Nov. 26, 2019

Antonio Farina Casper AndersenAdriano Rossi Andrew SouthCovered Bonds 2020 Outlook

Harmonization Set To Raise The Bar

Key Takeaways 3

2019 In Review 4

Sustainable Covered Bonds 8

Harmonization Accomplished 11

New Markets Expansion 12

Issuance Projections 15

Economic Conditions 16

Sovereigns And Banks Outlook 19

Ratings Outlook 25

Germany And Austria 26

Spain, Italy, And Greece 29

France 32

Belgium And The Netherlands 35

U.K. And Ireland 38

The Nordics 41

Related Research 45

Analytical Contacts 46

Contents

2

Sustainability: Several new entrants in the green and social space, with rising issuance

Key Takeaways

Harmonization: Higher standards for asset quality, disclosure, and supervision

New markets: Rapid expansion, with banks from countries such as Japan and Brazil issuing for the first time

Issuance: Despite issuers’ renewed access to cheap central bank funding, European covered bond issuance could rise 5%-10% in 2020, given high scheduled maturities

Economic conditions: Broadly supportive in Europe, despite a slowing economy. House prices expected to rise over the next two years, but at a slower pace

Bank and sovereign ratings: Covered bonds are fairly well insulated from the risk of bank downgrades, while sovereign ratings will remain a key credit driver, especially in Southern Europe

3

Spain And Greece Sovereign Upgrades TriggeredMost Covered Bond Upgrades

Most Covered Bonds Are Rated ‘AAA’

2019 In Review: Sovereign And Bank UpgradesDrove Rating Actions

4

Source: S&P Global Ratings Source: S&P Global Ratings

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Upgrades Downgrades

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2011 2012 2013 2014 2015 2016 2017 2018 2019

'AAA' 'AA' 'A' 'BBB' 'BB'

Year-To-Date Issuance Up 3% At €117 Billion The U.K., Italy, And Spain Grew The MostBenchmark European investor-placed covered bond issuance, 2019 YTD, by country (bil. €)

2019 In Review: Issuance Broadly Stable

5

2019 figures as of Oct. 31. Source: S&P Global Ratings.

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>15% Between +15% and -15% -15%<Growth compared to 2018

Issuance Held Up Despite Less ECB BuyingCBPP3 Holdings

Supported By The Rise In Sustainable Bonds

2019 In Review: Sustainable Issuance Gains Ground

6

Source: European Central Bank. Source: S&P Global Ratings

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2014 2015 2016 2017 2018

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Primary market Secondary market

Harmonized Legal Framework Vote Is A Milestone But Still Work To Do

2019 In Review: Harmonization Will Open Up New Markets

7

Issuers From New Jurisdictions Are Coming To The Market

Source: European Covered Bond Council.

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bil.

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Brazil

Japan

South Korea

Singapore

Oceania

Canada

Central And Eastern Europe

Source: S&P Global Ratings.

Sustainable Covered Bonds: A Steady Rise

– Sustainable covered bond issuance is growing, with year-to-date issuance already 20% above that of 2018 full year.

– Green covered bonds account for approximately three-quarters of sustainable covered bond issuances, in line with the relative share of mortgage-backed covered bonds (typically inclusive of green covered bonds).

– However, social covered bonds have emerged as a key component in the ESG landscape, reflecting the potential positive social impact of public sector lending.

Issuance date Issuer ESG type Maturity (years) Size (bil.)November 2019 CAFFIL Green 10 €0.75November 2019 DKB Social 10 €0.50October 2019 Sparbanken SOR Green 7 €0.50October 2019 SR-Boligkreditt Green 7 €0.50July 2019 Société Générale SFH Green 10 €1.00June 2019 PKO Bank Hipoteczny Green 5.3 PLN0.25May 2019 Nykredit Green 3.4 SEK5.64Mar 2019 Realkredit Danmark Green 3.3 DKK0.10Feb 2019 CAFFIL Social 8 €1.00January 2019 DNB Boligkreditt Green 4.9 SEK9.00January 2019 SCBC Green 5.2 SEK6.00

8

Sustainable Issuance Set To Hit A New Record

Recent Sustainable CB Issuances

YTD--Year to date, as of Nov. 15, 2019. Source: S&P Global Ratings.

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2014 2015 2016 2017 2018 2019YTD

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EUR DKK PLN SEK USD Volume outstanding

Sustainable Covered Bonds: Drivers And Challenges In A Tug Of War

9

Challenges

– No common definition for the collateral backing sustainable covered bonds

– Sustainable covered bond programs are currently more expensive to set up and manage than an unsecured funding program

– There is (so far) no significant funding cost differentiation in the current low interest rate environment

Drivers

– Reputational benefits

– Diversification of the investor base

– Creating favorable conditions for the funding of green and social assets

Sustainable Covered Bonds: 2020 Issuance Expectations

– 2019 full year sustainable issuance is expected to be approximately €9 billion.

– For 2020, assuming that the topic of definitions is addressed, issuance should easily reach €11 billion, representing a 20% year-on-year growth.

10

Published in: “Are Covered Bonds Becoming More Sustainable?”, Sept. 6, 2019

Alignment Of National Legislations With EBA Best Practices

Harmonization Accomplished: A New European Covered Bond Framework

– In April, the European Parliament approved a legislative framework for the harmonization of EU covered bond legislations. The legislative package consists of a directive and regulation.

– National authorities will have 18 months after the legislation is published in the Official Journal of the EU—expected before the end of this year—to transpose the directive into their national legislation and an additional 12 months to implement the new rules.

– We expect that certain countries, such as Spain or Austria, will have more work to do to align their existing framework with the directive.

– While we believe that the framework is broadly positive for the product, raising the standards for asset quality, disclosure, and supervision, we do not expect any immediate impact on our ratings.

11

Sources: European Banking Authority, European Covered Bond Council. Published in: "Harmonization Accomplished: A New European Covered Bond Framework", April 18, 2019.

New Markets: No Longer Just A European Affair

12

*Hungary (€3.8 bil.), South Korea (€2.8 bil.), Turkey (€2.3 bil.), Japan (€1.0 bil.), and Brazil (€454 mil.). Source: European Covered Bond Council.

– Outstanding covered bonds grew by 8% in the last 10 years, but geographic distribution changed.

– While eurozone covered bond balances decreased significantly, notably in Germany, they grew in otherEuropean countries such as Denmark and Sweden.

– Covered bonds in Central and Eastern Europe (CEE) and new markets grew the most in the last years.

Outstanding Covered Bonds In CEE Grew By More Than 50% In The Last Five Years

Central And Eastern Europe: Harmonization Will Support Issuance

– Covered bonds are expanding rapidly in CEE, notably in Poland. We expect this expansion to continue, with new issuers accessing the market for the first time and further enhancements to some of the local frameworks.

– Issuers in the region have traditionally funded themselves with customer deposits and, in several instances, parent support from foreign banks. However, covered bonds are playing an increasingly important role in their funding mix. At the same time, we expect solid growth in mortgage lending in the region, which should support covered bond issuance.

– Several countries, such as Slovakia and Estonia, have recently amended or approved covered bond legislation. Estonia is also working with Lithuania and Latvia to create a pan-Baltic legal framework for the issuance of covered bonds.

– We expect the European Commission's recent legislative initiative on covered bond harmonization to further encourage local legislators to amend or approve frameworks aligned to best practices in established markets.

13

Source: European Covered Bond Council.

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2007 2009 2011 2013 2015 2017

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Czech Republic Hungary Poland Slovakia Turkey

Funding Needs Are Limited In Developed Asia ButHigher In Emerging EconomiesCustomer deposits as percentage of domestic loans

Asia And Latin America: Credit Conditions Remain Supportive But Risk Looms

– Fed and ECB policy should be positive for capital flows in the near term. However, volatility could resurface and sour financial conditions for issuers in emerging markets, as trade and GDP slow and political risks mount.

– South Korea and Singapore pioneered covered bond issuance in Asia. While we expect them to remain the biggest Asian markets in the foreseeable future, other Asian countries could benefit from funding diversification through covered bonds.

– Sumitomo Mitsui Banking Corp. issued the first Japanese covered bond in November 2018, using a contractual structure. We believe that other lenders may follow suit due to the Japanese mortgage market's size and local lenders' funding needs in foreign currencies.

– Although Brazil's National Congress passed a dedicated covered bond legislation in 2015 and related regulation was approved by the central bank in 2017, banks only began testing this new instrument after the 2018 presidential election. We believe that the real test for the success of covered bonds in Brazil will be once issuers are allowed to issue public placements or cross-border covered bonds.

14

Source: S&P Global Ratings.Published in: “New Covered Bond Markets Set To Expand Amid Legislative And Market Developments”, March 21, 2019.

European Issuance Could Rise 5%-10% In 2020

15

– Issuers’ renewed access to cheap central bank funding may substitute for some European covered bond issuance.

– However, ECB asset purchases and ongoing negative yields could help spur supply.

– Scheduled covered bond maturities are also set to rise by nearly 10% in 2020.

– Even assuming flat net issuance, gross volumes could therefore rise modestly.

F--Forecast. Source: S&P Global Ratings.

European Benchmark Covered Bond Issuance

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2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F

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Germany And Italy Weigh On Economic Growth Low Yields Pose Challenges To Banks

Eurozone Economy Is Slowing Further Amid Rising Uncertainties

16

F--S&P Global Ratings forecast.Source: S&P Global Ratings.

Note--Actual yields are quarterly averages. F--S&P Global Ratings forecast. Sources: S&P Global Ratings, Refinitiv.

– We expect the eurozone economy to slow further in 2020 to 1.1% growth, on the back of weaker external demand.

– We expect the ECB to lower its deposit rate by another 10 basis points in December 2019, and to be unable to raise rates until 2022.

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S&P Global Ratings' Eurozone Economic Forecast

Low Growth And Lower Rates In 2020

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F--S&P Global Ratings Research forecast. y/y--year on year. Source: Oxford Economics. Published in: “European Economic Snapshots: Further Slowdown Amid Rising Uncertainties”, Oct. 22, 2019.

– Household consumption and construction will remain the main pillars of growth as unemployment remains low; inflation will be contained at 1.3% in 2020.

– Risks for growth and confidence also remain due to global trade tensions, Brexit, and political fragmentation.

2015 2016 2017 2018 2019F 2020F 2021F 2022F

Real GDP (% y/y) 2.0 1.9 2.7 1.9 1.2 1.0 1.2 1.3

Real exports (% y/y) 6.4 3.0 5.7 3.5 2.4 2.2 2.6 2.7

Real imports (% y/y) 7.5 4.2 5.0 2.7 2.6 2.9 3.1 2.9

Real fixed investment (% y/y) 4.7 3.9 3.8 2.3 2.8 2.1 1.9 1.8

Real private consumption (% y/y) 1.8 1.9 1.8 1.4 1.2 1.3 1.2 1.2

Real government consumption (% y/y) 1.3 1.8 1.5 1.1 1.3 1.2 1.2 1.2

CPI inflation (% y/y) 0.2 0.2 1.5 1.8 1.2 1.2 1.3 1.5

Unemployment rate (%) 10.9 10.0 9.1 8.2 7.6 7.4 7.3 7.2

Short-term interest rate (%) 0.05 0.01 0.00 0.00 0.00 0.00 0.00 0.00

Long-term interest rate (%) 1.21 0.86 1.09 1.13 0.34 -0.01 0.24 0.51

Exchange rate ($ per €) 1.11 1.11 1.13 1.18 1.12 1.12 1.15 1.19

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2016 2017 2018 2019F 2020F 2021F 2022F

House Price Inflation Is Slowing

Europe's Housing Markets Lose Speed

18

Nominal house prices, y/y change. F--forecast. Sources: S&P, OECD, Hypoport, Wüest Partner.Published in: “Europe's Housing Markets Lose Speed As The Economy Weakens”, Sept. 24, 2019.

– We forecast house prices will continue to rise over the next two years, but at a slower pace.

– Looser financing conditions should be broadly supportive of housing demand.

– Worsening affordability and less dynamic job markets will put a lid on house price growth.

Ireland

Netherlands

GermanyU.K.

France

Italy

Spain

Covered Bonds Rating ActionsBy cause, 2010 - 2019

Covered Bond Rating Transitions2010 - 2019

Bank And Sovereign Ratings Trigger Actions OnCovered Bonds

Issuerrating action(35%)

Collateral(15%)

Counterparty rating action(4%)

Sovereignrating action(22%)

Change in criteria(24%)

19

From AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ Total

AAA 62 9 - 7 2 4 5 2 1 2 1 95

AA+ - 1 - - - 1 - - - - - 2

AA 1 - - 1 - - - - - - 2

AA- - - - - - - - - - - -

A+ - - - - - 1 - - - - - 1

Total 63 10 - 8 2 6 5 2 1 2 1 100

Source: S&P Global Ratings. Source: S&P Global Ratings.

– Most of our rating actions on covered bond programs since 2010 resulted from issuer or sovereign rating actions and the application of new criteria.

– Collateral performance explains just 15% of rating actions, due to issuers’ willingness to support their programs and top up the cover pool when asset performance was weakening.

Slow Pace Of Recovery For European Developed Markets Sovereign Ratings

Outlook Distribution Balanced – But Mind The Brexit Gap

EMEA Sovereigns Outlook: Many Ratings Still Below 2009 Level

20

Source: S&P Global Ratings. Source: S&P Global Ratings.

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Positive Negative Outlook balance

Lingering In The Lowzone: Top European Risks

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Source: S&P Global Ratings.

HIGH

Risk level Trend

ELEVATED

HIGH

MODERATE

Disruptive Brexit: Negative economic impact on the U.K. and Eurozone; potential confidence shock.

Rising protectionism given the unilateral policy changes, trade wars (Airbus decision, U.S. tariffs on European car exports).

Weakening European political cohesion, political gridlock, polarization driven by populism and political uncertainty.

Italy: political situation, economic stagnation and eurozone slowdown, public finance sustainability.

EMEA Banks Outlook

22

Key Expectations– The ratings bias is flat and likely to turn negative through 2020.

– In the absence of meaningful strategic initiatives to tackle costs and restructure, some banks’ business models will come under more pressure.

– Capitalization and asset quality should hold up, and we could see further asset quality improvement in some markets.

– Systemic banks will continue making progress in the buildup of bail-in buffers.

– The rationale for consolidation is stronger than ever, but most banks are unwilling to pursue it.

Key Assumptions– The U.K. will not leave the EU without a deal.

– Economic growth will be modest, but the region will not enter into recession.

– The success of monetary policy actions in boosting growth will be limited in the absence of fiscal stimulus.

– Credit conditions will remain favorable and support refinancing and asset quality.

Key Risks– A disruptive Brexit that leads to a severe economic downturn in the U.K.

– Economic growth challenges spread to eurozone countries other than Germany and Italy.

– A lack of a decisive response from banks to their low profitability.

– A build-up of asset bubbles, higher risk taking, or irrational pricing dynamics.

Published in: “Global Banks 2020 Outlook: The Unrelenting Hunt For Returns”, Nov. 18, 2019.

1. Low Profitability Is Becoming A Structural Issue 2. Banks Need To Tackle Their Costs

The Challenges Of Low-For-Much-Longer Rates

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Median: 6.8%

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1. Projected 2020 return on equity for top 100 EMEA banks. 2. Projected 2020 cost to income ratio for top 100 EMEA banks. 3. Increase in nominal house prices. 4. Yield curves for EMEA nonfinancials by rating category. Source: S&P Global Ratings.

3. Risk Of Build Up Of Bubbles In Property Markets 4. Too Low Pricing For Risk In Corporate Europe

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1. Germany: Profitability Is Under Pressure 2. France: Need To Address Inefficiencies

Key Issues In EMEA Banking Systems

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GR IE PT PL ES UK BE FR DK AT SE DE IT NL

Lending margin

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Top 50 European banks Top 5 French banksCost-to-income ratio

3. U.K.: Impact Of Brexit On The Economy 4. Italy: Workout Of Legacy NPAs

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1. Lending margins are measured as the difference between interest rates for new business loans and a weighted-average rate of new deposits. Sources: ECB, S&P Global Ratings. 2. Inefficiencies measure based on the cost-to-income ratio (%). F--S&P Global Ratings forecast.

The Risk Of Downgrades Triggered By Bank Downgrades Is Fairly Limited

25

– The presence of unused notches of uplift reduces the risk of covered bond downgrades if we were to lower our rating on the issuing bank.

– French and German programs are more protected from the risk of bank downgrades.

– Spanish and Italian programs have less of a buffer to mitigate the effect of bank downgrades, and could be immediately affected by a sovereign downgrade.

Source: S&P Global Ratings.

Unused Notches By Country

Positive Signs Of Covered Bonds Upgrades

Sovereign Ratings

Germany* AAA/Stable

Austria AA+/Stable

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Germany Still An Issuance PowerhouseBenchmark investor-placed covered bond issuance

Germany And Austria Credit Trends: Rating Stability Prevails

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*Unsolicited rating. YTD--Year to date. Source: S&P Global Ratings.

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Economic And Housing Market Statistics

Germany And Austria Economic Conditions:Housing Markets Are Heating Up

Economic indicators (%) 2016 2017 2018 2019F 2020F 2021F 2022F

Germany

Nominal house prices, % change y/y 8.4 6.2 6.2 5.3 4.5 3.8 3.3

Real GDP, % change 2.2 2.5 1.5 0.6 1.1 1.2 1.1

CPI inflation (%) 0.4 1.7 1.9 1.4 1.7 1.8 1.9

Unemployment rate 4.2 3.8 3.4 3.2 3.2 3.1 3.0

Austria

Nominal house prices, % change y/y 6.3 1.6 4.7 4.9 4.9 5 N/A

Real GDP, % change 2.0 2.6 2.7 1.4 1.4 1.4 1.4

CPI inflation (%) 1.0 2.2 2.1 1.8 1.9 2.0 2.0

Unemployment rate 6.0 5.5 4.9 4.7 4.8 4.8 4.9

27

F--Forecast. N/A--Not applicable. y/y--Year on year. Sources: S&P Global Ratings, Eurostat, Hypoport, Federal Statistics Office.

HPIs Are Rising Faster Than In Rest Of Europe – Compared with international levels, we consider the risk of a sharp correction in house prices in Austria to be low in the medium term.

– For Germany, we forecast a gradual decline in real house price growth to 3.8% in 2021, from 6.2% in 2018. This gradual slowdown could come amid a somewhat weaker economic growth outlook. That said, we believe low and potentially declining interest rates, demand outstripping supply, and continued net immigration might sustain high house prices.

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Debt Levels Remain Low For German Households

Growth Of German Mortgages Not Fully Transmitted To Covered Bonds

Germany And Austria Credit Outlook

Source: S&P Global Ratings

Austrian banks have conservative lending and underwriting standards. They broadly use mortgage covered bonds for funding, and low LTV ratios also stem from conservative mortgage lending standards required by Austrian covered bonds legislation. We estimate that lending and issuance will increase in line with lending growth. The new harmonization directive will likely mean a reformation of the current Austrian covered bond landscape, which may affect issuance depending on the final outcome.

Notwithstanding the mortgage lending growth, a meaningful increase in private sector leverage through 2021 is not likely. We will continue to see the industry's generally sound underwriting practices. Harmonization may prompt German issuers to begin adopting features seen in other European jurisdictions such as soft bullet structures, and higher loan-to-value (LTV) limits. Targeted long-term refinancing operations (TLTRO) continue to dampen German issuers’ need to issue more covered bonds, although rising house prices could lead to increased issuance.

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Spain And Greece Upgrades Lift Covered Bonds Ratings

Most Covered Bond Programs Have A StableOutlook

Spain, Italy, And Greece Credit Trends: SovereignRatings Trigger Upgrades

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Upgrades Downgrades

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*Unsolicited rating. Source: S&P Global Ratings. N/A--Not applicable. Source: S&P Global Ratings.

N/A(31%)

Stable(38%)

Positive(15%)

Negative(15%)

Sovereign Ratings

Greece BB-/Positive

Italy* BBB/Negative

Spain* A/Stable

Economic And Housing Market Statistics

Spain, Italy, And Greece Economic Conditions: Growth Decelerates In Spain, Stagnates In Italy

30

– House prices in Italy should contract further by 0.4% in 2020, on the back of a stagnating economy. Favorable affordability metrics and low borrowing costs will ensure that demand holds up in the more dynamic economic regions and that the overall fall in housing prices therefore remains mild.

– In Spain, resilient economic conditions and expansionary monetary policy should support housing demand and prices, but affordability is worsening. We therefore expect house-price inflation to decelerate to 5.5% this year and to 4.4% in 2020.

Affordability Worsens In Spain, But Is Better ThanThe Long-Term Average In Italy And GreecePrice-to-income ratio

Greece 2016 2017 2018 2019F 2020F 2021F 2022FReal GDP, % change -0.2 1.5 1.9 2.0 2.5 2.7 2.9CPI inflation (%) 0.0 1.1 0.8 0.6 0.8 1.2 1.5Unemployment rate 23.6 21.5 19.3 17.5 15.9 14.5 13.5Italy Nominal house prices, % change y/y 0.2 -1.2 -0.5 -0.9 -0.4 0.3 1Real GDP, % change 1.2 1.8 0.7 0.1 0.4 0.6 0.7CPI inflation (%) 0 1.3 1.2 0.8 0.7 0.8 1.2Unemployment rate 11.7 11.3 10.6 10.3 10.3 10.2 10.2Spain Nominal house prices, % change y/y 4.5 7.2 6.7 5.5 4.4 3.9 3.3Real GDP, % change 3.2 3 2.6 2.2 1.7 1.7 1.5CPI inflation (%) -0.3 2 1.7 1.1 1.4 1.4 1.6Unemployment rate 19.6 17.2 15.3 13.9 13.3 12.7 12.2

F--Forecast. y/y--Year on year. Sources: S&P Global Ratings, Eurostat, OECD, Banco de Espana, Instituto Nacional de Estadistica (INE), Nomisma.

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Issuance Grows, But Still Well Below PeakBenchmark investor-placed covered bond issuance

Spain, Italy, And Greece Credit Outlook

– Covered bond issuance should remain constrained by continued subordinated issuance to meet regulatory expectations on bail-in buffers, weak growth in funded assets, and the competition from TLTRO III.

– Spanish authorities have considerable work to do to align the local legislation to the harmonization directive recently approved by the European Parliament.

– Most outlooks on banks in the region are stable and the presence of unused notches should limit the impact of rating actions on issuers.

– Most ratings in the region are constrained by sovereign risk considerations. We expect rating actions on governments, if any, to remain a key trigger of covered bond rating actions.

31

YTD--Year to date. Source: S&P Global Ratings.

Sovereign Ratings Are Rebounding

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AAAAAA+A-

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BCCC+CCC-

CC

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Spain Italy Greece

Limited Recent Rating Actions On Covered Bonds

Ample Headroom For Overcollateralization In French Mortgage Programs

France Credit Trends: Covered Bond Ratings Are Stable

32

*Unsolicited rating. Source: S&P Global Ratings. Source: S&P Global Ratings.

25%

20%

15%

10%

5%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Upgrades Downgrades

0% 10% 20% 30% 40% 50%

AXA HL SFH

BNPP SFH

BPCE SFH

CA HL SFH

CM-CIC SFH

HSBC SFH

LBP HL SFH

MMB SCF

Available credit enhancementAsset default riskMarket value risk

Sovereign Rating

France* AA/Stable

Economic And Housing Market Statistics

France Economic Conditions: Weak Household Income Growth Constrains House Prices

33

Source: S&P Global Ratings.

Price Ratios: Household Income Limits Growth

2016 2017 2018 2019F 2020F 2021F 2022F

Nominal house prices, % change y/y 1.5 3.2 3.3 3.4 3.1 2.7 2

Real GDP, % change 1 2.4 1.7 1.4 1.4 1.4 1.4

CPI inflation (%) 0.3 1.2 2.1 1.1 1.1 1.1 1.5

Unemployment rate 10.1 9.4 9.1 8.8 8.8 8.7 8.7

We expect house prices in France to continue to grow steadily by 3.4% this year after 3.3% last year, but to gradually soften after that. Although borrowing costs will drop further with upcoming monetary policy easing, the current weaker economic environment points to less dynamic income growth. This will limit gains in property prices given an already high price-to-income ratio.

F--Forecast. y/y--Year on year. Source: S&P Global Ratings, Eurostat, OECD, INSEE.

0

20

40

60

80

100

120

140

160

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Inde

x (l

ong-

term

ave

rage

= 1

00)

Price-to-income ratio Price-to-rent ratio Long-term average

– In 2020, we expect covered bonds to remain a primary funding source for French banks.

– Issuance should remain roughly stable as the dynamic French housing market (with transactions at an all-time high in May 2019) will provide ample collateral for covered pools. That said, covered bond issuance volumes will be offset by unsecured issuances –comprising senior non-preferred and senior preferred debt – and MREL eligible funding instruments.

– The high ratings on French banks, the stable outlook on all covered bond programs, and the presence of unused notches in the covered bond ratings reflect limited potential for rating actions on covered bond issuers.

– The "société de financement de l'habitat" (SFH) and "société de crédit foncier" (SCF) legal frameworks are in line with the EU harmonization directive, suggesting no immediate need for a revision. In the transposition of the directive into national legislation, the national legislator will need to address the issue of the extension conditions for soft-bullet maturities --just as in other jurisdictions.

Issuance Has StabilizedBenchmark investor-placed covered bond issuance

France Credit Outlook

34

YTD--Year to date. Source: S&P Global Ratings.

0

10

20

30

40

50

60

2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

Bil.

€

No Recent Rating Actions On Covered Bonds

Belgium And Netherlands Credit Trends: Covered Bond Ratings In Safe Territory

35

*Unsolicited rating. Source: S&P Global Ratings Source: S&P Global Ratings.

60%

40%

20%

0%

20%

40%

60%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Upgrades Downgrades

The Netherlands Has A Wide Issuer Base

35%

35%

13%

5%3%

3%3% 2% 1% ING Bank N.V.

ABN AMRO Bank N.V.

Rabobank

De Volksbank N.V.

NIBC Bank N.V.

Nationale-Nederlanden Bank N.V.

AEGON Bank N.V.

Van Lanschot N.V.

Achmea Hypotheekbank

Total €110.8 bil.

Sovereign Ratings

Belgium* AA/Stable

Netherlands* AAA/Stable

Economic And Housing Market Statistics

Belgium And Netherlands Economic Conditions: House Prices Growth Is Stretching Affordability

36

Price Ratios: Affordability Is Worsening

Belgium 2016 2017 2018 2019F 2020F 2021F 2022F

Nominal house prices, % change y/y 2.6 3.6 2.6 3 2.4 2 2

Real GDP, % change 1.5 1.7 1.4 1.1 1.3 1.4 1.4

CPI inflation (%) 1.8 2.2 2.3 1.6 1.7 1.8 1.9

Unemployment rate 7.8 7.1 6 5.7 5.8 5.7 5.7

Netherlands

Nominal house prices, % change y/y 6 8.5 9.1 6.5 5.5 4.6 4

Real GDP, % change 2.1 3 2.6 1.7 1.6 1.5 1.4

CPI inflation (%) 0.1 1.3 1.6 1.8 1.1 1.8 1.8

Unemployment rate 6 4.9 3.8 3.3 3.2 3.2 3.2

– In Belgium despite stretched affordability, we expect favorable economic and financing conditions will support house price growth. We forecast prices will rise by 3.0% this year and 2.4% in 2020.

– In the Netherlands we expect house prices to grow strongly by 6.5% this year and 5.5% in 2020. This marks a deceleration from 9.1% in 2018 due to worsening affordability and weaker growth. The price slowdown in Amsterdam should be sharper than in the rest of the country.

0

50

100

150

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Inde

x (l

ong-

term

ave

rage

= 1

00)

Belgium price-to-income ratioLong-term averageNetherlands price-to-income ratio

F--Forecast. y/y--Year on year. Source: S&P Global Ratings, Eurostat, Banque Nationale de Belgique, Kadaster, CBS Statistics Netherlands, OECD.

Netherlands Issuance Is Robust; Belgium VolatileBenchmark investor-placed covered bond issuance

Belgium And Netherlands Credit Outlook– In the Netherlands, we expect covered bond issuance to

remain stable as the Dutch housing market is still dynamic with associated levels of mortgage lending. On the other hand, Dutch banks continue to use residential mortgage-backed securities (RMBS) issuances as a primary funding tool, somewhat limiting the growth potential for covered bonds.

– In Belgium, although new lending for housing loans has been solid in the past few years, covered bond issuance has been volatile as Belgian banks’ funding needs have been reduced by the recourse to the TLTRO programs. Competition from TLTRO III will continue in 2020.

– The steady ratings on Belgian and Dutch banks, the stable outlook on covered bond programs (excluding Dutch conditional pass-through [CPT] programs, which don’t have outlooks), and the presence of unused notches in the ratings on bullet maturity covered bond programs leads to reduced potential for rating actions on covered bond issuers.

37

*Year to date data. Source: S&P Global Ratings

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

Bil.

€

Belgium Netherlands

Recent Program Upgrades Concentrated In Ireland

Stable Outlooks PrevailCovered bond outlooks – U.K. and Ireland

U.K. And Ireland Credit Trends: Ratings Stable, But Brexit Still Looms

38

*Unsolicited rating. Source: S&P Global Ratings. Source: S&P Global Ratings.

25%

20%

15%

10%

5%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Upgrades Downgrades

Stable(83%)

Negative(17%)

Sovereign Ratings

U.K.* AA/Negative

Ireland A+/Stable

Economic And Housing Market Statistics

U.K. And Ireland Economic Conditions: U.K. Price Growth Stalls While Irish Recovery Slows

39

F--Forecast. y/y--Year on year. Sources: S&P Global Ratings, Eurostat, OECD, Department for Communities and Local Government, Central Statistics Office.

Price Ratios: Future Depends On Brexit Deal

U.K. 2016 2017 2018 2019F 2020F 2021F 2022F

Nominal house prices, % change y/y 5.3 4.6 2.4 0 1.5 3.5 4

Real GDP, % change 1.8 1.8 1.4 1.2 1.4 1.3 1.8

CPI inflation (%) 0.6 2.7 2.5 1.8 1.7 2.4 1.8

Unemployment rate 4.9 4.4 4.1 3.8 4.2 4.5 4.6

Ireland

Nominal house prices, % change y/y 8.7 11.9 7.2 2.5 4 4 3.5

Real GDP, % change 5 7.2 6.7 4 3.4 3 3

CPI inflation (%) -0.2 0.3 0.7 1 1.4 1.5 1.5

Unemployment rate 8.4 6.7 5.8 5.2 5 4.5 4.5

– In the U.K., against the backdrop of Brexit uncertainty, we expect house price growth to stall at the end of this year, before recovering from 2020. In a disruptive no-deal Brexit, we would expect U.K. house prices to drop significantly.

– In Ireland, following the recent slowdown, we expect prices to rise more moderately, provided a disruptive Brexit is avoided. We forecast price rises of 2.5% this year, after a 7.2% rise in 2018. 0

20406080

100120140160180

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Inde

x (l

ong-

term

ave

rage

= 1

00)

U.K. price-to-income ratioIreland price-to-income ratioLong-term average

U.K. And Ireland Credit Outlook

40

YTD--Year to date. Source: S&P Global Ratings

U.K. Issuance Rising; Ireland MutedBenchmark investor-placed covered bond issuance

– In the U.K., 2019 covered bond issuance continued to increase due mainly to banks’ need to find alternative funding sources after the end of the Bank of England’s Term Funding Scheme in 2018. On the other hand, U.K. banks continue to use RMBS issuances as a primary funding tool, which caps the growth potential for covered bonds.

– 2019 has also seen several U.K. banks taking advantage of funding through covered bonds with markets still being receptive prior to any potential Brexit-induced disruptions.

– In Ireland, covered bond issuance has been muted as Irish banks’ funding needs have been addressed by other funding sources--such as RMBS--and recourse to the TLTRO programs.

– The solid ratings on U.K. banks, stable outlooks on covered bond programs (excluding one public sector program), and the presence of unused notches--although limited in magnitude--in the ratings on covered bond programs points to a reduced potential for rating actions on covered bond programs. We may change this view if there is a no-deal Brexit (this scenario would cause rating actions on the issuing banks of two or more notches).

LIBOR Phase-Out Under The SpotlightA common issue affecting U.K. issuers is the LIBOR phase-out in 2021: While new issuances are already Sterling Overnight Index Average (SONIA) denominated, existing LIBOR-denominated bonds and related swaps need to be converted to SONIA. This activity has already started in 2019 and will continue being on most U.K. banks “to-do” lists in 2020.

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

Bil.

€

UK Ireland

Foreign Demand Is Increasing For Danish Covered Bonds

The Nordics Credit Trends: Growth In Private DebtIs Supporting Issuance

41

YTD--Year to date. Source: S&P Global Ratings

Norway And Sweden Domestic Currency Bonds Exceed Euro Issuance In 2019

0%

5%

10%

15%

20%

25%

30%

0%

2%

4%

6%

8%

10%

12%

14%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Share of euro-denominated Danishcovered bonds (leftscale)

Share of foreignownership in Danishcovered bonds (rightscale)

Source: S&P Global Ratings

0

5

10

15

20

2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD

Bil.

€

Finland

Norway

Sweden

Economic And Housing Market Statistics

The Nordics Economic Conditions (I): Still Supportive Of Program Ratings Despite Headwinds

42

Denmark 2016 2017 2018 2019F 2020F 2021F 2022F

Nominal house prices, % change y/y N/A 2.9 3 3 2.5 2.2 N/A

Real GDP, % change 2.4 2.3 1.5 1.7 1.7 1.6 1.7

CPI inflation (%) 0 1.1 0.7 1.1 1.5 1.8 2

Unemployment rate 6.2 5.7 5 5.2 5.1 5.1 5.1

Sweden

Nominal house prices, % change y/y 7.4 -4.3 0 1.1 2.2 3 N/A

Real GDP, % change 2.7 2.1 2.4 1.5 1.8 2 2.2

CPI inflation (%) 1.1 1.9 2 1.8 1.9 2 2.1

Unemployment rate 6.9 6.7 6.3 6.3 6.3 6.2 6.2

Finland

Nominal house prices, % change y/y 0.5 0.3 -0.6 0.8 0.9 1.2 N/A

Real GDP, % change 2.8 3 1.7 1.3 1.2 1.1 1.3

CPI inflation (%) 0.4 0.8 1.2 1.3 1.4 1.6 1.8

Unemployment rate 8.8 8.6 7.4 6.8 6.9 7 7

Norway

Nominal house prices, % change y/y 3.4 3.1 -2.1 0.3 1.2 N/A N/A

Real GDP, % change N/A 2.3 1.3 2 2.3 2 2

CPI inflation (%) 3.6 1.8 2.7 2.3 2 1.9 1.9

Unemployment rate 4.7 4.2 3.8 3.6 3.4 3.2 3.2

F--Forecast. N/A--Not applicable. y/y--Year on year. Sources: S&P Global Ratings.

The Nordics Economic Conditions (II): A Mixed Bag

43

1. Source: Denmark's Central Bank. 2. Source: Statistics Norway. 3. Source: ValueGuard, HOX Index. 4. Source: Statistics Finland.

3. Swedish House Prices Have Seen A Correction 4. Finland: House Prices Still Strong In The Helsinki Area

-40

-20

0

20

40

0

50

100

150

2004 2007 2010 2013 2016

Year-on-year grow

th (%)

Inde

x (2

006

= 1

00)

One-family houses Owner-occupied flatsOne-family houses (right scale) Owner-occupied flats (right scale)

-15%

-5%

5%

15%

25%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Rol

ling

12-m

onth

pri

ce

chan

ge

Sweden - Total Sweden - flats Stockholm - flatsSweden - houses Stockholm - houses

80

90

100

110

120

130

2005 2007 2009 2011 2013 2015 2017

Inde

x (2

005

= 1

00)

Greater Helsinki Whole country - Greater HelsinkiTampere Turku

-30%

-20%

-10%

0%

10%

20%

30%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018The whole country Oslo including BærumStavanger BergenAkershus excluding Bærum Agder and Rogaland excluding StavangerVestlandet excluding Bergen

2. Norwegian House Prices Correction1. House Prices Are Still Increasing In Denmark

44

Nordics Credit Outlook

Denmark: Interest-Only Issuances DecreasingCredit conditions have tightened significantly since the latest crisis. In 2014, the regulator introduced a 5% downpayment requirement for new mortgage loans. In addition, the regulator supervisory diamonds have set out aggregate limits for banks and mortgage institutes to proactively avoid future imbalances associated with credit growth, interest-only lending, short-term financing, and interest rate risks, among other guidelines. As each mortgage loan is traditionally matched with a bond in Denmark, we expect reduced issuance of interest-only covered bonds.

Sweden: Household Debt Looks Set To IncreaseWe expect the continued growth in debt to support further issuance in Swedish covered bonds. However, as in most jurisdictions, available liquidity is at an all-time high, which makes banks less reliant on further issuance. Finally, the new harmonization directive will require Swedish covered bond issuers to cover 180 liquidity. Although, we do not expect this to affect the market significantly, uncertainty could negatively affect issuance in 2020.

Norway: Private Debt Growth Likely To StabilizeWe believe that the house price correction over 2017 indicates that 2017 represents the peak and that household credit growth will likely slow down, which will lower covered bond issuance. More restrictive lending policies will continue to reduce funding needs. In addition, high household debt partly reflects the high share of home ownership in Norway, compared with countries with similarly high levels of household debt.

Finland: Private Debt Expected To GrowWe expect the demand for credit to remain moderate in the short term, despite the Finnish economy's still-sound-but-slowing growth. We forecast private sector credit will grow moderately by 4% annually, Thanks to household demand for loans, especially via mortgage loans and loans to housing corporations. This will in turn support further covered bond issuance. Over the past few years the growth in housing companies has accelerated, which could support covered bond issuance. That said, untapped potential remains as slightly more than half of Finnish households hold no debt at all.

Related Research

– Global Outlook: Banks Can Largely Fend Off Tougher 2020, Nov. 18, 2019

– European Economic Snapshots: Further Slowdown Amid Rising Uncertainties, Oct. 22, 2019

– Europe's Housing Markets Lose Speed As The Economy Weakens, Sept. 24, 2019

– Global Covered Bond Characteristics And Rating Summary Q3 2019, Sept. 10, 2019

– Global Covered Bond Insights Q3 2019, Sept. 10, 2019

– Credit FAQ: Are Covered Bonds Becoming More Sustainable?, Sept. 6, 2019

– When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn?, Sept. 4, 2019

– S&P Global Ratings' Covered Bonds Primer, June 20, 2019

– Credit FAQ: Understanding The Role Of European Secured Notes In Funding SME And Infrastructure Lending, May 21, 2019

– Harmonization Accomplished: A New European Covered Bond Framework, April 18, 2019

– New Covered Bond Markets Set To Expand Amid Legislative And Market Developments, March 21, 2019

45

Analytical Contacts

46

Casper Andersen

Director, Covered Bonds

+44-20-7176-6757

casper.andersen@spglobal.com

Antonio Farina

Senior Director, Covered Bonds

+34- 91-788-7226

antonio.farina@spglobal.com

Andrew SouthHead of Structured Finance Research - EMEA

+44-20-7176-3712

andrew.south@spglobal.com

Adriano Rossi

Director, Covered Bonds

+39-02-7211-1251

adriano.rossi@spglobal.com

47

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