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Fitch Takes Actions on 3 Mid-Sized Italian Banks' OBG Programmes
June 5, 2017 / 4:52 PM / 4 months ago

Fitch Takes Actions on 3 Mid-Sized Italian Banks' OBG Programmes

(The following statement was released by the rating agency) MILAN/LONDON, June 05 (Fitch) Fitch Ratings has taken rating actions on three Italian mortgage covered bonds programmes (Obbligazioni Bancarie Garantite, OBG) issued by Banca Popolare di Sondrio-Societa' Cooperativa per Azioni (BPS, BBB/Negative/F3), Credito Emiliano S.p.A. (Credem, BBB/Stable/F2) and Banca Carige S.p.A. - Cassa di Risparmio di Genova e Imperia (Carige, B-/RWN/B/RWN) and guaranteed by Carige Covered Bond S.r.l. The rating actions follow the periodic review of the programmes and are as follows: - BPS OBG affirmed at 'AA'; Outlook Stable - Credem OBG affirmed at 'AA'; Outlook Stable - Carige OBG 'BBB+'; maintained on Rating Watch Negative (RWN) KEY RATING DRIVERS The breakeven asset percentage (AP) for the OBG programmes is revised to 88% for BPS OBG, 90.5% for Carige OBG and 75.5% for Credem OBG for their respective instrument rating (equivalent to 13.6%, 10.5% and 32.5% in overcollateralisation (OC) terms). All programmes have a soft bullet liability profile with a principal maturity extension of 12 months (15 months for Carige OBG) and a three-month rolling liquidity reserve for interests and senior expenses. This is reflected in the unchanged payment continuity uplift (PCU) assigned to each programme. BPS and Credem OBG have a PCU of six notches; Carige OBG's PCU remains at four notches, lower than the standard PCU of six notches typically assigned to soft-bullet programmes. This is due to the programme's cover pool-specific alternative management posing a high risk to payment continuity in the event that the source of covered bonds payments switches from the issuer to the cover pool. The cover pools of BPS and Credem OBG comprise residential mortgage loans, while Carige's includes also a limited portion of secured loans granted to small and medium enterprises (5.5% as of March 2017). The credit loss for Carige OBG absorbs 6.4% OC and it is the major driver of the breakeven AP; it accounts for 6% and 4.9% OC for BPS OBG and Credem OBG, respectively. The asset disposal loss remains the greatest contributor to the breakeven AP for BPS and Credem OBG (respectively 13.5% and 16.4%) and the second driver of Carige OBG breakeven AP (6%). It represents the cost of bridging refinancing needs due to maturity mismatches between amortising assets and bullet liabilities and it is driven by rating spread levels that Fitch assumes for Italian mortgage loans. The asset disposal loss for Carige OBG is reduced by the additional OC that the issuer puts aside in the asset coverage test to account for deposit set-off. The cash flow valuation reduces the breakeven OC for Carige's (-2.1%) and BPS's (-5.7%) OBG and it reflects the presence of hedging structures as well as limited open interest rate positions (7.2% for Carige and 11.9% for BPS). The cash flow valuation component for Credem OBG absorbs 11% OC and reflects interest rate mismatches between the assets and the liabilities. The cover pool comprises fixed-rate loans (24.5%), floating-rate loans (30.8%), floating with cap loans (1.7%), and loans with switching options (43%); in a rising interest rate scenario, which is the most stressful in Fitch's analysis, loans with switching options are assumed to switch to a fixed rate and floating with cap loans are treated as fixed-rate loans. Credem OBG are fixed-rate, and 92.9% are hedged via an interest rate swap, on which the special purpose vehicle (SPV) pays Euribor 1 month plus a spread, which the agency takes into account in its cash flow analysis; Credem acts as liability swap provider. Credit Suisse International (A-/Stable/F1/A-(dcr)) acts as swap counterparty on both the underlying assets (67.6% of the cover pool) and liabilities (38.6% of the outstanding OBG) in Carige's programme. BNP Paribas S.A. (A+/Stable/F1/A+(dcr)) hedges 65% of the OBG issued by BPS. The swap providers are eligible counterparties as per Fitch's criteria and in its analysis the agency considered post-swaps cash flows for the hedged assets or liabilities. The unchanged Issuer Default Rating (IDR) uplift of two notches for all programmes reflects that the banks' Long-Term IDR is either driven by the banks' respective Viability Rating (VR), or in the case of Carige above its 'cc' VR, as well as a low risk of under-collateralisation at the point of resolution. This is based on Fitch's assessment of the Italian legal framework, which includes the existence of an independent asset monitor, asset eligibility criteria and a contractual minimum level of OC, as applicable. BPS OBG BPS OBG are rated 'AA', six notches above the bank's Long-Term IDR of 'BBB'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of six notches and a recovery uplift of two notches. The AP of 78.74% which Fitch relies upon in its analysis (investor report dated March 2017) provides more protection than the revised 'AA' breakeven AP of 88% (from 85.5% previously). The breakeven AP corresponds to a 'A+' tested rating on a probability of default (PD) basis and a two-notch recovery uplift. The programme is rated at Italy's Country Ceiling of 'AA', which caps the rating, and the Stable Outlook reflects that on Italy's IDR and the significant buffer against a downgrade of the bank's Long-Term IDR due to the different uplift factors. Carige OBG Carige OBG are rated 'BBB+'/RWN, eight notches above the bank's Long-Term IDR of 'B'/RWN. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of four notches and a recovery uplift of three notches. The AP of 81.97% which Fitch relies upon (investor report dated March 2017) in its analysis provides more protection than the revised 'BBB+' breakeven AP of 90.5% (from previous 90%). The breakeven AP corresponds to a 'BB+' tested rating on a PD basis and a three-notch recovery uplift. The RWN on the 'BBB+' rating reflects that on the bank's IDR as the covered bonds' rating does not have any buffer against a downgrade of the bank's IDR. Credem OBG Credem OBG are rated 'AA', six notches above the bank's Long-Term IDR of 'BBB'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of six notches and a recovery uplift of two notches. Fitch takes into account the highest AP of the last 12 months of 60.2% (as of October 2016), which provides more protection than the revised 'AA' breakeven AP of 75.5% (from previous 76%). The programme is rated at Italy's Country Ceiling of 'AA' and the Stable Outlook on the OBG primarily reflects that on Italy's IDR and the significant buffer against a downgrade of the bank's Long-Term IDR due to the different uplift factors. The rating on Credem OBG is constrained by the documented counterparty provisions which support a maximum achievable tested rating on a PD basis of 'A+'. CRITERIA VARIATION BPS Fitch's analysis of BPS's cover pool varied from the agency's "Criteria Addendum: Italy - Residential Mortgage Assumptions". Fitch applied a PD adjustment of 1.3 instead of 1.5 to loans granted to SAE 614/615 borrowers (artisans and family-run businesses, as coded by the Bank of Italy) based on the observed levels of default rates, which in Fitch's view warrants a smaller adjustment than that envisaged by the criteria. The application of this variation has no impact on the OBG's rating. RATING SENSITIVITIES Banca Popolare di Sondrio-Societa' Cooperativa per Azioni (BPS) Obbligazioni Bancarie Garantite (OBG) All else being equal, the 'AA' rating of BPS OBG is vulnerable to a downgrade if any of the following occurs: (i) Italy's Country Ceiling is revised down; or (ii) the Long-Term Issuer Default Rating (IDR) of BPS is downgraded to 'B+' or below; or (iii) the relied-upon asset percentage (AP), which is disclosed in the investor report, rises above Fitch's 'AA' breakeven AP of 88%. Banca Carige S.p.A. - Cassa di Risparmio di Genova e Imperia (Carige) OBG All else being equal, the 'BBB+'/RWN rating of the covered bonds issued by Carige would be vulnerable to a downgrade if any of the following occurs: (i) Carige's Long-Term IDR is downgraded to 'CCC' or below; or (ii) the relied-upon AP, which is disclosed in the investor report, rises above Fitch's 'BBB+' breakeven AP of 90.5%. Credito Emiliano S.p.A. (Credem) OBG All else being equal, the 'AA' rating of Credem OBG is vulnerable to a downgrade if any of the following occurs: (i) Italy's Country Ceiling is revised down; or (ii) the Long-Term IDR of Credem is downgraded to 'B+' or below; or (iii) the relied-upon AP rises above Fitch's 'AA' breakeven AP of 75.5%. If the relied upon AP increases to the maximum contractual level of 93%, the covered bonds rating would be downgraded to 'A'. Fitch's breakeven AP for a given OBG rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the breakeven AP for a covered bonds rating cannot be assumed to remain stable over time. Contact: Primary Analyst Sara De Novellis Analyst +39 02 87 90 87 295 Fitch Italia S.p.A. Via Morigi, 6 20123 Milan Secondary Analyst Alessandro Bosello Analyst +39 02 87 90 87 278 Committee Chairperson Ilaria Farina Senior Director +39 02 87 90 87 242 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: Italy (pub. 29 Nov 2016) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here SME Balance Sheet Securitisation Rating Criteria (pub. 03 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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