Fitch Affirms CBA's Mortgage Covered Bonds at 'AAA'; Revises D-Cap

(The following statement was released by the rating agency)SYDNEY, October 07 (Fitch) Fitch Ratings has affirmed Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) AUD23.85bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. The discontinuity cap (D-Cap) has been revised to 4 (Moderate risk) from 3 (Moderate high risk).The rating action and revised D-Cap follows the addition of 12-month extendible maturities (soft bullet) to CBA's outstanding benchmark covered bonds after bondholders' consent. The conversion of these bonds, which were originally issued with hard bullet maturity dates, brings the total amount of soft bullet bonds to 84% of the outstanding covered bonds' balance. The remaining hard bullet series have scheduled maturity dates from February 2017 up to August 2031.KEY RATING DRIVERSThe rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', the D-Cap of 4 and the asset percentage (AP) of 89.5% used in the programme's asset coverage test which is equal to Fitch's 'AAA' breakeven AP, supporting a 'AA' tested 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 CBA's IDR.Fitch has revised the liquidity gap and systemic risk component of its D-Cap analysis to 'Moderate' (D-Cap of '4') from 'Moderate High' (D-Cap of '3'). While hard bullet bonds remain outstanding on the programme, we believe they would not be the primary driver in causing a cross acceleration in a covered bond default scenario, notwithstanding the limited cure period for these hard bullet bonds. In our view, the change to soft bullet on the benchmark covered bonds considered in the solicitation constitutes an effective mitigant against liquidity gaps in the programme. Extendible maturities create a period during which liquidity can be raised from the cover pool should it become the sole source of payment.There is no change to the break-even AP of 89.5% as the programme continues to show significant asset/liability mismatches. The weighted life of the assets is 15 years compared with 4.3 years of the covered bonds. RATING SENSITIVITIESThe 'AAA' rating would be vulnerable to downgrade should any of the following occur: CBA's IDR was downgraded by four notches to 'BBB+'; the D-Cap fell by four categories to 0 (full discontinuity); or the AP that Fitch takes into account in its analysis increased above the 'AAA' breakeven AP of 89.5%.Fitch's 'AAA' breakeven AP for 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 the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. Contact: Sebastian HebenstreitAnalyst+61 2 8256 0360Fitch Australia Pty Ltd.Level 15, 77 King Street, Sydney NSW 2000Claire HeatonSenior Director+61 2 8256 0361Committee ChairpersonBen McCarthyManaging Director+61 2 8256 0388The source of information used to assess these ratings was Commonwealth Bank of Australia. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public.Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria APAC Residential Mortgage Criteria (pub. 23 Jun 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867437Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175Covered Bonds Rating Criteria (pub. 23 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868658Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum (pub. 23 Sep 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871331Global Criteria for Lenders’ Mortgage Insurance in RMBS (pub. 23 Jun 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865195Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=991905Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991905Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL 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. 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