Table of contents

 

 

1. Introduction

2. Business landscape

3. Financial results, capital adequacy and financial instruments

4. Development lines and operations of ING Bank Hipoteczny S.A.

5. Internal business conditions

6. Organisational framework and authorities of ING Bank Hipoteczny S.A.

7. Corporate governance and information for investors

8. ING Bank Hipoteczny S.A. Management Board statement

1.    Introduction

 

ING Bank Hipoteczny S.A. (the Bank) was established on 26 February 2018, upon obtaining a permit issued by the Polish Financial Supervision Authority on 16 January 2018.

ING Bank Hipoteczny S.A. is a subsidiary of ING Bank Śląski S.A. which as at 30 June 2021 held 100% shares in the share capital of ING Bank Hipoteczny S.A. The latter is a member of the Group which in this document is referred to as the ING Bank Śląski S.A. Group (the Group).

As at 30 June 2021, the share capital of ING Bank Hipoteczny S.A. amounted to PLN 380,000,000.00 and was fully taken up by ING Bank Śląski S.A. ING Bank Hipoteczny S.A.’s shares were paid in cash.

ING Bank Hipoteczny S.A. runs business based on the strategic cooperation with ING Bank Śląski S.A., acquiring debt under mortgage-backed loan agreements. The strategic objective of the Bank is to provide the Group with long-term and stable funding by way of issue of covered bonds.

In connection with the COVID-19 pandemic, the Bank analyses market developments on an ongoing basis, identifying risks related to potential increased delays in loan repayments and a potential decrease in property prices.  The Bank also analyses the market situation regarding covered bonds and changes in the regulatory and economic environment on an ongoing basis. Moreover, it is monitored all the time whether the suppliers are able to provide services.

Having identified the risk of COVID-19 pandemic, the Bank took all measures to maintain operational continuity, ongoing customer service included. Preventive measures were also taken to protect employees’ health by introducing, for instance, remote working. The Bank’s standing is good in terms of its liquidity and capital position. In fact, it significantly exceeds the required regulatory levels.

So far, the Bank has not recorded any material COVID-19 related deterioration in portfolio quality.

The further development of the situation and its impact on the Bank's operations is difficult to assess at this point in time due to the observed dynamics of change in the external environment caused by the pandemic. Thus, taking a conservative approach, the Bank continues its monitoring and analysis processes on an ongoing basis. Chapter 4.2. shows a description of actions taken by the Bank to help its customers.

 

2.    Business landscape

 

2.1 Macroeconomic environment

 

Gross Domestic Product

In January 2021, ING economists forecast GDP growth for the year at 4.5% y/y, or by 4.1% y/y above consensus, pointing to the "fading effect of the epidemic on the economy". GDP for 1Q 2021 showed how strong this effect is. Despite the third wave of the pandemic in 1Q 2021 and the scale of freezing of the economy, which was similar to that from the start of the pandemic (2Q 2020), GDP grew by as much as 1.1% q/q. Since 3Q 2020, industry has been the main driver of the economy. The structure of Polish GDP is helpful, with a relatively high share of diversified manufacturing. Globally, demand has shifted from unavailable services to durable goods. The fact that household incomes was strongly supported by aid programmes both in Poland and abroad, has made it possible for the manufacturing industries, especially the export-oriented ones, to recover relatively quickly.

According to ING economists, the COVID-19 related recession ended in Poland in 4Q 2020, and the GDP growth (q/q) initiated in 1Q 2021 will continue. The growing resilience of the economy is a good sign when we face the 4th wave of the pandemic. Most of the rebound effect of the economy after its reopening is still ahead of us. Its first signals in Poland and its trading partners appeared in May. The data from that month show that the "second engine" of GDP, namely market services (trade included), is starting to work. ING economists estimate that market services will grow (7% y/y) in 2Q 2021 after the declines since 2Q 2020.

At the end of May, ING economists changed their GDP forecast for 2021 by increasing it to 5.4% y/y. They are of the opinion that GDP has already returned to pre-pandemic levels in 2Q 2021, and the negative demand gap will close at the end of 2021 and beginning of 2022. The delta variant of COVID-19 implies the risk of slower growth than forecast, but ING economists believe that the risk is limited.

 

 

Labour market and payroll

The payroll growth rate reached 10% y/y in April and May 2021, but this is mainly due to a very low comparative database from the previous year, when many companies had their workers on furlough and implemented reduced working hours and wages. According to ING economists, this effect will be fading starting from June, and wage growth will slow down to around 7% y/y and remain at that level until the end of 2021.

High inflation may lead to employees’ increased demands for higher wages and salaries. However, ING economists do not expect a significant increase in wage dynamics in the coming months. The percentage of companies that plan to increase wages and salaries has reached the 2018 levels by now and does not indicate an increase in the scale of rises. An inhibiting factor will be the expiry of job protection related to the PFR financial shield. This may result in an increased number of layoffs due to structural changes in the economy. Although it may be expected that layoffs will be offset by the new jobs created by companies benefiting from the economic recovery, increased flows in the labour market should limit payroll pressure.

Wage dynamics are expected to increase in the first quarter of 2022, as wages are usually raised at the beginning of the year. The benchmark in wage negotiations will be the inflation rate as at the end of 2021, which will again be close to 5%. According to economists at ING, the wage dynamics will exceed 8% and then it will stabilise at a slightly lower level for the rest of the year (after deducting the seasonal wage growth effect).

Inflation

The pandemic-induced recession has contributed little to the decreased inflation in 2021. ING economists are of the opinion that inflation will remain high in the next 2-3 years (4.1-3.5% y/y on average in 2021-2022). They believe that inflation results not only from temporary but also structural factors. The demand pressure that will be activated in 2022 will keep core inflation high (approx. 3.5% y/y) when transitory factors start to fade. Although in 2022 CPI will fall near the upper limit above the NBP's target, but the fact that core inflation will stay at the record level of 3.5% y/y can be alarming.

Among the persistent inflation factors, ING economists see the GDP structure of recent years, with a high share of consumption and a low share of private investment (in 2020 it fell to a record low of 12.1% of GDP). By the end of 2022, this share will grow, however it will not exceed the level of 4Q 2019. The weakness of investment limits productivity growth, which could mitigate price pressures in an environment of rising demand driven by public transfers. This is why Poland entered the pandemic period with high inflation.

The models indicate that there will be no significant decline in core inflation in Poland in the coming quarters, and in 2022 the revival of consumer demand and delayed effects of high PPI will have a strong impact. In 2H 2022, core inflation will also accelerate as a result of the already positive output gap in the conditions of fast GDP growth and double fiscal stimulation. On the other hand, inflation in non-core components should fall from the beginning of next year, so the average CPI will be 3.5% y/y. We assume that there will be no longer such high increases in fuel and food prices, which propelled inflation in 2021.

 

 

Monetary policy

Since the May meeting, the MPC's attitude to possible interest rate rises has been gradually changing.  According to ING economists, the increases in interest rates will most likely take place in November, following the publication of a new projection.  This is consistent with CPI forecasts that show persistently high core inflation in 2022 and 2023, even when CPI goes down due to lower fuel and food contribution.  The consensus still expects a later start to tightening.  According to ING economists, rates will be at 1.25% by the end of 2022.

Before increasing the rates, the MPC wants to see how big a threat of the 4th wave of pandemic is, whether the recovery is sustainable and what risk the demand pressure brings. The demand pressure will come after the opening of the economy and fiscal stimulation in 2022.

 

 

 

Macroeconomic projections

 

 

2018

2019

2020

2021P

2022P

GDP growth (%)

5,4

4,8

-2,7

5,4

5,0

General government debt as per the EU methodology (% of GDP)

48,8

45,9

57,5

59,7

58,9

Average annual inflation (CPI) (%)

1,7

2,3

3,4

4,1

3,5

Unemployment rate (%, yearend)

5,8

5,2

6,2

6,1

5,5

USD/PLN exchange rate (yearend)

3,76

3,80

3,76

3,56

3,83

EUR/PLN exchange rate (yearend)

4,30

4,26

4,61

4,38

4,40

3M WIBOR (yearend)

1,72

1,71

0,21

0,46

1,40

 

 

2.2 Residential estate market

 

One of the regular elements charactering the Polish social and economic situation is insufficient supply of apartments. As defined by the Eurostat, over 37% of Poles live in overcrowded houses. Both the average apartment floor area and the floor area per one citizen are below the EU average.

Depending on the methodology, the shortage of apartments is estimated to range from 1.4 million and 4.4 million in Poland. The data of the Central Statistical Office show that in the first five months of 2021 approximately 87.1 thousand apartments or 8.9% more than a year ago were commissioned for use. Additionally, there were nearly 118,800 apartments whose construction was started (more by 46.3% than the same period last year) and 141,400 apartments to be built (more by 48.2% than the same period last year), namely apartments for which building permits were issued or building designs were registered.

In the absence of other attractive capital investing alternatives, a gradual pay rise, low unemployment and interest rates encouraged investment in apartments. However, further growth in the housing market depends on COVID-19 related developments and the MPC's decisions on interest rate levels.

Availability of adequate apartments is among further social and economic growth drivers. A limitless shortage of apartments in Poland is an opportunity for development of the mortgage banking market which is based on real estate funding with long-term covered bonds.

 

2.3 Mortgage lending market

 

As at the end of May 2021, banks’ receivables under housing loans in Poland totalled PLN 476.8 billion or went up by 3.1% y/y (as per the data published by the National Bank of Poland). The balance of loans awarded in PLN rose by 10% y/y and closed at PLN 373.1 billion.

The Polish mortgage market is almost entirely dominated by variable interest rate loans. Recently, banks have been introducing more and more fixed interest rate loans into their offers which gain increasing interest from clients. This results, inter alia, from the implementation of Recommendation S supporting these activities.  There is also a noticeable trend of an increase in the average value of the housing loan granted.

As at the end of May 2021, the strategic partner to the Bank, ING Bank Śląski S.A. was ranked number one and number three in terms of new sale and volume of the held portfolio of PLN mortgage loans respectively.

A large demand for apartments, developing economy and low interest rates are conducive to further growth of the market of mortgage loans. However, further growth depends on COVID-19 related developments and the MPC's decisions on interest rate levels.

 

2.4 Covered bonds market

 

As at the end of June 2021, there were five mortgage banks in Poland:

o        PKO Bank Hipoteczny S.A.,

o        mBank Hipoteczny S.A.,

o        Pekao Bank Hipoteczny S.A.,

o        Millennium Bank Hipoteczny S.A.,

o        ING Bank Hipoteczny S.A.

The Polish market of covered bonds is small when compared with developed EU economies where covered bonds are an important source of mortgage lending funding. Still, it grew dynamically over previous years. Polish issuers place covered bonds both in the Polish market and abroad. Public issues prevail; variable interest rate ones in Poland and fixed interest rate ones abroad.

As at the end of the first fourth quarter of 2021, the covered bonds in trading in Poland totalled approximately PLN 25.7 billion, or were down by PLN 0.8 billion from June 2020. For the time being, PKO Bank Hipoteczny is the largest issuer of covered bonds in Poland. The ratio of mortgage loans funding with covered bonds still remains low.

Operations of mortgage banks make it possible to: strengthen funding stability within the group, diversify funding sources for the portfolio of retail mortgage loans, better match the maturities of assets and liabilities in the balance sheet (as a rule, Polish banks finance long-term mortgage loans with short-term deposits) as well as reduce the funding costs of the lending campaign for the portion of the lending portfolio funded with other long-term instruments.

 

2.5 Regulatory and legal landscape

 

Significant legal changes that came into force in the first half of 2021 affecting the Bank's operations relate in particular to amendments to the Banking Law and the Regulation of the Minister of Finance, Funds and Regional Policy of 8 June 2021 on the risk management system and internal control system and remuneration policy at banks.

In particular, the following regulations should be mentioned:

1.      Act of 25 February 2021 on amending the Banking Law and certain other acts.

The purpose of the Act is, in particular, to make the necessary changes to the national legal regime due to the effective entry of the European Union regulations on capital requirements for financial institutions, the so-called CRD V/CRR II. Changes resulting from the CRD V Directive include: Remuneration policy; Introduction of an obligation for the PFSA to assess the fulfilment of requirements by members of a bank's management board and supervisory board; Authorisation for the PFSA to dismiss a member of a bank's management board or supervisory board if such a person fails to fulfil the requirements necessary to perform the function; Clarification of PFSA's supervisory measures; Increase in the amount of penalties (up to PLN 21,312,000) that may be imposed by PFSA on members of a bank's management board if they fail to comply with recommendations regarding conduct of business in breach of the regulations and charter, refuse to provide explanations and information, or if they fail to perform duties related to consolidated supervision. At the same time, the possibility of imposing such penalties has been extended to the members of the bank's supervisory board; Extension to the members of the bank's supervisory board of the obligations to inform the PFSA of charges brought in criminal or penal and fiscal proceedings; Application by banks of internal systems for assessing interest rate risk or a standard methodology or, in the case of small and non-complex institutions, a simplified standard methodology; Clarification of the scope of SREP (Supervisory Review and Evaluation), as well as introduction of the possibility of issuing recommendations by the PFSA with regard to maintaining the expected level of own funds above the regulatory requirements, as a result of a SREP score in which internal capital was examined; Clarification of the provision concerning the provision of information covered by banking secrecy to authorised services free of charge (in connection with proceedings referred to in the provisions on the protection of classified information); Amendments relating to capital buffers; Amendments relating to the provision of information upon request of the PFSA on loans, cash loans, bank guarantees and sureties granted to persons related to the Bank or persons holding managerial positions.

Changes related to the CRR II Regulation include the introduction of appropriate references in the Banking Law and the obligation to address the risk of excessive leverage.

The Act also introduces the possibility of waiving the use of the European Single Electronic Format (ESEF) for annual reports for 2020 and extending the scope of financial market supervision by the Polish Financial Supervision Authority to include supervision within the scope provided for in Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.

The Law entered into force on 28 June 2021 with certain exceptions. The amendments relating to the ESEF and the supervision of the application of Regulation 2019/2088 entered into force on the day following the date of promulgation of the Law, while the provisions referring to the leverage ratio buffer requirement will enter into force on 1 January 2023.

2.      Regulation of the Minister of Finance, Funds and Regional Policy of 8 June 2021 on the risk management system and internal control system and remuneration policy at banks (Journal of Laws, item 1045)

The regulation entered into force on 11 June 2021. The new regulations replace the regulation of the Minister for Economic Development and Finance of 6 March 2017 in the scope related to the risk management system, internal control system and remuneration policy. The regulation sets out the manner in which the risk management system and the internal control system operate at banks, including the procedure for anonymous reporting to a designated member of the management or supervisory board of violations of the law and the procedures and ethical standards in force at the bank, as well as the detailed scope of the remuneration policy applied to a limited extent and the manner of its determination. Changes in the risk management system include clarification of the provisions on the risk management system; introduction of a strategic limit at the bank level for each material risk. The adopted types of limits and their amount are approved by the bank's management board or appropriate committees appointed by them. In the case of strategic limits, the decision of the management board is referred to the supervisory board (irrespective of the board's competence to approve the acceptable overall risk level). If the strategic limit is exceeded, the bank's management board immediately provides the supervisory board with information on such an event together with information on the recovery actions taken or planned. Under the regulation, the Bank establishes limits for material risks at the consolidated level (group level).

Specific provisions regarding interest rate risk in the banking book, require policies/procedures to include risk management rules derived from internal systems for assessing interest rate risk or from standardised or simplified standardised methodologies to identify, assess, manage and mitigate risks from potential changes in interest rates that affect both the economic value of equity and the net interest income from operations in the banking book; risk management policies, derived from internal systems, to assess and monitor the risk arising from potential changes in credit spreads that affect both the economic value of equity and the net interest income from the banking book business; Provisions for operational risk, including a definition of such risk and consideration of the principles for managing the conduct risk; Indication that risk management policies and procedures should also include principles for managing reputation risk and principles for managing compliance risk.

The changes in remuneration policy concerned, inter alia, the indication that the remuneration policy for all bank employees should be gender neutral; the period of deferral of variable components of remuneration and the rules on the application of remuneration policy to a limited extent. In the provisions on the internal control system, the changes concern, among others, the list of types of controls, which has been extended to include legal safeguards and insurance - mandatory or necessary for the safe and uninterrupted conduct of the bank's business.

Most of the provisions of the regulation entered into force on the day after the date of promulgation. The amendments regarding interest rate risk management took effect on 28 June 2021. The amendments concerning the setting of strategic limits for each risk type and limits at the consolidated level will be effective as of 31 December 2021. The provisions of the regulation do not apply to the variable components of remuneration due for 2020 and prior years.

Other regulatory and legal amendments and work:

1.      Recommendation S – concerning best practices in management of mortgage-backed credit exposures. The amended Recommendation S indicates that the bank should make it possible for a retail client to change the loan interest rate formula from a variable interest rate to a fixed interest rate or periodically fixed interest rate - this also applies to credit facility agreements concluded before this Recommendation entered into force. Furthermore, the amended Recommendation S introduces provisions concerning loans with the option of releasing the obligation towards the bank on account of credit exposure secured with a mortgage on residential real estate in the case of transferring by the borrower to the bank the ownership title to the real estate funded with a loan, hereinafter referred to as loans with the "key for debt" option. Recommendation S should be implemented by the Banks by 30 June 2021 at the latest.

2.      On 15 April 2021, the Polish Financial Supervision Authority (PFSA) issued Recommendation R. The revised Recommendation R constitutes a set of best practices regarding the classification of credit exposures, assessment and recognition of expected credit losses, in accordance with accounting and credit risk management policies adopted and binding at banks. The need for the Recommendation resulted from the entry into force of IFRS 9 - Financial Instruments, which entailed changes in the bank management area. Recommendation R comes into effect on 1 January 2022.

3.      Polish Financial Supervision Authority has announced on its website that the FCA has announced that the LIBOR benchmarks will cease to be published:

The following benchmarks will no longer be prepared:

o        CHF LIBOR (all terms) - as of the end of 2021;

o        EUR LIBOR (all terms) - as of the end of 2021;

o        LIBOR GBP, LIBOR JPY (selected terms) - as of the end of 2021;

o        USD LIBOR (selected terms) - as of 30 June 2023.

Polish Financial Supervision Authority emphasises that the FCA's statement provides the basis for regulated entities using LIBOR family benchmarks to trigger the actions provided for in the contingency plans referred to in Article 28(2) of the BMR. The regulator also expects the regulated entities using the LIBOR family benchmarks to immediately initiate actions to inform clients holding contracts, financial instruments and units of investment funds in which the above benchmarks are used about the planned discontinuation of preparing them and the consequences thereof. At the same time PSFA informs that the FCA's announcement provides a basis for possible actions to be taken by the European Commission in order to designate a replacement for selected LIBOR family benchmarks under the EU law.

4.      On 15 May 2021, the Law of 30 March 2021 on amending the Act on Counteracting Money Laundering and Terrorism Financing and certain other laws entered into force (Journal of Laws, item 815)

As a rule, the Act shall enter into force after 14 days from the date of its announcement in the Journal of Laws. Changes related, inter alia, to the extension of the catalogue of obliged institutions shall enter into force after 3 months from the date of announcement, i.e. on 31 July 2021. Some of the changes related, among others, to financial safety measures, extension of the scope of the Central Register of Ultimate Beneficial Owners, new types of regulated activities and extension of sanctions will enter into force after 6 months from the date of announcement, i.e. on 31 October 2021. The law also contains transitional provisions concerning, inter alia, the completion of citizenship information in the Central Register of Ultimate Beneficial Owners.

The amendments concern, among other things: the list of obliged institutions, as well as the definitions of ultimate beneficial owner, group, politically exposed persons. In addition, the provisions on financial safety measures in relation to trusts, as well as the exchange of virtual currencies have been supplemented. The provisions on the identification and verification of the identity of the customer and the ultimate beneficial owner have been amended. When establishing a business relationship or carrying out an occasional transaction with a customer who is subject to the obligation to register information on ultimate beneficial owners, obliged institutions will have to obtain either a confirmation of registration or an extract from the Central Register of Ultimate Beneficial Owners or from the register kept in the competent Member State. The catalogue of circumstances indicating a higher risk of money laundering and terrorist financing has been expanded, and a reference to a delegated act of the European Commission has been introduced regarding the list of high-risk countries to which enhanced safety measures shall be applied.

For the banking sector, it is important to amend the regulations related to the obligation of confidentiality by obliged institutions, allowing in principle the exchange of such information between group entities (credit and financial institutions).

The catalogue of institutions obliged to make and update entries in the Central Register of Ultimate Beneficial Owners (CRUBO) was also extended. In addition, an obligation has been imposed on ultimate beneficial owners to provide the entities obliged to report to CRUBO with information and documents necessary for reporting the information about the ultimate beneficial owner, and to update the information within the deadline and under the pain of a fine up to PLN 50,000. As a result of the changes, obliged institutions are to note discrepancies between the information disclosed in the Register and the information on the customer's ultimate beneficial owner determined by it and take actions to clarify the reasons for these discrepancies. The amendment introduces new categories of regulated activities and virtual currency activities within the meaning of Article 2(1)(12). Compliance with the Act will be required to be able to carry out such activities. This involves the creation of two new registers: a register of activities for companies or trusts and a register of virtual currencies.

The option of imposing an administrative penalty has been extended, inter alia, to the failure to appoint a person from the management body in charge of the implementation of the obligations set out in the Act, failure to keep information on the planned initiation and on the conduct of analyses relating to money laundering or terrorist financing confidential or failure to implement post-inspection recommendations.

5.      The EBA has also published new Guidelines on customer due diligence and the factors that should be taken into account by credit and financial institutions when assessing money laundering and terrorist financing risks associated with individual business relations and occasional transactions (“Guidelines on ML/TF Risk Factors''), which replace the 2017 document.

The guidelines sets out the factors that firms should take into account when assessing the money laundering or terrorist financing risks associated with a business relationship or an occasional transaction. In addition, they provide guidance on how financial institutions can adjust their customer due diligence measures to mitigate the money laundering and terrorist financing risks identified by them, so that they are more appropriate and proportionate. The guidelines will be effective three months after publication in all EU official languages.

3.    Financial results, capital adequacy and financial instruments

 

The year 2021 was the third year of operations for ING Bank Hipoteczny S.A. At the end of the reporting period, the Bank had a mortgages portfolio worth approximately 4.2 billion and being in major part the potential collateral for future covered bond issues. As part of its strategy, the Bank acquires a mortgages portfolio from ING Bank Śląski. In 2021, the newly acquired mortgages portfolio amounted to PLN 0,7 billion. The acquired portfolios were mainly funded with the loan taken from the parent entity and issue of green covered bonds worth PLN 400 million. As part of diversification of funding sources, the Bank also issued own bonds in the first half of 2021 in the amount of approximately PLN 150 million. The above events were the primary drivers of the financial results of the Bank.

Below, the key financial facts and figures of the Bank for the period from 1 January 2021 to 30 June 2021 are presented.

 

3.1 Core financial ratios

 

 

 

 

 

as at

as at

30.06.2021

30.06.2020

ROA - return on assets (%)

0.39%

0.43%

ROE - return on equity (%)

3.53%

4.07%

DR - total debt ratio (%)

89.10%

88.77%

TCR - total capital ratio (%)

26.82%

24.81%

LR - leverage ratio (%)

10.83%

11.13%

LCR - liquidity coverage ratio (%)

11160%

2861%

 

 

 

 

ROA and ROE - return on assets / return on equity ratio - the quotient of the sum of the Bank's net profit for the last 12 months and the average of the last five quarters, respectively: for ROE the amount of capitals, for ROA the amount of the Bank's assets.

DR – total debt ratio – liabilities of ING Bank Hipoteczny S.A. to assets as at 30 June 2021.

TCR – total capital ratio – own funds of ING Bank Hipoteczny S.A. to risk-weighted assets as at 30 June 2021.

LR – leverage ratio – Tier 1 capital to leverage ratio exposure as at 30 June 2021.

LCR - liquidity coverage ratio – liquid assets to net outflows as at 30 June 2021.

 

3.2 Interim condensed statement of financial position

 

 

 

 

 

 [in PLN thousand]

 

note

as at

as at

as at

30.06.2021

31.12.2020

30.06.2020

Amounts due from banks

7.6

31,847.6

65,823.7

68,937.5

Debt securities measured at fair value through other comprehensive income

7.7

50,084.3

50,186.9

49,740.7

Debt securities measured at amortized cost

7.7

32,999.9

0.0

0.0

Loans and advances granted to customers

7.8

4,173,149.3

3,690,920.7

3,896,687.3

Property, plant and equipment

7.9

573.2

739.4

893.3

Intangible assets

7.10

328.9

824.8

1,320.7

Deferred tax assets

 

1,087.8

942.2

986.4

Other assets

7.11

3,381.5

3,781.4

4,970.9

Total assets

 

4,293,452.5

3,813,219.1

4,023,536.8

 

 

 

 

 

Liabilities to banks

7.12

3,262,954.3

1,969,597.2

3,161,279.8

Liabilities under issue of bonds

7.13

150,153.0

975,131.6

0.0

Liabilities under issue of covered bonds

7.14

399,619.8

399,480.6

399,872.0

Provisions

7.15

775.8

775.8

669.6

Current tax liabilities

 

673.1

98.8

107.3

Other liabilities

7.16

11,086.4

6,351.7

9,812.8

Total liabilities

 

3,825,262.4

3,351,435.7

3,571,741.5

Share capital

7.n/a

380,000.0

380,000.0

380,000.0

Supplementary capital - share premium

 

62,002.2

62,002.2

62,002.2

Accumulated other comprehensive income

7.17

-165.8

-46.4

-536.1

Retained earnings

7.n/a

26,353.7

19,827.6

10,329.2

Total equity

 

468,190.1

461,783.4

451,795.3

Total equity and liabilities

 

4,293,452.5

3,813,219.1

4,023,536.8

 

 

 

 

 

Carrying amount

 

468,190.1

461,783.4

451,795.3

Number of shares

 

380,000

380,000

380,000

Carrying amount per share (in PLN)

 

1,232.08

1,215.22

1,188.93

 

 

 

 

 

The interim condensed statement of financial position should be read in conjunction with notes to the interim condensed financial statements, which form an integral part thereof.

For details of the statement of Bank’s financial position, refer to notes 7.6 through 7.17 of the Financial Statements.                                         

 

3.3 Condensed income statement

 

 

 

 

 [in PLN thousand]

 

note

period

period

from 01.01.2021

from 01.01.2020

to 30.06.2021

to 30.06.2020

Interest income

7.1.

39,707.2

64,662.5

including, calculated using the effective interest method

7.1.

39,707.2

64,662.5

Interest costs

7.1.

-14,043.8

-37,668.9

Net interest income

7.1.

25,663.4

26,993.6

Fee and commission income

7.2.

227.5

231.9

Commission expenses

7.2.

-749.4

-90.7

Net commission income

7.2.

-521.9

141.2

FX result

 

-5.6

7.2

Net income on other basic activities

 

-32.9

-34.8

Net income on basic activities

 

25,103.0

27,107.2

General and administrative expenses

7.3.

-16,099.2

-13,290.8

Expected loss provision

7.4.

248.6

-840.6

Tax on certain financial institutions

 

-63.2

0.0

Gross profit (loss)

 

9,189.2

12,975.8

Income tax

7.5.

-2,663.0

-2,646.6

Net profit (loss)

 

6,526.2

10,329.2

 

 

 

 

Number of shares

 

380,000

380,000

Profit(+)/loss(-) per ordinary share - basic (in PLN)

 

17.17

27.18

Profit(+)/loss(-) per ordinary share - diluted (in PLN)

 

17.17

27.18

 

 

 

 

There were discontinued operations at ING Bank Hipoteczny SA neither in the period that ended 30 June 2021 nor in the same period last year.

The interim condensed income statement should be read in conjunction with notes to the interim condensed financial statements, which form an integral part thereof.

For detailed notes to the Income Statement items, refer to the Financial Statements – notes 7.1 through 7.5.

 

3.4 Own funds requirements – Pillar 1

 

In keeping with the CRR, the Bank computes own funds requirements for the following risks:

o        for credit risk – using the standardised approach,

o        for the CVA risk – using the standardised approach,

o        for delivery and settlement risk – using the standardised approach,

o        for operational risk – using the basic indicator approach (BIA),

o        for market risk (FX risk) using the standardised approach.

 

As at the end of June 2021, the Bank reports zero values for the own funds requirements for the CVA risk, delivery and settlement risk, and market risk. Having regard to the above, as at the date of this report, the total requirement for own funds consisted of the credit risk and operational risk requirements.

Own funds requirements

30.06.2021

Credit risk (PLN million)

133.72

Operational risk (PLN million)

3.90

Total requirement for own funds (PLN million)

137.62

Common Equity Tier 1 ratio (CET1)

26.82%

Tier 1 ratio (T1)

26.82%

Total capital ratio (TCR)

26.82%

 

Pillar 1 has been discussed in detail under item 7.28 of the financial statements concerning the Total Capital Requirement.

The Bank maintains own funds at the level not lower that the higher of the below values:

a.      capital requirement,

b.      internal capital

 

Capital management

The process of capital management is carried out in the Bank based on the implemented Capital Management Policy at ING Bank Hipoteczny S.A. that was developed on the basis of applicable regulations.

Capital management at ING Bank Hipoteczny S.A. is an integral part of the Bank's management and its aim is to enable and facilitate the Bank's development in line with its strategy and business model, while maintaining safe levels of capital adequacy ratios. Furthermore, it makes it possible to manage the capital actively, keeping in mind volume and dynamics of current and future changes.

The main objective of the capital management process is to have sufficient and effective capitalisation of the Bank required to effect its business strategy and development plans specified in the Financial Plan of the Bank, while meeting at the same time both internal and external capital requirements. The above stands for financial flexibility in the present and future landscape in order to adjust the Bank to the changing market and regulatory conditions.

To this end, the capital management activities should apply any available capital instruments and transactions both in the baseline scenario as well as in the adverse scenario.

External regulations govern keeping a proper level of capital adequacy. The main capital constraints result from internal resistance to risk that is assessed, among others, in stress tests, in Supervisory Review and Evaluation Process (SREP), regulatory minimum levels of capital and leverage ratios and internal risk appetite.

This management includes:

o        Pillar 1: minimum capital requirements provided for in the regulations,

o        Pillar 2: internal capital, determined, inter alia, with the Bank’s own models, for the risks deemed to be material and permanently material.

o        Pillar III: disclosures on risk profile and capitalisation level in the financial statements.

Under capital management, the Bank:

a.      identifies and assesses materiality of the risk types inherent to its operations;

b.      takes actions in order to assess and monitor internal capital, capital requirement and own funds;

c.       monitors potential threats to capital adequacy;

d.      allocates internal capital;

e.      sets internal limits in order to curtail the generated capital requirements and internal capital;

f.        pursues dividend policy resulting from a long-term capital objective and preferred capital structure;

g.      plans internal capital and capital requirement as well as own funds;

h.      develops contingency capital plans which define the procedure for the risk of capital adequacy deterioration below the “inadmissible” levels;

i.         analyses the impact of the macroeconomic factors on capital adequacy in line with the “Stress Testing Policy at ING Bank Hipoteczny S.A.”

 

As at 30 June 2021, the total capital ratio of the Bank was 26.82%.

 

3.5 Internal capital – Pillar 2

 

In keeping with the binding laws, internal capital is defined as the amount estimated by the bank which is indispensable for covering all identified material risks occurring in the bank’s business and changes in the business environment, considering the envisaged risk level.

The Bank estimates internal capital. The internal capital estimation process is an integral element of the capital management and Bank governance system. It warrants proper identification, measurement, monitoring and aggregation of the risk taken. At the same time, it enables the Bank to maintain the requisite own funds and manage risk and capital in an effective but cautious manner.

 

The above process covers:

a.      Identification and assessment of materiality of the risks impacting the Bank’s operations,

b.      risk measurement and control,

c.       internal capital estimation and aggregation with the use of the tools and methodologies approved by the Management Board or competent committees,

d.      internal capital monitoring,

e.      internal capital allocation, planning and reporting.

For the Bank, internal capital is estimated for material and permanently material risks in the following categories:

a.      credit risk encompassing default risk and counterparty risk, concentration risk, residual risk an d risks of other non-credit assets;

b.      market risk encompassing the interest rate risk in the banking ledger;

c.       business risk encompassing macroeconomic risk;

d.      funding and liquidity risk;

e.      operational risk encompassing the following areas: control risk, abuse risk, processing risk, improper staffing practice and workplace risk, information risk, internal and external fraud risk, business continuity risk, physical safety and resource risk, compliance risk and legal risk; the possibility of occurrence of conduct risk, reputational risk and concentration risk (for operational risk) are also within the scope of operational risk;

f.        model risk.

 

The total internal capital is the total of internal capital indispensable for covering all material and permanently material risks of the Bank. The Bank applies a prudent approach to estimating the internal capital and does not use the diversification effect.

Internal capital structure

30.06.2021

For credit risk

55.2%

For market risk

38.3%

For business risk

0%

For funding and liquidity risk

0%

For operational risk

6.5%

For model risk

0%

Total

100.0%

 

3.6 Disclosures – Pillar 3

 

Taking into account the scale and specifics of the Bank’s operations, the Bank discloses selected information concerning capital adequacy in its financial statements or in the Management Board Report on Operations of the Bank in accordance with the requirements of Executive Regulation No 2021/637:

o        Template EU KM1 – Key metrics

o        Template EU OV1 – Overview of total risk exposure amounts

o        Template EU CC1 – Composition of regulatory own funds

o        Template EU CC2 - reconciliation of regulatory own funds to balance sheet in the audited financial statements

o        Template EU LIQ1 - Quantitative information of LCR

o        Template EU LIQ2: Net Stable Funding Ratio

o        Template EU CCyB1 - Geographical distribution of credit exposures relevant for the calculation of the countercyclical buffer

o        Template EU CCyB2 – Amount of institution-specific countercyclical capital buffer

o        Template EU LR1 – LRSum: Summary reconciliation of accounting assets and leverage ratio exposures

o        Template EU LR2 – LRCom: Leverage ratio common disclosure

o        Template EU LR3 - LRSpl: Split-up of on balance sheet exposures (excluding derivatives, SFTs and exempted exposures)

o        IFRS 9/Article 468-FL: Comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 or analogous ECLs, and with and without the application of the temporary   treatment in accordance with Article 468 of the CRR

o        Template EU CR1: Performing and non-performing exposures and related provisions

o        Template EU CR1-A: Maturity of exposures

o        Template EU CR2: Changes in the stock of non-performing loans and advances

o        Template EU CQ1: Credit quality of forborne exposures

o        Template EU CR3 – CRM techniques overview: Disclosure of the use of credit risk mitigation techniques

o        Template EU CR4 – standardised approach – Credit risk exposure and CRM effects

o        Template EU CR5 – Standardised approach

 

Each time, the Bank assesses adequacy of the disclosed information in terms of providing the market participants with complex information about the risk profile of the Bank.

The Bank, being a part of the ING Bank Śląski S.A. Group, provides the information also to the parent company in order to include it in the consolidated data.

Specific information about the scope of disclosed information, method of its verification and publication is presented in the document called: “Policy of Disclosure of Qualitative and Quantitative Information About Capital Adequacy and Other Information to be Disclosed at ING Bank Hipoteczny S.A.”

 

3.7 Financial instruments

 

Between 1 January and 30 June 2021, the Bank occasionally placed its temporary surplus funds on short-term deposit accounts at ING Bank Śląski S.A. For details, refer to note 7.6 of the Financial Statements of ING Bank Hipoteczny S.A. The Bank did not apply hedge accounting in the reporting period.

The Bank was making Treasury transactions on the wholesale financial market. For details, refer to note 7.7 of the Financial Statements of ING Bank Hipoteczny S.A. As a target, credit debt acquisition from ING Bank Śląski S.A. will be funded from the issue of covered bonds. In the reporting period, the acquisition of credit debt from ING Bank Śląski S.A. was financed primarily with funds from: (i) credit lines, (ii) the issue of covered bonds and (iii) own bonds issued. The Bank adhered to the norms defined in the Act on covered bonds and mortgage banks concerning the admissible amount of liabilities due to loans and credit facilities (including the liabilities due to acquired debt) and issue of bonds to own funds of the Bank. In 1H 2021, the Bank did not issue covered bonds, however to diversify its existing funding sources, it issued short-term bond series under the established own bond programme.

For future issues of covered bonds, the potential IR risk and FX risk will be hedged with appropriate derivatives. The Bank plans to apply hedge accounting in the future.

The Bank Management Board is of the opinion that as at 30 June 2021 there were no conditions which could indicate presence of default risk for the liabilities assumed by the Bank.

 

4.    Development lines and operations of ING Bank Hipoteczny S.A.

 

4.1 Development lines

 

The strategic objective of Bank Hipoteczny S.A. is to acquire and later gradually increase the share of long-term funding in the ING Bank Śląski S.A. Group’s balance sheet – through issue of covered bonds – as well as joining the group of major issuers of those instruments in the Polish market.

The objective will be delivered by:

o        strengthening the funding stability within the ING Bank Śląski S.A. Group,

o        diversification of funding sources for the current portfolio of retail mortgage loans,

o        matching the maturities of assets and liabilities in the balance sheet of the ING Bank Śląski S.A. Group,

o        freeing the liquidity of the ING Bank Śląski S.A. Group,

o        reducing the funding costs of the lending campaign for the portion of the lending portfolio funded with other long-term instruments.

 

4.2 Acquisition of mortgage-backed debt and lending portfolio structure

 

 

The main element of the business pursued by ING Bank Hipoteczny S.A. is acquisition of mortgage-backed residential loan portfolios with a view to issuing covered bonds. The Bank acquires debt only from ING Bank Śląski S.A. Debt is acquired under the Debt Transfer Framework Agreement to issue covered bonds, signed in 2019.

In the first half of 2021, the Bank acquired 1 portfolio of mortgage-backed securities from ING Bank Śląski S.A. As at the transfer of the debt claims, classified as green, the total principal amount was PLN 0.71 million.

In the debt acquisition process, ING Bank Hipoteczny S.A. satisfies the criteria of the Act on covered bonds and mortgage banks, and also sets additional conditions to be met by the debt acquired. The main criteria were presented in the table below:

 

Criterion

Value

Amount of debt purchased/ banking and lending value of the real estate

Max. 100%

Credit collateral

Established first ranking mortgage

Loan currency

PLN

Loan purpose

Residential goals

Title to real estate

Ownership or perpetual usufruct

Repayment arrears or impairment conditions

None

 

LtV-based lending portfolio structure – 30.06.2021:

 

LTV (banking and lending value of the real estate)

Structure %

(0-50>

24.2%

(50-60>

17.0%

(60-70>

20.7%

(70-75>

9.7%

(75-80>

9.1%

(80-100>

19.2%

Total

100.0%

 

Mark-to-market LTV

Structure %

(0-50>

36.0%

(50-60>

24.0%

(60-70>

25.1%

(70-75>

13.1%

(75-80>

1.9%

(80-100>

 0.0%

Total

100.0%

 

The average LtV for the capital-weighted banking and lending value of the real estate was 63.00%, while the average mark-to-market LtV was 53.82%.

As at 30.06.2021, the carrying value of the portfolio of debt under the mortgage-backed loan agreements was PLN 4,164.7 million. All the receivables under the acquired loan agreements bear variable interest rate (6M WIBOR).

In connection with the COVID-19 pandemic, the Bank has implemented measures to assist customers facing financial difficulties:

o        Since 7 April 2020, our borrowers may suspend repayment of loan instalments (principal part of the instalment or the full loan instalment) for a period of up to 6 months. This was in line with the Polish Bank Association’s “Position of banks on the standardization of principles of offering aid measures to banking sector customers” (i.e. a non-statutory moratorium within the meaning of the EBA Guidelines). By 30 June 2021, a total of 601 customers had benefited from the suspension of instalment repayments under the rules indicated above, with the suspension period ending for all applications at the end of the period under review;

o        Since 24 June 2020, our borrowers may suspend the execution of the loan agreement (under the amended Act on special arrangements for preventing, counteracting and combating COVID - 19, other contagious diseases and crisis situations caused by them). As at 30 June 2021, 30 borrowers have availed themselves of the suspension of the execution of the loan agreement. In this case, also for all applications, the suspension period has already ended. At present, we have no active suspension applications.

 

As at 30 June 2021, we find that borrowers who have availed themselves of either a suspension of the repayment of loan instalments or a suspension of the execution of the loan agreement are by and large repaying their obligations on a regular basis.  After the suspension period, with regard to requests for commercial suspensions, we identified only 2 defaulting accounts, and in the case of statutory suspensions there were no defaults at all.

The Bank performed a simulation of the impact of the suspension of the repayment of the credit instalments on the Bank’s result and its ability to settle its amounts payable to the buyers of covered bonds. The Bank assumed, among other things, the worst case scenario in which all clients who take advantage of the suspension of instalments avail themselves of the suspension of the performance of the credit agreement. Keeping in mind high overcollateralization of the issue of covered bonds (as at 30.06.2021, debt claims worth PLN 3,232,981.9 million were entered in the cover register, the analysis showed that the Bank is on the safe side and can settle its liabilities to investors on an ongoing basis.

The analysis shows that the Bank is highly resilient to the risk of growing number of persons availing themselves of such suspension. The simulation shows that the Bank’s standing remains to be good, and the Bank is able to pay its liabilities to investors.

On 30 June 2021, the Bank implemented the amended Recommendation S of the Polish Financial Supervision Authority, making it possible for its customers, inter alia, to change the interest rate formula from a variable interest rate to a periodically fixed, 5-year interest rate.

 

4.3 Covered bonds

 

In the first half of 2021, due to very high overliquidity in the financial sector resulting from the government assistance programmes launched in response to the adverse effects of the Covid-19 pandemic, the Bank did not issue covered bonds. As at 30 June 2021, the nominal value of the covered bonds in trading that were issued by the Bank did not change from the end of 2020 and totalled PLN 400 million.

The covered bonds of the Bank are quoted on the Stock Exchange in Luxemburg and placed in the parallel market of the Warsaw Stock Exchange. The covered bonds of the Bank may secure the lombard and technical loans and the repo operations of the National Bank of Poland.

The rating for the PLN mortgage bonds issued by the Bank remains at the highest possible level for a Polish issuer, namely 'Aa1' (according to the Moody's rating agency), which confirms the high quality of the mortgage portfolio serving as collateral for the above-mentioned debt securities.

Subsequent issues of mortgage bonds will depend on market conditions and the level of overliquidity in the financial sector.

 

4.4 Rating of the Bank and covered bonds

 

In line with the decision of Moody's Investor Service (the Agency) of 13 July 2021, the Bank's long-term ratings were increased by 1 notch. The increase in the Bank's selected ratings and assessments reflects a change in the Agency's methodology for assessing risks for highly integrated entities. As a result of its assessment, the Agency considered that the likelihood that the parent entity, that is ING Bank Śląski S.A., may change, in a stressful situation, its priorities in terms of meeting its obligations in a manner unfavourable for the Bank is negligible.

 The updated rating of ING Bank Hipoteczny S.A. and its covered bonds is as follows:

 

Rating of covered bonds

Aa1

 

LT Issuer Rating

A3

 

ST Issuer Rating

P-2

 

LT Counterparty Risk

A1

 

ST Counterparty Risk

P-1

 

Outlook

Stable

 

CR Assessment

A1 (cr) / P-1 (cr)

 

 

 In its communication, the Agency emphasised there that the rating of the Bank reflected:

 

o        the fact that the Bank was owned in 100% by ING Bank Śląski S.A. and that it had a stable growth outlook,

o        Strategic adaptation and operational integration within the ING Bank Śląski S.A. Group,

o        ING Bank Śląski S.A.’s commitment to support the capital and liability position of ING Bank Hipoteczny S.A. to satisfy the regulatory requirements.

 

5.    Internal business conditions

 

5.1 Employee competences

 

In the course of the recruitment procedure, experienced and qualified employees were welcomed. Most of them come from the ING Bank Śląski S.A. Group. The Bank implemented the procedures ensuring adequate competences for all key jobs as needed for its functioning. The Bank enables its employees to upgrade their qualifications on an ongoing basis. The headcount was matched with the scale of business pursued.

 

5.2 Cooperation with ING Bank Śląski S.A.

 

In principle, the business formula of Bank Hipoteczny S.A. is based on leveraging on the synergy effect between Bank Hipoteczny and ING Bank Śląski S.A. as the strategic outsourcing partner to Bank Hipoteczny S.A., in particular by:

o        outsourcing of activities admitted by law to ING Bank Śląski S.A. as far as justified from the viewpoint of the Bank’s business effectiveness, based on the existing solutions hammered out by the ING Bank Śląski S.A. Group,

o        sharing of IT infrastructure and systems used by the ING Bank Śląski S.A. Group,

o        shaping of the organisational framework of Bank Hipoteczny in the manner ensuring effective control of the services entrusted to ING Bank Śląski S.A. and performance by the Bank of activities required by law, like taking risk management-related decisions or performing risk management processes,

o        mirroring current loan service processes of ING Bank Śląski S.A., considering the indispensable modifications, including those resulting from the legal order.

Therefore, the outsourcing agreement is the key vehicle governing the cooperation of the two entities. Its key elements are:

o        ensuring that ING Bank Hipoteczny S.A. performs the activities required by law; they include but are not limited to: decisions or risk management processes, and for automated or partly automated processes – their set-up using the terms and conditions defined by the Bank,

o        entrusting ING Bank Śląski S.A. with: (i) intermediation in some banking activities offered by the Bank, in particular as regards administration and post-sale service of mortgage-backed loan debt acquired by the Bank and (ii) factual activities connected with the bank business of the Bank,

o        taking account of limitations stemming from Article 6a.3 of the Banking Law Act (Banking Law); i.e., ensuring that the following activities are not entrusted to ING Bank Śląski S.A.: (i) bank governance within the meaning of Article 368.1 of the Commercial Companies and Partnerships Code, and notably management of the banking business risk, including management of assets and liabilities, credit capacity assessment and credit risk analysis; and (ii) internal audit of the Bank,

o        ensuring that any further commissioning of activities by ING Bank Śląski S.A. to third parties satisfies the requirements of Article 6a.7 of the Banking Law – and in individual cases – that direct agreements be made between such entities and the Bank,

o        development and update – both by ING Bank Śląski S.A.  and the Bank – of business plans ensuring continuous and undisrupted conduct of business covered by the outsourcing agreement,

o        ensuring for the Bank the tools to effectively monitor and control performance of the agreement by ING Bank Śląski S.A.

For the client whose mortgage loan will be transferred as part of transfers of receivables to ING Bank Hipoteczny, both the loan service process and the credit and credit-related costs will remain the same.

The terms and scope of cooperation of ING Bank Hipoteczny with ING Bank Śląski S.A. have been detailed in the Cooperation Agreement.

 

5.3 Internal control system

 

Internal control system is among the Bank governance elements. Its fundaments, principles and objectives stem from the Banking Law and the Regulation of the Minister for Finance, Funds and Regional Policy on risk management, internal control systems and remuneration policy at banks in particular.

 

I. Internal control system objectives

 

The internal audit system serves to ensure:

1)      Operational efficiency and effectiveness of the Bank;

2)      Reliable financial reporting;

3)      Compliance with the risk management principles of the Bank;

4)      Compliance of the Bank with the law, regulatory requirements, internal regulations and market standards.

 

As part of general objective accomplishment process, the internal control system further ensures:

1)      examination of compliance of the Bank’s business and business activities performed by related persons with the regulations of the markets the Bank is active in, the regulations of the Central Securities Depository of Poland, clearing and settlement chambers referred to in Article 68a of the Act on Trading in Financial Instruments and stock exchange clearing chambers referred to in Article 2.4 of the Act on Commodity Exchanges which the Bank is the member of,

2)      proper organisation and safe business pursuit,

3)      functioning of appropriate administrative and booking procedures,

4)      effectiveness of internal acts concerning circulation of confidential and privileged information and such information access protection,

5)      reliability of non-financial reports,

6)      effectiveness of internal acts concerning review of client complaints and requests and maintenance of complaint records,

7)      effectiveness of internal acts concerning counteracting money laundering and terrorist financing,

8)      investing by the Bank in compliance with the requirements and standards and in the manner adequate to the risk of such investments.

 

 

II. Roles of Bank bodies

1.  Supervisory Board

As part of their tasks connected with monitoring of and supervision over the internal control system, as laid down inter alia in the Bank Charter and the ING Bank Hipoteczny S.A. Supervisory Board Bylaw, following the recommendation of the Audit and Risk Committee, the Supervisory Board:

1)      approve the Policy – ING Bank Hipoteczny S.A. Internal Control System;

2)      approve the criteria for assessment of adequacy and effectiveness of the internal control system, as proposed by the Management Board;

3)      supervise introduction and functioning of adequate and effective internal control system;

4)      monitor effectiveness of the internal control system, based on the information provided by the Management Board, the Audit and Risk Committee, the Compliance Cell and the Internal Audit Position;

5)      annually assess the adequacy and effectiveness of the internal control system, including the adequacy and assessment of the control function performed by the first and second lines of defence, the Compliance Cell and the Internal Audit Position, as well as the compliance of the Bank Management Board with the obligations referred to in part B of Recommendation H;

6)      approve the categorisation principles for the irregularities detected by the internal control system, covering at least high and critical irregularities;

7)      as part of ensuring that the internal control system complies with laws, internal regulations and market standards, the Supervisory Board:

o        oversee the performance of the Management Board’s duties concerning compliance risk management,

o        approve the ING Bank Hipoteczny S.A. Compliance Policy,

o        assess, at least once a year, the effectiveness of the compliance risk management by the Bank.

2. Audit and Risk Committee

The Audit and Risk Committee consult and advise the Supervisory Board on the internal control system-related tasks. The Committee is composed of two independent Members, including a Certified Auditor with knowledge and skills in accounting and auditing the financial statements.

3. Bank Management Board

As part of the Bank governance process, the Bank Management Board:

1)      design, introduce and ensure functioning of adequate and effective internal control system;

2)      take action to ensure internal control system continuity;

3)      set the criteria for assessment of adequacy and effectiveness of the internal control system;

4)      define the actions to be taken to eliminate irregularities detected by the internal control system, including remedies and disciplinary measures;

5)      accept the categorisation principles for the irregularities detected by the internal control system, covering at least high and critical irregularities;

6)      approve the criteria for selection of material processes and their list along with their correlation with general and specific goals;

7)      ensure regular review of all Bank processes for materiality;

8)      accept the Policy – ING Bank Hipoteczny S.A. Internal Control System, ensure its periodical review and update and present the review deliverables to the Audit and Risk Committee and the Supervisory Board;

9)      ensure access of Compliance Cell employees, the Internal Auditor and also the Operational Risk Officer and other units coordinating performance of general objectives to indispensable source documents, including but not limited to those reading confidential information, in connection with performance of their business duties;

10) set the principles of control design, approval and implementation in all Bank processes and define the role of organisational units responsible for control design, approval and implementation;

11) are responsible for ensuring adequacy and effectiveness of controls in Bank processes;

12) as part of ensuring that the internal control system complies with laws, internal regulations and market standards, the Bank Management Board are responsible for managing effectively the compliance risk at the Bank, developing the compliance policy, ensuring compliance and reporting to the Audit and Risk Committee and to the Supervisory Board on compliance risk management;

13) set the adequate scope of and criteria for independent monitoring of observance of controls, covering ongoing verification and testing;

14) ensure functioning of the control function matrix along with allocation of tasks connected with ensuring its functioning;

15) set the reporting rules, at least for the effectiveness of key controls and vertical testing deliverables.

 

At the same time, the Bank Management Board advise the Supervisory Board, at least once year, on the manner of performance of internal control system tasks, considering in particular:

a)      the adequacy and effectiveness of the internal control system in ensuring accomplishment of all the internal control system goals;

b)      the scale and nature of significant and critical irregularities as well as most important actions taken to eliminate the same, including remedies and disciplinary measures,

c)      the need to ensure the independence of the Compliance Cell and the Internal Audit Position,

d)      the need to ensure adequate staffing as indispensable for effective task performance and the funds necessary for regular upgrade of qualifications, experience gathering and skills learning by the employees of the Compliance Cell and the Internal Audit Position.

 

III. Three-lines-of-defence model within the Bank’s organisational framework

The internal control system covers the entire universe of the Bank and structured into three lines of defence.

 

 

 

 

The first line of defence

 

 

 

The second line of defence

 

 

 

The third line of defence

Business and organisational units of the Bank which support Business operations

 

1) Units from the area of:

   operational risk

   compliance risk

   legal risk

   credit and market risk

   finance

   human resources management and

2) Model validation job

 

Internal Audit

 

 

1. The first line of defence

It is an element of the control function. The first line of defence is in charge of developing, implementing and performing controls designed to ensure that general and specific goals of internal control system are achieved. This LoD also performs independent monitoring of compliance with controls by ongoing verification and/or horizontal testing.

The first line of defence is responsible for acting in compliance with the principles resulting from the approved policies, regulations, manuals and procedures. The scope of responsibilities of the first line of defence includes, among others, analysis, control and management of the risks in the processes, including in relation to outsourced activities.

The tasks of the first line of defence are performed by senior management and by the organisational units overseen by it which deliver business objectives and which provide direct support thereto.

2. The second line of defence

The second line of defence performs the tasks stemming from its function and supports the first line of defence in order to achieve the goals of the internal control system.

It is responsible for:

o        issuing standards of conduct, as well as advising on the Bank internal regulations (including legal and regulatory monitoring and analysis of compliance with external legal acts) and providing internal control methods and tools,

o        approving the decisions made by the first line of defence as to implementation, modification or removal of controls,

o        monitoring application of internal control system regulations by the first line of defence,

o        monitoring horizontally the compliance with controls by the second line of defence,

o        monitoring vertically the first line of defence as to compliance with controls.

Under control activities, the units from the second line of defence perform their own independent assessment of the effectiveness of operations of the first line of defence; they do it using tests, reviews and other forms of control.

3. The third line of defence

The Internal Audit (IA) forms the third line of defence. The IA provides management with an independent and unbiased assurance as to the adequacy and effectiveness of the risk management system and internal control system within the first and second lines of defence.

The roles, powers, scope and nature of work plus the accountability of IA employees and the terms of cooperation of Bank organisational units with the IA are laid down in the Policy – Internal Audit Charter of ING Bank Hipoteczny S.A. (Audit Charter).

IV. Control function

Control function is an element of the internal control system which comprises all controls implemented in bank processes, independent monitoring of their observance and control function reporting. It covers jobs, groups of people or organisational units responsible for performance of function tasks.

Within the control function, the processes which are material to the Bank were isolated and key control function controls were assigned thereto.

V. Principles of assessment of adequacy and effectiveness of the internal control system

The Internal Audit annually assesses the adequacy and effectiveness of the internal control system, in split into the first and second lines of defence, based on:

o        deliverables/ opinions from the audits performed under the annual audit plan. To formulate the annual audit plan, the Internal Auditor uses the information about the internal control system from the control function matrix;

o        deliverables/ opinion of the audit by the external auditor along with regulator’s recommendations which are open as at the internal control system assessment date;

o        critical and high risks identified during the year, with focus placed on risks which apply as at the internal control system assessment date;

o        timely implementation and progress in the implementation of risk mitigants.

 

The final assessment of the internal control system is made by the Supervisory Board, considering the recommendation of the Audit and Risk Committee which factors in particular:

o        assessment of the Internal Audit,

o        information from the Management Board on the manner of performance of internal control system tasks,

o        periodical reports of the Compliance Cell,

o        information material to the adequacy and effectiveness of the internal control system, information from the parent entity;

o        findings of the statutory auditor or external auditor,

o        findings from supervisory activities performed by authorised institutions (like the Polish Financial Supervision Authority or the Office of Competition and Consumer Protection),

o        assessments and opinions material to the adequacy and effectiveness of the internal control system, provided by third parties, if made.

The Supervisory Board assessed the 2020 internal control system of ING Bank Hipoteczny S.A., taking into account the above factors and issued an opinion that the internal control system of ING Bank Hipoteczny S.A. was effective and adequate for the Bank business model and scale of operations.

 

5.4 Risk management

 

Risk management at ING Bank Hipoteczny S.A. serves to ensure effective risk control and limitation within the risk appetite accepted by the Bank in volatile legal and macroeconomic conditions and considering the pre-set business targets. The assumed risk level is an important factor of the planning process.

Risk management at ING Bank Hipoteczny S.A. is based in particular on the following rules:

o        risk management process, including the lending process is defined and governed by strategies, policies and procedures adopted by the Management Board and Supervisory Board of ING Bank Hipoteczny S.A.,

o        the Bank manages all identified bank risks and carries out the ICAAP (the Internal Capital Adequacy Assessment Process), where:

o        risk management matches the scale of business and the materiality, scale and complexity of a given risk and where it is tailored to new risk factors and drivers on an ongoing basis,

o        risk management methods, risk measurement models and systems and their assumptions match the scale and complexity of risk and are periodically verified and validated,

o        the organisational structure of risk management guarantees independence of the risk area, including independence of real estate appraisal and credit decisions taken from business activity,

o        the risk management process is integrated into the planning and controlling processes and it supports delivery of the Bank’s strategy, while staying compliant with the risk management strategy, especially as far as the risk appetite is concerned,

o        the risk management process is consistent with the risk management principles of the ING Bank Śląski S.A. Group, also in respect of use of group risk models, tailored to the specific operations of ING Bank Hipoteczny S.A. and approved by the competent authorities of ING Bank Hipoteczny S.A.,

o        stress tests are performed in the Bank based on previously approved scenarios. Stress test results are discussed at committee and Management Board meetings. Reporting of risk sources and factors as well as reporting of risk level measurement and its costs make it possible to take appropriate preventive and remedy measures.

The risk management process is supervised by the Bank Supervisory Board which regularly receive information about the risk profile at ING Bank Hipoteczny S.A. and key actions taken to manage risk.

The Bank Management Board are responsible for risk management, including but not limited to, overseeing and monitoring of actions undertaken by the Bank in this respect. The Bank Management Board take the most important decisions affecting risk level of the Bank and resolve on internal regulations concerning risk management.

Risk is managed through three independent lines of defence.

The objectives, principles and organisation of risk management, as well as the specific management of individual risk categories are described in the financial statements of ING Bank Hipoteczny S.A.

 

5.5 Valuation of mortgage loan collateral

 

ING Bank Mortgage S.A. performs the credit collateralization tasks based on the following external and internal regulations:

o        the Act on covered bonds and mortgage banks,

o        the Act on land and mortgage registers and mortgage,

o        the Banking Law Act,

o        Instructions and recommendations of the Polish Financial Supervision Authority, including recommendations F, S and J in particular,

o        Provisions of internal banking regulations, and notably the Banking and Lending Value of the Real Estate Valuation Bylaw.

 

The Bank has and applies the Banking and Lending Value of the Real Estate Valuation Bylaw, approved on 4 January 2019 by the Polish Financial Supervision Authority. The Bylaw provides for the guidelines listed in Recommendation F and concerning the basic criteria applied by the Polish Financial Supervision Authority to approve the banking and lending value of the real estate valuation bylaws made by mortgage banks.

The banking and lending value of the real estate is the value set using an expert method, in line with the Act on covered bonds and mortgage banks, which in the opinion of the Bank mirrors the risk of the real estate forming the collateral for the loans acquired by the Bank.

The banking and lending value of the real estate is set using an expert method in order to enable the Bank to take a decision whether or not to acquire the given debt. The banking and lending value of the real estate is set in a prudent manner, considering long-term parameters.

ING Bank Hipoteczny S.A. sets the banking and lending value of the real estate based on the real estate value. The banking and lending value of the real estate expertise is made with due diligence and prudence. It factors in only those real estate parameters which are of long-term nature and which can be obtained by any real estate owner, when the estate is rationally used. It factors in all risks which because of the experience held and analyses made can adversely impact on the banking and lending value of the real estate.  The expertise which is developed at a certain date, evidences the assumptions and parameters used in the analysis, the process of the banking and lending value of the real estate determination and the resultant banking and lending value of the real estate proposal.

The expertise factors in the analyses and projections of the typical real estate parameters which considerably impact on the assessment of the credit risk of real estate acceptance as collateral. It also takes into account general factors, including, economic cycles, changes to the purchasing power of money, demography, unemployment rate or local zoning plans.

At the Bank, the banking and lending value of the real estate determination process is performed by a dedicated team from the Risk Management Area which is independent from the business functions of the Bank.

For the debt acquisition operation, the banking and lending value of the real estate determination process is constructed into four stages:

 

Verification of the legal status of the real estate

ING Bank Śląski S.A. under the Outsourcing Agreement

Carrying out an inspection, on-site property inspection and local market research included.

Estate Appraiser who holds adequate experience and ability to estimate banking risk for residential loan collateralization

Banking and lending value of the real estate expertise compilation

Dedicated organisational cell of the Bank – Valuation and Credit Decisions Team

Verification of banking and lending value of the real estate expertise and determination of the  banking and lending value of the real estate

Dedicated organisational cell of the Bank – Valuation and Credit Decisions Team

The processes of the banking and lending value of the real estate expertise compilation and banking and lending value of the real estate determination as described above are performed by two persons independent from one another.

 

5.6 Cover register

 

ING Bank Hipoteczny S.A. keeps and maintains the cover register (the Register). The Register is maintained in compliance with the requirements set out in the following documents:

o        The Act on covered bonds and mortgage banks 29 August 1997 (Journal of Laws of 2020, item 415)

o        Resolution No. 633/2015 of the Polish Financial Supervision Authority of 1 December 2015 on determination of the template cover register,

o        Recommendation K of the Polish Financial Supervision Authority of 9 February 2016 on the terms of maintenance of the cover register by mortgage banks.

The Bank enters into the register all the debt claims acquired under the mortgage-backed housing loan agreements as well as the rights and funds used to issue covered bonds and extra funds which form the surplus for covering interest on covered bonds in trading to be paid within the next 6 months. Covered bonds are secured with Bank debt secured with the first ranking mortgage.

Further, the Bank’s funds indicated in Article 18.3 of the Act on covered bonds and mortgage banks can be also used to issue covered bonds.

As at 30 June 2021, the mortgage-backed debt and other funds referred to in the Act on covered bonds and mortgage banks closed with PLN 3,246.4 million. In other words, the covered bonds were secured in 811.61%.

As at the date, the structure of the register was as follows:

 

T-bonds of PLN 15 million partially secure the payment of interest on covered bonds for 6 months (PLN 1,6 million). The total value of the mortgage-backed debt claims and substitute collateral (in the part not used to cover the payment of interest on covered bonds) was reflected in the overall level of collateralisation of covered bonds, which was 811.61%.

Since mortgage-backed debt and issued covered bonds matched in terms of currency and interest rate, there were no hedging transactions in the register as at 30 June 2021.

Register maintenance is overseen by the Cover Pool Monitor on an ongoing basis.

For the key register data as at 30 June 2021, refer to the table below:

 

30.06.2021

Cover register

Mortgage-backed debt (PLN million)

Treasury Bonds (PLN million)

 

3,232.9

15.0

Liquidity buffer (PLN thousand)

1,566

Number of active loans

17,464

Average loan amount (PLN thousand)

     185.1

Average maturity (in months)

239

Average LtV (loan value to the mark-to-market value of the real estate)

51.79%

Average LtV (loan value to the banking and lending value of the real estate)

60.68%

 

 

 

 

5.7 Cover Pool Monitor

 

In keeping with the Act on covered bonds and mortgage banks (Act), for each mortgage bank a Cover Pool Monitor and at least one Deputy Cover Pool Monitor are appointed. The Cover Pool Monitor shall be responsible for verifying whether:

o        the liabilities attributable to the covered bonds in trading are secured by the mortgage bank in compliance with the Act,

o        the banking and lending value of the real estate taken by the Bank was set in compliance with the bylaw,

o        the mortgage bank complies with the requirements of Article 18 of the Act,

o        the coverage balance test and liquidity test confirm that the mortgage bank’s debt as well as the rights and funds entered into the cover register suffice to fully satisfy the holders of covered bonds.

o        the manner of the cover register maintenance by the mortgage bank satisfies the terms and conditions of the Act,

o        the mortgage bank ensures – under the Act – the collateral for the planned issue of covered bonds and control of whether adequate provisions were entered into the cover register.

Having considered the application of the Supervisory Board of ING Bank Hipoteczny S.A., on 4 January 2019 the Polish Financial Supervision Authority appointed Ms Grażyna Zielińska as the Cover Pool Monitor of ING Bank Hipoteczny S.A. and Mr Krzysztof Brejdak as the Deputy Cover Pool Monitor.

The Bank keeps and stores the cover register in which it enters its debt claims as well as the rights and funds used to issue covered bonds and surplus funds for covering the interest on covered bonds in trading to be paid within the next 6 months.

Register maintenance is overseen by the Cover Pool Monitor and Deputy Cover Pool Monitor on an ongoing basis.

 

5.8 Statutory limits

 

Acting in accordance with the Act on covered bonds and mortgage banks, ING Bank Hipoteczny S.A monitors the applicable business limits.

As at 30 June 2021, the statutory limits and their utilisation were the following:

No.

Statutory limit

Statutory limit value

Limit utilisation

Legal grounds

1.

Maximum amount of the Bank’s debt claims in excess of 60% of the banking and lending value of the real estate vis-à-vis total amount of the mortgage-backed debt held by the mortgage bank.

30%

11.27%

 

Article 13.1 of the Act on covered bonds and mortgage banks

2.

Share of debt for which the ratio of a single mortgage-backed loan to the banking and lending value of the real estate is over 100% at the acquisition date

0%

0%

 

Article 13.2 of the Act on covered bonds and mortgage banks

3.

Maximum ratio of refinancing the acquired debt (in the portion of up to 80% of the banking and lending value of the real estate) with the funds obtained from the issue of covered bonds

100%

9.76%

 

Article 14 of the Act on covered bonds and mortgage banks

4.

Maximum volume of acquired and taken-up shares or holdings in other entities vis-à-vis own funds of the mortgage bank

10%

0%

 

Article 15.1.5 of the Act on covered bonds and mortgage banks

5.

Maximum multiple of the total of drawn loans and credit facilities, issued bonds vis-à-vis own funds of the mortgage bank (in first 5 years)

10

7.39

 

Article 15.2.1 of the Act on covered bonds and mortgage banks

6.

Maximum multiple of the total amount of nominal amounts of covered bonds traded by the mortgage bank to own funds of the mortgage bank

40

0.87

 

Article 17.1 of the Act on covered bonds and mortgage banks

7.

Minimum overcollateralisation of the issue of covered bonds with mortgage-backed debt and other funds (bonds, cash, cash with the National Bank of Poland, hedging instruments)

110%

811.61%

 

Article 18.1 of the Act on covered bonds and mortgage banks

8.

Minimum overcollateralisation of the issue of covered bonds with mortgage-backed debt

85%

808.25%

 

Article 18.1 of the Act on covered bonds and mortgage banks

9.

Minimum ratio of income of the mortgage bank under debt and other funds (bonds, cash, cash with the National Bank of Poland, hedging instruments) vis-à-vis costs of interest on the traded covered bonds

100%

2107.77%

 

Article 18.2 of the Act on covered bonds and mortgage banks

10.

Coverage with fuds (bonds, cash, cash with the National Bank of Poland) of the nominal amounts of interest on traded covered bonds to be paid out within the subsequent 6 months.

100%

100%

 

Article 18.3a of the Act on covered bonds and mortgage banks

11.

Maximum ratio of debt backed with mortgages established during the construction investment project to the total amount of the mortgage-backed debt used to issue covered bonds.

10%

0%

 

Article 23.1 of the Act on covered bonds and mortgage banks

12.

Maximum ratio of debt backed with mortgages on real estates earmarked for development as per the zoning plan to the total amount of the mortgage-backed debt used to issue covered bonds.

1%

0%

 

Article 23.2 of the Act on covered bonds and mortgage banks

 

Additionally to monitoring of the statutory limits, the Bank - in accordance with the Act on Covered Bonds and Mortgage Banks - makes a mortgage cover calculation for each business day. The coverage balance test is performed at least every 6 months and the liquidity test at least every 3 months.

Keeping in mind the prudential approach to management, the Bank carries out coverage and liquidity balance tests each and every business day.

Throughout the reporting period, ING Bank Hipoteczny did not exceed any of the limits indicated in the table and the outcome of the mortgage cover calculation and coverage balance and liquidity tests was positive.

6.    Organisational framework and authorities of ING Bank Hipoteczny S.A.

 

6.1.Organizational framework

 

ING Bank Hipoteczny S.A. governance is underpinned by the organisational framework presented on the diagram below and the segregation of duties among the Bank bodies discussed further on.

 

 

 

 

 

 

 

 

Organisational framework of ING Bank Hipoteczny S.A. in functional areas

 

 

By resolution of the Supervisory Board of 5 May 2021, the Organisational Bylaw was updated. The Treasury Area was separated out of the Management Area and now it reports to the Vice President in charge of the Operations, IT and Finance Area.

 

6.2 Authority of bodies and committees of ING Bank Hipoteczny S.A.

 

The authority of individual Bank bodies has been laid down in the Banking Law, the Commercial Companies and Partnerships Code and other laws and provisions of the Bank Charter as well as in their individual bylaws.

 

The authority of the Bank General Meeting is the following:

o        review and approval of the Management Bank Report on Bank Operations and the financial statements for the past financial year and acknowledgment of fulfilment of duties by the members of the Bank bodies,

o        appointment and recall of Supervisory Board members,

o        passing resolutions on the determination of principles of remuneration of the Supervisory Board members and other matters foreseen by the law, Charter or those submitted by the Supervisory Board, Management Board or eligible shareholders,

o        passing resolutions on damage claims, for the damages caused upon Bank establishment or exercise of management or supervision,

o        determination of the mode of shares redemption and of the fee for the shares redeemed as well as consent to the acquisition of Bank’s shares for redemption purposes,

o        passing resolutions on liquidation, disposal or lease of the Bank enterprise or its organised part and establishing limited right in property thereon.

 

 

The authority of the Bank Supervisory Board is the following in particular:

o        assessment of the Management Board Report and financial statements for the past financial year as to their compliance with the ledgers, documents and the actual state of affairs.

o        assessment of Management Board motions regarding profit distribution or loss coverage,

o        submission to the General Meeting of the annual written report on the said assessment results,

o        revision of the Bank’s property and financial control,

o        approval of the rules of prudent and stable Bank management and the Bank strategy developed by the Management Board as well as periodical review and verification of its delivery, and also approval of many-year development plans of the Bank and annual budgets of  the Bank as developed by the Management Board,

o        approval of accepted risk levels in the Bank’s business areas,

o        approval of Management Board motions regarding formation or liquidation of Bank’s organisational units abroad,

o        consent to acquisition or disposal by the Bank of shares and share rights or holdings of other legal persons, provided the amount of assets covered by one such operation exceeds the PLN equivalent of EUR 1,000,000 or the said operation concerns the assets accounting for at least 50% of the share capital of another legal person; the Supervisory Board’s consent is not required for the Bank’s exposure under debt conversion, liquidation of the collateral accepted by the Bank,

o        appointment and recall of Management Board Members,

o        conclusion with Management Board Members of agreements on performance of their duties and determination of remuneration thereunder, as well as consent to receipt by Management Board Members of other considerations from the Bank or related entities,

o        approval of the Management Board Bylaw, Organisational Bylaw and internal control system of the Bank,

o        selection of the entity authorised to audit the financial statements of the Bank, based on the recommendation of the Audit and Risk Committee of the Supervisory Board and provision of advice as to establishment of cooperation with that entity,

o        consent to conclusion of transactions by the Bank with its shareholders or related entities or members of Bank authorities, provided the amount of the transaction exceeds EUR 1,000,000, save for typical and routine transactions made on an arm's length basis whose nature and terms arise from the daily business of the Bank or transactions foreseen in the annual budget of the Bank as approved by the Supervisory Board,

o        consent to assuming a liability by the Bank or making an administrative decision whose amount in such one-off operation or on an aggregate basis for one entity or a few entities related to the entity exceeds 10% of own funds of the Bank; save for provisions of item 4) and 11), the consent is not required for the entities referred to in item 9),

o        consent to acquisition, disposal or encumbering by the bank of property, plant and equipment item whose amount exceeds the PLN equivalent of EUR 1,000,000; save for provisions of item 10), the consent of the Board is not required when the property, plant and equipment item is acquired through transfer of such item by the Bank as the creditor due to the Bank’s debt recovery procedure,

o        consent to acquisition, disposal or encumbrance by the Bank of real estate or an interest in real estate or the right of perpetual usufruct whose value exceeds the Polish zloty equivalent of EUR 1,000,000,

o        submission to the General meeting of reports and assessments laid down in the regulations, recommendations of the regulator and other laws of the Bank,

o        suspension – for important reasons – of the Bank Management Board Members in their capacity and delegation – for the period of up to 3 months – of Supervisory Board Members to temporarily act in the capacity of the Management Board Members incapable of discharging their duties,

o        approval of the Bank’s compliance risk policy,

o        approval of the rules for the processes of internal capital estimation, capital management and capital planning,

o        approval of the bylaw used to determine the  banking and lending value of the real estate; the bylaw takes effect upon approval by the Polish Financial Supervision Authority,

o        approval of cooperation agreements with ING Bank Śląski S.A.,

o        submission of a request to the Polish Financial Supervision Authority for appointment of the Cover Pool Monitor and his/her deputy,

o        approval of model risk management rules,

o        approval of the code of ethics and conflict of interest management rules.

 

Supervisory Board resolutions may concern in particular:

o        formulation of conclusions and recommendations under the supervision and control activities conducted,

o        granting consents and permissions,

o        rendering advice,

o        reports and assessments submitted by the Board to the General meeting and in particular:

o        report on results of assessment of the financial statements and Management Board reports on Bank operations in the financial year, and also the Management Board motion on the distribution of the Bank’s profit for the financial year,

o        assessment of the Bank’s standing, considering the assessment of the risk management and internal control systems, the compliance and audit cell included,

o        report on the operations of the Board and their committees in the financial year along with the work assessment in that period by the Board,

o        report on the remuneration policy of the Bank,

o        assessment of application by the Bank of the principles of corporate governance for supervised institutions,

o        other matters within the Supervisory Board's powers.

The authority of the Supervisory Board Audit and Risk Committee is the following in particular:

o        supporting the Supervisory Board in monitoring and supervising the financial reporting, the internal and external audit  and the governance system of the Bank, and in particular as to adequacy and effectiveness of the internal control system and risk management system and the relation between the Bank and the firm auditing the financial statements of the Bank.

o        supporting the Supervisory Board in monitoring and supervising the risk management process, including for the operational risk, credit and market risk, and also the internal capital estimation process, capital planning and management as well as the model risk and capital adequacy.

The authority of the Bank Management Board is the following in particular:

o        representing the Bank before the authorities and third parties as well as administration and management of the property and interests of the Bank. The Management Board take action for all the matters not resting with other Bank bodies,

o        issue of resolutions which under the universally effective laws and provisions of the Bank Charter require decisions by other statutory Bank bodies,

o        formulation of Bank’s policies, including but not limited to the lending policy, risk management policy and remuneration policy,

o        determination of acquisition principles for funds from other financial institutions and the principles of their utilisation as well as determination of principles for investing funds with banks,

o        formulation of principles for setting interest for the products offered by the Bank, including but not limited to the interest for loans and credit facilities or penalty interest,

o        reviewing motions regarding recognition of extraordinary losses and establishment of provisions beyond the amounts otherwise set by the Management Board,

o        passing investment plans and setting investing principles,

o        resolving on the matters pertaining to the acquisition, encumbering, disposal of lease of real estates and other property rights – for operations going beyond the amounts otherwise set by the Management Board,

o        resolving on acquisition and disposal by the Bank of shares and holdings of other legal persons – for operations going beyond the amounts otherwise set by the Management Board,

o        determination of principles of granting and revoking powers of attorney to perform certain acts or take certain actions,

o        the matters going beyond the ordinary course of business, including but not limited to the matters going beyond the powers of individual Management Board members or Committees established by the Management Board,

o        other matters for which decisions rest with the Management Board  under other resolutions adopted by the Management Board and other matters submitted by the President of the Management Board or another Management Board Member.

The Bank Management Board established the following standing committees: the list of standing committees forms Enclosure No. 4 with the Organisational Bylaw of ING Bank Hipoteczny S.A.:

o        Assets and Liabilities Committee (ALCO),

o        Credit Policy Committee (CPC),

o        Non-Financial Risk Committee (NFRC),

o        Green Covered Bonds Committee (GCBC).

The Assets and Liabilities Committee supervise and take decisions on:

o        market and liquidity risk management at ING Bank Hipoteczny,

o        management of the Bank’s balance sheet (assets and liabilities), including the transfer pricing system methods and parameters,

o        structure of ING Bank Hipoteczny S.A.’s ledgers,

o        capital and capital adequacy management,

o        valuation of financial instruments and calculation of valuation adjustments, considering the factors not accounted for in the valuation in the Bank’s systems.

Credit Policy Committee

Responsibilities

o        Credit risk appetite as to specific risk appetite limits and concentration limits:

o        Define limit types,

o        Set and change limit levels,

Lending Policy:

o        the Credit Policy Committee take decisions on the regulations concerning the implementation of the ING Bank Hipoteczny S.A. Credit Risk Management Policy,

o        the Credit Policy Committee define and modify the principles of risk, identification, assessment and control, including:

o        credit risk assessment principles,

o        credit analysis standards,

o        credit powers,

o        rating process flow,

o        principles of client and credit exposure monitoring,

o        restructuring and debt recovery principles,

o        collateral establishment and monitoring principles,

o        impairment and provisioning principles,

o        social and environmental risk assessment principles,

o        counterparty risk assessment principles.

Credit risk models:

o        the Credit Policy Committee approve regulations on development, maintenance and use of risk models, including:

o        principles of the credit risk models management,

o        methodology of building and monitoring of the models,

o        definitions of the credit risk models,

o        the scope of use of the credit risk models,

o        results of credit risk model validation.

o        The Credit Policy Committee approve the reports on results of credit risk model validation.

o        The Credit Policy Committee monitor credit risk, ensure compliance with laws, supervisory regulations and ING Group’s standards as well as discuss and approve any other credit- and settlement risk-related matters.

 

The Non-Financial Risk Committee – following the requirements of the universally applicable laws, regulator’s requirements, internal regulations of the Bank and good practices of the ING Bank Śląski S.A. Group, the Committee have inter alia the following areas and matters in scope:

o        Initiating and recommending the changes and new solutions for the non-financial risk area.

o        Performing the tasks resulting from the use of outsourcing as described in the ING Bank Hipoteczny S.A. Outsourcing Policy and the ING Bank Hipoteczny S.A. Outsourcing Manual.

o        Approving, advising on and recommending plans, projects and programmes as well as control standards for non-financial risk management.

o        Approval of:

o        operational risk management plan for the calendar year concerned,

o        waivers and deviations for the non-financial risks area,

o        annual control testing plans and results,

o        annual Risk Identification and Assessment Plan and the results of this process when unacceptable risks are identified as well as the outcome of the Business Environment Assessment,

o        action plans and report on the 2LoD monitoring as part of key control testing (IT area included),

o        non-financial risk reports and recommendation to the Bank Management Board of decisions for material non-financial risk issues (including the unacceptable risks attributable to product-related changes),

o        list of obligatory training courses in non-financial risk,

o        periodical results of Bank’s organisational framework reviews for compliance with the operational risk management rules,

o        methodology for operational risk capital estimation, 

o        results of measurement of economic and regulatory capitals for operational risk, including quarterly monitoring of the capital required for operational risk and capital change drivers,

o        mitigating actions.

o        Supervision of:

o        non-financial risk identification, assessment, monitoring and mitigation processes (including approval of control standards),

o        the process of distribution of regulatory information to competent Bank units,

o        the quality assurance process for the non-financial risk management processes.

o        Monitoring of:

o        the processes of NFR identification, assessment, monitoring and mitigation, outsourcing area included,

o        the quality assurance process for the non-financial risk management processes,

o        the status of mitigation and enhancement activities related to non-financial risk programmes and projects in the Bank,

o        risk factors arising from the Business Environment Assessment.

o        Assessment of:

o        reputational risk reports, customer complaints and conduct risk matters,

o        non-financial risks for considerable changes to the Bank’s governance structure and essential elements of outsourcing processes.

The Green Covered Bonds Committee is responsible for all green aspects of covered bonds.

Responsibilities:

o        Initiation and recommendation of changes and new solutions for green covered bonds.

o        Approval of:

o        amendments to the ING Bank Hipoteczny S.A. Green Covered Bond Framework,

o        changes to technical conditions enabling qualification of a credit debt to the portfolio of green assets,

o        allocation reporting and impact reporting,

o        periodical reports delivered to the Climate Bonds Initiative.

o        Supervision of:

o        processes relating to operational implementation of changes arising from the ING Bank Hipoteczny S.A. Green Covered Bond Framework,

o        processes relating to operational implementation of changes to technical conditions enabling qualification of a credit debt to the portfolio of green assets,

o        the process of utilisation of funds acquired from the issue of green covered bonds, considering the potential alternative investment projects laid down in the ING Bank Hipoteczny S.A. Green Covered Bond Framework,

o        the process of green assets portfolio building,

o        collaboration with third parties involved in the green covered bonds-related processes,

o        quality assurance for the green covered bonds-related processes,

o        reporting process to ING Group.

 

6.3 Management Board of ING Bank Hipoteczny S.A.

 

In the period from 1 January 2021 to 30 June 2021, the Management Board of ING Bank Hipoteczny S.A. worked in the following composition:

 

Function

Function Holding Time

Mirosław Boda

President of the Management Board

 

26.02.2018 - at present

 

Jacek Frejlich

Vice-President of the Management Board

 

26.02.2018 - at present

 

Roman Telepko

Vice-President of the Management Board

26.02.2018 - at present

 

Segregation of key authorities within the Bank Management Board:

Mirosław Boda

President of the Management Board responsible for the Management Area

Jacek Frejlich

Vice-President of the Management Board responsible for the Finance, Treasury, Operations and IT Areas

Roman Telepko

Chief Risk Officer

 

Other management functions of Management Board Members:

 

Function

Function Holding Time

Mirosław Boda

Deputy Chairman of the Supervisory Board – ING Usługi dla Biznesu S.A.

Throughout the reporting period.

Jacek Frejlich

Did not hold any additional functions of the Management Board or Supervisory Board member.

Throughout the reporting period.

Roman Telepko

Did not hold any additional functions of the Management Board or Supervisory Board member.

Throughout the reporting period.

 

The composition, responsibilities of and segregation of duties among the Management Board Members did not change.

Recruitment policy – selection and evaluation of Management Board Members

All the appointed members of the ING Bank Hipoteczny S.A. Management Board satisfy the requirements of Article 22aa of the Banking Law Act and underwent a suitability assessment before appointment as per EBA guidelines.

In May 2021, a secondary assessment of the suitability of the Bank's Management Board was performed. According to the PFSA Methodology, this assessment was triggered by a change in the scope of responsibility of the Management Board Members. The composition of the Bank's Management Board did not change, however both individual assessments of the Management Board Members and a collective assessment of the entire board were carried out.

In June 2021, keeping in mind the planned changes in the composition of the Supervisory Board and changes in the competencies of the Supervisory Board Members, the Bank's Management Board decided to initiate a secondary assessment of the suitability of the Supervisory Board Members. The individual assessment of Ms Bożena Graczyk was conducted in connection with her planned taking up a position of Chairman of the Supervisory Board. Individual assessments of the remaining Supervisory Board Members are now in progress. The suitability assessment process will be completed by a collective assessment of the Board.

The process of selection and assessment of candidates for ING Bank Hipoteczny S.A. Management Board follows the terms and conditions of the Policy of selection, nomination, re-nomination and succession planning of ING Bank Hipoteczny S.A. Management Board and Supervisory Board Members.

Upon the request of the ING Bank Hipoteczny S.A.,  the HR unit of ING Bank Śląski S.A. prepares a list of candidates for a given position, based on the succession database. The list of candidates should satisfy the requirements of the Diversity Policy of ING Bank Hipoteczny S.A. In the absence of internal candidates satisfying the requisite criteria, external recruitment process is initiated. The Supervisory Board select at least 2 persons from the list of candidates; they are invited to the assessment process made by a third party. That stage closes with the third-party report.

The Supervisory Board commission the suitability assessment process as per the Suitability assessment policy for Supervisory Board and Management Board Members and the persons holding key functions at ING Bank Hipoteczny S.A. considering the terms of the Diversity Policy applicable to the ING Bank Hipoteczny S.A. Management Board and Supervisory Board Members.

The following terms of selection, nomination and succession planning apply to Management Board Members:

o        Management Board Members are appointed and recalled in the secret ballot, considering the requirements of the Banking Law Act.

o        The Bank Management Board consists of at least three members, inclusive of the President and Vice-Presidents.

o        The number of the Management Board Members is determined by the Supervisory Board. At least half of the Members of the Management Board are the citizens of the Republic of Poland.

o        Management Board Members are appointed for the joint term office which commences at their appointment date and lasts for five full subsequent financial years.

o        The President of the Management Board and the Vice-President supervising the management of the risk material to the Bank’s business are appointed by the Supervisory Board upon the approval of the Polish Financial Supervision Authority. The earlier appointed Management Board Member may be entrusted with the capacity of the Vice-President referred to hereinabove only upon approval of the Polish Financial Supervision Authority.

Diversity Policy

The ING Bank Hipoteczny S.A. has the Diversity Policy for ING Bank Hipoteczny S.A. Management Board and Supervisory Board Members.

The Policy seeks to achieve a broad scope of competence upon appointment of the Supervisory Board and Management Board members so as to acquire various opinions and experience and enable individual bodies to issue independent opinions and reasonable decisions as well as to ensure top quality of duties performance by the managing bodies.

The Bank perceives diversity as one of the attributes of the corporate culture. As regards business-related criteria, the strategy of diversity ensures selection of persons with diverse knowledge, skills and experience, suitable for positions held by them and duties entrusted to them, who complement each other at the level of all the Management Board and Supervisory Board Members.

The criteria are verified in the suitability assessment process described in the Suitability assessment policy for Supervisory Board and Management Board Members and the persons holding key functions at ING Bank Hipoteczny S.A. Further, the Diversity Policy covers and employs the differences which besides knowledge and professional experience are driven by sex and age to accomplish top results.

Principles of remuneration of  Bank Management Board Members

On 7 December 2020, the Supervisory Board – by way of Resolution No. 47/11/2020 – approved amendments to the Remuneration Bylaw for Members of the ING Bank Hipoteczny S.A. Management Board. The Bylaw provides for the primary terms and conditions of remuneration for members of the ING Bank Hipoteczny S.A. Management Board. The Bylaw remains in concordance with the values and long-term interests of ING Bank Śląski S.A. Group, whereby it fosters effective risk management by the Group. The principles of remuneration of  Bank Management Board Members are set using the market data. They factor in the knowledge and skills as well as the accountability of and the risk taken by a given function. Each Bank Management Board member made an employment contract with the Bank. The contract reads inter alia the terms and conditions of remuneration and the competition ban.

 

6.4 Supervisory Board of ING Bank Hipoteczny S.A.

 

In the period from 1 January 2021 to 30 June 2021, the Supervisory Board of ING Bank Hipoteczny S.A. worked in the following composition:

 

Function on the Bank Supervisory Board

 

 

Appointment date

Recall/ resignation date

 

Independent member*