August 29, 2017 / 6:19 AM / 24 days ago

Fitch Affirms Westpac's Mortgage Covered Bonds at 'AAA'/Stable

(The following statement was released by the rating agency) SYDNEY, August 29 (Fitch) Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, AA-/Stable/F1+) AUD27.7 billion of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. KEY RATING DRIVERS The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and the asset percentage (AP) of 91.0% used in the programme's asset coverage test. This AP is relied upon by Fitch in its analysis and provides more protection than Fitch's 'AAA' breakeven AP of 91.5%. Fitch's breakeven AP supports a 'AA+' tested rating on a probability-of-default basis and a recovery uplift of one notch to 'AAA'. The Outlook on the covered bonds reflects the four-notch buffer against the downgrade of the bank's IDR. Breakeven AP The 'AAA' breakeven AP of 91.5%, which is unchanged since Fitch's last analysis of WBC's covered bond portfolio, corresponds to a breakeven overcollateralisation (OC) of 9.3% and is driven by the asset disposal loss component of 13.2%, which reflects the maturity mismatches between the cover pool (15.7 years) and the covered bonds (3.8 years). The credit loss component contributes 3.9% to the OC and has increased since the last analysis, driven by a higher cumulative weighted-average foreclosure frequency (WAFF) calculated by Fitch on the cover pool. The cash flow valuation component decreases the OC by 7.9%, representing the excess spread modelled by Fitch in the programme. IDR Uplift The IDR uplift remains unchanged at zero notches. Australia does not have a specific advance resolution regime, but the regulator can 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, giving rise to the risk of cover pool enforcement. Therefore, WBC's Long-Term IDR remains the floor for its covered bond rating. PCU The PCU remains unchanged at six notches and reflects the strength of liquidity protection in the form of a 12-month extension period on the soft-bullet bonds. It also reflects the three-month interest protection in the form of a reserve that will be funded upon the loss of WBC's Short-Term IDR rating of 'F1+'. Recovery Uplift The recovery uplift on the rating is capped at one notch, as the programme is exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the assets are denominated in Australian dollars while 88.5% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect those swaps to terminate in a recovery scenario. The cover pool consisted of 111,063 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD30.9 billion, as at 12 July 2017. The cover pool's weighted average current loan/value ratio (LVR) was 62.2%, the Fitch calculated weighted-average indexed current LVR was 58.6% and the loans' weighted-average seasoning was 42 months. The agency calculated that, in a 'AAA' scenario, there would be a cumulative WAFF of 10.6% and a weighted-average recovery rate of 57.4% for the cover pool. The WAFF has increased primarily due to the presence of loans to employees of WBC. In accordance with criteria, as the covered bond rating assigned is higher than that of WBC, Fitch added 25% to the default probability for loans to employees that were less than 24 months ahead of their scheduled repayments. RATING SENSITIVITIES Westpac Banking Corporation's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 91.5% 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% 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 other factors, by the profile of the cover assets relative to the 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 Westpac Banking Corporation. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) 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#solicitation 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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