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Polish banks' profits, net interest margin to dive as rate cuts bite

Polish banks, already hit by the economic impact of the coronavirus, will see between a third and half of their profits wiped out and their net interest margins sharply decline over the next year following three interest rate cuts by Poland's central bank, analysts predict.

The National Bank of Poland's Monetary Policy Council slashed the country's reference rate to 0.10% May 28. This was down from an historic low of 0.5%, reached following reductions totaling 1 percentage point in March and April that aimed to soften loan repayments for households and companies.

Łukasz Jańczak, an analyst at Ipopema Securities in Warsaw, forecast banks will feel the impact of the rate cuts from the second quarter, with the magnitude rising toward the end of the year and into next. Lower interest income will eat into earnings, reducing profits by between 30% and 40% in 2021, he said.

Marcin Materna, head of research at brokerage Millennium, predicted profits will take a hit of between 30% and 50% in 2021.

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Poland's largest lender PKO Bank Polski SA's first-quarter net profit fell 41.6% to 503 million złotys, according to S&P Global Market Intelligence data. First-quarter return on average equity — a key measure of profitability — dropped to 4.75% from 8.74% over the same period in 2019. The bank warned on June 1 that interest rate cuts would reduce full-year 2020 profit by between 850 million złotys and 900 million złotys, from 4 billion złotys in 2019.

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Bank Pekao SA's first-quarter profit fell 22.7% to 187 million złotys from 242 million złotys a year earlier, while ROAE declined to 3.18% from 4.24%. The bank said May 29 its full-year 2020 net profit will fall by between 650 million złotys and 700 million złotys from 2.17 billion złotys in 2019.

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Net interest margin among most of Poland's largest banks was relatively stable in the first quarter as the interest rate cut had yet to take effect, S&P Global Market Intelligence data shows. Millennium BCP's Polish subsidiary Bank Millennium SA posted a rise in its first-quarter net interest margin, to 2.76% from 2.42% in the previous year, as did Commerzbank AG's Polish subsidiary mBank SA, whose net interest margin increased to 2.63% from 2.58% in the three months to March 31, 2020.

Polish banks' dependence on net interest income means net interest margins are likely to come under pressure, analysts expect.

Referring to the country's banks as "vanilla," Marta Czajkowska-Bałdyga, an analyst at Haitong Bank in Warsaw, said she estimates the 140 basis point rate cuts would translate into a net interest margin decline of 60 to 70 basis points in 2020.

Materna predicted margins could be "cut in half."

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Jańczak said he expected lenders that are more focused on consumer loans, such as Alior Bank SA, will be more affected by the rate cuts than their larger peers like PKO BP and Pekao, which may benefit more from government stimulus programs and cash injections from the central bank to maintain liquidity. Co-operative banks and troubled lenders such as Getin Noble Bank SA and Idea Bank SA, will also be hurt, he predicted.

Both banks have suffered losses and faced legal and regulatory issues. Getin Noble said the three rate reductions could knock between 140 million zlotys and 200 million zlotys off on its 2020 interest income, with the May rate cut alone lowering it by 50 million zlotys to 70 million zlotys. Idea Bank said it could cope with the impact of the cuts as it has room for a further reduction of its deposit interest rates.

Poland's financial regulator, the FSA, recently appointed a supervisor for local cooperative lender Warszawski Bank Spoldzielczy to improve its financial situation.


Pekao Deputy CEO Tomasz Kubiak said the pandemic could double or triple the sector's loan loss provisions, Polish news agency PAP recently reported.

At the end of the 2019 third quarter, Poland's gross nonperforming debt instruments as a percentage of total gross debt instruments was 5.19% compared to the EU average of 2.52%, according to S&P Global Market Intelligence data.

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First-quarter net impaired loans as a percentage of loans at amortized cost fell at PKO BP to 1.76% from 2.17%, and at Pekao to 1.91% from 2.05%. The numbers were stable at most of Poland's largest banks. Millennium Bank had the largest rise, up to 2.73% from 2.19%.

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Czajkowska-Bałdyga said loan holidays for corporate and retail clients are "basically postponing the impact of potential [nonperforming loan] increases for the sector." NPLs will likely rise sharply in 2021, she said.

As of June 17, US$1 was equivalent to 3.98 Polish złotys.