Cover pool quality continues to drive the rating. Fundamental credit factors also shield the Spanish covered bonds against adverse changes to the cover pool, limiting a potential downgrade.
Scope Ratings has today affirmed the AAA rating on Bankia SA’s cédulas hipotecarias (Spanish mortgage covered bonds). The Outlook remains Stable.
Scope’s rating of AAA/Stable for the EUR 30.2bn (as of March 2018) of cédulas hipotecarias issued by Bankia SA (Bankia) reflect the issuer’s rating (BBB+/Stable, see Scope’s issuer report) enhanced by a seven-notch credit uplift provided by the cover pool.
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The entire mortgage book provides 144% of over collateralisation, fully mitigating identified credit and market risks. Pronounced cash flow mismatch remains a key driver for the rating-supporting over collateralisation, although available over collateralisation remains generously above the level needed to maintain the cover pool-based uplift. Fundamental credit factors have not changed since the last annual review, maintaining the six-notch rating uplift and anchoring the additional cover pool-based uplift at AA+.
According to Scope’s cover pool analysis, an over collateralisation of 34% based on performing mortgage loans supports a seven-notch uplift. The analysis did not incorporate mortgage loans granted to developers or secured by land which would be excluded from an over collateralisation level the agency takes into account.
Following BMN merger, cover-pool credit quality remains stable but asset-liability mismatch risk increases
In Scope’s view, the cover pool’s credit profile remains materially similar to that from a year ago, even with the issuer’s merger with Banco Mare Nostrum S.A. (BMN), effective on 8 January 2018. As of March 2018, the combined mortgage book (equivalent to the cover pool) increased to EUR 73.7bn, which compares to the EUR 60.1bn from a year before.
The cover pool’s credit quality has improved but, because of the reference to the whole mortgage book, remains weak in an international context. The mortgage book’s average indexed loan-to-value has increased to 58.8% from 57.5% since the last annual review. The BMN merger also resulted in an increased exposure to mortgage loans secured by properties in Andalucía, the Balearic Islands and Murcia. However, the resulting geographical concentration does not materially affect the rating.
Scope’s recovery assumptions have only moderately changed, reflecting two counterbalancing factors. The reduction in recovery assumptions for residential loans (86.6% of total book balance), due to an increase in their loan-to-value to 58.4% from 55.9% a year earlier, was offset by the higher recovery expectations for commercial loans, due to a decrease in the latter’s loan-to-value to 62% from 68.9% over the same period.
The programme remains strongly exposed to market risks, particularly regarding maturity mismatches. According to Scope’s calculations, the weighted average remaining life of the assets is 17.6 years, but only 6.1 years for the bonds. This creates a duration gap of 11.6 years, which compares to the 9.7-year gap before the BMN merger and from a year ago. Scope expects maturity mismatch risk to continue to drive the rating-supporting over collateralisation. There is also the risk that maturing bonds are not fully refinanced, which would further widen the maturity gap between assets and covered bond redemptions.
Interest rate risk is also material as around 70% of outstanding bonds pay a fixed rate while 95% of cover assets pay a floating coupon. While newly originated fixed-rate mortgages will reduce the mismatch, persistently low interest rates will continue to stress the programme’s excess spread.
Quantitative analysis and key assumptions
Scope has analysed Bankia’s highly granular mortgage book using a normal inverse distribution. Lifetime default rates assumed in Scope’s analysis are 15% for residential loans and 30% for commercial loans (excluding land and developers), with coefficients of variation at 70% and 60%, respectively. Scope’s assumptions are based on mortgage performance data provided regularly by the Bank of Spain and were adjusted for Bankia’s performance. The latter has improved since the last annual review, resulting in a reduction in Scope’s default assumption for commercial loans by 5pp.
Scope has calculated a weighted average recovery rate of 45.1% for residential loans and 40.3% for commercial loans in the stressed scenario. The blended servicing fee was assumed at 25bps and the blended refinancing spread at 250bps. Scope did not apply the highest trading spreads under its methodology because assets would need to be sold continuously for more than 10 years and, in the agency’s opinion, such spreads cannot be maintained throughout the whole term.
In the stressed analysis, Scope has used a low prepayment rate (0%) together with non-converting low interest rates that decrease to 1% after the second year. All bonds are denominated in euro, while 20bps of assets are denominated in other currencies. Scope deems this exposure immaterial and therefore did not apply foreign exchange stresses.
Scope’s Stable Outlook reflects: i) the continuous availability of high over collateralisation, which provides a significant buffer against a rise in credit and market risks, thereby maintaining the cover pool-based support; ii) Scope’s view that the European covered bond harmonisation will not negatively impact the fundamental support factors relevant for the cédulas hipotecarias; and iii) Scope’s Stable Outlook on Bankia. In addition, a one-notch change in the issuer rating is unlikely to affect the covered bond rating.
The covered bond rating may be downgraded if i) Scope’s rating on the issuer deteriorated by more than two notches, ii) the mortgage book reduced significantly in size; or iii) Bankia issued significant amounts of cédulas hipotecarias, eroding available over collateralisation below the rating-supporting level.