OREANDA-NEWS. Fitch Ratings has upgraded Bankia, S.A.'s (Bankia; BBB-/Stable/bbb-/F3) mortgage covered bond programme (Cedulas Hipotecarias, CH) to 'A' from 'A-'. The Outlook is Stable.

This action follows the latest rating action on Bankia (see 'Fitch Affirms Caixabank and Popular, Outlook Positive; Upgrades Bankia', dated 23 February 2016, on www.fitchratings.com).

KEY RATING DRIVERS
The upgrade of Bankia's CH is mainly driven by the bank's Issuer Default Rating (IDR) upgrade to BBB-, and the level of overcollateralisation (OC) of 75.0% that Fitch takes into account in its analysis, which is greater than the 67.0% breakeven OC for the 'A' rating level. Bankia's CH 'A' rating is further supported by an IDR uplift of 2 notches, a D-Cap of 0 notches and a two-notch recovery uplift which provides for recoveries in excess of 91% on CH in a 'A' default scenario.

In calculating the relied-upon OC for Bankia's CH, Fitch considers the lowest OC over the past 12 months (94.1%) and applies a 20% haircut to account for potential volatility. Total OC on Bankia's CH programme stood at 109.3% as of February 2016.

The 67% 'A' breakeven OC is mainly driven by an asset disposal loss component of 41.3%, which is explained by the refinancing spreads of 4.7% per annum applied to estimate the cover pool liquidation value under a 'A' rating stress scenario. The breakeven OC is also influenced by a cash flow valuation component of 16.1%, driven by the large maturity mismatch between CHs and the cover pool. The weighted average remaining maturity term of the CHs is 6.9 years, while that of the cover pool is 20.5 years.

Moreover, the 'A' breakeven OC is also influenced by the estimated lifetime credit loss rate of the cover pool of 20.7%, which translates to a 26% breakeven OC credit loss component. Fitch's credit analysis recognises the cover pool's composition, in terms of borrower and security profile, and also the trend of non-performing loans (NPLs), both of which have improved since the last rating action in September 2015. As of the last reporting cut-off date of 31 December 2015, the NPL ratio based on a doubtful classification of assets, stood at 10.3%, down from 12.6% in June 2015, and the share of residential assets in the pool has increased to 83.4% from 81.9%.

RATING SENSITIVITIES
The 'A' covered bond rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches; or (ii) the IDR uplift is reduced to 1 or zero; or (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'A' breakeven level of 67%.