According to earlier publications, due to a number of unfavourable macroeconomic factors and the resulting internal business decisions of the Bank, despite measures taken by the Management Board to optimise the financial results, the negative financial result of BRE Bank after Q4 grew and amounted to PLN 200,077 thousand for the Bank alone and PLN 379,221 thousand including the (equity method) valuation of subsidiaries. The negative financial result of the Group was PLN 381,102 thousand after Q4 2002 while the consolidated total assets grew to PLN 27,516,068 thousand. The Bank started a new year with a reorganised structure and increased provisions providing an incentive for further growth in 2003.
Selected financial data at the end of Q4 2002 and Q4 2001 are shown in the table below [PLN’000]:
Selected financial data at the end of Q4 2002 and Q4 2001 are shown in the table below [PLN’000]:
Particularly notable in the Bank’s results is its profit on banking operations and its fee and commission income. These figures are not much different than those recorded in the profitable year 2001. This proves that the Bank continues to generate high income and confirms that after recession when the provisions are reduced the Bank is more than likely to regain profitability. Equally importantly, the Bank has kept all its regulatory ratios at a high level: the Bank’s liquidity remains safe and its solvency ratio was 10.0%, much above the floor limit set in the Banking Law. In addition, the Bank’s supplementary capital was gradually increased in 2002 and helped to keep the equity at a level comparable to 2001; including the subordinated loan, the equity actually grew.Determinants of the ResultsThe strong ratios and the good results on the core business prove that the weak financial results in 2002 were brought about by macroeconomic and market determinants. The material deterioration of the results in Q4 2002 was mainly caused by the re-rating of the credit and investment portfolios based on very strict criteria in late 2002, as well as high provisions (the provisions stood at ca. PLN 495 million at the Bank and PLN 528.5 million at the Group as at 31 December 2002), including rebuilt general risk provisions (PLN 103 million in Q4 2002). The Bank’s Management Board believe that those measures helped to use the worst year in the history of the Bank, when the entire banking sector was hit, to carry out internal reform resulting in restored profitability of the Bank already in 2003 and ROE (return on equity) at 15% in 2005.The Bank’s results in 2002 were affected by many other unfavourable factors, including:very difficult economic conditions affecting the financial standing of many companies, including bank clients (additional provisioning required, especially in late 2002);legislative change, especially change in accounting rules for equity investment in subsidiaries (charged more heavily against the Bank’s P&L);material decrease in the value of securities in the Bank’s portfolio (bearish conditions on the Warsaw Stock Exchange);necessary investment in the growth of strategic companies of the BRE Bank Group;necessary further investment in the growth of the retail banking business;postponed finalisation of several capital transactions (including the sale of a package of shares of PTE Skarbiec-Emerytura, shares in ITI), deferring expected gains until a later time;decision not to spin off and sell a package of shares of mBank.In 2002, BRE Bank made several decisions to counteract the impact of the said negative conditions in the market environment on the Bank’s financial results. In addition to, among others, a strict cost regime, workforce restructuring, and amended rules of remuneration of employees, the Bank’s investment strategy was updated by reducing the risk profile and disposing of high-risk investments in the capital markets. The equity investment of BRE Bank was reduced by ca. PLN 200 million in H2 2002 and is planned to be further reduced by another PLN 300 million in H1 2003. However, the overarching principle followed by the Bank in closing its positions is to optimise the rate of return on investment. Although this is not easy under the prevailing market conditions, the Bank has confirmed in the past weeks that very difficult capital investments can be closed at a profit, for instance the sale of Elektrim SA shares providing the Bank with capital gains of over PLN 20 million. The Bank will release provisions for loans secured with Elektrim SA shares in Q1 2003. In the coming months, the Bank plans to finalise the sale of Telbank shares at a profit; the Bank is also working to reduce its investment in ITI.Business Areas and Group Companies in 2002In 2002, BRE Bank achieved good results in its money and capital market operations. The Bank took the lead in an NBP ranking of money market dealers. According to Fitch Polska, the Bank was the second largest issuer of mid-term debt and the third largest issuer of short-term debt (moving up to the second position in late January 2003). The Bank is a leading arranger of municipal bond issues (third position). BRE Bank is a renown derivative player, distinguished by the prestigious Risk Magazine.Due BRE Bank’s huge investment in its retail banking business, both mBank, the unquestionable leader in Poland’s internet banking, and MultiBank are growing their market share. In 2002, mBank reported an impressive growth rate in the number of new clients (up 131%) and deposits (up 76%). As at 26 February 2003, over 360 thousand clients deposited nearly PLN 2 billion in over PLN 435 thousand accounts. Thus, mBank is moving fast to break even (projected at the turn of 2003 and 2004).The product offer of MultiBank attracts growing interest of clients. In 2002, MultiBank opened 17 new Financial Service Centres and now has a network of 28 branches; another 4 will open in 2003. Under the state-of-the-art offer of financial plans, MultiBank clients have submitted over 2,000 credit applications for more than PLN 360 million since May 2002.In 2002, the Bank was a very active partner of corporate clients. The Bank reported a 3% growth in receivables from clients and governmental institutions; it was a significant provider of borrowing for companies. The share of irregular receivables in the Bank’s portfolio was 19.9% under the NBP methodology, less than the market average (21.4%). The portfolio of debt overdue for more than 90 days (the default portfolio under Basel II) was only 4% and was fully secured and provisioned. In 2002, the value of Bank’s portfolio of loans and guarantees grew, among others for such sectors as financial intermediation (excluding insurers and pension funds – up 23%), banks (up 24%), production of foodstuffs and beverages (up 50%), production of vehicles (up 96%). BRE Bank developed an extended product package for SMEs facilitating access to and use of most popular bank products. In addition, BRE Bank was very active in servicing Poland’s foreign trade. BRE Bank’s share in this market grew to 17.1% in 2002 (from 16.4% at the end of 2001) and amounted to over US$ 13 billion.Companies of the BRE Bank Group also achieved good results in 2002. Rheinhyp-BRE Bank Hipoteczny reported a 30% growth in the loan portfolio (PLN 1,334.95 million) and a 160% growth in its financial result (PLN 7,684 thousand net). In 2002, Rheinhyp-BRE strengthened its position as the leading issuer of mortgage bonds; the Bank’s share in this market in Poland is 89.5%. BRE Leasing remained in the strong second position in the leasing market in Poland. The company made a fast entry into the passenger car leasing market in 2002 (portfolio at PLN 77 million) and reinforced its position in traditional sectors: leasing of industrial machinery and real estate. In addition, BRE Corporate Finance, a leading consultant in the Polish market of mergers and acquisitions and strategic consulting, was an advisor (together with Commerzbank) in the acquisition of 85% shares of STOEN SA by RWE Plus. The Intermarket Bank Group is the leading factor in Central Europe; Intermarket Bank AG alone had a 55% share in the Austrian market.The year 2002 brought a breakthrough for BRE Bank Group operations in the asset management market. The formation of Skarbiec Asset Management Holding was completed. The Holding comprises SKARBIEC TFI, SKARBIEC Serwis Finansowy, SKARBIEC Investment Management, BRE Agent Transferowy and – on the operating level – PTE Skarbiec-Emerytura. SAMH’s major achievement is the integration of asset management, sales, marketing, and customer service operations, cutting the overheads of the Group by as much as 20%. The assets of the Holding were PLN 3.3 billion as at 31 December 2002; it had 700 thousand clients. Among SAMH companies, Skarbiec TFI merits particular mention: it reported a nearly 50% growth in assets of the investment fund in 2002 (from PLN 1.27 billion to PLN 1.88 billion at 31 December 2002) while the results of several of its funds were the best in their class in the market. In 2002, Skarbiec was the fourth largest investment fund company in the market and for the first time reported a net profit of PLN 1.26 million. Moreover, Skarbiec Investment Management reported an impressive 69% growth in proprietary assets under management (excluding the assets of Skarbiec TFI); Skarbiec IM manages PLN 2.5 billion in assets (including PLN 1.8 billion of Skarbiec TFI assets). In addition, after the merger of PTE Skarbiec-Emerytura and PTE BIG BG, Skarbiec moved up to the fifth position in the market in terms of the value of assets (PLN 1.22 billion) and the number of subscribers (639 thousand); it also cut its operating costs by 70%.Outlook for 2003Improving financial results of BRE Bank Group companies, optimised income of the Bank’s businesses (in particular the investment banking business) and relatively satisfactory results of the core business in 2002 give ground for moderate optimism in the context of the Bank’s return to the profitability track in 2003. With significant provisions set up in 2002 (including general risk provisions), the Bank is in a position to better mitigate risks which may arise in 2003, including catastrophic risks. Significant reduction of the allowed risk of equity investment has curbed investment in long-term high-risk transactions. In addition, with GDP growth at 3% projected by BRE Bank’s Chief Economist Janusz Jankowiak, the Bank expects to grow its lending to Polish companies and consequently to earn more interest income.In this context, the Management Board of BRE Bank believe that the annus horribilis witnessed in 2002 in terms of financial results will be a one-off exception from the rule whereby BRE Bank generates above-average profits and a high return on equity (15% in 2005). Equally importantly, the Bank will continue its policy of allocating ca. 30% of profits to the shareholder dividend (while no dividend will be paid out for 2002, the “premium” paid to the shareholders in 2001-2002 was several times the average dividend paid out by listed banks in that period, proving that long-term investment in BRE Bank stocks is profitable). The conviction that the Bank’s results will soon improve is realistic as the Bank entered the year 2003 with cleaned-up books and higher provisions, without a burden accrued in previous years, and is now ready for further growth at a dynamic pace recorded in the past.