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
