Old loans have PKO in corner
Pushing to plug holes in PKO BP's balance sheet, the banking supervision set a deadline for Poland's largest retail bank and the government to reach some sort of agreement on how to cover the zl. 5.36 billion ($1.34 billion) portfolio of housing loans, which were issued during communism, according to Business Journal sources.
Under existing regulations, many of those loans, which were made to housing cooperatives, are considered to be "bad." So far, the government has agreed to guarantee the portfolio on a year-by-year basis, but now the banking supervision is saying it wants a final solution. This could come in the form of the government guaranteeing the whole portfolio once and for all, or PKO BP swallowing the bitter provision pill.
The bank hopes that a special law on old housing loans, a draft of which has been submitted to Treasury Minister Emil Wasacz for approval, will close the matter. That law would force the government to guarantee the portfolio and determine what level of interest would be paid on those loans.
"We hope that the decision will be made in October," said Jaroslaw Bauc, chairman of PKO's supervisory board and a deputy finance minister.
Both provisions for that portfolio and the interest that is supposed to be paid on the loans has blown serious holes through PKO BP's balance sheet. According to the bank's annual report for last year, a copy of which was obtained last week by the Business Journal, in 1998 PKO had to up provisions for old-housing loans by zl. 113.5 million ($32.43 million) to a total provision of zl. 156.8 million ($44.80 million). That set aside resulted in the bank losing zl. 1.3 billion ($371 million) in 1998.
That loss, in turn, wiped out half of PKO's capital in 1998, leaving the bank with zl. 1.6 billion ($457 million). But much of that capital base stems from the capitalized interest payments that should have been paid on the old housing loans. The problem is that PKO has never actually received any of that money, though, and the funds simply exist on paper. Those difficulties caused the bank's solvency ratio to fall to 6.18% at the end of 1998, well below the 8% required by the banking supervision. Banking observers have said many times though that the institution will most likely need another capital injection from the government.
To reach an 8% solvency ratio, the bank needs an extra zl. 458.7 million ($114.66 million) in fresh capital, according to qualitative statements auditor Arthur Andersen made in the bank's annual report, which has not been released publicly yet.
Arthur Andersen pointed out that the bank's main problem lies in the housing loan portfolio, which must be solved with governmental assistance. The National Bank of Poland (NBP) saddled PKO BP with the majority of the old loans when the economic system changed 10 years ago. Under communism, the housing cooperatives took out the loans to pay for construction and refurbishments. Many of the housing cooperatives, however, had difficulty paying the money back after the hyperinflation of the early 1990s. The issue became more difficult when the NBP passed a new regulation in February 1999 that required banks to label any housing loan as "bad" if even a single member of the cooperative in question failed to make his payments. Labeling the loan as "bad" forces a bank to make provisions of 100% of the credit's value. PKO, however, received preferential treatment and was able to put off the provisions because it had neither issued the old loans nor asked for them.
To solve the issue, PKO, the Finance Ministry and Arthur Andersen came up with a "not very brilliant" plan, Bauc said.
While Bauc would not disclose specific details, the basic idea calls for PKO to retain and manage the loans while the state would offer a full guarantee. "But at the same time any solution has to mean minimal involvement of the state budget," Bauc said.
Apart from being a serious financial burden for the bank, the old housing loans are also considered to be the main obstacle standing in the way of its future sale. "Solving the old housing loans problem is crucial for the bank's privatization," Bauc said.
PKO has managed to turn things around slightly in the first half of 1999, though. At the end of June, the bank reported total assets of zl. 61.3 billion ($15.33 billion) and net profit of zl. 282.1 million ($70.53 million).
Under existing regulations, many of those loans, which were made to housing cooperatives, are considered to be "bad." So far, the government has agreed to guarantee the portfolio on a year-by-year basis, but now the banking supervision is saying it wants a final solution. This could come in the form of the government guaranteeing the whole portfolio once and for all, or PKO BP swallowing the bitter provision pill.
The bank hopes that a special law on old housing loans, a draft of which has been submitted to Treasury Minister Emil Wasacz for approval, will close the matter. That law would force the government to guarantee the portfolio and determine what level of interest would be paid on those loans.
"We hope that the decision will be made in October," said Jaroslaw Bauc, chairman of PKO's supervisory board and a deputy finance minister.
Both provisions for that portfolio and the interest that is supposed to be paid on the loans has blown serious holes through PKO BP's balance sheet. According to the bank's annual report for last year, a copy of which was obtained last week by the Business Journal, in 1998 PKO had to up provisions for old-housing loans by zl. 113.5 million ($32.43 million) to a total provision of zl. 156.8 million ($44.80 million). That set aside resulted in the bank losing zl. 1.3 billion ($371 million) in 1998.
That loss, in turn, wiped out half of PKO's capital in 1998, leaving the bank with zl. 1.6 billion ($457 million). But much of that capital base stems from the capitalized interest payments that should have been paid on the old housing loans. The problem is that PKO has never actually received any of that money, though, and the funds simply exist on paper. Those difficulties caused the bank's solvency ratio to fall to 6.18% at the end of 1998, well below the 8% required by the banking supervision. Banking observers have said many times though that the institution will most likely need another capital injection from the government.
To reach an 8% solvency ratio, the bank needs an extra zl. 458.7 million ($114.66 million) in fresh capital, according to qualitative statements auditor Arthur Andersen made in the bank's annual report, which has not been released publicly yet.
Arthur Andersen pointed out that the bank's main problem lies in the housing loan portfolio, which must be solved with governmental assistance. The National Bank of Poland (NBP) saddled PKO BP with the majority of the old loans when the economic system changed 10 years ago. Under communism, the housing cooperatives took out the loans to pay for construction and refurbishments. Many of the housing cooperatives, however, had difficulty paying the money back after the hyperinflation of the early 1990s. The issue became more difficult when the NBP passed a new regulation in February 1999 that required banks to label any housing loan as "bad" if even a single member of the cooperative in question failed to make his payments. Labeling the loan as "bad" forces a bank to make provisions of 100% of the credit's value. PKO, however, received preferential treatment and was able to put off the provisions because it had neither issued the old loans nor asked for them.
To solve the issue, PKO, the Finance Ministry and Arthur Andersen came up with a "not very brilliant" plan, Bauc said.
While Bauc would not disclose specific details, the basic idea calls for PKO to retain and manage the loans while the state would offer a full guarantee. "But at the same time any solution has to mean minimal involvement of the state budget," Bauc said.
Apart from being a serious financial burden for the bank, the old housing loans are also considered to be the main obstacle standing in the way of its future sale. "Solving the old housing loans problem is crucial for the bank's privatization," Bauc said.
PKO has managed to turn things around slightly in the first half of 1999, though. At the end of June, the bank reported total assets of zl. 61.3 billion ($15.33 billion) and net profit of zl. 282.1 million ($70.53 million).
