4.1. Economy and the banking sector in 2014

4.1.1.   Solid growth in a turbulent environment

As generally expected, 2014 brought about accelerated economic growth, which stepped up from 1.7% in 2013 to 3.3%. The growth rate was higher than projected in most forecasts early in the year. Inflation came as an unpleasant surprise in 2014: despite expectations, it was a year of an almost monotonous decline of inflation, which fell below zero for the first time ever in July and stood at -1% at the year’s end.

The steady fall of inflation, which postponed the prospect of inflation returning close to the NBP’s target, was combined with growing uncertainty about the market conditions in Poland and beyond. A series of adverse events (slow-down in the eurozone, economic crisis in Central and Eastern European countries, mainly Russia and Ukraine) put in question the potential dynamic growth of foreign demand for Polish goods and services. Coupled with a decline of many economic indicators, these factors prompted the Monetary Policy Council to resume monetary policy easing. After cutting the main interest rate by 50 basis points in October, the Monetary Policy Council remained dovish and signalled further cuts. In the opinion of the Bank, the decision will most likely be made in March 2015.

The first weeks of 2014 were not easy for the Polish currency: an outflow of capital from emerging markets, mainly affecting Turkey which wrestled with the external imbalance and political problems, precipitated a sellout of Polish assets as well, and the zloty fell to ca. 4.26 against the euro at the end of January. Subsequent months brought optimistic statistics of the real economy as well as steadily rising expectations concerning European Central Bank initiatives. These drivers gradually allowed the zloty to strengthen to 4.09 against the euro and 2.98 against the dollar in early June. In the latter half of the year, the zloty depreciated due to a combination of adverse factors, from weaker economic activity in Poland and resumed interest rate cuts, to escalation of the Ukrainian-Russian crisis and a collapse of the financial systems of both countries, to a strong appreciation of the US dollar. At the end of the year, on a shallow market in the holiday season, the zloty fell to 4.40 against the euro and 3.60 against the dollar. The Swiss National Bank’s decision to drop the cap on the CHF exchange rate on 15 January 2015 added more volatility to the Polish FX market. As a result, the exchange rate of the Swiss franc against PLN rose from ca. 3.6 to more than 4. For more information, please see section 4.4., chapter “Impact of the appreciation of the Swiss franc on the position of borrowers, the banking sector, and mBank”.

Growth and inflation

The Polish economy started the year in full swing as GDP growth was no less than 3.4% in Q1, which came as a nice surprise to economists, and not the only one in 2014. Notwithstanding some risks and resulting concerns about the Polish economy, as well as unpleasant surprises concerning frequently published statistics, economic growth remained above 3% quarter after quarter (3.5% in Q2, most likely ca. 3% in Q4). The very good performance of the Polish economy was driven by several factors:

  • Further acceleration of consumption, supported by higher real increase of household incomes (including both salaries and other income, such as social security benefits) and a steadily improving consumer sentiment. While retail sales grew moderately in 2014, the growth of consumption was largely driven by services.
  • Strong growth of private investments, which accounted for most of the impressive 10% increase of fixed capital formation in 2014. In the opinion of the Bank, the strength of private investments derives mainly from deferred investment demand (investment projects were postponed during the economic downturn) and strong improvement of corporate sentiment at the turn of the year, as well as the need to expand the production capacity whose utilisation is relatively high.
  • Very vibrant Polish labour market: the unemployment rate continued to fall in 2014 and was only 11.4% in December (compared to 13.4% at the end of 2013). In addition, the number of persons employed grew dynamically in 2014, by 0.7% to 2% depending on the measures used and the source of data.
  • Drastic easing of the monetary policy in the preceding year, which had immediate effects reducing the debt burden of households and impacted the structure of households’ assets (cash was moved from savings accounts to investment funds or used for consumption) in support of consumer spending.

Contrary to general projections and NBP’s expectations, inflation did not begin to grow in 2014. Quite the opposite: inflation fell below the zero mark in 2014, hitting one low after the next month after month. Within the year, inflation fell from 0.5% reported in January to -1% in December. This was driven by many factors, from the sharp decrease of food prices thanks to very good harvests and the later trade wars with Russia, to the “oil shock” in late 2014 (as oil prices fell by more than 50%), whose effect is not yet fully reflected in CPI data. These stimuli were coupled with low core inflation, attributable to deflation in the external environment of the Polish economy (negative index of the prices of imported goods for the most part of the year), as well as the still incomplete recovery of domestic demand. Under those conditions, the average annual consumer price index was almost precisely zero in 2014.

Interest rates

In the first half of 2014, the monetary policy remained dovish in the absence of inflation pressures in the economy. According to the consensus shared by the Monetary Policy Council with analysts and market participants, the interest rates were to remain record-low for several months. However, a change of the monetary policy took some time. Expectations of interest rate cuts emerged in May and June as domestic macroeconomic statistics declined, the trade wars with Russia escalated, and the European Central Bank initiated a new phase of quantitative easing. Data published in the summer months only reinforced the trend. Eventually, at its September meeting, the Monetary Policy Council signalled a new cycle of interest rate cuts. The decision came in October when the reference rate was cut by 50 bps (the Lombard rate by as much as 100 bps). The decisions of the Monetary Policy Council in the months that followed were affected by internal differences of opinion on what would be an adequate response to the combination of solid growth and declining inflation prospects. Although proposed by the dovish members of the Monetary Policy Council, no cuts were decided at the November and December meetings.

4.1.2.   Banking sector

2014 turned out to be moderately better than 2013 for the financial results of the Polish banking sector. The net profit of the sector stood at PLN 16.2 billion in 2014, compared to PLN 15.2 billion reported in 2013. The increase of the profits of the banking sector was driven mainly by improved net interest income, which grew by PLN 2.5 billion year on year, however, mainly owing to a decrease of interest expenses by PLN 5.5 billion. In the environment of extremely low interest rates, interest income shrank by PLN 3 billion.

2014 brought further improvement of the quality of banks’ loan portfolios. The percentage share of non-performing loans decreased from 8.5% to 8.1% in 2014 (year-end figures), including a decrease from 11.5% to 10.2% for enterprises and a decrease from 7.0% to 6.5% for households.

2014 was another consecutive year when the assets of the banking sector continued to grow. The balance sheet total of the Polish banking sector stood at PLN 1.53 trillion at the year’s end (an increase of 9% year on year). Some two-thirds of the growth in assets is attributed to expansion of lending. As for equity and liabilities, in addition to growth of deposits at a pace similar to new lending, equity continued to grow by ca. PLN 13.5 billion year on year.

The offer of the Polish banking sector was characterised by the following trends:

  • The criteria and terms of bank loans were gradually relaxed. This concerned nearly all segments of the market but the credit policy was mainly relaxed for small and medium-sized enterprises, as well as consumer loans for households. The terms and criteria of housing loans became stricter, mainly due to the minimum down-payment requirement imposed in early 2014.
  • Interest rates on retail and corporate loans and deposits decreased following the NBP’s October rate cut.
  • Mobile banking and non-cash payments continued to grow.
  • Margins on loans and deposits were reduced. With the exception of mortgage loans, credit margins were falling steadily in 2014 as a proxy of lower credit risk and improved financial standing of borrowers. Due to falling interest rates and the aspiration to compete for deposits (mainly in the retail segment), banks were often forced to maintain interest rates on deposits above the interbank rates WIBOR and WIBID.

 

In 2014, further symptoms of recovery emerged on the credit market even if they mainly concerned the corporate segment: the growth rate of loans for enterprises increased from 1.6% at the end of 2013 to ca. 10% a year later. This was largely driven by the fact that the recovery on the corporate lending market, initially boosted only by investment loans, also involved the other segments in 2014. In this context, it should be noted that the de minimis guarantee programme continued: ca. PLN 10 billion of guarantees were extended in 2014 (compared to PLN 7 billion in 2013).

On the other hand, the retail segment (households) did not report a break-through in 2014 due to a very modest increase of mortgage loan volumes and a relatively low growth rate of consumer credit. The former segment reported a growth rate under 5% in 2014 while the modest volume of new loans (under PLN 10 billion per quarter) was offset by growing repayments of the stock of loans built in the previous years. This was the case despite the record-low interest rates on mortgage loans. In terms of volumes, the key development was the decision of the Swiss National Bank to drop the cap on the exchange rate of the Swiss franc, which caused the value of CHF denominated loans to rise from PLN 136.2 billion at the end of December to ca. PLN 154 billion at the end of January 2015 according to the Bank’s estimates. However, the decision is most likely to have a minor impact on the amount of instalments paid by borrowers because the FX effect will be largely offset by the decrease of LIBOR CHF (-0.88% on three-month loans).

On the other hand, the volume growth of consumer loans was limited in 2014. The October cut of the Lombard rate by 100 bps set a new maximum interest rate on consumer loans, which was 4 percentage points lower, but it went practically unnoticed by the market and probably failed to boost demand for loans.

2014 was also a time of deposit base growth. In particular, despite the low interest rates, the inflow of new cash to household deposits not only did not slow down but actually accelerated throughout the year. Household deposits stood at more than PLN 591 billion at the end of 2014, representing an increase of PLN 49 billion year on year. The year-on-year growth rate of household deposits accelerated from ca. 4% to more than 9%. Corporate deposits also grew dynamically in 2014 and stood at PLN 226 billion at the year’s end, representing an increase of PLN 19 billion year on year. Their grow rate ranged within the year from 4.5% to 10.5% year on year, reflecting the turbulent story of Polish corporate finance (effects of the Russian crisis, sharp decrease of costs thanks to falling commodity prices).