Economy and the banking sector in Poland

Key macroeconomic indicators 2019 Banking sector parameters 2019
Real GDP growth rate (forecast) 4.1% Base interest rate 1.5%
Nominal GDP per capita (EUR) 12,9001 Loan to Deposit ratio 90.2%
GDP per capita in PPS (EU-28=100) 70.3%1 NPL ratio 6.4%
Average annual inflation rate 2.3% Total Capital Ratio (TCR)2 18.9%
Average annual unemployment rate 3.3% Net Return on Assets (ROA) 0.7%
Population 38 million Net Return on Equity (ROE) 7.1%

Source: Statistics Poland (GUS), Eurostat, Polish Financial Supervision Authority.

1 Data as at the end of 2018

2 Data as at September 2019

Summary of developments

The global economic slowdown deepened for most of the past year, affecting virtually all of the world’s main economies and regions. Many economic indicators hit ten-year lows. This was down to, among others, an abrupt increase in fiscal uncertainty caused by the escalation of the Sino-American trade and economic war; problems experienced by some sectors of the economy (in particular the automotive and semiconductor industries); as well as inherent factors, such as the waning fiscal stimulus in the USA and further weakening of domestic consumption in China. The economy stabilised only in the autumn when a truce was reached in the US-China trade war with global industry indicators starting to grow by the end of the year. The gap between relatively good consumer and services sector sentiment and the sentiment of the industrial sector persisted throughout 2019.

The Polish economy was almost unaffected by the condition of the global economy for most of the past year. This was caused by a relatively high increase in domestic consumption, i.e. continued fast growth in the key components of Poland’s economic cycle (i.e. private consumption and investment). However, this does not mean that Poland was totally immune to the global economic slowdown. On the contrary, economic indicators and other short-term economic figures were in a downward trend. GDP growth fell from 4.8% year on year in Q1 to approximately 3.1% year on year in Q4. As a consequence, the Polish economy is likely to have grown by 4.1% in the whole of 2019 compared with 5.1% a year before.

Private consumption and investment were the two main drivers of the economy. The sources of the consumption boom (private consumption continued to grow by over 4% year on year throughout 2019) have been already extensively discussed. It is worth reiterating that it was propelled by favourable situation on the labour market (record-low unemployment), fast-rising household incomes (especially from contract-based employment), unflinching consumer optimism, relatively high immigration to Poland, highly active real property market, and solid growth in consumer credit. In 2019, these factors were reinforced by the fiscal stimulus comprising social benefits and personal income tax cuts (accounting for approx. 1.8% of GDP in total). Investment was volatile and followed a downward trajectory throughout the year. The year began with an over 12% increase in investment spurred by the completion of public investment projects and an abrupt rise in investment projects implemented by foreign companies. It is likely to have ended with a slight year-on-year decrease mainly due to a slowdown in public investment – central and local government investment spending fell compared with the previous year already in Q3 to decrease even further by the end of the year.

The past year was marked by a fast increase in inflation, making it probably the most exciting and talked-about Polish economic indicator of 2019. Growth in consumer prices accelerated from 0.7% year on year in January to 3.4% year on year in December. This trajectory was down to several factors. Firstly, 2019 saw a fast increase in food prices, which affected almost all components of the basket, including the most volatile ones. It was caused, among others, by agricultural drought in Central Europe, spread of the ASF virus in Asia, and the impact of rising labour costs on processed food prices. Secondly, core inflation was on an upward trajectory throughout 2019. With 3.1% the December reading was one of the highest in history. The increase in core inflation was down to a combination of factors, including: an increase in regulated prices, the end of price wars on the mobile network and cable TV markets, growing labour costs pushing up the prices of services, and rising prices of public services. Prices of energy carriers and effects of the electricity price freeze (which, as a result of the electricity excise duty cut, were classified by Statistics Poland as a decrease in the price of electricity supplied to households) were among the few factors that pushed inflation down.

2019 was another year of monetary stability with interest rates remaining flat throughout the year. The Monetary Policy Council’s rhetoric was becoming more dovish along with the deterioration in global sentiment. At the same time, neither the Polish economic data, nor inflation readings encouraged the Council to soften or tighten its stance. Projections assuming weaker growth and inflation remaining close to the target over the next two years added to the rationale for an unchanged monetary policy. At the end of the year, the MPC’s declarations to keep interest rates unchanged were extended by the end of its current term of office.

The zloty remained stable throughout 2019. It appreciated against the euro by approximately PLN 0.04 (from PLN 4.30 to PLN 4.26) but slid by PLN 0.10 against the Swiss franc (from PLN 3.82 to PLN 3.92) and by PLN 0.04 against the US dollar (from PLN 3.76 to PLN 3.80 at the end of the year). The changes against USD and CHF derive largely from a moderate weakening of the euro against a basket of other currencies in 2019, whereas the appreciation of the zloty against Europe’s single currency deserves a comment. It can be attributed to both domestic and foreign factors. The former include CJEU’s ruling on foreign currency mortgages and growing concerns about inflation growth in Poland at the end of the year. The latter comprise monetary loosening by central banks, which triggered an inflow of portfolio capital to emerging markets. Nevertheless, the entire year was marked by low fluctuations, compared with both the previous years and other emerging market assets. Consequently, to Poland, being a sound and open economy, the exchange rate is no longer a factor mitigating adverse shocks.

Those who expected market interest rates to decline were again the biggest winners on the market for Treasury debt securities. At the end of 2019, bond yields and swap rates fell from the levels reported at the beginning of the year. In August 2019 yield curves hit a record-low with all rates falling to their lowest since 2015. Despite better sentiment on global markets and the end of monetary loosening conducted by the main central banks, yields on ten-year Polish Treasury debt securities are currently quite similar to the yields on their US counterparts. Throughout the year the market was affected by several trends: mounting fears over global economic growth, especially in the second half of the year; low supply of Treasury debt securities (resulting from strong fiscal performance); inflows and outflows of capital from emerging markets in response to decreases and increases (respectively) of market interest rates in the United States and in Europe. Judging from the performance of the Polish bond market in 2019, it seems clear that it represents features characteristic of a developed rather than an emerging-market economy.

The 2019 growth in loan volumes was similar to the figure reported in the previous year. Growth in household loans accelerated from 5.6% to 5.7% year on year (net of the FX effect), whereas corporate lending advanced by 3.3% from the previous year (down from 6.7%). The former category deserves more attention. The strongest growth in retail loans since 2012 was driven by a nearly two-digit surge in consumer credit and record-breaking sales of real property loans. The quarterly origination of the latter (PLN 16.9 billion in Q3 2019) hit a historic high in the PLN-denominated loans category. The entire 2019 is likely to have seen a record-high volume of new loans, exceeding PLN 60 billion, thereby breaking the 2008 record. It stems directly from the highly active real property market and upbeat consumer sentiment. Consumer credit, in turn, should be treated as a gauge lagging behind the consumption cycle; in other words, it supports consumption at the time of a slowdown rather than fuels it during a revival. The corporate lending segment witnessed a major shift in the lending structure with investment loans systematically replacing real property loans and overdraft facilities (in consequence, the total volume of corporate loans decreased). On the one hand, it was caused by the relatively small role of bank loans in financing investments, and, on the other hand, by lower demand for liquidity due to the waning effects of salary increases and tax system tightening.

2019 was marked by an increase in deposits, but the growth rates varied across sectors. Household deposits were rising by 10%-12% in the course of the year, while growth in corporate deposits jumped from 3.7% to 10.3% year on year. Retail deposit stabilisation was largely due to the fiscal stimulus and rotation of households’ assets (high inflow of money to the market for new homes continued). In addition, it was propped up by an increase in the household savings ratio. High growth (in relation to the previous years and close to the multiannual average) in corporate deposits is attributable to lower pressure on financial performance in the enterprises sector (slower growth in salaries accompanied by rising inflation), the weak increase in investment, and waning effects of tax system tightening.

Economy and the banking sector in the Czech Republic

Key macroeconomic parameters 2019 Banking sector indicators 2019
Real GDP growth rate (forecast) 2.5% Base interest rate 2.0%
Nominal GDP per capita (EUR) 19,5001 Loan to Deposit ratio 72.8%
GDP per capita in PPS (EU-28=100) 90.5%1 NPL ratio 2.5%
Average annual inflation rate 2.6% Total Capital Ratio (TCR) 20.3%1
Average annual unemployment rate 2.1% Return on Assets (ROA) 1.2%1
Population 10.6 million Return on Equity (ROE) 16.0%1

Source: Eurostat, Česká národní banka (CNB).

1 Cumulative data for 9 months (as at September 30, 2019) or the latest data available

Economic growth in the Czech Republic is expected to have slowed down from 3.0% in 2018 to 2.5% in 2019, the main reason being sluggish internal demand, as reflected mainly in weaker growth in investment (down from 7.2% to 1.1% year on year) and a modest slowdown in private consumption increase. Owing to its strong commercial ties with the euro zone and export-oriented nature, the Czech economy benefits when the global economy picks up (like in 2017), but is strongly affected during a slowdown (like in 2019). At the same time, a tightening labour market (Czech Republic has the lowest unemployment rate in the EU) and robust growth in salaries bode well for private consumption. The inflow of EU funding fuels public investment, while easing trade tensions are expected to boost private investment. Czech GDP is expected to grow by an average of 2.1% annually in 2020-2021, which is roughly in line with the potential output growth rate.

A dynamic increase in salaries and relatively fast economic growth (compared with the potential GDP growth rate) keep inflation high. The average annual inflation rate stood at 2.6% in 2019, while core inflation readings were even higher. In view of the mounting risk of inflation being persistently above the target in the medium term, the Czech National Bank (CNB) continued its monetary policy normalisation throughout 2019. At the end of 2019, the CNB’s reference rate stood at 2.00% and is among the region’s highest (only Romania has a higher rate). As the external environment of the Czech economy was in equilibrium, the start of monetary policy normalisation did not cause rapid appreciation of the koruna. The CNB is expected to abide by its current policy in the quarters to come, although at a reduced pace.

The favourable developments recorded in the Czech financial sector in past years continued into 2019. Good economic conditions were reflected in growth of the assets of the banking sector, which managed to maintain high profitability. Czech banks benefited mainly from rising monetary policy rates and their slower transmission to deposit rates than to loan rates, which allowed for a rebound of net interest margin. This, together with growing volumes, resulted in a double-digit increase of net interest income. A six-year downtrend of net fee and commission income was halted in 2018, but persisting competitive pressure has hindered any visible improvement of the line. Profits of the Czech banks have been also boosted by exceptionally low risk costs thanks to minor default rate, good recovery performance and some sales of impaired receivables. Asset quality remained very resilient as demonstrated by a further decrease of NPL ratio to 2.5% at the end of 2019 from 3.3% observed a year earlier, which is the lowest level compared to other countries in the CEE region. Funding and liquidity profiles continued to be solid with the sector’s loan-to-deposit ratio of 72.8%. Czech banks have been very well-capitalized. However, responding to the risk associated with the phase of the business cycle, the central bank (ČNB) has been gradually rising the countercyclical capital buffer rate. It amounted to 1.50% in H2 2019, and starting from January 2020 was raised by 25 basis points to 1.75%, while another increase to 2.00% has been announced with effect from July 2020.

The growth in total loans to households maintained above 6% in 2019, but the annual dynamics decelerated slightly compared to the 2 preceding years. The development was predominantly driven by mortgage loans, which expanded by 9.3% from December 2018, while the volume of consumer and other loans showed a much slower increase during the same period. The ČNB tightened mortgage lending conditions as of October 2018, stating that the loan should not exceed nine times the net annual income of applicants, who should also spend no more than 45% of their net monthly income on debt service. The ČNB also recommended that the loan-to-value (LTV) ratio should not exceed 90% and that a LTV of over 80% should be for only 15% of loans provided by banks. The share of non-performing loans in the total volume of loans to households was 1.7% in December 2019, declining from 2.1% at the end of 2018. After a slight slowdown in Q1 2018, the annual growth pace of household deposits regained to 8% in December 2018 and then it inverted again, approaching to 6.5% at the end of 2019. The maturity structure of deposit base was evolving significantly in 2013-2018, with demand deposits rising at double-digit rate and term deposits falling on average by 5% annually. However, 2019 brought some reversal of this long-lasting trend as inflows to term deposits reappeared.

Expansion of the outstanding corporate loan volume slowed down slightly in H2 2017, showing a subdued growth until mid-2018. After an acceleration at the turn of the year, the annual dynamics stabilized in the range of 3-4% in H2 2019. 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 3.2% at the end of 2019, compared to 3.6% a year earlier. Corporate deposits decelerated visibly during 2018, reaching near zero growth pace in September. Then, the dynamics restored and oscillated around 5% in H2 2019.

Economy and the banking sector in Slovakia

Key macroeconomic parameters 2019 Banking sector indicators 2019
Real GDP growth rate (forecast) 2.7% Base interest rate 0.0%
Nominal GDP per capita (EUR) 16,5001 Loan to Deposit ratio 104.5%
GDP per capita in PPS (EU-28=100) 73.1%1 NPL ratio 2.6%
Average annual inflation rate 2.7% Total Capital Ratio (TCR) 18.3%1
Average annual unemployment rate 5.8% Return on Assets (ROA) 0.6%1
Population 5.4 million Return on Equity (ROE) 6.5%1

Source: Eurostat, Národná banka Slovenska (NBS).

1 Cumulative data for 9 months (as at September 30, 2019) or the latest data available

The Slovak economy continues to grow steadily. After a 4.0% increase in GDP in 2018, the country’s economy is estimated to have grown by 2.7% in 2019 due to weaker growth in investment and private consumption. The slowdown in investment was driven by lower inflow of EU funds and mounting trade tensions. Private consumption, in turn, has slowed down compared to the record highs in 2017, but still remains strong. It benefits from the continuous improvement in the labour market, subdued inflation, and the resulting growth in real disposable incomes.

As an Eurozone member, Slovakia has its reference rate set by the European Central Bank (ECB). In 2019 there was only one change in interest rates, i.e. a cut in the deposit facility rate.

The inflation rate stood at 2.7% in 2019, up from the 2.5% rise in consumer prices observed a year before. The reading was inflated by some components of the core part of the inflation basket. Inflation in Slovakia is thus higher than the Eurozone average.

The unemployment rate has been falling gradually since 2014 thanks to growing economic activity and creation of new jobs. The seasonally adjusted unemployment rate stood at 5.8% in December 2019 which represents a year-on-year decrease.

Although Slovak banks have operated in a relatively supportive economic environment in recent years, their profitability has remained lower than in many countries of the CEE region. The protracted period of ultra-low interest rates has continued to put pressure on their business model. In 2019, a further expanding lending activity was not enough to compensate for falling net interest margin, what resulted in negative dynamics of net interest income and consequently a marginal decline of total banking revenues. In addition, banks in Slovakia have been paying the special levy, which at present is set at 0.2% of total liabilities per year and costs the sector around 18% of its net profit on average. A key counterbalancing factor has been development of loan impairment provisions. The credit risk costs have descended significantly over the past years and is now at a historically low level, but the default rate has stopped falling. The improvement of asset quality was mainly the result of both dynamic expansion in loans and a decline in the stock of
non-performing receivables. The NPL ratio for Slovakia is among lowest in the CEE region, reaching 2.6% at the end of 2019 and dropping from 2.7% a year earlier. The overall loan-to-deposit ratio continued to be above 100% in 2019, but did not materially change compared to the end of 2018. The Slovak banking sector’s resilience has been strengthened by its increasing capital adequacy. However, at its meeting in July 2019, the Board of Slovak National Bank decided to increase the countercyclical capital buffer rate for Slovak exposures by 50 basis points, to 2.0% of risk weighted assets, with effect from August 2020.

The growth rate of total loans to households gradually moderated in 2019, to 8.0% at year-end. The slowdown was particularly large in the case of consumer loans. Its main causes were the central bank’s tightening of regulatory lending requirements and the incipient saturation of certain market segments. The volume of new housing loans has surged, partly due to borrowers taking advantage of lower rates to refinance or top up their existing loans. The portfolio expanded by more than 10% for most of the year. The continuing high loan growth has largely reflected strong demand supported by a long-running uptrend in borrowing capacity. According to the local central bank, thanks to wage growth and falling interest rates, the loans that borrowers can afford are one-third higher now than they were in 2016. This increase is roughly consistent with the rise in residential prices over the same period. The share of non-performing loans in the total volume of loans to households remained broadly stable and reached 2.9% in December 2019. Development of retail deposits showed a constant downward trend from mid-2016 and bottomed out in Q1 2018. Then, client inflows accelerated, what translated into faster annual dynamics, which stabilized at around 7% in H2 2019. Since the mid-2013 the structure of household deposit base has been changing. The volume of term deposits has been mostly decreasing over the past years, what was more than compensated by strong growth of retail demand deposits, which continued to expand by more than 10% in 2019.

In 2017, the corporate credit market was in the expansionary phase of its cycle, with the average annual growth rate oscillating at around 7-8%. For most of 2018, the volume increase remained slightly decelerated to mid-single digit, while the pace advanced to 7.0% in December. The Slovak economy’s recent slowdown had an impact on the activity of enterprises in H2 2019. The year-on-year increase in total loans to this segment decelerated to around 4%, mostly driven by lower financing granted for investments and contracts with terms longer than one year. The share of non-performing loans in the total volume of loans to non-financial corporations decreased to 3.3% at the end of 2019 from 3.7% in 2018. After an acceleration of corporate deposits from mid-2017 to a local peak in Q1 2018, the year-on-year dynamics visibly slowed down and finally recorded 0% in April 2019. In H2 2019, the annual growth rebounded and ended the year at around 5%.

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