Polish bank’s outstanding foreign-currency housing loans, mainly denominated in Swiss francs and extended between 2005 and 2012, stand at PLN 124bn (EUR 28bn). In May 2019, an Opinion from a European Court of Justice Advocate General ruled indexation provisions in mortgage contracts unfair. A final verdict is expected at any moment. In most cases the Court follows the Opinion submitted by the Advocate General.

“A verdict in favour of the plaintiffs will likely result in an increasing number of lawsuits brought against Polish lenders,” said Chiara Romano, senior analyst in the financial institutions team at Scope Ratings and author of a short Q&A on the subject, published today. “The national courts have sided with banks on a number of occasions. However, the ruling will constitute an important precedent.”

Any determination of unfairness could translate either into indexation provisions in mortgage contracts being removed or annulled. Indexation means in essence that the loan was deemed to have been disbursed in PLN, the remaining balance calculated in CHF with instalments also expressed in CHF but debited in PLN; in short, no CHF exchanged hands.

Taking the entire outstanding amount of housing loans denominated in Swiss francs, ca. PLN 100bn or 5% of banking assets as of July 2019, a forced conversion today might reach ca. PLN 44 bn (EUR 10bn) or 3.4x Polish banks’ annual profits.

Millennium, the Polish subsidiary of Banco Comercial Português, has a significant amount of CHF denominated loans, ca. PLN 15bn as of H1 2019.

mBank, the Commerzbank subsidiary, follows closely with PLN 14bn.

As neither of these lenders discloses what share of the overall portfolio is indexed, Scope uses the Polish financial supervisor’s estimate of 55% and assigns a 50% probability of a negative outcome from the verdicts, which would result in a severe impact on the profitability of both lenders. However, the timing of the court decision could help spread the impact of the increase in provisioning over a number of years.

Santander Bank Polska reported ca. PLN 8bn of CHF loans, either indexed or denominated, and disclosed that the share of indexed loans on total FX stands above 80%. This would infer a ca. PLN 270m cost p.a. or a drop of 110bp on the bank’s ROE.

PKO extended most of its CHF-indexed loans between 2010 and 2012, when, compared to 2008, the Swiss franc had already significantly appreciated. Combined with the fact that the bank’s portfolio is significantly smaller, PLN 3.4bn as of H1 2019, the P&L impact would be manageable.

“We do not expect a final ruling from the ECJ on the consequences of abusive clauses to have a catastrophic effect on the Polish banking system,” said Romano. “However, for some lenders the impact on profitability might be significant, even if spread over time. Macroprudential measures could be adjusted if needed, especially if banks’ capitalisation comes under stress.” 

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