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2018 Financial and Social Report

Polish banking sector, Bank’s position and risk factors

Positive trends in the business environment in Poland continued, confirmed with high GDP growth at approx. 5%, and improved results of the Polish banking sector in 2018. The rate of growth of total deposits in the banking sector accelerated to 8.5% annually (NBP data), especially strongly in the households segment (+9.8% per year). Likewise growth of total loans reached the level of 7.6% per year and was only partly supported by appreciation of foreign currencies to PLN. The rate of growth of corporate loans was particularly strong (8.5%), although retail loans also maintained a high growth rate: 7.0% per year. In consequence the Loans/Deposits ratio for the entire sector shrunk slightly during 2018 to a level below 96%.

Strong growth of business volumes brought growth of net interest income, which remained the main factor of profitability improvement in Polish banks in 2018 (+5.2% y/y). The unfavourable situation on capital markets brought a decline of total income from fees and commissions (-10.5% y/y) vs. 2017. Operating costs and risk provisions grew in 2018 as compared with the previous year, nevertheless total net profit of the Polish banking sector was PLN 14.7 bn in 2018 i.e. grew by 7.5% yearly.

The Polish banking sector is also maintaining a very strong capital position. In December 2018 the equity of Polish banks reached PLN 206 bn and solvency ratio rose to 19.1% (Total Capital Ratio – TCR) and to 17.2% (Tier 1 ratio). In 2018 KNF confirmed validity of the same restrictive recommendations as in the previous year relating to dividend policy for banks. At the same time KNF carried out a review of Other Systemically Important Institutions’ buffers as well as pillar 2 buffers concerning FX mortgage exposures. Additionally the all-system capital conservation buffer was increased since the start of 2019 by 0.625% to the target level of 2.5%. Maintaining by Polish banks of high buffers and capital ratios is good from the point of view of risk although it does adversely affect return on the equity invested by banks’ shareholders (lower ROE and limited dividend).

2018 brought continuation of the process of growing concentration in the Polish banking sector. In November Santander Bank (previously under the name of BZ WBK), the third-largest bank in Poland, finalised the legal and operational merger with the part of Deutsche Bank Polska it acquired. In October the transaction was finalised of acquisition of the majority of Raiffeisen Polska by BGŻ BNP Paribas. In result of this transaction, BNP Paribas Polska moved up to the sixth place among banks in Poland in terms of size of assets. At the end of September 2018 the top 5 Polish banks held 51% of total assets of the whole sector.

At end of 2018 Bank Millennium Group was 7th among top commercial banks in Poland by total assets and deposits. The Bank’s market share was 5.3% in deposits and 4.6% in loans. Bank Millennium Group, comprising the Bank itself and the lease company, mutual funds company and brokerage house, keeps a relatively stronger position in the household segment (6.2% in deposits and 5.6% in loans, including 7% in mortgages and 8% in transactions made with credit cards). In the corporate segment, where Bank Millennium has a smaller share than in the retail segment (3.9% in deposits and 3.3% in loans), the Bank’s Group maintains a traditionally above-average position in lease and factoring products. The Group continues to distribute its products and services via a network of 361 branches as well as through electronic channels, including cash machines, the internet, phone and mobile apps.

According to the Bank’s forecasts, despite the expected slight slowdown of business activity, 2019 should bring a maintained high pace of growth of credit as well as deposit volumes. Lending will be supported by the expected rebound of corporate capital expenditure and also a high level of consumption as well as growing demand on the real estate market. On the deposits side strong growth should continue thanks to still growing income of Polish households.

Despite favourable forecasts for the economic situation of Poland and of the banking sector for 2019, there are also potential threats, which – if materialised – may in the coming year have material influence on the activity and results of the Polish banking sector (Bank Millennium included):

  • A stronger-than-expected slowdown in global economic growth as a result of intensified protectionism in global trade, an increase in uncertainty regarding the UK leaving the European Union (Brexit) and high public debt in some of the eurozone countries. Due to the connections within the global production chains, such events in the external environment may have a negative impact on Polish exports and thus on the income situation of domestic enterprises and households.
  • Strongly increasing labor costs in Poland and growing problems with finding employees with appropriate qualifications may limit profitability of some enterprises and new investments
  • Introduction of costly legal-regulatory solutions towards FX mortgages. 2018 year did not bring legal changes towards FX mortgage portfolios. On 2 August 2016 the President’s Bill on support for FX mortgage borrowers was submitted to the Parliament. The proposed law is to apply to FX (all currencies) loan agreements signed from 1 July 2000 to 26 August 2011 (when the “Anti-spread Act” came into force). This Bill concerns the return of part of FX spreads applied by banks. On 2 August 2017 a new Presidential Bill appeared in Parliament regarding changes in the Act on Support for Distressed Borrowers who Took Residential Loans. The Bill assumes a modification of the existing Borrowers’ Support Fund by separating-out two Funds: Supporting Fund and Conversion Fund. As regards the Supporting Fund, the Bill aims to increase availability of money from the fund by means of: relaxing criteria, which must be satisfied by a borrower applying for support; increasing the maximum amount of support; extending the period, for which the support is granted; forgiving part of the support granted conditional on punctual repayment to the fund. The Conversion Fund is to be used for currency conversion of FX mortgages to PLN. The Bill contains very general regulations and does not specify criteria of eligibility for such currency conversion and its rules. Quarterly payments to the Conversion Fund made by lenders are not to exceed the equivalent of the FX mortgage portfolio and the rate of 0.5%. The maximum costs for the entire sector, assessed based on FX mortgage balance (PLN 128 billion in December 2018 according to KNF), equal to up to PLN 2.6 billion in the first year of operation of the Conversion Fund. According to the Bill, KNF may issue a recommendation to lenders specifying the principles of voluntary conversion of receivables with consideration of stability of the financial system and effective use of money in the Restructuring Fund. After Government’s acceptance and voting of several changes by the Parliamentary Sub-Committee, Presidential Bill of 2 August 2017 was sent on 24 January 2019 for the further parliamentary proceedings.
    The two above Bills included, so far four draft Acts have been submitted to Parliament and in consequence it is not possible to estimate the impact of the proposed legislation on the banking sector and the Group. However if any of the Bills is adopted and begins to bind banks, this may lead to significant reduction of the Group’s profitability and its capital position.
  • Potential future increases of contributions to the Banking Guaranteed Fund.
  • Continued deterioration of the situation on capital markets, especially on the local market of mutual funds, coupled with further regulatory trimming of income generated by the banking sector on managing and distributing units of these funds, may cause further erosion of commission income of the banking sector, including Bank Millennium Group.

There is also the likelihood of a more favourable macroeconomic scenario than the assumed one, which may lead to better results of the banking sector and Bank Millennium Group, in particular:

  • Faster than expected economic growth in Poland, due to the strong consumption of households, would support an increase in the Bank’s lending.
  • The rebound of business investment in production capital would support the increase in demand for investment loans.
  • A favorable income situation of households and enterprises would support the improvement of the quality of the Bank’s loan portfolio, and would also increase the inflow of deposit funds.