Matthew Day in Warsaw -

Get Jan Krzysztof Bielecki on the subject of football and his passion for the game bubbles to the surface. A dedicated follower of the sport and a familiar face at international matches, this former prime minister and head of Poland's biggest lender Bank Pekao says this year could be a watershed for Poland's national team as it goes for glory in the Euro 2008 Championships. When talk turns to the industry that's his day job, he's a bit more cautious.

Polish banks have enjoyed a number of heady years as they tapped into the country's relatively low-penetrated banking sector coupled with a strong demand for mortgages, business loans and other banking products. However, the desire to get in on the act and sign up customers before the competition did, Bielecki points out, led to some banks throwing caution to the wind.

"There were a lot of new businesses fighting for market share," he says, between sips of coffee in his office. "A lot of foreign banks, in particular, were fighting for any market share they could find. Mortgage lending was – two or three years ago – identified as the best way to reach the customers and, therefore, some banks were lending below the break-even point."

The 56-year-old Bielecki, who was also Poland's prime minister in the early 1990s, adds that the passion for gaining market share at the expense of financial prudence also characterised the commercial banking sector. "There's been a tremendous fight for customers and market share, and banks have been offering very low margins – like a couple of basis points, which in my view was too generous for large corporates.

"The banks have been thinking – when it comes to large corporations – 'If I can lend them one billion, then I can say that my market share has increased'. So the fight was for market share and customers, and this meant that margins were squeezed and were going down and down. Sometimes in the corporate business in particular there was a situation when the margins didn't cover the cost of risk. Okay, the cost of risk was going down from something like 170 basis points two or three years ago to something like 50 – at least in our case – but still the margins were lower than the cost of risk. That shows you how fierce the competition was."

The frantic activity has helped fuel the banking sector's rapid expansion in Poland. According to Stanislaw Kluza, head of the country's Financial Supervision Commission, the sector's assets rose by 17.6% on year to €233bn at the end of 2007, and commercial banks' assets grew by 17.7% to €219bn. Little wonder that Kluza says Polish banking is in a good condition.

Pekao, which is now part of the Italy's UniCredit group, has also been on something of a roll. In late April, Fitch Ratings affirmed the bank's 'A' rating on its long-term insurer default ratio, and cited the bank's "continuous improvement in its underlying profitability, successful diversification of its revenue sources and strong market share."

And while Bielecki believes that Polish banks will see continued growth – he expects retail to grow at around 14% in 2008, for example – he is adamant that the sector is now experiencing major change and, surprisingly given the sorry state of the global banking industry, changes for the better.

Better days

To begin with, he says, the austerity and uncertainty sweeping banking as a result of the credit crunch could force Polish bankers to shift their attention from the headlong pursuit of gaining market share to good management. "You really will have to manage your capital and not just go for market share," Bielecki explains. "Even though competition might be even fiercer this year, the capital and equity requirement will ask good questions of the management of banks, which are now lending mortgages at almost dumping prices, to review their margins." Closer scrutiny and prudent financial policies, he adds, should allow margins to grow.

"We are finished with the stupid phase of development when business was based on the assumption that if we have good marketing, people will buy anything," he continues. "Now we are beginning a new phase based on the basic principles of good governance."

But while Bielecki, who has been at Pekao's helm since 2003, pulls no punches when it comes to some lending policies, he adds that one of the reasons Polish bankers talk about the "resilience" of the sector stems from the Polish mortgage market still being relatively small in macro-economic terms. "When you have 10% of mortgages measured to GDP, even when compared to the Czech Republic it's not that impressive," he quips.

At the same time Polish banks are now having to deal with the novel experience of a lack of liquidity as funding becomes an issue, mainly due to the global credit crunch. The fact it's novel, says Bielecki, has much to do with Poland having managed to avoided a banking crisis similar to those that struck the Czech Republic and Hungary in the 1990s owing to a careful privatisation process he says that was largely free of political interference.

Just how well some of his younger colleagues cope with the new situation, Bielecki adds, remains to be seen. Drawing on a football analogy, he puts Poland's dismal performances in the last two World Cups down to inexperience and reckons the Polish banking sector too will not only adapt to the new game, but also benefit from it.

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