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Forex mortgage proposals to hit Polish bank profits, but impact limited


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According to Market Intelligence, April 2023

Forex mortgage proposals to hit Polish bank profits, but impact limited

Fresh proposals to solve the thorny issue of Poland's foreign-exchange mortgages would impact local banks' profits in the coming years, but the long-term effects would be limited, according to analysts.

Many Polish homeowners took out Swiss franc-denominated 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 Polish government made cleaning up the problem a key plank of its election manifesto in 2015. It had previously wanted banks to convert the loans into zlotys, but backed down following estimates suggesting they would face a hit of up to 67 billion zlotys. The latest proposals put forward by President Andrzej Duda would create a restructuring fund financed by lenders.

Quarterly contributions

Banks would have to make a quarterly contribution to the fund of up to 0.5% of the foreign-exchange-denominated loans held on their balance sheets, something that could cost them as much as 2.6 billion zlotys to 3.2 billion zlotys annually, or around 20% of their profits, according to analysts speaking to S&P Global.

According to Moody's, legacy foreign-exchange mortgages make up 13.4% of Polish banks' total loans. These loans had a nonperforming loan ratio of 3.5% at the end of June, and had declined by 10% year over year at that point. Meanwhile, zloty-denominated mortgages constituted 35% of the loan book, had an NPL ratio of 2% and grew by 10.5% over the same period.

Moody's estimated the potential impact of the new measures to banks at up to 3.2 billion zlotys per year, or 20% of its estimate of 2017 pretax earnings. An equity analyst speaking to S&P Global, who wished to remain unnamed for compliance reasons, also pegged the probable annual impact at up to 3.2 billion zlotys.

"It looks like a huge impact, but the 20% is maybe overstated," said Lukasz Janczak, an analyst at Ipopema Securities. He estimated that, in the worst-case scenario, banks would have to pay out between 2.6 billion zlotys and 2.7 billion zlotys in additional costs in 2018. The costs would decline over the coming years because of the concurrent decline in franc mortgages, he said.

Furthermore, a fall in the value of the franc relative to the zloty of about 8% since the beginning of 2017 has led to lower repayments for borrowers and eased pressure on the government.

Under the new proposals, once contributions are made to the fund, lenders would have six months to use the money to help finance the conversion of franc loans for borrowers. If they do not use the fund, they will lose out on the money.

"The whole idea is to encourage banks to offer an attractive restructuring plan for the borrowers," Marcin Gatarz, head of research at Pekao Investment Banking in Warsaw, said in an interview. If a bank pays in 100 million zlotys, it can use that money to cover the costs of restructuring mortgages, but if it only uses 10 million zlotys, the other 90 million zlotys will go to a common pool and other banks can use it.


The banks with the largest exposure to franc mortgages are Getin Noble Bank SA, Millennium BCP unit Bank Millennium SA, Commerzbank AG unit mBank SA, PKO Bank Polski SA and Banco Santander SA unit Bank Zachodni WBK SA.

"It will be an incentive for banks because if they don't use the money it will then go to someone else," said the unnamed equity analyst. The fact that payments are quarterly and can be adjusted depending on macroeconomic conditions is also a positive for banks, he said.

MBank and Getin Noble declined to comment on the proposed measures, and Bank Millennium said it is waiting to see what the outcome of the proposals will be. The other lenders did not respond to requests for comment.

Gatarz estimated that bank contributions to the fund could total up to 3 billion zlotys, accounting for 18% of the sector's earnings in 2018. It would eat up 44% of net profit at Bank Millennium, 24% at mBank, 16% at PKO BP and 9% at BZ WBK, he estimated.

Janczak said the loss-making Getin Noble would be the worst affected because of its high exposure to franc loans and net losses. The money the bank would have to pay out would equal about 97% of its market capitalization, he said. The bank posted a net loss of 95.5 million zlotys in the first quarter of 2017.

Fitch Ratings said Aug. 10 that the plans were unlikely to have much impact on ratings for most banks, as the process would be spread over time and slowed down if necessary in order to safeguard the sector's stability.

PKO Bank Polski SA As of Aug. 11, US$1 was equivalent to 3.64 Polish zlotys.