Assessment of the Bank's standing on a consolidated basis, including the assessment of adequacy and effectiveness of the internal control system, risk management system, compliance and the internal audit function
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
The economic growth in Poland in 2023 decelerated to approximately 0.2%, mainly as a consequence of high inflation which translated into a decline of the real purchasing power of households and shrunk households’ consumption by around 0.1%. We saw falling consumption mainly in the first half of the year. In view of the double-digit pay growth, disinflation translated into a reconstruction of real wages and a slight consumption rebound in the second half of the year. Investments accelerated to around 8%, chiefly due to outlays in large companies. The falling domestic demand was accompanied by a strong decline in imports. As a result, despite the poor situation in the exports markets and falling exports, the trade balance improved and brought a positive contribution of around 4pp to the GDP growth. By contrast, reduced inventory weighed heavily on the GDP growth (negative contribution of approx. 5pp).
Previous year saw the fade of the earlier energy shock which translated into fast disinflation. In February 2023, consumer prices grew by 18.4% y/y, only to slow down to 6.2% y/y in December. The average annual CPI growth was 11.4%. With weaker internal demand, companies had less room for raising their prices. Labour costs also became a challenge, and the pressure in terms of raw materials and stock was visibly lower than a year earlier.
The fast inflation decrease prompted the National Bank of Poland to ease its monetary policy. In September 2023, the reference rate was cut by 75bp; in October, it was cut by another 25bp only to finish off the year at 5.75bp. In view of the uncertain inflation outlook, the central bank has now gone into the wait-and-see mode. On a short-term basis, that is as at the end of Q1 2024, inflation may be hovering around the inflation target (2.5%, +/- 1pp). However, with the abolishment of the zero VAT rate on food as of end of March 2024, and of the Anti-Inflation Energy Shield mid year (the energy and gas prices were frozen at the 2022 levels), we are likely to see inflation spike visibly in the second year-half. The expansive fiscal policy which caused the central- and local government agencies’ sector’s deficit exceed 5% of the GDP last year is another factor driving inflation.
In 2023, the banking sector was a very strong performer – the sector’s net profit grew approximately 160% y/y reaching nearly PLN 28 billion; ROE nearly doubled and totalled 12% All that was mainly courtesy of high interest rates – higher net interest income of banks mitigated the high risk costs of the FX mortgage portfolio, and courtesy of lower regulatory burden – no credit holiday (its estimated negative impact on revenue is PLN 12.8 million in Q3 2022 alone), the payments to System Ochrony Banków Komercyjnych S.A. (PLN 3.5 billion) or the Borrower Financial Assistance Fund (PLN 1.4 billion). Under the prevailing market conditions, banks took efforts to make their deposit offer more attractive, which induced clients to invest their funds into term deposits. On the other hand, the higher interest rates added to
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
a lower demand for lending, particularly for corporate loans – their sale was down by 3% y/y. Sale of mortgages saw a 21% increase y/y, largely thanks to the government programmes – Bezpieczny kredyt 2% [Safe Loan at 2%]. Consumer activity in terms of consumer loans was also invigorated – consumer loan sales went up by 22% y/y.
In 2023, banks intensified efforts to enable their clients who hold FX mortgages to reach a bank settlement agreement, whether in line with the proposal of the PFSA Chairman or based on their own mediation models. Even so, 2023 was yet another year with a record balance of credit provisions for related legal risk.
Despite the ramifications of the factors affecting the Polish economy and the banking sector in 2023, the ING Bank Śląski S.A. Group generated net profit of PLN 4,440.9 million, up by 159% from 2022. The higher net profit of the ING Bank Śląski Group resulted primarily from the high net interest income – no additional regulatory levies which were the case in 2022 in relation to the credit holidays (-PLN 1,644.9 million), and the payment to System Ochrony Banków Komercyjnych S.A. (-PLN 470.7 million).
Total income of the Bank grew PLN 2,955 million y/y (+38%), whereas the bank’s total costs (including the banking tax) rose by PLN 55 million (+1%) and the balance sheet total went up by 13% y/y. As a consequence, the Bank’s costs (including banking tax) to income ratio went down by 14.9p.p. and stood at 40.7%. The Bank’s risk costs, including the legal costs of the FX mortgages declined by PLN 417 million (-40%) y/y, which was largely related to the changes in macroeconomic assumptions in the bank’s risk calculation models. The costs of legal risk alone went down by PLN 228 million y/y. The decline of the risk costs was followed by a change in the accumulated margin of risk costs which finished off at 0.39% at the end of 2023 vis-à-vis 0.68% as at the end of 2022. The coverage ratio of Stage 3 loans and other receivables and POCI improved by 2.3pp y/y and stood at 60.9%.
The Supervisory Board exercise oversight over the Bank’s operations, keep watch over the bank’s adherence to the relevant regulations in the area of accounting, finance and reporting of public companies. The powers of the Supervisory Board also include supervision of the individual risk management processes at ING Bank Śląski S.A. with the support of the Risk Committee and Audit Committee. Based on the recommendations of the aforesaid Committees, the Supervisory Board accept and approve the business risk management strategy of the Bank, the key principles of the risk management policy and the related risk appetite level, among other things. Further, the Supervisory Board monitor the utilisation of internal limits vis-à-vis the current strategy of the Bank.
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
The Risk Committee support the Supervisory Board in monitoring the risk management process, including the management of operational (non-financial) risk, liquidity risk, credit risk and market risk. Further, the Risk Committee supervise the risk management process as well as the assessment of internal capital, capital adequacy, and of the risk of capital-related models and other models. The Committee voice opinions about the end-to-end readiness of the Bank to assume risk on ongoing- and long-term bases. Furthermore, the Committee approve, on a periodic basis, the interim quantitative- and qualitative information on the capital adequacy of the Bank Group which the Bank discloses on a quarterly basis. The Risk Committee Chair who is also an independent member of the Supervisory Board holds regular meetings with individuals in charge of the individual risk areas, including the Chief Audit Executive and Centre of Expertise Lead III – Compliance. During the meetings, they discuss major aspects of ongoing operations of the Bank.
Monitoring of the financial reporting process is among the tasks of the Audit Committee. In that context, the Audit Committee periodically analyse the Bank financial statements and the results of their audit. Further, the Chair of the Audit Committee – who is also an independent member of the Board – holds periodic meetings with the Chief Financial Officer supervising the CFO Division in which the Chair is updated on the interim financial results of the Bank prior to their publication. The Chair of the Audit Committee also meets regularly with the Chief Audit Executive and Centre of Expertise Lead III – Compliance, to discuss the aspects typical for the internal audit and compliance risk management functions. The Audit Committee are also actively involved in the process of selecting the entity authorised to audit financial statements of the company, and analyse the performance of works by that entity, safeguarding its independence and effectiveness. Furthermore, the Audit Committee monitor the adequacy and effectiveness of internal control and internal audit systems, and also assess the effectiveness of measures used to mitigate risks, including compliance risk, and the said risk management quality. Following the organisational changes at the Bank in 2023, the Audit Committee recommended that the Supervisory Board make a change in the position of the Internal Audit Department Director. The change took place as of 1 July 2023.
There was also established the Remuneration and Nomination Committee within the Supervisory Board, which monitor inter alia the situation of the labour market in the context of salaries, the employee turnover process, the Management Board succession plans and also staff satisfaction survey results. The Committee regularly monitor the remuneration system of the Bank, the payroll and bonus policy included. The Remuneration and Nomination Committee Chair who is also an independent member of the Supervisory Board holds regular meetings
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
with key function holders in the HR area. In 2023, following the resignation of Mr Aris Bogdaneris from his function as a Supervisory Board Member and in view of the agenda of the General Meeting on 26 April 2023 which provided for the change in the number of Supervisory Board members from seven to eight, the Committee completed an individual assessment of two candidates to hold the office of the Supervisory Board Members, that is Mr Hans De Munck and Ms Katarzyna Zajdel-Kurowska, and a collective assessment of the Supervisory Board. Furthermore, the Committee, together with a third party, conducted a collective suitability assessment of the Audit Committee, including the process of the individual assessment of candidates for the Audit Committee, and gave the relevant recommendations to the Supervisory Board. The Committee also made a periodic suitability assessment of the individual Management Board Members, along with a periodic collective suitability assessment of that body.
The Supervisory Board assess the risk management system at ING Bank Śląski S.A. Group to be adequate and efficient. It covers all material risks. The Bank applies instruments and techniques adequate for specific risks to identify, measure, manage and report the same. The Bank reached the main goals of the risk management system in 2023 and ensured the independence of risk management organisational units and the adequate human resources necessary for the effective performance of their tasks. In 2023, ING Bank Śląski S.A. satisfied all the requirements of sound business operations and capital adequacy, and in particular:
• it pursued prudent lending policy. The lending processes and procedures applied by the Bank were compliant with the regulatory requirements and best practices on the market. In 2023, the Bank took account of the economic situation in its credit policy and applied more restrictive procedures towards sectors generating higher risk. The Bank’s credit portfolio was diversified with a significant share of high-quality loans extended to business entities. Within the Bank Group, Stage 3-credit receivables represented 2.7% of the total gross exposure (measured at amortised cost), which is significantly less than the average for the entire banking sector (5.0% as at the end of 2023.);
• it had systems and procedures in place in the area of market risk management (i.a. relating to interest rate or currency) that meet the highest market standards. Throughout 2023, individual market risk categories were managed actively so that their levels were within the limits effective at the Bank. The Bank’s balance sheet structure was balanced from the currency perspective; its distinctive feature is the low share of FX receivables in the total mortgage receivables, among other things;
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
• it maintained an adequate liquidity level. In 2023, neither the regulatory limits nor the internal liquidity limits were exceeded, and the sound liquidity position of the Bank is attributable to the stable household deposits base which is one of the largest among Polish banks;
• it effectively managed the operational risk, including model risk, while fulfilling market standards in that regard;
• it had an adequate level of own funds which allowed it to fulfil the regulatory requirements. In December 2023, the total capital ratio of the ING Bank Śląski S.A. Group was 16.73%, while the Tier 1 ratio stood at 15.32%.
• within its organisational structure, the Bank had clearly defined responsibilities and accountability for the development and implementation of ESG risk management mechanisms; it also developed and implemented new methods and tools in that regard. The Bank had in place mechanisms to mitigate the ESG risk as part of the KYC process and developed the approach to the RAS limits that account therefor. The Bank also has in place mechanisms that allow it to manage the ESG risk as part of the standard lending processes for retail- and corporate clients, and also as part of the operational risk management process, including reputational risk management. The Bank developed an approach to the collation of data needed to manage ESG risk, and has gradually implemented it.
The internal control system of the Bank is sufficiently adequate and effective to secure the Bank from unexpected developments in terms of funding granted, non-financial risk, market risk, liquidity risk or capital adequacy. The system covers all organisational units of the Bank and all three lines of defence. To ensure compliance with the law, supervisory requirements, internal regulations and market standards, firm corrective measures were planned and taken for weaknesses identified. The Bank has an official reporting path for the scale and nature of the identified irregularities as well as the status of corrective and disciplinary measures taken. Corrective and disciplinary measures are performed in a timely and efficient manner. The independence of the Internal Audit Department and the Centre of Expertise – Compliance has been ensured as well as sufficient human resources needed to carry out the tasks of those units.
Given the moderate economic growth as well as geopolitical- and regulatory uncertainty, the Supervisory Board is of the opinion that the Bank should continue to focus on the actions to maintain an adequate capital level as well as to ensure the availability and competitiveness of products and customer experience, such as:
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Assessment of the ING Bank Śląski S.A. Group Operations in 2023
• adequate capital management in order to ensure safe lending growth as well as fulfilment of all present and future regulatory requirements,
• further development of the product offer, including the offer of sustainable products, and electronic distribution channels,
• increasing lending capabilities, while being prudent when assessing clients’ risk which will foster keeping high quality of the portfolio and boost net interest income;
• maintenance of adequate stable deposits to ensure the liquidity needed to expand lending;
• an improvement of cost effectiveness while maintaining high-quality of processes by optimum use of resources and taking advantage of benefits from the increased scale of operations.
According to the Supervisory Board, the strategy pursued by the Bank over the recent years to increase the scale of its operations proved to be successful, which is reflected in the achieved financial and commercial results. Consequently, the Bank intends to uphold its strategy in 2024 while maintaining an adequate level of capital.
In view of the ongoing conflict between Russia and Ukraine, 2024 will certainly be marked by further uncertainty. On the other hand, it should also be a year of economic revival during which ING Bank Śląski and the entire banking sector will have a very important role to play, notably as an economic stabiliser in Poland.