Falling interest rates, Russia continuing to plague banks
Several of the larger banks have already revised down their profit forecasts for 1998 after surveying the damage at the end of 10 months. One of the hardest hit is Bank Pekao, whose zl. 70 million ($20 million) net profit after the first 10 months of the year is 71% lower compared to the same period in 1997.
"Obviously, it's still the impact of the Russian crisis," said Marek Juras, banking analyst with Erste Securities Polska.
Another big loser at the end of October was Bank Handlowy, whose net profit of zl. 367.6 million ($105 million) was 26% lower than for the first 10 months of 1997. Bank Przemyslowo-Handlowy (BPH) was also hit, with net profit of zl. 255.8 million ($73 million) by the end of October representing a 40% drop compared to the same period in 1997.
Much of Pekao's profit was gutted through provisions. The bank set aside zl. 81.8 million ($23.37 million) to cover potentially problematic loans to Russia. In addition to that, however, the bank has also had to significantly write down securities, particularly certificates it holds in the Mass Privatization Program. The bank established additional reserves of zl. 17.5 million ($5 million) for those investments in October alone. Total write-downs for securities in 1998 has amounted to zl. 55.8 million ($15.94 million). Total provisions for the year stand at zl. 228 million ($65 million).
Pekao is also suffering from the decision last year to break out its brokerage activities and report the profit of its operation, Centralny Dom Maklerski (CDM), separately. The brokerage has earned zl. 70 million ($20 million) so far this year.
But provisions and write-downs aside, analysts said that Pekao has a much larger problem to tackle - widening costs. The bank's costs ballooned 38% in the first three quarters of this year, while the bank's margins eroded amid falling interest rates, Juras said. On the other hand, increased competition has made it difficult for banks to bring down deposit rates.
"Let's face it - Pekao is not a very profitable bank," Juras said.
Pekao had anticipated that it would be a bad year, and already revised down the projected consolidated net profit for the group to zl. 484.6 million ($138.46 million) from the original zl. 705.2 million ($201.49 million) planned for the end of 1998.
The projected profit for Bank Pekao alone - it is one of four banks comprising the group - was notched down to zl. 79.9 million ($22.83 million) from zl. 265.2 million ($75.77 million).
"Our forecasts are even lower than that," Juras said. "We estimated that consolidated net profit at the end of the year will be at the level of zl. 247.6 million."
Along with Pekao, Handlowy also is expected to end 1998 on a less than stellar note. Juras said he expects the bank's net profit to end up at around zl. 463 million ($132.29 million), a 20% drop from 1997.
In addition to a zl. 101.8 million ($29 million) provision taken for loans to Russia, losses from currency trading also has caused the bank some pain in recent months. Although Handlowy would not disclose what its losses from those operations are.
Either way, the bank's profitability has deteriorated in the last four to five months. By the end of the first half of 1998, Handlowy was sitting fairly pretty with net income for the year at zl. 310 million ($88.57 million), a 19.2% increase from the same period in 1997. By the end of October, the bank's net profit of zl. 367.6 million ($106 million) for the first 10 months was 26% lower than for the first 10 months of 1997.
In addition to Handlowy and Pekao, analysts are also questioning whether BPH can make its profit projection for 1998. The bank recently reconfirmed that it expects to pull in net profit of zl. 356 million ($101.74 million) by the end of 1998. But analysts said that may be difficult, if not impossible, to achieve.
The analysts also do not expect the situation for banks to improve in the near future. The main reason, they said, are falling margins which the banks have not yet been able to compensate for with lowered costs. The banks are also further burdened by the significant amount of money they are spending expanding their branch network, restructur
ing and redoing their infrastructure, particularly technology, said Artur Szeski, analyst with CDM Pekao.
For example, a report Nov. 19 by investment bank Merrill Lynch highlighted how falling interest rates had sliced the net profit margins of two banks, BPH and Bank Slaski. According to that, BPH's net margin has eroded from 8% in 1997 to an anticipated 6.5% in 1998 and 5.4% in 1999. For Bank Slaski, the net margin has fallen from 7.1% in 1997 to about 5.5% this year.
"It's the first time that Polish banks are operating in such a low-rate environment," Szeski said. "It would be different if it was accompanied by fast economic growth and banking service development, but this hasn't happened."
He said the banks must work to bring down their costs, or roll out new products and locations so that they can dig further into the market, particularly the retail banking one. That segment holds the most opportunity, with more than half of Polish households still not using any form of banking services.
But making money at retail will require the banks to run extremely efficient operations, as margins thin considerably when the mass market and their lower bank balances are taken into account. The banks also need to work on developing fees.
"Obviously, it's still the impact of the Russian crisis," said Marek Juras, banking analyst with Erste Securities Polska.
Another big loser at the end of October was Bank Handlowy, whose net profit of zl. 367.6 million ($105 million) was 26% lower than for the first 10 months of 1997. Bank Przemyslowo-Handlowy (BPH) was also hit, with net profit of zl. 255.8 million ($73 million) by the end of October representing a 40% drop compared to the same period in 1997.
Much of Pekao's profit was gutted through provisions. The bank set aside zl. 81.8 million ($23.37 million) to cover potentially problematic loans to Russia. In addition to that, however, the bank has also had to significantly write down securities, particularly certificates it holds in the Mass Privatization Program. The bank established additional reserves of zl. 17.5 million ($5 million) for those investments in October alone. Total write-downs for securities in 1998 has amounted to zl. 55.8 million ($15.94 million). Total provisions for the year stand at zl. 228 million ($65 million).
Pekao is also suffering from the decision last year to break out its brokerage activities and report the profit of its operation, Centralny Dom Maklerski (CDM), separately. The brokerage has earned zl. 70 million ($20 million) so far this year.
But provisions and write-downs aside, analysts said that Pekao has a much larger problem to tackle - widening costs. The bank's costs ballooned 38% in the first three quarters of this year, while the bank's margins eroded amid falling interest rates, Juras said. On the other hand, increased competition has made it difficult for banks to bring down deposit rates.
"Let's face it - Pekao is not a very profitable bank," Juras said.
Pekao had anticipated that it would be a bad year, and already revised down the projected consolidated net profit for the group to zl. 484.6 million ($138.46 million) from the original zl. 705.2 million ($201.49 million) planned for the end of 1998.
The projected profit for Bank Pekao alone - it is one of four banks comprising the group - was notched down to zl. 79.9 million ($22.83 million) from zl. 265.2 million ($75.77 million).
"Our forecasts are even lower than that," Juras said. "We estimated that consolidated net profit at the end of the year will be at the level of zl. 247.6 million."
Along with Pekao, Handlowy also is expected to end 1998 on a less than stellar note. Juras said he expects the bank's net profit to end up at around zl. 463 million ($132.29 million), a 20% drop from 1997.
In addition to a zl. 101.8 million ($29 million) provision taken for loans to Russia, losses from currency trading also has caused the bank some pain in recent months. Although Handlowy would not disclose what its losses from those operations are.
Either way, the bank's profitability has deteriorated in the last four to five months. By the end of the first half of 1998, Handlowy was sitting fairly pretty with net income for the year at zl. 310 million ($88.57 million), a 19.2% increase from the same period in 1997. By the end of October, the bank's net profit of zl. 367.6 million ($106 million) for the first 10 months was 26% lower than for the first 10 months of 1997.
In addition to Handlowy and Pekao, analysts are also questioning whether BPH can make its profit projection for 1998. The bank recently reconfirmed that it expects to pull in net profit of zl. 356 million ($101.74 million) by the end of 1998. But analysts said that may be difficult, if not impossible, to achieve.
The analysts also do not expect the situation for banks to improve in the near future. The main reason, they said, are falling margins which the banks have not yet been able to compensate for with lowered costs. The banks are also further burdened by the significant amount of money they are spending expanding their branch network, restructur
ing and redoing their infrastructure, particularly technology, said Artur Szeski, analyst with CDM Pekao.
For example, a report Nov. 19 by investment bank Merrill Lynch highlighted how falling interest rates had sliced the net profit margins of two banks, BPH and Bank Slaski. According to that, BPH's net margin has eroded from 8% in 1997 to an anticipated 6.5% in 1998 and 5.4% in 1999. For Bank Slaski, the net margin has fallen from 7.1% in 1997 to about 5.5% this year.
"It's the first time that Polish banks are operating in such a low-rate environment," Szeski said. "It would be different if it was accompanied by fast economic growth and banking service development, but this hasn't happened."
He said the banks must work to bring down their costs, or roll out new products and locations so that they can dig further into the market, particularly the retail banking one. That segment holds the most opportunity, with more than half of Polish households still not using any form of banking services.
But making money at retail will require the banks to run extremely efficient operations, as margins thin considerably when the mass market and their lower bank balances are taken into account. The banks also need to work on developing fees.
