Moody’s downgraded Erste Bank mortgage covered bonds from Aaa to Aa1 yesterday (Monday), and left them and the issuer’s public sector covered bonds on review for downgrade, as a result of the rating agency cutting the Austrian bank’s rating from Baa1 to Baa2 on Friday.

Following the downgrade of the issuer, the “probable” Timely Payment Indicator (TPI) of the mortgage programme caps the covered bond rating at Aa1, resulting in the downgrade of those covered bonds. The TPI of the public sector programme is “high”.

Moody’s said that, maintain a Aa1 rating on the mortgage covered bonds, Erste will have to provide committed overcollateralisation (OC) of 13%. OC of 21% will be required to retain the public sector covered bonds’ Aaa rating. The rating agency said that for the mortgage covered bonds the total level of OC consistent with the current rating is 19% (with all OC levels being in present value terms). It added that the highest ratings achievable without contractual OC commitments are Aa2 for the public sector covered bonds and Aa3 for the mortgage.

According to Moody’s, as of 31 March OC in the mortgage cover pool was 31.7%, of which 0% is on a committed basis, while OC in the public sector cover pool was 24.6%, with 0% committed.

The rating agency cited as reasons for the downgrade of the bank weak earnings and resulting significantly reduced internal capital generation, which it said is further pressured by ongoing high credit risk charges for the bank’s Hungarian and Romanian operations.

The outlook on the issuer rating is negative, which Moody’s said reflects pressure on support resulting from the Bank Recovery & Resolution Directive and Single Resolution Mechanism in the EU.