Moody's: Collateral for Slovak covered bonds increases with rise of mortgage loans

An increase in mortgage loan volumes and fall in non-performing loans are credit positive for covered bonds in Slovakia, allowing for an increase in collateral and thus over-collateralisation (OC) for cover pools, says Moody's Investors Service in a new report published today.

"Mortgage loans increased by 11.7% year over year in March 2015, much higher than the 3.3% average growth rate over the last five years, owing to low borrowing costs and improving housing market prospects", says Tomas Rodriguez-Vigil, a Moody's Analyst. "Any eligible mortgage loans on an issuer's balance sheet would support Slovak covered bonds in the event of the issuer's insolvency".

Weighted average OC for Slovak covered bonds exceeded 25% in September last year for the first time in eight years, and has remained above this level for more than six months.

In addition, the non-performing mortgage loans rate fell to 2.3% in March 2015 from 3.0% in March 2010. With this decline, more assets are forming cover pools, increasing OC levels.

Furthermore, Moody's expects a small pickup in house prices over the next two years given robust GDP growth forecasts and improving unemployment rates. Because assets only qualify as eligible if they fulfill certain criteria, including a loan-to-value limit, a decline in property value could make some loans eligible and prevent some from becoming ineligible.