Bank Tax Imperils Polish Debt Sales as Lenders Vet Credit Plans

  • Law & Justice sends $1.8 billion asset levy to parliament
  • Commerzbank AG's local unit steers clear of Eurobonds

A long-anticipated tax on Polish banks has started its journey through parliament, threatening to curb bond issuance by lenders as they cut back on lending.

The ruling Law & Justice party made good on an election pledge last week, sending a proposed annual levy for as much as 7 billion zloty ($1.77 billion) on bank assets to lawmakers. The tax, along with the possibility lenders will be forced to convert as much as $38 billion of Swiss-franc mortgages into zloty, has dimmed the outlook for the industry, prompting Commerzbank AG’s local unit to avoid foreign debt markets.

Law & Justice made bank-bashing a cornerstone of its pitch to voters in the run up to October elections and the impact can be seen in rising bond yields, slowing issuance and a decline in lenders’ return on assets. The new tax bill winding its way through the legislature will have “negative implications” for the industry and the broader economy, while higher capital requirements and flagging profitability will slow loan growth from the start of next year, Deutsche Bank AG said.

“The new tax regime will indeed impact profitability of banks, and it may prompt investors to demand higher premiums for their debt,” Michal Surowski, the head of debt capital markets in Warsaw for Societe Generale SA, said on Friday. “Lenders are expected to continue extending their funding by new issuances, but if the price gets unfavorable, such attempts will contract.”

Asset ‘Aversion’

The tax will hurt lending and slow economic growth, economists at PKO Bank Polski SA, Poland’s largest lender, warned in a note last week. PKO’s January 2019 euro-denominated bonds have fallen every day since the bill was filed, lifting the yield six basis points to a two-week high of 1.36 percent.

The combined net income for the country’s lenders dropped 21 percent to 11.42 billion zloty in the first 10 months of the year, according the most recent data from the country’s financial regulator. Zloty bond sales by banks were down 18 percent at 7.1 billion zloty in the same period compared with 2014, according to data compiled by Fitch Ratings. Polish lenders haven’t sold any Eurobonds this year, after 3 issues for a total of $2 billion in 2014, according to data compiled by Bloomberg.

“Aversion against amassing more assets” means loan growth will slow from the start of 2016, Krzysztof Kalicki, the chief executive officer at Deutsche Bank Polska SA, the country’s 11th largest lender by assets, said on Dec. 4. He predicted the average return on equity for the industry will fall by half to 4 percent due to the new levy.“Banks will face difficulties lengthening their funding by debt issuances, as investors already avoid Polish lenders’ securities,” he said.

Commerzbank’s MBank unit won’t sell Eurobonds until there’s clarity over a plan to convert Swiss-franc mortgages to zloty, CEO Cezary Stypulkowski said on Dec. 1. Risks at home make the foreign bond markets “more difficult for Polish entities,” he said. Deutsche Bank has raised its margins on new mortgage loans and is reviewing its credit operations, according to spokeswoman Sabina Salamon.

Diminishing Returns

The average rate of return on Polish bank assets has fallen more than four times that of peers in the MSCI Emerging Markets Banks Index, dropping 17 basis points from the start of the year to 0.83 percent, data compiled by Bloomberg show. The industry had to pay an unexpected 2 billion zloty contribution to the state Bank Guarantee Fund after the bankruptcy of the country’s largest cooperative lender last month.

“The application of the tax to the total assets of the sector will likely have a negative impact on the credit growth in Poland,” Ivan Bokhmat, analyst at Barclays PLC in London said in an e-mailed note on Dec. 4. “As the sector is currently generating lower return on assets, the banks are likely to limit new lending.”

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