Warsaw Stock Exchange
GetBack, which completed an IPO on the Warsaw Stock Exchange (WSE) in July 2017, has been at the centre of a widening scandal since missing payments on its debt in mid-April.
Multiple members of the firm’s senior management, including former CEO Konrad Kakolewski, have been arrested on charges including fraud, mismanagement and destroying evidence.
Other members of the Warsaw financial community have also been caught up in the affair.
Several asset managers are facing scrutiny over investments in distressed debt funds managed by GetBack, while two former board members of WSE-listed fund manager Altus were detained in early September on charges relating to the sale of debt collector EGB Investments to GetBack in May 2017.
The turmoil has also been felt in the Polish banking sector, where locals fear it could prove crippling for two troubled lenders controlled by local tycoon Leszek Czarnecki.
Getin Noble Bank, the larger of the two, has been loss-making since late 2016 after an ill-advised attempt to build market share in the wake of the financial crisis by handing out risky mortgages, which resulted in ballooning bad debts.
An ambitious restructuring programme was supposed to put the lender back in the black by the second quarter of this year.
However, half-year results published at the end of September showed further losses in the three months to the end of June, as a chunky loan to a subsidiary of GetBack resulted in another round of provisioning and investments in a fund managed by the debt collector turned sour.
This resulted in further erosion of Getin Noble’s already weak capital base. Despite a PLN190 million ($51.1 million) equity injection by Czarnecki in the first half of the year, the bank’s tier-1 ratio stood at just 9.2% by the end of June, more than three percentage points below the regulatory minimum.
A follow-up recapitalization of PLN100 million in September, and the promise of another of equal size, failed to reassure rating agencies or investors.
On October 10, Moody’s downgraded Getin Noble to Ba3 and put the rating on review for downgrade, noting the bank’s “prolonged undercapitalization”, weak asset quality – at 15%, its non-performing loan ratio is well above the Polish average – and vulnerability to costs related to foreign-currency mortgages.
Before the financial crisis, Getin Noble was one of Poland’s biggest issuers of Swiss franc mortgages, and the legacy loans still account for 24% of the bank’s portfolio.
While the appetite of Polish policymakers for punitive action in relation to these loans appears to have moderated, the risks associated with them have not. Recent judgements in Polish courts suggest that banks might yet be forced to make substantial reparations to buyers of FX mortgages.
All these concerns have been reflected in Getin Noble’s share price, which by mid-October had slumped to just PLN0.5, equating to a price-to-book value of 0.1.
“I’ve never seen a bank stock trading that low,” says a local banker in Warsaw.
The share price of Czarnecki’s other lender, Idea Bank, has also taken a beating, falling to PLN3.32 from a high of PLN28.5 just after its IPO in May 2015.
The market has started to worry about these banks. They are not very large, but in terms of deposits they are quite material- Andrzej Powierza, Citi Handlowy Brokerage House
Set up in 2010 as an SME-focused challenger bank, Idea has also been hit by the fallout from the GetBack affair. The lender has faced criticism and compensation claims from clients for its role in selling bonds issued by the debt collector, which are expected to receive a haircut of at least 50%.
At the time of its default, GetBack had PLN2.6 billion of bonds outstanding, most of which were held by more than 9,000 retail investors.
Although not authorized to sell the bonds, Idea Bank has admitted to in effect marketing them to clients through a local stockbroker and included PLN14 million of provisioning for compensation in its first-half results.
Whether Getin Noble and Idea Bank will be able to weather their respective headwinds is the question gripping the Polish banking sector.
“The market has started to worry about these banks,” says Andrzej Powierza, an equity analyst at Citi Handlowy Brokerage House. “They are not very large, but in terms of deposits they are quite material.
“Even larger banks are starting to consider whether this could affect them.”
At the end of June, the combined deposit base of Getin Noble and Idea Bank amounted to just over PLN60 billion, equivalent to more than four times the total assets of Poland’s deposit guarantee scheme at the start of the year.
This has prompted speculation that, if the situation at the two lenders continues to deteriorate and sufficient capital is not forthcoming from their existing shareholder, policymakers could sponsor a takeover of the pair by one of Poland’s state-controlled banks.
Market leader PKO Bank Polski has yet to comment on the situation, but in late September Michal Krupinski, CEO of Polish number two Bank Pekao, told local media that the lender had no interest in any assets owned by Czarnecki.
Matters are expected to come to a head in November, when Getin Noble and Idea reveal their third-quarter results, and are also expected to announce a decision on proposals to merge the two lenders.
“The focus will be on what is happening with deposits in these banks,” says Powierza. “If there are no major outflows and if they manage to avoid further provisions, they should be back in profit and the market excitement will calm down.
“On the other hand, if there is a big increase in funding costs or a substantial decline in deposits, it could lead to further speculation about the future of the banks.”