Fitch Affirms ING's Soft Bullet Covered Bonds at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed ING Bank N.V.'s (ING, A/Stable/F1) EUR5bn mortgage covered bonds issued out its soft bullet programme at 'AAA'. The Outlook is Stable.
KEY RATING DRIVERS
The rating reflects ING's Long-term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of 2 notches, an unchanged D-Cap of 4 notches (moderate risk) and the asset percentage (AP) used in the asset cover test. This is currently at 77.7%, above the updated 77.5% breakeven AP for the 'AAA' rating. However, Fitch understands from ING that it will amend the committed AP to a level no higher than the breakeven AP for the 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 three-notch cushion against a downgrade of ING's IDR.
The unchanged D-Cap of 4 notches reflects moderate payment interruption risk. The weakest links remain the asset segregation, liquidity gap, and systemic risk and privileged derivatives components. The moderate risk assessment for the liquidity gap & systemic risk component takes into account mitigants against liquidity gaps in the form of a six-month interest reserve fund and a 12-month extendible maturity on the covered bonds. The two-notch IDR uplift reflects ING's status as a systematically important bank for its domestic market and that ING's senior unsecured debt accounts for more than 5% of the bank's adjusted balance sheet.
The 77.5% 'AAA' breakeven AP is down from 77.7% in April 2015, despite rising house prices in the Netherlands, mainly due to a larger share of NHG loans which on average have a higher loan-to-value (LTV) ratio than non-NHG loans in the cover pool. This has a negative impact on the amortisation test (AT), which gives no credit to the share of loans that are above 80% of the property value.
The 'AAA' breakeven AP is equivalent to a breakeven OC of 29%, which is primarily driven by an asset disposal loss component of 30.6% due to large maturity mismatches between the assets and the liabilities. It also incorporates the effect of the programme's AT.
The 77.5% 'AAA' breakeven AP is also partly driven by a 4.9% 'AAA' credit loss component, which represents the impact from a 13.9% weighted average default rate (WAFF) and a 66.4% weighted average recovery rate (WARR) for the mortgage cover assets in a 'AAA' scenario. The 'AAA' WARR has increased from 60.6% a year ago, mainly due to lower indexed current LTVs and a higher share of NHG loans. The available excess spread has led to a reduction of the 'AAA' breakeven OC by 4.4%. 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) ING Bank N.V.'s IDR is downgraded by four 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 two or lower; or (iii) the AP that Fitch considers in its analysis remains higher than 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.