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Integrated Annual Report
of ING Bank Śląski S.A. 2019

Financial market and its regulations

  • [102-15]
    Key impacts, risks, and opportunities

In 2019, the financial results and the condition of the banking sector, including ING Bank Śląski was influenced by a number of external factors, whose importance is important in the context of our bank's future development strategy. They have a direct impact on the sector profitability.

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Banking sector

Liabilities

As of the end of December 2019, the basic cash categories were as follows:

  • Liabilities to households totalled PLN 908.8 billion, which means they were up by PLN 78.8 billion y/y or up by 9.5% compared to the 2018 yearend.
  • Liabilities to institutional clients amounted to PLN 446.9 billion, up by 6.3% compared to 2018 yearend. The volume increase by PLN 26.6 billion can be mainly attributed to higher liabilities to enterprises (up by 10.0% i.e. by PLN 28.9 billion) and to local government institutions and the Social Insurance Fund (up by 5.1% i.e. by PLN 2.3 billion). Deposits collected by non-commercial institutions providing services to the households totalled PLN 27.0 billion of 2019 yearend and were up by PLN 0.8 billion (+3.0% y/y) compared to 2018 yearend. On the other hand, liabilities to non-monetary financial institutions were down by 8.9% or by PLN 5.4 billion in the period under study.

Receivables

  • Receivables from households reached PLN 760.8 billion in December 2019 and were up by 6.0% compared to the previous year. Housing loans, which formed the main part of the banks’ credit exposure to households (58.3% of receivables from that group of clients), were up by 6.6% and reached PLN 443.5 billion. The increase was fuelled by the acceleration of the growth rate of the PLN-denominated housing loan portfolio, from 11.7% in 2018 to 12.3% at 2019 yearend. At the 2019 yearend, the portfolio of PLN housing loans arrived at PLN 323.5 billion and was up by PLN 35.4 billion y/y. The portfolio of the FX housing loans shrank by PLN 7.9 billion y/y and fell to the level of PLN 120.0 billion due to natural depreciation of the CHF portfolio (at the 2019 yearend, PLN depreciated against CHF by 2.7% y/y, which partially offset the decline in the portfolio caused by depreciation). Other retail loans, including consumer credits, were up by 5.1% (by PLN 15.3 billion in value terms) compared to 2018 yearend and reached PLN 317.3 billion.
  • Receivables from institutional Clients were up by PLN 18.4 billion (4.1%) to the level of PLN 468.0 billion compared to December 2018. Receivables from enterprises alone were up by PLN 10.3 billion (up by 3.0% y/y) and reached the level of PLN 350.2 billion.
 Change currency: PLNEURUSD

* Based on NBP data.

*  Based on NBP data.

 Change currency: PLNEURUSD

* Based on NBP data.

*  Based on NBP data.

Our bank’s economists expect the GDP growth rate to slow down from 4% to 3% y/y in 2020. Lower economic activity growth rate will lead to a slowdown in lending activities. Current economists’ forecasts provide for a slowdown in lending growth rate from 5.3% to 3.3% y/y. The slowdown will be particularly evident in the corporate lending segment due to the low propensity to invest. In this segment, we expect the growth rate to fall from 3.9% to 1.2% y/y. In the case of retail lending, a downward trend will also be visible, but the growth rate will remain stronger (4.7%). Poor lending results should be accompanied by a solid growth of deposit base – the Bank's economists expect their growth rate to slow down slightly from 8.7% to 7.2% y/y. In the case of the retail banking segment, the projected growth rate of deposits in 2020 (7.7%) will be continue to be similar to that of wages and salaries (7.4%); in the retail segment, a slightly lower growth rate is expected (6.2%).

 Change currency: PLNEURUSD

* Based on NBP data.

* Based on NBP data.
** Excluding FX mortgage portfolio.

 Change currency: PLNEURUSD

* Based on NBP data.

* Based on NBP data.
** Excluding FX mortgage portfolio.

Assets quality

With respect to asset quality, in December 2019 the share of loans in Stage 3 among all the loans measured at amortised cost was 5.9% (versus 6.4% at the end of 2018).

Share of impaired receivables / in stage 3 *

* Estimate based on PFSA data.

The improved asset quality ratio was due to an improved quality both in the household segment (from 5.9% to 5.5%) and in the institutional loan credit sector (from 7.2% to 6.6%). The improved quality of household loans is due to a better quality of mortgage loans (improvement from 2.7% to 2.5%) and consumer loans (improvement from 10.8% to 9.8%). The improved quality of institutional sector loans was due to an improved quality of working capital loans (from 10.2% to 10.0%), investment loans (from 7.9% to 6.8%) and loans for properties (from 9.9% to 9.5%).

Financial results

The overall sector of the Banking sector in 2019 was good despite the increased provisions at the end of the year for legal risk related to FX mortgage loans. This year’s financial results were affected by the slowdown of Poland’s economy and data from the labour market. A trend was observed of further reduction of headcount in the Banking sector and a reduction of the number of outlets.

In 2019, the net financial profit of the Banking sector grew by 12.5% y/y up to PLN 14.7 billion.

In 2019, the gross profit of the Banking sector was PLN 20.3 billion and was by 11.3% higher than the gross profit for 2018. The growth of the gross profit was due to a faster growth rate of total revenues (2.6% y/y) than of operating expenses (1.5% y/y). The following made a positive contribution to the gross profit of the sector in 2019:

  • net interest income (increase by PLN 4.4 billion or 9.8% y/y),
  • net commission income (increase by PLN 1.0 billion or 8.3% y/y), and
  • costs of risk (decrease by PLN 0.4 million or 4.3% y/y).

On the other hand, the negative impact on it was caused by:

  • other income (decrease by PLN 0.9 billion or 7.5% y/y), and
  • other revenues (decrease by PLN 0.9 billion or 7.8% y/y), and
  • operating expenses, including Bank tax (increase by PLN 2.9 billion or 8.0% y/y).
 Change currency: PLNEURUSD
Change drivers for result before tax of the banking sector in 2019 (PLN billion)*
Change drivers for result before tax of the banking sector in 2019 (EUR billion)*
Change drivers for result before tax of the banking sector in 2019 (USD billion)*

* Estimate based on PFSA data.
** Including the share in net profits of affiliated entities.

Growth of BGF costs

On 20 February 2019, the Council of the Bank Guarantee Fund (BGF) approved resolutions on the total amount of premiums for the Bank guarantee fund and the total amount of premiums for the enforced restructuring fund in 2019. The total amount of both types of premiums for the Banking sector was set at PLN 2,791 million. In 2018, the total value of both premiums was PLN 2,200 million which means a growth of the premiums in 2019 by as much as 27% versus 2018. Additionally, there was a major modification to the split of premiums to both funds – in 2019 the premium for the enforced restructuring fund (PLN 2,000 million) accounted for 72% of total premium while a year earlier (PLN 960 million) it was 44%.

The decision of the BGF Council resulted in a material growth of operating expenses of the Banking sector in 2019, independent of Banks. For our Bank, the costs of BGF premium amounted to PLN 202.3 million in 2019 versus PLN 165.2 million in 2018 (+22% y/y). This means that the growth of BGF costs accounts for 22% of increase of operating expenses versus to 28% estimated in the sector.

In a communication from 27 February 27 2020, BGF indicated that the total amount of bank contributions in 2020 will amount to PLN 3,175 million. This means an increase by 14% compared to the previous year. BGF indicated that the increase in the sum of premiums in 2020 results primarily from 1) the dynamics of guaranteed funds, which at the end of 2019 amounted to 9.1%, thus being above the long-term average, 2) activities carried out in the field of resolution.

In compliance with the Act on BGF, the target level of resources in the guarantee fund by 3 July 2030 is to be 2.6% of guaranteed deposits. While the target level of resources in the enforced restructuring fund is 1.2% to be reached by 31 December 2030. In accordance with BGF data for 2019, the resources in the guarantee fund amounted to 1.79% and in the enforced restructuring fund was 0.65%. The amount of guaranteed funds in Banks as at the end of 2019 was about PLN 860 billion.

Asset-backed funding market

In 2019, the Polish lease market went down by 5.8%, arriving at PLN 77.8 billion. The active portfolio of lease agreements totalled PLN 160.4 billion (up by 9.4% y/y) as at the yearend. For comparison, the value of capex loans extended by the banking sector stood at PLN 159.0 billion as at the end of December 2019. This means that in terms of value of the portfolio lease exceeded capex loans and is the biggest funding source of the investment undertakings in Poland.

The largest lease market segment (the share in sales dropped from 48.4% to 45.3%) covered vehicles with weight up to 3.5 tons. The value of assets in that lease category was PLN 35.3 billion (-11.7% y/y). The core category generating the drop in the segment were passenger cars (-14.5% y/y).

Vehicles weighing up to 3.5 tons constituted the biggest segment of the leasing market (with their share in the sales down from 48.4% to 45.3%). The funds granted in that leasing category totalled PLN 35.3 billion (-11.7% y/y). The core category generating the drop in the segment were passenger cars (-14.5% y/y). The drop and lower financing of passenger cars than a year earlier was the effect of fiscal changes in accounting for lease contracts for passenger cars in force since 1 January 2019 and therefore purchases by business were moved from 2019 to the last quarter of 2018.

The second largest market segment – the segment of machines and equipment (including IT) recorded an annual growth of 4.0%. The total value of financed machines and equipment was PLN 22.6 billion.

Source: Polish Leasing Association

Sales in the factoring market, associated in the Polish Factors Association (PZF), grew in 2019 by 16.0% y/y and reached PLN 281.7 billion. The form of financing most frequently selected by companies for non-recourse factoring (51.5% of total sales), under which in 2019 sales amounted to PLN 145.0 billion and the growth was 17.5% y/y.

The number of clients associated in PZF was 18.0 thousand after a growth by 6.5% y/y. The number of invoices issued in 2019 was 12.7 million (decrease by 14.8%). In the sectoral approach, it is production and distribution companies that most often use factoring companies for their receivables (43.7% and 34.9% respectively).

Source: Polish Factors Association

In 2019, the Polish lease market went down by 5.8%, arriving at PLN 77.8 billion. The active portfolio of lease agreements totalled PLN 160.4 billion (up by 9.4% y/y) as at the yearend. For comparison, the value of capex loans extended by the banking sector stood at PLN 159.0 billion as at the end of December 2019. This means that in terms of value of the portfolio lease exceeded capex loans and is the biggest funding source of the investment undertakings in Poland.

The largest lease market segment (the share in sales dropped from 48.4% to 45.3%) covered vehicles with weight up to 3.5 tons. The value of assets in that lease category was PLN 35.3 billion (-11.7% y/y). The core category generating the drop in the segment were passenger cars (-14.5% y/y).

Vehicles weighing up to 3.5 tons constituted the biggest segment of the leasing market (with their share in the sales down from 48.4% to 45.3%). The funds granted in that leasing category totalled PLN 35.3 billion (-11.7% y/y). The core category generating the drop in the segment were passenger cars (-14.5% y/y). The drop and lower financing of passenger cars than a year earlier was the effect of fiscal changes in accounting for lease contracts for passenger cars in force since 1 January 2019 and therefore purchases by business were moved from 2019 to the last quarter of 2018.

The second largest market segment – the segment of machines and equipment (including IT) recorded an annual growth of 4.0%. The total value of financed machines and equipment was PLN 22.6 billion.

Source: Polish Leasing Association

Sales in the factoring market, associated in the Polish Factors Association (PZF), grew in 2019 by 16.0% y/y and reached PLN 281.7 billion. The form of financing most frequently selected by companies for non-recourse factoring (51.5% of total sales), under which in 2019 sales amounted to PLN 145.0 billion and the growth was 17.5% y/y.

The number of clients associated in PZF was 18.0 thousand after a growth by 6.5% y/y. The number of invoices issued in 2019 was 12.7 million (decrease by 14.8%). In the sectoral approach, it is production and distribution companies that most often use factoring companies for their receivables (43.7% and 34.9% respectively).

Source: Polish Factors Association

Capital market

Warsaw Stock Exchange

Despite of high increment in GDP and good economic situation, the year 2019 showed decreases in majority of the main WSE indexes. Industry-specific market sentiment varied a great deal. The WIG-IT index recorded the highest growth (+42.3% y/y) and it was followed by WIG-Telecom (+40.9% y/y). Meanwhile WIG-Fuels (-18.9% y/y) and WIG-Energy (-18.6% y/y) indexes recorded the strongest declines. In 2019 WIG index was one of the weakest indexes in the world. This may be related to the lack of inflows of funds into the investment funds, melting assets in Open Pension Funds as well as the expected decline in the economic growth rate in Poland in the years to come. A positive impulse for the Polish stock exchange indexes may be given by the inflow of funds to the newly established Employee Capital Programs and their planned expansion to include further groups of companies. A risk factor may be the planned transformation of Open Pension Funds into Individual Pension Accounts, and consequently the required decisions of Poles to transfer their funds to Individual Pension Accounts or to Social Insurance Institution. Not without significance for the Polish stock exchange may be international events such as talks between the USA and China, or the growing conflict between the USA and Iran.

The value of the broad market index WIG rose slightly in 2019 by 0.3% y/y, which did not come close to the historical peak recorded in 2007. In the same period, the alternative market index, NC Index, rose by 19.3% y/y.

The traded volumes in shares, rights to shares and pre-emptive rights on the main floor reached PLN 195.3 billion, down by 7.8% y/y. Despite the NC Index growth, the New Connect alternative market recorded a decline in traded volume to the level of PLN 1.5 billion (-7.7% y/y). Meanwhile the Catalyst market saw a 13.3% increase in trading volume up to the level of PLN 2.9 billion.

From the perspective of the number of entities listed on the WSE, 2019 was another year (and the third one in a row) in which more companies were removed (22) than introduced (7) to the main floor. As at 2019 yearend, 449 companies were listed on the main floor (465 years earlier). Their total capitalization declined to PLN 1,103.8 trillion (-2.2% y/y). The NewConnect market recorded a higher number of IPOs, reaching 15 in 2019 (as in the previous year), but the number of listed companies fell to 375 (27 withdrawals, of which 5 are transfers to the WSE). The value of listed corporate and municipal stock issues on the Catalyst market was up by 6.3% y/y to the level of PLN 92.1 billion.

Main WSE indexes in 2019 (as of 28 December 2018 = 100)

Source: Warsaw Stock Exchange

Investment funds

The value of the mutual fund market measured by the funds under management accumulated by these institutions was up in 2019 by PLN 11.2 billion (4.4% y/y), up to the level of PLN 268.1 billion. In non-dedicated funds, the accumulated funds were up to the level of PLN 164.6 billion (5.7% y/y), and in dedicated funds up to PLN 103.5 billion (2.3% y/y).

Clients of non-dedicated funds were most willing to invest their funds in investment funds with a relatively low risk profile. The most popular investment category were money and bond funds (65.4% of total assets of non-dedicated funds), whose assets were up during the year by 11.2%. They were followed by mixed funds, which accounted for 14.8% of the undedicated portion of the market (decrease in assets by 4.2% y/y) and equity funds responsible for 12.7% of the undedicated portion of the market (assets down by 1.8% y/y).

In 2019, the balance of purchase and redemption of participation units and investment certificates was again negative (PLN -0.5 billion), but significantly lower than in 2018 (PLN -12.4 billion). Only the debt funds recorded a positive balance of inflows in 2019 (PLN +6.1 billion).

Source: Chamber of Fund and Asset Management Companies

Open-End Pension Funds

As at the end of December 2019, pension funds’ assets amounted to PLN 154.8 billion, i.e. down by PLN 2.5 billion (1.6%) compared to the previous year. In 2019, Open-Ended Pension Funds collected PLN 3.5 billion (vs. PLN 3.3 billion in 2018), and the transfer of funds under the safety slider mechanism to ZUS amounted to PLN 6.9 billion (vs. PLN 7.9 billion a year earlier).

Source: Analizy Online and the Polish Financial Supervision Authority

Employee Capital Plans

The Act on Employee Capital Plans (ECP) entered into force on 1 January 2019 and provides for four stages of covering an increasingly broad group of companies with the ECP program:

  • effective from 1 July 2019, employees in companies with a minimum of 250 employment were covered by the ECP programme,
  • effective from 1 January 2020 companies with at least 50 employees joined the ECP programme,
  • effective from 1 July 2020, the programme will be extended to companies with at least 20 employees,
  • effective from 1 January 2021 other public sector entities and bodies.

The payment of ECP contributions is voluntary. The basic ECP contribution – financed by the employer – is 1.5% of the monthly salary, and by the employee – 2%. Additionally, from the funds of the Labour Fund, the State makes a one-time so-called “welcome payment” in the amount of PLN 250, and in subsequent years it pays PLN 240 per year. The employer and the employee may increase the amounts paid, each up to a maximum of 4.0% of the ECP member’s gross salary. An employee is also entitled to reduce the compulsory basic payment to a level not lower than 0.5% of his gross salary, if he makes an appropriate declaration that his earnings do not exceed 1.2 times the minimum wage for work. According to The Chamber of Fund and Asset Management data, in 2019 PLN 62 million was transferred to ECP funds managed by Investment Fund Management Companies.

Source: Social Insurance Institution (ZUS) and The Chamber of Fund and Asset Management (IZFiA)

Modification of regulations concerning the banking sector

dokument
The table presents the key amendments to the banking sector regulations.
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Changes to capital requirements

Banks in Poland should maintain minimum capital ratios in line with the following:

  • Total capital ratio (TCR) at the following level: 8% + add-on + combined buffer requirement;
  • Tier I ratio (T1) at the following level: 6% + 75%*add-on + combined buffer requirement;
  • Common Equity Tier 1 ratio (CET1) at: 4.5% + 56%*add-on + combined buffer requirement.

Whereas, the combined buffer requirement is a total of:

The capital conservation buffer was instituted in 2016 under the Act on macroprudential supervision over the financial system and crisis management in the financial system. Effective from 1 January 2019 the capital conservation buffer has been at the level of 2,5%.

The buffer shall apply to the exposures on which such a buffer has been imposed by the competent authorities. The countercyclical buffer is variable over time depending on the structure of adequate exposures and the levels of countercyclical buffer rates imposed on adequate exposures. The countercyclical buffer for exposures in Poland is 0% from 1 January 2016.

In October 2019, the PFSA updated the list of banks, which were deemed by it systemically important institutions. Currently, it features 9 banks (7 commercial and 2 cooperative ones). Capital add-on was imposed on these institutions both at the consolidated and separate levels. The PFSA decided to impose buffers of 0.10% – for cooperative banks – up to 1.0% for one commercial bank. Among commercial banks: two banks received a buffer of 0.25%, one bank (ING Bank Śląski S.A.). 0.50%, three banks 0.75% and one bank 1.00%.

The systemic risk buffer has been effective since 1 January 2018. It was introduced by the Regulation of the Minister for Economic Development and Finance on systemic risk buffer of 1 September 2017. Its current value is 3%.

The capital conservation buffer was instituted in 2016 under the Act on macroprudential supervision over the financial system and crisis management in the financial system. Effective from 1 January 2019 the capital conservation buffer has been at the level of 2,5%.

The buffer shall apply to the exposures on which such a buffer has been imposed by the competent authorities. The countercyclical buffer is variable over time depending on the structure of adequate exposures and the levels of countercyclical buffer rates imposed on adequate exposures. The countercyclical buffer for exposures in Poland is 0% from 1 January 2016.

In October 2019, the PFSA updated the list of banks, which were deemed by it systemically important institutions. Currently, it features 9 banks (7 commercial and 2 cooperative ones). Capital add-on was imposed on these institutions both at the consolidated and separate levels. The PFSA decided to impose buffers of 0.10% – for cooperative banks – up to 1.0% for one commercial bank. Among commercial banks: two banks received a buffer of 0.25%, one bank (ING Bank Śląski S.A.). 0.50%, three banks 0.75% and one bank 1.00%.

The systemic risk buffer has been effective since 1 January 2018. It was introduced by the Regulation of the Minister for Economic Development and Finance on systemic risk buffer of 1 September 2017. Its current value is 3%.

The PFSA also monitors the banks’ exposure under FX mortgage loans. Institutions with material exposure need to meet a higher capital requirement (separately at the consolidated level and separate level), so called add-on. The PFSA did not impose that requirement on ING Bank Śląski.

For the ING Bank Śląski Group, the above-referred requirements mean the following minimum ratios:

  • CET1 >= 10.5%,
  • T1 >= 12.0%,
  • TCR > 14.0%

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