OREANDA-NEWS. Fitch Ratings has affirmed KBC Bank's (KBC; A-/stable/a-) EUR5.8bn mortgage pandbrieven at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The affirmation follows Fitch's review of the programme. The agency has revised its breakeven overcollateralisation (OC) for the 'AAA' rating to 22.0% from 24.5%. This is driven by improved maturity mismatches between the assets and the liabilities under Fitch's updated cash flow analysis. The programme also continues to benefit from high levels of excess spread.

The rating is also based on KBC's Long-term Issuer Default Rating (IDR) of 'A-', a revised IDR uplift of 2, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the 70.4% OC that Fitch takes into account in its analysis, which provides more protection than the 22.0% 'AAA' breakeven OC. The Stable Outlook on the pandbrieven rating reflects the Stable Outlook on KBC's IDR and on the underlying residential loan assets.

The 'AAA' breakeven OC of 22.0% is driven by the cover pool's credit loss of 7.5% in a 'AAA' scenario (compared with 6.9% previously). The cash flow valuation component of 13.0% (compared with 12.5% previously) reflects the high excess spread levels for the programme and the higher weighted average life of the assets compared with the liabilities. The updated asset disposal loss of 5.3% (compared with 8.5% previously) is driven by improved maturity mismatches between the assets and the liabilities and the reduction in Fitch's refinancing spread assumptions for a 'AA' rating scenario. The breakeven OC 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 revised IDR uplift of 2 reflects the covered bonds exemption from bail-in, that the issuer is systemically important in its domestic market (so that Fitch considers that resolution by other means than liquidation is likely) and that there is protection provided by senior unsecured debt in excess of 5% of total adjusted assets.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to a downgrade if any of the following occurs: (i) KBC's IDR is downgraded by two notches to 'BBB' or lower; (ii) the number of notches represented by the D-Cap and the IDR uplift is reduced to three or fewer; (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'AAA' breakeven level of 22.0%.

The Fitch breakeven OC for the pandbrieven rating will be affected, amongst 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 pandbrieven rating cannot be assumed to remain stable over time.

More details on the cover pool and Fitch's analysis will be available in a full rating report, which will shortly be available at www.fitchratings.com.

In the report 'Breaking Down Breakeven Overcollateralisation', dated 8 July 2014, Fitch details its approach for determining the breakeven OC components.