Bayerische Landesbank

Transcription

1 CREDIT OPINION Bayerische Landesbank Update following legislative change in Germany Update Summary RATINGS Bayerische Landesbank Domicile Germany Long Term CRR Type LT Counterparty Risk Rating - Fgn Curr Outlook Not Assigned Long Term Debt Type Senior Unsecured Dom Curr Outlook Stable Long Term Deposit Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. On August 18, we reclassified as junior senior unsecured the senior debt instruments of Bayerische Landesbank (BayernLB) and downgraded them to A from A1 negative. At the same time, we reclassified complex structured debt instruments as senior unsecured and affirmed their ratings at stable. As a result, we upgraded the bank's issuer and senior unsecured program ratings to stable and (P) from A1 negative and (P)A1, respectively. We also affirmed the bank's stable/p deposit ratings. We continue to assign a Baseline Credit Assessment (BCA) of baa, an Adjusted BCA of ba and Counterparty Risk Ratings (CRRs) of /P. BayernLB's ratings reflect (1) its baa BCA; () its ba Adjusted BCA, incorporating our assessment of a high probability of affiliate support from Sparkassen-Finanzgruppe (SFinanzgruppe, Aa stable, a)1, which results in two notches of rating uplift; () the result of our Advanced Loss Given Failure (LGF) analysis, which provides three notches of rating uplift to the bank's senior unsecured debt and deposit ratings; and (4) our assumption of a moderate probability of government support for the bank's deposit and senior unsecured debt ratings, equivalent to one additional notch of rating uplift. BayernLB's baa BCA reflects the bank's healthy asset quality and its sound capital ratios. At the same time, its BCA is constrained by the bank's low profitability and wholesaledependent funding profile. Exhibit 1 Rating Scorecard - Key financial ratios Contacts BayernLB (BCA: baa) Carola Schuler MD-Banking carola.schuler@moodys.com CLIENT SERVICES 5% 16% 45% 14% 4% 5% 1% % 1% 5% 8% 6% % 15%.1% 4% 1% % 16.8% Asia Pacific Japan EMEA % 44.1%.1% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % 5% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Americas Median baa-rated banks 18% Source: Moody's Financial Metrics Profitability: Net Income/ Tangible Assets Liquidity Factors (RHS) Liquidity Factors Alexander Hendricks, CFA Associate Managing Director alexander.hendricks@moodys.com Solvency Factors Katharina Barten Senior Vice President katharina.barten@moodys.com

2 Credit strengths» Sound asset quality and low tail risks from noncore exposures» Sound capitalisation» Adequate liquidity to balance high market-funding dependence Credit challenges» High sector concentrations related to commercial real estate and utilities» Profitability challenged by low interest rates and cost pressures» High wholesale funding dependence» Legal risk related to a legacy dispute over amounts due from Heta Asset Resolution AG (Heta, A) Outlook The outlook is stable and reflects our expectation that, despite continued strain on profitability, the bank will be able to at least sustain its improved solvency over the next 18 months, supported by a benign domestic credit environment. While mildly stronger metrics could translate into a higher BCA in the next 18 months, the stable outlook reflects that a single-notch upgrade to the BCA would not translate into a higher Adjusted BCA and, therefore, not result in upgrades to the bank's debt and deposit ratings. Factors that could lead to an upgrade» An upgrade of BayernLB's ratings could be triggered by a two-notch uplift to the bank's BCA, which would be needed to trigger upward pressure on the bank's ba Adjusted BCA, based on our high sector support assumptions.» A BCA upgrade by more than one notch would be subject to a combination of (1) a reduction in market funds relative to total assets; () an increase in liquid resources; () higher capital ratios combined with improvements in balance-sheet leverage; and (4) strengthening recurring earnings.» In addition, junior senior unsecured debt and subordinated instrument ratings could be upgraded because of lower loss given failure, for example, if subordination were to increase, although this seems unlikely at present. The potential for a higher LGF result does not apply to BayernLB's senior unsecured debt and deposit ratings because with three notches of rating uplift from the Adjusted BCA, the respective ratings already benefit from the highest possible LGF result. Factors that could lead to a downgrade» A downgrade of BayernLB's ratings could be triggered following (1) a deterioration in the bank's financial fundamentals supporting its BCA; () indications of weakening support from S-Finanzgruppe; () an increase in the expected loss severity because of changes in the bank's liability structure, which could result in fewer notches of rating uplift as a result of our Advanced LGF analysis; or (4) a lower likelihood of government support.» A downgrade of BayernLB's BCA could result from weakening asset-quality or capital metrics, although there is some leeway for weaker metrics within the baa BCA category. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

3 Key indicators Exhibit Bayerische Landesbank (Consolidated Financials) [1] Total Assets (EUR billion) Total Assets (USD billion) Tangible Common Equity (EUR billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) CAGR/Avg [1] All figures and ratios are adjusted using Moody's standard adjustments. [] Basel III - fully-loaded or transitional phase-in; IFRS. [] Basel II; IFRS. [4] May include rounding differences due to scale of reported amounts. [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented. Source: Moody's Financial Metrics Profile Headquartered in Munich, Bayerische Landesbank (BayernLB) is a German universal bank offering financial products and services to retail customers, medium-sized and large corporate clients, and real estate customers. BayernLB fully owns Deutsche Kreditbank AG (DKB, A1 stable/a, baa), a commercial bank that conducts public sector, corporate and online retail operations. BayernLB's four operating segments are Corporates and Mittelstand, Real Estate and Savings Banks, DKB and Financial Markets, of which DKB is the strongest contributor to the group's revenue and profit. BayernLB had consolidated assets of 15 billion as of December 17. The bank is majority-owned by the Free State of Bavaria (Aaa stable4) and is a member of S-Finanzgruppe. For more information, please see BayernLB's Issuer profile and our German Banking System Profile. Weighted Macro Profile of Very Strong (-) BayernLB's Very Strong (-) Weighted Macro Profile is in line with the Very Strong (-) Macro Profile of Germany, reflecting that the bank's activities are predominantly focused on the German home market. Germany's Macro Profile reflects its very high economic, institutional and governmental financial strengths and very low susceptibility to event risk, but also the fact that operating conditions for the German banking system are constrained by high fragmentation in an oversaturated market, low fee income generation and intense competition for domestic businesses. Recent developments On August 18, we reclassified a range of senior debt instruments issued by German banks and took rating actions on them. The changes came in response to the German legislation that took effect on 1 July 18, transposing an amendment to the European Union's (EU) Bank Recovery and Resolution Directive (BRRD) into domestic law. We downgraded most of the banks senior unsecured bonds that were already outstanding on July 18, as the legislative change led us to abandon our previous assumption that these instruments would benefit from government support if required. This is because the new law ranks these legacy instruments alongside new junior senior instruments introduced to help EU banks achieve the minimum holdings of loss-absorbing debt stipulated under the BRRD's minimum requirements for own funds and eligible liabilities.

4 We also upgraded the banks' (including BayernLB's) issuer ratings and senior unsecured programme ratings. This is because the law allows German banks, for the first time since the implementation of Germany's first amendment to the national BRRD law, to issue new preferred senior unsecured debt in a plain vanilla format. These instruments, which rank as German lenders most senior plain vanilla unsecured bonds, have become the reference point for their issuer ratings. Detailed credit considerations BayernLB's asset quality is sound, but concentrated sector exposures could make it vulnerable in a downturn BayernLB's asset-risk metrics are sound, reflecting the benefits of the extended benign credit cycle in Germany, as well as the bank's focused de-risking efforts in previous years. This strength is reflected in the bank's ba Asset Risk score, two notches below the a initial score, which takes into consideration risks not captured by the bank's problem loan ratios in particular, sector concentration risks and single-borrower concentrations for which we apply negative adjustments. The overall benign domestic credit environment and the progressed wind-down of the bank's legacy noncore exposures will continue to support BayernLB's asset-risk profile in 18. The bank's noncore assets, no longer reported as a separate unit since January 17, represent a modest risk considering that a release of risk charges drove their 19 million contribution to profit in 17. That said, adjusted for a 1. billion legacy exposure to one financial institution, around 4% of BayernLB's.8 billion nonperforming loans as of December 17 were still related to noncore assets. As of year-end 17, BayernLB reported a slightly improved ratio of problem loans to gross credit exposure at 1.5%, down from 1.6% as of year-end 16. The reduction was largely driven by the sale or accelerated workout of underperforming legacy assets. Based on our calculation of the ratio of impaired loans to customers (including 9-day past due loans) to gross loans, the bank's problem loan ratio was a modest.6% as of December 17. That said, BayernLB reported a relatively large forborne exposure, which increased 14% in 17. BayernLB's risk profile benefited from adequate provisioning of around % as of year-end 17 (the ratio of loan-loss reserves to problem loans, 16: 6%), which was broadly in line with that of its domestic peers. BayernLB's 47.5 billion commercial real estate exposure (16: 46.5 billion) represents a relatively high 5.1x its Common Equity Tier 1 (CET1) capital. This concentration is somewhat mitigated by BayernLB's focus on the modestly volatile German market, in which 9% of this exposure originates, and a large 18 billion sub-portfolio of lower-risk financings for social housing, sponsored by German municipalities. BayernLB's second-largest sector concentration is on utilities, with a total of.9 billion as of December 17. With an increasing portion related to renewable energy financings, the bank is exposed to policy changes in this highly regulated sector. Most of the group's utilities exposure and the retail exposure is housed at its 1% subsidiary, DKB. BayernLB remains exposed to litigation risk in the context of some. billion due from Austrian wind-down vehicle Heta. Earlier in June 18, the Munich Higher Regional Court declared null and void a decision taken in May 15 in favour of BayernLB, stating purely formal procedural reasons. Considering that the disputed amounts due from Heta were principally considered valid claims of BayernLB in the 15 judgement, we believe the risk of deviating future judgments to be low. However, in the unlikely event that the risk were to materialise, the financial burden could be substantial. Sound capital ratios BayernLB's financial strength is underpinned by its sound capital ratios and ability to generate capital through profit retention. Our favourable assessment is reflected in the bank's ba Capital score, although we position it five notches below the aa initial score because we include negative adjustments for BayernLB's elevated leverage, the potential for rising risk-weighted assets (RWA) in a less benign credit environment or in more volatile markets, and prospective organic growth. In 18, higher RWA will likely offset further improvement in BayernLB's capital ratios from profit retention, considering that the bank is making efforts to expand in several areas of its core lending business. In this context, we expect broadly stable capital ratios this year. As of the end of March 18, the bank's fully phased-in CET1 capital ratio was 14.6%, down from 15.% three months earlier. The weakening was mainly driven by higher RWA, which increased by 4% to 6.7 billion during the three months ended March 18. The 14.6% CET1 ratio requirement of 9.4%, as determined under the Supervisory Review and Evaluation Process, is adequate in the context of its risk profile. 4

5 While BayernLB's CET1 ratio is in line with the German market average, its leverage remains somewhat below average. The bank reported its regulatory leverage ratio at 4.% as of December 17, up from.8% as of year-end 16. Profitability is challenged by low interest rates We assign a b1 Profitability score, which is two notches below the ba initial score, illustrating that BayernLB's modest profitability constrains its credit profile. Although the bank's profit generation in 17 was relatively strong on account of higher net interest income and unusually low risk charges, BayernLB's high dependence on interest income, persistent margin pressure, the volatility in its fair value measurement results and cost pressures relating to administration expenses leave the bank vulnerable to eroding profit. At the same time, the relative earnings stability and growth at DKB will continue to reduce earnings volatility and help mitigate revenue and cost pressures in the group's corporate and real estate segments in the coming years. Despite higher annual risk charges, BayernLB had a good first quarter in 18, reporting a 7 million pretax profit, which was mildly above the pretax profit in Q1 17 (+%). Higher net interest income of 45 million (+5%) more than compensated the lower fee and commission income of 6 million (5%). For full-year 17, BayernLB reported pretax results of 65 million. Adjusting the reported 78 million pretax profit in the previous year, with 178 million in positive one-off effects from the sale of equity interests, the pretax result for 17 was % higher than a year earlier. The main drivers of this growth were (1) the higher net interest income of 1.7 billion (+1%), although some of this growth corresponded to lower gains on hedge accounting from the year earlier; and () a % cost reduction to 1.6 billion. These factors more than offset the lower fee income of 6 million (1%), mainly because of lower returns on DKB's credit card business and a sharp decline in the high valuation gains recorded in 16. The 94 million risk charge (16: 87 million) remained considerably below the bank's run rate through the credit cycle. The 679 million net profit (16: 55 million) strongly benefitted from a one-off tax refund for previous years, boosting the group's profit retention in 17. DKB, which represents one of BayernLB's four operating segments, contributed 56% to the group's net interest income and 4% to its consolidated pretax profit in 17. While DKB's strong contribution and superior cost-income dynamics make the subsidiary a valuable part of the group's business mix, we understand that BayernLB will nonetheless keep up its efforts to enhance operations and efficiency at the bank level. In this context, new co-operations and various measures to strengthen business bear potential for profitability improvement, although probably not in 18 because of elevated costs. BayernLB's wholesale funding dependence constrains the baa BCA We assign a b Funding Structure score, three notches above the b1 initial score, which includes positive adjustments for BayernLB's low-cost covered bond issuances and pass-through subsidised loans included in interbank liabilities. At the same time, our assessment takes into account the fact that deposits generated through DKB are partly ring-fenced and therefore not freely available to fund BayernLB's lending business. BayernLB's wholesale-dependent funding profile weighs on its standalone credit strength. As of the end of December 17, BayernLB's market funding predominantly consisted of 54.4 billion in liabilities to banks and 41.8 billion in issued debt, equivalent to 45% of the bank's total balance sheet, broadly unchanged from the level as of December 16. The bank's relatively high market funding dependence is also illustrated in its loan-to-deposit ratio of 147% (16: 155%). That said, we recognise several mitigating factors, including the fact that interbank borrowings are inflated by some billion in pass-through loans from promotional banks to savings banks. For its funding structure, BayernLB further benefits from its access to long-term funds from its customers, as illustrated by onequarter of the bank's 9 billion customer deposits having durations of over one year. BayernLB's satisfactory liquidity reserves mitigate funding risks BayernLB's satisfactory liquidity is reflected in the assigned baa Liquidity score. Our negative adjustment from the initial score includes negative adjustments for encumbered liquid assets used as collateral and pass-through interbank claims related to promotional loans. BayernLB's short-term liquidity gaps from funding mismatches are suitably covered by liquidity buffers. The bank's comfortable liquidity profile is illustrated in its liquidity coverage ratio of 159% as of December 17 (16: 16%). 5

6 Support and structural considerations Affiliate support BayernLB benefits from S-Finanzgruppe's cross-sector support, which reduces the probability of default because such support would be available for stabilising a distressed member bank and not just to compensate for losses in resolution. Our assumption of high crosssector support provides two notches of rating uplift, leading to an Adjusted BCA of ba. Loss Given Failure (LGF) analysis BayernLB is subject to the EU BRRD, which we consider an operational resolution regime. We, therefore, apply our Advanced LGF analysis where we consider the risks faced by the different debt and deposit classes across the liability structure should the bank enter resolution. Our Advanced LGF analysis follows the recently revised insolvency legislation in Germany that became effective on 1 July 18. Following the change in law, the legal hierarchy of bank claims in Germany is now consistent with most other EU countries, where statutes do not provide full preference to deposits over senior unsecured debt. However, in our Advanced LGF analysis, we now consider not only the results of both the formal legal position (pari passu or de jure scenario), to which we assign a 75% probability, but also an alternative liability ranking, reflecting the resolution authority's discretion to prefer deposits over senior unsecured debt (full depositor preference or de facto scenario), to which we assign a 5% probability. In line with our standard assumptions, we further assume residual tangible common equity of %, post-failure losses of 8% of tangible banking assets, a 5% runoff in junior wholesale deposits and a 5% runoff in preferred deposits.» For BayernLB's deposits and senior unsecured debt, rated, our LGF analysis indicates an extremely low loss given failure, leading to a three-notch uplift from the bank's ba Adjusted BCA.» For junior senior unsecured debt, rated A, our LGF analysis indicates a very low loss given failure, leading to a two-notch uplift from its ba Adjusted BCA.» For senior subordinated debt, rated Baa, our LGF analysis indicates a high loss given failure, leading us to position the rating one notch below the ba Adjusted BCA.» For junior subordinated debt instruments (Genussscheine), rated Baa(hyb), additional notching applies to reflect the junior subordinated claim in liquidation and cumulative coupon deferral features tied to the breach of a balance-sheet loss trigger. Government support considerations Given its size on a consolidated basis, we consider S-Finanzgruppe as domestically and systemically relevant. We, therefore, attribute a moderate probability of German government support for all members of the sector, in line with support assumptions for other systemically relevant banking groups in Europe. For BayernLB, this results in an additional government support uplift by one notch for its long-term senior unsecured debt and deposit ratings. For junior senior unsecured debt, the legal changes to Germany's bank insolvency rank order has lowered the likelihood of government support being available for these instruments, because legally they rank pari passu with most of the outstanding (statutorily subordinated) senior unsecured instruments issued up until July 18. This pari passu ranking of new junior senior unsecured debt with legacy (statutorily subordinated) senior unsecured instruments makes it less likely that German authorities would selectively support the legacy instruments (which we reclassified into junior senior unsecured debt), following clarification that the German authorities expect these liabilities to bear losses in a resolution. As a result, we have reduced our government support assumption for these instruments to low from moderate. BayernLB's guaranteed senior and subordinated obligations that qualify for grandfathering under the public law guarantee (Gewaehrtraegerhaftung) of the Free State of Bavaria are rated Aaa. Counterparty Risk Ratings (CRRs) CRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratings 6

7 assigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities might benefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralised portion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchase agreements. BayernLB's CRRs are positioned at /P The CRRs, prior to government support, are positioned three notches above the Adjusted BCA of ba, reflecting the extremely low loss given failure from the high volume of instruments that are subordinated to CRR liabilities. BayernLB's CRRs benefit from one notch of rating uplift based on government support, in line with our support assumptions on deposits and senior unsecured debt. Counterparty Risk (CR) Assessment CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and expected financial loss, and () apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities. BayernLB's CR Assessments are positioned at (cr)/p(cr) The CR Assessments, prior to government support, are positioned three notches above the Adjusted BCA of ba, reflecting the extremely low loss given failure. BayernLB's CR Assessments benefit from one notch of rating uplift based on government support, which is in line with our support assumptions on deposits and senior unsecured debt. Methodology and scorecard The principal methodology we use in rating BayernLB is Banks rating methodology, published in August 18. About Moody's Bank Scorecard Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read in conjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 7

8 Rating methodology and scorecard factors Exhibit Bayerische Landesbank Macro Factors Weighted Macro Profile Very Strong - Factor Solvency Asset Risk Problem Loans / Gross Loans Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1.1% a ba Sector concentration Capital TCE / RWA 16.8% aa ba Expected trend Profitability Net Income / Tangible Assets.% ba b1 Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 44.1% b1 b Extent of market funding reliance Liquid Resources Liquid Banking Assets / Tangible Banking Assets.1% baa Asset encumbrance Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Balance Sheet Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Junior senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Preference shares (bank) Equity Total Tangible Banking Assets 8 1% a Key driver # Nominal leverage baa baa in-scope (EUR million) 91,41 71,59 5,7 18,57,5 5,14 1, ,84 9,45 Deposit quality b baa Aaa baa-b baa ba % in-scope 4.6% 4.% 5.% 8.8% 1.7% 16.8%.7%.%.% 1% at-failure (EUR million) 98,61 6,991 5,95 1,896,5 5,14 1, ,84 9,45 % at-failure 47.1%.6%.9% 6.6% 1.7% 16.8%.7%.%.% 1%

9 Debt class Counterparty Risk Rating Counterparty Risk Assessment Deposits Senior unsecured bank debt Junior senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Instrument class Counterparty Risk Rating Counterparty Risk Assessment Deposits Senior unsecured bank debt Junior senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA 9.% 9.% 9.% 9.% 9.% 9.% 9.% 9.% (cr) 9.%.7% 9.%.4% 9.%.7%.4%.7%.7%.9%.7%.9% a.9%.%.9%.% baa.%.%.%.% baa (hyb) Loss Given Failure notching Additional Preliminary Rating Notching Assessment (cr) a baa baa (hyb) Government Support notching Local Currency Rating (cr) A Baa Baa (hyb) Foreign Currency Rating - A Baa -- [1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics Ratings Exhibit 4 Category BAYERISCHE LANDESBANK Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured -Dom Curr Junior Senior Unsecured Subordinate Jr Subordinate -Dom Curr Commercial Paper Other Short Term -Dom Curr Moody's Rating Stable /P /P baa ba (cr)/p(cr) A Baa Baa (hyb) P (P)P DEUTSCHE KREDITBANK AG Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Junior Senior Unsecured -Dom Curr Stable A1/P A1/P baa ba A1(cr)/P(cr) A Source: Moody's Investors Service 9

10 Endnotes 1 The ratings shown are S-Finanzgruppe's corporate family rating and outlook, and its BCA. The rating shown is Heta Asset Resolution AG's backed subordinated debt rating. The ratings shown are DKB's deposit rating and outlook, its junior senior unsecured debt rating, and its BCA. 4 The rating shown is Bavaria's long-term issuer rating and outlook. 1

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It would be reckless and inappropriate for retail investors to use MOODY S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. and respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY, to approximately JPY5,,. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER

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