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Unfavorable EU court ruling could force 'massive' provisions at Polish banks

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Unfavorable EU court ruling could force 'massive' provisions at Polish banks

An upcoming ruling from the European Court of Justice is leading to concerns of a multibillion-zloty hit for the Polish banking sector, but lenders are hoping that their capital buffers, along with lengthy judicial processes and the ongoing amortization of loans, will offset the impact.

The ruling could determine whether Polish banks will be liable for repaying billions of zlotys to borrowers who took out Swiss franc-denominated home loans to take advantage of low rates before the 2008 financial crisis, but were left exposed when Switzerland unpegged its currency from the euro in early 2015, triggering an almost instant 40% appreciation.

The issue took center stage during the country's elections in 2015, and the government looked at several proposals to help borrowers, but eventually left the matter to the courts. Following one such case, a Warsaw court asked the European Court of Justice for its opinion, and the court's advocate general in May issued a nonbinding opinion that sided with borrowers. A final ruling will be made in the coming weeks.

The Polish banking association estimates lenders could face costs of at least 60 billion Polish zlotys in the event of an unfavorable ruling, equivalent to about four years of the Polish banking sector's profits.

High risk

"The uncertainty and the risk is pretty high," Łukasz Jańczak, an analyst at Ipopema Securities in Warsaw, said in an interview. "In the worst-case scenario, it's not only a problem for Polish banks, but it will also be a problem for the entire Polish economy; lending will be impacted."

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Polish banks may be forced to make "massive upfront provisions" to cover all the costs of future cases, which could have a negative impact on their capital, he said. Otherwise, they may decide to make annual provisions for upcoming cases, he said. That could translate into two or three years without profits because earnings would be eaten up by provisions, he said.

Several of Poland's top lenders have significant exposure to foreign-exchange mortgages, although the court's decision will only apply to mortgages indexed to foreign currencies, which constitute around 55% of all forex mortgage loans issued by Polish lenders. The advocate general's opinion said agreements with abusive clauses may be converted into Polish zlotys, while maintaining their Swiss franc London interbank offered rate, or may be rendered null and void.

"This decision, if you compare it to other countries, could be unprecedented," Marcin Materna, head of research at brokerage Millennium, said in an interview. Banks might have to bear "very huge losses" because mortgage contracts would effectively change, he said.

S&P Global Market Intelligence data shows that Millennium BCP unit Bank Millennium SA has the highest level of forex mortgages as a percentage of total gross loans among Polish banks, at 19.84%. Commerzbank AG unit mBank SA is next with 15.91%, followed by PKO Bank Polski SA, Santander Bank Polska SA and BNP Paribas SA's Polish unit BNP Paribas Bank Polska SA, with 10.94%, 6.73% and 6.57%, respectively.

That said, the banking sector as a whole has been reducing its exposure to foreign exchange loans. According to data compiled by S&P Global Market Intelligence, foreign exchange housing loans fell to 127.2 billion zlotys at the end of June 2019 from 165.6 billion zlotys at the end of June 2014. As a percentage of total loans, they had dropped to 11.33% from close to 20% over the same period.

Court decisions

A spokesman for mBank declined to comment on the potential impact on the lender because the court has yet to give its ruling, but noted that Polish courts would not have to automatically follow the ECJ's advice. Courts would have to decide if individual cases were abusive or not and then take action accordingly, he said.

The spokesman said the bank's franc-denominated retail loan portfolio has declined significantly since 2017. MBank expects its whole franc home-loan portfolio to be repaid by 2028.

Artur Kulesza, head of investor relations at Bank Millennium, said his bank had 15 billion zlotys of mainly franc indexed loans. The ECJ opinion has brought "a lot of confusion," he said in an email.

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Stability

He declined to estimate what the potential impact might be for Bank Millennium and the sector as a whole. But he noted that previous measures to deal with forex mortgages that would have been costly for the sector had been abandoned, and said he doubted the Polish government, the National Bank of Poland and the judicial system would allow a situation that could jeopardize the banking system's stability.

The bank does not plan to set aside cash as it has won the "vast majority" of cases brought against it, he said, adding that the lender was also trying to reduce its outstanding foreign exchange mortgage portfolio through early loan repayments. That, plus loan amortization, was allowing the lender to reduce its franc portfolio by about 8% a year, he said.

Polish banks are also generally well capitalized, with buffers dedicated exclusively to foreign exchange mortgages, Kulesza said. Bank Millennium, given its high share of forex loans, has an additional capital buffer of 6.27% of risk-weighted assets.

Bank Pekao SA said its Swiss franc mortgage indexed loans amounted to 12 million zlotys, or 0.1% of its total lending book. It said it was too early to quantify the impact of the ruling given the ongoing uncertainty and reiterated that Polish courts would decide on individual cases no matter what the ECJ rules.

Share pressure

PKO Bank Polski and Santander Bank Polska did not respond to requests for comment, but a spokesman for ING Bank Śląski SA, whose forex mortgages as a percentage of gross loans stand at just 0.86%, said it would be difficult to quantify the exact impact without knowing the final ruling.

"Nevertheless, it might be a significant amount for the sector," he said in an email. At the end of the second quarter the bank's franc mortgage loan portfolio amounted to 941.4 million zlotys with all loans indexed to the franc, he added.

Pressure on bank shares is likely to continue, according to Michał Konarski, an analyst at mBank in Warsaw, who said investors would shy away because of the uncertainty around the ruling.

As of Sept. 10, US$1 was equivalent to 3.92 Polish zlotys.