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Bank Pekao SA (BPKD)

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Thursday 13 March, 2003

Bank Pekao SA

Annual Report consolidated P1

Bank Pekao SA
13 March 2003

Part 1:


                   SECURITIES AND EXCHANGE COMMISSION (KPWiG)

                     Consolidated annual report SAB-RS 2002

 (in accordance with (S) 57 pos. 2 of the Decree of the Council of Ministers of
                                16 October 2001

      - Journal of Law No. 139, item. 1569 and of 2002 No. 31, item. 280)

                                  (for banks)

For the period from 01.01.2002 to 31.12.2002

with comparable data for the period from 01.01.2001 to 31.12.2001

      12 March 2003

(date of submission)

                                        Bank Polska Kasa Opieki Spolka Akcyjna
                                              (full name of issuer)
            BANK PEKAO SA                                                                         banks
          (abbreviated name                                                         (classification according
             of issuer)                                                                      to WSE)
               00-950                                                                           Warszawa
            (postal code)                                                                        (town)
             Grzybowska                                                                           53/57
              (street)                                                                          (number)
              656-00-00                             656-00-04                               [email protected]
             (telephone)                              (fax)                                     (e-mail)
            526-00-06-841                          0000-10-205                              www.pekao.com.pl
                (NIP)                                (REGON)                                      (www)



                                                                              Ernst&Young Audit Sp. z o.o.

(registered audit company)



Consolidated annual report comprises:


      Chartered accountant's opinion with the report of the review of the
    consolidated annual financial statement

  Letter of the President of Management Board

  Consolidated annual financial statement

Introduction       Statement of changes in consolidated shareholders' equity

Consolidated balance sheet      Consolidated statement of cash flows

Consolidated profit and loss account      Notes to the consolidated financial
statement

  Report of the Management Board (report on the activities of capital group of
the issuer)

SUMMARY FINANCIAL INFORMATION                                         PLN' 000                       EURO' 000
                                                                   2002            2001            2002           2001
I. Interest income                                               5,347,556       7,403,210      1,381,905      2,027,777
II. Commission income                                            1,390,406       1,462,245        359,306        400,516
III. Profit on banking activities                                        -               -              -              -
IV. Profit on operating activities                               1,159,915       1,748,521        299,742        478,928
V. Gross profit (loss)                                           1,173,201       1,764,495        303,175        483,304
VI. Net profit (loss)                                              769,588       1,253,760        198,875        343,411
VII. Net cash flow from operating activities                     1,730,264       4,189,545        447,131      1,147,538
VIII. Net cash flow from investing activities                   -1,059,267        -779,677       -273,734       -213,557
IX. Net cash flow from financing activities                       -629,844               -       -162,763              -
X. Total net cash flow                                              41,153       3,409,868         10,634        933,981
XI. Total assets                                                65,083,501      74,136,843     16,189,120     21,050,241
XII. Amounts due to the Central Bank                             2,484,032       3,958,394        617,888      1,123,937
XIII. Amounts due to financial institutions                      1,944,867       4,027,180        483,774      1,143,468
XIV. Amounts due to customers and the public sector             49,527,962      52,642,247     12,319,776     14,947,116
XV. Shareholders' equity (with the badwill)                      7,077,556       6,941,383      1,760,498      1,970,920
XVI. Share capital                                                 165,748         165,748         41,229         47,062
XVII. Number of shares                                         165,748,203     165,748,203       X              X
XVIII. Net book value per share ( PLN/EUR)                           42.70           41.88          10.62          11.89
XIX. Diluted net book value per share ( PLN/EUR)                     42.63           41.85          10.60          11.88
XX. Capital adequacy ratio (%)                                       17.26           15.36       X              X
XXI. Net profit (loss) per share ( PLN/EUR)                           4.64            7.56           1.20           2.07
XXII. Diluted net profit (loss) per share ( PLN/EUR)                  4.63            7.56           1.20           2.07
XXIII. Dividend declared or paid out per share ( PLN/EUR)             4.18            3.80           1.08           1.04



              Letter from the President of the Management Board of

                           Bank Polska Kasa Opieki SA



On behalf of the Management Board of Bank Polska Kasa Opieki SA I present the
Consolidated Annual Report for the year 2002, drawn up in accordance with the
requirements laid down in the Ordinance of the Council of Ministers dated 16
October 2001 on current and periodical information submitted by issuers of
securities (Journal of Laws No. 139/2001, item 1569, as subsequently amended).

We address this Report to the shareholders and supervisory bodies of the Bank,
capital market regulatory bodies, the Stock Exchange, investors, our customers
and the general public. The report contains consolidated financial statements of
Bank Polska Kasa Opieki SA for 2002, drawn up in accordance with Polish
accounting principles, audited by Ernst&Young Audit Spolka z o.o., an entity
authorized to audit financial statements, and the consolidated report on the
activities for 2002.

The Report contains detailed information on the results of the operations of the
Bank and its group of companies in 2002, which are shown in the consolidated
financial statements. The consolidated report on activities contains information
as required by the Ordinance of the Council of Ministers mentioned above, which
include, among other things, the external conditions of the operations in 2002,
the products and services of the Bank, description of activities in each segment
of the banking services market, activities of the Group's companies, sources of
financing the operational activities, credit policy, investing activities,
balance-sheet structure, and financial performance. Hence, in this letter I
focus on the last year's events and achievements, which are most important for
the Bank and the Group.

2002 was a difficult year for the Polish economy, the customers of the Bank and
its subsidiaries, and consequently also for Bank Pekao itself. The Polish
economy was at a standstill for more than five quarters. Some symptoms of
accelerated growth, which could be seen in the latter half of the year, were too
weak to significantly improve the situation. Consequently, economic growth
reached 1.3% last year. Also in the Euro zone, especially in Germany, our main
trade partner, there were no marked signs of recovery. In view of the strong
links of Poland's economy with the European economy those fact could not be
ignored. We had to provide for a much longer period of standstill, which
affected the financial condition of households and business. Companies, which
used to operate in a high-growth environment in previous years, were affected
most profoundly by the persistent economic stagnation. We could see how their
financial condition and ability to pay debts on time steadily declined over the
year.

In view of the macroeconomic forecasts and deterioration of our customers'
condition, we again had to look critically at our loan portfolio. As a result of
one of series of reviews of the portfolio and evaluation of collaterals, the
Management Board decided to set up credit risk provisions higher than originally
planned in the budget. Consequently, the Group set aside PLN 1504m in provisions
over the year, increasing the coverage ratio for irregular loans to 57.7%. This
increased the security of our operations, but also adversely affected our net
profit.

Bank Pekao has strong fundamentals, which it owes to consistent implementation
of a market strategy and cost control policies, which have become one of our
main strengths. The cost reduction policy, initiated when the economy was still
booming, is today yielding measurable benefits. Despite difficult market
conditions, we have increased operating profit and achieved a very good cost to
income ratio of 45.3%.

Pursuing the strategic goals of strengthening the position of the Bank and the
banking related companies associated with it in the financial services market by
increasing our effectiveness and ability to compete, we made major
organizational changes in 2002 in order to ensure better identification of
customer needs. The implementation of a new customer segmentation system, in
particular the offering of joint service to VIP individuals and small business
customers, enabled us to concentrate on the development of an offer precisely
addressing the needs of the different customer groups and improvement of the
quality of services.

Technological upgrading is strategically important for the improvement of
competitiveness and effectiveness of the Bank's operations. In 2002, we
continued the process of conversion of branches to the new IT system. This
enabled us to offer the customers a completely new quality of service through
the Pekao24 package, that is access to the Bank's products and services via
channels such as Internet, fixed and mobile telephony, call center. The number
of customers using the Bank's services over these access channels is increasing
steadily.

In 2002, consolidated net profit of Bank Pekao SA reached PLN 769.6m, and return
on equity 11.4%. It is a good result, given the economic environment of our
operations.

Macroeconomic forecasts for the year 2003 envisaged steady acceleration of
economic growth. This should make it possible to improve the financial position
of companies, and thus improve the banking sector's performance. The key factors
are credit portfolio quality and risk costs. This is the area on which we are
focusing our efforts.

We are also going to develop the sale of our product and service packages,
enhancing our offer and making it more attractive to customers. We also intend
to actively promote the sale of products offered by the companies of the Pekao
S.A. Group, in particular investment fund participation units.

A great deal of mobilization is required to achieve good results in 2003. I am
convinced we can count on support from our strategic investor, on loyalty of our
customers as well as commitment and professionalism of our employees.

We thank the customers using our services and shareholders investing in the
Bank's stock for the trust placed in us. I assure you that our efforts will be
driven by the main part of the Bank's mission: seeking to guarantee sustainable
and attractive growth of the shareholder value and ensure fair partnership in
our relations with customers.

On behalf of the Management Board, I thank the Supervisory Board of the Bank for
the support they gave to our efforts. And I wish to thank all employees for
their good work and commitment.



Warsaw, 5th of March, 2003

Maria Wioeniewska

President of the Management Boar

of Bank Polska Kasa Opieki S.A.




                     Consolidated Report on the activities
                           of Bank Polska Kasa Opieki

                                 Spolka Akcyjna




                               Warsaw, March 2003






    1     Introduction     *

2     Evaluation of factors and events having a significant influence on the
Group performance     *


    2.1     Macro-economic conditions     *

    2.2     Situation in the banking sector     *

    2.3     Major events bearing on the Bank's activities and results     *

    2.4     Major sources of risk and threats     *

    2.5     Forecast for 2002     *

    2.6     Direction of the Bank's and Group's development     *

3     Organisation of the Group     *


    3.1     Units included in the consolidated statement     *

    3.2     Description of the changes in organisation of the related parties in
    2002     *

    3.3     Changes in the Bank's organisational and capital relations with
    entities other than the Group's entities     *

    3.4     Investment plans, including capital investments     *

4     Core products, services and activities of the Group     *

5     Management of the Bank     *

6     The Bank's shareholder structure     *


    6.1     Shares owned by members of the Bank's management     *

    6.2     Management options programme     *

7     Assessment of the financial credibility of the Bank     *

8     Financial results of the Group     *


    8.1     Structure of net profit     *

    8.2     Presentation of financial data     *

    8.3     Consolidated P&L account     *

    8.4     Structure of the balance sheet     *

    8.4.1     Assets     *

    8.4.2     Liabilities     *

    8.4.3     Off-balance sheet items     *

    8.4.4     Fixed assets investment     *

    8.5     Asset and liability management     *

9     Agreement important for the activity     *


    9.1     Important credit agreement     *

    9.2     Syndicated agreement     *

    9.3     Debt security issue agreements     *

    9.4     Other significant agreements     *

10     Significant events after balance sheet date     *

11     Number and value of titles of execution and the value of collateral     *

12     Selected financial ratios of the Group     *


                                  Introduction

Pekao SA is the largest bank in Poland in terms of own funds and a leading
provider of banking services and holds majority stakes in financial institutions
acting on assets management, pension funds, brokerage, leasing and factoring
markets.

In the year 2002 the Bank as well as Group's companies developed their financial
services seeking to consolidate their position in retail and institutional
banking. The Bank and the Group are continually improving their offer of
up-to-date services tailoring them to the needs of various client groups. In the
year 2002 the Bank introduced changes in its organisation of sales of products
and services. Those modifications are designed to increase competitiveness of
the Bank's offer and availability of services as well as help create new
client-oriented sales patterns.

The Bank's main objectives are as follows:


  • to ensure a continuous increase in the Bank's value achieved by increasing
    sales of income-generating products and services accompanied by tight cost
    controls,

  • to strengthen the leading position in Poland's financial sector.

The implementation of those objectives are supported by such activities as:


  • changes in the organisational structure and methods of management,

  • employment policy,

  • development of modern distribution channels,

  • implementation of a new IT system,

  • monitoring the loan portfolio quality.




    Evaluation of factors and events having a significant influence on the Group
                                    performance

                                                       Macro-economic conditions

The year 2002 in the Polish economy was characterised by marked variations in
the macro-economic situation in the first half and the second half of the year.
In the first half of 2002 the stagnant tendencies, which emerged in the second
quarter of 2001, continued (growth of GDP per annum in the first quarter of 2002
was 0.4% and 0.8% in the second quarter; the GDP ratio for the entire half of
the year was 0.6%, which was almost identical with the ratio for the second half
of 2001). In that period growth was almost exclusively credited to a relatively
high dynamics of domestic demand driven by the dynamics of individual
consumption, while investments and export showed overall decline or stagnancy as
the prevailing tendencies. The fact that the dynamics of economic growth
remained on a low level prevented a considerable reduction of the rate of
unemployment - in February and March it reached 18.2%, the highest level on
record, and the seasonal improvement in the second quarter helped reduce it by
not more than 0.8 of a percentage point, i.e. to 17.4% in June. Low economic
growth in the first half of 2002 was accompanied by favourable changes in the
external and internal balance. The cumulative 12-month current account deficit
remained stable at slightly over USD 7 billion, which corresponded to about 4%
relative to GDP. The retail price index was systematically declining from 3.4%
in January to 1.6% in June.

Monetary policy remained neutral, which meant reductions of base rates of
interest to the extent justified by the falling inflation. In the first 6 months
all base interest rates were reduced four times by 400 base points in the case
of the Lombard and re-discount rates and 300 base points for the market
intervention rate.

From mid-2002 the economy started to show some upward tendencies, driven by
improving exports in addition to the stable dynamics of individual consumption.
Investments continued to decline but at a reduced pace. As a result, the rate of
increase of GDP per annum went up to 1.6% in the third quarter and to 2% in the
fourth quarter (this yielded growth for the second half at about 1.7% and
justified a forecast of the annual growth of about 1.2%). A lightly higher
economic growth was reflected in the stabilisation of the rate of unemployment -
having reached 17.5% in July, it remained on that level through October, while
November and December - the months that usually generate unfavourable results in
view of the seasonal nature of certain activities - saw only a slight rise in
the rate of unemployment up to 17.8% and 18.1% respectively.

The upward tendencies in the Polish economy in the second half of the year were
reflected in the industrial production dynamics ratios, which were above zero in
all months of the second half except for August. The overall industrial output
sold in the year 2002 rose by 1.5%, and the area characterised by the highest
dynamics was export-oriented processing sector.

In the second half of the year the external and internal balance of the economy
continued to show favourable tendencies. The aforementioned upward trends in
exports and the satisfactory balance of unclassified transactions resulted in a
further decrease in the cumulative 12-month current account deficit to about USD
6.7 billion, which corresponded to about 3.7% relative to GDP. At this safe
level the latter ratio remained throughout the half-year. The retail price index
was also declining, reaching 0.8% at the end of December (which yielded yearly
average inflation of 1.9%).

Low inflation facilitated further reductions of the base rates of interest. Like
in the first 6 months, in the second half they were reduced four times by a
total of 275 base points in the case of the Lombard rate, 250 base points in the
case of the re-discount rate and 175 base points in the case of the market
intervention rate. This led to the range of the base rates being markedly
narrowed - from 300 base points in June to 200 base points in December 2002.
Eventually the Lombard rate as at the end of 2002 was 8.75%, the re-discount
rate - 7.5% and the market intervention rate - 6.75%.

There were relatively favourable foreign exchange rates changes over the entire
2002. In relation to euro, which is the major currency of Polish export
contracts, Polish currency got weaker in nominal terms by about 11% - from the
average January rate of PLN/EUR 3.59 to the average December rate of PLN/EUR
3.99. This change improved the situation of Polish exporters. As regards the
relation of Polish currency to USD, it grew stronger by nearly 4%, with the
average rates in January and December of PLN/USD 4.06 and PLN/USD 3.91
respectively.

Summarising, it can be concluded that the first half of the year was
characterised by stagnation and relatively good parameters of the macro-economic
balance, while the second half of the year saw a slight acceleration of economic
growth, with the macro-economic balance retained or even improved. The level of
economic growth did not prove to be sufficient to ensure a long-lasting
improvement in the labour market.


                                                 Situation in the banking sector

In the year 2002 there was a marked slowdown in the particular areas of the
banking sector. Low economic growth overall and poor prospects for growth in
global economy combined with the interest rates, which remain relatively high,
and the persistent 18% rate of unemployment slowed down the pace of the loans
increase.



Changes in the dynamics of deposits and loans are presented below.
                                                                                   Change (%)
                                                                                     2002                      2001
Deposits                                                                            (4.3)                       8.9
Corporate                                                                           (5.2)                      14.5
Including companies                                                                   1.4                      16.4
Households                                                                          (3.9)                       6.7
Loans                                                                                 5.2                       9.3
Corporate                                                                             3.3                       6.6
Including companies                                                                   1.4                       3.7
Households                                                                            8.6                      14.7

In the year 2002 total deposits decreased by 4.3%, including households deposits
that fell by 3.9%, while in 2001 total deposits and households deposits rose
markedly by 8.9% and 6.7% respectively.

In the latter part of the year banks offered clients their own bonds, which
became very popular. Households deposits adjusted for funds generated from the
banks' bonds issues decreased by 3.0%.

The decrease in the volume of deposits was accompanied by an increase in
individuals' savings placed with investment funds. The net value of the funds
rose from PLN 11.9 billion at the end of 2001 to PLN 22.8 billion at the end of
2002 (increase by PLN 10.9 billion). This increase could largely be credited to
the gradual reduction of interest rates offered by banks and the implementation
of tax on interest on bank deposits.

The increase in loans granted in 2002 amounted to 8.6% for households and 3.3%
for corporate clients, while in the year 2001 it was 14.7% and 6.6%
respectively. The low increase in loans resulted from a slowdown in economic
growth, the deterioration of the financial standing of numerous companies, the
persistent high rate of unemployment and the banks' conservative loans policy
driven by the ever increasing risk.

In the year 2002 loans rose by 5.2% overall, deposits decreased by 4.3%, which
increased the ratio of loans to deposits in the banking sector by 7.9 percentage
points compared to December 2001.

As rates of interest declined, the banking sector reduced rates of interest on
deposits faster than interest on loans, which secured fair stabilisation of the
margin; however, a fast rise in irregular loans and the need to create high
provisions prevented net result from being generated on a level comparable to
2001.

The economic and financial situation of commercial banks varied, as some banks
reported good results while others reported losses.

This was due to poor macroeconomic situation and a bearish condition on the
Warsaw Stock Exchange. One of the factors that had an adverse effect on the
overall results of the banking sector were the costs of creating provisions for
loans, including those granted to Stocznia Szczecinska. The increase in the
share of non-performing loans in the credit portfolio reduced revenue from
interest and drove the operating results of banks downward.

Banks adjusted the level of operating expenses to the scale of their activities
and headcount reductions were accompanied by an increase in expenses for the
implementation of product and technological innovations and mergers of banking
institutions.



                       Major events bearing on the Bank's activities and results


  • Financial situation of Stocznia Szczecinska Porta Holding S.A.,

  • Significant deterioration of the loan portfolio,

  • Loss of Pekao Leasing Sp. z o.o.,

  • Decision on the liquidation of a branch in New York,

  • Rationalisation of employment,

  • Continuation of the non-personnel costs rationalisation process,

  • Continuation of the development of distribution channels,

  • Continuation of the process to implement a new IT system,

  • Introduction of a new VIP as well as small and micro enterprises (SME)
    client service models,

  • Improvement of sales and corporate client service systems.



Financial situation of Stocznia Szczecinska Porta Holding S.A.

In June 2002 the Bank publicly announced that its exposure to Stocznia
Szczecinska was PLN 497.8 million.

The Bank took measures with a view to restructuring and collecting the debt.

Under several agreements the Bank seized and then sold four ships constituting
the collateral, releasing Stocznia Szczecinska from part of its debt. In 2002
the construction of all four ships was completed and the vessels were handed
over to clients.

Currently the Bank's receivable from Stocznia Szczecinska is PLN 207 million and
is fully covered with provisions.

The negative effect of the creation of the provisions and the restructuring of
its loan granted to Stocznia Szczecinska in 2002 on the Bank's net results was
below PLN 70 million.

Significant deterioration of the loan portfolio

The unfavourable macroeconomic conditions caused a deterioration of the
financial situation of numerous companies which are on the Bank's client list,
particularly in shipbuilding and repairs, construction, real estate management
and retail/ wholesale trade.

The quality of loans measured by the ratio of non-performing loans to total
loans deteriorated from 15.0% at the end 2001 to 19.9% at the end of 2002.

The above factors underlay the need to bear the costs of provisions in 2002 of
PLN 1,286.5 million, of which the major portion (PLN 682.2 million) was
generated in the second quarter of 2002.

The Bank continued to pursue its conservative policies in areas of provisions
and valuation of collaterals. This was accompanied by the process of improving
credit risk valuation procedures and tools.

Loss of Pekao Leasing Sp. z o.o.

Another consequence of the unfavourable economic environment was deterioration
of the financial standing of the Group's clients.

In 2002 Pekao Leasing Sp. z o.o. incurred a loss of PLN 172.4 million, which
resulted from the requirement to create net provisions totalling PLN 164.4
million in connection with the deteriorating financial standing of clients and
the verification of the method of valuation and the quality of collateral.

The Bank's share in profits (losses) of companies valued using the equity method
in 2002 was negative, i.e. PLN -181.6 million.


Decision on the liquidation of a branch in New York

As it proved impossible to ensure a satisfactory rate of return on the capital
invested by the Bank's New York Branch, the Bank elected to liquidate the
branch.

In 2002 net provision for loan in New York Branch were created (PLN 82.1
million). Additionally provisions for the liquidation costs were charged to the
Bank's P&L account in 2002 (a total of PLN 20.3 million).

Rationalisation of employment

Decrease in headcount

As at 31 December 2002 the Bank's headcount totalled 16,887 and it decreased in
the course of the year to 1,250 employees. The Group's headcount decreased from
19,455 employees as at 31 December 2001 to 17,949 as at 31 December 2002. The
systematic reduction of headcount is the result of the consistent application of
the Bank's policy, which assumes tight control of the recruitment process,
special incentive programmes for employees intending to retire earlier and the
normal turnover.

The Bank also sold its foreign subsidiary (Pekao Trading Corporation), which
drove the Group's headcount down.

The Bank plans to decrease headcount in 2003 by 750 employees. The provision
connected with planned decrease in headcount were charged to P&L account of 2002
(a total of PLN 13.3 million).

Personnel structure

The Bank employs young, dynamic and career-oriented personnel. The average age
of an employee is 38.3 and the largest group of employees are people at age
30-35. Female employees account for 81% of total headcount. 40% of the Bank's
employees are university graduates. The personnel turnover ratio in 2002 was
9.83% (excluding retirees).

MBO incentive scheme

To support the implementation of the Bank's business and financial objectives an
MBO (Management by Objectives) incentive system was implemented. The employees
covered by the scheme are assigned individual tasks the fulfilment of which
determines the amount of their annual bonus.

Training and professional qualifications improvement

The major objective of the Bank's training programmes was to motivate employees
to work effectively and achieve specific goals, primarily to satisfy clients'
needs and expectations and provide top quality service.

The number of trainees in 2002 totalled 19,005, including 18,260 participants of
in-house professional training programmes.

Among the 2002 training initiatives of crucial importance were those relating to
the improvement of management qualifications of the Bank's executives and
training programs supporting the retail clients service system. In December 2002
a series of seminars of the Business Academy launched in March 2001 was
completed. Business Academy seminars help develop a new organisational culture
of the Bank and improve management competency of senior executives. The
completed series of training programs was attended by 549 trainees of the Bank's
senior management, among them members of the Bank's Management Board, executive
directors, regional directors, directors of branches. A new series of seminars
for another group of trainees was launched in January 2003.

Other training programs included sales techniques, negotiations, interpersonal
planning and communication, product training focused on investment products and
funds as well as investment-and-insurance and mortgage training. Also, a new
training project has been launched for client area managers - 'Client Area
Manager - Client Service Development Leader'.



Continued rationalisation of non-personnel costs

The process of implementing solutions that facilitated effective cost control
and more effective management of the Bank's property was continued. Savings are
maximised by optimisation of consumption of goods, more effective use of the
existing resources, implementation of innovative technologies minimising
purchase costs and application of more rigorous criteria to new purchases. The
joint programme for non-personnel cost rationalisation and improvement of Group
companies' property management is also conducted by Bank Pekao SA and the
Group's companies together.

Continued development of distribution channels

The policy of developing diversified distribution channels was continued,
including traditional and alternative channels. In 2002 the Bank opened 29 new
outlets in new locations, and 15 outlets were closed. At the end of 2002 there
were 827 outlets in the Bank's network. The new outlets are targeted mainly at
wealthy customers and SMEs. In the year 2002 161 new ATMs were installed and the
total number of ATMs at the end of December amounted to 1,117.

Continued implementation of a new IT system

According to the agreed schedule the work on the implementation of the new
integrated IT system was continued in the Bank's outlets. The scope of remote
electronic distribution channels - Client Centre (Multichannel), including Call
Centre, Teleserwis and internet services was broadened. Computer hardware was
continued to be replaced in all outlets, another step towards standardisation of
the network that also prepares the outlets for the implementation of a new
system. The process is in its final stage.

The implementation of the centralised payroll and personnel system Oracle HRMS
and the centralisation of the interbank electronic clearing system were
finished.

As regards the IT infrastructure, the Bank continued to develop its WAN
extensive network with focus on network safeguards.

Introduction of a new model of services for VIPs and SMEs

In 2002 the Bank changed the organisation of sales of banking products and
services. A new model of banking services for wealthy customers (VIPs) and SMEs
was introduced. Wealthy customers who are also entrepreneurs receive integrated
banking services for their private and corporate account - advisory services
provided in one place by a specialised VIP / SME advisor. Individual advisors
were assigned to wealthy customers who are not entrepreneurs or who are not
interested in combined banking services while small companies were covered by
tailor-made services provided by customer managers.

Improvements in sales and corporate customers services systems

The Bank continued its work on the improvements in sales and corporate customers
services systems as part of tailoring its offer and services to the needs of the
particular segments of the corporate customers market. A new model of services
for corporate customers was introduced - 25 Corporate Customer Centres (CCC),
which manage relations with medium and large customers. CCCs co-ordinate the
sales of the most profitable products and services rendered for medium customers
retaining both the important role of the outlet (account operations, cash
payments, deposits) and the Bank's head office (dealing room operations). CCC
Client Managers, which carry on customer-tailored services for medium companies,
are supported in the sales and consulting processes by product specialists.

Large companies were continued to be serviced by CCCs and additionally by
specialised Client Advisers in the Bank's head office. The range of products was
extended. In the second half of 2002 the Bank continued its work on inter alia
the service allowing automatic identification of transfers coming to a corporate
account, which is targeted at large corporations with large-scale clients.


    Major sources of risk and threats

Macro-economic conditions

Bank Pekao SA operates in accordance with Polish law and the majority of the
bank's assets are situated in the territory of Poland. For this reason, the
policy of the Polish government and the economic conditions in Poland or global
economic factors bearing on the Polish economy are also relevant to the
financial situation of Bank Pekao SA.

Credit risk

As it extends credits, the Bank is by definition exposed to credit risk. The
Bank has implemented safeguards protecting it against credit risk - for more
information see Item 8.5.

Market risk

Like any other financial institution, Bank Pekao SA suffers market risks, namely
the interest rate risk, the liquidity risk and the foreign exchange risk.

The Bank monitors the situation on the market on an on-going basis and adjusts
its actions to the external conditions.

Market risks management is described in more detail in Item 8.5.


    Forecast for 2002

In the current report of 26th of July 2002 the Bank published its forecast for
2002.

The implementation of the Bank's financial objectives identified in the forecast
is as follows:

                                                                         Result                      Forecast
                                                                        in 2002                      for 2002
Net financial result (PLN million)                                        801.7                         1,000
Return on Equity (%)                                                       11.9                      about 15
Costs/Income (%)                                                           43.8                      below 50
Capital adequacy ratio (%)                                                 16.6                          12.5
Loans/Deposits (%)                                                         63.5                          62.9

In the current report dated 5 February 2003 the Bank's Management Board
announced that the 2002 net profit of PLN 801.7 million, which was generated in
very unfavourable macro-economic conditions, was one of the best net profit
results since the Bank's inception and one of the best in the banking sector. As
revenues remained stable on the prior year level and the rigorous measures
designed to increase cost-effectiveness were consistently applied, the operating
result was 10.8% higher compared to 2001. The return on equity ratio of 11.9%
can be judged satisfactory.

One of the factors that affected the Bank's net profit for 2002 was the need to
create provisions for debts. Additionally, the sale of PolCard shares was
deferred to 2003. The Bank also decided to liquidate its New York Branch and the
provisions for the resultant liquidation costs were charged to the 2002 P&L
account.

The Bank's Management Board will put forth for the General Meeting's approval a
proposal to pay out dividends at an amount higher than that paid out in 2002 by
PLN 0.38 per share (i.e. PLN 4.18 per share). This reflects the policy of
assuring an increase in the nominal value of dividend per one share.


    Direction of the Bank's and Group's development

The strategy adopted by the Bank and the Group assumes a new quality of
management and is focused on enhancing the shareholder value through growing the
Bank's value for the customers. The Bank plans - through increased segmentation,
better identification of needs of the individual groups of customers, and
adjustment of the product offering to meet those needs - to increase the level
of customer satisfaction and optimise operating expenses.

The Bank will focus on key business functions, rationalisation of operating
costs, implementation of advanced, higher quality technological solutions, and
will continue to outsource certain functions. These processes will be aimed at
strengthening the Bank's and Group's competitive position and achieving the
enterprise value satisfactory to the shareholders. The strategy will be
implemented both by the Bank and its equity-linked subsidiaries.

The Bank's main objective is to maintain and strengthen its leading position in
the retail banking segment by active participation in the process of
accumulation of household savings, particularly through product innovation and
advanced delivery channels leveraging both the existing capabilities of the
Bank's branch network and new forms of distribution/communication with
customers. The strategy assumes taking full advantage the Centralny Dom
Maklerski Pekao S.A. and Pioneer Pekao Investment Management S.A. market
positions through promotion of investment-savings products.

In 2002 a new business function was set up to service the Bank's key clients,
i.e. individuals with earnings above average salary (VIPs) and small and
micro-enterprises (SMEs). The Bank has improved this area of service and has
built stronger ties with those client groups.

In the area of corporate banking, the strategy's objective is to strengthen the
Bank's market position and increase its share in all main segments of the
market. The Bank's activities are also based on increased segmentation. They are
focused on customer-oriented organisation of sales, customised approach to
services provided to the largest customers, and packaging of products and
services customised to the identified needs of selected groups of customers.

The Bank and the Group intend to aggressively develop advanced delivery
channels, such as: Internet banking, telebanking and direct sales. At the same
time the Bank also plans to open new branches and restructure its existing
branch network, and further develop the ATM network.

One of the main strategic goals is to complete the implementation of the new IT
system during 2004. The aim of the implementation and full utilisation of a
modern IT system is to ensure higher level of client's services, cost efficiency
and improve management information and risk management processes.

Further restructuring of the Bank and its subsidiaries will be continued to
improve efficiency of its operations both in terms of personnel and
non-personnel costs. The Bank is pursuing a rational human resources policy,
involving not only flexible adjustments of the headcount to the level of
activities, but also allowing for improvement of quality of the staff and
appropriate motivation in order to hire and maintain the best employees.

The Bank also plans to continue its conservative credit risk management and
provisioning policies in the Bank and in companies of the Group. Appropriate
actions are being taken and planned to improve the quality of the loan portfolio
in the following years.


    Organisation of the Group

The Pekao SA Group is composed of financial and non-financial institutions
gathered around a universal bank and provides a full range of financial services
available in Poland to its retail and corporate customers.


     1. Units included in the consolidated statement

The following companies were included in the 2002 consolidated financial
statement:


                                                  PLN million
 No.                     Name of company                     NAV 31.12.2002            Status      Consolidation
                                                                                                          method
    1 Bank Pekao SA                                                 7,043.3            parent                  -
    2 Centralny Dom Maklerski Pekao S.A.                              213.3        subsidiary               full
    3 Bank Pekao (Tel-Aviv) Ltd.                                       55.4        subsidiary               full
    4 Pekao Fundusz Kapitalowy Sp. z o.o.                              53.7        subsidiary               full
    5 Pekao Faktoring Sp. z o.o.                                       40.8        subsidiary               full
    6 Bank Pekao (Ukraine) Ltd.                                        26.9        subsidiary               full
    7 Leasing Fabryczny Sp. z o.o.                                     21.8        subsidiary               full
    8 Pekao Pioneer PTE S.A.                                           12.1        subsidiary               full
    9 Drukbank Sp. z o.o.                                               8.8        subsidiary               full
   10 BDK Consulting Sp. z o.o.                                         1.6        subsidiary               full *
   11 Pekao Leasing Sp. z o.o.                                       (98.1)        subsidiary               full
   12 Pekao Development Sp. z o.o.                                     40.9        subsidiary             equity
   13 Central Poland Fund LLC                                          21.5        subsidiary             equity
   14 Fabryka Maszyn w Janowie Lubelskim Sp. z o.o.                    23.3        subsidiary             equity **
   15 Polonit Sp. z o.o.                                               11.1        subsidiary             equity **
   16 Pekao Financial Services Sp. z o.o.                              10.7        subsidiary             equity
   17 Zaslaw Zaklad Przyczep i Naczep Sp. z o.o.                        0.5        subsidiary             equity **
   18 MASTERS S.A.                                                      8.5        subsidiary             equity **
   19 Access Sp. z o.o.                                                 2.5        subsidiary             equity
   20 Pekao Informatyka Sp. z o.o.                                      0.3        subsidiary             equity
   21 Trinity Management Sp. z o.o.                                    18.4     co-subsidiary             equity
   22 Anica Systems S.A.                                                8.1     co-subsidiary             equity **
   23 Jupiter NFI S.A.                                                288.2        associated             equity
   24 Krajowa Izba Rozliczeniowa S.A.                                  76.9        associated             equity
   25 Pioneer Pekao Investment Management S.A.                         49.3        associated             equity
   26 Pollena Ewa S.A.                                                 30.5        associated             equity ***
   27 Tomtex S.A.                                                      13.6        associated             equity **
   28 Grupa Inwestycyjna NYWIG S.A.                                     9.3        associated             equity
   29 Fabryka Sprzetu Okretowego 'Meblomor' S.A.                        7.5        associated             equity **
   30 ZPC OEwidnik Sp. z o.o.                                           2.4        associated             equity **
   31 Wytwornia Silnikow PZL Mielec Sp. z o.o.                          1.2        associated             equity **
   32 WAW PZL Mielec Sp. z o.o.                                       (1.2)        associated             equity **
   33 Hotel Jan III Sobieski Sp. z o.o.                             (133.7)        associated             equity


    * consolidated by Bank Pekao (Ukraine) Ltd.

    ** consolidated by Pekao Fundusz Kapitalowy Sp. z o.o.

    *** consolidated by Centralny Dom Maklerski Pekao S.A.

Explanation: 'consolidated' include companies consolidated using full method and
companies presented using equity method.

The following companies were not consolidated as they meet the relevant
requirements of the Polish Accountancy Act of September 29, 1994, as amended
(Art. 57 and Art. 58):


  • Pekao Immobillier SARL,

  • Pekao Uslugi Korporacyjne S.A.,

  • CPF Management (does not operate),

  • Pracownicze Towarzystwo Emerytalne CDM Pekao S.A.

The accounts of the above mentioned companies were not included in the Bank's
consolidated financial statements as the financial data contained therein is
insignificant.


     Description of the changes in organisation of the related parties in 2002

As at 31 December 2002 the related parties comprised of 37 companies: the Bank
(parent company / major investor), 22 subsidiary companies, 2 co-subsidiary
company and 12 associated companies.

The structure of the related parties (excluding the Bank Pekao SA) was as
follows:
                                                  31.12.2002                Change               01.01.2002
                                                    Number                  Number                 Number
Subsidiary companies
                                                     19                      +2                      17
        Consolidated*
                                                     
        Not consolidated                              3                      -3                       6
                                                     
        Total subsidiary                             22                      -1                      23

    Co-subsidiary companies
                                                   
        Consolidated*                                 2                       -1                      3
                                                     
        Not consolidated                              0                                               0
                                                     
        Total co-subsidiary                           2                       -1                      3

    Associated companies   
                          
        Consolidated*                                11                       -2                      13

                                                      
        Not consolidated                              1                                               1

                                                      
        Total associated                             12                       -2                     14

Total                                                36                       -4                     40

* 'consolidated' include companies consolidated using full method and companies
presented using equity method.

The number of related parties as of 1 January 2002 results from the employment
of the legal regulations amending the rules of company classification.

The change in the number of related parties as at 31 December 2002 compared with
1 January 2002 was caused by:

Subsidiary companies


  • disposal of shares in consolidated under equity method company Pekao
    Trading Corporation, disposal of shares in P.K.O. Trading Corporation and in
    LKK Lubelska Korporacja Komunikacyjna Sp. z o.o.,

  • completion of liquidation of Pekao Delta Company Pty. Ltd.,

  • acquisition of shares in Zaklady Wyrobow Uszczelniajacych i
    Termoizolacyjnych 'POLONIT' Sp. z o.o.,

  • transfer of Leasing Fabryczny, previously classified as an associated
    company, in connection with the control takeover.

Co-subsidiary companies


  • disposal of shares in LTMnnen Polska Sp. z o.o. consolidated under the
    equity method,


    Associated companies


  • disposal of shares in B.H.I. S.A. Luxembourg consolidated under the equity
    method,

  • transfer of shares in Leasing Fabryczny to subsidiary companies.

As a result of changes in legal regulations governing the qualification of
commercial companies, the following companies consolidated under equity method
were included in the consolidated accounts: Pioneer Pekao Investment Management
S.A., Central Poland Fund LLC, Fabryka Maszyn w Janowie Lubelskim Sp. z o.o.,
Masters SA, Zaslaw Zaklad Przyczep i Naczep
Sp. z o.o., Krajowa Izba Rozliczeniowa S.A., Grupa Inwestycyjna NYWIG S.A.,
Hotel Jan III Sobieski Sp. z o.o., Wytwornia Silnikow PZL Mielec Sp. z o.o.,
Fabryka Sprzetu Okretowego Meblomor SA, Tomtex SA, Zaklad Produkcji Cywilnej w
OEwidniku Sp. z o.o., Wytwornia Aparatury Wtryskowej PZL Mielec Sp. z o.o.,
Pollena Ewa S.A. and Anica Systems SA.

Pekao Trading Corporation, B.H.I. S.A. Luxembourg and Lannen Polska Sp. z o.o.
are no longer included in the consolidated financial statements following
disposal of shares in those companies.

Transactions with related entities

Bank Pekao SA (Bank)


  • On 11 January 2002 the Bank signed two agreements with Pekao Development:
    the agreement to purchase the property located in Warsaw in 5 Gieldowa Str.
    and the agreement to purchase the share of 639/1000 in the property located
    in Lodz in 288 Piotrkowska Str., for the total amount of PLN 85 million.


    Prior to signing these agreements the Bank was granted the appropriate
    permissions of the Ministry of Administration and Internal Affairs for
    purchasing the property by a foreign entity.


  • On 25 January 2002 the Bank and Pekao Faktoring signed Appendix 1 to the
    bond issue agreement of 15 December 2000, which the Bank announced in
    current report No 99/2000. According to the appendix the agreement is to be
    extended for an indefinite period and the total value of the short-term
    bonds issued will not exceed PLN 400 million.

  • On 29 January 2002 the Bank signed the 'Master Loan Agreement' with
    UniCredito Italiano London Branch (the transaction with an associated
    entity, within the UniCredito Italiano Capital Group). The subject of the
    transaction is credit line of EUR 10 million for financing international
    trading between Italy and Poland. The maturity is 8 years.

  • On 8 March 2002 the Bank signed the agreement with US Money Express to
    sell 110 shares of Pekao Trading Corporation New York (foreign subsidiary of
    the Bank) for the price of USD 2,225,000  and 10 shares of P.K.O. Trading
    Corporation (foreign subsidiary of the Bank) for the price of USD 2,100. As
    a result of this agreement the Bank Pekao SA sold all shares in Pekao
    Trading Corporation New York and P.K.O. Trading Corporation.


    The Bank also withdrew 140 shares of Pekao Trading Corporation New York for
    the price of USD 1,650,000 and signed the agreement with Pekao Trading
    Corporation New York to use the trademark owned by the Bank until 8 March
    2007 for the price of USD 1,250,000.


  • On 6 May 2002 Bank Pekao SA sold 25,959 shares of B.H.I. S.A. Luxembourg
    to the Bank's client for the total amount of EUR 6,706.07. The shares sold
    by the Bank account for 21.63% of the statutory capital of the company and
    carry 21.63% of the votes at the Shareholder Meeting. The shares did not
    have a nominal value. The book value of the shares sold was EUR 6,705.86.
    The shares sold were not held as a long-term capital investment. The parties
    are not associated with each other.

  • Based on a resolution of an Extraordinary General Shareholders Meeting of
    Pekao Leasing passed on 6 August 2002, Bank Pekao SA, acting as the sole
    shareholder, made a returnable additional payment of PLN 75 million, payable
    in lump sum within 7 days of the date of the resolution being passed.

  • On 5 November 2002 the Bank signed a contract with Pekao Faktoring for the
    re-purchase of the Bonds. The contract was to continue for the period
    necessary for its realisation but was to terminate on 31 December 2003 at
    the latest. The subject of the contract was Pekao Faktoring's unconditional
    re-purchase of the Bonds issued by the Bank within the Issue Program. The
    re-purchaser will fulfil its obligation in accordance with the procedures
    and through CeTO - a purchase order was made separately for all Bonds in a
    given series, at the price equal to their nominal value plus interest
    accrued to the date of the re-purchase transaction being settled by the
    Securities and Exchanges Commission. Pekao Faktoring is required to fulfil
    its obligations arising from the Contract using funds provided for this
    purpose by the Bank under a separate agreement (loan or credit). The
    re-purchaser's fee was set at 0.05% of the amount of the bonds re-purchased
    and the Bank will additionally cover external costs of that transaction
    incurred by Pekao Faktoring.

Pekao Faktoring Sp. z o.o. (Pekao Faktoring)


  • Pekao Faktoring signed an agreement with Bank Pekao Tel-Aviv Ltd. to for
    transferred of debt. The nominal value of receivables purchased was USD
    11,426.3 thousand. Pekao Faktoring will pay PLN 2,000 thousand.

Centralny Dom Maklerski Pekao S.A. (CDM)


  • On 28 March 2002, within an off-session transaction at the Warsaw Stock
    Exchange, CDM sold to PFK 939,040 shares of Pollena Ewa S.A. for the price
    of PLN 8,075,744 (i.e. PLN 8.60 per share). The shares sold accounted for
    33.2% of the company's share capital and carried 22% of the votes at the
    General Shareholder Meeting.

  • On 8 May 2002, within an off-session transaction at the Warsaw Stock
    Exchange, CDM repurchased from PFK 939,040 shares of Pollena Ewa S.A. for
    the price of PLN 8,263,552 (i.e. PLN 8.80 per share). The repurchased shares
    accounted for 33.2% of the company's initial equity and carried 22% of the
    votes at the General Meeting.

  • On 30 July 2002 the Minister of Finance cancelled the agreement with CDM
    dated 11 April 1996 to perform the function of the issue agent of Treasury
    Bonds. The period of notice is 1 year.

    The Bank was surprised by the decision of the Minister of Finance as the
    present contract was extended for another five years in 1999. Moreover, the
    Ministry did not announce that it was considering terminating the contract.

    Upon termination CDM will continue to fulfil its current duties in respect
    of the bonds for which it acted as an agent in the period before the notice
    of termination was filed.

    In view of the 1-year period of notice, the notice did not have any impact
    on CDM's financial results in 2002.

Pekao Fundusz Kapitalowy Sp. z o.o. (PFK)


  • On 26 June 2002 PFK bought 25,681 shares of Zaklady Wyrobow
    Uszczelniajacych i Termoizolacyjnych 'POLONIT' Sp. z o.o. (POLONIT) from the
    Industry Development Agency. Those shares constitute 24.05% of the share
    capital of POLONIT and carry 25,681 votes (24.05% of all votes) at the
    General Shareholder Meeting.


    After this transaction PFK holds 79,061 shares of POLONIT, which account for
    74.04% of POLONIT share capital and carry 74.04% of the votes at the General
    Meeting.

    As at 31 December 2002 PFK held 80.85% of shares in POLONIT. The share
    increased when PFK took up new shares of POLONIT. issued in exchange for
    PFK's contribution in the form of shares in WSK PZL Kalisz SA.


  • The agreement on the repayment of debt between Swarzedz Meble S.A.
    (Swarzedz) and PFK was signed on 5 July 2002. As at the date of the
    agreement PFK had accounts receivable from Swarzedz in the amount of PLN
    6,005,248.22, including PLN 5,930,021.66 for the repurchase of own
    commercial notes. The subject of the agreement is repayment of the above
    debt by transferring to PFK title to 702,988 shares of Jarocinskie Fabryki
    Mebli S.A. held by Swarzedz at par value of PLN 3.93, and all rights
    attaching thereto.


    The agreement came into force on 10 July 2002. The transfer of the shares
    took place on 31 July 2002 when the depositary acted on the instructions of
    Swarzedz Meble S.A. and transferred the shares.


  • On 28 October 2002 PFK signed a contract with LTMnnen Tehtaat Oyj based
    in Sakyla (Finland) for the sales of all 107,711 shares in LTMnnen Polska
    Sp. z o.o., which account for 50% of the company's share capital and give
    107,711 voting rights at the General Meeting (50% of the total number of
    votes).


    On 13 November 2002 all conditions set out in the contract of sales of
    107,711 shares in LTMnnen Polska Sp. z o.o. were met.


  • On 19 December 2002 PFK and Universal Commerce Sp. z o.o. based in Warsaw
    signed a contract for the sales of all 22,411 shares held in Wytwornia
    Aparatury Wtryskowej PZL - Mielec Sp. z o.o., which account for 49.93% of
    the Company's share capital and carry 22,411 votes at the General Meeting
    (49.93% of the total number of votes).


    As the conditions set out in the contract had been satisfied, on 3 January
    2003 a total of 22,411 shares in Wytwornia Aparatury Wtryskowej PZL - Mielec
    Sp. z o.o. were transferred to Universal Commerce Sp. z o.o. based in
    Warsaw.

Access Sp. z o.o.

  • As a result of the decision of the Regional Court in Warsaw, 19th
    Commercial Department of the National Court Register on 27 June 2002 the
    increase of the statutory capital of Access Sp. z o.o. by PLN 17,329 to PLN
    207,389 was duly registered. The increase was realised with a cash
    contribution.


    As a result of the statutory capital increase the total number of votes at
    the Shareholder Meeting is 371, of which Bank Pekao holds 205 (55.26%).

Hotel Jan III Sobieski Sp. z o.o.


  • On 27 June 2002 the change of the company name from SYRENA INTERNATIONAL
    Sp. z o.o. to HOTEL JAN III SOBIESKI Sp. z o.o. was registered in the
    Register of Entrepreneurs.

Pekao Uslugi Korporacyjne S.A.


  • On 3 July 2002 the change of the business name Pekao Capital Management
    S.A. in liquidation to Pekao Uslugi Korporacyjne S.A. was registered in the
    Register of Entrepreneurs.


     1. Changes in the Bank's organisational and capital relations with entities
        other than the Group's entities

Sale of shares in NFI im. E. Kwiatkowskiego S.A.

In fulfilment of the contract signed on 14 January 2002 by the Bank and its
subsidiaries, the Bank sold 4,612,470 of the Fund's stock, which accounted for
15.35% of share capital and the total number of the votes at the General
Meeting. The sales time scale was as follows:


  • 11 April 2002 - 1,509,929 shares were sold (5.02% of capital and votes),
  • 13 August 2002 - 1,500,000 shares were sold (4.99% of capital and votes),
  • 4 November 2002 - 700,000 shares were sold (2.33% of capital and votes),
  • 13 December 2002 - 902,541 shares were sold (3.01% of capital and votes).

After these transactions the Bank does not hold any shares in NFI im. E.
Kwiatkowskiego S.A.

In 2002 the Bank and its subsidiaries did not carry out any related party
transactions other than those listed in Items 3.2 and 3.3 other than typical and
routine transactions whose aggregate value would have exceeded the PLN
equivalent of EUR 500,000.


     1. Investment plans, including capital investments

Bank Pekao SA realises its development strategy with strengthening its leading
position in the financial sector as one of the major goals.

In 2003 the Bank plans the following investments projects:


  • Sales of shares in PolCard S.A.

As the sales of PolCard S.A. shares (29.7% share in statutory capital and 17.4%
share in votes at GSM) planned for 2002 was not effected, the transaction was
postponed to 2003.


  • Centralisation of leasing operations

As the Bank has been the sole shareholder of Leasing Fabryczny Sp. z o.o. since
mid-2002 and holds 100% shares in Pekao Leasing Sp. z o.o., the Bank's
Management Board decided to opt for carrying on leasing operations within a
single off-bank entity. This will help optimise the utilisation of
organisational resources, improve product policy, marketing expenses and
financial risk management and optimise the structure of employment. The capital
increase of PLN 250 million of Pekao Leasing is planned.


  • Closing the Bank's New York Branch

As the rate of return on the investment in the Bank's New York Branch was lower
than expected, in February 2003 the Bank's Management Board decided to liquidate
the branch. The provision for the liquidation costs was charged to the bank's P&
L account.


  • Sales of shares in Bank Pekao (Tel-Aviv) Ltd.

As the rate of return on the investment was lower than expected, the Bank's
Management Board decided to launch the sales of shares in Bank Pekao (Tel-Aviv)
Ltd. If potential investors submit binding offers, the Bank will elect to sell
the company's shares.


  • Sales of shares in Pekao Development Sp. z o.o.

Within the scope of measures designed to sort out the structure of Pekao SA, the
Bank acting as the sole shareholder resolved to sell its shares in Pekao
Development Sp. z o.o. The transaction is tentatively scheduled to be finalised
in the first quarter of 2003.


  • Planned launch of business

It is planned that in 2003 a distribution company focused on increasing the
Bank's share in the VIPs market through the Pekao SA group and its strategic
partners will launch its business. It will offer VIPs investment,
investment-and-insurance as well as typical banking products.

  • Change in the Bank's investment policy towards Pekao Fundusz Kapitalowy
    Sp. z o.o.

Under the investment policy adopted by Bank Pekao SA, all assets of PFK were to
be disposed of by the end of 2002 and the Fund's liquidation was to begin. Due
to unfavourable climate on the Polish investment market (demonstrating weaker
interest in investments), the disinvestment process was not completed and the
Fund will continue its activities. At present, the Bank is considering an option
whereby the company's activities would be extended to include participation in
the restructuring of past due accounts receivable Bank Pekao SA's loan
portfolio.

Any investment decision is subject to a detailed analysis from the point of view
of economic account.


 1. Core products, services and activities of the Group

Core products, services and activities of the Bank are described in Report on
the activities of Bank Pekao SA.

Principal areas of activities of the Group's units

Brokerage

Centralny Dom Maklerski Pekao S.A. - CDM

CDM is wholly-owned by Bank Pekao SA. As at 31 December 2002, its share capital
totalled PLN 213.3 million.

In 2002, CDM provided comprehensive services as a brokerage house, except for
asset management services (in 2001, the CDM Asset Management Department was sold
to PPIM). CDM operates the largest in Poland network of 121 customer service
points, 97 of which provide a full range of brokerage services.

As at 31 December 2002, CDM managed over 180,000 investment accounts
representing about 18% of all investment accounts maintained by brokerage houses
in Poland. CDM also renders its investment account services electronically
(www.cdm.net.pl), allowing its customers to purchase and sell all instruments
traded on the WSE and CeTO (OTC) via the Internet. As at the end of December
2002, CDM maintained 6,700 Internet accounts.

CDM offers its customer a wide array of services available both to capital
market investors as well as entities searching for sources of financing on the
capital market. As one of the first brokerage houses in Poland, it provides
services to investors wishing to trade in foreign securities.

CDM's services on the primary market

In 2002, CDM strengthened its leading position on the public offering market by
arranging three out of the four largest offerings and one of the two successful
IPOs. In the Rzeczpospolita ranking of brokerage houses on the market of public
equity offerings, CDM came first.

Projects executed by CDM in 2002:


  • Organisation of a public offering for W. Kruk S.A. CDM prepared an Issue
    Prospectus and an incentive scheme based on bonds with pre-emptive rights to
    shares. The offering took place in July 2002 and generated approximately PLN
     20 million for the issuer. As part of the public offering, the existing
    shareholders sold a portion of their shares,

  • Provision of services as Offeror for the new issue (restructuring) of
    Netia Holding S.A. shares.

Moreover, CDM took part in three rights issues.

In 2002, CDM concluded one best-efforts underwriting agreement with W. Kruk S.A.
worth PLN 21 million.

In 2002, a new public offering market was established for investment
certificates issued by closed-end and mixed investment funds and for public
issues of bank bonds. In this segment of the market, CDM's activities included:


  • Q1 2002 - organised an offering of investment certificates for Pioneer
    Arbitrage Investment Fund (Closed-End). The entire issue (PLN 60 million)
    was sold (oversubscription) through the network of the CDM customer service
    points,

  • June 2002 - commencement of the subscription for certificates of the
    Pioneer Bond 2 Investment Fund (Mixed), which ended on July 29, 2002 (ahead
    of schedule). Investors acquired the entirety of the issue in the amount of
    PLN 500 million. These certificates could be purchased not only through the
    CDM network, but also through a special network of customer service points
    established temporarily for the time of the offering at 509 Bank Pekao SA
    outlets;

  • CDM served as Offeror for the Bank Pekao SA public bond issue programme
    worth PLN 2 billion. In 2002, two bond series issues were closed totalling
    approximately PLN 900 million, representing over 51% of the public bond
    issue programmes organised in Poland last year. The Bank Pekao SA bonds were
    sold through the CDM network as well as a network of 640 temporary customer
    service points established at Bank Pekao SA branches.

Since 1 June 1992, CDM has provided services as the Issue Agent offering retail
treasury bonds under an agreement concluded with the Ministry of Finance (the
Ministry has terminated the agreement with effect as of July 30, 2003; Section
3.2 of the Report contains details). CDM has organised and oversees a Brokerage
Consortium which designates its units to sell and to provide further services
related to the bonds. At present, treasury bonds are sold by 19 brokerage houses
with a total network of 503 customer service points throughout the country. In
addition, treasury bonds may be purchased from CDM via the Internet under the
following Web address: www.obligacje.cdmpekao.pl.

Throughout 2002, 59 million bonds were sold in total. CDM customer service
points had a 43.5% share in the retail bond sales executed through the Brokerage
Consortium.

In 2002, CDM customer service points distributed participating units of 47
investment funds managed by 8 investment fund companies; in this, CDM cooperated
3 transfer agents. The sale of participating units is an on-going process, with
all CDM customer service points participating. The aggregate value of payments
made through the agency of CDM for participating units in 2002 totalled PLN
747.5 million.

Since April 2002, under an agreement with PPIM, CDM customer service points has
been selling Standard Share Portfolios (mini-portfolios), and as of August 2002,
they distribute participating units in a new Pioneer investment fund - Pioneer
Dollar Plus Bond Investment Fund (Open-End), offered by Pioneer Pekao TFI SA.

CDM is also engaged in canvassing on behalf of the Pekao Open Pension Fund which
is managed by Pekao Pioneer PTE S.A.

CDM's services on the secondary market

Despite the very strong competition on the brokerage services market in 2002,
CDM remained at its helm in terms of share in the trading volume on the WSE,
with a significant lead ahead of the competition. Its share in the trading
volume on the equity market stood at 13.7%, on the bond market - 40.2% and on
the futures market - 12.9%.

On the CeTO (OTC) market, CDM accounted for 27.2% of the trading volume by value
and 26.6% of the trading volume in terms of the number of concluded
transactions.

As at 31 December 2002, CDM served as market maker for all series of treasury
bonds, 21 companies, 11 types of futures contracts. It also provided services as
specialist for 14 listed companies and market maker for three companies quoted
on the CeTO (OTC).



Awards and Prizes

Once again, the Warsaw Stock Exchange acknowledged CDM to be the best brokerage
house and awarded it the three top prizes in the following categories:


  • Share in equity trading in 2002,

  • Share in futures trading in 2002,

  • Share in treasury bonds trading in 2002.

Banking activity

Bank Pekao SA is the parent company of two banks operating abroad: Bank Pekao
Tel-Aviv (Pekao Tel-Aviv) Ltd. and Bank Pekao (Ukraine) Ltd. in Luck. The
activities of both the dependant banks are of minor significance in comparison
with the activities of Bank Pekao SA.

Bank Pekao Tel-Aviv Ltd. (Pekao Tel-Aviv) - Bank Pekao Tel-Aviv

Bank Pekao SA holds 99.99% of the statutory capital of Bank Pekao Tel-Aviv. As
at 31 December 2002, Bank Pekao Tel-Aviv's equity stood at PLN 55.4 million.

In 1993, Bank Pekao Tel-Aviv was established after transformation of the former
branch of Bank Pekao SA operating since 1933 into a standalone bank incorporated
under Israeli law.

Bank Pekao Tel-Aviv holds a full banking licence.

Bank Pekao (Ukraine) Ltd. in Luck - Bank Pekao (Ukraine)

Bank Pekao SA directly holds 35% of the statutory capital of Bank Pekao
(Ukraine). Directly and indirectly, Bank Pekao SA is a 100% owner of Bank Pekao
(Ukraine). The other shareholders of this Ukrainian bank are Pekao Faktoring Sp.
z o.o. and Drukbank Sp. z o.o., both wholly-owned subsidiaries of Bank Pekao SA.
These two companies hold 35% and 30%, respectively, of the capital of Bank Pekao
(Ukraine). All of the bank's shares carry the same voting and dividend rights.
As at 31 December 2002, the equity of Bank Pekao (Ukraine) stood at PLN 26.9
million.

Bank Pekao (Ukraine) is a universal commercial bank specialising in
foreign-trade settlements and support of the Polish-Ukrainian and
Italian-Ukrainian economic exchange. The bank offers a broad range of banking
services, supported by the professional experience, high quality of customer
service and continuous customisation of the offering. At customer's request, to
eliminate foreign exchange risk and cost of purchasing Ukrainian currency, Bank
Pekao (Ukraine) settles foreign-trade transactions between Poland and Ukraine
also in the Polish currency. The bank cooperates with the most credible of the
Ukrainian banking institutions. Through its cooperation with over 165 banks all
worldwide, Bank Pekao (Ukraine) is able to settle interbank transactions
effectively.

Bank Pekao (Ukraine) conducts its activities through two branches located in
Kiev and Luck.

Asset management

Pekao Pioneer Powszechne Towarzystwo Emerytalne S.A. - Pekao Pioneer PTE

Bank Pekao SA holds 65% of the company's statutory capital and the same
percentage of the total vote at the General Shareholders Meeting. The value of
Pekao Pioneer PTE's equity as at 31 December 2002 amounted to PLN 12.1 million.

Following a disposal of 35% of the company's shares by Bank Pekao SA in December
2001, the investment fund company changed its name from Pekao Powszechne
Towarzystwo Emerytalne S.A. to Pekao Pioneer Powszechne Towarzystwo Emerytalne
S.A. The change was registered on 16 April 2002.

In 2002, the investment fund company focused on the organic growth of Pekao OFE
(open-end pension fund) and on building up on the results of the 2001 takeover
of management of three open-end pension funds: OFE Epoka, Pioneer OFE, and OFE
Rodzina. The efficiency of the canvassing activities, conducted through the Bank
Pekao SA network, was improved and the process of customer migration from Pekao
OFE to other pension funds was curtailed. All this was achieved through such
measures as intensification of training activities for the sales force,
improvement of quality of the infoline services for fund members (by
transferring the infoline service to Pekao Pioneer PTE) and a number of mailing
campaigns addressed to various groups pension fund members.

As a result of all those initiatives, Pekao Pioneer PTE reported a better
performance than in 2001:


  • With over 7,000 agreements with new fund members selecting pension fund
    for the first time the company gained a 2% share in this market segment.
    Compared with 2001, the company acquired approximately 5,000 more new
    members choosing their pension fund for the first time,

  • With a negative (almost 7,000 people) balance of transfers to and from
    Pekao OFE, the company ranked tenth amongst all of the funds, but given the
    fact that the quality of accounts of newly acquired members was
    significantly better then the accounts of lost members, the balance of
    assets transferred to and from OFE was only slightly negative; compared with
    2001, the balance of transfers was better by over 3,500 accounts.

As a result, at the end of 2002, Pekao Pioneer PTE achieved the following market
position (data of the Superintendency of Pension Funds):


  • The number of all members of Pekao OFE was over 292,000, which accounted
    for 2.7% of the entire market,

  • The number of members, whose accounts were credited with at least one
    contribution payment, increased by about 17,000, to almost 194,000,
    accounting for 2.1% of the market,

  • The fund's net asset value (NAV) increased by about PLN 188 million, to
    PLN 517.0 million, accounting for 1.64% of the market.

Pioneer Pekao Investment Management S.A. - PPIM

Bank Pekao SA holds 49.0% of the company's statutory capital and the same
percentage of the total vote at the company's General Shareholders Meeting. The
other PPIM's shareholder is Pioneer Investments. As at the end of 2002, PPIM's
shareholders' equity was PLN 49.3 million.

Under an asset management agreement PPIM manages the assets of Pioneer Pekao TFI
investments funds. The company also provides securities portfolio management
services to individual customers.

As at 31 December 2002, the value of assets of the 15 investment funds managed
by PPIM was PLN 5,439.3 million, meaning that in terms of NAV Pioneer Pekao TFI
accounted for 23.9% of the market. In 2002, the value of the assets under
management by Pioneer Pekao TFI increased by PLN 2,589.0 million.

Net assets value increase of the investment funds of Pioneer Pekao TFI S.A. is
shown in the table:



PLN million
                                                                31 December 2002       31 December          Change
                                                                                              2001
Pioneer Bond Investment Fund                                             3,045.4           1,571.7         1,473.7
Pioneer Balanced Investment Fund                                           570.9             602.4          (31.5)
Pioneer Bond 2 Investment Fund                                             518.8                 -           518.8
Pioneer Debt Securities Investment Fund                                    322.7              90.3           232.4
Pioneer Dollar Plus Bond Investment Fund                                   256.8                 -           256.8
Pioneer Money Market Investment Fund                                       198.5             188.1            10.4
Pioneer Aggressive Investment Fund                                         190.5             230.6          (40.1)
Pioneer Arbitrage Investment Fund                                           63.4                 -            63.4
Pioneer Balanced Plus Investment Fund                                       61.2              58.6             2.6
Pioneer US High Yield Bond Investment Fund                                  44.1                 -            44.1
Pioneer Service Sector Investment Fund                                      22.8              26.9           (4.1)
Pioneer Equity Investment Fund                                              20.9              20.9               0
Pioneer American Equity Investment Fund                                     17.4              47.2          (29.8)
Pioneer Index Investment Fund                                                8.0               8.0               0
Other (III Pilar)                                                           97.9               5.6            92.3
Net assets value of Pioneer Pekao TFI                                    5,439.3           2,850.3         2,589.0
Net assets value of TFI (market)                                        22,772.2          11,862.2        10,910.0
Market share of Pioneer Pekao TFI                                          23.9%             24.0%       -0.1 p.p.

In 2002, Pioneer Pekao TFI S.A. added its offering two new close-end funds
(Pioneer Arbitrage Investment Fund and Pioneer Bond 2 Investment Fund) and two
new open-end funds (Pioneer US High Yield Bond Investment Fund and Pioneer
Dollar Plus Bond Investment Fund).

Pekao Fundusz Kapitalowy Sp. z o.o. - PFK

Bank Pekao SA holds 100% of PFK shares. As at 31 December 2002, the company's
shareholders' equity was PLN 53.7 million.

PFK's objective is to maximise profits in the sell-off of the Fund's investment
portfolio assets acquired in 1995-2002, and to increase or maintain the market
value of the assets through efficient management of the restructuring processes.

In 2002, the company's business, based on the management model developed by
Trinity Management, focused on:


  • management of restructuring assets,

  • asset portfolio management with a view to achieving a satisfactory level
    of growth of the companies' value and an optimum level of return on the
    assets intended for disposal in 2002,

  • disinvestments from the portfolio companies.

In 2002, PFK increased its engagement or purchased interests in seven companies:
WS PZL Mielec Sp. z o.o., WAW PZL Mielec Sp. z o.o., Zwoltex SA, ZWUiT Polonit
Sp. z o.o., Pollena Ewa S.A., Tomtex SA and Jarocinskie Fabryki Mebli SA. Two of
them (Pollena Ewa S.A. and WAW PZL Mielec Sp. z o.o.) were short-term
investments.

Trinity Management Sp. z o.o. - Trinity

Bank Pekao SA holds 50% of the company's statutory capital and the same
percentage of the total vote at the company's General Shareholders Meeting. The
other shareholder is Company Assistance Ltd. As at 31 December 2002, Trinity's
shareholders' equity was PLN 18.4 million.

In 2002, Trinity Management provided asset management services for Jupiter NFI
S.A. and Pekao Fundusz Kapitalowy Sp. z o.o.

Jupiter Narodowy Fundusz Inwestycyjny S.A. - Jupiter NFI S.A.

Bank Pekao SA holds 32.4% of the fund's statutory capital and the same
percentage of the total vote at the General Shareholders Meeting. As at 31
December 2002, the fund's shareholders' equity amounted to PLN 288.2 million.

Jupiter NFI S.A. conducts its business on the basis of the Act on National
Investment Funds and their Privatisation of 30 Apri 1993, as amended. The fund's
assets comprise equity interests as well as short-term debt securities.

With a view to achieving its main objective, which is steady growth of the value
of the fund's assets, in 2002 the fund engaged in the following activities:


  • Consistent reconstruction of the investment portfolio through disposal of
    both lead and minority portfolio shareholdings;

  • Preparation of the companies for introduction of Polish and foreign
    investors;

  • Gradual implementation of the process of directing cash flows to
    shareholders;

  • Continuation of the open shareholding policy and transparency (ample
    information).

In 2002, the fund purchased over 3.2 million of its own shares, and together
with the shares purchased in 2001 (3.5 million) held 11.2% of its own shares.
The fund acquires its own shares for resale.

Central Poland Funds LLC - CPF

Bank Pekao SA holds 53.2% of the company's statutory capital and the same
percentage of the total vote at the General Shareholders Meeting. The other
shareholders are the European Bank for Reconstruction and Development and
International Finance Corporation. As at 31 December 2002, CPF's equity amounted
to PLN 21.5 million.

The company's business is portfolio management, with the main objectives being a
satisfactory level of growth of the values of managed companies, and optimum
returns on assets intended for sale.

Leasing activity

Pekao Leasing Sp. z o.o. (Pekao Leasing)

Bank Pekao SA holds 100% of the company's statutory capital. As at 31 December
2002, Pekao Leasing's equity was negative at PLN -98.1 million, which was
brought about by the company's 2002 net loss of PLN -172.4 million. In August
2002, Bank Pekao SA made a refundable additional contribution of PLN 75 million
to Pekao Leasing's equity.

Pekao Leasing offers a full portfolio of leasing products, including leases of
real property, as well as tangible and intangible fixed assets. It operates
countrywide, through a network of 23 branches (including the Head Office in
Warsaw), in close cooperation with branches of Bank Pekao SA.

Leasing Fabryczny Sp. z o.o. - Leasing Fabryczny

Since July 2002, Bank Pekao SA has held 100% of the company's statutory capital.
As at 31 December 2002, Leasing Fabryczny's shareholders' equity was PLN 21.8
million.

On 23 July 2002, the company concluded agreements with Daewoo Motor Co. Ltd. and
Korea Merchant Banking Corporation, whereby it purchased from the Korean
shareholders the company shares representing 50% of the capital, with a view to
retiring the shares. Following the transaction, since 23 July 2002, Bank Pekao
SA has been the only shareholder in the company. Bank Pekao SA holds 6,569
company shares with a par value of PLN 1,100 per share.

The company's business includes lease of tangible fixed assets, primarily
vehicles, plant and equipment. It operates countrywide through a network of 21
branches located in major cities and through a group of representatives (under
canvassing agreements). In 2002, the company expanded the sales of leasing
services through Bank Pekao SA's branch network.

Small and medium-sized enterprises are the largest group of the company's
customers.

The net value of new lease agreements concluded by Leasing Fabryczny in 2002
amounted to PLN 29.0 million, that is 22.7% less than in 2001. 44.7% of the
lease agreements covered vehicles, 19.9% - plant and equipment and 35.4% - other
assets.

Grupa Inwestycyjna Nywig S.A. (Nywig)

Bank Pekao SA's share in Nywig's statutory capital is 24.6%. As at 31 December
2002, Nywig's shareholders' equity was PLN 9.3 million.

Nywig is a highly specialised arranger of big-ticket lease transactions of a
non-typical and individualised nature, primarily relating to real property,
plant and equipment.

The other area of Nywig's business activity is economic and financial advisory.

Other financial services

Pekao Faktoring Sp. z o.o. - Pekao Faktoring

Bank Pekao SA holds 100% of shares in Pekao Faktoring's capital. As at 31
December 2002, the company's shareholders' equity was PLN 40.8 million.

In addition to factoring services (recourse and non-recourse factoring), the
company offers other services, including collection of data on debtors' standing
and on-going monitoring of payments. The company also provides advisory services
and consulting on the choice of financing methods and origination of
factoring-related loans.

In June 2002, the company won, for the second time in a row, in the ranking of
Dziennik Wschodni, and was awarded the title of 'The Best Company of the Lublin
Province'.

Pekao Financial Services Sp. z o.o. - PFS

Bank Pekao SA holds 100% of shares in the company's capital. As at 31 December
2002, the company's shareholders' equity was PLN 10.7 million (including a PLN
7.0 million refundable contribution by the Bank).

In 2002, the company continued its strategy of strengthening the position of a
leader on the Polish market for transfer agent services. The company also
developed co-operation with Pioneer Pekao TFI S.A., launched new products and
implemented a new IT system supporting investment funds. The number of registers
kept for Pioneer Pekao TFI rose to about 247,000 at the end of 2002, up from
about 227,000 a year before. Additionally, the Company kept about 300,000
registers of Telekomunikacja Polska S.A. Employee Pension Fund (managed by
Pioneer Pekao TFI).

After taking over in 2001 the provision of services for new open-end pension
funds (Pioneer, Rodzina, ERGO Hestia), the company continued the process of
expanding its customer base and range of services offered on the pension fund
market. At the end of 2002, the Company held an over 40% share in the market of
outsourcing services for pension funds.

In 2002, the company won the tender for the provision of transfer agent services
for Fundusz Wlasnooeci Pracowniczej PKP (PKP employee insurance scheme) of the
Specialist Investment Fund (Open-End). The negotiations resulted in the
conclusion of an agreement with the fund manager, i.e. TFI Banku Handlowego S.A.
Since September 2002, the company has provided services to 384,000 participants
to the scheme.

The number of individual accounts run for the members of pension funds rose to
1,360,000 as at the end of 2002, up from 870,000 accounts at the end of 2001.

Other consolidated companies

Other subordinated entities which are consolidated in the financial statements
of the 2002:

Pekao Informatyka Sp. z o.o. - Pekao Informatyka

Pekao Informatyka is wholly-owned by Bank Pekao SA. As at 31 December 2002, the
company's shareholders' equity stood at PLN 0.3 million.

Pursuant to the decision of the Bank Pekao SA's Management Board, on 31 July
2002 the company discontinued its activities.

Pekao Development Sp. z o.o. - Pekao Development

Pekao Development is wholly-owned by Bank Pekao SA. As at 31 December 2002, the
company's shareholders' equity stood at PLN 40.9 million.

In 2002, the company's activities consisted in:


  • Sale of dwellings - Olszyny housing estate in Warsaw, Janow housing estate
    in Lodz, Mrowka housing estate in Nadarzyn and the flat complex at ul. Monte
    Casino in Lodz;

  • Lease of office space - Centrum Biznesu office building in Poznan and
    Ancora office building in Gdynia.

In addition, in 2002 the company was a replacement investor and general
contractor during the process of adapting office space for Bank Pekao SA's
outlets.

In January 2002, Pekao Development sold 2 office buildings to Bank Pekao SA.

On 20 December 2002, the company received the ISO 9001:2000 Quality Management
System certificate.

Access Sp. z o.o. - Access

Bank Pekao SA holds 55.26% of the statutory capital of Access and the same
percentage of the total vote at the General Shareholders Meeting. As at the end
of 2002, the company's shareholders' equity stood at PLN 2.5 million.

The company's core business consists in the provision of professional advisory
on mergers and acquisitions.

Hotel Jan III Sobieski Sp. z o.o.

Bank Pekao SA holds 37.5% of the statutory capital of Hotel Jan III Sobieski Sp.
z o.o. and the same percentage of the total vote at the General Shareholders
Meeting. As at the end of 2002, the company's shareholders' equity was negative
and stood at PLN -133.7 million.

The company's business activities include the management of Jan III Sobieski
Hotel of Warsaw.

Krajowa Izba Rozliczeniowa S.A. (KIR)

Bank Pekao SA holds 23.0% of the statutory capital of KIR and the same
percentage of the total vote at the General Shareholders Meeting. As at the end
of 2002, the company's shareholders' equity stood at PLN 76.9 million.

KIR develops and standardises the interbank clearing system, which includes the
exchange of payment orders, their registration and computation mutual
liabilities as well as reporting to the National Bank of Poland on the results
of clearing activities of the banks operating in Poland.




                                                        5. Management of the Bank

Members of the Management Board of Bank Pekao SA
             31.12.2002                                                31.12.2001
1.    Maria Paslo-Wioeniewska                            1.      Maria Paslo-Wioeniewska
      President, CEO                                             President, CEO

2.    Paolo Fiorentino                                   2.      Paolo Fiorentino
      Deputy President, COO                                      Deputy President, COO

3.    Igor Chalupec                                      3.      Igor Chalupec
      Deputy President                                           Deputy President

4.    Janusz Dedo                                        4.      Janusz Dedo
      Deputy President                                           Deputy President

5.    Sabina Olton                                       5.      Sabina Olton
      Deputy President,                                          Deputy President,
      Chief Accountant                                           Chief Accountant

6.    Przemyslaw Figarski                                6.      Przemyslaw Figarski
      Member of the Management Board                             Member of the Management Board

7.    Cezary Smorszczewski                               7.      Cezary Smorszczewski

      Member of the Management Board                             Member of the Management Board


Members of the Supervisory Board of Bank Pekao SA

              31.12.2002                                                31.12.2001
1.     Alessandro Profumo                                1.      Alessandro Profumo
       Chairman                                                  Chairman

2.     Jerzy Woznicki                                    2.      Jerzy Woznicki
       Deputy Chairman                                           Deputy Chairman

3.     Roberto Nicastro                                  3.      Roberto Nicastro
       Secretary                                                 Secretary

4.     Pawel Dangel                                      4.      Pawel Dangel
5.     Fausto Galmarini                                  5.      Fausto Galmarini
6.     Kurt Geiger                                       6.      Kurt Geiger
7.     Enrico Pavoni                                     7.      Enrico Pavoni
8.     Leszek Pawlowicz                                  8.      Leszek Pawlowicz
9.     Jerzy Starak                                      9.      Jerzy Starak




                          The Bank's shareholder structure

As of 31 December 2002, the shareholders holding (directly or indirectly via
subsidiaries) at least 5% of total votes at the Bank's General Shareholders
Meeting (GSM) were as follows:

         Shareholder          Number of votes and shares  The share in the equity and in the total number of votes
                                        at GSM                                     at GSM
                                    31 December 2002        31 December 2002               31 December 2001

UniCredito Italiano S.p.A.            88,121,725                53.17%                       53.17%
EBOiR                                 10,985,803                 6.63%                       6.63%
Bank of New York*                          -                       -                         5.85%

Note: According to the Ss11 of the Statute of Bank Pekao S.A. each share gives
the right to one vote.

In 2002 due to the redemption of depositary notes, Bank of New York became a
shareholder holding less than 5% of share equity of Bank Pekao SA.


                                Shares owned by members of the Bank's management

The total number and face value of all shares of the Bank, including shares and
stakes in the entities of the Bank's Group, owned by managing and supervising
persons did not change in 2002 compared to the end of 2001.

As of 31 December 2002 members of the Management Board owned 2,839 Bank's
shares.

Members of the Supervisory Board did not own any of the Bank's shares.

The shares owned by members of the Bank's Management Board as of 31 December
2002:

Name                             Number of shares                Type of shares            Nominal value (in PLN)

Sabina Olton                                1,680        ordinary bearer shares                             1,680
Igor Chalupec                                 928        ordinary bearer shares                               928
Cezary Smorszczewski                          231        ordinary bearer shares                               231
Total                                       2,839                                                           2,839

Members of the Management Board are entitled to participate in the management
options programme.


                                                    Management options programme

In accordance with the General Shareholders Meeting resolution of 29 April 2000,
the Bank introduced a management options programme, which aims at building a
strong relationship between the Bank and its management and improving the
management's motivation, thus supporting the realisation of the Bank's business
objectives.

This programme allows the Bank's management to purchase the Bank's shares. The
shares offered for sale cannot exceed the limit of 1,670 thousand shares. The
realisation of the options will take place only in the years 2003, 2004 and
2005. The price of one option is PLN 0.01, and the issue price of one share at
which eligible persons can purchase it in 2003 is PLN 55. The price of one share
for the 2004 and 2005 issues is determined as the average closing price of one
share of the Bank at the Warsaw Stock Exchange during March and April in the
years 2001 and 2002 respectively. The issue price for the 2004 issue is PLN
66.00 and for the 2005 issue is PLN 106.50.

In the period to 31 December 2002 members of the Management Board had acquired
the options to purchase 415,664 shares. Moreover, 65 persons from the Bank's
management (excluding members of the Management Board) acquired options to
purchase 1,112,768 shares. In the year 2002 the number of options held by the
Management Board increased by 167,786 and held by management of the Bank
(excluding the Management Board) increased by 509,797 shares. The increase is
related to the realisation of the management options programme in relation to
the shares that are to be issued in the year 2005.



              Assessment of the financial credibility of the Bank

In the year 2002 the ratings of Bank Pekao S.A. did not change significantly.
The improvement of these ratings, except for the assessment financial condition
of the Bank and the Group UniCredito Italiano, is restrained by the level of
assessment of the financial credibility of the country's financial situation, so
called 'country ceiling'.





As of the 31 December 2002 Bank Pekao SA had the following ratings of financial
credibility:

FITCH Ratings Ltd.
Long-term rating                       BBB+            indication of the likelihood of a bank defaulting on its long
                                                       term debt. Investment grade ratings: AAA, AA, A, BBB (with a
                                                       possibility of adding '+' or '-'); speculative categories: BB,
                                                       B, CCC, CC, C, DDD, DD, D. The highest grade - 'AAA', the
                                                       lowest grade - 'D'
Short-term rating                      F2              indication of the likelihood of a bank defaulting on its short
                                                       term debt. The ratings are given in the following range from
                                                       the highest to the lowest: F1, F2, F3, B, C, D depending on the
                                                       main rating category
Individual rating                      C/D             individual ratings are given in the following range from the
                                                       highest to the lowest: A, B, C, D, E.
Support rating                         2               support ratings are given in the following range from the
                                                       highest to the lowest 1, 2, 3, 4, 5 with a possibility of
                                                       adding a letter T
The prospect of retaining the rating   Stable
Standard and Poor's
Long-term rating                       BBB             Evaluation of long-term financial strength in the range: AAA,
                                                       AA, A, BBB, BB, B, CCC, CC (the highest rating AAA, the lowest
                                                       rating CC), with a possibility of adding '+' or '-' for grades
                                                       from AA to CCC showing the differences between obligations
                                                       falling in the same generic rating category. Applies to two
                                                       types of obligations: loans and certificates of deposits.
Short-term rating                      A-2             Evaluation of long-term financial strength in the range: A-1,
                                                       A-2, A-3, B, C (the highest grade A-1, the lowest grade C).
                                                       Applies to two types of obligations: loans and certificates of
                                                       deposits.
The prospect of retaining the rating   Positive
Moody's Investors Service Ltd.
Long-term rating of deposits           Baa1            Rating in the category of debt instruments and deposits in
                                                       general given in the following range from the highest to the
                                                       lowest: Aaa, Aa, A, Baa, Ba, Caa, Ca, C with the possibility of
                                                       adding numeric modifiers 1, 2, and 3 (the highest -1, the
                                                       lowest -3) in each generic rating classification from Aa
                                                       through Caa.; investment grade from Baa3.
Short-term rating of deposits          Prime-2         Evaluation of the Bank's capacity for timely payment of
                                                       short-term deposit obligations in the range from the highest to
                                                       the lowest: Prime-1, Prime-2, Prime-3, Not Prime; investment
                                                       grade from Prime-3.
Financial strenght                     C               Evaluation of a bank's intrinsic safety and soundness. The
                                                       ratings are given in the following range from the highest to
                                                       the lowest: A, B, C, D, E, with a possibility of adding '+' or
                                                       '-'modifiers to distinguish those banks that fall in
                                                       intermediate categories.
The prospect of retaining the rating   Stable          The prospect of retaining the rating is relevant mostly to main
                                                       long-term and short-term ratings. There are three categories of
                                                       the prospects of ratings:

                                                       Negative - showing the existence of indications threatening the
                                                       retaining of the level of given ratings,

                                                       Stable - showing the lack of such indications,

                                                       Positive - indicating the possibility of increasing the given
                                                       ratings in the future.

On 14 January 2003 the rating agency Moody's Investors Service Ltd. increased
the ratings of deposits of Bank Pekao SA:


  • long-term from Baa1 to A2,

  • short-term from P-2 to P-1,

maintaining the prospect of retaining the rating as stable with the financial
strength rating unchanged.

Price of Bank share

During the year 2002 the Bank's share price rose from PLN 79.90 (as of 31
December 2001) to PLN 94.50 (as of 31 December 2002), that is by 18.3%. During
the same time the WIG index rose by 3.19% and the WIG Banks index rose by
17.76%.

The price of Bank's share was fluctuating in the range from PLN 72.40 as of 8
August 2002 to 115.00 as of 3 June 2002. The price was influenced by the trends
on the stock exchange, but also a transparent presentation of financial results
of the company for investors.

Investor relations

Bank adopts a policy of openness and transparency towards the investors and the
market. The basis for this policy is the assumption that transparent companies
are seen by investors as less risky, the market is able to estimate more
precisely the position and prospects of such company, and thus better value its
shares.

A steady practise of the Bank, continued since its debut on the stock exchange
in 1998, are quarterly meetings with investors and market analysts, at which the
Management Board presents the results of the Bank and informs about new
enterprises and activities.

In the previous year, the Capital Market Day was organized for the first time, a
whole-day meeting of the management of the Bank with analysts and financial
investors, aiming at fostering the cooperation. It was first presentation of
this kind of any company organised in Poland.

In the meeting analysts and investors from Warsaw and London took part,
representing all major investment banks publishing analyses and recommendations
related to the Bank and biggest institutional investors - pension funds and
investment funds.

The meeting created an opportunity for the participants to get to know the broad
spectrum of the Bank's activities in detail. Subjects of presentations included:
macroeconomic conditions, Bank's strategy, changes in organizational structure
connected to new segmentation of the market., lending policy and portfolio
structure, financial results of the Bank, market strategy in individual business
sectors, development of IT technologies. Capital Market Day was included into
the cyclic calendar of meetings of Bank representatives with investors.

Awards and Prizes

Customers and competitors highly evaluate the activities of the Bank. It is
proven by the following prizes and awards that the Bank received in 2002:


  • 1st award for the best financial statements of public company for the year
    2001 in the category 'banks and financial institutions', Special Award of
    Stowarzyszenie Inwestorow Indywidualnych and Warsaw Stock Exchange.

  • An award 'Bank Friendly for Entrepreneurs' in the category of small and
    medium-sized companies granted by the Polsko-Amerykanska Fundacja Doradztwa
    dla Malych Przedsiebiorstw i Warszawski Instytut Bankowosci

  • Award of Investor Relation Magazine, professional magazine about investor
    relations in category:

  • for the best company in the region of Central and Eastern Europe assessed
    by Corporate Governance;

  • for the best company in Poland assessed by investor relations;

  • for the best company in the region of Central en Eastern Europe assessed
    by the quality of meetings with investors and analysts.

  • 'The Banker Award 2002'. The Banker, one of the most prestigious financial
    magazines in the world, awarded Bank Pekao S.A. as the best bank in Poland.

  • 'Award for Excellence 2002'. Bank Pekao SA was awarded in the third
    consecutive time as the best bank in Poland by the prestigious 'Euromoney'
    magazine.

  • Two Awards from Europay International: Golden Rock 2001 for the
    significant role in the development of new products (for the card Pekao/
    Shell) and Silver Rock 2001 for achievements in issuance of Maestro card.

  • Award 'Zlotego Byka i Niedzwiedzia' (Golden Bull and Bear) for the best
    managed company in 2001 from the editorial of the stock exchange magazine '
    Parkiet'.

  • Award 'Students' Bank of the Year 2002'. Bank Pekao SA received the main
    award for the savings account Eurokonto Akademickie in the category 'where
    the student saves'. The survey was organised by the publisher of students
    magazine 'Dlaczego'.




                           Financial results of the Group

                                                         Structure of net profit

The financial result of the Bank Pekao SA for 2002 was the most important driver
of the consolidated result of the associated parties. The net profit of the Bank
was higher by PLN 32.1 million than the consolidated net profit. The difference
between the unconsolidated and consolidated profit levels was influenced by the
consolidation adjustments, including primarily unification of valuation for the
shares in the Bank Pekao Tel-Aviv Ltd. (PLN -20.0 million) in both
unconsolidated as well consolidated statements and the sale of shares in Pekao
Trading Corporation (PLN -12.7 million). The net results of the subsidiaries as
well as the adjustments related with the depreciation of goodwill and negative
goodwill the exclusion of the result achieved in the transactions between the
associated parties had no significant impact upon the change of result at the
consolidated level, since they were already included in the unconsolidated
result of the Bank (due to application of the equity method valuation).



The structure of the Group Profit and Loss Account in 2002 is presented below.

                                                                                                            PLN million


                                                                      2002            2001     Change           2001  
                                                                               (comparable)        2-3    (published) 
                                1                                         2               3          4              5 
  Net profit of the Bank Pekao SA                                     801.7         1 262.2    (460.5)        1,261.0 
  Net profit (loss) of entities consolidated under full method      (161.8)          (51.5)    (110.3)         (57.2) 
  Centralny Dom Maklerski Pekao S.A.*                                   8.5            25.7     (17.2)           25.7 
  Pekao Faktoring Sp. z o.o.                                            3.8             2.1        1.7            2.1 
  Leasing Fabryczny Sp. z o.o.**                                        2.7               -        2.7              - 
  Bank Pekao Tel-Aviv Ltd. (Pekao Tel-Aviv)                             1.0             2.6      (1.6)            2.6 
  Bank Pekao (Ukraine) Ltd. in Luck                                     0.3           (0.4)        0.7          (0.4) 
  Drukbank Sp. z o.o.                                                 (0.1)             0.2      (0.3)            0.2 
  Pekao Pioneer PTE S.A.                                              (3.6)          (90.2)       86.6         (90.2) 
  Pekao Fundusz Kapitalowy Sp. z o.o.*                                (2.0)            13.4     (15.4)            7.7 
  Pekao Leasing Sp. z o.o.                                          (172.4)           (4.9)    (167.5)          (4.9) 
  Net profit (loss) of entities included under equity method ***     (19,2)             5,6     (24,8)            6,3 
  Pioneer Pekao Investment Management S.A.                             10.0             0.5        9.5              - 
  Krajowa Izba Rozliczeniowa S.A.                                       6.6             4.9        1.7              - 
  Pekao Financial Services Sp. z o.o.                                   4.8             0.3        4.5            0.3 
  Pekao Development Sp. z o.o. ****                                     3.2             4.7      (1.5)            0.7 
  Trinity Management Sp. z o.o.                                         2.6             1.4        1.2            1.4 
  Grupa Inwestycyjna Nywig S.A.                                         0.6             0.0        0.6              - 
  Access Sp. z o.o.                                                     0.1             0.7      (0.6)            0.6 
  Hotel Jan III Sobieski Sp. z o.o.                                     0.0             0.0        0.0              - 
  Pekao Informatyka Sp. z o.o.                                        (0.1)             0.6      (0.7)            0.6 
  Subsidiaries of Centralny Dom Maklerski Pekao S.A.                  (0.9)             0.0      (1.0)              - 
  Leasing Fabryczny Sp. z o.o.**                                      (1.3)             0.2      (1.5)            0.2 
  Central Poland Fund LLC                                             (2.9)             0.0      (2.9)              - 
  Subsidiaries of Pekao Fundusz Kapitalowy Sp. z o.o.                 (8.2)           (9.5)        1.3              - 
  NFI Jupiter S.A.                                                   (33.6)           (0.4)     (33.2)            0.1 
  Pekao Trading Corporation New York                                      -             1.5      (1.5)            1.5 
  Pekao Trading Company (Canada) Ltd.                                     -             0.5      (0.5)            0.5 
  B.H.I. S.A. Luxembourg                                                  -             0.2      (0.2)            0.4 
  Exclusion of results of companies valued under the equity           181.6          (42.4)      224.0              - 
  method from the net profit of the Bank Pekao SA                                                                     
  Other exclusions and adjustments *****                             (32.7)            79.9    (112.6)           42.1 
  Net profit (loss) of the subsidiary companies                       769.6         1,253.8    (484.2)        1,252.2 

* Net result for 2002 does not include the valuation of subsidiaries under
equity method - which is included in item 'Net profit (loss) of entities
included under equity method' and 'Other exclusions and adjustments',

** At the end of 2001 and in 1H 2002 the entity was consolidated by the Bank
Pekao SA under equity method,

*** According to the share of the Bank in profit / loss of subsidiaries,

**** 2002 net profit has been adjusted by the result on transactions executed
between related parties,

***** This item relates to: write-off in respect of goodwill, negative goodwill
on consolidation and remaining consolidation adjustments.



The following factors played the most important role in the change between the
2002 and 2001 consolidated net profit (on comparable basis):


  • Decrease in net profit at Bank Pekao SA,

  • Increase in the Bank's share in net losses of subordinated entities
    consolidated with the full method - from PLN -51.5 million to PLN -161.8
    million,

  • Decrease in the Bank's share in net results of subordinated entities
    consolidated with the equity method - from PLN +5.6 million to PLN -19.2
    million,

  • Negative balance of consolidation adjustments in 2002 - PLN -32.7 million
    in comparison to the 2001 positive balance of PLN +79.9 million.



Results of the subordinated entities in 2002

Pioneer Pekao Investment Management S.A. (PPIM)

The 2002 consolidated net profit of PPIM (PPIM and Pioneer Pekao TFI S.A.) stood
at PLN 20.5 million (Bank's share: PLN 10.0 million). The high profit was
achieved thanks to the higher-than-expected revenue and on-going monitoring of
the expenses incurred by PPIM. The undertaking's high revenue was an offspring
of a material increase in the investment fund assets of Pioneer Pekao TFI SA
which is managed by PPIM. In 2002, the assets of this investment company grew by
PLN 2.6 billion, to PLN 5.4 billion.

Centralny Dom Maklerski Pekao S.A. (CDM)

The 2002 net profit stood at PLN 7.6 million (including a valuation of
subordinated company with the equity method: PLN -0.9 million) falling 70.4%
short of the 2001 result. The most important factor contributing to the drop was
smaller revenue on core brokerage activities on the primary and secondary
markets (lower trading volume on the WSE in relation to 2001 - by 19% on the
equity market, by 13% on the bond market, and by 15% on the futures market),
which went hand in hand with a decrease in the undertaking's operating expenses
as well as the disclosure in 2001 of an extraordinary gain upon disposal of the
CDM Asset Management Department to PPIM (PLN 6.1 million) and a loss on the
valuation of CDM's own investment portfolio.

Krajowa Izba Rozliczeniowa S.A. (KIR)

In 2002, KIR earned a net profit of PLN 28.7 million (Bank's share: PLN 6.6
million) in relation to PLN 21.5 million in 2001 (Bank's share: PLN 4.9
million). The undertaking was improved its result thanks to a close to 10%
increase in sales revenue and a 3.1% reduction in operating expenses.

Pekao Financial Services Sp. z o.o. (PFS)

In 2002, PFS earned a net profit of PLN 4.8 million, that is PLN 4.5 million
more than a year earlier. This increase was an offspring of a 36% increase in
revenue (mainly as a result of attracting new customers and the sale of a
broader range of services) and the concurrent rise in operating expenses by only
16%.

Pekao Faktoring Sp. z o.o. (Pekao Faktoring)

Pekao Faktoring disclosed a 2002 net profit of PLN 3.8 million representing a
PLN 1.7 million increase over the 2001 figure. This good result was achieved
foremost thanks to: the continued large sales of the factoring services which
was apparent in the higher turnover and the balance of factoring accounts
receivable; curbing of the operating expenses; and the care committed to the
quality of the portfolio of factoring accounts receivable.



Pekao Development Sp. z o.o. (Pekao Development)

In 2002, Pekao Development earned a net profit of PLN 19.4 million versus the
PLN 4.7 million reported for 2001. This significant improvement was achieved
mainly thanks to the closure of sale of office buildings to Bank Pekao SA
(contribution to undertaking's results: PLN +16.2 million, eliminated upon
consolidation with the Bank's results). The Bank's share in the result recorded
by Pekao Development in 2002: PLN 3.2 million.

Trinity Management Sp. z o.o. (Trinity)

Thanks to cost rationalisation and despite lower revenue, Trinity was able to
earn a net profit of PLN 5.2 million in 2002 (Bank's share: PLN 2.6 million),
that is almost 90% more than in 2001. The undertaking was able to cut operating
expenses mainly by downsizing its staff. The drop in revenue was in part an
offspring of lower fees for managing the assets of Jupiter NFI S.A. and Pekao
Fundusz Kapitalowy Sp. z o.o.

Leasing Fabryczny Sp. z o.o. (Leasing Fabryczny)

In 2002, Leasing Fabryczny earned a net profit of PLN 0.1 million in comparison
to the PLN 0.4 million recorded in 2001. The drop in the 2002 net profit was due
to the lower sales revenue which was an offspring of lower volume of concluded
new lease agreements and the necessity of creating provisions for non-performing
accounts.

In July 2002, the Bank increased its equity interest in Leasing Fabryczny to
100%, and therefore, as at the end of 2002, this undertaking was consolidated by
Bank Pekao SA using the full method. The Bank's share in Leasing Fabryczny's
2002 net result was calculated as 50% of the H1 2002 net result (PLN -1.3
million - using the equity method) and 100% of the H2 2002 net result (PLN +2.7
million - using the full method).

Bank Pekao Tel-Aviv Ltd. (Pekao Tel-Aviv)

In 2002, Pekao Tel-Aviv earned a net profit of PLN 1.0 million in comparison to
the PLN 2.6 million recorded the preceding year. The weaker result was due to:
an almost PLN 1.0 million fall in the result on banking activities (mainly due
to a drop in net interest income) and inclusion in the 2001 other operating
income of a portion of the tax return on salaries and wages paid out by Pekao
Tel-Aviv in 2000.

Grupa Inwestycyjna Nywig S.A. (Nywig)

In 2002, Nywig earned a net profit of PLN 2.2 million (Bank's share: PLN 0.6
million) in comparison to the PLN 0.1 million recorded in the preceding year. Of
material importance to the higher profit was the conclusion of five agreements
for the lease of gas pipelines. The Nywig result was adversely affected by the
need to revaluate the undertaking's long-term financial investments.

Bank Pekao (Ukraine) Ltd.

In 2002, the Bank Pekao (Ukraine) Ltd. earned a net profit of PLN 0.3 million,
which represents an increase of PLN 0.7 million from the preceding year. The
good result, despite the lower revenue (result on banking activities PLN 1.8
million lower than in 2001), was achieved thanks to a rationalisation of the
undertaking's operating expenses (down by PLN 1.2 million) and the possibility
of releasing a portion of the loan-loss provisions (positive balance of
provisions totalling PLN 0.9 million).

Access Sp. z o.o. (Access)

The downward trend which has been apparent on the M&A advisory services market
over the last two years continued in 2002. The value of transactions executed
worldwide dropped by approximately 30% in comparison to 2001. Due to the
difficult macroeconomic situation in Poland, the corporate sector's investment
activities dwindled. Due to the above factors, Access was able to generate a net
profit of only PLN 0.2 million (Bank's share: PLN 0.1 million).

Hotel Jan III Sobieski Sp. z o.o.

Given the negative value of the undertakings' shareholder's equity as at 31
December 2001 and 31 December 2002, the balance-sheet valuation of the Bank's
interest in Hotel Jan II Sobieski Sp. z o.o. was nill.

Drukbank S.A.

Durkbank S.A. did not conduct any business activities in 2002. The undertaking's
result of PLN -0.1 million includes a valuation, using the equity method, of a
30% interest in an associated undertaking - Bank Pekao (Ukraine) Ltd.

Pekao Informatyka Sp. z o.o. (Pekao Informatyka)

Pekao Informatyka discontinued its operations in July 2002.

Subordinated Companies of CDM Pekao S.A.

In 2002, CDM participated in the net loss of a subordinated entities, which
amounted to PLN
-0.9 million (PLN 0.0 million in 2001).

Central Poland Fund LLC (CPF)

In 2002, CPF incurred a net loss of PLN 5.5 million (Bank's share: PLN -2.9
million), mainly due to a loss incurred on the disposal of assets.

Pekao Pioneer PTE S.A. (PTE)

As the Social Security Authority (ZUS) failed to transfer the entire amounts of
contributions due to pension funds, PTE's net sales revenue in 2002 missed the
forecast, which translated into a 2002 loss of PLN -3.6 million. In 2001, the
undertaking incurred a net loss of PLN -90.2 million as a result of the high
expenses related to taking over the management of three funds: Epoka, Pioneer
and Rodzina (the cost of acquisition of open-end pension funds is amortised over
a five-year period at the Bank), which means that the results achieved in 2001
are not comparable to those recorded in 2002.

Pekao Fundusz Kapitalowy Sp. z o.o. (PFK)

In 2002, PFK incurred a net loss of PLN -7.5 million (including a valuation with
the equity method of subordinated undertakings: PLN -5.5 million), in comparison
to the PLN 10.4 million in net profit earned in 2001 (including a valuation with
the equity method of subordinated undertakings: PLN -3.0 million). The most
important factor which led to the loss in 2002 was the need to revaluate the
portfolio (provision for permanent impairment of value) and the losses incurred
by consolidated undertakings (valuated with the equity method).

Subordinated Companies of Pekao Fundusz Kapitalowy Sp. z o.o.

In 2002, PFK (and, indirectly, Bank Pekao SA) participated in a PLN -8.2 million
net loss incurred by subordinated entities (in comparison to the PLN -9.5
million in 2001). Its share in the loss incurred by subsidiary undertakings in
2002 was partially off-set by a PLN 2.7 million positive balance of amortisation
write-offs on goodwill and negative goodwill (PLN 6.5 million in 2001).

NFI Jupiter S.A. (Jupiter)

In 2002, Jupiter incurred a net loss of PLN -96.3 million (Bank's share: PLN -
33.6 million). This was by and large due to the necessity to consolidate the
loss and settle the portfolio companies' valuation goodwill, adverse
macroeconomic conditions, the need to create provisions for a permanent
impairment of value and the alignment of accounting policies effective at the
undertakings in the investment portfolio.

Pekao Leasing Sp. z o.o. (Pekao Leasing)

Due to the high negative balance of provisions in 2002, the undertaking incurred
a net loss of PLN -172.4 million versus the PLN -4.9 million loss of 2001. The
high loss in 2002 was due to the deterioration in the financial standing of the
undertaking's customers, review of valuation procedures, and quality of leased
assets and additional collateral, which necessitated the creation of additional
provisions (PLN 164.4 million net provisions in 2002.). Before the provisions,
Pekao Leasing's operating profit was PLN 19.2 million greater than in 2001.

Adjustments on consolidation

Consolidation adjustment concerning the the sale of shares in Pekao Trading
Corporation (PTC)

Positive influence of the transaction on the Bank's result on equity
investments, arising from the difference between sale price of PTC shares (PLN
16.1 million) and their value at purchase price (PLN 0.6 million) amounted to
PLN 15.1 million.

Positive influence of the sale on the Bank's consolidated result, arising from
the difference between sale price of PTC shares (PLN 16.1 million) and the
Bank's share in net assets of the company (PLN 13.3 million) amounted to PLN 2.8
million.

Consolidation adjustment concerning PTC amounted to PLN -12.7 million.

Other consolidation adjustments

The other consolidation adjustments were at the level of PLN -20.0 million and
resulted from:


  • the unification of valuation of Bank Pekao Tel-Aviv Ltd. at the
    consolidated and unconsolidated level (PLN -20.0 million);

  • the settlement of the negative goodwill of Bank's subsidiaries,
    subsidiaries of PFK, being included in Bank's consolidated statement;

  • the depreciation of the costs associated with the purchase of Epoka,
    Pioneer and Rodzina open-end pension funds by Pekao Pioneer PTE in 2001 as
    well as the costs associated with the purchase of PTE shares by the Bank in
    2000;

  • the settlement of the minority shareholder share in the result of Pekao
    Pioneer PTE S.A. (the company is consolidated by the Bank Pekao SA under the
    full method);

  • the exclusion of the income on transactions between the associated
    parties: Bank Pekao (Tel-Aviv) Ltd. and Pekao Faktoring Sp. z o.o.;

  • the exclusion of the valuation of Bank Pekao (Ukraine) Ltd. in the results
    of Pekao Faktoring Sp. z o.o. and Drukbank Sp. z o.o. (Bank Pekao (Ukraine)
    Ltd. is consolidated under the full method by the Bank Pekao SA).


                                                  Presentation of financial data

For comparability reasons, in the consolidated financial statement for 2002,
presentation reclassifications were introduced concerning data reported in 2001.
The detailed explanations of these changes can be found in the Additional notes
to the financial statement.

In the balance sheet the most important changes were as follows:


  • including in 'Accumulated profit (loss)' and 'Revaluation reserves' the
    effects of the application of the changes in accounting principles. The most
    significant changes were the adjustments of valuation of debt securities at
    amortised cost using effective interest rate method, changes in the
    valuation of subsidiaries, transfer of Brady's bonds to trading portfolio,

  • 'Commercial Papers' were moved to amounts due (previously presented as '
    Debt securities'),

  • provisions for jubilee and retirement payments are shown as 'Provisions'
    (previously presented as 'Accruals'),

In the profit and loss account the most important changes were as follows:


  • the structural foreign exchange differences arising from foreign
    investment of the Bank have been included in the income statement,

  • the majority of extraordinary income were moved to 'Other operating income
    ' item,

  • the companies which were not consolidated earlier, were included in
    consolidated financial statement (in result of accounting act changes),

  • the result from the capitalised interest has been included and interest on
    payables classified as watch excluded from the income statement.

In addition, for the purpose of presented Consolidated Report of activities for
2002, in comparison to the balance sheet as of 31 December 2001 and as of 31
December 2002 presented in the financial statements for the year 2002 the
following changes were made:


  • including the effect of valuation of the positions related to the central
    investment: loan on central investment using the effective interest rate
    method, refinancing loan, other assets and other liabilities (as to
    capitalised interest from these loans). The loan for central investment was
    reduced - by PLN 1.7 billion, refinancing loan and prepayments in other
    assets - by PLN 1.9 billion, and accruals in the liabilities by PLN 2.4
    billion,

  • transfer of the amount of PLN 416 million from the issuance of not
    assigned as for 31 December 2002 bonds series C from 'Deposits of customers'
    to 'Liabilities arising from securities issued'.



The balance sheet and P&L account presented in the financial statement for the
year 2001 and the balance sheet and P&L account comparable with the balance
sheet and P&L account for the year 2002 are presented below:

Balance


                                                                                                         
                                                                                                         PLN million

Assets                                                      31.12.01 published  31.12.01 comparable  Change 3 - 2


                            1                                             2                   3                 4
Cash and balances with the Central Bank                                4,264.0             4,264.0             0.0
Amounts due from banks                                                 8,178.4             8,178.4             0.0
Amounts due from customers*                                           33,874.7            32,559.1       (1,315.6)
Reverse repo                                                              67.0                67.0             0.0
Debt securities                                                       20,509.4            20,254.1         (255.3)
Shares and other securities and property rights                          340.0               361.1            21.1
Tangible and intangible assets                                         1,951.7             1,935.4          (16.3)
Other assets                                                           4,936.1             3,038.7       (1,897.4)
Total assets                                                          74,121.3            70,657.8       (3,463.5)

* including debt securities available for rediscounting with the Central Bank.


                                                                                                       PLN million

Liabilities                                                       31.12.01     31.12.01 comparable  Change 3 - 2
                                                                 published


                              1                                      2                  3                 4
Amounts due to the Central Bank                                        3,958.4             2,647.2       (1,311.2)
Amounts due to banks                                                   3,271.6             3,271.6             0.0
Amounts due to customers                                              53,068.7            53,068.7             0.0
Liabilities arising from securities issued                               329.4               329.4             0.0
Other liabilities                                                      6,619.5             4,347.5       (2,272.0)
Shareholder's equity                                                   6,873.7             6,993.4            84.2
Total liabilities                                                     74,121.3            70,657.8       (3,463.5)



P&L account

                                                                                                        PLN million

                                                               2001 published     2001 comparable    Change 3 - 2
                              1                                      2                 3                 4
Net interest income *                                                 3,118.5             3,123.7             5.2
Net commission income                                                 1,256.5             1,252.4           (4.1)
Income from shares and other securities                                  29.8                43.4            13.6
Result on financial operations                                          (8.1)              (17.3)           (9.2)
Foreign exchange income                                                 399.5               380.0          (19.5)
Other operating income                                                 (11.3)              (26.5)          (15.2)
Total income                                                          4,784.9             4,755.7          (29.2)
Operating costs including depreciation                              (2,349.8)           (2,349.8)             0.0
Operating profit                                                      2,435.1             2,405.8          (29.3)
Net provisions                                                        (689.1)             (657.3)            31.8
Net extraordinary gains (losses)                                         10.0                 0.0          (10.0)
Write-off of positive goodwill on consolidation                         (0.6)               (1.1)           (0.5)
Write-off of negative goodwill on consolidation                          10.2                17.1             6.9
Gross profit (loss)                                                   1,765.6             1,764.5           (1.1)
Income tax                                                            (519.7)             (516.4)             3.3
Share in net profit (loss) of entities consolidated under the             6.3                 5.6           (0.7)
equity method
(Profit) loss of the minority shareholders                                0.0                 0.0             0.0
Net profit (loss)                                                     1,252.2             1 253.8             1.6

* together with the income from SWAP transactions

All data and indices for the year 2001 presented in this Consolidated Report on
the activities were amended to allow comparability.


                                                        Consolidated P&L account

For the last few quarters, the Pekao SA Group's results have been affected by
the unfavourable macroeconomic situation in Poland and the related deterioration
of financial standing of its customers. Deteriorating quality of the Group's
assets entailed the necessity to set up high provisions. In addition, the
Group's management decided to close Pekao SA New York Branch, as its results
were unsatisfactory to the Bank, for the credit loans of this branch created in
2002 net provisions in amount of PLN 82.1 million. Provisions for liquidation
cost totalling PLN 20.3 million decreased the 2002 result.

The Group achieved a very good operating profit which was higher by PLN 258.4
million or 10.7% than a year before.

The consolidated P&L account of the Group for 2002 is presented below:
                                                                               2002             2001    Change
                                                                             PLN million                   %
Net interest income *                                                       2,964.7          3,123.7        (5.1%)
Net commission income                                                       1,225.6          1,252.4        (2.1%)
Income from shares and other securities                                         6.8             43.4       (84.3%)
Result on financial operations                                                187.7           (17.3)             x
Foreign exchange income                                                       412.8            380.0          8.6%
Other operating income                                                         73.6           (26.5)             x
Total income                                                                4,871.1          4,755.7          2.4%
Operating costs including depreciation                                    (2,207.0)        (2,349.8)        (6.1%)
Operating profit                                                            2,664.2          2,405.8         10.7%
Net provisions                                                            (1,504.2)          (657.3)        128.8%
Net extraordinary gains (losses)                                              (0.0)              0.0             -
Write-off of positive goodwill on consolidation                               (2.4)            (1.1)        118.2%
Write-off of negative goodwill on consolidation                                15.7             17.1        (8.2%)
Gross profit (loss)                                                         1,173.2          1,764.5       (33.5%)
Income tax                                                                  (391.6)          (516.4)       (24.2%)
Share in net profit (loss) of entities consolidated under the                (19.2)              5.6             x
equity method
(Profit) loss of the minority shareholders                                      7.2              0.0             -
Net profit (loss)                                                             769.6          1 253.8       (38.6%)

* together with the income from SWAP transactions, excluded from 'the result on
the financial operations'.

Net interest income

The table below presents the net interest income of the Group:
                                                                             2002                 2001     Change
                                                                          PLN million
Interest income                                                           5,347.6              7,403.2        (27.8%)
Interest expense                                                        (2,479.2)            (4,507.8)        (45.0%)
Net interest income                                                       2,868.4              2,895.4         (0.9%)
Income from SWAP transactions                                                96.3                228.3        (57.8%)
Adjusted net interest income                                              2,964.7              3,123.7         (5.1%)
Interest spread* %                                                           4.3%                 4.3%       0.0 p.p.
Interest spread adjusted for SWAP transactions * %                           4.5%                 4.6%     (0.1 p.p.)
Net interest margin* %                                                       4.7%                 4.8%     (0.1 p.p.)
Net interest margin adjusted for SWAP transactions * %                       4.9%                 5.2%     (0.3 p.p.)

* For the purpose of computation of the interest spread and the net interest
margin, the Group adopted average gross interest assets net of interest and
accounts receivable in transit as well as interest liabilities net of interest
and liabilities in transit.

The 2002 net interest income amounted to PLN 2,964.7 million, down by 5.1% as
compared to the previous year.

The lower net interest income followed from:


  • National Bank of Poland reduced interest rates eight times during the
    year, which resulted in falling market interest rates,

  • Market USD rates fell; the 6M LIBOR rate decreased from 1.98% as at the
    end of 2001 to 1.38% as at the end of December 2002,

  • Volume of the deposit and lending activity failed to compensate the fall
    in interest rates,

  • Volume of SWAP transactions decreased as a result of shrinking interest
    rate differentials. Income on SWAP transactions executed in the 2002 was PLN
    96.3 million, comparing to PLN 228.3 million in 2001,

  • Quality of loans deteriorated, which resulted in recording accrual
    interest as qualified income.

In the year 2002 the income from SWAP transactions diminished significantly due
to the following factors:


  • narrowing of spreads realised on FX SWAP transactions. On average in 2002
    in comparison with 1 January 2002 the differences in the interest for PLN/
    USD and PLN/EUR decreased from 2.5 p.p. to 3.2 p.p.,

  • the increase in the volume of transactions USD/EUR concluded with the
    purpose of current management of liquidity but generating negative SWAP
    points,

  • the increase in the volume of transactions IRS in the second half of the
    year 2002, when the transactions of swapping the higher fixed rate for the
    lower variable rate were prevailing. As the result of these operations the
    cost of SWAP points increased.



The 2002 net interest margin amounted to PLN 4.9% and, on comparable basis
(taking account of effective interest rates in order to determine the income on
cenral investments), was lower by 0.3 p.p.than a year before.

Non-interest income
                                                                      2002                   2001         Change
                                                                         PLN million                               %
Commission income                                                  1,390.4                1,462.3           (4.9%)
Commission expense                                                 (164.8)                (209.9)          (21.5%)
Net commission income                                              1,225.6                1,252.4           (2.1%)
Income from shares and other securities                                6.8                   43.4          (84.3%)
The result of financial operations                                   187.7                 (17.3)                x
Foreign exchange income                                              412.8                  380.0             8.6%
Net result of other operating activities                              73.6                 (26.5)                x
Total non-interest income                                          1,906.5                1,632.0            16.8%

The non-interest income earned in 2002 was higher than in 2001 (by PLN 274.5
million or 16.8%), primarily as a result of an increase in income of financial
operations (by PLN 205.0 million) and in other operating income (by PLN 100.1
million).

Net commission income in 2002 decreased by PLN 26.8 million over last year,
which chiefly followed from lower (by PLN 21.6 million) commission income in
Bank Pekao SA resulting from lower commission on lending activity. In addition,
the value of commission in CDM decreased (by PLN 20.4 million), which was a
consequence of lower trade volume at the stock exchange. Commission in PTE (by
PLN 3.0 million), Pekao Leasing (by PLN 2.6 million) and Pekao Faktoring (by PLN
1.6 million) grew over 2001.

The most significant item under the commission income comprised income on
servicing bank accounts - 37.8%. Other significant items include: income on
payment cards - 23.7%, income on lending and guarantee activity - 16.5% and
income on brokerage activity - 10.4%.

In 2002 the result of financial operations (excluding income on SWAP
transactions, disclosed under net interest income) amounted to PLN 187.8
million. This figure is mainly the effect of proceeds from sale of securities
(PLN 176.9 million), valuation of securities and financial instruments (PLN 38.1
million) and the adjustment of last year's result of PLN -21.6 million (accrual
interest on accounts receivable which in 2001 were classified as performing
accounts receivable, and in 2002 - as higher risk groups). In Q4 2002 alone, the
result of financial operations amounted to PLN 275.1 million, and resulted from
the final structure of the securities portfolio and valuation of securities and
financial instruments, in accordance with new regulations (effective interest
rate for securities), as well as adjustment of this valuation for previous
periods.

The foreign exchange income in 2002 equalled PLN 412.8 million, i.e. by 8.6%
higher than last year. This is primarily a consequence of an increased
transaction volume.

The net result of other operating activities in 2002 was PLN 73.6 million, which
represents an PLN 100.1 million increase over 2001, and which is mainly
attributable to Bank Pekao SA's income, including income on the restructuring of
the Bank's exposure toward Stocznia Szczecinska, the negative result on the
restructuring of accounts receivable from one customer, as well as the provision
for cost of liquidation of the Bank's New York Branch.

Operating costs
                                                                       2002                  2001        Change
                                                                       PLN million                            %
Personnel costs                                                   (1,095.6)             (1,230.8)          (11.0%)
Non-personnel costs                                                 (856.2)               (862.8)           (0.8%)
Costs connected with BGF                                             (12.6)                (20.7)          (39.1%)
Depreciation                                                        (242.5)               (235.5)             3.0%
Total operating costs                                             (2,207.0)             (2,349.8)           (6.1%)

The operating costs (including depreciation) incurred by the Group in 2002,
amounted to PLN 2,207.0 million, which represents a decrease by 6.1% in
comparison to 2001 (7.9% in real terms).

The issues of cost rationalisation and cost adjustment to the Group's needs are
of crucial importance.

The personnel costs in 2002 were reduced by 11.0% (by 12.6% in real terms), as a
result of:


  • Withdrawal, upon agreement with trade unions and pursuant to the
    collective labour agreement, from payment of jubilee awards, and validation
    of provisions for jubilee awards in connection with their one-off payment in
    Bank Pekao SA,

  • Validation of provisions for other, incentive-related components of
    remuneration,

  • Reduction of staff by 1506,

  • Control of the remuneration level.

The non-personnel costs decreased by 0.8% in nominal terms and by 2.6% in real
terms, and were reduced mainly in Bank Pekao SA and CDM. The largest items of
administrative expenses include telecommunication costs, lease costs as well as
IT costs.

The depreciation costs of the Group in 2002 amounted to PLN 242.5 million,
against PLN 235.5 million in 2001. The increase refers mainly to Bank Pekao SA,
in connection with the initiated depreciation of computer hardware and software
enabling the Bank's customers a multi-channel access to its products.



Net provisions

Net provisions in 2002 equalled PLN 1,504.2 million and PLN 657.3 million in
2001.

The structure of net provisions is presented below:
                                                                                                    PLN million
                                                                                2002                       2001
Provisions for receivables, off-balance sheet                              (1,510.6)                    (583.3)
liabilities and other
Revaluation of financial assets                                               (24.4)                     (31.2)
General risk provision of the Bank Pekao SA                                     30.8                     (42.8)
Total                                                                      (1,504.2)                    (657.3)

The Group's provisioning cost were affected by the following factors in 2002:


  • Deteriorating financial standing of Bank Pekao SA's Group customers, due
    to such factors as unfavourable macroeconomic situation;

  • Provisions for the Bank's exposure to Stocznia Szczecinska (PLN 207
    million);

  • Provisions set up for New York Brach (PLN 82 million);

  • Provisions set up in Pekao Leasing in connection with weaker financial
    standing of the customers, with the review of the valuation procedures, and
    the quality of collateral;

  • Consistent conservative policy of provisioning and valuation of collateral
    (primarily with respect to real property valuation) in the current
    macroeconomic situation.

The loan portfolio's quality deteriorated in comparison to the end of 2001. As
at the end of 2002, the share of non-performing loans in total loans equalled
21.2%, up from 15.3% as at the end of December 2001.

All non-performing loans are covered with provisions adequate to the default
risk. Coverage of sub-standard loans was 8.5%, doubtful loans - 27.9%, and lost
loans - 73.6%.

Furthermore, in order to protect against risk, Bank Pekao SA maintains
provisions for general banking risk. In 2002, the Bank reduced these provisions
by PLN 30.8 million. It was caused by the fact of limiting the general risk not
secured by specific provisions. The exposure to retail loans qualified as
performing loans was reduced. The provisions for general banking risk (including
provisions set up in previous periods) are at the level of PLN 273.5 million and
represent 1.28% of the performing loans portfolio.

Provisions and deferred tax asset

                                       
                                                                                                   PLN million

                                                                            31.12.2002              31.12.2001
Provisions for off-balance sheer liabilities                                      69.7                    59.3
General risk provisions                                                          248.5                   265.5
Provision for income tax                                                           0.0                    29.6
Provisions for personnel liabilities                                              81.1                   100.5
Other provisions                                                                  88.0                    60.1
Total                                                                            487.3                   515.0

The value of provisions as disclosed in the balance fell from PLN 515.0 million
as at the end of 2001 to PLN 487.3 million as at the end of 2002. A drop in the
value of provisions for liabilities to employees was mainly driven by the change
of rules and the liquidation of the jubilee fund.

The Group sets up the provision and determines the value of assets for timing
difference under the income tax in accordance with the Polish Accountancy Act
and relevant tax regulations. At the end of 2002, the value of assets for the
income tax timing difference stood at PLN 154.0 million. As at the end of 2001,
the value of assets for timing difference amounted to PLN 33.4 million and the
income tax provision was PLN 29.6 million.

In 2002, Group's pre-tax result was reduced by PLN 391.6 million in income tax.

                                                  Structure of the balance sheet

The balance sheet of the Bank has the most significant impact on the Group's
balance sheet. It determines both the amount of the balance-sheet total, as well
as the structure of assets and liabilities. As at the end of December 2002, the
ratio of the Bank's balance-sheet total to the balance-sheet total of the Group
was 99.5%.

As at the end of 2002, the balance-sheet total of the Group was PLN 65,083.5
million, i.e. PLN 5,574.3 million less relative to the end of 2001 (the opening
balance sheet).

The table below presents the Group's balance sheet.
Assets                                                             31.12.02         31.12.01 *          Change (%)
                                                                    PLN million
Cash and balances with the Central Bank                             3,175.4            4,264.0             (25.5%)
Amounts due from banks                                              7,089.5            8,178.4             (13.3%)
Amounts due from customers                                         29,925.3           32,559.1              (8.1%)
Reverse repo                                                           67.4               67.0                0.6%
Debt securities                                                    21,307.7           20,254.1                5.2%
Shares and other securities and property rights                       271.5              361.1             (24.8%)
Tangible and intangible assets                                      2,056.6            1,935.4                6.3%
Other assets                                                        1,190.1            3,038.7             (60.8%)
Total assets                                                       65,083.5           70,657.8              (7.9%)

* adjusted opening balance


Liabilities                                                        31.12.02         31.12.01 *          Change (%)
                                                                    PLN million
Amounts due to the Central Bank                                     2,484.0            2,647.2              (6.2%)
Amounts due to bank                                                 1,139.6            3,271.6             (65.2%)
Amounts due to customers                                           48,709.3           53,068.7              (8.2%)
Liabilities arising from securities issued**                        1,637.5              329.4              397.2%
Other liabilities                                                   4,035.5            4,347.5              (7.2%)
Shareholders' equity***                                             7,077.6            6,993.4                1.2%
Total equity and liabilities                                       65,083.5           70,657.8              (7.9%)

* adjusted opening balance,

** the item includes all bonds issued by the Bank sold by December 31st 2002,
with interest,

*** including negative goodwill of subordinated entities.

Note: Customers item includes: individual clients, corporate clients, budget
sector and non-banking financial institutions and commercial bills.


    Assets

Changes in the assets structure

Amounts due from customers represented the most significant item of the assets.
As at 31 December 2002, they amounted to PLN 29,925.3 million and represented
46.0% of the total assets of the Group (as at the end of December 2001, the
ratio was 46.1%). The decrease in the value of this item in 2002 was due to a
decrease in the value of the gross loan portfolio, on the one hand, and a large
increase of specific provisions for loan capital, on the other.

The balance of amounts due from banks fell by PLN 1,088.9 million (13.3%). In
2002, the item's share in the balance-sheet total decreased by 11.6%, to 10.9%.

In 2002, the value of shares and other securities and property rights fell by
PLN 89.6 million (24.8%), mainly due to the losses incurred by NFI Jupiter S.A.
and the subordinated entities of PFK, as well as the disposal of shares in NFI
im E. Kwiatkowskiego SA.

The value of cash and balances with Central Bank fell by PLN 1,088.6 million. As
at the end of 2002, the value of balances with Central Bank was lower by PLN
269.8 million relative to the end of 2001. The value of cash decreased by PLN
811.3 million due to a significant amount of foreign currency funds disclosed as
at the end of 2001, mainly due to deposits of euro-basket currencies received in
the last days of 2001.

The value of other assets fell by PLN 1,848.6 million, which was mainly due to
the decrease in inter-bank clearing accounts maintained by Bank Pekao SA.

Loans

The loan structure by client type
Gross loans                                                   31.12.02             31.12.01          Change %
                                                               PLN million
Retail loans                                                   6,669.4              6,870.8            (2.9%)
Other loans *                                                 24,793.3             26,336.1            (5.9%)
Total gross loans (principal)                                 31,462.7             33,206.9            (5.3%)
Overdue interest                                               1,698.4              1,179.8             44.0%
Amounts due in transit                                           268.3                291.5            (8.0%)
Accrued interest                                                  92.2                125.4           (26.4%)
Specific provisions                                          (3,596.3)            (2,244.5)             60.2%
Amounts due from clients (net)                                29,925.3             32,559.1            (8.1%)

* this item includes: corporate clients, non-banking financial institutions,
budget sector, commercial bills and debt securities available for rediscounting
with the Central Bank.

In 2002, the value of the gross loan portfolio fell by PLN 1,744.2 million, or
5.3%. The decrease in the gross loan portfolio was due to such factors as:
unfavourable macroeconomic conditions resulting in a slowdown of the loan growth
rate and the resulting deterioration of the financial standing of the Group's
customers; restructuring of the debts of Stocznia Szczecinska connected with the
forfeiture of ships financed with loans advanced by the Bank; restructuring of
certain other loans and advances; and decrease in loans advanced to finance
central investment.

In 2002, the value of loans to retail customers fell by PLN 201.4 million, or
2.9%. An increase in mortgage loans did not offset the drop in such items as
current account overdraft, car loans, and securities purchase loans advanced to
the customers.

Loans advanced to other customers represented the largest share in the gross
loan portfolio. As at the end of December 2002, loans to other customers
represented 78.8% of total gross loans, with their share down by 0.5 p.p. in
comparison to the end of 2001. In 2002, the value of the portfolio of loans to
other customers fell by PLN 1,542.8 million, which was due to such factors as
the restructuring of the debts of Stocznia Szczecinska (decrease of PLN 267
million in loans to Stocznia Szczecinska), decrease of PLN 202 million in loans
advanced to finance central investment, and the restructuring of certain other
loans and advances. The value of loans advanced by Pekao Leasing and the foreign
banks was also down.

In 2002, the value of the provisions for loans as disclosed in the balance sheet
increased by PLN 1,351.8 million. This was due to sharp deterioration of the
financial standing of the borrowers. The provisions created for the Bank's
exposure to Stocznia Szczecinska and provisions in Pekao Leasing had a
significant impact on the provision balance. At the same time, the Bank
continued its conservative provisioning policy. The conservative approach was
applied, inter alia, in the valuations of collateral in connection with the
macroeconomic conditions, and mainly in valuations of real property. The Bank
also improved procedures and tools for credit risk assessment.

The currency structure of the loans for clients
Gross loans for clients denominated in:                             31.12.02                    31.12. 01
                                                                PLN million          %     PLN million            %
- PLN                                                              20,466.8      65.1%        22,342.1        67.3%
- foreign currencies*                                              10,995.9      34.9%        10,864.8        32.7%
Total                                                              31,462.7     100.0%        33,206.9       100.0%

* including indexed loans.

The changes in the exchange rate of the basic currencies against the Polish
zloty had a significant impact on the changes in the loan volumes. The USD
exchange rate fell by 3.7% in comparison to 31 December 2001, while the EUR and
CHF exchange rates increased by 14.1% and 16.5%, respectively. The strengthening
of the latter currencies against the Polish zloty resulted in an increase in the
PLN value of foreign currency loans (meaning increased share in the loan
portfolio). As at the end of December 2002, the larges share in the loans and
advances denominated in foreign currencies was attributable to loans and
advances denominated in EUR (49.7%), USD (38.2%) and CHF (11.4%).

Loans denominated in the Polish zloty dominated the currency structure of the
loan portfolio. As at the end of 2002, they represented 65.1% of gross loans. In
order to limit the currency risk of the retail customers, the Bank offers more
favourable terms to the borrowers applying for loans in the Polish zloty.

Loan portfolio quality
Categories of loans*                                               31.12.02                    31.12. 01

(gross principal) in category:                                PLN million          %        PLN million          %

Normal                                                           22,151.3       70.4           26,676.7       80.3
of which 'watch' category                                         2,644.3        8.4            1,461.5        4.4
Non-performing                                                    6,667.1       21.2            5,068.7       15.3
Sub standard                                                      1,425.0        4.5            1,505.0        4.5
Doubtful                                                          1,087.2        3.5            1,117.7        3.4
Lost                                                              4,154.9       13.2            2,446.0        7.4
Total loans                                                      31,462.7      100.0           33,206.9      100.0

* Includes loans for customers.

As at 31 December 2002, the share of non-performing loans in the total loans
amounted to 21.2% and was up by 5.9 p.p. in comparison to 31 December 2001. The
deterioration of the quality of loans in 2002 was mainly felt by Bank Pekao SA
and Pekao Leasing, and also by the foreign banks. On the other hand, the quality
of loans improved at Pekao Faktoring.

The deterioration of the quality of a loan portfolio is due to the following
factors:


  • Overall deterioration of the financial standing of borrowers resulting
    from the macroeconomic conditions,

  • Need to downgrade loans and advances to Stocznia Szczecinska from the
    performing to lost category,

In 2002, the total value of non-performing loans increased by PLN 1,598.4
million, of which the highest increase (of PLN 1,708.9 million) was recorded in
lost accounts.

In 2002, the value of 'watch' loans rose by PLN 1,182.8 million, which was
mainly due to the conservative approach to loans and advances to one customer
adopted by Bank Pekao SA.

Provisions were created for all non-performing loans in an amount adequate to
the default risk. As at the end of 2002, the provision coverage ratio for the
sub-standard accounts, doubtful accounts, and lost accounts amounted to 8.4%,
27.9% and 74.3%, respectively.

Loan portfolio structure by maturity

                                                        PLN million
                                                    Loans to clients                      Of which to subordinated

                                                             (gross)
Current and up to 1 month                                    5,842.6                                           0.4
1-3 months                                                   1,520.1                                           0.3
3 months - 1 year                                            4,311.2                                          10.7
1-5 years                                                    5,076.8                                          52.7
Over 5 years                                                14,712.0                                         129.5
Total                                                       31,462.7                                         193.6

Loans with maturities of over five years (including mainly a large loan advanced
to finance a central government investment, mortgage loans, and loans classified
as non-performing) dominated the loan structure by maturity, representing 46.8%
of the gross loan portfolio. Loans to subsidiary, co-subsidiary and associated
companies represented 0.5% of the loan portfolio.

The lending policy

The principles of the Group's lending activity are in line with the principles
of the Bank's lending activity. Bank Pekao SA follows a conservative policy with
respect to the assumption of credit risk, by applying defined security rules to
lending activity in the individual market segments as well as necessary
instruments limiting asset exposure to the credit risk.

For the assessment of ecological risk, the Group applies standards defined by
the European Bank for Reconstruction and Development.

The credit risk assessment procedures applied at the Bank's companies require
consultations with the Bank's Head Office.

In accordance with the Bank's lending policy, the following main directions of
mitigating credit risk are followed:


  • Diversification of the portfolio structure in terms of loans and
    borrowers, and day-to-day analysis of the portfolio structure aimed at early
    identification of threats resulting from excessive exposures, and
    implementation of appropriate limits;

  • Limitation of lending activity for financing of certain areas;

  • Exercising particular caution in financing high-risk areas and observing
    the adopted procedure applicable to co-operation with entities with a
    deteriorating financial standing;

  • Approval of transactions requested by foreign branches by the Bank's
    Credit Committee;

  • Diversification of collateral, appropriate valuation and monitoring of the
    adequacy of collateral during the term of loan;

  • Identification of the existing threats and taking preventive actions.

Under the co-operation with UniCredito Italiano, the Bank carried out intensive
work on on-going rationalisation of the lending process aimed at improving its
efficiency and security. In particular, the Bank works on the improvement of
procedures and tools for credit risk measurement and monitoring.

In order to mitigate the risk, an automatic loan application processing system
was implemented at the Bank for the standard customer segment. In the first days
of 2003, a new rating model for corporate customers was also implemented. The
work on automatic loan application processing system for the customers from the
VIP/SME segment is also advanced.

Loan portfolio concentration

Except for one borrower, who has been advanced a loan to finance a central
government investment, the Group's lending activities are not dependent on any
other customer.

As at 31 December 2002, Clients A's debt calculated using the effective interest
rate stood at PLN 2,695.7 million (nominal value of PLN 4,132.6 million). The
debt was a result of a loan contracted for a central investment, which, starting
from 1999 has been repaid quarterly. The final repayment date for the loan is 30
December 2012. The loan agreement for financing of the central investment was
concluded on 30 April 1984. The loan is refinanced by the National Bank of
Poland and guaranteed by the State Treasury.

Concentration of the Group's loan portfolio follows the approach assuming
avoidance of dependence on a limited group of customers.


        The concentration of the Group's loan portfolio is as follows*:

                                                                          31.12.02
                                                            PLN million        Share in total loans%
10 largest loans                                                    5,473.9                    17.4%
20 largest loans                                                    6,963.5                    22.1%
50 largest loans                                                    8,889.4                    28.3%

* loan for financing of the central investment is calculated using effective
interest rate.



To a large extent, the figures above have been affected by the loan to finance
central state investment.

The table below shows the 10 largest borrowers* of the Group as of 31 December
2002:

                                          PLN million
                                      Total exposure     Balance sheet exposure                  Off-balance sheet
                                                                                                          exposure
Client 1                                     2,707.7                    2,695.7                               12.0
Client 2                                     1,021.4                    1,021.4                                0.0
Client 3                                       502.6                      466.7                               35.9
Client 4                                       500.0                      139.5                              360.5
Client 5                                       456.1                      456.1                                0.0
Client 6                                       430.2                      281.7                              148.5
Client 7                                       412.6                      412.6                                0.0
Client 8                                       400.9                      265.2                              135.7
Client 9                                       368.3                      335.3                               33.0
Client 10                                      343.3                       45.0                              298.3

* these data do not include exposure related to the shares and other securities.
This list entails exposure to one entity, i.e. without exposure to related
entities. In case of client 1 loan for financing the central state investment
valuation based on the effective interest rate method



Debt securities
                                                 31.12.02           31.12.01                Change %
                                                         PLN million
PLN                                                   16,277.1           14,480.1              12.4%
Non-financial entities bonds                           8,265.1            7,054.2              17.2%
Treasury and NBP money bills                           2,997.2            3,377.6            (11.3%)
NBP bonds                                              2,290.9            2,179.0               5.1%
restructuring bonds                                      811.5              976.7            (16.9%)
other                                                  1,912.5              892.6             114.3%
Foreign currencies                                     5,070.2            5,818.8            (12.9%)
USD denominated bonds                                  1,350.5            2,351.4            (42.6%)
Brady's bonds                                          1,323.5            1,885.8            (29.8%)
other                                                  2,396.2            1,561.6              51.5%
Total debt securities (gross)                         21,347.3           20,298.9               5.2%
Provisions                                              (39.6)             (44.8)              11.5%
Total debt securities (net)                           21,307.7           20,254.1               5.2%

The structure of debt securities is dominated by debt securities in the Polish
zloty; as at the end of December 2002, they accounted for 76.2% of total debt
securities. The largest items in the zloty-denominated securities are
non-financial entities bonds (PLN 8.3 billion), treasury and NBP money bills
(PLN 3.0 billion) and National Bank of Poland bonds, which were purchased as
part of the changes in mandatory reserves (PLN 2.3 billion).

According to the new accounting principles in the Group, the portfolio
securities were divided into held-to-maturity, available-for-sale and trading
securities. As at the end of 2002, the structure of the Group's portfolio of
debt securities was as follows:


                                        PLN million

                                     Held to maturity     Available for sale              Trading               Total
PLN                                          11,950.4                2,797.4              1,529.3            16,277.1
Foreign curriencies                           1,705.5                  365.1              2,999.6             5,070.2
Gross securities                             13,655.9                3,162.4              4,528.9            21,347.3
Provisions                                     (28.9)                 (10.7)                  0.0              (39.6)
Net securities                               13,627.0                3,151.7              4,528.9            21,307.7


    Liabilities

Changes in the liabilities structure

Funds deposited by customers represent the most significant part of the Group's
liabilities. As at the end of 2002, deposits from customers and debt securities
in issue amounted to PLN 50,346.8 million and fell over the year by PLN 3,051.3
million. The share of those items in the liabilities grew from 75.6% as at the
end of 2001 to 77.4% as at the end of 2002.

In 2002, deposits from Central Bank fell by PLN 163.2 million as a result of
partial repayment of the refinanced loan for a central investment. The share of
those items in the liabilities stayed flat (3.8%).

Deposits from banks were also reduced (by PLN 2,132.0 million).

In 2002, shareholders' equity (including the profit) increased by PLN 84.2
million and the share of this item in total shareholders' equity and liabilities
increased to 10.9% (9.9% as at the end of 2001).



Sources of financing

Customer deposits as well as proceeds from the issue of own securities
(including the Bank bonds) and cash from banks are the main financing sources
for the Group's lending and investment activities. As at the end of 2002, they
amounted to PLN 51,095.7 million, which represented 78.5% of the total
liabilities (77.3% at the end of 2001).

As at the end of 2002, customer deposits represented 89.6% of the total external
financing sources (88.4% at the end of 2001).

Almost all customer deposits, i.e. 99.9%, were acquired by the domestic
undertakings of Bank Pekao SA. The remaining part is attributable to: CDM, the
Bank's foreign branches in New York and Paris and Pekao Faktoring Sp. z o.o.

The loan funds for the central state investment granted by the Bank are
refinanced by the refinancing loan from the NBP. The amount due to the NBP
(valued at the effective interest rate) decreased in 2002 by PLN 175.7 million
to the level of PLN 2,469.0 million. The nominal value of the liability due to
the NBP was PLN 3,618.5 million at 31 December 2002.

Financing on the financial institutions market constitutes a relatively small
part of external sources of financing for the Group.

External sources of financing
                                                            31.12.02                     31.12.01
                                                        PLN million          %       PLN million           %
NBP                                                         2,469.9       4.6%           2,647.1        4.5%
Banks                                                       1,114.2       2.1%           1,798.9        3.0%
Clients                                                    48,350.8      89.6%          52,421.8       88.4%
Liabilities arising from securities issued                  1,630.7       3.0%             329.4        0.6%
Interest                                                      301.5       0.6%             522.6        0.9%
Amounts due in transit                                         96.5       0.2%           1,597.1        2.7%
Total sources of financing                                 53,963.6     100.0%          59,316.9      100.0%



The deposits acquired by the companies consolidated with the full method
represented less than 1% of the Group's deposits. Bank Pekao SA acquires the
deposits mainly in Poland.

At the end of December 2002, the geographical structure of the deposits acquired
by domestic undertakings was as follows:
Region                                              % of the total deposits
Warsaw                                                                 29.6
Malopolski                                                             13.5
South - Eastern                                                        13.1
Wielkopolski                                                            9.4
Mazovian                                                                9.3
Western                                                                 8.9
Gdansk                                                                  8.7
Central                                                                 7.5

In comparison with the end of December 2001 there was a change in the regional
division: the Wielkopolski region was merged with Lower-Silesian, Malopolski
with Silesian, the Mazovian region with North - Eastern and Gdansk with
Kujavian. At the same time the Warsaw region was excluded from the Mazovian
region.

If the regional division at the end of December 2002 remains unchanged, there
will be no significant changes in the regional structure of the deposits
acquired in 2002.

Deposits

Deposit structure by client category
                                                                   31.12.02             31.12.01           Change
                                                                   PLN million                                  %
Retail deposits                                                    36,239.3             39,595.4           (8.5%)
Corporate deposits *                                               12,111.5             12,826.4           (5.6%)
Total deposits                                                     48,350.8             52,421.8           (7.8%)
Accrued interest                                                      282.0                516.5          (45.4%)
Amounts due in transit                                                 76.5                130.4          (41.3%)
Total amounts due to clients                                       48,709.3             53,068.7           (8.2%)
Bank's bonds**                                                      1,329.4                    -                x
Group amounts due to clients                                       50,038.7             53,068.7           (5.7%)

* includes: corporate clients, non-banking financial institutions and budget
sector.

** Includes liabilities under paid up but not allocated bonds.

As at the end of December 2002, the deposits from customers stood at PLN
48,709.3 million, having gone down by 8.2% over the twelve months of 2002,
mainly due to a drop in the balance of deposits from retail customers of the
Bank Pekao SA. Similar trends were noted throughout the banking system in 2002.

The shrinking balance of deposits is, on the one hand, an offspring of
deteriorating financial standing of the customers and, on the other hand, of
changes in customers' savings preferences and selection of alternative savings
instruments - in relation to bank deposits - including investment fund
participating units and bank bonds.

Deposits from retail customers comprise the bulk of the Group's deposits. The
aggregate amount of deposits from retail customers accumulated on accounts in
the Group totalled PLN 36,239.3 million as at 31 December 2002 (in comparison to
PLN 39,595.4 million as at 31 December 2001), representing 75.0% of total Group
deposits (75.5% as at the end of December 2001). The drop in deposits from this
customer segment followed from the lower attractiveness of bank deposits as a
means of saving for customers, caused by the reduction of the main interest
rates by the National Bank of Poland, the introduction of tax on interest on
bank deposits, and the shifts in customers' savings preferences.

In order to meet customers' expectations, Bank Pekao SA decided to issue its own
bank bonds. In Q4 2002, a subscription was organised for the Bank Pekao SA
Series A and B bonds and a subscription period commenced for Series C bonds.
These subscriptions were a source of strong interest among customers. By the end
of 2002, they acquired bonds with a total value of PLN 1,329.4 million.

In 2002, the Bank noted a further increase in the net asset value (NAV) of
Pioneer Pekao TFI S.A. investment funds. Pioneer Pekao TFI participating units
are sold chiefly through the network of Bank Pekao SA and CDM. In 2002, these
assets grew by PLN 2,589.1 million, to PLN 5,439.3 million as at the end of
December 2002. The total savings portfolio of retail customers - including bonds
and investment funds sold through the Bank's network - saw a very small
reduction of PLN 296.1 million in 2002.

Net assets value of Pioneer Pekao TFI S.A.
                                                        31.12.02           31.12.01            Change
                                                           PLN million                              %
NAV of PP TFI S.A.                                       5,439,3            2,850,2             90,8%
- sold in Bank's network                                 3,214.5            1,483.9            116.6%

Deposits from corporate customers, non-banking financial institutions and the
public sector deceased by PLN 714.9 million. As at the end of 2002, their
balance stood at PLN 12,111.5 million.

Currency structure of deposits
                                                                 31.12.02                        31.12.01
                                                             PLN million            %         PLN million          %
PLN                                                             30,851.3        63.8%            33,180.8      63.3%
Foreign currencies                                              17,499.5        36.2%            19,241.0      36.7%
Total deposits                                                  48,350.8       100.0%            52,421.8     100.0%

In 2002, PLN-denominated deposits shrunk by PLN 2,329.5 million (by 7.0%), to
PLN 30,851.3 million. As at 31 December 2002, these deposits represented 63.8%
of the Group's total deposits.

FX deposits totalled PLN 17,499.5 million, going down by 9.1% over the year. The
volume of FX deposits, expressed in the zloty, were affected by a change in the
FX rates of the main currencies in relation to the zloty. Among FX deposits,
USD-denominated deposits amounted to the most (70.0%), followed by
EUR-denominated deposits (25.7%).

Maturity structure of the deposits

The maturity structure of the deposits at 31 December 2002 is presented below:

                                                                            PLN million       Structure %
A vista*                                                                       17,402.3                    35.7%
Term deposits:                                                                 31,025.1                    63.7%
up to one month**                                                              11,566.8                    23.7%
1-3 months                                                                      8,284.7                    17.0%
3 months - 1 year                                                               7,328.1                    15.0%
1-5 years                                                                       2,958.6                     6.1%
over 5 years                                                                      886.8                     1.8%
Total deposits                                                                 48,427.4                    99.4%
Accrued interest                                                                  282.0                     0.6%
Total amounts due to clients                                                   48,709.3                   100.0%

* including 24-hours deposits, which were previously presented as term deposits,

** includes amounts due in transit.

As at the end of 2002, term deposits represented the largest item of Group's
deposits (64.1%). Among term deposits, accounts maturing within a month had the
largest share (37.3%), followed by those maturing within one and three months
(26.7%), and those maturing within three months to a year (23.6%).

The Group's deposit base is highly diversified. The deposits are placed mainly
by retail and corporate customers. The Group is not dependant upon any single
customer or group of customers.


More to follow.....   


                      This information is provided by RNS
            The company news service from the London Stock Exchange
                  

FR NKNKKOBKKKND                                                                                                                                                                                                                

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