Fitch Ratings has assigned National Australia Bank Limited's (NAB, A+/Stable/F1) Series 40 USD1,650 million fixed-rate mortgage covered bonds a rating of 'AAA'.

The Outlook is Stable.

This issuance brings NAB's total outstanding covered bonds to the equivalent of AUD23.3 billion. The bond is due in November 2027 and benefits from a 12-month extendable maturity.

KEY RATING DRIVERS

The 'AAA' rating of the mortgage covered bonds is based on NAB's Long-Term Issuer Default Rating (IDR) of 'A+', the various uplifts above the IDR granted to the programme and the overcollateralisation protection provided through the programme's asset percentage (AP).

The covered bonds are rated four notches above the bank's IDR. This is out of a maximum achievable uplift of seven notches, consisting of a resolution uplift of zero notches, a payment continuity uplift of six notches and a recovery uplift of one notch. Fitch's analysis relies on the programme's committed AP used in the asset coverage test, which is equal to the 'AAA' breakeven AP of 93.5%.

The Stable Outlook reflects a three-notch buffer against an IDR downgrade.

RATING SENSITIVITIES

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

The rating on the covered bond is 'AAA', which is the highest level on Fitch's rating scale. The rating cannot be upgraded.

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

The rating on NAB's covered bonds would be vulnerable to a downgrade if the bank's 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 93.5%. If the AP in the programme rises to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA-', one notch above the IDR.

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 the 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.

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

Date of Relevant Committee

08 June 2022

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 the 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 entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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