Fitch Affirms SNS's Covered Bonds at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The rating reflects SNS's Long-term Issuer Default Rating (IDR) of 'BBB+', an unchanged IDR uplift of two notches, an unchanged D-Cap of four notches (moderate risk) and the 75.0% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 77.5% breakeven AP for the 'AAA' rating. The latter supports a 'AA' tested rating on a probability of default basis and a two-notch recovery uplift to a 'AAA' rating. The Stable Outlook reflects a one-notch cushion against a downgrade of SNS's IDR.
The unchanged D-Cap of four notches reflects moderate payment interruption risk. The weakest links remain the asset segregation, liquidity gap and systemic risk, and cover pool-specific alternative management components. The moderate risk assessment for the liquidity gap & systemic risk component takes into account mitigants against liquidity gaps of a six-month interest reserve fund and a 12-month extendible maturity on the covered bonds. The two-notch IDR uplift reflects SNS's status as a systemically important bank for its domestic market and that SNS's senior unsecured debt accounts for more than 5% of the bank's adjusted balance sheet.
The 77.5% 'AAA' breakeven AP is up from 76.5% in June 2015, mainly due to a lower credit loss, driven by a lower weighted average loan-to-value ratio of the loans in the cover pool and rising house prices in the Netherlands.
The 'AAA' breakeven AP is equivalent to a breakeven OC of 29%, which is primarily driven by an asset disposal loss component of 27.5% due to large maturity mismatches between the assets and the liabilities with a weighted average life of 19 years (assuming no prepayments) and 2.7 years, respectively.
The 77.5% 'AAA' breakeven AP is also partly driven by an 8.1% 'AAA' credit loss component, which represents the impact from an 18.0% weighted average default rate, down from 20.1%, and a 58.2% weighted average recovery rate for the mortgage cover assets in a 'AAA' scenario. The available excess spread has led to a reduction of the 'AAA' breakeven OC by 3.6%. The breakeven AP considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) SNS Bank N. V.'s IDR is downgraded by two or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to four or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 77.5%.
The Fitch breakeven AP 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 AP to maintain the covered bond rating cannot be assumed to remain stable over time.