Outlook for Polish banks remains negative

The fundamental credit outlook for the Polish banking system remains negative, reflecting the fact that banks' financial fundamentals have suffered in the worsening operating environment, notably in terms of declining asset quality, reduced profitability and lower growth, Moody's Investors Service said in its new Banking System Outlook on Poland.
"We expect the negative trends apparent in the H1 2009 financials of most of the rated Polish banks to persist into the next forecasting period. Notwithstanding the solid pre-crisis trends and healthy system-wide liquidity, Polish banks have not been able to avert a crisis of confidence in wholesale funding, which has lead to a severe contraction in banking activities and earnings generation, and redefined strategic priorities for most banks," said Irakli Pipia, Moody's lead analyst for the Polish banking system.
Polish banks have responded to the new market conditions by slowing their lending activities and concentrating on replacing their maturing wholesale funding with customer (mostly retail) deposits. As a result, Moody's notes that competition for customer deposits has become even fiercer, hiking up average funding costs and contributing to significant margin pressure.
Asset quality, which had improved prior to the crisis, has dramatically declined and most of the rated Polish banks have seen a jump in non-performing loans. Initially, a large proportion of this deterioration was due to the foreign exchange-related derivatives contracts in corporate portfolios. However, during H1 2009, all other asset classes, including retail, exhibited increasing payment delinquencies.
Moody's has noted on many occasions previously that, like its peers in other Central and Eastern Europe countries, the majority of Polish banks' loan portfolios remain unseasoned and have not been tested in an economic downturn, let alone by such a severe regional and global contraction.
"The rapid growth seen in the years prior to the crisis was partly fuelled by the pressure to outperform revenue and lending targets set by foreign parents," added Pipia. Moody's expects the current downturn to provide a "litmus test" for the underwriting standards of Polish banks and challenge the reliability and benefits of the support they receive from international parents.
Nonetheless, Moody's takes comfort from the fact that the rated Polish banks have entered the crisis with relatively healthy financial fundamentals compared with some of their regional peers. The system remains adequately liquid and mainly relies on internal funding sources. Most of the rated banks are well-established domestic players and as such are insulated from the vagaries of international capital markets.
Overall, Moody's understands that the crisis adjustment has required the majority of banks to redefine their strategies and adapt to a low-growth scenario. There will be a far more cautious approach to lending, defensive strategies with regard to liquidity and liability management and depressed profitability. Compared with the beginning of the year, when the banks attached the highest priority to their liquidity management and funding mismatches, the rating agency expects the next 12 months to be increasingly dominated by asset quality and risk management considerations. As a result, the sufficiency of capital and other risk absorbing factors are likely to dominate the agenda for regulators and banks alike. These latter factors will also represent the main rating drivers and changes in them will provide a basis for further rating actions.