Austrian financial institutions are increasingly using covered bonds as a source of mortgage rather than public sector finance, with Bawag PSK well on its way to establishing a mortgage backed programme and another having performed a veritable flip-flop with its cover pool.

HSBC Trinkaus strategists Sebastian von Koss and Johannes Rudolph drew attention to this trend in the context of fundierte Bankschuldverschreibungen (FBS), one of two main types of covered bonds issued by Austrian financial institutions.

“Almost unnoticed, the Austrian covered bond market has in the past 12 months undergone a change,” they said.

Until the middle of 2010 only public sector assets were used as collateral for FBS, despite mortgage debt also being eligible as collateral, but issuers have since then been making changes to their cover pools, according to the HSBC analysts.

Raiffeisen-Landesbank Steiermark, for example, at the end of June 2010 reported that it had established a separate mortgage cover pool, although it is only Eu67m and the issuer has yet to issue a covered bond backed by this pool (according to its latest report, from 30 June 2011).

But other issuers have already sold mortgage backed FBS. HSBC Trinkaus’s analysts described one savings bank, Allgemeine Sparkasse Oberösterreich, as a trailblazer.

“According to the issuer, mortgages were added to the original public sector cover pool in the middle of 2010, with the pool being managed as a pure mortgage one from the third quarter of 2010, which can also be seen from its cover pool reports,” they said.

The cover pool has since evolved back into a mixed one, but Christian Stöbich, head of funding and financial engineering at Allgemeine Sparkasse Oberösterreich, told The Covered Bond Report that the issuer intends to manage separately its public sector and mortgage collateral, and will establish separate cover pools once sufficient qualifying assets are available. As at 30 June around 98% of the issuer’s cover pool comprised mortgages, according to an investor report.

“The reform of Austrian covered bond frameworks in 2005 allowed fundierte Bankschuldverschreibungen to be backed by mortgages, with all issuers making use of this option,” said Stöbich. “We have since then restructured our cover pool so that it is almost purely mortgage oriented.”

Martin Schweitzer, head of balance sheet structuring at Erste Group Bank and a representative of the Ősterreichisches Pfandbrief und Covered Bond Forum, traces the development of a mortgage backed covered bond market in Austria further back than 2010, namely to May 2009, when Erste Bank sold a Eu1bn seven year mortgage Pfandbrief.

“That heralded the beginning of mortgage backed covered bonds in Austria, with other issuers following suit,” said Schweitzer. “So it is not a recent development, although there is a very clear trend toward mortgages as security for covered bonds.

“It is a function of the nature of the newer issuers,” he added, “which have more mortgage assets on their books and are therefore taking advantage of these for use as collateral.”

According to information on the Ősterreichisches Pfandbrief und Covered Bond Forum’s website, eight out of 14 covered bond banks have mortgage cover pools. In addition to those mentioned above, these are: UniCredit Bank Austria, Hypo Tirol Bank, Vorarlberger Landes- und Hypothekenbank, Hypo Bank Burgenland, and Hypo Alpe-Adria-Bank. Banks in the Raiffeisen and Volksbanken sectors are also understood to be working on new mortgage covered bonds programmes.

While mixed cover pools are permissible under the law governing FBS, separate mortgage and cover pools are likely to be the standard, said Schweitzer.

Bawag to take mortgage pool abroad

Bawag PSK (Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse) – an issuer that, unlike many of the aforementioned banks, has previously sold benchmark covered bonds – is also aiming to make use of the funding instrument as a tool to refinance its mortgage lending business.

The bank is well advanced with its plans to set up a mortgage backed programme, said David Sperlich, head of capital markets solutions at Bawag PSK, with Moody’s due to assess the cover pool and assign a rating.

“The mortgage cover pool will be used for international issuance, whether private placements or benchmarks,” he told The Covered Bond Report. “There is in general an international trend toward covered bonds, with all banks trying to optimise their secured funding opportunities.

“Bawag PSK is one of the largest banks in Austria with a growing mortgage business, so it only makes sense for us to pursue this project to make use of our mortgage assets, as long as they meet the quality standards.”

HSBC Trinkaus’ von Koss and Rudolph expect FBS to become increasingly important as a source of mortgage refinancing for savings banks and cooperative banks. They put the size of the Austrian mortgage backed covered bond market at the end of 2010 at around Eu9.6bn, of which 76.3% comprised issuance from Erste Bank and UniCredit Bank Austria. At Eu21.1bn, the volume of outstanding public sector covered bonds is more than twice this.

Erste Bank’s Schweitzer envisages that the collateral composition of Austrian covered bonds will change significantly over the next few years.

“In a few years the chart will be reversed,” he said.