Moody’s has placed a negative outlook on Poland’s banking system on the basis the country’s banks are likely to suffer increased funding pressures and contracting loan growth.
This may come as a surprise to investors who were assured the region was well protected from the subprime contagion — even six months ago. The key problem, according to Moody’s, is the drying up of long-term funding and foreign exchange hedging facilities.
The ratings agency writes:
…the original growth strategies have become increasingly questionable. ‘In the current market conditions, the availability of wholesale funding has shrunk notably and interbank lending remains frozen. As a result, competition for retail deposits has become even fiercer, hiking up average funding costs, and is likely to contribute to margin pressures in the coming year…’
With the good times over, Moody’s now expects borrowers to increasingly start experiencing payment problems.
These trends are most likely to be most pronounced in the real estate segment and, in particular, in this segment’s foreign exchange lending component. The rating agency believes the current downturn will provide a ‘litmus test’ for the underwriting standards of Polish banks and challenge the reliability and benefits of the support they receive from their international parents.
Meanwhile, the investment houses have already begun slashing their expectations for Polish GDP growth in 2009.
Among the most bearish views is JP Morgan’s. The bank has reportedly lowered its forecast to 1.5 per cent this week. That compares to a government forecast of 4.8 per cent, a National Bank of Poland forecast of 2.8 per cent and an EC prediction of 3.8 per cent — some very varying views.
Morgan Stanley, whose own 2009 GDP forecast for Poland is 2.5 per cent, warns forex loans may be about to drop dramatically.
This is important because a vast amount of Polish mortgages has been issued in foreign currency denominations. TD securities estimates the amount totals up to PLN88bn, nearly $30bn at today’s exchange rate, while Morgan Stanley notes household FX loan growth hit nearly 60 per cent in September, a series high – just before the major disruption that hit Eastern European markets in mid October.
Morgan Stanley explains:
September shows that local banks were still granting credit in local currency fairly generously. We think that the big hit to FX lending will take place starting already in the October data. Recall that some banks in Hungary (MKB) suspended FX lending in October, and others said they would slow it down. And in Poland, the recently published Senior Loan Officer Survey shows expectations for tightening in both supply and demand for housing loans (mostly in FX), and ‘marked’ tightening for consumer loans.
On a monthly basis, the new FX lending to households averaged some PLN8.2bn (CHF2.1b). While this may be attributed to borrowers seeking FX loans while still available, MS concludes that, either way, it’s just a matter of time before the credit growth collapses.
But, going back to those repayment concerns of Moody’s, one factor not addressed by many analysts is history.
When you consider Poland’s general consumer credit history – and the same goes for the rest of Eastern Europe – it equates to very little compared to the west. Getting a mortgage is still a relatively new concept for most of the population, with the boom in credit availability largely taking place over the last 5-8 years.
In addition, when you think (subprime aside) that most lenders in the established credit markets are cautious of lending to consumers with insufficient credit history, it’s incredible to think how keen they were to get into a largely untested market. More so, in these countries, it hasn’t been 20 years since housing (be it often a sub-standard form) was a state guarantee, no strings attached.
Related link:
The EE mortgage – FT Alphaville
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