43.3. Quantitative data

Provision of 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.

The Court ruled unambiguously that a credit prepayment entitles the consumer to a reduction in all costs included in the total cost of credit. However, the judgment did not specify the method of calculation of such a reduction in respect of non-recurring costs, such as commissions and preparation fees.

The formula approved by the President of UOKiK and the Financial Ombudsman for the settlement of credit costs with borrowers is the so-called 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. However, due to the absence of legal regulations in this respect, the practice in such situations may vary.

In connection with the CJEU judgment, the PZU Group has estimated the effects of the legal risk resulting from early repayment of consumer loans made before the date of the CJEU judgment and recognized a provision which was charged to other operating expenses in the amount of PLN 272 million.

As at 31 December 2019, the value of the provision was PLN 254 million. 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 short observation period and 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.

For early repayments made after the CJEU judgment, the borrowing costs are refunded on an ongoing basis and charged to the net interest income. For the period from the date of the judgment, i.e. 11 September, to 31 December 2019, this was PLN 99 million.

In addition, the PZU Group has estimated the difference between the interest income recognized until the balance sheet date using the effective interest rate method, and the income which should be recognized taking into account early repayments of consumer loans that may be made in the future and the resulting refunds according to a linear formula, which has reduced the net investment income by PLN 60 million.

 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 CHF-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 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, one cannot talk about an established line of rulings in cases pertaining to Swiss franc mortgage loans, which is confirmed by frequently contradictory rulings of common courts and legal queries asked to CJEU and Supreme Court aimed at dispelling the courts’ doubts.

Considering the increasing numbers of statements of claim pertaining to CHF mortgage loans observed in the banking sector and the lack of consistency in the line of rulings pertaining to such loans, the PZU Group has estimated a provision for the legal risk associated with CHF mortgage loan agreements in the total amount of PLN 59 million, which was charged to other operating expenses in the amount of PLN 22 million (for exposures repaid as at the balance sheet date) and movement in allowances for expected credit losses and impairment losses in financial instruments in the amount of PLN 37 million (for exposures not repaid as at the balance sheet date).

The amount of the provision for pending disputable cases is determined on the basis of legal opinions pertaining to assessment of the CHF mortgage loan agreement templates and on a case-by-case assessment (for each statement of claim) of the risk of losing the given case in court, taking into account the nature of the claims and the possible financial effects.

In addition, as at 31 December 2019, the PZU Group estimated the portfolio provision for future possible statements of claim, whose value is based on an assessment of the legal risk. Calculating the provision amount, the PZU Group estimates the value of the portfolio for which future statements of claim may be filed challenging the loan agreement, the probability of losing future court cases, and the possible financial effects of losing court cases, taking into account the possibility of:

• 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 it with the average NBP exchange rate,
• dismissing the statement of claim.

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

Considering the inconsistent line of rulings pertaining to CHF mortgage loans and the short period for which historical data is available for court cases associated with such loans, the estimation of the provision required making expert assumptions by the PZU Group and entailed a significant uncertainty. The PZU Group will monitor the impact of the CJEU ruling on the directions of decisions made by Polish courts, the market practice and the behaviors of borrowers, and will update all assumptions made in the provisioning process.

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

The amount of PLN 57 million pertains to the penalty imposed on PZU in the proceedings of the President of the Office of Competition and Consumer Protection. Additional information on this matter is presented in section 50.2.

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 has not recognized the revenue on account of the refunded resources but recognized a provision.

Provision for restructuring expenses

The Pekao Management Board reported that on 4 April 2019, in accordance with the provisions of the Act on the Rules for Terminating Employment Relationships it adopted a resolution concerning the intention of conducting group layoffs and commencing the consultation procedure on group layoffs. 

In the period from 26 April 2019 to 31 October 2019, the Pekao Management Board intended to terminate employment contracts with a maximum of 900 employees and modify employment conditions to a maximum of 620 employees.

The total costs related to the termination of employment contracts and to the modification of the employment conditions of Pekao employees under group layoffs has been estimated at PLN 85 million and the restructuring provision in this amount has been established for this purpose. As at 31 December 2019, the value of the provision was PLN 19 million and pertained to disbursements to be made in 2020.

The remaining balance is made up of:

• PLN 10 million – pertaining to the restructuring process conducted in PZU and PZU Życie (PLN 10 million as at 31 December 2018);
• PLN 5 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 2018: PLN 10 million).