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Rating Action:

Moody's affirms Nykredit Realkredit's and Nykredit Bank's ratings and upgrades Counterparty Risk Ratings and Counterparty Risk Assessments; outlook positive

11 Dec 2018

Positive outlook reflects improvements in Nykredit's standalone credit profile and potentially lower loss-given-failure for senior creditors

Limassol, December 11, 2018 -- Moody's Investors Service (Moody's) today affirmed the ratings and assessments assigned to Nykredit Realkredit A/S (Nykredit) and Nykredit Bank A/S (Nykredit Bank) and upgraded their long-term Counterparty Risk Ratings (CRR) to A3 from Baa1 and their long- and short-term Counterparty Risk Assessments (CRA) to A2(cr)/P-1(cr) from A3(cr)/P-2(cr). The rating agency also changed the outlook on Nykredit's Baa1 long-term issuer rating and Nykredit Bank's Baa1 senior unsecured and Baa1 deposit ratings to positive from stable.

The ratings affirmation was driven by (1) Nykredit's standalone credit strength, underpinned by its low risk mortgage lending, solid regulatory capitalisation and modest but stable profitability, and Moody's assessment of a very high probability of affiliate support towards its subsidiary Nykredit Bank, which helps align the ratings of the two entities; (2) the rating agency's Advanced Loss Given Failure (LGF) analysis that takes into account the current limited loss-absorbency of the group's liability structure in case of a bail-in because it is predominantly funded by covered bonds that are outside the scope of securities that can be bailed-in under Denmark's resolution framework; and (3) Moody's assumption of a moderate likelihood of support from the Government of Denmark (Aaa stable) given Nykredit's very high market share in Danish mortgages of around 40%.

The upgrade of the CRR and the CRA follows Moody's forward-looking view that the loss absorption buffer for counterparties will increase because of the ongoing implementation of a regulatory debt buffer for mortgage lending activities and a minimum requirement for own funds and eligible liabilities (MREL) for commercial banking. Moody's expects these requirements will lead the group to issue additional bail-inable debt, predominantly in the form of non-preferred senior debt -- referred to as "junior senior" unsecured debt by Moody's -- and therefore increase the amount of loss-absorbing debt that Nykredit carries on its balance sheet.

The positive outlook on the long-term ratings reflects a combination of (1) Moody's expectation that Nykredit's asset risk and capitalisation will sustain improvements to its standalone credit profile; and (2) the potential that the aforementioned junior senior debt issuances could exceed the amounts required to meet the regulatory minimum, thereby affording a higher loss-absorption buffer for junior depositors and senior unsecured creditors, which rank just below the liabilities expressed by the CRR and CRA.

Please refer to the end of this press release for a list of all affected ratings and assessments.

RATINGS RATIONALE

-- RATINGS AFFIRMATION

The affirmation of the two entities' ratings reflects Nykredit's baa1 standalone Baseline Credit Assessment (BCA) and the support that would be forthcoming to its affiliate Nykredit Bank, Moody's LGF analysis on the group's liability structure, which takes into account the current limited loss absorbency, and a moderate likelihood of government support.

Nykredit's baa1 BCA primarily reflects (1) its robust asset quality supported by a benign operating environment and the focus on relatively low risk mortgage lending, but also, therefore, high concentration to Danish property; (2) solid capitalisation and moderate leverage with a Basel III leverage ratio of 5% as of September 2018; (3) modest but stable profitability, with a net income to tangible assets of 0.45% during the first nine months of 2018; (4) limited earnings diversification; and (5) high market funding dependence, although benefiting from a stable local covered bond investor base.

Nykredit Bank's baa3 BCA reflects Moody's expectation of continued improving asset quality, problem loan ratio (defined as IFRS9 Stage 3 loans / gross loans) was 5.0% at end-June 2018, solid capitalisation with a CET1 ratio of 20.0%, and adequate liquidity, which are balanced against elevated asset risk in its portfolio, volatile profitability as well as high market funding dependence. Nykredit Bank makes up about 5% of Nykredit's total lending. Moody's assumes a very high probability of affiliate support for Nykredit Bank from its parent reflecting its high interconnectedness to the group, resulting in rating uplift and a baa1 Adjusted BCA for the bank, the same as for Nykredit, and helps align its final ratings with that of Nykredit.

The other driver for the affirmation relates to Moody's Advanced LGF analysis on Nykredit's liabilities, which is performed at the consolidated group level for both entities in line with the Danish FSA's single-point-of-entry resolution strategy, and which considers the risks faced by the different debt and deposit classes across its liability structure in the unlikely event that the group enters resolution. Nykredit has low amounts of bail-inable debt because it is overwhelmingly funded by covered bonds, which are outside the scope of securities that can be bailed-in under the country's resolution framework, thereby providing little protection for senior creditors. As a result, for Nykredit's issuer rating and Nykredit Bank's junior deposit and senior unsecured ratings Moody's LGF analysis indicates a high loss-given-failure, which translates into a one-notch negative adjustment from the two entities' baa1 Adjusted BCA.

Further, Moody's continues to consider a moderate probability of government support for Nykredit and Nykredit Bank, resulting in one notch of government support uplift in the assigned long-term issuer, deposit and senior unsecured ratings, and the CRR and CRA. This reflects Nykredit's systemic importance with a very high market share in Danish mortgages of around 40%.

-- UPGRADE OF COUNTERPARTY RISK RATINGS AND COUNTERPARTY RISK ASSESSMENTS

The upgrade of Nykredit's and Nykredit Bank's CRR and CRA reflects Moody's expectation that the ongoing implementation of regulatory requirements for additional bail-ianble liabilities will increase the amount of loss-absorbing debt that Nykredit carries on its balance sheet and reduce the loss severity for the counterparty liabilities and operating obligations that relate to the CRR and the CRA, in case of failure, which rank more senior to junior deposits and senior unsecured debt.

Based on Danish regulatory requirements that focus on supporting the effective resolution of large banking groups, Nykredit will need to build up bail-inable liabilities that amount to at least 8% of total liabilities by 1 January 2022, as a combination of a debt buffer for mortgage activities, capital requirements and MREL. Moody's expects Nykredit will cover the shortfall predominantly by continuing to issue junior senior debt. As of end-September 2018 Nykredit had DKK17.1 billion in junior senior debt outstanding, and Moody's expects the total issuance to rise to at least around DKK30 billion over the coming years. According to Moody's, the issuance of the expected minimum amount of junior senior debt would be enough to boost protection for counterparties, driving today's upgrade.

-- POSITIVE OUTLOOK ON LONG-TERM RATINGS

The positive outlook on the Baa1 long-term issuer, senior unsecured and junior deposit ratings reflects a combination of (1) expected improvements in Nykredit's standalone credit profile, particularly with regards to its capitalisation and asset risk; and (2) that additional amounts of junior senior issuances, beyond the minimum estimated amount described above, could also help materially reduce loss-given-failure for junior depositors and senior creditors, potentially leading to rating uplift.

With regards to Nykredit's standalone credit profile, Moody's considers that Nykredit's capital flexibility has improved and will help the group to comply with potential future changes to regulatory capital requirements, such as proposed new Basel standards that include "output floors" in the use of internal models, and to better cope with macro-economic shocks that affect its capital metrics, ultimately helping to improve Nykredit's leverage. Nykredit is not a publically traded company and its access to capital improved in late 2017 after several Danish pension companies raised their ownership in the company to 16.9%. The transfer of shares was recommended by the association Forenet Kredit, Nykredit's 78.9% majority owner.

Nykredit's common equity tier 1 (CET1) capital ratio stood at a strong 20.9% as of September 2018 (year-end 2017: 20.6%) and it also has potential access to additional DKK14.7 billion in CET1 capital, which can add 4 percentage points to its CET1 ratio, through Forenet Kredit's liquid assets and from non-binding investment commitments from the Danish pension companies.

Further, according to the rating agency, credit risk in Nykredit's lending portfolio is also subsiding along with shifts in the structure of its mortgages, supported by macroprudential rules. These shifts include an increase in fixed rate mortgages and in fixed-rate periods for variable rate mortgages that help reduce the vulnerability of households to hikes in interest rates, and a reduction in interest-only loans. The average loan-to-value ratio of its mortgage portfolio has also reduced to 62% as of September 2018 from 69% as of 2014. Generally, housing market developments in Denmark have been more stable in 2018, with rises in the price of owner-occupied flats in large urban centers showing signs of slowing down and new lending rules introduced in 2018 helping to contain the proportion of new risky loans to households with high debt-to-income ratios.

Further helping to drive the positive outlook on the long-term ratings, is the potential that the group may issue amounts of junior senior debt at the higher end of Moody's expectation, at over DKK40 billion, which, assuming modest balance sheet growth, could eventually provide rating uplift for the deposit, senior unsecured and issuer ratings because of lower loss-given-failure. The exact amount of such debt to be issued remains unclear at this stage and will largely depend on management's appetite to issue additional amounts in the form of a buffer above the regulatory minimum.

WHAT COULD CHANGE THE RATING UP/DOWN

Nykredit's issuer rating and Nykredit Bank's deposit and senior unsecured ratings could be upgraded following a continued improvement in Nykredit's fundamental credit profile, as indicated by an upgrade of its standalone BCA, for instance if credit risk in its portfolio continues to reduce, and if it demonstrates a sustained improvement in its access to capital and a leverage ratio above 5%, while maintaining a stable net income to tangible assets of around 0.5%.

The two entities' long-term ratings could also be upgraded following a decrease in the expected loss severity for senior creditors following issuance of material additional amounts of junior senior debt, which would result in more rating uplift for these ratings as a result of Moody's LGF analysis.

The positive outlooks assigned to Nykredit's and Nykredit Bank's ratings could be revised to stable, however, if the group issues junior senior debt volumes at the lower-end of Moody's expectation or its liability structure changes in a way that does not reduce loss-given-failure for these instruments, and based on standalone considerations, if Nykredit fails to sustain the improvements to its solvency profile, for example if it undertakes more risky lending, or, if property market developments in Denmark lead to higher risks, and if its profitability faces a sustained reduction.

A downgrade of the two entities' ratings could be triggered following (1) a downgrade of Nykredit's standalone BCA; or (2) a change in Moody's government support assumptions. Downward rating pressure for Nykredit Bank could emerge from a change in Moody's affiliate support assumptions.

Downward rating pressure for Nykredit's BCA could develop as a result from (1) a decrease in the group's capitalisation, below its current capital target; (2) increasing risks in its portfolio or weaker asset quality; (3) larger asset-liability maturity mismatches; or (4) a weakening in the operating environment for banks in Denmark.

LIST OF AFFECTED RATINGS AND ASSESSMENTS

Issuer: Nykredit Realkredit A/S

..Upgrades:

.... Long-term Counterparty Risk Assessment, Upgraded to A2(cr) from A3(cr)

.... Short-term Counterparty Risk Assessment, Upgraded to P-1(cr) from P-2(cr)

.... Long-term Counterparty Risk Rating, Upgraded to A3 from Baa1

..Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed baa1

.... Baseline Credit Assessment, Affirmed baa1

.... Short-term Counterparty Risk Rating, Affirmed P-2

.... Short-term Issuer Rating, Affirmed P-2

.... Long-term Issuer Rating, Affirmed Baa1, outlook changed to Positive from Stable

..Outlook Action:

....Outlook Changed To Positive From Stable

Issuer: Nykredit Bank A/S

..Upgrades:

.... Long-term Counterparty Risk Assessment, Upgraded to A2(cr) from A3(cr)

.... Short-term Counterparty Risk Assessment, Upgraded to P-1(cr) from P-2(cr)

.... Long-term Counterparty Risk Rating, Upgraded to A3 from Baa1

..Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed baa1

.... Baseline Credit Assessment, Affirmed baa3

.... Short-term Counterparty Risk Rating, Affirmed P-2

.... Short-term Bank Deposits, Affirmed P-2

.... Short-term Deposit Note/CD Program, Affirmed (P)P-2

.... Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Other Short Term, Affirmed (P)P-2

.... Long-term Deposit Note/CD Program, Affirmed (P)Baa1

.... Commercial Paper, Affirmed P-2

.... Long-term Senior Unsecured Debt, Affirmed Baa1, outlook changed to Positive from Stable

.... Long-term Bank Deposits, Affirmed Baa1, outlook changed to Positive from Stable

..Outlook Action:

....Outlook Changed To Positive From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alexios Philippides
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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