Poland’s banking sector has entered its second year of unbroken prosperity, an outpour on new credit lines hoisting the sector’s earnings at a pace double that of the GDP. As a result, Polish banks have been able to improve their record end-2006 figures, sometimes even surpassing foreign banks. This article by Stanisław Kubielas, Ph.D. is based on a report compiled for the Institute of Economics of the Polish Academy of Sciences (INE PAN).

Now in its second year, Poland’s economic boom has also embraced its banking sector, which is growing really fast. Rising household and company incomes mean more consumer spending and investment, which in turn means more demand for credit. Favourable macro-economic conditions, stable interest rates and falling unemployment all encourage credit-taking and the rising credibility of credit applicants – not least an effect of record incomes in the corporate sector – has considerably diminished delinquency risks. At the close of the second quarter of this year Poland’s banking market grew at an annual rate of 15.3% (16.1% in 2006), its value rising to PLN 725.5 billion.
For the second year running the banking sector is growing twice as fast as the GDP, the ratio of its net assets to the GDP exceeding 65%. Employment in the banking sector has been on a sharp rise for the past three years, growing respectively 2%, 3% and 4%. New bank branches are appearing at an even faster rate – 1,000 opened countrywide in the past 12 months, bringing the total count to about 13,000. Together they employ 161,000 people.
This high is accompanied by a visible dispersion trend, showing that small and medium banks are becoming stronger on the market. Unfortunately, the rising demand for credit is not accompanied by a comparable rise in deposits, which could seriously hamper the sector’s further growth. By the middle of this year the volume of granted loans equalled 98% of the sector’s entire deposits.
In order to continue expanding, banks will have to resort to more expensive financing. Lagging behind the credit-driven income rise are also capital levels (12.9%), mainly because last year’s record earnings resulted in equally record dividends. The solvency index, still two years ago at 15.5%, is now down to 12.4%. True, the acceptable lower limit here is 8%, however with credit rising at the present rate banks will need capital injections, either from their earnings or shareholder loans. Another solution may be securement of credit portfolios along the lines of foreign, especially U.S. banks. On the other hand rising credit quality, evidence by a fall in delinquencies from 13.2% two years ago to the present 6.3% means a considerable drop in operational risk despite a fast-rising banking sector. Nothing appears to indicate changes in these trends this, and maybe even next year – bar a major crisis on foreign markets and soaring interest rates.
Mortgage credit boom
Banks today are experincing a veritable credit boom largely riven by household loans. A record rise in mortgage loans doubled the credit growth rate last year. In the 2nd quarter of 2007 the growth in corporate loans approached that of investment spending.
Since the preceding year credit granted to the non-financial sector rose from quarter to quarter, the growth pace reaching almost 20% after the 2nd quarter of 2006, 27% at year’s end, and 35% ( 32% counting inflation) in mid-2007 (year to year). Counting inflation, the credit rise in this period was highest since 1989. The fastest growth was visible in household loans, doubling from about 20% in 2006 to almost 40% in mid-2007. Corporate credit began to rise somewhat later (in the 3rd quarter of 2006), the growth pace reaching 15% at the close of last year and 22% in the first half of 2007. Generally speaking, the rise in corporate loans is twice as slow as the rise in household credits – over the past 18 months the share of household loans in credit granted to the non-financial sector rose to almost 60% (in banking statistics household credit includes loans to firms employing up to 9 people and production loans to farmers. If they were added to corporate loans the share of household and corporate loans  would be more or less equal).
Mortgage loans continue to be a major element in the banking sector’s credit offer, rising 50% from the first half of 2006. Mortgage credit granted in 2006 totalled PLN 45 billion, almost twice the 2005 figure (PLN 24 billion), rising by a further PLN 28 billion in the 1st half of 2007. In all PLN 108 billion have been granted in mortgage loans, of which PLN 97 billion were granted to households (45% of all household debts to banks). The share of mortgage loan debts in the non-financial sector’s dues to banks has reached 28%. Consumer loans have risen from 56.4% at the beginning of the year to 67.2% at the close of the 2nd quarter.
Retail banking (especially mortgage loans) are the main driving force of growth in the Polish banking sector. In keeping with forecasts by the Gdańsk Institute for Market Economics (IBnGR), the share of housing loans in the GDP should double to 18% by 2011. In light of recent developments on the U. S. mortgage loan market this gives rise to questions about the safety of the banking sector (which appears safe at the moment). In contrast to the United States, Polish banks show considerably more caution in granting housing credit and apply more rigorous solvency and collateral criteria.
Consequently, banks have introduced a so-called “recommendation S” for foreign currency loans, with a further tightening of security measures in this respect expected at the turn of the year. Right now the share of irregular loans in this sector is about 1.5%, four times below the average. However, it may rise fast given a sudden price collapse on the real estate market, especially accompanied by a tighter fiscal policy, rising interest, an economic slump and falling household incomes. A mere 2% interest hike is enough for many loan takers to start having problems with rising credit rates. For this reason new regulations must be accompanied by a well-weighed fiscal policy making room for income structure changes in the banking sector.
The corporate credit sector began to rise with a quarterly delay in result of a marked investment rise since the 3rd quarter of last year, nearing the growth in investment spending by the 2nd quarter of 2007. For over three years now Polish companies have booked remarkably good financial results with solvency levels up to over 30% (1st class), annual deposits to over 20%, and profits at a record high with return above 6%, so they are less dependent on outside financing. The present rise in corporate loans is rather driven by a rising demand for floating capital and investments launched by financially weaker companies. Corporate deposits have soared, reaching a record 30% in the first quarter of this year and falling slightly to 23% at the close of June (year to year). This was an effect of record profits in the first quarter of 2007 (PLN 43 billion, up 32%), when many firms deposited uninvested surplus capital in banks. Household deposits, on the other hand, fell despite rising incomes as the unbroken stock market boom encouraged more and more Poles to move their savings from banks to investment funds. In the first half of 2007 household savings rose 15.4%, amounting to PLN 674 billion at the close of June, but only one-third of this – PLN 223 billion – was deposited in banks. More people chose funds, which drew around PLN 277 billion (139 billion in investment funds, 138 billion in retirement funds); PLN 67 billion was invested in public  stock, PLN 36 billion in capital insurance funds. Falling August figures and a predicted stock market slowdown helped check this trend to a degree and restored more deposits to banks, nonetheless funds continue to be an attractive savings option and bring relatively high returns (the PLN 4 billion drop in investment fund assets from the close of July to the close of August, from 142 billion to 138 billion, was mainly due to falling stock prices and not investor withdrawal).
Financial results
In the first half of 2007 Polish banks improved further on their soaring 2006 results, not infrequently landing better than their foreign mother organizations.
The financial high continued into the second half of the year, gross profits rising 25% (to PLN 8.7 billion) and net figures 21% (to PLN 7 billion) against the first half of 2006. In the past 6 months the banking sector earned as much as in the entire EU-accession year 2004. Also the gross and net income growth rate is considerably above last year’s average (respectively 19% and 17%). Earnings on banking operations rose 17.5%, including a 14.8% rise in interest incomes and a 21.6% rise in commission earnings. A large part of these earnings derive from high investment fund sales and simultaneous low bank operating costs, which rose at a pace of only 12%. In effect, the C/I (cost/income) ratio fell from 57.6% at the close of 2006 to 53.3% after the 1st half of 2007, which is a truly remarkable result also on the international scale. Several domestic banks (BPH, Pekao SA, Bank Zachodni WBK) even managed to cut their C/I ratio to below 50%, proving more efficient than their foreign owners.
Polish banks managed to improve their record end-2006 efficiency figures, sometimes even surpassing foreign institutions. ROE (Return on Equity) in the entire banking sector rose to 27% from 23% at the close of 2006, ROA (Return on Assets) to 2.1% from 1.8%. These excellent figures are mainly a result of the rising market’s influence on C/I. Rising demand for bank credit has allowed banks to make better and broader use of their assets and there is every indication that these trends will continue in the near future (although forecasters say capital returns in the sector will not exceed 30%). Next year banks may not reap such exorbitant profits if rising interest rates stifle the present mortgage credit fever.

The share of housing credit in the GDP is expected to double to 18% by 2011. This gives rise to the security issue, especially in light of recent developments on the U.S. mortgage loan market. Right now the banking system appears rather stable. Unlike U.S. banks, Polish banks are cautious with housing loans and apply much stricter credibility and collateral criteria.