Polish banks are accelerating the restructuring of their networks

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A decrease in profitability and an increase in costs caused, among others, by the banking tax mean that the Polish banks are speeding up the restructuring of their networks and employment.

These are strategic decisions associated with the future business model. Errors can prove very costly. The three largest banks PKO BP, Pekao and BZ WBK have the biggest problem, and at the same time the most comfortable situation. They don’t have to hurry with restructuring like the smaller institutions, because they have relatively decent cost-to-income ratios and relatively high profitability in the context of declines in the whole banking sector.

They also benefit from economies of scale, which means that in their case the net interest margin (NIM) is significantly higher than the average in the sector, which in the second half of the year reached approx. 230 basis points, after minimal growth. At the end of the first half of the year, and despite a decline in year-on-year terms, BZ WBK had an NIM of 3.67 per cent, and PKO BP 3.13 per cent. In the course of the network restructuring these banks must be especially careful to ensure that cost cutting do not result in the decrease of revenues.

“We have to adapt to the preferences of the customers. If customers want to visit the branches, we will have more of them. If they want to use mobile banking, and this is a global trend, then the digital transformation will determine the number of branches and employees in the branch,” says Zbigniew Jagiełło, the CEO of PKO BP.

According to data from the Polish Financial Supervision Authority, after seven months of 2016, employment in Polish banks decreased by 1,400 people, which is about 0.8 per cent. By the end of July there were fewer than 14,400 branches which means a decrease of 0.8 per cent compared to the end of 2015.

According to the “Report on the situation of banks in 2015” in the previous year credit institutions reduced the number of employees by about 1,700 people, that is, by about 1.0 per cent, and reduced the network by 548 branches, or 3.6 per cent.

However, the situation in the headquarters looks a bit different than in the branch offices. Employment in the former is growing, especially in the compliance and IT departments. In the branches, the layoffs are significantly larger. From the beginning of 2016 to the end of July, almost 3,300 people employed in banks’ branches, that is 3.4 per cent, lost their job. This is almost as many as during the whole of the previous year. And this could mean that the cuts are gaining momentum.

Mergers as cost cutting opportunity

Before 2015, reductions in employment and the number of branches in the Polish sector were mainly the result of mergers, in which banks removed branches located too close to each other or overlapping functions in the headquarters. And so in the last year the leader of layoffs was BGŻ BNP Paribas which announced the redundancy of 1,800 people and the closure of 100 branches after the merger of BNP Paribas and BGŻ. According to the statistics of the web portal Bankier.pl, last year the bank laid off 769 employees (9.2 per cent), and the implemented reduction of the network exceeded its plan.

After the acquisition of Kredyt Bank, BZ WBK optimized its network and employment in a similar way for two years, and when the merger ended, the previous CEO, Mateusz Morawiecki (nowadays the Deputy Prime Minister of Poland), announced the reduction of the network by 20-40 branches per year. Last year the bank reduced its employment by 4.2 per cent, and closed 65 branches, which indicates a certain acceleration in relation to the previous announcement. As a result, at the end of the first half of 2016, the bank’s cost-to-income ratio fell to a record low of 41.8 per cent.

Problems with profitability and capital adequacy have become the second reason for the accelerated cost-cutting through the closure of branches and reduction of the headcount. In recent years the network and branches have also been reduced by Raiffeisen Polbank, BPH and Millennium, in connection with a new strategy of reducing the cost-to-income ratio to 45-47 per cent next year. All three banks have very large and barely profitable or unprofitable portfolios of Swiss franc denominated mortgages loans, and because of that additional capital demands were imposed on them. The first two will disappear from the market. BPH has already been divided and sold, and Raiffeisen Polbank is up for sale.

Getin Noble Bank found itself in a difficult situation for the same reasons. Already in the first half of 2016 the bank cut its operating costs by nearly PLN39m, or by more than 8 per cent. It also announced the layoff of 15 per cent of the staff which translates to over 700 people. For now, the bank’s plans regarding the branches are not clear. According to its new strategy, implemented this year, they are to be adapted to the three segments to which the bank divided its customers. By the end of 2015 GNB had 277 branches.

Although the cost cutting is done mainly by the banks that are already in troubles some strong players are also considering such moves. ING BŚK will be converting 2-3 smaller branches into one larger facility, and in a city of 100,000 inhabitants such branches will employ approx. 12 persons. At the end of the first half of 2016 the bank had 391 branches. It will simultaneously develop a network of mobile branches.

Customers did not leave the branches

This year, the banks are under even stronger pressure. In the first quarter of 2016 did they paid more than PLN600m of bank tax (which has been applied since February), and their operating costs have increased by more than PLN700m, or 10 per cent, in y/y terms according to reports of the Polish Financial Supervision Authority.

The Polish Financial Stability Committee has announced the imposition of additional capital buffers on several institutions in connection with its macro-prudential policy, and it is very possible that successive buffers imposed on banks will put them under pressure to convert foreign currency mortgages into Polish złoty. In this situation, the cost side cannot be observed with calm anymore.

This is happening in the circumstances of the decline in the return on capital in the Polish banking sector to 6.8 per cent at the end of the first half of the year, which is around the European average. At the same time, the average profit of the bank per one client decreased from EUR75 to 57, or by 24 per cent, while the effectiveness of the employees also deteriorated, according to reports of the consulting firm AT Kearney.

There is nothing else to do other than to escape forward. However, this will be very difficult. Last year’s study carried out by Deloitte showed that in spite of the rapid migration to the internet, when optimizing their networks, the banks have to take into account the conservative habits of customers who still visit the branches.

In turn, the data of the Polish Bank Association indicate that less than half of the customers who signed an agreement on the use of Internet banking services actually actively use them. More than 90 per cent of the core products are still sold in the branches. Almost two-thirds of the respondents in Deloitte’s survey did not want to spend more than 15 minutes to get to the branch in order to sort out a relatively simple matter.

At the same time, the current state of the branch network has little to do with the customers’ expectations. Some 60 per cent of them would like the branch to be located close to their place of residence, two-thirds would like to go to the bank after work, and a quarter before work. And this means that a branch should operate from 6 am to at least 9 pm. In this situation, instead of laying off workers, the banks should double the front-desk staff. Meanwhile, the cost of an average branch employing 6-7 people is PLN1.00m per year on average.

In an outbuilding on the fifth floor

Before the banks attempt to restructure their network and employment, they should answer several questions. First of all, at what pace and how many customers they can move to the digital channels. In addition, this should happen in such a way that the customers do not notice the disappearance of the branches because they no longer need them. And so the banks should provide high comfort of services, the possibility of obtaining competent and precise information, including by email or through the website. Perhaps the online or mobile current account panel should transform into a universal platform of services and offers addressed to the client.

The second question is related directly to the strategy: What type of network is necessary to achieve the established goals? This is a problem stemming from the fact that even relatively small Polish credit institutions seek to implement the strategies of universal banks. And a universal bank also needs a universal network.

Finally, the question arises: What should the purpose of branches be? Even if the transactions are moved to the internet, there are two possible answers to this question: branches are needed to offer advanced services and consultancy but also to acquire new customers. The answers are not unambiguous. A few years ago, the Scandinavian banks, led by the Norwegian DNB, decided that if a customer truly wants to visit a branch, then he or she will not be deterred by the fact that it is not located on the main street, or in the middle of a shopping mall. Such a branch, however, has limited sales advantages.

A branch is no longer needed even for depositing cash, because this role can be taken over by the cash deposit machines and many banks are starting to use them. This may also be true in the case of small business, and even “street market” business, where payments are made in cash.

“ATMs and cash deposit machines are very convenient for us,” says the CEO of ING BŚK Brunon Bartkiewicz. He adds, however, that the customers are using the former less and less frequently, because they are paying in stores using cards or through an application on their smartphone.

Mini-branches and stands located in shopping malls will most likely be the new sales instrument of the banks. They have already been introduced by ING BŚK and mBank. At such a stand the customer can take care of all the issues which do not require sophisticated consultancy, including the depositing of cash in a cash deposit machine. Such “branches”, easily movable from place to place, are also planned by Citi Handlowy which calls them “mini smarts”.

It is not yet known how the “mini smarts” are supposed to look. The “mini sales and customer service points” are to have a much wider range of services and product sales than “any initiative of this type present on the Polish market”. The bank’s CEO Sławomir Sikora only adds that these will be facilities that can be moved from place to place at a low cost, for example, near a beach in the summer. “It will be something that our competitors are not yet offering,” he says.

Shopping malls are not a guarantee of success

Citi Handlowy is a good example of how easy it is to make a mistake when choosing the network restructuring strategy. It was the first one to begin closing branches and reducing employment starting from 2011. The number of branches of the bank fell from a peak of 155 in 2010 to 36, out of which 16 are so-called “smart” branches located mainly in the busiest parts of shopping malls in the largest cities of the country. The bank is paying exorbitantly high rents for that.

Citi Handlowy was very successful in this regard, because, among other things, thanks to this transformation it strengthened its image as a “bank for the rich” and a “modern bank”. At the end of last year, it boasted the high effectiveness of “smart” branches. It reported that about 63 per cent more customers visiting these branches that decided to accept a credit card, about 62 per cent more customers selected the “priority” account, and that the sale of unsecured loans in these branches increased by 161 per cent in year-on-year terms.

These are impressive data, but there is no way not to notice that the standard branches have much worse localization and are usually open between 9 am and 5 pm, while the “smart” branches usually operate from 9 am to 10 pm. And this means that their working time is 62.5 per cent longer.

“After four years of their operation, it appears that not all “smart” branches have been a success,” Sławomir Sikora said at a press conference. Citi Handlowy admits that it was late with the introduction of mobile banking in comparison to the domestic competition. In the Q2 it launched work on a new version of the internet system also available on smartphones, which is to be implemented at the beginning of next year. It reports that the current mobile application is used by 83,000 people. For comparison, ING BŚK has 10 times as many customers of services available through smartphones.

“We have focused on mobile banking. When the “smart” concept was developed it did not seem so obvious (…) We are working on a new Citibank online system. The previous one reflected the expectations from two years ago. Now we want a faster time-to-market,” says Sławomir Sikora.

Will a new mBank be created?

Sławomir Lachowski, the creator of the online based mBank, said in 2000 that the concept behind a credit institution operating exclusively on the internet was that the minimization of operating costs should allow for a better valuation of products. This model of a bank emerged in Poland probably a bit too early, and it turned out that it needed the support of “physical” branches. But thanks to that approach the network of the current mBank has never become a very large one.

“I think that close to 200 branches that we have is enough. We realize that some of the banks will be restructuring their networks. Because of that they may lose a part of the turnover, with consequences for the income,” says Cezary Stypułkowski, the CEO of mBank.

Mobility and effectiveness are two of the three pillars of the new strategy of mBank which reports that by the end of theH1’16, 42 per cent of its active customers (the largest percentage in Poland) used mobile banking, and its cost-to-income ratio was 50.1 per cent.

Is there a place for another bank, and especially an internet bank, in the light of the progressive consolidation of the banking sector in Poland? This is perhaps a more exciting question for the coming years than the question of who will merge with whom. The example of Alior Bank, created in 2008, showed that despite the high competitiveness of the Polish market it is possible to quickly build a very large institution. But does that apply to online banks as well?

ING DiBa, which only has three branches, is the third largest retail bank in Germany. It employs 3,800 people which is a few hundred less than CitiHandlowy employs in Poland; has 8.5 million customers and a cost-to-income ratio of 40 per cent at the end of 2015. This is probably the model of the bank of the future, although it is not yet known how distant.

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