Fitch Ratings has affirmed Australia and New Zealand Banking Group Limited's (ANZ, A+/Stable/F1) AUD13.6 billion equivalent of outstanding mortgage covered bonds at 'AAA'.

The Outlook is Stable.

This follows a periodic review of the covered bond programme.

KEY RATING DRIVERS

The mortgage covered bond rating is based on ANZ's Long-Term Issuer Default Rating (IDR), the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection provided through the programme's asset percentage (AP).

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. For its analysis, Fitch relies on the committed AP used in the programme's asset coverage test (ACT) of 90.5%, which protects more than Fitch's breakeven AP of 96%.

The Stable Outlook 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 leaves the resolution uplift for Australian covered bonds unchanged at zero notches.

The PCU is unchanged at six notches. It reflects the strength of liquidity protection in the form of a 12-month extension period on the outstanding soft-bullet bonds. The programme also has three-month interest protection in the form of a reserve that was fully funded following the downgrade of ANZ's Short-Term IDR to 'F1', from 'F1+', in April 2020.

The recovery uplift is capped at one notch, as the programme is exposed to foreign-exchange risk from recoveries given default of the covered bonds. This is because the assets are denominated in Australian dollars and are longer-dated than all the covered bonds outstanding, which are euro-denominated. Swaps are in place on the liabilities, but we expect these to terminate in a recovery scenario, which lowers our recovery expectation.

'AAA' Breakeven AP

Fitch's unchanged 'AAA' breakeven AP of 96.0% corresponds to 4.2% 'AAA' breakeven OC, which allows the covered bonds to attain a 'AA+' timely payment rating and one notch of recovery uplift to 'AAA'. The ALM loss is 1.1% and the credit loss component is 3.3%.

Cover Pool Summary

The cover pool consisted of 65,444 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of AUD20.1 billion at 2 April 2024. The pool's weighted-average (WA) current loan/value ratio was 59.5% and WA seasoning was 42.7 months. The pool comprised investment (25.4%) and interest-only loans (5.5%) and was geographically diversified, with the largest portion in Victoria, at 34.7%, followed by New South Wales and the Australian Capital Territory at 31.5% combined.

The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action.

RATING SENSITIVITIES

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

The rating is at the highest level on Fitch's rating scale and cannot be upgraded.

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

The covered bond rating would be vulnerable if ANZ's Long-Term IDR were to be 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 96.0%. There is no rating impact on the bonds if the relied-upon AP rises to the maximum 95.0% contractual AP stipulated in the programme documents, as it supports a greater level of OC than Fitch's 'AAA' breakeven AP.

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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