Money in the bank

However, regulators say lenders' fast and loose granting of foreign-currency loans needs to be reigned in, and experts agree that a coming consolidation wave will make life much more difficult for the country's smaller financial institutions. 

Contrary to the recent fuss over the foreign ownership of banks in Poland, "in comparison to the countries which entered the EU with us, we are a country which has maintained the largest share of domestic capital in the banking sector," the president of the Polish Bank Association (ZBP), Krzysztof Pietra-szkiewicz, said. During the 12th annual Banking Forum conference, he explained that some 70 percent of capital in Polish banks is in foreign hands. "In Slovakia, the Czech Republic, Hungary or the Baltic states the share of foreign capital is over 80 percent, and in some cases even above 90 percent," Pietraszkiewicz explained.

 

Tough competition

What's more, the industry is fairly competitive in Poland. The largest five players have a 49-percent market share in Poland, which puts Poland in the middle of the EU pack. In Estonia the figure is 99 percent, while in Ireland and Belgium it is 84 percent. Among the most competitive markets are Germany and Italy. In 2004, the top five banks in Germany could claim a 22-percent market share and in Italy the top five had a 26-percent share.

Interestingly, the director of the financial-markets department at Ernst&Young, Tomasz Bieske, said there is little relation between market concentration and the price of banking products. Poland's ratio of banking fees to GDP per capita is one of the highest in the EU, but according to Bieske this is the result of ineffective procedures and the level of interest rates, rather than lack of competition.

Franc discussion

The banking sector made a net profit of zł.9.2 billion in 2005 in comparison to the zł.7.1 billion in 2004, and according to the General Inspector of Banking Supervision Wojciech Kwaśniak, mortgage loans are one of the main factors behind the banking industry's recent impressive results. However, he expressed his worries about the rapidly growing number of mortgage loans in foreign currencies.

At the end of Q3 2005 more than 12 percent of all mortgage loans were in a currency other than the złoty. The value of mortgage loans in foreign currencies grew by 158 percent year-on-year for that period. Kwaśniak has made a number of recommendations regarding these loans to the Banking Supervision Commission (KNB). He suggests obligating banks to set higher credit-rating requirements for for those wishing to take out loans in foreign currencies. Furthermore, he believes they should have to perform worst-case-scenario analyses of changes in exchange rates between the złoty and other currencies. "We mean big changes, not one percent," Kwaśniak underlined.

Under his recommendations, banks would also be required to look for sources of financing loans other than deposits. He added that in the second quarter of 2006, limits on granting loans in foreign currencies by a bank will be established. He reminded the forum that liberal loan requirements led to a crisis in the banking sector in Scandinavian countries in the late 1980s.

On all fronts

Other factors responsible for the hefty profits in Poland's banking sector are the rise of currency transactions and clients' improved ability to pay back debt. Loans grew on all fronts last year. Credit-card debt rose by 30 percent, loans for micro firms grew by eight percent and there was an increase in loans for enterprises.

However, experts agree that the the structural change in loans taken out is what's most significant. "We witnessed a fall in operating loans, while investment loans noticeably grew - three- to five-year loans by 15 percent and seven-year loans by seven percent," Mariusz Zygierowicz of ZBP said.

Kwaśniak points out that two factors - Return on Assets (ROA) and Return on Equity (ROE) - put the Polish banking sector in front of its European counterparts. ROA for the industry in Poland in 2005 was at the level of 1.6 percent. The ROE of banks in Poland was 17.2 percent in 2004 while the EU average was 12.2 percent. Last year, the Polish sector recorded 20.8-percent ROE.

"This puts us at the forefront of the EU ... It means that the Polish market is attractive for investors-both foreign and domestic," Kwaśniak said. He also said that the ratio of bank branches per head in Poland is one of the lowest in the EU, which means that there is still plenty of room for expansion in Poland.

 

Consolidation coming

The appearance of more foreign investors will ultimately mean mergers and consolidation.

"Consolidation will continue to take place in Europe whether somebody likes it or not," Bieske said. Vice president of Poland's largest bank, PKO BP, Kazimierz Małecki, shares this opinion. "Consolidation is inevitable," he states.

ZBP's Pietraszkiewicz said that according to estimates, consolidation processes in Europe will lead to the disappearance of a few hundred banks. "This is necessary if European banks want to compete with American ones as well as with the rising Asian banks," he explained. As for the consequences for Poland, Pietraszkiewicz claims that a diverse banking sector, "one where global and continental banks are present alongside active local players, including cooperative banks," should be to the benefit of the economy.

Małecki claims that although big banks in Poland probably won't be affected by consolidation processes, small and medium banks could be hurt. "Mergers will create big challenges for them. They will have to look for new segments of activities," Małecki says.