Fitch Ratings has assigned Bendigo and Adelaide Bank Limited's (BEN, A-/Stable/F2) Series 2023-1 and 2023-2 mortgage covered bonds a rating of 'AAA'.

The Outlook is Stable.

This is the second issuance under the programme, totaling AUD750 million, which is split over Series 2023-1 and Series 2023-2. Series 2023-1 is a AUD400 million floating rate bond and Series 2023-2 is a AUD350 million fixed-rate bond. Both bonds are due June 2028 and benefit from a 12-month extendable maturity. This brings the total outstanding issuance to AUD1.2 billion.

KEY RATING DRIVERS

The 'AAA' rating is based on BEN'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).

The covered bonds are rated six notches above the bank's IDR, at the highest end of the rating scale. This is out of a maximum achievable uplift of eight notches, consisting of a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches. We rely on the 91.5% AP applied in the asset coverage test, which provides more protection than Fitch's 'AAA' breakeven AP of 95.0%.

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

'AAA' Breakeven AP

The 'AAA' breakeven AP of 95.0% corresponds to a 5.3% 'AAA' breakeven OC, which allows the covered bonds to support a 'AA' timely payment rating level and two notches of recovery uplift to 'AAA'. This is driven by the 2.9% credit loss component, reflecting the low credit risk of the underlying cover pool. Our analysis is driven by the application of the criteria portfolio loss floor (4% at AAA) due to the low credit loss calculated on the portfolio.

The ALM loss component, which reflects the modelled asset and liability mismatches, inclusive of the modelled excess spread and the pro rata sales constraint, contributed 2.5%. This has increased from the previous level of 2.1% as the new bonds have increased the weighted-average bond margin and bond swap margin, which slightly reduced the modelled excess spread. Nonetheless, Fitch's breakeven AP remains unchanged even after an increase of the ALM loss component due to the AP being rounded to the nearest 0.5%.

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 covered bonds are rated at the highest level on Fitch's scale and cannot be upgraded.

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

The covered bond rating is vulnerable to a downgrade if BEN's IDR is downgraded by three 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' breakeven AP of 95.0%. Even if the AP in the asset coverage test equals the maximum 95.0% contractual AP stipulated in the programme documents, there would be no impact on the 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.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the bonds (or programme), either due to their nature or the way in which they are being managed by the bonds. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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