47.3. Legal risk regarding foreign currency mortgage loans in CHF

The Group recognizes that the legal risk related to the outstanding portfolio of foreign currency mortgage loans in CHF as at 31 December 2021 affects the expected cash flows from this portfolio and the level of expected credit loss within the meaning of IFRS 9 that can be incurred by the Group.

In connection with the above, the credit risk of the portfolio of foreign currency mortgage loans in CHF is assessed by the Group, taking into account the legal risk associated with this portfolio. The Group recognizes that there has been a significant increase in credit risk in relation to the CHF portfolio since the initial recognition date and classifies these loans to Stage 2. Due to unfavorable judgments, resulting in a significant probability of losing the case, in the event that the client files a court claim, the loans covered by such claims, the Bank classifies to Stage 3.

However, with regard to the repaid portfolio of foreign currency mortgage loans in CHF, the Group applies IAS 37 and recognizes provisions allocated to this part of the portfolio under ‘Provisions’ and ‘Other operating expenses’, which were presented in Note 37 and Note 13, respectively.

Bank Pekao S.A. has not granted loans in CHF to the public since 2003. Almost the entire current portfolio of loans in CHF for individuals was taken over by Bank Pekao S.A. in the process of partial division of Bank BPH S.A. (loans granted before August 2006).

As at 31 December 2021, the Group had a portfolio of foreign currency mortgage loans in CHF with a total gross carrying amount of PLN 2 716.5 million (i.e. CHF 610.7 million) compared to PLN 2 899 million (i.e. CHF 679.9 million) as at 31 December 2020.

The tables below present the structure and quality of the CHF loan portfolio for individuals:

As of 31 December 2021 the average LTV for CHF loans to individuals granted by the Group amounted to 35.5% (38.1% as at 31 December 2020), with an average LTV for the whole portfolio of mortgage loans of 52.3% (55.8% as at 31 December 2019).

On 3 October 2019, the Court of Justice of the European Union (hereinafter the ‘CJEU’) issued a ruling on a CHF-indexed loan granted by another bank, in which it interpreted the provisions of Council Directive 93/13 / EEC of 5 April 1993 on unfair terms in consumer loans based on the CHF indexed loan agreement. The CJEU indicated the consequences of recognizing the possible abusiveness of conversion clauses by the domestic court, without examining the possible abusiveness of contractual provisions at all. The CJEU did not prejudge that in the event that a domestic court finds possible abusiveness, the court should automatically declare the entire contract invalid. The assessment in this respect remains to be decided by the national court, but the CJEU has not ruled out the possibility of filling the gap resulting from the abusive nature of conversion clauses by means of domestic regulations.

The ruling of the CJEU constitutes general guidelines for Polish courts. Final decisions made by Polish courts are made on the basis of EU regulations interpreted in accordance with the CJEU judgment, taking into account the provisions of domestic law and the analysis of the individual circumstances of each case. At the same time, it is difficult to talk about a formed line of jurisprudence in cases of mortgage loans in CHF, which is often confirmed by mutually exclusive judgments of common courts, as well as legal inquiries to the CJEU and the Supreme Court to resolve doubts.

In particular, attention should be paid to the application submitted on 29 January 2021 by the First President of the Supreme Court to the full composition of the Civil Chamber of the Supreme Court to resolve legal issues related to foreign currency mortgage loans in CHF, relating in particular to the following aspects:

1. whether the abusive provisions relating to the method of determining the currency rate in an indexed or denominated loan agreement can be replaced by provisions of civil or customary law,
2. if it is impossible to establish a binding exchange rate for a foreign currency in a denominated loan agreement, the agreement may bind the parties in the remaining scope,
3. if it is impossible to establish a binding exchange rate for a foreign currency in the loan agreement, the agreement may bind the parties in the remaining scope,
4. whether the balance theory or the theory of two conditions will apply in the event of cancellation of the loan agreement,
5. which is the moment to start the limitation period in the event that the bank makes a claim against the borrower for the repayment of the loan,
6. whether it is possible for banks and borrowers to receive remuneration for using the funds.

In the Group’s opinion, the ruling of the Supreme Court on the above issues may have a significant impact on the further shaping of the line of judicial decisions in this regard. However, it is not certain whether and when the full Civil Chamber will adopt a resolution on the above-mentioned legal questions.

On 7 May 2021, a resolution was adopted by the Supreme Court composed of seven judges, after the resolution of the legal issue in the case III CZP 6/21 in the Civil Chamber, indicating that:

• a prohibited contractual provision (Art.385 (1) § 1 of the Civil Code) is from the outset, by operation of law, ineffective in favor of the consumer, who may subsequently give informed and free consent to this provision and thus restore its effectiveness retroactively;
• if the loan agreement cannot be binding without an ineffective provision, the consumer and the lender are entitled to separate claims for the reimbursement of cash benefits provided in the performance of the agreement (Art. 410 § 1 in conjunction with Art. 405 of the Civil Code). The lender may request the return of the benefit from the moment the loan agreement becomes permanently ineffective.

The resolution in question was given the force of a legal principle, therefore in the scope of resolved issues, it is binding in other cases examined by common courts as well as by the Supreme Court.

In addition, there is a trend in the market related to the referral by common courts of inquiries regarding various types of doubts arising to the Supreme Court, which may also affect the future directions of judicial decisions.

As at 31 December 2021, 1 596 individual court cases were pending against the Group regarding foreign currency mortgage loans in CHF, which were granted in previous years, with the total value of the claim in the amount of PLN 459.2 million (as at 31 December 2020, the number of cases was 592, and the corresponding value of the dispute is PLN 159,7 million). The main cause of the dispute, as indicated by the plaintiffs, concerns the questioning of the provisions of the loan agreement with regard to the Group’s application of conversion rates and results in claims regarding the partial or complete invalidity of the loan agreements. In 2021, the Group received 124 unfavorable court judgments in cases brought by borrowers, including 19 final judgments and 11 favorable court judgments, including 4 final judgments (in 2020: 36 unfavorable court judgments, including 3 final judgments stating the invalidity of the loan agreement and 13 favorable court judgments, including 2 final judgments dismissing the claim for declaring the invalidity of the loan agreement and a claim for payment in connection with the invalidity of the loan agreement).

As at 31 December 2021, the level of the provision for the above-mentioned legal risk related to CHF mortgage loan agreements estimated by the Group amounted to PLN 626.2 million and increased by PLN 190.1 million compared to the level of these provisions as at 31 December 2020.

The above amount includes the provision for individual existing court cases to which the Group is a party in the amount of PLN 266.1 million as at 31 December 2021 (PLN 76.1 million as at 31 December 2020) and the portfolio provision for remaining foreign currency mortgage loan agreements in CHF, which are subject to legal risk related to the nature of these agreements, in the amount of PLN 360.1 million as at 31 December 2021 (PLN 360.0 million as at 31 December 2020).

With regard to the portfolio provision, as at 31 December 2021, the Group based its calculations on 3 possible scenarios in order to best account for the various possible solutions which are currently being analyzed in the banking sector, in the estimation.

The calculation of the provision performed by the Group as at 31 December 2021 was based on the following scenarios:

• the baseline scenario – considered as the most probable, where the Group assumes that approximately 12% of foreign currency borrowers (with both active and repaid loans with an initial capital of CHF 1 651 million) will bring claims against the Group regarding the questioning of the loan agreement and in which the Group estimates the probability of losing court cases, as well as possible financial consequences in the event of losing a court case, accepting as possible settlement:
  • nvalidation of the entire agreement for a foreign currency mortgage loan in CHF as a result of recognizing the indexation clause as illegal,
  • recognition that the clauses contained in the loan agreement constitute prohibited contractual provisions resulting in the determination of the loan balance in PLN and the interest rate on the loan based on the LIBOR rate, the so-called ‘Defrancation’,
  • recognizing the valorization clause as abusive and replacing the Bank’s exchange rate table in its content with the average exchange rate of the National Bank of Poland,
  • dismissal of the claim.

In the baseline scenario as at 31 December 2021, the Group took into account the current state of the macroeconomic environment, including the currently observed trends in court judgments regarding foreign currency mortgage loans in CHF, as well as its own history of lawsuits and the history of lawsuits observed on the market. Moreover, the Group made estimates in terms of the probability of losing the disputes and the probabilities of possible solutions in the event of a dispute, based on an updated opinion of an external law firm.

An additional element of the estimates in the baseline scenario is the probability distribution of a possible dispute resolution, which is associated with a specific loss level. The Group attributes the largest share in the possible settlement scenarios, amounting to 80% (70% at the end of 2020), to the cancellation of the loan agreement. In this scenario, the Group does not assume any settlements with customers.

• settlement scenario – as a possible scenario of events in the Group’s opinion in the current market conditions, in which the majority of customers (approximately 80% of the portfolio value) will qualify for the option of settlements with the Group based on solutions implemented in the banking sector, as proposed by the Chairman of the Polish Financial Supervision Authority.

In the settlement scenario, the financial effects for the Group are equal to the sum of the differences between the current balance of the foreign currency mortgage loan in CHF and the balance of the hypothetical loan in PLN based on the WIBOR rate increased by the margin of the loan granted at the same time and for the same period as the loan in CHF and repaid by the borrower in accordance with the repayments made on the CHF loan. As a result, with the current market parameters, the Group’s costs of concluding settlements would amount to approximately PLN 511 million. For contracts currently in dispute, the Group assesses the possible propensity of customers to withdraw the lawsuit and conclude a settlement, taking into account the ratio of the benefit that can be achieved by the customer from the settlement to the potential benefit from the lawsuit (including the costs of pursuing a lawsuit) and the expected resolution of the dispute.

• negative scenario – as a possible scenario to occur in a situation of a significant deterioration of the macroeconomic environment, in particular in terms of a significant intensification and deepening of the negative trend regarding unfavorable jurisprudence and common courts of law regarding foreign currency mortgage loans in CHF, the number of possible claims will be twice as high as assumed in the baseline scenario, with a simultaneous greater likelihood with regard to unfavorable court judgments. Moreover, with regard to the probability distribution of possible settlements of disputes in this scenario, the Group also assumed a higher probability of invalidity of the entire agreement of a foreign currency CHF mortgage loan (at the level of 95% of decisions – levels of % unchanged compared to those adopted in 2020). In this scenario, the Group does not assume any settlements with customers.

Although the subject of legal risk related to the CHF loan portfolio is one of the key topics in the sector in recent years, there is still a history of data on the scale of lawsuits (in particular in the field of final judgments), and whether the line of court jurisprudence in this area is not stabilized. All of the above causes that the process of determining the level of the provision requires each time the Group adopts many expert assumptions based on professional judgment.

Subsequent rulings and possible sectoral solutions that will appear on the Polish market with regard to foreign currency mortgage loans in CHF may affect the amount of the provision determined by the Group and cause the necessity to change individual assumptions adopted in the calculations. In connection with the above-mentioned uncertainty, it is possible that the amount of the provision will change in the future.

Following the above principles, as at 31 December 2021, the Group allocated the total amount of the provision in the amount of PLN 626.2 million as follows:

1. PLN 496 million for current and future disputes regarding balance sheet exposures, recognized as an element of impairment losses on credit receivables in correspondence with ‘Net allowances for expected credit losses’ (PLN 345.1 million as at 31 December 2020),
2. PLN 130.2 million for current and future legal disputes regarding repaid exposures, recognized as provisions in correspondence with ‘Other operating expenses’ (PLN 91 million as at 31 December 2020).

A summary of the recognition of the provision for legal risk related to foreign currency mortgage loans in CHF in the statement of financial position and income statement is presented in the tables below.

The Group performed a sensitivity analysis in relation to the significant assumptions of the provision calculation, where a change in the level of individual parameters would have the following impact on the amount of the provision for the legal risk of foreign currency mortgage loans in CHF.

Impact on the provision level in the event of changes to the assumptions (with other elements of the calculation unchanged):