Fitch Affirms Bayerische Landesbank's Mortgage Pfandbriefe at 'AAA'; Outlook Stable

Fri Jun 20, 2014 11:54am EDT

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(The following statement was released by the rating agency) FRANKFURT/LONDON, June 20 (Fitch) Fitch Ratings has affirmed Bayerische Landesbank's (BLB; A+/Negative/F1+) outstanding mortgage Pfandbriefe at 'AAA' following a periodic review of the programme. The Outlook is Stable. KEY RATING DRIVERS The rating is based on BLB's Long-Term Issuer Default Rating (IDR) of 'A+'; the IDR uplift of '2', an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk); and the overcollateralisation (OC) that Fitch takes into account in its analysis, which is 27%, based on a contractual commitment. This level of OC supports a 'AA+' rating on a probability of default (PD) basis and a one-notch recovery uplift. The Outlook on the Pfandbriefe is Stable despite the Negative Outlook on BLB's IDR, reflecting Fitch's favourable view on the position of covered bonds under the proposed EU Bank Recovery and Resolution Directive (BRRD), which has recently been approved by the European Parliament and the Council of the European Union. Fitch expects the unchanged IDR uplift of '2' to offset potential negative rating actions on BLB's IDR related to the weakening of state support. Although Fitch's 'AAA' breakeven OC remains unchanged at 25%, the pool`s credit risk has slightly worsened. This impact is offset by lower open FX positions from a year ago. The credit loss in the pool is 18.3%, up from 17.5% previously, driven by higher defaults (62.1% up from 59% previously) due to increased concentration in the SME portfolio. The decrease in FX risk predominantly results from around GBP600m of loans having matured over the last 12 months. This has had the effect of leaving the GBP assets nearly matched with GBP liabilities. The programme is also exposed to CHF, USD and SEK. A further risk driver is the notable initial open variable interest rate position, which did not change significantly. Around 50% of the assets are floating-rate compared with only 33% of the Pfandbriefe. No derivatives have been registered to mitigate these market risks. As of 31 March 2014 the cover pool consisted of 15,194 loans, 8% of which Fitch classified by balance as residential mortgage assets and the remaining as commercial assets. Around 40% are office properties followed by retail (25%) and multi-family (15%). Of the assets 68% are secured by properties in Germany, followed by the UK (8%), France (7%), USA (5%) and others. The unchanged D-Cap of 4 reflects Fitch's assessment of the liquidity gap and systemic risk as well as the cover pool specific alternative management, which are both deemed as moderate risk and the weakest link in the constituents of the D-Cap. RATING SENSITVITIES The 'AAA' rating of BLB's mortgage covered bonds would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by five or more notches to 'BBB-' or lower; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 1; (iii) the OC that Fitch considers in its analysis drops below Fitch's 'AAA' breakeven level of 25%. The Fitch breakeven OC for the covered bond rating will be affected, among other factors, 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 the breakeven OC for the covered bonds cannot be assumed to remain the same. More details on the portfolio and Fitch's analysis will be available soon in a full rating report, at www.fitchratings.com. Contact: Primary Analyst Mathias Pleissner Director +49 69 768076 133 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Kai-Uwe Richter, CFA, FRM Associate Director +49 69 768 076 131 Committee Chairperson Rebecca Holter Senior Director +49 69 768076 261 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, Covered Bonds Rating Criteria (10 March 2014), Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (23 January 2014), Criteria for the Analysis of Commercial Real Estate Loans Securing Covered Bonds (22 May 2014), EMEA RMBS Master Rating Criteria (28 May 2014), EMEA Residential Mortgage Loss Criteria (28 May 2014), Criteria Addendum: Germany (3 June 2014), Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum (4 February 2014), are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Criteria for the Analysis of Commercial Real Estate Loans Securing Covered Bonds here EMEA RMBS Master Rating Criteria here EMEA Residential Mortgage Loss Criteria here Criteria Addendum: Germany - Residential Mortgage Loss and Cash Flow Assumptions here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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