Morningstar DBRS Confirms AA (low) Credit Ratings on Banca Nazionale del Lavoro S.p.A. Covered Bonds (OBG - Mortgages), Assigns Credit Ratings to Series 21 and Series 22

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (low) credit ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Nazionale del Lavoro S.p.A. Covered Bonds Programme (the Programme). This credit rating action follows a review of the Programme's documentation, which was amended in April 2024 in order to align the Programme with the new European CB legislative framework.

Concurrently, Morningstar DBRS assigned credit ratings of AA (low) to Series 21 (ISIN IT0005593782) and to Series 22 (ISIN IT0005593790); Series 21 is a EUR 2.7 billion floating-rate bond maturing on 28 July 2027, whereas Series 22 is a EUR 2.8 billion floating-rate bond maturing on 28 July 2028. Both series benefit from a 12-month maturity extension.

Morningstar DBRS also discontinued its AA (low) ratings on Series 17 (ISIN IT0005434052) and on Series 18 (ISIN IT0005453714), which were repaid early on 29 January 2024.

As of the date of this credit rating action, there were four series of OBG under the Programme, totalling an outstanding nominal amount of EUR 10.4 billion. The series are guaranteed by Vela OBG S.r.l.

The credit ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). Banca Nazionale del Lavoro S.p.A. (BNL) is the Issuer and the reference entity (RE) for the programme. There is no Critical Obligations Rating associated with the RE, but Morningstar DBRS classifies Italy as a jurisdiction for which covered bonds (CB) are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of "Adequate" associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, which is the lowest CPCA in line with the final LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (low).
-- No uplift for recovery prospects.
-- A level of overcollateralisation (OC) of 44.7% to which Morningstar DBRS gives credit, which is the minimum observed OC level over the past 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating on the Republic of Italy, rated BBB (high) with a Stable trend by Morningstar DBRS, as of the date of this rating action.

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, and interest rate stresses.

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 on the CB ratings.

BNL acts as the account bank for this transaction. Based on its rating and on the replacement provisions included in the documentation, Morningstar DBRS considers the risk of such counterparty to be consistent with the credit ratings assigned, in accordance with its "Legal Criteria for European Structured Finance Transactions" and "Global Methodology for Rating and Monitoring Covered Bonds".

BNL also acts as the cover pool (CP) swap counterparty. However, the swap documentation is not in line with Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions", and as a consequence, Morningstar DBRS did not give credit to the swaps in its analysis.

The total outstanding amount of OBG is currently EUR 10.4 billion.
As at 31 March 2024, the CP was composed of EUR 15.4 billion of residential (92.9% of the loan balance), commercial (6.4%), and public sector (0.7%) mortgages plus EUR 554 million of cash, resulting in a total OC of 52.5%.

The weighted-average (WA) current loan-to-value ratio of the mortgages was 48.2% with an average seasoning of 5.3 years as at 31 March 2024. The assets securing the loans in the CP were mainly located in the Italian regions of Lazio (22.7% of the loan balance) and Lombardy (16.6%).

The CP comprised fixed-for-life loans (91.3% by outstanding balance) and floating-rate loans (8.7%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.

By comparison, 100% of the liabilities pay a floating rate linked to three-month Euribor. Morningstar DBRS considered the resulting interest and basis risks as unhedged 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 was 9.2 years as at 31 March 2024, whereas the WAL of the OBG, as of the date of this rating action, was 2.9 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension and by the OC.

In April 2024, the Programme's documentation was amended, in order to align the Programme with the new European CB legislative framework. Morningstar DBRS has reviewed the relevant amendments and has considered them in its analysis.

Following this review, Morningstar DBRS has reassessed the LSF related to the Programme as "Adequate", changing it from the previous "Modest" assessment, according to its "Global Methodology for Rating and Monitoring Covered Bonds". For more information, please refer to the Morningstar DBRS commentary "Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework" at https://www.dbrs.morningstar.com/.

Morningstar DBRS' credit ratings on the outstanding CB Series address 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 amount.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636.

Other methodologies referenced in this transaction are listed at the end of this press release.

In Morningstar DBRS' opinion, the changes 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 amendments in the Programme's documentation aimed at aligning it with the new European CB legal framework (April 2024) and on the final terms of Series 21 and Series 22.

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 these credit ratings include historical performance data (static pool default data from 2009 to 2023 for the residential pool and from 2000 to 2019 for the commercial pool; dynamic pool delinquency data from 2012 to 2023 and prepayments data from 2010 to 2023), loan-level information on the CP as at 30 September 2023 and stratification information on the CP until March 2024 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 impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings 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.

The last credit rating action on this transaction took place on 15 December 2023, when Morningstar DBRS confirmed its AA (low) ratings on the CB Series outstanding under the Programme.

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.

These credit ratings are 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: 16 December 2019

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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 (2 April 2024), https://dbrs.morningstar.com/research/430636

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight Model version 7.0.0.0, https://dbrs.morningstar.com/research/430103

-- European RMBS Insight: Italian Addendum (2 October 2023), https://dbrs.morningstar.com/research/421317

-- Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023), https://dbrs.morningstar.com/research/422269

-- Rating CLOs Backed by Loans to European SMEs (22 October 2023) and SME Diversity Model version 2.6.1.4, https://dbrs.morningstar.com/research/422274

-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024), https://dbrs.morningstar.com/research/431155

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730

-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754

-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602

-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572

-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054

-- Global Methodology for Rating Sovereign Governments (6 October 2023), https:// dbrs.morningstar.com/research/421590

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

-- Modelling Assumptions for Portfolios of Public Sector Exposures (12 July 2023) and Public Sector Exposure Model v. 0.2.1, https://dbrs.morningstar.com/research/417064

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.