Polish bank stocks are unlikely to reach new peaks in 2022 as the risks posed by inflation and mortgage exposures overshadow the benefits of rising interest rates and an improved economic outlook.
Polish banks were the star performers on the Warsaw Stock Exchange in 2021 and achieved superior share price growth to other European lenders, with the WIG Banks index rising 87% during the year. An economic recovery from the COVID-19 pandemic and multiple rate increases mean 2022 is poised to be a strong year for Polish lenders' balance sheets.
Much of this positive momentum has already been accounted for in banks' share prices, and risk factors such as rising inflation and the long-running saga around Swiss franc mortgage exposures are coming into focus. Analysts' price targets for the country's biggest lenders show limited expectations for further growth this year.
"The 2022 financial results will be very good," said Sobiesław Kozłowski, who heads the analysis department at Polish broker Noble Securities, in an email. "But they are priced in."
Stellar performance
Alior Bank SA recorded share-price growth of more than 260% from January 2021 through Jan. 13, 2022, S&P Global Market Intelligence data shows. The lender was tipped by analysts at mBank Brokerage House in September 2021 to be one of the major beneficiaries of rate hikes due to its large consumer finance exposure.
Bank Polska Kasa Opieki SA, or Bank Pekao, which claimed the title of the best-performing European bank stock in 2021 among lenders with assets worth more than €50 billion, registered a stock-price increase of more than 120% in the same period.
Other top performers in the WIG Banks index included Banco Comercial Português SA unit Bank Millennium SA, Commerzbank AG-controlled mBank SA and Santander Bank Polska SA. Shares in PKO Bank Polski SA, which has the largest weighting in the index, rose more than 70% over the period.
With four central bank rates rises since October and further hikes expected, Polish banks' profits could grow 30% year over year in 2022, DM BOŚ Bank analyst Michał Sobolewski said in an email. "The sector's fundamentals will be strong," Sobolewski said. "We have growing interest margins, continued good quality of assets and stable demand for loans."
Double-digit net profit growth for the banking sector is also expected by Kamil Stolarski, head of the stock market analysis team at Santander Bank Polska. "In the baseline scenario, banks will have a good year due to the ongoing cycle of interest rate increases," Stolarski said.
Banks operating in Poland earned 12.18 billion zlotys from January through November 2021, a 54.7% year-over-year increase, according to central bank data. Almost all of the country's top banks reported improvement in their net profit during the first nine months of 2021, with higher interest rates, lower loan loss provisions and the economic recovery having a positive impact on their performance.
Limited scope for growth
Analysts' expectations for Polish banks' share price growth are much lower. Bank Millennium and mBank were trading significantly above the mean consensus price target as of Jan. 13, Market Intelligence data shows. Alior Bank, Bank Pekao and Santander Bank Polska were within 3% of their price targets, while PKO Bank Polski was seen as having the biggest upside, with the mean price target about 12% above current trading.
Large numbers of Polish borrowers took out Swiss franc mortgage loans in the 2000s but were left with higher repayments when the franc rose sharply in value in 2015. Many have sued, and the banks have set aside legal provisions amid a growing number of lawsuits. MBank said Jan. 21 that it expects to post a net loss of roughly 1.2 billion zlotys for 2021 after setting aside a further 2 billion zlotys for Swiss franc mortgage-related issues. The move will also impact parent Commerzbank's fourth-quarter result.
Lenders could face a deterioration in the quality of loan portfolios if the central bank raises its key rate from the current 2.25% to above 4%, according to a survey carried out by Polish news agency PAP of chief risk officers at several Polish banks. The problem would particularly affect mortgage loans, most of which have floating interest rates.
"Such a rate hike is not in our baseline scenario, but we agree that if the interest rate were to increase by more than 300 basis points, the quality of portfolios could suffer," Sobolewski said. If the monetary policy tightening cycle were to end in the first half of the year, the deterioration in the quality of loan portfolios would most likely be small, he said.
Among Poland's top banking stock performers, Alior Bank had the highest rate of problem loans, amounting to almost 12.5% of its total book as of Sept. 30, 2021. The problem loan rate at Poland's largest lender, PKO Bank Polski, was roughly 4.3% at the end of September.
Polish bank stocks and emerging market equities in general will be also challenged by the tightening of the monetary policy by the U.S. Federal Reserve in 2022 and subsequent years, according to Kozłowski. "Higher U.S. interest rates mean a stronger dollar, risk of capital outflow from the stock market and the pressure of global sentiment on emerging markets," he said.
Polish bank stocks could approach their 2021 price peak in the first half of 2022, but are unlikely to cross it, Kozłowski said. "For the second half of 2022, I see the predominance of risk factors over opportunities."
Alior, mBank, Bank Millennium, Bank Pekao and PKO Bank Polski did not respond to requests for comment.