OREANDA-NEWS. September 21, 2015.  Fitch Ratings has affirmed Westpac Banking Corporation's (WBC, AA-/Stable/F1+) AUD25.96bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS
The rating is based on WBC's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) of 89.0% used in the programme's asset coverage test, which is lower than Fitch's 'AAA' breakeven AP of 89.5%, supporting 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 WBC's IDR.

The 'AAA' breakeven AP of 89.5%, corresponding to a breakeven overcollateralisation (OC) of 11.7%, is driven by the asset disposal loss component of 15.5% due to significant maturity mismatches in the programme and the refinancing assumptions applied to Australian residential mortgages, followed by the cover pool's credit loss component of 3.6%. The cash flow valuation component reduces the 'AAA' breakeven OC by 6.4% due to the excess spread available in the programme. The 'AAA' breakeven AP has not changed since the last analysis in January 2015, due to the stable composition of the cover pool.

As of 31 July 2015, the cover pool consisted of 131,611 loans secured by first-ranking mortgages over Australian residential properties with a total outstanding balance of AUD31.98bn. The cover pool credit quality has remained relatively stable over the past 12 months. Fitch's calculated 'AAA' expected loss is 3.5% on the residential mortgage assets, which benefits from credit to lenders mortgage insurance. Maturity mismatches are significant, with the WA residual life of the assets at 15.1 years and the liabilities at 3.8 years.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) WBC's IDR was downgraded by three notches to 'A-'; (ii) the D-Cap fell by three 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 89.5%.

Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover pool 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.