SUMMARY

Transcription

1 SUMMARY EVALUATION OF THE FINANCIAL SITUATION OF POLISH BANKS Warsaw, June 2004

2 3 1. Methodological notes The present study outlines the economic and financial situation of the banking sector 1 in The analysis encompasses 58 commercial banks and 600 cooperative banks. The study has been compiled by reference to data for the end of 2003, as held in their database of bank reports available on January 22, The study presents amendments in the structure of the banking sector, the profile of banking operations and sources of funding. It also outlines the scale of risk in taken by the banks and the methods used by them to mitigate this risk. In addition, the financial performance of banking institutions is reviewed, as is their operating efficiency. The graphic design of the study has been changed and new information has been added to the attachments. 2.3%) and good export results. In 2003, both export receipts (PLN billion at current prices) and import payments (PLN265.1 billion) 4 were higher (by 24.9% and 17.9%, respectively) than in the previous year and the trade deficit amounted to PLN 56.2 billion and was lower than in 2002 (PLN 57.5 billion). % GDP growth Industrial output improved markedly while construction industry output was still falling, although the drop was smaller than in The market services sector exhibited stronger growth than in the previous year. Total consumption grew by 2.5% year-on-year, of 2. Macroeconomic environment 3 which individual consumption grew by 3.1% (against 2.8% and 3.3% in 2002, respectively). According to preliminary estimates, the Polish economy grew by 3.7% in 2003 (2.2% in Q1, 3.8% in Q2, 3.9% in Q3 and about 4.9% in Q4) the growth was markedly faster than during the previous year (1.4%). Gross fixed investment decreased by 0.9% (against a drop by 5.8% in 2002). Despite a visible improvement in the trend regarding gross fixed investment, capital expenditure in the entire economy slowed down further. The accelerated growth was caused both by an increase in domestic demand (year-on-year rise by 1 The term banking sector as used herein does not include the National Bank of Poland (NBP) and banks which do not have operating activity (including those declared bankrupt or in liquidation). 2 No account has been taken of any adjustments to those reports submitted by banks and entered in their database subsequent to that date. Industrial output 5 was up by 8.7% year-on-year, compared to an increase by 1.5% in the previous year. The increase (by 12.1%) of industrial production in the fourth quarter was much larger 3 Figures in this section are based on Central Statistical Office data and the on NBP data. 4 In dollar terms, exports totalled USD 53.6 billion and imports amounted to USD 68.0 billion. 5 This refers to companies employing a staff of over nine.

3 4 than in previous quarters. Labour efficiency (as measured by output per employee) rose by some 12%, while the average employment shrank (down by 2.9%). In 2003, the average monthly remuneration in the corporate sector (gross) stood at PLN 2,341.5, an increase of 2.8% year-on-year. The purchasing power of average wages also rose (by 2.0%), as did that of old age and disability pensions, for both employees (by 4.1%) and farmers (by 2.8%). The average employment in the corporate sector (4,724,400) was lower by 3.8% compared to the previous year. In 2003 registered unemployment declined, while during the previous 3 years its growth year-on-year had been registered. At the end of December 2003, the registered jobless total amounted to 3,175,700 and the unemployment rate stood at 18%, just as in 2002 (20% after adjustment, i.e. taking into account the results of the 2002 national census). At the end of 2003, all stock exchange indices (except for the National Investment Funds) were higher than a year earlier. The WIG the index of the first-tier market of the Warsaw Stock Exchange was up by 44.9% and the index of the secondtier market doubled. With regard to sectoral indices, the largest increase 50% was recorded by WIG- SPOŻYW (food industry), by 43.1% for WIG- INFO (IT industry) and by 36.5% for WIG- BUDOW (construction industry) while the WIG- BANKI index, tracking bank shares, grew the least by 8.8% % Consumer price growth (corresponding period previous year = 100) % Unemployment rate (year end) old data adjusted data In 2003 the average exchange rate for the US dollar stood at PLN 3.89 and was lower by 4.7% than in The average PLN/EUR exchange rate (PLN 4.40) was higher by 14.1%. PLN/USD and PLN/EUR exchange rates in % 4.20 The increase in consumer prices in 2003 was higher than in the previous year (1.7% compared to 0.8%) but the average annual inflation rate was lower than in 2002 (0.8% against 1.9%). According to preliminary data, producer price inflation amounted to 3.7% (against 2.2% in the year before) PLN/EUR PLN/USD In 2003 the exchange rate of the euro against the PLN grew systematically and at the end of the year it hit the highest level (PLN/EUR ) since its

4 5 introduction at the beginning of 1999, lover by over 17% than at the end of The PLN/EUR exchange rate exhibited stronger fluctuations in the first half of the year than in the second half, but it remained within the range of PLN/USD throughout the year, and strengthened slightly. At the end of the year, the dollar was trading at PLN , i.e. lover by 2.6% than a year earlier. The PLN also weakened against other currencies, especially the Swiss franc (by over 9%), the pound sterling (by 8%) and the yen (by over 8%) the increased fears of investors concerning the future situation of the public finance sector. As a consequence, despite the fact that basic NBP interest rates had remained unchanged since the end of June, the weighted average yield on outstanding Treasury bills rose to 6.1% (from 5.8% in December 2002 and 4.7% in June). The monthly average for 1M WIBOR (the Warsaw Interbank Offered Rate) was 5.5% in December 2003, which meant a drop (by 7.1%) when compared to December 2002 and an increase (by 5.3%) against that in June After six cuts in NBP interest rates in the first half of 2003, the Monetary Policy Council (MPC) did not change monetary policy parameters during the second half, which was the result of a visible economic recovery. At the end of the year, the NBP interest rates were as follows: the reference rate stood at 5.25% (6.75% in 2002), the rediscount rate at 5.75% (7.50%), the lombard rate at 6.75% (8.75%) and the deposit rate at 3.75% (4.75%). NBP interest rates vs. rates on financial instruments reference rate lombard rate 1M WIBOR treasury bill yields The decisions of the MPC resulted in a decline in money market rates in the first half of the year. Due to factors outside the scope of the monetary policy, however, a sharp downturn occurred on the Treasury securities market in the second half of the year (the yields and thus the interest rates of Treasury securities rose), which had a certain impact on the money market. A major cause was PLN deposit & lending rates overall PLN deposits consumer loans overall PLN loans corporate loans The banks reacted to a slip in central bank rates by lowering interest rates on loans and deposits. At the end of 2003 weighted average rates on overall PLN deposits (from both households and corporates) were lover by 1.3 percentage points than in December 2002 (at 2.9%) and PLN lending rates sank 2.0 points to 9.6% The decline in lending rates for persons (1.9 percentage points) was slightly larger than in the case of corporates (1.7 percentage points) 6, whereas in the previous year the banks mainly cut their rates on corporate loans. Thus the banks introduced reductions in their rates that were larger than the cut in the reference rate (by 1.5%). The gap between loan and deposit rates for households remains however relatively large. In 2003 the rates on 6 Rates on consumer loans dropped from 17.7% to 15.8% while corporate loan rates fell from 8.9% to 7.2%.

5 6 personal current accounts (which declined from 1.2% to 0.3%) and corporate current accounts (from 0.4% to 0.1%) hit their lowest levels and an increasing number of banks no longer pay interest on such savings. 3. Structure of the banking sector Wschodni SA, Bank CZĘSTOCHOWA SA and LG Petro Bank SA) were merged with other banks (with Bank Społem SA 9, NORDEA BANK POLSKA SA 10 and BRE Bank SA 11, respectively), the number of commercial banks decreased to 60 (from 62 at the end of 2002) and the number of banks conducting operating activity fell to 58 (from 59). The banking sector remains the largest segment of the Polish financial market despite the dynamic growth since the middle of the 1990s of non-bank financial institutions (insurance companies as well as investment and pension funds). At the end of 2003 the share of banks in the assets of the Polish financial system amounted to almost 78% (against 94.5% in 1996). Commercial banks 73.8% Structure of the Polish financial market (end 2003) open-ended pension funds 7.1% Brokerage houses 0.4% Credit unions (SKOK) 0.5% Cooperative banks 4.1% Investment funds 5.3% Insurance companies 8.8% At the end of 2003, 658 banks 7 conducted operating activity in Poland, of which 56 were joint stock companies, one was a state bank, one was a branch of a foreign bank and 600 were cooperative banks. Two banks started their operation in 2003 (Nykredit Bank Hipoteczny SA 8, the fourth mortgage bank in Poland, and HSBC Bank Polska SA, founded on the basis of a licence held by Polski Kredyt Bank SA). Due to the fact that three small banks (Bank 7 Two commercial banks did not conduct operating activity. 8 On September 19. In 2003, the authorised capital of commercial banks increased by PLN 890 million, while the members share funds of cooperative banks grew by PLN 37 million (to PLN 11,561 million and PLN 512 million respectively). The amendments in the ownership structure of the authorised capital of banks were primarily the result of: start of operating activity by Nykredit Bank Hipoteczny SA with an authorised capital of PLN 50 million and HSBC Bank Polska SA (Polski Kredyt Bank SA until January 12, 2004) with an authorised capital of PLN million, increase by PLN 29.4 million in the registered equity fund of BGK (by PLN 14.9 million due to appropriations from earnings and by PLN 14.5 million due to the bank taking over certain NBP branch offices), increase in the authorised capital of 11 banks 12 (totalling PLN 926 million), 9 On January 7. On March 13 the bank changed its name to Euro Bank SA. 10 On February On June The authorised capital of Bank Handlowy w Warszawie SA was raised by PLN 21.7 million as a result of the PZU SA insurance company taking up Series B shares in return for the Bank s convertible bonds, which led to a decrease (by 3.9 percentage points, to 89.3%) of the share of Citibank Overseas Investment Corporation in the Bank s capital; the authorised capital was also raised at Bank Pocztowy SA (by PLN 13 million), AIG Bank Polska SA (by PLN 16 million), Raiffeisen Bank Polska SA (by PLN 75 million), Górnośląski Bank Gospodarczy SA (by PLN 59 million), Kredyt Bank SA (by PLN 317 million; the share of KBC NV in the Bank s capital increased from 58.2% to 81.4%), GE Bank Mieszkaniowy SA (by PLN 60 million ), Bank Polskiej Spółdzielczości SA (by PLN 35 million), Mazowiecki Bank

6 7 decrease in the authorised capital of 2 banks 13 (totalling PLN 147 million), increase in the equity interest of Commerzbank AG in BRE Bank SA from 50% to 72.2% (primarily through the announcement of a tender offer for BRE Bank SA shares), mergers of Bank CZĘSTOCHOWA SA (with an authorised capital of PLN 42.2 million) 14 and LG Petro Bank SA 15 with other banks. PLN 4,480 million and accounted for 38.7% of the commercial banks capital. Two groups of shareholders dominate in the ownership structure of the banks listed on the stock exchange: foreign investors (78.4% of the authorised capital) and small investors (18.7%). This structure differs from the ownership structure of the commercial banks authorised capital. The stocks of these banks 16 were withdrawn from trading on the stock exchange, which meant that the number of banks listed on the Warsaw Stock Exchange was reduced to 13. The share of banks in the total capitalisation of the exchange dropped to 33% (from 48.4% in 2002). This trend was not halted by the appearance of Bank Austria Creditanstalt AG 17 on the stock exchange, because its shares are not included in the WIG-BANKI industry index (the WIG-BANKI rose only by 8.8% over the end of 2002, while the WIG increased by 44.9% and the WIG 20 by 33.9%). At the end of 2003, the authorised capital of the banks listed on the stock exchange amounted to 9.7% 60.6% Ownership structure of banks in Poland December 31, % 14.3% 1.9% 9.3% State Treasury other state institutions other domestic investors foreign investors small investors members of cooperative banks Ownership structure of banks quoted on the Exchange in Poland December 31, % 1.39% 18.71% 0.15% foreign investors other state institutions State Treasury small investors Regionalny (by PLN 3.6 million), Wschodni Bank Cukrownictwa SA (by PLN 181 million; the Bank s capital was increased by 12 banks which had intaken to restructure it), and at Euro Bank SA (by PLN 145 million, after incorporating Bank Wschodni SA). 13 The authorised capital of CC-Bank SA was lowered by the new owner (the Spanish company Santander Consumer Finance SA) from PLN 174 million to PLN 50 million, and that of INVEST-BANK SA by PLN 23 million (the bank covered a loss amounting to PLN 43 million and received a capital injection of PLN 20 million). 14 The authorised capital of BRE Bank SA was not raised. 15 As a result, the capital of NORDEA BANK POLSKA SA increased by PLN 83 million, while the remaining capital of LG Petro Bank SA (PLN 28 million) was used to cover its losses. 16 The shares of Bank CZĘSTOCHOWA SA were withdrawn on March 1. The listing of LG Petro Bank SA stocks was suspended on June 17 and on July 1, 2003 they were removed from trading on the stock exchange. 17 On October 14, the first listing of shares in a foreign company Bank Austria Creditanstalt AG, a direct shareholder of Bank Przemysłowo-Handlowy PBK SA took place on the Warsaw Stock Exchange. other domestic investors 78.39% At the end of 2003, foreign investors from 15 countries held stakes in the banking sector. The total equity interest held by foreign investors in banks operating in Poland edged up to PLN 574 million (to PLN 7,316 million) and their share in the authorised capital of the banking sector grew to 60.6% (an increase by 0.1 percentage points against the end of 2002), while their share in the capital of commercial banks rose to 63.3% (by 0.2 percentage points).

7 8 Investors from Belgium increased their equity involvement the most (by PLN 430 million), followed by those from the United Kingdom (by PLN 113 million ), Sweden (by PLN 83 million ), Austrian (by PLN 75 million) and Denmark (by PLN 50 million). As a result of the acquisition of Bank of America (Polska) SA by the Spanish company Santander Consumer Finance SA and the sale of a shareholding in Kredyt Bank SA by Bankers Trust Company to Belgium s KBC NV, there was a decline in the capital involvement of US investors, amounting to PLN 233 million. Germany Foreign capital investment by country of origin (PLN million) December 31, 2003 USA Belgium Holland Ireland France Sweden Portugal , ,799.3 against 67.4% at year end 2002). These banks had taken 62.6% (62.2%) of all the deposits from the non-financial sector and originated 69.7% (70.4%) of the loans less provisions (Cf. Attachment 6). In Poland, just as in other Central and Eastern European countries, the proportion of banks controlled by foreign investors participating in the total assets of commercial banks is much higher than in most EU countries. The Treasury controlled 6 banks, exercising direct control in 3 cases. These banks held 24.4% of assets, had extended 21.7% of all loans (less provisions) to the non-financial sector, had taken 29.5% of those customers deposits, and held 15.7% of total core and supplementary capital (at year end 2002, the respective figures were 25.1%, 21.5%, 30.5% and 15.3%). Austria Great Britain Other Germany Italy USA Holland Belgium Ireland Portugal Proportion of banks controlled by foreign investors in banking sector assets December 31, ,0 4,8 5,7 7,3 8,9 13,1 18,4 The number of private banks with a majority Polish equity dropped by one to 6. These banks held 2.5% of assets, had extended 1.5% of all loans (less provisions) to the non-financial sector, had taken 1.3% of those customers deposits, and held 2.2% of total core and supplementary capital (at year end 2002, the respective figures were 2.5%, 1.6%, 1.1% and 2.1%). France 2,2 Austria Others 1,8 1,6 Foreign investors controlled 46 commercial banks 18 (one more than at the end of 2002). Their capital and assets accounted for 76.7% of the total banking sector capital (as against 77.8% at year end 2002) and 67.8% of the sector s total assets (as 18 Until the end of 2003, foreign investors also exercised control over Spółdzielczy Bank Rozwoju SAMOPOMOC CHŁOPSKA via Bank Przemysłowo-Handlowy PBK SA. On January 1, 2004 pursuant to a Resolution of the Commission for Banking Supervision of December 3, 2003, Spółdzielczy Bank Rozwoju SAMOPOMOC CHŁOPSKA merged with Bank Przemysłowo-Handlowy PBK SA. Among the 600 cooperative banks, two (Spółdzielczy Bank Rozwoju SAMOPOMOC CHŁOPSKA and Krakowski Bank Spółdzielczy in Cracow) operated independently, while the remaining 598 cooperative banks were affiliated with 3 structures 19. The cooperative banks increased their share in the total capital of the banking sector by 0.6 points to 5.4%, in the sector s total assets by 19 The affiliating institutions were Mazowiecki Bank Regionalny SA, Gospodarczy Bank Wielkopolski SA and Bank Polskiej Spółdzielczości SA, which affiliated 78, 157 and 363 banks, respectively.

8 9 0.3 points to 5.3%, in the loan portfolio by 0.6 points to 7.1%, and in deposits from the nonfinancial sector by 0.4 points to 6.6%. 4. Distribution channels for banking services The majority of commercial banks (42) carried out their operations through branch offices (a total of 3,119), and also through sub-branches, customer service offices and other offices (a total of 5,986), whereas the remaining banks are subsidiary institutions of foreign banks, which do not have branches and operate solely via their head offices. Compared with the end of 2002, the number of domestic offices of commercial banks fell by 802. functions). Such offices are being increasingly replaced by small front office branches. It should be mentioned here that some countries with less dense branch networks (e.g. those in Scandinavia) exhibit a high proportion of Internet banking services. Some banks, however, are developing or intend to develop retail networks. Dominet Bank SA, for example, is constructing a network of agents (with additional franchising elements concerning organisation and commercial standards). In 2003 the number of offices based on this model increased by 49. BRE Bank SA intends to add 50 Multibank offices and 100 small offices of the Internet-based mbank to its network. The development of such offices will allow the banks to downsize their employment and limit costs. Banks per million inhabitants (year end 2002) Austria 101 Finland 71 Holland 33 Denmark 33 Germany 29 Sweden 24 Ireland 22 Portugal 20 Poland 17 France 17 Italy 14 Belgium 11 Spain 9 GB 7 Greece Foreign branches were operated by Kredyt Bank SA (1 branch in Vilnius with 5 sub-branches) and Bank Polska Kasa Opieki SA (in Paris), while representative offices abroad were operated by Kredyt Bank SA (in Kaliningrad), BGŻ SA (in Moscow) and Raiffeisen Bank Polska SA (in Vilnius). In addition, BRE Bank SA, Kredyt Bank SA and Bank Pekao SA held significant equity interests in four foreign banks. Spain Germany Austria Belgium Portugal Italy France Denmark Poland Holland Greece GB Ireland Finland Sweden Bank offices per million inhabitants (year end 2002) Compared with its counterparts in EU countries, the branch network of the Polish banking sector is less dense due to a difference in the type of traditional bank offices (large branches with back office The number of branches, sub-branches and representative offices abroad is being reduced. In August 2003, the Bank Pekao SA branch in New York was closed. The strategic investor of Kredyt Bank SA has also decided to cease its operations abroad. Cooperative banks opened another 105 offices in the period in review. Although 5 head offices were closed due to bank mergers, the number of branches and other offices increased (by 13 and 97, respectively).

9 10 Most large banks and an increasing number of smaller ones, including cooperative banks, now offer their customers Internet-based services. BRE Bank SA, PKO Bank Polski SA and Volkswagen Bank Polska SA run their own virtual banks (these trade as mbank, Inteligo and Volkswagen Bank Direct, respectively). Banks in Poland offer all types of payment cards, not only debit, credit and charge cards, but also prepaid ones. At the end of 2003, there were almost 15,130,000 cards issued by commercial banks in use, which was by 11% fewer than at year end 2002, despite the fact that their number grew systematically from Q2 onwards. The increase in the number of cards in the last nine months (by 500,000) did not, however, offset the drop in Q1 (by 2,307,000). Debit cards (88%) still prevail on the market. In 2003, the share of credit cards increased (up to 7.8% from 4.8% at the end of 2002), while that of charge cards dipped (from 6.1% to 4.2%). Almost all cards (98.6%) have payment and ATM withdrawal functions. million Number of payment cards and average transaction value number of cards average transaction value zloty million cards Number and value of payment card transactions X-XII 2002 I-III number of transactions The number of card transactions increased systematically quarter by quarter (from million in Q1 to million in Q4) million transactions with a total value of PLN 130 billion were conducted in The average transaction value was PLN 240 (PLN in Q1, PLN in Q4). The number of accounts operated by commercial banks decreased (from 41,235,000 at the end of 2002 to 39,153,000 at year end 2003). The drop was most pronounced at two large chain banks. In the coming years the number of accounts may soar due to the inflow of EU structural funds (around EUR 10 billion) in the years , because potential recipients will have to have their own bank accounts. 5. Employment in the banking sector The year 2003 has been the fourth in succession to witness a decline in staffing 20 within the Polish banking sector. This reduction in employment can largely be traced to consolidations, the introduction of modern integrated IT systems, the expansion of electronic banking, and the banks pursuit of costcutting measures IV-VI 2003 VII-IX X-XII 2003 value of transactions PLN billion 20 Numbers given as equivalent of full-time posts.

10 11 Personnel numbers in the banking sector were at their peak in 1999 (174,400 employees, of which 149,600 were in commercial banks). In the next few years, employment in commercial banks fell by several thousand each year (5,400 in the years 2000 and 2001 and 6,900 in 2002). At the end of 2003, the number of personnel in the sector had dropped by 7,440 year-on-year (the figure for commercial banks was 7,782). Some large banks, aiming to reduce their costs, are planning group layoffs in , ,000 90,000 60,000 30,000 30,000 24,000 18,000 12,000 6, Staffing and offices, commercial banks 149, , , ,878 10,428 11,470 10,721 9, , staffing Staffing and offices, cooperative banks number of offices 25,110 25,697 26,403 26,819 27,161 2,619 2,708 2,878 3,046 3, ,000 16,000 12,000 8,000 4, ,000 4,000 3,000 2,000 1,000 0 PLN billion Banking sector assets assets GDP share Commercial banks, which account for 94.7% of banking sector assets, had a decisive influence on the development of the sector. The growth in the assets of these banks (by 104.6%) following a drop in the previous year was, however, much slower than in the years After accounting for the depreciation of the PLN, the figure would be lower by almost 2 percentage points. PLN billion Commercial bank assets value growth rate, previous year=100 % % staffing number of offices On the other hand, personnel numbers at cooperative banks have grown during the last two years (by 416 in 2002 and by 342 in 2003). 6. Financial situation of commercial banks The growth in commercial operations (by 9.1%) was driven by claims on the non-financial sector (which rose by 7.2%), government and local government institutions as well as social security funds (by 34.6%) and non-bank financial institutions (by 8.1%) was a better year for the banking sector than The economic and financial standing of banks improved and the assets of the sector grew by 4.8%.

11 12 The non-financial sector s debt due to granted loans grew faster. The increase in loan portfolios was primarily caused by the rise in household PLN debt, which climbed by 17.6% on a comparable basis, i.e. allowing for amendments in the reporting of accounts. % billion zloty Loans to the non-financial sector loans, gross housing loans Growth rate, loans to the non-financial sector previous year = total housing the other hand, it was caused by the fact that the banks limited such loans to customers with secured risk and with incomes allowing them to repay the loan after a 15%-30% depreciation of the zloty. Also a contributing factor were the recommendations of banking supervision indicating the need to monitor the borrowers exposure to FX risk particularly closely, which were often communicated to bank management boards Act. As a result, most banks took the customers FX risk into account in their loan granting procedures, classification criteria and claim reviews, as well as in their guidelines concerning credit policies. Credit risk stemming from foreign currency loans remains significant because at the end of 2003 such loans accounted for 34.0% of the banks loan portfolios. In the 10 largest banks (which held around 80% of the portfolio) this share came close to 40% and in nine other (8.8% of the portfolio) it exceeded 70%. Fluctuations in the zloty exchange rates may expose borrowers to FX risk, which may be translated into the banks credit risk. The growth in foreign currency lending, which had been rapid in previous years, slowed down. Foreign currency loans sank by 5.4% on a comparable basis (i.e. allowing for the depreciation of the zloty and amendments in the reporting of accounts). Conversions of foreign currency debts to the zloty in the last quarter were a contributing factor here. The banks exposure to loans indexed to foreign currencies also diminished. This change in the trend that had lasted several years was, on the one hand, the result of a weaker demand for loans linked to foreign exchange rates, caused by an awareness of the growing burden of debt repayments due to a depreciation of the zloty, and a simultaneous decrease in differences between zloty and foreign currency loan interest rates. On The most important factor fuelling the demand for loans was the boom in the property market, which was caused by the announcement that the VAT rate on construction materials would be raised to 22% and the uncertainty concerning the possible increase in property prices after Poland s accession to the European Union, was the most important factor fuelling the demand for loans. The significant interest in housing loans considerably increased the commercial banks involvement in property financing (by 43.3%). The share of residential housing loans (which went up by 40.4%) in such loans was 90.8%. Indebtedness to the banking sector from this title regarding amounted to 4.8% of GDP (3.6% in

12 ). The proportion of residential housing loans to households to their annual disposable income was 5.1% (3.6%). banks granting such loans on a general basis dominate this market (70.5%), thus the application of strict property valuation rules by such banks is of great importance. Due to the imperfection of such Loans for other property also grew strongly (by 179.6%) but they were still an insignificant proportion of the commercial banks lending (in valuations and the necessity of limiting the impact of price fluctuations on collateral values, the loanto-value ratio should also be applied at such banks. December 2003 their share of loans amounted to 1.9% and a year earlier it was 1.1%). Due to their relatively high quality in 2003 (7.5% irregular), property loans improved the average level of irregular claims in the commercial banks loan portfolio. Property loans constituted 20.4% of loan claims on the non-financial sector (15.2% in 2002). The banks considerable involvement in financing the property market makes them vulnerable to risk The growth in outstanding loans to corporates (102.6%) was much lower than in the case of households (113.8%). The increase in corporate debt (by PLN 3.1 billion) resulted from a rise in residential housing loans (by PLN 1.7 billion, i.e. 22.4%) and other loans (by PLN 1.4 billion, i.e. 78.9%). Operating and investment loans grew at a much slower pace (PLN 0.4 billion and 0.9 billion, 1.0% and 2.2%, respectively). stemming from price fluctuations on this market, which often occur due to e.g. amendments in economic growth rate, interest or tax rates. Such fluctuations, linked to the inflexibility of supply relative to demand, directly translate into collateral Gross claims on central and local government institutions rose significantly (by 33.8%), primarily due to an increase (by 48.8%) in the debt of central government institutions. value and the amount of interest lost on nonperforming claims. Claims on central and local government Property market slumps, resulting in suddenly plummeting prices, have sparked economy-wide crises in many countries. Therefore banking supervision attaches increasing importance to reliable property valuation (when the property serves as collateral for a bank loan) and the assessment of assumptions of planned ventures PLN billion , total local government related to commercial property loans. It also analyses the rules of loan refinancing and the proportion of the amount of loan granted to the value of property. Mortgage banks, which are subject to special statutory regulations, have only a small share (5.4%) in the property loan market. Large universal The bank debt of local government bodies has been growing rapidly for several years, stemming from their need to supplement their revenues and state subsidies. This debt consists almost entirely (97.7%) of loans with a repayment term of over a year (in 66% of cases it is longer than 5 years). This results from an increased demand for external

13 14 financing, which is confirmed by a rise in debt due to bonds issued (by 20.5%). Despite an increase in the growth rate of loan claims, the securities portfolio edged up (by 7.5%) to PLN 112 billion, which was close to the record high at the end of September This rise was caused by large purchases of Treasury bonds (by PLN 15 billion) encouraged by an improvement in their yields such purchases led to a temporary deterioration in the earnings of the banks that held them (to the extent to which they were classified as part of the trading portfolio), but Treasury bonds remained the safest (and profitable) way of investing funds that were not used to finance commercial enterprises. significantly reduced at the beginning of the year and recover in the following quarters. In 2003, after a decrease by 6.7% in Q1, they grew in the successive quarters (by 11.2%, 6.6% and 12.6%, respectively) and already in June they reached a higher level than at year end This may reflect an improvement in the liquidity of enterprises and their reluctance to invest. A downward trend in household deposits persisted (a drop of PLN 4.7 billion, i.e. by 2.3%), which was caused by falling deposits from persons (95% of household deposits). This was a result of several factors: a decrease in the savings rate as well as a growing interest in investment funds (by 48.3%) and insurance policies (by 21.3%). At the same time the portfolio of NBP bonds decreased due to the early retirement of all nonmarket bonds (with a face value of PLN 5.2 billion) issued in 1999 in connection with the lowering of reserve requirements; also money market bill and Treasury bill portfolios diminished (by PLN 1.3 billion and PLN 0.3 billion, respectively). PLN billion Deposits from non - financial customers Intensified investment in securities was primarily linked to the release of funds (around PLN 3.2 billion) from banks accounts held with the NBP, which was caused by the drop in required reserve rates (from 4.5% to 3.5%). This was accompanied by a decrease in bank placements (down by PLN1.4 billion, i.e. 2.4%). The growth in assets was financed by deposits from the non-financial sector, which for the first time since 2001 expanded (by PLN 8.8 billion, i.e. 3.4%). This increase was entirely due to corporate deposits, which grew by PLN 13.2 billion (24.5%). Such deposits, however, are unstable and subject to seasonal variations. They are usually total deposits from persons In the coming years, the share of deposits in household savings will probably continue to shrink as alternative financial market instruments develop. In most EU countries the proportion of deposits in financing the banks operations (from 25% to 50%) is much lower than in Poland. The increase in deposits was largely the result of an increase in balances on current accounts, both corporate and household ones, which went up by PLN 12.9 billion (16.5%). Consequently, the share of demand deposits in total deposits grew by 3.8 percentage points, reaching 27.2% for household deposits and 52.4% for corporate ones.

14 15 PLN billion % Deposits from the non - financial customers, commercial banks dem and time, assigned and notice proportion of demand deposits to total deposits Maturity structure of time deposits from the non - financial customers, commercial banks up to 1 month (inclusive) over 3 up to 6 months over 1 up to 2 years over 1 up to 3 months over 6 months up to 1 year over 2 years Time deposits slipped by PLN 4.1 billion (i.e. 2.3%), which means a slowdown in their rate of decrease by over 10 percentage points compared to This was due to corporates, which deposited PLN 7.5 billion more (by 30.6%) in time deposits than during the previous year. The change in the amount of time deposits from households (which equalled 92.6% of the previous year s value) was similar to that recorded in 2002 (93.0%). The amounts of deposits with a maturity of up to 1 month and over 2 years grew (by 3.5% and 2.8%, respectively) and the rest decreased the largest drop (by 16.1%) was recorded in the 3 to 6 months group. The outflow of deposits may constitute an obstacle to the development of banks operations in the long term and the current overliquidity of the banking sector may soon be transformed into inliquidity typical for EU countries. This may translate to higher financing costs due to the necessity of using 3.5 % more expensive funds from the capital or interbank markets. Some banks (21) also raised funds through their own issues of debt securities. The banks indebtedness from such issues at the end of 2003 (PLN 5.2 billion) was almost PLN 1.5 billion (38.3%) higher than the year before, despite the fact that two banks, which were the largest issuers, redeemed their bonds in the last quarter. The increase in this debt was mainly caused by a rise in issues of anti-tax bonds placed on the market (by PLN 537 million, i.e. 28.6%) and a growth in mortgage bonds issues by one mortgage bank. Almost 60% (PLN 3 billion) of such debt securities were purchased by the non-financial sector and the remaining 40% were taken up by banks (22% of them operating abroad). Bonds the fundamental instrument used by the banks accounted for 56.1% of debt (63.4% in 2002) and mortgage bonds for 15.4% (6.5%). In total, the banks raised PLN 273 billion (3.6% up on the year before) from the non-financial sector (through deposits and issues). The ratio of nonfinancial sector credits to deposits plus the value of debt securities issued by the banks edged up to 75.0% (from 72.9% in 2002), which had a favourable influence on the banks net interest income from operations regarding this sector. The increased proportion of funds raised on the capital market to total liabilities means a larger differentiation in financing sources, bringing the banks operating in Poland closer to EU banks, which exhibit a much more diverse structure of liabilities. A significant increase (by PLN 12 billion, i.e. almost 57%) in funds from foreign financial institutions (by 50.0% from banks and by 67.0%

15 16 from other financial institutions) constituted another important source of financing for commercial bank operations. Such funds constituted 7.2% of total banking sector assets (4.8% in 2002). At the same time, the amount of funds raised on the Polish interbank market continued to fall (down by PLN 2.8 billion, i.e. 9%); their share in total financing also dipped (down to 5.9% of assets from 6.8% in 2002). Capital (funds) and subordinated debt shown in the balance sheets of the commercial banks grew by PLN 1.6 billion (3.4%), mainly due to the following: PLN 2.4 billion from 2002 net earnings was appropriated to capital. Distributable net earnings for 2002 were 6.5% lower than in the previous year, which meant that, although appropriations to capital were higher by 0.3 points as a percentage of net profit (coming to 64.8%), the absolute sum of retained earnings was down by PLN 0.2 billion on the year before; increases in the authorised capital of 11 banks (totalling PLN 926 million), mainly one large universal bank (PLN 317 million), which received a capital injection from its foreign investor who took up its new share issue; the start of operations by Nykredit Bank Hipoteczny SA and HSBC Bank Polska SA (until January 12, 2004 Polski Kredyt Bank SA) with authorised capitals of PLN 50 million and PLN 113 million, respectively. Off balance sheet commitments of the sector grew by 36.0% (to PLN 1,644 billion ) due to the banks growing involvement in interest rate futures (up 84.0% to PLN billion), mostly FRA (by 103.6% to PLN billion) and IRS (by 77.2% to PLN 360 billion ). These instruments allowed banks to hedge the risk resulting from their holding of Treasury bills and bonds in highly volatile interest rates. The weaker interest of foreign entities in Polish Treasury securities after a reduction in the disparity between domestic and foreign interest rates was the main reason for the fall in the volume of FX swaps (down 14.2%, to PLN billion), which used to accelerate the development of the Polish FX market in previous years. In connection with the drop in the profitability of such operations, this reduced the banks earnings. PLN billion Derivative transactions total derivatives interest rate transactions FX transactions options The quality of loan claims on the non-financial sector improved. The slowdown in irregular claims growth and the accelerated rise in gross claims caused the irregular loan ratio at the end of the year (21.8%) to fall below last year s level (by 0.2 percentage points) for the first time since These data are, however, subject to change as a result of audits. This drop would have been much more noticeable (by another 0.9 percentage points) had it not been for the increase (by almost PLN 2 billion) in irregular assets at one of the top 10 banks. The quality improvement should be attributed to zloty claims (the share of zloty claims in total zloty claims decreased by 0.2 percentage points and leveled off 23.5%). As opposed to the zloty portfolio, the quality of foreign currency loans decreased (the share of irregular loans increased by

16 percentage point to 18.7%) as a result of a simultaneous halt in the growth of the portfolio and an accrual of irregular claims, which was a delayed result of high debt growth rates in previous years. According to most banks, the decrease did not directly result from the zloty depreciation. Despite that, the quality of foreign currency claims was still higher than that of the zloty claims. % Quality of commercial banks claims on households individual companies individual farmers private persons The smaller share of irregular claims was also related to the change in the regulations concerning bank accounting. Due to such amendments, it was possible to move claims classified as loss, fully covered with specific provisions, to off-balance sheet items. A few banks took the opportunity to do so, including two large banks with dominant foreign capital. The total claims in by those banks amounted to PLN 1.2 billion. A significant drop (by 1.2 percentage points) in the share of irregular claims in household debts (to 14.3%) was mainly caused by the growth of the portfolio (by 13.6%), which was faster than the growth of irregular claims (by 4.8%). The relatively high quality of these claims is due to housing loans that dominate in the portfolio. Such loans have a low and stable share of irregular claims (5.5%). On the other hand, the quality of corporate debt decreased. % Quality of commercial banks claims on non-financial entities enterprises households (right axis) % A high growth rate was characteristic for doubtful claims (109.1%) and claims classified as loss (108.7%), although some of these claims were transferred to off-balance sheet items. On the other hand, substandard claims decreased by 3.3%. % Share of irregular claims in claims on the non-financial sector in commercial banks substandard doubtful loss Irregular claims included also fully serviced claims, classified as irregular only due to the debtors bad financial situation. The share of overdue claims in the portfolio amounted to 13.4%, which is a decrease by 1.2 percentage points as compared with September. PLN claims (16.5% of overdue claims) were serviced far worse than foreign currency claims (7.3%). The decrease in overdue claims, much greater than on irregular claims, means that more and more claims are repaid in a timely manner.

17 18 % Share of irregular claims in claims on the non-financial sector with secured risk with limited risk requiring reserves PLN billion interest earnings Structure of banking activity earnings of commercial banks commission earnings earnings from other ti Claims requiring provisions (without the appropriate quality of security) amounted to 10.3% of the loan portfolio (1.1 percentage points less than the year before). The transfer of claims classified as loss fully covered by specific provisions to off-balance sheet items decreased the level of provisions created earlier for such claims by almost PLN 0.7 billion. In spite of that, the specific provisions for claims classified as loss increased (by PLN 1.8 billion), which translated into an increase in total provisions for irregular claims (by PLN 1.3 billion up to PLN 19.4 billion). Provisions for doubtful and substandard claims decreased (by PLN 0.5 billion). The provisions created amounted to 21.3%, 53.4% and 100.7% of substandard, doubtful and loss reduced by legal securities, respectively. Hence, they exceeded the minimum legally required level in all categories. The improved loan portfolio quality was the major source of the banks increased earnings. Due to smaller (by 4%) deductions for specific provisions, the provisions balance was by PLN 3.9 billion (by almost 40%) lower than the year before. The decrease would have been significantly greater (by almost 21 percentage points) had it not been for the provisions created in one large bank. PLN billion Breakdown of banking earnings of commercial banks operating costs balance of provisions depreciation gross earnings The gross earnings increased by 27.5% (by 19.3% following adjustments due to the share in the earnings of subsidiaries included in the balance of provisions and adjustments last year) to PLN 4.2 billion, while net earnings grew by 12.5% (up to PLN 2.2 billion). The fact that the net earnings growth was lower than the gross earnings growth was caused by a higher income tax burden. This was partly due to the fact that assets and deferred income tax provisions (related to the reduced CIT rate from 27% to 19% in 2004) were negatively revalued. The actual tax burden rate and the rate of other burdens was 41%, against 40.5% in The halted growth rate of deductions for specific provisions balanced the drop in banking earnings. It decreased by PLN 2.1 billion (by 7.9%) as compared with the previous year, due to reduced earnings from:

18 19 Treasury bond operations (by PLN 1.3 billion) as a result of their lower prices in the second half of the year, FX operations (by PLN 881 million, i.e. by 22%), interest (by PLN 885 million, i.e. by 6.1%), due to reduced interest earnings from debt securities issued by the NBP and the State Treasury, following the reductions in interest rates. Losses incurred in the second half of the year by the banks whose portfolios included Treasury bonds amounted to PLN 0.3 billion (having taken into account earnings from securing operations). Extremely severe losses on interest were experienced by banks with a relatively high share of debt securities in their assets. Those banks were not able to counter the effects of lower interest rates on such securities by means of an appropriate rate policy in operations with clients. % Interest margin in commercial banks interest earnings as % of average assets The interest margin decreased (by 0.3 percentage points), since the reduction of the average ROA (by 2.3 percentage points) was greater than the decrease in the average cost of liabilities with interest (by 2.2 percentage points). The average interest rate on liabilities decreased due mainly to reductions in interest rates and amendments in the structure of liabilities: an increased (by 2.0 percentage points) share of current deposits of the non-financial sector (the interest rate of avista accounts for corporates was 0.1%, and for individual clients 0.3% at the end of 2003), a decreased share (by 0.9 percentage points) of relatively expensive funds obtained on the Polish interbank market (WIBOR rates exceeded 5%). On the other hand the margin was adversely affected by a greater (by 0.3 percentage points) share of issued own securities, whose cost of obtaining (5.5% on average) was twice as high as the cost of deposits from the non-financial sector (2.7%). The yield on interest assets was adversely affected mainly by reductions in interest rates (for zloty loans by 2 percentage points on average), and by the increased share of relatively cheap housing loans in assets (by 1.9 percentage points). The balance of interest from operations with non-financial entities increased (by PLN 2 billion, i.e. by 36.0%) mainly due to the increased (by 2.1 percentage points to 75%) ratio of loans to liabilities towards the non-financial sector (due to deposits and issuance of bonds). The decreasing share of deposits from the nonfinancial sector in financing the banks operations and a low level of interest rate on avista funds (which are dominant) means that the possibility of maintaining the interest margin in the case of any further decrease in interest rates is limited. The main cause of decreased FX earnings was the decreased turnover on the FX swap market. Changed conditions on the money and foreign currency markets adversely affected the financial situation of 9 out of top 10 banks. Earnings decreased due to the same reason also in the group of subsidiaries of foreign banks, whose activities focused on those operations.

19 20 The negative influence of the market conditions on the banks earnings was partially offset by a fast growth in commission earnings (by 15.1% as compared to 6.9% in the previous year). Their share in the earnings from banking activity increased by 5.6 percentage points (to 28.1%), which is positive considering the stability of banks earnings. was indicated by an increase (by 5.1 percentage points) of the Cost/Income (C/I) ratio. The ratio was at its highest ever (68.0%). In comparison the ratio in the banks of E u member states amounted to 66.0% in Cost/Income Ratio PLN billion Operating costs of commercial banks % ratio of operating costs and depreciation to banking earnings personnel costs installment and payments to BFG maintenance costs taxes and fees The banks earnings also improved thanks to a reduction in operating costs (by PLN 275 million, i.e. by 1.9%), which was mainly due to lower costs of maintenance and rental of facilities (by PLN million) and other material costs (by PLN million). This was related to the restructuring of the network (over 800 units were closed down) and the completion of the IT system implementation in some banks (in previous years IT projects significantly increased those banks operating costs). These processes were accompanied by employment reductions (by 7.5 thousand persons on average, i.e. by 5.6%). The personnel costs remained on the same level as in the previous year, mainly due to lower (by 7.4% in total) margins on remuneration and additional benefits. The remuneration costs were higher (by 1.4%), which was related to the increase (by 7.4%) of the average monthly remuneration (to PLN 4,195). The ratio level indicates that the banking earnings are inadequate to their potential, and that the banks have limited possibilities of intaking short-term cost-related adjustment activities. Many cost items are relatively constant, and some banks incur additional costs due to technological modernisation and new product launches. The banks low cost effectiveness stems mainly from a small scope of activities, especially of those that generate revenue from fees and commissions. The net earnings of commercial banks would have been higher by over 12% (by almost 17% in the case of banks with capital employed in subsidiaries) had they not included an adjustment of the sum of shares in the earnings of subsidiaries valued using the equity method (PLN 274 million). The valuation of a group on consolidated basis is possible on the basis of the bank s individual balance statement thanks to the principle of adjustment of the individual bank s earnings for its share in the earnings of its subsidiaries. A halt of growth in the operating costs did not prevent deterioration in cost effectiveness, which

20 21 15 Efficiency of commercial banks order to balance the FX risk. As far as the remaining 17 are concerned, the ratio ranged between 2% and 22% in 16 banks and was very % % high (73%) in one small bank (with dominant private Polish capital). The banking sector was most exposed to FX amendments of the zloty to the dollar and the euro. ROE (left axis) ROA Following the increase in earnings, ROE increased by 0.7 percentage points and ROA remained on the same level. However, the ratios did not achieve the level from before ROA in Poland is lower than in the majority of the Central and Eastern European countries but higher than in Portugal, Germany or France. PLN million Total and global positions of commercial banks total position global position 224 The banks FX exposure decreased, which is proven by the decrease in the long total and net global positions. The total of 10-day VaRs of commercial banks was much lower at the end of 2003 than the year before. This was mainly due to a significant decrease in the long net position in EUR (from PLN 422 million at the end of 2002 to PLN 3.7 million). PLN million Total short and long positions of commercial banks total long positions total short positions 54 commercial banks with open foreign currency positions were exposed to the FX risk. Large banks took up 68% of the total of long positions (85% in 2002). The total position of 37 commercial banks was lower than 2% of equity. As a result, those banks were not bound by capital requirements in The capital required to cover that risk significantly decreased (by PLN 133 million, i.e. by 88.1%), which was mainly due to limited exposures and a lower (from 12% to 8%) ratio that specifies the minimum coverage of the whole foreign currency position with capital. The increase in the banks capitals, mainly in the banks being restructured, as well as their limited lending activity, investing unengaged funds in safe securities, as well as the fact that two banks from that group were acquired by other banks, led to the decrease of capital requirements regarding the exceeded limit of receivables concentration (by PLN 0.7 billion, i.e. by 46.1%). The receivables concentration limits (20% and 25%) specified in Art. 71 Section 1 of the Banking Law were exceeded in 11 banks. At the end of 2003, the allowed thresholds of capital concentration were exceeded by 2 commercial banks ingoing rehabilitation programs: a large bank listed on the stock exchange and its dependent PTE (Powszechne Towarzystwo