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Polish banks' Swiss franc mortgage pressure set to ease in 2024

Polish banks' Swiss franc mortgage woes could ease in 2024 after substantial further loan loss provisions were set aside in the fourth quarter of 2023.

The country's seven largest listed banks set aside a combined 4.9 billion zlotys for legal risks related to their Swiss franc mortgage portfolios in the fourth quarter of 2023, 17.8% more than in the year-ago period, according to calculations by S&P Global Market Intelligence. The banks put aside 16.8 billion zlotys across the whole year, a 49.4% annual increase.

For 2024, banks could set aside fewer provisions related to franc mortgages, as the provision coverage of those loans is approaching 100%, according to Mikołaj Lemańczyk, equity analyst at mBank SA's brokerage unit. "This [coverage] in our opinion should be sufficient to handle the stream of lawsuits as well as the continuation of banks' settlement programs," said Lemańczyk.

Total provisions for legal risks related to franc mortgage portfolios amounted to almost 40 billion zlotys at the end of 2023 for the seven banks, a 41% year-over-year increase.

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The legal risk-related coverage ratio on franc mortgages at Commerzbank AG unit mBank and BNP Paribas SA's BNP Paribas Bank Polska SA was close to 100% as of 2023-end, the lenders said. According to estimations by Lemańczyk, the legal risk coverage ratio at BNP Paribas Bank Polska could even exceed 100%.

ING Groep NV's ING Bank Slaski SA and Bank Polska Kasa Opieki SA also had coverage ratios above 100%, while the coverage ratio at Banco Santander SA unit Santander Bank Polska SA and PKO Bank Polski SA was at 81% as of 2023-end, according to Lemańczyk's estimations.

While the provisions are expected to be lower in 2024, they will still represent a significant cost for banks with franc portfolios, said Michał Sobolewski, senior equity analyst at DM BOŚ.

PKO Bank could set aside almost 2.6 billion zlotys in legal provisions on franc mortgages in 2024, according to Lemańczyk's estimations, while provisions at Santander Bank Polska, Banco Comercial Português SA unit Bank Millennium SA and BNP Paribas Bank Polska could amount to 2.3 billion zlotys, 1.4 billion zlotys and 494 million zlotys, respectively. Lemańczyk noted, however, that the estimates could be revised downwards for some of the banks.

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Legacy issues

The problem of franc mortgages in Poland dates back to the early 2000s, when borrowers were encouraged to take out loans in the Swiss currency to benefit from lower interest rates. The value of the franc later spiked, leaving customers with higher repayments. Polish courts have overwhelmingly ruled against banks in subsequent legal disputes, prompting local lenders to accelerate the process of forming legal provisions on franc loans.

The increase in provisions in 2023 came after the advocate general at the European Court of Justice (ECJ) said in February that borrowers may assert additional claims against banks for compensation on paid installments on Swiss franc mortgages, which Polish courts invalidated due to unfair contractual clauses, opening the route for more disputes. The advocate general also denied banks the right to seek additional remuneration, including interest, on such mortgages.

The ECJ confirmed this opinion in June 2023, meaning that lenders would have to set aside about 42 billion zlotys of additional provisions through 2025, the Polish Bank Association said at the time.

The total value of active franc mortgages in the Polish banking sector after provisions stood at 27 billion zlotys at the end of November 2023, down from 55.1 billion zlotys the year prior, according to the Polish Financial Supervision Authority. Such loans comprised 7.1% of total loans in the banking sector as of August 2023, the central bank said in its latest Financial Stability Report.

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Profit pinch

The latest provisions will strongly impact the fourth-quarter 2023 profitability of banks with the greatest relative exposure to franc mortgages, such as mBank or Bank Millennium, Sobolewski said.

Bank Millennium expects to report a profit for the fourth quarter of 2023 despite the latest provisions, while BNP Paribas Bank Polska said it will report a loss for the quarter but a profit for the full year. mBank expects its fourth-quarter and full-year 2023 financial results to be positive, or near zero.

Despite the increase in provisions, the banks are likely to post robust full-year 2023 earnings that surpass the results reported for both 2022 and 2021, according to S&P Capital IQ consensus estimates.

Analysts also expect PKO Bank Polski, Bank Millennium, mBank and BNP Paribas Bank Polska to further increase profit in 2024 as pressure from the franc provisions eases.

Overall, banks operating in Poland earned 27.9 billion zlotys for the 11 months ended Nov. 30, 2023, a 113.6% increase year over year, Poland's Financial Supervision Authority said. The sector's return on equity jumped to 13.02% from the year-ago 4.42%.

Among the seven analyzed banks, ING Bank Śląski had the highest ROE as of the end of the third quarter at 34.8%, while mBank had the lowest at 0.44%, Market Intelligence data shows.

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As of Jan. 23, US$1 was equivalent to 4.03 Polish zlotys.