By Patryk Wasilewski

WARSAW--Poland's state-controlled insurer PZU SA has bought a minority stake in a medium-sized local bank as part of its mission to build a large lender and reduce the role eurozone investors play in the Polish banking sector.

The insurer has agreed to buy 25% in Alior Bank SA (ALR.WA) from Italy's Carlo Tassara for 1.6 billion zlotys ($427 million) with its chief executive, Andrzej Klesyk, already setting his sights on two more banks in a move aimed at creating a lender capable of challenging the country's biggest market players.

The plan has the blessing of the Polish government which is determined to increase the share of domestically-owned banks at a politically sensitive time, as general elections are due in the autumn.

"After years of importing capital and know-how from foreign banks it's time for 'repolonization' of the financial sector, which means using Polish capital in its consolidation," Treasury Minister Wlodzimierz Karpinski said after the transaction was announced.

In a weekend interview for Rzeczpospolita daily, Mr. Klesyk, the PZU CEO, said creating a big Polish bank "would be good for the country," although he remains focused on shareholder value. He said the company's ultimate share he hopes to build in the bank through acquisitions will be higher than 25%.

Poland has for years sought to reduce the share of its domestic banking sector held by foreign lenders amid concerns that the debt problems of some eurozone members could affect local lending and banking operations.

The plan, originally conceived by the conservative opposition party Law and Justice, has the central bank's backing. National Bank of Poland Governor, Marek Belka, has said the central bank is ready to assist any transaction that would bring commercial banks with troubled parents back into Poland's fold. Poland has a relatively high share of its banking sector in foreign hands after asset sales made at an early stage of its transition to a market economy after 1989.

The renewed issue of Polish capital playing a bigger role in Poland follows the victorious campaign of presidential challenger Andrzej Duda in the May election. Opinion polls show his Law and Justice party could win the parliamentary ballot due around October.

So far, efforts by Polish investors--who hold about 60% of local banking sector assets--to gain more control have had limited success with only the state-controlled bank PKO Bank Polski SA managing to buy the Polish unit of Nordea Bank AB (NDA.SK) in 2013.

That could change, with PZU boasting earlier this month that it can spend heavily on investments and pick and choose its targets because many Polish banks are for sale.

Facing its own financial pressures, Raiffeisen Bank International AG (RBI.VI) is looking for suitors for its local lender Raiffeisen Polbank. Meanwhile, General Electric Co.'s (GE) financial arm GE Money is looking to sell Bank BPH after it failed to meet the desired scale of operations.

Although PZU faces competition from foreign lenders, it has a higher chance of getting regulatory backing because the financial oversight authority is skeptical about foreign banks increasing their market share.

The financial sector regulator has said it sees Poland's relatively fragmented banking market as appropriate and any buyers would have to be newcomers.

-Write to Patryk Wasilewski at patryk.wasilewski@wsj.com

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