Outlook on Nykredit Bank's BFSR remains negative
London, 14 March 2014 -- Moody's Investors Service has today affirmed Nykredit Realkredit
A/S's Baa2/Prime-2 long- and short-term issuer
ratings and Ba2(hyb) preferred stock rating. Concurrently,
the outlook on the long-term ratings was changed to stable from
negative.
At the same time, Moody's affirmed Nykredit Bank A/S's
standalone D+ bank financial strength rating (BFSR), which
is equivalent to a baa3 baseline credit assessment (BCA), and its
Baa2/Prime-2 long- and short-term debt and deposit
ratings. The outlook on the bank's long-term ratings
was changed to stable from negative, whilst the outlook on the BFSR
remains negative. (Nykredit Bank is a banking subsidiary of Nykredit
Realkredit.)
RATINGS RATIONALE
RATINGS RATIONALE -- NYKREDIT REALKREDIT
The affirmation of Nykredit Realkredit's Baa2/Prime-2 ratings
reflects the group's strong franchise and market-leading
position in Denmark, albeit offset by the group's low profitability
and volatile earnings. Moody's also notes the likely loss
of a major distributor. In February, Jyske Bank (one of Denmark's
'big five' banks -- by assets) announced its planned
acquisition of BRFKredit, a competitor to Nykredit. As at
end-December 2013, Jyske Bank customers accounted for around
7% of the Nykredit Group's mortgage loans.
However, the outlook change of Nykredit Realkredit's ratings
to stable from negative reflects Moody's assessment that the operating
environment in Denmark, although still challenging, is stabilising
as evidenced by recent key economic trends including stabilising house
prices and lower volumes of property repossessions.
Furthermore, the Bill on Mortgage-Credit loans and Mortgage-Credit
bonds passed by the Danish parliament on 11 March in Moody's view
introduces a framework for addressing a failed covered bond auction for
adjustable rate mortgages, and mitigate refinancing risk for Danish
financial institutions arising from short-term market disruption.
With more than 40% of Nykredit Realkredit group's total funding
relating to adjustable rate mortgages, the new bill removes a historically
significant negative credit driver for the group. However,
Moody's notes that there is some implementation risk associated
with the new bill until all current outstanding short-term mortgage
bonds are rolled over into bonds covered by the new bill.
RATINGS RATIONALE - NYKREDIT BANK
Nykredit Bank's standalone D+ BFSR corresponding to a BCA of
baa3 reflects the bank's full-scale Danish franchise and
the benefits from being part of the wider Nykredit group, as well
as the bank's weak profitability and earnings growth. As
a result of Moody's parental support assessment, the bank's
long-term deposit rating receives a one notch uplift to Baa2.
The continued negative outlook on Nykredit Bank's BFSR reflects
Moody's view that although the operating environment in Denmark
is stabilising, this trend is still not clearly visible in the bank's
financial performance, with the level of problem loans remaining
high in 2013 at above 11% of the gross book (stable relative to
2012). In addition, the bank's profitability,
even on a pre-provision level, remains low, with pre-provision
profit as a proportion of risk-weighted assets (RWA) of around
0.5% in 2013 (2012: 0.9% and 2010:
2.2%).
According to Moody's rating scale, Nykredit Bank's current
standalone BFSR of D+ can map to a BCA of either baa3 or ba1.
The negative outlook on the standalone D+ BFSR indicates that Moody's
sees the potential for the BCA to transition to the lower ba1 mapping,
given the rating agency's assessment of the risks associated with
the bank's low profitability and high level of problem loans.
The change in the outlook on Nykredit Bank's long-term deposit
rating to stable from negative reflects the corresponding outlook change
on the bank's parent, Nykredit Realkredit A/S, and Moody's
assessment that group support is sufficient to compensate for a potential
one notch reduction of the bank's BCA.
WHAT COULD MOVE THE RATING -- UP/DOWN, NYKREDIT REALKREDIT
Upward pressure on Nykredit Realkredit's ratings could develop as
result of a sustained and material improvement in the group's profitability,
without an increase in its risk profile.
While Nykredit Realkredit current ratings incorporate a degree of deterioration,
downward pressure would develop on the ratings: (1) if the group
experiences worsening financing conditions; (2) following asset quality
erosion, especially if such deterioration reflects a broader-based
weakening of repayment capacity as opposed to additional impairments on
previously identified problem customers or segments; and (3) if there
is evidence that the group's risk profile is increasing, for
example, as a result of increased exposures to more volatile sectors
and business operations.
WHAT COULD MOVE THE RATING -- UP/DOWN, NYKREDIT BANK
Given the negative outlook on Nykredit Bank's BFSR, Moody's
currently views upwards ratings pressure on the bank's standalone
ratings as unlikely, particularly given the persistently low profitability
and elevated level of problem loans. The outlook on the stand alone
rating could be changed to stable as a result of a sustained and material
improvement in the bank's profitability without an increase in its
risk profile. In Moody's view, a material improvement
in profitability would most likely result from a reduction in impairment
provisions and reflect an improvement in asset quality across the main
lending segments including real estate. However, Moody's
believes that a sustained and material increase in profitability will
also require an increase in the bank's interest margin on total
assets and an improvement in cost efficiency.
While Nykredit Bank's current debt and deposit ratings incorporate
a degree of deterioration, downward pressure would develop on the
ratings (1) following an increase in the volume of problem loans,
especially where an increase reflects new impairments as opposed to additional
impairments on previously identified problem customers or segments;
(2) if the bank experiences worsening financing conditions; and (3)
if the bank's risk profile increases, for example as a result
of increased exposures to more volatile sectors and business operations.
Nykredit Bank's Baa2 rating receives a one-notch uplift from
the baa3 BCA as a result of Moody's parental support assessment;
and any change in the rating agency's assessment of the parent's
willingness and ability to support the bank could exert upward or downward
pressure on the rating.
The principal methodology used in these ratings was Global Banks published
in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
These rated entities or related third parties did not participate in the
rating process. Moody's was not provided, for purposes
of the rating, access to books, records and other relevant
internal documents of the rated entities or related third parties.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Kim Bergoe
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Simon Harris
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's changes outlook on Nykredit Realkredit A/S's and Nykredit Bank's ratings to stable from negative; affirms ratings
