A troubled banking sector

By Aleksander Nowacki

After two months of steady growth, the Pengab banking-climate index, a measure of the expectations of the nation's top 200 bank managers, fell by 8.5 points to 13 in May, down from 21.5 points in the previous month, drawing varied responses from market watchers.

The results of the survey, which is based on a minus-100 to 100 point scale, indicate an increase in bank managers' pessimism about the prospects for their sector - one of the country's most important - over the coming months.

In the survey bank managers give their expectations for major financial aggregates, such as interest rates, volumes of loans and deposits as well as year-end inflation levels. They are also asked to evaluate the general situation of the sector.

While Eugeniusz Śmiłowski, president of Pentor, the agency that compiles the survey, said that the result was a minor downward adjustment to an otherwise rising trend, other observers were more cautious.

"The trend is firmly downward," said Tomasz Dumała, analyst at Bank Gospodarki Żywnościowej brokerage. "What we had witnessed previously was a minor adjustment. Now we are back to a more realistic situation." He went on to say that the sector's poor results in the first quarter of the year were bound to have an impact on the business climate.

Others noted, however, that the poor results had been anticipated, which made the sudden collapse of optimism somewhat unexpected.

Furthermore, the index collapsed in the wake of the government's announcement of encouraging industrial production figures for April, which may indicate that an economic recovery is just around the corner. If a recovery materializes, the situation in the banking industry would be alleviated, as both the volume and quality of loans in the corporate sector would improve. That would ease the strain that provisions set aside for bad loans and over-liquidity have been to the country's banking sector thus far.

The one negative factor that observers regarded as new and likely to have influenced bankers' decreased confidence levels was the announcement of particularly poor results in the German economy and, consequently, in its banking sector in the first quarter of the year. Considering the heavy involvement of German banks on the market here, it is likely that bad results at the capital-group level induced pessimism on the part of the bankers.

"I have no doubt that poor returns of the group will raise questions over maintaining foreign operations," said Maciej Stańczuk, president of West LB. "But Poland is a promising market. I cannot see that any reasonable person would consider withdrawing from this market."

Stańczuk went on to describe the country as the "natural area of expansion" for international banks, as the market is still underdeveloped and not quite transparent. He said that the situation allows banks to realize higher profits from charges on their services than is the case in western European countries.

If the corporate segment of the market has been the source of anxiety for banks so far, the deterioration of the quality of loans in the retail sector has become apparent this year. Although still less marked than in the number of loans to companies, loan quality deterioration is seen by many as a significant development since banks regard the retail segment as safer and more profitable. Household deposits have also fallen, as banks have been losing clients to investment funds.

Dariusz Filar, chief economist at Bank Pekao, is not bullish about the situation.

"You might say - only half in jest - that no one in this country is saving any money or taking out any loans," he said. "You can hardly expect banks to be enthusiastic under the circumstances. Where are they going to make their money?"

While previously banks were able to compensate for low earnings from interest by putting up charges, Filar said, the worrying development at present is that all their sources of income are dwindling.

Other observers were eager to stress that returns on government bonds have finally fallen to a level that makes it impossible to use them as an alternative to earnings from loans.

"Until last year it was possible to reduce somewhat the direct impact of the cyclical factors by reverting to bonds," Dumała said. "That is no longer an option."

Maciej Stańczuk does not expect a significant recovery in the banking sector in the near future.

"The only light at the end of the tunnel is EU accession," he said. "I do not see any significant improvements happening prior to that date. The Yes vote in the EU referendum has already been factored into the market, so it will not be a boost." .