Prof. Adam Glapiński, Governor of Poland’s central bank, NBP (©NBP)
The NBP President added that the stability of the system was above all the result of the sound condition of the banks observed earlier, as well as the measures taken by public institutions during the pandemic in 2020.
“This (the stability of the system) results, in particular, from the absence of financial and macroeconomic imbalances before the pandemic, the high quality of capital accumulated in the banks, and the effective measures taken by public institutions supporting the economy and the financial system directly and indirectly,” said the NBP President.
In his speech for the ZBP, President Glapiński recalled all the most important measures that the central bank had taken since March 2020 in order to mitigate the effects of the pandemic and support the economy and the financial system. The most important of these were the following: the reduction of the NBP interest rates and the required reserve ratio, the introduction of the possibility of refinancing loans granted to enterprises in the form of bill discount credit, and the launch of purchases of Treasury bonds and government-guaranteed debt securities on the secondary market. The 3-percent systemic risk buffer was also abolished.
“All these measures strongly support the whole of the economy and the banking sector. It is true that lower interest rates cause the interest margin to shrink, but by supporting economic activity, they significantly reduce banks’ credit losses,” said the President of NBP.
The NBP President recalled that the Financial Stability Report published by NBP in the previous week stated that credit losses reduce banks’ profits to a much greater extent than lower interest margins, which is so often discussed.
The increase in credit losses is a major threat
The NBP President said that currently the risk of a sharp increase in banks’ credit losses continued to pose a major threat to the stability of the financial system.
“Amid a fall in economic activity, costs of credit losses rose significantly in the first half of 2020. This was also the result of the creation of provisions against expected credit losses in the future. These losses were limited by significant state aid under the anti-crisis and financial shields as well as the credit moratoria. The impact of the expiry of moratoria on credit risk indicators will gradually become apparent in the data for 2020 Q4 and in the next year,” said the President of NBP.
At the same time, President Glapiński acknowledged that concerns about the risk of excessive reduction in credit supply, a so-called credit crunch, had not been confirmed. The results of NBP business surveys did not indicate an excessive reduction in access to bank finance.
The results of the surveys indicate that the negative growth in loans to enterprises in Poland is largely related to their substitution by funds transferred to enterprises under the anti-crisis and financial shields. At the moment, companies possess sufficient funds on their accounts and do not need to resort to working capital loans.
“COVID-19 has also aggravated the existing weaknesses. Above all, the situation of certain banks with low capital levels and low profitability has deteriorated. The number of banks incurring losses has increased. The level of losses has also increased,” admitted the President of NBP.
The decrease in profitability of the banking sector is a challenge for the stability of the financial system in the longer term. Before the onset of the pandemic, the profitability of the sector was already steadily declining, adversely affecting the possibility of obtaining capital from external sources. This is a particular challenge for smaller commercial banks and the cooperative banking sector,” he added.
He also pointed out that in 2020 the exposure of the sector to Treasury bonds and government-guaranteed bonds had risen significantly. These instruments exceeded 20 per cent of the banking sector’s assets and their value was more than twice as high as banks’ regulatory capital. “However, in our assessment, such a situation does not pose a threat to financial system stability. Nevertheless, it may increase the sensitivity of banks to market risk,” said the President of NBP.
The risk of FX housing loans remains high
The risks related to COVID-19 overlap to a large extent with the legal risk associated with FX housing loans, which is independent of the other risks. What the regulators have managed to achieve so far is to enhance the resilience of the banking sector by imposing additional capital requirements to cover this risk,” assured President Glapiński.
The NBP President added that despite earlier incentives for the sector to reduce its FX loan portfolio by reaching voluntary settlements with borrowers, these measures were not taken up effectively by the banks. “Meanwhile, the problem has grown and following the ruling of the Court of Justice of the European Union it has taken on a new dimension,” acknowledged the NBP President.
“For the banks this means the necessity to make provisions and growing costs. This issue weighs down on the overall assessment of the outlook for financial system stability. At the same time, I would like to stress that neither NBP nor the PFSA have legal grounds to take action which could influence the settlement made on a purely legal level,” said Prof. Glapiński.
What does the future hold? Improvement expected from 2022
“In the case of the realisation of the base scenario hinged on the central path of NBP’s November macroeconomic projection, we expect a deterioration in the quality of banks’ loan portfolios and a further increase in provisions for expected credit losses,” said the NBP President. He added that the process of creating these provisions will be spread over time, but that most losses should be recognised by the end of 2021.
“NBP estimates indicate that in the years 2020-2021 the average annual costs of provisions for credit risk could double compared to 2019. With the assumption of the materialisation of the forecast costs and credit risk and the gradual adjustment of the interest rate on assets and liabilities to the new level of interest rates, it is likely that in 2020 the profit of the sector will not reach half that of the previous year, and in 2021 there will unfortunately be a further drop,” said Prof. Glapiński.
“However, beginning from 2022 we can expect an improvement in the quality of the loan portfolio and the beginning of a rebound of the performance of the banks,” he assured.
“The very good news is that the sector possesses sufficient capital surpluses to absorb the forecast losses and build up lending. This concerns the overwhelming majority of banks, including those that are recognised as systemically important, which will be able to absorb credit losses without the risk of violating capital requirements. Of course, there are a few weak banks, but their weaknesses already existed earlier, before the crisis, and the pandemic only exacerbated them,” said the NBP President.
“To summarise, the results of our analyses show that despite the huge scale of the shock during the pandemic, the losses and the uncertainty, the banking system as a whole is functioning and will function in a stable manner,” assured President Glapiński.