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Moribund Home Loans Spur Regulator to Relax Grip: Poland Credit

Oct. 17 (Bloomberg) -- The smallest increase in household borrowing since 1998 and the cost of loans at a two-year high are prompting Poland’s financial regulator to relax rules for banks in a bid to resuscitate the lending market.

Credit growth decelerated to 4.6 percent in the 12 months to Aug. 31 from 12.4 percent in December, the central bank said on Oct. 12. The average interest rate on zloty-denominated home loans was 6.9 percent in June, up 50 basis points this year and the highest since 2010, central bank data show. That compares with a 40 basis point drop in euro-region mortgages to 3.36 percent, according to data from Austria’s central bank.

Weaker credit growth was one of the reasons behind the first drop in Poland’s domestic demand in three years in the second quarter. The regulator will amend its recommendations for banks to “stop the decline in consumer lending,” Andrzej Jakubiak, the head of the financial markets supervisory office, said in Warsaw on Oct. 15.

“Restrictive regulations have been the main driver of a sharp decline in bank consumer lending,” Radoslaw Bodys, chief economist at PKO Bank Polski SA, said by phone yesterday. The changes “should stimulate bank consumer lending,” he said.

Reversing Direction

From the start of 2013, banks with a Tier 1 capital ratio, a key measure of financial strength, exceeding 9 percent and a solvency ratio above 12 percent will be allowed to simplify rules when making consumer loans, the regulator said on Oct. 15.

The watchdog will no longer cap clients’ payments at 50 percent of their monthly income, reversing stricter recommendations introduced in 2010 to avoid a lending bubble that led to bailouts of U.S. and western European banks.

The loosening of loan criteria comes as Moody’s Investors Service kept its negative outlook for Polish banks for a second year, according to an Oct. 16 report. Their performance is “under pressure” from weakening credit demand, which is likely to persist, senior analyst Irakli Pipia said in the note.

The country’s lenders also remain exposed “to the on-going euro-area turmoil” because banks rely on their western parents “for a major portion of foreign-currency funding needs,” Pipia said. Five out of Poland’s seven largest banks are controlled by lenders from western Europe, data compiled by Bloomberg show.

Wider Slowdown

Cash loans, lending for cars and home appliances and debt on credit cards fell 3.5 percent to 125.9 billion zloty ($40 billion) in July from the end of last year. The regulator will also seek to soften regulations for mortgages, which fell 0.6 percent in the period, according to its data.

The slowing credit growth is a reflection of the wider economy, which will expand 2.5 percent this year and 2.2 percent in 2013, according to government forecasts. Gross domestic product grew 4.3 percent last year.

Second-quarter GDP growth slowed to 2.4 percent, the lowest rate since 2009, while domestic demand, the engine of the country’s growth during Europe’s crisis, shrank 0.2 percent, data from the Central Statistics Office in Warsaw show.

Poland’s economy has been hit by a triple whammy of monetary and fiscal tightening as well as more stringent regulations for loans, Boguslaw Grabowski, an adviser to Prime Minister Donald Tusk, said in an interview on Oct. 8.

Rate Cut?

After defying expectations for a cut in interest rates this month, central bank Governor Marek Belka said this month policy makers will reduce them should new data confirm a “protracted” economic slowdown and “limited” risk of price pressure.

Forward-rate agreements show borrowing costs falling 50 basis points over the next three months, data compiled by Bloomberg show.

The Narodowy Bank Polski raised its benchmark rate by 25 basis points, or 0.25 percentage point, to 4.75 percent in May, the highest in three years, to combat inflation. The European Central Bank lowered its main rate by a quarter point to a record low of 0.75 percent in July in an attempt to revive stalled growth in the euro area, Poland’s biggest export market.

The bank regulator’s easier policies “will have a positive impact on lending,” Iza Rokicka, an analyst at BRE Bank SA, said by phone from Warsaw on Oct. 15. “Banks will have to offset falling margins resulting from lower interest rates.”

The extra yield investors demand to hold Polish dollar bonds rather than U.S. Treasuries declined one basis point to 124 at 10 a.m. in Warsaw, indexes compiled by JPMorgan Chase & Co. show. The additional yield on Polish 10-year zloty bonds over German bunds narrowed one basis point to 305, the least since June 2011, according to data compiled by Bloomberg. The zloty strengthened 0.1 percent to 4.0907 to the euro.

Default Swaps

The cost to insure Polish government debt against non-payment for five years using credit-default swaps fell two basis points to 88, the least since April, 2010, data compiled by Bloomberg show.

The swaps cost 89 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, compared with a gap of 78 basis points on average in the first half of 2012. The default swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

The watchdog’s changes are aimed at allowing better capitalized banks to take on more risk and “return to positive trends in consumer lending,” according to Jakubiak. Lenders controlling more than 90 percent of the Polish banking assets fulfil the criteria for simplified lending, the regulator said.

The softening of regulations may even “be more effective” than a rate cut as it addresses industries that have seen their access to credit limited in past months, Andrzej Slawinski, the head of research at the central bank, said by phone on Oct. 11.

-- With assistance from Konrad Krasuski and David McQuaid in Warsaw, Edith Balazs in Budapest and Boris Groendahl in Vienna. Editors: Wojciech Moskwa, Rodney Jefferson

To contact the reporter on this story: Marta Waldoch in Warsaw at

To contact the editor responsible for this story: Gavin Serkin at

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