Moody’s yesterday (Wednesday) upgraded the mortgage covered bond programmes of six Portuguese banks from Aa2 to Aaa, and the public sector issuance of Banco BPI from Aa3 to Aa2, after raising the rating of the Portuguese government two notches, from Baa2 to A3.

The sovereign upgrade to A3, on stable outlook, reflects the sustained positive credit effects over the medium term of a series of economic and fiscal reforms, private sector deleveraging and ongoing strengthening of the banking sector, according to Moody’s.

The rating action on the government was accompanied by a lifting of Portugal’s country ceilings from Aa2 to Aaa, reflecting a six-notch gap for which Eurozone jurisdictions are typically eligible under the rating agency’s methodology.

On the back of the sovereign upgrade, Moody’s upgraded seven Portuguese banks, among them covered bond issuers Banco BPI (upped from A3 to A2), Banco Comercial Português (BCP/Millennium bcp) (Baa2 to A3), Banco Santander Totta (A3 to A2), Caixa Geral de Depósitos (CGD) (Baa1 to A3), Caixa Economica Montepio Geral (Banco Montepio) (Ba2 to Baa3), and Novo Banco (Ba3 to Ba1). Their counterparty risk (CR) assessments also improved.

“The increase in the starting points for the covered bond ratings (CB Anchor) enabled all Portuguese issuers to raise their mortgage covered bonds to the level of Aaa by maintaining the necessary overcollateralisation,” noted DZ analysts.

“The public sector covered bonds of Banco BPI were also upgraded, but only by one notch from Aa3 to Aa2. In our opinion, Moody’s rating methodology would have allowed a higher upgrade. We suspect that the issuer was not prepared to commit to the necessary overcollateralisation.

In upgrading the Portuguese mortgage programmes, the rating agency also noted that it had also lowered its refinancing margins for all Portuguese covered bonds, citing, in addition to macro improvements, a significant reduction in their spreads over the last years, and successful implementation of the EU covered bond directive, reinforcing their systemic importance.