The credit quality of covered bonds on Central and Eastern European markets will expand in 2020 as Central European banks look to fund the growth of local mortgage sectors with long-term wholesale funding which will be supported by positive regulatory changes and a largely stable outlook for issuers and sovereigns, US-based international credit ratings agency Moody’s has said in its latest outlook on the European covered bond market.
According to the agency’s forecast, covered bond issuance from Central and Eastern European countries increased significantly over the recent years with the growth being led by the Czech Republic and to lesser extent, Poland and Slovakia.
Moody’s expects that an increased willingness to source funds locally, partially due to new ownership structures, will also increase demand for market funding in the Baltic states, noting that the Estonian government passed legislation to establish a covered bond market while Latvia and Lithuania are expected to follow.
Romania’s Alpha Bank SA also issued the first Romanian covered bond deal in 2019.
The expansion of covered bond markets in the CEE region will support the credit quality of banks by diversifying funding sources and improve their asset and liability matching as covered bond maturities tend to be relatively long, Moody’s added.
“Domestic strengths will support European economies, limiting risk for covered bonds, even as slowing economic growth makes the global economy more vulnerable to negative developments,” Miguel Lopez Patron, AVP analyst at Moody’s said, adding that the ratings agency’s outlook for most banks in most European countries is stable and “this will underpin the continued strong credit quality of European covered bonds in 2020.”