OREANDA-NEWS. Fitch Ratings has affirmed Danske Bank's (Danske, A/Stable/F1) mortgage covered bonds secured by Cover Pool I at 'AAA' with a Stable Outlook. The rating action follows a review of the programme. Danske has EUR12.6bn-equivalent of covered bonds outstanding secured by Cover Pool I

KEY RATING DRIVERS

The rating is based on Danske's Long-Term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of 2 notches, an unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk) and the 14.6% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the revised 10% 'AAA' breakeven OC. The Stable Outlook for the covered bonds rating reflects that on the bank's IDR.

As at 31 March 2016, the cover pool consisted of 51% Norwegian residential mortgages and 49% Swedish residential mortgages, in line with the composition in June 2015. Fitch has applied the Norwegian residential mortgage loss criteria updated in March 2016 and also reviewed its assumptions for analysing Swedish residential mortgages to these loans. The foreclosure frequency assumptions have not changed compared with last year and can be found in the Appendix of the Credit Update dated 5 June 2015 (available at this link: https://www. fitchratings. com/creditdesk/reports/report_frame. cfm? rpt_id=866512). The market value decline assumptions have been marginally adjusted in 2016 based on a review of the Swedish housing market and updated house price index.

The market value decline assumptions (in %) are rating dependent and split into the region of Stockholm and the rest of the country. For the 'AAA' rating scenario the revised assumptions are 65.5% for Stockholm and 61.7% for the rest of the country. The complete revised assumptions will be made available in the Credit Update for the 2016 review.

The 'AAA' weighted average (WA) default rate and 'AAA' WA recovery rate are 12.7% and 49%, respectively.

The 'AAA' breakeven OC has decreased to 10% from 12% due to the reduction in the asset disposal loss component to 3.3% from 5.1% and a reduction in the credit loss component to 6.8% from 7.7%. The asset disposal loss component is mostly driven by the negative carry resulting from Fitch's re-investment cost assumptions under a high prepayment scenario (45% p. a.). The cover pool's credit loss of 6.8% in a 'AAA' scenario has reduced from last year because of improved recoveries stemming from lower loan-to-values (LTV).

The cash flow valuation component leads to a lower 'AAA' breakeven OC by 6.2% due to positive excess spread on the assets versus the covered bonds in a Fitch's worst case high prepayment scenario. The breakeven OC considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario.

The D-Cap remains at 3 and is driven by Fitch's assessment as moderate to high risk in the liquidity gap and systemic risk, cover pool-specific alternative management, and privileged derivatives components. The covered bonds have an extendible maturity feature, which can be exercised at the discretion of the issuer and can provide time to raise liquidity from the assets after the recourse has switched to the cover pool.

The IDR uplift is unchanged at 2 due to Fitch classifying Denmark as a covered bond-intensive jurisdiction, and our view that given the large size of Danske and its status as a domestic systemically important financial institution, there is a high likelihood of resolution methods being used rather than the bank being liquidated.

The bonds have been issued in EUR, NOK, CHF, GBP and USD at fixed and variable rates and are swapped to SEK or NOK to match the currency of the mortgages in the pool. Asset and covered bond swaps are in place with Danske Bank to hedge the currency and interest rate mismatches in the programme.

The following criteria variation was applied during the analysis of this programme. Fitch did not apply FX stresses in its cash-flow modelling. The agency considers that a wind-down of the programme after recourse has switched to the cover pool would not expose bondholders to FX risk, as the notional and weighted average life of cover assets in each currency exceed that of the corresponding bonds on a post swap basis. This reflects Danske's management of the assets and liabilities in SEK and NOK separately, to limit the currency risk that arises when assets and liabilities in the respective currencies diverge.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the Issuer Default Rating is downgraded by three or more notches to 'BBB' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap is reduced to two or lower; or (iii) the overcollateralisation that Fitch considers in its analysis decreases below Fitch's 'AAA' breakeven level of 10%.

The Fitch breakeven overcollateralisation for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven overcollateralisation to maintain the covered bond rating cannot be assumed to remain stable over time.