Upgrade reflects higher loss-absorption because of senior non-preferred issuance
Limassol, April 28, 2020 -- Moody's Investors Service, (Moody's) has today upgraded
Nykredit Realkredit A/S's (Nykredit) long-term issuer rating
to A3 from Baa1 and its wholly owned subsidiary Nykredit Bank A/S's
(Nykredit Bank) long-term deposit and senior unsecured ratings
to A3 from Baa1. The rating agency also changed the outlook on
the aforementioned ratings to stable from positive. Concurrently
Moody's also affirmed Nykredit's Baseline Credit Assessment
(BCA) and Adjusted BCA at baa1 and Nykredit Bank's BCA at baa3 and
its Adjusted BCA at baa1.
The upgrade of the long-term issuer, senior unsecured and
deposit ratings to A3 reflects Moody's forward-looking view that
these senior creditor classes will benefit from lower loss-given-failure
in light of the growing cushion of more junior debt predominantly in the
form of senior non-preferred (SNP) debt -- defined
as "junior senior" unsecured debt by Moody's.
The stable outlook on the long-term ratings together with the affirmation
of the two entities BCAs and Adjusted BCAs reflect the rating agency's
view that the recent trend of an underlying strengthening in Nykredit's
fundamental credit profile, will be held back by the coronavirus-induced
macroeconomic downturn. However, Nykredit will remain relatively
resilient to the current macroeconomic challenges, with strong capitalisation
and improved capital flexibility providing a substantial buffer,
despite added pressure on the group's profitability. Moody's
expects asset quality to deteriorate, but for Nykredit to be less
impacted than other banks given its focus on lower-risk first lien
mortgages.
Please refer to the end of this press release for a list of all affected
ratings and assessments.
RATINGS RATIONALE
-- RATINGS UPGRADE
The upgrade of Nykredit's issuer rating and Nykredit Bank's
deposit and senior unsecured ratings to A3 reflects the ongoing increase
in the amount of loss-absorbing debt that Nykredit carries on its
balance sheet benefiting senior creditors. These growing amounts,
which are in response to regulatory requirements, lead to a higher
uplift for senior creditors under the rating agency's Advanced Loss
Given Failure (LGF) analysis.
According to Danish regulatory requirements, Nykredit will need
to build up eligible bail-inable liabilities as a combination of
capital requirements, a debt buffer for mortgage activities,
and a minimum requirement for own funds and eligible liabilities (MREL)
for commercial banking, but no less than 8% of total liabilities
and own funds (TLOF). Based on the rating agency's calculations
the 8% of TLOF floor forms the group's binding requirement.
Nykredit had issued approximately DKK38 billion in SNP debt to meet these
requirements up to January 2020 and carried total eligible liabilities
of around DKK128 million or close to the minimum 8% of TLOF requirement.
Furthermore, Moody's expects, in line with market practice
and based on public disclosures, that the group will strive to issue
additional amounts of SNP debt so as to maintain a buffer above requirements
and to incorporate future asset growth expectation.
Moody's Advanced LGF analysis on Nykredit's liabilities that incorporates
current and potential future SNP issuances, now indicates a moderate
loss-given-failure for Nykredit's issuer rating and Nykredit
Bank's junior deposit and senior unsecured ratings, which translates
into a zero notch adjustment from the two entities' baa1 Adjusted BCA,
from a one-notch negative adjustment previously. Moody's
performs its Advanced LGF analysis at the consolidated group level for
both entities in line with the Danish Financial Supervisory Authority's
single-point-of-entry resolution strategy for Nykredit.
-- STABLE OUTLOOK
The stable outlook on the long term ratings reflects Moody's view
that that the recent trend of an underlying strengthening in Nykredit's
fundamental credit profile, will be held back by the coronavirus-induced
macroeconomic downturn. In particular, the rating agency
expects that the coronavirus outbreak will weigh on Denmark's economy,
leading to an uptick in problem loans for Danish banks, and to exacerbate
pressure on the sector's profitability. The Danish government's
policy response for those affected has been comprehensive, encompassing
financial support for businesses and workers. However, it
will not be sufficient to fully counterbalance the coronavirus-induced
drop in growth, which will become more severe the longer the outbreak
lasts.
Despite this, the rating agency expects that Nykredit's credit
profile will be relatively resilient to an expected economic downturn.
Specifically its strong capital buffers and low-asset risk operating
model should help the group sustain its creditworthiness in light of an
economic contraction for 2020 and a rise in unemployment in Denmark.
Nykredit's common equity tier 1 (CET1) capital ratio stood at a strong
19.5% as of the end of 2019 and it also has potential access
to additional DKK16.5 billion in CET1 capital, which can
add 5 percentage points to its CET1 ratio, through its majority
shareholder's, Forenet Kredit, reserves and from non-binding
investment commitments from five Danish pension companies that own 17%
of Nykredit. The group has also suspended dividends that will help
with potential risk-weighted assets inflation as credit risk increases
and credit limits are extended to affected borrowers.
Profitability will face pressure from higher impairment charges,
which will depend on how deep and prolonged the economic disruption will
be, forbearance measures, reduced trading and investment income
from increased financial market volatility and potentially lower fee income
due to a stalled business cycle. Nykredit's strong market
position as the largest mortgage lender in the country, resilient
mortgage margins and efficient operations, with a cost-to-income
ratio of 37% in 2019, will be able to offset some of these
pressures.
Asset quality will deteriorate and Nykredit's performance is highly
correlated to the Danish economy and the domestic real estate market.
Nevertheless, asset risk for the group is driven by its focus on
relatively low-risk first lien secured lending to Danish households
and companies.
Mortgage loans secured by property collateral made up around 95%
of the total lending at the end of 2019. Nykredit's mortgage portfolio
is well collateralised, the average loan-to-value
of Nykredit's mortgage portfolio was 62%, partly mitigating
the tail risk of a sharp correction in property prices. In recent
years there has also been a credit positive shift towards lower risk mortgages
in Nykredit credit's portfolio such as a higher proportion of amortising
loans. Further, mortgage loans granted through Totalkredit
(slightly more than half of all loans at Nykredit) are covered by set-off
agreements, which means that Totalkredit can offset part of the
losses incurred on the loans against future commission payments to the
partner banks that originated and service the loans, and partial
guarantees.
Generally, low interest rates, combined with macroprudential
measures, a preceding period of moderate credit growth and a decline
in overall indebtedness (from very high levels for individuals) have made
Danish businesses and households potentially more resilient to the current
downturn compared to previous macroeconomic shocks.
The rating agency expects funding and liquidity to remain stable and Denmark's
covered bond market, on which Nykredit relies heavily on,
to remain liquid.
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. This reflects Nykredit's systemic
importance with a very high market share in Danish mortgages of around
40%.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
-- AFFIRMATION OF BCA AND ADJUSTED BCA
Nykredit's BCA and Adjusted BCA was affirmed at baa1 reflecting
(1) its focus on relatively lower risk mortgage lending, but also,
therefore, high concentration to Denmark's property market;
(2) strong regulatory capitalisation well above requirements, and
moderate leverage (tangible common equity to total assets of 5.4%
at the end of 2019), while access to capital has improved;
(3) modest but historically stable profitability (net income to tangible
assets ratio of 0.4% for 2019), at similar levels
to other regional mortgage lenders but which will be under pressure from
the economic downturn; (4) limited earnings diversification;
and (5) high market funding dependence.
Nykredit Bank's baa3 BCA was affirmed reflecting its (1) solid capital;
(2) adequate liquidity; (3) elevated asset risk in the bank's portfolio;
(4) Moody's expectation that profitability will decline from higher
impairments, forbearance measures, negative trading and investment
income and legacy derivatives; and (5) high market funding dependence.
Nykredit's Bank's baa1 Adjusted BCA is driven by Moody's assumption
of a very high probability of affiliate support from its parent Nykredit
reflecting its high interconnectedness to the group. This results
in rating uplift and an Adjusted BCA for Nykredit Bank that is,
the same as for Nykredit, and helps align its final ratings with
that of Nykredit.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Nykredit's and Nykredit Bank's ratings could be upgraded if the
group's fundamental credit profile demonstrates relative resilience
to the current stressed conditions. For instance if, despite
the negative macroeconomic downturn from the coronavirus outbreak,
the group's profitability remains broadly stable and credit impairments
remain contained. The group's BCA may also be upgraded in
case of a substantially stronger leverage ratio.
Nykredit's long-term issuer rating and Nykredit Bank's long-term
senior unsecured and deposit ratings could also be upgraded following
a decrease in the expected loss severity for senior creditors from much
higher than currently expected issuance of SNP debt, which would
result in rating uplift for these ratings under Moody's Advanced
LGF analysis.
An upgrade of Nykredit Bank's BCA could result from (1) a meaningful improvement
in the bank's asset risk profile; and (2) a material improvement
in the bank's sustainable profitability without an increase in its risk
profile.
A downgrade of the entities' long term 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's BCA could develop as a result
of (1) increasing risks in its portfolio, including property market
developments in Denmark, or, materially weaker asset quality;
(2) a decrease in the group's capitalisation, below its current
capital target; (3) if its profitability faces a sustained reduction,
(4) larger asset-liability maturity mismatches; or (5) a weakening
in the operating environment for banks in Denmark.
Nykredit's issuer rating and Nykredit Bank's deposit and senior
unsecured ratings could also be downgraded if the group issues SNP volumes
below current expectations or its liability structure changes in a way
that increases loss-given-failure for senior creditors.
LIST OF ALL AFFECTED RATINGS AND ASSESSMENTS
Upgrades:
...Issuer: Nykredit Realkredit A/S
....LT Issuer Rating (Foreign Currency),
Upgraded to A3 from Baa1 , Outlook, Changed To Stable From
Positive
..Issuer: Nykredit Bank A/S
....Senior Unsecured MTN Program (Foreign
Currency), Upgraded to (P)A3 from (P)Baa1
....LT Deposit Note/CD Program (Foreign Currency),
Upgraded as Definitive to A3 from (P)Baa1
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Upgraded to A3 from Baa1 , Outlook,
Changed To Stable From Positive
....LT Bank Deposit Ratings, Upgraded
to A3 from Baa1 , Outlook, Changed To Stable From Positive
Affirmations:
..Issuer: Nykredit Realkredit A/S
.... Adjusted Baseline Credit Assessment,
Affirmed baa1
.... Baseline Credit Assessment, Affirmed
baa1
....LT Counterparty Risk Assessment,
Affirmed A2(cr)
....ST Counterparty Risk Assessment,
Affirmed P-1(cr)
....LT Counterparty Risk Ratings, Affirmed
A3
....ST Counterparty Risk Ratings, Affirmed
P-2
....ST Issuer Rating (Foreign Currency) ,
Affirmed P-2
..Issuer: Nykredit Bank A/S
.... Adjusted Baseline Credit Assessment,
Affirmed baa1
.... Baseline Credit Assessment, Affirmed
baa3
....LT Counterparty Risk Assessment,
Affirmed A2(cr)
.... ST Counterparty Risk Assessment,
Affirmed P-1(cr)
....LT Counterparty Risk Ratings, Affirmed
A3
....ST Counterparty Risk Ratings, Affirmed
P-2
....ST Bank Deposit Ratings, Affirmed
P-2
....Other Short Term (Foreign Currency),
Affirmed (P)P-2
....Commercial Paper (Foreign Currency),
Affirmed P-2
Assignments:
..Issuer: Nykredit Bank A/S
..ST Deposit Note/CD Program (Foreign Currency),
Changed To Definitive P-2 from Provisional (P)P-2
Outlook Actions:
..Issuer: Nykredit Bank A/S
....Outlook, Changed To Stable From
Positive
..Issuer: Nykredit Realkredit A/S
....Outlook, Changed To Stable From
Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation:
NO
b.With Access to Internal Documents: NO
c.With Access to Management: NO
For additional information, please refer to Moody's Policy for Designating
and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social and
governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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
Vice President - Senior 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
