FINANCIAL HIGHLIGHTS	PLN k		EUR k
		31.12.2021	31.12.2020	31.12.2021	31.12.2020
Stand-alone financial statement
I	Net interest income	4 514 301	4 368 302	986 194	976 331
II	Net fee and commission income	2 119 447	1 765 507	463 014	394 597
III	Profit before tax	1 548 754	1 227 727	338 341	274 401
IV	Profit for the period	915 878	738 412	200 083	165 038
V	Total net cash flows	4 618 779	(3 745 668)	1 009 018	(837 170)
VI	Total assets	218 184 874	203 140 470	47 437 682	44 019 344
VII	Deposits from banks	1 337 573	2 993 349	290 815	648 641
VIII	Deposits from customers	175 354 581	161 133 491	38 125 534	34 916 679
IX	Total liabilities	194 357 522	177 717 626	42 257 147	38 510 364
X	Total equity	23 827 352	25 422 844	5 180 535	5 508 981
XI	Number of shares	102 189 314	102 189 314
XII	Net book value per share in PLN/EUR	233,17	248,78	50,70	53,91
XIII	Capital ratio	20,99%	23,90%*
XIV	Profit per share in PLN/EUR	8,96	7,23	1,96	1,62
XV	Diluted earnings per share in PLN/EUR	8,96	7,22	1,96	1,61
XVI	Declared or paid dividend per share in PLN/EUR*	2,16**	-*	0,47	-*

*Data in relevant period include profits included in own funds based on the decisions of the Polish Financial Supervision Authority and the applicable EBA requirements.

**Detailed information are described in Note 55.

The following rates were applied to determine the key EUR amounts for selected financial statements line items:

·         for balance sheet items – average NBP exchange rate as at 31.12.2021: EUR 1 = PLN 4,5994 and as at 31.12.2020: EUR 1 = PLN 4.6148

·         for profit and loss items – as at 31.12.2021 - the rate is calculated as the average of NBP exchange rates prevailing as at the last day of each month in 2021: EUR 1 = PLN 4,5775; as at 31.12.2020 - the rate is calculated as the average of NBP exchange rates prevailing as at the last day of each month in 2020: EUR 1 = PLN 4.4742

As at 31.12.2021, FX denominated balance sheet positions were converted into PLN in line with the NBP FX table no. 254/A/NBP/2021  dd. 31.12.2021

 

 

I.     Income statement. 66

II.    Statement of comprehensive income. 77

III.  Statement of financial position. 88

IV.  Statement of changes in equity. 99

V.   Statement of cash flows. 1010

VI.  Additional notes to financial statements. 1111

1.       General information about issuer  1111

2.       Basis of preparation of financial statements  1212

3.       Risk management 4444

4.       Capital management 7474

5.       Net interest income  7878

6.       Net fee and commission income  7979

7.       Dividend income  7979

8.       Net trading income and revaluation  8080

9.       Gains (losses) from other financial securities  8080

10.     Other operating income  8080

11.     Impairment allowances for expected credit losses  8181

12.     Employee costs  8181

13.     General and administrative expenses  8282

14.     Other operating expenses  8282

15.     Corporate income tax  8282

16.     Earnings per share  8383

17.     Cash and balances with central banks  8383

18.     Loans and advances to banks  8484

19.     Financial assets and liabilities held for trading  8585

20.     Hedging derivatives  8686

21.     Loans and advances to customers  8787

22.     Securitisation of assets  9393

23.     Investment securities  9494

24.     Investments in subsidiaries and associates  9595

25.     Intangible assets  9797

26.     Goodwill 9898

27.     Property, plant and equipment 100100

28.     Right of use assets  101101

29.     Net deferred tax assets  102102

30.     Fixed assets classified as held for sale  103103

31.     Other assets  103103

32.     Deposits from banks  104104

33.     Deposits from customers  104104

34.     Subordinated liabilities  105105

35.     Debt securities in issue  105105

36.     Provisions for off balance sheet credit facilities  106106

37.     Other provisions  106106

38.     Other liabilities  107107

39.     Share capital 108108

40.     Other reserve capital 109109

41.     Revaluation reserve  110110

42.     Hedge accounting  111111

43.     Sell-buy-back and buy-sell-back transaction  115115

44.     Offsetting financial assets and financial liabilities  116116

45.     Fair value  117117

46.     Legal risk connected with CHF mortgage loans  122122

47.     Contingent liabilities  126126

48.     Assets and liabilities pledged as collateral 127127

49.     Information about leases  128128

50.     Statement of cash flows - additional information  129129

51.     Related parties  129129

52.     Acquisitions and disposals of investments in subsidiaries and associates  132132

53.     Employee benefits  133133

54.     Share based incentive scheme  134134

55.     Dividend per share  136136

56.     Operating segments reporting  137137

57.     Events which occurred subsequently to the end of the reporting period  138138

        

I.                   Income statement

for the period		1.01.2021-31.12.2021	1.01.2020-31.12.2020
Interest income and similar to interest		4 745 525	5 002 557
Interest income on financial assets measured at amortised cost		3 791 645	4 146 469
Interest income on financial assets measured at fair value through other comprehensive income		940 407	816 253
Income similar to interest on financial assets measured at fair value through profit or loss		13 473	39 835
Interest expense		(231 224)	(634 255)
Net interest income	Note 5	4 514 301	4 368 302
Fee and commission income		2 432 555	2 089 039
Fee and commission expense		(313 108)	(323 532)
Net fee and commission income	Note 6	2 119 447	1 765 507
Dividend income	Note 7	277 498	108 679
Net trading income and revaluation	Note 8	251 800	154 588
Gains (losses) from other financial securities	Note 9	91 428	242 885
Other operating income	Note 10	196 317	106 064
Impairment allowances for expected credit losses	Note 11	(841 012)	(1 361 577)
Operating expenses incl.:		(4 477 231)	(3 595 940)
-Staff, operating expenses and management costs	Note 12 and 13	(2 594 814)	(2 649 985)
-Amortisation of property, plant and equipment and Intangible assets		(358 721)	(357 396)
-Amortisation of right of use asset		(145 726)	(157 471)
-Other operating expenses	Note 14	(1 377 970)	(431 088)
Tax on financial institutions		(583 794)	(560 781)
Profit before tax		1 548 754	1 227 727
Corporate income tax	Note 15	(632 876)	(489 315)
Profit for the period		915 878	738 412
Net earnings per share	Note 16
Basic earnings per share (PLN/share)		8,96	7,23
Diluted earnings per share (PLN/share)		8,96	7,22

II.                Statement of comprehensive income

	for the period:	1.01.2021-31.12.2021	1.01.2020-31.12.2020
Profit for the period		915 878	738 412
Items that will be reclassified subsequently to profit or loss:		(2 688 163)	536 610
Revaluation and sales of debt financial assets measured at fair value through other comprehensive income gross	Note 23 and 41	(3 305 330)	642 520
Deferred tax		628 013	(122 079)
Revaluation of cash flow hedging instruments gross	Note 41 and 48	(13 390)	19 962
Deferred tax		2 544	(3 793)
Items that will not be reclassified subsequently to profit or loss:		397 522	(32 380)
Revaluation of equity financial assets measured at fair value through other comprehensive income gross	Note 23 and 41	484 653	(36 711)
Deferred and current tax		(91 874)	6 785
Provision for retirement benefits – actuarial gains/losses gross	Note 41 and 54	5 856	(3 029)
Deferred tax		(1 113)	575
Total other comprehensive income, net		(2 290 641)	504 230
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		(1 374 763)	1 242 642

III.             Statement of financial position

as at:		31.12.2021	31.12.2020
ASSETS
Cash and balances with central banks	Note 17	8 167 900	5 369 638
Loans and advances to banks	Note 18	2 743 994	2 918 962
Financial assets held for trading	Note 19	4 020 966	3 218 460
Hedging derivatives	Note 20	163 043	6 901
Loans and advances to customers incl.:	Note 21	125 449 130	119 077 346
- measured at amortised cost		123 268 726	116 786 037
- measured at fair value through other comprehensive income		1 729 848	1 556 791
- measured at fair value through profit and loss		450 556	734 518
Buy-sell-back transactions	Note 43	453 372	293 583
Investment securities incl.:	Note 23	68 865 411	64 355 667
- debt securities measured at fair value through other comprehensive income		67 138 415	63 312 701
- debt securities measured at fair value through profit and loss		113 733	106 639
- debt investment securities measured at amortised cost		1 421 272	-
- equity securities measured at fair value through other comprehensive income		191 991	823 633
- equity securities measured at fair value through profit and loss		-	112 694
Assets pledged as collateral	Note 48	21 462	14 392
Investments in subsidiaries and associates	Note 24	2 377 407	2 377 407
Intangible assets	Note 25	590 959	628 643
Goodwill	Note 26	1 688 516	1 688 516
Property, plant and equipment	Note 27	545 431	576 975
Right of use asset	Note 28	460 682	642 396
Current income tax assets		212 204	-
Net deferred tax assets	Note 29	1 568 080	1 199 689
Fixed assets classified as held for sale	Note 30	4 308	4 308
Other assets	Note 31	852 009	767 587
Total assets		218 184 874	203 140 470
LIABILITIES AND EQUITY
Deposits from banks	Note 32	1 337 573	2 993 349
Hedging derivatives	Note 20	1 641 824	1 686 042
Financial liabilities held for trading	Note 19	3 880 926	3 053 416
Deposits from customers	Note 33	175 354 581	161 133 491
Sell-buy-back transactions	Note 43	21 448	14 387
Subordinated liabilities	Note 34	2 649 991	2 654 394
Debt securities in issue	Note 35	4 660 882	2 772 351
Lease liabilities	Note 49	556 169	712 304
Current income tax liabilities		-	138 782
Provisions for off balance sheet credit facilities	Note 36	73 130	74 436
Other provisions	Note 37	1 809 635	670 645
Other liabilities	Note 38	2 371 363	1 814 029
Total liabilities		194 357 522	177 717 626
Equity
Share capital	Note 39	1 021 893	1 021 893
Other reserve capital	Note 40	20 790 808	20 273 125
Revaluation reserve	Note 41	(1 311 047)	1 819 661
Retained earnings		2 409 820	1 569 753
Profit for the period		915 878	738 412
Total equity		23 827 352	25 422 844
Total liabilities and equity		218 184 874	203 140 470

IV.            Statement of changes in equity

Statement of changes in equity 1.01.2021 - 31.12.2021	Share capital	Other reserve capital	Revaluation reserve	Retained earnings and profit for the period	Total
Note	39	40	41
As at the beginning of the period	1 021 893	20 273 125	1 819 661	2 308 165	25 422 844
Total comprehensive income	-	-	(2 290 641)	915 878	(1 374 763)
Profit for the period	-	-	-	915 878	915 878
Other comprehensive income	-	-	(2 290 641)	-	(2 290 641)
Profit allocation to other reserve capital	-	738 412	-	(738 412)	-
Interim dividend*	-	(220 729)	-	-	(220 729)
Transfer of revaluation of equity financial assets measured at fair value through other comprehensive income**	-	-	(840 067)	840 067	-
As at the end of the period	1 021 893	20 790 808	(1 311 047)	3 325 698	23 827 352

*details in Note 55

**details in Note 45

Statement of changes in equity 1.01.2020 - 31.12.2020	Share capital	Other reserve capital	Revaluation reserve	Retained earnings and profit for the period	Total
Note	39	40	41
As at the beginning of the period	1 020 883	19 214 757	1 315 180	2 626 766	24 177 586
Total comprehensive income	-	-	504 230	738 412	1 242 642
Profit for the period	-	-	-	738 412	738 412
Other comprehensive income	-	-	504 230	-	504 230
Issue of shares	1 010	-	-	-	1 010
Profit allocation to other reserve capital	-	1 056 762	-	(1 056 762)	-
Share-based payment	-	1 606	-	-	1 606
Transfer of revaluation of equity financial assets measured at fair value through other comprehensive income	-	-	251	(251)	-
As at the end of the period	1 021 893	20 273 125	1 819 661	2 308 165	25 422 844

V.               Statement of cash flows

for the period	1.01.2021-31.12.2021	1.01.2020-31.12.2020
Cash flows from operating activities
Profit before tax	1 548 754	1 227 727
Adjustments for:
Depreciation/amortisation	504 447	514 867
Profit from investing activities	(77 903)	(221 593)
Interest accrued excluded from operating activities	(735 547)	(583 589)
Dividends	(275 665)	(108 485)
Impairment losses (reversal)	64 938	46 860
Changes in:
Provisions	1 137 684	432 509
Financial assets / liabilities held for trading	43 481	(116 425)
Assets pledged as collateral	(7 070)	16 345
Hedging derivatives	(147 152)	730 688
Loans and advances to banks	(34 455)	(7 099)
Loans and advances to customers	(10 194 482)	(4 919 567)
Deposits from banks	(1 644 201)	1 481 425
Deposits from customers	15 516 029	17 028 627
Buy-sell/ Sell-buy-back transactions	(122 009)	171 015
Other assets and liabilities	514 745	342 865
Interest received on operating activities	3 782 707	4 271 983
Interests paid on operating activities	(80 158)	(391 287)
Paid income tax	(814 683)	(984 378)
Net cash flows from operating activities	8 979 460	18 932 488
Cash flows from investing activities
Inflows	14 868 031	7 016 008
Sale/maturity of investment securities	13 515 618	5 878 063
Sale of intangible assets and property, plant and equipment	41 598	35 831
Dividends received	275 665	108 485
Interest received	1 035 150	993 629
Outflows	(19 462 508)	(28 975 510)
Purchase of investment securities	(19 129 239)	(28 712 488)
Purchase of intangible assets and property, plant and equipment	(333 269)	(263 022)
Net cash flows from investing activities	(4 594 477)	(21 959 502)
Cash flows from financing activities
Inflows	4 273 650	462 190
Debt securities in issue	4 273 650	444 930
Proceeds from issuing/shares	-	1 010
Drawing of loans	-	16 250
Outflows	(4 039 854)	(1 180 844)
Debt securities buy out	(2 294 798)	(550 000)
Repayment of loans and advances	(1 255 804)	(311 359)
Repayment of lease liability	(160 236)	(169 799)
Dividends to shareholders	(220 729)	-
Interest paid	(108 287)	(149 686)
Net cash flows from financing activities	233 796	(718 654)
Total net cash flows	4 618 779	(3 745 668)
Cash and cash equivalents at the beginning of the accounting period	13 411 198	17 156 866
Cash and cash equivalents at the end of the accounting period	18 029 977	13 411 198

Information regarding liabilities arising from financing activities relating to loans received, subordinated liabilities and the issue of debt securities were presented respectively in Notes 32-35.

VI.            Additional notes to financial statements

1.        General information about issuer

Santander Bank Polska SA is a bank located in Poland, 00-854 Warszawa, al. Jana Pawła II 17, National Court Registry identification number is 0000008723, TIN os 896-000-56-73, National Official Business Register number (REGON) is 930041341.

On 7.09.2018, the District Court for Wrocław-Fabryczna in Wrocław,  VI Economic Unit of the National Court Register, entered into the register of entrepreneurs changes in the Bank’s statute resulting in, among others, the change of the Bank's name from the Bank Zachodni WBK SA to Santander Bank Polska SA.

The immediate and ultimate parent entity of Santander Bank Polska SA is Banco Santander, having its registered office in Santander, Spain.

Santander Bank Polska SA offers a wide range of banking services to individual and business customers and operates in domestic and interbank foreign markets. It also offers the following services:

·         intermediation in trading in securities,

·         leasing,

·         factoring,

·         asset/ fund management,

·         insurance distribution services,

·         trading in shares of commercial companies,

·         brokerage services.

2.        Basis of preparation of financial statements

2.1. Statement of compliance

These separate annual financial statements of Santander Bank Polska S.A. were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, which are applied on a consistent basis, as at 31 December 2021, in the case of matters not governed by the above Standards, in accordance with the provisions of the Accounting Act of 29 September 1994 (consolidated text: Journal of Law 2021, item 217) and related implementing acts as well as the requirements imposed on issuers whose securities are admitted to trading on regulated markets or issuers who have applied to have securities admitted to trading on regulated markets outlined in the Act of 29 July 2005 on Public Offering, on Conditions for the Introduction of Financial Instruments to the Organized Trading System and on Public Companies.

These financial statements have been approved for publication by the Management Board of Santander Bank Polska S.A. on 22.02.2022.

The separate financial statements of Santander Bank Polska SA are published on the same date as the consolidated financial statements of the Santander Bank Polska SA Group. 

2.2. Basis of preparation of financial statements

These separate financial statements have been prepared on the assumption that the company will continue as going concern in the foreseeable future, ie for a period of at least 12 months from the date on which these financial statements were prepared.

In its assessment, the Management Board considered, inter alia, the impact of the COVID-19 pandemic and has determined that it affects the valuation of assets and estimated future results, but does not create material uncertainty about the entity's ability to continue as a going concern.

Separate financial statements are presented in PLN, rounded to the nearest thousand.

These financial statements of Santander Bank Polska S.A. have been prepared in accordance with the International Financial Reporting Standards (IFRS) adopted in the European Union. Santander Bank Polska S.A. prepared the separate financial statements in accordance with following valuation rules:

Item	Balance sheet valuation rules
Held-for-trading financial instruments	Fair value through profit or loss
Loans and advances to customers which do not meet the contractual cash flows test	Fair value through profit or loss
Financial instruments measured at fair value through other comprehensive income	Fair value through other comprehensive income
Share-based payment transactions	According to IFRS 2 "Share-based payment" requirements
Equity investment financial assets	Fair value through other comprehensive income – an option
Equity financial assets	Fair value through profit or loss
Debt securities measured at fair value through profit or loss	Fair value through profit or loss
Non-current assets	The purchase price or production cost reduced by total depreciation charges and total impairment losses
Non-current assets held for sale and groups of non-current assets designated as held for sale	Are recognised at the lower of their carrying amount and their fair value less costs of disposal.

The same accounting principles were applied as in the case of the separate financial statements for the period ending 31 December 2020, changes resulting from application of new standards are described in p.2.4 of these financial statements.

2.3. New standards and interpretations or changes to existing standards or interpretations which can be applicable to Santander Bank Polska S.A. and are not yet effective and have not been early adopted.

IFRS	Nature of changes	Effective from	Influence on Santander Bank Polska S.A.
Annual improvements to IFRS standards 2018-2020	As a result of annual improvements project, amendments to four IFRSs were introduced (IFRS1, IFRS9, IFRS16, IAS 41). Amendments to IFRS 9 clarify which fees an entity applies when "10% test" is performed for derecognition of financial liabilities. For IFRS 16 an illustrative example for lease incentives treatments was changed, in order not to cause confusion.	1 January 2022	The amendment will not have a significant impact on financial statements.
Amendments to IAS 37 Provisions	The changes concern the clarification of the scope of costs that should be taken into account in assessing whether the contract is a onerous contract	1 January 2022	The amendment will not have a significant impact on financial statements.
Amendments to IAS 16 Property, Plant and Equipment	The changes indicate, i.a, that revenues from the sale of goods produced in the course of bringing an asset to the desired location and condition, cannot be deducted from the costs associated with this asset. Instead, such revenues should be recognized in the profit and loss account along with the costs of manufacturing these products	1 January 2022	The amendment will not have a significant impact on financial statements.
Amendments to IFRS 3  Business combinations	IFRS 3 "Business Combinations" was amended to refer to the 2018 Conceptual Framework for Financial Reporting, in order to determine what constitutes an asset or a liability in a business combination. Prior to the amendment, IFRS 3 referred to the 2001 Conceptual Framework for Financial Reporting. In addition, a new exception in IFRS 3 was added for liabilities and contingent liabilities.	1 January 2022	The amendment will not have a significant impact on financial statements.
IFRS 17 Insurance Contracts	IFRS 17 defines a new approach to the recognition, valuation, presentation and disclosure of insurance contracts. The main purpose of IFRS 17 is to guarantee the transparency and comparability of insurers’ financial statements. In order to meet this requirement the entity will disclose a lot of quantitative and qualitative information enabling the users of financial statements to assess the effect that insurance contracts  have on the financial position, financial performance and cash flows of the entity. IFRS 17 introduces a number of significant changes in relation to the existing requirements of IFRS 4. They concern, among others: aggregation levels at which the calculations are made, methods for the valuation of insurance liabilities, recognition a profit or loss over the period , reassurance recognition, separation of the investment component and presentation of particular items of the balance sheet and profit and loss account of reporting units including the separate presentation of insurance revenues, insurance service expenses and insurance finance income or expenses.	1 January 2023	The standard will not have a significant impacton financial statements.*
Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors	Amendments to IAS 8 include definition of accounting estimates, which should help to distinguish between accounting policies and accounting estimates	1 January 2023	The amendment will not have a significant impact on financial statements.*
Amendments to IAS 12	Amendments clarify how companies account for deferred tax on transactions such as leases and decommissioning obligations.	1 January 2023	The amendment will not have a significant impact on financial statements.*
Amendments to IAS 1	There are two amendments to IAS 1. The first one affect requirements for the classification of liabilities as non-current. The second one concerns accounting policy disclosures .	1 January 2023	The amendment will not have a significant impact on financial statements.*

.*New standards and amendments to the existing standards issued by the IASB, but not yet adopted by EU.

2.4. Standards and interpretations or changes to existing standards or interpretations which were applied for the first time in the accounting year 2021

IFRS	Nature of changes	Effective from	Influence on Santander Bank Polska S.A.
Amendments to IFRS 16 Leasing-extention	The amendments provide the possibility of exempting lessees from recognizing rental concessions as modifications in accordance with IFRS 16, if they meet certain conditions and result from COVID-19. Extention by one year for rent concessions beyond 30 June 2021 ( May 2020 amendment)	1 April 2021	The amendment does not have a significant impact on financial statements.*
IBOR reform -Phase 2 (amendments to IFRS 9, IAS 39,IFRS 7,IFRS 4, IFRS 16)	The amendments complement the changes introduced in Phase 1 and relate to the following areas: changes in cash flows, hedge accounting and disclosures. The change in cash flows resulting from reform will only require updating the EIR, without affecting the gross carrying amount of the financial instrument or the need to derecognise it.	1 January 2021	The amendment does not have a significant impact on financial statements.**
*New standards and amendments to the existing standards issued by the IASB, but not yet adopted by EU. ** For details of Interest Rate Benchmark Reform please refer to Risk Management section p. Interest Rate Benchmark Reform.

2.5. Use of estimates

Preparation of financial statement in accordance with the IFRS requires the management to make subjective judgements, estimations and assumptions, which affects the applied accounting principles as well as presented assets, liabilities, revenues and expenses.

The estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying amounts of assets and liabilities that are not readily apparent from other sources.

The estimates and assumptions are reviewed on an ongoing basis. Changes to estimates are recognised in the period in which the estimate is changed if the change affects only that period, or in the period of the change and future periods if the change affects both current and future periods.

Key accounting estimates made by Santander Bank Polska S.A.

Key estimates include:

·         Allowances for expected credit losses

·         Fair value of financial instruments

·         Estimates for legal claims

·         Estimated collective provisions for risk arising from mortgage loans in foreign currencies

·         Estimates regarding reimbursement of fees related to early repaid consumer loans.

Allowances for expected credit losses in respect of financial assets

The IFRS 9 approach is based on estimation of the expected credit loss (ECL). ECL allowances reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. ECL allowances are measured at an amount equal to a 12-month ECL or the lifetime ECL, when it is deemed there has been a significant increase in credit risk since initial recognition (Stage 2) or impairment (Stage 3). Accordingly, the ECL model gives rise to measurement uncertainty, especially in relation to:

·   measurement of a 12-month ECL or the lifetime ECL;

·   determination of when a significant increase in credit risk occurred;

·   determination of any forward-looking events reflected in ECL estimation, and their likelihood.

As a result, ECL allowances are estimated using the adopted model developed using many inputs and statistical techniques. Structure of the models that are used for the purpose of ECL estimation consider models for the following parameters:

·   PD - Probability of Default, i.e. the estimate of the likelihood of default over a given time horizon (12-month or lifetime);

·   LGD - Loss Given Default, i.e. the part of the exposure amount that would be lost in the event of default;

·   EAD – Exposure at Default, i.e. expectation for the amount of exposure in case of default event in a given horizon 12-month or lifetime.

Changes in these estimates and the structure of the models may have a significant impact on ECL allowances.

In accordance with IFRS 9, the recognition of expected credit losses depends on changes in credit risk level which occur after initial recognition of the exposure. The standard defines three main stages for recognising expected credit losses:

·   Stage 1 – exposures with no significant increase in credit 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 credit risk since initial recognition, but with no objective evidence of impairment. For such exposures, lifetime expected credit losses is recognised.

·   Stage 3: exposures for which the risk of default has materialised (objective evidence of impairment has been identified). For such exposures, lifetime expected credit losses is recognised.

For the purpose of the collective evaluation of ECL, financial assets are grouped on the basis of similar credit risk characteristics that indicate the debtors' ability to pay all amounts due according to the contractual terms (for example, on the basis of the Bank’s credit risk evaluation or the grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). The characteristics chosen are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. The rating/scoring systems have been internally developed and are continually being enhanced, e.g through external analysis that helps to underpin the aforementioned factors which determine the estimates of impairment charges.

In the individual approach, the ECL charge was determined based on the calculation of the total probability-weighted impairment charges estimated for all the possible recovery scenarios, depending on the recovery strategy currently expected for the customer.

In the scenario analysis, the key strategies / scenarios used were as follows:

·   Recovery from the operating cash flows / refinancing / capital support;

·   Recovery through the voluntary liquidation of collateral;

·   Recovery through debt enforcement;

·   Recovery through systemic bankruptcy/recovery proceeding/liquidation bankruptcy;

·   Recovery by take-over of the debt / assets / sale of receivables

·   Recovery as part of legal restructuring.

In addition, for exposures classified as POCI (purchased or originated credit impaired) - i.e. purchased or arising financial assets that are impaired due to credit risk upon initial recognition, expected credit losses are recognized over the remaining life horizon. Such an asset is created when impaired assets are initially recognized and the POCI classification is maintained over the life of the asset.

A credit-impaired assets

Credit-impaired assets are classified as Stage 3 or POCI.  A financial asset or a group of financial assets are impaired if, and only if, there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset or asset was recognized as POCI and that impairment event (or events) had an impact on the estimated future cash flows of the financial asset or group of financial assets that could be reliably estimated. It may not be possible to identify a single, event that caused the impairment, rather the combined effect of several events may have caused the impairment. Objective evidence that a financial asset or group of assets was impaired includes observable data:

·   significant financial difficulty of the issuer or debtor;

·   a breach of contract, e.g. delay in repayment of interest or principal over 90 days in an amount exceeding the materiality threshold (PLN 400 for individual and small and medium-sized enterprises and PLN 2,000 for business and corporate clients) and at the same time relative thresholds (above 1% of the amount past due in relation to the balance sheet amount);

·   the Santander Bank Polska S.A., for economic or legal reasons relating to the debtor's financial difficulty, granting to the debtor a concession that the Santander Bank Polska S.A. would not otherwise consider, which fulfill below criteria:

(1)   contingent restructuring transactions that meet the criteria for reclassification into basket 3 (quantitative and / or qualitative),

(2)   contingent restructuring transactions previously classified as non-performing, which have been refinanced or restructured, or are more than 30 days past due to the customer's with observed financial difficulties,

(3)   restructured transactions, where contractual clauses have been applied that defer payments through a grace period for repayment of the principal for a period longer than two years,

(4)   restructured transactions including debt write-off, interest grace periods or repaid in installments without contractual interest,

(5)   restructured transactions, where there was a change in the net present value of cash flows (NPV) of at least 1% compared to the NPV before the application of the forbearance measures,

(6)   transactions where:

o   inadequate repayment schedules (initial or later, if used) were applied, which are related to, inter alia, repeated situations of non-compliance with the schedule, changes in the repayment schedule in order to avoid situations of non-compliance with it, or

o   a repayment schedule that is based on expectations, unsupported by macroeconomic forecasts or credible assumptions about the borrower's ability or willingness to repay was applied.

(7)   transactions for which the Bank has reasonable doubts as to the probability of payment by the customer.

·   it becoming probable that the debtor will enter bankruptcy, recovery proceedings, arrangement or other financial reorganisation;

·   the disappearance of an active market for that financial asset because of financial difficulties;

·   exposures subject to the statutory moratorium, the so-called Shield 4.0 (Act of 19 June 2020 on interest subsidies for bank loans granted to entrepreneurs affected by COVID-19) - application of a moratorium on the basis of a declaration of loss of source of income.

Impaired exposures (Stage 3) can be reclassified to Stage 2 or Stage 1 if the reasons for their classification to Stage 3 have ceased to apply (particularly if the borrower’s economic and financial standing has improved) and a probation period has been completed (i.e. a period of good payment behaviour meaning the lack of arrears above 30 days), subject to the following:

·   In the case of individual customers, the probation period is 180 days.

·   In the case of SME customers, the probation period is 180 days, and assessment of the customer’s financial standing and repayment capacity is required in some cases. However, the exposure cannot be reclassified to Stage 1 or 2 in the case of fraud, client`s death, discontinuation of business, bankruptcy, or pending restructuring/ liquidation proceedings.

·   In the case of business and corporate customers, the probation period is 92 days, and positive assessment of the financial standing is required (Bank assesses all remaining payments as likely to be repaid as scheduled in the agreement). The exposure cannot be reclassified to Stage 1 or 2 in the case of fraud, discontinuation of business, or pending restructuring/ insolvency/ liquidation proceedings.

·   Additionally, if the customer is in Stage 3 and subject to the forbearance process ( incl. so-called Shield 4.0 moratoria), they may be reclassified to Stage 2 not earlier than after 365 days (from the start of forbearance or from the downgrade to the NPL portfolio, whichever is later) of regular payments, repayment by the client of the amount previously overdue / written off (if any) and after finding that there are no concerns as to the further repayment of the entire debt in accordance with the agreed terms of restructuring.

Detailed disclosures regarding credit risk are included in section 3:Risk management

A significant increases in credit risk

One of the key elements of IFRS 9 is the identification of a significant increase in credit risk which determines the classification to Stage 2. The Bank has developed detailed criteria for the definition of a significant increase in the level of risk based on the following main assumptions:

·   Qualitative assumptions:

·   Implementing dedicated monitoring strategies for the customer following the identification of early warning signals that indicate a significant increase in credit risk

·   Restructuring actions connected with making concessions to the customers as a result of their difficult financial standing

·   Delay in payment as defined by the applicable standard, i.e. 30 days past due combined with the materiality threshold

·   Quantitative assumptions:

·   A risk buffer method based on the comparison of curves illustrating the probability of default over the currently remaining lifetime of the exposure based on the risk level assessment at exposure recognition and at reporting date. Risk buffer is set in relative terms for every single exposure based on its risk assessment resulting from internal models and other parameters of exposure impacting assessment of the Bank whether the increase might have significantly increased since initial recognition of the exposure  (such parameters considered types of the products, term structure as well as profitability). Risk buffer methodology was prepared internally and is based on the information gathered in course of the decisioning process as well as in process of transactions structuring.

Thresholds (determining the maximum permissible value of the probability of default (PD) as at the reporting date after the change in relation to the PD value at the moment of initial recognition) for classification into basket 2 are specified individually for each exposure,. The table presents the average annual values of the PD thresholds, taking into account the time to maturity of the exposure.

Average threshold (per annum) of the probability of default
mortgage loans				3,04%
consumer loans				13,95%
corporate loans				13,17%

Fact of being covered by aid measures related to COVID-19 (excluding exposures subject to statutory moratoria (Shield 4.0)) does not automatically result in classification into Stage 2 or Stage 3. Additional client`s risk is monitored on an ongoing basis. In order to manage credit risk following COVID-19 pandemic, management reports and early warning systems have been expanded, the most vulnerable populations are reviewed in detail

·   Exposure in Stage 2 may be re-classified into Stage 1 without probation period as soon as significant increase in credit risk indicators after its initial recognition end e.g. when the following conditions are met: client`s current situation does not require constant monitoring, no restructuring actions towards exposure are taken, exposure has no payment delay over 30 days for significant amounts, no suspension of the contact due to Shield 4.0, and according to risk buffer method no risk increase occurs. 

Santander Bank Polska S.A. does not identify low credit risk exposures under IFRS 9 standard  rules, which allows to recognize 12-month expected loss even  in cease of significant increase of credit risk since initial recognition.

ECL measurement

Another key feature introduced by IFRS 9 is the approach to the estimation of risk parameters. For the purpose of estimating allowances for expected losses, Santander Bank Polska S.A. uses its own estimates of risk parameters that are based on internal models. Expected credit losses are the sum of individual products for each exposure of the estimated values of PD, LGD and EAD parameters in particular periods (depending on the stage either in the horizon of 12 months or in lifetime) discounted using the effective interest rate. The estimated parameters are adjusted for macroeconomic scenarios in accordance with the assumptions of IFRS 9. To this end, Bank determines the factors which affect individual asset classes to estimate an appropriate evolution of risk parameters. Bank uses scenarios developed internally by the analytical team, which are updated on a monthly basis at least every six months. The models and parameters generated for the needs of IFRS 9 are subject to model management process and periodic calibration and validation. These tools are also used in the financial planning process.

Determination of forward-looking events and their likelihood

Forward-looking events are reflected both in the process of estimating ECL and when determining a significant increase in credit risk, by developing appropriate macroeconomic scenarios and then reflecting them in the estimation of parameters for each scenario. The final parameter value and the ECL is the weighted average of the parameters weighted by the likelihood of each scenario. Bank uses three scenario types: the baseline scenario and two alternative scenarios, which reflect the probable alternative options of the baseline scenario: upside and downside scenario. Scenario weights are determined using the expected GDP path and the confidence intervals for this forecast in such a way that the weights reflect the uncertainty about the future development of this factor.

The bank's models most often indicate the dependence of the quality of loan portfolios on the market situation in terms of the level of deposits, loans, as well as the levels of measures related to interest rates.

Baseline scenario

In the baseline scenario the economic growth will be supported by looser fiscal policy (Polish Deal programme) and new EU funds, with 4.9% and 3.6% GDP growth rates envisaged for 2022 and 2023. As for end of 2021, EU Recovery Fund was not available, but the scenario assumes that the government will be able to reach an agreement with the European Commission and unlock new funds in 2022. Strong domestic demand along with weaker PLN, energy hikes and higher commodity prices driven by worldwide supply chain disruptions will be fuelling CPI inflation, which is expected to average 6.2% in 2022.  In late 2021 the NBP started tightening the monetary policy and hiked interest rates in October and November by a total of 115bp, to 1.25%. Interest rates are expected to reach 3.00% at the end of 2022.

Best case scenario

The upside scenario was built under an assumption that no new coronavirus waves or lockdowns appears. EU funds are unlocked and supply disruptions disappear. In 2022 the economy is expected to grow by 6.2% and then to decelerate gradually, but to remain strong. Strong growth will fuel the already elevated inflation, averaging 6.5% in 2022 and 4.1% in 2023. The NBP will continue its tightening cycle. Interest rates are expected to climb to 3.00% at the end of 2022.

Worst case scenario

The downside scenario was built under an assumption that the new coronavirus wave will lead to a renewal of epidemic restrictions. At the same time, the conflict between the Polish government and the European Commission will not be resolved anytime soon, so Recovery Fund means will not be disbursed. In 2022 the economy is expected to rise by 3.3% and then to slow down to 1.3% in 2023. Despite slower growth, CPI inflation is expected to remain elevated and to average 6.2% in 2022. Deterioration of the economic outlook will find the MCP during its hiking cycle, so after applying rate increases bringing the reference rate to 3.00% in 2Q22 rates will go down to 1.50% in 1Q23.

The tables below present the key economic indicators arising from the respective scenarios.

Scenario as at 2021.12.31			baseline		best case		worst case
likehood			60%		20%		20%
			2022	average, next 3 years	2022	average, next 3 years	2022	average, next 3 years
GDP		YoY	4,9%	3,0%	6,2%	4,8%	3,3%	1,3%
WIBOR 3M		average	3,0%	3,0%	3,0%	3,0%	2,8%	1,8%
unemployment rate		% active	3,2%	3,0%	3,2%	2,7%	3,2%	3,4%
CPI		YoY	6,2%	3,1%	6,5%	3,4%	6,3%	2,5%
EURPLN		period-end	4,46	4,34	4,39	4,3	4,73	4,51

Scenario as at 2020.12.31			baseline		best case		worst case
likehood			60%		20%		20%
			2021	average, next 3 years	2021	average, next 3 years	2021	average, next 3 years
GDP		YoY	3,1%	3,1%	4,4%	4,1%	1,8%	2,2%
WIBOR 3M		aveage	1,6%	1,6%	1,6%	1,6%	1,6%	1,6%
unemployment rate		% active	2,6%	2,1%	2,4%	1,9%	2,7%	2,4%
CPI		YoY	2,9%	2,0%	3,4%	2,4%	2,5%	1,7%
EURPLN		period-end	4,30	4,27	4,23	4,17	4,36	4,38

Management provision covering risk resulting from COVID-19 pandemic

In 2021, in connection with the cyclical review of risk parameters for expected credit losses calculation, the models and macroeconomic scenarios were updated, taking into account the current forecasts of the future economic situation in accordance with the requirements of IFRS 9.

The Bank decided to withdraw the management adjustment in respect of COVID-19, which in previous periods covered a very high uncertainty about the development of macroeconomic factors. Its aim was also to capture the impact of significant and short-term economic shocks on the long-term path of economic growth. Currently, this uncertainty regarding forecasts has significantly decreased, and it was decided to take into account both the realization of the risk factors observed during the pandemic and the expectations of these factors in the future directly in the parameters of expected credit losses.

At the same time, Bank continues to closely monitor the economic situation and the behavior of credit portfolios in connection with the COVID-19 events.

At the end of 2021, in addition to the ECL write-offs resulting from the complex calculation model implemented in the system, management adjustments were also created, updating the risk level with current and expected events in the future:

·         A management reserve of PLN 17 200 k related to changes in the classification of exposures on the retail and SME portfolio resulting from the implementation of the KNF R recommendation at the beginning of 2022, in particular:

·         when the Bank has balance sheet exposures towards the obligor which are past due more than 90 days and which constitute over 20% of all balance sheet exposures towards this obligor, all balance sheet and off-balance sheet exposures towards that obligor are considered non-performing

·         a delay in repayment for a given exposure exceeding 90 days in a situation where the materiality criterion of an overdue credit obligation has not been met for a given exposure results in the classification to stage 2

·         A management reserve for the corporate portfolio of PLN 20 000 k created to reflect the estimated impact of new additional constraints related to the protracted COVID-19 pandemic on the hospitality business. When determining the amount of the additional write-off, the Bank assumed an additional classification to stage 2 of the sector with a probability of 50%, and the current stage 2 with an additional probability of 2% will be reclassified to stage 3. In the calculation of the management provision, the average coverage with a write-off for the hotel industry portfolio was assumed.

·         A management reserve for the SME portfolio in the amount of PLN 35 000 k related to planned changes in LGD models

(planned separation of separate portfolios with lower expected recoveries for exposures after the implementation of GDM collateral and in bankruptcy, as well as exclusion for the SME leasing portfolio during the estimation of historical recoveries at a level not currently implemented).

Potential variability of ECL

Changes in forecasts of macroeconomic indicators may result in significant effects affecting the level of created provisions. Adoption of macroeconomic parameter estimates at only one scenario level (upside or downside scenario) will result in a one-off change in ECL at the level below.

in PLN m					ECL change
scenario				31.12.2021	31.12.2020
	consumer	mortgage	corporate	Total	Total
worst case	4.7	1,8	12.4	18.9	43.5
best case	(6.7)	(0.2)	(11.8)	(18.7)	(43.3)

The sensitivity of individual portfolios to changes in the environment largely depends on the correlation between the default risk and market indicators. This relationship is different for different portfolios, and the expected risk may depend on changes in unemployment, CPI, exchange rates, etc.

Based on the GDP indicator as the main factor determining the condition of the economy, Santander Bank Polska S.A. estimates that the target level of gross domestic production will be reduced by 1% in 2022, would translate into an increase in expected credit losses in the amount of PLN 14 776 k. The above analysis was made assuming the preservation of the relationship between macroeconomic factors.

Significant volatility for the income statement may be reclassifications to stage 2 from stage 1. The reclassification of given percentage of exposures from stage 1 with the highest risk level to stage 2 for each type of exposure would result in an increase in ECL according to below table

	additional expected credit loss (PLN m)
reclassification from stage 1 to stage 2	individual	mortgage	corporate	Total 31.12.2021	Total 31.12.2020
1%	6,0	11,0	5,3	22,3	19,2
5%	35,3	44,5	29,6	109,4	89,5
10%	63,8	66,7	54,3	184,8	152,8

The theoretical reclassification of 1% of exposures from stage 1 with the highest risk level to stage 2 for each type of exposure would result in an increase in ECL by PLN 22 300k according to the portfolio as of 31 December 2021 for Santander Bank Polska S.A.  (in relation to PLN 19 200k as at 31 December 2020).

The above estimates show expected variability of loss allowances as a result of transfers between stage 1 and stage 2, resulting in significant changes in the degree to which exposures are covered with allowances in respect of different ECL horizons.

Fair value of financial instruments, including instruments which do not meet the contractual cash flows test

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Santander Bank Polska S.A. applies a methodology for measuring the fair value of credit exposures and debt instruments  measured at fair value through profit or loss.

In the case of the instruments with distinguishable on-balance sheet and off-balance sheet components, the extent of fair value measurement will depend on the nature of the underlying exposure, and:

·   the on-balance sheet portion always will be measured at fair value;

·   the off-balance sheet portion will be measured at fair value only if at least one of the following conditions is met:

·   condition 1: the exposure has been designated as measured at fair value (option) or

·   condition 2: the exposure may be settled net in cash or through another instrument or

·   condition 3: Santander Bank Polska S.A. sells the obligation immediately after its granting  or

·   condition 4: the obligation was granted below the market conditions.

The fair value is measured with the use of valuation techniques appropriate in the circumstances and for which sufficient data are available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

Bank applies following valuation techniques:

·   market approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business unit)

·   income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) date. When the income approach is used, the fair value measurement reflects the current market expectations as to the future amounts.

Santander Bank Polska S.A. uses the income approach for fair value measurement relating to financial instruments which do not meet contractual cash flows test.

The following arguments support the use of the income approach:

·   no active market;

·   the cost approach is not used in the case of financial assets (it usually applies to property, plant and equipment and property investments).

In the case of credit exposures and debt instruments, the present value method within income approach is typically used. In this method, the expected future cash flows are estimated and discounted using a relevant interest rate. In the case of the present value method, Santander Bank Polska S.A. uses the following elements in the valuation:

·   expectations as to the future cash flows;

·   expectations as to potential changes in cash flow amounts and timing (uncertainties are inherent in cash flow estimates);

·   the time value of money, estimated using risk-free market rates;

·   the price of uncertainty risk inherent in cash flows (risk premium) and

·   other factors that market participants would take into account in the circumstances.

The present value measurement approach used by Santander Bank Polska S.A. is based on the following key assumptions:

·   cash flows and discount rates reflect the assumptions that market participants would adopt in the measurement of an asset;

·   cash flows and discount rates reflect only the factors allocated to the asset which was subject to measurement;

·   discount rates reflect the assumptions which are in line with the cash flow assumptions;

·   discount rates are consistent with the key economic factors relating to the currency in which the cash flows are denominated.

The fair value determination methodology developed by Santander Bank Polska S.A. provides for adaptation of the fair value measurement model to the characteristics of the financial asset subject to measurement. When determining the need for adaptation of the model to the features of the asset subject to measurement, Santander Bank Polska S.A. takes into account the following factors:

·   approach to the measurement (individual/ collective) given the characteristics of the instrument subject to measurement;

·   whether a schedule of payments is available; 

·   whether the asset subject to measurement is still offered by Santander Bank Polska S.A. and whether the products recently provided to customers can be a reference group for that asset. 

Other significant groups of financial instruments measured at fair value are all derivatives, financial assets held within a residual business model, debt investment financial assets held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and equity investment financial assets. These financial instruments are either measured with reference to a quoted market price for that instrument or by using a respective measurement model.

Where the fair value is calculated using financial-markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis independently sourced market parameters including, for example, interest rate yield curves, securities and commodities prices, option volatilities and currency rates. Most market parameters are either directly observable or are implied from instrument prices.

In justified cases, for financial instruments whose carrying amount is based on current prices or valuation models, Santander Bank Polska S.A. takes into account the need to identify additional adjustments to the fair value of the counterparty credit risk.

The fair value measurement models are reviewed periodically.

A summary of the carrying amounts and fair values of the individual groups of assets and liabilities is presented in Note 45.

Estimates for legal claims

Santander Bank Polska S.A raises provisions for cases disputed in court on the basis of likelihood of unfavourable verdict and recognises them in accordance with IAS 37.

The provisions have been estimated considering the likelihood of payment and their impact is presented in other operating income and cost.

As at  31 December 2021, Bank increased its provisions for legal claims regarding mortgage loans denominated in foreign currencies due to the increase in the number of cases in which the Bank is party to the proceedings.

Details on the value of provisions for legal claims can be found in Note 37.

Estimated collective provisions for risk arising from mortgage loans in foreign currencies

In connection with the CJEU’s ruling described in Note 46, there is an increased risk that clauses in agreements from the portfolio of mortgage loans denominated in or indexed to foreign currencies may be effectively challenged by customers. The Management Board considered the risk that the scheduled cash flows may not be fully recoverable and/or a liability may arise resulting in a future cash outflow. Santander Bank Polska S.A. decided to maintain additional collective provision for legal risk, in addition to provisions for individual court cases.

The collective provision, in particular the provision for mortgage loans denominated in or indexed to foreign currencies, has been estimated on the basis of a specific time horizon, the likelihood of a number of events, such as finding contractual clauses abusive or losing a court case, and different scenarios for possible judgments. Result of collective provisions impacts other operating income and cost.

Bank, based on observed data, has changed portfolio provision for mortgage loans in foreign currencies as at 31 December 2021, and will carry on with monitoring of the risk in subsequent reporting periods. As at 31 December 2021 collective provision amounts to

PLN 611 713k ( PLN 191 900k as at 31 December 2020).

Details on the value of the provisions and the assumptions made for their calculation are provided in Notes 37, 46 and 46.

Estimates regarding reimbursement of fees related to early repaid consumer loans

Santander Bank Polska S.A. has changed estimated future cash flows for cash loan portfolio due to early prepayments done by clients. Change in cash flows was assessed on the base of historical prepayment levels, volume and portfolio characteristics and amounted to PLN 2 820k in 2021. The decrease in cash flows was recognised as an adjustment to gross carrying amount of loan receivables and decrease in interest income.

In addition, due to early prepayments causing shorter tenors, the Bank decided to adjust third party intermediary cost calculated according to EIR in respect of expected early prepayments. The adjustment amounted to PLN 8 129k, and was recognised as an adjustment to gross carrying amount of loan receivables and decrease in interest income. As at 31 December 2020 intermediary cost adjustment amounted to PLN 35 155k.

Potential variability

Change in client`s behavior regarding complaints may cause current provisions levels to be changed in following manner. Extension of the period for which the Bank expects consumer complaints to continue is assessed as a pessimistic scenario, whereas the shortening is regarded as optimistic.

in PLN m				change in provision level
scenario			31.12.2021	31.12.2020
pessimistic			9,9	9,9
optimistic			(8,6)	(8,6)

2.6. Judgements that may significantly affect the amounts recognized in the financial statements

When applying the accounting principles, the management of Santander Bank Polska S.A., makes various judgements that may significantly affect the amounts recognized in financial statements.

Assessment whether contractual cash flows are solely payments of principal and interest

The key issue for Santander Bank Polska S.A.'s business, is to assess whether the contractual terms related to financial assets component indicate the existence of certain cash flow dates, which are only the repayment of the nominal value and interest on the outstanding nominal value.

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition and ‘interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, Santander Bank Polska S.A. considers the contractual terms of the instrument. This includes assessing whether the financial assets contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In  making the assessment the Santander Bank Polska S.A. considers:

·   contingent events that would change the amount and timing of cash flows,

·   leverage features,

·   prepayment and extension terms,

·   terms that limit Santander Bank Polska S.A.’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements)

·   features that modify consideration for the time value of money.

A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for early termination of the contract.

In addition, a prepayment feature is treated as consistent with this criterion if a financial asset is acquired or originated at a premium or discount to its contractual paramount, the prepayment amount substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable compensation for early termination), and the fair value of the prepayment feature is insignificant on initial recognition.

In the process of applying Santander Bank Polska S.A.’s accounting policy management assessed whether financial assets, including loan agreements, whose interest rate construction contains a multiplier greater than 1, meet classification criteria allowing their valuation at amortised cost, that is:

·   business model and

·   characteristics of contractual cash flows.

The most significant portfolio of financial assets, whose interest rate construction contained a multiplier greater than 1, includes credit cards granted until 01.08.2016, whose interest rate formula was based on 4x lombard rate and did not contain direct reference to the provisions of the Civil Code in the regard of interest cap.

This financial asset portfolio is maintained in a business model whose objective is to hold financial assets in order to collect contractual cash flows. Credit risk for these assets is the basic risk managed in portfolios, and historical analysis of frequency and volume of sales do not indicate significant sales of asset portfolios for reasons other than credit risk.

In addition, it was not found that:

·   fair value was a key performance indicator (KPI) for assessing portfolio performance for internal reporting purposes,

·   the assessment of the portfolio's results was based only on the fair value of assets in the analyzed portfolio,

·   remuneration of portfolio managers was related to the fair value of assets in the analyzed portfolio.

Whereas contractual terms related to a financial asset indicate that there are specific cash flow terms that are not solely payments of principal and interest on the principal outstanding due to the existence of a financial leverage in the construction of interest rate. It increases the variability of the contractual cash flows with the result that they do not have the economic characteristics of interest. The credit card portfolio with the above characteristics s disclosed as a portfolio measured at fair value through profit or loss.

Business Model Assessment

Business models at Santander Bank Polska S.A. are determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The business model does not depend on the intentions of the Santander Bank Polska S.A. management regarding a particular instrument, which is why the model is assessed at a higher level of aggregation.

All business models, quantitative and qualitative criteria used for business model assessment are described in p.2.7 regarding financial asset classification.

2.7. Accounting policies

With the exception of the changes described in point 2.3, the Santander Bank Polska S.A. consistently applied the adopted accounting principles both for the reporting period for which the statement is prepared and for the comparative period.

Foreign currency

Foreign currency transactions

The Polish zloty (PLN) is the functional currency of Santander Bank Polska S.A. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Resulting from these transactions monetary assets and liabilities denominated in foreign currencies, are translated at the foreign exchange rate ruling at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the reporting currency at the foreign exchange rates ruling at the dates that the fair values were determined. Foreign exchange differences arising on translation are recognised in profit or loss except for differences arising on retranslation of equity instruments of other entities measured at fair value through other comprehensive income, which are recognised in other comprehensive income.

Financial assets and liabilities

Recognition and derecognition

Initial recognition

Santander Bank Polska S.A. recognises a financial asset or a financial liability in its statement of financial position when, and only when, it becomes bound by contractual provisions of the instrument.

A regular way purchase or sale of financial assets is recognised and derecognised, as applicable, at the settlement date.

Derecognition of financial assets

Santander Bank Polska S.A. derecognises a financial asset when and only when, if:

·   contractual rights to the cash flows from that financial asset have expired, or

·   Santander Bank Polska S.A. transfers a financial asset, and such operation meets the derecognition criteria specified further in this policy.

Santander Bank Polska S.A. transfers a financial asset when and only when, if:

·   Santander Bank Polska S.A. transfers contractual rights to the cash flows from that financial asset, or

·   Santander Bank Polska S.A. retains contractual rights to receive the cash flows from that financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions specified further in this policy.

When Santander Bank Polska S.A. retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), then Santander Bank Polska S.A. treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met:

·   Santander Bank Polska S.A. has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset,

·   Santander Bank Polska S.A. is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows,

·   Santander Bank Polska S.A. has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, Santander Bank Polska S.A. is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents (as defined in IAS 7 Statement of Cash Flows) during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients.

When Santander Bank Polska S.A. transfers a financial asset, it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In such a case:  

·   if Santander Bank Polska S.A. transfers substantially all of the risks and rewards of ownership, then it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer;

·   if Santander Bank Polska S.A. retains substantially all the risks and rewards of ownership, then it shall continue to recognise the financial asset;

·   if Santander Bank Polska S.A. neither transfers nor retains substantially all the risks and rewards of ownership, then it shall verify if it has retained control of the financial asset. In such a case:

a) if Santander Bank Polska S.A. has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer;

b) if Santander Bank Polska S.A. has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset.

The transfer of risks and rewards is evaluated by comparing Santander Bank Polska S.A.’s exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. Santander Bank Polska S.A. has retained substantially all the risks and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer. Santander Bank Polska S.A. transfers substantially all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of the future net cash flows associated with the financial asset.

Santander Bank Polska S.A. derecognises a part of financial asset (or a part of a group of similar financial assets) when and only when, if the part to be derecognised fulfills one of the three conditions:  

·   that part comprises only specifically identified cash flows on a financial asset (or a group of similar financial assets),

·   that part comprises only a fully proportionate (pro rata) share of cash flows from that financial asset (or a group of similar financial assets),

·   that part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). 

In all other cases, Santander Bank Polska S.A. derecognises a financial asset (or a group of similar financial assets) as a whole.

Derecognition of financial liabilities

Santander Bank Polska S.A. shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished — i.e. when the obligation specified in the contract is discharged or cancelled or expires.

An exchange between Santander Bank Polska S.A. and the lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial

modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.

If Santander Bank Polska S.A. repurchases a part of a financial liability, Santander Bank Polska S.A. shall allocate the previous carrying amount of the financial liability between the part that continues to be recognised and the part that is derecognised based on the relative fair values of those parts on the date of the repurchase. The difference between:

·   the carrying amount allocated to the part derecognised, and

·   the consideration paid, including any non-cash assets transferred or liabilities assumed, for the part derecognised, arerecognised in profit or loss.

Classification of financial assets and financial liabilities

Classification of financial assets

Classification of financial assets which are not equity instruments

Unless Santander Bank Polska S.A. has made a prior decision to measure a financial asset at fair value through profit or loss, the Santander Bank Polska S.A. classifies financial asset that are not an equity instrument as subsequently measured at amortised cost or at fair value through other comprehensive income or fair value through profit or loss on the basis of both:

·   the business model of Santander Bank Polska S.A. for managing the financial assets and

·   the contractual cash flow characteristics of the financial asset.

A financial asset is measured at amortised cost if both of the following conditions are fulfilled:

·   the financial asset is held in a business model whose purpose is to hold financial assets to collect contractual cash flows, and

·   the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset is measured at fair value through other comprehensive income if both of the following conditions are fulfilled:

·   the financial asset is held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and

·   the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

If a financial asset is not measured at amortised cost or at fair value through other comprehensive income, it is measured at fair value through profit or loss.  

Santander Bank Polska S.A. may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an “accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

Classification of financial assets which are equity instruments

Santander Bank Polska S.A. measures the financial asset that is an equity instrument at fair value through the profit or loss, unless Santander Bank Polska S.A. made an irrevocable election at initial recognition for particular investments in equity instruments to present subsequent changes in fair value in other comprehensive income.

Santander Bank Polska S.A. classifies investments in other entities that meet criterion of a debt financial instrument as measured at fair value through profit or loss.

Business models

Business models at Santander Bank Polska S.A. are determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The business model does not depend on the intentions of the Santander Bank Polska S.A. key management regarding a particular instrument.

The business model refers to how Santander Bank Polska S.A. manages its financial assets in order to generate cash flows. That is, the business model determines whether cash flows will result from:

·   collecting contractual cash flows

·   selling financial assets

·   or both.

Consequently, the business model assessment is not performed on the basis of scenarios that Santander Bank Polska S.A. does not reasonably expect to occur, such as so-called “worst case” or “stress case” scenarios.

Santander Bank Polska S.A. determines the business model on the basis of the assessment of qualitative and quantitative criteria.

Qualitative criteria for the assessment of a business model

The business model for managing financial assets is a matter of fact and not merely an assertion. It is observable through the activities undertaken to achieve the objective of the business model. Santander Bank Polska S.A. uses judgement when it assesses its business model for managing financial assets and that assessment is not determined by a single factor or activity. Santander Bank Polska S.A. considers all relevant qualitative and quantitative criteria available at the date of business model assessment.  Such relevant evidence includes the following issues: 

·   policies and business objectives applicable to a given portfolio and their effective delivery. In particular, the assessment covers the management strategy for generating income from contractual interest payments, maintaining a specific profile of portfolio interest rates, managing liquidity gap and generating cash flows from the sale of financial assets;

·   method for assessing the profitability of the financial asset portfolio and its reporting and analysis by the key management personnel;

·   risks which affect the profitability and effectiveness of a specific business model (and financial assets held within such a business model) as well as method for managing such risks;

·   method for remunerating business managers as part of a specific business model, i.e. whether the remuneration payable to the key management personnel depends on changes in the fair value of financial assets or the value of contractual cash flows.

Quantitative criteria for the assessment of a business model

In addition to qualitative criteria, the business model should also be reviewed in terms of quantitative aspects, unless the initial analysis of qualitative criteria clearly implies a residual model managed on the fair-value basis.

The purpose of the analysis of quantitative criteria of business model assessment is to determine if the sale of financial assets during the analysed period exceeds the pre-determined threshold values (in percentage terms) defined in internal regulations.

As part of the analysis of quantitative criteria, Santander Bank Polska S.A. reviews the frequency, values and the time of sale of financial assets in the previous reporting periods, reasons for such sale and expectations as to the future sales activity.

In the analysis of the quantitative criteria of the business model assessment, Santander Bank Polska S.A. determines that a business model whose objective is to hold assets in order to collect 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 related to the assets,

·   if the sale is infrequent (even if its value is significant),

·   if the value of the sale is insignificant (even if the sale is frequent),

·   if the assets are sold to improve liquidity in a stress case scenario,

·   if the sale is required by third parties (it applies to the assets which have to be sold owing to e.g. the requirements of supervisory authorities, but were originally held to collect contractual cash flows),

·   if the sale results from exceeding the concentration 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 the financial assets and the proceeds from the sale are approximations of the contractual cash flows that Santander Bank Polska S.A. would have collected if it had held the assets until their maturity date.

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

Business model types

The analysis of qualitative and quantitative criteria makes it possible to identify three basic business models applied in the operations of Santander Bank Polska S.A.:

·   the business model whose objective is to hold assets in order to collect contractual cash flows (hold to collect),

·   the business model whose objective is achieved by both collecting contractual cash flows and selling financial assets (hold to collect and sell),

·   the other/ residual business model (the business model whose objective is achieved by selling assets).

Presented below are characteristics of all business models, with an indication of the financial instruments assigned to each.

A business model whose objective is to hold assets in order to collect contractual cash flows

Financial assets that are held within a business model whose objective is to hold assets in order to collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the whole life of the instrument. That is, Santander Bank Polska S.A. manages the assets held within the portfolio to collect those particular contractual cash flows (instead of managing the overall return on the portfolio by both holding and selling assets). In determining whether cash flows are going to be realised by collecting the financial assets' contractual cash flows, it is necessary to consider the frequency, value and timing of sales in prior periods, the reasons for those sales and expectations about future sales activity. However, sales in themselves do not determine the business model and therefore cannot be considered in isolation. Instead, information about past sales and expectations about future sales provide evidence related to how Santander Bank Polska S.A.’s stated objective for managing the financial assets is achieved and, specifically, how cash flows are realised. Santander Bank Polska S.A. each time considers information about past sales within the context of the reasons for those sales and the conditions that existed at that time as compared to current conditions. Although the objective of the business model may be to hold financial assets in order to collect contractual cash flows, Santander Bank Polska S.A. needs not hold all of those instruments until maturity. Thus, Santander Bank Polska S.A.’s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur or are expected to occur in the future.

A business model whose objective is to hold assets in order to collect contractual cash flows spans the entire spectrum of credit activity, including but not limited to corporate loans, mortgage and consumer loans, credit cards, loans granted and debt instruments (e.g. treasury bonds, corporate bonds), which are not held for liquidity management purposes. Financial assets on account of trading settlements are substantially also recognised under this model. Such assets are recognised in the books of Santander Bank Polska S.A. on the basis of an invoice issued payable within maximum one year.

A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets

Santander Bank Polska S.A. may hold financial assets in a business model whose objective is achieved both by collecting contractual cash flows and by selling financial assets. In this type of business model, the key management personnel of Santander Bank Polska S.A. decided that both collecting contractual cash flows and selling financial assets are integral to achieving  the business model’s objective. There are various objectives that may be consistent with this type of business model. For example, the objective of the business model may be to manage everyday liquidity needs, to maintain a particular interest yield profile or to match the duration of the financial assets to the duration of the liabilities that those assets are funding. To achieve such an objective, Santander Bank Polska S.A. will both collect contractual cash flows and sell financial assets.

Compared to a business model whose objective is to hold financial assets to collect contractual cash flows, this business model will typically involve greater frequency and value of sales. This is because selling financial assets is integral to achieving the business model's objective instead of being only incidental to it. However, there is no specific frequency or sales value threshold that must be achieved in this business model as collecting contractual cash flows and selling financial assets are both integral to achieving the model's objective.

A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets includes:

·   financial assets acquired for the purpose of liquidity management, such as State Treasury bonds or NBP bond and

·   loans and advances subject to underwriting, i.e. portion of credit exposures that are planned to be sold before maturity for reasons other than increase in credit risk.

Other/ residual business model

Financial assets are measured at fair value through profit or loss if they are not held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. A business model that results in measurement at fair value through profit or loss is one in which Santander Bank Polska S.A. manages the financial assets with the objective of realising cash flows through the sale of the assets. Santander Bank Polska S.A. makes decisions based on the assets' fair values and manages the assets to realise those fair values. In this case, Santander Bank Polska S.A.’s objective will typically result in active buying and selling. Even though Santander Bank Polska S.A. will collect contractual cash flows while it holds the financial assets, the objective of such a business model is not achieved by both collecting contractual cash flows and selling financial assets. This is because the collection of contractual cash flows is not integral to achieving the business model's objective; instead, it is incidental to it.

Other, residual model is used for classifying assets held by Santander Bank Polska S.A. but not covered by the first or second category of the business model. They include assets from the “held for trading” category in the financial statements, such as listed equity

instruments, commercial bonds acquired for trading purposes and derivatives (e.g. options, IRS, FRA, CIRS, FX Swap contracts) which are not embedded derivatives.

The business model whose objective is to hold assets in order to collect contractual cash flows is the most frequent business model in Santander Bank Polska S.A. except in the case of:

·   debt instruments measured at fair value through other comprehensive income that are maintained in the ALM segment and credits and loans covered by underwriting process described above; those instruments are subject to the business model whose objective is achieved by both collecting contractual cash flows and selling financial assets,

·   instruments held for trading, including debt instruments and derivative instruments which are not subject to hedge accounting; those instruments are covered by the other/ residual business model.

Changing the business model

Santander Bank Polska S.A. reclassifies all affected financial assets when, and only when, it changes its business model for managing financial assets. Such changes are expected to be very infrequent. They are determined by the senior management of Santander Bank Polska S.A. as a result of external or internal changes and must be significant to the Santander Bank Polska ‘s S.A.   operations and demonstrable to external parties. Accordingly, a change in the business model of Santander Bank Polska S.A. will occur only when Santander Bank Polska S.A. either begins or ceases to perform an activity that is significant to its operations (for example, when a business line has been acquired, disposed of or terminated).

The objective of the business model of Santander Bank Polska S.A. is changed before the reclassification date.

The following are not changes in business model:

·   a change in intention related to particular financial assets (even in circumstances of significant changes in market    conditions),

·   the temporary disappearance of a particular market for financial assets,

·   a transfer of financial assets between segments of Santander Bank Polska S.A. with different business models.

If Santander Bank Polska S.A. reclassifies a financial asset, it applies the reclassification prospectively from the reclassification date.

If Santander Bank Polska S.A. reclassifies a financial asset out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is established at the reclassification date.

Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in profit or loss.

Characteristics of contractual cash flows

Santander Bank Polska S.A. classifies financial assets on the basis of the contractual cash flow characteristics of the financial asset if that asset is held within a business model:

·   whose objective is to hold assets to collect contractual cash flows or

·   whose objective is achieved by both collecting contractual cash flows and selling financial assets unless Santander Bank Polska S.A. has designated that financial asset to be measured at fair value through profit or loss.

For this purpose, Santander Bank Polska S.A. determines if the contractual cash flows generated by the asset in question are solely payments of principal and interest on the principal amount outstanding.

Principal is the fair value of the financial asset at initial recognition. However, that principal amount may change over the life of the financial asset (for example, if there are repayments of principal).

Interest should include the consideration for:

·   the time value of money,

·   credit risk associated with the outstanding principal amount,

·   other basic lending risks and costs,

·   and a profit margin.

The time value of money is the element of interest that provides consideration for only the passage of time. That is, the time value of money element does not provide consideration for other risks or costs associated with holding the financial asset. In order to assess whether the element provides consideration for only the passage of time, Santander Bank Polska S.A. applies its own judgement and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set.

Credit risk is defined as the risk that one party to a financial instrument will cause a financial loss for Santander Bank Polska S.A. by failing to discharge an obligation. In other words, credit risk refers to the possibility of the Customer’s failure to repay the principal and interest due within the contractual deadline.

Other basic lending risks and costs include for example administration costs related to the analysis of the credit application, assessment of the customer’s repayment capacity, monitoring of the customer’s economic and financial standing, etc.

Financial instruments which do not meet the requirements of contractual cash flow characteristics and are valued with fair value through profit and loss, include:

·   credit card portfolios whose interest rates are set on the basis of principles applicable in Santander Bank Polska S.A. until 1 August 2016;

·   instruments providing for participation of Santander Bank Polska S.A. in the customer’s profit or loss; and

·   other instruments whose contractual cash flows do not meet the definition of interest due to the lack of an economic relationship between the amount of interest accrued and the amount of interest payable to Santander Bank Polska S.A.

Classification of financial liabilities

Santander Bank Polska S.A. classifies all financial liabilities as subsequently measured at amortised cost, except for: 

·         financial liabilities measured at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value.

·         financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies;

·         financial guarantee contracts. After initial recognition, the issuer shall measure contract at the higher of:

1)     amount of the expected credit loss allowance,

2)     initial recognised amount, less respective cumulated income recognised as per IFRS 15;

·         commitments to provide a loan at a below-market interest rate. If the liability is not measured at fair value through profit or loss, the issuer shall subsequently measure it at the higher of:

1)       amount of the expected credit loss allowance,

2)       initial recognised amount, less respective cumulated income recognised as per IFRS 15;

·         contingent consideration recognised by the acquire under the business combination arrangement governed by IFRS 3. Such contingent consideration shall subsequently be measured at fair value with changes recognised in profit or loss.

Upon initial recognition of the liability, Santander Bank Polska S.A. may irrevocably classify such item as the one measured at fair value through profit or loss if such an accounting method provides a better view of the accounts, because:

·         it eliminates or largely prevents the accounting mismatch that would arise if assets or liabilities or related profit or loss were recognised under different accounting methods, or

·         a group of financial liabilities or  financial assets and liabilities is managed and measured at fair value as per the documented strategy for risk management and investments, and information about these items are provided to key management personnel  within the Santander Bank Polska S.A. (as per the definition specified in IAS 24 Related Party Disclosures).

Embedded derivatives

An embedded derivative is a component of a hybrid contract that also includes a non-derivative host—with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument.

For financial assets, that meet the definition of hybrid contracts with an embedded derivative, a derivative that is a component of such a contract is not separated from the host contract which is not a derivative, the entire contract is assessed in terms of the contractual cash flow characteristics.

Measurement of financial assets and financial liabilities

Initial measurement

At initial recognition, Santander Bank Polska S.A. measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, Santander Bank Polska S.A. recognises this instrument on that date as follows:

·   when the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, then Santander Bank Polska S.A. recognises the difference between the transaction price and the fair value at initial recognition as a scenasc or loss.

·   in all other cases, at the measurement adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, Santander Bank Polska S.A. recognises that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.

At initial recognition, Santander Bank Polska S.A. shall measure trade receivables that do not have a significant financing component (determined in accordance with IFRS 15) at their transaction price (as defined in IFRS 15).

Subsequent measurement of financial assets

After initial recognition, Santander Bank Polska S.A. recognises a financial asset:

·   at amortised cost, or

·   at fair value through other comprehensive income, or

·   at fair value through profit or loss.

Allowances for expected credit losses  are not calculated for financial assets measured at fair value through profit or loss.

Subsequent measurement of financial liabilities

After initial recognition, Santander Bank Polska S.A. recognises a financial liability:

·   at amortised cost, or

·   at fair value through profit or loss.

Liabilities measured at amortised costs include: deposits from banks, deposits from customers, liabilities due to repo transactions, loans and advances obtained, issued debt instruments and subordinated liabilities.

Liabilities are recognised as subordinated liabilities which in the event of liquidation or bankruptcy of Santander Bank Polska S.A. are repaid after satisfaction of claims of all other Santander Bank Polska S.A. creditors. Financial liabilities are classified as subordinated liabilities by the decision of the Polish Financial Supervision Authority issued at the request of Santander Bank Polska S.A.

Amortised cost measurement

Financial assets

Effective interest method

Interest revenue is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for credit-impaired financial assets. At the time a financial asset or a group of similar financial assets is reclassified to stage 3, interest revenue is calculated on the basis of a net value of a financial asset and presented at the interest rate used for the purpose of discounting the future cash flows for the purpose of measurement of impairment.

In case of interest revenue on POCI assets is calculated on the basis of the net carrying amount, applying the effective interest rate adjusted for credit risk over the lifetime of the asset. The credit-adjusted effective interest rate is calculated by taking into account the future cash flows adjusted for the effect of credit risk over the lifetime of the asset.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, Santander Bank Polska S.A. shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but does not consider potential future credit losses.

The calculation includes paid and received fees (e.g. arrangement and grant of loan, arrangement of loan tranche, prolongation of loan, renewal of loan, restructure fees and fees for annexes which modify payments) transaction costs and all other premiums or discounts.

Costs that can be directly related to the sales of loan products are partially accounted for in interest income using the effective interest method, if there is a possibility of direct allocation to the specific loan agreement, and partly recognised in the fee income, at the moment of realisation, if there is no possibility of direct allocation to the specific loan agreement.

Credit-adjusted effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset to the amortised cost of a financial asset that is a purchased or originated credit-impaired financial asset. When calculating the credit-adjusted effective interest rate, Santander Bank Polska S.A. estimates the expected cash flows by considering all contractual terms of the financial asset (for example, prepayment, extension, call and similar options) and expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the remaining life of a financial instrument (or group of financial instruments), Santander Bank Polska S.A. uses the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

The gross carrying amount of a financial asset is its amortised cost, before adjusting for any expected credit loss allowances, and taking into account any non-derecognised penalty interest accrued on overdue principal.

Purchased or originated credit-impaired assets  (POCI)

Santander Bank Polska S.A.  distinguished the category of purchased or originated credit-risk assets . POCI are assets that are credit-impaired on initial recognition. Financial asset that were classified as POCI at initial recognition should be treated as POCI in all subsequent periods until they are derecognized.

At initial recognition, POCI assets are recognized at their fair value. After initial recognition POCI assets are measured  at amortized costs.

Valuation of POCI assets is based on the effective interest rate  adjusted for the effect of credit risk .

For POCI assets (purchased or originated credit impaired) expected credit losses are recognised over the lifetime of the asset.

Modification of contractual cash flows

The concept of modification

Changes to the contractual cash flows in respect of the financial asset are regarded by Santander Bank Polska S.A. as modification if made in the form of an annex. Changes to the contractual cash flows arising from performance of the contractual obligations are not considered to be a modification.

If the terms of the financial asset agreement change, the Santander Bank Polska S.A. assesses whether the cash flows generated by the modified asset differ significantly from cash flows generated by financial asset before modification of the terms of the asset agreement.

Modification criteria

When assessing whether a modification is substantial or minor, Santander Bank Polska S.A. takes into account both quantitative and qualitative criteria. Both criteria groups are each time analyzed together.

COVID-19 debt moratorium itself is not a trigger for significant modification and financial instrument derecognition. Deferral or suspension of installments repayments under assistance programs were evaluated according to existing in Bank qualitative and quantitative criteria.

Quantitative criteria

To determine the significance of the impact of modifications, the so-called "10% test" is carried out which is based on a comparison of discounted cash flows of the modified financial instrument (using the original effective interest rate) with discounted (also with the original effective interest rate) cash flows of the financial instrument before modification, whose value should correspond to the value of undue capital, increased by the value of undue interest and adjusted for the amount of unsettled commission.

Qualitative criteria

During the qualitative analysis, Santander Bank Polska S.A. takes into account the following aspects:

·   adding / removing a feature that violates the contractual cash flow test result,

·   currency conversion - except for currency conversions resulting from the transfer of the contract for collection,

·   change of the main debtor - change of the contractor results in a significant modification of contractual terms and

·   consolidation of several exposures into one under an annex.

Substantial modification

Identification of substantial modification resulting in the exclusion of a financial instrument from the statement of financial position is based on qualitative and quantitative criteria described above.

In addition, a substantial modification occurs when the cash flows of the modified financial instrument are "materially different" from the original financial instrument, i.e. when the difference between discounted cash flows of the modified financial instrument (using the original effective interest rate) and the discounted (also with the original effective interest rate), cash flows of the financial instrument before the modification, is higher than 10%.

If the modification of a financial asset results in derecognition of the existing financial asset and recognition of the modified financial asset, the modified asset is considered as a "new" financial asset. The new asset is recognized at fair value and the new effective interest rate applied to the new asset is calculated.

Minor modification

If neither the qualitative criteria, nor the quantitative ones are met, the modification is regarded by Santander Bank Polska S.A. as insignificant.

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this policy, Santander Bank Polska S.A. recalculates the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset's original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Change in gross carrying amount is amortised into interest income/cost using effective interest rate method.

Write-off

Santander Bank Polska S.A. directly reduces the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event.

Financial asset can be written off partially or in its entirety.

Santander Bank Polska S.A. writes off financial assets if at least one of the following conditions apply:

·   Santander Bank Polska S.A. has documented the irrecoverability of the debt

·   there are no reasonable expectations of recovering the financial asset in full or in part;

·   the debt is due and payable in its entirety and the value of the credit loss allowance corresponds to the gross value of the exposure, while the expected debt recovery proceeds are nil; 

·   the asset originated as a result of a crime and the perpetrators have not been identified or

·   Santander Bank Polska S.A. has received:

·       a decision on discontinuation of debt enforcement proceedings due to irrecoverability of the debt (in relation to all obligors), issued by a relevant enforcement authority pursuant to Article 824 § 1 (3) of the Polish Code of Civil Procedure, which is recognised by the Santander Bank Polska S.A. as corresponding to the facts;

·       a court decision in respect of :

-     dismissing a bankruptcy petition, if the insolvent debtor's assets are insufficient to cover the cost of the proceedings or suffice to cover this cost only; or

-     discontinuing the bankruptcy proceedings or

-     closing the bankruptcy proceedings.

Financial assets written off are then recorded off balance sheet. Analogous premises are taken into account in the case of writing off penalty interest.

Impairment

General approach

Santander Bank Polska S.A. recognises allowances for expected credit losses on a financial asset in respect of:

·   financial assets measured at amortised cost or at fair value through other comprehensive income;

·   lease receivables;

·   contract assets, i.e. the consideration to which Santander Bank Polska S.A. is entitled in exchange for the goods or services transferred to the customer in accordance with IFRS 15 Revenue from Contracts with Customers;

·   loan commitments and

·   off-balance sheet credit liabilities and financial guarantees.

Santander Bank Polska S.A. applies the impairment requirements for the recognition and measurement of a loss allowance for financial assets that are measured at fair value through other comprehensive income. However, the loss allowance is recognised in income statement and does not reduce the carrying amount of the financial asset in the statement of financial position.

At each reporting date, Santander Bank Polska S.A. measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

The objective of the impairment requirements is to recognise lifetime expected credit losses for all financial instruments for which there have been significant increases in credit risk since initial recognition — whether assessed on an individual or collective basis — considering all reasonable and supportable information, including that which is forward-looking.

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, Santander Bank Polska S.A. measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

For loan commitments and financial guarantee contracts, the date that Santander Bank Polska S.A. becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements.

If Santander Bank Polska S.A. has measured the loss allowance for a financial instrument at an amount equal to lifetime expected credit losses in the previous reporting period, but determined at the current reporting date that the credit risk for that financial instrument has declined, Santander Bank Polska S.A. measures the loss allowance at an amount equal to 12-month expected credit losses at the current reporting date.

Santander Bank Polska S.A. recognises in profit or loss, as an impairment gain or loss, the amount of expected credit losses that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised.

Santander Bank Polska S.A. charges interest revenue on exposures classified in Stage 3 on the net exposure value.

Simplified approach for trade receivables and contract assets

In the case of trade receivables and contract assets, Santander Bank Polska S.A. always measures the loss allowance at an amount equal to lifetime expected credit losses for trade receivables or contract assets that result from transactions that are within the scope of IFRS 15, and that do not contain a significant financing component.

Purchased or originated credit-impaired financial assets (POCI assets)

At the reporting date, Santander Bank Polska S.A. recognises only the changes in lifetime expected credit losses as a loss allowance for purchased or originated credit-impaired financial assets.

Interest revenue on POCI assets is calculated on the basis of the net carrying amount, applying the effective interest rate adjusted for credit risk over the lifetime of the asset. The credit-adjusted effective interest rate is calculated by taking into account the future cash flows adjusted for the effect of credit risk over the lifetime of the asset.

At each reporting date, Santander Bank Polska S.A. recognises in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. Santander Bank Polska S.A. recognises favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition.

Contingent liabilities

Santander Bank Polska S.A. creates provisions for impairment risk-bearing irrevocable contingent liabilities (irrevocable credit lines, financial guarantees, letters of credit, etc.). The value of the provision is determined as the difference between the estimated amount of available contingent exposure set using the Credit Conversion Factor (CCF) and the current value of expected future cash flows under this exposure.

Santander Bank Polska S.A. raises provisions for off-balance sheet liabilities subject to credit risk, broken down into 3 stages.

Approach to the estimation of risk parameters used to calculate expected losses

For the purpose of estimating allowances for expected losses, Santander Bank Polska S.A. continues using own estimates of risk parameters that are based on internal models, however with the necessary modifications (such as estimating the parameters over the lifetime of the exposure or taking into account future macroeconomic conditions). Santander Bank Polska S.A. has developed a methodology for models’ parameters and built valuation models. Expected credit losses are equal to the estimated PD parameter multiplied by the estimated LGD and EAD parameters for each individual exposure. The final value of expected credit losses is the sum of expected losses from all periods (depending on the stage, either in 12 months or in the entire lifetime) discounted using the effective interest rate. The estimated parameters are adjusted for macroeconomic scenarios. The scenarios used by Santander Bank Polska S.A. are developed internally.

The models and parameters are subject to model management process and periodic calibration and validation.

Gains and losses

A gain or loss on a financial asset or liability measured at fair value is recognised in profit or loss unless the asset or liability is:

·   a part of a hedging relationship,

·   an investment into an equity instrument and Santander Bank Polska S.A. has decided to present gains and losses on that investment in other comprehensive income,

·   a financial liability designated as measured at fair value through profit or loss and Santander Bank Polska S.A. is required to present the effects of changes in the liability's credit risk in other comprehensive income; or

·   is a financial asset measured at fair value through other comprehensive income and Santander Bank Polska S.A. is required to recognise some changes in fair value in other comprehensive income.

Dividends are recognised in profit or loss only if:

·   the right of Santander Bank Polska S.A. to receive payment of the dividend is established,

·   it is probable that the economic benefits associated with the dividend will flow to Santander Bank Polska S.A., and

·   the amount of the dividend can be measured reliably.

A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss through the amortisation process or in order to recognise impairment gains or losses. A gain or loss on a financial liability that is measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the financial liability is derecognised and through the amortisation process.  

With regard to the financial assets recognised by Santander Bank Polska S.A. at the settlement date, any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost. For assets measured at fair value, however, the change in fair value is recognised in profit or loss or in other comprehensive income. The trade date means the date of initial recognition for the purposes of applying the impairment requirements.

Investments in equity instruments

Investments in equity instruments are measured at fair value through profit or loss unless at their initial recognition Santander Bank Polska S.A. makes an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of this policy that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies.

If Santander Bank Polska S.A. has elected to measure equity instruments at fair value through other comprehensive income, dividends from that investment are recognised in profit or loss.

Liabilities designated as measured at fair value through profit or loss

Santander Bank Polska S.A. presents a gain or loss on a financial liability that is designated as measured at fair value through profit or loss as follows:

·   the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, and

·   the remaining amount of change in the fair value of the liability is presented in profit or loss unless the treatment of the effects of changes in the liability's credit risk described in (a) would create or enlarge an accounting mismatch in the profit or loss of Santander Bank Polska S.A..

If the requirements specified above would create or enlarge an accounting mismatch in the profit or loss of Santander Bank Polska S.A., Santander Bank Polska S.A. presents all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss.

Santander Bank Polska S.A. presents in profit or loss all gains and losses on loan commitments and financial guarantee contracts that are designated as measured at fair value through profit or loss.

Assets measured at fair value through other comprehensive income

A gain or loss on a financial asset measured at fair value through other comprehensive income is recognised in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses, until the financial asset is derecognised .If the financial asset is derecognised , Santander Bank Polska S.A. accounts for the cumulative gain or loss that was previously recognised in other comprehensive income in profit or loss. Interest calculated using the effective interest method is recognised in profit or loss.

Financial instruments held for trading

A financial asset or financial liability is classified by Santander Bank Polska S.A. as held for trading if:  

·   it has been acquired or incurred principally for the purpose of selling or repurchasing in the near term,

·   on initial recognition it is a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

·   it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

Derivative financial instruments are recognised at fair value without any deduction for transactions costs to be incurred on sale. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received).

If a hybrid contract contains a host contract that is not an asset within the scope of this IFRS 9, Santander Bank Polska S.A. separates the embedded derivative from the host contract and accounts for it as other derivatives if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract and the host contract is not carried at fair value through profit or loss. Embedded derivatives are measured at fair value with changes recognised in the profit and loss account.

Santander Bank Polska S.A. uses derivative financial instruments to hedge its exposure to FX risk and interest rate risk arising from Santander Bank Polska S.A.’s operations. The derivatives that do not qualify for hedge accounting are accounted for as instruments held for trading and recognised at fair value.

Hedge accounting

Pursuant to paragraph 7.2.21 of IFRS 9, Santander Bank Polska S.A. chose to continue to apply the hedge accounting requirements and hedging relationships arising from IAS 39.

Hedge accounting recognises the offsetting effects on the income statement income of changes in the fair values of the hedging instrument and the hedged item.At the inception of the hedge there is formal designation and documentation of the hedging relationship and risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction and the nature of the risk being hedged. The Santander Bank Polska S.A. also documents, at inception and on ongoing basis, an assessment of the hedging instrument's effectiveness in offsetting the exposure to changes in the fair value of the hedged item.

The Santander Bank Polska S.A. uses derivative financial instruments among others to hedge its exposure to interest rate risks arising from Santander Bank Polska S.A. operational, financing and investment activities.

The Santander Bank Polska S.A. discontinues hedge accounting when:

·         it is determined that a derivative is not, or has ceased to be, effective as a hedge;

·         the derivative expires, or is sold, terminated, or exercised;

·         the hedged item matures or is sold, or repaid,

·         the hedging relationship ceases.

Fair value hedge

This is a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the income statement.

A fair value hedge is accounted for as follows: the gain or loss from remeasuring the hedging instrument at fair value (for a derivative hedging instrument) shall be recognised in profit or loss; and the gain or loss on the hedged item attributable to the hedged risk shall adjust the carrying amount of the hedged item and be recognised in profit or loss. This rule applies if the hedged item is otherwise measured at amortised cost or is a financial asset measured at fair value through other comprehensive income.

Cash flow hedge

This is a hedge of the exposure to variability in cash flows that:

1.       is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest    payments on variable rate debt) or a highly probable forecast transaction; and

2.       could affect profit and losses.

A cash flow hedge is accounted for as follows: the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised directly in other comprehensive income and the ineffective portion of the gain or loss on the hedging instrument shall be recognised in income statement.

Interest income and expenses on hedged and hedging instruments are recognised as net interest income.

Amounts recognised in ‘Other comprehensive income’ are reclassified to profit or loss during the period of time in which the hedged item affects the income statement.

If the hedging instrument expires or is sold or the hedge accounting relationship is terminated, Santander Bank Polska S.A. discontinues hedge accounting. All profits or losses on the hedging instrument pertaining to the effective hedge recognised in other comprehensive income remains an element of equity until the forecast transaction occurs, when it is recognised in income statement.

If the transaction is no longer expected to occur, the cumulative gain or loss relating to the hedging instrument recognised in other comprehensive income is reclassified to profit or loss.

Repurchase and reverse repurchase transactions

The Santander Bank Polska S.A. also generates/invests funds by selling/purchasing financial instruments under repurchase/reverse repurchase agreements whereby the instruments must be repurchased/resold at the previously agreed price.

Securities sold subject to repurchase agreements (“repo and sell-buy-back transaction”) are not derecognised from the statement of financial position at the end of the reporting period. The difference between sale and repurchase price is treated as interest cost and accrued over the life of the agreement.

Securities purchased subject to resale agreements (“reverse repo and buy-sell-back transactions”) are not recognised in the statement of financial position at the end of the reporting period. The difference between purchase and resale price is treated as interest income and accrued over the life of the agreement.

The principles described above are also applied by Santander Bank Polska  S.A. to transaction concluded as separate transaction of sale and repurchase of financial instruments but having the economic nature of repurchased and reverse repurchase transactions.

Property, plant and equipment

Owned fixed assets

Property, plant and equipment including assets under operating leases are stated at cost or deemed cost less accumulated depreciation and impairment losses.

Leased assets

Cost model

Santander Bank Polska S.A as a lessee shall measure the right-of-use asset at cost:

a)       less any accumulated depreciation and any accumulated impairment losses; and

b)       adjusted for any remeasurement of the lease liability

Subsequent expenditure

Santander Bank Polska S.A. recognises in the carrying amount of property, plant and equipment the cost of replacing part of such an asset when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to Santander Bank Polska S.A. and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

Depreciation

Depreciation is charged to the income statement on a straight-line basis over the estimated economic useful lives of each part of an item of property, plant and equipment.

The estimated economic useful lives are as follows:

·   buildings: 22-40 years

·   IT equipment: 3 years

·   transportation means: 4 years

·   other fixed assets: 14 years.

Right-of-use assets are depreciated on a straight basis overt the assets’s useful life.

Depreciation rates are verified annually. On the basis of this verification, depreciation periods might be changed.

Goodwill and Intangible assets

Goodwill

Goodwill as of the acquisition date measured as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable acquired assets, liabilities and contingent liabilities less impairment. Goodwill value is tested for impairment annually.

Licences, patents, concession and similar assets

Acquired computer software licences are recognized on the basis of the costs incurred to acquire and bring to use the specific software.

Expenditures that are directly associated with the production of identifiable and unique software products controlled by Santander Bank Polska S.A., and that will probably generate economic benefits exceeding expenditures beyond one year, are recognised as intangible assets.

Development costs

Santander Bank Polska S.A. capitalises direct costs and a justified part of indirect costs related to the design, construction and testing of a chosen alternative for new or improved processes, systems or services.

Santander Bank Polska S.A. recognises the development costs as intangible assets based on the future economic benefits and fulfilment of conditions specified in IAS 38, i.e.:

·   has the ability and intention to complete and use the asset that is being generated,

·   has the adequate technical and financial measures to complete the works and use the asset that is being generated and

·   can reliably measure the amount of expenditure incurred during the development works that can be allocated to the generated intangible asset.

The economic life of development costs is definite. The amortisation rates are adjusted to the length of the economic life. Santander Bank Polska S.A. indicates separately the costs from internal development. Development expenditure comprises all expenditure that is directly attributable to development activities.

Other intangible assets

Other intangible assets that are acquired by Santander Bank Polska S.A. are stated at cost less accumulated amortisation and total impairment losses.

Expenditure on intangible assets

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed in the income statement as incurred.

Amortisation

Amortisation is charged to the income statement on a straight-line or degressive method (for intangible assets resulting from business combinations) over the estimated economic useful lives of intangible assets, which for the majority of intangibles equals to three years.

Amortisation rates are verified annually. On the basis of this verification, amortisation periods might be changed.

Leasing

Separating elements of the leasing contract

Lessee

Santander Bank Polska  (the lessee) does not separate non-lease components from lease components, and instead accounts for each lease component and any associated non-lease components as a single lease component for each underlying asset class where it is not possible and where the share of non-lease components is not significant compared to total net lease payments.

Lessor

For a contract that contains a lease component and one or more additional lease or non-lease components, Santander Bank Polska  (the lessor) allocates the consideration in the contract applying the provisions of the accounting policy in respect of revenue from contracts with customers.

Lease term

Santander Bank Polska  determines the lease term as the non-cancellable period of a lease, together with both:

·   periods covered by an option to extend the lease if Santander Bank Polska S.A. (the lessee) is reasonably certain to exercise that option; and

·   periods covered by an option to terminate the lease if Santander Bank Polska S.A. (the lessee) is reasonably certain not to exercise that option.

The lease term is updated upon the occurrence of either a significant event or a significant change in circumstances.

Santander Bank Polska S.A. as the lessee

Recognition

At the commencement date, Santander Bank Polska S.A. (the lessee) recognises a right-of-use asset and a lease liability.

Initial measurement of the right-of-use asset

At the commencement date, Santander Bank Polska S.A. (the lessee) measures the right-of-use asset at cost.

The cost of the right-of-use asset comprises:

·   the amount of the initial measurement of the lease liability;

·   any lease payments made at or before the commencement date, less any lease incentives received;

·   any initial direct costs incurred by Santander Bank Polska S.A. (the lessee); and

·   an estimate of costs to be incurred by Santander Bank Polska S.A. (the lessee) in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease.

Initial measurement of the lease liability

At the commencement date, Santander Bank Polska S.A. (the lessee) measures the lease liability at the present value of the lease payments that are not paid at that date. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be readily determined. Otherwise, Santander Bank Polska S.A.(the lesse) uses its incremental borrowing rate.

At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

·   net fixed lease  payments (including in-substance fixed lease payments), less any lease incentives;

·   net variable lease payments that depend on an index or a rate;

·   net amounts expected to be payable by the lessee under residual value guarantees;

·   net exercise price of a call option if the lessee is reasonably certain to exercise that option; and

·   payments of net penalties for terminating the lease, if the lease term reflects that Santander Bank Polska S.A. (the lessee) may exercise an option to terminate the lease.

Lease modifications

Santander Bank Polska S.A. (the lessee) accounts for a lease modification as a separate lease if both:

·   the modification increases the scope of the lease by adding the right to use one or more underlying assets; and

·   the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

For a lease modification that is not accounted for as a separate lease, at the effective date of the lease modification Santander Bank Polska S.A. (the lessee):

·   does not allocate the consideration in the modified contract;

·   determines the lease term of the modified lease; and

·   remeasures the lease liability by discounting the revised lease payments using a revised discount rate.

Recognition exemptions

Santander Bank Polska S.A. (the lessee) does not apply the recognition and measurement requirements arising from the accounting policy to:

·   leases which start date period of no longer than 12 months

·   leases for which the underlying asset is of low value (i.e. if the net value of a new asset is lower or equal to PLN 20,000).

In the case of short-term leases or leases for which the underlying asset is of low value, Santander Bank Polska S.A. ( the lessee) recognises the lease payments associated with those leases as an expense on  a straight-line basis over the lease term.

Santander Bank Polska S.A. as the lessor

Classification of leases

Santander Bank Polska S.A. (the lessor) classifies each of its leases as either an operating lease or a finance lease.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.

Lease classification is made at the inception date and is reassessed only if there is a lease modification.

Finance lease

Recognition and measurement

At the commencement date, Santander Bank Polska S.A. (the lessor) recognises assets held under a finance lease in its statement of financial position and presents them as a receivable at an amount equal to the net investment in the lease.

Initial measurement

Santander Bank Polska S.A. (the lessor) uses the interest rate implicit in the lease to measure the net investment in the lease.

Initial direct costs are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term.

Initial measurement of the lease payments included in the net investment in the lease.

At the commencement date, the lease payments included in the measurement of the net investment in the lease comprise the following payments for the right to use the underlying asset during the lease term that are not received at the commencement date:

·   net fixed lease payments less any lease incentives payable;

·   net variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

·   any net residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee;

·   net exercise price of a call option if the lessee is reasonably certain to exercise that option; and

·   payments of penalties for terminating the lease, if the lease term reflects that the lessee may exercise an option to terminate the lease.

Subsequent measurement

Finance income is recognised over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the lease.

Santander Bank Polska S.A. (the lessor) allocates finance income over the lease term on a systematic and rational basis. The lease payments relating to the period reduce the net investment in the lease Santander Bank Polska S.A. (the lessor) applies the derecognition and impairment requirements in IFRS 9 to the net investment under finance lease.

Operating lease

Recognition and measurement

Santander Bank Polska S.A. (the lessor) recognises lease payments from operating leases as income on a straight-line basis.

Santander Bank Polska S.A. (the lessor)recognises costs, including depreciation, incurred in earning the lease income as an expense.

Santander Bank Polska S.A., as the lessor, adds initial direct costs incurred in obtaining an operating lease to the carrying amount of the underlying asset and recognises those costs as an expense over the lease term on the same basis as the lease income.

Other items of the statement of financial position

Fixed assets held for sale

On initial date of classification of non-current assets as assets held for sale, Santander Bank Polska S.A. measures them at the lower of carrying amount and fair value less cost to sell.

Potencial reduction of the carrying amount of assets held for sale as at the date of their initial classification as well as subsequent write off to the level of fair value less costs to sell are recognized in the income statement.

Other trade and other receivables

Trade receivables and other receivables with maturity less than 12 months from the origination are measured at the initial recognition at par value due to the immaterial effect of discounting. Trade receivables and other receivables payable within 12 consecutive months are recognised in the amount of the required payment less impairment loss at the balance sheet date.

Other liabilities

Other liabilities payable within 12 months from the initial recognition are measured at par value due to the immaterial effect of discounting. Like other liabilities payable within 12 consecutive months, trade payables are recognised in the amount of the payment due at the balance sheet date.

Equity

Equity comprises capital and funds created in accordance with applicable law, acts and the Articless of Association. Equity also includes retained earnings and accumulated losses.

Share capital is stated at its nominal value in accordance with the Articles of Association and the entry in the court register.

Supplementary capital is created from profit allocations and share issue premiums.

Reserve capital is created from profit allocations and may be earmarked for covering balance sheet losses or dividend payment.

The result of valuation of management incentive program is included in reserve capital (IFRS 2.53).

The supplementary, reserve, general banking risk fund and share premium  are presented jointly under category “Other reserve capital”.

Revaluation reserve is comprised of adjustments relating to the valuation of financial assets measured at fair value through other comprehensive income and adjustments relating to the valuation of effective cash flow hedges taking into account deferred tax and actuarial gains from estimating provision for retirement. The revaluation reserve is not distributable.

Except for own equity, non-controlling interests are also recognised in Santander Bank Polska S.A. capital.

On derecognition of all or part of financial assets measured at fair value through other comprehensive income the total effects of periodical change in the fair value reflected in the revaluation reserve are reversed. The value of a given financial asset measured at fair value through other comprehensive income is increased or decreased by the whole amount or an adequate portion of the impairment allowance made previously. The effects of the fair value changes are removed from the revaluation reserve with a corresponding change in the income statement.

The net financial result for the financial year is the profit disclosed in the income statement of the current year adjusted by the corporate income tax charge.

Custody services

Income from custody services is an element of the fee and commission income. The corresponding customer assets do not form part of Santander Bank Polska S.A.’s assets and as such are not disclosed in the consolidated statement of financial position.

Capital payments (Dividends)

Own dividends for a particular year, which have been approved by the General Meeting of Shareholders but not paid at the at the end of the reporting period are recognised as dividend liabilities in “other liabilities” item.

Provisions

A provision is recognised when Santander Bank Polska S.A. has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the amount is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Santander Bank Polska S.A raised  provisions for legal risk related to loans indexed/ denominated in foreign currencies and for reimbursements of portion of fees related to early repayment of consumer loans. Both provisions are presented  as Other provisons.

Income statement

Net interest income

Santander Bank Polska S.A. presents the interest income recognised at the effective interest rate and effective interest rate adjusted for credit risk in separate lines of the income statement: “Interest income from financial assets measured at amortised cost” and “Interest income from assets measured at fair value through other comprehensive income”.

In turn, the interest income from financial assets which do not meet the contractual cash flows test is presented in line “Income similar to interest - financial assets measured at fair value through profit or loss”.