Perspectives (Outlook)

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Factors that may affect the results and operations of the Bank's Capital Group

The most important external factors, which in the Bank’s opinion may affect the Group’s results in the subsequent periods, include the following:

Russia’s invasion of Ukraine on 24^th February 2022 is the most important factor that will shape the domestic and global economic situation. It is currently impossible to estimate the impact of the war in Ukraine on prices and economic growth and the behavior of domestic and foreign financial markets. The impact will depend on how long the war will last, what the political solution to the conflict will be, what additional sanctions will be imposed on Russia and what Russia’s response to them will be. However, it can be expected that the war in Ukraine will weaken the rate of economic growth and increase inflation compared to scenarios assumed before the outbreak of the war. We should also assume an increase in state expenditure on defence and humanitarian aid for refugees from Ukraine, and consequently an increase in the deficit of the public finance sector. What remains unknown is the reaction of the central bank and monetary policy this year and next year, which will depend on the combination of economic growth, inflation and the PLN exchange rate.

The outlook for the global economy has improved, but the ongoing recovery will be significantly different from what we know. It is likely to remain uneven and will depend on the effectiveness of vaccination programmes and public health policies. Recovery continues to be much slower in some countries than in others. The economic recovery has not been interrupted even despite the emergence of new variants of the COVID-19 virus. The International Monetary Fund (IMF) forecasts that the global economy grew by 5.9% in 2021, with GDP growth slowing to 4.9% in the current year. The forecast for 2021 has been revised down by 0.1 p.p. compared to the July projection. According to the IMF, the revision reflects lower projections for advanced economies – partly due to supply disruptions – and for low-income developing countries, mainly due to deteriorating pandemic dynamics. This was partly offset by a better short-term outlook for commodity-exporting developing economies. The European Commission (EC), in contrast, in its February projection, revised its forecasts upwards for 2021 and downwards for 2023-20223. According to the EC, GDP in the eurozone is expected to grow by 5.3% y/y in 2021, 0.3 p.p. higher than the autumn forecast. According to the winter update, GDP growth in 2022 is expected at 4.0% vs. 4.5% previously. In the case of Poland, the GDP growth forecast for the current year has been raised. In 2022, the dynamics is likely to reach 5.5% (previously 5.2% y/y), and in the following year it should exceed 4.2% y/y. A similar growth of the Polish economy is estimated by the OECD. In 2022. GDP will grow by 5.0% and in the following year it will slow down to 3.4% y/y. Both the OECD and the EC stress that the level of uncertainty is still high, however. The recent rise in COVID-19 cases across Europe has served as a reminder that COVID-19 continues to be a serious problem and that further increases in vaccination rates – within and outside the EU – are crucial to a sustained improvement in the situation.

In addition to the coronavirus pandemic situation, central bank policy will be an important factor shaping the pace of the global recovery this year and next. By the end of 2021, there has been a clear shift in the positions of the world’s major central banks. Policymakers at the US Federal Reserve (Fed) announced the start of a cycle of interest rate hikes. Market expectations are for four increases in 2022, with the first as early as March. Moreover, since November the Fed has significantly reduced its asset purchase programme. First by 15 billion USD, and in December it increased the scale of reductions to 30 billion USD per month. The entire QE programme is expected to end in the first quarter of this year. The European Central Bank (ECB) has also recently tighten its position. After the January meeting, the head of the ECB indicated that the inflation risk had increased and did not rule out an increase in interest rates in the euro area later this year. As a result, the market started to price in the likelihood of such a move in the coming months. At present, a 10 bps increase in the deposit rate is expected as early as the middle of this year.

From October 2021. The Monetary Policy Council (hereinafter: MPC) has continued the cycle of monetary policy tightening in Poland. In February, the MPC decided on another, fifth interest rate increase, to 2.75%. According to the President of the NBP, Adam Glapiński, the cycle will continue at least until the reference rate reaches 4.0%. In his opinion, this is a level which would not have a negative impact on economic activity in Poland. As a result, we expect the Council to continue raising interest rates at a pace of +50 bps at least until March. In the following months, the scale of tightening may be reduced to 25 bps. However, this is highly dependent on incoming data on both the economy and the pandemic situation. The path of the 3-month Wibor, implied by FRA contracts, is currently in the vicinity of 4.0% at the end of 2022. The Bank expects a positive impact of interest rate increases on net interest income in 2022. The estimation and sensitivity of the net interest income to interest rate changes are presented in section 9.2. in the risk part.

In the middle of the fourth quarter of last year, the zloty was clearly gaining against the major currencies. The EUR/PLN exchange rate decreased at the end of November from 4.72 to 4.52 at the end of 2021. The situation was similar for the USD/PLN pair, where still in mid-November the exchange rate was around 4.20 and at the end of the year it fluctuated around 3.95. The beginning of 2022 will see the continuation of the appreciation trend of the zloty. To a large extent this is an effect of the increase in interest rates in Poland and the announcement of the continuation of the cycle of increases at least until the reference rate reaches 4.0%. The zloty is also supported by external factors, such as very good sentiment on the markets, which supports the currencies of emerging markets. A risk factor for the zloty, however, remains the issue of EU funds. The ongoing impasse between the government and the European Commission postpones the disbursement of funds earmarked for the National Recovery Plan (Krajowy Plan Odbudowy), which is part of the Next Generation budget aimed at supporting post-crisis economies in 2020.

Last year ended with GDP growth of 7.3% in the fourth quarter. As a result, the Polish economy grew by 5.7% in 2021. Growth was mainly driven by private consumption, which added 3.4 p.p., and investment, responsible for around 1.3 p.p. of the total dynamics. This year, GDP dynamics will slow down to around 4.5% per annum in our view. GDP growth should be driven primarily by domestic demand, including mainly private consumption, which despite high inflation and rising interest rates should be supported by fiscal policy and savings accumulated during the pandemic by households. According to the Inflation Report published in November, this year the NBP expects GDP growth to remain high, at around 4.9% y/y. The first two quarters in particular, according to the NBP, will be characterised by a high annual growth rate of over 5.0%. The slowdown in economic growth may be affected by, inter alia, further increases in interest rates or the emergence of another much more serious mutation of the COVID-19 virus.

The Polish labour market has recovered very quickly from the shock of the coronavirus pandemic. Since the onset of the pandemic, the unemployment rate has increased by 1.2 p.p. to 6.6% in February 2021 and has been falling again since then. In December it reached 5.4%, only 0.2 p.p. above the pre-pandemic level. This was due, among other things, to the reinstatement of posts eliminated during the pandemic and the appearance of new vacant posts. In December, the number of vacancies was the highest since the middle of the second quarter of 2019. Another positive development is the increase in the labour force participation rate in the 25-64 age group, which approached 80% in early 2022. Following the recovering labour market, wages in the business sector grew dynamically. In the fourth quarter of last year, salary growth averaged 9.9% y/y. In 2022 the salary dynamics will probably accelerate even more. The Inflation Report published in November shows that in the current year wage growth will reach 8.4% y/y.

In 2021, the price level in Poland increased by 5.1% on an annual basis. While in the first half of the year, the dynamics of CPI inflation remained at or just above the inflation target set by the National Bank of Poland (i.e. 2.5% +/-1 p.p.), it has clearly accelerated since June. In the third quarter, the average price level increased by 5.4% y/y, and in the fourth quarter the increase was already 7.7% y/y. The dynamic acceleration of inflation in Poland was largely due to the situation on global commodity markets. The increase in gas and oil prices translated into higher fuel and energy prices. In addition, disruptions in supply chains combined with the aforementioned increases in raw material prices translated into higher production costs, which also accelerated the CPI in Poland. In addition to external factors, the acceleration of inflation was strongly influenced by the increase in core inflation, which excludes energy and food prices. In the third quarter, it rose by 3.9% y/y, and in the fourth quarter growth remained around 4.8% y/y. CPI inflation has continued to rise since the beginning of 2022. CPI inflation accelerated to 9.2% y/y in January, rising by 0.6 p.p. on the previous month. A significant influence on the overall price level in Poland is the increase in energy costs (+54% gas, +24% electricity), which is, however, mitigated by measures under the Anti-Inflation Shield (reductions in VAT and excise tax rates on electricity and gas and zero VAT on a large part of food products). In 2022, we also expect core inflation to remain high, among others due to the very good situation in the labour market. In addition, core inflation will be strengthened by the increase in excise duty on alcohol and tobacco, which from January will increase its dynamics by about 0.2 p.p. and high consumer demand for durable goods. High inflation and the improving labour market situation may translate into an increase in the Bank’s costs, in particular in the area of staff costs. The level of administrative costs in 2022 will be affected by the level of fees to the Bank Guarantee Fund (BFG) – according to the BFG’s announcements, the contribution in 2022 is expected to be higher not only compared to the 2021 level, but also compared to 2020.

In 2020, the general government deficit clearly deteriorated to 7.0% of GDP. In 2021, the deficit is likely to narrow to 3.3% according to European Commission forecasts. In subsequent years, the deficit is forecast to improve gradually to 1.8% in 2022 and 2.1% in 2023. At the same time, public debt will fall from 57.4% of GDP recorded in 2020 to 49.5% in 2023. This forecast is, however, subject to high risk due to uncertainty regarding the disbursement of funds from the Next Generation budget and the financial perspective for 2021-2027. In addition, the situation of public finances may be worsened by the government’s announcement at the end of 2021. Anti-Inflation Shield and its continuations. As a result, VAT on gas and food has been reduced to zero and on fuel reduced to 8%. The estimated cost of the Shield is around PLN 15-20 billion.

The main factor that will influence market sentiment in 2022 will be the monetary policy of the major central banks. The interest rate hikes already announced by the US Federal Reserve, among others, may significantly dampen risk appetite in the equity market. In addition, the emergence of a more contagious or more hospitalizing variant of COVID-19 may again worsen the mood on financial markets.

The risk of a deterioration in the quality of the loan portfolio due to the pandemic did not materialise. Shield programmes on the part of the government and banks proved sufficient to dampen the increase in the non-performing loans ratio of the non-financial sector to just +0.4 p.p. at the end of 2020, which translated into a level of 7.0%. Analysing the situation in individual segments, the situation was slightly worse among small and medium-sized enterprises and consumer loans. In these areas, increases of just over +1 p.p. were recorded at peak times. According to NBP data, after December 2021, the non-performing loans ratio of the non-financial sector was already only 5.8%. On a segmented basis, each group was on a favourable trajectory, achieving readings more favourable than before the pandemic. Risks to this trend could be rising interest rates, or further waves of the pandemic and consequently worse growth prospects.

Information on the impact and current situation with respect to CHF loans is described in Section 11.3 „Legal cases”.

According to the PFSA’s data for November 2021, the loan-to-deposit ratio stood at 75%, thus remaining at a very low level, although its slight rebound from the record-low data of September 2021 should be noted. (+0.9 p.p.). Starting from July 2021, a return to moderate growth in loan volumes is visible, offset, however, by still strongly growing deposits. The driver of credit growth is no longer only mortgage products (+8% y/y, PLN 40 billion). Other categories are also growing, including consumer loans (+2% y/y, PLN 4 billion), which allowed us to return to the pre-pandemic volume of PLN 199 billion. Corporate loans also saw a slight increase (+1% y/y, PLN 4 billion), although its structure is not fully satisfactory. The growth is generated by the category of current loans (+6% y/y, PLN 8 billion), while investment loans are still stagnating and falling in annual terms (-2% y/y, PLN 3 billion). On the deposit side, households grew 8% year on year (PLN 73 billion), while corporate deposits grew as much as 11% (PLN 42 billion). Note the strong nominal monthly growth in both segments, by PLN 13 billion and PLN 14 billion, respectively, compared to October 2021. The high and persistent excess liquidity of the sector may cause the cost of funding to rise more slowly than will be implied by changes in the NBP reference rates.

The Bank emphasises that the volatility of the environment may give rise to other significant factors not mentioned in this Report, which may affect the Bank’s and the Group’s results and operations in future periods.

Growth perspectives for the Bank’s Group

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The operating environment of the banking sector is changing dynamically. Forecasts predicting the continuation of zero interest rates proved to be wrong. The currently observed cycle of their dynamic growth will translate favourably into interest margins. However, this is not a risk-free scenario. Higher interest rates mean growing loan instalments. This may be particularly difficult for PLN mortgage loans. The uncertainty concerns not only a potential deterioration of the portfolio quality, which is historically unlikely, but also the social reaction. On the wave of settlements for franking credits, an attempt to use this mechanism in an analogous way seems possible, however legally questionable. It should also be noted that rising interest rates are a result of exceptionally high inflation. This translates into wage pressure, which the industry and the economy as a whole will feel.

The Bank enters 2022 well prepared to benefit from market opportunities as well as to absorb any risks that may materialise. After a period of mergers and transformation, the time has come for clear organic growth, as already demonstrated by the 2021 results. The Bank expects this path to continue and even strengthen this year and beyond. Despite the global pandemic and the write-downs related to franking credits, the capital and liquidity position remains strong and allows us to look to the future with optimism, focusing on business development.

In line with the long-term vision, responsible volume growth and high-quality customer acquisition will be key to success. Sales must continue to be made to the highest ethical standards so that the customer is fully informed and chooses a tailored product. In terms of acquisition, the Bank will focus on acquiring active customers who treat BNP Paribas as their main bank. At the same time, a number of actions will be taken to activate existing customers and deepen the relationship with the Bank.

Relations with customers are increasingly handled via remote channels. Responding to this trend, the Bank continuously strengthens the capabilities of digital tools, which is appreciated by customers and visible in the statistics of their use. At the same time, the Bank notes a still significant base of customers preferring to be served in branches, for whom it wants to continue to provide services according to their preferences. Those interested in using remote channels will be supported by the Bank’s employees in learning how to use new technologies safely.

The Bank will focus on building an attractive image as an environmentally friendly and socially responsible institution. In doing so, it will use its important position in the economic ecosystem to fully engage in the implementation of the European „green new deal” initiatives. The Bank will strive to become the first choice in financing sustainable development, including in particular the energy transition. These actions will also support the building of a stronger, better recognised brand with corporate social responsibility embedded in its values.

Dynamic and above all efficient growth will not be achieved without improving internal processes and systems. There is still much to be optimised in this area, which is visible above all through a cost-to-income ratio below the Bank’s ambitions. To remedy this, the Bank is planning extensive changes that will involve significant investments. The main tool for change, will be the agile working methodology (Agile@Scale) introduced from 1 January 2022. 1,300 people will work in the new way.

In the same time, much attention will be paid to further improving customer satisfaction, which will facilitate the strengthening of loyalty and, in the long term, translate into further improvements in profitability. The Bank is convinced that engaged employees translate into satisfied customers. Hence, it will be crucial to provide an environment that supports activity and creativity, but also accepts mistakes resulting from testing bold, non-standard solutions. It will remain important to ensure work-life balance and care for the mental health of employees. A high level of activity will be maintained in supporting the development of women within the Bank’s structures and in promoting diversity at all levels of the organisation.

Overview of ESG regulations

Environmental, Social, and Governance (ESG) criteria are business-related standards used by investors in decision-making processes. Environmental criteria (E) concern a company’s approach and performance in terms of environmental protection and climate change. These criteria can also be used to assess the environmental risks faced by a company and to manage these risks. Social Criteria (S) concern a company’s approach and performance regarding employees, suppliers, Customers and local communities. They also include human rights issues. Management criteria (G) are related to an entity’s management structure, including the approach to diversity and transparency, as well as ensuring compliance with appropriate regulations.

The directive will replace the current Non-Financial Reporting Directive (NFRD). It will take effect from 2023. Therefore, the first sustainability reports following CSRD requirements will be published in 2024 and will be devoted to companies’ 2023 operations. The descriptions will be prepared according to a unified standard and published in Management Board reports. The information and data provided in the report will need to be audited by an independent external body. Work is currently underway to develop a uniform standard. Maria Krawczyńska, Director of the CSR and Sustainable Finance Department, is a member of the expert working group at the European Financial Reporting Advisory Group (EFRAG) which is preparing the European Sustainable Development Reporting Standard.

The document, issued by the European Commission, contains practical recommendations for companies on reporting how their activities affect the climate, as well as on the impact of climate change on their activities. The EC guidelines incorporate the international recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and were created to improve the reporting of climate-related financial information. They are designed to obtain consistent, valuable, future-oriented information on the significant financial implications of climate-related risks and opportunities, including those regarding the global transition to a low-carbon economy.

Under the SFRD, financial market entities and financial advisors, including banks, are subject to new obligations regarding transparency and disclosure of their sustainability risk management in investment processes and decisions. According to the Regulation, new disclosures should include:

Information on the adopted strategy for mitigating sustainable development risks in investment decision-making (in accordance with Regulation guidelines in terms of scope).
Disclosures regarding the negative impact of investment decisions on sustainable development
Information on the remuneration policy, including information on the consistency of the policy with the introduction of sustainability risks into the business.

The EU Taxonomy is a unified classification system – a list of environmentally sustainable economic activities. The regulation consists of six objectives and detailed criteria that help to determine whether a given investment is environmentally sustainable.