The year 2016 brought a gradual improvement in the situation in the global economy, despite increased uncertainty and many risk factors. The situation of many emerging economies improved due to the discontinuation of the downward trend in raw material prices. An improvement has also been seen in developed economies, in particular in the final months of the year, despite the negative effect of uncertainty associated with the potential effects of Brexit.
Poland experienced a moderate and temporary slowdown in the rate of economic growth in 2016. Its main sources included the end of the EU Financial Perspective 2007-2013 and the associated limitation of investment activities in the public sector, mainly in local administrative units.
A similar phenomenon (‘transition’ between EU long-term financial perspectives, resulting in a lower rate of growth of investments and GDP) was observed in other economies of the region (the Czech Republic, Hungary).
The role of individual consumption in the Polish economic growth structure increased. Accelerated growth of consumption reflected an improvement in the situation on the labour market and the outcome of the ‘Rodzina 500+’ programme. Gross expenditure on fixed assets had a temporary adverse effect on GDP growth. This was observed mainly in the area of public investment (local authorities’ expenditure and expenditure on railway infrastructure were significantly limited) and in part of the private sector (including the power sector, water supply, waste water and solid waste management). The GDP growth amounted to 2.8% in the whole of 2016, compared with 3.9% in the previous year. The economic upturn, which is reflected by the main economic ratios for the final months of 2016, and progress in the absorption of EU funds confirm that the economic slowdown observed last year was temporary.
Positive trends on the labour market throughout 2016 also confirm the temporary nature of the economic slowdown. The employment level increased strongly in the enterprise sector (2.9% compared with 1.3% in the previous year) and registered unemployment dropped to a historic low level (8.3% at the end of the year). The rate of growth of salaries and wages accelerated to 4.1% compared with 3.5% in 2015, and research results indicated exceptionally good moods among households and a growing percentage of firms planning future wage increases.
The annual average inflation rate in 2016 increased to -0.6% from -0.9% in 2015. After a 28-month period of deflation, inflation returned in December 2016 (0.8% y/y), mainly due to the low base effect and an increase in fuel prices associated with an increase in crude oil prices and appreciation of the American dollar.
In view of the lack of negative implications of deflation and the temporary nature of moderate economic slowdown, the Monetary Policy Council maintained the basic interest rates of The National Bank of Poland (NBP) unchanged throughout 2016 (the NBP reference rate amounted to 1.50%). The need to maintain the financial system’s stability was also mentioned among the arguments against easing the monetary policy.
Growth of GPD and its consituents (%, y/y)
Unemployment and employment (end of period, %)
Situation on the financial market
|Stock market||The beginning of 2016 brought deep decreases in the share markets. These were caused by deteriorating assessments of the condition of the global economy (in particular, the Chinese economy). Such assessments caused a drop in raw material prices, which in turn led to concerns not only about the condition of mining companies, but also broader implications for the global economy and financial markets. The raw material prices bounced back later in the year, which was partly due to an economic upturn in China. Together with the more moderate rhetoric of the American Central Bank, it was possible to reverse the negative market trend. The second and third quarter of 2016 brought a side trend, which was temporarily disturbed by the results of the British referendum on EU membership. The end of the year proved to be very important and crucial for the whole picture of the year. A strong growth trend began on the stock markets after Donald Trump’s victory in the Presidential elections in the USA. Investors focused on these aspects of the new President’s programme that support growth. The year 2016 was quite good for the Polish stock exchange. The main index increased by 11.4% y/y. It was achieved mainly due to the global trend, the fact that the main concerns associated with the economic situation and regulatory activities affecting the major sectors represented on the WSE did not materialize, and the expected faster GDP growth in 2017.|
|Interest rates market||The National Bank of Poland kept the interest rates in 2016 and suggested that the monetary policy would not change at least until the end of the following year. As a result, WIBOR3M and WIBOR6M fluctuated within a very narrow range, i.e. 1.67%–1.73% and 1.74%–1.81%, respectively. Despite the fact that the interest rates did not change, the market expectations concerning the monetary policy varied strongly between the valuation of one interest rate decrease of 25 b.p. in 2017 and an interest rate increase of 25 b.p. at the end of the following year. On the Polish interest rate market, Treasury bond yields remained in the side trend over a major part of the year. The situation changed in the last quarter due to rapid changes in the moods on the global market. Donald Trump’s victory in the US presidential election was the factor that initiated major changes in bond yields around the world. Concerned about the introduction of a stricter monetary policy in consequence of fiscal easing announced during the presidential campaign, investors were selling American bonds and approached investments on emerging markets, including Poland, with more caution. A drop in the prices of Polish Treasury bonds was visible primarily at the longer end of the profitability curve. Asset swap spreads remained at high levels in 2016. The lower valuation of bonds was mainly a result of: concerns about the rating agencies’ decisions, pressure on capital outflow from emerging markets due to the stricter monetary policy of the Fed and big supply of Treasury securities on the primary market.|
In 2016, the main factors determining changes on the currency market were the following:
Situation in the Polish banking sector
As at the end of 2016, the situation in the banking sector was stable. However, a number of sources of risk remain in the environment of banks, including regulatory risk associated with housing loans in foreign currencies.
In the conditions of stable economic growth, in 2016 the banking sector generated a net profit of PLN 13.9 billion (+24.3% y/y). A high, two-digit rate of net profit growth was caused by one-off events that occurred both in 2016 and in 2015; the most important ones included:
- additional write-downs for the loan portfolio of SK Bank in Wołomin (SK Bank),
- payments made by banks to the guaranteed funds protection fund (FOŚG) in connection with the bankruptcy of SK Bank,
- costs incurred by banks in connection with the establishment of the Borrowers’ Support Fund,
in 2016: additional revenue from the settlement of the Visa Europe Ltd. transaction by Visa Inc. (the Visa transaction).
In 2016, in addition to the Visa transaction settlement, the following factors had a positive effect on the banking sector's profit: a noticeable improvement in the net interest income (resulting from both a y/y increase in interest income and a significant decrease in interest expenses) and a relatively stable level of net write-downs (net of the effect of one-off events).
Bank tax charges and a decrease in net fee and commission income had an adverse effect on the net profit.
Change in the net profit of the banking sector (PLN billion)
Source: PFSA, the calculation of PKO Bank Polski SA; operating costs including the tax on certain financial institutions
The profitability of the banking sector as at the end of 2016, measured in terms of ROE, increased to 7.7% as compared with the record low level of 6.6% as at the end of 2015.
Statement of financial position
The value of the banks’ assets increased due to good economic conditions. The scale of the banking sector’s operations increased as at the end of 2016. The sector's total assets increased to PLN 1 711 billion (+7.0% y/y). The assets structure changed as a result of the introduction tax on certain financial institutions; the share of repo transactions decreased and the share of Treasury securities increased (to approx. 15% as compared to 12% before the introduction of the tax on certain financial institutions).
The value of loans granted by the banking sector increased to PLN 1 130 billion as at the end of 2016. The rate of their growth was moderate in 2016 (4.9% y/y). The following factors affected the loan market: (1) the continued significant slow-down in the y/y rate of growth of retail housing loans (+4.9% vs. 7.1% as at the end of 2015; after adjustment for foreign exchange differences, a relative stabilization was observed), (2) the continued slow-down in the y/y growth of corporate loans (5.4% as compared to 8.3% as at the end of 2015), and (3) accelerated y/y rate of growth of consumer loans (7.3% as compared to 6.6% as at the end of 2015). Consumer loans, as well as housing loans in PLN, were among the fastest-growing categories of loans. While interest rates remained low, it was possible due to the banks’ focus on more profitable products which at the same time generated relatively low capital requirements.
Loan structure of banking sector
The rate change of loans in the banking sector (y/y)
* Other deposits include loans to individual entrepreneur, non-monetary financial institution, farmers and non-commercial institutions providing services for households.
Source: NBP, calculations of PKO Bank Polski SA
The deposit market in 2016 was affected by better conditions on the labour market and an increase in the income of individuals, as well as a good liquidity position of enterprises, low level of interest rates and the low historical attractiveness of savings and investments treated as alternative products to bank deposits.
The volume of banking sector deposits increased to PLN 1 145 billion as at the end of 2016; its growth accelerated to 9.5% y/y compared to 7.5% as at the end of 2015. It was a result of: (1) continued fast y/y growth of deposits of individuals (9.5% y/y as at the end of 2016 vs. 9.8% as at the end of 2015), (2) slower y/y growth of corporate deposits (8.2% y/y vs. 10.5% y/y as at the end of 2015), and (3) a growth in deposits of the public sector (24.8% y/y vs. a decrease of 16.6% y/y as at the end of 2015).
The high rate of growth of banking sector deposits, which was maintained in 2016, accompanied by a moderate growth of the volume of banking sector loans, resulted in a drop in the loans/deposits ratio to a historical low level of 97.8% as at the end of 2016. Previously, such a low level of the loans/deposits ratio was observed in 2008.
Deposit structure in the banking sector
The rate of change of deposits in the banking sector (y/y)
* Other deposits include loans to individual entrepreneur, non-monetary financial institution, farmers and non-commercial institutions providing services for households.
Source: NBP, calculations of PKO Bank Polski SA
The situation of the Polish non-banking sector
|Investment fund sector|
In 2016 the Polish investment fund market continued its growth trend. However, it was much weaker than in the previous year. In 2016, the assets managed by open pension funds’ management companies (TFI) increased by 2.6% to PLN 258.6 billion compared with the 20.5% increase in 2015.
In 2016 the relatively small increase in total assets (+PLN 6.4 billion compared with PLN +43 billion in 2015) was accompanied to a large extent by a negative balance of payments made by institutional investors and their surrenders noted in the fourth quarter of 2016 (PLN -10.2 billion). The regulatory changes which have been prepared and which became binding as of 1 January 2017, which resulted in covering part of the entities on the closed-ended investment funds with CIT had a significant impact on this trend.
In 2016 the value of assets of institutional investors managed by TFI dropped by PLN 2.2 billion (-2.0%). Thus, the share of assets of this group of investors dropped to 49.4% of the total investment fund assets.
In 2016 the increase in demand for participation units on the part of individual investors had a positive impact on the increase in investment fund assets, which was particularly visible in the second half of the year. In the second half of 2016 this group of investors paid PLN 4.7 billion net to investment funds (PLN -1.4 billion in a similar period of 2015). As at the end of 2016 assets of individuals increased by 7.1% year on year, to PLN 131 billion compared to the increase in 2015 of 5.2%. In 2016 the largest inflow of new funds from individuals was paid to absolute return funds (PLN 3.4 billion), cash and money funds (PLN 2.6 billion) and debt funds (PLN 1.6 billion). The largest outflow of funds of individual investors was noted in equity and mixed funds of PLN -2.7 billion and PLN -1.9 billion respectively.
The development of investment funds in 2016 was accompanied by the high volatility of returns on Polish Treasury bonds, including strong increases in returns noted in the fourth quarter of 2016, and an improvement in conditions on the equity market on the Warsaw Stock Exchange in the second half of 2016 and the prevailing low base interest rates. This translated into the increase in realized 12M rates of return by funds investing their capital in Polish shares which was visible in the second half of 2016. The rates of return of 12M Polish equity funds and Polish mixed funds which had been negative over the majority of 2016 as at the end of December exceeded the level of interest on new household deposits. This situation contributed to an improvement in the mood of individual investors, and in effect to an increase in demand for investment fund units.
|Open pension fund market||In 2016 Open Pension Fund (OFE) assets increased by 9.2% (PLN 12.9 billion) y/y to PLN 153.4 billion, compared with the drop of 5.7% (PLN -8.6 billion) y/y in 2015. The OFE market remained influenced by: the improved situation on the labour market, regulatory changes (change in the structure of the OFE investment portfolio) and improved conditions on the Warsaw Stock Exchange (the WIG index increased by 11.4% y/y). Polish shares dominated in the structure of OFE assets. In 2016 the number of OFE participants continued to fall (-107 thousand to 16.4 million).|
|The lease market|
In 2016 the lease industry continued to grow at a two-digit pace. In accordance with the data of the Polish Leasing Association (Związek Polskiego Leasingu) the value of assets financed by lease companies increased by 16.6% y/y reaching the level of PLN 58.1 billion (compared with a 16.3% increase in 2015). Apart from bank loans, leases constituted the second most important external sources of financing investments. As at the end of 2016 the total value of the active lease portfolio amounted to PLN 105 billion compared with the volume of investment loans extended to businesses of PLN 151 billion. The development of the lease market was supported by good market conditions in Poland.
Leases of light vehicles, mainly passenger cars, had the largest positive impact on the development of the lease market. The value of assets leased out in this segment amounted to PLN 24.4 billion (+30.9% y/y), which constituted 42% of total leases granted by lease companies.
Leases of heavy vehicles developed robustly. The value of leased assets in this segment amounted to PLN 17.2 billion (+27.7% y/y), to which the stable rate of growth of the economy in the Euro Area, and the replacement of used fleets with new Euro 6 standard vehicles contributed.
The lease market noted a drop in the segment of plant and machinery (-3.5% y/y). Lease companies financed plant and machinery with a value of PLN 14.6 billion. In this segment leasing agricultural machines dropped most significantly (-22.6% y/y). One of the factors which contributed to the drop in leases of plant and machinery despite the good and stable economic position of enterprises and the relatively high level of use of production capacity and relatively good availability of loans was ending the financing with funds from the EU financial perspective 2007-2013 with a simultaneous weak absorption of funds from the 2014-2020 perspective. In the period under analysis leases of property dropped strongly to PLN 719 million (-49.6% y/y), and its share in the market was further marginalized.
|The insurance market|
During the three quarters of 2016 assets of insurance companies increased by PLN 5.0 billion (2.8%). This was the effect of a slight increase in life insurance assets (0.6%) and stronger growth in personal and property insurance assets (+5.7%).
The net profit of the life insurance sector generated in a period covering three quarters of 2016 decreased to PLN 1.7 billion (-26.3% y/y), which was mainly due to a strong decrease in deposit income (-14.9%). A decrease in the costs of insurance activities (-14.2% y/y) and a decrease in the amount of loss payments made (of 6.6% y/y) had a positive effect on this result. The gross written premium decreased by 14.5% y/y, which was mainly due to the fact that insurance companies ceased offering agreements with an insurance capital fund (Group 3 in Section I). Non-life insurance companies recorded a y/y decrease in profit of 37.3% which amounted to PLN 196 million as at the end of the 3rd quarter of 2016. The value of losses paid and the costs of insurance activities increased (9.44% y/y and 2.2% y/y, respectively). At the same time, the value of gross written premium increased significantly (14.2% y/y) mainly in automotive insurance (Group 3 and 10 in Section II), which will have a positive effect on the results in future periods due to the manner of recording provisions.
Costs of tax on some financial institutions binding as of February 2016 had a strong impact on the profits of insurance companies. According to the estimates of the Polish Chamber of Insurance, the respective costs incurred in the period February-September 2016 by insurers amounted to approx. PLN 450 million.
|The factoring market|
In 2016, the factoring market continued to grow dynamically. This is confirmed by the factoring companies which report to the Polish Factors Association (Polski Związek Faktorów). Their revenue reached PLN 158.2 billion, which translated into an acceleration of the growth rate to 20.6% y/y compared to 17.6% y/y in 2015. The growing demand for factoring companies is also reflected in the number of customers serviced (an increase of 11% y/y to 7.9 thousand) and invoices (an increase of 16% y/y to PLN 7.5 million).
In 2016 domestic factoring was the driver of growth of the factoring market (an increase in revenues of 23% y/y to PLN 124.9 billion), including both recourse and non-recourse factoring. Recourse export factoring also developed very dynamically (an increase in transaction volumes of approx. 27% y/y to PLN 18.8 billion), which supports the foreign expansion of enterprises. The share of import factoring in the market structure remained marginal, and amounted to 1.0% compared with 1.3% in a similar period of the previous year.
The Ukrainian market
The year 2016 brought Ukraine a long-awaited economic upturn. GDP growth rate was positive for the first time since 2012, exceeding 2% (estimation based on the preliminary GDP measurement for the 4th quarter of 2016: 4.7% y/y). However, the improvement in the GDP growth rate was largely due to a low base (in 2015, GDP decreased by 9.9%). In 2017, the GDP growth should accelerate moderately to approx. 2.5%). Inflation showed a downward trend (base inflation decreased from 34.7% y/y as at the end of 2015 to 5.8% y/y in December 2016), and major changes in the main price index reflected mainly administrative actions (including utility price increases from April 2015 and October 2016). In previous years, export was a major driver of economic growth. Its competitive advantage grew rapidly after the depreciation of the hryvnia exchange rate. In 2016, wages and salaries started to grow in real terms (on average by 7.9% y/y in the discussed period) due to a decrease in inflation and a relatively stable growth in nominal wages and salaries (on average 23.4% y/y in the whole year). It had a positive effect on consumption and internal demand.
After the significant weakening of the hryvnia exchange rate in February 2016, the exchange rate stabilized only to undergo significant depreciation at the end of the year. As a result, at the end of 2016, 27.1 hryvnia had to be paid for one dollar compared with 24.0 in the previous year. The stabilization of the exchange rate of the hryvnia during the year and the drop in inflationary pressure enabled the Central Bank to reduce rates six times during the year (to 14% in December 2016 from 22% as at the end of 2015). The situation in public finance deteriorated after a rapid increase in the public sector deficit in December. At the end of 2016 the debt of the public finances sector reached 73.8% of GDP compared with 67.4% GDP in 2015.
The banking sector remained unprofitable. In the period from January to November ROA was -1.63% compared with -5.46% in 2015, and ROE was -15.05% compared with -51.91% in 2015. Bankruptcies and mergers led to a decrease in the number of banks from 117 as at the end of 2015 to 98 as at the end of November 2016. The announcement of the nationalization of Private Bank on 18 December (20.9% of the sector’s assets) was a significant event in the sector. The share of foreign capital in the sector increased to 55.5% in the period under discussion from 43.3% as at the end of 2015. The banks managed to improve their equity position. The equity to asset ratio increased from 8.3% as at the end of December 2015 to 11.4% in November 2016. Nevertheless, the volume of loans did not increase. The increase in the volume of deposits led to a drop in the loans to deposits ratio to 120.3% as at the end of 2016 from 134.2% in December 2015.
The increased share of the banks in the structure of Treasury securities holders from 16.1% to 38.3% in 2016 indicates that free cash flows were mainly invested in safe Treasury assets.
The value of total assets in the Ukrainian banking sector increased slightly in 2016 (by UAH 9 billion until November 2016). A slight increase in the loan volume of UAH 10.4 billion was recorded in 2016, despite a decrease in the volume of foreign currency loans (of UAH 57.8 billion), including household loans. An increase in the volume of loans denominated in UAH, which could be noticed during the year, suggests a reversal of the downward trend in lending activity, which should bring positive effects in 2017. The share of non-performing loans increased from 22.1% of total loans as at the end of 2015 to 24.2% in November.
In the period under discussion deposits increased by UAH 96.5 billion, and the growth related both to foreign currency deposits and to UAH deposits, and both household and corporate deposits. The drop in inflation (increase in the real payroll budget) and acceleration of economic growth should translate into a further increase in the volume of deposits in consecutive quarters.