Founded on a solid macro-economic base, Poland’s positive market sentiment should enhance the further growth of the banking sector. However, one should hardly expect a repetition of last year’s credit boom as rising inflation and an expected slowdown in personal income growth threaten to weaken the demand for credit. A price growth slowdown, and in some cases even falling prices on the real estate market coupled with growing interest will curb the mortgage credit market – the first signs of this trend were visible already after the first quarter. Competitive pressure has forced banks to cut margins on credit products as a remedy for the higher interest, however growing capital acquisition costs will make it increasingly hard to win new clients. Also to be reckoned with is a drop in investment fund earnings, which is the first visible effect of the international turbulencies caused by capital markets and falling stock market prices. One positive side of this are growing deposits, but this can prove short-lived as investors return to the floors after the capital markets have settled down.
The U.S. credit crisis may have a direct bearing on Polish banks, which are beginning to experience solvency troubles due to an excess on credit over deposits. The Polish banking sector is dominated by foreign banks, which in normal conditions allows the financing of credit from foreign debit. Now this will be far more difficult and expensive in light of rising risk costs on international financial markets. Banks are facing a bitter battle for domestic deposits, which does not augur well for deposit margins.
At the moment the mortgage credit market in Poland appears safe as Polish banks apply stricter credibility criteria and more safeguards than their U.S. counterparts, which results in a minimum delinquency quantum. Nonetheless rising competition may lead to an uncontrolled depreciation of binding standards. Already today some banks offer a very liberal LTV (loan-to-value) ratio, also many of the financial agents who sell banking products provide misleading information about the financial standing of creditees. In such situations the banking supervisory authority should carefully monitor the ratio of a bank’s capital assets to the crediting risk factor, especially in the case of high-LTV loans (the lack of such monitoring was one of the main causes behind the U.S. crisis). Currently in preparation is legislation on bank solvency standards, last December saw the foundation of a Financial Stability Committee to watch over the system’s financial stability and avert possible threats. Banks are advised to channel the lion’s share of their earnings into de-capitalisation.
Polish banks have managed to avoid the effects of the crisis on world financial markets because they had not invested in securities based on U.S. mortgage loans, and due to delays in developing securitization instruments. However, solvency problems may speed up the introduction of such instruments and increasingly there is talk about solutions enhancing securities trading and the securitization of assets. Already today some banks offer credit agreements with a clause on creditee consent to cede (sell) securities, which makes securitization easier. The broadscale introduction of such instruments is only a matter of time, hence it is very necessary to introduce regulations obliging banks to disclose information concerning their exposure to such assets and to sound risk assessment.
The current tension on international financial markets may lead to further mergers and fusions, which in turn may re-shape the domestic banking sector and restructure its dependence of foreign debit. This may be further enhanced by government plans to privatize what is left of Poland’s banking sector (BGZ, BOŚ, PKO BP), which may enable the transfer abroad of profits and solvency from Polish banks. This should become a matter of primary concern for the banking regulatory authority in its strivings to ensure stability and growth on the domestic banking market.