Banking in post-accession Poland

Raimo Valo is president of Bank Svenska Handelsbanken Polska.

On June 7 and 8, the country goes to the polls to vote on the important question of whether it should join the 15 member nations of the European Union. As I write, there are those who predict a close result and, rather than be caught out, I shall reserve my comments to those related to a post-accession Poland and the effects of membership on the banking sector.

From my perspective, there is little doubt that Poland's entry into the EU community will be good for the country, good for the people and good for the banking sector. That is not to say there will not be problem areas along the way and issues that will require a change in mind-set to tackle. And, of course, the EU being the EU, there will be more in the way of paperwork. But that is a small price to pay for a better Poland.

The added paperwork in the banking sector will be the result of a shift of power from the National Bank of Poland to the European Central Bank, with the latter requiring census-type information. And whereas in the past the NBP had final authority over how the banking sector was managed and who would be granted a license, it will now be possible for more banks to compete in and for the market here, operating within EU regulations rather than NBP regulations as they do at present.

But while final authority will rest with the European Central Bank, there are one or two legal clauses on the statute books that could be referred to by the central-banking authorities in Poland to support the NBP in its quest to maintain some authority over Polish banking. These amendments will carry little weight with the European Commission and, indeed, would only result in legal action through the European courts.

On the other hand, and to be entirely fair to the NBP, the central bank's handling of legal and technical issues associated with Poland's membership in the EU has been nothing less than professional. Parliamentary laws governing Polish banking have been changed, new ones introduced that, in some instances, are better than those we have in the west. As a result of their diligent work during the transition period and the run-up to EU membership, a framework is in place which will allow Poland to take its position in the European community insofar as the banking sector is concerned.

The branch system

A key area of change, post-accession, is the manner in which foreign banks operate in the domestic market. Until now, it was almost impossible for foreign banks to operate as a local branch of their foreign parent. This meant that foreign banks had to acquire local banks or apply for a banking license to operate as a Polish bank under the laws governing domestic banking. The consequences of this were wide and varied.

Banks with foreign ownership, for example, were not allowed to pass on customer information to parent-bank headquarters located outside Poland. For example, the branches of our parent bank, Handelsbanken, that operated in other countries were free to exchange information across borders with their headquarters if given customer permission. This was not the case with Handelsbanken as a stand-alone Polish bank in the country.

This will now change with EU accession. Foreign banks will be allowed to establish a branch office here, and they will only have to send a letter to the NBP informing them of this activity. Therefore, I expect to see a number of banks that are already operating here seek to change their status from a Polish bank to a branch of the parent company.

The simple transition to a branch bank in a post-accession Poland will allow banks to extend higher amounts of credit and loans to their customers under the so-called concentration limit. This is because the lending facilities of local banks with foreign ownership will be based on a percentage of equity documented on the balance sheet of the parent bank and not on the balance sheet of the Polish banks (which will now become branches).

At the present time, all banks are limited by law to grant no more than 25% of their equity by way of credit or loan to any single, individual borrower. This can be very restrictive for small to medium-sized banks. But it should be pointed out that this rule is not a major issue for foreign banks that entered the domestic market through the acquisition of some of the larger Polish banks (now 80% controlled by foreign institutions).

My bank, by way of comparison, invested a more limited amount of capital here since we came into the market as a start-up operation. This restricts our ability to grant loans of a more substantial size through our Polish banking operation. Instead, we are forced to recommend that the business be moved outside the country to our parent in Stockholm, where the needs of our Polish customers can be easily met. But their gain, however, is a loss for the Polish banking sector.

Capital markets

Let me now turn to the business of credit and the capital markets, and how that will change in a post-accession Poland.

It is fair to think that membership in the EU will bring many more opportunities for businesses wishing to expand or invest anew here. I speak not only of greenfield opportunities but also of acquisitions, mergers, joint ventures and similar operations. This will represent a sizeable business opportunity for Polish banks. Unfortunately, the capital market in Poland, as it exists, is underdeveloped and far less sophisticated than in other countries. This makes it difficult for złoty borrowers or even those who seek loans or credit in other currencies to compete for funds.

There are many reasons for the lack of a strong capital market here, namely foreign exchange regulations as well as the high interest rates maintained to fund the budget deficit. The latter has had the effect of crowding out borrowers, as it is known. Under this scenario, it is far safer and simpler for a bank to buy treasuries and bonds to secure a better rate of return than it is to take risks on loans that will not pay the same returns.

But the state of the capital market here is likely to change after EU accession. As the barriers come down and foreign exchange regulations disappear, there is a serious question in my mind as to whether banks here are prepared for the competition that is likely to come their way. There is a lack of know-how, ability and experience as well as little inclination on the part of some financial institutions to develop new instruments - by which I mean products - for borrowers. These borrowers require flexibility in the tenor and structure of loans, such as fixed or floating or terms from one to 10 years and more.

But the banks ignore this market at their peril. Once the country joins the EU, global banks that operate in the more sophisticated money markets of London will be free to attract lucrative Polish business, and they don't even have to have a presence here. But for commercial enterprises to thrive in Poland, there should be a domestic capital market in złoty. And no single country of the 10 new nations set to join the EU has a greater call and more responsibility to support a market in its own currency than Poland, given its size and large population.

But in order for a capital market to thrive and for banks to become players rather than bystanders, they must know how to manage risk, plain and simple. Unfortunately, risk management is thin on the ground here and the use of derivatives and other instruments to hedge and protect loan investments is not widely understood or appreciated. This is hardly surprising given that there was no need for more sophisticated instruments, restricted here under foreign exchange regulations. This market was more appropriate to the financial markets of London.

Competition

Hence, the face of Polish banking is bound to change once the country is a member of the European Union. In a way, the domestic banking sector is already undergoing a change, as the market begins to consolidate. But this will only be accelerated after EU accession. And as the domestic economy improves and the opportunities for investment grow, more and more foreign banks will likely decide to move a branch operation into the country or step up a gear to develop their current operation at a more rapid pace.

HSBC, to name but one bank, has gone public on its intention to assume a position in the Polish market that equates with its status in other markets - namely to be one of the big three banks.

All of this activity will unsettle a number of domestic banks, especially those with unhealthy balance sheets, outstanding debt and shaky management. The competition will be too much for these banks, and it is likely they will be swallowed up by the giants, merge or disappear from the market. In a post-accession Poland, control of the banking sector will rest in the hands of a few big international banks, perhaps part of a Big Ten, and maybe one or two of the government-owned banks.

The exception will be the small- and medium-sized banks that have carved out a market niche for themselves. I put my own bank into the latter category. We are focused exclusively on Scandinavian companies based here or companies doing business between the Nordic countries and Poland - this is our niche.

As for the rest, it will be a case of the survival of the fittest.