By Patricia Kowsmann 

The European Union's top court ruled in favor Thursday of Polish consumers who took out low-rate mortgages tied to the Swiss franc years ago, only to see the currency and their repayments soar -- potentially leaving banks on the hook for billions of dollars.

Drawn by the promise of interest rates far lower than those offered in the Polish zloty, more than half a million Poles took out mortgages tied to the Swiss franc, largely between 2006 and 2008.

The Polish operations of Germany's Commerzbank AG, Spain's Santander SA and Portugal's Banco Comercial Português SA sold these types of mortgages, as did some Polish banks.

What seemed a great deal for borrowers turned sour after the Swiss franc, seen as a haven currency, surged after the financial crisis in 2008 and again in 2015, when the Swiss central bank abandoned its commitment to cap the value of the franc.

Unable to make their mortgage payments, many borrowers took the case to Poland's courts, alleging unfair terms in their contracts.

Courts have mostly sided with the borrowers in case decisions this year, but have been unable to agree on what actually happens to the contracts. However, on Thursday, the European Court of Justice ruled that contracts would have to be annulled, paving the way for borrowers to pay the remainder of their debt in zloty, at the original exchange rate, rather than in Swiss francs.

Chiara Romano, senior analyst at rating agency Scope Ratings, said the decision to annul, rather than change the contracts, raised the question of whether the banks could be forced to reimburse borrowers for payments already made.

According to Ms. Romano, there are 100 billion zloty ($25 billion) in outstanding housing loans denominated in Swiss francs, worth 5% of total Polish banking assets as of July. A forced conversion from Swiss francs to zloty at 2008 exchange rates could cost Polish banks 44 billion zloty, or 3.4 times their annual profit, she added.

The ruling's impact on banks will depend on whether more mortgage holders sue and the outcome of those cases. ING Bank estimates only 2% of all forex-mortgages are currently disputed in courts in Poland.

Shares of mBank SA, Commerzbank's subsidiary in Poland were up 2.3% Thursday. Santander Bank Polska shares were down 2.8% and shares in the Polish subsidiary of BCP were up 1.7%.

Poland's banking regulator said Thursday that its banks were well capitalized and secure, and that lenders with a large share of foreign currency loans were required to hold enough capital to handle any troubles.

Economists at ING expect lenders will eventually propose ways to settle with the borrowers to avoid expensive legal costs. The debt then will likely be converted into zloty at the original exchange rate when the mortgage was taken out.

Most of the Polish borrowers who have loans in Swiss francs took them out in 2006-2008 when the zloty was closer to 2.5 to the franc or even below 2, compared with current levels close to 4.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

 

(END) Dow Jones Newswires

October 03, 2019 10:37 ET (14:37 GMT)

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