Fitch Assigns Spanish Mortgage Covered Bond Programmes ...

Fitch Assigns Spanish Mortgage Covered Bond Programmes Outlooks and D-Caps
11 Sep 2012 5:06 PM (EDT)
Fitch Ratings-London-11 September 2012: Fitch Ratings has assigned three Spanish
mortgage covered bond programmes issued by Caja Laboral Popular ('BBB'/
Negative/'F3'), Banco Mare Nostrum S.A. ('BB+'/ Stable/'B'), and NCG Banco S.A. ('BB+'/
Stable/'B') Negative Outlooks following the publication of the agency's updated Covered
Bonds Rating Criteria. Discontinuity Caps (D-Caps) have also been assigned to all seven
Spanish programmes and are available at the end of this commentary.
The Negative Outlook on Caja Laboral Popular's mortgage covered bonds reflects the
Outlook on the banks' Long-term Issuer Default Rating (IDR). A one-notch downgrade of
the bank's IDR would make the covered bonds vulnerable to downgrade. The Negative
Outlook on Banco Mare Nostrum S.A. and NCG Banco S.A. mortgage covered bond
ratings reflect the material uncertainties regarding the restructuring implications of the
banking sector in Spain.
Fitch has not assigned Outlooks to the ratings of the following four programmes as they are
currently on Rating Watch Negative (RWN): Cajamar Caja Rural, Sociedad Cooperativa de
Credito's (Cajamar, 'BBB-'/RWN/'F3'), Banco Espanol de Credito S.A. (Banesto,
'BBB+'/Negative/'F2'), Banco Santander S.A. (Santander, 'BBB+'/Negative/'F2'), and Unnim
Banc S.A. ('BB+'/Rating Watch Positive/'B').
D-Caps determine the maximum rating notch uplift from the bank's IDR to the covered bond
rating on a Probability of Default (PD) basis reflecting Fitch's view of the likelihood of a
covered bond programme defaulting in the aftermath of an issuer default. The D-Cap is
based on the highest risk assessment of the following components: asset segregation,
liquidity gap and systemic risk, alternative management (systemic and cover pool-specific)
and privileged derivatives.
Fitch has assigned a low risk assessment of asset segregation to all Spanish covered
bonds, mainly considering the Spanish mortgage market and insolvency laws that provide a
strong setting for covered bond holders to gain full, first priority access to the underlying
assets. However, as no cover assets are explicitly segregated the agency believes any
excess over-collateralisation may not be immune to the claims of other creditors and as
such prevents the asset segregation score from reaching the very low assessment.
Fitch attributes a very high risk or full discontinuity liquidity gap and systemic risk
assessment to all Spanish covered bonds considering the lack of specific protection against
liquidity shortfalls post assumed issuer insolvency. In the agency's opinion, only
intervention by the Spanish authorities would avoid a default on the covered bonds in this
scenario. For banks rated below the Spanish sovereign IDR ('BBB'/Negative/'F2'), the very
high risk assessment implies a maximum one-notch uplift on a PD basis. For banks rated at
or above the sovereign, a full discontinuity risk has been assigned.
The systemic alternative management risk is considered moderate high for all programmes,
mainly because the Spanish law does not provide for a separate mortgage pool
administrator to organise the transition process in the event of the bank defaulting. Fitch
views this as weaker than jurisdictions with dedicated mortgage pool administrators,
because they are able to focus exclusively on the interests of covered bondholders. Fitch
also believes the covered bond oversight imposed by the Spanish regulator is relatively
light when compared with those of some other banking authorities in Western Europe,
where dedicated covered bond legislation is also in place.
The cover pool-specific alternative management risk assessment for Spanish programmes
goes from moderate to moderate high depending on the quality of bank's systems and the

level of data provided and available to the analysis. The moderate high risk assessment on
NCG Banco S.A. covered bond programme is driven by the uncertainties about the
institution's long term business viability in light of the overall banking sector restructuring,
and therefore it is considered to be under a wind down status.
The risk assessment for privileged derivatives is considered as very low for all Spanish
programmes. Fitch-rated Spanish programmes do not have privileged derivative contracts
linked to the mortgage book or to the covered bonds. The absence of any privileged
hedging arrangements also means there is no potential termination payment to impact the
liquidity risk or credit risk assessment.
Cajamar's mortgage covered bond programme is on RWN reflecting the RWN on the
banks' IDR, and therefore a one-notch downgrade of the bank's IDR would make the
covered bonds vulnerable to downgrade. The ratings of Banesto, Banco Santander, and
Unnim Banc S.A. mortgage covered bond programmes are on RWN because of data
issues that will be discussed and assessed during the annual review of these programmes.
The programmes' D-Caps and the risk assessments of the components are as follows:
Caja Laboral Popular.
Mortgage covered bond Rating: 'A-'/Negative
D-Cap: 0 (full discontinuity risk)
Asset segregation risk: low
Liquidity gap and systemic risk: full discontinuity
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate
Privileged derivatives risk: very low
Banco Espanol de Credito S.A. (Banesto)
Mortgage covered bond Rating: 'A'/RWN
D-Cap: 0 (Full discontinuity risk)
Asset segregation risk: low
Liquidity gap and systemic risk: full discontinuity
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate high
Privileged derivatives risk: very low
Banco Santander, S.A.
Mortgage covered bond Rating: 'A'/RWN
D-Cap: 0 (full discontinuity risk)
Asset segregation risk: low
Liquidity gap and systemic risk: full discontinuity
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate high
Privileged derivatives risk: very low
The driver of the D-Cap for Caja Laboral Popular, Banesto and Santander is the full
discontinuity risk assessment of liquidity gap and systemic risk. This is driven by the IDR of
these banks being at or above the one of the sovereign.
Banco Mare Nostrum S.A.
Mortgage covered bond Rating: 'BBB+'/Negative
D-Cap: 1 (very high risk)
Asset segregation risk: low
Liquidity gap and systemic risk: very high
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate
Privileged derivatives risk: very low

NCG Banco, S.A.
Mortgage covered bond Rating: 'BBB+'/Negative
D-Cap: 1 (very high risk)
Asset segregation risk: low
Liquidity gap and systemic risk: very high
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate high
Privileged derivatives risk: very low
Cajamar Caja Rural, Sociedad Cooperativa de Credito (Cajamar)
Mortgage covered bond Rating: 'A-'/RWN
D-Cap: 1 (very high risk)
Asset segregation risk: low
Liquidity gap and systemic risk: very high
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate
Privileged derivatives risk: very low
Unnim, Banc, S.A.
Mortgage covered bond Rating: 'BBB+'/RWN
D-Cap: 1 (very high risk)
Asset segregation risk: low risk
Liquidity gap and systemic risk: very high
Systemic alternative management risk: moderate high
Cover pool-specific alternative management risk: moderate high
Privileged derivatives risk: very low
For all of Fitch's Eurozone Crisis commentary go to
http://www.fitchratings.com/web_content/pages/grs/eurozone
Contact:
Primary Analyst (Banco Santander, S.A.)
Juan David Garcia
Senior Director
+34 91 702 57 74
General Castanos 11
28004 Madrid
Spain
Primary Analyst (Banco Espanol de Credito, S.A.)
Federica Fabrizi
Director
+39 02 87 90 87 232
Fitch Italia S.p.A.
1, Vicolo S. Maria alla Porta
20123 Milan
Primary Analyst (Banco Mare Nostrum S.A.)
Solena Gloaguen
Director
+44 20 3530 1126
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Primary Analyst (Cajamar, Unnim Banc S.A., NCG Banco, S.A.)
Covadonga Aybar
Analyst
+34 91 702 57 75
Fitch Ratings Spain - Madrid

Calle General Castanos 11, 1st Floor
Madrid
Primary Analyst (Caja Laboral Popular)
Natasha Ahmed
Associate Director
+ 44 203 530 1301
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst (Banco Mare Nostrum S.A., NCG Banco S.A.)
Carlos Masip
Director
+34 91 702 57 73
General Castanos 11
28004 Madrid
Spain
Secondary Analyst (Banco Santander, Banesto, Unnim Banc S.A., Cajamar)
Natasha Ahmed
Associate Director
+ 44 203 530 1301
Secondary Analyst (Caja Laboral Popular)
Solena Gloaguen
Director
+44 20 3530 1126
Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email:
christian.giesen@fitchratings.com.
Additional information is available at www.fitchratings.com.
Santander and Banesto's Covered Bond ratings were unsolicited and have been provided
by Fitch as a service to investors.
All other covered bond ratings were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 September 2012, 'Covered
Bonds Counterparty Criteria', dated 13 March 2012, 'EMEA Residential Mortgage Loss
Criteria' dated 7 June 2012, 'EMEA Criteria Addendum - Spain - Mortgage Loss and Cash
Flow Assumptions', dated 24 July 2012, 'Criteria for Rating Granular Corporate Balance-
Sheet Securitisations (SME CLOs)' dated 1 June 2012 are available on
www.fitchratings.com.
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria
Covered Bonds Counterparty Criteria
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - Spain - Mortgage and Cashflow Assumptions
Criteria for Rating Granular Corporate Balance-Sheet Securitisations - SME CLO
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