Market and legal environment

The year 2020 was a great challenge for many economies around the world due to the emergence of the coronavirus pandemic. Governments in many countries made decisions to shut down almost all economic industries, resulting in a deep rate of decline in global GDP, which fell to its lowest point in the second quarter of 2020. Since then, the global economy has gradually recovered. Poland’s quarterly declines in GDP were among the lowest in the European Union. Poland’s GDP grew by 7.9% q/q in the third quarter. Compared to last year, the economy shrank by only 1.5%. Household consumption and net exports were the main drivers of the economic recovery in July-September, while the public consumption increased by 3.4% y/y. Investment, on the other hand, recorded another decline, this time by 9.0% y/y. Available activity data for the last two months of 2020 indicate that the restrictions that entered into force in November had a limited impact on the Polish economy. The forecast based on economic activity and service sector surveys indicates that GDP growth in December was around 0% y/y. The positive data in December significantly improved the outlook for full-year GDP decline in 2020. Estimated GDP change in 2020 amounted to -2.8%. Moreover, the progressive popularization of coronavirus vaccination brings optimism about the growth prospects of the global economy in the medium term. It may also help to limit the rate of decline in Polish GDP in early 2021.

* flash estimate
Source: CSO

Industrial production, after a slump in economic activity in the second quarter of 2020, has recorded monthly increases since June. Data for December indicated a sound 11.2% y/y increase in industrial production. To some extent, the positive data was due to the favorable effect of working days, however, eliminating the impact of seasonal factors, the data also turned out to be very strong. In the fourth quarter, industrial production increased by almost 6.0% y/y while in 2020 it was 0.9% lower than in 2019. Construction and assembly production in 2020 gradually declined mainly following decelerating capital inflows from EU structural funds and investment in the economy. Nevertheless, in December, construction and assembly production recorded positive annual growth for the first time in nine months, rising by 3.4% y/y. This slowed the decline in construction production dynamics in the fourth quarter to -2.4% y/y compared to almost -11.0% y/y in Q3. For 2020 as a whole, construction production declined by 2.7% y/y. Reflecting the fall in consumer demand in mid-2020, real retail sales fell by an average about 10.6% y/y in the second quarter of 2020. In the third quarter, retail sales growth was positive at around 2.0% y/y. However, at the end of the year, due to the outbreak of the second wave of coronavirus, the sales dynamics was again negative (-2.8% y/y). The decline in activity was significantly weaker than it was during the first wave. As a result, 2020 retail sales were 2.7% lower y/y.

CPI inflation in 2020 amounted to 3.4%. The higher average annual inflation was driven by a dynamic increase in the price level in the first half of the year, significantly above the upper limit of the NBP inflation target (i.e. 1.5-3.5% y/y). A gradual slowdown in the growth of the overall price level occurred at the end of Q2 due to the economic slowdown resulting from the pandemic. CPI inflation remained then at ca. 3.0% y/y. The downward trend was sustained in the second half of the year and eventually CPI inflation returned to the NBP inflation target range. The main factor behind the increase in the price level last year was core inflation, which amounted to 3.9% on average. Core inflation grew most rapidly in periods of June-July and September-November. This was a result of entrepreneurs passing on to consumers higher costs associated with maintaining a sanitary regime. We expect inflation to fall moderately in early 2021, mainly due to lower demand associated with restrictions. However, the introduction of a new „sugar tax” in January and an increase in household electricity prices suggest that despite the opening of a negative demand gap, core inflation is likely to remain close to the NBP’s inflation target of 2.5% in 2021.

Source:CSO

The coronavirus epidemic has significantly affected the monetary policy implemented by the National Bank of Poland (NBP). Starting from March 2020 the Monetary Policy Council (MPC) decided on three interest rate cuts, by 140 bps in total. Currently the reference interest rate amounts to 0.1%. In addition, the NBP continues its first-ever quantitative easing (QE) programs, which involves the purchase of securities (Treasury bonds and bonds with a Treasury guarantee issued by Bank Gospodarstwa Krajowego and the Polish Development Fund). The aim of these actions was to stabilize the secondary market for treasury bonds and also to strengthen the monetary policy transmission mechanism. According to the MPC members, further interest rate cuts cannot be completely excluded, however it appears that unless there is a clear deterioration of the economic outlook, the monetary easing cycle has ended.

Source: CSO, NBP

In 2020, yields of government bonds in Poland remained under the influence of the situation on the core markets (US and Euro zone) and domestic data on inflation, public debt, as well as investors' expectations regarding the future monetary policy of the Monetary Policy Council. The policy adopted by the MPC at the beginning of 2020 contributed to maintaining the yield of Polish bonds at low levels. The risk premium for long-term Polish bonds (measured by the spread against 10-year German bonds) at the end of 2020 remained in the range of 175-200 bp, as compared to around 220-285 bps at the beginning of the year. The increase in the spread between bond yields in March was significantly influenced by concerns about the budgetary situation after the introduction of aid packages by the government. In the following months, the narrowing of the spread was affected by the NBP’s actions, among others, the quantitative easing programme.

Source: Macrobond

By the end of 2020, the USD/PLN exchange rate was already fluctuating in the range of 3.60-3.70, compared to nearly 4.30 in March. In the course of the year, the USD/PLN exchange rate recorded two more significant rises to the level of ca. 4.00 in June and in November, which was partly related to the increase in risk aversion on the markets. The CHF/PLN exchange rate followed a similar pattern, falling to 4.10-4.30 in the fourth quarter from nearly 4.40 at the beginning of the pandemic. At the end of 2020, despite the favourable environment for the appreciation of the zloty, the EUR/PLN exchange rate rose strongly above 4.50 in mid-December and remained above this level also at the beginning of 2021. The sudden weakening of the zloty was caused by the intervention of the central Bank. NBP President Adam Glapinski indicated that strengthening of the zloty could be detrimental to Poland’s economic recovery, which could be the reason for the NBP’s activity in the foreign exchange market. There were also other reasons for the central Bank’s actions. The most frequently mentioned explanation was the central Bank’s desire to increase the value of its foreign exchange reserves (expressed in PLN). Higher value of foreign exchange reserves at the end of the year means higher profit of the central Bank, which is then transferred in large part to the state budget, reducing borrowing needs. Further interventions of the NBP cannot be excluded, however the improving prospects of both the global and Polish economies will be supporting the appreciation of the zloty, especially in the second half of 2021, when the economic situation should be visibly better.

The net financial result of the banking sector in Poland in 2020, according to preliminary data from the Polish Financial Supervision Authority (KNF), amounted to PLN 7.8 billion and was lower by PLN 6.0 billion, or 43.8%, than the profit achieved in 2019.

The decrease in the banking sector’s net profit resulted from a decrease in net income and an increase in net impairment losses on financial assets and other provisions.

In 2020 the negative dynamics of the sector’s result was influenced by the increase of impairment losses on financial assets and other provisions by PLN 4.1 billion or 33.9% y/y. This change was a consequence of the deteriorating quality of consumer and SME receivables and the incorporation of changes in macroeconomic forecasts related to the COVID-19 pandemic in the risk models. The increase in the balance of impairment provisions was accompanied by a growth in provisions for legal risk related to the portfolio of FX housing loans. This was mainly a result of a growing number of lawsuits and a change in the line of jurisprudence in favour of borrowers.

The sector’s net income in 2020 was 2.9 billion or 4.1% lower than in 2019. The sector’s net interest income decreased by 2.1 billion, or 4.3%. The decrease was caused primarily by the Monetary Policy Council’s triple reduction in NBP interest rates, the sector’s over-liquidity resulting from the launch of government support programs related to the COVID-19 pandemic, which contributed to reduced lending in the corporate segment, and the implementation of the provisions of the September 2019 CJEU judgment regarding proportional refunds of early loan repayment fees accounted under net interest income. Other income decreased y/y by PLN 2.3 billion or 27.7% due to, among others, a significant decrease in the sector’s income from dividends and revaluation of financial instruments at fair value. The negative impact of the above factors was partially neutralized by an increase in net fee and commission income by PLN 1.5 billion or 11.1%.

Operating expenses (including Bank tax and amortization) remained at levels similar to those recorded in 2019. A moderate increase in depreciation and amortization and a slight increase in general and administrative expenses were neutralized to a significant extent by a decrease in employee costs.

Source: PFSA

The level of loans to non-bank Customers at the end of December 2020 amounted to PLN 1,312.4 billion, with a growth rate of 0.7% y/y – despite the significant weakening of the zloty against the currencies of the core markets. This growth was significantly lower than that recorded at the end of 2019. (5.0%), which was mainly due to negative dynamics of loans to non-financial businesses, other financial institutions and consumer loans to individuals.

Source: NBP

The volume of loans to non-financial business entities fell on an annual basis (by 5.0%), and such a deep decline in this category occurred for the first time since March 2010. The determining factor for the negative dynamics was the COVID-19 pandemic. The introduced sanitary regime contributed to the crisis of some industries, and uncertainty about the development of the pandemic stopped investment plans of many entities. Demand for corporate credit was negatively affected by the implementation of the government’s financial support program for business entities, the so-called Anti-crisis Shield, which satisfied a large portion of corporate liquidity needs. As a result of the above-mentioned factors, at the end of December 2020, the volume of corporate loans decreased by 15.0% y/y. This reflected, on the one hand, a change in the liquidity situation of business entities (receiving institutional support) and, on the other hand, a reduction in their economic activity. The volume of investment loans increased by 3% y/y, but this resulted only from zloty depreciation. PLN-denominated investment loans decreased by 1.5% y/y.

Source: NBP

The volume of loans to individual Customers increased by 4.5% on an annual basis. The achieved growth rate was lower than in 2019, when it amounted to 7.0%. A factor that contributed to the weaker growth rate was a 2.1% y/y decline in consumer loan volumes. It was associated with both the decline in effective demand as well as the tightening of credit policy by Banks in the face of the outbreak of the pandemic and the sanitary regime introduced, temporarily significantly reducing sales opportunities. In consequence of the above-mentioned factors, the value of sales of cash loans, according to the Credit Information Bureau (BIK), decreased by 30% y/y.

The decrease in the volume of consumer loans was offset by an increase in PLN-denominated housing loans. The growth rate amounted to 10.1% y/y, which was slightly lower than last year’s 12.2%. The value of granted housing loans according to BIK data decreased by 2.9% compared to 2019, which was caused by a strong decline in the number of loans granted for lower amounts, partially offset by an increase in the number of higher-value loans.

The factor that positively affected the annual change in loans to individuals was the sustained balance of foreign-currency housing loans. Their dynamics at the end of 2020 amounted to 0.4% y/y vs. -6.3% y/y at the end of 2019, which resulted from the depreciation of the PLN against CHF and EUR.  

Source: NBP

2020 was a year of significant growth in non-bank Customer deposits, which amounted to 13.8% y/y compared to 8.2% y/y at the end of 2019. The rate of deposit growth increased compared to last year due to a rapid growth in deposits of non-financial businesses, which was 22.0%, i.e. more than double than in 2019 (10.3%). The increase in deposits of non-financial business entities was characterized by a significant growth in the second quarter of 2020, which was related to the implementation of the government support program, i.e., the aforementioned Anti-crisis Shield. The continuing uncertainty about the development of the COVID-19 pandemic and the related postponement of investment plans was also a factor that may have contributed to the accumulation of funds by business entities.

Deposits from non-financial corporations grew as dynamically as deposits from government institutions – by PLN 26.3 billion or 70.1% y/y.

The growth rate of individual Customer deposits amounted to 8.1% y/y and was lower than the year before (9.3%). The consumer’s willingness to deposit funds with Banks was affected by several opposing factors. It was supported by reduced consumer spending and uncertainty related to the COVID-19 pandemic, translating into aversion to higher-risk alternative forms of saving and investing. On the other hand, interest rates on funds offered by Banks fell dramatically after the National Bank of Poland lowered interest rates to historically low levels. A change in pricing policy in which the interest rate offered on time deposits slightly exceeded the interest rate on current deposits and uncertainty about the future had an impact on the change in the composition of deposit growth. The growth in individuals’ deposits was visible only in the current deposit category, which increased by 28.8% y/y, while time deposits decreased by 29.3% y/y.

At the same time, there was a noticeable increase in the assets of investment funds, whose balance at the end of 2020 increased by PLN 12.5 billion, or 4.7%, compared to the end of 2019.

Source: NBP

In 2020, BNP Paribas Bank Polska Group remained the 6th largest Bank in Poland in terms of assets.

In the „loans to non-bank Customers” category, the Bank’s share in the sector amounted to 5.7%, compared to 5.6% at the end of 2019. The increase was primarily driven by continued growth in zloty-denominated mortgage loans for individuals and a slower, compared to the sector, decline in loans to individual entrepreneurs.

The Bank’s share of deposits to non-bank Customers decreased from 6.1% at year-end 2019 to 5.5% at year-end 2020. The main factor was a decline in share in the non-financial business segment to 8.1%, with a slight decrease in share in the segment of individual Customers. This was driven by faster growth in the sector and the adjustment of deposit volumes to the Bank’s liquidity needs.

Throughout 2020, the WIG stock index, representing all listed companies on the Warsaw Stock Exchange (WSE), was characterized by increased volatility, which translated into a more than 35% decline in February/March, followed by more than 60% increase until December, compared to the March minimums registering a 17% correction in September and October. The year 2020 brought a significant diversification of returns among corporate segments. For the period from 31 December 2019 to 31 December 2020 WIG reported a negative return (1.4%). For WIG20 index, which groups the largest entities on the Warsaw Stock Exchange, it was also negative (7.7%). The index of medium-sized companies mWIG40 closed with a slight profit of 1.7%. The reversal of the trend in quotations was observed in the case of the index of smaller companies sWIG80, of which the rate of return turned out to be double-digit and reached 33.6%, despite the continued outflow of funds from domestic equity funds.

However, the Warsaw Stock Exchange indices performed relatively weaker compared to foreign equity markets. For example, the U.S. S&P500 index recorded a rate of return of over 16.0% in the 12 months of 2020, Japanese Nikkei225 also rose 16.1%, while the German DAX increased by 3.5%.

The following factors, among other, had an impact on the outlook of the Warsaw Stock Exchange in 2020: (i) Uncertainty about the impact of the COVID-19 epidemic on the global economy resulting from a possible disruption of the global supply chain, loss of liquidity for enterprises and a drop in consumer spending; (ii) Increased risk aversion and thus the flow of capital to so-called safe havens (iii) the accommodative policy of central Banks and the related growing share of negative-yield debt instruments; (iv) a clear decline in macroeconomic data, and at the same time the expectation of a rapid economic recovery (v) geopolitical risk factors, in particular the Beijing-Washington conflict; (vi) a clear weakening of the zloty and a cutting of interest rates by the Monetary Policy Council to a record low level, (vii) expectations of availability of the vaccine for COVID-19.

The first half of 2020 brought a clear downward trend in the yields of Polish government bonds, which took place in an environment of increased volatility and was also maintained in the second half of the year, but with lower dynamics. The above was a result of, on the one hand, the uncertainty on the markets caused by concerns about the economic effects of the COVID-19 pandemic and, on the other hand, the actions of central Banks and particular governments, which introduced fiscal stimulation programs to protect the economy. Major central Banks, led by the U.S. Federal Reserve, have made deep interest rate cuts, which in the case of the U.S. are in the range of 0.0-0.25%. Likewise, the Monetary Policy Council (MPC) reduced the reference rate to the level of 0.1% in three steps. The above, together with the purchase of treasury bonds and other securities guaranteed by the National Bank of Poland, translated into a decrease in yields of 10-year treasury bonds to record low levels – still at the beginning of the year they were above 2.00%, while at the end of December it was only 1.25%.

In 2020, the WSE’s main market had 7 new listings, including one foreign company, and 2 companies transferred from NewConnect, while 23 companies left the exchange.

Fourteen issuers were newly listed on the organised market NewConnect in the 12 months of 2020, including five foreign companies, while one company was delisted at the same time. The Catalyst bond market had a total of 515 bond series listed and the value of issues exceeded PLN 1,064 billion.