Poland’s banking stocks and currency tumbled on Thursday after the country’s top court issued an unfavourable ruling in a closely watched and potentially expensive dispute over foreign-exchange mortgages.
Polish banks have around 104bn zlotys worth of mortgages tied to the Swiss franc on their books, which were issued in the years after the country joined the EU, and have since morphed into the biggest risk hanging over the sector.
Borrowers were initially drawn by the lower interest rates on foreign currency loans. But when the franc surged against the zloty during the financial crisis, and again in 2015, many found themselves facing higher repayments, and thousands went to court to challenge their contracts.
In a ruling on one such case, Poland’s supreme court said on Thursday that the loans could be converted back into zloty without cancelling the contract. It added that the interest paid by borrowers would continue to depend on Swiss franc interest rates, which are considerably lower than the zloty equivalent.
The ruling only applies to one case. But investors fret that the ruling, the first since the EU’s top court delivered its own landmark ruling last month on how to deal with such mortgages, could set the tone for other cases, and require Polish banks to reimburse tens of billions of zlotys to customers.
Bank Millennium, owned by Portugal’s BCP, fell almost 4 cent on the news, while Santander Polska dropped 3 per cent, and Poland’s biggest bank PKO BP slid 2.9 per cent. The Polish currency weakened to its lowest level against the euro since the start of October.
Gabor Kemeny, an analyst at Autonomous Research, said that the ruling was “clearly a negative outcome” for Poland’s banks.
“What the consequences are for the sector will depend on two things: the verdicts in existing cases; and whether this triggers a domino effect and encourages a huge number of clients to go to court and incur the costs of filing a suit,” he said.
“These two factors will determine how much provisions banks set aside — starting probably in the fourth quarter.”
Poland’s banks issued two different types of FX mortgages: those denominated in Swiss francs; and those which were instead merely indexed to the franc.
Until now, banks had assumed that the bulk of the legal risks were associated with indexed loans. However, the supreme court’s ruling raises the prospect that FX-denominated loans could also be affected, meaning that the provisions facing the sector could potentially be higher.
The Polish banking association ZBP estimated earlier this year that in the worst-case scenario, the sector could take a 60bn zlotys hit — albeit spread over several years.