“Poland’s financial system is functioning in a stable manner, supported by the domestic economic environment that exhibits no major imbalances. (…) However, the risk stemming from the external environment of the Polish economy remains at an elevated level,” the very first words of the report indicate that bad things may come from the outside world, because there are no major threats within the Polish economy.
“The share of liquid assets in the banks’ balance sheets has stabilized at a high level. Banks fulfil the supervisory liquidity ratios. However, the need to issue debt instruments that may help to meet the MREL requirement will pose a challenge for banks,” states the report.
However, because the profitability of the banks improved in 2017, the issue of instruments, such as bonds, should not be a big problem for the sector as a whole. The total profits of the sector were similar to those achieved in 2016, when the banks recorded a significant one-off income from the sale of shares in Visa Europe.
It is no surprise that the situation in the credit union sector is worse. NBP points out that a large part of the sector still does not meet the regulatory minimum capital requirements and that over time the liquidity requirements (which are currently met) may also come under pressure of a difficult capital situation.
Fortunately, the cooperative banking sector is much closer to the sound condition of commercial banks than to the difficult situation of the credit unions. Nevertheless, NBP warns that the existing association agreements in cooperative banks expire by the end of 2018, and recommends those entities that have not yet done so to join the Institutional Protection Systems.
The above recommendations are regularly repeated in the financial stability reports. In this edition of the report it is worth taking a look at the evidence suggesting that Pole’s savings are growing and that Poles are increasingly looking for safe ways to invest them.
This is one of the reasons, why the net assets of investment funds reached the highest level in the sector’s history — EUR70.6bn. This corresponds to 15 per cent of GDP and indicates certain progress, although Poland is still far away from the levels recorded in the Eurozone countries, where the value of such assets is equal to the value of GDP.
In the past year, the investment funds sector recorded inflows of EUR3.5bn. The largest part of that amount was contributed by households, which mainly invested in debt funds (especially in cash and money market funds, as well as in corporate bonds). Meanwhile the significance of insurance companies in the structure of the unitholders decreased.
Of course, it is worth noting that an investment in a fund does not guarantee automatic profits for the investor. However, the increase in the inflow of funds translates into higher profits of the investment fund management companies (TFI).
Data from NBP indicate that the TFIs recorded the second-best financial result in their history (it was better only in 2007). Their net financial result increased from EUR116.3m at the end of 2016 to EUR156.4m at the end of 2017.
The increase in profitability calculated using the popular ROE ratio (return on equity) is striking. And so, from the already impressive level of 30.4 per cent at the end of 2016, the ROE of the TFIs increased to 41.1 per cent at the end of 2017. For comparison, the ROE of the pension fund management companies (i.e. the entities managing the open pension funds and the voluntary pension funds) amounted to 19.9 per cent at the end of 2017 (an increase from 17.1 per cent at the end of 2016). Outside the financial sector, any profitability ratio that reaches double-digits is considered good.
The NBP report interprets the movement of households towards safer types of investment funds as a search for ways of allocating capital that are potentially more profitable than bank deposits.
A similar argument can be made when describing the real estate market, which was in the expansion phase. The value of production in progress and the sale of apartments from the previous peak of 2006-2008 was matched or exceeded.
NBP analysts are pointing out, however, that the expansion phase does not necessarily have to be followed by a sudden collapse. There are significant differences compared with the previous expansion. The rate of growth of lending is much lower, and the high demand — mainly consisting of clients paying in cash — is matched by a high supply. As a result, we are observing only slight increases in the prices of housing. What’s more, the nominal prices are still lower than, for example, in 2007, even though the current incomes are much higher. One final argument is the fact that there is no speculative demand, which occurs when the expectation of large increases in housing prices in the future is widespread.
“Investment demand for housing is driven by the expectations of relatively high rates of return from housing rental compared to the rate of return on other assets in which households could invest their funds. In Poland, such assets are mainly bank deposits, and to a lesser extent Treasury bonds and investment funds units. Low interest on deposits means that investment in housing, despite the risk associated with its low liquidity and protection of tenants,” states the report.
NBP analysts add that although the housing market remains in a state of relative equilibrium, it is “becoming less stable”, i.e. the occurrence of possible supply or demand shocks could lead to the emergence of imbalances with a greater probability than in previous years.
A supply shock could be caused by the fact that developers will not be able to easily increase the supply of apartments. This will be hampered by the increases in the price of land, building materials and the remunerations of the contractors. On the other hand, even the current production levels would lead to problems with the sale of apartments in the demand shock scenario.
However, these are only alternative scenarios. For the time being, developers are building a lot of new apartments and Poles are buying a lot as well, and no one is taking any shocks into consideration.