Not learning from past mistakes

Concerning the new bank tax and the general condition of the whole banking sector, WBJ Observer spoke with the President and ceo of Poland’s 8th biggest bank Raiffeisen Polbank, Piotr Czarnecki WBJ Observer: The new bank tax, CHF mortgage conversion, higher contributions to the Bank Guarantee Fund. It’s not a great time to manage a bank these days. Interview by Jacek Ciesnowski Piotr Czarnecki: It’s ironic that so many obstacles are being thrown at the sector, which at the beginning of last year was considered one of the best organized, sustainable, well-capitalized, most innovative and best performing banking industries in the world. The International Monetary Fund published a report last year analyzing the sector in various countries and the Polish one was presented as a benchmark for others to follow. Thanks to its soundness, Poland avoided being hit by the financial crisis in 2008-09 and now the new government wants to tax us with the highest rate of bank levy in Europe, more than doubling the amount we already pay into the state coffers just to cover increasing social expenditures. In other countries bank taxes are aimed at strengthening resolution and guarantee funds, or they serve as an incentive to decrease the size of a banking sector that has become too big to fail. Until now there was no doubt about the strength of the banking sector and its resilience to shocks, because everyone knew that year by year the banks set aside a big chunk of their profits, which is hundreds of PLN millions for capital buffers, while sharing the rest with shareholders. Now, as a result of successive burdens, profits evaporate quickly, so the capacity to absorb unexpected losses may worsen. Warnings were issued by all major rating agencies. This may cause an increase in funding costs, which in turn can translate into prices paid by customers. One could say that with such good profits you won’t have a problem coughing up additional taxes. If this was the only burden, but we already pay tons of taxes. In 2014, banks were responsible for 20 percent of all CIT collected by the government. Our contribution to the Bank Guarantee Fund, which is nothing but another form of tax, has increased because we had to cover the deposits of several SKOK credit unions and big cooperative banks that went under, and now they are demanding even more from us. On the other hand, the revenue side of the banking business also suffered because of all-time low interest rates and drastically reduced provisions for payment card transactions. This all leads to impairment of the banking sector. This view is shared by many experts, including the head of the National Bank of Poland. On top of that there is the concept of subsidizing one small group of banks’ clients; Swiss Franc borrowers. What can you do in this current political climate? Close up shop? It’s not that simple. Some proponents of new legislation are using the rhetoric that the banks, especially those that are foreign-owned, can transfer all of their capital somewhere else. But they couldn’t be more wrong. It’s not our capital, so we can’t do such a thing. The financial supervision will not allow it either. This is the essence of the financial sector, which is much more strictly regulated than other industries, with more requirements, more costs, more scrutiny. You could sell it. You need to find a buyer first. If the whole sector is under pressure, it won’t be that easy. You can’t just say one day, “I’m giving up.” You have depositories who you are responsible to. And when you’re an international capital group, of which Raiffeisen Polbank is one part, you can’t just close up shop in one of the countries where you operate. This would damage your credibility in other countries. Right now there is one potential buyer, state-owned insurer PZU, which  recently purchased Alior Bank. The new government is a strong proponent of repolonizing the banking sector. There are too many mouths to feed in the Polish economy. Many sectors need financing, and without printing money, which I hope we won’t be doing, there aren’t many profitable industries from which you can take money and give it to those in need. Is the banking sector one that needs help? Not yet. When will it need help? I don’t know, but it has happened before. Many banks in Western Europe needed financial help during the latest economic crisis. Over €800 billion of public money was spent on it. Polish banks didn’t get a single cent from the state, because as I’ve said before, we were well and cautiously managed. Let's also clearly state: the Polish regulator KNF also played a crucial role. But, on the other hand, banking is as same as any other sector, why should it be protected or treated differently? But we’re not protected and treated differently! We always pay all taxes: VAT (banks cannot deduct it), CIT (the banking sector is the biggest payer of all industries), the aforementioned banking fund. We increase capital buffers to fulfill rising regulatory requirements and bear many other costs. Plus, you have to remember the pricey investments we undertake. Polish banking is one of the most advanced in the world, and that is also expensive. Clients would like to get it all for free: security, mobility, liquidity and state-of-the-art technological and financial solutions. Banks can only profit from margins, whether from lending to or borrowing from our clients. This has to cover all our expenses, and where are we supposed to get the funds? You can get funds from your clients, by raising fees and suchlike. No, no. That’s not how it works, you get funds from investors. But in the current investing climate that’s not an easy task. The stock market is in the doldrums. Not long ago, banks were valued at twice their book value, nowadays it’s at book value, and the trend is still towards  downturn. Hence, the only way to build your capital is from retained profits, which we will be deprived of because of the sectoral tax. It limits our lending capacity as we need more regulatory capital to keep our clients’ deposits safe. It always angers me when I hear someone say, “It’s disgraceful that governments are deep inside banks’ pockets.” They don’t have to be. There are good examples like  Norway. Because of their natural resources? Oil and gas help, but in principle they decided to spend less than they earn. We can also cite Estonia, which has a balanced budget and no natural resources. Other governments prefer taking on debt. I am afraid we have started a bit too early to sacrifice our advantages as a low cost economy in order to quickly increase social transfers while we are still in desperate need of investments. We should find a balance between the long-awaited catch-up with a more western-like consumption level and investments. Anyway, in both situations you use your own savings or borrow money from abroad. Still we have not generated enough local capital. In such a position, discouraging foreign investors would not be a prudent stance. Banks should be happy with higher consumption funded with credit. That’s how they earn a living. By loaning. The basic feature of a bank is the security of its customers' deposits. Firstly, we loan from people, who trust that when they give us their money it will be safe and they will get it back, with interest, or without – here I should be more cautious because one can see negative interest rates in central and commercial banks more and more frequently. When Greece was again on the brink of default last year, what was the prime reason for bailing them out? That the banks were running out of money, from their clients’ deposits. Out of the €85 billion that the EU paid out to Athens in the latest tranche, €35 billion went straight to banks, so they could have the necessary capital to pay out clients’ deposits. Today it seems that we’ve learned nothing from our past mistakes, taking a deposit’s security for granted. They forget that even Poland was in default not so long ago (in the 1980s). We had to reach agreements with the London and Paris Clubs to be able to pay off our reduced debt. The government’s reasoning for most of the aforementioned changes is not necessarily economic, but rather social. I understand this. I myself am a father of two sons, and can imagine that there are many people in our society who are less fortunate and will benefit greatly from the new allowances. But on the other hand, can this be the sole reason for dismantling one of the biggest and most important pillars of our economy? How will this affect the sector in the longer term? Will the banks consolidate further, or will the weakest links become even weaker? It’s hard to tell at this stage, this might affect not only our sector, but others as well. Investments don’t mix well with such an uncertain climate as we have today. We should not neglect those warning signs like the PMI index falling or negative comments from the rating agencies. I like that comparison of giving blood. You can only give 450 milliliters every two months. It’s a safe amount. You could give more, but it could lead to anemia or other health risks. The banking system is like blood for the entire economy. Could we give more than we are giving right now? Sure, but who knows how it would end. Maybe we’d be fine, but what if not? It won’t only be a problem for us bankers and managers. Most of all, small and medium-sized companies, family businesses, or the core of our economy, which was supposed to be taken care of by the government, will be affected. With smaller profits banks will have to curb lending, and so firms will have less funds to invest, develop and as a result will contribute less to the whole economy in the long run. Large corporations have their own funding sources and access to foreign markets, they will muddle through relatively comfortably.