Blessing Behind 72% Polish Bank Rally May Turn Into a Curse

(Bloomberg) -- Fast rising interest rates, the key factor behind this year’s 72% rally in Polish bank stocks, could gradually turn into a strain on valuations in 2022.

The industry has benefited from monetary tightening that boosted bank revenue from mostly variable rates on credit. Loans with interest linked to interbank rates immediately pass on changes in official borrowing costs to clients, as opposed to fixed-rate agreements which allow creditors to lock in servicing costs. 

The risk is that floating-rate loans, which continue to dominate Polish banking, will become problematic next year as borrowers who took out cash- or home-loans when the Wibor rate was near zero face higher and higher interest payments.

“Polish banks remain among the last lenders in Europe with the majority of new loans sold in the floating-rate regime, therefore they are very sensitive to hikes,” said Jovan Sikimic, a Vienna-based analyst at Raiffeisen Bank International AG. “While there is still some upside, much of the expected monetary tightening is in the shares and it’s hard to expect banks to outperform the same as in 2021.”

Even with a selloff over the last month, the WIGBank index has advanced more than twice as much as the Stoxx Europe 600 Banks gauge in 2021 and is on track for its best performance this century. Banks most exposed to cash loans climbed even more, with Alior Bank SA soaring by 223% and Bank Millennium SA by 138%.

Since October, Poland’s central bank raised its key rate by 165 basis points to 1.75%. During the same period, the three-month Wibor rate which serves as the base for most floating-rate loans has increased 215 basis points to 2.4%, rising further than the benchmark in anticipation of future central bank increases.

Derivatives used to bet on interest rate levels show the three-month Wibor jumping to about 3.75% in nine months, close to a level that the country’s largest lender, PKO Bank Polski SA, said would have a “visible impact” on credit quality. 

The focus is on mortgages and consumer loans, which ballooned during the pandemic when rates where near zero. Despite the regulator’s push to make banks offer more fixed-rate products, 99% of local-currency home loans and 60% of cash credits are linked with the Wibor. 

In Hungary, where floating-rate credit represents only 36% of outstanding home loans, the government ordered a freeze on mortgage rates for six months. Analysts from Raiffeisen and Erste Group Bank AG have warned that a similar regulatory intervention may be on the cards in Poland, which would further undermine the still upbeat outlook for the country’s lenders.

“Banks should report stellar earnings in the next two quarters, which together with the first dividends after the pandemic should be supportive for shares,” Maciej Marcinowski, a Warsaw-based analyst at Trigon Dom Maklerski SA, told Bloomberg. “However, the rally should be limited by weaker perspectives for the second half of the year.”

©2021 Bloomberg L.P.