Fitch Ratings has affirmed Alpha Bank S.A.'s (Alpha, B/Positive/B) covered bonds' rating at 'BBB-' and removed it from Rating Watch Positive where it was placed since August 2022.

The Outlook is Positive mirroring that of the bank's Long-Term Issuer Default Rating (IDR).

The rating action reflects the implementation of Fitch's revised Covered Bonds Rating Criteria published on 8 August 2022.

KEY RATING DRIVERS

The covered bonds are rated five notches above the bank's Long-Term IDR of 'B', out of a maximum achievable uplift of 10 notches. This is based on an unchanged resolution uplift of two notches, an unchanged payment continuity uplift (PCU) of six notches and a recovery uplift of three notches (which would be capped at two notches if the timely payment rating level is in the investment-grade category).

The 'BBB-' break-even asset percentage (AP) is revised to 89% (from 90%), higher than the committed AP of 78.7% that Fitch relies on (equivalent to 27% over-collateralisation (OC)), which constrains the covered bonds' rating at 'BBB-'.

The updated refinancing spread level assumptions (RSLs) of the revised covered bonds criteria have in isolation a positive impact on the break-even AP for the rating. However, the committed AP cannot support a higher rating than 'BBB-'. This is because the portion of fixed-rate loans in the cover pool has increased to 20% in September 2022 from 12% in December 2021. This decreases the net present value of the cover assets in a rising interest-rate environment, which has a negative impact on the break-even OC for the rating. Also, the credit losses on the cover pool have widened slightly as the cover pool's weighted average loan-to-value increased to 44% in September 2022 from 42% in December 2021, leading to the lower break-even AP for the 'BBB-' rating.

Fitch has recalibrated and reduced the applicable RSLs for Greek residential mortgages to 300 bp in a 'B' scenario (from 400 bp previously) while keeping them unchanged at 'BBB+' (the maximum achievable rating for Greek covered bonds). In Fitch's covered bonds analysis, the RSLs are applied when simulating the sale of the cover assets once the recourse to the cover pool has been enforced upon issuer default.

OC Protection

The 'BBB-' rating can be reached based on three notches of recovery uplift above the 'BB-' resolution reference point as the committed AP does not sustain timely payments in scenarios higher than 'BB-'. The only contributor to the break-even AP is the credit loss, which stands at 12.1% for Alpha at the 'BBB-' rating. This has been revised from 11.2%, as the cover pool's weighted average loan-to-value has increased.

Uplifts

The unchanged resolution uplift of two notches reflects Greek covered bonds' exemption from bail-in, that the bank's Long-Term IDRs is driven by its Viability Rating, and Fitch's view of the low risk of under-collateralisation at the point of resolution. The PCU remains six notches given the soft-bullet feature of the covered bonds and the available protection for interest payments of at least three months. The programme is eligible for a recovery uplift of three notches as the timely payment rating level is in the non-investment-grade category and Fitch has not identified any material downside risk to recoveries given default.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The covered bonds issued by Alpha could be upgraded to the Country Ceiling of 'BBB+' if OC is able to withstand stresses associated with higher ratings

Alpha's covered bonds could be upgraded if the IDR is upgraded by one notch, resulting in a new resolution reference point of 'BB', provided that OC is able to support higher rating levels

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Alpha's covered bonds would be vulnerable to a downgrade if the relied-upon AP rises above Fitch's 89% break-even AP for the 'BBB-' covered bonds' rating

A downgrade of Alpha's IDR would lead to a downgrade of the covered bonds' rating if OC is not able to withstand stresses associated with the 'BBB-' rating

If Alpha's IDR is downgraded below 'B-', Fitch would in line with its Covered Bonds Rating Criteria apply a floor in its covered bonds analysis if it believes that the switch of recourse to the cover pool is unlikely to occur on a default on senior unsecured obligations. The floor will be set at the higher of 'B-' or the IDR plus resolution uplift. No resolution uplift will be considered above the floor, but we would continue to apply the PCU and recovery uplift above the floor.

Fitch's break-even AP for the covered bonds' rating will be affected, among other factors, by 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 break-even AP to maintain the covered bonds' rating cannot be assumed to remain stable over time.

We maintain a neutral sector outlook for global covered bonds, despite the deteriorating asset performance outlook for many jurisdictions, reflects the instrument's dual-recourse nature, liquidity protection mechanisms, ample OC cushion, and limits, such as cover assets eligibility criteria and contractual tests, which mitigate asset performance deterioration (see 'Global Covered Bonds Outlook 2023').

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The ESG Relevance Score of Transaction Parties & Operational Risk for the covered bonds has been revised to '3' from '5'. Although the relied-upon OC is not sufficient to support higher ratings than 'BBB-', Alpha has not lowered their OC commitment below the level supporting the current rating.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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