Poland's banks emerged from the first wave of the economic crisis relatively unscathed, but are now preparing for a second shock as the domestic economy slows and its foreign banks, which own almost two-thirds of the country's banking sector, face challenges at home. But, as in 2008, financial institutions in central Europe's largest economy are unlikely to need assistance to pull through.
The sector goes into the next crisis battle-hardened from its experience over the past five years and in solid financial shape. Poland's banks reported a record profit of 15.7bn zlotys ($5bn) in 2011 (a 37% increase compared with a year earlier) on the back of healthy increases in lending and a reduction in provisions. The sector has an overall core Tier 1 capital ratio of 12.2%, better than many banking systems in western Europe.
“The banking sector in Poland will stay profitable this year and next year and there will be no need for state intervention,” Krzysztof Kalicki, CEO of Deutsche Bank's Polish affiliate, said at a recent conference. “But this year will be less profitable than last and 2013 will be still less profitable.”
The central bank expects bank profits to fall by almost a third by 2014.
Housing crisis
On the domestic front, banks have dramatically reined in mortgage lending in foreign currencies – something that had been very popular before the crisis because of the lower interest rate paid on Swiss francs. However, the crisis caused a steep depreciation in the value of the zloty, a boon for Poland's exporters but a disaster for the 700,000 people holding foreign exchange mortgages and a problem for the banks that had lent them money.
Many banks, especially small and aggressive ones, funded themselves on the short-term swap market, and ran into big problems in refinancing their Swiss franc positions. In recent years banks have succeeded in shifting to longer-term financing, and the weight of foreign exchange mortgages is slowly shrinking – currently making up 59% of all outstanding housing loans and 33% of all credits.
Borrowers are steadily repaying their mortgages, which have a non-performance rate of 2.5%, lower than the sector's overall non-performing loan rate of 8.5%.
“Our banking sector is very conservative,” says Andrzej Raczko, a former finance minister and now a senior official at Poland's central bank. “We had only one significant problem, which is mortgages in foreign currencies. But at the end of the day it was the best clients who got mortgages denominated in foreign currencies and they have an income cushion that helped them survive the depreciation of the zloty.”
There are still some danger signs as mortgages that originated in 2007 and 2008, the height of Poland's real estate boom when banks had the sloppiest standards, show a faster rate of deterioration than earlier loans.
“The mortgage portfolio is still very young,” says Andrzej Jakubiak, head of the Polish Financial Supervision Authority (KNF), the banking regulator.
New household borrowing is slowing as banks tighten up requirements, the government winds up a scheme to help families buy their first property and many buyers sit on the sidelines, waiting for real estate prices to stop falling before deciding to buy.
“That's not bad for the overall health of the Polish economy,” says Mateusz Morawiecki, CEO of Bank Zachodni WBK, which was acquired by Spain's Santander in 2011 to create Poland's third largest banking group. “I'm not a big fan of cement in the economy.”
Construction collapse
Not everyone is so sanguine. The slowdown in new lending has set off alarms about the impact on the economy, prompting the KNF to recently mull the possibility of loosening some of its tough lending standards imposed during the first wave of the crisis to rein in hazardous lending. However, banks are now so skittish that any regulatory changes are unlikely to spur a wave of new lending, say executives.
While mortgages lending is under control, banks have been dealt a blow from an unexpected quarter – the country's construction sector. Construction companies gorged on big highway and infrastructure contracts in recent years, many of them co-financed by EU structural funds, leading banks to think that the sector was a safe bet.
However, government tender procedures pushed builders desperate to win contracts into a race to the bottom, cutting their margins by so much in order to get business that many ended up making losses.
As the rush to build highways and stadiums ahead of this June's European football championships wound up several months ago, many of Poland's largest construction companies reported that they were in deep financial trouble and some have since gone bankrupt – causing a big problem for their banks.
An analysis by PKO Bank Polski (PKO BP), the state-controlled bank which is the country's largest, found that banks are owed as much as 60bn zlotys by construction companies, amounting to about one-fifth of all corporate lending. Several banks, especially the two largest, PKO BP and Bank Pekao, owned by Italy's UniCredit, have had their profits affected by being forced to make provisions for potential bad loans.
“Banks have already felt the impact of the collapse of the construction sector. It was a bit of a surprise for us because it seemed like a potential bonanza,” says Slawomir Sikora, CEO of Citibank Handlowy, an affiliate of the US bank.
Parental guidance
As the overall economy slows – the finance ministry recently reduced its growth estimate for 2013 to 2.2% from an earlier 2.9% – corporate lending is also expected to grow more slowly. Zbigniew Jagiello, the CEO of PKO BP, expects that his bank will see new corporate lending grow at only about 5% to 6%, down from double-digit rates in recent years.
Banks have already felt the impact of the collapse of the construction sector. It was a bit of a surprise for us because it seemed like a potential bonanza
The gloomier conditions are forcing the country's smaller banks – those with less than 5% of the market – to undertake cost reductions, laying off staff and shuttering branches built in boom times. “Smaller banks will either have to find a niche or else be sold or merged as they will be unable to meet the double-digit returns expected in Poland,” says Mr Jagiello.
The first wave of the crisis forced a round of ownership changes as troubled parent banks were forced to divest foreign assets by government rescuers. This was the reason that Allied Irish Banks sold Bank Zachodni WBK to Santander, which went on to buy Kredyt Bank from Belgium’s KBC Bank. Austria's Raiffeisen recently bought Polbank, the Polish subsidiary of Greece's Eurobank EFG. But few new ownership changes are expected.
With the domestic market largely under control, most threats to Poland's banks come from abroad, largely from any potential risk of parent banks draining liquidity from their Polish operations in order to cover funding gaps in other countries. That is the reason Mr Jakubiak and other Polish regulators have looked askance at moves to create a single banking regulator in the eurozone.
“Banks are going to try to balance their positions by country, which means that banking systems such as Poland’s, which is seen as fairly safe, have to face the risk that financing could be withdrawn from Polish banks,” says Mr Kalicki.
Safeguarding Polish interests
With a loan-to-deposit ratio of 116%, Poland's banks are scrambling to pull in more deposits and are still reliant on external funding, creating a risk in the event of a pull-back by parent banks. Regulators are well aware of the danger.
KNF insists that banks have a core Tier 1 capital of more than 12%, plus current financing needs before paying any dividends. The regulator also wants banks to retain at least one-quarter of their 2012 profits. “Capital is the best buffer,” says Mr Jakubiak.
Regulators are also keeping a very keen eye on flows within banking groups to ensure that the interests of Polish affiliates retain primacy over their corporate parents.
“Foreign-owned banks are formally Polish companies operating under Polish law and it is illegal for management to make decisions that harm their companies,” says Mr Raczko, while other regulators give pointed warnings that executives deemed to be acting contrary to the interests of a Polish-registered bank can expect a swift visit from the prosecutor's office.
For now, there are few signs of banks pulling capital out of Poland. “At my bank, I see no sign of a withdrawal of assets from Poland,” says Mr Kalicki.
