 - - - 3.2% Total 8 177 1 975 10 152 - - - 100.0% Bank Pekao S.A. 101 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The distribution of rated portfolio for corporate client segment (excluding impaired loans) 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO CREDIT CARDS (MASTERSCALE) AA 0% <= PD <= 0.01000% 51 8 59 525 11 536 20.2% AA- 0.01000% < PD <= 0.01700% 24 3 27 188 4 192 7.4% A+ 0.01700% < PD <= 0.02890% 33 4 37 219 5 224 8.9% A 0.02890% < PD <= 0.04913% 40 4 44 228 5 233 9.4% A- 0.04913% < PD <= 0.08352% 51 5 56 226 5 231 9.8% BBB+ 0.08352% < PD <= 0.14199% 60 6 66 201 4 205 9.2% BBB 0.14199% < PD <= 0.24138% 63 6 69 166 4 170 8.1% BBB- 0.24138% < PD <= 0.41034% 68 8 76 131 3 134 7.1% BB+ 0.41034% < PD <= 0.69758% 71 8 79 98 3 101 6.1% BB 0.69758% < PD <= 1.18588% 58 6 64 61 2 63 4.3% BB- 1.18588% < PD <= 2.01599% 49 4 53 38 1 39 3.1% B+ 2.01599% < PD <= 3.42719% 38 4 42 22 1 23 2.2% B 3.42719% < PD <= 5.82622% 26 3 29 12 - 12 1.4% B- 5.82622% < PD <= 9.90458% 5 16 21 2 6 8 1.0% CCC 9.90458% < PD <= 16.83778% - 16 16 - 4 4 0.7% CC 16.83778% < PD <= 28.62423% - 11 11 - 2 2 0.4% C 28.62423% < PD <= 100% - 17 17 - 2 2 0.7% Total 637 129 766 2 117 62 2 179 100.0% LIMITS (MASTERSCALE) AA 0% <= PD <= 0.01000% 5 - 5 199 - 199 20.6% AA- 0.01000% < PD <= 0.01700% 4 - 4 104 - 104 10.9% A+ 0.01700% < PD <= 0.02890% 7 - 7 108 - 108 11.6% A 0.02890% < PD <= 0.04913% 11 - 11 92 - 92 10.4% A- 0.04913% < PD <= 0.08352% 17 - 17 74 - 74 9.2% BBB+ 0.08352% < PD <= 0.14199% 22 - 22 54 - 54 7.7% BBB 0.14199% < PD <= 0.24138% 27 - 27 41 - 41 6.9% BBB- 0.24138% < PD <= 0.41034% 28 - 28 29 - 29 5.8% BB+ 0.41034% < PD <= 0.69758% 28 - 28 22 - 22 5.1% BB 0.69758% < PD <= 1.18588% 25 - 25 14 - 14 4.0% BB- 1.18588% < PD <= 2.01599% 19 - 19 9 - 9 2.8% B+ 2.01599% < PD <= 3.42719% 14 - 14 5 - 5 1.9% B 3.42719% < PD <= 5.82622% 9 - 9 2 - 2 1.1% B- 5.82622% < PD <= 9.90458% 2 5 7 - 1 1 0.8% CCC 9.90458% < PD <= 16.83778% - 5 5 - 1 1 0.6% CC 16.83778% < PD <= 28.62423% - 3 3 - - - 0.3% C 28.62423% < PD <= 100% - 3 3 - - - 0.3% Total 218 16 234 753 2 755 100.0% Retail client segment - total 63 733 8 595 72 328 4 342 163 4 505 Bank Pekao S.A. 102 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The distribution of rated portfolio for corporate client segment (excluding impaired loans) 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO CORPORATES (MASTERSCALE) AA 0% <= PD <= 0.01000% - - - - - - 0.0% AA- 0.01000% < PD <= 0.01700% - - - - - - 0.0% A+ 0.01700% < PD <= 0.02890% - - - - - - 0.0% A 0.02890% < PD <= 0.04913% - - - - - - 0.0% A- 0.04913% < PD <= 0.08352% 168 - 168 357 - 357 0.5% BBB+ 0.08352% < PD <= 0.14199% 95 - 95 1 001 5 1 006 1.1% BBB 0.14199% < PD <= 0.24138% 1 292 10 1 302 4 373 121 4 494 5.8% BBB- 0.24138% < PD <= 0.41034% 2 364 32 2 396 6 891 62 6 953 9.3% BB+ 0.41034% < PD <= 0.69758% 6 069 246 6 315 7 419 198 7 617 13.9% BB 0.69758% < PD <= 1.18588% 13 946 343 14 289 33 345 154 33 499 47.6% BB- 1.18588% < PD <= 2.01599% 3 104 1 153 4 257 4 484 477 4 961 9.2% B+ 2.01599% < PD <= 3.42719% 1 962 176 2 138 916 200 1 116 3.2% B 3.42719% < PD <= 5.82622% 1 226 746 1 972 742 571 1 313 3.3% B- 5.82622% < PD <= 9.90458% 812 756 1 568 497 323 820 2.4% CCC 9.90458% < PD <= 16.83778% 20 992 1 012 - 422 422 1.4% CC 16.83778% < PD <= 28.62423% 1 221 47 1 268 1 029 11 1 040 2.3% C 28.62423% < PD <= 100% - - - - 1 1 0.0% Total 32 279 4 501 36 780 61 054 2 545 63 599 100.0% SME (MASTERSCALE) AA 0% <= PD <= 0.01000% 4 - 4 1 - 1 0.0% AA- 0.01000% < PD <= 0.01700% 2 - 2 1 - 1 0.0% A+ 0.01700% < PD <= 0.02890% 2 - 2 13 - 13 0.1% A 0.02890% < PD <= 0.04913% 22 - 22 69 - 69 0.8% A- 0.04913% < PD <= 0.08352% 38 - 38 265 - 265 2.8% BBB+ 0.08352% < PD <= 0.14199% 106 - 106 217 4 221 3.0% BBB 0.14199% < PD <= 0.24138% 227 4 231 339 11 350 5.3% BBB- 0.24138% < PD <= 0.41034% 420 25 445 614 31 645 10.0% BB+ 0.41034% < PD <= 0.69758% 629 43 672 637 37 674 12.3% BB 0.69758% < PD <= 1.18588% 611 92 703 469 68 537 11.4% BB- 1.18588% < PD <= 2.01599% 873 94 967 411 40 451 13.0% B+ 2.01599% < PD <= 3.42719% 1 091 141 1 232 451 42 493 15.8% B 3.42719% < PD <= 5.82622% 518 224 742 204 120 324 9.8% B- 5.82622% < PD <= 9.90458% 492 289 781 105 76 181 8.8% CCC 9.90458% < PD <= 16.83778% 75 237 312 48 64 112 3.9% CC 16.83778% < PD <= 28.62423% 84 86 170 61 3 64 2.1% C 28.62423% < PD <= 100% 4 62 66 2 12 14 0.7% Total 5 198 1 297 6 495 3 907 508 4 415 100.0% Corporate clients - total 37 477 5 798 43 275 64 961 3 053 68 014 Bank Pekao S.A. 103 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO CORPORATES (MASTERSCALE) AA 0% <= PD <= 0.01000% - - - - - - 0.0% AA- 0.01000% < PD <= 0.01700% - - - - - - 0.0% A+ 0.01700% < PD <= 0.02890% - - - - - - 0.0% A 0.02890% < PD <= 0.04913% - - - - - - 0.0% A- 0.04913% < PD <= 0.08352% - - - 50 - 50 0.1% BBB+ 0.08352% < PD <= 0.14199% 76 - 76 299 - 299 0.6% BBB 0.14199% < PD <= 0.24138% 630 114 744 1 369 15 1 384 3.2% BBB- 0.24138% < PD <= 0.41034% 2 270 1 2 271 2 227 5 2 232 6.8% BB+ 0.41034% < PD <= 0.69758% 2 445 - 2 445 14 988 9 14 997 26.4% BB 0.69758% < PD <= 1.18588% 2 830 - 2 830 3 275 1 3 276 9.3% BB- 1.18588% < PD <= 2.01599% 2 229 197 2 426 2 184 105 2 289 7.1% B+ 2.01599% < PD <= 3.42719% 1 275 900 2 175 1 390 208 1 598 5.7% B 3.42719% < PD <= 5.82622% 1 742 235 1 977 5 181 198 5 379 11.2% B- 5.82622% < PD <= 9.90458% 2 839 375 3 214 14 528 164 14 692 27.1% CCC 9.90458% < PD <= 16.83778% 281 628 909 77 617 694 2.4% CC 16.83778% < PD <= 28.62423% - 14 14 - 48 48 0.1% C 28.62423% < PD <= 100% - - - - - - 0.0% Total 16 617 2 464 19 081 45 568 1 370 46 938 100.0% SME (MASTERSCALE) AA 0% <= PD <= 0.01000% - - - - - - 0.0% AA- 0.01000% < PD <= 0.01700% - - - - - - 0.0% A+ 0.01700% < PD <= 0.02890% 3 - 3 3 - 3 0.0% A 0.02890% < PD <= 0.04913% 29 - 29 63 - 63 0.3% A- 0.04913% < PD <= 0.08352% 95 - 95 193 17 210 0.9% BBB+ 0.08352% < PD <= 0.14199% 368 4 372 590 10 600 2.9% BBB 0.14199% < PD <= 0.24138% 947 52 999 1 498 46 1 544 7.6% BBB- 0.24138% < PD <= 0.41034% 2 184 43 2 227 1 837 27 1 864 12.2% BB+ 0.41034% < PD <= 0.69758% 1 908 50 1 958 1 962 65 2 027 11.8% BB 0.69758% < PD <= 1.18588% 2 721 147 2 868 2 114 147 2 261 15.2% BB- 1.18588% < PD <= 2.01599% 2 602 426 3 028 1 107 179 1 286 12.8% B+ 2.01599% < PD <= 3.42719% 945 431 1 376 592 164 756 6.3% B 3.42719% < PD <= 5.82622% 1 786 315 2 101 933 326 1 259 10.0% B- 5.82622% < PD <= 9.90458% 2 497 940 3 437 1 420 303 1 723 15.3% CCC 9.90458% < PD <= 16.83778% 181 804 985 73 248 321 3.9% CC 16.83778% < PD <= 28.62423% 9 120 129 - 50 50 0.5% C 28.62423% < PD <= 100% 9 54 63 - 31 31 0.3% Total 16 284 3 386 19 670 12 385 1 613 13 998 100.0% Corporate clients - total 32 901 5 850 38 751 57 953 2 983 60 936 Bank Pekao S.A. 104 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The distribution of rated portfolio for local government units segment (excluding impaired loans) 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO LOCAL GOVERNMENT UNITS (MASTERSCALE) AA 0% <= PD <= 0.01000% - - - - - - 0.0% AA- 0.01000% < PD <= 0.01700% - - - - - - 0.0% A+ 0.01700% < PD <= 0.02890% - - - - - - 0.0% A 0.02890% < PD <= 0.04913% - - - - - - 0.0% A- 0.04913% < PD <= 0.08352% - - - 3 - 3 0.3% BBB+ 0.08352% < PD <= 0.14199% 95 - 95 12 - 12 9.1% BBB 0.14199% < PD <= 0.24138% 38 - 38 86 - 86 10.5% BBB- 0.24138% < PD <= 0.41034% 167 - 167 104 - 104 23.0% BB+ 0.41034% < PD <= 0.69758% 188 - 188 301 - 301 41.6% BB 0.69758% < PD <= 1.18588% 104 - 104 32 - 32 11.6% BB- 1.18588% < PD <= 2.01599% 19 - 19 27 - 27 3.9% B+ 2.01599% < PD <= 3.42719% - - - - - - 0.0% B 3.42719% < PD <= 5.82622% - - - - - - 0.0% B- 5.82622% < PD <= 9.90458% - - - - - - 0.0% CCC 9.90458% < PD <= 16.83778% - - - - - - 0.0% CC 16.83778% < PD <= 28.62423% - - - - - - 0.0% C 28.62423% < PD <= 100% - - - - - - 0.0% Total 611 - 611 565 - 565 100.0% 31.12.2022 GROSS CARRYING AMOUNT OF ON- BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS RANGE OF PD STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO LOCAL GOVERNMENT UNITS (MASTERSCALE) AA 0% <= PD <= 0.01000% - - - - - - 0.0% AA- 0.01000% < PD <= 0.01700% - - - - - - 0.0% A+ 0.01700% < PD <= 0.02890% - - - - - - 0.0% A 0.02890% < PD <= 0.04913% - - - - - - 0.0% A- 0.04913% < PD <= 0.08352% 3 - 3 13 - 13 1.3% BBB+ 0.08352% < PD <= 0.14199% 152 - 152 32 - 32 15.1% BBB 0.14199% < PD <= 0.24138% 247 - 247 20 - 20 21.8% BBB- 0.24138% < PD <= 0.41034% 128 - 128 30 - 30 12.9% BB+ 0.41034% < PD <= 0.69758% 214 - 214 257 - 257 38.5% BB 0.69758% < PD <= 1.18588% 104 - 104 3 - 3 8.8% BB- 1.18588% < PD <= 2.01599% 18 - 18 1 - 1 1.6% B+ 2.01599% < PD <= 3.42719% - - - - - - 0.0% B 3.42719% < PD <= 5.82622% - - - - - - 0.0% B- 5.82622% < PD <= 9.90458% - - - - - - 0.0% CCC 9.90458% < PD <= 16.83778% - - - - - - 0.0% CC 16.83778% < PD <= 28.62423% - - - - - - 0.0% C 28.62423% < PD <= 100% - - - - - - 0.0% Total 866 - 866 356 - 356 100.0% Bank Pekao S.A. 105 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The distribution of the portfolio exposure to specialized lending (excluding impaired loans) 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO EXPOSURE TO SPECIALIZED LENDING High 341 - 341 328 - 328 3.2% Good 12 847 656 13 503 5 249 364 5 613 90.6% Satisfactory 434 573 1 007 229 68 297 6.2% Low - - - - - - 0.0% Total 13 622 1 229 14 851 5 806 432 6 238 100.0% 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES RATING CLASS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO EXPOSURE TO SPECIALIZED LENDING High 597 - 597 12 - 12 4.2% Good 8 917 136 9 053 2 274 44 2 318 79.3% Satisfactory 364 1 801 2 165 198 - 198 16.5% Low - 2 2 - - - 0.0% Total 9 878 1 939 11 817 2 484 44 2 528 100.0% Portfolio of exposures not covered by the rating model (excluding impaired loans), broken down by delays in repayment 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO EXPOSURES NOT COVERED BY THE RATING MODEL Not past due 5 682 481 6 163 2 115 344 2 459 97.7% Past due , of which : 90 111 201 - - - 2.3% up to 1 month 76 49 125 - - - 1.4% between 1 month and 2 months 13 31 44 - - - 0.5% between 2 and 3 months 1 31 32 - - - 0.4% Total 5 772 592 6 364 2 115 344 2 459 100.0% 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL % PORTFOLIO EXPOSURES NOT COVERED BY THE RATING MODEL Not past due 15 416 499 15 915 13 503 364 13 867 93.8% Past due , of which : 307 1 640 1 947 27 - 27 6.2% up to 1 month 300 1 220 1 520 27 - 27 4.9% between 1 month and 2 months 7 419 426 - - - 1.3% between 2 and 3 months - 1 1 - - - 0.0% Total 15 723 2 139 17 862 13 530 364 13 894 100.0% Bank Pekao S.A. 106 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Portfolio of impaired exposures, broken down by delays in repayment 31.12.2023 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO IMPAIRED EXPOSURES Not past due 786 2 061 192 3 039 459 40 16 515 33.3% Past due , of which : 2 165 3 501 1 426 7 092 6 6 1 13 66.7% up to 1 month 60 369 43 472 1 1 - 2 4.4% between 1 month and 3 months 32 272 16 320 1 2 - 3 3.0% between 3 months and 1 year 647 553 25 1 225 2 1 - 3 11.5% between 1 year and 5 years 229 1 406 568 2 203 2 1 1 4 20.7% above 5 years 1 197 901 774 2 872 - 1 - 1 27.1% Total 2 951 5 562 1 618 10 131 465 46 17 528 100.0% 31.12.2022 GROSS CARRYING AMOUNT OF ON-BALANCE EXPOSURES NOMINAL AMOUNT OF OFF-BALANCE EXPOSURES STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO IMPAIRED EXPOSURES Not past due 562 2 003 257 2 822 201 42 15 258 29.5% Past due , of which : 3 368 2 897 1 071 7 336 14 4 1 19 70.5% up to 1 month 546 368 22 936 - 1 - 1 9.0% between 1 month and 3 months 13 210 22 245 - - - - 2.4% between 3 months and 1 year 57 519 29 605 - 1 1 2 5.8% between 1 year and 5 years 643 1 126 607 2 376 14 1 - 15 22.9% above 5 years 2 109 674 391 3 174 - 1 - 1 30.4% Total 3 930 4 900 1 328 10 158 215 46 16 277 100.0% Bank Pekao S.A. 107 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Client/transaction rating and credit risk decision-making level Decision-making level connected with transaction approval is directly dependent upon the client’s rating. Decision-making entitlement limits are associated with the position held, determined in accordance with the Bank’s organizational structure. The limits are determined taking the following matters into consideration: • the Bank’s total exposure to a client, including the amount of the requested transaction, • type of a client, • commitments of persons and entities associated with the client. Validation of rating models The internal validation of models and risk parameter assessments is focused on the quality assessment of risk models and the accuracy and stability of parameter assessments, applied by the Bank. Validation is carried out at the level of each risk model, although the Bank may apply several models for each class of exposures. Moreover, the internal audit unit is obligated to review the Bank’s rating systems and their functionality at least once a year. In particular, the internal audit unit reviews the scope of operations of credit division and estimations of risk parameters. Division of loans and advances to customers for covered and not covered by internal rating models 31.12.2023 PORTFOLIO GROSS CARRYING AMOUNT IMPAIRMENT ALLOWANCE NET CARRYING AMOUNT Exposures with no impairment 140 397 (1 663) 138 734 Rated portfolio for retail client segment 75 296 (729) 74 567 Micro-enterprises (Masterscale) 2 317 (23) 2 294 Individual client – mortgage loans (Masterscale) 60 830 (333) 60 497 Individual client – consumer loans (Masterscale) 11 078 (323) 10 755 Individual client – credit cards (Masterscale) 830 (39) 791 Individual client – limits (Masterscale) 241 (11) 230 Rated portfolio for corporate client segment 43 275 (505) 42 770 Corporates (Masterscale) 36 780 (394) 36 386 SMEs (Masterscale) 6 495 (111) 6 384 Rated portfolio for local government units segment (Masterscale) 611 (1) 610 Specialized lending exposures 14 851 (310) 14 541 Exposures not covered by the rating model 6 364 (118) 6 246 Impaired exposures 10 131 (7 408) 2 723 Total loans and advances to customers subject to impairment () 150 528 (9 071) 141 457 () Loans and advances to customers measured at amortised cost and measured at fair value through other comprehensive income. 31.12.2022 PORTFOLIO GROSS CARRYING AMOUNT IMPAIRMENT ALLOWANCE NET CARRYING AMOUNT Exposures with no impairment 141 624 (2 055) 139 569 Rated portfolio for retail client segment 72 328 (1 071) 71 257 Micro-enterprises 2 359 (20) 2 339 Individual client – mortgage loans (Masterscale) 58 817 (614) 58 203 Individual client – consumer loans (Masterscale) 10 152 (393) 9 759 Individual client – credit cards (Masterscale) 766 (35) 731 Individual client – limits (Masterscale) 234 (9) 225 Rated portfolio for corporate client segment 38 751 (561) 38 190 Corporates (Masterscale) 19 081 (266) 18 815 SMEs (Masterscale) 19 670 (295) 19 375 Rated portfolio for local government units segment (Masterscale) 866 (1) 865 Specialized lending exposures 11 817 (248) 11 569 Exposures not covered by the rating model 17 862 (174) 17 688 Impaired exposures 10 158 (7 485) 2 673 Total loans and advances to customers subject to impairment () 151 782 (9 540) 142 242 () Loans and advances to customers measured at amortised cost and measured at fair value through other comprehensive income. Bank Pekao S.A. 108 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Division of off-balance sheet exposures to customers (loan commitments and financial guarantee contracts) for covered and not covered by internal rating models 31.12.2023 PORTFOLIO NOMINAL AMOUNT IMPAIRMENT ALLOWANCE Exposures with no impairment 83 844 (307) Rated portfolio for retail client segment 6 568 (11) Micro-enterprises (Masterscale) 1 060 (1) Individual client – mortgage loans (Masterscale) 2 312 (6) Individual client – credit cards (Masterscale) 2 429 (3) Individual client – limits (Masterscale) 767 (1) Rated portfolio for corporate client segment 68 014 (216) Corporates (Masterscale) 63 599 (198) SMEs (Masterscale) 4 415 (18) Rated portfolio for local government units segment (Masterscale) 565 - Specialized lending exposures 6 238 (62) Exposures not covered by the rating model 2 459 (18) Impaired exposures 528 (238) Total off- balance sheet exposures to customers 84 372 (545) 31.12.2022 PORTFOLIO NOMINAL AMOUNT IMPAIRMENT ALLOWANCE Exposures with no impairment 82 219 (337) Rated portfolio for retail client segment 4 505 (7) Micro-enterprises 802 (1) Individual client – mortgage loans (Masterscale) 769 (2) Individual client – credit cards (Masterscale) 2 179 (3) Individual client – limits (Masterscale) 755 (1) Rated portfolio for corporate client segment 60 936 (235) Corporates (Masterscale) 46 938 (150) SMEs (Masterscale) 13 998 (85) Rated portfolio for local government units segment (Masterscale) 356 - Specialized lending exposures 2 528 (14) Exposures not covered by the rating model 13 894 (81) Impaired exposures 277 (77) Total off- balance sheet exposures to customers 82 496 (414) Bank Pekao S.A. 109 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Classification of loans and advances to banks according to Fitch ratings () CARRYING AMOUNT STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) 31.12.2023 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO LOANS AND ADVANCES TO BANKS MEASURED AT AMORTISED COST AA+ to AA- 271 - - - - 271 9.6% A+ to A- 1 038 (1) - - - 1 037 36.6% BBB+ to BBB- 604 - - - - 604 21.4% BB+ to BB- 2 - - - - 2 0.1% B+ to B- 1 - - - - 1 0.0% No rating 842 14 60 - - 916 32.3% Total gross carrying amount 2 758 13 60 - - 2 831 100.0% Impairment allowance (9) - - - - (9) Total net carrying amount 2 749 13 60 - - 2 822 CARRYING AMOUNT STAGE 3 (LIFETIME ECL - CREDIT- IMPAIRED) 31.12.2022 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO LOANS AND ADVANCES TO BANKS MEASURED AT AMORTISED COST AA+ to AA- 158 - - - - 158 2.9% A+ to A- 2 372 - - - - 2 372 43.8% BBB+ to BBB- 1 941 - - - - 1 941 35.8% BB+ to BB- 98 - - - - 98 1.8% B+ to B- 2 - - - - 2 0.0% No rating 724 - 128 - - 852 15.7% Total gross carrying amount 5 295 - 128 - - 5 423 100.0% Impairment allowance (19) - (2) - - (21) Total net carrying amount 5 276 - 126 - - 5 402 () Applies to receivables from banks presented in the statement of financial position in the items "Cash and cash equivalents" and "Loans and advances to banks". Bank Pekao S.A. 110 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Classification of exposures to debt securities according to Fitch ratings () CARRYING AMOUNT STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) 31.12.2023 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO DEBT SECURITIES MEASURED AT AMORTISED COST AAA 13 415 - - - - 13 415 14.5% AA+ to AA- 3 753 - - - - 3 753 4.0% A+ to A- 41 527 - - - - 41 527 44.8% BBB+ to BBB- 209 - - - - 209 0.2% BB+ to BB- 644 - - - - 644 0.7% No rating 33 022 83 - - 96 33 201 35.8% Gross carrying amount 92 570 83 - - 96 92 749 100.0% Impairment allowance (82) (3) - - (71) (156) Carrying amount 92 488 80 - - 25 92 593 DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME AAA 1 289 - - - - 1 289 5.6% A+ to A- 9 644 - - - - 9 644 41.6% BBB+ to BBB- 2 006 - - - - 2 006 8.7% BB+ to BB- 208 - - - - 208 0.9% No rating 9 999 38 - - - 10 037 43.2% Carrying amount 23 146 38 - - - 23 184 100.0% Impairment allowance () (66) (1) - - - (67) DEBT SECURITIES HELD FOR TRADING AAA 230 8.6% A+ to A- 1 103 41.4% BBB+ to BBB- 142 5.3% No rating 1 192 44.7% Carrying amount 2 667 100.0% (*) Debt securities presented in the statement of financial position under "Securities" and "Assets pledged as security for liabilities". () The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the " Revaluation reserve " item and does not reduce the carrying amount. Bank Pekao S.A. 111 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Classification of exposures to debt securities according to Fitch ratings () CARRYING AMOUNT STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) 31.12.2022 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL % PORTFOLIO DEBT SECURITIES MEASURED AT AMORTISED COST AAA 5 264 - - - - 5 264 8.4% AA+ to AA- 1 750 - - - - 1 750 2.8% A+ to A- 30 850 - - - - 30 850 49.3% BBB+ to BBB- 247 - - - - 247 0.4% BB+ to BB- 670 - - - - 670 1.1% No rating 23 745 - 24 - 63 23 832 38.0% Gross carrying amount 62 526 - 24 - 63 62 613 100.0% Impairment allowance (77) - (24) - (53) (154) Carrying amount 62 449 - - - 10 62 459 DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME AAA 2 339 - - - - 2 339 10.5% A+ to A- 9 254 - - - - 9 254 41.6% BBB+ to BBB- 2 401 - - - - 2 401 10.8% BB+ to BB- 207 - - - - 207 0.9% No rating 8 000 64 - - - 8 064 36.2% Carrying amount 22 201 64 - - - 22 265 100.0% Impairment allowance () (67) (2) - - - (69) DEBT SECURITIES HELD FOR TRADING AAA 14 0.8% A+ to A- 767 42.4% BBB+ to BBB- 25 1.4% No rating 1 002 55.4% Carrying amount 1 808 100.0% () Debt securities presented in the statement of financial position under "Securities" and "Assets pledged as security for liabilities". () The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the " Revaluation reserve " item and does not reduce the carrying amount. Bank Pekao S.A. 112 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Classification of exposures to derivative financial instruments according to Fitch ratings DERIVATIVES HELD FOR TRANDING HEDGING DERIVATIVES 31.12.2023 BANKS OTHER FINANCIAL INSTITUTIONS NON- FINANCIAL ENTITIES BANKS OTHER FINANCIAL INSTITUTIONS NON- FINANCIAL ENTITIES TOTAL % PORTFOLIO AAA 4 - - - - - 4 - AA+ to AA- 140 983 - 41 91 - 1 255 12.4% A+ to A- 1 771 19 17 229 - - 2 036 20.0% BBB+ to BBB- 155 - 42 10 - - 207 2.0% BB+ to BB- 1 - - - - - 1 - B+ to B- - - - - - - - - No rating 71 5 720 427 29 405 - 6 652 65.6% Total 2 142 6 722 486 309 496 - 10 155 100.0% DERIVATIVES HELD FOR TRANDING HEDGING DERIVATIVES 31.12.2022 BANKS OTHER FINANCIAL INSTITUTIONS NON- FINANCIAL ENTITIES BANKS OTHER FINANCIAL INSTITUTIONS NON- FINANCIAL ENTITIES TOTAL % PORTFOLIO AAA - - - - - - - - AA+ to AA- 159 1 386 - - 11 - 1 556 10.1% A+ to A- 2 264 19 - 90 - - 2 373 15.4% BBB+ to BBB- 354 - 191 - - - 545 3.5% BB+ to BB- 3 - - - - - 3 - B+ to B- - - - - - - - - No rating 153 10 127 478 29 150 - 10 937 71.0% Total 2 933 11 532 669 119 161 - 15 414 100.0% The description of the model for impairment allowance The Bank has recognized impairment allowance in accordance with the IRFS 9. IFRS 9 assumes the calculation of impairment losses based on expected credit losses and taking into account forecasts and expected future economic conditions in the context of credit risk exposure assessment. Expected credit loss model Expected credit loss model applies to financial assets classified, in accordance with the IFRS 9, as financial assets at amortised cost or at fair value through other comprehensive income (with the exception of equity instruments) as well as to off-balance sheet commitments. Expected credit loss model in accordance with IFRS 9 is based on the allocation of exposure to one of the three stages, depending on credit quality changes compared to the initial recognition of assets in the accounting records. How to calculate the impairment loss depends on the stage. STAGE CLASSIFICATION CRITERION TO THE STAGE THE METHOD OF CALCULATING THE IMPAIRMENT ALLOWANCE Stage 1 Exposures for which no significant increase in credit risk has been identified since the initial recognition until the balance sheet date and no impairment was identified 12-month expected credit losses Stage 2 Exposures for which a significant increase in credit risk has been identified since the initial recognition until the balance sheet date and no impairment was identified Stage 3 Exposures for which impairment has been identified Lifetime expected credit losses In addition, financial assets that were classified as POCI at the time of initial recognition are treated as POCI (i.e. purchased or originated credit -impaired) in all subsequent periods until they are derecognised . This rule applies even if, in the meantime, the impairment triggers have ceased to exist. In other words, assets once recognized as POCI remain in this status regardless of future changes in estimates of their cash flows. In the case of instruments with the POCI status, life-time expected credit losses are recognized throughout the lifetime of these instruments. Bank Pekao S.A. 113 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Calculation of expected credit losses For the purpose of calculating the credit loss in accordance with IFRS 9, the Bank compares cash flows that it should receive pursuant to the agreement with the borrower and flows estimated by the Bank that it expects to receive. The difference is discounted using the effective interest rate. Expected credit losses are determined in the contractual maturity period with the exception of products meeting the criteria of IFRS 9 para. 5.5.20, for which the Bank determines the expected losses in the period in which it is exposed to credit risk (i.e. in the economic maturity). Methodology for calculating group parameters - PD, RR and EAD The lifetime ECL calculation requires the use of long-term risk parameters. Multi-year probability of default (PD) parameters are an assessment of the probability of a default event in the next annual intervals in the lifetime horizon. The long-term PD curve for a given exposure depends on the current value of the PD parameter in the horizon of 12 months (and the appropriate rating class) determined based on the internal PD models of the Bank. In the estimation, the Bank: • estimates unbiased PD parameters without taking into account additional margins of conservatism (IFRS 9, paragraph 5.5.17 (a)), • takes into account current and forecasted macroeconomic conditions (IFRS 9, paragraph 5.5.17 (c)). The calculation of expected recovery rates (RR) is based on the “pool” model, in which, within homogeneous groups, average monthly recoveries are calculated conditionally against the months since default (MSD). Homogeneous groups of accounts were separated on the basis of the following characteristics: • the type of borrower , • product type , • ranges of the LTV parameter (for mortgages and housing loans) or credit amount (for chosen products). As part of defined homogeneous groups, average monthly recovery rates are calculated, which consist of repayments and recoveries resulting from both the secured part and the unsecured exposure, weighted by the value of outstanding capital observed at the beginning of a given MSD. For products for which a repayment schedule is available, the Bank sets the exposure value at the moment of default (EAD, Exposure at Default) and principal at the moment of default (PAD, Principal at Default) in the lifetime (i.e. for future repayments) based on contractual payment schedules and taking into account the following effects: • the effect of arrears on principal and interest installments related to the expected non-payment of the last installments prior to the occurrence of the default, • the effect of arrears of payments (principal and interest) on the date of calculation of the provision, • the effect of settlement of the EIR adjustment over time. For products for which a repayment schedule is not available, the Bank sets the long-term EAD and PAD using the CCF (Credit Conversion Factor) and parameters. CCF parameters vary depending on the portfolio and the time horizon of EAD / PAD estimation. For exposures for which it is not possible to determine risk parameters based on internal models, the Bank adopts an approach based on using parameters from other portfolios with similar characteristics. The models and parameters used to calculate impairment allowance are periodically validated. Changes in the methodology of calculation an expected credit losses introduced in 2023 In 2023, the Bank did not change its approach to rules for calculating an expected credit losses. In particular, compared to the end of 2022, the Bank did not introduce any significant changes in forecasting the quality of the portfolio and continues to use trend analyzes for retail portfolios and quantitative/expert analysis for other portfolios. Due to the instability of internal and external conditions, the probability of materialization of the negative scenario is still high (50%). Keeping the solution worked out in 2022, the Bank selects customers operating in higher-risk industries and increases PD on them by 100%. As a result, the Bank maintains an increased level of expected credit losses in the amount of PLN 242 million for the portfolio of performing loans with a total gross carrying amount of PLN 18 797 million. The analysis of industries took into account the indirect impact of the armed conflict in Ukraine, the marked deceleration in domestic demand and investment and the burden of interest costs resulting from loans and advances (due to the high level of NBP interest rates). Adjusted industries with the largest share in the Bank's loan portfolio are, by PKD division, as follows: 68 activities related to real estate market services, 49 land transport and pipeline transport, 41 construction works for the erection of buildings, 23 manufacture of other non-metallic mineral products, 16 production of products from wood, cork, straw (except furniture). Bank Pekao S.A. 114 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Sensitivity analysis of ECL in established changes of PD and RR/LGD parameters The tables below present the results of the ECL sensitivity analysis for the assumed changes in PD and RR/LGD parameters carried out separately for exposures subject to individual and group analysis. For the exposures included in the Bank analysis, the PD and recovery rate (1-RR=LGD) increase and decrease by 1% and 5% scenario were presented compared to the values used to calculate the expected credit loss as of date 31 December.2023 and 31 December 2022. For the exposures analyzed individually, the estimated impact is presented as a reduction of recoveries from collaterals included in the debt collection scenario by 10%. Changes in impairment allowances level (ECL) in different scenarios of changing the influencing parameters for the calculation of write-offs (in PLN million). SCENARIO GROUP ANALYSIS INDIVIDUAL ANALYSIS 31.12.2023 DELTA PARAMETER PD CHANGE RECOVERY RATE CHANGE (1-LGD) DEBT COLLECTION CHANGE -10.0% n/a n/a 38.0 -5.0% (86.2) 256.1 n/a -1.0% (17.3) 51.2 n/a 1.0% 16.8 (51.2) n/a 5.0% 83.8 (256.0) n/a SCENARIO GROUP ANALYSIS INDIVIDUAL ANALYSIS 31.12.2022 DELTA PARAMETER PD CHANGE RECOVERY RATE CHANGE (1-LGD) DEBT COLLECTION CHANGE -10.0% n/a n/a 57.1 -5.0% (95.0) 246.7 n/a -1.0% (19.0) 49.3 n/a 1.0% 16.1 (49.1) n/a 5.0% 93.4 (243.0) n/a Exposures with low credit risk According to par. 5.5.10 IFRS 9 exposures that are considered as low risk credit exposures at the reporting date may remain in Stage 1, regardless of the scale of the relative credit deterioration from the initial recognition. According to par. B.5.5.22 of IFRS 9, the credit risk of a financial instrument is considered low when: • the financial instrument has a low risk of default, • the borrower has a strong capacity to meet its contractual cash flow obligations in the near term, • adverse changes in the economic and business conditions in the long term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Bank applies a low credit risk criterion for three portfolios: exposures to banks, exposures to local government units and exposures to the State Treasury and the National Bank of Poland. Classification criteria to Stage 2 Financial assets for which at the balance sheet date the Bank will identify a significant increase in credit risk from the initial recognition are classified in Stage 2. The Bank recognizes that for a given asset a significant increase in credit risk has been identified if a quantitative or qualitative criterion is met, in particular if contractual payments are more than 30 days past due, where the occurrence of a given criterion is verified at the exposure level. Quantitative criteria Taking into account the requirements of the standard, the Bank defined two basic characteristics of the quantitative model: • the measure on the basis of which risk change assessment is made, • the materiality threshold of the measure, above which the Bank recognizes that there has been a significant increase in credit risk. The measure, on the basis of which risk change assessment is made, was set by the Bank as the ratio of the annual average: • current credit risk assessment defined as lifetime PD in the horizon from the reporting date to the maturity date determined on the basis of the characteristics effective as at the reporting date, • the original credit risk assessment defined as lifetime PD in the period from the reporting date to the maturity date determined on the basis of the characteristics applicable as at the date of initial recognition. The assessment of significance of credit risk deterioration is carried out by comparing the observed measure with the threshold above which the Bank considers that a significant deterioration in credit risk occurred. Bank Pekao S.A. 115 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The allocation threshold is designated as the reporting date at the single exposure level by a statistical model based, among others, on information on the credit risk assessment as of the date of the initial recognition, the time from the date of the initial recognition of the exposure and historical price volatility. This threshold is 2 increased by buffer. Buffer calibration is performed separately for each homogeneous group of portfolios modeled to correspond to the Bank's risk appetite in the period at the time of origination the transaction. The absolute quantitative criterion for classification Stage 2 is the value of one-year PD determined using scoring / rating models above the level of 25%. This criterion results from the fact that the Bank granting loans does not accept the risk higher than approximately 10%. A 25% PD therefore by definition means a significant increase in credit risk. The bank additionally applies benchmarking of the level of loans classified in Stage 2 based on NBP data and the average long-term DR (default rate) of a given portfolio. If the share of Stage 2 in the Bank is lower than the long-term average for the polish banking sector in a given portfolio (or three times DR), then the Bank classifies exposures into the Stage 2 until the average is reached, where the credits are moved in the order corresponding to their distance from Stage 2 in based on the other 2 criteria mentioned before. Each of the three criteria described is applied separately. The tables below present the arithmetic average () values of the risk change measure as at 31 December 2023 and 31 December 2022 determined for the most significant portfolios covered by the quantitative model. AVERAGE MEASURE OF THE INCREASE RISK 31.12.2023 PORTFOLIO STAGE 1 STAGE 2 Cash loans 0.6 2.7 Mortgages 0.8 2.6 SME Loans 0.5 2.3 Loans to other enterprises 0.4 1.3 AVERAGE MEASURE OF THE INCREASE RISK 31.12.2022 PORTFOLIO STAGE 1 STAGE 2 Cash loans 0.8 3.0 Mortgages 0.8 2.6 SME Loans 0.4 1.8 Loans to other enterprises 0.5 1.5 () The measure on the basis of which the risk change is assessed is determined by the Bank as the ratio of: • current credit risk assessment defined as lifetime PD in the horizon from the reporting date to the maturity date, determined on the basis of the characteristics applicable as at the reporting date, • original credit risk assessment defined as lifetime PD in the period from the reporting date to the maturity date, determined on the basis of the characteristics valid at the date of initial recognition. Qualitative criteria As a result of the monitoring process carried out by the Bank, the qualitative criteria for the allocation to Stage 2 are identified, such as: • the amount of arrears simultaneously above the set materiality threshold (PLN 400 for retail exposures and PLN 2 000 for non-retail exposures) and the relative threshold of 1% for more than 30 days up to 90 days inclusive, • a delay in repayment over 90 days, below the thresholds of materiality, • occurrence of forbearance status, • exposure is on the Watchlist. In addition to the above, for individual monitoring the Bank has defined a number of specific quality criteria for various types of portfolios, such as, inter alia, changes in the internal rating, changes in supervisory classes for selected segments (e.g. specialized financing), warning signals identified in the monitoring system and credit risk management or the results of individual monitoring. In the case of granting credit holidays under the Act on crowdfunding for business ventures and assistance to borrowers of 14 July 2022, the Bank applies an approach consistent with regulatory guidelines in this regard. Granting credit holidays does not result in automatic reclassification to Stage 2. However, such reclassification is performed if the deterioration of credit risk is affected by additional factors indicating the debtor's problems. During the credit holidays, the Bank suspends the counting of overdue days. Classification criteria to Stage 3 Financial assets for which at the balance sheet date the Bank has identified occurrences of the default event are classified in Stage 3. Bank Pekao S.A. 116 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The Bank recognizes that for a given asset a default was identified if at least one of the following occurred: • the amount of arrears simultaneously above the set materiality threshold (PLN 400 for retail exposures and PLN 2 000 for non-retail exposures) and the relative threshold of 1% for over 90 days, • exposure during the restructuring process, • other qualitative impairment trigger . For SME and corporate segments, default is identified at the customer level, whereas for the retail segment at the customer/product group level. The criterion of days and amounts of delays is also defined at the level of identification. The Bank applies a six-month quarantine period effective from the moment all defaults cease to exist. At the end of 2023, the Bank additionally included CHF mortgage loans in Stage 3 in accordance with the principles presented in the Note 43.3. Forecast of risk parameters Based on significant inertia of retail portfolios, a trend analysis of historical default rates have been applied. Based on the history of realized default rates for portfolios of retail exposures, trends were estimated, which were then used for future projections. For non-retail portfolios projections are based on expert judgment of the economic conditions applied to the long term average through the cycle parameters. The analysis for non-retail portfolios consists of the following steps: an expert evaluation of the forecasted economic conditions based on Bank’s projections and studies carried out by the Central Statistical Office in Poland (GUS), translation of this evaluation onto quantitative measure at the scale 0-100% indicating the phase of the economic cycle (e.g. 75% represents situation where in the past 75% of observation situation is better and in 25% is worse), finally getting the corresponding quantile of the historical default rates and use of it as the forecast for first year. For the second year forecast assumes the linear convergence to average through the cycle parameters which is assumed to take place in the fifth year (which mirrors few years long credit cycles). Tables below show 12-month PD forecasts used in the calculation of expected credit losses in baseline scenario. For retail portfolios the parameters are weighted with the gross carrying amount limited to PLN 2 million at the loan level and at the customer level for SME loans. For non-retail, the parameters are weighted with the gross carrying amount limited to PLN 20 million at the client level. Forecasts in the baseline, upward and downward scenarios include the PD mark-up for higher-risk industries described in the Expected credit loss model section. 31.12.2023 PORTFOLIO HISTORICAL MEDIAN BASE PD FORECAST Cash loans 3.7% 4.3% Mortgages 0.5% 0.7% SME loans 3.6% 5.4% Loans to other enterprises 1.7% 4.1% 31.12.2022 PORTFOLIO HISTORICAL MEDIAN BASE PD FORECAST Cash loans 3.9% 5.0% Mortgages 0.5% 0.6% SME loans 3.5% 5.5% Loans to other enterprises 1.8% 4.1% Scenarios definition The PD parameters presented in the previous section refer to the baseline scenario of portfolio quality development. They reflect the assumption of a slow exit from economic slowdown amid persistent high inflation and interest rates (actual GDP growth of 0.5%, average annual inflation of about 10% and WIBOR 3M at the end of the year over 5.5%). The assumptions for the remaining scenarios and the weights assigned to them are presented below. In the applied approach the Bank used 3 scenario of evolution of quality of the portfolio: baseline (presented above), upward (assuming positive change in the credit quality of the portfolio in the next years compared to the baseline) and downward (assuming negative change in the credit quality of the portfolio in the next years compared to the baseline). The baseline scenario has the probability of occurrence of 45%, upward of 5% and downward of 50%. High probability of downward scenario reflects Bank’s expert judgment of the possibility of realization of some risks the economy of Poland faces and their significant impact on credit portfolio with regard to: • macroeconomic data, which show the strongest in 15 years, excluding the period of the COVID-19 pandemic, economic slowdown (GDP, inflation, producer inflation, interest rates), • business climate surveys that confirm the difficult, expected economic situation (PMI, NBP, GUS), • record numbers of company restructurings and consumer bankruptcies, • geopolitical threats. Bank Pekao S.A. 117 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Individually the risk of these scenarios is equal or below 50% in the Bank’s view but their number implies high risk of occurrence of one of them. The diversified nature of the observed threats and the breakdown of the dependencies between the parameters of the quality of the loan portfolio and the macroeconomic variables means that it is impossible to formulate scenarios in the form of extreme changes in macroeconomic factors. Therefore, the Bank applied an alternative approach in which the PD change scenarios are determined based on the historical variability of the DR. The downward scenario is assigned values corresponding to the high past observations, and similarly to the upward scenario, the values corresponding to the low past observations are assigned. This translates into the following 12-month PD forecasts: 31.12.2023 PORTFOLIO UPWARD SCENARIO DOWNWARD SCENARIO Cash loans 2.5% 7.0% Mortgages 0.5% 1.1% SME Loans 3.7% 5.9% Loans to other enterprises 2.0% 5.0% 31.12.2022 PORTFOLIO UPWARD SCENARIO DOWNWARD SCENARIO Cash loans 3.4% 7.4% Mortgages 0.3% 1.0% SME Loans 3.7% 5.9% Loans to other enterprises 2.0% 4.9% The Bank also carried out analysis confirming the lack of dependence of the recovery rates for non-performing exposures (RR parameter) on the economic situation. Therefore, the same recovery rates are assumed in each of the scenarios. Sensitivity analysis regarding the forecast of the macroeconomic situation The Bank estimates probability weighted expected credit losses taking into account 3 macro-economic scenarios: baseline (occurring with a probability of 45%), upward (assuming positive change of the quality of the portfolio in the next years compared to the baseline, occurring with a probability of 5%) and downward (assuming worsening of the quality of the portfolio in the next years compared to the baseline that could occur with a probability of 50%). The changes in expected credit losses presented in the table below (in PLN million) for exposures without impairment were designated as the difference between the expected credit losses calculated for a specific macroeconomic scenario and expected credit losses calculated taking into account all scenarios macroeconomic factors weighted with the probability of their realization (in accordance with IFRS 9). 31.12.2023 BASLINE SCENARIO UPWARD SCENARIO DOWNWARD SCENARIO Changes in expected credit losses for exposures without impairment (Stages 1 and 2) assuming 100% implementation of the scenario (233) (891) 310 31.12.2022 BASLINE SCENARIO UPWARD SCENARIO DOWNWARD SCENARIO Changes in expected credit losses for exposures without impairment (Stages 1 and 2) assuming 100% implementation of the scenario (212) (911) 295 Bank Pekao S.A. 118 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The tables below present the level of impairment allowances and gross carrying amount of financial assets not measured at fair value through profit or loss by class of financial assets and the level of expected credit losses and the nominal value of off- balance sheet commitments granted: STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) 31.12.2023 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST (*) Gross carrying amount 11 217 13 60 - - 11 290 Impairment allowance (18) - - - - (18) Carrying amount 11 199 13 60 - - 11 272 LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST Gross carrying amount 124 273 15 991 2 951 5 562 1 618 150 395 Impairment allowance (775) (887) (2 172) (4 106) (1 130) (9 070) Carrying amount 123 498 15 104 779 1 456 488 141 325 LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () Gross carrying amount 133 - - - - 133 Impairment allowance (1) - - - - (1) DEBT SECURITIES MEASURED AT AMORTISED COST Gross carrying amount 92 570 83 - - 96 92 749 Impairment allowance (82) (3) - - (71) (156) Carrying amount 92 488 80 - - 25 92 593 DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () Gross carrying amount 23 146 38 - - - 23 184 Impairment allowance (66) (1) - - - (67) OFF-BALANCE SHEET COMMITMENTS Nominal amount 84 129 3 957 464 47 18 88 615 Impairment allowance (223) (90) (211) (24) (4) (552) (*) Applies to loans and advances to banks and the Central Bank presented in the statement of financial position in the items "Cash and cash equivalents" and "Loans and advances to banks". () Impairment allowance relating to loans and advances to customers measured at fair value through other comprehensive income and debt securities measured at fair value through other comprehensive income is included in the item "Revaluation reserves" and does not reduce their carrying amount. Bank Pekao S.A. 119 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) 31.12.2022 STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST () Gross carrying amount 14 421 - 128 - - 14 549 Impairment allowance (27) - (2) - - (29) Carrying amount 14 394 - 126 - - 14 520 LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST Gross carrying amount 122 798 18 523 3 930 4 900 1 328 151 479 Impairment allowance (827) (1 228) (3 183) (3 538) (764) (9 540) Carrying amount 121 971 17 295 747 1 362 564 141 939 LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () Gross carrying amount 303 - - - - 303 Impairment allowance (4) - - - - (4) DEBT SECURITIES MEASURED AT AMORTISED COST Gross carrying amount 62 526 - 24 - 63 62 613 Impairment allowance (78) - (23) - (53) (154) Carrying amount 62 448 - 1 - 10 62 459 DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () Gross carrying amount 22 201 64 - - - 22 265 Impairment allowance (67) (2) - - - (69) OFF-BALANCE SHEET COMMITMENTS Nominal amount 84 042 3 553 286 45 16 87 942 Impairment allowance (244) (121) (58) (22) (4) (449) () Applies to loans and advances to banks and the Central Bank presented in the statement of financial position in the items "Cash and cash equivalents" and "Loans and advances to banks". () Impairment allowance relating to loans and advances to customers measured at fair value through other comprehensive income and debt securities measured at fair value through other comprehensive income is included in the item "Revaluation reserves" and does not reduce their carrying amount. Bank Pekao S.A. 120 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The tables below present the changes in impairment allowances and gross carrying amount of financial assets not measured at fair value through profit or loss by class of financial assets: LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST (*) STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 14 421 - 128 - 14 549 Transfer to Stage 1 - - - - - Transfer to Stage 2 (13) 13 - - - Transfer to Stage 3 - - - - - New / purchased / granted financial assets 2 059 - - - 2 059 Financial assets derecognised , other than write-offs (repayments) (5 111) - (61) - (5 172) Financial assets written off () - - - - - Other, in this changes resulting from exchange rates (139) - (7) - (146) GROSS CARRYING AMOUNT AS AT 31.12.2023 11 217 13 60 - 11 290 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2023 27 - 2 - 29 Changes in balances included in the income statement (table in the Note 10), of which: (9) - (1) - (10) New / purchased / granted financial assets 5 - - - 5 Financial assets derecognised, other than write-offs (repayments) (4) - - - (4) Changes in level of credit risk (excluding the transfers between the Stages) (10) - (1) - (11) Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Financial assets written off () - - - - - Other, in this changes resulting from exchange rates - - (1) - (1) IMPAIRMENT ALLOWANCE AS AT 31.12.2023 18 - - - 18 (*) Receivables from the Central Bank include a current account and deposits. () Including the value of contractual interest subject to partial write-off in the amount of PLN 0 million. Bank Pekao S.A. 121 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO BANKS AND CENTRAL BANKS MEASURED AT AMORTISED COST () STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 4 954 49 - - 5 003 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 (128) - 128 - - New / purchased / granted financial assets 11 700 - - - 11 700 Financial assets derecognised , other than write-offs (repayments) (2 202) (49) - - (2 251) Financial assets written off () - - - - - Other, in this changes resulting from exchange rates 97 - - - 97 GROSS CARRYING AMOUNT AS AT 31.12.2022 14 421 - 128 - 14 549 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2022 8 - - - 8 Changes in balances included in the income statement (table in the Note 10), of which: 19 - 2 - 21 New / purchased / granted financial assets 4 - - - 4 Financial assets derecognised, other than write-offs (repayments) (1) - - - 1 Changes in level of credit risk (excluding the transfers between the Stages) 16 - 2 - 18 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 (1) - 1 - - Financial assets written off () - - - - - Other, in this changes resulting from exchange rates 1 - (1) - - IMPAIRMENT ALLOWANCE AS AT 31.12.2022 27 - 2 - 29 () Receivables from the Central Bank include a current account and deposits. () Including the value of contractual interest subject to partial write-off in the amount of PLN 0 million. Bank Pekao S.A. 122 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 122 798 18 523 3 930 4 900 1 328 151 479 303 - 303 Transfer to Stage 1 4 463 (4 332) (15) (116) - - - - - Transfer to Stage 2 (8 351) 8 580 (51) (178) - - - - - Transfer to Stage 3 (999) (1 508) 471 2 036 - - - - - New / purchased / granted financial assets 43 630 - - - 90 43 720 - - - Financial assets derecognised , other than write-offs (repayments) (36 795) (5 073) (874) (835) (228) (43 805) (170) - (170) Financial assets written off (*) - - (793) (513) (37) (1 343) - - - Modifications not resulting in derecognition (2) - - - - (2) - - - Adjustment related to credit holidays 911 91 - 5 - 1 007 - - - Other, in this changes resulting from exchange rates (1 382) (290) 283 263 465 (661) - - - GROSS CARRYING AMOUNT AS AT 31.12.2023 124 273 15 991 2 951 5 562 1 618 150 395 133 - 133 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2023 827 1 228 3 183 3 538 764 9 540 4 - 4 Changes in balances included in the income statement (table in the Note 10), of which: ( 149) 207 123 192 (49) 324 (4) - (4) New / purchased / granted financial assets 369 - - - 4 373 - - - Financial assets derecognised, other than write-offs (repayments) (133) (94) (14) (54) (14) (309) (2) - (2) Changes in level of credit risk (excluding the transfers between the Stages) () (385) 301 137 246 (39) 260 (2) - (2) Transfer to Stage 1 281 (262) - (19) - - - - - Transfer to Stage 2 (120) 194 (3) (71) - - - - - Transfer to Stage 3 (28) (165) (242) 435 - - - - - Financial assets written off () - - (793) (513) (37) (1 343) - - - Other, in this changes resulting from exchange rates (36) (315) (96) 544 452 549 1 - 1 IMPAIRMENT ALLOWANCE AS AT 31.12.2023 775 887 2 172 4 106 1 130 9 070 1 - 1 () Including the value of contractual interest subject to partial write-off in the amount of PLN 615 million. () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 379 million. The total value of undiscounted expected credit losses at the time of initial recognition of financial assets purchased or originated credit impaired in the period ended 31 December 2023 amounted to PLN 219 million. Bank Pekao S.A. 123 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 118 099 23 769 4 115 3 273 952 150 208 115 231 346 Transfer to Stage 1 9 969 (9 750) (120) (99) - - 50 (50) - Transfer to Stage 2 (9 776) 10 054 (73) (205) - - - - - Transfer to Stage 3 (1 071) (1 892) 321 2 642 - - - - - New / purchased / granted financial assets 39 501 - - - 127 39 628 150 - 150 Financial assets derecognised , other than write-offs (repayments) (33 543) (3 859) (286) (498) (77) (38 263) (8) (183) (191) Financial assets written off () - - (293) (339) (5) (637) - - - Modifications not resulting in derecognition (4) (1) - - - (5) - - - Adjustment related to credit holidays (911) (91) - (5) - (1 007) - - - Other, in this changes resulting from exchange rates 534 293 266 131 331 1 555 (4) 2 (2) GROSS CARRYING AMOUNT AS AT 31.12.2022 122 798 18 523 3 930 4 900 1 328 151 479 303 - 303 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2022 578 1 037 3 234 2 211 230 7 290 2 4 6 Changes in balances included in the income statement (table in the Note 10), of which: (53) 291 21 1 600 7 1 866 1 (3) (2) New / purchased / granted financial assets 260 - - - 11 271 2 - 2 Financial assets derecognised, other than write-offs (repayments) (101) (69) (13) (49) (4) (236) - (1) (1) Changes in level of credit risk (excluding the transfers between the Stages) () (212) 360 34 1649 - 1831 (1) (2) (3) Transfer to Stage 1 430 (373) (31) (26) - - 1 (1) - Transfer to Stage 2 (75) 163 (15) (73) - - - - - Transfer to Stage 3 (195) (201) 22 374 - - - - - Financial assets written off () - - (293) (339) (5) (637) - - - Other, in this changes resulting from exchange rates 142 311 245 (209) 532 1 021 - - - IMPAIRMENT ALLOWANCE AS AT 31.12.2022 827 1 228 3 183 3 538 764 9 540 4 - 4 () Including the value of contractual interest subject to partial write-off in the amount of PLN 488 million. () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 575 million. The total value of undiscounted expected credit losses at the time of initial recognition of financial assets purchased or originated credit impaired in the period ended 31 December 2022 amounted to PLN 56 million. Bank Pekao S.A. 124 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) CORPORATE STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 58 738 10 087 3 749 1 389 1 247 75 210 303 - 303 Transfer to Stage 1 3 257 (3 197) (15) (45) - - - - - Transfer to Stage 2 (5 110) 5 186 (50) (26) - - - - - Transfer to Stage 3 (725) (528) 509 744 - - - - - New / purchased / granted financial assets 29 679 - - - 54 29 733 - - - Financial assets derecognised , other than write-offs (repayments) (26 824) (3 695) (754) (342) (204) (31 819) (170) - (170) Financial assets written off - - (779) (177) (36) (992) - - - Modifications not resulting in derecognition (1) - - - - (1) - - - Other, in this changes resulting from exchange rates (1 332) (295) 269 78 438 (842) - - - GROSS CARRYING AMOUNT AS AT 31.12.2023 57 682 7 558 2 929 1 621 1 499 71 289 133 - 133 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2023 638 347 3 009 923 739 5 656 4 - 4 Changes in balances included in the income statement (table in the Note 10), of which: (17) 25 119 (89) (23) 15 (4) - (4) New / purchased / granted financial assets 237 - - - - 237 - - - Financial assets derecognised, other than write-offs (repayments) (112) (58) (13) (11) (13) (207) (2) - (2) Changes in level of credit risk (excluding the transfers between the Stages) (142) 83 132 (78) (10) (15) (2) - (2) Transfer to Stage 1 107 (104) - (3) - - - - - Transfer to Stage 2 (94) 104 (2) (8) - - - - - Transfer to Stage 3 (9) (50) (209) 268 - - - - - Financial assets written off - - (779) (177) (36) (992) - - - Other, in this changes resulting from exchange rates (40) (37) 10 314 436 683 1 - 1 IMPAIRMENT ALLOWANCE AS AT 31.12.2023 585 285 2 148 1 228 1 116 5 362 1 - 1 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the "Revaluation reserve " item and does not reduce the carrying amount of the loan. Bank Pekao S.A. 125 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) CORPORATE STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 52 890 9 405 3 933 987 896 68 111 115 231 346 Transfer to Stage 1 4 156 (4 026) (120) (10) - - 50 (50) - Transfer to Stage 2 (6 473) 6 547 (70) (4) - - - - - Transfer to Stage 3 (689) (221) 309 601 - - - - - New / purchased / granted financial assets 30 751 - - - 99 30 850 150 - 150 Financial assets derecognised , other than write-offs (repayments) (22 173) (1 703) (276) (130) (69) (24 351) (8) (183) (191) Financial assets written off - - (282) (137) (5) (424) - - - Modifications not resulting in derecognition (3) - - - - (3) - - - Other, in this changes resulting from exchange rates 279 85 255 82 326 1 027 (4) 2 (2) GROSS CARRYING AMOUNT AS AT 31.12.2022 58 738 10 087 3 749 1 389 1 247 75 210 303 - 303 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2022 441 269 3 065 762 212 4 749 2 4 6 Changes in balances included in the income statement (table in the Note 10), of which: 83 140 14 450 14 701 1 (3) (2) New / purchased / granted financial assets 202 - - - 7 209 2 - 2 Financial assets derecognised, other than write-offs (repayments) (82) (30) (13) (13) (2) (140) - (1) (1) Changes in level of credit risk (excluding the transfers between the Stages) (37) 170 27 463 9 632 (1) (2) (3) Transfer to Stage 1 179 (148) (31) - - - 1 (1) - Transfer to Stage 2 (73) 89 (13) (3) - - - - - Transfer to Stage 3 (127) (95) 17 205 - - - - - Financial assets written off - - (282) (137) (5) (424) - - - Other, in this changes resulting from exchange rates 135 92 239 (354) 518 630 - - - IMPAIRMENT ALLOWANCE AS AT 31.12.2022 638 347 3 009 923 739 5 656 4 - 4 () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the " Revaluation reserve " item and does not reduce the carrying amount of the loan. Bank Pekao S.A. 126 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) MORTGAGE LOANS TO INDIVIDUAL CLIENTS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 53 461 6 188 42 2 343 49 62 083 Transfer to Stage 1 746 (701) - (45) - - Transfer to Stage 2 (2 413) 2 504 (2) (89) - - Transfer to Stage 3 (100) (776) (28) 904 - - New / purchased / granted financial assets 8 719 - - - 23 8 742 Financial assets derecognised , other than write-offs (repayments) (6 068) (680) (9) (263) (8) (7 028) Financial assets written off - - (9) (173) - (182) Modifications not resulting in derecognition (1) - - - (1) (2) Adjustment related to credit holidays 911 91 - 5 (1) 1 006 Other, in this changes resulting from exchange rates (1) (23) 9 55 9 49 GROSS CARRYING AMOUNT AS AT 31.12.2023 55 254 6 603 3 2 737 71 64 668 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2023 58 560 35 1 811 20 2 484 Changes in balances included in the income statement (table in the Note 10), of which: (83) 134 3 174 (12) 216 New / purchased / granted financial assets 14 - - - 1 15 Financial assets derecognised, other than write-offs (repayments) (2) (8) (1) (21) - (32) Changes in level of credit risk (excluding the transfers between the Stages) (95) 142 4 195 (13) 233 Transfer to Stage 1 89 (80) - (9) - - Transfer to Stage 2 (3) 40 (1) (36) - - Transfer to Stage 3 (1) (39) (25) 65 - - Financial assets written off - - (9) (173) - (182) Other, in this changes resulting from exchange rates (1) (272) - 185 4 (84) IMPAIRMENT ALLOWANCE AS AT 31.12.2023 59 343 3 2 017 12 2 434 Bank Pekao S.A. 127 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) MORTGAGE LOANS TO INDIVIDUAL CLIENTS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 52 989 12 450 39 1 126 35 66 639 Transfer to Stage 1 5 417 (5 350) - (67) - - Transfer to Stage 2 (1 799) 1 956 (3) (154) - - Transfer to Stage 3 (159) (1 500) 12 1 647 - - New / purchased / granted financial assets 4 557 - - - 15 4 572 Financial assets derecognised , other than write-offs (repayments) (6 908) (1 504) (8) (138) (3) (8 561) Financial assets written off - - (7) (58) - (65) Modifications not resulting in derecognition - - - - - - Adjustment related to credit holidays (911) (91) - (5) - (1 007) Other, in this changes resulting from exchange rates 275 227 9 (8) 2 505 GROSS CARRYING AMOUNT AS AT 31.12.2022 53 461 6 188 42 2 343 49 62 083 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2022 28 450 29 605 16 1 128 Changes in balances included in the income statement (table in the Note 10), of which: (135) 57 5 1 084 - 1 011 New / purchased / granted financial assets 3 - - - 3 6 Financial assets derecognised, other than write-offs (repayments) (1) (11) - (16) (1) (29) Changes in level of credit risk (excluding the transfers between the Stages) (137) 68 5 1 100 (2) 1 034 Transfer to Stage 1 172 (159) - (13) - - Transfer to Stage 2 - 41 (1) (40) - - Transfer to Stage 3 (8) (40) 5 43 - - Financial assets written off - - (7) (58) - (65) Other, in this changes resulting from exchange rates 1 211 4 190 4 410 IMPAIRMENT ALLOWANCE AS AT 31.12.2022 58 560 35 1 811 20 2 484 Bank Pekao S.A. 128 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) OTHER LOANS AND ADVANCE TO INDIVIDUAL CLIENTS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 9 395 2 132 27 1 167 31 12 752 Transfer to Stage 1 437 (412) - (25) - - Transfer to Stage 2 -(772) 834 - (62) - - Transfer to Stage 3 (177) (203) (8) 388 - - New / purchased / granted financial assets 5 141 - - - 13 5 154 Financial assets derecognised , other than write-offs (repayments) (3 587) (657) (1) (232) (16) (4 493) Financial assets written off - - (5) (163) - (168) Modifications not resulting in derecognition - - - - 1 1 Other, in this changes resulting from exchange rates 13 28 6 126 16 189 GROSS CARRYING AMOUNT AS AT 31.12.2023 10 450 1 722 19 1 199 45 13 435 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2023 131 314 27 803 4 1 279 Changes in balances included in the income statement (table in the Note 10), of which: (44) 47 - 107 (15) 95 New / purchased / granted financial assets 118 - - - 3 121 Financial assets derecognised, other than write-offs (repayments) (19) (29) - (22) (2) (72) Changes in level of credit risk (excluding the transfers between the Stages) (143) 76 - 129 (16) 46 Transfer to Stage 1 81 (74) - (7) - - Transfer to Stage 2 (20) 46 - (26) - - Transfer to Stage 3 (19) (76) (7) 102 - - Financial assets written off - - (5) (163) - (168) Other, in this changes resulting from exchange rates (1) (3) 4 47 13 60 IMPAIRMENT ALLOWANCE AS AT 31.12.2023 128 254 19 863 2 1 266 Bank Pekao S.A. 129 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT AMORTISED COST STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) OTHER LOANS AND ADVANCE TO INDIVIDUAL CLIENTS STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 10 501 1 775 31 1 161 21 13 489 Transfer to Stage 1 390 (368) - (22) - - Transfer to Stage 2 (1 451) 1 498 - (47) - - Transfer to Stage 3 (223) (171) - 394 - - New / purchased / granted financial assets 4 187 - - - 12 4 199 Financial assets derecognised , other than write-offs (repayments) (4 013) (583) (3) (230) (5) (4 834) Financial assets written off - - (3) (143) - (146) Modifications not resulting in derecognition (1) (1) - - - (2) Other, in this changes resulting from exchange rates 5 (18) 2 54 3 46 GROSS CARRYING AMOUNT AS AT 31.12.2022 9 395 2 132 27 1 167 31 12 752 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2022 104 314 27 844 2 1 291 Changes in balances included in the income statement (table in the Note 10), of which: 3 94 3 66 (8) 158 New / purchased / granted financial assets 55 - - - 1 56 Financial assets derecognised, other than write-offs (repayments) (17) (27) - (20) (1) (65) Changes in level of credit risk (excluding the transfers between the Stages) (35) 121 3 86 (8) 167 Transfer to Stage 1 79 (66) - (13) - - Transfer to Stage 2 - 31 - (31) - - Transfer to Stage 3 (60) (65) - 125 - - Financial assets written off - - (3) (143) - (146) Other, in this changes resulting from exchange rates 5 6 - (45) 10 (24) IMPAIRMENT ALLOWANCE AS AT 31.12.2022 131 314 27 803 4 1 279 Bank Pekao S.A. 130 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) DEBT SECURITIES MEASURED AT AMORTISED COST () DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2023 62 526 - 24 63 62 613 22 201 64 22 265 Transfer to Stage 1 - - - - - 48 (48) - Transfer to Stage 2 (83) 83 - - - (46) 46 - Transfer to Stage 3 - - - - - - - - New / purchased / granted financial assets 299 219 - - - 299 219 1 062 683 - 1 062 683 Financial assets derecognised , other than write-offs (repayments) (269 687) - - - (269 687) (1 063 012) (25) (1 063 037) Financial assets written off - - (24) - (24) Modifications not resulting in derecognition - - - - - - - - Other, in this changes resulting from exchange rates 595 - - 33 628 1 272 1 1 273 GROSS CARRYING AMOUNT AS AT 31.12.2023 92 570 83 - 96 92 749 23 146 38 23 184 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2023 78 - 23 53 154 67 2 69 Changes in balances included in the income statement (table in the Note 10), of which: 7 - - - 7 - (3) (3) New / purchased / granted financial assets 19 - - - 19 26 - 26 Financial assets derecognised, other than write-offs (repayments) (8) - - - (8) (11) (1) (12) Changes in level of credit risk (excluding the transfers between the Stages) (4) - - - (4) (15) (2) (17) Transfer to Stage 1 - - - - - - - - Transfer to Stage 2 (3) 3 - - - (1) 1 - Transfer to Stage 3 - - - - - - - - Financial assets written off - - (24) - (24) - - - Other, in this changes resulting from exchange rates - - 1 18 19 - 1 1 IMPAIRMENT ALLOWANCE AS AT 31.12.2023 82 3 - 71 156 66 1 67 () Debt securities presented in the statement of financial position under " Securities " and " Assets pledged as security for liabilities " . () The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the " Revaluation reserve " item and does not reduce the carrying amount of the securities. Bank Pekao S.A. 131 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) DEBT SECURITIES MEASURED AT AMORTISED COST () DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME () STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI TOTAL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) TOTAL GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT AS AT 1.01.2022 43 824 319 35 39 44 217 28 408 89 28 497 Transfer to Stage 1 80 (80) - - - 26 (26) - Transfer to Stage 2 - - - - - (17) 17 - Transfer to Stage 3 - - - - - - - - New / purchased / granted financial assets 30 430 - - - 30 430 149 637 - 149 637 Financial assets derecognised , other than write-offs (repayments) (12 788) (239) - - (13 027) (156 589) (18) (156 607) Financial assets written off - - (13) - (13) - - - Modifications not resulting in derecognition - - - - - - - - Other, in this changes resulting from exchange rates 980 - 2 24 1 006 736 2 738 GROSS CARRYING AMOUNT AS AT 31.12.2022 62 526 - 24 63 62 613 22 201 64 22 265 IMPAIRMENT ALLOWANCE () IMPAIRMENT ALLOWANCE AS AT 1.01.2022 61 8 34 30 133 83 3 86 Changes in balances included in the income statement (table in the Note 10), of which: 17 (8) - - 9 (16) (1) (17) New / purchased / granted financial assets 18 - - - 18 6 - 6 Financial assets derecognised, other than write-offs (repayments) (2) (5) - - (7) (25) - (25) Changes in level of credit risk (excluding the transfers between the Stages) 1 (3) - - (2) 3 (1) 2 Transfer to Stage 1 - - - - - - - - Transfer to Stage 2 - - - - - - - - Transfer to Stage 3 - - - - - - - - Financial assets written off - - (13) - (13) - - - Other, in this changes resulting from exchange rates - - 2 23 25 - - - IMPAIRMENT ALLOWANCE AS AT 31.12.2022 78 - 23 53 154 67 2 69 () Debt securities presented in the statement of financial position under " Securities " and " Assets pledged as security for liabilities " . () The impairment allowance for debt securities measured at fair value through other comprehensive income is included in the " Revaluation reserve " item and does not reduce the carrying amount of the securities. Bank Pekao S.A. 132 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The tables below present changes in the level of impairment allowances and nominal value of off-balance sheet commitments granted: OFF-BALANCE SHEET COMMITMENTS GRANTED STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI) TOTAL NOMINAL VALUE NOMINAL VALUE AT 1.01.2023 84 042 3 553 286 45 16 87 942 Transfer to Stage 1 1 483 (1 472) (3) (8) - - Transfer to Stage 2 (2 901) 2 935 (31) (3) - - Transfer to Stage 3 (169) (205) 352 22 - - New / purchased off-balance sheet commitments 36 443 - - - 1 36 444 Extinguished off-balance sheet commitments (30 928) (937) (158) (7) - (32 030) Changes in the level of available off-balance sheet commitments (3 132) 106 19 (2) 1 (3 008) Other, in this changes resulting from exchange rates (709) (23) (1) - - (733) NOMINAL VALUE AT 31.12.2023 84 129 3 957 464 47 18 88 615 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2023 244 121 58 22 4 449 Changes in balances included in the income statement (table in the Note 10), of which: 64 (11) 60 1 (1) 113 New / purchased off-balance sheet commitments 196 - - - - 196 Extinguished off-balance sheet commitments (60) (33) (30) (2) - (125) Changes in level of credit risk (excluding the transfers between the Stages) (72) 22 90 3 (1) 42 Transfer to Stage 1 21 (19) - (2) - - Transfer to Stage 2 (18) 22 (3) (1) - - Transfer to Stage 3 (86) (20) 104 2 - - Other, in this changes resulting from exchange rates (2) (3) (8) 2 1 (10) IMPAIRMENT ALLOWANCE AS AT 31.12.2023 223 90 211 24 4 552 Bank Pekao S.A. 133 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank’s exposure to credit risk The maximum credit risk exposure The table below presents the maximum credit risk exposure for statement of financial position and off-balance sheet positions as at the reporting date. 31.12.2023 31.12.2022 Due from Central Bank 8 451 9 118 Loans and advances from banks and from customers 142 133 147 827 Derivative financial instruments (held for trading) 9 350 15 134 Hedging instruments 805 280 Securities 119 047 87 081 Other assets (*) 2 046 1 603 Balance sheet exposure () 281 832 261 043 Obligations to grant loans 57 534 58 417 Other contingent liabilities 30 751 29 349 Off-balance sheet exposure 88 285 87 766 Total 370 117 348 809 () Includes part of "Other assets" item (accrued income, interbank and interbranch settlements, other debtor and card settlements). () Balance sheet exposure is equal to the carrying amount presented in the statement of financial position. Credit risk mitigation methods Bank has established specific policies with regard to collateral accepted to secure loans and guarantees. This policy is reflected under internal rules and regulations, which are based on supervision rules, specified in 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. OFF-BALANCE SHEET COMMITMENTS GRANTED STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI) TOTAL NOMINAL VALUE NOMINAL VALUE AT 1.01.2022 71 142 5 322 380 13 19 76 876 Transfer to Stage 1 2 335 (2 333) - (2) - - Transfer to Stage 2 (2 335) 2 348 (12) (1) - - Transfer to Stage 3 (116) (42) 120 38 - - New / purchased off-balance sheet commitments 34 928 - - - 1 34 929 Extinguished off-balance sheet commitments (19 217) (1 246) (83) (2) - (20 548) Changes in the level of available off-balance sheet commitments (2 956) (513) (120) (1) (4) (3 594) Other, in this changes resulting from exchange rates 261 17 1 - - 279 NOMINAL VALUE AT 31.12.2022 84 042 3 553 286 45 16 87 942 IMPAIRMENT ALLOWANCE IMPAIRMENT ALLOWANCE AS AT 1.01.2022 205 83 144 8 1 441 Changes in balances included in the income statement (table in the Note 10), of which: 22 50 (79) 11 (2) 2 New / purchased off-balance sheet commitments 101 - - - - 101 Extinguished off-balance sheet commitments (41) (13) (14) (1) - (69) Changes in level of credit risk (excluding the transfers between the Stages) (38) 63 (65) 12 (2) (30) Transfer to Stage 1 31 (30) - (1) - - Transfer to Stage 2 (14) 19 (5) - - - Transfer to Stage 3 (2) (2) 1 3 - - Other, in this changes resulting from exchange rates 2 1 (3) 1 5 6 IMPAIRMENT ALLOWANCE AS AT 31.12.2022 244 121 58 22 4 449 Bank Pekao S.A. 134 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The most frequently used types of collateral for credits and loans, accepted in compliance with the relevant policy of Bank are as follows COLLATERAL COLLATERAL VALUATION PRINCIPLES MORTGAGES commercial residential Collateral value is defined as the fair market value endorsed by a real estate expert. Other evidenced sources of valuation are acceptable, e.g. binding purchase offer, value dependent on the stage of tendering procedure, etc. REGISTERED PLEDGE/ ASSIGNMENT inventories The value is defined basing on well evidenced sources e.g. amount derived from pledge agreement, amount disclosed in last financial statements, insurance policy, stock exchange quotations, the value disclosed through foreclosure procedure supported with evidence e.g. prepared by bailiff/receiver. machines and appliances The value is defined as expert appraisal or present value determined based on other, sound sources, such as current purchase offer, register of debtor’s non-current assets, value evidenced by bailiff or court receiver, etc. vehicles The value is defined based on available tables (e.g. from insurance companies) proving the car value depending on its producer, age, initial price, or other reliable sources e.g. value stated in the insurance policy. other The value is defined upon individually. The valuation should result from reliable sources. securities and cash The value is defined upon individually estimated fair market value. Recovery rate shall be assessed prudently reflecting the securities price volatility. TRANSFER OF RECEIVABLES from clients with investment rating assigned by independent rating agency or by internal rating system of the Bank The value is defined upon individually assessed claims’ amount. from other counterparties The value is defined upon individually assessed claim’s amount. GUARANTIES/SURETIES (INCL. RAFTS)/ACCESSION TO DEBT from banks and the State Treasury Up to the guaranteed amount. from other counterparties enjoying good financial standing, particularly when confirmed by investment rating, assigned by an independent rating agency or by the internal rating system of the Bank The value is defined upon individually assessed claim’s amount. from other counterparties Individually assessed fair market value. The financial effect of pledged collaterals for exposure portfolio with recognized impairment defined individually amounts to PLN 435 million as at 31 December 2023 (PLN 706 million at 31 December 2022). The level of required impairment allowances for the portfolio would increase by this amount, if the discounted cash flows from collateral were not taken into account during estimation. Bank Pekao S.A. 135 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The Bank analyzes the concentration within LtV levels (the ratio of debt to the value of collateral), which is particularly important in the case of mortgage loans to individual clients. The structure of mortgage loans to individual clients according to the LtV level is presented below: 31.12.2023 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) LTV LEVEL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL MORTGAGE LOANS TO INDIVIDUAL CLIENTS – GROSS CARRYING AMOUNT 0% < LtV <= 50% 29 992 4 865 - 2 410 59 37 326 50% < LtV <= 70% 16 171 1 484 4 264 11 17 934 70% < LtV <= 90% 6 432 232 - 33 2 6 699 90% < LtV <= 100% 1 770 5 - 6 - 1 781 100% < LtV 78 14 - 26 2 120 Total 54 443 6 600 4 2 739 74 63 860 31.12.2022 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) LTV LEVEL STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL MORTGAGE LOANS TO INDIVIDUAL CLIENTS – GROSS CARRYING AMOUNT 0% < LtV <= 50% 27 520 4 690 16 1 970 38 34 234 50% < LtV <= 70% 19 173 1 227 11 312 9 20 732 70% < LtV <= 90% 5 720 248 6 34 2 6 010 90% < LtV <= 100% 162 9 - 5 - 176 100% < LtV 139 14 10 25 1 189 Total 52 714 6 188 43 2 346 50 61 341 Credit risk concentration According to valid regulations the total exposure of the Bank to single borrower or a group of borrowers related by capital or management may not exceed 25% of the Bank’s Tier 1 capital. In 2023 the maximum exposure limits set in the valid regulations were not exceeded. a) Breakdown by individual entities EXPOSURE TO 10 LARGERST CLIENTS OF THE BANK AS AT 31 DECEMBER 2023 () % SHARE OF PORTFOLIO Client 1 0.8% Client 2 0.7% Client 3 0.6% Client 4 0.4% Client 5 0.4% Client 6 0.4% Client 7 0.4% Client 8 0.3% Client 9 0.3% Client 10 0.3% Total 4.6% () On-balance sheet and off-balance sheet exposures including exclusions that can be used in the large exposure limit specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council. Bank Pekao S.A. 136 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) EXPOSURE TO 10 LARGERST CLIENTS OF THE BANKP AS AT 31 DECEMBER 2022 () % SHARE OF PORTFOLIO Client 1 0.9% Client 2 0.8% Client 3 0.6% Client 4 0.5% Client 5 0.4% Client 6 0.4% Client 7 0.4% Client 8 0.4% Client 9 0.3% Client 10 0.3% Total 5.0% () On-balance sheet and off-balance sheet exposures including exclusions that can be used in the large exposure limit specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council. b) Concentration by capital groups EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE BANK AS AT 31 DECEMBER 2023 () % SHARE OF PORTFOLIO Group 1 1.2% Group 2 0.8% Group 3 0.7% Group 4 0.7% Group 5 0.6% Total 4.0% () On-balance sheet and off-balance sheet exposures including exclusions that can be used in the large exposure limit specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council. EXPOSURE TO 5 LARGEST CAPITAL GROUPS SERVICED BY THE BANK AS AT 31 DECEMBER 2022 () % SHARE OF PORTFOLIO Group 1 1.1% Group 2 0.9% Group 3 0.7% Group 4 0.6% Group 5 0.6% Total 3.9% () On-balance sheet and off-balance sheet exposures including exclusions that can be used in the large exposure limit specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council. c) Breakdown by industrial sectors. In order to mitigate credit risk associated with excessive sector concentration the Bank sets up a system for shaping the sectoral structure of credit exposure. Every year within credit risk policy the Bank defines sector limits for particular sectors of economy. These limits are subject to ongoing monitoring. The system applies to credit exposure in particular types of business activity according to the classification based on the Polish Classification of Economic Activities (Polska Klasyfikacja Działalności – PKD). Concentration limits are set based on the Bank’s current credit exposure and risk assessment of each sector. Periodic monitoring of the Bank’s exposure allows for ongoing identification of the sectors in which the concentration of sector risk may be too excessive. In such cases, an analysis of the economic situation of the sector is performed including both the current and forecast trends and an assessment of quality of the current exposure to that sector. These measures enable the Bank to formulate the activities to reduce sector concentration risk and ongoing adaptation of the Bank’s credit risk policy to a changing environment. Bank Pekao S.A. 137 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The table below presents the structure of exposures by sectors EXPOSURE’S STUCTURE BY SECTORS () 31.12.2023 31.12.2022 Agriculture, forestry and fishing 0.5% 0.5% Mining and quarrying 1.0% 0.9% Manufacturing 19.9% 18.8% Electricity, gas, steam and air conditioning supply 5.2% 4.8% Water supply 2.3% 2.2% Construction 5.1% 4.4% Wholesale and retail trade 13.9% 14.1% Transport and storage 3.5% 3.8% Accommodation and food service activities 1.4% 2.0% Information and communication 2.9% 2.5% Financial and insurance activities 24.4% 28.1% Real estate activities 9.6% 9.0% Professional, scientific and technical activities 2.5% 1.4% Administrative and support service activities 1.6% 1.8% Public administration and defence, compulsory social security 3.6% 3.2% Education 0.2% 0.1% Human health services and social work activities 0.9% 0.8% Arts, entertainment and recreation 0.7% 0.7% Others 0.8% 0.9% Total 100.0% 100.0% () On-balance sheet and off-balance sheet exposures including exclusions that can be used in the large exposure limit specified in Regulation (EU) No 575/2013 of the European Parliament and of the Council. Financial assets subject to modification The table below presents information about financial assets that were subject to a modification that didn’t result in derecognition and for which, prior to modification, an impairment loss on expected credit losses was calculated as a loan loss over the lifetime of the exposure. 2023 2022 FINANCIAL ASSETS WHICH WERE SUBJECT TO MODIFICATION IN THE PERIOD Carrying amount according to the amortised cost before modification 1 790 1 111 Net modification gain or loss (1) (1) FINANCIAL ASSETS WHICH WERE SUBJECT TO MODIFICATION SINCE INITIAL RECOGNITION Gross carrying amount of financial assets for which the loss allowance has changed during the reporting period from lifetime expected credit losses to an amount equal to 12-month expected credit losses 1 143 1 080 Restructured exposures The Bank considers a restructured exposure the exposure whose repayment terms have been changed during the term of the liability to the debtor who experiences or is likely to experience financial difficulties. The change of contractual conditions includes restructuring measures specified by the Bank, in particular: • the extension of initial maturity (due) date (in case of additional appendix to the contract) or signing a restructuring contract (in case of full past-due debt), in particular as a result of constant reduction of installments amount, • the modification of the contract’s terms or conditions which results in lower interests and/or principal payments to eliminate the past-due debt, • the refinancing by the other loan in the Bank. A restructured exposure that has been: • classified as non-performing due to restructuring measures, or • classified as non-performing prior to commencement of forbearance measures, or • transferred from the performing to non-performing exposure class, including as a result of more than 30 days past due for a restructured exposure in a conditional period, it is classified as a forborne non-performing exposure. Bank Pekao S.A. 138 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The classification as forborne exposure shall be discontinued when all the following conditions are met: • the contract is considered as a performing exposure, • a minimum 2 year probation period has passed from the date the forborne exposure was considered as performing, • none of the exposures to the debtor is at least 30 days past-due at the end of the probation period of forborne exposure. If conditions, referred above, are not fullfiled at the end of the probation period, exposures are classified respectively as performing or non-performing forborne exposures in the probation period untill all these conditions are met. The fullfilment of the conditions is assesed at least on a quarterly basis. Exposure is classified as restructuring exposure only if the modification of the contractual terms is related to the financial difficulties of the borrower. The restructuring exposure agreements are monitored for fulfillment of the obligations contained in the agreement. The decision to apply the restructuring exposure measure is undertaken by the authorized Unit within the credit application process. The accounting policies in respect to the evaluation and the provisioning of the forborne exposures generally follow the principles in line with the provisions of IFRS 9. In the case of granting loan holidays the Bank applies an approach consistent with regulatory guidelines in this regard. Granting loan holidays does not automatically identify restructuring exposure (forborne exposures). Share of forborne exposures in the Bank’s loan portfolio 31.12.2023 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI) TOTAL Loans and advances measured at amortised cost, including : 123 498 15 104 779 1 456 488 141 325 Forborne exposures gross - 765 1 016 532 299 2 612 Loss allowance - (25) (629) (387) (30) (1 071) Forborne exposures net - 740 387 145 269 1 541 Loans and advances measured at fair value through other comprehensive income, including: 133 - - - - 133 Forborne exposures - - - - - - Loss allowance () - - - - - - Loans and advances measured at fair value through profit or loss, including: 249 Forborne exposures - 31.12.2022 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT-IMPAIRED (POCI) TOTAL Loans and advances measured at amortised cost, including : 121 971 17 295 747 1 362 564 141 939 Forborne exposures gross 167 853 2 145 657 331 4 153 Loss allowance (1) (37) (1 695) (464) (116) (2 313) Forborne exposures net 166 816 450 193 215 1 840 Loans and advances measured at fair value through other comprehensive income, including: 303 - - - - 303 Forborne exposures - - - - - - Loss allowance () - - - - - - Loans and advances measured at fair value through profit or loss, including: 184 Forborne exposures - () The impairment allowance for loans and advances to customers measured at fair value through other comprehensive income is included in the "Revaluation reserve" item and does not reduce the carrying amount of the loan. Bank Pekao S.A. 139 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The quality analysis of forborne exposures broken down by delays in repayment 31.12.2023 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL FORBORNE EXPOSURES MEASURED AT AMORTISED COST () Gross carrying amount, of which : - 765 1 016 532 299 2 612 not past due - 740 617 143 143 1 643 up to 1 month - 23 30 69 33 155 between 1 month and 3 months - 2 - 49 10 61 between 3 months and 1 year - - 224 61 18 303 between 1 year and 5 years - - 18 201 90 309 above 5 years - - 127 9 5 141 Impairment allowances, of which: - (25) (629) (387) (30) (1 071) not past due - (23) (270) (87) 52 (328) up to 1 month - (2) (16) (44) - (62) between 1 month and 3 months - - - (33) (3) (36) between 3 months and 1 year - - (213) (43) (9) (265) between 1 year and 5 years - - (7) (171) (65) (243) above 5 years - - (123) (9) (5) (137) The quality analysis of forborne exposures broken down by delays in repayment 31.12.2022 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL FORBORNE EXPOSURES MEASURED AT AMORTISED COST () Gross carrying amount, of which: 167 853 2 145 657 331 4 153 not past due 164 762 218 184 191 1 519 up to 1 month 3 58 495 69 12 637 between 1 month and 3 months - 33 7 44 15 99 between 3 months and 1 year - - 25 85 15 125 between 1 year and 5 years - - 433 210 90 733 above 5 years - - 967 65 8 1 040 Impairment allowances, of which: (1) (37) (1 695) (464) (116) (2 313) not past due (1) (26) (111) (112) (62) (312) up to 1 month - (7) (257) (43) (3) (310) between 1 month and 3 months - (4) (5) (26) 21 (14) between 3 months and 1 year - - (21) (55) (6) (82) between 1 year and 5 years - - (377) (166) (59) (602) above 5 years - - (924) (62) (7) (993) Bank Pekao S.A. 140 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Changes in net carrying amount of forborne exposures 2023 2022 Carrying amount at the beginning 1 840 2 407 Amount of exposures recognized in the period 658 658 Amount of exposures derecognized in the period (822) (1 118) Changes in impairment allowances 15 92 Other changes (150) (199) Carrying amount at the end 1 541 1 840 Interest income 147 143 Forborne exposures by product type 31.12 .2023 31.12 .2022 Mortgage loans 647 842 Current accounts 72 55 Operating loans 193 160 Investment loans 528 657 Cash loans 77 115 Other loans and advances 24 11 Carrying amount 1 541 1 840 Forborne exposures by industrial sectors 31.12 .2023 31.12 .2022 Corporates: 883 1 110 Real estate activities 79 75 Manufacturing 16 68 Wholesale and retail trade 296 98 Accommodation and food service activities 25 414 Construction 225 272 Professional, scientific and technical activities 168 64 Transportation and storage 13 15 Financial and insurance activities 39 28 Other sectors 22 76 Individuals 658 730 Carrying amount 1 541 1 840 Forborne exposures by geographical structure 31.12 .2023 31.12 .2022 Poland 1 541 1 784 United Kingdom - 56 Carrying amount 1 541 1 840 Offsetting financial assets and financial liabilities The disclosures in the tables below include financial assets and financial liabilities that are subject to an enforceable master netting agreements or similar agreements, irrespective of whether they are offset in the statement of financial position. The netting agreements concluded by the Bank are: • ISDA agreements and similar master netting agreements on derivatives, • GMRA agreements on repo and reverse-repo transactions. The netting agreements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the one of the counterparty. At the balance, day there were no cases of offsetting financial assets and financial liabilities for these netting agreements. The Bank receives and gives collateral in the form of cash and marketable securities in respect of the derivatives transactions. Such collateral is subject to standard industry terms. The collateral in the form of cash stems from an ISDA Credit Support Annex (CSA). Bank Pekao S.A. 141 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Financial assets and financial liabilities subject to enforceable master netting agreements and similar agreements and which may be potentially offset in the statement of financial position. AMOUNT OF POTENTIAL OFFSETTING 31.12.2023 CARRYING AMOUNT OF FINANCIAL ASSETS PRESENTED IN THE STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS (INCLUDING RECEIVED COLLATERAL IN THE FORM OF SECURITIES) CASH COLLATERAL RECEIVED NET AMOUNT FINANCIAL ASSETS Derivatives 10 122 (9 124) (528) 470 Repo transactions 562 (555) (4) 3 TOTAL 10 684 (9 679) (532) 473 AMOUNT OF POTENTIAL OFFSETTING 31.12.2023 CARRYING AMOUNT OF FINANCIAL LIABILITIES PRESENTED IN THE STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS (INCLUDING PLEDGED COLLATERAL IN THE FORM OF SECURITIES) CASH COLLATERAL PLEDGED NET AMOUNT FINANCIAL LIABILITIES Derivatives 10 623 (9 141) (679) 803 TOTAL 10 623 (9 141) (679) 803 AMOUNT OF POTENTIAL OFFSETTING 31.12.2022 CARRYING AMOUNT OF FINANCIAL ASSETS PRESENTED IN THE STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS (INCLUDING RECEIVED COLLATERAL IN THE FORM OF SECURITIES) CASH COLLATERAL RECEIVED NET AMOUNT FINANCIAL ASSETS Derivatives 15 313 (14 459) (863) (9) Reverse repo transactions 756 (753) (1) 2 TOTAL 16 069 (15 212) (864) (7) AMOUNT OF POTENTIAL OFFSETTING 31.12.2022 CARRYING AMOUNT OF FINANCIAL LIABILITIES PRESENTED IN THE STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS (INCLUDING PLEDGED COLLATERAL IN THE FORM OF SECURITIES) CASH COLLATERAL PLEDGED NET AMOUNT FINANCIAL LIABILITIES Derivatives 18 661 (14 473) (2 573) 1 615 Repo transactions 51 (51) - - TOTAL 18 712 (14 524) (2 573) 1 615 The carrying amount of financial assets and financial liabilities disclosed in this statement of financial position are presented: • derivatives – on the fair value base, • repo and reverse repo transactions – on a value at amortised cost base. Reconciliation of the carrying amount of financial assets and financial liabilities subject to enforceable master netting agreements and similar agreements to the amounts presented in the statement of financial position. 31.12.2023 NET CARRYING AMOUNT ITEM IN STATEMENT OF FINANCIAL POSITION CARRYING AMOUNT IN STATEMENT OF FINANCIAL POSITION CARRYING AMOUNT OF TRANSACTIONS NOT IN SCOPE OF OFFSETTING DISCLOSURES NOTE FINANCIAL ASSETS 9 317 Derivative financial instruments (held for trading) 9 350 33 18 Derivatives 805 Hedging instruments 805 - 19 Reverse repo transactions 562 Cash and cash equivalents 14 836 14 271 16 FINANCIAL LIABILITIES 9 194 Derivative financial instruments (held for trading) 9 308 114 18 Derivatives 1 429 Hedging instruments 1 429 - 19 Bank Pekao S.A. 142 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 31.12.2022 NET CARRYING AMOUNT ITEM IN STATEMENT OF FINANCIAL POSITION CARRYING AMOUNT IN STATEMENT OF FINANCIAL POSITION CARRYING AMOUNT OF TRANSACTIONS NOT IN SCOPE OF OFFSETTING DISCLOSURES NOTE FINANCIAL ASSETS 15 033 Derivative financial instruments (held for trading) 15 134 101 18 Derivatives 280 Hedging instruments 280 - 19 Reverse repo transactions 756 Cash and cash equivalents 18 211 17 455 16 FINANCIAL LIABILITIES 15 486 Derivative financial instruments (held for trading) 15 539 53 18 Derivatives 3 176 Hedging instruments 3 176 - 19 Repo transactions 51 Amounts due to other banks 4 135 4 084 29 43.3. Legal risk regarding foreign currency mortgage loans in CHF Adopted accounting principles The Bank recognizes that the legal risk related to the outstanding portfolio of foreign currency mortgage loans in CHF as at 31 December 2023 affects the expected cash flows resulting from loan agreements of this portfolio and the level of expected credit loss within the meaning of IFRS 9 that can be incurred by the Bank. In connection with the above, the credit risk of the portfolio of foreign currency mortgage loans in CHF is assessed by the Bank, taking into account the legal risk associated with this portfolio, which materializes in the form of court disputes and out-of-court settlements concluded with borrowers. Due to unfavorable judgments, resulting in a significant probability of losing the case, as at 31 December 2023 the Bank assumed that loans subject to legal dispute and loans for which the probability that the client will file a lawsuit or reach a settlement with the Bank is estimated at higher level than 60% are classified as Stage 3. Other loans (not meeting the above criterion) were classified to Stage 2. As a result of the above, in the case of the part of the provision relating to (allocated to) an active loan agreement, it is recognized first as an element of the impairment allowance on the loan exposure. However, any surplus of this provision over the net value of the loan exposure is presented as an element of provisions in the "Provisions" line in accordance with IAS 37. With regard to the repaid portfolio of foreign currency mortgage loans in CHF, the Bank applies IAS 37 and recognizes provisions allocated to this part of the portfolio under "Provisions" and "Other operating expenses", which were presented in the Note 34 and the Note 11, respectively. At the same time, part of the provision concerns additional costs related to the possible loss of a court dispute (i.e. interest for delay and costs of legal representation) due to the fact that they do not result from the loan agreement are recognized in accordance with IAS 37 as an element of the "Provisions" (regardless of whether this estimate concerns an active loan agreement or a repaid loan). Portfolio characteristics Bank Pekao S.A. has not granted loans in CHF to the public since 2003. Almost the entire current portfolio of loans in CHF for individuals was taken over by Bank Pekao S.A. in the process of partial division of Bank BPH S.A. (loans granted before August 2006). As at 31 December 2023, the Bank had a portfolio of foreign currency mortgage loans in CHF with a total gross carrying amount of PLN 1 943 million (i.e. CHF 415 million) compared to PLN 2 303 million (i.e. CHF 483 million) as at 31 December 2022. Bank Pekao S.A. 143 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The tables below present the structure and quality of the CHF loan portfolio for individuals: 31 .12.2023 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL Gross carrying amount, of which: - 120 - 1 814 9 1 943 denominated in CHF - 120 - 1 814 9 1 943 indexed to CHF - - - - - - Impairment allowances, of which (): - (49) - (1 515) (7) (1 571) denominated in CHF - (49) - (1 515) (7) (1 571) indexed to CHF - - - - - - Carrying amount, of which: - 71 - 299 2 372 denominated in CHF - 71 - 299 2 372 indexed to CHF - - - - - - () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 379 million (including Stage 1 in the amount of PLN 0 million, Stage 2 in the amount of PLN 48 million, Stage 3 in the amount of PLN 1 331 million). 31 .12.2022 STAGE 3 (LIFETIME ECL - CREDIT-IMPAIRED) STAGE 1 (12M ECL) STAGE 2 (LIFETIME ECL - NOT CREDIT- IMPAIRED) INDIVIDUAL ASSESSMENT GROUP ASSESSMENT PURCHASED OR ORIGINATED CREDIT- IMPAIRED (POCI) TOTAL Gross carrying amount, of which: 1 677 28 1 590 7 2 303 denominated in CHF 1 676 28 1 590 7 2 302 indexed to CHF - 1 - - - 1 Impairment allowances, of which (): - (330) (26) (1 424) (5) (1 785) denominated in CHF - (330) (26) (1 424) (5) (1 785) indexed to CHF - - - - - - Carrying amount, of which: 1 347 2 166 2 518 denominated in CHF 1 346 2 166 2 517 indexed to CHF - 1 - - - 1 () Including the provision for legal risk regarding foreign currency mortgage loans in the amount of PLN 1 575 million (including Stage 1 in the amount of PLN 0 million, Stage 2 in the amount of PLN 323 million, Stage 3 in the amount of PLN 1 252 million). As of 31 December 2023 t he average LTV for CHF loans to individuals granted by the Bank amounted to 27.3% ( 31.5% as at 31 December 2022) , with an average LTV for the whole portfolio of mortgage loans of 47.5% ( 47.8% as at 31 December 2022). Court proceedings related to foreign currency mortgage loans in CHF In 2019, the Court of Justice of the European Union (hereinafter the “CJEU”) issued a ruling on a CHF-indexed loan granted by another bank, in which it interpreted the provisions of Council Directive 93/13 / EEC of 5 April 1993 on unfair terms in consumer loans based on the CHF indexed loan agreement. The CJEU indicated the consequences of recognizing the possible abusiveness of conversion clauses by the domestic court, without examining the possible abusiveness of contractual provisions at all. The CJEU did not prejudge that in the event that a domestic court finds possible abusiveness, the court should automatically declare the entire contract invalid. The assessment in this respect remains to be decided by the national court, but the CJEU has not ruled out the possibility of filling the gap resulting from the abusive nature of conversion clauses by means of domestic regulations. However, subsequent rulings of the CJEU exclude the admissibility of filling the gap after eliminating the prohibited provision under national law, as a result of which the courts of the countries recognize loan agreements as unenforceable after the removal of the abusive provision (conversion clause) and consider that the agreement cannot be enforced, as a result of which the courts declare the loan agreement invalid. On 7 May 2021, a resolution was adopted by the Supreme Court composed of seven judges, after the resolution of the legal issue in the case III CZP 6/21 in the Civil Chamber, indicating that: • a prohibited contractual provision (Art.385 (1) § 1 of the Civil Code) is from the outset, by operation of law, ineffective in favor of the consumer, who may subsequently give informed and free consent to this provision and thus restore its effectiveness retroactively, • if the loan agreement cannot be binding without an ineffective provision, the consumer and the lender are entitled to separate claims for the reimbursement of cash benefits provided in the performance of the agreement (Art. 410 § 1 in conjunction with Art. 405 of the Civil Code). The lender may request the return of the benefit from the moment the loan agreement becomes permanently ineffective. Bank Pekao S.A. 144 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The resolution in question was given the force of a legal principle, therefore in the scope of resolved issues, it is binding in other cases examined by common courts as well as by the Supreme Court. In addition, there is a trend on the market related to the referral by common courts of inquiries regarding various types of doubts arising to the Supreme Court, as well as to the CJEU, which may also affect the future directions of judicial decisions. An example of such an important ruling is the judgment of the CJEU of 8 September 2022 issued in joined cases C-80/21 to C- 82/21, in which the CJEU replied to the questions referred for a preliminary ruling by the District Court for Warszawa Śródmieście in Warsaw in the CHF case. The CJEU stated: 1) The national court may not find that the entire contract term is unfair, but only its element which renders it unfair, if such removal would amount to changing the content of the term which would affect its essence. This means that, in principle, the national court is confined to finding that a whole contract term is unfair. 2) If a national court finds that a contract term is unfair, with the result that the entire contract may continue in force despite the exclusion of the unfair terms, the national court cannot replace these terms with a national provision of an optional nature. This means that in such a case the national court may not apply the provisions of the Civil Code concerning the conversion of installments with the average exchange rate of the National Bank of Poland. 3) The national court, after finding that a contract term is unfair, is not entitled to amend the content of that term in order to maintain the validity of the contract, which cannot remain in force after removal of the term, if the relevant consumer has been informed of the consequences of nullity of the contract and has agreed to the consequences of this nullity. This means that if the consumer has agreed to the consequences of the nullity of the contract (being informed of them), the national court may not, by ruling, change the content of such a condition, but must declare nullity. 4) The run of the 10-year limitation period for the consumer's claim for reimbursement of the paid installments may not start from the moment of performance of each service in the performance of the contract (repayment of each installment), even if the consumer was not able to independently assess the unfairness of a contract term or did not become aware of unfair nature of this condition and without taking into account that the loan agreement provided for a much longer (30-year) repayment period. This means that the 10-year limitation period for the consumer's claim for repayment of installments does not start from the date of repayment of each installment. In practice, it should be assumed that no consumer claims for reimbursement of installments paid have expired. On 15 June 2023, the CJEU introduced a judgment in case C-520/21, in which it settled the question referred for a preliminary ruling by the District Court for Warsaw - Srodmiescie in Warsaw, stated that in the context of recognizing a mortgage loan agreement as invalid in its entirety due to the fact that it cannot continue to apply after removing the unfair terms from it, Art. 6 sec. 1 and art. 7 sec. 1 of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts should be interpreted as follows: • they do not preclude a judicial interpretation of national law according to which the consumer is entitled to claim compensation from the credit institution beyond the reimbursement of the monthly installments and costs paid for the performance of that contract and the payment of statutory interest for late payment from the date of the request for payment, provided respect the objectives of Directive 93/13 and the principle of proportionality, and • they preclude a judicial interpretation of national law according to which a credit institution is entitled to demand compensation from the consumer beyond the reimbursement of the capital paid for the performance of that contract and the payment of statutory interest for late payment from the date of the demand for payment. The judgment in question closed the way for the banks to pursue the so-called remuneration for the use of capital, while as regards consumer claims against banks, the CJEU referred to national law and emphasized that it is for the referring court to assess, in the light of all the circumstances of the dispute, whether the inclusion of such consumer claims complies with the principle of proportionality. As of today, we are not aware of such claims by borrowers, and thus their legal basis, scope or nature. At the same time, this judgment does not literally refer to the admissibility of the bank's claim for judicial indexation of the amount corresponding to the amount of the loan capital granted. On 7 December 2023, the CJEU issued a judgment in case C-140/22, which states that the possibility of exercising rights by a consumer cannot be made conditional on the consumer's submission to the court of consent to the maintenance of an unfair contract term, consent to invalidity contract and a statement that the consumer is aware of the consequences of the invalidity of the contract and that when settling the invalidity of the contract, banks cannot retain capital interest accrued in the course of performing the contract, thus stating that banks cannot demand compensation from the consumer that goes beyond the return of the paid capital. On 11 December 2023, the CJEU issued a decision in case C-756/22, in which it ruled that Art. 6 section 1 and art. 7 section 1 of Directive 93/13 must be interpreted as meaning that in the context of declaring a mortgage loan agreement concluded with a consumer by a banking institution to be invalid in its entirety because that agreement contains unfair terms without which it cannot continue to be in force, precludes a judicial interpretation of the law of a Member State according to which that institution is entitled to demand from that consumer the repayment of sums other than the capital paid for the performance of that contract and statutory interest for delay from the time of the request for payment. The above ruling may in the future result in banks being able to claim from Swiss franc borrowers only the return of the loan capital along with statutory interest for delay from the moment of payment demand, without remuneration for the use of capital or capital indexation. Bank Pekao S.A. 145 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) On 14 December 2023, the CJEU issued a judgment stating that Art. 6 section 1 and art. 7 section 1 of Directive 93/13, in connection with the principle of effectiveness, must be interpreted as precluding a judicial interpretation of national law according to which the limitation period for an entrepreneur's claims arising from the invalidity of a mortgage loan contract begins to run only from the date on which the contract becomes permanently ineffective and that they preclude a judicial interpretation of national law according to which the submission of an objection by the entrepreneur to the retention will from that moment result in the consumer losing the possibility of claiming interest for the delay. Moreover, the CJEU ruled that a credit institution is not obliged to examine whether a consumer who is a party to a loan agreement is aware of the consequences of the invalidity of the agreement. Summarizing a number of December judgments, regarding the compensation banks are entitled to in excess of the capital paid, the CJEU confirmed its position presented in the judgment of 15 June 2023. The judgments of the CJEU regarding the commencement of the limitation period for banks' restitution claims do not cause any changes in the Group's approach to this type of cases, due to the unclear jurisprudence of national courts, the Bank assumes the earliest possible date for the commencement of the limitation period, which is the submission by the borrower of a declaration containing a demand related to the allegation that the contract was invalid. The above December rulings may change the approach of courts to awarding interest from banks for delays with a date earlier than the date of submission of the consumer's declaration of consent to the invalidity of the contract and the effects of this invalidity, and may also unify the approach to the issue of whether filing an allegation of retention by a credit institution causes interruption and charging of interest to the customer, which, if such a practice is established before common courts, may be unfavorable for banks. Until 31 December 2023, 5.4 thousand individual court cases were pending against the Bank regarding foreign currency mortgage loans in CHF (including 1 thousand regarding contracts repaid as at the date of filing the lawsuit) which were granted in previous years, with the total value of the claim in the amount of PLN 1 694 million (as at 31 December) which were granted in previous years, with the total value of the claim in the amount of PLN 1 694 million (as at 31 December 2022, the number of cases was 2.3 thousand, and the corresponding value of the dispute is PLN 780 million). The main cause of the dispute, as indicated by the plaintiffs, concerns the questioning of the provisions of the loan agreement with regard to the Bank's application of conversion rates based on the Bank's exchange rate Table and results in claims regarding the partial or complete invalidity of the loan agreements. During the 12-month period ended on 31 December 2023, 1 218 unfavorable court judgments were passed in cases brought by borrowers against the Bank, including 181 final judgments and 33 favorable court judgments, including 2 final judgments (in 2022: 540 unfavorable court judgments, including 84 final judgments stating the invalidity of the loan agreement and 18 favorable court judgments, including 2 final judgments dismissing the claim for declaring the invalidity of the loan agreement and a claim for payment in connection with the invalidity of the loan agreement). Court settlement program On 2 October 2023, the Bank started offering out-of-court settlements under the name “2% safe settlement". The program applies to borrowers who as of 31 March 2023 had an active mortgage loan agreement denominated in CHF, including those in legal dispute with the Bank. As part of the settlement, a new debt balance is determined, expressed in PLN and calculated as the loan amount paid by the Bank, increased by contractual interest calculated at a fixed interest rate of 2% per annum and reduced by all repayments made by the borrower until the settlement is concluded. The amount of debt remaining after the settlement bears interest at a fixed interest rate of 2% per annum for the first 60 months, and thereafter in accordance with the Bank's current offer. If the new debt balance turns out to be negative (i.e. there is an overpayment), the Bank refunds the overpaid amount to the borrower. The Bank successively sends settlement offers to subsequent groups of borrowers covered by the program, starting with the oldest loans granted. As of 31 December 2023, approximately half of the borrowers responded to the settlement offer received, of which approximately 70% (1.5 thousand customers) accepted the Bank's proposal. The program is scheduled to be completed by the end of 2024. Provision related to foreign currency mortgage loans in CHF - assumptions and calculation methodology The calculation of the provision performed by the Bank as at 31 December 2023 was based on estimating the expected loss of the Bank resulting from the possible materialization of the legal risk of mortgage loans in CHF. The estimate made by the Bank includes the following key elements: 1) forecast of disputes The Bank updated the forecast of the expected number of future lawsuits using statistical methods and taking into account the observed trends in the scale of incoming lawsuits, as well as issued certificates on the history of loan repayments (which are a leading indicator in relation to future lawsuits). According to the opinion of an external law firm, for index-linked loans originally granted by Bank Pekao S.A., the Bank assesses the probability of the contractual provisions being deemed abusive as negligible, as the indexation clause used was based on the average NBP exchange rate and not the Bank's exchange rate table. As a result, the Bank does not expect an influx of lawsuits for such agreements in the future, and for existing lawsuits (9 pieces) it does not create an individual provision, At the same time, for agreements repaid 10 years ago or earlier (i.e. inactive at the end of 2013), the Bank assumes the possibility of successfully raising objections resulting in the dismissal of the claim and also does not Bank Pekao S.A. 146 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) expect an influx of lawsuits for such agreements in the future. This is confirmed by past practice: the scale of litigation for the remainder of the loan population is negligible. As a result, the entire forecast of future lawsuits relates to denominated loans of active loans or loans that have been fully repaid within the last 10 years. The Bank estimates that in total, i.e. counting the lawsuits that have been and will be brought by borrowers against the Bank, approximately 41% (including approximately 65% for active contracts and 13% for repaid contracts) of the total CHF approximately 2 billion of such loans granted may be in dispute (relative to 47%, including 71% for active contracts and 16% for repaid contracts estimated at the end of 2022), and the phenomenon of the inflow of lawsuits may remain significant until the end of 2028. 2) the likelihood of losing a court case According to the opinion of an external law firm, for the denominated loans acquired by the Bank as a result of the acquisition (demerger) of Bank BPH, the Bank estimates the probability that the contractual provisions will be considered abusive at a minimum of 95% (against a minimum of 95% at the end of 2022). 3) financial implications of court disputes The Bank accepts the following possible litigation settlements: • invalidation of the entire CHF foreign currency mortgage loan agreement as a result of declaring the valorization clause illegal, which the Bank considers to be the most likely outcome (above 95%); • recognition that the clauses contained in the loan agreement constitute prohibited contractual provisions resulting in the loan balance being set in PLN and the loan interest rate remaining based on the SARON/LIBOR rate (the so- called "de-franking"); • declare the valorization clause abusive and replace in its content the Bank's exchange rate table with the average NBP rate; • dismiss the claim. The Bank maintained expectations including the probability distribution of possible outcomes and the amount of expected financial impact if the court case is lost, taking into account statistics for litigation cases currently pending. In particular, the share of loan cancellation in possible settlement scenarios exceeds 95% (no changes compared to 2022). Moreover, the calculation takes into account additional costs related to the possible loss of a court dispute, calculated for the entire portfolio covered by the provision calculation: interest for delay and costs of legal representation. The Bank also takes into account the time value of money, in accordance with the projected dynamics of the inflow of future lawsuits and the expected duration of the dispute, i.e. the financial consequences of the dispute in an amount not exceeding the net carrying amount of a given contract were discounted using the effective interest rate of the loan, and the remaining part, including the entire interest for delay and costs of legal representation, profitability of Polish treasury bonds. 4) inclusion of a settlement program For the population of agreements covered by the program, the Bank assumes that the borrower will accept the settlement offer with a probability of approximately 35%, resulting from empirical observations. If a settlement is reached, the Bank no longer expects a lawsuit under a given contract. Otherwise, the probability and distribution of resolutions of the court dispute are the same as described in point 1)-3). Although the subject of legal risk related to the CHF loan portfolio is one of the key topics in the sector in recent years, the history of data on the scale of lawsuits (in particular in the field of final judgments), is still insufficient. All of the above causes that the process of determining the level of the provision requires each time the Bank adopts many expert assumptions based on professional judgment. Subsequent rulings and possible sectoral solutions that will appear on the Polish market with regard to foreign currency mortgage loans in CHF may affect the amount of the provision determined by the Bank and cause the necessity to change individual assumptions adopted in the calculations. In connection with the above-mentioned uncertainty, it is possible that the amount of the provision will change in the future. Provision related to foreign currency mortgage loans in CHF – results and allocation As at 31 December 2023, the level of the provision for the aforementioned legal risk related to CHF denominated mortgage contracts estimated by the Bank amounted to PLN 2 151 million and increased by PLN 151 million relative to the level of such provisions as at 31 December 2022. As a result, the level of the provision at 31 December 2023 represents approximately 42% of the total volume of CHF-denominated loans granted, active or fully repaid over the last 10 years (relative to approximately 35% at 31 December 2022). For active contracts, the allocated provision corresponds to 67% and for repaid contracts to 14% of the amount granted. The above amount includes a provision for individual existing litigation to which the Bank is a party and a portfolio provision for the remaining CHF foreign currency mortgage loan contracts that are subject to the legal risk of the recognition of abusive conversion clauses. Bank Pekao S.A. 147 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) A summary of the recognition of the provision for legal risk related to foreign currency mortgage loans in CHF in the statement of financial position and income statement is presented in the tables below . STATEMENT OF FINANCIAL POSITION 31.12.2023 31.12.2022 Impairment allowances for loan exposures, in this: 1 379 1 575 Individual provisions 559 296 Portfolio provisions 820 1 279 Provisions for litigation and claims, in this: 772 425 Individual provisions 487 143 Portfolio provisions 285 282 Total 2 151 2 000 2023 IMPAIRMENT ALLOWANCES FOR LOAN EXPOSURES PROVISIONS FOR LITIGATION AND CLAIMS TOTAL Opening balance 1 575 425 2 000 Provision charges/revaluation (114) 403 289 Provision utilization (58) (56) (114) Closing balance (24) - (24) Opening balance 1 379 772 2 151 2022 IMPAIRMENT ALLOWANCES FOR LOAN EXPOSURES PROVISIONS FOR LITIGATION AND CLAIMS TOTAL Opening balance 394 113 507 Provision charges/revaluation 1 185 319 1 504 Provision utilization (4) (7) (11) Closing balance 1 575 425 2 000 INCOME STATEMENT 2023 2022 Net allowances for expected credit losses 114 (1 185) Other operating expenses (403) (319) Foreign exchange result (foreign currency exchange differences) 24 - Total (265) (1 504) Sensitivity analysis The Bank performed a sensitivity analysis in relation to the significant assumptions of the provision calculation, where a change in the level of individual parameters would have the following impact on the amount of the provision for the legal risk of foreign currency mortgage loans in CHF. Impact on the provision level in the event of changes to the assumptions (with other elements of the calculation unchanged): PARAMETR SCENARIO IMPACT ON THE PROVISION LEVEL 31.12.2023 IMPACT ON THE PROVISION LEVEL 31.12.2022 +10% 107 203 Total number of lawsuits -10% (101) (203) +5 p.p. 76 107 Probability of failure -5 p.p. (75) (107) +5 p.p. 2 n/a Probability of concluding a settlement -5 p.p. (2) n/a Bank Pekao S.A. 148 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43.4. Market risk The Bank is exposed in its operations to market risk and other types of risk caused by changing market risk parameters. Market risk is the risk of deteriorating financial result or capital of the Bank resulting from market changes. The main factors of market risk are as follows: • interest rates, • foreign exchange rates, • stock prices, • commodity prices. The Bank established a market risk management system, providing structural, organizational and methodological frames for the purpose of shaping the structure of balance and off-balance items to assure the achievement of strategic goals. The main objective of market risk management is to optimize financial results so as to assure the implementation of financial goals of the Bank while keeping the exposure to market risk within the risk appetite defined through risk limits approved by the Management Board and the Supervisory Board. The organization of the market risk management process is based on a three-tier control system, established in compliance with the best international banking practices and recommendations from banking supervision. The process of market risk management and procedures regulating it have been developed taking into consideration the split into trading and banking books. Market risk of the trading book The Bank’s management of market risk of the trading book aims at optimizing the financial results and assuring the highest possible quality of customer service in reference to the market accessibility (market making) while staying within the limits of risk approved by the Management Board and the Supervisory Board. The main tool for market risk of the trading book measurement is Value at Risk model (VaR). This value corresponds to the level of a one-day loss, which will be exceeded with the probability not greater than 1%. VaR value is calculated with historical simulation method based on 2 years of historical observations of market risk factors’ dynamics. The set of factors used when calculating VaR consists of all significant market factors that are taken into account for valuation of financial instruments, excluding specific credit risk of an issuer and counterparty. Estimating the impact of changes in market factors on the present value of a given portfolio is performed under the full revaluation (which is a difference between the value of the portfolio after the adjustments in market parameters’ levels by historically observed changes of the parameters and the present value of the portfolio). For such a set of probable changes in the portfolio value (distribution), VaR is defined to be equal to 1% quantile. The model is subject to continuous, statistical verification by comparing the VaR values to actual and revaluated performance figures. Results of analyses carried out in 2023 and 2022 confirmed the adequacy of the model applied. The tables below present the market risk exposure of the trading portfolio of the Bank measured by Value at Risk as at 31 December 2023 and 31 December 2022. 31.12.2023 MINIMUM VALUE AVERAGE VALUE MAXIMUM VALUE foreign exchange risk - - - 1 interest rate risk 5 2 4 7 Trading portfolio 5 2 4 8 31.12.2022 MINIMUM VALUE AVERAGE VALUE MAXIMUM VALUE foreign exchange risk - - - 1 interest rate risk 3 2 3 6 Trading portfolio 3 2 3 6 Interest rate risk of the banking book In managing the interest rate risk of the banking book the Bank aims at hedging the economic value of equity and achieving the planned interest result within the accepted limits. The financial position of the Bank in relation to changing interest rates is monitored by using various measures of interest rate risk, including the interest rate gap (repricing gap), duration analysis, sensitivity analysis of net interest income and economic value of equity in scenarios of parallel and non-parallel changes in interest rates and Value at Risk. In 2023, remaining at a relatively high level interest rates of NBP and high banking sector liquidity had a significant impact on the level of the Bank's exposure to interest rate risk and the amount of net interest income. The Bank maintains a balanced interest rate’s risk profile. The economic value of equity and the income stream were secured by concluding IRS transactions on an appropriate scale and by purchasing fixed-coupon bonds. Bank Pekao S.A. 149 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) The table below presents the sensitivity levels of the contractual interest income (NII) to the interest rate change by 100 b.p. and of economic value of the Bank’s equity (EVE) to the interest rate change by 200 b.p. (standard regulatory shock excluding the risk profile of own funds) for the end of December 2023 and December 2022. SENSITIVITY IN % () 31.12.2023 31.12.2022 NII (1.44) (3.94) EVE (6.49) (5.51) () The risk profile of own funds is taken into account in estimating the sensitivity of the economic value of equity for the purposes of internal analyses. Currency risk Currency risk management is performed simultaneously for the trading and the banking book. The objective of currency risk management is to maintain the currency profile of statement of financial position and off-balance items within the internal limits. The tables below present the Bank’s currency structure of selected financial assets and financial liabilities. 31.12.2023 PLN EUR USD CHF OTHER TOTAL ASSETS Cash and cash equivalents 11 519 1 770 865 191 491 14 836 Loans and advances to banks 314 112 - - - 426 Loans and advances to customers 115 344 23 531 1 962 373 497 141 707 Debt securities 98 168 13 782 4 846 - - 116 796 LIABILITIES Amounts due to other banks 1 448 1 182 112 80 4 2 826 Financial liabilities held for trading 757 - - - - 757 Amounts due to customers 192 608 27 350 11 875 713 1 995 234 541 Debt securities issued 1 902 2 176 - - - 4 078 Subordinated liabilities 2 781 - - - - 2 781 OFF-BALANCE SHEET COMMITMENTS Financial and guarantee commitments granted 70 083 16 170 2 200 2 160 88 615 Bank Pekao S.A. 150 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 31.12.2022 PLN EUR USD CHF OTHER TOTAL ASSETS Cash and cash equivalents 12 751 3 818 953 256 433 18 211 Loans and advances to banks 436 190 - - - 626 Loans and advances to customers 115 034 25 154 1 221 521 496 142 426 Debt securities 73 291 6 610 5 701 - - 85 602 LIABILITIES Amounts due to other banks 2 362 1 552 122 94 5 4 135 Financial liabilities held for trading 875 - - - - 875 Amounts due to customers 172 251 24 122 12 260 687 1 669 210 989 Debt securities issued 5 894 - - - - 5 894 Subordinated liabilities 2 789 - - - - 2 789 OFF-BALANCE SHEET COMMITMENTS Financial and guarantee commitments granted 71 868 13 416 2 550 - 108 87 942 The tables below present the Bank’s foreign currency risk profile measured by Value at Risk and currency position. VALUE AT RISK 31.12.2023 31.12.2022 Currencies total () 1 - () VaR presented in “Currencies total” is VaR constitutes the Bank's total exposure to currency risk. The value of the VaR measure is determined using the same method as for market risk in the trading book, i.e. the historical simulation method based on a 2-year history of observation of the dynamics of market risk factors, with a 99% confidence level, which reflects the level of a one-day loss that may be exceeded with a probability of no more than 1%. By default, the historical simulation method takes into account correlation relationships between currencies. Currency exposure BALANCE SHEET OPERATIONS OFF-BALANCE SHEET OPERATIONS DERIVETIVES 31.12.2023 ASSETS LIABILITIE S LONG POSITION SHORT POSITION NET POSITION EUR 40 288 31 739 13 911 22 314 146 USD 7 946 12 084 9 716 5 559 19 CHF 417 793 1 545 1 214 (45) GBP 399 1 218 884 67 (2) NOK 285 84 1 202 - SEK 98 169 172 101 - CAD 27 204 327 150 - CZK 42 139 376 278 1 RON 42 36 128 134 - CNY 17 16 20 21 - HUF 5 29 62 39 (1) Other currencies 76 112 69 33 - TOTAL 49 642 46 623 27 211 30 112 118 BALANCE SHEET OPERATIONS OFF-BALANCE SHEET OPERATIONS DERIVETIVES 31.12.2022 ASSETS LIABILITIE S LONG POSITION SHORT POSITION NET POSITION EUR 37 074 26 908 18 990 29 179 (23) USD 8 254 12 567 12 834 8 502 19 CHF 929 781 3 771 3 926 (7) GBP 328 1 274 984 37 1 NOK 283 68 24 239 - SEK 65 83 43 25 - CAD 21 83 66 3 1 CZK 50 46 274 276 2 RON 58 17 456 496 1 CNY 10 21 949 942 (4) HUF 48 17 78 108 1 Other currencies 70 74 64 63 (3) TOTAL 47 190 41 939 38 533 43 796 (12) Bank Pekao S.A. 151 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43.5. Liquidity risk The objective of liquidity risk management is to: • ensure and maintain the Bank’s solvency with respect to current and future payables taking into account the cost of acquiring liquidity and return on the Bank’s equity, • prevent the occurrance of crisis situations, and • provide solutions necessary to survive a crisis situation when such circumstances occur. The Bank has centralized liquidity risk management system covering current liquidity management and first level control performed by the responsible functions, the second level control carried out by a dedicated unit responsible for risk management and the third level control performed by an independent audit. Managing the Bank's liquidity is carried out in intraday, short-term and long-term horizon. Analysing of intraday liquidity concerns flows realized during the day, through a short-term liquidity analysis is understood liquidity measurement system which refers to the time horizon shorter than one year, long-term analysis covers period above one year. Due to the specific tools and techniques used for liquidity risk management, the Bank manages current and medium-term liquidity together with short-term liquidity. The liquidity control is performing as a continuous process of determining and analysing the levels of various indicators and measures related to intraday, short-term and long-term liquidity. Monitoring frequency is matched to the specific liquidity aspect – e.g. daily for short-term liquidity, monthly for long-term liquidity. Liquidity ratios and measures are subject to a formal limiting process. The limits’ utilisation is regularly monitored and presented to the Management of the Bank. In case of exceeding, escalation process is running as to inform decision-makers and ultimately to restore the liquidity risk exposures to acceptable levels. Scenario-based stress analyses, conducted on a monthly basis, constitute an integral part of the Bank’s liquidity monitoring process. Within the scope of these analyses the Bank’s liquidity is assessed under the conditions of crisis which is caused by financial markets or is caused by internal factors, specific to the Bank. Managing the liquidity, the Bank pays special attention to the liquidity in foreign currencies through monitoring, limiting and controlling the liquidity individually for each currency, as well as monitoring demand for the current and future currency liquidity and in case of identification of such need the Bank hedges using currency swaps. It is also monitored the potential influence on the liquidity of placing required collateral deposits for derivative transaction. In order to define the rules of contingency liquidity management, Bank prepared “Contingency Liquidity Principles” approved by the Management Board, which defines the contingency procedures in the event of crisis situations. These principles involve daily monitoring of the system and specific early-warning indicators for the Bank and the Group as well as three levels of liquidity risk states depending on the level of early-warning indicators, the Bank’s, the Group’s and market situation. They also define the sources for covering the expected outflows from the Bank. This document sets the procedures for monitoring the liquidity states, emergency action procedures, task forces dedicated for restoring the Bank’s liquidity and the Management's responsibilities for taking necessary decisions to restore the required liquidity level. Bank Pekao S.A. 152 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Below are presented basic quantitative information concerning the Bank's liquidity at the end of 2023 year in comparison to the end of 2022. They cover the structure of financial liabilities by contractual maturity, the liquidity coverage ratio (“LCR”) and the net stable funding ratio (“NSFR”), adjusted liquidity gap and financial flows from derivative transactions. Structure of financial liabilities by contractual maturity 31.12.2023 UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL BALANCE SHEET LIABILITIES () Amounts due to banks () 2 134 - 44 279 411 2 868 Amounts due to customers 189 008 16 145 18 825 3 749 6 677 234 404 Lease liabilities 12 12 48 240 632 944 Debt securities issued 44 - 219 4 576 - 4 839 Subordinated liabilities - - 189 2 338 1 129 3 656 Financial liabilities held for trading - - - 39 718 757 Total 191 198 16 157 19 325 11 221 9 567 247 468 OFF-BALANCE SHEET COMMITMENTS () Financial commitments granted 57 888 - - - - 57 888 Guarantee commitments granted 30 727 - - - - 30 727 Total 88 615 - - - - 88 615 () Exposure amounts from balance liabilities, financing-related off-balance sheet commitments granted and guarantee liabilities granted have been allocated to earliest tenors, for which an outflow of assets from the Bank is possible based on contracts entered into by the Bank. However, outflows expected by the Bank are actually significantly lower than those indicated by the specification presented above. The above is a consequence of considerable diversification of amounts due to customers and stages of life of individual contracts. Risk monitoring and management in relation to the outflow of assets are provided by the Bank on continuous basis. The Bank estimates also more probable flows that are reflected in Tables “Adjusted liquidity gap”. () Including Central Bank . 31.12.2022 UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL BALANCE SHEET LIABILITIES () Amounts due to banks () 2 960 224 70 268 767 4 289 Amounts due to customers 172 584 12 235 17 828 3 393 5 465 211 505 Lease liabilities 14 17 49 65 385 530 Debt securities issued 437 2 701 2 857 - - 5 995 Subordinated liabilities - - 210 1 911 1 708 3 829 Financial liabilities held for trading - - 44 669 162 875 Total 175 995 15 177 21 058 6 306 8 487 227 023 OFF-BALANCE SHEET COMMITMENTS () Financial commitments granted 59 070 - - - - 59 070 Guarantee commitments granted 28 872 - - - - 28 872 Total 87 942 - - - - 87 942 () Exposure amounts from balance liabilities, financing-related off-balance sheet commitments granted and guarantee liabilities granted have been allocated to earliest tenors, for which an outflow of assets from the Bank is possible based on contracts entered into by the Bank. However, outflows expected by the Bank are actually significantly lower than those indicated by the specification presented above. The above is a consequence of considerable diversification of amounts due to customers and stages of life of individual contracts. Risk monitoring and management in relation to the outflow of assets are provided by the Bank on continuous basis. The Bank estimates also more probable flows that are reflected in Tables “Adjusted liquidity gap”. () Including Central Bank. Regulatory liquidity ratios LCR and NSFR () SUPERVISORY LIQUIDTY NORMS LIMIT 31.12.2023 31.12.2022 LCR Liquidity coverage ratio 100% 235% 199% NSFR Net stable funding ratio 100% 168% 154% () The values of regulatory liquidity ratios have been determined in accordance with the principles set out by the Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation No. 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions . Bank Pekao S.A. 153 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Adjusted liquidity gap The adjusted liquidity gaps presented below include, inter alia, the adjustments concerning the stability of core deposits and their maturities, adjustments of flows from granted off-balance sheet commitments arising from financing, guarantees and from assets without contractual repayment schedules. On top of that, included are also the adjusted flows stemming from the security portfolio and flows resulting from earlier repayment of mortgage loans portfolio. These are the main elements differentiating the adjusted gaps from unadjusted ones. Moreover, the gaps are of static nature, i.e. they do not take into consideration the impact of changes of balance sheet and off-balance sheet items volume (i.e. new deposits). The tables below present adjusted liquidity gap. 31.12.2023 UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL Balance sheet assets 95 381 5 076 37 696 88 281 68 043 294 477 Balance sheet liabilities 23 060 11 872 32 822 53 299 173 424 294 477 Off-balance sheet assets/liabilities (net) (5 779) (4 596) 2 287 4 487 3 734 133 Periodic gap 66 542 (11 392) 7 161 39 469 (101 647) 133 Cumulated gap - 55 150 62 311 101 780 133 - 31.12.2022 UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL Balance sheet assets 68 328 6 767 33 858 101 969 60 783 271 705 Balance sheet liabilities 26 069 14 655 34 585 58 311 138 085 271 705 Off-balance sheet assets/liabilities (net) (3 939) (4 148) (651) 4 308 4 022 (408) Periodic gap 38 320 (12 036) (1 378) 47 966 (73 280) (408) Cumulated gap - 26 284 24 906 72 872 (408) - Off-balance derivative transactions The following are the liabilities and financial cash flows associated with off-balance sheet derivative transactions, settled, respectively in net and gross amounts. Off-balance sheet derivative transactions settled by the Bank in net amounts include: • Interest Rate Swaps (IRS), • Forward Rate Agreements (FRA), • Foreign currency options, • Interest rate options (Cap/Floor), • Transactions based on equity securities and stock indexes, • Transactions based on commodities and precious metals . Off-balance sheet derivative transactions settled by the Bank in gross amounts include: • Cross-Currency Interest Rate Swaps (CIRS), • Foreign currency forward contracts, • Foreign currency swaps (FX-Swap), • Forward contracts based on securities. Liabilities from off-balance transactions on derivatives recognized in net amounts UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL 31.12.2023 141 260 1 098 6 409 2 070 9 978 31.12.2022 211 134 1 132 11 458 4 135 17 070 Bank Pekao S.A. 154 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Flows related to off-balance derivative transactions settled in gross amounts UP TO 1 MONTH BETWEEN 1 AND 3 MONTHS BETWEEN 3 MONTHS AND 1 YEAR BETWEEN 1 AND 5 YEARS OVER 5 YEARS TOTAL 31.12.2023 Inflows 24 944 8 350 9 170 4 013 162 46 639 Outflows 24 937 8 212 9 107 4 127 168 46 551 31.12.2022 Inflows 21 618 16 544 17 947 7 932 281 64 322 Outflows 21 493 16 560 17 942 8 310 349 64 654 43.6. Operational risk Operational risk is defined as the risk of losses resulting from inadequacy or failure of internal processes, people, systems or external events. It includes law risk, whereas strategic risk, business risk and reputation risk are separate risk categories. Operational risk management is based on internal procedures that are consistent with the law requirements, resolutions, recommendations and guidelines of the supervisor. Operational risk management includes identification, assessment, monitoring, preventing and reporting. Identification and assessment of operational risk is based on an analysis of internal factors and external factors that may have a significant impact on the achievement of the objectives of the Bank. The main tools used in identifying and assessing operational risk are: internal operational events, external operational events, key risk indicators, scenario analysis and self-assessment of operational risk. Monitoring activities are conducted on three levels of defence: risk management in operational activity of the Bank (all employees), risk management control (Integrated Risk Management Department) and internal audit (Internal Audit Department). Preventing operational risk includes definition of operational risk limits and the obligation to initiate mitigation actions in case they are exceeded, the system of internal control, business continuity plans and insurance coverage. Operational risk reporting system enables the assessment of the Bank's exposure to operational risk and the effective management of this risk, and also plays a fundamental role in the process of informing the Supervisory Board, the Management Board and executives of the Bank's exposure to operational risk. It is based in particular on the quarterly reports on operational risk control that include, among others: profile of operational risk, loss limit utilization, analysis of trends in the relevant categories of operational risk, potential losses, information on key indicators of operational risk and operational risk capital requirement. The Supervisory Board and the Management Board, supported respectively by the Supervisory Board Risk Committee and the Operational Risk Committee are involved in operational risk management. The Integrated Risk Management Department coordinates the process of operational risk management. All employees of the Bank and selected specialized units are responsible in their areas for operational risk management, due to diversified character of this risk which requires professional knowledge. In order to ensure compliance of the operational risk management system with regulatory requirements, at least once a year verification of the operational risk management system is carried out. Bank Pekao S.A. 155 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43.7. Climate risk In a broader context, matters related to the ESG Strategy of the Bank, including climate-related issues and actions taken in this regard by the Bank, have been outlined in the "Statement on the Non-Financial Information of the Bank Pekao S.A. Capital Group for the year 2023". Furthermore, the definition of ESG risk within the Bank and comprehensive information on ESG risk management is provided in the "Disclosures on capital adequacy of the Bank Pekao S.A. Capital Group as at 31 December 2023”. Managing ESG risk, including climate risk, within the risk management system ESG risk is considered a cross-cutting risk impacting various major risk types, such as credit, market, and operational risks. ESG risk has been recognized as significant in the Bank and Group's operations, and general principles governing its management are derived from the document " Risk management strategy and principles for internal capital estimation". A strategic limit for ESG risk has been established at the Group and Bank levels, specifying the minimum commitment to internally defined green exposures above 3.2% of the financial portfolio. Additionally, in alignment with the Bank's ESG Strategy, the level of high-emission financing in the Bank's financial portfolio is monitored, reaching 1.04% by the end of 2023, which is slightly above the target set in the ESG Strategy at a maximum level of 1.0%. Economic capital for ESG risk is indirectly considered within the economic capital for major risk types (i.e., credit, market, operational). The Bank acknowledges that climate risk will be a significant factor for certain industries, prompting actions to identify relevant data and establish comprehensive risk management for physical and transition risks. In 2023, efforts were made to calculate the carbon footprint for the financing of all business entities and retail mortgage products. In the realm of risk management, the Bank undertakes tasks to ensure compliance with the following external regulations: 1) Commission Implementing Regulation (EU) 2022/2453 of 30 November 2022, amending the implementing technical standards laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of information of environmental, social, and corporate governance risks under Article 449a 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, amending Regulation (EU) No 648/2012, 2) Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020, on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088, along with delegated regulations. Climate risk in credit assessment The assessment of ESG risk, including climate risk, constitutes an integral component of the credit transactions evaluation with economic entities. Alongside the assessment of creditworthiness and credit risk strictly speaking, the Bank meticulously evaluates transaction-specific risks, including legal, reputational, political, ESG, including climate and environmental risks, money laundering and terrorist financing risks, and conflicts of interest risks. The ESG risk analysis aims to: • avoid financing activities listed in the Environmental and Social Exclusion List, • identify the type of ESG risk pertinent to a client's activity and the transaction financed by the Bank, • evaluate the client's ability to undertake actions to mitigate existing ESG risks, • assess potential exposure of the Bank to risks and obligations arising from ESG issues. Responsibility for ESG risk management The ESG Board, established by the Bank's Management Resolution in 2020, serves as an advisory body to the Bank's Management, supporting decisions on ESG matters and engagement in projects related to social responsibility and sustainable development. In 2023, the Bank introduced a new organizational structure for managing the ESG area, consolidating most competencies in a dedicated unit within the Risk Management Division. Additionally, in the Bank operates the Sustainable Finance Committee, ensuring financial compliance with qualification criteria defined in the Sustainable Finance Framework for green eurobond issuances under the Medium-Term Euro Note (EMTN) issuance program. Bank Pekao S.A. 156 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 43.8. Capital management The capital management process applied by the Bank has been adopted for the following purposes: • ensuring the safe and secure functioning by maintaining the balance between the capacity to undertake risk (limited by own funds), and the risk levels generated, • maintenance of capital for covering risk above the minimum stated levels in order to assure further business operations, taking into consideration the possible, future changes in capital requirements and to safeguard the interests of shareholders, • maintenance of the optimal capital structure in order to maintain the desired quality of risk coverage capital, • creation of value to shareholders by the best possible utilization of the Bank funds. The Bank has put in place a formalized process of capital management and monitoring. The Finance Division under the Chief Financial Officer is responsible for functioning of the capital management process in the Bank. The ultimate responsibility for capital management is allocated to the Management Board of the Bank, supported by the Assets, Liabilities and Risk Management Committee, which approves the capital management process. The Supervisory Board supervises the capital management system, in particular approves the capital management strategy. The Capital Management Strategy defines the objectives and general rules of the management and monitoring of the Bank’s capital adequacy, such as the guidelines concerning risk coverage sources, preferred structure of capital for risk coverage, long-term capital targets, capital limits system and sources of additional capital under contingency situations. The Bank has also implemented, as part of the capital management policy, the capital contingency plans which establishes rules and obligations in the event of crisis appearance or further development that would significantly reduce capitalization level of the Bank. The policy defines the principles of supervision including split of responsibilities for the purpose of early and consistent management in case of crisis situation development. The capital adequacy of the Bank is controlled by the Assets, Liabilities and Risk Management Committee and Management Board of Bank. Periodic reports on the scale and direction of changes of the capital ratios together with indication of potential threats are prepared for the Supervisory Board, Management Board and for the Assets, Liabilities and Risk Management Committee. The level of basic types of risks is monitored according to the external limits of the banking supervision and the internal limits of the Bank. Analyses and evaluations of directions of business activities development are performed assessing the compliance with capital requirements. Forecasting and monitoring of risk weighted assets, own funds and capital ratios constitute an integral part of the planning and budgeting process, including stress tests. The Bank also has a capital allocation process in place, with an aim of guaranteeing the shareholders a safe and effective return on invested capital. On one hand, the process requires capital allocations to products/clients/business lines, which guarantee profits adequate to the risks taken, while on the other hand taking into consideration the cost of capital associated with the business decisions taken. Risk-related efficiency ratios are used in the analyses of income generated compared against the risk taken as well as for the optimization of capital usage for different types of operations. Regulatory capital requirements and own funds Calculations of the regulatory capital requirements were performed based on Regulation of the European Parliament and of the Council (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012, together with further amendments, as well as Commission Implementing Regulations or Delegated Regulations (EU) (Regulation 575/2013). The Bank defines components of own funds in line with the binding law, particularly with Regulation 575/2013 and The Banking Act of 29 August 1997 with further amendments. According to law, Bank is required to maintain minimal values of capital ratios resulting from Pillar 1 level (Regulation 575/2013 ), capital requirement of Pillar 2 resulting from The Banking Act and combined buffer requirement resulting from Act on macro-prudential supervision. Minimal value of capital ratios on Pillar 1 level are: • Total capital ratio (TCR) in amount of 8%, • Tier 1 capital ratio (T1) in amount of 6%, • Common Equity Tier I capital ratio (CET 1) in amount of 4.5%. Bank does not have any Capital requirement of Pillar 2. Bank Pekao S.A. 157 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Combined buffer requirement, as at 31 December 2023 consists of: • Capital conservation buffer in amount of 2.5%, • Countercyclical capital buffer in amount of 0.02%, • Other systemically important institution buffer in amount of 1.00%, • Systemic risk buffer in amount of 0.00% (according to the Regulation of the Minister of Finance, the systemic risk buffer was abolished on 19 March 2020. The buffer value applicable until that date was 3% of the total risk exposure amount for all exposures located only in the territory of the Republic of Poland). In total, Bank is required to maintain: • Total capital ratio (TCR) in amount of 11.52%, • Capital ratio Tier 1 (T1) in amount of 9.52%, • Common Equity Tier (CET 1) in amount of 8.02%. As at 31 December 2023 total capital ratio of the Bank amounted at 19.4% (as at 31 December 2022 – 19.9%). 31.12.2023 31.12.2022 () CAPITAL REQUIREMENTS Credit risk 9 028 8 911 Market risk 103 106 Counterparty risk including CVA 154 228 Operational risk 1 539 1 243 Total capital requirement 10 824 10 488 OWN FUNDS Common Equity Tier 1 capital 23 858 23 418 Tier 2 cepital 2 434 2 707 Own funds for total capital ratio 26 292 26 125 OWN FUNDS REQUIREMENTS Common Equity Tier 1 capital ratio 17.6% 17.9% Total capital ratio 19.4% 19.9% () Data for 31 December 2022 have been recalculated taking into account the retrospective recognition of part of the profit for 2022, in accordance with the EBA position expressed in Q&A 2018_3822 and Q&A 2018_4085. Internal capital adequacy assessment To assess the internal capital adequacy of the Bank, the Bank applies methods designed internally. The Bank takes the following risks into consideration: • credit risk, • operational risk, • market risk, • liquidity risk , • business risk (the risk of macroeconomic condition changes and strategic risk), • compliance risk, • reputational risk, • model risk, • excessive leverage risk, • bancassurance risk, • ESG risk (Environmental, Social and Governance). For each risk deemed material, the Bank develops and applies adequate economic capital measurement or assessment methods for the risk evaluation. The Bank applies the following methods: • qualitative assessment – applied in case of risks which are difficult to measure (compliance, reputational and bancassurance risks) with potencial capital coverage in other risks areas, • assessment by estimation of capital buffer, for risks that are not easily quantifiable however some aggregate assessment of their impact is possible (model risk and business risk) , • quantitative assessment – applied for risks which can be measured with the use of economic capital (other risk types apart from liquidity risk and excessive leverage risk) or based on other risk-specific measures (liquidity risk and excessive leverage risk). Bank Pekao S.A. 158 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Preferred methods of measuring risks and determining the resulting capital requirements are Value at Risk models, based on assumptions derived from the Bank’s risk appetite. The models are developed in compliance with the best market practices and regulatory requirements and supplemented with stress tests and/or scenario analyses. In the case of risk types for which such methodologies have not been finally developed or implemented, the Bank uses regulatory models supplemented with stress tests or simplified measurement methods. The determination of the capital buffer to cover business risk, which includes the risk of changes in macroeconomic conditions and strategic risk, is made on the basis of an analysis of the impact of the economic slowdown scenario on economic capital over the forecast horizon, including the impact of changes in interest rates and credit spreads on net interest income and on changes in the valuation of portfolios classified as HTCS (Held to Collect and Sell – classification according to IFRS9). Model risk is estimated using results of model validation and scenario analyses making it possible to evaluate the impact of potential model inconsistencies on its output. Based on the aggregated output, the model risk capital buffer is determined. Economic capital for ESG risk is estimated as part of the quantification of credit, operational and market risks, depending on and adequately to the identified ESG risk factors in individual risks. The procedure of estimating capital needs starts with the calculation of economic capital, separately for each material quantifiable risk identified by the Bank. Next, economic capital figures for individual risks are aggregated. Then, the amount is increased by the capital buffer for model and business risks. The sum of economic capital and the capital buffer constitutes the internal capital of the Bank. 43.9. Fair value of financial assets and liabilities Financial instruments that are measured at fair value in the separate statement of financial position of the Bank The measurement of fair value of financial instruments, for which market values from active markets are available, is based on market quotations of a given instrument (mark-to-market). The measurement of fair value of Over-the-counter (“OTC”) derivatives, instruments with limited liquidity (i.e. for which no market quotations are available), as well as the valuation of credits and loans, is made on the basis of other instruments quotations on active markets by replication thereof using a number of valuation techniques, including the estimation of present value of future cash flows(mark-to-model). As of 31 December 2023 and 31 December 2022, the Bank classified the financial assets and liabilities measured at fair value into the following hierarchy of three categories based on the following hierarchy: • Level 1: mark-to-market, applies to securities quoted on active markets, • Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to illiquid government, municipal, corporate and central bank debt securities, linear and non-linear derivative instruments of interest rate markets (including forward transactions on debt securities), equity, commodity and foreign currency exchange markets, except for those cases that meet the criteria of Level 3, • Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, applicable to loans and advances, corporate and municipal debt securities and for linear and non-linear derivative instruments of interest rate, equity, commodity and foreign currency exchange markets for which unobservable parameters (e.g. credit risk factors) are recognized as significant. The measurement at fair value is performed directly by an organizational units within Risk Management Division and Finance Division, independent of front-office units. The methodology of fair value measurement, including the changes of its parameterization, is subject to approval of Assets and Liabilities Committee (“ALCO”). The adequacy of measurement methods is subject to on-going analysis and periodical reviews in the framework of model risk management. The same Risk Management Division unit performs the assessment of adequacy and significance of risk factors and assignment of valuation models to appropriate method class, according to established hierarchy of classification. Bank Pekao S.A. 159 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Assets and liabilities measured at fair value in breakdown by fair value hierarchy levels 31.12.2023 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Assets: 8 684 17 833 10 474 36 991 Financial assets held for trading 1 063 676 932 2 671 Derivative financial instruments, including: - 9 347 3 9 350 Banks - 2 142 - 2 142 Customers - 7 205 3 7 208 Hedging instruments, including: - 805 - 805 Banks - 309 - 309 Customers - 496 - 496 Securities measured at fair value through other comprehensive income 5 973 7 005 8 947 21 925 Securities measured at fair value through profit or loss - - 210 210 Assets pledged as security for liabilities 1 648 - - 1 648 Loans and advances to customers measured at fair value through other comprehensive income - - 133 133 Loans and advances to customers measured at fair value through profit or loss - - 249 249 Liabilities: 757 10 737 - 11 494 Financial liabilities held for trading 757 - - 757 Derivative financial instruments, including: - 9 308 - 9 308 Banks - 1 957 - 1 957 Customers - 7 351 - 7 351 Hedging instruments, including: - 1 429 - 1 429 Banks - 73 - 73 Customers - 1 356 - 1 356 31.12.2022 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Assets: 7 135 25 153 8 235 40 523 Financial assets held for trading 674 988 97 1 759 Derivative financial instruments, including: - 15 134 - 15 134 Banks - 2 933 - 2 933 Customers - 12 201 - 12 201 Hedging instruments, including: - 280 - 280 Banks - 119 - 119 Customers - 161 - 161 Securities measured at fair value through other comprehensive income 5 531 8 751 7 464 21 746 Securities measured at fair value through profit or loss - - 187 187 Assets pledged as security for liabilities 930 - - 930 Loans and advances to customers measured at fair value through other comprehensive income - - 303 303 Loans and advances to customers measured at fair value through profit or loss - - 184 184 Liabilities: 875 18 715 - 19 590 Financial liabilities held for trading 875 - - 875 Derivative financial instruments, including: - 15 539 - 15 539 Banks - 3 713 - 3 713 Customers - 11 826 - 11 826 Hedging instruments, including: - 3 176 - 3 176 Banks - 126 - 126 Customers - 3 050 - 3 050 160 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Change in fair value of financial assets measured at fair value according to Level 3 by the Bank 2023 FINANCIAL ASSETS HELD FOR TRADING DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUETHROUGH OTHER COMPREHENSIVE INCOME LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES) Opening balance 97 - 303 184 187 7 464 - Increases, including: 2 179 3 29 102 25 6 809 - Reclassification from other levels 54 3 - - - 1 436 - Transactions made in 2023 - - - - - - - Granting 1 293 - - 90 - 4 629 - Purchase 823 - - - - 1 - Gains on financial instruments 9 - 29 12 25 743 - recognized in the income statement 9 - 20 12 25 374 - recognized in revaluation reserves - - 9 - - 369 - Decreases, including: (1 344) - (199) (37) (2) (5 326) - Reclassification to other levels - - - - - (1 328) - Settlement/Redemption - - (199) (37) - (1 368) - Sale (1 344) - - - - (2 586) - Losses on financial instruments - - - - (2) (44) - recognized in the income statement - - - - (2) (44) - recognized in revaluation reserves - - - - - - - Closing balance 932 3 133 249 210 8 947 - Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: - 3 8 12 - 384 - Income statement: - 3 3 12 - 58 - net interest income - - 1 3 - 69 - net allowances for expected credit losses - - 2 - - (11) - result on financial assets and liabilities held for trading - 3 - 9 - - - Other comprehensive income - - 5 - - 326 - 161 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Bank Pekao S.A. Change in fair value of financial assets measured at fair value according to Level 3 by the Bank 2022 FINANCIAL ASSETS HELD FOR TRADING DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUETHROUGH OTHER COMPREHENSIVE INCOME LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES) Opening balance 101 - 346 160 171 7 443 - Increases, including: 1 179 - 166 56 16 4 059 - Reclassification from other levels 14 - - - - 1 498 - Transactions made in 2022 - - - 53 - - - Granting 36 - 151 - - 2 270 - Purchase 1 124 - - - - 2 - Gains on financial instruments 5 - 15 3 16 289 - recognized in the income statement 5 - 15 3 16 286 - recognized in revaluation reserves - - - - - 3 - Decreases, including: (1 183) - (209) (32) - (4 038) - Reclassification to other levels (71) - - - - (1 304) - Settlement/Redemption (13) - (203) - - (1 174) - Sale (1 099) - - - - (1 233) - Losses on financial instruments - - (6) (32) - (327) - recognized in the income statement - - - (32) - (65) - recognized in revaluation reserves - - (6) - - (262) - Closing balance 97 - 303 184 187 7 464 - Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: - - (7) 3 - (305) - Income statement: - - 1 3 - 8 - net interest income - - 2 2 - 21 - net allowances for expected credit losses - - (1) - - (13) - result on financial assets and liabilities held for trading - - - 1 - - - Other comprehensive income - - (8) - - (313) - Bank Pekao S.A. 162 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Transfers of instruments between fair value hierarchy levels are based on changes in availability of active market quotations as at the end of the reporting periods. In the period from 1 January to 31 December 2023 the following transfers of financial instruments between the levels of the fair value hierarchy were made: • from Level 3 to Level 2: corporate bonds which were valued based on information on the prices of comparable financial instruments, corporate and municipal bonds with immaterial impact of the estimated credit parameters on the valuation, • from Level 2 to Level 3: assets or liabilities for which impact of estimated unobservable factor on the valuation was material: corporate and municipal bonds (credit parameters), treasury bonds, foreign exchange derivatives (probability of default). Sensitivity analysis 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 as at 31 December 2022 is as follows. IMPACT ON FAIR VALUE AS AT 31.12.2023 FINANCIAL ASSET/LIABILITY FAIR VALUE AS AT 31.12.2023 VALUATION TECHNIQUE UNOBSERVABLE FACTOR SCENARIO POSITIVE SCENARIO NEGATIVE SCENARIO Corporate and municipal debt securities 9 489 Discounted cash flow Credit spread +50 p.b. / -50 p.b. 93 (100) Treasury bonds 10 Discounted cash flow Spread to the reference bond +40 p.b. / -40 p.b. - - Foreign exchange derivatives 3 Discounted cash flow Probability of default +20% / -20% - (2) Loans and advances measured at fair value through profit or loss 249 Discounted cash flow Credit spread +50 p.b. / -50 p.b. 10 (9) Loans and advances measured at fair value through other comprehensive income 133 Discounted cash flow Credit spread +50 p.b. / -50 p.b. 1 (1) IMPACT ON FAIR VALUE AS AT 31.12.2023 FINANCIAL ASSET FAIR VALUE AS AT 31.12.2023 PARAMETER SCENARIO POSITIVE SCENARIO NEGATIVE SCENARIO Equity instruments mandatorily measured at fair value through profit or loss 210 Conversion discount +10% / -10% 6 (22) Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income 321 Discount rate +1% / -1% 52 (39) IMPACT ON FAIR VALUE AS AT 31.12.2022 FINANCIAL ASSET/LIABILITY FAIR VALUE AS AT 31.12.2022 VALUATION TECHNIQUE UNOBSERVABLE FACTOR ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE) POSITIVE SCENARIO NEGATIVE SCENARIO Corporate and municipal debt securities 7 250 Discounted cash flow Credit spread +55 p.b. / -55 p.b. 117 (117) Capital market derivatives - Black Scholes Model Correlation +20% / -20% - - Loans and advances measured at fair value through profit or loss 184 Discounted cash flow Credit spread +50 p.b. / -50 p.b. 5 (5) Loans and advances measured at fair value through other comprehensive income 303 Discounted cash flow Credit spread +50 p.b. / -50 p.b. 4 (4) Bank Pekao S.A. 163 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) IMPACT ON FAIR VALUE AS AT 31.12.2022 FINANCIAL ASSET FAIR VALUE AS AT 31.12.2022 PARAMETER SCENARIO POSITIVE SCENARIO NEGATIVE SCENARIO Equity instruments mandatorily measured at fair value through profit or loss 187 Conversion discount +10% / -10% 5 (20) Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income 270 Discount rate +1% / -1% 32 (26) As part of the measurement preparation, the Bank reviews unobserved risk factors affecting fair value. The Bank assumes that the dynamics of observable and unobservable risk factors should be characterized by a similar direction and scale of changes. The recalibration of unobservable factors aims to make the dynamics of the fair value of instruments classified to Level 3 of the valuation hierarchy consistent with the dynamics of market prices. Financial instruments that are not measured at fair value in the separate statement of financial position of the Bank The Bank also holds financial instruments which are not presented at fair value in the financial statements. 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. As of 31 December 2023 and 31 December 2022, the Bank classified the financial assets and liabilities not measured at fair value in the separate statement of financial position into the following three categories based on the valuation level : • Level 1: mark-to-market, applies to government securities quoted on the liquid market and cash, • Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to interbank deposits, own issues, illiquid government, municipal, corporate and central bank debt securities, • Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, is applicable to corporate and municipal debt securities and loans and deposits for which the applied credit risk factor (an unobservable parameter) is recognized significant. In case of certain groups of financial assets, recognized at the amount to be received with impairment considered, the fair value was assumed to be equal to carrying amount. The above applies in particular to cash and other financial assets and liabilities. In the case of loans for which no quoted market values are available, the fair values presented are generally estimated using valuation techniques taking into consideration the assumption, that at the moment when the loan is granted its fair value is equal to its carrying amount. Fair value of non-impaired loans is equal to the sum of future expected cash flows, discounted at the balance sheet date, less expected credit loss. Moreover, the fair value of mortgage loans in PLN as at 31 December 2023, estimated by the Bank, takes into account that with a 50% probability there may be modifications in the expected flows resulting from the suspension of loan repayments in the group of approximately 70% of eligible borrowers in the event of the entry into force of the Act amending the Act on support for borrowers (details regarding this act are presented in Note 44). The discount rate is defined as the appropriate market risk-free rate plus the liquidity risk margin and current sales margin for the given loan products group. The margin is computed on loans granted broken down by loan product groups and maturity. For the purpose of the fair value of foreign currency loans estimation, the margin on PLN loans adjusted by the cross-currency basis swap quotes and FX-Swap is used. The fair value of impaired loans is defined as equal to the sum of expected recoveries, discounted with the use of effective interest rate, since the average expected recovery values take the element of credit risk fully into consideration. In case of loans without repayment schedule (loans in current account, overdrafts and credit cards), the fair value was assumed as equal to the carrying amount. Since no quoted market prices are available for deposits, their fair values have been generally estimated using valuation techniques with the assumption that the fair value of a deposit at the moment of its receipt is equal to its carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows, discounted at the relevant balance sheet date. The cash flow discount rate is defined as the relevant market risk-free rate, increased by the sales margin. The margin is computed on deposits acquired during last three months broken down by deposit product groups and maturity. In case of short term deposits (current deposits, overnights, saving accounts), the fair value was assumed as equal to the carrying amount. The fair value of deposits and loans, apart from mortgage loans denominated in PLN and CHF for which prepayment model is used, is calculated based on contractual cash flows. The mark-to-model valuation of own issue debt instruments is based on the method of discounting the future cash flows. Variable cash flows are estimated based upon rates adopted for specific markets (depending upon issue specifications). Both the fixed and implied cash flows are discounted using interbank money market rates. Bank Pekao S.A. 164 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Assets and liabilities not measured at fair value in the financial statement in breakdown by fair value hierarchy levels OF WHICH: 31.12.2023 CARRYING AMOUNT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Assets Cash and cash equivalents 14 836 14 748 3 990 9 606 1 152 Loans and advance to banks 426 425 - 81 344 Loans and advances to customers measured at amortised cost 141 325 142 631 - 1 702 140 929 Debt securities measured at amortised cost 92 593 91 009 42 015 42 963 6 031 Assets pledged as security for liabilities - - - - - Other assets 2 180 2 180 - - 2 180 Total Assets 251 360 250 993 46 005 54 352 150 636 Liabilities Amounts due to other banks 2 826 2 879 - 585 2 294 Amounts due to customers 234 541 234 525 - - 234 525 Debt securities issued 4 078 4 122 - 4 122 - Subordinated liabilities 2 781 2 778 - 2 778 - Other liabilities 5 529 5 529 - - 5 529 Total Liabilities 249 755 249 833 - 7 485 242 348 OF WHICH: 31.12.2022 CARRYING AMOUNT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Assets Cash and cash equivalents 18 211 18 161 4 317 11 162 2 682 Loans and advance to banks 626 629 - 262 367 Loans and advances to customers measured at amortised cost 141 939 142 924 - 1 337 141 587 Debt securities measured at amortised cost 62 459 57 505 25 580 29 194 2 731 Assets pledged as security for liabilities - - - - - Other assets 1 695 1 695 - - 1 695 Total Assets 224 930 220 914 29 897 41 955 149 062 Liabilities Amounts due to other banks 4 135 4 218 - 1 417 2 801 Amounts due to customers 210 989 210 794 - - 210 794 Debt securities issued 5 894 5 890 - 5 890 - Subordinated liabilities 2 789 2 788 - 2 788 - Other liabilities 4 725 4 725 - - 4 725 Total Liabilities 228 532 228 415 - 10 095 218 320 Bank Pekao S.A. 165 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 44. Subsequent events No objections of the Polish Financial Supervision Authority with regard to the payment, in the form of dividend, of undistributed profit for 2019 retained by the Bank On 7 February 2024 Bank received a letter from Polish Financial Supervision Authority in which PFSA indicated that after analyzing the current financial, economic and capital of the Bank as well as the arguments and additional explanations presented by the Bank, PFSA does not raise any objections to the possibility of paying, in 2024, the undistributed profit in the amount of PLN 1 685 057 618.28 retained by the Bank for 2019 in the form of a dividend. The payment of the dividend depends on the final decisions of the Bank’s bodies, which will be taken in the manner provided by the provisions of the Commercial Companies and Partnerships Code, while maintaining the principles of prudent and stable of the Bank management, ensuring of Bank having own funds enabling coverage of all business risks, as well as its further sustainable growth. The Bank will inform about the decisions made in a separate current report. Proceedings of the President of the Office of Competition and Consumer Protection regarding unauthorized transactions Details of the proceedings of the President of the Office of Competition and Consumer Protection regarding unauthorized transactions are described in Note 39. Planned support for consumer borrowers On 12 February 2024, the next iteration of the government project amending the Act on supporting consumer borrowers who have taken out a mortgage loan and are in a difficult financial situation and the Act on crowdfunding for business ventures and support to borrowers was published on the website of the Government Legislation Center. The purpose of the proposed Act is to enable borrowers with PLN loans to benefit from the instrument of suspension of loan repayment in 2024 for 2 months from 1 April 2024 to 30 June 2024 and one month each in the third and fourth quarter of 2024. The project provides that suspension of loan repayment will only be possible if the loan value does not exceed PLN 1 200 thousand and the arithmetic average of the RdD index value (ratio of installment to income) for the period of the last three months preceding the month of submitting the application exceeds 35%. Additionally, the Act also provides for changes to the Act of 9 October 2015 on support for borrowers who have taken out a mortgage loan and are in a difficult financial situation, the aim of which is to increase the use of the Borrower Support Fund funds, among others by reducing the ratio of the borrower's expenses related to servicing the monthly mortgage loan installment to the borrower's monthly household income and by increasing the amount of income entitling to obtain support. If the regulations are adopted in the above-mentioned shape, they may affect the Bank's financial results in 2024. Bank Pekao S.A. 166 Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) 20.02.2024 Leszek Skiba President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Jarosław Fuchs Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Marcin Gadomski Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Jerzy Kwieciński Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Paweł Strączyński Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Błażej Szczecki Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Wojciech Werochowski Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Piotr Zborowski Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature 20.02.2024 Magdalena Zmitrowicz Vice President of the Management Board The original Polish document is signed with a qualified electronic signature Date Name/Surname Position/Function Signature Bank Pekao S.A. I Separate Financial Statements of Bank Pekao S.A. for the year ended on 31 December 2023 (in PLN million ) Glossary IFRS – International Financial Reporting Standards – the standards, interpretations and their structure adopted by the International Accounting Standards Board (IASB.) IAS – International Accounting Standards – previous name of the standards forming part of the current IFRS. IFRIC – International Financial Reporting Interpretations Committee – the committee operating under the International Accounting Standards Board publishing interpretations of IFRS. CIRS – Currency Interest Rate Swap – the transaction exchange of principal amounts and interest payments in different currencies between two counterparties. IRS – Interest Rate Swap – the agreement between two counterparties, under which the counterparties pay each other (at specified intervals during the contract life) interest on contractual principal of the contract, charged at a different interest rate. FRA – Forward Rate Agreement – the contract under which two counterparties fix the interest rate that will apply in the future for a specified amount expressed in currency of the transaction for a predetermined period. CAP – the financial agreement, which limits the risk borne by lender on a variable interest rate, exposed to the potential loss as a result of increase in interest rates. Cap option is a series of call options on interest rates, in which the issuer guarantees the buyer the compensation of the additional interest costs, that the buyer must pay if the interest rate on loan increases above the fixed interest rate. FLOOR –the financial agreement, which limits the risk of incurring losses resulting from decrease in interest rates by the lender providing the loan at a variable interest rate. Floor option is a series of put options on interest rates, in which the issuer guarantees the interest to be paid on the loan if the interest rate on the loan decreases below the fixed interest rate. PD – Probability Default – the parameter used in Internal Ratings-Based Approach which determines the likelihood that the debtor will be unable to meet its obligation. PD is a financial term describing the likelihood of a default over an one year time horizon. LGD – Loss Given Default – the percentage of loss over the total exposure when bank’s counterparty goes to default. EAD – Exposure at Default. EL – Expected Loss. Life-time ECL – Lifetime Expected Credit Loss. CCF – Credit Conversion Factor. VaR – Value at Risk – the risk measure by which the market value of an asset or portfolio may be reduced for a given assumptions, probability and time horizon. ICAAP – Internal Capital Adequacy Assessment Process – the process of assessing internal capital adequacy. FVH – fair value hedge accounting. LTV – Loan to Value. CFH – cash flow hedge accounting.

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