Whoever Wins Polish Election, Banks Lose on Compensation Demands

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The main question for Polish banks looking ahead to the October election is how much they’ll lose.

Following on the tail of opposition demands for special levies on lenders, the ruling Civic Platform last week introduced a bill that would force banks to pay half the cost of clients switching their foreign-currency loans into zloty. Bonds tumbled, sending the extra yield on notes from Commerzbank AG’s MBank SA to the highest relative to government debt since Law & Justice’s presidential vote victory in May.

Investors may be getting a sense of deja vu. Hungarian Prime Minister Viktor Orban’s special taxes and levies introduced after 2010 cost banks $8.4 billion, causing money managers to flee. Civic Platform said loan conversions will cost banks as much as 9.5 billion zloty ($2.5 billion) through 2020 while the opposition predicts its new tax could cost an annual 5 billion zloty, about a third of last year’s profit.

“Investors are horrified by what may happen if all of these populist measures are applied, just like in Hungary,” Marek Buczak, who helps oversee the equivalent of $1.3 billion as director of foreign markets at mutual fund Quercus TFI SA in Warsaw, said by phone on July 9. “This is riskier for the Polish economy than last year’s Ukrainian conflict.”

Swiss Burden

The government, which opinion polls show will lose power in the ballot, is under pressure to help its middle-class voters struggling with mortgage payments that have risen alongside a surge in the Swiss currency.

The opposition party’s alternative for fixing the country’s franc burden is set to cost banks 50 billion zloty, according to Finance Ministry estimates. Law & Justice also seeks to increase domestic ownership of lenders.

Yields on MBank’s 2021 notes jumped to 2.80 percent at 11:39 a.m. in Warsaw, the highest level since January. The spread over similar-maturity Polish government Eurobonds widened to 174 basis points, the most since March. PKO Bank Polski SA, Poland’s largest lender, saw the yield on its 2019 Eurobond jump to 1.49 percent on Monday, hoovering around the most since January when Switzerland removed the cap on the franc, allowing it to gain.

‘Radical Stance’

“Although much of the pre-election rhetoric will likely not find strong political backing, more volatility along the way toward the new consensus will surely be negative for banking credits,” Morgan Stanley analyst Pasquale Diana said in a research note on July 9.

The current government’s mortgage conversion plans won’t “threaten” bank stability, Lukasz Dajnowicz, spokesman for the country’s financial regulator, said in an e-mailed statement on July 8. Rather, the proposal will help address a major weakness that arises when the franc surges and the loan is worth more than the property, he said.

Hungary’s Orban this year vowed to make his policies, which included loan conversions, more predictable and ease the tax burden on lenders that left his nation’s banking industry unprofitable, curbed lending and contributed to a cut in the sovereign’s credit rating to junk.

“Political headwinds in Poland and a more radical stance toward banks will likely bring more volatility,” Martin Kutny, a bond market analyst at Raiffeisen Bank International AG in Vienna, who has a sell recommendation for MBank’s 2019 Eurobonds, said by e-mail on July 10. “Surely, a softer Hungarian scenario and the possibility of a bank levy are among the key risks watched now.”

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