Fitch upgraded Banco Santander Totta obrigações hipotecárias today (Monday) following an upgrade of the issuer on Friday, when it also affirmed the rating of three other Portuguese covered bond issuers.

The rating agency upgraded the Totta covered bonds from BBB to BBB+ after upgrading the long term Issuer Default Rating (IDR) of Banco Santander Totta from BBB- to BBB to reflect its view of an improved ability of the parent bank, Banco Santander, to provide support. Fitch views Totta as a strategically important subsidiary of Santander, which it rates A-, on stable outlook.

The Totta covered bond rating is based on an IDR of BBB, an IDR uplift of 0, a Discontinuity Cap (D-Cap) of 0 and overcollateralisation (OC) of 15% that Totta publicly commits to. Fitch put breakeven OC at 11%, which it said is lower than the breakeven OC of 12% for the previous BBB rating.

The rating agency said that the improvement in the breakeven OC is mainly driven by a reduction in the asset and liability mismatch. According to the rating agency, the weighted average life of assets in the cover pool is 7.2 years, whereas that on the covered bonds is 2.4 years, up from 1.8 years in October. Fitch said that the 15% OC committed to by Totta is sufficient to achieve recoveries of at least 51% in the case of default.

This supports a one notch uplift of the OH to BBB+.

Fitch said that the rating action on Totta was also driven by the expected benefits of a banking union in the EU, particularly as regards the fungibility of liquidity and capital. It revised the outlook on Totta’s rating from negative to positive following a change in the outlook for the Portuguese sovereign rating in April from negative to positive.

Alongside the upgrade of Totta, Fitch affirmed the rating of three Portuguese covered bond issuers at BB+ on Friday: Caixa Geral de Depósitos, Banco Comercial Português and Banco BPI, with each of the banks’ rating on negative outlook.