(Bloomberg) – The rapid rise in interest rates, a key factor in the 72% rally in Polish bank stocks this year, could gradually turn into pressure on valuations in 2022.
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The industry benefited from a monetary tightening which boosted banking income mainly from variable rates on credit. Loans with interest tied to interbank rates pass changes in official borrowing costs immediately on to customers, unlike fixed rate arrangements that allow creditors to lock in service costs.
The risk is that floating rate loans, which continue to dominate the Polish banking sector, will become problematic next year, as borrowers who took out cash or home loans when the Wibor rate was close to zero will have to pay. higher and higher interest.
“Polish banks remain among the last lenders in Europe with the majority of new loans sold in the floating rate regime, so they are very sensitive to increases,” said Jovan Sikimic, Vienna-based analyst at Raiffeisen Bank International AG. “While there is still some upside, much of the expected monetary tightening is in equities and it is difficult to expect banks to outperform the same way as in 2021.”
Even with a massive sell off over the past month, the WIGBank index has risen more than twice as much as the Stoxx Europe 600 Banks gauge in 2021 and is on track for its best performance of this century. The banks most exposed to cash loans grew even more, with Alior Bank SA up 223% and Bank Millennium SA up 138%.
Since October, Poland’s central bank has raised its key rate by 165 basis points to 1.75%. During the same period, the three-month Wibor rate that serves as the basis for most variable rate loans rose 215 basis points to 2.4%, beating the benchmark in anticipation of future increases in the central bank.
Derivatives used to bet on interest rates show the three-month Wibor surging to around 3.75% in nine months, close to a level which, according to the country’s largest lender, PKO Bank Polski SA, would have a “visible impact” on credit quality.
The focus is on mortgages and consumer loans, which exploded during the pandemic when rates were close to zero. Despite pressure from the regulator for banks to offer more fixed rate products, 99% of home loans in local currency and 60% of cash loans are linked to Wibor.
In Hungary, where variable rate credit represents only 36% of outstanding mortgage loans, the government has ordered mortgage rates to be frozen for six months. Analysts from Raiffeisen and Erste Group Bank AG have warned that similar regulatory intervention could be considered in Poland, further undermining the still optimistic outlook for lenders in the country.
“Banks are expected to report windfall profits over the next two quarters, which, along with the first dividends after the pandemic, should support stocks,” Maciej Marcinowski, Warsaw-based analyst at Trigon Dom Maklerski SA, told Bloomberg. “However, the rally should be limited by a weaker outlook for the second half of the year.”
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