Fitch Upgrades Mortgage Liquidity Assessment for Australian Covered Bond Programmes

(The following statement was released by the rating agency)SYDNEY, July 02 (Fitch) Fitch has revised the liquidity gap and systemic risk component of its discontinuity risk (D-Cap) analysis to 'Moderate' (D-Cap of '4') from 'Moderate High' (D-Cap of '3') for a typical Australian covered bond programme, secured by prime Australian residential mortgages. This applies to mortgage programmes with liquidity protection in the form of a 12 month maturity extension on soft bullet bonds and a pre-maturity test with a cure period of up to 12 months for issued hard bullet bonds. The amendment to Fitch's mortgage liquidity assessment is supported by the increased size of the Australian covered bond market, the continued use of covered bonds by issuing banks for funding and the refinancing of existing covered bonds. In Fitch's view, this demonstrates willingness by the issuers to maintain current issuance profiles and market liquidity of the covered bond product. Mortgage liquidity is also enhanced by a long-standing securitisation market in Australia which has seen a resurgence of issuance in the past 12-18 months. As the weak link in the D-Cap assessment for Australian programmes is the liquidity gap and systemic risk component, the D-Cap assigned to the programmes will improve by one category. Programmes with outstanding hard bullet covered bonds subject to a cure period of up to six months under the pre-maturity test, post an issuer default, will still retain a one-notch difference in the liquidity gap and systemic risk assessment compared to programmes with better liquidity provisions and which equates to a 'Moderate high' (D-Cap of '3') assessment. The revision in D-Cap has no impact on the ratings of Australian mortgage programmes as outstanding covered bonds are already rated 'AAA'. The increase in the D-Cap will provide an additional one-notch buffer against a potential downgrade of the covered bonds rating. The revised D-Caps are as follows:Australia and New Zealand Banking Group LimitedD-Cap: revised to '3' (Moderate high) from '2' (High)Commonwealth Bank of AustraliaD-Cap: revised to '3' (Moderate high) from '2' (High)National Australia Bank LimitedD-Cap: revised to '4' (Moderate) from '3' (Moderate high)Suncorp-Metway LimitedD-Cap: revised to '4' (Moderate) from '3' (Moderate high)Westpac Banking Corporation D-Cap: revised to '3' (Moderate high) from '2' (High)Contact: Claire HeatonSenior Director+61 2 8256 0361Fitch Australia Pty LimitedLevel 15, 77 King StreetSydney NSW 2000Sebastian HebenstreitAnalyst +61 2 8256 0360Fitch Upgrades Mortgage Liquidity Assessment for Australian Covered Bond ProgrammesFitch has revised the liquidity gap and systemic risk component of its discontinuity risk (D-Cap) analysis to 'Moderate' (D-Cap of '4') from 'Moderate High' (D-Cap of '3') for a typical Australian covered bond programme, secured by prime Australian residential mortgages. This applies to mortgage programmes with liquidity protection in the form of a 12 month maturity extension on soft bullet bonds and a pre-maturity test with a cure period of up to 12 months for issued hard bullet bonds. The amendment to Fitch's mortgage liquidity assessment is supported by the increased size of the Australian covered bond market, the continued use of covered bonds by issuing banks for funding and the refinancing of existing covered bonds. In Fitch's view, this demonstrates willingness by the issuers to maintain current issuance profiles and market liquidity of the covered bond product. Mortgage liquidity is also enhanced by a long-standing securitisation market in Australia which has seen a resurgence of issuance in the past 12-18 months. As the weak link in the D-Cap assessment for Australian programmes is the liquidity gap and systemic risk component, the D-Cap assigned to the programmes will improve by one category. Programmes with outstanding hard bullet covered bonds subject to a cure period of up to six months under the pre-maturity test, post an issuer default, will still retain a one-notch difference in the liquidity gap and systemic risk assessment compared to programmes with better liquidity provisions and which equates to a 'Moderate high' (D-Cap of '3') assessment. The revision in D-Cap has no impact on the ratings of Australian mortgage programmes as outstanding covered bonds are already rated 'AAA'. The increase in the D-Cap will provide an additional one-notch buffer against a potential downgrade of the covered bonds rating. The revised D-Caps are as follows:Australia and New Zealand Banking Group LimitedD-Cap: revised to '3' (Moderate high) from '2' (High)Commonwealth Bank of AustraliaD-Cap: revised to '3' (Moderate high) from '2' (High)National Australia Bank LimitedD-Cap: revised to '4' (Moderate) from '3' (Moderate high)Suncorp-Metway LimitedD-Cap: revised to '4' (Moderate) from '3' (Moderate high)Westpac Banking Corporation D-Cap: revised to '3' (Moderate high) from '2' (High)Contact: Claire HeatonSenior Director+61 2 8256 0361Fitch Australia Pty LimitedLevel 15, 77 King StreetSydney NSW 2000Sebastian HebenstreitAnalyst +61 2 8256 0360Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.comRelated Research:Covered Bonds Rating CriteriaCovered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress AddendumApplicable Criteria Covered Bonds Rating Criteria (pub. 08 Aug 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753052Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum – Effective 14 November 2012 to 3 June 2013 (pub. 14 Nov 2012)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693949ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.