This report complies with International Financial Reporting Standards (IFRS) including International Accounting Stan-dard (IAS) 34 on Interim Financial Reporting. To the extent not regulated by the above standards financial figures are presented in compliance with the Act of Sept. 29, 1994 on accounting (Journal of Laws of 2002 No. 76. item 694 as amended) and the implementing regulations issued there under and also with the Council of Ministers’ Ordinance of Oct. 19, 2005 on current and periodic reports by issuers of securities (Journal of Laws of 2005 No. 209 item 1744).
This Q3 2008 mid-term report follows the same accounting policies and calculation methods as the latest annual finan-cial statements and as the Consolidated Report of the Bank BPH Group for the year 2007. Based on IFRS 7 and on interpretations of the application of the standard in respect of presenting revenues and expenses from financial assets and liabilities other than valued at fair value through profit or loss the Bank modified its presentation of the refinancing costs of CIRS and FX swap, as well as of trading securities, as of January 1, 2008. The refinancing costs are now reported under interest expense instead of under the net trading income. This change was intended to arrive at a uniform presentation under net interest income of interest revenues and expenses from all financial instruments other than those valued at fair value through profit or loss.
Further relevant details can be found in the Consolidated Report of the Bank BPH Group for the 1H 2008.
Since June 17, 2008, Bank BPH has belonged to an Ameri-can corporation General Electric, which via its subsidiary - GE Money Bank possesses 66% shares in Bank BPH.
Bank BPH SA is the parent company of Bank BPH Group. Its consolidated report until the spin-off i.e. November 29, 2007 included the following subsidiaries:
• BPH Bank Hipoteczny SA, Warsaw, in whose equity the Bank had a 99.96% interest;
• BPH PBK Leasing SA, Warsaw, of which the Bank held 80.1%;
• BPH Finance plc, a London based company, then owned in 99.998% by the Bank;
• BPH PBK Zarządzanie Funduszami Sp. z o.o., then wholly owned by the Bank.
Following the spin-off date the Bank’s Consolidated Report includes just one wholly owned subsidiary. BPH PBK
In Q3, the main indices of the Warsaw Stock Exchange had been sliding for the fifth quarter in a row. The persistence of the sub-prime mortgage crisis in the USA and Europe was affecting the sentiments on the world’s financial markets.
Between the first trading in July and the last trading day of September, WIG (Warszawski Indeks Giełdowy) lost 7.71%, whilst mWIG40 and sWIG80 lost 12.98% and 15.13%, re-spectively. During the same period, the banking sector’s WIG-Banki index gained 0.29%.
The main factor affecting stock market performance all around the world was the negative information from the North American and European financial sectors. The nationaliza-tion of Freddie Mac and Fannie Mae and the bankruptcy of Lehman Brothers, compounded by the US government’s injection of 85 billion dollars in AIG produced even more global risk aversion. Domestically, mass withdrawals from investment funds, including nearly 6.4 billion zlotys net in Q2 alone (more than 20% of the total net placements in the whole of 2007), again proved to be the crucial factor making the Warsaw indices not just follow, but also to exaggerate the declining trends on the global markets.
Between June and September, the Bank’s stock lost 1.36%
Throughout the period, our stock performed in strong correla-tion with the WIG-Banki and our stock yield beat all of: WIG, mWIG and sWIG indices by the respective figures of 6.4, 11.5 and 13.8 percentage points.
The quarterly stock trading volume was 770.5 thousand shares, or 38.8% less than in Q2. The average daily trading volume in the quarter stood at 11,854 shares.
1 Bank BPH SA has its shares listed on the main floor of the Warsaw Stock Exchange (WSE), in the continuous quoting system. At the end of Q3 2008 they belonged to WIG, mWIG40 and WIG-Banki indices. The Bank’s Global Deposi-tory Receipts (GDRs) are also listed on the London Stock Exchange.
Comments to the Consolidated Report of Bank BPH Group for Q3 2008 6 Performance of Bank BPH stock against the WIG mWIG-40, sWIG80
and WIG-Banki indexes on the WSE in Q3 2008 (standardized charts)
55 zł
4. Macroeconomic conditions and market situation in Q3 2008
In Q2, Polish GDP grew by 5.8% in real terms compared to Q2 2007, according to preliminary estimates published by the Main Statistical Office. The domestic demand remained the main GDP driver and, at 6.2%, continued to exceed the GDP rate. Household consumption contributed 3.4% to the GDP,
After a 3.7% y/y decrease in August, industrial sales rose by 7.0% y/y in September or by 3.5% y/y when a seasonality effect is taken into account. This fluctuation was caused mainly by the performance of manufacturing industry that grew by 7.7% y/y. The construction sector grew by 13.2%
y/y (or by 16.7% y/y after the seasonality adjustment).
The labor market continued to offer good conditions. In the enterprise sector the average job growth rate was 4.1% y/y in September.
In Q3, the inflation rate metrics showed slightly lower growth rates, including:
• 4.5% annual consumer price index growth rate, com-pared to 4.6% in June. This development resulted from price increases in a number of sectors: food industry by 5.1% y/y, apartments by 8.4% y/y, rent and bills by 10.1% y/y, transport by 2.6% and restaurants and hotels by 6.7%;
• In September, prices of industrial goods sold were 2.1%
y/y higher. These were a result of price increases in
manufacturing (7.7% y/y) and mining (5.7% y/y), partly offset by a reduction in the utilities by 2.3% y/y.
During the quarter, the Monetary Policy Council (RPP) made no change to the interest rates. The reference rate remained at 6.0%, rediscount rate at 6.25%, Lombard rate at 7.50%
and the deposit rate at 4.50% pa.
The M3 aggregate metric of money supply rose by 17.1% y/y in September compared to 16.8% y/y in August. A high growth rate of deposits (23.9% y/y) was accompanied by a continued outflow of cash from investment funds seen as more risky than the safer bank deposits. September also saw acceleration in the growth of corporate deposits by 6.7% y/y, while lending grew by 33.4% y/y in the household sector and by 24.4% y/y in the corporate sector. The faster growth of household borrowing was driven by the weakening zloty, which helped boost the zloty value of FX-denominated loans.
An additional factor that played in this direction in September was the expected tighter future lending policies.
Household and corporate debt growth (% y/y)
105
Household and corporate deposit growth (% y/y)
90
7 Comments to the Consolidated Report of Bank BPH Group for Q3 2008 GDP growth (same period of previous year = 100)
102,4 104,0 104,7 104,0 106,6 107,2 106,4 106,4 106,1 106,1 105,8
103,2102,4
1Q'03 2Q'03 3Q'03 4Q'03 1Q'04 2Q'04 3Q'04 4Q'04 1Q'05 2Q'05 3Q'05 4Q'05 1Q'06 2Q'06 3Q'06 4Q'06 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08
in %
GDP Investments Domestic demand
Exchange rates vis-à-vis reference rate and inflation
2,0
Jan-04 Mar-04 May-04 Jul-04 Oct-04 Dec-04 Feb-05 May-05 Jul-05 Sep-05 Dec-05 Feb-06 Apr-06 Jun-06 Sep-06 Nov-06 Jan-07 Apr-07 Jun-07 Aug-07 Nov-07 Jan-08 Mar-08 May-08 Aug-08 0
Reference rate (RA) Inflation - CPI (RA)
InflationReference rate
EUR/PLN USD/PLN Sep 08
5. Discontinued activity
In view of the Bank BPH spin-off described in detail in note 9 of the Statement, the profit and loss account is broken-down into the so called: discontinued operations (a portion trans-ferred to Bank Polska Kasa Opieki SA, Pekao) and continu-ing operations (remaincontinu-ing at Bank BPH). The discontinued operations cover the period from January 1, 2007 until the spin-off date i.e. November 29, 2007 inclusive and refers to 285 branches, Corporate Centers and part of the Head Office as well as the consolidated subsidiaries (BPH Bank Hipotec-zny SA – mortgage bank, BPH PBK Leasing SA, BPH Fi-nanse plc). To ensure comparability of the results a similar recognition of continuing and discontinued operations has been also adopted in the P&L account for the period of January 1 and September 30, 2007.
Income and expense with discontinued operation (PLN’000) Profit & Loss Account
Jan. 1, 2007 - September 30,
2007
Interest income 2 228 524
Interest expenses -801 273
Net interest income 1 427 251
Impairment charges -145 896
Net interest income incl. impairment charges 1 281 355
Fee and commission income 908 511
Fee and commission expenses -94 212
Net fee and commission income 814 299
Net trading income and revaluation 25 701
Net income from investments 173 993
General administrative expenses -841 513
Result on operating income and expenses 18 756
Result on operating activity 1 472 591
Result on other income and expenses -2 640
Gross profit from discontinued operations 1 469 951
Income tax expense -280 334
Net profit from discontinued operations 1 189 617
1. Attributable to minority interests 4 535
2. Attributable to equity holders of the Company 1 185 082
6. Bank BPH Group profit and loss account (continuing activit y)
6.1 Net interest income
Net interest income (PLN’000)
Change (1/2) Change (5/6)
Bank BPH Group generated the net interest income of 121.3 million zlotys in Q3 and was higher by 25.3% (or by 24,478 thousand zlotys) from a comparable period of 2007. The net interest income for three quarters of 2008 increased up to 354,393 thousand zlotys, or 23.5% y/y, which can be attrib-uted mainly to higher loan and deposit volumes.
The Bank’s net interest income for three quarters 2008 is higher than the consolidated figure because of a dividend of 27.8 million zlotys paid by the subsidiary BPH PBK Zar-ządzanie Funduszami. In the Bank’s financial statements this amount raised the net interest income, whilst in the consoli-dated statements it is included in the net mutual exclusions within the Group.
6.2 Impairment charges
In Q3, the balance of impairment charges was positive at 1.2 million zlotys, as impairment reductions more than fully offset impairment increases. This was achieved through large sums recovered from work-out. The cumulative figure after three
Comments to the Consolidated Report of Bank BPH Group for Q3 2008 8 quarters was, however, negative at 15.8 million zlotys, or
29.5% lower y/y.
Provisioning is set up under legal regulations binding in Poland and also in line with the Bank’s prudential credit risk policy.
6.3 Net fee and commission income
Breakdown of net fee and commission income (PLN’000)
Change (1/2) Change (5/6) income rose by 10.5% (or 9,021 thousand zlotys) and stood at 95,288 thousand zlotys, while for cumulative three quar-ters this year, the income was up by 2.8% (or 7,614 thou-sand zlotys).
The biggest contributors were fees on commission on do-mestic payments, which swelled by 57.2% y/y during nine months 2008 (or 36,556 thousand zlotys), primarily due to an increased number of bank accounts as well as volumes and amount of payment card transactions. Fees and commis-sions on foreign payments grew by 32% y/y (i.e. 2,819
thou-sand zlotys) while net transactional exchange rate position rose by 62% y/y (or 16,484 thousand zlotys).
Result on BPH TFI commission in Q3 2008 amounted to 15 million zlotys, and to 58.2 million zlotys during the whole nine-month period (drop of 66.8% and 47.7%, respectively), what had a negative impact on net fees and commissions of Bank BPH Group.
In Q3 2008, result on fees on commission covered 47.2% of Bank BPH Group operating costs (in the same period last year, the ratio was 63.6%).
6.4 Net trading income and revaluation
Net trading income and revaluation (PLN’000)
Change (1/2) Change (5/6)
The Bank modified its reporting of the net trading income and of the net interest income and interest costs. The cost of refinancing the trading portfolio (interest on IRS designated as hedges under the hedge accounting) allocated to the net trading income is now reported under ‘interest revenue and 65,035 zlotys, what means an increase in comparison to the similar periods of the previous year by 40.4% and 57.4%
respectively. It was caused by high jump in exchange gain (by 60.3% and 87.6% respectively).
6.5 General administrative expenses
Changes in general administrative expenses (PLN’000)
Change (1/2) Change (5/6)
*Costs are allocated in reference with transactions between the continuing and discontin-ued operations introduced as part of an internal cost allocation system. Details are pre-sented in note 9 Discontinued operation of Bank BPH Group Mid-year Financial Report.
9 Comments to the Consolidated Report of Bank BPH Group for Q3 2008
As compared to Q3 last year, general administrative and management expenses went up by 48.8% (or 66,278 thou-sand zlotys), reaching the amount of 202,001 thouthou-sand zlotys (during the first nine months of the year they stood at 599,876 thousand zlotys, up by 48.3%, or 195,330 thousand y/y). Excluding the item ‘Cost allocation’ amounting to 56.2 million zlotys in Q3 2007 and 130.5m zlotys during first nine months of 2007 (which related to settlements of mutual services rendered between two separated Bank BPH parts, one intended for integration with Pekao and the second one remaining in Bank BPH after the spin-off and lasted until the Bank’s spin-off), costs would increase by 5.2% and 12.1%.
Remuneration costs in Bank BPH Group grew by 43.4% in Q3 2008 against the same period of last year and by 31.9%
y/y during nine months of 2008. This resulted from the in-creased employment by 865 FTEs as compared with the end of 2007, what was connected with a dynamic business re-building, as well as the policy of key staff retention. Building maintenance and lease costs grew by 57.9% (Q3 2008 vs.
Q3 2007), i.a. in relation to opening of new branches and lease of Headquarters. Depreciation dropped by 26.1% and other costs decreased by 32%.
6.6 Asset impairment charges
During Q3, 2008, fixed assets impairment charges amounted to 5,866 thousand zlotys.
6.7 Other operating income and expenses
Other operating income and expenses (PLN’000)
Change (1/2) Change (5/6) growth by 76.7 million zlotys y/y). The dominating component of this item was revenue from services outsourced to Pekao, of which 33 million zlotys to Q1, 22.4 million zlotys to Q2 (no impact in Q3 as the services were finalized in May 2008).
These revenues in Q3 2007 were recognized as costs of mutual transactions between the continuing and discontinued operations and effectively reduced the ‘general and adminis-trative expenses’ under the ‘Cost allocation’ item.
Other operating revenues contain a positive net result of 19.4 million zlotys on the sale of the building located Marynarska Street in Warsaw, which took place in Q2 2008.
7. Bank BPH Group balance sheet
A major development in the balance sheet was reduction in other liabilities, due to concluded migration of accounts that were transferred to Pekao under the Bank’s spin-off process.
This resulted in significant reduction in the balance of ac-counts used for recording settlements with Pekao. Thus the ratio: other assets to other liabilities went back to neutral levels, in line with the Bank’s plans.
7.1 Assets
Although amounts due from customers grew by 1,777.3 million zlotys (28.8%) in Q3 2008, Bank BPH Group balance sheet decreased by 504.1 million zlotys (3.9%) as compared to end of 2007, reaching 12,515.5 million zlotys. Drop in the value of assets was mostly attributable to reduced item
‘Investment financial assets’ (which went down by 923.2 million zlotys, or 42.2%), which in turn followed a settlement of the Bank’s spin-off.
Changes to asset breakdown (PLN‘000)
Change (1/2) Change (1/5)
Cash and balances with
central bank 531 306 516 379 14 927 2.9 2 128 766 -1 597 460 -75.0
Trading assets 838 063 969 492 -131 429 -13.6 2 380 191 -1 542 128 -64.8
Hedging derivates 11 865 21 933 -10 068 -45.9 170 359 -158 494 -93.0
Amounts due from banks 1 016 098 1 604 243 -588 145 -36.7 3 195 362 -2 179 264 -68.2
Property and equipment 268 650 292 617 -23 967 -8.2 854 728 -586 078 -68.6
Intangibles 156 103 194 593 -38 490 -19.8 253 051 -96 948 -38.3
Assets and disposal
groups held for sale 18 011 0 18 011 100.0 6 776 11 235 165.8
Other assets 469 253 1 068 318 -599 065 -56.1 904 782 -435 529 -48.1
Total assets 12 515 469 13 019 578 -504 109 -3.9 61 324 909 -48 809 440 -79.6
7.2 Loans and advances
Despite the spin-off of Bank BPH the quality of its credit portfolio continued to improve. At the end of September impaired loans constituted 3.9% of the portfolio.
Bank BPH Group loan portfolio including discount loans reported in Note 9
“Cash and cash in central bank” (PLN‘000)
As at 30 Sep- tember 2008
% As at 30 June 2008
%
As at 31 Decem- ber 2007
% As at 30 Sep- tember 2007
%
Comments to the Consolidated Report of Bank BPH Group for Q3 2008 10 7.3 Liabilities
The main reason behind changes in assets funding sources was drop in inter-bank deposits (by 2,970 million zlotys, or 92% against the end of 2007 which was related the settle-ment of Bank’s spoff. Amounts due to customers in-creased by 43.7% compared to the end of 2007, mainly due to rising deposits of individuals and businesses.
Changes to assets financing sources (PLN’000)
Change (1/2) Change (1/5)
Provisions 290 869 240 878 49 991 20.8 584 796 -293 927 -50.3
Trading financial
liabilities 718 923 868 826 -149 903 -17.3 1 294 006 -575 083 -44.4
Hedging derivates 10 799 9 328 1 471 15.8 70 400 -59 601 -84.7
Other liabilities 524 348 640 134 -115 786 -18.1 1 197 020 -672 672 -56.2
Minority interests 77 771 61 224 16 547 27.0 133 899 -56 128 -41.9
Equity 1 623 914 1 500 504 123 410 8.2 6 845 726 -5 221 812 -76.3
Total liabilities 12 515 469 13 019 578 -504 109 -3.9 61 324 909 -48 809 440 -79.6
7.4 Deferred income tax provisions and assets The balance of assets and provisions under deferred income tax is reported in the balance sheet. The change observed from the previous quarter is proportional to the time lapse.
Timing differences are differences between taxable profit and gross accounting profit that originate in one period and re-verse in subsequent periods.
Balance of deferred income tax reserve and assets (PLN‘000)
8. Business segmentation
The Bank’s business is segmented strictly along its organiza-tional lines. The Bank is organized and managed under strategic customer segments, including Retail Banking and Corporate Banking with profit centre competences, and the International Markets’ segment. The latter is mainly respon-sible for the development and sales of treasury and invest-ment products and for capital market and custodian services, but also for the management of interest rate, currency and liquidity risks, as well as for the segment of Financial Institu-tions.
Selected items of the Income Statement and the Balance Sheet by business segments over Q3 2008 (PLN‘000)
Business segments Consolidated income
statement
Retail Corporate INM*
Other (not under either the Corporate or the Retail Segment. The segment performance of the INM does not include the performance of the INM’s Sales and Capital Markets.
9. Important actions of Bank BPH Group and list of key developments
Bank BPH Group as at September 30, 2008
Since the spin-off, Bank BPH Group includes two entities:
BPH PBK Zarządzanie Funduszami Sp. z o.o. (direct sub-sidiary) and BPH TFI SA (indirect subsidiary, held via BPH PBK Zarządzanie Funduszami Sp. z o.o.). The remaining shares in BPH TFI SA belong to General Electric Capital Corporation based in Stamford, USA. GE Capital Corporation purchased BPH TFI shares on June 18, 2007.
Selected financial data of Bank BPH Group companies (company data based on preliminary financial statements PLN’000)
Company Registered
Sharehold-ers’ equity Assets
Dominant entity
11 Comments to the Consolidated Report of Bank BPH Group for Q3 2008
Considering the unfavorable condition on international and domestic financial markets our investment fund management company, BPH TFI, continued its efforts to retain the existing asset volume. A variety of new closed-ended funds are awaiting roll-out.
At the end of the period, BPH TFI managed 11 investment funds, including one open-ended fund (BPH FIO Parasolowy) with 10 individual sub-funds. The deepening global financial crisis and the high volatility of the financial markets drove investors to reduce new placements and increase redemp-tions. As a result, BPH TFI lost 3.6 billion zlotys in assets under administration, but retained its 4.2% market share.
10. Important details on the Bank’s human resources, assets and financial standing and its financial performance
10.1 Intended integration of Bank BPH SA and GE Money Bank SA
Bank BPH and GE Money Bank belong to the same capital group of General Electric Company. By merging Bank BPH with GE Money Bank General Electric Company will consoli-date its banking activity in Poland. On September 23, 2008, the Management Boards of Bank BPH SA and GE Money Bank SA signed and the Supervisory Boards of both banks accepted the Merger Plan of Bank BPH and GE Money Bank. It is assumed that the merger of Bank BPH and GE Money Bank will take place under Art. 124 §1 and §3 of the Banking Law, in connection with Art. 492 §1 section 1 of the Companies Commercial Code (CCC), by transferring all of Money Bank’s shareholders will become direct shareholders in Bank BPH. Taking into consideration that GE Money Bank is currently a 66% shareholder of Bank BPH, the merger shall cause two significant effects, all occurring on the day of the merger:
• according to Art. 494 §1 of the CCC, on the day of the merger, Bank BPH will become the legal successor of all rights and obligations of GE Money Bank. As a result, Bank BPH shall become the owner of the treasury shares (Treasury Shares) together with other assets of GE Money Bank and immediately thereafter, Bank BPH shall allocate the Treasury Shares to GE Money Bank’s share-holders, (one) GE Money Bank share, the shareholders of GE Money Bank will receive 0.825 of Bank BPH share. For 81,080,688
• according to Art. 494 §1 of the CCC, on the day of the merger, Bank BPH will become the legal successor of all rights and obligations of GE Money Bank. As a result, Bank BPH shall become the owner of the treasury shares (Treasury Shares) together with other assets of GE Money Bank and immediately thereafter, Bank BPH shall allocate the Treasury Shares to GE Money Bank’s share-holders, (one) GE Money Bank share, the shareholders of GE Money Bank will receive 0.825 of Bank BPH share. For 81,080,688