Fitch Ratings has affirmed Commonwealth Bank of Australia's (CBA, A+/Stable/F1) AUD33.0 billion equivalent of outstanding mortgage covered bonds as of 24 April 2024 at 'AAA'.

The Outlook is Stable.

This follows a periodic review of the covered bond programme.

KEY RATING DRIVERS

The 'AAA' rating of the mortgage covered bonds is based on CBA's Long-Term Issuer Default Rating (IDR) of 'A+', the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection provided through the programme's asset percentage (AP). Fitch's breakeven AP remains unchanged.

The covered bonds are rated four notches above the bank's IDR, at the highest end of the rating scale. This is out of a maximum achievable uplift of seven notches, consisting of a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. Fitch's analysis relies on the programme's committed AP used in the programme's asset coverage test (ACT), which is 95.0%.

The Stable Outlook on the rating reflects the three-notch buffer against a downgrade of the issuer's IDR.

Uplifts

Australia's Resolution Planning Regulation does not contain statutory senior debt bail-in powers. Therefore, there is no clear distinction on the relative resolution position of covered bonds to senior liabilities. This means the resolution uplift for Australian covered bonds remains unchanged at zero notches.

The PCU remains unchanged at six notches and reflects the strength of liquidity protection in place in the form of a 12-month pre-maturity test on the hard-bullet bonds, which have a cure period of six months, and the 12-month extension period on the soft-bullet bonds, which make up the bulk of the issuance. The issued hard-bullet bonds have less liquidity protection due to the six-month cure period, but Fitch believes it is unlikely they will cause a cross-default due to the size and distribution of the remaining hard-bullet bonds. They form a relatively small proportion of the liability profile and continue to reduce as a result of maturity and further soft-bullet issuance. The PCU also reflects the three-month interest protection in the form of a reserve that has been fully funded as of the last payment date.

The recovery uplift on the rating is capped at one notch, as the programme is exposed to foreign-exchange risk from recoveries in a default of the covered bonds, which lowers recovery expectation. This is because the longer-dated assets are denominated in Australian dollars while 98.5% of the covered bonds outstanding are denominated in other currencies. Swaps are in place on the liabilities, but we expect these swaps to terminate in a recovery scenario.

'AAA' Breakeven AP

Fitch's 'AAA' breakeven AP remains at 97.0%, corresponding to a 3.1% 'AAA' breakeven OC, which allows the covered bonds to attain a 'AA+' timely payment rating level and one notch of recovery uplift to 'AAA'.

The ALM loss component has worsened slightly to 0.5%, from 0.2%, mainly due to a lower modelled variable-rate asset margin over the bank bill swap rate.

The credit loss component of 2.8% is the largest component of the 'AAA' breakeven AP and has been maintained as we carried forward the results of our asset model in line with the Covered Bonds Rating Criteria.

Cover Pool Summary

The cover pool consisted of 147,000 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of about AUD35.6 billion at 31 March 2024. The cover pool's weighted-average unindexed current loan/value ratio (LVR) was 51.7% and the loans' weighted-average seasoning was 62.5 months. The pool includes interest-only loans (4.9% of the pool) and investment loans (23.8%). The cover pool is geographically diversified, with the major concentrations in New South Wales (39.2%) and Victoria (28.1%).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The rating on the covered bond is 'AAA', which is the highest level on Fitch's rating scale. The rating cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

CBA's 'AAA' covered bond rating would be vulnerable to a downgrade if the bank's IDR were downgraded by four or more notches to 'BBB' or below; or if the relied-upon AP were to provide less protection than Fitch's 'AAA' breakeven AP of 97.0%. If the AP in the ACT equals the maximum 95.0% contractual AP stipulated in the programme documents, there would still be no impact on the covered bond rating.

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 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.

SOURCES OF INFORMATION

The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The covered bond rating is driven by the credit risk of the issuing financial institution, as measured by its Long-Term IDR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the programme, either due to their nature or the way in which they are being managed by the programme. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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