One year after the US Federal Reserve announced it intended to scale down its quantitative easing programme, and six months after it actually started to do so, the prospect of interest rates creeping up is still a frightening proposition for many businesses across the globe. For Polish banks, however, it is just the opposite. They are looking forward to interest rates going up as it will boost their revenues.
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In better shape than many of their peers in eastern Europe and helped by a resilient economy, Polish banks are now looking for ways to continue to grow despite headwinds such as shrinking net interest margins, various stress-tests and a multitude of regulatory constraints that will add to their costs.
If interest rates do rise, Polish banks will be able to raise the interest they charge on the loans they make, thus increasing their net profit margins and revenues, even if volumes remain flat or increase very slowly.
Loans challenge
"The main challenge for the Polish banks will be increasing the volume of loans. There is a recovery, but there are no significant signs that lending is growing," says Magdalena Komaracka, a banking stocks analyst with Austria's Erste Bank.
Credit rating agency Moody's, which in October last year upgraded the outlook of Polish banks to 'stable' from 'negative', forecasts steady performance for the rest of this year. "Moody’s expects this year to be a year of growth; not very rapid growth, just in line with economic growth," says Irakli Pipia, Moody's vice-president and senior analyst.
Polish gross domestic product expanded by 2.7% year on year in the fourth quarter of 2013, up from 1.9% in the third quarter. Analysts at economic research house Capital Economics expect growth to accelerate, "albeit modestly", over the coming quarters as the country's export-led industrial sector benefits from a recovery in the eurozone and as domestic consumption increases gradually.
Polish growth had slowed in line with that in the wider EU, although the country did not experience a recession in 2009. In response, the Polish central bank had cut rates to a record low of 2.5% and "the historically lowest interest rates put pressure on the banks' net interest income", says Zbigniew Jagiello, the chief executive of PKO Bank Polski, the country’s biggest bank by assets, according to The Banker’s Top 1000 World Banks.
Low interest
The low interest rate environment has initially helped Polish lender Getin Noble to decrease its cost of funding, which is still about 200 basis points higher than that of its peers, says the president of the bank’s management board, Krzysztof Slawomir Rosiński.
Unlike many other big banks in Poland, Getin is not owned by a large Western bank. It has grown its assets at a pace of between 25% and 30% a year in recent years, says Mr Rosiński. To do that, it has raised all its funding by attracting deposits on the local market, and did this by paying higher rates than its rivals.
"But now we've reached our target," says Mr Rosiński. "Rate increases after 2015 will be positive for us. The market is begging for higher interest rates because it will re-evaluate... assets. To be honest, we would like it. Most of our loans are floaters. Most of our passive side is on fixed rates."
Until interest rates do increase, however, the banks are positioning themselves for growth in different ways, each drawing on its particular area of strength to try to outsmart rivals.
The year of M&A
For the biggest banks, size is the best weapon. And becoming even bigger is important, despite warnings from the Polish regulator, KNF, that it wants the country's banking sector to remain more fragmented than in western Europe, as it wants to avoid having to deal with 'too big to fail' banks.
Mr Jagiello, whose PKO Bank Polski is listed on the Warsaw Stock Exchange (WSE), says there needs to be a compromise solution on this issue as he sees the sector as too fragmented. "In my opinion, there is only space for between five and seven banks in the Polish retail market in the longer term," he says. "Those who will not be able to build the scale effect will be losing because they won't be able to compete in terms of prices and costs in the low-rate environment. Therefore I expect further consolidation in the banking sector in 2014."
PKO, which in 2013 bought the Polish operations of Scandinavian bank Nordea, is going for cost synergies via integration of operations such as IT, support and cross-selling functions, the acquisition of new customers and bancassurance.
"The transaction will have a positive impact on PKO Bank Polski Group’s net financial result as early as in 2014," predicts Mr Jagiello, but stops short of disclosing whether his bank has any future acquisition plans.
The second largest bank in Poland in terms of assets, Pekao, which is owned by Italy's UniCredit, did not respond to The Banker's requests for comment, but the bank's actions show that it, too, is going for acquisitions. Last year it announced in October a bid for Dutch group Rabobank's Polish unit BGZ – only to be beaten by France's BNP Paribas, which ended up buying BGZ in December for about a €1bn.
Market consolidation
Piotr Czarnecki, the chief executive of Poland’s seventh largest bank Raiffeisen Bank Poland (a unit of Austria's Raiffeisen), notes that the five largest banks in the country control only about 50% of the assets, while the 10 largest have about 70% of the market.
"The market will continue to consolidate," says Mr Czarnecki. "Medium-sized banks want to achieve a 4% to 5% market share in order to achieve economies of scale." He adds that Raiffeisen’s own acquisition of Polbank in 2011 "significantly improved our position"; a planned listing on the WSE in two years’ time represents a benchmark for his bank in terms of effectiveness and profitability, as it needs to be on a par with "the best banks already listed on WSE".
Mr Rosiński from Getin believes that the top two or three players in the market are only going to get "stronger and stronger", and says that only the top six or seven banks are really strong players. "I see the market this year and next in a final countdown in terms of market position or M&A [mergers and acquisitions]. M&A will be a key word this year and next," he predicts.
Mr Rosiński plays his own cards close to his chest: "Our strategy [on M&A] is we keep it confidential and we act quickly. We are looking around every day. There are a few opportunities in the market. I cannot tell you anything more than that."
Expansion strategies
Not everybody, however, believes M&A is the only way to grow. For one thing, the consolidation that took place among Polish banks in recent years happened when "stressed foreign banks were selling to generate cash and retrench”, says Sam Theodore, managing director for financial institutions at European credit rating agency Scope Ratings.
But the Polish market, with its higher growth potential than the Western economies, is still attractive to foreign banks, which own about two-thirds of banking assets and "would not sell their Polish operations unless they were forced", says Mr Theodore. Organic growth, agrees Erste's Ms Komaracka, could be a better strategy as "you know what you grow, but you don't know what you buy".
Spain's Santander acquired Bank Zachodni WBK in 2012 and last year was among the bidders for Rabobank's BGZ. But now, although still looking at opportunities for acquisitions "closely and actively”, the bank's focus is primarily on organic growth, says Mateusz Morawiecki, president of the bank’s management board. On the back of a stronger economy, Bank Zachodni WBK wants to increase financing for small and medium-sized enterprises, and for infrastructure projects, he adds.
Economic recovery
Commerzbank's Polish unit, mBank, also expects to benefit from the economic recovery as demand for loans in the corporate sector increases with growing investment and with increased spending of EU funds, according to director for investor relations, Wojciech Chmielewski.
He expects growth in "the mid to high single digits" for mBank's loans and deposits this year. The focus will be on organic expansion particularly in the bank's strongest area, that of remote banking, after it launched an online platform including video banking.
"We believe competitors will close branches going forward," says Mr Chmielewski. "Branches cost money and there are demographic changes in Poland. The younger generation no longer need them."
Wojciech Sobieraj, the chief executive of Alior Bank, a small but fast-growing Polish player established in 2008, says the bank is "well on the way" to attaining its goal of doubling its market share by 2016 (it was about 1.6% in the first half of last year, according to Fitch Ratings).
Alior struck a deal with Deutsche Bank's mobile telephony operator T-Mobile, the largest operator in Poland, to create a mobile bank. Another such partnership was agreed by mBank with Orange, to create a mobile bank for smartphone and tablet users from the second half of this year.
These kinds of deals, says Ms Komaracka, are likely to put additional downward pressure on net interest margins for other banks and eat into their market shares, as the mobile telephony operators offer their banking partners fast access to millions of additional customers.
Obstacles ahead
No matter what route Polish banks take towards growth this year, it will not be without obstacles. And although the hurdles are not insurmountable, they are likely to take a toll by possibly raising costs and adding uncertainty.
The Polish regulator, KNF, has started a series of stress-tests. The results are due to be published in July. There is also the European Central Bank's asset quality review, which is part of the process by which the bank is preparing to become the single supervisor for banks in the eurozone.
Bankers are generally optimistic that both reviews will pass without incident and say that overall they are positive, as they will contribute to increasing transparency and investor confidence. But they acknowledge that, with the added burden of regulation and compliance, they will have to hire more people, increasing their costs.
There is also the problem of foreign exchange loans, which the banks granted during the boom years to allow customers to take advantage of lower interest rates in the eurozone and Switzerland. But, as the European Bank for Reconstruction and Development director for country strategy and policy, Piroska Nagy, points out, in Poland the foreign exchange loan stock as a percentage of the overall household loan stock is smaller than in other countries in the region at about 40%, compared with almost 60% in Hungary and more than 60% in Romania.
Moreover, "foreign exchange loans seem to be of better quality than in other countries", while "new lending flows are now almost entirely in local currency", adds Ms Nagy.
NPL issues
The spectre of non-performing loans (NPLs), the plague of banks in central, eastern and south-eastern Europe, is another obstacle on the road ahead. The ratio of NPLs in Poland was 8.5% of total loans in December last year, says Ms Nagy. That is relatively low compared with Hungary's 17% or Romania's 22%, but "significantly exceeds" NPLs in Estonia at just 1.7% or Slovakia at 5.3%.
However, the level of NPLs in Poland is far from dangerous. Mr Theodore of Scope Ratings says: "They may have actually peaked." Meanwhile, Moody's Mr Pipia points out that banks have already made provisions for their old NPLs and says it is unlikely that, with the expected improvement in economic trends, there will be many new NPLs.
Finally, there is the risk coming from the turmoil in Poland's bigger neighbour, Ukraine. Bankers say it is too early to tell how the situation will affect the sector, but they all agree it is a big worry. "The situation in Ukraine and Crimea changed everything," says Getin's Mr Rosiński. "For example, how will sanctions affect the regional economy? I would say this is a new factor in the game. No news is bad news, in this case."
