Morningstar DBRS Assigns AA Credit Rating to Banco BPI S.A. Covered Bonds (Obrigações Cobertas - Mortgages) Series 28

DBRS Ratings GmbH (Morningstar DBRS) assigned a AA credit rating to the Series 28 Obrigações Cobertas (the Portuguese legislative covered bonds) issued under the Banco BPI S.A. (BPI or the Issuer) Covered Bond Programme (the Programme). Series 28 is a EUR 1,800 million floating-rate bond paying a coupon of 3-months Euribor plus 0.6% and maturing on 18 December 2031.

At the same time, Morningstar DBRS discontinued its credit rating on OC Series 23, due to mature on 20th December 2024, which was repaid on 10 December 2024.

There are nine series of covered bonds (CBs) outstanding under the Programme, totalling a nominal amount of EUR 7.25 billion.

CREDIT RATING RATIONALE
The credit ratings are 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 18.2% 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 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 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 ratings.

In addition, all else unchanged, the CB ratings 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 8.89 billion as of 30 September 2024 while the total amount of liabilities outstanding is EUR 7.25 billion, yielding a current OC ratio of 22.6%. The OC level to which Morningstar DBRS gives credit is 18.2%, after applying a scaling factor of 0.85 to the minimum level of OC observed during the past 12 months.

As of 30 September 2024, the CP assets comprised EUR 8.7 billion of outstanding mortgage loans and EUR 177 million of other assets. The mortgage CP had a weighted-average (WA) current unindexed loan-to-value ratio of 54% and a WA seasoning of 9.0 years. The CP is located mainly in Lisbon (39.4% by outstanding balance), northern Portugal (26.4%), and central Portugal (17.9%).

The majority of the loans in the CP (75.8%) are floating rate, indexed to different bases and reset at different times, while Series 25, Series 26 and Series 27 are fixed rate, and the remaining outstanding CB (78.6%) 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 14.6 years, which is longer than the WA life of 4.1 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 28 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 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
General 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 at https://dbrs.morningstar.com/research/437781.

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 (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 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 28.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Credit 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 this credit rating include stratification tables as of 30 September 2024, loan-by-loan data on the CP as of 30 September 2024, and static delinquencies (90+ days) by vintage of origination spanning from 2007 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 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 4 July 2024, when Morningstar DBRS confirmed the AA credit ratings to the outstanding Series.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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: Christian Aufsatz, Managing Director
Initial Rating Date: 1 April 2015

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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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
-- Global Methodology for Rating Banks and Banking Organisations (4 June 2024),
https://dbrs.morningstar.com/research/433881
-- Legal & Derivative Criteria for European Structured Finance Transactions (19 November 2024),
https://dbrs.morningstar.com/research/443196
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024),
https://dbrs.morningstar.com/research/439913
-- European RMBS Insight Methodology (3 December 2024) and European RMBS Insight model v.10.0.0.1,
https://dbrs.morningstar.com/research/444100
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024),
https://dbrs.morningstar.com/research/439571
-- Global Methodology for Rating Sovereign Governments (15 July 2024),
https://dbrs.morningstar.com/research/436000
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk 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/439604.

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