Fitch Ratings has affirmed Bendigo and Adelaide Bank Limited's (BEN, A-/Stable/F2) AUD2.0 billion outstanding mortgage covered bonds at 'AAA'.

The Outlook is Stable.

The covered bondholders benefit from a dual recourse against BEN. The bonds are an unsecured, unsubordinated obligation of BEN and have the benefit of a guarantee from the Covered Bond Trust, which is secured by the cover assets.

KEY RATING DRIVERS

One-Notch Rating Cushion: The 'AAA' mortgage covered bond rating is based on BEN's Long-Term Issuer Default Rating (IDR) of 'A-', a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. The rating also relies upon the asset percentage (AP) of 90.0% applied in the programme, which provides more protection than the agency's 'AAA' breakeven AP of 96.0%.

The total potential uplift of seven notches results in a one-notch buffer against a downgrade of the bank's Long-Term IDR. This supports a Stable Outlook.

Zero-Notch Resolution Uplift: The covered bonds are granted a zero-notch resolution uplift, resulting in an 'A-' resolution reference point. There is no specific advanced resolution regime in Australia, but the regulator can 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.

Six-Notch PCU: The six-notch PCU reflects principal liquidity protection provided by a 12-month maturity extension for soft-bullet issuance. Timely payment interest protection through a reserve will cover swap payments, bond interest (if applicable) and senior expenses in the next three months.

One-Notch Recovery Uplift: Fitch has granted a recovery uplift of one notch to the programme, above the timely payment rating level of 'AA+', as foreign-exchange risk could have a material impact on recoveries in a default of the covered bonds. The covered pool assets are denominated in Australian dollars, while bonds issued from this programme are denominated in various currencies. All foreign-currency-denominated bonds are fully hedged, although we expect these hedges to terminate upon a covered bond default.

'AAA' Breakeven AP: Fitch's 'AAA' breakeven AP of 96.0% corresponds to 4.2% 'AAA' breakeven overcollateralisation, which supports a 'AA+' timely payment rating level and one-notch recovery uplift to 'AAA'. Fitch carried forward the results of the previous asset and cash flow model outputs, as programme characteristics key to the analysis have remained stable and the programme satisfies all the conditions set out in Fitch's Covered Bonds Rating Criteria relating to the previous model analysis application. Both the ALM loss (0.8%) and the credit-loss component (3.3%) were maintained.

Cover Pool Summary: The cover pool consisted of 9,981 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD3.0 billion at 31 August 2023. The cover pool's weighted-average (WA) current loan/value ratio was 57.15%, and the loans' WA seasoning was 36.74 months. Interest-only loans comprised 3.96% of the pool.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The covered bonds are rated at the highest level on Fitch's scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The covered bond rating is vulnerable to a downgrade if BEN's Long-Term IDR is downgraded by two or more notches to 'BBB' or below; or if the AP considered by Fitch in our analysis were to provide less protection than Fitch's 'AAA' breakeven AP of 96.0%. Even if the AP in the asset coverage test equals the maximum 95.0% contractual AP stipulated in the programme documents, there would be no impact on the covered bond rating.

Fitch's 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, the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

SOURCES OF INFORMATION

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 rating is driven by the credit risk of the issuing financial institution, as measured by its Long-Term Foreign-Currency IDR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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