Despite the Global Financial Crisis, the Banking Sector in Poland Records Robust Growth

Despite the persisting global financial crisis, the banking sector in Poland recorded a robust growth in 2011. The total assets of commercial banks increased by 12% yoy, the net banking revenue went up by 9% and the bottom line surged by over 33% to 14.5 billion PLN concludes recent report by Inteliace Research.

• Economy. With its GDP increasing by 4.3% yoy in 2011, Poland was among the strongest economies in Europe, outpaced only by the Baltic countries. This favorable performance was an effect of strong investment demand in the corporate and public sector, steady household consumption, and a positive foreign-trade contribution. Nevertheless, the quarterly indicators signaled that the economy has been cooling off since 3Q 2011. In particular, fading consumption attributable to accelerating inflation (4.6% in Dec. 2011) and unemployment that was inching up (13.2% in Jan. 2012) have disappointed the most. Also, public spending has showed some fatigue in the second half of 2011 as a few large infrastructure projects have been coming to an end.

• Performance of banks. Poland’s banking sector recorded healthy growth in 2011 with total assets increasing by 12% yoy. Unlike previous years, the corporate segment has showed a robust growth with loans and deposits going up by 17% and 12% respectively. In the retail segment, outstanding mortgage loans jumped by 19% while consumer lending stagnated. Retail deposits increased by 13%, benefiting from an upward trend in nominal interest rates.
Commercial banks’ performance improved in 2011 as net banking revenue went up by 9% and the bottom line surged by over 33% to 14.5 billion PLN. Revenue was driven mostly by net interest (+15%), while the key reason for the jump in profits was the cost of risk, which fell by over 17%. As a consequence, the ROAA and ROAE benchmarks grew to 1.30% and 12.5% respectively as calculated by Inteliace Research. Also, the cost-to-income ratio (CIR) improved, falling below 50%.

• Capital & funding. Quickly growing corporate and mortgage lending portfolios increased the need for additional equity. The capital requirement of commercial banks went up by almost 17%, but own funds of banks rose by just 10%, causing the drop in capital adequacy ratio (CAR) from 13.9% to 13.1% in 2011. As a consequence, the Supervision Commission (KNF) has asked banks to pursue prudent dividend policies in 2012 in order to preserve capital. Due to the deepening crisis in Western Europe, foreign banks are increasingly trying to reduce funding of their Polish subsidiaries, which they previously supplied abundantly with cheap credit. As a result, Polish subsidiaries of foreign banks have been increasingly forced to become self-contained. In order to assure stable funding while not being able to draw enough new client deposits, many banks have started issuing own bonds. (e.g., BRE bank is issuing bonds with face value of 2 billion EUR)

• Competition, consolidation, & new players. The consolidation wave that started in 2010 has continued. The recently most active foreign buyer, Banco Santander, has just announced a takeover of KBC´s subsidiary, Kredyt Bank, after acquiring BZ WBK in 2010. If all of Santander´s operations in Poland are combined, the bank will rank #3 in terms of assets and will have market share of 9.4%. Another consolidator, Raiffeisen will soon become #7 on the list after merging its Polish subsidiary with the previously Greek-owned Polbank EFG. However, not all expected M&A deals have been completed. In 2011, Banco Comercial Português refrained from selling its Polish subsidiary (Bank Millennium), and DNB gave up divesting its Polish operations: a bank and a bill payment network. In both cases a considerable gap between sellers’ expectations and potential buyers’ offers was the most likely deal breaker. The high growth potential of the Polish banking market is encouraging new investors. Two Chinese giants, ICBC and Bank of China, and the British Vanquis bank are about to enter Poland by opening local branches in the first half of 2012. Also, the Russian Sbierbank is examining various entry options including M&A and greenfield; as well, it is not excluding a listing on the Warsaw Stock Exchange.

• Future outlook. In our base-case scenario, we see a moderate growth in key banking volumes through 2014. The elevated level of unemployment and the population’s stagnating real incomes, combined with a restrictive regulatory environment will keep weighing on mortgage loans, hampering the overall lending in households sector in 2012-2013. Retail deposits are likely to continue a stable growth, despite a short-lived slow down caused by the withdrawal of tax friendly offers. In the corporate segment, a solid growth in lending is expected to continue in 2012, but a transitory cooling, resulting from slowing investments, may occur in 2013. Corporate deposits will continue to grow steadily, reflecting a solid financial condition of enterprises.

As far as banks’ profitability is concerned, we expect a moderate increase in revenues due to growing volumes and stable margins. Profits of banks are likely to remain on the previous year’s level, as increasing revenues will be offset by growing operating costs and by falling quality of retail lending portfolios.

The good condition of banks operating in Poland is contrasting with the troubled banking sectors in Western Europe. Forced by regulators to improve balance sheets, short on capital and lacking liquidity, more and more Western European banks consider cashing on their Polish subsidiaries. The funding of lending expansion with cheap credit, previously abundantly pumped up to Poland, by foreign banks is coming to an end. Poland’s banks are expected now to become self-contained in terms of funding of their lending. Unfortunately, the local deposit markets are not deep enough to accommodate all the needs, so bonds and other long term financing options are becoming increasingly popular in filling the gap.

The future outlook for the sector is still positive. Key banking volumes are expected to sustain growth, while profits of banks are likely to remain at the current level.