Banks in central and eastern Europe (CEE) are facing heavy losses on Swiss franc mortgages after politicians in the region rushed to implement measures to protect householders from the effects of the currency’s dramatic appreciation.
Swiss franc mortgages were hugely popular in emerging Europe in the run-up to the financial crisis and several countries still have large retail exposures in the currency. In Poland and Croatia, household debt in Swiss francs amounts to 8% and 7.2% of GDP respectively, while in Romania it stands at 4.3% of total lending.
The Swiss National Bank’s decision on January 15 to remove the cap on its euro exchange rate therefore prompted calls from politicians and debtors across the region for banks to share the pain of the subsequent 20% appreciation of the Swiss currency with mortgage holders.
In Poland, where parliamentary and presidential elections are due this year, the opposition Law and Justice party demanded a Hungarian-style solution to the problem. Hungary, which until November had the largest holdings of Swiss franc mortgages in CEE, completed a forced conversion of the entire debt stock into forint shortly before the SNB’s announcement.
The party’s demands were initially rejected by Polish policymakers. Speaking at Euromoney’s annual CEE Forum in Vienna on January 21, National Bank of Poland board member Andrzej Raczko rejected the Hungarian model as unworkable.
Instead, finance minister Mateusz Szczurek backed proposals by banks to refrain from increasing collateral requirements on Swiss franc mortgages, reduce the foreign exchange spread used to calculate repayments, and offer loan extensions, repayment holidays and optional conversion to zloty for struggling households.
Lenders also agreed to pass on negative Swiss franc interest rates to customers, a key requirement of the Polish government. The Polish Bank Association, however, rejected calls by Szczurek to accept negative total interest on loans, saying it would violate banking laws. In response, the country’s antitrust regulator UOKiK launched an investigation into whether banks had illegally forced mortgage holders to sign contracts ruling out negative interest rates.
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Polish central bank governor Marek Belka had previously put the total cost to the banking sector of such a forced conversion at $2.7 billion. Not all lenders, however, would be equally affected. At the country’s two largest banks, state-owned PKO BP and UniCredit’s Bank Pekao, Swiss franc mortgages account for only 16% and 4% respectively of total loans.
By contrast, Swiss franc loans make up 42% of the total at Bank Millennium, 34% at mBank, 31% at Getin Bank, and 29% at Raiffeisen Polbank. Marcin Mrowiec, chief economist at Bank Pekao, said Swiss franc lending was particularly popular with smaller banks looking to increase their market share. He added that, combined with weaker than expected growth in the Polish economy, the fallout from the Swiss franc appreciation could spark further consolidation in the sector.
Meanwhile, capital ratios in Poland are high, limiting the risks to the banking sector as a whole. Stress tests carried out by the local banking regulator before the SNB’s announcement estimated that even an increase in the Swiss franc-zloty rate to 4.50 – above the high of 4.40 reached last month – would only shave 24bp off the sector’s capital adequacy ratio of 14.62%.
Banks in Croatia are also well-capitalized but, with the economy emerging from six years of recession, retail borrowers are less buoyant. The country is also due for parliamentary elections this year, which analysts said likely influenced the decision of prime minister Zoran Milanovic to impose a 12-month freeze on the exchange rate on Swiss franc mortgages at pre-SNB levels.
Eight of the country’s 37 banks are affected, including the local operations of UniCredit, Intesa Sanpaolo, Erste and OTP. Intesa subsidiary Privredna Banka Zagreb, Croatia’s second-largest lender, which has 6.5% of total loans in Swiss francs, put the cost of the exchange rate freeze at €7 million to €8 million.
Ministers said further measures were being considered, including turning Swiss franc loans into long-term lease agreements and wholesale conversion of loan portfolios into local currency. Boris Vujcic, Croatia’s central bank governor, said the latter option could reduce the country’s currency reserves by 30%.
Meanwhile in Romania, where Swiss franc loans total around $2.5 billion, the reaction by policymakers was more restrained. Despite street protests by debtors, finance minister Darius Valcov ruled out forced conversion and said government measures would be limited to widening tax credits for borrowers.