We just want the state not to push too hard

Interview with Przemek Gdański, CEO of BNP Paribas Bank Polska published in Dziennik Gazeta Prawna daily on 15 June 2020

By ?ukasz Wilkowicz

Given what’s currently happening in the economy, have the strategies of banks in Poland remained up-to-date? Or should they be trashed and should new ones be built in their place?

Strategies that were developed prior to the pandemic are largely still valid. If we look at our strategy, it puts a great emphasis on digital development, in terms of both customer solutions and automation of internal processes. The strategy also talks about growth, which is still achievable, although on a different scale. Digitalisation aspects and everything that has to do with new technologies are certainly still up-to-date and even growing in importance. At the same time, the strategy calls for the development of an inclusive organisation that will stimulate the development of its employees.

When it comes to the financial aspect: the targets will certainly not be the same as before.

This results from numerous factors. First of all, demand for banking services visibly declined when the pandemic began. People were staying home, not thinking about loans for apartment upgrades, holidays or a new car. Second of all, three consecutive interest rate cuts will significantly reduce banks’ income, and this applies to all banks, without exception. Thirdly, much higher risk costs will be recognised in statements of profit and loss, due to the fact that the economy has entered a stage in which gross domestic product declines. The level of risk in the sector has already gone up significantly, as seen in the results for the first quarter. Therefore, financial parameters this year will not reach the expected levels.

2021 will probably also be weak and as for later, we do not know how many banks will stay on our market.

In 2021, we should see GDP growth, although from a lower base after this year’s decline, so there is no doubt that the results will be weaker than those expected in the mid-term plans developed before the pandemic. As regards the number of banks on the market, of course we can contemplate whether there will be further consolidation. We can also worry about the ability of certain institutions to survive – those smaller and weaker, which were not in the best shape when the interest rates were higher and the cost of risk was lower.

Will competition on the Polish market strengthen or weaken as a result of the on-going crisis, all of the events such as interest rate cuts?

The situation has been highly competitive for many years. Banks are outpacing one another in implementing new solutions. They are also strongly competing on price, both in terms of margins and fees and commissions. This causes the economy of running a banking business in Poland to be filled with challenges. Much depends on how far the consolidation processes will go. If we look at the European markets, most of the countries are dominated by a few big banks. There is no such dispersion as in our case.

You recently notified that interest rate cuts – at the end of May the Monetary Policy Council reduced the main interest rate to 0.1 percent – will reduce the bank’s interest income this year by PLN 200-230 million. This is roughly a third of the annual profit in the past two years. How much of that and how quickly will the bank be able to recover? And most importantly – how? Will the prices of banking services go up?

The loss of income on the back of interest rate cuts is in my opinion irreversible. To a certain degree, banks will try to do this. In Poland, banking services are very attractively priced, oftentimes much below many other mature markets. We will probably see an increase in fees and commissions. Credit margins should more closely reflect the higher level of risk. A high level of competitiveness means that these changes will not be fundamental and will not make banking services expensive. But we have to clearly and precisely say that these services have for years been too cheap on our market.

What fees are the most likely to be increased?

Many services were and continue to be offered by banks to customers without fees. There is a free account, free wire transfers, free cards. The question is whether this is the right business model? Can we find another industry in which so many of the key services are free of charge? An interest rate cut by 140 basis points means that there is no room for everything to remain free any longer. We can say that this change in interest rates will sort of civilise the approach to banking: what should not be free will no longer be free.

Will a decline in profitability in the banking sector affect its ability to prop up the economy, i.e. by expanding lending activity?

Banks are able to lend as much as their equity allows, which is built in two ways: by retaining earnings and by issuing new shares. The second option is practically unrealistic in a situation where capital markets are under pressure and bank valuations are drastically down. So, earnings will be retained instead. When there are no earnings, it will be absolutely natural that the ability to create new credit will diminish. If the banking sector is not healthy, stable, able to accumulate equity, then a long-term economic depression might be on the cards.

Do you see any specific threats?

This is driven by many factors, starting with very extensive regulations in the sector, through costs that we have to deal with – such as contributions to the Bank Guarantee Fund, coupled with a significant decline in revenue resulting from the interest rate cut and higher cost of risk. I will also add that banks have incurred additional expenses to maintain operational continuity in a remote work model and ensure their employees’ and customers’ safety during the pandemic. We are in a situation where branches must be equipped with disinfectants, plastic walls, thermal vision cameras, 90% of head office employees are working remotely, so we had to provide them with proper equipment, ensure that everything is safe – all of this constitutes significant costs for the bank.

How significant were these expenses?

I cannot provide a specific figure but we are talking about tens of millions of zlotys. On top of this come the costs of adapting systems, processes in order to distribute funds from the Polish Development Fund – banks made it possible free of charge. Banks also implemented, at their own initiative, a moratorium on loans, for which we are also not charging any additional fees. In this case, banks were also required to implement additional IT solutions.

Something else is threatening us and I am very worried about it, as is the entire sector – the statutory credit holidays, which would rid banks of interest income during such holidays. Secondly, and few people seem to realise this, it would probably force banks to recognise provisions for the loans that would be the subject of such holidays.

Why?

If a customer declares that he lost his main source of income – which is how it is supposed to work under the draft act – and is unable to service his loan, then the bank, acting in a professional and prudent manner, would have to reclassify the loan and create a provision. In total, this would mean billions in burden for the sector.

Banks would rather not know that customers are having trouble with repaying their loans?

A temporary loss of the main source of income does not have to mean that the customer is unable to service his loan. People use their savings for this or even borrow from their family.

The increased pressure on banks has been here for several years already. Does this not mean that the opinion on the banks in general is not good?

It started with the bank tax introduced in 2016. I did not understand the reasons for introducing it since Poland is one of the few countries that did not have to spend taxpayers’ money during the financial crisis of 2008-2009. I believe that this is unfair. A single industry should not be excessively pressured, compared to other industries. And now this tax would be due also on loans that would be subject to credit holidays. This is simply not fair.

Have the banks not earned this negative assessment, though?

We, as a sector, certainly made mistakes but it is difficult to find an industry that doesn’t make them. The level of animosity toward banks is incommensurate to the scale of these errors. Let me go back to the beginning of the pandemic. Back then, all banks concluded that they are of strategic importance to the economy. That they have to remain available to customers across all channels. Our employees in branches were coming to work even though they saw that the world was closing down. This was very responsible behaviour, which showed our authentic involvement. Banks have actively engaged in a number of activities financing the fight against the epidemic, financing tests for coronavirus, providing personal protective equipment, meals for seniors and medical professionals or providing computers to children for remote education. Banks also came up with the idea of a moratorium on loans, which was introduced already on 13 March. We are discussing the statutory credit holiday now, in the middle of June.

I am unable to say why the dislike of banks is so high. I am worried about the emergence of thinking that liabilities toward banks are something that can be approached lightly and that it can be stated by law that liabilities do not have to be honoured and there is no need to pay for the money made available by a bank. I think that in the background there is a lack of understanding of banking and generally a low level of financial education in Poland. We are striving to improve our image and I think that banks have done and continue to do a lot in this regard.

But effects can hardly be seen.

My mind sometimes wanders into areas such as loan sharking or even antisemitism and other such dangerous areas. That is where I try to find a relatively logical justification for this negative attitude. If we were in a country where the state would be forced to put up tens of billions of euros or dollars to save the banking system, it would be much easier for me to understand. But the Polish banking sector went through the financial crisis without taking a single zloty from taxpayers, and the Polish economy as one of very few in the world grew after 2009. An effective banking sector helped us a lot.

Would the banks need any sort of support in order to increase lending and help in simulating economic growth after the current crisis?

The banking sector does not need help from the state. All we need is not to be pressured to much. What should be changed? It could mean things such as classifying contributions to the Bank Guarantee Fund as tax-deductible expenses. Let me repeat: in Poland the taxpayer did not have to rescue banks, which is why the bank tax did not have and will not have any rational justification as in other countries where the state treasury was forced to rescue the banking sector. I believe that to stimulate credit supply in the context of higher risk, at least new loans should be exempt from the banking tax. Banks should be treated as institutions of key significance, indispensable for economic growth. The Polish economy needs a healthy, strong banking sector, rather than a banking sector that is itself struggling to survive.