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Shaky foundations

As opposition to the merger of Poland’s Pekao and BPH mounts, the banks’ contrasting approaches to foreign currency lending are highlighting concerns over the surge in Swiss franc-denominated mortgages. Nick Spiro reports.
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Europe’s largest cross-border banking deal, the €15.4bn acquisition in June of Germany’s HVB by Italy’s UniCredit, was bound to cause a stir in Poland, where the consequent merger of HVB-owned BPH and UniCredit-owned Pekao would create central Europe’s largest lender with one-fifth of the Polish banking sector’s assets. Yet not even Alessandro Profumo, the chief executive of UniCredit, could have expected such fierce opposition to the tie-up.

Prior to a vote on the merger in February or March by a seven-member Polish banking supervisory commission (KNB), government ministers, including premier Kazimierz Marcinkiewicz, have come out strongly against the link-up, claiming it would harm competition and hurt consumers. A leaked report by advisers to Poland’s finance ministry, The merger of HVB and UniCredit and its consequences for Poland, says the deal would lead to an oligopoly, with Pekao-BPH and PKO BP, Poland’s largest bank, dominating the retail market.

Even if Pekao and BPH eventually do merge (Poland is under pressure from the European Commission to approve the deal after Brussels cleared UniCredit’s acquisition of HVB), analysts point to a clash of styles between the two. The conservative and more risk-averse Pekao shuns foreign currency lending whereas the aggressive BPH has rapidly gained market share through mortgage lending, with 75%-80% of its loans in foreign currency (the highest proportion in the sector).

Regulatory spotlight

After several years of rapid growth, Poland’s residential mortgage market, with just under 50bn zlotys ($15.6bn) in outstanding loans, is under the regulatory spotlight because of the extraordinarily high share of foreign currency borrowing. Just over two-thirds of the stock of mortgage loans in Poland is in foreign currency, one of the highest levels in the EU (see graph below).

Higher borrowing costs in central Europe, particularly in Poland where interest rates were still in double digits as recently as 2002, have fuelled demand for mortgages denominated in foreign currencies, mostly Swiss francs.

Maciej Kossowski, a consultant at Expander, a Polish independent financial adviser (IFA), says: “We are a poor country, our mortgage market is booming and competition among banks to offer attractively priced loans is fierce. Customers can save as much as 300 zlotys in monthly payments if they take out a Swiss franc loan. They are more focused on the price than the currency risk.”

Central bank warning

Foreign currency borrowing has also grown rapidly in other central European countries. In Hungary, for example, high nominal interest rates (6%, compared with 4.5% in Poland and 2.25% in the eurozone) and cuts to the state subsidy scheme for forint-denominated mortgages have increased demand for Swiss franc and euro loans. Yet Poland’s central bank has been outspoken in warning of the risks given borrowers’ exposure to (and limited knowledge of) disruptive swings in exchange rates.

Krzysztof Pietraszkiewicz, head of the Polish Banking Association (ZBP), says: “Mortgages used to be for the elite [of Polish society]. But over the past few years, banks have been gradually penetrating the less well-off groups of society. The mortgage market has become a very important part of our economy, which is why it needs careful regulation.”

In early December, Poland’s banking regulator (GINB) announced that it was considering curbs on foreign currency borrowing. This came on the heels of a report by credit rating agency Fitch, which expressed concern about the rapid growth of foreign currency lending in central Europe. “Foreign currency mortgages have material repayment and reputational risk. While lenders are typically hedged, in nearly all cases borrowers are unhedged,” Fitch warned.

Strong currencies in central Europe (in early January, the Polish zloty rose to its strongest level against the euro since 2002) have hitherto masked the credit risk of foreign currency borrowing. Yet some industry experts fear a repeat of the exchange rate woes that wreaked havoc on Italy’s mortgage market in the early 1990s, saddling borrowers with higher loan payments and tarnishing banks’ reputations.

Mixed opinions

Mr Kossowski believes such fears are exaggerated. “We never experienced a currency crisis, unlike the Czechs and Hungarians. The Polish zloty is strengthening, property prices are rising and we’ll be in the eurozone in five years’ time,” he says.

But Mr Pietraszkiewicz, whose association recommends a ban on foreign currency loans apart from clients who have stable incomes in foreign currency, is not as sanguine. “Can we really afford to wait for a currency crisis to appear? We all agree that the currency risk is real. Our members differ, however, in their risk sensitivity,” he says.

Pekao, along with Allied Irish Banks-owned Bank Zachodni WBK and ING-owned Bank Slaski, generally does not lend in foreign currency. Pekao spokesman Robert Moren says: “It wasn’t an easy decision as we forsook a nice source of income. But we believe having too many loans in FX is risky for both our clients and the bank. We believe customers should borrow in the currency in which they earn. Clearly, UniCredit’s experience in its home market had a bearing on our [mortgage] lending policy.”

BPH, on the other hand, is among Poland’s most aggressive lenders in foreign currency, along with GE Money Bank and Bank Millennium, which is owned by Banco Comercial Portugues. BPH claims it has taken measures to minimise the risks of foreign currency lending. According to a report by Credit Suisse First Boston on central Europe’s mortgage markets, BPH can point to “a non-performing loan ratio in its FX book [of] 1.6%, compared with 4.4% in its zloty book, [while] foreign currency [loan-to-value] ratios are lower and maturities longer”.

Yet Fitch notes that favourable exchange rate movements to date have “lessened the risk of FX mortgage portfolios by lowering the local currency value of instalments and outstanding principal for borrowers”. Robert Sobieraj, an equity analyst at SEB investment fund in Warsaw, says if there was a currency crisis in Poland, “every loan could be a problem. The average duration of these [mortgage] loans is 20 years. There would have to be a very deep and long-term depreciation for the market to suffer”.

Although Poland’s banking regulator is unlikely to ban foreign currency mortgage loans outright, some restrictions are likely. “A blanket ban wouldn’t work. Consumers would find ways to circumvent the ban – for instance, by borrowing abroad,” says Piotr Krawczynski, a consultant at Open Finance, another Polish IFA.

Compromise likely

Mr Pitraszkiewicz expects a tightening of the eligibility criteria for foreign currency mortgages. “We want to stabilise the situation in the mortgage market, given that this is a very promising segment of the industry. Even banks like BPH are not afraid of restrictions. There will be a compromise solution and it will be a victory for the industry as a whole,” he says.

Yet the regulator will have to be careful. The surge in foreign currency loans is partly responsible for the recent strengthening of the zloty. By curbing the growth of foreign currency borrowing, the central bank could remove one of the main props of the zloty, thus increasing the risk of foreign currency mortgages for lenders and borrowers.

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Read more about:  Central & Eastern Europe , Poland