(The following was released by the rating agency)
SYDNEY, December 21 (Fitch) Fitch Ratings has affirmed Commonwealth Bank of Australia's (CBA, 'AA-'/Stable/'F1+') residential mortgage covered bonds at 'AAA' with a Stable Outlook.
The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 2 (high) and an asset percentage (AP) of 85.0%, which is the below Fitch's breakeven AP of 85.5%.
In terms of sensitivity of the covered bonds rating, the 'AAA' rating would be vulnerable to a downgrade if the issuer's Long-Term IDR is downgraded by two or more notches; if the D-Cap falls by more than one category; or if the programme's AP rises above 85.5%.
Commonwealth Bank of Australia
Long-Term Issuer Default Rating: 'AA-', Outlook Stable
Mortgage covered bond rating: 'AAA', Outlook Stable
D-Cap: 2 (high)
Asset segregation: very low
Liquidity gap and systemic risk: high
Cover pool-specific alternative management: low
Systemic alternative management: moderate
Privileged derivatives: moderate
The driver of the D-Cap is the high risk assessment for liquidity gap and systemic risk. This is principally driven by programme documentation which provides, in certain circumstances, for a six-month period prior to a scheduled covered bond maturity for cover pool asset sales, while Fitch has assessed the time required to sell cover pool assets in Australia at 12 months.
The system-based alternative management and privileged derivatives components are assessed as moderate from a discontinuity point of view. Cover pool-specific alternative management is assessed as low and asset segregation as very low risk in terms of discontinuity, in line with all Australian programmes. The breakeven AP of 85.5% supports a 'AA' rating on a probability of default (PD) basis. The D-Cap of 2, when combined with the institution's IDR and recovery uplift, supports a 'AAA' rating on the covered bonds.
As of 30 November 2012, the cover pool consisted of 78,691 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD18.5bn. The portfolio is wholly made up of full documentation loans, which have a weighted average current loan-to-value ratio of 59.7%, and a weighted average seasoning of 40.5 months. Floating-rate loans comprise 89.4% of the cover pool. In an 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 7%, and a weighted average recovery rate of 39%. The cover pool is geographically distributed across Australia's states, with the largest concentrations being in New South Wales (38%) and Victoria (36%). The agency's mortgage default analysis is based on its Australian residential mortgage criteria.
The outstanding covered bonds, totalling AUD13.1bn, are guaranteed by Perpetual Corporate Trust as trustee of the CBA Covered Bond Trust.
The Fitch breakeven AP in line with 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 to remain stable over time.