The outlook for Poland's banking system remains negative for the second consecutive year, Moody's Investors Service said in a new Banking System Outlook, based on the slowdown in economic growth; the consequent asset-quality deterioration and constrained ability to grow and diversify revenues; and banks' potential exposure to a significant asset-liability mismatch risk, particularly in foreign currency.
The rating agency also expects that the increasingly volatile and uncertain external environment and encouragement from West European parents will push Polish banks to accumulate liquidity and intensify competition for customer deposits, thus diminishing their interest margins.
The slowdown in economic growth has placed banks' performance under pressure by weakening credit demand and reducing "bankable" lending opportunities in Poland. Moody's said that weak demand is likely to persist in 2013 as it expects GDP growth to remain subdued at 1.7%.
Moody's expects selective weakening in the performance of certain market segments over the outlook period -- construction, SMEs and unsecured consumer lending -- although large corporates and retail mortgages will likely remain more resilient. However, the hitherto strong quality of foreign-currency retail-mortgage books could be negatively exposed to the possibility of a sharp and protracted depreciation in the Polish zloty. In terms of construction, during H1 2012 several high-profile defaults affected the largest players in the construction industry and drove up the provisioning expenses of several leading banks.
The system appears to be broadly self-funded with limited reliance on wholesale markets. However, the bulk of customer deposits have very short-term contractual maturities with a history of high price volatility, thus exposing banks to a significant asset-liability mismatch risk.
A number of foreign subsidiaries rely on their (largely Western European Bank) parents for a major portion of foreign-currency funding needs. This exposes them to the ongoing euro area turmoil and potential pressure to reduce their intra-group borrowings.
Despite these negative factors, Moody's noted that the Polish Banking Supervisor's recommendation to retain a greater share of 2011 profits improved leverage ratios and boosted most leading Polish banks' loss-absorption capacity.
Following this, the rating agency believes that the capital resources of Polish banks will remain solid, with an aggregate capital adequacy ratio of 13.1% and Tier 1 ratio of 11.7% as of end-2011. This compares favourably with those of Central European peers but only partly offsets the aforementioned asset-quality credit risks.
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