Fitch Rates ING Bank (Australia) Limited's Mortgage Covered Bonds 'AAA(EXP)'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): ING Bank (Australia) Limited - Mortgage Covered Bonds https://www.fitchratings.com/site/re/10031242 Fitch Ratings-Sydney-August 02: Fitch Ratings has assigned ING Bank (Australia) Limited's (IBAL, A/Stable/F1) first mortgage covered bonds an expected rating of 'AAA(EXP)' with a Stable Outlook. Fitch has assumed the first issuance to be up to AUD1 billion of soft bullet bonds with a 12 month extension period, split over a three-year and a five-year maturity for its analysis. The covered bond holders benefit from a dual recourse against IBAL Covered Bond Trust, which is secured by the cover assets, and an unsecured, unsubordinated recourse against IBAL. The assignment of the final rating is contingent upon receipt of final documents conforming to the information already received. KEY RATING DRIVERS The 'AAA(EXP)' covered bond rating is based on IBAL's Long-Term Issuer Default Rating (IDR) of 'A', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift (RU) of two notches. It is also based on the asset percentage (AP) that will be applied in the asset coverage test, which is expected to be lower than or equal to Fitch's breakeven AP of 93%. The Stable Outlook on the rating reflects a three-notch buffer against a downgrade due to the different uplift factors above the bank's IDR. The 'AAA' breakeven AP of 93%, corresponding to a breakeven overcollateralisation (OC) of 7.5%, is based on a tested rating of 'AA' on a probability of default basis and a two-notch recovery uplift to 'AAA'. It is largely driven by the 13.7% asset disposal loss component, reflecting the significant assets and liabilities maturity mismatch and the need to sell assets to bridge liquidity gaps under a stress scenario. The 2.8% credit loss component reflects the good credit quality of the cover pool and is in line with the credit loss levels of other established Australian covered bonds programmes rated by Fitch. The cash flow valuation component reduces the 'AAA' breakeven OC by 9.2% due to available excess spread in a low prepayment scenario as modelled by Fitch. UPLIFTS ASSIGNED ABOVE THE BANK'S IDR The IDR uplift assigned is at zero notches which is the same as other Australian covered bond programmes rated by Fitch. 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, IBAL's Long-Term IDR remains the floor for its covered bond rating. The six-notch PCU reflects the assumed soft-bullet amortisation profile with a 12-month principal maturity extension. Interest payment interruption risk is mitigated via a dynamic reserve covering three-month interest payments and senior expenses. The dynamic reserve is expected to be funded at the point when IBAL loses both its 'A' and 'F1' ratings. The agency does not expect downside risk to payment continuity arising from asset segregation and alternative management. The two-notch recovery uplift is based on the expectation that the inaugural covered bond issue will be Australian dollar-denominated, the same currency as the cover pool's residential mortgage loans, and that the OC that Fitch relies upon sufficiently covers the credit loss in a 'AAA' stress scenario. The recovery uplift would be limited to one notch if the covered bonds were denominated in another currency than Australian dollars. Recovery uplift would still be limited even if the bonds were swapped into Australian dollar as we believe the swap would not offer protection against foreign-exchange risk in a recovery scenario where the guarantor would have defaulted on the covered bonds and the swap. In that scenario, the longer-dated domestic currency asset cash flows would be detrimental, in a devaluation scenario, to recoveries on the foreign currency-denominated covered bonds assumed to be in default. COVER POOL CREDIT QUALITY The cover pool consisted of 4,242 loans secured by first-ranking mortgages of Australian residential properties as of 30 June 2018, with a total outstanding balance of about AUD1.5 billion. The cover pool's weighted-average loan/value ratio (LVR) was 53.7%; the Fitch-calculated indexed current LVR was 51.2% and the weighted-average seasoning was 25.8 months. Investment loans formed 7.4% of the pool, while 11.0% of the pool was interest-only loans. The cover pool is geographically diversified with the highest concentrations in New South Wales (42.7%), followed by Victoria (32.0%). Fitch calculated that, in a 'AAA' scenario, there would be a cumulative weighted-average foreclosure frequency of 8.3% and a weighted-average recovery rate of 51.5% for the cover pool. The results are driven by the 'AAA' minimum loss floor of 4.0% as outlined in criteria. These levels are in line with Australian peers. RATING SENSITIVITIES ING Bank (Australia) Limited's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 93%, if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB', or if the total number of notches represented by the IDR uplift, the PCU and the RU is reduced to four or lower. 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-', two notches above the IDR. The final covered bond rating could also be affected by any changes in the final terms and conditions. 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 Natasha Vojvodic Senior Director +61 2 8256 0350 The source of information used to assess these ratings was ING Bank (Australia) Limited. 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: +6567967234, 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. 22 Jun 2018) https://www.fitchratings.com/site/re/10034713 Covered Bonds Rating Criteria (pub. 02 Mar 2018) https://www.fitchratings.com/site/re/10021721 Exposure Draft: Structured Finance and Covered Bonds Counterparty Rating Criteria - Effective from 31 May 2018 to 1 August 2018 (pub. 31 May 2018) https://www.fitchratings.com/site/re/10029890 Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 02 Feb 2018) https://www.fitchratings.com/site/re/10018863 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: Derivative Addendum - Effective from 31 May 2018 to 1 August 2018 (pub. 31 May 2018) https://www.fitchratings.com/site/re/10029891 Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 02 Feb 2018) https://www.fitchratings.com/site/re/10018549 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10031240 Solicitation Status https://www.fitchratings.com/site/pr/10031240#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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