Polish banks nervously await new proposal on forex mortgage conversion

Polish banks nervously await new proposal on forex mortgage conversion
The president's office has been seeking a way to smooth a big hit on the banks from the conversion of forex mortgages.
By bne IntelliNews June 6, 2016

Polish banking stocks dropped further on June 6 as the sector braced for the publication of a new proposal to force conversion of forex-denominated loans. The Warsaw Stock Exchange’s banking index fell over 3% in morning trade, as details of the new draft bill, expected to be presented by the president's office on June 7, began to leak.

President Andrzej Duda went back to the drawing board on the bill earlier this year, as his first effort was withdrawn over concerns that the cost it would inflict on the banking sector, estimated to run up to PLN70bn (€16bn), would threaten the stability of the financial system. However, the president pledged to address the issue of the 550,000 or so Swiss franc mortgage holders in his campaign for the head of state a year ago.

The sharp rise of the Swiss currency at the start of 2015 saw borrowers' repayments spike. Hungary - often cited as a model for the new Polish government - and Croatia - have implemented conversion schemes in the past year or two. Despite insistence from Warsaw that the eventual Polish scheme will seek to smooth the effect on the banks, the WIG Banki index has been suppressed for over a year by certainty that a big hit is on the way. The issue has also all but stalled the Polish banking M&A market.

According to leaks on the new proposal in the Polish press, the president will now propose to convert loans at historical exchange rates, i.e. the value of the zloty to the Swiss franc on day the loan was originated. The banks would absorb all resulting losses, apart from customers’ gains on lower interest rates compared to PLN-denominated loans, it is reported.

The proposal is not thought to contain a clause dictating the return of spreads banks have been charging on borrowers. “If the banks were not forced to return the spreads, the impact would be smaller by some PLN6bn compared to the last proposal,” analysts at KBC suggest.

Given that the last proposal’s estimated costs potentially ran at around four times Polish banks’ profit for 2015, slicing PLN6bn from the annual tab is unlikely to be seen as a huge improvement by either lenders or the markets. “The conversion of FX loans would be negative for banks and potentially for the economy too,” KBC states frankly.

At the same time, lenders appear continue to fail to work constructively within the framework. The banking lobby ZBP proposed its own latest solution on May 30, but as has been the case since the start of last year, it is seen as unrealistic, applying only to a tiny fraction of outstanding loans.

Warsaw has clearly flagged its determination to fulfill its populist pledge to help borrowers. In a bid to achieve that but also avert destabilising the banking sector, the president's office has long suggested it plans to put the National Bank of Poland into harness in order to spread the costs for the banks and support their balance sheets.

According to the leaked details of the new scheme, lenders would have the option to access capital injections by selling shares to the central bank or state owned development bank BGK, with an accompanying repurchase agreement.

The NBP has stressed consistently that it does not want to take part in any conversion scheme, meaning the proposal could set up a fight. With the possibility that any such scrap could also pull in the EU, the issue threatens to leave huge risk hanging over Polish financial markets for some time to come.

"Such a solution might require changes in other regulations (like the bill on the central bank)," worry analysts at Raiffeisen Polbank. They also suggest the proposal could "raise questions [over] whether [such] support for banks is a kind of public help (which is restricted by the EU)".