Scope has published the final version of its covered bond rating methodology. The methodology update, which follows a call for comments released on 10 May 2024, has no rating impact. Scope has not received any comments.

The introduction by Poland’s financial supervisory authority (KNF) of a long-term finance ratio for residential mortgages could provide a boost to Poland’s hibernating covered bond market. Green covered bonds could become the instrument of choice.

This year will not set any records for investor-placed covered bonds. After moderate-to-strong activity for most of the year, issuance in June was the slowest in over 10 years. But we still believe our projected volume of EUR 170bn for 2024 is feasible.

There is less than six months to go until the property value in the updated Capital Requirements Regulation takes effect. This could have a notable impact on covered bonds as market values are directly linked to the amount of bonds that can be issued.

Scope Ratings requests comments on its Covered Bond Rating Methodology by 27 June 2024. The proposed changes to the methodology are not expected to have an impact on outstanding covered bond ratings assigned by Scope.

With our negative CRE outlook persisting and the collateral values of CRE loans volatile, covenant breaches are also driving up NPLs. Regulators are seeking to address value volatility, but Pfandbriefe are shielded because of cover-pool eligibility caps.

EU supervisors remain concerned that banks’ real-estate exposure is vulnerable, and US contagion risk is an issue. But while German banks’ CRE portfolios are unlikely to have endangered the safe-haven status of Pfandbriefe, office exposure is a worry.

After a strong January, EUR benchmark covered bond issuance slowed in February and March. Some of the reluctance to issue may have been driven by Germany’s specialised commercial mortgage lenders, given rising tensions in commercial real estate.

Housing affordability is stretched and systemic risk a concern. Policy measures to improve financial system resilience can help. Germany might introduce borrower-based measures but they will need to be carefully calibrated to avoid further curbing supply.

Active covered-bond supply so far this year is testament to a functioning market, but the end of ECB asset purchases has shown that the waters can become choppy: issuers and arrangers have to take care around timing and investor appetite.