Press Release

DBRS Morningstar Confirms Ratings on Series Outstanding under Banco BPM Covered Bonds (OBG - Mortgages - Popolare Programme 1)

Covered Bonds

February 12, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banco BPM Covered Bonds Programme 1 (Banco BPM OBG1 or the Programme). The rating action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its rating on Series 11 (ISIN IT0005322711), which was reimbursed in June 2020.

As of today, there were five outstanding series of OBG, for a total nominal amount of EUR 3.25 billion under the Programme. The series are guaranteed by BP Covered Bond S.r.l.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BBB (high), which is the Long-Term Critical Obligations Rating (COR) of Banco BPM. Banco BPM is the Issuer and Reference Entity (RE) for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which covered bonds (CB) are a particularly important funding instrument and deems the cover pool (CP) strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of BBB (high).
-- A two-notch uplift for high recovery prospects.
---A level of overcollateralisation (OC) of 0.1% to which DBRS Morningstar gives credit, being the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.9. DBRS Morningstar gives limited credit to the cash portion of the CP.

DBRS Morningstar analysed the transaction using its European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, and interest rate stresses.

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the covered bonds ratings.

In addition, all else unchanged, the CB ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

Banco BPM acts as the account bank for this transaction. The replacement trigger on Banco BPM in its capacity as account bank is not fully compliant with DBRS Morningstar’s counterparty criteria; hence, DBRS Morningstar gives limited credit to the cash accumulating in the account bank in accordance with its “Rating and Monitoring Covered Bonds” methodology.

UBS Europe SE acts as the CB swap counterparty; however, the swap documentation is not fully compliant with DBRS Morningstar’s derivatives criteria. As such, no credit was given to swap transactions in DBRS Morningstar’s analysis.

The total outstanding amount of OBG is EUR 3.25 billion. As at 30 November 2020, the aggregate balance of the CP was EUR 4.0 billion of residential mortgages plus EUR 405 million of cash collections, resulting in a total OC of 36.5%. However, when considering the reduced credit DBRS Morningstar gives to cash, the resulting net OC amounts to 29.0%.

As at November 2020, the CP comprised 56,868 loans secured by first-rank mortgages, originated by Banco Popolare SC and network banks of the group.

The weighted-average current loan-to-value ratio of the mortgages was 49.3% with a seasoning of 9.4 years. The CP was mainly distributed in Lombardy (29.3%), Veneto (13.4%), Tuscany (11.3%), and Emilia Romagna (11.3%).

The CP comprised 26.6% fixed-for-life loans by outstanding balance and 73.4% floating-rate loans. The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.

In comparison, 38.5% of the liabilities pay a fixed rate and 61.5% pay a floating rate linked to one- and three-month Euribor plus a spread. The resulting interest and basis risks are considered as unhedged in DBRS Morningstar’s cash flow analysis.

All CP assets and OBG are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

The weighted-average life (WAL) of the CP is 8.0 years, whereas the WAL of the OBG is 1.5 years. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS Morningstar has assessed the LSF related to the Programme as “Adequate”, according to its rating methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” at www.dbrsmorningstar.com.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may increase in the coming months for many CPs, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. In the CP analysis of this programme, DBRS Morningstar assumed a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CBs in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating and Monitoring Covered Bonds” (27 April 2020).

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

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

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

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include historical performance data (static pool default data from 2011 to 2020 for the residential pool; static pool delinquency data from 2011 to 2020 and dynamic pool prepayments data from 2011 to 2020), stratification information on the CP as at 30 November 2020 and loan-level information on the CP as at 31 December 2020 provided by the Issuer.

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

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

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

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

The last rating action on this transaction took place on 14 February 2020, when DBRS Morningstar confirmed its “A” ratings on the outstanding CB series.

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

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 15 February 2016

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana, 81
Floors 26 & 27
28046 Madrid
Spain

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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