October 23, 2021

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Experts: Foreign currency loans were not a profitable business for banks at all

Experts: Foreign currency loans were not a profitable business for banks at all

If the banks ignored the franc craze that occurred in Poland after its accession to the European Union in 2004, and continued until the major financial crisis in 2008, if they had only granted loans in zloty, they would have come out much better. But so far, converting loans in francs into zloty could allow it to recover.

– For banks, foreign currency housing loan portfolios were not a profitable business at all – Vojisch-Zatto of the University of Lodz said during the webinar “Recalculating Home Loans in Foreign Currency: Capital Costs and Impact on Banks and the Economy”.

why? This is the result of the calculations of economists from the University of Lodz. Of course – they keep – these are accounts for the entire portfolio of these loans in the Polish banking system. Some banks can finance these loans at a cheaper rate, and grant them at different times than others, so they are better at that. But some turned out to be worse.

Let’s start from the beginning. In 2005-11, banks granted Swiss franc housing loans in the amount of 107 billion PLN, of which in 2008 more than 40 billion PLN. From 2012, they practically did not grant foreign currency loans for mortgages. The value of loans in Swiss francs in the PLN comes after the elimination of volatility of the zloty against the franc.

Interest income on the Swiss franc loan portfolio was 28.4 billion PLN. For this, you need to add profits to the currency spread (the difference between the bid and ask price). It consisted in the fact that the bank paid a loan in PLN at a lower rate than the average, a few percent lower, and acceptable installments at a higher rate, so the borrower had to pay a little more. According to estimates by the Polish Financial Supervisory Authority, the banks earned 15.2 billion PLN in this matter. In total, this amounts to 43.6 billion PLN.

But it wasn’t a profit at all. Because the costs should be deducted from these revenues, and these were significant. It is about the costs of obtaining francs, because the banks did not have franc deposits, because Poland is not Switzerland. The Polish Financial Supervision Authority calculated in 2016 that loans in francs were mainly financed by banks from their foreign mothers – 46 percent. But not only, because 40 percent. These were derivative instruments that guaranteed the availability of francs, CIRS contracts, and currency swaps. 14 percent were loans from other banks and debt instruments, such as franc bonds and deposits.
What are the costs of this funding? It was difficult to estimate, because francs were obtained in different ways, and besides, the cost varied greatly over time. But with all reservations, Wojciech Zato estimated that the amount was 19.1 billion PLN. If we deduct the costs from the revenues, we get 24.5 billion PLN in interest income on the loans in francs.

The scientist himself asked how the banks would exit if they did not grant loans in francs at all. Let us remind you that many Polish banks have not joined the franc craze. It turns out that they were much better at it.

Loans in Swiss francs were “cheap”, and banks calculated the most favorable creditworthiness to customers (with low income it was possible to obtain a loan in Swiss francs higher than the zloty). It is unlikely that Polish banks will be able to grant loans in zloty of the same amount, ie 107 billion PLN, on top of what they did anyway. But Wojciech Zatoń assumed that mortgage loans in PLN could have been granted at half that amount. What can banks do with the other half? Buy government bonds, as it is the simplest and least profitable project.

If they did, then instead of granting loans in francs, using loans in zlotys and buying government bonds, their interest income would be PLN 54.6 billion. These loans – like the purchase of bonds – will be funded by PLN deposits. The costs of this financing are relatively easy to calculate and Wojciech Zato put it at 27.1 billion PLN. Consequently, the interest result in the case of this alternative capital allocation will amount to 27.5 billion PLN, which is 3 billion PLN more than the loans in Swiss francs.

The scientist said – even assuming the relatively low cost of obtaining foreign currency loan financing, the result is still less than an extremely simple alternative allocation.

However, this is not the end of the benefits of “alternative allocation” and loan losses in francs. If banks grant loans in zlotys, they will have to “provide” less capital for them, as the risk weight for the zloty mortgage is 35 percent, and for the franc loan – 150 percent. In addition, banks are now being sued for lien payments – depending on court decisions – banks could lose even more than PLN 200 billion, which could lead to the collapse of many institutions and a banking crisis in Poland.

The profitability of foreign currency loans compared to the allocation of alternative capital was lower, ignoring the costs of legal risk. It’s just a sad picture, Wojciech Zatto said.

He said his calculations show that the profitability of the banks, i.e. the return on assets (ROE) ratio, would have been 2-3 percentage points higher in recent years if the banks had not taken out loans in Swiss francs but were only granted. Them in zloty.

Converting loans in Swiss francs into zloty is one possible scenario for resolving the current disputes between the Swiss franc and the banks. The Polish Banking Association just announced that at the end of April, more than 50,000 courts of first and second instance are being heard. More than 12 thousand cases since the beginning of the year. the new. The courts suspended the adjudication of many cases pending Supreme Court decisions that have been postponed several times and have not yet been issued. Of the cases that were legally settled by the courts in 2021, 61 percent. Banks have lost it so far, and 39 per cent. Gains.

According to the currency conversion scenario for loans so that they are considered granted “from the start in zloty”, at the interest rate on the date of grant, at the interest rate of 3M WIBOR plus a margin – according to the Polish Financial Supervision Authority – banks will lose 35 billion PLN. This scenario also envisages that the loan will be re-settled from the date it is disbursed.

Banks could also gain a lot from such a turnaround, says Cheslau Lipinski of the University of Lodz. First of all, about the difference in risk weights between a mortgage in PLN and the Swiss franc. Reducing risk weights reduces risk weighted assets and hence capital requirements. The bank would simply have to have less ‘allocated’ capital, and the capital it is supposed to use to make new loans.

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Chislav Lipinski made calculations on the example of the Millennium Bank, according to its report at the end of 2020. The bank has 14.3 billion Polish zlotys in Swiss franc loans in its portfolio, and it is assumed that it has at least 14.16 percent. The capital in relation to risk-weighted assets, but with reserves has 19.16%. Currency conversion, that is, lowering risk weights, and thus risk-weighted assets in the case of Millennium, would reduce Millennium’s minimum capital requirement to 10.75 percent. This means that the capital surplus will amount to 6.2 billion PLN.

In this case, despite the losses incurred as a result of the currency conversion of the loans, Millennium will be able to continue to exist and have sufficient capital to continue borrowing money. However, other variants to solve the franc loan problem are still in the game, which may shake the foundations of many Polish banks.

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Jacek Ramotovsky

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