December 1, 2017 / 2:59 AM / a year ago

Fitch Affirms CBA's Mortgage Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, November 30 (Fitch) Fitch Ratings has affirmed Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) AUD23.6 billion of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. KEY RATING DRIVERS The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches, a recovery uplift of one notch and the asset percentage (AP) of 92% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP is equal to Fitch's unchanged 'AAA' breakeven AP of 92% and supports a 'AA+' tested rating on a probability-of-default basis and a 'AAA' rating after giving credit for recoveries from the cover assets given default of the covered bonds. The Outlook on the covered bonds reflects the four-notch buffer against the downgrade of the issuer's IDR. Breakeven AP The 'AAA' breakeven AP of 92%, corresponding to a breakeven overcollateralisation (OC) of 8.7%, remains unchanged and is driven by the asset disposal loss component of 10.5%, reflecting the asset and liability mismatches in the programme with the weighted-average residual life of the cover assets at 14.9 years and the liabilities of 5.5 years. The credit loss component remains unchanged at 3.1% and the cash flow valuation component decreases the OC by 4.9%, representing the excess spread modelled by Fitch in the programme. IDR Uplift The IDR uplift remains unchanged at zero notches. In Australia, while there is no specific advanced resolution regime, the regulator does have the ability to resolve a bank under its regulatory powers pursuant to the Banking Act. Even so, covered bonds are not explicitly exempt from bail-in should a bank be resolved, resulting in the direct enforcement of recourse against the cover pool for the payment of the outstanding covered bonds. Therefore, CBA's Long-Term IDR remains the floor for its covered bond rating. PCU The PCU is unchanged at six notches and reflects the strength of liquidity protection in place in the form of a 12-month pre-maturity test on the hard-bullet bonds, which has a cure period of six months, and the 12-month extension period on the soft-bullet bonds, which makes up the bulk of issuance. It also reflects three-month interest protection in the form of a reserve that will be funded upon the loss of CBA's Short-Term IDR rating of 'F1+'. While the issued hard-bullet bonds have less liquidity protection due to the six-month cure period, the likelihood of cross default caused by them is not considered likely by Fitch, due to the size and distribution of the remaining hard-bullet bonds. They form a relatively small proportion of the liability profile, which continues to reduce as a result of maturity and further soft-bullet issuance. Recovery Uplift The recovery uplift remains capped at one notch as foreign-exchange risk could have a material impact on recoveries given a default of the covered bonds. This is because the assets are denominated in Australian dollars, while 89% of the covered bonds outstanding are denominated in other currencies. Although there are swaps in place on the liabilities, we expect those swaps to terminate upon a covered bond default. This would mean the longer-dated Australian dollar asset cash flows would provide recoveries in a different currency than the majority of the covered bonds. The cover pool consisted of 113,132 loans secured by first-ranking mortgages of Australian residential properties at end-October 2017, with a total outstanding balance of AUD24.7 billion. The cover pool's weighted-average loan/value ratio (LVR) was 58.4% and the weighted-average seasoning was 54 months. Interest-only loans formed 18.4% of the pool. The cover pool is geographically diversified across Australia, with the largest concentrations in New South Wales (33.4%) and Victoria (30.3%). Fitch calculated that, in a 'AAA' scenario, there would be a cumulative weighted-average foreclosure frequency of 7.8% and a weighted-average recovery rate of 54.1% for the cover pool. RATING SENSITIVITIES CBA's covered bonds would be vulnerable to a downgrade if the relied upon asset percentage (AP) rises above the 'AAA' breakeven AP of 92% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. If the AP in the programme rises to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', one notch above the IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time. Contact: Primary Analyst Sambit Agasti Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 The source of information used to assess these ratings was CBA. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) here Covered Bonds Rating Criteria (pub. 30 Oct 2017) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 30 Oct 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here RMBS Lenders’ Mortgage Insurance Rating Criteria (pub. 09 Jun 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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