Fitch Rates CBA's EUR1 Billion Covered Bonds 'AAA'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 25: Fitch Ratings has assigned Commonwealth Bank of Australia's (CBA, AA-/Stable/F1+) Series 69 EUR1 billion mortgage covered bonds ratings of 'AAA'. The Outlook is Stable. This brings the total outstanding issuance of covered bonds to AUD26.2 billion. Series 69 is a fixed-rate bond due in April 2023 and benefits from a 12-month extendable maturity. KEY RATING DRIVERS The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift of six notches, a recovery uplift of one notch and the asset percentage (AP) of 92% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP provides more protection than Fitch's 'AAA' breakeven AP of 92.5%. Fitch's 'AAA' breakeven AP supports a 'AA+' tested rating on a probability-of-default basis and a 'AAA' rating after giving credit for recoveries from the cover assets given default of the covered bonds. The Outlook on the covered bonds reflects the four-notch buffer against the downgrade of the issuer's IDR. The 'AAA' breakeven AP of 92.5%, corresponding to a breakeven overcollateralisation (OC) of 8.1%, is driven by an asset disposal loss component of 9.9%. This reflects the asset and liability mismatch in the programme, with the weighted-average residual life of the cover assets at 15.3 years and the liabilities at 5.6 years. The credit loss component is 3.1% and the cash flow valuation component decreases OC by 5.0%, reflecting the excess spread modelled by Fitch in the programme. 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 assets are denominated in Australian dollars, while 90.1% of the covered bonds outstanding are denominated in other currencies. There are swaps in place on the liabilities, but we expect those swaps to terminate upon a covered bond default. This would mean the longer-dated Australian dollar asset cash flows would be providing recoveries for the outstanding foreign-currency denominated covered bonds. RATING SENSITIVITIES Commonwealth Bank of Australia's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 92.5% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. 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. Contact: Primary Analyst Sambit Agasti Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Hilary Tan Senior Director +852 2263 9904 The 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: 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 Bank Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023430 Covered Bonds Rating Criteria (pub. 02 Mar 2018) https://www.fitchratings.com/site/re/10021721 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 Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) https://www.fitchratings.com/site/re/898538 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10027882 Solicitation Status https://www.fitchratings.com/site/pr/10027882#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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