Supplementary information

Following received by the Bank recommendation issued by Financial Supervision Commission regarding banks’ dividend policy in 2016, and taking into account the additional capital requirement in order to secure the risk resulting from FX mortgage loans for households, and the need to maintain capital conservation buffer for the Bank, the Annual General Meeting held on 31st March 2016 decided to retain the net profit for 2015 in the Bank by allocating it in full to reserve capital.

On 6th December 2016, KNF issued its position in the matter of the dividend policy of banks (among other entities) in 2017. Based on this recommendations, the Management Board of the Bank will submit to the General shareholders meeting a proposal to retain in own funds the full net profit of 2016.

As at 31 December 2016 following assets of the Bank constituted collateral of liabilities (PLN’000):

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No.	Type of assets	Portfolio	Secured liability	Par value of assets	Balance sheet value of assets
1.	Treasury bonds WZ0118	available for sale	Lombard credit granted to the Bank by the NBP	130 000	131 180
2.	Treasury bonds WZ0118	available for sale	Initial security deposit for bond futures	500	505
3.	Treasury bonds WZ0118	available for sale	Loan agreement	623 000	628 657
4.	Treasury bonds WZ0118	available for sale	Security of Guaranteed Monies Protection Fund under the Bank Guarantee Fund	310 000	312 815
5.	Cash	receivables	Payment to the Futures Settlement Guarantee Fund	100	100
6.	Cash	receivables	Payment to the Security Fund OTC-KDPW_CCP	4117	4117
7.	Deposits	deposits in other banks	Settlement on transactions concluded	1 071 202	1 071 202
Total				2 138 919	2 148 576

As at 31 December 2015 following assets of the Bank constituted collateral of liabilities (PLN’000):

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No.	Type of assets	Portfolio	Secured liability	Par value of assets	Balance sheet value of assets
1.	Treasury bonds WZ0118	available for sale	Lombard credit granted to the Bank by the NBP	130 000	131 063
2.	Treasury bonds WZ0118	available for sale	Initial security deposit for bond futures	500	504
3.	Treasury bonds WZ0117	available for sale	Loan agreement	554 000	558 920
4.	Treasury bonds WZ0118	available for sale	Security of Guaranteed Monies Protection Fund under the Bank Guarantee Fund	210 000	211 718
5.	Treasury bonds WZ0117	available for sale	Security of Guaranteed Monies Protection Fund under the Bank Guarantee Fund	89 000	89 790
6.	Cash	receivables	Payment to the Futures Settlement Guarantee Fund	100	100
7.	Cash	receivables	Payment to the Security Fund OTC-KDPW_CCP	3 752	3 752
8.	Deposits	deposits in other banks	Settlement on transactions concluded	1 981 663	1 981 663
Total				2 969 015	2 977 510

As at 31 December 2016  the Group did not have any repo transactions concluded.

The majority of the Group’s derivatives portfolio arises due to conclusion by the Bank framework ISDA agreements (International Swaps and Derivatives Agreements). Provisions included in the agreements define comprehensive procedures in case of infringement (mainly difficulties in payments), and provide possibility to cancel a deal, making settlements with counterparty base on offset amount of mutual receivables and liabilities. To date, the Bank has not exercised that option, however, in order to meet information requirements as described in IFRS 7 the following table presents the fair values of derivative instruments (both classified as held for trading and dedicated to hedge accounting) as well as cash collaterals under ISDA framework agreements with a theoretical maximum amount resulting from the settlement on the basis of compensation.

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	Amounts to be received	Amounts to be paid
Valuation of derivatives	191 135	1 251 266
Amount of cash collaterals accepted/granted	(13 305)	(1 025 510)
Financial assets and liabilities covered by framework ISDA agreements allowing compensation	177 830	225 756
Theoretical maximum amount of compensation	(169 009)	(169 009)
Financial assets and liabilities covered by framework ISDA agreements allowing compensation taking into account theoretical amount of compensation	8 821	56 747

For the purpose of the cash flow statement the following financial assets are classified by the Group as cash or its equivalents:

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	31.12.2016	31.12.2015
Cash and balances with the Central Bank	1 778 768	1 946 385
Receivables from interbank deposits (*)	159 814	359 920
Debt securities issued by the State Treasury (*)	3 443 400	4 544 850
of which available for sale	3 442 191	4 544 850
of which held for trading	1 209	0
Total	5 381 982	6 851 155
The impact of changes in currency exchange rates during the financial year on cash and cash equivalents	640	4 098

(*) Financial assets with maturity below three months

In the periods presented in the financial statements the Group has received and made interest payments in the following amounts:

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Data in PLN thous.	01.01.2016 – 31.12.2016	01.01.2015 – 31.12.2015
Interests received, including:	2 247 596	2 324 948
– operating activities	2 013 508	2 117 526
– investing activities	234 088	207 422
Interests paid, including:	836 971	898 455
– operating activities	814 127	873 757
– financing activities	22 844	24 698

For the purpose of the cash flow statement the following classification of activity types was adopted:

1. Operating activities – cover the basic scope of operations connected with services provided by the Group’s units covering events whose purpose is to earn profit and not being investment or financial activity,
2. Investment activities cover operations connected with the purchasing and selling of fixed assets, in particular financial assets not included in the ”for trading” category, shares and shares in subsidiaries, tangible and intangible fixed assets.
3. Financial activities cover activities connected with raising of funds in the form of capital or liabilities, as well as servicing sources of funding.

As of 31.12.2016 the Custody Department maintained 12,583 accounts in which Customers’ assets were kept with the total value of PLN 41.47 billion (including assets of the Group’s companies in the amount of PLN 0.22 billion). Net revenue from the custody business for 2016 amounted to PLN 8.96 million (of which PLN 0.10 million falls on Group’s companies). The Custody Department serves as a depositary bank for 85 mutual funds including 11 of Millennium TFI S.A.

The Group has lease agreements for office space, which according to IAS 17 are posted under operating leasing. As a standard, the Group’s companies usually make agreements of lease of commercial property for a specified period of maximum 5 years’ time, with a clause providing the right of the lessee to extend the term of the lease for another 5 years upon presentation of a statement. The Bank (parent company) made in the past also other agreements with no time limitation, which may be terminated with adequate notice, usually 3 to 6 months.

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Balance of liabilities as at:	31.12.2016	31.12.2015
– to 1 year	153 711	180 760
– above 1 year to 5 years	236 907	322 649
– above 5 years	8 891	15 594
TOTAL	399 509	519 003

In 2012 the Bank implemented Variable Remuneration Policy for Persons Holding Managerial Positions in Bank Millennium S.A. Group in accordance with requirements described in Resolution of Polish Financial Supervisory Authority no 258/2011.

According to the mentioned Policy, Bank’s and Group’s employees who are covered by this Policy, who have significant impact on Group’s risk profile, will be paid variable remuneration on the basis of individual results and on the basis of unit / department and the entire Bank and Group results.

Part of the variable remunerations for employees of the Bank and Group will be paid in the form of Bank’s phantom shares. Those payments fulfil definition of the cash-settled share-based payments.

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Variable Remuneration – Phantom Shares for:	2016	2015	2014	2013
Kind of transactions in the light of IFRS 2	Cash-settled share-based payments
Commencement of vesting period	1 January 2016	1 January 2015	1 January 2014	1 January 2013
The date of announcing the program	30 July 2012
Starting date of the program in accordance with the definition of IFRS 2	Date of the Personnel Committee meeting taking place after closing of financial year
Number of granted  instruments	Determined at the grant date of the program in accordance with the definition of IFRS 2
Maturity date	3 years since the date of granting program
Vesting date	31 December 2016	31 December 2015	31 December 2014	31 December 2013
Vesting conditions	Employment in the Group 2016, results of the Group and individual performance	Employment in the Group 2016, results of the Group and individual performance	Employment in the Group 2016, results of the Group and individual performance	Employment in the Group 2016, results of the Group and individual performance
Program settlement	On the settlement date, the participant will be paid the amount of cash being equal to the amount of held by a participant phantom shares multiplied by arithmetic mean of the Bank’s share price at the closing of last 10 trading sessions on the Stock Exchange in Warsaw, preceding the settlement date. Aforementioned value cannot be greater or less than 20% compared to the original value of the deferred share pool. Phantom shares are settled in three equal annual instalments starting from the date of the Personnel Committee which decides about assignment.
Program valuation	The fair value of the program is determined at each balance sheet date according to the rules adopted for determining the value of the program on the settlement date.

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Phantom shares granted to Group’s employees who are not members of the Management Board of the Bank, for the year:	2016	2015	2014	2013
Date of shares assigning	02.02.2017	12.02.2016	06.02.2015	13.02.2014
Number of shares	159 087	167 211	85 990	42 956
– granted	0	0	0	0
– deferred	159 087	167 211	85 990	42 956
Value as at assigning date (PLN)	920 000	902 102	625 402	381 106
–granted	0	0	0	0
– deferred	920 000	902 102	625 402	381 106
Fair value as at 31.12.2016 (PLN)	–	867 824	500 322	304 885

Profit and Loss Account for 2016 has been charged with the change in the value of the phantom shares assigned for the years 2013, 2014 and 2015, and the provision for phantom shares to be assigned for 2016.

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Phantom shares granted to members of the Management Board of the Bank, for the year:	2016	2015	2014	2013
Date of shares assigning	–	13.05.2016	21.05.2015	24.04.2014
Number of shares	–	311 204	164 512	69 916
– granted	–	0	0	0
– deferred	–	311 204	164 512	69 916
Value as at assigning date (PLN)	–	1 500 000	1 285 900	612 000
– granted	–	0	0	0
– deferred	–	1 500 000	1 285 900	612 000
Fair value as at 31.12.2016 (PLN)	–	1 615 149	1 028 858	489 552

Until the publication of the Annual Report, the Personnel Committee of the Supervisory Board has not taken a decision on the amount of variable remuneration for the members of the Management Board for 2016.

Banking tax

Commencing from February 2016 a new special banking tax was introduced, with 0,44% annual rate on the balance of total assets less own funds, Treasury bonds and PLN 4 billion tax-exempt amount.

FX mortgage loan portfolio

On August 2nd 2016 a presidential proposal of legislation aimed at supporting FX mortgage borrowers was put forward. The draft Act  covers all foreign currency loans concluded from 1st July 2000 to 26th August 2011 (date of entry into force so called anti-spread Act). Aforementioned draft Act envisages reimbursement of part of fx spread applied by banks. It was also announced that further capital requirements may be imposed for the banks in order to restructure fx mortgage loans.

Including the above mentioned draft Act, there are currently three different draft acts submitted to the polish parliament and as a consequence it is not possible to estimate the impact of this potential regulation on the banking sector. However, announced legislative intentions on spread return, if implemented and made mandatory for banks, could significantly deteriorate the Bank’s profitability and capital position.

On 10th of August 2016, the Financial Stability Committee („FSC”) (composed by the governor of NBP, Minister of Finance, Head of Polish Financial Supervision Authority and Head of Banking Guarantee Fund), upon the initiative of the Chairman of the National Bank of Poland, appointed the Working Group for the Risk of Currency Housing Loans, which included representatives of institutions represented in the Financial Stability Committee.

On 13th of Jan 2017 a Resolution no 14/2017 in the matter of the recommendation pertaining to the restructuring of the housing loan portfolio in foreign currencies was issued by FSC.

Following the analysis and evaluation of risk related to the still significant portfolio of FX mortgage loans, the FSC believes that it would be justified to start restructuring the portfolio.

Nevertheless, the FX loan restructuring measures must be implemented gradually, must be voluntary and first of all take into account the need to protect the stability of the financial system.

The possible currency conversion (or a different form of restructuring) should be implemented gradually and by negotiation between the bank and the customer; in every case it must consider all the circumstances, such as the borrower’s current situation or the features of the loan.

It is not possible with the available information to analyse the impacts of the recommendations, but implementation of part or all recommendations may have influence on the results and capital ratios of the banks, including Bank Millennium, although it is possible that there will be some offsetting effects.