DBRS Morningstar Confirms AA (low) Ratings on Banca Nazionale del Lavoro S.p.A. Covered Bonds (OBG - Mortgages)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (low) ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Nazionale del Lavoro S.p.A. Covered Bonds Programme (the Programme). This rating action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its AA (low) ratings on Series 14 (ISIN IT0005380453), which were repaid on 28 July 2023.

As of the date of this rating action, there were four series of OBG under the Programme, totalling an outstanding nominal amount of EUR 8.3 billion. The series are guaranteed by Vela OBG S.r.l.

The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). Banca Nazionale del Lavoro S.p.A. (BNL) is the Issuer and the reference entity (RE) for the programme. There is no Critical Obligations Rating associated with the RE, but DBRS Morningstar classifies Italy as a jurisdiction for which covered bonds (CB) are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Modest” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of AA (low).
-- No uplift for recovery prospects.
-- A level of overcollateralisation (OC) of 28.8% to which DBRS Morningstar gives credit, which is the minimum observed OC level over the past 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating on the Republic of Italy, rated BBB (high) with a Stable trend by DBRS Morningstar, as of the date of this rating action.

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 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 on the CB ratings.

BNL acts as the account bank for this transaction. Based on its rating and on the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” and “Global Methodology for Rating and Monitoring Covered Bonds”.

BNL also acts as the cover pool (CP) swap counterparty. However, the swap documentation is not in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions”, and as a consequence, DBRS Morningstar did not give credit to the swaps in its analysis.

The total outstanding amount of OBG is currently EUR 8.3 billion. As at 30 September 2023, the CP was composed of EUR 13.3 billion of residential (92.4% of the loan balance), commercial (6.8%), and public sector (0.8%) mortgages plus EUR 556 million of cash, resulting in a total OC of 63.6%.

The weighted-average (WA) current loan-to-value ratio of the mortgages was 46.5% with an average seasoning of 5.6 years as at 30 September 2023. The assets securing the loans in the CP were mainly located in the Italian regions of Lazio (22.6% of the loan balance) and Lombardy (15.6%).

The CP comprised fixed-for-life loans (88.4% by outstanding balance) and floating-rate loans (11.6%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.

By comparison, 100% of the liabilities pay a floating rate linked to three-month Euribor. DBRS Morningstar considered the resulting interest and basis risks as unhedged in its 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 was 8.8 years as at 30 September 2023, whereas the WAL of the OBG, as of the date of this rating action, was 1.7 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension (on part of the OBG principal instalments) and by the OC.

DBRS Morningstar has assessed the LSF related to the Programme as “Modest”, according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” at https://www.dbrsmorningstar.com/.

DBRS Morningstar’s credit ratings on the outstanding CB Series address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related principal amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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, 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 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.

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

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 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 Ratings on Other DBRS Morningstar Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://www.dbrsmorningstar.com/research/421590.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/421227/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2023-update.

The sources of data and information used for these credit ratings include historical performance data (static pool default data from 2009 to 2023 for the residential pool and from 2000 to 2019 for the commercial pool; dynamic pool delinquency data from 2012 to 2023 and prepayments data from 2010 to 2023) as well as loan-level and stratification information on the CP as at 30 September 2023 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 credit rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

DBRS Morningstar 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 transaction took place on 16 December 2022, when DBRS Morningstar confirmed its AA (low) ratings on the CB Series outstanding under the Programme.

Information regarding DBRS Morningstar credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar 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: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 16 December 2019

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

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds

-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023), https://www.dbrsmorningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads

-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight model version 6.0.1.0, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology

-- European RMBS Insight: Italian Addendum (2 October 2023), https://www.dbrsmorningstar.com/research/421317/european-rmbs-insight:-italian-addendum

-- Global Methodology for Rating CLOs and Corporate CDOs
(22 October 2023), https://www.dbrsmorningstar.com/research/422269/global-methodology-for-rating-clos-and-corporate-cdos

-- Rating CLOs Backed by Loans to European SMEs (22 October 2023) and SME Diversity Model version 2.6.1.4, https://www.dbrsmorningstar.com/research/422274/rating-clos-backed-by-loans-to-european-smes

-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023), https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions

-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions

-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions

-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers

-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators

-- Global Methodology for Rating Sovereign Governments (6 October 2023), https://www.dbrsmorningstar.com/research/421590/global-methodology-for-rating-sovereign-governments

-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

-- Modelling Assumptions for Portfolios of Public Sector Exposures (12 July 2023) and Public Sector Exposure Model v. 0.2.1, https://www.dbrsmorningstar.com/research/417064/modelling-assumptions-for-portfolios-of-public-sector-exposures

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