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European Covered Bond Outlook 2022

DBRS Morningstar published its annual outlook for European covered bonds (CBs). As we look forward to 2022 and what to expect for the European CBs, DBRS Morningstar observed a number of key themes that we believe will influence the market:

-- DBRS Morningstar expects CB ratings to remain stable. Issuer credit quality will continue to be the key driver for CB ratings, but updates to CB frameworks may have an impact in some countries. Asset performance and sovereign risk are likely to be secondary drivers of rating performance.
-- We expect limited credit deterioration in cover pools, thanks to asset coverage tests and the fact that pools usually contain prime loans. Additional factors, such as the expected stability of house prices in 2022 and current low interest rates, will also help loan performance.
-- DBRS Morningstar expects distributed issuance volumes to increase over 2021 volumes, returning to 2020 levels, coinciding with the end of European Central Bank support via targeted longer-term refinancing operations (TLTRO).
-- Greening of CB market will likely expand with more Green and Social CB issuances. We expect issuers to continue looking toward energy-efficient mortgage lending portfolios.
-- Harmonisation of CB frameworks will continue in 2022.

“While some countries have already implemented the European CB Directive, some others will wait until the deadline in July 2022 to do so. Harmonisation will have a different impact on each country, although we expect it to be neutral or positive in most cases. Spain will be one of the most affected frameworks in Europe,” said Tomás Rodriguez-Vigil Junco, Vice President, European RMBS and Covered Bonds.