PKO Bank Polski has submitted an application to the Polish FSA for a permit to set up a mortgage bank that will issue covered bonds as a source of improved ALM and long term financing, with the bank targeting an early 2015 launch, an official at the bank told The Covered Bond Report.

The Polish Bank submitted its application to the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego, or KNF) on 13 February, and expects to receive the permit mid this year, said Rafal Kozlowski, head of the PKO Bank Hipoteczny project.

According to Kozlowski, the primary purpose of establishing the mortgage bank is for the issuance of covered bonds, which will provide the bank with improved ALM and a source of long term financing.

The bank has said that it will issue primarily in zloty and euros. However, Kozlowski said that it will not exclude issuance in other currencies if there is demand.

“Once we receive the permit from the FSA, we will develop our covered bond programme before sending that for final approval,” he said. “We expect the bank to begin operations in early 2015 with its first covered bonds being issued few months afterward”

PKO BP is the largest commercial bank in Poland with mortgage loans in excess of Pln100bn (Eu23.9bn) and a PKO BP mortgage bank would be the third covered bond issuer in Poland, in addition to Pekao Bank Hipoteczny and mBank Hipoteczny (formerly BRE Bank Hipoteczny), which is the largest specialist mortgage bank and has over Pln2.35bn of covered bonds outstanding.

If material adjustments that have been proposed are made to the covered bond framework in Poland, a PKO BP mortgage bank could be looking at issuance in excess of Pln20bn within three years, said Kozlowski, as opposed to just a few billion of issuance under the existing framework.

Of eight changes being proposed to Polish covered bond legislation, three have significant importance for international investors, he said: adjusting the existing bankruptcy law to provide covered bonds with the ability to be granted uplift against the issuer’s rating by the rating agencies; waiving withholding tax on covered bonds; and increasing the maximum loan to value (LTV) ratio for mortgages from 60% to 80%.

“These changes would provide investors with the assurance that the collateral is in place in the case of issuer bankruptcy, and put Polish covered bond legislation in line with the majority of European regulations,” he said.