Moody’s has cut Sampo Bank and Pohjola Bank as part of rating actions on Danish and Finnish financial institutions, but the rating agency confirmed Sampo’s covered bonds at Aaa, while those issued by OP Mortgage Bank and linked to Pohjola Bank’s ratings were not on review for downgrade.

The downgrades were carried out on Wednesday in a round of rating actions that hit Danish financial institutions and their covered bonds, with Sampo Bank, a Finnish subsidiary of Danske Bank, drawn into cuts of its parent’s ratings and being downgraded by one notch, to A2.

“While we recognise the macro-economic environment in Finland is more supportive than in many other European countries, in our view the ongoing crisis in the Euro area will likely negatively affect economic growth – and thereof Sampo Bank’s earnings opportunities in Finland,” said Moody’s.

In line with the factors driving Moody’s cuts of Danish financial institutions, the rating agency identified as a key credit risk Sampo’s high use of market funding because of the “confidence sensitivity” that such funding relies on, even though the issuer has had good access to capital markets so far.

Sampo’s covered bonds’ ratings were not affected by the downgrade and Moody’s yesterday confirmed the rating at Aaa. The combination of a Timely Payment Indicator (TPI) of Probable-High and an issuer rating of A2 provides for a TPI leeway of one notch.

Moody’s also cut Pohjola Bank, from Aa2 to Aa3, after downgrading the bank financial strength rating of co-operative OP-Pohjola Group, with the entities’ reliance on market funding, higher sector concentration risks, and weakened earnings capacity driving the rating actions.

According to Moody’s 35% of OP-Pohjola Group’s funding stems from non-deposit funding, including covered bonds and interbank placements, with 57% of its total market funding at the end of 2011 short term (maturing within one year).

“The reliance on market funding is more pronounced for Pohjola Bank, for which 73% of funding relates to market-based sources,” said Moody’s. “Despite the bank’s recent good access to capital markets – and recent maturity extensions – Moody’s regards reliance on wholesale funding as credit negative, due to the confidence-sensitive nature of these funding sources and the potential for the availability and cost of market-based funding to change unexpectedly.”

OP Mortgage Bank is a covered bond issuing subsidiary of OP-Pohjola Group, but is not rated by Moody’s. Instead, its covered bonds’ ratings are linked to the issuer rating of Pohjola Bank. OP Mortgage has two programmes, one for covered bonds issued before August 2010 and a second for issuance thereafter. In both cases the Timely Payment Indicator (TPI) leeway is three notches, based on the new rating of Pohjola Bank.