Poland's banking system is doing fine, the sector's authorities say. But concerns are growing that fiscal pressures may accentuate systemic problems in 2016.
The head of the country's financial watchdog (KNF), Andrzej Jakubiak, recently sought to head off concerns that the Polish banking sector would be facing difficult times ahead. He told reporters in Warsaw that the system was "stable and money held in Polish banks safe."
But the recent sacking of Deputy Finance Minister Konrad Raczkowski for saying that some small Polish banks could go bust in the near future raised some eyebrows. "Several smaller banks are toxic and they will go bankrupt later this year," Raczkowski said.
Poland's banking system is about 70 percent foreign-owned and was well-capitalized during the 2008-2010 international financial crisis, emerging largely unscathed from it. But a combination of ongoing deflation and political uncertainties could combine to tarnish its largely unblemished reputation.
The new right-wing Law and Justice (PiS) government has sought various means since taking office last November to fund its ambitious – read expensive – social programs. And the banks are in the firing line.
Raczkowski, however, said the banks would go under not because of a pending bill on converting Swiss franc mortgages or the imposition of an asset tax on banks in Poland, but because they are poorly managed and institutional supervision has not worked well.
The banking authorities were quick to react. KNF spokesman Lukasz Dajnowicz told reporters that the banking system was "stable and efficient," while Finance Minister Pawel Szalamacha said the Polish banking sector was in a stable state.
A changing banking landscape
But all agree that Poland-based banks are facing historically low and falling interest rates. The base rate was cut from 4.75 percent at the end of 2012 to 1.50 percent at the end of 2015 and has stayed at that level since. As deflation in Poland continues and the European Central Bank (ECB) cuts rates this week also, it is expected that by mid-2016 Polish interest rates may drop even further.
Net profit in the domestic banking sector was PLN 16.2 billion (approx. 4.6 billion euros) in 2014, and banks had a 10.2-percent return-on-equity profitability ratio, one of the highest in Europe, against an EU average of 4.6 percent. By comparison, in Hungary the ratio was minus 32.2 percent.
"The external environment is posing more and more challenges for Polish banks, which they will increasingly need to face in 2016. These challenges are likely to result in much lower profits than the banks have become used to," according to ratings agency Standard & Poor's.
Laws of diminishing returns
Three factors will likely impact banks this year, S&P's said.
First, the introduction of a banking sector tax. The tax means banks have to pay 0.44 percent of their adjusted assets every year. Moody's estimates this could cost the sector 4.4 billion zlotys (1 billion euros) in 2016, or 32 percent of banks' annual earnings for the first 10 months of 2015/16.
The ECB, meanwhile, warned that the tax could push banks to restructure their portfolios in favor of riskier products.
The second factor is the controversial plan to convert about 570,000 Swiss franc-denominated mortgages into zlotys to protect borrowers from the strongly appreciating Swiss franc over the last 12 months. If conversion is pushed through on terms unfavorable to the banks, it could also threaten the stability of the banking sector, S&P's said. Among lenders with the biggest Swiss franc loan books are PKO BP and Getin Noble, as well as the Polish banking businesses of Santander, Commerzbank, BCP, Raiffeisen and General Electric. Getin is the most exposed to Swiss franc loans, according to the ratings agency Fitch.
Thirdly, the government's requirement that Polish banks increase their contributions to the deposit guarantee fund following the bankruptcy of a small lender, SK Bank, will lower profits.
A possible fourth factor could be the fate of Cooperative Savings and Credit Unions (SKOKs). Audits have revealed a number of problems which need to be resolved, with some financial help from banks, either directly - through the acquisition of some SKOKs - or indirectly, via payments from the Bank Guarantee Fund.
All change in the banking system?
"Our negative view about the risk sector reflects our opinion, according to which the banking sector's ability to absorb losses and to cope with shocks may weaken over the next two years," a statement by S&P's read.
The agency said "the Polish banking system is facing a negative trend with respect to risk, economy and industry in the next two years."
This could in turn drive a consolidation trend. Several banks are already up for sale. The PiS government has said it wants to build up a large financial group around state-controlled insurer PZU, which took over Alior Bank last year, and said it wants to make other bank acquisitions. The Warsaw-listed PZU is again reportedly in talks over the acquisition of GE Capital's local unit Bank BPH.
"PZU should become interested in banking activity," Treasury Minister Dawid Jackiewicz said recently. "The capital [that PZU has should be] invested in the banking sector in order to strengthen Polish capital in that sector."
Meanwhile, GE Capital wants to take advantage of the government's more statist position and has reportedly stopped talks with other potential buyers, now hoping to sell BPH to the state. This would see the Polish banking mergers and acquistions market moving again after an 18-month hiatus.
Smaller players are feeling the squeeze already. After SK Bank's bankruptcy, BGZ BNP Paribas could see losses for 2016, S&P's said. The agency also gave mBank and Pekao negative outlooks.
Poland's Alior CEO said recently he expected two big sales on the Polish banking market this year. "I expect one transaction in the first half of the year and the next one in the second half, with one of them an element of a pan-European deal," Wojciech Sobieraj told reporters in Warsaw.