FINANCIAL HIGHLIGHTS	PLN k		EUR k
		31.12.2022	31.12.2021 restated	31.12.2022	31.12.2021 restated
Separate financial statement
I	Net interest income	8 040 542	4 514 002	1 715 023	986 128
II	Net fee and commission income	2 277 921	2 119 409	485 874	463 006
III	Profit before tax	3 598 278	1 548 754	767 502	338 341
IV	Profit for the period	2 449 043	915 878	522 373	200 083
V	Total net cash flows	16 460 043	4 618 779	3 510 877	1 009 018
VI	Total assets	238 098 041	216 715 146	50 768 255	47 118 134
VII	Deposits from banks	2 245 128	1 337 573	478 716	290 815
VIII	Deposits from customers	185 655 260	175 354 581	39 586 187	38 125 534
IX	Total liabilities	211 802 781	192 887 794	45 161 471	41 937 599
X	Total equity	26 295 260	23 827 352	5 606 785	5 180 535
XI	Number of shares	102 189 314	102 189 314
XII	Net book value per share in PLN/EUR	257,32	233,17	54,87	50,70
XIII	Capital ratio	21,80%	21,56%*
XIV	Profit per share in PLN/EUR	23,97	8,96	5,11	1,96
XV	Diluted earnings per share in PLN/EUR	23,97	8,96	5,11	1,96
XVI	Declared or paid dividend per share in PLN/EUR**	2,68**	2,16	0,57	0,47

*The data includes profits included in own funds, taking into account the applicable EBA guidelines

**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 31.12.2022: EUR 1 = PLN 4,6899 and as at 31.12.2021: EUR 1 = PLN 4,5994

·         for profit and loss items – as at 31.12.2022 - the rate is calculated as the average of NBP exchange rates prevailing as at the last day of each month in 2022: EUR 1 = PLN 4,6883; 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 31.12.2022, FX denominated balance sheet positions were converted into PLN in line with the NBP FX table no. 252/A/NBP/2022  dd. 30.12.2022

 

I.     Separate income statement66

II.    Separate statement of comprehensive income77

III.  Separate statement of financial position88

IV.  Separate statement of changes in equity99

V.   Separate statement of cash flows1010

VI.  Additional notes to financial statements1111

1.       General information about issuer  1111

2.       Basis of preparation of financial statements  1212

3.       Risk management 4747

4.       Capital management 7575

5.       Net interest income  7979

6.       Net fee and commission income  8080

7.       Dividend income  8080

8.       Net trading income and revaluation  8181

9.       Gains (losses) from other financial securities  8181

10.     Other operating income  8181

11.     Impairment allowances for expected credit losses  8282

12.     Employee costs  8282

13.     General and administrative expenses  8383

14.     Other operating expenses  8484

15.     Corporate income tax  8484

16.     Earnings per share  8585

17.     Cash and balances with central banks  8585

18.     Loans and advances to banks  8585

19.     Financial assets and liabilities held for trading  8787

20.     Hedging derivatives  8888

21.     Loans and advances to customers  8989

22.     Securitisation of assets  9595

23.     Investment securities  9696

24.     Investments in subsidiaries and associates  9999

25.     Intangible assets  101101

26.     Goodwill 102102

27.     Property, plant and equipment 103103

28.     Right of use assets  104104

29.     Deferred tax assets  105105

30.     Fixed assets classified as held for sale  107107

31.     Other assets  107107

32.     Deposits from banks  107107

33.     Deposits from customers  108108

34.     Subordinated liabilities  108108

35.     Debt securities in issue  109109

36.     Provisions for financial liabilities and guarantees granted  110110

37.     Other provisions  110110

38.     Other liabilities  111111

39.     Share capital 112112

40.     Other reserve capital 113113

41.     Revaluation reserve  113113

42.     Hedge accounting  114114

43.     Sell-buy-back and buy-sell-back transaction  118118

44.     Offsetting financial assets and financial liabilities  119119

45.     Fair value  120120

46.     Legal risk connected with CHF mortgage loans  125125

47.     Contingent liabilities  131131

48.     Assets and liabilities pledged as collateral 133133

49.     Information about leases  134134

50.     Statement of cash flows - additional information  134134

51.     Related parties  135135

52.     Acquisitions and disposals of investments in subsidiaries and associates  138138

53.     Employee benefits  138138

54.     Share based incentive scheme  140140

55.     Dividend per share  140140

56.     Operating segments reporting  141141

57.     Events which occurred subsequently to the end of the reporting period  141141

        

I.                   Separate income statement

for the period		1.01.2022-31.12.2022	1.01.2021-31.12.2021* restated
Interest income and similar to interest		10 189 968	4 745 226
Interest income on financial assets measured at amortised cost		8 305 893	3 791 346
Interest income on financial assets measured at fair value through other comprehensive income		1 808 196	940 407
Income similar to interest on financial assets measured at fair value through profit or loss		75 879	13 473
Interest expense		(2 149 426)	(231 224)
Net interest income	Note 5	8 040 542	4 514 002
Fee and commission income		2 699 737	2 432 517
Fee and commission expense		(421 816)	(313 108)
Net fee and commission income	Note 6	2 277 921	2 119 409
Dividend income	Note 7	172 181	277 498
Net trading income and revaluation	Note 8	109 912	251 800
Gains (losses) from other financial securities	Note 9	(19 820)	91 428
Gain/loss on derecognition of financial instruments measured at amortised cost	Note 46	(169 235)	337
Other operating income	Note 10	74 552	128 352
Impairment allowances for expected credit losses	Note 11	(798 605)	(841 012)
Cost of legal risk associated with foreign currency mortgage loans	Note 46	(1 428 333)	(1 157 849)
Operating expenses incl.:		(3 908 534)	(3 251 417)
-Staff, operating expenses and management costs	Note 12 and 13	(3 378 652)	(2 594 814)
-Amortisation of property, plant and equipment and Intangible assets		(321 549)	(358 721)
-Amortisation of right of use asset		(125 382)	(145 726)
-Other operating expenses	Note 14	(82 951)	(152 156)
Tax on financial institutions		(752 303)	(583 794)
Profit before tax		3 598 278	1 548 754
Corporate income tax	Note 15	(1 149 235)	(632 876)
Profit for the period		2 449 043	915 878
Net earnings per share	Note 16
Basic earnings per share (PLN/share)		23,97	8,96
Diluted earnings per share (PLN/share)		23,97	8,96

* details are described in Note 2.5

II.                Separate statement of comprehensive income

	for the period:	1.01.2022-31.12.2022	1.01.2021-31.12.2021
Profit for the period		2 449 043	915 878
Items that will be reclassified subsequently to profit or loss:		286 593	(2 688 163)
Revaluation and sales of debt financial assets measured at fair value through other comprehensive income gross*	Note 23 and 41	704 361	(3 305 330)
Deferred tax		(133 829)	628 013
Revaluation of cash flow hedging instruments gross	Note 41 and 48	(350 542)	(13 390)
Deferred tax		66 603	2 544
Items that will not be reclassified subsequently to profit or loss:		6 139	397 522
Revaluation of equity financial assets measured at fair value through other comprehensive income gross	Note 23 and 41	8 050	484 653
Deferred and current tax		(1 529)	(91 874)
Provision for retirement benefits – actuarial gains/losses gross	Note 41 and 54	(472)	5 856
Deferred tax		90	(1 113)
Total other comprehensive income, net		292 732	(2 290 641)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		2 741 775	(1 374 763)

* in the reporting period the Bank changed the classification of specific bonds portfolio - details in note 23

III.             Separate statement of financial position

	as at:	31.12.2022	31.12.2021* restated	1.01.2021* restated
ASSETS
Cash and balances with central banks	Note 17	10 135 099	8 167 900	5 369 638
Loans and advances to banks	Note 18	9 709 800	2 743 994	2 918 962
Financial assets held for trading	Note 19	6 879 751	4 020 966	3 218 460
Hedging derivatives	Note 20	537 924	163 043	6 901
Loans and advances to customers incl.:	Note 21	134 842 828	123 979 402	118 660 194
- measured at amortised cost		132 062 037	121 798 998	116 368 885
- measured at fair value through other comprehensive income		2 628 660	1 729 848	1 556 791
- measured at fair value through profit and loss		152 131	450 556	734 518
Buy-sell-back transactions	Note 43	13 824 606	453 372	293 583
Investment securities incl.:	Note 23	52 123 963	68 865 411	64 355 667
- debt securities measured at fair value through other comprehensive income**		36 303 503	67 138 415	63 312 701
- debt securities measured at fair value through profit and loss		62 907	113 733	106 639
- debt investment securities measured at amortised cost**		15 499 348	1 421 272	-
- equity securities measured at fair value through other comprehensive income		200 170	191 991	823 633
- equity securities measured at fair value through profit and loss		58 035	-	112 694
Assets pledged as collateral	Note 48	2 157 372	21 462	14 392
Investments in subsidiaries and associates	Note 24	2 377 407	2 377 407	2 377 407
Intangible assets	Note 25	625 519	590 959	628 643
Goodwill	Note 26	1 688 516	1 688 516	1 688 516
Property, plant and equipment	Note 27	497 686	545 431	576 975
Right of use asset	Note 28	437 342	460 682	642 396
Current income tax assets		-	212 204	-
Deferred tax assets	Note 29	1 331 258	1 568 080	1 199 689
Fixed assets classified as held for sale	Note 30	4 308	4 308	4 308
Other assets	Note 31	924 662	852 009	767 587
Total assets		238 098 041	216 715 146	202 723 318
LIABILITIES AND EQUITY
Deposits from banks	Note 32	2 245 128	1 337 573	2 993 349
Hedging derivatives	Note 20	1 872 039	1 641 824	1 686 042
Financial liabilities held for trading	Note 19	7 117 867	3 880 926	3 053 416
Deposits from customers	Note 33	185 655 260	175 354 581	161 133 491
Sell-buy-back transactions	Note 43	2 158 520	21 448	14 387
Subordinated liabilities	Note 34	2 705 885	2 649 991	2 654 394
Debt securities in issue	Note 35	5 899 300	4 660 882	2 772 351
Lease liabilities	Note 49	516 881	556 169	712 304
Current income tax liabilities		85 412	-	138 782
Provisions for financial liabilities and guarantees granted	Note 36	74 012	73 130	74 436
Other provisions	Note 37	463 657	339 907	253 493
Other liabilities	Note 38	3 008 820	2 371 363	1 814 029
Total liabilities		211 802 781	192 887 794	177 300 474
Equity
Share capital	Note 39	1 021 893	1 021 893	1 021 893
Other reserve capital	Note 40	22 305 509	20 790 808	20 273 125
Revaluation reserve	Note 41	(1 018 315)	(1 311 047)	1 819 661
Retained earnings		1 537 130	2 409 820	1 569 753
Profit for the period		2 449 043	915 878	738 412
Total equity		26 295 260	23 827 352	25 422 844
Total liabilities and equity		238 098 041	216 715 146	202 723 318

* details are described in Note 2.5

** in the reporting period the Bank changed the classification of specific bonds portfolio - details in note 23

IV.            Separate statement of changes in equity

Statement of changes in equity 1.01.2022 - 31.12.2022	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	20 790 808	(1 311 047)	3 325 698	23 827 352
Total comprehensive income	-	-	292 732	2 449 043	2 741 775
Profit for the period	-	-	-	2 449 043	2 449 043
Other comprehensive income	-	-	292 732	-	292 732
Profit allocation to other reserve capital	-	1 514 701	-	(1 514 701)	-
Dividend payment	-	-	-	(273 867)	(273 867)
As at the end of the period	1 021 893	22 305 509	(1 018 315)	3 986 173	26 295 260

.

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

V.               Separate statement of cash flows

for the period	1.01.2022-31.12.2022	1.01.2021-31.12.2021* restated
Cash flows from operating activities
Profit before tax	3 598 278	1 548 754
Adjustments for:
Depreciation/amortisation	446 931	504 447
Net gains on investing activities	18 291	(77 903)
Interest accrued excluded from operating activities	(1 584 492)	(735 547)
Dividends	(171 242)	(275 665)
Impairment losses (reversal)	12 158	64 938
Changes in:
Provisions	124 632	85 108
Financial assets / liabilities held for trading	338 496	43 481
Assets pledged as collateral	21 462	(7 070)
Hedging derivatives	(175 256)	(147 152)
Loans and advances to banks	(3 005 112)	(34 455)
Loans and advances to customers	(18 141 728)	(9 141 906)
Deposits from banks	993 419	(1 644 201)
Deposits from customers	12 203 847	15 516 029
Buy-sell/ Sell-buy-back transactions	2 177 770	(122 009)
Other assets and liabilities	455 901	514 745
Interest received on operating activities	7 898 958	3 782 707
Interests paid on operating activities	(2 243 194)	(80 158)
Paid income tax	(683 462)	(814 683)
Net cash flows from operating activities	2 285 657	8 979 460
Cash flows from investing activities
Inflows	17 712 343	14 868 031
Sale/maturity of investment securities	16 255 502	13 515 618
Sale of intangible assets and property, plant and equipment	35 821	41 598
Dividends received	171 242	275 665
Interest received	1 249 778	1 035 150
Outflows	(3 978 441)	(19 462 508)
Purchase of investment securities	(3 625 654)	(19 129 239)
Purchase of intangible assets and property, plant and equipment	(352 787)	(333 269)
Net cash flows from investing activities	13 733 902	(4 594 477)
Cash flows from financing activities
Inflows	2 325 350	4 273 650
Debt securities in issue	2 325 350	4 273 650
Outflows	(1 884 062)	(4 039 854)
Debt securities buy out	(1 219 340)	(2 294 798)
Repayment of loans and advances	(75 149)	(1 255 804)
Repayment of lease liabilities	(152 101)	(160 236)
Dividends to shareholders	(273 867)	(220 729)
Interest paid	(163 605)	(108 287)
Net cash flows from financing activities	441 288	233 796
Total net cash flows	16 460 847	4 618 779
Cash and cash equivalents at the beginning of the accounting period	18 029 977	13 411 198
Cash and cash equivalents at the end of the accounting period**	34 490 824	18 029 977

* details are described in Note 2.5

** details are described in Note 50

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 2022, and 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 21.02.2023.

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 and are required by law. 

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 current situation in Ukraine and has determined that it does not create material uncertainty about the Bank'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 measurement rules:

Item	Balance sheet valuation rules
Held-for-trading financial instruments	Fair value through profit or loss
Loans and advances to customers which meet the contractual cash flows test	Amortized cost
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-trading	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
Right of use assets ( IFRS 16)	Initial measurement 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 2021, except for changes in accounting standards p. 2.4 and changes in accounting policy descibed in p. 2.5.

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.
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 Bank considered the impact of the standard on the valuation of investments in associates and performance guarantee. The Bank assesses this impact on financial statements as insignificant.
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	The amendment concern accounting policy disclosures with regard to the scope of such disclosures.	1 January 2023	The amendment will have a significant impact on disclosures and information presented in financial statements.
Amendments to IAS 1	The amendments affect requirements for the presentation of liabilities. Specifically, they clarify one of the criteria for classifying a liability as non-current.	1 January 2024	The amendment will not have a significant impact on financial statements.*
Amendments to IFRS 16	Change in the calculation of the lease liability in sale and leaseback transactions.	1 January 2024	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 2022

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 asset. For IFRS 16 an illustrative example for lease incentives treatments was changed, not to cause confusion.	1 January 2022	The amendment does not have a significant impact on consolidated 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 does not have a significant impact on consolidated 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 does not have a significant impact on consolidated financial statements.
Amendments to IFRS 3  Business combinations	IFRS 3 "Business Combinations" outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.	1 January 2022	The amendment does not have a significant impact on consolidated financial statements.

2.5. Comparability  of previous periods

Change (1): Legal risk related to the mortgage loans portfolio denominated in/ indexed to CHF.

Based on the analysis, due to the applicable legal situation related to mortgage loans portfolio denominated and indexed in foreign currencies, and inability to  recover all contractual cash flows risk materialisation, the Bank decided to change the accounting policy for their recognition, starting from 1 January 2022.

Prior to the amendment, the legal risk of this portfolio was recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. From 1 January 2022, the Bank decided to apply IFRS 9 Financial Instruments.

As of 1 January 2022, the Group decided to reduce the gross carrying amount of mortgage loans denominated in/ indexed to foreign currencies in line with IFRS 9 (IFRS 9 paragraph B5.4.6). If there is no gross exposure or if the existing exposure is insufficient to cover loss, the provision is recognised in accordance with IAS 37.

Taking into consideration the significance of portfolio`s legal risk cost and in accordance with paragraph 29 of IAS 1 Presentation of financial statements, the Bank decided to present a separate line in the consolidated income statement " Cost of legal risk associated with foreign currency mortgage loans”, which presents the overall impact of the portfolio's legal risk on the income statement.

The change in accounting policy was intended to provide users of financial statements with more useful information on the impact of the legal risk of the portfolio of loans denominated and indexed in foreign currencies on the financial position, financial result and cash flows of theBank.

The change also aligned the approach used in the Bank financial statements with the market practice observed in this respect.

Comparative data as at 1 January 2021 and 31 December 2021 and all reporting periods in between have been appropriately restated in order to assure comparability.

The introduced change in accounting policy did not affect the amount of the Bank's net assets in the comparative period, i.e. as of 1 January 2021 and 31 December 2021.

Change (2): Change in the presentation of selected items of the income statement

To present the financial position and financial performance of the Bank in the most transparent way, as well as to provide the highest informative value for the readers of the  Bank's financial statements, the Bank decided to present  “Gain/loss on derecognition of financial instruments measured at amortised cost" in the income statement

Income statement

	for the period: 1.01.2021 - 31.12.2021
	before	adjustment (1)	adjustment (2)	after
Interest income and similar to income	4 745 525	-	(299)	4 745 226
Interest income on financial assets measured at amortised cost	3 791 645	-	(299)	3 791 346
Interest income on financial assets measured at fair value through other comprehensive income	940 407	-	-	940 407
Income similar to interest on financial assets measured at fair value through profit or loss	13 473	-	-	13 473
Interest expense	(231 224)	-	-	(231 224)
Net interest income	4 514 301	-	(299)	4 514 002
Fee and commission income	2 432 555	-	(38)	2 432 517
Fee and commission expense	(313 108)	-	-	(313 108)
Net fee and commission income	2 119 447	-	(38)	2 119 409
Dividend income	277 498	-	-	277 498
Net trading income and revaluation	251 800	-	-	251 800
Gains (losses) from other financial securities	91 428	-	-	91 428
Gain/loss on derecognition of financial instruments measured at amortised cost	-	-	337	337
Other operating income	196 317	(67 965)	-	128 352
Impairment losses on loans and advances	(841 012)	-	-	(841 012)
Cost of legal risk associated with foreign currency mortgage loans	-	(1 157 849)	-	(1 157 849)
Operating expenses incl.:	(4 477 231)	1 225 814	-	(3 251 417)
-Staff, operating expenses and management costs	(2 594 814)	-	-	(2 594 814)
-Amortisation of property, plant and equipment and Intangible assets	(358 721)	-	-	(358 721)
-Amortisation of right of use asset	(145 726)	-	-	(145 726)
-Other operating expenses	(1 377 970)	1 225 814	-	(152 156)
Tax on financial institutions	(583 794)	-	-	(583 794)
Profit before tax	1 548 754	-	-	1 548 754
Corporate income tax	(632 876)	-	-	(632 876)
Profit for the period	915 878	-	-	915 878
Net earnings per share
Basic earnings per share (PLN/share)	8,96	-	-	8,96
Diluted earnings per share (PLN/share)	8,96	-	-	8,96

1)          Adjustment resulting from changes in  accounting policy

2)          Adjustment resulting from changes in the presentation

Statement of financial position

	as at: 31.12.2021
	before	adjustment (1)	after
Loans and advances to customers incl.:	125 449 130	(1 469 728)	123 979 402
- measured at amortised cost	123 268 726	(1 469 728)	121 798 998
Total assets	218 184 874	(1 469 728)	216 715 146
Other provisions	1 809 635	(1 469 728)	339 907
Total liabilities	194 357 522	(1 469 728)	192 887 794

	as at: 01.01.2021
	before	adjustment (1)	after
Loans and advances to customers incl.:	119 077 346	(417 152)	118 660 194
- measured at amortised cost	116 786 037	(417 152)	116 368 885
Total assets	203 140 470	(417 152)	202 723 318
Other provisions	670 645	(417 152)	253 493
Total liabilities	177 717 626	(417 152)	177 300 474

1)        Adjustment resulting from changes in  accounting policy

Statement of cash flows

	for the period: 1.01.2021 - 31.12.2021
	before	adjustment (1)	after
Changes in:
Provisions	1 137 684	(1 052 576)	85 108
Loans and advances to customers	(10 194 482)	1 052 576	(9 141 906)

1)        Adjustment resulting from changes in  accounting policy

.

2.6 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

·         Estimates of risk arising from mortgage loans in foreign currencies

·         Estimates of the impact of payment deferrals under the Crowdfunding Act for business and support to borrowers

·         Estimates of the return of increased margin in period till mortgage collateral is registered by court

·         Estimates of commission reimbursement for mortgage loans in the event of early repayment

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 whether/when a significant increase in credit risk occurred;

·   determination of any forward-looking information 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 rating 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 orginated 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 stage 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.

Changes in the classification resulting from Recommendation R

From January 2022, the Bank adjusted the rules of exposure classification to the new guidelines resulting from the KNF recommendation. The main changes in the classification of exposures relate to the situation where:

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

·   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 classification into a stage 2

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 credit 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 the course of the decision process as well as in the 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 stage 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 (annualized) of the probability of default
mortgage loans				3,08%
consumer loans				14,32%
Bussines loans				8,10%

The fact that the exposure is supported by the Borrowers' Support Fund is reported as a forborne and a significant increase in credit risk (Stage 2), and in justified cases (previously identified impairment, a delay in repayment over 30 days, subsequent forbearance, no possibility to service the debt according to the current schedule) exposure is classified in Stage 3.

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 case of significant increase of credit risk since initial recognition.

ECL measurement

Another key feature required 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 information 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

The scenario was built under assumption that Poland loses about 10% of its natural gas supply, impacting its economy mostly in 1Q23, when the gas consumption is the highest due to seasonal pattern. Scenario was built under the assumption that COVID-19 will not be having a significant impact on the economy in the upcoming .years

In 2Q22 the economy in Poland entered a recession caused by disruptions related to the war in Ukraine, energy and interest rate shock, which according to the baseline scenario, will be prolonged until early 2023, amid worsening global economic growth and worsening situation in European energy markets. Later in 2023 gradual rebound in economic activity is expected. 2023 GDP growth is expected at 0.7%. CPI is to remain elevated, and is expected to be 11.7% in 2023.

The NBP will continue with interest rate increases, bringing the main rate from 1.75% at the end of 2021 to 7.50% in 1Q23. Further on, the NBP will reduce interest rates to 5.25%, but keep them at elevated level due to heightened inflation.

Best case scenario

The upside scenario was built under the assumption that the economy will quickly recover from war-related shock and EU funds will be disbursed without further delays. No new coronavirus waves or lockdowns will appear. EU funds will be unlocked and supply disruptions will disappear.

In 2023 the economy is expected to grow by 2.9% and jump by 6.1% in the following year. Strong growth will fuel the already elevated inflation, averaging 9.5% in 2023. The NBP will continue its tightening cycle. Interest rates are expected to climb to 8.00% at the end of 2023 and then to decline to the level of 6.00% in 1Q25, as inflation will be going down.

Worst case scenario

The downside scenario was built under an assumption the impact of war in Ukraine and disruptions in energy markets will be longer lasting, coupled with prolonged blockade of EU funds disbursement and forfeit or their larger part.

In this scenario in 2023 the economy is expected to decline by 1.8% and then to rebound by 1.0% in 2024. Despite slower growth, CPI inflation is expected to remain elevated and to average 13.9% in 2023 and 8.2% in 2024.

Deterioration of the economic outlook will force the NBP to decrease interest rates, so after applying rate increases bringing the reference rate to 7.25% in 2Q23 rates will go down to 3.50% in 2Q25.

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

Scenario as at 2022.12.31			baseline		best case		worst case
likehood			60%		20%		20%
			2023	average, next 3 years	2023	average, next 3 years	2023	average, next 3 years
GDP		YoY	0,7%	3,4%	2,9%	4,6%	-1,8%	1,8%
WIBOR 3M		average	6,8%	5,8%	9,2%	6,7%	7,8%	4,3%
unemployment rate		% active	3,6%	3,7%	3,0%	2,8%	3,8%	4,9%
CPI		YoY	11,7%	5,9%	15,6%	5,4%	13,9%	4,4%
EURPLN		period-end	4,69	4,62	4,6	4,48	4,81	4,81

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

Management ECL adjustments

In the fourth quarter of 2022, in addition to the ECL resulting from the complex calculation model implemented in the system, Santander Banka Polska S.A. reviewed management adjustments, updating the risk level with current and expected future events, which resulted in:

·    Creation of a management provision for retail mortgage portfolio in the amount of  PLN 14 100 k,  the risk of which may increase after the cessation of aid measures

·    Creation of a management provision for SME portfolio in the amount of  PLN 30 000 k, due to additional risk of external sale (its share has increased significantly) not covered by PD model

·    Creation of a management provision for corporate portfolio in the amount of  PLN 35 000 k, due to estimated impact of rising costs (including energy) on the portfolio's risk profile and additional risk in sectors involved in the sale and production of durable goods for household use

·    Other management adjustments due to model and system changes and updating of macroeconomic scenarios were withdrawn.

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		change in ECL level
scenario					31.12.2022	31.12.2021
	individuals	housing loans	business		Total	Total
worst case	49,3	2,8	20,0		72,1	18,9
best case	(38,3)	(2,9)	(26,7)		(67,9)	(18,7)

Based on the GDP indicator as the main factor determining the condition of the economy, Santander Bank Polska S.A. estimates that if the target level of gross domestic production will be reduced by 1% in 2023, this would translate into an increase in expected credit losses in the amount of PLN 30 990 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 a 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 the below table

	additional expected credit loss (PLN m)
reclassification from stage 1 to stage 2	individual	mortgage loans	business	Total 31.12.2022	Total 31.12.2021
1%	5,1	8,0	3,7	16,8	22,3
5%	29,8	37,3	23,8	91,0	109,4
10%	57,3	57,8	44,8	159,9	184,8

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 16 800 k according to the portfolio as of 31 December 2022 for Santander Bank Polska S.A.  (in relation to PLN 22 300 k as at 31 December 2021).

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. 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 legal claims in accordance with IAS 37. The provisions have been estimated considering the likelihood unfavourable verdict and amount to be paid, and their impact is presented in other operating income and cost.

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

Due to their specific nature, estimates related to legal claims of mortgage loans in foreign currencies are described below

Estimates of risk arising from mortgage loans in foreign currencies

Due to the revolving legal situation related to mortgage loans portfolio denominated  and indexed to foreign currencies, and inability to  recover all contractual cash flows risk materialisation, Bank estimates impact of legal risk on future cash flows.

Gross book value adjustment resulting from legal risk is estimated based on a number of assumptions, taking into account:a specific time horizon and a number of probabilities such as:

·         the probability of possible settlements and

·         the probability of submitting claims by borrowers,and

·         the probability in terms of the number of disputes

which are described in more details in Note46

In mid-2022, the Bank prepared a settlement scenario which reflects the level of losses for future settlements.

Legal risk is estimated individually for each exposure in the event of litigation and in terms of portfolio in the absence of such.

As explained in the accounting policies, Santander Bank Polska S.A. accounts for the impact of legal risk as an adjustment to the gross book value of mortgage loan portfolio. If there is no credit exposure or its value is insufficient, the impact of legal risk is presented as a provision according to IAS 37.

The result on legal risk is presented in a separate position in income statement  “Cost of legal risk associated with foreign currency mortgage loans” and “Gain/loss on derecognition of financial instruments measured at amortised cost”.

In 2022, the Bank recognized PLN 1 428 333 k as cost of legal risk related to mortgage loans in foreign currencies and PLN 183 256 k as a cost of signed settlements.

The Bank will continue to monitor this risk in subsequent reporting periods.

Details presenting the impact of the above-mentioned risk on financial statement,  assumptions adopted for their calculation,scenario description and sensitivity analysis are contained in notes 37, 46 and 47 respectively.

Estimates of the impact of payment deferrals under the Crowdfunding Act for business and support to borrowers

On July 14, 2022, the President of the Republic of Poland signed the Act on crowdfunding for business ventures and  assistance to borrowers, aimed at support for people repaying mortgage loans in a difficult financial situation in the form of the so-called payment holidays, governing the scope of assistance and borrowers who can benefit from such assistance.

Based on the conditions defined in the act, the size of the portfolio for which payment deferral may occur and assumptions regarding the number of eligible customers who will benefit from deferred installments, the Bank made one-off estimate of the impact of the holidays on the Bank's financial result at the time of entry into force of the Act and recognized it as a decrease in the carrying amount of the mortgage loan portfolio and a decrease in interest income. The estimate for the so-called credit holidays was updated in Q4 2022.

As at 31 December 2022, the estimated impact was approximately PLN 1,538,000 k and already included all requested deferrals of installments as well as potential requests for deferrals that may still be submitted by customers in 2023.

At the end of December 2022, the number of loans for which installment deferrals were applied for amounted 124,684.

The current level of participation (in terms of volume) for installments possible to be deferred in 2022 was 61.2%. The participation assumption (in terms of volume) for installments possible to be deferred in 2023 is 63.8%. The average level assumed by the Bank is 62.5%.

Below is an analysis of the change in the estimate in the event that the number of customers requesting a deferral of all possible installments increases by 5 b.p. and 10 b.p., respectively

	additional estimate for so-called payment holidays  (mPLN)
increase in hit ratio					31.12.2022
5 b.p.					125,0
10 b.p.					251,0

The final impact on the Bank's financial result will depend, inter alia, on the number of clients who will use these support solutions, the number of installments deferred by each of these clients and the moment they start taking advantage of deferral.

Estimates of the return of increased margin in period till mortgage collateral is registered by court

Due to the entry into force on 17 September 2022 of the Act of August 5, 2022 on the amendment to the Mortgage Loan Act and the supervision over mortgage brokers and agents, the Bank, after making entry into the land and mortgage register is obliged for additional cost charged, to either  reimburse  the borrower for these costs or include them towards the repayment of the loan.

The Act applies to contracts concluded from the date of its entry into force and to contracts concluded before the date of its entry into force, if the mortgage has not been entered by that date.

In 2022, the Bank recognised a liability for reimbursement to individual customers of additional mortgage costs incurred until the mortgage collateral is established in the amount of PLN 37 800 k, which decreased interest income.

Estimates of commission reimbursement for mortgage loans in the event of early repayment

The Bank analyzed the introduction of a proportional reduction of the total cost of the loan by a commission  in the event of repayment of all or part of the mortgage loan before maturity (for contracts granted from 22.07.2017), taking into account the position of the Office of Competition and Consumer Protection in this respect and the received recommendation from the Polish Financial Supervision Authority, which assumed the reduction of the total cost of the loan by the commission charged for granting the loan, for the period by which the term of the agreement was shortened.

As a result, the Bank decided to change the current approach, which assumed no reduction in the cost of the loan in the event of early repayment and recognised a liability for the reimbursement of commission to customers who already repaid the loan in the amount of PLN 40 500 k which decreased interest income.

In addition, the Bank estimated the amount of potential returns for the portfolio of outstanding mortgage loans in the amount of PLN 36 600 k. This value includes the expected amount of overpayments in subsequent periods, third-party intermediary cost and the straight-line method of return. It is presented as an adjustment to the mortgage portfolio.

2.7. 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 of financial assets  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 contain 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 par amount, 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 Bank’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.

However contractual terms of these 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  is therefore not measured at amortised cost but  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.

2.8. 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;