March 30, 2017 / 6:36 AM / 10 months ago

Fitch Affirms Suncorp-Metway's Mortgage Covered Bonds at 'AAA'/Stable

(The following statement was released by the rating agency) SYDNEY, March 30 (Fitch) Fitch Ratings has affirmed Suncorp-Metway Limited's (SML, A+/Stable/F1) AUD2.5 billion of outstanding mortgage covered bonds at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The rating is based on SML's Long-Term Issuer Default Rating (IDR) of 'A+', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and the asset percentage (AP) of 89.29% used in the programme's asset coverage test, which Fitch relies upon in its analysis. This AP is lower than Fitch's 'AAA' breakeven AP of 93.5% and supports a 'AA' tested rating on a probability-of-default basis and a recovery uplift (RU) of two-notches to 'AAA' The Outlook on the covered bonds reflects the four-notch buffer against the downgrade of SML's IDR. The 'AAA' breakeven AP corresponds to a breakeven overcollateralisation (OC) of 7.0% and is driven by the asset disposal loss component of 12.6%, which reflects the maturity mismatches between the cover pool (13.6 years) and the covered bonds (3.8 years). The mismatch creates the need for a stressed sale to meet timely payment of the bonds. The credit loss component contributes 1.8% and has increased slightly since the last analysis due to a slight deterioration of the credit risk on the cover pool assets. The cash flow valuation component decreases the OC by 7.4%, representing the excess spread modelled by Fitch in the programme. The IDR uplift remains unchanged at zero notches. Australia does not have a specific advance resolution regime, but the regulator can resolve a bank under its regulatory powers pursuant to the Banking Act. Even so, covered bonds are not explicitly exempt from bail-in should a bank be resolved, giving rise to the risk of cover pool enforcement. Therefore, SML's Long-Term IDR remains the floor for its covered bond rating. 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 bond. The programme also provides for a three-month reserve for interest payments in its structure. SML's covered bonds benefit from a two-notch RU, as Fitch sees the underlying assets as standard and the breakeven OC compensates for the credit loss modelled in a 'AAA' stress scenario. Also, all of SML's cover assets and covered bonds are denominated in Australian dollars, hence, currently there is no FX risk exposure in a recovery scenario. Therefore, Fitch does not expect any material downside risk to recovery expectations. The cover pool consisted of 12,914 loans at end-February 2017, secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of AUD2.9 billion. The cover pool's weighted-average loan-to-value ratio (LVR) was 68.6%, the Fitch-calculated indexed current LVR was 64.1% and the weighted-average seasoning was 71 months. Investment loans formed 21.4% of the pool, while 13.9% of the pool was interest-only loans. The cover pool is concentrated in Queensland with 52.7% of loans originated in the state. As of 28 February 2017, 53.0% of the pool had lender's mortgage insurance (LMI) cover; however, any further advances granted after the original settlement of a loan may not necessarily be covered by LMI. This consideration was incorporated into Fitch's analysis. RATING SENSITIVITIES Suncorp-Metway Limited's covered bonds would be vulnerable to a downgrade if the relied upon AP rises above the 'AAA' breakeven AP of 93.5% or where the issuer's IDR falls below 'BBB'. If the nominal AP in the programme rises to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', two notches above the IDR. 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 the 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. Contact: Primary Analyst Sambit Agasti Analyst +61 2 8256 0337 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 The source of information used to assess these ratings was Suncorp-Metway Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Criteria (pub. 30 Aug 2016) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Criteria for Lenders’ Mortgage Insurance in RMBS (pub. 28 Jul 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021350 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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