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Report 26/2021: The supervisory letter regarding position of the Polish Financial Supervision Authority with respect to dividend policy in the second half of 2021 and stress tests results for Bank Pekao S.A.

Bank Polska Kasa Opieki Spółka Akcyjna (the "Bank") hereby informs that on June 30, 2021 the Bank received a letter from the Office of the Polish Financial Supervision Authority regarding position with respect to commercial bank dividend policy in the second half of 2021 adopted by the Polish Financial Supervision Authority (the "PFSA") on June 24, 2021 and stress tests results (the "Supervisory Letter").

The dividend up to 50% of the profit from 2020 can only be paid by the bank:

1.    not in the middle of recovery program or recovery plan,

2.    having overall BION rate not worse than 2.5,

3.    having a leverage ratio (LR) at above 5%,

4.    having Common Equity Tier 1 ("CET1") ratio not lower than the required minimum: 4.5% + 56% * add-on + combined buffer requirement, taking into account the systemic risk buffer at the level of 3%,

5.    having Tier 1 ("T1") ratio not lower than the required minimum: 6% + 75% * add-on + combined buffer requirement, taking into account the systemic risk buffer at the level of 3%,

6.    having Total Capital Ratio ("TCR") not lower than the required minimum: 8% + add-on + combined buffer requirement, taking into account the systemic risk buffer at the level of 3%

The above criteria should be met by the bank at the end of March 2021 and on the date of the resolution of the bank's general meeting on dividend payment, both on an individual and consolidated level.

A dividend of up to 75% of the 2020 net profit may be paid only by a bank that meets all the criteria for a dividend payment of up to 50% of profit, with the additional incorporation within capital criteria the bank's sensitivity to an adverse macroeconomic scenario ("ST1 parameter"), measured by supervisory stress tests. The sensitivity level is captured as the difference between TCR in the reference scenario and the TCR in the shock scenario at the end of the forecast period (2021), taking into account supervisory adjustments. According to the Supervisory Letter, after the above adjustments, the ST1 parameter for the Bank was set at the level of 0.9 percentage point

The dividend up to 100% of the net profit for 2020 may be paid only by the bank that meets all the criteria for the payment of the dividend up to 50% of the profit, while additionally taking into account the level of the bank's sensitivity to an unfavorable macroeconomic scenario ("ST2 parameter"), measured by supervisory stress tests. The sensitivity level is calculated as the difference between the TCR in the reference scenario and the TCR in the shock scenario at the end of the forecast period (2021), taking into account supervisory adjustments, with the reservation that the T1 and T2 capital issues assumed by the bank are not taken into account in the shock scenario. According to the said Supervisory Letter, after the above adjustments, the ST2 parameter for the Bank was set at the level of 2.28 percentage points.

Taking into account the abovementioned criteria and values of capital buffers for Bank standalone and consolidated levels as of March 31, 2021, to make dividend payment:

·    up to 50% of the 2020 net profit, the Bank is required to maintain at least CET1 ratio at the level of 10.76%, T1 ratio at the level of 12.26%, and TCR at the level of 14.26% on standalone level; and at least CET1 ratio at the level of 10.76%, T1 ratio at the level of 12.26%, and TCR at the level of 14.27% on consolidated level,

·    up to 75% of the 2020 net profit, the Bank is required to maintain at least CET1 ratio at the level of 11.66%, T1 ratio at the level of 13.16%, and TCR at the level of 15.16% on standalone level; and at least CET1 ratio at the level of 11.66%, T1 ratio at the level of 13.16%, and TCR at the level of 15.17% on consolidated level,

·    up to 100% of the 2020 net profit, the Bank is required to maintain at least CET1 ratio at the level of 13.04%, T1 ratio at the level of 14.54%, and TCR at the level of 16.54% on standalone level; and at least CET1 ratio at the level of 13.04%, T1 ratio at the level of 14.54%, and TCR at the level of 16.55% on consolidated level.

Due to the fact that the share of foreign currency housing loans at the Bank does not exceed 5% of the value of the loan portfolio from the non-financial sector, dividend adjustment ratios are not applicable for the Bank.

Based on capital ratios on March 31 2021 and the Supervisory Letter, the Bank meets all the requirements for the payment up to 100% of the dividend for 2020. As indicated in the current report no. 21/2021 of June 11, 2021, on June 11, 2021, the Ordinary General Meeting of the Bank adopted a resolution for the payment of a dividend from the net profit for 2020 ("Resolution on the distribution of profit for 2020"). The amount of dividend was dependent on: (i) the position of the PFSA regarding the dividend policy of commercial banks in the second half of 2021 (as indicated above, such a position was adopted by the PFSA on June 24, 2021) and (ii) the supervisory recommendation of the PFSA regarding the Bank's dividend policy in the second half of 2021. According to the Supervisory Letter, the Bank will receive a separate recommendation regarding dividend payment and as well as other activities that may result in a reduction of the capital base. Receiving abovementioned recommendation will allow for determination of the fulfillment or non-fulfillment of individual dividend payment conditions specified in the Resolution on the distribution of profit for 2020, about which the Bank will inform in a separate current report.

According to the Supervisory Letter, at the end of 2021, along with the dividend policy for 2022, the PFSA will issue a separate position on retained earnings, including the profit for 2019.

Legal basis: Art. 17 of (1) MAR - inside information