POLISH NON-GOVERNMENT DEBT MARKET: Q AND THE YEAR 2010

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1 POLISH NON-GOVERNMENT DEBT MARKET: Q AND THE YEAR 2010 Debt Market At the end of Q4 2010, the value of the non-government debt market broke PLN 67,2 bn, which represents a 40,2% increase during the last 12 months. In comparison to the end of last quarter, it rose by 6,3%. Q Q Q Q Q Total debt value PLNm , , , , ,87 dynamics (annual) 7,3% 19,3% 40,5% 47,1% 40,2% dynamics (quarterly) 11,6% 5,6% 15,9% 7,7% 6,3% Commercial Paper PLNm 9 969, , , , ,81 dynamics (annual) -23,0% -13,4% -1,8% 15,1% 48,4% dynamics (quarterly) -18,1% 7,1% 6,3% 23,5% 5,5% Corporate bonds (over 365 days) PLNm , , , , ,83 dynamics (annual) -18,6% 0,9% 6,1% 19,3% 44,6% dynamics (quarterly) -11,6% 14,9% 5,7% 11,0% 7,2% number of issuers Bank debt (over 365 days) PLNm , , , , ,46 dynamics (annual) 53,0% 58,9% 110,3% 103,5% 26,8% dynamics (quarterly) 62,8% 0,0% 30,2% -4,1% 1,5% number of issuers Municipal bonds (over 365 days) PLNm 6 906, , , , ,76 dynamics (annual) 54,8% 61,5% 72,8% 68,7% 57,2% dynamics (quarterly) 27,0% 2,7% 12,3% 15,2% 18,4% number of issuers Non-government debt market structure by issues placed in Q (over 365 days) Non-government debt market (as of December 31, 2010) Corporate bonds 46,69% Commercial Paper 21,99% Corporate bonds (over 365 days maturity) 26,13% Municipal bonds 36,85% Bank debt 16,46% Municipal bonds (over 365 days maturity) 16,13% Bank debt (over 365 days maturity) 35,75% Statistics of the non-government debt market, December 31, 2009 December 31, 2010 (PLN mln) Commercial Paper Corporate bonds Bank debt Municipal bonds

2 Non-government debt market flows in 2010, as of December 31, 2010 Q PLN mln Q PLN mln Q PLN mln Q PLN mln 2010 PLN mln Issues Introduced Redempt Introduced Redempt Introduced Redempt Introduced Redempt Introduced Redempt corporations 1 691,96 151, ,13 362, ,63 317, , , , ,16 banks 124,12 76, ,83 533,14 624, , ,54 360, , ,54 municipalities 371,96 20,56 987,98 210, ,90 113, ,66 379, ,49 725,39 Total 2 188,04 248, , , , , , , , ,09 Bonds placed in Q lead manager's share (over 365 days) 17,99% PKO Bank Polski 19,75% Bonds placed in lead manager's share including infrastructure bonds by BGK (over 365 days) 13,95% BGK 32,33% 11,95% 17,29% ING Bank Śląski 5,41% PKO Bank Polski 8,63% 16,97% ING Bank Śląski 16,01% 17,01% 11,00% Grupa u 11,71% 2010 The year of Euro Zone problems 2010 brought very dynamic progress of the Polish non-govie bond market. The whole closed at PLN 67,279bn which translates to 40% growth yoy. In individual market segments situation looks even better. Corporates launched 35 new bond programmes (+75% yoy); 104 long term bond issues were outstanding at the close of the year and the value of corporate bonds outstanding reached a record PLN 17,577bn (+45% yoy). Municipalities launched 268 new bond programmes (+31% yoy); 458 bond issues were outstanding at year end and this segment reached a new record of PLN 10,855bn (+57%). The CP market was up 48% and amounted to PLN 14,794bn. One should note two factors that occurred on the global DCM last year. Firstly, high yield bond volume reached a record high again and hit USD 406.7bn, including USD 217.5bn in the US (+66% yoy) and USD 55.9bn in Europe (+46% yoy). It resulted mainly from a volume decline in investment grade issues as well as stronger belief among investors in the global economic recovery and therefore a greater appetite for risk and yield. Secondly, a record was also reached by Emerging DCM. It reached USD 758.7bn, having surpassed the previous record of USD 695bn set in It reflected a flow of funds from developed to Emerging Markets, which are perceived to have a bigger potential to rise in comparison to Western Europe and USA, which have been afflicted additionally by the crisis in the banking sector was the first full year of the Catalyst platform operating, which was launched by the Warsaw Stock Exchange and BondSpot on 30th September During 2010, 69 new bond issues debuted and the 109 issues which were outstanding and listed on Catalyst amounted to PLN 21,552bn. It is an undoubted success given that few people believed in the likely prosperity of this project. To further the success of the platform, growth in turnover is necessary, which certainly would be assured if banks were admitted to conduct direct transactions on that market. Insofar as the outlook for 2011, on the basis of our internal research and quarterly surveys conducted by Fitch among the top 100 investors in Europe, we believe that the strong supply of high yield bonds will continue. This results from constraints in bank loans for high yield entities as well as yield chasing by investors. Furthermore, in January 2011 already 55% of surveyed investors were fearful of inflation, while in July 2010 that percentage was only 12%. Majority of investors surveyed reckon also that the Euro Zone will muddle through as a result of the PIIGS problems which scared investors last year. Volatility will not disappear from the markets. Investors assume a growth in bond issues by banks and Emerging Market corporates. Such firms will remain favoured issuers for investors. Mirosław Dudziński miroslaw.dudzinski@fitchratings.com (+48 22) Director at Fitch Ratings responsible for business and relationship management in area of Central and Eastern European corporates and public finance entities 2

3 Commercial Paper (CP) Market In Q the value of Commercial Paper debt market reached PLN 14,79 bn, an increase of 48,4% y/y, and quarterly dynamics of +5,5%. There are 16 lead managers and dealers on the market, with 5 largest: ING Bank Śląski, PKO BP,,, Bank Handlowy, holding a total market share of 88,6%. CPs constituted 21,99% of the total market value. Market share of leading CP organizers by debt value ING Bank Śląski PKO BP Bank Handlowy 8,7% 6,9% 11,4% 10,3% 25,9% 21,4% 23,4% 19,8% 25,3% 14,6% 17,0% 15,3% % 5% 10% 15% 20% 25% 30% Corporate Bond Market (with maturities over 365 days) In Q the value of the corporate bond market with maturities over 365 days amounted to PLN 17,57 bn. Quarterly dynamics were +7,2%, while yearly amounted to +44,6%. In Q new issues with a total value of PLN 2,97 bn were placed on the market by: Boryszew SA, Empik Sp. z o.o., ENERGA- OPERATOR S.A., Geo Sp. z o.o., Grupa ADV, IPF Investments Sp. z o.o., Jarocin PWIK, Kruk SA, KWB Konin S.A., Magellan SA, Międzynarodowe Targi Łódzkie Sp. z o.o., MPWiK w m.st. Warszawie S.A., MWIK w Bydgoszczy Sp.z o.o., NFI Empik SA, PBG, PLG, Polnord SA, Powiatowy Zespół Opieki Zdrowotnej w Ostródzie, Rank Progress S.A., Sygnity SA, Tauron Energia S.A., Wodociągi Kępińskie Sp. z o.o., Zakład Komunikacji Miejskiej w Gdańsku Sp. z o.o. Corporate bond issues constituted 26,13% of the total market value. Corporate bonds placed in Q lead managers' share (over 365 days) Corporate bonds placed in lead managers' share (over 365 days) PKO Bank Polski 21,40% ING Bank Śląski 19,86% 21,39% 14,09% Copernicus Securities SA 8,65% 9,64% 17,89% 15,43% 15,79% 29,06% 10,65% PKO Bank Polski 8,44% ING Bank Śląski 7,72% 3

4 Bank Debt Market (with maturities over 365 days) The value of outstanding bank debt, with maturities over 365 days amounted to PLN 24 bn. Yearly dynamics amounted to +26,8% and quarterly to +1,5%. In Q there were issues of Bank Millennium, BOŚ Bank, Hipoteczny, BS Biała Rawska, Krakowski Bank Spółdzielczy, Pekao Bank Hipoteczny S.A., Santander Consumer Bank SA. The total value of all these issues amounted to PLN 1,33 bn. Bank non-government debt issues constituted 35,75% of the total market value. Bank debt placed in Q lead managers' share (over 365 days) ING Bank Śląski 22,50% 18,00% Bank debt placed in 2010 lead managers' share (over 365 days) including infrastructure bonds by BGK 9,45% 4,84% BGK 22,50% Bank Millennium 2,79% BGK 76,73% ING Bank Śląski 3,63% 32,29% Bank BPS/Dom Maklerski BPS 1,93% Bank BPH 0,48% Bank Millennium 2,63% Bank BPS/Dom Maklerski BPS 2,24% The performance of the Polish banking sector was robust in Impairment charges remained, as expected, at elevated levels, however in absolute terms they were almost 15% lower than in 2009 supporting improvement of pre-tax profits. What is more important is that the pre-impairment profits improved as well by around 10% yoy driven by higher than expected margins on the back of lower funding costs. Fee and commission income improved as well. Total revenue improved by around 7% yoy and the quality of 2010 revenues was better with reduced share of trading-related income. Operating environment remains supportive for banking sector in Poland and Fitch expects further profitability improvement in 2011 driven by revived demand for corporate loans, which failed to materialize in 2010, stable demand in consumer segment and reduced impairment charges. The potential negative impact of a bank levy is difficult to assess as there is still no clarity on whether and when it will be introduced and what form it may take. Against this backdrop, individual ratings of Polish banks remained stable over 2010, while in February the individual rating for Bank Pekao was upgraded to B/C. Fitch sees some potential for upward rating pressure on individual ratings for limited number of Polish banks provided that they will maintain conservative approach to managing risks and growth. While the situation on the domestic market was gradually improving banking sectors in some peripheral Eurozone countries experienced problems. This resulted in rating downgrades for some banks in these countries (Greece, Portugal). This in turn prompted negative rating actions for support driven IDRs for their subsidiaries in the region, including Poland. Many of Polish banks have their Long-term IDRs based on potential support from their respective parents. Fitch s view of very strong propensity of parents to support subsidiaries was confirmed by the crisis. However, the high costs of the recent crisis prompted actions to introduce mechanisms reducing or eliminating the use of sovereign support to troubled financial institutions. This may negatively affect Fitch s view on the state support available, especially for those banks that have enjoyed state support and have their Long-term IDRs at Support Rating floors. This in turn may have negative implications for ratings of their subsidiaries where ratings are support driven. However, improving fundamentals and an improved micro and macro prudential regulatory framework may mitigate this trend. Another risk mitigant in the local context is the fact that current Individual ratings of many Polish banks indicate investment-grade unsupported IDRs, which reduces the risk of multi-notch downgrades if Fitch s assessment of available parental support changes. Artur Szeski artur.szeski@fitchratings.com Director 4

5 Municipal Bonds (with maturities over 365 days) In Q the value of the municipal market amounted to PLN 10,85 bn. Yearly dynamics were +57,2%, while quarterly amounted to +18,4%. In Q new municipal bonds with total value of PLN 1,89 bn were issued by: municipalities: Barcin, Barlinek, Bełżyce, Białystok miasto, Biecz gmina, Bielawa, Bobolice, Bogdaniec, Boguchwała, Braniewo gmina, Braniewo miasto, Brodnica, Brodnica gmina, Brusy, Brzeg Dolny, Brzesko, Buk, Bytów gmina, Cewice gmina, Chęciny gmina, Chmielnik, Chojna gmina, Ciechanów, Cieszanów gmina, Cieszków, Czarna Dąbrówka gmina, Czarne, Czerwiona Leszczyny miasto, Dęblin, Dębnica Kaszubska Gmina, Długosiodło gmina, Dobczyce, Dobiegniew gmina, Dobrzeń Wielki, Dolsk miasto i gmina, Dopiewo, Drezdenko, Drobin, Duszniki-Zdrój, Dywity, Elbląg gmina, Elbląg miasto, Ełk (gmina), Ełk (miasto), Gdańsk miasto, Głuchołazy, Goleniów, Góra Kalwaria, Górzno gmina, Grajewo, Gronowo Elbląskie gmina, Grójec, Grudziądz, Gubin, Inowrocław, Izabelin, Jabłonowo Pomorskie, Jaktorów gmina, Jastków, Jawor gmina, Jaworzyna Śląska, Jedlina-Zdrój, Jednorożec, Jelenia Góra, Jerzmanowa gmina, Jutrosin gmina, Kartuzy gmina, Kartuzy gmina, Kobylanka gmina, Kołobrzeg gmina, Kołobrzeg miasto, Komorniki gmina, Konopiska, Końskie gmina, Koronowo gmina, Kościan, Kościerzyna gmina, Kozienice gmina, Koźmin Wielkopolski, Kórnik, Krasnobród, Krobia, Kruszwica, Krzeszyce gmina, Krzynowłoga Mała gmina, Krzyż Wielkopolski gmina, Książ Wielki gmina, Legionowo, Leszno, Lębork, Łapy gmina, Łaszczów gmina, Łobez, Malczyce gmina, Małomice gmina, Marki, Męcinka Gmina, Miastko gmina, Miejska Górka gmina, Mielno, Mielno Gmina, Międzyzdroje, Milicz gmina, Młynary Miasto i Gmina, Mogilany, Morąg gmina, Moryń, Mosina, Myślibórz, Nagłowice, Nidzica, Nieporęt gmina, Nowa Ruda (gmina), Nowa Ruda (miasto), Nowa Sól, Nowa Wieś Lęborska Gmina, Nowe Skalmierzyce, Oborniki, Obryte gmina, Olecko, Oleśnica (gmina), Olkusz, Olszanka gmina, Opalenica, Orneta gmina, Osieczna, Ostrołęka, Ostrów Wielkopolski, Oświęcim miasto, Pabianice Gmina Miejska, Pakosław gmina, Pątnów, Pelplin Miasto, Pełczyce, Pilawa, Płock miasto, Pniewy, Pokrzywnica gmina, Polanica-Zdrój, Polanów gmina, Połczyn-Zdrój, Poznań miasto, Prabuty Miasto Gmina, Prażmów, Proszowice, Przasnysz miasto, Przelewice, Przodkowo, Puławy, Pyrzyce, Radlin, Rakoniewice, Raszyn gmina, Rejowiec Fabryczny Miasto, Rydzyna, Ryki, Rząśnik gmina, Rzeszów miasto, Sandomierz miasto, Serock Miasto, Sędziszów, Sędziszów Małopolski gmina, Sieradz, Sieraków, Skarbimierz, Skaryszew Miasto i Gmina, Skąpe, Skierbieszów gmina, Słupsk, Sokołów Podlaski, Solec Kujawski, Sosnowiec, Starachowice, Stargard Szczeciński miasto, Stąporków gmina, Strzegom gmina, Sulików gmina, Swarzędz gmina, Szprotawa, Środa Śląska, Świeradów-Zdrój gmina, Świerzawa, Świętochłowice miasto, Tarczyn, Tarnów Opolski, Tczew, Teresin, Trawniki gmina, Trzebnica, Trzydnik Duży, Turek gmina miejska, Ustka gmina wiejska, Ustka miasto, Ustronie Morskie, Wałbrzych, Warka, Warszawa, Wąsosz gmina, Węgrów, Widuchowa, Wisznia Mała gmina, Wiślica gmina, Witnica, Wodzisław Śląski, Wołomin gmina, Wołów, Wschowa, Wschowa gmina, Zator, Zawonia, Zbiczno gmina, Zduny, Zgorzelec miasto, Zielonki, Złota gmina, Zwoleń, Żukowo gmina, Żyrardów; counties: Ełk Powiat, Gniezno Powiat, Gołdap powiat, Grójec powiat, Inowrocław powiat, Jarosław Powiat, Jawor powiat, Kartuzy powiat, Krotoszyn Powiat, Milicz powiat, Myślibórz powiat, Nowy Targ powiat, Oborniki Powiat, Oborniki Śląskie powiat, Olecko powiat, Ostróda powiat, Ostrów Wielkopolski powiat, Piaseczno powiat, Płock powiat, Ropczycko-Sędziszowski powiat, Sochaczew powiat, Starachowice powiat, Starogardzki powiat, Starograd Gdański powiat, Szydłowiecki powiat, Świebodzin powiat, Świecko powiat, Tczew powiat, Toruń powiat, Trzebnica powiat, Wieliczka powiat, Wieruszowski powiat, Wołów powiat, Zduńska Wola powiat, Zgorzelec powiat, Zielona Góra powiat, Zwoleń Powiat, Żagań powiat, Żary powiat; regions of opolskie and wielkopolskie. Municipal bond issues constituted 16,13% of the total market value. Municipal bonds placed in Q lead managers' share 18,89% 15,45% DM Banku Handlowego 7,61% Municipal bonds placed in lead managers' share BGK 6,66% 17,58% BGK 10,78% Grupa BRE Banku 11,78% PKO Bank Polski 32,19% 22,69% 13,43% PKO Bank Polski 24,31% 18,63% 5

6 Poland Overall Budgetary Performance in 2010 Despite Poland s economy improved in 2010, with the GDP growth of 3% local governments (LGs ) budgetary performance has weakened. Fitch expects the overall operating margin to drop significantly below the 2009 level of 10.6%; the estimated operating margin of 8% is an optimistic one. This will result from weakening financial position of corporate sector, growing unemployment and the state government decisions which negatively affected local budgets on their operating revenue and expenditure sides. Cuts in personal income tax (PIT) rates to 18% and 32% in 2009 from 19%, 30% and 40% and tax relieves in PIT for families with children have deprived LGs significant amount in PIT revenue which had not been compensated by any other financial source. This negative trend was strengthened by growing unemployment (to 11.5% by the end of October 2010 from 9.5% at 2008-end) limiting PIT collection. Shared taxes (personal and corporate income tax) received by local governments by the end of October 2010 were significantly below amounts collected in According to the MoF data, PIT revenue received by LGs in the first 10 months of 2010 was by 2% lower than in similar period of 2009, while CIT revenue was about 14% lower. In addition, LGs face continued pressure on operating expenditure reflecting growing costs of LGs services and underfunded responsibilities transferred to local governments by the state, mainly, in such areas as social care, education, road maintenance, staff costs etc. Staff expenditure continues to grow despite lower than projected revenue. The largest contributor to these costs is education in which personnel costs represent by average above 70% of operating spending in the sector. Raising teachers salaries widen the gap between the educational subsidy received from the state and operating costs in education which has to be financed by LGs from their own revenue. In 2010 these costs may increase by 7% while the educational subsidy by only 4.8% which means that LGs share in financing the sector will further increase from the current 25%-30% share in majority of LGs. The weakening of the overall operating performance negatively impacted LGs self-financing capacity and this process may continue in mainly due to growing operating expenditure pressure which Fitch observes since the last two-three years. Capital expenditure accelerated in 2010 as LGs do not have much time to complete their investment projects financed from the EU grants in the programming perspective Many projects are in the middle of implementation stage, several others are delayed. According to LGs budgets, in 2010 capex may reach PLN61bn up from PLN43.1bn in Weaker operating performance and high capex has speed up debt growth in The results posted in 20103Q reflect the LGs high pressure on debt growth: LGs capital expenditure increased by 4.8% yoy while their direct debt rose by about 12%. According to Fitch s rough estimations direct debt may increase by about 30% in 2010 from PLN40.3bn at end It may account for over 40% of current revenue from 30% in Debt repayment (debt-to-current balance) ratio of the sector may grow to about 7 years up from 3 years in Revenue Prospects in 2011 For 2011 Fitch expects LRGs revenue to increase slightly resulting from projected GDP growth (3.5%). Tax revenue which depends on the local tax base should increase in line of growing local economy. Income taxes in the 2011 state budget seem to be projected too optimistically as this was in These projections are usually reflected in LGs budgets and may negatively impact their operating performance. In the 2011 state budget PIT revenue is projected to increase by 6% and CIT by 13% which is significantly above GDP growth of 3.5%. Fitch expects income taxes to grow by lower pace than projected due to weak financial position of companies and high unemployment. After a sharp drop in the number of real estate transactions initiated in 2009 and 2010, property transfer tax may increase in 2011 as some recovery signals like growing real estate prices and number of transactions were visible in Fitch does not expect this revenue to reach the 2008 level (of PLN13.4bn) but it is likely to exceed the actuals for 2009 (PLN7.8bn) and Fitch expects that in 2011 current transfers will grow above inflation (2.3%). According to the state budget the main item of current transfers, which is the general subsidy, should increase by 2.5% amounting to PLN48.4bn. The other current grants from the state should also grow (by 3.7%). The EU transfers for social programmes should also increase slightly in 2011 but depending on individual effectiveness of a LG in gaining EU financing. However, transfers, being earmarked revenue, are not protective to the sector s operating performance. In some cases they may put additional pressure on operating spending if LRGs have to co-finance responsibilities financed from current (state or EU) grants. Growing Pressure on Operating Expenditure Fitch expects the pressure on operating expenditure to remain high in 2011, with operating expenditure growing above operating revenue. Only some LGs will be able to maintain operating expenditure growth in line with the growth in operating revenue. The largest contributor to the growth of opex will be education. The 7% raise in teachers salaries in September 2010 will have its full-year cost effect in Growing spending in education will speed-up in September 2011 as another raise of teachers salaries (by 7%) is projected for September Additionally, the educational subsidy for 2011 was established on the base of the 2010 actual which however does not include the full year effect of salaries growth in This will result in the 2011 educational subsidy to be underestimated. In this context Fitch expects that LGs share in financing education to continue to increase. Another rigid operating expenditure item is social care. Since 2011 the state government increase standards in social care services provided by LGs, eg. the number of pupils in foster care pensions must not exceed 30 children while in 2010 this was 60. The other new LGs responsibility is to employ family assistants to take care on families socially dysfunctional. Transferring national road maintenance to LGs as their own responsibility financed from local budgets is another challenge to LGs finance. 6

7 Increase of the VAT from 22% in 2010 to 23% in 2011 will also affect negatively LGs budgets raising their spending on goods and services and investments costs. All these factors do not allow us to expect the operating expenditure to be better controlled in 2011 than in previous years. In Fitch opinion pressure on operating spending will increase in 2011 and be continued in the future. LGs operating performance may weaken in the future if they do not tighten their control on operating spending. Capital Expenditure and Funding Capital expenditure has grown dynamically in It is budgeted to reach PLN61bn in 2010 from PLN25bn in In 2011 onwards LGs capital expenditure should increase as the EU financed investment projects has to be competed by the end Although significant proportion of capex will be financed from EU grants it will require LGs to co-finance it. In Fitch opinion LG will face strong demand on debt increase in the medium term (by 2013-end) with the highest one in , as LGs self-financing capacity is diminishing. In Fitch expects high pressure on investments as many infrastructure projects are at their implementation stage and are cofinanced by the EU, therefore have to be completed by end Some large cities (Warsaw, Poznan, Gdansk and Wroclaw), which will host European Football Championships in 2012, are under extraordinary investment pressure as they have to implement many projects related to this event. LGs will have limited flexibility in cutting their capex in case of a need as EU co-financed projects have to be completed till end-2013, as otherwise a LG will have to return back the already received EU grants on the projects not being completed on time. High capex will push LGs debt up sharply, close to legal debt limit of 60% of total revenue. Debt prospects The sector s 2010 deficit before debt variation is budgeted to total about PLN26bn up from PLN13bn in Although it is likely to be lower than budgeted, but still it will significantly exceed the 2009 and will be largely covered from debt. For Fitch expects further grow in direct debt. Furthermore, the LGs access to debt may be constrained by growing state government debt, which, according to some projections, may exceed 55% of GDP, breaching the 55% level that triggers debt limits on the state budget and public debt, including LRGs debt (see special report: Institutional Framework for Polish Subnationals). Indirect risk To limit LGs demand on debt financing, several investments have been undertaken by public-sector entities (PSEs). This enables LGs to limit their demand on direct debt but results in a growth of indirect risk. There is no legal obligation to LGs to report in full their indirect risk. However Fitch notices that indirect risk of LGs rated by Fitch increases steadily since the last three years. For many LGs it more than doubled in To support financially PSEs sector LGs make capital injections into their companies implementing high investment projects. This does not affect LGs debt and debt ratios but it is usually a moral obligation of a LG and will be continued until investment completion. Knowing the scale of PSEs investments Fitch expects indirect debt continue to grow in Elżbieta Kamińska elzbieta.kaminska@fitchratings.com Senior Director 7

8 Investors December 2010 Banks owned: 87,64% of all municipal issues 81,8% of all mortgage bonds 23,16% of all corporate issues and other (non-bank) short-term issues. 17,79% of all bank issues (short- and long-term) Corporates had in their portfolios: 40,92% of all corporate issues and other (non-bank) short-term issues 8,91% of all issues of bank papers. 0,04% of all municipal issues Foreign investors preferred: corporate issues and other (non-bank) short-term issues (2,9%) municipal bonds (2,72%) bank papers (0,73%). Pension funds invested in: bank bonds (14,15%) corporate issues and other (non-bank) short-term issues (9,19%) mortgage bonds (7,18%) municipal bonds (4,3%) Investment funds had: 30,13% of all issues of bank papers 15,19% of all corporate issues and other (non-bank) short-term issues 9,25% of mortgage bonds 3,53% of municipal bonds Insurance companies held: bank papers (6,44%) corporate issues and other (non-bank) short-term issues (3,44%) mortgage bonds (1,77%) municipal bonds (1,58%) Investors: non-government debt instruments in banks and customers portfolios, as of December 31, 2010 (based on data from 21 banks) Bank debt instruments debt instruments (PLNm) Total Up to 365 days Over 365 days Mortgage Bonds Municipal bonds Total Up to 365 days Over 365 days Total Banks 1 320,50 680,00 640,50 846, , , , , ,50 Insurance companies 477,80 30,10 447,70 18,30 116, ,50 29, , ,90 Pension funds 1 050,30 50, ,30 74,30 316, ,80 19, , ,00 Investment funds 2 236, , ,60 95,70 259, ,80 427, , ,00 Corporates 661,40 572,20 89,20 0,00 3, , , , ,00 Foreign entities 54,50 51,00 3,50 0,00 199,90 897,90 2,50 895, ,30 financial institutions 10,00 10,00 0,00 0,00 7,40 846,40 102,60 743,80 863,80 entities 1 612,20 31, ,20 0,00 6,80 758,20 546,20 212, ,20 Total 7 423, , , , , , , , ,70 Source: The National Bank of Poland Investors in non-government debt (long- and short-term), as of December 31, 2010 Corporates 28,49% Investment funds 15,60% Foreign entities 2,47% Pension funds 9,16% financial institutions 1,85% Insurance companies 3,59% Source: National Bank of Poland, based on data from 21 banks Banks 33,76% entities 5,09% 8

9 Foreign Long-term Local International ratings Short-term Foreign Local Individual rating Support rating Support rating floor National ratings Long-term Foreign Corporates Aquanet BBB- A (pol) Koleje Mazowieckie - KM BBB BBB+ AA- (pol) ORBIS BBB+(pol) PGE Grupa Energetyczna BBB+ BBB+ PKN Orlen BB+ BB+ B B Przedsiębiorstwo Wodociągów i Kanalizacji Olsztyn BBB (pol) Tauron Energia BBB BBB Telekomunikacja BBB+ F2 Zakład Komunikacji Miejskiej w Gdańsku BBB- A (pol) Financial Institutions Bank Handlowy w Warszawie 1 Bank Millennium BBB F3 C/D 2 A (pol) Bank Ochrony Środowiska BBB F3 D 2 BBB Bank Pekao A- F2 C 1 Bank Zachodni WBK BBB+ F2 C 3 BB A F1 C/D 1 Short-term Local BRE Leasing A F1 1 Electus B- B- B B B+ (pol) B (pol) Europejski Fundusz Leasingowy S.A. A+ F1 1 AAA (pol) F1+ (pol) Getin Noble Bank BB B D 5 BBB (pol) ING Bank Śląski A F1 C 1 Pekao Bank Hipoteczny SA A- F2 1 AA (pol) F1+ (pol) PKO BP 2 Municipalities Białystok BBB BBB A (pol) Bielsko-Biała BBB+ BBB+ AA- (pol) Bydgoszcz BBB BBB A (pol) Częstochowa BBB BBB Gdańsk BBB+ BBB+ Gliwice BBB BBB A (pol) Jarocin BBB + (pol) Katowice A- A- Kielce BBB- BBB- A-(pol) Koszalin BBB-(pol) Łódź BBB+ BBB+ AA- (pol) Myślenice BBB (pol) Olsztyn BBB + (pol) Opole Ostrów Wielkopolski BBB (pol) Płock BBB+ BBB+ AA-(pol) Rybnik Rzeszów BBB BBB A+ (pol) Szczecin BBB+ BBB+ F2 Toruń BBB BBB A (pol) Warszawa A-(pol) A (pol) AAA (pol) Wrocław BBB+ BBB+ A+ (pol) Zabrze BBB- BBB- A- (pol) Zielona Góra BBB- BBB- A- (pol) Regions Województwo dolnośląskie A- A- AA (pol) Województwo łódzkie A- A- AA- (pol) Województwo małopolskie A- A- AA (pol) Województwo mazowieckie A- A AAA (pol) Województwo wielkopolskie A- A F2 AA+(pol) F3 (pol) 9

10 Covered Bonds Pekao Bank Hipoteczny SA Long-term rating A Revenue bonds Long-term rating National Long-term rating Miejskie Przedsiębiorstwo Komunikacyjne Łódź BBB- Miejskie Wodociągi i Kanalizacja w Bydgoszczy BBB- Zakład Komunikacji Miejskiej w Gdańsku BBB A+ (pol) Insurance Companies Insurer Financial Strength National Insurer Financial Strength Towarzystwo Ubezpieczeń na Życie EUROPA SA BB BBB (pol) Towarzystwo Ubezpieczeń EUROPA SA BB BBB (pol) Country Long Term Issuer Default Rating Short Term Issuer Default Rating Local Currency Long Term Issuer Default Rating Country Ceiling Poland A- F2 A AA- Bulgaria BBB- F3 BBB BBB+ Croatia BBB- F3 BBB BBB+ Czech Republic A+ F1 AA- AA+ Estonia A F1 A AAA Lithuania BBB F3 BBB+ A Latvia BB+ B BBB- BBB Macedonia BB+ B BB+ BBB- Serbia BB- B BB- BB- Slovakia A+ F1 A+ AAA Slovenia AA F1+ AA AAA Hungary BBB- F3 BBB A- Outlook POSITIVE NEGATIVE EVOLVING STABLE Watch POSITIVE NEGATIVE EVOLVING Selected press releases and rating actions Q4 2010: Fitch Affirms Polish City of Koszalin at BBB-(pol) ; Outlook Stable Fitch Affirms Polish City of Lodz at 'BBB+'; Outlook Stable Fitch: Key Credit Drivers for Polish Water and Sewage Sector Fitch: Stable Outlook For Central European Oil & Gas in Fitch Affirms Polish Municipality of Jarocin at 'BBB+(pol)'; Outlook Stable Fitch Rates City of Warsaw's 2025 Bond 'AAA(pol)' Fitch: Stable Outlook For Central European Utilities in 2011, Despite Rising Leverage 10

11 Fitch Rates Pekao Bank Hipoteczny SA's Covered Bonds 'A' Fitch Revises Municipality of Myslenice's Outlook to Negative Fitch Affirms Polish City of Czestochowa at BBB ; Outlook Stable Fitch: Poland Needs Fiscal Consolidation to Retain Rating Level Fitch Assigns ORLEN Eurobonds Expected 'BB+' Rating Fitch Rates Koleje Mazowieckie 'BBB'/'BBB+'; Outlook Negative Fitch Downgrades Poland's Bank Millennium to 'BBB'; Outlook Negative Fitch Rates Poland's City Of Torun 'BBB'/'A(pol)'; Outlook Stable Fitch Assigns ZKM Gdansk's PLN13.46m Revenue Bond 'BBB'/'A+(pol)' Final Ratings Fitch Affirms Polish City of Gdansk at 'BBB+'; Outlook Stable Fitch Places Poland's Bank Handlowy Support Rating on Watch Negative Polish Non-Government Debt Market: Q Summary Fitch: Polish Subnationals Continue to Face Inefficient Debt Regulations Fitch Assigns ZKM Gdansk's Upcoming Revenue Bond Expected 'BBB'/'A+(pol)' Ratings Fitch Affirms Polish Region of Lodzkie at 'A-'/'AA-(pol)'; Outlook Stable Fitch Affirms Polish City of Katowice at 'A-'; Outlook Stable Fitch Affirms Poland's Orbis at 'BBB+(pol)'; Outlook Changed to Stable This document has been prepared by employees of Fitch S.A.; address: Królewska Str, No 16, Warsaw, Poland. phone: (+48 22) ; fax: (+48 22) ; rating@fitchpolska.com.pl. Fitch S.A. has used due care in the preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. Fitch S.A. shall owe no liability whatsoever to any person for any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without Fitch S.A. prior written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell. 11