Poland's Bank Millennium reported a stronger-than-expected second-quarter profit on Tuesday, as a sharp drop in provisions for lawsuits tied to old Swiss-franc mortgages helped offset weaker net interest income and higher taxes.
The Warsaw-based lender, a subsidiary of Portugal's Millennium bcp, said net profit for the three months ended June 30 came in ahead of analyst forecasts, according to Reuters. The beat was driven primarily by a significant reduction in the amount of money set aside to cover potential legal claims from borrowers who took out mortgages denominated in Swiss francs years ago.
What happened with the Swiss franc mortgages?
During the 2000s, many Polish households took out home loans in Swiss francs to take advantage of lower interest rates. When the Swiss franc surged against the zloty after 2015, those borrowers saw their monthly payments skyrocket, leading to a wave of lawsuits against Polish banks. Courts have often ruled in favor of borrowers, forcing lenders to convert loans back to zlotys at favorable rates.
For years, Bank Millennium and its peers have been setting aside large sums to cover potential losses from these cases. In the second quarter, those provisions fell sharply, giving the bank a significant earnings boost. The relief was timely: the bank's core lending business is under pressure from falling interest rates and a higher tax burden.
Net interest income under pressure
Net interest income — the difference between what a bank earns on loans and pays on deposits — slipped to 1.39 billion zlotys from 1.45 billion zlotys a year earlier. That decline reflects the impact of Poland's central bank cutting interest rates, which compresses the margins banks can earn on lending.
On a more positive note, fee and commission income rose 10% to 207.2 million zlotys, suggesting the bank is finding ways to generate revenue from other services such as account fees, card payments and investment products. Still, the overall revenue picture was mixed, with higher taxes also eating into the bottom line.
What it means for investors
For everyday investors, Bank Millennium's results highlight a key theme in European banking: the end of the rate-hiking cycle is squeezing net interest income, forcing lenders to rely on cost control and non-interest income to support profits. The bank's ability to reduce legal provisions is a positive sign, but it may not be sustainable if new lawsuits emerge or if courts change their stance.
Investors should watch for further developments in the Swiss franc mortgage saga, as well as the trajectory of Polish interest rates. If the central bank continues to cut rates, net interest income could face further pressure. On the other hand, if the legal environment stabilizes, the bank may be able to release more provisions in future quarters, providing a tailwind for earnings.
Bank Millennium's results also come against a broader backdrop of US banks beating earnings estimates on stronger revenue growth, though the dynamics differ. In Europe, lenders are more exposed to regulatory and legal risks, such as the Swiss franc mortgage issue in Poland.
The bank's performance is a reminder that even when core lending income weakens, other factors can drive a profit beat. For investors, the key is to assess whether those factors are one-off or recurring. In Bank Millennium's case, the legal provision release is likely to be temporary, meaning future quarters may not see the same boost.
Looking ahead
Bank Millennium's management will likely face questions about the outlook for net interest income and the pace of new Swiss franc mortgage lawsuits. The bank's stock price may react positively to the earnings beat in the short term, but longer-term performance will depend on the bank's ability to grow revenue in a lower-rate environment.
For investors tracking the Polish banking sector, Bank Millennium's results offer a useful data point. The broader sector has been grappling with similar headwinds, and the bank's ability to beat estimates despite those pressures is a sign of resilience. However, the reliance on legal provision releases to drive earnings is a risk that investors should monitor closely.
