When, in the autumn of 1990, a group of economists and lawyers led by Professor Grzegorz Domański sat down to write the first Polish law regulating the exchange of securities, none of them imagined the massive growth of the country's financial market that would take place over the next two decades.

“The Warsaw Stock Exchange [WSE] is one of the biggest successes of the Polish transformation and we built it from scratch,” says Jacek Socha, a member of the working group that created that law, who was later chairman of the Polish Securities and Exchange Commission and is currently vice-chairman of PricewaterhouseCoopers in Poland. He says the three basic rules set for the exchange – dematerialisation of securities (meaning they can be held without a certificate), centralisation of the exchange and a market based on consistent information – have remained unchanged and have proved the right choices after 19 years of trading (the exchange opened for business in April 1991).

Surviving the crisis

Unlike in other countries, the global financial crisis did not bring about many changes in the structure of the Polish financial market. “Because of the market correction, investment funds lost half the assets they had held at the market peak, but they are rebuilding them now at a solid pace. Apart from that, insurance companies were and are rock solid. No bank went belly-up, no mergers took place,” says Professor Krzysztof Rybiński, rector of the University of Economics and Computer Science in Warsaw and a former deputy governor of the National Bank of Poland.

The country's Financial Supervision Authority reacted promptly to the global turmoil and stood guard over the banking sector. So did the National Bank of Poland when, in April 2010, for the first time in 12 years, it intervened on the foreign exchange market to counter speculative zloty transactions.

Krzysztof Kalicki, president of Deutsche Bank Polska, says the Polish banking sector has proved one of the healthiest in Europe. “The government didn’t need to bail out the banks as was the case in other countries,” he adds.

The only large-scale acquisition of a Polish bank following the crisis was Santander's purchase of Bank Zachodni WBK, sold by its parent company, Allied Irish Banks, which had gone bankrupt and was told by the Irish government to sell its offshore assets.

“In the end, the Polish financial market, which is characterised by conservative risk-taking and resistance to external shocks, has emerged from the global crisis unscathed. No public aid for financial institutions was called for, no institution went bankrupt and the sector remained profitable and one of the strongest in Europe,” says Stanisław Kluza, chairman of the country's Financial Supervision Authority.

Stock exchange bounces back

Only the WSE echoed the global financial difficulties. Before the financial crisis, its capitalisation exceeded €270bn. In 2008, the exchange's WIG index of stocks fell by 51%. Now, two years after the crunch began, the WSE has regained roughly half of those losses and its current capitalisation amounts to €200bn. In comparison, the ATX exchange in Vienna, Warsaw’s biggest competitor within central and eastern Europe, plunged almost 62% in capitalisation and the market value of the companies listed on it is now slightly more than €100bn.

Between the beginning of 2009 and June 2010, only six new companies chose to go public on the Budapest, Ljubljana, Prague and Vienna stock exchanges put together. In the same period, according to an IPO Watch report, 78 new companies entered the WSE, which makes Warsaw, after London, the second largest initial public offering (IPO) market in Europe. In May this year, the flotation of PZU, eastern Europe's biggest insurer, raised about €2bn, making it Europe’s largest public offering since December 2007.

“In terms of the number and value of new listings, we already play in the European league, not in the central European one," says Wiesław Rozłucki, the co-founder and first president of the WSE, currently at Rothschild Polska. "If we talk about market capitalisation and trading volume, we actually gained the top position in central Europe at the time of the crisis.” 

For Ludwik Sobolewski, president of the WSE, the Polish capital market has proved to be very flexible and resistant to shocks. “The majority of domestic investors understood that we had been affected by the global downturn and volatility, not by any problems inherent to our economy or the financial system,” he says, adding that, despite difficulties, investors have remained active on the Warsaw market.

Bound to grow further

The WSE's market capitalisation is bound to grow further, firstly due to the ongoing Polish privatisation programme and secondly because the country's private companies will reach out for more funding.

The recent large IPOs proved that Polish retail investors are not afraid to put their capital in shares. Some 200,000 Poles subscribed for shares in Tauron, the country’s largest power generator, and 250,000 invested in PZU. In the first two quarters of 2010, transactions made by individuals amounted to 20% of the total trading volume of the WSE. With the growth of the Polish economy, the population's capital to invest is set to rise, so more people are expected to head for the stock exchange.

On top of that are the domestic institutional investors such as investment and pension funds, which will be more active in future, as the government wants to introduce more aggressive pension funds for younger Poles. This means that 80% of the funds’ assets will be invested in shares, compared with 40% now.

Foreign investors

The first two quarters of 2010 broke the record for foreign investors’ presence on the WSE. Foreign investors accounted for 47% of business, with the highest number of orders coming from the UK and France.

“Companies both domestic and foreign see the appetite for risk among the investors on the Polish trading floor. They see a lively market and available capital,” says Mr Rozłucki. “There’s demand. There’s supply. And there is positive feedback, which means that, if demand is strong, it raises the supply of new companies and the increased supply results in further demand. That is what other central and eastern European markets don’t have.”

“It is not a coincidence that the Warsaw Stock Exchange has overtaken other markets in the region,” says Deutsche Bank’s Mr Kalicki. “On the one hand, there is good supervision and good laws regulating the safe exchange of securities, liquidity and brokerage houses’ operations. On the other hand, a wide range of investment products are available.”

Mr Sobolewski adds that the WSE has a much larger market behind it than many competing exchanges and operates more developed platforms with a broad array of market segments and financial instruments. “The most significant difference is that the WSE is a capital market that is expanding and shows a very dynamic pace of development, while other markets are stagnant or even regressing,” he says.

Continuing competition

This does not mean that Warsaw has already become the undisputed financial centre for central and eastern Europe. An alliance of the Budapest, Ljubljana, Prague and Vienna exchanges, known as the CEE Stock Exchange Group, entered the landscape as a new and stronger player in September 2009. However, this year’s strategic and long-term co-operation between NYSE Euronext and the WSE, which gave the latter access to NYSE Euronext’s Universal Trading Platform for its cash and derivatives markets, is the latest volley in the battle for regional dominance.

Today, there are 384 companies listed in Warsaw, including 23 foreign firms. For some of them the WSE is a secondary market.

“We need to see a wide stream of foreign companies that will find Warsaw [preferable to] London’s AIM to raise capital. Only then will Warsaw become a financial centre for the region,” says Mr Socha. Mr Sobolewski adds: “This will happen when international investors start using the WSE as a gateway to the whole CEE region. In order to achieve this, we have to build a cluster of competences and abilities possessed by market participants and advisory firms and, of course, a central infrastructure open to the world.”