The ECJ ruling
Though widely expected, the EU Court of Justice (ECJ) issued two key judgments on Thursday in cases against Polish banks brought by consumers who took out loans denominated in Swiss francs. Both could have major implications for the banks.
The ECJ ruled that banks are not allowed to charge for the cost of capital on the mortgages that judges in Poland declared invalid because they contained unfair terms.
“EU law does not preclude, in the event of the annulment of a mortgage loan agreement vitiated by unfair terms, the consumers from seeking compensation from the bank going beyond reimbursement of the monthly installments paid,” the ECJ said in a statement. “By contrast, it precludes the bank from relying on similar claims against consumers.”
The Luxembourg court also ruled that Polish borrowers may assert additional claims against banks for compensation on paid installments on Swiss franc mortgages.
Banks have suffered a “crushing defeat in disputes with consumers today,” legal adviser Radoslaw Gorski told DW. As the ECJ is the European Union’s final judicial step, he said, “borrowers have obtained the best verdict and can stop being afraid of a lawsuit from the bank.”
Simply put: Banks do not have the right to demand remuneration from former borrowers for noncontractual use of capital after the contract is annulled.
What’s at stake?
The Polish Financial Supervision Authority (KNF) warned in October that the ruling could generate one-off costs of 100 billion zlotys (€23 billion, $25 billion) for lenders, or about 50% of own funds held by local commercial banks.
This in turn could trigger bankruptcies and a collapse of Poland’s financial system, according to the KNF. The maximum level of provisions is now estimated at 115 billion zlotys, though that depends on how many of the loan recipients decide to take the legal route.
The financial regulator described the ECJ verdict as a setback for the banking sector and wider economy but stressed that Polish lenders were safe.
Tadeusz Bialek, president of the Polish Bank Association, said the ruling would hurt banks’ ability to lend, harming the economy.
How did it start?
In the early 2000s, Polish banks encouraged domestic borrowers to take out mortgages denominated in Swiss francs to benefit from lower interest rates in Switzerland.
In 2008, the mortgages taken out in zlotys had an average annual interest rate of 8.7%, while similar Swiss franc-denominated loans issued by local banks had an average rate of 4.4%.
But many borrowers saw their installments spike dramatically, with the Swiss franc almost doubling in value against the złoty after the 2008 financial crisis and then after the Swiss franc was unpegged from the euro in 2015.
In 2019, the ECJ ruled in favor of Polish borrowers who had taken out loans from Polish banks in Swiss francs. The ruling meant that borrowers could ask Polish banks to convert their loans into the domestic currency. Thousands have done so to date.
Which banks are in the firing line?
MBank, owned by Germany’s Commerzbank, has the highest provision to cover its Swiss franc portfolio, with 51.6%, while Bank Millennium and BNP Paribas Bank Polska have coverage ratios of 41.3% and 36.9%, respectively.
Foreign currency mortgages were a key reason for the collapse of Getin Noble Bank, which entered an orderly restructuring in late 2022.
Operating profits should provide a strong buffer to absorb extraordinary costs this year, according to the KNF. “The Polish banking sector is well capitalized and liquid, which translates into its safety and stability,” it said.
ING Groep NV’s Polish unit — ING Bank Slaski — retroactively increased 2022 fourth-quarter Swiss franc mortgage-related legal risk provisions almost fivefold to 293 million zlotys on February 22, up from 63 million zlotys originally.
Bank Millennium and mBank increased their provisions in the fourth quarter, setting aside 478 million zlotys and 430 million zlotys, respectively, to cover a potential fallout. PKO Bank Polski, Bank Pekao, Santander Bank Polska and BNP Paribas Bank Polska made similar moves.
No need to panic, yet
Rating agency Fitch does not expect the ruling to have a major near-term impact on banks’ credit profiles, as it will take time for Polish courts to assess whether customers have the right to additional claims under Polish law.
“This will give banks time to build additional provisions for legal risks and strengthen their capital through earnings retention, unless auditors require immediate recognition of losses,” the credit rating agency Moody’s said.
Polish banks face other issues that could affect their profitability in 2023, including the risk of the government’s extending the mortgage-repayment deferrals and the gradual reduction of net interest margins over the coming quarters.
If these impinge on repayment schedules, banks could be tempted to raise fees and borrowing costs, with a potentially dire impact on already fragile consumer spending.
Edited by: Ashutosh Pandey
