PKO bank posts good results but Polish politicians can't stop meddling

By bne IntelliNews May 16, 2007

Jan Cienski in Warsaw -

Poland's largest bank, state-owned PKO BP, on Tuesday surprised analysts with a strong first quarter, reporting a 40% increase in profits thanks to a buoyant rising mortgage portfolio and cost restraints – but the good results can't mask increasing worries about the bank's future due to political interference.

PKO BP, which has about 20% of the Polish banking market, has been without a chief executive since last October, when Andrzej Podsiadlo quit. Podsiadlo left because he had been appointed by the previous centre-left government, and Poland's conservative Law and Justice party government has systematically purged top management at almost every state-owned company in the country and replaced them with party loyalists.

Since then, Poland's political masters have been unable to find a suitable candidate to take over the country's most important financial institution, which is 51.5% owned by the state.

Slawomir Skrzypek, a close ally of Poland's ruling Kaczynski twins, was the bank's acting head late last year, but could not be approved for the CEO post by regulators because he lacked any qualifications. Instead, he was named governor of the central bank. Kazimierz Marcinkiewicz, a former prime minister with no banking experience, was also considered for the top job.

Loyal servants

For the Kaczynskis twins, who are president and prime minister, loyalty is much more important than professional qualifications, because they have visions of using PKO BP as the core of a national financial champion that would include the postal bank and PZU, a government owned insurance company.

Three contests have been held to choose a CEO and most analysts expect another executive search scheduled for this week will also come up empty.

The dithering over choosing a new CEO has left the bank adrift at a time when Poland's banking market is becoming increasingly competitive.

"At the moment politicians are playing around with the bank to the detriment of the other shareholders," says Maciej Majewski, a banking analyst for Deloitte & Touche, the consultancy.

PKO BP is about to lose it place at the top of the bank rankings, pipped by rival Pekao, which is owned by Italy's UniCredit Group. Pekao is in the midst of merging with most of BPH, Poland's third largest bank, which had been owned by Germany's HVB, which was itself acquired by UniCredit in 2005.

Other banks are also growing fast. GE Money of the US is buying 200 surplus BPH branches that Unicredit was forced ot divest in order to merge Pekao with BPH. Other banks like Deutsche Bank, Polbank EFG of Greece and Scandinavian DnB Nord are planning to ramp up their branches over the next year or two.

Burger strategies

PKO BP recently came up with a strategy that consists basically of trying to stay the country's biggest bank.

"It's the kind of strategy which any company, from a hamburger chain to a car rental company, could have come up with," says Maciej Materna, a banking analyst with Bank Millennium.

The bank also wants to expand in neighbouring Ukraine and is thinking of opening a branch in London later this year – an attempt to cater to the hundreds of thousands of Poles who have migrated to work in the UK since Poland joined the EU in 2004.

For now, Poland's fast expanding economy – growth this year is expected to be at 6.1%, according to the European Commission – and booming mortgage market has meant fat times for all banks, including PKO BP. But analysts warn that its assets are growing by only about 8% a year, slower than many of its rivals.

The first-quarter results released on Tuesday showed earnings rose to PLN672m (€177m), up from PLN482m from the same period a year earlier. Analysts had expected earnings of about PLN599m, according to a survey conducted by the IAR news agency. The key was mortgage loans, which jumped by 37% to PLN24.5bn.

PKO BP has enormous advantages. It has by far the largest network of branches in the country, and many of its customers are older and more conservative, which means they are content to go to their home branches when looking for mortgage loans or investment advice.

But PKO BP's corporate banking arm is more troubled, and other banks, like small but aggressive Getin, are setting up lucrative private banking subsidiaries to grab the business of Poland's fast growing wealthy classes.

What PKO BP really needs is a new leader, who will make the tricky strategic and political decisions, like reducing a bloated workforce, that are impossible to do by committee.

"Over time this management problem will have a huge impact," says Materna.

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