Are the Polish government’s actions set to smother bank lending? That’s the threat, according to the country’s banks and opponents of the ruling Law & Justice (PiS) party.

Although anything but certain, it’s no small risk. The measures being pursued by the PiS against the banks are taken straight from the playbook of Hungary’s populist Fidesz government. Having wrapped up the conversion of foreign-currency loans in late 2014, Budapest is still trying to seal a peace deal with the banks in a bid to get them to resume lending.

Hungarian Prime Minister Viktor Orban’s tough treatment of the banks saw lending dwindle to 53% of GDP in 2014, down from 75% in 2009. The Magyar Nemzeti Bank stepped into the breach with its Funding for Growth Scheme, but now wants to step back. The economy, meanwhile, has shown signs of a sharp slowdown as Hungary struggles to keep pace with the rest of the region for foreign investment, including from banks still wary of the government. The head of the Hungarian Banking Association suggested to the pro-government Magyar Idok on February 9 that “seven lean years” could now be ending for the sector. However, lending by commercial banks remains in a rut.

Alongside numerous carrots and sticks, Budapest cut its headline bank tax at the start of this year from 0.53% on assets to 0.24%, with further breaks scheduled in the coming years. While that has been welcomed by the rating agencies – which dumped Hungary down into junk status five years ago – a return to investment grade has remained elusive.

Sounding ominously similar to Hungarian officials over the past few years, Polish Finance Minister Pawel Szalamacha announced at the start of the year that the era of “high returns on capital in the banking industry is gone”.

Poland’s copycat policies have already earned it one downgrade from Standard & Poor’s and a pair of warnings from Moody’s Investors Service and Fitch ratings. S&P’s surprise rating cut on January 15 was released the same day that the Polish government’s bank tax legislation was passed and the forex loans draft bill released. The potential hit on banking stability was flagged by all three rating agencies. S&P downgraded its outlook on Polish banks to negative on February 5 and Fitch has made similar noises.

The government hopes the new bank tax will raise up to PLN6bn (€1.35bn) for state coffers each year to help pay for its campaign spending promises. It is currently awaiting an estimate on the cost to the banks of the conversion of forex loans from regulator KNF, with estimates ranging from PLN10bn-40bn. The National Bank of Poland and the European Central Bank have both warned that the moves could threaten banking stability.

An additional PLN2bn in contributions to the Bank Guarantee Fund to cover the costs of the bankruptcy of SK Bank in late 2015 will bring little cheer to bank boardrooms. All of those issues, on top of record low interest rates and falling profitability, threaten to see the banks pull in their horns. Aggregate net profit across the sector was “significantly lower than in previous years” at PLN11.5bn in 2015, the KNF said on February 9.

Already battered by the uncertainty over government action on the forex loans issue, Poland’s WIG Banki index has dropped over 11.5% in the last three months. However, the government appears unwilling to engage in dialogue over the banks’ responsibilities towards their host country and borrowers who are struggling to cope with forex loans; PiS rode to power in the October elections on the back of promises to spread the benefits of Poland’s impressive growth over the past decade further. Instead, Warsaw appears intent on bludgeoning the banks into submission.

Naughty corner

Executives from the country’s biggest banks – state-controlled PKO BP and local units of international giants including Santander, UniCredit, Citigroup and ING - were hauled before lawmakers on February 9 like naughty schoolboys. PiS has reacted with fury to a rise in charges by the banks that coincided with the bank tax. Previously free or close to it, bank fees have been introduced on mortgages, cards, loans, current accounts and ATM withdrawals by several lenders.

Transferring the costs of the bank tax onto the public would be illegal, according to the legislation on the levy. Margins on Polish loans are higher than in the Eurozone, PiS claims. The banks, of course, insist that the new fees have nothing to do with the bank tax, and that Polish charges and margins are below the Western European average. Bankier.pl claims 15 of the top 20 Polish banks have raised loan margins in the last three months.

“Our goal is to find out why banking fees were raised so fast and in such a unfounded scale,” Wieslaw Janczyk, deputy chairman of the public finance committee, told Bloomberg. “Authorities have the tools to deal with price increases by banks.”

Tapping into the populist sentiment across the globe provoked by the role of banks in the recent crises, PiS MPs reportedly asked the bank CEOs if they operate along the lines seen in Hollywood films “The Big Short” or “The Wolf of Wall Street”.

PKO said in a statement on the morning of February 9 that it expects to pay PLN812mn in 2016 under the 0.44% annual tax on assets. It has recently raised some charges, but claims to have cut rates on some mortgages. “The bank’s response to the tax, as we seek to preserve stable profitability, will be to further expand the credit portfolio and improve operating efficiency,” PKO’s director for strategy, Pawel Borys, said in the statement.

Indeed, as a state-controlled bank in a sector otherwise dominated by foreign ownership, PKO is clearly central to PiS’ push to bring lenders to heel and protect lending levels to the economy. Hungary did not control any major financial houses throughout its scrap with the mostly foreign-owned banks.  

Yet it may not be enough to save the job of PKO CEO Zbigniew Jagiello, who is being talked about as the next state company chief to face the PiS axe. The new government has overseen a wholesale clearout at Poland’s state-controlled companies. Jagiello’s ties to Minister of Development Mateusz Morawiecki, who arrived in the cabinet from the country’s third largest lender, the Santander-owned BZWBK, had previously been viewed as protection from the storm. “A change [of] CEO is always negative,” claim analysts at Erste. The “turmoil would probably be harmful to the business”.

Yet as Polish governments have shown for years, government policy happily trumps the interests of minority shareholders. PiS officials have urged PKO and smaller Polish-owned lenders – which are seen most at risk from the bank tax and forex loans legislation – to take advantage of the rise in charges by dropping their costs in order to capture market share.

That only flags up that Warsaw is in no mood to offer any meaningful compromise. An official of the office of President Andrzej Duda said on February 9 that the draft legislation on the conversion of forex loans could be adapted to spread out the cost to banks should KNF's estimate come in at the higher end of the scale. Work on such a scenario is ongoing, the official added.

There is another area in which the government’s pressure might backfire. Regulator KNF ruled the sector with something of an iron fist during the last term of the liberal Civic Platform government, opposing further consolidation and keeping dividends to Eurozone parent groups on a tight leash. However, the watchdog has taken a backseat since PiS came to power, save to warn of the importance of sector stability.

With the uncertainty hanging over the sector over the past year or so having left efforts by GE Capital and Raiffeisen Bank International to offload their Polish units in limbo, the KNF now appears to sense that there will be no new major investment by Polish groups to expand domestic ownership, as insurance giant PZU had planned in the second half of 2015. Instead, the country’s second-largest bank Pekao, which is owned by UniCredit, is set to agree to buy BPH from GE, minus the forex loans portfolio, sources claimed on February 9.

In another echo of Hungary, S&P suggests that the US and Austrian groups might not be the last to leave a sector whose “ability to absorb losses and to cope with shocks may weaken over the next two years”. “[W]e believe that the structure of the banking sector can change over time, due to the pressure of consolidation and strategic decisions of foreign parent companies,” the rating agency said in its February 5 statement.