Fitch has downgraded Caixa Geral de Depósitos, Millennium bcp, and Banco BPI as a direct consequence of it cutting Portugal’s rating, from BBB- to BB+, with analysts saying Portuguese covered bonds are likely to remain investment grade rated at this stage.

The rating agency downgraded Portugal on Thursday, and on Friday followed through with cuts to Caixa Geral de Depósitos (CGD), Millennium bcp, and Banco BPI, while affirming the issuer rating of Caixa Económica Montepio Geral and Banco Internacional do Funchal.

The five banks’ ratings are on negative outlook, as is the sovereign’s rating. Fitch said that any further downgrade of Portugal’s sovereign rating would trigger a renewed lowering of CGD, Millenium bcp, and Banco BPI, and that Montepio and Banif might only be downgraded if Portugal was downgraded by more than one notch.

Fitch also downgraded the Viability Ratings (VRs) of CGD, Millenium bcp, and Banco BPI, reflecting the rating agency’s view that the banks need to strengthen capitalisation but that their flexibility to do so is likely to become increasingly constrained, and that the funding environment remains extremely challenging.

The rating agency said that any rating impact on Portuguese covered bonds will be set out in separate comments.

Royal Bank of Scotland analysts said that a downgrade of a Portuguese covered bond programme to sub-investment grade status is not likely to be imminent, and that it would not automatically mean that the covered bonds become ineligible for the Eurosystem’s second covered bond purchase programme (CBPP2), as all available ratings of a programme must be downgraded to below investment grade.

Bernd Volk, head of covered bond research at Deutsche Bank, said that the downgrade of the sovereign to BB+ leads to further downside risk for Portuguese covered bonds. He said that with Fitch rating the sovereign BB+, the Discontinuity Factors (D-Factors) it assigns to Portuguese covered bond programmes may increase to 100%, thereby increasing the linkage between the issuer and covered bond ratings.

On the basis of a D-Factor of 100% the lowest issuer rating at which it would be possible for the covered bonds to achieve a BBB- rating would be BB, he said.