OREANDA-NEWS. Fitch Ratings has revised the Outlook on Banco Santander Totta SA's (Totta, BBB/Stable/F2) mortgage covered bonds (Obrigacoes Hipotecarias, OH) to Stable from Positive and affirmed the OH at 'A-'. The rating action follows the Outlook revision to Stable from Positive on Totta's Issuer Default Rating (IDR), which has also been affirmed (see "Fitch Revises Santander Totta's Outlook to Stable; Affirms at 'BBB'" dated 9 March 2016 available at www.fitchratings.com)

KEY RATING DRIVERS
The 'A-' rating is based on Totta's Long-term IDR of 'BBB', an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 0 notches (full discontinuity risk) and the 15% over-collateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the revised 9% 'A-' breakeven OC (from 8.5%). The Stable Outlook reflects that on Totta's IDR.

The 15% OC that the issuer commits to allows the OH to achieve at least 51% recoveries given default, which is commensurate with a one-notch uplift from the 'BBB+' tested rating on a probability of default basis. The breakeven OC components are: -1.8% cash flow valuation, 12.6% credit loss and 4.4% asset disposal loss. The revised breakeven OC takes into account the EUR450m five-year fixed rate OH issued in February 2016.

The unchanged IDR uplift of 1 reflects bail-in exemption for fully collateralised OH and the domestically systemic importance of the issuer so that Fitch believes resolution methods other than liquidation are more likely to preserve important banking operations, including covered bonds. The unchanged D-Cap of 0 notches is driven by our assessment of full discontinuity risk for the liquidity gap and systemic risk component.

RATING SENSITIVITIES
The 'A-' rating would be vulnerable to downgrade if any of the following occurs: (i) Banco Santander Totta SA's Issuer Default Rating (IDR) is downgraded by one or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap is reduced to zero; or (iii) the over-collateralisation (OC) that Fitch considers in its analysis decreases below Fitch's 'A-' breakeven (BE) OC level of 9%.

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.