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Fitch Affirms 4 Portuguese Covered Bonds Programmes.

Milan/London: Fitch Ratings has affirmed the four Portuguese mortgage covered bonds programmes (Obrigacoes Hipotecarias, OH) issued by Banco Comercial Portugues, S.A. (BCP, BB-/Positive/B), Caixa Economica Montepio Geral, caixa economica bancaria, S.A. (Montepio, B+/Stable/B), Caixa Geral de Depositos, S.A. (CGD, BB-/Positive/B), and Banco Santander Totta SA (Totta, BBB+/Stable/F2), as follows:

- BCP's OH: 'BBB+'; Stable Outlook

- Montepio's OH: 'AA-'; Stable Outlook

- CGD's OH: 'BBB+'; Stable Outlook

- Totta's OH: 'A+'; Stable Outlook

The rating actions follow a periodic review of the programmes.

KEY RATING DRIVERS

The soft-bullet programmes' ratings are constrained by the absence of satisfactory liquidity protection mechanisms to preserve covered bonds' timely payments from interruption risk. This translates into an unchanged Payment Continuity Uplift (PCU) of zero notches for the OH of BCP, CGD and Totta. The tested rating on a probability of default (PD) basis for these programmes remains at the covered bonds rating floor.

Montepio's OH have a conditional pass-through (CPT) amortisation profile with an unchanged PCU of six notches - instead of the standard eight notches applicable to CPT programmes - to reflect the time lag to access the liquidity reserve when recourse to the cover pool is enforced. As per the programme documentation, the reserve is made available only after a five business- day grace period has elapsed upon an issuer event, or if triggered by a missed payment of interest. The reserve is held by Elavon Financial Services DAC (AA-/Stable/F1+).

The unchanged Issuer Default Rating (IDR) uplifts for all four programmes mirror the low risk of under-collateralisation of the OH in an issuer resolution scenario. Furthermore, for the covered bonds of BCP, CGD and Montepio, the two-notch IDR uplift takes into consideration that these banks' Long-Term IDRs are driven by the banks' Viability Ratings. Totta's IDR benefits from support provided by the bank's parent, Banco Santander S.A. (A-/Stable/F2), which is located in a different jurisdiction to the issuer, which drives the programme's one-notch IDR uplift.

Fitch maintains the maximum recovery uplift for the OH: the relied-upon overcollateralisation (OC) compensates for credit losses modelled in a stress scenario corresponding to covered bonds ratings. This results in a three-notch recovery uplift for non-investment grade tested rating on a PD basis (BCP and CGD) and a two-notch for investment grade (Montepio and Totta).

The breakeven OC for the programmes has either remained stable or decreased since the last rating action mainly due to smaller credit losses as a result of the application of Fitch's middle-loaded recovery rate vector.

BCP

The covered bonds of BCP are rated 'BBB+', five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and a recovery uplift of three notches. Fitch revised the 'BBB+' breakeven OC to the 5.3% legal minimum (from 5.5% previously) as the 'BBB+' stressed credit loss for the programme of 4.9% is now below the legal minimum OC. In its analysis Fitch relies on the 14% OC the issuer discloses in the programme's investor report.

The Outlook on the covered bonds is Stable in spite of a Positive Outlook on the issuer because a one-notch upgrade on the bank would not trigger an upgrade on the covered bonds (see Rating Sensitivities below).

Montepio

The covered bonds of Montepio are rated 'AA-', 10 notches above the bank's Long-Term IDR of 'B+'. 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 18% contractual OC that Fitch relies upon in its analysis provides more protection than the 'AA-' breakeven OC of 11.5% (down from previous 14%). The Stable Outlook reflects that of the bank's IDR.

The breakeven OC is driven by a 3.6% credit loss and a 8% ALM loss component, which mostly represents the OC needed to cover interest payments on the covered bonds without triggering any asset sale. The component also includes the impact of an unmitigated commingling exposure.

CGD

The covered bonds of CGD are rated 'BBB+', five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and a recovery uplift of three notches. The 'BBB+' breakeven OC is unchanged at the 5.3% legal minimum OC as the 'BBB+' stressed credit loss for the programme of 3.9% is now below the legal minimum OC. In its analysis, Fitch relies on the 28% OC the issuer discloses in the programme's investor report.

The Outlook on the covered bonds is Stable in spite of a Positive Outlook on the issuer because a one-notch upgrade on the bank would not trigger an upgrade on the covered bonds (see Rating Sensitivities below).

Totta

The covered bonds of Totta are rated 'A+', three notches above the bank's Long-Term IDR of 'BBB+'. This is based on an unchanged IDR uplift of one notch, an unchanged PCU of zero notches and a recovery uplift of two notches. The 15% committed OC that Fitch relies upon in its analysis provides more protection than the 'A+' breakeven OC of 5.5% (down from previous 6.5%), derived from a smaller 5.6% 'A+' credit loss. The Stable Outlook is driven by that of the bank's IDR.

RATING SENSITIVITIES

All else being equal, for the Obrigacoes Hipotecarias (OH) of Caixa Economica Montepio Geral, caixa economica bancaria, S.A. (Montepio) and Banco Santander Totta SA (Totta), a one-notch upgrade in the bank's Issuer Default Rating (IDR) would lead to a one-notch upgrade in the respective covered bonds programme rating as long as the relied-upon overcollateralisation (OC) is enough to compensate for stresses commensurate with a higher rating.

All else being equal, for the OH of Banco Comercial Portugues, S.A. (BCP) and Caixa Geral de Depositos, S.A. (CGD), a two-notch upgrade in the bank's IDR would lead to a one-notch upgrade in the respective covered bonds programme rating as long as the relied-upon OC is enough to compensate for stresses commensurate with a higher rating.

All else being equal, the OH issued by BCP, CGD and Totta could be upgraded up to the 'AA' Country Ceiling for Portugal if sufficient coverage for timely interest payments is provided for in the respective programme documentation and provided that the OC relied upon would be sufficient to withstand stresses associated with higher rating levels.

The Portuguese covered bonds programmes would be vulnerable to a downgrade if any of the following occurs: (i) the respective bank's Long-Term IDR is downgraded by one notch or more, or (ii) the relied-upon OC decreases below Fitch's breakeven OC for the OH rating.

Fitch's breakeven OC for a given covered bonds 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 OC for a covered bonds rating cannot be assumed to remain stable over time.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 23, 2019
Words:1180
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