Polish covered bond market looks stable - Moody's

In recent years, Polish house prices have outpaced the Euro area average, fuelled by increased mortgage affordability and relatively few dwellings per capita. Due to COVID-19 headwinds, house price growth slowed markedly in the third quarter of 2020, before trending up again in the fourth quarter. The fallout from the pandemic will likely exert further downward pressure on prices as government support measures come to an end.

During the last decade, the Polish covered bond market has rapidly increased from around EUR 700 million to over EUR 6 billion, although it remains small in comparison to other countries and as a proportion of the EUR 108 billion domestic residential mortgage market. The credit quality of covered bonds is high, with two programs rated Aa1 (at our country ceiling) and one rated Aa2, and our counterparty risk (CR) assessments for Polish issuers range from A2(cr) to A3(cr). Most cover pool assets are high-quality residential mortgage loans, although commercial loans represent around 30% of one cover pool.

"In our modeling, we assume average cover pool losses of 21%, which is in line with the average for European programs. However, there are material differences in the number of cover pool losses across Polish programs due to variations in the degree of exposure to interest rate and foreign exchange risks and the extent to which these risks are mitigated by hedging arrangements. Polish covered bond ratings are moderately linked to the credit quality of issuers; on average, issuers can be downgraded by almost three notches without triggering a TPI-driven downgrade of covered bonds," the Moody's analysts stated.