The June 2022 Financial Stability Report of the National Bank of Poland mentions that Judgements by courts ruling on FX housing loans are overwhelmingly favourable for borrowers.

The majority of cases won by clients involve judgements declaring the invalidity of the agreement (ineffectiveness). The majority of cases heard by courts are judgements of first instance courts (about 70,000 cases compared to about 6,000 judgements of second instance courts). So far, a limited number of decisions have become final (just over 1,500), which represents approx. 2% of the disputed agreements.

Borrowers’ propensity to challenge agreements through civil litigation remains high. To date, more than 80,000 lawsuits have been lodged, which corresponds to approximately 20% of the number of CHF-denominated housing loans. The vast majority of cases (almost 90%) involve loans on banks’ balance sheets (i.e. still being repaid). The line of jurisprudence of common courts and the Supreme Court, which is favourable to borrowers, may encourage more borrowers to file new lawsuits.

The depreciation of the zloty acts in a similar direction, increasing the level of current debt in zloty, despite regular repayment of the principal and interest instalments and higher instalment levels.

The number of banks offering amicable dispute resolution to borrowers is gradually increasing, which may have a positive impact on the final cost of eliminating the legal risk of this portfolio. So far, eight banks have launched programmes to offer out-of-court settlements to borrowers. In three of them, the settlements are offered under the terms consistent with the proposal issued by the Chairman of the KNF, which assumes the conversion of the loan to a PLN loan, so that its parameters correspond to the PLN loan taken out upon the granting of the FX loan. At the end of 2021, the share of such banks in the CHF loan portfolio was about 19%, while the number of settlements concluded by them reached approx. 8,000. Other banks are developing their own concepts of settlement agreements, with different rules of the distribution of costs resulting from the conversion of loans, including, for example, a proposal to convert only the outstanding loan amount. To date, a total of approx. 20,000 settlement agreements have been concluded.

The economic importance of the legal risk associated with the portfolio of FX housing loans remains significant due to the still high share of this portfolio in banks’ assets. As at the end of 2021, CHF housing loans, net of provisions, accounted for approx. 3.3% of the assets of the banks granting them, corresponding to approx. 37% of their Tier 1 own funds.

Since 2020, banks once involved in granting FX housing loans have significantly increased their provisions for risk of this portfolio, which has reduced the pressure on future earnings. The provisions, established mainly for active loan agreements, represented, on average, approx. 25% of CHF loans. As a result of measures undertaken by micro- and macro-prudential supervision, most banks also held capital to cover the requirement on account of the higher risk weight assigned to FX loans (150%) as well as the additional capital requirement under Pillar II. The value of provisions and the additional capital requirements corresponded cumulatively to about one-third of the portfolio value. Differences persisted between banks in terms of the level of that coverage, resulting, among others, from the size of portfolios and the financial strength of individual banks, as well as the strategies adopted to deal with customer disputes. It should be noted that the level of banks’ losses due to the declaration of ineffectiveness of agreements or voluntary settlements concluded with a customer is affected by the exchange rate at which the loan is written down or converted into PLN.

As a consequence, in the event of a significant depreciation of the zloty, the value of provisions established at a given moment in time may be insufficient.

For future costs of banks as well as for the assessment of the current level of provisions, the way of resolving the dispute with customers challenging the conversion clauses will be crucial. At present, the number of court cases is four times higher than the number of settlements. The final share of settlements and lawsuits in the structure of “restructuring” of FX housing loan portfolios will have an impact on the need to create further provisions. Settlement schemes offered by banks are still at early stages of implementation or at an advanced design stage.
At present, this hinders a reliable assessment of the outlook for customer interest in joining settlement programmes, and hence the costs of these schemes.

However, it can be estimated that, assuming the complete elimination of the legal risk related to the portfolio of housing loans in Swiss francs, the amount of additional provisions may vary from approximately PLN 20 billion with the prevalence of voluntary settlements to approximately PLN 50 billion with the prevalence of lawsuits. This means that in the most optimistic scenario considered (75% of the value of the CHF loan portfolio is converted to PLN under settlement agreements), banks would have to create additionally a similar value of provisions as in the last two years. On the other hand, in the pessimistic scenario (agreements corresponding to 75% of the value of the CHF loan portfolio are cancelled), banks would have to set aside, in the form of provisions, the amount over twice as high as the current value of the provision. The long-lasting process of reaching a court settlement means that banks’ losses, although higher than in the case of reaching a voluntary settlement, are more distributed over time.

Banks are currently better prepared for the challenges of restructuring the portfolio of FX housing loans and, in addition, the growth in interest income will support the capacity to create provisions in 2022. Furthermore, banks which will notify customers that they enter into arbitration proceedings in order to present proposals to debtors to amend the terms of the mortgage-backed loan agreement and which will create provisions of the portfolio equivalent indicated in the regulation, will be able to apply a lower risk weight to FX housing loans over 1.5 years, i.e. until 30 September 2023. The lower risk weight may amount to 50%, 75% or 100%. This possibility will have a positive impact on the ability to meet capital requirements in banks whose capital has been reduced by portfolio losses as a result of creating the provisions. Moreover, banks which cancel a part of a loan when converting it from foreign currency to PLN will be able to reduce the CIT tax base.

The war in Ukraine, through its impact on market parameters (exchange rate, interest rates on the loan), may also bear consequences for legal risk associated with the FX housing loan portfolio; however, its impact on the propensity to enter into settlements may be multi- directional. The depreciation of the zloty exchange rate may provide a positive incentive to enter into settlements with banks to convert the debt into PLN, especially for those borrowers who want to reduce their foreign exchange risk in an environment of high uncertainty. An increase in interest rates in PLN will have the opposite effect – conversion to PLN loans bearing significantly higher interest rates than CHF loans may not seem very attractive to borrowers. Due to the asymmetric effect of the two incentives, their combined effect on the propensity of both parties to enter into settlements is difficult to predict. Certainly, a positive stimulus for both parties is the reduction of risk in the environment of high uncertainty triggered by the conflict in Ukraine.

The report can be accessed here:
https://www.nbp.pl/homen.aspx?f=/en/systemfinansowy/stabilnosc.html