Polish Bank at Last Reckons With Mortgage-Loan Disaster

(Bloomberg) -- Poland’s MBank SA is finally facing up to potential losses from a legal battle over Swiss-franc loans in a sign of accumulating pain for the country’s financial industry.

The unit of Commerzbank AG will set aside a record 439.5 million zloty ($118 million) to cover risks from its foreign-currency mortgages in the final three months of 2020, likely putting the lender in red for the quarter. The unexpected move could prompt other Polish banks to follow suit, analysts said.

The step marks a climb-down for MBank Chief Executive Officer Cezary Stypulkowski, who has spent years arguing that lawsuits from disgruntled clients aren’t justified after their debt ballooned due to the Swiss franc appreciation against the zloty.

Yet the 2019 ruling from the European Union’s top court has turned the tide in the legal saga in favor of borrowers. Bank clients won 95% of lawsuits involving foreign currency loans in the fourth quarter, according to data compiled for PAP news agency by Votum Robin Lawyers, a legal firm that advises in cases.

The long-festering dispute is starting to find its resolution at the moment when Polish banks are already hurting from near-zero interest rates and could face a wave of defaults from companies hit by pandemic restrictions. The banking watchdog has already asked lenders to refrain from dividends at least until the middle of the year.

“The scale of provisioning is large as MBank is the most involved lender in court disputes,” Michal Sobolewski, an analyst at BOS Bank SA, said in an email. “Other banks will boost their provisions as well, but the scale may be smaller.”

MBank accounts for a quarter of all Swiss-franc loan cases brought by clients against Warsaw-listed lenders, according to Bloomberg calculations. Additional provisions, which were announced after the market close on Tuesday, will increase total amount of write-offs to 8% of MBank’s portfolio of foreign-currency mortgages.

While the string of legal victories by borrowers has spooked investors and triggered a selloff in banking stocks, the case is still far from being settled for good.

The 2019 verdict stopped short of specifying how Poland’s notoriously overwhelmed courts should split the bill from loan contracts that have been annulled. Judges are now looking for Poland’s Supreme Court to provide some guidance in the first ruling expected on Feb. 16. The top EU court was also asked to weigh in.

New Proposal

Polish financial watchdog has also sought to resolve the dispute over as much as $31 billion in Swiss franc mortgages. Last month, it proposed that banks should offer customers out-of-court settlements, in which they treat such loans as if they had been denominated in the local currency.

If adopted, such a solution would force banks to take significant one-off losses, but could alleviate legal uncertainty in the long-run. The proposal has so far received a lackluster reception from bank executives, who are concerned it may not provide sufficient protection against future lawsuits.

For now, the watchdog is holding “intense consultations” with banks interested in settlements to set standards for drafting such agreements, according to its spokesman Jacek Barszczewski. MBank’s spokesman Krzysztof Olszewski declined to comment.