12/16/2020

Fitch Affirms Danske Bank AS's Mortgage Cover Pool D and I Covered Bonds at 'AAA'/Stable

RATING ACTION COMMENTARY

Fitch Af rms Danske Bank AS's Mortgage Cover Pool D and I Covered Bonds at 'AAA'/Stable

Tue 15 Dec, 2020 - 2:12 PM ET

Fitch Ratings - Frankfurt am Main - 15 Dec 2020: Fitch Ratings has af rmed Danske Bank AS's (A/Negative/F1) mortgage covered bonds secured by the bank's cover pools D and I, at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS

The covered bonds' ratings for the two programmes are based on Danske's Long-Term Issuer Default Rating (IDR) of 'A' and the various uplifts above the IDR granted to the programmes. The covered bonds' ratings also consider overcollateralisation (OC) protection for covered bond holders.

The covered bonds are rated ve notches above the bank's IDR. This is out of a maximum achievable uplift of eight notches, consisting of a resolution uplift of two notches, a payment continuity uplift (PCU) of ve notches and a recovery uplift of one notch.

The Stable Outlook on the covered bonds' ratings re ects a three-notch buffer against an issuer downgrade, due to the different uplift factors above the bank's IDR.

For cover pool D, which consists of Danish residential mortgages, Fitch gives credit to 7.7% OC. This is the lowest nominal OC of the last 12 months and provides more protection than the 5.5% 'AAA' breakeven OC for the programme.

For cover pool I, which consists of Norwegian and Swedish residential mortgages, Fitch gives credit to 13% OC. This is the lowest nominal OC of the last 12 months and provides more protection than the 9% 'AAA' breakeven OC for the programme.

Uplifts

The two-notch resolution uplift re ects that covered bonds issued by retail banks in Denmark are exempt from bail- in. It also considers Fitch's assessment that the risk of under-collateralisation at the point of resolution is suf ciently low, and that a resolution of Danske, should it happen, would not result in the direct enforcement of the recourse against the cover pool.

Fitch's PCU for Danske's programmes is ve notches, rather than the standard six for mortgage covered bonds with a 12-month principal maturity extension and three-month protection for interest payment. This is due to the lack of

12/16/2020

Fitch Affirms Danske Bank AS's Mortgage Cover Pool D and I Covered Bonds at 'AAA'/Stable

formal provisions for a re nancing solution without a delay in the event of a maturity extension.

The recovery uplifts for the programmes are capped at one notch due to the presence of signi cant pre-swap FX mismatches between cover assets and liabilities.

Cover Pool D

Cover pool D consists of variable-rate mortgage loans, for roughly 70% of which the borrowers have a dedicated savings account with Danske. Borrowers have waived any right of set-off against the relevant loans and Danish legislation prohibits the exercise of set-off against mortgage loans funded through covered bonds. The remaining pool consists of short-term xed rate mortgages with similar characteristics.

The 'AAA' break-even OC has increased from 4.0% to 5.5%, due to an increase in the ALM loss component, while the credit loss component is unchanged.

Foreclosure frequency (FF) assumptions are derived from the analysis of vintage cumulative default data, which are then multiplied by 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 oor of 1%.

Based on a mild economic environment in Denmark, with low cumulative defaults, we have assigned the high rating scenario multiples de ned in the criteria to derive FF. This results in a 'AAA' weighted average FF of 8.5%, which is unchanged from prior analysis. Our recovery expectations of the cover pool are based on automated valuation model property values used for regulatory purposes. The 'AAA' weighted average recovery rate has also remained stable at 64.8%. As a result, the credit loss is driven by the 'AAA' portfolio loss oor of 4% in Fitch's criteria, which is applied to address the idiosyncratic risks of low-risk portfolios. The 'AA+' minimum loss assumption of 3.2% translates into the breakeven OC credit loss component of 3.3%.

The ALM loss component, which represents the non-credit loss component of the breakeven OC for the rating and re ects modelled maturity, interest-rate and FX mismatches, increased from 0.5% to 2.4%. This is a result of larger maturity mismatches as 60% of the liabilities are maturing between September-2024 and February-2025 and the lower excess spread because of falling mortgage rates in the pool coming from new originations, as more legacy mortgages mature or are re nanced with mortgages that pay a lower rate.

While the FX covered bonds are fully hedged until maturity (including the extension period), upon a covered bond's default, recoveries from Danish kroner-denominated assets, which have a longer weighted average life than the covered bonds, could expose holders of non-kroner-denominated bonds to FX risk.

Cover Pool I

The 'AAA' breakeven OC of 9% has decreased from 10%, driven by a lower ALM loss component. In line with Danske's plan to gradually turn the programme into a pure Norwegian residential mortgage pool, we have taken into account the expected reduction of Swedish assets in the pool in our analysis.

The asset modelling approach is similar to that for cover pool D. The derived loss expectations are below the 'AAA' portfolio loss oor of 4% in Fitch's criteria. In line with cover pool D, the resulting 'AA+' credit loss component is 3.3%.

The ALM loss component of the breakeven OC for the rating has decreased to 6.0% from 6.5%. The decrease is driven by the continued reduced fraction of long dated interest only SEK assets, leading to smaller asset liability mismatches. In our modelling, the ALM loss component shows high sensitivity to changes in asset margins, which are the main source of excess spread for the programme.

In Fitch's cash ow modelling, the lowest weighted-average asset margin observed in the pool over the last 12 months is subject to a haircut of 40bp for the rst 12 months and a haircut of 15bp thereafter, and to a oor and cap of 100bp

12/16/2020Fitch Affirms Danske Bank AS's Mortgage Cover Pool D and I Covered Bonds at 'AAA'/Stable

and 200bp, respectively. In our cash ow modelling, we assumed that the ex-loans would convert to repayment loans after an initial 10-year interest only period.

The FX covered bonds are fully hedged until maturity (including the extension period). However, upon a covered bonds' default, recoveries from Norwegian krone-denominated assets, which have a longer WAL than the covered bonds, could expose holders of non-Norwegiankrone-denominated bonds to FX risk.

RATING SENSITIVITIES

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. The ratings 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 Long-Term IDR was downgraded by four notches to 'BBB-' or below; or (ii) the level of OC Fitch gives credit to in its analysis falls below the 'AAA' breakeven OC of 5.5%. If the actual OC is reduced to the legal minimum of 0%, the covered bonds will be downgraded to 'AA', three notches above the bank's IDR. The Outlook on the covered bonds' ratings would then be aligned with the Outlook on 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 Long-Term IDR was downgraded by four notches to 'BBB-' or below; or (ii) the level of overcollateralisation (OC) Fitch gives credit to in its analysis falls below the 'AAA' breakeven OC of 9.0%. If the actual OC is reduced to the legal minimum of 0%, the covered bonds will be downgraded to 'AA', three notches above the bank's IDR. The Outlook on the covered bonds' ratings would then be aligned with the Outlook on the bank's IDR.

Pandemic Downside Scenario Stress Sensitivity:

Fitch expects the coronavirus containment measures to negatively impact the performance of Danish, Norwegian and Swedish residential mortgage loans. However, the covered bonds' ratings bene t from a signi cant cushion between the OC that Fitch relies upon in its analysis and the OC equivalent to Fitch's 'AAA' breakeven OC. In addition, the ratings are well protected by the three-notch buffer against a downgrade of Danske.

Fitch performed a downside sensitivity scenario stress by increasing the cover pool's probability of default and decreasing the recovery expectations on the mortgage loans, as well as increasing the stressed cost to re nance the cover pool. The additional stresses would lead to an increase of the 'AAA' breakeven OC, but the relied-upon OC still provided suf cient protection for the 'AAA' rating on the programmes.

The Fitch break-even OC for the covered bond rating will be affected, among other factors, by the pro le of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the break-even OC to maintain the covered bonds' rating cannot be assumed to remain stable over time.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a

12/16/2020

Fitch Affirms Danske Bank AS's Mortgage Cover Pool D and I Covered Bonds at 'AAA'/Stable

three-year rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst- case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector- speci c best- and worst-case scenario credit ratings, visit [https://www. tchratings.com/site/re/10111579]

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 the credit risk of the issuing nancial institution as measured by its Long- Term IDR.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit

www. tchratings.com/esg

RATING ACTIONS

ENTITY/DEBT

RATING

PRIOR

Danske Bank

A/S

• senior

LT

AAA Rating Outlook Stable

Af

rmed

AAA Rating

secured,

Outlook

Mortgage

Stable

Covered

Bonds,

Domestic

• senior

LT

AAA Rating Outlook Stable

Af

rmed

AAA Rating

secured,

Outlook

Mortgage

Stable

Covered

Bonds,

International

VIEW ADDITIONAL RATING DETAILS

FITCH RATINGS ANALYSTS

Matthew Aitken

Associate Director Primary Rating Analyst +49 69 768076 165

This is an excerpt of the original content. To continue reading it, access the original document here.

Attachments

  • Original document
  • Permalink

Disclaimer

Danske Bank A/S published this content on 16 December 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 16 December 2020 13:42:07 UTC