European Banks Have Another FX-Loan Ruling to Worry About

(Bloomberg) --

Croatian banks, mostly units of Italian and Austrian parents, have started to feel the heat ahead of a landmark Supreme Court ruling connected to Swiss-franc loans.

The tribunal is due to rule by April whether borrowers who voluntarily converted their mortgages into the euro may seek to have those contracts nullified and win compensation. Should it rule against the banks, their fresh costs related to all Swiss franc loans may reach 20 billion kuna ($2.9 billion), according to estimates from the banking industry and borrowers’ representatives.

The lenders have already taken notice. They doubled their provisions last year, according to the central bank, echoing events in Poland, where lenders raised provisions after the verdict last year by the European Court of Justice opened gates to a flood of lawsuits.

“The duration of the whole Swiss-franc loans story and the surrounding elements of populism -- that no hit is too big for the banks -- increase the impression that this is not a country attractive to investors,” said Velimir Sonje, an economist and owner of Zagreb-based Arhivanalitika consultancy. “In an extreme scenario, banks may have to recover the lost capital.”

Conversion

In 2015, Croatia passed legislation that forced banks to allow $3.4 billion in franc loans to be converted into euros after the Swiss currency surged, leading to higher installments for many borrowers across eastern Europe. The kuna is maintained in a tight band against the euro.

The lenders, including units of UniCredit SpA, Intesa Sanpaolo SpA and Erste Group Bank AG, bore a combined burden of 1 billion euros ($1.1 billion) but individual lawsuits have continued as local courts have delivered contradictory rulings, prompting the Supreme court to step in.

Having a healthy banking system is one of the key conditions for Croatia to adopt the common currency. The government expects a favorable decision from the European Central Bank to join the euro area’s ERM-2 antechamber in the second half of the year.

“Whatever the Supreme court decides, I don’t think it will jeopardize Croatia’s euro project,” according to Danko Sucevic, an independent economic analyst in Zagreb.

Should the court nullify the converted loan contracts, borrowers will seek to be compensated for payments beyond the return of the original capital of the loan and costs related to the initial fixed interest rate -- all denominated in kuna, according to Goran Aleksic, an opposition lawmaker and member of the Association of Swiss-franc Borrowers.

Croat Central Bank Probes if Raiffeisen Sought to Sway Courts

That would make their loans cheaper than any loan ever offered in Croatia. The lenders, among the best capitalized in the European Union, have warned that ensuing costs would dwarf the previous damage, pushing them into losses and hurting their capital positions.

“Such an outcome would create an inequality among borrowers,” said Zdenko Adrovic, director of the Croatian Banking Association. Those who took out the loans in Swiss francs would be “in a much more privileged position than those who from the start borrowed in euros.”

Activist Aleksic, who got elected to parliament on a platform of fighting banks over the contested loans, dismisses such concerns, adding the EU’s top court has in the past sided with the borrowers in Poland and Hungary.

“The question here is whether borrowers were fully compensated by converting Swiss franc loans into euro-denominated loans,” he said. “We don’t think so.”

--With assistance from Irina Vilcu.

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Piotr Bujnicki, Andras Gergely

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