OREANDA-NEWS. Fitch Ratings has revised the Outlook on Banca Popolare di Sondrio - Societa Cooperativa per Azioni's (BPS, BBB/Negative/F3) EUR1.0bn mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) to Negative from Stable and affirmed the OBG rating at 'A+'.

The rating action follows the revision of the Outlook on BPS's Issuer Default Rating (IDR) to Negative from Stable (see "Fitch Revises Banca Popolare di Sondrio's Outlook to Negative, Affirms at 'BBB'" dated 24 June 2016 and available at www. fitchratings. com).

KEY RATING DRIVERS

The rating is based on BPS's Long-Term IDR of 'BBB', an unchanged IDR uplift of zero notches, an unchanged Discontinuity Cap (D-Cap) of two notches (high discontinuity risk) and the 78.74% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the unchanged 88.5% 'A+' breakeven AP. The Negative Outlook reflects that on BPS's IDR.

The 78.74% AP the issuer publicly undertakes to apply in the programme's asset coverage test (as of the April 2016 investor report) provides recoveries of at least 91% on the covered bonds assumed to be in default in a 'A+' scenario and allows a two-notch recovery uplift from the 'A-' tested rating on a probability of default (PD) basis.

The unchanged IDR uplift of zero notches reflects the bail-in exemption for fully collateralised covered bonds and that none of the factors Fitch considers in assigning an IDR uplift higher than zero are satisfied for this programme.

The unchanged D-Cap of two notches is due to the weak-link assessment of the liquidity gap and systemic risk component and takes into account the soft bullet amortisation profile with a 12-month principal maturity extension. Fitch views a contractual principal maturity extension of at least 12 months adequate to successfully refinance the cover pool at a rating scenario up to two notches above the bank's IDR, as adjusted by the IDR uplift.

Fitch's analysis of BPS's cover pool varied from its "Criteria Addendum: Italy - Residential Mortgage Assumptions". The agency applied a PD adjustment of 1.3 instead of 1.5 to the 39% portion of loans granted to SAE 614/615 borrowers (artisans and family-run businesses, as coded by the Bank of Italy) based on the observed levels of default rates, which in Fitch's view warrant an adjustment smaller in magnitude than the one envisaged by the criteria. The application of this variation has no impact on the OBG programme's rating.

RATING SENSITIVITIES

The 'A+' rating of the covered bonds issued by Banca Popolare di Sondrio - Societa Cooperativa per Azioni (BPS) would be vulnerable to downgrade if any of the following occurred: (i) BPS's Issuer Default Rating (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 Discontinuity Cap is reduced to one or lower; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above Fitch's 'A+' breakeven level of 88.5%.

The Fitch breakeven AP for the covered bond rating will be affected, among other things, 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.