BRE Bank Hipoteczny is due to expand its role as covered bond issuer as part of changes designed to enable its parent to meet regulatory liquidity requirements, with a wider initiative also underway address barriers to the growth of the Polish covered bond market, the mortgage bank’s CEO told The CBR.

Piotr Cyburt, BRE Bank Hipoteczny

BRE Bank Hipoteczny is the largest specialist mortgage bank in Poland, having provided commercial real estate and public sector financing for 14 years. It was the first Polish bank to issue covered bonds in the post-war Polish capital market and has over Pln2.350bn (Eu562m) of covered bonds outstanding, comprising mortgage-backed and public sector-backed issuance.

Pekao Bank Hipoteczny is the other Polish covered bond issuer, although PKO Bank Polski, the largest commercial bank in Poland, has announced that it is aiming to set up a mortgage bank by next year to be able to issue covered bonds.

This is a welcome move in the context of efforts to grow the Polish covered bond market, according to Piotr Cyburt, chief executive of BRE Bank Hipoteczny.

He told The Covered Bond Report that the development of the covered bond market and other sources of long term funding is a focus for Polish banks and regulators given a need to plug a fairly large liquidity gap and be in a position to fulfil Basel III Net Stable Funding Ratio requirements when they are implemented in a few years’ time.

“Covered bonds fund only 0.14% of bank financing in Poland,” said Cyburt. “The aim is to develop the Polish covered bond market and build up covered bond volumes over a three to five year period.”

At BRE Bank, this challenge is being addressed by a change in business model, he said, based on close co-operation with the parent universal bank and an expansion of BRE Bank Hipoteczny’s retail lending and role as covered bond issuer.

“BRE Bank Hipoteczny used to have a small commercial real estate lending business, but now we will be booking residential mortgages if they meet the criteria of the Polish covered bond legislation,” said Cyburt. “The retail arm of the universal bank will be responsible for acquisition and distribution of mortgages, and the mortgage bank will be responsible for risk management and covered bond issuance.”

According to the bank, the priority project for 2013 is the remodelling of BRE Bank Group’s balance sheet on the basis of covered bonds issued by BRE Bank Hipoteczny as a source of long term refinancing.

“The project is a pioneering solution in the Polish banking sector,” it said earlier this year its H1 report, “and its successful implementation will be the determinant of directions of the market’s further development as well as searching for long term sources of refinancing by banks.”

However, Cyburt said that BRE’s transformation on its own will not be enough to grow the Polish covered bond market in the desired way.

“That is why we really appreciate that PKO Bank has said it will follow our lead,” he said.

In addition to changes taking place at individual banks, efforts are underway to agree regulatory and legal changes to overcome certain barriers to the development of the covered bond market, according to Cyburt.

“We are in talks with the regulator to find solutions as soon as possible,” he said, “mainly because of the NSFR coming up.”

According to Cyburt, the changes under discussion include amendments to bankruptcy law, and the introduction of legal minimum overcollateralisation of 10% and loan-to-value ratios of 80% for residential mortgages based on the concept of a mortgage lending value. A more favourable assessment by rating agencies is being sought from these proposals, he said.

Representatives of the banking industry are also in talks with the ministry of justice about how to speed up the transfer of mortgages in the mortgage registry, and with the ministry of finance where tax issues are also on the agenda for change, according to Cyburt.

Covered bonds could help satisfy demand from pension funds that may no longer be able to invest in government securities as a result of reforms, he added.

“They are a perfect replacement,” he said.

The Polish government is planning controversial changes to the country’s pension system, which are being described as involving a transfer of assets held by private pension funds to the state to reduce government debt, and banning funds from investing in government bonds.