Storm Clouds Over Swiss Franc Mortgages: PKO BP's Legal Risks and the Fate of European Banks

The Polish banking sector has long been haunted by the “Swiss franc saga”—a legacy of foreign currency mortgages that turned into financial nightmares for borrowers after the 2008 crisis. Now, PKO Bank Polski (PKO BP), Poland's largest mortgage lender, has reignited concerns by provisioning PLN 1.25 billion (€250 million) in Q2 2025 to address rising litigation and settlement costs tied to these loans. This move signals not just a localized problem but a systemic risk for European banks with similar exposures. For investors, the question is clear: How far will the fallout spread, and which institutions are best positioned to weather the storm?

The Spark: PKO BP's Q2 Provision and Its Drivers

PKO BP's Q2 provision marks a sharp escalation from its PLN 0.97 billion Q1 2025 charge, reflecting worsening litigation dynamics. Three factors are at play:
1. Litigation Escalation: Courts are increasingly ruling in borrowers' favor, particularly in disputes over contractual terms and interest calculations. For instance, Poland's Supreme Court recently upheld claims that banks improperly charged statutory interest during dispute resolution periods.
2. Settlement Costs: The bank's settlement program, aimed at resolving claims out of court, now requires higher payouts as borrowers demand fairer terms.
3. Statutory Interest: Revised estimates of interest owed to customers during protracted legal battles have added pressure.

The provision underscores a broader trend: legacy foreign currency loans—denominated in Swiss francs, euros, or other currencies—are no longer just historical blips but active liabilities.

Systemic Risks: Why This Isn't Just Poland's Problem

European banks in countries such as Hungary, the Czech Republic, and Austria also face similar exposures. The risks are threefold:

1. Capital Erosion: Provisions directly eat into capital buffers. For instance, PKO BP's Tier 1 capital ratio dipped to 15.8% in Q2 2025 from 16.5% a year earlier—a manageable decline but a warning for peers with thinner cushions.

2. Regulatory Scrutiny: New rules like the EU's Digital Operational Resilience Act (DORA) and Financial Markets Amendment Act 2026 are forcing banks to overhaul risk models and data practices. Non-compliance could amplify costs for institutions already grappling with litigation.

3. Investor Sentiment: Markets have already reacted. PKO BP's shares have underperformed the EuroSTOXX Banks Index by 18% year-to-date, reflecting fears of further provisions.
   

Banks to Watch: Winners and Losers

Not all institutions are equally exposed. Investors should distinguish between those managing risks proactively and those underestimating liabilities:

At Risk:
- OTP Bank (Hungary): Holds significant FX loans in a volatile currency market, with regulatory pressures mounting over transparency.
- Erste Group (Austria): Exposed to SEE markets where borrowers face similar currency-related strains.

Well-Positioned:
- Santander (Spain): Minimal FX mortgage exposure and robust capital reserves (Tier 1 ratio 14.7%).
- Nordea (Scandinavia): Strong risk management and a focus on domestic currency lending.

Investment Playbook: Navigating the Fallout

1. Avoid Banks with High FX Loan Exposure: Unless they've already booked significant provisions, these names could face further downgrades.
2. Look for Proactive Reserves: PKO BP's aggressive provisioning, while painful now, reduces tail risks. Investors might consider buying on dips if confidence in its reserves grows.
3. Monitor Regulatory Developments: The EU's FIDA framework (Financial Data Access), expected in 2027, could force banks to disclose more data, aiding borrowers in disputes. Banks with clear compliance strategies will outperform.

Conclusion: A Stress Test for European Banking

PKO BP's Q2 provision is a stark reminder that legacy issues can resurface with renewed force. While the Swiss franc saga began over a decade ago, evolving litigation and regulatory landscapes are turning old wounds into fresh liabilities. For investors, the challenge is twofold: avoid banks clinging to outdated risk models and favor those with clean balance sheets and adaptive strategies. The sector's recovery hinges on transparency and proactive risk management—lessons PKO BP is now learning the hard way.

In the end, the banks that survive will be those that treat these disputes not as isolated legal battles but as systemic tests of their resilience. For now, the storm clouds loom large.