Polish banks are facing higher costs and lower profits due to a new government program that will disrupt the country’s mortgage market.
The Borrower Support Program will help consumers for whom mortgage repayments have increased sharply as central bank rates rise. Bank profits, which are also increasing, could be constrained by the obligation to finance the initiative directly. The diet too proposes to change the way mortgage repayments are calculated in a way that will result in thinner margins for lenders in the future.
“[The program] will have a significant impact on the results of the banking sector, estimated at 5-6 billion zlotys ($1.1-1.4 billion) this year alone,” DM BOŚ analyst Michał Sobolewski told S&P Global Market Intelligence.
Pressure on households, pressure on banks
Inflation, fueled by rising energy and food costs and exacerbated by Russia’s invasion of Ukraine reached 12.3% in April and put pressure on Polish household incomes. The central bank has raised rates to 5.25% from 0.1% in the past eight months and mortgage payments have risen in parallel – a monthly mortgage payment has risen around 70% since the start of the tightening cycle monetary policy in October 2021, according to Property developer based in Poland, HRE Investments.
Under this program, lenders will be required to contribute to an existing support fund for borrowers as well as a new separate fund designed to build resilience in the banking sector. Polish banks include subsidiaries of Banco Santander SA, ING Groep NV, BNP Paribas SA and Commerzbank AG.
The government is also proposing to replace the Warsaw Interbank Offered Rate, or Wibor, which is used to calculate mortgage interest rates, with a lower rate from 2023. This could reduce monthly mortgage repayments by a total of around 1 billion zlotys per year and reduce bank margins on mortgages by an average of 0.3. or 0.4 percentage points over the life of a loan, according to government estimates.
Borrowers will also be able to delay certain mortgage payments from July under the scheme, which was announced by Polish Prime Minister Mateusz Morawiecki at the end of April. Some items such as the Wibor replacement have yet to be finalized, but Morawiecki said a “political decision” has been made to implement the program. A consultation is to be launched on May 10.
Banks should be able to absorb the associated “big cost” as they have benefited from the central bank’s rate hike, the prime minister said. As rates rise, banks can generate more net interest income—income from loans less expenses on deposits—by passing on higher rates to borrowers.
Indeed, the overall net profit and return on equity of Polish banks increased in January and February, according to data from the Polish financial regulator, and could reach record highs this year in a positive rate environment, Sobiesław Kozłowski, who heads the analytics department at Polish broker Noble Securities, told Market Intelligence. In 2021, the sector saw a rebound in profits amid a post-pandemic recovery.
Nevertheless, the program will have a negative impact on the future profits of banks and will increase political risk for the banking sector as investors worry about possible similar proposals in the future, BNP Paribas Bank Polska SA analysts said in an April 25 note.
Ahead of the next parliamentary election in 2023, Polish politicians might be tempted to “prove themselves” by implementing consumer-friendly actions such as the mortgage repayment holidays the government is offering, Kozłowski said.
In the short term, the obligation to pay according to Michał Konarski and Mikołaj Lemańczyk, analysts at Commerzbank’s brokerage unit, adding another PLN 1.4 billion to the existing PLN 600 million borrower support fund will have the greatest impact on banks, reducing total 2022 profits by approximately 7% Polish unit mBank SA. But returns on equity should remain above the cost of capital and loan repayment holidays should not have a big effect, they wrote in an April 26 note.
Polish unit of Banco Comercial Português SA, Bank Millennium SA and PKO Bank Polski SA have the highest number of mortgages as a proportion of total loans among major Polish banks — 55.9% and 49.4%, respectively, at the end of 2021. BNP Paribas Bank Polska has the lowest proportion, according to data from Market Intelligence.
Bank Millennium is likely to be the most affected by the government plan, mBank analysts say. Bank Millennium did not comment on the plan when contacted by Market Intelligence, saying it was awaiting further details.
PKO, the largest lender in Poland says the plan is “an adequate response” challenges faced by borrowers. Other banks contacted by Market Intelligence declined to comment or did not respond.
Banks, as well as Wibor’s rate-setting body GPW Benchmark, will have until the end of 2022 to find a replacement for Wibor to calculate mortgage interest rates. If they don’t, Wibor could be replaced by the Polonia overnight interbank rate, which is set by the central bank, according to Polish government officials.
More mortgages in Poland have floating interest rates, which are linked to the three- or six-month Wibor. The three-month Wibor rose to over 6% in early May, from 0.25% in October 2021, in response to the central bank’s rate hike. The Polonia interbank rate was 4.46% as of May 5.
In addition to impacting bank margins, the proposed Wibor replacement could encourage customers to sue banks, according to Sobolewski by DM BOŚ. Polish media reported earlier on several lawsuits filed by borrowers arguing that Wibor does not reflect the true cost of funding for banks and thus creates unfair opportunities for them to increase their income.