Poland’s aggressive rate cuts are amplifying profitability pressure for banks

Moody’s has recently published a report concluding that the Poland’s aggressive rate cuts are amplifying profitability pressure for banks.

On 28 May, the National Bank of Poland lowered its reference rate by 40 basis points, bringing the rate down 140 basis points cumulatively with three rate cuts since 17 March to a historic low of 0.10%.

Easing monetary policy is part of the authorities’ policy response to soften the negative effect of the coronavirus crisis. The interest rate cuts will significantly reduce Polish banks’ net interest margins and add to potential profitability pressures amid lower business volume and rising credit costs.

By lowering interest rates, the central bank aims to support household income and domestic business finances, which have suffered from the coronavirus health crisis. The rate cuts will help loan repayment and debt affordability. However, because Polish banks are primarily deposit-funded, they have limited ability to fully pass on the lower interest rates to their customers to reduce their funding costs. Therefore, the sector’s relatively good net interest margins will, like euro area peers, be significantly pressured.

The country’s leading banks announced the lower rates’ sizeable effect on their income statement

Bank Polska Kasa Opieki S.A (PEKAO, A2 stable, baa11), the country’s second-largest bank, said that it expects the new lower rate to reduce its net profit by PLN650-PLN700 million, shaving off around 45 basis points from its net interest margin of 2.80% as of year-end 2019. The reduction equates to approximately 23% of its 2019 pre-tax profit.

Powszechna Kasa Oszczednosci Bank Polski S.A. (PKO BP, A2/A3 stable, baa2), the largest bank, said that it expects 2020 net profit to decline by PLN750-PLN800 million, which accounts for around 8% of 2019 net interest income and 14% of pre-tax profit. According to our estimates, this would reduce the bank’s net interest margin to around 2.90% from 3.16% at year-end 2019.

Poland’s third largest bank, Santander Bank Polska S.A. (A2/A3 stable, baa2) said that it expects the rate cuts to shave PLN635-PLN700 million off its net interest income, or approximately 10% of 2019 net interest income. According to our estimate, keeping all else constant, the decline in net interest income would reduce the bank’s pre-tax profit by about 20% and its net interest margin to around 2.90% from 3.23% as of year-end 2019.

The rate cuts add to the pressure on the banks’ profitability. All three banks reported a significant 20%-50% reduction in profit for the first quarter of 2020 because of significantly higher credit costs tied to the coronavirus pandemic and resulting recession.

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