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Fitch: FC Mortgage Conversion Plan Manageable for Polish Banks
August 10, 2017 / 3:30 PM / 7 days ago

Fitch: FC Mortgage Conversion Plan Manageable for Polish Banks

(The following statement was released by the rating agency) WARSAW/LONDON, August 10 (Fitch) Losses at Polish banks under the latest plans to reduce exposure to foreign-currency (FC) mortgages should have little impact on ratings for most banks as the process will be spread over time and slowed if necessary to safeguard banking sector stability, Fitch Ratings says. We believe the plans are consistent with our ratings of Polish banks, which reflect our expectation that FC mortgage restructuring will be designed to avoid large one-off losses for banks. The proposals, outlined last week by the presidential office, strongly incentivise banks to convert FC mortgages into local currency. A fund would be financed by mandatory quarterly contributions from banks proportional to their FC mortgage portfolio. The fund would compensate banks for losses incurred on conversion. The net cost to banks would always be at least the contribution they paid in. Unclaimed contributions would be made available to other banks six months after being paid in - a strong incentive for banks to accelerate conversion. The plan would hit banks' profitability, costing the sector up to PLN3 billion (about EUR700 million) a year if the maximum quarterly contribution rate, 0.5% of banks' FC mortgage exposure, is applied. But we believe the Polish Financial Stability Committee would set a lower contribution rate given the capital pressure on some banks and its responsibility for banking sector stability. We therefore expect costs would be manageable for most banks and that any potential negative rating actions would be limited to a small number of banks. The sector reported net profit of PLN6.9 billion for 1H17 (2016: PLN13.9 billion). The sector also faces a one-off cost of up to PLN4 billion if last year's presidential proposal for banks to return the FX spread they charged to FC mortgage borrowers goes ahead. But it now appears unlikely this will be enacted as it would be onerous for banks and would not address risks on FC mortgages - a view that has been expressed by the Financial Stability Committee. The conversion process may run for several years, potentially until the entire stock of FC mortgages is restructured or repaid. Banks would need to offer customers debt relief of at least 20% to keep payments at a similar level after conversion, given the higher interest rates for local currency. We estimate they could convert up to about 10% of FC mortgages annually, assuming the maximum 0.5% contribution rate, and taking into account the likely capital benefit. Banks calculating their capital requirement for credit risk under the standardised approach would benefit significantly from conversion because local currency mortgages have a 35% risk weight compared with 100% for FC mortgages (150% from December 2017). However, the capital benefit depends on the amount converted and the terms offered to customers, and might be not be enough to fully offset losses on conversion. The benefit for banks using the internal ratings-based approach is less clear, as regulatory adjustments to loss-given-default assumptions being introduced from December 2017 have not been disclosed. The latest proposals also aim to broaden support from an existing bank-financed fund for mortgage borrowers in difficulty, by relaxing eligibility criteria and increasing the amount and duration of support available, and introduce support for borrowers whose mortgages exceed their property value when they want to sell. These changes appear tightly targeted and should not be a significant financial burden for banks. Polish banks widely offered cheap Swiss franc mortgages before 2009, and these accounted for about 30% of all home loans at end-1H17. Defaults have been low but banks have suffered from much higher loan-to-value ratios, risk-weighted assets and margin calls since 2015 when the Polish zloty fell sharply against the Swiss franc as Switzerland abandoned its euro ceiling. Contact: Artur Szeski Senior Director, Financial Institutions +48 22 338 6292 Fitch Polska SA Krolewska 16, Warsaw 00-103 Michal Bryks, ACCA Director, Financial Institutions +48 22 338 6293 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: malgorzata.socharska@fitchratings.com. 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