The global macroeconomic situation had a significant influence on the activities and financial situation of the Group in 2013. In the first half of the year the financial markets participants were again focused on the problems of the euro zone’s banking sectors in relation to the aid package for Cyprus. Agreement on the rules of financial support for Cypriot banks (in particular the project for a ‘tax on deposits’) increased uncertainty in the financial markets and negatively affected the deposit base of banks in the euro zone, which in turn had a negative effects on the liquidity situation and the willingness of banks to grant loans. In response to low economic activity in the euro zone and worsening projections for inflation (risk of price dynamics staying below the ECB’s stability criterion in a long term), the ECB council decided to decrease basic interest rate (repo) from 0.75% as at the beginning of the year to 0.25% at the end of 2013. Parallel to the decision on the level of interest rates, the ECB was preparing to take over the role of the regulator of the banking sector in the euro zone, including carrying out another round of stress tests (stress-test) in cooperation with the European Banking Authority (EBA) and was considering a new custom tool aimed at further easing financial conditions in the euro zone. Announced in 2012 the OMT programme (buying euro zone bonds by the ECB) was not launched. An important role in determining the behavior of financial market participants in 2013 had also the intensification of expectations of a gradual reduction of the scale of the quantitative programme of easing of monetary policy (QE) in the U.S. Starting from May, when the federal open market committee FED (FOMC) signaled willingness to reduce the dynamics of the asset purchase, there has been an outflow of capital from emerging markets, including Poland, despite the continuation of quantitative expansion in the U.S. and Japan. Considering improvement in the U.S. labor market and the reduction of the negative risks to economic growth in the U.S., in December 2013 FOMC has decided, starting from January 2014, to reduce the pace of assets purchase within the QE programme.
In 2013, GDP growth in Poland amounted to 1.6% compared with 1.9% in 2012. After reaching a cyclical ‘low point’ in the first quarter (GDP growth by 0.5% y/y), a slight acceleration in the second quarter (to 0.8% y/y), as expected, in the second half of the year, the economy entered the path of recovery (growth in the third quarter by 1.9% y/y and in fourth quarter by ~ 3.0% y/y). Together with the improvement in activity in the second half of the year, the change of the economic growth factors had been continued. In the second half of the year, the role of domestic demand increased, as a result of a gradual improvement in consumer and investment demand. Despite an increase in the import-intensive component of the domestic sale, sustained (throughout the year) strong exports favored positive contribution of net exports to growth. Due to inflation remaining below the lower bracket of fluctuations, in 2013 the Monetary Policy Council (‘RPP’) decided to decrease interest rates by total of -175 b.p. (and -225 b.p. in the whole cycle), which brought the reference rate to the level of 2.50%. In November was announced that interest rates will remain at this level at least until mid-2014.
PKO Bank Polski SA has positively passed the stress tests carried out in the second half of 2013 by Polish Financial Supervision Authority. Tests results confirm the high resistance of the Bank to the occurrence of macroeconomic shocks. In each scenario the Bank records a net profit and value of capital adequacy measures remains above the internal and external limits.
Taking into account the impact of the macroeconomic situation on the condition of the customers of the PKO Bank Polski SA Group, the Group strictly follows a conservative approach to credit risk by recognising impairment losses whose scale and structure reflects the impact of the current macroeconomic situation on the Group’s financial statements.
The financial results achieved by the Group in 2013 shaped up on a high level, and loan and deposit volumes were the highest among institutions in Polish banking sector. In 2013, the Group developed its business activities based on a safe and effective structure of financing.
Despite the negative growth in net profit on an annual basis, very good financial results were achieved in 2013. Compared to last year, in the structure of profit, a decrease in net interest income was recorded as a result of a strong reduction in market interest rates, which was partially offset by an increase in net fee and commission income, high operating income and an improvement in net impairment allowance. In addition, the discipline in terms of administrative expenses, despite the negative growth in the Group's income items, helped to maintain the high efficiency of the Group's activity measured with the C/I ratio.
Achieved financial results of the Group are an important element of the strategy ‘PKO Bank Polski. Codziennie Najlepszy’ (‘PKO Bank Polski. Daily the Best’) implementation for the years 2013-2015. Strategic objectives were implemented within 6 long-term strategic levers: ‘Satysfakcja klienta’ (‘Customer satisfaction’), ‘Doskonałość dystrybucyjna’ (‘Distribution excellence’), ‘Innowacje i technologie’ (‘Innovation and technology’), ‘Efektywność organizacji’ (‘Organisational effectiveness’), ‘Rozwój kompetencji’ (‘Development of competencies’), ‘Akwizycje i alianse’ (‘Acquisitions and alliances’). Key strategic initiatives focused on increasing value for shareholders, as well as strengthening the brand in areas such as: professionalism and flexibility of customer service, modern product offer, innovation and mobile technologies and branch network standards. The strategic objective was also to ensure a high profitability and operating efficiency, while maintaining safe levels of capital adequacy and liquidity ratios.
Due to the exposure in Ukrainian companies, in particular KREDOBANK SA, the Bank is exposed to the effects of risks characteristic to the Ukrainian market. In 2013, the Ukraine's economy was in stagnation (GDP growth amounted to 0.0% y/y after a decline of 0.2% y/y in 2012), which was due to a decline in investment demand, slowdown in private consumption and a decline in demand for primary export goods of Ukraine.
In the last months of 2013 and at the beginning of 2014, the political and social situation in Ukraine significantly deteriorated, which generate risks to the economic environment (risk of macroeconomic instability and insolvency of Ukraine, availability of foreign financing, risk of financial market and hryvnia exchange rate instability, risk to the stability of banking sector and regulatory uncertainty).
As a result of the rapid pace of running out foreign currency reserves, in February 2014, the National Bank of Ukraine (NBU) departed from the intervention policy in order to maintain a stable foreign exchange rate by introducing a variable rate regime. Administrative restrictions on the use of currencies by legal entities other than banks (e.g. prohibition of prepayment of foreign currency liabilities to non-residents). The scale of financing of banks by the NBU was also reduced. It intensified depreciation of the Ukrainian currency towards other main foreign currencies. Attempts to maintain hryvnia exchange rate resulted in reduction of currency reserves which have decreased to the lowest level for the last eight years.
Rating of Ukraine was decreased to Caa2 with negative perspective (Moody’s as at 31 January 2014), CCC with negative perspective (S&P’s and Fitch in February 2014). This led to the reduction in the rating of banks operating in Ukraine including KREDOBANK SA to CCC level.
There is a risk of intensification of macroeconomic instability in Ukraine, especially in case of lack of rapid solution of the ongoing political crisis.
PKO Bank Polski SA continues to implement measures aimed at ensuring the safe functioning of its companies in Ukraine in the environment of the current political and macroeconomic situation. These measures include strengthening supervisory activities, including i.a. monitoring funds transferred to the Companies by the Bank and the development of the regulatory requirements determined by the National Bank of Ukraine. The Bank is continuously analysing macroeconomic risks for KREDOBANK SA activities. Further developments of the situation in Ukraine may have significant impact on operating on that market entities of the Group.