Polish Borrowers Hail FX-Loan Victory as Banks Avoid Worst Case
Polish Banks Risk Setback on FX Loan Terms After EU Court Ruling
(Bloomberg) -- Polish banks suffered a setback in a ruling by the European Union’s top court on unfair terms in foreign-currency loans while avoiding a worst-case scenario.
Mortgage holders, who have struggled with spiraling repayments on their mostly Swiss franc loans, celebrated in Warsaw, hailing the verdict as a breakthrough. An index of Polish bank stocks dropped just 1.1% as some analysts said the ruling wasn’t a full victory for borrowers. The zloty strengthened in volatile trade.
- The ruling opens a path for the conversion of mortgages into zloty at the rate which prevailed on the day the loan agreements were signed.
- However, the verdict reveals “skepticism” toward allowing converted loans to continue to be based on Swiss franc money market rates. If Polish courts were to allow that, it would boost bank losses further.
- Polish courts will now decide if the loans are maintained at their initial value -- counted in zloty -- or annulled, with approval from the borrower. It’s not clear, however, how disputes regarding already paid installments will be settled.
“The decision creates uncertainty about the overall amount and timing of potential bank losses,” said Georgi Deyanov, an economist at Morgan Stanley. Nevertheless, it “represents less of an immediate risk about the banking system as a whole.”
Unfair terms in such loan contracts “cannot be replaced by general provisions of Polish civil law,” the EU Court of Justice said in its ruling on Thursday. If, once those unfair terms are removed, and the nature of the contract risks changing, “EU law does not preclude the annulment of those contracts.”
Financial Engineering
At the heart of the issue is what seemed like a clever bit of financial engineering that many Polish home buyers enjoyed before the 2008 financial crisis. Assuming that the zloty would indefinitely maintain its value-increasing run, mortgage holders took out foreign-currency denominated loans, with the Swiss franc proving particularly popular.
But when markets turned in the wake of the global banking meltdown, the equation no longer worked as the zloty began its long descent. To date, the currency lost about half of its value against its Swiss counterpart over the past 11 years. Poland now faces the burden of $31 billion in non-zloty loans that have left many homeowners struggling to reduce their debt or have pushed them underwater with mortgages exceeding their property values.
Valuations of Polish banks and the zloty currency declined in past months due to concern that lenders will need to boost provisions, eroding profit. Regulators have repeatedly played down concerns, while the government on Thursday said that it has tools to help banks deal with the impact of the ruling, if needed.
“The ruling is seen as a favorable outcome for mortgage holders, hence Polish banks shares are lower,” said Christopher Shiells, an analyst at Informa Global Markets. “However, this will be decided on a case by case basis and could take a very long time to sort out, and in previous cases of these types the banks end up winning most of the time.”
Swiss Temptation
Poland’s central bank Governor Adam Glapinski said this week that the country’s lenders are “very stable and well secured.” The industry’s average Tier 1 capital ratio, at 16.9%, is slightly above the European average.
Lenders exposed to foreign-currency mortgages have also been required by the regulator to accumulate additional capital buffers. The country’s banking lobby said it’s too early to revise its view over potential losses to the industry -- which it earlier estimated at up to 60 billion zloty, or four years of profit.
Thousands of Polish borrowers tempted by low interest Swiss franc mortgages more than a decade ago have sued for refunds after the depreciation of the zloty made their monthly repayments soar. They argued abusive terms in their contracts enabled the bank to set rates unilaterally in violation of the law.
Should they annul the disputed contracts, Polish courts would then be required to find a method to settle financial claims by both sides, including monthly installments to banks in remaining years. Poland’s Supreme Court said in August that such settlements should refer to the initial value of loan measured in zloty rather than to its current value.
That’s music to the ears of disgruntled borrowers.
“This verdict is a breakthrough,” Barbara Husiew, a director at the ‘Stop Banking Lawlessness’ group said in Warsaw as her colleagues popped champagne bottles in celebration. “The chances of borrowers winning lawsuits have significantly increased and it would be tough to imagine that anyone with a franc mortgage wouldn’t take advantage of this.”
The case is: Kamil Dziubak, Justyna Dziubak v. Raiffeisen Bank Polska SA.
--With assistance from Dorota Bartyzel, Konrad Krasuski, Adrian Krajewski, Maciej Onoszko, Piotr Bujnicki and Marek Strzelecki.
To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net;Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net
To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, ;Wojciech Moskwa at wmoskwa@bloomberg.net, Peter Chapman, Andras Gergely
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