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(Bloomberg) -- Polish banking shares will come under selling pressure after the market regulator hinted it may recommend lower dividends as the Swiss franc appreciation hurts earnings, brokerages Wood & Co. and BESI Grupo Novo Banco said.

PKO Bank Polski, Bank Zachodni WBK SA, MBank SA and Bank Millennium SA would suffer most, Wood & Co. analysts Marta Jezewska-Wasilewska and Pawel Wilczynski wrote in a note today, because they’re most exposed to the sector’s $35 billion of franc-denominated mortgages. The Financial Supervision Authority doesn’t rule out a review of the dividend policy this year, Andrzej Jakubiak, head of office, said in an interview on Polish radio yesterday. The industry “is stable as a whole,” he said.

The WIG Banking Index has dropped 6.7 percent since the Swiss central bank lifted its currency cap Jan. 15, on concern individuals will struggle to service franc mortgages, stoking an increase in bad loans. According to the regulator’s previous guidance, the banks were likely to pay out as much as 50 percent of their 2014 profits in dividends, Wood said.

“Lower dividends is what investors are worried about, but some of this concern may be partly already priced in,” Kamil Stolarski, an analyst at BESI, said by phone from Warsaw today. “Banking stocks may be under pressure as investors weigh whether Poland will introduce measures like Hungary, which forced loan conversion last year.”

Tumbling Zloty

Switzerland’s unexpected decision to end the currency cap sent the zloty tumbling against the franc, swelling payments for about 575,000 families who borrowed in the currency. Poland wants domestic banks to pass on negative interest rates in Switzerland to borrowers to ease the impact of the surging Swiss franc, according to Finance Minister Mateusz Szczurek.

Szczurek, central bank Governor Marek Belka and market regulators met with the biggest mortgage lenders on Tuesday after Croatia proposed fixing the exchange rate on similar loans to help borrowers. Polish measures stop short of Hungarian Prime Minister Viktor Orban’s move last year to order banks to convert $14 billion of foreign-currency loans into forint to cut his country’s exposure to currency swings.

“Investors see some regulatory risk, which in the longer term may erode banks’ earnings,” BESI’s Stolarski said. “Whether CHF appreciation will hit earnings now is less certain because it’s to early to assess it.”

MBank, with about 30 percent of its loans in the Swiss currency, “may have to retain more profit” if the zloty holds above 4 against the franc, Chief Executive Officer Cezary Stypulkowski said on the day of the SNB decision. Getin Noble, which has the weakest capital position among the banks with a Swiss franc mortgage exposure, was not expected to pay a dividend, Wood and BESI said.

The zloty depreciated 1.3 percent against the franc to 4.3389 at 3:35 p.m. in Warsaw and is down 18 percent since the SNB announcement on Jan. 15.

To contact the reporter on this story: Piotr Bujnicki in Warsaw at pbujnicki@bloomberg.net To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Chris Kirkham, Daliah Merzaban

Bloomberg