Fitch Ratings: Housing Developments Unlikely to Affect APAC Covered Bond 2019 Outlook

(The following statement was released by the rating agency) Fitch Ratings-Sydney-January 17: Fitch Ratings says that housing market developments in Asia-Pacific (APAC) are unlikely to affect Fitch's stable rating outlook for covered bonds in the region in 2019. This is due to high-quality cover assets included in the cover pools and that most covered bonds with a 'AAA' rating within the sector have a large buffer against a downgrade of the issuer's Long-Term Issuer Default Rating (IDR). Covered bond ratings assigned by Fitch in APAC have on average a 3.5-notch buffer against a downgrade of the issuer's IDR, which is unchanged from 2018. The buffer is supported by the strength of liquidity provisions in the programmes - mostly being a 12-month extension period. We also do not expect any downgrades of sovereign ratings in the region, in particular Country Ceilings, to affect APAC covered bond outlooks. However, the consequences of geopolitical risks on an international scale are hard to predict. Housing market risks through the region are varied. In Singapore, house prices are expected to rise; while in South Korea, Australia and New Zealand, property market conditions are likely to continue to soften. Our expectations of any deterioration in property market conditions in Australia and New Zealand are already incorporated in our default analysis of the cover assets. We do not foresee developments in housing markets in Australia and New Zealand to have a material impact on asset performance and therefore covered bond ratings in 2019, as both countries are supported by sustained economic growth, low and stable unemployment, significant population growth and low, albeit rising interest rates. Therefore, we do not expect volatility in the credit loss component of the 'AAA' breakeven overcollateralisation. In Australia we are monitoring developments that may arise in 2019 from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with its final report due to be submitted in February 2019. Fitch expects the commission's findings to result in further tightening of Australian lending standards. This would ultimately improve future loan-asset performance, but it may have a short-term adverse impact on credit availability from banks and on house prices. Upcoming elections in Australia, including state elections in Victoria and New South Wales and a likely Australian Federal election in May 2019, may result in significant changes in immigration and taxation policies, in particular to negative gearing, which may also give rise to further house price volatility. The Reserve Bank of New Zealand has eased some of its macro-prudential measures in the mortgage market including the loan-to-value ratio restrictions on mortgages in the last two years. The government has also introduced a ban on non-residents buying existing homes in October 2018. Fitch does not expect these changes to have a meaningful impact on house prices and the credit quality of New Zealand banks' assets in 2019. Furthermore, these developments are not expected to materially impact the current credit quality of the cover assets or the ratings on the New Zealand covered bonds during 2019. While Fitch does not expect housing market risks in South Korea to deteriorate in 2019, geopolitical risks related to North Korea and the effects of the Sino-US trade war will continue to persist. Any changes to the sovereign rating on Korea would be particularly relevant for the 'AAA' rating assigned to covered bonds issued by Kookmin Bank (A/Stable/F1), as it is above Korea's Country Ceiling of 'AA+'. Fitch expects deterioration in the 'AAA' breakeven overcollateralisation of Fitch-rated Singapore covered bonds during 2019 if market interest rates risk continues to persist. A significant proportion of Singapore cover mortgage assets backing Fitch-rated Singapore covered bonds are linked to bank fixed deposit rates or other bank discretionary rates. Market interest rates used in covered bonds in Singapore have risen on average by around 76bp over 2018, but there have been limited upward movements in certain discretionary mortgage rates products, which are becoming a larger share of assets backing the covered bonds. This has resulted in the compression of the cover pool asset margin in our analysis against the one-month Singapore Swap Offer Rate used in the covered bond swap. Fitch rates the majority of covered bond programmes in APAC: eight from Australia, five from New Zealand, two from Singapore and one from South Korea. All of the outstanding covered bonds from these programmes are rated 'AAA' with Stable Outlooks. Contact: Jimmy Tanzil Analyst +61 2 8256 0305 Fitch Australia Pty Ltd Level 15, 77 King Street Sydney NSW 2000 Claire Heaton Senior Director +61 2 8256 0361 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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