20 SEP 2023
Fitch Affirms Danske Bank A/S's Cover Pools D and I Mortgage Covered Bonds at 'AAA'; Outlook Stable
Fitch Ratings - Frankfurt am Main - 20 Sep 2023: Fitch Ratings has affirmed Danske Bank A/S's (A+/Stable/F1) mortgage covered bonds, secured by the bank's cover pools D and I, at 'AAA' with Stable Outlooks.
KEY RATING DRIVERS
The mortgage covered bonds' 'AAA' ratings are based on Danske's Long-Term Issuer Default Rating (IDR) of 'A+', the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection for covered bondholders. The Stable Outlook on the programmes reflect the Stable Outlook on Danske's IDR together with the six notches (for cover pool D) and five notches (for cover pool I) of buffer against an IDR downgrade.
Danske's covered bonds are rated four notches above the bank's Long-Term IDR. The maximum achievable uplifts are 10 notches for cover pool D and nine notches for cover pool I. The uplifts consist of a resolution uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches for cover pool D and one notch for cover pool I.
For cover pool D, which consists of Danish residential mortgages, the relied-upon OC is 7.4%. This is the lowest OC level in the past 12 months and provides more protection than the 4.0% 'AAA' breakeven OC for the programme. As of end-June 2023, Danske pool D's outstanding covered bonds (DKK38.9 billion equivalent) were secured by DKK42.8 billion of cover assets located in Denmark, resulting in a nominal OC of 10.1%.
For cover pool I, which consists of Norwegian residential mortgages, the relied-upon OC is 8.8%. This is the lowest level observed over the past 12 months and provides more protection than the 7.0% 'AAA' breakeven OC for the programme. As of end-June 2023, Danske pool I's outstanding covered bonds (DKK83.9 billion equivalent) were secured by DKK93.1 billion of cover assets located in Norway, resulting in a nominal OC of 10.9%.
In July 2023, Danske disclosed the intention of selling the Norwegian assets and liabilities at fair value to Nordea Eiendomskreditt AS (fully-owned mortgage credit subsidiary of Nordea Bank) as part of its Forward '28 Strategy. Danske has offered investors in the Norwegian krone-denominated cover pool I the opportunity to transfer their current NOK-bonds to Nordea Eiendomskreditt AS, while keeping their existing economic terms. The transaction is still subject to regulatory approvals and is expected to take place in 4Q24.
The two-notch resolution uplift reflects that covered bonds issued by retail banks in Denmark are exempt from bail-in. The resolution uplift takes also into account the sufficiently low risk of under- collateralisation at the point of resolution and Fitch's assessment that a resolution of Danske would not result in the direct enforcement of recourse against the cover pool.
Fitch's PCU is now six notches for each programme, reflecting the principal liquidity protection provided by a 12-month maturity extension and three-month protection for interest payments. In July 2022, changes in Denmark's covered bonds law took effect, transposing the EU Covered Bonds Directive. Changes included the clarification of how and when maturities could be extended and the new legal minimum OC of 2%, which is only applicable to programmes issuing new bonds after the effective date. Danske has issued new bonds under both cover pool registers since. Consequently, Fitch has increased the PCU to six notches from five.
The recovery uplift for cover pool D is two notches, as Fitch considers the Danish krone's peg to the euro a mitigating factor to the presence of significant pre-swapforeign-exchange (FX) mismatches between krone-denominated cover assets and euro-denominated liabilities.
The recovery uplift for cover pool I remains capped at one notch due to the presence of significant pre- swap FX mismatches between cover assets and liabilities. The FX covered bonds are fully hedged until maturity (including the extension period). However, upon a covered bond's default, recoveries from the Norwegian krone-denominated assets, could expose holders of non-Norwegiankrone-denominated bonds to FX risk.
Cover Pool D
The 'AAA' break-even OC remains 4.0%. It supports a two-notch recovery uplift to 'AAA' above the resolution reference point of 'AA' (two notches above Danske's IDR of 'A+'). The break-even OC was previously driven by a 'AA+' timely payment rating level and a one-notch recovery uplift. The break- even OC corresponds to the credit loss in a 'AAA' rating scenario.
Fitch derives foreclosure frequency (FF) assumptions from the analysis of vintage cumulative default data, to which it applies standardised sets of rating scenario multipliers to determine FF assumptions at stressed rating levels. Based on the default vintages for Danske's cover pool D's eligible residential mortgage loans, the expected-case FF remains at the floor of 1%.
The credit loss is driven by the 'AAA' minimum loss assumption of 4.0%, which Fitch applied to address the idiosyncratic risks of low-risk portfolios and translates into the 'AAA' credit loss of 4.2%. It reflects the high quality of Danske's cover assets with high seasoning and low current weighted average loan- to-value ratio of 53.2%, allowing for outstanding recoveries in case of default.
Cover Pool I
The 'AAA' breakeven OC increased to 7.0% from 6.5%, due to a higher ALM loss component for cover
pool I. This supports timely payments in a 'AA+' stress scenario and a one-notch recovery to 'AAA'. The asset modelling approach is similar to that for cover pool D. The derived loss expectations at 'AA+' is below the portfolio loss floor in Fitch's criteria and this translates into an 'AA+' credit loss component floored at 3.3%.
The ALM loss component of the breakeven OC for the rating has increased to 3.6% from 3.2%. The increase is driven by higher cost of sales due to shorter bond maturities. In Fitch's cash flow modelling, the lowest weighted average asset margin observed in the pool over the past 12 months is subject to a haircut of 40bp for the first 12 months and a haircut of 15bp thereafter, and to a floor and cap of 100bp and 200bp, respectively. For this analysis, the margin remains floored at 100bp, similar to last year's review. In our cash-flow modelling, we assumed that the flex-loans would convert to repayment loans after an initial 10-yearinterest-only period.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The covered bonds are rated 'AAA', which is the highest level on Fitch's scale and cannot be upgraded.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Cover Pool D
The 'AAA' rating of Danske's cover pool D mortgage covered bonds would be vulnerable to a downgrade if any of the following occurs: (i) Danske's 'A+' Long-Term IDR was downgraded by seven notches to 'BB' or below; or (ii) the level of OC Fitch gives credit to in its analysis falls below the 'AAA' BE OC of 4.0%. If the actual OC reduces to the legal minimum of 2%, the covered bonds would be downgraded to 'AA+', three notches above the bank's IDR.
Cover Pool I
The 'AAA' rating of Danske's cover pool I mortgage covered bonds would be vulnerable to a downgrade if any of the following occurs: (i) Danske's 'A+' Long-Term IDR was downgraded by six notches to 'BB+' or below; or (ii) the level of OC Fitch gives credit to in its analysis falls below the 'AAA' breakeven OC of 7.0%. If the actual OC reduces to the legal minimum of 2%, the covered bonds would be downgraded to 'AA+', three notches above the bank's IDR.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The covered bonds' ratings are driven by Danske Bank's Long-Term IDR.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit.
Fitch Ratings Analysts
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Sebastian Seitz, CFA, CAIA
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Danske Bank A/S published this content on 21 September 2023 and is solely responsible for the information contained therein. Distributed by, unedited and unaltered, on 21 September 2023 06:58:06 UTC.