OREANDA-NEWS. Fitch Ratings has upgraded SNS Bank's (SNS, BBB/Stable/F3, Viability Rating: bbb) EUR4.4bn mortgage covered bonds to 'AAA' from 'AA+'. The Outlook is Stable.

The upgrade follows an improvement in the 'AAA' breakeven asset percentage (AP) for the programme, an expected shortening of the remedial period for the programme's account bank, and recent upgrade on SNS's Viability Rating (VR).

KEY RATING DRIVERS
Following the upgrade of SNS's VR to 'bbb' (see 'Fitch Upgrades SNS Bank's VR to 'bbb'; Affirms IDR with Negative Outlook' dated 17 March 2015 at www.fitchratings.com) the maximum achievable covered bonds rating increased to 'AAA' from 'AA+'.

However, the account bank's remedial period of 30 business days was not in line with Fitch's criteria, which may have led to a tightening in the 'Discontinuity Cap' (D-Cap) assessment (see 'Fitch: Covered Bond Counterparty Risk Flagged in D-Cap Review' dated 27 March 2015 at www.fitchratings.com). SNS has since confirmed that the remedial period will be changed to 30 calendar days in the next update of the GIC agreement in the coming weeks and Fitch has maintained the D-Cap at 4.

The rating is based on SNS's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged IDR uplift of 2, an unchanged D-Cap of 4 (moderate risk) and the 75% AP that Fitch takes into account in its analysis, which provides more protection than the increased 76.5% 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 for the covered bonds rating reflects that on SNS's IDR.

The 76.5% 'AAA' breakeven AP has increased from the 75% 'AA+' breakeven AP calculated at the last rating action. The change is primarily driven by lower refinancing spread assumptions. The 'AAA' breakeven AP corresponds to a breakeven over-collateralisation (OC) of 30.7% and is driven by an asset disposal loss component of 29.1%, which mainly incorporates the effect of the programme's amortisation test. This test is particularly severe under Fitch stressed house price decline assumptions, as it gives no credit to the share of loans that are above 80% of the property value. The asset disposal loss component also reflects large maturity mismatches between the assets and the liabilities with a weighted average life (WAL) of 19.5 years (assuming no prepayments) and three years, respectively.

A 9.5% 'AAA' credit loss represents the impact on the breakeven OC from a 20.1% weighted average default rate (WAFF) and a 56.7% weighted average recovery rate for the mortgage cover assets in a 'AAA' scenario. The latest WAFF is an increase from 16.8% previously, due to an increased lender adjustment in light of high observed defaults of SNS's total mortgage book compared with Fitch's base case assumption.

The cash flow valuation component reduces the 'AAA' breakeven OC by 4% due to the longer weighted average life of the assets versus the liabilities and the spread earned under the total return swap.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one 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 five or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 76.5%.

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.