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SNB upending mortgages unnerves bank bondholders

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Among the victims of last week's shock surge in the Swiss franc are bond investors in Polish banks, which hold US$35 billion in mortgages denominated in the currency.

[WARSAW] Among the victims of last week's shock surge in the Swiss franc are bond investors in Polish banks, which hold US$35 billion in mortgages denominated in the currency.

Yields on Eurobonds for lenders including PKO Bank Polski SA and MBank SA jumped to five- and nine-month highs after the Swiss National Bank unexpectedly ditched its currency cap. The move sent the zloty tumbling against the franc on concern more Poles will fall behind on repaying franc-denominated home loans.

JPMorgan Chase & Co said the nation's banks may need to make additional provisions for non-performing mortgages in the currency, whose value is equivalent to 6.7 per cent of gross domestic product, data compiled by Bloomberg show. While the zloty plunged 20 per cent against the franc following the SNB action, Polish lenders have adequate capital to withstand a drop of more than twice that, the financial markets regulator said last week, citing results of October stress tests.

"This is clearly negative and increases the risks in the banking sector, which may or may not materialize," Marta Jezewska-Wasilewska, an analyst at Wood & Co, wrote in a research note Jan 15.

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"Polish banks have managed to deal with the FX mortgage issue relatively well since 2008."

The yield on PKO's 2019 euro-denominated bonds rose 39 basis points in the last three days to 1.55 per cent, the highest since Aug 22. The rate on similar-maturity MBank debt soared 83 basis points to 2.34 per cent in the same period.

The currency swing pushed banking stocks on the Warsaw Stock Exchange down by the most in more than three years, with Getin Noble Bank SA, owned by billionaire Leszek Czarnecki, leading declines after a 16 per cent drop on Jan. 15.

Getin's Swiss-franc loans accounted for "slightly" above 20 per cent of total loans at the end of last year, spokesman Wojciech Sury said in an e-mail last week. The bank sees no threat its liquidity levels will fall below the required minimum and is "ready for different scenarios," he said.

Getin and BNP Paribas Bank Polska SA were the only two Polish banks that failed the October tests. They both have already made up for a shortfall in capital.

The proportion of bad loans to total franc mortgages swelled to 3.1 per cent in November last year from below 1 per cent in 2009, according to data from the financial markets regulator, known as KNF. That compares with a 3.6 per cent ratio for zloty home loans and 13.2 per cent for consumer loans.

KNF's October tests showed a 50 per cent weakening of the zloty against the franc would cut local banks' aggregate capital-adequacy ratio by 106 basis points to 13.56 per cent, compared with the minimum required level of 12 per cent.

A "significant" increase of risk in the banking industry was "prevented by the Swiss central bank's decision to cut interest rates by 50 basis points," KNF said in a statement on its website Jan 15.

Borrowers' solvency may be at risk if the zloty stays close to 5 against the franc, PKO's head of strategy, Pawel Borys, said last week.

MBank, which has about 30 per cent of all loans in the Swiss currency, expects the zloty to stabilize at about 4 against the franc, Chief Executive Officer Cezary Stypulkowski said on the day of the SNB decision.

Political Tool The zloty's meltdown was mirrored by the forint, which lost 19 per cent versus the franc on Jan 15. Banks in Hungary may be less affected as the government last year ordered US$14 billion of foreign-currency household mortgages to be converted into forint, reducing their exposure to currency swings.

With Polish parliamentary and presidential elections scheduled for this year, some analysts said there may be a risk similar measures will be applied in Poland.

"The situation of foreign-currency borrowers can be used as a political tool," Jaromir Szortyka, Warsaw-based analyst at PKO's brokerage, wrote in a note last week.

Poland's biggest opposition party, Law & Justice, said Jan 16 citizens should be able to apply to get their Swiss-franc mortgages fixed at the exchange rate before the SNB decision.

"If the franc's strength is sustained near current or higher levels for a longer period, we could see a potential negative impact on capital, earnings and dividends for Polish banks," JPMorgan analysts led by Paul Formanko wrote in a note Jan 16. "In the current robust economic cycle, Polish asset quality is unlikely to be materially impacted."