PKO BH builds on leading green position

In June 2019, PKO Bank Hipoteczny issued the first green covered bond from central and eastern Europe, and has since followed up with a second deal as well as the launch of an energy efficient residential mortgage offer. Five years on from its creation, CEO Paulina Strugała tells Sustainabonds about the latest developments related to its green covered bond activity.

Having begun operations in April 2015, the subsidiary of PKO Bank Polski has become the biggest mortgage bank and biggest issuer of covered bonds from Poland. Its mortgage portfolio has grown some PLN5bn (€1.1bn) annually, with its current PLN25.8bn comprising PLN12.1bn originated through new sales and PLN13.7bn transferred from its parent. Its PLN16.2bn (€3.6bn) of covered bond issuance outstanding gives it a market share of 62%.

Sustainabonds: How has your green bond issuance developed?

Paulina Strugała, PKO Bank Hipoteczny: In June 2019, PKO Bank Hipoteczny was the first mortgage bank in Poland to offer institutional investors green mortgage covered bonds secured only on high-quality Polish zloty-denominated housing loans. The five year mortgage covered bond issue amounted to PLN250m and this was allocated to 20 domestic and foreign investors. The margin was set at 60bp above three month Wibor, which once again confirmed the high quality rating of the debt issued by the bank.

We were very pleased with how this went, so we followed it up shortly afterwards with another, in November 2019, again dedicated to the domestic market. For our second, PLN250m five year green covered bond issue, 20 investors put in orders totalling over PLN450m. The margin was set at 51bp above three month Wibor.

All green covered bonds of PKO Bank Hipoteczny obtained Climate Bonds Initiative (CBI) certification, which is granted to bonds that meet the highest standards of positive environmental impact. The methodology for assessing the energy efficiency of financed residential real estate developed by the bank has been recognized by international agencies as a benchmark for low carbon residential buildings in Poland.

Considering the large amount of green assets in our mortgage portfolio, PKO Bank Hipoteczny recently obtained CBI Programmatic Certification for green covered bonds issues. The idea behind this is to streamline certification for issuers that intend to issue multiple certified bonds against a large pool of assets. Subsequently, the issuer can launch more bonds against other parts of the same asset pool and the programme has to undergo verification only once per year.

Sustainabonds: How does green covered bond issuance fit in with PKO’s broader sustainability strategy?

Strugała, PKO BH: As part of the PKO Bank Polski SA Group, PKO Bank Hipoteczny is committed to the same CSR strategy as defined by the parent company, making sustainable development an integral part of its business strategy. PKO BP Group takes into consideration environmental criteria in its investment and modernization process. All entities belonging to the group monitor the consumption of natural resources and are involved in activities aimed at reducing this consumption.

PKO Group is committed to sustainable development, as it responds to the diverse needs of its employees and the market, society and the natural environment.

PKO Bank Polski Group intends to contribute to the development of the green bond market as it is an important tool for channelling more investments towards climate change mitigation. PKO Bank Hipoteczny, as a PKO BP Group member, believes that green bonds offer transparency and traceability to investors who wish to allocate funds to green assets. We believe that by issuing green covered bonds focused on energy efficiency, the bank, its clients and investors contribute to Poland’s greenhouse gas reduction targets.

Sustainabonds: I understand PKO began offering a new retail mortgage against energy efficient properties in August. Could you tell us about the strategy behind this and how it has been received?

Strugała, PKO BH (pictured): For several years now, the number of issues of green bonds financing pro-ecological projects globally has been growing dynamically. At the end of 2019, the overall green bond market was worth $255bn, with issuances out of Europe at $107bn, accounting for 42% of the market. As a consequence, one of the bank’s strategic projects has been to issue green mortgage bonds as financing for residential properties that meet higher energy efficiency requirements.

In April 2019, PKO Bank Polski Group was the first Polish financial institution to join the Energy Efficient Mortgages (EEM) pilot project, which aims to create standardized, Europe-wide solutions to finance energy efficient residential mortgage projects.

The development of these criteria has made it possible to introduce a “green mortgage” option into the mortgage loan offer.

In August 2019, the bank introduced the special offer for financing residential real estate that meets specific energy efficiency requirements. This offer is in accordance with the applicable standards for low carbon residential buildings in Poland, approved by the Climate Bonds Initiative as a proxy for the Polish market. In order to receive preferential terms for the mortgage loan, the client must submit a valid energy performance certificate confirming the required energy efficiency of the financed residential property.

Since the introduction of the green offer, the interest of our clients in providing the bank with energy performance certificates has been growing from month to month. We observe that the awareness and importance of energy efficiency is growing among mortgage borrowers. However, due to the fact that the offer was implemented only in August last year and includes financing of residential real estate also from the primary market, which is connected to a longer investment implementation period, we have to wait for tangible results. Nevertheless, we do expect this growing interest from our clients to continue.

Sustainabonds: How do your offerings in energy efficient mortgages and covered bonds fit in with EU moves, such as the taxonomy and planned Green Bond Standard?

Strugała, PKO BH: From the very beginning, PKO Bank Hipoteczny has done everything by the book, keeping up with the highest established market standards in terms of green bond issuance.

Our methodology for defining green assets was developed in cooperation with German consultant Drees & Sommer Advanced Building Technologies. Our green covered bonds fully comply with the proposed new taxonomy and EU Green Bond Standard. The EU Green Bond Standard has been developed as a pattern that most green bond issuers are able to comply with over time and that could become an international best practice standard. Therefore, it is not surprising that the EU Green Bond Standard as currently proposed is by design compatible with the International Capital Market Association’s Green Bond Principles, which the bank incorporated in the process of developing its green covered bond framework.

We will be following closely all future developments with respect to the EU taxonomy legal framework.

Sustainabonds: What are your issuance plans for the year?

Strugała, PKO BH: PKO Bank Hipoteczny remains a regular issuer of covered bonds. However, all decisions regarding future issuances are dependent on the group’s liquidity needs as well as market conditions.

One of the key challenges for the entire banking sector in Poland will be meeting the requirements of the EU BRRD2 Directive regarding the issue of long term new debt instruments by banks. This is also posing a challenge for mortgage banks operating within larger banking groups.

The Polish legal framework regarding the mortgage covered bond market is in line with the best European benchmarks.

In 2020, the economic situation in Poland will be highly dependent upon how the EU as well as ourselves are able to cope with the fallout from Covid-19. We are expecting Poland to face a recession in 2020, of around 3.5% – compared with our neighbours, this would nevertheless be a better result. Poland will enter into negative growth for the first time in 30 years.

All these factors combined create the perfect environment for those looking to invest in covered bonds out of Poland. On top of this, covered bonds issued by PKO Bank Hipoteczny have the highest possible rating that Polish securities can obtain, capped only by the country ceiling.