Top Court Exposes Polish Banks to Nightmare FX-Loan Scenario

(Bloomberg) -- Poland’s Supreme Court sent the zloty and bank stocks tumbling as its first official verdict in a case over a foreign-currency mortgage stoked concern the local banking sector is exposed to the most-feared scenario in the $31 billion dispute.

The court said on Thursday that loans -- mostly in Swiss francs -- could be converted back to the zloty at an exchange rate that’s unfavorable for the lenders. Additionally, the interest paid by the client would still be benchmarked against a low Swiss Libor rate rather than a higher Polish equivalent.

The ruling is binding just for one specific case, but could serve as a guideline for common courts and more decisions could now follow the top court’s line, which “according to banks themselves, is the worst-case scenario,” said Lukasz Janczak, an analyst at Ipopema Securities SA in Warsaw.

This is the first published verdict of Poland’s top court after an Oct. 3 ruling in a similar case by the European Court of Justice. The EU court ruling, highly anticipated by around 450,000 borrowers, was seen by investors as not-so-negative for the banks as its wording seemed to rule out the most-feared zloty-plus-Libor scenario. After today’s ruling, it looks increasingly likely that this is the scenario that could become the core one.

To make matters worse for the banks, the Polish Supreme Court ruling referred to a so-called FX-denominated mortgage, granted in 2004 by Bank BPH SA and now on Bank Pekao SA’s books. The FX-denominated loans, which account for about half of the country’s total $31 billion FX-loans, have to date been perceived as less risky for banks than so-called “indexed” mortgages, generally viewed as more unfair for clients.

Investors voted with their feet, sending Warsaw’s WIGBank Index down as much as 2.2% and on track for the lowest close since Oct. 3. The plunge was led by the country’s top lender PKO Bank Polski SA, which has repeatedly assured investors it’s not overly exposed to the FX-loan risk as the majority of its foreign mortgages are denominated rather than indexed. Bank stocks dragged down the zloty, which weakened 0.3% against the euro, the second-worst performer in developing Europe.

The ruling “suggests that the entire non-zloty housing loans portfolio is now a threat for domestic lenders,” Bloomberg Intelligence European Banks analyst Tomasz Noetzel said in an email. “As the number of legal claims is set to rise, provisions to cover the risk will weigh on banks.”

JPMorgan Chase & Co. said earlier this month that as long as there’s no political interference banks should “easily” absorb losses doled out by the courts as their negative impact will be spread over time. Central bank Governor Adam Glapinski called the EU court verdict “moderate” and repeated his view that the financial sector remains stable in Poland.

Polish Banks Brace for FX-Mortgage Pain as Lawsuits Multiply

Up until now, less than 10% of mortgage holders sued their banks, but courts are starting to get flooded with cases. The Supreme Court ruling may encourage even more borrowers to seek justice as Polish courts have to date sided more with the clients. According to Votum SA, the country’s biggest law firm representing borrowers, 54 out of 72 verdicts in the last two months were in their favor.

The ruling isn’t binding for all judges “but it’s the first time that the Supreme Court refers to the EU court’s decision,” Wojciech Bochenek, a lawyer at Votum, said. “It also points to the fact that a consumer is the weaker side in the dispute and should be protected.”

--With assistance from Marek Strzelecki and Adrian Krajewski.

To contact the reporters on this story: Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net;Konrad Krasuski in Warsaw at kkrasuski@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net, Piotr Bujnicki, Maciej Onoszko

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