PKO says privatization could suffer if housing loans not sorted out
In an effort to speed government action, Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP) has said that failure to solve its old housing loan portfolio problem could scuttle its planned privatization.
"The lack of a credible way to solve the problem could seriously complicate the bank's privatization, in spite of the method chosen," the bank said in an official document sent to the Finance Ministry last month. It added that not only was the future at stake, but also the bank's current health.
"Right now, the lack of a decision negatively influences the bank's current operations," the document said.
PKO is trying to press its case as time runs out on an end
of November deadline set by the Banking Supervisory Commission (KNB). By that time, the bank and government must come to an agreement on how to make up for potential losses related to possible defaults of housing loans.
The government is accountable because it saddled PKO with the housing loan portfolio in 1987 when the bank was hived off from the cental bank. If the government doesn't come up with a solution, it will blow a zl. 1.7 billion ($425 million) hole in PKO's balance sheet, as the bank will have to write-off that amount.
As a result, the Finance Ministry was last week putting the finishing touches on special legislation related to the issue. The government maintains that such a law can be passed within the deadline. Although this would be tough, the Sejm's press office said it is possible to pass a bill in as little time as two weeks, provided it falls under an urgency clause and "everybody shows enough good will."
While the government is hopeful that this can happen, the bank is nervously awaiting its fate.
"I can't say how long it will take (to adopt the law)," said Jaroslaw Bauc, deputy finance minister and PKO BP's supervisory board chairman. "But it has to be done by the end of November."
If it doesn't happen, the bank will have to undertake additional provisioning of zl. 110 million ($27.5 million) that will result in a decrease in the bank's results for the 1997-1999 period by zl. 1.70 billion ($425 million) gross and zl. 1.79 billion ($447 million) net. To keep its solvency ratio at 12%, the bank would need additional capital of zl. 1.6 billion ($400 million), according to the documents prepared by PKO.
The bank would also have to write off zl. 760 million ($190 million) in current income from capitalized interests, which would result in a net loss for the bank for the second year in a row.
The document prepared by PKO assumes various scenarios for how the loans will be repaid. Under an optimistic scenario, 8% of the loans are defaulted on in 2000 with the percentage increasing to 20% by 2014.
If this occurs, subsidies from the central government budget over the next nine years would amount to zl. 250 million ($62.5 million).
The second, so-called realistic scenario assumes that 12% of the loans will be unpaid in 2000 and this amount will increase to 30% by 2014. In this event, the government would shell out zl. 549 million ($137.25 million). The last, pessimistic scenario assumes a 6% default rate in 2000, which will increase to 40% in 2014. This would result in government spending of zl. 813 million ($204 million).
"Compared to the need of one-time capitalization in the amount of zl. 1.6 billion if the portfolio is left without guarantees, the amount is relatively small," reads the document.
The government started to give the preferential housing loans in 1965 and PKO continued this until May 31, 1995. The loans, addressed to housing cooperatives and individuals, had maturities of 40 and sometimes 60 years and bore "symbolic" interest rates, from 1-6%. After the country's economic transformation, the interest rate skyrocketed to 115% in 1990.
Since most of the loans were given to cooperatives, according to the banking law, a loan is considered irregular even if one member of the cooperative has problems paying it back. As a result, theoretically the entire portfolio should be classified as irregular. At the end of June 1999, the old housing loan portfolio amounted to zl. 5.01 billion ($1.25 billion).
"The lack of a credible way to solve the problem could seriously complicate the bank's privatization, in spite of the method chosen," the bank said in an official document sent to the Finance Ministry last month. It added that not only was the future at stake, but also the bank's current health.
"Right now, the lack of a decision negatively influences the bank's current operations," the document said.
PKO is trying to press its case as time runs out on an end
of November deadline set by the Banking Supervisory Commission (KNB). By that time, the bank and government must come to an agreement on how to make up for potential losses related to possible defaults of housing loans.
The government is accountable because it saddled PKO with the housing loan portfolio in 1987 when the bank was hived off from the cental bank. If the government doesn't come up with a solution, it will blow a zl. 1.7 billion ($425 million) hole in PKO's balance sheet, as the bank will have to write-off that amount.
As a result, the Finance Ministry was last week putting the finishing touches on special legislation related to the issue. The government maintains that such a law can be passed within the deadline. Although this would be tough, the Sejm's press office said it is possible to pass a bill in as little time as two weeks, provided it falls under an urgency clause and "everybody shows enough good will."
While the government is hopeful that this can happen, the bank is nervously awaiting its fate.
"I can't say how long it will take (to adopt the law)," said Jaroslaw Bauc, deputy finance minister and PKO BP's supervisory board chairman. "But it has to be done by the end of November."
If it doesn't happen, the bank will have to undertake additional provisioning of zl. 110 million ($27.5 million) that will result in a decrease in the bank's results for the 1997-1999 period by zl. 1.70 billion ($425 million) gross and zl. 1.79 billion ($447 million) net. To keep its solvency ratio at 12%, the bank would need additional capital of zl. 1.6 billion ($400 million), according to the documents prepared by PKO.
The bank would also have to write off zl. 760 million ($190 million) in current income from capitalized interests, which would result in a net loss for the bank for the second year in a row.
The document prepared by PKO assumes various scenarios for how the loans will be repaid. Under an optimistic scenario, 8% of the loans are defaulted on in 2000 with the percentage increasing to 20% by 2014.
If this occurs, subsidies from the central government budget over the next nine years would amount to zl. 250 million ($62.5 million).
The second, so-called realistic scenario assumes that 12% of the loans will be unpaid in 2000 and this amount will increase to 30% by 2014. In this event, the government would shell out zl. 549 million ($137.25 million). The last, pessimistic scenario assumes a 6% default rate in 2000, which will increase to 40% in 2014. This would result in government spending of zl. 813 million ($204 million).
"Compared to the need of one-time capitalization in the amount of zl. 1.6 billion if the portfolio is left without guarantees, the amount is relatively small," reads the document.
The government started to give the preferential housing loans in 1965 and PKO continued this until May 31, 1995. The loans, addressed to housing cooperatives and individuals, had maturities of 40 and sometimes 60 years and bore "symbolic" interest rates, from 1-6%. After the country's economic transformation, the interest rate skyrocketed to 115% in 1990.
Since most of the loans were given to cooperatives, according to the banking law, a loan is considered irregular even if one member of the cooperative has problems paying it back. As a result, theoretically the entire portfolio should be classified as irregular. At the end of June 1999, the old housing loan portfolio amounted to zl. 5.01 billion ($1.25 billion).
