Hard-up Polish government gambles with its banks

By bne IntelliNews June 29, 2009

Jan Cienski in Warsaw -

Poland's banks are riding out the economic crisis in decent shape, which has prompted the government to turn to the country's largest bank in the hopes of squeezing it for a large dividend payment to repair this year's listing budget.

PKO BP, which is 51% owned by the state, is being pushed to pay out almost all of last year's profits, or PLN2.9bn (€640m), as a dividend. Though a compromise deal between the opposing sides of the Treasury and Finance Ministry is being readied in time for the bank's June 30 shareholder meeting, such a controversy at a time of crisis has caused alarm among Poland's banking regulators. "This is a very bad situation, if it does take place," said Slawomir Skrzypek, the central bank governor; Poland's Financial Supervision Authority warned: "In conditions of heightened risk, no bank can allow itself to weaken its capital strength."

Concern has been heightened because PKO BP was seen as crucial to ensuring that lending does not contract this year due to fears about the economic downturn. PKO BP accounts for about a quarter of Poland's banking market, and the hope had been that it would be motivated by concerns about the local economy to continue lending. "If we didn't have PKO we would be defenceless," says Krzysztof Rybinski, a partner at Ernst & Young's Warsaw office and formerly deputy governor of Poland's central bank. "PKO BP could perform an important role in offering credit at a time when other banks cannot."

About two-thirds of Poland's banking sector is foreign owned, and regulators have worried that foreign parents, many of whom are in trouble back home or have over-extended themselves in central Europe, may be reluctant to aggressively expand lending in Poland. "I fear that lending growth, measured from quarter to quarter, could fall to zero," Skrzypek said recently.

Now, the prospects of PKO BP taking up the strain are much reduced. The bank does plan to shore up its capital base later this year by issuing about PLN5bn in new shares, which would put its Tier 1 capital above 11%, but in the meantime the bank is unlikely to be an aggressive lender.

Mortgaged to the hilt

Without significant help from PKO BP, hopes of boosting lending seem remote. Authorities have taken steps to increase liquidity. The central bank has lowered its mandatory reserve rate to free up capital, and the government has brought in a programme to help cover part of the mortgage payments of qualifying families. However, indications are that new mortgage lending has slowed to a crawl and corporate lending has actually retreated. The only area growing strongly is consumer loans, where there are increasing concerns about the quality of the loan portfolio.

There is also a danger that the Treasury's pressure on PKO BP will send a negative message to other bank owners, who so far have heeded regulators and not paid out dividends despite last year's record profits of PLN14bn for the sector as a whole. The central bank and the Financial Supervision Authority are keen for banks to retain profits because the banking environment is likely to be a lot more difficult this year than last. In the first quarter of this year, profits for the sector came to PLN2bn, half of the level for the same period in 2008.

One source of trouble is the steadily increasing number of problem loans. The Polish Banking Association says that non-performing loans for the non-financial sector came to 5.3% in March compared to 4.75% in February.

Mortgage loans are so far not showing much strain, despite the fact that more than 70% of them are denominated in foreign currency, mostly the Swiss franc, and the zloty has lost more than a third of its value against the franc in the last half-year. However, most Poles bought flats to live in and not for speculation, and are ensuring that payments are made on time. "I don't see a worsening of that portfolio, our stress tests have shown there is no problem," says Mateusz Morawiecki, CEO of Bank Zachodni WBK, one of Poland's largest and an affiliate of Ireland's AIB.

The bigger problem is with corporate and consumer lending, where Morawiecki expects the number of problem loans to double or triple during the current crisis.

Profits are also being strained as banks rush to strengthen balance sheets by offering attractive rates for deposits. Until recently, rates as high as 9% were being offered by some of the smaller banks which had tended to rely on the wholesale market for financing and which now need to have their own access to liquidity; this at a time when the central bank's main interest rate is 3.75%.

The flow of capital into the banking system has stopped the deterioration of the sector's loan/deposit ratio. It is currently 123%, after having passed 100 in 2007, during the height of the recent real estate boom.

The costly war for deposits and rising problem loans will make this a difficult year for banks, but there is no indication that the sector won't be able to weather the downturn. "This year will certainly be worse than last, but it is still unclear whether banks will have a loss or not," says Rybinski.

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