PKO BP profits climb, but future still in question

"PKO BP … needs a strategic investor badly. It will have to compete in the coming years with globalization in the banking and capital markets as Poland joins the EU. I couldn't see it surviving past five to 10 years in its present form."

State-owned savings giant Powszechna Kasa Oszczźdności Bank Polski (PKO BP) will have to increase its profitability through a new strategic investor if it is to survive after Poland's entry into the European Union (EU), according to banking analysts.

"PKO BP … needs a strategic investor badly," said Grzegorz Zawada, analyst at Erste Securities in Warsaw. "It will have to compete in the coming years with globalization in the banking and capital markets as Poland joins the EU. I couldn't see it surviving past five to 10 years in its present form."

The assessment comes as PKO BP, Poland's largest commercial bank with a balance sheet worth zł. 70 billion ($17 billion), expects record profits this year. The bank announced third-quarter earnings of zł. 860 million ($210 million), 11.4% above expectations, and expects year-end net profits of zł. 1.1 billion ($268 million), compared to zł. 631 million ($154 million) in 2000.

But industry watchers said the bank's profits should not detract from its urgent need for privatization. Last December, the Solidarity Election Action (AWS) government guaranteed zł. 5 billion ($1.22 billion) worth of loans that PKO BP granted on behalf of the communist government before 1992. According to Leszek Zioło, the bank's spokeman, state guarantees will account for a third of PKO BP's profits this year. Analysts pointed to PKO BP's need for sizeable job cuts, new capital of about zł. 2 billion ($487 million) for a new IT system, and the banking know-how and global market strategy of a major foreign investor.

"The government should work to improve the bank's profitability and the simplest way to do this is, unfortunately, by reducing the workforce," said a banking analyst who asked to remain anonymous. "The government has a choice between PKO BP with Polish capital - dubious in terms of financial effectiveness - and a foreign private investor who will ensure the bank is profitable."

Streamlining

PKO BP urgently needs a new centralized IT system to help reduce the number of administrative staff in its 1,200 branches. A decision to purchase the Systematics system from U.S. computer firm Alltel was planned for September, but the bank's supervisory board is still weighing the purchase, according to Zioło, who was tight-lipped about the cause of the delay. Market observers estimate that the new IT system will cause a 20% reduction of the bank's 38,400 staff, but that a further reduction of at least 20% will be necessary to bring the bank up to international standards.

To help PKO BP raise the funds necessary for its new IT system and to finance severance payments, the AWS government planned to sell off 45% of the bank in 2002 - 15% to employees and 30% to small investors. In the second stage, to be completed by 2005, around 10% was to be sold to Polish and foreign institutional investors, with the treasury retaining at least 50% plus one share in the bank.

The strategy attracted widespread criticism from the market as it offered too small a stake to draw a foreign strategic investor to restructure the bank. "Selling 30% of the bank is missing the point, as it would be hard to attract an investor," said the analyst who asked to remain anonymous. "An investor with 30% would have no influence on the business direction of the bank." There were also doubts that the bank could get the necessary investment to meet its targets of introducing a new IT system, increasing the bank's capital and introducing new offers until the second stage of privatization.

All eyes are now on the the Democratic Left Alliance (SLD)-led government over its privatization plans for PKO BP. The treasury pulled the plug on a tender for privatization adviser for the bank in October, saying it needed more time to consider its global strategy for the three remaining state-owned banks: PKO BP, Bank Gospodarstwa Krajowego and Bank Gospodarki Żywnościowej. The press department of the Treasury Ministry said a development strategy for PKO BP bank was still in preparation, but Treasury Minister Wiesław Kaczmarek told the Business Journal in an August interview that privatization would not involve a strategic investor. "We do not envision a strategic investor, but an initial public offering with a very dispersed ownership structure and with individual stakes of up to 4%," Kaczmarek said.

Savings banks like PKO BP have traditionally been closely connected with the local and regional economies. However, in recent years, small- and medium-sized companies have slowly moved toward more modern and efficient competitors such as ING Bank Śląski, which has benefited from its strategic investor, the Netherlands' ING. Banking analysts said the privatization of PKO BP will mean the transformation of its commercial customer base. The bank will have to choose either to concentrate on developing its retail-corporate services or to concentrate on its existing private customers.

Other banks have also maneuvered to chip away at PKO BP's share of the retail banking market. At the end of 1998 BIG Bank Gdański (BIG) and Bank Handlowy (BH) launched flashy networks of branches built around small, bright storefront offices that contrasted with the drab look of PKO BP. BIG's Millennium and BH's Handlobank both aimed to poach customers from PKO BP by offering quick service and telephone and Internet banking.

PKO BP lost 100,000 customers in 1998 alone, and saw its market share fall from 62.5% in 1995 to 42.6%. The anonymous analyst interviewed for this article estimates that PKO BP is losing market share at the rate of 2% a year.

Greg Goodale