Banking (Bank Pekao, Alior Bank)

Market situation

The Polish banking sector is the largest one in Central and Eastern Europe with assets worth more than PLN 1,782 billion. 35 domestic commercial banks, 553 cooperative banks and 29 branches of credit institutions operated at the end of December 2017 in Poland.

The banking sector’s situation in 2017 was stable and boosted by the persistently vibrant economy and the operation of banks in a low interest rate environment. In 2017, the banking sector generated a net profit of PLN 13.6 billion, as compared to PLN 13.9 billion in the corresponding period of the previous year (down 2.3%). This slump in financial performance was caused chiefly by the sale of an equity stake in VISA Europe. If it had not been for this event, the realized net financial result would have been higher than that generated in the corresponding period of the previous year.

The sector’s net result was shaped predominantly by the improved result on banking operations (PLN 24.9 billion, up 4.1% from 2016), caused by significantly higher net interest income (up 12.1%) with a concurrent upswing in the result on fees and commissions (up 9.1%).

The record result on interest in the period from January to December 2017 vis-à-vis the corresponding period of the previous year was caused by a drop in interest expenses (by 2.1% y/y) with a concurrent increase in interest income (by 7.9% y/y). This result was generated owing to both the high interest margin (2.38%) and the growing loan base (primarily in the area of loans granted to businesses and households). The continuing economic recovery, the improved situation on the labor market and consumer sentiment, the good financial standing of the enterprise sector, the record low interest rates and the stable quality of the loan portfolio are contributing to the stable development of lending activity.

The banks’ operating expenses (excluding depreciation and provisions) in the period under analysis increased 4.3% to PLN 33 billion year-on-year. This increase was caused by higher employee expenses (up 5.8% to PLN 16.6 billion) and higher general and administrative expenses (up 2.8% to PLN 16.4 billion). It should be pointed out, however, that a clearly observable phenomenon is the continuation of the proces of employment and sales network optimization along with the development of electronic banking leading to a gradual headcount reduction and a leaner sales network.

The balance of impairment charges on financial assets in 2017 compared with the previous year went up 7.8% to PLN 8.2 billion.

In 2017, the net asset value of the banking sector was PLN 1,782 billion, up 4.1% (or PLN 70.4 billion) with respect to yearend 2016.

Gross receivables from the non-financial sector increased 3.2% to PLN 1,045 billion as at the end of 2017 vis-à-vis the year before. Growth in this area was driven mainly by receivables from enterprises (+6.1% y/y) and receivables from households (+1.7% y/y).

At the end of September 2017, the banking sector’s own funds for capital multiples, calculated in accordance with the regulations laid down in the CRR Regulation, was PLN 187.3 billion, up 8.9% from the end of September 2016.

The banking sector’s total capital multiple at the end of September 2017 was 18.65% (up 1.1 p.p. compared to the end of September 2016), while the Tier I capital ratio at the end of this period was 17.22% (up 1.2 p.p. in comparison with the end of September 2016). This increase was driven by the upheld recommendation to keep a strong capital base or, for certain banks, to strengthen it even further.

Material agreements

Acquisition of the equity stake in Bank Pekao

As a result of the settlement, on 7 June 2017, of the transaction for PZU and PFR S.A. (PFR) to buy 86,090,172 shares in Bank Pekao from UniCredit S.p.A. (UniCredit) representing 32.8% of the bank’s share capital and entitling them to exercise 86,090,172 votes representing 32.8% of the total number of votes, PZU and PFR jointly exceeded the 25% threshold of the total number of votes in the bank.

The settlement resulted from the agreement signed on 8 December 2016 by PZU and PFR with UniCredit to acquire a 32.8% equity stake in Pekao for a total amount of PLN 10.6 billion. The price also included payment for the acquired right to the dividend for 2016, or PLN 456 million in total. The price per share was PLN 123. It was one of the largest transactions in the European banking sector in recent years. The acquisition of shares in Bank Pekao was linked to PZU’s aspirations set forth in the Group’s strategy to 2020 in which the goal was to amass banking sector assets totaling at least PLN 140 billion and third party assets under management totaling PLN 50 billion. In accordance with the agreement entered into by PZU and PFR, these two entities will collaborate to procure the effective execution of the Bank Pekao’s growth strategy while retaining the bank’s current low risk profile, robust level of profitability and stable long-term dividend payout policy.

The essence of the agreement is to define the rules of cooperation between PZU and PFR following the acquisition of the equity stake in Bank Pekao from UniCredit and the rights and duties of the parties as bank shareholders, in particular pertaining to agreeing on the manner of jointly exercising voting rights on the shares and the implementation of a common long-term policy for the bank’s business to attain the objectives stated above. In particular, PZU and PFR have undertaken to each other to vote in favor of resolutions on the distribution of profit and the disbursement of dividends, in accordance with the rules and within the boundaries set by the applicable provisions of law and KNF’s recommendations and in accordance with the bank’s existing practice.

Cooperation between Bank Pekao and Alior Bank

On 23 October 2017, Bank Pekao and Alior Bank signed a letter of intent to commence preliminary talks on potential cooperation strategies that might be developed to increase their value for shareholders and clients. Undertaking preliminary talks and carrying out pertinent analyses, taking into account exchange of information preceded by obtaining the requires authorizations will be aimed at assessing the viability of this cooperation based on different scenarios.

Cooperation between banks with PZU and PZU Życie

In addition, within the framework of cooperation between Pekao, Alior Bank and the PZU Group, current activities are divided into four areas:

• Bancassurance: as part of PZU and PZU Życie, more than 6.1 thousand employees of Bank Pekao have been trained and certified at the OFWCA., and in 2017 Alior Bank was already selling.
• Assurbanking: PZU supports sales of the Pekao Account in several dozen branches, and on 5 March 2018 a pilotage was launched in three branches, where PZU employees actively offer the “Przekorzystne” Account to the Bank.
• Cooperation: on 20 November, the Polish Investment Forum was held and lasted for two days in New York. It is an initiative aimed at supporting the international expansion of Polish companies. The forum was organized by PZU, Bank Pekao SA and J.P. Morgan.
• Operational synergies: Cost synergies were implemented in the areas of IT administration and security that have a real impact on the costs of PZU and Bank Pekao.

Operations of the Pekao Group

The Pekao Group is led by Bank Pekao S.A., a universal commercial bank offering a full range of banking services rendered to individual and institutional clients operating chiefly in Poland. The Pekao Group consists of financial institutions operating on the following markets: banking, asset management, pension funds, brokerage services, transaction advisory, leasing and factoring.

From 2017 Bank Pekao has been part of the PZU Group, one of the largest financial institutions in Central and Eastern Europe. The bank’s strategic objectives announced in the new strategy for 2018-2020 “Strength of the Polish Bison” include becoming the leader of profitability in the Polish banking sector through embarking on the path of intelligent growth in a business model based on high efficiency and quality of processes. Business development is based on a strong capital and liquidity position, while maintaining the highest risk management standards and further improvement of cost effectiveness.

In addition, the Bank will realize the available synergies following from the cooperation in the PZU Group, which it announced in 2017. The bank’s innovation direction may also be an area for partnerships with technology leaders, other financial institutions and consumer companies.

Products and services

The bank offers competitive products and services, high-level customer service and developed network of branches and ATMs, providing convenient access throughout Poland, as well as a professional call center and a competitive Internet and mobile banking platform for individual and corporate clients, and small and micro businesses.

Client segmentation

The bank’s business model is based on client segmentation into the following groups:

• Retail Banking – providing services to individual clients and micro businesses through a leading network of branches and partner outlets, supported by remote channels;
• Private Banking – providing services to affluent clients and offering investment advisory services in private banking centers and remote channels;
• Small and Medium Enterprises (SME) – newly established segment focused on providing services for one of the fastest growing sectors of economy. Clients are serviced by relationship managers supported by product specialists. The service is provided in universal retail branches and in specialized Business Client Centers. Clients are offered professional products and services tailor-made to their individual needs based on the product solutions tested in corporate banking and adapted to the needs of the SME segment; 
• Corporate Banking – client segmentation comprises medium-sized and big corporations (segmentation based on revenues), public sector entities, financial institutions and the commercial property industry. Clients are serviced by relationship managers supported by product specialists, which supports optimization of the level of services and service costs. Relationship managers focus on providing high quality services and efficient customer service, using the best practices and integrated sales management tools.

Pekao TFI

Pekao Mutual Fund Company (Pekao TFI) is another member of the Pekao Group. Pekao TFI is the oldest mutual fund management company in Poland providing clients modern financial products, offering 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 voluntary retirement pillar. Pekao TFI also offers a managed account service. At the end of 2017 the company had assets under management totaling PLN 18.4 billion, thereby giving it a market share of 6.6%.

New products and services

Since mid-2017, the Bank’s customers have been able to use Pekao24, a new mobile service for mobile phone browsers, which apart from the design change, friendly navigation and intuitive operation, comprises functions known to clients from the Pekao24 application for tablets and from the Internet service: summary of expenditures by category, possibility of taking advantage of the “one click” credit offer and possibility of exchanging currencies at preferential rates. In 2017 the Bank launched further functions – now each service user may view the exchange rates and use a convenient calculator to quickly calculate the conversion. The service also makes it possible to split the debt on the Elastyczna credit card into installments.

The Bank systematically expands the scope of services that can be effected via remote access channels. In 2017 the Bank launched new forms of contact with the clients using chats, video or audio calls, available after logging into the Pekao24

Internet banking. In 2017, Bank Pekao in cooperation with PZU offered the possibility of purchasing insurance via the Pekao24 electronic banking website and the mobile service. The offer comprises the insurance products available in the My PZU portal: PZU Dom, PZU Wojażer, PZU Auto.

In 2017, the Bank signed two agreements with the European Investment Fund (EIF) under the EaSI program (Employment and Social Innovation Program) for loans covered by EIF guarantees for start-ups (companies operating in the market for less than 2 years). The agreements provide for EIF guaranteeing 80% of the principal and interest on the loans for such clients. In addition, the Bank actively participates in the de minimis guarantee program for micro and small businesses, managed by BGK.

Strategy

The key events in 2017 included, primarily:

• adoption of strategic directions for 2018-2020 on 8 November 2017, Bank Pekao announced adoption of an intelligent growth strategy which will make the bank the leader of profitability and efficiency in Poland. Bank Pekao’s objective is to achieve profitability measured by the Return on Equity ratio of 14% – one of the highest Poland’s banking sector. The Bank intends to generate over PLN 3 billion in net profit in 2020 and reduce the Cost/ Income (C/I) ratio to below 40%. The Bank’s current capital standing makes it possible to dynamically increase the scale of business, as assumed, while maintaining a safe level of solvency ratios and simultaneously paying out 100% of the net profit for 2017 and 2018.
• Purchase of Pekao PTE on October 17, 2017, Pekao acquired a 35% stake in Pekao PTE for a total price of PLN 8 million. As a result of the transaction, Pekao holds a 100% stake in Pekao PTE.

• purchase of PIM and Xelion on December 11, 2017, Pekao acquired 14,746 shares of PIM, representing 51% of PIM’s shares and providing 51% of shares in the share capital and in the total number of votes at the General Meeting of PIM. As a consequence, Pekao holds 100% of the equity of PPIM and indirectly 100% of the equity of Pekao TFI. As a consequence, the PZU Pekao recognizes that it obtained control over these companies and included them in consolidation. In addition, on December 11, 2017, Pekao acquired 50% of Xelion shares providing 50% of the total number of votes at the Xelion shareholders’ meeting.

Operations of the Alior Bank Group

Alior Bank heads up the group. 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 is one of the most modern and innovative financial institutions in Poland. It is a place for people who have ideas and business courage to set new banking standards. The bank’s offering includes products and services both for individual and business clients, including small and medium enterprises and institutional clients. The bank’s offer combines the principles of traditional banking with innovative solutions. As a result, Alior Bank systematically strengthens its market position and for years has been consistently setting new directions of development of the Polish banking.

As at 31 December 2017, Alior Bank catered to 3.8 million retail clients. The increase in the number of clients in 2017 resulted from Alior Bank’s organic growth and merger with the spun-off portion of Bank BPH.

Products and services

The Bank’s operations are conducted by various divisions that offer specific products and services earmarked for specific market segments. At present, the Bank does business in the following segments:

• Individual client (retail segment)
• Business client (business segment)
• Treasury activity

Due to the uniqueness of the activity conducted in the retail segment, the bank distinguishes three additional retail areas that have a dedicated offer for a separate groups of clients:

• mass clients (persons who have not been classified as affluent clients or Private Banking clients);
• affluent clients (persons with monthly receipts on personal accounts exceeding PLN 5 thousand or holding assets worth more than PLN 100 thousand);
• Private Banking clients (persons with assets worth more than PLN 1 million or investment assets over PLN 0.5 million).

Money Makers TFI

The Alior Bank Group also comprises Money Makers TFI S.A. (Money Makers). The company was established in 2010 and its operations originally focused on asset management services. Alior Bank’s cooperation with its subsidiary Money Makers pertains to three areas: asset management (portfolio management for retail clients/private banking), unit-linked funds, and Alior SFIO sub-fund management. From 5 January 2017, Money Makers TFI S.A. has been listed on the alternative market of the Warsaw Stock Exchange (NewConect).

In 2017 the key new products and services in the Alior Bank Group’s offering included:

• implementation of the video conference process thanks to which users, without having to leave home, may open an account remotely via a video call;
• implementation of the Konto Jakże Osobiste account – a unique account that flexibly adapts to fit the client’s needs;
• implementation of mobile payments in the HCE technology;
• implementation of the loan sales process in the new Internet banking system;
• implementation of the loan sales process in mobile banking;
• FG POIR (Smart Growth Operational Program Indemnity Fund) guarantee – as of September 2017 the offering has included a FG POIR guarantee addressed to clients executing innovative investment projects. Alior Bank is the first in Poland to grant loans secured by this guarantee;
• Broadband loan – Alior was the first to sign with BGK an agreement on financing access to fast Internet. Based on the loan, it offers clients from the telecommunication industry the so-called broadband loan, i.e. investment financing for development of optical fiber networks. The broadband loan offering will be soon extended to cover liquidity financing for telecommunication companies from the SME sector.

Significant new measures

The key events in 2017 included, primarily:

• On 13 March 2017 Alior Bank published its strategy for 2017-2020 entitled “Digital Disruptor”. By implementing this strategy, the Bank will be able to maintain the highest net interest margin on the market (4.5%), reduce its C/I ratio to 39% and provide Alior Bank’s shareholders with a return on equity from 8% in the first half of 2016 to 14% in 2020.Alior Bank’s objective is to maintain its innovation leadership position in Poland and to become one of the top 5 most innovative banks in Europe. During the next 4 years, in addition to the previously planned expenditures for ongoing IT development and maintenance work, the bank will invest the additional PLN 400 m in innovative technology projects. These expenditures will drive Alior Bank’s digital transformation, in which motivated employees will guide the individual and corporate customers to the digital world, in a safe and friendly manner, which will also be profitable for the shareholders.
• In addition, in 2017, Alior Bank finalized the take-over of the assets of the spun-off portion of Bank BPH. Between 24 and 26 March 2017 it completed the last stage of the merger of the two banks – operational merger, involving transfer of data of over 2,700 thousand clients from the acquired portion of Bank BPH to Alior Bank’s IT systems. The process was completed in less than 5 months of the legal merger and was thus the quickest merger in Poland ever. The total value of the integration costs incurred in 2017 was PLN 77 million.

Alior Bank also cooperates with PZU Group entities to realize cost and revenue synergies. This cooperation may pertain,among others, to innovations, digital channels, IT, real estate, marketing, development projects, procurement and financial products.

Factors, including threats and risks which will affect the banks’ operations in 2018

The situation of the banking sector in 2018 will primarily be affected by:

• operation in a stable environment of low interest rates, which puts pressure on the level of net interest margin;
• high requirements regarding equity and solutions with regard to the latest accounting standards (IFRS9), which are likely to have negative impact on the level of capital accumulated in banks and may lead to increased risk cost volatility;
• possible changes of the legal environment, including mainly the legislative solution of the issue of foreign currency residential loans and potentially an obligation to make additional contributions to BFG, may adversely affect the banking sector’s profitability;
• 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. Alior Bank’s credit portfolio includes exposure to over a dozen projects executed by companies operating on the renewable energy markets;
• cost of adjustments to numerous regulatory requirements (among others MIFID II, GDPR or PSD II).
• changes in the external environment and international events affecting the domestic economy.