Bad loans are killing banks

Bad loans are on the rise at Polish banks and likely to increase this year unless the economy improves, according to a report by the U.K.-based Standard & Poor's (S&P). The report expects another wave of provisioning for bad loans at Polish banks in the coming months as problem assets - "substandard," "doubtful," "loss-making" or "non-performing" loans - eat further into their bottom lines. "Ultimately, it's the shareholders in these banks who get lower returns on their investments," said Jiri Stanik, banking analyst at Raiffeisenbank in London. Domestic banks' loan portfolios, which grew rapidly between 1997 and 1999, have been slammed by weakened corporate and private borrowers over the past 15 months. Combined with Poland's still high interest rates, debt servicing is becoming increasingly difficult to maintain, while rising unemployment is straining the consumer lending market.

Although the National Bank of Poland's (NBP) main borrowing rate was slashed by some 900 basis points in the past 12 months, the report said commercial banks' lending levels haven't matched those cuts. "This has hampered the ability of borrowers to recover and the lag effect on borrowers' cash flow is likely to lead to prolonged asset-quality issues throughout 2002," the report reads. "On June 30, 2001, system-wide reported irregular credits rose to 17% of gross loans from 10.2% as recently as 1997." Through the first half of last year, BIG Bank Gdański and Bank Handlowy each saw problem assets accounting for more than 20% of their loan portfolios. By year-end 2001, non-performing loans accounted for 14.5% of Bank Pekao's portfolio, about 20% at the merged Bank Przemysłowo-Handlowy and Powszechny Bank Kredytowy (BPH-PBK) and Bank Zachodni WBK (BZ WBK), and 11.8% at BRE Bank, according to Raiffeisenbank figures.

"Although these levels of irregular credits are high by Polish and especially Western European standards, S&P believes that asset quality among many of the smaller banks in the system is significantly worse," the report said. Locally, however, experts say the situation might not be as bad as it seems. Older loans denoted as non-performing by many rating agencies are kept on the books simply to avoid taxes that would be levied by regulators should they be removed; artificially boosting the level of irregular credits in the Polish system, banking insiders said. Differences in Polish and Western regulations governing lending institutions are also a factor. While some nations recognize "letters of comfort" issued by owners of Western banks - shifting debts burdens from branches to their parents - Polish law does not. Still, the S&P report notes that banks' provisions through June 2001 barely covered mandated levels set out by the National Bank of Poland for non-performing loans in "sub-standard," "doubtful" and "loss-making" categories. Banks are supposed to provision against 20% of "sub-standard," 50% of "doubtful" and 100% of "loss-making" loans. By year-end 2001, Bank Pekao had provisioned for 50% of its non-performing loans, BPH-PBK 39%, BZ WBK 47%, and BRE Bank 21.5%, according to Raiffeisenbank.