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Pekao Conservatism Pays

Few institutions have been more conservative than Poland's Bank Pekao.

The financial crisis has made a virtue of conservative lending policies. And in Poland’s relatively robust banking sector, few institutions have been more conservative than Bank Pekao.

Unlike some of its rivals, Pekao, which is 59.28 percent-owned by Italy’s UniCredit, has not extended foreign currency mortgages since 2003, except to borrowers who derive their income from abroad. Banks that did make a large percentage of mortgages in euros or Swiss francs did so because such loans carry much lower interest rates — 4.25 percent for Swiss franc mortgages in mid-2008, compared with 7.7 percent for z/loty loans. But the sharp slide of the Polish currency — it has fallen by 38 percent against the euro since July — has suddenly made those loans much more expensive and exposed lenders to a higher risk of default.

“We think our decision not to give forex mortgages is being proved right,” says Lubomir Charchalis, Pekao’s director of development. Other Polish lenders seem to concur. In October big domestic bank PKO BP and Bank Millennium, an arm of the Portuguese lender, announced that they would cut back their Swiss franc–denominated mortgage lending.

Mortgages account for 70 percent of consumer loans at Pekao, and the bank’s refusal to ramp up foreign currency lending has caused growth to lag behind. Net income rose just 7.9 percent in the first half of 2008, to 1.97 billion z/loty (then worth $926 million), compared with a 44 percent rise in first-half earnings at PKO, to z/l1.85 billion. Pekao expects the Polish mortgage market to contract but believes that its focus on z/loty loans will allow it to pick up market share. “We see no reason to change our conservative strategy,” says Charchalis. Pekao’s share price has dropped 15 percent over the 12 months to late January, compared with a 20 percent drop for PKO. Each of the banks has a market cap of €6.4 billion ($8.2 billion), the biggest in the country.

UniCredit’s heavy exposure to Central and Eastern Europe — it has subsidiaries in 19 countries and combined assets of €105 billion as of October — has weighed on the group of late, raising investor fears about possible loan losses in the region. In October the Milan-based bank announced plans to raise €6.6 billion in capital after its share price plummeted 16 percent.

Poland’s banking sector has less exposure to foreign currency lending than do those of many other Eastern European countries. Such lending accounted for just over one quarter of all consumer and business loans in the first half of 2008, compared with a little more than one half in Hungary and Romania.

“Our banks offer very ordinary loans to both corporate and retail clients, so they have few risky assets on their balance sheets,” says Andrzej S/lawi´nski, a member of the National Bank of Poland’s Monetary Policy Council.