Covered bond rating action follows corresponding action on Deutsche Bank’s issuer rating.
Scope Ratings has today affirmed its AAA ratings on Deutsche Bank AG’s mortgage-covered bonds (Hypothekenpfandbriefe).
The agency has also changed the Outlook to Negative.
Todays ratings action is driven by the seven-notch uplift above Deutsche Bank’s issuer rating (BBB+/Negative) justified by fundamental and cover pool support. The change to Negative of the Outlook on the covered bonds mirrors the Outlook on the issuer. Ceteris paribus, a negative change in the issuer rating could prompt a rating action on the covered bonds.
Scope changed its Outlook on Deutsche Bank’s issuer rating of BBB+ to Negative on 6 June 2018. The agency’s action on the long-term rating Outlook reflects its view that Deutsche Bank’s issuer rating remains fraught with uncertainties around its multi-year effort to recalibrate its business model (see ‘Scope changes Deutsche Bank’s rating Outlook to Negative from Stable (Issuer Rating at BBB+)’).
Scope’s updated analysis of Deutsche Bank’s mortgage-covered bond programme supports the current ratings. The covered bond ratings incorporate the higher uplift provided by:
- fundamental credit support factors, allowing for a six-notch uplift above the bank’s rating; and
- cover pool support of seven notches reflecting available overcollateralisation which mitigates credit and market risks under stressed assumptions. Scopes cover pool analysis is based on publicly available information and therefore only allows for an uplift one notch higher than fundamental credit support.
Supportive legal framework and resolution regime provide six-notch credit differentiation
Fundamental credit support factors provide the covered bond ratings with a six-notch uplift above Deutsche’s issuer rating. Two notches of the uplift are driven by the agency’s analysis of the German legal covered bond framework; and four notches by the benefits of the resolution regime combined with the systemic importance of both the issuer and the product.
Germany’s legal covered bond framework meets all provisions relevant to establishing and maintaining a high-quality cover pool that remains available after potential issuer insolvency, supporting the two-notch uplift. Scope notes that the German covered bond framework is among the most detailed and regularly updated worldwide. The rating agency does not expect potential amendments to comply with the European Commission’s covered bond harmonisation directive to impact this assessment.
The covered bond rating incorporates four additional notches of credit support for issuer- and country-specific benefits provided by the resolution regime and the systemic importance of covered bonds in Germany. This reflects: i) the covered bonds’ exclusion from a bail-in in the hypothetical scenario of the bank experiencing regulatory intervention; ii) Scope’s view on the bank’s resolvability, reflecting the ability of regulators to apply available resolution tools to the issuer’s liabilities and equity, combined with Deutsche Bank’s status as a globally systemically important bank; iii) the flagship status of German covered bonds, their importance to domestic banks as a refinancing tool and strong presence in investor portfolios; and iv) the active and combined efforts of the domestic stakeholder community to maintain German covered bonds as a fixed income instrument of the highest quality.
Cover pool support as primary rating driver but uplift limited
Deutsche Bank’s covered bond ratings incorporate one notch of cover pool support on top of fundamental credit support. Scope analysed the covered bond programme’s credit and cash flow characteristics based on public information as of 31 March 2018. The cover pool characteristics provided are based on 30 June 2018 reporting as no material changes had been made to the composition at the time of the analysis.
Limited credit risk in the cover pool and cash flow risks contained
The largest part of the EUR 9.9bn cover pool comprises residential mortgage loans (61%) followed by commercial assets (36% also including 26% of multifamily housing), as well as 2.8% of substitute assets. The cover pool is highly granular with 72% of the exposures below EUR 300,000 and an average weighted loan-to-value ratio of a moderate 53.3%.
As of 30 June 2018, the covered bond programme benefits from overcollateralisation of 28.6% on a nominal basis. Scope has established that a minimum 22.5% of overcollateralisation supports the cover pool-based rating uplift. Scope observes a maturity mismatch between the assets and covered bonds of about two years (2.5 years on a duration basis). Interest rate risk is low in the cover pool as most assets and liabilities are fixed rate (98.9% and 4.3%% respectively). In addition, assets and liabilities are fully euro-denominated and do not, therefore, pose foreign exchange risk.
Quantitative analysis and key assumptions
Scope established conservative projections of cover pool default, based on comparable German cover pools rated by the agency, using an inverse Gaussian distribution The consolidated segment-specific default and recovery assumptions used in the analysis consist of a weighted average mean default rate of 10% for the residential sub-portfolio and 20% for the commercial assets with a coefficient of variation of 60% and 50% respectively.
Scope applied a weighted average stressed recovery rate of 52%. This translates into a mean loss rate of 6.0%. For the asset sale, Scope has added to its discount rate a blended liquidity premium between 125bps for substitute assets and up to 300bps for commercial loans. Servicing fees were assumed to be of 23 bps. In the stressed analysis, Scope used a low prepayment rate scenario (0%) together with a rising interest rate scenario after the second year.
Scope analysed the substitute assets accounting for 10% of total assets by applying its portfolio model resulting into a non-parametric distribution with a mean default rate of 1.5% and a coefficient of variation of 323%.
Rating Change Driver
Considering the current fundamental and cover pool support, a downgrade of the issuer rating could cause a downgrade of the covered bond rating. The cover pool analysis-based uplift is currently limited to one notch above that provided by fundamental support factors because Scope used public information to assess credit and cash flow risks. Further, it reflects the absence of public statements on the bank’s minimum overcollateralisation and detailed information on the bank’s cover pool management strategy.
Negative rating changes could also be prompted by excessive increases in the cover pool’s risk profile or a reduction in overcollateralisation below the level needed to support the rating. Overcollateralisation has generally remained above the level commensurate with the one-notch uplift, which Scope views positively. Moreover, fundamental support factors provide a floor for the covered bond rating. Credit-negative changes in the cover pool’s risk profile would, in themselves, result in a one-notch downgrade at most, assuming an unchanged issuer rating.
Additional information regarding credit and cash flow risks as well as the management of of the cover pool risks could lead Scope to revise the analysis and consider higher cover pool support up to a maximum of nine notches above the issuer rating and up to three notches above the fundamental support.
Sunak to use budget to expand apprenticeships in England
LONDON (Reuters) – British finance minister Rishi Sunak will announce more funding for apprenticeships in England when he unveils his budget next week, the government said on Friday.
Employers taking part in the Apprenticeship Initiative Scheme will from April 1 receive 3,000 pounds ($4,179) for each apprentice hired, regardless of age – an increase on current grants of between 1,500 and 2,000 pounds depending on age.
The scheme will extended by six months until the end of September, the finance ministry said.
Sunak will also announce an extra 126 million pounds for traineeships for up to 43,000 placements.
Sunak’s March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, but he will also probably signal tax rises ahead to plug the huge hole in the public finances.
Sunak is also expected to announce a “flexi-job” apprenticeship scheme, whereby apprentices can join an agency and work for multiple employers in one sector, the finance ministry said.
“We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike,” Sunak said in a statement.
(Reporting by Andy Bruce, editing by David Milliken)
UK seeks G7 consensus on digital competition after Facebook blackout
LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.
Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.
“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.
“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”
Dowden said recent events had strengthened his view that digital markets did not currently function properly.
He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.
“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.
Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.
“Nick strongly agreed with the Secretary of Stateâ€™s (Dowden’s) assertion that the governmentâ€™s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.
Britain will host a meeting of G7 leaders in June.
It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.
The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.
Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.
(Reporting by William James; Editing by Gareth Jones and John Stonestreet)
Britain to offer fast-track visas to bolster fintechs after Brexit
By Huw Jones
LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.
Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.
“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.
Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.
Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.
The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.
It also recommends more flexible listing rules for fintechs to catch up with New York.
“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.
“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)
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