2.3 Changes in the scope of consolidation and structure of the PZU Group

The acquisition of Idea Bank did not entail any payment from Pekao. As a result of the Transaction the PZU Group acquired Idea Bank’s assets and liabilities whose total estimate fair value was negative. Pekao did not acquire all assets of Idea Bank. In particular, it did not acquire any shares in Idea Bank’s subsidiaries or associates.

Considering the foregoing, on 8 January 2021 Pekao received from BFG support in the form of a subsidy of PLN 193 million to cover the difference between the value of the acquired liabilities and the value of the acquired property rights of Idea Bank.

As an inseparable element of the Transaction, Pekao also received from BFG a guarantee to cover the losses resulting from the risk associated with property rights or liabilities of the entity in restructuring referred to in Article 112 sec. 3 item 1 of the BFG Act (“Loss Cover Guarantee”) which includes a guarantee to cover losses resulting from credit risk associated with credit assets (“CRM Guarantee”) and a guarantee to cover losses (other than losses resulting from credit risk) associated with the Acquired Business (“Other Risk Guarantee”).

The acquisition of credit assets in the Acquired Business and could result in an increase in the amount of risk-weighted exposures (it is calculated by multiplying the exposure amounts and the risk weight following from the provisions of CRR). An increase in such risk-weighted exposure amounts could impact Pekao’s capital requirements.

In connection with the foregoing, the CRM Guarantee is used by Pekao as “recognized unfunded credit protection” within the meaning of CRR. As regards to credit risk, this made it possible to assign to the acquired exposures a risk weight appropriate for the entity providing the protection – BFG, classified as a public sector entity in accordance with the KNF opinion referred to in Article 116(4) of CRR. As a consequence of obtaining the opinion referred to in Article 116(4) of CRR and after the CRM Guarantee satisfies the remaining premises for the “recognized unfunded credit protection”, the exposures covered by the Loss Cover Guarantee are treated as exposures to central government, resulting in a significant reduction of the capital requirement on account of credit risk on the part of Pekao.

Purchase price allocation

Pekao performed a purchase price allocation for the Transaction by applying the principles set forth in IFRS 3 Business combinations as at the date of obtaining control (i.e. 3 January 2021) on the basis of the data as at 31 December 2020.

List of Idea Bank’s assets and liabilities as at 31 December 2020 by carrying amount and recognized fair value:

As a result of the foregoing, the PZU Group recognized the goodwill created through the merger in the amount of PLN 1 million, calculated as the difference between the net amount of identifiable acquired assets and assumed liabilities (PLN -194 million) and the amount of the subsidy from the Bank Guarantee Fund (PLN 193 million). Goodwill will not be tax deductible.

The determination of the fair value of the acquired assets and liabilities and the identification and recognition of the acquired intangible assets was carried out based on the available information and best estimates as at the date of preparation of the consolidated financial statements. The distinct assets and liabilities were measured at fair value based on their carrying amounts as at 31 December 2020 obtained by the PZU Group from the Bank Guarantee Fund 3 January 2021.

Cash and cash equivalents, receivables

The balance of these items has been adjusted to reflect all economic events pertaining to 31 December 2020 which, for operational reasons, were not included in the trial balance obtained by the PZU Group on 3 January 2021.

Moreover, in the area of receivables from banks, a loan was measured at fair value (using the fair value methodology similar to that presented in respect of loan receivables from clients).

Loan receivables from clients

Loan receivables from clients have been measured at fair value in accordance with the requirements of IFRS 3 and IFRS 13.

As regards outstanding loans, including acquired receivables, investment loans and operating loans, their fair value has been estimated using the income method in which future expected principal and interest flows from the portfolio are discounted, with prepayments taken into account.

Furthermore, the PZU Group has decided that the CRM guarantee obtained from the Bank Guarantee Fund should be treated as an integral part of the acquired loan portfolio covered by the guarantee, meaning that the measurement of loan receivables from clients at fair value reflects the effect of the guarantee by limiting the expected credit losses (due to applying reduced risk weights to the cost of capital mark-up).

Future cash flows calculated in this manner have been discounted with a rate taking into account the following components: the risk-free rate estimated in accordance with the IRS contract quotations based on WIBOR 1M, the cost of equity mark-up and a component representing the calibration margin.

After the CRM guarantee is recognized as unfunded protection, reduced risk weights for the cost of capital mark-up have been applied in the valuation of the loan portfolio.

Investment securities

The fair value adjustment of investment securities is a consequence of revaluation of the following items:

• value of corporate bonds, using the same rules as those described for loan receivables from clients, and

• value of shares of a financial entity, estimated using the discounted dividend model.

Intangible assets

The fair value adjustment of intangible assets is predominantly a consequence of adopting the perspective of an average market participant for the measurement and taking into account the entity’s plans for the continuation and further use of the intangible assets in question.

No grounds have arisen from the conducted analyses for the recognition of relationships with clients holding core deposit intangibles (CDIs) or relationships on credit products, chiefly due to the absence of a significant difference between the average level of interest on the acquired accounts and the opportunity cost of funding for the PZU Group as well as the banking sector’s significant excess liquidity. In respect of credit products, no significant relationships have been identified due to the low level of net interest income and commission income in relation to the corresponding significant costs of risk and administrative expenses.

Property, plant and equipment

The fair value adjustment of property, plant and equipment is predominantly a consequence of the perspective of an average market participant adopted for measurement. As regards lease agreements, the shutdown of the acquired facilities has been assumed. This approach is based on an analysis of the market, assessment of how attractive the locations of the branches are and a comparison of the pricing terms with the currently executed contracts of a similar size in similar locations.

Receivables

The fair value adjustment of receivables is chiefly a consequence of the revaluation of significant receivables from corporate clients based on the same approach as that applied to the measurement of credit exposures.

Liabilities to clients under deposits

In respect of current accounts, the assumption has been made that due to their nature (including the possibility of the withdrawal funds on demand, their renewability providing an opportunity to amend the contractual terms upon renewal, and the absence of maturity), their fair value does not differ from the carrying amount.

The fair value adjustment of term deposits and structured deposits has been estimated by discounting future values of term deposits and structured deposits, consisting of the repayments of nominal values and interest accrued until the date of repayment.

Provisions

The fair value adjustment of provisions is predominantly a consequence of the impairment loss on the restructuring provision.

Other liabilities

The fair value adjustment of other liabilities is a consequence of the revaluated provision for future liabilities. The value of liabilities has been estimated based on the expected future cash outflows and taking into account the discount factors resulting from the current market conditions.

On 31 May 2021, Bonus-Diagnosta sp. z o.o. acquired for PLN 4 million a 100% stake in NZOZ Grupa Medical sp. z o.o., which has been subject to consolidation since that date. On 2 November 2021, the merger of Bonus-Diagnosta sp. z o.o. (acquiring company) with NZOZ Grupa Medical sp. z o.o. (acquired company) was registered, as a result of which NZOZ Grupa Medical sp. z o.o. ceased to exist under its business name.

On 7 January 2021 the PZU Group sold all its shares in PayPo sp. z o.o. (on 10 February 2021 the sale was registered in the National Court Register) The transaction has not affected the PZU Group’s consolidated statements to any significant extent.