(The following statement was released by the rating agency) Fitch Ratings-Sydney-August 14: Fitch Ratings has affirmed National Australia Bank Limited's (NAB, AA-/Negative/F1+) AUD22.0 billion of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable.This follows a periodic review of the covered bond programme. KEY RATING DRIVERS The 'AAA' rating of the mortgage covered bonds is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', 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 three 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, which Fitch expects to be revised to at least equal the 'AAA' breakeven AP of 92.0%.The Stable Outlook reflects a four-notch buffer against an IDR downgrade.UpliftsThe 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, NAB'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 soft-bullet bonds and a 12-month pre-maturity test on the hard-bullet bonds. It also reflects the three-month interest protection in the form of a reserve that will be funded upon the loss of NAB's Short-Term IDR of 'F1+'.The recovery uplift on the rating is capped at one notch, as the programme is exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the cover assets are denominated in Australian dollars, while about 90% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect those swaps to terminate in a recovery scenario.'AAA' Breakeven APFitch's revised 'AAA' breakeven AP of 92.0% corresponds to an 8.7% '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 5.2% remains the largest component of breakeven OC for the rating and reflects the modelled asset and liability mismatches, inclusive of the effect of the pro rata sales clause documented in the programme. The ALM loss has increased from 3.4% at the previous analysis due to higher modelled maturity mismatches in the programme upon the worst-case issuer default timing, taking into account a high concentration of redemptions over a 12-month period from February 2021. This creates the need to sell more cover assets under our modelling and has a negative effect on the programme's pro rata sales clause, as it only allows the pro rata proportion of assets to be sold for the liabilities being redeemed. The credit loss component at 3.3% has gone up by 0.1% since the last analysis of the covered bond programme due to a higher indexed loan/value ratio calculated by Fitch. Credit applied to the mortgage loans covered by QBE Lenders' Mortgage Insurance Limited (A+/Stable) was also reduced, as the insurer's rating had changed since the last analysis. Additionally the number of loans covered by lenders' mortgage insurance was lower in this analysis.Cover Pool SummaryThe cover pool consisted of 89,467 loans secured by first-ranking mortgages of Australian residential properties at end-June 2019, with a total outstanding balance of AUD27.5 billion. The weighted-average (WA) seasoning for the cover pool was 49 months. The WA loan/value ratio was 56.9% and the Fitch-calculated consolidated WA indexed loan/value ratio was 60.4%. Interest-only loans formed 22.7% of the pool, while 9.8% was covered by lenders' mortgage insurance. The cover pool is geographically diversified across Australia, with the largest concentration in New South Wales (41.1%) and Victoria (28.5%). Fitch calculated that, in a 'AAA' scenario, there would be a cumulative WA foreclosure frequency of 9.0% and a WA recovery rate of 56.7% for the cover pool. These levels are in line with Australian peers. RATING SENSITIVITIES NAB's 'AAA' covered bond rating would be vulnerable to a downgrade if the bank's IDR was downgraded by five or more notches to 'BBB' or below or if the relied upon AP provided less protection than Fitch's 'AAA' 92.0% breakeven AP. If the AP in the programme rises to the maximum 95% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', 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 The source of information used to assess these ratings was NAB. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The covered bond ratings are driven by the credit risk of the issuing financial institution as measured by its Long-Term IDR. National Australia Bank Limited ----senior secured, Mortgage Covered Bonds, Mortgage Covered Bonds; Long Term Rating; Affirmed; AAA; RO:Sta Contacts: Primary Rating Analyst Sambit Agasti, Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Jimmy Tanzil, Senior Analyst +61 2 8256 0305 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 RMBS Lenders' Mortgage Insurance Rating Criteria (pub. 17 Mar 2019) https://www.fitchratings.com/site/re/10066008 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10086033 Solicitation Status https://www.fitchratings.com/site/pr/10086033#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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