DBRS Assigns A (high) Rating to Intesa Sanpaolo S.p.A. Covered Bonds Guaranteed by ISP OBG S.r.l. Series 23 and Series 24

DBRS Ratings Limited (DBRS) has today assigned A (high) ratings to the Series 23 and 24 Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Intesa Sanpaolo S.p.A. (ISP or the Issuer) EUR 30,000,000,000 Covered Bond Programme (ISP OBG or the Programme) guaranteed by ISP OBG S.r.l. Each series is a EUR 1.375 billion floating-rate OBG. Series 23 is linked to Euribor three-months + 0.50% and will mature in February 2026, while Series 24 is linked to Euribor three-months + 0.55% and will mature in August 2027.

Concurrently, DBRS has discontinued the ratings on Series 9 and Series 10, both early repaid on 15 February 2017, and confirmed its A (high) ratings on the other OBGs outstanding under the Programme. Including the newly issued series, there are 15 series outstanding for a total amount of EUR 21.9 billion.

The A (high) ratings assigned to ISP OBG reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A”, being the Long-Term Critical Obligations Rating (LT-COR) of ISP. ISP is the Issuer and Reference Entity for the Programme. DBRS does not classify Italy as a jurisdiction in which covered bonds are a particularly important funding instrument; however, DBRS deems the cover assets strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate assigned to the Programme.
-- An LSF-Implied Likelihood (LSF-L) of “A”.
-- A one-notch uplift for good recovery prospects.
-- A committed asset percentage of 94.5%, equivalent to 5.82% of overcollateralisation (OC) to which DBRS gives full credit.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values of the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch. In addition, the ratings of ISP OBG would be downgraded if the quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects.

As of today, there were 15 series outstanding for a total amount of EUR 21.9 billion. As of September 2016, the aggregate balance of loans in the CP was EUR 23.5 billion of residential and commercial mortgages (defaulted loans included), plus EUR 2.9 billion of cash collections (considering the principal component and reserve fund required amount), resulting in a total CP amount of EUR 26.4 billion and an estimated OC of 20.3%.

As of September 2016, the CP comprised 333,135 loans with an 85.7% residential versus a 14.3% non-residential split, based on the type of debtor, (debtors are considered “residential” when classified as SAE 600 according to Bank of Italy’s classification, and “non-residential” when classified as SAE other than 600, including 614 and 615, according to Bank of Italy’s classification).

The CP comprised fixed-rate (42.4%, of which 2.4% are optionally currently paying fixed rate) and floating-rate loans (56.7%, of which 8.9% are optionally currently paying floating rate), as well as balanced mortgages (0.9%). The floating-rate mortgage loans are indexed to different plain vanilla bases and reset at different dates. This compares to 100.0% floating-rate liabilities of the ISP OBG, linked to three-month Euribor plus a spread.

The interest rate risk in the transaction is hedged with swaps provided by ISP and other banks of the group (Banco di Napoli S.p.A., Carisbo S.p.A, Banca CRF S.p.A. and Cassa di Risparmio del Veneto S.p.A.) on their respective portfolios. The swap documentation embeds DBRS derivatives criteria and DBRS has taken swaps into account in its cash flow analysis.

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

As of today, the weighted-average (WA) life of the CP was roughly eight years, which is longer than the five years’ WA life of the OBGs calculated taking into account the expected maturity. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS has assessed the LSF related to the ISP OBG as Adequate according to its rating methodology. For more information, please refer to the Italian Covered Bonds Legal and Structuring Framework Review commentary available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

In DBRS opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.

A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 23 and Series 24. All the other 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 on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Investor Reports and loan-by-loan data on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing these ratings was of satisfactory quality.

DBRS did not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

DBRS 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 23 January 2017, when DBRS confirmed the A (high) ratings on ISP OBG and removed the Under Review with Developing Implications status.

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

For further information on DBRS 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.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 7 November 2014

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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