Polish banks focus on domestic activities amid fierce competition

The deposit, debt and issuer ratings of the 14 rated Polish financial institutions remain mostly driven by the support provided by foreign strategic investors to their increasingly integrated subsidiaries but are constrained by the A2 country ceiling for foreign currency bank deposits, Moody’s Investors Service said in its new Banking System Outlook for Poland.

The overall stable outlook reflects the banks’ ongoing focus on enhancing revenue generation, developing retail banking and opening new branches.

“The foreign owners of Polish banks are Western European banks that are well established in Central and Eastern Europe, with experience in restructuring regional banks. The Polish banks are benefiting from this experience in terms of both the pace of restructuring and the implementation of best practices including risk management tools, implementation of Basel II, quality of service and client focus,” said Yaroslav Sovgyra, a Moody’s Vice-President/Senior Analyst and author of the report.

The report notes that Polish banks are concentrating on their domestic activities and increasingly focusing on the retail and SME segments, which offer good growth prospects and wider margins than corporate lending. However, the focus on the domestic market means that competition is fierce and the rapid growth in retail lending — in particular, foreign exchange-denominated mortgage loans — means that credit risk remains a concern.

The financial turmoil caused by the problems in the US subprime mortgage market is expected to have only a marginal impact on Polish banks, since the majority are foreign-controlled and enjoy the benefits of financial and funding support from their higher-rated parents. In addition, Polish banks, generally, do not rely on external wholesale funding and continue to maintain sufficient balance sheet liquidity, which should limit any negative pressure on their ratings.

Most Polish institutions’ bank financial strength ratings (BFSRs) reflect their improving risk-weighted recurring earnings power profitability, efficiency and asset quality indicators. “The BFSRs of several banks were upgraded in 2006 and in the first half of 2007 to acknowledge various positive developments, including increases in revenues and profitability, lower specific loan loss provisioning charges, successful implementation of retail commercial strategies and the positive effects of bank restructurings,” said Sovgyra.

However, the report cautions that the political landscape in Poland remains highly unstable and recent political developments have somewhat overshadowed positive developments in the banking sector. Certain decisions regarding EMU accession and political debate over the adoption of a specific regulatory regime have created turbulence in the banking system.