- High deposit levels, low interest rates, and competitive central bank funding has left year-to-date German investor-placed benchmark covered bond issuance at nearly 37% lower than the total 2020 level. Nevertheless, Germany remains the second largest covered bond market with outstanding issuances totaling €375 billion in H1 2021.
- Germany was first to complete the parliamentary procedure for the implementation of the EU's Covered Bonds Directive on May 7, 2021. Certain parts of the directive implementation remain a work in progress.
- Government support, low property supply, and increasing immigration helped the German housing market sustain its momentum despite the COVID-19 pandemic. House prices have increased more in Germany's urban centers than in the rest of the country.
In its Covered Bond Market Insights report, 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.
Overview: COVID-19 And ECB Affect The Pfandbrief
Similar to that of other European markets, 2020 continued to be a challenging year for covered bond issuance in Germany. Year-to-date German investor-placed benchmark covered bond issuance is about 37% lower than the total 2020 level. Today the German covered bond market is the second-largest after Denmark and the largest euro benchmark market, with outstanding issuances totaling €375 billion as of H1 2021.
Overall, in 2021 we expect German investor-placed benchmark covered bond issuance to be lower than in 2020. This is due to issuers' continued access to competitively priced central bank funding--which steered some banks toward retained, rather than investor placed, covered bond issuances--and growth in bank deposits due to reduced consumer spending.
Transposition of EU's covered bond directive accomplished, but challenges remain
On April 15, 2021 the German Bundestag passed the Covered Bonds Directive Implementation Act (CBDUmsetzungsgesetz, CBDUmsG), aimed primarily at implementing the EU's Covered Bonds Directive into Germany´s Pfandbrief Act (Pfandbriefgesetz, PfandBG) and making adjustments to reflect changes to article 129 of the Capital Requirements Regulation (CRR). On May 7, 2021 the second reading in the Bundesrat took place, making Germany the first country to complete the parliamentary procedure for implementation of the EU's Covered Bonds Directive.
The main changes to the PfandBG include, amongst others: the introduction of an option for the cover pool administrator to extend the maturities of an insolvent issuer's covered bonds by up to one year; an additional nominal statutory overcollateralization (OC) requirement of 2% for mortgage and public sector covered bonds and 5% for ship and aircraft covered bonds; derivative eligibility amendments; amendments to provisions for the liquidity buffer and the cover pool monitor's reporting duty; and the expansion of transparency provisions.
Article 1 of the CBDUmsG, which includes the option to extend the maturities of covered bonds, entered into force on July 1, 2021. Article 2 CBDUmsG, including provisions on implementing the CBD, will enter into force on July 8, 2022.
We understand that the wording of the extension is currently being processed by German covered bond issuers. The deadline to include program documentation updates for new issuances is May 2022. The current documentation for outstanding bonds will not be amended.
We continue to view the German covered bond legal framework as very strong. These changes have no impact on our ratings on German covered bonds.
Concerns raised over valuations
The Association of German Pfandbrief banks (VDP) has expressed concerns regarding the Beleihungswertermittlungsverordnung (BelWertV)-–the German valuation regulation--which it considers too conservative and which may limit the use of covered bonds for funding of residential real estate. The BelWertV limits the valuations used for covered bond issuance and--combined with loan-to-value (LTV) limits of 60% (lower than the directive's 75%)--severely limits issuers' use of residential mortgage collateral in German covered bonds. In our opinion, stringent valuation limits are one reason for German covered bond issuers' higher percentage of commercial real estate as collateral for cover bonds compared to other countries.
COVID-19 has had a limited impact on loan performance and sustainable covered bonds support issuance
The German housing market strongly weathered the COVID-19 pandemic, partly due to pandemic policy measures in Europe, protecting workers' jobs and income, short-time work and furlough schemes which avoided a wide economic downturn. Germany has extended such measures until year end 2021. Despite lower issuance, green covered bonds continue to gain importance for German covered bond issuers.
Germany's Covered Bond Framework: Will Harmonization Bring Growth?
German covered bonds are issued on the basis of the PfandBG and The Regulation on the Determination of the Mortgage Lending Value. The PfandBG came into force in 2005 and has been amended on several occasions. In May 2021 Germany's Bundesrat approved amendments to the PfandBG, completing the parliamentary procedure for implementation of the EU's Covered Bonds Directive.
In addition to the main legal framework, we understand that three issuer-specific frameworks will continue to allow for the issuance of covered bonds: DZ-Bank covered bonds, DSL covered bonds, and Landwirtschaftliche Rentenbank covered bonds. We expect these frameworks to continue to align with the main legal framework
The PfandBG provides for covered bonds to be backed by: mortgage loans (Hypothekenpfandbriefe), public sector debt (Öffentliche Pfandbriefe), ship mortgages (Schiffspfandbriefe), or aircraft mortgages (Flugzeugpfandbriefe). These must each be included in separate cover pools. The majority of German covered bonds are backed by either public sector loans (about 34% of total outstanding covered bonds) or mortgage loans (approximately 66% of total outstanding covered bonds). For each of these collateral types, the German covered bond law defines the eligibility criteria, loan characteristics, and eligible jurisdictions.
|Legal Framework Comparison|
|Product||Pfandbriefe||Obligations à l'Habitat (OH)||Obligations Foncières (OF)||Dutch registered covered bond program||Regulated covered bonds (RCB)|
|Legislation||PfandbriefAct (Pfandbriefgesetz - PfandBG) from May 22, 2005, amended in 2009, 2010, 2013, 2014, 2015, 2021||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||Financial Supervision Act as amended in 2014 and subsequent amendments||Regulated covered bond regulations 2008 and subsequent amendments|
|Issuer||Universal credit institution with a special license||Specialized credit institution||Specialized credit institution||Universal credit institution with a special license||Universal credit institution with a special license|
|Owner of the cover assets||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)||SPE (guarantor of the covered bonds)|
|Cover asset type||Public sector assets, mortgage loans, ship loans, aircraft loans, credit institutions||Mortgage loans, securitizations||Public sector assets, mortgage loans, securitizations, credit institutions||Public sector assets, mortgage loans, ship loans, credit institutions||Public sector entities, mortgage loans|
|Mortgage cover asset location||EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Singapore||EEA (currently domestic only)||EEA||EEA (currently domestic only)||EEA, Switzerland, U.S., Canada, Japan, New Zealand, Australia, Channel Islands, Isle of Man|
|Residential mortgage cover assets LTV limit||60%||80%||Residential: 80%; state-guaranteed loans: 100%||80%||Residential: 80% LTV under the CRD; program documents on Regulated Covered Bonds currently a 75% LTV limit|
|Primary method for mitigating market risk||"Natural" hedging stress testing||"Natural" hedging stress testing||Derivatives||Derivatives||Derivatives|
|Mandatory overcollateralization||2% NPV; from July 8, 2022: 2% nominal for mortgage and public sector covered bonds; 5% nominal for ship and aircraft covered bonds||5% nominal||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.|
In addition to general banking supervision, covered bond issuers are subject to supervision by the Federal Financial Supervisory Authority (BaFin) to ensure compliance with the covered bond law. BaFin appoints an independent cover pool monitor to ensure the cover pool register is maintained at all times. Derivatives are eligible for inclusion in the cover pool under certain conditions and limitations. Payments to counterparties rank equal to payments due to covered bondholders.
One of the central pillars supporting the strong history of the mortgage Pfandbrief is that eligible loans may be included in cover pools only up to the mortgage lending limit of 60% of the valuation of the property securing the loan. Further, the valuation is based on the mortgage lending value ("Beleihungswert"), a conservative valuation based on long-term considerations, and which by definition cannot exceed the current market price. The new legislation will maintain the lending limits, which has raised some concern for limited growth in residential mortgage loans as security for covered bonds.
Overcollateralization, liquidity buffer, and maturity extension
The May 2021 amendments to the PfandBG introduced an additional nominal statutory OC requirement of 2% for mortgage and public sector covered bonds and 5% for ship and aircraft covered bonds effective July 8, 2022.
The PfandBG still also requires issuers to hold a liquidity buffer that covers maximum net liquidity outflow over the next 180 days.
One of the main amendments to the PfandBG is the introduction of an option for the cover pool administrator to extend the covered bonds' maturities of an insolvent issuer by up to one year. The maturity extension cannot affect the ranking of covered bond investors or invert the sequencing of the covered bond programs' original maturity. Maintaining the original payment sequence of outstanding covered bonds may be a challenging exercise in our opinion, and will likely lead to further extensions, since extending one bond may require extension of other bonds due within the extension period.
Our rating analysis will consider the extended maturity of the covered bonds, which could help improve the observed mismatch between assets and liabilities--particularly for residential mortgage programs with traditionally higher asset-liability mismatches. For public sector programs, which traditionally have lower asset liability mismatches, we expect the effect to be limited.
Accordingly, we anticipate that a maturity extension may affect the overcollateralization commensurate with the maximum collateral-based uplift (see also "Approach To Analyzing German Covered Bonds Clarified Following Changes To The German Covered Bond Law," published on Oct. 6, 2021).
Commingling risk refers to the risk that cash collected from the cover assets (mortgage loans, for example) could be trapped in the insolvent estate or temporarily restricted from servicing the covered bonds. If the insolvent issuer's estate can make a claim, such cash collections may be considered lost or frozen depending on its status under general insolvency law. The German cover register does not constitute a legal entity prior to the default of the issuer. Therefore, following the issuer's insolvency, cash is held in the issuer's name and some cash holdings are held on the cover pool's behalf, which creates potential commingling risk.
N-bonds or NamensPfandbriefe, a German specialty
Since peaking in 2014 the traditionally smaller segment of the market--the so-called "Namenspfandbriefe" (N-bonds)--has reduced as a percentage of the total market. It has proven particularly popular for public sector funding. An N-bond is a covered bond or debt security, which, unlike a typical Pfandbrief or security, is unregistered. No records are kept of the owner or the transactions involving ownership. The liquidity of such bonds is generally considered lower than typical Pfandbrief, and investors have traditionally been buy-to-hold investors, such as life insurance companies. Although they remain a popular source of public sector funding, N-bond volumes have also fallen due to the rapidly declining level of outstanding public sector covered bonds. The recent introduction of extendable maturities to all German Pfandbriefe may also affect the N-bond's future attractiveness.
|German 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|
|Mortgage covered bond programs|
|Wuestenrot Bausparkasse AG||A-/Stable/A-1||AAA/Stable/--||2,213.6||Hard bullet||89.6% residential, 1.3% commercial, 9.1% substitute assets||Link||Link|
|DZ HYP AG - Mortgage Sector Program||A+/Stable/A-1||AAA/Stable/A-1+||33,630.7||Hard bullet||56.2% residential, 41.3% commercial, 2.5% substitute assets||Link||Link|
|Deutsche Apotheker-und Aerztebank eG||A+/Stable/A-1||AAA/Stable/--||7,995.1||Hard bullet||77.7% residential, 18.2% commercial, 4.1% Substitute assets||Link||Link|
|Public covered bond programs|
|DZ Hyp - Public Sector Covered Bond program||A+/Stable/A-1||AAA/Stable/--||12,332.1||Hard bullet||100.0% public sector||Link||Link|
|DZ BANK AG Deutsche Zentral-Genossenschaftsbank||A+/Stable/A-1||AA+/Stable/A-1+||11,557.1||Hard bullet||0.03% mortgages, 11.2% public sector, 1.7% substitute assets, 87.2% other||Link||Link|
|NRW Bank||AA/Stable/A-1+||AAA/Stable/--||1,502.8||Hard bullet||100% public sector||N/A||Link|
|*Except for NRW Bank, as reported by the issuer in the June 2021 HTT report. N/A--Not applicable.|
Mortgage Market Overview: German Housing Market Maintains Momentum
We anticipate Germany's economy will grow by 3.1% in 2021 and 5% in 2022, after a 4.9% contraction in 2020. Increasing vaccination rates will result in further lifting of restrictions, which leads to a boost in private consumption. Furthermore, the boost to investment across Europe from the Next Generation EU plan should lead to higher demand for German industrial products and exports. However, the main risks stem from the impact of COVID-19 variants and financing conditions when central banks reduce their bond purchases.
In line with the observed recovery, we expect unemployment to decline from the current level of around 4% to 3.5% in 2022 and 3.4% in 2023.
|Year||Real GDP growth (%)||Unemployment rate (%)||Nominal house prices (%)|
|Source: S&P Global Ratings. f--Forecast. *--Estimate.|
Property market outlook: House prices should increase more slowly in 2021
House prices exceeded 6% in 2020 and are expected to growth 5% in 2021. The expected sustained economic and employment recovery will support the housing market beyond 2021, with house prices expected to grow by 4.9% in 2022 and by 4.5% in 2023. The search for yield will continue to generate investor demand in large cities and investor-based markets, especially in Germany, where housing prices are still catching up with the rest of Europe.
House prices in Germany are also supported by population growth, which, despite low birth rates and high death rates, continue to increase due to positive net migration (see chart 7). Growing immigration will continue to support German house prices, particularly in urban areas (see chart 8). The top 10 largest German cities have recorded positive growth in population from 2009-2020. Strongest growth is observed in Leipzig, Munich, and Frankfurt. In the same period, the total population increased at a much lower rate of 1.7%. We expect growing urbanization in Germany to continue to support demand for housing despite COVID-19, with stable house prices in the bigger cities at least.
Features Of German Covered Bond Programs
German cover pools are managed according to the German covered bond legislation, which allows for dynamic management of the cover pool. This may affect the asset composition, the geographical focus of the assets, and the level of overcollateralization (as long as it is above the legal minimum), while issuers may utilize covered bonds more or less depending on their funding needs. The following table depicts the development of the top 10 issuers in Germany's covered bond market. It shows the change in outstanding bonds over time as the market has moved from covered bonds backed by public sector assets to mortgage backed covered bonds. Further, the changes reflect consolidation in the market, with a number of mergers taking place since 2011.
|Comparison Of Top 10 Issuers (Bil. €)|
|As of Q2 2021||As of Q1 2020||As of Q3 2018||As of Q2 2017||As of Q4 2011|
|DZ HYP Hypf||33,630.70||DZ HYP Hypf||30,739.1||DZ HYP Hypf (prev. DG/WL Hyp Hypf)||28,390.4||Münchener Hypo Hypf||22,255.0||LBBW Oepf||40,656.0|
|Munchner Hypo Hypf||30,036.90||Munchner Hypo Hypf||27,898.3||Munchner Hypo Hypf||23,159.2||Unicredit Bank AG Hypf||17,129.3||Hypothekenbank Frankfurt Hypf||38,919.2|
|HELABA Oepf||28,721.90||HELABA Oepf||26,841.3||Commerzbank Hypf||20,148.2||HELABA Oepf||16,696.3||Deutsche Pfandbriefbank Oepf||33,742.4|
|Unicredit Bank AG Hypf||22,127.30||Unicredit Bank AG Hypf||24,580.9||Unicredit Bank AG Hypf||18,249.2||Bayern LB Oepf||16,678.6||Dexia Kommunal Bank Oepf||32,746.0|
|Commerzbank Hypf||21,872.70||Commerzbank Hypf||21,016.5||Bayern LB Oepf||17,752.0||WL Bank Hypf||16,388.5||Hypothekenbank Frankfurt Oepf||32,396.8|
|Bayern LB Oepf||18,998.40||Bayern LB Oepf||18,472.5||Deutsche Pfandbriefbank Hypf||16,066.0||Deutsche Pfandbriefbank Hypf||14,904.4||Bayern LB Oepf||29,670.0|
|Berlin Hyp Hypf||16,368.70||Deutsche Pfandbriefbank Hypf||16,365.0||Nord LB Oepf||15,921.3||Commerzbank Hypf||14,869.6||Unicredit Bank AG Hypf||25,431.5|
|Deutsche Pfandbriefbank Hypf||16,295.00||Berlin Hyp Hypf||14,071.4||DZ HYP Oepf (prev. DG Hyp Oepf)||15,890.5||Nord LB Oepf||14,237.0||DG Hyp Oepf||23,379.9|
|DZ HYP Oepf||12,332.10||DZ HYP Oepf||13,382.2||HELABA Oepf||15,020.5||HELABA Hypf||12,054.5||Nord LB Oepf||19,811.0|
|Commerzbank Oepf||12,172.90||HELABA Hypf||12,261.5||Berlin Hyp Hypf||13,892.7||LBBW Hypf||11,758.0||WL Bank Oepf||19,788.6|
|Hypf--Mortgage. Oepf--Public sector.|
Cover pool loans
Residential mortgage loans Most German residential mortgage loans have a fixed interest rate for 10 to 20 years. The borrower typically pays regular installments and decides whether to make additional down payments on the loan (Sondertilgung). Full prepayment before maturity requires the borrower to compensate the issuer. Installments are the same amount throughout the repayment period, and the interest portion is therefore high in the beginning, while repayment increases over the life of the loan. Not all loans are repaid in full at maturity, and such loans would need refinancing before maturity.
Building society loans (Bausparvertrag) Since 2016, building societies (Bausparkassen) can issue covered bonds. The typical Bausparkassen product consists of an annuity loan linked to a building society savings program funding residential mortgages. Installments paid into the program are used to pay off the mortgage at a later stage. The popularity of building society loans increased rapidly from the late 1970s until the mid-1990s because they guaranteed high interest rates on savings and security. However, the low interest rate environment has reduced demand for new contracts.
Commercial real estate loans Commercial properties eligible for German cover pools vary but consist mainly of office space, retail facilities, and to a lesser extent, industrial space. The largest segment is often multifamily housing, which from a regulatory standpoint is not considered commercial real estate exposure. Mortgage loans are normally variable-rate linked to the euro interbank offered rate (EURIBOR) and have shorter maturities and interest-only characteristics. As chart 9 shows, the total percentage of commercial real estate and multifamily housing remained at about 39% and 22% respectively over the last year. The percentage of collateral secured by all property types in Germany now makes up almost 80% on average.
Public sector loans Public sector loans are relatively diverse, ranging from loans to German local and regional governments, public utility companies, export credit agencies, and supranational organizations. However, local and regional government debt has decreased, and banks have struggled to find other assets with attractive margins for covered bond funding.
COVID-19 and the consequent increase in spending by local and regional governments may increase their need for funding, and in turn, this may support new issuance of public sector Pfandbriefe.
Green Covered Bonds And ESG Considerations
As one of the largest covered bond markets, we expect German covered bond issuers to be on the forefront of the developments within this growing segment. Since 2019, the Association of German Pfandbrief banks (VDP) has maintained the minimum standards for Green Pfandbriefe. Furthermore, the VDP has established minimum standards for social covered bonds that build on existing green and social standards. Participating banks are planning further product development.
Environmental and social credit factors are typically credit neutral in our analysis of German mortgage covered bonds. While we typically consider social factors to be a credit positive in the assessments of the public sector entities included in public sector cover pools. The German Pfandbrief law requires the coverage of 180 days liquidity. Issuers are not committed to maintain a minimum level of OC in the program. While this does not affect our ratings on the bonds, it reduces the number of unused notches which provides protection in the event of an issuer downgrade.
Climate Risk Vulnerability
Extreme weather events such as heavy rainfall and heatwaves are becoming more frequent. In July 2021, severe weather conditions resulted in some of the worst flooding catastrophes seen in Germany. Heavy rain and flooding led to significant damages mainly in the German states of North Rhine-Westphalia, Rhineland-Palatinate, and Bavaria. The total damages are estimated to be about €7 billion. Of that sum, €6.5 billion alone is for residential buildings, households, and businesses.
Although most properties affected may have residential building insurance, natural risk insurance is not a common feature of household insurance in Germany. According to the Gesamtverband der Deutschen Versicherungswirtschaft (GDV), only 47% of properties in North Rhine-Westphalia and 37% of properties in Rhineland-Palatinate are secured against natural risk.
In response to severe damages, the German government has established a €30 billion reconstruction fund. From this sum, €2 billion will be used for infrastructure reconstruction, with the remaining €28 billion to be distributed amongst impacted states according to the damages caused (54.4% to Rhineland-Palatinate, 44.0% to North Rhine-Westphalia, 1% to Bavaria, and 0.48% to Saxony). Impacted homeowners, companies, and other facilities are expected to receive a compensation up to 80% of the total damage. In more severe cases it is possible to receive 100%.
We do not expect the damages linked to the current flooding to have any impact on the rating of our rated mortgage covered bonds. Although losses are significant, the affected regions make up a limited part of the diversified loan portfolios constituting the security for covered bonds. Compared to the overall size of the cover pool, we expect losses to be manageable also considering the strong government support for the borrowers.
Comparison Of German Covered Bond Programs
As shown in chart 10B, the share of German assets backing covered bonds varies across issuers. While most issuers focus on assets sourced in Germany, some include mainly non-German assets in their cover pools. Our collateral support analysis is performed using the respective criteria for the underlying asset type, while our resolution regime and jurisdictional support analysis reflects the issuer's jurisdiction.
As chart 10A shows, the share of commercial assets also varies significantly across issuers. While we believe that commercial real estate asset performance may deteriorate, we do not anticipate this significantly impairing the credit quality of the German mortgage covered bonds that we rate. This is because of the availability of credit enhancement to absorb losses.
|German Covered Bond Programs--Key Characteristics|
|German mortgage covered bond programs||Long-term issuer credit rating||Covered bond rating||Outstanding covered bonds (mil. €)*||Maturity profile*||Collateral type*||Link to surveillance report||Link to transaction update||Outstanding assets (mil. €)*||No. of loans*||WA LTV (%)*||WA seasoning (months)*||Interest rate type*||Repayment type*||WAFF (%)||WALS (%)||Available credit enhancement (%)||Target credit enhancement (%)||'AAA' credit risk (%)||OC consistent with the current rating (%)||Unused notches|
|Wuestenrot Bausparkasse AG||A-/Stable/A-1||AAA/Stable/--||2213.6||Hard bullet||89.6% residential, 1.3% commercial, 9.1% substitute assets||Link||Transaction update||2,746||34,257||45.1||125.88||99.1% fixed, 0.9% floating||70.8% amortizing, 29.2% bullet/IO||10.34||9.02||20.14||8.84||6.31||7.58||2|
|DZ HYP AG - Mortgage Sector Program||A+/Stable/A-1||AAA/Stable/A-1+||33,630.7||Hard bullet||56.2% residential, 41.3% commercial, 2.5% substitute assets||Link||Transaction update||38,424.5||109,140||50||58.56||88.8% fixed, 11.2% floating, other 0.0%||74.4% amortizing, 25.6% bullet/IO, 0.0% other||19.87||30.97||14.25||9.1||7||7||4|
|Deutsche Apotheker-und Aerztebank eG||A+/Stable/A-1||AAA/Stable/--||7,995.10||Hard bullet||77.7% residential, 18.2% commercial, 4.1% Substitute assets||Link||Transaction update||8,810.10||83,141||55.1||65.04||92.5% fixed, 7.5% floating||67.2% amortizing, 29.9% bullet/IO, 3.0% other||21.55||27.18||10.83||7.03||5.25||5.25||4|
|German public sector covered bond programs||Long-term issuer credit rating||Covered bond rating||Outstanding covered bonds (mil. €)*||Program type*||Collateral type*||Outstanding assets (mil. €)*||Public sector assets (%)*||Scenario default rate (%)/scenario loss rate (%)||Weighted-average cover pool rating||Available credit enhancement (%)||Target credit enhancement (%)||'AAA' credit risk (%)||OC consistent with the current rating (%)||Unused notches|
|DZ Hyp - Public Sector Covered Bond program||A+/Stable/A-1||AAA/Stable/--||12,332.15||Hard bullet||100.0% public sector||Link||Transaction update||14,556.80||100||23.6||A-||18.04||14.24||10||10||4|
|NRW Bank||AA/Stable/A-1+||AAA/Stable/--||1,502.80||Hard bullet||100% public sector||N/A||Transaction update||2,141.40||100||80.44||B||42.49||126.59||16.58||16.58||1|
|DZ BANK AG Deutsche Zentral-Genossenschaftsbank||A+/Stable/A-1||AA+/Stable/A-1+||11,557.05||Hard bullet||0.03% mortgages, 11.2% public sector, 1.7% substitute assets, 87.2% other||Link||Transaction update||18,240.30||11||N/A||N/A||65.92||WH||WH||5.19||2|
|Note: This table can be expanded on www.capitaliq.com to view all of the data presented in tables 2, 5, and 6, in one combined table. The data can also be exported to Microsoft Excel. *Except for NRW Bank, as reported by the issuer in the June 2021 HTT report. WA--Weighted-average. LTV--Loan-to-value. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. N/A--Not applicable. WH--Withheld at the issuer's request. OC--Overcollateralization.|
Ratings Outlook: Unused Notches Mitigate Bank Downgrade Risk
The German covered bonds which we rate are issued by highly-rated issuers, which are the first recourse for bondholders. As a result, most of our rated German covered bond programs benefit from multiple unused notches of ratings uplift, which protect the ratings on the covered bonds if the issuer is downgraded.
On June 24, 2021 we downgraded various German banks including the Cooperative Banking Sector (see "Various German Banks Downgraded On Persistent Profitability Challenges And Slow Digitalization Progress"). This rating action did not affect our ratings on the covered bonds issued by Deutsche Apotheker- und Aerztebank eG, the public sector and mortgage covered bonds issued by DZ Hyp AG, and DZ Briefe issued by DZ Bank AG (see "German Cooperative Banking Sector Downgrade Does Not Affect Ratings On Four Covered Bond Programs," published on June 28, 2021).
|German Covered Bond Programs--Credit Enhancement|
|Program||Available credit enhancement (%)||Target credit enhancement (%)||'AAA' credit risk (%)||OC consistent with the current rating (%)||Unused notches|
|Mortgage covered bond programs|
|Wuestenrot Bausparkasse AG||20.14||8.84||6.31||7.58||2|
|DZ Hyp AG - Mortgage Sector CB Program||14.25||9.1||7||7||4|
|Deutsche Apotheker- und Aerztebank eG||10.83||7.03||5.25||5.25||4|
|Public Sector Covered Bond Programs|
|DZ Hyp AG - Public Sector CB Program||18.04||14.24||10||10||4|
|DZ BANK AG Deutsche Zentral-Genossenschaftsbank||65.92||WH||WH||5.19||2|
|WH--Withheld at the issuer's request. OC--Overcollateralization.|
Chart 14 shows the breakdown of the average target credit enhancement levels of mortgage and public sector covered bond programs compared to the available credit enhancement across countries. We define the target credit enhancement as the OC commensurate with the maximum collateral-based uplift.
Scenario Analysis: German Covered Bonds Can Withstand Substantial House-Price Corrections
Despite the currently strong housing market, we have carried out a scenario analysis with large drops in house prices to gauge their impact on the final rating outcome or the OC commensurate with the current ratings on the covered bonds. We have tested the impact for house-price drops of 10% and 20%, similar to what we observed in Eastern Germany after the reunification when more than one million of the East German population immigrated to West Germany. In the mid-1990s, house prices decreased within three years by about 15%, and shortly after the 2000s, the accumulated price drop was roughly 20%.
Table 7 shows the impact of house-price declines on the weighted-average loss severity calculation for our rated mortgage programs. The OC in line with the current rating would not increase significantly. Additionally, these hypothetical price drops would not decrease the maximum achievable rating on any of the mortgage covered bond programs.
|Effect Of House Price Decline On Rated German Covered Bond Programs|
|Wuestenrot Bausparkasse AG||DZ HYP AG||Deutsche Apotheker-und Aerztebank eG|
|House price haircut|
|'AAA' credit risk (%)||6.31||7.00||5.25|
|Target credit enhancement (%)||8.84||9.10||7.03|
|Overcollateralization commensurate with rating (%)||7.58||7.00||5.25|
|'AAA' credit risk (%)||6.35||7.10||5.61|
|Target credit enhancement (%)||8.88||9.19||7.39|
|Overcollateralization commensurate with rating (%)||7.62||7.10||5.61|
|'AAA' credit risk (%)||6.48||7.33||6.47|
|Target credit enhancement (%)||8.99||9.41||8.28|
|Overcollateralization commensurate with rating (%)||7.74||7.33||6.47|
|WALS--Weighted-average loss severity. Source: S&P Global Ratings.|
- NRW.BANK Public Sector Covered Bond Program, July 28, 2021
- Deutsche Apotheker- und Aerztebank eG Mortgage Covered Bond Program, June 28, 2021
- DZ HYP AG (Public Sector Covered Bond Program), April 12, 2021
- DZ HYP AG (Mortgage Covered Bond Program), Feb. 23, 2021
- DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Feb. 1, 2021
- Wuestenrot Bausparkasse AG (Mortgage Covered Bond Program), Jan. 29, 2021
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Covered Bond Ratings Framework: Methodology and Assumptions, June 30, 2015
- Methodology And Assumptions: Analyzing European Commercial Real Estate Collateral In European Covered Bonds, March 31, 2015
- Covered Bonds Criteria, Dec. 9, 2014
- Methodology And Assumptions For Assessing Portfolios Of International Public Sector And Other Debt Obligations Backing Covered Bonds And Structured Finance Securities, Dec. 9, 2014
- Approach To Analyzing German Covered Bonds Clarified Following Changes To The German Covered Bond Law, Oct. 6, 2021
- European Economic Snapshots: A Faster-Than-Expected Restart, Sept. 29, 2021
- Credit Conditions Europe Q4 2021: Rampant Recovery, New Risks, Sept. 28, 2021
- Economic Outlook Europe Q4 2021: A Faster-Than-Expected Liftoff, Sept. 23, 2021
- Climate Risk Vulnerability: Europe's Regulators Turn Up The Heat On Financial Institutions, Aug. 2, 2021
- Covered Bonds Outlook Midyear 2021: Credit Stable Despite Waning Support, July 23, 2021
- Covered Bond Harmonization In The EU Remains A Work in Progress, July 13, 2021
- Commercial Real Estate In Covered Bonds: Is It Worth The Risk?, July 8, 2021
- German Cooperative Banking Sector Downgrade Does Not Affect Ratings On Four Covered Bond Programs, June 28, 2021
- Various German Banks Downgraded On Persistent Profitability Challenges And Slow Digitalization Progress, June 24, 2021
- Economic Research: How Long Can The ECB Yield Shield Last?, June 11, 2021
- Credit Trends: Global Financing Conditions: Bond Issuance Could Decline 2.25% In 2021 To $8.2 Trillion, April 28, 2021
- Europe’s Housing Market Will Chill In 2021 As Pent-Up Pandemic Demand Eases, Feb. 22, 2021
- ESG Industry Report Card: Covered Bonds, Nov. 9, 2020
- Glossary Of Covered Bond Terms, April 27, 2018
This report does not constitute a rating action.
|Primary Credit Analysts:||Natalie Swiderek, Madrid + 34 91 788 7223;|
|Andreas M Hofmann, Frankfurt + 49 693 399 9314;|
|Secondary Contact:||Casper R Andersen, Frankfurt + 49 69 33 999 208;|
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