March 15, 2016 / 4:10 PM / 4 years ago

UPDATE 2-Polish watchdog says FX loans bill may lead to banking crisis

* Polish regulator KNF: draft FX loan bill may cause financial crisis

* President’s draft bill may shake stability of some banks -KNF

* Regulator pegs bill’s costs for banks at up to PLN 103 bln (Combines FX loan bill stories, adds analyst comment)

By Wiktor Szary and Adrian Krajewski

WARSAW, March 15 (Reuters) - Poland’s financial watchdog said a proposed bill to convert foreign currency mortgages into zlotys could cost local lenders up to eight times their 2015 profits, potentially pushing one of Europe’s healthier banking sectors into crisis.

According to the supervisor KNF, Polish banks, which closed 2015 with a joint net profit of 13.1 billion zlotys ($3.4 billion), would have to bear 67 billion in the costs of a bill flagged by Poland’s president in January.

“The financial repercussions of the bill ... may in effect not only shake the stability of some banks, but also lead to loss of trust for the banking system and in a worst-case scenario cause a financial crisis,” KNF said on Tuesday.

Over half a million Poles took on Swiss franc mortgages to see repayment costs rise as the franc ascended. President Andrzej Duda presented the draft to make good on a 2015 election promise, leaving it to KNF to estimate the costs.

KNF said that in the most likely scenario five banks would see their capital ratio fall to below 4 percent, far below the required 8 percent, while the worst-case scenario would mean more than 103 billion zlotys in costs for lenders.

“Whichever the scenario, the losses more than exceed the absorption capabilities of the banking sector,” DB Securities analyst Marcin Jablczynski said.

KNF’s estimates come in above Poland’s central bank calculations of the costs, which Moody’s Investors Service credit rating agency said would hurt the banks’ ability to lend.

President Andrzej Duda said the legislation will take KNF’s calculations into account, listing banking sector stability among its priorities.

The response poured cold water on the bill’s prospects and helped Polish bluechip lenders and Swiss-franc portfolio holders, such as mBank and or BZ WBK, curb some of Tuesday losses.

Poland’s banking sector, 60 percent owned by foreign groups such as UniCredit, Santander and Commerzbank , was largely unscathed by the global financial crisis.

But Warsaw-listed banks lost a quarter of their market value last year and flagged their first major lay-offs in a decade to boost profits hurt by record low interest rates as well as the policies of the new Polish government.

Mortgage conversion uncertainty follows a bank asset tax implemented last month by the Law and Justice (PiS) party, which backs Duda and won a parliamentary majority last year on promises of welfare rises at the expense of big corporations. ($1 = 3.8647 zlotys) (Additional reporting by Marcin Goettig and Pawel Sobczak, editing by David Evans)

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