(Repeat for additional subscribers)
Dec 2 (The following statement was released by the rating agency)
Fitch Ratings has affirmed National Australia Bank
Limited's (NAB, AA-/Stable/F1+) outstanding AUD11.7bn mortgage covered bonds at
'AAA'. The Outlook is Stable.
KEY RATING DRIVERS
The rating is based on: NAB's Long-Term Issuer Default Rating (IDR) of 'AA-';
the unchanged Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) used
in the asset coverage test (ACT) of 88.3%. The latter provides a small cushion,
compared with the breakeven AP of 89.5%. The agency relies on the AP used in the
ACT as Australia's Banking Act stipulates that assets held in excess of this,
through a demand loan, do not form part of the cover pool at issuer insolvency.
The Outlook on the covered bonds' ratings is Stable, which reflects the Stable
Outlook on NAB's IDR, the Australian sovereign rating and the Australian
residential mortgage asset outlook.
Fitch's 'AAA' breakeven AP level of 89.5% supports a 'AA' rating on a
probability of default (PD) basis, and allows for a two-notch recovery uplift
for the covered bonds in a 'AAA' scenario. The breakeven AP has improved from
89.0% due to the agency's recently revised Australian refinancing cost
assumptions (RCA), and it now falls in the RCA range of Group B. See "Covered
Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum', dated
3 June 2013 for further information.
Maturity mismatches are significant, with the weighted average (WA) life of the
assets at 16.3 years, and that of the liabilities at 6.0 years. The Fitch
breakeven AP for the covered bond rating will be affected by, among others, 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.
The D-Cap of 3 is driven by the moderate-high risk assessment of NAB's liquidity
gap and systemic risk. This is mainly driven by the agency's view of the
liquidity gap mitigants in the form of a three-month interest reserve fund, the
12-month extendable period for the issued soft bullet bonds, and the
pre-maturity test for the issued hard bullet bonds. The pre-maturity test allows
up to a 12-month cure period, in the aftermath of an issuer default, where a
scheduled hard bullet covered bond maturity falls due within the test breach
period and has not been funded.
Fitch has maintained its low risk assessment of the cover pool-specific
alternative management, reflecting the agency's view of the IT systems,
processes and the delivery and quality of data received by Fitch as compared
with NAB's peers. The moderate risk assessment assigned to systemic alternative
management and privileged derivatives, and the very low risk assessment of asset
segregation have remained unchanged.
In a 'AAA' scenario, Fitch has calculated the pool's cumulative WA frequency of
foreclosure at 9.4%, and a WA recovery rate of 65.6%. As of October 2013, the
cover pool consisted of 55,094 loans secured by first-ranking Australian
residential mortgages with a total outstanding balance of AUD15.3bn. The
portfolio is wholly made up of full documentation loans that have WA current
loan-to-value ratio (LVR) of 62.5%, a Fitch calculated WA current indexed LVR of
62.3% and a WA seasoning of 34.4 months. Floating rate loans represent 91.6% and
fixed rate loans 8.4% of the cover pool by balance. The mortgage portfolio is
distributed geographically with the largest concentrations being in New South
Wales (34.3%) and Victoria (30.3%).
The 'AAA' rating would be vulnerable to downgrade if any of the following
occurred: NAB's IDR was downgraded by three notches; the D-Cap fell by more than
two categories; or if the AP that Fitch takes into account in its analysis
increased above the 'AAA' breakeven AP of 89.5%.