DBRS Morningstar Confirms AA Ratings on Deutsche Bank AG Conditional Pass-Through Structured Covered Bonds Guaranteed by SCB Alpspitze UG

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA ratings on the notes issued under the Deutsche Bank AG (DB AG or the Issuer) Conditional Pass-Through Structured Covered Bonds Programme (CPT SCB or the Programme) guaranteed by SCB Alpspitze UG. The confirmations follow the completion of a full review of the Programme.

There are two series of covered bonds outstanding under the Programme totalling a nominal amount of EUR 2.31 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, one notch below the Long-Term Critical Obligations Rating (COR) of Deutsche Bank AG. Deutsche Bank AG is the Reference Entity (RE) for the programme. Deviating from the “Rating and Monitoring Covered Bonds” methodology, DBRS Morningstar assigned a CBAP that is one notch below the COR even if the Programme can be seen as strategic for the funding of the primary activity of the RE. For more information, please refer to the rating report at www.dbrsmorningstar.com.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of AA (low).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. DBRS Morningstar gives full credit to this commitment in accordance with its “Rating and Monitoring Covered Bonds” methodology. The level is not subject to a haircut, as DBRS Morningstar considers it to be persistent based on historically observed levels.

DBRS Morningstar analysed the transaction using its European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, and interest rate stresses.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds (CB) ratings by one notch. In addition, all else unchanged, the CB ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB; (2) the LSF Assessment associated with the Programme was downgraded to “Average” or below; or (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects.

As of 30 September 2020, the aggregated outstanding balance of the CP underlying the Issuer’s CB was EUR 3.48 billion. The total amount of liabilities outstanding is EUR 2.31 billion, yielding a current nominal OC ratio of 50.8%. The Issuer has publicly committed to maintain an OC level of 15.0%.

As at March 2020, the CP assets comprised 41,054 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 70.9%, a WA seasoning of 77 months, and a WA remaining time to maturity of 198 months. The CP is located mainly in the German regions of North Rhine-Westphalia (32.6% by outstanding balance), Baden-Württemberg (10.6%), and Bavaria (8.2%). Almost all (roughly 98%) of the retail pool yields a fixed coupon and 89% is fully amortising.

The DBRS Morningstar-calculated WA life of the mortgage assets is roughly 10 years based on a 0% prepayment rate, which is longer than the three years of WA life on the CB, not accounting for any maturity extension. This risk is mitigated by the conditional pass-through nature of the CB.

All CP assets and CB are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

DBRS Morningstar has assessed the LSF related to the Programme as “Very Strong” according to its rating methodology. For more information, please refer to DB AG SCB rating report: https://www.dbrsmorningstar.com/research/353234/deutsche-bank-ag-conditional-pass-through-structured-covered-bonds-structured-mortgages-rating-report.

For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may increase in the coming months for many CPs, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. In its CP analysis of this programme, DBRS Morningstar increased the expected default rate for self-employed borrowers and assumed a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated CBs in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds“ (27 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports and loan-by-loan data on the CP as at 30 September 2020 as well as dynamic delinquencies (90d+) data by vintage of origination, spanning from 2010 to 2019, provided by the Issuer.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 30 April 2020, when DBRS Morningstar confirmed its AA rating on Series 5 and discontinued its rating of Series 4 after it was repaid.

The lead analyst responsibilities for this transaction have been transferred to Covadonga Aybar.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH, Sucursal en España are subject to EU and U.S. regulations only.

Lead Analyst: Covadonga Aybar, Vice President, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 1 November 2019

DBRS Ratings GmbH, Sucursal en España
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating and Monitoring Covered Bonds (27 April 2020)
https://www.dbrsmorningstar.com/research/360260/rating-and-monitoring-covered-bonds
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (27 April 2020)
https://www.dbrsmorningstar.com/research/360263/rating-and-monitoring-covered-bonds-addendum-market-value-spreads
-- Global Methodology for Rating Banks and Banking Organisations (8 June 2020)
https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020) and European RMBS Credit Model v 1.0.0.0
https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020) https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020) https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers
-- Global Methodology for Rating Sovereign Governments (27 July 2020)
https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.