Poland: CJEU ruling today to be costly, but perhaps not as damaging as feared

• CJEU to rule on Thurs. on whether banks/borrowers can seek interest for capital in invalided CHF loans
• CJEU advocate general said in Feb borrowers could seek interest but banks could not
• KNF has warned negative ruling could cost PLN 100bn, but it also said more recently bnaks are prepared
• Recent reports likewise suggest auditors could allow banks to spread out losses
• Finally, NBP says Wed. negative CJEU ruling is big, but won't fundamentally alter situation
• Still, it remains unclear if govt will seek systemic solution to problem

The Court of Justice of the EU (CJEU) will rule Thurs. at 10:00 CET on Case No. C-520/21 in what has been framed as nearly do or die for banks, though bank preparation for the ruling itself, the fact a negative ruling will likely help out-of-court settlements, and the possibility of auditors' reaction could be favourable all suggest the ruling, though impactful, won't be as devastating as feared. The full CJEU court will give its verdict on whether banks and borrowers can seek remuneration for CHF loans that a court rules illegal. At present, when the court rules that a CHF clause is illegal, the loan is invalidated and the capital is returned, whether the payments made by a borrower or the loan extended by the bank. The question is whether banks or borrowers can seek interest for the capital given to either side.

ADVOCATE GENERAL

The CJEU advocate general on the case, Anthony Collins, opined on Feb 16 [our story?here] that consumer claims going beyond reimbursement of the instalments paid and default interest at the statutory rate face no obstacle in national legislative provisions and could be made. "The contractual term held to be unfair does not produce binding effects on the consumer and, consequently, he or she ought to be restored to the factual and legal position he or she would have been in had that term not been included in the contract in the first place," Collins said. This would tend to encourage consumers to exercise rights they have while also deterring banks from introducing unfair terms in their contracts. But in the end, the advocate general said that it is a matter for national courts to determine whether consumers have the right to assert such claims and, if so, to rule on their merits.

But Advocate General Collins took the opposite view for banks. He said a bank is not entitled to assert against a consumer claims that go beyond reimbursement of the loan capital transferred and payment of default interest at the statutory rate from the date of the request for reimbursement because the annulment of a mortgage loan agreement arises as a consequence of the bank having introduced an unfair term into that agreement in the first place. "A supplier ought not to derive any economic advantage from a situation it has created by its own unlawful conduct," he said. "Nor would the bank be deterred from including unfair terms in loan agreements with consumers if, despite the annulment of the contract, it could charge consumers remuneration at the market rate for the use of the loan capital." On the contrary, banks might be incentivised to impose unfair terms on consumers, he warned.

The specialist Polish legal website Prawo.pl reported in February that the full CJEU followed the opinion of the advocate general in about 90% of cases. The expectation in Poland is that the CJEU will agree with the advocate general. The daily Rzeczpospolita asked 16 local economists and 15 said so, with only one saying the ruling would go in favour of banks. But of the 15, six said the CJEU would fully back the advocate general whereas nine said the CJEU could give local courts more say in the issue. To note, Poland's Supreme Court was supposed to rule on the remuneration issue, but it put off doing so while the status of Supreme Court judges named by the reformed National Council of the Judiciary (KRS) could be decided, something that has not yet been resolved.

PROVISIONING SHIELD

The Polish Financial Supervision Authority (KNF) has long put the cost of a ruling in line with the advocate general at PLN 100bn and said a systemic solution should be pursued. The KNF has proposed that CHF loans be treated as PLN ones from the beginning and the cost of doing so somewhat split. Still, the KNF has suggested at times that such a solution might be unlikely before the autumn general election, but continues to urge out-of-court settlements, out of which there have been something like 45,000.

The KNF can seem to focus on doom and gloom at times, but has changed its tune somewhat of late. On Jun 5, KNF head Jacek Jastzebski said the banking sector was prepared for a potential negative ruling by the CJEU due to high provisioning. Jastrzebski said he believed banks were ready for the ruling in light of the macroeconomic scenario in recent months, which has seen banks chalk up record profits [PLN 12.9bn in Jan-Apr vs PLN 13.1bn in all of 2022]. Jastrzebski did add that the KNF was still finishing work on assumptions for a statutory solution to the CHF loan problem, which he said he continued to see as the best way out.

Polish Bank Association (ZBP) head Tadeusz Bialek said May 30 that if the CJEU ruling matched the CJEU advocate general opinion, banks will have to sharply increase reserves for legal risk. Bialek said that would be a "huge blow" to the banking and financial sector in Poland, possibly hurting the ability of institutions to finance the economy and meaning large restrictions on the current possibilities of lending. Yet, the NBP said in its?Financial Stability Report?published on Jun 14 that affected banks might need to further increase provisioning, though this would not fundamentally change the situation regarding the scale of banks burden.

The NBP estimated in the report that provisions for legal risk and out-of-court settlements totalled around PLN 36bn-37bn at end-2022, up from PLN 30bn at end-H1 2022 and up from PLN 23bn-24bn at end-2021. The central bank also said that accumulated provisions, recognised mainly for active loan agreements, amounted to an average of some 45% of the value of Swiss franc loans at end-2022. The NBP admitted that a negative CJEU ruling for banks would lead to bigger provisions, but it said much depended on the share of loans dealt with via litigation and those with out-of-court settlements. If settlements affected 70% of loans and litigation 30%, then banks would have to create some PLN 40bn more in provisions, which is a lot, but more manageable than PLN 100bn. If litigation accounts for 75% of loans and settlements for 25%, then provisions will have to rise by PLN 50bn. The NBP noted that a 5-pp increase in the share of litigation increases the need for provisions by some PLN 1.5bn on average.

The NBP also noted that the CJEU ruling would have a major impact on this ratio. A very positive ruling for consumers will likely lead more of them to seek legal options, thereby driving up the final cost of provisioning. However, it can also be noted that the more negative the legal backdrop, the likelier banks are to offer better settlement terms. Banks don't have much incentive to offer great settlement terms since that would make a loss a reality vs. the theoretical losses for cases still on the go, and it should be remembered most court cases -- there are some 110,000 of them at present -- go on forever.

AUDITORS' REACTION

One major aspect to the situation is that the reaction of auditors will be important to whether banks need to deal with potential losses right away or can spread them out over time. On Jun 6, the daily Rzeczpospolita reported that bankers in Poland believe auditors won't rule that losses on CHF loans are one-off costs but will rather allow them to be spread them over time. The daily noted that bankers nearly unanimously said that the consequence of a negative CJEU ruling would be able to be spread over time. Yet, many bankers are also cautious, saying they wanted to wait for a final decision. Auditors aren't expected to make a ruling on this until after the CJEU's Thurs. verdict.

Rzeczpospolita added that a negative CJEU ruling would impact some banks right away, as they would have to take the ruling into account immediately and thus adapt models estimating the costs of legal risk. This was said to apply to mBank, which estimated the effects of invalidating CHF agreements with a 70% probability of the return of capital with remuneration. If this probability was zero, the extra cost would be PLN 1.3bn, the daily said. Other banks, such as BNP Paribas, were said not to assume any remuneration.

IN THE END

The CJEU's ruling on Thurs. morning is clearly key and looks very likely to burden banks further due to the CHF loans given out for the most part in the 2000s and which haven't been given out almost at all for over 10 years now. The NBP looks more sanguine about the impact of the ruling, but PLN 40bn or PLN 50bn of more provisioning will clearly be a bitter pill to swallow. That said, auditors could allow this to be spread out, softening the blow, and bank profits this year look likely to be very high. The ruling will be damaging but not deadly.

One final note is that the CJEU's rulings will likely enmesh the local court system somehow. Even the advocate general's view that consumers can charge for remuneration leaves this up to the local court system to confirm. That court system continues to be in crisis due to the Law and Justice (PiS) judicial reforms, which have split many key bodies into 'old' judges (those named before the KRS reform) and 'new' ones. Maybe the autumn elections will produce a government that deals with this issue, though the likelihood is the domestic judicial impasse will continue in some form or another for some time. That increases the risk that any CJEU passing on of the problem leads to continued legal confusion domestically.