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Mortgage bonds await wider market appeal

Participants at a Bratislava conference on mortgage banking in central Europe have said that while the fact the conference was held in the Slovak capital may have been a mark of progress in the country's financial sector, it also highlighted the struggle the sector faces in catching up with more developed western markets.
The November 16 and 17 conference, attended by vice-governor of the National Bank of Slovakia (NBS) Elena Kohútiková, as well as banking chiefs from across central Europe and Germany, concentrated on what is still proving a difficult move for Slovakia: offering more mortgage banking opportunities, and subsequently new bonds on the financial market - mortgage bonds - both of which would give a lift to retail banking and the country's inactive capital markets.


The largest mortgage lender, VÚB, has had limited success with its issues of mortgage-backed bonds.
photo: Ján Svrček

Participants at a Bratislava conference on mortgage banking in central Europe have said that while the fact the conference was held in the Slovak capital may have been a mark of progress in the country's financial sector, it also highlighted the struggle the sector faces in catching up with more developed western markets.

The November 16 and 17 conference, attended by vice-governor of the National Bank of Slovakia (NBS) Elena Kohútiková, as well as banking chiefs from across central Europe and Germany, concentrated on what is still proving a difficult move for Slovakia: offering more mortgage banking opportunities, and subsequently new bonds on the financial market - mortgage bonds - both of which would give a lift to retail banking and the country's inactive capital markets.

But while banking chiefs said at the conference that the bonds had a promising future as part of a wider development of the financial market, many dealers remain sceptical of the success the bonds will have in a currently soporific capital market.

"I would have to agree with people who say that there is a problem with low liquidity generally on the market and generating interest in these [mortgage] bonds," said Rastislav Živor, dealer for ING Barings.

"The issues of these bonds we've seen from VÚB [Všeobecná úverová banka - the country's largest mortgage lender - ed. note] have been around 100-200 million crowns [$2 million to $4 million], and they're too small for, say, insurance companies to go for them, but too large for small companies. There's little chance for these bonds if they are not promoted. We need a new attitude towards bonds on the market in general," he added.

An increase in mortgage lending over the last 18 months in Slovakia, combined with a fall in interest rates on state papers such as T-bills and T-bonds to around 8%, has seen those banks able to offer the bonds looking to them more and more as a way of topping up their finances.

Banks with mortgage lending facilities can use the money ordinary citizens are repaying on mortgages to back the bonds issued on the stock market. With rates of 12% or 13% being charged for mortgages, banks issuing mortgage bonds at 8.5% to 10% [the yields on the last issue of mortgage bonds by VÚB - ed. note] will make a 4% or 4.5% profit - the difference between what they have to pay back on the issued bonds and the money they receive in interest payments from customers.

They should also be able to attract more buyers to the bonds, they say, in having a secure bond interest repayment flow and a potentially more attractive yield than the current 8% for state papers.

"Banks know that they are going to get money over a longer period from their mortgage customers, because mortgages are paid over a longer period of time and debtors can't pay back in one go, so the income flows to back the funds are very secure. They [the banks] will make their margins on the difference between the customer repayments and their own repayments on the bonds," said Pavel Habšuda, analyst at Slávia Capital brokerage house.

The bonds themselves have been pinpointed by Slovak banking executives as an important new part of activity on the capital market itself. Dušan Jurčík, president of Slovakia's largest financial institution Slovenská sporiteľňa (SLSP), said at the conference that planned pension reform should enhance the development of mortgage-backed bonds, pension funds being considered the most likely investors in the securities.

But while experts have pointed to the stock market's liquidity problems and a general lack of interest in securities as possibly hampering the development of the bonds, Jurčík added that new legislation is planned to help make them more attractive securities.

"These bonds will be subject to a special security treatment, different from other securities," he said, explaining that the door for purchasing mortgage bonds will be opened to private entities. Until now, all issues of mortgage bonds were sold to institutional investors with the last four issues from VÚB, amounting to 550 million crowns ($11 million), again all sold to institutional investors.

In many western countries, where the provision of mortgages remains much more widespread, the share of institutional investors on the mortgage bond market is lower, the figure in Germany, for instance, at 84%. Private individuals make up the rest of the buyers.

However, the lack of institutions able to offer mortgages - only five, VÚB, SLSP, Istrobanka, Tatra Banka and HypoVereinsbank currently hold mortgage licences - is, according to market dealers, stifling development of the bonds and robbing the financial market of a chance to try to raise itself out of its present torpor.

"If there were more institutions able to offer mortgages, there could be more of them offering bonds backed by mortgages and there would be more activity on the market, some kind of a lift at least," said ING's Živor.

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