Polish banking sector and BM/BM Group’s position

The year 2020 was inseparably connected with the Covid-19 pandemic. A combination of the so called Covid-provisions with low interest rates (and pressure on NII/NIM as a result) and moderated economic activity substantially undermined banking sector’s profitability. High provisions against legal risk related to FX-mortgage portfolios were an additional significant burden. Following the unprecedented nearly PLN6bn net loss in 4Q20 (above-mentioned legal charges were the main reason), the commercial banks ended the full year 2020 with a combined net loss of nearly PLN0.7bn.

Year 2021, although still disrupted and influenced by next waves of the pandemic, was more about recovery and adaption to ‘new pandemic’ reality. The first two quarters of the year were characterised by continued contraction of NII which in 3Q21 reached a multi-year low (c90% of the pre-pandemic peak from 3Q19). However, simultaneously other sources of income, fees in particular, started to gradually improve. Combined with broadly stable opex (lower BFG charges and cost savings) and, most of all, lower risk charges, these translated into significant improvement of the banking sector’s net profit in 1Q21 and 2Q21. 9M21 saw net profit growing nearly 60% y/y, but 4Q21 again brought a significant growth of FX-mortgage related legal risk provisions. The latter more than outweighed the strong recovery of NII, an early impact of 165 bps increase of base interest rates by Poland Central Bank. As a result, the sector overall again posted a net loss in the quarter (PLN0.2bn) undermining somewhat the otherwise strong y/y growth. In 2021 overall, commercial banks combined earned PLN8.7bn (PFSA’s preliminary data) following the PLN0.7bn net loss in 2020 and PLN13.2bn net profit in 2019.

Operating trends of the banking sectors improved markedly during the year. The pace of y/y revenue growth accelerated to 10% from -2% in 1H21. Interest income, the main source of revenue growth in pre-pandemic years, contracted 1% y/y following the 3% drop in the previous year (4Q21 NII already up 16% y/y), while NIM recovered to 2,07% (last twelve months to end of December) from the low of 2.02% in September 2021 and compared to 2.26% in 2020. Net fee income grew 16% y/y after 12% growth in the preceding year while its share in total income increased to 26% from 23% in 2020. Banks continued to respond to revenue challenges with cost containing initiatives (additional tailwind from lower BFG charges) but increasing inflation and wage pressure translated into 1% y/y growth of opex in 2021 overall, following 1% contraction in 2020. The cost/income ratio for the whole sector improved to 59% from 63% in the previous year. The pandemic continued to accelerate sector digitalisation which, among others, resulted further branch closures and staff reduction. At the end of December 2021, the number of banking branches was 6% lower than at YE20 (9% drop in 2020 overall) while the number of staff decreased by 4% (5%). Decreasing risk charges (-48% y/y) were one of the main reasons behind the substantial improvement the results of the sector. Risk charges were equivalent of less than 20% of operating profit compared to over 30% the year before. The share of stage 3 loans decreased well below 6% from nearly 7% at YE20, while the coverage ratio increased to 60% from below 59% respectively. Sector’s ROE for the 12-months trailing to December 2021 improved to over 4% from a negative value in 2020 and 6.7% in 2019. According to PFSA’s data, in 2021, nine commercial banks posted combined net loss of nearly PLN4.0bn (PLN1.5bn in 2020) while their share in total sector’s assets nearly doubled to ca. 16%.

Banking balance sheets grew considerably during 2021 (+10% y/y), though slower than in 2020 (+18%) with inflow of deposits being the main driver. The latter largely came from the corporate sector but the gap between the growth of corporate deposits (+12% y/y) and retail ones (7%) narrowed from 18%/11% y/y in respectively in the preceding year. Since the start of the year, receivables from the non-financial sector (gross) grew by a 5% (2020: +1%) with these of households and corporates growth at the same pace (+5%). Total deposits increased 8% (2020: 13%) and as a result the over-liquidity of the sector increased further. This was evidenced, i.a., by a drop of loan/deposit ratio to 74% from 76% at YE20 or increase of NSFR ratios to 150% (end of September 2021 data) from 125% at YE20.

The Polish banking sector maintained a very strong capital position. At end of September 2021, the equity of Polish banks reached PLN228bn while capital ratios were not that far off from YE20 levels (TCR at 20.0% at the end of September vs. 19.1% while Tier 1 ratio at 18.1% from 17.0%). In December 2021, PFSA published its recommendation on dividend policy of commercial banks in 2022 in which it allowed dividend pay-outs on terms similar to these in the pre-pandemic period.

2021 brought a continuation of concentration and sector consolidation processes. At end of December 2021, the share of top five largest banks in total sector’s assets was 57% vs. 48% at YE20, while their share in full year net profit was 122% vs. 67% respectively. The number of commercial banks remained unchanged at 30 units.

At end of 2021 Bank Millennium ranked 7^th among top commercial banks in Poland by total assets and deposits. The Bank’s market share in deposits was 5.5% (5.3% at end of 2020) and 6.1% (6.1%) in loans. Bank Millennium Group had a relatively stronger position in the household segment (loans at 8.2% vs. 8.0% at YE20, deposits at 6.8% and 6.7% respectively, in particular in mortgage loans segment (8.7% vs. 8.6%), non-mortgage loans (8.6%+ vs. 8.6%) or transactions made with cards (8.0% vs. 7.8% at YE20). In the companies’ segment, where the Group has a lower share than in the retail segment (3.7% in deposits and 4.2% in loans), the Group maintains a traditionally above-average position in factoring products (c.7.3% at YE21). Also in 2021, the Group’s subsidiary significantly increased its market share in origination of leasing with its market in December at 5.4% compared to 4.5% in the respective period of the previous year. The Group continues to distribute its products and services via a network of 655 branches (own and franchise ones), as well as through electronic channels, including cash machines, the Internet, phone and mobile apps.

*3Q21/3Q20 data