AIB resigned to decline in profitability from banking operations in Poland

Profits from AIB's operations in Poland this year will be well down on forecasts made last October when the merger of Bank Zachodni and WBK bank was announced.

Profit forecasts prepared for the merger of the Polish banks, which was completed on target in June, show that AIB estimated net profits at the merged operation of 318.3 million Polish zlotys (€80.81 million) for 2001, 550.3 million zlotys for 2002 and 709.2 million zlotys for 2003.

In the six months to end June, Bank Zachodni WBK produced net profits of 140.6 million zlotys in a difficult economic environment, according to AIB's divisional director in Poland, Mr John Power.

The first-half result included a bad debt provision of 79.6 million zlotys. If growth continues at current levels and bad debts do not accelerate, current year profits will be at least 12 per cent off the levels forecast last October.

AIB accepts that profits from Poland this year will be well below these forecasts, pulled back by slower economic growth and bad debts crystallising faster than expected. But Mr Power expressed confidence that growth and profit potential in the Polish market remains strong in the medium term.

Recent AIB Group half-year results showed a sharp drop in the performance in Poland. Pre-tax profits were down 42 per cent to €26 million (£20.5 million) from €45 million, reflecting a weakening Polish economy where rising unemployment, high interest rates and the strength of the zloty against the euro have driven up bad debts and non-performing loans.

The zlotys forecasts, prepared for the merger, were based on projected growth in gross domestic product of 5 per cent each year over the three-year period. They included expected net cost savings of 38.6 million zlotys in 2001, 116.5 million zlotys in 2002 and 153.3 million zlotys in 2003, and allowed for a net merger cost of 110.5 million zlotys in the current year.

However, at a current annualised rate of 1.7 per cent, Polish GDP growth has fallen well short of the projected level.

Mr Power said the profit projects were prepared to put a future value on the bank for the calculation of share exchange ratios for the merger of the two banks. They were based on a number of assumptions that had to be made in a rapidly changing economic environment, he said.

Anticipated GDP growth has slowed, but economists expect some improvement in quarters three or four this year, he said. Bad debts and non-performing loans were "largely as anticipated".

AIB Group results show that the Polish operation had non-performing loans of €609 million at the end of June. Poland, which accounts for just 7.8 per cent of AIB Group loans, produced some 63 per cent of the group's non-performing loans. At the end of June, 18 per cent of total loans advanced in Poland were non performing.

However, the group figures show that the total provision as a percentage of non-performing loans was only 61 per cent at the difficult Polish operation compared, for example, to a level of 124 per cent at the more buoyant operations in the Irish market.

The group results show a bad-debt provision at the Polish operation of €5 million for the six months to end June, compared with €12 million for the first half of 2000.

While the provision made in Poland increased to 79.6 million zlotys for the period, the 59 per cent fall in the provision at group level reflected the use of some of the earlier group provisions made when Bank Zachodni was acquired.

In its assessment of Bank Zachodni's loan book when it acquired the bank in September 1999, AIB made a significant deduction to the value of the business for bad and doubtful debts, and these figures are turning out "exactly as anticipated", according to Mr Power. The deterioration in the economy has lead to some additional bad debts, he said.

But Mr Power was confident that the bank was managing the bad-debt situation well. AIB reorganised the Bank Zachodni lending operation from September 1999 to improve the quality of its Polish loan book, making a "drastic reduction" in the credit discretion of branch managers and regional directors, outlining the sectors it wanted to lend to and those from which it wanted to withdraw, and setting up a new unit to manage non-performing loans.

"We are still building the business and investing for medium-term growth and business expansion, and we are confident about the prospects for medium-term growth and profitability," Mr Power said.