Coronavirus crisis ramps up pressure on Poland’s banks

Poland’s banks are bracing for an unprecedented shock as the Covid-19 crisis pushes the country towards its first recession for nearly 30 years.

Analysts at Raiffeisen Bank International (RBI) are predicting that the economy, which expanded by 4.1% in 2019, will contract by 2% this year after Poland went into lockdown on March 11.

To mitigate the effects of Covid-19, the Polish government announced on March 18 a stimulus package purportedly worth Zl212 billion ($49.9 billion).

In practice, this includes limited support for Polish businesses.

Liquidity measures previously announced by the central bank, including Poland’s first quantitative easing programme and a local version of the targeted longer-term refinancing operation (TLTRO), accounted for a third of the headline number.

Guarantees for corporate credit from the BGK development bank and a new public investment fund accounted for most of the remainder, leaving just Zl29 billion for firms and workers.

The package, which was widely criticized in Warsaw as inadequate, sparked fears that the banking sector would be asked to bear the brunt of the crisis – particularly as it came hard on the heels of the central bank’s decision to remove its systemic capital risk buffer.

Risk rise

Analysts say the move, which will reduce banks’ tier-1 requirement by three percentage points, will release between Zl30 billion and Zl33 billion of capital. The Polish authorities have already made it clear that this should be used to absorb losses related to Covid-19.


Andrzej Powierza,
Citi Handlowy
Brokerage House

“The risk is that banks will be expected to bear part of the burden of supporting the Polish economy through debt forgiveness and rescheduling in return for the reduction in capital requirements,” says Andrzej Powierza, an equity analyst at Citi Handlowy Brokerage House.

Maciej Marcinowski, deputy head of research at Polish investment bank Trigon, agrees.

“The government measures in their current form do not seem sufficient to prevent many bankruptcies and a rise in unemployment in Poland,” he says. “Unless further are measures taken, it is likely that the cost of risk will rise in the Polish banking sector in the medium term.”

For their part, Polish banks have already offered to freeze loan payments for all customers for three to six months, as well as rolling over loans to businesses for up to six months on unchanged terms.

The Polish Banking Association (ZBP) says its members are also ready to facilitate access to short-term credit for entrepreneurs affected by Covid-19: “Banks are waiting for the completion of work initiated by state authorities and government agencies, which will make it possible to offer such assistance.”

Despite recent pressure on profitability – sector-wide return on equity has declined steadily over the last five years to just 8.2% in 2019 – Poland’s larger banks are financially sound and well-positioned to help in the fight against Covid-19.

Indeed, there are concerns that some may be asked to do too much. Both market leader PKO BP and number three player Bank Pekao are state-controlled, a factor that raises red flags for investors given the interventionist tendencies of Poland’s ruling Law and Justice Party (PiS).

“The question will be to what extent they will take only commercially driven decisions or whether they have to prioritise supporting the economy,” says Powierza.

Political risks

The risks of political interference in Poland were highlighted again on March 12 when, as the Covid-19 crisis gathered momentum, the president of state-controlled insurance giant PZU was replaced without warning.

PZU owns controlling shares in Bank Pekao and smaller rival Alior Bank.

“It was not a good moment for such an announcement by PZU,” says a local banker. “The change of president without any explanation and the appointment of a person who is not well-known to the market attracts the attention of investors to the political risk in state-controlled institutions.”

The risk is that banks will be expected to bear part of the burden of supporting the Polish economy through debt forgiveness and rescheduling in return for the reduction in capital requirements 

 – Andrzej Powierza, Citi Handlowy Brokerage House

All banks in Poland are also facing a squeeze on margins after the central bank slashed its benchmark interest rate by 50 basis points to a record low of 1% on March 17. Further cuts are widely expected over the coming months.

“Before the recent interest rate cut, the standard rate on many term deposits and savings accounts was 50bp or 40bp,” says Powierza. “This means the pressure on margins will be larger than in the case of previous rate cuts. I estimate the impact on net profit will be slightly above 10%.”

Litigation risks

Meanwhile the volatility in the currency markets in recent weeks has increased Polish banks’ risk of litigation relating to legacy Swiss franc mortgages. The sector was already facing losses of up to Zl40 billion, and analysts say the total will likely rise after the zloty lost a further 10% of its value against the franc.

“The zloty depreciation will likely incentivise more foreign-currency mortgage holders to go to court, and the loss on lost cases will be larger because it is a function of the difference between the current exchange rate and that at which the mortgage was taken out,” says Powierza.

In other countries in emerging Europe, banks are pressing for reductions in sector levies in return for support for the economy during the Covid-19 crisis. Locals have little hope, however, that the Polish government can be persuaded to reduce the bank tax it introduced in 2016.

Even before the start of the Covid-19 crisis, IMF forecasts showed Poland’s budget deficit rising to 2.5% of GDP this year on the back of lavish social giveaways by PiS – including a rise in child benefit and an additional month of state pension for all citizens – ahead of October’s parliamentary elections.

“I don’t expect to see a reduction in the bank tax because the budget is under pressure due to all the fiscal stimulus introduced by the government over the past few years,” says Marcinowski.

Some bankers have instead requested a reduction in contributions to Poland’s Bank Guarantee Fund. Again, analysts say this is unlikely, given that payments will automatically fall next year if the situation in the banking sector deteriorates.

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