Rating action

Scope Ratings GmbH (Scope) has affirmed the AAA rating on the Danish mortgage covered bonds (Pool C - særligt dækkede obligationer – SDO) issued by Danske Bank. The Outlook is Stable.

Download the covered bond performance update.

Key rating drivers

Covered bond rating anchor: A+/Positive. The issuer rating is the starting point of the covered bond rating. Its positive Outlook reflects the issuer’s improvements in governance and risk management embedded as key element of the group’s culture as the closure of the corporate probation period under ad-hoc regulatory oversight is approaching. See detailed rating report here.

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

Scope’s legal framework and structural support analysis for Danske Bank A/S’s Danish mortgage covered bonds (Pool C) considers: 1) the cover pool’s valid segregation from a potential insolvency estate of Danske Bank A/S; 2) the very high likelihood of bond payments continuing after a moratorium or insolvency; 3) strong legal asset eligibility and risk management principles; 4) that enhancements to the covered bond programme remain available after a moratorium or insolvency of the issuer; and 5) the strong regulatory oversight specifically for Danish covered bonds (ESG factor).

The resolution regime and systemic importance assessment considers: 1) the existence and clarity of statutory provisions that allow to maintain an issuer and its covered bonds as a going concern upon a regulatory intervention; 2) the strength of such statutory provisions protecting covered bonds against regulatory actions or bail-in; 3) the very high systemic importance in Denmark of the issuer and the very high relevance of Danish covered bonds; and 4) Denmark’s strong proactive stakeholder community (ESG factor).

Cover pool support (plus up to three notches). This potential additional rating uplift reflects the impact of the second recourse. It considers the programmes cover pool complexity (CPC) risk category of Low which could translate into an additional cover pool supported uplift of up to three additional uplift notches (ESG factor).

The current rating supporting overcollateralisation (OC) relies on the legal minimum OC. An OC of 6% would allow to shield the current rating against a five-notch issuer downgrade which is the lowest issuer rating that still allows to maintain the current assigned ratings.

This OC reflects:

• Credit risk – Norwegian and Swedish commercial mortgages prevail. The covered bonds are backed by mortgage loans from Sweden (70.3%) and Norway (29.7%), with 0.1% in substitute assets. Approximately 75.9% of the loans are for commercial properties (including agriculture), and 24.1% for private rental or multifamily housing. The pool includes 4,253 loans with an average size of DKK 12m (~EUR 1.6m). The top 10 loans account for 7.8%. The average LTV is 51.5%. Interest-only loans account for 33.5%, while the rest are amortising; 93.5% are adjustable-rate (fixed for up to one year), with the rest at fixed-rate. The default projection is based on an inverse Gaussian distribution, characterised by an annual default rate of 0.53% (WAL 4.3y) for the Swedish mortgage loans and 0.34% (WAL 1.8y) for the Norwegian mortgage loans, with a coefficient of variation of 55% for both pools. The stressed mortgage recovery rates are 55% for the Swedish portfolio and 62.5% for the Norwegian portfolio.
   
• Market risk – Well managed mismatches. Market risks are present due to mismatches in maturity, interest rates and currencies, though these are well managed and effectively hedged. The weighted average scheduled maturities of the cover assets (4.6 years) and liabilities (4.0 years including extensions) create a mismatch that may result in carry costs from excess cash – particularly in scenarios with high prepayments and a low or negative interest rate environment. Interest rate and currency mismatches are hedged on the covered bonds to match the profile of the cover assets.

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

Outlook and rating sensitivities

The Stable Outlook on the covered bonds reflects Scope’s view on the stable credit performance of the issuer, and that governance support or cover pool support factors will not materially change.

Upside scenarios are not applicable as the rating is the highest achievable.

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

• An issuer rating/Outlook downgrade by more than five notches.
   
• A reduction in the governance support uplift by five notches or more.
   
• A deterioration in Scope’s CPC assessment that could reduce the potential credit support from the cover pool.
   
• Available or committed OC below rating-supporting or 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. In addition, the stressed security value haircuts include another 5%, accounting for the portfolio’s exposure to second lien mortgages.

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 participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: the Rated Entity 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 were not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed.
Lead analyst: Mathias Pleißner, Executive Director 
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook were first released by Scope Ratings on 22 September 2015. The Credit Rating/Outlook were last updated on 4 July 2024.

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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