OREANDA-NEWS. Fitch Ratings has placed Volksbank Wien AG's (VBW; BB+/Positive) mortgage covered bonds' (Fundierte Bankschuldverscheibungen, FBS) 'BBB' rating on Rating Watch Evolving (RWE). The rating action follows the annual review of VBW's FBS.

ERROR IDENTIFICATION

The RWE follows an error identification in last year's analysis, which resulted in an IDR uplift of one notch, instead of zero. If the correct IDR uplift of zero had been applied, the assigned rating would have been 'BBB-' not 'BBB'.

When calculating the level of outstanding senior unsecured debt as a percentage of the total balance sheet of Volksbanken-Verbund (BB+/Positive), the agency considered intra-group exposure by using aggregated data, instead of consolidated data net of intra-group exposures. This calculation led to an assumed level of senior unsecured debt above the 5% threshold for which the agency granted an IDR uplift of one notch in accordance with its Covered Bonds Rating Criteria. The corrected calculation resulted into a senior unsecured debt share below this threshold.

Fitch has recently published an exposure draft (Exposure Draft: Covered Bonds Rating Criteria) of its Covered Bond Rating Criteria according to which an IDR uplift of up to two notches may be granted independent of the issuer's share of senior unsecured liabilities. The rating action will thus await the finalisation of the criteria. Should the proposed criteria changes come into effect, the rating may be upgraded by one notch to 'BBB+'. If the criteria remain unchanged, the rating would likely be downgraded by one notch to 'BBB-'.

KEY RATING DRIVERS

Fitch applied a limited rating uplift analysis as the available performance information did not enable the agency to perform a full asset analysis. Fitch does not communicate a break-even overcollateralisation (OC) level for the covered bond rating but tested whether, based on the legal minimum OC, recoveries in the respective rating scenario would be within the range of a one-notch recovery uplift.

Fitch found that the minimum legal OC of 2% is sufficient to achieve a nominal recovery rate on covered bonds assumed to be in default of at least 51%, thus leading to a one-notch recovery uplift, through applying sufficiently remote assumptions on asset default rates and property market value declines.

As of March 2016, the EUR1.428m FBS were secured by a dynamic pool of EUR1.689m mortgages loans that are well distributed across Austria. Around 92% are residential mortgage loans with the remaining 8% small commercial loans. The top 10 financings account for 2% of the total asset balance.

RATING SENSITIVITIES

Given Fitch's application of the limited rating uplift approach, the rating of the covered bonds is directly linked to Volksbank Wien AG 's Issuer Default Rating (IDR; BB+/Positive). Changes to the bank's IDR would be reflected immediately by the covered bonds rating.