Fitch Rates ANZ's bn Covered Bonds 'AAA'/Stable

Fitch Ratings has assigned Australia and New Zealand  Banking Group Limited's (ANZ, AA-/Stable/F1+) Series 2015-1 bn mortgage  covered bonds a rating of 'AAA'. The Outlook is Stable. This brings ANZ's total  outstanding issuance to AUD18bn. The fixed rate bond is due in May 2020 and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS

The rating is based on ANZ's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 2 (high), and an asset percentage (AP) of 87.0%, which provides a small buffer to Fitch's breakeven AP of 89.5%, supporting a tested rating of 'AA' on a probability of default (PD) basis, and a rating of 'AAA' after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on ANZ's IDR.

The 'AAA' break even AP of 89.5%, corresponding to a break even (OC) of 11.7%, is driven by an asset disposal loss component of 15.5% due to maturity mismatches and the refinancing assumptions applied to Australian residential mortgages, followed by the cover pool's credit loss of 4.2% in a 'AAA' scenario. The cash flow valuation component reduces the 'AAA' breakeven OC by 6.4% due to the excess spread available under the programme.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade should any of the following occur: ANZ's IDR is downgraded by two notches; the D-Cap falls by more than one category; or the AP that Fitch takes into account in its analysis increased above the 'AAA' breakeven AP of 89.5%.

Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among others, 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 the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the weighted average frequency of foreclosure at the tested rating on a probability of default basis. In its cash flow modelling of the asset cash flows, this multiple stresses the level of loans falling delinquent in the cover pool over a period of time, curing thereafter.