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Fitch Affirms RBS's Covered Bonds at 'AAA'; Outlook Stable
May 15, 2017 / 2:35 PM / 7 months ago

Fitch Affirms RBS's Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) Fitch Ratings has affirmed The Royal Bank of Scotland PLC's (RBS, BBB+/Stable/F2) outstanding mortgage covered bonds at 'AAA'; the Outlook is Stable. This affirmation follows the addition of around GBP3 billion of mortgage loans issued by NatWest Bank, the revision of the interest rate swap spread to 2.577% (from 2.675%) and the issuance of EUR1.25 billion and GBP1.25 billion of covered bonds. KEY RATING DRIVERS The rating is based on RBS's Long-Term Issuer Default Rating (IDR) of 'BBB+', an unchanged IDR uplift of two notches, an unchanged payment continuity uplift (PCU) of six notches, and the 88.5% asset percentage (AP) Fitch relies upon, which provides more protection than the 'AAA' breakeven (BE) AP of 92.5%. The Stable Outlook on the covered bonds reflects the Stable Outlook on RBS's Long-Term IDR and the two-notch cushion against an issuer downgrade. The 92.5% 'AAA' breakeven AP has increased from 91.0% since December 2016. This change was primarily driven by the dual-tranche EUR1.25 billion and GBP1.25 billion benchmarks issued on 15 May 2017 that improved the maturity matching and excess spread in the programme. The asset disposal loss has been reduced to 5.1% from 7.3% and the cash flow valuation to minus 2.1% from minus 0.8%. Fitch capped the BE AP for the rating at 92.5%, which is equivalent to the minimum regulatory OC level of 8% notwithstanding that the maximum asset percentage according to the programme's documentation is 90%. The asset disposal loss component remains the main driver of the BE AP, as maturity mismatches remain high with a weighted average life (WAL) for the assets of 11.4y, which compares to 4.3y for the covered bonds. The asset disposal loss is constrained by the SARA clause, which cannot be offset by the additional layer of overcollateralization provided by the negative carry factor. The second-largest driver of BE AP is credit loss. The increase in loss compared to our last analysis was driven by the top-up at the end of February 2017 of around GBP3 billion of assets originated by NatWest Bank. The new loans slightly increased the indexed weighted average (WA) loan to value to 47.5% from 42.9%, the remaining term to 18y from 16.2y and the share of BTL loans to 13.8% from 12.6% as of February/March 2017 investor reporting. The programme's cash flow valuation improved because the dual-tranche issuance decreased the WA margin (over one month GBP LIBOR) on the bonds to 1.45% from 2.12%. Some of this positive effect on AP is offset by the impact of the lower assets swap margin (over one month GBP LIBOR), to 2.675% from 2.577%, whereas the isolated effect on AP is limited. The cash flow valuation includes a 1% deduction for commingling risk during the holding period following an issuer's default. RATING SENSITIVITIES The 'AAA' rating of RBS's mortgage covered bonds is vulnerable to a downgrade if either of the following occurs: (i) the bank's Long-Term IDR is downgraded by three notches to 'BB+' or below; or (ii) the number of notches represented by the IDR uplift, the payment continuity uplift and the recovery uplift is reduced to six or lower. Fitch's BE AP for a given covered bond 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 BE AP for the covered bond rating cannot be assumed to remain stable over time. Contact: Primary Analyst Mathias Pleissner Director +49 69 768076 133 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Secondary Analyst Justina Niu Associate Director +44 20 35301580 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: UK Residential Mortgage Assumptions (pub. 03 Feb 2017) 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 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 20 Mar 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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