OREANDA-NEWS. Fitch Ratings has affirmed Denmark-based Nykredit Realkredit A/S's (Nykredit) Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a'. The Outlook on the Long-Term IDR is Stable.

Fitch has also affirmed wholly-owned subsidiary Nykredit Bank A/S's Long-Term IDR at 'A' with a Stable Outlook, and Support Rating at '1'.

A full list of rating actions is available at the end of this rating action commentary.

The rating actions are part of a periodic portfolio review of two major Danish banking groups rated by Fitch.



Nykredit's ratings reflect the bank's leading Danish mortgage lending franchise, resilient asset quality, and robust capitalisation. The ratings also factor in Nykredit's moderate profitability and wholesale funding reliance, although the latter is mitigated by a large, deep and liquid domestic covered bond market.

The loan book is of good quality, with a ratio of impaired-to-gross loans of 1.6% at end-March 2016. The vast majority are performing mortgage loans, with a small proportion of higher-risk non-mortgage lending in Nykredit Bank (impairment ratio of 7.3% at end-2015). Fitch expects the quality of mortgage lending to remain resilient, supported by a gradual domestic economic recovery and conservative risk appetite.

Management aims to gradually grow and diversify the bank's franchise in Denmark, although Fitch expects this to be achieved without increasing the group's risk appetite as growth will mainly focus on cross-selling and broadening the product offering with existing clients.

The bank's capitalisation is solid and compares well with peers, both on a risk-weighted and leverage basis. Its Fitch core capital (FCC) ratio amounted to 20% at end-March 2016, and its Basel III leverage ratio was 4.3%.

Nykredit benefits from resilient core revenue generation and sound cost management, but margins are low and reflect its low-risk business model. The bank recently announced a price increase on its administration margin (effective from 1 July 2016) that we believe will have a material positive earnings impact. Negative interest rates in Denmark have had a manageable impact on the bank's margins. The bank is not directly exposed to interest rate risk in its mortgage financing (due to the Danish covered bond funding structure) although it is sensitive to lower treasury returns.

Nykredit's mortgage business is by law entirely wholesale-funded, by mortgage bonds that match the interest term of the underlying mortgage loan. The group has actively reduced the share of bonds maturing within one year to just over 20% at end-2015 (from over one-third at end-2012), and the proportion of loans requiring refinancing on an annual basis to less than 10% of gross lending at end March 2016 (from just over 20% at end-2014). We believe that the bank's recently announced mortgage price adjustments will help reduce those volumes further.

We believe the risk of wholesale market dislocation is partly offset by the group's strong and sophisticated approach to wholesale funding requirements, and this dependence on short-term wholesale funding is also partially mitigated by structural features in the Danish mortgage covered bond market. We expect continued strong demand for Danish mortgage covered bonds in light of the need for domestic financial institutions, insurance companies and pension funds to hold highly liquid, high quality, securities in domestic currency. This is reinforced by a fairly limited outstanding volume of Danish government bonds. Nonetheless, maintaining a significant liquidity portfolio to mitigate refinancing risks is a key factor for Nykredit's current ratings.


Nykredit's '5' Support Rating (SR) and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event of the bank becoming non-viable. The EU's Bank Recovery and Resolution Directive provides a framework for resolving banks that will require senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.


Subordinated debt and other hybrid capital issued by Nykredit are all notched down from its VR and have been affirmed accordingly.

In accordance with Fitch's criteria, subordinated debt is rated one notch below Nykredit's VR to reflect the higher-than-average loss severity of this type of debt.

Tier 2 contingent capital instruments and Additional Tier 1 securities are rated three and five notches, respectively, below Nykredit's VR to reflect the higher-than average loss severity risk of these securities (two notches) as well as the high risk of non-performance (an additional one and three notches, respectively).


Nykredit Bank's IDRs and debt ratings are aligned with Nykredit's given the subsidiary's core position within the Nykredit group, including full ownership, strong support track record, and likely high reputational risk from allowing the subsidiary to default.

Nykredit also provides a full range of services to Nykredit Bank's customers, which the mortgage institution itself is unable to provide. Given its close integration into the larger group, including various shared services, we have not assigned a VR to the subsidiary.



The Stable Outlook reflects Fitch's view that Nykredit will continue to maintain strong asset quality while improving its earnings to internally generate capital.

Although not expected by Fitch, pressure on the ratings could come from an adverse change in investor sentiment materially affecting Nykredit's ability to access competitively priced funding or from reduced emphasis on liquidity. An increased reliance on international debt investors who may prove less stable during financial stress, or increasing risk appetite - particularly at Nykredit Bank - would also be rating-negative.

An upgrade is currently unlikely given the group's already high ratings and limited product breadth. In the longer term, an upgrade would be contingent on Nykredit broadening its product offering, providing it with more diversified revenue streams.


An upgrade of the SR or upward revision of the SRF would be contingent on a positive change in Denmark's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.


The ratings of subordinated debt and hybrid securities issued by Nykredit are sensitive to a change in Nykredit's VR.

Tier 2 contingent capital instruments and Additional Tier 1 securities are also sensitive to Fitch changing its assessment of the probability of their non-performance risk relative to the risk captured in Nykredit's VR.


Nykredit Bank's ratings are sensitive to the same factors that may drive changes to Nykredit's IDRs.

The rating actions are as follows:

Nykredit Realkredit A/S

Long-Term IDR: affirmed at 'A', Stable Outlook

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'A'

Subordinated debt: affirmed at 'A-'

Tier 2 contingent capital notes: affirmed at 'BBB'

Additional Tier 1 notes: affirmed at 'BB+'

Nykredit Bank A/S

Long-Term IDR: affirmed at 'A', Stable Outlook

Short-Term IDR: affirmed at 'F1'

Support Rating: affirmed at '1'

Senior unsecured debt: affirmed at 'A'/'F1'