OREANDA-NEWS. Proposals for mortgage redenomination from Poland's ruling party and for a levy on assets from the main opposition party suggest that challenges will increase for Polish banks regardless of upcoming election results, Fitch Ratings says. Administrative measures for foreign-currency mortgages appear likely to be adopted because of a political consensus to place some of the costs on the banking sector.

The incumbent Civic Platform party recently proposed a bill that will allow holders of some Swiss franc-denominated mortgages to convert them into zlotys at the current rate, with lenders paying half the conversion cost. We believe the estimated potential loss of PLN9bn-PLN9.5bn (about PLN7.3bn-PLN7.7bn including the tax shield) for the sector should be manageable, especially as it would probably be incurred over several years. In the first five months of 2015 the banking sector's pre-tax profit equalled PLN7.9bn. Take-up would also be less than 100% because monthly instalments are likely to be higher after the conversion to zlotys. Therefore this solution will probably be most attractive for customers that are trapped in high loan-to-value loans that effectively prevent them from selling their property.

But there is the potential for the proposal to be broadened and for the costs to rise, especially as it only covers a limited proportion of outstanding foreign-currency mortgages. We also expect the main opposition Law and Justice (PiS) party to make its own proposals on mortgage redenomination, which are likely to be more borrower-friendly. Fitch's base case assumption is that measures will not be taken that would result in significant one-off losses for the banking sector, such as conversion of foreign-currency loans at the original FX-rates.

The PiS has proposed a 0.39% tax on bank assets. The party estimated the levy would raise PLN5bn a year, but based on end-May 2015 data we estimate it would cost the sector around PLN6.1bn a year, which is one-third of annualised pre-tax profit in the first five months of 2015. Proceeds from the tax would finance budget spending (like the Hungarian bank levy) and the charge would probably remain at least in the medium term.

Since the proposal is for a flat levy, the smallest and least profitable banks would be hit hardest. Among Fitch-rated banks, Getin Noble (BB/Stable) and Bank Ochrony Srodowiska (BB/Negative) would face the biggest impact. Bank Ochrony Srodowiska could become fundamentally unprofitable if at least part of the bank levy is not passed on to its customers. Getin would be among the most exposed to mortgage redenomination proposals because of its high exposure to Swiss franc loans (of which the majority had LTV ratios above 80%). For both banks the introduction of a levy alongside mortgage redenomination could put pressure on ratings.

Based on the response to the proposal from government ministers, we do not believe the Civic Platform party would introduce a similar levy if it wins the upcoming election in October.

Polish banks are already facing difficulties in 2015 due to low interest rates, reduced interchange fees and increased contributions to the Bank Guarantee Fund. Further significant pressure on profitability would put business models of smaller banks under pressure and could accelerate consolidation in the sector.