As Covid-19 spreads, causing more countries to take counter-measures, Central and Southeast Europe is no exception. ING’s latest report said that collectively it is downgrading the 2020 GDP outlook on the back of virus fears.
Prof. Adam Glapiński, Governor of Poland’s central bank, NBP (©NBP)
During the Banking Forum conference Professor Adam Glapiński added that this year’s economic slowdown could turn out to be somewhat milder than what NBP predicted in July. In NBP’s “Inflation Report” the forecasted decline in Poland’s GDP in 2020 was estimated at 5.4 per cent. “Our predictions concerning the further development of the situation should be regarded as very conservative,” said Professor Glapiński.
The Governor of NBP emphasized that the banking sector has been affected by the consequences of the pandemic to a much greater extent than, for example, the insurance sector.
The financial system is resilient
“The ability to maintain financial stability depends on the resilience that the financial system has developed over the recent years, on the implementation of the appropriate micro- and macroprudential policies, and on the attitude of the banks, which are now more able to take advantage of the consequences of this unexpected shock,” said Professor Glapiński. “Before the crisis, the Polish financial system was characterized by remarkably high resilience due to the strong capital base accumulated in recent years and the low levels of financial leverage. Over the past 10 years, the size of the banks’ own funds almost doubled. They saw an increase of 92 per cent,” he added.
“In total, in the period from March 16th to the end of September, NBP injected PLN158bn into the Polish banking system. This corresponds to approximately 7 per cent of the country’s GDP. This has contributed to an increase in the average level of the commercial banks’ liquidity coverage ratio (i.e. the coverage of the total net cash outflows) to 195.4 per cent, compared with 152.4 per cent a year before. In terms of the scale of liquidity support for the banking sector, NBP remains in the mainstream of the actions undertaken by central banks around the world,” said Professor Glapiński.
The Governor of NBP recalled that over the past seven months central banks across the world have increased the purchases of various financial assets. In the case of the European Central Bank (ECB), these purchases have accounted for the equivalent of 6.6 per cent of the Eurozone’s GDP. Meanwhile, the purchases of the Federal Reserve amounted to 12.4 per cent of the United States’ GDP, those of the Sveriges Riksbank corresponded to 4.5 per cent of the Swedish GDP, and the purchases carried out by the Bank of England corresponded to 12 per cent of the United Kingdom’s GDP.
The banks are likely to post losses in 2021
While commenting on the NBP interest rates reduction, Professor Glapiński stated that according to the estimates of bank analysts the lower payment amounts on loans granted to households and companies will allow Polish households to save approximately PLN7bn (approx. EUR1.52bn) per year.
“I’m aware of the negative impact of lower interest rates on the banks’ net interest income. However, in my opinion a deterioration of the situation in the real economy and a materialization of credit risk in the banks’ balance sheets would pose a greater threat to financial stability than a temporary reduction in the banks’ financial results,” explained Professor Glapiński. He added that it is possible for the banking sector as a whole to post negative profits in 2021.
“The downward trend in the profitability of banks will continue in the coming quarters. The main factor negatively affecting the banks’ results will not be the lower interest rates, as many erroneously claim, but the growing value of allowances for the expected credit losses,” explained the NBP Governor.
“The situation will be the most difficult in 2021. It is even possible that the banking sector as a whole will report losses. This is a pessimistic scenario, but it cannot be ruled out entirely,” said Professor Glapiński.
For comparison: in the first eight months of 2020, banks reported a profit of approximately PLN5.6bn (EUR1.2bn), while in the same period of the previous year their profit reached PLN10.6bn (EUR2.3bn).
Professor Glapiński noted that despite the large scale of the expected future losses, the banking sector as a whole has a significant capital base that could be used to cover these losses. Moreover, the sector will preserve an appropriate capital adequacy ratio and the banks will be able to continue to expand their lending activity. The NBP Governor pointed out that according to central bank’s analysis, it is crucial for banks that still have undistributed retained earnings from previous years to use these resources to increase their own funds. “We have to forget about any distribution of profits from previous years in the form of dividends or buybacks of own shares from the market. The banks’ management boards will need these funds,” said Professor Glapiński.
There will be no credit crunch
The Governor of NBP recalled that in conditions of a macroeconomic shock the banks’ willingness to extend new loans typically decreases. The main reason for that is the expected deterioration of the potential borrowers’ financial situation. Additionally, the assessment of credit risk becomes more difficult. “Despite the significant decrease in the growth rate of lending, NBP does not see any indication of a ‘credit crunch’ phenomenon in the Polish banking sector,” said Professor Glapiński (the term “credit crunch” means a collapse in the credit market resulting in more limited access to credit due to more restrictive lending conditions – editor’s note).
“The majority of enterprises are not experiencing any financing shortages, also thanks to the public aid provided under the subsequent editions of the ‘anti-crisis shields’. Meanwhile, consumer lending has been largely reduced in the segment of large-value loans, which can be seen as a positive shift in the banks’ lending policy,” emphasized Professor Glapiński.