Poland's biggest banks all reported quarter-over-quarter net profit declines in their latest results as higher regulatory costs offset the benefits of rising rates.
Among a sample of Poland's five biggest banks, state-owned PKO Bank Polski SA suffered the biggest quarterly net profit decline for the period ending June 30 at 70.4%. It was followed by Commerzbank AG-owned mBank SA with a 55.5% drop and Bank Polska Kasa Opieki SA, or Bank Pekao, which saw its profit fall 48.8%.
PKO Bank, Bank Pekao and ING Groep NV unit ING Bank Slaski SA also reported lower net profits on a year-over-year basis.
The Polish banks' results contrast with those of their peers in neighboring markets. The Czech Republic's three largest banks, Ceská sporitelna a. s., Ceskoslovenská obchodní banka a. s. and Komercní banka a.s., all logged net profit improvements on quarterly and annual bases. Meanwhile, Hungary's OTP Bank Nyrt. returned to profit in the second quarter after booking hefty provisions in the first quarter due to its exposure to Ukraine.
Multiple headwinds
PKO Bank's second-quarter profit would have been more than 4x higher were it not for heavier regulatory burdens, the lender said in an earnings presentation.
The introduction of a borrowers' support plan, whereby consumers can take up credit holidays and lenders will make contributions to a new solvency protection scheme, is weighing on lenders. While the most significant impact is expected to show in third-quarter results, Fitch Ratings in August had placed the viability ratings of five Polish banks, including Bank Pekao, and mBank, on rating watch negative. The action was driven by the downgrade of Poland's operating environment score to "bbb" from "bbb+," as Fitch believed the government's decision could result in higher bank costs.
Commerzbank has said it will take legal action against the Polish government over the credit holiday plan. Commerzbank CEO Manfred Knof in August described the Polish banking market as "noninvestable," though the German bank will stand by mBank for now.
PKO estimates the total cost of regulatory effects for 2022 at approximately 5.39 billion Polish zlotys, more than the bank's total net profit for 2021 of 4.87 billion zlotys.
Several lenders also increased their provisions for legal risks relating to the long-running Swiss franc mortgage affair during the quarter.
Even with those challenges, all five Polish banks grew net interest income on a quarter-over-quarter and year-over-year basis as lenders continued to benefit from rising rates. Banco Santander SA's local unit Santander Bank Polska SA was the best performer as its net interest income rose 29.9% on a sequential basis and more than doubled compared to the year-ago period.
Net interest margins also improved across the sample of Polish banks. Santander Polska CFO Maciej Reluga in an earnings call cautioned that while the bank expects further interest income growth in the second half, it is unclear to what extent that will be reflected in margins given the anticipated rise in costs, principally from the credit holiday.
Net interest margins grew year over year at the Czech banks but dropped sequentially. OTP Bank's net interest margin ticked up 0.1 percentage point from both the first quarter of 2022 and the second quarter of 2021.
Lending concerns
Every bank in this analysis reported constant or increased gross customer loans quarter over quarter for the latest period, with the exception of PKO Bank. Expectations for the remainder of the year are less positive, with rising interest rates and a deteriorating economic outlook putting a crimp on new lending across several central and eastern European markets.
Mortgage lending in the Czech Republic fell to 11.9 billion Czech koruna in July, about one-third less than in June 2022 and down 73% from June 2021, according to the Czech Banking Association. Banks are also awaiting news on a potential windfall tax similar to those already introduced in Hungary and Spain.
Polish banks also expect loan standards to tighten and demand to fall in the third quarter, according to the central bank's latest lending survey.
OTP Bank achieved the largest quarter-over-quarter loan growth in the sample at 3.94%, and its outlook is more positive. Performing loan growth for the second half of the year could be materially higher than the bank's prior guidance of 10% excluding Russia and Ukraine, CFO László Bencsik said on an earnings call.
The strongest demand is likely to come from markets where interest rates remain relatively low, such as Croatia, Slovenia and Montenegro, Bencsik said. He added that slower growth is expected in Hungary, where rates have risen to 11.75%.
As of Sept. 8, US$1 was equivalent to 4.72 Polish zlotys and 24.50 Czech koruna.