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.

The covered bond market saw USD 187bn-equivalent primary supply YTD to 19 July. The pace of issuance caused some strains at the end of Q2 as buyers succumbed to fatigue, pushing issuers to adopt a more cautious approach to pricing into the summer break.

Existing ratings are not impacted

House prices fell in real terms in all but two countries of the EEA in the year to Q1 2023, led by Sweden with a 15.2% decline and Germany with 14%. Across Europe, there was a real weighted average fall of 8.4%.

The updated methodology, now final following a call-for-coment period, will apply to all covered bonds ratings.