Fitch Ratings has affirmed Banca Monte dei Paschi di Siena S.p.A.'s (BMPS; BB/Stable/B) and UniCredit S.p.A.'s (UC; BBB/Stable/F2) Italian mortgage covered bond (Obbligazioni Bancarie Garantite, OBG) ratings at 'AA-' and 'AA', respectively.

The rating Outlook is Stable for both OBG programmes.

BMPS's conditional pass-through (CPT) OBG are guaranteed by MPS Covered Bonds S.r.l. and UC's soft bullet (SB) OBG are guaranteed by UniCredit BpC Mortgage S.r.l.

KEY RATING DRIVERS

BMPS's 'AA-' CPT OBG are eight notches above the bank's IDR, out of the overall available rating uplift of 10 notches for the programme. The 10-notch uplift consists of a resolution uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches. The Stable Outlook on the OBG reflects that the rating is constrained by over-collateralisation (OC) and a cushion of two notches against the bank's downgrade. In its analysis, Fitch relies on the committed asset percentage (AP) of 80%, which is in line with the revised 'AA-' break-even (BE) AP of 80% (from 81.5% previously).

UC's soft-bullet OBG are rated six notches above the bank's IDR. This is out of a maximum uplift of 10 notches, consisting of a two-notch resolution uplift, a PCU of six notches and a two-notch recovery uplift. The Stable Outlook on the OBG reflects that on Italy's Long-Term IDR as the programme is constrained by Italy's country cap of 'AA'.

As per Fitch's Covered Bonds Rating Criteria, UC's Short-Term IDR of 'F2' means Fitch can rely on the 28% highest nominal AP reported in the last 12 months. This provides more protection than the unchanged 'AA' BE AP of 88%.

OC Protection

BMPS

The 80% 'AA-' BE AP for BMPS's OBG, equivalent to a BE OC of 25%, sustains timely payment in a 'A' stress scenario and a two-notch recovery uplift to 'AA-'. The tightened 'AA-' BE AP is due to a larger assets-liabilities mismatch (ALM) loss of 22% (from 19%). The programme is constrained by OC as the relied-upon AP does not provide enough protection to sustain a timely payment rating level higher than 'A'.

The portfolio includes floating-rate (17.5 %), optional loans (1.3%), fixed-rate (64.5%), floating-rate with cap loans (16.7%), with the latter treated by Fitch as fixed-rate in a rising interest-rate scenario. The high share of fixed-rate loans in a rising interest rate environment, the most stressful one for the programme, increases the net present value (NPV) difference between the assets and the covered bonds, leading to a larger ALM loss OC component. The credit loss is revised to 3.1% (from 3.4%), driven by an increased availability of income data after an asset transfer in 2024.

UC

The 88% 'AA' BE AP for UC's OBG, equal to a 13.6% BE OC, sustains timely payment in a 'A+' stress scenario and a two-notch recovery uplift to 'AA' and is driven by a 9.6% ALM loss and 3.9% credit loss. Fitch carried forward the asset and cash flow analysis results from the last review as, among other factors, the characteristics of the cover assets and covered bonds have not materially changed.

In 1Q24 the UC jumbo covered bonds series matured (EUR1 billion) leaving outstanding OBG for EUR356 million while the portfolio was reduced to EUR1.7 billion from EUR4.7 billion after a repurchase by UC. The characteristics of the cover pool are broadly unchanged, while upcoming OBG maturities are now concentrated in 2H26. The overall effect is a lower nominal AP (including substitute assets), to 19.8% from 28.1%.

Resolution Uplift

The resolution uplift of two notches reflects the covered bonds' exemption from bail-in, the low risk of under-collateralisation at the point of resolution and that the banks' Long-Term IDRs are driven by their respective Viability Ratings.

PCU

The PCU of six notches for BMPS OBG, lower than the standard eight notches for CPT programmes, reflects Fitch's view that the cover pool-specific alternative management is a high risk to payment continuity (ie selective events are trigger for the enforcement of the guarantee). This results in a strong reliance on the bank's ability to service OBG payments and could pose risks to the timely enforcement of the cover pool as a source of payments. The PCU of six notches for UC's SB programme reflects a 12-month principal maturity extension and three-month liquidity protection for interest payments.

Recovery Uplift

Both programmes are eligible for a recovery uplift of two notches as the timely payment ratings of the OBG are in the investment-grade category. Also, Fitch has not identified any material downside risk to recoveries given default. All cover assets and covered bonds are euro-denominated.

ESG Governance - BMPS's OBG is exposed to higher risk on payment continuity in the event that the source of payments switches from the issuer to the cover pool, which limits the highest achievable rating for the OBG.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

UC's covered bonds may be upgraded if Italy's country cap is upgraded by at least one notch, provided sufficient OC is available to withstand stresses associated with higher ratings.

BMPS's covered bonds could be upgraded if the AP Fitch relies on is adequate to withstand stresses associated with a 'AA' rating.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

BMPS's covered bonds rating would be downgraded if BMPS's Long-Term IDR is downgraded to 'B' or below; or the AP that Fitch relies on in its analysis increases above Fitch's 'AA-' BE AP of 80%.

UC's covered bonds rating would be downgraded if (i) UC's Long-Term IDR is downgraded to 'B+' or below; or (ii) the AP which Fitch relies on in its analysis increases above Fitch's 'AA' BE AP of 88%; or (iii) the Italy's country cap is downgraded by at least one notch.

Fitch's BE AP for the covered bonds rating will be affected, among other factors, 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 BE AP to maintain the covered bond rating cannot be assumed to remain stable over time.

CRITERIA VARIATION

Fitch's analysis of BMPS OBG varied from the agency's European RMBS Rating Criteria. Fitch applied shorter recovery timing in all rating scenarios (ie 96 months at 'AA' instead of 104 months) to the entire cover pool based on BMPS's observed timing of recoveries, which in Fitch's view warrants a shorter recovery timing than that envisaged by the criteria. The application of this variation has a positive impact of one notch.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

BMPS has an ESG Relevance Score of '5' for Transaction Parties & Operational Risk due to the cover pool-specific alternative management, which poses a high risk to payment continuity in the event that the source of payments switches from the issuer to the cover pool. This is highly relevant to the rating and has a negative impact on the highest achievable rating, resulting in the PCU being reduced by two notches.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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