Poland’s Top Bank Proposes to Spend $1.7 Billion to Exit Franc Loans

PKO Bank Polski SA wants to set aside the equivalent of two years of profit to settle with holders of Swiss franc mortgages amid a deadlock in industry talks over resolving the country’s $32 billion pile of foreign-currency loans.

By breaking ranks with its peers, Poland’s biggest bank is seeking to quickly close the chapter on legacy lending that have made local lenders a target of multiple lawsuits and kept their valuations depressed.

To sweeten the message for investors, PKO also said it’s prepared to buy back as much as 10% of its shares with surplus capital which can be released by the resolution of the franc-loan issue. The stock traded 0.5% lower on Tuesday.

For months, PKO tried to coalesce the industry’s biggest players -- including local units of Commerzbank AG, Banco Santander SA and BNP Paribas SA -- around out-of-court settlements that are expected to cost at least 35 billion zloty. The talks have practically stalled because of concerns over legal risks and ahead of next month’s opinion on the issue by the Supreme Court.

“We are determined to clean up the issue of franc loans,” Rafal Kozlowski, PKO’s Chief Financial Officer, told Bloomberg. “With almost 19 billion zloty of surplus capital, we can afford both the settlements and the buybacks, which we see as an alternative to dividends.”

Poland’s Top Bank Proposes to Spend $1.7 Billion to Exit Franc Loans

At its April 23 shareholders meeting, state-controlled PKO will seek approval to create a 6.7 billion zloty ($1.7 billion) fund to cover costs of non-zloty loan settlements, according to a regulatory filing on Monday. In 2019 and 2020, the bank made a combined 6.68 billion zloty.

Positive Reviews

PKO said out-of-court deals with clients, where loans are converted into zloty based on the exchange rate from the date they were granted, was “the most advantageous option.” The bank wants to start offering settlements “immediately” after shareholder approval, before more creditors decide to sue the lender.

Tomasz Noetzel, an analyst at Bloomberg Intelligence, said PKO’s push for settlements is a “boon for investor sentiment” as it increases prospects for future dividends as well as for improving the bank’s return-on-equity ratio to near 10%. Wood & Co brokerage’s Marta Jezewska-Wasilewska described the announcement as positive, allowing the bank to move forward with growth plans.

To limit risk that settlements could later be disputed, PKO wants to sign agreements with clients at the financial regulator’s arbitration court, which would strengthen the credibility of the deals.

One of the sticking points for the industry has been how to convert loans in a way that won’t trigger a slump in the zloty as banks rush to obtain Swiss francs. Lenders have asked for the central bank to assist in the process, but Governor Adam Glapinski set stiff conditions for the aid.

Conversion ‘Alternative’

Kozlowski said PKO already has deals in place for sourcing Swiss francs and to close its currency position if central bank help isn’t available.

“We have an alternative,” he said, without elaborating on the details of potential transactions. “We haven’t wasted our time, as we see that our Swiss-loan fix, together with Supreme Court rulings, may trigger, over a short period of time, significant demand for francs by banks.”

PKO holds about 24 billion zloty of foreign-currency mortgages with more than 100,000 households. While the lender’s portfolio is the biggest in the industry, its share in total assets remains relatively low at 6.3%.

PKO also plans to create a 4.5 billion zloty fund for share buybacks, which can be tapped when the bank’s market price is below 95% of its book value, as it has been since the start of the pandemic. It plans to gradually use the fund over a five-year period, if the proposal gains regulatory approval.

The bank, whose shares have advanced 9.7% this year, is now at a price-to-book ratio of about 87% and last traded at or above 95% in the first quarter of 2020.

©2021 Bloomberg L.P.

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