January 15, 2016 / 1:22 PM / 4 years ago

UPDATE 2-Poland presents law to help Swiss franc borrowers, bank shares fall

* President’s office presents draft law

* Over 500,000 Poles have costly Swiss franc mortgages

* Analyst puts cost of new law at up to 32 bln zlotys

* Bank shares, zloty fall on concern over lenders’ health (Adds details, estimates, background)

By Marcin Goettig

WARSAW, Jan 15 (Reuters) - Poland laid out a draft law on Friday to saddle lenders with the costs of converting Swiss franc mortgages into zlotys, a move critics say could undermine the health of what was until recently one of Europe’s healthiest banking sectors.

Renewed efforts to solve the problem of Swiss franc mortgages have hit Polish bank shares and weighed on the zloty, which touched a 3-1/2 year low to the euro on Friday, over worries that some banks might struggle to swallow the cost.

The draft law presented by the president’s office is aimed at helping more than half a million Poles with Swiss franc mortgages and follows in the steps of Hungary, which converted such loans in the past few years, imposing heavy losses on its banks.

Poland did not estimate the cost of its plan but analysts at mBank, the Polish unit of Commerzbank, said it could be as high as $8 billion.

Most of the Swiss franc mortgages were taken out in 2007 and 2008. The franc has risen by 80 percent against the zloty since then, particularly after the Swiss central bank scrapped a peg on its currency a year ago.

Maciej Lopinski, a minister in the office presenting the draft, said the law envisages calculating a “fair rate” for each individual loan, which would be used to convert installments into zlotys from francs over the remaining lifetime of the loan.

Polish central bank governor Marek Belka warned in December that a simultaneous introduction of a tax on bank’s assets and the conversion of Swiss franc mortgages would cause a “serious crisis” for some banks.

Around 60 percent of Poland’s banking sector is owned by foreign groups such as Spain’s Santander, Italy’s Unicredit or Germany’s Commerzbank.

The bill for the asset tax, which the European Central Bank has warned might encourage lenders to engage in risky behaviour, passed the legislature on Friday and is expected to be signed into law shortly.

The Polish banking sector is well-capitalised compared to western European peers, but despite impressive averages some relatively large domestic banks have low profitability and the bank tax is seen eating up all of their profits in coming years, leaving little to divert to other aims.

Shares in Poland’s biggest bank PKO BP immediately slumped 3.6 percent on news of the mortgage conversion bill. The smaller Getin Noble Bank fell as much as 6 percent.

“The lack of details introduces more uncertainty and speculation, which resulted in a nervous reaction,” Jaroslaw Oldakowski, a broker at Millennium DM said.

WESTERN PARTNERS

The draft law on Swiss franc mortgages is likely to become another bone of contention with Poland’s partners from western Europe, already upset over the government policies targeting the judiciary and media.

Earlier this week, the European Union began an unprecedented inquiry into whether Poland’s new government has breached the EU’s democratic standards by passing new laws on the top court.

Several foreign banks said last year they would sue Poland if it decides to burden banks with costs of the conversion, arguing any such measures were retro-active in nature and violated bilateral deals on protection on investors.

The country, which joined the European Union in 2004, has hitherto been seen as a poster child of post-communist transformation in Europe, showing the highest economic growth in the EU in the last decade as it attracted billions of dollars in foreign direct investment.

Converting the mortgages to local currency has become a major political issue after President Andrzej Duda, backed by the conservative Law and Justice (PiS) party, promised a conversion to borrowers before he was elected in May last year. The PiS won parliamentary elections in October.

Polish finance minister Pawel Szalamacha said on Friday the president’s draft bill on mortgage conversion into zlotys is “generally” acceptable, but needs more work to make it more precise.

Lopinski said he expected work on the draft law to be concluded in a relatively short period of time. The draft law would now be sent to the financial regulator, which would calculate the cost to the banking sector, Lopinski said.

“It seems that the bill is completely unprepared if it does not include the cost element,” Urszula Krynska, economist at Bank Millennium.

Analysts at mBank, the Polish unit of Commerzbank, estimated the cost of the policy, assuming all eligible borrowers take part, at 32 billion zlotys ($8 bln), twice the size of the banking sector’s combined profit in 2014.

Swiss franc mortgages amount to about 8 percent of Polish gross domestic product and 14 percent of total loans in the banking sector.

The president’s office presented an Excel file to calculate the “fair rate” on its website, along with the text of the law:

here ($1 = 4.0199 zlotys) (Additional reporting by Adrian Krajewski, Anna Wlodarczak-Semczuk; Writing by Marcin Goettig; Editing by Katharine Houreld and Susan Fenton)

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