Fitch Affirms 4 Classes from 3 Pinnacle Series Transactions; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-June 05: Fitch Ratings has affirmed four classes of notes from three Pinnacle Series transactions, which consist of notes backed by pools of first-ranking Australian residential full-documentation mortgage loans. All mortgages were originated by Police and Nurses Limited, which trades as P&N Bank Limited, and the notes were issued by BNY Trust Company of Australia Limited in its capacity as trustee. The three transactions are: Pinnacle Series Trust 2010-T1 Pinnacle Series Trust 2013-T1 Pinnacle Series Trust 2014-SST A full list of rating actions follows at the end of this rating action commentary. KEY RATING DRIVERS Macroeconomic Factors: Fitch expects mortgage performance in Australia to remain stable in 2018, supported by the continuation of low interest rates, sustained economic growth driven by stable forecast GDP growth of 2.7% in 2019 and stable labour markets. Furthermore, unemployment rates in Western Australia (which represents 96.5% of the remaining loans in Pinnacle Series Trust 2010-T1, 94.9% in Pinnacle Series Trust 2013-T1 and 98.6% Pinnacle Series Trust 2014-SST) have peaked, indicating signs of further recovery for the Western Australian property market. Operational Risk: P&N Bank is an authorised deposit-taking institution, as defined by the Australian Prudential (LON:PRU) Regulation Authority. Fitch undertook an onsite operational review and found that the operations of the originator and servicer were comparable to other conforming lenders. Asset Analysis: As at end-March 2018, all the transactions, with the exception of Pinnacle 2014-SST, had 30+ days arrears above Fitch's 4Q17 Dinkum RMBS index of 1.01%. The 30+ days arrears ranged from 0.89% to 2.89% due to the smaller portfolios. Arrears balances on the respective pools have, however, remained stable, having incurred two losses over the three transactions. Lenders' mortgage insurance (LMI) covered 100% and 77% of the respective losses incurred in Pinnacle 2010-T1 and Pinnacle 2013-T1, respectively, with the remainder being covered by excess spread. The 'AAAsf' weighted-average (WA) foreclosure frequency for Pinnacle 2010-T1, Pinnacle 2013-T1 and Pinnacle 2014-SST changed to 11% from 10.5%, to 10% from 11.1%, and to 17.3% from 18.5%, respectively. The 'AAAsf' LMI-dependant WA loss severity for Pinnacle 2010-T1, Pinnacle 2013-T1 and Pinnacle 2014-SST changed to 19.1% from 21%, to 19.1% from 20.7%, and to 42.1% from 41.1% respectively. The Pinnacle 2010-T1 and Pinnacle 2013-T1 transactions are fully covered by LMI, with Pinnacle 2014-SST being partially covered. LMI is provided by Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (Insurer Financial Strength rating: A+/Stable) and QBE Lenders Mortgage Insurance Limited (Insurer Financial Strength rating: AA-/Stable). Pinnacle 2010-T1 and Pinnacle 2013-T1 do not have revolving periods. Pinnacle 2014-SST has a 10-year revolving period, of which less than six years remain. Fitch is of the view that the risks associated with the long revolving period are commensurate with the ratings because the transaction has defined portfolio parameters, the portfolio stratifications have not changed significantly and the portfolio is performing as expected. The cash flow model was not run in line with the APAC Residential Mortgage Rating Criteria as there have been no changes to transaction structure or asset performance. RATING SENSITIVITIES The ratings are not expected to be affected by any foreseeable change in performance. The Pinnacle 2010-T1 and 2013-T1 transactions amortise pro rata until the call triggers are met when they move back to sequential amortisation, mitigating tail risk, whilst the Pinnacle 2014-SST transaction is still in its revolving period with no amortisation. The ratings of the rated notes are LMI independent and therefore not sensitive to downgrades to the LMI providers' ratings. Fitch conducted sensitivity analysis on the three transactions by stressing the transactions base-case assumptions. The results of rating sensitivity testing are shown below. Fitch also undertook defined sensitivity testing to show the model implied sensitivities the transaction faces when the recovery rate assumption stresses are increased to a level that is required to reduce the notes' rating by one full category, to non-investment grade and to 'CCCsf'. Fitch applies the recovery rate stress to the pre-LMI recovery rate to isolate the effect of a change in recovery proceeds at the borrower level. Pinnacle 2010-T1 Notes: A2 / AB Rating: AAAsf / AAAsf Rating sensitivity to increased defaults: Increase in defaults by 15%: AAAsf / AAAsf Increase in defaults by 30%: AAAsf / AAAsf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf / AAAsf Reduce recoveries by 30%: AAAsf / AAAsf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AAAsf / AAAsf Increase defaults by 30%, reduce recoveries by 30%: AAAsf / AAAsf Decrease in recovery rate required to reduce note ratings: By one full category: not even with 0% recoveries / 87% To non-investment grade: not even with 0% recoveries To 'CCCsf': not even with 0% recoveries Pinnacle 2013-T1 Notes: A Rating: AAAsf Rating sensitivity to increased defaults: Increase in defaults by 15%: AAAsf Increase in defaults by 30%: AAAsf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf Reduce recoveries by 30%: AAAsf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AAAsf Increase defaults by 30%, reduce recoveries by 30%: AAAsf Decrease in recovery rate required to reduce note ratings: By one full category: not even with 0% recoveries To non-investment grade: not even with 0% To 'CCCsf': not even with 0% recoveries Pinnacle 2014-SST Notes: A Rating: AAAsf Rating sensitivity to increased defaults: Increase in defaults by 15%: AAAsf Increase in defaults by 30%: AAAsf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf Reduce recoveries by 30%: AAAsf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AAAsf Increase defaults by 30%, reduce recoveries by 30%: AAAsf Decrease in recovery rate required to reduce note ratings: By one full category: not even with 0% recoveries To non-investment grade: not even with 0% To 'CCCsf': not even with 0% recoveries USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio as part of its ongoing monitoring. As part of its on-going monitoring, Fitch conducted a file review of a small targeted sample of P&N Bank's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. SOURCES OF INFORMATION The information below was used in the analysis: Loan-by-loan data for the three transactions provided by P&N Bank as at 31 March 2018 Transaction reporting data provided by P&N Bank as at end-March 2018 The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. The rating actions are as follows: Pinnacle Series Trust 2010-T1 (as at April 2018 payment date): AUD27.6 million Class A2 notes (ISIN AU3FN0012274) affirmed at 'AAAsf'; Outlook Stable AUD3.6 million Class AB notes (ISIN AU3FN0012282) affirmed at 'AAAsf'; Outlook Stable Pinnacle Series Trust 2013-T1 (as at April 2018 payment date): AUD54.7 million Class A notes (ISIN AU3FN0020624) affirmed at 'AAAsf'; Outlook Stable Pinnacle Series Trust 2014-SST (as at April 2018 payment date): AUD740 million Class A notes (ISIN AU3FN0022190) affirmed at 'AAAsf'; Outlook Stable Contacts: Lead Surveillance Analyst Marija Buzevska Analyst +61 2 8256 0340 Fitch Australia Pty Ltd. Level 15, 77 King St, Sydney, NSW 2000 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 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) https://www.fitchratings.com/site/re/901072 Global Structured Finance Rating Criteria (pub. 15 May 2018) https://www.fitchratings.com/site/re/10029600 RMBS Lenders' Mortgage Insurance Rating Criteria (pub. 03 Apr 2018) https://www.fitchratings.com/site/re/10025397 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) https://www.fitchratings.com/site/re/898537 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10031747 Solicitation Status https://www.fitchratings.com/site/pr/10031747#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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