Moody’s issues negative outlook for Polish banking system

The fundamental credit outlook for the Polish banking system is negative, reflecting the increased probability that the financial fundamentals of the country's banks will suffer as a result of the ongoing turmoil in the global financial sector, which has already spread into Central and Eastern Europe.
It also reflects an anticipated increase in funding pressures in the current climate — prompting banks to adopt more defensive liquidity strategies — and an expected contraction in growth, Moody's Investors Service said in its new Banking System Outlook for Poland.
"During the first half of 2008, Polish banks to some extent managed to sustain the performance trends from the previous years of growth and expansion. Most of them continued to concentrate on their domestic activities, focusing on the expansion in the retail and SME segments. This was a positive factor that initially sheltered them from the financial turmoil spreading in the Western world and affecting most of their foreign parents," explained Irakli Pipia, a Moody's Assistant Vice-President/Analyst and co-author of the report.
However, as the availability of long-term funding and foreign exchange hedging facilities has dried up in the second half of the year, the original growth strategies have become increasingly questionable.
"In the current market conditions, the availability of wholesale funding has shrunk notably and interbank lending remains frozen. As a result, competition for retail deposits has become even fiercer, hiking up average funding costs, and is likely to contribute to margin pressures in the coming year," Pipia said.
Asset quality trends have been positive since the beginning of the year but, given the recent regional and global economic volatility, Moody's expects borrowers to increasingly start experiencing payment problems.
These trends are most likely to be most pronounced in the real estate segment and, in particular, in this segment's foreign exchange lending component. The rating agency believes the current downturn will provide a 'litmus test' for the underwriting standards of Polish banks and challenge the reliability and benefits of the support they receive from their international parents.
Moody's takes comfort from the fact that all of the rated Polish banks are well-established domestic players with minimum or no exposure to high-risk International structured transactions. Profitability and efficiency ratios have been improving so far and the majority of rated banks remain adequately capitalised, reflecting the strategic interests of their respective parents. The system-wide availability of retail funding is comfortable, compared to Western Europe, and the operating and regulatory environments have improved in recent years.
"Moody's anticipates that current developments are likely to lead to a cautious approach to lending, defensive strategies with regard to liquidity and liability management, and reduced profitability. In the coming year, attracting retail deposits will become a key priority for Polish banks and those with developed branch networks, balanced product portfolios and sales strategies are most likely to sustain their franchise values relatively intact," cautioned Gabriel Kadasi, Analyst and report co-author.