Morningstar DBRS Assigns AA Credit Rating to Banco BPI S.A. Covered Bonds (Obrigações Cobertas - Mortgages) Series 26

DBRS Ratings GmbH (Morningstar DBRS) assigned a AA credit rating to the Series 26 Obrigações Cobertas (the Portuguese legislative covered bonds) issued under the Banco BPI S.A. (BPI or the Issuer) Covered Bond Programme (the Programme). Series 26 is a EUR 500 million fixed-rate bond paying a coupon of 3.25% and maturing on 22 March 2030.

At the same time, Morningstar DBRS discontinued its credit rating on OC Series 17, which was repaid on 22 February 2024.

There are eight series of covered bonds (CBs) outstanding under the Programme, totalling a nominal amount of EUR 7.05 billion.

CREDIT RATING RATIONALE
The credit rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) reflective of the likelihood that the source of payments will switch from the Reference Entity (RE) to the cover pool (CP). BPI is the Issuer of and RE for the Programme. Morningstar DBRS considers Portugal as a jurisdiction in which CBs are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 17.9% to which Morningstar DBRS gives credit, which is the minimum level observed in the past 12 months adjusted by a scaling factor of 0.85.
-- The sovereign credit rating on the Republic of Portugal, rated “A” with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS 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, 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 CB credit rating.

In addition, all else unchanged, the CB credit rating would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below BBB (low); (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (3) the relative amortisation profile of the CBs and the CP moved adversely; or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

The aggregated outstanding balance of the CP backing BPI’s CBs was EUR 8.8 billion as of 31 December 2023 while the total amount of liabilities currently outstanding is EUR 7.05 billion, yielding a current OC ratio of 24.9%. The OC level to which Morningstar DBRS gives credit is 17.9%, after applying a scaling factor of 0.85 to the minimum level of OC observed during the past 12 months.

As at 31 December 2023, the CP assets comprised EUR 8.6 billion of outstanding mortgage loans and EUR 188 million of other assets. The mortgage CP had a weighted-average (WA) current unindexed loan-to-value ratio of 53.9% and a WA seasoning of 9.2 years. The CP is located mainly in Lisbon (40.0% by outstanding balance), northern Portugal (26.1%), and central Portugal (17.9%).

The vast majority of the loans in the CP (85.5%) are floating rate, indexed to different bases and resetting at different times, while Series 22, Series 25, and Series 26 are fixed rate and the remaining outstanding CB (75.2%) are linked to three- and six-month Euribor.

There are no swap agreements in the Programme’s documentation. Morningstar DBRS accounted for the interest rate mismatch in its analysis.

The WA life of the CP is 15.2 years, which is longer than the WA life of 2.9 years of the CBs, not accounting for any maturity extension. The resulting asset-liability maturity mismatch is mitigated by the extended maturity date, which falls one year after the maturity date, and by the available OC.

All CP assets and CBs are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

Morningstar DBRS assessed the LSF related to the Programme as “Strong” according to its “Global Methodology for Rating and Monitoring Covered Bonds”. For more information, please refer to the publication “Portuguese Covered Bonds: Legal and Structuring Framework Review”, available at https://dbrs.morningstar.com/.

Morningstar DBRS’ credit rating on Series 26 under this Programme addresses 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 balance.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on BPI 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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 rating 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.

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

A review of the transaction legal documents was focused on the final terms of Series 26.

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 Morningstar DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include stratification tables as at 31 December 2023, loan-by-loan data on the CP as at 31 December 2022, and static delinquencies (90+ days) by vintage of origination spanning from 2007 to 2022 provided by the Issuer.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

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

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

The last credit rating action on this transaction took place on 23 August 2023, when Morningstar DBRS assigned a AA credit rating to Series 25 Tranche 2.

The lead analyst responsibilities for this transaction have been transferred to Alejandro Tendero Delicado.

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

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alejandro Tendero Delicado, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 1 April 2015

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

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://dbrs.morningstar.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://dbrs.morningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (Master Methodology and Portugal Addendum) (13 September 2023) and European RMBS Credit Model v 1.0.0.0,
https://dbrs.morningstar.com/research/420575/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023),
https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://dbrs.morningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.