OREANDA-NEWS. August 31, 2015. Fitch Ratings has affirmed Danske Bank's (Danske, A/Stable/F1, Viability Rating: a) mortgage covered bonds secured by Cover Pool I at 'AAA' with a Stable Outlook. The rating action follows a review of the programme. Danske Category I has EUR13.9bn-equivalent of covered bonds outstanding.

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 15.7% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the 12% 'AAA' breakeven OC. The Stable Outlook for the covered bonds rating reflects that on the bank's IDR.

The 'AAA' break-even OC for Danske I covered bonds rating remains unchanged at 12% since the last rating action in May 2015. In the absence of a public OC commitment above the legal minimum, Fitch compares its calculated breakeven OC for the rating with the lowest OC over the last 12 months (15.7%), which the agency relied on given Danske's 'F1' Short-term IDR. 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 breakeven OC is driven by a cover pool credit loss component of 7.7% in a 'AAA' scenario. The 'AAA' weighted average (WA) default rate and 'AAA' WA recovery rate are 13.3% and 46.4% respectively, based on the agency's May 2015 analysis and there have been no significant changes to the pool composition since. The cover pool balance consists of 52% Norwegian residential mortgages and 48% Swedish residential mortgages.

The cash flow valuation component leads to a lower 'AAA' breakeven OC by 6.0% due to the large excess spread on the assets (144bps including the haircut applied by Fitch) versus the covered bonds (91bps).

The asset disposal loss component is 5.1%, mostly driven by the negative carry resulting from Fitch re-investment cost assumptions under a high prepayment scenario (45% p.a.) applied to cover pool cash flows with a much longer weighted average life (31.7 years) compared with the covered bonds (4.6 years).

The D-Cap of 3 notches is driven by what Fitch assesses as moderate high risk assessment of the liquidity gap and systemic risk, cover pool-specific alternative management, and privileged derivatives sections of the agency's discontinuity risk analysis.

The IDR uplift of 2 notches is attributable to Fitch classifying Denmark as a covered bond intensive jurisdiction and also the agency's view that given the large size of Danske in its domestic market there is a high likelihood of resolution methods being used rather than the bank being liquidated.

The bonds have been issued in EUR, CHF, GBP, NOK, and USD at fixed and variable rates, while nearly all mortgages in the pool pay a floating rate. Asset and covered bond swaps are in place with Danske Bank to hedge the currency and interest rate mismatches in the programme.

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 12%.

The Fitch breakeven overcollateralisation for the covered bond rating will be affected, amongst 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.