Polish banks in rude health?

(GotCredit, CC BY)

Chief of Poland’s financial regulatory (KNF), Andrzej Jakubiak, recently sought to head off concerns that the Polish banking sector is facing rocky times ahead, saying that the system was “stable and money held in Polish banks safe.”

But the recent resignation of a Deputy Finance Minister Konrad Raczkowski for saying banks could go bust this year did hit a nerve. Poland’s banking system is about 70 per cent foreign owned and was well capitalized during the 2008 financial crisis. But some believe current deflation and political uncertainties may undermine its largely unblemished situation.

The Law and Justice (PiS) government has sought since taking office in November 2015 ways to fund its expensive social programs and banks are in the firing line.

Raczkowski did say the banks would go under not because of a pending Swiss franc conversion bill or a tax on banks’ assets – or because of the illiquid state of Polish banks’ foreign owners or changes on international financial markets – but because they are badly managed and that institutional supervision has not been working.

The banking authorities were quick to react, with Finance Minister Paweł Szałamacha saying the Polish banking sector is “stable.”

Reality check

But Poland-based banks are facing historically low and falling interest rates, with the base rate down from 4.75 per cent at the end of 2012 to 1.5 per cent since the end of 2015. As deflation in Poland continues and the European Central Bank (ECB) cuts rates too, it is expected that by mid-2016 Polish interest rates may drop even further. 

Added to this are reduced credit card fees and raised contributions to the Bank Guarantee Fund, set up to boost banks’ reserve funds in cases of financial need and also part of internationally agreed higher reserve requirements.

“The external environment is posing more and more challenges for Polish banks, which they will increasingly need to face in 2016. These challenges are likely to result in much lower profits than the banks have become used to,” S&P’s said.

What will impact Polish banks?

There are three factors, S&P said. Firstly, the introduction of a banking sector tax. The new bank tax means Polish banks have to pay 0.44 per cent of their adjusted assets every year. Moody’s estimates this could cost the sector PLN4.4bn (EUR1bn) in 2016, or 32 per cent of banks’ annual earnings for the first 10 months of 2015/16. The tax could also hit credit growth by reducing banks’ capital creation.

The ECB, meanwhile, warned that a monthly 0.0366 per cent tax on banks’ assets could push banks to restructure their portfolios in favor of riskier products.

The second factor is the plan to convert about 570,000 Swiss franc-denominated mortgage loans into zlotys to protect mortgage borrowers from a strongly appreciating Swiss franc in the last 12 months. If conversion is pushed through on terms unfavorable to the banks it could also threaten the stability of the banking sector, S&P’S said. Among lenders with the biggest Swiss franc loan books are PKO BP and Getin Noble, as well as the Polish banking businesses of Santander, Commerzbank, BCP, Raiffeisen and General Electric. Getin is the most exposed to Swiss franc loans, according to Fitch.

Thirdly, the government’s requirement that Polish banks to increase their contributions to the deposit guarantee fund following the bankruptcy of a small lender, SK Bank, will lower profits.

All these could drive a consolidation trend. Several banks are already for sale. The PiS government has said it wants to build up a large financial group around state-controlled insurer PZU, which took over Alior Bank last year, and said it wants to make other bank acquisitions.

Smaller players are feeling the pressure already. After SK Bank’s bankruptcy, BGZ BNP Paribas could see losses for 2016, S&P’s said. The agency also gave mBank and Pekao negative outlooks.

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