Bank of Queensland Limited: Soft Bullet Mortgage Covered Bonds Programme.

Fitch Ratings has assigned Bank of Queensland Limited's (BOQ, A-/Stable/F2) proposed euro soft-bullet mortgage covered bonds a 'AAA(EXP)' rating. The Outlook is Stable.

BOQ has established its new programme in addition to its existing one. Under BOQ's second mortgage covered bond programme, BOQ can periodically issue soft-bullet covered bonds up to AUD6 billion equivalent, secured by a dynamic pool of Australian residential mortgage loans. BOQ's first covered bond programme which issues conditional pass-through covered bonds will continue to exist.

The assignment of the final rating is contingent upon receipt of final documents conforming to the information already received.

KEY RATING DRIVERS

The 'AAA(EXP)' mortgage covered bond rating is based on BOQ's Long-Term Issuer Default Rating (IDR) of 'A-', a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch.

The proposed covered bonds are rated six notches above the bank's IDR. This is out of a maximum achievable uplift of seven notches. The expected rating also relies upon the asset percentage (AP) of 90.9% applied in the programme, which provides more protection than the agency's 'AAA(EXP)' breakeven AP of 96.0%. Fitch's breakeven AP analysis assumes a five-year bond with a 12-month extension period, in line with the issuer's expectation, and one more bond of the same size with longer maturity (seven years) with a 12-month extension period, in line with Fitch's expectation.

The one-notch buffer against a downgrade of the bank's IDR supports a Stable Outlook.

Uplifts

The covered bonds are granted a zero-notch resolution uplift, resulting in a resolution reference point of 'A-'. This reflects that Australia's Resolution Planning Regulation which 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. .

The six-notch PCU reflects the programme's liquidity protection in the form of a soft-bullet issuance with a 12-month principal extension period, as well as interest liquidity provisions in the form of a reserve (swap payments if swapped or interest payments) and senior expenses on a rolling three-month basis if BOQ's Long-Term IDR falls below 'A-' and Short-Term IDR below 'F1'.

Fitch has granted a recovery uplift of one notch to the programme, above the timely payment rating level of 'AA+'. The covered pool assets are denominated in Australian dollars while bonds issued from this programme will be denominated in various currencies. All foreign-denominated bonds are fully hedged but these hedges are expected to terminate upon a covered bond default and such foreign-exchange risk could have a material impact on recoveries. This could lower our recovery expectation and, therefore, the recovery uplift is capped at one notch.

The 'AAA(EXP)' breakeven AP of 96.0% corresponds to the overcollateralisation (OC) of 4.2%, meeting timely payments in a 'AA+' stress scenario and recoveries given default with a one-notch recovery uplift considered under Fitch's Covered Bonds Rating criteria.

The credit loss component of 3.3% is the largest component of the breakeven OC for the expected rating. The ALM loss component reflects the modelled asset and liability mismatches, inclusive of the modelled excess spread, reinvestment costs for mortgage collection and contributes 1.1% to the breakeven OC for the expected rating.

Cover Pool Summary:

The provisional cover pool consisted of 3,255 loans secured by first-ranking mortgages on Australian residential properties, with a total outstanding balance of AUD1.2 billion as of 10 March 2024. The pool is geographically concentrated in Queensland (51.3%) followed by New South Wales (22.9%) and Victoria (13.5%) under Fitch's methodology. Nonetheless, the pool's credit is comparable with peers' and the overall low credit risk results in the expected loss being driven by the portfolio loss floor of 4.0% at 'AAA' rating stress.

The credit loss is driven by the 'AAA' portfolio loss floor of 4% in Fitch's criteria, which is applied to address the idiosyncratic risks of low-credit risk portfolios. The 'AA+' minimum loss assumption of 3.2% translates into a credit loss of 3.3%, which was used for 'AAA' breakeven OC analysis.

RATING SENSITIVITIES

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

The covered bonds are rated 'AAA(EXP)', which is the highest level on Fitch's scale. The rating cannot be upgraded.

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

BOQ's 'AAA(EXP)' covered bond rating would be vulnerable to a downgrade if the bank's Long-Term IDR were downgraded by two or more notches to 'BBB' or below; or if the AP considered by Fitch in our analysis were to provide less protection than Fitch's 'AAA(EXP)' breakeven AP of 96.0%. If the AP in the asset coverage test (ACT) equals the maximum 95.0% contractual AP stipulated in the programme documents, there would be still no impact to the expected covered bond rating.

Fitch's breakeven AP for the covered bond rating will be affected, among other factors, 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 breakeven AP to maintain the covered bond rating cannot be assumed to 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, 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 www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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