OREANDA-NEWS. Fitch Ratings has affirmed National Australia Bank Limited's (NAB, AA-/Stable/F1+) AUD18.1bn of outstanding mortgage covered bonds at 'AAA'. The Outlook is Stable.

The rating is based on NAB's Long-Term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 4; and the asset percentage (AP) of 89.5% used in the programme's asset coverage test, 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 NAB's IDR.

The 89.5% 'AAA' breakeven AP corresponds to a breakeven over-collateralisation (OC) of 11.7%. The asset disposal loss component of 14.1% remains the main driver due to significant maturity mismatches between the cover assets at 16.2 years versus the liabilities at 5.4 years and the refinancing assumptions applied to Australian residential mortgages. This is followed by the cover pool's credit loss component of 3.8%. Credit given to excess spread under the cash flow valuation component reduced the 'AAA' breakeven OC by 5.7%.

The D-Cap of 4 notches reflects Fitch's assessment of liquidity gap and systemic risk (moderate risk), which is driven by the agency's view of the liquidity gap mitigants, in the form of a three-month interest reserve fund which will be funded at the loss of 'F1+', the 12 month extension period for the issued soft bullet bonds and the pre-maturity test for the issued hard bullet bonds.

As of 31 October 2015, the cover pool consisted of 83,142 loans secured by first-ranking mortgages over Australian residential properties with a total outstanding balance of AUD24.9bn and a weighted average current loan/value ratio of 58.3%. Fitch's calculated 'AAA' expected loss is 4.0% on the residential mortgage assets, which benefits from credit to lenders mortgage insurance.

The 'AAA' rating would be vulnerable to a downgrade should any of the following occur: NAB'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' break-even 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' break-even AP to maintain the covered bond rating cannot be assumed to remain stable over time.