Consolidating a new type of banking relationship

In 1989 a part of the assets of the National Bank of Poland was used to create nine regional banks. Since then the Polish banking market has been very fragmented.

Each of these banks inherited a large portfolio of corporate clients. This meant that the loan portfolio of these banks was not very impressive. However, over time, the regional banks restructured their portfolios, diversified their product range and strengthened their position in the market.

In 1991 Wielkopolski Bank Kredytowy, based in Poznan, was floated on the Warsaw Stock Exchange with the Allied Irish Bank and the European Bank of Reconstruction and Development (EBRD) purchasing stakes in it. This privatisation was followed by the privatisation of the Bank of Slaki, based in Katowice, and Bank Przemyslowo-Handlowy, based in Krakow.

The final regional bank to be privatised was Bank Gdanski, the flotation of which was connected with an issue of Global Depository Receipts (GDRs), a complicated process in which McKenna & Co advised on Polish law.

The remaining major state banks from pre-1989 were Powszechna Kasa Oszczed-nosci Bank Panstwowy (PKO BP), a bank specialising in retail customers, Bank Handlowy, specialising in foreign trade finance, and Polska Kasa Opicki SA (Pekao SA), a bank for foreign exchange deposits (US dollars, German marks and so on).

These three banks, in the seven years since 1989, have diversified their product range. But PKO BP and Pekao SA still have a limited amount of corporate clients relative to their size.

Out of the nine regional banks, five are left to be privatised. Two of them, Bank Zachodni, based in Wroclaw, and Powszechny Bank Kredytowy, based in Warsaw, will probably be sold to an investor or consortium of investors.

This decision was made because, in the opinion of the Polish government, the Polish stock market would be unable to “swallow” any more shares of privatised banks. This is why the three other banks have been designated to become part of the consolidation process.

The government will also be privatising Bank Handlowy and PKO BP. Pekao SA will also be privatised, after the completion of the consolidation process.

The consolidation of Pekao SA and the three remaining regional banks – Bank Depozytowo-Kredytowy (BDK), Pomorski Bank Kredytowy w Szczecinie (PBKS) and Powsz-ecgny Bank Gospodarczy (PBG) – was intended to satisfy all the parties interested in such a process: the participating banks and the Polish government.

This resulted in a special parliamentary act, the Act of 14 June 1996 on the Merging and Grouping of Certain Banks. The Act stated that the basis for consolidation should be a “bank group agreement” signed by the participating banks.

However, it also said that the bank group created on the basis of that agreement should consist of a “dominant bank”, which would be a controlling shareholder of “dependent banks”. In the case of the Pekao Bank Group, Pekao SA is the dominant bank and BDK, PBKS and PBG are dependent banks.

It should be stressed that the Pekao SA transaction will probably be the only transaction realised on the basis of the Act.

The requirement that besides the capital link (the dominant bank's shareholding in dependent banks) there should be a contract regulating the relations between the banks in the bank group, proved to be a considerable difficulty.

The McKenna & Co team advising Pekao SA in the consolidation process, led by Karol Rutkowski, a partner in the Warsaw office, had to draft the bank consolidation agreement in such a way that it would not in any way restrict the rights of Pekao SA as a shareholder of the three dependent banks.

On the other hand, it was important that the agreement satisfied the requirements result- ing from the Act. Of these, the most problematic were the “rules and procedure of agreeing the financial and operational policy of the group”.

The Act did not specify what exactly should be regarded as the financial policy or operational policy. It should also be noted that, although the legislator used the word “agreeing”, due to the fact that Pekao SA was in the role of the dominant bank, it was impossible to treat the dominant bank and the dependent banks on equal terms.

The law firm, with input from Pekao SA, the three regional banks and government institutions, advised Pekao SA on the bank group agreement throughout the summer of 1996. On 16 September 1996 the bank group agreement between Pekao SA and the three regional banks was signed, thus forming a step in consolidating the Polish banking market prior to its entry into the EU.

It is not yet known whether, as a result of the creation of the Pekao SA banking group, the four participating banks will eventually merge with Pekao SA, but that option seems highly likely.

Official announcements state that the services provided by the banking group, such as reporting and treasury management, will be “standardised”, leaving much room for speculation about what “standardisation” means.

Nevertheless, it should be stressed that the result of the process is the creation of the largest banking group in Poland with funds of about £390m. Under the Act, although the four banks remain legal separate entities they are in fact one bank.