Banking sector under legislative attack – Coming costly problems for Polish banks.

Polish government is about to make decisions that may cause the banks’ stock price to fall below the „covid dip”, the banks themselves may forget about paying dividends for more than a year.
Above all banking sector be forced to incur costs in the tens of billions of zlotys in the first year and a dozen in subsequent years.

I will describe the biggest risk factors, which, surprisingly, outside of a few people in the banking, investment, and reporting sectors, are not more widely known.

At the beginning, a few words of introduction, so that it is clear what I am writing about – in the article the unit is the zloty, in Poland the dollar or euro cost less than 5 zlotys (I published this in 2 language versions). In addition, in the article as a loss I understand: write-offs, provisions for losses on financial results and loss of future profits (as in the case of conversion of LIBOR to a lower interest rate). In addition, part of the reserves already in the last quarterly report have appeared to some extent in costs.

To give context to what amounts we are talking about, I will mention the sector’s profit, which was small in terms of upcoming costs:

The banking sector’s net financial result in 2021 stood at PLN 8,849 million and it is impossible to compare it with the one achieved a year earlier, when the banking sector as a whole recorded a loss of – PLN 322 million. – According to the association of Polish banks.
* It is estimated that by raising interest rates, the banks’ profit would be higher by about 15bln pln, but the factors described below will make a sizable loss.

While I am not professionally connected with banking, nevertheless I consulted this article with people from the industry and took data from publicly available sources on day 15.07.2022 (situation changes dynamically)


A possible Tax on Too Low Interest on Deposits is a popular media topic – in an interview, a ministry official mentioned that the government was considering such a solution. It was later confirmed by the deputy prime minister and head of the ruling party.

Probably, it won’t come into effect, but it has caused banks to raise interest rates on deposits faster.

What caused such a slow increase in deposit interest rates?

Banks had too much cash from covid bailouts of companies, and this is also the aftermath of the NBP’s intervention in the covid interbank market.

What is the cost?

It will affect the banks’ interest earnings – similar to drop in the interest rate of about 0.5-1% – that is, up to PLN 2-5 billion less in interest earnings every year.,jaroslaw-kaczynski-oprocentowanie-depozytow-podatek-dla-bankow-lokaty.html


The hottest topic is the conversion of the WIBOR to another benchmark index for the debt and mortgage markets in Poland.

Why do they want to change it?

The idea is simple to reduce mortgage payments before the election, because they have grown very much this year and borrowers feel these interest rate increases due to the prevalence of mortgages at a variable rate (there are more than 90% of them in Poland).

Unfortunately, the idea here is not to systematize or organize the sector, as it was done abroad with LIBOR.

What do they want to give instead? What does the government propose instead?

WIRF, WRR or WIRF rate, it is not clear which one will come in

Why has it become such a big scandal that foreign investors have threatened to withdraw from our market and sue Poland in international tribunals?

Unfortunately, the counter-claims are several:

– The consultation period will last until the end of August, while the WIBOR swap itself is scheduled to go into effect as early as January 1, 2023!!!

In comparison, the LIBOR replacement for rfr-like was announced in 2018, fixed in 2019, and lasts until the end of 2021, and in some cases until the end of 2023.,WIRD-WIRF-WRR-konsultacje.html


– More and more costly reference indices are being proposed for the sector – initially there was a proposed WIBOR-like polonia indice- unfortunately it only has 0.2% lower quotes than WIBOR, so the government is looking for something radical – lagging indices like wirf – which guarantee observable lower overall mortgage installments, but the banking sector and bondholders will pay a lot for it – it is said ~2% in the first year.

– I would add to this that if WIRF, WRR or a similar lagging indicator comes in, borrowers will not feel the drop in interest rates to begin with.

– NO Quotation and derivatives on post WIBOR market – the mentioned indicators are new – barely a few months old.

As a result, there is a Lack of derivatives for the new indices. Another problem is that the government wants to suddenly change the WIBOR in mortgages. This will cause two more costly problems:

– Lack of publication = forcing closure of positions and settlement of IRS/FRA derivatives at a loss, etc.

– Bond issuance terms – such a change requires the consent of all bondholders, or else they risk immediate maturity – in effect, usually companies will have to pay extra.

There are rumors that some sort of intermediate rate is to come in, and the government seems to have let it go after difficult talks with London investment funds buying Polish bonds.

How is depth of market affected?

  • 189.1 trillion zlotys are Treasury bonds.
  • Mortgages are Poland’s for, 500billion zlotys.
  • The size of the position of Derivatives on the Polish interest rate is more than 2bln zlotys.
  • In addition, there are low tens of billions of corporate bonds and a hard to estimate number of corporate and company loans – more than 100 billion zlotys.

Ultimately, banks will make up some of this loss by increasing loan margins in next years.


What is the cost?

A minimum of PLN 15-20 billion due to a drop in lending rates during the first year, plus the cost of closing positions and converting them. According to the Vice President of ING who said, that it could be PLN 30 billion this year. This is still an optimistic variant – in case of an idiotic solution to the WIBOR issue, the financial sector in Poland may experience a panic and a banking crisis.

Again, I would add that if a lagging indicator is introduced then during the rate cuts some of these losses will be made up by the banks, and borrowers will not immediately feel the IR cuts.

A significant growth in Treasury bond yields.

– Treasury bonds account for as much as 27.3% of banks’ assets (PLN 722.7 billion), and only mortgages are more in banks. Treasury bonds alone in Poland also serve as a money substitute for banks in assets. Why? There IS NO bank tax on this asset, so banks having excess cash just bought Polish bonds. For now, the situation in the bond market has calmed down, but this may force the NBP to intervene in the interbank liquidity market.

What is the cost?

The write-down on the banks’ balance sheets of PLN 20 billion (10% of the banks’ total capital), unlike the other costs, is mainly a typical accounting cost, and if the banks do not have to sell them off, they will hold them until buyout and receive the nominal price for the bonds.

However, size of this write-down may also grow in the event of a currency panic in the region or with further dynamic increases in interest rates. Some banks to meet capital requirements will also sell these bonds with them, this loss will become as real as possible.

Yields of polish 10y gov bonds.

Cash back of the fee before the bank’s entry in the mortgage.

Banks in Poland used to charge mortgage borrower ~200 PLN for not being registered in the land registry documents. The problem is that the banks charged it every month, which is disputed by the Office of Consumer Protection (UOKIK) and the Ministry.

What is the cost?

It has been calculated that after the new regulation goes into effect, banks will lose about PLN 438 million annually, or PLN 4.8 billion over 10 years. It is also said that they will have to reimburse this cost for the 3-year period backwards, in which case it will come out ~1.5 billion more.

Provisions for (mortgage) credit vacations

The Polish government, in order to ease the burden on mortgage borrowers, has decided to introduce a suspension of loan repayments, for 1 month per quarter until January 1, 2024. That is, it will be possible to suspend 8 payments.

What’s the problem? It lies in the fact that no income criteria or restriction has been introduced to borrowers at risk of default, the only practical restriction is using mortgage for living aim. As a result, it is estimated that ~70% of mortgage borrowers will take those vacations.

What’s the cost?

Estimates by the Polish Bank Association suggest that universal credit vacations will cost financial institutions a total of up to PLN 20 billion. Although this is a maximum estimate with ~100% participation, however, a several billion loss for the sector is very likely.

In this quarter alone, Poland’s largest bank PKOBP estimates that it will lose PLN 3bln, while its subsidiary PKO Hipoteczny, is already predicting a loss this year for this reason alone.

Another large bank, Millennium – estimates that it will lose up to PLN 1.7 billion on the vacation and has announced the implementation of a recovery program.

In addition, during this time the borrower can overpay the loan, which will reduce future interest.

Apparently, lawsuits against Poland are also being prepared for this reason, for now Commerzbank – owner of mbank – 3rd biggest Polish bank – has declared one.


Swiss Franc loans

In Poland, a systemic solution to the problems with mortgages mainly denominated in Swiss frank has never been introduced. Aa result, customers went to court with banks and there was a key ECJ ruling on October 3, 2019 in the case C-260/18 (Dziubak vs. Raiffeisen). Which set a precedent for invalidating foreign currency loans and resulted in settlements for the spread and the way credits are calculated.

Between 2019 and 2021, Poland’s nine largest WSE-listed banks have set aside reserves totaling PLN 19.3 billion, which is 138% of the gross profit earned by the entire sector in the pre-pandemic year of 2019 (the sector’s gross profit at the time was PLN 14 billion). About 40% of the total provisions, or as much as PLN 7.6 billion, were write-offs for last year.

The average coverage of the foreign currency loan portfolio by provisions is currently 29%, excluding Getin Bank. And some law firms, make franking lawsuits their main source of business.

The ratios of coverage of the foreign currency mortgage portfolio ( mainly in Swiss Franc) with provisions in banks are as follows:

  • BOŚ Bank – 45%
  • ING Bank Śląski – 36%
  • PKO BP – 33%
  • mBank – 31%
  • BNP Paribas – 28%
  • Millennium – 23%
  • Santander – 21%
  • Pekao – 17%
  • Getin Noble Bank – 4% (this year this reserve in this bank will be increased)

The problem is also the weakening zloty, which will force banks to set aside reserves for the coming problems of franc borrowers.

What is the cost?

As of this moment, 480 million zlotys in reserves have been announced for this year alone. However, many of the court cases will not be resolved until 1-3 years from now, so the cost could rise by as much as PLN 2bln.

Getin Noble Bank

Here there may be a takeover by another bank as part of its asset rescue. There are several reasons for such concerns, and they are justified:

– Lack of an auditor’s signature on the last report, which in Poland has happened only when the company’s books are exceptionally bad.

– Nearly negative equity, catastrophic capital ratios and an equity gap of PLN 2 billion.

– Forced acquisition of another company in this ownership group – idea bank, for exactly the same reason.

– Misseling and risk of NPL growth.

The cost? In case of bankruptcy, it will have to be taken over by some state-owned bank PKOBP or Pekao SA, and will have to recapitalize it to the tune of PLN 2-5 billion. It will not be a loss but the bank acquirer and bfg will be forced to capitalise getin.

In addition, the possible takeover of Getin will burden the Bank Guarantee Fund (BFG) – I suspect at least half a billion zlotys.

Additional bank payments on reserves for 4.5 billion zlotys.

This mainly involves two provisions – for the borrower support fund. This is a special fund for borrowers in a terrible financial situation, and the allocation of capital to raise the reserve requirement, which rose to 3.5% after the recent interest rate hike.

In addition, banks will make deposits for a total amount of approx. 3.17 billion rubles to the voluntary fund of protection, burdensome their results for 2022.,alior-bank-ing-bank-slaski-mbank-millennium-bnp-paribas-bank-polska-pko-bp-pekao-sa-santander-bank-polska-system-ochrony.html


What will be the cost of this?

The aforementioned PLN 4.5 billion, but if rates rise further (especially the mandatory reserve) there is talk of another reserve of ~1.5 billion.

In addition, banks will make deposits for a total amount of approx. 3.17 billion rubles to the voluntary fund of protection, burdensome their results for 2022.

There are also other problems, such as declining creditworthiness and lending, tax on state-owned companies and possible lawsuits for variable-rate loans, but I won’t elaborate here, because these are topics for the long term.

Some strong points of Polish banking sector:

That there are not only problems with this sector in Poland, I will list some positives for the sector.

Very good quality of corporate loans, for the past few years banks in Poland have removed all problematic industries from financing, or have done so under very restrictive conditions, i.e.:

Motor transport

Coal power and coal mines

Part of real estate development, hotels, the furniture industry, and construction wholesalers.

Industries with inverted vat, e.g., steel trading.

Electronics trading and part of e-commerce (here they only gave credit lines).

In Poland, mortgages are much more sensitive to an increase in unemployment (or a sharp drop in GDP) than to the interest rate or inflation.

The banking sector is in much better shape than in many southern or eastern European countries.

NPLs and misselling – The problem is quite small. Only individual loans and banking units have had problems with it.

If interest rates begin to fall dynamically, banks will make millions on fixed rate loans. Unofficially, it is said that they are currently selling more than 80% of fixed rate mortgages. Before the rate hikes around the pandemic, it was <15%. On top of that, the borrower is not as protected when it comes to converting a loan to a variable rate as in reverse – there is no cap on the 3% cost when transferring a loan to another bank, while these loans themselves are now very profitable. Most are selling above a 10% interest rate when the interest rate is 6.5%, while IRS are hovering around 7.2%.


Unfortunately, this situation will end with losses in the sector (and no dividends) – probably for two years, and the need to issue shares and special bonds to recapitalize the sector, the fractional reserve, which has grown to 3.5%, and the currently incoming costs described here earlier.

A lot also depends on the behavior of our government, which is trying to please the voters at all costs before the elections (autumn 2023), and its decisions are being introduced in a hurry and chaotically, and they may significantly increase the costs to the sector than the current more than 10 billion euros and cause instability in the Polish financial sector for some time. Although there are indications that they will come to their senses.

From my point of view – a stock market analyst (not a back office employee at bank headquarters), unfortunately, but the wig-banks exchange rate will fall to the level of the covid stock dip 3084 or, with worse developments, to the hole from the Lehman Brothers crisis in 2008 – 2334. Currently, the exchange rate of this index is 4974. And they will make the sector itself not very attractive for investment and will make it difficult to wring profits in it for years, especially since the ROE of banks will be a negative and in the next few years very low. And most importantly, it will chase away the already small number of foreign investors buying Polish Shares from the WIG20 and Debt.

And another request to people from state institutions, if anyone reads this, please read it again with understanding and show it to your superiors. Because if these changes are implemented incorrectly, it will end very badly for our financial sector, and we will pay for it – all the Poles from our own pockets. This will result in less availability of mortgages or much more expensive cost of loans (bank margin at 3% will be the minimum) and banking (payment for every movement on the account), etc. Unfortunately, this is a key element for the entire economy, and even if you don’t like the industry, such radical changes must be carried out after good planning and consultations.


Bilingual text under a free CC-BY license, I want it to reach as many people connected with the market in Poland and abroad as possible, so thank you for any sharing.

If you want to ask for more details about the sector or my analysis interested you, feel free to contact me, I will be happy to exchange my opinions or indicator more sources and current market sentiment.

By Krzysztof Abramowicz

Polecane książki o tematyce finansowej. Kupując wspierasz portal.