Markets cheered by surprise softening of Poland's forex loans conversion scheme

Markets cheered by surprise softening of Poland's forex loans conversion scheme
President Andrezj Duda has led a push to force banks to help borrowers struggling with Swiss franc loans.
By bne IntelliNews August 2, 2016

Poland plans to launch the “first stage” of a plan to help borrowers of foreign currency loans by pushing lenders to refund 'unfair' spreads, but will hold off for a year on a conversion scheme, asking banks to come up with their own voluntary plans, the president’s office said on August 2. The announcement offered relief to markets anticipating a scheme that would hit the banks hard.

Investors were on tenterhooks as presidential officials and the head of the National Bank of Poland (NBP) presented the latest plan. A conversion plan for forex loans has been mulled since the Swiss franc leapt in value against the zloty in early 2015. Over 500,000 mortgage loans - mostly in the Swiss currency - were taken out by Poles ahead of the crisis.

The plan to introduce a conversion scheme has only anatgonised risk perception for investors in Poland this year. However, contrary to expectations, officials said there will be no bill to force the issue for the time being.

That solution “is not possible in the current conditions,” NBP Governor Adam Glapinski said. Earlier this year, financial market regulator KNF assessed the cost of a first draft scheme produced by the president's office at PLN70bn (16.2bn). Alongside the central bank, KNF warned that would threaten the stability of the banking sector.

For now, Glapinski and presidential minister Maciej Lopinski told a news conference that banks will be forced to refund forex spreads charged on the loans, which were often set arbitrarily. According to the proposal, lenders will now need to recalculate all past repayments using the NBP’s average CHF/PLN rate. The president’s office has previously estimated a refund of spreads could cost up to PLN4bn.

Relief rally

Regarding conversion, banks will be given 12 months to come up with their own scheme on how to deal with the conversion. However, Poland will not just sit back and wait for lenders to come up with a plan, Glapinski warned. The NBP will push them into action by “significantly increasing capital buffers for FX loan portfolios, to make preserving them unprofitable.”

Banks holding forex loans portfolios will receive recommendations setting new risk weights on their exposure to forex loans. If banks still do not offer borrowers conversion, the authorities will step in with mandatory conversion legislation, Glapinski said.

Uncertainty over the government's response to the forex loans issue has been stalking the banking sector for around 18 months. However, many officials have noted that Polish lenders have failed from the start to offer realistic solutions that would ease the pressure on borrowers.

Still, rating agencies and investment banks have warned in recent months that a scheme that would hit the banks hard is a significant risk to Poland's soveriegn credit rating. Investor sentiment is already under huge pressure due to the populist policies of the PiS government, which took power in November.

The response on the markets to the surprise softening of the draft scheme was immediate, and understandably one of relief. The zloty rose 0.7% against the euro, the biggest gainer among 31 major currencies tracked by Bloomberg. Government bonds climbed; the WIG20 stock index rallied 2.2%, before falling back to 1.47%.

The WIG Banki index, which has been battered since the start of 2015, gained 2.86%. Lenders with large Swiss franc loan portfolios led the rally. Getin Noble Bank gained nearly 28% to PLN0.55 per share, while the shares of Bank Millennium moved up nearly 13.5% to PLN5.5. The stock of another FX-exposed bank, mBank, traded at close to PLN346.5 per share, an increase of 11.75%.