A recent contraction of the covered bond market eased in 2015, comprehensive ECBC statistics show, as outstandings fell only 0.25%. Volumes are expected to remain stable in the coming years due to low mortgage growth and other pressures, as non-EEA issuers’ share is set to grow further.

The European Covered Bond Council (ECBC) market statistics, compiled by the industry body’s statistics and data working group and published annually, showed growth in the covered bond market every year from 2003 until 2013, when the market contracted Eu211bn, or 8%. This trend continued in 2014, albeit at a slower pace, with volumes falling Eu95bn, or 4%.

According to the market statistics for 2015, released on Friday (22 July), outstanding covered bond volumes decreased only marginally last year from 2014’s total, falling Eu6.26bn, or 0.25%, to Eu2.498tn.

The slight contraction in the market was led by European jurisdictions, with the largest falls including a Eu27.2bn decline in outstanding volumes in Spain, a Eu15.7bn fall in the UK, and a Eu17.874bn fall in Germany – which nevertheless retained its position as the largest market, albeit just Eu1.29bn ahead of Denmark.

However, these declines were compensated to an extent by growth in non-EEA markets such as Canada, where volumes were up Eu20.9bn, and Australia, up Eu7.28bn. The ECBC also noted that in 2015 Singapore joined the list of non-EEA countries issuing covered bonds, after DBS sold a $1bn three year debut last July.

In 2015, non-EEA countries ultimately increased their share of outstanding covered bonds by 1.65 percentage points from 2014, to 11.30%.

“I am particularly pleased to see the positive development of the covered bond market also outside the core markets in Europe, which proves the high quality and attractiveness of the product at a global level,” said Luca Bertalot, secretary general of the EMF-ECBC.

He expects issuance volumes from non-EEA markets to continue to grow in the coming years, adding that new markets could soon open.

“There is not only the new markets that we can see are already active using this instrument – like Singapore, Australia, New Zealand – but also a lot of new jurisdictions are looking very seriously at putting covered bond legislation in place,” he said.

Bertalot noted that the ECBC in June met with banks and financial authorities in Brazil, where work is currently underway to finalise secondary legislation that would enable covered bond issuance.

“The ECBC is also having intense discussions with other countries at an institutional level – such as South Africa, Malaysia and Thailand – and so the covered bond family will continue to increase in the coming years,” he said. “These numbers are confirming this trend.”

The statistics also show that while outstanding volumes fell, global covered bond issuance grew, after the previous two years were relatively light, with volumes up 17.93% in 2015 from 2014 levels, reaching Eu539.567bn.

Of this, some Eu429.873bn was publicly placed and Eu109.694bn privately placed. Some Eu275.003bn was denominated in euros, Eu231.921bn equivalent in issuers’ domestic currencies, and Eu32.643bn in other currencies.

Covered bond issuance volumes in euro billions

Source: ECBC, DZ Bank Research

Florian Eichert, chairman of the ECBC statistics and data working group and head of covered bond and SSA research at Crédit Agricole, said he expects both overall covered bond volumes and benchmark issuance to remain roughly stable for now.

“Net mortgage growth doesn’t look to be huge at this point, with even countries such as Sweden slowing down, and issuance backed by new collateral types do not seem to be on the horizon anytime soon,” he said. “Meanwhile, redemptions are not going to be huge next year, and you still have TLAC/MREL needs across banks, as well as ongoing cheap central bank money throughout 2017.

“The only driver for a more pronounced market growth in covered bonds in my view for 2017 would be a complete risk-off and volatile markets leading to a revival of retained covered bond issuance, and a refocus of the market funding mix to covered bonds and a delay of TLAC/MREL-eligible product issuance.”

Eichert also said that while the market share of non-EEA jurisdictions is set to grow further, issuance from such countries is likely to be too modest to drive a substantial growth in overall volumes.

Outstanding covered bond volumes in euro billions

Source: ECBC, DZ Bank Research

Analysts at DZ Bank agreed, and suggested that a more important factor on the potential direction of the market is the ECB’s approach to QE.

“How would the end of the central bank’s third covered bond purchase programme impact on the banks’ issuing activity?” asked Thorsten Euler, covered bond analyst at DZ Bank. “The overall spread widening we anticipate in such a scenario would probably heighten investor interest in covered bonds.

“However, the banks would likely reduce their issuing activities in light of higher costs. Given that the banks’ refinancing decisions are based on a number of factors – such as the relative cost advantage relative to other refinancing options and regulatory requirements – we can hardly predict the outcome for the new issue volume of covered bonds.”