Glum bank figures reflect weak economy, exposure to bad loans

Polish banks are expected to report depressed second-quarter earnings amid concern from analysts that the worst is not yet over in the financial sector. This week most banks will wrap up their second-quarter earnings reports, which will largely reflect Poland's sluggish economy plus isolated debacles, such as the bankruptcy of the Szczecin Shipyard. "I think for the second quarter we are very negative," said Simon Nellis, a banking analyst at Schroder Salomon Smith Barney. "(And) we don't know if something like the Szczecin Shipyard will occur again." The shipyard filed for bankruptcy in June, leaving banks holding $293 million in bad debt. Analysts are especially concerned about banks that have exposure to the steel and manufacturing industries, both of which are at risk of not being able to pay loans on time. Polish manufacturing companies are in trouble because of the marked slowdown in German economy, a major consumer of their output. And U.S. steel tariffs have strained the Polish steel industry as countries that used to sell to the U.S. now look to unload products in less protected markets.

"The situation is pretty bad," Nellis said. "What we really need is lower (interest) rates." Analysts have already spotlighted some banks for earnings forecasts. They are negative on most banks - especially the largest publicly traded financial institution, Bank Pekao, and BRE Bank. But there is at least one positive report. "I think that results will be poor, with the exception of ING Bank Śląski," said Marcin Materna, a banking analyst at BIG Bank Gdański. He also noted that Bank Zachodni WBK has already reported unexpectedly positive earnings. Materna said ING will register healthy profits in the second quarter because the bank took important steps last year to tidy up its debt portfolio, something many peers are just now doing. "In the fourth quarter there was a huge loss, (but) now ING's portfolio is well provisioned," he said. Analysts likened ING to BZ WBK. Last week, the subsidiary of Allied Irish Banks reported a zł. 89 million ($21.7 million) pre-tax profit for the second quarter of this year, up from zł. 39 million ($9.5 million) during the same period last year.

"They exceeded our forecast," Nellis said. "For other banks it will be much worse that (BZ WBK)." Analysts already expect BRE and Pekao to report disappointing numbers next week. BRE is expected to report as much as a zł. 50 million ($12.2 million) loss for the quarter as its share prices continue to trade at near three-year lows. "BRE is obviously having a difficult year," Nellis said. Also, rating agency Moody's last week downgraded BRE's credit rating to "D" from "D"-plus because of the bank's higher risk profile and exposure to a few stalled capital markets transactions. And early last week rumors circulated that Bank Przemysłowo-Handlowy PBK was working on plans to take over BRE to create Poland's second-largest bank. The rumors were not confirmed. "BRE will be weak due to huge losses on the capital markets," Materna said. And Bank Pekao is expected to post a large fall in profits, mainly because of its exposure to the Szczecin Shipyard. "The bank said they should have lowered their forecast," Materna said. "I expect a 70% drop in profits." Last month Pekao cut its full year net profit target almost a third to zł. 1 billion ($244 million) after it estimated that it could lose as much as zł. 150 million ($36.6 million) in the shipyard bankruptcy.