Annual Spring Conference May 17-18, 2018 Amsterdam

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1 Annual Spring Conference May 17-18, 2018 Amsterdam Dutch mortgage loans as an alternative investment opportunity Piet Hein Schram, Dirk Schubert KPMG IACPM

2 Agenda History of the Dutch mortgage market and considerations of traditional originators. Impact of new regulation on traditional players in the market and a catalyst for investment opportunities. Roles of intermediaries and electronic platforms in asset sourcing and facilitating asset transfers. Structuring challenges and new solutions for a changing environment. 2

3 Overview of the Dutch mortgage market Outstanding debt 2010: EUR 647 bln Outstanding debt 2016: EUR 662 bln Origination FY 2017: EUR 101 bln 9% 9% 9% 9% 2% 2% 2% 2% 6% 6% 6% 6% % 3% 3% 3% 10% 3% 6% 3% 6% 3% 6% 10% 10% 16% 16% 9% 9% 16% 9% 6% 6% 6% 6% 13% 13% 13% 62% 62% 62% 80% 80% 80% 80% 75% 75% 75% 75% Banks Banks Banks Banks Insurance companies Insurance Insurance companies Insurance companies companies Other (including foreign) Other (including Other Other (including foreign) (including foreign) foreign) Sources: DNB, IG&H Banks of insurance companies Banks Banks of insurance Banks of insurance of companies insurance companies companies Pension Funds Pension Pension Funds Pension Funds Funds Banks Banks Banks Regiepartijen Regiepartijen Regiepartijen Insurance Insurance companies Insurance companies compa Other Other (including (including Other foreign) (including foreign) Regulatory changes are putting pressure on traditional originators in the Dutch market leading them to reduce market share. New entrants (mainly so-called regiepartijen ) are benefitting from this opportunity backed by domestic and foreign capital. Dutch mortgages present unique investment opportunities: High return relative to credit risk; Very long fixed rates (20/30 years). 3

4 Mortgage debt (EUR bln) Historical and future mortgage debt 1,200 1,100 1, EUR 670 bln EUR 885 bln EUR 810 bln Sources: DNB, CBS Outstanding mortgage debt DNB projection - high DNB projection - low During the period, house prices declined strongly (approx. 23% from the pre-financial crisis peak). Annual mortgage production fell to EUR 46 bln in 2012/13, since then production nearly recovered to pre-crisis levels (EUR 100 bln in 2017 and EUR bln expected for 2018). Due to several demographic factors, DNB predicts that overall mortgage debt will further increase by the end of 2025 to EUR 810 bln EUR 885 bln. This additional debt of EUR 200bln in combination with the regular refinancings is expected to result in annual production volumes of EUR 100 bln for the years to come. 4

5 Disintermediation in the Dutch mortgage chain Distribution Approximately 3,500 financial intermediaries that sell mortgage loans of approximately 35 different mortgage labels. Some 450 of these are part of one of the four large mortgage advisory chains: De Hypothekers Associatie (#175); Hypotheekshop (#165); Van Bruggen Adviesgroep (#60); and HypotheekVisie (#50). Approximately 64% of new mortgage loans are sold through the intermediary channel (versus 31% through the traditional bank branch networks). Underwriting & Loan Servicing Approximately 20% of the total Dutch mortgage book is serviced by third party servicers. Virtually all of the underwriting and servicing actions in respect of Dutch mortgage loans can be outsourced to independent third party servicers. Limiting the requirement for upfront investment, third party servicing is a key facilitator for new entrant originators. Even for many existing originators, third party servicing is a costefficient solution and several large outsourcings have taken place in recent years. Servicer Volume With a market share of 2%, execution only mortgage loans (for which no advice is given) are only a very small part of the Dutch mortgage market. Due to this relatively high market share of the distribution channel, any originator with an attractive proposition and a sound marketing and distribution strategy can quickly gain traction in the Dutch mortgage market. Particularly for new entrants, the intermediary channel is very efficient: no need for significant upfront investments to have access to distribution. Own Servicing 80% Third-party Servicing 20% Aegon Rabobank NN SNS Bank* ING Bank ABN AMRO Stater Quion CMIS Vesting Finance EUR 43 bln EUR 196 bln EUR 26 bln EUR 46 bln EUR 120 bln EUR 147 bln EUR 78 bln EUR 58 bln EUR 5 bln EUR 4 bln Source: Annual reports, Fitch. (*) As of 2017, SNS changed its name to the Volksbank. 5

Disintermediation of funding is the next step Type 1 2 3 4 Distribution Intermediary channel Intermediary channel + own network Intermediary

originators Facilitated by the intermediary channel and third party servicing, a new type of mortgage originators has emerged in the past few

These originators have gained a significant market share, funded by non-traditional mortgage investors.

6 Disintermediation of funding is the next step Type Distribution Intermediary channel Intermediary channel + own network Intermediary channel Intermediary + own network Servicing Third party Own Third party Own Own On-balance funding No Yes Originators Emergence of new originators Facilitated by the intermediary channel and third party servicing, a new type of mortgage originators has emerged in the past few years: regiepartijen, mainly in direct response to investor demand. These originators have gained a significant market share, funded by non-traditional mortgage investors. With the expected growth of the Dutch market and the regulatory pressure on the traditional originators, these new originators will very likely continue to play an important role. Even the traditional originators are entering the arena of off-balance funding of their mortgage production. 6

7 Investing in Dutch mortgage loan exposure Indirect Structure = Participation or variable note Direct Structure = Actual mortgage receivable Dedicated = for one investor Syntrus Achmea Tellius Syntrus Achmea Attens BTG IQWOON CMIS BTG Elan Collective = multiple investors together Aegon AEGON DMF Co Munt Syntrus Achmea Achmea Rabobank Vista ASR NN NN ASR ASR NHG Dynamic Credit Bij Bouwe Merius Venn Venn Balloon size = Insurance = Regiepartij = Bank = Relative size of portfolio Single investor (dedicated) versus multi-investor (collective) mandates. Actual mortgage loans versus participation / variable note but in all cases relatively illiquid investment. Where the insurance originators started with the origination of mortgages for investment funds, the regiepartijen mainly opted for more direct structures. Rabobank has recently (April) entered the arena as well with a new label funded through a Robeco fund. 7

8 Investor preferences drive form of investment Dutch mortgage loan exposure 1 Asset backed exposure Actual mortgage loan exposure AAA rated or lower 3 Dutch mortgage loan exposure Originate new loans Structured transaction Whole loan transaction Covered bonds RMBS Notes Portfolio sale Established originator Regiepartij Own mortgage business 6 + Relatively liquid + Lower risk = Therefore lower returns + Up to now, relatively illiquid + Higher risk = Higher returns Dedicated mandate Direct Collective mandate Indirect 8

9 Innovative products Traditional products Traditional versus current versus innovative Drivers Originator balance sheet Tax deductibility Consumer preferences Traditional mortgage loans Numerous and relatively complex products such as savings, life and interest only. Limited linear and annuity. LTVs of up to 120%. Current mortgage loans Standardisation of Dutch mortgage product = much more recognisable for foreign investor. Annuity / linear only - no more savings / life products. Max 100% LTV. Investor preferences Search for yield Split mortgage loans Accommodate LTV and duration requirements ofdifferent types of investors resulting in competitively priced product for consumer. Capital Charge Bank Similar Insurer / PF Low / none Buy-to-let mortgage loans Recently introduced to the Dutch market. Historically an a-typical product in the Netherlands. Induced by changes in the rental market and strong increase in property prices. Duration Yield Shorter Higher Longer Marginally lower 9

10 Changing capital requirements for banks and insurers 1, 2 Capital requirement Source: KPMG analysis 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 40% 50% 60% 70% 80% 90% 100% 110% 120% Required capital Solvency II Required capital - Basel IV proposal Required capital - current Basel LTV The proposed Basel IV capital requirement for NHG mortgages remains unchanged at 3% driven by the leverage ratio requirements. Differences in capital requirements give rise to a reduction in market share of banks and simultaneously represent an investment opportunity for insurers. 1 : Basel IV: capital requirement as % of nominal value loan 2 : Solvency II: capital requirement as % of market value loan 10

11 Applicable regulations differ between different types of market participants Illustration Dutch mortgage loans Private persons Data protection Borrowers Originators: Definition according to CRR¹ Grant loans AFM² licence is needed Parties with or w/o balance sheet Banks 2 Banks Platforms SPV classic Regulatory Intermediaries Types of activity/ function: Intermediary takes over risk (banks only) 1 Intermediary takes no risk: Distribution/ allocation (operator) 3 Legal transformation (loan to security) Crowd Funding 2 Transfer of Loan / participation Security Insurers Solvency II Investment Funds Banks: Investors Applicable rules / regulations depend on type of investor and type of investment i.e. loan vs. security Basel II/III IFRS UCITS/ AIFM Directive IFRS ¹: Article 4 para 1 (13) of regulation 575/2013/EU (CRR) ² Authority Financial Mortgage (NL) Regiepartijen 2 Operating, underwriting and servicing MiFID II/ MiFIR As a result of the legal transformation into securities for the investor, corresponding regulations like MiFID II/ MiFIR become relevant. 11

12 Transfer of Loans or Participations Sell Side Originator (Bank) Incentive: sell exposure w.r.t. Dutch mortgage loans due to costs: Regulatory capital costs for credit risk under CRR dependent on: - Maturity (long term exposure) - Collateral (mortgage) - Credit rating of borrower Real funding costs Regulatory Capital Cost Measurement: Model dependent (SA, F-IRB, A-IRB) Basel III reforms: revision of SA, limited use of A-IRB, in- / output floors Investor Incentive: seeks profitable investments of liquidity surplus considering: Return on the Investment Arising costs: - Regulatory costs e.g. capital requirements (Solvency II) for market or credit risk in case of insurance - Operational costs Legal limitations to business activities Profitability Measurement: Model dependent Investor dependent Buy Side Development and Market Outlook Since the transfer of loans or participations is considered here, it is assumed that positions are illiquid. While Dutch mortgage loans may be considered as a homogeneous portfolio and originators (banks) have similar incentives, the interests of investors may differ significantly (e.g. between insurances and banks). So structuring approaches e.g. splitting Dutch mortgage loans w.r.t. maturities reflect different investors needs. 12

13 Transfer of Securities - Legal Transformation Sell Side Buy Side Originator (Bank) Incentive: transfer of credit risk exposure w.r.t. Dutch mortgage loans due to capital costs regarding credit risk (see previous slide) Regulatory Cost Measurement: Capital requirements w.r.t. credit risk of Loans: - Model dependent (SA, F-IRB, A-IRB) - Basel III reforms: revision of SA, limited use of A-IRB, in-/ output floors Transfer by securities: - Capital requirements w.r.t. originators in case of securities have to be considered - Regulatory requirements for securities (e.g. MiFID II/ MiFIR) become relevant Development and Market Outlook Investor Incentive: seeks profitable investments of liquidity surplus considering: Return on the Investment dependent on - Underlying portfolio - Seniority of tranche Arising costs: - Regulatory costs e.g. capital requirements (Solvency II) for market risk for insurances - Operational costs Legal / regul. limitations to business activities Profitability Measurement: Model and investor dependent Capital requirements w.r.t. investors in case of securities have to be considered Regulatory requirements for securities (e.g. MiFID II/ MiFIR) become relevant Since the transfer of securities is considered these financial instruments represent a more liquid version of Dutch mortgage loans. 13

14 Conclusion Dutch mortgages present an interesting alternative investment opportunity: Healthy return relative to credit risk; Long fixed rates (still around 3%). The Dutch market is forecast to continue to grow but traditional originators are not able / willing to provide the necessary funding. Investment structures that might also be combined: Current Structures Allow investors to invest in a Relatively illiquid instrument With limited regulation Funding required Alternative Structure Entails a legal transformation Yielding a more tradeable security to improve liquidity But brings with it more regulation Further decoupling of funding and origination Innovative Structure Builds on a splitting of loan w.r.t. the term of maturity Resulting parts attractive to different investors regarding the combination of yield and capital requirements To be combined with security enhancement to further increase liquidity Significant progress is being made in creating the infrastructure but numerous challenges remain. 14

15 Panel discussion Moderators: Dirk Schubert Partner KPMG DE Piet Hein Schram Director KPMG NL Panelists: Niels Roek Head of Structuring & Client Solutions CIO Office Aegon Steffen Lautz Executive Director FI Structured Solution Sales Natixis Philip Niemeyer Country Manager NL CrossLend 15

16 Panel discussion I Investment Decisions & Strategies II Ways to conclude trades & Market initiatives for platforms III Regulation IV New types of assets & Future developments 16

The appeal of investing in newly originated Dutch residential mortgage loans

The appeal of investing in newly originated Dutch residential mortgage loans Dynamic Credit_SSF_2018.qxp:XXXX_CB_2011 06/07/2017 13:09 Page 1 Investing in newly originated Dutch residential mortgage loans by Merijn Bosman, Dynamic Credit Partners Europe B.V. In the past five years