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Lenders hatch cautious consumer credit plans

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As economic uncertainty lingers, lending banks are vying for a slice of the retail market and, along with credit brokers, are honing their risk management skills. Nicholas Spiro reports from Warsaw.

After its sharpest downturn in a decade, Poland’s economy is coming back to life. Domestic demand rose by 2.3% year on year in the first quarter of 2003, the highest rate since early 2000. Retail sales in May were up 9.3%, following a 10.7% increase in April, while a monthly survey by the Ipsos agency revealed a sharp rise in consumer confidence in June.

Yet despite the signs that a recovery is under way, Poland’s banking sector is still feeling the pinch. Non-performing loans have risen to more than 20% of the sector’s total, while loans grew by just 2.9% last year, down from an average annual rate of 25% in the boom years of 1997-1999. “Everyone is acting cautiously and waiting for better times,” says Grzegorz Zawada, regional banks analyst at Erste Securities in Warsaw.

Retail attraction

With margins on corporate lending thinning as interest rates fall to a post-1989 low, banks are vying for a slice of the retail market where mortgage lending is belatedly taking off, growing by more than 30% last year – albeit from a tiny base. The lenders with an edge are those with specialised consumer finance units whose mastery of risk allows them to manage a large number of small payments.

Several foreign operators, such as the ubiquitous GE Capital and France’s Crédit Agricole, have gained a foothold in the market. Crédit Agricole acquired Grupa Lukas, Poland’s largest consumer credit company, in 2001. Kredyt Bank, a local lender majority-owned by Belgium’s KBC, runs Zagiel, another nationwide credit broker. Cetelem, a subsidiary of France’s BNP Paribas and the European leader in consumer finance, opened its first Polish branch in 1999.

As credit-driven patterns of consumption emerge, scores of lower-to-middle income Poles are flocking to the posrednicy (the Polish term for credit intermediaries) for credit cards, cash loans, car loans and instalment loans. “A large percentage of our clients have never had a relationship with a commercial bank,” says Piotr Stepniak, vice-president of Lukas. Lenders have exploited partnerships with large and medium-sized retailers to expand distribution channels and reach new clients.

Brokers weather storm

According to figures from the Conference of Financial Companies in Poland (KPF), an industry group, the largest credit brokers lent just over 7bn zlotys ($1.7bn) last year, a 0.8% fall on the previous year and a huge plunge from the stellar growth rates of the late 1990s. Brokers have weathered the economic storm by tightening lending and strengthening risk management systems. “We reduced the level of unsecured lending, particularly cash loans, to new customers,” says Mr Stepniak.

With unemployment in Poland at just under 18%, lenders are scrutinising their clients with extra care. Sophisticated scoring models that allow them to pigeonhole customers according to their level of risk are updated constantly and adapted to local conditions. “What works in Paris doesn’t necessarily work in Wroclaw,” says Mr Stepniak. He says Crédit Agricole, unlike some other foreign investors in Poland’s financial sector, deftly handled its acquisition of Lukas by retaining the company’s popular brand name and keeping local management in place.

Risk management

Poland set up a Western-style credit bureau (BIK) in 1999 but the agency does not keep track of short-term loans. The dearth of credit histories in eastern Europe puts a premium on foreign owners’ risk management tools, which combine behavioural and statistical expertise with state-of-the-art debt recovery systems. “Fraud used to be a problem when we set up shop,” says Gilles Marion, the head of Cetelem’s Polish operations. “But now it’s under control. We devote a considerable amount of time to understanding our clients in order to be able to advise them should they default on a payment.”

With its prized database of 4.6 million clients built up during an 11-year period, Lukas, which began its operations as an importer of audio-video equipment, is best placed to assess the riskiness of its borrowers. “In this business, time and experience are key. We’re now able to gauge risk not only by product type, but right down to the individual store,” says Mr Stepniak.

As competition heats up and the Polish retail sector consolidates, consumer credit companies are under pressure to retain and establish new partnerships with distributors. “Our strategy is to build win-win partnerships. We’re not going for market share at any price,” insists Mr Marion.

Market weaknesses

Other regulatory woes in Poland’s consumer finance market that increase the cost of credit include a flawed tax regime that does not allow lenders to deduct bad debts from their books; inadequate protection for lenders, particularly in the case of mortgage lending; and a lack of transparency in the sector despite the passage of a new law last September on consumer credit. “Some companies are not playing by the rules because their products do not include the proper APR [annual percentage rate],” says Mr Marion.

Yet, despite these failings, Cetelem still considers Poland to be one of its “strategic markets” along with the UK and Germany. Two new entrants, Household, the US consumer finance giant recently acquired by HSBC, and Spain’s Santander Central Hispano, are expected to start their operations in the coming months. Household has already entered Hungary through a partnership with Dixons, the UK electrical retailer, while Santander Consumer Finance is beginning its push into central Europe.

The confidence factor

Much hinges on Poland’s economic upturn. Mr Zawada expects GDP growth of nearly 3% this year but fears the recovery may prove fleeting if the leftist government of the prime minister Leszek Miller does not carry out much-needed structural reforms and overhaul public finances. Poland’s new economic supremo, Jerzy Hausner, favours a more expansive fiscal policy to boost growth to 5% next year and bring down unemployment. This may provide a fillip to consumer finance companies but it will be short-lived if foreign investors lose confidence in Poland’s economy.

The privatisation of the last of Poland’s big state-owned banks, PKO BP, has been further delayed after the treasury ministry announced it had annulled a tender for privatisation adviser. The ministry received two offers, one from Citigroup Global Markets Polska in co-operation with Bank Handlowy’s brokerage house and another from Credit Suisse First Boston together with PKO BP’s brokerage house. In a press release on July 11, the treasury said it was legally obliged to cancel the auction because one of the two bids fell foul of the tender rules (at least two offers were required to validate the auction). The ministry claimed that the representatives of PKO BP’s brokerage unit “exceeded their competencies” in representing the brokerage.

At a press conference at the state treasury on July 14, Piotr Czyzewski, Poland’s treasury minister, said a second tender would soon be launched with a view to selling a minority stake in the savings giant “in the second or third quarter of next year”.

Analysts say the delay in PKO BP’s privatisation will not weaken its position in the sector but it could be a problem for the bank’s management. “It’s difficult to plan ahead without knowing the precise structure of the sale,” says Artur Szeski, banking analyst at CDM Pekao Securities in Warsaw.

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