47.3 Quantitative data

Provision for potential refunds of borrowing costs

On 11 September 2019, the CJEU judgment in case C-383/18 was published. In its ruling, the CJEU stated that Article 16(1) of Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC should be interpreted as meaning that the consumer’s right to reduce the total cost of credit in the event of an early repayment includes all costs that have been imposed on the consumer.

Based on the legal interpretations in its possession, for the settlement of credit costs with borrowers the PZU Group applied the linear formula whereby a pro rata approach is adopted based on the period between the actual loan repayment date and the repayment date specified in the loan agreement and requires that any non-recurring cost be broken down on a pro rata basis across all payment periods.

In the case of early repayments of consumer and mortgage loans made before the date of the CJEU judgment, the PZU Group estimates the amount of expected disbursements pursuant to IAS 37 and recognizes a provision for this purpose which is charged to other operating expenses.

In 2020, PLN 270 million of the provision was utilized and its amount as at 31 December 2020 was PLN 128 million (PLN 254 million as at 31 December 2019). Its amount corresponds to the best possible estimate based on historical data on early repayments of consumer loans and on the observed historical number of received complaints regarding the pro rata refund of commissions, including in the period following the CJEU ruling, as well as taking into account the expectation of trends in the number of future complaints. The estimation of the provision has required adoption of a number of expert assumptions and entails a significant uncertainty following from, among others, the difficult to estimate volatility of the observed trends pertaining to the number and amounts of lodged complaints.

For this reason the provision amount will be subject to updates in the next periods, depending on the number of complaints and amounts to be refunded.

The PZU Group conducted a sensitivity analysis of the impact of changes in significant parameters of the provision on its amount.

Provision for legal risk pertaining to FX mortgage loans in Swiss francs

On 3 October 2019, CJEU issued a ruling regarding the effects of possible abusiveness of the provisions of an individual agreement on a CHF-indexed loan granted by one of the banks. CJEU interpreted the provisions of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts in the context of the Swiss franc-indexed loan agreement. CJEU specified the effects of declaring the possible abusiveness of the conversion clauses by the national court, without analyzing at all the possible abusiveness of the contractual provisions. CJEU did not rule that if the national court deems a clause abusive, then it should automatically declare the entire agreement invalid. An assessment in this respect is up to the national court, however CJEU did not rule out the possibility of supplementing the gap resulting from the abusiveness of the conversion clauses using national supplementary provisions.

The CJEU ruling provides general guidance for Polish ordinary courts. The ultimate resolutions made by Polish courts will be based on EU regulations interpreted in accordance with the CJEU judgment, taking into consideration the national laws and analysis of the individual circumstances of each case. At the same time, there is still no established line of rulings in cases involving mortgage loans in Swiss francs, an observation that is often corroborated by mutually exclusive judgments issued by ordinary courts and requests for a preliminary ruling sent by ordinary courts to the CJEU and the Supreme Court to resolve their legal doubts.

One should highlight the application submitted on 29 January 2021 by the First President of the Supreme Court to the full composition of the Supreme Court’s Civil Chamber regarding the question of resolution of the legal issues associated with CHF mortgage loans regarding, in particular, the following aspects:

• can abusive provisions regarding the method of determining the exchange rate of the currency in a indexed or denominated loan agreement be replaced by the provisions of civil or common law;
• if it is impossible to determine a binding exchange rate of a foreign currency in a denominated loan agreement, can the agreement bind the parties to the remaining extent;
• if it is impossible to determine a binding exchange rate of a foreign currency in a loan agreement, can the agreement bind the parties to the remaining extent;
• if a loan agreement is invalidated will the theory of balance or the theory of two condictions apply;
• what is the moment determining the start of the statute of limitations period if the bank makes a claim against the borrower for refund of the disbursed loan;
• is it possible for banks and borrowers to receive remuneration for the use of funds.

In the opinion of the PZU Group, the Supreme Court ruling expected to be handed down on 13 April 2021 in the above issues may have significant impact on the further line of court rulings in this respect. At the same time, discussions are waged in Poland regarding implementation of possible systemic solutions pertaining to FX mortgage loans in Swiss francs. In accordance with the proposal of the KNF Chairman of 8 December 2020, clients would have the possibility of converting their FX mortgage loan into a PLN loan (as if the borrower had, from the beginning, a PLN loan with interest based on WIBOR 3M with a margin adequate to historical levels (depending on when the loan was granted).

As at 31 December 2020, there were 592 individual course cases pending against the PZU Group pertaining to FX mortgage loans in Swiss francs which were granted in previous years with the total disputed amount of PLN 160 million (as at 31 December 2019 there were 195 cases pending with the value of PLN 59 million). The main cause of the litigation specified by plaintiffs pertains to challenging the provisions of the loan agreement as regards the application by the PZU Group of the exchange rates and results in claims to declare the loan agreements partially or fully invalid. As at 31 December 2020, the PZU Group received 36 unfavorable court judgments in cases filed by borrowers, including 3 final judgments declaring the loan agreement invalid, and 13  favorable court judgments, including 2 final judgments dismissing the claim for declaring the loan agreement invalid and a claim for payment in connection with invalidity of the loan agreement (as at 31 December 2019: 2 unfavorable court judgments – no final judgments declaring the loan agreement invalid and 4 favorable non-final judgments dismissing the claim for payment).

Considering the increase in the number of disputed cases in which the PZU Group is a party, and the increase in the number of statements of claim pertaining to CHF mortgage loans in the whole banking sector, as well as the strengthening unfavorable trend in the line of rulings, as at 31 December 2020, the PZU Group updated the estimation of the provision for legal risk associated with FX mortgage loans in Swiss franc in the total amount of PLN 436 million (PLN 59 million as at 31 December 2019).

The above amount comprises a provision for individual court cases in which the PZU Group is a party and a portfolio provision for the remaining FX mortgage loans in Swiss franc which are exposed to legal risk associated with the nature of these agreements.

For the needs of estimation of the provision, the PZU Group assesses the probability of the impact of the legal risk related to CHF mortgage loans on its future expected cash flows from its loan exposures and on the probability of cash outflows.

As regards existing court cases, the PZU Group assesses each time the probability of losing the case and the probability of a specific outcome (depending on what the statement of claim pertains to).

As at 31 December 2020, the PZU Group estimated the total amount of this provision at PLN 76 million (PLN 20 million as at 31 December 2019).

As regards the portfolio provision, as at 31 December 2020 the PZU Group based the calculations on 3 possible scenarios, to reflect best in the estimates of the portfolio provision the various possible solutions regarding CHF mortgage loans which are currently analyzed in the banking sector. In previous periods the PZU Group used one scenario.

The PZU Group decided to introduce the scenario method due to the significant changes observed in the banking market during 2020, especially regarding the significant increase in the disputed cases, still increasing complexity of the legal problems and the various sectoral solutions in the area of CHF mortgage loans being discussed.

The calculation of the provision carried out as at 31 December 2020 was based on the following equivalent scenarios:

• base scenario – assumes that approx. 6% of FX borrowers (with both active and repaid loans) have filed or will file over the next 3 years statements of claim challenging the loan agreement and estimates the probability of losing the court cases and the possible financial effects if the case is lost, adopting the following possible resolutions:
• invalidating the entire CHF mortgage loan agreement as a result of recognizing the indexation clause as abusive,
• recognizing the clauses contained in the loan agreement as abusive clauses resulting in determining the loan balance in PLN and leaving the loan interest rate based on the LIBOR rate (the so-called currency conversion of a CHF loan agreement),
• recognizing the indexation clause as abusive and replacing the Pekao exchange rate table in it with the average NBP exchange rate,
• dismissing the statement of claim.

The base scenario, as at 31 December 2020, takes into account the existing history of statements of claim, both against the Group and observed in the market, and uses the opinions of an external law firm to determine the probability of losing the disputed cases and the probability of possible solutions. As at 31 December 2020, the PZU Group estimates that the probability of losing a disputable case is in the range of 80% (up 10 p.p. relative to the assumptions in this respect as at 31 December 2019).

An additional element of the estimates in the base scenario is the distribution of the probability of the possible resolution of the disputable case which is associated with a specific level of loss. The biggest share in possible resolution scenarios – 70% (35% as at 31 December 2019) was assigned to invalidating the loan agreement.

• amicable settlement scenario – litigations regarding CHF loan agreements are possible, however clients will use them to a much lesser extent than in the base scenario, as most of them (approx. 75-80%) will take advantage of the option of a settlement with the bank, relying on the solutions discussed in the banking sector, in accordance with the proposal of the KNF Chairman. In the settlement scenario the financial effects are equal to the sum of the differences between the current balance of the CHF loan and the balance of the PLN mortgage loan based on the WIBOR rate plus the loan margin, granted at the same time and for the same term as the CHF loan and repaid by the borrower in accordance with the repayments made in the CHF loan. With the current market parameters and assuming that all borrowers for whom the conversion of the loan into PLN in accordance with the proposal of the Chairman of KNF would be favorable would enter into an appropriate agreement with the Bank, PZU Group’s loss on this account would amount to PLN 350-400 million.
• negative scenario – in the case of a negative (for the banks) resolution of the Supreme Court’s Civil Chamber in its full composition and in connection with this resolution, unfavorable line of rulings of common courts pertaining to CHF mortgage loans, the number of possible statements of claim will be in the future nearly 3 times higher than assumed in the base scenario, with simultaneous higher probability both with regard to unfavorable court judgments as to the principle (increase to 95%) and their resolutions in the form of declaring the entire CHF mortgage loan agreement invalid (95% of the resolutions).

Considering the short history of the data on the scale of the statements of claim (in particular on final verdicts), the significant complexity of the different legal aspects which may occur with regard to such loan agreements and the resulting undeveloped direction of possible court resolutions, the estimates regarding the above provision required that the PZU Group make a number of expert assumptions on the basis of its professional judgment.

New rulings and the expected resolution of the full composition of the Supreme Court’s Civil Chamber and the possible sectoral solutions which will appear in the Polish market for CHF mortgage loans may have impact on the amount of the provision established by the PZU Group and necessitate a change of individual assumptions adopted in the calculations, in particular for the weights of individual scenarios, probability of unfavorable solutions or the possible number of statements of claim. In connection with this uncertainty it is possible that the provision amount will change in the future.

The PZU Group carried out a sensitivity analysis for the major assumptions of provision calculations, where a change of the level of individual parameters would have the following impact on the provision amount for the legal risk of CHF mortgage loans.

The PZU Group considers that the legal risk impacts the expected cash flows from the credit exposure and the provision amount is the difference between the expected cash flows from the given exposure and the contractual cash flows within the meaning of IFRS 9.

In connection with the above, for the FX exposures of CHF mortgage loans outstanding as at 31 December 2020, it has been assumed that the provision amount (comprising the existing and possible future statements of claim) is recognized in “Impairment losses for loan receivables from clients” (in correspondence with the “Movement in allowances for expected credit losses and impairment losses on financial instruments” item up to the amount of the credit exposure. The PZU Group recognizes that with regard to the CHF loan portfolio there was a significant increase in credit risk from the date of initial recognition and classifies these loans into Basket 2.

In the case of part of the provision pertaining to repaid CHF mortgage loans (comprising existing and possible future statements of claim) or if the provision amount exceeds the net carrying amount of the credit exposure, the provision amount is recognized as “Provisions” (in correspondence with “Other operating expenses”).

In accordance with the above rules, as at 31 December 2020, the total provision amount of PLN 436 million was allocated in the following manner:

• PLN 345 million (PLN 37 million as at 31 December 2019) for current and future court cases pertaining to balance sheet exposures recognized as an element of the impairment losses for loan receivables from clients in correspondence with the “Movement in allowances for expected credit losses and impairment losses”,
• PLLN 91 million (PLN 22 million as at 31 December 2019) for existing and future disputable cases pertaining to repaid exposures recognized as provisions in correspondence with “Other operating expenses”.

A summary of the recognition of the provision for legal risk pertaining to CHF mortgage loans in the statement of financial position and profit and loss account is presented in the tables below.

Provisions for guarantees and sureties given

This item includes provisions recognized by banks for the potential loss of economic benefits resulting from off-balance sheet exposures (e.g. granted guarantees or credit exposures).

Provision for penalties imposed by the Office of Competition and Consumer Protection

Detailed information about the reversal of the provision in the amount of PLN 57 million related to the penalty imposed on PZU in the proceedings initiated by the President of the Office of Competition and Consumer Protection is presented in section 55.2.

The amount of 28 million pertains to a penalty returned by the Office of Competition and Consumer Protection to Pekao. Due to the potential risk of outflow of resources in connection with this case, the PZU Group maintains a provision to cover this risk.

The amount of PLN 11 million pertains to the penalty imposed by the President of the Office of Competition and Consumer Protection as a result of the decision in which he deemed that the clause used by Pekao in annexes to agreements on the rules for setting foreign exchange rates is an impermissible contractual clause. Pekao intends to submit an appeal to the court against the decision made by the President of UOKiK.

Provision for tax risk

PZU Finance AB (publ.), a PZU subsidiary, issued 5-year bonds in the period from 2014 to 2015, with the par value of EUR 850 million, which matured in July 2019. Proceeds from the issue were forwarded to PZU in the form of two loans for the total amount of EUR 850 million. Payments under the loans matched the payments under bonds in terms of the payment date and amount. PZU repaid loans to PZU Finance AB on 28 June 2019.

In 2018, in connection with concerns regarding taxation under the Swedish Conversion Act (2000:46) of the FX differences in the situation where Euro is a reporting currency, PZU Finance AB (publ.) applied for an individual tax ruling to the Swedish Tax Interpretation Board (Skatterättsnämnden). On 13 March 2019, PZU Finance AB (publ.) received a ruling under which the FX differences arising on repayment of the loan should be subject to taxation, while the FX differences arising on repayment of the bonds are not subject to taxation. In the PZU Group’s opinion, the Board’s interpretation would mean that a different approach is applied in Sweden to companies reporting in euros than to companies reporting in Swedish kronor, which would be inconsistent with the assumptions of Article 63 of the Treaty on the Functioning of the European Union (TFEU) on the need to ensure the free movement of capital in the European Union or Articles 49 and 54 TFEU on the freedom of establishment.

On 3 April 2019, PZU Finance AB (publ.) appealed against an individual tax ruling issued by the Swedish Tax Rulings Board to the Supreme Court of Administration (Högsta förvaltningsdomstolen). On 4 May 2020, the Supreme Administrative Court repealed the individual tax ruling in question and rejected the petition submitted by PZU Finance AB (publ), having found that sufficient grounds for the issue of an individual tax ruling had not been demonstrated and thus the ruling should not be issued.

At the same time, on 27 August 2020, PZU Finance AB (publ.) submitted a tax return as part of the disclosure procedure for 2019, according to which it presented the above situation and assumed in the calculation of the tax liability that the foreign exchange differences on account of repayment of the bond constitute tax-deductible expenses. On 22 December 2020, PZU Finance AB (publ.) received the tax decision from the tax office confirming that the tax was calculated correctly. The decision is not final. Consequently, PZU Group assesses the probability that the tax will have to be paid at less than 50%. As a consequence, the provision was reversed (as at 31 December 2019, it was posted as a liability of PLN 79 million) recognizing income (in other operating income) in the amount of PLN 89 million, recognizing at the same time a contingent liability.

Provision for restructuring costs

The Pekao Management Board reported that on 20 February 2020, in accordance with the provisions of the Act on the Rules for Terminating Employment Relationships, it adopted a resolution concerning the intention to effect group layoffs and commence the consultation procedure on group layoffs.

In the period from 13 March 2020 to 31 October 2020, the Pekao Management Board intended to terminate employment contracts with a maximum of 1,200 employees and modify employment conditions with a maximum of 1,350 employees, although Pekao could unilaterally decide to extend the process by at most 5 months.

The total costs related to the termination of employment contracts and the modification of the employment conditions for Pekao employees under group layoffs and the restructuring of the branch network were estimated at PLN 144 million, and the restructuring provision in this amount was established for this purpose. As at 31 December 2020, the value of the provision was PLN 81 million and pertained to disbursements to be made in 2021.

The remaining balance is made up of the following:

• PLN 9 million – pertaining to the restructuring process conducted in PZU and PZU Życie (PLN 10 million as at 31 December 2019);
• PLN 3 million – pertaining to the restructuring processes in Alior Bank, including the provision recognized in 2019 in connection with the acquisition of SKOK Jaworzno (as at 31 December 2019: PLN 5 million).