Polish Top Lender Sees Signs of Recovery, Earnings to Rebound in 2014

    The Wall Street Journal
    By The Wall Street Journal

    WARSAW–PKO Bank Polski SA expects to see an improvement in its operations as the Polish economy begins to recover, but lower interest rates will hit its profits this year, the chief financial officer of Poland’s largest lender told The Wall Street Journal on Wednesday.

    PKO holds around 22% of all Poles’ bank deposits and a significant part of its earnings are generated from a spread between lower deposit and higher lending rates. But the decision by the National Bank of Poland to cut interest rates to an all time low of 2.5% in July has hit the bank’s profitability.

    “Despite tight cost control, positive trends in fee income and stable cost of risk, the dent caused by lower interest rates will be very significant,” said Bartosz Drabikowski. The narrowing spread between lending and deposit rates will see earnings fall by some 10-15%, he said, in line with what he expects for the entire banking sector. Last year PKO Bank Polski earned 3.75 billion zlotys ($1.17 billion).

    The central bank has recently indicated that interest rates will not be cut further as the economy has likely bottomed out. The improving economic picture is expected to see at least a stabilization in rates which Mr. Drabikowski believes will allow PKO to return to growth in profitability.

    “Next year the sector should return to growth mainly driven by lending growth, higher margins and lower costs of risk,” Mr. Drabikowski said. “In our case results will also be supported by additional bancassurance activity and sales to former Nordea clients.”

    With PKO strengthening its leading market position through the recent PLN2.83 billion takeover of Nordea Bank AB’s Polish assets, the bank will now focus on identifying ways to make more money, both for its clients and for shareholders, Mr. Drabikowski said.

    “In the current market conditions the quality of our offer and the resulting higher profitability are more important for us than an increase in volumes,” Mr. Drabikowski said. “Chasing market share is less profitable and we are more concentrated on earnings from new sales.”

    However, despite opportunities stemming from the takeover, the costs of integration with Nordea will weigh on next year’s earnings, Mr. Drabikowski said.

    PKO plans to transform the assets it acquired from Nordea Bank Polska. It is planning on creating a specialized mortgage lender by 2015 and could issue several billion zlotys in tradable asset-backed securities that will allow it to cut financing costs of the banks’ extensive housing portfolio.

    The move could cut the bank’s financing costs by “tens of basis points” due to the ability to issue bonds rated above its current “A-” credit rating from Moody’s Rating Services.

    The lender is also looking for one or two partners that would invest in a joint insurance venture based on Nordea’s life insurance operations, lured by opportunity to gain unique access to PKO’s 6.2 million clients.

    “There is a lot of interest both from major Polish players and global insurance companies,” Mr. Drabikowski said. “Decisions should be made later this year.”

    Mr. Drabikowski is confident the joint venture will drive income from the fees it will charge for the use of its sales channels.

    He said PKO is not interested in acquiring more lenders for the time being, but he doesn’t rule out growing through acquisitions of other financial institutions like investment funds or leasing companies.

    The Wall Street Journal

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