Fitch Rates CBA's Series 50 & 51 Covered Bonds 'AAA'; Outlook Stable
KEY RATING DRIVERS
The rating is based on CBA's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 4 notches (moderate risk), and the asset percentage (AP) relied upon in Fitch's analysis of 89.5%, which is equivalent to Fitch's 'AAA' breakeven AP of 89.5%. The breakeven AP 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 CBA's IDR.
The 89.5% 'AAA' breakeven AP corresponds to a breakeven over-collateralisation (OC) of 11.7%. The asset disposal loss component of 14.3% remains the main driver due to significant maturity mismatches between the cover assets at 14.8 years versus the liabilities at 4.8 years and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss component of 3.6%. Credit given to excess spread under the cash flow valuation component reduced the 'AAA' breakeven OC by 5.0%.
The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: CBA's IDR is downgraded by four notches; the D-Cap falls by more than three notches; or the AP that Fitch takes into account in our analysis rises 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.