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Problem no. 4: Calculations before granting a CHF denominated loan


Remarks:
* The values below are just exemplary numbers, they have nothing to do with our factual loan parameters or income *
* The following calculations are based on our knowledge which we possessed after Deutsche Bank refused to change the loan currency from CHF to PLN without costly and time-consuming financial analysis which should had been carried out on the occassion of applying for the loan. We had never been interested in this sort of calculations bacause we are just clients who did put their complete trust in the Bank's policies and consistency of their procedures . But we had to take a closer look at the Bank's procedures when it turned out that we are trapped in a virtually unlimited currency risk which may have an immense impact on our lives. *


Suppose there is a married couple - without kids - freshly after the wedding and they want to buy a small apartment. They come to Deutsche Bank in the year 2009.
There are the following initial conditions:
  • value of the property: PVAL = 400 000 PLN;
  • initial loan balance in PLN: LBpln = 300 000 PLN;
  • loan interest rate in PLN (the Bank's margin + WIBOR): LIpln = 8% annual;
  • monthly income of the couple: CI = 9000 PLN;
  • period of repayment: RP = 30 years (a typical period in Poland);

  • The Bank's representative presents a WIBOR based loan simulation in PLN:
  • monthly installment: MI = 2201 PLN ;
  • initial LTV: LTVi = 76% ;
  • initial DTI : DTIpln = 24% ;
  • disposable income : DIpln = 6799 PLN ;

  • But also, the Bank's representative presents a LIBOR based loan simulation in CHF:
  • loan interest rate (the Bank's margin + LIBOR): LIchf = 4% annual;
  • PLN/CHF exchange rate at the date of presentation: XCRi = 2.2 PLN/CHF;
  • initial loan balance in CHF: LBchf = 136363 CHF;
  • monthly installment: MIchf = 612 CHF;
  • monthly intallment converted to PLN: MIpln2 = 1347 PLN;
  • initial DTI: DTIchf = 15%;
  • disposable income : DIchf = 7653 PLN.

  • According to the directives given by Finacial Control Office, CHF denominated loan can be granted providing that the client's financial standing is good enough to pay back the loan if the CHF exchange rate goes up by 20% and the CHF denominated loan interest rate equals to at least the interest of local currency loan (LIBOR = WIBOR). I refer to such a deterioration of loan repayment conditions as the Worst Case Scenario - which in fact is the lightest version of bad scenarios, because a truly professional institution should assume higher values of changes or just abandon the idea of selling foreign currency denominated loans to regular clients on a mass scale.

    So, the Bank's risk specialist team should make sure that the current client's financial standing allows the client to repay the monthly installments safely in the Worst Case Scenario. Also, the Bank's representative should present the client with the adequate information when Worst Case scenario arises, i.e. when the following situation takes place:
  • PLN/CHF exchange rate goes up by 20%: XCR2 = 1.2 x XCRi = 2.64 PLN/CHF;
  • interest rate of the loan goes up: LIchfWCS = LIpln = 8% annual;

  • So, the Bank's risk assessors should take the above conditions (the worst case scenario) into account and the resulting values should be presented to the client by the Bank's representative prior to contract signinig:
  • loan balance: LB20 = 1.2 x BLpln = 360000 PLN ;
  • monthly installment in PLN: MIpln20 = 2641 PLN;
  • DTI: 29% ;
  • disposable income: 6358 PLN;

  • The clients decide to take the CHF denominated loan, because they believe that the Bank's simulations show the Worst Case of CHF/PLN exchange rate change.

    Now let's assume, that after after 5.0 years some things changed drastically: the CHF/PLN exchange rate went up to 3 PLN/CHF and WIBOR based interest rate went down to 4%. Other things are still the same (the value of the property, the income of the couple did not change). But, to make things difficult, they have two children.

    After five years, the borrowers are in the following situation:
  • current loan balance: BL5 = 122823 CHF ;
  • chf / pln exchange rate: XCR5 = 3.0 PLN;
  • current loan balance in PLN: LB5pln = 368471 PLN;
  • loan to value: LTV5 = 92% ;
  • monthly installment in PLN : MI5pln = 1836 PLN;


  • Now, the borrowers are in a very dangerous situation. The LTV is very near to 100% which means that the loan is not safely protected by the mortgage - any further change in the CHF/PLN exchange rate might result in LTV exceeding 100%. This situation is unhealty not just for the borrowers, but also for the bank. So what should be done in this situation?

    Let's assume that the borrowers have the same income as five years earlier, but they also have two kids. They have no money to make an earlier partial repayment of the loan to lower the LTV to a safe level. So, what should be done? And who is to be blamed for this situation? It is not just a case of a singular family - there are almost 1 million families in this situation in the whole country.
    What should be done?

    Imagine that the borrowers want to eliminate the currency risk because they are afraid that the exchange rate will go up even more and trap them in a debt impossible to pay back. They ask the bank to calculate the monthly installment after conversion. They get the following simulation:
  • interest rate (the Bank's margin + WIBOR): 4% ;
  • monthly installment: MIc = 2233 PLN ;
  • DTI : DTIc = 25%;
  • period of repayment: PRc = 25 years ;

  • As you can see, the installment after convertion is smaller than the installment in the Worst Case Scenario (2233 PLN < 2641 PLN) so the conversion should create no problem for the Bank - because the Bank had already checked the debtors' ability to take loan in Worst Case Scenario. Surprisingly, the Bank demands that the borrowers submit a whole lot of documents which confirm their financial standing. So the borrowers have to prove again that they can afford a WIBOR based loan even though the Bank had checked that five years earlier. On the other hand, the borrowers can continue paying back the installments of their CHF denominated loan as if nothing had happened.

    Given the numbers above, there is only one conclusion to come to: the Bank had not checked thoroughly all the possibilities before selling CHF denominated loans to many households in Poland. It was the Bank's responsibility to predict the change of CHF/PLN exchange rates more than just 20%. And it is not our job to find solution to this problem - experts are responsible for finding a solution which will help people get out of this trap.



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    Contents / Spis tresci

    Trick no. 1 : Mortgage loan selling procedure
    Trick no. 2 : The spreads
    Trick no. 3 : Contract repairment
    Trick no. 4 : Convertion of loan currency
    Trick no. 5 : Conversion of variable interest rate to fixed interest rate
    Problem no. 1: What should be done
    Problem no. 2: A very important question to finance specialists in poland
    Problem no. 3: Inconsistency of Deutsche Bank procedures of foreign currency loans handling
    Problem no. 4: Calculations before granting a CHF denominated loan
    [2021-07-14] One more inquiry about the balance clause in the annex
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