Factors which may affect the performance of the Bank’s Capital Group

The unemployment rate continues to be at historically low levels. In the third quarter of 2019 it oscillated around 5.2%. The persistence of the labour market combined with low labour supply is likely to continue to reduce the unemployment rate. In the medium and long term, a reduction in labour supply could lower potential and real GDP growth. Wage pressure has recently continued to increase, further increased by raising the minimum wage by 15.6% to PLN 2 600.

Since June 2019, inflation in Poland has remained within the upper range of the NBP’s inflation target of 2.5-3.5%. The December preliminary data, according to which the inflation amounted to 3.4% y/y, came as a big surprise. The inflation acceleration is to a large extent related to the increase in food prices and core inflation. Moreover, we expect that the record-breaking minimum wage increase introduced in 2020, combined with demand pressures, will continue to accelerate core inflation, which will be around 3.4% at least in early 2020. CPI inflation is expected to remain above 3.5% in the first half of 2020. A downside risk is the possibility of a lower transfer of wage growth to core inflation in a context of increased productivity growth. Due to the continued CPI inflation within the permissible range of the NBP inflation target, the Monetary Policy Council (MPC) kept interest rates unchanged. After the first MPC meeting in 2020, NBP President Adam Glapiński indicated that in his opinion, interest rates may remain unchanged even until the end of the Council’s term in 2021. Nevertheless, we expect the central bank to revise its projection in the next update, scheduled for March, which will also reflect the recent surprising growth of the CPI. At the same time, however, given the attitude of the MPC members headed by President Glapiński, we assume that the Council will tolerate higher-than-target inflation and will not raise interest rates. We maintain our forecast for unchanged interest rates this year. However, we believe that the MPC’s current rhetoric is more likely to change, especially if – as we assume – the economic situation in Poland’s main trading partners, including Germany, were to improve in the second half.

Further tightening of the tax system and a good macroeconomic situation contributed to the reduction of the general government deficit in 2018 to a record 0.4% of GDP. In 2019, the public deficit continued to decline despite increased social spending. In the following year, the draft budget for 2020 assumes a balanced budget. However, it should be taken into account that in case of an economic slowdown, with a higher share of fixed expenditures, it will be difficult for the government to adjust the budget, which may result in a deficit in the state budget.

On 15th January the first phase agreement was signed between the USA and China. Following the signature of the agreement, the risk factor of the situation in world trade and its effects on the economic slowdown has decreased. The temporarily achieved de-escalation of the conflict is likely to improve sentiment in the markets, which may translate into a global economy boost later this year. Despite the signing of the agreement, the US has maintained the tariffs already imposed, so there is a risk that the promised increase in China’s imports from the US is too large and may be difficult to deliver. Works on a second-phase agreement are likely to continue during the course of this year, but the chances of signing it seem rather limited. The US presidential elections and the rhetoric of individual candidates on China will also be important for the development of the situation between the US and China over the coming year, which may become more intense as the electoral struggle intensifies.

It stems from the ECB’s efforts to loosen monetary policy in the euro area, which in turn stimulates risk appetite in European financial markets. Also, mitigating trade conflict can further contribute to improving sentiment on stock exchanges and thus channeling capital towards more risky assets, including, i. a. emerging markets.

Potential strengthening of the PLN exchange rate against key currencies, in response to a possible increase in risk appetite in financial markets. If the external environment remains stable, BNP Paribas forecasts the EUR/PLN exchange rate to be around 4.25 in the first half 2020.

The October judgment of the Court of Justice of the European Union, although significant, has dispelled only part of the doubts as to the correctness of the rulings. Polish courts, although taking this stance into account, consider each case individually, and thus differ significantly in the assessment of individual cases. Particularly controversial, from the economic point of view, were several rulings which ordered the loan to be converted into zloty, while leaving the interest rate based on the LIBOR rate. On a wider scale, according to the summary prepared by the Polish Bank Association, last year as many as 70% of disputes were legally settled in favour of banks. In the first instance, this percentage was 60%. There is no doubt, however, that the scale of losses for individual banks may be greater than assumed in the already recognised provisions. Hence the decisions of some institutions to increase the provisions for this purpose. It should be stressed that the number of court cases remains relatively small in relation to the size of the portfolio. According to the Polish Bank Association, they account for 1.7% of all foreign currency loans granted and 3.6% of active contracts.

On 11th September 2019, The Court of Justice of the European Union took a stance on the reimbursement of consumer credit costs in the case of early repayment. According to the judgment, the bank is obliged to reimburse non-interest costs in proportion to the period in which the client has actually been using the consumer credit. This applies primarily to the loan origination fee and other additional commissions. This position is consistent with the opinion already expressed in 2016 by the Competition and Consumer Protection Office and the Financial Ombudsman. The results of the largest stock exchange banks after the third quarter were burdened with additional provisions exceeding PLN 300 million. The Polish Bank Association estimates that the total value of claims may increase to PLN 1 billion.

The Act on Employee Capital Plans (Pracownicze Plany Kapitałowe – PPK), effective from 1 July 2019 In the first stage, the largest employers, employing over 250 employees, joined PPK. All employees were automatically enrolled in the programme, with the possibility to resign at any given moment. The first contributions were deducted from the salaries for November 2019 and the programme effectively began to operate from that moment. According to the first published statistics, 39% of employees remained in the programme, which was 1.1 million people.

At the beginning of July, the Parliament received a bill limiting the cost of loans, which is mainly targeted at companies offering so-called „Chwilówki.” The European Commission did not agree to the proceeding under urgent procedure. Nevertheless, this did not block further work, but it did not allow the Parliament of the previous term to vote on the law. At the moment, there are no further declarations as to whether the newly formed Parliament will resume the project. The last known project assumed a drastic reduction of the non-interest cost limits. A law in this form would, with a high degree of probability, strongly limit the possibilities of further activity of the lending companies, which would push some borrowers into unregulated areas. Moreover, a possible insolvency of the lending companies would mean that they would not redeem the bonds they issued, serving them as the primary source of financing.

Development of the offer of banking services by external entities, among others, thanks to the entry into force of the Payment Services Directive (PSD2) regarding payment services within the EU internal market from 14 September 2019. PSD2 introduces, among others, online access to data on the customer’s invoice and payment initiation service at the customer’s request. The above-mentioned services may be provided by third parties (entered in the registers kept by the Polish Financial Supervision Authority). The directive also imposes obligations on banks to provide public application software interfaces (so-called APIs) and to implement additional security requirements. First Polish financial institutions have already started to benefit from new possibilities. The clients of these banks were given the opportunity to view their transactions in other banks, within one system. These opportunities will certainly be further developed. The popularity of such solutions among clients and their impact on inter-bank competition will be difficult to predict.

According to the BFG Council the total contributions to in 2020 will increase to PLN 3.1 billion. This is a 14% increase, following a 27% increase in 2019. The increase in 2020 is mainly due to the dynamics of guaranteed funds, which at the end of 2019 amounted to 9.1%, thus being above the long-term average. The increase in premiums is also influenced by activities carried out in the field of to the mandatory bank resolution fund.