Polands banking sector, for so long the sole shining star in emerging Europe, is starting to lose its lustre, as the regional economic slowdown looks more and more severe.
Polands once-purring export engine, which saw the regions largest economy through the worst of the financial crisis, has started to sputter. GDP rose just 1.4% in the three months to end-September 2012, the slowest increase in 14 quarters.
The prognosis for the only European nation to elude recession during the global slump seems to deteriorate by the month. In October, the IMF cut its 2012 GDP forecast for Poland to 2.4%, from 2.6% previously, and its 2013 forecast to 2.1%, from 2.3%. In November, the IMF again scratched out those numbers and added new, smaller ones: GDP to expand by 2.25% in 2012 and by 1.75% in 2013.
Not surprisingly, Polands financial sector views such developments with a rising sense of dread. In a November 30 note, Citi Research warned that Polands banks "appear as pessimistic now as at almost any time in recent memory".
This glumness is not misplaced. The earnings of Polands eight largest publicly listed banks fell by 3% year on year in the third quarter of 2012, forced down by net fees, which declined 4% during the same period.
"This is a problem for the whole sector," says Andrzej Powierza, equity analyst at Citi in Warsaw. "Due to high interest rates, 2012 has been relatively good for Polands banks. Next year will be worse: well see lower lending growth, lower margins and lower fees."
This is uncertain territory for Polands banks. The past few years have been golden for the CEE regions largest economy at least in comparison to the overwhelming dysfunction undermining the eurozone, Polands biggest export customer.
Threats have emerged on all sides. Banks rarely post healthy profits when an economy loses its sparkle, and Poland appears no exception: retail sales rose by just 0.1% in the third quarter, the lowest rate in nine years, while fixed investment contracted by 1.5%.
"The problem isnt the banking sector," says Powierza. "Its the slowdown in the economy, which is affecting demand for bank products." Nowhere is that more evident than in retail loan growth, which Citi tips to come in at less than 5% for the full year 2012.
"I cant remember the last time retail loan growth was so sluggish it must have been in the 1990s," says Andrzej Halesiak, economist at Bank Pekao. "That will continue well into 2013."
Slowing growth forced Polands Monetary Policy Council to cut interest rates in early December for the second time in two months, to 4.25%, with further cuts expected in early 2013.
Bank provisioning costs rose by 17% year on year in the third quarter of 2012, in expectation of a rise in non-performing loans. By end-September, the ratio of bad loans to total lending stood at 8.8%, up from 8.2% at the start of the year. Analysts tip NPLs to rise above 9% in 2013.
And the hits keep coming. Rules proposed by the National Bank of Poland will cut interchange fees levied during credit and debit card transactions to 1.1% by 2016, from 1.6% at present, further denting bank profitability.
The government is also considering a new levy on banks: a prudential fee designed to help buffer the state against future bank failures even though, as lenders grumble, the Bank Guarantee Fund already performs this function.
Halesiak says that for some banks these new rules would be "difficult to absorb right now, given everything else that the industry is dealing with".
Pan-CEE bank prospects dim
Analysts reckon pan-CEE banks might also post worse profit numbers for 2013 and the second half of 2012, reflecting the gloomy regional economic outlook. Economic data released last month from Hungary, Czech Republic and Slovenia all showed deeper-than-expected economic contractions.
Gunter Deuber, an analyst at the Vienna-based regional bank Raiffeisen, says banks that thought the regional downturn would be less severe, and provisioned accordingly, will now have to catch up with reality.
At Raiffeisen, consolidated profit fell 11.5% in the third quarter compared with the previous quarter.
"The depth of the downturn and the pace of the recovery [in CEE] are surprising on the downside," says Mikhail Shlemov, a banks analyst at VTB Capital. "Its fair to say that this is eating into banks earnings outlook."