RPT-Fitch Affirms Nykredit Realkredit at 'A'; Outlook Stable

Thu Nov 28, 2013 9:22am EST

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Nov 28 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Denmark-based Nykredit Realkredit's (Nykredit) Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is provided at the end of this comment.

Fitch has also affirmed Nykredit Bank's, a wholly owned subsidiary, Long-term IDR at 'A' with a Stable Outlook, Short-term IDR at 'F1' and Support Rating at '1'.

KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT

The affirmation of Nykredit's IDRs and VR reflects Fitch's view that Nykredit's profitability, although moderate, will enable it to absorb unexpected shocks in Denmark until economic growth is firmly back on track in the country.

The ratings are based on the Nykredit's leading domestic mortgage business, sound capitalisation and strong asset quality of its mortgage portfolio. The ratings also factor in a higher-risk profile of the non-mortgage banking subsidiary which, however, is manageable within the context of the wider group. Reliance on wholesale funding is a negative rating driver for Nykredit, albeit mitigated by a large, deep and liquid domestic funding market.

Nykredit's largely mortgage-based loan portfolio has remained resilient through the Danish recession and housing downturn that has seen price falls of over 20% since the 2007 peak. Fitch expects the quality of the mortgage portfolio to remain strong, supported by a stabilising Danish economy. Impaired loans in Nykredit Bank remain higher than in Nykredit's mortgage portfolio, although given the still limited size, they are not expected to pose a material risk for the group.

Nykredit's profitability is driven by a low-margin mortgage business and by somewhat higher returns in Nykredit Bank. Fitch expects Nykredit will continue to focus on increasing mortgage margins and on keeping loan impairment charges (LICs) manageable. Nykredit is cost-efficient, and Fitch expects LICs as a proportion of pre-impairment operating profit to trend down in 2014, albeit from a fairly high level.

Similar to its domestic peers, Nykredit's mortgage business is by law entirely funded by mortgage bonds, of which around one-third mature within a year to match the interest term of the underlying mortgage. Generally such a dependence on short-term wholesale funding would suggest a lower rating. However, the supportive dynamics of the Danish mortgage bond market serve as an important mitigating factor for this risk. Fitch expects demand for Danish mortgage bonds to remain strong in light of the need by predominantly domestic financial institutions, insurance companies and pension funds to hold highly liquid and high-quality securities in domestic currency. This is reinforced by the fairly limited outstanding volume of Danish government bonds.

Nonetheless, maintaining a significant liquidity portfolio to mitigate any refinancing risk is key to the ratings. Nykredit's move to extend bond maturities will further mitigate refinancing risk The Danish government has put forward a proposal that mortgage covered bonds should include mandatory extension provisions which would address liquidity risk associated with concentrated refinancing via bond auctions (see 'Danish Mortgage Bond Extension Would Cut Refinancing Risk', dated 27 November 2013, at www.fitchratings.com).

Nykredit's capital adequacy ratios compare well with those of domestic and international peers. Low risk weights on mortgages boost reported capital ratios and leverage is fairly modest in a European context, with tangible common equity/tangible assets at around 4% at end-September 2013.

RATING SENSITIVITIES - VR, IDRS AND SENIOR DEBT

The Stable Outlook reflects Fitch's view that Nykredit will continue to focus on maintaining its strong asset quality and its adequate earnings to absorb unexpected shocks and to internally generate capital.

A rating downgrade would most likely be a result of Nykredit being unable to competitively access wholesale funding markets. The ratings would also come under pressure if it significantly increases its reliance on international debt investors that may be less stable during financial stress, or if the risk profile of Nykredit Bank worsens. Reduced focus on liquidity would also be rating-negative.

An upgrade is currently unlikely given Nykredit's already high ratings.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating and Support Rating Floor reflect Fitch's expectation of an extremely high probability of support from the Danish authorities if required. This is driven by Nykredit's systemic importance within the Danish financial sector.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor are potentially sensitive to any change in Fitch's assumptions about the ability (as reflected in its ratings) or willingness of the Danish state to provide timely support to the bank, if required. They are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for banks more generally.

In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. On 11 September 2013, Fitch outlined its approach to incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see "Fitch Outlines Approach for Addressing Support in Bank Ratings" and "Bank Support: Likely Rating Paths", at www.fitchratings.com).

The Support Rating would be downgraded and the Support Rating Floor revised down if Fitch concludes that potential sovereign support has weakened relative to its previous assessment.

KEY RATING DRIVERS AND SENSITIVITIES - SUSBIDIARY AND AFFILIATED COMPANY

Because Nykredit Bank's debt ratings are aligned with Nykredit's due to its core position within the Nykredit group, its ratings are sensitive to the same factors that may drive changes to Nykredit's IDR.

Given the close integration of Nykredit Bank in the larger group, including various shared services, no VR has been assigned to the subsidiary.

The rating actions are as follows:

Nykredit Realkredit

Long-term IDR: affirmed at 'A', Stable Outlook

Short-term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A-'

Nykredit Bank

Long-term IDR: affirmed at 'A', Stable Outlook

Short-term IDR: affirmed at 'F1'

Support Rating: affirmed at '1'

Long-term senior unsecured debt: affirmed at 'A'

Short-term senior debt: affirmed at 'F1'

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