OREANDA-NEWS.  Fitch Ratings has affirmed ASB Bank Limited's (ASB, AA-/Stable/F1+) outstanding mortgage covered bonds 'AAA'. The Outlook is Stable. This rating action follows the recent sale of mortgage loans totalling NZD2.0bn into the cover pool on 5 May 2016.

The sale brings the total value of the cover pool to NZD6.3bn. Total outstanding covered bond issuance is NZD3.2bn, of which NZD2.7bn is issued by ASB Finance Limited and NZD500m is issued by ASB. These covered bonds are guaranteed by ASB Covered Bond Trust Limited, a bankruptcy-remote special purpose vehicle established under the laws of New Zealand.

The addition of 8,783 loans to the cover pool resulted in a slight deterioration in the overall credit quality of the portfolio. This was mainly due to the increase in the proportion of cover assets linked to ASB's line of credit product - the Orbit loan - to 58.2% from 50.3%. Fitch believes the default probability for cover assets linked to an Orbit loan is higher due to their at-call nature and if there is a sale of cover assets, the market value of the linked loans could be lower than that of non-linked loans. The change in portfolio characteristics has resulted in the decrease of Fitch's 'AAA' breakeven asset percentage (AP) to 85% from 86%.

KEY RATING DRIVERS
The rating is based on: ASB's Long-Term Issuer Default Rating (IDR) of 'AA-'; a Discontinuity Cap (D-Cap) of 2 notches; and the AP that Fitch relies on in its analysis being the highest nominal AP in the last 12 months (74.1%). The AP provides a large buffer when compared to Fitch's breakeven AP for a 'AAA' rating of 85%. This supports a 'AA' tested rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries. The Outlook on the covered bonds reflects the Stable Outlook on ASB's IDR.

The 'AAA' breakeven AP of 85%, corresponding to a breakeven overcollateralisation (OC) of 17.6%, is driven by the asset disposal loss component of 21.7%, which reflects the maturity mismatches in the programme - with the weighted-average (WA) residual life of the assets at 13.6 years, and the liabilities at 2.8 years - and the refinancing assumptions applied to New Zealand residential mortgages. The cover pool's credit loss component increased to 4.9% from 4.2% due to the change in the cover pool characteristics. The cash flow valuation component reduces the 'AAA' breakeven OC by 7.2%, which reflects the longer WA stressed life of the assets versus the outstanding liabilities and the excess spread available under the programme.

As of 5 May 2016, the cover pool consisted of 36,999 loans secured by first-ranking mortgages of New Zealand residential properties with a total outstanding balance of NZD6.3bn and a WA loan-to-value ratio of 47.5%. Based on the outstanding value of the cover assets, loans with interest-only periods make up 13.9% of the pool, loans attached to investment properties accounted for 18.0% and loans linked to an Orbit loan comprise 58.2%. The cover pool is geographically spread across New Zealand with the highest concentration in Auckland (62.7%).

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) ASB's IDR was downgraded by two notches to 'A'; (ii) the D-Cap fell by two categories to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 85%.

Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, amongst 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.