polish banking sector outlook 2014: brighter prospects … · economic and operating pressures...
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Polish Banking Sector Outlook 2014:Brighter Prospects Ahead AsEconomic And Operating PressuresRecede
Primary Credit Analyst:
Francesca Sacchi, Milan (39) 02-72111-272; [email protected]
Secondary Contact:
Pierre Gautier, Paris (33) 1-4420-6711; [email protected]
Table Of Contents
Long-Term Growth Prospects Look Healthy
A Cautious Stance Sees Further Falls In Foreign Currency Lending
Profitability Should Remain Strong, Despite Declining Net Profit In 2013
Capitalization Will Remain Sound, Thanks To Moderate Asset Growth And
Steady Earnings Retention
Banks' Asset Quality Continues To Stabilize, But Downside Risks Persist
Banking System Remains Exposed To A Negative Shift In Investor
Confidence
Further Industry Consolidation Is On The Cards
Appendix
Related Criteria And Research
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Standard & Poor's Ratings Services believes that the Polish banking sector will be able to withstand adverse economic
and operating conditions and remain strongly profitable in 2013 and 2014, thanks to the banks' sound financial profiles
and balanced business models. A domestic economic slowdown and low interest rates inevitably weigh on the
profitability and asset quality of Polish banks, but, in our view, these pressures should ease from 2014 onward.
Until then, we believe that the Polish banks will optimize their cost bases to mitigate declining revenues and the high
cost of credit risk. We also anticipate that consolidation will continue in 2014, as economies of scale are crucial for
profitability. Overall, we believe that the banks' financial profiles will recover once the EU economic outlook improves,
thanks to Poland's low financial intermediation and increasing wealth. (Watch the related CreditMatters TV segment
titled "Brighter Prospects Ahead For Polish Banks In 2014," dated Jan. 14, 2014.)
Overview
• Polish banks should be able to withstand adverse economic and operating conditions thanks to their sound
financial profiles and balanced business models.
• Low interest rates are reducing Polish banks' net interest margins and squeezing their profitability.
• We anticipate that the banks will manage their cost bases to mitigate declining revenues and the high cost of
credit and remain adequately profitable in the next two years.
• Although we expect the banks' asset quality to stabilize, it could deteriorate if the Polish economy takes longer
to recover than we anticipate.
The Polish banking sector's strong fundamentals have helped it withstand the domestic economic slowdown, high
exposure to foreign-currency risk in mortgage portfolios, and heavy reliance on parent funding. Over the past two
years, Polish banks have reduced their risk appetite; absorbed increased credit risk through their operating revenues;
and improved their capitalization, mainly thanks to more moderate asset growth and steady earnings retention.
In our view, Polish banks' creditworthiness should benefit in the longer term from the gradual economic recovery,
thanks to an improvement in their earnings generation and stabilization of their asset quality. However, we believe that
potential downside risks persist in the economy and could put pressure on the Polish banking sector. In our view,
Polish banks' credit risk could worsen if the economic slowdown is more prolonged than we currently anticipate. This
could further delay Poland from catching up with more mature economies in terms of wealth. In addition, the banks'
high exposure to foreign currency risk through their foreign currency-denominated mortgage portfolios could
negatively affect their asset quality if investor confidence dwindles and causes the Polish zloty to depreciate sharply.
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Long-Term Growth Prospects Look Healthy
The Polish economy presents good long-term growth prospects for banks, in our view, with low financial
intermediation compared with EU countries, increasing GDP per capita, and a population of about 40 million
inhabitants. Poland's growth performance has remained relatively robust over the European debt crisis, and Poland is
the only EU country that has escaped recession since 2009. Having said that, real GDP growth slowed over 2012 and
2013, to the lowest rate for a decade. Real GDP growth moderated to 1.9% in 2012, from 4.5% in 2011, as the
contribution of domestic demand to growth fell dramatically. We forecast modest growth of just over 1% for 2013 and
2% in 2014 (see chart 1). Reduced external demand and uncertainties over changes to the Polish government's fiscal
policy have hampered both consumption and investment. That said, the Polish economy is showing signs of recovery.
We anticipate that economic growth will average almost 3% between 2014 and 2016, thanks to Poland's strong
manufacturing sector, competitive workforce, and increasingly diversified export markets. Recent data also indicate
that domestic demand is recovering, and, in our opinion, will resume as the main contributor to overall growth.
Chart 1
Poland's economic performance has been more resilient than that in the rest of the EU since the onset of the financial
crisis. Net exports, zloty flexibility, and the central bank's recent cycle of monetary easing have all contributed to
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Polish Banking Sector Outlook 2014: Brighter Prospects Ahead As Economic And Operating Pressures Recede
economic growth. In addition, Poland has diversified its export partners, increasing trade with Russia and Ukraine in
particular. This has helped to mitigate reduced demand from Poland's eurozone (European Economic and Monetary
Union) partners.
Year-on-year lending growth fell to 3% in the first half of 2013, from 7.5% a year before, as credit demand weakened
on the back of the economic slowdown, and banks' lending policies tightened (see chart 2). After a double-digit rise in
consumer and corporate lending before the onset of the financial crisis, credit growth has decelerated sharply, partly
due to negative consumer lending growth for the past two years. Credit growth has been sustained by housing
mortgages, which increased by 4% year on year in the first half of 2013. However, demand for housing loans has
softened since the beginning of 2013 as the government phases out its "First Family Home" (Rodzina Na Swoim)
program, whereby it subsidizes the interest on zloty-denominated housing loans.
Chart 2
Credit demand from corporate entities, especially small to midsize enterprises (SMEs), has suffered from these entities'
worsened creditworthiness and an uncertain economic outlook. These factors have kept investments at low levels.
Overall, we anticipate that credit to the private sector will match a trend in GDP and grow at a moderate average rate
of about 3%-5% over the next two years.
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A Cautious Stance Sees Further Falls In Foreign Currency Lending
Polish banks' risk appetite has decreased over the past two years. Not only are banks moderating credit growth, but
they are also reducing lending in foreign currencies. Lending in foreign currencies was high before the financial crisis,
and it continues to expose Polish banks to potentially higher losses in the event of a sharp devaluation of the zloty.
However, new lending denominated in foreign currencies has reduced substantially. About 94% of new lending in 2012
was in zloty, compared with 88% in 2009, and we expect this figure to rise further (see chart 3).
Chart 3
Additionally, since 2010, the Polish Financial Supervision Authority (KNF) has been attempting to reduce consumer
lending--which mainly generated credit losses during the financial crisis--and to curb foreign-currency lending to
households by tightening lending standards for consumer credits and for foreign-currency mortgage lending. We
believe that the KNF's recommendations have helped reduce lending growth in the consumer segment and the banks'
share of foreign-currency mortgages since mid-2010. For example, in early 2010, the KNF imposed tighter standards
on lending to households, including capping the debt-to-income ratio under stressed scenarios. In 2011, the KNF
strengthened standards on mortgage lending to households by capping the debt-to-income ratio for foreign-currency
loans at 42%. Positively, we note that Polish banks now apply stricter rules and parameters when they lend in foreign
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Polish Banking Sector Outlook 2014: Brighter Prospects Ahead As Economic And Operating Pressures Recede
currency (see chart 4).
Chart 4
According to the most recent guidelines issued in June 2013 on the maximum loan-to-value (LTV) ratio, banks have
until the end of 2016 to gradually reduce the LTV ratio of newly granted loans to 80%. Finally, since 2011, risk weights
for foreign-currency mortgages have risen to 100% from an already high 75%, and compared to a Basel II requirement
of 35% on mortgages.
Profitability Should Remain Strong, Despite Declining Net Profit In 2013
Although we anticipate a double-digit decline in net profit for the Polish banking sector in 2013 compared to 2012, we
believe the sector will remain strongly profitable overall, with margins sufficiently high to cover high credit losses.
Despite a decrease of 40 basis points (bps) since 2009, Polish banks' loss absorption capacity--measured as
pre-provision operating income on customer loans--has remained above 3%.
The Polish central bank cut the reference interest rate several times in 2013, by a total of 150 bps. The decrease in net
interest income was also caused by a drop in the spreads on government bonds in the banks' securities portfolio, which
represented about 20% of total assets as of June 30, 2013. The lower interest rate than before the crisis is reducing net
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interest margins and squeezing banks' profitability, especially those with a retail focus (see chart 5).
Chart 5
In addition, a reduction of interchange fees is weighing on commission income. As a result, net interest income
declined by 8.8% and fee income by 2.5%, year on year, as of June 2013. A potential increase in the fees banks pay to
the Bank Guarantee Fund to enforce the resolution fund could weaken banks' profitability in 2014. Nevertheless, we
anticipate that a stabilization of market interest rates and banks' efforts to improve operating efficiency could help net
profits to recover in 2014. We anticipate that the Polish banks will optimize their cost bases to mitigate the effect of
declining revenues and the high cost of credit risk and remain adequately profitable in the next two years.
Capitalization Will Remain Sound, Thanks To Moderate Asset Growth AndSteady Earnings Retention
In our opinion, Polish banks are well-capitalized. The Standard & Poor's risk-adjusted capital (RAC) ratios of the Polish
banks we rate are generally higher than those of Western European banks (see chart 6). In addition, Polish banks'
capital ratios have improved over the past year, mainly thanks to more moderate asset growth and steady earnings
retention. We note that Polish banks have increased their earnings retention since 2011. This follows the KNF's
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recommendation to local banks to refrain from paying out high dividends and to use the profits generated to
strengthen their capital bases. We expect this restriction to prevent Polish subsidiaries of foreign banks in financial
distress from supporting their parents to an extent that would impair the subsidiaries' stand-alone creditworthiness.
Chart 6
Consequently, we project that Polish banks' capitalization will remain sound overall. The capital ratio of certain banks
could weaken slightly due to ongoing acquisitions. This was the case for Powszechna Kasa Oszczednosci Bank Polski
S.A. (PKO), the largest state-owned bank in Poland, which recently announced the acquisition of the Polish businesses
of Sweden's Nordea Bank AB. Such mergers and acquisitions activity could affect the acquirer-banks' capital, although
the extent of the effect will vary by case. However, we do not expect a material weakening in the level of capitalization
for the banking sector overall, due to the size of the target or acquired banks.
Banks' Asset Quality Continues To Stabilize, But Downside Risks Persist
Polish banks' asset quality stabilized after a rapid deterioration between 2008 and 2009, when most nonperforming
assets (NPAs) came from consumer loans and the corporate sector, mainly SMEs. NPAs stood at 8.7% of gross
customer loans as of June 30, 2013, with SMEs still representing most NPAs (see charts 7 and 8). The NPA ratio was
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Polish Banking Sector Outlook 2014: Brighter Prospects Ahead As Economic And Operating Pressures Recede
8.8% as of end-2012 and 8.3% as of end-2011. The stabilization of the banks' asset quality reflects tightened
underwriting standards and sales of impaired consumer loans to third parties. With an economic rebound likely to start
in 2014, we believe that asset quality is likely to improve gradually.
Chart 7
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Chart 8
We anticipate that the construction and households sectors will generate most of the credit losses in 2013 and 2014.
However, we foresee that the magnitude of credit losses in the consumer loans segment will be significantly lower than
in 2009-2010. After peaking at about 190 bps in 2009, credit losses have gradually reduced to 100 bps in 2012, and we
expect a reduction to about 80 bps on average in 2013-2014 (see chart 9).
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Chart 9
That said, we believe that trends in NPAs and credit losses could diverge from our base-case scenario if the Polish
economy takes longer to recover than we anticipate, difficulties in the labor market persist, and real estate prices
decrease materially. In addition, we believe it will take time for Polish banks to reduce the stock of NPAs they have
accumulated over the past four years.
Banking System Remains Exposed To A Negative Shift In Investor Confidence
Despite its strong financial fundamentals, we consider that Poland's banking system remains exposed to external
shocks. We believe that risks posed by rebalancing and deleveraging in Western European economies and a
consequent negative shift in investor confidence toward Polish investments could put pressure on the Polish banking
system. Our concerns mainly derive from the banks' high exposure to foreign-currency risk in their mortgage
portfolios, and their still-high, albeit reducing, reliance on parent funding.
Polish banks' exposure to foreign currency lending accounts for about 30% of their total loan book as of mid-2013. The
proportion is particularly high for housing loans. We note that the share of mortgages denominated in foreign
currency, mostly Swiss francs (CHF), decreased to about 54% as of mid-2013, from 62% at end-2011, but continues to
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exacerbate households' vulnerability to the depreciation of the zloty (see chart 10). Despite the reduction in new
foreign currency lending since the beginning of 2012, we believe that it will take time to unwind this structurally risky
portfolio because of the long tenor of the mortgages.
Chart 10
Mitigating the aforementioned risk is the relative stability of the zloty versus the Swiss franc over past few years. This
attests to investors' confidence in the Polish economy and the adequate credit quality of Swiss franc-denominated
mortgages, since these loans were granted to highly creditworthy clients. However, in our view, if a shift in investor
confidence caused the zloty to depreciate sharply, this would rapidly increase household debt repayments, thereby
increasing NPAs and, as result, credit losses.
In addition, some banks have built large funding imbalances in the past decade. In particular, the subsidiaries of large
Western European banking groups have relied heavily on parent funding, notably to obtain long-term funds in foreign
currency to grant mortgages in Swiss francs. Parent banks have continued to withdraw such funding over the past 18
months since their liquidity positions have been stretched, although this trend is now starting to ease (see chart 11).
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Chart 11
We believe that Western European banks will remain committed to supporting their Polish affiliates because the Polish
banking sector remains a profitable investment. Nevertheless, we anticipate that liquidity transfers will likely be lower
and more expensive. We acknowledge that Polish banks have substituted funding from their parent banks with
domestic customer deposits and other wholesale funding over the past 18 months. We therefore anticipate that Polish
banks will become increasingly self-financed if foreign parent banks continue to withdraw funding. We see the
reduction in funding imbalances as positive, but at the same time a direct consequence of currently weak credit
demand and households' propensity to save money during uncertain economic times. In addition, the covered bonds
market is still not a viable alternative for the majority of Polish banks, which adds to their difficulties in accessing
long-term funding.
In our base-case scenario, however, we expect foreign parents to continue to support their Polish subsidiaries since
they are a source of recurrent revenues and economic prospects in Poland are good. We also anticipate that Polish
banks will continue to readjust their business models to lending in Polish zloty rather than in foreign currency, financed
by domestic customer deposits in zloty.
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Further Industry Consolidation Is On The Cards
There have been some noteworthy mergers and acquisitions in the Polish banking sector over the past two years, such
as the expansion into Poland of financially strong players Banco Santander S.A. and Raiffeisen Bank International AG.
We view these moves as positive for the Polish banking industry because financially stronger shareholders provide a
number of advantages such as better operational and managerial expertise, risk control culture and systems, and
access to capital and funding, if needed. In July 2013, PKO, the largest state-owned bank, announced the acquisition of
Nordea Bank's businesses in Poland. More recently, BNP Paribas reached an agreement to acquire BGZ bank, the
Polish affiliate of Netherlands-based Rabobank. Despite our belief that the Polish banking sector will remain more
fragmented than in other Central and Eastern European countries, we anticipate that consolidation will continue in
2014, as economies of scale are crucial for profitability.
Appendix
Table 1
Solicited And Unsolicited Ratings On Polish Banks
Bank Polska Kasa Opieki S.A. BBB+/Stable/A-2
Powszechna Kasa Oszczednosci Bank Polski S.A. A-/Negative/A-2
mBank (formerly BRE bank S.A.) BBB+/Negative/A-2
Bank Millennium Capital Group* BBpi
Bank Handlowy w Warszawie S.A.* BBBpi
*Public information; unsolicited ratings. Source: Standard & Poor's Ratings Services as of Jan. 13, 2014.
Table 2
Largest Financial Institutions By Assets
Parent nationality
Total assets (Bil.
PLN)
Gross customer loans (Bil.
PLN) Systemic importance
Powszechna Kasa Oszczednosci Bank
Polski S.A.*
Polish 226.8 177.4 High
Bank Polska Kasa Opieki S.A. Italy 150.9 99.8 High
Bank Zachodni WBK S.A. and Kredyt
Bank S.A.
Spanish 100.8 71.1 --
mBank (formerly BRE Bank S.A.) German 102.2 67.6 Moderate
ING Bank Slaski S.A. Dutch 78.3 50.4 --
Getin Noble Bank S.A. Polish 58.8 46.5 --
Raiffeisen Bank Polska Austrian 54.7 42.3 --
Bank Millennium Capital Group Portugal 52.7 41.5 Moderate
Bank Handlowy w Warszawie S.A. United States 43.5 16.4 Moderate
*Pro forma data, including the acquisition of Nordea. Source: Standard & Poor's Financial Institutions Ratings. Data as of year-end 2012.
PLN--Polish zloty.
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Related Criteria And Research
• Banking Industry Country Risk Assessment: Poland, Oct. 31, 2013
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
Additional Contact:
Financial Institutions Ratings Europe; [email protected]
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