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Załącznik nr: 2

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FINANCIAL HIGHLIGHTSfor reporting period ended:31.12.2017 31.12.2016 31.12.2017 31.12.2016
I Net interest income 5 276 897
4 770 372 1 243 173 1 090 196
II Net fee and commission income 2 013 126
1 914 720 474 268 437 580
III Operating profit 3 700 772
3 453 821 871 857 789 319
IV Profit before tax 3 335 221
3 122 054 785 738 713 498
V Net profit attributable to owners of BZ WBK S.A.

2 213 054
2 166 847 521 369 495 200
VI Total net cash flows (4 176 431)
(838 893) ( 983 917) (191 716)
VII Total assets 152 674 444
150 099 716 36 604 676 33 928 507
VIII Deposits from banks 2 783 083
2 561 281 667 262 578 951
IX Deposits from customers 111 481 135
112 522 457 26 728 316 25 434 552
X Total liabilities 129 330 815
129 081 240 31 007 892 29 177 495
XI Total equity 23 343 629
21 018 476 5 596 785 4 751 012
XII Non-controlling interests in equity 1 436 409
1 237 649 344 388 279 758
XIII Profit of the period attributable to non-contro lling interests 305 460 217 245 71 963 49 648
XIV Number of shares 99 333 481
99 234 534
XV Net book value per share in PLN/EUR 235,00 211,81 56,34 47,88
XVI Capital ratio 16,69% 15,05%
XVII Profit per share in PLN/EUR 22,29 21,84 5,25 4,99
XVIII Diluted earnings per share in PLN/EUR 22,25 21,80 5,24 4,98
XIX Declared or paid dividend per share in PLN/EUR* 5,40
- 1,27 -
Consolidated financial statement of Bank Zachodni WBK Group
PLN k
EUR k
* As of the date of publication of this report, the Management Board of Bank Zachodni WBK SA has not f inalised its analysis in
respect of recommendation on dividend payout for 20 17.On 17.05.2017 Annual General Meeting of Bank Zac hodni WBK S.A.


adopted a resolution on dividend payment. It was de cided to allocate PLN 535,866k from the Bank's undi vided net profit for 2014
and 2015 to dividend for shareholders. Dividend per share was PLN 5.40.
The following rates were applied to determine the k ey EUR amounts for selected financials:
· for balance sheet items – average NBP exchange rate as at 29.12.2017 EUR 1= 4,1709 PLN and as at 30.1 2.2016:
EUR 1 = PLN 4.4240
· for profit and loss items – as at 31.12.2017 - the rate is calculated as the average of NBP exchange r ates prevailing as at
the last day of each month in 2017: EUR 1= 4,2447; as at 31.12.2016 - the rate is calculated as the average of NBP
exchange rates prevailing as at the last day of eac h month in 2016: EUR 1 = PLN 4.3757
As at 31.12.2017, FX denominated balance sheet posi tions were converted into PLN in line with the NBP FX table no.


251/A/NBP/2017 dd. 29.12.2017.



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Załącznik nr: 3

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ANNUAL REPORT 2017
OF BANK ZACHODNI WBK GROUP
2017







Dear All,
In 2017, Bank Zachodni WBK Group consistently pursued its development strategy, strengthening its position among the top
Polish banks.

Our performance demonstrates that we h ave adopted the right strategy.
Once again, we have set new standards for building r elationships with customers and creating innovative bank products. We
are actively shaping the Polish banking sector by s upporting consolidation processes evidenced by the planned acquisition of
the demerged business of Deutsche Bank Polska to th e structures of Bank Zachodni WBK Group.

This transaction will
strengthen our current position in the domestic ban king market and provide new development opportuniti es for
Bank Zachodni WBK Group in the upcoming years, amon g others in the private banking and business banking areas.
The economic revival on Polish and European markets has also been a positive stimulus for the Group’s growth.


At the same time, the banking sector faced legal cha llenges resulting from the actions taken by legislative and regulatory
bodies both in the European Union and in Poland for cing financial institutions to promptly adjust their business models to the
new requirements.
Macroeconomic environment - we are on the rise
2017 positively surprised us with the pace of econo mic growth.

Already at the beginning of the year, the GDP growth rate exceeded
4% yoy to go beyond 5% yoy at the year-end with the average growth of 4.6% over the year.
Consumption was the driving force behind the econom ic growth (first fueled by 500+ programme and then by growing wages and
lower households savings) along with exceptionally favourable external environment (in particular sound revival in the Euro zone),
which boosted Polish exports. The long-awaited rebo und in investment started to materialise in the H2 2017 to gain momentum in
the fourth quarter.


Unemployment went down to a record low level and th e shortage of labour force has become a serious problem for Polish
companies and one of the key obstacles for business growth.

Fortunately, the employers were relieved by the labour migration,
mainly from Ukraine. The domestic labour market was not significantly disturbed even by the lowering of retirement age introduced
in October 2017.

However, a salary pressure was obs erved and it seems quite likely that the remuneration growth will accelerate in
2018 as the imbalance between the labour demand and supply will not decline.
Banking sector ready for new challenges
In 2017, the sector consolidation process observed over the last few years has accelerated with Bank Zachodni WBK Group as its
active participant.

We are convinced that thanks to the acquisition of demerged part of Deutsche Bank Polska business, based on
experience and skills presented by the teams in tho se two banks, we will provide customers with a conv enient and modern access
to services, a branch network covering the entire c ountry and even better, more innovative products an d financial solutions.


Banks are also consistently investing in digitisati on which is key to sustain profitability in the upc oming years. The Polish banking
sector is the most mature in this respect in the Ce ntral Europe, both as regards the online and mobile channels.
The issue of mortgage fx loans continues to be a si gnificant challenge for the banking sector.

We believe that the adopted solutions
will take into account both the interests of the cu stomers and the stability of the banking sector and , in consequence, of the Polish
economy.


Bank As You Want It
Our Customers and the relationship with them have a lways been in the centre of development strategy and business transformation
of Bank Zachodni WBK Group. Therefore, in 2017, we implemented a new strategy based on brand promise “ Bank As You Want It”.
We have focused on a progressive growth of customer satisfaction and ensuring top service standards at each touchpoint with the
Bank by providing solutions fully tailored to their individual needs.




The first products designed in line with the new concept of “Bank As You Want It” is the “Account As I Want It” which comes with a
customised card to enable simple and quick personal isation of selected functions. This is an innovative and pioneering solution in
the entire Polish banking sector.

Cryptocurrency dot com bubble


The digital transformation is an important element of those changes. BZ WBK Group is one of the leade rs in this area. We invest in
new technologies enhancing simple, intuitive and in tegrated access to services and interactive relationship with the customer.
We were the first in the Polish banking sector to introduce the video identification service based on biometrics and digital signature in
the cloud.

The fundamental initiatives encompass al so digitalisation and robotisaton of processes, design of an optimal model of
distribution channels, further growth of CRM, Big D ata analysis, and development of Internet and mobil e channels, including
biometric authentication and authorisation technologies.

The digital transformation covered retail, SME and corporate banking.
We have completed work on a distribution strategy d efining new roles for digital channels and branches, new branch design and
layout, new profile of an advisor and optimal network coverage.

We concentrate on leveraging the poten tial of digital channels while
the primary role of branches will be to develop rel ationships with customers, educate them in using di gital channels and sell
products to customer preferring personal contacts with advisors.
Through the “Bank As You Want It” strategy we want to be not only the best bank for the customers but also an innovator whose
primary goal is to increase customers satisfaction with services and their loyalty as well as business partners of
Bank Zachodni WBK Group.


Business effectiveness
Our financial performance confirms the effectiveness of our development strategy.

In 2017, the gross p rofit of
Bank Zachodni WBK Group totalled PLN 3,3bn, the un derlying profit increased and the value of our assets exceeded PLN 152bn.
We enjoy a strong capital position, complaint with regulatory requirements. We have continued strict c ontrol over costs whose level
has not changed yoy, despite investments in the fut ure and development of the Group, and the C/I ratio for 2017 was 43.4%.


In 2017, we decided to pay out a dividend of PLN 5. 4 per share from retained profit. We successfully conducted a subordinated debt
issue worth USD 150m, paid out in EUR, in the form of green bonds.

That was the first operation of such kind performed by a Polish
bank.
Positive performance is accompanied by growth in ou r customers’ trust and satisfaction. They have recognised and appreciated the
Group’s digital transformation policy. This is evid enced by a 4,5% growth yoy in the number of active users in digital channel.
In 2017, customers made over 23.5m transactions usi ng the mobile banking channel which represents a 10.2m growth yoy
(+76%). The number of credit products sold via remo te channels (mobile, Internet, contact centre) surged by 36%.


As for the SME segment , we consistently strive to become first choice ban k for Polish entrepreneurs. The number of customers is
growing in response to simplified access to financi al solutions and business support.
The Business and Corporate Banking Division persistently increased its market share in 2017, a nd the lending activity and new
sales were growing steadily.

This is the result of a new strategy introduced at the beginning of 2017 with the emphasis on
customers acquisition and activation by ensuring fl exible approach to their needs. We continued the Ex port Development Programme
and initiated, leveraging the Santander Group poten tial, the International Businesses Corridors Programme to facilitate customers’
access to new business partners on international ma rkets. We also gradually developed the sectoral approach which is a unique
offer on the Polish market, giving us a better unde rstanding with a view to tailoring our products to business needs.


2017 was also successful for the Global Corporate Banking Division We played a leading role in numerous transactions f or the
main sectors of the Polish economy, such as the big gest private placement transaction in the history of Warsaw Stock Exchange for
a top telecommunication company. We also actively s upported our domestic and international customers by financing their
development and acquisition deals, hedging fx and i nterest rate risk, and providing advisory services in capital and M&A
transactions.


Santander Consumer Bank Group, a part of Bank Zacho dni WBK Group, also generated excellent results - its net profit was higher by
36% than a year ago and the sale of products financ ing the purchase of passenger cars increased consid erably.




The Bank’s subsidiaries are also in good condition. BZ WBK Leasing financed assets totalling PLN 4.2bn , of which financing
machines and equipment accounted for nearly PLN 2bn , i.e.

18,8% up on last year. At the same time, the number of customers
increased by 14%. BZ WBK Faktor was ranked second o n the factoring market with a 12.6% share. Its turnover went up by 23% yoy
while the loan portfolio increased by 25% yoy.

BZ W BK TFI, thanks to excellent management and sales pe rformance, assets under
management rose in 2017 by PLN 2.6bn to PLN 16bn wh ich translated into a growth in the retail market share to 10.38%.
In 2017, changes took place in the composition of t he Bank’s Management Board. Dorota Strojkowska, in charge of the Business
Partnership Division, Arkadiusz Przybył, in charge of the Retail Banking Division and Maciej Reluga, t he head of Financial
Management Division, joined the Board.

Eamonn Crowl ey resigned from his post.
In Santander Consumer Bank, Piotr Kończal took up t he position of the President of the Management Board.
Corporate social responsibility
Responsibility is one of the foundations of Bank Za chodni WBK Group.

This is why we initiate and activ ely participate in CSR
projects. In 2017, similarly as in the previous yea rs, we focused on activities that are important for large communities and that make
a lasting change in the society. By this, I mean in vestments in science and education, supporting loca l communities, promoting
equal opportunities and social inclusion and popula rizing road safety standards. The scale of these activities is constantly growing,
reflecting our belief in the synergy of business an d investments that stimulate development of a civic society.


In 2017, Bank Zachodni WBK Group engaged in the fol lowing social projects: Jak Jeździsz (How's Your Driving),
Santander Orchestra, Santander Universidades, Obsłu ga bez barier (Barrier-Free Banking), Bank Zachodni WBK Foundation
and volunteering campaigns under which 580 of Bank’ s employees made a lasting difference.


Our commitment to the Customers
It was our Customers’ trust in our strategy of bein g the best bank for them that enabled Bank Zachodni WBK Group to generate
satisfactory results in 2017. It was also, and I ca nnot stress it enough, a reflection of skills, experience and engagement of all
Group’s employees that is visible in their work, ea ch and every single day.

Thanks to all this, Bank Z achodni WBK, as a leading
company of our Group, was awarded the “Best Bank in Poland” award for third time in a row in a prestigious competition
“Euromoney Awards for Excellence”. Bank Zachodni WB K was also awarded for its outstanding financial results, business efficiency
and successful implementation of innovations and ne w technologies to foster customer satisfaction and add value.

The Bank also
received the “Best Bank in Poland for SME” award as the best bank in Poland for SMEs. Once again, we were ranked first in
“Financing Provider of the Year” category and we re ceived Eurobuild Awards title for the best real estate bank in CEE.


We perceive all the awards as a valuable feedback b ut also a commitment to continue our hard work on i mproving the quality of our
services and customer satisfaction.
Michał Gajewski
President of Bank Zachodni WBK SA Management Board



FINANCIAL HIGHLIGHTSfor reporting period ended:31.12.2017 31.12.2016 31.12.2017 31.12.2016
I Net interest income 5 276 897
4 770 372 1 243 173 1 090 196
II Net fee and commission income 2 013 126
1 914 720 474 268 437 580
III Operating profit 3 700 772
3 453 821 871 857 789 319
IV Profit before tax 3 335 221
3 122 054 785 738 713 498
V Net profit attributable to owners of BZ WBK S.A.

2 213 054
2 166 847 521 369 495 200
VI Total net cash flows (4 176 431)
(838 893) ( 983 917) (191 716)
VII Total assets 152 674 444
150 099 716 36 604 676 33 928 507
VIII Deposits from banks 2 783 083
2 561 281 667 262 578 951
IX Deposits from customers 111 481 135
112 522 457 26 728 316 25 434 552
X Total liabilities 129 330 815
129 081 240 31 007 892 29 177 495
XI Total equity 23 343 629
21 018 476 5 596 785 4 751 012
XII Non-controlling interests in equity 1 436 409
1 237 649 344 388 279 758
XIII Profit of the period attributable to non-contro lling interests 305 460 217 245 71 963 49 648
XIV Number of shares 99 333 481
99 234 534
XV Net book value per share in PLN/EUR 235,00 211,81 56,34 47,88
XVI Capital ratio 16,69% 15,05%
XVII Profit per share in PLN/EUR 22,29 21,84 5,25 4,99
XVIII Diluted earnings per share in PLN/EUR 22,25 21,80 5,24 4,98
XIX Declared or paid dividend per share in PLN/EUR* 5,40
- 1,27 -
Consolidated financial statement of Bank Zachodni WBK Group
PLN k
EUR k
* As of the date of publication of this report, the Management Board of Bank Zachodni WBK SA has not f inalised its analysis in
respect of recommendation on dividend payout for 20 17.On 17.05.2017 Annual General Meeting of Bank Zac hodni WBK S.A.


adopted a resolution on dividend payment. It was de cided to allocate PLN 535,866k from the Bank's undi vided net profit for 2014
and 2015 to dividend for shareholders. Dividend per share was PLN 5.40.
The following rates were applied to determine the k ey EUR amounts for selected financials:
· for balance sheet items – average NBP exchange rate as at 29.12.2017 EUR 1= 4,1709 PLN and as at 30.1 2.2016:
EUR 1 = PLN 4.4240
· for profit and loss items – as at 31.12.2017 - the rate is calculated as the average of NBP exchange r ates prevailing as at
the last day of each month in 2017: EUR 1= 4,2447; as at 31.12.2016 - the rate is calculated as the average of NBP
exchange rates prevailing as at the last day of eac h month in 2016: EUR 1 = PLN 4.3757
As at 31.12.2017, FX denominated balance sheet posi tions were converted into PLN in line with the NBP FX table no.


251/A/NBP/2017 dd. 29.12.2017.




CONSOLIDATED FINANCIAL STATEMENT OF BANK ZACHODNI WBK GROUP
FOR
2017
Dear All,
2017


2
Consolidated financial statement of BZ WBK Group for 2017
Table of Contents
Consolidated income statement ..................................................................................................................................................

4
Consolidated statement of comprehensive income .... ..................................................................................................................

4
Consolidated statement of financial position ...... ......................................................................................................................... 5
Consolidated statement of changes in equity ....... .......................................................................................................................

6
Consolidated statement of cash flows .............. ........................................................................................................................... 7
Additional notes to consolidated financial statement ..................................................................................................... .............. 8
1. General information about issuer .................. .......................................................................................................................

8
2. Basis of preparation of consolidated financial stat ement ..................................................................................................... 10
3. Operating Segments reporting ...................... ..................................................................................................................... 25
4.

Risk management ................................... .......................................................................................................................... 47
5. Capital management ................................ .........................................................................................................................

68
6. Net interest income ............................... ............................................................................................................................ 71
7. Net fee and commission income .....................

...................................................................................................................

72
8. Dividend income ................................... ............................................................................................................................

72
9. Net trading income and revaluation ................ ....................................................................................................................

73
10. Gains (losses) from other financial securities .... .................................................................................................................

73
11. Other operating income ............................ .........................................................................................................................

73
12. Impairment losses on loans and advances ........... .............................................................................................................. 74
13. Employee costs .................................... ............................................................................................................................

74
14. General and administrative expenses ............... .................................................................................................................. 74
15. Other operating expenses ..........................

........................................................................................................................ 75
16. Corporate income tax .............................. .......................................................................................................................... 75
17. Earnings per share ................................ ............................................................................................................................

76
18. Cash and balances with central banks .............. ................................................................................................................. 76
19. Loans and advances to banks ....................... ....................................................................................................................

76
20. Financial assets and liabilities held for trading . ...................................................................................................................

77
21. Hedging derivatives ............................... ............................................................................................................................ 78
22. Loans and advances to customers ...................

................................................................................................................. 79
23. Financial assets available for sale ............... .......................................................................................................................

80
24.

Investments in associates ......................... ........................................................................................................................ 81
25. Intangible assets ................................. ..............................................................................................................................

83
26. Goodwill .......................................... ................................................................................................................................. 84
27. Property, plant and equipment ..................... ......................................................................................................................

86
28. Net deferred tax assets ........................... ........................................................................................................................... 88
29. Assets classified as held for sale ................ ....................................................................................................................... 89
30. Other assets ...................................... ...............................................................................................................................

89
31. Deposits from banks ............................... .......................................................................................................................... 89
32. Deposits from customers ........................... .......................................................................................................................

Cto utomated equities trading platform

90
33. Subordinated liabilities .......................... ............................................................................................................................ 91
34. Debt securities in issue ..........................

........................................................................................................................... 91
35. Provisions ........................................ ................................................................................................................................ 92
36. Other liabilities ................................. .................................................................................................................................

93
37. Share capital ..................................... ................................................................................................................................ 94
38. Other reserve capital ............................. ............................................................................................................................

95
39. Revaluation reserve ............................... ............................................................................................................................ 96
40. Non - controlling interests .......................

.......................................................................................................................... 97
41. Hedge accounting .................................. ........................................................................................................................... 97
42. Sell-buy-back and buy-sell-back transactions ...... ..............................................................................................................

99
43. Fair value ........................................ ................................................................................................................................ 100
44. Contingent liabilities ............................ ............................................................................................................................

102
45. Assets and liabilities pledged as collateral ...... .................................................................................................................. 103
46. Finance and operating leases ...................... ..................................................................................................................... 103
47. Consolidated statement of cash flows- additional in formation ...........................................................................................

105
48. Related parties ................................... .............................................................................................................................

105
49. Acquisitions and disposals of investments in subsid iaries and associates .........................................................................

107
50. Controlling stake at the companies PSA Finance Pols ka sp. z o.o. and indirectly, PSA Consumer Finance Polska sp. z o.o. . 109



3
Consolidated financial statement of BZ WBK Group fo r 2017
51. Employee benefits ........................................................................................................................................................... 111
52.

Share based incentive scheme ...................... ..................................................................................................................

112
53. Dividend per share ................................ .......................................................................................................................... 114
54. Events which occurred subsequently to the end of th e period ...........................................................................................

114




4
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
Consolidated income statement
for reporting period: 01.01.2017
31.12.2017
01.01.2016
31.12.2016
Interest income 6 529 307
6 060 920
Interest expenses (1 252 410)
(1 290 548)
Net interest income Note 65 276 897
4 770 372
Fee and commission income 2 526 814
2 388 464
Fee and commission expenses ( 513 688)
( 473 744)
Net fee and commission income Note 72 013 126
1 914 720
Dividend income Note 8 76 816 96 582
Net gains on subordinated entities Note 49 3 757 100
Net trading income and revaluation Note 9 194 974 280 820
Gains (losses) from other financial securities Note 10 47 502 402 774
Other operating income Note 11 150 587 140 764
Impairment losses on loans and advances Note 12 ( 690 473) ( 784 590)
Operating expenses incl.: (3 372 414)
(3 367 721)
Bank's staff, operating expenses and management cos ts Notes 13, 14 (2 939 432) (2 935 229)
Depreciation/amortisation ( 318 933)
( 277 220)
Other operating expenses Note 15 ( 114 049) ( 155 272)
Operating profit 3 700 772
3 453 821
Share in net profits of entities accounted for by t he equity method 58 264
55 439
Tax on financial institutions ( 423 815)
( 387 206)
Profit before tax 3 335 221 3 122 054
Corporate income tax Note 16 ( 816 707) ( 737 962)
Consolidated profit for the period 2 518 514
2 384 092
of which: -
attributable to owners of BZ WBK S.A.

Cto utomated equities trading platform

2 213 054
2 166 847
attributable to non-controlling interests 305 460
217 245
Net earnings per share (PLN/share) Note 17
Basic earnings per share 22,29 21,84
Diluted earnings per share 22,25 21,80
Consolidated statement of comprehensive income
for reporting period: 01.01.2017
31.12.2017
01.01.2016
31.12.2016
Consolidated profit for the period2 518 514
2 384 092
Other comprehensive income which can be transferred to the profit and loss account: 452 578 (510 064)
Available-for sale financial assets valuation, gros s 533 774
(738 327)
Deferred tax (101 417)
140 282
Cash flow hedges valuation, gross 24 964
108 618
Deferred tax (4 743)
(20 637)
Other comprehensive income which can't be transferr ed to the profit and loss account (7 622) 5 556
Provision for retirement allowances – actuarial gai ns/losses, gross (9 410) 6 859
Deferred tax 1 788
(1 303)
Other comprehensive income for the period, net of i ncome tax 444 956
(504 508)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 2 963 470
1 879 584
Attributable to:
owners of BZ WBK S.A.

2 651 427
1 666 087
non-controlling interests
312 043 213 497
Notes presented on pages 8 – 114 constitute an inte gral part of this Financial Statement.




5
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
Consolidated statement of financial position
as at: 31.12.2017
31.12.2016
ASSETS
Cash and balances with central banks Note 18 4 146 222 4 775 660
Loans and advances to banks Note 19 2 136 474 3 513 278
Financial assets held for trading Note 20 3 416 108 3 180 985
Hedging derivatives Note 21 218 061 67 645
Loans and advances to customers Note 22 107 839 897 103 068 538
Financial assets available for sale Note 23 28 415 812 29 307 878
Investments in associates Note 24 889 372 871 491
Intangible assets Note 25 490 327 486 762
Goodwill Note 26 1 712 056 1 688 516
Property, plant and equipment Note 27 930 717 878 298
Net deferred tax assets Note 28 1 414 227 1 534 322
Assets classified as held for sale Note 29 103 629
Other assets Note 30 1 065 068 725 714
Total assets 152 674 444
150 099 716
LIABILITIES AND EQUITY
Deposits from banks Note 31 2 783 083 2 561 281
Hedging derivatives Note 21 578 798 2 023 344
Financial liabilities held for trading Note 20 1 237 704 1 809 060
Deposits from customers Note 32 111 481 135 112 522 457
Sell-buy-back transactions Note 42 2 650 846 1 632 613
Subordinated liabilities Note 33 1 488 602 440 457
Debt securities in issue Note 34 5 895 814 5 529 187
Current income tax liabilities 192 925
84 151
Provisions Note 35 153 134 130 128
Other liabilities Note 36 2 868 774 2 348 562
Total liabilities 129 330 815
129 081 240
Equity
Equity attributable to owners of BZ WBK 21 907 220
19 780 827
Share capital Note 37 993 335 992 345
Other reserve capital Note 38 16 920 129 15 791 555
Revaluation reserve Note 39 714 466 276 093
Retained earnings 1 066 236
553 987
Profit for the current period 2 213 054
2 166 847
Non-controlling interests in equity Note 401 436 409
1 237 649
Total equity 23 343 629
21 018 476
Total liabilities and equity 152 674 444 150 099 716
Notes presented on pages 8 – 114 constitute an inte gral part of this Financial Statement.





6
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
Consolidated statement of changes in equity
Consolidated statement of changes in equity Share ca pital
Other reserve
capital
Revaluation
reserve
Retained
earnings and
profit for the
period Total
Non-controlling
interests in
equity Total equity
Note 37 38 39 40
Opening balance as at 31.12.2016 992 345
15 791 555 276 093 2 720 834 19 780 827 1 237 649 21 018 476
Total comprehensive income -
- 438 373 2 213 054 2 651 427 312 043 2 963 470
Consolidated profit for the period -
- - 2 213 054 2 213 054 305 460 2 518 514
Other comprehensive income -
- 438 373 - 438 373 6 583 444 956
Issue of shares 990
990
990
Distributions of profits and losses -
1 123 497 - (1 123 497) - - -
Share scheme charge ( 2 512)
( 2 512)
- ( 2 512)
Dividends -
- - ( 535 866) ( 535 866) ( 110 962) ( 646 828)
Equity adjustment due to merger and liquidation of subsidiaries and
controlling stake at the subsidiaries
-
7 589 - 4 765 12 354 ( 2 321) 10 033
As at 31.12.2017 993 335 16 920 129 714 466 3 279 290 21 907 220 1 436 409 23 343 629
Equity attributable to equity holders of BZ WBK SA
The revaluation reserve of PLN 714,466k comprises v aluation of debt securities of PLN 245,104k, equity shares of PLN 557,499k, cash flow hedges
of PLN (88,574)k and the provision for retirement a llowances with cumulative actuarial gains of PLN 43 7k.


Consolidated statement of changes in equity Share ca pital
Other reserve
capital
Revaluation
reserve
Retained
earnings and
profit for the
period Total
Non-controlling
interests in
equity Total equity
Note 37
38 39 40
Opening balance as at 31.12.2015 992 345
14 685 919 776 914 2 936 851 19 392 029 1 176 101 20 568 130
Total comprehensive income -
- ( 500 760) 2 166 847 1 666 087 213 497 1 879 584
Consolidated profit for the period -
- - 2 166 847 2 166 847 217 245 2 384 092
Other comprehensive income -
- ( 500 760) - ( 500 760) ( 3 748) ( 504 508)
Distributions of profits and losses -
1 177 730 - (1 177 730) - - -
Share scheme charge -
16 213 - - 16 213 - 16 213
Dividends -
- - (1 290 049) (1 290 049) ( 226 025) (1 516 074)
Equity from acquisition of controlling interest in PSA Finanse sp.

z o.o. and
PSA Consumer Finanse sp.

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z o.o.
-
- - - - 74 076 74 076
Settlement on account of merger of subsidiaries and other - ( 88 307) ( 61) 84 915 ( 3 453) - ( 3 453)
As at 31.12.2016 992 345 15 791 555 276 093 2 720 834 19 780 827 1 237 649 21 018 476
Equity attributable to equity holders of BZ WBK SA
The revaluation reserve of PLN 276,093k comprises v aluation of debt securities of PLN (145,039)k, equity shares of PLN 521,877k, cash flow
hedges of PLN (108,768)k and the provision for reti rement allowances with cumulative actuarial gains o f PLN 8,023k.


Notes presented on pages 8 – 114 constitute an inte gral part of this Financial Statement.

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7
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
Consolidated statement of cash flows
for the period01.01.2017-
31.12.2017 01.01.2016-
31.12.2016
Profit before tax 3 335 221
3 122 054
Total adjustments:
Share in net profits of entities accounted for by t he equity method ( 58 264)
( 55 439)
Depreciation/amortisation 318 933
277 220
Impairment losses 8 765
22 077
Profit from investing activities ( 62 297) ( 417 631)
3 542 358
2 948 281
Changes:
Provisions 23 006
( 2 442)
Trading portfolio financial instruments (1 506 362)
957 785
Hedging derivatives (1 594 962)
40 671
Loans and advances to banks ( 95)
4 589
Loans and advances to customers (4 771 359)
(8 154 654)
Deposits from banks 110 032
164 897
Deposits from customers ( 781 067)
10 336 381
Buy-sell/ Sell-buy-back transactions 1 018 233
(3 608 458)
Other assets and liabilities 277 134 683 114
(7 225 440)
421 883
Interest accrued excluded from operating activities ( 414 692)
( 436 651)
Dividend ( 76 270)
( 96 051)
Paid income tax ( 693 049)
(1 016 330)
Net cash flows from operating activities (4 867 093)
1 821 132
Inflows 4 461 677
6 069 162
Sale of subordinated entities -
100
Sale/maturity of financial assets available for sal e 3 673 594
5 327 990
Sale of intangible assets and property, plant and e quipment 45 342
26 800
Dividend received 76 270
95 903
Interest received 666 471
618 369
Outflows (4 206 618)
(10 406 768)
Purchase of subordinated entities net of cash acqui red -
( 61 197)
Purchase of financial assets available for sale (3 792 409)
(9 991 588)
Purchase of intangible assets and property, plant a nd equipment ( 414 209)
( 353 983)
Net cash flows from investing activities 255 059
(4 337 606)
Inflows 4 983 948
6 037 678
Debt securities in issue 3 562 288
2 762 880
Proceeds from issuing/shares 990
-
Drawing of loans 1 420 670
3 274 798
Outflows (4 548 345)
(4 360 097)
Debt securities buy out (2 095 000)
(1 554 700)
Repayment of loans (1 568 408)
(1 108 976)
Dividends and other payments to shareholders ( 646 828)
(1 516 074)
Interest paid ( 238 109)
( 180 347)
Net cash flows from financing activities 435 603
1 677 581
Total net cash flows (4 176 431)
( 838 893)
Cash and cash equivalents at the beginning of the a ccounting period 11 838 799 12 677 692
Cash and cash equivalents at the end of the account ing period 7 662 368 11 838 799
Cash and cash equivalents are presented in Note 47.


Information regarding liabilities arising from fina ncial activities in loans received, subordinated li abilities and the issue of debt
securities were presented respectively in notes 31- 34.
Notes presented on pages 8 – 114 constitute an inte gral part of this Financial Statement.




8
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
Additional notes to consolidated financial statemen t
1.

General information about issuer
Bank Zachodni WBK S.A. is a bank seated in Poland, 50-950 Wrocław, Rynek 9/11, TIN 896-000-56-73, Nati onal Official Business
Register number (REGON) 930041341, registered in th e District Court for Wrocław-Fabryczna, VI Economic Unit of the National
Court Registry under 0000008723 number.


Consolidated financial statements of Bank Zachodni WBK S.A. Capital Group (further: BZ WBK Group) incl udes Bank’s Zachodni
WBK S.A. stand-alone financial information as well as information from its subsidiaries (all together called Group) and shares in
associated entities.
The immediate and ultimate parent entity of Bank Za chodni WBK S.A. is Banco Santander S.A., having its registered office in
Santander, Spain.


BZ WBK Group offers a wide range of banking service s for individual and business customers and operates in domestic and
interbank foreign markets. Additionally, it offers also the following services:
· intermediation in trading securities,
· leasing,
· factoring,
· asset/ fund management,
· insurance services,
· trading in stock and shares of commercial companies ,
· brokerage activity.






9
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
BZ WBK Group consists of the following entities:
Subsidiaries:
SubsidiariesRegistered
office % of votes on AGM
31.12.2017
% of votes on AGM
31.12.2016
1.

BZ WBK Finanse sp. z o.o. Poznań 100.00 100.00
2. BZ WBK Faktor sp. z o.o. Warszawa 100% of AGM votes are held by
BZ WBK Finanse sp. z o.o. 100% of AGM votes are held by
BZ WBK Finanse Sp. z o.o.
3.

BZ WBK Leasing S.A.
1) Poznań 100% of AGM votes are held by
BZ WBK Finanse sp. z o.o. 100% of AGM votes are held by
BZ WBK Finanse Sp. z o.o.
4. BZ WBK Lease S.A.
1) Warszawa - 100% of AGM votes are held by
BZ WBK Finanse Sp. z o.o.
5. BZ WBK Inwestycje sp. z o.o. Poznań 100.00 100.00
6. Giełdokracja sp. z o.o. w likwidacji Poznań 100.00 1 00.00
7. BZ WBK F24 S.A. / BZ WBK Nieruchomości
S.A.
2) Poznań
100% of AGM votes are held by
BZ WBK Finanse sp.

z o.o. 99.99
8. BZ WBK Towarzystwo Funduszy
Inwestycyjnych S.A.
3) Poznań 50.00 50.00
9. Santander Consumer Bank S.A. Wrocław 60.00 60.00
10. Santander Consumer Finanse sp. z o.o. Wrocław 100% of AGM votes are held by
Santander Consumer Bank S.A.

100% of AGM votes are held by
Santander Consumer Bank S.A.
11. PSA Finance Polska sp. z o.o.
4) Warszawa 50% of AGM votes are held by
Santander Consumer Bank S.A. and 50% of AGM votes are held by
Banque PSA Finance S.A.


50% of AGM votes are held by
Santander Consumer Bank S.A. and 50% of AGM votes are held by
Banque PSA Finance S.A.


12. PSA Consumer Finance Polska sp. z o.o. 4) Warszawa 100% of AGM votes are held by PSA
Finance Polska sp. z.o.o. 100% of AGM votes are held by PSA
Finance Polska Sp. z.o.o.
13. Santander Consumer Multirent sp. z o.o. Wrocław 100% of AGM votes are held by
Santander Consumer Bank S.A.

100% of AGM votes are held by
Santander Consumer Bank S.A.
14. AKB Marketing Services Sp. z o.o.
5) Poznań -100% of AGM votes are held by
Santander Consumer Bank S.A.
15.

S.C. Poland Consumer 15-1 sp.zo.o
. 6) Warszawa subsidiary of Santander Consumer Bank S.A.
subsidiary of Santander Consumer
Bank S.A.
16. S.C. Poland Consumer 16-1 sp.zo.o
. 6) Warszawa subsidiary of Santander Consumer Bank S.A.
subsidiary of Santander Consumer Bank
S.A.
111) Details about the merger of BZ WBK Leasing S.A. and
BZ WBK Lease S.A. are provided in Note 49.

Financial Times , 1994, UK, English

2) On 18.10.2017, BZ WBK Nieruchomości S.A. with its r egistered office in Zakrzewo changed name to BZ WBK F24 SPÓŁKA AKCYJNA with its registered office in Poznań. On
24.11.2017, BZ WBK S.A. made contribution in kind o f BZWBK F24 S.A. (formerly BZ WBK Nieruchomości S.A .) shares to BZWBK Finanse sp.

z o.o. to cover the acquisition of
BZWBK Finanse sp. z o.o. shares by BZWBK S.A. On 12 .01.2018. in the Nation Court Register was registered increase of share capital BZWBK Finanse sp. z o .o to PLN 1,630k.
Share capital was fully paid.
3) As at 30.09.2017, Bank Zachodni WBK was a co-owner of BZ WBK Towarzystwo Funduszy Inwestycyjnych S.A., together with Banco Santander S.A. Both owners are
members of Santander Group and each holds an equal stake of 50% in the company's share capital.

Bank Zachodni WBK exercises control over BZ WBK Towarzyst wo Funduszy
Inwestycyjnych S.A. Consequently, the company is tre ated as a subsidiary.
4)
Details about the controlling stake at the companie s PSA Finance Polska sp.

Not enough money forex

z o.o. and indirectly, PSA Consumer Finance Polska sp. z o.o. are provided i n Note 2 and 50. 5) Details about the liquidation of AKB Marketing Services sp. z o.o. in liquidation are provided in Note 49. 6) SC Poland Consumer 16-1 sp. z o.o. set up for the p urpose of securitisation of a part of the loan portfolio; its shareholder is polish legal entity who has no ties with the Group;
the company is controlled by Santander Consumer Ban k, in accordance with the control criteria set out in IFRS 10.7.






10
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
Associates:
AssociatesRegistered
office % of votes on AGM
31.12.2017
% of votes on AGM
31.12.2016
1.POLFUND - Fundusz Poręczeń Kredytowych S.A. Szczecin 50.00 50.00
2.
BZ WBK - Aviva Towarzystwo Ubezpieczeń
Ogólnych S.A. Poznań 49.00 49.00
3.BZ WBK - Aviva Towarzystwo Ubezpieczeń na
Życie S.A.

Poznań 49.00 49.00
2. Basis of preparation of consolidated financial statem ent
2.1. Statement of compliance
This annual consolidated financial statement of BZ WBK Group was prepared in accordance with the Inter national Financial Reporting
Standards (IFRS) adopted by the European Union, whi ch are applied on a consistent basis, as at 31 December 2017 and, in the case
of matters not governed by the above Standards, in accordance with the provisions of the Accounting Ac t of 29 September 1994
(consolidated text: Journal of Law of 22 November 2 017, item 2342, as amended) and related implementin g acts as well as the
requirements imposed on issuers whose securities ar e admitted to trading on regulated markets or issuers who have applied to have
securities admitted to trading on regulated markets outlined in Act dated 29 July 2005 on Public Offer ing, on Conditions for the
Introduction of Financial Instruments to the Organi zed Trading System and on Public Companies.


These consolidated financial statements have been a pproved for publication by the Bank’s Zachodni WBK S.A. Management Board
on 12 February 2018.




11
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
2.2.

New standards and interpretations or changes t o existing standards or interpretations which can
be applicable to BZ WBK Group and are not yet effec tive or have neither been implemented earlier
IFRSNature of changes Effective from Influence on BZ WBK Group
IFRIC 22 Foreign Currency
Transactions and Advance
Consideration *IFRIC Interpretation 22 clarify the date of the transaction
for the purpose of determining the
exchange rate to use on initial recognition of the related as set, expense or income when an
entity has received or paid advance consideration in a forei gn currency.

The Interpretation
relates to the situation when the transaction is in foreign c urrency and the entity pays or
receives consideration in advance in a foreign currency bef ore the recognition of the related
asset, expense or income.

1 January 2018
The amendment will not
have a significant impact on financial statements.
IFRS 9 Financial Instruments The changes refer to the following areas:
• Classification and measurement – introduction of three cl
assification categories for debt
instruments, i.e. measured at: amortised cost, fair value t hrough other comprehensive
income and fair value through profit or loss.

Changes were ma de in the measurement of
equity instruments by limiting the possibility of m easurement at historical cost;
• Expected credit losses – introduction of a new model for rec ognition of impairment
(ECL): impairment charge is required to be measured as lifet ime expected credit losses
rather than 12-month expected credit losses;
• Hedge effectiveness testing and eligibility for hedge acc ounting – replacement of the
precise effectiveness range (80-125%) with a requirement t hat there is an economic
relationship between the hedged item and the hedging instru ment and that the hedge ratio is
the same as the one used for risk management purposes.

Item Preview

Ineffe ctive hedges continue to be
taken to a profit and loss account; • Hedged items – new requirements allow appointment of new he dged items in relation to
certain economically viable hedging strategies, which, to date, were not eligible under IAS
39;
• Hedging instruments – relaxation of requirements pertain ing to certain hedging
instruments listed in IAS 39.

The standard allow recognitio n of the time value of options
purchased and implementing non-derivative financial instruments as hedging instruments;
• Recognition of change in the fair value of financial liabil ity arising from changes in the
liability’s credit risk in other comprehensive inco me (in principle).1 January 2018
IFRS 9 implementation is
described below.
Amendment to IFRS 9 Financial
Instruments Prepayment right with
negative compensation * Amendment to IFRS 9 is effective for annual periods starting
from 1 January 2019 or later
with a possibility of earlier application.

As a result of ame ndment to IFRS 9, companies will
be able to measure pre-payable financial assets with negati ve compensation at amortised
cost or at fair value through other comprehensive income if a specified condition is met,
instead of at fair value a valuation at fair value through profit or loss.

1 January 2019BZ WBK Group is currently
in the process of analysing the amendment of the Standard and the
assessment of impact of the amendment
IFRS 15 - Revenue from Contracts
with Customers Changes relate to the following areas:
• Transfer of control – recognition of revenue only when the c
ustomer gains control over a
good or service. The amendment makes the definition of the tr ansfer of control more
precise.

Introducing regulations allowing to define the le gitimacy of recognising the revenue
over time or at a point in time;
• Variable consideration - the amendment takes into account variable consideration in
prices of goods or services arising, for example, as a result of penalties or performance
bonus;
• Allocation of the transaction price on the basis of an adequ ate sales price per unit -
introduction of the requirement to allocate the payment for goods or services in the case of
sale under a single contract;
• Licences - introduction of the requirement for entities to define the time for which a
licence is transferred and specifying more precisely the re venue calculation in the case of
transferring a licence at a point in time or over t ime;
• Time value of money – the transaction price is adjusted for t he time value of money.

The
entity may choose not to account for the time value of money wh en the interval between
transfer of the promised goods or services and payment by the customer is expected to be
less than 12 months;
• Costs of obtaining a contract - introducing the conditions which determine if the given
costs of obtaining a contract are subject to capitalization and can be amortised parallel to
revenue recognition;
• Disclosures - introduction of a requirement to disclose qu alitative and quantitative
information relating to judgements and changes in the judge ments related with revenue
recognition.

1 January 2018
IFRS 15 implementation is
described below.
Commentary on IFRS 15 Revenue
from Contracts with Customers The commentary is a source of additional information and gui
dance re: the key
assumptions of IFRS 15, including the identification of uni t-specific commitments, the
establishment of the unit’s role (agent vs.

principal) and t he mode of recording revenue
generated under the licence.
Apart from additional guidance, there are exemptions and si mplified rules for first time
adopters. 1 January 2018
IFRS 15 implementation is
described below.




12
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
IFRS 16 Leases The new standard establishes principles for the recognitio
n, measurement, presentation and
disclosure of leases.

All lease transactions results in the lessee’s right to use the assets
and the obligation to make a payment. Accordingly, the class ification of leases into
operating lease and finance lease as per IAS 17 no longer appl ies under IFRS 16, as the
new standard introduces a single model for accounting for le ases by the lessee.

The lessee
will be required to present the following: (a) assets and lia bilities in respect of all leases
executed for more than 12 months, except where an asset is of l ow quality; and (b)
depreciation charge for the leased asset separately from th e interest expense on the lease
liability in the statement of profit or loss and ot her comprehensive income.


The principles of accounting for leases by the lessee establ ished in IFRS 16 are largely the
same as in IAS 17.

As a consequence, the lessee continues to us e the classification into
operating lease and finance lease and accounts for them accordingly.1 January 2019
IFRS 16 implementation
progress is described below.
Annual Improvements to IFRS 2014-
2016 * In December 2016, the International Accounting Standards B
oard published ‘Annual
Improvements to IFRS Standards 2014-2016 Cycle’ which amen ded 3 standards, i.e.

IFRS
12 ‘Disclosure of Interests in Other Entities’, IFRS 1 ‘Firs t-time Adoption of International
Financial Reporting Standards’ and IAS 28 ‘Investm ents in Associates’.
The improvements feature guidelines and amendments re: the scope of applicability,
recognition and valuation as well as terminology an d editing changes. 1 January 2018 for
improvements to
IFRS 1 and IAS 28 The amendment will not
have a significant impact on financial statements.
Amendments to IAS 28 Long-term
Interests in Associates and Joint
Ventures * The amendment is effective for annual periods starting from
1 January 2019 or later with a
possibility of earlier application.

The amendments to IAS 2 8 Investments in Associates and
Joint Ventures clarify that companies accounting for long- term interests in an associate or
joint venture where the equity method is not applied, have to use IFRS 9. The IASB has also
published an example that illustrates how companies apply t he requirements in IFRS 9 and
IAS 28 to long-term interests in an associate or jo int venture.1 January 2019BZ WBK Group is currently
in the process of analysing
the amendment of the Standard and the
assessment of impact of
the amendment
Improvements to IAS 40 ‘Investment Property’ * Improvements to IAS 40 specify the requirements for transfe
rs to or from investment
property classification.

According to the amended standar d, a change in management
intention to use the property is not evidence of change in the use of the property. The
amendment applies to all changes in use that are introduced a fter the effective date of the
amendment and to all investment properties held at that date.1 January 2018
The amendment will not
have a significant impact
on financial statements.
Amendments to IFRS 2:
Classification and measurement
share-based payment transactions * Changes relate to the following areas:
• Guideliness on fair value measurement of liability due to c
ash-settled share-based
payment transaction;
• Guideliness on classification modification from cash-ba sed to equity-settled payment
transactions and also • Guideliness on employees tax liabilities recognition rel ating to share-based payment
transactions.

1 January 2018
The amendment will not
have a significant impact on financial statements.
Improvements to IFRS 4: Applying
IFRS 9 ‘Financial Instruments’ with
IFRS 4 ‘Insurance Contracts’ Improvements to IFRS 4 ‘Insurance Contracts’ address the is
sue of adopting a new
standard, i.e.

IFRS 9 ‘Financial Instruments’. Improvemen ts to IFRS 4 supplement the
existing options and are aimed to prevent temporary fluctua tions in the insurance industry
results arising from the implementation of IFRS 9. 1 January 2018
The amendment will not
have a significant impact on financial statements.
Improvements to IFRS 10 and IAS
28 * Improvements to IFRS 10 and IAS 28 cover sales or contributio
ns of assets between an
investor and its associate/joint venture.

The improvement s eliminate the inconsistencies
between IFRS 10 and IAS 28. The accounting treatment hinges o n whether the non-
monetary assets sold or contributed to an associate /joint venture constitute a business.
Should the assets constitute a business, the investor shall recognize the profit or loss in
full. Should the assests not constitute a business, the prof it or loss shall be recognised only
to the extent of unrelated investors’ interests in the associate or joint venture.


The improvements were published on 11 September 201 4.

Cto utomated equities trading platform

The International
Accounting
Standards Board
has not established the validity date of the amended
regulations. The amendment will not
have a significant impact on financial statements.
IFRS 17 Insurance Contracts * IFRS 17 replaces IFRS 4, which was brought in as an interim Sta
ndard in 2004. IFRS 4 has
given companies dispensation to carry on accounting for ins urance contracts using national
accounting standards, resulting in a multitude of differen t approaches.

As a consequence, it
is difficult for investors to compare and contrast the finan cial performance of otherwise
similar companies. IFRS 17 solves the comparison problems c reated by IFRS 4 by
requiring all insurance contracts to be accounted for in a co nsistent manner, benefiting both
investors and insurance companies.

Insurance obligations will be accounted for using fair
value – instead of historical cost. 1 January 2021
The standard will not have
a significant impact
on financial statements.
IFRIC 23 Uncertainty over Income
Tax Treatments * Interpretation clarifies how the recognition and measurem
ent requirements of IAS 12
"Income taxes" are applied where there is uncertainty over i ncome tax treatments.

An
uncertain tax treatment is any tax treatment applied where t here is uncertainty over whether
that treatment will be accepted by the tax authority. The imp act of the uncertainty should be
measured using the method that best predicts thre resolutio n of the uncertainty - either the
most likely amount method or the expected value met hod when measuring an uncertainty.1 January 2019
The amendment will not
have a significant impact on financial statements.


*New standards and amendments to the existing standa rds issued by the IASB, but not yet authorized for use in the EU.




13
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments was published by the I nternational Accounting Standards Board on 24 July 2014 and approved by
virtue of the Commission Regulation (EU) 2016/2067 of 22 November 2016 for application in the EU membe r states.

The standard
applies to financial statements for annual reportin g periods beginning on or after 1 January 2018, exc ept for insurers which may
apply the standard starting from 1 January 2021. IF RS 9 supersedes IAS 39 Financial Instruments: Recog nition and Measurement.
However, it allows reporting entities an option to continue to use the hedge accounting provisions sti pulated in IAS 39.


IFRS 9 introduces changes that affect the following areas of financial instruments accounting:
· classification and measurement of financial instrum ents
· recognition and calculation of impairment and
· hedge accounting.


In mid 2016, BZ WBK Group launched a project aimed at the implementation of IFRS 9. The project is delivered in liaison with an
external consultant and involves BZ WBK Group depar tments responsible for accounting policy, reporting, management information,
taxes, impairment charges for financial instruments , IT systems and operations related to loan sanctio n and monitoring.

The first
stage of the project was completed in early 2017. T he differences between IAS 39 and IFRS 9 were ident ified and an action plan was
defined to ensure the compliance with the new stand ard. The second stage was launched in February 2017 and is aimed at
implementing changes arising from IFRS 9.

In partic ular, BZ WBK Group’s objective was:
· development and implementation of models aimed to c alculate impairment charges based on the expected credit
loss (ECL) method. A particular focus was placed on defining a significant credit risk increase, rules for classifying
financial instruments into stages and the impact of macroeconomic scenarios considered in individual r isk
parameters,
· development and implementation of models for determ ining fair value of financial instruments unquoted on the active
market in the form of loans and debt financial inst ruments that must, due to the contractual cash flow test failure, be
mandatory valued at fair value through profit or lo ss,
· to design and implement new processes related to th e test of contractual cash flows, assessment of business model
and modification of contractual cash flows,
· to develop and implement IT solutions,
· to modify the existing internal regulations (polici es, terms of references, processes etc.).


Classification and measurement
The categories of financial instruments introduced by IAS 39, specifically held-to-maturity and available-for-sale financial
instruments, no longer apply under IFRS 9.

Pursuant to the new standard, the classification of financial assets depends on the
business model of financial assets management and t he nature of contractual cash flows.

In accordance with the standard, financial
instruments can be classified, on the basis of asse ssment of business models and the test of contractu al cash flows, to the
following groups only:
· financial assets measured at fair value through pro fit or loss,
· financial assets measured at fair value through oth er comprehensive income or
· financial assets measured at amortised cost.


Business models The business model refers to how BZ WBK Group manag es its financial assets in order to generate cash flows. That is, the business
model determines whether cash flows will result fro m collecting contractual cash flows, selling financial assets or both.


The business model assessment involves the analysis of qualitative and quantitative criteria.
Qualitative criteria are assessed by the key manage ment personnel of the units which are members of BZ WBK Group. The following
aspects are taken into account during the assessmen t:
a) how the performance of the business model and the f inancial assets held within that business model are evaluated and
reported to the key management personnel for the ma nagement accounting purposes.


b) the risks that affect the performance of the busine ss model (and the financial assets held within that business model) and,
in particular, the way in which those risks are man aged.


c) the method of remunerating the persons who manage t he financial instruments portfolio.
The purpose of the analysis of quantitative criteri a of business model assessment is to determine if t he sale of financial assets during
the analysed period exceeds the pre-determined thre shold values (in percentage terms) defined in internal regulations.





14
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
In the analysis of the quantitative criteria of the business model assessment, BZ WBK Group determines that a business model
whose objective is to hold assets in order to colle ct contractual cash flows enables the sale of those assets, without affecting the
current business model, in the following cases:
· if the sale is due to the increase in credit risk r elated to the assets
· if the sale is infrequent (even if its value is sig nificant)
· if the value of the sale is insignificant (even if the sale is frequent)
· if the assets are sold to improve liquidity in a st ress case scenario
· if the sale is required by third parties (it applie s to the assets which have to be sold owing to e.g.

the requirements of
supervisory authorities, but were originally held t o collect contractual cash flows)
· if the sale results from exceeding the concentratio n limits specified in internal procedures and is a part of the credit risk
management policy
· if the sale is made close to the maturity date of t he financial assets and the proceeds from the sale are an approximation
of the contractual cash flows that the BZ WBK Group would have collected if it had held the assets until their maturity date.


Other forms of the sale of assets as part of the bu siness model whose objective is to hold assets in o rder to collect contractual cash
flows (e.g. frequent sales of significant value) re sult in the need to change the business model, and reclassify the financial assets
which were originally allocated to that model.


BZ WBK Group has assessed the business models, and on the basis of the analysis determined the business model whose objective
is to hold assets in order to collect contractual c ash flows as the prevailing financial assets manage ment model. This is with the
exception of:
· Available-for-sale debt instruments which BZ WBK Gr oup holds for liquidity management purposes in a portfolio for
which the business model whose objective is achieve d by both collecting contractual cash flows and selling financial
assets was determined as the appropriate business m odel;
· Held-for-trading instruments for which another (res idual) business model was determined as the appropr iate
business model which reflects the method of their m anagement.


Contractual cash flows test
In accordance with IFRS 9, only the contracts whose contractual cash flows include:
· the contractual principal (principal amount) and
· contractual interest
meet the requirements of the contractual cash flows test, and may be measured at:
– amortised cost, in the case of the assets classif ied to the business model whose purpose is to hold assets to collect contractual
cash flows, or
– fair value through other comprehensive income wit h regard to the assets classified to the business model whose purpose is both
to collect contractual cash flows and sell financia l assets.


The assets which do not meet the contractual cash f lows test must be measured at fair value through profit or loss regardless of the
adopted business model.
Contractual principal is the fair value of the fina ncial asset at initial recognition. However, that p rincipal amount may change over the
life of the financial asset (for example, if there are repayments of principal). In turn, interest inc ludes a payment for:
· the time value of money;
· credit risk associated with the principal amount ou tstanding during a particular period of time;
· other basic lending risks and costs;
· as well as a profit margin.


For the purpose of this disclosure BZ WBK Group tak es into account the portfolio of financial assets, whose interest construction is
based on a multiplier greater than one, at amortize d cost.
Given the pending discussions regarding the classif ication and measurement of financial instruments wh ose interest rate structure is
based on a multiplier higher than 1, the above appr oach may change and portfolio of credit cards offer ed to retail banking customers
may have to be measured at fair value through profi t or loss.


As part of analyses of the cash flows to which BZ W BK Group is entitled under an agreement with the customer, a particular note
was taken of the prepayment option and the impact o f that option on the result of the contractual cash flows test.




15
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
According to BZ WBK Group, the assessment of whethe r the prepayment option is in line with the contractual cash flows test criteria
depends both on the nature of the circumstances whi ch give one of the parties the right to make a prepayment, and on the
prepayment amount.

As a rule, these two factors are taken into account when assessing whether contract ual cash flows include only
repayment of principal and interest on the outstand ing principal, which may also include reasonable ad ditional compensation for the
early termination of the contract.
A contractual term that permits the issuer (i.e.

th e debtor) to prepay a debt instrument or permits th e holder (i.e. BZ WBK Group) to
put a debt instrument back to the issuer before mat urity and the prepayment amount substantially represents unpaid amounts of
principal and interest on the principal amount outs tanding, which may include reasonable additional co mpensation for the early
termination of the contract, is contractual cash fl ows which are only repayment of the principal amoun t and interest on the
outstanding principal amount, and as such meet the SPPI test criteria.


Identified changes in classification and measuremen t
In order to ensure correct classification and measu rement of the financial assets held as at 31 Decemb er 2017, BZ WBK Group
analysed its assets portfolios whereby it:
· determined and allocated financial assets to the bu siness models which reflect the asset management me thod
through how the portfolio results are reported to t he key management personnel, an analysis of the ris k types
affecting the profitability and effectiveness of po rtfolios, the method of managing the risk related t o the given portfolio
and the method of remunerating portfolio managers;
· analysed the value, frequency and reasons for selli ng the assets in the years prior to implementation of IFRS 9;
· determined the expectations and plans of the key ma nagement personnel as to the method of managing the assets
portfolio, including the value and frequency of fin ancial asset sales;
· analysed the contractual terms relating to financia l assets to determine if the contractual cash flows to which BZ
WBK Group is entitled represent payment of principa l and interest.


Based on the results of the analyses performed by B Z WBK Group, supported by the outcome of tests of c ontractual cash flows and
assessment of the business model, additional change s in the classification and measurement of financial assets concern the
following:
– profit sharing agreements identified in certain t ranches of debt instruments that have additional ca sh flows, other than solely
payments of principal and interest, representing a contractually determined share in the customer’s pr ofit or loss.

The adjustment to
the fair-value measurement has been set at PLN (64 726)
k, without the deferred tax effect.
– financial instruments whose contractual cash flow s are not payments of principal and interest, which applies to debt instruments
classified as “Loans and advances” whose interest i s accrued on the subscription price and capitalised over the life of the product
(until maturity) whereas interest payments to BZ WB K Group will be calculated on the nominal price so these cash flows do no
represent interest payments as defined in IFRS 9.

T he adjustment to the fair-value measurement has bee n set at PLN (15,897)k and
unsettled provision amounted PLN (106) k without th e deferred tax effect,
– a different recognition method for interest incom e from assets held, depending on the level of credi t risk. Until the end of 2017, the
interest income from exposures measured at amortise d cost, for which IBNR impairment charge was calculated, was recognised at
the net carrying amount, whereas from 1 January 201 8 at the gross carrying amount of the exposure.

IFRS 9 provides for two
exceptions from this rule:
a) POCI (Purchased or Originated Credit Impaired) a ssets. The interest income from these exposures is calculated on
the net carrying amount based on the credit risk-ad justed effective interest rate.
b) financial assets impaired after the initial reco gnition (stage 3) The interest income from these ex posures is calculated
based on the effective interest rate and the net ca rrying amount.


Considering the differences in the recognition of i nterest income from financial assets classified int o stages 1 and 2, for which until
end of 2017 the IBNR provision charge was calculate d, on the effective date of IFRS 9, BZ WBK Group recognised an interest income
adjustment of PLN (23,787) k without deferred tax e ffect.


– non-listed equity instruments classified as avail able for sale, due to a significant limitation of the ability to measure such assets at
historical cost less impairment charges, if any. By default, equity instruments are measured at fair value through profit or loss unless
an irrevocable election is made at initial recognit ion to measure subsequent fair value changes at fai r value through other
comprehensive income.


Using the option permitted by IFRS 9, BZ WBK Group took an irrevocable decision to designate strategic equity investments from the
portfolio of financial assets other than those held for trading as instruments measured at fair value through other comprehensive
income. The equity investments for which BZ Group c hose the option of fair value measurement through other comprehensive
income were acquired to be maintained in the invest ment portfolio for a long term and strategically, without the intention to make a
profit on selling them in the short or medium term.

If the equity instrument designated to be measured at fair value through other
comprehensive income is sold, the gain (loss) on th e transaction is not recycled to profit or loss at the time of the sale. The




16
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
adjustment to the fair-value measurement of equity instruments has been set at PLN (17,078) k and amou nt of reversed impairment
charges at PLN 1,984 k, without the deferred tax ef fect.


As at 31 December 2017, BZ WBK Group has not identi fied any financial assets which it would intend to designate, as of 1 January
2018, to be measured at fair value through profit o r loss to reduce the accounting mismatch, which wou ld otherwise emerge as a
result of measuring financial assets at amortised c ost or at fair value through other comprehensive income.


Financial liabilities will continue to be measured in accordance with the existing rules laid down in IAS 39, i.e.

at amortised cost or at
fair value through profit or loss. BZ WBK Group has not chosen the option of measuring financial liabilities at fair value. Should this
option be chosen, changes in the fair value arising from changes in BZ WBK Group credit risk will be t aken to other comprehensive
income, and once a financial liability is derecogni sed, the value previously recognised in other compr ehensive income will not be
recycled to profit or loss.
Comparative data
The use of IFRS 9 requires a change in presentation and the scope of disclosure, including in the first year after adoption, when a
wide range of information is needed to allow financ ial statement users to understand the impact that the IFRS 9 might have in terms
of classification, measurement and impairment of fi nancial instruments on the financial position and the financial results of BZ WBK
Group.


BZ WBK Group elected to use the IFRS 9 provisions w hich provide for exemption of the obligation to restate comparative information
for prior periods in relation to the changes arisin g from classification, measurement and impairment.

Differences in the carrying
amount of financial assets and liabilities resultin g from the application of IFRS 9 are reported in re tained earnings in equity as at
1 January 2018.
Hedge accounting
The standard expands the list of eligible hedged it ems and allows entities to designate as hedging ins truments financial assets or
liabilities measured at fair value through profit o r loss.

The retrospective effectiveness test and th e 80-125% bright line are removed,
and the prerequisite for applying hedge accounting is the existence of an economic relationship betwee n the hedged item and the
hedging instrument.

Furthermore, the standard expan ds the scope of disclosures concerning risk managem ent strategies, cash flows
arising from hedging transactions and impact of hed ge accounting on financial statements.
Pursuant to paragraph 7.2.21 of IFRS 9, BZ WBK Grou p chose to continue to apply the hedge accounting requirements and hedging
relationships arising from IAS 39.

Cto utomated equities trading platform


For this reason, implementation of IFRS 9 will have no impact on the financial position of BZ WBK Grou p with regard to hedge
accounting.


Impairment of credit exposures
IFRS 9 introduced a new approach to estimating loss es related to credit exposures measured at amortised cost. The new approach
is based on expected credit loss instead of the inc urred loss model that is currently used under IAS 3 9.

In accordance with IFRS 9,
the recognition of expected credit losses depends o n changes in risk after recognition of the exposure.
IFRS 9 makes the method of recognizing expected los ses dependent on the change in the level of risk that occurred since the
exposure was recognized.

The standard introduced th ree main stages for recognising expected credit losses:
· stage 1 – exposures with no significant increase in risk since initial recognition, i.e. the likelihood of the exposure
being downgraded to the impaired portfolio (Stage 3 exposures) has not increased. For such exposures, 12-month
expected credit losses is recognised.


· stage 2 – exposures with a significant increase in risk since initial recognition, but with no objective evidence of
default. For such exposures, lifetime expected cred it losses is recognised.
· stage 3 – exposures for which the risk of default h as materialised.

For such exposures, lifetime expected credit
losses is recognised.
In addition, for exposures classified as POCI (purc hased or originated credit impaired), expected loss es are recognized over the
remaining life time horizon.


One of the key aspects of implementation of IFRS 9 was to work out a definition of a significant increase in credit risk that
determines the classification of an exposure into S tage 2. BZ WBK Group developed the definition of de tailed criteria for a significant
increase in risk.
BZ WBK Group developed detailed criteria for the de finition of a significant increase in the level of risk based on the
following main assumptions:
· qualitive:




17
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
- customer coverage with dedicated monitoring strat egies as a consequence of identifying early warning signals
indicating a significant increase in credit risk,
- restructuring measures related to providing clien ts with facilities forced by their difficult financial situation,
· quantitative:
- the risk buffer method based on a comparison of t he probability of insolvency curves in the horizon of the current
remaining lifetime of exposures according to the ri sk level assessment at the moment of the exposure r ecognition
and the reporting date,
- delay in payment in accordance with the criteria of the standard, ie 30 days of delay in payment com bined with
materiality threshold consistent with the classific ation to stage 3.


Another key feature introduced by IFRS 9 is the app roach to the estimation of risk parameters. For the purpose of estimating
impairment losses, BZ WBK Group continues using own estimates of risk parameters that are based on internal models, however
with the necessary modifications in the context of IFRS 9 requirements (such as estimating the paramet ers over the life of the
exposure or taking into account future macroeconomi c conditions).

BZ WBK Group has defined a methodolo gy for parameters
modelling and has developed models compliant with I FRS 9.
Expected credit losses are the product of the indiv idual for each exposure of estimated values of PD, LGD and EAD parameters, and
the final value of expected losses is the sum of ex pected losses in individual periods (depending on t he basket over a 12 month
horizon or lifetime) discounted by the effective in terest rate.

The estimated parameters in accordance with the assumptions of IFRS 9
are subject to adjustment for macroeconomic scenari os. Group BZ WBK uses internally developed scenario s.
The models and parameters created for the needs of IFRS 9 are subject to the process of model manageme nt and regular calibration
and validation.
BZ WBK Group has developed IT solutions for the pur pose of implementation of a new method for calculation of impairment in the
systems.

The changes were implemented in production systems in January 2018.
The implementation of IFRS 9 requirements caused in crease in impairment losses in BZ WBK Group. The t otal value of additional
impairment charges recognised in retained earnings for previous years is PLN 193,864 k, without the deferred tax effect, of which
PLN 240,637 k relates to balance sheet items, PLN 1 5,034 k the increase in provisions for off-balance sheet liabilities presented in
the line "Provisions" and the reclassifications of financial instruments from the category of assets m easured at amortized cost to
measured at fair value through profit or loss trigg ered impairment charge reversal in the amount of PL N 61,807 k.


In addition, BZ WBK Group expects higher volatility of impairment charges due to changes in the classi fication of exposures between
stage 1 and 2 and material changes in the coverage of the exposure resulting in write-offs due to different horizons for recognizing
expected losses. An important element affecting the volatility of estimates is also the use of macroeconomic forecasts in the
calculation expected credit losses.


Impact of IFRS 9 on financial position
The table below presents the impact of IFRS 9 imple mentation on financial assets as at 1 January 2018:
Item Measurement category –
IAS 39Measurement category –
IFRS 9 Carrying amount –
IAS 39 IFRS 9 implementation
impact * IFRS 9 implementation
impact * Carrying amount – IFRS 9
Classsification and
measurement impact Impairment impact
ASSETS
Loans and advances to
customers
Amortised cost Amortised cost 107 71
5 574 ( 23 787) ( 240 637) 107 451 150
Loans and advances to
customers Amortised cost Fair value through profit
or loss
124 323
( 80 729) 61 807 105 401
Financial assets available for
sale
Historic cost/purchase price less impairment charges Fair value through OCI 52 1
57 ( 17 078) 1 984 37 063
Total assets 107 892 054 ( 121 594) ( 176 846) 107 593 614
* without deferred tax effect
The value of other financial assets presented in th e consolidated statement of financial position did not change significantly as a
result of implementation of IFRS 9.





18
Consolidated financial statement of BZ WBK Group fo r 2017
w In thousands of PLN
The table below presents the impact of IFRS 9 imple mentation on liabilities as at 1 January 2018:
Item Measurement category Measurement category Carryi ng amount IFRS 9 implementation
impact * IFRS 9 implementation
impact * Carrying amount – IFRS 9
Classsification and
measurement impact Impairment impact
LIABILITIES
Provisions IAS 37 IFRS 9 5
0 652 - 15 034 65 686
Total liabilities 50 652 - 15 034 65 686
* - without deferred tax effect
The value of other liabilities presented in the con solidated statement of financial position did not c hange as a result of implementation
of IFRS 9.


As at 1 January 2018, the total value of the impact of IFRS 9 implementation PLN (313,474) k, and the deferred tax effect in the form
of deferred net tax asset increase PLN 59,020 k dec reased the balance of retained earnings and revaluation reserve by the amount of
PLN (254,454) k.


However, as indicated in the section on classificat ion and measurement of financial instruments, the i mpact of changes in the
classification and measurement rules is presented f or information only. As at the date of this report, there are different opinions as to
the potential impact of a multiplier higher than 1 on the classification and measurement of financial assets other than held-for-trading
instruments.

For financial asset portfolios which i nclude such a multiplier, the total impact might di ffer from the impact presented
above.
Impact of IFRS 9 on capital adequacy
On 12 December 2017, the European Parliament and th e Council adopted Regulation No 2017/2395 amending Regulation (EU) No
575/2013 as regards transitional arrangements for m itigating the impact of the introduction of IFRS 9 on own funds and for the large
exposures treatment of certain public sector exposu res denominated in the domestic currency of any Mem ber State.

This Regulation
entered into force on the next day following its pu blication in the Official Journal of the European Union and has been applicable since
1 January 2018. The European Parliament and the Cou ncil concluded that the application of IFRS 9 may lead to a sudden significant
increase in expected credit loss provisions and con sequently to a sudden decrease in institutions’ Com mon Equity Tier 1 capital.


The regulation regarding the mitigation of impact o f IFRS 9 on Tier 1 capital provides for the following:
· Where an institution’s opening balance sheet on the day that it first applies IFRS 9 reflects a decrease in Common
Equity Tier 1 capital as a result of increased expe cted credit loss provisions, including the loss allowance for lifetime
expected credit losses for financial assets that ar e credit-impaired, compared to the closing balance sheet on the
previous day, BZ WBK Group should be allowed to inc lude in its Common Equity Tier 1 capital a portion of the
increased expected credit loss provisions for a tra nsitional period.

That transitional period should have a maximum
duration of 5 years and should start in 2018. The p ortion of expected credit loss provisions that can be included in
Common Equity Tier 1 capital should decrease over t ime down to zero to ensure the full implementation of IFRS 9 on
the day immediately after the end of the transition al period.
· The multipliers that can be applied in consecutive years of the transitional period are as follows: 95%, 85%, 70%,
50%, 25%.


· If BZ WBK Group decides to apply the IFRS 9 transit ional arrangements, it should publicly disclose its own funds,
capital ratios and leverage ratio both with and wit hout the application of those arrangements in order to enable the
recipients of financial statements to determine the impact of those arrangements.


· BZ WBK Group should decide whether to apply those t ransitional arrangements and inform the KNF accordingly.
· During the transitional period, BZ WBK Group may re verse once its initial decision, subject to the prior permission of
the KNF, which should ensure that such decision is not motivated by considerations of regulatory arbitrage.


· Institutions that decide to apply transitional arra ngements should be required to adjust the calculati on of regulatory
items which are directly affected by expected credi t loss provisions to ensure that they do not receive inappropriate
capital relief. For example, the specific credit ri sk adjustments by which the exposure value is reduc ed under the
standardised approach for credit risk should be red uced by a factor which has the effect of increasing the exposure
value.

This would ensure that an institution would not benefit from both an increase in its Common Equ ity Tier 1
capital due to transitional arrangements as well as a reduced exposure value.




19
w In thousands of PLN
Consolidated financial statement of BZ WBK Group fo r 2017
Having analysed Regulation No. 2017/2395, BZ WBK Gr oup has decided to apply the transitional arrangements provided for therein,
which means that the full impact of the introductio n of IFRS 9 will not be taken into account for the purpose of capital adequacy
assessment of BZ WBK Group.


As a result of the adjustment of the regulatory cap ital requirements calculation, which include transitional arrangements for mitigating
the impact of the introduction of IFRS 9 referred i n the Regulation (EU) 2017/2395 of the European Par liament and of the Council of
12 December 2017, the Tier 1 capital ratio and tota l capital ratio on BZ WBK Group level decreased by 2 bps.

In the case of non-
application of the transitional arrangements relate d to IFRS 9 specified in this regulation and taking into account the full impact of the
implementation of IFRS 9, the above-mentioned ratio s would decrease by 20 bps.
As presented above, as a result of IFRS 9 implement ation, Tier 1 capital ratio and total capital ratio of BZ WBK Group decreased
mainly due to the introduction of a new impairment model based on expected credit loss of Stage 2 expo sures.


Due to the decision to apply the transitional provi sions as of February 1, 2018, BZ WBK Group will dis close own funds, capital ratios,
as well as the leverage ratio, both with and withou t the application of transitional solutions resulting from article 473a of Regulation
(EU) No 575/2013 from the first quarter of 2018.
IFRS 15 Revenue from Contracts with Customers
Description of changes
IFRS 15 Revenue from Contracts with Customers was published on 28 May 2014 by the International Accounting Standards Board
and applies to annual reporting periods beginning o n or after 1 January 2018.


IFRS 15 introduced a new, 5-step model to be applie d to revenue-generating contracts with customers, excluding the contracts
which are covered by a separate standard. The stand ard was introduce to harmonise the rules used by enterprises and to eliminate
inconsistencies with previous standards.
As of 1 January 2018, IFRS 15 replaces the followin g standards and interpretations:
· IAS 18 Revenue
· IAS 11 Construction contracts
· SIC-31 Revenue - Barter Transactions Involving Adve rtising Services
· IFRIC 13 Customer Loyalty Programmes
· IFRIC 15 Agreements for the Construction of Real Es tate
· IFRIC 18 Transfers of Assets from Customers
The new standard is applied to almost all contracts with customers.

The main exceptions include leases (IAS 17), financial
instruments and other contractual rights or obligat ions (IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28), insurance contracts (IFRS 4)
and guarantees covered by other standards.


The previous standards (IAS 11/IAS 18) distinguishe d three separate models for revenue recognition, depending on the type of the
sale transaction:
· construction contract
· sale of goods