S&P put out a review of the Polish banking sector on Thursday which, quite worryingly, concluded that the industry’s credit risks were rising because foreign currency lending — seen as the country’s biggest exposure to the global crisis — is actually growing.
As they noted (our emphasis):
The share of foreign currency loans in total lending to the nonfinancial private sector was about 35% at end-May 2009, which is not an unduly high figure for the CEE, but has been increasing since the beginning of 2008, when it was 25%. Although there is a significantly higher proliferation of foreign currency loans in the portfolios of the large commercial banks that dominate the system, supportive foreign owners, or state support largely mitigate individual bank risks. However, to take the banking sector as a whole, foreign currency lending has exposed the system to currency risks, although this is limited by the relatively small open foreign exchange positions kept by the most active banks. Of more tangible concern is the borrower’s ability to repay during an adverse currency cycle or a period of robust interest rate rises. Attracted by lower interest rates, Polish retail borrowers have been increasingly eager to take out foreign currency loans. In May 2009, about 40% of total retail lending was in foreign currencies (compared with 31% at end-2007), which is much higher than the corporate sector’s foreign currency loans to total lending (26% on the same date). S&P further noted asset quality was probably worsening too:
Systemwide, the quality of corporate loans improved in 2008 (table 3). However, in the fourth quarter of 2008, the growth rate of the value of nonperforming loans (NPLs) to enterprises was higher that the growth rate of the value of loans, which lead to an increase in the NPL ratio. These trends intensified in the first months of 2009: the value of NPLs to enterprises in the first quarter rose by 41%, whereas the NPL ratio increased to 7.9%. The increase was observed in typically export-oriented sectors (manufacture of furniture, wood, and wood products; machinery; food products; textile products; and wearing apparel), in sectors related to the motor vehicle industry (manufacture of motor vehicles, trailers and semitrailers, transport and communications), and sectors related to the construction industry (manufacture of metals and metal products, fabricated metal products except machinery and equipment).
And most interestingly perhaps, S&P finally picked up on the issue of Poland’s relatively young credit history, something we’ve been warning about for a while.
As they put it:
In the first quarter of 2009, the value of NPLs rose by 15.4% from the first quarter of 2008, while the NPL ratio amounted to 3.8%. In 2007 and 2008, the value of loans to households more than doubled (after excluding the impact of exchange rate movements). As a result, we believe that the relatively young and consequently unseasoned loan portfolio is particularly vulnerable in such a difficult operating environment. We estimate that NPLs as a percentage of total loans will be in high single digits by the end of this year, if the pace of deterioration of the first half persists for the rest of the year. Additionally, we expect a notable increase in new loan loss provisions at most Polish banks to better reflect their deteriorated operating environment and expected credit losses.
You can view the full report in the Long Room.
Related links:
Poland: not so strong after all? – FT Alphaville
The big Le-borrow-ski – FT Alphaville
Emerging Europe outlook: still bleak – FT Alphaville