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Fitch Affirms Nykredit Realkredit at 'A'; Outlook Stable
September 18, 2014 / 4:12 PM / 3 years ago

Fitch Affirms Nykredit Realkredit at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 18 (Fitch) Fitch Ratings has affirmed Denmark-based Nykredit Realkredit's (Nykredit) Long-term Issuer Default Rating (IDR) at 'A', Short-term IDR at 'F1' and Viability Rating (VR) at 'a'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this comment. Fitch has also affirmed wholly-owned subsidiary, Nykredit Bank's Long-term IDR at 'A' with a Stable Outlook, Short-term IDR at 'F1' and Support Rating at '1'. KEY RATING DRIVERS - VR, IDRS, AND SENIOR DEBT The affirmation of Nykredit's ratings reflects its strong Danish franchise as the leading domestic mortgage lender, robust asset quality, and solid capitalisation. The ratings also factor in the group's modest profitability and wholesale funding reliance, although the latter is mitigated by a large, deep and liquid domestic covered bond market. Nykredit's asset quality is strong, reflecting its focus on mortgage lending. Impaired mortgage loans remain low despite a 20% house price correction since the 2007 peak. Fitch expects the quality of the mortgage lending to remain strong in 2015, supported by a stabilising Danish economy and Nykredit's conservative risk appetite. Impaired loans in Nykredit Bank represent a much more significant proportion of lending than in the mortgage loan portfolio, but given the bank's limited size, Fitch does not expect it to pose a material risk to the group. Nykredit's capitalisation compares well with domestic and international peers. Low risk weights on mortgage loans boost capital ratios, although leverage is modest in a European context. Like its domestic peers, Nykredit is obliged by law to fund its mortgage lending through the issuance of mortgage bonds. Around one-third of these mature within one year which is matched by the interest rate term on the underlying mortgage loan. This dependence on short-term wholesale funding would normally imply a lower rating. However, structural features in the Danish mortgage bond market are important mitigating factors. Fitch expects continued strong demand for Danish mortgage bonds. This is driven by a need from domestic financial institutions, pension funds and insurance companies to hold highly liquid, high quality securities denominated in Danish kroner, especially given the limited volume of Danish government bonds outstanding. Nonetheless, maintaining a significant liquidity portfolio to mitigate any refinancing risk is key for the ratings. Nykredit's move to extend bond maturities and Denmark's new law on mortgage bond maturity extension will help reduce refinancing risk. Nykredit has strong cost efficiency, and Fitch expects the group's profitability to remain stable but relatively modest compared to similarly rated peers. Loan impairment charges (LICs) as a proportion of gross loans remain low, but as a result of its low-margin mortgage lending, LICs have shaved off 40% to 60% of pre-impairment operating profits since 2011. Fitch expects LICs to reduce in 2014 and 2015 supported by improving macroeconomic conditions. RATING SENSITIVITIES - VR, IDRS, AND SENIOR DEBT The Stable Outlook reflects Fitch's view that Nykredit will continue to maintain solid asset quality while improving its earnings to internally generate capital. A downgrade would most likely be a result of Nykredit being unable to competitively access wholesale funding markets or if it significantly increases its reliance on international debt investors that may be less stable during financial stress. Increased risk appetite, notably at Nykredit Bank, would also be rating negative. An upgrade is currently unlikely given the bank's already high ratings and limited product portfolio. In the longer term, any upgrade would be contingent on Nykredit broadening its product offering, providing it with more diversified income streams. As the senior unsecured notes' rating is aligned with Nykredit's Long-term IDR, their rating is primarily sensitive to any change in this rating. Fitch has not notched down for structural subordination due to the inherent difficulty of accurately assessing recoveries in a liquidation scenario for highly rated banks. The notes' rating is hence sensitive to a wider notching if Fitch changed its assessment of the loss severity risk. The assumption about loss severity is particularly important to Nykredit's unsecured creditors, given its highly encumbered balance sheet resulting from a covered bonds led funding structure. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR Nykredit's Support Rating and Support Rating Floor reflect Fitch's expectation that there is an extremely high probability that support would be forthcoming from the Danish authorities if required. This is driven by its importance within the Danish financial sector. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. As an EU member country, Denmark is subject to the requirements of Bank Recovery and Resolution Directive (BRRD). RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor of Nykredit are primarily sensitive to the progress made in implementing a resolution regime in Denmark. The BRRD requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. Fitch expects that the BRRD will be enacted into national legislation in the near term. Although Denmark is not a eurozone country, Fitch believes it will follow a similar agenda to these countries. While the BRRD includes some exceptions for non-deposit taking mortgage banks, Fitch believes the Danish state's propensity to support senior unsecured creditors in the large mortgage banks will nonetheless reduce. Fitch expects to then downgrade Nykredit's Support Rating to '5' and revise its Support Rating Floor to 'No Floor'. The Support Rating and Support Rating Floor are also sensitive to a change in Fitch's assumptions about the ability of the Danish authorities to provide timely support, as reflected by Denmark's sovereign rating (AAA/Stable). KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Nykredit are all notched down from its VR. Therefore, their respective ratings have been affirmed and are sensitive to any change in Nykredit's VR. The ratings are in accordance with Fitch's criteria 'Assessing and Rating Bank Subordinated and Hybrid Securities' reflecting each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Nykredit's Tier 2 instruments are rated three notches below the VR. The notes are notched twice for loss severity to reflect the principal write-down feature and once for non-performance risk. The latter reflects moderate incremental risk due to the 7% common equity Tier 1 ratio trigger, which is partly offset by the large capital buffer above this trigger point, compared with the risk reflected in the Nykredit's VR. SUSBIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES Nykredit Bank's IDRs and debt ratings are aligned with Nykredit's due to its core position within the Nykredit group. Its ratings are sensitive to the same factors that may drive changes to Nykredit's IDRs. Given the close integration of Nykredit Bank with the larger group, including various shared services, we have not assigned a VR to the subsidiary. Nykredit Realkredit Long-term IDR: affirmed at 'A', Stable Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Long-term senior unsecured debt: assigned at 'A' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Subordinated notes: affirmed at 'BBB' Nykredit Bank Long-term IDR: affirmed at 'A', Stable Outlook Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Long-term senior unsecured debt: affirmed at 'A' Short-term senior debt: affirmed at 'F1' Contact: Primary Analyst Jens Hallen Senior Director +44 20 3530 1326 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Cristina Torrella Senior Director +34 93 323 8405 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014 is available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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