Fitch upgraded mortgage covered bonds of Banco Santander Totta to A- and those of Caixa Económica Montepio Geral to BBB- today (Thursday), after the Bank of Portugal identified the issuers as systemically important at a domestic level.

On 29 December the central bank identified six Portuguese banks as other systemically important institutions (O-SIIs), among them Santander Totta and Montepio.

Fitch consequently raised the IDR uplift for the obrigações hipotecárias (OH) programmes of the two banks from 0 to 1 to reflect the domestically systemic importance of the issuers. Fitch said it believes that authorities, if necessary, are more likely to apply resolution methods other than liquidation to preserve important banking operations, including covered bonds.

“None of the issuers have a level of senior debt in excess of 5% total adjusted assets and Portugal is not considered a covered bond-intensive jurisdiction by Fitch,” it added.

Totta’s OH rating was upgraded from BBB+ to A-. Fitch said the new rating is based on the revised IDR uplift, Totta’s IDR of BBB, an unchanged discontinuity cap (D-Cap) of 0, and 15% overcollateralisation (OC) that Fitch takes into account in its analysis, which, it noted, provides more protection than the 8.5% breakeven OC required for the A- rating.

Fitch said 15% committed OC allows the OH to achieve at least 51% recoveries given default, which is commensurate with a one notch uplift from the revised BBB+ tested rating on probability of default.

Montepio’s OH rating was upgraded from BB+ to BBB-. Fitch cited the revised IDR uplift, Montepio’s IDR of B+, an unchanged D-Cap of 0 and 35% OC that Fitch takes into account in its analysis, which provides more protection than the 16.5% breakeven OC required for the BBB- rating.

Fitch said the 16.5% breakeven OC considers a three notch uplift for at least 91% recoveries given default from the revised BB- tested rating on probability of default.

Totta’s OH rating is on positive outlook while Montepio’s is on stable outlook, both reflecting the respective outlooks on the issuers’ IDRs, Fitch said.

The Bank of Portugal also identified Banco Comercial Português and Caixa Geral de Depósitos as O-SIIs, but Fitch said this had no impact on the ratings of the issuers’ OH ratings, as the programmes already benefitted from an IDR uplift of 1.

“Fitch believes resolution measures would apply to BCP and CGD, if needed, due to their large size and economic inter-connectedness,” it added.

Also designated O-SIIs were Banco BPI and Novo Banco.