OREANDA-NEWS. Fitch Ratings has upgraded the Portuguese mortgage covered bonds (Obrigacoes Hipotecarias, OH) issued by Caixa Economica Montepio Geral (Montepio, B+/Stable/B) and Banco Santander Totta SA (Totta, BBB/Positive/F2). The Outlooks on the OH reflect those on the respective Portuguese banks' Issuer Default Ratings (IDR). A full list of rating actions, breakeven (BE) over-collateralisation (OC) and OC components is available at the end of this rating action commentary.

The rating actions follow Bank of Portugal's (BoP) announcement on the identification of other systemically important institutions (O-SIIs) at the domestic level.

There is no rating impact on the OH programmes issued by Banco Comercial Portugues S.A. (BCP, BB-/Stable/B) and Caixa Geral de Depositos S.A. (CGD, BB-/Stable/B) as they were already benefiting from an IDR uplift of 1. Fitch believes resolution measures would apply to BCP and CGD, if needed, due to their large size and economic inter-connectedness.

KEY RATING DRIVERS
On 29 December 2015 BoP identified all Portuguese OH issuers rated by Fitch as O-SIIs. As a consequence Fitch revised the IDR uplift on Montepio and Totta programmes to 1 from 0. The IDR uplift of 1 reflects the domestically systemic importance of the issuers, as indicated by their O-SIIs designation, so that Fitch believes, if necessary, resolution methods other than liquidation are more likely to be applied by authorities to preserve important banking operations, including covered bonds. None of the issuers have a level of senior debit in excess of 5% total adjusted assets and Portugal is not considered a covered bond-intensive jurisdiction by Fitch.

The rating of the OH continues to be based on recovery prospects, reflecting a discontinuity cap (D-Cap) of 0 (full discontinuity), driven by the liquidity gap and systemic risk component. The tested rating on a probability of default (PD) basis is therefore equalised with the IDR of the respective Portuguese banks as adjusted by the IDR uplift of 1. Fitch does not test timely payments because the tested rating on PD is also the floor for the rating of the OH, regardless of the level of OC.

In its analysis, Fitch has given credit to the level of OC that each of the issuers commits to in their latest investor reports (September 2015).

KEY RATING DRIVERS
Montepio
The 'BBB-' rating is based on Montepio's Long-term IDR of 'B+', a revised IDR uplift of 1 (from 0), an unchanged D-Cap of 0 and the 35% OC that Fitch takes into account in its analysis, which provides more protection than the 16.5% 'BBB-' BE OC (up from 14.5% at the previous 'BB+' rating). The 16.5% 'BBB-' BE OC considers a three-notch uplift for at least 91% recoveries given default from the revised 'BB-' tested rating on PD.

Totta
The 'A-' rating is based on Totta's Long-term IDR of 'BBB', a revised IDR uplift of 1 (from 0), an unchanged D-Cap of 0 and the 15% OC that Fitch takes into account in its analysis, which provides more protection than the 8.5% 'A-' BE OC (up from 7% at the previous 'BBB+' rating). The 15% committed OC allows the OH to achieve at least 51% recoveries given default, which is commensurate with a one-notch uplift from the revised 'BBB+' tested rating on PD.

RATING SENSITIVITIES
Caixa Economica Montepio Geral (Montepio)
The 'BBB-' rating would be vulnerable to downgrade if any of the following occurs: (i) Montepio's Issuer Default Rating (IDR) is downgraded by one or more notches to 'B' or below; or (ii) the number of notches represented by the IDR uplift and Discontinuity Cap (D-Cap) is reduced to zero; or (iii) the over-collateralisation (OC) that Fitch considers in its analysis decreases below Fitch's 'BBB-' breakeven (BE) OC level of 16.5%.

Banco Santander Totta SA (Totta)
The 'A-' rating would be upgraded if Totta's IDR is upgraded by one or more notches to 'BBB+' or above.

At the same time, all else being equal, the 'A-' rating would be vulnerable to downgrade if any of the following occurs: (i) the number of notches represented by the IDR uplift and D-Cap is reduced to zero; or (ii) the OC that Fitch considers in its analysis decreases below Fitch's 'A-' BE OC level of 8.5%.

The Fitch BE OC for the covered bond ratings 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 BE OC to maintain the covered bond ratings cannot be assumed to remain stable over time.

The rating actions are as follows:

Montepio
OH upgraded to 'BBB-' from 'BB+'; Outlook Stable with a BE OC of 16.5%
BE OC components: -5.9% cash flow valuation, 5.9% credit loss, 28% asset disposal loss

Totta
OH upgraded to 'A-' from 'BBB+'; Outlook Positive with a BE OC of 8.5%
BE OC components: -2% cash flow valuation, 12.6% credit loss, 5.3% asset disposal loss