The Polish authorities have sat on their hands for more than a decade, putting off a reckoning with the problem of the country’s estimated PLN86.5bn (€18.48bn) in Swiss franc mortgages.
Now this issue cannot be put off any longer and is coming to a head just as financial contagion is spreading throughout the world’s stock exchanges in the wake of the collapse of Silicon Valley Bank and the forced takeover of Credit Suisse by UBS.
The Warsaw Stock Exchange’s banking sector index, WIG-Banki, has already fallen nearly 7% this year to date, and just over 10% in March alone.
In the next few weeks the Court of Justice of the European Union (CJEU) is due to issue a ruling that is expected to say that Polish banks are allowed to charge borrowers only for repaying the loan principal if a court rules that the conditions of their mortgage were invalid. Some 20%-25% of more than 340,000 Polish Swiss franc mortgage holders have sued their banks, claiming the conditions were unfair, and most have won.
The Financial Supervision Authority (KNF) assessed that the ruling could set the sector back by no less than PLN100bn (€21.3bn) in immediate costs, which it predicted would cause the bankruptcy of several banks.
Polish banks have only set aside some PLN40bn in legal provisions against the CHF-denominated mortgages, which total PLN86.5bn, according to BIK, a Polish credit market analysis company.
This could force the Polish government to intervene to support the banking sector to prevent wider damage to the economy during the current global financial volatility.
This crisis is looming just as the Law and Justice (PiS) government is fighting what looks like a tight battle for re-election this autumn, and any solution bears the political risk of being accused either of siding with the banks against the people or clogging “the bloodstream of the economy” that the financial sector is, according to the banks.
Not so clever now
Mortgages denominated in the Swiss franc were all the rage in Poland at the beginning of the 2000s when the franc was at an all-time low against the zloty.
Hundreds of thousands of people signed on the dotted line to get mortgages, the terms of which benefited from the cheap franc and the Swiss National Bank’s low interest rates at the time.
But this decision did not look so clever after the franc began climbing upward against the zloty. The first spike took place in the wake of the 2008 credit crunch that elevated the value of the Swiss currency from around PLN2 to PLN3.5 in 2011.
The franc then stabilised for four years until the shock of January 1, 2015, when the Swiss National Bank surprisingly unpegged it from the euro, pushing the franc to over PLN4. The Swiss currency is now at over PLN4.7.
Since 2008, then, Polish borrowers have seen their repayments increase more than twofold, while the loan-to-value ratio of their property worsened. Many have since begun scrutinising their mortgage contracts and questioning the clauses.
Borrowers’ main arguments are that they were not told in clear enough terms that a mortgage in a foreign currency bears the risk of that currency fluctuating against the zloty.
Secondly, they accuse the banks of using opaque methods to calculate the value of the franc and imposing disadvantageous terms for the CHF/PLN spread.
A trickle in the beginning, the tide of court cases against the banks began rising quickly, as borrowers realised their arguments had got traction with the courts.
Banks, meanwhile, found themselves with huge portfolios of CHF-denominated mortgages at risk of becoming truly toxic with every court ruling invalidating a Swiss franc mortgage.
The CHF-denominated mortgages are a significant portion of several Polish banks’ portfolios. According to an analysis by S&P Global Market Intelligence from January, Bank Millennium has the highest percentage of Swiss franc mortgages in its portfolio among Poland's largest banks at 9.4%, followed by mBank SA with 5.4% and BNP Paribas Bank Polska with 4.7%.
The risks for the banks are real. “Foreign-currency mortgages were a significant reason for the collapse of Getin Noble Bank, which entered a orderly restructuring in late 2022, while large legal provisions for Swiss franc mortgages were one reason for a financial recovery programme at Bank Millennium, a unit of Portugal's Banco Comercial Portugues,” the S&P analysis said.
Source: S&P Global Market Intelligence
An adviser to the Court of Justice of the European Union (CJEU) said in a non-binding opinion last month that banks cannot claim payments beyond reimbursement of the loan principal in case an FX mortgage contract is annulled due to containing unfair terms.
“Banks ought not to derive any economic advantage from a situation [they have] created by [their] own unlawful conduct”, the advocate general said.
The opinion routed bank stocks on the Warsaw bourse amid warnings by Poland’s financial authorities that were the CJEU to share the advocate general’s view – which typically is the case – the sector is in for bankruptcies unless the government agrees on helping it.
The KNF assessed that banks faced more than PLN100bn in immediate costs from a possible ruling of the CJEU, representing 63% of own capital held by banks with a portfolio of foreign currency mortgages and 128% of the surplus capital of these banks above the regulatory minimum. It is also about 50% of own capital held by all commercial banks operating in Poland. The KNF warned that the costs incurred “may cause the bankruptcy of one or more major banks”.
“The difficulties faced by large banks and the associated burdens could lead to further problems, including those of smaller banks without foreign currency loan portfolios, triggering a ‘contagion effect’,” the KNF also said.
The IMF recently said that Polish banks were well-capitalised but recommended that the Polish authorities take action to resolve the uncertainty.
It also warned that the Polish government’s repayment holidays for mortgage holders have led to significant costs for banks and should not be extended. More than half of mortgage holders took advantage of the holidays last year and the government has indicated that they may be extended to next year.
The KNF has been working on a systemic solution that would rely on the conversion of the problematic loans as if they had been taken out in the zloty from the beginning or, alternatively, based on a calculation of instalments of the NBP’s average exchange rate.
Banks have praised the proposal as “going as far as possible while still being rational,” CEO of mBank Cezary Stypulkowski told Newseria Biznes, a local newswire.
Anything more than the KNF proposal seems to me to be “simply an unjustified enrichment of a relatively narrow group of people and an outflow of banks' capital with far-reaching consequences”, Stypulkowski said.
Poland's Finance Minister Magdalena Rzeczkowska told Bloomberg on March 27 that her ministry is also working on a solution to address the problem but the final proposal will depend on the CJEU ruling.