Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022 prepared by the Supervisory Board
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
Poland’s economic growth was 4.9 per cent in 2022, helped by a rebound in demand, subdued during the COVID-19 pandemic, and refugee purchases from Ukraine. On the supply side, a positive support for growth has been the streamlining of global supply chains. Household consumption grew by 3.0 per cent last year, with the annual growth rate slowing markedly in the second half of the year. This was due to high inflation, which eroded real wages and reduced household purchasing power. Investment growth also slowed down in the second half of 2022, with a 4.6% increase for the year as a whole. Instead, companies were rebuilding their stocks of working capital after supply channels were unblocked and freight prices from China to Europe fell to pre-pandemic levels. As a result, in 2022, the change in stocks accounted for more than half of GDP growth (contribution of 2.9 percentage points to GDP growth of 4.9%).
The weakening economy in 2022 was accompanied by dynamic price increases. The energy shock amplified by Russian aggression against Ukraine and sanctions on energy commodities from Russia not only drove up energy and other commodity prices, but also generated secondary effects. Companies raised prices of finished goods in response to rising costs. Consumer inflation rose to the highest levels in a quarter of a century and stood at 16.6% in December 2022. The average annual increase in consumer prices in 2022 was 14.4%.
In response to rapidly rising inflation, the National Bank of Poland (NBP) continued the interest rate hike cycle that began in autumn 2021. Consequently, we have seen a large scale of rapid monetary tightening. The reference rate increased from 1.75% at the end of 2021 to 6.75% as at 2022 yearend. At the same time, the central bank did not adjust its balance sheet by buying or selling assets and did not carry out currency interventions. The tightening of monetary policy in 2022 has been accompanied by a loosening of fiscal policy. Reductions in direct taxes (higher tax-free amount and reduction of the first PIT rate from 17% to 12%) were accompanied by reductions in indirect tax rates (VAT, excise duty) as part of the so- called “anti-inflation shield”. This took place against the backdrop of the positive impact of high inflation on budget revenues.
In 2022, the banking sector’s performance was influenced by additional regulatory burdens: credit holidays (in Q3 2022 alone, their estimated negative impact on revenues was PLN 12.8 billion, with an average 66% client participation), contributions to the Commercial Bank Protection Scheme, or SOBK for short (PLN 3.5 billion), or the Borrower Support Fund (PLN 1.4 billion). The regulatory burden was to some extent absorbed by rising interest rates and the consequent increase in banks’ interest earnings. As a result of rising interest rates,
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
banks made their deposit offerings more attractive, prompting clients to place funds on term deposits. The structure of deposits held at banks has also changed, with a decline in current deposits in favour of time deposits. On the other hand, the rise in interest rates has caused a collapse in the mortgage market. Mortgage sales recorded a 44% y/y decline. However, the activity of economic operators was improving. The need to replenish day-to-day liquidity, finance supplies and replenish inventories, with high double-digit inflation, has contributed to an increasing demand for working capital credit.
In 2022, banks have stepped up their work to enable their clients, holders of foreign currency mortgages, to enter into bank settlements, whether in line with the PFSA Chairman’s proposal or based on their own mediation models. Nevertheless, 2022 was another year with a record balance of provisions for legal risk associated with this loan portfolio.
As a as a result factors affecting the Polish economy and the banking sector in 2022, the ING Bank Śląski S.A. Group achieved a net profit of PLN 1,714.4 million, a marked 26% deterioration 2021. The lower net profit in the ING Bank Śląski Group was mainly a consequence of the additional regulatory burden in 2022 related to the credit holiday (PLN - 1,644.9 million) and the contribution to the Commercial Bank Protection Scheme (PLN -470.7 million). Despite the credit moratorium, which took a toll on the bank’s interest income, the bank’s total income increased by PLN 825 million y/y (+12%). However, the bank’s total costs, charged to SOBK, increased y/y by PLN 678 million (+23%) and bank levy by a further PLN 102 million y/y (+19%), with total assets up 8% y/y. Consequently, this resulted in a 4.6 pp y/y increase in the bank’s overheads plus bank levy to income ratio, to 55.5%. The bank’s cost of risk including the legal risk cost of foreign currency mortgages increased y/y by PLN 658 million (+177%), which was mainly related to changes in the macroeconomic assumptions in the bank’s risk calculation models. Legal risk costs alone increased by PLN 238 million y/y. Following the increase in the cost of risk, the cumulative cost of risk margin changed to 0.68% at the end of 2022 vs 0.27% as at 2021 yearend, while the provisioning coverage ratio of Stage 3 loans and other receivables and POCI deteriorated y/y by 6.6 p.p. to 58.6%. In contrast, the level of coverage of the active portfolio of foreign currency mortgages by provisions for legal risk is one of the highest in the banking sector and stood at 88% as at 2022 yearend.
The Supervisory Board oversees the activities of the Company, ensuring compliance with the relevant laws and regulations relating to accounting, finance and reporting by public companies. The Supervisory Board is also responsible for overseeing processes related to the
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
management of individual risks in ING Bank Śląski S.A. with the support of the Risk Committee and the Audit Committee. On the basis of the recommendations of these Committees, the Supervisory Board accepts and approves the risk management alia strategy for the Bank’s activities, the main principles of the policy in the risk management, as well as the level of risk appetite. In addition, the Supervisory Board monitors the level of utilisation of internal limits from the perspective of the Bank’s current strategy.
The Risk Committee provides support to the Supervisory Board in monitoring the risk management process, including operational (non-financial) risk, liquidity risk, credit risk and market risk. The Committee also oversees the risk management process, as well as: internal capital estimation, capital adequacy and the risk of capital and other models. The Committee expresses its opinion on the Bank’s overall risk appetite in the current and long term. In addition, the Committee periodically approves the interim qualitative and quantitative information on capital adequacy disclosed by the Bank to the Bank Group on a quarterly basis.
Monitoring the financial reporting process is the responsibility of the Audit Committee. In this context, the Audit Committee periodically reviews the Bank’s financial statements and the results of the audit of these statements, whereby the Chairperson of the Audit Committee – who is also an independent member of the Board – holds regular meetings with the Vice- President of the Management Board supervising the CFO Division, during which she reviews the Bank’s interim financial results prior to their publication. The Audit Committee takes an active part in the process of selecting the company’s auditor and analyses the results of the auditor’s work, overseeing its independence and effectiveness. In addition, the Audit Committee monitors the adequacy and effectiveness of the internal control system and internal audit, and assesses the effectiveness of measures used to mitigate risks, including compliance risk, and the quality of the management of these risks.
The Supervisory Board also has a Remuneration and Nomination Committee, which monitors, among other things, the labour market situation in terms of remuneration, employee turnover processes, succession plans and the results of employee satisfaction surveys. The Committee regularly monitors the remuneration system in place at the Bank, including the remuneration and bonus policy. Following the resignation of Mr Remco Nieland as a member of the Bank’s Supervisory Board, the Committee carried out an individual assessment process of the Supervisory Board candidate Mr Aris Bogdaneris and a collective assessment of the Supervisory Board in 2022. In addition, the Committee conducted, with the involvement of an external company, a process of collective assessment of the suitability of
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
the Audit Committee, including a process of individual assessment of Audit Committee candidates, making appropriate recommendations to the Supervisory Board.
The Committee also carried out an assessment of the suitability of the Bank’s Management Board and periodic assessments of the suitability of individual Board members, together with a collective assessment of the suitability of this body in connection with changes in the responsibilities of individual members of the Bank’s Management Board.
The Supervisory Board assesses that the risk management system in ING Bank Śląski S.A Group is adequate and effective. It covers all relevant risks and the processes for identifying, measuring, managing and reporting them use risk-specific instruments and techniques. The main objectives of the risk management system were achieved in 2022 and the independence of the organisational units for risk management was ensured as well as adequate human resources necessary for the effective performance of these units. In 2022, ING Bank Śląski S.A. complied with all safe harbour and capital adequacy requirements, in particular:
• pursued a prudent lending policy. Lending processes and procedures were in line with supervisory requirements and best practices in the market. In 2022, the Bank took into account in its lending policy the situation prevailing in the economy and applied stricter procedures with regard to industries generating an increased level of risk. The Bank had a diversified loan portfolio with a significant proportion of high quality loans to businesses. At the Bank Group level, Stage 3 loan receivables represented 2.3% of total gross exposure (measured at amortised cost), which is significantly less than the average for the banking sector as a whole (5.0%);
• had procedures and systems in place to meet the highest market standards in the area of market risk management (including interest rate and currency risk). During 2022, the various categories of market risk were actively managed so that their level remained within the Bank’s limits. The Bank has a currency-balanced balance sheet structure, inter alia characterised by a low share of foreign currency receivables in total mortgage receivables;
• maintained an adequate level of liquidity. In 2022, the regulatory liquidity limits were not exceeded and the bank’s secure liquidity position is due to one of the largest stable household deposit bases among Polish banks;
• effectively managed operational risk, including model risk, meeting market standards in this regard;
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
• had an adequate level of own funds to meet supervisory requirements. In December 2022, the total capital ratio of the ING Bank Śląski S.A. Group was 15.23% and the Tier 1 capital ratio was 13.70%;
• had clearly defined duties and responsibilities within its organisational structure for the development and implementation of ESG risk management mechanisms, and developed and introduced new methods and tools in this regard. The Bank had mechanisms in place to mitigate ESG risk as part of the KYC process and mechanisms to manage ESG risk as part of its standard corporate client lending processes, as well as in its operational risk management including reputation risk.
In 2022, ING Bank Śląski S.A. also improved its credit risk management process:
• on the calculation of individual provisions, taking into account the principles set out in Recommendation R, by introducing a monthly calculation cycle,
• in the calculation of collective provisions by, inter alia, making changes to the methodology for classifying exposures into stages.
In addition, the Bank’s internal control system sufficiently adequately and effectively protects the Bank against unexpected events in terms of granted financing, non-financial risk, market risk, liquidity or capital adequacy. This system covers all the Bank’s business units and all three lines of defence. For the purpose of compliance with legislation, supervisory requirements, internal regulations and market standards for the identified weaknesses, decisive corrective actions were planned and taken. The Bank has a formalised path for reporting the scale and nature of identified irregularities and the status of corrective actions and disciplinary measures taken. Corrective and disciplinary actions are implemented in a timely and effective manner. The independence of the Internal Audit Department System and also the Centre of Expertise – is ensured, as well as the adequate human resources necessary for the effective performance of these units.
In the face of the economic downturn and geo-political and regulatory uncertainty, the Supervisory Board believes that the Bank's attention should continue to be focused on measures that enhance capital security and ensure accessibility and competitiveness in terms of products and client service quality, such as:
• adequate capital management to ensure secure credit growth as well as to meet all current and future regulatory requirements;
• further development of the product range, including sustainable products and electronic service channels;
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Assessment of the ING Bank Śląski S.A. Group’s Operations in 2022
• increasing lending, while maintaining a prudent assessment of client risk, which will contribute to maintaining a high quality portfolio and increasing interest income;
• maintaining an adequate level of stable deposits to provide the necessary liquidity for credit expansion;
• improving cost efficiency while maintaining high process quality through optimal use of existing resources and the benefits of increased scale of operations.
In the opinion of the Supervisory Board, the existing strategy of increasing the scale of operations pursued by the Bank in recent years has proved successful, as evidenced by the financial and commercial results achieved. The success of the strategy so far justifies the Bank’s intention to continue it in the next year while maintaining an adequate level of capital.
Certainly, 2023, in light of the ongoing Ukrainian-Russian conflict, will be marked by further uncertainty, and a return to robust economic growth will still have to wait. In this situation, the role of banks, including ING Bank Śląski, as stabilisers of the Polish economy is all the more important.