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PKO’s future is uncertain

Poland’s state savings bank’s long-delayed initial public offering is under threat, yet its CEO is optimistic. Nicholas Spiro reports from Warsaw.
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Powszechna Kasa Oszczednosci Bank Polski (PKO BP), the last of Poland’s big state-owned banks, has some lingering image problems. Excluded from privatisation in the early 1990s because of its crippling legacy of communist-era housing loans and put off-limits to foreign strategic investors to preserve its Polish identity, PKO is still seen as an old-fashioned, unwieldy and heavily politicised former monopolist. Yet these are perceptions that it is keen to rebut as it prepares to go public at the end of this year in what is expected to be one of east Europe’s largest stock market flotations.

On March 22, Poland’s treasury ministry picked a consortium of Credit Suisse First Boston (CSFB) and the brokerage arm of Bank Gospodarki Zywnosciowej (BGZ), a local agricultural bank, to advise it on the sale of a 30% stake in PKO on the Warsaw Stock Exchange. This is the fifth attempt to privatise the bank. Previous efforts foundered because of delays in shoring up its capital, a sharp economic slowdown in 2001-02 and a steely determination on the part of politicians to keep the retail giant in local hands. Successive governments eschewed a sale to a strategic investor in favour of a politically palatable stockmarket listing that keeps ownership dispersed and allows the state to retain majority control.

Wider target

An earlier plan would have targeted the offering exclusively at local retail investors but the treasury is now prepared to allow foreign funds to buy shares in the bank. “If the government goes ahead with the sale, then it has to make sure it is a success,” says Artur Szeski, banking analyst at CDM Pekao Securities in Warsaw. “PKO has a brand name recognised by everyone and there will be a lot of interest from domestic and foreign buyers.” The treasury is under pressure to raise 8.8bn zlotys ($2.3bn) in asset sales this year to help plug a swelling budget deficit. PKO’s privatisation alone would fetch 4bn-5bn zlotys ($1bn-$1.3bn).

The offering has been eagerly awaited. None of Poland’s lenders, with the possible exception of UniCredito-owned Bank Pekao, has anything like the nationwide reach of PKO. With 1246 branches and roughly five million savings accounts, it commands one third of Polish banks’ retail deposits, one fifth of their household loans (plus an enviable 40% of fast-growing mortgage loans) and one sixth of their assets. Although it steadily lost market share in the 1990s to nimbler foreign-owned rivals, it achieved its best results to date in the past two years. “We reversed the trend [of declining market share] and maintained our leading positions in our core market segments,” says Andrzej Podsiadlo, PKO’s chief executive.

In the first three quarters of last year, PKO posted a net profit of 994m zlotys, a little less than the 1.05bn zlotys it earned in 2002 (its best result to date), which accounted for more than 40% of the net profit of Poland’s banking sector. Its loans in the first three quarters of last year grew by 14%, driven by a stunning 120% increase in mortgage lending and a 150% rise in credits to the budget sector. The bank’s 22.3% return on equity in 2002, although down 5.3% on 2001, was still the highest in the sector.

Mr Podsiadlo says the initial public offering (IPO) could not have taken place earlier because “nobody would have bought a bank with a heavy load of communist-era debts”.

Groomed for sale

The government groomed PKO for sale in the late 1990s by providing hefty guarantees for its old housing credits and bolstering its capital. “The bank gained a lot of support from the treasury. But they also improved the quality of their service – and they did this without a centralised IT system in place,” says Mr Szeski.

PKO recently invested 400m zlotys in a new integrated IT system as part of a sweeping three-year restructuring plan that is designed to streamline its operations and upgrade its products. Its 2002 acquisition of Inteligo, a catchy internet bank, from Bankgesellschaft Berlin’s Polish unit, has allowed it to push aggressively into online banking. “This helps us fight the stereotype that PKO is a bank solely for pensioners,” says Mr Podsiadlo.

Unlike its main domestic rivals, Pekao and Bank Austria-owned BPH, which experienced a severe deterioration in asset quality as Poland’s economy faltered in 2001-02, the retail giant emerged from the downturn relatively unscathed. “PKO has limited exposure to corporate lending, so when things go wrong, it’s fairly well protected,” says Mr Szeski.

Some analysts claim that the bank benefits unfairly from lucrative government contracts and is still a financial arm of the state in certain strategic industries. But Mr Podsiadlo insists that the lender is not politicised. “This is nonsense. The government has no influence over our credit decisions, and our excellent results attest to this,” he says.

Yet PKO still suffers from a lack of transparency and shoddy corporate governance. “The offering will boost transparency,” says Mr Podsiadlo. Mr Szeski says: “It will give added credibility, prestige and open up new opportunities.”

Political shadow

Yet a successful offering is far from assured. Although Poland’s historic entry to the EU on May 1 (along with seven other post-communist countries) is likely to spark renewed interest in central and east European equities, prime minister Leszek Miller’s decision to step down on May 2 has plunged Poland into political uncertainty. The ruling social democrats (SLD), whose two-and-a-half year stint in power has been tarnished by a string of corruption scandals and constant high unemployment, are trying to rally parliamentary support behind president Aleksander Kwasniewski’s candidate for premier, Marek Belka, despite opposition from Poland’s rightist parties and the socialist wing of the SLD. If Mr Belka fails to win a confidence vote in parliament in the first half of May, then the president may decide to dissolve parliament and call for early elections in the autumn.

This could postpone PKO’s privatisation by several months or even keep the bank in state hands indefinitely, if Andrzej Lepper’s demagogic self-defence party (Samoobrona) wins a snap election – it is now the most popular party in Poland, according to some opinion polls, with nationwide support ranging from 24% to 30%. To make matters worse, the treasury itself may have imperilled PKO’s IPO. On March 19, treasury minister Zbigniew Kaniewski called for a merger of PKO and Powszechny Zaklad Ubezpieczen (PZU), Poland’s dominant insurer, to create a national champion in Polish finance.

PZU, a company that has long been a source of patronage for successive Polish governments (resulting in mismanagement and the plundering of funds), is embroiled in a high-profile legal dispute pitting the Polish state, which still owns 55% of the company, against Eureko, an Amsterdam-based alliance of insurers that bought a minority stake in 1999. After being promised a controlling stake in PZU by Poland’s previous government, Mr Miller’s SLD has refused to cede control of the insurer, prompting Eureko to launch arbitration proceedings before an international court in Stockholm. Analysts believe the prospect of a tie-up between PKO and PZU could dissuade investors from buying into PKO.

Mr Podsiadlo dismisses talk of a full-blown merger of PKO and PZU since this would fall foul of Poland’s banking and insurance regulations. Yet he sees benefits in a “capital link” given that the two groups’ customer bases overlap significantly, and says “every country has rules on foreign ownership [and] should have one large financial institution in local hands.”

Privatisation in jeopardy

Mr Szeski also believes a PKO-PZU tie-up would offer huge opportunities in bancasssurance. “Nobody has done this on a big enough scale [in Poland] to achieve the desired results.” Yet he warns that the PZU conflict could jeopardise PKO’s flotation. “Investors would need to know that the legal dispute with PZU has been settled or that the treasury has no intention of pushing head with a PKO-PZU tie up [prior to the bank’s privatisation.] The situation has to be clear,” he says.

PKO’s IPO once again hangs precariously in the balance. While the parlous state of Poland’s public finances puts a heavy premium on boosting revenues from asset sales, an increasingly volatile political landscape provides an inauspicious backdrop for one of the region’s biggest privatisations. Mr Podsiadlo believes the offering will go ahead but is focusing on completing the bank’s three-year restructuring plan. “Our success does not hinge on privatisation. It would not be disastrous for the bank if the offering was postponed,” he says. With PKO’s enviable market share and impressive financial results, it is Poland’s cash-strapped government that is in a much greater hurry to offload the minority stake. Yet Mr Podsiadlo admits a successful offering would do wonders for PKO’s still-dowdy image.

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Read more about:  Central & Eastern Europe , Poland