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Letter of the President of the Management Board

Dear Sirs and Madams,

The year 2016 presented in this Report has been particularly demanding for the Bank Pocztowy Capital Group.

On the one hand, the Group generated a net banking income of PLN 339.1 million, i.e. 3.5% higher than last year and reported a 6.4% higher balance of cash loans and installment loans and a 5.9% growth in deposits granted to individuals. In the same period the net interest income grew by 4.2%, which translated into a higher interest margin, which considerably exceeded the average for commercial and cooperative banks.

On the other hand, many negative factors adversely affected the Group’s performance in 2016. The most important of them was the recognition of higher impairment losses on loans and advances, which significantly impacted this year’s performance. The impairment losses increased by PLN 35.3 million (up by 50% YoY) and reached PLN 100.5 million in 2016. The adverse change resulted from the credit policy followed in 2013-2016, which did not sufficiently hedge the Group’s credit risk and which will adversely affect its performance in the coming years. Therefore, the Management Board appointed for the tenth term of office implemented a strategy aimed at improving the quality of the loan portfolio.

Another significant factor, with a detrimental impact on the profit for 2016 was the recognition of provisions for proceedings instigated by the Office for Competition and Consumer Protection of PLN 10.1 million concerning fees for bank statements charged since 2015. The Group’s performance was also affected by a payment to the Bank Guarantee Fund of PLN 0.8 million following the bankruptcy of Bank Spółdzielczy in Nadarzyn and writing off expenses incurred in the process of preparing the IPO in 2015 and 2016 of PLN 3.2 million. The total impact of non-recurring events in 2016 was PLN 16.5 million.

Other factors affecting the Group’s performance were: low interest rates and a bank tax charged since 1 February 2016, which equaled PLN 4.8 million.

The Group’s performance was positively affected by the sale of shares in VISA Europe to VISA Inc. for PLN 16.9 million.

The Bank Pocztowy Group reported a net profit of PLN 2.5 million in 2016. Significantly, if not for the wrong decisions of the management taken in previous years and negative impact of one-off events, the net profit would have reached PLN 40 million.

At the end of 2016, the Bank provided services to 1.3 million consumers and managed over 830 thousand current accounts, which gave the Bank a good market share of 2.7%. The quality of accounts maintained with Bank Pocztowy has improved, i.e. current account holders have become more active and the average balance of funds deposited has increased by 30% comparing to last year.

In the analyzed period the Bank followed the balance sheet optimization strategy aimed at increasing the share of more profitable assets, i.e. cash loans and installment loans, which have become key products of the Bank in the recent years. The value of these loans reached PLN 2.2 billion. Gross loans amounted to ca. PLN 5.5 billion and the balance of deposits reached PLN 5.8 billion. The solvency ratio amounted to 14.4% and Tier 1 reached 11.1%, i.e. it exceeded the minimum regulatory level required.

The key challenge for the Bank has been to improve the quality of the credit portfolio, therefore, in the recent months the Bank carried out intensive works to introduce necessary changes to the policy, processes, credit procedures and to make organizational changes. By the end of the first quarter of 2017 the New Credit Process for Cash Loans will be introduced to streamline the credit approval process and improve the quality of loans granted and the credit portfolio.

In 2016 the Bank made organizational changes aimed at improving the management quality at the Bank and activate own sales network. Changes have been made to the incentive scheme for the network employees and the first incentive scheme in the last few years has been introduced to motivate the sales staff of the extensive network of Poczta Polska. Considering the importance of the changes for the Bank’s growth and financial performance, in the coming years the works will be intensified to promptly develop an optimal cooperation model.

Additionally, the Bank carried out a project of developing new digital banking system under the EnveloBank brand and successfully launched the public issue of bonds scheme. As a result of the bond issue the Bank raised the assumed maximum amount of PLN 50 million.

At present the Bank is working on a new strategy which will enable it to take its natural place in the Polish financial market - to become a people’s bank. We are certain that this growth direction will comply with the strategy followed by the entire Poczta Polska Capital Group and, consequently, the Bank’ s customers will gain access to an integrated offer of traditional and modern bank services, postal, government administration (e-administration) and e-commerce services. The Bank finds is particularly important to develop strong local relations with the majority shareholder - Poczta Polska. Therefore, we will foster and encourage cooperation to render services to our clients in line with European postal banking standards. Consequently, both institutions will be able to grow the revenue and generate better performance in the coming years.

Best regards,

Sławomir Zawadzki
President of the Management Board