FX mortgages will weigh on Central-East European banks

Subject

The challenging operating environment for CEE banks.

Significance

Raiffeisen Bank's financial woes, although they stem mainly from the poor performance of its Russian and Ukrainian businesses, reflect the challenging operating environment for banks in Central-Eastern Europe (CEE). Risks related to mortgages denominated in foreign currencies (FX) are putting further strain on a sector still suffering from a deterioration in asset quality and weak lending growth. FX-mortgage-related risks diminished significantly in Hungary, following the forced conversion of FX loans into forint-based contracts. Poland and Croatia, whose banks have large portfolios of Swiss franc loans, are under pressure to follow suit.

Impacts

• FX-mortgage-related risk across the CEE region will act as a constraint on already subdued lending to households.
• However, it will also encourage banks to replace external liabilities with local sources of funds, resulting in a more secure funding model.
• Polish and Croatian government reluctance to allow borrowers Hungarian-style debt relief will further reduce support ahead of elections.