September 5, 2017 / 8:18 AM / 10 months ago

Fitch: 'B' Losses Exceed EBA's OC Proposal in 10% of Cover Pools

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 'B' Portfolio Loss Rates for Covered Bonds here PARIS/LONDON, September 05 (Fitch) Expected losses in a mild 'B' stress scenario would not be covered by the minimum 5% overcollateralisation (OC) proposed by the European Banking Authority (EBA) in 10% of covered bond programmes included in Fitch Ratings' latest annual cover pool loss rate study. Ten of the 98 programmes in our sample have 'B' portfolio loss rates (PLRs) higher than 4.76%. This loss rate would reduce collateralisation to 100% from 105%, which is the minimum level the EBA has suggested in its recommendations for harmonising European covered bond frameworks. The 'B' PLR for the 10 cover pools, which back programmes from issuers in Cyprus, Greece and Spain, range from 6.8% to 14.3%. This compares with an average of 2%, unchanged since last year. Average 'B' PLRs for the Portuguese (3.5%) and Polish (2.9%) pools analysed in our report are also above the average for the sample as a whole. 'B' PLRs are a measure of credit risk in cover pools over the lifetime of the cover assets under our mild 'B' rating stresses. The high PLRs for programmes in Cyprus, Greece and Spain reflect both the impact of the sovereign debt and financial crises on those peripheral eurozone economies and the cover pool composition. Notably, Spanish cedulas hipotecarias are secured against an issuer's entire mortgage book, including riskier SME loans and loans to real-estate developers. Fitch's breakeven OC for a given rating is generally higher than 5%. Only eight programmes have a breakeven OC for their rating of 5% or less, most of which are rated not far above their issuer rating. Fitch's average breakeven OC is 12.3% for its 'AAA'-rated programmes. This is because OC provides protection for other sources of risk than the cover pool's loss rate, such as maturity and interest-rate mismatches between the cover pool and the covered bonds. Assumed credit losses for the cover pool represent almost half of the breakeven OC for the rating in cases where Fitch tests OC for timely payment of the covered bonds in addition to recovery given default. In this year's 'B' Portfolio Loss Rates report, Fitch also compared the 'B' PLR of residential mortgage pools securing covered bonds with those backing RMBS. While loan-to-value restrictions and a smaller proportion of riskier loans mean that credit quality in Dutch and UK cover pools is higher than in RMBS of the same issuer, this is not the case everywhere. In Belgium, Italy and Portugal, loans backing RMBS have on average lower 'B' PLRs than those in cover pools of the same issuers, due to higher seasoning. In Australia, RMBS have a lower 'B' PLR, due to a larger share of loans with lenders' mortgage insurance. For more details, see "2017 'B' Portfolio Loss Rates for Covered Bonds," published today and available at or by clicking on the link above. Contact: Barbara M. Burdzy Director, Covered Bonds +44 20 3530 1820 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Anne-France Chane Analyst, Covered Bonds +44 20 3530 1491 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Related Research APAC Covered Bonds Quarterly - 2Q15 here Covered Bonds Surveillance Snapshot here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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