DBRS Confirms A (high) Ratings on Banco BPI S.A. Covered Bonds, Removes UR-Developing

DBRS Ratings Limited (DBRS) has today confirmed its A (high) ratings on the outstanding Obrigações Hipotecárias (OH, the Portuguese mortgage covered bonds) issued under Banco BPI S.A.’s (BPI) Covered Bonds Programme (the Programme) and has removed the Under Review with Developing Implications status. The confirmation follows the completion of a full review of the Programme.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) reflective of the likelihood that the source of payments will switch from the Reference Entity to the cover pool (CP). BPI is the Issuer and Reference Entity for the Programme. BPI was not assigned a Critical Obligation Rating, nor does DBRS consider Portugal as a jurisdiction in which Covered Bonds are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A CP Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 28.2% that DBRS gives credit to, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9, and an OC commitment of 25.0%.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads in order to calculate liquidation values on the CP.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bond ratings by one notch. In addition, everything else being equal, the BPI OH ratings would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below BBB (low), (2) the LSF Assessment associated with the Programme were downgraded, (3) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects, (4) the relative amortisation profile of the OH and CP were moved adversely or (5) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

The Programme was established in 2008 under the Portuguese covered bond law to issue up to EUR 7 billion of OH. All series benefit from a maturity extension of one year.

As of today, there are nine series of OH outstanding, for a total amount of EUR 5.2 billion. The aggregate balance of the assets in the CP is EUR 6.83 billion (as at February 2017), resulting in a total OC level of 31.3%. The Issuer has publicly committed to maintain an OC level of 25.0%.

The Under Review with Developing Implications status has been removed because the conditions that led to the assignment of it have been resolved. In February 2017, Caixabank successfully finalised the acquisition of Banco BPI, raising its stake in the company to 84.5%. This has had a positive impact on the CBAP, as it helped reduce BPI’s exposure to Angola, which had been putting negative pressure on the CBAP.

As at 30 December 2016, the CP assets comprised EUR 6.50 billion of outstanding mortgage credits (99.8% of the CP) and EUR 16.17 million of other assets (0.2% of the CP). The CP comprises 134,053 residential mortgages with a weighted-average current unindexed loan-to-value ratio of 54.9%, a weighted-average seasoning of 103 months and a weighted-average remaining time to maturity of 297 months. The pool is geographically diversified across the country and almost entirely originated for the purpose of acquiring first or second homes (99.0% of the CP). All CP assets are denominated in euros as well as all OH. As such, investors are not currently exposed to any foreign exchange risk.

Currently, BPI’s OH does not benefit from any swap contract to hedge the mismatches between the interest yielded by the CP (95.9% floating rate linked to different indexes and resets) and the interest paid to holders of the covered bonds, linked to three-month Euribor with quarterly resets.

The weighted-average life of the assets is roughly 13 years, whereas the current weighted-average life of the OH is roughly five years; this generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on BPI’s OH, please refer to the 2 August 2016 rating report available on www.dbrs.com.

DBRS has assessed the LSF related to BPI’s OH as Average according to its covered bond rating methodology. For more information, please refer to the DBRS commentary “Portuguese Covered Bonds: Legal and Structuring Framework Review” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

DBRS has applied the principal methodology consistently and conducted a full review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for this rating include investor reports, loan-by-loan data and static performance data on the CP provided by the Issuer, which allowed DBRS to further assess the portfolio.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the information it receives in connection with the rating process.

The last rating action on this Programme took place on 22 February 2017 when DBRS assigned an A (high) UR-Dev rating to Series 17.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 1 April 2015

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The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies:

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.