Banks in Poland: very high profits, a lot of risk

According to KNF data, the banking sector recorded very good results in March and throughout the first quarter of 2023. There was an increase in interest income compared to the previous quarter, as well as the first quarter of 2022. That translated into an increase in earnings, and therefore an improvement in return on equity. However, there are plenty of risks looming that could severely limit banks’ profitability in the coming quarters.

In March, the banks made a net profit of PLN 2.6 billion, of which PLN 2.1 billion was attributed to commercial banks, and the rest to cooperative banks. In the entire first quarter, the sector generated a profit of PLN 8.8 billion. This is more than 2/3 of the sector’s result for the whole of last year, when it amounted to PLN 12.4 billion.

The main reason for the increase in segment profits is due to higher interest income, i.e. interest income minus interest costs. In March, it amounted to PLN 8 billion and was 1/3 higher than in March 2022. In the whole of the first quarter, interest income amounted to PLN 23.5 billion against PLN 16.9 billion last year. This increase is mainly due to higher interest rates.

In the first quarter, commission income decreased slightly. It amounted to PLN 4.6 billion against PLN 4.7 billion in the first quarter of 2022. Perhaps this is the effect of a decrease in the number of new loans granted. In March alone, net commission income exceeded PLN 1.6 billion.

Total costs increased moderately compared to the first quarter of last year. It was at the level of PLN 12.2 billion, compared to PLN 11 billion a year earlier. This was mainly due to the increase in personnel costs, which rose from PLN 4.9 to PLN 5.8 billion.

Return on equity (ROE) continues to improve. In March, it was 7.3 percent, and for the entire first quarter it averaged 7 percent. Last year, they were 4.6% and 3.9%, respectively. Return on assets (ROA) also improved, coming in at more than 0.5% in March.

Immediately after the publication of these results, an induction appeared in the media that this year could be a record year for banks. However, it should be noted that last year, in the first months, it also seemed that the result of Banks would be very high, and compared to previous years, even astronomical. Then, in the first quarter of 2022, banks made PLN 6.2 billion in profits, with interest rates cut in half. However, already in May, credit holidays were announced, which took away almost PLN 18 billion from the profits of banks. Later, there was a need to increase reserves for Swiss franc loans, in connection with the extremely unfavorable course of court decisions and the rapidly increasing number of cases. In addition, there was a need to increase the composition of the Bank Guarantee Fund (BFG) and the costs of forced restructuring of Getin Bank.

Right now, the list of risks for banks is longer and more worrying than it was a year ago. Let’s start with the most serious.

The biggest risk to the banking sector is the issue of Swiss franc loans, but it is a complex problem. The main event in this regard will be the ruling by the CJEU, which will be announced on June 15, regarding the possibility of the bank claiming a reward for the use of the capital in the event of the cancellation of the Swiss Franc contract. In other words, when the court finds that the franc loan was granted on the basis of an invalid contract, it formally orders the borrower to return the money received to the bank, and the bank returns all the money received from the borrower in the form of annuities. The borrower is also exempted from the additional repayment of the loan.

In fact, the amount of the installments paid so far greatly exceeds the amount of the loan granted, and therefore the borrower is more advantageous. In this approach, he does not pay any fees for using the loan he has obtained. The CJEU’s ruling relates to whether these fees can be claimed by the bank at the time the contract is cancelled. In mid-February, the IJC’s Solicitor General issued a negative opinion to the banks in this case, stating that they could not claim these bonuses. Given that the judgment of the CJEU usually agrees with the opinion of the Commissioner, this decision will be unfavorable to the banks.

The second case for the Swiss franc, in which the CJEU will also issue a ruling on June 15, is the question of suspending the payment of loan installments as security for the proceedings. The important point is whether our cashiers, at the beginning of the case, are entitled to demand a suspension, even if they have not paid the loan installments in full. The National Court denied such a right in a case, which is why the cashiers applied to the CJEU. If the court determines that this right belongs to the borrowers, it can quickly suspend the loan installments in the pending proceedings. This, in turn, means a decrease in the sector’s revenues.

In addition, there is also the matter of undermining the CHF loans that have already been paid off. This trend is not very significant yet, but with more very favorable case law, it may gain traction.

So what is the cost of sector governance? At the end of last year, KNF calculations of the reward for the use of capital indicated that it could reach PLN 100 billion. This estimate is the total cost, which includes the reserves banks have already created. After Q1, it amounted to about PLN 40 billion. This means that banks will have to allocate another PLN 60 billion in provisions.

In order to understand the magnitude of these costs, they can be compared with the previously mentioned profits for the sector last year, i.e. PLN 12 billion. In this view, the need to pay back would be five times the earnings. You can also look at it in terms of provisions created by banks in the first quarter of 2023, which amounted to PLN 3 billion. And that means another twenty quarters of those writedowns, or five years of resolving this problem. However, there is a risk that in the event of massive undermining of loans that have already been paid off, these costs could be even higher. In addition, it must be remembered that as current interest rates rise, banks can create many billions in reserves, but when interest rates fall, their ability to do so will decline.

In the most negative scenario, the CHF loan problem will push at least one large bank to the brink of collapse and another forced restructuring of the sector will be required.

However, this is not the end of the risks facing the banking sector. The real danger is the extension of credit holidays (announced last year for 2022 and 2023). Assuming that the participation will be the same as last year, it would mean 6-9 billion PLN for the next year of operation. Ironically, the rise in bank profits in the first quarter of this year may make the sector considered able to bear such costs. Recently, the Prime Minister announced that the decision on whether to extend credit holidays will be made in June or July.

Another risk is the possibility of financing electoral promises thanks to the additional burden on banks. One can imagine, for example, raising the bank tax in the new parliamentary session or introducing some other form of payment into the state budget. If this happens, it will be dictated by the need to finance costly electoral promises recently made by the government and the opposition.

The banking industry is currently putting an ill-equipped sapper in a minefield. You may attempt to reduce damages by speeding up settlement completion and increasing the frequency of judgment creation. However, the costs associated with franc loans would still be huge. At the same time, he must convince the politicians and the public that he will not be able to bear the burden any more. After all, its influence has been waning in recent years. This means that despite the good results achieved in the first month of 2023, the sector is not facing a difficult time.