OREANDA-NEWS. November 17, 2015. Fitch Ratings has affirmed Australia and New Zealand Banking Group Limited's (ANZ, AA-/Stable/F1+) AUD15.9bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS

The rating is based on ANZ's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3, and the asset percentage (AP) of 87.0% used in the programme's asset coverage test, which is lower than Fitch's 'AAA' breakeven AP of 89.5%. These factors support a 'AA' tested rating on a probability of default (PD) basis and a 'AAA' rating after giving credit for recoveries given default of the covered bonds. The Outlook on the covered bonds reflects the Stable Outlook on ANZ's IDR.

The 89.5% 'AAA' breakeven AP corresponds to a breakeven over-collateralisation (OC) of 11.7%. The asset disposal loss component of 14.4% remains the main driver due to significant maturity mismatches between the cover pool and covered bonds (cover assets at 16.1 years versus liabilities at 4.3 years) and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss component of 4.2%. Credit given to excess spread under the cash flow valuation component reduced the 'AAA' breakeven OC by 5.7%. The 'AAA' breakeven AP has not changed since the last analysis in May 2015, due to the stable composition of the cover pool.

The D-Cap of 3 reflects the weak-link assessment of liquidity gap and systemic risk, which is driven by the limited cure period of up to six months in the aftermath of an issuer event of default for the hard-bullet bonds issued. Fitch's analysis has assessed the time required to sell cover pool assets in Australia in a stressed market at 12 months.

As of 30 September 2015, the cover pool consisted of 87,635 loans secured by first-ranking mortgages over Australian residential properties with a total outstanding balance of AUD23.26bn. The cover pool's credit quality has remained relatively stable over the past 12 months. Fitch's calculated 'AAA' expected loss is 4.0% on the residential mortgage assets.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) ANZ's IDR was downgraded by three notches to 'A-'; (ii) the Discontinuity 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 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.