While the recovery in economic activity we have been calling for in H2 13 is becoming increasingly visible, we maintain our neutral outlook towards Poland's banking sector. The deterioration in Poland's macroeconomic performance in H113 has become clear in the performance of the domestic banking sector, with growth in business loans down sharply in the first quarter of 2013. Over the coming quarters, we expect net interest margins to remain under pressure, while credit risk will continue to rise over the year. Nevertheless, the sector remains well capitalised, and overall the current financial situation remains stable .
|House Purchase Loan Growth Will Slow|
|Poland - Credit Growth By Segment, % chg y-o-y|
Loan growth on aggregate picked up in June, growing by 3.6% year-on-year ( y-o-y ) , although drilling down into credit segments highlights the stark differences across sectors of the economy. General consumer loans remained weak in April after household consumption co llapsed towards the end of 2012. Nonetheless, while the household segment is likely to remain relatively subdued over 2013, the reversal of 'Recommendation T', which forced banks to tighten credit standards when it was introduced in 2010, should help consumer loans to see positive growth rates in 2014, despite weak confidence in the economy. On aggregate, we forecast loans to grow by 2.0% in 2013 and 6.0% in 2014.
|Credit Conditions Tightening|
|Poland - Accumulated index of changes in banks' lending policy standards|
The growth rate in loans for house purchase slowed slightly, but remained positive at 4.5% y-o-y in April. However, over 2014, house loan growth is likely to slow due to adjustments made by the Polish Financial Supervision Authority (KNF) to 'Recommendation S', which set down new guidelines on housing loans to reduce the maximum and recommended maturities of housing loans granted as well as reducing maximum loan-to-value ratios on new loans. The amendments to 'Recommendation S' also introduced more flexibility for banks in setting debt-to-income ratio levels. Perhaps most s ignificantly, the amendments also introduced a requirement for housing loans to be granted in the currency of the borrowers income - effectively amounting to a de facto ban on FX mortgages for all but a tiny minority of borrowers.
|Under Pressure From Rate Cuts|
|Poland - Banks Net Interest Spread, basis points|
With rising US yields driving huge weakness in emerging market currencies as investors begin to rotate out of EM assets and into DM markets, the move to reduce the amount of FX mortgages in the banking system is a positive development. Nonetheless, as banks have largely shifted away from CHF and EUR denominated mortgages since 2009, which together accounted for just 7.2% of new mortgages in March 2013, it is unlikely to have a significant impact in the immediate future. Furthermore, with interest rates at historic lows, the relative appeal of FX-denominated mortgages over PLN has been reduced.
|Resting On Solid Foundations|
|Poland - Average capital adequacy ratio of domestic commercial banks in impaired loan scenarios|
Nonetheless, recent political developments do generate some cause for alarm. Opposition party Law and Justice member Ryszard Czarnecki has proposed that the government should take action in order to ease the burden on the 700,000 Poles with FX loans. The move is most likely an attempt to solidify the lead of the Law and Justice party, which has overtaken the Prime Minister Donald Tusk's Civic Platform party in opinion polls. Czarnecki has suggested that banks should be made to shoulder more of the costs, similar to recent developments in Hungary and Croatia.
|FX Loans More Popular Among Wealthy|
|Poland - FX & PLN Housing Loans By Income Bracket (by value)|
However, while Czarnecki has tackled the issue from a social justice angle, it is questionable whether the majority of borrowers who took out FX loans are at high risk . Data from the NBP shows that the distribution of FX loans by value is most concentrated in the highest level of income bracket ( see chart ). While there is a slight bias as those with higher incomes are more prone to take out higher value house loans, FX loans (by number of loans) in the three top income brackets are still disproportionately high relative to the whole household sector . This helps to explain why the quality of FX housing loans is substantially better than zloty housing loans.
|Profitability Will Recover Slightly In 2014|
|Poland - Bank's Quarterly Net Earnings, PLNbn|
Overall, bank earnings are liable to remain under pressure in 2013 as NBP rate cuts keep net interest margins under pressure, and as weak domestic demand restrains lending activity. ROE declined in Q113 for the fifth consecutive quarter, due to declining margins and a reduction in overall leverage as banks built up their core capital. We have previously speculated that the NBP ' s rate cuts were having a negative impact on bank's income, and recent data shows that declining market interest rates affected interest on loans to a greater extent than interest on deposits, leading to a fall in net interest income. Profitability should recover slightly in 2014, as both loan activity and net interest margins improve slightly.
|ROE||Share of net earnings in pre-tax earnings||Share of pre-tax earnings in income from banking activity||Income from banking activity to risk-weighted assets||Risk-weighted assets to assets||Assets to core capital|