(The following statement was released by the rating agency) Fitch Ratings-Sydney-November 25: Fitch Ratings has affirmed Macquarie Bank Limited's (MBL, A/Stable/F1) EUR500 million of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable. This follows a periodic review of the covered bond programme. Macquarie Bank Limited ----senior secured, Mortgage Covered Bonds, Mortgage Covered Bonds; Long Term Rating; Affirmed; AAA; RO:Sta KEY RATING DRIVERS The 'AAA' rating of the mortgage covered bonds is based on MBL's Long-Term Issuer Default Rating (IDR) of 'A', the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection provided through the programme's asset percentage (AP). The covered bonds are rated five notches above the bank's IDR. This is out of a maximum achievable uplift of seven notches, consisting of an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. For its analysis, Fitch relies on the programme's committed AP used in the asset coverage test of 87%. The relied upon AP provides more protection than Fitch's revised 'AAA' breakeven AP of 89.5%. The Stable Outlook reflects a two-notch buffer against an IDR downgrade. Uplifts The IDR uplift remains unchanged at zero notches. There is no specific advanced resolution regime in Australia, but the regulator has the ability to resolve a bank under its regulatory powers pursuant to the Banking Act. Even so, covered bonds are not explicitly exempt from bail-in should a bank be resolved, which may result in the direct enforcement of recourse against the cover pool for the payment of the outstanding covered bonds. Therefore, MBL's Long-Term IDR remains the floor for its covered bond rating. The PCU remains unchanged at six notches and reflects the strength of liquidity protection in the form of a 12-month extension period on the outstanding soft-bullet bond. It also reflects three-month interest protection through a reserve fund, which had a balance of AUD8.8 million at end-October 2019. The recovery uplift on the rating is capped at one notch, as the programme is significantly exposed to foreign-exchange risk that could affect recoveries given a default of the covered bonds. There are swaps in place on the liabilities, but we expect the swaps to terminate upon a covered bond default. This would mean the longer-dated Australian-dollar asset cash flow would need to provide recoveries for the euro-denominated covered bond. 'AAA' Breakeven AP Fitch's revised 'AAA' breakeven AP of 89.5% corresponds to 11.7% 'AAA' breakeven OC, which allows the covered bonds to attain a 'AA+' rating on a probability of default (PD) basis and one-notch recovery uplift to 'AAA'. The ALM loss of 8.9% remains the largest component of the breakeven OC for the rating and reflects the modelled asset and liability mismatches. The ALM loss has increased from 8.3% in our previous analysis due to greater modelled mismatches between the weighted-average (WA) life of the assets and liabilities in the programme upon the worst-case issuer default timing. The stressed WA residual life of the cover assets calculated by Fitch is at 8.0 years (up from 7.6 years), including prepayments, and the liabilities is 1.2 years, including the extension period. The credit loss component of 2.8% remains unchanged since the last analysis. Fitch carried forward the results of the previous asset-model outputs, as programme characteristics remain stable and the programme satisfies all the conditions set out in Fitch's Covered Bonds Rating Criteria relating to the previous model analysis application. Cover Pool Summary The cover pool consisted of 4,383 loans secured by first-ranking mortgages of Australian residential properties at end-October 2019, with a total outstanding balance of AUD2.1 billion. The WA seasoning for the cover pool was 53 months. The WA loan/value ratio was 64.5%. Investment loans comprised 29.9% of the pool, while interest-only loans formed 26.6%. The cover pool is geographically diversified across Australia, with the largest concentration in New South Wales (46.8%) and Victoria (21.0%). Fitch calculated in the previous analysis that in a 'AAA' scenario, there would be a cumulative WA foreclosure frequency of 13.5% and a WA recovery rate of 71.5%. RATING SENSITIVITIES MBL's 'AAA' covered bond rating would be vulnerable to downgrade if the bank's IDR was downgraded by three or more notches to 'BBB' or below or if the relied upon AP provided less protection than Fitch's 'AAA' 89.5% breakeven AP. If the AP in the programme rose to the maximum 95% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'A+', one notch above the IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to the outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time. SOURCES OF INFORMATION MBL was the source of information used to assess this rating. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the transaction, either due to their nature or the way in which they are being managed. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Primary Rating Analyst Jimmy Tanzil, Senior Analyst +61 2 8256 0305 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Marc Dinkelmann, CA Associate Director +61 2 8256 0371 Committee Chairperson Claire Heaton, Senior Director +61 2 8256 0361
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 04 Jun 2019) https://www.fitchratings.com/site/re/10076316 Bank Rating Criteria (pub. 12 Oct 2018) https://www.fitchratings.com/site/re/10044408 Covered Bonds Rating Criteria (pub. 24 Jul 2019) https://www.fitchratings.com/site/re/10081331 Fitch Ratings Interest Rate Stress Assumptions for Structured Finance and Covered Bonds (Excel) (pub. 28 Oct 2019) https://www.fitchratings.com/site/re/10098460 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 18 Apr 2019) https://www.fitchratings.com/site/re/10068780 Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 18 Apr 2019) https://www.fitchratings.com/site/re/10069072 Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 28 Oct 2019) https://www.fitchratings.com/site/re/10095115 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10102670 Solicitation Status https://www.fitchratings.com/site/pr/10102670#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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