Poland’s banks have established themselves among the top tier of central and eastern European lenders in recent years. This achievement is not just a question of size – the country’s biggest institutions dwarf their peers in Austria, the region’s traditional financial hub by market capitalisation – it also reflects the degree of innovation that has fuelled their success. Today, all eyes are on Warsaw, rather than Vienna, when it comes to the next market-defining advancement in digital banking. From this position of strength, Polish lenders are now preparing for the next phase of their growth story.
The immediate difficulties posed by the Covid-19 pandemic have, so far, caused minimal stress for the country’s banking sector. By adopting a flexible approach to customer support through payment holidays and moratoria, in conjunction with assistance from the government, Polish lenders have been able to cushion the blow for their customers to a large degree.
Importantly, balance sheet strength has remained intact. Tier 1 capital ratio of the sector stood at an impressive 17.5% midway through 2021, while its total capital ratio was almost 20%, according to data from the central bank’s December 2021 Financial Stability Report. Notably, sector-wide asset quality registered only a marginal deterioration in 2020 and started to improve in 2021, with the ratio of impaired loans sitting at around 6.5%, according to Fitch Ratings.
The fact that Poland’s banks were relatively untouched by the worst of the health crisis also reflects the low contribution of pandemic-sensitive economic sectors, including tourism and hospitality, to gross domestic product. In addition, employment levels have remained relatively steady over the past few years, thanks in part to government-backed efforts to steady the economy and support Polish households.
Profitability squeeze
Yet the pandemic has not been problem-free for the country’s lenders. The central bank’s decision to provide emergency support for the economy by slashing interest rates, among other measures, delivered a serious hit to the profitability of many Polish banks. “Interest rates in Poland went down rapidly in 2020, which had a clear impact on the profitability of the sector. Polish banks are quite vulnerable on the interest rate front because a significant part of the asset side is still linked to floating rates,” says Artur Szeski, senior director of banks in Europe, the Middle East and Africa at Fitch Ratings.
For Poland’s larger banks, the challenge of lower profitability should be mitigated over time and as the health crisis recedes. In particular, the normalisation of interest rates is likely to provide a huge boost. Between October 2021 and January 2022, the Polish central bank hiked its main policy rate four times to reach a level of 2.25%. And with inflation spiking, the central bank governor has indicated further rate increases can be expected over the coming year.
“On the revenue side, I’m quite optimistic for Polish banks in 2022. Though credit demand could slow with higher interest rates, the effect of repricing existing facilities will be significant enough to outweigh that and provide a boost to profitability,” says Mr Szeski.
Nevertheless, for the country’s smaller and medium-sized banks, low profitability presents something of an existential risk. This is because the wider banking system is populated by a high number of lenders, including 30 commercial banks and 530 small co-operative lenders, which means that securing higher profitability for many of them may prove elusive.
In its June 2021 Financial Stability Report, the central bank, Narodowy Bank Polski, noted: “The decrease in the profitability of Poland’s banking sector is a challenge to financial stability in the longer term. A gradual decline in the sector’s profitability — particularly noticeable in the group of small and medium-sized banks — was already observed before the outbreak of the pandemic.”
Digital shift
Rapid digitisation across Poland’s banking sector is helping to address some of these profitability pressures. In an online briefing delivered by S&P Global Ratings in November 2021, Michal Selbka, associate director of financial institutions ratings, underscored that Polish banks are digitising at a rate that puts them among the top tier of banks anywhere in Europe. “[It’s] a competitive edge for the Polish banking sector,” said Mr Selbka. “A lot of ideas are being originated in Poland, even for the international banks. [These ideas] are not always imported; it works both ways.”
A lot of ideas are being originated in Poland, even for the international banks
To this end, the country’s leading lenders are pushing ahead with ambitious digital transformation plans. Among them is BNP Paribas Bank Polska, the winner of The Banker’s Bank of the Year 2021 award for Poland.
“We will continue adapting digitally to customer expectations, providing them with solutions that make life easier. A good example is the branches, which we are transforming to a cashless format and making sure they are accessible to different customer groups, such as the elderly or people with disabilities. But we also plan continued growth in our omnichannel service, as we can already see a significant increase in the share of digital customers in the total number of customers,” says Przemek Gdański, CEO and president of the management board at BNP Paribas Bank Polska.
As Mr Gdański emphasises, however, the lender is also prioritising digitisation to pursue operational improvements. “It is important to remember that a key element of digital transformation is the way the organisation operates. We are keen on making our new agile-at-scale organisation a success, to accelerate our business and operational efficiency through empowerment,” he says. “We understand agile transformation to mean not just implementation of a set of practices and methods, but above all a way of thinking for employees at all levels and creating a new organisational culture together.”
For BNP Paribas Bank Polska, these efforts have produced several positive outcomes, not least a huge reduction in the use of paper. To date, the bank has signed a million documents through its digital ‘Autenti’ platform, helping to cut its paper consumption by a third compared to the pre-pandemic period. It also means the bank can onboard new customers, grant loans and sign contracts in a fully remote way.
Polish banks’ digitisation plans will need to accelerate in the coming years, as the demands of its young and tech-savvy population grow. Most lenders are registering astonishing year-on-year increases through their digital channels, pointing to a rapidly changing banking landscape. As a result, branch networks are being scaled back while digital product and service offerings are being boosted across the sector.
“We have been reducing branches as we have been having less customer traffic. It’s possible that in the future there will be fewer branches, not in a radical process, but in a very natural process,” explains João Brás Jorge, chairman of the management board of Bank Millennium. “At present, 2.3 million of our clients are digital clients, while 1.9 million are active mobile banking users.”
However, increased digitisation alone will not be the panacea for Polish banks’ profitability woes. For one, though total staff numbers may reduce over the coming years, lenders are likely to need a higher skilled workforce with advanced information and technology skills. This could put new pressures on their cost base. “Although banks’ headcounts are going down, their employment structure is changing and with inflationary pressures increasing, I think it will be extremely difficult to cut down on staff costs and other operating costs,” says Mr Szeski.
Mortgage settlements
Meanwhile, the Polish banking system is still wrestling with the problem posed by foreign-currency-denominated mortgages, mostly in Swiss francs. This legacy issue, stemming largely from the first decade of the 2000s, is a result of Polish borrowers taking advantage of low-interest Swiss rates to secure Swiss-franc-denominated mortgages through their local bank. When the value of the Swiss franc spiked, from about 2015 onwards, many borrowers were left with sky-high, unserviceable repayments. The total value of these foreign currency loans stands at about $31bn.
This problem is most acute for many of Poland’s foreign-owned banks, including Bank Millennium, mBank, Santander Bank Polska and BNP Paribas Bank Polska, among others. In 2021, most of the court cases brought by bank customers led to unfavourable outcomes for the lenders. This has led to a change in strategy from the banks in how they deal with this problem. “[The past year] has also brought, I think, a bit of a change in how banks approach the situation. They are trying to actively settle out of court and reach an agreement with their customers,” says Mr Szeski.
For its part, mBank has taken the lead in this regard by pursuing out of court settlements to achieve a resolution. “In December 2021, mBank launched a pilot programme of settlements with customers who repay loans in Swiss francs, proposing to convert the loan into zlotys and cancel part of the debt,” says Krzysztof Olszewski, group spokesperson of mBank. “Taking into account the above conditions and trends, in 2021 [mBank has] created provisions for legal risk related to foreign currency loans in the amount of 2.7bn zlotys ($690m), of which 1bn zlotys may be allocated to potential settlements with holders of Swiss franc loans.”
Going green
Polish banks are at the forefront of efforts to decarbonise the country’s economy. This is no easy task, given the reticence of the governing Law and Justice Party to adopt a more proactive stance. In the absence of political leadership, Poland’s lenders, in partnership with other private sector players, are taking on the mantle of responsibility.
“The battle against the climate disaster has come to the forefront of our efforts. The banking industry is going to play a substantial role in financing the transformation towards a zero-emission economy. According to Boston Consulting Group estimates, between €275bn and €365bn is needed to decarbonise the Polish economy. Of this amount, €200bn to €300bn is to come from the private sector, including €120bn to €180bn from banks,” says Mr Olszewski.
“In line with EU goals, we have announced that we will reach net-zero emissions in terms of energy directly generated and bought by mBank by 2030, and will become fully climate neutral by 2050, including the emissions related to our credit portfolio. To reach this goal, we will continue supporting our corporate clients in their transformation,” says Mr Olszewski.
mBank intends to mobilise 10bn zlotys for green investments, half of which will come from the bank’s own funds while the rest will come from other sources, such as green bonds and lending consortiums. The industries eligible for this financing include renewable energy, waste management, recycling and electromobility.
Sure-footed
Looking ahead, Poland’s banking sector is set to emerge from the pandemic in a strong position. With the country’s leading banks boasting robust balance sheets and ambitious plans to cut costs, digitise their operations and pursue a more sustainable future, there remains plenty of upside for higher profitability and asset growth over the coming years.
Nevertheless, the swift maturation and growing success of the country’s banking market is exposing Polish banks to an array of difficulties. “One challenge that Polish banks have been facing for years is the sector’s overregulation, and the excessive tax and parafiscal burdens imposed on it,” says Mr Gdański. “There are no indications that significant changes are about to take place in this area anytime soon.”
In addition, both the regional and domestic operating environment continue to increase in complexity. “Other external factors are difficult to predict: the geopolitical situation in the region, the inflation rate or further evolution of the pandemic. Although when it comes to coronavirus, I am optimistic and hope that the current wave is the last dangerous one,” Mr Gdański adds.
Despite this complexity, however, Poland’s banks are likely to apply the same mix of innovation and flexibility that has helped catapult them to the pinnacle of regional banking to overcome these problems.
