In fact, even the rating agency's press release shows that whilst the banking system outlook is negative, most of the banks' standalone and senior debt and deposit ratings currently carry stable outlooks. This reflects Moody's current view that on a standalone basis, most banks have capital buffers and solid franchises that will likely help them withstand more difficult operating conditions without significantly weakening their credit profiles. Moody's will closely monitor banks' individual performance in what will likely be a more challenging environment over the next 12-18 months.
Polish banks remain strong and stable and their rating outlook downgrade by Moody's stems more from the situation of their Western parents, stated BELKA for the Polish financial press. "We know that Polish banks are very well capitalized and stable," NBP governor underlined and reminded that 2011 is "absolutely record" in terms of banks' profits in Poland. However, he stressed that a significant stress factor could be "the decisions of the European Council which oblige the European banks to increase their capital ratios significantly, which of course, despite all official assurances could result in decreasing the willingness of these banks to expand lending and on the other hand to continue short-term financing".
The outlook expresses Moody's expectations for the fundamental credit conditions in this sector over the next 12-18 months. Weaker economic growth will trigger asset-quality deterioration and increase funding competition, says Moody's, limiting the banks' ability to expand their lending, and therefore negatively impact revenues. In this environment Moody's anticipates that banks will accumulate liquidity and pursue defensive strategies, thus reversing the positive momentum gained in first half 2011.
Whilst Poland is more insulated from the turbulence in the euro area than some of its smaller neighbours, it is not immune to external shocks. Moody's therefore expects that weaker growth in the major Western European countries (Poland's principal trading partners), fiscal consolidation and restrained bank lending will suppress the pace of economic expansion in Poland and affect banking system performance. Moody's said that it does not anticipate an immediate sharp downturn in banks' performance, however, but expects pressures to build gradually over the next 12-18 months, adversely affecting asset quality, liquidity and profitability.
In line with its view of softer economic growth and lower domestic consumption, Moody's expects asset quality to deteriorate progressively. Although in first half 2011, system-wide asset-quality trends stabilised for the first time since 2008, certain asset classes have not shown signs of recovery, such as unsecured consumer lending, small and medium-sized enterprises (SMEs), mining, shipping and steel. Moody's expects these segments' underperformance to persist in 2012.
Swiss franc-denominated mortgages are of particular concern, according the rating agency, by representing 21.3% of total loans as of August 2011. Further sharp and sustained depreciation of the Polish zloty -- which is prone to abrupt volatility from external factors -- would increase delinquencies on these mortgages. In Moody's opinion, the banks' risk management and loan-recovery systems are inadequate to cope with a large influx of non-performing assets. Consequently Moody's expect write-offs and losses from lengthy loan work-outs to increase. However, asset-quality concerns are partly offset due to banks' solid capital resources. Risk-absorption capacity is stronger now in Poland than before the period of market turmoil that began in 2008. With a 12.4% average Tier 1 ratio, Poland's banking system is one of the better capitalised systems compared with regional peers, providing solid loss-absorption capacity under Moody's scenario analysis.
System funding and liquidity remain vulnerable to stressed market conditions due to the banks' structural reliance on price-sensitive short-term customer deposits. Funding competition can flare up rapidly, leading to so-called "price-wars for deposits". In addition, some foreign parents' subsidiaries rely on parental funding support, which is crucial to limit currency mismatches as these subsidiaries have limited access to FX funding on a standalone basis. Although Moody's views parental funding as a stable source of liabilities, this funding structure will leave the system exposed to rollover and debt-concentration risks over the outlook period.
The weakening operating environment will gradually weigh down on profitability and loan origination. The pace of the latter has declined considerably over the past two years and is likely to remain subdued due to Polish consumers' high indebtedness. However, Moody's notes that profitability momentum so far has been good and that Polish banks have maintained stable revenues and resilient pre-provision earnings under difficult conditions, as evidenced by a healthy 12.5% system-wide return on equity at end-2010, which compares favourably with other Central European banking systems.
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