Press Release

DBRS Morningstar Confirms AA (low) Ratings of Banca Nazionale del Lavoro S.p.A. Covered Bonds (OBG - Mortgages)

Covered Bonds

December 16, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (low) ratings of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Nazionale del Lavoro S.p.A. Covered Bonds Programme (BNL OBG or the Programme). This rating action follows the completion of a full review of the Programme.

As of today there were six series of OBG under the Programme, totalling an outstanding nominal amount of EUR 9.5 billion. The series are guaranteed by Vela OBG S.r.l.

The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). Banca Nazionale del Lavoro S.p.A. (BNL) is the Issuer and the reference entity (RE) for the programme. There is no Critical Obligations Rating associated with the RE, but DBRS Morningstar classifies Italy as a jurisdiction for which covered bonds (CB) are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Modest” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of AA (low).
-- No uplift for recovery prospects.
-- A level of overcollateralisation (OC) of 7.1% to which DBRS Morningstar gives credit, which is the minimum observed OC level over the past 12 months adjusted by a scaling factor of 0.85.

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, interest rate stresses, and market value spreads to calculate liquidation values on the CP.

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB ratings.

BNL acts as the account bank for this transaction. Based on its rating and on the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” and “Rating and Monitoring Covered Bonds” methodologies.

BNL also acts as the cover pool (CP) swap counterparty; however, the swap documentation is not in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, no credit has been given to swaps in DBRS Morningstar’s analysis.

The total outstanding amount of OBG is currently EUR 9.5 billion. As at 30 September 2020, the CP was composed of EUR 12.1 billion of residential (91.8% of the loan balance), commercial (7.2%), and public sector (1.0%) mortgages plus EUR 857 million of cash, resulting in a total OC of 33.2%.

The weighted-average current loan-to-value ratio of the mortgages was 49.4% with an average seasoning of 4.8 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Lazio (22.2% of the loan balance) and Lombardy (14.0%).

The CP comprised fixed-for-life loans (78.6% by outstanding balance) and floating-rate loans (21.4%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.

In comparison, 100% of the liabilities pay a floating rate linked to three-month Euribor. The resulting interest and basis risks are considered as unhedged in DBRS Morningstar’s cash flow analysis.

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

The weighted-average life (WAL) of the CP is 8.7 years, whereas the WAL of the OBG, as of today, was 1.1 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the OC.

DBRS Morningstar has assessed the LSF related to the Programme as “Modest”, according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” on https://www.dbrsmorningstar.com/.

On 2 November 2020, DBRS Morningstar published a Request for Comments on the “European RMBS Insight: Italian Addendum”. If the proposed methodology addendum were adopted without any changes to replace the Italian Addendum in DBRS Morningstar’s “Master European Residential Mortgage-Backed Securities Rating Methodology”, no rating impact would be expected on the ratings of the CB series outstanding under this Programme.

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 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 the CP analysis of this programme, DBRS Morningstar 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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370673/dbrs-morningstar-releases-global-macroeconomic-scenarios-december-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 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.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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 principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found at: https://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 historical performance data (static pool default data from 2009 to 2020 for the residential pool and from 2000 to 2017 for the commercial pool; dynamic pool delinquency data from 2012 to 2020 and prepayments data from 2010 to 2020), and loan-level and stratification information on the CP as at 30 September 2020 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 ratings, 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 these ratings 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 28 July 2020, when DBRS Morningstar assigned a AA (low) rating to Series 16 issued under the Programme.
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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 16 December 2019

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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