On 11 August 2016, Scope placed several ratings of Deutsche Bank under review for a possible downgrade. The agency has not placed the German mortgage covered bonds (Hypothekenpfandbriefe) under review for downgrade. The current AAA ratings on the mortgage covered bonds are well supported – at up to seven notches above the bank’s Issuer Credit-Strength Rating (ICSR). This uplift reflects the exceptionally strong fundamental credit support for German mortgage covered bonds, the support of Scope’s resolution regime assessment, and is enhanced by a strong cover pool providing support to the current rating.

In Scope’s view, the fundamental support for German covered bonds translates into a credit support of six notches above the ICSR (see report: 'Covered Bond Framework Analysis – Analytical Considerations'). Based on publicly available information on the pool, Scope believes the current composition of the covered bond programme provides an additional notch of support.

On 30 June 2016 Deutsche Bank’s mortgage cover pool of EUR 8.5bn comprised about EUR 8.2bn of mortgages and EUR 0.3bn of substitute collateral, overall supporting EUR 6.4bn of outstanding mortgage covered bonds. Granular residential mortgage loans make up 87.5% of the mortgage cover pool and only 12.5% consist of mortgage loans backed by commercial real estate. With an average loan-to-value ratio of 54% based on the ‘Beleihungswert’ (lending value), full recovery of delinquent borrowers’ loans is highly likely, even in a rating scenario commensurate with the currently assigned ratings.

The combined view on cover asset redemptions and covered bonds due do not reveal significant liquidity mismatches. Current mismatches are also mitigated by the availability of liquid substitute assets. The current available level of substitute assets might help to avoid a fire sale of mortgage assets. Scope considers that after coverage of credit and mismatch risk, available overcollateralisation is sufficient to cover residual interest rate mismatches arising from the 7.5% higher share of floating-rate covered bonds compared with the cover assets.

Reflecting the credit view on the bank, Scope gives benefit to available overcollateralisation, which, at 32.6% on a nominal basis and 48.5% on an NPV basis, is highly likely to support full recovery of the covered bonds. According to Scope’s methodology, this high likelihood translates into an additional one-notch cover pool uplift above that already suggested by the fundamental assessment of the German covered bond framework.

With a seven-notch credit differentiation supported by the cover pool analysis, the covered bond ratings appear sufficiently resilient, which also supports Scope’s maintenance of the Stable Outlook.

If the review of the bank’s ICSR results in a two-notch downgrade and an assignment of a Negative Outlook on the current rating, Scope would change the covered bonds’ Outlook to Negative. A downgrade of more than two notches on the bank’s ICSR would prompt Scope to take a negative rating action on the covered bonds.