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04 Nov 2009
London, 04 November 2009 -- The fundamental credit outlook for the Polish banking system remains negative,
reflecting the fact that banks' financial fundamentals have suffered
in the worsening operating environment, notably in terms of declining
asset quality, reduced profitability and lower growth, says
Moody's Investors Service in its new Banking System Outlook on Poland.
Moody's negative outlook for the Polish banking system expresses
the rating agency's view on the likely future direction of fundamental
credit conditions in the industry over the next 12 to 18 months.
It does not represent a projection of rating upgrades versus downgrades.
"We expect the negative trends apparent in the H1 2009 financials
of most of the rated Polish banks to persist into the next forecasting
period. Notwithstanding the solid pre-crisis trends and
healthy system-wide liquidity, Polish banks have not been
able to avert a crisis of confidence in wholesale funding, which
has lead to a severe contraction in banking activities and earnings generation,
and redefined strategic priorities for most banks," says Irakli
Pipia, Moody's lead analyst for the Polish banking system.
Polish banks have responded to the new market conditions by slowing their
lending activities and concentrating on replacing their maturing wholesale
funding with customer (mostly retail) deposits. As a result,
Moody's notes that competition for customer deposits has become
even fiercer, hiking up average funding costs and contributing to
significant margin pressure.
Asset quality, which had improved prior to the crisis, has
dramatically declined and most of the rated Polish banks have seen a jump
in non-performing loans. Initially, a large proportion
of this deterioration was due to the foreign exchange-related derivatives
contracts in corporate portfolios. However, during H1 2009,
all other asset classes, including retail, exhibited increasing
Moody's has noted on many occasions previously that, like
its peers in other Central and Eastern Europe countries, the majority
of Polish banks' loan portfolios remain unseasoned and have not
been tested in an economic downturn, let alone by such a severe
regional and global contraction. "The rapid growth seen in
the years prior to the crisis was partly fuelled by the pressure to outperform
revenue and lending targets set by foreign parents," adds
Mr. Pipia. Moody's expects the current downturn to
provide a "litmus test" for the underwriting standards of
Polish banks and challenge the reliability and benefits of the support
they receive from international parents.
Nonetheless, Moody's takes comfort from the fact that the
rated Polish banks have entered the crisis with relatively healthy financial
fundamentals compared with some of their regional peers. The system
remains adequately liquid and mainly relies on internal funding sources.
Most of the rated banks are well-established domestic players and
as such are insulated from the vagaries of international capital markets.
"Capitalisation in the system declined due to the rapid growth seen
prior to the crisis, but the quality of capital is good and the
rate of earnings retention was close to 100% in 2008. Moody's
stress tests suggest the current stock of capital is sufficient to withstand
a reasonable degree of stress (under the base-case scenario) in
the coming year, but is not sufficient to support new lending expansion
and could be a major factor in limiting the supply of bank credit to the
economy," explains Mr. Pipia.
Overall, Moody's understands that the crisis adjustment has
required the majority of banks to redefine their strategies and adapt
to a low-growth scenario. There will be a far more cautious
approach to lending, defensive strategies with regard to liquidity
and liability management and depressed profitability. Compared
with the beginning of the year, when the banks attached the highest
priority to their liquidity management and funding mismatches, the
rating agency expects the next 12 months to be increasingly dominated
by asset quality and risk management considerations. As a result,
the sufficiency of capital and other risk absorbing factors are likely
to dominate the agenda for regulators and banks alike. These latter
factors will also represent the main rating drivers and changes in them
will provide a basis for further rating actions.
The principal methodologies used in rating the Polish banking system are
the "Bank Financial Strength Ratings: Global Methodology"
and "Incorporation of Joint-Default Analysis into Moody's Bank
Ratings: A Refined Methodology", which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating the Polish banking system can also
be found in the Rating Methodologies sub-directory on Moody's
The "Banking System Outlook: Poland" is available on
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Moody's outlook for Polish banks remains negative
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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