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 2019 would allow to pay dividend if not additional K1 and K2 criteria for banks with FX mortgage loan portfolio, which KNF maintained when announcing in December 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.

Regardless of  the above,  taking into consideration the acquisition and subsequent merger with Euro Bank S.A. conducted in 2019 (without a share issue), the Bank intends to retain all of its 2019 net profit in own funds in order to strengthen capital ratios. Therefore, the Management Board of the Bank will submit to Annual General Meeting a proposal of full retention of 2019 net profit.

If the proposal to retain the entire net profit for 2019 is accepted by the General Meeting of Shareholders, the positive impact on the T1 and TCR ratio will be approximately 0.4-0.5 p.p. (to levels 17.4% and 20.6% for Group, respectively). It should be reminded that capital rations as of end 2019 already incorporated the 1st half 2019 net profit, according to positive decision of KNF upon the Bank’s request.

As at 31 December 2019 following assets of the Bank constituted collateral of liabilities (PLN’000):

Additionally, as at December 31, 2019, 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 90,453 thousand (corresponding liabilities are presented in Chapter 14., note 33).

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

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 14., note 33).

As at 31 December 2019 following securities (presented in the Group’s balance-sheet) were underlying Sell-buy-back transactions (PLN’000):

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

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.

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

* 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 31.12.2019 the Custody Department of Bank Millennium S.A. maintained 13,077 accounts in which Customers’ assets were kept with the total value of PLN 37.7 billion. Net revenue from the custody business for 2019 amounted to PLN 6.8 million (including PLN 1.9 million from Capital Group entities). The Custody Department serves as a depositary bank for 25 mutual funds including 21 of Millennium TFI S.A.

In 2012, the Group implemented a policy specifying the principles of remuneration for persons having a material impact on the risk profile of Bank Millennium Group, as amended, in accordance with the requirements described in Resolution of the Polish Financial Supervision Authority No. 258/2011, and then the Regulation of the Minister of Development and Finance of March 6, 2017 on the risk management system and the internal control system, remuneration policy and the detailed method of internal capital estimation in banks. In accordance with the policy, employees of the Group having a significant impact on the Group’s risk profile receive variable remuneration, part of which is paid in the form of financial instruments: the Bank’s phantom shares in 2016-2018; Bank Millennium own shares: for 2019. Commencing from 2019, by the decision of the General Meeting of Bank’s Shareholders of August 27, 2019, the Group introduced an incentive program to remuneration entitled persons previously identified as having a significant impact on the risk profile (Risk Taker). Under this framework, the Own Shares acquired by the Company will be, in accordance with the applicable Risk Taker’s remuneration policy, intended for free acquisition in the appropriate number by the indicated Risk Takers during the Program Term.

Profit and Loss Account for 2019 has been charged with the change in the value of the phantom shares assigned for the years 2016-2018, the provision created for phantom shares to be assigned for 2019 and the social insurance costs resulting from the above transactions.

At the balance sheet date, the Personnel Committee of the Supervisory Board has not taken a decision on the amount of variable remuneration for Group’s employees who are not members of the Management Board of the Bank for 2019. The estimated value of the Program for 2019 is
PLN 4 850 thousand.

At the publication date 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 2019.

PAYMENTS BASED ON THE FORMER EURO BANK SHARES

In the former Euro Bank, the „Remuneration Policy for Identified Persons” applied to employees having a significant impact on the risk profile. According to the aforementioned policy, employees of the bank covered by it, having a significant impact on the Bank’s risk profile, received variable remuneration, part of which was paid in the form of shares of the former Euro Bank. On the day Euro Bank was taken over by Bank Millennium, these shares ceased to exist. Therefore, by decision of the Supervisory Board, Bank Millennium adopted the rules for converting non-existent Euro Bank shares with a value of PLN 4,773,969 into Bank Millennium shares. Deferred part of variable remuneration in cash for payment in 2020: PLN 230,559.

FX mortgage loan portfolio

Regarding regulations on FX mortgage loans, which have been discussed in Poland during last 4 years, it was approved a Presidential Draft Bill of 2 August 2017 regarding changes in the Act on Support for Distressed Borrowers who Took Residential Loans. The finally accepted Bill does not include the creation of a Conversion Fund. On the other hand, it increased availability of the PLN 600 million worth Borrowers’ Support Fund originally created in 2015 and still waiting to be used for borrowers in need (both PLN and FX mortgages) and sets potential future contributions. The Bill came into force from 1 January 2020.

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.

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 in year 2018. 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 consisted 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 was 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 was PLN 67,492 thousand.

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.
2. 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.
3. 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.

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

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 in year 2018.

Events after the date for which financial statements were prepared

Group layoffs

On January 24, 2020, an agreement was concluded between the Bank and trade unions regarding group layoffs (as part of the restructuring process after merging with Euro Bank). The parties agreed that the group layoffs will cover 260 employees and will take place in the first quarter of 2020.

As the above negotiations started after the balance sheet date (i.e. after December 31, 2019), the costs associated with this process will be charged to the result of 2020 and according to current estimates will amount to approximately PLN 13.5 million.