Pressure to start raising new debt to meet bail-in funding requirements will add to the challenges facing Polish banks going into 2020, according to analysts.
Banks in the eastern part of the European Union (EU) have lagged their counterparts in the west when it comes to building minimum requirement for own funds and eligible liabilities (MREL) buffers.
None has yet issued bonds in the necessary senior non-preferred format.
In Poland, the region’s largest market, the shortfall could be as high as PLN70 billion (€16.4 billion), according to local investment bank Trigon.
Most banks in emerging Europe have yet to disclose the MREL ratios assigned by local regulators to systemically important institutions, but Polish market leader PKO Bank Polski has indicated it will need to raise €2.3 billion to meet its target of 23.0% of risk-weighted assets.
Closest rivals Santander Bank Polska and Bank Pekao have funding gaps of €1.4 billion and €0.9 billion respectively, according to analysts at Raiffeisen Bank International (RBI).
As with other markets in the region, Polish banks have historically relied mainly on deposit funding. Issuing senior non-preferred bonds will put pressure on margins already squeezed by low interest rates and intense competition, particularly as the vast majority will likely have to be sold outside Poland.
“The Polish market is too small for these volumes, so banks will have to go abroad,” says Andrzej Powierza, an equity analyst at Citi Handlowy Brokerage House. “For some, this will only be a matter of price, but others will struggle to find investors for this type of instrument.”
Several Polish banks already have a track record in international bond markets. PKO BP and Commerzbank subsidiary mBank have issued euro-denominated Eurobonds and covered bonds, while Santander BP made its international market debut in September 2018.
Others have yet to venture outside Poland. Neither Bank Pekao nor smaller state-controlled rival Alior Bank have sold bonds internationally, although the former is planning to issue a debut senior Eurobond next year to set a benchmark for MREL issuance.
Swiss franc mortgages
The need to tap international markets comes at a bad time for the sector, which is already facing headwinds in the form of litigation over Swiss franc mortgages, rising levies and restrictions on fees on consumer loans.
More than 10 years after the financial crisis, when lending in foreign exchange to retail customers was banned in Poland, Polish banks still have around CHF25 billion of mortgages linked to the Swiss franc on their books.
Despite several bouts of critical rhetoric, Poland’s populist Law and Justice Party (PiS) government has refrained from forcing banks to convert their portfolios into zloty at pre-crisis rates – possibly because, unlike in Hungary, Swiss franc mortgages in Poland were mostly sold to affluent clients.
This case will not determine all future verdicts in Polish courts. However, it has definitely increased the risk that final verdicts will be more negative for banks going forward
– Lukasz Janczak, Ipopema
This prompted borrowers seeking redress to take their cases to the courts, where they recently notched two notable victories. In October, the European Court of Justice (ECJ) ruled that Polish consumers can ask national courts to convert their Swiss franc debt or even potentially annul the contract.
This was followed on November 28 by a ruling by Poland’s Supreme Court that Swiss franc loans can be converted into zloty without cancelling the contract, but that interest should continue to be paid based on Swiss franc rates.
“This case will not determine all future verdicts in Polish courts,” says Lukasz Janczak, deputy head of equity research at Ipopema in Warsaw. “However, it has definitely increased the risk that final verdicts will be more negative for banks going forward.”
This in turn will encourage more borrowers to opt for litigation, adds Citi’s Powierza. He puts the total cost to the sector at PLN37.5 billion, based on around 70% of mortgagees going to court and 70% of cases being successful, as has been the case during the past two months.
Not all Polish banks are equally exposed. Bank Pekao avoided issuing Swiss franc mortgages and Alior Bank was set up in 2008, just before the ban on foreign currency lending was introduced. PKO BP also has relatively limited exposure.
Bank guarantee fund
Nevertheless, even banks without large Swiss franc portfolios could find themselves on the hook through Poland’s bank guarantee fund (BFG).
Mandatory contributions to the BFG, which cover deposit protection and a bank restructuring fund, are already high. This year, total sector contributions reached PLN2.8 billion.
A further rise in BFG requirements is expected next year. Current consensus is for a 10% to 15% increase, but analysts say it could jump by as much as 30% if the situation at two troubled local lenders deteriorates.
The larger of the two, Getin Noble Bank, has been loss-making since late 2016 after an ill-advised attempt to build mortgage market share aggressively in the wake of the financial crisis.
Idea Bank, an SME-focused lender operating under its current name since 2010, failed to gain traction in a competitive market and was hit by the failure of Polish debt collector GetBack in April 2018. Last year, it posted a net loss of PLN1.9 billion.
An attempt to merge the banks, both of which are owned by local tycoon Leszek Czarnecki, was blocked by the Polish regulator this summer due to concerns over Idea Bank’s capitalization. By the end of September, its capital adequacy ratio stood at just 2.2%.
With a CET1 ratio of 8.8%, Getin Noble Bank is better positioned, but is also among the most at risk of Swiss franc mortgages litigation, accounting for around 11% of outstanding loans linked to the currency.
“The financial standing of Getin Noble and Idea Bank is still weak, and they have significant capital deficits,” says Janczak. “Up to PLN4 billion of equity is needed in those two banks and there are no obvious ways of raising it.”
Some investors believe Commerzbank will give minorities a present and take this book for free without any discount. I don’t believe in Santa Claus
– Andrzej Powierza, Citi Handlowy Brokerage House
Swiss franc mortgages could also complicate the disposal of mBank, Poland’s fourth-largest lender, which was put up for sale by Commerzbank in September.
The bank, which is credited with leading Poland’s digital banking revolution, has attracted interest from leading local lenders including PKO BP, Bank Pekao and ING Bank Slaski, as well as those not currently present in Poland, such as Erste Group.
As in the recent sales of Raiffeisen and Deutsche Bank’s Polish subsidiaries, potential buyers are expected to insist that mBank’s large Swiss franc mortgage portfolio is carved out ahead of a deal.
As Powierza notes, however, this will be complicated by the fact that – unlike with Raiffeisen Polbank and Deutsche Bank Polska – mBank is listed on the Warsaw Stock Exchange. Commerzbank holds a 69.3% stake, with the rest in free float.
“Some investors believe Commerzbank will give minorities a present and take this book for free without any discount,” says Powierza. “I don’t believe in Santa Claus.”
Another question mark over the deal is whether – as in the case of the sale of Bank Pekao by UniCredit in 2016 – there will be political pressure for mBank to go to a Polish buyer as part of the PiS government’s drive to “repolonize” the banking sector.
So far, messages from policymakers have been mixed. Polish prime minister Mateusz Morawiecki said in September that the acquisition of mBank by a Polish institution was not a priority, while other members of the government have indicated they would prefer a local buyer.
Given the size of the deal, that would mean a state-controlled organization such as PKO BP, Bank Pekao or Poland’s biggest insurance company PZU, which already owns Pekao and smaller lender Alior Bank.
Ipopema’s Janczak sees PKO BP as the most likely buyer.
“It would be a good fit in terms of asset quality, asset structure and the quality of the client base, as well as offering the possibility to squeeze out some synergies,” he says.
At the same time, Powierza says recent events at Bank Pekao highlight the dangers of increasing state dominance of the sector.
On November 29, the bank announced the surprise departure of chief executive Michal Krupinski, as well as deputy CEO Michal Lehmann and management board member Piotr Wetmanski. Former chief risk officer Marek Lusztyn has taken over as acting CEO.
The bank declined to explain the changes, beyond saying that Krupinski – himself a political appointee – wanted to pursue a career abroad.
“This shows what it means to have a state-controlled bank,” says Powierza. “You can have surprising, not fully explained changes in the management board at any time. The question now is whether this is the end of the process or whether we will see someone politically connected appointed.”
Meanwhile, fellow state-controlled lender Alior is also underperforming. The bank, which RBI says will need to raise more than €500 million in MREL funding during next three years, has seen a sharp deterioration in asset quality after a series of large corporate defaults.
By end-September, non-performing loans had risen to 8.3% of the total for retail clients and 17.5% for corporates.
Profitability has also been affected by another ECJ ruling from September, this time on consumer loans. The court ruled that, in the event of early repayment, consumers have a right to demand the return of part of the commission paid on the loans.
The ruling will impact banks across the sector, but Alior will be particularly hard hit due to its high share of consumer loans and relatively high fees.
“They were also more active in pushing clients to opt for early repayments and to take out new loans,” says Powierza.