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Investor Presentation
24 June 2011
p2
Key Messages
Realkredit Danmark has discontinued Moody’s ratings on covered bonds issued out of Capital Centre S and
the General Capital Centre with immediate effect
The discontinuation follows a dialogue with Moody’s since mid2010 on the methodology applied for the rating
of Realkredit Danmark and the covered bonds issued out of Realkredit Danmark capital centres
Realkredit Danmark believes the Moody’s methodology applied for the rating of Realkredit Danmark and the
resulting requirements for maintaining the covered bond Aaa rating be misaligned with the underlying
strength and risk profile of the mortgage bank
Realkredit Danmark further believes Moody’s to underestimate the fundamental strength of the market and
the Danish mortgage banking model evidenced by the performance during the recent crisis and the more
than 200 year history of no defaults
Realkredit Danmark plans to raise fees to a level at which Realkredit Danmark remains competitive and
funding costs are maintained at a low level
For the purpose of adding to the long term robustness of the Danish mortgage banking system Realkredit
Danmark will establish a new capital centre for the funding of interest reset loans
Covered bonds issued out of Capital Centre S and the General Capital Centre will remain AAA rated by
Standard & Poor’s
p3
The Moody’s Rating Approach to Realkredit Danmark
Since mid2010 Moody’s have assigned a privately
monitored issuer rating to Realkredit Danmark
The issuer rating is assigned pursuant to the
Special Covered Bond Issuer method designed to
apply only to those financial institutions that
specialise in the issuance of covered bonds on
behalf of an owner bank. In addition the institution
may also have very limited lending activities
Based on this approach the issuer rating of
Realkredit Danmark has been pegged to the
Danske Bank issuer rating with a two notch
deduction to reflect the level of formal parent
support
The downgrades of Danish banks during 2011 in
response to the Danish bank restructuring scheme
(Bankpakke III) and the collapse of Amagerbanken
impacted Realkredit Danmark directly though
Realkredit Danmark was explicitly excluded from
the scheme
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Danske Bank
Realkredit Danmark
Mid2010
p4
The Moody’s Rating Approach to Realkredit Danmark (continued)
The 20 May downgrade of Danish banks would
have implied a further downgrade of the issuer
rating of Realkredit Danmark to Baa1 but at this
stage Moody’s initiated a complete review of their
rating approach towards Realkredit Danmark
Before concluding this review Moody’s lowered
Timely Payment Indicators and raised refinancing
margins. This had an impact on requirements at
par with the impact from an issuer rating
downgrade
Realkredit Danmark believes the approach is
misguided
The financial strength of Realkredit Danmark is not
factored in
The history of Realkredit Danmark is not factored
in
The Realkredit Danmark brand value is not
factored in
Realkredit Danmark clearly has lending activities
of its own
Realkredit Danmark is clearly not a SPV
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Danske Bank
Realkredit Danmark
Mid2011
p5
Over Collateralisation Requirements by Moody’s
0
40
80
120
160
Original OC Mid 2010 February 2011 May 2011 June 2011 Downgrade
scenario
Billion
29
5463
Pending on
Moody’s
review
97
147
The TPI for Danish covered bonds changed from Very High
to High
If the single notch
downgrade materialises
Special Covered Bond Issuer
approach first applied
RD issuer rating of A2
Downgrade of Danish banks
RD issuer rating automatically
changed from A2 to A3
Gen. Cap. 5.0%
Cap. S 10.5%
Gen. Cap. 5.5%
Cap. S 11.5%
Gen. Cap. 9.0%
Cap. S 27.0%Gen. Cap. 5.5%
Cap. S 18.0%
p6
Over Collateralisation Requirements Contrasted by Performance
The over collateralisation requirement of 18% on covered bonds issued out of Capital Centre S is
contrasted by loan impairment charges not exceeding 1% during the 1988 to 1992 crisis and 0.2% during
the recent crisis
-1%
1%
3%
5%
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Loan impairment charges to loan book ratio
p7
Over Collateralisation Requirements Contrasted by Performance(continued)
From beginning of 2008 to year to date 2011 Danish covered bonds have been traded in a 8.1:1 ratio to
Danish public debt
The liquidity of the market is deepest among peers which has also been testified to by Nationalbanken
Covered bond markets remained open to issuers throughout the financial crisis
The 1 January 2009 refinancing was completed in November and December 2008 at a time when liquidity
in most financial markets had vanished. Since then efforts have been made to reduce the volume of end
year refinancing
0
200
400
600
800
1000
1200
1400
1600
1800
2000
01-2008 07-2008 01-2009 07-2009 01-2010 07-2010 01-2011
Covered bonds Government bonds
Market value monthly turnover non repo
Billion
p8
Over Collateralisation Requirements Contrasted by Performance(continued)
During the financial crisis asset swap spreads on Danish covered bonds remained low relative to peers
This reflected investors remained confident in both the credit quality and liquidity of Danish covered bond
and the underlying strength of the market
-25
25
75
125
175
225
275
325
375
425
475
525
2-Feb-08 2-Dec-08 2-Oct-09 2-Aug-10 2-Jun-11
iBoxx EUR UK iBoxx EUR Ireland iBoxx EUR Spain iBoxx EUR France
iBoxx EUR Germany DM SEK Sweden DM DKK Denmark
Covered bond asset swap spreadsBps
p9
Over Collateralisation Requirements Contrasted by Performance(continued)
30000
35000
40000
45000
50000
55000
0
200
400
600
800
1000
1200
1400
q3 2008 q1 2009 q3 2009 q1 2010 q3 2010 q1 2011
Capital - rha Loan impairment charges Net profit
Million Million
Net profits recorded quarter by quarter throughout the crisis
Loan impairment charges kept in check by strong risk management
Funding windows remained open to Realkredit Danmark
Realkredit Danmark increased its capital position from retained earnings
Net profits and loan impairment charges during the crisis
p10
OC Requirements and Regulatory Capital Requirements
Realkredit Danmark’s Core Tier I capital ratio stood at 35.5% end 2011Q1
The binding regulatory capital requirement is the CRD transition rules at 24.6 billion
The gap between Moody’s OC requirement and regulatory capital requirements has grown into the extreme
Pillar 1+ Economic capital Transition Capital base Senior
unsecured
Standard &
Poor's
Moody's
11.2bn
24.6bn
45.5bnCapitalisation
Capitalisation floor20.9bn
17.0bn
49bn
97bn
15.1bn
Capitalisation end 2011Q1
p11
Stress Suggest Capitalisation be more than adequate
1447
1956
998799
391 381
2768
4427
115 119
22.0 20.7
135145
20.9 19.2
2011 2012 2011 2012 2011 2012 2011 2012
Net profit (DKKm) Loss impairment charges
(DKKm)
Risk weighted assets
(DKKbn)
Capital buffer (DKKbn)
Base scenario
Stress scenario
FSA assumptions Base Scenario Stress scenario
In % 2011 2012 2011 2012
GDP (Y/Y) 1.7 2.0 -1.6 -2.4
Unemployment 4.2 3.8 5.6 8.3
House prices (Y/Y) 1.5 2.0 -14.3 -14.6
Short term interest rate 0.7 0.9 2.0 2.4
Long term interest rate 2.9 3.4 5.1 6.1
FSA stress test indicate adequate capital level
within Realkredit Danmark
Capacity to generate net profit even in a stressed
scenario of sharply declining house prices
Capital buffer estimated to remain fairly stable at
approx. 20 billion
Solvency ratio impacted by substantial growth in
risk weighted assets
FSA stress test in line with credit crunch scenario
employed in ICAAP
Stress test results do not factor in the option to
increase administration fees
p12
Stress Suggest Capitalisation be more than adequate (continued)
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
ICAAP Stress test capital buffers
Credit crunch
Mild recession
Severe recession
Base
Interest rateincrease
Billion
p13
The Loan Book is Secure
Total loan book split by indexed loan to value ratio and borrower classification 2011Q1
DKK billion 0-20% 20-40% 40-60% 60-80% 80-100% Total
1 5 4 2 0 0 11
2 14 10 5 2 0 32
3 37 25 16 8 6 92
4 38 26 15 6 2 87
5 48 40 28 14 3 134
6 43 37 28 16 5 130
7 33 31 25 14 4 107
8 19 17 13 8 3 60
9 6 6 5 3 2 21
10 3 3 3 2 1 12
11 3 2 2 1 1 9
Total 250 201 141 75 28 695
Loan to value ratios has gone up in response to house price deflation
Yet 85% of the loan book is secured by a less than 60% loan to value mortgage on a marked to market
basis
The majority of high loan to value loans are granted to borrowers with a high classification
p14
The Way Forward
New capital centre will be established for the financing and refinancing of interest reset loans to enhance the
robustness of the Danish mortgage banking system
Capital Centre S and the General Capital Centre will remain AAA rated by Standard & Poor’s Realkredit
Danmark will seek a AAA rating of the new capital centre
Two tier issuance will be further analysed
0
100
200
300
400
500
600
Now End2011 End2012 End2013 End2014
Interest reset
Fixed rate
0
100
200
300
400
500
600
Now End2011 End2012 End2013 End2014
Interest reset
Capital Centre S New Capital Centre Billion Billion
p15
The Way Forward(continued)
Capital Centre S New Capital Centre Estimated
Average loan to value 64% Average loan to value 66%
1 month arrears 1.28% 1 month arrears 1.46%
Impairments 0.13% Impairments 0.16%
Average Seasoning 41 months Average Seasoning 45 months
Residential to total ratio 60% Residential to total ratio 56%
New Capital Centre is planned to operate from the end 2011 refinancing but the time schedule is not yet
confirmed
New series will be opened for the financing and refinancing of interest reset loans in DKK or EUR maturing
on either January 1 (for refinancing only) or April 1
Issuance in series 10S and 10Q from Capital Centre S will be ceased
Fixed rate loans and Capped floating rate loans will remain in Capital Centre S
Decision on which capital centre to refinance floating rate loans from is pending
p16
Cooperation with Moody’s continues for Danske Bank Group
Danske Bank Group continues its cooperation with Moody’s on ratings
Methodology is well described and Danske Bank has a strong ongoing dialogue with the ratings team
Danske Bank has the following ratings with Moody’s
Long-term rating: A2 (negative outlook)
Short-term rating: P1
Covered Bonds: Aaa
p17
Slide 17
p18
-
50
100
150
200
250
Financial institutions Life and pension funds Public sector Other domestic Foreign
Investors
Investor segmentation long term bonds
In billion
-
50
100
150
200
250
Financial institutions Life and pension
funds
Public sector Other domestic Foreign
Investor segmentation short term bonds
In billion
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