Fitch Affirms Westpac's Mortgage Covered Bonds at 'AAA'; Outlook Stable

Fitch Affirms Westpac's Mortgage Covered Bonds at 'AAA'; Outlook Stable

Reuters  | Jul 13, 2020 15:18

Fitch Affirms Westpac's Mortgage Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-13 July 2020: Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, A+/Negative/F1) AUD29.3 billion equivalent 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 WBC'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 four notches above the bank's IDR, at the highest end of the rating scale. This is out of a maximum achievable uplift of seven notches, consisting of a resolution 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 programme's asset coverage test (ACT) of 91.0%, which provides more protection than Fitch's 'AAA' breakeven AP of 91.5%. The Stable Outlook on the rating reflects the three-notch buffer against a downgrade of the issuer's IDR. Uplifts The resolution 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. 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. It also reflects the three-month interest protection in the form of a reserve that will be funded when WBC's IDR is downgraded below 'A-' and '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 assets are denominated in Australian dollars while 88.8% 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 AP Fitch's unchanged 'AAA' breakeven AP of 91.5% corresponds to a 9.3% 'AAA' breakeven OC, which allows the covered bonds to attain a 'AA+' timely payment rating level and one notch of recovery uplift to 'AAA'. The ALM loss component increased to 5.0%, from 4.6% at the previous analysis. This remains the largest component of the 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 credit loss component contributes 4.1% to the breakeven OC for the rating and has decreased from 4.4% since the last analysis, due to overall improvement in credit quality of the pool. Cover Pool Summary The cover pool consisted of 117,956 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD35.1 billion, as at 31 May 2020. The cover pool's weighted-average current loan/value ratio (LVR) was 61.4%, the Fitch-calculated weighted-average indexed current LVR was 61.4% and the loans' weighted-average seasoning was 47 months. Investment loans comprised 34.8% of the pool and interest-only loans 17.6%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: The rating of the bond is 'AAA', which is the highest level on Fitch's rating scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: WBC's 'AAA' covered bond rating would be vulnerable to a downgrade if the bank's IDR were downgraded by four or more notches to 'BBB' or below; or if the relied upon AP were to provide less protection than Fitch's 'AAA' breakeven AP of 91.5%. If the AP in the programme rose to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA-', one notch above the IDR. Coronavirus Downside Scenario Stress Sensitivity Fitch expects the coronavirus containment measures to have a negative impact on the performance of Australian residential-mortgage loans. WBC has substantial eligible mortgage loans, allowing it to replace non-performing loans in the cover pool in line with its asset coverage test. This would be the case even assuming significantly reduced new loan production, longer foreclosure periods and large take-up of payment holidays that could affect available revenue receipt and liquidity. Fitch performed a downside sensitivity scenario stress to the programme by increasing the probability of default on the mortgage loans in the cover pool, the recovery timing and the stressed cost to refinance the cover pool. We found that while the relied-upon AP supporting the 'AAA' rating would provide less protection than the 'AAA' breakeven AP, WBC still has significant amount of nominal OC of 24.4% in the programme and it has only utilised less than 50% of its maximum issuance capacity allowed under the Australian covered bond legislation. Based on these mitigating factors, we believe the programme has the capacity to support the 'AAA' rating. The dual recourse nature of covered bonds means the issuer is liable to pay the bonds irrespective of the performance of the cover pool. The 'AAA' covered bond rating is well protected by the three-notch buffer against a downgrade of WBC's Long-Term IDR. Nevertheless, the agency expects any OC cushion and the buffer against an issuer downgrade to be reduced as a consequence of the coronavirus crisis. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other things, by the profile of the cover assets relative to 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. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579] SOURCES OF INFORMATION The source of information used to assess these ratings was WBC. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. 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. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Westpac Banking Corporation ----senior secured, Mortgage Covered Bonds, Mortgage Covered Bonds; Long Term Rating; Affirmed; AAA; RO:Sta Contacts: Primary Rating Analyst Jimmy Tanzil, Senior Analyst +61 2 8256 0305 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Marija Buzevska, Senior Analyst +61 2 8256 0340 Committee Chairperson 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 Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 27 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10123329) Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10110041) Covered Bonds Rating Criteria (pub. 30 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10126060) Fitch Ratings Interest Rate Stress Assumptions for Structured Finance and Covered Bonds (Excel) (pub. 06 Dec 2019) (https://www.fitchratings.com/site/re/10104368) Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108544) Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108546) Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 06 Dec 2019) (https://www.fitchratings.com/site/re/10103887) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Covered Bonds Cash Flow Model, v1.27.1 (1 (https://www.fitchratings.com/site/re/976044)) ResiGlobal Model: Australia, v1.59.3 (1 (https://www.fitchratings.com/site/re/974535)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10129286) Solicitation Status (https://www.fitchratings.com/site/pr/10129286#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10129286#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10129286#endorsement-policy) 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 (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). 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