Fitch Ratings has revised Banco Comercial Portugues, S.A. (BCP, BB/Positive/B) mortgage covered bonds' (Obrigacoes Hipotecarias, OH) Outlook to Positive from Stable and affirmed the rating at 'BBB+'.
The rating action mirrors that on BCP's Issuer Default Rating (IDR; see 'Fitch Revises Banco Comercial Portugues' Outlook to Positive; Affirms at 'BB' dated 29 September 2022 on www.fitchratings.com).
KEY RATING DRIVERS
The Positive Outlook on BCP's OH reflects that on the bank's IDR. An IDR upgrade would likely lead to an upgrade on the OH rating, as the 14% over-collateralisation (OC) Fitch relies upon would likely offset the agency's break-even OC associated with a higher rating. The OH are rated four notches above BCP's 'BB' IDR, consisting of a two-notch resolution uplift, a payment continuity uplift (PCU) of zero notches and a two-notch recovery uplift.
In its rating analysis Fitch relies on the 14% OC commitment published in BCP's quarterly investor reports. This OC level provides more protection than Fitch's unchanged 'BBB+' break-even OC of 5.0%.
The granted resolution uplift reflects the exemption from bail-in of fully collateralised OH, the low risk of under-collateralisation at the point of resolution and Fitch's view that a bank resolution will not result in the direct enforcement of recourse against the cover pool. Furthermore, BCP's OH two-notch resolution uplift takes into account that the bank's IDR is driven by its Viability Rating.
The zero-notch PCU reflects Fitch's view on the absence of a satisfactory liquidity protection mechanism to protect the covered bonds' timely interest payments in case of an enforcement of recourse against the cover pool. However, the OH benefit from principal liquidity protection provided by a 12-month maturity extension (soft bullet).
The programme is eligible for a recovery uplift of two notches as the OH timely payment rating level is in the investment-grade category. Also, Fitch has not identified any material downside risk to recovery expectations. All cover assets and covered bonds are euro-denominated.
ESG - Governance
BCP's OH has an ESG Relevance Score of '5' for Transaction Parties & Operational Risk, which reflects Fitch's view on interest payment interruption risk in case of an enforcement of recourse against the cover pool.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The OH rating may be upgraded up to Fitch's 'AA' Country Ceiling for Portugal on sufficient coverage for timely interest payments. An upgrade of the bank's IDR would also lead to an upgrade of the OH rating. In both cases, an upgrade would be subject to the Fitch-relied on OC being sufficient to withstand the stress associated with a higher rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The OH rating would be downgraded if the bank's Long-Term IDR is downgraded by two notches or more. Should BPC's IDR be downgraded by one notch, the programme would be eligible for a three-notch recovery uplift, as the timely payment rating level would fall into the non-investment grade category. This would support the current rating on the covered bonds.
The OH would also be downgraded if the OC that Fitch relies upon in its analysis decreases below Fitch's 'BBB+' break-even OC of 5.0%.
Fitch's break-even OC for the covered bond 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 OC to maintain the covered bond rating cannot be assumed to remain stable over time.
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.
BCP has an ESG Relevance Score of '5' for Transaction & Collateral Structure due to the lack of mitigation against interest payment interruption risk, which has a negative impact on the credit profile, and is highly relevant to the rating, resulting in a PCU of zero notches.
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.