Moody's Corporation · NYSE:MCO
Moody's — Conference Presentation (September 2020)
33 slides from Moody's's conference presentation, September 2020
Slide 1: Continued Stress of the U.K. Mortgage Market
Continued Stress of the U.K. Mortgage Market Petr Zemcik, PhD • Brenda Solis Gonzalez • Luca Magni September 2020
Slide 2: Today's Speakers
Today’s Speakers Economics & Business Analytics Luca Magni Petr Zemcik, PhD Brenda Solis Gonzalez Associate Director Senior Director Assistant Director, Risk Modeler Continued Stress of the U.K. Mortgage Market | Sep 2020 2
Slide 3: Portfolio Analyser (PA) Suite of Models
Portfolio Analyser (PA) Suite of Models Retail loan-level econometric models for credit and impairment metrics Delinquency/Arrears (Flow rates or migration matrices) R e t a i l As s e t C l a s s e s Default Rates & PDs Mortgages Overdrafts (Dynamic term-structures) (With relevant sub-categories) (
Slide 4: Agenda
Agenda 1. Economic Outlook for the U.K. 2. Rising PD & LGD Forecasts for the U.K. Mortgage Market 3. Impact on IFRS 9 Impairments 4. Impact on Loss Distribution Continued Stress of the U.K. Mortgage Market | Sep 2020 4
Slide 5: Economic Outlook for the U.K.
1 Economic Outlook for the U.K.
Slide 6: Output Declines Dramatically in Q2
Output Declines Dramatically in Q2 Deviation from normal level of activity, ppts, by industry, July forecast Arts Accom. Transp. Wholesale Manufact. Real Est. Energy Constr. Educ. Finance Public admin. Prof. Other service Water Supply Agric. Admin. Households ICT Mining Health Total 2 -3 -8 -13 -18
Slide 7: Global Economic Body Blow
Global Economic Body Blow Real GDP growth, % change, baseline scenario 2020Q1 2020Q2 2020Q3 2020Q4 2019 2020 February 0.3 0.5 0.5 0.4 2.3 1.7 United States May -1.2 -9.4 3.8 0.2 2.3 -5.7 August -1.3 -9.5 5.4 0.7 2.2 -4.9 February 0.4 0.4 0.4 0.4 1.2 1.3 Euro Zone May -3.8 -12.4 12.7 0.5 1.2 -7.0 Aug
Slide 8: Unemployment Increases
Unemployment Increases Country Max of 2020-22 Unemployment Unemployment (Feb) in 2019Q4 Max of 2020-22 Unemployment (Aug) Value Date Value Date Shift of baseline scenarios Germany United Kingdom 5.00 3.80 5.36 4.64 2022Q4 2022Q4 6.25 8.42 2020Q4 2021Q1 France 8.10 8.51 2020Q1 11.12 2020Q3 Greece 16.
Slide 9: Rising Number of Infections
Rising Number of Infections Coronavirus reported cases per 100,000 population 25 The UK (L) The UK, 7-day MA (L) 10 France, 7-day MA (L) Germany, 7-day MA (L) The USA, 7-day MA (R) 20 8 15 6 4 10 2 5 0 0 28-Feb 27-Mar 24-Apr 22-May 19-Jun 17-Jul 14-Aug Sources: WHO, Moody’s Analytics Continued Stres
Slide 10: More Infections…Weaker Economy
More Infections…Weaker Economy Confirmed infections vs. change in unemployment Change in unemployment rate, June /July 2020 vs. 2019Q4 12 10 y = 0.0005x + 0.2954 Peru R² = 0.6212 8 Malaysia Hungary USA 6 South Korea Japan Canada Chile Denmark Netherlands 4 Israel Sweden Germany 2 Russia Poland Brazi
Slide 11: Widespread Contractions Across the Economy Contributed to the Fall in GDP
Widespread Contractions Across the Economy Contributed to the Fall in GDP GDP Monthly Index Construction Monthly Index Production Monthly Index Service Monthly Index 110 105 100 95 Index Level 90 85 80 75 70 65 60 Source: ONS Continued Stress of the U.K. Mortgage Market | Sep 2020 11
Slide 12: House Prices Hit Comparable to GFC
House Prices Hit Comparable to GFC GDP and House Price Index, % change yr ago 25.00 20.00 GDP HPI 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20E 21F 22F Sources: ONS, Moody’s Analytics Continued Stress of the U.K. Mortgage Market | Sep 2020 12
Slide 13: Regional Shocks to House Price Index (NUTS1)
Regional Shocks to House Price Index (NUTS1) U.K. regions: annual growth 2019 vs. 2020 (baseline forecast) 2019 Historical Growth <= 0.5% 2020 Forecasted Growth -9% to -7% (Baseline Scenario) 0.5% to 2% -7% to -6% >= 2% -6% to -4% Source: Moody’s Analytics Continued Stress of the U.K. Mortgage Marke
Slide 14: Severity, Avg. Deviations From Baseline, %
Severity, Avg. Deviations From Baseline, % S4 June S3 June S4 Feb BL June S3 Feb BL Feb Sources: Moody’s Analytics Continued Stress of the U.K. Mortgage Market | Sep 2020 14
Slide 15: GDP Declines
GDP Declines U.K. Real GDP level June BL August BL Feb BL BoE August Forecast BoE May Forecast 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 19 20F 21F 22F 23F 24F 25F 26F Sources: ONS, Moody’s Analytics Continued Stress of the U.K. Mortgage Market | Sep 2020 15
Slide 16: Rising PD & LGD Forecasts for the UK Mortgage Market
2 Rising PD & LGD Forecasts for the UK Mortgage Market
Slide 17: Modular Structure for Consumer Loans Analysis
Modular Structure for Consumer Loans Analysis The case of U.K. Mortgages using Moody’s Mortgage Portfolio Analyser FA C T O R S MODELS OUTPUT Staging, Account-level, Default/Prepayment Impairment forward-looking, Economic Data Calculations & scenario-conditional Forecasts cash-flows LGD Scenario pro
Slide 18: Definition of Synthetic Arrears Status
Definition of Synthetic Arrears Status Payment holiday was offered to borrowers who faced financial difficulties due to Covid-19 outbreak Current 30 DPD 60 DPD Default Current accounts 30 DPD accounts 60 DPD accounts Defaulted accounts All current accounts with regular observed loan » DPD30 arrears
Slide 19: EDW Mortgage Data in 2020
EDW Mortgage Data in 2020 Loan’s performance during the pandemic Arrears status distribution, % Potential “payment holiday” accounts Current 30DPD 60DPD Defaulted Payment holiday accounts Total number of accounts Payment holiday, % share Original 0.34 0.36 0.35 0.25 20 160 Thousands accounts 16.92 0
Slide 20: Characterizing the Loans
Characterizing the Loans 141,288 mortgages in June 2020 snapshot GBP 13,752,320,725 total outstanding balance Loan Status LT V a t o r i g i n a t i o n Current 30DPD 60DPD Defaulted 99.47 30 %Outstanding 25 80.80 %Outstanding 20 15 6.42 10.64 10 2.13 0.21 0.08 0.25 5 Original Arrears Status Synthet
Slide 21: Characterizing the Loans
Characterizing the Loans L o a n Te r m Loan Size 35 30 >= 0 25 %Outstanding 20 >= 97,382 15 >= 194,763 10 5 >= 292,145 0 >= 389,526 >= 0 >= 60 >= 120 >= 180 >= 240 >= 300 >= 360 >= 420 >= 480 >= 540 >= 486,908 Employment Status 100 90.88 >= 584,289 84.69 80 >= 681,671 %Outstanding 60 >= 779,052 40
Slide 22: Impact of Scenario Vintages on Risk Metrics
Impact of Scenario Vintages on Risk Metrics June snapshot Annualized conditional PD, % Annualized conditional LGD, % 4.5 40 4 35 3.5 30 3 25 2.5 20 2 15 1.5 10 1 0.5 5 0 0 2020M7 2023M12 2027M12 2031M12 2020M7 2023M12 2027M12 2031M12 Continued Stress of the U.K. Mortgage Market | Sep 2020 22
Slide 23: Impact on the Risk Metrics
Impact on the Risk Metrics June snapshot – weighted average 12-month PD, % Upside Baseline Downside 4.18 3.78 3.12 2.82 2.69 2.43 1.86 1.40 1.35 1.30 1.17 0.93 0.78 0.82 0.69 0.63 0.48 0.50 Jan Apr Jul Jan Apr Jul Jan Apr Jul Jan Apr Jul Jan Apr Jul Jan Apr Jul Original Synthetic Original Synthetic
Slide 24: Impact on IFRS 9 Impairments
3 Impact on IFRS 9 Impairments
Slide 25: Impact of Covid-19 on June Snapshot ECL
Impact of Covid-19 on June Snapshot ECL Combined effect: scenario vintages and synthetic arrears status Stage distribution by exposure, % Coverage ratio, % Stage 1 Stage 2 Stage 3 Scenario vintages: Jan Apr Jul 0.25 0.25 0.25 3.58 10.64 10.64 10.64 3.95 2.93 37.82 11.34 54.27 38.04 51.12 95.80 61.93
Slide 26: Expected Credit Losses for June Snapshot
Expected Credit Losses for June Snapshot … across loan characteristics and scenario vintages Scenario vintages: B y LT V By purpose 1.4 0.8 Original 0.70 Original 1.2 0.7 1.1 0.6 %Outstanding %Outstanding 0.9 0.5 0.8 0.4 0.35 0.6 0.3 0.25 0.5 0.18 0.3 0.2 0.13 0.13 0.2 0.1 0.04 0.02 0.02 0.0 0.0 >=
Slide 27: Expected Credit Losses for June Snapshot
Expected Credit Losses for June Snapshot … across loan characteristics and scenario vintages Scenario vintages: By loan term By occupancy 1.20 0.70 Original Original 0.58 1.00 0.60 %Outstanding 0.50 %Outstanding 0.80 0.40 0.60 0.29 0.30 0.40 0.20 0.17 0.20 0.11 0.10 0.04 0.02 0.00 0.00 >= 0 >= 60 >=
Slide 28: Impact on Loss Distribution
4 Impact on Loss Distribution
Slide 29: Loss Distribution
Loss Distribution VaR Approach - 12-month expected loss, % Baseline January April July Original Synthetic 1,800 Jan-20 Apr-20 Jul-20 Jan-20 Apr-20 Jul-20 Original 1,600 Expected Loss 1,400 Baseline 0.02 0.10 0.14 0.73 2.11 2.51 1,200 Downside 0.07 0.26 0.40 1.47 3.53 3.98 1,000 800 Aggregate Statist
Slide 30: Loan Ratings Distribution Based on 12-month PD
Loan Ratings Distribution Based on 12-month PD Baseline and downside forecast across scenario vintages Baseline Downside 40 40 Jan 2020 Jan 2020 July 35 July 2020 July 2020, Synthetic 35 July 2020, Synthetic 30 30 25 25 % share % share 20 20 15 15 10 10 5 5 0 0 Aaa A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B
Slide 31: Key Takeaways
Key Takeaways 1. Despite the current recovery phase, the U.K. economy is forecast to contract 9.7% in 2020. 2. Payment holiday scheme helped to contain the surge in impairments. A niche of customers has benefited more than others and might become reduced payments accounts. 3. With the end of the sch
Slide 32: Contact Us
Contact Us: Content Solutions - Economics & Business Analytics Offices West Chester, EBA-HQ London Prague Singapore +1.610.235.5299 +44.20.7772.5454 +420 (234) 747-532 +65.6511.4400 121 North Walnut Street, Suite 500 One Canada Square / Canary Wharf Pernerova 691/42 6 Shenton Way West Chester PA 193
Slide 33: Continued Stress of the U.K. Mortgage Market | Sep 2020
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