Saturday, 23 June 2018

Banking on Poland

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Global banks are rushing to set up shop in the lucrative Polish market to exploit its strong growth and economic fortitude. But establishing a presence there presents numerous challenges, to which banks have found an array of different solutions. But it remains unclear what impact this interest will have on the market, while some also question whether banks will stay in Poland for the long haul. Denise Bedell reports.

Citigroup, Credit Suisse, JP Morgan, Morgan Stanley, RBC and UBS are among the banks to have launched or built on banking operations in Poland in recent months. This represents a reversal of the withdrawal of many global banks from Poland – and other markets except their home jurisdictions – during the height of the financial crisis.

Although it is theoretically relatively simple to set up shop—EU-licensed banks do not need a separate banking license for Poland, as they can set up a Polish subsidiary of their other European operations—it can be quite costly. Poland is a competitive and complex market.

Part of the explanation for bank’ enthusiasm for Poland is their desire to participate in the many privatisations that are under way or soon to be commenced. But another attraction is the desire to access the under-banked, growing, and increasingly-wealthy corporate market, and the under-banked, growing, and increasingly-wealthy population.

“[Poland] is three-to-four times the size of the Czech Republic or Hungary,” said Nigel Rendell, senior emerging markets strategist for Central and Eastern Europe at RBC Capital Markets.“It has a large population and people are getting wealthier, the standard of living is increasing.” This population will need to be banked – their demand for banking products is growing and becoming more sophisticated.

In Poland banking products still have a relatively low penetration rate: only about 60% of the population has a bank account. “Mortgages are still a relatively new product in Poland,” said Aleksandra Gren, Fiserv country manager for Poland. “The total stock of mortgages to GDP is around 19%, while the EU average is around 50%. This clearly shows that the market and demand for banking products in Poland is still in the early growth stages, compared to the saturated markets of Western Europe.”

Poland has received almost a third of the cumulative value of FDI in Central and Eastern Europe. According to research by the United Nations Conference on Trade and Development and the National Bank of Poland, in 2008 Poland had US$163bn in cumulative FDI and US$14bnin FDI inflows that year.

A privatisation matter

The highly lucrative State privatisation programme is set to continue for some time. After selling off partial stakes in Polish insurer PZU and state-owned bank PKO Bank Polski earlier this year, both companies are expected to see further state-held stakes sold through IPOs. That should bring state ownership of each down to 25% from current holdings of 45.2% and 40.99%, respectively.

In addition, the Treasury is in the process of selling off an 82.9% stake in energy supplier Energa, with the Warsaw Stock Exchange preparing for an IPO. Oil refiner Lotos will also go up for sale, alongside cooperative banks BGZ and PBS and other state-owned assets.

On the corporate side, institutions hope not only to be involved in the privatisation programme but also to build on domestic corporate relationships. They hope to develop a local base of operations to provide the growing multinational client-base with domestic Polish investment banking and transaction banking solutions.

Poland is experiencing better than average GDP growth, a big draw for international businesses, and their banks. In 2009, GDP grew by 1.7%, the highest in the EU. Before that growth exceeded 5% for a number of years. This year GDP growth is estimated to hit 2.8%, a figure that is expected to increase over the coming years. Growing domestic consumption and exports, along with the strong FDI inflows, are fuelling this growth.

“The Polish economy is the best growth story in the region,” said Rendell. “Poland weathered the financial crisis extremely well while the rest of Europe suffered a deep recession. The Polish outlook is very positive.” 

Another big draw is the generally-high return on equity that banks in Poland enjoy. “Although the average ROE of the Polish banks in 2009 dropped to around 12%, in 2008, prior to the global crisis, it oscillated close to 30%,” said Gren. “This has been one of the highest levels of ROE in Europe and it is estimated to return to the 20-25% level in the years to come.”

The country also has a relatively high and stable credit rating – Moody’s rates it A2 – and thus offers moderately low risk for good returns. This presents many opportunities for financial institutions with operations in Poland.

Building a foothold

It is unclear exactly how all this new competition will affect the market going forward, and whether new entrants are in Poland for the long haul. With Polish policymakers having commented on the efficacy of having a unique currency to better-manage economic conditions during the crisis, there is some question whether Poland will aim to remain on its five-year euro-adoption trajectory, with potential consequences for the long-term vision of banks within the country.

At the moment there are few opportunities to grow through acquisition of domestic banks, often the easiest way to build up quickly in a new market, though Banco Santander recently announced a US$3.7bn acquisition of 70% of Bank Zachodni in Poland. However, that may change in coming months. Michal Bryks, analyst in Warsaw at Fitch Ratings, said in a recent report: “Acquisition opportunities may also arise as domestic banks reassess their competitive positions. Even banks with previously satisfactory franchises may be looking for stronger partners if the potential for revenues proves insufficient to weather current conditions or more crucially if funding strategies cannot be realigned to the changed market conditions.”

Building out a product line to fit the Polish market can be a challenge, as is finding the right staff.  “Findingtalented people of all seniority, who are trusted by clients,” is always problematic, said Walter Schuster, head of CEE and Greece operations at JP Morgan. 

And new or returning entrants must not only compete with existing domestic players, but also with those firms that moved in early and stayed for the duration of the crisis. These including the big regional players: UniCredit of Italy and Raffeissen of Austria. Many banks are therefore picking and choosing how they enter the market and what product lines they offer.

Building specific niche product lines, rather than setting up a full franchise, can allow banks to sidestep some of the challenges. For example, RBC focuses its efforts on investment banking.“We are looking at currency and the bond markets, and we have some interest in selected equities – such as mining related assets,” said Rendell.

In contrast, JP Morgan is taking a broader approach.“The combination of investment banking and treasury service business opportunities are why we seek a larger presence in Poland,” said Shuster. 

Shuster insists JP Morgan’s strategy is long term: “Even after the privatisations, the privatised companies remain and will need our services,” he said. “We are targeting certain clients and trying to demonstrate to them that we are the right bank when it comes to their next bond or equity issue or becoming their cash clearing provider. This takes time and requires commitment.” 

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