Banking (Bank Pekao, Alior Bank)
Market situation
In 2020, in connection with the COVID-19 pandemic, the balance of the banking sector was put to a test, and the results of a number of players were burdened with additional provisions. Despite that, banks managed to go through this phase of the crisis with stability. Polish banks started 2020 with, among others, efforts to adapt to the CJEU judgments concerning mortgage loans in foreign currencies and the so-called “small CJEU” concerning consumer loans. However, additional challenges associated with COVID-19 arose quickly. The pandemic spreading across the globe has pushed the global economy into a crisis at a scale not previously seen in the post-war history. Poland entered recession already in the second quarter and has not managed to make up for the losses before the end of the year. Deterioration of economic activity had direct impact on the results of the banking sector. Additionally, the sector had to struggle with record low interest rates. This was one of the instruments which the MPC introduced in order to support the economy during the slowdown period.
As at the end of December 2020, there were 30 domestic commercial banks, 530 cooperative banks and 35 branches of credit institutions operating in Poland. The banking network comprised a total of 5,551 branches, 2,911 offices, agencies and other customer service outlets and 3,106 representative offices (including partner outlets). Therefore the banking network comprised a total of 11,568 outlets, i.e. 1,213 outlets less than at the end of the previous year.
Headcount in the banking sector at the end of December 2020 fell to 149.0 thousand people and was 7.9 thousand (5.0%) lower than at end of 2019.
In 2020, the banking sector generated a net profit of PLN 7.8 billion, compared to PLN 13.8 billion in 2019, down PLN 6.0 billion (i.e. 43.8% y/y). The interest income movement (PLN -9.4 billion y/y) had the most profound impact on the development of the net profit. In addition the result on provisions and impairment losses was PLN 4.1 billion lower y/y and the dividend income declined by PLN 1.2 billion y/y. Positive impact came from a decrease of interest expense (PLN -7.3 billion y/y) and commission income (PLN +1.5 billion y/y).
The economic recession already from Q2 2020 exerted strong pressure on the margins in the sector. April and May brought a noticeable deterioration of the interest margin. Despite keeping financial costs under control, the margin dropped to 2.24% at the end of the year, compared to 2.63% in December 2019.
Return on equity in 2020 was gradually dropping, starting from March. In 2020, ROE in the banking sector stood at 3.38%, which was the lowest since 2012. Compared to 2019, it fell by 3.35 p.p.
In December 2020, the assets of the banking sector stood at PLN 2,356 billion, up 17.8% y/y. The increase in the assets of the banking sector was driven mainly by an increase of the value of debt instruments.
Loans and advances in December 2020 stood at PLN 1,295 billion, down 0.2% y/y, which is a sign of the slowdown of the lending activity as the crisis developed. Despite lower interest rates, the growth rate of deposits increased noticeably. At the end of December 2020 they increased to PLN 1,688 billion, i.e. 14.2% y/y.
The structure of deposits recorded a slight decrease of the share of the non-financial sector from 85.6% in December 2019 to 80.4% in December 2020. The biggest increase was posted in corporate deposits, as result of the crisis tendency to increase the liquidity cushion by businesses and accumulation of funds from the “Anti-crisis Shield”. Household deposits also accelerated but to a lesser extent than in the case of corporates.
At the end of September 2020, the banking sector’s own funds for capital ratios, calculated in accordance with the regulations laid down in the CRR Regulation1, was PLN 227.5 billion, up 8.1% from the end of September 2019.
The banking sector’s total capital ratio at the end of September 2020 was 20.4% (up 150 bp compared to the end of September 2019). The Tier I capital ratio at the end of September 2020 was 18.4% (up 143 bp compared to September 2019).
1 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012
Operations of the Pekao Group
Bank Pekao is a universal commercial bank offering a full range of banking services provided to individual and institutional clients operating chiefly in Poland. The Bank Pekao Group consists of financial institutions operating on the following markets: banking, asset management, brokerage services, transaction advisory, leasing and factoring. From 2017 Bank Pekao has been part of the PZU Group.
The Bank offers competitive products and services on the Polish market, high-level customer service and a developed distribution network. A broad product offering, innovative solutions and individual approach provide clients with comprehensive financial service. An integrated service model, in turn, guarantees the highest quality of products and services, as well as their alignment with the changing needs. The Bank systematically strengthens its market position in the strategic areas of business.
At the end of Q3 2020, Bank Pekao was the second largest bank in Poland (in terms of the asset value).
New products and services
In 2020, Bank Pekao took broad actions supporting employees, clients and business partners, adapting its activity to the challenges and restrictions associated with the COVID-19 pandemic. The solutions implemented were aimed at maintaining business continuity. The key was to reduce the risk of a coronavirus infection by the employees and provide clients with safe access to banking services.
Bank Pekao promoted “7 golden safe banking rules” encouraging clients to:
- use online baking – Pekao24 and the PeoPay mobile app;
- use remote contact via chat, video or phone;
- limit visits in the bank outlets;
- apply safety rules while visiting a branch.
Caring about client safety, Bank Pekao was one of the first banks to increase the limit for contactless payments to PLN 100, without authorization required, for all Bank Pekao clients using payment and credit cards.
Bank Pekao supported clients in maintaining financial liquidity during the COVID-19 pandemic. Retail banking clients were enabled to suspend repayment of consumer and mortgage loans for the time of temporary problems with managing the household budget during the pandemic. The “moratorium period” covered 6% of the retail loan portfolio and 4% of the micro business and SME loan portfolio. In Pekao24 the Bank launched the possibility of a fully remote application process.
Moreover, to alleviate the adverse consequences of the COVID-19 pandemic on the operation of enterprises, Bank Pekao signed a portfolio agreement with Bank Gospodarstwa Krajowego regarding a de minimis guarantee facility. As a result, clients from the micro business and SME sector could secure their loans with a guarantee granted on special terms, and portfolio guarantee agreement with BGK under the Liquidity Guarantee Fund. In addition, Pekao signed an agreement with the European Investment Fund pertaining to free guarantees for loans for micro businesses.
In 2020 Pekao opened 409 thousand new accounts. The account sales were driven by the innovative solutions introduced for clients, including primarily opening accounts using a selfie based on biometrics and implementation of the PeoPay KIDS package. In 2020, 26% accounts for retail clients were initiated online, which was four times more than in 2019. In the best months, as much as one out of three accounts was opened this way.
In June 2020, the bank released the PeoPay KIDS app developed specifically for children aged between 6 and 13. The app lets children learn in an easy and accessible manner how to save and manage their money. Children may also obtain their own PeoPay KIDS payment card to let them make purchases in stores and withdraw cash. PeoPay KIDS is linked to the parent panel in the PeoPay app and Pekao24 online banking. All child transactions require a parent’s authorization. Thanks to an intensive advertising campaign, Pekao acquired over 37 thousand PeoPay KIDS packages. As a result, the growth rate of the number of child accounts reached 31% y/y.
In H1 2020, Pekao implemented a Smart City solution – a modern contactless technology for acceptance of payment cards in public transport in Białystok. Thanks to this solution you can buy tickets without cash and the payment card authorizes the holder to ride on city busses. At the beginning of October, Białystok Public Transport started a new stage of the development of the Smart City. An alternative method of charging the fee for multiple trips during the day, the so-called Smart BKM Tariff, was introduced. The tariff offers measurable savings to passengers who travel by bus a few times a day. The bank plans to roll out this solution also in other cities.
In September 2020, the bank’s clients holding Visa Debit Gold and Visa Business debit cards were given the possibility of connecting them to Apple Pay. The service allows for quick contactless payments using Apple devices, such as iPhone, Apple Watch or iPad. To use these convenient payments, you just need to activate Apple Pay in the PeoPay app or add the card directly in Apple Wallet.
Since December 2020, the bank’s clients may enjoy the benefits of Google Pay. The service is available to holders of Mastercard and VISA cards.
In addition, in 2020 Pekao accepted applications under the governmental program Dobry Start 300+ subsidizing the purchase of school items, emerging as a leader among banks with the largest number of applications accepted online. In addition, together with PZU, an offer of school ADD insurance with a 10% discount was prepared.
The bank granted preferential loans for environmental investments, reduced the volume of consumed paper by encouraging clients to give up hardcopy bank statements, and used recycled paper for production of advertising materials.
Pekao TFI
The Pekao Mutual Fund Management Company (Pekao TFI) is member of the Pekao Group. It is the oldest mutual fund company in Poland. Pekao TFI provides clients with modern financial products and offers opportunities to invest in the largest capital markets on the globe. For many years it has been devising savings programs, including programs affording an opportunity to put aside more money for retirement under the third retirement pillar. Pekao TFI also offers portfolio management services and Employee Capital Schemes (ECSs). The company is in the ECS records and its offering is available also through the mojeppk.pl portal.
As at 31 December 2020, the net asset value of Pekao TFI funds (including ECS) totaled PLN 19.3 billion, down PLN 2.2 billion, i.e. 10.4% in comparison to the end of December 2019. The drop in the value of assets was driven down by the pandemic. Meanwhile, a lion’s share of cash obtained from the redemption of participation units in mutual funds was accumulated in bank accounts.
Operations of the Alior Bank Group
The Alior Bank Group is headed by Alior Bank. Alior is a universal deposit and credit bank, providing services to natural persons, legal persons and other domestic and foreign entities. The bank’s core business comprises maintaining bank accounts, granting cash loans, issuing bank securities and purchase and sale of foreign currencies. The bank also conducts brokerage activity, provides financial advisory and intermediation services, arranges corporate bond issues and provides other financial services.
Alior Bank provides services predominantly to clients from Poland. In 2017, Alior Bank opened a foreign branch in Romania, offering retail banking products and services. However the percentage of international clients in the overall number of the bank’s clients is negligible.
In 2020 Alior Bank published its new strategy for 2020-2022 entitled “More than a bank”. 2020 was also a period of challenges in the difficult COVID-19 pandemic conditions. Introduction of solutions that guarantee employee and client safety and ensure business continuity was key.
At the end of Q3 2020, Alior Bank was the 8th largest bank in Poland (in terms of the value of its assets).
New products and services
In 2020, Alior Bank focused on solutions which provided clients with online access to products and services, without the need to visit branches. Among the projects, the solutions supporting remote verification of identity were of key importance. This is an area that was being developed as a priority, to provide clients with convenient, fast and safe access to Alior Bank’s offering, at any time and in any place, also in the unique conditions created by the COVID-19 pandemic.
The first big project in 2020 of this category was the investment in the Autenti fintech. The platform developed by Autenti is used for authorization of documents and concluding agreements online, using all available sIDAS e-signatures: standard, advanced and qualified.
In Q1 2020, Alior Bank implemented also a proprietary client identity verification method without the need to visit a branch. Thanks to the FOTO ID method, the identity verification method takes no more than 5 minutes. At the same time, the solution is intuitive and does not require advanced digital skills.
The next effort focused on remote client identification was the cooperation with Polska Wytwórnia Papierów Wartościowych [Polish Security Printing Works]. One of the areas of cooperation is the use of an e-ID, which supports client identity verification without visiting a branch. Thanks to the eDo App, with an e-ID clients can confirm their personal data and may freely use Alior Bank’s products and services.
In 2020, Alior Bank made available to clients the “one click loan” option in a special offer in Alior Mobile and Alior Online. Thanks to the offer, those interested in borrowing additional money may apply for a loan quickly and conveniently without leaving home.
The bank expanded its credit card installment service by offering it through remote channels. Clients may themselves split the repayment into installments by logging into online or mobile banking.
Micro businesses were offered a fully remote borrowing process, based on the Foto ID method and the Autenti platform. The existing and new clients from this segment may obtain financing up to PLN 200 thousand without having to visit a branch. This comfortable solution comprises working capital loans in the form of a BGK guarantee and repayment period of up to 3 years.
From H2 2020, business clients may also sign, in Alior Bank’s branches, Employee Capital Scheme management agreements with the TFI PZU – inPZU SFIO ECS.
Alior TFI
Alior TFI (formerly Money Makers) is part of the Alior Bank Group. The company was established in 2010 and its operations, originally as a brokerage house, focused on asset management services. Following a transformation, from July 2015, it has been operating as a Mutual Fund Management Company.
Alior Bank’s cooperation with its subsidiary Alior TFI comprises primarily the company’s core business, i.e. development and management of mutual funds and representing them vis-a-vis third parties.
Factors, including threats and risks, which may affect the banks’ operations in 2021
The situation of the banking sector in 2021 will primarily be affected by the following factors:
- impact of the COVID-19 pandemic on the economic conditions and macroeconomic factors which will drive the demand for banking products, changes of the risk costs and the quality of the credit portfolio;
- scale of demand for banking services and the ability of banks’ clients to timely pay their financial liabilities, which largely depends on the clients’ financial standing. Apart from the country’s macroeconomic standing, the economic situation of a number of client groups also depends on the national economic policy being pursued. Both a lower growth rate of the Polish economy and changes in the legal framework for the operation of enterprises may have an adverse impact on the financial standing of selected clients of banks;
- possibility of a temporary increase in risk aversion due to the uncertainty caused by the impact of the COVID-19 pandemic on the level of global economic activity, which may translate into reduced investment activity of banks’ clients;
- continuing low interest rates exerting strong unfavorable impact on the results of the banking sector (through impact on the net interest income);
- interest rate policy of the Monetary Policy Council;
- banking sector consolidation and restructuring processes;
- development of banking services offered by non-regulated entities, including global technological companies;
- the fiscal and regulatory environment, including, in particular, the tax on certain financial institutions, the strict capital requirements, the BFG charges, the costs of further adjustments to a plethora of regulatory solutions (including MIFID II, GDPR, PSD II, MREL).
Other than the factors mentioned above, one of the most important issues of today remains that of foreign currency mortgage loans. In the absence of a final systemic solution of this issue, the largest impact on the banking system will be exerted by court rulings handed down in lawsuits concerning specific loan agreements. A number of events (among others, the CJEU ruling of 3 October 2019) prompted an increasing group of borrowers to bring their claims to court. This will have a strong adverse impact on the financial performance of the affected banks, in particular those with large portfolios of such loans. So far, the main area of impact were the provisions recognized by banks in connection with the anticipated legal risk – they had a strong, negative impact on the sector’s results in 2020. According to most forecasts, the total costs for the sector may reach tens of billions of Polish zloty but are difficult to estimate and will be spread over time. Much will depend, among other factors, on the actual number of lawsuits filed (how many borrowers end up bringing legal action against the banks), interpretations adopted by national courts in individual cases, reactions of national regulatory institutions and steps taken by the banks themselves. Also, a scenario cannot be ruled out in which the CHF loan problem will be eventually solved by the adoption of appropriate legislative measures.