OREANDA-NEWS. September 28, 2015. Fitch Ratings has assigned Sparkasse Pforzheim Calw's (A+/Stable) mortgage Pfandbriefe a 'AAA' rating. The Outlook is Stable.]

KEY RATING DRIVERS
The 'AAA' rating is based on Sparkasse Pforzheim Calw's Long-term Issuer Default Rating (IDR) of 'A+', adjusted by an IDR uplift of two notches and the 100% overcollateralisation (OC) that Fitch takes into account in its analysis, which allows for two notches recovery uplift and a 'AAA' Pfandbrief rating. As a consequence, the assigned Discontinuity-Cap (D-Cap) of four notches (moderate risk) is currently not driving the rating. The Stable Outlook for the covered bonds rating reflects that on the bank's IDR.

The 'AAA' breakeven OC is 16%, mainly driven by a credit loss of 10.7%. In a 'AAA' scenario Fitch has calculated a weighted average (WA) default probability for the cover assets of 29.9% and a WA recovery rate of 67.7%. This reflects the programme's main exposure to residential mortgages and a 16% exposure to small commercial assets. Fitch also adjusted the default risk for its high regional concentration with roughly 97% of borrowers located in Baden-Wuerttemberg. While this is an economically strong state, an unexpected shock in the region would severely affect the performance of the whole portfolio.

The cash flow valuation component of 9.4% reflects differences in the weighted average life of assets and liabilities, with 10.8 years for the former and 9.4 years for the latter. As the programme is rated on a recovery basis, Fitch does not model for timely payment. Therefore the asset disposal loss component of 7.3% reflects a stressed valuation of the entire cover pool after an assumed covered bond default.

The D-Cap of 4 notches reflects Fitch's 'moderate' risk assessment related to liquidity and systemic risk, which is in line with other German mortgage Pfandbrief issuers' programmes. It allows for a four-notch uplift above the issuer's IDR adjusted by the IDR uplift.

The IDR uplift of 2 reflects the covered bonds exemption from bail-in, Fitch's view that Germany is a covered bonds-intensive jurisdiction, and that the issuer is a member of the Sparkassen-Finanzgruppe, which is regarded as a systemically important in its domestic market so that Fitch considers that resolution by other means than liquidation is likely.

A large cushion exists between the breakeven OC of 16% and the level of OC Fitch gives credit to in its analysis, which equals to 100%. This is the lowest nominal OC observed in the last 12 months.

RATING SENSITIVITIES
The 'AAA' rating of the Pfandbriefe would be vulnerable to a downgrade if any of the following occurs: (i) Sparkasse Pforzheim Calw is downgraded to 'BBB-' or below or (ii) the total number of notches represented by the IDR uplift and the D-Cap is reduced to one or lower or (iii) the level of OC taken into account by Fitch is falling below the breakeven OC of 16%.

If the OC that Fitch considers in its analysis drops to the legal requirement of 2% on a net present value basis, the covered bond rating would likely be downgraded to 'AA+', because this level of OC would limit the covered bond rating to one-notch above the IDR as adjusted by the IDR uplift.

The Fitch breakeven OC for the covered bond rating will be affected, among 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 OC to maintain the covered bond rating cannot be assumed to remain stable over time.