Economy and the banking sector in Poland
|Key macroeconomic parameters||2016||Banking sector indicators||2016|
|Real GDP growth rate (forecast)||2.8%||Base interest rate||1.5%|
|Nominal GDP per capita (EUR)||11,200*||Loan to Deposit ratio||98.9%|
|GDP per capita in PPS (EU-28=100)||69%*||Non-performing loans ratio||7.0%|
|Average annual inflation rate||-0.6%||Total Capital Ratio (TCR)||17.6%*|
|Unemployment rate||6.3%||Return on Assets (ROA)||0.8%|
|Population||38 M||Return on Equity (ROE)||7.8%|
Source: Central Statistical Office (GUS), Eurostat, Polish Financial Supervision Authority.
* Data as of September 30, 2016.
Summary of changes
2016 was an eventful time with numerous changes taking place around the globe. Apart from the surprises in the political arena (the US election and the Brexit referendum), past year was also marked by the alleviation of concerns about growing deflation trends in many economies and recovered hopes for faster growth in the global economy. The political changes are a source of hope for financial markets. However, it is much too early to assess what impact on the global economy they will have.
Poland’s economy reported a slowdown. According to the initial data, GDP rose by 2.8% in 2016 (against 3.9% a year ago), which is well below expectations from the beginning of the year. In fact, 2016 saw numerous growth forecasts being revised down with every consecutive quarter turning out to be worse than expected (except for Q4). Looking at the downward trajectory of growth one can notice one more clear trend - private consumption is replacing investment as the main growth driver. It is worth stressing that the structure of the economic growth had not witnessed a shift like the one reported in 2016 for many years. In Q4 2016 private consumption rose by ca. 4-4.1%, whereas investment dropped by over 5% compared with +3.1% and +4.5% YoY, respectively, at the end of 2015. In other words, the difference between the contributions of private consumption and investment to GDP growth went up from 0.4 pp to record-high 3.6-3.7 pp in H2 2016. Changes in the remaining categories, i.e. a greater contribution of public consumption and changes in inventories, were in the background.
Accelerating private consumption came as no surprise - the growth rate increased from 3.2% in early 2016 to ca. 4.1% in Q4. Much has been said about the fundamental reasons behind the growth in consumption, but let us repeat the most important of them, i.e.: fast growth of real wages driven by low inflation (deflation prevailed for the most part of the year) and increasing mismatch between demand and supply in the Polish labour market (companies find it increasingly difficult to fill in vacancies); payment of 500+ child benefits, which accounted for ca. 40% of growth in household incomes; further improvement in household sentiment with household optimism hitting a record high according to some estimates.
As far as investment is concerned, the deep reduction in investment expenditure (-7.7% reported in Q3 marking the worst result in 15 years) was derivative of numerous, uncorrelated factors. These include primarily the exhaustion of funds from the EU’s previous budget and a delay in the preparation of new projects, which led to an investment gap, visible especially in the activity of local governments and railway companies. Secondly, the delayed spending of EU funds led to a drop in private investment, which was additionally stimulated by the growing uncertainty about the tax and regulatory environment and prospects for the global economy. Thirdly, investment in the linear infrastructure (water supply and sewage systems, power infrastructure) was badly affected by the announced legal changes, which resulted in a 50% decrease in the sector’s investment activity.
Inflation remained negative in 2016 with average rate dropping by -0.6% against 2015. Thus, the figure was only slightly higher than a year ago. The first period of deflation in Poland’s history lasted until Q4, when rising oil prices, the strengthening dollar and base effects (with an additional contribution of higher food prices) pushed inflation up to 0.8% YoY. The period of persistent deflation and economic slowdown met with a calm reaction from the Monetary Policy Council, which focused on medium-term aspects and stressed the temporary nature of both deflation and the slowdown. As a result, interest rates were kept unchanged throughout 2016 while the Council’s rhetoric was subject to only minor changes as new, initially pessimistic, and later optimistic data was coming in.
Throughout 2016 the zloty was weaker than in 2015. In fact, every day in 2016 (apart from the first week of the year) the EUR/PLN exchange rate was higher than on the same day a year before. The year started with a dramatic weakening of the zloty due to the downgrade of Poland’s rating by S&P and growing political risk. In February and March, improved perception of Polish assets and very favourable conditions in the emerging markets (dovish rhetoric and actions of central banks) resulted in a major strengthening of the zloty. The perception of Polish assets deteriorated again in Q2 due to a negative combination of both domestic (speculation around possible statutory solutions to the CHF loans issue) and international factors (aversion to the emerging markets, the Brexit vote). The second half of the year was the time of US election. The zloty weakened against the euro (for the third time that year) with PLN traded at 4.50 to the euro following the outcome of the vote. The major strengthening of the dollar that took place immediately after the election pushed the USD/PLN pair up to 4.30. As a result, the zloty fell to a new multi-year low against the dollar.
The market for treasury securities was marked by similar volatility in 2016. Compared with 2015, yields on Polish Treasury bonds went up from 1.62% to 2.03% for two-year securities, from 2.23% to 2.88% for five-year bonds and from 2.94% to 3.63% for ten-year bonds. Similarly to the exchange rate of the zloty, the demand for Polish bonds was determined by both domestic and foreign factors. In particular, in late 2016 the Polish bond market proved sensitive to growing expectations regarding economic growth and inflation in both Poland and globally. This pushed up both the risk-free rate (i.e. yields on German and US bonds) and the spread between the yield on Polish Treasury securities and German and US securities with the same maturities. The Warsaw capital market revived thanks to improved sentiment for the Polish economy and inflow of capital to the emerging markets. At the end of 2016, the main indices were by ca. 10% higher than at the beginning of the year.
Development of economy and banking sector in the Czech Republic
|Key macroeconomic parameters||2016||Banking sector indicators||2016|
|Real GDP growth rate (forecast)||2.2%||Base interest rate||0.05%|
|Nominal GDP per capita (EUR)||16,400*||Loan to Deposit ratio||78.3%|
|GDP per capita in PPS (EU-28=100)||87%*||Non-performing loans ratio||4.8%|
|Average annual inflation rate||0.6%||Total Capital Ratio (TCR)||17.7%*|
|Unemployment rate||4.0%||Return on Assets (ROA)||1.4%*|
|Population||10.6 M||Return on Equity (ROE)||15.3%*|
Source: Eurostat, Česká národní banka (ČNB).
* Cumulative data for 9 months (as of September 30, 2016) or latest available.
GDP, inflation, interest and FX rates
Economic growth in the Czech Republic is expected to have fallen to 2.2% in 2016 from 4.5% recorded in 2015, largely due to the drop in investment linked to the cycle of EU investment funding. In contrast, private consumption and foreign demand have provided a solid positive contribution. GPD growth is expected to pick up to 2.6% in 2017 and 2.7% in 2018 as investment activity recovers, also supported by the continuing strength in domestic consumption.
On November 7, 2013, the Czech National Bank (CNB) committed to sell the Czech crowns and buy euros as needed in order to prevent the crown from appreciating beyond the historically low rate of CZK 27 per euro, while the currency floats freely on the weaker side of this threshold. Since then, the central bank’s board has repeatedly confirmed the validity of this exchange rate commitment. At its most recent meeting on February 2, 2017, it was stated again that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before Q2 2017.
In 2013-2016, interest rates remained unchanged and the repo rate was maintained at 0.05%.
The year-on-year growth of consumer prices amounted to 2.1% in December 2016 and was significantly higher compared to -0.1% recorded at the end of 2015. The sharp rise in inflation at the close of last year was mainly due to a recovery in food price growth and an unwinding of the year-on-year fall in fuel prices. The average inflation rate for 2016 reached 0.6% and increased by 0.3 p.p. from the preceding year level of 0.3%.
Czech labour market parameters have been improving further. The country’s unemployment rate has remained the lowest in the Central and Eastern Europe (CEE) region. Its seasonally adjusted level reached 4.0% in December 2016 and decreased by 1.1 p.p. year on year.
The favourable developments recorded in the Czech financial sector in past years continued into 2016. The good economic conditions were reflected in growth of the assets of banks, which managed to maintain high profitability and strengthen their capital adequacy. The main challenge for Czech banks is a permanent low interest rate environment, causing a pressure on loan yields. Funding and liquidity profiles continued to be solid with the sector’s loan-to-deposit ratio of 78.3%. Asset quality remained resilient as demonstrated by a further decrease of NPL ratio to 4.8% at the end of 2016 from 5.8% observed a year earlier. Better risk indicators in the Czech Republic compared to other countries in the CEE region reflect the country’s relatively strong industrial base and limited foreign-currency lending (predominantly to corporate customers and almost non-existent in retail segment).
The growth in total retail lending was predominantly driven by mortgage loans, which expanded by 8.9% in 2016, while the volume of consumer and other loans showed a slower increase of 4.1% during the same period. The share of non-performing loans in the total volume of loans to households was 3.2% in December 2016, declining from 4.1% at the end of 2015. The annual growth pace of household deposits accelerated in 2016 and reached 8.4% in December. However, the maturity structure of deposit base has been evolving significantly over the last three years, with demand deposits rising at double-digit rate and term deposits falling by around 5% annually.
After subdued growth in corporate loan volume in 2014, the year-on-year dynamics accelerated visibly during 2015 and stabilized at a moderate pace of around 6% in 2016. The share of non-performing loans in the total volume of loans to non-financial corporations has been constantly declining since 2011 and amounted to 5.0% at the end of 2016, compared to 5.7% a year earlier. Corporate deposits decelerated visibly in 2016 and the end-year volume was almost unchanged versus December 2015.
Development of economy and banking sector in Slovakia
|Key macroeconomic parameters||2016||Banking sector indicators||2016|
|Real GDP growth rate (forecast)||3.4%||Base interest rate||0.00%|
|Nominal GDP per capita (EUR)||14,700*||Loan to Deposit ratio||98.8%|
|GDP per capita in PPS (EU-28=100)||77%*||Non-performing loans ratio||3.8%|
|Average annual inflation rate||-0.5%||Total Capital Ratio (TCR)||17.7%*|
|Unemployment rate||9.7%||Return on Assets (ROA)||1.1%|
|Population||5.4 M||Return on Equity (ROE)||10.0%|
Source: Eurostat, Národná banka Slovenska (NBS).
* Cumulative data for 9 month (as of September 30, 2016) or latest available.
GDP, inflation and interest rates
The Slovak economy has remained on a stable growth path. After a strong GDP expansion of 3.8% showed in 2015, the growth is seen to have reached 3.4% in 2016, underpinned by strengthening household demand and net exports. Although an increase in private investment is unlikely to fully compensate for a pronounced downturn in public investment linked to the cycle of EU investment co-funding in 2016, overall investment is forecast to return to solid growth in 2017 and 2018 thanks to buoyant investment in the car industry and a rise in spending on large infrastructure projects. Private consumption growth is set to accelerate in 2016 and 2017, benefitting from the continued improvement in the labour market, subdued inflation and consequently gains in real disposable income.
In Slovakia, as a member of euro zone, the key interest rate, set by the European Central Bank (ECB), was reduced to 0.00% in March 2016 from 0.05% kept during 2015.
In December 2016, annual inflation stood at 0.2%, compared to a contraction of consumer prices at 0.5% recorded at the end of 2015. The main drags were falling energy and food prices, which were overshadowing rising service prices. The average annual inflation rate for 2016 reached -0.5%, dropping by 0.2 percentage point from -0.3% in 2015.
Since 2014 unemployment in Slovakia has been gradually decreasing in line with the improvement in economic activity and sustained job creation. Its seasonally adjusted rate reached 9.7% in December 2016 and was lower by 1.8 percentage point year on year. At the same time, the participation rate is set to gradually increase, as incentives to join the labour force for the long-term unemployed rise.
Slovak banks have operated in a relatively strong economic environment, but their profitability has been exposed to several headwinds. The ultra-low interest rate level has caused a continued compression of margins in the sector. In addition, following the introduction of a statutory cap on housing loan early repayment fees as from March 21, 2016, the yield on retail loans has been decreasing at an accelerating pace. Consequently, the profitability of the Slovak banking sector improved in 2016 only due to a one-off gain on Visa transaction. With strong lending growth, the overall loan-to-deposit ratio has been gradually increasing and exceeded 98% at the end of 2016. However, the Slovak banking sector’s capital adequacy has remained among the highest in the CEE region, along with the Czech Republic. The overall improvement of the NPL ratio was mainly the result of the high growth in retail loans and stabilisation in the stock of non-performing loans. The NPL ratio for Slovakia is the lowest in the CEE region at 3.8% at the end of December 2016, dropping from 4.2% a year earlier.
The improving economy and low credit costs have promoted strong development of household loans in Slovakia. Retail lending has continued to rise rapidly over the recent years, mainly due to housing loan acceleration, with the year-on-year growth pace exceeding 13% in 2016, spurred recently by demand for credit refinancing. The share of non-performing loans in the total volume of loans to households declined to 3.7% in December 2016 from 3.9% at the end of 2015. Development of retail deposits have shown clearly upward trend since Q1 2014, with the annual dynamics oscillating around 8-9% in 2016. Since the mid-2013 the structure of household deposit base have been changing. The volume of term deposits has been decreasing over the past quarters, what is more than compensated by strong inflows of retail demand deposits, which expanded by more than 17% in 2016.
The favourable economic trends have not been fully reflected in the stock of corporate loans, with its average annual growth rate remaining at around 2.5% in H2 2016. The share of non-performing loans in the total volume of loans to non-financial corporations decreased to 6.3% at the end of 2016 from 6.9% in 2015. After acceleration of corporate deposits at the end of 2015, the year-on-year dynamics visibly slowed down in 2016 and finally were negative in the last month of the year.