The shifting sands of Polish banking

By bne IntelliNews October 17, 2011

Jan Cienski in Warsaw -

Spain's Santander is moving fast to realize its ambitions of playing a significant role in the Polish banking market - filing a binding offer to buy Kredyt Bank, a unit of Belgium's KBC thought to be worth about PLN4bn (€930m). If the transaction goes through it will mark another ownership change in a rapidly shifting Polish banking market.

KBC is selling the bank, as well as Warta, a Polish insurer, in order to raise the money needed to repay the Belgian government for a bailout that rescued the bank during the first wave of the economic crisis. That was the same reason that led to Santander's first large Polish acquisition, the purchase of Bank Zachodni WBK for €3.1bn from Allied Irish Banks, which in turn had been rescued by authorities in Dublin.

If it adds Kredyt Bank to BZ WBK, Santander will be the third-largest player on the Polish market, which is dominated by two large banks, the state-controlled PKO BP and Bank Pekao, a unit of Italy's UniCredit Group, with a raft of secondary banks making up the rest of the country's top-10. "Although there is still some chance that KBC will pull the deal due to an unsatisfactory price, a deal has clearly become more probable," writes Mark MacRae, an analyst with Wood & Co, a Central European investment bank.

The sale of Kredyt Bank is not the only change in the offing in the Polish banking sector. Portugal's Millennium BCP, which has also run into trouble at home, is selling its Polish subsidiary for an estimated €827m. The banks reportedly expressing an interest in buying the Polish Millennium include France's BNP Paribas, as well as PKO BP and Pekao. There are also rumours that Alior Bank, a recent and quite successful start-up, may also be on the market.

Best of both worlds

Polish banks are an attractive acquisition target because the sector is very profitable. In the first half of the year, Poland's banks reported a profit of PLN7.7bn, a 50% increase over the same period in 2010. For the year, the sector looks set to earn a record PLN15bn, beating the PLN13.9bn earned in 2008, the last pre-crisis year. "Polish banking has many of the positive aspects of a classic, developed-market banking sector, with the additional bonus of still having growth potential," says David Nangle, head of research at Renaissance Capital.

There had been worries that Polish banks would run into trouble because of their earlier propensity to lend in Swiss francs, popular before the first wave of the economic crisis because of the lower interest rates charged on such mortgages compared to loans denominated in zlotys. Swiss franc mortgages make up about 54% of all outstanding mortgages, even though banks and regulators have made access to such loans increasingly difficult.

Their true cost became apparent once the zloty started to lose ground against the franc, first sagging in 2009 before regaining some strength, and then falling steeply this year to almost PLN4 to the franc, while some mortgages taken in 2007 were signed when the franc was at about PLN2.

The franc's rise has strained the wallets of the approximately 700,000 Poles with Swiss franc mortgages, but so far they have been doing a good job making regular payments on their debt. Only about 1.6% of all such mortgages are in arrears, slightly lower than the level for zloty mortgages, and significantly below the level seen in Hungary, where borrowers were unable to take advantage of the cuts in Swiss interest rates because their rates were fixed, unlike the Polish floating loans.

The slack performance of the zloty is creating problems in covering liquidity positions for some banks with large Swiss franc portfolios, as they are having to scramble to increase their deposits. But because of the sector's profitability, and the economy's strong growth prospects, Polish banks are still attractive targets for foreign buyers. "There is a real sense that almost every bank in Poland is for sale if a buyer can be found," says Mariusz Grendowicz, former CEO of BRE Bank, a unit of Germany's Commerzbank.

But rather than looking for deals among the cash-strapped banks of Western Europe, which are bracing for another wave of crisis to hit the eurozone, the answer might be to look east.

In a harbinger of what might be a future trend, Russia's Sberbank recently agreed to buy most of the international operations of Austria's Volksbank. Such a transaction would not muster much enthusiasm among Polish banking regulators, but cash-flush banks from Russia, China and other points east might make better partners for Poland's profitable banks.

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