1.          Summary of 2020. 2

1.1    Description of the BGK Group. 2

1.2    Major events in the BGK Group. 2

1.3    Important events for the BGK Group in 2020. 2

1.4    Historical overview of the BGK Group. 2

1.5    Key financial data of the BGK Group for 2020. 2

1.6    Key financial data of BGK for 2020. 2

2.          The economy in 2020. 2

2.1    Domestic economy. 2

2.2    Economy abroad. 2

3.          Changes in the regulatory environment. 2

4.          Operations of Bank Gospodarstwa Krajowego and the BGK Group. 2

4.1    Division of operations within Bank Gospodarstwa Krajowego Group. 2

4.2    Lending activity of BGK. 2

4.3    Lending policy of BGK. 2

4.4    Deposit activities of BGK. 2

4.5    Electronic banking. 2

4.6    BGK’s activity on the money market and the debt securities market. 2

4.7    Share portfolio. 2

4.8    Projects 2

4.9    Sureties and guarantees provided by BGK under government programmes 2

4.10  Cooperation with international public institutions 2

4.11  Activities of BGK’s foreign representative offices 2

4.12  Public finance consolidation management. 2

4.13  European programmes 2

4.14  Social rental housing (SRH) programmes 2

4.15  Cash flow funds 2

4.15.1        COVID-19 Response Fund. 2

4.15.2        National Road Fund. 2

4.15.3        Railway Fund. 2

4.15.4        Inland Waterways Fund. 2

4.15.5        Subsidy Fund. 2

4.15.6        Thermal Modernisation and Refurbishment Fund. 2

4.15.7        Student Loan Fund. 2

4.15.8        Borrower Support Fund. 2

4.15.9        Polish Science Fund. 2

4.15.10      Tourist Refund Fund. 2

4.15.11      Interest Subsidy Fund. 2

4.15.12      National Guarantee Fund. 2

4.15.13      Liquidity Guarantee Fund. 2

4.16  Other programmes and delegated tasks 2

4.17  Operations of the BGK Group entities 2

4.18  Transactions with associates of BGK. 2

5.          Strategy and development directions of BGK and the BGK Group. 2

5.1    Strategy of BGK and the BGK Group. 2

5.2    Development directions of the BGK Group. 2

5.3    BGK’s anti-crisis measures in connection with the COVID-19 pandemic. 2

5.3.1 Aid package for micro, small and medium-sized enterprises 2

5.3.2 Aid package for large companies 2

5.3.3 COVID-19 aid package offered by KUKE S.A. 2

5.3.4 Other COVID-19 aid mechanisms 2

6.          Financial overview of the BGK Group and BGK. 2

6.1    Financial performance of the BGK Group. 2

6.2    Balance sheet of the BGK Group. 2

6.3    Financial performance of Bank Gospodarstwa Krajowego. 2

6.4    Balance sheet of the Bank Gospodarstwa Krajowego. 2

6.5    Rating of BGK. 2

7.          Organisational structure of the Bank. 2

8.          BGK’s CSR initiatives. 2

9.          HR policy pursued by BGK. 2

10.        Auditor of the financial statements. 2

11.        Disclosures required under banking law subject to audit by an auditor. 2

12.        Non-financial statement. 2

13.        Statement of compliance with corporate governance rules. 2

13.1  General rules 2

13.2  Tasks, scope of business and organisation of BGK. 2

13.3  Composition and rules of BGK’s governing bodies and committees, representation and powers vested in the President of the Management Board. 2

13.4  Internal controls, risk and capital management and financial reporting at the Bank. 2

14.        Managing and assessing credit, financial, operational and other risks. 2

14.1  Organisation of the risk management process 2

14.2  Organisation of the credit and concentration risk management process 2

14.3  Overview of key credit and concentration risks 2

14.4  Organisation of the financial risk management process 2

14.5  Overview of key financial risks 2

14.6  Organisation of the operational risk management process 2

14.7  Overview of operational risk. 2

14.8  Overview of business risk. 2

14.9  Other risks 2

14.10 Mitigation of the risk related to COVID-19 epidemic. 2

14.11 Capital adequacy. 2

1.    Summary of 2020

1.1         Description of the BGK Group

Bank Gospodarstwa Krajowego (BGK) is a state development bank whose mission is to support the social and economic development of Poland and the public sector in the fulfilment of its tasks. BGK and the BGK Group entities initiate and participate in cooperation between business, public sector entities and financial institutions.

As at 31 December 2020, the Group consisted of the following subsidiaries consolidated with the full method. The Group also includes equity-accounted associates.

Structure of the BGK Group as regards entities consolidated with the full method

§  Bank Gospodarstwa Krajowego – The only state-owned bank, which is also a state development bank – the parent entity of the BGK Group,

§  Fundusz Sektora Mieszkań na Wynajem FIZ AN (Dwelling for Rent Sector Closed-End Private Equity Investment Fund) – For more information see Section 4.17,

§  Fundusz Sektora Mieszkań dla Rozwoju FIZ AN (Dwelling for Development Sector Closed-End Private Equity Investment Fund) – For more information see Section 4.17,

§  Fundusz Ekspansji Zagranicznej FIZ AN (Foreign Expansion Closed-End Private Equity Investment Fund) – For more information see Section 4.17.

Entities consolidated by BGK using the equity method

§  The Three Seas Initiative Investment Fund (Three Seas Initiative Investment Fund S.A. SICAV-RAIF) – For more information see Section 4.17.

§  Infrastructural funds whose management has been entrusted by BGK to PFR TFI S.A., i.e.:

§   Fundusz Inwestycji Polskich Przedsiębiorstw FIZ AN (Polish Enterprise Investments Closed-End Private Equity Investment Fund),

§   Fundusz Inwestycji Infrastrukturalnych – Kapitałowy FIZ AN (Equity Infrastructure Investment Closed-End Private Equity Investment Fund),

§   Fundusz Inwestycji Samorządowych FIZ AN (Local Government Investments Closed-End Private Equity Investment Fund),

§  Surety funds established in cooperation with local government units,

§  Krajowa Grupa Poręczeniowa Sp. z o.o. (National Guarantee Group),

§  Korporacja Ubezpieczeń Kredytów Eksportowych S.A. (Export Credit Insurance Corporation)

For a detailed description and list of subsidiaries and associates see the consolidated financial statements.

Bank Gospodarstwa Krajowego and the BGK Group entities focus their activities in several main areas:

§   carrying out activities to support the economic growth of Poland by financing infrastructure projects and local government projects and by co-financing the foreign expansion of Polish companies and export projects. BGK offers surety and guarantee schemes in order to stimulate entrepreneurship and the development of micro, small and medium-sized enterprises. The Bank and group entities also operate programmes intended to improve the situation on the housing market;

§   initiating and implementing countercyclical actions, in particular during the COVID-19 pandemic, aimed at supporting economic growth and enterprise development;

§  mobilising capital in the economy by participating in consortia and structuring transactions in the domestic and foreign markets. The Bank finances capital needs through cooperation with development institutions and the mobilisation of private capital through the development of guarantee and surety programmes;

§  supplementing the banking system by filling the market gap in key areas of the economy through programmes activating stagnant sectors and countercyclical initiatives. The Bank finances projects of significant importance to the market economy and associated with high risk and supports economic growth in areas where the market is inefficient. The Bank cooperates with other financial institutions on a partnership basis, complementing their offerings;

§  consolidating public finances, management of European programmes and distribution of EU funds on a regional and national scale.

The Bank expands its product offer in the area of debt financing as well as surety and guarantee financing by investing in funds supporting the growth of Polish enterprises and infrastructure development.

The BGK Group’s activities have a multidimensional development context. The implementation of activities in one area, such as financing reindustrialisation, has a positive impact on other areas, i.e. on labour market development, reduction of the unemployment rate or increase in state budget revenue. The BGK Group’s infrastructure projects improve the quality and accessibility of services to the public and have a positive impact on the environment and the economy.

The BGK Group carries out its activities in a responsible and sustainable manner, while maintaining a reasonable risk appetite. Planned projects are analysed in terms of risk and their impact on the Poland’s sustainable economic growth. In 2020, the liquidity of BGK was at a safe level and its level of capital adequacy was monitored using capital adequacy ratios determined in line with the Banking Law and the CRR (Capital Requirements Regulation).

Financing of housing

An important element of the Bank’s and BGK Group’s operations are activities related to co-creation and implementation of programmes supporting the development of the housing industry, including provision of debt financing to entities in the social rental housing sector, non-refundable financing in the rental housing construction sector, in particular to municipal entities, as well as supporting thermal modernisation and refurbishment of residential buildings. In addition, BGK provides capital to Fundusz Sektora Mieszkań na Wynajem FIZ AN and Fundusz Sektora Mieszkań dla Rozwoju FIZ AN.

Support for exports and foreign expansion

The Bank and the BGK Group actively support activities focused on exports. The Bank is a shareholder of Korporacja Ubezpieczeń Kredytów Eksportowych S.A. (KUKE S.A.). Apart from its capital involvement, BGK is KUKE S.A.’s key partner in the implementation of the government export support programme, as part of which BGK grants export credits insured by KUKE S.A. In addition, BGK finances export projects that are partially implemented at ‘own risk’, with supplementary security provided by KUKE S.A.

Another BGK Group member, which provided funding to actively support the foreign expansion of Polish businesses is Fundusz Ekspansji Zagranicznej FIZ AN managed by PFR TFI S.A. The Fund helps Polish entities co-finance their investment projects abroad by offering loans or acquiring minority shareholdings with a buyout option. The Fund may invest both in EU and non-EU member states, also in developing and high-risk countries, in almost all sectors, not only in manufacturing, but also in distribution and service companies.

As at the end of 2020, Fundusz Ekspansji Zagranicznej FIZ AN was a party to 10 active investment agreements with Polish partners on equity or debt financing. BGK is the only participant of this investment fund.

In addition, the Bank carries out management activities related to export credits under the DOKE Programme (system of subsidies from the state budget to interest on export credits). The DOKE Programme is a system designed to stabilise interest on export credits advanced to buyers by Polish or foreign banks or international financial organisations. The rules of the Programme are based on the OECD Arrangement on Officially Supported Export Credits.

1.2         Major events in the BGK Group

COVID-19 – Package of aid measures

In 2020, the BGK Group prepared a range of solutions for businesses related to the COVID-19 pandemic in cooperation with the legislator, the European Commission, the banking sector regulators as well as commercial and cooperative banks with a view to implementing the broadest possible package of aid measures as quickly as possible.

The role of BGK as a bank supporting the socio-economic development of Poland and the public sector in the performance of its tasks has gained particular importance in 2020. BGK has successfully filled the market gap and undertaken countercyclical initiatives that activate stagnant sectors. During the global pandemic, BGK has successfully supported the Polish economy and Polish enterprises by implementing measures as part of the Anti-Crisis Shield or supplementing the government’s actions in this area. With the safety of its clients and employees in mind, the Group implemented electronic flow of documents.

In 2020, as part of the Anti-Crisis Shield and auxiliary activities, the Bank provided support worth more than PLN 54 billion of financing value to more than 60 thousand entrepreneurs. As part of the COVID-19 Response Fund, bonds totalling PLN 100.8 billion were issued.

Aid package for micro, small and medium-sized enterprises (for more information see Section 5.3 of this report):

Aid package for large companies (for more information see Section 5.3 of this report):

As part of the aid package, together with the legislator the Bank also established new cash flow funds (for more information see Section 4.15 of this report):

As part of the aid programme, KUKE S.A. launched State Treasury-guaranteed insurance of short-term export receivables – KUKE GAP Ex and GAP Ex+, and extended to 100% the insurance coverage for investment export projects (for more information see Section 5.3 of this report).

Three Seas Initiative Investment Fund

In 2019, on the initiative of BGK, the Three Seas Initiative Investment Fund was established (operating under the name Three Seas Initiative Investment Fund S.A. SICAV-RAIF) as an international investment fund supporting infrastructure projects which are significant growth drivers for countries located in Central and Eastern Europe between the Baltic Sea, the Black Sea and the Adriatic. The main objective of this financial vehicle is to fill in the infrastructure gap between western and eastern parts of the European Union by financing transport, energy and digital connections on the north-south axis in countries located in the Three Seas Region.

As at the end of 2020, the entity’s shareholders were entities representing Poland, Romania, Hungary, Estonia, Latvia, Slovenia and Bulgaria, while in January 2021 institutions from Croatia and Lithuania joined as new shareholders.

It is assumed that the target size of the Fund will be in the range of EUR 3–5 billion. The Fund is open also to international financial institutions and private investors.

The Fund reached full operational capacity in February 2020. Its management was entrusted to independent entities: (i) Fuchs Asset Management – a licensed fund manager, and (ii) Amber Infrastructure – an entity responsible for the investment process and portfolio management. The Fund operates under Luxembourg law. As at the end of 2020, its portfolio consisted of two investment projects.

European Commission’s pillar assessment

On 2 December 2020, the European Commission’s Directorate‑General for Economic and Financial Affairs officially confirmed that BGK successfully passed the accreditation procedure. The Bank has been successfully audited in all nine pillars assessed. As a result, BGK may be treated by the EC as a potential partner in implementation of projects that facilitate access to EU funds and a budgetary guarantee under direct management (i.e. access to InvestEU guarantee programme, EFSD+ guarantees under the NDICI programme or the CEF Blending Facility). For more information see Section 4.10 “Cooperation with international public institutions.”

Rise of the BGK statutory fund

To be able to actively support entrepreneurs hit by the effects of the COVID-19 pandemic, BGK received a capital injection of PLN 5 billion in Treasury bonds. The increase of BGK’s own funds improved its financial strength and helped achieve the expected financial leverage, which enables it to counteract and mitigate the consequences of the COVID-19 pandemic. As a result, the growth of own funds contributed to an increase in the value of funding granted under BGK’s banking activities and significantly improved the capacity to generate, in the long term, credit exposure and increase concentration ratio for individual exposures and groups of affiliated clients. Funds from the rise of statutory fund are used to increase the supply of loans, including to boost the financing of investment projects. The Bank’s financing offer is addressed to all clients and is based on market prices, and its availability is not limited to specific industries, selected sectors or geographical regions. BGK’s offer is addressed to all entities in the market which need to gain access to financing from BGK or syndicated financing from BGK and commercial banks.

To enhance the strength of own funds, BGK allocated the entire net profit for 2019 to increase its equity.

Rise of the KUKE S.A. statutory fund

In view of the situation related to the impact of COVID-19 on the economy, including commercial insurers, on 10 April 2020 the General Meeting of KUKE S.A. resolved to rise statutory fund of the company. On 22 April 2020, the Bank acquired 252,360 new shares in KUKE S.A. with a par value of PLN 100 per share, for PLN 50 million, in a private placement.

Foreign representative offices of Bank Gospodarstwa Krajowego

The primary purpose of the operation of BGK’s offices abroad is to promote the Bank and Poland, monitor the process of international legislation, actively participate in preparation and amendment of legal acts, and support exports and the foreign expansion of Polish businesses. The offices are intended to support foreign expansion and attract foreign investors through BGK’s communication and promotional activities abroad. Their role is to build and foster relations with financial centres and institutions with the strongest impact on regulations affecting global economy and the international banking system.

In 2018, BGK opened its first representative office in Brussels, which was followed by representative offices in Frankfurt am Main and London opened in 2019, and in Amsterdam in 2020. The Bank intends to set up further representative offices in the USA and Singapore.

Changes regarding the support of the housing industry

In 2020, further legislative changes were prepared to boost demand for rented dwellings and facilitate access to them. Many of those changes will be implemented in 2021. In the SRH programme, the autumn edition of the call for applications was extended to three months, i.e. from 1 July to 30 September, replacing the call for applications covering only September. An important step for the development of social rental housing were works on the so-called housing package, which involves a comprehensive range of legislative amendments supporting the housing industry. The works resulted in the adoption of the Act Amending Certain Acts Supporting the Housing Industry of 10 December 2020 and the Act on Settlement of the Price of Premises or Buildings in the Price of Property Sold from the Municipal Property Base of 16 December 2020, so-called “premises for land”. The pandemic of the coronavirus SARS-CoV-2 compelled the banking sector and other sectors of the economy to change the way of working from stationary to remote. Great emphasis was placed on adjusting the terms of operation of social and municipal housing support programmes to the current disease situation, i.e. digitisation of construction and lending processes. In addition, in March 2020 an emergency “Procedure of processing of applications for a change of the loan instalment schedule at Bank Gospodarstwa Krajowego” was introduced as a help facility for clients of the banking sector. The changes in the law and procedures were designed to enable the submission of documents in electronic form and holding meetings and conferences using tools for remote work. The Government Housing Development Fund was established using the resources of the COVID-19 Response Fund and the National Property Resource was enabled to create new Social Housing Initiatives or to join the existing Social Housing Initiatives/Social Housing Associations by contributing land or capital to those entities.

1.3         Important events for the BGK Group in 2020

1.4         Historical overview of the BGK Group

Establishment of BGK

Bank Gospodarstwa Krajowego is the only state-owned development bank in Poland. It was established by an order of the President of the Republic of Poland in 1924. During the interwar period, it focused on supporting public and municipal institutions as well as armament manufacturers, in addition to managing industrial plants the control of which was assumed by the state. The Bank also administered government special purpose funds and provided significant financial support to the modernisation and development of the Polish economy of that period, including the Central Industrial District and the city and sea port of Gdynia. After WWII, the operations of BGK were suspended in 1948.

Resumed operation in 1989

The Bank was reactivated in 1989 as an institution specialising in the provision of services to the public sector. The operations of BGK are governed by the Act on Bank Gospodarstwa Krajowego of 14 March 2003, as amended, and the Regulation of the Minister of Development on the adoption of the Articles of Association of Bank Gospodarstwa Krajowego, dated 16 September 2016. Currently, BGK is the major institution supporting the State in the administration of socio-economic government programmes designed to promote entrepreneurship as well as infrastructure and residential investment at the national, regional and local level.

Establishment of the National Housing Fund (NHF)

One of the first funds implementing government programmes within BGK was the National Housing Fund (Krajowy Fundusz Mieszkaniowy – KFM), whose key objective was to provide loans for the construction of social rental housing and auxiliary technical infrastructure. The legal basis of the NHF’s operations was the Act on Certain Forms of Support for Residential Construction of 26 October 1995. On 31 May 2009, the National Housing Fund was liquidated and the portfolio of loans advanced by the National Housing Fund is now managed by BGK as part of its assets.

Establishment of the Subsidy Fund (SF)

The Subsidy Fund was established at BGK pursuant to the Act on Interest Subsidies for Fixed-Rate Housing Loans of 5 December 2002. The Subsidy Fund commenced its operations in 2003 by subsidising interest on fixed-rate housing loans. In the following years, subsequent residential construction support programmes were launched by the Fund.

Establishment of the National Road Fund (NRF)

The National Road Fund was established with a view to finance the construction and alteration of national roads, including motorways and expressways, cover any payments to toll motorway operators and expenditure related to the construction and operation of toll collection systems on national roads. The Fund was established at Bank Gospodarstwa Krajowego under the Act on Toll Motorways and the National Road Fund of 27 October 1994. The NRF has been operated within BGK since 2004.

Taking over the management of the government programme “Support of Entrepreneurship with Sureties and Guarantees of Bank Gospodarstwa Krajowego”

Access of micro, small and medium-sized enterprises to financing for development needs, including investments, is facilitated thanks to BGK’s surety and guarantee scheme. Activities under the government programme have been carried out since 2009 in accordance with provisions laid down in the Act on Sureties and Guarantees Granted by the State Treasury and Certain Legal Persons of 8 May 1997. The Bank carries them out directly in the form of surety and guarantee activities by performing tasks related to the development of the system of regional and local surety funds, as well as through the National Guarantee Fund (NGF) established by BGK.

Establishment of investment funds managed by TFI BGK S.A. (currently PFR TFI S.A.)

In pursuing the mission of supporting the economic growth of Poland, the Bank also actively carries out operations related to equity investments. These operations are carried out by closed-end investment funds and entities established by them. Investment funds were created by Towarzystwo Funduszy Inwestycyjnych (Investment Fund Management Company) established by BGK in November 2013. In September 2017, TFI BGK S.A. was sold to Polski Fundusz Rozwoju S.A., but it retained the right to appoint three members of the Supervisory Board.

PFR Nieruchomości S.A. manages the assets of Fundusz Sektora Mieszkań na Wynajem FIZ AN and Fundusz Sektora Mieszkań dla Rozwoju FIZ AN, whose sole investor is BGK.

1.5         Key financial data of the BGK Group for 2020

The BGK Group reported a net profit of PLN 366.6 million for 2020, down by PLN 23.6 million, or 6.1%, year on year. The drop resulted mainly from higher net impairment losses and provisions, which rose year on year by PLN 153.5 million, or 66.3%, driven by the effects of the COVID-19 pandemic.

Administrative expenses grew slower (up 3.9%) than income from banking activities (up 5.7%).

TABLE 1: Key financial parameters of the BGK Group’s operations

The BGK Group closed the year 2020 with a balance sheet total of PLN 160,325.5 million. It went up by PLN 59,804.3 million, or 59.5%, year on year. The increase was mainly attributable to:

§  changes in assets and liabilities resulting from the management of BGK’s liquidity position,

§  loans, municipal and commercial bonds higher by PLN 1,914.6 million.

ROE fell by 0.4 pp, to 1.7%. ROA was 0.1 pp lower than in 2019 and stood at 0.2%. The C/I ratio, including other operating expenses and income, dropped by 1.4 pp year on year, to 37.1%.

The C/I ratio on core activities fell from 43.6% in 2019 to 42.9% in 2020.

The strong capital position of the BGK Group at the end of 2020 improves the potential to achieve BGK’s mission in upcoming years and allows to speed up lending, improve net interest income and expand investment activity supporting the Poland’s economic growth.

1.6         Key financial data of BGK for 2020

In 2020, the Bank reported a net profit of PLN 315.7 million, down by PLN 195.5 million as compared to the preceding year. Net profit dropped chiefly as a result of an increase in net impairment losses and provisions by PLN 117.8 million (29.2%) compared to the end of 2019 due to adverse movements in risk parameters and deterioration of borrowers’ financial condition in connection with the COVID-19 pandemic.

Key profitability ratios and performance indicators for 2020 were as follows: ROE dropped by 1.3 pp to 1.4%, ROA receded by 0.2 pp. to 0.2%, and the C/I ratio on core activities grew by 1.5 pp to 35.6%, over 2019.

Solvency ratio remained at a high and stable level of 33.1%.

TABLE 2: Key financial parameters of BGK’s operations

In 2020, the Bank reported the balance sheet total of PLN 160,301.2 million, which grew year on year by PLN 59,697.0 million, or 59.3%.

The increase was mainly attributable to:

§  items related to liabilities to customers – up by PLN 56,436.4 million, or 94.3%, year on year,

§  increase in total equity by PLN 5,198.8 million, or 27.8%, year on year,

§  increases related to the development of lending activities – up by PLN 1,911.0 million, or 4.3%, year on year.

2.    The economy in 2020

2.1         Domestic economy

First recession after the transformation

In 2020, the COVID-19 pandemic and the associated restrictions battered the Polish economy. The GDP shrank by 2.7%, compared to a growth of 4.5% in 2019. Domestic demand was severely limited. Major declines were seen in the case of stocks and investments, with consumption suffering somewhat less. At the same time, public consumption grew. The extent of GDP drop was also limited by international trade. Exports rebounded to levels from before the pandemic in the second half of 2020, while imports fell on the back of reduced domestic demand. Strong exports were driven by the situation in the industrial sector, which recovered quickly after the collapse in the second quarter. In other key sectors (construction, trade and services) the decline in added value was more severe. Industries which were most badly hit by the coronavirus crisis were those related to tourism (hospitality, restaurant, recreation).

TABLE 3: Changes in macroeconomic indicators year on year in real terms

Labour market protected by fiscal stimulus

To minimise the adverse effect of public health restrictions on the economy, state business support programmes were launched, so-called Anti-Crisis Shields, focused on maintaining employment. Thanks to transfers from Anti-Crisis Shields, only a slight lasting reduction of employment was recorded. As at the end of 2020, the unemployment rate was low at 6.2%, although it increased from the end of 2019, when it stood at 5.2%. The fiscal stimulus increased the debt of government and self-government institutions (GG sector) to 61.9% at the end of 2020, from 45.7% at the end of 2019.

Monetary policy closely tied with fiscal policy

In reaction to the unprecedented collapse of economic activity in the first half of 2020, the Monetary Policy Council undertaken extraordinary monetary policy easing measures. Interest rates were reduced to record-low levels, including the reference rate to 0.1% from 1.5% and the reserve ratio to 0.5% from 3.5%. The NBP commenced the asset purchase programme as part of Structural Open Market Operations. Moreover, a bill discount facility programme was launched to support lending activity in Poland. The monetary policy easing affected the domestic debt markets and balanced the strong supply of debt resulting from anti-crisis measures. During the year, the yield curve of Treasury securities fell to record lows, which facilitated financing under Anti-Crisis Shields.

However, a side effect of monetary easing was the reduction of interest income, which in turn adversely affected the profitability of the Polish banking sector. ROE for the whole sector decreased from 6.6% in 2019 to 3.4% in 2020. Net profit amounted to PLN 7.5 billion, having decreased by PLN 6 billion over the previous year. It is worth noting that amid the collapse in GDP only a small increase was recorded in write-downs on outstanding loans, which in 2020 amounted to PLN 12.7 billion vs. PLN 9.6 billion in 2019. The limited rise in outstanding loans is largely attributable to the implementation of Anti-Crisis Shields.

2.2         Economy abroad

Global recession

In 2020, economic downturn affected all major global economies, which caused a drop in global GDP. The coronavirus crisis did more damage to economies with a high share of service sectors, in particular international tourism. The fallout from the COVID-19-related economic crisis was less felt by economies with a strong participation of industry. Although in the first half of 2020 this sector slumped, crippled by disruptions in the supply chain, in the second half of the year it recovered quickly. The above trends are seen in the eurozone, where differences between economic conditions in Germany and southern eurozone countries resurfaced. Higher exports of industrial products helped improve the performance of the Chinese economy and keep its GDP growth rate positive. In turn, in the USA, which has a flexible labour market, the coronavirus crisis brought about strong fluctuations in employment. However, their impact on consumption was reduced with hefty social transfer programmes.

Historical extremes in debt markets

The general fiscal policy easing resulted in a sharp rise in budget deficits and debt in all major economies. At the same time, key central banks, including the Federal Reserve Bank and the ECB took strong monetary policy easing measures. Apart from lowering interest rates to zero, and primary focus was placed on increasing the scale of asset purchase with concurrent broadening of the range of instruments purchased by central banks. These initiatives were strongly reflected in the situation on global debt markets, where yields of key benchmarks were often touching record lows. During the year, the spill-over effects of the global monetary easing wave became more and more apparent, mainly reflected in an increasingly visible imbalance in financial markets. Examples include major stock indices hitting record highs (not corresponding to global economic performance) and rapidly growing prices of exotic assets (e.g. cryptocurrencies).

3.     Changes in the regulatory environment

The operations of Bank Gospodarstwa Krajowego, whose mission is to support the state in the implementation of the social and economic growth policy, are subject to more Polish and EU regulations than the activities of other banking sector entities – the Banking Law, Recommendations of the PFSA, requirements of CRR and other regulations applicable to banks. In 2020, as a result of the pandemic many laws were passed to regulate activities related to fighting the COVID-19 pandemic and its social and economic consequences.

The most important amendments that affect BGK’s operations concerned the following laws and regulations:

§  The Public Procurement Act of 11 September 2019, which entered into force on 1 January 2021;

§  The Act of 27 November 2020 Amending the Act on Works or Services Concessions Contracts, the Public Procurement Act and Certain Other Acts, which entered into force on 1 January 2021 (items 1 and 2 were complied with for 2020 due to an open project aimed at adjusting BGK’s activities to new regulations);

§  Sustainable Finance Action Plan published by the European Banking Authority (“EBA”) on 6 December 2019, the European Green Deal;

§  The Act of 23 January 2020 Amending the Act on Supporting Thermal Efficiency Improvement and Repairs, which entered into force on 12 April 2020;

§  The Act of 2 March 2020 on Specific Solutions Related to the Prevention of and Combating COVID-19 and Other Infectious Diseases and Crises They Caused, which entered into force on 8 March 2020;

§  The Act of 31 March 2020 Amending the Act on Specific Solutions Related to the Prevention of and Combating COVID-19 and Other Infectious Diseases and Crises They Caused, and Certain Other Acts, which entered into force on 31 March 2020;

§  The Act of 3 April 2020 on Specific Solutions Supporting the Implementation of Operational Programmes in Connection with the Occurrence of COVID-19, which entered into force on 18 April 2020;

§  The Act of 16 April 2020 on Specific Support Instruments in Connection with the Spread of SARS-CoV-2 Virus, which entered into force on 18 April 2020;

§  The Act of 6 May 2020 Amending the Public Roads Act and Certain Other Acts, which entered into force on 1 July 2020;

§  The Act of 14 May 2020 Amending Certain Acts Introducing Protective Measures in Connection with the Spread of SARS-CoV-2 Virus, which entered into force on 16 May 2020;

§  The Act of 19 June 2020 on Subsidies to Interest on Bank Loans Granted to Entrepreneurs Affected by COVID-19 and on Simplified Proceedings for Approval of an Arrangement in Connection with the Occurrence of COVID-19, which entered into force on 24 June 2020;

§  Regulation of the Council of Ministers of 28 July 2020 amending the regulation on the conditions and procedure for repayable funding provided as part of the government residential construction support programme implemented by Bank Gospodarstwa Krajowego and on minimum requirements for apartments developed using such financing, which entered into force on 15 August 2020;

§  The Act of 7 October 2020 Amending Certain Acts to Combat the Socio-Economic Consequences of COVID-19, which entered into force on 9 October 2020;

§  The Act of 28 October 2020 Amending the Act on Supporting Thermal Efficiency Improvement and Repairs, and Certain Other Acts, which entered into force on 1 January 2021;

§  The Act of 19 November 2020 Amending the Act on Roads Managed by Local Governments, and Certain Other Acts, which entered into force on 31 December 2020;

§  The Act of 27 November 2020 Amending the Act on Specific Solutions Related to the Prevention of and Combating COVID-19 and Other Infectious Diseases and Crises They Caused, and Certain Other Acts, which entered into force on 5 December 2020;

§  The Act of 9 December 2020 Amending the Act on Specific Solutions Related to the Prevention of and Combating COVID-19 and Other Infectious Diseases and Crises They Caused, and Certain Other Acts, which entered into force on 16 December 2020;

§  The Act of 10 December 2020 Amending the Act on Specific Solutions Supporting the Implementation of Operational Programmes in Connection with the Occurrence of COVID-19 in 2020, and Certain Other Acts, which entered into force on 23 December 2020;

§  The Act of 10 December 2020 Amending Certain Acts Supporting the Housing Industry, which entered into force on 19 January 2021;

§  Regulation of the Minister of Development, Labour and Technology of 31 December 2020 amending the regulation on the adoption of the Articles of Association of Bank Gospodarstwa Krajowego, which entered into force on 3 February 2021.

Apart from the above, a number of other generally applicable laws that govern the Bank’s operations to a varying degree were enacted in 2020.

4.    Operations of Bank Gospodarstwa Krajowego and the BGK Group

4.1         Division of operations within Bank Gospodarstwa Krajowego Group

The operations of BGK Group are carried out by the Bank and a group of institutions with organisational links to the Bank. These include primarily financial institutions or auxiliary institutions with equity links to the Bank or linked to the Bank by the fact that it exercises supervision over them, as well as subsidiaries and associates which implement BGK’s mission. They supplement the Bank’s operations by carrying out growth-oriented investment activities based on equity financing and the best asset management practices.

The BGK Group’s operations include:

§  banking activity, in which a major role is played by lending and surety activities as well as maintenance of accounts and deposits,

§  commissioned activities related to supporting the State and managing government and EU programmes,

§  investment activities, carried out by the Group entities.

Bank Gospodarstwa Krajowego as a state development bank is the key institution supporting the State in the administration of social and economic government programmes intended to promote entrepreneurship as well as infrastructure and housing projects at the national, regional and local level. In addition to conducting banking activities, BGK actively cooperates with ministries competent for specific areas of Poland’s growth and Polish development institutions. The Bank carries out government tasks on the basis of acts and agreements with ministries, including through cash flow funds established, entrusted or transferred to the Bank for which, by virtue of law, BGK keeps separate accounting books and prepares separate financial statements.

The funds manage and administer cash flows which are not recognised in the Bank’s statement of financial position and the statement of profit or loss. Tasks falling within the remit of cash flow funds are implemented by:

§  National Road Fund

§  Railway Fund

§  Thermal Modernisation and Refurbishment Fund

§  Subsidy Fund

§  Student Loan Fund

§  Borrower Support Fund

§  National Guarantee Fund

§  Polish Science Fund

§  Inland Waterways Fund

and funds established under the laws enacted to counteract the effects of the COVID-19 pandemic:

§  COVID-19 Response Fund

§  Liquidity Guarantee Fund

§  Interest Subsidy Fund

§  Tourist Refund Fund

Through investment funds and cooperation with surety funds and KUKE S.A. BGK also supports the development of entrepreneurship by providing sureties and facilitates the export of Polish businesses.

4.2         Lending activity of BGK

The gross value of the Bank’s credit exposures in 2020 reached PLN 45,935.0 million. The year-on-year increase was PLN 1,911.0 million and was related mainly to the area of financing self-government institutions and municipal companies, healthcare entities, structured financing, as well as export and foreign expansion financing. The Bank engages in providing financing to bridge the gap in the banking sector by participating in syndicate loans.

The table below presents the portfolio of credit exposures by business line.

TABLE 4: Loans and bonds (municipal and commercial), gross (PLN million)

The Bank achieved the strongest growth in the area of financing local government institutions and municipal companies of PLN 1,451.0 million, i.e. 12.5% in relation to the previous year.

In the area of structured financing, BGK recorded a 1.0% rise in the portfolio value. In this category BGK classified primarily financing related to the implementation of investment and infrastructure projects.

In the area of social housing, despite the progress of the social rental housing programme (SRH), BGK recorded a decline caused by repayments in the portfolio of the former National Housing Fund, which resulted in a rapid drop in the balance of the debt.

Loan portfolio statistics

The table below presents BGK’s portfolio of loans and commercial and municipal bonds by sector. Below are also presented the changes in lending activity by sector.

TABLE 5: Value and structure of the portfolio of loans and bonds (municipal and commercial), gross (in PLN million)

In 2020, the most considerable growth was observed in the public sector.

TABLE 6: BGK’s share in the loan market

As at the end of 2020, BGK’s market share was higher than in the previous year and stood at 2.9%. The increase was mainly driven by the implementation of the Bank’s mission and strategy, counter-cyclical measures, in particular in times of uncertainty caused by the COVID-19 pandemic.

As at the end of 2020, exposures past due by more than 90 days went up by PLN 87.9 million, i.e. 34.1%, to PLN 345.7 million, and constituted less than 1.0% of the credit exposures portfolio.

As at the end of 2020, total debt subject to collection or restructuring was PLN 1,684 million (1,402 transactions), while recoveries in 2020 totalled PLN 101.6 million.

The Bank is not involved in any litigation where the unit amount of the claim represents at least 10% of its equity. The total value of claims also does not exceed that threshold.

TABLE 7: Amount and structure of receivables that were subject to enforcement (in PLN million)

Development and structure of lending activity within the framework of BGK’s mission

The Bank pursues its Strategy as part of priorities: knowledge-based economic growth and sustainable social and territorial development. The Bank focuses on supporting activities concerning:

§  reindustrialisation and promoting infrastructure investments,

§  foreign expansion and export of Polish enterprises,

§  financing local government projects,

§  promoting equal opportunities and housing.

Support for reindustrialisation and infrastructure investment financing

Within the framework of its lending activity, the Bank primarily finances investment and infrastructure projects. The Bank’s operations are focused on supporting strategic sectors of Polish economy. These operations are carried out mainly through structured transactions that enable large investments in the production, fuel and gas sectors, and through financing of new technologies. These investments are carried out primarily through the participation of BGK in consortia and by increasing the use of leverage in financing investments of strategic importance to Poland. This enables using the funds of the financial sector in addition to BGK’s own funds. The share of structured financing in the exposure portfolio was 32.1% as at the end of 2020, which represented a balance sheet exposure of PLN 14,363.6 million.

Equally important are working capital facilities or medium-value investment loans that do not require structured financing. These types of loans are granted through BGK’s regional network.

As regards funding of infrastructure projects, the Bank also carries out its statutory activities through the National Road Fund, the Railway Fund and investment funds.

Export and foreign expansion financing

One of the objectives of the state strategy is to internationalise Polish economy. A special emphasis has been placed on the development of business relationships with non-EU member states (including higher risk countries), in addition to more sophisticated forms of international cooperation.

BGK plays a crucial role in providing Polish companies with solutions enabling them to effectively compete on international markets. Year by year, the Bank has been increasing its exposure to export financing and foreign expansion instruments granted both under the “Finansowe Wspieranie Eksportu” (Financial Exports Support) Programme and as part of the Bank’s own activities. In 2020, BGK strengthened its commitment to supporting not only exports, but also foreign expansion, through financing projects implemented by Polish businesses on international markets. This was expressed, inter alia, by the number of countries in which BGK supported the transactions/projects of Polish enterprises (72 as at the end of 2020).

§  “Finansowe Wspieranie Eksportu” (Financial Exports Support) Programme

BGK supports Polish exports by advancing export credits under the Financial Exports Support Government Programme adopted by the Council of Ministers in 2009. BGK provides credit facilities to foreign buyers (directly or through the buyer’s bank) to finance the purchase of Polish goods or services. The funds are transferred directly to the bank accounts of Polish exporters, which eliminates the risk of default, as the Polish business receives the transfer directly from BGK.

The solution offered under the Programme is considered particularly attractive for higher risk markets (such as Belarus, Ukraine), where the instruments offered by commercial banks are limited and the borrowing costs charged by local banks are high.

Since the launch of the Financial Exports Support Programme until the end of 2020, BGK advanced loans for an aggregate of approximately PLN 4.7 billion. The amount disbursed was approximately PLN 3.9 billion, while the value of supported export contracts was about PLN 5.6 billion.

§  Own activities of BGK in the area of export and foreign expansion support

Since 2015, in connection with the growing interest in financing expressed by Polish businesses operating on international markets, BGK expanded its product offer to include loans dedicated for foreign investments of Polish enterprises. Such a financial instruments is complementary to the available export credit products and to products offered by other financial institutions. This significantly increased the amount of loans granted in subsequent years and, at the same time, allowed BGK to enter the markets of highly developed countries through various forms of financing. The expansion of the product offer also affected the geographical diversification of BGK’s portfolio and enabled Polish businesses to secure attractive forms of support in relation to exports and when planning expansion into foreign markets.

The amount of export and foreign expansion financing provided by BGK in 2020 (under the Financial Exports Support Government Programme and as part of own activities) totalled PLN 2.9 million. BGK executed 191 transactions related to foreign projects of Polish companies, including the financing of: sale of semi-trailers to Côte d’Ivoire, sale of mining machinery to Russia, sale of construction services to Belarus, or foreign expansion of Polish businesses in the USA, France and Chile.

The geographical scope of transactions/projects of Polish enterprises supported by BGK since 2014 is presented on the figure below.

Financing of projects undertaken by local governments and healthcare entities

The amount of credit exposures to local government units and municipal companies as at the end of 2020 was PLN 13,063.9 million and was PLN 1,451.0 million higher compared to the previous year.

The Bank also finances healthcare sector entities. As at the end of 2020, its credit exposure was PLN 1,588.1 million, having increased by PLN 338.9 million over the previous year.

BGK also finances local government projects by means of equity instruments and acting through the Group entities. This applies to the Dwelling for Development Sector Fund and the Local Government Investments Fund.

Promoting equal opportunities and housing

The area of promoting equal opportunities features a whole spectrum of the BGK Group instruments related to the development of housing and ensuring access to housing for young families and persons with relatively low income as well as instruments to promote social mobility and labour market balance through the development of the institutional rental housing sector.

Within the framework of its lending activity, the Bank implemented social rental housing government programmes and the balance of its credit exposures as at the end of 2020 was PLN 4,694.0 million. The amount comprises the value of exposure in the portfolio of the former National Housing Fund and amounts disbursed under loans granted as part of the new social rental housing programme. For a detailed description of the execution of government programmes see Section 4.14 of this report. These programmes financed the construction of more than 105 thousand housing units.

BGK also supports the housing industry both through government programmes administered by the Subsidy Fund (including those related to municipal housing) and through the investment activities of funds managed by PFR TFI S.A., for which PFR Nieruchomości S.A. acts as the manager.

4.3         Lending policy of BGK

The purpose of the lending policy is to create a framework for the implementation of BGK’s mission which consists in supporting social and economic growth of Poland and supporting the public finance sector in the performance of its tasks, and in particular to:

§  strengthen the role of BGK as a development bank and significantly increase its current involvement in financing undertakings under government economic development programmes, including through implementation of BGK’s business model based on the following eight programmes:

§  Industrial Development,

§  Infrastructure, Transport and Logistics,

§  Business Development (SMEs),

§  Strategic Security,

§  Health Protection,

§  Public Finance,

§  Social and Territorial Cohesion,

§  Housing.

§  maintain the high quality of assets (especially the loan portfolio) within a specific risk level.

BGK carried out a broad range of tasks specified in the Strategy and defined in the Bank’s mission, prioritising lending decisions based on evaluation criteria related to impact on the following five areas:

§  quality of life of the community and availability of services provided to the public,

§  economic development,

§  state of the environment,

§  improving the labour market,

§  state of public finance.

Lending decisions are made based not only on legal (Banking Law) and internal regulations, the economic viability of projects and their safety in terms of credit risk, but also on the project’s impact on Poland’s economic growth.

In response to the COVID-19 crisis, BGK implemented guidelines on: assessment of risk of exposure (IFRS 9), procedure to be followed in the lending process and monitoring of credit exposures during a crisis.

The guidelines covered the following areas:

§  making lending decisions regarding unfulfilled conditions,

§  monitoring of credit exposures and other processes,

§  submission of visit reports and reports of Individual Technical Advisors/Project Engineers,

§  assessment of exposure risk (IFRS 9) during a crisis,

§  guidelines of the PFSA on assessment of creditworthiness in terms of working capital facilities of BGK’s existing clients (i.e. clients which currently have any exposure under loan products at the Bank).

The guidelines were also a response to the measures presented by the Polish Financial Supervision Authority, which prepared a package of measures to further bolster the banking sector’s resilience and its capacity to finance the economy which was named the Supervisory Stimulus Package for Security and Development. The primary role of the measures is to maintain a balance between ensuring proper indicators of stability of the banking sector and maintaining and supporting economic activity, as well as to enable banks to provide rescue financing if an entity is subject to temporary risk of losing liquidity.

In connection with the second wave of the pandemic, the guidelines were extended and modified as described below.

The guidelines apply to:

§  the PFSA’s position on assessment of creditworthiness in terms of working capital facilities of BGK’s existing clients,

§  procedure to be followed in the lending process – requirement for clients to present a “Liquidity Plan”,

§  assessment of risk of exposure (IFRS 9).

The guidelines cease to apply in the following areas:

§  making lending decisions regarding unfulfilled conditions,

§  monitoring of credit exposures and other processes,

§  submission of visit reports and reports of Individual Technical Advisors/Project Engineers.

4.4         Deposit activities of BGK

In 2020, BGK saw a year-on-year increase in the balance of deposits, from PLN 59,821.3 million to PLN 116,257.7 million, i.e. by 94.3%. In terms of value, the most considerable increase of PLN 24,150.4 million (up 106.3% year on year) was recorded in the non-financial business segment. In 2020, the value of deposits made by central budget units went up by PLN 22,848.0 million, or 83.6%, year on year.

TABLE 8: Volume and customer structure of the deposit base (in PLN million)

As at the end of December 2020, the balance of public sector deposits was PLN 54,771.0 million, up by 75.4% year on year. The largest item in this group are funds deposited by the Ministry of Finance, which are subject to high volatility, especially at the end of the year.

BGK diversifies its market sources of funds to ensure the stable financing of assets.

Customer deposits constitute an important source of financing, given the growing level of BGK’s lending and investment activities, and ensure a safe level of liquidity.

The territorial structure of deposits by volume as at 31 December 2020 is presented on the map below.

4.5         Electronic banking

In response to clients’ needs, in 2020 BGK continued to develop the functions of the bgk24 system. As part of the “Development of bgk24” project, more than 20 functional extensions were launched. In addition, in line with the requirements of PSD2 and the Act on Payment Services to Clients, the Bank implemented the mechanism of strong customer authentication during logging to the bgk24 system.

In the process of optimisation and review of client documentation, the number of forms in bgk24 was reduced. Declarations of will regarding banking operations submitted by clients in the online banking system were popularised and their number increased, which greatly improved the processes of remote customer service during the COVID-19 pandemic.

Number of clients, users and transactions in the bgk24 online system

The number of bgk24 users grew by 8.2% compared to 2019. As at the end of 2020, there were 4,281 active users, who made over 13.9 million financial instructions throughout the year, up by more than 18% compared to 2019.

In the area of online access services, BGK prepared and announced a public procurement procedure held as open tender named: “Supply, deployment, maintenance and integration of Host2Host system for clients of Bank Gospodarstwa Krajowego.”

4.6         BGK’s activity on the money market and the debt securities market

The Bank’s activities on the money market were primarily designed to achieve the following two objectives:

§  management of the current liquidity position (investment of excess liquidity);

§  maintenance of a liquidity buffer in the longer term by holding short-term and/or highly liquid assets.

As in previous years, BGK continued to play an active role on the Polish money market, acting as the Money Market Dealer. In 2020, BGK was again ranked first in the ranking of dealer activities in the money and currency market prepared by the National Bank of Poland to promote banks that are the most active in the market, to which the NBP proposes to carry out the function of a Money Market Dealer.

Current liquidity needs of BGK were regulated on the interbank market with basic liquidity instruments, mainly deposits, FX swaps, purchases of sell-back securities and sales of buy-back securities. In 2020, BGK’s exposure to different types of financial instruments was the effect of the situation on the interbank market (including record-low interest rates in Poland) and the implementation of the adopted investment strategy.

The outbreak of the COVID-19 epidemic generally did not affect BGK’s activity on the money market and the debt securities market. The efforts in this area in 2020 focused on, inter alia, ensuring that clients and funds managed by BGK have unrestricted access to market liquidity and investment instruments, as well as on optimising the securities portfolio in response to the market situation.

As BGK allocated its liquid assets in the portfolio of Treasury debt securities on an ongoing basis, its value exceeded PLN 10.6 billion as at the end of 2020.

TABLE 9: Value and composition of the debt securities portfolio (in PLN million)

“Other securities” mostly comprise debt securities issued by banks. As at the end of 2020, the Bank’s exposure to those securities was PLN 1.5 billion.

As part of its activity on the money market and the market of debt securities, BGK cooperated with the Ministry of Finance, e.g. by investing excess liquidity of the State Treasury.

4.7         Share portfolio

As at 31 December 2020, BGK’s total exposure to shares measured at carrying amount was PLN 954.3 million, i.e. it was reduced by PLN 114.9 million (10.7%) compared to the figure as at the end of December 2019. As at the end of 2020, the Bank held shares in 29 companies (including six public companies, of which five were listed on the Warsaw Stock Exchange). The table below presents the largest items in the share portfolio.

TABLE 10: Composition of the share portfolio (in PLN million)