The credit quality of covered bonds in the Asia-Pacific region will remain strong in 2017, according to Moody’s, despite a slight weakening in mortgage collateral in Australia and New Zealand, with the rating agency also noting the possibility of new issuers joining the Korean and Singaporean markets.

In an outlook report published yesterday (Monday), Moody’s gave positive forecasts for the stability and development of the Australian, New Zealand, Korean and Singaporean covered bond markets.

“Specifically, the credit quality of Australian and New Zealand covered bonds will remain strong in 2017, underpinned by the high sovereign credit quality of the two countries, and the credit quality of bank issuers, which remains high despite our negative outlooks on the four major Australian banks and their New Zealand subsidiaries,” said Jennifer Wu, an associate managing director at Moody’s.

The rating agency revised its outlooks on ANZ, CBA, NAB and Westpac, and their New Zealand subsidiaries, to negative in August, reflecting a more challenging operating environment for banks in Australia. Moody’s rates both the Australian and New Zealand sovereigns Aaa.

The rating agency expects the quality of mortgage collateral in Australian and New Zealand cover pools to weaken slightly with the inclusion of a greater proportion of riskier loans that were originated over the past three to four years.

“These mortgages are more vulnerable to economic or housing market shocks because of rapid property price appreciation and rising household debt over this period,” added Wu.

However, such risks are mitigated by low LTV ratios across cover pools and by measures introduced by regulators to limit the origination of riskier loans, Moody’s said.

The rating agency said the credit quality of Korean and Singaporean covered bonds will also be strong and stable next year, supported by the credit quality of issuers and the sovereign’s strength. Moody’s rates South Korea Aa2 and Singapore Aaa.

In Korea, Moody’s expects the quality of mortgage collateral to remain “good” next year.

“We expect that property prices in metropolitan areas in Korea will continue to rise in 2017, supported by low interest rates and investor demand,” it said. “Outside metropolitan areas, the completion of apartments currently under construction may create an oversupply, pressuring prices.

“That said, Korea’s low unemployment rate and low interest rate environment will support borrowers’ ability to make mortgage repayments, which will in turn support the credit quality of mortgage loans in cover pools.”

Korea Housing Finance Corporation and Kookmin Bank are the only Korean issuers to have sold covered bonds. Moody’s has assigned KHFC a foreign currency issuer rating of Aa2, and Kookmin a counterparty risk assessment of Aa3.

Moody’s said that other Korean banks may also establish covered programmes in 2017.

“Other large commercial banks in Korea that could potentially issue covered bonds are mostly rated in the A2 to Aa2 categories, with either negative or stable outlooks,” it added.

In Singapore, Moody’s also expects mortgage collateral to remain good. It said that despite declining property prices, Singapore’s low unemployment rate and low interest rate environment will support borrowers’ ability to repay their mortgages, and cited positive growth forecasts.

Singapore’s covered bond market currently comprises DBS and United Overseas Bank, while Oversea-Chinese Banking Corporation recently established a new covered bond programme.

Moody’s revised its outlooks on the large Singaporean banking groups, including DBS, UOB and OCBC, from stable to negative in March, reflecting a more challenging operating environment, but said their credit quality remains strong.