Polish banks go from resilience to vulnerability

Polish banks go from resilience to vulnerability
Poland’s central bank is expected to keep raising interest rates to 7% or even 8% but there are analysts who predict that the NBP will only stop at 10%.
By Wojciech Kosc in Warsaw June 21, 2022

Polish bankers are so distressed these days that they can look back to the days of the 2008 global financial crisis and long for the resilience they displayed then.

Today, the banking market faces unprecedented uncertainties. At first, the main risk just concerned Swiss franc mortgages, where the government and the courts have long held that banks should compensate clients for losses caused by the rapid appreciation of the franc.

Now there are many more worries: rampant inflation and the central bank’s attempts to contain it by aggressive monetary tightening; the risk of an economic recession and rising unemployment; and the prospect that the government will make the banking sector finance ideas such as a credit vacation for everyone before next year’s general election.

The banking sector is an easy target as, on the surface, banks are enjoying a boom.

In January-April, Polish banks netted PLN9.19bn, marking a jump of 111% y/y, according to the most recent available data compiled by the National Bank of Poland (NBP). 

The NBP’s aggressive rate hike campaign aimed at curbing inflation drove up the result, because it increased banks’ net interest margins, pushing net interest income up 83% y/y. After the NBP increased rates in May and June, taking them to a 14-year high of 6%, the second quarter is poised to be exceptionally good for the sector.

Yet, the sector has been lamenting a steady fall in the return on equity (ROE) ratio, which the bankers hoped would finally recover in 2022 after falling steadily since 2011.

These hopes were thwarted by the government, which, looking to soften the effects of the NBP’s tightening of monetary policy, has devised a plan for a universal credit vacation for mortgage payers. The vacation gives borrowers an option of making no repayments for four months this year and four in 2023. 

That, the banks say, will hit the sector for an estimated PLN20bn (€4.28bn), slashing net profit and flattening ROE.

The plan comes in reaction to growing discontent among borrowers, who are forced to pay ever-higher mortgage repayments as banks hike their margins in line with the way the NBP is raising the cost of money to fight inflation. 

Polish media are full of “it’s the death of the middle class” stories, citing borrowers whose repayments doubled only since October – when the NBP’s tightening cycle began – with the outlook for more increases in the coming months.

The government also plans to bulk up the banking sector’s fund to help borrowers in distress from the current PLN600mn (€128mn) to PLN1.4bn this year and PLN2bn in 2023.

Finally, there come risks linked to the government’s ideas for dealing with high mortgage repayments. Banks are worried about the planned replacement of the three-month Warsaw Interbank Offered Rate (WIBOR) with a new indicator as a new basis on which banks should calculate loan margins.

The government’s plans, on top of the macroeconomic outlook getting cloudy, have Polish bankers worried about their role in financing economic growth, Przemyslaw Gdanski, CEO of BNP Paribas Polska, said recently at an industry conference.

“In difficult times, the banking system should be as healthy as possible … it should be able to finance the economy,” Gdanski said, Business Insider reported earlier this month.

“We have a hard embargo [on trade with Russia], inflation, recession, and a deterioration in the quality of loan portfolios. The scenario from the turn of the 1970s and 1980s may repeat when Poland struggled with the effects of the crisis for several years,” Cezary Stypulkowski, who heads mBank, the Polish business of Germany’s Commerzbank, told the European Financial Congress held in Sopot.

According to Stypulkowski, the concoction of negative trends imported from abroad in the wake of Russia’s aggression on Ukraine and the government’s “inconsequential” response to the war and the lingering problems after the coronavirus pandemic, make Poland’s banking sector “ever more exotic and out of sync with international standards”.

The banking stock market sectorial index WIG-Banki has retreated over 36% in 2022 to date and is still nearly 30% down versus the time before the pandemic struck.

The biggest Polish lenders, state-controlled PKO BP and Pekao, have seen their stock tank 30% this year to date in what still are mild falls compared to losses nearing 50% in the same period in the case of mBank or Bank Millennium.

Taming inflation and halting the cycle of interest rate hikes are what Polish bankers expect to be the first harbinger of an improvement, it seems.

“It’s a myth that high interest rates are to our favour,” Michal Gajewski, CEO of Santander Bank Polska, told the European Financial Congress.

“[Our] customers are in trouble, so we need to create reserves. We want then to pay back their loans,” Gajewski said.

But that may well be wishful thinking if the NBP’s tightening continues – as it is expected to because of the pro-inflation moves by the government before the next general election in the autumn of 2023.

Poland’s interest rates are generally expected to keep rising to 7% or even 8% but there are analysts who predict that the NBP will only stop at 10%, given that inflation is still far from its peak.

That could result in a bigger than expected slowdown in GDP growth and an increase in unemployment, which would eat into the quality of banks’ credit portfolios. So far, predictions are for GDP expansion to ease to a still robust 3.5% in 2023 and 3.6% in 2024 from around 5% this year.