Poland: Banking sector overview

Introduction

The majority of institutions in Polish banking sector came into being following 1989. Prior to that time, the sector was divided between the direct operations of the National Bank of Poland and a group of four government-owned "specialist" banks. The NBP managed monetary policy and undertook some commercial banking functions. Each of the specialist banks served different industrial sectors or markets.

Following 1989, commercial banking departments of the National Bank of Poland commercial banking departments were spun-off and transformed into nine independent regional banks. These banks were joined by a host of new, mostly small, private banks.

In addition to local dynamism, another major factor in the banking sector’s evolution was the arrival in the mid-1990s of foreign entrants. Initially, these banks serviced relationships with home country clients, but eventually expanded into the local market. Ultimately, it has been foreign players that have driven consolidation among the sector’s largest banks. Currently, just over 75% of the sector’s net assets are controlled by foreign banking institutions.

A challenge arising from EU accession that current players should anticipate is the entry of a multitude of new "branch" banking competitors. In fact, from May 1, 2004 to July 27 2005, 87 notifications were submitted by the relevant supervisory authorities advising of the intention to carry out cross-border banking activities within the territory of Poland, by a branch of credit institutions under their supervision. Competitive pressure may be all the more intense as these entrants only permitted after accession may well benefit from lower costs of capital relative to their Polish domiciled competition.

Finally, any of the much anticipated sector consolidation among the larger banking institutions will more than likely be driven by strategic initiatives within the broader EU context.

Market structure

At the end of the first half of 2005 there were 647 domestic banks (54 public limited companies, 1 state-owned, 592 cooperative and 5 branches of credit institutions) carrying on operating activity on the Polish market. The authorised capital of the domestic commercial banks amounted to PLN 11.7 bn increasing by PLN 418 mn or 3.7%.

As of the end of June 2005, 14 domestic banks and 1 foreign bank were listed on the Warsaw Stock Exchange. Out of 55 domestic commercial banks 11 were controlled by the Polish majority shareholders, including 4 controlled by the State Treasury. The remaining 44 banks were directly or indirectly controlled by foreign investors from 17 different countries.

Over 70% of total banking sector assets and almost 78% of deposits of non-financial institutions were held by 10 largest banks, 6 of which each held assets of more than PLN 30bn.

Financial performance

Due to Poland’s economic recovery, the banking sector is once again growing. In the first two quarters of 2005 the total assets of the sector increased by 5.9% and reached nearly PLN 571 bn. Despite this recent asset growth, the total assets to GDP ratio stands at 61.3% substantially lower than in most of the EU member states. This suggests the potential for increasing banking product penetration, as Poland’s economy converges with that of the EU.

Despite the adoption of IFRS which had the net effect of slightly lowering asset values in the sector, the total assets of the Polish banking system grew by 5.9% in the first 6 months of 2005. This growth came substantially from an increase in lending to households—primarily consumer and mortgage lending which grew at 16.4% and 10.8% respectively. Corporate lending grew, but at the more conservative rate of 6.3%--primarily business expansion loans.

Following record results during 2004, the banking sector’s profitability is showing signs of continuing improvement. Net earnings for the first 6 months of 2005 of PLN 4.4bn increased 24.3% YoY on the first six months of 2004. This improvement was driven primarily by the sector’s expansion of lending volumes and an improvement in transaction volumes linked to the financial markets recovery.

The sector’s financial performance ratios have continued to improve: annualised ROE increased slightly to 21.5% at 1H2005 from 18.5% at 1H2004, while annualised ROA increased to 1.7% from 1.5% at 1H2004.

Non-performing loans

Although the share of nonperforming loans (NPLs) in total sector lending remains high at about 14% (compared with total lending to non-financial institutions including cooperative banks), it has fallen substantially in recent years from as high as 22% in 2003—partly due to a loosening of NBP classification standards, and partly due the relative expansion of banking sector lending (see above). In the first 6 months of 2005 NPLs have further declined by 5.3% to PLN 34.5 bn from year end 2004 when they stood at PLN 36.5 bn.

Non-performing loans* (in PLN m)
	2003	2004	% Change	1H2005	% Change
Substandard	10,633	6,499	-39%	5,462	-16%
Doubtfull	13,672	6,158	-55%	5,135	-17%
Lost	26,446	23,800	-10%	23,922	1%
Total	50,751	36,458	-28%	34,519	-5%