Press Release

DBRS Morningstar Confirms AA Ratings on Unione di Banche Italiane S.p.A. Covered Bonds (OBG - Mortgages - Programme 1)

Covered Bonds

September 14, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 1 (UBI OBG1 or the Programme). This rating action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its ratings on Series 3 (ISIN IT0004599491), Series 29 (ISIN IT0005355539), and Series 30 (ISIN IT0005355547), which were repaid between February and May 2022.

As of today, the series of OBG outstanding under the Programme, guaranteed by UBI Finance S.r.l., amounted to EUR 8.1 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, which is the Long Term Critical Obligations Rating of Intesa Sanpaolo S.p.A. (Intesa). Intesa is the Issuer and Reference Entity for the Programme. DBRS Morningstar classifies the Republic of Italy as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the cover pool (CP) strategic for the Issuer’s core activity.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (low).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 13%, to which DBRS Morningstar gives credit.
-- 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 with its DBRS Morningstar European Covered Bond Cash Flow tool. 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 on the CP.

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 of the covered bonds ratings.

In addition, all else unchanged, the OBG ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB; (2) the LSF Assessment associated with the Programme were downgraded; (3) the quality of the CP and level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects; (4) the relative amortisation profile of the OBG and CP moved adversely; (5) volatility in the financial markets caused the currently estimated market value spreads to increase; or (6) the sovereign rating on the Republic of Italy was downgraded below BBB (high).

Intesa acts as the account bank, which also holds the reserve account. Based on the ratings on Intesa and on the account bank’s 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” methodology.

The total outstanding amount of OBG is EUR 8.1 billion while the aggregate balance of the CP, considering data as at 31 July 2022, was EUR 8.9 billion of residential mortgages plus EUR 502 million of cash collections, resulting in a total OC of 15.9%.

As at July 2022, the CP comprised 122,683 first-ranking residential mortgages, originated by network banks of the Unione di Banche Italiane S.p.A. group.

The weighted-average (WA) indexed current loan-to-value ratio of the mortgages was 48.8% with a seasoning of 9.6 years. The CP was mainly distributed in the Italian regions of Lombardy (36.9% by outstanding balance) and Lazio (17.0%).

The CP comprised fixed-rate loans (44.6%) and floating-rate loans (55.4%), the former of which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon. The floating-rate mortgage loans are indexed to different plain-vanilla bases and reset at different dates.

In comparison, 92.6% of the liabilities pay a fixed rate and 7.4% pay a floating rate linked to three-month Euribor. The resulting interest and basis risks are unhedged. DBRS Morningstar considered this 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 is 8.7 years whereas currently the WAL of the OBG is 3.4 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 assessed the LSF related to the UBI OBG1 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” available at https://www.dbrsmorningstar.com.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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/396929/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 ratings is “Rating and Monitoring Covered Bonds” (22 April 2022).

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.

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.

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/401817/global-methodology-for-rating-sovereign-governments.

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/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include historical performance data (static pool default and prepayments data from 2012 to 2022) as well as loan-level and stratification information on the CP as at 30 June 2022 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 17 September 2021, when DBRS Morningstar confirmed its AA ratings on the CB series outstanding under the Programme.

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: https://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: 24 August 2015

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The rating methodologies used in the analysis of this transaction can be found at: https://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 [email protected].

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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