You can bank on it

Joanna Sździkowska, a newly appointed supervisory board member of Białystok-based Bank Wschodni (BW), stepped into a potentially small-scale disaster late last month. The bank's customers, panicked by somewhat valid fears that BW would go bust due to bad loans and questionable accounting practices, rushed to withdraw zł. 14 million ($3.33 million) in almost 14,000 transactions. Sździkowska, who has worked in the Polish banking industry for eight years, was installed in BW on June 21 by the National Bank of Poland's Commission for Banking Supervision (KNB) to help quell client fears and set BW back on track. But while the near catastrophe at BW has settled somewhat, the potential for similar calamities at other small banks is widespread since most fail to adequately evaluate their risk, Sździkowska cautioned. "When one bank in Poland has a problem, every bank in Poland has a problem," she said. "But it will not be a bigger problem in the future." BW's financial misery has company. Within a week of BW's debacle, the KNB appointed emergency management to Wschodni Bank Cukrownictwa (WBC), a much larger institution, after poor risk management also threatened its financial footing and could have cost it as much as zł. 600 million ($142.9 million). "We were frightened with WBC because it was much bigger," Sździkowska said. "But fortunately it was nothing like this." Tadeusz Piela, the vice president of WBC's new management board, declined to comment without authorization for this article; the WBJ declined those terms. Earlier, Warsaw-based Bank Społem, for example, fell into much the same trap as BW and WBC and was placed under forced administration in February on account of its at-risk loan portfolio. "The first thing we did was stop granting loans," said Roman Jurewicz, part of the KNB-appointed management team. "Now we are looking at the best possibilities for starting them again." The near failures - and the subsequent KNB remedies - raised serious questions about the viability of banks' lending practices. A number of banks lend to industries that provide the bulk of Poland's employment - the agricultural community and small- and medium-sized enterprises (SME).

Houses in order The KNB is working to increase vigilance, improve risk-management policies and increase know-how. As a result, the future is brighter for the sector than most reports indicate, according to analysts and bankers. "Banks need to take control of their houses," said Grzegorz Zawada, the director of research at Erste Securities in Warsaw. But there is no threat of an imminent, industry-wide collapse, he said. Indeed, the KNB had a bit more in mind than just Sździkowska's banking experience when it placed her on the scene. One reason the KNB tapped her as one of three of Bank Wschodni caretakers was her relationship with one of the ailing bank's potential saviors, banking entrepreneur Mariusz Łukasiewicz, who founded Lukas Bank. Sździkowska worked for Łukasiewicz at Lukas Bank. "He wants to buy the bank, and we only have to talk about ways of selling it," Sździkowska said. "The previous board tried to talk to him about buying the company, but he wasn't sure. He didn't know the situation in the bank. He didn't know all the details. He heard that there could be something wrong with it, so he didn't decide to come and invest." Because of the personal relationship, the transaction seemed more secure with the new managers. "When KNB decided to put us there, (Łukasiewicz) thought we could take care of the company," Sździkowska said. "And so it's a safe transaction with us … safer than with the previous board." Though documents have yet to be signed, the new management has put a shine on Łukasiewicz's probable investment. WBC seems to have found its lifeline from a dozen banks and the Bank Guarantee Fund (BFG), which the government put in place to ensure the security of bank deposits. A consortium of large banks, including Bank Polski (PKO BP), Pekao, BPH-PBK, Bank Zachodni WBK (BZ WBK), ING BSK Towarzystwo and Bank Handlowy, have pledged to pony up at least zł. 100 million ($23.8 million) this year and draw loans of as much as zł. 800 million ($190.5 million) from the BGF. That deal was officially signed on June 22. All but one of the banks, PKO, are foreign controlled.

Safe loans Marek Urbaniak, an adviser to the chairman of BFG, said that it is cheaper for the consortium to finance the reconstruction via a BGF-preferred loan rather than through bankruptcy proceedings. The fund does not expect there to be an uptick in demand for BGF resources, Urbaniak said. "We don't think that banks' expectations for this kind of help will increase, but in our opinion single cases may appear," he said. Through a spokeswoman, Wojciech Kwaśniak, the general inspector of banking supervision at the KNB, said there was no more to be said about the commission's actions.

Strike one, strike two The two rescues, coupled with the Szczecin Shipyard bankruptcy, which will force several major financial institutions to write off bad loans, seem to herald a tough road ahead for Poland's bankers. But they also prove that the industry is geared up to battle the weak economy, analysts said. Most lenders have improved their risk evaluation procedures, and lending regulations should preclude things from getting out of hand, analysts said. "The most important thing is that the Polish regulations regarding loan risk are (very) restrictive," said Artur Szeski, an analyst at CDM Pekao Securities. The local market is more heavily regulated than in the Czech Republic or Hungary, both of which are to accompany Poland into the European Union as soon as 2004. Poland is in some ways better off than countries to the west, where financial turmoil and scandal keeps trouble brewing, he added. Polish regulations classify lenders as "delinquent" when they don't pay installments within 30 days of scheduled payment. "It plays an important role as a signal of how bad a portfolio is," Szeski said. "You have a clear picture of what is happening." The June events indicate Polish authorities' commitment to shoring up banks' financial footing, analysts and newly installed management said. "Now you have Bank Wschodni and WBC. You have a great example of the (KNB) stepping in just in time," Szeski said. "They were just too aggressive in lending." For other institutions, it is in their own best interests to tidy up their portfolios. "I think a lot has been done to prevent bad loans, definitely for private and corporate customers," Szeski said. "The perception of risk has changed over the past few years."

Foreign example FCE Bank Polska, owned by Ford Financial Services Group, is one example of positive change, according to analysts. The lender has more than doubled its customer roster this year. But last year, anticipating a sluggish Polish economy, the European arm of Ford Financial Services instituted a revamped credit scoring system, through which it rates creditworthiness, and doubled the staff in its repossession department to crack down on debtors. "We're working closely with the supervisory board of FCE Polska," said Beata Jaszczur, a board member at FCE. "We have restructured our vindication department." The most important goal for the company is cutting its exposure to high-risk customers to 1.5% by year-end. "Two percent of our portfolio is delinquent," she said. That figure will not bankrupt the company, but it's not safe for a zł. 120 million ($28.6 million) loan portfolio. Jaszczur estimates that for banks like FCE, 1% delinquent loans is normal. But some have upwards of 3%. "From a Ford Credit standpoint, yes, it's a high number," she said. "It's definitely a problem with the whole industry."

Getting bigger Not only small banks are suffering as the economy limps along. As the Szczecin Shipyard case shows, big banks are not immune to market conditions. The yard declared bankruptcy last month, leaving $293 million in unpaid loans. "Unfavorable external conditions will certainly affect the earnings of BRE Bank," said Alicja Kos, BRE's spokeswoman who is also a member of the bank's management board. BRE has a zł. 408 million ($97 million) profit target for this year despite its exposure to the shipyard. The bank plans to make money from the as-of-yet unsuccessful initial public offering of media concern ITI Group and the sale of minority stakes in pension fund PTE Skarbiec-Emerytura and Internet bank mBank. But revenues, or losses, also ride on BRE's loan portfolio. "Although the loan book quality in BRE Bank is better than the sector average, (it) has to create provisions for (delinquent customers)," Kos said. She did not provide the percentage of at-risk loans.

Way back when Bankers and analysts remember when debt troubles at Polish banks first surfaced. Bank Staropolski's bankruptcy in 2000 cut sector profits by as much as 8% and provided the impetus for managers and authorities to look more closely at risk evaluation. "You have to realize that Staropolski is very important (to today's situation)," CDM Pekao's Szeski said. Regulators, and certainly banks, have learned from that costly bankruptcy, he said. Still, bad debt could mount, if the proper steps are not taken. "(More and more) banks have to have the proper scoring system; and their collection procedures should be at a higher level," said FCE's Jaszczur. Significant investment and time are still is needed to implement the necessary systems. State-of-the-art IT systems, which banks are working to implement, provide the necessary tools for accurate risk evaluation. "It's not easy," CDM Pekao's Szeski said. "It takes two or three years to implement a scoring system."

Capital connections Besides simply preempting further disasters, capital is needed to bandage the wounds of overextended portfolios. The KNB is working to find that capital. In its restructuring of BW and Bank Społem, the KNB placed emergency managers with connections to potential investors at their helms in February. The KNB wants Łukasiewicz to buy the two banks and merge them, according to bank management. Last month, the KNB shuffled around bankers who used to work at Lukas Bank, which Łukasiewicz has since sold. The commission moved Piotr Masiukiewicz from the emergency management team at Bank Społem to head the BW team with Sździkowska's help. At roughly the same time, it installed Roman Jurewicz, another Lukas veteran, to replace Masiukiewicz at Bank Społem. Both Sździkowska and Jurewicz said it's likely that the merger and sale will take place. The two were in Warsaw last week discussing the sale.

Profits at risk? For institutions like BW, the obsession with risk does have a cost. "My fear is that the profitability will fall," Szeski said. As analysts praise the sector for more or less averting disaster, they realize that such vigilance inevitably takes away from an entrepreneurial tack that wins profits. But averting disaster and keeping small institutions afloat is challenging - and rewarding, Sździkowska said. "I hope I stay with Bank Wschodni and with the investor (indefinitely)," she said.