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ANNUAL REPORT 2004

Our Shared Responsibilities

Citigroup’s goal is to be the most res-

pected global financial services company.

As a great institution with a unique and

proud history, we play an important role in

the global economy. Each member of the

Citigroup family has three Shared

Responsibilities:

We have a responsibility to OUR CLIENTS

We must put our clients first, provide superior advice,

products and services, and always act with the highest

level of integrity.

We have a responsibility to EACH OTHER

We must provide outstanding people the best oppor-

tunity to realize their potential. We must treat our

teammates with respect, champion our remarkable

diversity, share the responsibility for our successes,

and accept accountability for our failures.

We have a responsibility to OUR FRANCHISE

We must put Citigroup’s long-term interests ahead of

each unit’s short-term gains and provide superior

results for our shareholders. We must respect the

local culture and take an active role in the commu-

nities where we work and live. We must honor those

who came before us and extend our legacy for those

who will come after us.

Table of Contents

211

Letter of the President of the Management Board

of Bank Handlowy w Warszawie SA

211

The net profit of Bank Handlowy in 2004 amounted to

414 million zloty, which is an increase of 125 million zloty, or

43.6% over the same period in the previous year. We

attained very good revenues from interest and commission.

The increase in the net interest income of 150 million zloty

was achieved as a result of effective management of the

profit margin that took into account the rapidly developing

retail banking lending activities, an increase in deposits from

corporate customers and a larger debt instruments portfolio.

The increase in the net fee and commission income of 68

million zloty was achieved through commissions on

brokerage services, insurance products and fees for issuing

and using credit cards.

Thanks to an overall improvement in the macroeconomic

situation and stronger credit risk management, the quality of

the loan portfolio improved.

After a period of weak economic growth in many

sectors of the Polish economy the year 2004 should be

considered as a turning point. In the period preceding

Poland's accession to the EU, the rate of economic growth

increased to a level unseen since the middle of the nineteen-

nineties.

In 2004 the bank conducted its operations based on

its new and more effective coverage model.

One of the consequences of introducing this new customer

coverage model was an expansion of the products and

services offered to large and medium-sized companies.

The group of large corporations was covered by fully

personalised customer service.

Ladies and Gentlemen,

The year 2004 was a successful year

for the bank. We achieved our best

financial result since the merger of

Bank Handlowy with Citibank (Poland) SA, and managed to

confirm our leading position in many areas of commercial,

investment and retail banking.

The bank further strengthened its position as leader in

servicing international corporations and Poland's largest

companies. We are pleased to note that customers

appreciate the modern and extensive range of products and

services offered by us in transactional banking. The

economic growth, which facilitates the development of our

customers’ businesses, motivates us to introduce new

solutions in almost every quarter of the year.

In 2004 the UniKasa Utility Bill Payment Network (Sieæ

Obs³ugi P³atnoœci - SOP) underwent rapid growth. The high

level of interest in the UniKasa platform among Citigroup

entities gave rise to the first implementation of this system

outside Poland. A few of the first UniKasa bill payment points

were opened in Romania.

The bank strengthened its leading position among

participants on the FX, money and interest rate markets in

Poland. In 2004 the bank's FX market share increased to

23%. The bank also maintained its leading position on the

corporate bonds market with an almost 20% market share. It

is worth recalling that for many years the bank has remained

at the very top of companies operating on the primary

market for debt securities issued by companies and financial

institutions.

The year 2004 was also a successful year for the

Consumer Banking Sector: we retained our leading position

on the credit card market, noting a 14% increase in card

issues as compared to the end of 2003. The total number of

credit cards issued by our bank in 2004 exceeded 520,000.

We are the leading bank serving the most demanding

customers. Our CitiGold Wealth Management range of

products and services, introduced 2 years ago, continues to

hold the highest position on the market.

CitiFinancial, which offers cash loans to individual customers,

is doing very well, too. New branch offices are systematically

being opened throughout Poland. In 2004 the number of

outlets increased by 23, reaching a total number of 39 at the

end of 2004.

In 2004 the bank continued to promote its Citibank Online

(CBOL) internet platform.

The number of customers accessing their accounts over the

Internet amounted to 230,000, which constitutes a 56%

increase as compared to the end of 2003. This means that

over 65% of account holders at the bank access our banking

services via the Internet.

A positive accent ending last year was the European Quality

Award awarded to the bank. We are the first financial

institution on the Polish market to have received this title.

There are now new challenges ahead of us. The

macroeconomic environment helped us: Poland's economic

growth after its accession to the European Union - the

increase in GDP, stimulation of Polish exports, decreasing

unemployment and stable inflation have already given

results. Turnover on the Warsaw Stock Exchange, the second

largest in Europe in 2004 in terms of IPOs after the London

stock exchange, was a further signal that the chances for

growth by our customers in all segments, both retail and

corporate, are huge.

Our most important objective is to systematically increase

value for shareholders by ensuring a suitable return on

equity, and increasing the bank's share in key market

segments.

We intend to retain the bank's leading position in

corporate banking and in services for affluent individuals.

Areas of activities with great growth potential will be rapidly

developed, i.e. servicing large and mediumsized domestic

enterprises, servicing small business (the CitiBusiness

product offer) and cash loans for individual customers

(CitiFinancial). We are also counting on further growth in the

credit card segment.

In 2004 we worked intensively on our branch network

restructuring, designed to optimise operating costs and

facilitate access for our retail and corporate customers.

From a total number of 140 branch offices, 54 are corporate

branches and 86 are retail branches (11 of them are intended

to serve CitiGold Wealth Management customers).

In 2004 we took a decision to increase the functionality of

branches. Thanks to this a significant number of branches

hitherto servicing either corporate or retail customers only,

can now serve customers from both sectors.

Last year we completed the process of unifying the

bank's visual image. Currently both the retail and corporate

distribution networks operate under a common logo:

Our achievements were noted and appreciated by

prestigious financial institutions and the media. In 2004 we

were named the Best Employer among financial institutions

in the Newsweek Polska and Business Centre Club ranking.

The monthly magazine Global Finance considered us the Best

Bank on the FX Market in Poland, and the Best Bank in

Emerging Markets. Citibank Handlowy analysts were

recognized by Gazeta Bankowa for issuing the most accurate

macroeconomic forecasts. Our Brokerage House received an

award from the President of the Stock Exchange for taking

first place in the equity market turnover and for the largest

number of companies introduced into the stock market.

One of the bank's priorities for the next few years is the

development of its Regional Processing Centre in Olsztyn,

which provides clearing services for the bank and foreign

banks belonging to Citigroup in Central Europe.

Apart from concrete market shares, we are also interested in

ensuring that our environment perceives us as a model

corporation in Poland, with a high level of social

responsibility - a corporation with the highest moral and

ethical standards.

We will continue our mission to be a company that is

responsible to society by supporting cultural, educational

and charity work - both on a national scale, as well as at

community level - in particular through the Leopold

Kronenberg Foundation.

We are optimistically looking at our new challenges for 2005,

and we are well prepared to face them.

In inviting you to read our Report, I would like to thank our

customers and shareholders for the confidence placed in us,

the supervisory board for supporting the activities of the

bank's management board, and employees for their

commitment and professionalism.

S³awomir Sikora

President

of the Management

Board

The Polish economy in 2004

211

According to the estimates published by the Central Statistical

Office, the annual GDP growth in 2004 amounted to 5.4%. Such

significant growth was due to a very high GDP dynamic in the first

half of the year (6.5% year on year) followed by a weaker

performance in the second half. Consequently, GDP growth re-

mained at around 4.4% year on year, as the effects of Poland’s

entry into EU wore off.

On the demand side, the main growth factor was net exports (as per

national accounts) whereas the rate of increase of domestic

demand was slower than the GDP growth rate, and reached 4.9%

year on year throughout 2004. Gross investment increased sharply

by 14.1% year on year, however, fixed asset investment increased

by only 5.1% year on year. This, in turn, indicates that investment

growth was mainly caused by a rise in inventories. On the supply

side, the manufacturing sector was the main driver of economic

growth. Total industrial output grew by 13.1% year on year, and it is

worth noting that in the second half of the year this growth was

slower compared to the first half and amounted to 8.5% year on

year (17.7% year on year in the period from January to June).

Despite noticeable economic recovery, the situation in the labor

market improved very slowly. The registered unemployment rate

decreased only marginally on the previous year, down to 19.1% at

year end 2004 from 20% in the corresponding period of 2003,

when adjusted. Over the year, the number of jobless dropped by

276,100 and amounted to 2.99 million at the end of December. The

weakness of the falling trend in unemployment is partially

accounted for by strong growth in industrial productivity and by

likely employment growth in the grey economy.

Main macroeconomic trends

In 2004, the pace of economic growth significantly accelerated, in

particular in the run up to Poland’s accession to the EU. As exports

remained the main stimulator of economic growth, the current

account deficit improved markedly as a proportion of GDP. Despite

the favorable economic conditions, the situation in the labor market

saw only slight improvement and, in addition, a negative conse-

quence of EU accession was a significant increase in the inflation

rate.

In the first eleven months of 2004, the current account deficit

shrank significantly amounting to EUR 2.73 billion in comparison to

EUR 3.34 billion in the corresponding period of 2003 (preliminary

data of the National Bank of Poland). In relation to GDP, the eleven-

month rolling deficit dropped to around 1.8% in comparison with

the previous year’s 2.2% and remained at a safe level. This was

mainly caused by the improvement in the trade balance, a fall in the

deficit on commodity trade, and the deficit on services moved into

surplus. Such improvement was possible due to the very high rate

of increase of exports, fuelled by zloty depreciation in the pre-

accession period. Following Poland’s entry into the EU, export

growth was further stimulated by the removal of tariff barriers

between EU countries. Consequently, in the first eleven months of

2004 exports grew by 21.5% year on year and their growth was

superior to that of imports (19.5% year on year).

In 2004, the inflation growth rate accelerated sharply, with the

most significant increase reported in 2Q. This was due to factors

associated with Poland’s accession to the EU (such as price

increases due to increases in indirect tax rates and higher demand

by other EU countries for Polish food products) and strong increase

in raw materials prices, especially crude oil. Consequently, the

prices of consumption goods and services increased by 3.0%,

exceeding significantly the upper limit of NBP inflation target for

2004.

Strong growth was also reported in the prices of industrial output

which peaked in May and grew as much as 9.6% year on year.

Thereafter, their level decreased to reach 5.2% year on year at the

end of 2004. The primary reason for production price increases

was the price shock in mining and quarrying and – during the pre-

accession period – higher domestic demand, which allowed

manufacturers to widen margins earned on offered products.

The money supply, measured by the M3 aggregate, increased from

the beginning of the year by 9%, which continues to represent

a moderate increase in real terms (by 4.6% year on year). When

compared against the high pace of economic activity, this level

seems safe. Slow deposit growth in the first half of the year

gathered momentum in the second half. In 2004, total deposits

increased by 9.5% year on year against 5.6% year on year in 2003,

primarily reflecting deposit growth in social security funds (75.9%

over the year) and, to a lesser degree, that of local government

deposits (28.8%), deposits of non-monetary financial institutions

(27.4%) and corporate deposits (25.0%). Over the same period,

loans grew 4.0% year on year. Growth was reported in loans

granted to households (16.0%) and non-monetary financial

institutions (7.8%). Meanwhile, loans extended to non-commercial

institutions servicing households fell (by 6.4% year on year) and so

did loans to enterprises (5.3%).

The State Budget remained under control throughout 2004. The

budget deficit amounted to PLN 41.5 billion, representing 91.6% of

the full year 2004 budget deficit plan. The execution of the budget

was, therefore, significantly better than in prior years. The lower

deficit in the budget resulted from the higher than planned income,

in particular from indirect taxes and CIT. In addition, the increased

rate of economic growth accelerated inflows in comparison with the

previous year. At the same time budgeted expenditure was lower

than planned, mainly due to lower costs of debt service.

Despite positive economic trends, the Polish FX market was

dominated by the downward trend of the Zloty exchange rate in the

pre-accession period. The Zloty depreciated both in nominal and

real terms and the trend sustained later on. For eight months in

a row, the Zloty recorded the best performance among all the

currencies quoted in the world (appreciating some 25% against the

USD and 15% against Euro). This was due to a number of factors,

among which the key ones included political stability, attractive

interest rate differential, improving economic fundamentals, and

Poland’s accession to the European Union.

Capital market

In 2004, the situation on the Warsaw Stock Exchange (WSE) was

very favorable. The main stock exchange index, WIG, climbed from

20,820 points at year end 2003 to 26,636 points at year end 2004

(by 27.9%). The WIG20, an index of the most liquid stock

companies, grew 24.6%.

For the initial four months of 2004, the market followed an upward

trend. However, falling stock indices on the US exchanges in April

2004 triggered a price reduction on the WSE. Nevertheless,

in August 2004 came another wave of share price increases, which

took the WIG main stock exchange index to new record highs.

Money markets and FX markets

In 2004, the Monetary Policy Committee (“MPC”) raised interest

rates on three occasions, with the combined annual increase

amounting to 125 basis points. The upward trend of market rates

was reinforced by the factor, triggered by the Ministry of Finance,

of increasing Treasury yields, which affected the banking system’s

liquidity. Fearing that the State Budget may lose its liquidity after

Poland’s accession to EU, the Ministry expanded its liquidity

reserves. In consequence, liquidity was drained from the banking

system.

Towards the end of the year, the situation eased slightly. Influenced

by strong appreciation of the Polish currency and decreasing

inflationary pressure, the market began slowly to discount interest

rate cuts in 2005.

The first half of the year in the market for Treasury securities was

marked by substantial price volatility, dominated by downside

movements. The weakness of the Polish bond market was due to

a series of unfavorable events – an abrupt rise in inflation connect-

ed with Poland’s accession to EU, sales in international debt

securities markets and growing political risk originally caused by

discussions held over the Hausner plan and later associated with

the resignation of the government led by Prime Minister Miller

followed by the appointment of Marek Belka. In midyear, the trend

in the bond market reversed. Appreciating debt securities in base

markets, improving condition of the State Budget (higher inflows

attributable to economic recovery) and, most importantly, EU

accession combined with clear prospects for Poland’s euro zone

membership drew demand from foreign and then Polish investors.

At this point, it is also worth mentioning the specific mechanism

(akin to a ) which developed in the market –

appreciating debt securities attracted foreign investors and thus

strengthened the Polish currency. This, in turn, led to further

growth in bond prices.

erpetuum mobile

perpetum mobile

The successful initial public offering of PKO BP shares and the

flotation of a number of smaller companies were important events

in 2004. At year end 2003, the number of stock-listed companies

stood at 203. By the end of 2004, it had increased to 230. New

foreign companies debuted in the stock market. During 2004, their

number grew from 1 to 5. Total market capitalization noticeably

improved owing to the IPOs of newly-listed companies. At the end

of 2004, the market value of domestic companies reached PLN 214

billion (a 53.1% increase up from PLN 140 billion). Meanwhile, total

capitalization (inclusive of foreign companies) increased from PLN

167.7 billion to PLN 291.7 billion.

Index

Stock market indices as of 31 December

WIG

WIG-PL

WIG20

MIDWIG

TECHWIG

WIRR

NFI

Sector sub-indices

Banking

Construction

Foodstuffs

Telecommunications

26,636.2

26,540.1

1,960.6

1,730.1

666.3

4,738.6

98.0

35,454.4

19,014.6

12,996.5

23,761.6

10,242.9

14,366.7

n/a

1,175.6

950.2

356.1

1,365.6

59.8

24,091.0

10,876.4

9,394.7

12,668.4

6,068.3

27.9

27.4

24.6

36.3

16.5

72.9

66.9

35.2

28.1

(3.3)

25.1

32.7

20,820.1

20,825.0

1,574.0

1,269.3

571.9

2,740.7

58.7

26,221.8

14,847.5

13,446.1

19,000.4

7,718.5

44.9

n/a

33.9

33.6

60.6

100.7

(1.8)

8.8

36.5

43.1

50.0

27.2

20032004 2002Change (%)

Change (%)

Source: WSE, Dom Maklerski Banku Handlowego SA

Increased index levels were positively correlated with the activity of

investors in the equity market. Turnover on the equity market

increased 65% from PLN 66.4 billion to PLN 109.8 billion,

continuing the upward trend initiated in 2003.

The turnover value in the bond market remained virtually

unchanged and amounted to PLN 7.82 billion in comparison to PLN

7.84 billion in 2003.

Index growth and the continuing bullish equity market had a ne-

gative impact on the volume of futures contracts.

In 2004, investors’ activity in the futures market was 15% lower

than in 2003, the record year for this market. The number of

concluded futures transactions fell from 8.5 million down to 7.2

million.

Meanwhile, the number of option transactions increased almost

fourfold. This attests to dynamically growing interest in new

instruments. In 2004 option transaction turnover volume amounted

to 157,000, whereas in the prior year the number of transactions

stood at 41,300.

Despite substantial turnover growth in the equity market and

improved economic conditions in the brokerage business, the

number of WSE brokers fell from 21 to 20. This did not contribute to

further turnover concentration. The share of the top five brokers in

equity turnover dropped in 2004 to 62.0% down from 64.2% in

2003.

Equity (PLN million)

Bonds (PLN million)

Futures (volume)

Options (volume)

Number of brokers

109,775

7,820

7,218,250

157,504

47,729

3,986

6,349,530

65.2

(0.3)

(14.7)

281.4

66,443

7,840

8,461,206

41,294

39.2

96.7

33.3

n/a

2003 2001Change (%) Change (%)

Source: WSE, Dom Maklerski Banku Handlowego S.A.

Change (%)2004 2002

(21.2)

(21.7)

(15.1)

n/a

60,548

5,093

7,481,058

Equity and bond turnover, and derivative transaction volumes on WSE as of December 31

Banking sector

The banking sector’s net financial result for the year 2004

amounted to PLN 7.29 billion and was higher by 190% than in 2003.

Such a positive result of the banking industry reflects improved

economic conditions and, only to a small extent, is attributable to

one-off transactions of assets sales.

The sector’s profitability was primarily determined by improved

results on banking activity, reduced allowances to provisions and

growing participation in profits generated by subordinated entities

accounted for using the equity method. In 2004, the sector’s result

on banking activity grew by over PLN 2 billion in comparison with

2003, the net charges to provisions and revaluation were almost

PLN 2 billion lower than in 2003, whereas the participation in

profits generated by subordinated entities accounted for using the

equity method grew by over PLN 1 billion.

The sector’s result on banking activity in 2004 increased in relation

to the previous year by more than PLN 2.3 billion. This was

attributable to increases in net interest income, fees and

commissions and a slight increase in the result on financial

operations. On the other hand, income on shareholdings, other

securities and other financial instruments with variable income, and

the result on foreign exchange operations dropped in respect of

2003. In 2004, the banks’ interest expense increased in comparison

with 2003 as a result of interest rate increase. This growth,

however, was smaller than growth in interest income, which had

a positive impact on the banks’ net interest income.

In 2004, the growth of loans to individual customers was stable and

amounted to around 17% year on year. Nevertheless, the downward

trend of individual customers’ deposits continued (a 3% fall year on

year). This was mainly due to low attractiveness of bank placements

caused by low interest and tax on interest introduced in late 2001.

The portfolio of loans offered to economic entities decreased by

4%. Meanwhile, the situation in the market for corporate deposits

improved significantly and was reflected in a 24% increase.

Selected balance sheet data

and financial results of Bank

211

Financial results of the Bank in 2004

The net profit of the Bank in 2004 was PLN 414.2 million and was by

PLN 125.7 million, i.e. 43.6 % higher than in the corresponding

period of the previous year. The following were among the main

factors which contributed to the increase in the net profit of the

Bank:

• Reduction in net write-downs for specific provisions and

revaluation of financial assets, which amounted to a net charge of

PLN 8.8 million in comparison with a net charge of PLN 187.7

million in the corresponding period of the previous year (reducing

by 95.3%);

Profit and loss account

• Decrease in the charge for corporate income tax by PLN 66.6

million (35.0%) which amounted to PLN 123.7 million at the end of

2004;

• Increase in participation in net profits generated by subordinated

entities accounted for using the equity method up to PLN 61.9

million, i.e. by PLN 33.5 million (118.3%).

There were also factors that had a negative impact on net profit

due to:

• Decrease in profit on banking activity by PLN 30.9 million (1.6%),

• Increase in the Bank’s general expenses of PLN 144.5 million

(12.9%).

Summarized financial data of Bank Handlowy w Warszawie SA

in PLN million

Balance sheet total

Equity*

Loans**

Deposits**

Profit on banking activity

Net profit

Earnings per share or convertible bond (in PLN)

Dividend per share or convertible bond (in PLN) ***

Dividend payout ratio ****

Capital adequacy ratio

17,744.4

2,557.8

9,292.7

7,084.0

1,191.8

301.5

3.24

1.00

30.84%

13.7%

34,028.2

5,658.4

13,256.0

18,504.4

1,949.3

288.5

2.21

1.85

99.67%

16.0%

21,002.5

3,034.8

10,054.1

10,166.3

1,555.3

204.7

1.57

1.00

63.83%

15.6%

33,150.4

5,742.1

14,200.0

17,370.1

2,074.5

163.6

1.25

99.81%

21.2%

32,412.0

5,267.6

13,540.4

16,699.3

2,089.3

235.3

1.80

1.85

99.60%

18.5%

* Excluding net profit for the current period

** Non-financial and public sectors

*** Dividend per share of 2004 regards the proposed payment of a dividend from appropriation of 2004 profits and previous years’ profits

**** Calculation of dividend payout ratio of 2004 includes only dividend from appropriation of 2004 profits and net profit for the same period

20031998 2004

19,159.9

2,758.4

10,208.8

8,733.9

1,330.9

472.5

5.08

2.00

39.37%

14.5%

33,819.9

5,738.6

9,708.6

17,261.2

1,918.4

414.2

3.17

11.97

99.99%

19.3%

1999

2000 2001 2002

in PLN thousand

Profit and loss account

Interest income

Interest expense

Net interest income

Net fee and commission income

Income on shares, other securities and other financial instruments with variable income

Gains on financial operations

Foreign exchange profit

Profit on banking activity

Other operating income

Other operating expenses

General expenses

Depreciation and amortization

Goodwill amortization

Net charges to provisions and revaluation

Operating profit

Extraordinary items

Profit before taxation

Corporate income tax

Participation in net profit/(loss) of subordinated entities accounted for under the equity method

Net profit

266,860

(116,418)

150,442

68,313

(48,224)

(80,410)

(121,009)

(30,888)

12,236

(3,450)

(144,539)

13,266

—

178,947

25,572

—

25,572

66,616

33,533

125,721

1,653,161

(753,892)

899,269

590,464

16,526

51,765

360,352

1,918,376

90,101

(44,764)

(1,264,318)

(142,179)

(72,445)

(8,761)

476,010

—

476,010

(123,668)

61,872

414,214

1,386,301

(637,474)

748,827

522,151

64,750

132,175

481,361

1,949,264

77,865

(41,314)

(1,119,779)

(155,445)

(72,445)

(187,708)

450,438

—

450,438

(190,284)

28,339

288,493

Change Change (%)

19.3%

18.3%

20.1%

13.1%

(74.5%)

(60.8%)

(25.1%)

(1.6%)

15.7%

8.4%

12.9%

(8.5%)

—

95.3%

5.7%

—

5.7%

(35.0%)

118.3%

43.6%

2004 2003

In 2004, the Bank continued to pursue restructuring activities with

the aim to improve efficiency and increase profitability by lowering

the costs of operation. The most significant event during this period

related to further employment reduction. The changes in the

structure of employment followed the reorganization of individual

areas and the introduction of new technological and organizational

solutions. However, as a result of activities undertaken to adjust the

status and structure of employment to changes in strategies and

methods of operation of the Bank a significant number of employees

designated for reduction were redeployed to the fast growing

Consumer Sector of the Bank. As a consequence of this decision,

total severance cost amounted to PLN 33.0 million in 2004.

Expenses

Profit on banking activity

In 2004, the Bank reported a decrease in the profit on banking

activity by PLN 30.9 million, i.e. 1.6%. The following factors

contributed:

• increase in net interest income by PLN 150.4 million (i.e. 20.1%),

mainly as a result of higher interest income on debt securities due

to a marked increase in the portfolio of these securities;

• increase in net commission income by PLN 68.3 million (i.e.

13.1%), mainly due to commissions on insurance products, cash

management commissions, and payments for issuance and use of

payment and credit cards;

• decrease in gains on financial operations by PLN 80.4 million,

mainly due to lower gains on operations involving securities,

primarily shares and minority interests;

• decrease in net profit on foreign exchange by PLN 121.0 million,

mainly as a result of losses on foreign exchange differences

(revaluation).

in PLN thousand

Expenses

Salaries

Social security and other benefits

Total personnel expenses

Administrative expenses

Taxes and fees

Contributions and payments to the Bank Guarantee Fund

Restructuring charge – personnel costs

Total general expenses

Depreciation

Total expenses

20,139

8,673

28,812

85,622

466

(3,409)

33,048

144,539

(13,266)

131,273

468,899

91,580

560,479

654,585

8,526

7,680

33,048

1,264,318

142,179

1,406,497

448,760

82,907

531,667

568,963

8,060

11,089

—

1,119,779

155,445

1,275,224

Change Change (%)

4.5%

10.5%

5.4%

15.0%

5.8%

(30.7%)

—

12.9%

(8.5%)

10.3%

2004 2003

Important factors which also affected the level of salaries were

agreements concerning the participation of the Bank’s employees in

incentive plans of Citigroup Inc. A provision of PLN 8.5 million was

created in 2004 for the respective future payments.

Other important factors affecting the level of expenses included:

• the opening of 23 new CitiFinancial branches (a fast growing sector

of the Consumer Bank) in 2004,

• the signing, in April 2004, of agreements with Citibank N.A. for the

provision of a number of administrative support services relating

to current Bank activity, which include consultation and advice in

the areas of management, finance, accounting, auditing etc., as

well as the maintenance of IT systems to service operational

activity. Information relating to the above mentioned agreements

is presented in the Additional Explanatory Notes.

In 2004, net write-downs on provisions and revaluation of financial

assets decreased by PLN 178.9 million (i.e. 95.2%) in comparison

with 2003. As a result of the review of the Bank’s loan portfolio

conducted in 2004 and the increase in specific provisions, the Bank

decided to reduce the general provision by PLN 136 million. The

remaining amount of the general provision is PLN 164 million and is

considered adequate to cover the credit risk relating to the

consumer portfolio and the credit exposure from the “watch”

category.

in PLN thousand Change Change (%)2004 2003

Net charges to provisions and revaluation

Specific provisions

- financial institutions

- non-financial sector

- subordinated loans

- other

- off-balance sheet contingent liabilities

Provision for general risk

Revaluation of financial assets

Total net charges to provisions and net revaluation

19,404

(38,736)

(195,470)

137,664

8,968

106,978

136,000

23,543

178,947

(148,946)

(10,712)

(318,628)

68,703

6,024

105,667

136,000

4,185

(8,761)

(168,350)

28,024

(123,158)

(68,961)

(2,944)

(1,311)

—

(19,358)

(187,708)

11.5%

(138.2%)

(158.7%)

199.6%

304.6%

8,160.0%

—

121.6%

95.3%

Provisions and revaluation of financial assets

The share of problem loans in the gross loan portfolio from non-

banking institutions amounted to 26.9% as of 31 December 2004 as

compared to 29.8% at year-end 2003. The significant share of

problem loans was mainly due to the decrease in the nominal value

of the total loans portfolio. However as of 31 December 2004, loans

classified as irregular decreased by 30.9% in comparison with the

same period of the previous year, in particular a significant

decrease by 66.5% was noted in loans classified in the “doubtful”

category.

In 2004, the Bank released specific provisions of PLN 68.7 million

on receivables from subordinated loans funding the operations of

special purpose investment vehicles Handlowy Investments S.A. and

Handlowy Investments S.a.r.l. following the current assessment of

the possibility of repayment of the above mentioned loans.

Accounting for subordinated entities

In 2004, the net profit of the Bank was increased by PLN 61.9

million from the valuation of significant shareholdings in

subordinated undertakings valued using the equity method. This

amount was disclosed in the profit and loss account in the item

“Participation in net profits (losses) of subordinated entities

accounted for using equity method” and comprised of valuations

of the following entities: Handlowy Inwestycje Sp. z o.o., Handlowy

Inwestycje II Sp. z o.o., Dom Maklerski Banku Handlowego SA,

Handlowy-Leasing S.A., Citileasing Sp. z o.o., Handlowy Zarz¹dzanie

Aktywami S.A., Towarzystwo Funduszy Inwestycyjnych BH SA,

Handlowy Investments S.A., Handlowy Inwestments II S.a.r.l., Bank

Rozwoju Cukrownictwa S.A., Polskie Pracownicze Towarzystwo

Emerytalne DIAMENT S.A., Handlowy-Heller S.A., KP Konsorcjum

Sp. z o.o. The largest part of this amount was the effect of valuation

of net assets of Citileasing Sp. z o.o. totaling PLN 25.8 million

and that of Dom Maklerski Banku Handlowego SA totaling PLN

18.5 million.

Ratio analysis

In general, changes in ratios of return on equity (ROE) and return

on assets reflected changes in net profit. The Bank currently has

a significant amount of excess capital which contributes to a re-

latively high capital adequacy ratio and, at the same time, explains

a relatively low ROE.

As of 31 December 2004, the Bank’s balance sheet total amounted

to PLN 33,819.9 million and was lower by 0.6% than a year before.

Balance Sheet

Return on owners’ equity (ROE)*

Return on assets (ROA)**

Net interest margin (NIM)***

Earnings per 1 share or convertible

bond (EPS), in PLN

Cost/Income****

6.9%

1.2%

2.6%

3.17

71.6%

4.8%

0.9%

2.3%

2.21

64.2%

* Net profit divided by average equity and retained earnings (including current period’s net profit)

calculated on a monthly basis; annualized ratio

** Net profit divided by average assets calculated on a monthly basis; annualized ratio

*** Net interest income divided by average assets calculated on a monthly basis; annualized ratio

**** Relation of the sum of total operating expenses, depreciation and other operating expenses

(excluding goodwill amortization) to the sum of the profit on banking activity and other

operating income (excluding goodwill amortization)

Profitability and cost efficiency ratios

2004 2003in PLN thousand

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Balance Sheet

Cash, operations with the Central Bank

Due from the financial sector*

Due from the non-financial sector

Due from the public sector

Receivables subject to securities sale and repurchase agreements

Debt securities*

Equity investments*

Other financial assets

Intangible assets

- including: goodwill

Tangible fixed assets

Other assets

TOTAL ASSETS

(345,400)

(296,506)

(3,545,829)

(1,593)

4,608

3,460,765

54,266

480,228

(57,879)

(72,445)

(52,435)

91,491

(208,284)

841,114

8,418,278

9,707,041

1,538

293,209

7,303,033

513,987

4,105,123

1,237,133

1,171,200

711,710

687,766

33,819,932

1,186,514

8,714,784

13,252,870

3,131

288,601

3,842,268

459,721

3,624,895

1,295,012

1,243,645

764,145

596,275

34,028,216

(29.1%)

(3.4%)

(26.8%)

(50.9%)

1.6%

90.1%

11.8%

13.2%

(4.5%)

(5.8%)

(6.9%)

15.3%

(0.6%)

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

(40,427)

478,512

(1,309,604)

66,372

(62,244)

543,095

140,771

(230,614)

80,134

125,721

(208,284)

718

4,304,594

16,729,658

531,517

408,559

4,194,290

1,281,094

216,717

5,738,571

414,214

33,819,932

41,145

3,826,082

18,039,262

465,145

470,803

3,651,195

1,140,323

447,331

5,658,437

288,493

34,028,216

(98.3%)

12.5%

(7.3%)

14.3%

(13.2%)

14.9%

12.3%

(51.6%)

1.4%

43.6%

(0.6%)

Due to the Central Bank

Due to the financial sector

Due to the non-financial sector

Due to the public sector

Liabilities in respect of securities subject to sale and repurchase agreements

Other liabilities arising from financial instruments

Other liabilities

Provisions

Equity and retained earnings

Net profit

TOTAL LIABILITIES

* Subordinated loans funding investment vehicles and convertible bonds issued by Handlowy Investments – as of 31 December 2003 have been reclassified and are presented as equity investments.

Assets

Despite a substantial decline in the loan portfolio as a result of the

prudent lending policy pursued by the Bank, receivables due from

the non-financial sector remain the largest component of the

Bank’s assets. As of 31 December 2004, net credit exposure to non-

financial entities amounted to PLN 9,707.0 million, which

represented a reduction of exposure by 26.8% in comparison with

the corresponding period of the previous year.

In the twelve months of 2004, the Bank’s structure of assets

changed. Debt securities portfolio increased in the period by PLN

3,460.8 million (90.1%), mainly due to the growth in the portfolio of

treasury bonds and bills. The significant growth of the bond

portfolio was driven by the placement of liquid funds arising from

the reduction in the loans portfolio.

100%

24.9%

2.5%

28.7%

0.9%

21.6%

1.5%

19.9%

50%

Cash, operations with the Central Bank

Share of main assets in the balance sheet total of the Bank

3.5%

25.5%

39.0%

0.8%

11.3%

1.4%

18.5%

Due from the financial sector

Due from the non-financial sector and public sector

Receivables subject to securities sale

and repurchase agreements

Debt Securities

Equity investments

Other assets

100%

50%

31/12/2004 31/12/2003

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Treasury bonds

NBP bonds

Treasury bills

Certificates of deposit and bonds issued by banks

Issued by other financial institutions

Issued by non-financial sector

TOTAL

3,622,978

(597)

157,664

44,100

(298)

(363,082)

3,460,765

6,263,335

384,287

303,770

160,727

—

190,914

7 303 033

2 640,357

384,884

146,106

116,627

298

553,996

3,842,268

137.2%

(0.2%)

107.9%

37.8%

—

(65.5%)

90.1%

Debt securities portfolio

sheet valuation of these instruments is presented in “Other

financial assets” on the asset side and “Other liabilities arising from

financial instruments” on the liabilities side of the balance sheet.

The Bank pursues a strategy of reducing its equity investments. In

2004 the Bank sold its entire share in IPC JV Sp. z o.o. as well as

part of its holding of shares in Pia Piasecki S.A. and Elektromonta¿

Poznañ S.A.. As a result of the valuation of strategic subsidiaries,

mainly Dom Maklerski Banku Handlowego SA, Citileasing Sp. z o.o,

Towarzystwo Funduszy Inwestycyjnych Banku Handlowego SA, the

value of equity investments portfolio increased by PLN 54.3 million

(11.8%). Detailed information on the above mentioned transactions

is presented in Additional Notes to Financial Statement.

Liabilities and equity

There were no significant changes in the structure of liabilities and

equity of the Bank in 2004, which to a large extent resulted from

the stability of the deposit base.

The main source of financing the Bank’s assets continued to be

from liabilities due to the non-financial sector. In comparison with

the end of 2003, this item fell by PLN 1,309.6 million (i.e. 7.3%),

inter alia due to the decrease in foreign currency liabilities resulting

from Polish zloty appreciation.

Liabilities due to banks, which represent the majority of liabilities

due to the financial sector, increased in the period from PLN 1,792.9

million to PLN 1,859.6 million, i.e. by PLN 66.7 million (3.7%).

An important item on both sides of the Bank’s balance sheet is the

significant share of unrealized profits/losses on derivative

operations which reflects the scale of off-balance sheet

purchase/sale operations carried out by the Bank. The balance

100%

51.0%

12.7%

1.2%

16.9%

18.2%

50%

Due to the Central Bank and the financial sector

Share of main liabilities items in the balance sheet total of the Bank

11.4%

54.3%

1.4%

15.4%

17.5%

Due to the non-financial sector and the public sector

Liabilities in respect of securities subject to sale

and repurchase agreements

Other liabilities

Equity and earnings

100%

50%

31/12/2004 31/12/2003

Equity and capital adequacy

Compared to 2003, the equity of the Bank increased by PLN 80.1

million (i.e. by 1.4%) as a result of:

• change in principles of recording repo/reverse repo transactions

of the sell-buy-back and buy-sell-back type on securities. The

positive effect of the introduced changes in accounting principles,

of PLN 46.0 million, was disclosed in equity as the correction of

the net profit/loss from previous years in the item of profit (loss)

from previous years.

• increase in the revaluation fund by PLN 32.8 million, caused by

a net increase in the value of debt securities available for sale.

• increase in reserve capital by PLN 1.3 million, inter alia, as a result

of distribution of net profit for 2003. The remaining part of the

profit, of PLN 241.7 million, was allocated for payment of dividend

to shareholders.

Other changes in the structure of equity occurred in the period

under discussion. These changes included:

• the transfer of PLN 498 thousand from the revaluation capital to

reserve capital in relation to sale of fixed assets, as a result of

which the revaluation reserve was utilized.

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Authorized capital

Capital surplus

Reserve capital

Revaluation capital

General risk fund

Profit (loss) from previous years

Total equity

Core capital

Supplementary capital

Profit (loss) from previous years

—

1,288

32,863

—

45,983

80,134

1,288

32,863

45,983

522,638

3,044,585

1,726,561

19,651

390,000

35,136

5,738,571

5,683,784

19,651

35,136

522,638

3,044,585

1,725,273

(13,212)

390,000

(10,847)

5,658,437

5,682,496

(13,212)

(10,847)

—

0.1%

248.7%

—

423.9%

1.4%

0.0%

248.7%

423.9%

Equity

inter alia

In terms of total equity, the Bank ranked among the top players in

the sector. The level of capital was sufficient to guarantee financial

security to the institution and the deposits it accepts.

From 31 December 2003 to 31 December 2004 the ownership

structure of significant shareholders changed. This change was

attributable to the sale on 30 November 2004 by Citibank Overseas

Investment Corporation (COIC), a subsidiary of Citibank N.A., to

International Finance Associates B.V., based in Amsterdam,

a subsidiary of COIC, of 18,722,874 shares in the Bank, represent-

ing a 14.3% interest in the Bank’s authorized capital. As a result of

this transaction, the percentage share of COIC holdings in the

Bank’s authorized capital declined from 89.3% to 75%.

As of 31 December 2004, the capital adequacy ratio was 19.29%

and was higher than at the end of 2003 by 3.25%. The increase in

the ratio was mainly due to a reduction in the capital requirement

for credit risk by PLN 428.9 million which resulted from a reduction

in risk weighted assets and off-balance sheet commitments by PLN

5,361.6 million, to which the drop in the loan portfolio contributed to

a significant extent. The surplus of cash was primarily invested in

securities with a low risk weighting.

Moreover, the size of the capital adequacy ratio was also affected

by the increase in deduction of intangible assets (including

goodwill) from 60% in 2003 to 100% in 2004 from shareholders’

equity for calculation of the capital adequacy ratio.

Deductions, of which:

- goodwill

- other intangible fixed assets

- investments in subordinated

financial institutions

- financial assets revaluation reserve fund

Eligible capital

Risk-weighted off-balance sheet assets

and contingent liabilities (bank portfolio)

Total capital requirement, of which:

- capital requirement for credit risk

- capital requirement due to the excess

of credit concentration limit

- total capital requirement for market risks

- other capital requirements

Capital Adequacy Ratio

Balance sheet value of capital funds

1,708,617

1,171,200

65,933

480,854

(9,370)

4,029,954

14,737,211

1,670,944

1,178,977

198,444

191,315

102,208

19.29%

5,738,571

20,098,770

1,113,992

746,187

30,820

344,544

(7,559)

4,590,465

2,289,828

1,607,902

317,650

229,581

134,695

16.04%

5,704,457

Capital adequacy ratio

31/12/2004 31/12/2003

in PLN thousand

As of

Activities of Bank in 2004

211

Lending and other risk exposures

In 2004, the Bank reorganized its Corporate Banking Division, in

order to better position it in the various market segments. The

process of reorganization was completed in July.

Generally, the Bank’s lending policy includes active portfolio

management and precisely specified target market criteria, de-

signed to make it possible to control the credit exposure with

respect to a given industry or segment of customers. In addition,

individual borrowers are continuously monitored to detect deterio-

ration in the financial standing promptly and to apply the necessary

and timely corrective steps.

Lending

As of 31 December 2004, gross credit exposure to the non-financial

sector amounted to PLN 11,658 million, representing a decrease in

exposure by 23,4% compared to the same period of the previous

year. The decrease resulted from a combination of the Bank’s

prudent lending policy and the increased liquidity of numerous

segments of the economy, as well as the decrease in total value of

loans denominated in foreign currencies. High competition in the

banking sector and alternative ways of financing also impacted on

the size of the credit portfolio.

The largest part of the Bank’s loan portfolio, representing 74,6% of

the total, is the credit exposure to non-financial corporates.

Compared to 2003, loans to individuals grew significantly to PLN

1,946 million representing growth of almost 31%.

in PLN thousand Change Change (%)31/12/2004 31/12/2003

As of

Loans in PLN

Loans in foreign currency

Total

Loans to non-financial sector

Loans to financial sector

Loans to public sector

Total

Non-financial corporates

Non-bank financial entities

Individuals

Other non-financial entities

Public entities

Total

(1,134,320)

(2,421,468)

(3,555,788)

(3 427,018)

(127,410)

(1,360)

(3,555,788)

(3,880,486)

(127,410)

459,901

(6,433)

(1,360)

(3,555,788)

9,493,432

2,164,590

11,658,022

10,652,847

1,003,899

1,276

11,658,022

8,697,683

1,003,899

1,946,151

9,013

1,276

11,658,022

10,627,752

4,586,058

15,213,810

14,079,865

1,131,309

2,636

15,213,810

12,578,169

1,131,309

1,486,250

15,446

2,636

15,213,810

(10.7%)

(52.8%)

(23.4%)

(24.3%)

(11.3%)

(51.6%)

(23.4%)

(30.9%)

(11.3%)

30.9%

(41.6%)

(51.6%)

(23.4%)

Lending to non-bank customers (gross)

Loans excluding interest receivable.

During 2004, the currency structure of the loan portfolio slightly

changed as the result of strengthening of PLN against world

currencies. The share of foreign currency loans decreased

significantly to 19% in 2004 compared to 26% over the first half of

2004 and 30% in 2003. The Bank grants foreign currency loans to

customers who can provide a natural hedge against FX risk in the

form of foreign currency cash flows from exports, or to customers,

who in the Bank’s opinion, are able to absorb the risk of

depreciation of Polish currency.

The Bank monitors the concentration of its exposure on a regular

basis, seeking to avoid a portfolio concentrated in a limited group of

customers. As of 31 December 2004, the Bank’s portfolio of

exposure to non-bank entities did not include any exposure

exceeding the exposure concentration limits laid down by the law.

The largest exposure related to financing of a leasing company

owned by the Bank (Customer 1).

Loans classified as irregular as of 31 December 2004 dropped by

30.9% compared to 31 December 2003. In particular there was

a significant drop of 66.5% in loans classified as “Doubtful” which

were partially reclassified to “Watch” category. A significant part of

the “Doubtful” category was also repaid. At the same time, the

share of loans classified as “Watch” increased significantly up to

16,2%, which resulted from:

• Improved financial condition of certain enterprises previously

classified as irregular (reclassified to “Watch”);

• New regulations related to the classification of receivables and

creation of specific provisions.

Despite an improvement in the structure of classified exposures,

the Bank continued its policy of creating specific provisions,

increasing their level by almost 12% to PLN 1,688 million during

2004. At the same time, the Bank released PLN 136 million of

general risk provision, which at the end of 2003 amounted to PLN

164 million.

As a result of the changes in specific provisions and general risk

provision, the provisions to classified loans ratio increased from

40% as of 31 December 2003 to 59% as of 31 December 2004.

Quality of loan portfolio

Customer 1

Customer 2

Customer 3

Customer 4

Customer 5

Customer 6

Customer 7

Customer 8

Customer 9

Customer 10

Total 10

560,076

492,762

483,731

324,840

279,327

276,384

254,341

221,032

212,787

142,658

3,247,938

Total

exposure

Exposure concentration – non-bank customers

Balance sheet

exposure*

Off-balance

sheet exposure

502,258

75,742

122,769

198,425

127,672

1,294

158,028

6,020

1,192,237

57,818

492,733

407,989

202,071

80,902

148,712

254,341

219,738

54,759

136,638

2,055,701

* Does not include exposures to shares and other securities. Data for individual entities, excluding

exposures to entities related to a given customer.

in PLN

thousand

Off-balance sheet exposures

As of 31 December 2004, off-balance sheet exposure amounted to

PLN 11,762 million, which represented a decrease of 21,9% in

comparison with the same period of the previous year. Undrawn

credit lines represented 71% of total off-balance sheet exposure.

The amount of guarantees issued by the Bank decreased from PLN

3,020 million to PLN 2,351 million. Changes in letters of credit were

insignificant. The decrease in “Forward placements” mainly

reflected the significant value of above mentioned placement as of

31 December 2003. This was due to the Bank’s exposure to Citibank

Bahrain, a subsidiary of Citigroup. The exposure included two

forward placements of 350 and 500 million US dollar. These

placements were short term financial instruments at market price,

for the management of the Bank’s liquidity.

Change as from

31/12/2003

31/12/2004

31/12/2003

Specific provisions for receivables

- watch

- problem

General risk provision

Total provision

Index of provision coverage of problem loans

1,688,538

—

1,688,538

164,000

1,852,538

59.1%

in PLN thousand

1,505,931

—

1,505,931

300,000

1,805,931

39.8%

12.1%

—

12.1%

(45.3%)

2.6%

Provisions for non-bank loan portfolio

As of

Normal

Watch

Problem

- substandard

- doubtful

- loss

Total receivables from non-bank sector

Gross receivables from non-bank customers

by exposure quality

9,053,548

1,625,103

4,535,159

709,186

1,935,282

1,890,691

15 213 810

6,636,893

1,888,525

3,132,604

660,385

647,725

1,824,494

11,658,022

56.9%

16.2%

26.9%

5.7%

5.6%

15.7%

100.0%

59.5%

10.7%

29.8%

4.7%

12.7%

12.4%

100.0%

in PLN thousand

31/12/2004

Share %

31/12/2003

Indices of loan portfolio quality

Share %As of

in PLN thousand

External funding

As of the end of 2004, the total value of external funding of the

Bank was PLN 21,917 million and was higher by PLN 848 million

(3.7%) than as of the end of 2003. Liabilities to the non-financial

sector, which decreased by PLN 1,284 million (7.1%), were the main

factor changing the external funding of the Bank’s activities, which

mainly results from decreasing PLN equivalent of foreign currency

deposits.

Taking into account all sectors, the largest decrease in external

funding, as of the end of 2004, was in the group of individual

customers by PLN 487 million (8.2%), mainly in term deposits both

in PLN and foreign currency. This results from strong competition

from alternative offers of capital market investments. Despite the

decrease as of the end of 2004, the Bank still maintains its stable

position in the market for individual customers’ deposits.

The reason for the decrease of PLN 383 million (3.4%) in non-

financial entities deposits as of the end of 2004, compared to 2003,

was mainly sight deposits. During the year, the Bank noted

a significant increase in deposits made by corporate entities who,

as a result of economic improvement, placed their liquidity

surpluses in bank accounts.

By the end of the year, given the increased value of PLN and the

reduced liquidity of exporters,a decrease in deposits was observed.

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Guarantees

Letters of credit issued

Third-part confirmed letters of credit

Committed loans

Forward placements

Other financing

Total

Provisions for off-balance sheet liabilities

Provision coverage index

(669,630)

7,736

139

319,506

(3,058,066)

104,286

(3,296,029)

(105,667)

2,351,306

168,073

17,108

8,353,739

121,359

751,277

11,762,862

39,352

0.33%

3,020,936

160,337

16,969

8,034,233

3,179,425

646,991

15,058,891

145,019

0.96%

(22.2%)

4.8%

0.8%

4.0%

(96.2%)

16.1%

(21.9%)

(72.9%)

Off-balance sheet exposures

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Due to the Central Bank

Due to financial sector

Current

Long-term

- banking deposits

- received loans

- time deposits of non-bank institutions

Due to non-financial sector

Current

Long-term

Due to public sector

Current

Long-term

Sell-Buy-Backs

Total external funding

(40,098)

479,893

696,581

(216,688)

(13,087)

(98,507)

(105,094)

(1,284,916)

(454,763)

(830,153)

66,412

34,762

31,650

(62,147)

(840,856)

718

4,285,896

3,039,901

1,245,995

598,548

446,825

200,622

16,691,138

8,422,514

8,268,624

531,213

338,869

192,344

408,361

21,917,326

40,816

3,806,003

2,343,320

1,462,683

611,635

545,332

305,716

17,976,054

8,877,277

9,098,777

464,801

304,107

160,694

470,508

22,758,182

(98.2%)

12.6%

29.7%

(14.8%)

(2.1%)

(18.1%)

(34.4%)

(7.1%)

(5.1%)

(9.1%)

14.3%

11.4%

19.7%

(13.2%)

(3.7%)

External funding

Excluding interest payable.

Corporate funds management

The Bank has a rich, comprehensive and modern product offer

related to financial and transactional servicing of enterprises. Apart

from providing traditional services such as current accounts,

domestic and foreign transfers, deposits, and overdrafts, the Bank

also provides customers with more sophisticated transactional

banking products, particularly in the area of electronic and Internet

banking. Development of such activities is facilitated by access to

world-class Citigroup technological resources.

in PLN thousand Change Change (%)31/12/2004 31/12/2003As of

Individuals

Non-financial economic entities

Non-profit institutions

Non-bank financial institutions

Public sector

Suspense account liabilities

Total

Current

Long-term

Total

PLN

Foreign currency

Total

Liabilities towards:

(487,323)

(383,407)

(406,569)

445,146

66,411

(7,616)

(773,358)

130,246

(903,604)

(773,358)

(419,207)

(354,151)

(773,358)

5,489,847

10,749,745

424,038

2 247,722

531,212

27,510

19,470,074

10,808,488

8,661,586

19,470,074

14,508,306

4,961,768

19,470,074

5,977,170

11,133,152

830,607

1,802,576

464,801

35,126

20,243,432

10,678,242

9,565,190

20,243,432

14,927,513

5,315,919

20,243,432

(8.2%)

(3.4%)

(48.9%)

24.7%

14.3%

(21.7%)

(3.8%)

1.2%

(9.4%)

(3.8%)

(2.8%)

(6.7%)

(3.8%)

Liabilities to non-bank customers

Excluding interest payable.

Transaction servicing

The modern transactional banking offer is the result of continuous

efforts to provide services which meet the needs of the Bank's

customers in the most effective manner. Economic growth and new

business ideas of our customers stimulate the implementation of new

practical solutions.

Escrow Account is one of the new products implemented in 2004,

which has been included in the catalogue of bank accounts in the

Banking Law amended on 1 April 2004. Escrow Account provides an

additional level of security of transactions in the form of the

guaranteed manner of effecting payment instructions, precisely

defined in the Escrow Account Agreement and protecting the funds

in the account against third party claims.

Based on „SpeedCollect” - the mass payment processing platform,

which facilitates processing of the incoming payments, the product

team developed another solution called „SpeedCollect Plus”, which

supplements the missing data, that has not been recognized

automatically. Other Citigroup entities found the modernized

product very interesting, which resulted in the product

implementation for some of the global customers. The process of

implementation in other countries is continuing.

On 30 November 2004, the Bank established a relationship with the

Italian Bank Monte dei Paschi di Siena. As a result of this

relationship, the „Italian Desk” was established in Warsaw. The

project aims at acquiring customers trading with Polish or Italian

contractors and supporting their development with modern banking

solutions offered by the Bank.

In addition to product development, the Bank seeks to optimize

existing processes, starting from cost reduction. In 2003, the Bank

started to limit the number of printed hard copies of bank

statements. The implementation of electronic statements was one

of the process solutions. Such statements are identical with their

hard copies both in terms of appearance and content. Electronic

statements were well received by corporate customers. At the end

of June 2004, over 40% of total corporate customer statement

output was transmitted exclusively by electronic means. By the end

of 2004, approximately 60% of statements were transmitted

electronically. This service was rendered to over 12,000 customers.

Also, the Bank offers the possibility to save electronic statements

on CD's.

In 2004, the Bank continued its efforts to limit the number of hard

copy instructions delivered by the customers directly to the Bank's

branches and replace them with electronic communication. The

number of transactions ordered electronically increased from 95%

to 98% of the total volume of the transaction orders received by

the Bank. As a result, the number of hard copy instructions

decreased by several thousand a month.

At present, internet electronic banking systems are considered to

be the standard channels for servicing corporate customers with

respect to transactional banking products. The year 2004 was

characterized by a significant increase in their popularity. Several

changes have been introduced to both the traditional electronic

banking and internet banking system to enhance and improve their

performance. The most important was the introduction of CitiDirect

LITE - the new version of CitiDirect. CitiDirect LITE operates in

parallel to CitiDirect and focuses in particular on the Corporate

Banking Customers. As a result of the efforts taken to improve the

software operation and stability, the customers’ satisfaction has

increased.

In addition to new products and solutions, the Bank still strives for

acquiring customers for well-known products. The marketing of

Prepaid Payment Cards Visa Electron, where the Bank has been

maintaining its leading position may serve as an example. The Cards

are issued to corporate customers within loyalty and promotional

programs and in the form of Electronic Coupon. In 2004 the

number of customers using this product increased by 49%. By the

end of the year, the number of issued Prepaid Payment Cards

amounted to 127,000.

The Bank also actively acquires customers for Citibank Business

Debit Cards. The number of customers using Citibank Business

Debit Cards increased by 135% and the number of issued Cards

increased by 123%.

In 2004, the UniKasa Payment Servicing Network grew rapidly. The

number of UniKasa terminals increased by 1,200 compared to

December last year. In addition to the major national invoice

issuers, the creditors taking advantage of the network services also

include local companies, which has made the network even more

attractive. In December, the number of transactions concluded by

means of UniKasa Payment Servicing Network exceeded 300,000.

As Citigroup entities showed growing interest in UniKasa, for the

first time the network has been established abroad. In November

2004, a number of Payment Servicing Network terminals were

launched at gas stations in Romania. The service development team

entered into negotiations with other countries to arrange the 2005

UniKasa network implementation plan.

2004 saw further development of SpeedCollect, which is a basic

version of a mass payments servicing system. The system is offered

to cellular and cable telecom operators, cable TV providers,

distributors of gas and power supply and insurance companies.

Throughout 2004, SpeedCollect automatically processed over 130

million payments. In July, the elimination of paper-based

transaction servicing led to further automation and cost reduction.

A joint undertaking of the Bank and Poczta Polska resulted in

shorter post office payments transfer to the Bank, which now takes

only 2 business days. The launching of CitiConvert – an integrated

electronic report system - was one of the major projects influencing

the time and data quality of payments delivered to SpeedCollect

customers.

In 2004, the Bank played an active role on the market of servicing

payments by Direct Debit. Throughout 2004, the Bank processed

more than 4,76 million customer transactions, which in December

reached over 50% share of the Direct Debit market. The Bank was

able to retain this leading position thanks to participating in various

initiatives aimed at promoting direct debit among the Bank's

customers. The customers also highly appreciated the Bank's active

participation in the Coalition for Direct Debit, which organized and

carried out Direct Debit promotional campaign in the newspapers,

on the Internet and TV. As a result of the activities undertaken by

the Coalition, the Bank was awarded a prestigious prize of „Twój

Styl” - Alicja 2003. In addition, the Corporate Bank in cooperation

with the Consumer Bank introduced the possibility to activate

Direct Debit by individual customers via CitiPhone and

CitibankOnline.

In 2004, the Bank significantly enhanced and developed the

electronic platforms, through which trade finance products are

offered.

Due to a high level of interest shown by the Bank's customers, the

guarantee products offer was extended to include excise guarantee

which is an obligation contracted by the Bank towards the Customs

Office, upon the Bank customer’s order, representing a collateral

securing the payment of excise tax.

The Bank's guarantee offer was also extended to include the

standards required by PHARE, European Union and World Bank

programs and by the Customs Authorities.

A further innovation is the contract signed between the Bank and

the Agricultural Market Agency on cooperation in issuing and

servicing bank guarantees by the Bank in favor of the Agricultural

Market Agency, representing a security for proper performance of

financial obligations by the Agricultural Market Agency resulting

from the Common Agricultural Policy mechanisms.

In addition to guarantee products within trade finance products, the

Bank developed Supplier Finance – an option within factoring. The

financing mechanism involves the discount of receivables from the

selected group of suppliers of the given debtor, without the right to

recourse against the supplier. The Bank's entire risk is associated

with the debtor, who is also a borrower who, for the purpose of the

program, uses its credit line. The implementation of this product

enables the debtor to extend the payment dates and the supplier to

improve financial liquidity.

Trade Finance products

Commercial Revolving Loan is another new solution offered by the

Bank. It has been designed for financing the customer's operating

activity. The loan is secured with confirmed assignment of

receivables from selected local debtors. The main feature of the

product is the weekly adjustment of available credit line according

to the amount of submitted receivables. What is distinctive in this

product is the automation ensured by CitiConnect, which makes it

very user-friendly for the customer and efficient for the Bank.

Another advantage for the customer is the Bank's contact with

debtors, which makes the debtors more disciplined.

The following are the most important trade finance transactions

executed by the Bank in 2004:

• Framework agreement on issuing bank guarantees with a con-

struction company, for the amount of PLN 80 million;

• Payment guarantee issued within the syndicate of banks, upon

the request of the petroleum industry customer, for the total

amount of USD 96 million (the Bank's share was USD 48 million),

which secured proper performance of contractual obligations

towards suppliers;

• Letter of credit, constituting security for the amount of EUR 37.5

million, issued upon the request of the petroleum industry

customer and securing proper performance of contractual

obligations during the investment project;

• Launch of the export pre-financing programs for the shipyard

industry customer for the amount of USD 34.2 million for a foreign

shipowner in cooperation with KUKE and the State Treasury;

• Short-term financing of the tire industry customer distribution

network (over 80 distributors) based on Paylink Card (a tool

giving access to trade receivables next day after the invoice issue

date or its maturity, with the possibility to credit the debtor

automatically) for the total amount of PLN 34 million;

• Availment of the first tranche of a special purpose loan (short-

term financing of seasonal purchase) to the sugar industry for the

amount of PLN 30 million, the target amount is PLN 60 million;

• Availment of export prefinancing loan, for the total amount of

USD 87 million (the Bank's share was USD 29 million), granted by

the syndicate of banks to the shipyard industry for the

construction of 10 container ships in 3 years;

• Availment of export prefinancing loan for the amount of PLN 12

million to the machine-building industry;

• Supplier finance program for the construction industry for the

amount of PLN 10 million to cover 10 new suppliers.

Some of the aforementioned programs involve foreign trade

settlements, an area in which the Bank maintains its leading

position on the market. It is based on an extensive customer base

and long-standing experience in financial services provided to

Polish exporters and importers. A key strength of the Bank in the

foreign trade settlements market is also the complete range of

products offered, which includes all types of letters of credit,

documentary collections, guarantees, bankers’ acceptances, bills of

exchange discounting, and discounting of invoiced receivables. Also

the cooperation with Korporacja Ubezpieczeñ Kredytów

Eksportowych S.A. has brought favorable results, especially in

terms of insuring trade receivables originated by transactions with

countries of Eastern Europe.

The Bank is the leading depositary bank in Poland. It offers custody

services to foreign institutional investors and depositary services to

domestic financial institutions, in particular pension funds,

investment funds and insurance capital funds.

Custody services

As a part of its statutory activities, pursuant to the relevant license

of the Securities and Exchange Commission, the Custody

Department operates securities accounts, settles securities

transactions, handles dividend and interest payments, portfolio

valuation, individual reports, and arranges for customer

representation at general meetings of shareholders of listed

companies. It also maintains registers of foreign securities, which

also involves intermediation in the settlement of transactions for

domestic customers on foreign markets.

The Bank has also been actively participating in improving the

quality of legal regulations concerning the securities market, by

taking part, through its delegated representatives, in the Council of

Depositary Banks at the Association of Polish Banks. This enables

the Bank to propose changes in legal regulations and to create

practices that are more in line with international standards. The

Bank introduces new system solutions in cooperation with the

Securities and Exchange Commission, Krajowy Depozyt Papierów

Wartoœciowych S.A. (National Depository of Securities), the Warsaw

Stock Exchange and the Insurance and Pension Funds Supervisory

Commission.

As of the end of 2004, the Bank acted as depositary for 7 open-

ended pension funds and 12 investment funds managed by 4 in-

vestment fund societies.

In 2004, the Bank maintained its leading position on the Polish FX

market, money market and interest rate market. In 2004, the value

of FX turnover increased by 17% compared to 2003, thereby

increasing the Bank's market share up to 23%. In 2004, the Bank

maintained its leading position on the corporate bonds market with

market share at the level of almost 20%.

Money market and FX market

In 2004, the Bank acquired over 100 new customers trading with

options and introduced several new option structures to the

offering. This achievement contributed to the reinforcement of the

Bank’s leading position on the derivatives market. 2004 also saw

growing demand for Euro FX options, which in 2004 represented

63% of the volume, reflecting increasing settlements made by

Polish enterprises with the countries of the European Monetary

Union.

In 2004, the Treasury Division introduced many new products both

for corporate customers and private individuals. In March 2004, the

Bank introduced the “Market Linked Deposits” (MLD) program. The

product is complementary to a standard customer deposit and

attracts customers who seek higher rates of return, depending on

the selected market ratio dynamics, without compromising the

safety of the deposited funds. In the second half of 2004, the Bank,

meeting the customers' requirements, enriched the scope of

currencies in which MLD contracts may be executed. In 2004, 64%

of the MLD volume was based on USD and 31% on Euro.

Notable transactions executed by the Bank in 2004, were an

independent private placement transaction for the Ministry of

Finance involving the first private issue of structured coupon bonds

amounting to PLN 750 million and a structured transaction hedging

the raw material price for the power industry customer. The Bank

has observed increasing demand for hedging transactions; this also

resulted in concluding several hedging contracts in 2004 covering

raw material prices and interest rates.

Corporate Banking

The Corporate Banking Division has been created to provide

comprehensive service for more than 140 major customers, whose

demands exceed the basic product range and require advice in the

area of financial engineering that optimizes their cooperation with

the Bank. Individual departments of the Division provide coordi-

nation of the treasury and financial management products available

and prepare offers that embrace lending, debt and equity financing,

mergers and acquisitions.

The following are the main transactions that were executed by the

Bank in 2004:

• During the first half of 2004 the Bank acted as financial advisor for

a petroleum industry customer during the purchase of a foreign

petroleum company. The scope of the Bank’s advice related to the

analysis of the indebtedness encumbering the companies of the

group and to determining the methods of restructuring that debt,

as well as the analysis of the impact of the acquisition on the

Customer’s financing conditions;

• In March 2004, the Bank participated in the arrangement of

a syndicated loan of PLN 88 million for a power industry

company;

• In April 2004, the Bank acted as financial advisor for an inter-

national insurance group during the sale of its shares in a Polish

company. The Bank also prepared the information memorandum

and carried out the process of searching for a strategic investor

for the company;

• Also, in 3Q of 2004, the Bank concluded a 5-year loan agreement

with a telecom company for the amount of EUR 550 million.

There are 14 banks participating in this transaction and the Bank

acts as a syndication arranger and syndication agent;

Financial and advisory for enterprises

• In 4Q of 2004, the Bank concluded a 2.5-year loan agreement

with an aircraft company for the amount of PLN 400 million.

There are 5 banks participating in this transaction and the Bank

acts as a syndication arranger and syndication agent;

• In 4Q of 2004, the Bank concluded a commission contract with

a transport company to syndicate a 10-year syndicated loan for

the total amount of EUR 130 million. In this transaction the Bank

acts as a syndication arranger and syndication agent.

For many years, the Bank has been one of the top companies

operating on the primary market of debt securities issued by

corporations and financial institutions. In the first half of 2004 the

Investment Banking Department participated in launching the

following new issues:

• In January 2004, the Bank participated in the short-term debt

securities issuance program of a leasing company with the

indebtedness limit of PLN 600 million. The Bank acted as co-

arranger and dealer of the program.

• In June 2004, the Bank participated in the short- and medium-

term bonds issue program of an entity managing the network of

hypermarkets with the indebtedness limit of PLN 300 million. The

Bank acts as a dealer of the program.

• In July 2004, the Bank concluded a commission contract with

a power industry company to arrange long-term bonds issue

program for the total amount of PLN 600 million to finance the

construction of a power unit. The Bank acts as a bank structuring

the transaction and as one of 3 arrangers.

• In September 2004, the Bank singed annexes to the contracts on

debt securities issue program for the group of entities in

automotive industry, increasing the indebtedness limit within the

program up to PLN 2 billion. The Bank acts as a lead manager,

paying agent, depositary and dealer of the program.

Issuance of corporate debt securities

• In 4Q of 2004, the Bank concluded a contract on debt securities

issue program for an automotive company with the indebtedness

limit of PLN 500 million. The Bank acts as arranger, issuing agent,

paying agent, depositary and dealer of the program.

As of the end of 2004, the Bank had a leading share in the short-

term debt securities issuance market reaching over 20%.

Commercial Banking

In 2004, the Commercial Banking Division was established as

a separate division. It is responsible for servicing public sector

institutions and enterprises classified between SMEs and the largest

corporations. The Commercial Banking Division is oriented towards

countrywide servicing of enterprises with optimal usage of branch

network on the basis of the complete product offering, with special

focus on liquidity management and trade financing.

The establishment of the Commercial Banking Division ensures

more effective servicing and optimal adjustment of the Bank offer

to the expectations and needs of the Division’s customers. The key

feature of this service relates to the credit risk management

process. This process entails adjustment of the risk approval and

monitoring procedure to the characteristics of the client portfolio,

and hence the credit portfolio.

The service model provided to local enterprises serviced by the new

division has not changed. The product offering of the Bank (funds

management, treasury services and basic corporate finance and

investment banking products) has been made available to an

extended customer base through the intensification of cross-selling

of products.

In 2004 for several weeks, the Bank conducted a press campaign

for the Commercial Bank in prestigious and authoritative

magazines. The purpose of this campaign was to promote the image

of Citibank Handlowy as an institution offering a unique com-

bination of local know-how and experience on the Polish market,

and a professional team with an access to global solutions, in-

novative products and modern technology.

Consumer Banking

Since May 2004 the Consumer Bank offering has been enriched by

CitiBusiness designed for small and medium-sized enterprises. The

target market of CitiBusiness are business entities, regardless of

their legal status, with annual sales turnover not exceeding PLN 8

million, and whose business activity has not been excluded from the

Bank’s target market.

The CitiBusiness offering is based on the concept of selling

products and services in the form of 4 Product Packages. Thanks to

their variety they meet all the needs of the enterprises from the

target market. Packages currently available include the following:

CitiBusiness

CitiBusiness Start

CitiBusiness Dzia³anie

CitiBusiness Finansowanie

CitiBusiness Premium

Package

Small enterprises and enterprises

starting their operation

Transactionally active enterprises

Enterprises looking for sources

of financing their current operation

and investments

Enterprises expecting prestige service

and comprehensive product offering

Target Customers

Retail Banking

In 2004, Retail Banking faced opportunities relating to a growing

consumer demand for banking products, as well as challenges of

the financial services market, opened to competition form the EU

countries. Banks provided inducements in the form of lower fees

and margins, which generally sharpened the efforts to win and

maintain customers.

Under such circumstances, it is even more noteworthy that the

Bank was able to maintain its leading position on the credit card

market throughout 2004, generating a growth of 14% in the

number of cards issued in comparison to 2003 year-end figures.

The Motokarta Kredytowa Citibank-BP, issued through the BP gas

station network, has been the key growth factor. The total number

of credit cards issued by the Bank in 2004 (Citibank Silver, Citibank

Gold, Citibank-BP, Citibank-Era, Citibank-Elle) exceeded 520,000.

Another well received development was Installment Plan “Komfort”,

enabling convenient arrangement of monthly installments for chosen

credit card transactions. Moreover, since 2004, credit cards issued

by Citibank enable repayment by direct debit orders from accounts

serviced by another bank.

Other credit products provided by the Bank were also very popular.

The volume of Citibank Credits granted, provided with minimum

formalities and for any financing purpose, was twice as high as in

2003. The product’s popularity was also boosted by the option

enabling consolidation of several facilities into one.

Other credit products provided by the Bank enjoying significant

popularity included the Citibank Credit Line and the Citibank

Secured Credit Line. Despite higher interest rates, they enabled

completion of an intended purchase without liquidation of deposit

savings. Another advantage of the credit product is a zero interest

rate during the first 7 days. The volume of Credit Lines granted

throughout 2004 grew by 9%.

The introduction of CitiBusiness extended the product range, as

compared to services offered under Interbiznes brand. Customers

were provided with account access through Consumer Banking

distribution channels, such as CitiPhone 24 hour, Citibank Online

electronic banking and the network of Consumer Banking branch

offices and Citibank Online ATMs.

Moreover, thanks to a common reporting and accounting platform,

the inclusion of Citibusiness in Consumer Banking facilitated

personal accounts and company accounts to be combined, a no-

velty in the Bank’s product offering. Customers have the possibility

to establish a link between their personal accounts and company

accounts. This solution is designed for customers who conduct

business activities as private individuals or who are professionals.

The solution enables them to manage their financial means in the

company account through their personal account. Additionally, it

allows for cost reduction due to free transfers between the related

accounts.

The CitiBusiness offering is aimed at building the Bank’s image as

a partner for entrepreneurs from the very start-up of their

operations that supports their development. The Bank’s experience,

knowledge of the financial services and modern technologies

translate into a comprehensible, customer-friendly offer in the form

of Packages, available through various channels. The CitiBusiness

offering should be perceived as competitive in terms of price and

should be identified with all widely known advantages of Citibank

Handlowy: high quality, modern service and professionalism.

In Q4 of 2004 the CitiBusiness range was extended with trade

products and services: Letters of Credit, Documentary Collection,

Letters of Credit Discount and Bank Guarantee. In December 2004

a web page was also launched, providing de-

tailed information on the range, application forms and contact data.

www.citibusiness.pl

In order to extend its credit range, in March 2003 the Bank entered

into cooperation with GE Money Bank SA in the area of mortgage

credits. At selected multi-role branches and CitiGold branches

countrywide, the customers were provided with access to basic

information on the range and terms and conditions of credits, plus

a possibility to make an appointment with a representative of GE

Money Bank SA. The credit may be earmarked for purchase of an

apartment or a house on the primary or secondary market, and also

for building or alteration work. Credits are available in four

currency options – PLN, EUR, CHF and USD – with a variable interest

rate.

In 2004, the Bank recorded a significant increase in demand for

investment and insurance products, and the number of customers

interested in above-average profits with acceptable risk level

increased by nearly 35% in comparison with 2003.

The Bank’s range of insurance products includes e.g. the Savings

Program with Life Insurance Plus, Investment Program with Life

Insurance and Investment Portfolio. The latter, introduced in Q4 of

2003, saw a very dynamic growth rate in 2004. The product offers

a very attractive and innovative solution, which enables customers

to allocate their resources in many investment funds and move

resources flexibly between various funds. At the same time, the

product ensures protection of the capital and attractive legal and

fiscal conditions.

Among the investment products, the CitiFunds Targeted Savings

Plans (CPO) should be distinguished, as their sales in 2004 doubled

in comparison with 2003. Equally noteworthy are Market-Linked

Deposits (MLD). There were 34 subscriptions for MLD in 2004,

enabling customers to take advantage of favorable conditions on

capital markets, and 17 subscriptions for structured bonds.

In October 2004, the Bank launched agency services in connection

with sale of the product provided by the Towarzystwo Funduszy

Inwestycyjnych Banku Handlowego S.A. – the Individual Pension

Account (IKE) with CitiFunds, enabling investments in chosen funds.

Within an IKE, investments can be made in safe and more risky

funds, which may generate much higher profits on a long-term

basis.

2004 saw further growth of CitiGold Wealth Management – a retail-

banking service based on an integrated package of savings,

investment and insurance products, supported by Plan Maj¹tkowy

(Wealth Plan) and Analityk Portfela (Portfolio Analyst) software

applications. The package is provided under a sub-brand addressed

to customers who hold investment resources of not less than PLN

100,000 and who expect customized financial advice.

CitiGold Wealth Management ensures a comprehensive assessment

of the customer’s investment profile and makes it possible to create

a customized model meeting its financial needs with use of a wide

range of products. CitiGold Wealth Management is available at 11

CitiGold branches and 18 corporate branches of the Bank.

In spite of alternative savings products being popularized and

significant competition in the area of customer deposits, the Bank

maintains a stable position on the market without an aggressive

pricing policy. This is due to a range of leading-edge online T-lokaty

(T-Deposits), which ensure easy and quick access to the product,

a wide choice of currencies and attractive interest rate terms.

The development of the product range is accompanied by

implementation of pioneering distribution channels. In 2004 the

Bank observed a development of the over-the-phone payment

service implemented in 2003. Moreover, the Bank launched an

option for ordering of services online. In the area of payment

services initiated over the phone and online, throughout 2004 the

Bank cooperated with such operators as: Netia, Swiat Internet, Plus

GSM, Era GSM, Idea, TP SA, UPC and Cyfra Plus.

In May CitiPhone call center became a distribution channel for

unsecured credits in current accounts. At present, customers may

be granted a credit line for unsecured credit in current accounts

without paying a visit to the Bank’s branch office.

In 2004, the Bank continued the popularization of the Citibank

Online (CBOL) Internet platform and recorded an increase in the

number of registered platform customers to 230,000, i.e. a growth

by 56% in comparison to 2003 year-end figures. Additionally, it has

been established that over 70% of transactions are initiated via the

Internet platform, a measurable benefit for the Bank through

savings in other distribution channels.

2004 saw also a substantial growth of interest in the CitiGSM

service, which provides customers daily SMS reports concerning the

balance on their current account or credit card account. The

number of service users increased to over 54,000 at the end of

2004, which means there was a growth by 32% in comparison to

2003 year-end data.

At the end of 2004 the Consumer Banking Sector serviced 345,500

current accounts, compared with 329,200 at the beginning of the

year.

The strategic goal of CitiFinancial is to become the fastest-growing

and the most profitable enterprise on the Polish market of

consumer loans; the goal is pursued by establishing and maintaining

strong customer relations, where the top priority is given to

customers’ needs, with a simultaneous focus on profitability of

products and customers. The main principle is a personalized

approach to every customer, with a view to building a long-standing

relationship, beneficial for both parties.

The target market of CitiFinancial are 15.5 million private

individuals, in more than 7 million households. This is a significant

market where the access is guaranteed through the Bank’s credit

CitiFinancial

offering. First and foremost, CitiFinancial focuses on customers

who have not found a product range adjusted to their needs at

traditional banks. Most of them are customers with medium or

lower monthly incomes who appreciate the accessibility of the

Bank’s outlets. The Bank has rapidly developed its network of

branch offices located at shopping centers and in the vicinity of

housing estates. At the end of 2004 the Bank operated 39 branch

offices, compared with 16 at the end of 2003.

The CitiFinancial product offering includes consumer loans (secured

and unsecured) and sales of insurance products. Granted loans

constitute an entry product, which is the basis for developing the

relationship and offering other products, which CitiFinancial plans

to develop in order to adjust to the needs of customers.

The group of products described above, developed and sold under

the brand name of CitiFinancial, is characterized by a strong, more

than nine-fold sales growth, which proves the implemented market

penetration model to be efficient.

Branch network

2004 was a period of intensive restructuring of the Bank’s branch

network, aiming at optimization of the operating cost and

accessibility to retail and corporate customers. The corporate

network has been divided into four Macro-Regions with

Headquarters in Warsaw (Central-Eastern), Cracow (Southern),

Bydgoszcz (Northern) and Poznañ (Western), which had 54

branches in total at the end of 2004.

The Consumer Banking branch network had 86 branches at the end

of 2004, including 11 branches dedicated to CitiGold Wealth

Management customers.

One of the highlights in 2004 was an extension of branches’

functionality with both global and corporate customer services;

as a result, 28 out of 54 Corporate Banking branches and 10 out of

86 Consumer Banking branches may service customers of both

divisions. Moreover, the networks of both divisions’ – 129 branches

in total – may service CitiBusiness customers.

Additionally, the Bank has rapidly developed its CitiFinancial branch

network. In 2004 the number of branches grew by 23, amounting to

39 at the end of the year.

Changes in IT

The objective of IT development is to provide optimal processes

while ensuring data security and continuity, and implementation of

new solutions reflecting technological progress, product needs and

the Bank regulatory environment. The implementation and upgrade

of systems, which amounted to nearly PLN 50 million in 2004,

provides evidence of the sophistication of the Bank’s technological

infrastructure.

The following solutions supported the development of a leading-

edge product range, improvement in quality and efficiency, and

reduction in cost:

• Introduction of a data feed from the Skarbiec system to the

Portfolio Tracker system, which increased the range of Wealth

Management products for CitiGold customers;

• The implementation of new payment means for Social Security

(ZUS) and Tax Office, processed through CitiGateway, CitiDirect,

Goniec and Elixir-OK;

• Implementation of a piloting multi-station version of the NBP

Skarbnet system, which enables dealers to enter online into

transactions on money bills, treasury bonds and debentures;

• Implementation of the CRM application for servicing of the Bank’s

biggest customer segment, enhancing relationship management;

• Integration of the acquisition and sales elements in the CRM

application in the Commercial Bank Division, implementation of

mechanisms synchronizing customer and prospect data with the

marketing base in order to enhance customer service;

• Automation of payments delivered under an agreement between

the Bank and Poczta Polska. The implementation enabled

processing of ‘paper’ transactions initiated at the post office

through the CitiGateway system (the Poczta Polska project), and

substantial savings due to elimination of manual processing;

• Implementation of an automated interface between FlexCube, the

Bank’s main accounting system, and the Sorbnet system. The

interface reduces the waiting time for processing of Sorbnet

messages to 1 minute;

• Conversion of customers’ securities records from the Skarbiec

system to the Securities module in the Bank’s main accounting

system, which made it possible to withdraw the Skarbiec system,

and in consequence to reduce the cost of service;

• Implementation of Straight Through Processing (STP) for MT202

messages, which enabled an improvement of the customer

service and reduced use of paper.

In order to reduce expenses, the Bank uses state-of-the-art

technological achievements, implementing the idea of an e-office.

This may be evidenced by the extension of electronic archiving and

documents circulation processes for customers’ credit documenta-

tion. In result, the Bank obtains more efficient access to archival

documents and saves office space necessary for paper archives.

Moreover, a piloting version of an e-order module was implemented

among employees of technological departments to replace the

circulation of paper documents connected with administration of

equipment removal, equipment replacement or repairs at the Bank.

While operating a large number of branches countrywide, the Bank

also works on development of internal communication among its

employees. In 2004 a videoconference platform was launched,

which enables videoconference meetings of Bank’s employees with

Management. Also the intranet ród³o (Source) service is now being

upgraded with an enhanced news services, which has contributed to

significant improvement in communication between many of the

Bank’s units.

Additionally, the Bank takes care to optimize the fulfillment of its

regulatory obligations. In 2004 the Bank launched the full

functionality of the nCAPS system, facilitating automated

calculation, recording and reporting of loan provisions required by

the regulator and the Bank. Also a number of changes have been

implemented in the WEBIS and Abacus/Fire applications in the area

of functionality for management of reports required by the NBP.

A system has been developed and implemented for reporting of

suspicious transactions, pursuant to the Anti-Money Laundering Act

(Dimon – AML Register).

An additional functionality was also developed and implemented in

the BoP system, facilitating generation of reports sent to the NBP

pursuant to new requirements of the EU (Resolution No. 48/2003

of the Management Board of the NBP of 14 November 2003).

Another initiative that is managed by the Operations and

Technology Division is the redevelopment and centralization of

customer service systems. For example the telecommunication

infrastructure for the Customer Service Department in Katowice

was extended together with the provision of a backup solution and

implementation of IVR infrastructure.

Moreover, in 2004 the Bank launched an additional server center,

which increased the efficiency of the CitiDirect system; the Bank

implemented changes adapting the system to the new IBAN

account format.

In order to ensure high quality of service, in 2004, the Bank started

replacing its ATMs with more advanced and more efficient devices,

meeting the most recent requirements of Visa and MasterCard

systems. Changes were also introduced into the Citibank Online

e-banking system, improving its functionality and reliability.

In addition, together with development of the product range for

CitiBusiness customers, the Bank performed a number of

operations in order to adapt the system to this group of customers,

and in order to provide an access to CitiBusiness products in branch

networks of both the Corporate Bank and the Consumer Bank

Divisions.

Brokerage

The Bank operates on the capital market through its wholly owned

brokerage subsidiary Dom Maklerski Banku Handlowego SA

(„DMBH”). DMBH was established on 1 April 2001 as a result of the

transfer of all assets of Centrum Operacji Kapita³owych Banku

Handlowego (Capital Markets Centre, previously a unit within Bank)

to Citibrokerage S.A., which as of that day changed its name to that

used currently.

The bullish trend of the securities market in 2004 was a con-

sequence of, among other factors, Poland’s accession to the

European Union and a number of new listings, including Poland’s

largest bank PKO BP. There has also been a growing interest of

foreign investors in the Polish capital market, with particular focus

on participation in trade on the Warsaw Stock Exchange. DMBH

largely benefited from the bullish trend, and – having a very strong

Secondary Market

sales and transaction management team, specialized in servicing of

large institutional customers whose assets are kept at trustee

banks – DMBH was a leader on the stock market, with a share of

18.5% in the total turnover generated by all brokerage houses on

this market.

In 2004, DMBH recorded an increase in turnover of 64% in

comparison with 2003. The value of transactions settled in 2004

exceeded PLN 20 billion, with a subsequent increase in the number

of transactions of up to 432,000, i.e. a growth by more than 11% in

comparison with 2003.

The bullish market trend had a positive impact on the popularity of

capital market investments, which was manifested by a 13%

increase in the number of investment accounts managed by DMBH

in 2004 – it exceeded 14,500.

In 2004, DMBH arranged 5 issues, including a pioneering

transaction where the first American company, IVAX Corporation,

listed simultaneously at the AMEX and London Stock Exchange,

entered the Warsaw Stock Exchange. The shares entered the

market under a call for exchange of stocks, the first-ever in Poland.

The company taken over under this call was Polfa Kutno, and its

stocks were paid for with stocks of IVAX Corporation. DMBH

intermediated in the call.

The total value of offerings managed by DMBH was PLN 666

million, which is 4.9% of the value of securities offered on the

market. With respect to the number of offerings, DMBH managed

over 10% of transactions on the primary market.

Primary Market

DMBH as Market Maker

The Capital Operations Center of Bank Handlowy (COK BH) com-

menced its independent operations on the Warsaw Stock Exchange

(WGPW) in 1994, firstly as a Stock Exchange Member – Specialist,

and subsequently as a Market Maker. Since the beginning of the

futures market on the WGPW, DMBH has acted as a Market Maker in

the area of futures contracts for the WIG 20 index. Eight years ago,

and before COK BH merged with Citibrokerage, COK BH started its

function as a Market Organizer on the Central Table of Offers

(CeTO), whose operating principles are similar to those of a Market

Maker. This function is continued by DMBH.

Both Market Makers and Organizers are responsible for placing and

maintaining put and call offers of fixed value on the order cards of

individual companies. This provides investors with a guarantee of

order execution. It is especially important for companies with low

liquidity. At the end of 2004 DMBH acted as Market Maker for 44

company shares, i.e. 19.1% of all shares listed on the WGPW, one

convertible bond and futures contracts for the WIG20 index. It is

noteworthy that among companies managed by Market Makers,

there were three foreign companies quoted in parallel on parent

markets.

On the CeTO, DMBH operated as a Market Maker for one stock and

USD CitiBonds investment certificate of the Mixed Investment Fund.

DMBH held a leading position with respect to the value of

transactions managed as Market Maker. The share in this market

segment in 2004 reached 28.0% of the total turnover managed by

all brokerage houses acting as Market Makers.

Leasing

Leasing services are provided by two subsidiary companies of the

Bank: Handlowy-Leasing S.A. and Citileasing Sp. z o.o. The offering

of Handlowy-Leasing S.A. and Citileasing Sp. z o.o. is primarily

aimed at corporate customers serviced by Bank Handlowy w War-

szawie SA.

The range of products includes operating leases, financial leases

and sale and lease back of fixed assets in the following groups:

• industrial machinery and equipment, complete technological

lines, equipment of production plants;

• fleets of cars, vans and trucks;

• trailers, semi-trailers, refrigerated trucks;

• typographic machines;

• construction machines.

Additionally, in 2004, upgraded versions of transport and

typographic programs were introduced and a financing program for

plastics processing machines has been created and implemented.

2004 was also a period during which both companies made

considerable effort to standardize internal procedures and further

extend distribution channels by developing cooperation with the

Bank’s branch network.

The development of the product range reflected adaptation to

changes connected with Poland’s accession to the European Union.

In Q4 of 2004, Handlowy-Leasing S.A. issued lease commitments

within the first round of applications for structural funds of the

European Union granted to small and medium enterprises under the

auspices of the Sectoral Operational Programme – Increase of

Competitiveness of Enterprises (SOP – ICE).

Asset management

At the end of 2004, the value of assets managed by Handlowy

Zarz¹dzanie Aktywami S.A. (HanZA) was PLN 2,439 million,

a growth of over 50% in comparison with 2003 year-end figures.

The portfolio value of individual customers using the on-call

securities portfolio management service was PLN 775 million at the

end of the year. The value of institutional customers’ assets was

PLN 1,664 million, where PLN 415 million were assets of CitiFunds

and PLN 1,221 million came from insurance companies and other

financial institutions.

In 2004 the portfolios managed by HanZA generated good results.

Most investment strategies used for management of customer

portfolios exceeded the applicable reference rates (benchmarks).

The highest rate of return was generated by portfolios investing in

shares quoted on the Warsaw Stock Exchange – selective securities

portfolio generated 33.2%. Debt securities portfolios, which belong

to products most often chosen by institutional customers, had also

generated a competitive rate of return, amounting to 7.5%.

Investment funds management

The investment funds management business is performed by the

Bank’s subsidiary Towarzystwo Funduszy Inwetycyjnych Banku

Handlowego SA. The value of assets managed by Towarzystwo

Funduszy Inwetycyjnych Banku Handlowego SA at the end of

December 2004 exceeded PLN 1 billion. In comparison with the

volume of assets at the level of PLN 917 million on December 31,

2003, in 2004 the value of assets grew by ca. 10%. The fund with

the highest volume of assets on December 31, 2004 was CitiSenior

Specialized Open - Ended Investment Fund (SFIO) – the value of

assets was over PLN 252 million.

2004 was another successful year for equity and mixed funds,

which doubled their volume of assets in comparison with 2003.

Apart from a growth in assets, these funds also had very good

investment results. The highest rate of return in this period was

generated by a fund investing 100% in stocks – CitiEquity Open-

Ended Investment Fund (FIO), an increase by 20.42%. The

CitiBalanced Eastern European FIO generated 16.17% for holders of

participation units, and the CitiSenior SFIO 9.08%. The value of

CitiBonds FIO participation units grew by 5.43%, and CitiMoney FIO

by 4.58%. Very good results were also generated by the

CitiLiquidity SFIO – a growth by 5.64%.

A 2004 highlight was a change of the strategy implemented since

September by the CitiBalanced FIO, which opened its assets to

investments into stocks of companies listed on exchanges in

Eastern European countries. This new strategy has also been

reflected in the fund’s new name – now CitiBalanced Eastern

European FIO.

There has been a growing interest in CitiFunds Targeted Savings

Plans (CPO) – a savings product addressed to individual customers.

CPO assumes systematic investments of savings in participation

units of one of the CitiFunds for a period of 3, 5, 10 or 15 years. Over

5,600 CPO registers were opened during the year. By the end of

December, the customers accumulated over PLN 118 million in

registers opened under CPOs.

The network of entities distributing participation units of CitiFunds

is being constantly developed. Since 1Q 2004, as many as 5

CitiFunds – CitiEquity FIO, CitiBalanced Eastern European FIO,

CitiBonds FIO, CitiMoney FIO and CitiSenior SFIO – are available at

outlets of Deutsche Bank PBC S.A.

Special purpose investment companies

Apart from strategic commitments – including Dom Maklerski Banku

Handlowego SA, Towarzystwo Funduszy Inwestycyjnych Banku

Handlowego SA, Handlowy Zarz¹dzanie Aktywami S.A., Handlowy

Leasing S.A., Citileasing Sp. z o. o., Handlowy Heller S.A. – in 2004

the Bank performed capital operations through four special

purpose investment companies. Their activity was financed by the

Bank with returnable contributions to their equity capital,

subordinated loans, and also from financial profits of the com-

panies.

Apart from strategic companies, the remaining exposures were

allocated to restructuring portfolio, with an exit strategy.

Other Information about the Bank

The Bank has a full rating from the international rating agency

Moody’s Investors Service.

Since January 2003 Moody’s has maintained an A2 rating for long-

term deposits (investment grade, 6th on the 21 point rating scale)

and Prime-1 for short-term deposits (1st on the 4 point rating scale).

The Bank ratings are at the highest level available for entities

domiciled in Poland.

Additionally, on 31 October, 2004, the agency notified the Bank of

a change in outlook of the financial strength rating, now at D+ level,

from stable to positive, which was justified by the Bank’s leading

market position in the area of credit cards, corporate and invest-

ment banking, capital market expertise, as well as cash and trade

services and the expansion of mass-market Consumer Banking

under the CitiFinancial brand.

Rating

The Bank’s stock performance on the Warsaw Stock

Exchange

Awards and honors

The Bank’s share price on the Warsaw Stock Exchange (WGPW) in

2004 grew from PLN 58.5 (2 January 2004) to PLN 64.10

(31 December 2004), i.e. by 9.6%. For comparison, the WIGBANKI

banking sector index in the same period grew by 32.3%, and the

main exchange index, WIG, grew by 21.3%.

Awards and honors granted to Bank Handlowy w Warszawie SA in

2004:

1. The prestigious financial monthly, Global Finance, recognized

the Bank as the best bank in Poland in the foreign exchange

market (“Best Foreign Exchange Bank 2004”).

2. For the first time in the history of Dom Maklerski Banku

Handlowego SA, the President of the Warsaw Stock Exchange

honored it with an award for the largest share of stock

exchange turnover and for the largest share of market maker

activity.

3. The Editing Board of the Polish edition of “Newsweek” awarded

the Bank the title of the best employer of 2003 in the financial

institutions category.

4. The Bank was recognized as the best bank in Poland in the

ranking list of “Best Emerging Market Banks 2004” published by

the Global Finance magazine.

5. “Twój Styl” magazine granted to the Bank the special award

“Alicja 2003” as a member of the Coalition for Direct Debit.

Quotations of BHW Stocks & Chosen Indices

Stock Price & Indices on 2 Jan. 04 = 100

BHW

WIG Banki

WIG

100

105

110

115

120

125

130

135

01/04

03/04

05/04

07/04

09/04

11/04

BHW

WIG Banki

WIG

Quotations of BHW Stocks, PLN

BHW

01/04 03/04 05/04 07/04 09/04 11/04

BHW

6. Analysts of the Bank were ranked number one for their

forecasts of macroeconomic indices published in Gazeta

Bankowa in 2003.

7. MasterCard International awarded Bank Handlowy w Warszawie

SA the silver “Rock Award 2003” in the category of highest

achievements in credit card development.

8. Corporate branches of Citibank Handlowy in Bydgoszcz and

S³upsk were awarded in the category of customer-friendly banks

in the Kujawsko-Pomorski Region in a ‘Golden 100’ ranking

published by “Gazeta Pomorska”, Poland’s largest local daily.

9. Corporate Customer-Friendly Bank 2004 – a promotional

emblem, Golden Branch – Corporate Customer-Friendly Bank,

received by all branches signed up by the Bank: in Bydgoszcz,

Gorzów Wielkopolski and Poznañ.

10. The Bank received, as the first financial institution in Poland, an

award of the European Foundation for Quality Management

"Recognized for excellence".

Sponsoring activity and cultural patronage

• 2004 started with the concert entitled „VIVA KARNAWA£” {Long

Live the Carnival}, performed in Witold Lutos³awski Concert

Studio in Warsaw.

• The Bank, as the National Philharmonics Patron of the Year 2004,

was the main sponsor of the King’s Singers concert on 27 April

2004 in the National Philharmonics Concert Hall in Warsaw.

• The Bank sponsored the Extraordinary Symphonic Concert to

commemorate the 10th Anniversary of Witold Lutos³awski’s death

on 17 May 2004 in the National Philharmonics Concert Hall in

Warsaw.

• The artistic season at the National Philharmonics ended in a gala

concert on 28 May 2004 together with the Patron of the Year

awards, one of which was bestowed upon the Bank. The program

of the concert included one of the most eminent opera

masterpieces: “Cavalleria Rusticana” by Pietro Macagni.

• In December 2004 the Bank sponsored a concert of Diana Krall,

a renowned jazz singer, which took place in the Congress Hall of

the Warsaw Palace of Culture and Science.

In addition, from 28 to 30 April, 2004, the European Economic

Summit ‘Europe: Enlargement and Beyond’ was organized in

Warsaw by the World Economic Forum (WEF), the host of annual

conferences in Davos. WEF was assisted by the Polish Organization

Committee, based on a private-public partnership and headed by

Jerzy KoŸmiñski, a former Polish ambassador in Washington. The

Bank was one of the Summit partners, together with other major

companies, including PZU SA and PZU ¯ycie (Main Partner), PKN

Orlen, PGNiG, Eurobank, KGHM, Kulczyk Holding, PSE, and

Polkomtel.

Major risk factors relating to the environment

and operations of Bank

211

Major risk factors related to Bank’s

environment

The Polish economy is expected to slow down in 2005 and the GDP

growth rate should drop to 3.9% from 5.4% in 2004. In the face of

a dwindling role of exports as the main driver of net GDP the main

economic stimulus should be provided by growing investments.

During the second half of 2005, the Bank expects the investment

growth rate to go into double digits primarily as a result of EU

structural funds and direct foreign investment. Consumer spending

should remain low but stable under the influence of two major

factors. On the one hand, a decrease of real income, high

unemployment rate and a postponement of pension revaluation will

restrain consumer demand and on the other hand direct aid to

farmers and lower prices will push up consumer spending. In our

opinion the role of consumer demand in the GDP structure will

increase in 2006, thus boosting GDP growth, which should reach

4.7% year on year.

During 2005, the expected increasing appetite for investments will

be reflected by higher imports, which should indirectly enlarge the

current account deficit. We predict that the ratio of the current

account deficit to GDP will grow to 3.0-4.0% during 2005-2006, but

from the macroeconomic-balance point of view it should remain

safe.

In the medium term, the main risk to sustainable economic growth

will be the outcome of a reform of the public finance as a pre-

condition for meeting the Maastricht criteria and, in consequence,

for Poland’s adoption of the Euro currency. As a member of the

European Union with a prospect of joining the Economic and

Monetary Union Poland will attract foreign investors mainly with the

size of its market, skilled workforce and relatively low labor costs

combined with a similar level of business risk and technological

development. Foreign Direct Investments will also be stimulated by

Economy

a high, relative to other countries in the region, economic growth

and the expected acceleration of the privatization process.

The fading of the EU effect, which contributed to a rapid growth of

the inflation rate in 2004, will help the inflation rate drop down to

the Monetary Policy Council’s target midway through 2005 and

remain low and stable until the end of the year. Factors contributing

to the lower inflation rate will include the strength of the local

currency and the low pressure on consumer demand. As a con-

sequence, the monetary policy should go from restrictive to

expansive and moderate interest rate increases at a time of a fast-

shrinking inflation rate may, paradoxically, lead to a temporary

increase in real interest rates.

The overall economic condition will strongly depend on the

utilization of the EU funds and the country’s capacity to absorb

them fully and efficiently. It is also worth noting that the yet

undecided European Union’s budget for 2007-2013 may still, con-

trary to earlier assurances, restrict funds allocation to Poland.

The banking services sector, and consequently the Bank’s financial

condition remains closely linked to the country’s overall economic

situation and to the local and regional market conditions.

The greater investments will affect the customer demand for the

Bank’s credit. Other factors expected to influence our performance

include the main macroeconomic indicators, such as the inflation

rate, salaries, interest rates and their trends, foreign trade and

current account situation, budgetary deficit and exchange rates.

Any adverse changes of each of the macroeconomic indicators,

especially a temporary increase of real interest rates and exchange

rate fluctuations may affect the Bank’s performance and its general

economic condition.

Macroeconomic policies and the measures taken by government

institutions exert a major impact on the national economy, and

directly or indirectly on the financial performance of the Bank. In

this context, it cannot be ignored that future political decisions

could have an adverse effect on the Bank’s financial position.

Any changes in economic policies or in the legal system could have

a considerable effect on the Bank’s financial condition. In terms of

banking sector regulation, a particularly important role is played by

statute law, and by the secondary provisions issued by the Minister

of Finance, resolutions of the Management Board of the NBP,

ordinances issued by the President of the NBP, and also resolutions

of the Commission for Banking Supervision (“KNB”).

In terms of the regulations mentioned above, those of key

significance include:

• permissible concentration of credit exposure limits (Banking Act);

• ceiling on equity investments, measured in relation to the capital

base (Banking Act);

• liquidity and credit risk standards (resolutions of the KNB);

• calculation and maintenance of mandatory reserves (NBP,

Banking Act, and resolutions of the KNB and of the NBP

Management Board);

• obligation to create specific provisions against irregular assets

(Regulation of the Ministry of Finance dated 10 December 2003

on the principles of creating provisions for the risks related to the

operations of banks, Banking Act);

• taxation and similar charges;

• draft of the Act implementing the rules defining the limit of

interest rates and fees for consumer loans.

Regulatory risk

Competition within the banking sector

Competition between banks in different segments of the Polish

banking sector seems to be strong. We expect that companies will

increasingly utilize financial alternatives to bank loans, such as

issuance of short-term debt securities, bonds and equity or lease

finance. It is very likely that due to growth in foreign investment in

the banking sector, as well as creation of the single European

market of financial services, an increase in competition will be

observed particularly in such segments as foreign exchange

operations, foreign trade settlement and investment banking.

Poland is in sharp focus of international financial institutions

planning to include the country in their cross-border businesses.

Despite the large number of entities which have announced their

intention to start doing business in Poland, no significant changes in

the banking sector structure are to be expected. Indeed, institutions

for which Poland is an interesting and attractive market have been

active here for a number of years. As a result, the offering of banks

operating in Poland is often similar to that of Western banks. It may,

therefore, be expected that any changes in the sector resulting

from Poland’s EU accession will not alter the banking activity

significantly. The competition will take place mainly in the area of

service quality, especially the speed and efficiency of customer

service. Further consolidation processes could possibly relax the

competition. The significance of electronic access channels to

customer accounts will grow.

The Bank is well prepared to compete in the post accession

environment. Nevertheless, the growing level of competition within

the banking sector may have an adverse effect on the Bank’s

financial performance.

Major risk factors connected with Bank and its

operations

As a typical feature of the banking activity, maturity mismatches

between loans and the funding deposits are also experienced at the

Bank. They may give rise to potential problems for current liquidity,

were there to be a build-up of large payments to customers. The

management of the Bank’s assets and liabilities, including the

regulation and control of liquidity risk, is the responsibility of the

Assets and Liabilities Committee, which defines the strategy that is

implemented by the Treasury Department. There is no certainty,

however, that the persistence of maturity mismatches will not have

an adverse effect on the Bank’s financial condition in the future. The

Bank’s deposit base is stable, diversified and trending upwards. In

addition, the Bank has good access to interbank funding and

adequate capital. The level of liquidity risk is thus low.

The Bank performs foreign exchange operations both on behalf of

its customers and for its own account, and holds open foreign

exchange positions within established limits. As a result, the Bank is

exposed to exchange rate risk, and there is no certainty that future

movements in exchange rates will not have an adverse effect on

the Bank’s financial standing. The control of foreign exchange risk is

the responsibility of the Market Risk Department, which cooperates

with the Treasury Department, which manages the foreign ex-

change position. The market risk is moderate, and the limit of value

at risk (VaR) arising from open foreign exchange position is es-

tablished at a level below 1% of the Bank’s equity.

Liquidity risk

Foreign exchange risk

Interest rate risk

Credit risk

As is the case with other Polish banks, the Bank is exposed to

a mismatch risk regarding the interest rate changes on its assets

and the underlying liabilities. The interest rate risk can arise where

it proves impossible to offset the fall in income caused by lower

rates of interest on loans through a corresponding reduction in the

rates of interest paid to depositors. This risk also applies to

situations where a rise in deposit rates cannot be offset by a corres-

ponding rise in lending rates. The management of interest rate risk

is one of the functions of the Bank’s Assets and Liabilities

Committee, which determines principles for provisioning against

various financial risks being incurred and develops the Bank’s

pricing policies in terms of interest rate risk. There is no certainty

that future interest rate movements will not have an adverse effect

on the Bank’s financial condition. The present level of interest rate

risk is low.

Lending and guarantee business is inherently linked with the risk of

payment delinquency (in terms of both loan principal and interest),

and also with the risk that the asset represented by an outstanding

loan or granted guarantee will prove impossible to recover. The

Bank monitors its risk assets on an ongoing basis, classifies them in

accordance with the relevant regulations laid down by the National

Bank of Poland, and establishes all the requisite specific provisions

against loans classified as irregular. In connection with the pos-

sibility of changes in the external environment that could have

a negative impact on the financial situation of the Bank’s customers,

there is no certainty that in the future the need to provision

adequately against the existing asset portfolio will not have an

adverse effect on the Bank’s financial condition, or that the

provisions and collateral in place will prove sufficient to absorb the

losses possibly arising on lending activity.

Equity investment risk

Operating risk

Equity investments can be divided into two categories: strategic and

restructuring. The strategic portfolio includes the Bank’s shares in

financial institutions of a strategic significance to the Bank due to

its operations. The restructuring investment exposure arises from

debt to equity conversion. The investments are executed directly by

the Bank or indirectly via the Bank’s wholly-owned special purpose

investment vehicles. At the end of 2004, the value of net equity

investments including subordinated loans and convertible bonds for

the Bank’s investment companies amounted to PLN 433.6 million

compared to PLN 379.8 million as of 31 December 2003. For some

equity investments, their pricing is based on the assumption of

finding a strategic investor for the company, in which the Bank

holds shares. Therefore, a continuous high level of foreign

investment may be crucial to the valuation of such investments.

Moreover, due to a number of macroeconomic effects, the situation

on equity markets and other factors having an impact on activities

of the companies in which the Bank is a shareholder, may mean that

the selling price of owned shares may turn out to be lower than

expected, or even lower than their value in the Bank’s books, which

may have a negative impact on market valuation of the Bank’s

investments. The Bank has already created substantial provisions

related to its equity investments and hence the risk level connected

with a further drop in the value of the Bank’s investment portfolio is

low.

The Bank defines its operating risk as the risk of loss resulting from

inadequate or failed internal processes, people or systems, or from

external events.

In recent years, the Bank has managed its operating risk using

a variety of tools and techniques, such as policies, procedures,

checklists, ceilings, self assessment process, information security

monitoring tools, contingency planning, insurance and audits.

Following the publication of the Basel Committee’s recommen-

dations the Management Board enhanced qualitative and

quantitative measurements of operating risk. Centralization and

automation implemented in recent years has contributed to a con-

siderable reduction of the occurrence and amounts of operating

losses.

The overall level of operating risk is moderate.

Pursuant to the Act on the Bank Guarantee Fund, the Bank is

included in a mandatory deposit protection scheme for personal

deposits. Banks included in this scheme are required to make

specific contributions to the Fund.

Due to a general deterioration within the banking sector, or a ban-

kruptcy or financial distress of one of the participating institutions,

the Bank and other participants in the Bank Guarantee Fund may be

required to make large payments to the Fund, in proportion to the

sums held within the individual deposit protection funds established

for given institutions. This could adversely affect the Bank’s

earnings.

Contributions to the Bank Guarantee Fund

Prospects for the business

development of Bank

211

General objectives of the Bank’s development

The Bank’s objective is to systematically increase shareholder value

by ensuring an appropriate return on equity and increasing the

Bank’s share in key market segments.

The Bank has a high level of capital, PLN 5,738.6 bn as of 31

December 2004, which ranks the Bank in third place in the Polish

banking sector. The Bank may not fully utilize its capacity for

dynamic asset growth, measured by Capital Adequacy Ratio (CAR)

amounting to 19.3% as of 31 December 2004, which is significantly

above the obligatory level of 8%. Excess capital affects the return

on equity ratio, which is one of the key performance measures. The

Bank is considering various ways to optimalize the amount of

capital to a level more consistent with its business requirements,

while maintaining a safe level of Capital Adequacy Ratio not lower

than 10-12%.

Payment of future dividends, including a special dividend for

reducing excess capital, depends on several factors: Bank’s

earnings, financial condition including liquidity requirements, the

Bank’s expectations regarding future financial performance, as well

as tax, regulatory and legal issues.

As long as the CAR exceeds 10-12%, the Bank will continue its policy

to allocate most of the profits to dividend payments.

In the past year, the Bank increased its customer base thanks to,

among other factors, the expansion of services for small enter-

prises and consumer banking. In the coming years, the Bank’s

intention will be to continue active acquisition of new customers

from all market segments, with a particular emphasis on consumer

banking and enterprises generating sales revenues below 8 million

zloty (the so-called CitiBusiness segment).

Over the next few years, the Bank aims for a double-digit market

share, as measured by its share in the net income from banking

activity generated by the banking sector. During 2004, this share

amounted to 6.6%. The market share increase is to be attained by

maintaining the Bank’s leading position in corporate banking and

services for high net worth individuals. Business areas with a high

growth potential, mainly Global Consumer Bank and loans to private

individuals (CitiFinancial) will be significantly developed.

The Bank will also place a special emphasis on its cost management

policy. During 2004, the Bank’s share of general expenses of the

banking sector was 7.7% in comparison with 7.0% as at the end of

2003. In the coming years, the Bank will focus on a strict cost

discipline, so as to ensure a sustainable income/cost ratio above 2.0.

The Bank’s share in the net financial result of the banking sector

during 2004 amounted to 5.3%, as compared to 10.4% in 2003.

One of the Bank’s priorities for the coming years is further

development of the Regional Processing Center in Olsztyn, which

provides settlement services for the Bank and for foreign banks

within Citigroup.

The Bank is a corporate banking leader in Poland. At the end of

2004, its share of the corporate lending* market stood at 6.6%, as

compared to 9.1% at the end of 2003, whereas the share in the

corporate deposits market amounted to 11.8%, as compared to

15.3% in 2003. The Bank’s share of the corporate debt origination

market, measured by indebtedness size, was 20.3% at the end of

2004 compared to 23.5% at the end of 2003.

In 2004, the Bank operated on the basis of a newly implemented,

model for servicing corporate customers. As a consequence of

introducing the new Customer Coverage Model, the product

offering for large and medium-size domestic enterprises was ex-

panded. The largest customers of the Bank were provided with

a fully customized service.

Corporate banking

* Private and state-owned companies and cooperatives.

The Bank’s potential corporate banking customer base includes all

companies operating in Poland, except for those belonging to

sectors permanently excluded from the Bank’s target market due to

the general Bank policy or included on restricted lists as a result of

sanctions imposed either by international organizations or the US

government.

The Bank’s position is particularly strong in servicing international

corporations and the largest Polish companies. Moreover, it is the

foremost institution in handling money market and foreign

exchange transactions. The Bank’s goal is to retain its present

market share in these areas. In developing relationships with the

largest customers, the Bank has the significant advantage of being

part of Citigroup. The Bank is in a position to offer to these

customers unique services that blend its own knowledge of the

domestic business environment with the international experience

and global reach of Citigroup.

The majority of the Bank’s revenues will be generated by cash

management, trade service and treasury products. The solutions

and innovations in these product groups will be the key factors

determining the competitive advantage of the Bank, in particular in

cooperation with the most demanding international and leading

domestic companies. The Bank will also aim to use the possibilities

of selling these products to the large and medium-sized domestic

enterprises segment to a much greater extent.

Investment banking services will continue to be offered in close

cooperation between the Bank and Citigroup Global Markets. This

will make it possible to offer servicing of large-scale international

transactions as well as provide services to domestic companies.

Retail banking

The Bank considers that services for customers of the consumer

banking sector provide the highest growth potential in the medium

term.

At the end of 2004, the Bank’s share in total lending to private

individuals totaled 2.3%, compared to 2.0% at the end of 2003,

whereas at the end of 2004 market share of deposits totaled 2.8%

in comparison with 3.0% at the end of 2003.

The Retail Banking is interested in cooperation with all segments of

customers. It is reflected in special tailored product offers taken

into consideration variety of customer needs from different market

segments.

It is of key importance for the Bank to maintain the strong position

in credit cards – the market in which Citigroup is the world leader.

New card types as well as loyalty-building programs will be offered.

The target group of customers to whom the Bank will offer its cards

will be expanded.

The Bank has a very strong position in the high net worth customer

segment. What sets us apart from the field is that these customers

are offered worldwide services.

In 2004 the Bank gradually strengthened its position in this market

segment thanks to the CitiGold Wealth Management service. The

key highlight of the wealth management service is the savings and

investment plan comprising investment, insurance and banking

products. The products available in the Wealth Management

package include current accounts, term deposits, investment

deposits and dual-currency deposits, investment funds, treasury

bills, domestic and international bonds, brokerage services, credit

facilities, credit cards and insurance products. Customer funds are

managed in personalized investment portfolios based on the

customers’ individual needs and preferences. Poland is the first

European country where Citigroup introduced its CitiGold Wealth

Management service.

The Bank is expanding its offering to medium-income customers

holding CitiOne or CitiKonto accounts. In addition to developing

traditional deposit services and increasing transactional functiona-

lity of the accounts, special emphasis will be placed on extending

investment and insurance offering. Along with the increasing

customers’ demand for new methods of placing their savings, the

Bank will expand its investment fund offering (CitiFundusze) and

will make available the offering of other financial institutions to the

Bank’s customers.

The Bank also continues granting cash loans to low-income

customers. This activity is treated as a separate business and is

conducted under the brand of CitiFinancial, a Citigroup division

specialized in lending to private individuals. The Bank expects a dy-

namic growth in this area.

The bank actively seeks new customers in the small enterprises’

segment with annual sales revenues up to 2 million zloty, which

operates within the consumer banking structure under the

CitiBusiness logo. The CitiBusiness concept is to offer solutions

supporting customers at every step they take from the moment

they establish their own companies. In this respect the Bank

prepared a special, comprehensive product offer for SMEs, based

on product packages meeting entrepreneur’s expectations. An

important distinguishing feature of CitiBusiness service is the

combination of private and company accounts, which provides an

unprecedented access to retail products for entrepreneurs.

Distribution network

The standardization process of visual identification of the Bank has

been completed. Currently, both the consumer and the corporate dis-

tribution networks operate under a common logo - .

The priority is to build brand awareness among current and future

customers.

The Bank’s customer service is based on the network of outlets,

banking consultants, third party direct sales agents and remotely

operated distribution channels such as Internet banking, call Center,

IVR (interactive automatic telephone service) and multi-functional

ATMs.

The Bank has a network of outlets distributed throughout the

country. Currently, corporate banking customers have at their

disposal 54 branch offices. Customers of the consumer sector have

at their disposal 86 branches (75 multifunctional branches, 11

CitiGold Wealth Management branches). Private individuals are also

serviced in selected corporate banking branches (24 CitiGold

customer service points and 4 CitiBlue customer service points).

CitiFinancial provides services to its customers in 39 branches.

The planned streamlining of the branch network covers

optimization of available space, closure of less profitable outlets,

and merger of corporate and consumer sector branch offices. Small

businesses and self-employed individuals conducting business

activity (CitiBusiness customers) will be served at consumer and

corporate banking branches. In case of corporate and CitiGold

customers, the mainstay of the distribution network will be bank

consultants. The network of CitiFinancial branches will be

significantly enlarged.

The use of the Bank’s distribution network takes into account plans

of increasing the scope of activities in consumer banking and

achieving synergies with the corporate bank. In the coming years,

the Bank will aim to minimize operational activities in branches and

completely transform them into service centers. The priority is to

increase functionality and availability of remote distribution

channels and to further enhance the qualifications of banking

consultants, in particular those handling large entities that demand

more sophisticated financial products. In the case of consumer

banking substantial emphasis will be placed on further growth of

Internet usage (Citibank Online). Currently more then half of

transactions are carried out using this transaction channel. As

a target, the Internet is to become the basic source of conducting

transactions for private individuals.

High functionality and high quality of access to call centers will be

maintained. By the end of 2004, those services will have been

integrated for private individuals and small businesses at one call

center. The project of centralizing CitiService/Customer Service

Department telephone service for large and medium-sized

companies has been successfully completed.

Synergies

Wide-ranging experience and diverse operations provide the Bank

with strong competitive leverage and allow it to offer customers

comprehensive solutions by taking advantage of the opportunities

afforded by synergies between corporate and consumer banking,

between banking services, asset management and brokerage

services, and also between banking products and insurance, etc.

Packages of deposit and loan products are offered to the staff of

the largest corporate customers. A typical package includes per-

sonal current accounts (e.g. CitiKonto) together with payroll

support facilities, credit cards, mortgage loans and cash advances.

In addition to pricing incentives, the Bank is prepared to conduct

financial educational seminars for their employees.

The Bank will also continue to sell corporate products to its

consumer customers from the CitiGold sector. Specialized treasury

products, brokerage services and asset management facilities in

particular will be offered. All groups of consumer customers will

further be offered investment products, in particular participation

units in CitiFundusze. The product range of CitiFundusze will be

expanded to meet the new demands of customers. Handlowy

Zarz¹dzanie Aktywami, supported by the Treasury Department in

Poland and overseas, will provide expertise in this area.

The community

The Bank aspires to be a model corporation in Poland, with a strong

sense of social responsibility. The Bank actively supports various

cultural, educational and philanthropic activities – both at the

national level and in local communities, especially through the

Kronenberg Foundation. Moreover, the Bank actively participates in

the dialogue between the state authorities and the business sector

about regulations that influence the climate and conditions of

conducting business activity in Poland.

Management

and Supervisory Boards

211

S³awomir Sikora

President of the Bank’s

Management Board

Sunil Sreenivasan

Vice-President of the Bank’s

Management Board

Philip Vincent King

Vice-President of the Bank’s

Management Board

David J. Smith

Vice-President of the Bank’s

Management Board

Lidia Jab³onowska-Luba

Member of the Bank’s

Management Board

Micha³ H. Mro¿ek

Member of the Bank’s

Management Board

As of 31 December 2004, the Management Board of the Bank consisted of the following:

The following changes of the Bank’s Supervisory Board took place

in 2004:

• the following were not appointed for the subsequent term of

office:

24 June 2004 Andrzej Gdula,

24 June 2004 Allan J. Hirst,

24 June 2004 Edward T. Walsh.

In the letter dated 3 May 2004 Mr. Krzysztof Opawski offered to the

President of the Supervisory Board of the Bank his resignation from

the function of the Member of the Bank’s Supervisory Board.

The Bank was informed about the resignation of Mr. Krzysztof

Opawski on 25 May 2004.

As of 31 December 2004, the Supervisory Board of the Bank consisted of the following members:

Stanis³aw So³tysiñski

Shirish Apte

Göran Collert

Susan Helena Dean

Miros³aw Gryszka

Rupert Hubbard

President

Vice-President

Member

Edward Kuczera

Stephen H. Long

Jaros³aw Myjak

Andrzej Olechowski

Aneta M. Pop³awska

Frederick F. Seegers

Member

• in addition the following resigned on:

4 August 2004 Jean Paul Votron,

25 November 2004 Atif Aslam Bajwa,

25 November 2004 Carlos Urrutia.

• the following were appointed on:

24 June 2004 Atif Aslam Bajwa,

24 June 2004 Susan Helena Dean,

24 June 2004 Jaros³aw Myjak,

24 June 2004 Aneta M. Pop³awska,

7 December 2004 Rupert Hubbard,

7 December 2004 Stephen H. Long,

7 December 2004 Frederick F. Seegers.

The following changes of the Bank’s Management Board occurred in

2004:

• resigned on:

30 March 2004 Wies³aw Kalinowski,

• appointed on:

25 May 2004 Micha³ H. Mro¿ek.

On 7 December 2004, the Supervisory Board of the Bank appointed

Mr. Reza Ghaffari to the position of Vice-President of the Bank's

Management Board. The resolution became effective on 3 February

2005, after Mr. Reza Ghaffari fulfilled the condition of obtaining the

required work permit.

On 3 February 2004, Mr. David J. Smith resigned as Vice-President

and Member of the Management Board expired.

Financial statements

211

• issuing and confirming sureties,

• issuing and confirming bank guarantees and open letters of

credit,

• performing FX operations,

• provision of agency services in money transfers abroad by resi-

dents and settlements with non-residents in Poland,

• issuing of banking securities,

• commissioned operations related to issue of securities,

• safe-keeping of valuable objects and securities and safe-box

services,

• issuing of payment cards and processing of operations executed

with use of such cards,

• purchase and sale of receivables,

• processing of forward transactions.

The Bank may also:

• take up or purchase shares and rights attached to shares, shares

of other legal entities and investment fund units,

• organize and service financial lease projects,

• render factoring services,

• trade in securities on its own account and act as an agency in

securities trading,

• operate securities accounts,

• render financial consulting and advisory services,

• undertake commitments related to issue of securities,

• perform the function of a representative bank within the meaning

of the Bonds Act,

• purchase and sell real estate, and perpetual usufruct rights,

• perform settlements for trading in securities, property rights and

derivative financial instruments,

INTRODUCTION

Bank’s operations

Bank Handlowy w Warszawie SA (“the Bank”) has its registered seat

in Warsaw, at ul. Senatorska 16, 00-923 Warszawa. The Bank was

founded on the strength of a Notarial Deed of 13 April 1870. The

Bank is registered in the Register of Entrepreneurs in the National

Court Register maintained by the District Court for Warsaw, XIX

Commercial Department in Warsaw, under KRS number

0000001538.

Under the Polish Classification of Economic Activity (PKD), the

principal business of the Bank is “other banking activity”. According

to the classification followed by the regulated market Warsaw Stock

Exchange, the business of the Bank is “finance – banks”.

The Bank operates on the basis of applicable regulations and its

Articles of Association.

The business of the Bank is the performance of domestic and fo-

reign banking operations and all other activity related to banking

operations as permitted by law.

Pursuant to the Bank’s Articles of Association, the Bank performs

the following banking operations:

• accepting deposits payable on request or on a given date and

account operation for such deposits,

• operation of other bank accounts,

• performing cash settlements in all forms accepted in domestic

and international banking operations,

• extending credits and cash loans,

• conducting operations which involve checks, bills of exchange and

warrants,

• exchange debt for assets belonging to the debtor, on terms agreed

on with such a debtor,

• purchase and sell derivative financial instruments at the Bank’s

own account and act as an agency in trading therein,

• render financial services, including soliciting customers within the

meaning of the Act on the organization and operations of pension

funds,

• accept orders to purchase, sell or subscribe for participation units

and investment certificates of investment funds,

• render insurance agency services,

• act as depository for pension funds,

• act as depository for investment funds.

For the purpose of conducting its business, the Bank has the right

to hold foreign currencies and trade therein.

Time limits for the operation of the Bank

The operation of the Bank is not limited in time.

Financial data presentation periods

The annual financial statements of the Bank cover the period from

1 January 2004 to 31 December 2004. The comparable Financial

state-ments cover the period from 1 January 2003 to 31 December

2003.

Internal organization units of the Bank

The Bank’s annual financial statements for 2004 and comparable

financial data for 2003 contain the financial data of all of its organi-

zational units, through which operations are performed. As of 31 De-

cember 2004, these included the Head Office in Warsaw, 52 bran-

ches and 115 other establishments servicing clients in Poland.

None of these units prepare separate financial statements.

Related parties

The Bank is a parent entity and material investor. The list of subsi-

diaries, joint venture and associated undertakings held by the Bank

is presented in note 10 to the balance sheet. The Bank is preparing

a consolidated financial report for 2004.

Business combinations

In 2004 and 2003 no business combinations occurred.

Going concern

The financial statements for 2004 have been prepared under the

assumption of the Bank’s continued operation in the foreseeable

future, with no circumstances directly indicating any threat to such

continued operation.

Reclassification and presentation of financial

data for 2003

In order to maintain comparability of financial data with the

disclosures for the current period, the data covering 2003 was sub-

ject to adjustment with respect to the data published previously in

the 2003 annual report. These adjustments arise from the intro-

duction of a change in accounting principle of recording repo and

reverse repo transactions of the sell-buy-back (“SBB”) and buy-sell-

back (“BSB”) type. The changes are presented in explanatory Notes

to balance sheet no 2A, 16A and 20A.

Differences arising from the reclassification and financial effects of

the changes have been presented in Additional Explanatory Notes

32 and 33.

Opinion issued by auditors on the previous

period financial statements of the Bank

The Bank’s financial statements as of 31 December 2003 were re-

viewed by the chartered auditor KPMG Audyt Sp. z o.o. (until 9 May

2004 named KPMG Polska Audyt Sp. z o.o.). The auditor issued an

unqualified opinion.

Accounting principles

The Bank’s annual financial statements for 2004 were prepared in

accordance with the following:

• Regulation of the Council of Ministers dated 16 October 2001 con-

cerning current and periodical information reported by issuers of

securities (Journal of Laws no. 139, item 1569, as amended),

• Regulation of the Council of Ministers dated 11 August 2004,

concerning specific conditions that should be met by the issue

prospectus and the abbreviated prospectus (Journal of Laws no.

186, item 1921),

and with the provisions of:

• the Accounting Act of 29 September 1994 (Journal of Laws of

2002, no. 76, item 694, as amended),

• Regulation of the Ministry of Finance dated 10 December 2001 on

specific accounting principles for banks (Journal of Laws no. 149,

item 1673, as amended),

• Regulation of the Ministry of Finance dated 12 December 2001 on

specific principles for recognition, valuation and presentation of

financial instruments (Journal of Laws no. 149, item 1674, as

amended),

General information

• Regulation of the Ministry of Finance dated 10 December 2003 on

the principles of creating provisions for the risks related to the

operations of banks (Journal of Laws no. 218, item 2147).

Tangible and intangible fixed assets are recognized at their pur-

chase price less accumulated depreciation, and after charges for

permanent diminution in value at the end of the period. Depre-

ciation is calculated using the straight-line method at rates defined

in the approved depreciation schedule for 2004.

Annual depreciation rates employed by the Bank are as follows:

Assets with original cost less than PLN 3,500 are expensed as they

are brought into use.

Fixed assets also include rights of perpetual usufruct of land received

free of charge in previous years following applicable regulations

being in power at that time.

Tangible and intangible fixed assets

Buildings and structures

Motor vehicles

Computers

Office equipment

Other tangible fixed assets

Computer software and licenses (except

the main operating system, which is depreciated

at the rate of 20%)

Goodwill

Other intangible fixed assets

1.5%

14.0%

7.0%

34.0%

20.0%

34.0%

5.0%

20.0%

4.5%

20.0%

—

Historically, fixed assets were periodically subjected to value adjust-

ments with the indices published by the President of the Central

Statistical Office. The results of revaluation were reflected in the

revaluation reserve in the Bank’s equity. It should be noted that no

revaluation based on the indices published by the Central Statistical

Office has taken place since 31 December 1995.

Fixed assets under construction are represented by direct expenses

incurred in connection with unfinished construction, assembly or

improvement of fixed asset, including write-downs for permanent

diminution in value.

Balance sheet and off-balance sheet items denominated in foreign

currencies are translated at the average exchange rate at the ba-

lance sheet date as published by the President of the National Bank

of Poland (“NBP”).

Foreign exchange differences arising on the revaluation of balance

sheet foreign currency positions are recognized in the profit and

loss account as foreign exchange gains/losses.

Exchange rates for the major foreign currencies used for the trans-

lation of foreign currency balances are as follows:

Foreign currencies

Equity investments – interests in subordinated undertakings

Equity investments – interests in other entities

Outstanding loans and other receivables

Investments in subordinated entities, comprising subsidiaries, joint

venture and associated entities, are classified as “financial assets

available for sale”.

Material interests in subordinated entities are accounted for under

the equity method. Changes in their value are recognized in the

profit and loss account as a participation in net profits/(losses) of

subordinated entities accounted for under the equity method.

Investments in subordinated entities are recognized in the balance

sheet at their purchase price including write-downs for permanent

diminution in value.

Interests in entities other than subordinated undertakings are clas-

sified as “financial assets available for sale”. They are recognized in

the balance sheet at cost net of provisions for any permanent dimi-

nution in value.

Amounts due from financial institutions, non-financial sector and

government sector are presented in the balance sheet as the

difference between the sum of their nominal value and interest

accrued, and the value of specific provisions created for credit risk.

Purchased receivables are presented in the balance sheet as the

difference between the sum of their nominal value and, unsettled

discount, and the value of specific provisions created for credit risk.

1 USD

1 CHF

1 EUR

3.7405

3.0281

4.7170

2.9904

2.6421

4.0790

31.12.2004 31.12.2003in PLN

recognized as income or expense on financial operations. Changes

in the fair value of debt securities available for sale are recognized

in a revaluation reserve. They are recognized in the profit and loss

account only when realized.

Debt securities held until maturity are recorded at cost net of

provisions against any permanent diminution in value.

Interest, discount and premium on all types of debt securities are

accrued/amortized to profit and loss account on a straight line

basis. Adjustments to fair value or for permanent diminution in

value are made in relation to the value of the securities as

described above.

The Bank enters into repo/reverse repo transactions of the sell-

buy-back (“SBB”) and buy-sell-back (“BSB”) type on securities.

Securities sold with the promise to buyback (SBB) are presented in

balance sheet assets and concurrently are disclosed as liabilities

arising from granted promise of repurchase. In the case of BSB type

transactions the securities acquired are presented as a receivable

arising from repurchase clause.

Assets repossessed in lieu of debts are recognized at fair value.

A specific provision is established for the difference between the

outstanding debt and the repossessed assets or a revaluation write

down for the assets is made.

Specific provisions and write-downs for permanent diminution in

value are established according to the principles set out in the

Accounting Act, the Regulation of the Minister of Finance of 10

December 2001 on the particular accounting principles of banks,

Repo/reverse repo transactions

Repossessed assets in lieu of bad debts

Provisions, write-downs for permanent diminution in value

The Bank makes specific provisions, prescribed by the Regulation of

the Ministry of Finance dated 10 December 2003 on the principles

of creating provisions for the risks related to the operations of

banks (Journal of Laws no. 218, item 2147). The specific provisions

for possible credit losses have been calculated in accordance with

the risk classification of particular balance sheet and off-balance

sheet exposures. The following minimum provision percentages

have been applied to provisions for particular risk categories:

Certain collateral, specified in the Regulation of the Ministry of

Finance dated 10 December 2003 on the principles of creating

provisions for the risks related to the operations of banks, is taken

into account in the calculation of provisions necessary for problem

loans. Moreover, pursuant to the provisions of the Regulation, the

required level of provisions for normal loans (cash lending and

consumer loans) and watch loans is reduced by an amount

equivalent to 25% of the general risk provision.

Impaired loans where there is no possibility of collection are written-

off against the specific provisions.

Debt securities are classified in the trading portfolio as available for

sale or held until maturity.

Debt securities classified in the trading portfolio or available for

sale are recorded in the balance sheet at their fair value. Changes in

the fair value of debt securities held in the trading portfolio are

Debt securities

Normal (only consumer loans) and watch loans

Substandard loans

Doubtful loans

Lost loans

1.5%

20%

50%

100%

and the Regulation of the Minister of Finance of 10 December 2003

on the principles of creating provisions for the risks related to the

operations of banks.

Specific provisions are made based on the assessed risk arising on

any particular asset or off-balance sheet commitment.

Specific provisions held against amounts due from the financial

sector, non-financial sector and the State Budget sector and spe-

cific provisions against any permanent diminution in the value of

securities and other assets are deducted from the carrying value of

the related assets in the balance sheet. Provisions held against off-

balance items are disclosed in “Other provisions” in liabilities.

According to the law dated 29 August 1997, - the Banking Law

(Journal of Laws of 2002, no. 72, item 665, as amended), in the

past years the Bank has established a general risk provision, to

cover the potential risk tied to banking activity. The general risk

provision is created by a charge against earnings, and included in

“Other provisions” in liabilities.

In order to allocate the expenses to reporting periods to which they

apply, the Bank recognizes and accounts for expenses on an accrual

basis. This applies, in particular, to the general expenses of the

Bank.

Capital and own equity are stated at nominal value, except for the

revaluation fund which, to the extent it includes the results of

valuation of financial assets available for sale, is disclosed at the

net amount.

Prepayments and accruals

Equity

Derivative instruments

Calculating the net result

Interest income and expenses

Fee and commission income and expenses

Derivative instruments are recognized as financial assets and

liabilities held for trading purposes. Derivatives are valued at their

market value. The effects of changes in market value are included

in the profit and loss account as income or expense on financial

operations.

To date, the Bank has not adopted hedge accounting.

The net result is calculated in compliance with the concept of

prudence, accrual accounting and the matching concept. The net

result reflects all income and relevant expenses set off against

income within a particular reporting period, irrespective of the day

on which these are received or paid.

Interest income includes received or accrued interest on interbank

placement, loans and securities. Interest income and discount ac-

crued on receivables classified as normal and watch are recognized

in the profit and loss account on an accrual basis. Any prepayments

are recognized in the profit and loss account in the respective

reporting period. Interest expense on liabilities for the given repor-

ting period is also recognized on an accrual basis.

Fees and commissions are mainly comprised of amounts other than

interest income on loans, guarantees and letters of credit, as well as

the fees for maintenance of current accounts, banking operations

and servicing of credit cards.

Bank fees and commissions not related to single closed transac-

tions are amortized on a straight-line basis to the profit and loss

account for the period of the transaction they are related to,

excluding Consumer Banking loans, which are paid in equal instal-

lments. Bank fees and commissions related to these loans are amor-

tized according to a method similar to the effective interest rate

method - the so called the sum of digits method or 78 method.

Depending on their professional grade, Bank employees may be

awarded bonuses from the incentive fund, bonuses under the bonus

scheme applicable in a given area, or an annual discretionary incen-

tive award as approved within internal regulations of employees’

salaries.

Bonuses are awarded after the end of the period in which perfor-

mance is assessed.

Bank employees may also be awarded bonuses in the form of ma-

nagement options. A provision is established for future payments,

which is reviewed and revalued until the options are exercised. The

provision is included under liabilities in “Accruals and deferred

income”.

Within its salary scheme, the Bank guarantees its employees retire-

ment benefits which are dependent on the years of service with the

Bank and with Citigroup entities directly prior to eligibility date.

Moreover, the Bank’s employees who were hired under the provi-

sions set in the Company’s Labor Contract have the right to jubilee

payments. In case of employees hired in the Bank prior to 1 March

2001 the retirement and jubilee payments are calculated based on

numbers of years of employment defined according to the provi-

sions of the Company’s Labor Contract that was in force from 1 Ja-

nuary 1997. The provision for future payments is included in

“Accruals and deferred income”.

Bonuses, retirement benefits and Jubilee Awards

Other operating income/expenses

Corporate income tax

Other operating income/expenses are comprised of income and ex-

penses that that are not directly related to banking activity. These

include income and expenses due to sale or liquidation of fixed

assets and repossessed assets, compensation, penalties and fines.

Corporate income tax includes the Bank’s current tax liability

arising from income earned and deferred tax.

Deferred tax is calculated using the balance-sheet method, taking

into account both assets and liabilities expected to be subject to

corporate income tax in future tax periods and the deferred

corporate income tax assets, and is shown in the profit and loss

account or the revaluation reserve (fund). The provision and the

deferred corporate income tax assets are presented in the balance

sheet together.

In relation to the Act on the European Union Guarantee Fund which

came into effect on 16 April 2004 (Journal of Laws no. 121, item

1262), introducing Article 38a to the Act on Corporate Income Tax,

the Bank recognized in the Balance Sheet and in the Profit and Loss

Account the receivable from the State Budget arising from the right

to reduce the tax liability in the years 2007 to 2009.

EUR/Zloty rates

The following rates of exchange of PLN against EUR, as set by the

NBP, were used in periods covered by the financial statements and

the comparable financial data:

Major items of the balance sheet, profit

and loss statement and cash flow statement

converted into EUR terms

The major items of the balance sheet and the cash flow statement

are converted into EUR at average rates of exchange announced by

the National Bank of Poland, in force on the last day of the periods

presented.

The major items of the profit and loss account were converted into

EUR at rates being the arithmetical mean of the average PLN/EUR

rates of exchange announced by the National Bank of Poland, in

force on the last day of the periods presented.

Net profit per ordinary share and diluted profit per ordinary share

were converted into EUR at rates being the arithmetical mean of

the average PLN/EUR rates of exchange announced by the National

Bank of Poland, in force on the last day of each month of the

reported periods.

Exchange rate as at the reporting date:

Average rate, computed as the arithmetical

mean of the rates in force on the last day

of each month in the reporting period

The highest rate for the last day in the month

in the period

The lowest rate for the last day in the month

in the period

4.7170

4.4474

4.7170

4.1286

4.0790

4.5182

4.8746

4.0790

31.12.2004 31.12.2003in PLN

Cash and due from Central Bank

Due from financial sector

Due from non-financial sector

Due from budget sector

Receivables subject to securities sale

and repurchase agreements

Debt securities

Equity investments, other securities

and financial assets

Tangible and intangible fixed assets

Other assets

Total assets

Due to the Central Bank

Due to financial sector

Due to non-financial sector

Due to budget sector

Liabilities in respect of securities subject

to sale and repurchase agreements

Liabilities arising on financial instruments

Other liabilities

Provisions

Equity

Total liabilities

251,540

1,849,647

2,809,597

664

61,183

829,431

848,941

436,540

126,410

7,213,953

8,723

811,126

3,824,308

98,610

99,810

774,050

241,748

94,834

1,260,744

7,213,953

206,206

2,083,104

2,379,760

377

71,883

1,790,398

1,113,118

477,775

168,610

8,291,231

176

1,055,306

4,101,412

130,306

100,162

1,028,264

314,070

53,130

1,508,405

8,291,231

Balance sheet

31.12.2004 31.12.2003in EUR thousand

Main differences between Polish

and International Accounting Standards

On 7 December 2004, the General Meeting of Shareholders of Bank

Handlowy w Warszawie SA adopted a resolution to prepare the

Bank’s financial statements in accordance with International

Accounting Standards (IAS), International Financial Reporting

Standards (IFRS) and the related interpretation, published in the

form of Regulations of the European Commission, referred to as

“IFRS”, which are described in art. 2, section 3 of the Accounting

Act of 29 September 1994.

From 1 January 2005 the Bank is obliged to prepare stand alone

and consolidated financial statements in accordance with IFRS.

Currently the Bank is engaged in a significant effort to implement

system solutions, regarding, inter alia, the valuation of financial

instruments with the use of the effective interest rate and measure-

ment of loan impairment in accordance with IFRS 39.

Due to the fact that currently this process is not yet complete, the

respective quantitative data at the disposal of the Bank may change.

Thus, in the light of the provisions of the Regulation of the Council

of Ministers of 11 August 2004 concerning the detailed conditions

for the issue prospectus and the abbreviated issue prospectus, only

the main differences between Polish and International Standards

are stated below, without their quantification:

• in accordance with IFRS, interest, selected commissions, and the

direct acquisition costs of financial instruments should be measu-

red with the use of the effective interest rate. In 2002, the Bank

implemented this procedure in one of the IT systems used in the

Consumer Banking Sector, which keeps records of consumer

loans and credit cards. In the remaining areas, the Bank currently

accounts for commissions and direct costs of instrument acqui-

sition by the straight-line method. The Bank is in the process of

implementing a system, which will enable compliance with IFRS.

Net interest income

Net fees and commissions income

Income from shares, other securities

and floating-rate financial

instruments

Net gains (losses) on financial operations

FX gains

Profit on banking activity

Operating profit (loss)

Gross profit (loss)

Net profit (loss)

168,374

117,406

14,559

29,720

108,234

438,293

101,281

64,868

199,033

130,686

3,658

11,457

79,756

424,589

105,354

91,677

Income statement

in EUR thousand

2004 2003

12 months to 31 December

2004 2003

Net cash flow from operating

activities – indirect method

Net cash flow from investing activities

Net cash flow from financing activities

Net cash flow, total

Change in net cash

Cash at beginning of period

Cash at end of period

29,543

66,167

(52,611)

43,099

213,815

256,913

42,745

(24,361)

(77,184)

(58,800)

297,097

238,297

Major cash flow statement items

in EUR thousand

12 months to 31 December

The change in the method of valuing receivables – replacement of

the straight-line method with the effective interest rate method –

will not have a significant impact on the Bank’s financial state-

ments;

• under IFRS, the Bank’s financial statements should reflect all

investments in subordinated entities, controlled entities and

affiliated entities at their purchase price, or valued at their fair

market value. In the financial statements prepared according to

Polish Accounting Standards (PSR), such investments are valued

according to the equity method;

• in the financial statements prepared in accordance with PSR, the

level of write-down of credit exposure arises from the classifica-

tion of the receivable to the specific risk category specified in the

Regulation of the Minister of Finance of 10 December 2003, on

the principles of creating provisions for the risks related to the

operations of banks. In accordance with IFRS, specific provisions

are recorded based on the difference between the balance sheet

value of credit exposure and the present value of expected future

cash flows, discounted with the use of the effective interest rate

of the specific instrument. The level of the write-down created in

accordance with IFRS reflects the probability of recovering both

the principal as well as the interest, eliminating the recording of

deferred interest in suspense as a separate component of liabi-

lities of the Bank. After revaluation of the financial asset, interest

income is recognized on the basis of the effective interest rate

applied for the purposes of valuation of the present value of the

instrument;

• in accordance with PSR, in previous years the Bank created a pro-

vision for general risk intended for coverage of the unidentified

risk related to the conduct of banking activity. IFRS does not

allow the possibility to create provisions in the situation where no

objective evidence for impairment in value or non-recoverability

of a financial asset exists;

• in accordance with PSR, the Bank presents purchased goodwill as

the difference between cost and the value of net assets acquired

and amortizes it by the straight-line method. On the other hand,

IFRS requires the Bank to perform an annual impairment review

instead of amortization write-downs;

• the Bank, as an entity constituting part of Citigroup, offers its

employees discretionary rewards in the form of stock and options

for Citigroup shares, further referred to as equity benefit pro-

grams. Events tied to the allocation of equity benefits are re-

flected in the Bank’s books according to the provisions of IFRS 2.

Based on its best knowledge, the Bank classifies equity benefits

programs as payment transactions in the form of shares, settled

in cash. As a result, the Bank values the contracted liabilities at

fair value at each reporting date, and shows the cost of the

allocated benefits in the profit and loss account, in proportion to

the period of time for which the employee is obliged to render

services in order to be granted the right to collect the reward.

Currently the International Financial Reporting Interpretations

Committee (IFRIC) analyzes the rules for reflecting the payments

settled with the shares of the parent entity, from the standpoint of

classifying them under one of the following categories of IFRS 2:

(a) equity – settled share-based payment transactions;

(b) cash - settled share-based payment transactions.

In the event that IFRIC issues an interpretation that would include

equity benefits program in the second of the above named ca-

tegories, the current approach would be replaced with the approach

via the Bank’s equity, in line with rules provided for under IFRS 2 for

transactions settled in equity instruments.

BALANCE SHEET

Assets

I. Cash and due from NBP

II. Treasury bills and other bills eligible for refinancing with NBP

III. Due from financial sector

1. Current

2. Term

IV. Due from non-financial sector

1. Current

2. Term

V. Due from public sector

1. Current

2. Term

VI. Receivables subject to securities sale and repurchase agreements

VII. Debt securities

VIII. Investments in subsidiary undertakings

IX. Investments in joint ventures

X. Investments in associated undertakings

XI. Minority investments

XII. Other securities and other financial assets

XIII. Intangible assets

- goodwill

XIV. Tangible fixed assets

tys. z³ 31.12.2004 31.12.2003

841,114

—

8,496,980

5,468,012

3,028,968

9,707,041

2,423,075

7,283,966

1,538

1,447

293,209

7,303,033

389,036

6,671

11,829

27,749

4,105,123

1,237,133

1,171,200

711,710

1,186,514

—

8,724,786

6,822,543

1,902,243

13,252,870

3,529,638

9,723,232

3,131

3,044

288,601

3 912,427

338,218

5,323

12,388

23,633

3,624,895

1,295,012

1,243,645

764,145

notein PLN thousand

7, 10

8, 10

9, 10

as of

XV. Other assets

1. Repossessed assets

2. Other

XVI. Prepayments

1. Deferred tax

2. Other prepayments

TOTAL ASSETS

31.12.2004 31.12.2003

388,347

23,780

364,567

299,419

217,678

81,741

33,819,932

315,717

21,025

294,692

280,556

218,563

61,993

34,028,216

notein PLN thousand

Liabilities

I. Due to NBP

II. Due to financial sector

1. Current

2. Term

III. Due to non-financial sector

1. Savings deposits

a) Current

b) Term

2. Other

a) Current

b) Term

IV. Due to public sector

1. Current

2. Term

31.12.2004 31.12.2003

718

4,304,594

3,039,901

1,264,693

16,729,658

—

16,729,658

8,422,514

8,307,144

531,517

338,869

192,648

41,145

3,826,082

2,343,320

1,482,762

18,039,260

—

18,039,260

8,877,277

9 ,161,983

465 ,145

304,107

161,038

notein PLN thousand

as of

Liabilities - cont.

V. Liabilities in respect of securities subject to sale and repurchase agreements

VI. Debt securities issued

1. Short term

2. Long term

VII. Other liabilities arising from financial instruments

VIII. Special funds and other payables

IX. Accruals and deferred income

1. Accruals

31.12.2004 31.12.2003notein PLN thousand

20,21,22,24

2. Negative goodwill

3. Other deferred income and income in suspense

X. Provisions

1. Provision for corporate income tax

2. Other provisions

a) short term

b) long term

XI. Subordinated debt

XII. Share capital

XIII. Unpaid contributions to share capital (negative value)

XIV. Own shares (treasury stock - negative value)

XV. Equity reserves

XVI. Revaluation reserve

XVII. Other reserves

XVIII. Retained earnings (loss brought forward)

XIX. Net profit (loss)

TOTAL LIABILITIES

408,559

—

4,194,290

277,585

1,003,509

158 749

—

844,760

216,717

—

216,717

29,353

187,364

—

522,638

—

3,044,585

19,651

2,116,561

35,136

414,214

33,819,932

470,803

—

3,651,195

222,120

918,205

121,470

—

796,735

447,331

—

447,331

96,558

350,773

—

522,638

—

3,044,585

(13,212)

2,115,273

(10,847)

288,493

34,028,216

as of

31.12.2004 31.12.2003

19.29

6,152,785

130,659,600

47.09

—

16.04

5,946,930

130,659,600

45.51

—

notein PLN thousands

Capital adequacy ratio (in %)

Book value

Number of shares

Book value per share ( in PLN)

Diluted number of shares

Diluted book value per share (in PLN)

Off-balance sheet items

I. Contingent liabilities granted and received

1. Contingent liabilities granted:

a) lending

b) guarantees

2. Commitments received:

a) lending

b) guarantees

II. Commitments resulting from sale/purchase transactions

III. Other including:

- Collateral received

31.12.2004 31.12.2003

14,715,204

11,762,863

9,394,449

2,368,414

2,952,341

335,975

2,616,366

191,926,365

5,267,673

211,909,242

18,356,245

15,058,891

12,020,986

3,037,905

3,297,354

480,000

2,817,354

167,002,522

6,264,593

191,623,360

notein PLN thousands

Total off-balance sheet items

as of

PROFIT AND LOSS ACCOUNT

I. Interest income

II. Interest expense

III. Net interest income (I-II)

IV. Fee and commission income

V. Fee and commission expense

VI. Net fee and commission income (IV-V)

VII. Income from shares and other securities

1. Subsidiary undertakings

2. Joint ventures

3. Associated undertakings

4. Other entities

VIII. Net profit on financial operations

IX. Net profit on foreign exchange

X. Profit / (loss) on banking activity

XI. Other operating income

XII. Other operating expenses

XIII. General administrative expenses

XIV. Depreciation and amortisation

XV. Charges to provisions and revaluation

1. Charges to specific provisions and general risk fund

2. Revaluation of financial assets

1.01 - 31.12

2004

1.01 - 31.12

2003

1,653,161

(753,892)

899,269

655,854

(65,390)

590,464

16,526

15,185

—

341

1,000

51,765

360,352

1,918,376

90,101

(117,209)

(1,264,318)

(142,179)

(1,090,609)

—

1,386,301

(637,474)

748,827

570,945

(48,794)

522,151

64,750

500

59,530

4,697

132,175

481,361

1,949,264

77,865

(113,759)

(1,119,779)

(155,445)

(1,148,878)

(1,124,969)

(23,909)

notein PLN thousand

for the period

XVI. Release of provisions and revaluation

1. Release of specific provisions and provision for general risk fund

2. Revaluation of financial assets

XVII. Net (charges to)/release of provisions and decrease in respect of revaluation

XVIII. Operating profit

XIX. Extraordinary (losses)/gains

1. Extraordinary gains

2. Extraordinary losses

XX. Profit (loss) before tax

XXI. Corporate income tax

1. Current

2. Deferred

XXII. Other obligatory charges to profit/(loss)

XXIII. Participation in net profits (losses) of subordinated entities accounted for under equity method

XXIV.Net profit (loss)

Net profit/(loss) (annual basis)

Weighted average number of ordinary shares

Net profit/(loss) per ordinary shares (in PLN)

Diluted weighted average number of ordinary shares

Diluted profit/(loss) per ordinary share (in PLN)

1.01 - 31.12

2004

1.01 - 31.12

2003

1,081,848

1,077,663

4,185

(8,761)

476,010

—

476,010

(123,668)

(139,597)

15,929

—

61,872

414,214

130,659,600

3.17

—

961,170

956,619

4,551

(187,708)

450,438

—

450,438

(190,284)

(59,808)

(130,476)

—

28,339

288,493

130,659,600

2.21

—

notein PLN thousand

for the period

Profit and loss account - cont.

CHANGES IN SHAREHOLDERS' EQUITY

for the period

I. Opening balance

a) changes in adopted accounting principles

b) corrections of fundamental errors

I.a. Opening balance, after reclassifications to conform with current year presentation

1. Authorised share capital at start of period

1.1. Changes in share capital

a) increases (in respect of)

- issue of shares

- conversion of the Special Convertible Participating Bonds

b) decreases (in respect of)

- redemption of shares

1.2. Closing balance

2. Opening balance of unpaid contribution to share capital

2.1. Change in unpaid contributions to share capital

a) increase

b) decrease

2.2. Closing balance

3. Own shares - opening balance

a) increase

b) decrease

3.1. Own shares (treasury stock) - closing balance

4. Opening balance of equity reserves

1.01 - 31.12

2004

1.01 - 31.12

2003

5,946,930

—

5,946,930

522,638

—

522,638

—

3,044,585

5,969,109

(76)

—

5,969,033

500,902

21,736

—

21,736

—

522,638

—

3,044,585

in PLN thousand

for the period

4.1. Changes in equity reserves

a) increases (in respect of)

- issue of shares with premium

- distribution of profit (according to the law regulations)

- distribution of profit (voluntary)

b) decreases (in respect of)

- covered loss

4.2. Closing balance of equity reserves

5. Opening balance of revaluation reserve

a) changes in adopted accounting principles

5a.Opening balance of revaluation reserve, after reclassifications to conform with current year presentation

5.1. Changes in revaluation reserve

a) increase (in respect of)

- revaluation of securities for sale

- tax effect of revaluation of securities for sale

b) decrease (in respect of)

- sale of fixed assets

- revaluation of securities for sale

- tax effect of revaluation of securities for sale

5.2. Closing balance of revaluation reserve

6. Opening balance of general risk fund

6.1. Changes in general risk fund

a) increase (in respect of)

- distribution of profit

b) decrease (in respect of)

1.01 - 31.12

2004

1.01 - 31.12

2003

—

3,044,585

(13,212)

32,863

41,186

—

(8,323)

(498)

—

(7,825)

19,651

390,000

—

3,044,585

45,968

10,771

56,739

(69,951)

19,692

—

19,692

(89,643)

(1,075)

(88,568)

—

(13,212)

390,000

—

in PLN thousand

for the period

6.2. Closing balance of general risk fund

7. Opening balance of other reserves

7.1. Changes in other reserves

a) increase (in respect of)

- distribution of profit

- sale of fixed assets

b) decreases (in respect of)

- absorption of loss from equity accounting revaluation of subordinate undertakings shares

as of 1 Jan 2002 – changes of adopted accounting principles

- conversion of the Special Convertible Participating Bonds

7.2 Closing balance of other reserves

8. Opening balance of retained earnings (loss brought forward)

8.1. Opening balance of retained earnings

a) changes in adopted accounting principles

b) corrections of fundamental errors

8.2. Opening balance of retained earnings, after reclassifications to conform to current year presentation

8.3. Change of retained earnings

a) increase (in respect of)

- prior years' profit distribution

b) decrease (in respect of)

- charge to equity reserve

- dividends

8.4. Closing balance of retained earnings

8.5. Opening balance of loss brought forward

a) changes in adopted accounting principles

b) corrections of fundamental errors

1.01 - 31.12

2004

1.01 - 31.12

2003

390,000

1,725,273

1,288

790

498

—

1,726,561

277,646

288,493

—

288,493

(242,510)

—

(242,510)

(790)

(241,720)

45,983

(10,847)

390,000

1,776,283

(51,010)

2,044

969

1,075

(53,054)

(31,318)

(21,736)

1,725,273

242,689

—

242,689

(242,689)

—

(242,689)

(969)

(241,720)

—

(31,318)

(10,847)

—

in PLN thousand

Changes in shareholders' equity - cont.

for the period

8.6. Opening balance of loss brought forward, after reclassifications to conform with current year presentation

8.7. Change in loss brought forward

a) increase (in respect of)

- loss brought forward

b) decrease (in respect of)

- absorption of loss from equity accounting revaluation of subordinate undertakings shares as of 1 Jan 2002 – changes of

adopted accounting principles

8.8. Closing balance of loss brought forward

8.9. Closing balance of retained earnings (loss brought forward)

9. Net profit/(loss)

a) net profit

b) net loss

II. Closing balance of shareholders' equity

III. Shareholders' equity after proposed profit distribution (covering loss)*

1.01 - 31.12

2004

1.01 - 31.12

2003

(10,847)

—

(10,847)

35,136

414,214

—

6,152,785

4,588,790

(42,165)

31,318

—

31,318

(10,847)

288,493

—

5,946,930

5,705,210

in PLN thousand

*/ Shareholders’ equity as of 31 December 2004 includes the proposed payment of a dividend from appropriation of 2004 profits and from previous years’ profits, which was

transferred from the supplementary and reserve capital (see Additional Note to Financial Statement No.10).

CASH FLOWS STATEMENT

for the period

A. CASH FLOWS FROM OPERATING ACTIVITIES (indirect method)

I. Net profit (loss)

II. Adjustments for:

1. Participation in profits (losses) of subordinated entities accounted for on an equity basis

2. Depreciation

3. Foreign exchange gains/(losses)

4. Interest and dividends

5. Profit (loss) on investing activities

6. Changes in provisions

7. Change in debt securities held

8. Change in amounts due from financial sector

9. Change in receivables from non-financial and public sector

10. Change in receivables in respect of securities subject to sale and repurchase agreements

11. Change in equity investments and in other financial assets

12. Change in amounts due to financial sector

13. Change in amounts due to non-financial and public sector

14. Change in payables in respect of securities subject to sale and repurchase agreements

15. Change in securities issued

16. Change in other liabilities

17. Change in accruals

18. Change in deferred income and income in suspense

19. Other items

III. Net cash flows from operating activities (I +/- II) - indirect method

1.01 - 31.12

2004

1.01 - 31.12

2003

414,214

(239,858)

(61,872)

142,179

(35,038)

4,143

24,233

(230,614)

(3,460,766)

333,361

3,547,422

(4,608)

(480,228)

531,553

(1,243,230)

(62,244)

—

154,396

18,410

51,504

531,541

174,356

288,493

(149,139)

(28,339)

155,445

13,750

(16,346)

10,858

1,936

429,119

(3,370,864)

284,442

(268,834)

898,554

241,780

1,805,152

230,029

—

(26,697)

68,053

72,973

(650,150)

139,354

in PLN thousand

5. Net proceeds from the issue of shares and subsidies to capital

6. Other inflows

—

1,350

—

for the period

B. CASH FLOWS FROM INVESTING ACTIVITIES

I. Cash inflows from investing activities

1. Sale of investments in subsidiary undertakings

2. Sale of investments in joint ventures

3. Sale of investments in associated undertakings

4. Sale of other investments, other securities and other financial assets

5. Sale of intangible and tangible fixed assets

6. Sale of investments in real estate and intangible fixed assets

7. Other inflows

II. Cash outflows from investing activities

1. Acquisition of investments in subsidiary undertakings

2. Acquisition of investments in joint ventures

3. Acquisition of investments in associated undertakings

4. Acquisition of other investments, other securities and other financial assets

5. Acquisition of intangible and tangible fixed assets

6. Acquisition of investments in real estate and intangible fixed assets

7. Other outflows

III. Net cash flows from investing activities (I-II)

C. CASH FLOWS FROM FINANCING ACTIVITIES

I. Cash inflows from financing activities

1. Long-term loans from banks

2. Long-term loans from other financial institutions

3. Issuance of debt securities

4. Increase in subordinated debt

1.01 - 31.12

2004

1.01 - 31.12

2003

17,850

—

2,096

2,330

4,440

—

8,984

(117,218)

—

(476)

(116,742)

—

(99,368)

1,350

—

440,715

500

75,000

144

308,791

6,848

—

49,432

(128,605)

—

(14,782)

(113,823)

—

312,110

34,392

19,611

14,781

—

in PLN thousand

for the period

II. Cash outflows from financing activities

1. Repayment of long-term loans to banks

2. Repayment of long-term loans to other financial institutions

3. Redemption of debt securities

4. Other financial liabilities

5. Payments related to financial lease agreements

6. Change in subordinated debt

7. Payment of dividends and other payments to owners

8. Payments related to profit distributions, other than dividend

9. Purchase of own shares

10. Other outflows

III. Net cash flows from financing activities (I-II)

D. TOTAL NET CASH FLOWS (A.III+/-B.IIII+/-C.III)

E. BALANCE SHEET CHANGE IN CASH

- out of which cash arising from FX differences on foreign currencies

F. CASH AT THE BEGINNING OF REPORTING PERIOD

G. CASH AT THE END OF REPORTING PERIOD (F+/- D)

- including cash with limited possibility of disposal

1.01 - 31.12

2004

1.01 - 31.12

2003

(316,185)

(33,693)

(10,187)

—

(241,720)

—

(30,585)

(314,835)

(239,847)

(15,533)

1,211,860

972,013

—

(282,560)

—

(9,406)

—

(241,720)

—

(31,434)

(248,168)

203,296

4,891

1,008,564

1,211,860

—

in PLN thousand

Cash flows statement - cont.

EXPLANATORY NOTES

2004 2003in PLN thousand

Note 1A

Cash and due from NBP

a) Current account

b) Obligatory reserve

c) Amounts of Bank Guarantee Fund

d) Other

Total cash and due from NBP

841,114

—

841,114

1,186,514

—

1,186,514

Cash balances pledged or assigned:

- the obligatory reserve is kept on a current account in the NBP, the

amount of this reserve declared as of 31 December 2004 was PLN

738,313 thousand (31 December 2003: PLN 688,085 thousand).

The Bank may draw on its obligatory reserve provided that the sum of

the average monthly balance in its current account at NBP is not less

than declared.

Note 1B

Cash (currency structure)

2003

in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total cash

2004

782,069

59,045

6,857

27,969

6,876

20,561

10,515

841,114

1,123,971

62,543

5,835

27,526

7,010

26,221

8,796

1,186,514

unit currency

EUR

USD

thousand

NOTES TO BALANCE SHEET

Note 2A

Due from financial sector (by category)

2004 2003in PLN thousand

a) Current accounts

b) Loans and placements, including

- deposits with other banks and financial

institutions

c) Purchased receivables

d) Realised guarantees

e) Other receivables (in respect of)

- receivables in the course of settlement

f) Interest:

- accrued

- receivable

Total (gross) receivables from financial sector

g) provision for receivables from financial

sector (negative value)

Total (net) receivables from financial sector

824,190

7,677,701

7,043,329

12,710

251

3,000

114,231

72,244

41,987

8,632,083

(135,103)

8,496,980

883,069

7,928,841

7,275,059

26,876

314

3,763

75,042

34,838

40,204

8,917,905

(193,119)

8,724,786

Note 2B

Due from financial sector (by time to maturity)

2004 2003in PLN thousand

a) Current accounts

b) Term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

- matured before balance sheet date

c) Interest

- accrued

- receivable

Due from financial sector - gross

5,468,055

3,049,797

769,240

725,737

1,132,631

313,668

12,709

95,812

114,231

72,244

41,987

8,632,083

6,822,600

2,020,263

1,414,452

46,910

178,452

264,876

16,614

98,959

75,042

34,838

40,204

8,917,905

Note 2D

Due from financial sector (by currency structure)

2004 2003

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

b3. in currency

converted into PLN

other currencies

Due from financial

sector - gross

2,102,590

6,529,493

105,748

279,396

266,250

1,086,034

1,590,302

4,755,639

408,424

8,632,083

1,469,448

7,448,457

144,484

437,512

148,199

699,056

1,587,174

5,936,825

375,064

8,917,905

in PLN thousand unit currency

CHF

EUR

USD

thousand

Note 2C

Due from financial sector (by contractual maturity)

2004 2003in PLN thousand

a) Current accounts

b) Term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

c) interest

- accrued

- receivable

Due from financial sector - gross

5,468 055

3,049,797

97,970

813,233

1,391,984

478,710

267,900

114,231

72,244

41,987

8,632,083

6,822,600

2,020,263

345,173

1,070,281

54,516

401,978

148,315

75,042

34,838

40,204

8,917,905

Note 2G

Provisions for receivables from financial sector

2004 2003in PLN thousand

a) watch

b) irregular

- substandard

- doubtful

- loss

Total provisions for receivables from financial

sector

—

135,103

45,675

89,413

135,103

—

193,119

102,873

90,151

193,119

Note 2F

Legal collateral reducing basis for calculation of specific

provisions for non-performing receivables from financial sector

2004 2003in PLN thousand

a) watch

b) irregular

- substandard

- doubtful

- loss

Total legal collateral diminishing basis for

calculation of specific provisions for non-

-performing receivables from financial sector

92,212

5,000

—

5,000

97,212

—

121,626

4,752

108,888

7,986

121,626

Note 2E

Due from financial sector - gross

2004 2003in PLN thousand

1. Normal

2. Watch

3. Irregular:

a) substandard

b) doubtful

c) loss

4. Accrued interest

a) receivable

b) overdue

- from normal and watch receivables

- from non-performing receivables

Due from financial sector - gross

8,154,846

132,668

230,338

135,894

94,414

114,231

72,244

41,987

—

41,987

8,632,083

8,410,508

107,219

325,136

5,226

221,773

98,137

75,042

34,838

40,204

40,169

8,917,905

Note 3A

Receivables from non-financial sector (by category)

2004 2003in PLN thousand

a) loans and advances

b) purchased receivables

c) realised guarantees

d) other receivables (in respect of)

- receivables in the course of settlement

e) interest

- accrued

- receivable

Receivables from non-financial sector - gross

f) provision for receivables from the

non-financial sector (negative value)

Receivables from non-financial sector - net

10,423,263

162,803

66,781

506

651,033

55,388

595,645

11,304,386

(1,597,345)

9,707,041

13,766,494

239,040

74,332

3,157

597,714

141,466

456,248

14,680,737

(1,427,867)

13,252,870

Note 2H

Movements in provisions for receivables from financial sector

2004 2003in PLN thousand

1. Opening balance

a) increase (in respect of)

- charges to provisions

b) use (in respect of)

- write-off of receivables

c) release (in respect of)

- release of provisions

2. Provisions for receivables from financial

sector - closing balance

3. Required level of provisions for amounts

due from financial sector at the end of the

period, as per regulations in force

193,119

20,690

(26)

(78,680)

135,103

151,935

91,391

(120)

(50,087)

193,119

As of 31 December 2004 and 31 December 2003 the Bank did not have

any non-interest bearing loans and advances granted to financial

sector customers.

Interest on receivables due from financial sector has been included in

the Balance Sheet in term receivables.

Note 3C

Receivables from non-financial sector (by contractual maturity)

2004 2003in PLN thousand

a) current accounts

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

c) interest

- accrued

- receivable

Receivables from non-financial sector - gross

2,692,594

7,960,759

1,586,731

1,464,496

1,132,878

2,750,732

1,025,922

651,033

55,388

595,645

11,304,386

3,727,970

10,355,053

2,444,399

1,634,903

1,044,640

3,025,702

2,205,409

597,714

141,466

456,248

14,680,737

Note 3B

Receivables from non-financial sector (by time to maturity)

2004 2003in PLN thousand

a) current accounts

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

- matured before balance sheet date

c) interest

- accrued

- receivable

Receivables from non-financial sector - gross

2,375,331

8,278,022

2,392,283

587,858

1,520,815

1,789,415

140,647

1,847,004

651,033

55,388

595,645

11,304,386

3,519,264

10,563,759

3,865,379

762,134

1,180,960

2,762,308

354,655

1,638,323

597,714

141,466

456,248

14,680,737

Note 3E

Receivables from non-financial sector - gross

2004 2003in PLN thousand

1. Normal

2. Watch

3. Irregular:

a) substandard

b) doubtful

c) loss

4. Interest:

a) receivable

b) overdue

- on normal and watch loans

- on non-performing loans

Receivables from non-financial sector - gross

5,847,617

1,780,860

3,024,876

637,350

647,695

1,739,831

651,033

55,388

595,645

3,209

592,436

11,304,386

8,160,026

1,587,918

4,335,079

703,960

1,826,369

1,804,750

597,714

141,466

456,248

1,413

454,835

14,680,737

Note 3D

Receivables from non-financial sector (by currency)

2004 2003

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

b3. in currency

converted into PLN

other currencies

Receivables from non-

-financial sector - gross

9,453,178

1,851,208

76,437

201,955

298,924

1,219,311

137,192

410,258

19,684

11,304,386

10,674,871

4,005,866

193,247

585,170

512,351

2,416,760

220,372

824,303

179,633

14,680,737

in PLN thousand unit currency

CHF

EUR

USD

thousand

—

Note 3G

Provisions for receivables from non-financial sector

2004 2003in PLN thousand

a) normal

b) watch

c) irregular

- substandard

- doubtful

- loss

Total provisions for receivables from

non-financial sector

—

1,597,345

34,498

107,331

1,455,516

1,597,345

—

1,427,867

43,049

119,099

1,265,719

1,427,867

Note 3H

Movements in provisions for receivables from non-financial sector

2004 2003in PLN thousand

1. Opening balance

a) increases (in respect of)

- charges to provisions

- FX differences

- other

b) use (in respect of)

- write-offs

c) release (in respect of)

- release of provisions

- reclassification of assets

- FX differences

2. Closing balance

3. Required level of provisions for amounts

due from non-financial sector at the end of

the period, as per regulations being in force

1,427,867

884,552

881,128

—

3,424

(152,574)

(562,500)

—

1,597,345

1,364,918

732,693

732,610

(54,635)

(615,109)

(609,819)

(5,233)

(57)

1,427,867

As of 31 December 2004 and 31 December 2003, the Bank did not

have any non-interest bearing loans and advances granted to non-

financial sector customers.

Interest on receivables due from non-financial sector has been

included in the Balance Sheet in term receivables.

Note 3F

Collateral reducing specific provisions against receivables from

non-financial sector

2004 2003in PLN thousand

a) normal

b) watch

c) irregular

- substandard

- doubtful

- loss

Total collateral reducing specific provisions

against receivables from non-financial sector

—

673,478

1,182,212

464,862

433,038

284,312

1,855,690

—

367,262

2,616,280

489,001

1,588,241

539,038

2,983,542

100

Note 4A

Due from public sector (by category)

2004 2003

a) loans

b) purchased receivables

c) realised guarantees

d) other receivables (in respect of)

e) interest

- accrued

- receivable

Due from public sector - gross

f) provision made for amounts due from

public sector (negative value)

Due from public sector - net

1,186

—

261

—

1,538

—

1,538

1,095

1,540

—

496

—

3,131

—

3,131

in PLN thousand

Note 4B

Due from public sector (by time to maturity)

2004 2003in PLN thousand

a) current accounts

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

- matured before balance sheet date

c) interest

- accrued

- receivable

Due from public sector - gross

1,186

—

1,186

—

261

—

1,538

2,548

369

1,936

243

—

496

—

3,131

101

Note 4C

Due from public sector (by contractual maturity)

2004 2003

a) current accounts

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- over 5 years

c) interest

- accrued

- receivable

Due from public sector - gross

1,186

261

—

1,538

2,548

—

126

1,450

972

—

496

—

3,131

in PLN thousand

Note 4D

Due from public sector (by currency structure)

2004 2003

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

other currencies

Due from public sector

- gross

1,538

3,130

—

3,131

in PLN thousand unit currency

EUR

thousand

Note 4E

Due from public sector - gross

2004 2003in PLN thousand

1. Normal

2. Watch

3. Irregular:

a) substandard

b) doubtful

c) loss

4. Interest:

a) accrued

b) receivable

- on normal and watch loans

- on non-performing loans

Due from public sector - gross

1,277

—

261

—

1,538

2,635

—

496

—

3,131

102

Note 4F

Collateral reducing specific provisions against amounts due

from public sector

2004 2003

a) normal

b) watch

c) irregular

- substandard

- doubtful

- loss

Total collateral reducing specific provisions

against amounts due from public sector

— —

in PLN thousand

Note 4G

Provisions for non-performing amounts due from public sector

2004 2003

a) normal

b) watch

c) irregular

- substandard

- doubtful

- loss

Total provisions for non-performing amounts

due from public sector

— —

in PLN thousand

103

Note 4H

Movements in provisions for non-performing amounts

due from public sector

2004 2003

1. Opening balance

a) increases (in respect of)

b) write-offs (in respect of)

c) release (in respect of)

2. Closing balance

3. Required level of provisions for amounts

due from public sector at the end of the

period, as per regulations being in force

—

in PLN thousand

As of 31 December 2004 and 31 December 2003, the Bank did not have

any non-interest bearing loans and advances granted to public sector

customers.

Interest on receivables due from public sector has been included in

the Balance Sheet in term receivables.

Note 5

Receivables subject to securities sale and repurchase agreements

2004 2003

a) financial sector

b) non-financial sector

c) state budget

d) interest

Total receivables subject to securities sale

and repurchase agreement

292,849

—

360

293,209

288,386

—

215

288,601

in PLN thousand

104

Note 6A

Debt securities

2004 2003in PLN thousand

a) issued by central banks, of which:

- bonds denominated in foreign currencies

b) issued by other banks, of which:

- denominated in foreign currencies

c) issued by other financial institutions,

of which:

- denominated in foreign currencies

d) issued by non-financial institutions,

of which:

- denominated in foreign currencies

e) issued by State Budget, of which:

- denominated in foreign currencies

f) issued by local authorities, of which:

- denominated in foreign currencies

g) repurchased own securities

Total debt securities

384,287

—

160,727

—

190,914

—

6,567,105

1,398,285

—

7,303,033

384,884

—

116,627

—

70,457

70,159

553,996

—

2,786,463

1,689,405

—

3,912,427

Note 6B

Debt securities (by category)

2004 2003in PLN thousand

1. Issued by State Budget, of which:

a) bonds

b) treasury bills

c) other (by type):

2. Issued by parent entity, of which:

a) bonds

b) other (by type)

3. Issued by material investor, of which:

a) bonds

b) other (by type)

4. Issued by subsidiary undertakings, of which:

a) bonds

b) other (by type)

5. Issued by joint ventures, of which:

a) bonds

b) other (by type)

6. Issued by associated undertakings, of which:

a) bonds

b) other (by type)

7. Issued by other entities, of which:

a) bonds

b) other (by type)

- certificates of deposit

Total debt securities

6,567,105

6,263,335

303,770

—

735,928

727,409

8,519

7,303,033

2,786,463

2,640,357

146,106

—

70,159

—

1,055,805

1,033,564

22,241

3,912,427

105

As of 31 December 2004, the total amount of debt securities inclu-

des PLN 474,270 thousand representing pledges and assignments

(31 December 2003: PLN 542,100 thousand), including:

treasury bills with the par value of PLN 54,280 thousand, repre-

senting the security of liabilities towards the Bank Guarantee

Fund (31 December 2003: PLN 75,650 thousand),

bonds of the State Treasury with the par value of PLN 257,400

thousand, representing the security of Bank’s liabilities arising

from the accepted deposits resulting from repurchase transac-

•

• bonds of enterprises with the par value of PLN 162,590 thousand,

representing the security of Bank’s liabilities arising from the

accepted deposits resulting from repurchase transactions on

securities (31 December 2003: PLN 183,430 thousand).

The total amount of debt securities includes bonds of the National

Bank of Poland with the par value of PLN 366,665 thousand

purchased on 28 February 2002 within the framework of issue

designated for banks in connection with the reduction in rates of

obligatory reserve maintained by banks with the NBP. The NBP

bonds held include bearer bonds bearing an interest on the basis of

the interest rate fixed on the basis of the rate of return on 52-week

treasury bills.

As of 31 December 2003, the total amount of debt securities issued

by non-financial institutions includes EUR 14,874 thousand equivalent

to PLN 70,159 thousand, which is the value of non-interest bearing

convertible bonds issued by the subsidiary Handlowy Investments

S.A. On 31 December 2004, as a result of the transaction executed,

the Bank’s receivable arising from the convertible bonds of Handlowy

Investments S.A. was netted with the receivable due to this company

from the Bank. The details of the transaction executed are presented

in Note 16.

Note 6C

Movements in debt securities

2004 2003

Opening balance

- change in adopted accounting principles

Opening balance, after reclassifications

to conform with current year presentation

a) increases (in respect of)

- purchases

- revaluation

- FX differences

- amortisation of discount, premium and interest

b) decreases (in respect of)

- sales

- revaluation

- FX differences

- transfers to other asset groups

- amortisation of discount, premium and interest

Closing balance

3,912,427

—

3,912,427

155,664,837

155,402,015

2,541

735

259,546

(152,274,231)

(151,739,783)

(3,291)

(439,644)

(60,669)

(30,844)

7,303,033

4,356,193

220,901

4,577,094

122,967,465

122,755,436

9,763

106,385

95,881

(123,632,132)

(123,480,122)

(34,803)

—

(117,207)

3,912,427

in PLN thousand

106

Note 7C

Investments in subsidiary undertakings, including

2004 2003

- goodwill - subsidiary undertakings

- negative goodwill - subsidiary undertakings

—

in PLN thousand

Note 7D

Movements in goodwill - subsidiary undertakings

2004 2003

a) opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) closing balance

e) amortisation of goodwill - opening balance

f) charge for the period (in respect of)

g) amortisation of goodwill - closing balance

h) net goodwill - closing balance

— —

in PLN thousand

Note 7E

Movements in negative goodwill - subsidiary undertakings

2004 2003

a) gross negative goodwill - opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) gross negative goodwill - closing balance

e) amortisation of negative goodwill

- opening balance

f) charge for the period (in respect of)

g) amortisation of negative goodwill

- closing balance

h) net negative goodwill - closing balance

— —

in PLN thousand

Note 7A

Investments in subsidiary undertakings

2004 2003

a) in banks

b) in other financial institutions

c) in non-financial institutions

Total investments in subsidiary undertakings

40,255

339,338

9,443

389,036

38,788

289,988

9,442

338,218

in PLN thousand

Note 7B

Movements in investments in subsidiary undertakings

2004 2003

Opening balance

a) increases (in respect of)

- FX differences

- revaluation

b) decreases (in respect of)

- sale

- revaluation

- FX differences

- repayment of supplementary payments

to companies

- other

Closing balance

338,218

57,647

—

57 647

(6,829)

—

(797)

(6,032)

—

389,036

371,271

52,589

6,588

46,001

(85,642)

(6,113)

(17,454)

—

(42,000)

(20,075)

338,218

in PLN thousand

107

Note 8C

Shares in joint-ventures, including:

2004 2003

- goodwill - joint-ventures

- negative goodwill - joint-ventures

—

in PLN thousand

Note 8D

Movements in goodwill - joint ventures

2004 2003

a) opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) closing balance

e) amortisation of goodwill - opening balance

f) charge for the period (in respect of)

g) amortisation of goodwill - closing balance

h) net goodwill - closing balance

— —

in PLN thousand

Note 8E

Movements in negative goodwill - joint ventures

2004 2003

a) opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) closing balance

e) amortisation of negative goodwill

- opening balance

f) charge for the period (in respect of)

g) amortisation of negative goodwill

- closing balance

h) net negative goodwill - closing balance

— —

in PLN thousand

Note 8A

Investments in joint ventures

2004 2003

a) in banks

b) in other financial institutions

c) in non-financial institutions

Total investments in joint ventures

—

6,671

—

6,671

—

5,323

—

5,323

in PLN thousand

Note 8B

Movements in investments in joint ventures

2004 2003

Opening balance

a) increases (in respect of)

- revaluation

b) decreases (in respect of)

- sale

Closing balance

5,323

1,348

—

6,671

20,072

115,251

(130,000)

5,323

in PLN thousand

108

Note 9A

Investments in associated undertakings

2004 2003

a) in banks

b) in other financial institutions

c) in non-financial institutions

Total investments in associated undertakings

—

11,500

329

11,829

—

6,059

6,329

12,388

in PLN thousand

Note 9B

Movements in investments in subsidiary undertakings

2004 2003

Opening balance

a) increases (in respect of)

- reclassification of valuation from

another group

- revaluation

b) decreases (in respect of)

- sale

- revaluation

- reclassification of the undertaking

Closing balance

12,388

57,309

29,663

27,646

(57,868)

(23,490)

—

(34,378)

11,829

19,942

3,133

—

3,133

(10,687)

(2,077)

(8,610)

—

12,388

in PLN thousand

Note 9C

Investments in associated undertakings, including

2004 2003

- goodwill – associated undertakings

- negative goodwill – associated undertakings

—

in PLN thousand

Note 9D

Movements in goodwill - associated undertakings

2004 2003

a) Opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) Closing balance

e) amortisation of goodwill - opening balance

f) charge for the period (in respect of)

g) amortisation of goodwill - closing balance

h) net goodwill - closing balance

— —

in PLN thousand

Note 9E

Movements in negative goodwill - associated undertakings

2004 2003

a) Opening balance

b) increases (in respect of)

c) decreases (in respect of)

d) Closing balance

e) amortisation of negative goodwill

- opening balance

f) charge for the period (in respect of)

g) amortisation of negative goodwill

- closing balance

h) net negative goodwill - closing balance

— —

in PLN thousand

109

No. a b c d e f g h i j k l

Name of undertaking

(legal form)

Location Activity Capital

relationship

(subsidiary,

joint venture,

associated

undertaking)

including

direct

and indirect

relationship

Consolidation

method/

equity

accounting/

exclusion

from

consolidation

or equity

accounting

Date of

obtaining

control/

joint

control/

significant

influence

Value

of shares

at cost

Adjust-

ments

(total)

Book

value

invest-

ment

Holding

capital

Voting

power

at the

General

Assembly

Relationships

other than

mentioned in

j) or k),

basis for

control/

joint control/

significant

influence

10.

11.

12.

Warsaw

Poznañ

Luxembourg

Warsaw

Luxembourg

Warsaw

Leasing

Brokerage

Banking

Investment

activity

Investment

activity

Investment

activity

Production of

catering and trading

equipment

Investment

activity

Investment

activity

Brokerage

Insurance

Factoring

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Joint-venture

equity

accounting

equity

accounting

equity

accounting

equity

accounting

equity

accounting

equity

accounting

excluded from

equity

accounting

equity

accounting

equity

accounting

equity

accounting

equity

accounting

equity

accounting

04.03.1996

28.02.2001

18.09.1997

27.01.1997

16.04.1998

05.11.1997

30.11.2001

18.02.1997

16.08.1994

18.08.1999

19.04.2000

13.06.1994

120,000

70,950

52,580

38,515

42,000

41,475

13,502

10,084

8,070

5,000

2,140

2,752

64,253

24,134

(12,325)

(38,515)

(19,157)

(21,226)

(4,059)

(6,023)

226

(634)

(1,954)

3,919

184,253

95,084

40,255

22,843

20,249

9,443

4,061

8,296

4,366

186

6,671

97.47

100.00

80.97

100.00

79.27

25.00

indirect relationship

- see note below the table

—

97.47

100.00

80.97

100.00

79.27

25.00

CITILEASING Sp. z o.o.

DOM MAKLERSKI BANKU

HANDLOWEGO SA

BANK ROZWOJU

CUKROWNICTWA S.A.

HANDLOWY- INVESTMENTS S.A.

TOWARZYSTWO FUNDUSZY

INWESTYCYJNYCH BH S.A.

HANDLOWY -

- INVESTMENTS II S.a.r.l.

PPH SPOMASZ Sp. z o.o.

w likwidacji

HANDLOWY

INWESTYCJE II Sp. z o.o.

HANDLOWY

INWESTYCJE Sp. z o.o.

HANDLOWY

ZARZ¥DZANIE AKTYWAMI S.A.

POLSKIE PRACOWNICZE

TOWARZYSTWO EMERYTALNE

DIAMENT S.A. w likwidacji

HANDLOWY HELLER S.A.

Note 10

Shares in subordinated undertakings

indirect relationship

- see note below the table

indirect relationship

- see note below the table

110

m n o p r s t

equity

reserves

short

term

short

term

total

assets

sales unpaid

dividends

received

receivable

for the

prior

year

unpaid

capital

(negative

value)

authorised

capital

Equity:

other:

undis-

tributed

profit

(loss)

for

years

net

profit

(loss)

Liabilities:

long

term

Receivables:

long

term

168,248

95,084

40,255

(67,698)

22,843

18,591

4,061

8,054

4,366

235

26,685

123,120

70,950

25,064

38,515

13,000

53,138

5,000

100

10,000

—

28,739

3,222

9,745

29,000

—

10,080

8,066

1,223

11,011

16,389

20,912

5,446

(106,213)

(19,157)

(34,547)

(6,023)

(16)

(639)

(1,088)

5,674

1,329

833

(91,484)

(24,870)

(42,745)

(6,185)

(6,263)

(26)

(302)

—

4,418

20,079

1,573

(15,101)

5,713

1,239

162

(9)

(613)

(13)

5,674

18,188

217,259

187,849

1,200

20,401

1,599

103

164

366,813

15,108

217,259

1,200

1,599

103

164

366,813

3,080

—

187,831

—

20,375

—

39,883

172,973

30,479

1,040

884

161

391,215

26,398

172,618

30,479

1,040

884

161

391,215

13,485

355

—

189,510

319,018

43,731

120,151

24,686

34,069

4,062

18,321

5,706

399

398,438

3,220

52,867

2,263

20,556

5,425

32,681

—

4,257

—

no data available

111

13.

14.

15.

16.

17.

18.

19.

20.

Zabrze

Warsaw

Luxembourg

Guernsey

Warsaw

Production

and service con-

struction industry

Investment

fund management

Business inves-

tigation agency

Leasing, rent and

hire purchase

of real estate

Investment

activity

Investment

activity

Leasing

Factoring

Associated

undertaking

Associated

undertaking

Associated

undertaking

Subsidiary

undertaking

Subsidiary

undertaking

Associated

undertaking

Subsidiary

undertaking

Joint-venture

excluded from

equity

accounting

equity

accounting

excluded from

equity accounting

equity

accounting

equity

accounting

excluded from

equity accounting

equity

accounting

equity

accounting

28.06.2000

01.03.1995

29.06.1992

19.08.2003

05.11.1997

21.08.1998

19.08.2003

07.01.1999

89,250

1,260

329

3,125

10,112

19,722

3,125

3,558

(89,250)

10,240

—

10,836

(6,963)

(1,606)

1,426

3,113

11,500

329

13,961

3,149

18,116

4,551

6,671

34.44

49.99

49.03

100.00

19.03

23.86

2.53

25.00

—

34.44

49.99

49.03

100.00

19.03

23.86

2.53

25.00

MOSTOSTAL ZABRZE

HOLDING S.A.

KP KONSORCJUM Sp. z o.o.

CREDITREFORM PL Sp. z o.o.

HANDLOWY LEASING S.A.

HANDLOWY -

- INVESTMENTS II S.a.r.l.

NIF FUND HOLDINGS PCC Ltd.

CITILEASING Sp. z o.o.

HANDLOWY HELLER S.A.

Re. 1. As of 31.12.2004, the Bank holds indirectly an additional interest in Citileasing Sp. z o.o. via Handlowy Inwestycje Sp. z o.o. - 2.53% of the authorised capital. The total share of the Bank in the entity

equals 100 % of the authorised capital.

Re. 6. As of 31.12.2004, the Bank holds indirectly an additional interest in Handlowy Investments II S.a.r.l. via Handlowy Investments S.A. - 19.03% of the authorised capital. The total share of the Bank

in the entity equals to 100 % of the authorised capital.

Re. 12. As of 31.12.2004, the Bank holds indirectly an additional interest in Handlowy Heller S.A. - 25% of the authorised capital, through Handlowy Inwestycje Sp.z o.o. The total share of the Bank in the entity

equals to 50 % of the authorised capital.

1/ Indirect relationship via Citileasing Sp. z o.o.

2/ Indirect relationship via Handlowy Investments S.A.

3/ Indirect relationship via Handlowy Inwestycje Sp. z o.o.

No. a b c d e f g h i j k l

Name of undertaking

(legal form)

Location Activity Capital

relationship

(subsidiary,

joint venture,

associated

undertaking)

including

direct

and indirect

relationship

Consolidation

method/

equity

accounting/

exclusion

from

consolidation

or equity

accounting

Date of

obtaining

control/

joint

control/

significant

influence

Value

of shares

at cost

Adjust-

ments

(total)

Book

value

invest-

ment

Holding

capital

Voting

power

at the

General

Assembly

Relationships

other than

mentioned in

j) or k),

basis for

control/

joint control/

significant

influence

Shares in subordinated undertakings - cont

112

(102,895)

26,604

308

13,961

18,591

n/a

168,248

26,685

20,327

292

670

3,125

53,138

n/a

123,120

10,000

—

n/a

—

5,630

5,457

626

n/a

28,739

11,011

(128,852)

20,855

(373)

10,210

(34,547)

n/a

16,389

5,674

(122,233)

17,812

(505)

(42,745)

n/a

1,329

(12,298)

3,043

132

10,210

1,239

n/a

4,418

5,674

228,023

1,332

318

760,913

20,401

n/a

18,188

366,813

218,536

1,332

318

589,252

n/a

15,108

366,813

9,487

—

171,661

20,375

n/a

3,080

—

67,502

28,616

312

770,888

n/a

39,883

391,215

67,502

28,616

312

352,814

n/a

26,398

391,215

—

418,074

—

n/a

13,485

—

217,995

36,649

627

782,096

34,069

n/a

189,510

398,438

98,386

15,200

4,958

70,723

—

n/a

3,220

32,681

—

n/a

—

n/a

—

The financial data of individual entities available at the time of preparation of these statements and originating from non-audited financial statements of the

respective entities were presented.

m n o p r s t

equity

reserves

short

term

short

term

total

assets

sales unpaid

dividends

received

receivable

for the

prior

year

unpaid

capital

(negative

value)

authorised

capital

Equity:

other:

undis-

tributed

profit

(loss)

for

years

net

profit

(loss)

Liabilities:

long

term

Receivables:

long

term

113

2004 2003in PLN thousand

Note 11A

Minority investments

a) in other financial institutions

b) in non-financial institutions

Total minority investments

17,553

10,196

27,749

18,152

5,481

23,633

2004 2003in PLN thousand

Note 11B

Movements in minority investments

opening balance

a) increases (in respect of)

- purchases

- revaluation

- FX differences

- reclassification of the undertaking

- takeover for debt

b) decreases (in respect of)

- sale

- revaluation

- reclassification of valuation from

another group

- other

Closing balance of minority investments

23,633

37,539

476

2,685

—

34,378

—

(33,423)

(3,761)

—

(29,662)

—

27,749

23,512

22,674

14,782

—

7,840

(22,553)

(7,921)

(14,341)

—

(291)

23,633

114

Note 11C

Shares in other entities

Name of undertaking

(legal form)

Location Principal activity Book

value of

invest-

ment

capital

held %

Votes

at the

General

Meeting

Shareholders'

equity, including:

- share

capital

Unpaid

of capital

Dividends

received

receivable

for prior

year

No.

POLSKIE TOWARZYSTWO

REASEKURACYJNE S.A.

ELEKTROMONTA¯ S.A.

WSCHODNI BANK

CUKROWNICTWA SA

GÓRNOŒL¥SKIE TOWARZYSTWO

LOTNICZE SA

BIURO INFORMACJI

KREDYTOWEJ S.A.

STALEXPORT S.A.

KIR S.A.

MTS-CeTO S.A.

GPW S.A.

BIURO CENTRUM Sp. z o.o.

POLANIA Sp. z o.o. (in bankruptcy)

PIA PIASECKI S.A. (in bankruptcy)

12,809

4,715

4,386

4,105

1,026

344

313

—

a b c d e f g h i

10.

11.

12.

Warsaw

Poznañ

Lublin

Katowice

Warsaw

Katowice

Warsaw

Katowice

Gniezno

Kielce

Reinsurance

Construction

and assembly services

Banking

Aviation

Creditworthiness

information agency

Sale and distribution

of steelwork products

Interbank

settlements

Over-the-counter

stock exchange

Stock

exchange

Office building

administration

Leather and footwear

industry

Construction services

11.88

19.88

7.38

4.90

12.54

1.73

5.74

3.39

0.05

7.63

6.06

19.12

11.88

19.88

7.39

4.90

12.54

1.73

5.74

3.39

0.05

7.63

6.06

19.12

119,736

55,351

178,779

87,254

22,846

(28,970)

92,502

6,079

383,685

153

—

105,180

54,082

200,191

83,845

15,550

215,524

5,445

10,000

41,979

—

250

—

750

—

Presented financial data of the entities as of the date of preparation of the financial statements are taken from the unaudited financial

statements of these entities.

115

—

2004 2003in PLN thousand

Note 12A

Other securities and other financial assets (by type)

a) pre-emptive rights

b) derivative rights

c) other (by type)

- amounts receivable arising from valuation

of transactions in derivative instruments

Total securities, shares and other financial

assets

—

4,105,123

—

3,624,895

Note 12B

Movements in other securities and other financial assets

2004 2003in PLN thousand

Opening balance

a) increases (in respect of)

- revaluation

b) decreases (in respect of)

- sale

- revaluation

Closing balance

3,624,895

480,228

—

4,105,123

4,527,450

—

(902,555)

(4,000)

(898,555)

3,624,895

Note 12C

Securities, shares and other financial assets (by currency)

2004 2003in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total securities, shares

and other financial assets

4,094,654

10,469

1,117

4,557

1,977

5,911

4,105,123

3,607,076

17,819

1,213

5,722

3,234

12,097

3,624,895

unit currency

EUR

USD

thousand

116

2004 2003in PLN thousand

Note 13A

Financial assets

a) financial assets in trading portfolio

b) loans and own receivables not intended

for sale

c) financial assets held until maturity

d) financial assets available for sale

e) cash

Financial assets, total

5,316,963

18,495,262

—

6,526,478

841,114

31,179,817

4,743,692

22,262,468

70,159

3,103,033

1,186,514

31,365,866

Note 13B

Financial assets (by currency)

2004 2003in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total financial assets

23,065,975

9,846,290

756,814

3,087,046

1,952,677

5,839,286

919,958

32,912,265

19,648,823

13,338,029

938,747

4,428,071

1,957,969

7,323,783

1,586,175

32,986,852

unit currency

EUR

USD

thousand

Note 13C

Financial assets in trading portfolio (by negotiability)

2004 2003in PLN thousand

A. negotiable and quoted on the Stock

Exchange (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

B. negotiable and quoted on the OTC

market (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

841,458

—

841,458

834,851

—

444,182

—

444,182

434,678

—

117

Financial assets in trading portfolio (by negotiability) - cont.

2004 2003in PLN thousand

C. negotiable and non-quoted on the Stock

Exchange or OTC market (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

c1) treasury bills ( book value):

- fair value

- market value

- value at cost

D. Non-negotiable securities (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

18,740

18,678

4,456,765

343,122

342,163

—

36,042

32,348

32,661

3,694

3,684

4,263,468

616,332

614,228

—

2004 2003in PLN thousand

c) other - by type (book value)

c1) certificates of deposit (book value)

- fair value

- market value

- value at cost

c2) assets arising from valuation of financial

instruments (book value)

- fair value

- market value

- value at cost

Total value at cost*

Total opening balance

Total valuation adjustments*

Total book value

4,113,643

8,520

—

8,464

4,105,123

1,204,156

4,561,580

7,683

5,316,963

3,647,136

22,241

—

22,126

3,624,895

—

1,107,377

6,241,704

11,421

4,743,692

*/ Value at cost and valuation adjustments are related to securities.

118

Note 13D

Financial assets held until maturity (by maturity)

2004 2003in PLN thousand

A. negotiable and quoted on the Stock

Exchange (book value)

a) bonds (book value):

- value adjustments (balance)

- opening balance for the period

- value at cost

b) other - by type (book value)

B. negotiable and quoted on the OTC

market (book value)

a) bonds (book value):

- value adjustments (balance)

- opening balance for the period

- value at cost

b) other - by type (book value)

C. negotiable and non-quoted on the Stock

Exchange or OTC market (book value)

a) bonds (book value):

- value adjustments (balance)

- opening balance for the period

- value at cost

b) other - by type (book value)

—

2004 2003in PLN thousand

D. Non-negotiable (book value)

a) bonds (book value):

- value adjustments (balance)

- opening balance for the period

- value at cost

b) other - by type (book value)

Total value at cost

Opening balance for the period

Total valuation adjustments

Total book value

—

70,159

—

70,159

—

305,707

70,159

—

70,159

305,707

—

70,159

119

Note 13E

Financial assets available for sale (by type)

2004 2003in PLN thousand

A. negotiable and quoted on the Stock

Exchange (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

B. negotiable and quoted on the OTC

market (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

5,422,221

344

92,986

5,421,877

5,309,984

—

2,196,519

344

132,985

2,196,175

2,219,423

—

2004 2003in PLN thousand

C. negotiable and non-quoted on the Stock

Exchange or OTC market (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

c) other - by type (book value)

c1) treasury bills (book value):

- fair value

- market value

- value at cost

D. Non-negotiable (book value)

a) shares (book value):

- fair value

- market value

- value at cost

b) bonds (book value):

- fair value

- market value

- value at cost

669,317

384,287

366,665

285,030

274,362

434,940

475,357

—

527,296

384,884

366,665

142,412

140,927

379,218

468,165

—

120

in PLN thousand

c) other - by type (book value)

c1) participation units (book value):

- fair value

- market value

- value at cost

Total value at cost

Opening balance for the period

Total valuation adjustments

Total book value

2004 2003

—

6,519,354

3,103,033

7,124

6,526,478

—

3,328,165

3,004,560

(225,132)

3,103,033

2004 2003in PLN thousand

Note 14A

Intangible assets

a) cost of completed development works

b) goodwill

c) concessions, patents, licences and similar

assets, including:

- computer software

d) other intangible assets

e) advances for intangible assets

Total intangible assets

—

1,171,200

65,826

65,622

—

107

1,237,133

—

1,243,645

51,079

50,749

—

288

1,295,012

121

Note 14B

Movements in intangible assets (in assets categories)

research

and

development

costs

goodwill

a) gross opening balance

b) increases (in respect of)

- purchase

- capital expenditures

- transfer from capital expenditures

c) decreases (in respect of)

- settlement of capital expenditures

- other

d) gross closing balance

e) opening balance of accumulated depreciation

f) depreciation for the period (in respect of)

- increases (in respect of)

- depreciation charges

- decreases (in respect of)

g) accumulated depreciation at the end of period

h) charges for permanent diminution in value at the

beginning of the period

- increases

- decreases

i) charges for permanent diminution in value at the end

of the period

j) net intangible fixed assets at the end of period

167,712

37,183

16,048

21,135

—

204,895

116,633

22,436

139,069

—

65,826

a b

166,972

37,183

16,048

21,135

—

204,155

116,223

22,310

138,533

—

65,622

—

288

5,907

(6,088)

(5,289)

(799)

107

—

107

1,616,907

43,090

16,048

5,907

21,135

(6,088)

(5,289)

(799)

1,653,909

321,895

94,881

—

416,776

—

1,237,133

purchased licences,

patents, etc., including

computer

software

other

intangible

fixed

assets

advances

for

intangible

fixed

assets

total

intangible

fixed

assets

1,448,907

—

1,448,907

205,262

72,445

277,707

—

1,171,200

—

in PLN thousand

122

2004 2003in PLN thousand

Note 14C

Intangible assets (ownership structure)

a) own

b) used under rent, lease or similar

agreements

Total intangible fixed assets

1,237,026

—

1,237,026

1,294,724

—

1,294,724

Note 15A

Tangible fixed assets

2004 2003in PLN thousand

Tangible fixed assets

a) fixed assets, of which:

- land (including perpetual usufruct of land)

- buildings, premises and civil engineering

structures

- equipment

- means of transport

- other fixed assets

b) assets under construction

c) prepayments

Total tangible fixed assets

707,841

31,465

526,454

—

36,254

113,668

3,869

—

711,710

745,944

43,885

537,120

—

32,540

132,399

18,201

—

764,145

123

Movements in tangible fixed assets (by asset categories)

a) opening balance at cost

b) increase (in respect of)

- purchase

- transfer from assets under construction

- stocktaking

- other

c) decrease (in respect of)

- sale

- liquidation

- donation

- stocktaking

- other

d) closing balance at cost

e) opening balance of accumulated depreciation

f) depreciation for the period (in respect of)

- increase (in respect of)

- charge for the period

- stocktaking

- other

70,461

(176)

70,285

26,576

12,244

12,419

689,837

19,497

2,149

17,348

(13,383)

695,951

151,264

16,780

26,105

1,487,645

92,010

34,476

54,466

2,269

799

(90,643)

(14,169)

(23,628)

(772)

(50,751)

(1,323)

1,489,012

740,010

39,470

121,975

119,743

2,188

671,315

54,352

32,327

18,957

2,269

799

(64,996)

(2,224)

(10,245)

(691)

(50,751)

(1,085)

660,671

538,678

8,087

72,197

69,965

2,188

56,032

18,161

(12,088)

(11 769)

(81)

(238)

62,105

23,492

2,359

11,254

—

Note 15B

in PLN thousand

Land

(including

perpetual

usufruct

of land)

Buildings,

premises

and civil

engineering

structures

Equipment Means

transport

Other

fixed

assets

Total

fixed

assets

124

in PLN thousand

Movements in tangible fixed assets (by asset categories) - cont.

- decrease (in respect of)

- sale

- liquidation

- donations

- stocktaking

- other

g) accumulated depreciation at the end of period

h) charges for permanent diminution in value at the beginning

of the period

- increases

- decreases

i) charges for permanent diminution in value at the end of the period

j) net fixed assets at the end of period

(175)

38,820

—

31,465

(9,325)

(9,282)

(43)

168,044

1,453

526,454

Land

(including

perpetual

usufruct

of land)

Buildings,

premises

and civil

engineering

structures

Equipment Means

transport

Other

fixed

assets

Total

fixed

assets

(82,505)

(11,173)

(19,064)

(734)

(50,436)

(1,098)

779,480

1,691

707,841

(64,110)

(2,217)

(9,782)

(687)

(50,436)

(988)

546,765

238

113,668

(8,895)

(8,781)

(47)

(67)

25,851

—

36,254

—

125

2004 2003in PLN thousand

Note 15C

On-balance sheet fixed assets (ownership structure)

a) own

b) used under rent, lease or similar agreements

- leasing agreements

Total on-balance sheet fixed assets

707,841

—

707,841

745,873

745,944

2004 2003in PLN thousand

Note 15D

Off-balance sheet fixed assets

used under rent, lease or similar agreements,

of which:

- perpetual usufruct of land

Total off-balance sheet fixed assets

— —

Note 16A

Other assets

2004 2003in PLN thousand

a) Repossessed assets

b) Other, of which:

- interbank settlements

- settlements related to trade in securities

- settlements related to operations

on derivative instruments*

- accounts receivable

- staff loans out of the Social Fund

- sundry debtors

Total other assets

23,780

364,567

14,729

1,468

220,995

23,554

39,581

64,240

388,347

21,025

294,692

18,828

—

9,689

36,427

45,135

184,613

315,717

*/ As of 31 December 2004 settlements of operations on derivative

instruments included funds hedging derivative transactions

amounting to PLN 215,578 thousand, representing pledges

and assignments (31 December 2003: PLN 8,117 thousand).

126

2004 2003in PLN thousand

Note 16B

Repossessed assets

a) fixed assets under construction

b) real estate

c) other

Total repossessed assets

—

23,425

355

23,780

—

21,024

21,025

2004 2003in PLN thousand

Note 16C

Change in repossessed assets

Opening balance

- real estate

- other

a) increases (in respect of)

- transfer of a disputed claim

b) decreases (in respect of)

- write-downs for permanent impairment

- sale

Closing balance

- real estate

- other

21,025

21,024

2,756

(1)

—

(1)

23,780

23,425

355

25,677

—

(4,653)

—

21,025

21,024

Note 17A

Prepayments

2004 2003in PLN thousand

a. Long term

- deferred tax asset

- other accruals

b. Short term, including

- other accruals

Total prepayments

217,678

—

81,741

299,419

218,563

—

61,993

280,556

127

2004 2003in PLN thousand

Note 17B

Change in assets in respect of deferred corporate income tax*

1. Opening balance

a) recognised in financial results

b) recognised in shareholders' equity

c) recognised in goodwill or negative goodwill

1a. Adjustment resulting from the change in accounting principles adopted, concerning the recording of repurchase transactions on securities

- recognised under current charge to profit (loss)

1b. Adjustment resulting from the change in accounting principles adopted, concerning the recording of repurchase transactions on securities

- recognised under charge to profit (loss) from previous years

1c. Adjustment resulting from the change in accounting principles adopted, concerning the recording of repurchase transactions on securities

- recognised under revaluation capital

1d. Opening balance after reconciliation to comparable data

2. Increases

a) recognised in financial results of the period and resulting from positive or negative temporary differences

- provisions and permanent loss of share value

- accrued interest

- settlement of tax allowance for investments

- valuation of financial instruments and securities

- payable expenses

- income collected in advance

- other

b) recognised in the financial result and resulting from equity-accounting valuation of shares

c) carried over from retained profit (loss) to reserve capital, without effect on current result

d) recognised in shareholders' equity and resulting from negative temporary differences

e) recognised in the equity and resulting from tax loss

f) recognised in goodwill or negative goodwill and resulting from negative temporary differences

g) recognised in shareholders' equity and resulting from decreases of positive temporary differences on securities valuation, including

repurchase transactions on securities

218,563

205,716

12,847

—

218,563

27,069

15,579

12,224

686

1,070

1,599

—

425

329,318

326,170

3,148

—

2,739

1,273

(3,983)

329,347

49,540

19,465

—

2,198

10,146

—

7,121

—

8,833

—

19,692

128

2004 2003in PLN thousand

h) recognised in charge to profit (loss) from previous years arising from changes in the recording of repurchase transactions on securities

3. Decreases

a) recognised in the financial result for the period and resulting from positive and negative temporary differences

- valuation of financial instruments and securities

- accrued interest

- accrued expenses

- accrued income

- provisions and permanent loss of share value

- changes of tax rate from 27% in 2003 to 19% in 2004

- other

b) recognised in financial results of the period and resulting from tax loss

c) recognised in shareholders' equity and resulting from negative temporary differences

d) recognised in shareholders' equity and resulting from tax loss

e) recognised in goodwill or negative goodwill and resulting from negative temporary differences

f) recognised in financial results of the period and resulting from tax on current equity accounting of investments

g) recognised in liabilities from income tax

h) recognised in shareholders' equity and resulting from decreases of positive temporary differences on securities valuation

i) retained profit (loss) recognised in reserve capital, without effect on current result

j) recognised in charge to profit (loss) from previous years arising from changes in the recording of repurchase transactions on securities

4. Closing balance, including

a) recognised in current financial result

b) recognised in revaluation capital

c) recognised in profit (loss) from previous years

c) recognised in goodwill or negative goodwill

d) recognised in liabilities from income tax

1,550

(160,324)

(146, 107)

—

(24,382)

(622)

—

(71,357)

(49,746)

—

(5,384)

—

(8,833)

—

218,563

205,716

10,024

2,823

—

*/ Positive and negative temporary differences adopted for the calculation of deferred income tax are presented jointly in this note.

11,065

(27,953)

(1,208)

—

(856)

—

(352)

—

(18,495)

—

(8,250)

—

217,678

212,657

2,198

2,823

—

129

2004 2003in PLN thousand

Note 17C

Other prepayments

a) prepayments, of which:

- interest paid in advance

- other prepaid expenses

b) other prepayments, of which:

Total prepayments

81,741

—

81,741

—

81,741

61,993

802

61,191

—

61,993

Note 18

Subordinated loans

1. Handlowy Investments S.A.

2. Handlowy Investments S.A.

3. Handlowy Investments S.A.

4. Handlowy Investments II S.a.r.l

Total subordinated loans

Interest receivable

Total subordinated loans gross

Provision

Total subordinated loans net

38,174

33,210

25,308

16,168

112,860

39,255

152,115

(34,158)

117,957

b c d

Name of undertaking

in PLN '000 in currency unit currency

Interest terms MaturityAmount

thousand

PLN

WIBOR 3M PLN +1% p.a.

30.09.2005

130

—

Note 19

Charges/adjustments of (net) revaluation charges for permanent

diminution in financial asset value

2004 2003in PLN thousand

Recognised in profit and loss account

1. Investments in subsidiaries, investments

in other entities

- (net) charges for permanent diminution

in value

- adjustments (net) for permanent diminution

in value

2. Trading debt securities

- (net) charges for permanent diminution

in value

- adjustments (net) for permanent diminution

in value

Recognised in shareholders' equity

- revaluation capital*

1. Debt securities available for sale

- (net) charges for permanent diminution

in value

- adjustments (net) for permanent diminution

in value

- positive (net) valuation as of 1 January 2003

(change in accounting principles adopted)

Total charges/adjustments of (net)

revaluation charges for permanent diminution

in financial asset value

68,598

—

66,057

—

2,541

33,359

—

33,359

—

101,957

7,514

—

8,981

(1,467)

—

(58,105)

(68,876)

—

10,771

(50,591)

*/ taking into account the tax effect of valuation

Note 20A

Due to financial sector (by type)

2004 2003in PLN thousand

a) Current accounts and deposits

- deposits of banks and other financial

institutions

b) Loans and borrowings

c) Bills of exchange

d) Securities issues

e) Other liabilities (in respect of)

- liabilities in the course of settlement

- cash collaterals

f) interest

Total due to financial sector

3,814,668

3,093,183

446,825

—

24,403

21,033

3,370

18,698

4,304,594

3,233,270

2,177,593

545,332

27,401

16,186

11,215

20,079

3,826,082

131

Note 20B

Due to financial sector (by time to maturity)

2004 2003in PLN thousand

a) Current

b) Term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) Interest

Total due to financial sector

3,039,901

1,245,995

504,373

65,090

562,357

93,700

20,475

—

18,698

4,304,594

2,343,320

1,462,683

312,388

46,129

564,864

494,190

45,112

—

20,079

3,826,082

Note 20C

Due to financial sector (by contractual maturity)

2004 2003in PLN thousand

a) Current

b) Term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) Interest

Total due to financial sector

3,039,901

1,245,995

232,399

64,354

487,994

119,280

336,274

—

5,694

—

18,698

4,304,594

2,343,320

1,462,683

204,265

104,272

153,517

571,404

421,762

—

7,463

—

20,079

3,826,082

132

Interest on liabilities due to financial sector was included

in the Balance Sheet in term liabilities.

Note 20D

Due to financial sector (by currency)

2004 2003in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total due to financial

sector

3,424,887

879,707

131,861

537,861

80,860

241,803

100,043

4,304,594

2,917,049

909,033

115,787

546,168

86,223

322,517

40,348

3,826,082

unit currency

EUR

USD

thousand

Note 21A

Due to non-financial sector (by type)

2004 2003in PLN thousand

a) Current accounts and deposits

b) Loans and borrowings

c) Issued bills of exchange

d) Issue of securities

e) Other liabilities

- liabilities in the course of settlement

- cash collaterals

f) Interest

Total due to non-financial sector

16,322,099

—

369,039

27,510

341,529

38,520

16,729,658

17,569,386

—

406,668

35,126

371,542

63,206

18,039,260

Note 21B

Due to non-financial sector - saving accounts (by time to maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to non-financial sector - savings

accounts — —

133

Note 21C

Due to non-financial sector - savings accounts

(by contractual maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to non-financial sector - savings

accounts

— —

Note 21D

Due to non-financial sector - other (by time to maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to non-financial sector - other

8,422,514

8,268,624

5,052,910

1,828,860

983,012

403,684

158

—

38,520

16,729,658

8,877,277

9,098,777

5,229,253

1,649,915

1,540,772

678,743

—

63,206

18,039,260

134

Interest on liabilities due to non-financial sector was included

in the Balance Sheet in term liabilities.

Note 21E

Due to non-financial sector - other (by contractual maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to non-financial sector - other

8,422,514

8,268,624

3,951,497

2,066,746

1,637,496

612,662

223

—

38,520

16,729,658

8,877,277

9,098,777

4,166,019

1,823,583

1,957,901

1,149,419

325

—

1,530

—

63,206

18,039,260

Note 21F

Due to non-financial sector (by currency)

2004 2003in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total due to

non-financial sector

12,104,204

4,625,454

487,150

1,987,086

783,044

2,341,615

296,753

16,729,658

13,030,206

5,009,054

408,593

1,927,331

708,424

2,649,860

431,863

18,039,260

unit currency

EUR

USD

thousand

135

Note 22A

Due to public sector (by type)

2004 2003in PLN thousand

a) Current accounts and deposits

b) Loans and borrowings

c) Issued bills of exchange

d) Issue of securities

e) Other liabilities

- liabilities in the course of settlement

- cash collaterals

f) Interest

Total due to public sector

531,002

—

211

—

211

304

531,517

464,655

—

146

144

344

465,145

Note 22B

Due to public sector - saving accounts (by time to maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to public sector - savings accounts

— —

136

Note 22C

Due to public sector - savings accounts (by contractual maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to public sector - savings accounts

— —

Note 22D

Due to public sector - other (by time to maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to public sector - other

338,869

192,344

145,967

16,349

29,950

—

304

531,517

304,107

160,694

110,155

22,640

27,877

—

344

465,145

137

Interest on liabilities due to public sector was included

in the Balance Sheet in term liabilities.

Note 22E

Due to public sector - other (by contractual maturity)

2004 2003in PLN thousand

a) current

b) term, with maturity from balance sheet date:

- up to 1 month

- 1 month - 3 months

- 3 months - 1 year

- 1 year - 5 years

- 5 years - 10 years

- 10 years - 20 years

- over 20 years

- matured before balance sheet date

c) interest

Total due to public sector - other

338,869

192,344

125,802

32,913

33,510

118

—

304

531,517

304,107

160,694

90,631

25,292

43,865

906

—

344

465,145

Note 22F

Due to public sector (by currency structure)

2004 2003in PLN thousand

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total due to public sector

460,971

70,546

13,471

54,950

5,149

15,398

198

531,517

399,100

66,045

8,201

38,686

7,314

27,359

—

465,145

unit currency

EUR

USD

thousand

Note 23

Liabilities in respect of securities subject to sale

and repurchase agreements

2004 2003in PLN thousand

a) financial institutions

b) non-financial sector and Budgets

c) interest

Liabilities in respect of securities subject

to sale and repurchase agreements

239,490

168,871

198

408,559

297,711

172,797

295

470,803

138

Liabilities secured by assets

The liabilities arising from deposits accepted, presented in Note 23

and arising from reverse repo transactions on securities, were secu-

red by debt securities. The type and value of debt securities repre-

senting the security of these liabilities are presented in information

under Note 6C.

Note 24A

Securities issued

2004 2003in PLN thousand

a) bonds

b) certificates of deposit

c) other

d) interest

Total securities issued

— —

Note 24B

Movements in securities issued

2004 2003in PLN thousand

Opening balance

a) increases

b) decreases

Closing balance

—

Note 24C

Long term liabilities arising from debt securities issued

a b c d e f g h

debt

securities

by type

nominal

value

interest

terms

maturity collateral additional

rights

organised

secondary

market

other

139

Note 25

Special funds and other payables

2004 2003in PLN thousand

a) special funds (in respect of)

- staff benefits

b) other liabilities, of which:

- interbank settlements

- interbranch settlements

- settlements related to operations

on derivative instruments

- settlements with Tax Office

and National Insurance (ZUS)

- sundry creditors

Total special funds and other payables

67,609

209,976

65,804

128

230

28,935

114,879

277,585

80,208

141,912

37,753

1,398

—

5,175

97,586

222,120

Note 26A

Accruals and deferred income

2004 2003in PLN thousand

a) short term, including:

- provision for employee payments

- accrued expenses on restructuring,

of which:

- personnel

- premises

- other

b) long term, including:

- provision for employees retirement

and jubilee payments

Total accruals and deferred income

131,793

90,772

7,627

6,307

1,320

33,394

26,956

158,749

96,470

73,597

7,221

—

7,221

15,652

25,000

121,470

Note 26B

Change in negative goodwill

2004 2003in PLN thousand

Opening balance

a) increases

b) decreases

Closing balance

— —

Note 26C

Other accruals and deferred income

2004 2003in PLN thousand

a) short term, including:

- deferred income

- interest received in advance

- commission received in advance

- other income received in advance

- income in suspense (of which)

- interest in suspense

- other income to settle

- capitalised interest

b) long term, including:

- interest in suspense

Total other accruals and deferred income

309,834

113,342

2,420

57,191

53,731

196,492

166,653

15,838

14,001

534,926

844,760

249,906

77,692

5,897

16,964

54,831

172,214

98,153

49,089

24,972

546,829

796,735

140

Note 17B presents in total net positive and negative temporary

differences adopted for the calculation of the deferred income tax.

Note 27A

Change in accruals in respect of deferred corporate income tax

2004 2003in PLN thousand

1. Opening balance, in this:

a) recognised in financial results

b) recognised in shareholders' equity

c) recognised in goodwill or negative

goodwill

2. Increases

a) recognised in financial results of

the period and resulting from positive

temporary differences (in respect of)

b) recognised in shareholders' equity

and resulting from positive temporary

differences (in respect of)

c) recognised in goodwill or negative

goodwill and resulting from positive

temporary differences (in respect of)

3. Decreases

a) recognised in financial results of

the period and resulting from positive

temporary differences (in respect of)

b) recognised in shareholders' equity

and resulting from positive temporary

differences (in respect of)

c) recognised in goodwill or negative goodwill

and resulting from positive temporary

differences (in respect of)

Closing balance, including

a) recognised in financial results

b) recognised in shareholders' equity

c) recognised in goodwill or negative goodwill

—

Note 27B

Reserve for deferred income tax (currency structure)

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

other currencies

Total reserve for

deferred income tax

—

2004 2003in PLN thousand unit currency

Note 27C

Other provisions (by type), of which

- off-balance sheet contingent liabilities

- general risk

- other

Total other provisions

39,352

164,000

13,365

216,717

145,019

300,000

2,312

447,331

2004 2003in PLN thousand

141

Note 27D

Other provisions

a) short term (by type)

- off-balance sheet commitments

- other

b) long term (by type)

- off-balance sheet commitments

- general risk

Total other provisions

29,353

15,988

13,365

187,364

23,364

164,000

216,717

96,558

94,246

2,312

350,773

50,773

300,000

447,331

2004 2003in PLN thousand

Note 27E

Other provisions (currency structure)

a. in PLN

b. in foreign currencies

(in currency and

converted into PLN)

b1. in currency

converted into PLN

b2. in currency

converted into PLN

other currencies

Total other provisions

199,200

17,517

2,367

9,654

2,263

6,768

1,095

216,717

403,683

43,648

4,682

22,085

5,272

19,720

1,843

447,331

2004 2003in PLN thousand unit currency

EUR

USD

thousand

Note 27F

Movements in other short term provisions

Opening balance (by type)

- off-balance sheet commitments

- other

a) increases

- charges to provisions for off-balance sheet

commitments

- charges to provisions for future liabilities

b) utilisation

- charge to provisions

c) release

- release of provisions for off-balance sheet

commitments

- release of provisions for future liabilities

Closing balance (by type)

- off-balance sheet commitments

- other

Total closing balance

96,558

94,246

2,312

119,091

104,468

14,623

(1,207)

(185,089)

(182,726)

(2,363)

29,353

15,988

13,365

29,353

52,419

52,331

213,313

210,642

2,671

—

(169,174)

(168,727)

(447)

96,558

94,246

2,312

96,558

2004 2003in PLN thousand

142

Note 27G

Movements in other long term provisions

Opening balance (by type)

- off-balance sheet commitments

- general risk

a) increases

- transfer to provisions for off-balance sheet

commitments

b) utilisation

c) release

- release of provisions for off-balance sheet

commitments

- release of provisions for general risk

- reclassifications

Closing balance (by type)

- off-balance sheet commitments

- general risk

Total closing balance

350,773

50,773

300,000

81,540

—

(244,949)

(108,949)

(136,000)

—

187,364

23,364

164,000

187,364

392,976

92,976

300,000

86,455

—

(128,658)

(127,058)

—

(1,600)

350,773

50,773

300,000

350,773

2004 2003in PLN thousand

Note 28A

Subordinated debt

a b c d e f

Name

undertaking

Loan value (principal)

PLN '000

Interest

terms

Maturity Outstanding

balance

Interest

currency

Note 28B

Movements in subordinated debt

Opening balance

a) increases (in respect of)

b) decreases (in respect of)

Closing balance

—

2004 2003in PLN thousand

—

143

Changes in authorised share capital

As of 31 December 2004 and 31 December 2003, the Bank’s au-

thorised share capital amounted to PLN 522,638,400 and was

divided into 130,659,600 ordinary bearer shares with the par value

of PLN 4 each.

Between 31 December 2003 and 31 December 2004, the structure

of ownership of considerable shareholdings changed. This change

resulted from the sale by Citibank Overseas Investment Corporation

(COIC), a subsidiary of Citibank N.A., to International Finance

Associates B.V. based in Amsterdam, a subsidiary of COIC, of

18,722,874 shares corresponding to 14.3% of the share capital of

the Bank on 30 November 2004. As a result of this transaction, the

percent share of COIC in the authorised share capital of the Bank

fell from 89.3% to 75%.

Note 29

Share capital (structure)

Series/

issue

Type of

Type

limitation

Number

Par value

series/

issue

Method

payment

Date

registration

Eligibility

for

dividends

(from date)

Type

preference

Total number of shares

Total share capital

Par value of 1 share = PLN 4.00

27.03.97

27.10.98

25.06.99

16.11.99

24.05.02

16.06.03

28.02.01

01.01.97

01.01.00

paid in

transfer of CPSA

assets to Bank

260,000

4,480

6,230

8,960

70,594

21,736

150,638

522,638

65,000,000

1,120,000

1,557,500

2,240,000

17,648,500

5,434,000

37,659,600

130,659,600

—

ordinary shares

bearer shares

144

List of shareholders

The table below presents the shareholders holding as of 31 December

2004 at least 5% of the total number of votes at the General Meeting

of Shareholders or at least 5% of the Bank’s authorised share capital.

The Bank did not issue any privileged shares.

Value of shares

(in PLN thousand)

Number of

in %

Number of

votes at

General Meeting

% of votes

at General

Meeting

Citibank Overseas Investment Corporation, USA

International Finance Associates, USA

Other shareholders

Total

391,979

74,891

55,768

522,638

97,994,700

18,722,874

13,942,026

130, 659,600

75.0

14.3

10.7

100.0

97,994,700

18,722,874

13,942,026

130,659,600

75.0

14.3

10.7

100.0

Note 30A

Issuer own shares (treasury stock)

a b c d e

number of shares value at cost B/S value purpose

of acquisition

destination

Note 30B

Issuer's shares owned by subordinated undertakings

a b c d

name of undertaking number of shares value at cost book value

The item “Other shareholders” includes the pooled data of share-

holders with shareholdings which give them the right to less than

5% votes at the General Meeting of Shareholders.

145

The capital adequacy ratio was calculated in accordance with the

principles specified in Resolution No. 5/2001 of the Commission for

Banking Supervision dated 12 December 2001 regarding specific

rules for calculating capital requirements for banking risk catego-

ries, including capital requirement for exposure exceeding concen-

tration limits, method and detailed rules for calculation of the bank

solvency ratio, (…) (NBP Official Journal No. 22, item 43, as amen-

ded).

Note 34

Data necessary for the calculation of the capital adequacy ratio

*/ Due to inessential impact the data presented do not take into account the effect

of change in the applied accounting principles introduced in 2004

(see: Notes 32 and 33).

Note 31

Equity reserves

a) from sale of shares above par value

b) mandatory reserve

c) statutory reserves

d) contribution of shareholders

e) other (by type)

Total equity reserves

—

166,967

2,877,618

—

3,044,585

—

166,967

2,877,618

—

3,044,585

2004 2003in PLN thousand

Note 32

Revaluation reserve

a) revaluation of fixed assets

b) deferred tax

c) FX differences arising from translation

of foreign branches

d) other (by type)

- revaluation of financial assets

Total revaluation reserve

29,021

2,198

—

(11,568)

19,651

29,520

1,773

—

(44,505)

(13,212)

2004 2003in PLN thousand

Note 33

Other reserves (by purpose), including:

- General banking risk fund

- Equity reserves

Total other reserves

390,000

1,726,561

2,116,561

390,000

1,725,273

2,115,273

2004 2003in PLN thousand

Total capital requirement

Own funds, including:

Basic funds (with decreases)

Supplementary funds

Decreases of sum of basic

and supplementary funds

Capital adequacy ratio

1,670,944

4,029,954

4,481,787

29,021

480,854

19.29

2,289,828

4,590,465

4,905,489

29,520

344,544

16.04

31.12.2004 31.12.2003*in PLN thousand

146

Note 35

Data for calculation of book value per share

Shareholders' equity (Tier I)

Share capital

Equity reserves

General reserve

General banking risk fund

Other equity (Tier II)

Revaluation reserve

Profit (loss) for previous years (adjusted)

Net profit

Book value

Number of shares

Book value per share (in PLN)

Diluted number of shares

Diluted book value per share (in PLN)

5,683,784

522,638

3,044,585

1,726,561

390,000

19,651

35,136

414,214

6,152,785

130,659,600

47.09

—

5,682,496

522,638

3,044,585

1,725,273

390,000

(13,212)

(10,847)

288,493

5,946,930

130,659,600

45.51

—

2004 2003in PLN thousand

Note 36

Off-balance sheet commitments granted to related parties

a) guarantees granted

- subsidiary undertakings

- joint ventures

- associated undertakings

- material investor

- parent entity

b) other

- import L/Cs

- subsidiary undertakings

- joint ventures

- associated undertakings

- material investor

- parent entity

- credit lines granted

- subsidiary undertakings

- joint ventures

- associated undertakings

- material investor

- parent entity

Total off-balance sheet commitments granted

to related parties

1,847

1,500

347

—

132,272

545

—

131,727

57,911

73,816

—

134,119

60,987

1,500

347

59,140

—

134,837

4,620

—

130,217

90,056

38,503

1,658

—

195,824

2004 2003in PLN thousand

147

Note 37

Off-balance sheet commitments received from related parties

a) guarantees granted

- subsidiary undertakings

- joint ventures

- associated undertakings

- material investor

- parent entity

b) other

Total off-balance sheet commitments received

to related parties

—

13,484

—

748

12,736

—

13,484

2004 2003in PLN thousand

148

NOTES TO THE PROFIT AND LOSS STATEMENT

In 2004, the total amount of income from variable-income equity

investments, other securities and other financial instruments inclu-

ded the income from the liquidation of the subsidiary undertaking

Budowa Centrum Plac Teatralny Sp. z o.o. under liquidation, income

from the sale of some of the shares held in the associated under-

taking Elektromonta¿ Poznañ S.A., and income from dividends from

shares in minority undertakings.

In 2003, the total amount of income from variable-income equity

investments, other securities and other financial instruments inclu-

ded the income from the sale of shares in PKO/Handlowy Pow-

szechne Towarzystwo Emerytalne S.A., Bytom Collection Sp. z o.o.

and ZO Bytom S.A., and income from dividends from shares in mino-

rity undertakings.

Interest income

a) from financial sector

b) from non-financial sector

c) from budget sector

d) from fixed-income securities

e) other

Total interest income

216,302

929,255

3,663

503,941

—

1,653,161

125,001

981,912

4,794

274,594

—

1,386,301

2004 2003in PLN thousand

Note 38

Interest expense

a) from financial sector

b) from non-financial sector

c) from budget sector

d) other

Total interest expense

227,487

503,225

23,180

—

753,892

138,842

476,225

22,407

—

637,474

2004 2003in PLN thousand

Note 39

Fee and commission income

a) fee and commissions income from

banking operations

b) fee and commission income from

brokerage activities

Total fee and commissions income

655,854

—

655,854

570,945

—

570,945

2004 2003in PLN thousand

Note 40

Income from variable-income investments, other securities

and other financial instruments

a) from subsidiary undertakings

b) from joint ventures

c) from associated undertakings

d) from other undertakings

Total income from variable-income investments,

other securities and other financial instruments

15,185

—

341

1,000

16,526

500

59,530

4,697

64,750

2004 2003in PLN thousand

Note 41

149

Result on financial operations

a) securities and other financial instruments

- income from transactions on securities

and other financial instruments

- cost of transactions on securities

and other financial instruments

b) other

Total result on financial operations

51,765

3,720,478

3,668,713

—

51,765

132,175

3,344,734

3,212,559

—

132,175

2004 2003in PLN thousand

Note 42

Other operating income

a) professional asset management services

b) sale or liquidation of fixed assets

and assets for sale

c) recovered loss receivables

d) received compensation, fines, etc.

e) received donations

f) other

- refund of BGF expense

- other

- sale of goods and services

- release of specific provisions for sundry

debtors

- release of provisions for future liabilities

- settlement of perpetual usufruct right

to land

- real estate taken over for debt

- income from rental services

and other income

Total other operating income

—

1,798

8,212

—

80,091

4,309

1,733

7,687

3,539

2,363

7,261

4,299

48,900

90,101

—

1,147

8,737

—

67,981

3,957

3,121

8,543

3,509

447

6,389

7,554

34,461

77,865

2004 2003in PLN thousand

Note 43

150

In 2004 and 2003, the Bank made an amortisation write-down of

goodwill resulting from the combination of the Bank with Citibank

(Poland) S.A. on 28 February 2001.

In the first half of 2004, the general administrative expenses of the

Bank included additional expenses resulting from the creation of

provisions for severance packages for employees released within the

framework of group layoffs planned for 2004, provisions for costs of

payments arising from managerial options, and provisions for costs

of services provided by entities belonging to the strategic share-

holder, related to the IT systems used and advisory support (see Note

16).

Other operating expenses

a) professional asset management services

b) sale or liquidation of fixed assets

and assets for sale

c) write-offs of receivables

d) paid compensation, fines, etc.

e) donations made

f) other

- non-operating expenses

- special provision on sundry debtors

- amortisation of goodwill

- creation of provisions for future liabilities

- real estate taken over for debt

- permanent loss of value of assets for sale

- other expenses

Total other operating expenses

—

4,096

—

340

112,773

3,548

2,078

72,445

14,623

6,232

—

13,847

117,209

—

2,744

—

2,907

108,107

3,632

3,609

72,445

2,671

5,382

4,652

15,716

113,759

2004 2003in PLN thousand

Note 44

General administrative expenses

a) salaries

b) insurance and other benefits

c) operating costs

d) taxes and levies

e) Bank Guarantee Fund charges

f) other

- provision for restructuring - personnel

costs

Total general administrative expenses

468,899

91,580

654,585

8,526

7,680

33,048

1,264,318

448,760

82,907

568,963

8,060

11,089

—

1,119,779

2004 2003in PLN thousand

Note 45

151

In 2003, the total amount of revaluation of financial assets included

write-offs for permanent loss of value of shares in subsidiary under-

taking PPH Spomasz Sp. z o.o. under liquidation, in the associated

undertaking Mostostal Zabrze Holding S.A., and in minority under-

takings.

The Bank draws up the consolidated financial statements. The data

concerning the sale of companies will be presented in Note 51 in the

consolidated financial statements.

Note 48

Charges to provisions and revaluation

a) Charges to provisions for:

- normal loans

- watch loans

- non-performing loans

- receivables arising from subordinated loans

- general risk fund

- off-balance sheet commitments

- other

b) revaluation:

- financial assets

- other

Total charges to provisions and revaluation

1,090,609

—

901,817

—

186,007

2,785

—

1,090,609

1,124,969

—

745,040

78,961

—

297,097

3,871

23,909

—

1,148,878

2004 2003in PLN thousand

Note 46

Release of provisions and revaluation

a) release of provisions for:

- normal loans

- watch loans

- non-performing loans

- receivables arising from subordinated loans

- general risk fund

- off-balance sheet commitments

- other

b) revaluation:

- financial assets

- other

Total release of provisions and revaluation

1,077,663

—

572,476

68,703

136,000

291,675

8,809

4,185

—

1,081,848

956,619

—

649,906

10,000

295,786

927

4,551

—

961,170

2004 2003in PLN thousand

Note 47

152

Extraordinary gains

a) contingent

b) other (in respect of)

- extraordinary events

Total extraordinary gains

— —

2004 2003in PLN thousand

Note 49

Extraordinary losses

a) contingent

b) other

Total extraordinary losses

— —

2004 2003in PLN thousand

Note 50

Corporate income tax

1. Profit (loss) before taxation

2. Differences between profit before taxation

and taxable income

a) permanent differences between profit

before taxation and taxable income

b) temporary differences between profit

before taxation and taxable income

3. Taxable income

4. Corporate income tax at the rate 19% / 27%

5. Deductions and decreases

6. Corporate income tax payable as per tax

return for the period, including:

- recognised in the profit and loss account

- related to items that decreased

or increased shareholders' equity

- related to items that decreased

or increased goodwill or negative goodwill

7. Corporate income tax presented in the profit

and loss account (including tax on partici-

pation in profits of legal persons)

537,882

198,544

138,273

60,271

736,426

139,921

1,002

138,919

—

139,597

478,777

(257,272)

142,901

(400,173)

221,505

59,806

(984)

58,822

—

59,808

2004 2003in PLN thousand

Note 51A

153

Deferred income tax recognised in profit and loss account

- decrease (increase) resulting from creation

and reversal of temporary differences

- decrease (increase) resulting from change

in tax rates

- decrease (increase) resulting from previously

not recognised tax losses, tax allowances

or temporary difference related to previous

periods

- decrease (increase) resulting from writing

off deferred tax assets or impossibility

of utilisation of deferred tax provision

- other components of deferred tax

- receivables from Budget arising from

tax deductions for 2007-2009

Total deferred income tax expense

6,941

—

8,988

15,929

(80,730)

(49,746)

—

(130,476)

2004 2003in PLN thousand

Note 51B

Total deferred income tax expense

- recognised in shareholders' equity

- recognised in positive or negative goodwill

2,198

—

1,773

—

2004 2003in PLN thousand

Note 51C

Corporate income tax expense reported in profit and loss account

- discontinued activities

- result on extraordinary operations

—

2004 2003in PLN thousand

Note 51D

Other obligatory decreases of profit (increases of loss)

Other obligatory charges reducing profit

(increasing loss), of which:

Total other obligatory charges to profit (loss)

—

2004 2003in PLN thousand

Note 52

Participation in net profits (losses) of subordinated entities

accounted for using equity method, of which:

- charge of goodwill of subordinated entities

- charge of negative goodwill of subordinated

entities

- charge of difference in revaluation

of net assets

—

61,872

—

28,339

2004 2003in PLN thousand

Note 53

154

On 16 March 2005 the Management Board of Bank adopted a reso-

lution regarding the proposed appropriation 2004 profits (as

above) and the payment of a dividend from previous years’ profits

amounting to 1,149,804,480.00, transferred from the supplemen-

tary and reserve capital (see Additional Note to Financial Statement

No.10).

On 17 March 2005 the Management Board of Bank adopted a reso-

lution regarding the transfer of PLN 35,136,029.29 to the Bank’s

reserve capital, which represents the difference resulting from the

changes in accounting principles. In Financial Statements as of 31

December 2004 the cumulative results of this difference relating

previous years were presented as a retained earnings (see Addi-

tional Notes No.32 and 33). Above resolution of the Management

Board of Bank will be submitted to the Supervisory Board for its

opinion and subsequently to Bank’s General Shareholders’ Meeting

to approval.

Data for calculation of profit per share

Note 55

Net profit (loss) (in PLN)*

Average weighted number of ordinary shares

Profit (loss) per ordinary share (in PLN)

Diluted average weighted number of ordinary

Diluted profit (loss) per ordinary share (in PLN)

414,214,162.25

130,659,600

3.17

—

288,493,561.98

130,659,600

2.21

—

2004 2003

*/ Net profit for the year ended 31 December 2003 includes the result from the change

in the principles recording repo/reverse repo transactions of the sell-buy-back and

buy-sell-back type on securities, which were retrospectively implemented in 2004

(see: Additional Explanatory Notes No. 32 and 33).

12 months to 31 December

The table below presents the proposal of distribution of net profit

for 2004 and the method of distribution of net profit for 2003:

Note 54

Retained earnings

- Dividend

- Equity reserves

414,214,162.25

414,190,932.00

23,230.25

242,510,335.70

241,720,260.00

790,075.70

100%

99.,99%

0.01%

100%

99.67%

0.33%

Proposed distribution

of profit for 2004

Distribution of profit

for 2003

in PLN in % in PLN in %

155

ADDITIONAL NOTES TO CASH FLOWS STATEMENT

Reconciliation of differences between changes in certain items

reported in the balance sheet and movements in those items

shown in the cash flows statement

(3,460,766)

70,160

(3,390,606)

333,361

(105,555)

227,806

(480,228)

429,119

235,548

664,667

(3,370,864)

3,910

(3,366,954)

898,554

2004 2003

12 months to 31 December

Cash flows statement

A-II7. Change in debt securities

- net movement in debt securities held

until redemption date (proceeds and

expenditures related debt securities held

until redemption date are presented

in the investing activities section

of the cash flow statement)

Balance sheet change

VII. Debt securities

Cash flows statement

A-II-8. Change in amounts from

the financial sector

- movement in current balances (nostro

accounts, vostro overdrafts) as reported

in section D. Net cash flow, total

(movement in cash)

Balance sheet change

III. Due from financial sector

Cash flows statement

A-II-11. Change in equity investments

and other financial assets

in PLN thousand

- net movement in equity investment

and other financial assets available

for sale (proceeds and expenditure

related to equity investments

and other financial assets available

for sale are reported in the investing

activities part of the cash flow statement)

(4,116) 3,880

Cash structure in cash flows statement

opening balance:

- cash at hand

- nostro in NBP

- current accounts with other banks (nostro)

and overdrafts in nostro accounts

closing balance:

- cash at hand

- nostro in NBP

- current accounts with other banks (nostro)

and overdrafts in nostro accounts

1,211,860

321,536

864,977

25,347

972,013

310,650

530,464

130,899

1,008,564

326,960

652,348

29,256

1,211,860

321,536

864,977

25,347

2004 2003

Cash structure 12 months to 31 December

in PLN thousand

156

(484,344)

531,553

40,427

(93,468)

478,512

18,410

(37,273)

(18,863)

902,434

241,780

80,795

55,313

377,888

68,053

19,096

87,149

2004 2003

12 months to 31 December

in PLN thousand

- movement in liabilities arising from

operations with NBP

- long-term funding (term of over 1 year)

received from financial institutions

(reported in the financing activities

section) and interest payable (item A-II-19),

and also movement in FX differences

on borrowings received in prior periods

(included in item A-II-3)

Balance sheet change

Cash flows statement

Balance sheet change

Cash flows statement

Change in the balance sheet

II. Due to financial institutions

XVI. Accruals and prepaid expenses

A-II-17. Change in accruals (presented

as the net movement in asset

and liability items)

A-II-12. Change in liabilities to financial

institutions

XI. Investments in other undertakings

and XII. Other securities and other

financial assets

- change in accruals (liability items)

Notes to the cash flow items: „Other

adjustments”, „Other proceeds”, „Other

expenditure”

Change in receivables/liabilities relating

to securities (permanent diminution in value,

valuation of shares with the equity method,

discount, premium, interest) not affecting

cash flows

Change in liabilities arising from interest

accrued on long-term borrowings from banks

and financial institutions

Change in other assets

Change in other liabilities

Other items relating to changes in tangible

and intangible fixed assets not affecting

cash flows

Change in the Bank’s capital and revaluation

of financial assets

Participation in net profits (losses)

of subordinated undertakings accounted

for under the equity method

Change in assets for sale

(27,860)

13,603

(195,934)

570,227

79,029

33,359

61,872

(2,755)

(102,456)

13,981

155,204

(759,177)

78,183

(68,875)

28,339

4,651

Net cash flows from operating activities

2004 2003

12 months to 31 December

in PLN thousand

Total other adjustments 531,541 (650,150)

Other adjustments

157

Dividends from shares available for sale

Interest received on securities

(investing activities)

Return of additional capital contributed

to Handlowy Inwestycje Sp. z o.o.

Realised FX differences on investing activities

8,984

—

4,696

2,724

42,000

Realised FX differences on financing activities —

Repayment of interest on long-term borrowings

from banks and financial institutions

Realised FX differences on financial activities

(30,585)

—

(30,773)

(661)

2004 2003

12 months to 31 December

Other financial expenditure

in PLN thousand

2004 2003

12 months to 31 December

Other proceeds from financing activities

in PLN thousand

2004 2003

12 months to 31 December

Other proceeds from investing activities

in PLN thousand

Total other proceeds from investing activities 8,984 49,432

Net cash flows from investing activities

Total other proceeds from financing activities

1,350

1,350 —

Net cash flows from financing activities

Total other financial expenditure (30,585) (31,434)

158

Note 1

Concentration limits

The Banking Act of 29 August 1997 (Journal of Laws of 2002 No. 72,

item 665, as later amended) and its executive regulations issued by

the Commission for Banking Supervision define maximum exposure

limits for the Bank. Under article 71 paragraph 1 of the Act, which

came into force as of 1 January 2002, total balance sheet and off-

balance sheet exposure from one or more capital and organisa-

tionally related entity cannot exceed 20% of the Bank’s equity when

one of the entities is a parent entity or subsidiary undertaking of the

Bank or is a subsidiary undertaking to a parent entity of the Bank or

cannot exceed 25% of the Bank’s equity when there is no such

relationship between the Bank and such entities. Pursuant to pro-

visions of the Resolution No. 5/2001 of the Commission for Banking

Supervision dated 12 December 2001 regarding specific rules for cal-

culating capital requirements for banking risk categories, including

capital requirement for exposure exceeding concentration limits,

method and detailed rules for calculation of the bank solvency ratio

(…) (NBP Official Journal No. 22, item 43 as amended), the Bank is

allowed to maintain exposure exceeding concentration limits, as de-

fined in article 71 paragraph 1 of the Banking Act, solely with respect

to debt arising from operations included in the trading portfolio.

Equity for the purpose of setting concentration limits specified in

the Banking Act has been established in accordance with Resolution

No. 6/2001 of the Commission for Banking Supervision dated 12

December 2001 regarding specific rules for calculating equity for

banks (…) (NBP Official Journal No. 22, item 44).

As of 31 December 2004, the Bank had an exposure to a related

party from the banking sector exceeding the statutory debt concen-

tration limits. The excess exposure was related to debt arising from

Concentration of exposure

ADDITIONAL EXPLANATORY NOTES

transactions in derivative instruments. Due to the fact that the debt

concentration limit has been exceeded, an additional capital require-

ment for excess exposure was factored into the calculation of the

Bank’s capital adequacy ratio as of 31 December 2004.

The Bank sets out to limit its exposure to individual clients. In the

presented reporting periods the Bank’s exposure did not exceed the

statutory limits in respect of banking portfolio exposure to a single

entity or a group of entities related by equity or organisationally

and did not exceed other concentration limits set by the Banking

Law Act. As of 31 December 2004, the Bank’s exposure in banking

portfolio transactions with customers, which exceeded 10% of the

Bank’s equity, amounted to PLN 991,597 thousand, i.e. 24.6% of

these funds (31 December 2003: PLN 762,565 thousand, i.e. 16.6%).

Concentration of exposure in individual economy sectors

To avoid excessive concentration of credit risk, the Bank monitors its

exposure in individual sectors of the economy, defining the areas

where the Bank’s exposure should grow and the areas where oppor-

tunities for development are poor, and where the exposure should be

reduced. The policy of the Bank’s exposure to customers in individual

sectors is pursued separately with respect to corporate customers

within Corporate Banking Divisions and with respect to small and

medium-sized enterprises within the Commercial Bank.

The Bank’s policy regarding exposures to corporate customers in

particular sectors is developed through identification of target

markets. A key component in this identification of markets is an

assessment of sectoral risk. To this end, specialists in particular in-

dustries carry out sectoral analyses. Within the framework of the

target markets specified, lending programmes are drawn up with

documented requirements for approving the risk involved in spe-

cific kinds of business. The higher the sectoral risk, the tighter the

criteria for risk approval. The assessment of the financial condition

159

Wholesale trade and sales on commission

excluding motor vehicles and motorcycles

Financial intermediary excluding insurance

and pension funds

Generation and distribution of electrical energy,

gas, steam, and hot water

Production of food and beverages

Production of chemicals

Construction

Manufacture of machines and equipment

not classified elsewhere

Post and telecommunications

Sale, service, and repair of mechanical vehicles

and motorcycles, retail sale of fuel for motor

vehicles

Production of other means of transport

Top 10 sectors

19.60

10.73

8.64

6.66

3.73

3.66

3.50

3.39

3.07

2.69

65.67

20.84

7.41

6.80

7.25

3.80

4.07

3.67

3.03

3.61

3.29

63.77

Sector of the economy according to Polish

Classification of Economic Activity (PKD)

31.12.2004 31.12.2003in %

and development prospects of individual industries is a major ele-

ment in the internal rating assigned to a customer.

In terms of small and medium enterprises, the Bank’s policy on

exposures consists of identifying a target market by negative

selection particular industries. This involves eliminating from the

target market those industries where the risk of doing business is

considered too high in view of the standards in force in the Bank.

The Bank’s policy distinguishes the following criteria as the basis

for negative selection:

A/ industries excluded in view of their incompatibility with the

characteristics of small and medium enterprises,

B/ industries excluded in view of their sensitivity to market factors

and earnings volatility,

C/ industries excluded in view of their declining trends in perfor-

mance.

The target market is then defined as all other industries that have

not received an adverse assessment. A selective approach is admis-

sible in relation to specific industries excluded due to sensitivity and

volatility factors or to downward performance trends, whereby

those customers with the highest internal ratings in those indus-

tries are retained.

Given there is a large diversity of customers representing the indi-

vidual industries, the table below shows aggregated data for the

Bank's exposure to the 20 largest industries.

160

Other economic activities

Production of radio, television,

and communication hardware and equipment

Retail sale excluding motor vehicles

and motorcycles; repair household items

and consumer products

Production of rubber and plastic products

Production of electric machines and equipment

not classified elsewhere

Production of furniture; manufacturing

activities not classified elsewhere

Production of coke and refining products

of crude oil and nuclear fuels

Production of motor vehicles,

trailers and semitrailers

Land transport, transport by pipelines

Manufacture of products from other non-metal

raw materials

Top 20 sectors

Other sectors

Total Bank

2.44

2.30

2.25

2.21

2.16

2.13

2.07

1.94

1.57

1.46

86.20

13.80

100.00

2.39

1.70

2.23

2.36

1.70

1.64

2.70

1.43

1.75

84.03

15.97

100.00

Sector of the economy according to PKD

31.12.2004 31.12.2003in %

Note 2

Sources and uses of funds

Source of funds

Funds from banks

Funds of customers and public sector

Other external funds

Own funds and net profit

Total source of funds

1,898,252

19,911,344

5,857,551

6,152,785

33,819,932

1,868,837

20,502,794

5,709,655

5,946,930

34,028,216

Use of funds

Bank placements*

Amounts due from customers and public sector

Securities, shares, and other financial assets

Other uses

Total use of funds

7,043,329

10,957,444

12,136,650

3,682,509

33,819,932

7,275,059

14,388,879

8,205,485

4,158,793

34,028,216

* including one-day deposits like: “overnight”, “tom/next”, “spot/next”.

31.12.2004 31.12.2003

in PLN thousand

161

Set out below are amounts due to and from customers and the

public sector as on 31 December 2004 related to operations carried

out by the Bank branches, presented by Regions created in 2004,

within which the Bank branches are grouped.

Name of region / Geographic operating area by

provinces - districts

Amounts due to

customers

and public sector

Amounts due from

customers and

public sector

NORTHERN Region

provinces:

Kujawsko–Pomorskie, Pomorskie, Warmiñsko–Mazurskie and districts of the Zachodnio–Pomorskie

Province: s³awieñski, koszaliñski, ko³obrzeski, bia³ogardzki, œwidwiñski, szczecinecki, drawski, grodzki Koszalin.

SOUTHERN Region

provinces:

Œl¹skie, Opolskie, Ma³opolskie, Podkarpackie, Œwiêtokrzyskie

WESTERN Region

provinces:

Lubuskie, Wielkopolskie, Dolnoœl¹skie, Zachodnio–Pomorskie without districts allocated to the Northern Region

CENTRAL-EASTERN Region

city of Warsaw, provinces:

Mazowieckie, Lubelskie, £ódzkie, Podlaskie

Consumer Bank – CITIBANK HANDLOWY

TOTAL

944,001

1,359,975

1,199,392

10,542,408

5,865,568

19,911,344

975,195

1,173,741

1,516,851

5,246,036

2,045,621

10,957,444

in PLN thousand

162

Set out below are amounts due to and from customers and the

public sector as on 31 December 2003 related to operations carried

out by the Bank branches, presented by Regions created in 2004,

within which the Bank branches are grouped.

825,853

1,397,428

1,613,975

10,613,343

6,052,195

20,502,794

1,619,226

2,084,312

2,595,867

6,756,397

1,333,077

14,388,879

Name of region / Geographic operating area by

provinces - districts

Amounts due to

customers

and public sector

Amounts due from

customers and

public sector

NORTHERN Region

provinces:

Kujawsko–Pomorskie, Pomorskie, Warmiñsko–Mazurskie and districts of the Zachodnio–Pomorskie

Province: s³awieñski, koszaliñski, ko³obrzeski, bia³ogardzki, œwidwiñski, szczecinecki, drawski, grodzki Koszalin.

SOUTHERN Region

provinces:

Œl¹skie, Opolskie, Ma³opolskie, Podkarpackie, Œwiêtokrzyskie

WESTERN Region

provinces:

Lubuskie, Wielkopolskie, Dolnoœl¹skie, Zachodnio–Pomorskie without districts allocated to the Northern Region

CENTRAL-EASTERN Region

city of Warsaw, provinces:

Mazowieckie, Lubelskie, £ódzkie, Podlaskie

Consumer Bank – CITIBANK HANDLOWY

TOTAL

in PLN thousand

Note 3

Contributions to foreign branches

The Bank does not conduct any operations through foreign

branches.

163

Financial instruments by categories of financial assets

and liabilities

Financial instruments

Financial assets for trading purposes by particular group of assets:

Financial assets for trading purposes

Change in financial assets for trading purposes:

Debt securities for trading purposes

Debt securities for trading purposes include securities purchased in

order to benefit from short-term price fluctuations. Debt securities

for trading purposes are accounted for at their fair value, and the

result of the valuation is recognised in gains on financial operations.

Interest, discount or premiums on these securities are accrued to

the profit and loss account on a straight-line basis.

Note 4

Financial assets for trading purposes

Financial liabilities for trading purposes

Loans granted and own receivables

Financial assets held until maturity

Financial assets available for sale

Total financial instruments

5,316,962

4,194,290

18,495,262

—

6,118,936

34,125,450

4,743,692

3,651,195

22,262,468

70,159

2,747,098

33,474,612

31.12.2004 31.12.2003in PLN thousand

Debt securities

Amounts receivable from revaluation

of derivative instruments

Total financial assets for trading purposes

1,211,839

4,105,123

5,316,962

1,118,797

3,624,895

4,743,692

31.12.2004 31.12.2003in PLN thousand

Opening balance

- change in accounting principles

Opening balance after restatement

to conform with current year presentation

increases

- purchases

- FX differences

- revaluation

- settlement of discount, premium, interest

decreases

- sale

- revaluation

- settlement of discount, premium, interest

Balance of financial assets for trading

purposes as of the end of the period

4,743,692

—

4,743,692

122,317,652

122,199,799

735

2,541

114,577

(121,744,382)

(121,738,931)

—

(5,451)

5,316,962

6,080,900

160,804

6,241,704

103,201,486

103,169,266

210

32,009

(104,699,498)

(103,770,180)

(900,232)

(29,086)

4,743,692

2004 2003in PLN thousand

164

Amounts receivable from valuation of derivative instruments

Amounts receivable from valuation of derivative instruments repre-

sent positive revaluation of derivative instruments, i.e. forward FX

transactions, interest rate products and options.

The Bank enters into various derivative transactions for speculation

purposes and to manage its own risks arising from movements in

currency and interest rates. The settlement date of open positions

in derivative instruments depends mainly on the nature of the

instrument. In case of these transactions the floating interest rate is

based on interbank interest rates prevailing at the beginning of the

interest period and the fixed interest rate depends on the nature of

instrument and the objective of particular transaction.

As of 31 December 2004, the Bank placed deposits at other institu-

tions as collateral against derivative transactions amounting in total

to PLN 215,578 thousand (31 December 2003: PLN 8,117 thousand),

and for derivative transactions, the Bank received collateral totalling

PLN 8,116 thousand (31 December 2003: PLN 4,270 thousand).

Forward foreign exchange contracts are agreements to exchange

specific amounts of currency at a specified exchange rate, with

settlement date falling two working days after the transaction date.

Foreign currency swaps are combinations of spot (settlement on the

second working day following transaction date) and forward foreign

exchange contracts whereby a specific amount of currency is ex-

changed at the current rate for spot date, and then exchanged back

at a forward rate and date. The nominal value of foreign exchange

contracts expresses the amount of foreign currency purchased or

sold under the contracts and does not represent the actual market

or credit risk associated with these contracts.

Forward and swap FX contracts are used for closing daily open

foreign currency positions and for speculative purposes. Foreign

Forward and swap FX contracts

currency swaps are used for managing the Bank’s liquidity and posi-

tion on nostro accounts.

Forward and swap FX contracts are valued and accounted for in the

profit and loss account at their market value. A discounted cash

flow model is applied to assess forward and swap FX contracts.

Unrealised profits and losses from revaluation of forward and swap

FX contracts are recognised in the balance sheet in ‘Other securities

and other financial assets’ or in ‘Other liabilities arising on financial

instruments’ gross, i.e. without netting.

The object of FX option contracts is the sale or purchase by the Bank

of the right to exchange at a specified date one currency to another

at a fixed exchange rate. Exercise of an option may be done by

physical exchange of currencies or by settlement of the difference

between contract rate and market reference rate prevailing at the

exercise date. There are two types of options: call options that give

their owner the right to buy a contracted amount of foreign currency

at the exercise price amount of domestic currency or other foreign

currency, and put options that give their owner the right to sell

a contracted amount of foreign currency at the exercise price

amount of domestic currency or other foreign currency. The buyer

of an option pays to its drawer a premium for the purchased right to

buy or sell currency.

FX options are valued and recognised in the profit and loss account

at their market value and are calculated using the Garman-

Kohlhagen valuation model. Unrealised revaluation gains and losses

are recognised in ‘Other securities and other financial assets’ or

‘Other liabilities arising from financial instruments’ in their gross

value, i.e. without netting. Premiums received on written options

are presented in ‘Other liabilities arising from financial instruments’

and premiums paid on purchased options are presented in ‘Other

securities and other financial assets’. Premiums are recognised in

the profit and loss account at the close of the respective contract.

Currency option contracts

165

Interest rate contracts

Interest rate option contracts

The Bank’s interest rate transactions include interest rate swaps

(IRS), currency interest rate swaps (CIRS), and forward rate agree-

ments (FRA).

Interest rate swaps are agreements to exchange periodic interest

payment obligations. On the interest payment date the Bank and its

counterparts are obliged to exchange periodic fixed and floating

rate interest payments defined in a contract. The objective of cross-

currency interest rate swaps, which are concluded in two different

currencies, is the exchange of a counterparty’s obligation expressed

in one currency into its obligation in other currency. As a result, on

interest payment date the Bank and its counterparts are obliged to

exchange interest payments defined in a CIRS contract. Additio-

nally, counterparties may also exchange notional amounts of con-

tracts. The Bank concludes IRS and CIRS contracts on the interbank

market and with its customers.

The objective of FRA contracts is to fix interest rate levels for

counterparty receivables, which arise or will arise on set dates in

future or to fix interest rate levels for counterparty payables, which

arise or will arise on set dates in future. The Bank concludes FRA

contracts on the interbank market and with its customers.

Interest rate contracts are accounted for and recognised at their

market value in the profit and loss account. They are calculated

using the discounted cash flow valuation model. Unrealised revalu-

ation gains and losses are recognised in the balance sheet in ‘Other

securities and other financial assets’ or in ‘Other liabilities arising on

financial instruments’ in their gross value, i.e. without netting.

The object of an interest rate option contract is the right to receive

at specified dates in the future payments whose amount depends

on the future interest rates levels. There are two types of interest

rate options: cap option – where the seller agrees to pay the buyer a

difference between the reference rate (usually 3M or 6M LIBOR)

and agreed exercise rate – when the reference rate exceeds exer-

cise rate, and floor option – where the seller agrees to pay the

buyer a difference between the reference rate and the agreed

exercise rate – when the exercise rate exceeds the reference rate.

In both cases the seller receives a premium paid in advance.

The interest rate option contracts are accounted for and recognised

at their market value in the profit and loss account. Unrealised

revaluation gains and losses are recognised in the balance sheet in

“Other securities and other financial assets” or in “Other liabilities

arising from financial instruments” at their gross value, i.e. without

netting. Premiums received on written options are included in

‘Other liabilities arising from financial instruments’ and premiums

paid on purchased options are included in ‘Other securities and

other financial assets’. Premiums are recognised in the profit and

loss account at the close of the respective contract.

The Bank concludes purchase and sale contracts in debt securities

at a fixed price where the settlement occurs later than two days

following the spot date (forward contracts).

The contracts are accounted for at their market value and unrealised

revaluation gains and losses are recognised in the balance sheet in

“Other securities and other financial assets” or in “Other liabilities

arising on financial instruments”.

Share options give the buyer the right to receive the difference

between a share price or share index value defined in the option

contract and the value of these instruments at an exercise date

depending whether it is a call or put option, for increase or

decrease of the base instrument price respectively. The buyer of an

option pays a premium for the purchased rights.

Securities term contracts

Share options

166

The contracts are accounted for at their market value and unrealised

revaluation gains and losses are recognised in the balance sheet in

‘Other securities and other financial assets’ or in ‘Other liabilities

arising on financial instruments’ in their gross value, i.e. without

netting. Premiums received on written options are included in ‘Other

liabilities arising on financial instruments’ and premiums paid on

purchased options are included in ‘Other securities and other finan-

cial assets’. Both categories are recognised in the profit and loss

account at the close of the respective contract.

A financial futures contract is a contract traded on an organised

stock exchange, related to the purchase or sale of a standard

amount of the specific financial instrument at a specified date in the

future and at a preagreed price.

Financial futures contract may be based on financial instruments of

defined types, prices of which depend on interest rates. Financial

futures contract may also be based on changes in FX rates of

certain basic foreign currencies. The Bank does not carry out trade

in futures-type FX contracts.

Futures contracts

167

Characteristics of derivative instruments

Instrument description

Valuation methods applied

Purpose of contract

Number of transactions

before maturity

Future revenue/payments

Maturity

Possibility to exchange to

another asset/liability

Fixed rates/amounts of

revenue and payment dates

Other conditions

Type of risk

Instrument FX forward FX swap Currency option

contracts

IRS CIRS

Sale/purchase of a currency

at a specified date at the

exchange rate fixed for

the date of transaction.

discounted cash

flow model

for trade

1201

variable

2005-01-03 - 2007-09-28

none

variable

none

currency, liquidity, contractor

and interest rate

Concurrent and immediate

purchase/sale of the

currency and its forward

repurchase/resale

at a forward rate fixed

at the spot date.

discounted cash

flow model

for trade

331

variable

2005-01-03 - 2007-05-31

none

variable

none

interest rate, currency,

liquidity, contractor

Purchase by the option

contract purchaser of a right

(but not an obligation) to buy

or sell the currency at a fixed

rate at a specified date.

option valuation model

(Garman-Kohlhagen)

for trade

6067

variable

2005-01-03 – 2006-10-31

none

variable

none

currency, liquidity, interest

rate, price variability (vega),

contractor – for bought options,

and the Bank does not accept

nonlinear risk resulting from the

option, closing each time such

item of risk in the market

Exchange of interest

payments in the same

currency, based on

different interest rates.

discounted cash

flow model

for trade

2060

variable

2005-01-07 – 2018- 09-04

none

variable

none

interest rate, contractor,

currency for fx transactions

Exchange of interest

payments in different

currencies. This instrument

can also encompass the spot

and/or forward currency

exchange.

discounted cash

flow model

for trade

variable

2005-01-21 - 2013-05-27

none

variable

none

currency, interest rate,

liquidity, contractor

168

FRA Securities contracts Futures contracts

on interest rates

Share options Interest rate

options

Depositing/acceptance of a hypothe-

tical deposit contract for a specific

date in the future. Settled by the

amount of the discounted difference

between the interest accrued for

the contract period on the basis

of the contract rate and the interest

accrued on the basis of so-called

reference rate which is most often

the interbank money market rate.

discounted cash

flow model

for trade

233

variable

2005-01-03 – 2005-09-26

none

variable

none

interest rate, contractor,

currency for fx transactions

Forward sale or purchase of

securities at the price

fixed for the transaction date.

discounted cash

flow model

for trade

102

variable

2005-01-03 – 2005-01-07

none

variable

none

interest rate, liquidity,

contractor

Purchase or sale of a standard

amount of the specific financial

instrument at a specified date in the

future and at a pre-agreed

price. They are traded on an

organised stock exchange.

inventory method

for trade

variable

2005-03 - 2005-12

none

variable

none

interest rate, currency,

contractor

Purchase by the option contract

purchaser of a right (but not an

obligation) to receive the

difference between the share

price fixed in the contract and

the value of the instrument

as of the date of exercise of

the option.

option valuation

model (Black Scholes)

for trade

variable

2005-01-20 – 2008-10-13

none

variable

none

interest rate, issuer, market

price, price variability (vega) ,

and the Bank does not

accept non-linear risk resulting

from the option, closing each

time such item of risk in

the market

Purchase by the option contract

purchaser of a right (but not an

obligation) to exchange the

amount of interest accrued on

transaction amount on the

basis of the reference rate

option valuation

model (Black 76)

for trade

variable

2005-02-28 – 2013-10-24

none

variable

none

interest rate, issuer, market

price, price variability (vega) ,

and the Bank does not

accept non-linear risk

resulting from the option,

closing each time such item

of risk in the market

In the majority of cases it is possible to close the executed derivatives earlier, in accordance with their market value.

All derivative transactions executed with non-banking customers are executed on the basis of the assigned individual transaction limits.

In certain cases, presentation of security is required for the purpose of assignment of the limit. The most often used types of security

are guarantee deposit, promissory note, assignment, declaration of submittal to debt enforcement.

169

Interest rate instruments

- FRA - purchase

- FRA - sale

- interest rate swaps (IRS)

- currency-interest rate swaps

(CIRS)

- interest rate options purchased

- interest rate options sold

- futures contracts – purchase

- futures contracts – sale

Currency instruments

- FX forward

- FX swap

- currency options purchased

- currency options sold

- other (commodity swap)

Securities contracts

- share options purchased

- share options sold

- securities purchased pending

delivery

- securities sold pending delivery

Total derivative instruments

Nominal value

As of 31.12.2004

Time to maturity

Up to 3 months

Banks Other Banks Other Banks Other Banks Other Banks Other

3 months - 1 year 1 - 5 years Above 5 years

As of 31.12.2003

21,098,435

7,094,000

8,294,000

4,394,553

449,882

436,000

430,000

—

17,255,990

557,279

14,523,212

1,088,378

968,282

118,839

595,233

66,756

344

227,998

300,135

38,949,658

1,441,803

—

2,836

—

430,000

436,000

553,701

19,266

2,653,965

551,438

232,208

757,081

994,399

118,839

118,679

344

66,756

10,035

41,544

4,214,447

43,727,899

8,056,340

8,924,760

25,310,792

1,126,007

300,000

10,000

—

15,201,058

1,132,852

11,470,775

1,507,489

1,089,942

—

68,573

67,948

625

—

58,997,530

2,641,764

100,000

—

956,251

462,131

—

290,000

833,382

—

3,467,136

952,370

69,555

985,338

1,459,873

—

68,573

625

67,948

—

6,177,473

62,239,021

—

61,687,301

400,220

—

151,500

—

3,112,675

243,639

2,578,281

148,790

141,965

—

41,330

—

65,393,026

2,587,605

—

1,131,609

1,304,496

151,500

—

967,681

623,121

63,728

131,230

149,602

—

41,330

—

41,330

—

3,596,616

12,613,454

—

11,657,885

205,569

—

750,000

—

12,613,454

1,984,161

—

1,148,981

85,180

750,000

—

1,984,161

148,334,142

15,250,340

17,218,760

106,290,208

4,033,485

2,067,500

1,387,083

19,266

42,658,506

4,060,699

28,937,759

4,618,306

4,804,063

237,679

933,718

177,003

238,033

341,679

191,926,366

119,135,918

21,184,000

20,769,000

72,528,587

3,630,459

690,000

333,872

—

35,310,908

1,744,218

29,833,055

2,062,472

1,668,729

2,434

666,618

351,709

33,733

148,275

132,901

155,113,444

4,737,724

70,280

—

1,571,041

2,092,531

323,872

680,000

—

6,719,596

2,823,888

1,050,646

1,202,924

1,639,704

2,434

391,757

33,733

351,709

4,835

1,480

11,849,077

123,873,642

21,254,280

20,769,000

74,099,628

5,722,990

1,013,872

—

42,030,504

4,568,106

30,883,701

3,265,396

3,308,433

4,868

1,058,375

385,442

153,110

134,381

166,962,521

Times to maturity of derivative instruments as of 31 December 2004

in PLN thousand

170

Interest rate instruments

- FRA

- interest rate swaps (IRS)

- currency-interest rate swaps

(CIRS)

- interest rate options purchased*

- interest rate options sold*

- futures contracts

Currency instruments

- FX forward

- FX swap

- currency options purchased*

- currency options sold*

- other (commodity swap)

Securities contracts

- share options purchased

- share options sold

- forward contracts

Total derivative instruments

Positive market value

Banks

Negative market value Credit equivalents**

As of

31.12.2003

As of

31.12.2004

As of

31.12.2004

As of

31.12.2003

As of

31.12.2004

As of

31.12.2003

Other Banks Other Banks Other

2,185,115

27,770

2,026,413

1,148

—

1,490,181

57,377

1,354,876

64,351

12,152

1,425

3,060

2,347

—

713

3,678,356

129,784

248,143

—

120,244

20,048

723

149,764

91,823

2,413

47,648

6,088

1,792

4,243

—

3,921

322

402,150

107,039

2,708,464

38,636

2,451,121

5,317

407

—

870,755

103,003

654,828

105,663

7,084

177

12,947

1,512

10,729

706

3,592,166

212,983

2,174,556

24,754

1,976,539

613

19,544

—

1,301,495

65,524

1,176,349

6,842

50,988

1,792

4,982

3,921

—

1,061

3,481,033

153,106

158,623

813

84,026

—

1,148

713

251,032

161,126

25,757

4,302

58,423

1,424

2,361

—

2,347

412,016

71,923

2,509,489

35,120

2,184,826

297

4,817

—

802,104

117,185

581,130

9,143

94,469

177

12,330

10,729

1,512

3,323,923

284,429

540,734

501,988

230

—

331,852

14,783

296,054

18,336

—

2,679

6,868

—

879,454

38,492

189,312

250

71,706

16,028

—

102,455

58,579

2,594

34,839

—

6,443

—

291,796

101,328

1,176,392

27,527

940,035

202,023

6,807

—

345,529

88,282

198,348

58,802

—

15,372

—

1,537,293

* the valuation does not include premiums received and paid for the options issued and purchased.

** the column of off-balance sheet equivalents presents the value of so-called credit equivalents of derivatives calculated in accordance with the rules stated in the Resolution No. 5/2001

of the Banking Supervision Commission dated 12 December 2001 concerning the specific principles for calculation of capital requirements for particular types of risk, including excesses

of debt concentration limits, method and principles for calculation of solvency ratio of the bank, (…) (Official Journal of NBP No 22, item 43, as amended). Credit equivalents are used

as a measure of derivatives contractor risk in capital adequacy and debt concentration accounting.

Market values of derivative instruments before maturity as of 31 December 2004 are as follows:

in PLN thousand

171

Financial liabilities available for trading purposes by category:

Financial liabilities for trading purposes

Change in financial liabilities available for trading purposes:

The item “Liabilities arising on valuation of derivative transactions”

represents negative valuation of derivative instruments.

The different types of derivative transactions concluded by the Bank

and their valuation principles are described in par. ‘Financial assets

for trading purposes’.

Loans granted and own receivables by category:

Loans granted and own receivables

Change in loans granted and own receivables:

Opening balance

increases

- sale

- revaluation

decreases

- purchases

- revaluation

Closing balance of financial liabilities available

for trading purpose

3 651 195

563,841

—

563,841

(20,746)

(20 746)

—

4,194,290

4 182 578

288,863

—

(820,246)

—

(820 246)

3,651,195

2004 2003in PLN thousand

Liabilities arising on valuation of derivative

transactions

Liabilities arising from short sale of securities

Total financial liabilities available for trading

purposes

3.926,173

268,117

4,194,290

3,362,332

288,863

3,651,195

31.12.2004 31.12.2003in PLN thousand

* including short term revolving loans

Opening balance

increases

- new contracts*

- interest receivable

decreases

- repayment*

Closing balance of loans granted

and own receivables

23,883,454

24,903,348

24,810,930

92,418

(28,559,092)

20,227,710

20,398,499

28,731,824

28,658,010

73,814

(25,246,869)

23,883,454

2004 2003in PLN thousand

Loans and advances

Deposits in other banks

Purchased receivables

Drawn guarantees

Receivables from securities purchased

Interest receivable

Total loans granted and own receivables

– gross

Provision created

Total loans granted and own receivables

– net

16,522,781

2,402,464

176,699

67,032

292,849

765,885

20,227,710

(1,732,448)

18,495,262

21,240,209

1,339,290

267,456

74,646

288,386

673,467

23,883,454

(1,620,986)

22,262,468

31.12.2004 31.12.2003in PLN thousand

172

Consumer loans and loans related to credit cards issued to individuals

are accounted for at amortised cost using effective interest rates net

of specific provisions created.

Amounts due from financial institutions, non-financial sector and go-

vernment sector are presented in the balance sheet as the difference

between the sum of their nominal value and interest accrued, and the

value of specific provisions created for credit risk.

Change in provision for loans and own receivables:

Financial assets held until maturity

Change in financial assets held until maturity:

Debt securities held until maturity are accounted for at cost net of

provision for permanent diminution in value. Interest and discount on

these securities is accrued to profit and loss account on a straight line

basis.

Financial assets held until maturity – by category:

Opening balance

increases

- charges to provision

- FX differences

- other

decreases

- release of provision

- write-offs against provision

- reclassifications to other category of assets

- FX differences

Closing balance of provision for loans

and own receivables

1,620,986

905,242

901,818

—

3,424

(793,780)

(641,180)

(152,600)

—

1,732,448

1,516,853

824,084

824,001

—

(719,951)

(659,906)

(54,755)

(5,233)

(57)

1,620,986

2004 2003in PLN thousand

Debt securities

Total financial assets held until maturity

—

70,159

31.12.2004 31.12.2003in PLN thousand

Opening balance

increases

- purchases

- FX differences

decreases

- sale

- FX differences

- reclassification to another asset group

- settlement of discount, premium, interest

Closing balance of financial assets held

until maturity

70,159

—

(70,159)

—

(9,489)

(60,670)

—

305,707

10,364

—

10,364

(245,912)

(244,443)

—

(1,469)

70,159

2004 2003in PLN thousand

173

Pursuant to Resolution No. 1/9/OK/2003 of the Management Board

of the National Bank of Poland of 4 March 2003 on early redemption

of bonds issued by NBP for banks following a decrease in the obliga-

tory reserve rate on 3 April 2003, the National Bank of Poland made

an early redemption of bonds in the Bank’s portfolio for the total

amount of PLN 244,443 thousand.

Financial assets available for sale

Change in financial assets available for sale:

Debt securities available for sale consist of debt securities not clas-

sified as ‘for trading purposes’ or ‘held until maturity’. Debt securities

available for sale are accounted for at fair value. Changes in fair

value of debt securities are recognised in the revaluation reserve.

Financial assets available for sale – by category:

Debt securities

Shares in non-subordinated undertakings

Total financial assets available for sale

6,091,194

27,742

6,118,936

2,723,471

23,627

2,747,098

31.12.2004 31.12.2003in PLN thousand

Opening balance

- change in adopted accounting principles

Opening balance after restatement to conform

with current year presentation

increases

- purchases

- FX differences

- revaluation

- settlement of discount, premium and interest

- reclassification of an entity

decreases

- sale

- revaluation

- FX differences

- settlement of discount, premium and interest

- transfer from another category

Closing balance of financial assets available

for sale

2,747,098

—

2,747,098

33,859,105

33,682,443

—

144,969

31,693

(30,487,267)

(30,001,451)

(3,291)

(430,154)

(25,393)

(26,978)

6,118,936

2,520,153

60 097

2,580,250

19,778,277

19,600,950

96,021

9,593

63,872

7,841

(19,611,429)

(19,477,019)

(47,467)

—

(86,652)

(291)

2,747,098

2004 2003in PLN thousand

174

Interest income from debt financial instruments, loans granted

and own receivables

Market risk management

Market risk management in the Bank is based on principles and pro-

cedures approved by the Assets and Liabilities Committee (ALCO)

and the Management Board which reflect requirements set by Polish

supervisory bodies as well as meeting principles applied within

Citigroup.

Market risk management encompasses two key risk areas: liquidity

risk and pricing risk.

Liquidity risk is defined as the Bank’s potential inability to repay its

financial liabilities to customers and counterparties when due.

Pricing risk is defined as the risk that changes in market interest

rates, FX rates, share prices or in parameters affecting the rates

and prices may adversely affect the Bank’s results.

Measurement and setting limits for liquidity risk

The fundamental measure for liquidity risk of the Bank is the Market

Access Report (‘MAR’) which shows the gap in cash flows in parti-

cular tenors that identifies potential exposure of the Bank to the

necessity of finding additional sources of funding in the money

market. The MAR report includes all cash flows related to balance

sheet and off-balance sheet transactions. Liquidity management

encompasses all liabilities and receivables of the Bank. The report is

prepared daily and includes the total balance sheet of the Bank

(universal currency) and balance sheets in PLN, USD, EUR and CHF.

Gap limits proposed by the Head of Market Risk Department in

consultation with the Regional Risk Manager and Citigroup Risk

Manager and approved by the Assets and Liabilities Committee are

set for the following tenors: O/N, 2-7 days, 8-15 days, 1 month,

2 months, 3 months, 6 months, and 1 year. The liquidity gap above

one year is not limited but monitored. Statistical research related to

Liquidity risk management

Risk management

Loans granted and own receivables

accrued realised interest

accrued unrealised interest, of which:

interest receivable

interest overdue

Financial assets for trading purposes*

accrued realised interest

accrued unrealised interest

Financial assets held until maturity*

accrued realised interest

accrued unrealised interest

Financial assets available for sale*

accrued realised interest

accrued unrealised interest

1,185,042

765,885

128,253

637,632

141,948

17,859

—

224,515

194,742

1,103,571

673,467

177,015

496,452

85,709

7,139

2,724

—

164,682

67,985

31.12.2004 31.12.2003

Category of assets/

interest income

in PLN thousand

* Debt securities

175

inter alia the stability of the deposit base and the assumptions

concerning the share of individual product groups in the Bank’s

balance sheet, are used for calculating the gap. The report is pre-

pared every day. In addition stress tests are performed daily, taking

into account potential risks resulting for example from a crisis in

the banking system and the related limitation of market liquidity.

Additionally, in order to assess liquidity risk, the Market Risk

Department monitors the balance sheet structure of the Bank and

analyses its changes over time.

Scope of risk

Pricing risk management refers to all portfolios, where their profi-

tability is at risk of adverse impact of changing market conditions

such as interest rates, FX rates, prices of goods and parameters

affecting the rates and prices. In order to manage pricing risk the

Bank separates trading and bank portfolios. Trading portfolios

include transactions in financial instruments (balance sheet and off-

balance sheet), with the objective of earning profits due to gains on

changes in market parameters in a short period of time. Trading

portfolios are marked-to-market. The Treasury Department mana-

ges trading portfolios encompassing interest rate risk and FX risk.

Trading activity related to portfolios including shares and share

derivative instruments is conducted by Dom Maklerski Banku Han-

dlowego S.A. (“DM BH”). Bank portfolios include all other balance

and off-balance sheet items not included in trading portfolios. The

objective of such transactions is realisation of the result in the

whole contractual life of the transaction. Treasury manages inte-

rest rate risk arising from bank portfolios of the Corporate and

Investment Bank, Consumer Bank, leasing subsidiaries, and DM BH.

The management of interest rate risk is based on the fund pricing

system. The result of bank portfolios is calculated on accrual basis

of interest accumulation.

Pricing risk management

Measurement of pricing risk of banking portfolios

The Bank utilises two methods of pricing risk measurement for

banking portfolios:

• Interest Rate Exposure method

• Value at Close method

Risk limits are imposed with a potential change of interest income

following movement of interest rate curves by 100 base points for

the basic currencies (PLN, USD, EUR) used for denomination of as-

sets and liabilities of the Bank within 1, 5, and 10 year spans. The use

of limits is monitored daily. Changes in the costs of closing open in-

terest positions are also monitored daily. The Bank sets thresholds

for the changes which, if exceeded, result in notification to senior

management and the need of development of a further action plan

by the management.

Measurement of pricing risk measurement of trading portfolios

The main method for pricing risk measurement for trading port-

folios at the organisational unit level and the Bank level, is the ratio

of sensitivity of financial results to market risk factor changes

(interest rates, exchange rates, share prices, credit risk margins of

debt securities). With the application of sensitivity ratios and adop-

tion of a risk factor change unit (change of the general level of

interest rates and credit risk margin by 1 base point, change of

exchange rates and share prices by 1 per cent), the Bank sets limits

for risk positions broken down by currencies and organisational

units. For interest rate risk, additional thresholds for risk limits on

individual curve sections of interest rates and base risk, are applied.

Risk limits are set for positions at the end of the day and monitored

daily.

The Value-at-Risk method is applied at the Bank level, with the

assumed time horizon of closing positions in 1 day and a confidence

level of 99%. Value-at-Risk limits are set for exchange rate and

interest rate risk separately, as well as for the combined risk.

176

The Bank analyses stress test scenarios daily with assumed chan-

ges of risk factors higher than for the Value-at-Risk measurement

and without historical correlations between the factors. The Bank

measures the risk in stress conditions for three basic scenarios:

• the most probable, based on the historical changeability of risk

factors,

• financial crisis and

• very severe economic crisis.

The first two aforementioned methods of risk monitoring are com-

plemented with limits on:

• the portfolio loss accumulated within one month,

• aggregate contracts limit,

• maximum tenor,

• concentration limits for debt and equity securities.

Credit risk management

The Credit Policy Committee of the Bank defined the main prin-

ciples for credit risk management that are documented in the Credit

Policy Manual.

Additional regulations are included in the Credit Manuals for

Corporate Banking, Financial Institutions, the Public Sector and

Restructuring Department, as well as in numerous Credit Program-

mes.

The key elements of credit risk management are presented below:

• while managers are responsible for risk management in their areas

of responsibility, the Bank additionally has a system of controls

that includes:

- independent position of risk manager;

- each credit decision has to be taken by at least two authorised

persons. Larger loans, carrying higher risk, require approval

from more senior persons of authority;

- Independent Audit Department checking all activities related to

risk management;

• each borrower is assigned an appropriate risk scale, with its own

rating, based both on financial and quality criteria. Risk ratings

help the Bank to ensure that the credit portfolio overall is at an

acceptable risk level;

• each customer of the Bank is assigned to a control unit that ma-

nages the relationship with the customer. In case of customers

being a part of a capital group the risk is managed on a group

basis to avoid exceeding concentration limits;

• the Credit Policy Committee assigns individuals to approve loans

based on their experience and skills;

• the Bank has to reduce concentration in order to maintain diffe-

rentiated risk bearing assets as well as to meet capital require-

ments for the portfolio. Credit risk includes limitations for custo-

mers, sectors and regions;

• the Bank defined principles for periodic monitoring of customers’

results from their activities and identification of negative changes

in their standing which require immediate communication to

upper or middle-level management. This also includes opinions of

specialised restructuring units.

Credit risk guidelines related to products offered to Consumer

Banking customers are defined by the Bank for each of the product

offered separately. Key risk management concepts are presented

below:

• Credit Risk evaluation is based on:

- Minimum acceptance criteria,

- Scoring models,

177

- Judgmental criteria,

- Use of the Credit Bureau information,

• Advanced Management Information System is used to monitor

portfolio performance.

Operational risk management

In recent years the Bank has managed operational risk with the use

of various tools and techniques (e.g. policies, procedures, check-

lists, limits, self-assessment process, information security monito-

ring tools, contingency plans, insurance, audits).

After the recommendations of the Basel Committee were published,

the Bank Management Board intensified qualitative and quantitative

measurements of operational risk.

The roles and responsibilities at various levels of the Bank Mana-

gement are regulated in the “Operational risk management policy

including the self-assessment procedure”. The information about

them is transferred to organisational units within the framework of

regular training sessions.

Strategic decisions concerning the Bank’s policy and organisation,

allocation of roles and responsibilities, reorganisation of processes,

automation and centralisation are reserved for the Bank’s Mana-

gement Board.

The Head of Finance Division, in cooperation with the Business Risk,

Control and Compliance Committee, is responsible for monitoring

the operational risk of the Bank and for the Risk and Control Self

Assessment process (RCSA) including: providing guidance (e.g. de-

fining standards) in the setting and interpretation of the policy;

overseeing implementation of the corporate and local Policy; appro-

ving exception requests and changes to the policy; and reviewing

RCSA results information to identify areas of potential risk expo-

sure (at least quarterly).

Operational risk has been defined as the risk of loss resulting from

inadequate or failed internal processes, people, or systems, or from

external events. Operational risk excludes strategic risks and poten-

tial losses related solely to judgments with regard to taking credit,

market, interest rate (asset liability management or ‘ALM’), liquidity,

or insurance risk.

The RCSA process implemented in the Bank makes it possible to per-

form ongoing identification, control, assessment, monitoring, measu-

rement and reporting of quality of the control environment and

potential threats. Data on operational risk events’ effects (losses)

has been regularly collected since 2002. Issues, events and indica-

tors pertaining to operational risk are being regularly reported to

the Business Risk, Control and Compliance Committee.

The quality of the RCSA process is subject to rated internal audit.

Centralisation and automation introduced in recent years has made

it possible to reduce the number and amounts of operational losses

considerably. Further efforts will concentrate on processes covered

by the Bank risk profile.

Hedge accounting

To date the Bank has not applied hedge accounting.

178

Note 5

As of 31 December 2004 and 31 December 2003, the Bank did not

enter into any subscription option contracts or ordinary share sales

contracts.

Note 6

Assets being used as a pledge against the Bank’s own obligations or

third party obligations as of 31 December 2004 and 31 December

2003 are shown in explanatory Notes to balance sheet no.1B, 6C

and 16A.

Note 7

Repurchase transactions as of 31 December 2004 and 31 December

2003 have been disclosed in the balance sheet.

Data on subscription option contracts or ordinary shares

sale contracts

Assets being used as a pledge against the Group’s own

obligations or third party obligations

Information on repurchase transactions not included in the

balance sheet

Note 8

Financial commitments granted include undrawn credit lines, open

import letters of credit and commitments arising on concluded

deposit contracts (placements given pending delivery), for which

realisation date depends only on the time necessary for the tech-

nical preparation of the funds transfer, and other off-balance sheet

financial commitments. Data related to financial commitments gran-

ted as of 31 December 2004 and 31 December 2003 is shown in

Additional Explanatory Note no. 9.

As of 31 December 2004 the Bank’s financial commitments granted

are irrevocable, except for credit lines which constitute commit-

ments amounting to PLN 2,580 thousand (31 December 2003: PLN

38,013 thousand).

Financial commitments granted

179

Guarantees issued include credit principal repayment guarantees,

other repayment guarantees, guarantees to advance repayment

guarantees, performance guarantees, tender guarantees, and bills

of exchange.

The Bank makes specific provisions for off-balance sheet commit-

ments pursuant to the Regulation of the Minister of Finance dated

10 December 2003 on the principles of creating provisions for the

risks related to the operations of banks. As of 31 December 2004,

the specific provisions created for off-balance sheet commitments

amounted to PLN 39,352 thousand, including provisions for off-

balance sheet commitments granted to subordinated entities

amounting to PLN 265 thousand (31 December 2003: PLN 145,019

thousand, including off-balance sheet commitments to related enti-

ties – PLN 8,496 thousand).

Contingent liabilities received

As of 31 December 2004, total contingent liabilities received

amounted to PLN 2,952,341 thousand, of which PLN 2,616,366 thou-

sand related to guarantee contingencies (31 December 2003: PLN

3,297,354 thousand, of which PLN 2,817,354 thousand of guarantee

contingencies). As of 31 December 2004, the Bank did not have any

guarantee contingent liabilities received from subordinated entities

(31 December 2003: PLN 13,484 thousand).

Issues underwritten by the Bank

As of 31 December 2004, the Bank did not have any underwriting

agreements or issues underwritten for the benefit of other issuers.

The underwriting agreements entered into by the Bank, in force as

of 31 December 2003, are shown in the table below:

Note 9

Off-balance sheet commitments granted

Off-balance sheet commitments granted, by individual off-balance

sheet category, were as follows:

Off-balance sheet commitments

Letters of credit by category were as follows:

Import L/Cs issued

including to related parties

Export L/Cs confirmed

Total L/Cs

168,073

545

17,108

185,181

160,337

4,620

16,969

177,306

31.12.2004 31.12.2003in PLN thousand

L/Cs

including to related parties

Guarantees granted

including to related parties

Credit lines granted

including to related parties

Deposits to be issued

Other financial liabilities

Total commitments granted

185,181

545

2,351,306

2,355

8,353,740

131,727

121,359

751,277

11,762,863

177,306

4,620

3,020,936

60,987

8,034,233

130,217

3,179,425

646,991

15,058,891

31.12.2004 31.12.2003in PLN thousand

180

Note 10

On 16 March 2005, the Management Board of Bank adopted a reso-

lution regarding the proposed appropriation of 2004 profits and the

payment of a dividend from previous years’ profits. The Manage-

ment Board recommends that the following amounts be designated

for this purpose:

1) 414,190,932.00 PLN from the 2004 profits;

2) 1 149,804,480.00 PLN from previous years’ profits, transferred

from the supplementary and reserve capital.

The total amount designated for the payment of the dividends will

be 1,563,995,412.00 PLN.

The above proposal means that the 2004 dividend per share will be

3.17 PLN and the dividend per share from previous years’ profits will

be 8.80 PLN.

The aggregate dividend per share will be 11.97 PLN.

Dividend payment

The Management Board proposed the record date for the purpose

of the dividend payment to be 25 July 2005, and the dividend

payment date to be 1 September 2005. The above proposal will be

submitted to the Supervisory Board for its opinion.

The proposed payment of the dividend from previous years’ profits

will require an amendment to the Bank’s Charter. The Management

Board will recommend amendments to the Charter at the Bank’s

nearest Extraordinary General Shareholders’ Meeting, that will be

convened on 28 April 2005 - a date that allows the amendments in

the National Court Register to be registered prior to the date of the

Bank’s Ordinary General Shareholders’ Meeting in 2005.

Additionally, the proposed payment of the dividend in the amount

specified above will require the consent of the Commission for

Banking Supervision pursuant to Art. 129 Section 3 of the Banking

Law of 29 August 1997. If the Supervisory Board gives a favorable

opinion on the proposed dividend payment, the Management Board

will apply to the Commission for Banking Supervision for such

consent.

Can Pack SA

Kraków

Urtica Finanse SA

Wroc³aw

30,000

10,000

Total

30,000

10,000

40,000

Name

of Issuer

and location

Type of

agreement

Term

of agreement

Bank’s

remuneration

Type

of security

Negotiability

of the

security

Average original

amount promised

to be underwritten

by the Bank

(in PLN thousand)

Guarantee com-

mitment by the

Bank existing

as of 30.06.2004

(in PLN thousand)

purchase of

bonds

issue of bonds under

the Securitisation

Programme

10.07.2002

- 10.10.2004

23.01.2001

- 23.01.2004

commission

bonds

on secondary market,

private placement

on secondary market,

private placement

181

After having obtained the aforementioned consent of the Com-

mission for Banking Supervision, the Management Board will submit

recommendations regarding the appropriation of the 2004 profit

and the payment of the dividend from previous years’ profits to the

Bank’s General Shareholders’ Meeting.

The Bank did not issue preferred shares.

Note 11

As of 31 December 2004, the Bank did not have any liabilities arising

from the approved dividend payment from allocation of profit for

previous years.

Note 12

As of 31 December 2004 and 31 December 2003, the Bank did not

have any liabilities due to the State Budget or local authorities

arising from ownership rights to buildings and structures.

Note 13

In 2004, the Bank did not abandon any form of business and does

not envisage the abandonment of any form of economic activity in

the foreseeable future.

Note 14

In 2004 and in 2003, the Bank did not incur any expenses relating

to projects in progress, fixed assets and development costs.

Liabilities arising on approved dividend payable

Amounts due to the Budget or local authorities

Abandoned business

Expenses relating to projects in progress, fixed assets

and development costs

Note 15

Capital expenditure incurred under projects in progress and intan-

gible assets as of 31 December 2004 amounted to PLN 3,976 thou-

sand (31 December 2003: PLN 18,489 thousand). Capital expenditure

in the next 12 months are planned at PLN 100,466 thousand and

include mainly investments in expenditure on building improvements

and information technology.

Note 16

Transactions with shareholders of the Bank holding at least

20% of votes at the General Shareholders’ Meeting

As of 31 December 2004, the shareholders of the Bank holding,

directly or indirectly through subsidiaries, at least 10% of votes at

the General Shareholders’ Meeting were the following entities:

• Citibank Overseas Investment Corporation (COIC), a subsidiary of

Citibank N.A., holder of 75% of votes at the Bank’s General Share-

holders Meeting. COIC held 97,994,700 shares, which correspon-

ded to 75% of the Bank’s authorised share capital. The number of

votes resulting from shares held by COIC was 97,994,700, which

corresponded to 75% of the total number of votes at the General

Shareholders Meeting of the Bank,

• International Finance Associates B.V., based in Amsterdam, the

Netherlands (“IFA”), a subsidiary of COIC, holder of 14.3% of votes

at the Bank’s General Shareholders Meeting. IFA held 18,722,874

shares, which corresponded to 14.3% of the Bank’s authorised

share capital. The number of votes resulting from shares held by

IFA was 18,722,874, which corresponded to 14.3% of the total

number of votes at the General Shareholders Meeting of the Bank.

Incurred and planned capital expenditures

Transactions with related parties

182

In 2004, the ownership structure of significant shareholdings

changed. This change resulted from the sale by COIC to IFA of

18,722,874 shares corresponding to 14.3% of the share capital of

the Bank on 30 November 2004. As a result of this transaction, the

percent share of COIC in the authorised share capital of the Bank

fell from 89.3% to 75%.

The sales transaction of the Bank’s shares by COIC for the benefit of

IFA is connected with the execution of the requirement concerning

the lowering of Citigroup’s share in the Bank’s capital to 75%. The

shares were sold by COIC in connection with the issue by Citibank,

N.A. of bonds convertible to the Bank’s shares (“Bonds”). Each bond

holder will have the right to issue instructions concerning the

execution of the voting rights arising from such number of shares

which would be obtained by the bond holder as a result of execution

of the right to convert the Bonds held by such bond holder.

COIC and other entities of Citigroup Inc. enter into a number of

transactions with the Bank.

The balances of accounts receivable and payable and off-balance

sheet commitments towards Citigroup Inc. companies are as follows:

Furthermore the Bank incurs costs and receives income of an ope-

rational nature from agreements concluded between Citigroup Inc.

entities and the Bank for the provision of mutual services.

The costs arising and accrued in 2004 from agreements concluded

in 2004 and in prior periods amounted in total to PLN 149,894

thousand and related in particular to the costs arising from the

provision of services related to the maintenance of the Bank’s

information systems and advisory support for the Bank; income in

the amount of PLN 42,581 thousand arose from the provision of

data processing services by the Bank.

In 2004, the Bank entered into new agreements with Citigroup Inc.

entities, related to mutual services as well as agreements consti-

tuting a continuation of previously concluded contracts. The most

important among new agreements is the agreement concluded on

27 April 2004 with Citibank N.A., London Branch, Citibank N.A., New

York; Citibank International PLC, London Branch; Citigroup Global

Markets Deutschland AG & CO, Germany; Citigroup Global Markets

Limited, London; Citigroup Global Markets Asia Limited, Hong Kong;

Citigroup Global Markets, INC. companies affiliated to Citibank N.A.,

the sole shareholder of Citibank Overseas Investment Corporation,

which is a majority shareholder of the Bank. The subject matter of

this agreement is the provision by the above entities (as the service

providers) to provide for the benefit of the Bank (the service user)

services related to advisory support of the day-to-day operations of

the Bank, including consultation and advising in the areas of mana-

gement, finance, accounting, auditing and compliance assessment,

law and taxes, marketing and public affairs, human resources,

administrative issues, and risk analysis and assessment.

Transactions with subordinated undertakings

Balance sheet amounts due from and revenues received from subsi-

diaries, joint ventures and associated undertakings as of 31 Decem-

ber 2004 are as follows:

Receivables, including:

Placements

Liabilities, including:

Deposits

Loans received

Off-balance sheet guarantee liabilities granted

Off-balance sheet guarantee liabilities received

Derivative transactions

Interest and commission income*

Interest and commission expense*

4,898,775

4,877,390

674,489

456,866

217,623

110,680

619,087

114,058,930

62,975

26,191

5,502,307

5,485,579

491,818

275,704

216,114

3,258,637

555,471

97,279,361

48,487

24,672

* not including Derivative transactions

31.12.2004 31.12.2003in PLN thousand

183

As of 31 December 2004, the specific provisions for receivables from

subsidiaries, joint ventures and associated undertakings amounted

to PLN 57,036 thousand.

Amounts due and expense paid to subsidiaries, joint ventures and

associated undertakings as of 31 December 2004 are as follows:

in PLN thousand Subsidiary Joint venture Associate Total

Amounts due to:

financial institutions – in respect of

- current accounts

- deposits taken

other undertakings – in respect of

- current accounts

- deposits taken

Total payable

Interest and commission expense

—

169

—

169

490,453

50,211

169

—

540,833

14,708

145

—

145

490,308

50,211

—

540,519

14,703

financial entities – in respect of:

- current accounts

- loans granted

- subordinated loans

- bonds convertible into shares

other undertakings – in respect of

- current accounts

- loans granted

Total receivables

Interest and commission income

Amounts due from (net):

—

1,889

2,849

4,738

588,728

41,809

117,957

—

1,889

2,849

753,232

25,279

in PLN thousand Subsidiary Joint venture Associate Total

100,323

—

100,323

4,372

488,405

41,809

117,957

—

648,171

20,868

184

Amounts due from and revenues received from subsidiaries, joint

ventures and associated undertakings as at 31 December 2003 are

as follows:

The total amount of interest and fee income includes PLN 5,441

thousand of interest received from subordinated loans granted to

subsidiary undertakings of the Bank.

As of 31 December 2003, the specific provisions for receivables from

subsidiaries, joint ventures and associated undertakings amounted

to PLN 141,453 thousand.

in PLN thousand Subsidiary Joint venture Associate Total

financial entities – in respect of:

- current accounts

- loans granted

- subordinated loans

- bonds convertible into shares

other undertakings – in respect of

- current accounts

- loans granted

- other term receivables

Total receivables

Interest and commission income

Amounts due from (net):

—

4,481

11,431

161

16,073

2,451

659,051

95,980

41,041

70,159

4,481

11,431

161

882,304

27,790

21,274

—

21,274

700

637,777

95,980

41,041

70,159

—

844,957

24,639

185

Amounts due and expense paid to subsidiaries, joint ventures and

associated undertakings as of 31 December 2003 are as follows:

The following transactions with subordinated undertakings were

executed in 2004:

• sale by the subsidiary Handlowy Investments S.A. of its whole

shareholding in Polimex Cekop S.A. representing a 36.64% stake in

capital and the same number of votes at the general meeting of

shareholders of this enterprise;

• redemption of some of the shares in the capital of the associated

undertaking NIF Fund Holdings PCC Ltd. owned by the subsidiary

Handlowy Investments S.A. The redeemed shares represented in

total 10.19% of the entity’s capital. The Bank’s stake in the capital

of the entity and the number of votes at the general meeting of

shareholders of this enterprise did not change and amounted to

23.86%;

• sale of some of the shares of the associated undertaking Pia

Piasecki S.A. The shareholding sold represented a 17.40% stake in

the capital of the entity. As a result of this transaction, the Bank

holds a 19.12% stake in capital and the same number of votes at

the general meeting of shareholders of this enterprise;

• sale of some of the shares of the associated undertaking IPC JV

Sp. z o.o. representing a 31.00% stake in the capital of the entity

and the same number of votes at the general meeting of share-

holders of this enterprise;

• sale of some of the shares of the associated undertaking Elektro-

monta¿ Poznañ S.A. The shareholding sold represented a 5.42%

stake in the capital of the entity. As a result of this transaction,

the Bank holds a 19.88% stake in capital and the same number of

votes at the general meeting of shareholders of this enterprise;

• on 29 December 2004, an agreement on the sale of all shares of

the associated undertaking Creditreform Polska Sp. z o.o.

(“Creditreform”) held by the Bank to Creditreform Frankfurt Emil

Vogt KG based in Frankfurt am Main, Germany, was signed. The

shareholding sold represented a 49.03% stake in the capital of

Creditreform and the same number of votes at the general

in PLN thousand Subsidiary Joint venture Associate Total

Amounts due to:

financial institutions – in respect of

- current accounts

- deposits taken

other undertakings – in respect of

- current accounts

- deposits taken

Total payable

Interest and commission expense

—

9,589

16,365

25,971

1,603

229,316

85,001

9,589

16,365

340,271

14,837

—

229,225

85,001

—

314,226

13,219

186

meeting of shareholders of this enterprise. The Agreement en-

visages that the profit for the financial year 2004 generated by

Creditreform and corresponding to the Shares held by the Bank on

the Agreement signing date will be paid within two months of

adopting the resolution on dividend payment by Creditreform

shareholders at the latest. In accordance with the agreement

terms and conditions, the transfer of ownership of the shares will

take place in January 2005, upon payment of the total selling

price by the purchasing party;

• on 31 December 2004, the Bank concluded with its subsidiary

undertaking Handlowy Investments S.A. (“Handlowy Investments”)

the transaction (“Netting Agreement”), the object of which was

netting of some mutual receivables of the Bank and of this under-

taking. The Bank holds 99.99% of the authorised share capital of

Handlowy Investments and 99.99 % of votes at the general

meeting of shareholders.

Before entering into the Netting Agreement, the Bank held con-

vertible bonds (“Bonds”) with the redemption date on 20 August

2004, issued by Handlowy Investments on 20 August 1999. For

the Bonds, the Bank had a receivable from Handlowy Invest-

ments for payment of the purchase price at the total amount of

EUR 14,873,611.49 (“Bank’s Receivable”). For the purposes of the

Netting Agreement, the parties translated the Bank’s Receivable

into PLN on the basis of the average EUR/PLN exchange rate

announced in Table A of average FX rates of the NBP of 31

December 2004, i.e. 4.0794 zlotys. Therefore, the Bank’s

receivable amounted to PLN 60,675,410.71.

On the other hand, under the provisions of the agreement on

assignment of receivables signed between the Bank and

Handlowy Investments on 4 June 2004 (“Assignment Agree-

ment”), under which Handlowy Investments transferred to the

Bank on the custody basis the receivables payable to Handlowy

Investments in connection with the agreements on the sale of

shares in Polimex-Cekop S.A. of 4 June 2004, including in parti-

cular the purchase price receivable, Handlowy Investments had

against the bank the receivable amounting to USD 9,881,638

(“Receivable of Handlowy Investments”). For the purposes of

the Netting Agreement, the parties translated the Receivable of

Handlowy Investments into PLN on the basis of the average

USD/PLN exchange rate announced in Table A of average FX

rates of the NBP as of the date of signing of the Assignment

Agreement.

In accordance with the provisions of the Netting Agreement,

the Parties netted both receivables, as a result of which the

Receivable of Handlowy Investments was redeemed in total,

and the Bank’s Receivable remained in the amount of PLN

23,033,287.08.

• the transaction executed on 31 December 2004 between the Bank

and Handlowy Investments, the subject matter of which is

Handlowy Investments assuming the liability towards the Bank re-

lated to the repayment of the loan of PLN 23,033,287.08, in order

to redeem the liability of Handlowy Investments towards the Bank

arising from the performance of the Netting Agreement is closely

related to the above Netting Agreement.

The Bank has a right to variable contractual interest on the loan

amount, calculated as the sum of: a) WIBOR for 3-month depo-

sits in Polish zlotys (PLN), fixed in individual quarters, and b)

fixed element of 0.5% p.a. in force for the whole period for

which the loan was granted. The loan is to be repaid together

with the payable contractual interest to 30 September 2005.

The following transactions with subordinated undertakings were

executed in 2003:

• the Bank, together with its subsidiary Handlowy Inwestycje II Sp.

z o.o., sold its whole shareholding of its associated undertaking

ZO Bytom S.A. having its registered office in Bytom. The share-

holding sold represents in total a 27.64% stake (for the Bank -

18.46% and for Handlowy Inwestycje II Sp. z o.o. – 9.18%, res-

pectively) in authorised share capital and the same number of

votes at the general shareholders meeting of this entity;

187

• sale of the whole shareholding in the subsidiary “Bytom

Collection” Sp. z o.o. having its registered office in Radzionków,

representing a 100% stake in capital and the same number of

votes at the general meeting of shareholders of this enterprise;

• sale of the whole shareholding in the subsidiary Handlowy

Leasing S.A. having its registered office in Warsaw within the

Bank’s Capital Group, to the subsidiary undertaking Handlowy

Inwestycje Sp. z o.o. The shareholding sold by the Bank repre-

sented a 0.01% stake in the capital of this undertaking. As a result

of this transaction, Handlowy Inwestycje Sp. z o.o. held 100%

stake in capital and the same number of votes at the general

meeting of shareholders of Handlowy Leasing S.A;

• acquisition by Handlowy Inwestycje Sp. z o.o. shares in the increa-

sed authorised share capital of Citileasing Sp. z o.o. The acquisi-

tion of shares has been covered by a contribution in kind of

shares in Handlowy Leasing S.A. As a result of this transaction,

Handlowy Inwestycje Sp. z o.o. holds a 2.53% stake in the capital

of Citileasing Sp. z o.o. and the same number of votes at the

general meeting of shareholders of this enterprise, and Citileasing

Sp. z o.o. holds a 100% stake in the capital of Handlowy Leasing

S.A. and the same number of votes at the general meeting of

shareholders of this enterprise;

• takeover by the Bank the assets of its subsidiary Budowa Centrum

Plac Teatralny Sp. z o.o. in liquidation in which the Bank held

a 61.25% stake in capital and the same number of votes at the

general meeting of shareholders, due to the process of winding up

of this subsidiary;

• reimbursement for the Bank of supplementary payment made by

the Bank for the subsidiary Handlowy Inwestycje Sp. z o.o., at the

total amount of PLN 27,000 thousand, pursuant to the resolution

of the Extraordinary General Meeting of Shareholders of Handlowy

Inwestycje Sp. z o.o. of 2 April 2003;

• reimbursement for the Bank of supplementary payment made by

the Bank for the subsidiary Handlowy Inwestycje II Sp. z o.o., at the

total amount of PLN 15,000 thousand, pursuant to the resolution

of the Extraordinary General Meeting of Shareholders of Handlowy

Inwestycje Sp. z o.o. of 2 April 2003.

• sale of the whole owned shareholding in the joint venture

PKO/Handlowy Powszechne Towarzystwo Emerytalne S.A. having

its registered office in Warsaw, in which the Bank held a 50% stake

in capital and the same number of votes at the general meeting of

shareholders.

The Bank did not enter into any transactions with related entities,

i.e. transactions involving the transfer of rights and obligations

with spouses, in-laws or ascendants and descendants to the

second degree, adopted or adopting persons, or other relatives

of members of the Board and supervisory bodies of the Bank.

Transactions with members of the Board and supervisory bodies of

the Bank are presented in Note 26.

188

Credit decision-making in respect of borrowers constituting the

Capital Group of Bank Handlowy w Warszawie SA follows the rules

applicable to external customers.

As of 31 December 2003, the percentage share of transactions with

related parties was as in the following table:

The Bank's credit exposure to related parties consisted of loans and

advances extended to companies of the Bank’s Capital Group.

Percentage share of transactions with related parties in individual

categories of transactions conducted by the Bank

As of 31 December 2004, the percentage share of transactions with

related parties was as in the following table:

Receivables

Debt securities

Liabilities

Off-balance sheet liabilities granted

Off-balance sheet liabilities received

Derivative transactions

5,652,007

—

1,215,322

245,307

619,087

114,058,930

30.55

—

5.53

2.09

20.97

59.43

Transaction categories Transactions

with Citigroup

Inc. companies

Transactions with

Bank’s Capital

Group companies

Total

transactions

with related

parties

753,232

—

540,833

134,627

—

4,898,775

—

674,489

110,680

619,087

114,058,930

Share in %

in PLN thousand

Receivables

Debt securities

Liabilities

Off-balance sheet liabilities granted

Off-balance sheet liabilities received

Derivative transactions

6,314,452

70,159

832,089

3,454,461

568,955

97,279,361

28.35

1.79

3.65

22.94

17.25

58.25

812,145

70,159

340,271

195,824

13,484

—

5,502,307

—

491,818

3,258,637

555,471

97,279,361

Transaction categories Transactions

with Citigroup

Inc. companies

Transactions

with Bank’s

Capital Group

companies

Total

transactions

with related

parties

Share in %

in PLN thousand

189

Note 17

In 2004 and in 2003, the Bank did not participate in joint ventures

with related entities.

Note 18

The Bank does not engage in brokerage activity within its structure.

Brokerage activity is carried out via the Bank’s wholly owned sub-

sidiary, Dom Maklerski Banku Handlowego S.A.

Note 19

As of 31 December 2004, bad debts written off against provisions

created amounted to PLN 152,600 thousand (31 December 2003:

PLN 55,011 thousand).

In 2004, the amount of bad debts written off against other

operating expenses was PLN 4,819 thousand. In 2003 the Bank did

not record operating expenses relating to write-offs of bad debts.

Note 20

As of 31 December 2004, provision for future payments to employees

amounted to PLN 124,035 thousand (31 December 2003: PLN 98,597

thousand), including:

• provision for remunerations and charges to remunerations amoun-

ting to PLN 90,772 thousand (31 December 2003: PLN 73,597

thousand),

• provision for personnel restructuring expense amounting to PLN

6,307 thousand (31 December 2003: did not exist),

Joint ventures excluded from the consolidation

Income and expenses related to brokerage activity

Write-offs of bad debts

Provisions for employee payments

• provision for employees’ retirement and jubilee payments amoun-

ting to PLN 26,956 thousand (31 December 2003: PLN 25,000

thousand).

Note 21

The Bank has created an Employee Pension Plan (the Plan) for its

employees, with the objective to save and accumulate through in-

vestments funds from premiums paid within the Plan into an indivi-

dual account of the participant in order to ensure benefit payments

after the participant attains the age of 60 years or undergoes early

retirement or if the participant obtains the rights to disability bene-

fits due to incapacity for work.

The current Plan, which is a continuation of PPE Polskie Towarzys-

two Emerytalne “Diament”, was implemented on 19 March 2004

under an agreement with CitiSenior SFIO (“PPE CitiSenior”) mana-

ged by Towarzystwo Funduszy Inwestycyjnych Banku Handlowego

S.A. (“TFI BH”).

The basic premium for Plan participants is paid from the Bank’s

funds at the amount of 6% of individual salary of the employee –

- Plan participant.

Each employee who participates in the Plan can also make additio-

nal premium contributions to the Plan.

The total of premiums paid to PPE CitiSenior is invested in units of

Specjalistyczny Otwarty Fundusz Inwestycyjny Kapita³ Handlowy

Senior managed by Towarzystwo Funduszy Inwestycyjnych Banku

Handlowego S.A. TFI BH.

Financing Employee Pension Plans

190

Note 22

The Custody Department (“the Department”) operates on the basis

of the Polish legal regulations and in accordance with international

standards of custody services offered to investors and intermedia-

ries active on international markets of securities and is able to com-

ply with the requirements of the largest and most demanding insti-

tutional customers. The Department operates as part of the global

Citigroup structure operating under the name of Global Transaction

Services which offers transaction banking-related services, also

including trade in securities.

The Bank is the leader in the market of depository banks in Poland.

It offers both custody services for foreign institutional investors as

well as the depository services intended for domestic financial enti-

ties, in particular pension funds, investment funds, and capital insu-

rance funds.

As part of the statutory activities and pursuant to the permit gran-

ted by the Polish Securities and Exchange Commission, the Custody

Department operates securities accounts, clears securities transac-

tions, handles dividends and interest payments, assets portfolio

valuation, develops individual reports, and arranges representation

of clients at general shareholders meetings of public companies.

Additionally, the Securities Custody Department provides services

of maintenance of the foreign securities register, which includes

settlement of transactions concluded by domestic customers on

foreign markets.

In the past year, the Bank made available to its customers the

possibility of participation in the special programme of loans of

securities granted as collateral for liquidity risk associated with the

settlement of transactions in the stock exchange market. The

objective of the programme for borrowers is to reduce the costs

incurred as a result of suspensions of transactions settled in

Custody services for securities

Krajowy Depozyt Papierów Wartoœciowych S.A. and to generate

additional income to long-term investors holding passive portfolios,

who play the role of lenders.

In December 2004, the Bank concluded an agreement to purchase

the operations related to securities accounts, current accounts, and

performing the function of a depository for investment funds from

ABN AMRO Bank (Polska) S.A. The agreement was completed in

February 2005 after the consent of supervisory authorities, inclu-

ding the Commission for Banking Supervision, was obtained. The

objective of the transaction is to extend the range of products

offered and to increase the customer base, and as a consequence to

reinforce the position of the Bank in the domestic market of custody

services.

Number of securities accounts

As of 31 December 2004, the Bank operated 7477 securities

accounts.

Depository for open-end pension funds

The Bank performed the duties of a depository for seven Open-End

Pension Funds:

• Commercial Union OFE BPH CU WBK

• AIG OFE

• SAMPO OFE

• OFE Pocztylion

• Pekao OFE

• Generali OFE

• ING Nationale Nederlanden Polska OFE

and for Pracowniczy Fundusz Emerytalny Telekomunikacji Polskiej

S.A.

191

Note 24

In 2004, the average number of employees at the Bank was 5,120,

including 40 technical staff positions (in 2003: 4,822 employees,

including 44 technical staff positions).

Note 25

Total amount of salaries, awards and benefits paid or payable to the

current and former members of the Bank Management Board in 2004:

Employment

Salaries and awards (in cash and in kind), including bonuses

from retained profit, paid or payable to persons managing

and supervising the Bank

Depository for investment funds

The Bank acted as a depository for twelve investment funds mana-

ged by the following investment fund companies:

• BZ WBK AIB TFI S.A.

• SEB TFI S.A.

• PIONEER PEKAO TFI S.A.

• DWS Polska TFI S.A.

Note 23

As of 31 December 2004 and 31 December 2003, the Bank had no

securitised receivables.

Asset securitisation

Management Board members performing

their functions at the end of 2004

S³awomir Sikora

Sunil Sreenivasan

Philip King

David Smith

Lidia Jab³onowska-Luba

Micha³ Mro¿ek

(until 25 May 2004 performed function

as Managing Director)

Management Board members who ceased

performing their functions in 2004:

Wies³aw Kalinowski (until 30 March 2004)

Total

16,000

8,000

1,500

27,000

118

404

168

786

1,556

216

2,765

4,603

Remuneration re-

ceived for positions

held in governing

bodies of subordi-

nated undertakings

Name

in PLN thousand

Salaries, awards and benefits received in the Bank

2,291

3,926

2,475

174

1,057

1,249

428

11,600

Other

benefits

Value of shares

awarded in

2004

Managerial options

granted in 2004

(in units)

Base salaries

and awards

192

Supervisory Board members performing their

functions at the end of 2004

Stanis³aw So³tysiñski

Göran Collert

Miros³aw Gryszka

Edward Kuczera

Jaros³aw Myjak (from 24 June 2004)

Andrzej Olechowski

Supervisory Board members who ceased

performing their functions in 2004

Andrzej Gdula (till 24 June 2004)

Total

107

462

Name and Surname

in PLN thousand

Total value

of paid and payable

salaries

andawards

Advances Guarantees Bank

loans*

in PLN thousand

Employees

Members of the

Management Board

Members of the

Supervisory Board

Relatives of the

persons managing

or supervising

the entity

Total:

69,928

843

—

70,838

39,581

—

39,581

Loans

granted

from the

Company

Social

Fund

1,133

318

—

1,451

104

—

104

* The interest rates and repayment schedules for bank loans are at normal

market conditions.

The total amount of “Base salaries and awards” includes the gross

amount of base salaries paid in 2004 and the award for 2004.

According to decision of the Supervisory Board the remaining

amount of awards granted to the members of the Bank Manage-

ment Board for 2003, paid in 2004 in total amounted to PLN 3,294

thousand.

The total amount of “Other benefits” includes the gross amount of

paid remuneration arising from indemnification for employment

contract termination, managerial options granted, benefits in kind,

lump-sum payment for the use of company car, insurance policy

premium, holiday leave equivalent, dividend, supplementary bene-

fits consistent with the employment contract of foreign employees.

Total amount of salaries, awards and benefits paid or payable to the

current and former members of the Bank Supervisory Board in 2004:

In 2004, persons having supervisory functions in the Bank did not

receive any remuneration for their positions held in the governing

bodies of subordinated undertakings of the Bank.

Note 26

The Bank’s exposures arising from advances, loans and guarantees

granted to employees, members of the Management Board and

supervisory bodies of the Bank as of 31 December 2004 were as

follows:

Advances, loans and guarantees granted to employees,

members of the Management Board and supervisory bodies

of the Bank

193

The Bank’s exposures arising from advances, loans and guarantees

granted to employees, members of the Management Board and

supervisory bodies of the Bank as of 31 December 2003 were as

follows:

Note 27

In 2004, no significant events occurred, resulting from previous

years, which would have a material impact on the financial state-

ments of the Bank for 2004

Note 28

On 20 January 2005, the Bank entered with its wholly owned

subsidiary Handlowy Inwestycje II Sp. z o.o. (“Inwestycje II”), an

agreement concerning the claiming of shares in increased share

capital of this company. The claiming of shares was covered by the

contribution in kind in the form of shares in Mostostal-Zabrze

Holding S.A. („MZH”) representing 24.60% of the authorised share

capital of this company. The value of the contribution in kind to

Inwestycje II was determined at PLN 467,400.00. Following the

registration of the increase in the authorised share capital on 4 Fe-

bruary 2005, the authorised share capital of Inwestycje II is PLN

471,400.00 and is divided into 4,714 shares with the nominal value

of PLN 100 each, while each share corresponds to one vote at the

meeting of shareholders. Before the sale of shares, the share-

holding held by the Bank represented 34.44% of the authorised

share capital of MZH and gave right to 34.44% of the total number

of votes at the general meeting. As a result of this transaction, the

Bank holds 9.84% share in the authorised share capital of MZH and

the same number of votes at the general meeting of shareholders

of the company.

On 15 February 2005, the District Court in Warsaw, First Civil Divi-

sion, dismissed the action of Marek Gil against Bank Handlowy w War-

szawie SA for the payment of PLN 276,508,282.

Significant events relating to previous years presented in

the financial statements for 2004

Significant post balance sheet events excluded from the

financial statements for 2004

As of 31 December 2004 and 31 December 2003, none of the em-

ployees, the Management Board and the Supervisory Board mem-

bers of the Bank or relatives of the persons managing or supervi-

sing the Bank benefited from advances, loans and guarantees gran-

ted by subsidiaries, joint ventures or associated undertakings of the

Bank.

Advances Guarantees Bank

loans*

in PLN thousand

Loans

granted

from the

Company

Social

Fund

Employees

Members of the

Management Board

Members of the

Supervisory Board

Relatives of the

persons managing

or supervising

the entity

Total:

69,126

650

—

69,776

45,135

—

45,135

1,327

331

—

1,658

138

—

138

* The interest rates and repayment schedules for bank loans are at normal market

conditions.

194

The action in question was brought by Marek Gil on 20 October 2003.

Marek Gil, the majority shareholder of Spó³ka Biuro Inwestycyjne

CODE S.A. (CODE), stated as the basis for his claims the Bank’s

violation of the agreement of 20 June 1999 under which the Bank

was an agent of issuance of bonds of the CODE company. The award

is not legally valid yet. The fact that the action was brought against

the Bank in 2003 was not disclosed to the public pursuant to the

decision of the Polish Securities and Exchange Commission dated 27

October 2003 No. DSPN/451/186/03.

On 28 February 2005, having obtained the consent of the Polish

Securities and Exchange Commission, the Bank signed a transfer

agreement under which the Bank will purchase part of a banking

enterprise, including the conduct of operations related to the ope-

ration of securities accounts, cash/bank accounts, and performing

the function of a depository for investment funds from ABN AMRO

Bank (Polska) S.A. based in Warsaw.

On 14 March 2005 the Bank concluded the agreement based on

which 2,357 shares in subsidiary Investment II Sp. z o o (previously

"Handlowy-Inwestycje II" Sp. z o. o.) (Inwestycje II) with the nominal

value of PLN 100 each and the total nominal value of PLN 235,700

being 50% of the share capital of Inwestycje II and giving rights to

50% of votes on the shareholders meeting, were sold to Mr Zbigniew

Opach. The sale agreement was concluded based on the conditional

agreement of the above mentioned shares for the amount of PLN

1,200,000 with the possibility of the adjustment according to the

relevant terms of the agreement. The book value of the shares sold

in the Bank's books was PLN 2,264,192.13. The acquirer is not a re-

lated party neither to the Bank nor people managing and supervising

the Bank.

Independently from the above mentioned transaction, the Bank

concluded on 14 March 2005 the agreement based on which the

remaining 2,357 shares in subsidiary Investment II Sp. z o. o. (pre-

viously "Handlowy-Inwestycje II" Sp. z o o) (Inwestycje II) with the

nominal value of PLN 100 each and the total nominal value of

235,700 being 50% of the share capital of Inwestycje II and giving

rights to 50% of votes on the shareholders meeting, were sold to

Mrs Malgorzata Waniowska. The sale agreement was concluded

based on the conditional agreement of the above mentioned shares

for the amount of PLN 1,200,000 with the possibility of the adjust-

ment according to the relevant terms of the agreement. The book

value of the shares sold in the Bank's books was PLN 2,264,192.13.

The acquirer is not a related party neither to the Bank nor people

managing and supervising the Bank.

Prior to sale of the shares as described above, the Bank had 4,714 of

shares in Inwestycje II being 100% of the share capital of this

company and giving rights to 4,714 of votes on shareholders meeting.

Currently the Bank does not hold any shares in Inwestycje II.

On 16 March 2005, the Management Board of the Bank adopted a

resolution regarding the proposed appropriation of 2004 profits

and the payment of a dividend from previous years’ profits. Detailed

information on the payment of the dividend is presented in

Additional Note to Financial Statement No.10.

Note 29

In 2004 the Management Board of the Bank continued restructuring

activities, taking the decision to further reduce employment. The

changes in structure of employment follow the reorganisation of

individual areas and introduction of new technological and orga-

nisational solutions. The Bank expects that this will lead to an im-

provement in quality and effectiveness of customer service. On 23

March 2004, the Bank entered with trade unions an agreement

defining the procedures for dealing with employees laid off in the

above period, and in particular defining the level of severance be-

nefits payable to them. However as a result of activities undertaken

Significant events related to the current period that have

a significant impact on the structure of balance sheet and

profit and loss account

195

Bond holders the right to convert them into shares in the Bank. Each

Bond holder will have the right to issue instructions concerning the

execution of the voting rights arising from such number of shares in

the Bank which corresponds to the number of the shares in the Bank

which is subject to conversion for the Bonds held by the specific

Bond Holder.

As stated in the information provided by Citigroup Inc., the offer

contains the following terms and conditions of issue: (i) issue price:

100%; (ii) interest coupon paid in six-month periods: 2.875%; (iii)

conversion price, i.e. the price at which the Bond holders will be able

to convert their Bonds into shares in the Bank: USD 23.3209 or PLN

75.00 (at the PLN/USD exchange rate: 3.2160); (iv) difference bet-

ween the conversion price and the current price of shares in Bank

Handlowy: 25%; (v) redemption price: 100%; (vi) redemption date: 8

December 2007. The issuer - Citibank, N.A – has an option of re-

demption of the Bonds which can be executed starting from De-

cember 2005, on condition that the price of shares in the Bank will

be at the level above 115% of the conversion price.

The Bonds were offered to institutional investors consistent with

the respective laws and regulations in force in each country where

the offer was conducted. The offer was not conducted in the ter-

ritory of the United States, it was not addressed to US persons, and

was not conducted in the territory of Canada and Japan.

The Bonds have been traded on the Luxembourg Stock Exchange

since 8 December 2004. On 3 March 2005 the Bonds were listed on

the Warsaw Stock Exchange with the use of the so-called European

passport procedure.

The objective of the above-described transaction is to reduce the

share of Citigroup in the authorised share capital of the Bank to

approximately 75% of the total number of shares of the Bank to

75% of the total number of votes at the General Meeting of the

Bank. The proceeds from the offer will be used to meet the general

financial needs of Citibank, N.A.

The transaction presented above should not be understood as an

offer of sale of the securities in question in the United States. These

securities cannot be sold in the United States without prior registra-

to adjust the status and structure of employment to changes in

strategies and methods of operation of the Bank a significant num-

ber of employees designated for reduction were employed in the

dynamically developing Consumer Sector of the Bank.

On 24 June 2004, the Ordinary General Meeting of Shareholders of

the Bank was held, which passed resolutions including a resolution

on distribution of profit for 2003 and on determination of the divi-

dend date and dividend payment date.

The Ordinary General Meeting of Shareholders resolved to:

1) distribute the 2003 profit of PLN 242,510,335.70 as follows:

a) dividend for shareholders: PLN 241,720,260, the amount of

dividend per share being PLN 1.85,

b) write-off for reserve capital: PLN 790,075.70;

2) set the dividend date at 26 July 2004;

3) set the dividend payment date at 1 September 2004

On 21 October 2004, the Moody's rating agency notified the Bank

on an increase in the rating perspective of the financial strength of

the Bank from stable to positive. The Bank’s ratings, i.e. evaluation

of short- and longterm liabilities and financial strength remained

unchanged (A2/P-1/D+).

In the opinion of Moody’s, the financial strength rating at the level

of D+ together with its positive perspective arise from the benefits

from integration with Citigroup, the leading market position in cre-

dit cards, corporate and investment banking and competencies in

the capital and transaction banking services market. The Bank will

use the “know-how” provided by the parent company in particular

at expansion in the mass market of consumer banking, where it

intends to become a leading institution via its CitiFinancial brand.

On 23 November 2004, Citigroup Inc. disclosed to the public that

Citibank, N.A. had announced and successfully conducted the offer

of convertible bonds worth USD 436.5 million (“Bonds”) with three-

year term, convertible to about 14.3% of issued and traded shares of

Bank Handlowy w Warszawie SA ("Bank”). The Bonds will give to the

196

Note 31

The financial data reported in these financial statements has not

been adjusted for inflation. Over the twelve months ended 31 De-

cember of 2004, 2003 and 2002, the inflation rate as measured

using the index of increase in goods and services consumer prices

(December to December) did not exceed 100%, running at 4.4%,

1.7% and 0.8%. The above inflation rates have been taken from the

Statistical Bulletin published by the Central Statistical Office.

Basic balance sheet and profit and loss account items

adjusted for inflation

tion or without obtaining exclusion from registration under the U.S.

Securities Act of 1933, as amended.

In connection with issuing by Citibank, N.A. the Bonds convertible to

shares in the Bank, on 30 November 2004 Citibank Overseas

Investment Corporation (COIC), a subsidiary of Citibank N.A. sold to

International Finance Associates B.V. based in Amsterdam, the

Netherlands (“IFA”), a subsidiary of COIC, 18,722,874 shares consti-

tuting 14.3% of the authorised share capital of the Bank. As a result

of this transaction, the percent share of COIC in the authorised

share capital of the Bank was reduced from 89.3% to 75%.

The remaining significant events which occurred in 2004 concerned

agreements and transactions entered into with related parties, which

are presented in Note 16.

Note 30

The Bank has no legal predecessor.

Information on the Bank’s relationship with its legal

predecessor

197

BALANCE SHEET

Note 32

In order to maintain comparability of financial data with the disclo-

sures for the current period, the data presented concerning the year

2003 were subject to the respective modifications with respect to

the previously published data in the annual report SAB-R 2003.

These transformations are presented in the tables below:

Listing of differences between the information disclosed in

these financial statements and the comparable information

in the previously prepared and published financial

statements

Assets

I. Cash and due from NBP

II. Treasury bills and other bills eligible for refinancing with NBP

III. Due from financial sector

1. Current

2. Term

IV. Due from non-financial sector

1. Current

2. Term

V. Due from public sector

1. Current

2. Term

VI. Receivables subject to securities sale and repurchase agreements

VII. Debt securities

in PLN thousand

as of

31.12.2003

presented

previously

Change Change

description

item

as of

31.12.2003

after the

change

1,186,514

8,724,786

6,822,543

1,902,243

13,252,870

3,529,638

9,723,232

3,131

3,044

288,601

3,912,427

(8,117)

288,601

470,562

1,186,514

8,732,903

6,822,543

1,910,360

13,252,870

3,529,638

9,723,232

3,131

3,044

3,441,865

198

458

8,117

759,629

5,323

12,388

23,633

3,624,437

1,295,012

1,243,645

764,145

307,600

21,025

286,575

280,548

218,555

61,993

33,268,587

338,218

IX. Investments in joint ventures

X. Investments in associated undertakings

XI. Minority investments

XII. Other securities and other financial assets

XIII. Intangible fixed assets

- goodwill

XIV. Tangible fixed assets

XV. Other assets

1. Repossessed assets

2. Other

XVI. Prepayments

1. Deferred tax

2. Other interbank settlements

Total assets

VIII. Investments in subsidiary undertakings

in PLN thousand

as of

31.12.2003

presented

previously

Change Change

description

item

as of

31.12.2003

after the

change

338 218

5 323

12 388

23 633

3 624 895

1 295 012

1 243 645

764 145

315 717

21 025

294 692

280 556

218 563

61 993

34 028 216

199

Liabilities

in PLN thousand

as of

31.12.2003

presented

previously

Change Change

description

item

as of

31.12.2003

after the

change

I. Due to NBP

II. Due to financial sector

1. Current

2. Term

III. Due to non-financial sector

1. Savings deposits

a) current

b) term

2. Other

a) current

b) term

IV. Due to public sector

a) current

b) term

V. Liabilities in respect of securities subject to sale and repurchase agreements

VI. Securities issued

1. Short term

2. Long term

VII. Other liabilities arising on financial instruments

VIII. Special funds and other payables

IX. Accruals and deferred income

1. Accruals

2. Negative goodwill

3. Other deferred income and income in suspense

41,145

3,826,082

2,343,320

1,482,762

18,039,260

8,877,277

9,161,983

465,145

304,107

161,038

470,803

3,651,195

222,120

918,205

121,470

796,735

470,803

288,863

41,145

3,826,082

2,343,320

1,482,762

18,039,260

8,877,277

9,161,983

465,145

304,107

161,038

3,362,332

222,120

918,205

121,470

796,735

200

in PLN thousand

as of

31.12.2003

presented

previously

Change Change

description

item

as of

31.12.2003

after the

change

447,331

96,558

350,773

522,638

3,044,585

(13,212)

2,115,273

(10,847)

288,493

34,028,216

(35,173)

(10,847)

45,983

759,629

447,331

96,558

350,773

522,638

3,044,585

21,961

2,115,273

242,510

33,268,587

X. Provisions

1. Provision for corporate income tax

2. Other provisions

a) short term

b) long term

XI. Subordinated debt

XII. Share capital

XIII. Unpaid contributions to share capital (negative value)

XIV. Own shares (negative value)

XV. Equity reserves

XVI. Revaluation reserve

XVII. Other reserves

XVIII.Undistributed profit (loss) of prior year

XIX. Net profit (loss)

Total liabilities

201

Off-balance sheet items

in PLN thousand

as of

31.12.2003

presented

previously

Change Change

description

item

as of

31.12.2003

after the

change

I. Contingent liabilities granted and received

1. Contingent liabilities granted:

a) lending

b) guarantees

2. Commitments received:

a) lending

b) guarantees

II. Commitments resulting from sale/purchase transactions

III. Other including

- Collateral received

Total off-balance sheet items

(736,244)

18,356,245

15,058,891

12,020,986

3,037,905

3,297,354

480,000

2,817,354

167,738,766

6,264,593

192,359,604

15,058,891

12,020,986

3,037,905

3,297,354

480,000

2,817,354

167,002,522

6,264,593

191,623,360

18,356,245

202

Profit and loss account

in PLN thousand

for the period

01.01 - 31.12

2003 previously

published

Change Change

description

item

for the period

01.01 - 31.12

2003 after

the change

I. Interest income

II. Interest expense

III. Net interest income (I-II)

IV. Fee and commission income

V. Fee and commission expense

VI. Net fee and commission income (IV-V)

VII. Income from shares and other securities

1. Subsidiary undertakings

2. Joint ventures

3. Associated undertakings

4. Other entities

VIII. Net profit on financial operations

IX. Net profit on foreign exchange

X. Profit/(loss) on banking activity

XI. Other operating income

XII. Other operating expense

XIII. General administrative expense

XIV. Depreciation expense

XV. Charges to provisions and revaluation

1. Charges to specific provisions and general risk fund

2. Revaluation of financial assets

XVI. Release of provisions and revaluation

1. Release of specific provisions and provision for general risk fund

2. Revaluation of financial assets

1,386,301

(637,474)

748,827

570,945

(48,794)

522,151

64,750

500

59,530

4,697

132,175

481,361

1,949,264

77,865

(113,759)

(1,119,779)

(155,445)

(1,148,878)

(1,124,969)

(23,909)

961,170

956,619

4,551

12,658

9,030

3,628

54,609

58,237

1,373,643

(628,444)

745,199

570,945

(48,794)

522,151

64,750

500

59,530

4,697

77,566

481,361

1,891,027

77,865

(113,759)

(1,119,779)

(155,445)

(1,148,878)

(1,124,969)

(23,909)

961,170

956,619

4,551

203

Change descriptions:

1) cash used as collateral for transactions on derivative instruments

included in term due from financial sector were disclosed in the

balance sheet as “Other assets”,

2) change in the principles recording repo/reverse repo transac-

tions of the sell-buy-back (“SBB”) and buy-sell-back (“BSB”) type

on securities. Securities sold on the basis of the sell-buy-back

(“SBB”) transaction are presented in the assets of the balance

sheet and at the same time are recognised on the side of liabi-

lities as liabilities arising from the granted repurchase commi-

tment. In the case of the BSB-type transactions, the purchased

securities are presented as a receivable arising from the repur-

chase clause. Before the recording rules were changed, these

transactions were disclosed as independent purchase or sale

transactions.

In the annual financial statements for 2004, changes were intro-

duced in the balance sheet data and cash flow statement with res-

pect to the earlier published quarterly report for the fourth quarter

of 2004, resulting from verification of financial data. As a result of

these changes, the balance sheet total as of 31 December 2004 was

reduced by PLN 31,316 thousand, and shareholders’ equity as well as

net profit were decreased by PLN 2,210 thousand, respectively.

Profit and loss account - cont.

in PLN thousand

for the period

01.01 - 31.12

2003 previously

published

Change Change

description

item

for the period

01.01 - 31.12

2003 after

the change

(187,708)

450,438

(190,284)

(59,808)

(130,476)

28,339

288,493

58,237

(12,254)

45,983

(187,708)

392,201

(178,030)

(59,808)

(118,222)

28,339

242,510

XVII. Net (charges to)/release of provisions and decrease in respect of revaluation

XVIII. Operating profit

XIX. Extraordinary (losses)/gains

1. Extraordinary gains

2. Extraordinary losses

XX. Profit (loss) before tax

XXI. Corporate income tax expense

1. Current

2. Deferred

XXII. Other obligatory charges to profit/(loss)

XXIII. Participation in net profits (losses) of subordinated entities accounted

for using equity method

XXIV. Net profit (loss)

204

Note 33

In 2004, the following changes in the accounting principles (policy)

applied by the Bank were introduced:

• principles of creating specific provisions for credit risk, introduced

on 1 January 2004 under the provisions of the new Regulation of

the Minister of Finance concerning the rules of creating pro-

visions for risk associated with banking business. These changes

include new principles of classification of credit exposures, in

particular in the area of time limits for reclassification into indivi-

dual risk categories, which implies prolongation of periods after

which loans are included in the group of non-performing loans,

use of collateral at the classification stage, and widening of the

list of allowable collateral;

• principles of recognising the interest on receivables classified as

watch receivables, payable to the Bank, introduced on 1 January

2004 under the amendment to the provisions of the Regulation

of the Minister of Finance concerning the particular principles of

accounting of banks. In accordance with the amendment to this

Regulation, the income from interest and discount on receivables

classified as watch receivables are disclosed in the profit and loss

account on the accrual basis. Before 1 January 2004, such inte-

rest was classified as income in suspense until received.

• principles of recording repo/reverse repo transactions of the sell-

buy-back (“SBB”) and buy-sell-back (“BSB”) type on securities.

In accordance with the amendment to the provisions of the Regu-

lation of the Minister of Finance concerning the particular prin-

ciples of recognition, valuation methods, scope of disclosure, and

method of presentation of financial instruments and the pro-

visions of IAS 39, the Bank’s liabilities or receivables arising from

SBB and BSB transactions are disclosed in the financial state-

ments as a deposit or placement, respectively. Before the change

in recording principles was introduced, such transactions were re-

Changes in accounting policy in 2004

corded as independent purchase or sale transactions. The change

in the principles of recording SBB and BSB transactions was ap-

plied retrospectively, with maintenance of comparability with the

presented data for previous reporting periods. The accumulated

effects of the change introduced were disclosed in the financial

statements of the Bank as a correction of the opening balance of

capital as of 1 January 2003, reducing such balance by PLN 76

thousand. The effect of these changes on financial data for 2004

was an increase in the balance sheet total by PLN 676,552 thou-

sand and reduction in shareholders’ equity by PLN 31 thousand.

The change in shareholders’ equity was an effect of a reduction of

revaluation capital by PLN 43,571 thousand, an increase in net

profit by PLN 8,466 thousand, and disclosure of a positive result

on these transactions from previous years amounting to PLN

35,136 thousand.

Note 34

The Bank did not have to adjust any fundamental errors in the fi-

nancial statements for 2004.

Note 35

There is no doubt as to the Bank’s ability to continue operations.

Note 36

No business combinations took place in 2004 and 2003.

Adjustments of fundamental errors

Going concern assumption

Business combination

205

including capital requirement for exposure exceeding concentration

limits, method and detailed rules for calculation of the bank solvency

ratio, (…) (NBP Official Journal No. 22, item 43, as amended).

The currency position for core currencies as of 31 December 2004

was as follows:

Note 37

The Bank’s currency position was calculated in accordance with the

principles specified in Resolution No. 5/2001 of the Commission for

Banking Supervision dated 12 December 2001 regarding specific

rules for calculating capital requirements for banking risk categories,

Currency structure of assets and liabilities

Country

USA

European Union

United Kingdom

Switzerland

Sweden

Denmark

Australia

Norway

Canada

Japan

Czech Republic

Hungary

Slovakia

Estonia

Lithuania

Latvia

Russia

South Africa

Total unconvertible currencies

Total

Total currency position

79,952

(92,792)

3,855

29,178

1,019

(2,433)

(279)

(635)

212

(1,644)

1,542

(1,723)

147

(182)

(1,476)

(329)

—

454

(46)

116,359

Currency Assets Liabilities Off-balance

sheet assets

Off-balance

sheet liabilities

Indexed

assets/

liabilities

Long

(short)

position

—

14,825,706

4,805,218

306

631,322

25,833

393

1,166

2,277

—

4,375

168,392

216

—

261

1,890

2,919

—

20,470,274

11,505,278

4,324,820

6,924

380,009

16,801

—

163

—

32,190

—

16,266,185

2,644,959

2,647,169

141,865

139,505

26,629

3,238

152

7,018

3,281

1,861

4,472

1,608

1,053

—

89,807

5 712 628

6,045,339

3,034,775

139,102

419,996

36,680

1,198

1,039

8,497

3,493

4,592

142,216

101

1,200

414

2,590

454

89,761

9,931,537

USD

EUR

GBP

CHF

SEK

DKK

AUD

NOK

CAD

JPY

CZK

HUF

SKK

EEK

LTL

LVL

RUB

ZAR

in PLN thousand

206

As of 31 December 2004, the total capital requirement for foreign

exchange risk was set at PLN 2,861 thousand.

The currency position for core currencies as of 31 December 2003

was as follows:

As of 31 December 2003, the capital requirement for foreign ex-

change risk was set at zero.

In calculating its capital requirement against foreign exchange risk

as of 31 December 2004 and 31 December 2003, the Bank applies

the standardised method as specified in Resolution No. 5/2001 of

the Commission for Bank Supervision dated 12 December 2001.

USA

European Union

United Kingdom

Switzerland

Sweden

Denmark

Australia

Norway

Canada

Japan

Czech Republic

Hungary

Slovakia

South Africa

Total unconvertible currencies

Total

Total currency position

46,323

(1,076)

1,350

(32,910)

(1,437)

(335)

(149)

(621)

1,929

(9,990)

(867)

409

463

(57)

50,555

—

17,261,664

6,284,990

85,498

2,030,298

11,920

2,269

1,404

4,203

—

31,244

188,082

989

—

25,902,561

13,371,422

4,508,454

133,858

1,109,431

—

4,465

1,404

1,646

—

47,958

1,178

—

19,179,816

3,288,618

2,668,552

184,545

72,605

15,587

12,493

195

3,556

7,859

8,794

10,910

271

—

189,268

6,463,253

7,225,183

4,444,012

137,535

960,562

26,070

9,962

5,492

9,788

30,048

150,167

163

409

463

189,211

13,189,111

USD

EUR

GBP

CHF

SEK

DKK

AUD

NOK

CAD

JPY

CZK

HUF

SKK

ZAR

Country Currency Assets Liabilities Off-balance

sheet assets

Off-balance

sheet liabilities

Indexed

assets/

liabilities

Long

(short)

position

in PLN thousand

207

Note 38

1. The Balance Sheet as of 31 December 2004 shows total assets

and liabilities amounting to PLN 33,819,932,007.05;

2. Off-balance sheet items as of 31 December 2004 amounted to

PLN 211,909,242,473.89, including offbalance liabilities granted

at PLN 11,762,862,936.53;

3. The Profit and Loss Account for the period from 1 January 2004

to 31 December 2004 shows a net profit of PLN 414,214,162.25;

4. The statement of changes in shareholders’ equity for the period

from 1 January 2004 to 31 December 2004 shows shareholders’

equity of PLN 6,152,785,024.29;

5. The Cash Flow Statement for the period from 1 January 2004 to

31 December 2004 shows a net cash outflow of PLN

239,847,604.37.

Note 39

The annual report for 2004 will be made available at the website of

Bank Handlowy w Warszawie SA, at

www.citibankhandlowy.pl

Main items of the balance sheet, profit and loss account

and cash flow statement without rounding

208

209

Opinion of the independent auditor

211

Management Board of Bank Handlowy w Warszawie SA is respon-

sible for the true and fair presentation of the accompanying

financial statements and the accuracy of the accounting records.

Our responsibility was to audit and express an opinion on the true

and fair presentation of the financial statements and whether the

financial statements are derived from properly maintained

accounting records.

We conducted our audit of financial statements in accordance with

International Standards on Auditing as promulgated by the Inter-

national Federation of Accountants, section 7 of the Polish

Accounting Act dated 29 September 1994 (Official Journal from

2002, No. 76, item 694 with subsequent amendments) and the

professional standards established by the Polish National Council of

Certified Auditors. These standards require that we plan and

perform the audit to obtain reasonable basis for expressing an

opinion on the financial statements. An audit includes examining, on

a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by the

Bank’s Management Board, as well as evaluating the overall finan-

cial statements presentation. We believe that our audit provides

a reasonable basis for our opinion.

In our opinion, the audited financial statements of Bank Handlowy

w Warszawie SA have been prepared from properly maintained

accounting records and present fairly, in all material aspects, the

financial position of the Bank as at 31 December 2004 and the

results of its operations for the year then ended in accordance with

the accounting standards as set out in the Polish Accounting Act

dated 29 September 1994, the Resolution of the Minister of Finance

dated 10 December 2001 regarding special accounting principles for

banks (Official Journal from 2001, No. 149, item 1673 with

To the Shareholders

of Bank Handlowy w Warszawie SA

We have audited the accompanying financial statements of Bank

Handlowy w Warszawie SA seated in Warsaw, ul. Senatorska 16,

consisting of the introduction to the financial statements, the

balance sheet as at 31 December, 2004, with total assets and total

liabilities and equity of PLN 33,819,932 thousand, the capital

adequacy ratio, the statement of contingencies and commitments

granted as at 31 December, 2004 amounting to PLN 11,762,863

thousand, the profit and loss account for the year then ended with

a net profit of PLN 414,214 thousand, the statement of changes in

equity for the year then ended with an increase in equity of PLN

205,855 thousand, the cash flow statement for the year then ended

with a decrease in cash amounting to PLN 239,847 thousand, and

the supplementary information and explanations.

212

subsequent amendments), requirements relating to issuers of

publicly traded securities and regulations and with the respective

laws, regulations and the Bank’s statute, that apply to the Bank’s

financial statements.

As required under the Polish Accounting Act dated 29 September

1994, we also report that the Report on the Bank’s activities

includes the information required by Art. 49 Note 2 of the

Accounting Act and requirements of the Resolution of Council of

Ministers dated 16 October 2001 on current and periodic

information provided by issuers of publicly traded securities

(Official Journal from 2001, No. 139, item 1569 with subsequent

amendments) and the information is consistent with the financial

statements.

Certified Auditor No. 3683/5018

Janina Skwarka

On behalf of KPMG Audyt Sp. z o.o.

ul. Ch³odna 51; 00-867 Warsaw

Robert J. Widdowson, Director

On behalf of KPMG Audyt Sp. z o.o.

ul. Ch³odna 51; 00-867 Warsaw

Certified Auditor No. 9941/7390

Bo¿ena Graczyk

Member of the Management Board

Warsaw, 24 March 2005

213

Bank Handlowy w Warszawie SA

Head office: 16 Senatorska St., 00-923 Warsaw, Poland

tel. (48 22) 657 72 00, 690 40 00, fax (48 22) 692 50 23

www.citibankhandlowy.pl, e-mail: [email protected]

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tel. (48 32) 386 80 86