trending Market Intelligence /marketintelligence/en/news-insights/trending/wFozDi1r-M6yaYE84MY9wA2 content esgSubNav
In This List

Polish banks with Swiss franc mortgages may need to boost capital


Banking Essentials Newsletter: 23rd August edition


Banking Essentials Newsletter: 9th August Edition


Navigating Industry Level Credit and Market Risks in the Light of Slow Growth and Interest Rate Hikes


Kensho Launches Word Error Rate Calculator

Polish banks with Swiss franc mortgages may need to boost capital

Newly published proposals to deal with Polish banks' exposure to mortgages denominated in foreign currency would force lenders to cut dividends and could result in some having to raise additional capital, analysts said.

On Jan. 13, Poland's Financial Stability Committee recommended that banks should increase risk weightings on foreign-currency mortgage exposures to 150% from 100% and add a 3% systemic risk buffer to capital held against them.

The proposals now under consideration by the Finance Ministry come as Polish authorities mull ways to help the 40% of the country's homeowners who signed up for Swiss-franc mortgages to take advantage of low rates, but have faced soaring repayment costs since Switzerland's central bank unpegged its currency from the euro in January 2015, triggering an almost instant 40% appreciation.

Most banks have some degree of exposure to the total $36 billion in Swiss franc mortgages, with the biggest shares held by 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.

Getin Noble, Poland's seventh-largest in terms of assets, may be most vulnerable to the proposals, and may even have to raise capital, said Michal Konarski, an analyst at mBank.

"It depends when the 150% (risk weighting) will be implemented," he said. If the risk weighting is not increased until the end of 2017, the bank may avoid having to increase its capital, he added.

Loss-making Getin, which is already undergoing a restructuring program and says it will return to profit this year, had a core Tier 1 ratio of 12.45% at the end of September 2016, the lowest among its peers. mBank's core Tier 1 ratio was 15.88% end September 2016, while PKO BP's was 14.65% and BZ WBK 14.88%.

Getin might have to raise 500 million zlotys to bolster capital, while other banks such as Millennium Bank may have to issue subordinated debt, Lukasz Janczak, analyst at Ipopema Securities, said.

In August 2016, Poland backed down from proposals to force banks to convert franc loans into local currency, which had led to fears the sector would face a hit of up to 67 billion zlotys. Instead the government is now working on proposals for banks to reimburse fees for currency conversion, which would only cost the sector a few billion zlotys.

But the measures proposed by the Financial Stability Committee are more stringent than investors expected, analysts at Erste Securities Polska said in a note, adding that costs to banks relating to franc mortgages might now come in at higher than 11 billion zlotys they had been estimating.

And the government, under pressure from consumer groups, could still add additional measures to recompense foreign currency borrowers, analysts said.

"This proposed regulation does not solve anything," Janczak said. "It does not solve the fundamental problem of the FX risk. It just strengthens the capital of the banks, and I think Polish borrowers expected something else so there is still a risk."

Poland's economic growth and rapid transformation into a free market economy made it a darling of foreign investors, with the banking sector a key target. But lower growth and increased state intervention by the socially conservative Law and Justice Party government, including a tax on bank assets, are darkening the picture, with the prospect of further costs associated with franc mortgages only making matters worse.

"We have to question whether this is a healthy market," said Gunter Deuber, head of economics, fixed income and foreign exchange research at Raiffeisen Bank International in Vienna. "Operating profitability is not that good for the banks to take additional hits," he said, noting that several banks have already had to restructure and cut costs. "There are not too many buffers left."

Higher capital requirements, as well as restrictions on dividend payments by banks with foreign-currency mortgages imposed by the Financial Supervision Authority in December 2016, mean most lenders won't be able to make payouts for the next couple of years, with the exception of Bank Pekao SA and Citibank USA's Bank Handlowy w Warszawie SA, analysts said.

Lenders that meet all regulatory requirements will be allowed to set aside up to 50% of their profits for dividend payments, according to the FSA.

"(Banks') capital will increase and their capital adequacy ratio will increase, so afterwards they will be able to pay dividends in about two to three years," Konarski said.

As of Jan. 20, US$1 was equivalent to 4.09 Polish zlotys.