OREANDA-NEWS. Fitch Ratings has affirmed Unione di Banche Italiane Scpa - UBI Banca's (UBI, BBB/Stable/F3) EUR10.5bn mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG), guaranteed by UBI Finance S.r.l. (UBI Finance), at 'A' and EUR1.78bn mortgage OBG, guaranteed by UBI Finance CB2 S.r.l. (UBI Finance CB2), at 'BBB+', both with a Stable Outlook. The affirmation follows a full review of the programmes.

KEY RATING DRIVERS - UBI Finance
The 'A' rating is based on UBI's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 2 (high risk) and the 84.5% asset percentage (AP) that Fitch takes into account in its analysis, which is in line with the unchanged 'A' breakeven AP. The Stable Outlook for the covered bonds rating mirrors that of UBI's IDR.

The 84.5% 'A' breakeven AP, corresponding to a breakeven overcollateralisation (OC) of 18.3%, is driven by an asset disposal loss component of 12.3%, due to large maturity mismatches and high refinancing spreads applied to Italian residential mortgage loans (390bps in a 'A' scenario).

This is followed by an increased credit loss component of 9.5% (from 8.8% previously) in a 'A' scenario, reflecting a weighted average (WA) frequency of foreclosure and a WA recovery rate (RR) of 27.9% and 68.9% for the cover pool, respectively. The EUR14.7bn cover pool comprises solely residential mortgage loans.

The cash flow valuation component has decreased to -0.5% from 1.5% previously, due to fewer interest rate mismatches between assets and liabilities; the portion of floating-rate assets has increased to 71% (from 68%) versus 75% of floating-rate covered bonds, which has remained stable. In a rising interest rate scenario, which is the most stressful scenario in Fitch's analysis, the agency modelled fixed-rate cash flows for 29% of the cover pool, which comprises fixed-rate loans (15%) and loans with floating-to-fixed switching options (14%).

The programme benefits from a liability swap provided by UBI that exchanges Euribor plus a spread and pays a coupon on 70% of the EUR8.75bn fixed-rate covered bonds. UBI is currently posting collateral in line with Fitch's criteria.

The D-Cap remains 2 (high risk), due to what Fitch assesses as weak link of the liquidity gap and systemic risk component.

The unchanged IDR uplift of 0 reflects the covered bonds' exemption from bail-in, Fitch's view that Italy is not a covered bonds-intensive jurisdiction, the issuer is not systemically important in its domestic market and there is no protection provided by senior unsecured debt in excess of 5% of total adjusted assets.

Fitch takes into account the 84.5% AP which is publicly disclosed by the issuer in its test performance report of April 2015 and used to perform the nominal value test. This level of AP allows the OBG to make timely payments at the 'BBB+' tested rating on a probability of default (PD) basis, and it is adequate to achieve at least 91% recoveries given default of the covered bonds in a 'A' scenario.

KEY RATING DRIVERS - UBI Finance CB2
The 'BBB+' rating is based on UBI's IDR of 'BBB', an unchanged IDR uplift of 0, an unchanged D-Cap of 0 (full discontinuity) and the contractual 100% AP that Fitch takes into account in its analysis, in line with the maximum AP allowed by the OBG legal framework. The Stable Outlook for the covered bonds rating mirrors that of UBI's IDR.

Fitch's credit loss for the cover pool is broadly in line with previous levels at about 16.3%, which reflects the WA default rate and WARR of 46.2% and 64.7%, respectively. As of end-May 2015 the EUR 3.5bn cover pool comprised 42% residential mortgage loans (of which 38% are loans granted to UBI's employees) and 58% granted to Italian small and medium-sized enterprises (SME).

The data that the issuer provided on the SME portion was limited; Fitch's analysis is based on conservative asset assumptions and an estimation of nominal recoveries, which is in line with the category of a one-notch recovery uplift, in accordance with the agency's Covered Bond Rating Criteria.

The unchanged D-Cap of 0 reflects what Fitch assesses as weak link in 'full discontinuity' of the liquidity gap and systemic risk component. In its discontinuity assessment the agency has taken into account the presence of SME loans in the portfolio, which are considered as less liquid than residential mortgage loans, preventing a successful liquidation of the cover pool within a 12-month maturity extension of the covered bonds. The full discontinuity assessment also factors in the liquidity reserve, which covers one-month interest payments (instead of three months) that become due on the OBG.

The 100% AP that Fitch gives credit to allows the OBG to achieve a one-notch uplift above the 'BBB' tested rating on a PD basis, providing recoveries of at least 51% on the OBG assumed to be in default in a 'BBB+' rating scenario.

RATING SENSITIVITIES

The 'A' rating of the covered bonds programme issued by Unione di Banche Italiane Scpa - UBI Banca (UBI) and guaranteed by UBI Finance S.r.l. would be vulnerable to downgrade if any of the following occurs: (i) UBI's Issuer Default Rating (IDR) is downgraded by two or more notches to 'BB+' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap is reduced to zero; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above Fitch's 'A' breakeven level of 84.5%.

The 'BBB+' rating of the covered bonds programme issued by UBI and guaranteed by UBI Finance CB2 S.r.l. would be vulnerable to downgrade if UBI's IDR is downgraded by one or more notches.

The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.