Polish Bank Stocks Brace for ‘Emotional’ Reaction to EU Ruling

(Bloomberg) -- Warsaw’s banking stocks are bracing for a stress test as the top court in the European Union prepares to deliver a verdict on allegedly abusive terms in foreign-currency loans sold to home buyers in Poland.

For a decade, selling Swiss-franc mortgages to Poles seeking cheaper ways to fund their home purchases proved a fast way for local lenders to gain customers. The strategy has backfired, with a legal battle over whether some clauses in the agreements are unfair driving a 5.7% slump in bank stocks this year, a worse performance than their western Europe peers.

The European Court of Justice is expected on Thursday to set guidelines for how Polish courts should deal with the contentious clauses. Poland‘s Advocate General has already sided with customers, indicating in May that local courts should remove contested currency indexation from the contracts, without amending other parts. Following this approach could force lenders into asset writedowns as loan values are converted back to the initial zloty values.

Read more: A Guide to the FX-Loan Ruling Rattling Poland’s Zloty and Banks

Thursday’s ruling may hold varying implications for individual banks and the market may be “volatile and misleading” in its wake, said Slawomir Sklinda, deputy head of asset management at PKO Bank Polski TFI SA, Poland’s biggest mutual fund. A judgment that proves supportive to the sector could even transform banks into a driver for gains in local equities, he said.

Uneven Risks

Polish lenders have 125 billion zloty ($31 billion) of foreign-currency mortgages on their books. While the local banking association estimates total costs in worst-case scenario of as much as 60 billion zloty, four times its combined annual profits, the true picture will depend on how many clients proceed with lawsuits and how long it takes the courts to process them. Plus the risks aren’t spread evenly among the banks, with Getin Noble Bank SA, Millennium Bank SA and MBank SA seen as the most exposed.

Investors may have so far failed to fully account for an additional variable: how lenders intend to cope with the strain on their finances, said Marta Jezewska-Wasilewska, head of research at Wood & Co. in Warsaw.

“The market hasn’t priced in a negative scenario assuming that several lenders will need additional capital,” Jezweska-Wasilewska said by phone. “While the market may be volatile and emotional, the most important factor will be the approach of auditors to their provisioning policy after the ruling.”

Jezewska-Wasilewska doesn’t expect an immediate impact on banks’ write-offs from the court’s verdict in her base scenario, as lenders and their auditors will probably wait to see outcomes in local courts and for statistics on new lawsuit flows before making any adjustments.

Key Events:

• Oct. 3, 9:30 a.m. Warsaw time: Ruling in case C-260/18, Kamil Dziubak, Justyna Dziubak v. Raiffeisen Bank Polska SA in Luxembourg
• Oct. 3, 12:30 p.m. Warsaw: Polish bank association due to comment on judgment
• Oct. 9-10: First local banking congress, with CEOs attending where the EU ruling will be a major point of discussion
• Oct. 28: Bank Millennium third-quarter earnings
• Oct. 30: MBank, Santander Bank Polska SA third-quarter earnings

To contact the reporter on this story: Konrad Krasuski in Warsaw at kkrasuski@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Paul Jarvis

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