Polish Banks benefit from economic growth, but instability persists

In a global context, Standard & Poor’s Ratings Services considers the banking sector in the Republic of Poland (foreign currency, A-/Stable/A-2; local currency; A/Stable/A-1) to be of slightly higher-than-average risk. The Polish banking system ranks moderately in a Central and Eastern European (CEE) context and still substantially lower than Western European countries, Standard & Poor’s noted in a report entitled, “Bank Industry Risk Analysis: A Good Economy Props Up Polish Banks, Despite Political Volatility”.

The Polish economy is experiencing renewed growth, driven largely by private consumption and the restructuring efforts of recent years.

“While labour participation is still low in a European context, employment growth, and labour productivity is driven by the increasingly diversified economy and good export performances. Consequently, rising corporate and particularly household confidence is providing the banking sector with ample lending opportunities,” said Standard & Poor’s credit analyst Matthew Pirnie.

The financial profile of the Polish banking sector has improved considerably in the past two years. Profitability is now exceeding CEE peers’, asset quality is improving, and funding, liquidity, and capitalization all remain adequate.

The creditworthiness of the banking sector is amplified by the dominance of strategically important subsidiaries of overseas parent banks. At year-end 2006, eight of the top-10 commercial banks were foreign owned and accounted for more than 50% of total banking system assets. Advantages include access to management expertise and risk control, but also to funding and capital should the need arise.

While credit risk in generally stabilising alongside improving asset quality, high demand for retail lending is raising concerns about the untested debt culture of Polish households, and to a greater extent their indirect exposure to foreign currency and real-estate fluctuations.

Poland’s unstable party politics have been proved to affect the banking sector, including the vocal resistance by key members of government to a banking merger ratified by the European commission and plans to merge financial industry regulation in such a way that it may undermine its independence. Currently, the regulation of the banking sector is viewed positively by Standard & Poor’s, but any attempt to undermine the control or independence of regulation could change this opinion.

“The competition among Polish banks is heating up. Standard & Poor’s is concerned that attempts to garner market share and maintain financial performance would affect credit origination standards negatively going forward,” added Mr. Pirnie.