Fitch downgraded obbligazioni bancarie garantite (OBGs) issued out of UBI Banca’s second covered bond programme yesterday (Wednesday), cutting the programme, which is used for retained issuance, to A- following a downgrade of the Italian issuer.

Fitch on Monday downgraded UBI Banca from BBB to BBB- on negative outlook. The rating agency cited its belief that even if the bank achieves a targeted reduction of non-performing loans (NPLs), its capitalisation will remain burdened by a high level of unreserved NPLs in the absence of any NPL sale.

“The high level of unreserved impaired loans exposes the bank to changes in the valuation of the collateral for these loans, and the bank is therefore highly vulnerable to a further deterioration of the Italian operating environment,” it said.

Fitch subsequently downgraded UBI Banca’s Eu5bn mortgage covered bond programme from A to A- yesterday afternoon, on negative outlook.

“UBI II OBG are rated at their maximum achievable rating and, as a result, the one-notch downgrade on UBI’s IDR has led to a one-notch downgrade of the OBG rating,” said the rating agency. “The OBG’s outlook mirrors that on UBI’s IDR.”

The OBGs are rated three notches above UBI’s IDR based on an unchanged IDR uplift of two notches, an unchanged payment continuity uplift (PCU) of zero notches and a recovery uplift of one notch. The PCU is at zero notches because the cover pool comprises secured loans to small and medium-sized enterprises, which Fitch deems less liquid than residential mortgage loans.

Due to a lack of data provisions, Fitch rates the programme on a limited uplift basis and uses publicly available information.

UBI’s main covered bond programme, which it uses for pubic issuance, is not rated by Fitch. The rating agency withdrew its covered bond rating on the Eu15bn programme in 2015 at the issuer’s request.

The main programme is rated Aa2 by Moody’s and AA (low) by DBRS.