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Moody's sees Polish lenders' EU court ruling losses at 1.5x sector's 2018 profit

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Moody's sees Polish lenders' EU court ruling losses at 1.5x sector's 2018 profit

Polish banks are facing rising legal risk from their foreign exchange mortgage portfolios, but the financial impact of the European Court of Justice's upcoming ruling could be significantly lower for local lenders than previously estimated, according to Moody's.

Upcoming ruling

The court will issue a ruling on Oct. 3 in a case analyzing the use of abusive clauses in Swiss franc-indexed mortgage contracts. Local lenders fear that the ruling will side with the opinion of the ECJ's advocate general. The advocate general concluded in May that Swiss franc-indexed mortgage 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, with the decision to be made by domestic courts.

Moody's calculated that the conversion of existing forex mortgage loans, worth 129 billion Polish zlotys, at an exchange rate from 2008, which would be the most unfavorable scenario for Polish lenders, would generate losses for the banking sector equivalent to around 1.5x its 2018 profit.

The rating agency's figure is significantly below the estimate of the Polish Bank Association. It put the banking sector's losses at between 60 billion zlotys and 80 billion zlotys — more than 4x the 2018 profit of local banks.

The 2018 net profit of the Polish banking sector stood at 14.5 billion Polish zlotys, according to the Polish Financial Supervision Authority.

Getin Noble, Millennium most vulnerable

Getin Noble Bank SA and Millennium BCP unit Bank Millennium SA would be most affected by a negative ECJ ruling due to the significant size of their forex mortgage portfolios in relation to their capital. On the other hand, ING Groep NV unit ING Bank Śląski SA and Bank Pekao SA would be least vulnerable and could easily absorb potential losses stemming from an unfavorable ruling, the ratings agency said.

Moody's said that the impact of a negative ECJ ruling on Polish banks will largely depend on the number of borrowers seeking legal action, as well as the time necessary for Polish courts to conclude such cases. It could take several quarters for local courts to issue their rulings, which would give local lenders more time to boost their reserves.

Stable outlook

The rating agency also said in its Sept. 23 report that it kept a stable outlook on the country's banking system, pointing to its sound, deposit-based funding and large liquidity buffers.

Moody's expects profitability in the country's banking sector to be moderate and broadly stable, although the increasing legal risk in relation to forex mortgage exposures could harm profitability in the future.