Key Takeaways
- Increased refinancing activity, driven by lower mortgage rates, and a stronger housing market may lead to an increase in the issuance of DKK-denominated covered bonds.
- We believe that covered bonds remain a stable funding source for commercial real estate, despite recent price declines and ongoing elevated interest rates.
- We expect lower interest rates and rising household incomes to support house price growth.
In this Covered Bond Market Insights report, S&P Global Ratings presents the local covered bond market, provides an overview of the local mortgage market, and compares key characteristics of existing programs.
Overview: Denmark, Lower Rates May Boost Refinancing
Denmark has the second-largest covered bond market globally, following France, with a total outstanding issuance of €465.3 billion (approximately 127% of GDP) at the end of 2023. While euro-denominated benchmark covered bond issuance remains niche--reaching €2 billion so far in 2024, the highest volume since 2017 (see chart 1)--we expect it to stay at similar levels in 2025. This is mainly because issuers continue to focus on Danish krone (DKK)-denominated funding. Meanwhile, the issuance of DKK-denominated covered bonds may rise due to a stronger housing market and increased refinancing activity, driven by falling mortgage rates.
Chart 1
Chart 2
Since July 2022, foreign investment in Danish mortgage bonds has declined due to interest rate hikes. Rising rates have reduced the market value of outstanding fixed-rate covered bonds, encouraging borrower buybacks. Although foreign investors' demand for Danish covered bonds has recently stabilized, their attractiveness will depend on their relative value compared to other high-value asset classes, primarily U.S. and French.
Chart 3
Lower policy rates, but monetary policy remains restrictive
The Danish central bank, Danmarks Nationalbank, followed the European Central Bank's (ECB) benchmark monetary policy rate cuts of 25 basis points in June, September, October, and December 2024, given the considerably lower inflation rate in Denmark and the euro area. The Danish central bank will continue to align its interest rate adjustments with those of the euro area. These rate cuts are quickly transmitted to the local economy, partly through adjustable-rate mortgages. That said, Danmarks Nationalbank assesses its monetary policy as restrictive in Denmark as the real monetary policy rate significantly exceeds estimates of the neutral rate.
Refinancing auctions of particular interest
Approximately 60% of the Danish covered bond market (50% in 2023) comprises adjustable-rate mortgages, financed by the continued issuance of one-, three-, or five-year fixed-rate covered bonds. Mortgage rate fixing matches the issued covered bonds at quarterly mortgage auctions. The results of the December 2024 auction, traditionally the largest of the year, will take effect in January 2025.
A significant part of the adjustable-rate mortgage market has faced increased mortgage rates, driven by multiple rate hikes over 2022-2023. During the same period, borrowers with fixed and low interest rate mortgages have refinanced their loans to adjustable-rate mortgages to reduce mortgage debt, which has increased borrowers' sensitivity to high interest rates, in our view.
Considering the high percentage of short-term and adjustable-rate mortgages, the Danmarks Nationalbank's 2024 interest rate cuts will be swiftly transferred to interest rates for mortgage borrowers, thereby improving affordability; however, interest rates for new loans remain high compared to pre-2022 levels. Some loans with a longer interest rate fixation period, for example, three- or five-year, which have not yet been adjusted after rate hikes, may still incur significant interest expenses.
Chart 4
Homeowners turn to refinancing when rates rise
As of October 2024, average mortgage rates (including lenders' administration rates) remained relatively stable, at 3.48%--double the record low in 2021. While average mortgage interest rates for existing mortgages will continue to rise as adjustable-rate mortgages reset, interest rate cuts have lowered the rate for new mortgages. Therefore, improving housing affordability, as well as minimizing the gap between the average mortgage rate of existing and new mortgage loans.
Chart 5
Borrowers with low interest, fixed-rate loans with a 30-year mortgage period have been able to refinance (call the covered bond at market value), thereby reducing mortgage debt. Nearly half of refinancers switched to adjustable-rate mortgages, mostly with shorter fixed terms of less than three years (see chart 6). Although this makes these homeowners more sensitive to rising interest rates and falling house prices, their lower leverage after refinancing partly offsets this risk, in our view.
Chart 6
The Danish Mortgage Market: Lower Interest Rates Supports House Price Growth
The Danish economy has remained fairly resilient to recent economic volatility and geopolitical uncertainty because of its counter-cyclical export structure--consisting of agriculture, shipping, and pharmaceutical products. In our view, economic growth will be supported by strong demand for pharmaceutical products and the recovery of industrial exports, and strong real GDP growth of 2.2% in 2024, before averaging 1.7% over 2025-2027.
As of June 2024, Denmark's labor market remains tight, with historically low unemployment rates of 5.9%, below the euro area average of 6.5%. Unemployment rose marginally to 5.2% in 2024, which we expect to decrease to 5.0% by 2027.
Table 1
| Economic indicators | ||||||
|---|---|---|---|---|---|---|
| Year | Real GDP growth (%) | Unemployment rate (%) | ||||
| 2022 | 2.7 | 4.5 | ||||
| 2023 | 1.9 | 5.1 | ||||
| 2024f | 2.2 | 5.5 | ||||
| 2025f | 2.0 | 5.3 | ||||
| 2026f | 1.6 | 5.2 | ||||
| 2027f | 1.6 | 5.0 | ||||
| f--Forecast. Source: S&P Global Ratings. | ||||||
Chart 7
According to Danmarks Nationalbank, growth in total bank and mortgage lending to Danish households has been negative since the end of 2022, with no growth as of September 2024. This is due to fewer housing transactions and homeowners' refinancing to reduce their housing debt following rate hikes.
Mortgage lending as a share of household disposable income has reached its lowest point since 2005, partly due to loan refinancing and wage increases during the 2021-2022 high inflation period.
House prices have slowly risen since the beginning of 2023 on the back of arising real wages, a strong labor market, and lower interest rates. We expect developments in interest rates and household incomes to underpin continued house price growth. In addition, high household wealth, low public debt, and government macro policy measures will continue to support the Danish housing market, in our view.
Chart 8
House price declines, but cover pool loan-to-value (LTV) ratios remain resilient
Despite house price corrections during 2022-2023, LTV ratios in our rated Danish covered bond programs have not significantly increased, partly due to increasing refinancing by Danish homeowners. Therefore, our view of credit quality remains relatively stable.
Chart 9
Limited impact of new property tax rules
In 2024, the Danish government introduced new private property tax rules. New taxes (generally with lower tax rates) are based on new public valuations, and then fluctuate according to market valuations. Furthermore, if the total property tax increases despite lower tax rates, the private property owner will receive a temporary discount until it sells its properties.
The taxation is initially based on the preliminary assessments, published in September 2023, and may be adjusted when the final assessments are completed (expected in 2025). The publication of the temporary property valuations clarified where the changes will be mostly felt. Some high-value property owners fear that their property's market valuation will decrease when the tax changes are implemented. These owners therefore progressed with sales before the taxes take effect, increasing the number of properties for sale, particularly across Copenhagen and Northern Zealand.
That said, the strong labor market, high housing demand, and decreasing interest rates continue to support house prices, and prices in these areas have not reduced significantly. In our view, the new property tax rules will contribute to stabilizing house prices.
Amendments in the Totalkredit partnership agreement may increase competition in the mortgage market
On Sept. 25, 2024, Totalkredit and the Danish Competition and Consumer Authority agreed to amend the Totalkredit partnership agreement. The amendments allow partner banks to leave the Totalkredit partnership and enter new ones, or to participate in mergers/acquisitions with other banks without loss of commission on already distributed mortgage loans. Also, partnership banks can simultaneously distribute mortgage loans for Totalkredit and other competing mortgage institutions. In our view, the agreement creates opportunities for other mortgage providers and should increase competition within the mortgage market.
Banks' exposure to commercial real estate still poses systemic risks
According to Danmarks Nationalbank, mortgage credit institutions have a significant existing exposure to real estate companies, accounting for 30%-40% of total corporate lending and largely secured by commercial real estate.
Increased yield requirements for commercial real estate has significantly reduced property values. For example, prime office properties in Copenhagen saw their property values fall by about 20% since peaking in 2022. Rising rents have somewhat helped to mitigate this.
We recently examined covered bonds' capacity to provide stable funding for European commercial real estate. We are yet to observe significant changes to the composition of our rated cover pools to an extent that would lead us to change our credit risk view. We believe the available overcollateralization can absorb expected losses and remain commensurate with the current ratings, and that the close relationship between Danish banks and local investors continues to support the Danish covered bond market (see "European Covered Bonds Resist Commercial Real Estate Jitters," published on Aug. 27, 2024).
Chart 10
Offshore windmills could trigger further covered bond issuance
In April 2023, the Danish government announced that it would amend the local covered bond law to allow the financing of offshore windmills.
As part of its ambitious goal to significantly reduce emissions by 2030, it expects funding of up to DKK300 billion to early-stage energy projects and has communicated an approximately DKK200 billion (€27 billion) potential increase in covered bond issuance. Issuers estimate the probable size to be closer to DKK50 billion (roughly €7 billion).
Given the supervisory limitations on Danish mortgage lending (which limit large exposures, among others), it is likely the scope of covered bond funding for offshore windmills will be below the amounts initially communicated. The mortgage lending "supervisory diamond" limits the exposure to the top 20 borrowers and cannot exceed the issuer's core capital.
Due to the nature of the assets, their inclusion in rated covered bond programs will require further analysis and will likely affect our view of credit risk. We assume individual exposure will be relatively large and that issuers will be cautious around committing too much capital to such lending. This could limit growth, and we have not observed significant loan growth since our previous insight publication.
Interest-only mortgages: The market's integral part
Danish households have extensively used interest-only mortgages since their introduction in October 2003. After less than five years of their launch, they comprised more than half of all Danish mortgage loans. This played a deciding role in house price hikes before the great financial crisis. Following a slight decline due to interest-only loan limits set by the DFSA in 2015, the portion of interest-only Danish mortgages has again increased--fueled by the pandemic as well as the introduction of interest-only mortgage loan products for the full maturity of the loan. Higher mortgage loans have not led to an increase in only demand. The market level of interest-only loans has remained stable.(see chart 11).
Chart 11
The proportion of interest-only loans in the main Danish capital centers notably differ and reflect the focus of certain centers on interest-only lending. Their volume has increased since the COVID-19 pandemic and have remained stable since our previous publication (see chart 12).
Chart 12
In our credit analysis, we typically increase our foreclosure frequency assumptions unless the loan is underwritten on a full repayment basis, or the borrower has sufficient time to separately build equity to proceed with the final repayment.
Interest-only mortgage loan performance has trended in line with other mortgage products, and we continue to assign our standard upward risk adjustments in line with our criteria guidance for the analysis of interest-only loans.
Chart 13
Comparison Of Danish Covered Bond Programs
In 2024, the indexed weighted-average LTV ratio in some of our rated programs has increased slightly since 2023. Hence, the credit coverage (foreclosure frequency multiplied by loss severity) has moderately increased in some of our rated programs, mainly due to the higher LTV ratios.
Chart 14
The rating uplift assigned to our rated Danish covered bond programs can be accessed here (under "Country Focus/Denmark").
Table 2
| Danish mortgage covered bond programs--Key characteristics | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Program | Outstanding assets (mil. DKK) | No. of loans | WA LTV - indexed (%) | WA seasoning (years) | Interest rate type | Repayment type | WAFF (%) | WALS (%) | ||||||||||
| Danske Bank A/S - Pool C | 46,827 | 4,139 | 51.2 | 1.8 | 95% floating, 5% fixed | 66.5% amortizing, 30.5% bullet/IO, 3% other | 25.19 | 40.4 | ||||||||||
| Danske Bank A/S - Pool D | 38,077 | 40,353 | 53.2 | 5.3 | 60.1% floating, 39.9% fixed | 70% amortizing, 5.3% bullet/IO, 24.7% other | 12.03 | 36.1 | ||||||||||
| Danske Bank A/S - Pool I | 47,700 | 30,760 | 53.8 | 4.5 | 88.8% floating, 11.2% fixed | 95.7% amortizing, 1.8% bullet/IO, 2.5% other | 11.19 | 28.41 | ||||||||||
| DLR Kredit A/S - Capital Center B | 217,981 | 72,127 | 50.5 | 21.0 | 56.1% floating, 43.9% fixed | 61.6% amortizing, 38.4% bullet/IO | 24.68 | 52.85 | ||||||||||
| DLR Kredit A/S - General Capital Center | 610 | 1,394 | 24.4 | 28.5 | 74.33% floating, 25.67% fixed | 100% amortizing | 14.5 | 7.62 | ||||||||||
| Jyske Realkredit A/S - Capital Center B | 12,277 | 10,294 | 50.2 | 17.5 | 45.9% floating, 54.1% fixed | 60.8% amortizing, 39.2% bullet/IO | 10.45 | 26.19 | ||||||||||
| Jyske Realkredit A/S - Capital Center E | 349,903 | 132,541 | 50.2 | 11.7 | 41.2% floating, 58.8% fixed | 48.6% amortizing, 51.4% bullet/IO | 15.3 | 36.61 | ||||||||||
| Jyske Realkredit A/S - General Capital Center | 4,611 | 1,579 | 24.3 | 28.8 | 100% fixed | 100% amortizing | 22.26 | 33.37 | ||||||||||
| Nordea Kredit Realkredit A/S - Capital Center 1 | 1,955 | 2,663 | 47.6 | 22.3 | 37.7% floating, 62.3% fixed | 100% amortizing | 14.01 | 7.77 | ||||||||||
| Nordea Kredit Realkredit A/S - Capital Center 2 | 450,163 | 231,560 | 51.5 | 13.0 | 26.5% floating, 73.5% fixed | 46.4% amortizing, 53.6% bullet/IO | 13.08 | 37.2 | ||||||||||
| Nykredit Realkredit A/S - Capital Center D | 14,264 | 14,373 | 39.7 | 24.6 | 87.4% other, 12.6% fixed | 60.3% amortizing, 39.7% bullet/IO | 16.57 | 22.43 | ||||||||||
| Nykredit Realkredit A/S - Capital Center E | 579,854 | 385,244 | 56.4 | 11.4 | 0.2% other, 99.8% fixed | 72.3% amortizing, 27.7% bullet/IO | 10.24 | 30.52 | ||||||||||
| Nykredit Realkredit A/S - Capital Center G | 84,366 | 15,073 | 57.4 | 15.5 | 100% other | 80% amortizing, 20% bullet/IO | 26.99 | 82.71 | ||||||||||
| Nykredit Realkredit A/S - Capital Center H | 788,384 | 339,617 | 54.2 | 12.5 | 100% other | 36.2% amortizing, 63.8% bullet/IO | 13.98 | 34.73 | ||||||||||
| Nykredit Realkredit A/S - Capital Center I | 6,180 | 1,176 | 66.3 | 15.4 | 100% fixed | 100% amortizing | 29.94 | 95.43 | ||||||||||
| Realkredit Danmark A/S - Capital Center S | 286,112 | 152,374 | 44.6 | 14.0 | 0.4% floating, 99.6% fixed | 66.7% amortizing, 33.3% bullet/IO | 13.13 | 30.51 | ||||||||||
| Realkredit Danmark A/S - Capital Center T | 487,101 | 186,197 | 49.9 | 13.0 | 99.9% floating, 0.1% fixed | 32.7% amortizing, 67.3% bullet/IO | 16.24 | 33.38 | ||||||||||
| Realkredit Danmark A/S - General Capital Center | 18,432 | 16,134 | 35.7 | 18.1 | 70.44% floating, 29.56% fixed | 96.21% amortizing, 3.79% bullet/IO | 19.76 | 22.35 | ||||||||||
| Totalkredit A/S - Capital Center C | 3,855 | 6,347 | 23.8 | 22.4 | 100% fixed | 100% amortizing | 5.56 | 2.1 | ||||||||||
| Sources: Issuers' Harmonised Transparency Template/cash flow profile as of September 2024, S&P Global Ratings. WA--Weighted-average. LTV--Loan to value. IO--Interest only. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. DKK--Danish krone. | ||||||||||||||||||
Ratings Outlook: Danish Covered Bonds Remain Well Protected From The Risk Of Bank Downgrades
We have assigned most Danish covered bond issuers a high issuer credit rating (ICR), allowing most of their covered bond programs to reach a 'AAA' rating based on jurisdictional support alone. The programs benefit on average from 3.3 of unused notches by which the ICR can be lowered without changing our ratings on the covered bond programs, all else being equal.
Despite some increases in LTV ratios (see chart 9), Danish programs on average have lower credit and market risk compared to peer countries, thanks to relatively low mortgage LTV ratios and the Danish matched funded covered bond feature. Consequently, the available credit enhancement is also lower relative to peer countries see here (under "Country Focus").
The available credit enhancement over credit enhancement commensurate with the rating by country can be found here (under "Ratings distribution and outlook/Overcollateralization").
Related Criteria
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Europe Supplement, April 4, 2024
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Covered Bond Ratings Framework: Methodology And Assumptions, June 30, 2015
- Methodology And Assumptions: Analyzing European Commercial Real Estate Collateral In European Covered Bonds, March 31, 2015
- Methodology And Assumptions For Assessing Portfolios Of International Public Sector And Other Debt Obligations Backing Covered Bonds And Structured Finance Securities, Dec. 9, 2014
- Covered Bonds Criteria, Dec. 9, 2014
Related Research
- Global Covered Bond Insights Q1 2025: Overall A Healthy Year, Dec. 18, 2024
- Covered Bonds Outlook 2025: Lower Rates, Higher Uncertainty, Dec. 6, 2024
- Economic Outlook Eurozone Q1 2025: Next Year Will Be A Game Changer, Nov. 26, 2024
- European Covered Bonds Resist Commercial Real Estate Jitters, Aug. 27, 2024
- Covered Bonds Primer, March 19, 2024
- Banking Industry Country Risk Assessment: Denmark, Dec. 7, 2023
- Denmark, Aug. 12, 2024
- European Housing Markets: Better Days Ahead, July 17, 2024
- Covered Bonds Could Ease The Pain In European Commercial Real Estate, May 16, 2023
- European Covered Bonds Reach Harmonization Milestone As The Journey Continues, July 12, 2022
- Asset Price Risks: Inflated Property Values Mean Higher Loss Assumptions In European RMBS And Covered Bonds, March 21, 2022
- Glossary Of Covered Bond Terms, April 27, 2018
- S&P Global Ratings Clarifies Its Approach To Analyzing Danish Subsidized Housing, Jan. 15, 2019
- The Danish Mortgage Sector Solved The Immediate Problem Of Interest-Only Mortgages, But Remains Vulnerable To Housing Slumps, Sept. 12, 2017
This report does not constitute a rating action.
| Primary Credit Analyst: | Casper R Andersen, Frankfurt + 49 69 33 999 208; casper.andersen@spglobal.com |
| Secondary Contact: | Phuong Nguyen, Paris +33 1 44 20 66 59; phuong.nguyen@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.