Separate statement of profit or loss

The most important event affecting the level of net profit in 2019 and the comparability with results from 2018 was the finalization on 31 October 2018 of the acquisition of the Core Business of Raiffeisen Bank Polska S.A. („RBPL”). As a consequence of the method used to perform and settle the transaction, only the income and expenses of the Core Business of Raiffeisen Bank Polska S.A. for the last two months of 2018 are recognized in the profit or loss of the Bank for 2018 (i.e. made after 31 October 2018).

In addition, the following factors related to the aforementioned transaction have affected the comparability of results reported in 2019 and 2018:

• integration costs in the amount of PLN 414,537 thousand recognized in the general administrative expenses and other operating expenses in 2019, in comparison to PLN 265,804 thousand of integration costs recognized in 2018 (concerning the initiated process of merging the Bank with RBPL and previous merger processes of BGŻ S.A. and BNP Paribas Bank Polska S.A. and acquisition of SKOK Rafineria);
• the initial settlement of the merger of entities and calculating the gain on the bargain purchase of the Core Business of RBPL, as a result of which the amount of PLN 291,706 thousand was recognized in the category of other operating income;
• an allowance due to expected credit losses (ECL) in the 12-month horizon for loans and advances to customers and amounts due from banks, without impairment as well as for debt securities measured at amortised cost, recognized in the result of 2018, in the total amount of PLN 238,897 thousand.

In addition, the comparability of results reported in 2019 and 2018 is influenced by the following factors:

• the Bank incurred higher costs for the Bank Guarantee Fund in 2019 as a result of the increased total amount of contributions to the Bank Resolution Fund by the BFG Board compared to 2018. In 2019, the total costs of the BFG incurred by the Bank amounted to PLN 166,100 thousand and were by PLN 48,806 thousand (i.e. by 41.6%) higher than in 2018;
• recognition (charging the results of second half of 2019) of provisions for the proportional return of commissions in the case of early repayment of the loan by the customer in the total amount of PLN 69.6 million. The recognition of provisions was a result of the judgment of the Court of Justice of the European Union of 11 September 2019 in Case C-383/18 concerning the consumer’s right to reduce the total cost of credit in the case of early repayment;
• recognition (charging the results of fourth quarter of 2019) of provisions for portfolio risk relating to proceedings on CHF mortgage loans in the amount of PLN 29.5 million (judgment of the Court of Justice of the European Union of 3 October 2019 in case C-260/18),
• execution on 28 June 2019 of the transaction of sale of the organised part of the Bank’s enterprise conducting the factoring activity to BGŻ BNP Paribas Faktoring Sp. z o.o. and recognition in the Group’s gross financial result in 2019 the amount of PLN 42,435 thousand.

Net income on banking activity by segments for 2019 r.

Net income on banking activity by segments for 2018 r.

The changes in the structure of the net income on banking activity by segments visible in the charts is slightly distorted by the presentation in “Other banking activity” segment in 2018 gain on the bargain purchase of the Core Business of RBPL. Excluding the amount of PLN 291,706 thousand in the result on banking activity in 2018, the share of Retail and Business Banking would be 56%, SME 13%, Corporate Banking 20%, CIB Banking 3%, and Other Activity 9%. This means an increase in the share of Corporate Banking and CIB with a simultaneous decrease in the share of Retail and Business Banking.

Net interest income, constituting the main source of the Bank’s income, in 2019 amounted to PLN 3,117,110 thousand, and increased y/y by PLN 1,040,592 thousand, i.e. by 50.1%.

A factor positively influencing the level of net interest income in 2019, but at the same time disturbing comparability with 2018, was the fact that the Bank recognized in the profit or loss for 2018 only the interest income and expenses of the acquired Core Business of Raiffeisen Bank Polska S.A. realized after 31 October 2018, i.e. for the last two months of 2018.

The net interest income in 2019 was higher than that earned in 2018, due to, among other things, the recognition in the income statement of the fair value adjustment for the Phase I credit portfolio acquired under the Core Business of RBPL (positive impact + PLN 78,927 thousand). In 2019, the amount of PLN 96,885 thousand was recognised in interest income (of which: in Q4: PLN 14,247 thousand, in Q3: PLN 21,980 thousand, in Q2: PLN 28,370 thousand and in Q1: PLN 32,288 thousand). In the net interest income in Q4 of 2018, the amount of 17,958 thousand PLN was recognised.

Important external factor affecting the level of net interest income in 2019 was the continuation of the NBP’s policy regarding the development of basic interest rates, i.e. their stabilization at low level (the reference rate since March 2015 amounts to 1.5%). As a result of this policy, a downward trend in deposit interest rates is observed on the market, which has a positive impact on the margins realised by banks.

In addition, the fact that the Bank’s liquidity position was significantly improved as a result of finalizing the acquisition of the Core Business of RBPL (net loans / deposits ratio fell from 97.1% at the end of September 2018 to 79.6% at the end of December 2018) enabled optimization of the pricing policy and, consequently, the improvement of deposit margins.

At the end of December 2019, the Bank applied fair value hedge accounting. The change in the fair value measurement of hedging transactions is recognized in the result on hedge accounting. Interest on IRS transactions and hedged items is recognized in net interest income.

The net interest income on hedging relationships (the sum of interest income and interest expense from derivative instruments in fair value hedge accounting) was positive in 2019 and amounted to PLN 34,796 thousand as compared to PLN 21,641 thousand in 2018 (increase by PLN 13,156 thousand, i.e. by 60.8%).

The Bank’s net fee and commission income in 2019 amounted to PLN 785,924 thousand and was higher by PLN 250,752 thousand, i.e. by 46.9% y/y.

A factor positively affecting the level of net fee and commission income in 2019 but at the same time disturbing comparability with 2018 was the fact that the Bank has recognized in the profit or loss for 2018 only the fee and commission income and expenses of the acquired Core Business of Raiffeisen Bank Polska S.A. realized after 31 October 2018, i.e. for the last two months of 2018.

The fee and commission income increased in 2019 as compared to 2018 by PLN 318,779 thousand, i.e. by 47.0% y/y while commission expenses increased by PLN 68,027 thousand, i.e. by 47.7%.

The increase in fee and commission income was recorded in all categories. The largest increases concerned income from:

• handling payment and credit cards by PLN 97,828 thousand, i.e. by 82.3%,
• lending and leasing activities by PLN 49,722 thousand, i.e. by 23.5%,
• execution of transfers and electronic banking services by PLN 42,309 thousand, i.e. by 71.0%,
• account maintenance by PLN 31,320 thousand, i.e. by 29.2%,
• asset management and brokerage operations by PLN 26,221 thousand, i.e. by 42.3%,

The increase in fee and commission expense was mainly caused by higher expenses due to:

• handling payment and credit cards by PLN 38,060 thousand, i.e. 46.9%,
• cash service by PLN 9,252 thousand, i.e. by 146.2%,
• intermediation in the sale of the Bank’s products and acquisition of customers by PLN 4,969 thousand, i.e. by 20.6%,
• other commissions by PLN 6,269 thousand, i.e. by 69.7%.

Dividend income in 2019 amounted to PLN 6,007 thousand was derived from the profits of the companies for 2018, in which the Bank held minority interests, i.e.: Biuro Informacji Kredytowej S.A. (BIK, PLN 4,221.0 thousand), Krajowa Izba Rozliczeniowa S.A. (KIR, PLN 1,179.4 thousand), VISA (PLN 377.2 thousand) and CCIG Group Sp. z o.o.(PLN 229.8 thousand), as well as profits of subsidiaries: BNP Paribas Group Service Center S.A. (PLN 19,980.7 thousand).

Dividend income in 2018 was derived from the profits of the companies for 2017, i.e.: Biuro Informacji Kredytowej S.A. (BIK, PLN 3,944.0 thousand), Krajowa Izba Rozliczeniowa S.A. (KIR, PLN 783.7 thousand) and VISA (PLN 132.4 thousand), as well as profits of subsidiaries: BNP Paribas Group Service Center S.A. (PLN 3,387.9 thousand), TFI BGŻ BNP Paribas S.A. (PLN 2,257.0 thousand).

The net trading income in 2019 amounted to PLN 681,469 thousand and was higher by PLN 350,850 thousand, i.e. by 106.1% y/y. The level and volatility of this result is mainly determined by the valuation of derivative instruments and the result on the exchange position. A factor positively influencing the result on trading activities in 2019 but at the same time disturbing comparability with 2018 was the fact that in the Bank’s result for 2018, only the results of the Core Business of RBPL for the last two months of 2018 were recognized.

The net investment income for 2019 was negative and amounted to PLN -36,592 thousand and was by PLN 83,997 thousand lower in comparison to net investment income for 2018 (profit in the amount of PLN 47,405 thousand).

In 2019, the most important item was the change in the valuation of the portfolio of loans and advances to customers measured at fair value through profit or loss, which was negative and amounted to PLN -35,654 thousand (in 2018 PLN 5,984 thousand).

In 2018, the most important item was the profit from the sale of debt instruments in the amount of PLN 41,244 thousand (the majority of profit has been realized in the 4 ^th quarter of 2018).

Other operating income in 2019 amounted to PLN 158,917 thousand, and was lower by PLN 234,276 thousand, i.e. by 59.6% as compared to the previous year.

The level of income realised in the analysed periods was mainly influenced by the following:

• preliminary accounting settlement of the merger of the companies and calculation of profit from the bargain purchase of RBPL, as a result of which in 2018, the amount of PLN 291,706 thousand was recognised in other operating income,
• recognition in other operating income the amount of PLN 42,435 thousand due to concluded in June 2019 transaction of sale of the organised part of the Bank’s enterprise conducting the factoring activity to BGŻ BNP Paribas Faktoring Sp. z o.o. (Factoring Company). The amount of PLN 45,000 thousand was recognized in the first half of 2019, and then in July 2019 the Bank and the Factoring Company have made the final verification of the transferred net factoring receivables, which were the basis for calculating the sales price at the end of June 2019. The resulting difference of PLN 2,565 thousand was recognized in the third quarter of 2019.

In addition, the level of other operating income in 2019 was positively influenced by:

• increase in income due to release of provisions for litigation and claims and other liabilities by PLN 10,152 thousand, i.e. by 477.7%.
• increase in income on sale or liquidation of property, plant and equipment and intangible assets by PLN 7,323 thousand, i.e. by 53.7%.

The amount of other operating income in 2019 was adversely affected by:

• decrease in income on recovered indemnities by PLN 10,550 thousand, i.e. by 80.0%;
• decrease in income on leasing operations by PLN 4,083 thousand, i.e. by 19.4%.

Other operating expenses of the Bank in 2019 amounted to PLN 309,741 thousand and were higher by PLN 148,135 thousand (i.e. by 91.7%) as compared with 2018 mainly due to:

• recognition of provisions for the proportional return of commissions in the case of early repayment of the loan by the customer in the total amount of PLN 69.6 million as a result of the judgment of the Court of Justice of the European Union of 11 September 2019 in Case C-383/18 concerning the consumer’s right to reduce the total cost of credit in the case of early repayment;
• recognition (charging the results of fourth quarter of 2019) of provisions for portfolio risk relating to proceedings on CHF mortgage loans in the amount of PLN 29.5 million (judgment of the Court of Justice of the European Union of 3 October 2019 in case C-260/18),
• recognition in the third quarter of 2019 of a provision in the amount of PLN 11.3 million for a court judgement unfavourable for the Bank regarding a corporate client option case and PLN 6.4 million for operating loss related to incorrect execution of a tax seizure in 2017.

In addition, the level of other operating expenses in 2019 was influenced by:

• higher losses (by PLN 47,315 thousand, i.e. by 295.9%) on sale or liquidation of property, plant and equipment and intangible assets;
• higher other operating expenses (by PLN 8,802 thousand, i.e. by 21.4%).

The result of impairment allowances on financial assets and provisions for contingent liabilities amounted to PLN -409,298 thousand in 2019, and its negative impact on the Bank’s results was lower by PLN 127,977 thousand, i.e. by 23.8% y/y.

The factor negatively influencing the net impairment allowance on financial assets and provisions for contingent liabilities in 2019 and at the same time disturbing comparability with 2018 was the fact that loan portfolio significantly increased and the Group in 2018 recognized in profit or loss only two months of result on net impairment allowance on financial assets related to Core Business of RBPL acquired on 31 October 2018.

As a result of the acquisition of the Core Business of RBPL in 2018, an allowance due to expected credit losses (ECL) in the 12-month horizon for loans and advances to customers and amounts due from banks, with no impairment, was recognized in the total amount of PLN 238,897 thousand. Excluding ECL allowance, the net impairment allowance on financial assets and provisions for contingent liabilities would amount to PLN -298,378 thousand in 2018, and would be lower by PLN 110,920 as compared to 2019.

Considering the key operating segments*:

• the Retail and Business Banking segment recorded an increase in the negative balance of allowances by PLN 136,489 thousand y/y,
• SME Banking – increase by PLN 11,806 thousand y/y,
• Corporate Banking segment (including CIB) – decrease by PLN 38,009 thousand y/y.

In 2019, the Bank concluded agreements regarding the sale of retail, SME and corporate loan portfolio. The gross book value of the portfolio amounted to PLN 447,953 thousand, the value of impairment allowances amounted to PLN 358,972 thousand. The contractual price for the sale of these portfolios has been set at PLN 114,396 thousand. The net effect on the Bank’s results from the sale of portfolios which amounted to PLN 25,414 thousand and is presented in Recognition and release of impairment allowances on loans and advances.

In 2018, the Bank concluded agreements regarding the sale of a portfolio of loans from the retail portfolio and SMEs. The amount of receivables sold under agreements covered in a significant part by impairment allowances, or fully written-off, amounted to PLN 1,072,097 thousand (principal, interest and other side charges). The contractual price for the sale of these portfolios has been set at PLN 126,152 thousand. The net impact on the Bank’s result from the sale of portfolios amounted to PLN 30,436 thousand and is presented in the creation and derecognition of impairment allowance on loans and advances.

The cost of gross credit risk expressed as the ratio of net impairment allowances to average gross balance of loans and advances to customers, measured at amortized cost (calculated on the basis of balances at the end of the quarters) amounted to 0.57% in 2019 and improved by 38 bps in comparison to 2018 (0.95%). Excluding an additional allowance in 2018 due to expected credit losses in the 12-month horizon, the cost of gross credit risk would amount to 0.53%, i.e. on the level comparable to 2019. The ratio without taking into account the impact of portfolio sales would be 0.60% for 2019 and 0.58% for 2018 (without ECL).

*Information based on the note on operational segments included in the Separate financial statements of the BNP Paribas Bank Polska S.A. for the year ended 31 December 2019

General administrative expenses (including depreciation and amortization) of the BNP Paribas Bank Polska S.A. for 2019 amounted to PLN 2,842,361 thousand, and were higher by PLN 843,627 thousand, i.e. by 42.2% as compared to 2018.

The increase in the expenses was mainly due to the merger of the Bank with the Core Business of Raiffeisen Bank Polska S.A. (RBPL) and related integration costs, as well as the increase in the contribution to Bank Guarantee Fund.

The total amount of integration costs in 2019 amounted to PLN 414.5 million (including PLN 4.1 million related to acquisition of SKOK Rafineria) compared to PLN 265.8 million in 2018, of which:

• PLN 389.9 million has been included in general administrative expenses,
• PLN 24.6 million – in other operating expenses and relates mainly to the cost of liquidation of property, plant and equipment (PLN 29.6 million), impairment allowance update (PLN 6.0 million) and provision for branch restructuring (decrease of costs by PLN 10.5 million).

Integration costs recognized in general administrative costs and depreciation are related mainly to integration with RBPL and include i.a.:

• IT costs related to infrastructure and system migration as well as outsourcing services – PLN 110.5 million,
• costs of accruing accelerated depreciation of systems in connection with the merger processes of banks – PLN 105.1 million,
• personnel expenses – PLN 89.6 million,
• costs of consulting services – PLN 29.8 million,
• rebranding costs related to the change of the Bank’s name from 1 April 2019 – PLN 25.2 million.
• costs related to branches reorganization (excluding IT costs) – PLN 12.0 million,
• other integration costs (administrative, business trips) – PLN 9.8 million.

The largest increase in expenses by type y/y (by PLN 296.2 million) occurred in the item „personnel expenses”, which is mainly due to employment growth after the acquisition of RBPL, the costs of provisions created for retention programs and inclusion in the Group’s structure of employees of three companies previously owned by the RBPL Capital Group. In 2018 the Bank created a provision for employment restructuring in the amount of PLN 130.5 million.

In addition, the level of expenses in 2019 was influenced by the increase of the following expenses:

• IT and telecommunications costs (an increase of PLN 135.9 million) – related mainly to the costs of maintenance of the systems of the merged Bank (software and hardware) and costs related to integration of IT infrastructure and systems in connection with the operational merger;
• other tangible costs (increase by PLN 102.7 million) – mainly related to administrative costs – in connection with the increase in employment and the number of bank branches after the merger with RBPL – including: telecommunication services (by PLN 10.6 million), security (by PLN 8.6 million), office supplies (by PLN 7.5 million), postal fees and outsourcing and distribution of mass correspondence (by PLN 7.4 million), VAT on real estate contracts (increase by PLN 20.2 million as a result of change in cost accounting according to IFRS 16 standards);
• outsourcing costs (increase by PLN 63.3 million) – related mainly to operational merge;
• increase of BFG contributions due to the increase of contributions rate.

Total contributions included in the Bank’s expenses for 2019 amounted to PLN 166.1 million and were PLN 48.8 million higher than in the previous year:

• annual contribution to the mandatory bank resolution fund for 2019 (fully settled in the first quarter of 2019) amounted to PLN 116.1 million, compared to PLN 52.8 million of expenses (booked in the first half of 2018),
• contribution to the bank guarantee fund due for 2019 amounted to PLN 50.0 million and was lower by PLN 14.5 million than in 2018.

In 2019 there was an increase in the total amount of contributions to the BFG for the banking sector determined by the Council of the Bank Guarantee Fund (PLN 2 billion of contributions to the bank resolution fund for 2019 against PLN 960 million for 2018 and PLN 791 million of contributions to the bank guarantee fund for 2019 against PLN 1.24 billion in the previous year).

In 2019 the costs of advisory and consulting decreased by PLN 27.3 million.

In consequence of implementation from 1 January 2019 of IFRS 16 „Leasing”, which defines a single model for the valuation of leasing, there has been a change in the cost accounting. Rental costs of the Bank for 2019 were presented: within depreciation costs as depreciation of the right to use property (PLN 115.0 million), within interest costs as interest on the lease liability (PLN 7.5 million), as a separate item of administrative costs „Costs of short-term leasing and operation” (PLN 96.4 million) and in other tangible costs as costs of VAT on real estate contracts (PLN 20.2 million).

Depreciation and amortization expenses of the BNP Paribas Bank Polska S.A. in 2019 amounted to PLN 452.4 million and were higher by PLN 263.6 million as compared to the previous year, which resulted mainly from the implementation of IFRS 16 „Leasing” standard from 1 January 2019 – shifting the costs of rents, car lease and IT equipment to depreciation – increase in the Bank by PLN 124.4 million, costs of calculation of accelerated depreciation of systems in connection with bank merger processes – increase by PLN 105.1 million.