Covered Bonds funding by bank’s on a rise but modest – Fitch Report

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16 March, 2011: 

A recent Fitch Special Report on ‘Banks’ Use of Covered Bond Funding on the Rise’ issued on 10th March, 2011 had a positive outlook on rise of use of covered bonds funding by banks and is believed to be a preferred form of funding in the medium term. The report explains that the rise in covered bonds is characterized partly due of risk aversion amongst investors and partly because of the regulatory incentives made available.  

The report observes that post the recent financial turmoil, covered bonds have become a dominant source of funding by banks and the issuances are not only registered from existing issuers launching new program secured on separate asset pools but also from new issuers, from countries where covered bonds markets have not been fully developed, like Italy, where the covered bonds legislation has been recently enacted.  

Covered bonds are issued with increased size of cover pool assets and covered bonds funding is acting as a threat to potential senior unsecured debt investors. Though the dependence on covered bonds by banks as increased, but it is not viewed as a risk for banking groups as most of the countries and issuances reviewed for the purpose of this report by Fitch had modest usage of this funding route. Also banks in several countries like Canada, Italy and New Zealand have explicit put issuance limits.  

There has been a significant use of covered bond funding by few banking groups. Though covered bonds did not take off in the US, Europe also had some effect on the Covered Bonds volume, Covered bonds in non-European countries had been on a rise significantly. Volumes of covered bonds are expected to grow from new markets from the trend set in 2010, where maiden covered bonds issues came from Korea, New Zealand etc. As per the statistics compiled by European Covered Bonds Council, covered bonds have grown at an annualized rate of 8% between 2003 and 2009. Annual benchmark issuance amounted to EUR125 bn in 2009 and EUR183 bn in 2010 and it is expected that the volumes would reach a EUR200 bn in 2011. 

Covered Bonds are all over and are expanding geographically. The German origins, though existent for 300 years now, with no default history, have been able to find their place globally and seem to be the right solution to regain investors’ confidence. More so after the financial crisis, where securitization was shunned as jinxed instruments, covered bonds has become much of an eye candy with Non European countries, so much so that several countries are now introducing covered bonds legislations or are amending their existing legislations to accommodate this instrument. Although a few banking groups make significant use of covered bond funding, most of the growth expected by Fitch in this asset class will come from new markets or issuers with a low volume of covered bonds in issue. 

[Reported by: Nidhi Bothra]