Despite the increasingly robust growth of Poland’s economy, a real growth observed in wages and consumption, lending is picking up only moderately.
The picture of the Polish credit market is becoming increasingly heterogeneous and complex. Some market segments are growing fast, while others are doing well below expectations. Lending is not growing quickly, because it is curbed/held up by three factors:
- The first one is the rising capital requirements for banks. This applies to the banking sector all around the world.
- The second impediment emerged at the beginning of this year and consists in the outflow of funds from bank deposits, which render extremely low interest rates. In the case of non-financial sector deposits, in the first eight months of 2017 there was a decrease of EUR1.8bn – informs Poland’s central bank, NBP. As a result, in April 2017 the value of the granted loans exceeded the value of deposits, and the LTD ratio is once again higher than 100 per cent, after several quarters of decreases.
- The third impediment is the withdrawal of financing from Polish companies by their foreign parent companies. From January to July 2017 this financing decreased by EUR3.43bn. These are data from the Bank Guarantee Fund.
Mortgages with interest rate risk
The largest outflow of deposits occurred in January 2017. After that, the situation varied from month to month, but deposits were never restored to the level from the end of 2016. The outflow was mainly caused by a decline in corporate deposits, as households added EUR2.32bn to their bank accounts by the end of August 2017. This is still much less than in previous years. Let us recall that banks’ obligations towards the non-financial sector had increased by between EUR6.52-7.6bn in the first eight months of each of the previous years.
Deposit growth observed since the last quarter of 2015 has exceeded, but at the same time stimulated, lending growth. Now banks have faced a situation where this growth engine has stopped working. According to data from the Bank Guarantee Fund, at the end of July 2017 total assets of the banking sector had shrunk by EUR830m compared to the end of 2016, with the largest decline observed in the first quarter. In the subsequent months there was very slow growth.
The shrinking of deposits coincided in time (with a two-month lag) with the descent of real interest rates into negative territory. Savers who want to preserve the value of their money have only one alternative – buying property. And this is the segment where credit risk is mounting.
The trend to invest savings in real estate has been gaining strength since the time when interest rates were heading towards the lowest level in history. A marked increase in demand for real estate was observed over 2016. However, while previously properties were in large part purchased for cash withdrawn from banks, now we can see very clearly that these purchases are increasingly financed with increasingly higher loans.
The report of the Credit Information Bureau entitled “Credit Trends” shows that in the H1’17 banks granted 108,000 mortgage loans, i.e. 5.7 per cent more than in the same period of 2016, for a total amount of EUR5.64bn, which is 12.7 per cent higher than the year before. This happened as a result of a significant drop in the sales of mortgage loans for amounts up to EUR23,691, i.e. ones that previously supplemented relatively high own funds of the borrowers.
In this way the average loan value increases, as does the LtV ratio. Data of the AMRON SARFiN centre indicate that in the Q2’17 banks increased the number of loans with an LtV exceeding 80 per cent of the property value to 49.18 per cent of the entire loan pool, or by 4.66 percentage points compared to the previous quarter.
Let us recall that before the introduction of Recommendation S in 2014 banks granted over 60 per cent of loans with an LtV ratio well in excess of 80 per cent. However, in the Q2 the share of loans with the highest possible LtV was among the highest since the recommendation entered into force.
Since 2015, the Polish Financial Supervision Authority has been advising banks on how they should examine creditworthiness, what assumptions they should adopt with regard to the debt-to-income ratio (DtI) and the simulations of this ratio’s resilience to interest rates hikes. At the beginning of 2015 the WIBOR 3M rate, which is the basis for the interest rates of the largest portion of mortgages, was 1.65 per cent (currently: 1.73 per cent), while back in 2008 it reached 7 per cent, and in 2000 it was 20 per cent. The Polish Financial Supervision Authority has also published the simulations of the increase occurring in instalment amounts for loans taken out in conditions of historically lowest interest rates, once these rates rise. Has this brought any results?
“In light of the inappropriate practices observed in the area of mortgage lending, consisting, among others in accepting underreported living costs and underestimating the interest rate risk in the calculation of creditworthiness, the Financial Supervision Authority has issued individual recommendations to banks. Current monitoring indicates that some banks still have delays in updating the cost of livings, and some still use inadequate buffers for the interest rate risk”, wrote the Financial Supervision Authority in its last “Report on the Condition of Banks”.
According to the data of the Credit Information Bureau (BIK), after seven months of 2017 banks have provided 13.7 per cent more mortgages in terms of value than in the same period of the previous year. Certainly not all mortgages granted in a period of the lowest interest rates in history are resistant to the risk of rising interest rates. The data on the lending activity show that this pool is probably quickly growing right now.
Increasingly larger consumer loans
Consumer credit market is also expanding at an increasingly fast pace. During the first eight months of 2013, the increase in the balance sheet value of such loans amounted to just 0.2 per cent, while one year later the increase was 3.2 per cent. In the eight months of 2017 the balance sheet value of consumer credits had increased by 6.1 per cent.
According to data from the Credit Information Bureau, from January to July 2017 banks extended a little more than 4 million new consumer loans with a value of EUR10.76bn, or 3.1 per cent higher than in the corresponding period of 2016. In terms of value there was also an increase in limits on credit cards (of 4.4 per cent) and current accounts overdraft limits (of 5.2 per cent).
Although interest rates are still at their all-time lows, the Credit Information Bureau report for August shows that the quality of consumer loans is gradually deteriorating. Each month consumer loans with a value of more than EUR125.6m become nonperforming ones (i.e. become more than 90 days past due). The value of such nonperforming mortgage loans is EUR66.3m.
Additionally, credit sales data show that the risk associated with them is not related to a sharp increase in the balance sheet value or in new sales, but to the fact that banks are trying to grant such loans in the highest possible amount. Large consumer loans already reach values on a par with small mortgages. At the same time, the sales volume of the latter is falling.
The Credit Information Bureau notes that the number of people indebted with consumer credit is constant at slightly above 8 million, and is even decreasing somewhat, while the value of the debt is growing. This is due to the fact that banks are providing more loans for increasingly high amounts, often extending the repayment period. The mechanism that applied to mortgages before the crisis is therefore being replicated (however in those times to a great extent stimulated by the increase in property prices).
And so the average value of a consumer loan, which amounted to EUR3,860 in the H1’16, rose to EUR4,057 in the H1’17 (an increase of 5.1 per cent). In the H1’17 the banks granted 6.1 per cent fewer loans for amounts up to EUR947.6, and 15.1 per cent more loans for amounts over EUR23,691 than the year before.
In this way banks are making room in the small-loan segment for shadow banking companies, which are also driving up the amounts of financing granted to customers. The non-bank financing sector, and especially the non-bank consumer lending, is growing across Europe, the United States, and has been growing for a long time in China. The report prepared by Eurofinas, a federation of the associations of loan companies in 17 European countries and Turkey, indicates that the number of new consumer loans in the H1’17 increased by 5.9 per cent year-on-year. The increase in the United Kingdom, which is the largest market, was 4.9 per cent, while in Germany it reached 7.7 per cent, and in Spain 10.9 per cent. The increase in the Swedish market, which is relatively small and young in this respect, amounted to as much as 67.1 per cent.
In Poland loan companies (which provide data to the databases of the Credit Information Bureau) have 426,000 customers, compared to 15.2 million who are indebted to banks. A little more than 80 per cent of these clients also have debts in banks. Among them, there are the almost 40,000 people defined as overactive customers by the Credit Information Bureau, i.e. ones having more than ten debts to pay back in both sectors. These are the riskiest customers.
Despite a slight deterioration in relation to the previous months, for the time being the quality of consumer loans at the banks is good. The Credit Information Bureau notes a certain pattern of loans typically “going bad” until the 36th month of repayment, after which the “non-performance rate” stabilizes at approx. 4 per cent, which is three times lower than in the case of loans granted in 2008. This would be good news, if not for the fact that loans granted for higher amounts, and especially those with longer repayment periods, will clash with the cycle of interest rate increases, causing much pain. And in this segment there may be an increase in loan defaults.
Companies vulnerable to interest rates increases
Corporate lending is also accelerating. In the first eight months of 2017, the balance sheet value of these loans rose by EUR4.62bn, i.e. by 5.7 per cent, compared to the end of 2016. In the first eight months of 2016 the increase reached EUR3.9bn (an increase by 5.1 per cent). But in the same period of 2015 the balance sheet value of loans to companies increased by EUR5.33bn, i.e. by 7.5 per cent. Therefore there is no boom to speak of.
In the segment of companies banks approach the prospect of interest rates hikes with much greater caution, trying to ensure the customers secure their obligations.
“Companies with high turnover and low margins, at the level of 1 per cent, can be very sensitive to interest rates increases. Customers are even concluding interest rate swaps for 2-3 years ahead,” said Dariusz Kucharski, a member of the board of HSBC Polska, during a meeting of bankers in October.
The cited report of the Credit Information Bureau points out that in the H1’17 there was an increase in the portfolio of loans granted to micro-enterprises – of 9.3 per cent in terms of volume and 11 per cent in terms of value – to EUR14.7bn. This rate of increase is much greater than in the case of loans to large enterprises or small and medium-sized companies. The volume of new loans granted by banks increased by 7.7 per cent. Their value increased by EUR237m, or 9.7 per cent, compared to the year before and amounted to EUR2.6bn.
Since we have identified the areas of risk, we have to ask where it will accumulate. This will vary across different banks. When it comes to mortgages, they will probably be accumulated in the four largest banks. We should remember that two of them are companies with State Treasury shareholding. According to data of the Credit Information Bureau they sell 73 per cent of all mortgages. In the case of loans to businesses the risk is much more dispersed. They are provided by both small cooperative banks, as well as the branches of large foreign institutions. It is hard to come up with clear predictions.
Consumer instalment loans are also heavily concentrated in the five largest banks, but these are mostly small amounts, barely exceeding EUR947.6 on average. Meanwhile these five banks only hold a bit more than half of the consumer credits granted for amounts that are four times higher on average. This could mean that there is more risk in non-market leading institutions, which generally grant loans to more risky customers.
This is not the end of the problems that credit institutions may experience if interest rate rises. Another issue will be the financing costs. Banks have already become accustomed to the environment of the lowest interest rates in history and were able to increase the interest margin to 2.57 per cent in July 2017 from a low point of 2.38 per cent in the H2’15. As the banks are now losing their maturing deposits, at least in the first phase of the cycle the financing costs could exceed the margin by which the price of credit could increase.
So far the biggest players on the market have not been experiencing liquidity problems. It is secured by the broadest access to current accounts. The question remains, however, how large of an increase in lending could this support, since lending growth will probably remain faster than the salary increases.
At the same time small institutions such as Nest Bank or the Estonian Inbank are now joining the struggle for deposits. At a time when the average interest rate on deposits with maturity of up to two years was 1.4 per cent (according to NBP data for August 2017), they have decided to play for higher stakes by providing positive real interest rates. What is more, these interest rates are increasing.
We could say that on the Polish banking market there have always been entities that waged interest rate wars – especially small institutions or banks with liquidity problems. It is possible that if the interest rate hikes become more likely, others could be forced to participate in the race. Will the largest banks join as well? A lot depends on the path of inflation expectations.
Banks have adapted to the environment of the lowest and stable interest rates relatively quickly. The interest margin in the sector rose from the low of 2.38 per cent in mid-2015 by nearly 20 basis points. It may start shrinking again soon as a result of interest rates on deposits growing faster than interest rates on loans.
Meanwhile, the local market of deposits is becoming increasingly important for the financing of local banks. This is not only because the share of domestic capital in the sector exceeded 50 per cent after the acquisition of Pekao Bank by PZU. It is also due to the fact that since mid-2015 the foreign parent companies once again have begun deleveraging and withdrawing funds from their Polish subsidiaries. According to data from the Bank Guarantee Fund, from the beginning of the year to the end of July 2017 EUR3.44bn was sent back abroad. This mainly consisted in the withdrawal of loans, with a minimal increase in deposits received by the Polish institutions.
The possible deterioration of credit quality, financing conditions, interest margin – with constant increases in capital requirements – is a challenge that banks may have to deal with in the time horizon extending beyond next year.
“We are appealing to banks to take into account the increase in interest rates in the future. It may turn out that people who take out loans now will fall into the same trap as those who took out loans with a cheap Swiss Franc,” said Katarzyna Zajdel-Kurowska, a Member of the Management Board of NBP, during the Meeting of Leaders of Banking and Insurance organized in October in Warsaw.