Fitch: Asia-Pacific Safest Region for Cover Pool Credit

Asia-Pacific is the safest region for mortgage cover pools, according to Fitch Ratings' analysis of 'B' portfolio loss rates (PLR) across all its rated covered bond programmes. The average 'B' PLR for Fitch-rated Asia-Pacific covered bond programmes was 0.4%, half the average 'B' PLR for Fitch-rated non-peripheral eurozone covered bond programmes.

Fitch's 'B' PLR corresponds to the cover pool's lifetime loss expectation in a low-stress scenario. The rating scenario represents a mild stress, which differentiates it from the expected-case scenario. It is used to compare the creditworthiness of loan portfolios securing covered bonds, irrespective of the covered bonds' rating. Fitch's "APAC Covered Bonds Quarterly - 3Q17" report outlines the average change in the 'B' PLR for the Asia-Pacific region compared with 2016 and ranks the countries where the agency rates mortgage covered bond programmes.

Fitch has also compared the credit quality of the cover pools against residential mortgage-backed securities (RMBS) transactions. The agency expected cover pools to be of better credit quality than RMBS in countries where issuing banks use both for funding, as covered bond issuers actively manage pools by removing arrears and defaulted loans and limit higher loan/value ratio (LVR) loans, which is not the case for RMBS transactions.

However, when looking at 36 RMBS transactions originated by Fitch-rated covered-bond issuing banks in Australia, the reverse was true. The average 'B' PLR across the RMBS transactions was 0.3% lower than that of the cover pool. This was due to the use of lenders' mortgage insurance in the portfolios, which enhances recoveries in low rating stresses on defaulted loans compared with cover pools that have little or no lenders' mortgage insurance. Generally, lenders' mortgage insurance is taken out by the mortgage lender for loans with an LVR of 80% or more. Before 2010, it was common for originators to have lenders' mortgage insurance on the entire loan portfolio.

The use of lenders' mortgage insurance has been decreasing in RMBS transactions over the past couple of years; as of end-3Q17, only 59% of the prime RMBS market had lenders' mortgage insurance cover, down 0.8% from the previous quarter. Should this trend continue, the average 'B' PLR on RMBS will increase over time.

Fitch's "APAC Covered Bonds Quarterly - 3Q17" report also contains aggregate information on the 15 Asia-Pacific programmes that Fitch rates publicly grouped by country and each programme's individual statistics as well as commentary on covered bond rating actions and issuance. Data is as of end-September 2017. The report can be accessed at www.fitchratings.com or via the link above.

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