ANÁLISIS Y DISCUSIÓN GENERAL DE RESULTADOS

One of the more important reasons for high irregular loan ratios in both periods is related to the banks themselves, and involves credit risk management. The banks may be considered to have made mistakes in their credit risk management, both at the beginning of the 1990s and in recent years, by failing to take account of the possibility of the economy slackening162_{. This yielded similar}

results in both periods, producing a growing proportion of adversely classified assets. Nonetheless, one factor that distinguishes the years 1992–94 from 2001–2002 is the relative quality of credit analysis in these periods, one expression of this being the application of appropriate internal policies and procedures163_{. It would be hard to compare the credit analysis methods employed in}

these years given the experience accumulated in the intervening period, e.g., in assessing customer creditworthiness. The implementation of more advanced credit risk management methods was also helped by years of cooperation with external auditors and the competence developed by banking supervision.

Furthermore, as regards gauging the real volume of impaired assets, a particularly dangerous practice in the first half of the 1990s was the “rollover” of delinquent loans. This involved replacing past due loans, including the interest accrued, with new facilities classified satisfactory, which thus meant concealing loan repayment problems and understating the proportion of adverse classifications.

160_{Art. 16, para 1. subpara. 26, of the Corporate Income Tax Act of February 15, 1992 (as published in Dziennik Ustaw} no. 45/2003, item 391, and subsequently amended).

161_{The banks were obliged to make public disclosures of their financial performance under Regulation no. 5/93 of the} President of the NBP on the procedures for the publication of audited bank balance sheets and profit and loss accounts, March 30, 1993 (as published in Dziennik Urzedowy NBP no. 4/1993, item 8).

162_{An example here is the delayed reaction of the banks to the financial malaise of the Szczecin shipyard.}

163_{In the years 1991–94, some banks did put in place procedures and methods of analysing loan applications that had} been developed together with their partners under the twinning agreements of that time with Western banks.

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Apart from the “technical” factors that condition the differences between the present level of irregular loans and that seen in 1992–94, another issue that has to be considered is the length of time these have been carried in the banks’ assets. Some irregular loans have been booked in this category for many years. In 2000, almost 20% of loss classifications dated back to before 1995, while in 2001 13.3% were pre-1996, and in 2002 16.4% were pre-1997. The fact that loss loans are held in bank portfolios for so long is primarily the result of collection problems and the reluctance of the banks to write them off, since this would entail surrendering their claims and abandoning attempts at recovery. In the years 1992-94, the ageing of irregular loans was relatively short, as they had generally been originated at the start of the 1990s; hence the need for a swift surge in specific provisioning.

An important problem for banks was and still remains the collection of past due claims, including the enforcement of their security interests. The weakness of enforced collection stems from the poor effectiveness and slowness of the courts and bailiffs. The establishment of a security interest is a similarly costly and time-consuming process, e.g., in taking a mortgage on a property (entering the mortgage lien in real estate records) or entering movable assets in a court lien register. The upshot is that the banks demand security to a value well above the loan amount being granted and have a preference for highly-liquid collateral.

One factor that reduced the potential risk associated with the bank’s irregular loan portfolios was the creation in 1995 of the Bank Guarantee Fund164_{. The task of the Fund is to provide deposit}

protection to the banks and hold funds earmarked for assistance to banks implementing

Table 7.2

Specific provisions required and established in the years 1993, 1994, 2001 & 2002 (%) Risk category Regulatory provisioning Specific provisions established

requirement 1993 1994 2001 2002 Substandard 20 12.7 25.6 20.6 21.4 Doubtful 50 17.8 54.6 54.6 56.8 Loss 100 74.4 100.0 100.5 101.1 Source: NBP. Table 7.3

Net provisioning charges

1992 1993 1994 2000 2001 2002

Net charges to specific & general provisions and valuation allowances

- million zloty 459 1,708 1,873 4,439 5,469 6,137

- % of total assets 0.8 2.2 1.8 1.1 1.2 1.3

- % of net income from banking activity 10.7 34.5 28.7 15.9 22.1 21.1

Net interest margin (% of total assets) 5.3 4.3 4.1 4.3 3.4 3.3

Net income from banking activity

(% of total assets) 7.8 6.4 6.1 7.0 6.5 6.2

Net earnings (million zloty) 1,497 -190 -7 4,255 4,496 2,855

ROA (%) 2.7 -0.2 -0.01 1.1 0.9 0.6

NB: The figures for financial performance in 1993 include Bank Handlowo-Kredytowy, Katowice, which was under liquidation; this inclusion contributes to the large losses recorded.

Source: NBP.

164_{The Act on the Bank Guarantee Fund of December 14, 1994 (consolidated text published in Dziennik Ustaw no.} 9/2000, item 131).

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rehabilitation programmes. In these circumstances, the risk of confidence in the banking sector being undermined by a bank’s insolvency is considerably lower than at the beginning of the 1990s, although the cost of any payouts on insured deposits are borne by the whole industry.

Coverage of irregular assets by specific provisions

In 1993, in the wake of the introduction of Regulation no. 19/1992, the banks attempted to establish specific provisions against exposures classified irregular. However, by year end they had not managed to achieved the regulatory level of provisioning coverage, particularly with respect to doubtful classifications. It was not until 1994 that the banks fulfilled their provisioning requirements in full, with a certain surplus in provisions against substandard and doubtful exposures. In the years 2001–2002, the level of provisioning was higher than required, although the surplus in the case of substandard classifications was now minor165_.

In the years 1993–94, banks were forced to devote some 30% of their net income from banking activity to specific provisioning against irregular exposures, which represented the equivalent of around 2% of their total assets. In the years 2001–2002, specific provisioning expense (net) was much lower, corresponding to around 20% of net income from banking activity and 1.3% of total assets. On the other hand, the cumulative net value of provisions established was several

165 _{These calculations take into account the value of eligible security, i.e., security admitted by the aforementioned Regulation as a deduction} from the provisioning base.

Figure 7.2

Net charges to provisions as percentage of net income from banking activity and total assets

Source: NBP.

% of net income from banking activity % of total assets

0 5 10 15 20 25 30 35 40 0.0 0.5 1.0 1.5 2.0 2.5 2002 2001 2000 1994 1993 1992 % % Table 7.4

Distribution of banks by risk-based capital ratio (percentage of total no. of banks)

1992 1993 1994 2000 2001 2002 Under 0% 15 16 18 1.4 1.4 1.7 0% – 2% 4 – 1 – – 1.7 2.1% – 7.9% 12 6 4 8.2 3 3.4 Over 8% 69 78 77 90.4 96 91.5 Source: NBP.

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times greater, reflecting the changed scale of banking operations (as measured by total assets and by claims on non-financial customers, these operations expanded six- and sevenfold, respectively, from 1993 to 2001).

In the years 1993–94, the effective net interest margins reported by the banks were much higher than in the years 2000–2002. This implies a lower sensitivity to loan portfolio quality in the early 1990s.

Bank solvency

In the years 1992–94, a huge 15% –18% of the banks were insolvent by prudential standards, while the number satisfying minimum capital adequacy requirements ranged from 69% to 78%. By contrast, in the years 2001–2002 less than 2% of the banks were insolvent. Over 90% had a risk- based capital ratio equal to or exceeding 8%. In 1993, average risk-based capital stood at only 4.7%, whereas in 2000–2002 it came to 13%. This means that at present most banks not only have adequate capital against their risk exposures, but also hold a surplus cushion that could absorb a higher level of risk. This confirms the hypothesis that the state of the banking sector in the years 1992–94 diverged substantially from that observed today. While the years 1992–94 can be considered a time when banking sector stability was in jeopardy, the situation witnessed in recent years gives no such grounds for concern.