Banking sector in Poland and position of Bank Millennium Group

During 2016, banks in Poland were operating in a difficult market environment, caused mainly by introduction of (from February 2016) a new special banking tax, with 0,44% annual rate on the balance of total assets less own funds, Treasury bonds and PLN 4 billion tax-exempt amount. On the other hand, 2016 year did not bring so strong new regulatory interventions on interest or fee income, like the ones which happened in 2015 (e.g. cut of market interest rates, cut of maximum interchange fees, creation of a new Mortgage Borrowers Support Fund or an increase of obligatory Banking Guarantee Fund charges), but was still affected by implementation on new regulations on insurance business. There was also smaller extra charge to Banking Guarantee Fund connected with bankruptcy of co-operative banks: PLN 140 million in 2016 compared to over PLN 2 billion in 2015.

2016 year did not bring any regulatory solution to FX denominated mortgage loans, although there are currently three different draft acts submitted to the polish parliament, including presidential proposal of legislation aimed at supporting FX mortgage borrowers in the form of reimbursement of part of FX spread applied by banks. Such situation has generated some uncertainty that affected market valuations of most banks listed on the Warsaw Stock Exchange, despite the fact of comfortable average quality of FX mortgage portfolio in Polish banking system and strong capital position of polish banks.

2016 year also brought further higher capital requirements from banks, including a new capital conservation buffer of 1.25% (obligatory in Poland since January 2016) and other systematically important institution buffer, imposed on the biggest Polish banks in the amount between 0.75% and 0.25%. In the second half of 2016 year  Polish Financial Supervision Authority (KNF) also revised special pillar 2 buffers to cover risk resulting from FX mortgage loans granted to households. It was also announced that further capital requirements may be imposed for the banks in connection with FX mortgage loans. Such situation drives up equity of Polish banks mainly by limiting possibility of paying dividends. Equity of Polish banks increased by 6% during the year reaching a very high amount of PLN 184 billion. This level of own funds allowed Polish banks to keep very strong solvency ratios: Total Capital Ratio (TCR) at 17.6% and Tier 1 ratio at 16% (data for September 2016). Strong capital position of Polish banks, positive from the point of view of safety, creates however another negative pressure on banks’ market valuations, due to lower ROE ratios and no dividends.

At the same time the process of growing concentration of the banking sector in Poland continues, mainly due to acquisition activity of state-controlled entities (PKO BP, PZU SA and PFR – Polish Development Fund).  At the end of 2016 year Unicredit Bank, owner of the second biggest bank in Poland, agreed to sell 32,8% stake in Pekao SA to PZU and PFR. When concluded, this transaction would increase share of banks with predominant domestic capital (mainly controlled by the State) in the Polish system to around 50%. At the end of Q3 2016 top 10 banks accounted for 68% and top 5 had 50% of total sector assets.

During 2016 year total deposits of the banking sector grew strongly by 8.9% per annum (NBP data), which is the second consecutive such strong growth, despite cutting of interest rates in Poland in 2014 and 2015 year to the record low level of 1.5% (reference rate). Especially strong growth was noticed in households segment: +9.4% yearly. Total loans of banks grew less remarkably, by 4.6% yearly, with disappointing 3.7% growth of loans to corporate sector. As a consequence, liquidity of Polish banks improved during 2016 year: Loans to Deposits ratio in the entire sector dropped from 103% at the end of 2015 to 96% at the end of December 2016.

At end of September 2016 Bank Millennium Group was the 8th biggest among commercial banks in Poland by total assets and deposits. As at the end of 2016 Bank’s market share in deposits reached 5.1% while in loans it stood at 4.5%. Bank Millennium Group, comprising the Bank itself and a leasing company, mutual fund management company as well as a brokerage house, keeps a relatively stronger position in retail loans and credit cards (approx. 5.7% market share). Other important segments of the Group include leasing (7th place on the market) as well as factoring (the 4th biggest player in the market). Distribution of the Group’s products and services is done through  369 branches as well as electronic channels, including cash machines, the internet, phone and mobile applications. During 2016 Bank Millennium Group improved market share position in retail deposits, while market share in mortgage loans and corporate deposits fell.

In 2017 the Bank is expecting deceleration of deposits growth in the banking sector, mainly due to growing consumption as well as competition of other, non-deposit saving products. As regards banking sector loans, the Bank expects them to accelerate, supported by expected rebound in companies’ investments.

There are also potential external factors, which might have a significant influence on the activity of the Polish banking sector (and Bank Millennium) in the coming quarters:

• On August 2nd 2016 a presidential proposal of legislation aimed at supporting FX mortgage borrowers was put forward. The draft Act covers all foreign currency loans concluded from 1st July 2000 to 26th August 2011 (date of entry into force so called anti-spread Act). Aforementioned draft Act envisages reimbursement of part of FX spread applied by banks. It was also announced that further capital requirements may be imposed for the banks in order to restructure FX mortgage loans. Including the above mentioned draft Act, there are currently three different draft acts submitted to the polish parliament and as a consequence it is not possible to estimate the impact of this potential regulation on the banking sector. However, announced legislative intentions on spread return, if implemented and made mandatory for banks, could significantly deteriorate the Bank’s profitability and capital position.
• On January 13th 2017 Financial Stability Committee (KSF) in Poland released set of recommendations regarding restructuring of FX mortgage loans. The proposed supervisory instruments aimed to support banks and borrowers in the direction of taking decisions on restructuring include, among other: to increase risk weight for FX mortgage exposures, to increase the minimum value of LGD parameter for FX mortgages, to allow utilize Mortgage Borrowers Support Fund for supporting voluntary restructuring of loans, to update BION/SREP methodology in order to assign appropriate level of capital surcharge to further risk factors connected with FX mortgage loans (operational, market and risk of a collective default of the borrowers) and to supplement currently used Pillar 2 additional capital buffers with these risk factors. KSF suggested also that KNF should issue a recommendation regarding good practices of restructuring FX mortgage loans. Finally KSF suggests, that BFG should take risks connected with FX mortgage loans into consideration in the method of determining fees for the Banking Guarantee Fund. It is not possible with the available information to analyse the impacts of these recommendations, but implementation of part or all recommendations may have influence on the results and capital ratios of the banks, including Bank Millennium, although it is possible that there will be some offsetting effects.
• Increased uncertainty over consequences of Brexit, policy of the new U.S. President D. Trump and elections in Europe might undermine outlook for the global economy, triggering volatility in the financial markets and reducing scope for economic recovery in Poland.
• Possible recovery in corporate investments, especially in the second half of the year, thanks to expected increase in utilization of the EU funds, might support growth of investment loans. However, because of good financial results and high liquidity of Polish companies, demand for financing from corporate sector might remain moderate.
• Potential increase of yields of Polish bonds driven by higher borrowing needs, global sentiment and expected rate hikes in interest rates in Poland in 2018 year.
• Still good situation in labour market and growing households’ income, partially because of programme Rodzina 500+ (Family 500+), should support demand for households credit and quality of loans portfolio.