Well prepared for a global slowdown
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Macro environment
The 2012 macroeconomic environment is expected to be less favorable, with our forecast showing GDP growth slowing to 3.1 % yoy from above 4 % expected to have been recorded in 2011. The main factor behind the slowdown should be a smaller contribution of investment, which we see peaking in 1H 2012 (in preparation for the European football championship), and then declining in 2H 2012 as public expenditures on infrastructure level off. Corporate investment should be able to offset some of the decline, but the uncertainty related to the Eurozone debt crisis might limit capitaloutlays. A weaker pace of growth in the Eurozone is set to reduce external demand, but an even stronger decline in imports on the back of internal substitution stimulated by the weaker zloty should render the contribution of net exports to GDP growth positive. With regard to foreign trade it is worth noting that compared to other CEE economies Poland is less dependent on external demand (accounting for 40 % of GDP) and exports are mainly directed toward Germany, which will likely avoid recession in 2012. Over the medium term we continue to see solid potential for growth in Poland given the flexibility of the economy (large domestic market helps to absorb external shock) and credible policy. Recent government actions aimed at keeping the fiscal deficit / debt under control should help to rebalance growth to more sustainable trajectory over the medium term.

Slower growth in 2012 is expected to create stronger headwinds for the labor market. We have seen employment in the enterprise sector improving recently, but would be cautious about any significant improvement in the unemployment rate from here on. At 3 % growth, the labor market is not able to absorb the inflow of young people entering the labor pool. A fairly weak labor market in our view should lower demand pressure and coupled with a statistical base effect, help bring inflation closer to the central bank target (2.5 %) in 2012. This would create space for monetary policy easing.We expect the NBP reference rate to be reduced by 75 bp over the course of the year, translating into a slightly smaller interest margin for the banks and putting some pressure on overall banking sector profitability. Our reasoning is that banks will favor keeping interest rates on deposits high, amid the uncertain funding outlook.

Banking environment
The Polish banking sector, dominated by Western European capital, is potentially threatened by some parent banks’ deleveraging. Still a number of factors play into a more favorable story, given that: i) a significant (1 / 3) part of banking assets belongs to domestic owners; ii) foreign capital is highly diversified – investors stem from as many as 18 countries and no country accounts for more than 12.5 % of total assets; iii) reliance on parent funding is limited (net foreign liabilities account for 12 % of assets). So far the problems of parent banks have not had significant implications for the Polish banking system. What we have been witnessing instead is a change of ownership, with AIB selling BZ WBK to Santander, and EFG Eurobank intending to sell its controlling stake in Polbank to Raiffeisen.
In order to reduce their dependence on parent funding (and thus support the deleveraging process) some banks may focus on deposit collection in 2012. On the back of this, we expect deposit growth in 2012 to be higher than that of loans (7.8 % yoy vs. 5.9 % yoy), which should also help to maintain a healthy L / D ratio of below 110 (also beyond 2012). The larger slowdown in loan volumes is chiefly a function of a less favourable macro environment (which should dampen demand for credit from enterprises) and slower growth of household incomes. We expect the biggest slowdown to be visible in the corporate segment (from 12.5 % in 2011 to around 4 % in 2012) and mortgage loans (from 18.9 % in 2011 to 9.1 % in 2012). The mortgage market should tend in the direction of smaller volumes of new loans and smaller average size, given the declining prices of dwellings and reduced subsidies for housing loans. In the case of loans for consumption financing we do not expect significant changes in 2012, with the growth rate remaining subdued (3.9 % vs. 2.6 % in 2011) on the back of high saturation. The flipside of the overall slowdown is that growth in corporate deposits ought to remain in line with that seen in 2011, as the financial results of Polish companies remain solid and their propensity to invest declines.
We also expect that a less favorable macroeconomic environment will likely halt the process of loan quality improvement. During 2011 the non-performing loans ratio fell by 0.6 % (to 7.4 % in October). We expect that at the end of 2012 the NPLs ratio should reach 7.7 %. Something that may also constrain its improvement is the FX loan portfolio structure (~40 % of retail loans, most of which are CHF mortgages), which is highly dependent on developments in the global FX markets. Further measures by the Swiss National Bank to weaken the franc against the euro would support the stabilization of households’ balance sheets in Poland.
The Polish banking sector remains stable and attractive, with gross profits forecast in excess of 1 % of GDP forecast for the coming years. Following the robust results seen in 2011, we expect to see some moderation in the banks’ P&L in 2012 on the back of higher cost of risk, even as operating results remain decent. ROE should remain close to double digits and the cost /income ratio ought to continue to decline as banks keep tight control of their outlays. Another factor that makes Polish banks attractive is their overall high capitalization. At the end of 3Q 2011 the capital adequacy ratio (CAR) stood at 13.2 %, with the vast majority of capital in the form of the highest quality core tier1 capital. Stress tests conducted by the Polish Financial Supervision Authority (KNF) in 2011 showed that even in the adverse macroeconomic environment all large banks operating in Poland would not only meet the 5 % core tier 1 requirement, but also the 9 % requirement. Polish banks do not have any exposure to Greek sovereign debt or any meaningful exposure to other Eurozone sovereigns. Nevertheless, the regulator is putting pressure on bank owners to retain a significant part of their 2011 earnings, something that is expected to further support the CAR during 2012.
Another topic worth highlighting is the further potential for additional regulatory tightening. The KNF continues its policy of issuing recommendations aimed at reducing bank exposure to market and credit risk. The regulator was among the pioneers in the CEE region in introducing regulations limiting customers’ access to FX loans. An important step in this direction was recommendation S (from 2006), which imposed the requirement of an additional income buffer for those borrowing in FX. Thanks to this prudent policy, the quality of the FX mortgage portfolio is now better than the one in zloty. Most recent regulatory changes are aimed at further displacing FX loans from the retail segment (e. g. starting from 2012 a risk weight for FX mortgage exposures is being raised from 75 % to 100 %). An important change in 2012 is also an amendment to the Tax Ordinance Act, which eliminates a loophole in the law creating space for tax avoidance (capital gains tax on interest from deposits). The existence of this loophole has contributed to the significant reduction of the average retail deposit maturity, which should now be reversed. On the other hand, banks are likely to be forced to increase interest on deposits to avoid an outflow toward alternative forms of savings. At the time of writing, we are also seeing further developments on the earlier proposed special tax on banks, with the Ministry of Finance having presented a bill amending the law on the Bank Guarantee Fund and proposing the subsequent creation of a new stability fund. The fund is to be financed from the contributions of banks in the form of a “prudence fee”. The fee is designed to be of anti-cyclical nature, and will hence be introduced in 2013 at the earliest. According to the draft, a sum of the prudential fee and the general yearly contribution to the Guarantee Fund cannot exceed 0.3 % of the base (the latter is 12.5 times the capital requirement). Given that the yearly contribution is now 0.099 %, the ceiling for the “prudential fee” according to our estimates would be 0.201 %.

Powyższy tekst stanowi część raportu w którego opracowaniu miałem przyjemność uczestniczyć. Jest on poświęcony sytuacji sektora bankowego w Europie Środkowo Wschodniej. Cały raport jest dostępny na stronie: http://www.bankaustria.at/en/open.html#/de/24751.html

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O mnie
Andrzej Halesiak
Komentator polskiej rzeczywistości. Więcej na: linkedin: https://pl.linkedin.com/in/andrzej-halesiak-0b9363 Twitter: @AndrzejHalesiak