Morningstar DBRS Upgrades Credit Ratings on Banco Comercial Português S.A. Covered Bonds (Obrigacoes Cobertas - Mortgages) to AA (low)

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit ratings on the Portuguese Covered Bonds issued under the Banco Comercial Português S.A. Covered Bonds (Obrigações Cobertas - Mortgages) to AA (low) from "A". The upgrade follows the completion of a full review of the credit ratings.

This credit rating action follows Morningstar DBRS' upgrade on Banco Comercial Português, S.A. (BCP or the Issuer) credit ratings on 3 October 2024, particularly its Long Term Critical Obligations Rating (COR) to "A" with Stable trend from A (low) with Positive trend, together with the postponement of the expected maturity of Series 5 (ISIN PTBIPGOE0061) to 18 October 2028 from 18 October 2024, and its extended maturity to 18 October 2029 from 18 October 2025, per the amended final terms executed in October 2024.

Furthermore, we consider in the analysis an increase on the over-collateralisation (OC) to which Morningstar DBRS gives credit and the recent evolution of the market interest rates.

There are currently four series currently outstanding under the Programme, totalling a nominal amount of EUR 9.2 billion.

CREDIT RATING RATIONALE
Morningstar DBRS based its credit ratings on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of "A", which is the Long Term COR of BCP. BCP is the Issuer and Reference Entity (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), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of "A (high)".
-- A one-notch uplift for good recovery prospects.
-- A level of overcollateralisation (OC) of 16.0% 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 Positive trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with 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. Morningstar DBRS assumed different prepayment scenarios, ranging from the typically assumed prepayment rate indicated in the covered bonds methodology to the observed prepayment rate.

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

The total outstanding amount of Obrigações Cobertas under the Programme is currently EUR 9.2 billion, while as of end June 2024, the aggregate balance of mortgages and other assets in the CP was EUR 11.4 billion. This resulted in a total estimated OC of 23.4%. The Issuer has publicly committed to maintaining an OC level of 14.0%. The OC level to which Morningstar DBRS gives credit is 16.0%, after applying a scaling factor of 0.85 to the minimum level of OC observed during the past 12 months.

As of 30 June 2024, the CP comprised 182,486 residential mortgage loans granted to individuals, with an average loan amount of EUR 61,962. The weighted-average (WA) current loan-to-value ratio was 51.0% with a seasoning of 109 months. The pool is located mainly in Lisbon (44.5%), northern Portugal (28.7%), and central Portugal (13.9%).

Of the loans in the portfolio, 74.0% pay a floating interest rate and 26.0% pay a fixed rate, while 100% of the CBs are floating rate. This asset-liability mismatch is mitigated by the available OC.

The Morningstar DBRS-calculated WA life of the mortgage assets is roughly 15.9 years, which is longer than the WA life of 2.1 years on the CBs, not accounting for any maturity extension. This generates an asset-liability mismatch that is mitigated by the available OC and the extended maturity date, which falls one year after the maturity date.

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 ratings on the applicable classes 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 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: Global Methodology for Rating and Monitoring Covered Bonds (02 April 2024) https://dbrs.morningstar.com/research/430636.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was focused on the amendment agreements for the postponement of Series 5 legal maturity and extended legal maturity, executed in October 2024.

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/436000.

The sources of data and information used for these credit ratings include investor reports, loan-by-loan data on the CP as of 30 June 2024, aggregated data as of 30 June 2024, and static performance data for delinquencies from 2003 to 2023 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 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 issuer took place on 29 February 2024, when Morningstar DBRS confirmed its "A" credit ratings on BCP's outstanding Obrigações Cobertas.

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: Alejandro Tendero, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 28 February 2012

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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 (18 September 2024), https://dbrs.morningstar.com/research/439573 and European RMBS Insight model v 10.0.0.0.
-- European RMBS Insight: Portuguese Addendum (19 April 2024), https://dbrs.morningstar.com/research/431376
-- Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Global Methodology for Rating Sovereign Governments (15 July 2024), https://dbrs.morningstar.com/research/436000
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.