Morningstar DBRS Confirms AAA Credit Ratings on Kutxabank, S.A. Covered Bonds

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA credit ratings on the outstanding Cédulas Hipotecarias (CH, Spanish mortgage covered bonds) issued under the Kutxabank, S.A. Covered Bonds programme (Kutxabank CH or the Programme). This rating action follows the completion of a full review of the credit ratings.

CREDIT RATING RATIONALE
The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), which is one notch above Kutxabank's Long Term Issuer Rating. Kutxabank is the Issuer and Reference Entity (RE) for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of "Very Strong" associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 25.5% to which Morningstar DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating of the Kingdom of Spain, rated "A" with a Positive trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with its European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses, and market value spreads to calculate liquidation values on the CP.

Everything else being equal, a two-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB ratings. In addition, all else unchanged, the CH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (low); (2) the sovereign rating on the Kingdom of Spain was downgraded below A (low); (3) the LSF assessment associated with the programme was downgraded to Average; (4) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the CH and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH under the programme was EUR 2.4 billion as of end March 2025, while the assets in the CP amounted EUR 4.0 billion. This resulted in a total estimated OC of 67.2%.

Spanish CBs are backed by a specific portfolio of assets selected by the issuer. As of 31 March 2025, the CP is composed of 25,575 residential mortgage loans, with a weighted-average (WA) current loan-to-value ratio of 51.5%. The CP is geographically diversified, with higher concentrations in Basque Country (49.8%), Madrid (20.5%), and Catalonia (9.9%). The pool is 76 months seasoned.

As is customary in the Spanish market, CH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (61.5% floating-rate linked to different indexes and resets) and the interest paid to the CB holders (54.2% floating-rate linked to six months Euribor). This risk is mitigated by the available OC and has been accounted for in Morningstar DBRS' cash flow analysis.

All the assets and liabilities are denominated in EUR.

The WA life of the mortgage assets as per the issuer calculations is approximately nine years, which is longer than the WA life of the CH (around five years). This generates an asset-liability mismatch that is mitigated by the available OC and accounted for in Morningstar DBRS' cash flow analysis.

Morningstar DBRS has assessed the LSF related to the Programme as "Very Strong" according to its "Rating and Monitoring Covered Bonds" methodology. For more information, please refer to Morningstar DBRS's "Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review" commentary, available at dbrs.morningstar.com.

For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.
Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) at https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable to the credit rating is Global Methodology for Rating and Monitoring Covered Bonds (25 March 2025) https://dbrs.morningstar.com/research/450542.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a 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 legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include CP stratification tables as at 31 March 2025.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purpose of providing these credit ratings to be of satisfactory quality.

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

The last credit rating action on this issuer took place on 4 June 2024, when Morningstar DBRS confirmed the outstanding credit ratings under the Programme.

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomas Rodriguez-Vigil Junco, Senior Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 5 June 2023

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81, Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
D-60311 Frankfurt am Main
Tel. +49 (69) 8088 3500
Geschäftsführung: Detlef Scholz, Marta Zurita Bermejo
Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (25 March 2025), https://dbrs.morningstar.com/research/450542
-- Global Methodology for Rating Banks and Banking Organisations (23 May 2025), https://dbrs.morningstar.com/research/454637
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- European RMBS Insight Methodology (8 May 2025) and European RMBS Insight model v.10.1.0.1, https://dbrs.morningstar.com/research/453613
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Global Methodology for Rating Sovereign Governments (15 July 2024), https://dbrs.morningstar.com/research/436000
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.