Rating action

Scope Ratings GmbH (Scope) has affirmed the AAA rating on the NOK 50bn (NO0013056184) Norwegian mortgage covered bond (obligasjoner med fortrinnsrett) issued by DNB Boligkreditt (DNBB). The Outlook is Stable.

Download the performance report.

Key rating drivers

Covered bond rating anchor: not disclosed. The high credit quality of the issuer forms the starting point of the covered bond rating. It reflects the mortgage bank’s strong integration into the DNB group, the leading financial services franchise in Norway. Scope has a subscription rating on DNB Bank ASA. To view the rating and rating report on ScopeOne, Scope’s digital marketplace, or to register, please click here.

Governance support (plus up to six notches). This rating uplift reflects the high likelihood of DNBB’s covered bonds being maintained as a going concern in the event of regulatory action in the issuer or its parent as well as a smooth transition from the first (issuer) to the second recourse (cover pool) if needed. It consists of four notches from our resolution regime and systemic importance assessment and two notches from Scope’s legal framework and structural support assessment.

Scope’s legal framework and structural support analysis for DNBB’s covered bonds considers: 1) the cover pool’s valid segregation from the insolvency estate of the issuer and its parent; 2) the very high likelihood of bond payments continuing after insolvency; 3) the strong legal and programme specific asset eligibility and risk management principles; 4) that enhancements to the covered bond programme remain available after an insolvency of the issuer; and 5) the strong regulatory oversight specifically for Norwegian covered bonds. (ESG factor)

The resolution regime and systemic importance assessment considers: 1) the existence of statutory provisions (Bank Recovery and Resolution Directive) that protect the covered bonds against regulatory actions in a resolution scenario; 2) the strength of statutory provisions including their exemption from being bailed-in; 3) the very high systemic importance in Norway of the issuer and Norwegian covered bonds; and 4) Norway’s strong and proactive stakeholder community. (ESG factor)

Cover pool support (plus one notch). This rating uplift reflects the impact of the second recourse, constrained by Scope’s cover pool complexity (CPC) risk assessment of ‘high’. (ESG factor)

An overcollateralisation (OC) of 5% (legal minimum) is needed to support the current AAA rating. As of June 2024, the OC is 67.4%. The rating-supporting OC reflects:

• Credit risk – Granular floating rate mortgage loans. The rated covered bond ranks pari passu to other covered bonds issued under the bank’s €60,000,000,000 European Covered Bond (Premium) Programme. The programme is covered by a granular portfolio of domestic mortgage loans with around 350,000 loans. Around two third of the pool are secured by owner-occupied properties. As is usual for Norwegian mortgages, loans are mostly floating rate. The share of bullet loans is 23.4%. These include revolving credit lines, typically with moderate LTVs. The average indexed LTV of 51.8% indicates strong recoveries even under our most severe stresses. In total 1.1% have arrears, 0.12% with arrears exceeding 90 days. The loan’s seasoning stands at around 5.6 years. Scope has calculated a weighted average annualised default rate of 69bps together with a coefficient of variation of 55% and stressed recovery rate of 67.5%.
   
• Market risk – Market risk hedged; maturity mismatches prevail. Both, interest and currency mismatches are hedged. Market risk is driven by maturity mismatches. The weighted average life (WAL) of cover assets of 14.5 years compares to 3.9 years of the liabilities. Mismatches are partly mitigated by the bond’s legal soft-bullet structure shifting the WAL to 4.8 years. The programme does not benefit from liquid, substitute assets.

An OC of 10% would shield the current rating against a five-notch issuer downgrade.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook on DNBB’s covered bond reflects Scope’s view on the stable quality of the issuer as well as governance support factors and the cover pool which together provide a rating buffer of five notches.

Upside scenarios are not applicable as the ratings are the highest achievable.

The downside scenarios for the rating and Outlook are (individually or collectively):

• An issuer rating downgrade by more than five notches.
   
• A reduction in the governance support uplift by more than five notches.
   
• A deterioration in the programme’s interplay between complexity and transparency that worsens Scope’s CPC assessment and reduces the potential credit support from the cover pool in case the covered bond rating becomes reliant on cover pool support.
   
• Available or committed OC below the -supporting level and/ or the legal minimum.

Environmental, social and governance (ESG) factors

Governance is a key rating driver. For more detail, please refer to ‘governance support’ and ‘cover pool support’ (CPC assessment) under the ‘key rating drivers’ section above.

Quantitative analysis and assumptions

For its quantitative analysis Scope applied assumptions as laid down in the covered bond methodology.

Stress testing
No stress testing was performed.

Cash flow analysis
The assessment of potential cover pool support uplift is based on a cash flow analysis using Scope Ratings’ covered bond model (Covered Bonds Expected Loss Model Version 1.2). The model applies Credit Rating distance-dependent stresses to scheduled cash flows to simulate the impact of increasing credit and market risks. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodology used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 26 July 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and Outlook is (Covered Bonds Expected Loss Model Version 1.2), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.
 
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties did not participate in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating and Outlook was not amended before being issued.
 
Regulatory disclosures
The Credit Rating and Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook is UK-endorsed.
Lead analyst: Mathias Pleißner, Executive Director
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 8 November 2023. 
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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