ING Bank Śląski | Annual Report 2014

ING BANK ŚLĄSKI

ING BANK ŚLĄSKIAnnual Report 2014

Macroeconomic situation

1. Major trends in Polish economy

Gross Domestic Product

The year 2014 has shown where there are boundaries for the Polish growth in the situation when the Eurozone is wrestling with stagnation. In the first quarter, there was a relatively dynamic recovery in the economy (3.4% y/y), taking into account mixed signals as to the Eurozone standing. What helped was warm winter and changes in VAT for company cars. In the second and third quarters, the growth stayed at that fairly high level despite the burden stemming from the Russia-Ukraine conflict. The economic growth for the whole year was probably 3.3% versus 1.7% in 2013. The end of 2014 brought also a positive supply shock due to the rapid and significant fall in the crude oil prices worldwide, whereby the achieved level seems maintainable in 2015.

Labour market and payroll

Average unemployment rate in 2014 was 12.3% versus 13.5% in the previous year. What is characteristic is the improvement regularity for the data describing the labour market, though the very pace of employment improvement in the sector of enterprises is not among the fastest (for most part of the year it was 0.7-0.8% y/y). It is noteworthy that already in mid-2014 the unemployment rate made up for the whole increase caused by the slowdown of the years 2012-2013 and despite this it is still not losing its impetus in the downward movement.

The wage growth rate in the corporate sector rose from 2.6% y/y on average in 2013 to 3.9% in 2014. The annual average real salaries went up to 3.9% from 1.6% in the previous year owing to the deceleration of inflation trends. It is worth noting, however, that towards the end of 2014 the growth in salaries started to slow down which could reflect the worse condition of the mining industry and the falling pay pressure vis-à-vis the surprising scale of price growth decline during the year (from 0.7% y/y in December 2013 to -1% y/y in the following year).

Inflation

Despite optimistic expectations as regards the overall economic situation, 2014 was marked by the first since before several decades deflation period. The annual average inflation settled at 0.0% versus 0.9% in 2013, although yet in December 2013 the median of expectations as to its average level in 2014 was 2%. The deflation period has been lasting continually since July 2014. The reason for such a low growth in prices is the long-term season of very low inflation in the Eurozone on account of weak market conditions, but also global falls in the prices of raw materials, including energy resources. The pressure on declining food prices resulted from the co-occurrence of good harvest in Poland and Russia’s placing an embargo on food imports from the EU (while some restrictions and difficulties concerning the exports to Russia affected Poland nearly from the beginning of the previous year; the embargo on food from the EU came into force in August).

Impact of the global financial markets on Polish economy  

2014 was characterised, on the one hand, by the tapering of the quantitative easing programme by the American Federal Reserve Bank and preparing for the interest rates rise, and on the other hand, by the European Central Bank gradually taking to next unconventional measures aimed at loosening the monetary policy. Apart from that, Japan intensified the stimulation scale. In the environment of low and falling inflation and economic stagnation in the Eurozone, this led to the drop in profitability of bonds, both in base markets, developed markets and among emerging markets, Poland included. Prudent withdrawal from the policy of cheap money by the USA and expectations that the ECB balance sheet would augment shored up the climate of “searching for profitability”. The investors’ behaviour was also influenced by Russia’s taking over Crimea as well as by the continued conflict between Russia and Ukraine. The sanctions imposed on Russia by, among others, the EU and USA led it to the verge of liquidity crisis and combined with Russia’s retaliatory actions resulted in worsening of the European business sentiment. The Polish zloty showed considerable resistance to much turbulence in emerging markets in 2014 but because of it could not appreciate to such a degree as the sound condition of the economy when juxtaposed with other emerging markets and relatively high interest rates would suggest.

State budget

The execution of the central budget for 2014 was surprisingly positive, considering that inflation was markedly lower than planned and the economy had to face up to the economic impact of the conflict between Russia and Ukraine. The actual deficit after November turned out to be more than PLN 20 billion below the plan, which was the effect of relatively high income (including over-10% higher VAT y/y) and lower actual expenditures (inter alia, as regards debt service costs). The public finance sector deficit at 3.3% of GDP as estimated by the Ministry of Finance is low enough to make it possible to simultaneously fulfil the obligations under the EU fiscal framework and arrange for some support of the economy from the fiscal policy in 2015.

2. Monetary policy

The Monetary Policy Council kept the interest rates unchanged until the end of the third quarter, even though the nose-diving inflation and its descent below zero created pressure towards further reductions. On 08 October, the key interest rate was reduced by 50 bps and at the same time the lombard rate was reduced by 100 bps as a result of which the corridor set by the lombard and deposit rates narrowed from 300 bps to 200 bps. The persisting relatively good results of the economy in real terms as well as concerns that further reductions will be ineffective prevented the Council from additional cuts contrary to the market expectations. In consequence, Poland still stood out among emerging economies, due to its relatively high level of real interest rates.

The Monetary Policy Council is confronted with the continued good market conditions and further deepening of deflation. Besides, it is aware of the fact that the policy of cheap money of the main central banks led to a difficult situation in financial markets where huge capital flows are not rare. Hence, the financial markets stability and predicting of investors’ reactions constitute important factors for shaping the monetary policy. The uncertainty engendered by the conflict between Russia and Ukraine which impacts significantly on the dynamics of prices in Poland and, to some extent, influences also the economic growth is an additional impediment here. The Monetary Policy Council may decide to further reduce the interest rates by 25-50 bps in total in March or in the following months under the pressure from very low price dynamics figures. PLN depreciation from December 2014 and January 2015 plus large nervousness of its movements in that period were named by the Monetary Policy Council the factor necessitating interest rate stabilization. Nonetheless, during the press conference in February, Marek Belka, the President of the National Bank of Poland, declared to see sufficient arguments and support from the Council to reduce rates in March. .

Since 08 October 2014, the interest rates have been as follows:

  • reference rate – 2.00%,
  • rediscount rate – 2.25%,
  • lombard rate – 3.00%,
  • deposit rate – 1.00%.

3. Banking sector10 

In 2014, the situation of the banking sector was impacted by accelerated economic growth and stable financial market (record low interest rates, record low yields of T-securities and relatively stable Polish zloty). Good financial standing of companies and improved condition of the labour market brought lending revival. Higher lending volumes were positively impacted by low interest rates and the government programme of De Minimis Portfolio Guarantee Line. Despite record low interest rates, the term deposit base grew faster than a year ago. Absence of attractive alternatives caused by  the bear market experienced by the Warsaw Stock Exchange translated into higher term deposit volumes, in particular on the part of households.

The main monetary categories were as follows:

  • Liabilities to households went up during the year by PLN 51.6 billion and as at the end of December 2014 they amounted to PLN 605.3 billion, up by 9.3% from the end of 2013.
  • In December 2014, liabilities to institutional clients11 amounted to PLN 328.5 billion, up by 6.5% from the 2013 yearend. The volume increase by PLN 20.1 billion can be mainly attributed to higher liabilities to enterprises (up by 9.0%, or by PLN 18.7 billion). Liabilities towards other sectors grew slower, while liabilities towards local government institutions and social insurance funds even dropped slightly.

  • In December 2014, receivables from households amounted to PLN 593.2 billion, 
  • up by 5.5% from the end of last year. Housing loans, which formed the main part of the banks’ credit exposure towards households, grew in nominal terms by 5.1%, arriving at PLN 352.8 billion. Their rise would have been higher if it had not been for the first – of such scale – transaction of sale of non-performing housing loans by one of the banks. Upon excluding the exchange rate effect, the housing loans portfolio  went up by approximately 3% throughout the year. According to the preliminary data of the Polish Bank Association, in 2014, banks granted mortgage loans totalling PLN 38.0 billion (PLN 37.5 billion in 2013); 99.2% of which were PLN loans. The volume of consumer credits went up a second year in a row. It rose by 4.01% from December 2013 to arrive at PLN 144.1 billion. 
  • Receivables from institutional clients went up by 9.1% (PLN +31.2 billion) in the past year, arriving at PLN 372.9 billion, including corporate loans which rose by PLN 15.4 billion (or 6.3%) during the year. The investment loans which went up by 9.9% from the 2013 yearend were the main growth driver. Working capital loans rose by 5.4% year on year, while loans for real property by 1.9%. Receivables from  other sectors grew at the following pace:
    • receivables from non-monetary financial institutions: +24.0% (or up by PLN 10.3 billion), 
    • receivables from local government institutions and social insurance funds: PLN +4.0 billion (PLN 1.4 billion),
    • receivables from non-commercial institutions for households: +7.1% (PLN 0.4 billion).

In 2014, the financial results of the banking sector were primarily driven by the low interest rate landscape. The result on core activity went up by 4.0% from the past year. It was triggered by significantly higher net interest income (up by 7.1 y/y), slightly better net income on fees and commissions (up by 0.7%) and lower net income on other banking operations (down by 11.5%). Net interest income accelerated as an effect of completion by the banks of their adaptation to working in the low interest rate landscape. Banks managed to significantly reduce the cost of interest liabilities and obtain a lower drop in assets profitability at the same time. Interest income in the said period went down by 4.9% while interest costs dropped by 20.3%. Low dynamics of net income on fees and commissions was impacted by changes to the accounting policy as regards recognition of commission for selling insurance products. Lower net income on other banking operations resulted mainly from decreased trading activity following the drop in the profit on sales of the debt instruments portfolios from 2013.

Banks managed to keep the cost discipline (both the number of client outlets and the headcount went down) and as a result the operating expenses along with amortisation/depreciation went up only by 0.2%. when compared with the same period last year. Costs were adversely affected by higher contributions to BGF due to the prudential fee. Costs rose slower than income which made C/I ratio go down by 1.4 p.p. (or from 53.6% to 52.2%).

Stable quality of lending portfolios caused the costs of impairment losses for assets remain unchanged when compared with 2013.

As a result of the above-discussed phenomena, going-concern net profit went up by 7.0% (or +PLN 1.1 billion) from 2013.

The key banking sector effectiveness ratios looked as follows: ROA was 1.1% and it did not change from 2013, whereas ROE rose slightly from 10.1% to 10.2%.

The share of impaired receivables in total receivables from the non-financial sector went down from 8.5% in December 2013 to 8.1% as at the 2014 yearend. It was triggered by economic revival accompanied by improving standing of companies and households as well as by lower costs of debt service following easing of the monetary policy by the Monetary Policy Council.

In the corporate sector the improvement was seen in large corporates (decrease in impaired loans from 9.6% as at the 2013 yearend to 9.0% in December 2014) and in SME (drop from 13.0% to 12.7%).

The share of impaired receivables from households went down from 7.1% to 6.5% in the analysed period. The share of impaired housing loans did not change (3.1%), while the share of non-performing consumer credits fell noticeably (down from 14.7% to 12.8%). Stable quality of housing loans was undoubtedly impacted by a large transaction of sale of non-performing housing loans by one of the banks.

The main changes introduced in 2014 by the Polish Financial Supervision Authority as regards regulatory requirements are as follows:

  • Recommendation F on basic criteria used by PFSA when approving bylaws for determining the bank and mortgage value of the real property made by mortgage banks,
  • Recommendation K on the principles of maintaining registers and accounts securing mortgage bonds by mortgage banks,
  • Polish Financial Supervision Authority Resolution No. 218/2014 concerning publication of Principles of Corporate Governance for Supervised Institutions,
  • Recommendation U on good practices on the bancassurance market, to take effect until 31 March 2015.

10 The amounts discussed are for receivables and liabilities of monetary financial institutions from/ to other domestic industries. Source: NBP, NALEZ_ZOBOW_MIF.xls file – December 2014.
11 Total for the following classes of entities: non-monetary financial institutions, enterprises, non-commercial institutions for households, local government institutions and social insurance funds.
12 Going concern gross profit.

4. Asset-backed funding market

Leasing

In 2014, the leasing industry financed transactions totalling PLN 42,8 billion13, i.e. up by 21.3% from the past year. It should be emphasized that it is at the same time the best result in the Polish leasing industry track-record. Such a good result was due to the economic upturn: high utilisation of corporate output capacity, increased demand for means of transport, acquisition of extra EU funds for farming as well as one-off factors of legislative nature (“cargo partition window”, derogation list for heavy goods vehicles complying with the Euro 5 emission standard).

The largest market segment (35.1%) – commercial vehicles –14 was boosted by the terminating sale of vehicles meeting the Euro 5 emission standard and increased demand for transport services stemming from economic upswing. As a result, this segment grew by 30.8% from 2013. Leasing of passenger cars also saw a high growth (up by 24.5%; y/y) and represented 25.9% of the market. It was a result of the “cargo partition window” effective in Q1 2014, making it possible to fully deduct VAT from the purchase price of passenger cars with approval for registration as goods vehicles. Favourable laws on lease of vehicles from premium segment supported maintenance of high growth rate of those vehicles lease in subsequent quarters.

In 2014, machinery and equipment accounted for 31.7% of all assets funded by leasing companies. This segment grew – by 17.7% from the past year, inter alia, in consequence of a dynamic growth of the value of funded construction machinery (up by 51.8% y/y).

The value of leased IT hardware and software went up by 8.8% from 2013. In turn, the value of means of railway, water and air transport funded by leasing companies fell by 3.6% y/y.

2014 saw a further drop in the real estate lease worth. This segment, whose market share (2.9%) is significantly lower than in Western Europe, shrank by 23.5%. It should be however underlined that the last quarter of 2014 brought some upturn (52.4% of the total production).

It is a standing trend on the market that loans in funding by lease companies gain in significance - already 15.6% of all movables were funded in that way in 2014. This phenomenon was primarily fuelled by extra funding for farming investment projects obtained from the closing EU Financial Perspective 2007-2013 (farming machinery is the the main category of assets funded with cash loans) and the growing popularity of cash loans in funding of passenger cars.

Factoring

2014 was yet another good year for Polish factoring companies. The turnover of the factoring companies being members of the Polish Factors Association arrived at PLN 114.4 billion, or went up by 17.3% from 2013. The growing popularity of factoring services is driven by the fact that they allow for both improving the company’s liquidity and hedging against the counterparty risk. Traditionally, domestic factoring (both full and limited) was the most popular form of factoring services in 2014 – its share in turnover of the companies grouped in the Polish Factors Association was 78.8%.

13 Source: Polish Leasing Association, ZPL file -finansowanie rynku – rok 2014 – tabela wartość i ilość wg firm.xls
14 Commercial vehicles comprise heavy goods vehicles of gross vehicle weight rating over 3.5 tonnes, tractor units, trailers and buses.

5. Capital market

Warsaw Stock Exchange

In 2014, the Warsaw Stock Exchange saw bear market which was driven by both internal factors (change of the open-end pension funds functioning among other things) and external factors (conflict between Russia and Ukraine). The broad market index – WIG closed 2014 with a slight gain of 0.3%.15 Blue-chip index – WIG20 lost 3.5%, while WIG30 being a gauge for the most liquid companies closed the year 2.0% below the return seen by the last trading day in 2013. As far as the local stock market is concerned, medium-sized companies brought most gains for investors – mWIG40 picked up 4.1%. Among the main indices, sWIG80 saw the deepest drop, as it fell by 15.5% in the discussed period. The indices of the NewConnect market also performed poorly – NCIndex went down by 20.7%, and NCIndex30 grouping the most liquid companies of this market dropped by 25.5%.

As far as sector indices are concerned, WIG-Energy picked up most in 2014 (+23.6%), followed by WIG-Media (+10.5%) and WIG-Fuels (+5.2%). The biggest drops were recorded by WIG-Telecom (-8.0%), WIG-Developers (-9.8%), WIG-Basic Materials (-15.5%) and WIG-Food (-24.0%). The political situation in Ukraine made indices of companies coming from that country and listed on the WSE plummet. WIG-Ukraine lost 50.5% from the 2013 yearend.

As at the end of December 2014, there were 471 companies listed on the WSE main floor, including 51 foreign ones. Domestic companies were worth PLN 591.2 billion, down by 0.4% from December 2013. Domestic and foreign companies were worth PLN 1,253.0 billion in total, the number representing a 49% growth from 2013. This boom can be attributed to initial public offering of Banco Santander and German insurance company, Talanx on WSE. 2014 saw 28 IPOs and delisting of 7 companies.

In 2014, NewConnect saw 22 companies listed for the first time while 10 moved their quotations to the WSE main floor – the biggest number in that market history. As at the 2014 yearend, there were 431 companies quoted on the alternative market (445 as at the 2013 yearend). Domestic and foreign companies were worth PLN 9.1 billion in total (down by 17.3% from the 2013 yearend).

2014 saw fewer main floor trades. Trading volumes went down by 6.7% from 2013 and settled at PLN 205.3 billion. Total trading (block trades included) went down by 9.1%, arriving at PLN 232.9 billion. Trading in shares of high-potential companies on the alternative market – NewConnect went up from the previous year by 17.1%, reaching PLN 1.4 billion.

The issues of non-government bonds on the Catalyst market totalled PLN 64.1 billion versus PLN 59.0 billion as at the 2013 yearend. On the contrary, the value of trading fell and in 2014 was PLN 3.1 billion, or down by 28% from a year ago.

In 2014, the volume of stock indices contracts went up by 6.0% from 2013 and closed with 4.5 million deals.16

Open-end pension funds

As at the end of December 2014, the funds accumulated in pension accounts totalled PLN 149.1 billion, as compared with PLN 299.3 billion as at the 2013 yearend. Such a big drop of assets is a result of forwarding bond holdings of open-end pension funds to the Social Insurance Institution on 03 February 2014. As a consequence of transferring PLN 153 billion, being 51.5% of assets, the funds accumulated in the open-end pension funds shrank from PLN 298.6 billion to PLN 145.6 billion over one day. Following this operation, open-end pension funds became aggressive funds with equity holdings prevailing in their portfolios (82.2% as the 2014 yearend).


Mutual funds

Despite WSE bear market, last year proved positive for mutual funds, although not all its segments brought adequate return. The interest rates remaining at low levels did not favour accumulation of savings in bank accounts and made investors look for alternative ways of saving. In 2014, the market of Mutual Funds Associations welcomed almost PLN 11.5 billion worth of new funds17, which is a drop from 2013 (PLN 21.5 billion). In no month a negative balance of payments and redemptions was posted nonetheless. As at the end of 2014, the mutual funds’ assets totalled PLN 209.0 billion, 18up by PLN 20.0 billion or 10.6% year on year. Last year the assets of capital and money market funds were more dynamic than those of private market funds19 (11.0% versus 9.7%).

In 2014, cash and money market funds boasted very high returns. They assets rose by PLN 7.2 billion (+30.6% y/y) over the past 12 months. Individual clients seeking attractive alternatives to low-interest bank deposits prevailed among their investors. Cash and money market funds reported both a positive sales balance and management result; their market share went up by 2.2 p.p. to 14.6%.

Low interest rates and expected further interest cutbacks rendered investors eager to buy Polish bonds, notably long-term ones of fixed interest rate. In consequence, yields on Polish T-securities dwindled to the lowest levels ever. Under these conditions, the assets of debt funds proved very dynamic going up by 26.4% y/y (PLN +8.3 billion) and the entire segment solidified its market position by 2.4 p.p. (market share of 19.1%). Commodity market funds were very dynamic in 2014. They are the smallest market segment. Their assets augmented by 27.8%, but by PLN 73 million only in amount.

With the downturn experienced especially by the domestic stock market, equity funds posted both negative management result and trading balance. Their accumulated assets declined by PLN 1.3 billion to PLN 29.7 billion and their share in the market total fell from 2.2 p.p.to 14.2%). In the group of equity funds, those investing in medium-sized companies (mWIG40 gained 4.1% in 2014) and in foreign shares from the markets of India, Turkey and United States coped relatively well.

Mixed funds did not manage to safeguard themselves against a decline either (down by PLN 0.6 billion). Towards the end of December 2014, their volume was PLN 34.9 billion or 16.7% of the market (-2.1 p.p. over the year).

The segment of private funds grew primarily thanks to private equity funds and securitisation funds which built up their assets by PLN 5.2 billion (+9.2% y/y) and PLN 1.2 billion (+42.6% y/y) respectively. In 2014, the latter proved an absolute leader of growth among all funds groups, still they remain among the smallest segments on the Polish market with the share of 1.9%.Real property funds experienced a slump in managed funds last year (-15.56% y/y). It was driven by the fact that some products activated a few years ago entered their closing stage, entailing return of funds invested to clients.

As at the end of 2014, the share of private asset funds in the entire market was 32.4% versus 32.6% a year earlier.

15 Source: Key WSE statistics http://www.gpw.pl/analizy_i_statystyki_pelna_wersja
16 With historical volumes of WIG20 contracts adjusted with the multiplier of PLN 10.
17 Source: http://www.izfa.pl/files_user/xls/Raport flowy 31.12.2014.xls
18 Source: http://www.izfa.pl/files_user/xls/Raport aktywa 31.12.2014.xls
19 Private equity, real property and securitisation funds.

6. Macroeconomic factors to affect  operations of ING Bank Śląski S.A. in 2015

One of the global factors that may adversely affect the Polish economic situation is the pace of normalisation of the monetary policy in the USA. Should the expectations about increasing the US interest rates intensify, the risk of large outflow of capital from Poland and other emerging economies will become higher. Falling crude oil prices are another factor that because of its size can be seen as a positive supply shock that may prove favourable to the economy through freeing household funds by reducing fuel expenses and that through decreasing costs of enterprises protects their profitability in the period of falling consumer prices.

The key question is whether the Eurozone will manage to overcome the many-year economic stagnation in 2015. The European Central Bank intends to keep interest rates practically at the 0% level in the long time perspective. Further, it launched other non-conventional monetary policy instruments, including a large programme of purchase of sovereign bonds expected in 2014. All this in the environment of lasting works on the European investment programme that can be seen as an equivalent of Polish EU-funds-based programmes. Still, the fruits of the Juncker investment plan being the economic upturn will be visible first in 2016 only. Because of high debt and fiscal deficit, many Eurozone economies have limited capacity to support growth with fiscal policy. 2015 may see political risks persist (potential questioning of the Eurozone’s fiscal framework by Greece and Spain generating for the former the risk of zone exit), whereby business sentiments can get sapped in the Eurozone.

Decelerating euro (by 16% y/y versus USD) and lower crude oil will aid the Eurozone in 2015. A relatively better condition of the German economy (when compared to the situation in the Eurozone) will enable keeping of the growth rate of the Polish export. In 2014, depletion of the Polish export caused by the Russian and Ukrainian conflict and Russian embargo was offset by higher volumes of goods exported in other directions, such as the Netherlands, Italy, Germany and also more exotic ones. Even a slight economic rebound in the Western Europe ought to suffice to continue to balance out the impact of the conflict.

Internationally, Poland still has one of the highest real interest rates which will attract portfolio capital to the debt and FX markets. On the other hand, nominal interest rates are currently at the lowest level since the beginning of transformation. At some point in time this may discourage retail clients from keeping term deposits and make them look for other forms of saving and storing their values. Still, 2014 saw undistorted accumulation of term deposits, although a strong growth in the amount of cash held outside of the banks was noted.

Macroeconomic conditions for banks’ functioning will be defined by sustainable economic recovery in Poland. ING economists’ forecasts show that in 2015 economy will grow at the pace of 3.2-3.6% y/y. Labour market occurs to be more vibrant than suggested by the economic growth rate only, while the ratios of the economic situation formed on the basis of the survey-based researches indicate that enterprises are prone to continue to raise employment after pretty cautious steps taken in mid-2014, the situation which was probably impacted by the geopolitical risk and uncertainty of the Eurozone. The 2014 yearend data showed a sustained trend of declining unemployment rate (after seasonal adjustment) and accelerated employment dynamics after a long period of stable, but low growth. The average unemployment rate projected for 2015 is 10.7% or 1.6 p.p.  down from 2014. That the pay dynamics did not follow inflation in 2014 is worth noting as it made household income rise considerable in real terms.

2015 should see further closing of the gap between private consumption and income growth. One can have an impression that after the slowdown experienced in 2012 and 2013, consumers became more prudent in spending, and thus the projected growth rate of private consumption of over 3% y/y can be accompanied by moderate increase in household loans only.

After a strong growth of investments in 2014 (over 9%), we may see a slight decline, below 8%. The high level of own funds held by enterprises and alternative forms of funding can lead to the situation where launch of investment project will not translate in a two-digit growth in corporate lending.

Deflation may last up until Q3 2015, but it will be driven by fluctuations of crude oil prices and Polish zloty. We expect that the Monetary Policy Council will cut down interest rates between March and May 2015 by 25-50 bps in total. Thus, the final cutback can take place shortly before or concurrently with the turning point of inflation and economic situation (business activity should pick up in H2 2015). CPI rebound in H2 2015 can reach over 1.5% y/y because of a very low base of food prices, weak PLN and a potential rise in crude oil prices over that time.

As regards foreign exchange rate, the appreciation trend may be noted  for the major part of the year. However, the fact that we are approximating rises in interest rates in the USA and the geopolitical risk of Russia can move EUR/PLN rate over 4.20. The CHF exposure of some Polish households and banks also receives negative perception of investors. Assuming that upon intensive actions of ECB to weaken their own currency, the EUR/CHF rate will find it hard to come back over 1 this year, the issue of Swiss franc impact on the condition of households and consequently on the results of economy and quality of lending portfolios may come back, which will prove detrimental to Polish zloty. Economic revival and overcoming of deflation should trigger a more visible appreciation trend of PLN in H2 2015.

The geopolitical situation and the possible comeback of the Russian currency and liquidity crisis throughout 2015 is another uncertainty driver due to high maturities of FX corporate debt under the circumstances where following the sanctions Russia is cut off from funding in USD and EUR. This in turn can weaken the Polish currency and export potential on that market. On the other hand, Polish bonds market benefited from the Ukraine crisis as it became a “safe haven” for funds withdrawing from other, more risky countries of the region. It is assumed that only a dramatic exacerbation of the crisis in the Eastern Europe posing risk of violation of NATO borders could degrade the status of the Polish bonds market.

Polish economy in  years 2006-201620
  2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F
GDP growth (%) 6.2 7.2 3.9 2.6 3.7 4.8 1.8 1.7 3.3 3.5 3.8
General government debt as per the EU methodology (% of GDP) 47.7 45.0 47.1 50.9 54.9 56.2 54.9 57.1 48.5 48.6 47.2
M3 money supply (PLN billion) 495.3 561.6 666.2 720.3 783.6 881.5 921.4 978.9 1,059.2 1,170.4 1,246.1
Producer Price Index growth (%) 12.0 9.4 3.0 -3.6 11.1 6.8 1.4 2.4 3.4 5.2 6.5
Average annual inflation (CPI) (%) 1.0 2.5 4.2 3.5 2.6 4.3 3.7 0.9 0.0 -0.2 1.4
Unemployment rate (%) 14.8 11.2 9.5 12.1 12.4 12.5 13.4 13.4 11.5 10.5 10.2
PLN/USD (yearend) 2.91 2.76 2.94 2.85 2.96 3.42 3.10 3.01 3.51 4.05 4.39
PLN/EUR (yearend) 3.83 3.58 4.11 4.11 3.96 4.42 4.09 4.15 4.26 4.05 3.95
WIBOR 3M (average) 4.20 4.80 6.34 4.31 3.93 4.58 4.87 2.97 2.49 1.79 1.82

20  2015-2016 Forecast updated in February 2015.

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