As we noted last week, the Swiss National Bank's decision to un-peg from the Euro (thus strengthening the CHF dramatically) will have very significant repercussions - not the least of which is for Hungarian and Polish Swiss-Franc-denominated mortgage-holders. The 20% surge in Swiss Franc translates directly into a comparable jump in the zloty value of loan principles and and monthly payments for about 575,000 Polish families owing a total $35 billion in mortgages denominated in the Swiss currency which has prompted calls for Poland's government to bail them out. Never mind the FX risk, the low-rates were all anyone cared about and now yet another 'risk-free' trade has exploded, Deputy PM Piechocinski says, if the franc "remains above the 4 zloty level, the government may provide support" to debtors but Poland's Central Bank is not supportive of the bailout.
As Bloomberg reports,
The SNB’s abandonment of its franc floor roiled markets in some eastern European countries, where policy makers have tried to wean borrowers off of foreign currency loans.
While Polish banks stopped granting franc-denominated home loans after the global economic crisis caused the zloty to plunge in 2008, mortgage holders in the country of 38 million are still paying off debt taken last decade when they saw the franc as a way to borrow cheaply in an environment of a strengthening zloty.
Total balance of SFr denominated mortgage loans in Poland stood at PLN131 bn at the end of November which corresponds to 22% and 15% of retail and total lending respectively, and some 8% of Polish GDP. The individual exposures of banks under our coverage differ significantly with MBK, PKO having >20% of Swiss franc loans while the balances of PEO and BHW amount to <5%. SFr lending remains a legacy product, the balance of which has been declining over the recent years (-22% since 2009) and is expected to fall further.
Implications from strong depreciation of PLN vs. SFr predominantly relate to the risks of asset quality and to a lesser extent capital and liquidity. Strong performance of SFr denominated exposures over the last 5 years (2009-14) that came against 28% depreciation of PLN vs. SFr is largely attributable to the fact that mortgage installments remained stable because of declining LIBOR rates. In a press release published today (January 15), the KNF disclosed that according to their stress test, the depreciation of PLN by 30% to circa 4.5 level should not have meaningful and systemic implications for the sector (CET1 - 20bp to 13.3%), while a 50% move (towards 5.1 level) could see banks’ CET1 ratios come under moderate pressure (CET1 -100bp to 12.5%).
We cut our earnings estimates for Polish banks by 3% in 2015 and -3% in 2016 to better reflect weaker asset quality and topline trends; we modestly lower our CET1 forecasts.
And despite the Polish Central Bank's comments that:
- *POLISH CENTRAL BANK GOVERNOR BELKA SPEAKS ON RADIO TOK FM
- *BELKA SAYS CHF LOANS CONVERSION `NOT WISE'
- *BELKA SAYS MOST POLISH CHF BORROWERS WILL BE ABLE TO PAY DEBT
- *POLISH C. BANK MEMBER ZIELINSKA-GLEBOCKA SPEAKS ON TVNBIS
- *ZIELINSKA SAYS IS AGAINST STATE ACTIONS TO HELP CHF BORROWERS
- *ZIELINSKA SAYS IS AGAINST HUNGARY'S STYLE MEASURES ON CHF LOANS
- *ZIELINSKA SAYS POLISH C.BANK SHOULD TAKE NO `NERVOUS' ACTIONS
Here come the populist politicians to the rescue...
The government will watch “further developments on the FX market,” Krystyna Skowronska, head of the parliamentary finance committee and a representative of the ruling Citizens Platform party, said in an interview with Radio 1 on Monday.
Poland’s Financial Stability Committee, whose members include the finance minister, the central bank governor and the financial market watchdog, is meeting tomorrow to discuss the loans. Some commercial banks will also attend, Jacek Bartkiewicz, a central bank management board member, said in interview with Radio 1.
“The Polish government could help borrowers with franc-denominated home loans if monthly repayments are too high compared with their income,” Bartkiewicz said. Such measures could include helping borrowers with monthly installments exceeding “say, 40 percent” of their income or the “transfer of some government aid for new home buyers to those in trouble now,” he said.
Banks should also agree to renegotiate loan contracts with clients, helping them ease the burden of higher debt costs by, for example, extending loan maturities, he said. He added the zloty may remain above 4 against franc “in the mid-term.”
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Perhaps - just perhaps - the 575,000 mortgage holders that exposed themselves directly to FX translation risk all with the aim of lower interest rates to afford thaty bigger home - should learn a lesson from this... one which, it appears, few in the new normal are ever allowed to experience.
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But Poland has a bigger problem than just mortgages. As Goldman Sachs goes on to explain...
Poland appears to be most exposed to CHF strength, given the size of remaining CHF debt. But although a stronger CHF will hit the budgets of households with CHF loans, CHF appreciation should not trigger systemic growth or stability problems.
At PLN131bn, the stock of the remaining CHF loans is still substantial (an equivalent of EUR30.5bn, or 7.7% of GDP), even though banks have not been extending CHF or other FX mortgages for a few years now and the vast majority of new lending has been in the Polish Zloty. Some 550 thousand households still have CHF loans, out of some 700 thousand with FX loans in total (in a country of 38 million) And, unlike in Croatia and Hungary (where FX loans had constituted larger shares of GDP), there has been no policy induced transfer of the currency exposure to banks. FX loans are one of the best performing bank assets (NPL at 3.1%, against an average NPL of 8%).
At current market pricing, a stronger CHF, even if partially offset by lower Swiss interest rates, will still have a discernible impact on household budgets, although it should not trigger a systemic growth problem. Looking at an average household with a CHF mortgage, we calculate that a combination of CHF appreciation against the PLN (some 22%), and the fall in interest rates after the cut by the SNB of around 50bps (CHF mortgages are indexed to CHF rates), will increase an average monthly mortgage payment by some PLN350, or EUR85. In total, the increase would add up to some 0.15%-0.2% of Polish GDP, or 0.25% of private consumption.
While this might not seem that much on a macro scale, an extra PLN350 in loan repayments could subtract some 9% from an average gross wage, or nearly 5% for a higher earning person (CHF loans were more popular among higher earners). Assuming the average income tax burden, higher mortgage payments would reduce disposable income for those earning twice the average salary and having an average CHF mortgage by some 6.6%. Also, more households will be pushed into negative equity (the size of the mortgage will exceed the value of the property); the negative impact on households' net wealth could also affect consumption. And given the high growth multiplier of consumer spending, the impact could be deeper than the initial 0.2% of GDP.
According to the recent stress tests from the Polish regulator KNF and the NBP, a stronger CHF should have a limited impact on overall financial stability. Recent tests indicated that banks can handle a stronger CHF (given that households carry most of the FX risk) and the increase in non-performing loans should also be limited. Also, banks should remain well capitalized even with the CHFPLN at 5.0 (the PLN traded at around CHFPLN 3.5 ahead of the SNB decision). Given that Polish (and many European) mortgages are full recourse, a higher share of negative equity loans will not necessarily trigger a wave of defaults or banks demanding extra collateral (like deposit blocks) or insurance protection from the households. But an even higher share of households with negative equity could cause the real estate market to stagnate.
However, a large CHF depreciation would require additional hedging by banks funded through cross-currency swaps (and not by FX lending from parent banks or FX deposits). We would assume that the regulator has been monitoring these risks; high liquidity in the banking sector should also help with covering those extra funding needs. But with banks being well capitalized, the cost impact should not have a large impact on the sector, although the demand for FX may put additional, occasional pressure on the Zloty. An externally driven increase in PLN volatility increases the risk of the NBP intervening in the FX markets, should the Zloty weaken rapidly over the course of a few days, without a clear domestic driver.
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The Repercussions are only just starting...