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Polish banks face drawn-out saga to resolve forex mortgages problems

This is one of a two-part series on the Polish banking sector. For a story about the potential sale of mBank by Germany's Commerzbank, and the relevance of mBank's large Swiss franc mortgage portfolio, click here.

A recent ruling by Europe's top court in favor of Polish borrowers will weigh on Poland's banking sector for some time to come, as uncertainty over the total cost to the sector lingers and potential legal bills put pressure on profits, according to analysts.

On Oct. 3, the European Court of Justice, or ECJ, sided with a Polish couple who had taken Raiffeisen Bank International AG to court over a Swiss franc mortgage they had taken out in 2008. This could open the door for a slew of lawsuits by borrowers hit by the zloty's fall against Switzerland's currency.

Before the financial crisis, borrowers had taken out Swiss franc mortgages to benefit from low interest rates before the 2008 financial crisis. But the currency's rise since the crisis, coupled with Switzerland's decision to unpeg it from the euro in early 2015, have seen it appreciate by about 40% against the zloty over the past 10 years. This left many mortgage holders paying back more than they had initially borrowed.

The matter has plagued the banking sector for years, and several attempts to find a solution have failed. Foreign exchange housing loans held by Polish banks totaled 131.13 billion zlotys at the end of August and accounted for 11.46% of loans to households, non-financial corporations and nonprofits, 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.

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Legal wranglings

And uncertainty thrown up by the ECJ ruling is likely to prolong the issue.

"The impact from the ruling will be long term," Łukasz Jańczak, an analyst at Ipopema Securities in Warsaw, said in an interview. While the ruling sides with borrowers, it will be up to Polish courts to decide whether a loan includes abusive clauses, should be converted into zlotys or could be annulled, he said, predicting that it could take up to two years for some kind of common legal judgment on the issue.

Banks will have to set aside funds to deal with the potential costs over the coming two years, he said. They will not be subject to huge one-off provisions that many in the sector had feared, but higher provisions will impact their bottom line, he added.

But questions linger over how much banks may have to pay back to customers, or whether they can still request interest on the loans, and only future rulings will determine the answer, he said.

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Other countries have implemented plans to help banks and borrowers with the issue of foreign exchange mortgages. For example, Hungary converted foreign currency loans into forints and was subject to four different ECJ opinions on the subject before banks were able to establish the best way to handle the issue, said Kamil Stolarski, head of equity research at Santander Bank Polska.

Polish banks could be subject to further rulings from courts or even the ECJ, making it difficult to establish what their costs will be, he predicted.

Polish banks were already suffering from low profits because regulators have required lenders to set aside capital to cope with any adverse impact, said Gunter Deuber, head of economics, fixed-income and foreign exchange research at Raiffeisen Bank International in Vienna.

The sector has had a single-digit return on equity over the past three years, he said, and a return on assets of 0.8%, which is "really low for such a market." He predicted that low profits would continue over the next one or two years because of the ECJ ruling.

Deuber estimated the potential cost to the sector to be €4 billion to €8 billion but said it would be spread out over time, making it "digestible" for the sector.

Banks affected

The banks most affected by the ruling are Millennium BCP's Bank Millennium SA, which has the highest level of forex mortgages as a percentage of total gross loans among Polish banks, at 19.84%, and Commerzbank AG's Polish subsidiary mBank SA, which has a 15.91% exposure. Bank Millennium declined to comment due to a closed period before its earnings release Oct. 28.

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A spokesman for mBank said the lender already makes provisions for legal risks and did not expect to have to make additional provisions or reevaluate its loan portfolio because of the European court ruling. The bank does not anticipate any impact on its financial results or its stability, he said.

The ruling concerns a specific case and has no immediate or direct impact on mBank, he said, adding that the bank's Swiss franc loan book was of "good quality" and that its size was decreasing. The bank's Swiss franc retail loans as a percentage of total gross loans fell to 13.7% by the end of the second quarter from 17.5% at the end of 2017.

Other Polish banks affected by the ruling, including PKO Bank Polski SA, Banco Santander SA's Polish unit Santander Bank Polska SA, Bank Pekao SA and BNP Paribas SA's Polish subsidiary BNP Paribas Bank Polska SA, did not respond to a request for comment.

Regulators will step in to help the sector if needed, Deuber said.

"I think they will find a way to handle this issue and spread the losses over time without completely crashing their banking sector," he added.