Swiss franc surge hits emerging Europe bank sector

By Michael Shields and Krisztina Than

VIENNA/BUDAPEST (Reuters) - The Swiss central bank's surprise move to let the franc surge sent shock waves through the banking sector in central and eastern Europe (CEE), where widespread mortgages denominated in francs suddenly became much harder to service.

Analysts said Poland and Hungary looked especially exposed to the currency swing that could boost bad loans and poses a policy headache for governments watching citizens' purchasing power dwindle.

"The (Swiss National Bank) decision, leading to massive Swiss franc appreciation, is extremely bad news for FX-borrowers in Central Europe, Poland and Hungary in particular," said Michal Dybula, an economist at BNP Paribas in Warsaw.

"It will make servicing Swiss franc loans more expensive, reducing disposable income and hurting consumption. That's bad news for growth and the banking sector, as the (non-performing loan) ratio of franc-denominated mortgages is likely to increase," he said in a research note.

Hungary already got ahead of the curve last year by fixing exchange rates for many borrowers who had taken out mortgages in Swiss francs to capitalise on low interest rates, only to lose out when the franc surged during the financial crisis.

The banks that issued those loans had to pick up the bill for fixing the rates, but a Hungarian market source said they were safe too because they had already converted their Swiss francs into forints last year and closed their positions.

"God is with us," the market source said, when asked about the timing of the conversion.

Erste Group said its Hungary loan book was unaffected.

Shares in Polish banks led Warsaw bourse decliners after the SNB move.

"The most exposed banks are Getin Noble Bank, BPH, Millennium, mBank, BZ WBK and PKO BP, but the last two are strong enough to live with the problem," said Michal Sobolewski, an analyst with DM BOS, adding it was impossible to assess the impact of Swiss franc strengthening on banks at the moment.

The chief executive of mBank, Cezary Stypulkowski, told reporters there is no reason to worry about Polish banks and that the situation would stabilise soon.

Several banking sources in Warsaw said that there may be pressure now on the government to introduce a relief scheme for borrowers of Swiss franc mortgages.

Hardship for borrowers could turn into a political issue in a year when Poland is to vote in presidential and parliamentary elections.

"Radical solutions like those introduced in Hungary are not very likely, though, because (Swiss franc loans) are not such a big problem as there," said Jakub Borowski, chief economist at Credit Agricole Polska.

One banking source in Romania said Swiss franc loans made up 6-8 percent of the total, according to data from last year.

"The actual chunk could now be much smaller. There's no risk here as most of this has been refinanced," he added.

In Austria, Swiss franc loans made up 96 percent of the 25.7 billion euros (19.73 billion pounds) in foreign-currency loans households held at the end of September, posing a problem for lenders like Erste, Raiffeisen and Bank Austria . Regulators banned the issue of such loans in 2008.

(Reporting by Michael Shields, Marcin Goclowski, Krisztina Than, and bureaux in central and eastern Europe)