Poland: Bank M&A threat from Swiss franc mortgage move
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Poland: Bank M&A threat from Swiss franc mortgage move

$5.8 billion bill for loan conversion; portfolios ‘impossible to price’, say analysts.


President Andrzej Duda must approve or veto Civic Platform’s draft bill to force banks to convert part of their foreign-currency mortgage portfolios into zloty

Rising regulatory and political risk in Poland ahead of parliamentary elections in October has knocked bank valuations and could scuttle planned disposals, say analysts. 

Poland’s main opposition party, Law and Justice (PiS), which had a commanding lead in the polls in early September, has promised to introduce a tax of 0.39% on bank assets. It has also led a campaign to force banks to bear the cost of converting large portfolios of Swiss franc mortgages into zloty at historic exchange rates.

Granting foreign currency loans to retail borrowers was banned in Poland in 2009 but more than half a million households still hold Swiss franc mortgages worth Z144 billion ($38.2 billion). Although non-performing loans in the segment are lower than for zloty borrowers, PiS’s position has proved increasingly popular with voters since the Swiss National Bank’s decision to lift the cap on its currency in January.

This also appears to have prompted the governing Civic Platform party to harden its stance on the issue. In July, it sponsored a draft bill to force banks to convert part of their foreign-currency mortgage portfolios into zloty, with losses being split evenly between lenders and borrowers. After amendments by left-wing parties, however, the bill that was passed by Poland’s lower house on August 5 requires banks to bear 90% of the cost of conversion of a wider range of FX mortgages. 

Many of these borrowers are characterized by above-average incomes and are in a stronger financial position than a signification proportion of zloty mortgage-holders

KNF, The Polish Regulator

The revised legislation allows all borrowers holding mortgages with a loan-to-value ratio of more than 80% on properties of less than 150 square meters – or 100 sqm for apartments – to apply for conversion to zloty at historic rates at any time in the next five years. According to the KNF, the Polish regulator, 159,000 mortgage-holders would be eligible for conversion.

The changes to the bill prompted a strong reaction from Poland’s banking authorities. In a statement in mid-August, the KNF said there was “no justification” for granting extraordinary assistance to Swiss franc mortgagees. “Many of these borrowers are characterized by above-average incomes and are in a stronger financial position than a signification proportion of zloty mortgage-holders,” the regulator said. 

The KNF put the total cost to banks of the revised bill at Z21.9 billion, compared with Z13.6 billion for the original proposal. It also noted that, for six of the banks most exposed to the segment, losses incurred could exceed three years’ worth of earnings and shave 20% off their equity

Poland’s Financial Stability Committee also spoke out against the bill, warning that the legislation threatened the stability of the Polish financial sector and would also curb economic growth by restricting banks’ ability to lend. 

Meanwhile, Poland’s banks promised legal challenges if the bill is ratified. The Polish Banking Association (ZBP) said the legislation could be unconstitutional, while foreign parents of Polish subsidiaries – which account for roughly 60% of the sector by total assets – said it could breach international agreements. 

The final cost to banks could be even higher than current estimates. The bill is due for discussion by the Polish Senate in early September and will then return to the lower house for final review before passing to president Andrzej Duda for approval or veto. 

The range of potential outcomes is huge

Piotr Romanowski, PwC

Duda, a former PiS member, campaigned in May on a promise to force banks to bear the full cost of converting all FX mortgages into zloty at pre-2008 rates. PiS has also expressed support for the proposal, which it is estimated could cost the banking sector as much as Z64 billion – an additional threat, given that time is running out for legislation to be passed before elections on October 25.

The uncertainty over the issue risks scuppering planned bank disposals in Poland as Swiss franc mortgage portfolios are almost impossible to price in a transaction context, according to Piotr Romanowski, CEE/CIS advisory leader at PwC. “The range of potential outcomes is huge,” he says.

Banks for sale in Poland include Raiffeisen Polbank and GE’s BPH Bank, both of which have large Swiss franc mortgage portfolios. Analysts say sellers will likely have to retain risks related to these loans to get deals done, particularly as the KNF has intimated that it will prevent banks from shirking their foreign-currency mortgage responsibilities. 

Raiffeisen is considering carving out its €3.2 billion Swiss franc portfolio to facilitate a sale. Even so, local bankers say the Austrian bank could face further challengesgiven its need to achieve a price of at least book value for Polbank to boost its capital base. “It is not at all obvious that they can get this price in Poland,” says one. Even healthy Polish banks such as market leader PKO BP saw their share price slump by nearly 30% in the past 12 months. 

Warsaw locals say politics could also derail Polish insurer PZU’s bid to create a new top five banking player by consolidating smaller lenders. The state-controlled firm bought Alior Bank in May and is said to be leading the bidding for both BPH and Polbank. 

The plan has the backing of Civic Platform but could be stalled in the event of a PiS election victory, according to one analyst. “Whether PZU’s supervisory board would be willing to approve acquisitions worth Z2 billion or so under a new administration that would be delighted to find reasons to criticize and even replace them must be open to question,” he said.

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