Fitch Ratings has affirmed National Australia Bank Limited's (NAB, A+/Stable/F1) AUD28.4 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 NAB'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. Fitch's analysis relies on the programme's committed AP used in the programme's asset coverage test of 95.0%, which provides more protection than Fitch's revised 'AAA' breakeven AP of 97.0%.

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 and a 12-month pre-maturity test on the hard-bullet bonds. It also reflects the three-month interest protection in the form of a reserve that has been fully funded.

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 99.6% 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 the event of default of the covered bonds and in a recovery scenario.

Revised 'AAA' Breakeven AP

Fitch's 'AAA' breakeven AP of 97.0%, revised from 96.5%, corresponds to a 3.1% 'AAA' breakeven OC, which allows the covered bonds to attain a 'AA+' rating on a timely payment rating level and one-notch recovery uplift to 'AAA'.

The change in 'AAA' breakeven AP was driven by the change in the ALM loss component, reflecting the modelled asset and liability mismatches, inclusive of the modelled excess spread and the effect of the pro rata sales clause documented in the programme. The ALM loss has improved to -0.2%, from 0.7% at the previous analysis, due to improved modelled asset and liability mismatches.

The credit loss component, which is the driver of the breakeven AP, reflects the credit quality of the underlying cover pool. This component is maintained from the previous analysis, at 3.1%.

Cover Pool Summary

The cover pool consisted of 112,843 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD37.3 billion, as of end-December 2023. The cover pool's weighted-average current loan/value ratio was 57.6% and the loans' weighted-average seasoning was 46.5 months. The pool comprised investment loans (27.3%) and interest-only loans (7.6%). The cover pool is geographically diversified, with the major concentrations in the Australian states of New South Wales (38.0%) and Victoria (30.3%).

RATING SENSITIVITIES

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

The covered bond rating is at the highest level on Fitch's scale and cannot be upgraded.

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

NAB's 'AAA' covered bond rating would be vulnerable to a downgrade if the bank's Long-Term 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 97.0%. 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 remain at 'AAA'.

The breakeven AP will be affected, among other things, 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.

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 the Long-Term 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 programme, 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 https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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