Interview: Ralf Burmeister, DeAWM

Ralf Burmeister, senior portfolio manager for covered bonds at DeAWM, spoke to Nordic FIs & Covered about welcome regulatory moves in the Nordic region and more.

You last shared your views on Nordic covered bonds with us in October — have they changed in any way?

Our general approach has not changed, but what has become more intensive are our discussions and contact with issuers on the topic of regulation. During 2011 and 2012 you were arguably more focussed on following macro figures, but the gold plating of the Basel III process that is going on in some of the Nordic countries has led us to enter into an intensive debate with issuers to ask them about the regulations and try to get a feeling of the impact it has on them, for example what the implications are for capital ratios of the higher risk weightings for mortgages that some regulators are contemplating.

It’s not that it is worrying us, but it is about getting a sense of whether the regulations will strangle the banks or whether this is a co-operative process. So this is something that has changed a little bit, due of course due to the ever changing regulatory landscape and it is a little bit of extra homework. What is going on in the Nordic region with respect to CRD IV and CRR is the opposite of creating a level playing field but we are not concerned about that because we are talking about a top-up of EU regulation and at the end of the day it benefits the investors. I don’t think it is bad for banks’ funding situation and especially the stability of that funding. Nordic banks can access various market and currencies, which is what makes them very different from banks in other regions.

Ralf Burmeister, Senior Portfolio Manager for Covered Bonds, Deutsche Asset & Wealth Management (DeAWM)

How have Nordic covered bonds performed and what is the outlook?

We are fine with their performance. Measured by indices if you have a yield of around 1% there’s not too much room for further tightening unless you are expecting an extreme Japanese scenario with yields close to 0%. It’s clear that Nordic covered bonds are a defensive play and that you are not going to get gains of 4%-7% per year in total return, which is fine. It’s a solid asset class, highly rated and a defensive play. It is a liquid asset class, with small bid offer spreads. It varies a bit depending on the name but in general we haven’t experienced problems to either acquire some names or especially to unload paper these days. The tightening potential is obviously limited due to the absolute levels but given the macro environment it’s always good to have some Nordic paper in your portfolio.

Do you have any concerns about the housing markets in some of the Nordic countries?

The discussion, especially in Sweden, about house prices and whether there is a housing bubble and house prices has been around for some time and I think investors are or at least should be aware of this and it is something we are following and watching closely. However, given the general economic growth situation in Europe or even globally I don’t think demand is being fuelled in an excessive way.

The other thing to mention is that there are very good, pre-emptive moves being made by the regulators in the Nordics. For example, Swedish banks have been required to tighten lending standards, there are LTV limits, amortising loans, and banks are required to hold more capital. In Norway you have the discussion around asset encumbrance, which is about limiting issuance of new mortgage backed covered bonds but will probably also have an effect on banks’ lending. If you restrict banks in terms of their funding it should feed through to the asset side as well, especially for new loan origination.

I like the attention the regulators are paying to certain topics and the action they are taking. If you restrict funding you have to demonstrate that if you take away options from the treasurers that it has a stabilising effect overall, but that’s obviously not a given. But overall given that the approach to limiting issuance is not overly restrictive I would say that on average it is a good point. It’s a good selling point, a good marketing point for the Nordics that the regulators are looking at this now and trying to be pre-emptive. That gives us some comfort and makes you stay in the asset class and the region.

Sweden and Norway have taken different approaches to asset encumbrance at times, but is it overall the fact that the regulators are addressing the topic that you like?

Yes, that’s the main point, it’s about willingness. Generally speaking support consists of two components: one is the willingness and the other is the capability. And I think there is a very strong signal in terms of the willingness of some of the regulators in the Nordic region to not look away and ignore certain developments because things are running smoothly. We like this and I think it has been a helpful and important step for the market.

The Nordic region is a low yielding but high quality market and it makes sense that the regulators would do whatever they can to safeguard the status of being recognised as a high quality market.

How do you assess the health of the banking sector in general?

The Nordic region is a consolidated banking market. I wouldn’t expect too much movement in terms of mergers and acquisitions as is happening in other regions. It is a developed market so it is worth doing the credit market and going for the analysis of single names because I would expect these issuers to be around for quite some time.

What do you think of the Nordic issuers’ response to various industry transparency initiatives?

I welcome what they are doing very much. First of all they have signed up to the ECBC Label but what I also appreciate very much is that the Nordics are very close to moving to the Covered Bond Investor Council (CBIC) template. It was set up by investors purely to fit investors’ needs and if issuers follow that as far as they can this is positive for us. Transparency in the Nordic region has never been a problem as it has in other regions. What issuers are doing now by following the ECBC Label or carrying out good investor communication in general is not something new or surprising as the Nordic issuers tend to have a good track record in terms of transparency.