Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, A+/Stable/F1) AUD34.1 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 on 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 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 of 93.4% used in the programme's asset coverage test, which provides more protection than Fitch's revised breakeven AP of 96.0%.

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. As part of resolution planning Australian banks may provide for loss absorbing capacity as determined by the regulator; however, covered bonds are not explicitly exempt from bail-in should a bank be resolved. This 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 upon the loss of 'A-' and 'F1' ratings.

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 about 90% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect these swaps to terminate following a default of the covered bonds, exposing recoveries to currency risk.

'AAA' Breakeven AP

Fitch's 'AAA' breakeven AP of 96.0% corresponds with a 4.2% '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 'AAA' breakeven AP has worsened slightly since the previous analysis (96.5%) due to the increase in the ALM loss component.

The ALM loss has increased to 0.8%, from 0.4%, driven by a slightly lower asset margin modelled on the variable rate mortgages. The credit loss component reflects the credit quality of the underlying cover pool and contributes 3.3% to the breakeven OC for the rating. This component has remained stable at 3.3% since the previous analysis.

Cover Pool Summary

The cover pool consisted of 142,162 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD43.4 billion at 27 April 2023 (pool cut date 20 March 2023). The cover pool's weighted-average current loan/value ratio (LVR) was 60.5%. The pool comprised investment loans (30.4%) and interest-only loans (9.1%). The cover pool is geographically diversified, with the major concentrations in the Australian states of New South Wales (37.3%) and Victoria (27.1%).

The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action.

RATING SENSITIVITIES

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

The rating on the covered bonds is 'AAA', which is the highest level on Fitch's rating scale. Therefore, the rating 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 96.0%.

There is no rating impact on the bonds if the relied-upon AP in the programme rises up to the maximum 95.0% contractual AP stipulated in the programme documents, as it supports a greater level of overcollateralisation than Fitch's 'AAA' breakeven AP.

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

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