Fitch Rates NAB's Series 14-1 Covered Bonds 'AAA'; Outlook Stable

Wed Jul 24, 2013 9:42pm EDT

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(The following statement was released by the rating agency) SYDNEY, July 24 (Fitch) Fitch Ratings has assigned National Australia Bank's (NAB, 'AA-'/Stable/'F1+') Series 14-1 issue of NZD350m mortgage covered bonds a 'AAA' rating. The Outlook is Stable. The fixed-rate bond is due in July 2023 and benefits from a 12-month extendable maturity. KEY RATING DRIVERS The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 (moderate high) and an asset percentage (AP) of 87%, which is equivalent to Fitch's breakeven AP for a 'AAA' rating, supporting a 'AA' rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on NAB's IDR. The D-Cap assigned is driven by the high risk assessment for liquidity gap and systemic risk. This reflects the agency's view of the liquidity gap mitigants in the form of a three-month interest reserve fund, the 12-month pre-maturity test on the hard bullet covered bonds and the 12-month extendable maturity on the soft bullet covered bonds. The D-Cap of 3, when combined with the institution's IDR and recovery uplift, continues to support a 'AAA' rating on the covered bonds. As of 4 July 2013, the cover pool consisted of 49,796 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD13.8bn. The portfolio is wholly made up of full documentation loans, which have a weighted average current loan-to-value ratio of 59.4%, and a weighted average seasoning of 35 months. Floating rate loans comprise 91.1% and fixed rate loans 8.9% of the cover pool by balance. The mortgage portfolio is geographically distributed across Australia's states, with the largest concentrations being in New South Wales (34.4%) and Victoria (30.2%). In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 9.9%, and a weighted average recovery rate of 67.9%. The agency's mortgage default analysis is based on its Australian residential mortgage criteria. Maturity mismatches are significant, with the weighted-average residual life of the assets at 16.6 years and of the liabilities at 6.8 years. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to a downgrade if the issuer's Long-Term IDR is downgraded by three or more notches; if the D-Cap falls by more than two categories; or if the programme's AP rises above the breakeven AP of 87.0%. Contacts: Primary Analyst Claire Heaton Director +61 2 8256 0361 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst James Leung Director +61 2 8256 0322 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 The source of information used to assess these ratings was National Australia Bank Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 September 2012; 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013; 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 13 May 2013 ; 'APAC Residential Mortgage Criteria', dated 3 August 2012; 'APAC Residential Mortgage Criteria Addendum - Australia', dated 3 August 2012; 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum' dated 13 June 2013; 'Global Criteria for Lender's Mortgage Insurance in RMBS', dated 7 September 2012, are available at www.fitchratings.com. Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here APAC Residential Mortgage Criteria here APAC Residential Mortgage Criteria Addendum — Australia here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Global Criteria for Lenders’ Mortgage Insurance in RMBS here Additional Disclosure Solicitation Status 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 FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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