About report

For the second time now, the ING Bank Śląski S.A. Group has compiled the annual report in line with the best global practices of integrated reporting. To help readers use the interactive tools, we prepared a user guide with key features. We encourage you to watch a short animated video before reading the report.

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We adopt a multi-faceted approach to our role in creating the value for the community, not limiting ourselves to banking products and services only. We do not forget about sustainable growth in our activity. We are aware that each aspect of our activity impacts society and environment. We also observe the market today and envisage that in the future to set trends and respond to challenges.
Brunon Bartkiewicz
President of the Management Board

Our stakeholders expect us to keep them informed not only about the results, but also about the development perspectives. The strategy, its implementation and market competition are the most important topics indicated in the report survey made among Bank stakeholders.

We understand this expectation. A careful analysis of the macroeconomic and social environment in the short- and mid-terms allows us to take apt business decisions. We always strive after the solutions that will be of maximum benefit both to the Bank clients and its shareholders. Our analyses and forecasts are also used in a broader context – to create the Bank’s business strategy. We listen attentively to the voice of a wide group of stakeholders. The topics that are the most crucial for them underpin our social responsibility strategy.

We adopt a multi-faceted approach to our role in creating the value for the community. We go beyond the usability of banking products and services. People are our most important asset. We engage our resources in developing competence and building work environment that fosters innovativeness. The results of our actions translate into unique customer experience, safety and development perspectives. In the case of our shareholders, we focus on delivering stable and predictable financial results. We also ensure that our contribution to the economic and social environment is long-lasting and positive.

Banking sector

[G4-2]

In 2016 and 2017, the financial results and standing of the banking sector, ING Bank Śląski S.A. included, were shaped by multiple external factors. They are of material significance for the future development strategy of the Bank. They translate directly into profitability of banks.

Liabilities

  • Liabilities to households went up by 4.2% (PLN 30.1 billion) and arrived at PLN 746.2 billion versus 2016 yearend.
  • Liabilities to institutional clients amounted to PLN 396.4 billion, up by 4.0% from 2016 yearend. The volume increase by PLN 15.1 billion can be mainly attributed to higher liabilities to enterprises (up by 2.4%, or by PLN 6.4 billion) and to non-monetary financial institutions (up by 6.8%, or by PLN 3.7 billion). Liabilities to local government institutions and the Social Insurance Fund augmented by 9.1%, that is by PLN 3.2 billion, in that period.
kantor  Change currency: PLNEURUSD

 

 

 

1based on NBP data

1based on NBP data

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1based on NBP data

1based on NBP data

Receivables

  • In December 2017, receivables from households amounted to PLN 664.7 billion, up by 2.0% from December 2016. Housing loans, which formed the main part of the banks’ credit exposure to households (representing 58.4% of receivables from that group of clients), went down by 1.5%, arriving at PLN 388.5 billion. The decline was mainly driven by PLN appreciation to CHF (13.4% y/y). Further, the growth rate was also affected by the natural amortisation of the CHF portfolio that dropped 8.0% y/y (CHF 2.6 billion). The portfolio of PLN housing loans grew by 10.6% y/y (PLN 24.6 billion). Upon excluding the exchange rate effect, the housing loans portfolio went up by approximately 3.1% in 2017. As per data of the Polish Bank Association, in 2017 banks extended housing loans totalling PLN 44.6 billion (PLN 39.5 billion in 2016, i.e. +12.9% y/y). Other retail loans, consumer credits included, rose by 7.2% (PLN 18.7 billion) from 2016 yearend, arriving at PLN 276.2 billion.
  • Receivables from institutional clients went up by PLN 26.7 billion (or 6.9%) from December 2016, arriving at PLN 411.9 billion. Receivables from enterprises rose by PLN 17.5 billion (or 5.9% y/y), arriving at PLN 315.4 billion.
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1based on NBP data,
2excluding the FX mortgage portfolio
Source: National Bank of Poland and Polish Financial Supervision Authority

1based on NBP data,
2excluding the FX mortgage portfolio
Source: National Bank of Poland and Polish Financial Supervision Authority

kantor  Change currency: PLNEURUSD

 

 

 

1based on NBP data,
2excluding the FX mortgage portfolio
Source: National Bank of Poland and Polish Financial Supervision Authority

1based on NBP data,
2excluding the FX mortgage portfolio
Source: National Bank of Poland and Polish Financial Supervision Authority

Our bank economists expect that high GDP growth rate, accelerated EU funds absorption and improved investment, private investment in particular, will translate into volumes of loans and deposits in the economy in 2018. Economists estimate that the deposits growth rate in the sector will arrive at 4.5% y/y in 2018 and will be spread evenly across retail and corporate loans (4.5% y/y each). The growth rate of loans in 2018 is to accelerate up to 7.2% y/y. Retail loans will accelerate to 5.3% y/y and corporate loans up to 10.0% y/y.

Assets quality

As regards assets quality in December 2017, the share of impaired receivables in total receivables was 5.9% (6.2% as at 2016 yearend). The improved portfolio quality was reported primarily for receivables from institutional clients, where the share of impaired receivables materially went down for another consecutive year, by 70 b.p. y/y, settling at 5.6%.

Share of impaired receivables in the sector1(as at yearend)

1based on NBP data

The quality of the household loans portfolio slightly deteriorated versus 2016 yearend, i.e. it went up by 5 b.p., closing at 6.1%. It was mainly driven by a growing share of impaired non-housing retail loans (i.e. other retail loans) in total impaired retail loans (from 71% as at 2016 yearend to 73% as at 2017 yearend). The share of “bad” housing loans improved by 12 b.p. y/y and closed at 2.8% as at 2017 yearend. In 2017, the quality of other retail loans also improved by 8 b.p. y/y; the reported share of impaired loans was the lowest since 2009 and arrived at 10.8%.

Financial results

The overall condition of the banking sector in 2017 was good. This can be attributed to the accelerating growth rate of the Polish economy, solid data from the labour market and a stable situation in the financial market. The trend of headcount streamlining continued in the banking sector, as well as of reducing the number of branches.

In 2017, the net financial result of the banking sector went down by 2.3% y/y to PLN 13.6 billion. It results however from one-off events in 2016, which disrupted the comparability of results versus 2017. The reported 2016 result before tax of PLN 18.1 billion was affected by:

  • sale of VISA Europe shares of PLN 2.5 billion and
  • additional contribution to the BGF of PLN 0.1 billion.

Upon excluding one-off events, the comparable 2016 result before tax closed at PLN 15.7 billion.

In 2017, the result before tax of the banking sector arrived at PLN 18.4 billion, or 16.6% over the comparable 2016 result before tax (and 1.4% over the reported result before tax for the year before). The result before tax augmented, because the comparable total income grew at a faster pace (7.8%) than the operating expenses (4.1%). In 2017, the result before tax of the banking sector was boosted (versus comparable data) by:

  • net interest income (up by PLN 4.6 billion or 12.1% y/y) and
  • net commission income (up by PLN 1.2 billion or 9.1% y/y).

On the other hand, it was negatively affected by:

  • other income (down by PLN 1.2 billion or 12% y/y),
  • operating expenses (up by PLN 1.3 billion or 0% y/y),
  • risk costs (up by PLN 0.3 billion or 2.9% y/y), and
  • Bank tax (up by PLN 0.4 billion or 13.5% y/y).
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Result before tax of the banking sector1 in 2017 (PLN billion)

Result before tax of the banking sector1 in 2017 (EUR billion)

Result before tax of the banking sector1 in 2017 (USD billion)

1based on PFSA data

Asset-backed funding market

In 2017, the Polish lease market went up by 15.7%, arriving at PLN 67.8 billion. The active portfolio of lease agreements totalled PLN 119.3 billion (up by 13.5%) as at the yearend. For comparison, the value of investment loans extended by the banking sector stood at PLN 127.0 billion as at the end of December 2017. These figures confirm that in terms of value, leasing is the second biggest funding source for investment undertakings in Poland after investment loans.

Vehicles weighing up to 3.5 tons constituted the biggest segment of the leasing market (with their share in the sales up from 42.1% to 45.6%). The funds granted in that leasing category totalled PLN 30.5 billion (+25.0% y/y). Passenger cars were the main turnover driver in that segment (28.0% y/y).

The segment of machines and equipment (IT included) reported a 14.6% annual growth. The total value of the machines financed reached PLN 17.6 billion.

2017 was an important year for the real property market, where after a pronounced drop in 2016, it reported an increase of 26.5% y/y, arriving at PLN 909.4 million.

Source: Polish Leasing Association

In 2017, the turnover of the factoring companies belonging to the Polish Factors Association multiplied by 16.7% y/y, arriving at PLN 185.0 billion. The most popular funding form chosen by companies was non-recourse factoring; its turnover in 2017 reached over PLN 100 billion and the growth rate of 19.5% was higher than the market.

The number of clients of companies in the Polish Factors Association was 9,000 following a growth of 12.6% y/y, while the number of debtors whose liabilities were taken over reached over 250,000 (vs 172,000 in 2016).

Sector-wise, the highest volumes of receivables were entrusted to factoring companies by production and distribution companies (47.8% and 37.1%, respectively).

Source: Polish Factors Association

In 2017, the Polish lease market went up by 15.7%, arriving at PLN 67.8 billion. The active portfolio of lease agreements totalled PLN 119.3 billion (up by 13.5%) as at the yearend. For comparison, the value of investment loans extended by the banking sector stood at PLN 127.0 billion as at the end of December 2017. These figures confirm that in terms of value, leasing is the second biggest funding source for investment undertakings in Poland after investment loans.

Vehicles weighing up to 3.5 tons constituted the biggest segment of the leasing market (with their share in the sales up from 42.1% to 45.6%). The funds granted in that leasing category totalled PLN 30.5 billion (+25.0% y/y). Passenger cars were the main turnover driver in that segment (28.0% y/y).

The segment of machines and equipment (IT included) reported a 14.6% annual growth. The total value of the machines financed reached PLN 17.6 billion.

2017 was an important year for the real property market, where after a pronounced drop in 2016, it reported an increase of 26.5% y/y, arriving at PLN 909.4 million.

Source: Polish Leasing Association

In 2017, the turnover of the factoring companies belonging to the Polish Factors Association multiplied by 16.7% y/y, arriving at PLN 185.0 billion. The most popular funding form chosen by companies was non-recourse factoring; its turnover in 2017 reached over PLN 100 billion and the growth rate of 19.5% was higher than the market.

The number of clients of companies in the Polish Factors Association was 9,000 following a growth of 12.6% y/y, while the number of debtors whose liabilities were taken over reached over 250,000 (vs 172,000 in 2016).

Sector-wise, the highest volumes of receivables were entrusted to factoring companies by production and distribution companies (47.8% and 37.1%, respectively).

Source: Polish Factors Association

Capital market

Warsaw Stock Exchange

2017 was a successful year for the Warsaw Stock Exchange. Its operations were fostered by a good situation on global financial markets. In the United States, capital markets reached historically highest maximums while in Europe only Moscow Exchange closed the year below its 2016 result. In Poland, the economic growth was the fastest since 2012. The amount of foreign trades was close to balance and better than budgeted. Along with rising wages and employment, it had a positive impact on the Warsaw Stock Exchange.

In 2017, the WIG broad market index went up 23.2% y/y and was only 3.5% lower than the historically highest figure in 2017. Meanwhile, in the very same period the alternative market NC Index went up by 9.2% y/y.

 

The volume of trades on the main floor reached PLN 261.0 billion, or up by 28.9% y/y. Less impressive growth (up by 7.9% y/y) was reported for the New Connect alternative market arriving at PLN 1.5 billion, while the Catalyst reported a turnover decline of 11.1%, down to PLN 2.8 billion.

In the context of the number of WSE-listed companies, 2017 was the first year when more companies were delisted (20) than newly listed on the main floor (15). As at 2017 yearend, 482 companies were listed on the main floor, 5 less from the year before. Their total capitalisation went up to PLN 1.4 billion (up by 23.7% y/y). A higher number of Initial Public Offerings was reported for the NewConnect market with 19 debuts in 2017. The worth of listed issues on the Catalyst market rose by 17.1% y/y, up to PLN 95.8 billion.

 

Main WSE indexes in 2017 (30 December 2016 = 100)

Source: Warsaw Stock Exchange

Mutual funds

In 2017, the mutual funds market worth measured with funds under management gathered by these institutions went up by 7.8% y/y, up to PLN 279.0 billion. Favourable market conditions fostered non-dedicated funds and as at 2017 yearend the assets accumulated therein totalled PLN 159.5 billion (+17.7% y/y). The change can be largely contributed to the net inflow of funds (PLN 16.4 billion). Funds accumulated in dedicated funds shrank to PLN 119.5 billion (PLN 3.9 billion or -3.1% y/y) mainly due to the effect of net outflows (PLN 2.4 billion).

Clients of non-dedicated funds were most eager to deposit their cash in funds with a relatively low risk profile. The most popular category were money market funds (26.1% of the non-dedicated funds assets), which went up by 27.0% y/y. Debt funds came next (24.9% of the non-dedicated funds assets), which given low interest rates constituted an attractive alternative to bank deposits; their assets augmented by 11.8% during the year. They were followed by mixed funds forming 17.7% of the non-dedicated part of the market (assets up by 18.5% y/y) and equity funds forming 17.5% of the market (assets up by 18.4% y/y).

Source: Chamber of Fund and Asset Management

Open-end pension funds

As at the end of December 2017, pension funds assets amounted to PLN 179.6 billion, up by PLN 26.1 billion (17.0%) from the year before. This was triggered by the bull market on the WSE. On the other hand, the balance of payments and withdrawals was negative for another year in a row. In 2017, only PLN 3.3 billion was transferred to open-end pension funds (vs PLN 3.2 billion in 2016), while the “safety zipper” transfers to the Social Insurance Institution, as estimated by the Chamber of Commerce of Pension Funds, amounted to PLN 6.1 billion (vis-à-vis PLN 3.5 billion the year earlier). The higher value of the funds transferred under the “safety zipper” mechanism stemmed from the lower retirement age having come into force as of 1 October 2017. In consequence, the monthly average value of transferred funds rose from PLN 0.2 billion to PLN 1.0 billion.

Despite former announcements, there was no reform of the open-end pension funds system in 2017.

Source: Chamber of Commerce of Pension Funds and Polish Financial Supervision Authority

Implementation of IFRS 9

One of the key regulatory changes in 2018 that will have a material impact on the banking sector results (ING Bank Śląski S.A. included) is the application of a new IFRS 9 Financial Instruments. It was published by the International Accounting Standards Board in July 2014 and was adopted by the European Union in November 2016. IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement. It covers the requirements in terms of:

  • classification,
  • measurement of financial assets and liabilities,
  • impairment of financial assets, and
  • hedge accounting.

The new standard came into force on 1 January 2018. We took a decision to apply it retrospectively for classification, valuation and impairment through the adjustment of the opening balance sheet as at 1 January 2018, without adjusting the comparative periods. It applies both to assets and liabilities, still the biggest change concerns assets.

Implementation of IFRS 9 guidelines was a huge challenge both for our Bank and for the entire financial sector. In practice, it translated into an extensive scope of analyses, interpretations and consultations engaging different areas of the Bank’s operations. The results of our works were presented in the notes to our 2017 financial statements..
Jolanta Alvarado Rodriguez
Accounting Department Director

IFRS 9 implements two criteria that determine classification and, in consequence, the way financial assets are measured:

  • cash flow characteristics test for assets, i.e. the SPPI test – solely payments of principal and interest, and
  • business model test, or determination of the purpose of holding a given asset:
    • hold to collect the contractual cash flows – “hold to collect”,
    • hold to both collect the contractual cash flows and sell an asset – “hold to collect and sell”, and
    • hold for other business purposes – “sell”.

The chart below shows the simplified manner of IFRS 9 financial assets classification, which is used to determine how a given asset item should be measured:

IFRS 9 introduces three classification categories of financial assets measurement:

  • at amortized cost,
  • at fair value through other comprehensive income, and
  • at fair value through profit or loss.

After such an analysis (i.e. SPPI and business model tests) based on the data as at 1 January 2018, we classified:

  • PLN 104.0 billion-worth financial assets (mainly loans and receivables and other debt instruments classified under IAS 39 as Investments held to maturity) measured at amortized cost,
  • PLN 17.6 billion-worth financial assets measured at fair value through other comprehensive income, including:
    • PLN 17.5 billion-worth assets (mainly debt instruments classified under IAS 39 as Financial assets available for sale) with the reversal option through profit or loss, and
    • PLN 0.1 billion-worth assets (equity instruments classified under IAS 39 as Financial assets available for sale) without the reversal option through profit or loss,
  • PLN 2.6 billion-worth financial assets (mainly derivative instruments classified under IAS 39 as Financial assets held for trading) measured at fair value through profit or loss.

Application of IFRS 9 will have a material impact on the impairment loss estimation methodology for the portfolio of financial assets measured at amortized cost and at fair value through other comprehensive income. The new methodology is based on the forward-looking expected credit loss concept. It also takes account of different macroeconomic scenarios with a fixed probability of their materialisation. In order to compute the expected credit loss, we split loans and other debt instruments into three stages:

  • Stage 1 covers performing assets for which no significant credit risk increase has been reported from the initial recognition date. The expected loss for those assets is computed in the horizon of 12 months;
  • Stage 2 covers performing assets for which significant credit risk increase has been reported from the initial recognition date. The expected loss for those assets is computed in the lifetime perspective;
  • Stage 3 covers impaired assets. The expected loss for those assets is computed in the lifetime perspective.

Apart from the 3-stage classification, there is a separate, independent category of POCI financial assets. This category embraces financial assets purchased or originated credit impaired. These items are measured at fair value and the expected loss is calculated throughout their lifetime.

The net effect of the change from IAS 39 to IFRS 9 methodology will have a negative impact (understood as the opening balance sheet effect as at 1 January 2018) on equity. We estimate the figure to arrive at PLN 246.3 million.

Additionally, the methodology change will also have a negative impact on the Bank’s and Group’s capital ratios. We estimate that the total negative impact on Tier 1 ratio will be 33 b.p. We also stress that the Bank used the option of the progressive 5-year transition period (under Regulation of the European Parliament and of the Council (EU) 2017/2395), which will alleviate the impact of the new IFRS 9 impairment loss model on the Tier 1 capital. In keeping with the regulation, the IFRS 9 adjustments linked to credit risk, such as:

  • impairment losses,
  • deferred tax assets for impairment losses, or
  • the adjustment of credit risk-based shortage versus the expected losses under the AIRB Approach,

shall be subject to transition periods. This means that their impact on capital ratios will increase incrementally, from 5% in 2018 to 100% as of the beginning of 2023, following the values in the table below.

Simplified diagram of the impact of the implementation of IFRS 9 on capital ratios

Period: 1 2 3 4 5 6
Year: 2018 2019 2020 2021 2022 2023
IFRS 9 adjustments subject to transition periods 5% 15% 30% 50% 75% 100%
IFRS 9 adjustments not subject to transition periods 100% 100% 100% 100% 100% 100%
Total impact ~20%         100%

 

On the other hand, the other IFRS 9 adjustments like:

  • capital investment measurement or
  • other deferred tax assets

will be immediately fully mirrored in capital ratios. Therefore, we estimate that the negative impact of IFRS 9 on the Group’s Tier 1 ratio as at 1 January 2018 will be 3 b.p.

More details on the IFRS 9 implementation at the Bank can be found in the 2017 Consolidated Financial Statements of ING Bank Śląski S.A. Group on page 11.

Modification of regulations concerning the banking sector

Name Effective date Description
2017
The Regulation of the Minister for Economic Development and Finance of 21 November 2017 on abandoning the collection of income tax on some income (revenues) relating to housing mortgage loans Temporary nature
and is effective from 1 January 2017 to 31 December 2018
Thereunder, the personal income tax shall not be collected on:

  • amounts written off by the lender under the loans taken to satisfy the borrowers’ housing needs, provided that the taxpayers did not make use of a write-off of another mortgage loan received for their own housing needs, and
  • amounts of income under repayment of the loan taken for one’s own housing needs and collateralised with a mortgage, below its nominal value due to application by the lender of a negative interest rate.

For the corporate income tax, tax shall not be collected on the income being equivalent to written off credit liabilities, starting from the portion of principal where abandoning of the CIT collection begins under the said regulation. The solution is to apply to the CIT taxpayers licensed to grant loans under other acts.

Recommendation C on concentration risk management 1 January 2017 The PFSA recommendation supplements and expands on the issues of concentration risk management at banks.
The Act on amendment to the act on payment services and certain other acts of 30 November 2016 8 February 2017 with an 18-month transition period for performance of the most significant duties by banks The Act implements the provisions of Directive 2014/92/EU (PAD). The amendment extends the disclosure duties towards consumers concerning, inter alia, the fees charged under the account-related services. The new provisions also set out the principles of consumer access to the so-called primary account and the principles of moving the consumer payment accounts.
Act on Common Reporting Standard of 9 March 2017 1 May 2017 with a transition period for performance of the reporting duties by banks The so-called CRS Act implements Directive 2014/107/EU. The provisions of the Act introduce the financial institutions’ duties regarding automatic exchange of tax information on reported accounts.
The Regulation of the Minister for Economic Development and Finance on risk management system
and internal control system, remuneration policy and detailed manner of internal capital quantification at banks of 6 March 2017
1 May 2017 The regulation superseded PFSA Resolution 258/2011. The provisions of the regulation define a detailed manner of functioning of the risk management system and internal control system at banks. The regulation also covers a detailed scope of the remuneration policy and its determination mode as well as a detailed manner of internal capital quantification.
The Act on amending the Act on Trading in Financial Instruments and Certain Other Acts of 10 February 2017 5 May 2017 The Act implements the provisions of Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse (MAD) and serves applying Regulation No. 596/2014 on market abuse (MAR).
The Act on Statutory Auditors, Auditing Firms and Public Oversight of 11 May 2017 21 June 2017,
with a transition period for bringing the audit committee composition into line with the new requirements
The new provisions follow the European Union regulations (implementation of Directive 2014/56/EU and use of Regulation 537/2014). The Act concerns, among others, the audit committee responsibilities in public interest entities (which also covers banks) and the relationships with auditing firms authorised to audit financial statements.
Act on Mortgage Loans
and Supervision over Mortgage Loan Brokers and
Agents of 23 March 2017
22 July 2017 (concerns the majority of provisions) The Act sets out the principles and mode of concluding the mortgage loan agreements. The new provisions regulate the rights and duties of lenders and borrowers, mortgage loan brokers and agents. They cover the information disclosed prior to concluding a mortgage loan agreement and the procedure in the course of the agreement.
Recommendation H concerning internal control system at banks 31 December 2017 The Recommendation is a collection of good practices as regards the internal control system at banks which expand on the current laws.
2018
The Act amending the Personal Income Tax Act,
the Corporate Income Tax Act and the Act on the Flat-Rate Income Tax on Some Income Earned by Natural Persons of 27 October 2017
1 January 2018 Among the main amendments having an impact on the tax issues of, among others, the financial sector one may list:

  • amending the principles of including in the banks’ tax base the provisions formed for the business risk of banks and the provisions formed by the banks that apply the International Accounting Standards to making loss allowance for expected credit losses – IFRS 9;
  • ring-fencing in the Corporate Income Tax Act the sources of income in the form of capital gains and separating the income earned from that source from the taxpayers’ other income;
  • modifying the provisions limiting the amount of the interest deducted (costs of debt financing), known as “thin capitalisation” – financial institutions have been excluded from that modification;
  • introducing the provisions limiting the amount of tax deductible costs linked to the intangible services agreements (licence agreements, advisory, management and control services, for example) and associated with the use of intangible assets, as well as the provisions clarifying the definition of “acquisition” of an intangible assets item;
  • amending the regulation that enables recognition under tax deductible costs of the losses under the paid disposal of the debt claim formerly recognised as the income due by reducing the amount of the losses to the previously recognised income.
Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and
insurance-based investment products
The Regulation has been effective since 1 January 2018 The Regulation introduces a common standard for documents with the key information on the so-called packaged retail and insurance-based investment products. It covers, for example, mutual funds, structured deposits (combination of bank deposits with investment solutions) and insurance policies with an investment element.
Regulation (EU) No. 600/2014 of the European Parliament and of the Council and Directive No. 2014/65/UE of the European Parliament and of the Council on markets in financial instruments The MiFIR has been directly applied since 3 January 2018. The Directive needs to be implemented into Polish law. The package of provisions contained in the Regulation (MiFIR) and Directive (MiFID II) as well as in the secondary legislation issued thereunder establishes new regulations regarding provision of investment services. The European Union provisions impose the duties relating to, inter alia, investor protection and market transparency on the financial market entities.
The Act on amending certain acts to prevent the use of the financial sector for tax frauds of 24 November 2017 Most of the provisions of the Act took effect on 13 January 2018. The Act specifies transition periods for the banks to adapt to the new duties. The Act provides for the Head of the National Revenue Administration analysing the risk of the banks being used to commit tax crimes. To that end, he or she will use the analysis prepared by the National Clearing House which will determine in its ICT system the risk ratios on the basis of the data obtained from banks and credit unions.
Regulation (EU) No. 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data The Regulation takes effect as of 25 May 2018. The General Data Protection Regulation constitutes a new, comprehensive regulation pertaining to the processing of the personal data of natural persons by entrepreneurs. The new provisions set out the principles of personal data protection, the rights of data subjects, the duties of the controller and the processor as well as the competence of regulators. The regulation creates the duty to report incidents and infringement upon personal data protection to supervisory bodies.
The Act of on amendment to the Value-Added Tax Law and certain other acts of 15 December 2017 1 July 2018 The amendment introduces the so-called split payment mechanism for the Value-Added Tax Under the solution, the payment for the goods or services purchased is made in such a way that the payment corresponding to the net sales value is remitted by the buyer to the clearing account or it is settled differently, while the rest of the payment being the VAT amount is remitted to a dedicated bank account – i.e. VAT account. It entails the banks’ duties to maintain the VAT accounts.
Insurance Distribution Act of 15 December 2017 28 February 2018 The new provisions result from the implementation of Directive 2016/97 on insurance distribution. The Act covers the duties of the insurance distributing entities. It provides for, in particular, the disclosure duties towards clients, an adequate remuneration system and training duties.
Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market The Directive awaits implementation into Polish law. The PSD II establishes new regulations regarding provision of payment services. The provisions of the directive introduce, among others, the duty to use the so-called strong user authentication mechanism by payment services providers. Moreover, the distribution of the responsibility between banks and users for unauthorised payment transactions will be changed.
Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing The Directive awaits implementation into Polish law. The anti-money laundering directive (AMLD) introduces, inter alia, wider duties relating to the banks’ assessing the money laundering and terrorist financing risk, including the amendments to the procedure of using the financial security measures. It also provides for introducing the register of information on corporate persons’ ultimate beneficial owners and other legal entities.
The Recommendation Z on the internal governance principles at banks The PFSA draft recommendation is a collection of good practices as regards the internal governance principles. Internal governance includes but is not limited to the bank management system, bank organisation, operating mode, rights, duties and responsibility as well as mutual relations between the supervisory board, management board and key function holders at a bank.

 

Changes to capital requirements

In November 2017, the PFSA issued a stance on minimum capital ratios. As of 1 January 2018, banks in Poland should maintain minimum capital ratios in line with the following:

  • Total Capital Ratio (TCR) at: 8% +add-on+ combined buffer requirement,
  • Tier 1 ratio (T1) at: 6% + 75%*add-on+ combined buffer requirement,
  • Common Equity Tier 1 ratio (CET1) at: 4.5% + 56%*add-on + combined buffer requirement.

Whereas, the combined buffer requirement is a total of:

  • capital conservation buffer,
  • countercyclical capital buffer,
  • buffer of other systemically-important institution,
  • systemic risk buffer.

The capital conservation buffer was instituted in 2016 under the Act on macroprudential supervision over the financial system and crisis management in the financial system. In 2016-2017, it was 1.25%; in 2018, it went up to 1.875%; and as of the beginning of 2019, it will settle at 2.5%.

Under the Act on macroprudential supervision over the financial system and crisis management in the financial system, it amounts to 0% at present.

At the end of 2017, the PFSA updated the list of banks which were deemed by it systemically important institutions. Currently, it features 12 banks (10 commercial banks and 2 cooperative banks). These institutions were charged with a capital add-on both at the consolidated and stand-alone levels. The imposed buffer (O-SII) cap is 2%. The PFSA decided to impose buffers of 0% – for cooperative banks – up to 0.75% for two commercial banks. Five commercial banks were assigned a buffer of 0.25%, and the other three commercial banks (ING Bank Śląski S.A. included) 0.5%. For more details, please visit the PFSAwebsite.

The systemic risk buffer has been effective since 1 January 2018. It was introduced by the Regulation of the Minister for Economic Development and Finance on systemic risk buffer of 1 September 2017. Its current value is 3%.

The capital conservation buffer was instituted in 2016 under the Act on macroprudential supervision over the financial system and crisis management in the financial system. In 2016-2017, it was 1.25%; in 2018, it went up to 1.875%; and as of the beginning of 2019, it will settle at 2.5%.

Under the Act on macroprudential supervision over the financial system and crisis management in the financial system, it amounts to 0% at present.

At the end of 2017, the PFSA updated the list of banks which were deemed by it systemically important institutions. Currently, it features 12 banks (10 commercial banks and 2 cooperative banks). These institutions were charged with a capital add-on both at the consolidated and stand-alone levels. The imposed buffer (O-SII) cap is 2%. The PFSA decided to impose buffers of 0% – for cooperative banks – up to 0.75% for two commercial banks. Five commercial banks were assigned a buffer of 0.25%, and the other three commercial banks (ING Bank Śląski S.A. included) 0.5%. For more details, please visit the PFSAwebsite.

The systemic risk buffer has been effective since 1 January 2018. It was introduced by the Regulation of the Minister for Economic Development and Finance on systemic risk buffer of 1 September 2017. Its current value is 3%.

The PFSA also monitors the banks’ exposure under FX mortgage loans. Institutions with material exposure need to meet a higher capital requirement (separately at the consolidated level and separate level). Best quality capitals (Tier 1) need to account for at least 75% of this requirement. The PFSA did not impose that requirement on ING Bank Śląski S.A.

For the ING Bank Śląski S.A. Group, the above-referred requirements mean the following minimum ratios:

  • CET1 >= 9.875% (as of 2019: 10.5%),
  • T1 >= 11.375% (as of 2019: 12.0%),
  • TCR >= 13.375% (as of 2019: 14.0%).

Ongoing restructuring of the credit unions (SKOK) and cooperative banks sector

Ensuring the security of deposits built up within the banking sector in a broad sense has been invariably one of the priorities of both the sector and sector regulators. What is important, not only in the eyes of clients but also in keeping with Polish law. the savings deposited with both commercial banks (such as ING Bank Śląski S.A.) and cooperative banks or credit unions provide the same security. They are all covered by uniform Bank Guarantee Fund guarantees.

In 2017, the PFSA together with the BGF continued the restructuring of the credit unions sector. In 2017, their number went down by six to a total of 35 credit unions as at yearend. Four of them filed for bankruptcy, which entailed the necessity to pay out approximately PLN 550 million worth of guarantees by the BGF. Two subsequent credit unions were taken over by banks, Bieszczadzka SKOK by ING Bank Śląski S.A. and Lubuska SKOK by Bank Spółdzielczy in Wschów. At the beginning of 2018, SKOK Bogdanka – in accordance with the PFSA decision of 6 February 2018 – was taken over by SKOK Kozienice. In other three credit unions, the compulsory administration was still operating.

As regards cooperative banks, their number over 2017 dropped by 5 banks to 550 as at yearend. The restructuring of these five cooperative banks was conducted within the sector – they were all taken over by other cooperative banks.

Gross Domestic Product

2017 was a year of a material economic revival. The GDP growth accelerated from 2.7% y/y in Q4 2016 to over 5% y/y in Q4 2017 (throughout 2017, the GDP rose by 4.5% y/y). It was mainly driven by the households consumption expenditures which grew fast and were boosted by a good situation of the labour market as well as by the 500+ programme benefits. The impact of the latter proved stronger and more sustained than the expectations. Investment projects rebounded markedly only in H2 2017 and notably in Q4 2017 (up by 11.4% y/y vis-à-vis 3.3% y/y in Q3 2017). This was due to the finalisation of investment projects in the power sector and outlays on road and local government infrastructure. Company investments also went up in that period, as proven by higher loans awarded to businesses.

Economists at our bank expect a growth of GDP in 2018 to remain elevated (4.4% y/y versus 4.5% y/y in 2017). To a lesser extent, it will be driven by consumption and to a larger extent by investment. It will be boosted by the accelerated absorption of EU funds and rebound in private investment (output capacity of companies is close to zero). Investment projects co-financed with the EU will reach high nominal levels (rebound of their dynamics in 2017 is rather caused by the low base effect from 2016). Payments for the beneficiaries of the EU funds paid out by BGK will total around PLN 40 billion over the year, or 33% more than in 2017. As a result, the growth rate of investment in non-current assets will exceed 8% y/y versus 5.4% y/y in 2017. Other factors of a good economic situation are: a high increase in wages and a favourable economic situation of Poland’s key trade partners.

Macroeconomic projections

2013 2014 2015 2016 2017 2018F 2019F
GDP growth (%) 1.4 3.3 3.8 2.9 4.5 4.4 3.6
General government debt as per the EU methodology (% of GDP) 55.7 50.2 51.1 54.1 52.0 50.2 48.8
Producer Price Index growth (%) 2.3 3.4 4.9 3.0 6.5 4.7 3.8
Average annual inflation (CPI) (%) 0.9 0.0 -0.9 -0.6 2.0 2.0 2.7
Unemployment rate (%) 13.4 11,4 9.7 8.3 6.6 5.5 5.4
USD/PLN exchange rate (yearend) 3.01 3.51 3.90 4.18 3.48 3.15 3.07
EUR/PLN exchange rate (yearend) 4.15 4.27 4.26 4.42 4.17 4.10 4.15
3M WIBOR (yearend) 3.0 2.5 1.7 1.7 1.7 1.7 2.0

 

Low interest rate landscape

A significant factor of the Bank’s activity in 2017, as the year before, was sustained low level of interest rates. The NBP reference rate stood at 1.5% throughout the year and the Monetary Policy Council (MPC) underscored no need to tighten up the monetary policy. Conducive to that position was a mild course of the CPI inflation which oscillated around 2% in 2017 and only in one month, namely November, reached the NBP inflation target (2.5%). The main inflation factor were growing food and fuel prices, while the fast growth in wages (above 7% y/y in Q4 2017) only slightly affected the core inflation.

ING Bank Śląski S.A. economists take the view that in 2018 the MPC will keep the interest rates unchanged. One may expect that the rates will move upwards only in H1 2019. Stabilisation of inflation around 2% y/y, that is below the NBP target (2.5%), will favour maintaining of the present monetary policy. Bank economists are of the opinion that in 2018 the food price inflation will go down, following the trend already visible in international markets. On the other hand, the sustained high pay pressure in Poland as well as the pay pressure abroad (among others, as a result of environmental reforms in China) will cause an increase in the core inflation. However, its impact on the key inflation rate will be limited due to a rise in output and the low inflation imported from the Eurozone.

It is also worth highlighting that good market conditions in Eurozone and US economies have, so far, only slightly translated into the global inflation growth because of a high level of unutilised workforce following the former crisis, the services market having become more international as well as the cheap USD. As a result, the European Central Bank is slowly closing the asset purchase programme (according to ING projections, it will be closed only in Q4 2018) and is putting off the interest rate increases until 2019. In turn, the Federal Reserve has been systematically raising the interest rates – as per ING Group’s forecasts, their growth is assumed at 75 bp in 2018 (up to 2.25%).

Condition of public finance

The fiscal situation of Poland is systematically improving thanks to good economic situation and tightening up of the fiscal system, in particular in the VAT domain. This is how, in 2017, we managed to lower the structural deficit by 0.9 p.p. (to 2.3% of GDP). Yet, arrival at the medium-term monetary objective in the fiscal area (deficit at 1% of GDP) seems far away. The period of the upturn in the economy was not used appropriately to prepare for the future cyclical deterioration in the public finance. ING economists expect that 2018 will see further balancing of public finance, while the structural deficit will fall below 2% of GDP. This will be possible due to continued tightening up of the fiscal system. From the beginning of 2018, small-and microenterprises were required to fill in the so-called uniform control file which facilitates fiscal control. VAT split payment will take effect mid-2018 in selected sectors. Better fiscal situation of Poland translates into its lower credit risk.

The tensions between the European Commission and Poland (activation of Article 7, among others) and the fears about the institutional landscape affect our ratings to a limited degree so far. An unfavourable perception among the Western economies may adversely impact Poland’s access to EU funds budgeted for 2021-2027.

International business landscape

US and European economies entered the path of a faster growth and will most probably go over the potential output. In the Eurozone, one could notice better sentiments in H2 2017 among all EU member states, outliers included. Still, a higher GDP growth rate is not accompanied by government or private debt reduction in the countries sustaining the major difficulties (Greece, Portugal and Italy). Fiscal problems will most probably steer the European Central Bank into deferring the monetary policy normalisation.

Contrary to the anxieties, political changes in H2 2017 were relatively moderate. Still, they revealed a significant fragmentation of political systems, among others:

  • in Germany where the CDU/CSU-SPD coalition formed a new government,
  • in the Czech Republic, the ANO movement has problems with government formation,
  • still unresolved dispute with the Catalan authorities,
  • outcome of the Italian parliamentary elections (March 2018) will most probably preclude formation of the government that would be strong enough to institute structural reforms.

A high uncertainty also accompanies Brexit negotiations – the final outcome of the negotiations is unknown yet, but it ranges from the scenario of abandoning the concept of EU exit to the one in which the UK exits the EU without new commercial treaties.

The risk of trade war between the US, China, NAFTA members and Germany is the second source of concern. The activities of the Donald Trump’s administration to date, e.g. imposition of a duty on solar panels and household equipment from China triggered verbal action on the part of Beijing (announcement to curb the share of USD-denominated assets in the reserves of the People’s Bank of China). Further conflict escalation may entail world growth outlook deterioration.

Despite a short-term adjustment on the world trading floors, stock prices still remain high vis-à-vis the results recorded by companies. Credit expansion of American companies plus the situation in the real property market in the US and Europe – where prices go considerably beyond the inflation growth rate and in some cases beyond salary rises – cause more and more concerns.

Further, financial markets are very sensitive to a potential leap in inflation and interest in the US. Earlier expansive policy of central banks and low rates forced multiple financial institutions (pension funds and insurers, for example) to invest in assets of above-standard risk profile. Should inflation increase or should the expected rate path change considerably, then revaluation of some markets of assets may affect large financial institutions outside the banking sector and threaten the stability of the global financial system.

Challenges to the financial sector

Market megatrends are the factors that impact the future of our bank. We refer to them in the business strategy and CSR assumptions, and also in the value creation model.

We realize that technological progress entails digitalisation of banking services, and that is followed by new channels of interaction with clients and a greater significance of network security. New needs of clients call for a personalised approach. Due to these factors, we need to focus on banking services from the aspect of experience that we offer to clients. Therefore, it is customer experience that determines the technological solutions we implement at our bank. We rely on availability, speed and intuitiveness plus readability and simplicity of communication, as well as customer privacy.

Poles’ poor financial awareness is still – despite the passing years – a key challenge to the market. We feel responsible for the financial education of our clients. That is why, we offer them such solutions like, among others, the Moje ING system, which are a springboard for taking independent and informed financial decisions.

We also recognise the market opportunities and needs associated with the environmental protection. We concentrate on responsible investing by ensuring adequate assessment of the environmental and social risks of large investment projects (in keeping with the international Equator Principles).

The need to react flexibly to market developments combined with growing competition sets requirements for the workplace area. To attract and maintain employees and, at the same time, take care of the competitive quality of human capital, we count not only on the friendly workplace but also on the way of working based on innovativeness

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