Fitch Ratings has revised Bank of Cyprus Public Company Limited`s (BoC, B-/Positive/B) conditional pass-through (CPT) mortgage covered bonds` Outlook to Positive from Stable and affirmed the rating at `A`.

The rating action follows the Outlook revision to Positive (from Stable) on Cyprus`s Long-Term Foreign-Currency Issuer Default Rating (IDR)  dated 11 October 2019.

According to Fitch the Positive Outlook mirrors that on Cyprus`s IDR. It also takes into account the unused notches in terms of uplift factors applicable to the programme rating and reflects Fitch`s expectations that the relied-upon overcollateralisation (OC) would be sufficient to withstand stresses associated with higher rating scenarios should the Country Ceiling be upgraded.

The `A` rating is based on BoC`s Long-Term `B-` IDR, the various uplifts above the IDR granted to the programme and the publicly committed OC relied upon by Fitch. The covered bonds are rated 10 notches above the bank`s IDR as the Country Ceiling constraints the rating at `A`. This is out of a maximum achievable uplift of 12 notches, consisting of an IDR uplift of two notches, a payment continuity uplift (PCU) of eight notches and a recovery uplift of two notches.

In its analysis, Fitch relies on the publicly committed OC of 47% disclosed in the investor report as at September 2019, which provides more protection than the unchanged `A` breakeven OC of 33.5%.

The 47% OC supports timely payments at the `BBB+` tested rating on a probability of default (PD) basis and allows a two-notch recovery uplift up to the covered bonds` `A` rating. The greatest contributor to the `A` breakeven OC remains the ALM (asset and liability mismatch) loss (25.8%) followed by the credit loss (7.8%).

Fitch said that the rating of the covered bonds would be upgraded, if Cyprus`s Country Ceiling is upgraded, provided sufficient OC is available to sustain stresses in rating scenario higher than the `A` rating level. All else being equal, an upgrade of the bank`s IDR would have no impact on the covered bonds` rating.

The covered bonds would be vulnerable to downgrade if the programme`s overcollateralisation (OC) commitment decreases below Fitch`s 33.5% `A` breakeven OC, Fitch noted.