Poland’s household mortgage suspension threatens bank profits

As inflation soars and recession looms in Poland, a break in mortgage payments will be a well-deserved respite for Jakub Rdzanek and his wife.

The couple have seen their monthly mortgage bills soar by more than 70% since the start of the year as the country’s central bank raised interest rates to combat soaring prices.

“Our mortgage suddenly became terrifying,” said Rdzanek, who bought their apartment in Warsaw last August.

The Rdzaneks aren’t the only household breathing a sigh of relief after the Polish government imposed a moratorium on mortgage repayments last Friday.

The move will allow borrowers to suspend payments for eight months, split between this year and next. But as the Polish government gives mortgage holders a credit holiday, banks are warning it will wipe out their profits.

Lenders also say the right-wing government is offering borrowers the mortgage holiday to boost its chances of winning national elections next year. The outcome could depend on the ability of the Polish economy to withstand the double blow of soaring inflation and the war in Ukraine.

It’s not just Eastern Europe seeking pain relief; Governments around the world are facing the challenge of reining in high inflation by raising interest rates, as the cost of living crisis casts a shadow over the global economy.

Banks have been targeted by other governments. Hungary recently announced a one-off €2 billion tax on lenders and energy companies, while Spain said it would tax banks €1.5 billion a year. Romania is also considering lowering mortgage payments for households hardest hit by inflation.

“That idea is obviously starting to catch on elsewhere, so it’s something we have to watch,” said Simon Nellis, managing director of European banking research at Citigroup. “This is clearly a concern for bank shareholders.”

Unlike the Romanian proposal, Poland’s policy is not means-tested. Some Polish regulators had urged the government to limit the scope of the moratorium. “There are also rich people who don’t need this exemption,” Adam Glapiński, governor of the National Bank of Poland, told a news conference last month.

Glapiński also questioned whether the law was going “in a different direction” from the central bank’s monetary tightening efforts. Poland raised its benchmark interest rate in July for the sixth consecutive month to 6.5%, after inflation hit its highest level in 25 years.

Some bankers even hinted that the government had launched a crusade against them. Jarosław Kaczyński, leader of the main government party, Law and Justice, recently proposed a windfall tax on banks that did not pay enough interest on deposits.

Polish banks were on track to report strong profits, but now estimate a combined cost of around 20 billion zlotys ($4 billion) if all eligible mortgage holders skip monthly payments. The moratorium only applies to mortgages taken out in zlotys.

The two largest Polish banks, PKO and Pekao, which account for 40% of the national mortgage market, will be the hardest hit by the change. But the Polish branches of foreign lenders Santander, ING, Commerzbank and BNP Paribas will also suffer.

Commerzbank expects 60-80% of mortgage holders at its Polish subsidiary, mBank, to take the credit holiday. The bank is considering legal action against the Polish government. “Unfortunately, the new legislation in Poland entails considerable one-off charges,” said Bettina Orlopp, chief financial officer of Commerzbank.

Citi’s Nellis expects some banks to take the issue to court, despite the lackluster record of previous attempts to force governments to change their mortgage policy. “The government is stepping in and retroactively changing contracts, which seems a bit mean,” he added.

The Polish housing market is highly exposed to rate fluctuations as the vast majority of Polish mortgages carry a variable rate rather than a fixed rate. In Romania, variable mortgages account for more than 70% of new loans, which has led the Bucharest government to offer mortgage holidays.

Some economists are warning that the suspension of credit in Poland could prove counterproductive, as monetary tightening already threatens to plunge the economy into a technical recession in the coming quarters.

“Banks can become more selective in offering financing,” said Marcin Kujawski, senior economist at the Polish subsidiary of BNP Paribas. The moratorium, he warned, “could lead to tighter credit policies, as well as more entrenched inflation, which could require more interest rate hikes than would otherwise be the case.” .

In another move, the government is seeking a new interbank lending rate as early as January.

However, banks are warning against accelerating a reform of the interbank offered rate in Warsaw, similar to that undertaken to scrap the scandal-ridden Libor rate, which took years to come into force. BNP Paribas is among banks warning that Poland’s rate change could lead to international lawsuits.

“This is a massive reform, it means reassessing all portfolios and also all hedging instruments,” said Przemysław Paprotny, who leads PwC’s financial services practice in Poland. “We have to remember that Polish banks hedge interest rate and currency risk – and this is contracted with international parties.”

Despite the tumult in the banking sector, Parotny said Polish banks’ balance sheets were strong enough to withstand the moratorium. “We do not foresee a dramatic situation that would call for discussions on immediate capital injections,” he said.

The Polish banking market is still embroiled in a decade-long court battle over who should bear the cost for Polish buyers who opted for Swiss franc mortgages in the early 2000s, when Switzerland had much lower rates. to those of Poland. Following the financial crisis of 2008, the cost of these mortgages exploded, in parallel with the appreciation of the Swiss franc against the zloty.

Agnieszka Accordi, audit partner at PwC, said looking at how borrowers finance their homes made sense in the context of Swiss mortgages. Poland, she said, should seek to “close the discussion on whether customers understand what they are paying for”.

When Rdzanek and his wife bought their apartment in Warsaw last summer, their real estate agent advised them to use a variable rate for their mortgage. “It’s a decision I regret for sure,” Rdzanek said. The processing fees charged by his bank had also risen sharply in recent months.

Even at a time of intense political polarization in Poland, the moratorium was overwhelmingly approved in parliament, backed by a left-wing opposition that wants to share credit for helping consumers rather than banks.