POLISH BANK AND BORROWER HAVE TOUGH ROAD AHEAD

In 2015, the franc - already appreciating against the zloty - skyrocketed as the Swiss central bank removed a currency cap.Thousands of Polish borrowers took out the loans more than a decade ago to take advantage of low Swiss interest rates but faced higher costs when the zloty slumped. Germany's Commerzbank (CBKG.DE), Portugal's BCP (BCP.LS) and France's BNP Paribas (BNPP.PA) all have foreign-exchange denominated mortgage portfolios in Poland as do domestic lenders such as PKO BP (PKO.WA).

At current, most borrower decided to take the banks to court over clauses they say are abusive and the problem could cost the banking sector over 200 billion zlotys ($53 billion) in worst-case scenario estimates. More than 37,000 lawsuits were filed in 2020, according to data from the Polish Justice Ministry cited by Rzeczpospolita daily. While most cases are won by mortgage holders, there have been variations in how courts treat the issue. This could be resolved by the Polish Supreme Court sitting ,which is expected to determine whether banks agree to sign up to a plan for settlements with clients. All judges of the Civil Chamber of the Supreme Court are scheduled to address six questions from the President of the Supreme Court, clarifying issues surrounding the claims that can be made when a contract is found to have an unfair clause.

In December, the head of Poland's financial market regulator KNF proposed a plan for banks to convert foreign currency loans into zlotys as if they had been taken out in the local currency originally. However, so far only the nation's largest lender PKO BP has committed itself to settlements, with others waiting for Tuesday's guidance. The KNF estimates that the cost to banks of court cases could be between 70.5 billion and 234 billion zlotys, while the cost of its settlement plan would be 34.5 billion zlotys. the Polish banking sector had a net profit of 7.7 billion zlotys in 2020.

If the Supreme Court guidance is unfavorable for the banks, they will need to increase their provisioning against losses related to these mortgages and may lose bargaining power in out of court settlements. In the worst scenario... the banking sector is seriously threatened, a situation in which some banks are insolvent is possible.