Morningstar DBRS Confirms AAA Credit Ratings of Kutxabank, S.A. Covered Bonds

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA credit ratings on the outstanding Cédulas Hipotecarias (CH, Spanish mortgage covered bonds) issued under the Kutxabank, S.A. Covered Bonds programme (Kutxabank CH or the Programme). This rating action follows the completion of a full review of the credit ratings.

At the same time, Morningstar DBRS discontinued its credit rating on the Cedulas Hipotecarias - Series 1, which matured on 23 October 2023.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), which is one notch above Kutxabank's Long Term Issuer Rating. Kutxabank is the Issuer and Reference Entity (RE) for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of "Strong" associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 24.8% to which Morningstar DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating of the Kingdom of Spain, rated "A" with a Positive trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with 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. In addition, all else unchanged, the CH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (low); (2) the sovereign rating on the Kingdom of Spain was downgraded below A (low); (3) the LSF assessment associated with the programme was downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the CH and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH under the programme was EUR 2.4 billion as of end March 2024, while the assets in the CP amounted EUR 3.1 billion. This resulted in a total estimated OC of 29.2%.

Spanish CBs are backed by a specific portfolio of assets selected by the issuer. As of 31 March 2024, the CP is composed of 26,622 residential mortgage loans, with a weighted-average (WA) current loan-to-value ratio of 53.5%. The CP is geographically diversified, with higher concentrations in Basque Country (46.8%), Madrid (23.5%), and Catalonia (11.3%). The pool is 72 months seasoned.

As is customary in the Spanish market, CH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (59.9% floating-rate linked to different indexes and resets) and the interest paid to the CB holders (54.2% floating-rate linked to six months Euribor). This risk is mitigated by the available OC and has been accounted for in Morningstar DBRS' cash flow analysis.

All the assets and liabilities are denominated in EUR.
The Morningstar DBRS-calculated WA life of the mortgage assets is approximately 12 years, which is longer than the WA life of the CH (around five years). This generates an asset-liability mismatch that is mitigated by the available OC and accounted for in Morningstar DBRS' cash flow analysis.

Morningstar DBRS has assessed the LSF related to the Programme as "Strong" according to its "Rating and Monitoring Covered Bonds" methodology. For more information, please refer to Morningstar DBRS's "Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review" commentary, available at dbrs.morningstar.com.

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

Morningstar DBRS' credit rating on the Issuer's covered bond series addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Principal Balance.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Credit rating actions on the Issuer are likely to have an impact on this credit rating.

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings .

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable to the credit ratings is
Global Methodology for Rating and Monitoring Covered Bonds (02 April 2024)
https://dbrs.morningstar.com/research/430636/global-methodology-for-rating-and-monitoring-covered-bonds

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

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

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

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include CP stratification tables as at 31 March 2024.

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

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

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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

This is the first credit rating action since the Initial Rating Date.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: June 05, 2023

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024),
https://dbrs.morningstar.com/research/430636
-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024),
https://dbrs.morningstar.com/research/431155
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight model v.8.0.0.0,
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Spanish Addendum (8 March 2024),
https://dbrs.morningstar.com/research/429109
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.