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Dutch Covered Bond Market Insights 2020


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Dutch Covered Bond Market Insights 2020

In its Covered Bond Market Insights reports, S&P Global Ratings presents the local covered bond market, explains how the relevant legal framework works, provides an overview on the local mortgage market, compares key characteristics of the existing programs, and presents the results of a scenario analysis. In this report, we review the Dutch covered bond market.

In our view, resilient credit conditions, stable ratings and outlooks on most issuers, and a strong sovereign will continue to support ratings stability for Dutch covered bonds in the medium term, despite the COVID-19 pandemic.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Overview: An Established But Dynamic Covered Bond Market

The Dutch covered bond regulatory framework was introduced 12 years ago, although Dutch covered bonds had been issued for years before that using the structured model. The covered bond market comprises 11 residential mortgage-backed programs from nine issuers, representing over €98 billion of outstanding issuance.

Although the market is expanding, with an increasing share of global issuances and some innovative structuring, it faces a number of challenges--some widely shared by the covered bond market, some more specific to the Dutch economy.

Chart 1


Chart 2


COVID-19: limited impact on loan performance

We expect that the consequences of the COVID-19 pandemic on the real economy will be strong but not lasting. The Dutch unemployment rate has historically been among the lowest ones in Europe. We expect a temporary increase in unemployment to about 4.1% in 2020 and to 5.4% in 2021 from 3.4% in 2019, before it starts to fall in 2022. However, we are currently seeing a limited impact of this temporary increase on loan performance. This is mainly due to the combination of a structurally low unemployment rate, a supportive social benefit system, and prudent underwriting standards. Furthermore, Dutch borrowers are relatively affluent and characterized by a strong payment culture.

European covered bond framework is under implementation

The alignment of the Dutch legislative framework with the European Banking Authority's best practices is high, in our view. National authorities will transpose and implement the Covered Bond Directive into national legislation by July 8, 2021. Dutch covered bond program structures are already compatible with the directive's 180-day liquidity requirements, and stipulate a 5% nominal minimum level of overcollateralization--in line with the "nominal principle" of the directive. A key item to specify in the legislation will be the conditions for extending the bond maturity of soft-bullet covered bonds.

Macroprudential measures have reshaped the Dutch lending market

The Dutch tax system, which traditionally encouraged household indebtedness via mortgage borrowing, has shaped the main characteristics of the Dutch mortgage market: high loan-to-value (LTV) ratios and a large proportion of interest-only loans. From the early 2000s onward, the Dutch government started to adjust the generous tax deductibility of mortgage interest to curb one of the highest household indebtedness worldwide.

Then, in 2013, it launched a comprehensive set of macroprudential measures to address both of the above risk factors. Newly originated mortgages now need to amortize within up to 30 years to benefit from tax deductibility. Furthermore, the extent of tax deductibility is being reduced in incremental steps from the highest marginal tax bracket (52%) to the lowest one (37.1%) by 2023. The relatively small initial steps of 0.5% per year were replaced by a reduction of 3% each year since 2020. In parallel, the maximum LTV ratio has been reduced to 100% by 2018 from 120% in the early 2000s and loan-to-income (LTI) limits now cap the borrower's potential interest burden.

As a result, the share of interest-only loans has decreased in our rated cover pools to 54% in 2020 from 85% in 2010. Also, the average current LTV ratio in the rated cover pools has fallen to 63% from 69% over the same period. Household debt decreased to 236% of net disposable income in 2019 from its peak of 286% in 2010, based on Organisation for Economic Co-operation and Development data.

The Legal Framework: Limited Changes Needed For The Harmonized Framework

Legal framework

The first Dutch covered bonds were structured products entirely defined by documentation. Since 2008, a framework inscribed in the Financial Supervision Act has regulated Dutch covered bond issuance. The framework was further amended in 2014, when it received the status of law, and in 2015.

Bondholders have a dual recourse to receive payments on their debt: they have unlimited recourse to the issuing bank but also recourse to the cover pool assets if the issuer becomes insolvent. The framework stipulates a clear segregation of the cover pool assets for the bondholders' benefit, who have a senior claim to them. This is achieved by a transfer of the assets from the issuing bank to a bankruptcy-remote covered bond company (CBC).

Chart 3


Table 1

Legal Framework Comparison
Netherlands Germany France France U.K.
Product Dutch registered covered bond program Pfandbriefe Obligations à l'Habitat (OH) Obligations Foncières (OF) Regulated covered bonds (RCB)
Legislation Financial Supervision Act as amended in 2014 and subsequent amendments PfandbriefAct (Pfandbriefgesetz - PfandBG) from May 22, 2005, amended in 2009, 2010, 2013, 2014, and 2015 Article L. 515-34 and seq. of the French Monetary and Financial Code The articles L.513-2 to L.513-27 and R.513-1 and seq. of the French Monetary and Financial Code Regulated covered bond regulations 2008 and subsequent amendments
Issuer Universal credit institution with a special license Universal credit institution with a special license Specialized credit institution Specialized credit institution Universal credit institution with a special license
Owner of the cover pool assets SPE (guarantor of the covered bonds) Issuer Credit institution (pledged to the issuer and transferred upon trigger event) Issuer or credit institution (pledged to the issuer and transferred upon trigger event) SPE (guarantor of the covered bonds)
Cover pool asset type Public sector assets, mortgage loans, ship loans, credit institutions Public sector assets, mortgage loans, ship loans, aircraft loans, credit institutions Mortgage loans, securitizations Public sector assets, mortgage loans, securitizations, credit institutions Public sector entities, mortgage loans
Mortgage cover pool asset location EEA (currently domestic only) EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Singapore EEA (currently domestic only) EEA EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Channel Islands, Isle of Man
Residential mortgage cover assets LTV limit 80% 60% 80% Residential: 80%; state-guaranteed loans: 100% Residential: 80% LTV under the CRD; program documents on Regulated Covered Bonds currently a 75% LTV limit
Primary method for mitigating market risk Derivatives "Natural" hedging stress testing "Natural" hedging stress testing Derivatives Derivatives
Mandatory overcollateralization 5% nominal 2% NPV 5% nominal 5% nominal 8% nominal
SPE--Special-purpose entity. EEA--European Economic Area. NPV--Net present value. LTV--Loan to value. Source: European Covered Bond Council, S&P Global Ratings.
Setoff risk

The Dutch mortgage market contains a number of products that raise specific setoff issues upon issuer insolvency. These products, known as savings mortgages ("Spaarhypotheek"), insurance mortgages ("Verzekeringshypotheek"), and investment mortgages ("Beleggingshypotheek"), are designed to take advantage of a tax asymmetry that allows the borrower to obtain a cheaper effective rate of interest on his or her mortgage loan. In effect, the borrower, instead of repaying principal to the lender (the bank), invests in a savings product provided by an insurance company (the insurer). The return on this investment is tax free (as are interest payments) and is used to repay the mortgage loan.

Therefore, following the insolvency of the issuer, there is a potential setoff risk pertaining to deposits maintained by borrowers with the issuer (whose loan has been included in the cover pool). This risk can be mitigated by the coverage tests or additional overcollateralization.

Conditional pass-through covered bonds lose attractiveness to some investors

Conditional pass-through (CPT) covered bonds have been particularly popular in the Netherlands given the traditionally high proportion of interest-only loans in cover pools, which considerably increase refinancing costs in more traditional soft-bullet structures. As CPT covered bonds structurally eliminate refinancing risk--the risk that the pool administrator is forced to liquidate the assets to repay a maturing bond--we delink the rating on a covered bond from the rating on the issuing bank when the covered bond's overcollateralization is legally or contractually committed. This allows lower-rated issuers to access a 'AAA'-dominated market.

As of Jan. 1, 2019, the Governing Council of the European Central Bank excluded CPT covered bonds from its reinvestments under the CBPP3 (Covered Bond Purchase Programme 3). While the decision has no impact on the eligibility of CPT programs in the Eurosystem collateral framework, the product lost attractiveness for some investors. Some CPT issuers--for example Nationale-Nederlanden Bank N.V.--have recently established soft-bullet programs. Currently, 37% of outstanding covered bonds in the Dutch market have soft-bullet maturities compared to 31% at the end of 2018. The share of CPT covered bonds has stayed fairly stable at 11% versus 10% two years ago in the Dutch market.

As our analysis of covered bond programs starts with the assumption of the issuer's default on day one, for CPT programs we typically model in our cash flows a switch to the pass-through mode and the extension of the bonds to their legal final maturity date. Our rating therefore addresses the timely payment of interest and of principal on the legal final maturity date, and not on the scheduled maturity.

Coverage tests

Issuers typically commit to a minimum level of overcollateralization via contractual asset coverage tests (including the amortization test).

These tests are designed to not only ensure a minimum ratio of cover pool assets for covered bonds, but they also serve to enhance the credit quality of the assets in the portfolio. This is because the tests exclude certain mortgage loans from the amount eligible and therefore create an incentive for issuers to remove them from the cover pool. Non-eligible loans can include mortgages subject to setoff risk or impaired assets, among others.

Table 2

Dutch Covered Bond Programs--Overview
Program Long-term issuer credit rating Covered bond rating Outstanding covered bonds (mil. €) Program type Collateral type Link to surveillance report Link to transaction update
AEGON Bank N.V. A/Stable/A-1 AAA 2,250 CPT 100% residential AEGON Bank N.V. TU Aegon Bank N.V.
ING Bank N.V. A+/Stable/A-1 AAA/Stable 17,523 Soft and hard bullet 100% residential ING Bank N.V. TU ING Bank N.V.
ING Bank N.V. Soft Bullet A+/Stable/A-1 AAA/Stable 22,925 Soft bullet 100% residential ING Bank N.V. Soft Bullet TU ING Bank N.V. SB
Nationale-Nederlanden Bank N.V. Conditional Pass-Through A-/Stable/A-1 AAA 2,595 CPT 100% residential NN Bank N.V. TU NN Bank N.V.
Nationale-Nederlanden Bank N.V. Soft Bullet A-/Stable/A-1 AAA/Stable 1,000 Soft bullet 100% residential NN Bank N.V. New Issue NN Bank N.V.
NIBC Bank N.V. BBB+/Negative/A-2 AAA 3,000 CPT 100% residential NIBC Bank N.V. TU NIBC Bank N.V.
Van Lanschot N.V. BBB+/Negative/A-2 AAA 1,500 CPT 100% residential Van Lanschot N.V. TU Van Lanschot N.V.
CPT--Conditional pass-through.

Mortgage Market Overview: COVID-19 Sets A Temporary Hold On The Economy This Year And On House Price Growth Next Year

Government stimulus following COVID-19

Following the COVID-19 outbreak, the Dutch government introduced emergency support policy measures to help the economy, which will amount to more than 4% of GDP (€30 billion). Via three main schemes, government spending focuses on labor cost compensation, and support to entrepreneurs as well as the self-employed. Moreover, companies are allowed to defer and provisionally adjust their tax payments as well as benefit from state guarantees. Dutch covered bond issuers also indirectly benefit from a eurozone monetary stimulus.

The Dutch economy has expanded at a faster pace over the past five years, and unemployment has been lower than the eurozone average. While we expect the Dutch real economy to contract by 5.2% and unemployment to exceed 4% in 2020, we don't foresee an economic collapse. Our current forecast for 2021 is for solid growth of the real economy and a modest unemployment rate.

Table 3

Economic Indicators
Year Real GDP growth (%) Unemployment rate (%) HPI change (%)
2019 1.7 3.4 6.5
2020f -5.2 4.1 6.1
2021f 3.4 5.4 -1.5
2022f 3.1 5 4.1
2023f 2.2 4.5 3.8
Source: S&P Global Ratings. HPI--House price index.

Chart 4


Temporary break in house price growth eases the strain on affordability

We expect house prices to continue increasing dynamically this year despite the economic slowdown related to the pandemic. For 2021 we forecast a temporary slowdown in property price rises after the supportive government measures launched this year phase out. Due to the combination of healthy economic growth and a stable labour market, we expect the property market to return to a healthy growth path in 2022.

Dutch house prices have shown markedly strong cycles in both directions over the past decades: following close to 20% annual increase in the early 2000s they plummeted by close to double-digits in the negative territory in 2012-2013. During the past five years, solid economic growth, a buoyant labour market, negative real interest rates, and sluggish supply caused house prices to continue to rise strongly. Following a short catch-up phase, prices quickly outpaced their pre-crisis levels.

Consequently, housing has become increasingly hard to afford. Price-to-income ratios for today's generation have approximately doubled compared to those of their parents. We expect that the temporary moderation of house prices should somewhat ease the strain for the average individual to buy a home.

The homeownership rate in the Netherlands (68%) is similar to other Western European countries (66% on average) and is lower than in most Eastern and Southern European economies (81% on average).

Chart 5


Chart 6


Dutch cover pool

Even though the Dutch covered bond legislation contemplates public loans, commercial mortgages, and shipping loans, currently all existing programs comprise residential mortgage-backed covered bonds.

The majority of the outstanding mortgages pay a fixed interest rate for a period ranging from five to 15 years. At the end of the fixed-rate period, the interest rate typically resets to a new fixed rate.

Due to the macroprudential measures of the recent years, amortizing structures (linear mortgage loans, annuity mortgages) are gaining popularity in the market. On the other hand, there is still a high stock of interest-only loans, a large share of them in combination with an insurance or savings product to accumulate capital for repayment.

NHG guarantee

Owner-occupier borrowers can apply, subject to strict conditions and limitations, to a Nationale Hypotheek Garantie (NHG) from the Homeownership Guarantee Fund (Waarborgfonds Eigen Woningen; WEW), which is an independent institution that has fallback agreements with the Dutch government and municipalities. The guarantee covers the major part of the losses to a lender.

On June 1, 2020 new NHG underwriting criteria entered into force, in order for the NHG guarantee to be eligible for banks under the CRR (Capital Requirement Regulation). A key change is the introduction of the NHG Advance Right, a right of the lender to receive an advance payment of the expected loss. Previously, the guarantee used to pay at the end of the foreclosure process on a defaulted mortgage loan. It has remained unchanged that the guarantee will be effective only if certain conditions are met so that the WEW will not necessarily cover NHG-guaranteed loans if the borrower defaults.

We equate the creditworthiness of the WEW to that of the Dutch sovereign and give credit to the NHG guarantee in our loss-given default calculation on a case-by-case basis, depending on the historical payout rate from the NHG that the bank can show. The presence of a large proportion of NHG-guaranteed loans in some of our rated programs has by and large led to a below-average weighted-average loss severity (WALS; our measure of loss-given default) for our rated Dutch pools compared to other countries (see Global Covered Bond Characteristics And Rating Summary Q3 2020," published Sept. 17, 2020).

High social benefit support

The Dutch social security system is one of the most comprehensive in Europe, encompassing sick leave, unemployment benefits, disability benefits, maternity leave, child support, and pensions. As such, it provides a safety cushion for borrowers if personal circumstances change or if the economy takes a downturn. In particular, employees are entitled to unemployment benefits in the Netherlands if they partially or completely lose their jobs, resulting in more stable collateral performance for residential pools throughout economic cycles.

Table 4

Dutch Covered Bond Programs--Key Characteristics
Program Outstanding assets (mil. €) No. of loans WA LTV - indexed (%) WA seasoning (months) Interest rate type Repayment type WAFF (%) WALS (%)
AEGON Bank N.V. 2,714 16,439 57.80 71.9 Fixed (96.2%); floating (3.8%) Amortizing (65.3%); interest-only (34.7%) 9.7 13.0
ING Bank N.V. 22,646 132,725 56.50 165.5 Fixed (87.9%); floating (12.1%) Amortizing (6.9%); interest-only (71.1%); other (22%) 6.0 19.4
ING Bank N.V. Soft Bullet 28,102 139,179 69.90 80.4 Fixed (95.5%); floating (4.5%) Amortizing (48.1%); interest-only (42.6%); other (9.3%) 12.5 28.0
Nationale-Nederlanden Bank N.V. Conditional Pass-Through 2,920 12,115 63.80 85.0 Fixed (99.2%); floating (0.8%) Amortizing (55.6%); interest-only (44.4%) 12.4 36.4
Nationale-Nederlanden Bank N.V. Soft Bullet 1,595 6,848 66.70 65.3 Fixed (99.6%); floating (0.4%) Amortizing (58.7%); interest-only (41.3%) 12.0 32.7
NIBC Bank N.V. 3,535 15,584 67.69 79.1 Fixed (98%); floating (2%) Amortizing (49.5%); interest-only (50.5%) 14.0 33.2
Van Lanschot N.V. 1,760 3,659 55.90 87.1 Fixed (98.8%); floating (1.2%) Amortizing (33.3%); interest-only (66.7%) 16.1 39.2
WA--Weighted average. LTV--Loan to value. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity.

Chart 7


Ratings Outlook: Covered Bonds Are Well Insulated From Risk Of Bank Downgrades

On top of a solid pool performance, Dutch covered bonds benefit from highly rated issuers, which are the first recourse for bondholders. Moreover, programs with a highly rated issuer and which are not conditional pass-through can benefit from unused notches of uplift, offering some protection against downgrades of the issuing bank. CPT programs can benefit from an unlimited number of notches uplift from the issuer credit rating, provided that committed overcollateralization in the program is commensurate with the highest achievable rating.

Chart 8


Table 5

Dutch Covered Bond Programs--Credit Enhancement
Program Available credit enhancement (%) Target credit enhancement (%) 'AAA' credit risk (%) O/C consistent with the current rating (%) Unused notches
AEGON Bank N.V. 20.29 2.5 2.5 2.5 N/A
ING Bank N.V. 16.8 16.34 2.5 2.5 4
ING Bank N.V. Soft Bullet 19.48 12.67 2.87 2.87 4
Nationale-Nederlanden Bank N.V. Conditional Pass-Through 12.15 2.5 2.5 2.5 N/A
Nationale-Nederlanden Bank N.V. Soft Bullet 236.97 5.47 3.7 3.7 3
NIBC Bank N.V. 15.86 2.5 2.5 2.5 N/A
Van Lanschot N.V. 16.94 2.5 2.5 2.5 N/A
Note: This table can be expanded on to view all of the data presented in tables 2, 4, and 5 in one combined table. The data can also be exported to Microsoft Excel. O/C--Overcollateralization. N/A--Not applicable.

Chart 9 shows the breakdown of the average target credit enhancement levels compared to available credit enhancement across countries. We define the target credit enhancement as the overcollateralization commensurate with the maximum collateral-based uplift.

Dutch programs on average have both lower credit and market risk compared to those of peer countries. Consequently, the available credit enhancement is also lower relative to peer countries' programs.

Chart 9


Scenario Analysis: Dutch Covered Bond Ratings Could Withstand House-Price Corrections

Despite a solid outlook, we have carried out a scenario analysis with large drops in house prices to gauge whether these would affect the overcollateralization that is commensurate with our rating. We have decided to test this scenario analysis using house price drops of 20% and 30% because 20% is the drop seen after the financial crisis between 2008 and 2014.

Table 6 shows the impact of the house price decline on our WALS calculation. The overcollateralization in line with the current rating does not increase significantly. These hypothetical house price drops do not affect the achievable rating on any of the programs either.

Table 6

Impact Of House Price Declines
Year Aegon Bank N.V. ING Bank N.V. ING Bank N.V. Soft Bullet NN Bank CPT NN Bank Soft Bullet NIBC Bank N.V. Van Lanschot CB
House price haircut
Base case
WALS (%) 13.03 19.41 27.99 36.35 32.66 33.18 39.15
'AAA' credit risk (%) 2.50* 2.50* 2.81 *2.50* 3.11 2.50* 2.50*
Target credit enhancement (%) 2.50* 14.01 12.94 2.50* 3.65 2.50* 2.50*
Overcollateralization commensurate with rating (%) 2.50* 2.50* 2.81 2.50* 3.25 2.50* 2.50*
Stress scenario 1 - 20%
WALS (%) 13.81 22.32 30.55 38.59 33.3 34.85 40.67
'AAA' credit risk (%) 2.50* 2.50* 3.06 2.50* 3.11 2.50* 2.50*
Target credit enhancement (%) 2.50* 14.14 13.44 2.50* 3.65 2.50* 2.50*
Overcollateralization commensurate with rating (%) 2.50* 2.50* 3.06 2.50* 3.25 2.50* 2.50*
Stress scenario 2 - 30%
WALS (%) 17.58 28.13 35.41 43.4 38.55 40.65 45.69
'AAA' credit risk (%) 2.50* 2.50* 3.55 2.50* 3.11 2.50* 3.21
Target credit enhancement (%) 2.50* 14.65 14.3 2.50* 3.65 2.50* 3.21
Overcollateralization commensurate with rating (%) 2.50* 2.50* 3.55 2.50* 3.25 2.50* 3.21
*Floor to the 'AAA' rating is 2.5% credit enhancement. WALS--Weighted-average loss severity. Source: S&P Global Ratings.

Related Criteria

Related Transaction Updates And New Issue Reports

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Judit O Woelk, Frankfurt + 49 693 399 9319;
Secondary Contacts:Maria Luisa Gomez Grande, Madrid (34) 91-788-7208;
Adriano Rossi, Milan + 390272111251;

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