OREANDA-NEWS. Fitch Ratings has affirmed Deutsche Postbank AG's (DPB, BBB+/Rating Watch Evolving/F2) EUR3.8bn mortgage Pfandbriefe at 'AAA' with Stable Outlook, following a periodic review of the programme.

KEY RATING DRIVERS
The rating is based on DPB's Long-term Issuer Default Rating (IDR) of 'BBB+', an unchanged IDR uplift of 2 notches, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) notches and the 15.0% voluntary over-collateralisation (OC) commitment that Fitch takes into account in its analysis, which equals an unchanged 'AAA' breakeven OC of 15.0%.

DPB's ratings are currently on Rating Watch Evolving (RWE) following its parent Deutsche Bank's plans to divest the subsidiary. The RWE on DPB's Long- and Short-term IDRs reflects our view that DPB's IDRs and debt ratings could be affirmed, upgraded or downgraded, depending on our assessment of either its stand-alone strength after the divestment, or on support from a more highly rated buyer with a strong ability and propensity to provide support. Currently the form (IPO or sale) and timing of a possible deconsolidation from Deutsche Bank is not known. The Outlook on the mortgage Pfandbriefe is Stable, despite the Watch Evolving on the issuer, since the rating can sustain a downgrade of DPB's IDR by one notch.

The main contributor to the 'AAA' breakeven OC of 15.0% remains the cash flow valuation component, which increased to 13.3% from 12.1% over the past 12 months. The increase reflects that modelling for commingling losses has now been included in the analysis as DPB's IDR has fallen below the minimum IDR at which commingling risk is deemed to be sufficiently mitigated. Fitch has also applied its residential mortgage prepayment vector adjusted for seasoning, increasing assumed prepayments from the last analysis. This has resulted in a greater mismatch between assets and liabilities since all the assets mature well before the liabilities and in less excess spread generation as assets amortise.

The credit loss in the 'AAA' breakeven OC increased to 5.1% from 4.2%, mirroring the change in the agency's asset modelling assumptions for the analysis. The foreclosure frequency was adjusted upwards to 30.1% from 26.8% as Fitch decided to apply a conservative assumption on a part of the cover pool for which the employment type was not known. Market value decline assumptions were also adjusted based on historical data from DPB to account for the higher quick sale adjustment compared to peers. This led to a lower modelled recovery rate of 83.8% than the 85.5% in the last analysis conducted.

The asset disposal loss component improved to 0.4% from 1.7% over the last 12 months. The decrease reflects that due to the adjusted prepayment assumptions and matured (May 2015) benchmark issuance more cash is available and no assets need to be sold. Accordingly this component is driven by negative carry of reinvested cash rather than forced asset sales.

As the programme continues to be classified as dormant, Fitch relies on the publicly stated level of OC of 15% on a nominal base, which equals the breakeven OC. This level of OC supports an 'AA' rating on a tested probability of default basis and allows for a two-notch uplift for outstanding recoveries given default. The commitment is only valid for DPB's residential mortgage Pfandbrief programme (so called cover pool D) and features a one-month notice period.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by two or more notches to 'BBB-' or below; or (ii) the number of notches represented by the D-Cap is reduced to two or lower; or (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'AAA' breakeven level of 15.0%.

If the OC that Fitch considers in its analysis drops to the legal minimum requirement of 2% on a net present value basis, it would not sustain timely payment in scenarios above the IDR adjusted by the IDR uplift, and would support recoveries given default commensurate with one further notch. As a result, the covered bond rating would likely be downgraded to 'A+'.

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.