Polish banks' performance rebounds ahead of key regulatory ruling

A key legal ruling will determine the performance of Polish banks in 2023, despite lenders entering the year on the back of much-improved fourth-quarter 2022 earnings.

Almost all major Polish lenders reported higher net profit and net interest income for the fourth quarter of 2022, S&P Global Market Intelligence data shows, thanks largely to reduced regulatory costs. This was a respite from previous quarters that were marked by significant provisions on Swiss franc mortgages and regulatory burdens, including costs related to Poland's mortgage repayment deferral scheme.

While the regulatory burdens had a smaller impact on the last-quarter results, a European Court of Justice ruling later this year on the Swiss franc mortgage saga could hit performance hard. The head of the country's state development fund previously warned that an adverse outcome for banks could spark a macroeconomic crisis, and the court's advocate general has already ruled on the side of borrowers.

PKO Bank Polski SA, Poland's largest lender, posted fourth-quarter net profit of 1.7 billion zlotys, equivalent to about €367 million, while its net interest income (NII) was about €881 million. PKO's results improved on a quarterly and annual basis and were the highest in a sample of major Czech, Hungarian and Polish lenders.

Other Polish banks also reported improved quarterly performance, with Commerzbank AG unit mBank SA achieving the highest quarterly NII in its history, according to bank executives. ING Groep NV unit ING Bank Śląski SA was the only Polish bank in the sample whose fourth-quarter net profit was lower on an annual basis.

Hungary's OTP Bank Nyrt. and the Czech Republic's three largest banks posted either drops or only small improvements in their fourth-quarter key financial indicators.

Hungary's windfall tax, high interest rates and various government measures, including an interest rate cap extension on certain loans until mid-2023, affected OTP Bank's fourth-quarter performance. The high interest rate environment in Hungary had a negative impact, and the group expects rate reductions to start soon, OTP's CFO László Bencsik said on a March 10 earnings call.

Société Générale SA's Czech unit, Komercní banka a.s., reported a slowdown in NII as it also ceased to benefit from high interest rates. Improved asset quality was the only reason net profit rose on a quarterly basis, the bank's executives said during a Feb. 8 earnings call.

KBC Group NV's Czech unit, Ceskoslovenská obchodní banka a.s., or ČSOB, reported both quarter-over-quarter and annual drops in fourth-quarter net profit, as well a quarterly drop in NII. Erste Group Bank AG unit Česká spořitelna a. s. was the only Czech bank in the sample that increased its fourth-quarter profit and NII compared to both 2021 and the previous quarter.

The stronger fourth-quarter performance was not enough for most of the Polish banks in the sample to compensate for the previous quarters, and their full-year net profits fell. Only Santander Bank Polska SA posted annual net profit growth, which exceeded 145.4%, while mBank managed to reduce its loss year over year. Banco Santander SA's unit also posted the largest full-year growth in its NII among the nine analyzed banks at 57.8%, according to Market Intelligence's calculations.

PKO Bank had the biggest net profit drop in the sample at 33.3%, followed by OTP Bank, whose performance was affected by the Hungarian government's measures and the war between Russia and Ukraine.

Challenges ahead

Polish banks are expected to further increase legal risk provisions on Swiss franc mortgages ahead of a key ruling that the European Court of Justice will issue later this year. Poland's financial regulator recently asked PKO and other banks to suspend 2022 dividend payments until the ruling is announced.

The regulator also pointed to other risks faced by the Polish banking sector, including a potential deterioration of credit quality due to high inflation, slower economic growth and high debt-servicing costs for borrowers. Banks face the risk of the government extending its mortgage repayment deferral scheme beyond 2023 as well.

Meanwhile, OTP Bank's profitability will remain under pressure from the windfall tax in Hungary. Its domestic NII will be also affected by an increase of reserve rate requirements for local lenders in the second quarter and the decrease in the interest the central bank pays on those reserves.

However, the group anticipates that its Hungarian NII will improve compared with the fourth quarter, according to CFO Bencsik. OTP also hopes that the challenges in the domestic market will be mitigated by recent acquisitions and the performance of the group's foreign units.

For 2023, Czech banks will also be subject to a three-year windfall tax, although Komerční banka said the tax's impact on its 2023 performance will be limited. The lender also expects that its NII will be hit in the second half of 2023 by the "progressive normalization" of interest rates.

Unaffected by recent failures

Meanwhile, the turbulence around several US lenders, including Silicon Valley Bank, and the problems of Credit Suisse Group AG do not pose a direct threat to local banks, the countries' regulators said. The Czech and Hungarian central banks noted that local lenders have a strong capital base, while Poland's Financial Supervision Authority head Jacek Jastrzębski said there have been no signs of deposits withdrawal from local banks, nor any concerns reminiscent of the crisis at Credit Suisse or failures of a pair of US banks.

Czech banks had the highest common equity Tier 1 (CET1) capital ratios in the analyzed sample as of the end of 2022, with ČSOB's ratio reaching 19.9%, Market Intelligence data shows. The fourth-quarter liquidity coverage ratio, which measures a bank's ability to meet its short-term financial obligations, was highest at Poland-based mBank and Bank Pekao SA, amounting to 193.4% and 178.2%, respectively.

To compare, the average CET1 ratio at Europe's 30 largest banks was at 15%, while the average liquidity coverage ratio for Europe's 14 largest lenders stood at 161% at the end of 2022, according to a recent Market Intelligence analysis.

As of March 28, US$1 was equivalent to 4.31 Polish zlotys.