Will Foreigners Rule Poland's Banks?

They're snapping up a big chunk of the industry

It hasn't been Cezary Stypulkowski's rosiest season. So far this summer, the 43-year-old president of Bank Handlowy has tried to buy stakes in two newly privatized banks--only to lose out to foreigners. The same thing happened to Wojciech Kostrzewa, 39, the German-educated president of Bank Rozwoju Eksportu (BRE). Now, the two are in merger talks to create Poland's No. 3 institution. But that won't change a stark reality: The accents that count in Polish banking these days are German, Italian, and English. Indeed, even Handlowy and BRE have some foreign ownership.

Could Poland be the first European country whose banks are run by foreigners? Poles never thought to ask--until now. Warsaw decided years ago that the fastest way to restructure the creaky system left from the communist era was to bring foreigners into it. That strategy has worked--at a price. Foreign banks now control nearly half of Polish banks' share capital. And there is mounting concern, even among officials, that Poles are losing control. "Experts say the prudent level of foreign investment in the national economy is 25%, 33%, or 45%," says Jacek Bendykowski, a prominent member of the Conservative People's Party, a partner in the ruling Solidarity coalition. "But in the banking sector, we've already exceeded these levels."

Yet foreign banks may gain more clout as consolidation gets under way. More than 70 banks now compete in a nation of 39 million. Analysts expect the 20 big commercial institutions to swallow up the regional banks--and then consolidate. Jacek Dzierwa, banking analyst with Salomon Smith Barney in London, thinks a few giants soon will dominate. "This is just the beginning," he says. And it's the banks with foreign partners that are likely to prevail.

There's still plenty to do--especially as Poland prepares to join the European Union. One of every five Poles has a bank account vs. four of five in Western Europe. Banks' return on equity, at roughly 16%, compares poorly with averages of 20% or so in Britain and the U.S. Profitability got a boost on July 21, when Warsaw relaxed the high reserve requirements it imposed two years ago, but banks are still reeling from the Russian crisis, slow growth at home, and heavy spending on technology.

EXPANSION. The industry is moving quickly in some respects. It will add 1,000 retail outlets by yearend--a 50% jump. Automated teller machines, a rarity a few years ago, now number more than 3,200. But little of this progress would have been possible without foreign partners in most of the big commercial banks. "Foreign investors have brought clear strategies and management direction," says Martin van Tol, banking analyst in London for Raiffeisen Zentralbank Osterreich.

Stypulkowski and Kostrzewa can't argue with that. Germany's Commerzbank holds almost 49% of BRE, and J.P. Morgan, Swedbank, and Zurich Group own a total of 27% of Bank Handlowy. The two Polish banks and their foreign shareholders saw the privatization of Bank Pekao and Bank Zachodni in June as a chance to build crucial retail networks. But they were edged out when UniCredito Italiano and German insurer Allianz took 52% of Pekao, and Allied Irish Bank got 80% of Bank Zachodni.

Deutsche Bank is next. It wants to boost its 9.9% stake in BIG Bank Gdanski to 25%, but it may have to fight for it. While the Banking Supervisory Commission is likely to approve, BIG Bank Gdanski's management board is unlikely to sell DB any of the 24% stake it controls. The privatization of Powszechna Kasa Oszczednosci Bank Panstwowy, the retail behemoth still known as "the people's bank," could also prompt political concerns. But the sale of PKO BP is a couple of years off, and improved performances among the other Polish banks could temper the mood.

As a hint of things to come, consider the position of Allied Irish. It now owns stakes in two Polish banks, Zachodni and Wielkopolski Bank Kredytowy. A merger would create one of Poland's top five retail institutions--and take the Poles a step closer to a modern banking system. The question is whether they will own it.

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