Will The 'CHF-Mortgages' Story Trigger A Wave Of Capital Calls At European Banks? - Part 1

by: Renaissance Research


The Poland’s FX/CHF-mortgages story represents a significant systemic risk to the European banking sector.

The conversion of FX-loans into zloty at historical exchange rates would result in a significant deterioration in the banks’ asset quality.

Most leading Polish banks are owned by Western Europe’s parents, hence there is a contagion risk.

In this series of articles, we will be looking at the Polish FX-mortgages story and its implications for European banks and Citigroup.

The FX-mortgages story

The risk associated with Polish banks' significant exposure to FX-denominated mortgage loans (43% of the sector's total mortgage book and 17% of its total loans) has moved into the spotlight as the Polish zloty (PLN) has kept depreciating against the Swiss franc (CHF), in which the bulk (circa 83%) of FX mortgages outstanding are denominated.

To recap, the CHF-denominated mortgages were very popular in Poland in 2007-2008, as the clients were benefiting from the low Swiss interest rates and the Polish zloty appreciation.

Source: Bloomberg

The Polish zloty was the strongest vs the Swiss franc in 2008, having now significantly depreciated from the peaks due to a number of events: a) the 2008-2009 global financial crisis; b) the 2011 European debt crisis; c) The Swiss National Bank abandoned the CHF peg in 2015.

Source: Bloomberg

Source: Bloomberg

Moreover, housing prices in Poland peaked in 2007-2008, have since come off circa 20% in the secondary market.

Source: NBP

The CHF-mortgages NPL ratio is on the rise

The Polish banking regulator has recently been active in discouraging FX mortgage lending and imposed a number of new regulations ("Recommendation S";"Recommendation T", etc.). The FX-denominated mortgages now represent 43% of the sector's total mortgage book vs 71% in 2009:

Source: NBP, Renaissance Research

According to NBP (National Bank of Poland) data, mortgage loans have the lowest proportions of NPLs compared with all the other categories of loans:

Source: NBP, Renaissance Research

Having said that, unlike with corporate loans or even PLN-mortgages, the CHF-mortgages NPL ratio is clearly on the rise:

Source: NBP, Renaissance Research

It is also worth mentioning that the difference between NPL ratios in zloty and FX-mortgages is not quite an accurate reflection of reality, as banks tend to convert non-performing mortgages from FX into zloty.

The government mulls converting FX-loans into zloty at historical exchange rates

Last January the ruling Civic Platform drafted a law that would force banks to convert FX- loans into zloty at "historical exchange rates". There is no final decision yet, however, should the parliament approve this plan, that would result in a significant deterioration in the banks' asset quality.

Why is it so important for the European banking sector?

Given the fact that most leading Polish banks are owned by Western Europe's banks (more than 50% of the sector's total assets), the FX-mortgages story represents a systemic risk to the European banking sector.

Source: Company data, Renaissance Research

In the next article, we will stress test the FX mortgage portfolio, looking at the key moving parts: the exchange rate (PLN/CHF), the Swiss franc interest rate, average wages and property prices in Poland. We then use them to estimate their combined impact on the consumer‟s debt burden (monthly payment/monthly income) and LTV of the mortgage loan books, which we view as the key variables that affect loan quality.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.