TEXT-Fitch affirm Santander's mortgage covered bonds at 'A'

Tue Nov 13, 2012 11:43am EST

Nov 13 - Fitch Ratings has affirmed Banco Santander S.A.'s 
(Santander, 'BBB+'/Negative/'F2') mortgage covered bonds (Cedulas Hipotecarias
or CH) at 'A' with a Negative Outlook and removed them from Rating Watch
Negative (RWN).

The rating actions follow the receipt of additional performance data, which
allowed the agency to capture the latest credit trends of the underlying
mortgage loan portfolio and consequently finalise its annual review. Fitch also
conducted an operational visit to Santander in October 2012 and was able to
discuss with the management team the current origination and servicing
strategies in the challenging macroeconomic environment. The agency also
received a concise overview of Santander's IT system, which is being used to
manage and report on the cover pool. The CH were maintained on RWN on 18 June
2012 (see "Fitch Takes Rating Actions on Spanish Covered Bond Programmes" at
www.fitchratings.com).

The CH rating is based on Santander's Long-term Issuer Default Rating (IDR) of
'BBB+', the Discontinuity Cap (D-Cap) assessment of 0 (full discontinuity risk)
and the overcollateralisation (OC) ratio of 85% that Fitch takes into account
within its analysis. The CH 'A' rating would be vulnerable to a downgrade if the
issuer's IDR was downgraded, or the programme OC drops below Fitch's estimated
breakeven OC ratio of 75% in a 'A' stress environment. The Negative Outlook on
Santander's IDR drives the Negative Outlook on the CH.

As of October 2012, Santander's total CH amounted to EUR26.6bn and were secured
over the bank's total mortgage cover pool of EUR52.0bn as of June 2012,
resulting in a total OC of 95%. In line with Fitch's covered bond criteria for
'F2' rated issuers in the absence of contractual minimum levels of OCs, the
agency applies a 10% OC haircut on the lowest OC observed of the last 12 months
(94%) to derive a total OC credited level of 85% within its analysis.

Fitch's unchanged D-Cap of 0 for the CH implies an interruption of payments on
the covered bonds upon issuer default. This continuity risk analysis is driven
by the liquidity gap and systemic risk assessment for Spanish covered bonds
issued by banks rated above the sovereign ('BBB'/Negative/'F2'). In Fitch's
opinion, there is a lack of specific protection against liquidity shortfalls
post assumed issuer insolvency and only intervention by the Spanish authorities
would avoid a default on the covered bonds in this scenario (see "Fitch Assigns
Spanish Mortgage Covered Bond Programmes Outlooks and D-Caps" dated 11 September
2012 at www.fitchratings.com). As a result, the covered bonds can only be rated
based on recoveries from the cover pool given a default of the issuer, up to two
notches above Santander's IDR.

Fitch considers Santander's CH to be materially exposed to maturity mismatches,
as the cover assets have a weighted-average (WA) residual life of 15.8 years,
compared to a shorter WA residual life of 4.0 years for the CH. In line with
other CH, the interest rate mismatches between a predominantly floating rate
cover pool (92%) and almost entirely fixed rate liabilities are risk-neutral for
covered bond holders as the stressed net present value of the cover pool would
not be greatly impacted by the prevailing interest rate environment.

Fitch has received cover pool data aggregated by sub-pools depending on the
borrower profile and property type among others (residential 57%, commercial 26%
and real estate developers, 17%), which the agency has deemed adequate given
that the CH are rated on a recovery given default basis. In terms of portfolio
loss analysis, and based on the cover pool composition and historical
performance data analysed, Fitch estimates a total cover pool WA default rate of
34.4%, a WA recovery rate of 28.2% and a WA loss rate of 24.7% in a 'A' stress
environment.

The Fitch breakeven OC for a given 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 issuances. Therefore it cannot be
assumed to remain stable.

Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 September 2012, ,
'EMEA Residential Mortgage Loss Criteria' dated 7 June 2012, 'EMEA Criteria
Addendum - Spain - Mortgage Loss and Cash Flow Assumptions', dated 24 July 2012,
'Criteria for Rating Granular Corporate Balance- Sheet Securitisations (SME
CLOs)', dated 1 June 2012 are available on www.fitchratings.com.

Applicable Criteria and Related Research:
Covered Bonds Rating Criteria - Amended
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - Spain - Mortgage and Cashflow Assumptions
Criteria for Rating Granular Corporate Balance-Sheet Securitisations - SME CLO
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