Danske Bank A/S : Fitch Affirms Realkredit Danmarks CC S and CC T Covered Bonds at AAA 07 Dec 2021

07 DEC 2021

Fitch Affirms Realkredit Danmark's CC S and CC T Covered Bonds at 'AAA'

Fitch Ratings - Frankfurt am Main - 07 Dec 2021: Fitch Ratings has affirmed Realkredit Danmark A/S's (A/Stable/F1/a) mortgage covered bonds issued out of Capital Centre (CC) S and CC T at 'AAA'. The Outlooks are Stable.

KEY RATING DRIVERS

The covered bonds' ratings for both programmes are based on Realkredit'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 bond programmes are rated five notches above the bank's IDR. This is out of a maximum achievable uplift of eight notches, consisting of a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches.

The Stable Outlook on both programmes is driven by that on Realkredit's IDR and the three-notch cushion against an IDR downgrade.

For the CC S cover pool, which consists of Danish fixed-rate residential and commercial mortgages, Fitch gives credit to 5.5% OC. This is the lowest nominal OC observed in the last 12 months and provides more protection than the 3% 'AAA' breakeven OC for the programme.

For the CC T cover pool, which consists of Danish floating and adjustable-rate residential and commercial mortgages, Fitch gives credit to 7.2% OC. This is also the lowest nominal OC observed in the last 12 months and provides more protection than the 3% 'AAA' breakeven OC for the programme.

Uplifts

Fitch currently does not assign a resolution uplift to Realkredit's covered bonds, as the issuer is a specialised mortgage lender not operationally integrated into a parent bank and the bail-in tool is not applicable to specialised mortgage banks in Denmark.

The six-notch PCU for both programmes reflects the liquidity protection in place for at least 12 months. Of the outstanding bonds in CC S, more than 99% have a pass-through amortisation profile and more than 99% of the CC T bonds have extendible maturity. The remaining CC S and CC T bonds are hard- bullet and their redemptions are covered by liquid assets for at least 12 months. The six notches also reflect interest payment protection of at least three months in both programmes.

Both programmes are eligible for a recovery uplift of two notches. The combination of a 'AA+' timely payment rating level and a one-notch recovery uplift results in the lowest breakeven OC supporting the 'AAA' ratings.

OC Protection

Fitch's breakeven OC has decreased for both programmes. For CC S, the Fitch 'AAA' breakeven OC has decreased to 3% from 4%. For CC T, the Fitch 'AAA' breakeven OC has decreased to 3% from 6% since the last review.

The reduction in Fitch's 'AAA' breakeven OC reflects the lower default rate assumptions for the commercial assets. This is the result of a reduced expected average annual default rate (90 days' past due), and updated assumptions used in Fitch's Portfolio Credit Model (PCM). Recovery rates have also increased as the weighted average LTV has decreased in both cover pools. The share of residential and commercial assets in the portfolios has also remained stable with good residential asset performance.

The breakeven OC for both programmes remains driven by the credit risk of each pool as Fitch does not model a sale of assets in its cash flow analysis, but considers the possibility of bond refinancing post insolvency or models the pass-through or maturity extension of bonds with these features. The 'AA+' credit loss component of the breakeven OC is now 3.3% for CC S, which is the portfolio loss floor under Fitch's criteria, and is applied to address the idiosyncratic risks of low-risk portfolios. For CC T, the 'AA+' credit loss component is 4.5%.

For the residential assets, Fitch has derived foreclosure frequency (FF) assumptions based on the analysis of vintage cumulative default data, as described under its originator-specific residential mortgage analysis rating criteria. The expected FF is unchanged at 1.00% for the residential assets in

1. S and has increased to 1.53% from 1.47% for CC T, to which Fitch applied the 'high' rating scenario multiples to derive FF in each rating scenario. This is due to the mild economic environment in Denmark and low cumulative defaults. For recovery prospects, we give full credit to the automated property valuation model used for regulatory purposes, to which we applied the updated market value decline assumptions for each rating scenario, as detailed under the criteria.

Fitch analysed the commercial sub-portfolios under the Appendix 10 of its Covered Bonds Rating Criteria (Commercial Real Estate Loans Securing Covered Bonds Analysis), which references Fitch's SME Balance Sheet Securitisation Rating Criteria. To derive stressed losses for these assets the agency uses its PCM, which it recently updated, as detailed in Fitch's updated CLO and Corporate CDO Rating Criteria. The expected average annual default rate for the performing commercial mortgage portfolio was set at 1% (from 1.5% in 2020).

Fitch applied different probability of default (PD) assumptions for each asset according to its internal rating score, with a floor at 0.5%. The reduction in the target portfolio PD reflects changes to the SME Balance Sheet Securitisation Rating Criteria where Fitch now places more emphasis on the originating bank's SME loan book performance, and gives higher credit to cure rates in the 'AA' to 'B' rating categories. We now give more credit to the good portfolio performance of Realkredit's commercial portfolio. For the social and cooperative housing segment, the expected average annual default rate

was unchanged at 0.50% (floored at 0.25% for each loan), given its good historical performance.

We also applied low and high stressed prepayment rates of 0% and 20%, respectively (lower than for residential loans based on historical data), cure rates of 50% in a 'B' scenario and a three-year recovery timing assumption for these loans. The 'AAA' collateral haircuts are 75% for industrial properties and 65% for other commercial properties. For the social and cooperative housing segments, we applied the residential market value declines that are set out in the Originator-Specific Residential Mortgage Analysis Rating Criteria.

For the commercial sub-pool analysis, Fitch tested high and low prepayment assumptions in both its portfolio credit and cash-flow models. The worst-case scenario in our cash flow model was high prepayments for both CC S and CC T. The resulting ALM loss component was -0.2% for CC S and -1.3% for CC T, reflecting the excess spread in the programmes coming from the administrative margins charged to borrowers.

In Fitch's cash flow modelling, the interest payments on both the assets and liabilities is floored at zero when the spread plus index component goes negative, which occurs in Fitch's base and low interest rate scenarios. However, for these programmes the excess spread is not exposed to market rates and Realkredit can charge the investor negative coupons. To reflect this feature, Fitch increased the margin on both the assets and the bonds so that the excess spread is maintained in the modelled decreasing and base interest rate scenarios.

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 and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

CC S

The 'AAA' rating of Realkredit's CC S mortgage covered bonds would be vulnerable to a downgrade if Realkredit's Long-Term IDR was downgraded by four notches to 'BBB-' or below, or the level of OC Fitch gives credit to in its analysis falls below the 'AAA' breakeven OC of 3%. If the relied-upon OC decreased to the legal minimum of 8% (of risk-weighted assets), we would downgrade the covered bonds to 'A+', one notch above the bank's IDR.

CC T

The 'AAA' rating of Realkredit's CC T mortgage covered bonds would be vulnerable to a downgrade if Realkredit's Long-Term IDR was downgraded by four notches to 'BBB-' or below, or the level of OC Fitch gives credit to in its analysis falls below the 'AAA' breakeven OC of 3%. If the relied-upon OC decreased to the legal minimum of 8% (of risk-weighted assets), we would downgrade the covered bonds to 'A+', one notch above the bank's IDR.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined 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- specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.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 financial 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.fitchratings.com/esg

Fitch Ratings Analysts

Matthew Aitken

Associate Director Primary Rating Analyst [phone]

Fitch Ratings - a branch of Fitch Ratings Ireland Limited Neue Mainzer Strasse 46 - 50 Frankfurt am Main D-60311

Geir Brust

Director

Secondary Rating Analyst [phone]

Vessela Krmnicek, CFA Senior Director Committee Chairperson [phone]

Media Contacts

Athos Larkou

London

[phone] [e-mail]

Rating Actions

ENTITY/DEBT

RATING

RECOVERY

PRIOR

Realkredit

Danmark A/S

• senior
secured,
Mortgage	AAA	Affirmed	AAA
LT

Covered

Bonds,

S

• senior
secured,
Mortgage	AAA	Affirmed	AAA
LT

Covered

Bonds,

T

RATINGS KEY OUTLOOK WATCH

POSITIVE

NEGATIVE

EVOLVING

STABLE

Applicable Criteria