NBP report: Banks’ results in question

At the end of November 2021, the official reserve assets of Poland, managed by the National Bank of Poland, amounted to EUR 146.7 billion, and converted to USD 166.7 billion – the central bank announced in a press release.

On Tuesday, the NBP released the data on official reserve assets. They show that at the end of November 2021 their balance expressed in euro amounted to EUR 146.7 billion and was higher by EUR 2.6 billion than at the end of October 2021. The balance of reserves expressed in USD decreased by 1.1 billion dollars and reached the level of 166.7 billion dollars.

“The National Bank of Poland manages foreign exchange reserves, taking care to maximize their profitability, but the priority is their safety and maintaining the necessary level of liquidity. The NBP invests its reserves in typical instruments used by central banks. The vast majority of them (75%) are invested in government securities. , in securities issued by international institutions and government agencies.
The remaining amount is kept in the form of deposits in banks with high creditworthiness and in monetary gold “- it was written in the central bank’s communiqué.

The low profitability of the banking sector remains a challenge, but does not create direct threats to financial stability, the NBP reported in its semi-annual report.

Stress tests show that equity and current earnings create a sufficient buffer against unexpected shocks. The stock exchange valuation of banks has also improved significantly, which indicates a reduction in restrictions on obtaining financing from external sources, including for MREL purposes.

However, the situation in the banking sector is heterogeneous and the low profitability is a challenge, in particular for smaller commercial banks and the cooperative banking sector, the NBP report wrote.

As pointed out by the NBP, the effects of the pandemic turned out to be less severe for the economy and the banking sector than initially expected.

“In 2021, the burden of credit losses on banks’ balance sheets has decreased significantly and is not expected to increase. Concerns that arose at the beginning of the pandemic about the excessive credit crunch by banks have not materialized.

The portfolio of loans to the non-financial sector has started to grow again, and the banks expect an increase in demand in most loan categories, “he added.

“In the event of the implementation of the shock scenario, with the increase in write-offs for legal risk of FX housing loans assumed in the simulation, the total financial result of the analyzed banks in 2021-2023 would be negative. Losses in this period would be incurred by banks with a 32% share in the sector’s assets, including also some of the largest institutions, “the report said.

“For comparison, in the reference scenario, the share of banks with negative profitability would amount to 10%, and in most of them the potential loss would be mainly caused by the costs of legal risk,” he added.

The NBP announced that the losses incurred as a result of the materialization of the shock scenario would significantly reduce capital ratios and limit the available capital surplus at banks.

Commercial banks with a total share of 7.5 percent. in the sector’s assets, they would not meet the capital standards of Pillar I and II, and the total shortage of capital would amount to approximately PLN 16 billion (in the reference scenario, 3.2% and PLN 10 billion, respectively).

In turn, the estimated capital shortfall in relation to the requirement of the combined buffer in the shock scenario would amount to almost PLN 22 billion and would apply to commercial banks with a share of 17.1 percent. in the sector’s assets (in the reference scenario, PLN 12 billion and 4.2% respectively).

For comparison, at the end of June 2021, banks with a share of 4% did not meet the requirement of the combined buffer. in sector assets.

“The results of the stress tests under the adopted assumptions show that the current total capital surpluses of the analyzed banks (increased by a part of profits estimated in the projection period) would be sufficient to absorb the losses resulting from the analyzed scenarios and the adopted variant of increasing the write-offs for legal risk related to FX housing loans .

Most banks, even in a shock scenario, could develop their lending further, “the report wrote.

In the banking sector, the shortage of own funds to cover MREL amounts to PLN 15 billion – the NBP informed in the report on the stability of the financial system.

“Preliminary NBP estimates based on data from June 2021 indicate that the sector may have shortages of own funds and / or liabilities eligible to cover the MREL requirement at the target level and the current level of the combined buffer requirement, amounting to approx. PLN 15 billion” – wrote the NBP .

Banks’ exposure to bonds issued or guaranteed by the State Treasury remains high. The share of banks controlled by the State Treasury in the balance sheet total of the banking sector increased slightly (from 44% to 46%), but this does not result from ownership changes, but is only the result of a faster growth of these banks’ assets compared to the rest of the system.

The banking sector’s exposure to Treasury debt securities and guaranteed by the State Treasury stabilized after a significant increase in 2020. At the end of June 2021, the value of these instruments in banks’ balance sheets amounted to PLN 519 billion, i.e. 22 percent. banking sector assets and approx. 250 percent. banks’ own funds.

Treasury bonds and bonds guaranteed by the State Treasury constitute the dominant part of banks’ liquid assets, next to funds kept in accounts with the NBP and money bills. The high share of Treasury bonds and bonds guaranteed by the Treasury in the assets of the banking sector increases banks’ sensitivity to potential shocks caused by market factors, but this exposure does not pose a threat to financial stability.

The risk of “contamination” related to the weaker financial condition of some credit institutions has decreased and does not pose a significant threat to the stability of the entire banking sector, the NBP reported in its semi-annual report on the stability of the financial system in Poland.

“The contagion risk related to the weaker financial condition of some credit institutions has decreased and does not pose a significant threat to the stability of the entire banking sector. Direct exposures between banks in Poland are limited and the contagion channel may be mainly increased contributions from other banks to replenish BFG funds. financial results resulting from the resolution process or possible bankruptcy of weaker entities should not, however, significantly deteriorate the financial situation of other banks “- it was written.

The NBP explains that the effects of contagion are understood as a threat of bankruptcy of a stable bank, which occurs as a result of the necessity to incur increased costs of BFG contributions.

About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

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