The credit quality of cover pools backing covered bond programmes rated by Fitch is continuing to improve, the rating agency said yesterday, with the biggest declines in its B portfolio loss rate measure occurring in peripheral Eurozone countries and the US over the past year.

B portfolio loss rates (PLRs) show Fitch’s view on the credit performance of cover pools securing covered bond programmes under the agency’s B rating stresses over the lifetime of the cover assets. Fitch says the PLR measure, which is available for most programmes, allows a comparison of cover pools across the board, independent of the covered bonds’ ratings.

In a report published yesterday (Thursday), using data for 116 programmes it rates publicly, Fitch said the median B PLR was 0.7% as of end-July, down from 0.8% as of end-August 2015 – when the previous data was evaluated – and down from 1.1% in 2014.

The rating agency said the improvement is mainly due to stabilised performance in programmes from Cyprus and Greece, and improved performance in the US and, to a lesser degree, Portugal and Italy.

In Portugal and Italy – where average loss rates were down 0.5 percentage points and 0.3 percentage points, respectively – cover pool compositions were largely unchanged, but Fitch said that shrinking exposures to foreign borrowers and deleveraging, among other factors, led to overall reductions in credit losses.

Average B PLRs for programmes in the Eurozone periphery shrank 0.5 percentage points over the past year to 6.0%, with loss rates in Spanish and Irish pools relatively steady. North American programmes registered the largest improvement, as their average B PLR fell 0.7 percentage points to 1.3%.

Nevertheless, the rating agency said peripheral cover pools continue to appear to be the riskiest, with programmes exhibiting higher PLRs than other regions. It said this can partly be attributed to the difference in the cover pool composition – noting that, for example, Spanish programmes are backed by a higher concentration of loans to developers, which tend to have higher default rates than residential mortgage loans.

“Despite continuing declines in averages, performance nuances emerge upon a closer look at individual programmes,” Fitch added. “Among the three biggest B PLR decreases and increases, four out of six relate to programmes in peripheral Eurozone and two to programmes in France and the US.”

The biggest absolute increase in a B PLR for an individual programme was 1.6% for the public sector programme of Cajas Rurales Unidas, Sociedad Cooperativa de Crédito. Fitch said the main reasons for the change in the Spanish programme’s B PLR were an increase in obligor concentration and an increased share of unrated municipalities that are modelled with a higher default rate expectation.

The cover pool of Caisse de Refinancement de l’Habitat (CRH) experienced the third highest B PLR increase, of 0.6%, as a result of updated treatment of foreign currency stresses for loans denominated in Swiss francs.

The biggest fall in B PLR was 9.0% for the mortgage cover pool of WM Covered Bond Programme – formerly the programme of Washington Mutual before the collapse of the US institution, after which it was transferred to JP Morgan. Fitch attributed this mainly to portfolio improvement due to improvement in borrowers’ credit scores, lower LTVs and seasoning.

The second and third most improved B PLRs were those of Bank of Cyprus’s Cypriot mortgage pool and National Bank of Greece’s Programme II cover pool, respectively, which fell 8.4% and 4.5%,

In terms of collateral types, the biggest improvements were observed in mortgage cover pools, Fitch said, with the average B PLRs for mortgage programmes down from 2.4% in 2015 to 2% as of end-July. Losses in public sector programmes increased over the same time period, from 1.2% to 1.4%.

Photo: Washington Mutual. Source: Ecnerwal/Flickr