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Moody's Investors Service says that the credit quality of covered bonds in the Asia Pacific markets of Australia, New Zealand, Korea and Singapore will remain strong in 2018, underpinned by the high credit quality of issuers and the strong sovereign credit quality of these countries.
In addition, regulatory measures introduced to limit the origination of riskier mortgages will be positive for the quality of cover pools in 2018.
Moody's conclusions are contained in its just-released report, "Covered bonds - Asia Pacific 2018 outlook - Strong issuers and regulatory action on risky mortgages will underpin credit quality".
All four markets, as indicated -- Australia (Aaa stable), New Zealand (Aaa stable), Korea (Aa2 stable) and Singapore (Aaa stable) -- have strong sovereign credit quality and this will provide a supportive backdrop.
"With Australia and New Zealand, the credit quality of all covered bond issuers is high and this will support the strong credit quality of covered bond programs in 2018," says Irene Kleyman, a Moody's Vice President and Senior Credit Officer.
"In addition, we expect the quality of mortgage collateral in cover pools to improve from already good levels, because of limits on the origination of riskier interest-only loans in Australia and the high loan-to-value (LTV) mortgage restrictions in New Zealand. Furthermore, both Australia and New Zealand have strong sovereign credit quality, which will provide a supportive environment for covered bonds," says Kleyman.
"In Korea, the credit quality of covered bonds will be strong in 2018. The credit quality of the covered bond issuers in Korea is high and this will support the credit quality of covered bonds in 2018," says Joe Wong, a Moody's Vice President and Senior Analyst.
"Meanwhile, measures introduced to curb growth in riskier mortgage loans and help reduce high household debt levels will have a positive influence on the quality of Korean cover pools in 2018," says Wong.
At present, the average LTV of mortgages in Korean cover pools is 40%-65%, depending on the cover pool.
In Singapore, the credit quality of covered bonds will remain strong in 2018. Moody's expects the economic environment, including the low unemployment rate, in Singapore will be supportive for mortgage borrowers in 2018, which is positive for the quality of cover pools. Property prices are also showing signs of stabilizing after a period of decline.
In Singapore, mortgages in cover pools have relatively low average LTVs of 50%-60%, which is positive for the quality of cover pools.
