Polish Banks Await Judgment on $31 Billion Saga Over Franc Loans

(Bloomberg) -- Polish lenders with foreign-currency mortgages face a crucial Supreme Court ruling that may determine their exit strategy from the decade-long Swiss franc loan saga.

The tribunal’s Civil Chamber is meeting from 10 a.m. in Warsaw on Tuesday to answer six questions asked by Supreme Court President Malgorzata Manowska in an effort to clarify the legal status of $31 billion of non-zloty mortgages held by about 430,000 Polish households.

The hearing, already postponed twice, will be key to how lenders approach the disputed loans after they wrote off 6.8 billion zloty ($1.8 billion) for legal risks. Warsaw-listed bank stocks gained ahead of the sitting amid hopes that the decision won’t further weaken their position in suits against clients.

The ruling is an attempt to streamline and speed up verdicts of clogged lower courts. A favorable verdict for consumers could encourage more court suits and undermine their willingness to settle out of court with lenders, including local units of Commerzbank AG, BNP Paribas SA and Banco Comercial Portugues SA.

On the other hand, a decision that isn’t “explicitly biased against banks should meet with a mildly positive reaction from the market,” said MBank SA analysts Michal Konarski and Mikolaj Lemanczyk. That would be a repeat of what happened after the European Union’s top court weighed in on the issue two weeks ago.

‘Legal Objections’

Commerzbank’s MBank and BCP’s Bank Millennium SA both gained more than 5% on Monday ahead of the decision, while ING Bank Slaski SA, Santander Bank Polska SA and PKO Bank Polski SA all traded more than 3% higher.

Read More: Banks Surge as EU Judges Pass the Buck on FX Loans

The hearing could be affected by the legal limbo caused by controversial court reforms, the subject of numerous lawsuits by the EU executive over the alleged erosion of judicial independence by the Polish government. Rzeczpospolita, a daily, reported on Monday that it’s not clear if any “legal objections” will arise during the sitting, citing Civil Chamber boss Dariusz Zawistowski.

The full Civil Chamber consists of 18 judges appointed in the old system and 10 chosen by a revamped National Council of the Judiciary, a body which has been widely criticized for being stacked with political appointees. Infighting between the groups may further delay the ruling and highlights the legal risks of doing business in Poland six years after the Law & Justice party started its judicial overhauls.

Abusive Clauses

In the first three questions, Justice Manowska asked if loan agreements can still be valid once they are ruled to include “abusive” foreign-currency calculation clauses.

If the answer is yes, then can the abusive clause be replaced by a different method of calculating exchange rates. In practice, this has meant loans being based on the central bank’s daily currency fixing. Or, should the loan be considered as being denominated in zloty following the elimination of the abusive clause, and recalculated at the exchange rate from the date that the mortgage was taken.

The loans would still have interest based on the Swiss franc Libor rate since that clause wasn’t deemed abusive. Exchanging the loans into zloty, while continuing to have them based on Swiss interbank rates, would cost banks 78.5 billion zloty if all clients, current and those who have already paid back their mortgages, decide to sue and win, according to the Polish financial markets regulator KNF.

Bank Compensation

If the loan agreement becomes void once courts rule that it included abusive clauses, the question is whether banks should be compensated for their capital. Banks have counter-sued their clients in a bid to force them to pay back the capital as well as interest. If lenders are able to claim back their capital, in zloty, as well as interest, they would stand to lose as much as 70.5 billion zloty, according to the KNF.

If banks wouldn’t be able to gain compensation for lost interest, their costs would rise to as much as 101.5 billion zloty. In the worst case for lenders, their costs would spiral to 234 billion zloty if courts ruled that their potential counter-claims were already overdue. However, last week’s decision by the Supreme Court reduced the risks of this scenario happening.

Read More: Poland at a Turning Point With Franc Loans: QuickTake

After the verdict is announced, banks will have to decide whether to continue preparations for large-scale out of court settlements or try to wait out the wave of lawsuits. For borrowers, accepting settlements may cut their current loan burden by about 30%, but court battles could end in much bigger payouts later on.

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