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2018 Financial and Social Report

Supplementary Information

Bank Millennium has a dividend policy of distributing between 35% to 50% of net profit, assuming that the recommendations of the Polish Financial Supervision Authority (KNF) regarding the payment of dividends will be met.

The high capital ratios at the end of 2018 would allow to pay 75% if not additional K1 and K2 criteria for banks with FX mortgage loan portfolio, which KNF maintained when announcing in January 2019 a recommendation on the banks’ dividend policy. K1 criterion is based on FX mortgage share in total portfolio and K2 criterion is based on share of 2007-2008 vintages in total FX mortgage portfolio.

Due to the above and considering the planned acquisition of Euro Bank S.A., the Bank intends to retain all of its 2018 net profit in own funds in order to strengthen capital ratios. The Bank’s Management Board will submit to the General Shareholders Meeting a relevant proposal to retain the full net profit generated in 2018.

As at 31 December 2018 following assets of the Bank constituted collateral of liabilities (PLN’000):

No. Type of assets Portfolio Secured liability Par value of assets Balance sheet value of assets
1. Treasury bonds WZ0121 Held to Collect and for Sale Lombard credit granted to the Bank by the NBP 130 000 131 630
2. Treasury bonds WZ0120 Held to Collect and for Sale Initial security deposit for bond futures 500 507
3. Treasury bonds WZ0120 Held to Collect and for Sale Securing the Fund for Protection of Funds Guaranteed as part of the Bank Guarantee Fund 311 000 315 273
4 Central Bank bills NBP_040119 Held to Collect and for Sale Security of payment obligation to BFG contribution – guarantee fund 35 600 35 600
5. Central Bank bills NBP_040119 Held to Collect and for Sale Security of payment obligation to BFG contribution – compulsory resolution fund 27 100 27 100
6. Cash receivables Payment to the Futures Settlement Guarantee Fund 100 100
7. Cash receivables Payment to the Security Fund OTC-KDPW_CCP 2 583 2 583
8. Deposits Deposits in banks Settlement on transactions concluded 264 108 264 108
TOTAL 770 991 776 901

 

Additionally, as at December 31, 2018, the Group had concluded short-term transactions (usually settled within 7 days) of Treasury securities sale with a repurchase agreement, subject of securities worth PLN 50,290 thousand (corresponding liabilities are presented in Chapter 13., note 33).

As at 31 December 2017 following assets of the Bank constituted collateral of liabilities (PLN’000):

No. Type of assets Portfolio Secured liability Par value of assets Balance sheet value of assets
1. Treasury bonds WZ0119 available for sale Lombard credit granted to the Bank by the NBP 130 000 131 537
2. Treasury bonds WZ0120 available for sale Initial security deposit for bond futures 500 506
3. Treasury bonds WZ0119 available for sale Loan agreement 120 000 121 418
4 Treasury bonds WZ0120 available for sale Loan agreement 503 000 509 298
5. Treasury bonds WZ0119 available for sale Security of Guaranteed Deposit Protection Fund under the Bank Guarantee Fund 325 000 328 842
6. Central Bank bills NBP_050118 available for sale Security of payment obligation to BFG contribution – guarantee fund 18 000 17 998
7. Central Bank bills NBP_050118 available for sale security of payment obligation to BFG contribution – compulsory resolution fund 15 500 15 498
8. Cash receivables Payment to the Futures Settlement Guarantee Fund 100 100
9. Cash receivables Payment to the Security Fund OTC-KDPW_CCP 3 377 3 377
10. Deposits Deposits in banks Settlement on transactions concluded 115 173 115 173
TOTAL 1 230 650 1 243 747

As at 31 December 2018 following securities (presented in the Group’s balance-sheet) were underlying Sell-buy-back transactions (PLN’000):

Type of security Par value Balance sheet value
Treasury bonds 49 667 50 290
TOTAL 49 667 50 290

 

In result of conclusion of Sell-Buy-Back transactions with the underlying securities presented in the table above, the Group is exposed to risks, which are the same as in case of holding securities with the same characteristics in its treasury portfolio.

As at 31 December 2017 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.

 

PLN’000 Amounts to be received Amounts to be paid
Valuation of derivatives 191 163 423 704
Amount of cash collaterals accepted/granted (68 883) (263 712)
Financial assets and liabilities covered by framework ISDA agreements allowing compensation 122 280 159 992
Theoretical maximum amount of compensation (118 605) (118 605)
Financial assets and liabilities covered by framework ISDA agreements allowing compensation taking into account theoretical amount of compensation 3 675 41 387

For the purpose of the cash flow statement the following financial assets are classified by the Group as cash or its equivalents (PLN’000):

  PLN’000 31.12.2018 31.12.2017
Cash and balances with the Central Bank 2 450 176 2 080 151
Receivables from interbank deposits* 462 324 120 350
Debt securities issued by the State Treasury* 1 608 188 6 207 751
of which FVTOCI (AFS as at 31.12.2017) 1 599 800 6 206 913
of which held for trading 8 388 838
Total 4 520 688 8 408 252

(*) Financial assets with maturity below three months

 

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 31.12.2018 the Custody Department maintained 12,522 accounts in which Customers’ assets were kept with the total value of PLN 37.5 billion. Net revenue from the custody business for 2018 amounted to PLN 8.6 million. The Custody Department serves as a depositary bank for 23 mutual funds including 13 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 variable period up to 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.

Future payment commitments under non-cancellable operating leases as at, (PLN’000):

31.12.2018 31.12.2017
– to 1 year 112 744 130 650
– above 1 year to 5 years 205 451 243 236
– above 5 years 100 343 132 958
Total 418 538 506 844

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.

Variable Remuneration 2018 2017 2016 2015
Phantom Shares for:
Kind of transactions in the light of IFRS 2 Cash-settled share-based payments
Commencement of vesting period 1 January 2018 1 January 2017 1 January 2016 1 January 2015
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 2018 31 December 2017 31 December 2016 31 December 2015
Vesting conditions Employment in the Group 2018, results of the Group and individual performance Employment in the Group 2017, results of the Group and individual performance Employment in the Group 2016, results of the Group and individual performance Employment in the Group 2015, 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.

 

Phantom shares granted to Group’s employees who are not members of the Management Board of the Bank, for the year:

2018 2017 2016 2015
Date of shares assigning 23.01.2019 07.02.2018 02.02.2017 12.02.2016
Number of shares 135 504 125 013 106 588 56 852
– granted 0 0 0 0
– deferred 135 504 125 013 106 588 56 852
Value as at assigning date (PLN) 580 500 1 195 500 616 400 306 715
– granted 0 0 0 0
– deferred 580 500 1 195 500 616 400 306 715
Fair value as at 31.12.2018 (PLN) 1 244 200 1 108 866 739 680 368 058

 

Profit and Loss Account for 2018 has been charged with the change in the value of the phantom shares assigned for the years 2015-2017, the provision created for phantom shares to be assigned for 2018 and the social insurance costs resulting from the above transactions.

Phantom shares granted to members of the Management Board of the Bank, for the year:

2018 2017 2016 2015
Date of shares assigning 09.04.2018 25.05.2017 13.05.2016
Number of shares 272 260 175 788 104 564
– granted 0 0 0
– deferred 272 260 175 788 104 564
Value as at assigning date (PLN) 2 235 000 1 252 500 504 000
– granted 0 0 0
– deferred 2 235 000 1 252 500 504 000
Fair value as at 31.12.2018 (PLN) 2 414 946 1 502 987 604 798

 

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 2018.

FX mortgage loan portfolio   

2018 year did not bring legal changes towards FX mortgage portfolios. On 2 August 2016 the President’s Bill on support for FX mortgage borrowers was submitted to the Parliament. The proposed law is to apply to FX (all currencies) loan agreements signed from 1 July 2000 to 26 August 2011 (when the “Anti-spread Act” came into force). This Bill concerns the return of part of FX spreads applied by banks. On 2 August 2017 a new Presidential Bill appeared in Parliament regarding changes in the Act on Support for Distressed Borrowers who Took Residential Loans. The Bill assumes a modification of the existing Borrowers’ Support Fund by separating-out two Funds: Supporting Fund and Conversion Fund. As regards the Supporting Fund, the Bill aims to increase availability of money from the fund by means of: relaxing criteria, which must be satisfied by a borrower applying for support; increasing the maximum amount of support; extending the period, for which the support is granted; forgiving part of the support granted conditional on punctual repayment to the fund. The Conversion Fund is to be used for currency conversion of FX mortgages to PLN. The Bill contains very general regulations and does not specify criteria of eligibility for such currency conversion and its rules. Quarterly payments to the Conversion Fund made by lenders are not to exceed the equivalent of the FX mortgage portfolio and the rate of 0.5%. The maximum costs for the entire sector, assessed based on FX mortgage balance (PLN 128 billion in December 2018 according to KNF), equal to up to PLN 2.6 billion in the first year of operation of the Conversion Fund. According to the Bill, KNF may issue a recommendation to lenders specifying the principles of voluntary conversion of receivables with consideration of stability of the financial system and effective use of money in the Restructuring Fund. After Government’s acceptance and voting of several changes by the Parliamentary Sub-Committee, Presidential Bill of 2 August 2017 was sent on 24 January 2019 for the further parliamentary proceedings.

The two above Bills included, so far four draft Acts have been submitted to Parliament and in consequence it is not possible to estimate the impact of the proposed legislation on the banking sector and the Group. However if any of the Bills is adopted and begins to bind banks, this may lead to significant reduction of the Group’s profitability and its capital position.

 

Mortgage Bank

Mortgage loans are an important element of the Bank’s retail business. Therefore, in June 2018, the Bank filed to the Polish Financial Supervision Authority an application for granting permission to set up a mortgage bank called “Millennium Bank Hipoteczny” based in Warsaw, the sole shareholder of which will be Bank Millennium. The new Bank is to provide medium and long-term financing through the issuance of covered bonds to support residential mortgage lending business.

 

Euro Bank

On 5 November 2018 the Bank announced the agreement on the transaction to buy 99.8% of the shares in Euro Bank S.A., which should be finalized in 1st half of 2019 (as of June 2018 Euro Bank had PLN 1.4 million of clients, holding PLN 11.9 billion in loans and PLN 7 billion in deposits).

After obtaining all the approvals, the Bank assumes the closing of the transaction in 2nd quarter 2019, which will enable the following step of getting approval for the legal merger, envisaged for 3rd quarter 2019. Subsequently, an effective merger of the organisational structures of both banks will be possible and the full operational merger is planned by the end of the year 2019 and will be preceded by the migration of all the customers and products of the acquired bank to the platform of Bank Millennium. After the merger the Bank will operate under Millennium logo.

 

SKOK Piast conveyance

On the basis of decision of the Polish Financial Supervision Authority on 17 October 2018 Bank Millennium took over management of the assets of Spółdzielcza Kasa Oszczędnościowo-Kredytowa Piast (SKOK Piast) (Cooperative Credit Union SKOK Piast), until the moment of conveyance SKOK PIAST carried out standard operational activities. The conveyance accomplished in accordance with article 74c paragraph 4 of the Act on Credit Unions took place on 1 November 2018.

Bank Millennium is a consecutive bank to join the SKOK turnaround process supported by the Polish Financial Supervision Authority and the Bank Guarantee Fund (BFG). Conveyance of SKOK Piast fits well within efforts to ensure stability of the national financial system and to ensure safety for all clients of financial institutions in Poland.

In the Bank’s accounting books the conveyance was settled in accordance with IFRS 3. The conveyance process was carried out with assumption of the support to be granted by BFG on the basis of art. 264 of the Bank Guarantee Fund Act and did not involve a transfer of the payment by the Bank. The BFG support will consist of transferring the subsidy and granting a guarantee to cover losses resulting from the risk related to the acquired property rights of SKOK Piast.

The BFG subsidy will be granted to cover, fixed at a conveyance date, the difference between the value of the taken over property rights and liabilities from guaranteed funds in the accounts of depositors and as at 31 December 2018 its value is estimated at PLN 67 492 thousand. Due to the ongoing auditor’s review of the financial statements of SKOK Piast prepared as at the date of closing the accounting books (31 October 2018), the amounts applied for settlement of the transaction as at December 31, 2018 may still be subject to change. According to IFRS 3, the Bank has 12 months for the final settlement of the acquisition – until the end of October 2019.

Accordingly to IFRS 3 provisions the Bank recognized in its books fair values of taken over assets and liabilities, the fair value adjustments represents the difference between amounts of assets and liabilities recorded in SKOK Piast financial statements prepared accordingly Polish Accounting Standards as at 31 October 2018 and their fair value amounts calculated at the same date. The aforementioned differences are related with following balance sheet items:

  1. Loan portfolio adjustments

Total fair value of loan portfolio of SKOK Piast was determined separately for performing and nonperforming (defaulted) loans. The default definition was determined based on 90 DPD and other qualitative triggers. Fair value of performing loan portfolio of SKOK Piast was determined using discounted cash flows model with application of current margin. For non-performing portion of loan portfolio the fair value was determined using estimation of expected self repayments and sales recoveries.

  1. Deposit portfolio adjustment

Fair value adjustment on the deposit portfolio is mainly driven by slightly higher interest rates of SKOK’s Piast term deposits as compared to the average market rates.

  1. Real estates adjustments

The positive fair value adjustment consists of differences between the book value and market value of buildings resulting from external appraisals.

Additionally the Bank recorded deferred tax resulting from FV adjustments calculated by applying 19% to effect of the above adjustments.

Assets SKOK Piast data as at 31.10.2018 Fair value adjustments Fair value of taken over assets
Cash 18 630 18 630
Loans and advances to customers* 88 355 7 767 96 122
Investments in subsidiaries 5 738 5 738
Tangible assets 5 969 424 6 393
Other assets 12 632 12 632
Total assets 131 324 8 191 139 515

(*) gross value of credit portfolio amounted to PLN 157 833 thousand

 

Liabilities SKOK Piast data as at 31.10.2018 Fair value adjustments Fair value of taken over liabilities
Guaranteed deposits 198 816 239 199 055
Provisions 4 696 4 696
Deferred tax liability 2 042 1 511 3 553
Other liabilities 1 809 1 809
Total liabilities 207 363 1 750 209 113

 

As a result of the conveyance, the Bank recognized goodwill (being the difference between the net fair value of identifiable assets and liabilities and the amount of BFG subsidy) of PLN 2,105 thousand. PLN, which was subsequently fully amortized in costs.

 

Events after the date for which financial statements were prepared

Issuing by the Chairman of the Office of Competition and Consumer Protection of the consent in the matter of a concentration consisting in the takeover by Bank Millennium S.A. of the control over Euro Bank S.A.

On 3 January 2019 the Bank received information about the issuing of the decision of 28 December 2018 by the Chairman of the Office of Competition and Consumer Protection in the matter of the concentration consisting in the takeover by Bank of the control over Euro Bank S.A. Spółka Akcyjna with seat in Wrocław. The decision indicated above means that there has been fulfilled one of the conditions precedent indicated in the agreement concerning the Bank’s acquisition of around 99,78% of the shares in Euro Bank SA from SG Financial Services Holdings i.e. obtaining the consent of the appropriate antitrust authority.

Issue of W-Series subordinated bonds of the Bank

The Management Board of the Bank on 17 January 2019 took the decision in the matter of issue by Bank on 30 January 2019, under provisions of the Act of 15 January 2015 on bonds, subordinated bonds W-series. Bonds were issued by Bank under the existing Third Bond Issue Program, approved in 2015, with nominal value not greater than PLN 3,000,000,000 (or the 4 equivalent of this amount in EUR, USD or CHF).

On 30th January 2019 the issue of 1,660 series W subordinated bonds of the Bank was settled. All bonds in the total amount of PLN 830,000,000 were acquired by bondholders.
Maturity of the bonds is on 30th January 2029. The issuer may decide to redeem the bonds on 31st January 2024 only after obtaining prior assent of Polish Financial Supervision Authority for earlier redemption of the bonds, if such assent is required. The interest rate on the bonds is variable, based on WIBOR 6M plus a margin of 2.30% per annum.

After the assent of Polish Financial Supervision Authority is obtained the bonds shall constitute instruments in the Bank’s Tier 2 capital in the meaning of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012.

The Bank shall strive to introduce the bonds to trading in the Alternative Trading System of BondSpot S.A. or Giełda Papierów Wartościowych w Warszawie S.A.

 

Signatures:
Date Name and surname Position/Function Signature
22.02.2019 Joao Bras Jorge Chairman of the Management Board signed with a qualified electronic signature
22.02.2019 Fernando Bicho Deputy Chairman of the Management Board signed with a qualified electronic signature
22.02.2019 Wojciech Haase Member of the Management Board signed with a qualified electronic signature
22.02.2019 Andrzej Gliński Member of the Management Board signed with a qualified electronic signature
22.02.2019 Wojciech Rybak Member of the Management Board signed with a qualified electronic signature
22.02.2019 António Ferreira Pinto Júnior Member of the Management Board signed with a qualified electronic signature
22.02.2019 Jarosław Hermann Member of the Management Board signed with a qualified electronic signature