Poland's largest bank PKO Bank Polski will continue to play a crucial role in financing the nation’s rapid defence build-up, according to CEO Szymon Midera, who reported net profits quadrupled in the second quarter of this year on August 22.

In the face of Russia’s invasion of Ukraine, Poland has set itself the goal of building the largest conventional army in Europe and been investing heavily in modernising its military. Poland’s defence budget was 2.3% of GDP in 2023, well above Nato’s recommended 2% and one of the biggest budgets in Europe in both proportional and absolute terms.

PKO BP has actively participated in financing Poland’s military build-up, providing funds to the state-owned Armaments Group (PGZ) and purchasing bonds from the Armed Forces Support Fund.

"Today, we're already active in this field; we have credit limits for PGZ, and we're ready to increase them," Midera told reporters on August 22, ahead of the bank's new strategy that is to be unveiled in the autumn, Reuters reports.

PKO BP’s net profit quadrupled in the second quarter, climbing to PLZ2.35bn ($611.61mn), primarily driven by a reduction in legal provisions related to Swiss franc mortgage loans and robust growth in its core business sectors.

While most of Europe sites on the cusp of recession, PKO BP has benefited from a strong Polish economy; Polish GDP growth surged 4% year on year in the second quarter, picking up sharply versus a revised gain of 1.8% y/y in the preceding three months, seasonally adjusted data from the Central Statistical Office (GUS) showed earlier this month.

However, the wider economic problems of Europe may be beginning to weigh on the Polish economy as it made a weak start to the third quarter, says ING. July industrial output surprised to the downside, amid declines in export-oriented industries linked to the German automotive sector. The Polish labour market also softened but remains firm, ING commented on August 21.

PKO BP’s provisions for legal risks linked to Swiss franc loans fell by 60%, dropping to just under PLZ1bn, as nearly 20% fewer borrowers chose to pursue legal action during the quarter.

Like many Polish banks, PKO BP has faced significant challenges due to the popularity of these loans, which have cost the banking sector over PLZ80bn since 2021 – exceeding the sector’s net profit for the same period by more than PLZ25bn.

If the Swiss franc mortgage issue remains unresolved, it could continue to have an impact on the sector's profitability for another 12 to 15 years, according to data from the Polish Banks Association, Reuters reports.