Make Poland Great Again

The war in Ukraine. Mainly because it catalysed a lot of processes that we may have been dealing with to some extent already, as they were happening somewhere 'in the background'. What I have in mind are things such as high inflation, spurred by rising prices of energy sources and fuels, but also by the increased consumption resulting from the inflow of refugees, as well as by the wave of fear for the future among both businesses and individual customers; all those have precipitated inflationary processes. With inflation came interest rate rises. This triggered further waves of small avalanches in the economy. For the banking sector, the important aspects included creation of the Commercial Bank Protection System (SOBK) or introduction of a credit moratorium.

The latter was already a response to high interest rates.

They did not have quite as much impact on the overall situation.

They did have an impact on the banking sector’s situation.

At a certain point, they ceased to be an effective tool. As early as March/April, we knew that retail lending in Poland was coming to a serious halt. As far as businesses were concerned, it was evident that the stall would come as well, but with a slippage of six to seven months - after completion of restocking processes and when higher costs could no longer be easily shifted onto the customers.

We started with the war, but 2022 was also another year of large provisions for the legal risk of foreign currency mortgages, as well as attempts to undermine mortgages in PLN.

Let's hope this was the last year of damaging the components of the social contract we have in Poland. The lack of understanding of what the problems with Swiss francs stem from is deepening. We've seen indications of a lack of understanding how the mortgage market in Poland is structured. A lot of people started to wonder how this market works, even though it has been around for 20 years. In the second half of the year, we had a pointless discussion about undermining WIBOR rates. To me, that is dismantling the fabric of a healthy, functioning economy. It now turns out that any contract can be undermined.

We'll get back to that. How significant was the economic downturn for the banks?

We are dealing with recession elements and certain adjustments, efforts to mitigate this. It was a challenge for the government, but also for businesses, including banks. In this respect, I believe we are doing quite well, as there is no deep recession, no sharp slowdown in Poland. Apart from housing, which is unfortunately a consequence of the rate hikes which started in 2021.

Even if there is a recession in Poland, it does not manifest in the social dimension, i.e. as an increase in unemployment. This is probably crucial for the banks as well?

Let's be precise. It is not that unemployment is not growing. Rather, the labour shortage is not shrinking. What we have today is actually a negative unemployment with a huge number of job vacancies that remain open, and the number is not decreasing. So first, there is the issue of being 300,000 workers short. That is nowhere near unemployment. I ask that no one accuses me of stating untruths, 'because plant A in town B had shut down and laid off X number of people'. This has nothing to do with the problem of labour shortage or unemployment on an economy-wide scale.

Staying with 2022; can it be considered the sector's greatest achievement that a major risk factor, namely Getin Noble Bank's threat of bankruptcy, has disappeared? After all, it was among top ten institutions in the sector.

10 billion.

The success came at a cost, of course.

Again: 10 billion. This is not a success. It is removal of a risk factor, but at a very high cost. That it went out of the banks' pockets because, in addition to the creation of the Commercial Banks Protection System (SOBK), it also included contributions to the Bank Guarantee Fund (BFG) from previous years, which should not make us happy. It indicates a certain inefficiency of how we all function ‒ I am talking about the sector, the regulators ‒ if we have to put up PLN 10 billion for the failure of the ninth largest bank in a relatively small market. And the problem is still not fully resolved.

Why?

Getin's Swiss franc portfolio is now in the custody of the BFG, which is funded by contributions from the banks. The portfolio is not necessarily going to be profitable, even in a situation where after the resolution the Swiss franc borrowers do not have the right to appeal to the courts.

Except that the 10 billion you are talking about is the upper limit of the cost to the sector. Every single PLN flowing into the residual bank represents a reduction of this cost for the sector.

It might. Provided that nothing else happens with the portfolio. For example, a change that would result in clients being able to seek continuation of litigation cases, against the state now.

Are those the concerns of bank presidents with regard to Getin?

These are not concerns. It is more like a sigh of relief from those in charge of institutions that have paid a great deal to keep the problem from growing. Everyone should realise that without the involvement of the sector, we would be facing the worst-case scenario, i.e. the bankruptcy of that bank. This would have been much more expensive for everyone: for the banks, of course, through increased contributions to the BFG; for the state; and most importantly, it would entail major financial losses for many clients. For example, any customer with more than EUR 100,000 of savings in that institution would suffer a loss.

Can the resolution of Getin ‒ this was the second such procedure involving a bank of the same owner ‒ be viewed as an 'attempted nationalisation', a 'takeover for a penny'? Opinions of this kind have been voiced. Do you find them justified?

Let me put it ironically: the queue of those willing to take over Getin and Idea was so long that nobody could see it. It is difficult to comment on this at all. Maybe let's think like lawyers: why would someone do this? To achieve some colossal business success? Great growth? Please. It's laughable. If someone wants to portray these two banks as excellent assets, wouldn't there be someone on the free market willing to buy them for a good price? Where is this queue of buyers? And to be clear: I was not standing in it, and I did not want to stand in it.

What do you think will be the biggest challenge in 2023?

Still the war in Ukraine. It remains, as a certain exemplification of geopolitical tensions, the most relevant. Today it is assumed that the state of the conflict is fairly stable and that it is slowly moving towards some kind of peaceful solution ‒ it sounds cruel, but that is the world's perception. In addition, after all, this is only one of the possible scenarios for the situation to develop.

For the banking sector, it will be important to see how the economy turns: when we decide that investments are already viable, that it is worthwhile to enter the housing market, that it is better not to stuff the warehouses ‒ in a word, more faith in the future. 2023 will determine how many players are going to be affected by the slowdown, and how severely. Case in point: prolonged inactivity in the housing market will obviously wipe out a lot of weak companies from that market. If the downturn ends fairly quickly, a large-scale problem will be avoided. But if it were to last an entire year, it will have consequences over the next few years, because the process of restoring manufacturing capacity will take quite a while. But let me repeat: apart from residential construction, we do not see any major problems. This is confirmed both in the attitude of Polish entrepreneurs and in the attitude of companies, which still perceive Poland as a very attractive country to invest in. The opportunity that has somehow been created from the change in geopolitical alignment, in form of nearshoring in both industry and services, indicates that things are going to be all right.

Are you seeing this phenomenon at your bank ‒ through customer enquiries, funding, advisory services?

Yes, it is visible. It may not be the scale we wanted, but there is such a wave among medium-sized companies. Optimism should increase if we just launch the National Recovery Plan, if we demonstrate that we are indeed on energy transition path. Poland remains a very attractive country, with high growth, a strong manufacturing sector and, of course, its human resources, the quality of which is an incredible asset.

All this even with a war going on nearby?

Poland is a frontline country, but everyone is aware that the likelihood of the conflict spreading to other countries should be considered suicidally low.

Would the end of the war in Ukraine accelerate the processes of attracting investments to Poland?

Most certainly. But some form of calming of the situation would change the focus somewhat. Rebuilding the Ukrainian market is such a colossal undertaking ‒ it will be a bona fide gold rush. I don't mean it as any form of preying on the Ukrainian state, just the fact that large amounts of aid funds will be directed to implement of huge projects there, while at the same time Ukraine itself, from the implementation perspective, will not be able to cope with such a huge task on its own. One could say, in a highbrow manner, that the reconstruction of Ukraine will be a task for all of us.

What about the mortgage loans? Would you say that 2022 saw the end of the discussion about foreign currency lending?

In a bout of great optimism, I believe that we will bounce off this muddy bottom, come back to the surface, take a breath and continue to build a good, competitive economy. A kind of 'Make Poland Great Again'.

There seem to be no grounds for assuming that this is already the bottom. For example, we are waiting for the ruling of the EU Court of Justice regarding the banks' right to charge for the use of capital.

A good 70 years ago, Feliks Koneczny already spoke of the 'paragraphisation' of social life: we no longer understand that there are certain customs to be followed. Everything must be provided for in an Act of law and its 729 subsections. If something is not listed there, then one can attempt to undermine anything. After all, lawyers want to make a living, too.

At the end of the path, there are financial consequences. Not only for the banks. Also for the economy, for the banks' clientele. How do you see the consequences of the potential CJEU ruling that would be unfavourable to borrowers?

The banks would survive, but the belief that the state is a certain configuration of people who keep their promises and honour their contracts would not. If every contract can be undermined, this is really a civilisational turning point. We should vehemently oppose this.

The Financial Supervision Authority (FSA) estimates that if the CJEU were to rule that banks are not entitled to remuneration for the use of capital, the banks' losses would amount to PLN 100 billion.

I assume that the chairman of the FSA was talking about the total cost of the Swiss franc problem for banks. The President of the NBP estimated the consequences of a negative verdict to range between PLN 26 billion and PLN 50 billion. This would be the cost of creating additional provisions. Please remember that the sector has already created approximately PLN 50 billion worth of provisions for the legal risk of foreign currency loans.

So there is no risk of a banking crisis, a domino chain of bankruptcies?

Simulations performed so far do not at all indicate that the problem doesn’t exist. They make it clear that in case of an unfavourable outcome, one bank would effectively require an immediate recapitalisation, overnight. Two others would need a major strengthening, but no longer in 'pneumonia' mode. At the same time, we are talking about large banks. So this is a major topic, a very grave one.

Still, not quite as dramatic as presented two months ago by the chairman of the FSA.

If this were to be resolved by the strength of Polish banks alone, it would mean that all Polish banks are going to be in trouble. Consequently, each bank would have difficulties meeting its obligations to maintain capital levels. Somebody would have to bear the cost of recapitalisation. If it were not the shareholders of these banks ‒ if they decided that they 'don't want to', 'can't', 'can't afford to' ‒ it would indeed become a serious problem. These shareholders will face the same question as in case of Getin and Idea. Back then, the question was whether the principal shareholder of both these banks was willing, ready, able to afford the recapitalisation. The answer, albeit with many meanderings, was 'no'.

Are these problems a realistic scenario?

We are bound by accounting standards. In the event of a negative verdict, or even just in the event it becomes probable based on the Advocate General's speech, which is expected to happen on 16 February, the auditors would expect banks to make adequate provisions quickly. So this point of uncertainty at the turn of the first and second quarter is a significant risk factor.

In a negative scenario, would we be in danger of, for example, reduced availability of credit? To put it bluntly: would the sector's ability to help the economy recover from the downturn be reduced?

The ability would be sustained. Mainly because some banks would remain strong regardless, unless, as I said, they would have to bail out the weakest ones themselves. In a worst-case scenario, there would be some trouble. But given appropriate behaviour of those weaker institutions' shareholders, I think the situation would not be dramatic, the entire economy would not be infected. Banks capable of financing economic development would remain in place. Please remember that lending activity has declined recently. Loan portfolios are not growing, in fact they are shrinking. And through retained profits, the sector is getting stronger in terms of capital. On the other hand ‒ would we be able, as a sector, to finance explosive economic growth? Would we be able to make a big contribution to the energy transition? Probably not. However, if it is spread over a longer period, there should be no problem. At this time, we do not know what the ruling is going to be. If the ruling is negative, banks will have no choice but to raise fees, increase credit margins and reduce payments on deposit instruments in order to maintain their capital ratios. The arithmetic is ruthless.

You talk about rebuilding capital. At the same time, banks are recording losses on bonds and other instruments that are falling in price due to interest rate rises, which reduces capital.

You are talking about instrument valuation, which does not necessarily translate directly into capital values used for regulatory purposes. Repricing of bonds on banks' balance sheets is a liquidity problem rather than a profit and loss or equity problem. Banks cannot sell bonds because the income statement would show a loss then.

It is well known why banks bought bonds. It was because we had colossal over-liquidity, a veritable 'flood'. We had to invest it somewhere. Polish capital market is so shallow that government bonds are virtually the only instrument available. This means, however, that we are subject to market pressure, as in October, when we suddenly saw bond yields at over 9 per cent.

You talked about the futility of undermining contracts based on WIBOR rates. But work is advanced on replacing WIBOR with a new index ‒ WIRON. The roadmap adopted by the National Working Group indicates that it is to take place in 2025. Will the sector make it in time?

Not the sector. This kind of thinking is one of the fundamental errors. WIRON, like WIBOR, is not a rate set by the banking sector. The banks merely provide the data. Of course, given the importance of the issue, they work very closely with the public authorities that carry out this process. The need for change is driven by EU directives, not by the wishes of the banking sector.

The question concerned introduction of products based on WIRON rates or fulfilment of the promises that were made when the change was announced ‒ that loans would be cheaper once the change was made.

This is not about fulfilling anyone's promises. It is about carrying out a very difficult, demanding process at a very difficult and ill-timed moment. This operation is important because Poland is a country where we have a plethora of banking products and services and, more broadly, instruments of the financial market as a whole, which decades ago we decided would rely on market index-based variable rates. We are touching a market where the importance of these indices is significantly higher than in many other markets which had to go through this process pursuant to the same regulations.

At this time, the National Working Group is working on filling this roadmap, which envisages a full transition by 2025, with content. For example, today the working teams are working on standards to be used by financial institutions in creating new products. How the new rate should be interpreted, which form of WIRON to adopt, how to modify systems to enable them to handle rates calculated to five decimal places. It is as if you had a calculator with two decimal places and suddenly were commanded to calculate to four or five decimal places. And that's in complicated mechanisms where there is compound interest for many, many years. There is also the requirement to introduce new products, both loans and hedging instruments, within the next two years. Only that will allow us to arrive at a situation in which exchanging one indicator for another would not cause excessive conflicts and resentment.

In 2022, Polish banks bore the costs of loan holidays, contributions to the SOBK, an increase in the Borrowers' Support Fund, but even before that, there was already a lot of talk about high charges to the BGF and, above all, the bank tax. To what extent did the developments of recent years disrupt the development path of the sector? Until a few years ago, Polish banks had the reputation of being highly technologically advanced. Is this opinion still justified?

It is true. Our development has stalled. Things are still not bad from the perspective of direct customer service. Here, we are still evolving due to the teams we have built and the ongoing projects. The costs are not huge either. On the other hand, can Polish banks afford to replace their infrastructure with state-of-the-art technology today? Do they have the strength and capacity to do what the best in the world do? The answer to these questions is already negative. Maybe three years ago we were still at the top of the peloton. Today, we're in a chasing group. It may be the first one, but nonetheless only a chasing group.

Modern institutions should continually replace all layers of their IT infrastructure. But when a bank is struggling to make a profit, it postpones investment. Then we are dealing with a widening 'IT gap' of the amount that would need to be invested to be on par with current market standards. This will translate into the competitive position of Polish banks in the future. ©℗

For the banking sector, it will be important to see how the economy turns: when we decide that investments are already viable, that it is worthwhile to enter the housing market, that it is better not to stuff the warehouses ‒ in a word, more faith in the future. 2023 will determine how many players are going to be affected by the slowdown, and how severely