A decade ago, the banking sector was among Europe’s leaders in terms of profitability. Today, this status is long gone, due to the regulations introduced in recent years that capped profitability and the legacy of foreign currency mortgages that have not found a systemic solution. When interest rates began to rise, opening a path to higher yields, the Prime Minister said they were ‘unfair’.
Profit levels are expected to decline,” says Leszek Skiba, CEO of Bank Pekao, responding to a question about the impact of the government’s proposals to improve the situation of bank customers. Bank Pekao is the second-largest bank on the Polish market. Its main owners are PZU, a state-controlled and the largest insurer in Poland, and the Polish Development Fund, a state-owned development vehicle that has played a major role in fighting the economic consequences of the pandemic. “This is why stock prices of banks have been falling recently on the Warsaw Stock Exchange: everyone knows that profits should decrease,” echoes the Deputy CEO of one of the largest banks with foreign capital.
The WIG-Banks industry index has lost 30% since the start of the year (as of 6 May 2022). WIG20, the main WSE index, has fallen by nearly 24% during the same period, mostly because of banking stocks (in dollar terms, the decline of WIG20
is approx. 30% due to the depreciation of the zloty against the US dollar).
The government’s new proposals are supposed to address the rapid increases in interest rates. After the outbreak of the COVID pandemic, the Monetary Policy Council came to the rescue, cutting national interest rates. The National Bank of Poland’s main rate was reduced to 0.1%. When it was at this level, Poles took out nearly 300,000 mortgage loans, the vast majority with a variable rate, indirectly dependent on the central bank’s short-term rates. Starting from October 2021, the Monetary Policy Council increased the price of money from 0.1% to 5.25%. The WIBOR interbank market rates, which are used to calculate interest rates for loans, are clearly higher than 6%. For a considerable group of borrowers, monthly instalments have doubled over the course of nine months.
The Polish government wants to introduce ‘credit holidays’ that would postpone, without an additional fee, the repayment of one instalment per quarter for the next two years, expand the Borrower Support Fund and make it more accessible (the Fund, established a few years ago, was initially designed for citizens repaying CHF mortgages, which are popular in Poland, though actual use of the Fund has been negligible until recently). The government also wants to establish an institutional protection scheme (IPS) for commercial banks, akin to those in the cooperative sector in EU countries, and replace the WIBOR in mortgage loans with a new rate, based on interbank overnight deposits (given that further interest rate increases are expected, the three- and six-month WIBOR rates significantly exceed the overnight rates, and are even higher than the National Bank of Poland’s Lombard rate).
The government estimates the cost of all new solutions at PLN 5 billion per year. In the first two months of 2022, the entire banking sector earned a profit of under PLN 4.2 billion.
However, banks have more problems than just these costs. “Today, commercial banks are taking excessive advantage of rising interest rates. I hope that all commercial banks are busy analysing the situation to raise interest rates on deposits for individuals and businesses,” Prime Minister Mateusz Morawiecki said when presenting proposals to help borrowers. “Do not wait any longer because you have excess profits in your wallets, unfair profits,” said the Prime Minister, formerly the CEO of Bank Zachodni
WBK, which was initially in the hands of Allied Irish Banks and then controlled by Spain’s Santander after the global financial crisis.
The gradual increase of interest rates on deposits, coupled with immediate indexation of loans, has recently enabled Polish banks to achieve significant income increases. At Bank Pekao, the interest income in Q1 of 2022 was more than 50% higher than one year earlier while profits more than tripled. At Santander Bank Polska, the third-largest bank overall and the largest bank in Poland among those controlled by foreign capital, the interest income in Q1 of 2022 was over 60% higher than one year earlier, while net profit recorded a more than six-fold increase.
At present, banks are boasting about raising interest rates on deposits, which have climbed to 2 or 3% from nearly zero in the autumn of 2021. However, members of the government continue to threaten deposit institutions by announcing their plans to launch new laws to correct “the improper relationship between interest rates on loans and deposits,” as government spokesman Piotr Mueller put it.
The political opposition also has some ideas. The Civic Platform, headed by Donald Tusk, former President of the European Council and Prime Minister of Poland, would like to freeze interest rates on mortgages at the level before the increases introduced by the MPC.
In the first half of the previous decade, Polish banks achieved an average return on capital of approx. 10%. Later on, however, their profitability gradually declined. When Civic Platform was still in power, a law was adopted to curb commissions on card transactions. This was the first example when financial institutions were stripped of part of their income in order to support customers (in fact, retail prices did not decline so the solution benefited retail chains rather than shoppers, but lower commissions gave a boost to cashless payments in general). More steps of this nature were taken soon afterwards.
The CHF exchange rate spiked in January 2015, an event known in Poland as ‘Black Thursday’. The related increase in instalments on FX mortgages triggered a discussion about solving the ‘Swiss franc problem’. A promise to resolve this issue was one of the claims that helped Andrzej Duda win the 2015 presidential election. Several attempts to legislate a solution have been unsuccessful so far. For a few years now, customers have started to take matters into their own hands by filing lawsuits and demanding the cancellation of agreements signed over 10 years ago (shortly after the outbreak of the global financial crisis, banking supervision effectively banned banks from lending in currencies other than those in which customers earn their income). Until autumn 2019, most of these cases were won by banks. However, that situation changed after the ruling of the Court of Justice and today courts rarely take the banks’ side in such cases.
“Until November, we won 70% of cases. However, this trend has reversed considerably since November, as if someone waved a magic wand. The prevailing view in case-law is that a CHF loan is invalid,” Artur Klimczak, CEO of Getin Noble Bank, recently said. He represents the country’s largest institution with private domestic capital and one of the banks most heavily involved in CHF loans. The main owner of Getin Noble Bank is Leszek Czarnecki, who used to top the ranking of the wealthiest Poles. At the turn of 2021, Idea Bank, owned by Czarnecki, underwent compulsory resolution. In fact, Getin Noble Bank has been in the red for the last six years. It lost more than PLN 1 billion in 2021, largely due to provisions against the so-called legal risk of FX currency loans (recording a profit of less than PLN 20 million in Q1 of 2022).
Since 2016, the performance of the entire banking sector has been affected by the tax on financial institutions. It is mostly paid by banks, although it also applies to insurance companies and cash loan providers. The banking sector has argued that such a new burden would be justified if the proceeds from the tax were transferred to the Bank Guarantee Fund, which, much like in other EU countries, protects deposits up to the equivalent of EUR 100,000. An increase in BGF contributions is another problem, but the bank tax actually finances current budgetary expenditures. At the same time, it is not a tax-deductible cost, thus increasing the effective CIT
rate, which amounted to 41% in 2021 (nominally, corporate income tax is 19%).
At the beginning of the previous decade, the Polish banking sector consisted of nearly 50 commercial banks, 576 cooperative banks, and over 20 branches of foreign banks. All of them operated a total of over 14,000 walk-in branches and employed 176,000 people. In the mid-2000s, Poland already had fewer than 40 commercial banks, the number of cooperative banks had dropped to around 560, and the number of branches of foreign banks rose to 27. Several hundred new walk-in offices were opened, but employment shrank to just over 170,000. According to the latest data, 30 banks now hold a domestic licence in Poland (including several specialised mortgage banks – this is actually the only type of institution which emerged on the market, but they are mainly used to refinance mortgage loans granted by their parent companies, i.e. large players on the Polish market). Just over 500 cooperative banks have survived until today (and very few pay the bank tax since it applies to institutions with assets exceeding PLN 4 billion, and there are exemptions for exposures in treasury bonds), while the number of foreign branches has risen to 36 (although they are still marginal within the sector). However, the developments in the banking sector are best illustrated by data on the number of walk-in branches and employment: now, the former have declined to less than 10,700, while employment in the sector has shrunk to 142,500.
“The Polish banking sector has one of the highest cost-to-income ratios. In this regard, we outperform Western European banks by several or even more than 10 percentage points. If a bank has a C/I ratio at 40%, it is difficult to improve it significantly,” says Przemysław Paprotny, Partner and Financial Services Leader at PwC Poland.
No significant players have entered the Polish market in recent years. In fact, there have been more cases of players exiting Poland. Some of the most significant ones include UniCredit’s sale of its stake in Bank Pekao (a heavily publicised case of so-called ‘repolonisation’ or domestication), Deutsche Bank, and Raiffeisen Bank International divesting their core businesses, and Societe Generale withdrawing from retail operations. Deutsche Bank and Raiffeisen Bank continue to operate on the Polish market to a limited extent, mainly because they need to maintain their CHF portfolio. However, some exits have provided an opportunity for other players to reinforce their positions. For instance, Deutsche Bank’s business (except CHF mortgages and services to major corporate clients) was taken over by a subsidiary of Santander, while Raiffeisen’s business was taken over by a local subsidiary of BNP Paribas. Euro Bank, sold by Societe Generale, ended up in the hands of Bank Millennium, controlled by Portugal’s Millennium
BCP. Citigroup put up its retail business for sale in Poland, as it did in other European markets (but Citi has virtually no exposure to FX mortgages). Many observers challenge the feasibility of this transaction (Polish law permits the division of a bank, but lawyers claim that a spun-off part may only be bought by a company that is present on the local market), and it has just been postponed, with geopolitics being stated as the official reason.
“For a couple of years now, I have been very vocal in saying that Poland is not a country for all banks,” Brunon Bartkiewicz, the CEO of ING Bank Śląski, held by the Netherland’s ING group, recently asserted during a discussion of CEOs from the largest banks organised by Dziennik Gazeta Prawna daily. ING Bank Śląski
is among the few banks that have managed to achieve an ROE of over 10% in recent years (in 2020, the ROE was less than 8%). Bartkiewicz added, “If we look at our sector’s performance, it becomes clear why so few players are willing to try to operate this business in Poland. Until recently, smaller banks that had a confident business vision could hope to find an investor. That prospect is gone now.” ©℗