Talks in Poland for settling $32 billion in foreign-currency mortgages have practically stalled because of lenders concern over legal risks, according to five bankers with direct knowledge of the situation.

The negotiations — which include the Polish units of

Commerzbank AG,

Banco Santander SA and

BNP Paribas SA — have been difficult with lenders failing to agree on even basic issues, such as the cost of the planned out-of-court settlements, said the people, who asked not to be named because theyre not authorized to speak on the subject publicly.

Lenders also have questions about the legal standing of the proposed settlements, according to the people. The zloty weakened to a 2021 low against the euro and Warsaw-listed bank stocks

dropped the most in three months on Wednesday amid concerns about the lack of progress in the negotiations as well as growing risk over another pandemic lockdown in Poland.

Adding further uncertainty to the banking industry, the Supreme Court is due to issue guidance next week for how lower courts should resolve disputes over the mostly Swiss franc home loans.

The authorities have encouraged voluntary out-of-court deals with clients, which would convert loans into zloty from the date the mortgages were taken. The regulator touted this as the best option for banks, which may cost 34.5 billion zloty ($8.9 billion) or more. Thats four times last years industry profit, but a fraction of the bill if courts end up annulling all franc loans, according to official estimates.

The central bank has offered help in converting the loans into zloty, under strict conditions including widespread approval for the settlements by lenders. However, both the

monetary authority and the

government have sent signals that theyre running out of patience as talks drag on.

If the talks fall apart, it would expose banks to more losses as courts increasingly side with mortgage holders. The Supreme Court opinion, which Dziennik Gazeta Prawna newspaper reported on Wednesday may be delayed, is likely to strengthen this trend, which could trigger another wave of lawsuits.

Legal Pain Rises

New FX-loan lawsuits filed to Polish courts more than tripled in 2020

Source: Justice Ministry

Only state-controlled

PKO Bank Polski SA appears determined to forge ahead and offer settlements, even if others dont follow, the people said. Another group with relatively small non-zloty loan portfolios, which includes

ING Bank Slaski SA,

Bank Pekao SA and

BOS Bank SA, are described as sitting on the fence.

Lenders with hefty piles of foreign-currency loans, such as

MBank SA,

Bank Millennium SA and

BNP Paribas Bank Polski SA, are skeptical, while Raiffeisen Bank International AG conspicuously

quit the talks last month. Some are pushing for assurances from the financial regulator and the competition watchdog to ensure that the settlements cant be later questioned in courts, the people said.

Fitch Ratings put the credit score of MBank and Millennium on watch negative due to increased risks related to legacy exposures of their non-zloty mortgages.

Getin Noble Bank SA, the lender with highest exposure to non-zloty loans compared with its total assets, hasnt even joined the negotiations, according to the people. All of the lenders involved declined to comment on the negotiations.

Different Approach

Banks vary with their approach to FX-loan risk provisioning

Source: Banks’ reports

Data for Getin Noble, BOS Bank as of end-3Q

PKO, Polands largest bank, and its team of lawyers have taken the lead in trying to iron out details of the plan that would be palatable to a majority, the people said. A survey of its clients has shown 70% would be open to some form of settlement.

The industry also wants the central bank to provide currency reserves for the operation, with some seeking to soften the criteria needed to get assistance, the people said. At the same time, PKO signaled it may get the needed Swiss francs to convert the loans into zloty without the central banks help, according to one person.

Read More: Poland Nears Turning Point With Franc Loans

A deal backed by most lenders isnt currently likely, the people said, meaning that banks may miss out on central bank help and face years of escalating legal fees. This situation may change after the Supreme Court decision on March 25, but the road is long and bumpy.

Following the ruling, interested banks would need to survey mortgage holders to figure out how many are willing to convert their loans, and how this blow would affect their capital requirements. They would next compare this cost with that of continuing court battles. If it makes financial sense, and if shareholders of individual banks approve the outlays, the path for settlements would open.

With assistance by Piotr Bujnicki, and Piotr Skolimowski

(Updates with market reaction, Fitch and potential court delay from third paragraph.)

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