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Investment Research

Scandi Covered Bond Handbook

The covered bond handbook of banks and specialist

mortgage banks in the Scandinavian region

2011/2012

www.danskeresearch.com


Investment Research

2011/2012

Scandi Covered Bond

Handbook

7th Edition

Welcome to the seventh edition of the Scandi Covered Bond Handbook from the Fixed

Income Research team at Danske Markets.

This publication is intended to act as a quick reference guide to the Scandinavian covered

bond market, providing an overview of covered bond issuers in Denmark, Finland,

Norway and Sweden. The publication provides a thorough description of the legislative

framework in each of the four Scandinavian markets, as well as an evaluation of their

respective housing markets and an overview of trends and characteristics in each country.

Table 1. Issuers included in this edition

Denmark Finland Norway Sweden

BRFkredit Aktia MB DnBNOR BK Landshypotek

Danmarks Skibskredit OP MB KLP Kommunekreditt LF Hypotek

Danske Bank Nordea Finland SpareBank 1 BK Nordea Hypotek

DLR Kredit Sampo HLB Sparebanken Vest BK SCBC / SBAB

Nordea Kredit Storeband KF SEB

Nykredit/Totalkredit Terra BK Stadshypotek

Realkredit Danmark

Swedbank Hypotek

Source: Danske Markets

Most covered bond issuers are subsidiaries of larger, universal banks. The specialist

banking principle is applied in Finland and Norway but only partly in Denmark. Parent

banks are covered only briefly in this handbook.

While issuer profiles of Danish specialist mortgage banks are included in this handbook,

we refer to the publication Danish Covered Bond Handbook by Danske Bank for an indepth

description of this unique market. For a description of the Swedish covered bond

market we refer to our publication The Guide to the Swedish Covered Bond Market.

Copenhagen, September 2011

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

Important disclosures and certifications are contained from page 82 of this report.

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Scandi Covered Bond Handbook

Contents

Scandi Covered Bond Handbook .................................................................................... 1

Introduction ..................................................................................................................................................................... 5

Market maturity and size ....................................................................................................................................... 5

Currencies and monetary objectives .............................................................................................................. 6

Covered bond issuers and asset location .................................................................................................... 6

The Scandinavian housing markets ................................................................................................................. 7

Conclusion ....................................................................................................................................................................... 7

Danish Covered Bonds .............................................................................................................. 8

Background ..................................................................................................................................................................... 8

Key elements of Covered Bond Act .................................................................................................................. 8

Issuers and credit quality .................................................................................................................................... 10

Outlook for the Danish economy ..................................................................................................................... 13

BRFkredit ............................................................................................................................................. 14

Company profile ........................................................................................................................................................ 14

Financial performance .......................................................................................................................................... 15

Business model and funding profile .............................................................................................................. 15

Cover pool and asset quality .............................................................................................................................. 15

Danske Bank ..................................................................................................................................... 16

Financial performance .......................................................................................................................................... 16

Business model and funding profile .............................................................................................................. 17

Cover pool and asset quality .............................................................................................................................. 17

Danmarks Skibskredit ........................................................................................................... 18

Company profile ........................................................................................................................................................ 18

Financial performance .......................................................................................................................................... 18

Business model and funding profile .............................................................................................................. 18

Cover pool and asset quality .............................................................................................................................. 19

DLR Kredit ........................................................................................................................................... 20

Company profile ........................................................................................................................................................ 20

Financial performance .......................................................................................................................................... 20

Business model and funding profile .............................................................................................................. 21

Cover pool and asset quality .............................................................................................................................. 21

Nordea Kredit .................................................................................................................................. 22

Company profile ........................................................................................................................................................ 22

Financial performance .......................................................................................................................................... 22

Business model and funding profile .............................................................................................................. 22

Cover pool and asset quality .............................................................................................................................. 23

Nykredit/Totalkredit ................................................................................................................ 24

Company profile ........................................................................................................................................................ 24

Financial performance .......................................................................................................................................... 24

Business model and funding profile .............................................................................................................. 24

Cover pool and asset quality .............................................................................................................................. 25

Realkredit Danmark ................................................................................................................. 26

Company profile ........................................................................................................................................................ 26

Financial performance .......................................................................................................................................... 26

Business model and funding profile .............................................................................................................. 27

Cover pool and asset quality .............................................................................................................................. 27

Finnish Covered Bonds ......................................................................................................... 28

Background .................................................................................................................................................................. 28

Key elements of the Mortgage Act ................................................................................................................ 29

Issuers and credit quality .................................................................................................................................... 30

Outlook for the Finnish economy ..................................................................................................................... 30

Aktia Mortgage Bank .............................................................................................................. 31

Company profile ........................................................................................................................................................ 31

Financial performance .......................................................................................................................................... 31

Business model and funding profile .............................................................................................................. 32

Cover pool and asset quality .............................................................................................................................. 32

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Scandi Covered Bond Handbook

Nordea Bank Finland ............................................................................................................... 33

Company profile ........................................................................................................................................................ 33

Financial performance .......................................................................................................................................... 33

Business model and funding profile .............................................................................................................. 33

Cover pool and asset quality .............................................................................................................................. 34

OP Mortgage Bank ..................................................................................................................... 35

Company profile ........................................................................................................................................................ 35

Business model and funding profile .............................................................................................................. 36

Cover pool and asset quality .............................................................................................................................. 36

Sampo Housing Loan Bank ............................................................................................... 37

Company profile ........................................................................................................................................................ 37

Financial performance .......................................................................................................................................... 37

Business model and funding profile .............................................................................................................. 38

Cover pool and asset quality .............................................................................................................................. 38

Norwegian Covered Bonds ............................................................................................... 39

Background .................................................................................................................................................................. 39

Key elements of the Covered Bond Act ...................................................................................................... 39

Credit quality ............................................................................................................................................................... 40

Outlook for the Norwegian economy ............................................................................................................ 41

DnB NOR Boligkreditt ............................................................................................................. 42

Company profile ........................................................................................................................................................ 42

Financial performance .......................................................................................................................................... 42

Business model and funding profile .............................................................................................................. 43

Cover pool and asset quality .............................................................................................................................. 43

KLP Kommunekreditt ............................................................................................................. 44

Company profile ........................................................................................................................................................ 44

Financial performance .......................................................................................................................................... 44

Business model and funding profile .............................................................................................................. 45

Cover pool and asset quality .............................................................................................................................. 45

Sparebank 1 Boligkreditt .................................................................................................... 46

Company profile ........................................................................................................................................................ 46

Financial performance .......................................................................................................................................... 46

Business model and funding profile .............................................................................................................. 47

Cover pool and asset quality .............................................................................................................................. 47

Sparebanken Vest Boligkreditt .................................................................................... 48

Company profile ........................................................................................................................................................ 48

Financial performance .......................................................................................................................................... 48

Business model and funding profile .............................................................................................................. 49

Cover pool and asset quality .............................................................................................................................. 49

Storebrand Boligkreditt........................................................................................................ 50

Company profile ........................................................................................................................................................ 50

Financial performance .......................................................................................................................................... 50

Business model and funding profile .............................................................................................................. 51

Cover pool and asset quality .............................................................................................................................. 51

Terra Boligkreditt ........................................................................................................................ 52

Company profile ........................................................................................................................................................ 52

Financial performance .......................................................................................................................................... 52

Business model and funding profile .............................................................................................................. 53

Cover pool and asset quality .............................................................................................................................. 53

Swedish Covered Bonds ..................................................................................................... 54

Background .................................................................................................................................................................. 54

Key elements of Covered Bond Act ............................................................................................................... 54

Credit quality ............................................................................................................................................................... 55

Outlook for the Swedish economy .................................................................................................................. 56

Landshypotek .................................................................................................................................. 57

Company profile ........................................................................................................................................................ 57

Financial performance .......................................................................................................................................... 57

Business model and funding profile .............................................................................................................. 58

Cover pool and asset quality .............................................................................................................................. 58

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Scandi Covered Bond Handbook

LF Hypotek .......................................................................................................................................... 59

Company profile ........................................................................................................................................................ 59

Financial performance .......................................................................................................................................... 59

Business model and funding profile .............................................................................................................. 60

Cover pool, asset quality and rating .............................................................................................................. 60

Nordea Hypotek ............................................................................................................................ 61

Company profile ........................................................................................................................................................ 61

Financial performance .......................................................................................................................................... 61

Business model and funding profile .............................................................................................................. 62

Cover pool and asset quality .............................................................................................................................. 62

SCBC (SBAB) ................................................................................................................................... 63

Company profile ........................................................................................................................................................ 63

Financial performance .......................................................................................................................................... 63

Business model and funding profile .............................................................................................................. 64

Cover pool and asset quality .............................................................................................................................. 64

SEB ............................................................................................................................................................. 65

Company profile ........................................................................................................................................................ 65

Financial performance .......................................................................................................................................... 65

Business model and funding profile .............................................................................................................. 66

Cover pool and asset quality .............................................................................................................................. 66

Stadshypotek ................................................................................................................................... 67

Company profile ........................................................................................................................................................ 67

Financial performance .......................................................................................................................................... 67

Business model and funding profile .............................................................................................................. 68

Cover pool and asset quality .............................................................................................................................. 68

Swedbank Hypotek .................................................................................................................... 69

Company Profile ........................................................................................................................................................ 69

Financial performance .......................................................................................................................................... 69

Business model and funding profile .............................................................................................................. 70

Cover pool and asset quality .............................................................................................................................. 70

Covered Bond Frameworks ............................................................................................. 71

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Scandi Covered Bond Handbook

Introduction

With a total outstanding amount of nearly EUR77bn in euro-denominated jumbo covered

bonds issued out of Denmark, Finland, Norway and Sweden, the Scandinavian jumbo

covered bond market is far from being the most important compared with the rest of the

world. However, the region is continually growing in importance and the market share of

the total European euro-denominated jumbo market has increased to nearly 8% in 2011%,

from 4% in 2010. The total outstanding amount of jumbo and non-jumbo covered bonds

issued out of Scandinavia denominated in SEK and NOK is around EUR185bn

(equivalent) together with a substantial EUR270bn (equivalent) in jumbo and non-jumbo

covered bonds denominated in DKK issued out of Denmark. As volumes suggest, the

market is very large yet highly fragmented. They also show that Scandinavian banks and

mortgage banks have so far issued bonds almost exclusively in domestic markets.

Often financial markets in Scandinavian countries are treated as a single market for

historical and cultural reasons. Although Scandinavian covered bond markets are fairly

homogeneous because their covered bond frameworks are consistent with UCITS and the

Capital Requirement Directive (CRD) and macroeconomic cycles are somewhat

synchronised, we see several important differences when comparing one Scandinavian

market with another.

Market maturity and size

The most important distinction between Scandinavian markets is their individual history

and size. The Danish covered bond market is the second largest in Europe dating back to

1851. Traditionally, the Danish mortgage market has tended to comprise 30-year,

callable, fixed-rate annuity bonds, tapped into the market on a daily basis. Besides

domestic investors, only their specialised international counterparts invest in such bonds

due to the complexity of option pricing. Furthermore, the vast majority of Danish

mortgage bonds are denominated in DKK, which is another reason for limited

international demand for Danish mortgage bonds.

In July 2007, the Danish Parliament passed a revised second-generation mortgage act,

rendering Danish covered bonds UCITS and CRD compliant. From an international

perspective, it is significant that the specialist banking principle has now been abandoned.

As a result, the first euro-style jumbo covered bonds were issued by a Danish universal

bank in 2008. Still, the market is very mature, having been traditionally dominated by

specialist banks.

Developments in Sweden are fairly similar to those in Denmark. The Swedish bond

market is the fourth largest in. It is also fairly mature. Benchmark bonds in the Swedish

market are 1-5 year bullet bonds very similar to European jumbo covered bonds, except

for their SEK currency denomination.

Finland and Norway, however, are different. In these markets, there is no long-standing

tradition of covered bond issuance with Covered Bond Acts introduced only recently.

Therefore, covered bond markets in Finland and Norway are fairly immature and not yet

of the same size as their Danish and Swedish peers. For the same reason, Danish and

Swedish issuers have strong domestic investor bases, while Finnish and Norwegian

issuers previously relied more on a diversified and international investor base. However,

we have seen increasing interest from Norwegian and Finnish domestic investors over the

last few years fuelled by the incentives provided in coming regulation such as

Basel3/CRD4 and Solvency 2, which favour covered bonds over other bank funding

sources. In the case of Norway, this is best illustrated by the outstanding amount of NOKdenominated

covered bonds, which has increased to more than NOK400bn (EUR53bn

equivalent at EURNOK of 7.8).

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Scandi Covered Bond Handbook

Currencies and monetary objectives

Of the four Scandinavian countries, only Norway is not yet an EU member. However,

only Finland has replaced its domestic currency, the Finnish mark, with the euro.

Consequently, each Scandinavian country has its own currency including the Danish

kroner (DKK) in Denmark, Norwegian kroner (NOK) in Norway, Swedish kronor (SEK)

in Sweden and euro in Finland. Furthermore, monetary policy objectives in Denmark,

Norway and Sweden vary. In Denmark, the cross currency is pegged to the euro, while in

Norway and Sweden central banks have inflation target objectives. As a result, interest

rate developments are also different. Consequently, growth in housing markets and

changes in housing prices may not be highly correlated; also, as interest rates can

influence a debtor’s ability to service a mortgage, depending on the extent of adjustablerate

mortgages, the credit quality of mortgage portfolios may not be correlated either.

Finally, the industrial profile of each of these four countries varies. The Danish economy

is dominated by service industries, the Finnish economy by traditional production

industries, the Norwegian economy by oil production and the Swedish economy by

production of consumer investment goods.

Covered bond issuers and asset location

The number of covered bond issuers varies between each of the four countries. In Sweden

the number of issuers is as many as seven, the same as in Denmark (five mortgage banks,

one ship finance institute and one universal bank). From a situation prior to the financial

crisis with only 3 active issuers, the introduction of Norges Bank’s swap facility

(Bytteordningen) in Norway saw a large increase in the number of issuers (many of them

relatively small), as covered bonds became the way to obtain liquidity (as in many other

countries).

Until autumn 2010, Finland had only two active issuers (OP Mortgage Bank and Aktia

Mortgage Bank) but with the revival of Sampo Housing Loan Bank and the launch of

Nordea Bank Finland’s new covered bond programme, Finland is set to increase in

importance going forward. Just recently, Ålandsbanken announced their intention to

launch a covered bond program.

Furthermore, the location of assets is restricted to domestic markets. In other words,

lenders are exposed only to domestic housing markets. This is the case for all issuers

except Danske Bank, which has included an international cover pool in its covered bond

programme. The international cover pool (I) can comprise mortgages from all

Scandinavian countries as well as from Ireland (although not before November 2019).

Currently, only mortgages from Norway and Sweden are included in the international

Cover Pool I. In 2010, Danske Bank also launched a combined cover pool – Cover Pool C

– containing both residential and commercial mortgages. Currently only Swedish

mortgages are present in the cover pool but it is intended that Norwegian commercial

mortgages will later be included.

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Scandi Covered Bond Handbook

The Scandinavian housing markets

In view of the US sub-prime crisis and the global challenges for housing markets, it is

important to remember that the vast majority of collateral backing up Scandinavian

covered bonds comprises residential mortgages. Regardless of the unique features of

covered bonds, collateral is ring-fenced with the investor enjoying double recourse to

both the issuer and the collateral pool; payments on covered bonds depend firstly on the

mortgagor’s ability to service the loan and, secondly, in the case of property foreclosure,

on the value of the house.

Eventually, regulative frameworks and housing traditions in Scandinavia supporting the

credit quality of cover pools will become at least as important as specific Covered Bond

Acts. Ultimately, payments to bond holders in the case of default by the homeowner as

well as the issuer depend on foreclosure procedures in the country in which the collateral

is located. Based on data from the European Banking Industry Committee, the average

duration for the entire foreclosure procedure in European countries is 6-12 months,

although in Italy the average duration is, exceptionally, five to seven years. As the

following table shows, foreclosure proceedings in Scandinavian countries can be carried

out relatively quickly compared with other European countries.

Table 2. Foreclosure period in housing markets

Finland Sweden Denmark Spain Germany France

3 months 6 months 6 months 9 months 12 months 25 months

Source: European Banking Industry Committee

Finally, it is worth mentioning that if the eventual foreclosure price on a property is

insufficient to cover the outstanding mortgage debt and additional costs, then the

mortgage provider has a claim on the borrower. In other words, borrowers are liable for

their mortgages in terms of both the property mortgaged and personally.

Conclusion

From our perspective, several positive factors characterise Scandinavian covered bonds

including their high quality of credit and strong domestic investor bases. Indeed, domestic

covered bond markets in Denmark and Sweden have continued to be characterised by

daily issuance activity throughout the financial crisis. Furthermore, spreads in these

domestic markets are significantly tighter than in the European market. Finally, issuing

banks in Denmark, Norway and Sweden benefit from the option to tap their domestic

markets by issuing bonds denominated in their local currency.

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Investment Research

September 2011

Danish Covered Bonds

Særligt dækkede obligationer and realkreditobligationer

Background

Despite Denmark having a long and internationally recognised tradition of funding

residential and commercial properties by issuing mortgage bonds, in May 2007 a proposal

for a new Mortgage Act was passed, which became effective on 1 July 2007. Executive

orders concerning the Mortgage Act were passed shortly afterwards.

The main reasons for amending the Danish Mortgage Act were to ensure that Danish

covered bonds comply with the EU Capital Requirement Directive (CRD) and, therefore,

qualify for preferential risk weighting, and also to abandon the specialist banking

principle in order to enable Danish universal banks to access attractive covered bond

funding.

Traditionally, Danish mortgage bonds are tapped into the market on a daily basis.

Mortgage bonds are matched with mortgages in order to ensure that mortgage banks are

not exposed to any kind of interest, currency, option or liquidity risk. Furthermore, the

Danish mortgage market is the only one (besides the US) where 30-year, fixed-rate,

callable loans remain the predominant mortgage type. See our publication Danish

Covered Bond Handbook for a more in-depth description of the traditional Danish

mortgage market.

Key elements of Covered Bond Act

Danish covered bonds fall into three categories.




Særligt dækkede obligationer (SDOs).

Særligt dækkede realkreditobligationer (SDROs).

Realkreditobligationer and Skibskreditobligationer (ROs).

The legal framework for ROs is almost unchanged compared with the previous Mortgage

Act. We expect the market for ROs to be insignificant, as they do not comply with the

CRD. Besides issuer privileges related to SDROs, the primary difference between SDOs

and SDROs concerns the types of substitution assets allowed in the cover pool. However,

in both cases eligible substitution assets must comprise safe and liquid securities,

according to the CRD.

The specialist banking principle, allowing only specialised institutions restricted in their

business to issue covered bonds, has been abandoned. This is also the case in Germany

and Sweden. Specialist mortgage banks still enjoy the privilege of issuing

realkreditobligationer (ROs) and SDROs, while Danmarks Skibskredit has the privilege

of issuing Skibskreditobligationer (ROs).

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

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Danish Covered Bonds

Universal banks, specialist mortgage banks and Danmarks Skibskredit can apply for the

right to issue SDOs.

In accordance with UCITS 52(4) requirements, the issuer is subject to special public

supervision. The issuer must keep a cover register of collateral (including open hedge

positions) and bonds issued. Collateral assets may include residential and commercial

mortgages, public loans, derivatives and substitute assets, including RMBS (if maximum

risk-weighting under CRD is 20%). Universal banks issuing SDOs may also include ships

as collateral assets. LTV ratio limits are 80% and 60% for mortgage and commercial

loans, respectively. The LTV ratio is limited to 75% regarding 30y IO-mortgages.

Regarding substitution assets in the form of short-term guarantees from loan-providing

banks or SDOs issued by another credit institution (only when issuing SDOs), the 15%

limit on exposure to other credit institutions (according to the CRD) has been abandoned

in the Danish Covered Bond Act. The valuation of cover assets must be carried out in a

prudent manner and not exceed the market value and the assessment must be on an

individual basis. If approved by the Danish FSA, statistical models can be used.

Properties in the cover asset pool must be valued on an ongoing basis, i.e. commercial

properties annually and residential properties every third year. Eventually, if the LTV

ratio limits are breached, the issuer is obliged to include substitution assets in the cover

asset pool. Specialist mortgage banks can issue senior debt secured on the cover pool

(ranking second to covered bonds) to fund such assets.

Mandatory minimum over-collateralisation (O/C) is fixed at 8% of risk-weighted

assets for specialist mortgage banks, regardless of the type of covered bond issued. Cover

pool O/C is not fixed when universal banks issue SDOs. Asset segregation and

bankruptcy proceedings concerning bondholders are unchanged in the new legislation

but, in line with other European covered bond acts, the revised act specifies that

derivatives counterparties rank pari passu with bondholders. Lenders of senior debt

rank second to covered bondholders regarding claims for cover assets but rank above

lenders of subordinated debt or hybrid core capital. There is no acceleration of payment

following bankruptcy of the issuer.

As regards ALM requirements, the executive order sets strict limits for interest rate risk,

currency risk, option risk and liquidity requirements. We consider Danish ALM requirements

to be the strictest in Europe. Issuers can choose to adhere to one of two different balance

principles: the general balance principle (illustrated below) and the specific balance principle.

Regarding liquidity risk, the executive order states that interest payable to bondholders in any

given 12-month period must not exceed interest received from assets, according to the specific

balance principle. Furthermore, NPV coverage is required.

Table 3. Balance principle

Requirement Universal banks Specialist banks

Interest rate risk - scenario 1

(+/-100bp change in ir. curve)

10% of O/C 1% of capital requirement +

2% of voluntary O/C

Interest rate risk - scenario 2

(+/-250bp change in ir. curve)

100% of O/C 5% of capital requirement +

10% of voluntary O/C

Currency risk

(+/-10%/50% change in ex. rate)

5% of O/C 10% of capital requirement +

10% of voluntary O/C

Option risk

(+/-100% change in vol. curve)

5% of O/C 0.5% of capital requirement +

1% of voluntary O/C

Source: Danske Markets

As regards exposure to cross currencies other than EUR/DKK, the currency risk limit for

specialist mortgage banks is 1% of the capital requirement + 1% of voluntary O/C.

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Danish Covered Bonds

Below, we show how issuers in the Danish market have positioned themselves

concerning the type of covered bond and type of balance principle. Nordea Kredit and

Realkredit Danmark, owned by the two large banks Nordea and Danske Bank,

respectively, are the only ones to issue covered bonds in the SDRO format and adhere to

the specific balance principle. DLR Kredit also adheres to the specific balance principle.

Danmarks Skibskredit is the only issuer that does not issue CRD-compliant covered

bonds. In the case of Danmarks Skibskredit, these non-compliant bonds are so-called

skibskreditobligationer (ROs). The message from these issuers is therefore clear: they are

concentrating on their core mortgage business.

Table 4. Covered bond positions

Issuer Covered bond type Balance principle Issuing principle

BRFkredit SDO & RO General principle Pass-through

Danmarks Skibskredit RO Specific principle -

Danske Bank SDO General principle Euro style

DLR Kredit SDO Specific principle Pass-through

Nordea Kredit SDRO Specific principle Pass-through

Nykredit/Totalkredit SDO & RO General principle Pass-through

Realkredit Danmark SDRO Specific principle Pass-through

Source: Danske Markets

BRFkredit and Nykredit/Totalkredit have opted for the general balance principle and (in

common with DLR Kredit) issue covered bonds in the SDO format. The main reasons for

doing so are to have the option of carrying out joint funding, to benefit from a slightly

more flexible balance principle and to have the choice of including a broader range of

collateral in the cover pool.

Not being a specialised mortgage bank, Danske Bank is allowed to issue covered bonds

only in the SDO format. Obviously, the general balance principle within the ALM suits it

best as a universal bank. So far, Danske Bank is the only bank issuing covered bonds in a

euro benchmark style.

Issuers and credit quality

The Danish covered bond set-up is recognised as one of the strongest in the world, with

high systemic support. In particular, the almost non-existent market risk, eliminated by

the balance principle, is a major advantage for traditional Danish covered bonds.

According to S&P’s new rating methodology, Danish covered bonds belong in its best

category (no. 1) and the asset and liability mismatch risk (ALMM) has so far also been

categorised in the best category (ALMM low), giving Danish covered bonds the

possibility of the highest uplift in covered bond rating (seven notches above issuer rating).

Until June 2011, Danish covered bonds issued by mortgage banks enjoyed the best timely

payment indicator (TPI) possible at Moody’s (‘Very High’). However, Moody’s changed

this one step down to ‘High’ due to the increased use of loans with embedded refinancing

(in contrast to loans where the maturity of the loan is exactly matched by the maturity of

the bond). For specialist lender DLRkredit, this was further reduced to ‘Probable-High in

July 2011. Covered bonds issued by universal bank Danske Bank have not been affected

as they already had a lower TPI score of ‘Probable’.

Despite the adjustment, the TPI of Danish mortgage banks still compares favourably with

other jurisdictions as can be seen from the table below which illustrates the typical TPI

within selected countries.

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Danish Covered Bonds

Table 5. Typical country TPI

Very Improbable Improbable Probable Probable-High High Very High

Greece Portugal Austria (mortgage) Austria (public) Denmark (ex Danske)

Hungary Denmark (Danske) France (OF) Germany (public)

Ireland Finland Germany (mortgage) Norway (savings banks)

France (OH)

Spain (public)

Italy

Netherlands

Norway (DNB Nor)

Spain (mortgage)

Sweden

Switzerland

UK

Source: Moodys and Danske Markets

Besides the TPI revision, Moody’s in particular has been very active on Danish issuers in

2011. Issuer ratings have come under pressure mainly as a result of Moody’s changed view

on the Danish banking sector and the systemic support expected to be available for banks.

The failure of Amagerbanken highlighted that the Danish authorities would actively use the

power given in the Danish bail-in resolution implemented in October 2010 and impose a

loss on senior secured bondholders and depositors (above the depositor guarantee scheme of

DKK750,000). The failure of Amagerbanken triggered Moody’s to reclassify Denmark

from a being ‘High’ support country to a ‘Low’ support country in terms of expected

systemic support. Only four banks currently receive a one-notch uplift from systemic

support at Moody’s (Danske Bank, Jyske Bank, Nordea Bank Denmark and Sydbank).

Previously Moody’s gave up to three notches of support. The removal of systemic support

incorporated in Danish issuer ratings was not countered by an uplift in the stand-alone rating

and hence issuers were downgraded by up to three notches.

Below we highlight some of the latest announcements from Moody’s in respect of Danish

mortgage banks.




24 June: RD announces that it has terminated its collaboration with Moody’s. See the

report: Realkredit Danmark terminates its collaboration with Moody’s.

1 July: Moody’s downgrades Nykredit’s issuer rating from A1 to A2, BRF’s issuer

rating from Baa1 to Baa3 and DLR’s issuer rating from A3 to Baa1. Also, BRF’s

covered bond rating for its Capital Centre E is downgraded from Aa1 to Aa2 and

Nykredit’s junior covered bonds are downgraded from A1 to A2. See the report

Moody’s downgrades issuer ratings of Nykredit, BRF Kredit and DLR Kredit.

28 July: Moody’s downgrades bonds issued out of Nykredit’s Capital Centre D from

Aaa to Aa1 and withdraws RD’s ratings. DLR’s TPI lowered from “High” to

“Probable High” and BRF’s mortgage bonds placed on “review for downgrade”. See

the report Moody’s takes action on Danish covered bonds.

In addition to taking action on current ratings and rating outlooks, Moody’s raised its

current OC requirements for the various mortgage banks. The OC requirements for

maintaining existing ratings were raised to between 11.5% (Nykredit) and 18.0% (RD).

This is a rather steep hike relative to Q3 10 when the OC requirements ranged between

4.5% (Nykredit) and 11.0% (RD). The many increases in OC requirements, which may

lead to current ratings being downgraded, are in particular causing investor jitters. The

table below shows the most recent data from Moody’s on the various mortgage bank’s

most active SD(R)O capital centre (cover pools) and Danske Bank’s Cover Pool D and I

(C is not rated by Moody’s but only by Fitch/S&P). Whereas the OC requirement has

been increasing for Danish mortgage banks, Danske has actually seen the OC requirement

fall over the last year.

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Danish Covered Bonds

Table 6. Recent data from Moodys

Mortgage bank BRF DLR Nordea Nykredit RD Danske Bank Danske Bank

Capital centre E B 2 E S D-pool I-pool

CB rating Aa2/Review for downgrade Aa1/Stable Aaa/Stable Aaa/Stable Withdrawn Aaa Aaa

Issuer rating Baa3/Negative Baa1/Negative Unpublished A2/Negative Unpublished A2/Negative A2/Negative

Group/parent rating Baa3/Negative n/a Aa3/Stable A2/Negative A2/Negative A2/Negative A2/Negative

TPI High Probable High High High High Probable Probable

TPI leeway 0 0 4 2 - 1 1

Collateral score 16.1% 16.9% 20.8% 12.8% 16.7% 9.2% 7.9%

Current OC 13.9% 14.8% 18.8% 7.3% 10.1% 14.9% 30.3%

OC level necessary to

maintain current rating 14.5% 15.0% 16.0% 11.5% 18.0% 14.5% 14%

Source: Moodys

Judged by, for example, Moody’s collateral score (a measurement of the credit quality,

can be interpreted as the amount of risk-free assets that should be added to a cover pool to

achieve an Aaa rating) and the level of NPL, the credit quality of Danish cover pools has

been stable or even improved over recent quarters. However, the housing market still

seems fragile and, although the labour market seems to have stabilised, any deterioration

in these markets cannot be ruled out and, as such, the outlook for Danish cover pools

seems clouded. All issuers have increased administration fees (especially against

corporate clients), in order to offset rising loan losses and impairments (this can typically

be done with three months’ notice).

Compared with Nordic peers, the magnitude of corporate lending within cover pools is

much higher and this is the main driver for Danish issuers scoring higher (or worse)

collateral scores.

The overall credit quality of the Danish banking industry is slightly unclear. Several

regional and local banks are still struggling due to their high exposure to real estate

developers and the funding situation has been very challenging, particularly for small and

medium banks. Currently, Danske Bank, BRFkredit, DLR, Nykredit and Danish Ship

Finance are on negative outlook with either Moody’s or S&P (or both).

Table 7. Danish covered bond issuers (most active capital centre)

Issuer Issuer rating (M/S/F) CB rating (M/S/F) Moodys TPI Moodys Collateral score Fitch D-factor

BRF Baa1/-/- Aa2/-/- High 16.1% -

DANSKB A2/-/- A2/-/- - - -

DBDK D A2/A/A+ Aaa/AAA/AAA Probable 9.2% 19.2%

DBDK I A2/A/A+ Aaa/AAA/AAA Probable 7.9% 22.3%

DBDK C A2/A/A+ -/AAA/AAA Probable - 24.9%

DLR Baa1/-/- Aa1/-/- Probable-high 16.9% -

NOR - Aaa/AAA/- High- 20.8% -

NYK/TOT A2/A+/- Aaa/AAA/- High 12.8% -

RDDK - WR/AAA/- High 16.7% -

Source: Rating agencies

Comparing Danish cover pools reveals some differences, with DLRkredit negatively

exposed on higher arrears and BRFkredit high on properties taken over. BRFkredit holds

almost half of all properties taken over by Danish mortgage banks. BRFkredit is also the

only Danish mortgage bank that does not benefit from material loan loss guarantees from

providing banks. On the positive side, BRFkredit has so far been able to sell off the

foreclosed properties at a profit and improved arrears significantly (down from 2.7% in

September 2009 to 1.0% in September 2010). LTV levels remain fairly uniform, with the

lowest levels recorded in Danske Bank’s cover pools, which on the other hand seem to have

greater tail risk (a larger share of mortgages with an LTV above 80%).

12 | September 2011

www.danskeresearch.com


Danish Covered Bonds

Table 8. Cover pool overview

BRF DB dom. DB intl. DLR Nordea Nykredit RD

Cover pool (DKKbn) 209 33 91 145 318 1,031 472

WA Indexed LTV 67% 60% 60% 64% 66% 61% 64%

WA LTV >80% 7% 15% 15% n/a 5%- 2.7% 4%

Property portfolio (count) 267 - - n/a 115 137 -

Seasoning - 47m 36m - - - 38m

Arrears 1.0% 0,0% 0,0% NA 0,5% 0,8% 0.6%

IO-mortgages 51% - - 54 56% 51% 0%

Geography Denmark Denmark Norway & Denmark Denmark Denmark (97%) Denmark (99%)

Sweden

Source: Company data and Danske Markets

Outlook for the Danish economy

The recovery in Denmark has so far been slow and uneven. Private consumption growth

has been more or less absent since the sharp decline in 2009, despite a large increase in

disposable income, and that has kept overall growth low, despite increased public

spending and good export performance. With the outlook for subdued growth in Europe

generally, Danish GDP is likely to grow at around 1.5 percent annually in the coming

years. That is close to its trend rate of growth, which means there will be more or less

unchanged unemployment. Eventually, private consumption will take off, as savings are

now running at a very high level, but the timing is difficult to forecast. Most likely, we

are facing several years of low consumption growth and a weak housing market. Political

initiatives to stimulate demand in 2012 could change the outlook if they prove effective.

Danish economy

11 % Houseprices ra. 2000=100

190

9

7

30 yr. benchmark

interest rates ra.

170

150

5

130

3

110

1

Unemployment sa. la.

90

-1

70

96 98 00 02 04 06 08 10

Source: Danske Markets

There was a technical recession in Denmark starting in Q4 2010, as GDP declined q/q for

two consecutive quarters. That mainly reflects the fact that quarterly Danish GDP figures

are highly volatile, and we often have declines in GDP, even during strong upswings.

A general election has been called for September 15, so the outlook for economic policy

is unclear at present. Both main political groups have called for a modest fiscal stimulus,

starting as soon as possible and lasting into 2012. The present government has proposed a

stimulus package of 0.6 percent of GDP, mainly in the form of public investments and

subsidies to stimulate the housing market, private housing investment and service

consumption. The government also intends to make the early retirement scheme less

attractive as a long-term reform but to compensate by letting people withdraw their

savings within the scheme at a tax advantage in 2012. If implemented, this will increase

the public deficit by perhaps one percent of GDP, but might boost private consumption.

All in all, the outlook is for a deficit of more than 5 percent of GDP next year on present

policies. That implies a significant tightening of fiscal policy in 2013, where the deficit

must be lowered to 3 percent of GDP or less to comply with EU rules, which both

political blocks have pledged to respect.

Both sides also support the goal of balanced public finances in 2020, and they have each

drawn up plans to reach it. They include tax increases, restrained public spending and

measures to increase labour supply.

The housing market has been weak throughout 2011, as increasing interest rates has

dampened demand. Actual sales prices of one-family homes declined 1.9 percent in Q1

alone. According to the home house price index, which usually tracks official statistics

well, prices in July where almost five percent lower than at the beginning of the year.

Over the same period, the number of homes for sale has increased by 17.9 percent to

reach its highest level ever, suggesting that prices will have to fall further. On the other

hand, interest rates have declined sharply since July and there is likely to be some form

short-term political support for the housing market. Most likely in our view, prices will

stabilize but fail to keep up with inflation, and so remain a negative factor for private

consumption.

13 | September 2011

www.danskeresearch.com


Investment Research

August 2011

BRFkredit

Særligt dækkede obligationer

Company profile

BRFkredit is the only entirely independent specialist mortgage bank operating in

Denmark. It is wholly owned by BRFfonden, an independent business foundation,

through holding company BRFholding. BRF was established in 1959 as an independent

business foundation authorised to grant third-lien mortgages. Originally, it was intended

that BRFkredit grant mortgage loans for specific purposes. Today, it is an independent

specialist mortgage bank providing customers with financial solutions and other services

connected with real estate. Being owned by a foundation, BRFkredit’s financial goal is to

generate sufficient earnings to ensure the continued and competitive development of the

company.

In 1995, BRFkredit established BRFbank, currently a wholly owned subsidiary of

BRFkredit. Its objective is to support the activities of BRFkredit by offering products to

supplement mortgage loans in connection with new building projects, property

transactions and remortgaging of existing home loans. Less than 10 years ago, BRFkredit

was the third-largest mortgage bank in Denmark but over the past couple of years it has

lost market share due to weak distribution. Today, BRFkredit is the smallest player in the

retail market (by net new lending), with a market share of 5.1% (down from 7.3% in

2009). BRFkredit issues covered bonds (særligt dækkede obligationer [SDO]) in the form

of traditional pass-through callable bonds and bullet bonds. In addition, BRFkredit

adheres to the general balance principle.

On 10 June 2011, Moody’s lowered the TPI for several Danish covered bond

programmes, including the one from BRFkredit, from Very high to High. On 1 July 2011,

BRFkredit’s issuer rating was downgraded from Baa1 to Baa3 by Moody’s due to

concerns regarding exposure to commercial real estate, where arrears have increased

significantly. Simultaneously, the rating of the SDOs issued by BRFkredit was lowered

from Aa1 to Aa2, which, due to the decrease in TPI, is the maximum attainable covered

bond rating for the current issuer rating. ROs retained their Aa3 rating.

Table 9. Ratings

Covered bond rating:

Aa2(Aa3)/-/-

Issuer rating:

Baa3(n)/-/-

Fitch D-factor: -

Moodys C-score: 12.2% to 22.6%

Moodys TPI:

High

S&P category: 1

Source: Rating agencies and Danske Markets

Table 10. Financial information

DKKm 2010 2009

Net interest income 1,644 1,730

Fees and commissions -45 114

Net gain/losses -269 351

Pre-provision income 844 903

Loan losses and provisions 471 2,125

Operating profit 21 -858

Arrears 1.0% 2.7%

Loan loss ratio 0.2% 0.9%

Cost/income ratio 64% 43%

Core capital ratio 13.7% 13.3%

Total capital ratio 13.5% 13.0%

Source: BRFkredit and Danske Markets

Table 11. More info

Bond ticker

Website

Source: Danske Markets

BRF

www.brf.dk

On 6 July, following the downgrade of its SDOs, BRFkredit announced its decision to

(1) open a new SDO Capital Centre H for the issuance of loans for refinancing purposes

(primarily ARM loans), (2) initiate a dialogue with Standard & Poor’s (S&P) about the

rating of BRFkredit’s capital centres and (3) establish a new, temporary SDO Capital

Centre M, for the issuance of other loans (primarily fixed rate loans).

BRFkredit participates in the Danish Bank Package II, under which BRFkredit has been

approved for issuance of state-guaranteed junior covered bonds or senior debt for a total

of DKK20bn.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


BRFkredit

Financial performance

In 2010, BRFkredit turned 2009’s deficit of DKK858m into a surplus ending up with a

positive pre-tax result of DKK21m. The positive result was obtained despite seeing preprovision

income decrease slightly from DKK903m to DKK844m y/y. Key drivers of 2010’s

surplus for BRFkredit were the sharp decrease in loan impairment charges along with a

strong Q3 and Q4. Loan impairments fell by around 78% from DKK2.1bn in 2010 to

DKK0.47bn in 2009. However positive, the pre-tax profit still has some way to go before

reaching pre-crisis levels (2007 DKK703m, 2006 DKK741m, 2005 DKK765m). Arrears fell

back from 2.7% to 1.0% in 2009, which caused Moody’s to ease the OC requirement from

13.5% to 9.5% (equivalent to DKK4bn) for lending out of BRFkredit’s Capital Centre E.

Business model and funding profile

BRFkredit is a specialist mortgage bank subject to supervision by the Danish FSA.

BRFkredit offers mortgages through several partnerships. For example, BRFkredit cooperates

with estate agency chains EDC and SAFE Mæglerne. BRFkredit has also entered

into partnerships with FIH, Handelsbanken/Midtbank, Lån & Spar Bank and Alm. Brand

Bank. It also distributes mortgages through its website (www.brf.dk) and directly from its

headquarters.

BRFkredit only offers mortgages secured on properties in Denmark, specialising in those

used for residential properties and office and shop premises. Loans for residential

properties, including owner-occupied homes, co-operative homes, rental homes and

publicly subsidised housing projects, comprise most of the total mortgage book.

BRFkredit offers interest reset loans (59%), fixed-rate callable loans (23%), floaters

(10%, of which some include a cap) and a small share of others (8%). All mortgages are

based on the pass-through principle, which provides consumers with a delivery option on

the underlying bonds. Interest reset loans are financed by issuance of a fixed-rate noncallable

bond portfolio, while other types of mortgages are funded individually by issuing

bonds with identical characteristics to those of the corresponding mortgages.

Mortgage-backed covered bonds issued by BRFkredit are divided into different cover registers

(capital centres). Approximately 40% of the entire mortgage book is included in Capital

Centre B, with covered bonds issued until the end of 2007. Bonds issued prior to 31 December

2007 are grandfathered to the CRD. New ROs (Realkreditobligationer) are also issued from

Capital Centre B but they do not comply with the CRD and hence do not get preferential

treatment in terms of risk weighting. According to the revised Mortgage Act, any new SDOs

must be issued out of separate capital centres and new SDOs (49% of total mortgages) are

issued out of new Capital Centre E. Covered bonds issued from Capital Centre E are all Aa2

rated by Moody’s, while covered bonds from other capital centres are rated Aa3.

Cover pool and asset quality

At February 2011, BRFkredit’s cover pool E stood at DKK108bn, comprised of 99%

Danish-based loans. The average LTV ratio is 70%. Loans are well diversified; however, the

majority of the properties (45%) are located in the Copenhagen area. Of the cover pool, 85%

is residential property and 15% is commercial. Fixed-rate assets constitute 10% of the pool.

Table 12. Funding profile

Total assets

DKK231bn

Retail deposits 2%

Corporate deposits 5%

Market funds (match-funded) 84%

Other 4%

Subordinated debt 1%

Equity 4%

Source: BRF, Danske Markets

Table 13. Cover pool info

Cover pool E

DKK108bn

Average loan size

DKK1,810,000

OC (committed) 14%* (9.5)

WA LTV 70%

WA Indexed LTV -

Seasoning -

Arrears -

Fixed-rate assets 10%

Geography

99% Denmark

-Copenhagen area 45%

-Sealand 15%

-Northern region

-Central region

-Southern region

5%

16%

17%

Asset type

-Residential 55%

-Rental housing 15%

-Commercial 14%

-Subsidised 15%

-Other 1%

Properties (stock/value) 267/DKK896m

Source: BRF

*Source: Moodys.

At the end of 2010, BRFkredit had 267 foreclosed properties (2009 213) at a total value

of DKK896m (2009 DKK1,22bn). In 2010 BRFkredit managed to sell properties

acquired on foreclosure for a total value of DKK2,444m, which further contributed to the

increase in profits since the properties were generally sold above purchase price.

BRFkredit has committed to maintain an OC within the cover pool designated Capital Centre

E (from which all SDOs are issued) of 9.5% (as of November 2010), whereas BRFkredit

does not provide OC above the legal requirement (8% of risk-weighted assets) in other cover

pools (capital centre). According to Moody’s, the OC as per end-March 2011 was 14%.

15 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Danske Bank

Særligt dækkede obligationer

The history of Danske Bank includes the history of three of the first large banks in

Denmark, which came to be known as Den Danske Bank (Danske Bank). Danske Bank

originated in the late 19 th Century with the establishment of Den Danske Landmandsbank

(later Den Danske Bank) in 1871 and Handelsbanken in 1873. Between 1960 and 1990

the Danish banking sector was rationalised. A further key to Den Danske Bank’s

development was the gradual liberalisation of the country’s banking laws, which resulted

in fewer restrictions on marketing, product development and continual technological

innovation. Indirectly, the result of this development was that in 1990, Den Danske Bank,

Handelsbanken and Provinsbanken merged to form Den Danske Bank. From 2000, Den

Danske Bank was renamed Danske Bank, merging with several domestic and Nordic

banks. The latest merger occurred in 2007 when Danske Bank acquired Sampo Bank of

Finland. Today, Danske Bank is active in all Nordic countries as well as Ireland, Northern

Ireland, Luxembourg, Germany, Poland and the Baltic countries.

Danske Bank provides a wide range of banking products and services to retail, corporate

and institutional clients. Domestically, Danske Bank offers mortgages through mortgage

subsidiary Realkredit Danmark and pension plans and life insurance through subsidiary

Danica Pension. It has roughly 300 retail branches in Denmark and several corporate

branches. Danske Bank provides banking services under various brands: Danske Bank in

Denmark (62% of total credit exposure from lending), Sampo Bank in Finland (9%),

Danske Bank in Sweden (11%), Fokus Bank in Norway (10%), National Irish Bank in

Ireland (4%) and Northern Bank in Northern Ireland (3%). Danske Bank benefits from a

shared IT platform and shared business procedures in all markets. Danske Bank is the

largest bank in Denmark with a retail market share of approximately 30%. The group is

one of the largest banking groups in Scandinavia.

Danske Bank’s issuer (fundamental) ratings from Moody’s, S&P and Fitch are A2, A and

A+ respectively – all on negative outlook. Covered bonds (særligt dækkede obligationer -

SDOs) issued by Danske Bank have corresponding Aaa/AAA/AAA ratings from

Moody’s/S&P/Fitch. On the issuer ratings, Moody’s downgraded Danske Bank (and a

range of other Danish banks) two notches from Aa3 to A2 following a change in its

assumption regarding systemic support, in which Denmark is now viewed as a lowsupport

country rather than a high-support country.

Financial performance

Danske Bank came out of 2010 with an operating profit of DKK6.5bn, an increase of

35% from the 2009 level of DKK4.8bn. The increase in profit was achieved despite a

significant decline in net interest income dropping by 24% to DKK36bn and income from

trading activities seeing a DKK10bn drop from a 2009 level of DKK18bn to 2010’s

DKK8bn. On a positive note, impairment charges faced by Danske Bank fell by

DKK12bn in 2010 with resulting impairment charges of DKK13.8bn out of which

DKK7.3bn can be accredited loans to small and medium-sized corporate clients and

DKK1.4bn to the Bank Package I. Danske Bank expects the decline in loan impairment

Table 14. Ratings

Covered bond rating: Aaa/AAA/AAA

Issuer rating:

A2(n)/An/A+(n)

Fitch D-factor:

19.2%(D)/22.3%(I)

/24.9%(C)

Fitch supporting O/C: 13.5%(D)/14.9%(I)

28.0% (D)/

Moodys C-score:

9.2%(D)/7.9%(I)

(C)/

Moodys TPI:

Probable (D/I)

S&P Category: 1

Source: Rating agencies, Danske Markets

Table 15. Financial information

DKKm 2010 2009

Net interest income 35,983 47,542

Fees and commissions 8,089 7,242

Net gain/losses 5,984 14,101

Pre-provision income 20,267 30,432

Loan losses and provisions 13,817 25,677

Operating profit 6,450 4,755

NPL 5.8% 5.2%

Loan loss ratio 0.71% 1.35%

Cost/income ratio 56% 49%

Core capital ratio 14.8% 14.1%

Total capital ratio 17.7% 17.8%

Source: Danske Bank, Danske Markets

Table 16. More information

Bond ticker

Website

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

DANBNK

www.danskebank.com

www.danskeresearch.com


Danske Bank

charges to continue. Core capital ratio is up by 0.7% while the Tier 1 ratio remains

relatively unchanged with a +0.1% change. Further on the capital base, in 2010 Danske

Bank issued DKK22bn worth of short-lived bonds (maturities of less than five years)

along with DKK30bn worth of covered bonds (maturities five-seven years). Danske Bank

also raised an additional DKK20bn through the issuance of new shares in April 2011. The

planned issuance of new shares is mentioned in Danske Bank’s 2010 annual report

together with a permission request to the Danish government that Danske Bank be

allowed to prematurely repay the hybrid capital loan issued by the government during the

financial crisis.

Business model and funding profile

Danske Bank is a universal bank subject to supervision by the Danish FSA. The bank has

a well-diversified funding platform including a solid deposit base.

Danske Bank has established three cover pools within its EUR25bn covered bond

programme. Cover Pool D comprises 100% domestic mortgages while Cover Pool I

includes international mortgages originated by Danske Bank. Currently, Norwegian and

Swedish mortgages are included, each with a 50% weight. Cover Pool C comprises

entirely Swedish loans and is made up from a diverse combination of loan types. Danske

Bank is committed to not include Irish mortgages before November 2019. The vast

majority of the mortgage portfolio comprises adjustable-rate mortgages. Furthermore, in

September 2009, Danske Bank established two new cover pools. Cover Pool N comprises

only Norwegian residential mortgages and Cover Pool R consists purely of Irish

residential mortgages. The two new cover pools are established as part of Danske Bank's

liquidity contingency plans and – at least for the time being – are not for the public

market.

Danske Bank issues covered bonds in the SDO format and adheres to the general balance

principle, according to the Danish Covered Bond Act.

Cover pool and asset quality

As of 1 February 2011, Cover Pool D totals DKK33bn and consists primarily of Danishbased

mortgages, but also a small amount of substitute assets (DKK1bn). All mortgages

in Cover Pool D are floating rate. The overall indexed LTV ratio in Cover Pool D is 60%.

The pool is very well seasoned with an overall weighted seasoning of 47 months.

Currently, O/C is 22.7%. 15% of the cover pool has an indexed LTV above 80%.

At the same time, Cover Pool I amounts to DKK91bn and consists (besides DKK6.5bn of

substitute assets) of Norwegian (51%) and Swedish mortgages (49%). All mortgages in

Cover Pool I are floating-rate. The overall indexed LTV ratio in Cover Pool I is 60%.

15% of the cover pool has an indexed LTV above 80%. The pool is very well seasoned

with an overall weighted seasoning of 36 months. Currently, O/C is 24.5%.

Cover Pool C stands at DKK9.7bn and thus is the smallest of Danske Bank’s cover pools.

The assets in Cover Pool C are all Swedish floating-rate assets – mainly non-residential

with industrial, retail and agricultural assets making up some 59% of the pool. The rest of

the pool is rental housing (31%) and cooperative housing (9%).

Loans in arrears are not allowed in the cover pools. Furthermore, Danske Bank commits

to a voluntary minimum OC of 2% (agreed with the Danish FSA). Approval of mortgages

by Danske Bank is based on a strict credit policy, identical to that of Realkredit Danmark.

Table 17. Funding profile

Total assets

DKK3,214bn

Retail deposits 13%

Corporate deposits 23%

Market funds 43%

Interbank 13%

Subordinated debt 3%

Equity 4%

Source: Danske Bank, Danske Markets

Table 18. Cover pool info (D)

Cover Pool D

DKK33bn

Average loan size

DKK600,000

OC 22.7% (2%)

WA Indexed LTV 60%

Seasoning

47m

Arrears 0.0%

Adjustable-rate

100%

mortgages

Geography

Denmark

Greater Copenhagen 36%

Other Zealand 12%

Western region 51%

Asset type

-Residential 97%

-Commercial 0%

-Subsidised 0%

-Other 3%

Source: Danske Markets

Table 19. Cover pool info (I)

Cover Pool I

DKK91bn

Average loan size

DKK824,000

OC (committed) 24.5% (2%)

WA LTV -

WA Indexed LTV 60%

Seasoning

36m

Floating-rate mortgages 100%

Geography Norway (51%)

Sweden (49%)

Asset type

- Owner occupied 74%

- Housing cooperatives 26%

Source: Danske Markets

Table 20. Cover pool info (C)

Cover Pool I

DKK9.7bn

Average loan size

DKK2,656,000

OC (committed) 30.2% (2%)

WA LTV 49%

WA Indexed LTV -

Seasoning

46m

Floating-rate mortgages 100%

Geography Sweden (100%)

Property type

-Rental housing 31%

-Industrial 26%

-Retail 24%

-Agriculture 9%

-Cooperative housing 9%

Source: Danske Markets

17 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Danmarks Skibskredit

Skibskreditobligationer

Company profile

Danmarks Skibskredit (DSF) was established in 1961 with the creation of Danmarks

Skibskreditfond to create a permanent source of funding for ship owners. In 2005,

Danmarks Skibskreditfond was converted into a limited liability company. According to

its Articles of Association, “the object of the Company is to provide ship financing in

Denmark. In addition, the Company may provide ship financing in the international

market, so long as such activities do not unnecessarily limit the Company’s Danish

operations”. DSF operates almost exclusively with corporate shipping clients, with

virtually no exposure to riskier segments. DSF is owned by the Danish Central Bank

(19%), banks (40%), shipyards (3%), shipping companies (20%), the Danish Maritime

Fund (10%), insurance companies (4%). DSF has 58 employees.

DSF’s issuer rating and senior unsecured rating from Moody’s (A2) is on negative

outlook due to a significant deterioration of the shipping industry.

Financial performance

The hardships of the shipping industry in 2009 meant that 2010 was a year of anticipation

for many ship owners. As a result of the hesitance in the market DSF received fewer loan

applications than usual, and hence, only DKK2.3bn worth of loans were issued, which is

significantly lower than previous years. However, the economy has picked up, seeing an

increase of 15% in the global trade, sending the shipping industry back to 2008 levels.

Resulting, in 2010 DSF had a slightly reduced net interest income, but at the same time

impairment charges were reduced by 72% from DKK874m (2009) to DKK245m (2010).

The reduction in impairments is the key driver of the increase in pre-tax income

increasing by DKK290m to the 2010 level of DKK613m (+90%). This brings DSF’s pretax

income back to the pre-crisis level of DKK519m (2007).

Business model and funding profile

According to an executive order issued by the FSA, the principal rule is that DSF can

only provide loans against first-lien mortgages on a financed ship for up to 70% of the

ship’s market value. However, DSF is allowed to provide loans for the remaining 30% of

the ship’s market value secured by mortgage against other high-quality collateral,

including government and covered bonds (both with a haircut of 10%). Moreover, DSF

can provide loans secured by a first-lien mortgage over a financed ship for up to 80% of

the ship’s value, if accepted by the Danish Enterprise and Construction Authority.

According to the same executive order, loans may have a maximum term of 15 years

from their origination (four years for building loans). All covered bonds issued by DSF

are issued out of the same capital centre. DSF follows – and has always followed – the

specific balance principle, which requires DSF to maintain its interest rate, currency and

liquidity risk within narrow limits set out in both the FSA’s executive order and statute.

Regarding interest rate risk, DSF is subject to the same regulation as issuers of traditional

Danish mortgage bonds.

Table 21. Ratings

Senior unsecured rating:

A2(n)/-/-

Issuer rating:

A2(n)/-/-

Fitch D-factor: -

Moodys C-score: -

Moodys TPI: -

S&P Category: -

Source: Rating agencies, Danske Markets

Table 22. Financial information

DKKm 2010 2009

Net interest income 881 723

Fees and commissions 65 49

Net gains/losses -2 508

Pre-provision income 860 1,198

Loan losses and provisions 245 874

Operating profit 613 323

NPL -

Loan loss ratio -

Cost/income ratio 11% 7%

Core capital ratio 15.3% 14.3%

Total capital ratio 15.3% 14.3%

Source: Danmarks Skibskredit, Danske Markets

Table 23. More info

Bond ticker

Website

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

DANSKB

www.skibskredit.dk

www.danskeresearch.com


Danmarks Skibskredit

Regarding liquidity and currency risk, DSF is subject to more relaxed regulations.

Liquidity risk concerning the future liquidity deficit arising from mismatches between

inflows and outflows can comprise 100% of solvency capital, while currency risk can

account for 2% of the solvency capital ratio (25-100% and 0.1%, respectively, for issuers

of traditional Danish mortgage bonds).

DSF relies solely on access to capital markets in order to finance its lending. It obtains its

funding mainly through issuance of non-callable, ship-backed covered bonds

denominated in DKK. Most bonds are bullet bonds with maturities ranging from one to

20 years. Most are listed on the OMX Nordic Exchange in Copenhagen. According to

Bloomberg, DSF has diversified debt distribution, with average maturity mid 2015.

DSF manages liquidity closely. According to the company, “the total financing

requirement owing to differences in maturity between the funding raised and the loans

paid out shall at no time exceed 100 per cent of its capital and reserves”. Moreover,

according to strict internal guidelines, “DSF shall have an overall positive liquidity within

the next 18-month period”.

Table 24. Funding profile

Total balance

DKK84bn

Interbank 11%

Market funds 72%

Other 5%

Subordinated debt 1%

Equity 11%

Source: Danmarks Skibskredit

All bonds issued by DSF comply with UCITS Article 22(4). If DSF chooses to issue

CRD-compliant covered bonds (SDOs), it is required to open a new capital centre for the

purpose. In that event, DSF can choose between ‘the specific balance principle’ and ‘the

general balance principle’ in the new capital centre. Since the summer of 2007, DSF has

had the option to issue CRD-compliant covered bonds. However, it has not used the

option yet, and we understand that it currently has no plans to do so. Consequently, the

DKK2.9bn in bonds issued in 2010 are not CRD-compliant and therefore do not qualify

for preferential risk weighting.

Covered bondholders have a claim against the capital centre backing their bonds. Each

capital centre has a claim against its own group of debtors. Each debtor in a capital centre

is liable for his/her own part of the remaining debt, and if they cannot meet their

obligations, capital centres can redeem the pledge provided by non-paying debtors.

Moreover, covered bondholders have a claim against DSF, which by law is required to

maintain a solvency capital ratio of at least 8%.

Cover pool and asset quality

As of 31 December 2010, DSF’s total loan portfolio amounted to DKK52bn.There is a

high degree of concentration risk as the five largest borrowers (shipping companies) make

up 51% of the total portfolio, of which one is significantly larger than the others. Due to

the cyclical nature of shipping, the economic slowdown has significantly reduced the

asset quality of shipping in general, and although DSF applies a cautious approach with

prudent underwriting criteria, there was a rise in loans and receivables subject to

impairment charges as percentage of gross loans, from 10% in 2008 to 17% in 2009.

However, most loans (90%) benefit from either MVCs – market value clauses – or

covenants. The additional security provided from borrowers through these ensures that

loan-to-value levels remain fairly stable through a credit cycle.

Table 25. Cover pool info

Cover pool

DKK52bn

Average loan size -

WA LTV 65%

WA Indexed LTV -

Seasoning -

Arrears -

Geography

-Denmark 45%

-Europe 18%

-USA 4%

-Other 33%

Asset type

-Containers 29%

-Tankers 20%

-Ferries 9%

-Dry bulk 9%

-Other 33%

Source: Danmarks Skibskredit, Danske Markets

19 | August 2011

www.danskeresearch.com


Investment Research

August 2011

DLR Kredit

Særligt dækkede obligationer

Company profile

Dansk Landbrugs Realkreditfond (DLR) is a Danish mortgage lender, specialised in

agricultural and commercial mortgages. DLR was founded in 1960 on the initiative of the

banks and savings banks associations (now the Danish Bankers Association). DLR’s

formation was driven by farmers’ requirements for long-term capital in the 1950s, which

were only partially covered by first- and second-lien mortgage banks. Lack of funding

resulting from hesitant lending policies of first- and second-lien mortgage banks led in

part to the establishment of DLR, which was allowed to operate with a loan-to-value ratio

of 70% of DLR’s valuation of the mortgaged property.

Between its establishment in 1960 and 1 July 2000, DLR operated on its own individual

legal basis pursuant to the DLR Act. DLR’s exclusive right to grant loans based on a LTV

ratio of 45-70% was abandoned from 1 January 1999. DLR became subject to the

Mortgage Credit Act as of 1 July 2000 and in 2001 it became a company limited by

shares. Shares in DLR are held by 99 local and regional banks and savings banks (+1,000

branches across Denmark). The main shareholders are members of the Association of

Local Banks (74%), members of the Association of Regional Banks (23%) and other

banks (3%). As well as providing mortgage loans, DLR has managed the loan portfolio of

LR Realkredit (majority-owned by Nordea, Danske Bank, SEB and Arbejdernes

Landsbank) since 1994. LR Realkredit provides loans mainly for social and cultural

projects as well as subsidised housing. DLR takes no credit risk on this portfolio. In these

markets DLR holds almost a 17% share (based on loan stock). On the same basis, DLR’s

overall market share is less than 6%.

Table 26. Ratings

Covered bond

rating:

Aa1/-/-

Issuer rating:

Baa1(n)/-/-

Fitch D-factor: -

Moodys C-score: 17.3% (B) / 12.9%(GC)

Moodys TPI:

High

S&P Category: 1

Source: Rating agencies, Danske Markets

Table 27. Financial info

DKKm 2010 2009

Net interest income 857 1,047

Fees and commissions -278 -240

Net gain/losses 33 -14

Pre-provision income 443 609

Loan losses and provisions 106 159

Operating profit 336 450

Arrears - -

Loan loss ratio 0.08% 0.12%

Cost/income ratio 47% 45%

Core capital ratio 12% 11.6%

Total capital ratio 12% 11.7%

Source: DLR Kredit, Danske Markets

In 2009, DLR implemented a significant strengthening of its capital base through both a

government hybrid core capital injection and an increase in DLR’s share capital, and the

total capital ratio increased by two percentage points. Moody’s downgraded DLR’s issuer

rating from A1 to A3 in November 2009 as a direct consequence of a new rating approach

towards specialist banks owned by multiple owners, hence the downgrade was not due to

a deterioration of credit quality. On 1 July 2011, Moody’s further cut DLR’s long-term

rating from A3 to Baa1, due to a perceived weakened financial strength of DLR’s banks.

DLR’s current Baa1 rating is on negative outlook. This rating action did not affect the

covered bond rating, which remained at Aa1.

Financial performance

In 2010 DLR saw a reduction in operating profit compared to 2009. The operating profit

dropped 25% from DKK450m in 2009 to DKK336m in 2010. The decrease was mainly

due to a reduction in net interest income, which was caused by 1) the low interest rates in

2010 and 2) interest expenses linked to the hybrid capital from the Danish Government

loan. DLR improved its core capital through an issuance of new shares, which gave DLR

an additional DKK325m. DLR will strengthen the capital base further by including the

entire 2010 surplus – amounting to DKK251m after tax. Combined, this means that

Table 28. More info

Bond ticker

Website

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

LANDBR

www.dlr.dk

www.danskeresearch.com


DLR Kredit

DLR’s core capital ratio and total capital ratio will both increase to 12% from 11.6% and

11.7% respectively.

Business model and funding profile

DLR is a specialist mortgage bank subject to supervision by the Danish FSA. DLR

provides mortgages through the branch networks of its 99 shareholder banks. DLR has no

branches itself. DLR only offers mortgages secured on properties in Denmark. It focuses

on mortgages on agricultural and commercial properties as well as co-operative homes,

rental homes and publicly-subsidised housing projects. The bank offers interest reset

loans (66%), fixed-rate callable loans (19%), floating rate loans (13%) and capped

floaters (2%). All mortgages are based on the pass-through principle, meaning that

consumers have a delivery option on underlying bonds. Interest reset loans are funded by

issuing a portfolio of fixed-rate, non-callable bonds, while other types of mortgages are

funded individually by issuing bonds with exactly the same characteristics as the

mortgages.

DLR has a management agreement with all shareholder banks, which requires loanproviding

banks to put up an individual loan loss guarantee covering the most risky part

of each mortgage. The agreement includes all commercial properties. As a result, DLR’s

risk of losses arising from the granting of loans for the property types mentioned is very

limited. Loans for agricultural properties are also protected by a collective guarantee

scheme set up between DLR and the loan-providing banks, which comes into force in the

event that the losses suffered by DLR within a given financial year exceed a given level.

The guarantee scheme means that DLR’s risk of losses arising from the granting of loans

for agricultural properties is relatively limited. The guarantee scheme covers 91% of

DLR’s total loan portfolio; the remaining loans often have a very low LTV.

Mortgage-backed covered bonds issued by DLR are divided into different cover registers

(capital centres). According to the revised Mortgage Act, any new SDOs must be issued

out of separate capital centres. By the end of 2007 DLR closed and subsequently

grandfathered the existing series in Capital Centre A, according to the Capital

Requirement Directive (CRD), with new SDOs issued out of new Capital Centre B.

Cover pool and asset quality

As of March 2011, cover pools total DKK106bn and consist mainly of Danish-based

assets, distributed with 59% in residential assets and 26% in commercial assets. All assets

are geographically well diversified with a slight tendency to be concentrated in Western

Denmark (Jutland peninsula). LTVs are capped at 80% for the residential assets, and 60%

for the commercial part of the pool. Current OC is 14.8%.

Approval of mortgages by DLR is based on a strict credit policy. Only mortgages on

properties stated in the Mortgage Act are allowed in the cover pool. The LTV ratio on

each mortgage is monitored on an ongoing basis while the borrower’s ability to pay is

reviewed each month.

Table 29. Funding profile

Market funds (match-funded) 85%

Corporate deposits 2%

Other 4%

Subordinated debt 4%

Equity 5%

Source: DLR, Danske Markets

Table 30. Cover pool info

Cover pool

DKK106bn

Average loan size

OC (committed)

14.8% (8% RWA)

WA LTV

WA Indexed LTV

Seasoning

Arrears

IO-mortgages 58%

Asset type

Residential assets 59%

Interest only loans 58%

Floating rate loans 2.8%

LTV > 80% 3.6%

NPL 1.2%

Regional distribution

-Southern Denmark 30%

-Mid Jutland 30%

-Northern Jutland 23%

-Sealand 12%

Commercial assets 26%

Fixed rate loans 96%

LTV > 80% 8.1%

Regional distribution

-Southern Denmark 24%

-Mid Jutland 31%

-Northern Jutland 11%

-Sealand 16%

-Copenhagen area 18%

Source: Danske Markets

21 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Nordea Kredit

Særligt dækkede obligationer

Company profile

Nordea Kredit Realkreditaktieselskab (NOR) is a wholly owned subsidiary of Nordea

Bank Danmark, which forms part of the Nordea Group. Nordea was established relatively

recently, in 2000. In 1997, Swedish Nordbanken merged with Finnish Merita Bank to

form MeritaNordbanken. In 2000, Danish Unibank merged with MeritaNordbanken,

which, at the same time, changed its name to Nordea. Later in 2000, the Norwegian-based

Christiania Bank joined the newly formed Scandinavian banking group. Today, Nordea is

the largest bank in Scandinavia with activities in Scandinavia, the Baltic region, Poland

and Russia.

Nordea’s main business areas include retail banking, corporate banking, asset

management, life insurance & pensions, and mortgage finance.

NOR began its mortgage activities in September 1993. Initially it only provided lending

for residential properties and holiday homes. Currently, however, mortgage loans are

offered for most types of property. NOR’s share of the domestic mortgage market is 13%

(stock).

The bank’s corresponding long-term ratings by Moody’s/S&P/Fitch are Aa3/AA-/AA-.

Moody’s downgraded Nordea Bank Denmark two notches from Aa3 to A2 following a

change in its assumption regarding systemic support, in which Denmark is now viewed as

a low-support country rather than a high-support country. Covered bonds issued by NOR

have Aaa/AAA ratings from Moody’s/S&P.

Financial performance

2010 proved a good year for Nordea Group. On the bottom line, Nordea Group managed

to increase operating profit by EUR0.5bn to EUR3.5bn. The addition to the 2009 result

was mainly driven by an increase in fees and commission income of EUR0.5bn, and net

loan losses being reduced by 40% to a 2010 level of EUR0.9bn (2009: EUR1.5bn).

Business model and funding profile

NOR is a specialist mortgage bank subject to supervision by the Danish FSA. The

objective of NOR is to carry on business as a mortgage bank, including any kind of

business permitted pursuant to the Danish Mortgage Act. NOR only has mortgage credit

activities in Denmark, while all mortgages in the cover pool are secured on properties

situated in Denmark. All mortgages included in the cover pool are distributed through

Nordea’s branch network and that of the real estate chain, DanBolig, which is a wholly

owned subsidiary of Nordea Danmark.

Table 31. Covered bond rating

Covered bond rating:

Aaa/AAA/-

Issuer rating:

Aa3/AA-/AA-

Fitch D-factor: -

Fitch supporting O/C -

Moodys C-score:

12.9% (CC1)/

21.5% (CC2)

Moodys TPI: -

S&P Category:

1 (expected)

Source: Rating agencies, Danske Markets

Table 32. Financial info (parent bank)

EURm 2010 2009

Net interest income 5,159 5,281

Fees and commissions 2,156 1,693

Net gain/losses 1,837 1,946

Pre-provision income 4,452 4,513

Loan losses and provisions 879 1,486

Operating profit 3,573 3,027

NPL 1.5% 1.5%

Loan loss coverage 59.1% 58.3%

Cost/income ratio 52% 50%

Core capital ratio 9.8% 10.2%

Total capital ratio 11.5% 11.9%

Source: Nordea, Danske Markets

Table 33. More info

Bond ticker:

Website

Source: Danske Markets

UNIKRE

www.nordea.com

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Nordea Kredit

A management agreement exists between NOR and Nordea Bank Danmark. It states as

follows: Nordea Bank Danmark A/S provides a guarantee for the upper 25% of mortgage

loans originated by the bank. For loans granted for non-profit housing, youth housing and

housing for the elderly, there is only a 10% guarantee. For loans for all-year dwellings,

co-operative housing, private rental housing, non-profit rental housing and properties for

social, cultural and educational purposes, the guarantee covers that part of the mortgage

loan which exceeds 60% of the valuation made in conjunction with the loan origination

process. For loans granted to agricultural properties, the guarantee covers that part of the

mortgage loan which exceeds 55% of the valuation made in conjunction with the loan

origination process. For loans granted to recreational dwellings, industrial and

craftsmen’s properties, office and retail properties, and collective energy supply plants,

the guarantee covers that part of the loan which exceeds 45% of the valuation made in

conjunction with the loan origination process. The guarantee remains in force for ten

years from the disbursement of the loan. For loans granted to owner-occupied, all-year

and recreational dwellings, the guarantee remains in force for only five years.



The branch that originated the mortgage is responsible for all customer handling.

NOR receives all payments from customers directly. In turn, NOR pays provisions to

Nordea Bank Denmark.

Currently, guarantees from Nordea Bank Danmark A/S cover loans worth DKK262bn, of

which guarantees amount to DKK70bn.

The mortgages backing the covered bonds issued by NOR are divided into different cover

pools (capital centres). According to the revised Mortgage Act, new SDROs must be

issued out of separate capital centres. Therefore, at the end of 2007, NOR closed and

subsequently grandfathered the existing series, according to the Capital Requirement

Directive (CRD), and new SDROs have been issued out of Capital Centre 2. Capital

Centre 2 holds 53% of the total mortgage book.

Cover pool and asset quality

As of 31 December 2010, the cover pool totalled DKK318bn and consisted entirely of

Danish-based mortgages. These are mainly secured on residential (70%) mortgages,

followed by agricultural (13%) and commercial (10%). Forty-two per cent of all

mortgages carry a fixed rate, 54% are interest-reset loans and the remaining are capped

floaters.

The average indexed LTV ratio in NOR’s cover pools is 66%. Only 5% of all mortgages

have an LTV above 80%, and 58% have an LTV below 40%.

Table 34. Cover pool info

Cover pool

DKK318bn

Average loan size -

WA LTV -

WA Indexed LTV 66%

Seasoning -

Arrears 0.46%

IO-mortgages 56%

Geography

Denmark

-Copenhagen area 36.2%

-Zealand 20.3%

-Northern region

-Central region

-Southern region

4.4%

23.9%

15.2%

Asset type

- Residential 70%

- Subsidised 0%

- Rental housing 5%

- Commercial 10%

- Other 15%

Source: Nordea, Danske Markets

23 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Nykredit/Totalkredit

Særligt dækkede obligationer

Company profile

Nykredit Realkredit (NYK) is a wholly owned subsidiary of Nykredit Holding, the thirdlargest

financial institution in Denmark. Nykredit Holding is an unlisted holding company

owned by Foreningen Nykredit (88%), Industriens Realkreditfond (6%), Foreningen

Østifterne (3%) and PRAS (3%). As a mortgage association, NYK originated in 1851.

Today, besides mortgage finance, NYK is active in retail and corporate banking, asset

management, insurance and real estate. Mortgage finance is the most important business

area, with mortgages comprising over 75% of total assets.

In 2003, NYK acquired Totalkredit (TOT), which is currently a wholly owned subsidiary

of NYK. Following the acquisition of TOT, NYK became the largest specialist mortgage

bank in Denmark with a current market share based on outstanding mortgages of 43%.

There are nearly 100 banks (with over 1,000 branches) in the TOT corporation network,

making it crucial for the distribution of NYK mortgages. NYK and both local and

regional banks are competitors in agricultural mortgage and non-mortgage markets. In

2008 NYK acquired Forstædernes Bank, which increased NYK’s market share within

banking to 5.1%. Forstædernes Bank has subsequently been merged with Nykredit Bank.

Current covered bonds issued by NYK have Aaa/AAA ratings from Moody’s and S&P,

and NYK has an A2(neg)/A+ long-term rating from Moody’s/S&P. NYK was placed on

review for further downgrade on 14 April 2011, due to ongoing concern from Moody’s

regarding the asset quality and volatility of its securities portfolio. While under review,

Moody’s will analyse NYK’s potential for generating (adequate) future stable income.

Financial performance

Nykredit Group improved 2009’s result significantly, ending 2010 with an operating

profit of DKK3,090m compared with DKK179bn in 2009. Despite a net loss in financial

assets of DKK559m (2010 +DKK2,195m), Nykredit Group managed to come out of the

year with a substantial increase in profits due mainly to a sharp decrease in loan losses

and provisions, which were reduced by 70% between 2009 (DKK7,919m) and 2010

(DKK2,382m).

Furthermore, Nykredit Group reduced its cost/income ratio (to a five-year low 58%) and

increased both the core capital ratio and the capital ratio.

Business model and funding profile

NYK is a specialist mortgage bank subject to supervision by the Danish FSA. Banking,

asset management and insurance activities are carried out by wholly owned separate

subsidiaries of NYK. As mentioned above, TOT is also a wholly owned subsidiary of

NYK. Under the Nykredit brand, retail and commercial customers are offered mortgages

through Nykredit’s distribution channels, which include 49 retail centres, 26 commercial

centres, nykredit.dk, a central sales centre and the real estate agencies of the Nybolig and

Estate chains. Like NYK, TOT is a specialist mortgage bank under the supervision of the

Danish FSA.

Table 35. Ratings

Covered bond rating:

Aaa/AAA/-

Issuer rating:

A2(n)/A+/-

Moodys C-score: 12.8% to 13.7%

Moodys TPI:

Very high

S&P Category: 1

Source: Rating agencies and Danske Markets

Table 36. Financial information

DKKm 2010 2009

Net interest income 11,210 11,230

Fees and commissions 554 508

Net gain/losses -559 2,195

Loan losses and provisions 2,382 7,919

Operating profit 3,090 179

NPL 0.6% 0.8%

Loan loss ratio 1.3% 1.3%

Cost/income ratio 58% 62%

Core capital ratio 18.5% 16.7%

Total capital ratio 18.5% 17.8%

Source: Nykredit Danske Markets

Table 37. More info

Bond ticker

Website

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

NYKRE

www.nykredit.com

www.danskeresearch.com


Nykredit/Totalkredit

In 1994 TOT was established as a joint mortgage bank by local and regional banks in

Denmark. Since the acquisition of TOT in 2003, NYK has developed a partnership with

Danish local and regional banks with substantial distribution networks including over

1,000 branches. Mortgage products under the Totalkredit brand are sold through these

local and regional banks. The vast majority of growth in mortgage lending is delivered by

local and regional banks.

Denmark is the largest market for NYK and TOT. In addition, NYK provides loans

secured by residential property in Poland, France and Spain. TOT only offers mortgages

secured on residential property, while NYK’s core markets in Denmark are in residential

housing and commercial properties, which comprise loans to customers for urban trade,

agriculture and residential rental properties.

A management agreement exists between NYK/TOT and the local and regional banks.

The agreement states the following.


The branch that originated the mortgage is responsible for all handling of customers.

Table 38. Funding profile

Market funds (match-funded bonds) 74%

Corporate deposit 7%

Retail deposits 4%

Other 9%

Subordinated debt 1%

Equity 4%

Source: Nykredit, Danske Markets



The bank that originated the mortgages covers all losses (LTV between 60-80%) on

mortgages originated by the said bank.

TOT receives all payments directly from customers. In turn, TOT pays provisions to

the banks.

Since 2006 NYK and TOT have been jointly funded, so all mortgages originated by NYK

or TOT are funded by covered bonds issued out of NYK Capital Centre D. TOT has a

similar Capital Centre D, which is subject to the same terms as NYK's Capital Centre D.

The model for joint funding is based on lending out of TOT’s Capital Centre D funded by

issuing covered bonds from Capital Centre D in NYK.

According to the revised Mortgage Act, new SDOs must be issued out of separate capital

centres. Therefore, since 1 January 2008 NYK/TOT has issued SDOs out of a new capital

centre – E, with existing series in Capital Centre D closed at the end of 2007. The existing

series will be grandfathered according to the Capital Requirement Directive (CRD).

Going forward, joint funding will be carried out from Capital Centre E.

Cover pool and asset quality

As of 30 June 2011, NYK’s Cover Pool E totalled DKK602bn, of which 95% is Danishbased

mortgages. These are secured on residential (76%), agricultural (8%) and

commercial and other properties (16%). The cover pool has a weighted average LTV of

64% and 15% of all mortgages carry a fixed rate.

Table 39. Cover pool info

Cover pool E

DKK602bn

Junior covered bonds

DKK24bn

Average loan size 1,449,000

WA LTV 64%

WA Indexed LTV -

Seasoning -

Fixed rate loans 15%

Arrears 0.8%

IO-mortgages 63%

Geography

-Copenhagen area 26%

-Remaining Sealand 9%

-Jutland region

-Funen

52%

8%

-International 5%

Asset type

-Owner-occupied 68%

-Rental housing 8%

-Commercial

-Agriculture

11%

8%

-Other 5%

25 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Realkredit Danmark

Særligt dækkede obligationer

Company profile

Realkredit Danmark (RD) is a wholly-owned subsidiary of Danske Bank, the largest

financial institution in Denmark, which was originated in 1871. Today, Danske Bank is a

global bank with activities in northern Europe and the Baltic region under various brands.

In 2006 Danske Bank acquired Sampo Bank in Finland. Its main business areas are retail

banking, corporate banking, asset management, life insurance & pensions and mortgage

finance.

RD was established in 1851 under the name Østifternes Kreditforening. In 2001, RD

merged with Danske Kredit A/S and BG Kredit A/S following the merger of Danske

Bank A/S and RealDanmark A/S. RD is the continuing mortgage credit arm of the

Danske Bank Group and the second-largest specialist mortgage bank in Denmark, with a

loan portfolio market share of 32%. RD was the first to issue CRD-compliant covered

bonds under the revised Danish Covered Bond Act.

On 23 June, RD announced that it would terminate its collaboration with Moody’s. The

decision came after Moody’s, as a result of model calculations, demanded that RD

provided an additional excess cover of DKK32.5bn. In the same statement RD announced

the opening of a new capital centre for the financing of adjustable rate mortgages

(ARM). Existing ARMs – currently issued out of RD’s Capital Centre S – are to be

refinanced in to the new capital centre starting from the refinancing auctions set for

December 2011.

RD has no issuer rating although Danske Bank’s long-term ratings by Moody’s/

S&P/Fitch are A2(n)/A(n)/A+(n), respectively. Covered bonds issued by RD have an

AAA rating from S&P.

Financial performance

Danske Bank came out of 2010 with an operating profit of DKK6.5bn, an increase of

35% from the 2009 level of DKK4.8bn. The increase in profit was achieved despite a

significant decline in net interest income (NII) dropping by 24% to DKK36bn and income

from trading activities seeing a DKK10bn drop from a 2009 level of DKK18bn to

DKK8bn in 2010. On a positive note, impairment charges faced by Danske Bank fell by

DKK12bn in 2010 with resulting impairment charges of DKK13.8bn out of which

DKK7.3bn can be accredited loans to small and medium-sized corporate clients and

DKK1.4bn to the Bank Package I. Danske Bank expects the decline in loan impairment

charges to continue. The core capital ratio is up by 0.7%, while the tier 1 ratio remains

relatively unchanged, showing just +0.1% change. Furthermore, on the capital base, in

2010 Danske Bank issued DKK22bn worth of short-lived bonds (maturities less than five

years) along with DKK30bn worth of covered bonds (maturities five to seven years).

Danske Bank is also raising an additional DKK20bn through the issuance of new shares.

The planned issuance of new shares is mentioned in Danske Bank’s annual report

Table 40. Ratings

Covered bond rating:

-/AAA/-

Issuer rating: -/-/-

Fitch D-factor: -

Fitch supporting O/C

Moodys C-score: 11.1% to 18.3%-

Moodys TPI:

Very high

S&P Category: 1

Source: Rating agencies, Danske Markets

Table 41. Financial information

(Danske Bank)

DKKm 2010 2009

Net interest income 35,983 47,542

Fees and commissions 8,089 7,242

Net gains/losses 5,984 14,101

Pre-provision income 20,267 30,432

Loan losses and provisions 13,817 25,677

Operating profit 6,450 4,755

Cost/income ratio 56% 49%

Core capital ratio 14.8% 14.1%

Total capital ratio 17.7% 17.8%

Source: Danske Markets

Table 42. Further information

Bond ticker

Website

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

DANBNK

www.danskebank.com

www.danskeresearch.com


Realkredit Danmark

together with a permission request to the Danish government that Danske Bank is allowed

to prematurely repay the hybrid capital loan issued by the government during the

financial crisis.

Business model and funding profile

RD is a specialist mortgage bank subject to supervision by the Danish FSA. RD’s

objective is to carry out business as a mortgage bank, including any kind of business

permitted by the Danish Mortgage Act. RD’s principal market is Denmark. In addition,

RD provides loans secured on real estate in the Faroe Islands, Greenland and Sweden and

has previously provided loans secured on property in France, the UK and Germany. RD’s

core markets in Denmark are residential housing – defined as lending for the financing of

owner-occupied housing and holiday homes – and the corporate market, which comprises

loans to customers with property in urban trade, agriculture and residential rental

property.

All mortgages included in the cover pool are distributed through the branch networks of

Danske Bank, the joint finance centres and the wholly-owned real estate agent ‘home’ in

Denmark.

A management agreement exists between RD and Danske Bank, stating the following:




The branch that originated the mortgages is responsible for all handling of customers.

Danske Bank covers all losses (with a LTV of 60-80%) on mortgages originated at

Danske Bank branches.

RD receives all payments directly from customers. In turn, RD pays provisions to

Danske Bank.

As of Q1 11, loss guarantees issued by Danske Bank amounted to DKK48bn, of which

only 13% (DKK6.2bn) are being utilised. All mortgages are transparent (pass-through),

which means that consumers have a delivery option on the underlying bonds. Interest

reset loans are funded by a portfolio of fixed-rate non-callable bonds, while other types of

mortgages are funded individually by issuing bonds with exactly the same characteristics

as the mortgages.

Mortgages backing covered bonds issued by RD are divided into different cover registers

(capital centres). About half of the entire mortgage book is included in the newlyestablished

Capital Centre S. According to the revised Mortgage Act, new SDROs must

be issued out of separate capital centres. Therefore, since July 2007 SDROs have been

issued out of the new Capital Centre S, and existing series in the General Capital Centre

were closed at the end of 2007. The existing series will be grandfathered according to the

Capital Requirement Directive (CRD).

Cover pool and asset quality

As of Q2 2011, the cover pool for Capital Centre S totalled DKK472bn and comprised

primarily Danish-based mortgages. These are secured on residential (74%) and

commercial mortgages (15%). Of the assets in the pool, 12.5% carry a fixed interest rate.

Current OC is 10.3%. Geographically the pool is well diversified across Denmark. The

pool has an average seasoning of 38 months and a weighted average LTV of 64%. The

LTV is capped at 80% for residential and 60% for commercial mortgages.

Table 43. Funding profile (Danske

Bank)

Total assets

DKK3,214bn

Retail deposits 13%

Corporate deposits 23%

Market funds 43%

Interbank 13%

Subordinated debt 3%

Equity 4%

Source: Danske Markets

Table 5. Cover pool info

Capital Centre S

DKK472bn

Average loan size -

OC 10.3%

WA LTV -

WA Indexed LTV

64% LTV

LTV > 80% 4%

WA Seasoning

38 months

Arrears (>6 months) 0.6%

IO-mortgages 0%

Fixed rate loans 12.5%

Geography

Primarily Denmark

- Copenhagen area 37%

- Sealand 18%

- Western region 26%

- Southern region 19%

Asset type

- Residential 74%

- Commercial 26%

Source: Danske Markets

27 | August 2011

www.danskeresearch.com


Investment Research

September 2011

Finnish Covered Bonds

Kiinteistövakuudellinen joukkovelkakirjalaina

Background

In December 1999, the Finnish Parliament passed the Act on Finnish Mortgage Banks

(MB). However, it took several amendments before the first Kiinteistövakuudellinen

joukkovelkakirjalaina (mortgage backed covered bond) was issued in 2004.

The major milestones in the evolution of the Finnish Mortgage Act were as follows. In

December 1999 the first Mortgage Act was passed. In October the following year,

amendments were made to the act. The primary goal was to clarify investor rights in the

event of default. The most significant amendments were as follows.

16

14

12

10

8

6

4


Insolvency proceedings were improved.

Substitution assets were capped at 20%.

In January 2003, the Mortgage Act was again revised in order to strengthen its

effectiveness. The main amendments were as follows.

2008

2

0



ALM requirements were introduced.

A 10% cap on commercial loans in mortgage-backed covered bonds was imposed.

Aktia Real Estate Mortgage Bank (Aktia MB) was the first issuer of covered bonds in

June 2004, though Sampo Housing Loan Bank (Sampo HLB – now part of Danske Bank)

soon followed suit in 2005 with the first Finnish benchmark-sized covered bond. At the

end of May 2007, OP Bank Group Mortgage Bank (OP MB) became the third Finnish

issuer with an inaugural 5Y EUR1bn issue.

In 2010, the Finnish Mortgage Act was subject to a larger revision. The changes and

clarifications that came into effect on 1 August 2010 include the following.








Abandoning of the specialist bank principle.

Maximum LTV for residential mortgages to be raised to 70%, from 60% (commercial

lending unchanged at 60%).

Derivatives counterparties will now rank pari passu covered bond holders.

One cover pool for both mortgages and public loans instead of separate cover pools.

Cash can be used as substitute assets but substitute assets still limited to 20% of total

cover pool.

Loans with LTV ratios above 60% shall no longer be restricted to one-sixth of the

issuer’s mortgage portfolio.

Clarification of the administrator’s rights post default, including the possibility of

raising liquidity (the insolvency process will be written directly into the covered bond

act instead of relying on references to, for example, the general banking law).

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Finnish Covered Bonds

Key elements of the Mortgage Act

As in Denmark and Sweden, the specialist banking principle has been abandoned and

universal banks can receive a licence to issue covered bonds. Collateral assets may

include residential and commercial mortgages, public loans, derivatives and substitute

assets.

Up to 20% of substitution assets is allowed but only on a temporary basis. ABS and

RMBS are not considered eligible as substitution assets. Consistent with UCITS 52(4)

requirements, the issuer will be subject to special public supervision. The issuer must

keep a cover register of collateral (including open hedge positions) and bonds issued. So

far, only mortgage-backed covered bonds have been issued (without commercial

collateral).

Further, LTV ratio limits are 70% for mortgage and 60% for commercial loan. Loans

with LTV ratios of up to 100% are allowed in the cover pool but will not be accounted for

in any matching tests performed.

The valuation of cover assets must be carried out prudently and any assessment must be

on an individual basis. Properties in the cover asset pool must be valued on an ongoing

basis: commercial properties every year and residential properties every third year.

Eventually, if LTV ratio limits are breached the issuer is obliged to include substitution

assets in the cover asset pool.

Mandatory minimum over-collateralisation (O/C) is not required by law. However,

current issuers have contractually committed themselves to maintain minimum O/C.

Voluntary O/C provided is protected by Finnish law if registered in the cover pool.

Asset segregation is secured through the cover register. Regarding bankruptcy

proceedings, the preferential right to cover assets is explicitly stipulated. Therefore, in

the event of mortgage bank insolvency, bondholders have a statutory preferential right to

the cover pool. Swap counterparties rank pari passu with bondholders respecting claims

on the cover pool.

The law explicitly defines the mandatory procedures to be followed in the event of

bankruptcy as well as those necessary to ensure punctual payments. As in Germany, after

an issuer has been placed in liquidation or declared bankrupt, the Finnish FSA is required

to appoint an attorney to supervise the interests of bondholders. Note that an issuer

default does not prompt an acceleration of covered bonds or a determination of derivative

contracts. The attorney shall in particular supervise the management of funds placed as

collateral for bonds and their conversion into cash as well as contractual payments to be

made to bondholders. A bankruptcy trustee shall, if required by attorney, conclude

derivatives contracts necessary to hedge against risks relating to bonds and sell collateral

for the bond in order to fulfil the obligations relating to the bond. In addition, the trustee

may, by permission of the attorney, transfer liability for a bond and funds placed as its

collateral to another mortgage bank. The trustee may convey the collateral for a bond

only after he has obtained permission from the FSA. Should funds prove insufficient to

honour the bondholder’s claims, the covered bonds will accelerate. Any unfulfilled claim

will rank pari passu with other creditors.

In respect of ALM requirements, the law states that the value of the cover pool,

including derivatives, must exceed the value of outstanding bonds issued. Bonds, loans,

substitute assets and derivatives must be calculated at book value.

The issuer shall continually ensure that the remaining average maturity of the covered

bonds is shorter than the remaining average maturity of the cover assets. The average

term to maturity is calculated as the present-value weighted average of the terms to

maturity of a contract’s remaining (nominal) cash flows (derivative contracts included).

29 | September 2011

www.danskeresearch.com


Finnish Covered Bonds

The total amount of interest received from the cover assets shall, during any 12 months,

exceed the total amount of interest payable on the covered bonds during the same period.

This must happen while taking into account the possibility of 100bp parallel shifts in the

yield curve. No currency risk is accepted (hedging allowed).

Issuers and credit quality

Following the abandoning of the specialist principle Nordea Bank Finland in 2010

introduced the first covered bond programme from a universal bank. Furthermore, in

2010 Danske Bank decided to revive its Sampo Housing Loan Bank Covered Bond

programme after being dormant for more than four years. Hence, the number of Finnish

issuers has doubled over the last year.

In general, we regard the credit quality of Finnish covered bonds as very high, a view

supported by key data in the following tables.

Table 44. Finnish covered bond issuers

Issuer Issuer rating (M/S/F) CB rating (M/S/F) Moodys TPI Moodys Collateral score SP category

Aktia MB NR Aa1/-/- Probable 5.8% 2

OP MB NR Aaa/AAA/- Probable-High 4.2% 2

Nordea Aa2/AA-/AA- Aaa/-/- Probable 5.7% 2

Sampo NR Aaa/-/- Probable-High 3.3% 2

Source: Rating agencies

Table 45. Cover pool overview

Aktia MB

OP MB (A/B)

Nordea Bank

Finland Sampo HLB

Cover pool (EURbn) 3.4 4.6/1.8 8.8 3.5

Average loan size 79 48,000/66,000 58,500 -

WA LTV 56% 46%/56% 51% 41% (indexed)

Seasoning 28 months 55/39 months 47 months 52 months

NPL 0% 0%/0% 0% 0.2%

Geography Only Finland Only Finland Only Finland Only Finland

Source: Danske Markets

Outlook for the Finnish economy

Finnish economy has been recovering from the recession in 2009, which was driven

mainly by a massive fall in exports. GDP rose 3.6 per cent in 2010, and a broad based

recovery continued during the first half of 2011. Exports have bounced back to pre-crisis

level in most industries, except in investment goods, and private consumption has risen

on the back of improving employment. Housing market survived the recession well and

housing prices have continued to rise. Prices of old flats and terraced houses went up by

1.1 per cent q/q or 3.2 per cent y/y during the second quarter 2011. Financial market

volatility and moderation in leading indicators give a reason to be cautious about the

outlook for late 2011 and 2012. Finnish exports have a high weight in cyclical industries,

such as metal engineering and forest industries. Even faced with tougher export market,

Finnish economy has also several strengths. Well capitalised banks, low interest rates and

healthy corporate balance sheets help to cushion the impact on employment and housing

market. Public finances do not give reason for worries in the short term, although an

austerity package with both tax increases and expenditure cuts is going to be implemented

in 2012. Economic outlook is very uncertain; as a main scenario GDP is forecast to rise

nearly 3% y/y in 2011 and clearly less than 2% y/y in 2012. Weak growth will not create

enough jobs and unemployment rate is projected to stay around 7-8 per cent in 2011-

2012. Inflation is set to fall from well above 3% in 2011 to below 3% in 2012. Despite

stagnant outlook, low interest rates and limited construction can be expected to support

the housing market. Overall, we expect fairly stable prices in 2011-2012.

Finnish Economy

10 % 2000=100

9

8

Unemployment sa. la.

7

10 yr Benchmark interest rate

6

5

Houseprices ra.

4

3

2

00 02 04 06 08 10

Source: Danske Markets

170

160

150

140

130

120

110

100

90

30 | September 2011

www.danskeresearch.com


Investment Research

August 2011

Aktia Mortgage Bank

Kiinteistövakuudellinen joukkovelkakirjalaina

Company profile

Helsinki-based Aktia Real Estate Mortgage Bank (Aktia MB) is a specialised mortgage

bank founded in 2001 by Aktia Savings Bank. In 2005, ownership was expanded to

include 32 Finnish savings banks while in 2006 a total of 36 local cooperative banks

joined. Aktia Savings Bank owns 70% of the voting rights, and savings banks and

cooperative banks own 20% and 10%, respectively. As a result, Aktia MB is regarded as

a core subsidiary of Aktia Savings Bank. In 2008, Aktia Savings Bank changed its name

to Aktia Bank and the group’s parent company to Aktia. On 29 September 2009, Aktia

became a listed company, which it had worked to become since 1995.

Bilingual (Swedish and Finnish) Aktia Bank is a member of the Aktia Group, which,

besides Aktia MB, includes Aktia Asset Management Oy Ab, Aktia real estate brokerage,

Aktia Fund Management Ltd and Aktia Kort & Finans Ab. Aktia Bank’s market share of

mortgage lending was 13% as of Q1 11.

As a specialist mortgage bank, the sole purpose of Aktia MB is to grant mortgage loans to

private individual customers of its partner banks, and to fund them by wholesale market

operations. Over 300 local bank branches originate loans, which represent collateral for

Aktia MB’s covered bond issuance. All customer service functions and loan-related

issues are managed locally by partner banks, while administration, risk management and

financing are transacted centrally by Aktia MB staff.

Aktia Bank has a long-term credit rating of A1 from Moody’s. Aktia MB’s issuer rating is

unpublished. However, on 25 May 2009, Moody’s announced that the covered bond

rating was constrained by Aktia MB’s issuer rating and its TPI (Probable). Its covered

bonds were subsequently downgraded from Aaa to Aa1.

Table 46. Ratings

CB rating (M/SP/F)

Aa1/-/-

Issuer rating (M/SP/F)*

A1/-/-

Fitch D-factor: -

Fitch supporting O/C -

Moodys C-score: 5.8%

Moodys TPI:

Probable

S&P Category: 2

Source: Danske Markets, rating agencies

* Aktia Banks rating

Table 47. Financial information

EUR millions 2010 2009

Net interest income 149.2 152.4

Fees and commissions 51.2 40.7

Net gain/losses 1.5 0.3

Operating income 202.3 196.7

Operating profit 70.8 54.2

NPL 0.54% 0.55%

Cost/income ratio 59% 57%

Core capital ratio 10.1% 9.5%

Total capital ratio 15.9% 15.9%

Source: Danske Markets, Aktia Bank

Table 48. More info

Financial performance

In 2010, Aktia Bank increased total income by 3% from EUR197m (2009) to EUR202m,

with net interest income accounting for EUR149m (2009: EUR152m). Further,

commissions rose by EUR10.5m to EUR51.2m in 2010. Overall, Aktia Bank achieved an

increase in operating profit of 30% going from EUR54.2m (2009) to EUR70.2m (2010).

As a result of the positive development in operating profit, Aktia Bank improved its core

capital ratio by 0.6 percentage points, so that it now stands at 10.1%, while the total

capital remained unchanged at 15.9%.

Bond ticker:

Web site:

Source: Danske Markets

AKTIA

www.aktia.fi

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Aktia Mortgage Bank

Business model and funding profile

Previously, Aktia MB was limited to an issue size of EUR250m. However, in 2008, the

programme was updated and restrictions on size and maturity abolished. Consequently,

Aktia MB can now issue benchmark bonds. The size of the covered bond programme was

therefore doubled to EUR4bn. During 2009, Aktia MB printed a EUR125m 3Y floater

(February) and a EUR600m 5Y fixed rate (June) with a 4.25% coupon. In 2010, Aktia

MB had two issuances: a EUR500m 5Y 3%, and a 3Y 2% of similar size.

Out of its EUR5bn programme, covered bonds secured by residential real estate have

been issued for an amount of EUR2.875bn. Further, under a EUR500m domestic bond

programme, EUR308m have been issued.

Table 49. Funding profile (Aktia MB)

Covered bonds 83%

Liabilities to banks 11%

Other liabilities 2%

Equity and sub. Debt 4%

Source: Danske Markets, Aktia MB

Aktia MB hedges the vast majority of its loan portfolio with interest rate swaps. Aktia

Bank is the counterparty in all derivatives contracts.

Aktia MB aims to fund some 75% of its loan portfolio through covered bonds. Other

sources of financing include unsecured bonds, debenture loans and short-term financing

from other banks.

Cover pool and asset quality

Aktia MB’s total eligible cover pool collateral was EUR3.4bn as of June 2011, of which

EUR3.3bn represent Finnish first-lien mortgages and EUR0.1bn are substitution assets

qualifying as collateral for covered bond issuance. The weighted average LTV on the

entire loan portfolio was 56% as of June 2011. The average size of housing loans granted

was EUR78,500 and the largest individual loan was EUR1.5m. No loan losses were

booked during the period.

Current OC is 17.5%, which is well above the committed level of 8.5%.

Table 50. Cover pool info

Cover pool

EUR3.4bn

OC (committed) 17.5% (8.5%)

Average loan size

EUR78,500

WA LTV 56%

Seasoning

28 months

NPL 0%

Floating rate 77%

IO-mortgages 0%

Geography

Only Finland

-Southern Finland 57%

-Western Finland 33%

-Eastern Finland 4%

-Northern Finland 6%

Asset type

-Residential 94%

-Multi-family

-Substitute assets

3%

3%

Tier 1 ratio 7.6%

Total capital ratio 9.8%

Source: Danske Markets, Aktia MB

32 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Nordea Bank Finland

Kiinteistövakuudellinen joukkovelkakirjalaina

Company profile

Nordea Bank Finland (NBF) is the largest bank in Finland with market share exceeding

30% in both mortgage and corporate lending. The bank also engages in other core areas,

such as private banking, mutual funds, pension and insurance. The Nordea franchise is

organised at a group level. NBF is a wholly-owned subsidiary of Nordea Bank AB, which

forms part of the Nordea Group. Nordea was established relatively recently, in 2000. In

1997, Swedish Nordbanken merged with Finnish Merita Bank to form

MeritaNordbanken. In 2000, Danish Unibank merged with MeritaNordbanken, which at

the same time changed its name to Nordea. Later in 2000, the Norwegian-based

Christiania Bank joined the newly-formed Scandinavian banking group. Today, Nordea is

the largest bank in Scandinavia with activities in Scandinavia, the Baltic region, Poland

and Russia.

Nordea’s main business areas include retail banking, corporate banking, asset

management, life insurance & pensions and mortgage finance.

NBF is licensed by the Finnish FSA to issue covered bonds pursuant to the Finnish

Covered Bond Act (688/2010). NBF issues these covered bonds directly from its balance

sheet, as this is permitted under the Finnish Covered Bond Act – for non-specialist

mortgage banks this was not the case under the previous legislation.

The bank’s corresponding long-term ratings by Moody’s/S&P/Fitch are Aa2/AA-/AA-.

Covered bonds issued by NBF enjoy an Aaa-rating from Moody’s.

Financial performance

2010 proved a good year for Nordea Group. On the bottom line it managed to increase

operating profit by EUR 0.5bn to a 2010 result of a EUR3.5bn. The increase on the 2009

result is mainly driven by an increase in fees and commission income of EUR 0.5bn, and

net loan losses being reduced by 40% to a 2010 level of EUR 0.9bn (2009: EUR1.5bn).

Business model and funding profile

NBF is a universal bank, licensed by the Finnish SFA to issue covered bonds, which it

uses to fund its mortgage lending business. As of December 2010, the total loan book of

NBF amounted to EUR71bn, out of which EUR24bn was mortgage loans. The main

funding source for NBF is its deposits, which account for more than 60% of the balance

sheet. With an amount of some EUR40bn, issued debt makes up roughly 21% of the

balance and out of this covered bonds issued in 2010 account for EUR2bn (a 5y

maturity). As of 30 June 2011, a further EUR3bn in benchmarks have been issued

distributed on EUR1bn in a 10y deal and EUR2bn in a 3y deal. Total covered bonds

outstanding as of 30 June 2011 are EUR5.5bn.

Table 51. Ratings

Covered bond rating:

Aaa/-/-

Issuer rating:*

Aa2/AA-/AA-

Fitch D-factor: -

Moodys C-score: 5.6%

Moodys TPI:

Probable

Source: Rating agencies, Danske Markets

* Rating of Nordea Bank Finland

Table 52. Financial info (Nordea

Group)

EURm 2010 2009

Net interest income 5,159 5,281

Fees and commissions 2,156 1,693

Net gain/losses 1,837 1,946

Pre-provision income 4,452 4,513

Loan losses and provisions 879 1,486

Operating profit 3,573 3,027

NPL 1.5% 1.5%

Loan loss coverage 59.1% 58.3%

Cost/income ratio 52% 50%

Core capital ratio 9.8% 10.2%

Total capital ratio 11.5% 11.9%

Source: Nordea, Danske Markets

Table 53. More information

Bond ticker

Website

Source: Danske Markets

Table 54. Funding profile (NBF)

NBHSS

www.nordea.fi

Total balance

EUR190bn*

Deposits, public 29%

Deposits, credit inst. 32%

Debt securities 21%

Equity 6%

Other 12%

Source: Nordea, Danske Markets

*Excl. derivatives.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Nordea Bank Finland

Cover pool and asset quality

As of 30 June 2011 NBF’s cover pool stood at EUR8.8bn, comprising 150,000 loans of

which none are in arrears, and with an average LTV of 56%. With nominal outstanding

covered bonds of EUR5.5bn, the OC level is currently 60%. The vast majority of the

loans are located in the Uusimaa area (39%) and have a variable interest rate (93%). The

remaining cover pool is geographically well diversified, with only three individual areas

accounting for shares between 10% and 5% of the loan book. Residential assets make up

98% of the cover pool.

Table 55. Cover pool information

Cover pool

EUR8.8bn

OC (required*) 60% (2%)

Average loan size

EUR58,573

WA LTV 56%

WA LTV, indexed 51%

WA seasoning

47 months

NPL 0%

Property type

-Single family houses 46%

-Tenant owner units 49%

-Vacation houses 2%

-Commercial 1%

-Public sector 1%

Fixed rate loans 7%

Geography

100% Finland

-Uusimaa 39.1%

-Pirkanmaa 9.5%

-Pohjois-Pohjanmaa 6.9%

-Vaasan rannikkoseutu 5.7%

(remaining < 5%)

Source: Nordea Finland, Danske Markets

* Required by the Finnish Covered Bond Act.

34 | August 2011

www.danskeresearch.com


Investment Research

August 2011

OP Mortgage Bank

Kiinteistövakuudellinen joukkovelkakirjalaina

Company profile

OP Mortgage Bank (OP MB) is incorporated as a public limited company in Finland and

is a wholly-owned subsidiary of the OP-Pohjola Group (previously OP Bank Group). OP

MB was established in 2000 as a mortgage bank under the Act governing mortgage credit

banks. OP MB’s sole purpose is to issue covered bonds backed by domestic, Finnish

mortgages. As all OP MB operations are essentially supported through services from the

Central Cooperative and its group companies, OP MB has only a very limited number of

employees.

The OP-Pohjola Group is the largest financial services group in Finland, providing banking,

asset management and insurance services. The group has more than four million customers,

nearly a third of which are also owner-members of the cooperative banks. The OP-Pohjola

Group has market share of more than 30% in both deposits and loans. The group consists of

OP Group Central Cooperative (OP Bank Group Central Cooperative, until 21 April 2008),

the group’s central institution and its subsidiaries, Pohjola Bank (previously OKO Bank)

including non-life insurance company Pohjola Insurance, OP Life Assurance Company,

Helsinki OP Bank, OP Mortgage Bank, OP-Kotipankki and more than 200 member

cooperative banks. The OP-Pohjola Group is mainly in charge of control and supervision of

risk management, capital adequacy and liquidity of all member banks, and also provides

centralised services including product development and strategic guidelines for efficiency

and competitiveness. However, all member banks remain independent and responsible for

implementation of their own strategies within the group’s defined risk and financial limits.

The group is supervised on a consolidated basis. The member banks and the Central

Cooperative are responsible for each other’s liabilities and commitments, resulting in

joint and several liabilities for the OP-Pohjola Group and member credit institutions

(note: therefore only banking operations, Pohjola Insurance and OP Life Assurance

Company are not included). Joint liabilities are acknowledged by rating agencies. These

joint liabilities do not interfere with the priority rights of covered bond holders. OP MB is

well consolidated with Tier 1 capital/total capital ratios of 8.6% (2009: 8.6%) and 9.7%

(2009: 9.8%) respectively. The parent bank in the OP Pohjola Group (Pohjola Bank plc)

has long-term ratings of Aa2(n), AA- and AA-(n) by Moody’s, S&P and Fitch,

respectively.

Table 56. Ratings

CB rating (M/SP/F):

Aaa/AAA/-

Issuer rating:

Aa2(n)*/-/-

Fitch D-factor: -

Fitch supporting O/C -

Moodys C-score (A/B)**: 2.7%/4.2%

Moodys TPI (A/B)**:

Probable/

Probable-High

S&P Category: 2

Source: Danske Markets, rating agencies

*: Parent rating (Pohjola Bank)

**: Two different cover pools.

Table 57. Financial info (Pohjola Bank)

EUR millions 2010 2009

Net interest income 258 241

Fees and commissions 164 143

Pre provision income 412 393

Loan losses and provisions 104 129

Operating profit 308 264

Profit 229 194

Cost/income 35% 35%

Problem loans/total loans 0.2% 0.3%

Tier 1 capital ratio 12.5% 11.8%

Capital adequacy ratio 13.3% 13.5%

Source: Danske Markets, Pohjola

Table 58. More information

Bond ticker:

Web site:

Source: Danske Markets

POHBK

www.pohjola.fi

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


OP Mortgage Bank

Business model and funding profile

Prior to its five-year EUR1bn inaugural covered bond issue in 2007, OP MB was mainly

funded by loans from Pohjola Bank plc. Since then, OP MB has issued three additional

covered bonds – in November 2009 (EUR1.25bn), June 2010 (EUR1bn) and April 2011

(EUR1bn) – all with fixed coupons and five-year maturities. OP MB is expected to keep

issuing benchmark covered bonds regularly. Besides its covered bonds, MB has also

issued bonds to the public on a small scale.

Prior to the introduction of the Finnish Covered Bond Act of 2010 (the CBA), OP MB

established a EUR10bn covered bond programme pursuant to the Finnish Act on

Mortgage Credit Banks – out of the four covered bond issuances by OP MB, the first

three were issued under this programme. However, following the introduction of the

CBA, issuance out of the old programme was brought to an end and a new EUR10bn

programme was established, under which the most recent OP MB covered bond was

issued in April 2011.

OP MB’s loan portfolio increased to EUR5bn in 2010 from EUR4.4bn in 2009 with a

significant part of the rise resulting from the purchase of housing loans from member

banks in the OP-Pohjola Group in May and October 2010.

OP MB has hedged its entire loan portfolio with interest rate swaps. Pohjola Bank plc is

the counterparty in all derivative contracts.

Cover pool and asset quality

As of the covered bond series of April 2011, which was issued under the newly

established programme following the CBA, a new cover pool (cover pool B) was created.

Covered bonds issued prior to the introduction of the CBA are backed by the assets in OP

MB’s cover pool A. OP MB is required through the CBA to keep an over-collateralisation

(OC) level of no less than 2%, but has committed itself to maintain a voluntary OC of

5%.

Some mortgage loans included in the cover pools benefit from a state guarantee. The

Finnish government offers a state guarantee on mortgages for home purchases. However,

it covers only a maximum of 25% of the loan value and reduces in line with the loan as it

amortises.

As of March 2011, cover pool A totalled EUR4.6bn. The cover pool consists of 100%

first-lien Finnish residential mortgages with an average loan size of EUR48,000. Of these

mortgages, 98.1% are written on floating-rate loans. Geographically, the cover pool is

well diversified. The cover pool is dynamic but OP MB intends to include only Finnish

residential mortgage loans granted to individuals, with loans to housing associations

therefore excluded. The unindexed LTV level for the cover pool is relatively low,

standing at 46% (in March 2011). Furthermore, the OC level is well above the committed

5%, standing currently at 41.8% (March 2011).

Cover pool B comprises total assets worth EUR1.8bn, consisting of 100% Finnish

residential first-lien mortgages, with an average loan size of roughly EUR66,000. The

larger average loan amount, compared with cover pool A, is reflected in the higher LTV

ratio of 56% compared with 46% for cover pool A. The OC level stands at a very high

80.1%, but this should be seen in the light of the fact that there has only been one covered

bond issuance out of this pool. All loans in cover pool B are floating-rate loans.

Table 59. Funding profile, OP MB

Covered Bonds 63%

Liabilities to fin. Inst. 32%

Other liabilities 2%

Equity and sub. Debt 3%

Source: Danske Markets, OP MB

Table 60. Cover Pool A (old)

Cover pool

EUR4.6bn

OC (committed) 41.8% (5%)

Average loan size

EUR48,000

WA LTV, unindexed 46%

Seasoning

55 months

NPL 0%

Floating rate 98.1%

IO-mortgages 0.6%

Geography

100% Finland

-Southern Finland 47%

-Western Finland 33%

-Eastern Finland 6%

-Northern Finland 14%

Asset type

100% residential

-Owner-occupied 98.6%

-Second/vacation home 1.4%

Source: Danske Markets, OP MB

Table 61. Cover Pool B (new)

Cover pool

EUR1.8bn

OC (committed) 80.1% (5%)

Average loan size

EUR65,978

WA LTV, indexed 56%

Seasoning

39 months

NPL 0%

Floating rate 100%

IO-mortgages 0.4%

Geography

100% Finland

-Southern Finland 38%

-Western Finland 40%

-Eastern Finland 10%

-Northern Finland 12%

Asset type

100% residential

-Owner-occupied 100%

Source: Danske Markets, OP MB

Moody’s and S&P have both assigned triple-A ratings to OP MB’s covered bond issues.

36 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Sampo Housing Loan Bank

Kiinteistövakuudellinen joukkovelkakirjalaina

Company profile

Helsinki-based Sampo Housing Loan Bank (SHLB) is a wholly owned subsidiary of

Sampo Bank plc (SB). Since February 2007, SB has been a wholly owned subsidiary of

Danske Bank, Denmark’s largest financial group with total assets (SB included) of

EUR431bn.

In September 2005, SHLB announced that it would establish a EUR5bn EMTN covered

bond programme. Under this programme SHLB issued the first Finnish EURdenominated

covered bond, backed by residential mortgages, the same year. To date,

SHLB has issued covered bonds with a total nominal value of EUR3bn, with EUR2bn

still outstanding.

As a specialist mortgage bank, the sole purpose of SHLB is to purchase mortgage loans

from SB and fund these by wholesale market operations, primarily through covered

bonds. SHLB itself does not grant loans. SB accounts for 14% of the Finnish residential

mortgage market.

Since SHLB is a specialist bank with no senior unsecured issuance, it has no senior

unsecured rating. For modelling purposes, Moody’s assigns SHLB an issuer rating

corresponding to that of SB, which stands at A1 with stable outlook (S&P: A(n)).

Financial performance

Sampo Bank Group reported pre-tax profit of EUR152.3m in 2010 – a EUR119.6m

increase from EUR32.7m in 2009. The increase was mainly due to a significant decrease

in loan impairment charges. Trading income also contributed to the positive result,

growing from EUR9.7m (in 2009) to EUR55.7m (in 2010). Net interest income in the

same period fell by 30% to EUR322m in 2010. Operating expenses remained steady at

EUR438m.

Table 62. Ratings

Covered bond rating:

Aaa/-/-

Issuer rating:*

A1/A(n)/-

Fitch D-factor: -

Moodys C-score: 3.3%

Moodys TPI:

Probable-High

Source: Danske Markets, rating agencies.

*Sampo Bank Plc rating.

Table 63. Financial information*

EURm 2010 2009

Net interest income 321.9 458.9

Fees and commissions 188.7 181.7

Net trading income 55.7 9.7

Operating income 623.3 698.0

Loan losses and provisions 32.7 227.3

Operating profit 185 260

Cost/income ratio 70.3% 62.8%

Core capital ratio 14.1% 14.3%

Total capital ratio 15.2% 15.5%

Source: Sampo Bank, Danske Markets

* Sampo Bank Plc

Table 64. More information

Bond ticker

Website

Source: Danske Markets

DANBNK

www.sampopankki.fi

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Sampo Housing Loan Bank

Business model and funding profile

As of 31 March, SB’s main funding source is retail deposits (66%). A long way second,

covered bonds only make up 9% of the total funding, but this percentage is expected to

grow in the future. SHLB has two outstanding covered bonds, each with an outstanding

amount of EUR1bn, and with maturities in September 2011 and December 2016.

Consistent with the mortgage act, SHLB has hedged the vast majority of the loan

portfolio with interest rate swaps. SB is the counterparty in all derivatives contracts.

SHLB issues covered bonds under the Finnish covered bond act (CBA) of August 2010.

Under the CBA, swap counterparties entered into the pool rank pari passu with

bondholders, thus making it more likely that replacement swap counterparties will be

willing to enter into hedging agreements with the issuer. Furthermore, covered bonds

issued under the CBA are fully UCITS and CRD compliant.

Table 65. Funding profile

Total assets

EUR26.2bn

Deposits 66%

Covered bonds 9%

Issued bonds 7%

Other 8%

Subordinated debt 2%

Equity 8%

Source: Danske Markets, Sampo Bank

Under the CBA, covered bonds may only be backed by residential mortgage loans with

an LTV of up to 70% of the market value of the property on which the mortgage is

written (60% for commercial). An OC of 2% is required.

Cover pool and asset quality

The cover pool comprises 99.8% Finnish prime residential mortgages with an average

indexed LTV of 40.75%. The remaining 0.2% is vacation homes, and hence the pool does

not comprise any commercial mortgages. Finnish covered bond legislation dictates an OC

of 2%, but currently it stands at 5% for SHLB’s covered bond programme. The

robustness of the SHLB cover pool is evident in the low collateral score from Moody’s

(3.3%) and the low average LTV.

Table 66. Cover pool info

Cover pool

EUR3.48bn

Average loan size -

OC (required) 5% (2%)

WA Indexed LTV 40.75%

Seasoning

52 months

Arrears 0.2%

IO-mortgages 0%

Geography

100% Finland

Floating rate 93%

Source: Danske Markets

38 | August 2011

www.danskeresearch.com


Investment Research

September 2011

Norwegian Covered Bonds

Obligasjoner med fortrinnsrett

Background

In 2002, the Norwegian Parliament introduced the Mortgage Act to facilitate the issuance

by mortgage institutions of bonds secured by mortgage loans. However, there were a

number of areas in the act that required further clarification.



There were uncertainties in the law regarding the separation of the cover pool from

the issuer bank in the event of the bank’s default. Covered bondholders only had a

priority claim over cover assets in the event of default by the issuer and not a statutory

right to the asset pool in that circumstance.

Bankruptcy proceedings – under the original version of the 2002 Mortgage Act,

mortgage institutes were subject to ordinary bankruptcy proceedings.

Furthermore, additional regulations had to be implemented in areas such as derivatives,

valuation, registration, auditing, liquidity and market risk. The first step to addressing

these issues was taken in January 2004, when a new set of rules was incorporated into the

Financial Services Act from 1988 that allowed the following.



All Norwegian financial institutions to securitise loan portfolios and obtain capital

relief under certain conditions.

Mortgage institutions to finance mortgage loans by issuing covered bonds.

In December 2006, a proposal for a new Mortgage Act was made. The proposal was

passed and became effective on 16 March 2007. In May 2007, secondary legislation was

passed.

Key elements of the Covered Bond Act

The specialist banking principle applies, allowing only specialised institutions restricted

in their business to issue covered bonds. This is also the case in Finland, Ireland and

France, while Germany, Sweden and Denmark have abandoned the principle. In

accordance with UCITS 22(4) requirements, the issuer will be subject to special public

supervision. The issuer must keep a cover register of the collateral (including open

hedge positions) and bonds issued. Collateral assets may include residential and

commercial mortgages, public loans, derivatives and substitute assets (up to 20%). On a

temporary basis, the FSA can allow up to 30% of substitution assets. The issuer may

decide to keep eligible assets in separate pools (residential, commercial and public loans)

or in a single pool. LTV ratio limits are 75% and 60% for mortgage and commercial

loans, respectively. RMBS is allowed in the cover pool and may comprise a maximum of

20%. Non-performing loans are allowed in the cover pool, yet they are not taken into

account when matching assets and liabilities. The valuation of covered assets must be

carried out in a prudent manner, must not exceed the market value and the assessment

must be made on an individual basis by an independent valuer.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Norwegian Covered Bonds

In respect of ALM requirements, the law states that the value of the cover pool,

including derivatives, must exceed the value of outstanding bonds issued. Bonds, loans,

substitute assets and derivatives must be calculated at market value, so there is only a

nominal match and no net present value match, as for example in Sweden and Germany.

No over-collateralisation (O/C) is fixed.

The issuer must set limits for interest rate risk (measured against subordinated capital)

allowing for the possibility of 100 basis points parallel shifts and twists in the yield curve

(divided into maturity classes). With respect to liquidity requirements, section 2-32 of the

revised Mortgage Act states that cash flow from collateral assets must at all times meet

scheduled payments of covered bondholders and derivatives’ counterparties. Secondary

legislation states only that an issuer must not take on more liquidity risk than can be

considered ‘secure’. Therefore, it is up to separate issuers to set liquidity limits. Currency

risk must be hedged but again secondary legislation does not state how much risk is

‘secure’. No stress test is mentioned.

With respect to the interest rate, liquidity and currency risk limits, we would have been

more comfortable if these were defined explicitly by law, as is the case in, for example,

Sweden, Germany and Denmark.

Asset segregation and bankruptcy proceedings in the old legislation were

unsatisfactory. Bondholders and derivatives counterparties only had a pledge to the cover

pool. In the revised Act, the preferential right to cover assets is explicitly stipulated.

Therefore, in the case of the insolvency of the mortgage bank, bondholders’ and

derivatives’ counterparties have a statutory preferential right to the cover pool.

Furthermore, the law explicitly defines the mandatory procedures to be followed in the

event of bankruptcy and procedures to ensure timely payments.

Credit quality

Until the outbreak of the financial crisis, the number of Norwegian issuers was limited.

However, the introduction of the swap facility at Norges Bank prompted many new

issuers. While many issuers initially issued only for the repo facility, increasing interest

from domestic investors over the last few years –fuelled not least by the incentives

provided in coming regulation such as Basel III/CRD4 and Solvency 2 – have resulted in

a rapid build-up of a domestic market for NOK covered bonds, though still far from the

size of the Danish and Swedish markets. Currently, the total outstanding amount of NOKdenominated

covered bonds is NOK400bn.

The credit quality of Norwegian banks and cover pools is very high illustrated by some of

the lowest observed collateral scores from Moody’s and many Norwegian issuers also

enjoy very strong TPIs.

Table 67. Norwegian covered bond issuers

Issuer Issuer rating (M/S/F) CB rating (M/S/F) Moodys TPI Moodys Collateral score Fitch D-factor

DNBNOR -/-/A+ Aaa/AAA/AAA Probable 7.5% 18.9%

SPABOL -/-/A- Aaa/-/AAA Probable High 3.4% 15.3%

STBNO - Aaa/-/- High 4.2% -

VESTBO -/-/A- Aaa/-/AAA High 6.9% 17.3%

TERBOL - Aa2/-/- High 2.6% -

KLP -/-/A- Aaa/-/AAA High 1.7% 16.6%

Source: Rating agencies

40 | September 2011

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Norwegian Covered Bonds

Table 68. Cover pool overview*

DnB Nor Sparebank 1 BK Sparebanken Vest Storebrand Terra

Cover pool (NOKbn) 422 86b 29 15 31

Average loan size (NOK) 1,039,000 1,082,000 945,000 1,240,000 1,300,000

WA LTV - 57% 53% 49% 52%

WA Indexed LTV 55% 50% - - 47%

Seasoning 52 months 31 months 32 months 38 months 18 months

NPL 0.12% 0.00% 0.0% 0.0% 0.0%

Geography Norway only Norway only Norway only Norway only Norway only

* KLP is not included in this overview due to a lack of cover pool data

Source: Danske Markets

Outlook for the Norwegian economy

It still appears that the Norwegian economy is moving into an expansion phase.

Growth in the mainland economy is above trend, and the labour market have been

tightening. We have nevertheless revised down our forecast for mainland growth in

2011 from 3.2 % to 2.7 % due to the global turmoil. At the same time, leading

indicators still suggest that economic growth will hold up in H2, fuelled by high oil

investment, low real interest rates and expansionary fiscal policy. A solid

improvement in the terms of trade will also bring strong demand for capital goods

and labour, which in turn spells substantial growth in real household disposable

income. Employment growth accelerated towards the end of last year, and

unemployment has fallen despite strong growth in the labour supply due to higher

labour immigration and participation rates. The housing market has become even

tighter. Prices are climbing, average time to sell is falling, and the stock-to-sales ratio

is at its lowest since 2006. However, the main driver behind rising housing prices

seem to be a strong growth in disposable income (chart). Rising house prices have

breathed life into homebuilding, which is having a clear impact on the construction

sector. The strong housing market has also brought higher growth in household

borrowing, although it remains moderate. Due to uncertain times abroad, it appears

that interest rates will rise more slowly than anticipated by Norges Bank in the June

MPR. Our current projections indicate that the next rate increase will come in

October or December, and four more next year.

Norwegian housing prices

7.0 % 2000=100

6.0

10 yr Benchmark

interest rates la.

5.0

4.0

3.0

Houseprices ra.

2.0

Unemployment

1.0

sa. la.

00 02 04 06 08 10

Source: Danske Markets

180

170

160

150

140

130

120

110

100

90

41 | September 2011

www.danskeresearch.com


Investment Research

August 2011

DnB NOR Boligkreditt

Obligasjoner med Fortrinnsrett

Company profile

DnB NOR Boligkreditt (DNBBOL) is a wholly owned subsidiary of the largest bank in

Norway, DnB NOR Bank ASA (DnB NOR). The Norwegian state owns 34% of DnB

NOR. Ownership is not active, with the state not represented on the board of directors.

The purpose of ownership is mainly to ensure that ownership of the major banks in

Norway remains in domestic hands. DnB NOR is a full-scale bank with retail and

corporate lending, life insurance, asset management and capital markets operations. DnB

NOR enjoys an approximate market share of 30% of both the retail and the corporate

market in Norway, with 2.2 million retail customers and 200,000 corporate clients.

Further, DnB NOR has international operations in Scandinavia, the Baltic region and

northern Europe. DnB NOR’s main business areas are retail banking and large corporate

& international corporate responsible for 61% and 28% of total income respectively.

DNBBOL’s sole purpose is to issue covered bonds backed by mortgages on retail

properties and public loans in Norway. DNBBOL was the first to issue covered bonds

according to the Norwegian Mortgage Act. All mortgages and public loans included in

the cover pool are distributed through the branch network of DnB NOR. The bank’s

extensive distribution network includes around 220 domestic DnB NOR branches.

DnB NOR is well consolidated with Core Tier 1 capital/total capital ratios of 10.1%/

12.4%. DnB NOR is rated Aa3/A+ by Moody’s/S&P.

Financial performance

2010 was the year in which DnB NOR reached its goal set in 2007 of a pre-tax preprovision

profit of NOK20bn. In 2010, it reported pre-provision profit of NOK21bn, and

doubled its profits with a result of NOK14bn, compared with NOK7bn in 2009. The yearon-year

improvement was mainly due to a 61% decline in provisions to NOK3bn in 2010

from NOK7.7bn in 2009. However, DnB NOR also saw improvements in net interest

income of roughly NOK0.8bn, along with a minor increase in income from financial

market activities.

Table 69. Ratings

Covered bond rating: Aaa/AAA/AAA

Issuer rating (M/SP/F)

-/-/A+

Moodys C-score: 7.5%

Moodys TPI:

Probable

S&P Category: 2

Source: Rating agencies, Danske Markets

Table 70. Financial information (DnB

NOR Group)

NOK millions 2010 2009

Net interest income 23,436 22,633

Fees and commissions 7,041 6,655

Net gain/losses 20,035 19,748

Pre-provision profit 21,081 18,716

Loan losses and provisions 2,997 7,710

Loan loss ratio 0.3% 0.7%

Operating profit (pre-tax) 18,108 11,032

NPL 1.55% 1.71%

Cost/income ratio 47.6% 48.4%

Core Tier 1 capital ratio 10.1% 9.3%

Total capital ratio 12.4% 12.1%

Source: DnB NOR, Danske Markets

Table 71. More info

Bond ticker:

Web site:

Source: Danske Markets

DNBNOR

www.dnbnor.com

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


DnB NOR Boligkreditt

Business model and funding profile

Historically, DnB NOR’s funding structure has been weighted towards retail deposits as

well as capital market funding in the form of, for example, an EMTN programme and a

US MTN programme. Going forward, covered bonds will be an important part of DnB

NOR’s funding.

As a specialist mortgage lender, DNBBOL has a very transparent balance sheet.

Liabilities consist almost entirely of covered bonds and only to some extent debt obtained

from the parent bank. Cover pool hedging contracts for the purpose of hedging currency

risk and interest rate risk are also with DnB NOR.

Table 72. Funding profile

Total assets

NOK1,862bn

Retail deposits 34%

Interbank loans & deposits 14%

Debt securities 27%

Subordinated debt 2%

Equity 6%

Other 17%

Source: Danske Markets

DNBBOL has a EUR45bn and USD8bn covered bond programme, and is expected to

issue covered bonds totalling around EUR5-6bn annually. In 2011, DNBBOL became the

first European issuer of covered bonds to issue in the Australian market with AUD0.6bn

in a 5Y maturity.

A management agreement exists between DNBBOL and DnB NOR concerning, among

other things:




Marketing, sales and distribution of loans, management of loans, product

development, issuing documentation and credit lines.

Short-term funding and management of liquidity and interest rate risk.

Sales of covered bonds and handling of derivatives.

The management agreement does not include any kind of loan loss guarantee from DnB

NOR to DNBBOL.

Cover pool and asset quality

As of 31 May 2011, the cover pool amounted to NOK422bn, representing 405,741

mortgages, and comprising entirely Norwegian residential mortgages. The geographical

distribution is well diversified with the majority in the Eastern part including Oslo (67%),

followed by Western Norway (16%) and North, South and Mid Norway (6.4%, 5.9% and

4.7%, respectively).

The current weighted average indexed LTV ratio is 55% which is significantly below the

LTV ratio limits set by the Norwegian Mortgage Act requiring retail loans to have an

LTV ratio of maximum 75% and commercial loans an LTV ratio of maximum 60%.

The share of floating rate loans is 94%. Rates on floating rate loans can be reset at any

time at the bank’s discretion by giving debtors six weeks’ notice.

Moody’s/S&P/Fitch all assign triple-A ratings to the covered bond programme.

Table 73. Cover pool info (DNBBOL)

Cover pool

NOK422bn

Average loan size

NOK1,039,000

OC 35.1%

WA Indexed LTV 55%

Seasoning

52 months

NPL (>90 days) 0.12%

Fixed rate loans 6%

Interest only loans 40%

Geography

100% Norway

-Oslo 20.3%

-Eastern (excl. Oslo) 46.6%

-Southern 5.9%

-Western 16.1%

-Mid 4.7%

-Northern 6.4%

Source: Danske Markets, DnB NOR Boligkreditt

43 | August 2011

www.danskeresearch.com


Investment Research

August 2011

KLP Kommunekreditt

Obligasjoner med Fortrinnsrett

Company profile

KLP Kommunekreditt is a wholly owned subsidiary of KLP Banken AS which in turn is

a wholly owned subsidiary of Kommunal Landspensjonskasse (KLP). KLP is the secondlargest

life insurance company in Norway with more than 700 employees and NOK272bn

in total assets. The main product provided by KLP is public sector occupational pensions,

servicing 330 municipalities, 2,500 corporate enterprises and 25 of Norway’s 27 health

enterprises; in total KLP’s pension schemes cover more than 300,000 active workers and

150,000 pensioners. KLP is owned by municipalities and county authorities, state health

enterprises, and other companies associated with the public sector.

KLP is not only a pension fund, as it also provides services within banking, insurance,

asset management and real estate through a number of subsidiaries: KLP Bedriftspensjon,

KLP Skadeforsikring, KLP Eiendom, KLP Kapitalforvaltning, KLP Fondsforvaltning,

KLP Forsikringsservice, KLP Bankholding (KLP Banken, KLP Kreditt, KLP

Kommunekreditt) and KLP Alternative Investments.

KLP is rated A2 by Moody’s and A- by S&P. In the latest rating report, S&P states that

“The ratings on Norway-based mutual insurer Kommunal Landspensjonskasse (KLP)

reflect its dominant position in the Norwegian public-sector pensions market, strong

capital adequacy, and improved financial management. The ratings are constrained,

however, by the company’s concentration in the Norwegian public sector and the

uncertain impact on KLP of the evolving competitive and regulatory landscape.” This is

very much in line with our view on KLP, albeit we also find its ability to make capital

calls on owners a key feature.

In December 2009, KLP Kommunekreditt issued its inaugural NOK3bn Norwegian

covered bond backed by public sector loans. The issue was a domestic private placement

and the covered bond is currently unrated. Since then, an additional NOK9.5bn and

SEK1bn worth of covered bonds have been issued.

Table 74. Ratings

Covered (M/SP/F)

Aaa/-/AAA

Issuer rating:

-/-/A-

Moodys C-score: 1.7%

Moodys TPI:

High

Source: Rating agencies, Danske Markets

Table 75. Financial information (KLP)

NOK millions 2010 2009

Premium income 20,959 19,404

Investment income 16,369 14,236

Claims -10,590 -10,365

Change insurance liabil. -15,394 -13,415

Funds for insurance -2,586 -2.427

contracts

Technical profit 503 776

Total profit 572 738

Capital adequacy 11.5% 12.0%

Core capital ratio 9.6% 9.2%

Source: KLP, Danske Markets

Table 76. More information

Bond ticker:

Web site:

Source: Danske Markets

KLPKOM

www.klp.no

Financial performance

In 2010 KLP’s profit amounted to NOK572m, with the bulk stemming from life

insurance (77%), followed by non-life insurance (14%), banking (6%) and asset

management (3%). Compared with 2009, the profit declined by 22% y/y. Over the same

period, KLP saw its capital adequacy ratio drop by 0.5 percentage points, and its core

capital ratio increase by 0.4 percentage points.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


KLP Kommunekreditt

Business model and funding profile

In June 2009, KLP bought Kommunekreditt Norge AS from Eksportfinans, and at the

same time sold its 20% stake in Kommunalbanken to the Norwegian state. This entity

was subsequently renamed KLP Kreditt, and a new entity named KLP Kommunekreditt

was established to issue covered bonds. KLP Kommunekreditt acquires public sector

loans from KLP Kreditt to be included in its cover pool to back the issuance of covered

bonds. It is KLP Kommunekreditt’s intention to rely on the covered bond market in order

to refinance both the existing portfolio of loans as well as future loans.

When it comes to derivatives contracts in connection with the issuance and maintenance

of covered bonds, KLP Kommunekreditt will only enter into agreements with

counterparties rated at least A2/A (M/ F). Further, substitute collateral will not make up

more than 20% of the cover pool, and is restricted to comprise (1) deposits in banks with

a minimum short-term rating of P1/F1 (M/F), (2) bonds and certificates issued by either

the Norwegian state, municipalities or counties, or (3) Norwegian covered bonds

(maximum amount: 20% of outstanding covered bonds). The cover pool’s maximum

exposure to a single municipality/county is capped at 5% of cover pool, and maximum

exposure to financial institutions is 15% of outstanding covered bonds.

Cover pool and asset quality

As per 31 March 2011, the cover pool stood at NOK16.4bn comprising NOK15.5bn

worth of public sector loans and NOK0.9bn worth of substitute assets (NOK489m in

deposits and NOK440m in bonds comprising bonds issued by municipalities and

Norwegian AAA-rated covered bonds). With a total covered bond issuance of

NOK13.6bn this is equivalent to an OC of 20%, which is well above the OC level of 16%

to which KLP Kommunekreditt has committed.

Only direct loans to a municipality or a county or loans with an unconditional and

irrevocable guarantee from such entity are included in the cover pool. Hence, we expect

the cover pool to be very strong by both national and international standards.

Table 77. Funding profile (KLP)

Total balance

NOK271.8bn

Provisions, life insurance 84%

Covered bonds 3%

Debt to fin. inst. 5%

Subordinated debt 1%

Other 7%

Source: Danske Markets

Table 3. Cover pool info

Cover pool

NOK16.4bn

Substitute assets

NOK929m

Average loan size

NOK24m

NPL 0%

Public sector loans 100%

Geography (incl. subst. assets) 100% Norway

Main concentrations:

-Møre & Romsdal 11.5%

-Rogaland 9.4%

-Sør-Trøndelag 8.7%

Committed OC 16%

Current OC 20%

Interest only loans 14%

Floating rate loans 100%

Source: Danske Markets

45 | August 2011

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Investment Research

August 2011

Sparebank 1 Boligkreditt

Obligasjoner med Fortrinnsrett

Company profile

SpareBank 1 Boligkreditt (SPABOL) is a separate legal entity owned by the banks in the

SpareBank 1 Alliance. The members of the alliance are SpareBank 1 Nord-Norge (A1/A

by Moody’s/Fitch), SpareBank 1 SMN (A1/A-), SpareBank 1 SR-bank (A1/A-),

Sparebanken Hedmark (Moody’s: A1), Samarbeidende Sparebanker (16 smaller saving

banks, NR).

The SpareBank 1 Alliance constitutes one of the largest financial institutions in Norway

with assets totalling NOK665bn and the second-largest retail mortgage lender. The

alliance employs 6,500 people in a total of around 350 branches, and services more than

1.1 million customers. In late-2008 the members of the alliance acquired Glitnir Bank

ASA (former BN Bank ASA) including BN Boligkreditt.

In 1996 the alliance founded SpareBank 1 Gruppen AS (SP1G). SP1G is an unlisted

financial holding company, which through its subsidiaries provides general and life

insurance, fund management and other financial products and services to members of the

alliance and their customers, as well as to members of the Norwegian Federation of Trade

Unions. In addition, SP1G has its own banking operations in Oslo, Akershus and

Hedmark through Bank 1 Oslo AS. The main owners are SpareBank 1 Nord-Norge

(19.5%), SpareBank 1 SMN (19.5%), SpareBank 1 SR-Bank (19.5%), Samarbeidende

Sparebanker AS (19.5%), Sparebanken Hedmark (12%) and the Norwegian Federation of

Trade Unions (10%).

SPABOL itself was established in 2005 and is an independent financial institution

supervised by the Norwegian FSA with the sole purpose of issuing covered bonds backed

by mortgages on retail properties and governmental loans in Norway. This involves

arranging the purchase and transfer of mortgages from constituent banks of the

SpareBank 1 Alliance and marketing the covered bonds to investors. SPABOL itself does

not originate loans.

Table 78. Ratings

Covered bond rating

Aaa/-/AAA

Issuer rating (M/SP/F)

-/-/A-

Moodys C-score: 3.4%

Moodys TPI:

Probable-High

S&P Category: 2

Source: Danske Markets

Table 79. Financial information

2010 2009

Net interest income N/A N/A

Fees and commissions N/A N/A

Net gain/losses N/A N/A

Pre-provision income N/A N/A

Loan losses and provisions N/A N/A

Operating profit N/A N/A

NPL N/A N/A

Loan loss ratio N/A N/A

Cost/income ratio N/A N/A

Core capital ratio N/A N/A

Total capital ratio N/A N/A

Source: Danske Markets

Table 80. More information

Bond ticker:

Web site:

Source: Danske Markets

SPABOL

www.sparebank1.no

Members of the SpareBank 1 Alliance are well consolidated. As of end-2010, the three

largest members all enjoy solid Tier 1 capital ratios; SpareBank 1 Midt-Norge (10.9%),

SpareBank 1 Nord-Norge (11.9% [end-2009]) and SpareBank 1 SR-bank (10.2%).

Financial performance

As the Sparebank 1 Alliance does not make a consolidated annual report on behalf of

underlying banks, we do not comment on the financial performance of these banks.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Sparebank 1 Boligkreditt

Business model and funding profile

In 2010 SPABOL issued some EUR4bn worth of covered bonds distributed as two NOK

issuances (NOK5bn), two EUR issuances (EUR2.25bn) and a single USD issuance

(USD1.5bn). So far, in 2011 SPABOL has issued a single EUR benchmark with a

notional of EUR1bn, a USD with a notional of USD1.25bn and a total of NOK3.5bn.

Going forward, SPABOL plans to issue at least one benchmark covered bond a year.

A management agreement exists between SPABOL and the savings banks. The

agreement states:





The savings bank that originated the mortgage is responsible for all customer handling

even in the case of bank default and is responsible for any economic loss due to

mishandling. In the event of a bank default, the savings bank will be put under public

administration and so continue to deal with customers. If a savings bank cannot

handle its own customers, the other savings banks are required to service them.

A savings bank can be asked to fund up to 15% of the portfolio it transfers at a fixed

rate (NIBOR 3M flat) at the time of transfer. SPABOL can set off any claim for such

a loan if it has a set-off right in respect of that claim.

SPABOL receives payments directly from customers. In turn, SPABOL pays

provisions to the savings banks. Provision payments are subject to a delay of 18

months. Eventually, it may deduct annual payments for credit default. Furthermore,

there is a loss of provision for single loans if a customer loan is sent for collection or

has been written off. Finally, there is a 50% deduction in payments for single loans if

the LTV ratio stays above 80% for more than three months.

A savings bank can decide to withdraw its portfolio with 12 months notice.

Cover pool and asset quality

As of 31 December 2010 the cover pool stands at NOK85.5bn and consists primarily of

Norwegian-based residential mortgages (NOK74.6bn = 87.25% of cover pool) but also

substitute assets (NOK10.9bn = 12.75%) comprising mainly treasury bills (NOK6.7bn)

and deposits (NOK2.1bn), but also covered bonds (NOK1.4bn) and other bonds rated

A/A2 or higher (NOK0.5bn).

The mortgage pool is 100% owner occupied, and all loans carry a variable rate. Holiday

houses account for 2.5% of the mortgages and the rest is all regular residential property.

The cover pool is very well seasoned with an average of 31 months. Geographically, the

pool is well diversified. The main concentrations are Rogaland (22%), Sør Trøndelag

(11%) and Akershus (8%). The current weighted-average indexed LTV ratio is 50%, and

with outstanding covered bonds at NOK75bn this equals an OC of 14%.

Table 81. Cover Pool Info

Cover pool

NOK85.5bn

Average loan size

NOK1,082,000

WA LTV 57%

WA Indexed LTV 50%

Seasoning

31 months

NPL 0.00%

O/C 14%

Interest only loans 37%

Geography

- Rogaland

- Sør Trøndelag

22%

11%

- Akershus 8%

Asset type

- Mortgages

- Substitute assets

Source: SPABOL, Danske Markets

87%

13%

47 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Sparebanken Vest Boligkreditt

Obligasjoner med Fortrinnsrett

Company profile

Sparebanken Vest Boligkreditt (VESTBO), the covered bond issuing subsidiary of

Sparebanken Vest Bank, was established on 22 May 2008. Sparebanken Vest (SVEG) is

an independent savings bank, incorporated in 1823, offering traditional banking services

to both retail and corporate clients. The bank is the leading financial services group in

western Norway, headquartered in Bergen, with strong ties to the local and regional

communities. In 2004, the bank left the Sparebank 1 Alliance, which consists of three

regional and several local savings banks, because it acknowledged the importance of

being a local bank rooted in the neighbouring community. SVEG will still distribute

products from the Sparebank 1 Gruppen but the sale of Sparebanken 1 Gruppen’s

insurance products has ended after the company recently set up two life and non-life

insurance companies (Frende Forsikring), as a joint venture with 13 other small savings

banks.

As per June 2010, SVEG had 63 branches, 221,000 retail customers and 8,500 corporate

clients. As a savings bank, SVEG has no owners or shareholders. The original ownership

structure was based on a foundation. Since 1987, Norwegian savings banks have been

allowed to issue PCCs (primary capital certificates) in order to obtain capital. PCCs have

almost the same characteristics as shares – being traded on the Oslo Stock Exchange,

taxed as shares and entitled to potential dividends – but they do not include real

ownership of assets in the bank. SVEG issued PCCs in 1995. SVEG is the third-largest

savings bank in Norway. The bank intends to remain independent as a standalone regional

bank and to act as a driving force in the development of the region.

During the second half of 2009, SVEG made an agreement with the Norwegian State

Finance Fund, which ensured a capital injection of NOK960m core capital in form of

hybrid capital. In the spring of 2010, the NOK960m was refinanced by the issuance of

new equity (NOK612m) and perpetual subordinated debt (NOK400m). These transactions

had no effect on SVEG’s capital adequacy.

Table 82. Ratings

CB rating (M/S/F)

Aaa/-/AAA

Issuer rating:

-/-/A-

Moodys C-score: 6.9%

Moodys TPI:

High

Fitch D-factor 16.4%

Source: Danske Markets

Table 83. Financial information

NOK millions 2010 2009

Net interest income 1,516 1,453

Fees and commissions -

Net gain/losses -

Pre-provision income 927 770

Loan losses and provisions 127 270

Pre-tax profit 800 500

NPL - -

Loan loss ratio 0.15% 0.32%

Cost/income ratio 0.56 0.60

Core capital ratio (B II) 12.2% 9.0%

Total capital ratio (B II) 15.0% 13.2%

Source: Sparebanken Vest and Danske Markets

Table 84. More information

Bond ticker:

Web site:

Source: Danske Markets

SVEG

www.spv.no

SVEG is rated A2 (stable) and A-(stable) by Moody's and Fitch.

Financial performance

Despite seeing only a small increase in net interest income (+4.3% y/y), SVEG increased

pre-tax profit by 60% from NOK500m in 2009 to NOK800m in 2010. This was mainly

attributable to a 52% reduction in loan losses and provisions. The positive result was

obtained after recording a record-high profit before write-downs of NOK927m. Further,

SVEG increased its efficiency, reducing the cost/income ratio from 0.60 in 2009 to 0.56

in 2010. The core capital ratio increased from 9.0% to 12.2% and the total capital ratio

increased from 13.2% to 15.0%.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Sparebanken Vest Boligkreditt

Business model and funding profile

SVEG’s funding base comprises 50% customer deposits but it is still relatively dependent

on wholesale funding. To manage its liquidity, SVEG focuses on a liquidity indicator and

a funding ratio. The liquidity indicator identifies the ratio of long-term funding (residual

maturity exceeding 12 months) to non-liquid assets (mainly lending), while the funding

ratio represents the ratio of deposits to lending. The bank targets maintaining a liquidity

indicator of 100% and a funding ratio of 55%. Liquidity is below that of European peers

but in line with its Norwegian counterparts. Norwegian banks traditionally enjoy strong

liquidity management. The bank targets a nine months structural liquidity, i.e. the period

the bank can operate without access to new funding.

Table 85. Funding Profile (the bank)

Total balance

NOK97bn

Deposits, credit institutions 13%

Deposits customers 50%

Securitised debt 27%

Subordinated loans 2%

Equity 6%

Others 1%

Source: Sparebanken Vest and Danske Markets

During 2008, SVEG transferred a NOK9bn mortgage loan portfolio to VESTBO and on

24 November 2008, VESTBO issued its inaugural NOK4.5bn covered bond. During

2009, SVEG transferred additional mortgage loans of NOK6.9bn to VESTBO. As of end-

2009, VESTBO had issued covered bonds worth NOK10.5bn, and as per end-May 2011

the total covered bonds issued amounted to NOK24.9bn backed by a loan portfolio of

NOK28.2bn plus a minor amount of substitute assets (NOK800m). In June 2010

VESTBO issued its first EUR-denominated covered bond – a 5Y EUR0.5bn. In February

2011 issued a similar EUR covered bond. Except for these two issuances, all other

covered bonds are NOK denominated.

Except for the inaugural issuance in 2008, all covered bonds have maturities of five years

or more as short-term funding is provided by the sponsor bank, SVEG.

Cover pool and asset quality

As of May 2011, the cover pool stood at NOK29bn, comprising a Norwegian firstranking

residential mortgage portfolio of size NOK28.2bn, plus roughly NOK800m in

substitute assets. All housing loans are backed by properties representing the main

residence of the borrower. The weighted-average LTV ratio of the pool is 52.5%. Eligible

first ranking residential loans may reach LTV ratios of up to 75% of the prudent market

value. The loan portfolio consists entirely of floating-rate loans of which none are

interest-only loans and the average seasoning is 32 months. There is no committed OC

level. However, current OC stands at 16.4%.

Moody’s and Fitch have both assigned triple-A ratings to the covered bond programme.

Table 86. Cover pool info

Cover pool

NOK29bn

Average loan size

NOK945,000

WA LTV 52.5%

Seasoning

32 months

Ineligible assets 0.23%

OC 16.4%

Interest only loans 0%

Variable rate loans 100%

Geography

-Hordaland 87%

-Sogn og Fjordane 5%

-Rogaland 4%

-Others 4%

Asset type

-Residential 100%

Source: Sparebanken Vest Boligkreditt and

Danske Markets

49 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Storebrand Boligkreditt

Obligasjoner med fortrinnsrett

Company profile

Storebrand Boligkreditt (formerly Storebrand Kredittforetag) is a wholly-owned

subsidiary of Storebrand Bank ASA (A3/BBB+; Moody’s/S&P), part of the Storebrand

Group (Baa3/BBB/BB+; Moody’s/S&P/Fitch). The Storebrand Group, originated in

1767, is currently a leading player in Nordic pensions, life and health insurance, banking

and asset management markets. Storebrand commenced sales of property and casualty

insurance products to the retail market in late-2006 and acquired the Swedish life

insurance and pension provider, SPP, in December 2007. The Storebrand Group has total

assets of NOK390bn as of 31 December 2010. Storebrand Bank’s objective is to be “the

smart choice for the modern customer”. The bank aims to be seen as a bank that is easy to

relate to with popular products at competitive prices.

Storebrand Boligkreditt’s (STBNO) sole purpose is to issue covered bonds backed by

mortgages on retail properties and public loans in Norway. STBNO was the fifth credit

institution in Norway to issue covered bonds under the terms of the Norwegian Mortgage

Act. All mortgages and public loans included in the cover pool are distributed through the

branch network of Storebrand Bank.

Storebrand Bank is well consolidated with Tier 1 capital/total capital ratios of 10.6% and

13.0%, respectively.

Financial performance

After tax, Storebrand Bank achieved a profit of NOK38m in 2010, which is a doubling of

the 2009 result. The increase in profits was mainly attributable to cost reductions (2010:

NOK351m; 2009: NOK391m), decreases in loan losses (2010: NOK15m; 2009:

NOK46m) and an increase in net interest income (2010: NOK457m; 2011: 423m).

As a group, Storebrand ASA turned a pre-tax pre-provision profit of NOK1.6bn for 2010,

which constitutes an increase of roughly NOK350m from its 2009 result of NOK1.25bn.

The main contributors to the 2010 result are the groups L&P services in Norway and

Sweden accounting for 55% and 29% of the profit respectively, followed by asset

management with 21% and on a fourth place banking operations with 10%.

Table 87. Ratings

Covered bond rating (M/SP/F) Aaa/-/-

Issuer rating: -/-/-

Moodys C-score: 4.2%

Moodys TPI:

High

S&P Category: 2

Source: Rating agencies, Danske Markets

Table 88. Financial information

(Storebrand Bank)

NOK millions 2010 2009

Net interest income 457 423

Fees and commissions 74 76

Net gain/losses -

Pre-provision profit 144 80

Loan losses and provisions 15 46

Operating profit 129 35

NPL 2.02% 2.45%

Loan loss ratio 0.04% 0.12%

Cost/income ratio 68% 71%

Core capital ratio 10.6% 10.4%

Total capital ratio 13.0% 13.5%

Source: Storebrand, Danske Markets

Table 89. More information

Bond ticker:

Web site:

Source: Danske Markets

STBNO

www.storebrand.no

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Storebrand Boligkreditt

Business model and funding profile

As of 31 December 2010, Storebrand Bank’s funding comprised more than 48% customer

deposits. The deposit-to-loan ratio increased to 55% in 2010 from 51% in 2009. However,

the bank’s liquidity position should not be viewed independently, but rather as part of the

Storebrand Group. Storebrand Bank manages its liquidity position on the basis of a

rolling liquidity gap and long-term funding indicators. The liquidity gap measures

liquidity in excess of min. requirement over the next 90 days.

As a specialist mortgage lender, STBNO has a very transparent balance sheet. Liabilities

consist almost entirely of covered bonds. Cover pool hedging contracts for hedging

currency risk and interest rate risk are also with Storebrand Bank.

Table 90. Funding Profile (the bank)

Credit Institutions 20%

Deposits 48%

Commercial paper and bonds issued 22%

Subordinated loans 2%

Equity 6%

Other 2%

Source: Danske Markets, Storebrand Bank

STBNO has participated in the swap agreement (“bytteordningen”) with Norges Bank

and hence improved the liquidity position for Storebrand Bank. Furthermore, as the swap

agreement also allows the inclusion of commercial real estate loans (not currently

included in STBNO), Storebrand Bank established Storebrand Eiendomskreditt AS in Q2

2009 in order to utilise this opportunity as part of the banking group’s financing strategy.

The Norwegian FSA granted the company its licence on 6 July 2009.

A management agreement exists between the “kredittforetag” and the bank. The

agreement concerns the approval of mortgages to be included in the cover pool:

Only floating rate first-ranking mortgages secured on residential property with a

maximum principal of NOK10m may be included.

The LTV ratio of each individual mortgage cannot exceed 75%.

The management agreement does not include any kind of loan loss guarantee from the

bank to the “kredittforetag”.

Cover pool and asset quality

As per 31 March 2011, the cover pool stood at NOK15.2bn with an average loan size of

NOK1.24m, and it consists entirely of Norwegian-based residential mortgages: no buy-tolet

loans are included nor any substitute collateral. All loans included in the cover pool

carry a variable rate. The cover pool is very well seasoned with an average of 38 months,

which is high by European standards. As of March 2011, the current weighted-average

LTV ratio was 49%, and with a total covered bonds amount outstanding of NOK11.6bn

the OC ratio was 31% - well above the committed level of 8%.

Table 91. Cover Pool Info

Cover pool

NOK 15.2bn

Average loan size NOK 1.24m

WA LTV 49%

WA Indexed LTV -

Seasoning

38 months

NPL 0.0%

OC (committed) 31% (8%)

Interest only loans 0%

Asset type

-Residential 100%

Geography

100% Norway

-Akershus 31%

-Oslo 27%

-Rogaland 7%

Source: Danske Markets

51 | August 2011

www.danskeresearch.com


Investment Research

August 2011

Terra Boligkreditt

Obligasjoner med fortrinnsrett

Company profile

Terra Boligkreditt (TERBOL) is a subsidiary of Terra-Gruppen AS (Terra Group), the

third-largest savings group in Norway with a retail market share of 10.9%. Terra Group

was founded in 1997 by local Norwegian savings banks and is an unlisted financial

holding company. It was initially established as a bank and product alliance between a

large numbers of small Norwegian local savings banks, in order to promote the interests

of the banks in areas where individual banks are too small to access satisfactory solutions

and terms. Since the banks have strong local relationships, typically in the form of

savings banks, creating a cooperation model protects strong local recognition, maintains

their separate legal status as independent savings banks and enables efficiency gains.

Terra Group was solely owned by 78 local savings banks up until February 2009, when

Oslo Bolig og Sparelag (OBOS, largest housing cooperative and condominium

association in Nordic region), through a rights issue, gained a 2% stake in Terra Group

and at the same time a 9.9% stake in TERBOL. OBOS will also provide collateral for

TERBOL.

TERBOL was established in 2003 and began operations in 2005. The sole purpose of

TERBOL is to offer mortgages on retail properties in Norway distributed through Terra

banks and real estate agents Terra Eiendomsmegling and Aktiv Eiendomsmegling. The

branch network of Terra Group includes around 190 domestic branches evenly distributed

across Norway.

During the autumn of 2007, Terra Securities (investment banking division) faced trouble,

and its investment banking license was withdrawn by the Norwegian FSA. The event

triggered a rating re-valuation by Moody’s. Due to the low credit risk of the portfolio, a

strong Norwegian legal framework and the joint support of the Terra Group and banks in

the Terra Alliance through a Letter of Comfort, TERBOL managed to retain a Aaa rating

for its covered bonds. However, TERBOL had to raise its self-imposed OC level from

2.75% to currently 5%. No mandatory O/C ratio is required by law.

In March 2009, Moody’s downgraded the covered bonds issued by TERBOL to Aa2 from

Aaa and placed it on review for possible further downgrade. The rating action was

prompted by the rating of the issuer (not public) in the wake of a methodology change by

Moody’s. In general, this change means that some issuer ratings (specialist banks) are

lowered when used in Moody’s TPI-matrix. However, as of November 2009, the rating

was affirmed at Aa2, and it is no longer on review for possible downgrade. This was,

according to Moody’s, based on – among other things – “the exceptional high quality of

assets in the cover pool, which is reflected in the low Collateral Score” (the collateral

score stands at 2.6% as per 31 March 2011).

Financial performance

As the Terra Group does not publish a consolidated annual report on behalf of its

underlying 78 banks, we do not comment on its financial performance.

Table 92. Ratings

Covered (M/SP/F)

Aa2/-/-

Issuer rating: -/-/-

Moodys C-score: 2.6%

Moodys TPI:

High

S&P Category: 2

Source: Rating agencies, Danske Markets

Table 93. Financial information

2010 2009

Net interest income N/A N/A

Fees and commissions N/A N/A

Net gain/losses N/A N/A

Pre-provision income N/A N/A

Loan losses and provisions N/A N/A

Operating profit N/A N/A

NPL N/A N/A

Loan loss ratio N/A N/A

Cost/income ratio N/A N/A

Core capital ratio N/A N/A

Total capital ratio N/A N/A

Source: Danske Markets

Table 94. More information

Bond ticker:

Web site:

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

TERBOL

www.terra.no

www.danskeresearch.com


Terra Boligkreditt

Business model and funding profile

TERBOL is the strategic funding company in the Terra Group. TERBOL offers low-risk

residential mortgages, funding them in the capital market. Going forward, the primary

funding source will be covered bonds, which are issued under TERBOL’s EUR10bn

medium term covered bond programme. Savings banks originating mortgages are

responsible for all customer handling.

2010 proved to be an active year for TERBOL both in the domestic and international

market. TERBOL had two major issues in the Norwegian market with a NOK1bn tap in a

5y maturity in February, and a NOK1.5bn new issuance in a 6y maturity in May. In

addition to these two major issuances, TERBOL sold covered bonds in varying maturities

worth a total of NOK1.3bn. In the euro market, TERBOL had a EUR600m transaction in

March and a EUR500m transaction in August with maturities of 2.5y and 5y respectively.

A guarantee agreement exists between TERBOL and Terra banks including:

A loss guarantee, covering the portion of the mortgage exceeding a 50% LTV ratio

(minimum NOK25,000). The loss guarantee remains in force for a period of six years.

A share in the framework guarantee covers a total of 1% of the overall mortgage

portfolio distributed by the local bank at any given time.

Furthermore, an agreement on handling missing debt service exists. One month after a

missing payment on a mortgage has occurred, the local bank originating the mortgage is

notified and must choose between three options:

The local bank covers the missed payments.

The local bank buys back the mortgage at par plus interest. As a result, the mortgage

is removed from the cover pool.

The local bank pays the guarantee amount, after which TERBOL takes action against

the customer regarding foreclosure, etc.

The local bank in question must take one of these steps no later than two months after

delinquency.

The covered bond programme is furthermore supported by liquidity facilities covering

NOK4bn or one quarter of the cover pool. Liquidity lines are facilitated by Terra

Boligkreditt’s distributors (NOK3bn) and DnB Nor (NOK1bn).

Cover pool and asset quality

As of 31 March 2011, the cover pool was NOK34bn of which NOK4bn is substitution

assets such as cash and cash equivalents. The rest of the cover pool consists solely of

Norwegian-based residential mortgages: no buy-to-let loans are included. Furthermore,

all are owner-occupied, so second homes/holiday houses are excluded from the pool.

Roughly 92% of the mortgages carry a variable rate (rates on floating rate loans can be

reset at any time at the bank’s own discretion, by giving debtors six weeks’ notice) and all

loans are currently performing. The cover pool’s seasoning is limited to an average of 18

months, which is relatively low. The geographical diversification is adequate.

As of 31 March 2011, the weighted-average unindexed LTV ratio was 51.8%. The

Norwegian covered bond legislation stipulates a 75% LTV-limit, but Terra has selfimposed

a limit of only 60%, similar to Finnish and German covered bonds. The current

OC ratio is 8%, 3 percentage points above the committed level of 5.0%.

Table 3. Cover Pool Info

Cover pool

NOK31bn

Average loan size

NOK1.3m

WA LTV 51.8%

WA indexed LTV 47.4%

Seasoning

18 months

NPL 0%

OC (current) 8%

Interest only loans 0%

Fixed rate loans 8%

Geography

100% Norway

-Oslo 20%

-Akershus 17%

-Sør-Trøndelag 12%

-Rogaland 8%

-Telemark 6%

-Østfold 6%

-Other (each


Investment Research

September 2011

Swedish Covered Bonds

Säkerställda obligationer

Background

The Swedish Covered Bond Act was passed in July 2004 but did not come into effect

until 2006 when the first Swedish issuers were licensed and issued covered bonds.

Swedish mortgage bonds (Bostadsobligationer) were, however, already an established

asset class before the law became effective, with Sweden having the fourth largest

mortgage bond market in Europe. However, because investor protection in previous

Bostadsobligationer was unsatisfactory, they did not enjoy European covered bond status.

In order to issue covered bonds under the new law, Swedish issuers were obliged to

convert existing Bostadsobligationer to Säkerställda Obligationer. All previous

Bostadsobligationer now have the status of covered bonds.

In October 2006, Nordea Hypotek became the first issuer of a Swedish EUR covered

bond though SCBC (SBAB) and Stadshypotek (Handelsbanken) soon followed. Today,

all Swedish issuers actively issue covered bonds. SEB has taken advantage of the

abandonment of the specialist banking principle in Sweden and merged former SEB

Bolån into parent bank SEB AB. SEB has taken over the licence to issue covered bonds

under the Swedish Covered Bond Act from SEB Bolån.

For a description of the Swedish covered bond market we refer to our publication The

Guide to the Swedish Covered Bond Market.

Key elements of Covered Bond Act

As in Germany and Denmark, no specialist banking principle is applied in Sweden.

Collateral assets may include residential and commercial mortgages (up to a limit of

10%), public loans, derivatives and substitution assets to a maximum 20% (the FSA can

temporarily allow 30%). In line with UCITS 22(4) requirements, the issuer will be subject

to special public supervision. The issuer must keep a cover register of collateral

(including open hedge positions) and bonds issued. The issuer is not obliged to keep a

separate register of mortgage and public covered bonds as is the case in Germany and

Ireland. Non-performing mortgages are to be removed from the cover pool after 60 days.

LTV ratio limits are 75% and 60% for mortgage and commercial loans, respectively.

Agricultural loans can be included subject to an LTV ratio of 70%. (if additional security

for that part of the loan that exceeds 60% is provided).

The valuation of cover assets must be made prudently and the assessment must be on an

individual basis. Properties in the cover pool must be valued on an ongoing basis, i.e.

commercial properties every year and residential properties every third year. Eventually,

if LTV ratio limits are breached, the issuer is obliged to include substitution assets in the

cover pool.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Swedish Covered Bonds

The Swedish Mortgage Act requires that both the nominal and present values of the cover

pool exceed those of covered bonds and derivatives. If a loan is more than 60 days in

arrears it cannot be included in the calculation of asset value. Mandatory minimum overcollateralisation

(O/C), however, is not required by law. Issuers are able to commit

themselves contractually to obtain a minimum nominal O/C. SCBC has committed itself

to a minimum O/C ratio of 2%. Voluntary O/C provided is protected by Swedish law if

registered in the cover pool.

Asset segregation is secured through the cover register. Regarding bankruptcy

proceedings, the preferential right to cover assets is explicitly stipulated. Consequently,

in the event of an issuer’s insolvency, bondholders have a statutory preferential right to

the cover pool. As in Denmark and Germany, Swedish law stipulates that swap

counterparties (for cover pool hedging only) may rank pari passu with bondholders

regarding claims on the cover pool.

Further, the law defines mandatory procedures to be followed in case of bankruptcy and

procedures to ensure payments are made on time. Note that an issuer default does not

prompt an acceleration of covered bonds or a determination of derivative contracts.

After an issuer has been placed in liquidation or declared bankrupt, the Swedish FSA

must appoint an administrator to supervise the interests of all creditors. There is,

therefore, no special covered bond administrator as is the case in, for example,

Germany. Recently approved amendments (with effect from 1 June 2010) require that the

bankruptcy administrator be given an express mandate, on behalf of the bankruptcy

estate, to take out liquidity loans and enter into other agreements for the purpose of

maintaining matching between the cover pool, covered bonds and derivative contracts.

Should funds prove insufficient to honour the bondholder’s claims, the covered bonds

will accelerate. Any unfulfilled claim will rank pari passu with other creditors.

As regards ALM requirements, the law states that the value of the cover pool, including

derivatives, must exceed the value of outstanding bonds issued. A present value test

must furthermore be conducted taking into account shocks to both the interest rate

(parallel shifts of +/- 100bp) and currency (+/- 10%). The act furthermore states that, in

addition to present value calculations, the issuing institution should also regularly perform

other calculations relevant to it, based on assumed sudden and sustained interest rate

changes including twists in the swap rate curve.

Credit quality

As non-performing loans (NPLs) in cover pools in Sweden are typically transferred to the

parent company, it is necessary to consider the overall performance of the loan book in

order to obtain a clear picture of NPL performance. Regarding issuers in this report, NPL

levels remain very low while the cover ratio from provisions compares favourably with

European peers. The asset quality of Swedish assets remains the best in Europe with

significant loan losses and provisions mainly resulting from foreign operations. Swedish

bank exposure to Eastern Europe have previously dominated but both SEB and Swedbank

have managed to handle the exposure very well and the issue no longer dominates to the

same extent as previously.

Overviews of Swedish cover pool characteristics are provided in the following table. As

regards most cover pool indicators, there is a high degree of homogeneity in Swedish

cover pools.

55 | September 2011

www.danskeresearch.com


Swedish Covered Bonds

Table 95. Cover pool characteristics (as of March 2011)

LF Hypotek Swedbank Nordea SEB SBAB/SCBC Landshypotek Stadshypotek

Cover pool (SEKbn) 99 643 403 306 200 51 498

Avg. loan size (SEK) 844,000 419,000 573,000 591,000 569,000 379,000 605,000

WA LTV 59% 56%- 59% 45% 57% 40% 48%

Seasoning 54 months 57 months 47 months 40 months 46 months 83 months 35 months

NPL 0% 0% 0% 0.4% 0% 0%

Fixed rate 37% 36% 36% 39% - 40% 48%

Geography Only Sweden Only Sweden Only Sweden Only Sweden Only Sweden Only Sweden Only Sweden

Source: Company data and Danske Markets

Table 96. Swedish cover bond issuers

Issuer Issuer rating (M/S/F) CB rating (M/S/F) Moodys TPI Moodys Collateral score Fitch D-factor

Landshypotek A3/A-/A+ -/AAA/- - - -

LF Hypotek - Aaa/AAA/- Probable 4.1% -

Nordea Hypo - Aaa/AAA/- Probable 5.4% -

SCBC - Aaa/AAA/- Probable 9.5% -

SEB A1/A/A+ Aaa/-/- - 8.7% -

Stadshypotek -/AA-/AA- Aaa/-/- Probable 8.4% -

Swedbank Hyp. A2/A/- Aaa/AAA/- Probable 7.3% -

Source: Rating agencies and Danske Markets

Outlook for the Swedish economy

The Swedish economy was hit hard by the global crisis but the subsequent recoil as

economic policy turned decisively expansionary and inventories stabilised has been every

bit as impressive. The first annual estimates for 2010 GDP growth show a hefty 5.3% y/y

bounce, bringing GDP levels back to the levels seen before the crisis. The first half of

2011 demonstrated an even more impressive 6% y/y growth (preliminary estimate Q1 and

Q2 flash GDP). In addition, developments on labour markets have clearly rivalled the

development of GDP, implying strong employment growth (even if productivity has been

somewhat weaker) and thus a hefty improvement in public finances (Sweden has strong

automatic stabilisers). Despite current woes on financial markets and an international

outlook that seems to be deteriorating by the day, our forecast for GDP growth remains at

3.5% y/y for 2011 and 2.0% y/y for 2012. Our below-consensus forecast is also explained

by our call for slightly lower house prices (c. -5% y/y on average in 2011 and 2012),

which lowers the non-trivial contribution to consumption from “home equity

withdrawal”.

Inflationary developments have thus far been driven by the Riksbank itself (mortgage

interest rate costs are a component of Swedish CPI calculations) and rising prices for

food, energy and other input goods. Wage pressures have thus far been moderate but this

autumn a new centralised wage negotiation round is being finalised. Given the swift

improvements in labour markets and a desire to “compensate” the low outcomes during

the height of the crisis, there is a risk that the agreements will be inflationary. The

Riksbank, in contrast, expects an outcome below what is compatible with the inflation

target (2%). We feel a little more concerned by the almost wilful rhetoric from the trade

unions and believe that the growth/inflation trade off has worsened during the crisis,

something that is visible in our comparatively high inflation forecasts for 2011 and 2012.

Still, the inflation target should not be in any immediate danger of being surpassed and,

from our point of view, once the Riksbank reaches a policy rate of 2.5% it can hold

steady for a longer period of time, evaluating previous hikes and developments of

international demand.

Chart 1. Swedish economy

11 % 2000=100

9

7

Houseprices ra.

Unemployment sa. la.

5

3

1

10 yr Benchmark interest rates la.

-1

00 02 04 06 08 10

Source: Reuters EcoWin

200

180

160

140

120

100

80

56 | September 2011

www.danskeresearch.com


Investment Research

August 2011

Landshypotek

Säkerställda obligationer

Company profile

Landshypotek (LANHYP) is a borrower-owned specialised mortgage bank with more

than 50,000 members, specialising in first mortgage lending secured on agricultural and

forestry properties. The bank was originated in 1836 when the first mortgage bank was

founded in Sweden.

With total lending of SEK51.8bn as of 31 December 2010, LANHYP is a small lender

with less than 3% share of total mortgage lending in Sweden. However, LANHYP holds

more than 35% of its core markets (agriculture and forestry) based on its mutual

ownership and its refund offer to borrower-members creating a strong customer loyalty

incentive and making LANHYP the market leader in these areas.

In 2007, the bank’s cooperation with LF Bank ended. Previously LF Bank provided

banking and insurance services to supplement mortgages offered to LANHYP clients. In

July 2007, LANHYP converted existing bostadsobligationer to covered bonds following

approval by the Swedish FSA.

LANHYP operates through 19 regional branches, with customers also able to obtain loans

and advisory services through the internet. The bank reports a Tier 1 capital ratio of 7.8%

and a Total capital ratio of 9.0%. LANHYP covered bonds are rated AAA by S&P.

Financial performance

In 2010, lending grew by an impressive 11.4% (following equally impressive growth of

12.5% in 2009) resulting in a total loan book of SEK51.8bn. The profit for the year was a

record SEK273.7m (2009: SEK129m), mainly as a result of a significant SEK177m

increase in net interest income – a 60% increase from 2009’s. At the same time, close

attention has been paid to cost reduction. Since 2007, costs have been cut by 25%, while

over the same period of time, increasing lending by 30%. From 2009 to 2010,

cost/income was reduced from 56% to 37%. 2010 also saw a decrease in provisions for

loan losses.

Table 97. Ratings

Covered bond rating:

-/AAA/--

Issuer rating:

A3/A-/A+

Fitch D-factor: -

Fitch supporting O/C

Moodys C-score: -

Moodys TPI: -

S&P Category:

1 (expected)

Source: Rating agencies, Danske Markets

Table 98. Financial information

SEKm 2010 2009

Net interest income 472 295

Fees and commissions -9 10

Net gain/losses 4 49

Pre-provision income 357 181

Loan losses and provisions 6.7 8.5

Operating profit 351 172

NPL

NPL coverage

Cost/income ratio 37% 56%

Tier 1 capital ratio 7.8% 8.1%

Total capital ratio 9.0 8.9%

Source: Landshypotek, Danske Markets

Table 99. More information

Bond ticker:

Web site:

Source: Danske Markets

LANHYP

landshypotek.se

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Landshypotek

Business model and funding profile

In July 2007, the Swedish FSA approved LANHYP’s application to convert existing

bostadsobligationer into covered bonds. In August 2007, LANHYP made its first covered

bond issue. As a specialist mortgage lender (monoline business) the bank is only allowed

to carry out mortgage lending and funding business. Consequently, it relies heavily on

wholesale funding. The vast majority of its covered bond issuance has occurred in the

domestic Swedish market. So far LANHYP has not tapped the euro market.

Market risk is very limited with both lending and funding carried out in SEK and all

currency exposure hedged with highly rated Swedish and international banks. The same

largely applies to interest rate risk, which is limited to a maximum of 2.5% of equity

capital. Finally, LANHYP targets a liquidity reserve to cover maturities of six months.

The holding consists of securities issued by Swedish institutions with a high credit rating

and mainly includes covered bonds (75% as per 31 December 2010).

LANHYP finances its business mainly through bond loans and money market

instruments. Funding is also obtained via borrowing from credit institutions, but lately the

share of funding from credit institutions has been greatly reduced – from SEK5bn in 2009

to SEK0.08 in 2010.

Cover pool and asset quality

As of 31 March 2011, the cover pool totalled almost SEK62.1bn of which SEK11.3bn

comprised substitute assets (mainly Swedish AAA-rated covered bonds). Concentration

risk was very low with the top 20 borrowers accounting for only 3% of the total cover

pool and an average loan size of only SEK379,000. Aside from substitute collateral the

cover pool consists of 98.8% Swedish mortgages secured on agricultural and forestry

properties, and 1.2% residential. The seasoning of loans is 83 months.

The indexed weighted average LTV ratio of the pool is 40%, which is well below the

70% cap for agricultural mortgages required by Swedish legislation. Stress tests

performed by LANHYP show that a 15% fall in house prices only raises the weighted

average LTV ratio by 2.7 percentage points. With SEK49.8bn currently outstanding

covered bonds, the level of OC is 24.7%.

Table 100. Funding Profile

Total balance

SEK64bn

Market funds 91%

Deposits 0%

Interbank 0%

Other debt 3%

Subordinated debt 1%

Equity 5%

Source: Danske Markets, Landshypotek

Table 101. Cover Pool Info

Cover pool

SEK62.1bn

Of which substitute assets SEK11.3bn

Average loan size

SEK379,000

OC 24.7%

WA LTV 40%

WA Indexed LTV -

Seasoning

83 months

NPL

Fixed rate-mortgages 40%

Geography

Only Sweden

-Linkjöping 13%

-Lund 9%

-Skara 8%

Asset type

-Residential 1.2%

- Agriculture 98.8%

Source: Danske Markets

58 | August 2011

www.danskeresearch.com


Investment Research

August 2011

LF Hypotek

Säkerställda obligationer

Company profile

Länsförsäkringar Hypotek (LF Hypotek) is a wholly-owned subsidiary of

Länsförsäkringar Bank (LF Bank), which in turn is a fully-owned subsidiary of the

insurance group Länsförsäkringar AB, formed by 24 regional independent mutual

insurance companies, with a total customer base exceeding three million. LF Bank was

originally established to deliver banking products and services to customers of the 24

independent mutual insurance companies.

Today LF Bank is a full-service retail bank (74% of the loan portfolio consists of retail

mortgages) offering a full range of financial products and services to its customers

although it focuses on providing savings and lending products for private customers and

farmers. With a business volume of SEK232bn, LF Bank is Sweden’s fifth-largest retail

bank and unlike most domestic peers its assets are wholly Swedish, i.e. it has no Baltic

exposure.

LF Hypotek reported a total loan portfolio of SEK118bn as of 31 December 2010,

corresponding to an approximate 4.4% share of the private customer mortgage market

(increasing from 3.4% in 2009). Furthermore, Länsförsäkringar Alliance is the market

leader in non-life insurance with a dominant share of almost 30%, which is intended to

leverage business potential for subsidiaries. In 2010, LF Hypotek held a 9% share of new

lending.

LF Hypotek operates through 124 branches of the 24 independent regional insurance

companies. It also distributes loans through the internet. Länsförsäkringar

Fastighetsförmedling (real estate agency) has nearly 100 branches in Sweden. These also

act as an increasingly significant sales channel.

As a measure of its strength, LF Bank was one of only two major banks in Sweden not to

issue under or apply for a state guarantee during the financial crisis. LF Bank is rated

A2/A (both stable) by Moody’s/S&P.

Financial performance

In 2010, profits before loan losses rose by 32% to SEK405m compared to SEK308m in

2009. With loan losses of SEK60m, operating profits ended at SEK345m – an

improvement of SEK87m from 2009. Operating income increased by 7% to SEK1,387m,

which was mainly attributable to a rise in net interest income along with higher

commissions as a result of greater managed funds. The additional net interest income was

mainly due to higher business volumes but also improved margins. Cost income was

brought down a bit to 0.71 from 0.76 in 2009. The Tier 1 capital ratio remained stable at

8.2% while the capital adequacy ratio decreased a bit, falling from 9.7% to 9.4%.

Table 102. Ratings

Covered bond rating:

Aaa/AAA/-

Issuer rating:*

A2/A/-

Fitch D-factor: -

Fitch supporting O/C -

Moodys C-score: 4.1%

Moodys TPI:

Probable

S&P Category

1 (expected)

Source: Rating egencies, Danske Markets

* Rating of Lansforsakringar Bank AB (parent)

Table 103. Financial Info (parent bank)

SEKm 2010 2009

Net interest income 1,363 1,148

Fees and commissions -155 -96

Net gain/losses 10 101

Pre-provision income 1,387 1,301

Loan losses and provisions 60 50

Operating profit 345 258

Bad debt % of gross loans 0.17% 0.21%

Cost/income ratio 0.71 0.76

Tier 1 capital ratio 8.2% 8.2%

Capital adequacy ratio 9.4% 9.7%

Source: LF Bank, Danske Markets

Table 104. More info

Bond ticker:

Web site:

Source: Danske Markets

LANSBK

lansforsakringar.se

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


LF Hypotek

Business model and funding profile

LF Hypotek is a mortgage company whose sole business is to grant loans secured on

mortgages to Swedish households. As LF Hypotek is a core area of LF Group, it is

expected that support would probably be offered should the need arise. Previously, LF

Hypotek was refinanced exclusively by LF Bank in connection with managing and

meeting the company’s volume and maturity requirements. LF Hypotek received a

licence to issue Swedish covered bonds in March 2007. As of 31 March 2011, LF

Hypotek had issued Swedish benchmark covered bonds worth SEK55bn. Furthermore,

LF Hypotek has issued covered MTN (SEK15.4bn) and covered EMTN (SEK11.5bn).

Total funding so far raised by covered bonds is SEK81.9bn.

Parent company, LF Bank, has a stable funding base in its retail deposits. In 2010,

deposits provided by the general public rose 11%, such that by the end of 2009 deposits

represented 29% of group total liabilities and bonds 62% (of which 92% was through LF

Hypotek). Also, LF Bank maintains both a domestic and Euro CP programme.

Cover pool, asset quality and rating

As of 31 March 2011, the cover pool comprises SEK99bn – SEK78bn in mortgage loans,

SEK16bn in substitute collateral (81% Swedish AAA covered bonds/19% Swedish

government bonds) and SEK5bn in separate deposits. Besides substitute assets the cover

pool consists only of Swedish residential mortgages (mainly single houses) with sound

geographical diversification and a very low peer-relative risk concentration (see table

below). The weighted average LTV ratio is currently 59%.

To illustrate the sensitivity of LTV levels, LF Hypotek has calculated that in a stress

scenario in which house prices decrease by 20% from current levels, the WA LTV ratio

would increase to 67%, well below many current levels for European peers. LF Hypotek

has committed to an OC of 10%; however, current OC is 21% (nominal basis) as of 31

March 2011. Even in an extreme situation in which house prices were to fall by 20%,

available OC would still exceed the current voluntarily committed level of 10%.

As with other Swedish covered bond issuers, asset quality should be judged by reference

to the parent bank to which non-performing loans are transferred. LF Bank's overall asset

quality compares very favourably with peers with a bad debt/total loan ratio of only

0.17% (down from 0.21% in 2010) and loan losses of 0.04% (down from 0.05%) as of 31

December 2010.

Table 105. Funding Profile (LF Bank)

Total balance

SEK 147bn

Deposits 29%

Bonds 61%

Liabilities to credit institutions 3%

Commercial papers 2%

Equity 4%

Subordinated debt 1%

Source: LF Bank

Table 106. Cover Pool Info

Cover pool

SEK99bn

Average commitment

SEK844,000

OC (committed) 21% (10%)

WA indexed LTV 59%

WA LTV

N/A

Seasoning

54 months

NPL

(None)

Fixed rate-mortgages 37%

Geography

Only Sweden

-Greater Stockholm 17%

-West Sweden 21%

-North/Middle Sweden 48%

-South Sweden 14%

Asset type

-Single-family homes 79%

-Commercial -

-Second home 1%

- Agriculture -

- Tenant owned 20%

-Public sector -

Source: Danske Markets

60 | August 2011

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Investment Research

August 2011

Nordea Hypotek

Säkerställda obligationer

Company profile

Nordea Hypotek grants loans to individuals, businesses, municipalities and other legal

entities. Loans are mainly granted for the financing of property, agriculture and municipal

activities, and are issued out of the parent bank’s (Nordea Bank AB) branch network. At

the end of 2010 Nordea Hypotek had a market share of 15.1% of the Swedish mortgage

market, which is an increase of 0.2 percentage points from 2009. This makes Nordea

Hypotek the third largest mortgage lender in Sweden.

Nordea Bank AB (Nordea) is the leading bank in the Nordic region in terms of market

value and total assets. The group has operated as Nordea since 2001 and targets a

European cross-border operating model. The group originated with the establishment of

MeritaNordbanken in 1997, which combined Merita Bank of Finland and Nordbanken of

Sweden, and was completed in 2000 with the merger with Unidanmark of Denmark and

acquisition of Christiana Bank of Norway. Nordea has a distinctive footprint in the

Nordic area, supported by around 10 million customers, 1,400 branches and leading

positions in retail banking, corporate finance and savings management. Furthermore, the

bank has established operations in Estonia, Latvia, Lithuania, Poland and Russia.

Most group earnings result from core markets in the Nordic region (which accounts for

approx. 90% of the total loan portfolio). Nordea’s market position differs in each

geographical market. For example, in-market consolidation is largely complete in

Finland, where Nordea is market leader with over 30% of both household and corporate

lending. While the group has a smaller market share in Denmark, Norway and Sweden,

its position still represents between 10-25% of both household and corporate lending. The

Swedish state is the second-largest holder of Nordea shares, holding roughly 13% of all

shares. We do not expect it to reduce its holding in the immediate future although it

remains a long-term goal of the current government to divest its shares. The Finnish

insurance group Sampo Oyj is the largest shareholder with a stake of just over 21%.

Parent bank Nordea is rated Aa2/AA-/AA- by Moody’s/S&P/Fitch, respectively.

Financial performance

2010 proved a good year for Nordea Group. On the bottom line Nordea Group managed

to increase the operating profit by EUR0.5bn to a 2010 result of a EUR3.5bn. The

addition to the 2009 result is mainly driven by an increase in fees and commission income

of EUR0.5bn, and net loan losses being reduced by 40% to a 2010 level of EUR0.9bn

(2009: EUR1.5bn).

Table 107. Covered bond rating

Covered bond rating:

Aaa/AAA/-

Issuer rating:*

Aa2/AA-/AA-

Moodys C-score: 5.4%

Moodys TPI:

Probable

S&P Category:

1 (expected)

Source: Rating agencies, Danske Markets

* Rating of Nordea Bank AB.

Table 108. Financial info (parent bank)

EURm 2010 2009

Net interest income 5,159 5,281

Fees and commissions 2,156 1,693

Net gain/losses 1,837 1,946

Pre-provision income 4,452 4,513

Loan losses and provisions 879 1,486

Operating profit 3,573 3,027

NPL 1.5% 1.5%

Loan loss coverage 59.1% 58.3%

Cost/income ratio 52% 50%

Core capital ratio 9.8% 10.2%

Total capital ratio 11.5% 11.9%

Source: Nordea, Danske Markets

Table 109. More info

Bond ticker:

Web site:

Source: Danske Markets

NBHSS

www.nordea.com

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Nordea Hypotek

Business model and funding profile

As a specialist bank Nordea Hypotek relies heavily on covered bonds which represent

72% of funding. As of 31 December 2010, total wholesale funding from covered bonds

was SEK307bn of which SEK22bn was issued in 2010. Of covered bond issuance, 78% is

SEK denominated, while the remaining 22% is in foreign currency (predominantly EUR).

Nordea Hypotek can issue both Swedish benchmark covered bonds (bostadsobligationer)

and EMTNs (in any agreed currency) through its EUR15bn covered bond programme.

Private placements have also been made in NOK, USD and CHF.

Parent company, Nordea AB, has a stable funding base in its retail and commercial

deposits. In addition, treasury funding appears well diversified. At the end of 2010

deposits and borrowings from the public represented around 56% of group total lending, a

relatively high share given that mortgage lending in Denmark is funded directly in the

market without risk for Nordea (Nordea Kredit). The bank targets a positive net balance

of stable funding, requiring that stable assets must be funded by stable liabilities (deposits

and long-term bonds). Furthermore, Nordea holds a liquidity buffer comprising highgrade

liquid securities capable of being sold or used as collateral in funding operations.

Cover pool and asset quality

As of 31 March 2011, the cover pool totalled SEK403bn, of which SEK11bn are

substitute assets. Hence, with a total lending to public of SEK415, Nordea Hypotek’s

cover pool comprises 94% of Nordea Hypotek’s total lending.

Nordea Hypotek’s cover pool has a current LTV of 59%. The LTV limits for inclusion in

the cover pool are 75% for residential mortgages, and 60% for both commercial and

agricultural mortgages. The pool has an OC of 25.4%, which is a strong level – especially

considering the 0% non-performing loans in the pool. Geographically, the cover pool is

well diversified spanning the entire country of Sweden with a slight overweight in the

greater Stockholm area. Mortgage type is distributed 36% fixed rate, and 64% floating

rate mortgages.

The Swedish Covered Bond Act does not require mandatory OC and Nordea has not

committed itself to provide voluntary OC. Current OC stands at 25.4% (nominal).

Table 110. Funding Profile (parent

bank)

Total balance

EUR581bn

Credit institution deposits 7%

Retail deposits 30%

Derivatives 17%

Debt securities 26%

-of which covered bonds 12%

Subordinated debt 1%

Equity 4%

Other 14%

Source: Danske Markets, Nordea

Table 111. Cover Pool Info

Cover pool

SEK403bn

OC 25.4%

Average loan size

SEK573,000

WA LTV 59.4%

WA Indexed LTV 53.2%

Seasoning

47 months

NPL 0%

Fixed rate-mortgages 36%

Geography

Only Sweden

-Greater Stockholm 36%

-West Sweden 24%

-North/Middle Sweden 22%

- South Sweden 18%

Asset type

-Single-family 70%

- Multi-family 16%

-Commercial 4%

-Public sector 10%

Source: Danske Markets, Nordea Hypotek

62 | August 2011

www.danskeresearch.com


Investment Research

August 2011

SCBC (SBAB)

Säkerställda obligationer

Company profile

SBAB is wholly owned by the Swedish Government and has been mandated to contribute

to competition in the Swedish residential mortgage market. For the purpose of issuing

covered bonds, SBAB has created a wholly owned dedicated covered bond subsidiary,

The Swedish Covered Bond Corp. (SCBC). In March 2006, SCBC was licensed by the

Swedish FSA to issue covered bonds pursuant to the Swedish Covered Bond Act. It

issued its first covered bond in October 2006. SCBC itself will not issue loans but acts as

a restricted issuance vehicle with SBAB as the single creditor. SBAB has agreed that all

its claims rank below those of SCBC’s covered bondholders, which is positive as it

isolates covered assets in case of insolvency. SBAB has increased its market share in

recent years to 9.6% of the Swedish residential mortgage market at the end of 2010

(2009: 9.5%; 2008: 8.5%). SCBC has no issuer rating though SBAB is currently rated A1

(n)/A+ by Moody’s and S&P respectively, the latter being an upgrade made on 3

September 2010 from A+(n). S&P justified the upgrade by the high quality of SBAB’s

assets and SBAB’s favourable potential to maintain or improve its position in the

Swedish residential mortgage market through its strengthened capital base.

On 13 June 2007, the Swedish parliament passed a bill confirming plans by the newly

elected governing party to privatise ownership of SBAB. However, due to dislocated

financial markets, the sale is currently not under consideration. Instead, on 31 January

2009 the Swedish Government submitted a proposal to allow SBAB to potentially expand

its business into banking and fund activities. On 22 April 2009, permission to do so was

granted by the Swedish government. SBAB/SCBC has issued under the Swedish

Government guarantee programme although due to improving capital markets, SBAB

decided in the autumn of 2009 not to extend its participation in the programme.

Table 112. Ratings

Covered bond rating:

Aaa/AAA/-

Issuer rating: -/-/-

Fitch D-factor: -

Fitch supporting O/C

Moodys C-score: 9.5%

Moodys TPI:

Probable

S&P Category:

1 (expected)

Source: Rating agencies, Danske Markets

Table 113. Financial information

(SBAB)

SEKm 2010 2009

Net interest income 1,716 1,519

Fees and commissions -44 -46

Net gain/losses -289 495

Pre-provision income 1,429 1,974

Loan losses and provisions 40 107

Operating profit 785 1,289

Loan loss coverage 70% 72%

Cost/income ratio 45% 35%

Core capital ratio 8.7% 7.4%

Total capital ratio 10.2% 9.2%

Source: SBAB, Danske Markets

Table 114. More info

In September 2010, the Swedish government reiterated the message that sell-offs of some

state-owned companies, including SBAB, might be imminent. However, following

elections the government no longer holds an outright majority and whether the proposed

sell-offs will actually take place is uncertain.

Financial performance

SBAB saw a decrease in operating profit in 2010 with a result of SEK785m compared

with SEK1,289m in 2009. Net interest income improved by SEK200m, but at the same

time the net result from financial instruments measured at fair value declined from a

positive SEK495m in 2009 to a negative SEK-289m in 2010. Operating expenses were

kept at a stable level, increasing slightly to SEK604m (2009: SEK578m), but the

reduction in operating income (2010: SEK1,429m; 2009: SEK1,974) meant that SBAB

only produced an operating profit of 61% of its 2009 result. However, SBAB managed to

strengthen its capital base seeing a core capital ratio of 8.7% and a total capital ratio of

10.2% compared to 2009 levels of 7.4% and 9.2% respectively – this in turn led to an

upgrade from A+(neg) to A+(stable) with S&P.

Bond ticker:

Web site:

Source: Danske Markets

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

SCBCC

www.sbab.se

www.danskeresearch.com


SCBC (SBAB)

Business model and funding profile

As of 31 December 2010, SBAB’s market funding programme totalled SEK262bn of

which 58% was raised through SCBC either as Swedish covered bonds (35%) or covered

EMTNs (23%). Furthermore, some 25% of funding was raised through SBAB’s EMTN

programme and 6% under the Swedish government guarantee.

Although SBAB has launched new savings campaigns to attract more depositors, those

from the retail sector account for only 2% of Group total liabilities, highlighting its very

high dependence on wholesale funding.

Cover pool and asset quality

As of 28 February 2011, the cover pool was SEK200bn, comprising only residential

mortgage loans with no commercial lending. Single family houses predominate (39%),

followed by tenant owner apartments (22%), cooperatives (24%) and multi-family houses

(15%). Of the total portfolio, almost 3% of loans enjoy a public sector guarantee. The

average LTV ratio of the pool is 57%. The share of amortisation mortgages is 43% and

non-amortisation mortgages 57%.

The Swedish Covered Bond Act does not require mandatory O/C. However, SCBC

intends to ensure that the nominal value of assets exceeds the nominal value of covered

bonds by at least 2%. Covered bonds from SCBC are rated Aaa/AAA by Moody’s/S&P,

respectively.

Table 115. Funding Profile (SBAB)

Total balance

SEK317bn

Market funds 83%

Retail deposits 2%

Interbank 6%

Subordinated debt 2%

Equity 3%

Other 4%

Source: Danske Markets, SBAB

Table 116. Cover Pool Info

Cover pool

SEK200bn

Average loan size

SEK569,000

WA LTV 57%

WA Indexed LTV -

Seasoning

NPL

Interest only loans

46m

0%

58%

Fixed rate-mortgages -

Geography

Only Sweden

-Greater Stockholm 48%

-West Sweden 14%

-North/Middle Sweden 9%

- South Sweden 28%

Asset type

-Residential 39%

-Commercial 0%

-Cooperative 24%

- Multi-family 15%

- Tenant owned 22%

-Public sector 0%

Source: Danske Markets, SBAB

64 | August 2011

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Investment Research

August 2011

SEB

Säkerställda obligationer

Company profile

Skandinaviska Enskilda Bank (SEB) is ranked as the third-largest financial group in the

Nordic region and the second-largest bank in Sweden with market shares of 12.4% and

8% for household and corporate respectively. SEB offers a full range of retail,

commercial, investment banking and insurance products. The bank is active in the Nordic

and Baltic region, Germany, Poland and Russia, with four million private and around

400,000 SME corporate customers in 12 countries.

In 2010, 56% of SEB's operating profit was generated in Sweden. The remainder of the

bank’s operating profit is fairly equally divided between Germany, Denmark and

Norway. In addition, the group retains a strong position in offering capital market-related

services to large corporate and institutional clients and is also a leading provider of life

and unit-linked pension products in the Swedish market. Fundamentally, SEB has a

stronger commercial bank profile than any of its Scandinavian counterparts. For SEB,

merchant banking accounted for 46% of operating income in 2010, while retail banking

only accounted for half of that. The group is also a leading Nordic asset manager. SEB

targets continued organic growth in core markets including Sweden, Germany, Poland

and the Nordic and Baltic countries, as well as expansion into Russia and Ukraine. 2010

was also the first year since 2008 in which SEB’s Baltic operations returned a profit.

As per March 2011, SEB had a total mortgage loan portfolio of SEK362bn.

SEB improved its capital ratios in 2010. Tier 1 capital ratio increased to 12.2% (2009:

11.7%) and the total capital ratio to 14.2% (2009: 13.9%).

Financial performance

In 2010, SEB Group saw a decline in profit before credit losses, going from SEK16bn in

2009 to SEK13bn in 2010. The decrease was mainly due to declines in net interest

income (2010: SEK16bn; +SEK2bn y/y) and net gains from financial transactions (2010:

SEK3.2bn; +SEK1.3bn y/y). However, loans losses and provisions were drastically

reduced, ending up at SEK1.8bn in 2010 compared to SEK12bn in 2009. The reduction in

losses meant that operating profit was SEK11.1bn in 2010 – more than double the 2009

operating profit of SEK4.4bn. Further, SEB Group’s Baltic operations returned profits in

Q3 and Q4 10 for the first time since 2008. Operating profit for the Baltics came out at an

end-of-year deficit of SEK0.1bn, which is a vast improvement from 2009’s deficit of

SEK10.3bn. SEB Group strengthened its capital position in 2010, improving its Tier 1

capital ratio by 0.5 percentage points to 12.2% and its total capital ratio by 0.3 percentage

point to 14.2%.

Table 117. Ratings

Covered bond rating:

Aaa/-/--

Issuer rating:

A1/A/A+

Moodys C-score: 8.7%

Moodys TPI:

Probable

Source: Rating agencies, Danske Markets

Table 118. Financial information (SEB

Group)

SEKm 2010 2009

Net interest income 16,010 18,046

Fees and commissions 14,160 13,285

Net gain/losses 3,166 4,488

Profit before loan losses 12,928 16,377

Loan losses and provisions 1,837 12,030

Operating profit 11,105 4,351

NPL 1.8% 2.4%

Cost/income ratio 65% 61%

Tier 1 capital ratio 12.2% 11.7%

Total capital ratio 14.2% 13.9%

Source: SEB, Danske Markets

Table 119. More information

Bond ticker:

Web site:

Source: Danske Markets

SEB

www.sebgroup.com

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


SEB

Business model and funding profile

SEB has acquired SEB Bolån’s licence to issue covered bonds under the terms of the

Swedish Covered Bond Act. Previously, issued Swedish domestic bonds have been

converted into covered bonds as the Act requires. Covered bonds are mainly issued out of

the parent bank (SEB AB) in the form of Swedish säkerställda obligationer, but SEB’s

German subsidiary (SEB AG) also issues covered bonds in the form of both mortgage and

public Pfandbriefe.

As of March 2011, SEB AB had issued covered bonds totalling SEK210bn through SEB

AB and SEK31bn of Pfandbriefe through its German subsidiary SEB AG. The covered

bonds issued out of SEB AB are distributed as 72% SEK-denominated, 27% EURdenominated

with the remaining 1% split between NOK and CHF. Consequently, covered

bonds/Pfandbriefe constitute 11% of SEB Group’s funding. However, the main funding

tool for SEB Group is deposits, which account for 43% of SEB Group funding.

Cover pool and asset quality

As of March 2011, the cover pool comprised assets worth a total of SEK306bn. The cover

pool consists entirely of Swedish residential mortgage loans, mainly single family houses

(61%). No substitution assets are included in the cover pool. The weighted-average

indexed LTV ratio is 45% and no loans have an LTV above 75%. Some 46% of the

mortgage book has a LTV ratio below 40%. As of March 2011, OC was 46%. Loans in

arrears in the cover pool totalled only 0.12%. For SEB as a whole, impaired loans in 2010

comprised 1.3% (2009: 2.4%) of total loans and receivables.

Table 120. Funding Profile

Total balance

SEK2,180bn

Deposits, credit institutions 10%

Deposits, public 33%

Debt securities 24%

Financial liab. at fair value 9%

Subord. debt 1%

Equity 5%

Liabilities to policyholders 12%

Other 6%

Source: SEB, Danske Markets

Table 121. Cover Pool Info

Cover pool

SEK306bn

Average loan size

SEK591,000

WA LTV -%

WA Indexed LTV 45%%

NPL 0.4%

Fixed rate-mortgages 39%

Geography

Only Sweden

-Greater Stockholm 45%

-West Sweden 23%

-North/Middle Sweden 4%

- South Sweden 28%

Asset type

-Single-family 61%

-Multi-family 15%

-Tenant owned 24%

Source: Danske Markets

66 | August 2011

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Investment Research

August 2011

Stadshypotek

Säkerställda obligationer

Company profile

Stadshypotek is a wholly owned subsidiary of Svenska Handelsbanken (Handelsbanken).

Established in 1871, Handelsbanken provides a full range of retail, commercial and

investment banking services through its extensive branch network in Sweden, other

Scandinavian countries and the UK. Handelsbanken is one of the largest Scandinavian

banks, offering universal banking in all Scandinavian countries (Sweden, Norway,

Denmark and Finland) and in the UK. Operations outside Sweden continue to grow in

importance and in 2010 more than 33% of Handelsbanken’s total operating income was

generated through its branches in the UK, Finland, Norway and Denmark. Going forward,

Handelsbanken sees particularly promising growth potential in the UK and therefore aims

to further increase its activities through organic growth. Handelsbanken has 90 branches

in the UK, of which 21 were opened in 2010. In total, the bank has more than 720

branches in 22 countries. Business operations are very decentralised with a high degree of

responsibility delegated to branch managers. Furthermore, Handelsbanken has a distinct

culture including, for example, no centralised marketing and no budgets. Instead, the

company makes extensive use of internal and external benchmarking.

Stadshypotek is a specialist bank. Its sole purpose is to grant loans secured on mortgages

to Swedish households, municipalities, municipal housing companies and corporate

clients. With a total loan portfolio of SEK718bn, Stadshypotek is one of the largest

lenders in the Swedish mortgage market.

Handelsbanken’s capitalisation continued to improve in 2010. Under full Basel II, the

Tier 1 ratio improved to 16.5% from 14.2% in 2009, and the total capital ratio increased

to 20.9% from 20.2% over the same period.

Financial performance

The performance of Handelsbanken during the financial crisis was the best in the

Scandinavian region, and there is no apparent sign of any major slowdown. Despite a 3%

decrease to a net interest income level of SEK21.3bn in 2010 (2009: SEK22bn), and a

decrease in net gains to SEK1.4bn (2009: SEK2.5bn), Handelsbanken still managed to

increase operating profit by 7.5%. The increase in operating profit was mainly attributable

to a more than 50% reduction in loan losses falling from SEK3.4bn in 2009 to SEK1.5bn

in 2010. Further, fees and commissions rose by roughly SEK0.6bn. The cost/income ratio

remained stable at 48% (2009: 47%).

Table 122. Ratings

Covered bond rating:

Aaa/-/--

Issuer rating:

Aa2/AA-/AA-

Moodys C-score: 8.4%

Moodys TPI:

Probable

Source: Rating agencies, Danske Markets

Table 123. Financial information

(Handelsbanken AB)

SEKm 2010 2009

Net interest income 21,337 22,000

Fees and commissions 8,022 7,393

Net gain/losses 1,377 2,457

Pre-provision income 16,278 17,115

Loan losses and provisions 1,507 3,392

Operating profit 14,770 13,727

NPL 0.23% 0.21%

Cost/income ratio 48% 47%

Tier 1 capital ratio 16.5% 14.2%

Total capital ratio 20.9% 20.2%

Source: Handelsbanken, Danske Markets

Table 124. More information

Bond ticker:

Web site:

Source: Danske Markets

SHBASS

handelsbanken.se

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

Important disclosures and certifications are contained from page 3 of this report.

www.danskeresearch.com


Stadshypotek

Business model and funding profile

Stadshypotek funds itself mainly through covered bonds and mostly in SEK although also

in other currencies through the bank’s EMTN covered bond programme. SEK issuance

accounts for 80% of total SEK426bn covered bonds issued.

At parent level, deposits account for 25% of total funding, while 45% of funding has been

obtained through the debt market – a relatively high level of wholesale funding

dependence due to the financing of mortgage bonds through Stadshypotek.

Cover pool and asset quality

As of 31 March 2011, the cover pool totalled SEK498bn, comprising mainly residential

mortgages (95%), but also some public, agricultural and commercial loans. All loans are

issued by Handelsbanken’s branch network. By type of property, single-family houses

(including vacation homes) account for 47% of total loan collateral, followed by multifamily

houses at 27%. The weighted average LTV ratio of the loan pool is 48%.

Table 125. Funding profile

(Handelsbanken)

Total balance

SEK2,153bn

Market funds 45%

Retail deposits 25%

Interbank 13%

Subordinated debt 2%

Equity 4%

Other 11%

Source: Danske Markets, Handelsbanken

Table 126. Cover pool info

Cover pool

SEK498bn

OC 17%

Average loan size

SEK605,200

WA LTV 48.4%

WA Indexed LTV -

Seasoning

35 months

NPL 0%

Fixed rate-mortgages 48%

Geography

Only Sweden

-East( incl Stockholm) 56%

-West Sweden 18%

-North Sweden 9%

- South Sweden 17%

Asset type

-Single-family/vacation home 47%

-Commercial 1%

-Multi-family 17%

- Agriculture 1%

- Tenant owned 21%

-Public sector 3%

Source: Danske Markets, Stadshypotek

68 | August 2011

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Investment Research

August 2011

Swedbank Hypotek

Säkerställda obligationer

Company Profile

Swedbank Hypotek (also known as Swedbank Mortgage) is a wholly owned subsidiary of

Swedbank, Sweden’s fourth largest banking group in terms of assets. Swedbank was

formed in 1997 as a result of the merger of Sparebanken Sverige and Foreningsbanken.

Originating in 1893, Swedbank Hypotek is the oldest mortgage institution in Sweden and

also the largest mortgage provider with a market share of approximately 26%. Swedbank

Hypotek is a specialist bank exclusively providing loans secured on mortgages to

Swedish households, municipalities, municipal housing companies and corporate clients.

Around 62% of Swedbank Group’s lending is conducted by Swedbank Hypotek.

Swedbank is the largest retail bank and fund manager in Sweden. Furthermore, Swedbank

has the widest distribution network in Sweden with 680 branches and enjoys very strong

domestic market share in retail financial services (particularly in mortgage finance

through Swedbank Hypotek), asset management through the country’s largest asset

manager, Swedbank Robur and retail deposits, in which Swedbank’s market share is 60%

(Q1 10). In addition, the bank services customers either jointly or through alliances and

independent savings banks in Sweden. Through Hansapank, Estonia’s largest bank, the

group also has important operations in Latvia and Lithuania with strong market share, as

well as smaller exposure to Russia. Credit exposure to the Baltic region based on lending

to the public represented 5% of total lending as of 31 December 2010 with the group most

exposed to Estonia.

In August 2009, Swedbank had its second rights issue. One of the purposes behind this

was that Swedbank wanted to leave the state guarantee programme, under which the

Swedish government guaranteed loans, thus enabling Swedish banks to fund themselves

on competitive terms. On 9 April 2010, Swedbank issued a press release saying that it

was leaving the state guarantee programme (which it had not utilised since July 2009)

with immediate effect and returning to independent funding.

Table 127. Ratings

Covered bond ratings:

Aaa/AAA/-

Issuer rating

A2/A/-

Fitch D-factor: -

Moodys C score: 7.3%

Moodys TPI:

Probable

S&P Category:

1 (expected)

Source: Rating agencies, Danske Markets

Table 128. Financial information

(Group)

SEKm 2010 2009

Net interest income 16,329 20,765

Fees and commission 9,525 7,825

Net gains/losses 2,400 2,770

Pre-provision income 13,365 15,629

Loan losses and provision 2,810 24,641

Operating profit 9,955 -9,461

NPL 2.53% 2.85%

Cost/income ratio 57% 51%

Core Tier 1 capital ratio 13.9% 12.0%

Tier 1 capital ratio 15.2% 13.5%

Source: Swedbank, Danske Markets

Table 129. More information

Bond ticker: SPNTAB

Web site: www.swedbank.se

Source: Danske Markets

As of December 31 2010, Swedbank had a Core Tier 1 ratio of 13.9% (2009: 12.0%) and

a Tier 1 ratio of 15.2% (2009: 13.5%). Swedbank’s Board of Directors decided in early

2011 to introduce a capitalisation target effective from the financial year 2011. The target

is to keep the core Tier 1 ratio above 13% until 2013 and in the longer term to keep it

above 10%.

Financial performance

In 2010, profits rose by some SEK18bn from a 2009 deficit of SEK10.5bn to a 2010

profit of SEK7.5bn, despite a 21% decrease in net interest income – a result of lower rates

and a decline in volumes, especially in the Baltic region. The vast improvement in profits

was mainly attributable to a significant reduction in loan losses and provisions, which was

cut by SEK21.8bn to a 2010 amount of SEK2.8bn.

Analyst

Søren Skov Hansen

+45 45 12 84 30

SRHA@danskebank.dk

www.danskeresearch.com


Swedbank Hypotek

Business model and funding profile

As a specialist bank, Swedbank Hypotek relies heavily on covered bonds for funding.

Short-dated funding is provided through US, European (multi-currency), French and

domestic CP programmes.

The domestic mortgage bond market is the bank’s main funding source although

Swedbank Hypotek can also access international wholesale markets. As regards the

outstanding amount of covered bonds, some 65% has been raised through domestic

issues, a total of 31% through EMTN and MTNs, 4% as registered covered bonds and

finally 1% out of a Norwegian programme.

Swedbank is a retail-oriented bank with a substantial domestic branch network providing

access to a relatively stable source of retail deposits representing approximately one-third

of total funding in 2010 and 47% of total lending.

Cover pool and asset quality

As of 31 March 2011, the cover pool totalled SEK643bn. The average loan size is small

highlighting low concentration risk. The cover pool consists entirely of Swedish mortgage

loans. Swedbank Hypotek focuses mainly on residential lending, which accounts for 91%

of the portfolio. Loans more than 60 days in arrears are not considered eligible assets. On

5 October 2008, Swedbank Hypotek acquired all credits granted by Swedbank

Jordbrukskredit AB. Going forward, lending for agricultural and forestry properties will

be provided directly by Swedbank. However, according to Swedish covered bond

legislation only a maximum of 10% of commercial assets is allowed in the cover pool.

Currently, some 7% of the cover pool consists of loans commercial loans (forestry and

agriculture).

Table 130. Funding Profile (Swedbank)

Total balance

SEK1,795bn

Market funds 40%

Deposits 31%

Interbank 8%

Subordinated debt 2%

Equity 6%

Other 14%

Source: Danske Markets, Swedbank

Table 131. Cover Pool Info

Cover pool

SEK643bn

Avg. loan size

SEK419,000

OC 27%

WA LTV -

WA Indexed LTV 56%

Seasoning

57 months

NPL 0%

Geography

Sweden only

-West 20%

-South 24%

-East 17%

- Middle 32%

- North 7%

Interest only loans 46%

Fixed rate loans 36%

Asset type

-Residential 91%

-Public 2%

-Forest&agriculture 7%

Of residential loans:

-Home owner 68%

-Tenant owner 18%

-Multi-family 14%

Source: Danske Markets, Swedbank Hypotek

70 | August 2011

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Investment Research

September 2011

Covered Bond Frameworks

Legal overview

In this appendix, we provide an overview of the covered bond frameworks in the

following countries in Europe and Northern America:




















Canada (individual contracts)

Denmark (Realkreditobligationer)

Denmark (Særlig dækkede obligationer/Særligt dækkede realkreditobligationer)

Finland (Kiineistövakuudellinen joukkovelkkakirjalaina)

France (Obligations Fonciéres)

France (Obligation de Financement de l’Habitat)

France (CRH)

Germany (Pfandbriefe)

Greece (legally based covered bonds)

Holland (legally based covered bonds, individual contracts)

Ireland (Asset Covered Securities)

Italy (Obbligazioni Bancarie Garantite)

Luxembourg (Lettre de garge)

Norway (Obligasjoner med fortrinnsrett)

Portugal (Obrigações)

Spain (Cédulas)

Sweden (Säkerställda obligationer)

UK (Regulated Covered Bonds, individual contracts)

USA (individual contracts)

71 | September 2011

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Covered Bond Frameworks

Canada

Denmark

Covered bonds

Realkreditobligationer (RO)

Framework Contractual Legal

Type of

Residential

Mixed

covered bonds

Specialist banking No Yes

Cover assets

Residential

Substitution assets (10%)

Residential

Commercial

Public loans

Substitution assets (15%)

Hedging contracts

Ongoing valuation Subject to bank internal procedures No, only up-front

Required O/C

Subject to the asset percentage from the asset 8% of RW assets

coverage test

Asset segregation

Equitable assignment to guaranteeing vehicle

(GLP).

Segregation, bankruptcy remote per se via capital centres. All assets on

balance sheet are cover assets, including hedging contracts.

Matching requirements Asset coverage tests are performed to ensure

that the adjusted value of mortgages more than

covers the outstanding principal. Interest rate

and currency hedging on contractual basis. Soft

bullet repayment structure.

Interest rate/currency risk 1% and 0.1% of capital base, respectively.

Future payments to investors must be covered by payments from

borrowers received in advance or the capital base. Callable loans must be

funded by callable bonds with matching cash flows. Interest rate risk is

tested in scenarios of yield curve shifts and yield curve twist [of +/- 100bp.

(Note: It is assumed that specialist banks use the specific principle even

though they are allowed to use the general principle. In practice, they use

the specific principle.)

Post bankruptcy procedures Cover pool becomes static, no acceleration of

payments. A less strict asset coverage test is

performed (amortisation test). Breach of the

test equals default of GLP. If GLP defaults

Cover pools become static, no acceleration of payments. A trustee will be

appointed by the FSA to manage all financial transactions. The trustee has

the option to issue mortgage bonds to refinance maturing mortgage bonds

and subordinated debt to raise liquidity.

bonds are accelerated.

Treatment of derivatives Termination of contracts would only occur if

GLP defaults. The payment structure of a GLP

Derivatives used for hedging of interest and currency risk have same

preferential rights as covered bond investors.

usually ranks derivative counterparties higher

bondholders.

LTV residential 80% 80%

LTV commercial - 60%

Accounting of loans in arrears No recognition Yes

Fulfils UCITS/CRD No/No Yes/No

Source: Danske Markets

72 | September 2011

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Covered Bond Frameworks

Denmark

Finland

Særligt dækkede obligationer & realkreditobligationer (SDRO) Kiineistövakuudellinen joukkovelkkakirjalaina

Framework Legal Legal

Type of

Mixed

Mixed

covered bonds

Specialist banking No (SDO), yes (SDRO) No

Cover assets Residential

Commercial

Public loans

Substitution assets (15%)

Hedging contracts

Residential

Commercial

Public loans

Substitution assets (20%)

Hedging contracts

Ongoing valuation Residential: every third year

Regular valuation check

Commercial: every year

Required O/C 8% of RW assets (mortgage banks). No O/C required (banks) No nominal O/C required; however, 2% on NPV basis

Asset segregation Segregation, bankruptcy-remote per se via capital centres. All

assets on balance are cover assets, including hedging contracts

Cover register (joint registers for public and mortgage) including

hedging contracts.

(specialist banks).

Cover register (separate registers for public and mortgage)

including hedging contracts (banks).

Matching

requirements

The matching requirements depend on 1) whether the covered

bond is an SDO or an SDRO, and 2) whether the issuer uses the

specific or general principle.

In all cases, however, strict matching requirements and several

stress/scenario tests apply regarding interest rate risk, currency

Nominal and NPV coverage is required. The average residual

maturity of the covered bonds cannot exceed the average residual

maturity of the assets. The interest payable in any given 12-month

period to the bondholders must not exceed the interest received

from the assets. Any currency mismatch must be hedged

risk and liquidity risk.

Post bankruptcy

procedures

Cover pools become static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions. The administrator has the option to issue mortgage

Cover pool becomes static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions.

bonds to refinance maturing mortgage bonds and subordinated

debt to raise liquidity.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

LTV residential 80% 70%.

LTV commercial 60% (70% if sufficient guarantee) 60%

Accounting of loans Yes

Yes

in arrears

Fulfils UCITS/CRD Yes/Yes Yes/Yes

Source: Danske Markets

73 | September 2011

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Covered Bond Frameworks

France

France

Obligations Fonciéres

Obligation de Financement de lHabitat

Framework Legal Legal

Type of

Mixed

Residential

covered bonds

Specialist banking Yes Yes

Cover assets

Residential

Commercial

Public loans

Residential

Substitution assets (15%)

Hedging contracts

Substitution assets (15%)

Hedging contracts

Ongoing valuation Every year Indexed house price index

Required O/C By law 2%, contractual OC often higher By law 2%, contractual OC often higher (standard 8.1%)

Asset segregation Asset segregation, bankruptcy-remote subsidiary per se via SCF.

All assets on SCFs balance sheet are cover assets.

Asset segregation, bankruptcy-remote subsidiary per se via SCF.

Equitable assignment to SFH, assets remain on parent banks

balance.

Matching

requirements

OC, 180-day liquidity needs coverage and ability to repo own

issuances, controlled ALM

OC, 180-day liquidity needs coverage and ability to repo own

issuances, controlled ALM

Post bankruptcy

procedures

SCF is bankruptcy remote from parent bank (which acts as asset

originator and servicer). If the SCF is declared bankrupt, the

entire SCF becomes static. No further claim against parent bank

if cover assets prove insufficient to satisfy bondholders claims.

However, if the SCF becomes insolvent and the parent company

is a going concern, the French banking regulators may exert

pressure on the holding company to provide support.

SFH is bankruptcy remote from parent bank (which acts as asset

originator and servicer). If the SFH is declared bankrupt, the SFH

becomes static. No further claim against parent bank if cover

assets prove insufficient to satisfy bondholders claims. However,

if the SFH becomes insolvent and the parent company is a going

concern, the French banking regulators may exert pressure on

the holding company to provide support.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

LTV residential 60% (80% if 60-80% is non-privileged debt) 80% (loans with LTV levels of up to 100% are allowed in the

cover pool, but in the ACT a 80% LTV ratio cut-off is applied)

LTV commercial 60% -

Accounting of loans in Yes

No recognition or haircut (30% in the amortisation test)

arrears

Fulfils UCITS/CRD Yes/Yes Yes/Possible but in practice no

Source: Danske Markets

74 | September 2011

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Covered Bond Frameworks

France

Germany

CRH

Pfandbriefe

Framework Legal Legal

Type of

covered bonds

Residential

Mortgage

Public

Ships

Specialist banking Yes No

Cover assets

Residential

Substitution assets are not allowed

Residential

Commercial

Public loans

Substitution assets (20% mortgage, ships)

Substitution assets (10% public)

Hedging contracts (12% NPV basis)

Ongoing valuation Regular inspections by CRH Every two years

Required O/C Min. 25% (plus CRHs equity) 2% on NPV basis

Asset segregation The housing loans refinanced by CRH remain on the banks

balance sheets. However, in the event of a borrower default, the

Cover register (separate registers for public and mortgage)

including hedging contracts.

loans will be transferred to CRH.

Matching

requirements

Direct matching of both average life and present value between

the pledged portfolio and the bonds. Moreover, the average

interest rate on the pledged portfolio must at least be equal to

Coverage by nominal value and NPV coverage is maintained

under either dynamic or static cover pool. Must hold liquidity to

cover the next 180 days of payments on bonds.

that of the bonds.

Post bankruptcy

procedures

If the pledged portfolio is insufficient to cover liabilities, CRH has

recourse to the borrowing bank (pari passu with the unsecured

creditors). Furthermore, if this is still not enough, CRH defaults

and the bondholders have recourse to CRH.

No acceleration of payments. Special cover pool/covered bond

administrator appointed with authorities to engage in bridge

financing as well as transferring cover pool to another bank

(subsequently cover pool becomes dynamic again).

Treatment of

derivatives

CRH is not allowed to use derivatives as collateral.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors. Limit of 12%

of NPV.

LTV residential 60% (80% if 60-80% is non-privileged debt) 60%

LTV commercial - 60%

Accounting of loans in No recognition

Yes

arrears

Fulfils UCITS/CRD Yes/yes Yes/Yes

Source: Danske Markets

75 | September 2011

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Covered Bond Frameworks

Greece

Holland

Covered bonds

Covered bonds

Framework Legal Legal (individual contracts)

Type of

Mixed

Residential

covered bonds

Specialist banking No No

Cover assets

Residential

Commercial

Residential

Substitution assets (10%)

Public loans

Substitution assets

Hedging contracts

Ongoing valuation - Indexed house price index

Required O/C 5.3% 5.5-10.5% (contractual)

Asset segregation 1) Cover register including hedging contracts, or 2) SPV set-up Equitable assignment to guaranteeing vehicle (LLP).

with equitable assignment to guaranteeing vehicle (CB).

Matching

requirements

Nominal value coverage and NPV coverage is required - also

under a 200bp shift in interest rates. Duration of bonds cannot

exceed the duration of the cover assets.

Asset coverage tests are performed to ensure that adjusted

value of mortgages more than covers outstanding principal.

Interest rate and currency hedging on contractual basis.

Different repayment structures (soft/hard bullet bonds). Hard

bullet structure includes pre-maturity test and liquidity buffer.

Post bankruptcy

procedures

In case of issuer insolvency cover pool becomes static, no

acceleration of payments. An administrator is appointed to

take care of cover assets

Cover pool becomes static, no acceleration of payments. A less

strict asset coverage test is performed (amortisation test).

Breach of the test equals default of LLP. If LLP defaults bonds

are accelerated.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Termination of contracts would only occur if LLP defaults. The

payment structure of an LLP usually ranks derivative

counterparties higher than bondholders.

LTV residential 80% Generally 80% (loan-to-market-value) or 125% (loan-toforeclosure-value)

LTV commercial 60% -

Accounting of loans in No recognition

No recognition, repurchase or haircut

arrears

Fulfils UCITS/CRD -/- Yes/Yes (but only if cover pool assets comply with CRD)

Source: Danske Markets

76 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Ireland

Italy

Asset Covered Securities

Obbligazioni Bancarie Garatite

Framework Legal Legal

Type of

covered bonds

Residential

Commercial

Mortgage

Public

Public

Specialist banking Yes No

Cover assets

Residential

Commercial

Public loans

Substitution assets (15%)

Hedging contracts

Residential

Commercial

Public loans

Substitution assets (15%)

Hedging contracts

Ongoing valuation Regular valuation check (at least once a year) based on prudent

market value principles

Professional valuer with market value as basis (semi-annual

review)

Required O/C

Residential 3% (nominal basis)

No minimum O/C required by law

Commercial 10% (nominal basis)

Public loans 3% (NPV basis)

Asset segregation Cover register (separate register for public, commercial and Cover register including hedging contracts.

mortgage) including hedging contracts.

Matching

Nominal and NPV coverage is required. Duration of bonds cannot NPV and nominal coverage is required.

requirements

exceed assets. The average residual maturity of the covered

bonds cannot exceed the average residual maturity of the assets.

The interest payable in any given

12-month period to bondholders must not exceed the interest

received from assets.

Post bankruptcy

procedures

Cover pool becomes static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions.

Cover pool becomes static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

LTV residential 75% (loans with higher LTV allowed but capped at 75%, maximum 80%

average LTV 80%).

LTV commercial 60% (loans with higher LTV allowed but capped at 60%, maximum 60%

average LTV 80%)

Accounting of loans in No recognition, substitution indented.

No recognition, substitution indented.

arrears

Fulfils UCITS/CRD Yes/Yes Yes/Yes

Source: Danske Markets

77 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Luxembourg

Norway

Lettre de gage

Obligasjoner med fortrinnsrett

Framework Legal Legal

Type of

covered bonds

Mortgage

Public

Mixed

Mortgage

Public

Specialist banking Yes Yes

Cover assets

Residential

Commercial

Public loans

Substitution assets (20%)

Hedging contracts

Residential

Commercial

Public loans

Substitution assets (20%, up to 30% with the consent of the

supervisor)

Hedging contracts

Ongoing valuation Regular valuation check Regular valuation check

Required O/C No O/C required No O/C required

Asset segregation Cover register (separate registers for public and mortgage)

including hedging contracts.

Cover registers (joint registers or separate registers for public,

commercial and mortgage) including hedging contracts.

Matching

requirements

Nominal and NPV coverage is required. The interest payable to

the bondholders must not exceed the interest received from the

assets.

Nominal coverage and NPV coverage. Nominal coverage is

maintained under stress scenarios (parallel yield curve shifts +/-

100bp and twists. Currency stress tests +/- 10%).

Post bankruptcy

procedures

Cover pools become static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions.

Cover pools become static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all financial

transactions. Further details to be announced.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

LTV residential 60% (loans with higher LTV allowed but only portion up to 60% is 75%

considered eligible).

LTV commercial 60% (loans with higher LTV allowed but only portion up to 60% is 60%

considered eligible).

Accounting of loans in

arrears

Yes

Yes, but only performing loans are included in matching

calculations.

Fulfils UCITS/CRD Yes/No Yes/Yes

Source: Danske Markets

78 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Portugal

Spain

Obrigações

Cédulas

Framework Legal Legal

Type of

covered bonds

Mortgage

Public

Mortgage

Public

Specialist banking Optional No

Cover assets

Residential

Commercial

Public loans

Substitution assets (20%)

Hedging contracts

Residential

Commercial

Public loans

Substitution assets (5%)

Hedging contracts

Ongoing valuation Regular valuation check based on prudent market value

Regular valuation check

principles (residential = every three years, commercial = every

year).

Required O/C

Nominal O/C of 5.26%. Voluntary O/C protected by law in case of

insolvency.

Mortgage 25%

Public 43%

Asset segregation Cover register including hedging contracts. Cover register including hedging contracts. Investors have a

priority claim over entire mortgage book.

Matching

Nominal and NPV coverage required. On NPV basis the cashflow No matching requirements.

requirements

from the cover pool must exceed that of the covered bonds,

taking into account stress tests (+/- 200bp). The average

residual maturity of the covered bonds cannot exceed the

average residual maturity of the assets. Interest payable to

bondholders cannot at any point in time exceed the interest

received from assets. Currency risk must be hedged.

Post bankruptcy

procedures

No acceleration of payments but bonds can accelerate if twothirds

of bondholders vote in favour. An administrator will be

appointed by the FSA to manage all financial transactions.

No acceleration of payments, cashflows from mortgage loan book

continue to make payments to bondholders. The law does not

specify who will take over administration. For joint-Cédulas, a

liquidity buffer is provided and any potential loss from the default

of one of the participating banks is distributed pro rata among

other participants.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

Derivatives used for hedging of interest and currency risk have

same preferential rights as covered bond investors.

LTV residential 80% 80% (95% in case of bank guarantee or credit loan insurance).

LTV commercial 60% 60%

Accounting of loans in If arrears >90 days loan must be replaced.

Yes

arrears

Fulfils UCITS/CRD Yes/Yes Yes/Yes

Source: Danske Markets

79 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Sweden

UK

Säkerställda obligationer

Regulated Covered Bonds

Framework Legal Legal (individual contracts)

Type of

Mixed

Mortgage

covered bonds

Specialist banking No No

Cover assets

Residential

Commercial (10%)

Public loans

Substitution assets (20%, can be increased to 30% if

Residential

Commercial

Substitution assets (In most contracts, substitution assets

can constitute up to 10/15%).

approved).

Hedging contracts

Ongoing valuation Regular valuation check Indexed house price index

Required O/C No O/C required 7.0-20.5% (contractual)

Asset segregation Cover register (shared register for public and mortgage) Equitable assignment to guaranteeing vehicle (LLP).

including hedging contracts.

Matching

requirements

Nominal as well as NPV coverage. NPV coverage is

maintained under stress scenarios (parallel yield curve shifts

+/- 100bp and currency +/- 10%).

Asset coverage tests are performed to ensure that adjusted

value of mortgages more than covers outstanding principal.

Interest rate and currency hedging on contractual basis.

Different repayment structures (soft/hard bullet bonds). Hard

bullet structure includes pre-maturity test and liquidity buffer.

Post bankruptcy

procedures

Cover pool becomes static, no acceleration of payments. An

administrator will be appointed by the FSA to manage all

financial transactions (not a dedicated cover pool

administrator). Bridge financing is allowed and administrator

Cover pool becomes static, no acceleration of payments. A

less strict asset coverage test is performed (amortisation

test). Breach of the test equals default of LLP. If LLP defaults

bonds are accelerated.

can sell assets to generate liquidity for bondholders.

Treatment of

derivatives

Derivatives used for hedging of interest and currency risk

have same preferential rights as covered bond investors.

Termination of contracts would only occur if LLP defaults. The

payment structure of an LLP usually ranks derivative

counterparts senior to bondholders.

LTV residential 75% 80%

LTV commercial 60% (70% agricultural) 60%

Accounting of loans in Repurchase if arrears >60 days

No recognition, repurchase or haircut

arrears

Fulfils UCITS/CRD Yes/Yes Yes/Depends on contracts

Source: Danske Markets

80 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

US

Covered Bonds

Framework

Contractual

Type of

covered bonds

Residential

Specialist banking No

Cover assets

Residential

Substitution assets (10%)

Hedging contracts

Ongoing valuation Indexed house price index (15% haircut for indexed valuation).

Required O/C

4.2% (Bank of America)

7.5% (Washington Mutual, now part of JPMorgan Chase)

Asset segregation Wamu/BoA issue covered bonds through statutory trusts. Asset

segregation is achieved by cover registers in the banks own

books.

Matching

Asset coverage tests are performed to ensure that adjusted

requirements

value of mortgages more than covers outstanding principal.

Interest rate and currency hedging on contractual basis. Soft

bullet repayment structure (120 days).

Post bankruptcy Default of the bank does not accelerate payments. But if the

procedures

statutory trust defaults, all payments would be accelerated.

Treatment of

Depending on the contract

derivatives

LTV residential 75% (contractual)

LTV commercial -

Accounting of loans in If arrears > 60 days, loans are not taken into account in the ACT

arrears

Fulfils UCITS/CRD No/No

Source: Danske Markets

81 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Disclosures

This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank").

The author of the research report is Søren Skov Hansen, Analyst.

Analyst certification

Each research analyst responsible for the content of this research report certifies that the views expressed in the

research report accurately reflect the research analyst’s personal view about the financial instruments and issuers

covered by the research report. Each responsible research analyst further certifies that no part of the compensation

of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed

in the research report.

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to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske

Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the

regulation by the Financial Services Authority are available from Danske Bank upon request.

The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’

rules of ethics and the recommendations of the Danish Securities Dealers Association.

Conflicts of interest

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high

quality research based on research objectivity and independence. These procedures are documented in the

research policies of Danske Bank. Employees within the Danske Bank Research Departments have been

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Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes

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Danske Bank is a market maker and may hold positions in the financial instruments mentioned in this research

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General Disclaimer

This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for

informational purposes only. It does not constitute or form part of, and shall under no circumstances be

considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments

(i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or

options, warrants, rights or other interests with respect to any such financial instruments) ("Relevant Financial

Instruments").

The research report has been prepared independently and solely on the basis of publicly available information

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affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without

limitation any loss of profits, arising from reliance on this research report.

The opinions expressed herein are the opinions of the research analysts responsible for the research report and

reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not

undertake to notify any recipient of this research report of any such change nor of any other changes related to the

information provided in the re-search report.

This research report is not intended for retail customers in the United Kingdom or the United States.

This research report is protected by copyright and is intended solely for the designated addressee. It may not be

reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior

written consent.

82 | September 2011

www.danskeresearch.com


Covered Bond Frameworks

Disclaimer related to distribution in the United States

This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer

and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S.

Securities and Exchange Com-mission. The research report is intended for distribution in the United States solely

to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this

research report in connection with distribution in the United States solely to “U.S. institutional investors”.

Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence

of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are

not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements

of a non-U.S. jurisdiction.

Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial

Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-

U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be

registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and

auditing standards of the U.S. Securities and Exchange Commission.

83 | September 2011

www.danskeresearch.com


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