bne IntelliNews – Polish banks move from resilience to vulnerability

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 showed back then.

Today, the banking market faces unprecedented uncertainties. At first, the main risk was solely in Swiss franc mortgages, where the government and courts have long argued that banks should compensate customers for losses caused by the rapid appreciation of the franc.

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

The banking sector is an easy target because, on the surface, banks are booming.

In January-April, Polish banks brought in PLN 9.19 billion, marking a year-on-year jump of 111%, according to the latest available data compiled by the National Bank of Poland (NBP).

The NBP’s aggressive rate-hike campaign aimed at curbing inflation drove the bottom line as it boosted banks’ net interest margins, pushing net interest income up 83% year-on-year. After the NBP raised rates in May and June to a 14-year high of 6%, the second quarter is shaping up to be exceptionally good for the sector.

Still, the industry bemoans a steady decline in the return on equity (ROE) ratio, which bankers had hoped would finally recover in 2022 after a steady decline since 2011.

These hopes were dashed as the government, seeking to blunt the effects of the NBP’s monetary policy tightening, devised a universal credit vacation plan for mortgage payers. The holidays give borrowers the option of making no repayments for four months this year and four in 2023.

This, according to the banks, will hit the sector for an estimated 20 billion PLN (4.28 billion euros), reducing net profit and flattening ROE.

The plan comes in response to growing discontent among borrowers, who are being forced to pay ever-higher mortgage payments as banks increase their margins in line with how the NBP is raising the cost of money to fight the coronavirus crisis. inflation.

Polish media are rife with ‘it’s the death of the middle class’ stories, citing borrowers whose repayments have only doubled since October – when the NBP tightening cycle began – with prospects of further increases in the coming months.

The government also plans to strengthen the banking sector fund to help troubled borrowers from PLN 600 million (€128 million) to PLN 1.4 billion this year and PLN 2 billion in 2023.

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

The government’s plans, in addition to the gloomy macroeconomic outlook, have Polish bankers worried about their role in financing economic growth, Przemyslaw Gdanski, CEO of BNP Paribas Polska, told an industry conference recently.

“In tough times, the banking system should be as sound as possible…it should be able to finance the economy,” Gdanski said, Business Intern 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 of the turn of the 1970s and 1980s could repeat itself when Poland has struggled with the effects of the crisis for several years,” said Cezary Stypulkowski, who heads mBank, the Polish subsidiary of Germany’s Commerzbank, at the European Financial Congress. which was held in Sopot.

According to Stypulkowski, the concoction of negative trends imported from abroad in the wake of Russia’s aggression against Ukraine and the government’s “inconsequential” response to war and lingering problems after the coronavirus pandemic, make the Polish banking sector “increasingly exotic and irrelevant”. synchronize with international standards”.

The WIG-Banki banking stock market sector index is down more than 36% in 2022 to date and is still down nearly 30% from the pre-pandemic period.

Poland’s largest state-controlled lenders PKO BP and Pekao have seen their stock plummet this year to date in what are still slight declines from losses close to 50% during the same period in the case of mBank or Bank Millennium.

Getting inflation under control and stopping the cycle of rising interest rates is what Polish bankers expect to be the first harbinger of an improvement, it seems.

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

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

But that could well be wishful thinking if the NBP tightening continues – as expected due to the government’s pro-inflationary measures ahead of the next general election in the fall of 2023.

Poland’s interest rates are widely expected to continue to rise to 7% or even 8%, but some analysts are predicting that the NBP will only stop at 10%, given that inflation is still far from its peak.

This could lead to a greater than expected slowdown in GDP growth and an increase in unemployment, which would undermine the quality of banks’ credit portfolios. So far, forecasts are for GDP expansion to slow to 3.5% in 2023 and 3.6% in 2024, from around 5% this year.