The operating and financial review presented below was prepared based on the Consolidated Financial Statements.
The following discussion of the Group’s results of operations and financial condition should be read and interpreted in conjunction with the Consolidated Financial Statements (as defined herein) and other financial information included in other sections of this Offering Memorandum. The discussion includes forward-looking statements that reflect the current views of the Management Board and due to their nature, involve risks and uncertainties. The actual results of the Group could differ materially from those contained in any forward- looking statements as a result of the factors discussed below and elsewhere in this Offering Memorandum, particularly in “Risk Factors” (see also “Important Information — Forward-Looking Statements”). Investors should read this Offering Memorandum in its entirety and not base their decisions or opinions solely upon the information included in this section.
In the 2009 Consolidated Financial Statements, the Group changed the presentation of data regarding its business segments. In the 2008 Consolidated Financial Statements, the Group changed the method of
presentation of selected items of the consolidated statement of financial position in relation to comparable data for 2007. For a more detailed discussion, see “Key Factors Affecting Comparability — Change of Presentation of
Comparative Financial Data”in this section.
A summary of critical accounting policies and estimates that have been applied to our Consolidated
Financial Statements is set forth in this section under“— Critical Accounting Policies and Estimates”.
Overview
The Group is one of the largest universal banking groups in Poland providing retail banking, corporate banking and investment banking and other financial services. It was the third largest banking group in the Polish market in terms of total assets and loans and number of retail current accounts and the fourth largest banking group in terms of deposits as of 31 December 2009. The Group also has a strong position in the following markets: brokerage services, commercial real estate financing, factoring and leasing. The Group also expanded the distribution of insurance products, including third-party insurance products.
The Group’s operations are divided into two segments: the Retail Banking Segment and the Corporates and Markets segment (including the Corporates and Institutions sub-segment and the Trading and Investment Activity sub-segment).
For the three months ended 31 March 2010, the Retail Banking segment and the Corporate and Markets segment contributed 49.9% and 49.5%, respectively, of the Group’s total net interest income, net fee and commission income and net trading income. The remaining business accounted for 0.6% of these items. For the year ended 31 December 2009, the Retail Banking Segment and the Corporates and Markets Segment
contributed 47.8% and 51.1%, respectively, of the Group’s total net interest income, net fee and commission income and net trading income. The remaining business accounted for 1.1% of these items.
As of 31 March 2010, the Group had approximately 3.4 million retail customers, including individual retail customers and micro-businesses. The Group offers customers in its Retail Banking segment a full range of products and services, including current and savings accounts (including foreign currency accounts), term deposits, lending products (retail mortgage loans and non-mortgage loans such as consumer loans, car loans, cash loans, overdrafts, credit cards, and other loan products), debit cards, insurance and investment products and brokerage services. In Poland, the Group distributes its products and services in its Retail Banking segment through the internet platforms of mBank and MultiBank, through the 134 branches of MultiBank as well as 23 financial centres 65 mKiosks and 46 partner kiosks throughout Poland and 270 mobile agents managed by Aspiro, and also through phone services and through ATM networks. mBank targets young, self-directed customers seeking low-cost banking alternatives as well as micro-businesses. MultiBank offers a broad range of products and services targeted at affluent customers and micro-businesses seeking high quality, personalized
Most of the Group’s corporate banking activities are conducted by the Bank with others conducted by different subsidiaries of the Group. As of 31 March 2010, the Bank had approximately 13.0 thousand corporate banking customers. The Bank offers its corporate banking customers in its Corporates and Markets Segment a broad range of transactional banking products and services, including current accounts, internet banking based cash management services, term deposits, foreign exchange transactions, short-term financing and investment loans, cross-border credit, project finance and trade finance solutions, structured and mezzanine finance services, and investment banking services and products. The Bank distributes its products and services through a fully dedicated network of 24 corporate branches and 21 corporate offices, as well as through its corporate banking internet platform, iBRE.
The Bank’s investment banking services consist of trading in financial instruments, origination of debt securities for corporate banking customers and banks in the Polish market as well as direct sales of financial markets products to corporate banking customers and non-banking financial institutions (such as insurance companies, pension funds, mutual funds and asset management companies) and selected private banking customers.
In addition to its banking products and services offered by the Bank to retail and corporate banking
customers, the Group provides the following services through its subsidiaries: leasing and factoring, commercial real estate financing, brokerage and financial instrument origination, insurance, and corporate finance advisory.
For a more detailed discussion of the Group’s Business, see “Business Description”. General Factors Affecting Operating and Financial Results
The Group’s operating and financial results are affected by: (i) general economic conditions, in particular the economic environment in Poland and, to a much lesser extent, in the Czech Republic and Slovakia; (ii) the inflation rate, the level of interest and foreign currency exchange rates; (iii) developments in the Polish banking sector, especially in terms of the level of competition, and regulatory changes; and (iv) the situation in the capital markets. In addition, the Group’s operating and financial results are also affected by the development of the mortgage and real estate markets in Poland, the development of fee and commission based products and services, the quality of its loan portfolio and the availability and cost of funding.
The key factors affecting the Group’s financial and operating results for the years 2007 to 2009 and in the first three months of 2010 are discussed below. The Management Board believes that these factors had, and in the future may continue to have an impact on the business, operating and financial results, financial condition and development prospects of the Group.
A detailed analysis of the impact of the factors referred to below on the specific items of the consolidated income statements and consolidated statements of financial position of the Group in the indicated periods and on
the indicated dates is provided in this section under “—Results of Operations” and “—Statement of Financial
Position”.
Economic Environment in Poland
The Group conducts its operations mostly in Poland where 99.1% of the total of its net interest income, net fee and commission income, and net trading income for the year ended 31 December 2009 was generated. Therefore, the macroeconomic factors relating to Poland, such as GDP, inflation, interest rates and foreign currency exchange rates, as well as the unemployment rate, household income, the financial situation of companies, together with various other factors, have a material impact on customer demand and margins for the Group’s products and services, which materially affect the Group’s results and statement of financial position.
A favourable economic environment existed in Poland in 2007 and throughout the first three quarters of 2008 which had a positive impact on the Polish banking sector as a whole. According to data from GUS, Poland’s GDP grew by 6.8% in 2007 and 5.0% in 2008. Average gross monthly wages in the corporate sector increased from approximately PLN 3,028 in December 2006 to PLN 3,245 in December 2007 and to PLN 3,428 in December 2008. The unemployment rate in Poland decreased significantly from 14.8% in December 2006 to 11.4% in December 2007 and to 9.5% in December 2008. Economic growth in Poland during this period led to growth in personal wealth, which resulted in increased consumption. These factors, combined with a stable interest rate environment (see “Inflation and Interest Rate Environment” in this section), resulted in: (i) generally
increased corporate activity which fuelled the growth of the corporate banking business of the Group,
(ii) increased private consumption and personal wealth, which led to an increased demand for consumer loans on and investment products and (iii) strong demand for home ownership, which resulted in a rapid growth of the Group’s retail mortgage lending activities. These developments, in particular, resulted in the significant growth of the Group’s loan portfolio, including loans to companies, retail mortgage loans and other retail consumer finance products.
The positive market environment resulted in the relatively good quality of the loan portfolio of the Group. All factors combined led to double-digit growth in net profit from continued operations for the year ended 31 December 2008 as compared to the year ended 31 December 2007.
However, the fourth quarter of 2008 and the year 2009, especially the first two quarters, saw a marked deterioration in Poland’s key economic indicators and its growth prospects as the global financial crisis spilled over into the real economy. According to GUS, the growth rate of Poland’s GDP decreased from 5.0% in 2008 to 1.8% in 2009 and the unemployment rate in Poland increased from 9.5% in December 2008 to 11.9% in
December 2009 and 12.9% as at the end of March 2010. The above factors led to a slower growth rate in the volume of corporate and retail loans. According to data from NBP, the growth rate in the volume of corporate and retail loans in the Polish market reached 28.3% and 44.6% in 2008, respectively, and (3.6)% and 12% in 2009, respectively. By comparison, the growth rate of loans and advances to corporate entities and to individuals of the Group reached 28.4% and 92.1% in 2008, respectively, as well as (6.3)% and 8.3% in 2009, respectively. The increase in the growth rate of loans and advances to individuals in 2008 was partially explained by the movement in the CHF/PLN exchange rate. The first quarter of 2010 saw a gradual recovery of the Polish economy. It was evidenced by a strong industrial production growth (9.4% on an annualized basis) and monthly data for January and February 2010 on the balance of payments which indicated positive trends in exports and imports for the first quarter of 2010. A significant decline in production in the building industry (especially in February 2010) was caused by adverse weather. Based on currently available data, GDP growth in the first quarter of 2010 is expected to amount to 3.0% year-to-year. The recovery of the Polish economy in the first quarter of 2010 has not yet resulted in an increase in the Group’s lending business as annual corporate loans dynamics fell to (9%) from (3.6%) at the end of 2009. Growth in the amount of consumer loans granted fell to 5.8% from 12.0% in December 2009.
Inflation and Interest Rate Environment
Interest income represents a substantial portion of the Group’s operating income. Interest income, as well as the Group’s assets and liabilities, are sensitive to changes in the interest rate environment. The level of market interest rates, the yield curve and the trend of the changes thereof each have a material impact on net interest income earned by the Group and also impact the value of the Group’s investment securities portfolio.
The basic objective of the monetary policy conducted by the Monetary Policy Council is maintaining price stability. Since 1998 the Monetary Policy Council has utilized a direct inflation target strategy in the
implementation of its monetary policy. Within the framework of this strategy, the Monetary Policy Council defines the inflation target and then adjusts the NBP basic interest rates in order to maximize the probability of achieving the target. Since the beginning of 2004, the Monetary Policy Council has pursued a continuous
inflation target at the level of 2.5% with a permissible fluctuation band of +/- 1 p.p. The Monetary Policy Council maintains interest rates at a level consistent with the adopted inflation target by influencing the level of nominal short-term interest rates on the money market.
Polish banks may use their own discretion in setting interest rates on loans and deposits, subject to restrictions imposed by anti-usury regulations and the Act of 20 July 2001 on Consumer Loan (Dz. U. No. 100, item 1081, as amended). However, the official interest rates published by the NBP, particularly the reference rate, have a significant influence on market interest rates, and therefore on interest rates on loans and deposits. The three-month Polish interbank offered rate (commonly referred to as the three-month “WIBOR”) is widely used in Poland as the reference rate for interbank borrowings and deposits as well as for loans and deposits to retail and corporate customers.
The following table sets forth, in the periods and on the dates indicated, the average annual inflation rates, the NBP reference rates and the three-month interbank loan interest rates.
Average Annual Inflation Rate in Poland* NBP Reference Rate (end of period)
Three-month interbank loan interest rate (end of period)
WIBOR(1) EUR LIBOR(2) USD LIBOR(3) CHF LIBOR(4) CZK Pribor(5) 31 December 2007 . . . 2.5 5.00 5.68 4.68 4.70 2.76 4.11 31 December 2008 . . . 4.2 5.00 5.88 2.89 1.43 0.66 3.63 31 March 2009 . . . 3.6** 3.75 4.17 1.51 1.19 0.40 2.44 31 December 2009 . . . 3.5 3.50 4.27 0.66 0.25 0.25 1.54 31 March 2010 . . . 2.6** 3.50 4.10 0.58 0.29 0.25 1.44
Source: GUS, NBP, Bloomberg
(1) Represents the Polish interbank interest rates on PLN-denominated three-month interbank loans. (2) Represents the London interbank interest rates on EUR-denominated three-month interbank loans. (3) Represents the London interbank interest rates on USD-denominated three-month interbank loans. (4) Represents the London interbank interest rates on CHF-denominated three-month interbank loans. (5) Represents the Prague interbank interest rates on CZK-denominated three-month interbank loans (*) For a given year ended 31 December.
(**) Annual inflation rate as at March of given year.
The relatively stable inflation and interest rate environment had a positive impact on general economic activity in Poland in 2007 and in the first three quarters of 2008 from which the Group benefited, particularly in relation to its net interest income and asset quality. A lower level of CHF LIBOR rates and an increasing interest rate differential as compared to WIBOR rates and the appreciation of the PLN against the CHF (see “—
Exchange Rate Environment” below) resulted in a strong demand for retail housing and mortgage loans denominated in CHF and was one of the drivers in the overall increase in demand for the Group’s housing and
mortgage loans to individuals (retail mortgage loans) (see “—Development of the Mortgage and Real Estate
Markets” in this section).
The deterioration of the macroeconomic environment in the fourth quarter of 2008 resulted in a reduction in the official interest rates by the NBP and other central banks. 98.0% and 98.2% of loans and advances portfolio granted to customers by the Group as of 31 December 2008 and 31 December 2009, respectively, were floating rate loans and advances, in particular linked to WIBOR, CHF and EUR LIBOR rates. Interbank market liquidity was limited due to the financial crisis. However, net interest income of the Group was not as significantly adversely affected as compared to other Polish banks and continued to grow on a year on year basis for the following reasons: (i) the CHF-funding provided by Commerzbank enabled the Group to avoid the use of expensive cross currency interest rate swaps (“CIRS”) to fund its CHF-denominated retail housing and mortgage loans, (ii) the Group avoided offering aggressive interest rates to customers for PLN deposits as it had sufficient PLN liquidity to fund its PLN-denominated lending activities and (iii) the Group early increased lending margins for the portfolio of new corporate and retail loans. As a result of the above factors and due to the continued growth of its client base and growing use by customers of the Bank’s interest-bearing products, the Group’s net interest income increased from PLN 1,027.8 million for the year ended 31 December 2007 to PLN
1,392.5 million for the year ended 31 December 2008 and to PLN 1,658.2 million for the year ended
31 December 2009. In the first quarter of 2010, consumer prices increased by 3.0% on an annualized basis but inflation decreased significantly. The consumer price index fell from 3.5% in January 2010 to 2.6% in March 2010. In this period the Monetary Policy Board commenced its third term of office. At its meetings, the newly appointed board maintained the main reference interest rate at 3.5%. Additionally, the Monetary Policy Board continued its neutral approach to monetary policy, focusing on the PLN exchange rate, as a rapid appreciation of the Polish currency could be detrimental to the economy at the moment of its recovery. This approach eased expectations concerning interest rate increases in the coming months.
Exchange Rate Environment
A substantial portion of the total loans and advances to customers of the Group 57.4% as at 31 December 2009), is denominated in or indexed to foreign currencies, primarily CHF. Historically, the relatively high demand for CHF-denominated loans was mainly driven by lower interest rates for CHF-denominated loans than PLN-denominated loans combined with the appreciation of the PLN against foreign currencies, in particular the CHF. In addition as at 31 December 2009, 45.2%, of the Group’s total interest bearing liabilities were
As a result, fluctuations in exchange rates between PLN and foreign currencies, especially the EUR and CHF, impact the Group’s results and operations. In particular, exchange rate fluctuations impact the Group’s total amount of assets and liabilities due to the fact that the assets and liabilities denominated in or indexed to foreign currencies are presented in PLN as the presentation currency of the Group. However, since a large portion of the Group’s assets and liabilities especially in CHF is currency matched, exchange rate fluctuations impact the movement of the total amounts of assets and liabilities similarly.
In addition, exchange rate fluctuations can impact the scale of the Group’s lending activity in foreign currencies. Also, the ability of customers to service foreign currency denominated lending obligations can change
adversely for customers who earn their salaries in PLN in case of the depreciation of the PLN (see “—Loan
Portfolio Quality” below).
For information on the impact on the valuation of foreign exchange derivatives due to the depreciation of the PLN against foreign currencies in the fourth quarter of 2008 and in 2009 on the Group’s results of operations, see “Specific Factors Affecting Financial and Operating Results — Decrease in Valuation of Foreign Exchange Derivatives” below.
For information on the exchange rates of the PLN against the EUR, USD, CHF, CZK and JPY in recent years, see “Exchange Rates” in this Offering Memorandum.
Competitive Landscape in the Polish Banking Sector
The Polish banking sector is highly competitive. According to the PFSA, the combined market share of the five largest banks in the Polish banking sector in terms of assets, deposits and loans for the non-financial sector as of 30 September 2009 were 43.5%, 53.2% and 42.8%, respectively. In addition, some large international banks