Polish banks brace for Q3 earnings hit as customers get 'credit holidays'

Poland's banks are likely to be hit with costs of about 13 billion zlotys from a new "credit holiday" plan to help borrowers, an amount roughly equivalent to the sector's total profits for the first five months of 2022, according to S&P Global Market Intelligence analysis.

Under the government's mortgage repayment deferral scheme, designed to help borrowers cope with higher interest rates, holders of zloty-denominated housing loans can skip repayments in 2022 and 2023 and move them to the end of the repayment period, free of charge. Banks will have to shoulder the costs up front, booking them in the third quarter.

Nine large banks, which represent more than 90% of total banking sector assets between them, expect a collective impact of between 12.5 billion zlotys and 13.1 billion zlotys. This is roughly equal to the aggregate net profits for the sector between January and May 2022, according to Poland's Financial Supervision Authority.

The bank estimates assume an expected customer participation rate of between 50% and 100%, but this rate could change. If all eligible customers were to participate in the scheme, the total costs could reach approximately 19 billion zlotys, which is equivalent to 70% of estimated 2022 profits for the sector, according to S&P Global Ratings.

"We believe these costs will not only dilute the expected income boost from increased interest rates in 2022 but push the banking sector's profitability below the 2021 level, and some banks to an annual loss," Ratings said in a July 20 report.

The costs will more than offset the expected benefit of higher interest rates, which allow banks to generate more interest income, Ratings said.

Profit impact

Poland's largest lender, PKO Bank Polski SA, expects to book a 3 billion zloty impact from the scheme in the third quarter, based on an assumed client participation rate of 63%. This equates to 57% of the net profit analysts expect the bank to generate in 2022, according to Market Intelligence data. Based on a 100% uptake, the bank expects a 4.8 billion zloty hit.

Bank Polska Kasa Opieki SA, or Bank Pekao, and Banco Santander SA unit Santander Bank Polska SA will book costs of 2.4 billion zlotys and 1.3 billion zlotys in their respective third-quarter results, or roughly 83% and 50% of 2022 net profits expected by analysts. Citigroup Inc. unit Bank Handlowy w Warszawie SA expects around a 60 million zloty hit from the scheme, equivalent to 5.5% of its 2022 estimated profit.

Banco Comercial Português SA unit Bank Millennium SA estimates the costs at roughly 1.8 billion zlotys and expects to book a loss for the third quarter. Third-quarter losses associated with the credit holidays are also anticipated by ING Groep NV unit ING Bank Slaski SA, Bank Pekao and mBank SA. The latter's parent, Commerzbank AG, is considering legal action against the credit holiday scheme.

When contacted, the banks either did not respond to requests for comment or did not provide additional information regarding the impact of the credit holiday scheme.

Eroded capital

The deferral scheme, other costs related to the wider borrowers' support program and the increased provisions on Swiss franc mortgage loans will diminish banks' capital, forcing some to launch financial recovery plans, according to S&P Global Ratings.

Bank Millennium already announced the launch of such a plan, concerned that its capital ratios could fall below minimum requirements due to the government's measures. Other banks said their capital ratios remain at required levels, although ING Bank Śląski noted in a July 15 filing that credit holiday-related costs will adversely impact its total capital ratio by approximately 1.2 percentage points.

The government's measures will negatively impact the sector's competitive dynamics and governance, Ratings said. They will also make it more difficult for Polish lenders to attract investors for potential equity raising or issuances of bonds to meet their minimum requirements for own funds and liabilities, the rating agency said, although it does not expect a lasting impact on the sector's profitability.

The planned 2023 replacement of the Warsaw interbank offer rate as the reference rate in loan contracts, which is also part of the borrowers' support program, could add to financial instability in the sector, the rating agency noted.

As of Aug. 1, US$1 was equivalent to 4.59 Polish zlotys.